SCHWAB CHARLES CORP 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations INTRODUCTION The Charles Schwab Corporation (CSC) is a savings and loan holding company. CSC engages, through its subsidiaries (collectively referred to as Schwab or the Company), in wealth management, securities brokerage, banking, asset management, custody, and financial advisory services. Principal business subsidiaries of CSC include the following: • Charles Schwab & Co., Inc. (CS&Co), incorporated in 1971, a securities broker-dealer; • TD Ameritrade, Inc., an introducing securities broker-dealer; • TD Ameritrade Clearing, Inc. (TDAC), a securities broker-dealer that provides trade execution and clearing services to TD Ameritrade, Inc.; • Charles Schwab Bank, SSB (CSB), our principal banking entity; and • Charles Schwab Investment Management, Inc. (CSIM), the investment advisor for Schwab’s proprietary mutual funds (Schwab Funds ® ) and for Schwab’s exchange-traded funds (Schwab ETFs™). Unless otherwise indicated, the terms “Schwab,” “the Company,” “we,” “us,” or “our” mean CSC together with its consolidated subsidiaries. Schwab provides financial services to individuals and institutional clients through two segments – Investor Services and Advisor Services. The Investor Services segment provides retail brokerage, investment advisory, and banking and trust services to individual investors, and retirement plan services, as well as other corporate brokerage services, to businesses and their employees. The Advisor Services segment provides custodial, trading, banking and trust, and support services, as well as retirement business services, to independent registered investment advisors (RIAs), independent retirement advisors, and recordkeepers. Schwab was founded on the belief that all Americans deserve access to a better investing experience. Although much has changed in the intervening years, our purpose remains clear – to champion every client’s goals with passion and integrity. Guided by this purpose and our vision of creating the most trusted leader in investment services, management has adopted a strategy described as “Through Clients’ Eyes.” This strategy emphasizes placing clients’ perspectives, needs, and desires at the forefront. Because investing plays a fundamental role in building financial security, we strive to deliver a better investing experience for our clients – individual investors and the people and institutions who serve them – by disrupting longstanding industry practices on their behalf and providing superior service. We also aim to offer a broad range of products and solutions to meet client needs with a focus on transparency, value, and trust. In addition, management works to couple Schwab’s scale and resources with ongoing expense discipline to keep costs low and ensure that products and solutions are affordable as well as responsive to client needs. In combination, these are the key elements of our “no trade-offs” approach to serving investors. We believe that following this strategy is the best way to maximize our market valuation and stockholder returns over time. Management estimates that investable wealth in the United States (U.S.) (consisting of assets in defined contribution, retail wealth management and brokerage, and registered investment advisor channels, along with bank deposits) currently exceeds $65 trillion, which means the Company’s $7.82 trillion in client assets leaves substantial opportunity for growth. Our strategy is based on the principle that developing trusted relationships will translate into more assets from both new and existing clients, ultimately driving more revenue, and along with expense discipline and thoughtful capital management, will generate earnings growth and build long-term stockholder value. This Management’s Discussion and Analysis should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended December 31, 2022 (2022 Form 10-K). On our website, https://www.aboutschwab.com , we post the following filings after they are electronically filed with or furnished to the Securities and Exchange Commission (SEC or Commission): annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934. In addition, we post to the website the Dodd-Frank stress test results, our - 1 - THE CHARLES SCHWAB CORPORATION Management’s Discussion and Analysis of Financial Condition and Results of Operations (Tabular Amounts in Millions, Except Ratios, or as Noted) regulatory capital disclosures based on Basel III, our average liquidity coverage ratio (LCR), and our average net stable funding ratio (NSFR). The SEC maintains a website at https://www.sec.gov that contains reports, proxy statements, and other information that we file electronically with them. FORWARD-LOOKING STATEMENTS In addition to historical information, this Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act, and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements are identified by words such as “believe,” “anticipate,” “expect,” “intend,” “plan,” “will,” “may,” “estimate,” “appear,” “could,” “would,” “expand,” “aim,” “maintain,” “continue,” “seek,” and other similar expressions. In addition, any statements that refer to expectations, projections, or other characterizations of future events or circumstances are forward-looking statements. These forward-looking statements, which reflect management’s beliefs, objectives, and expectations as of the date hereof, are estimates based on the best judgment of Schwab’s senior management. These statements relate to, among other things: • Maximizing our market valuation and stockholder returns over time; our belief that developing trusted relationships will translate into more client assets which drives revenue and, along with expense discipline and thoughtful capital management, generates earnings growth and builds stockholder value (see Introduction in Part I – Item 2); • 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); • 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; outstanding balances and the use of supplemental funding; net interest revenue (see Results of Operations); • Capital expenditures (see Results of Operations); • Management of interest rate risk; the impact of changes in interest rates on net interest margin and revenue, bank deposit account fee revenue, economic value of equity, and liability and asset duration (see Risk Management); • The phase-out of the use of LIBOR (see Risk Management); • Sources and uses of liquidity and capital (see Liquidity Risk and Capital Management); • Capital management; the potential migration of insured deposit account balances (IDA balances) to our balance sheet; expectations about capital requirements, including accumulated other comprehensive income (AOCI), and meeting those requirements; plans regarding capital and dividends (see Capital Management and Commitments and Contingencies in Item 1 – Note 9); • The expected impact of new accounting standards not yet adopted (see New Accounting Standards in Item 1 – Note 2); • The likelihood of indemnification and guarantee payment obligations and clients failing to fulfill contractual obligations (see Commitments and Contingencies in Item 1 – Note 9); and • The impact of legal proceedings and regulatory matters (see Commitments and Contingencies in Item 1 – Note 9 and Legal Proceedings in Part II – Item 1). Achievement of the expressed beliefs, objectives, and expectations described in these statements is subject to certain risks and uncertainties that could cause actual results to differ materially from the expressed beliefs, objectives, and expectations. