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 $9.12 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, 2023 (2023 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 the Commission. 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; and 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); • Integration of Ameritrade, including the timing of client transitions, transition-related attrition, the amount and timing of expense and revenue synergies, and the benefits of the combined platform (see Overview in Part I – Item 2, 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 in Part I – Item 2); • Our actions to streamline our operations and amount of associated exit and related costs that we will incur (see Overview and Results of Operations in Part I – Item 2, 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 in Part I – Item 2); • Net interest revenue; the adjustment of rates paid on client-related liabilities; and outstanding balances and the use of supplemental funding (see Results of Operations in Part I – Item 2); • Capital expenditures (see Results of Operations in Part I – Item 2); • 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 in Part I – Item 2); • Sources and uses of liquidity and capital (see Liquidity Risk and Capital Management in Part I – Item 2); • Capital management; the return of capital to stockholders; 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 in Part I – Item 2 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 outcome and 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, equity market valuations and volatility; • 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; • Client cash allocations and sensitivity to deposit rates; • 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) • The level and mix of client trading activity, including daily average trades, margin balances, and balance sheet cash; • 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; • Our ability to successfully implement integration plans relating to Ameritrade, including client account transitions; • The risk that client transitions may not be completed when expected or may result in a negative client experience; expected expense and revenue synergies and other benefits from the Ameritrade acquisition may not be fully realized or may take longer to realize, and integration expense may be higher than expected; • Increased compensation and other costs due to inflationary pressures; • Re al estate and workforce decisions; • The timing and scope of technology projects; • Capital and liquidity needs and management; • 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; • Migrations of bank deposit account balances (BDA balances); • 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 2023 Form 10-K. - 3 - THE CHARLES SCHWAB CORPORATION Management’s Discussion and Analysis of Financial Condition and Results of Operations (Tabular Amounts in Millions, Except Ratios, or as Noted) OVERVIEW Management focuses on several client activity and financial metrics in evaluating Schwab’s financial position and operating performance. Results for the first quarter of 2024 and 2023 are as follows: Three Months Ended March 31, Percent Change 2024 2023 Client Metrics Net new client assets (in billions) (1) $ 88.2 $ 150.7 (41) % Core net new client assets (in billions) $ 95.6 $ 131.7 (27) % Client assets (in billions, at quarter end) $ 9,118.4 $ 7,580.0 20 % Average client assets (in billions) $ 8,761.1 $ 7,385.4 19 % New brokerage accounts (in thousands) 1,094 1,042 5 % Active brokerage accounts (in thousands, at quarter end) 35,301 34,120 3 % Assets receiving ongoing advisory services (in billions, at quarter end) $ 4,628.0 $ 3,895.5 19 % Client cash as a percentage of client assets (at quarter end) (2) 10.0 % 11.2 % Company Financial Information and Metrics Total net revenues $ 4,740 $ 5,116 (7) % Total expenses excluding interest 2,942 3,006 (2) % Income before taxes on income 1,798 2,110 (15) % Taxes on income 436 507 (14) % Net income 1,362 1,603 (15) % Preferred stock dividends and other 111 70 59 % Net income available to common stockholders $ 1,251 $ 1,533 (18) % Earnings per common share — diluted $ .68 $ .83 (18) % Net revenue change from prior year (7) % 10 % Pre-tax profit margin 37.9 % 41.2 % Return on average common stockholders’ equity (annualized) 15 % 23 % Expenses excluding interest as a percentage of average client assets (annualized) 0.14 % 0.17 % Consolidated Tier 1 Leverage Ratio (at quarter end) 8.8 % 7.1 % Non-GAAP Financial Measures (3) Adjusted total expenses (4) $ 2,802 $ 2,773 Adjusted diluted EPS $ .74 $ .93 Return on tangible common equity 39 % 83 % (1) The first quarter of 2024 and 2023 include net outflows of $7.4 billion and inflows of $19.0 billion, respectively, from off-platform certificates of deposit (CDs) issued by CSB. (2) Beginning in the third quarter of 2023, client cash as a percentage of client assets excludes brokered CDs issued by CSB. The prior period has been recast to reflect this change. (3) In the first quarter of 2024, 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. Further improvements in the macroeconomic environment helped bolster investor sentiment and engagement in the first quarter of 2024. Inflation remained at moderate though persistent levels during the quarter, leading to shifting market expectations around the pace and extent of potential Federal Reserve interest rate reductions. Equity markets had a strong start to the year, with the S&P 500 ® rising 10% in the first quarter of 2024. Schwab’s organic asset gathering and equity market gains helped total client assets reach $9.12 trillion as of quarter-end, up 20% from March 31, 2023, as clients entrusted us with core net new assets of $95.6 billion in the first quarter of 2024. As we have experienced over the course of the Ameritrade client account conversions, net new assets in the first quarter of 2024 reflected expected asset attrition from the Ameritrade integration, though the amount of attrition continued to be below amounts anticipated when we announced the acquisition in late 2019. Clients’ daily average trades (DATs) were 6.0 million in the first quarter of 2024, up slightly from the first quarter of the prior year. Clients opened 1.1 million new brokerage accounts in the first quarter of 2024, helping active brokerage accounts rise 3% year-over-year to reach 35.3 million at quarter-end. - 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) Schwab’s financial performance in the first quarter of 2024 reflected the benefits of a supportive macroeconomic backdrop, increased client engagement, and solid organic growth. The Company’s financial results were down relative to the first quarter of 2023, though overall performance improved sequentially from the fourth quarter of 2023 driven by lower interest expense due to reduced supplemental funding, rising equity markets and client engagement, and our late-2023 cost reduction efforts. Net income totaled $1.4 billion in the first quarter of 2024, down 15% from the first quarter of 2023 and up 30% from the fourth quarter of 2023. Diluted earnings per share (EPS) was $.68 in the first quarter of 2024, down 18% from the prior-year first quarter and up 33% from the fourth quarter of 2023. Adjusted diluted EPS (1) was $.74 in the first quarter of 2024, down 20% from the first quarter of 2023 and up 9% from the fourth quarter of 2023. Total net revenues decreased 7% year-over-year to $4.7 billion during the first quarter of 2024. Net interest revenue was $2.2 billion in the first quarter of 2024, down 19% from the prior year’s first quarter due primarily to greater use of supplemental funding and lower average interest-earning assets, partially offset by higher rates on interest-earning assets. Asset