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; • 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™). In May 2024, the Company completed the final client account conversions to CS&Co from the Ameritrade broker-dealers, TD Ameritrade, Inc. and TD Ameritrade Clearing, Inc. (TDAC). Accordingly, these entities are no longer principal business subsidiaries. See Overview – Integration of Ameritrade for additional information regarding the integration. 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 $70 trillion, which means the Company’s $9.41 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) - 1 - THE CHARLES SCHWAB CORPORATION Management’s Discussion and Analysis of Financial Condition and Results of Operations (Tabular Amounts in Millions, Except Ratios, or as Noted) or 15(d) of the Securities Exchange Act of 1934. In addition, we post to the website the Dodd-Frank stress test results, our 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,” “prioritize,” “will,” “may,” “estimate,” “appear,” “could,” “would,” “maintain,” “continue,” “seek,” and other similar expressions. In addition, any statements that refer to expectations, strategy, objectives, 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, expected levels of attrition, and expense and revenue synergies (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); • Exit and related costs associated with our actions to streamline operations (see Overview and Results of Operations in Part I – Item 2, and Exit and Other Related Liabilities in Item 1 – Note 10); • Capital expenditures and expense management (see Results of Operations in Part I – Item 2); • Net interest revenue; the adjustment of rates paid on client-related liabilities (see Results of Operations in Part I – Item 2); • Supplemental funding and expectations for repayment of outstanding balances (see Results of Operations in Part I – Item 2, and Liquidity Risk 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 (see Liquidity Risk in Part I – Item 2); • Capital management; potential migration of insured deposit account balances (IDA balances) to our balance sheet; capital accretion; expectations about capital requirements, including accumulated other comprehensive income (AOCI); long-term operating objective; and uses of capital and return of excess capital to stockholders (see Capital Management in Part I – Item 2 and Commitments and Contingencies in Item 1 – Note 9); • The expected impact of proposed and final rules (see Current Regulatory and Other Developments in Part I – Item 2); • 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; - 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) • Competitive pressure on pricing, including deposit rates; • 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; • The risk that client transitions 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; • 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); • Regulatory and legislative developments; • 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 second quarter and first six months of 2024 and 2023 are as follows: Three Months Ended June 30, Percent Change Six Months Ended June 30, Percent Change 2024 2023 2024 2023 Client Metrics Net new client assets (in billions) (1) $ 74.2 $ 72.0 3 % $ 162.4 $ 222.7 (27) % Core net new client assets (in billions) $ 61.2 $ 52.2 17 % $ 156.8 $ 183.9 (15) % Client assets (in billions, at quarter end) $ 9,407.5 $ 8,015.8 17 % Average client assets (in billions) $ 9,134.1 $ 7,698.3 19 % $ 8,946.1 $ 7,541.8 19 % New brokerage accounts (in thousands) 985 960 3 % 2,079 2,002 4 % Active brokerage accounts (in thousands, at quarter end) 35,612 34,382 4 % Assets receiving ongoing advisory services (in billions, at quarter end) $ 4,722.9 $ 4,075.3 16 % Client cash as a percentage of client assets (at quarter end) (2) 9.7 % 10.5 % Company Financial Information and Metrics Total net revenues $ 4,690 $ 4,656 1 % $ 9,430 $ 9,772 (3) % Total expenses excluding interest 2,943 2,965 (1) % 5,885 5,971 (1) % Income before taxes on income 1,747 1,691 3 % 3,545 3,801 (7) % Taxes on income 415 397 5 % 851 904 (6) % Net income 1,332 1,294 3 % 2,694 2,897 (7) % Preferred stock dividends and other 121 121 — 232 191 21 % Net income available to common stockholders $ 1,211 $ 1,173 3 % $ 2,462 $ 2,706 (9) % Earnings per common share — diluted $ .66 $ .64 3 % $ 1.34 $ 1.48 (9) % Net revenue change from prior year 1 % (9) % (3) % — Pre-tax profit margin 37.2 % 36.3 % 37.6 % 38.9 % Return on average common stockholders’ equity (annualized) 14 % 17 % 15 % 20 % Expenses excluding interest as a percentage of average client assets (annualized) 0.13 % 0.15 % 0.13 % 0.16 % Consolidated Tier 1 Leverage Ratio (at quarter end) 9.4 % 7.5 % Non-GAAP Financial Measures (3) Adjusted total expenses (4) $ 2,768 $ 2,701 $ 5,570 $ 5,474 Adjusted diluted EPS $ .73 $ .75 $ 1.47 $ 1.68 Return on tangible common equity 34 % 62 % 36 % 71 % (1) The second quarter and first six months of 2024 include net inflows of $2.7 billion and net outflows of $4.7 billion, respectively, from off-platform brokered certificates of deposit (CDs) issued by CSB. Also in the second quarter and first six months of 2024, this includes an inflow of $10.3 billion from a mutual fund clearing services client. The second quarter and first six months of 2023 includes inflows of $7.8 billion and $26.8 billion, respectively, from off-platform brokered CDs issued by CSB. Also in the second quarter and first six months of 2023, this includes an inflow of $12.0 billion from a mutual fund clearing services client. (2) Client cash as a percentage of client assets excludes brokered CDs issued by