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this Quarterly Report on Form 10-Q or, in the case of documents incorporated by reference, as of the date of those documents. Important factors that may cause actual results to differ include, but are not limited to: • General market conditions, including the level of interest rates and equity valuations; • The level and mix of client trading activity; • Our ability to attract and retain clients, develop trusted relationships, and grow client assets; • Client use of our advisory and lending solutions and other products and services; • The level of client assets, including cash balances; • Competitive pressure on pricing, including deposit rates; - 2 - THE CHARLES SCHWAB CORPORATION Management’s Discussion and Analysis of Financial Condition and Results of Operations (Tabular Amounts in Millions, Except Ratios, or as Noted) • Client sensitivity to rates; • Regulatory guidance and adverse impacts from new or changed legislation, rulemaking, or regulatory expectations; • Capital and liquidity needs and management; • Our ability to manage expenses; • Our ability to attract and retain talent; • Our ability to develop and launch new and enhanced products, services, and capabilities, as well as enhance our infrastructure, in a timely and successful manner; • Our ability to monetize client assets; • Our ability to support client activity levels; • The risk that expected cost synergies and other benefits from the TD Ameritrade acquisition may not be fully realized or may take longer to realize than expected and that integration-related expenses may be higher than expected; • Increased compensation and other costs due to inflationary pressures; • The timing and scope of integration-related and other technology projects; • Re al estate and workforce decisions; • Our ability to timely and successfully streamline our operations and realize expected run-rate cost savings; • Client cash allocations; • Migrations of bank deposit account balances (BDA balances); • Balance sheet positioning relative to changes in interest rates; • Interest-earning asset mix and growth; • Our ability to access and use supplemental funding sources; • Prepayment levels for mortgage-backed securities; • Adverse developments in litigation or regulatory matters and any related charges; and • Potential breaches of contractual terms for which we have indemnification and guarantee obligations. Certain of these factors, as well as general risk factors affecting the Company, are discussed in greater detail in Part I – Item 1A – Risk Factors in the 2022 Form 10-K. - 3 - THE CHARLES SCHWAB CORPORATION Management’s Discussion and Analysis of Financial Condition and Results of Operations (Tabular Amounts in Millions, Except Ratios, or as Noted) OVERVIEW Management focuses on several client activity and financial metrics in evaluating Schwab’s financial position and operating performance. Results for the third quarter and first nine months of 2023 and 2022 are as follows: Three Months Ended September 30, Percent Change Nine Months Ended September 30, Percent Change 2023 2022 2023 2022 Client Metrics Net new client assets (in billions) (1) $ 48.2 $ 114.6 (58) % $ 270.9 $ 278.5 (3) % Core net new client assets (in billions) $ 45.7 $ 114.6 (60) % $ 229.6 $ 299.3 (23) % Client assets (in billions, at quarter end) $ 7,824.5 $ 6,644.2 18 % Average client assets (in billions) $ 8,032.4 $ 7,125.9 13 % $ 7,705.4 $ 7,385.0 4 % New brokerage accounts (in thousands) 894 897 — 2,896 3,113 (7) % Active brokerage accounts (in thousands, at quarter end) 34,540 33,875 2 % Assets receiving ongoing advisory services (in billions, at quarter end) $ 3,981.0 $ 3,417.5 16 % Client cash as a percentage of client assets (at quarter end) (2) 10.8 % 12.9 % Company Financial Information and Metrics Total net revenues $ 4,606 $ 5,500 (16) % $ 14,378 $ 15,265 (6) % Total expenses excluding interest 3,223 2,823 14 % 9,194 8,475 8 % Income before taxes on income 1,383 2,677 (48) % 5,184 6,790 (24) % Taxes on income 258 657 (61) % 1,162 1,575 (26) % Net income 1,125 2,020 (44) % 4,022 5,215 (23) % Preferred stock dividends and other 108 136 (21) % 299 401 (25) % Net income available to common stockholders $ 1,017 $ 1,884 (46) % $ 3,723 $ 4,814 (23) % Earnings per common share — diluted $ .56 $ .99 (43) % $ 2.03 $ 2.53 (20) % Net revenue change from prior year (16) % 20 % (6) % 11 % Pre-tax profit margin 30.0 % 48.7 % 36.1 % 44.5 % Return on average common stockholders’ equity (annualized) 14 % 25 % 18 % 18 % Expenses excluding interest as a percentage of average client assets (annualized) 0.16 % 0.16 % 0.16 % 0.15 % Consolidated Tier 1 Leverage Ratio (at quarter end) 8.2 % 6.8 % Non-GAAP Financial Measures (3) Adjusted total expenses (4) $ 2,703 $ 2,570 $ 8,177 $ 7,724 Adjusted diluted EPS $ .77 $ 1.10 $ 2.45 $ 2.83 Return on tangible common equity 58 % 74 % 66 % 42 % (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. (4) Adjusted total expenses is a non-GAAP financial measure adjusting total expenses excluding interest. See Non-GAAP Financial Measures. 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 - 4 - THE CHARLES SCHWAB CORPORATION Management’s Discussion and Analysis of Financial Condition and Results of Operations (Tabular Amounts in Millions, Except Ratios, or as Noted) 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. See Non-GAAP Financial Measures for further details and a reconciliation of such measures to GAAP reported results. - 5 - THE CHARLES SCHWAB CORPORATION Management’s Discussion and Analysis of Financial Condition and Results of Operations (Tabular Amounts in Millions, Except Ratios, or as Noted) 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, 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. Estimated timing and amounts of synergy realization are subject to change as we progress in the integration. Refer to Part II – Item 7 – Overview in our 2022 Form 10-K, Results of Operations – Total Expenses Excluding Interest, Non-GAAP Financial Measures, and Item 1 – Note 10 for additional information regarding our integration of TD Ameritrade. Other 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. 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 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 - 6 - THE CHARLES SCHWAB CORPORATION Management’s Discussion and Analysis of Financial Condition and Results of Operations (Tabular Amounts in Millions, Except Ratios, or as Noted) Act of 1974. 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. 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 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. In December 2022, the SEC proposed a set of four related equity market structure rules that would make significant changes to how national market system (NMS) stock orders are priced, executed and reported. The four proposed rules are described below. • The “Order Competition Rule” would require that, before most individual investors’ orders could be executed internally by a trading center (like wholesaler market makers), those orders must first be exposed to a qualifying order-by-order auction in which both market makers and institutional investors can participate. • “Regulation Best Execution” would establish an SEC-level best execution standard (in addition to the existing FINRA and MSRB best execution rules) for broker-dealers and require them to establish, maintain, and enforce written policies and procedures addressing how the broker-dealer will comply with the best execution standard and make routing or execution decisions for customer orders. Regulation Best Execution would apply not only to equities, but to all securities. • Amendments to Rule 605 of Regulation NMS requiring enhanced disclosures of order execution quality for large brokers that handle retail orders. • A rule to (i) amend minimum pricing increments (or tick sizes) that would apply to both the quoting and trading of NMS stocks, (ii) reduce the exchange access fee caps, and (iii) require transparency of odd-lots. The comment periods for the proposed rules ended on March 31, 2023 and the impact to Schwab cannot be assessed until final rules are released. - 7 - THE CHARLES SCHWAB CORPORATION Management’s Discussion and Analysis of Financial Condition and Results of Operations (Tabular Amounts in Millions, Except Ratios, or as Noted) In November 2022, the SEC proposed