management and administration fees totaled $1.3 billion in the first quarter of 2024, rising 21% from the first quarter of 2023 primarily as a result of growth in money market funds, equity market gains, and growth in advice solutions. Trading revenue declined 8% year-over-year to $817 million in the first quarter of 2024, primarily due to a decrease in order flow revenue, reflecting narrower spreads on options and lower equity volume. Bank deposit account fee revenue was $183 million in the first quarter of 2024, up 21% year-over-year due primarily to $97 million of one-time breakage fees incurred when we ended our arrangements with certain third-party banks in the first quarter of 2023. BDA balances totaled $90.3 billion at March 31, 2024, down 7% from year-end 2023, reflecting client cash allocation decisions. Total expenses excluding interest were $2.9 billion in the first quarter of 2024, down 2% from the first quarter of 2023, reflecting the benefits of our cost reduction restructuring efforts undertaken in late 2023, which drove year-over-year decreases in compensation and benefits and occupancy and equipment. Partially offsetting these reductions were growth in depreciation and amortization driven by capital expenditures to support the Ameritrade integration and growth of the business, and higher regulatory fees and assessments, which included an incremental Federal Deposit Insurance Corporation (FDIC) special assessment of $25 million (see Current Regulatory and Other Developments). Adjusted total expenses (1) were $2.8 billion, up 1% from the first quarter of 2023 reflecting the above items and lower acquisition and integration-related costs in the first quarter of 2024. Acquisition and integration-related costs, amortization of acquired intangible assets, and restructuring costs totaled $140 million in the first quarter of 2024, down 40% from the first quarter of 2023. Return on average common stockholders’ equity was 15% in the first quarter of 2024, down from 23% in the first quarter of 2023. Return on tangible common equity (1) (ROTCE) was 39% in the first quarter of 2024, down from 83% in the first quarter of 2023. These decreases were due primarily to higher average stockholders’ equity and lower year-over-year net income. Average stockholders’ equity was higher in the first quarter of 2024 due to higher average retained earnings due to full-year 2023 and first-quarter 2024 net income, as well as higher average AOCI. The increase in average AOCI was driven by lower unrealized losses on our available for sale (AFS) investment securities portfolio and securities transferred in 2022 from AFS to held to maturity (HTM) (see Item 1 – Note 15). The Company continued its diligent approach to balance sheet management, seeking to prioritize flexibility. During the first quarter of 2024, total balance sheet assets decreased 5% from year-end 2023 to $468.8 billion. This decrease was driven primarily by lower cash balances. As the pace and amount of client cash realignment continued to decrease, the Company reduced the total outstanding balance of supplemental funding, which includes brokered CDs, Federal Home Loan Bank (FHLB) borrowings, and borrowings under repurchase agreements, by $8.8 billion, or 11%, during the first quarter of 2024. In addition, the Company repaid $3.3 billion in maturing long-term debt during the first quarter of 2024. Supported by net income and a smaller balance sheet, our consolidated Tier 1 Leverage Ratio increased to 8.8% as of March 31, 2024. (1) Adjusted diluted EPS, adjusted total expenses, and return on tangible common equity are non-GAAP financial measures. See Non-GAAP Financial Measures for further details and a reconciliation of such measures to GAAP reported results. Integration of Ameritrade Effective October 6, 2020, the Company completed its acquisition of TD Ameritrade Holding Corporation, now Ameritrade Holding LLC (Ameritrade Holding), and its consolidated subsidiaries (collectively referred to as “Ameritrade”). The Company has made significant progress in its integration of Ameritrade. We’ve transitioned approximately $1.6 trillion in client assets across more than 15 million client accounts, including 7,000 RIAs, from Ameritrade to the Schwab platform across four transition groups. In connection with these transitions, we have experienced some related attrition of client assets from retail - 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) accounts and RIAs, which have been below our initial estimates when we announced the acquisition. The Company expects to complete the remaining client transitions from Ameritrade to Schwab in a final transition group in May 2024. We continue to expect total acquisition and integration-related costs and capital expenditures will be 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 certain 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 as we prepare for the last transition group and remaining integration work include the level of employee attrition, the complexity to wind-down the operations of the Ameritrade broker-dealers and related technology, and real estate-related exit cost variability. Acquisition and integration-related costs, which are inclusive of related exit costs, totaled $38 million and $98 million for the first quarters of 2024 and 2023, respectively. Over the course of the integration, we expect to realize annualized cost synergies of between $1.8 billion and $2.0 billion, and, through March 31, 2024, we have achieved over 80% of this amount on an annualized run-rate basis. The Company expects to realize 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 – Management’s Discussion and Analysis of Financial Condition and Results of Operations (Item 7) – Overview in our 2023 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 Ameritrade. Other In addition to cost synergies directly related to the integration of Ameritrade, the Company took incremental actions in 2023 to streamline its operations to prepare for post-integration, including through position eliminations and decreasing its real estate footprint. Through these actions, the Company has realized approximately $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 $500 million, substantially all of which have been recognized as of March 31, 2024. The Company anticipates the remaining costs, primarily related to real estate, will be incurred 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 April 2024, the U.S. Department of Labor adopted a final rule to significantly broaden the definition of “fiduciary” under the Employee Retirement Income Security Act of 1974. Among other requirements, the rule subjects broker-dealers who provide non-discretionary investment advice to retirement plans and accounts to a “best interest” standard. The rule generally takes effect on September 23, 2024 with a one-year transition period after the effective date for certain provisions. The Company is currently evaluating the impacts and the related implementation and operational issues of the final rule. In March 2024, the SEC adopted amendments to Rule 605 of Regulation National Market System (NMS) requiring enhanced disclosures of order execution quality for large broker-dealers that handle retail orders. We do not expect the new rule to have a material impact on the Company’s business, financial condition, or results of operations. Three related equity market structure rule proposals released in December 2022 by the SEC remain pending. In November 2023, the FDIC approved a final special assessment to recover losses incurred by the Deposit Insurance Fund (DIF) to protect uninsured depositors due to the March 2023 closures of two banks, that was subject to potential extension and a potential one-time final special assessment for any shortfall