CSB. (3) Beginning in July 2023, adjustments made to GAAP financial measures also include restructuring costs. See Non-GAAP Financial Measures for further details and a reconciliation of such measures to GAAP reported results. (4) Adjusted total expenses is a non-GAAP financial measure adjusting total expenses excluding interest. See Non-GAAP Financial Measures. During the second quarter and first six months of 2024, the macroeconomic environment reflected generally positive investor sentiment and engagement, as equity markets, primarily led by technology stocks, continued to advance. The S&P 500 ® rose 4% in the second quarter and 14% in the first half of the year, while the NASDAQ Composite ® moved higher by 8% in the second quarter and 18% year-to-date. While inflation remained above the Federal Reserve’s target of 2%, readings late in the second quarter showed progress, increasing expectations for the Federal Reserve to cut rates later this year. Sustained equity market strength and organic asset gathering pushed total client assets to $9.41 trillion as of June 30, 2024. Core net new assets gathered in the second quarter were $61.2 billion, up 17% year-over-year, which brought the year-to-date total to $156.8 billion. Our second quarter and first half of 2024 net new assets 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. Our clients were engaged in the markets throughout the first six months of the year, with clients’ daily - 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) average trades (DATs) at 5.5 million and 5.7 million during the second quarter and first six months of 2024, respectively, up 4% and 2% from the prior-year periods. Clients opened 985 thousand new brokerage accounts in the second quarter of 2024 to bring the total for the first half of the year to 2.1 million, helping active brokerage accounts rise 4% year-over-year to reach 35.6 million at quarter-end. The Company’s financial performance in the second quarter and first six months of 2024 reflected the benefits of equity market strength, increased client engagement, and solid organic growth. Net income totaled $1.3 billion and $2.7 billion in the second quarter and first six months of 2024, respectively, up 3% and down 7% from the same periods in 2023. The Company produced diluted earnings per share (EPS) of $.66 and $1.34 in the second quarter and first six months of 2024, respectively, up 3% and down 9% from the comparable periods in the prior year. Adjusted diluted EPS (1) was $.73 and $1.47 in the second quarter and first six months of 2024, respectively, down 3% and 13% from the comparable 2023 periods. Total net revenues increased 1% year-over-year to $4.7 billion in the second quarter, bringing the year-to-date total to $9.4 billion, down 3% from the first half of 2023. Net interest revenue was $2.2 billion and $4.4 billion in the second quarter and first six months of 2024, respectively, down 6% and 13% from the comparable periods in 2023, due primarily to lower balances of interest-earning assets and higher interest rates paid on funding sources, partially offset by higher yields on interest-earning assets and increased margin and bank lending. Asset management and administration fees totaled $1.4 billion and $2.7 billion in the second quarter and first six months of 2024, respectively, rising 18% and 19% from the comparable 2023 periods primarily as a result of growth in money market funds, equity market gains, and growth in advice solutions. Trading revenue was $777 million and $1.6 billion in the second quarter and first six months of 2024, respectively, down 3% and 6% from the same periods in 2023, due to lower commissions and order flow revenue as a result of changes in mix. Bank deposit account fee revenue was $153 million in the second quarter of 2024, down 13% year-over-year primarily due to lower average BDA balances. For the first six months of 2024, bank deposit account fee revenue was up 3% from the prior-year period due primarily to $97 million of one-time breakage fees incurred in 2023. BDA balances totaled $84.5 billion at June 30, 2024, down 13% from year-end 2023, reflecting client cash allocation decisions. Total expenses excluding interest were $2.9 billion and $5.9 billion in the second quarter and first six months of 2024, respectively, lower by 1% from both comparable periods in the prior year, reflecting lower acquisition and integration-related costs, as well as the benefits of our cost reduction restructuring efforts undertaken in late 2023, which helped drive 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, higher other expenses inclusive of $43 million in regulatory accruals (see Results of Operations – Expenses Excluding Interest and Item 1 – Note 9) and higher exchange processing fees due primarily to the SEC’s May 2024 fee rate increase, and higher regulatory fees and assessments, reflecting incremental Federal Deposit Insurance Corporation (FDIC) special assessments of $5 million and $30 million in the second quarter and first six months of 2024, respectively (see Current Regulatory and Other Developments). Adjusted total expenses (1) were $2.8 billion and $5.6 billion in the second quarter and first six months of 2024, respectively, up 2% from both comparable prior-year periods. Acquisition and integration-related costs, amortization of acquired intangible assets, and restructuring costs totaled $175 million and $315 million in the second quarter and first six months of 2024, respectively, down 34% and 37% from the comparable periods in 2023. Return on average common stockholders’ equity was 14% and 15% for the second quarter and first six months of 