a rule that would require substantial changes to the liquidity risk management programs for open-end mutual funds other than money market funds (funds) and require them to implement “swing pricing” and impose a “hard close” on the acceptance of purchase and redemption orders. Swing pricing would require funds to adjust the fund’s current net asset value (NAV) per share by a “swing factor” if the fund has either (i) net redemptions (no threshold) or (ii) net purchases that exceed a specified threshold (2% of the fund’s net assets). To implement the swing pricing requirements, the proposed rule also would require that a fund, its transfer agent, or a registered clearing agency receive purchase and redemption orders prior to the time the fund has established for determining the NAV, typically market close, in order to receive a given day’s NAV (a “hard close”). Current practices permit fund orders received by a financial intermediary prior to the fund cut-off time to be transmitted to the fund after the fund cut-off time and for the order to receive that day’s NAV. Under the proposed rule, orders received by the fund, its transfer agent or registered clearing agency after the fund cut-off time would receive the next day’s NAV. The comment period for the proposed rule ended on February 14, 2023 and the impact to Schwab cannot be assessed until the final rule is released. RESULTS OF OPERATIONS Total Net Revenues The following tables present a comparison of revenue by category: 2023 2022 Three Months Ended September 30, Percent Change Amount % of Total Net Revenues Amount % of Total Net Revenues Net interest revenue Interest revenue 20 % $ 4,028 88 % $ 3,357 61 % Interest expense N/M (1,791) (39) % (431) (8) % Net interest revenue (24) % 2,237 49 % 2,926 53 % Asset management and administration fees Mutual funds, exchange-traded funds (ETFs), and collective trust funds (CTFs) 28 % 666 14 % 520 9 % Advice solutions 5 % 476 10 % 452 8 % Other 9 % 82 2 % 75 2 % Asset management and administration fees 17 % 1,224 26 % 1,047 19 % Trading revenue Commissions (9) % 394 9 % 435 8 % Order flow revenue (25) % 325 7 % 432 8 % Principal transactions (22) % 49 1 % 63 1 % Trading revenue (17) % 768 17 % 930 17 % Bank deposit account fees (50) % 205 4 % 413 8 % Other (7) % 172 4 % 184 3 % Total net revenues (16) % $ 4,606 100 % $ 5,500 100 % N/M Not meaningful. Percent changes greater than 200% are presented as not meaningful. - 8 - THE CHARLES SCHWAB CORPORATION Management’s Discussion and Analysis of Financial Condition and Results of Operations (Tabular Amounts in Millions, Except Ratios, or as Noted) 2023 2022 Nine Months Ended September 30, Percent Change Amount % of Total Net Revenues Amount % of Total Net Revenues Net interest revenue Interest revenue 45 % $ 12,148 85 % $ 8,386 55 % Interest expense N/M (4,851) (34) % (733) (5) % Net interest revenue (5) % 7,297 51 % 7,653 50 % Asset management and administration fees Mutual funds, ETFs, and CTFs 23 % 1,881 13 % 1,524 10 % Advice solutions (1) % 1,393 10 % 1,409 9 % Other 3 % 241 1 % 234 2 % Asset management and administration fees 11 % 3,515 24 % 3,167 21 % Trading revenue Commissions (11) % 1,210 8 % 1,362 9 % Order flow revenue (17) % 1,104 8 % 1,332 9 % Principal transactions 77 % 149 1 % 84 — Trading revenue (11) % 2,463 17 % 2,778 18 % Bank deposit account fees (50) % 531 4 % 1,059 7 % Other (6) % 572 4 % 608 4 % Total net revenues (6) % $ 14,378 100 % $ 15,265 100 % N/M Not meaningful. Percent changes greater than 200% are presented as not meaningful. Net Interest Revenue Revenue on interest-earning assets is affected by various factors, such as the composition of assets, prevailing interest rates and spreads at the time of origination or purchase, changes in interest rates on 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, 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 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 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. - 9 - THE CHARLES SCHWAB CORPORATION Management’s Discussion and Analysis of Financial Condition and Results of Operations (Tabular Amounts in Millions, Except Ratios, or as Noted) The following tables present net interest revenue information corresponding to interest-earning assets and funding sources on the condensed consolidated balance sheets: 2023 2022 Three Months Ended September 30, Average Balance Interest Revenue/ Expense Average Yield/Rate Average Balance Interest Revenue/ Expense Average Yield/Rate Interest-earning assets Cash and cash equivalents $ 34,391 $ 459 5.22 % $ 53,127 $ 294 2.16 % Cash and investments segregated 21,987 285 5.08 % 49,554 214 1.69 % Receivables from brokerage clients 63,760 1,282 7.87 % 72,751 912 4.91 % Available for sale securities (1) 129,545 724 2.22 % 273,968 1,161 1.69 % Held to maturity securities (1) 163,904 706 1.72 % 97,568 345 1.41 % Bank loans 40,177 426 4.23 % 39,984 300 2.99 % Total interest-earning assets 453,764 3,882 3.37 % 586,952 3,226 2.17 % Securities lending revenue 105 124 Other interest revenue 41 7 Total interest-earning assets $ 453,764 $ 4,028 3.50 % $ 586,952 $ 3,357 2.26 % Funding sources Bank deposits $ 290,853 $ 911 1.24 % $ 420,132 $ 241 0.23 % Payables to brokerage clients 63,731 66 0.41 % 96,802 41 0.17 % Other short-term borrowings (2) 7,315 97 5.26 % 708 4 1.95 % Federal Home Loan Bank borrowings (2,3) 36,287 477 5.18 % — — — Long-term debt 23,492 193 3.30 % 21,024 131 2.49 % Total interest-bearing liabilities 421,678 1,744 1.64 % 538,666 417 0.31 % Non-interest-bearing funding sources 32,086 48,286 Securities lending expense 46 13 Other interest expense 1 1 Total funding sources $ 453,764 $ 1,791 1.56 % $ 586,952 $ 431 0.29 % 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. - 10 - THE CHARLES SCHWAB CORPORATION Management’s Discussion and Analysis of Financial Condition and Results of Operations (Tabular Amounts in Millions, Except Ratios, or as Noted) 2023 2022 Nine Months Ended September 30, Average Balance Interest Revenue/ Expense Average Yield/ Rate Average Balance Interest Revenue/ Expense Average Yield/ Rate Interest-earning assets Cash and cash equivalents $ 38,700 $ 1,419 4.83 % $ 63,598 $ 461 0.95 % Cash and investments segregated 29,752 1,041 4.61 % 50,891 308 0.80 % Receivables from brokerage clients 61,682 3,533 7.55 % 78,630 2,244 3.76 % Available for sale securities (1) 143,360 2,340 2.17 % 281,897 3,196 1.51 % Held to maturity securities (1) 167,405 2,172 1.73 % 100,890 1,062 1.40 % Bank loans 40,183 1,227 4.08 % 38,238 717 2.50 % Total interest-earning assets 481,082 11,732 3.23 % 614,144 7,988 1.73 % Securities lending revenue 341 383 Other interest revenue 75 15 Total interest-earning assets $ 481,082 $ 12,148 3.35 % $ 614,144 $ 8,386 1.81 % Funding sources Bank deposits $ 315,309 $ 2,392 1.01 % $ 440,801 $ 285 0.09 % Payables to brokerage clients 68,548 205 0.40 % 101,472 47 0.06 % Other short-term borrowings (2) 7,286 280 5.13 % 2,656 12 0.60 % Federal Home Loan Bank borrowings (2,3) 35,896 1,387 5.11 % — — — Long-term debt 21,685 489 3.01 % 20,673 363 2.34 % Total interest-bearing liabilities 448,724 4,753 1.41 % 565,602 707 0.17 % Non-interest-bearing funding sources 32,358 48,542 Securities lending expense 96 28 Other interest expense 2 (2) Total funding sources $ 481,082 $ 4,851 1.35 % $ 614,144 $ 733 0.16 % Net interest revenue $ 7,297 2.00 % $ 7,653 1.65 % (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. 