in the DIF. The pre-tax impact of the final rule’s initial assessment to the Company was $172 million, which is tax deductible and was recognized in earnings in the fourth quarter of 2023. The special assessment will be paid over eight quarters which began in the first quarter of 2024. In late February 2024, the FDIC notified banks, including the Company’s banking subsidiaries, that the estimated assessed losses to the DIF increased. Accordingly, during the first quarter of 2024, Schwab recognized a pre-tax charge of $25 million for its estimate of this incremental special assessment, which is tax deductible. This amount remains subject to further adjustment; the FDIC has indicated it will provide any updates to the estimated special assessment applicable to each bank as part of the FDIC’s June 2024 invoices. - 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) See Part II – Item 7 – Current Regulatory and Other Developments in our 2023 Form 10-K for additional information regarding these and other pending regulatory matters including: • The U.S. federal banking agencies’ August 2023 proposed rulemaking on long-term debt requirements for certain large banking organizations; • The U.S. federal banking agencies’ July 2023 notice of proposed rulemaking with amendments to the regulatory capital rules, which, among other things, 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; and • The SEC’s November 2022 proposed rule that would require substantial changes to the liquidity risk management programs for open-end mutual funds other than money market funds and require them to implement “swing pricing” and impose a “hard close” on the acceptance of purchase and redemption orders. RESULTS OF OPERATIONS Total Net Revenues The following tables present a comparison of revenue by category: 2024 2023 Three Months Ended March 31, Percent Change Amount % of Total Net Revenues Amount % of Total Net Revenues Net interest revenue Interest revenue (2) % $ 3,941 83 % $ 4,016 78 % Interest expense 37 % (1,708) (36) % (1,246) (24) % Net interest revenue (19) % 2,233 47 % 2,770 54 % Asset management and administration fees Mutual funds, exchange-traded funds (ETFs), and collective trust funds (CTFs) 30 % 758 16 % 585 11 % Advice solutions 11 % 503 11 % 453 9 % Other 9 % 87 2 % 80 2 % Asset management and administration fees 21 % 1,348 29 % 1,118 22 % Trading revenue Commissions (2) % 413 9 % 422 8 % Order flow revenue (15) % 352 7 % 414 8 % Principal transactions (7) % 52 1 % 56 1 % Trading revenue (8) % 817 17 % 892 17 % Bank deposit account fees 21 % 183 4 % 151 3 % Other (14) % 159 3 % 185 4 % Total net revenues (7) % $ 4,740 100 % $ 5,116 100 % 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. In response to continued elevated inflation, the Federal Reserve raised the federal funds target overnight rate four times in the first three quarters of 2023 for a total of 100 basis points before holding rates unchanged since July 2023. Short-term rates - 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) remained consistent through the first quarter of 2024, as the Federal Reserve maintained the upper bound of the target overnight rate at 5.50%. Schwab’s average interest-earning assets in the first quarter of 2024 were lower compared with the first quarter of 2023, primarily due to clients’ reallocation of cash from sweep products to higher-yielding investment solutions throughout 2023 and the first quarter of 2024, which resulted primarily from 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 supplemental funding, including drawing upon FHLB secured lending facilities, engaging with external financial institutions in repurchase agreements, and issuing brokered CDs. The average pace of client cash allocation out of sweep products into higher-yielding investment solutions decreased significantly beginning in the second half of 2023, and continued to decrease in the first quarter of 2024. The following tables present net interest revenue information corresponding to interest-earning assets and funding sources on the condensed consolidated balance sheets: 2024 2023 Three Months Ended March 31, Average Balance Interest Revenue/ Expense Average Yield/Rate Average Balance Interest Revenue/ Expense Average Yield/Rate Interest-earning assets Cash and cash equivalents $ 33,791 $ 454 5.31 % $ 37,056 $ 413 4.46 % Cash and investments segregated 29,297 388 5.24 % 40,068 432 4.31 % Receivables from brokerage clients 63,804 1,260 7.81 % 60,543 1,084 7.16 % Available for sale securities (1) 111,867 594 2.12 % 155,791 825 2.12 % Held to maturity securities (1) 157,410 690 1.75 % 170,889 746 1.75 % Bank loans 40,529 440 4.36 % 40,248 391 3.92 % Total interest-earning assets 436,698 3,826 3.48 % 504,595 3,891 3.09 % Securities lending revenue 76 112 Other interest revenue 39 13 Total interest-earning assets $ 436,698 $ 3,941 3.59 % $ 504,595 $ 4,016 3.19 % Funding sources Bank deposits $ 274,368 $ 921 1.35 % $ 343,105 $ 618 0.73 % Payables to brokerage clients 68,343 73 0.43 % 77,169 75 0.39 % Other short-term borrowings 7,385 103 5.61 % 6,917 86 5.05 % Federal Home Loan Bank borrowings 24,857 330 5.27 % 24,458 304 5.05 % Long-term debt 25,000 224 3.59 % 20,290 139 2.74 % Total interest-bearing liabilities 399,953 1,651 1.65 % 471,939 1,222 1.05 % Non-interest-bearing funding sources 36,745 32,656 Securities lending expense 55 22 Other interest expense 2 2 Total funding sources $ 436,698 $ 1,708 1.57 % $ 504,595 $ 1,246 1.00 % Net interest revenue $ 2,233 2.02 % $ 2,770 2.19 % (1) Amounts have been calculated based on amortized cost. Interest revenue on investment securities is presented net of related premium amortization. Net interest revenue decreased $537 million, or 19%, in the first quarter of 2024 compared to the same period in 2023. This decrease was 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. Average interest-earning assets for the first quarter of 2024 were lower by 13% compared to the same period in 2023. This decrease was primarily due to lower bank deposits as a result of changes in client cash allocations due to higher market interest rates and a smaller investment securities portfolio, partially offset by greater margin loan balances. Net interest margin decreased to 2.02% in the first quarter of 2024 from 2.19% in the same period in 2023, as the higher rates paid across interest-bearing funding sources more than offset the improved yields on interest-earning assets. The Company’s higher average balances in the first quarter of 2024 relative to the same period in 2023 of FHLB borrowings, repurchase agreements, and brokered CDs resulted in higher funding costs. The Company prioritizes repayment of the outstanding balances of its supplemental funding sources, and during the first quarter of 2024, the total outstanding balance - 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) decreased by $8.8 billion, which helped support a 13-basis-point improvement in net interest margin for the first quarter of 2024 compared with the fourth quarter of 2023. Our use and the financial impacts of such supplemental funding 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 continued to decline from peak levels, uncertainty remains, including in regard to the path of market interest rates and client behavior, which will significantly impact our utilization of supplemental funding sources. The impacts to net interest revenue of using supplemental funding sources also depend on the type of funding source used and levels of interest rates. The Company currently expects its outstanding balances of supplemental funding sources to decrease over time. Certain amounts outstanding at March 31, 2024 will require rollover into new borrowings, the amount and costs of which will depend on the above noted factors. See