2024, respectively, down from 17% and 20% from the same prior-year periods. Return on tangible common equity (1) (ROTCE) was 34% and 36% in the second quarter and first six months of 2024, respectively, down from 62% and 71% in the same periods in 2023. These decreases were due primarily to higher average stockholders’ equity for both the second quarter and year-to-date periods, and for the year-to-date period, lower net income. Average stockholders’ equity was higher in the second quarter and first six months of 2024 due to higher average retained earnings driven by net income for full-year 2023 and the second quarter and first half of 2024, 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. Total balance sheet assets decreased 4% during the second quarter, and decreased 9% from year-end 2023 to June 30, 2024. These decreases were driven primarily by lower bank deposits, which reflected client cash reallocation into higher-yielding investment cash alternatives, strong client engagement in the equity markets, and seasonal tax payments in the second quarter. Total outstanding balances of supplemental funding, which included brokered CDs of $40.3 billion, Federal Home Loan Bank (FHLB) borrowings of $24.4 billion, and borrowings under repurchase agreements of $9.0 billion, increased in aggregate by $2.9 billion, or 4%, during the second quarter of 2024 due primarily to margin loan growth, though the outstanding balance of - 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) supplemental funding of $73.7 billion as of June 30, 2024 was lower by $5.9 billion, or 7%, from year-end 2023. Supported by net income and a smaller balance sheet, our consolidated Tier 1 Leverage Ratio increased to 9.4% as of June 30, 2024. Our consolidated adjusted Tier 1 Leverage Ratio (1) , which includes AOCI in the ratio, was 5.9% as of the end of the second quarter. In addition, the Company updated its long-term operating objective to be its consolidated adjusted Tier 1 Leverage Ratio (1) of 6.75% - 7.00% (see Capital Management for additional information). (1) Adjusted diluted EPS, adjusted total expenses, return on tangible common equity, and adjusted Tier 1 Leverage Ratio 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 During the second quarter of 2024, the Company completed the conversion of the final client transition group from Ameritrade to the Schwab platform. Over the course of five client transition groups, we converted approximately $1.9 trillion in client assets across more than 17 million client accounts, including 7,000 RIAs, from Ameritrade to Schwab, and conversion of this final client group is a significant milestone in our integration. In connection with these transitions, we have experienced some related attrition of client assets from retail accounts and RIAs that continues to be below our initial estimates when we announced the acquisition. We continue to expect total acquisition and integration-related costs and capital expenditures will be between $2.4 billion and $2.5 billion. Acquisition and integration-related costs, which are inclusive of related exit costs, totaled $36 million and $74 million for the second quarter and first six months of 2024, respectively, and $130 million and $228 million for the second quarter and first six months of 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 June 30, 2024, we have achieved approximately 90% 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 costs incurred and synergy realization are subject to change as we work to complete 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 June 30, 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, in conjunction with associated prohibited transaction exemptions (PTEs), subjects broker-dealers who provide non-discretionary investment advice to retirement plans and accounts to a “best interest” standard. The rule was scheduled to take effect September 23, 2024, with a one-year transition period for certain PTE provisions. On July 25 and 26, 2024, federal district court judges in two separate industry lawsuits seeking to vacate the rule stayed effectiveness of the rule pending resolution of litigation. 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, which was subject to potential extension - 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) 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 was tax deductible and was recognized in earnings in the fourth quarter of 2023. 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. During the second quarter of 2024, the Company recognized an additional pre-tax charge of $5 million based on the FDIC’s June 2024 invoices, resulting in a year-to-date total of $30 million. The Company paid its first amount on the special assessment in the second quarter of 2024 and expects the remaining collection period to be the next two years. The FDIC has indicated that its special assessments and related collection period remain subject to further refinement. 