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 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 - 11 - THE CHARLES SCHWAB CORPORATION Management’s Discussion and Analysis of Financial Condition and Results of Operations (Tabular Amounts in Millions, Except Ratios, or as Noted) 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. Asset Management and Administration Fees The following table presents asset management and administration fees, average client assets, and average fee yields: Three Months Ended September 30, 2023 2022 Average Client Assets Revenue Average Fee Average Client Assets Revenue Average Fee Schwab money market funds before fee waivers $ 414,074 $ 270 0.26 % $ 184,834 $ 132 0.28 % Fee waivers — — Schwab money market funds 414,074 270 0.26 % 184,834 132 0.28 % Schwab equity and bond funds, ETFs, and CTFs 485,326 99 0.08 % 422,711 89 0.08 % Mutual Fund OneSource ® and other no-transaction-fee (NTF) funds (1) 255,039 170 0.26 % 183,019 139 0.30 % 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) $ 1,787,341 666 0.15 % $ 1,538,240 520 0.13 % Advice solutions (2) Fee-based $ 468,305 476 0.40 % $ 431,276 452 0.42 % Non-fee-based 97,957 — — 85,567 — — Total advice solutions $ 566,262 476 0.33 % $ 516,843 452 0.35 % Other balance-based fees (3) 610,450 64 0.04 % 537,809 58 0.04 % Other (4) 18 17 Total asset management and administration fees $ 1,224 $ 1,047 2023 2022 Nine Months Ended September 30, Average Client Assets Revenue Average Fee Average Client Assets Revenue Average Fee Schwab money market funds before fee waivers $ 368,788 $ 735 0.27 % $ 158,525 $ 340 0.29 % Fee waivers — (57) Schwab money market funds 368,788 735 0.27 % 158,525 283 0.24 % Schwab equity and bond funds, ETFs, and CTFs 466,995 284 0.08 % 436,928 278 0.09 % Mutual Fund OneSource ® and other NTF funds (1) 235,561 469 0.27 % 196,032 453 0.31 % Other third-party mutual funds and ETFs (1) 663,577 393 0.08 % 805,204 510 0.08 % Total mutual funds, ETFs, and CTFs (2) $ 1,734,921 1,881 0.14 % $ 1,596,689 1,524 0.13 % Advice solutions (2) Fee-based $ 455,730 1,393 0.41 % $ 446,979 1,409 0.42 % Non-fee-based 95,951 — — 87,528 — — Total advice solutions $ 551,681 1,393 0.34 % $ 534,507 1,409 0.35 % Other balance-based fees (3) 588,922 189 0.04 % 573,733 186 0.04 % Other (4) 52 48 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. (3) Includes various asset-related fees, such as trust fees, 401(k) recordkeeping fees, and mutual fund clearing fees and other service fees. (4) Includes miscellaneous service and transaction fees relating to mutual funds and ETFs that are not balance-based. Asset management and administration fees increased by $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 - 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) 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 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: Schwab Money Market Funds Schwab Equity and Bond Funds, ETFs, and CTFs Mutual Fund OneSource ® and Other NTF funds 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 Net inflows (outflows) 38,265 51,111 3,010 10,805 (7,060) (9,600) 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 Schwab Money Market Funds Schwab Equity and Bond Funds, ETFs, and CTFs Mutual Fund OneSource ® and Other NTF funds 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 Net inflows (outflows) 144,108 63,703 15,669 25,950 (18,339) (28,363) Net market gains (losses) and other (1) 13,292 867 25,483 (107,070) 70,593 (25,079) Balance at end of period $ 436,326 $ 211,079 $ 454,094 $ 373,744 $ 287,992 $ 181,498 (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 Trading revenue includes commissions, order flow revenue, and principal transactions revenues. Commission revenue is affected by volume and mix of trades executed. Order flow revenue is comprised of payments received from trade execution venues to which our broker-dealer subsidiaries send equity and option orders. Order flow revenue is affected by volume and mix of client trades, as well as pricing received from trade execution venues. Principal transactions revenue is recognized primarily as a result of accommodating clients’ fixed income trading activity, and includes adjustments to the fair value of securities positions held to facilitate such client trading activity. Principal transactions revenue also includes unrealized gains and losses on cash and investments segregated for regulatory purposes. The following tables present trading revenue, trade details, and related information: Three Months Ended September 30, Percent Change Nine Months Ended September 30, Percent Change 2023 2022 2023 2022 Commissions $ 394 $ 435 (9) % $ 1,210 $ 1,362 (11) % Order flow revenue Options 219 292 (25) % 751 895 (16) % Equities 106 140 (24) % 353 437 (19) % Total order flow revenue 325 432 (25) % 1,104 1,332 (17) % Principal transactions 49 63 (22) % 149 84 77 % Total trading revenue $ 768 $ 930 (17) % $ 2,463 $ 2,778 (11) % - 13 - THE CHARLES SCHWAB CORPORATION Management’s Discussion and Analysis of Financial Condition and Results of Operations (Tabular Amounts in Millions, Except Ratios, or as Noted) Three Months Ended September 30, Percent Change Nine Months Ended September 30, Percent Change 2023 2022 2023 2022 DATs (in thousands) 5,218 5,523 (6) % 5,461 6,103 (11) % Product as a percentage of DATs Equities 49 % 50 % 49 % 51 % Derivatives 24 % 24 % 23 % 23 % ETFs 19 % 20 % 20 % 20 % Mutual funds 6 % 5 % 6 % 5 % Fixed income 2 % 1 % 2 % 1 % Number of trading days 62.5 64.0 (2) % 186.5 188.0 (1) % Revenue per trade (1) $ 2.35 $ 2.63 (11) % $ 2.42 $ 2.42 — (1) Revenue per trade is calculated as trading revenue divided by DATs multiplied by the number of trading days. 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 The Company earns bank deposit account fee revenue from TD Bank USA, National Association and TD Bank, National Association (together, the TD Depository Institutions). These fees are affected by changes in interest rates and the composition of balances designated as fixed- and floating-rate obligation amounts. 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. Schwab provides recordkeeping and support services to the TD Depository Institutions with respect to the deposit accounts for which Schwab receives an aggregate monthly fee. Under the 2023 IDA agreement, the service fee on client cash deposits held at the TD Depository Institutions remains at 15 basis points, as it was in the 2019 IDA agreement. See Item 1 – Note 9 for additional discussion of the 2023 IDA agreement. 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 September 30, Percent Change Nine Months Ended September 30, Percent Change 2023 2022 2023 2022 Bank deposit account fees $ 205 $ 413 (50) % $ 531 $ 1,059 (50) % Average BDA balances $ 101,666 $ 148,142 (31) % $ 107,003 $ 152,698 (30) % Average net yield 0.79 % 1.09 % 0.66 % 0.92 % Percentage of average BDA balances designated as: Fixed-rate balances 91 % 79 % 93 % 78 % Floating-rate balances 9 % 21 % 7 % 22 % In January 2023, the Company ended its arrangements with other third-party banks to simplify bank sweep operations ahead of the first TD Ameritrade client transition group in February 2023. In addition, the FDIC implemented a 2-basis-point increase to the initial base deposit insurance assessment rate, which became effective for the first quarterly assessment period in 2023. This increase in the FDIC’s deposit insurance assessment results in a decrease to bank deposit account fee revenue, dependent on BDA balance levels. - 14 - THE CHARLES SCHWAB CORPORATION Management’s Discussion and Analysis of Financial Condition and Results of Operations (Tabular Amounts in Millions, Except Ratios, or as Noted) 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 $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. Total Expenses Excluding Interest The following table shows a comparison of expenses excluding interest: Three Months Ended September 30, Percent Change Nine Months Ended September 30, Percent Change 2023 2022 2023 2022 Compensation and benefits Salaries and wages $ 1,229 $ 901 36 % $ 3,162 $ 2,630 20 % Incentive compensation 300 348 (14) % 951 1,098 (13) % Employee benefits and other 241 227 6 % 793 720 10 % Total compensation and benefits $ 1,770 $ 1,476 20 % $ 4,906 $ 4,448 10 % Professional services 275 264 4 % 805 766 5 % Occupancy and equipment 305 292 4 % 923 855 8 % Advertising and market development 102 89 15 % 293 296 (1) % Communications 151 131 15 % 485 444 9 % Depreciation and amortization 198 167 19 % 566 476 19 % Amortization of acquired intangible assets 135 152 (11) % 404 460 (12) % Regulatory fees and assessments 114 65 75 % 277 200 39 % Other 173 187 (7) % 535 530 1 % Total expenses excluding interest $ 3,223 $ 2,823 14 % $ 9,194 $ 8,475 8 % Expenses as a percentage of total net revenues Compensation and benefits 38 % 27 % 34 % 29 % Advertising and market development 2 % 2 % 2 % 2 % Full-time equivalent employees (in thousands) At quarter end 35.9 35.2 2 % Average 36.1 35.2 3 % 36.0 34.5 4 % 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 - 15 - THE CHARLES SCHWAB CORPORATION Management’s Discussion and Analysis of Financial Condition and Results of Operations (Tabular Amounts in Millions, Except Ratios, or as Noted) 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. 