also Risk Management – Liquidity Risk, Item 1 – Note 7 Bank Deposits, and Item 1 – Note 8 Borrowings for additional information on these and other funding sources. Asset Management and Administration Fees The following table presents asset management and administration fees, average client assets, and average fee yields: Three Months Ended March 31, 2024 2023 Average Client Assets Revenue Average Fee Average Client Assets Revenue Average Fee Schwab money market funds $ 499,887 $ 336 0.27 % $ 316,391 $ 213 0.27 % Schwab equity and bond funds, ETFs, and CTFs 539,661 107 0.08 % 450,581 91 0.08 % Mutual Fund OneSource ® and other no-transaction-fee (NTF) funds 314,576 209 0.27 % 222,437 148 0.27 % Other third-party mutual funds and ETFs 605,625 106 0.07 % 676,344 133 0.08 % Total mutual funds, ETFs, and CTFs (1) $ 1,959,749 758 0.16 % $ 1,665,753 585 0.14 % Advice solutions (1) Fee-based $ 506,133 503 0.40 % $ 443,027 453 0.41 % Non-fee-based 106,032 — — 94,469 — — Total advice solutions $ 612,165 503 0.33 % $ 537,496 453 0.34 % Other balance-based fees (2) 719,447 69 0.04 % 561,788 62 0.04 % Other (3) 18 18 Total asset management and administration fees $ 1,348 $ 1,118 (1) Average client assets for advice solutions may also include the asset balances contained in the mutual fund and/or ETF categories listed above. (2) Includes various asset-related fees, such as trust fees, 401(k) recordkeeping fees, and mutual fund clearing fees and other service fees. (3) Includes miscellaneous service and transaction fees relating to mutual funds and ETFs that are not balance-based. Asset management and administration fees increased by $230 million, or 21%, in the first quarter of 2024 compared to the same period in 2023. This increase was primarily a result of higher balances in Schwab money market funds as clients shifted their cash allocations to higher-yielding investment solutions. The increase was also due to growth in balances in Mutual Fund OneSource ® and fee-based advice solutions, as a result of strong equity markets and, for advice solutions, net inflows of client assets. 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 48% and 40% of the asset management and administration fees earned in the first quarter of 2024 and 2023, respectively: Schwab Money Market Funds Schwab Equity and Bond Funds, ETFs, and CTFs Mutual Fund OneSource ® and Other NTF funds Three Months Ended March 31, 2024 2023 2024 2023 2024 2023 Balance at beginning of period $ 476,409 $ 278,926 $ 506,149 $ 412,942 $ 306,222 $ 235,738 Net inflows (outflows) 30,940 75,036 7,719 10,344 (4,161) (4,629) Net market gains (losses) and other 8,329 3,860 35,022 20,433 27,115 13,153 Balance at end of period $ 515,678 $ 357,822 $ 548,890 $ 443,719 $ 329,176 $ 244,262 - 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) Trading Revenue The following tables present trading revenue, client trading activity, and related information: Three Months Ended March 31, Percent Change 2024 2023 Commissions $ 413 $ 422 (2) % Order flow revenue Options 242 281 (14) % Equities 110 133 (17) % Total order flow revenue 352 414 (15) % Principal transactions 52 56 (7) % Total trading revenue $ 817 $ 892 (8) % Three Months Ended March 31, Percent Change 2024 2023 DATs (in thousands) 5,958 5,895 1 % Product as a percentage of DATs Equities 51 % 49 % Derivatives 22 % 23 % ETFs 19 % 21 % Mutual funds 6 % 5 % Fixed income 2 % 2 % Number of trading days 61.0 62.0 (2) % Revenue per trade (1) $ 2.25 $ 2.44 (8) % (1) Revenue per trade is calculated as trading revenue divided by DATs multiplied by the number of trading days. Trading revenue decreased $75 million, or 8%, in the first quarter of 2024 compared to the same period in 2023. This change is primarily due to lower options order flow revenue reflecting narrower quoted spreads in the options market, and lower equities order flow revenue reflecting lower equity trading volume overall. Additionally, commissions decreased as a result of changes in the mix of client trading activity and fewer trading days. 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. In accordance with the Second Amended and Restated Insured Deposit Account Agreement (2023 IDA agreement) executed on May 4, 2023, cash held in eligible brokerage client accounts is swept off-balance sheet to deposit accounts at the TD Depository Institutions. Schwab provides recordkeeping and support services to the TD Depository Institutions with respect to the deposit accounts for which Schwab receives an aggregate monthly fee. Under the 2023 IDA agreement, the service fee on client cash deposits held at the TD Depository Institutions is 15 basis points. See Item 1 – Note 9 for additional discussion of the 2023 IDA agreement. - 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) The following table presents bank deposit account fee revenue, average BDA balances, average net yield, and average balances earning fixed- and floating-rate yields: Three Months Ended March 31, Percent Change 2024 2023 Bank deposit account fees $ 183 $ 151 21 % Average BDA balances $ 92,859 $ 115,877 (20) % Average net yield 0.78 % 0.52 % Percentage of average BDA balances designated as: Fixed-rate balances 88 % 92 % Floating-rate balances 12 % 8 % Bank deposit account fees increased $32 million, or 21%, in the first quarter of 2024, compared to the same period in 2023. The increase was primarily due to $97 million of breakage fees incurred that resulted in lower bank deposit account fee revenue in the first quarter of 2023. In addition, the average amount of floating-rate BDA balances increased in the first quarter of 2024 compared to the first quarter of 2023, which contributed to an increase in average net yield. These factors were partially offset by a decrease in average BDA balances in the first quarter of 2024 compared to the same period in 2023, primarily due to client cash allocation decisions in response to higher short-term market interest rates. The percentages of BDA balances designated as fixed-rate and floating-rate obligation amounts as of March 31, 2024 were 88% and 12%, 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 $26 million, or 14%, in the first quarter of 2024 compared to the same period in 2023, primarily due to lower exchange processing fees and certain lower service fees, partially offset by lower provision for credit losses on bank loans. Exchange processing fees decreased primarily due to a decrease in the SEC fee rate which became effective in the first quarter of 2023. The provision for credit losses on bank loans was lower in the first quarter of 2024 compared to the same period in 2023, as during the first quarter of 2024, loan loss factors decreased while the total balance of first lien residential real estate mortgage loans (First Mortgages) remained consistent with year-end 2023. Subsequent to March 31, 2024, the SEC announced that effective May 22, 2024, it would increase its fee rates applicable to most securities transactions from the rate in effect since late February 2023. This change will result in higher exchange processing fees per security transaction in other revenue and a corresponding increase in other expense, resulting in no impact to net income. - 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) Total Expenses Excluding Interest The following table presents a comparison of expenses excluding interest: Three Months Ended March 31, Percent Change 2024 2023 Compensation and benefits Salaries and wages $ 854 $ 972 (12) % Incentive compensation 387 364 6 % Employee benefits and other 297 302 (2) % Total compensation and benefits $ 1,538 $ 1,638 (6) % Professional services 241 258 (7) % Occupancy and equipment 265 299 (11) % Advertising and market development 88 88 — Communications 141 146 (3) % Depreciation and amortization 228 177 29 % Amortization of acquired intangible assets 130 135 (4) % Regulatory fees and assessments 125 83 51 % Other 186 182 2 % Total expenses excluding interest $ 2,942 $ 3,006 (2) % Expenses as a percentage of total net revenues Compensation and benefits 32 % 32 % Advertising and market development 2 % 2 % Full-time equivalent employees (in thousands) At quarter end 32.6 36.0 (9) % Average 32.7 35.6 (8) % Expenses excluding interest decreased by $64 million, or 2%, in the first quarter of 2024, compared to the same period in 2023. Adjusted total expenses, which excludes acquisition and integration-related costs, amortization of acquired intangible assets, and, beginning in the third quarter of 2023, restructuring costs, increased 1% in the first quarter of 2024, compared to the same period in 2023. 