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 June 30, Percent Change Amount % of Total Net Revenues Amount % of Total Net Revenues Net interest revenue Interest revenue (7) % $ 3,817 81 % $ 4,104 88 % Interest expense (9) % (1,659) (35) % (1,814) (39) % Net interest revenue (6) % 2,158 46 % 2,290 49 % Asset management and administration fees Mutual funds, exchange-traded funds (ETFs), and collective trust funds (CTFs) 25 % 785 17 % 630 13 % Advice solutions 10 % 510 11 % 464 10 % Other 11 % 88 2 % 79 2 % Asset management and administration fees 18 % 1,383 30 % 1,173 25 % Trading revenue Commissions (3) % 383 8 % 394 8 % Order flow revenue (2) % 357 8 % 365 8 % Principal transactions (16) % 37 1 % 44 1 % Trading revenue (3) % 777 17 % 803 17 % Bank deposit account fees (13) % 153 3 % 175 4 % Other 2 % 219 4 % 215 5 % Total net revenues 1 % $ 4,690 100 % $ 4,656 100 % - 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) 2024 2023 Six Months Ended June 30, Percent Change Amount % of Total Net Revenues Amount % of Total Net Revenues Net interest revenue Interest revenue (4) % $ 7,758 82 % $ 8,120 83 % Interest expense 10 % (3,367) (36) % (3,060) (31) % Net interest revenue (13) % 4,391 46 % 5,060 52 % Asset management and administration fees Mutual funds, ETFs, and CTFs 27 % 1,543 16 % 1,215 13 % Advice solutions 10 % 1,013 11 % 917 9 % Other 10 % 175 2 % 159 2 % Asset management and administration fees 19 % 2,731 29 % 2,291 24 % Trading revenue Commissions (2) % 796 8 % 816 8 % Order flow revenue (9) % 709 8 % 779 8 % Principal transactions (11) % 89 1 % 100 1 % Trading revenue (6) % 1,594 17 % 1,695 17 % Bank deposit account fees 3 % 336 4 % 326 3 % Other (6) % 378 4 % 400 4 % Total net revenues (3) % $ 9,430 100 % $ 9,772 100 % 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 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 remained consistent through the first six months 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 second quarter and first six months of 2024 were lower compared with the same periods in 2023, reflecting clients’ reallocation of cash from sweep products to higher-yielding investment solutions particularly throughout 2023, which resulted from the higher interest rate environment. In the first six months of 2024, the Company saw additional reduction of sweep cash, which also reflected strong client engagement in the equity markets and seasonal tax payments in the second quarter. These changes in client cash reduced average balances of bank deposits during the second quarter and first six months of 2024, and payables to brokerage clients during the first six months of 2024. To support client cash allocation activity that resulted from the higher interest rate environment, 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 half of 2024 from peak levels seen in mid-2023. - 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) 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 June 30, Average Balance Interest Revenue/ Expense Average Yield/Rate Average Balance Interest Revenue/ Expense Average Yield/Rate Interest-earning assets Cash and cash equivalents $ 28,839 $ 382 5.24 % $ 44,683 $ 547 4.84 % Cash and investments segregated 21,493 281 5.17 % 27,399 324 4.68 % Receivables from brokerage clients 68,715 1,351 7.78 % 60,709 1,167 7.60 % Available for sale securities (1) 104,045 555 2.13 % 145,032 791 2.18 % Held to maturity securities (1) 154,314 658 1.70 % 167,499 720 1.72 % Bank loans 41,562 460 4.44 % 40,124 410 4.09 % Total interest-earning assets 418,968 3,687 3.50 % 485,446 3,959 3.24 % Securities lending revenue 95 124 Other interest revenue 35 21 Total interest-earning assets $ 418,968 $ 3,817 3.62 % $ 485,446 $ 4,104 3.36 % Funding sources Bank deposits $ 258,119 $ 840 1.31 % $ 312,543 $ 863 1.11 % Payables to brokerage clients 67,680 77 0.45 % 64,892 64 0.40 % Other short-term borrowings 9,268 129 5.59 % 7,622 97 5.08 % Federal Home Loan Bank borrowings 25,582 348 5.42 % 46,813 606 5.13 % Long-term debt 22,460 208 3.70 % 21,237 157 2.95 % Total interest-bearing liabilities 383,109 1,602 1.68 % 453,107 1,787 1.57 % Non-interest-bearing funding sources 35,859 32,339 Securities lending expense 57 28 Other interest expense — (1) Total funding sources $ 418,968 $ 1,659 1.59 % $ 485,446 $ 1,814 1.49 % Net interest revenue $ 2,158 2.03 % $ 2,290 1.87 % - 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) 2024 2023 Six Months Ended June 30, Average Balance Interest Revenue/ Expense Average Yield/Rate Average Balance Interest Revenue/ Expense Average Yield/Rate Interest-earning assets Cash and cash equivalents $ 31,394 $ 836 5.26 % $ 40,891 $ 960 4.67 % Cash and investments segregated 25,503 669 5.19 % 33,699 756 4.46 % Receivables from brokerage clients 66,259 2,611 7.80 % 60,626 2,251 7.39 % Available for sale securities (1) 107,956 1,149 2.12 % 150,382 1,616 2.15 % Held to maturity securities (1) 155,862 1,348 1.73 % 169,184 1,466 1.73 % Bank loans 41,046 900 4.40 % 40,185 801 4.00 % Total interest-earning assets 428,020 7,513 3.49 % 494,967 7,850 3.16 % Securities lending revenue 171 236 Other interest revenue 74 34 Total interest-earning assets $ 428,020 $ 7,758 3.60 % $ 494,967 $ 8,120 3.27 % Funding sources Bank deposits $ 266,243 $ 1,761 1.33 % $ 327,739 $ 1,481 0.91 % Payables to brokerage clients 68,011 150 0.44 % 70,997 139 0.40 % Other short-term borrowings 8,327 232 5.60 % 7,272 183 5.06 % Federal Home Loan Bank borrowings 25,220 678 5.35 % 35,697 910 5.07 % Long-term debt 23,730 432 3.64 % 20,766 296 2.85 % Total interest-bearing liabilities 391,531 3,253 1.66 % 462,471 3,009 1.31 % Non-interest-bearing funding sources 36,489 32,496 Securities lending expense 112 50 Other interest expense 2 1 Total funding sources $ 428,020 $ 3,367 1.57 % $ 494,967 $ 3,060 1.24 % Net interest revenue $ 4,391 2.03 % $ 5,060 2.03 % (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 $132 million, or 6%, and $669 million, or 13%, in the second quarter and first six months of 2024, respectively, compared to the same periods in 2023. These decreases were primarily due to lower average interest-earning assets and, for the year-to-date period, utilization of higher cost supplemental funding sources to support client cash allocations in the elevated rate environment. Average interest-earning assets for both the second quarter and first six months