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 $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 - 16 - THE CHARLES SCHWAB CORPORATION Management’s Discussion and Analysis of Financial Condition and Results of Operations (Tabular Amounts in Millions, Except Ratios, or as Noted) 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. Taxes on Income 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 Financial information for our segments is presented in the following tables: Investor Services Advisor Services Total Three Months Ended September 30, Percent Change 2023 2022 Percent Change 2023 2022 Percent Change 2023 2022 Net Revenues Net interest revenue (20) % $ 1,710 $ 2,143 (33) % $ 527 $ 783 (24) % $ 2,237 $ 2,926 Asset management and administration fees 16 % 877 755 19 % 347 292 17 % 1,224 1,047 Trading revenue (16) % 672 800 (26) % 96 130 (17) % 768 930 Bank deposit account fees (40) % 157 263 (68) % 48 150 (50) % 205 413 Other (5) % 144 151 (15) % 28 33 (7) % 172 184 Total net revenues (13) % 3,560 4,112 (25) % 1,046 1,388 (16) % 4,606 5,500 Expenses Excluding Interest 11 % 2,356 2,117 23 % 867 706 14 % 3,223 2,823 Income before taxes on income (40) % $ 1,204 $ 1,995 (74) % $ 179 $ 682 (48) % $ 1,383 $ 2,677 Net New Client Assets (in billions) (1) (48) % $ 28.6 $ 55.1 (67) % $ 19.6 $ 59.5 (58) % $ 48.2 $ 114.6 Investor Services Advisor Services Total Nine Months Ended September 30, Percent Change 2023 2022 Percent Change 2023 2022 Percent Change 2023 2022 Net Revenues Net interest revenue (2) % $ 5,448 $ 5,551 (12) % $ 1,849 $ 2,102 (5) % $ 7,297 $ 7,653 Asset management and administration fees 10 % 2,523 2,299 14 % 992 868 11 % 3,515 3,167 Trading revenue (11) % 2,148 2,407 (15) % 315 371 (11) % 2,463 2,778 Bank deposit account fees (43) % 396 690 (63) % 135 369 (50) % 531 1,059 Other (3) % 451 465 (15) % 121 143 (6) % 572 608 Total net revenues (4) % 10,966 11,412 (11) % 3,412 3,853 (6) % 14,378 15,265 Expenses Excluding Interest 7 % 6,780 6,359 14 % 2,414 2,116 8 % 9,194 8,475 Income before taxes on income (17) % $ 4,186 $ 5,053 (43) % $ 998 $ 1,737 (24) % $ 5,184 $ 6,790 Net New Client Assets (in billions) (1) 22 % $ 144.0 $ 118.5 (21) % $ 126.9 $ 160.0 (3) % $ 270.9 $ 278.5 (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 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- - 17 - THE CHARLES SCHWAB CORPORATION Management’s Discussion and Analysis of Financial Condition and Results of Operations (Tabular Amounts in Millions, Except Ratios, or as Noted) 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 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. 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. RISK MANAGEMENT Schwab’s business activities expose it to a variety of risks, including operational, compliance, credit, market, and liquidity risks. The Company has a comprehensive risk management program to identify and manage these risks and their associated potential for financial and reputational impact. For a discussion of our risk management programs, see Part II – Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Risk Management in the 2022 Form 10-K. Market Risk Market risk is the potential for changes in earnings or the value of financial instruments held by Schwab as a result of fluctuations in interest rates, equity prices, or market conditions. Schwab is exposed to market risk primarily from changes in interest rates within our interest-earning assets relative to changes in the costs of funding sources that finance these assets. To manage interest rate risk, we have established policies and procedures, which include setting limits on net interest revenue risk and economic value of equity (EVE) risk. To remain within these limits, we manage the maturity, repricing, and cash flow characteristics of the investment portfolios. Management monitors established guidelines to stay within the Company’s risk appetite. In 2023, the Company began to utilize interest rate swap derivative instruments to assist with managing interest rate risk, 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. 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, and include derivative instruments. Key assumptions include the projection of interest rate scenarios with rate floors, - 18 - THE CHARLES SCHWAB CORPORATION Management’s Discussion and Analysis of Financial Condition and Results of Operations (Tabular Amounts in Millions, Except Ratios, or as Noted) 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. Net interest revenue is affected by various factors, such as the distribution and composition of interest-earning assets and interest-bearing liabilities, the spread between yields earned on interest-earning assets and rates paid on interest-bearing liabilities, which may reprice at different times or by different amounts, and the spread between short- and long-term interest rates. Interest-earning assets include investment securities, margin loans, bank loans, and cash and cash equivalents. These assets are sensitive to changes in interest rates and changes in prepayment levels that tend to increase in a declining rate environment and decrease in a rising rate environment. Because we establish the rates paid on certain brokerage client cash balances and bank deposits and the rates charged on certain margin and bank loans, and control the composition of our investment securities, we have some ability to manage our net interest spread, depending on competitive factors and market conditions. When we have liquidity needs that exceed our primary sources of funding, the Company has needed to utilize higher cost funding sources, which can reduce net interest margin and net interest revenue. Net interest revenue sensitivity analysis assumes the asset and liability structure of the consolidated balance sheet would not be changed as a result of the simulated changes in interest rates. While this approach is useful to isolate the impact of changes in interest rates on a statically-sized asset and liability structure, it does not capture changes to client cash allocations. We conduct simulations on EVE to capture the impact of client cash allocation changes on our balance sheet. As we actively manage the consolidated balance sheet and interest rate exposure, we have taken and would typically seek to take steps to manage additional interest rate exposure that could result from changes in the interest rate environment. Higher short-term interest rates would generally positively impact net interest margin as yields on interest-earning assets are expected to rise faster than the cost of funding sources. If the cost of funding sources is greater than the increased revenue from repricing assets, however, net interest margin can be reduced. A decline in short-term interest rates could negatively impact the yield on the Company’s investment and loan portfolios to a greater degree than any offsetting reduction in interest expense from funding sources, compressing net interest margin. The following table shows simulated changes to net interest revenue over the next 12 months beginning 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 % Increase of 100 basis points 5.2 % 3.6 % Increase of 50 basis points 2.8 % 1.7 % Decrease of 50 basis points (1.3) % (1.5) % Decrease of 100 basis points (3.0) % (3.2) % 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 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. - 19 - THE CHARLES SCHWAB CORPORATION Management’s Discussion and Analysis of Financial Condition and Results of Operations (Tabular Amounts in Millions, Except Ratios, or as Noted) Effective Duration Effective duration measures price sensitivity relative to a change in prevailing interest rates, taking account of amortizing cash flows and prepayment optionality for mortgage-related securities and loans. Duration is measured in years and commonly interpreted as the average timing of principal and interest cash flows. We seek to manage the Company’s asset duration in relation to management’s estimate of the Company’s liability duration. The Company’s liability duration is impacted by the composition of funding sources, and typically decreases in periods of rising market interest rates and increases in periods of declining market interest rates. The 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. 