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 Ameritrade (see below and Overview – Other for additional information). Total compensation and benefits expense decreased in the first quarter of 2024 compared to the same period in 2023, primarily due to lower headcount as a result of position eliminations completed in the second half of 2023 as part of restructuring, partially offset by higher incentive compensation and annual merit increases. Compensation and benefits included acquisition and integration-related costs of $17 million and $58 million in the first quarter of 2024 and 2023, respectively. Compensation and benefits also included a $31 million benefit in the first quarter of 2024 primarily due to a change in estimate in restructuring costs. Professional services expense decreased in the first quarter of 2024 compared to the same period in 2023, primarily due to lower utilization of professional services as we approach the completion of the Ameritrade integration and client account transitions. Professional services included acquisition and integration-related costs of $17 million and $33 million in the first quarter of 2024 and 2023, respectively. Occupancy and equipment expense decreased in the first quarter of 2024 compared to the same period in 2023, primarily due to lower technology equipment and software costs, as well as lower occupancy costs as a result of facility closures in 2023 related to restructuring and the Ameritrade integration. Occupancy and equipment included restructuring costs of $2 million in the first quarter of 2024 and acquisition and integration-related costs of $4 million in the first quarter of 2023. Advertising and market development expense in the first quarter of 2024 remained consistent with the same period in 2023. Communications expense decreased slightly in the first quarter of 2024, compared to the same period in 2023, primarily as a result of certain lower exchange quotation services expenses. - 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) Depreciation and amortization expense increased in the first quarter of 2024 compared to the same period in 2023, primarily as a result of higher amortization of purchased and internally developed software, driven by capital expenditures in 2023 and the first three months of 2024 to support the Ameritrade integration and enhance our technological infrastructure to support growth of the business. Amortization of acquired intangible assets decreased slightly in the first quarter of 2024 compared to the same period in 2023, as certain assets from the Ameritrade acquisition were fully amortized during 2023. Regulatory fees and assessments increased in the first quarter of 2024 compared to the same period in 2023, primarily as a result of a $25 million incremental FDIC special assessment and higher FDIC deposit insurance assessments, reflecting greater use of brokered CDs, partially offset by a lower assessment base. See Current Regulatory and Other Developments for discussion of the FDIC special assessment. Other expense increased slightly in the first quarter of 2024 compared to the same period in 2023, primarily due to higher exchange processing fees, partially offset by lower other clearing costs. Exchange processing fees increased in the first quarter of 2024 compared to the first quarter of 2023 as a result of higher trading volumes. Other expense included restructuring costs of $1 million in the first quarter of 2024. Subsequent to March 31, 2024, the SEC announced that effective May 22, 2024, it would increase its fee rates applicable to most securities transactions from the rate in effect since late February 2023. This change will result in higher exchange processing fees per security transaction in other expense and a corresponding increase in other revenue, resulting in no impact to net income. Capital expenditures were $122 million and $187 million in the first quarter of 2024 and 2023, respectively. Capital expenditures decreased for the first quarter of 2024 compared to the same period in 2023, primarily due to lower purchased and internally developed software as we approach the completion of the Ameritrade integration and client account transitions. We continue to anticipate capital expenditures for full-year 2024 will be approximately 3-5% of total net revenues. Taxes on Income Taxes on income were $436 million and $507 million for the first quarter of 2024 and 2023, respectively, resulting in effective tax rates of 24.2% and 24.0%, respectively. The increase in the effective tax rate in the first quarter of 2024 compared to the same period in 2023 was primarily related to the release of tax reserves in the first quarter of 2023 due to the resolution of certain state tax matters and a decrease in equity compensation benefit in the first quarter of 2024. These increases were partially offset by a decrease in state tax expense and the recognition of certain tax credits. Segment Information Financial information for our segments is presented in the following tables: Investor Services Advisor Services Total Three Months Ended March 31, Percent Change 2024 2023 Percent Change 2024 2023 Percent Change 2024 2023 Net Revenues Net interest revenue (14) % $ 1,742 $ 2,033 (33) % $ 491 $ 737 (19) % $ 2,233 $ 2,770 Asset management and administration fees 18 % 947 805 28 % 401 313 21 % 1,348 1,118 Trading revenue (8) % 713 775 (11) % 104 117 (8) % 817 892 Bank deposit account fees 36 % 135 99 (8) % 48 52 21 % 183 151 Other (11) % 135 151 (29) % 24 34 (14) % 159 185 Total net revenues (5) % 3,672 3,863 (15) % 1,068 1,253 (7) % 4,740 5,116 Expenses Excluding Interest 1 % 2,265 2,233 (12) % 677 773 (2) % 2,942 3,006 Income before taxes on income (14) % $ 1,407 $ 1,630 (19) % $ 391 $ 480 (15) % $ 1,798 $ 2,110 Net New Client Assets (in billions) (1) (56) % $ 34.9 $ 79.4 (25) % $ 53.3 $ 71.3 (41) % $ 88.2 $ 150.7 (1) In the first quarter of 2024 and 2023, Investor Services includes net outflows of $7.4 billion and inflows of $19.0 billion, respectively, from off-platform brokered CDs issued by CSB. - 13 - THE CHARLES SCHWAB CORPORATION Management’s Discussion and Analysis of Financial Condition and Results of Operations (Tabular Amounts in Millions, Except Ratios, or as Noted) Segment Net Revenues Investor Services total net revenues decreased by 5% in the first quarter of 2024, compared to the same period in 2023, and Advisor Services total net revenues decreased by 15% in the first quarter of 2024, compared to the same period in 2023. Net interest revenue decreased for both segments due to higher cost funding sources and lower average interest-earning asset balances, as described above. Trading revenue decreased for both segments, primarily due to lower payment for order flow and, for Investor Services, lower commissions, as described above. Other revenue decreased for both segments, primarily due to lower exchange processing fees and certain lower service fees, 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, primarily