of 2024 were lower by 14% compared to the same periods in 2023. These decreases were due primarily to lower bank sweep deposits as a result of client cash reallocation into higher-yielding investment cash alternatives and fixed income investments. Maturities and paydowns on the AFS and HTM investment securities portfolio supported reductions in bank sweep deposits, and, for the second quarter, lower year-over-year balances of supplemental funding sources. Net interest margin increased to 2.03% during the second quarter of 2024 from 1.87% compared to the same period in 2023 as improved yields on interest-earning assets offset higher rates paid across interest-bearing funding sources. Net interest margin during the first six months of 2024 was 2.03%, remaining unchanged from the same period in 2023 as the benefit of improved yields on interest-earning assets was offset by higher rates paid on interest-bearing funding sources. The Company’s average balances of FHLB borrowings and brokered CDs were lower in the second quarter of 2024 compared to the same period in 2023, which helped support a 16-basis-point improvement in net interest margin for the second quarter of 2024 compared with the same period in 2023. The Company continues to prioritize repayment of the outstanding balances of its supplemental funding sources. The total outstanding balance of supplemental funding sources increased by $2.9 billion during the second quarter of 2024 as client cash was retained on the Company’s broker-dealer to support higher levels of margin lending activity, though the outstanding balance of supplemental funding of $73.7 billion as of June 30, 2024 was lower by $5.9 billion, or 7%, from year-end 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, clients’ margin lending activity, as well as asset gathering and the level of maturities and paydowns on our investment securities portfolios. 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, levels of interest rates, and the use of proceeds. The Company currently expects its - 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) outstanding balances of supplemental funding sources to decrease over time. Certain amounts outstanding at June 30, 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 June 30, 2024 2023 Average Client Assets Revenue Average Fee Average Client Assets Revenue Average Fee Schwab money market funds $ 523,665 $ 357 0.27 % $ 375,898 $ 252 0.27 % Schwab equity and bond funds, ETFs, and CTFs 565,848 112 0.08 % 465,079 94 0.08 % Mutual Fund OneSource ® and other no-transaction-fee (NTF) funds 338,198 214 0.25 % 229,207 151 0.26 % Other third-party mutual funds and ETFs 600,902 102 0.07 % 681,486 133 0.08 % Total mutual funds, ETFs, and CTFs (1) $ 2,028,613 $ 785 0.16 % $ 1,751,670 $ 630 0.14 % Advice solutions (1) Fee-based $ 525,689 $ 510 0.39 % $ 455,859 $ 464 0.41 % Non-fee-based 110,234 — — 95,427 — — Total advice solutions $ 635,923 $ 510 0.32 % $ 551,286 $ 464 0.34 % Other balance-based fees (2) 763,750 69 0.04 % 594,528 63 0.04 % Other (3) 19 16 Total asset management and administration fees $ 1,383 $ 1,173 Six Months Ended June 30, Schwab money market funds $ 511,776 $ 693 0.27 % $ 346,145 $ 465 0.27 % Schwab equity and bond funds, ETFs, and CTFs 552,755 219 0.08 % 457,830 185 0.08 % Mutual Fund OneSource and other NTF funds 326,387 423 0.26 % 225,822 299 0.27 % Other third-party mutual funds and ETFs 603,263 208 0.07 % 678,915 266 0.08 % Total mutual funds, ETFs, and CTFs (1) $ 1,994,181 $ 1,543 0.16 % $ 1,708,712 $ 1,215 0.14 % Advice solutions (1) Fee-based $ 515,911 $ 1,013 0.39 % $ 449,443 $ 917 0.41 % Non-fee-based 108,133 — — 94,948 — — Total advice solutions $ 624,044 $ 1,013 0.33 % $ 544,391 $ 917 0.34 % Other balance-based fees (2) 741,599 138 0.04 % 578,158 125 0.04 % Other (3) 37 34 Total asset management and administration fees $ 2,731 $ 2,291 (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 $210 million, or 18%, and $440 million, or 19%, in the second quarter and first six months of 2024, respectively, compared to the same periods in 2023. These increases were primarily a result of higher balances in Schwab money market funds as clients shifted their cash allocations to higher-yielding investment solutions. These increases were 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. - 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) The following tables present 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 49% of the asset management and administration fees earned in both the second quarter and first six months of 2024, compared with 42% and 41% in the second quarter and first six months of 2023, respectively: Schwab Money Market Funds Schwab Equity and Bond Funds, ETFs, and CTFs Mutual Fund OneSource ® and Other NTF funds Three Months Ended June 30, 2024 2023 2024 2023 2024 2023 Balance at beginning of period $ 515,678 $ 357,822 $ 548,890 $ 443,719 $ 329,176 $ 244,262 Net inflows (outflows) 11,295 30,807 8,794 2,315 (6,863) (6,650) Net market gains (losses) and other 6,613 4,258 6,318 19,813 22,500 17,024 Balance at end of period $ 533,586 $ 392,887 $ 564,002 $ 465,847 $ 344,813 $ 254,636 Six Months Ended June 30, Balance at beginning of period $ 476,409 $ 278,926 $ 506,149 $ 412,942 $ 306,222 $ 235,738 Net inflows (outflows) 42,235 105,843 16,513 12,659 (11,024) (11,279) Net market gains (losses) and other 14,942 8,118 41,340 40,246 49,615 30,177 Balance at end of period $ 533,586 $ 392,887 $ 564,002 $ 465,847 $ 344,813 $ 254,636 Trading Revenue The following tables present trading revenue, client trading activity, and related information: Three Months Ended June 30, Percent Change Six Months