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. 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 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 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 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. - 20 - THE CHARLES SCHWAB CORPORATION Management’s Discussion and Analysis of Financial Condition and Results of Operations (Tabular Amounts in Millions, Except Ratios, or as Noted) Liquidity Risk Liquidity risk is the potential that Schwab will be unable to sell assets or meet cash flow obligations when they come due without incurring unacceptable losses. Due to its role as a source of financial strength, CSC’s liquidity needs are primarily driven by the liquidity and capital needs of: CS&Co, TD Ameritrade, Inc., and TDAC, our principal broker-dealer subsidiaries; the capital needs of the banking subsidiaries; principal and interest due on corporate debt, and dividend payments on CSC’s preferred and common stock. The liquidity needs of our broker-dealer subsidiaries are primarily driven by client activity including trading and margin lending activities and capital expenditures. The capital needs of the banking subsidiaries are primarily driven by client deposit levels and other borrowings. We have established liquidity policies to support the successful execution of business strategies, while ensuring ongoing and sufficient liquidity to meet operational needs and satisfy applicable regulatory requirements under both normal and stressed conditions. We seek to maintain client confidence in the balance sheet and the safety of client assets by maintaining liquidity and diversity of funding sources to allow the Company to meet its obligations. To this end, we have established limits and contingency funding plans to support liquidity levels during both business as usual and stressed conditions. We employ a variety of metrics to monitor and manage liquidity. We conduct regular liquidity stress testing to develop a view of liquidity risk exposures and to ensure our ability to maintain sufficient liquidity during market-related or company-specific liquidity stress events. Liquidity sources are also tested periodically and results are reported to the Financial Risk Oversight Committee. A number of early warning indicators are monitored to help identify emerging liquidity stresses in the market or within the organization and are reviewed with management periodically. Funding Sources Schwab’s primary source of funds is cash generated by client activity which includes bank deposits and cash balances in client brokerage accounts. These funds are used to purchase investment securities and extend loans to clients. Other sources of funds may include cash flows from operations, maturities and sales of investment securities, repayments on loans, securities lending of assets held in client brokerage accounts, FHLB borrowings, issuance of CDs, cash provided by securities issuances by CSC in the capital markets, and other facilities described below. To meet daily funding needs, we maintain liquidity in the form of overnight cash deposits and short-term investments. For unanticipated liquidity needs, we also maintain a buffer of highly liquid investments, including U.S. Treasury securities. Our clients’ bank deposits and 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 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. Schwab’s need for borrowings from external debt facilities arises primarily from timing differences between cash flow requirements, including in the event the outflow of client cash from the balance sheet is greater than cash flows from operations and investment securities and bank loans; payments on interest-earning investments; movements of cash to meet regulatory brokerage client cash segregation requirements; and general corporate purposes. We maintain policies and procedures necessary to access funding, and test borrowing procedures on a periodic basis. Rollover risk is the risk that we will not be able to refinance or payoff borrowings as they mature. We manage rollover risk on borrowings, taking into account expected principal paydowns on our investment and loan portfolios along with expected deposit flows. - 21 - THE CHARLES SCHWAB CORPORATION Management’s Discussion and Analysis of Financial Condition and Results of Operations (Tabular Amounts in Millions, Except Ratios, or as Noted) 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) October 2023 - September 2024 5.17% Federal Reserve discount window Banking subsidiaries — 7,225 (1) N/A — Federal Reserve Bank Term Funding Program Banking subsidiaries — 40,157 (1) N/A — 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 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) N/A — (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’ or CSC’s ability to provide collateral deemed acceptable by each respective counterparty. See Note 12 for additional information. (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. N/A Not applicable. Available borrowing capacity from the FHLB and Federal Reserve facilities maintained by our banking subsidiaries is dependent on the value of assets pledged and the terms of the borrowing arrangements. As of 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. Additional details regarding availability and use of these facilities is described below. Amounts available under secured credit facilities with the FHLB are dependent on the value of our First Mortgages, home equity lines of credit (HELOCs), and the fair value of certain of our investment securities that are pledged as collateral. These credit facilities are also available as backup financing in the event the outflow of client cash from the banking subsidiaries’ respective balance sheets is greater than maturities and paydowns on investment securities and bank loans. CSC’s banking subsidiaries must each maintain positive tangible capital, as defined by the Federal Housing Finance Agency, in order to place new draws upon these credit facilities, and the Company manages capital with consideration of minimum tangible capital ratios at our banking subsidiaries. Tangible capital pursuant to the requirements of the FHLB borrowing facilities for our banking subsidiaries is common equity less goodwill and intangible assets. Our banking subsidiaries also have access to short-term secured funding through the Federal Reserve discount window. Amounts available under the Federal Reserve discount window are dependent on the fair value of certain investment securities that are pledged as collateral. Our banking subsidiaries may also engage with external financial institutions in repurchase agreements collateralized by investment securities as another source of short-term liquidity. 