as a result of higher balances in money market funds, and Mutual Fund OneSource ® and, additionally for Investor Services, fee-based advice solutions. Bank deposit account fees increased for Investor Services and decreased for Advisor Services. Both segments were impacted by breakage fees incurred in the first quarter of 2023, partially offset by lower average BDA balances in the first quarter of 2024. Segment Expenses Excluding Interest Investor Services total expenses excluding interest increased by 1% in the first quarter of 2024, compared to the same period in 2023, while Advisor Services total expenses excluding interest decreased by 12% in the first quarter of 2024, compared to the same period in 2023. Both segments had decreases in compensation and benefits expense primarily due to lower headcount as a result of position eliminations in 2023, partially offset by higher incentive compensation and annual merit increases. Occupancy and equipment expense decreased in both segments, primarily due to lower technology equipment and software costs and lower occupancy costs due to facility closures in 2023 related to restructuring and the Ameritrade integration. Other expense decreased for Advisor Services and increased for Investor Services, primarily due to decreases in exchange processing fees and other clearing costs for Advisor Services and increases in similar fees and costs for Investor Services. Additionally, regulatory fees and assessments increased in both segments, primarily due to higher FDIC assessments, as described above. For Investor Services, depreciation and amortization expense also increased, primarily due to higher amortization of purchased and internally developed software, driven by capital expenditures in 2023 and the first three months of 2024 to enhance our technological infrastructure to support growth of the business. 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 – Risk Management in the 2023 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, 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- - 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) 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. Consistent with our policies related to the management of interest rate risk, the Company’s net interest revenue sensitivity analysis primarily involves gradual parallel increases/decreases in interest rates over a twelve-month period, though we also regularly simulate the effects of non-parallel shifts and instantaneous shifts of interest rates on net interest revenue. 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. Higher prevailing short-term interest rates generally improve yields on shorter duration interest-earning assets. During periods of rapidly rising interest rates, clients tend to reallocate cash out of sweep products into higher-yielding, off-balance sheet, fixed income investments and money market funds within Schwab’s product offerings. This can result in lower interest-earning assets and/or may require supplemental funding with higher funding costs, which therefore tend to constrain net interest revenue when interest rates are moving rapidly higher. 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. 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. The following table presents simulated changes to net interest revenue over the next 12 months beginning March 31, 2024 and December 31, 2023 of a gradual increase or decrease in market interest rates relative to prevailing market rates at the end of each reporting period: March 31, 2024 December 31, 2023 Increase of 200 basis points 10.0 % 10.8 % Increase of 100 basis points 5.3 % 5.8 % Increase of 50 basis points 2.9 % 3.1 % Decrease of 50 basis points 0.5 % 0.4 % Decrease of 100 basis points 0.0 % (0.2) % Decrease of 200 basis points (3.5) % (4.2) % The Company’s simulated incremental increases and decreases in market interest rates had a smaller impact on net interest revenue as of March 31, 2024 compared to December 31, 2023. This is primarily due to lower cash balances held at March 31, 2024, partially offset by lower interest-bearing deposits, which reduces interest expense in a higher rate environment and reduces interest expense savings in a lower rate environment. 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 - 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) composition of funding sources, and typically decreases in periods of rising market interest rates and increases in periods of declining market interest rates. The following table presents the Company’s estimated effective durations, which reflects anticipated future payments, by category: March 31, 2024 March 31, 2023 In years Estimated effective duration, exclusive of derivatives: Consolidated total assets 2.5 2.6 AFS investment securities portfolio 2.4 2.4 AFS and HTM investment securities portfolio 3.9 4.0 Estimated effective duration, inclusive of derivatives (1) : Consolidated total assets 2.4 2.6 AFS investment securities portfolio 2.1 2.3 AFS and HTM investment securities portfolio 3.8 3.9 (1) See Note 11 for additional discussion on the Company’s derivatives. AFS and HTM securities comprised approximately 55% and 58% of the Company’s consolidated total assets as of March 31, 2024 and 2023, respectively. The estimated effective duration of the remaining balance sheet assets in aggregate was less than one year as of both March 31, 2024 and 2023. 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 and prepayment speed modeling for mortgage-backed securities and mortgage loans. As interest rates have risen in the Federal Reserve’s tightening cycle, EVE sensitivity has 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 March 31, 2024 and December 31, 2023, 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. 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 - 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) 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, borrowings under repurchase agreements with external financial institutions, 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 35.3 million active brokerage accounts. More than 80% of our bank deposits qualified for FDIC insurance as of March 31, 2024. 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. - 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) The following table describes external debt facilities available at March 31, 2024: Description Borrower Outstanding Available Maturity of Amounts Outstanding Weighted-Average Interest Rate on Amounts Outstanding FHLB secured credit facilities Banking subsidiaries $ 24,000 $ 63,439 (1) May 2024 - January 2025 5.33% Federal Reserve discount window Banking subsidiaries — 32,935 (1,2) N/A — Repurchase agreements Banking subsidiaries, CSC 7,705 — (3) April 2024 - December 2024 5.46% Unsecured, uncommitted lines of credit with various external banks CSC, CS&Co — 1,617 N/A — Unsecured commercial paper CSC — 5,000 N/A — Secured uncommitted lines of credit with various external banks CS&Co — — (4) N/A — Secured uncommitted lines of credit with various external banks TDAC 700 — (4) April 2024 5.69% Unsecured, committed revolving line of credit with various external banks CSC — 2,100 (5) N/A — (1) Amounts shown as available from the FHLB and Federal Reserve facilities represent remaining capacity based on assets pledged as of March 31, 2024. 