Ended June 30, Percent Change 2024 2023 2024 2023 Commissions $ 383 $ 394 (3) % $ 796 $ 816 (2) % Order flow revenue Options 248 251 (1) % 490 532 (8) % Equities 109 114 (4) % 219 247 (11) % Total order flow revenue 357 365 (2) % 709 779 (9) % Principal transactions 37 44 (16) % 89 100 (11) % Total trading revenue $ 777 $ 803 (3) % $ 1,594 $ 1,695 (6) % Three Months Ended June 30, Percent Change Six Months Ended June 30, Percent Change 2024 2023 2024 2023 DATs (in thousands) 5,486 5,272 4 % 5,718 5,584 2 % Product as a percentage of DATs Equities 52 % 51 % 52 % 50 % Derivatives 22 % 24 % 22 % 23 % ETFs 18 % 19 % 18 % 20 % Mutual funds 6 % 5 % 6 % 5 % Fixed income 2 % 1 % 2 % 2 % Number of trading days 63.0 62.0 2 % 124.0 124.0 — Revenue per trade (1) $ 2.25 $ 2.46 (9) % $ 2.25 $ 2.45 (8) % (1) Revenue per trade is calculated as trading revenue divided by DATs multiplied by the number of trading days. Trading revenue decreased $26 million and $101 million in the second quarter and first six months of 2024, respectively, compared to the same periods in 2023. These decreases were primarily due to lower commissions and order flow revenue, reflecting changes in the mix of client trading activity. - 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) 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. The following table presents bank deposit account fee revenue, average BDA balances, average net yield, and average balances earning fixed- and floating-rate yields: Three Months Ended June 30, Percent Change Six Months Ended June 30, Percent Change 2024 2023 2024 2023 Bank deposit account fees $ 153 $ 175 (13) % $ 336 $ 326 3 % Average BDA balances $ 87,016 $ 103,622 (16) % $ 89,938 $ 109,716 (18) % Average net yield 0.70 % 0.67 % 0.74 % 0.59 % Percentage of average BDA balances designated as: Fixed-rate balances 88 % 97 % 88 % 94 % Floating-rate balances 12 % 3 % 12 % 6 % Bank deposit account fees decreased $22 million, or 13%, and increased $10 million, or 3%, in the second quarter and first six months of 2024, respectively, compared to the same periods in 2023. The decrease in the second quarter of 2024 compared to 2023 was primarily due to lower average BDA balances. The increase in the first six months of 2024 compared to 2023 was primarily due to $97 million of breakage fees incurred that resulted in lower bank deposit account fee revenue in the first six months of 2023. In addition, the average amount of floating-rate BDA balances increased in the second quarter and first six months of 2024 compared to the same periods in 2023, which contributed to an increase in average net yield. These factors were partially offset by a decrease in average BDA balances in the second quarter and first six months of 2024 compared to the same periods 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 June 30, 2024 were 89% and 11%, respectively. Other Revenue Other revenue includes exchange processing fees, certain service fees, other gains and losses from the sale of assets, and the provision for credit losses on bank loans. Other revenue increased $4 million, or 2%, and decreased $22 million, or 6%, in the second quarter and first six months of 2024, respectively, compared to the same periods in 2023. The increase in the second quarter of 2024 was primarily due to higher exchange processing fees and lower provision for credit losses on bank loans, partially offset by certain lower service and other fees. The decrease in the first six months of 2024 was primarily due to certain lower service and other fees, partially offset by lower provision for credit losses on bank loans. Exchange processing fees increased in the second quarter of 2024 due to higher SEC fee rates compared to the second quarter of 2023. Effective May 22, 2024, the SEC increased 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. The provision for credit losses on bank loans was lower in the second quarter and the first six months of 2024 compared to the same periods in 2023, due to lower loan loss factors while the total balance of first lien residential real estate mortgage loans (First Mortgages) remained largely consistent with year-end 2023. - 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) Total Expenses Excluding Interest The following table presents a comparison of expenses excluding interest: Three Months Ended June 30, Percent Change Six Months Ended June 30, Percent Change 2024 2023 2024 2023 Compensation and benefits Salaries and wages $ 886 $ 961 (8) % $ 1,740 $ 1,933 (10) % Incentive compensation 329 287 15 % 716 651 10 % Employee benefits and other 235 250 (6) % 532 552 (4) % Total compensation and benefits $ 1,450 $ 1,498 (3) % $ 2,988 $ 3,136 (5) % Professional services 259 272 (5) % 500 530 (6) % Occupancy and equipment 248 319 (22) % 513 618 (17) % Advertising and market development 107 103 4 % 195 191 2 % Communications 172 188 (9) % 313 334 (6) % Depreciation and amortization 233 191 22 % 461 368 25 % Amortization of acquired intangible assets 129 134 (4) % 259 269 (4) % Regulatory fees and assessments 96 80 20 % 221 163 36 % Other 249 180 38 % 435 362 20 % Total expenses excluding interest $ 2,943 $ 2,965 (1) % $ 5,885 $ 5,971 (1) % Expenses as a percentage of total net revenues Compensation and benefits 31 % 32 % 32 % 32 % Advertising and market development 2 % 2 % 2 % 2 % Full-time equivalent employees (in thousands) At quarter end 32.3 36.6 (12) % Average 32.3 36.2 (11) % 32.5 35.9 (9) % Expenses excluding interest decreased by $22 million, or 1%, and $86 million, or 1%, in the second quarter and first six months of 2024, respectively, compared to the same periods 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 