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 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 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. Borrowing capacity available under this program is dependent upon the par value of the investment securities that are pledged as collateral. The Company is eligible to obtain advances under this program. This facility was not used during the first nine months of 2023. - 22 - THE CHARLES SCHWAB CORPORATION Management’s Discussion and Analysis of Financial Condition and Results of Operations (Tabular Amounts in Millions, Except Ratios, or as Noted) 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 September 30, 2023. 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. CSC also has a universal automatic shelf registration statement on file with the SEC, which enables it to issue debt, equity, and other securities. CS&Co maintains uncommitted, unsecured bank credit lines with a group of banks as a source of short-term liquidity, which can also be accessed by CSC. 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 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 $ 45,418 November 2023 - April 2025 5.06% Cash Flow Activity As a result of rapidly increasing short-term interest rates beginning in 2022, the Company saw an increase in the pace at which clients moved certain cash balances out of our sweep features and into higher yielding alternatives. As a result of these outflows, our banking subsidiaries have supplemented excess cash on hand and cash generated by maturities and paydowns on our investment securities portfolios with fixed- and floating-rate FHLB advances, repurchase agreements, and issuances of brokered CDs. The 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 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. - 23 - 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 Coverage Ratio Schwab is subject to the full LCR rule, which requires the Company to hold high quality liquid assets (HQLA) in an amount equal to at least 100% of the Company’s projected net cash outflows over a prospective 30-calendar-day period of acute liquidity stress, calculated on each business day. See Part I – Item 1 – Business – Regulation in the 2022 Form 10-K for additional information. The Company was in compliance with the LCR rule at September 30, 2023, and the table below presents information about our average daily LCR: Average for the Three Months Ended September 30, 2023 June 30, 2023 Total eligible HQLA $ 60,781 $ 65,738 Net cash outflows 51,351 50,965 LCR 119 % 129 % To support growth in margin loan balances at our broker-dealer subsidiaries while meeting our LCR requirements, the Company may issue commercial paper or draw on secured lines of credit, in addition to capital markets issuances. Net Stable Funding Ratio Schwab is subject to disclosure requirements under the NSFR rule, which requires the semi-annual public disclosure of its NSFR levels beginning in the second quarter of 2023. The NSFR rule stipulates that the Company’s available stable funding (ASF) must be at least 100% of the Company’s required stable funding (RSF). 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 September 30, 2023. Long-Term Borrowings 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 Interest Rate Moody’s Standard & Poor’s Fitch CSC Senior Notes $ 24,562 2024 - 2034 3.12% A2 A- A TDA Holding Senior Notes 213 2024 - 2029 3.47% A2 A- — During the second quarter of 2023, Standard and Poor’s downgraded CSC’s and TDA Holding’s long-term issuer credit and senior unsecured debt ratings from A to A- and affirmed its outlook remained stable. Moody’s also affirmed its rating of A2 for CSC and TDA Holding and changed its outlook from positive to stable. New Debt Issuances The below debt issuances in the first nine months of 2023 were senior unsecured obligations. Additional details are as follows: Issuance Date Issuance Amount Maturity Date Interest Rate May 19, 2023 $ 1,200 05/19/2029 5.643% (1) May 19, 2023 1,300 05/19/2034 5.853% (1) 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. Schwab additionally enters into guarantees and other similar arrangements in the ordinary course of business. For information on these arrangements, see Item 1 – Notes 5, 6, 8, 9, and 12. - 24 - 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. See also Item 1 – Condensed Consolidated Statements of Cash Flows, Item 1 – Note 7 for the Company’s bank deposits, Item 1 – Note 8 for the Company’s debt and borrowing facilities, and Item 1 – Note 14 for equity outstanding balances and activity. CAPITAL MANAGEMENT Schwab seeks to manage capital to a level and composition sufficient to support execution of our business strategy, including balance sheet growth over time, management of the 2023 IDA agreement inclusive of potential migration of IDA balances (see further discussion below), providing financial support to our subsidiaries, and sustained access to the capital markets, while at the same time meeting our regulatory capital requirements and serving as a source of financial strength to our banking subsidiaries. Schwab also seeks to return excess capital to stockholders. We may return excess capital through such activities as dividends, repurchases of common shares, preferred stock redemptions, and repurchases of our preferred stock represented by depositary shares. Schwab’s primary sources of capital are funds generated by the operations of subsidiaries and securities issuances by CSC in the capital markets. To ensure that Schwab has sufficient capital to absorb unanticipated losses or declines in asset values, we have adopted a policy to remain well capitalized even in stressed scenarios. Regulatory Capital Requirements CSC and certain subsidiaries including our banking and broker-dealer subsidiaries are subject to various capital requirements set by regulatory agencies as discussed in further detail in Part II – Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Capital Management of the 2022 Form 10-K and in Item 1 – Note 17. As of 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 following table details the capital ratios for CSC consolidated and CSB: September 30, 2023 December 31, 2022 CSC CSB CSC CSB Total stockholders’ equity $ 37,784 $ 13,669 $ 36,608 $ 7,664 Less: Preferred stock 9,191 — 9,706 — Common Equity Tier 1 Capital before regulatory adjustments $ 28,593 $ 13,669 $ 26,902 $ 7,664 Less: Goodwill, net of associated deferred tax liabilities $ 11,788 $ 13 $ 11,816 $ 13 Other intangible assets, net of associated deferred tax liabilities 6,739 — 7,079 — Deferred tax assets, net of valuation allowances and deferred tax liabilities 37 35 37 35 AOCI adjustment (1) (20,752) (18,144) (22,620) (19,680) Common Equity Tier 1 Capital $ 30,781 $ 31,765 $ 30,590 $ 27,296 Tier 1 Capital $ 39,972 $ 31,765 $ 40,296 $ 27,296 Total Capital 40,032 31,820 40,376 27,370 Risk-Weighted Assets 129,544 91,481 139,657 99,631 Average Assets with regulatory adjustments 488,627 330,908 562,803 372,802 Total Leverage Exposure 492,284 333,402 566,809 375,846 Common Equity Tier 1 Capital/Risk-Weighted Assets 23.8 % 34.7 % 21.9 % 27.4 % Tier 1 Capital/Risk-Weighted Assets 30.9 % 34.7 % 28.9 % 27.4 % Total Capital/Risk-Weighted Assets 30.9 % 34.8 % 28.9 % 27.5 % Tier 1 Leverage Ratio 8.2 % 9.6 % 7.2 % 7.3 % Supplementary Leverage Ratio 8.1 % 9.5 % 7.1 % 7.3 % (1) Changes in market interest rates can result in unrealized gains or losses on AFS securities, which are included in AOCI. As a Category III banking organization, CSC has elected to exclude AOCI from regulatory capital. The Company’s consolidated Tier 1 Leverage Ratio 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 - 25 - 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 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 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. The Company’s ability to migrate these balances to its balance sheet is dependent upon multiple factors including having sufficient capital levels to sustain these incremental deposits. See Item 1 – Note 9 for further information on the 2023 IDA agreement. Dividends 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. 