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) On March 11, 2024, the Federal Reserve Bank Term Funding Program (BTFP) ceased to make new loans available. As such, during the first quarter of 2024, the Company reallocated certain amounts of collateral previously pledged under the BTFP to the Federal Reserve discount window. The BTFP was not used by the Company during the first quarter of 2024. (3) 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. (4) Secured borrowing capacity is made available based on CS&Co’s or TDAC’s ability to provide acceptable collateral to the lenders as determined by the credit agreements. (5) During the first quarter of 2024, CSC entered into an unsecured committed revolving line of credit with various external banks. N/A Not applicable. Available borrowing capacity from the FHLB and Federal Reserve facilities maintained by our banking subsidiaries is dependent on the value of assets pledged and the terms of the borrowing arrangements. As of March 31, 2024, the Company had additional investment securities with a par value of approximately $135 billion or a fair value of approximately $124 billion available to be pledged to obtain additional capacity. 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 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 three months of 2024 and there were no amounts outstanding at March 31, 2024. CSC maintains a standing bilateral repurchase agreement with an external bank. This facility was not used during the first quarter of 2024 and there were no amounts outstanding under this facility at March 31, 2024. 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 March 31, 2024. CSC also has a universal automatic shelf registration statement on file with the SEC, which enables it to issue debt, equity, and other securities. - 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) Beginning in the first quarter of 2024, CSC has access to an unsecured, committed revolving line of credit with various external banks. This line will expire in January 2025. Other than an overnight borrowing to test the availability, the facility was not used during the first quarter of 2024. 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. During 2023 and the first three months of 2024, CSB issued brokered CDs as a supplemental funding source. The following table provides information about brokered CDs issued by CSB and outstanding as of March 31, 2024: Amount Outstanding Maturity Weighted-Average Interest Rate Brokered CDs $ 39,128 April 2024 - April 2025 5.22% 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 at Schwab. 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 pace of client cash allocations out of sweep products into higher-yielding investment solutions decreased significantly beginning in the second half of 2023, and continued to decrease in the first quarter of 2024. Cash and cash equivalents decreased $11.6 billion from year-end 2023 to $31.8 billion at March 31, 2024; cash and cash equivalents, including amounts restricted, decreased $16.8 billion to $57.7 billion at March 31, 2024. This decrease reflected repayments of supplemental funding balances of $8.8 billion and maturities of long-term debt of $3.3 billion. Bank deposits decreased during the first quarter of 2024 by $20.5 billion, resulting from a decrease of $11.4 billion in deposits swept from brokerage accounts due to client cash allocations and a decrease in brokered CDs of $9.2 billion. Partially offsetting the decrease in bank deposits and repayment of borrowings, net investing cash flows from our AFS and HTM securities totaled $10.0 billion in the first three months of 2024. Liquidity Coverage Ratio Schwab is subject to the full LCR rule, which requires the Company to hold high quality liquid assets (HQLA) in an amount equal to at least 100% of the Company’s projected net cash outflows over a prospective 30-calendar-day period of acute liquidity stress, calculated on each business day. See Part I – Item 1 – Business – Regulation in the 2023 Form 10-K for additional information. The Company was in compliance with the LCR rule at March 31, 2024, and the table below presents information about our average daily LCR: Average for the Three Months Ended March 31, 2024 December 31, 2023 Total eligible HQLA $ 58,841 $ 58,056 Net cash outflows 45,195 44,793 LCR 130 % 130 % 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. In managing compliance with our LCR requirements, the broker-dealer subsidiaries may also retain client cash balances rather than sweeping such balances to our banking subsidiaries. - 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) 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. 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 March 31, 2024. Long-Term Borrowings The Company’s long-term debt is primarily comprised of Senior Notes and totaled $22.9 billion and $26.1 billion at March 31, 2024 and December 31, 2023, respectively. The following table provides information about our Senior Notes outstanding at March 31, 2024: March 31, 2024 Par Outstanding Maturity Weighted Average Interest Rate Moody’s Standard & Poor’s Fitch CSC Senior Notes $ 22,612 2024 - 2034 3.72% A2 A- A Ameritrade Holding Senior Notes 213 2024 - 2029 3.47% A2 A- — New Debt Issuances There were no new debt issuances of senior unsecured obligations in the first three months of 2024. Schwab additionally enters into guarantees and other similar arrangements in the ordinary course of business. For information on these arrangements, see Item 1 – Notes 5, 6, 8, 9, and 12. Additional information regarding our sources and uses of liquidity and management of liquidity risk is included in Part II – Item 7 – Risk Management – Liquidity Risk in our 2023 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, inclusive of balance sheet growth over time, management of the 2023 IDA agreement, financial support to our subsidiaries, sustained access to the capital markets, and regulatory capital requirements. 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 – Capital Management of the 2023 Form 10-K and in Item 1 – Note 17. As of March 31, 2024, 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. - 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) The following table details the capital ratios for CSC consolidated and CSB: March 31, 2024 December 31, 2023 CSC CSB CSC CSB Total stockholders’ equity $ 42,412 $ 16,695 $ 40,958 $ 16,079 Less: Preferred stock 9,191 — 9,191 — Common Equity Tier 1 Capital before regulatory adjustments $ 33,221 $ 16,695 $ 31,767 $ 16,079 Less: Goodwill, net of associated deferred tax liabilities $ 11,764 $ 13 $ 11,782 $ 13 Other intangible assets, net of associated deferred tax liabilities 6,577 — 6,664 — Deferred tax assets, net of valuation allowances and deferred tax liabilities 41 35 41 35 AOCI adjustment (1) (17,568) (15,297) (18,131) (15,746) Common Equity Tier 1 Capital $ 32,407 $ 31,944 $ 31,411 $ 31,777 Tier 1 Capital $ 41,598 $ 31,944 $ 40,602 $ 31,777 Total Capital 41,635 31,977 40,645 31,816 Risk-Weighted Assets 121,328 81,261 128,230 83,809 Average Assets with regulatory adjustments 471,116 306,869 476,069 315,851 Total Leverage Exposure 474,371 309,011 479,302 318,007 Common Equity Tier 1 Capital/Risk-Weighted Assets 26.7 % 39.3 % 24.5 % 37.9 % Tier 1 Capital/Risk-Weighted Assets 34.3 % 39.3 % 31.7 % 37.9 % Total Capital/Risk-Weighted Assets 34.3 % 39.4 % 31.7 % 38.0 % Tier 1 Leverage Ratio 8.8 % 10.4 % 8.5 % 10.1 % Supplementary Leverage Ratio 8.8 % 10.3 % 8.5 % 10.0 % (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 8.8% at March 31, 2024 from 8.5% at year-end 2023. This increase during the first quarter was primarily due to lower total Company assets and also the benefit of net income earned during the quarter. Total balance sheet assets decreased $24.4 billion, or 5%, during the first quarter of 2024 due primarily to a decrease of $11.4 billion in bank sweep deposits, a decrease of $9.2 billion in brokered CDs, and repayment of $3.3 billion in long-term debt. CSB’s Tier 1 Leverage Ratio also increased from year-end 2023, ending the first quarter of 2024 at 10.4% primarily as a result of lower total assets as well as net income