2% in the second quarter and first six months of 2024, compared to the same periods 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 second quarter and first six months of 2024 compared to the same periods 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 $18 million and $48 million in the second quarter of 2024 and 2023, respectively, and $35 million and $106 million in the first six months of 2024 and 2023, respectively. Compensation and benefits also included a $3 million and $34 million benefit in the second quarter and first six months of 2024, respectively, due to a change in estimated restructuring costs. Professional services expense decreased in the second quarter and first six months of 2024 compared to the same periods in 2023, primarily due to lower utilization of professional services as we completed Ameritrade client account transitions in the second quarter of 2024, and approach the completion of the overall Ameritrade integration. Professional services included acquisition and integration-related costs of $12 million and $41 million in the second quarter of 2024 and 2023, respectively, and $29 million and $74 million in the first six months of 2024 and 2023, respectively. Occupancy and equipment expense decreased in the second quarter and first six months of 2024 compared to the same periods in 2023, primarily due to lower technology equipment and software costs, lower property tax expense, and 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 $1 million and $3 million in the second quarter and first six months of 2024, respectively. - 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) Occupancy and equipment included acquisition and integration-related costs of $10 million and $14 million in the second quarter and first six months of 2023, respectively. Advertising and market development expense increased in the second quarter and first six months of 2024 compared to the same periods in 2023, primarily due to higher client promotional spending. Communications expense decreased in the second quarter and first six months of 2024, compared to the same periods in 2023, primarily as a result of lower exchange quotation services expenses. Depreciation and amortization expense increased in the second quarter and first six months of 2024 compared to the same periods in 2023, primarily as a result of higher amortization of purchased and internally developed software, driven by capital expenditures in 2023 and the first six months of 2024 to support the Ameritrade integration and enhance our technological infrastructure to support growth of the business. Depreciation and amortization expense included acquisition and integration-related costs of $5 million in the second quarter and first six months of 2024. Amortization of acquired intangible assets decreased in the second quarter and first six months of 2024 compared to the same periods in 2023, as certain assets from the Ameritrade acquisition were fully amortized during 2023. Regulatory fees and assessments increased in the second quarter and first six months of 2024 compared to the same periods in 2023, primarily as a result of incremental FDIC special assessments and higher FDIC deposit insurance assessments, reflecting greater use of brokered CDs, partially offset by a lower assessment base. The incremental FDIC special assessments totaled $5 million and $30 million in the second quarter and first six months of 2024, respectively. See Current Regulatory and Other Developments for further discussion of these special assessments. Other expense increased in the second quarter and first six months of 2024 compared to the same periods in 2023, primarily due to a $43 million accrual in the second quarter of 2024 related to an industry-wide regulatory review of off-channel communications, and higher exchange processing fees, partially offset by lower other clearing costs. Exchange processing fees increased due largely to higher SEC fee rates in effect during the second quarter of 2024 compared to the second quarter of 2023. Effective May 22, 2024, the SEC increased 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. Other expense included restructuring costs of $12 million and $13 million in the second quarter and first six months of 2024, respectively. Other expense included acquisition and integration-related costs of $20 million and $22 million in the second quarter and first six months of 2023, respectively. Capital expenditures were $92 million and $168 million in the second quarter of 2024 and 2023, respectively, and $214 million and $355 million in the first six months of 2024 and 2023, respectively. Capital expenditures decreased for the second quarter and first six months of 2024 compared to the same periods in 2023, primarily due to lower purchased and internally developed software as we completed Ameritrade client account transitions in the second quarter and approach the completion of the overall Ameritrade integration. As a result of higher year-to-date total net revenues and lower spending, we now estimate capital expenditures for full-year 2024 will be on the lower end of our previously disclosed expected range of approximately 3-5% of total net revenues. Taxes on Income Taxes on income were $415 million and $397 million for the second quarter of 2024 and 2023, respectively, resulting in effective tax rates of 23.8% and 23.5%, respectively. Taxes on income were $851 million and $904 million for the first six months of 2024 and 2023, respectively, resulting in effective tax rates of 24.0% and 23.8%, respectively. The increase in the effective tax rates in the second quarter and first six