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: 2023 2022 Nine Months Ended September 30, Cash Paid Per Share Amount Cash Paid Per Share Amount Common and Nonvoting Common Stock $ 1,379 $ .75 $ 1,179 $ .62 Preferred Stock: Series A (1) N/A N/A 25 63.30 Series D (2) 33 44.64 33 44.64 Series E (3) N/A N/A 27 4,544.37 Series F (4) 12 2,500.00 13 2,500.00 Series G (2) 100 4,031.25 101 4,031.25 Series H (2) 68 3,000.00 75 3,000.00 Series I (2) 63 3,000.00 68 3,000.00 Series J (2) 20 33.39 20 33.39 Series K (5) 28 3,750.00 18 2,458.33 (1) Series A was redeemed on November 1, 2022. Prior to redemption, dividends were paid semi-annually until February 1, 2022 and quarterly thereafter. The final dividend was paid on November 1, 2022. (2) Dividends paid quarterly. (3) Series E was redeemed on December 1, 2022. Prior to redemption, dividends were paid semi-annually until March 1, 2022 and quarterly thereafter. The final dividend was paid on December 1, 2022. (4) Dividends paid semi-annually until December 1, 2027 and quarterly thereafter. (5) Series K was issued on March 4, 2022. Dividends are paid quarterly, and the first dividend was paid on June 1, 2022. N/A Not applicable. Share Repurchases On July 27, 2022, CSC publicly announced that its Board of Directors approved a new share repurchase authorization to repurchase up to $15.0 billion of common stock, replacing the previous and now terminated share repurchase authorization of up to $4.0 billion of common stock. The new share repurchase authorization does not have an expiration date. There were no repurchases of CSC’s common stock during the three months ended September 30, 2023. CSC repurchased 37 million shares of - 26 - 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 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 nine months ended September 30, 2023 . The repurchase prices are inclusive of $3 million of dividends accrued by the stockholders as of the repurchase date. Beginning in 2023, share repurchases, net of issuances, are subject to a nondeductible 1% excise tax which was recognized as a direct and incremental cost associated with these transactions. For repurchases of common stock, the tax is recorded as part of the cost basis of the treasury stock repurchased, resulting in no impact to the condensed consolidated statement of income. For repurchases of preferred stock, the tax impact is included within preferred stock dividends and other on the condensed consolidated statement of income. OTHER Foreign Exposure 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. At December 31, 2022, the fair value of these holdings totaled $16.4 billion, with the top three exposures being to issuers and counterparties domiciled in France at $5.1 billion, the United Kingdom at $4.8 billion, and Canada at $1.7 billion. In addition, Schwab had outstanding margin loans to foreign residents of $2.7 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 nine months of 2023. NON-GAAP FINANCIAL MEASURES In addition to disclosing financial results in accordance with generally accepted accounting principles in the U.S. (GAAP), Management’s Discussion and Analysis of Financial Condition and Results of Operations contain references to the non-GAAP financial measures described below. We believe these non-GAAP financial measures provide useful supplemental information about the financial performance of the Company, and facilitate meaningful comparison of Schwab’s results in the current period to both historic and future results. These non-GAAP measures should not be considered a substitute for, or superior to, financial measures calculated in accordance with GAAP, and may not be comparable to non-GAAP financial measures presented by other companies. - 27 - 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, 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. These acquired intangible assets contribute to the Company’s revenue generation. Amortization of acquired intangible assets will continue in future periods over their remaining useful lives. We exclude acquisition and integration-related costs, 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. Return on tangible common equity Return on tangible common equity represents annualized adjusted net income available to common stockholders as a percentage of average tangible common equity. Tangible common equity represents common equity less goodwill, acquired intangible assets – net, and related deferred tax liabilities. Acquisitions typically result in the recognition of significant amounts of goodwill and acquired intangible assets. We believe return on tangible common equity may be useful to investors as a supplemental measure to facilitate assessing capital efficiency and returns relative to the composition of Schwab’s balance sheet. Adjusted Tier 1 Leverage Ratio Adjusted Tier 1 Leverage Ratio represents the Tier 1 Leverage Ratio as prescribed by bank regulatory guidance for the consolidated company and for CSB, adjusted to reflect the inclusion of AOCI in the ratio. Inclusion of the impacts of AOCI in the Company’s Tier 1 Leverage Ratio provides additional information regarding the Company’s current capital position. We believe Adjusted Tier 1 Leverage Ratio may be useful to investors as a supplemental measure of the Company’s capital levels. The Company also uses adjusted diluted EPS and return on tangible common equity as components of performance criteria for employee bonus and certain executive management incentive compensation arrangements. The Compensation Committee of CSC’s Board of Directors maintains discretion in evaluating performance against these criteria. The following tables present reconciliations of GAAP measures to non-GAAP measures: Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Total expenses excluding interest (GAAP) $ 3,223 $ 2,823 $ 9,194 $ 8,475 Acquisition and integration-related costs (1) (106) (101) (334) (291) 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 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. - 28 - 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 Amount Diluted EPS Amount Diluted EPS Amount Diluted EPS Amount Diluted EPS Net income available to common stockholders (GAAP), Earnings per common share — diluted (GAAP) $ 1,017 $ .56 $ 1,884 $ .99 $ 3,723 $ 2.03 $ 4,814 $ 2.53 Acquisition and integration-related costs 106 .06 101 .05 334 .18 291 .15 Amortization of acquired intangible assets 135 .07 152 .08 404 .22 460 .24 Restructuring costs 279 .15 — — 279 .15 — — Income tax effects (1) (127) (.07) (62) (.02) (247) (.13) (183) (.09) Adjusted net income available to common stockholders (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, 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 Return on average common stockholders’ equity (GAAP) 14 % 25 % 18 % 18 % Average common stockholders’ equity $ 28,274 $ 30,282 $ 27,747 $ 36,526 Less: Average goodwill (11,951) (11,951) (11,951) (11,952) Less: Average acquired intangible assets — net (8,457) (8,999) (8,589) (9,151) Plus: Average deferred tax liabilities related to goodwill and acquired intangible assets — net 1,822 1,848 1,830 1,867 Average tangible common equity $ 9,688 $ 11,180 $ 9,037 $ 17,290 Adjusted net income available to common stockholders (1) $ 1,410 $ 2,075 $ 4,493 $ 5,382 Return on tangible common equity (non-GAAP) 58 % 74 % 66 % 42 % (1) See table above for the reconciliation of net income available to common stockholders to adjusted net income available to common stockholders (non-GAAP). September 30, 2023 CSC CSB Tier 1 Leverage Ratio (GAAP) 8.2 % 9.6 % Tier 1 Capital $ 39,972 $ 31,765 Plus: AOCI adjustment (20,752) (18,144) Adjusted Tier 1 Capital 19,220 13,621 Average assets with regulatory adjustments 488,627 330,908 Plus: AOCI adjustment (20,033) (17,950) Adjusted average assets with regulatory adjustments $ 468,594 $ 312,958 Adjusted Tier 1 Leverage Ratio (non-GAAP) 4.1 % 4.4 %