during the quarter. In light of the Federal Reserve’s 2023 regulatory capital rule proposal, which among other things, would require the Company to include AOCI in regulatory capital (See Part II – Item 7 – Current Regulatory and Other Developments in the 2023 Form 10-K), the Company has developed an adjusted Tier 1 Leverage Ratio, which is a non-GAAP financial measure that includes AOCI in the ratio. The primary component of AOCI for Schwab is unrealized gains and losses on our AFS investment securities portfolio and on securities transferred from AFS to the HTM category. As of March 31, 2024, our adjusted Tier 1 Leverage Ratio, which includes AOCI in the ratio, was 5.3% for CSC consolidated and 5.7% for CSB (see Non-GAAP Financial Measures for further details and a reconciliation of such measures to GAAP reported results). The Company is continuing to retain and accrete capital organically well ahead of the Federal Reserve’s proposed regulatory capital rules’ 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 three months of 2024, 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. - 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) Dividends Cash dividends paid and per share amounts, exclusive of amounts related to preferred stock repurchases, for the first three months of 2024 and 2023 are as follows: 2024 2023 Three Months Ended March 31, Cash Paid Per Share Amount Cash Paid Per Share Amount Common and Nonvoting Common Stock $ 459 $ .25 $ 463 $ .25 Preferred Stock: Series D (1) 11 14.88 11 14.88 Series F (2) — — — — Series G (1) 33 1,343.75 33 1,343.75 Series H (1) 22 1,000.00 24 1,000.00 Series I (1) 21 1,000.00 21 1,000.00 Series J (1) 7 11.13 7 11.13 Series K (1) 9 1,250.00 9 1,250.00 (1) Dividends paid quarterly. (2) Dividends paid semi-annually until December 1, 2027 and quarterly thereafter. Share Repurchases On July 27, 2022, CSC publicly announced that its Board of Directors approved a 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 share repurchase authorization does not have an expiration date. There were no repurchases of CSC’s common stock during the three months ended March 31, 2024. CSC repurchased 37 million shares of its common stock for $2.8 billion during the three months ended March 31, 2023. As of March 31, 2024, approximately $8.7 billion remained on the authorization. There were no repurchases of CSC’s preferred stock during the three months ended March 31, 2024 . During the three months ended March 31, 2023, the Company repurchased on the open market 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 . The repurchase prices are inclusive of $3 million of dividends accrued by the stockholders as of the repurchase date. 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 March 31, 2024, Schwab had exposure to non-sovereign financial and non-financial institutions in foreign countries, as well as agencies of foreign governments. At March 31, 2024, the fair value of these holdings totaled $13.0 billion, with the top three exposures being to issuers and counterparties domiciled in France at $5.9 billion, the United Kingdom at $2.7 billion, and Canada at $887 million. At December 31, 2023, the fair value of these holdings totaled $12.8 billion, with the top three exposures being to issuers and counterparties domiciled in the United Kingdom at $5.0 billion, France at $3.2 billion, and Canada at $1.5 billion. In addition, Schwab had outstanding margin loans to foreign residents of $2.7 billion and $2.5 billion at March 31, 2024 and December 31, 2023, respectively. - 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) CRITICAL ACCOUNTING ESTIMATES Certain of our accounting policies that involve a higher degree of judgment and complexity are discussed in Part II – Item 7 – Critical Accounting Estimates in the 2023 Form 10-K. There have been no changes to critical accounting estimates during the first three months of 2024. NON-GAAP FINANCIAL MEASURES In addition to disclosing financial results in accordance with generally accepted accounting principles in the U.S. (GAAP), Management’s Discussion and Analysis of Financial Condition and Results of Operations contain references to the non-GAAP financial measures described below. We believe these non-GAAP financial measures provide useful supplemental information about the financial performance of the Company, and facilitate meaningful comparison of Schwab’s results in the current period to both historic and future results. These non-GAAP measures should not be considered a substitute for, or superior to, financial measures calculated in accordance with GAAP, and may not be comparable to non-GAAP financial measures presented by other companies. Schwab’s use of non-GAAP measures is reflective of certain adjustments made to GAAP financial measures as described below. 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 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. - 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) The following tables present reconciliations of GAAP measures to non-GAAP measures: Three Months Ended March 31, 2024 2023 Total expenses excluding interest (GAAP) $ 2,942 $ 3,006 Acquisition and integration-related costs (1) (38) (98) Amortization of acquired intangible assets (130) (135) Restructuring costs (2) 28 — Adjusted total expenses (non-GAAP) $ 2,802 $ 2,773 (1) Acquisition and integration-related costs for the three months ended March 31, 2024 primarily consist of $17 million of compensation and benefits, and $17 million of professional services. Acquisition and integration-related costs for the three months ended March 31, 2023 primarily consist of $58 million of compensation and benefits, $33 million of professional services, and $4 million of occupancy and equipment. (2) Restructuring costs for the three months ended March 31, 2024 reflect a change in estimate of $31 million in compensation and benefits, partially offset by $2 million of occupancy and equipment expense and $1 million of other expense for the period. There were no restructuring costs for the three months ended March 31, 2023. Three Months Ended March 31, 2024 2023 Amount Diluted EPS Amount Diluted EPS Net income available to common stockholders (GAAP), Earnings per common share — diluted (GAAP) $ 1,251 $ .68 $ 1,533 $ .83 Acquisition and integration-related costs 38 .02 98 .05 Amortization of acquired intangible assets 130 .07 135 .07 Restructuring costs (28) (.01) — — Income tax effects (1) (33) (.02) (56) (.02) Adjusted net income available to common stockholders (non-GAAP), Adjusted diluted EPS (non-GAAP) $ 1,358 $ .74 $ 1,710 $ .93 (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 March 31, 2024 2023 Return on average common stockholders’ equity (GAAP) 15 % 23 % Average common stockholders’ equity $ 32,493 $ 27,028 Less: Average goodwill (11,951) (11,951) Less: Average acquired intangible assets — net (8,196) (8,724) Plus: Average deferred tax liabilities related to goodwill and acquired intangible assets — net 1,759 1,842 Average tangible common equity $ 14,105 $ 8,195 Adjusted net income available to common stockholders (1) $ 1,358 $ 1,710 Return on tangible common equity (non-GAAP) 39 % 83 % (1) See table above for the reconciliation of net income available to common stockholders to adjusted net income available to common stockholders (non-GAAP). - 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) March 31, 2024 CSC CSB Tier 1 Leverage Ratio (GAAP) 8.8 % 10.4 % Tier 1 Capital $ 41,598 $ 31,944 Plus: AOCI adjustment (17,568) (15,297) Adjusted Tier 1 Capital 24,030 16,647 Average assets with regulatory adjustments 471,116 306,869 Plus: AOCI adjustment (17,817) (15,664) Adjusted average assets with regulatory adjustments $ 453,299 $ 291,205 Adjusted Tier 1 Leverage Ratio (non-GAAP) 5.3 % 5.7 %