months of 2024 compared to the same periods in 2023 was primarily related to the release of tax reserves in the first six months of 2023 due to the resolution of certain state tax matters. This increase was partially offset by a decrease in state tax expense and the recognition of certain tax credits. - 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) Segment Information Financial information for our segments is presented in the following tables: Investor Services Advisor Services Total Three Months Ended June 30, Percent Change 2024 2023 Percent Change 2024 2023 Percent Change 2024 2023 Net Revenues Net interest revenue 1 % $ 1,715 $ 1,705 (24) % $ 443 $ 585 (6) % $ 2,158 $ 2,290 Asset management and administration fees 16 % 973 841 23 % 410 332 18 % 1,383 1,173 Trading revenue (2) % 685 701 (10) % 92 102 (3) % 777 803 Bank deposit account fees (19) % 113 140 14 % 40 35 (13) % 153 175 Other 8 % 168 156 (14) % 51 59 2 % 219 215 Total net revenues 3 % 3,654 3,543 (7) % 1,036 1,113 1 % 4,690 4,656 Expenses Excluding Interest 2 % 2,231 2,191 (8) % 712 774 (1) % 2,943 2,965 Income before taxes on income 5 % $ 1,423 $ 1,352 (4) % $ 324 $ 339 3 % $ 1,747 $ 1,691 Net new client assets (in billions) (1) 11 % $ 39.9 $ 36.0 (5) % $ 34.3 $ 36.0 3 % $ 74.2 $ 72.0 Six Months Ended June 30, Net Revenues Net interest revenue (8) % $ 3,457 $ 3,738 (29) % $ 934 $ 1,322 (13) % $ 4,391 $ 5,060 Asset management and administration fees 17 % 1,920 1,646 26 % 811 645 19 % 2,731 2,291 Trading revenue (5) % 1,398 1,476 (11) % 196 219 (6) % 1,594 1,695 Bank deposit account fees 4 % 248 239 1 % 88 87 3 % 336 326 Other (1) % 303 307 (19) % 75 93 (6) % 378 400 Total net revenues (1) % 7,326 7,406 (11) % 2,104 2,366 (3) % 9,430 9,772 Expenses Excluding Interest 2 % 4,496 4,424 (10) % 1,389 1,547 (1) % 5,885 5,971 Income before taxes on income (5) % $ 2,830 $ 2,982 (13) % $ 715 $ 819 (7) % $ 3,545 $ 3,801 Net new client assets (in billions) (1) (35) % $ 74.8 $ 115.4 (18) % $ 87.6 $ 107.3 (27) % $ 162.4 $ 222.7 (1) In the second quarter and first six months of 2024, Investor Services includes net inflows of $2.7 billion and net outflows of $4.7 billion, respectively, from off-platform brokered CDs issued by CSB. Also in the second quarter and first six months of 2024, Investor Services includes an inflow of $10.3 billion from a mutual fund clearing services client. In the second quarter and first six months of 2023, Investor Services includes inflows of $7.8 billion and $26.8 billion, respectively, from off-platform brokered CDs issued by CSB. Also in the second quarter and first six months of 2023, Investor Services includes an inflow of $12.0 billion from a mutual fund clearing services client. Segment Net Revenues Investor Services total net revenues increased by 3% in the second quarter of 2024 compared to the same period in 2023. This increase was primarily due to higher asset management and administration fees as a result of higher balances in money market funds, fee-based advice solutions, and Mutual Fund OneSource ® . This increase was partially offset by lower bank deposit account fees primarily due to lower average BDA balances. Net interest revenue was relatively flat as lower average interest-earning asset balances and higher cost funding sources were offset by higher margin loan balances. Advisor Services total net revenues decreased by 7% in the second quarter of 2024 compared to the same period in 2023. This decrease was primarily due to lower net interest revenue as a result of lower average interest-earning asset balances and higher rates paid on funding sources. This decrease was partially offset by higher asset management and administration fees, primarily as a result of higher balances in money market funds and Mutual Fund OneSource. Investor Services and Advisor Services total net revenues decreased by 1% and 11%, respectively, in the first six months of 2024 compared to the same period in 2023. The decreases for both segments were primarily due to lower net interest revenue as a result of lower average interest-earning asset balances and higher cost funding sources, with the Investor Services decrease being partially offset by higher margin loan balances. Trading revenue decreased in both segments, primarily due to lower payment for order flow and, for Investor Services, lower commissions, as described above. These decreases were partially offset by higher asset management and administration fees for 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. - 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) Segment Expenses Excluding Interest Investor Services total expenses excluding interest increased by 2% in the second quarter and first six months of 2024, compared to the same periods in 2023, while Advisor Services total expenses excluding interest decreased by 8% and 10% in the second quarter and first six months of 2024, respectively, compared to the same periods in 2023. Compensation and benefits expense decreased in both segments, 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, lower property tax expense, and facility closures in 2023 related to restructuring and the Ameritrade integration. Regulatory fees and assessments increased in both segments, primarily due to higher FDIC assessments, as described above. For Investor Services, depreciation and amortization expense increased, primarily due to higher amortization of purchased and internally developed software, driven by capital expenditures in 2023 and the first six months of 2024 to enhance our technological infrastructure to support growth of the business. In Investor Services, other expense increased primarily due to accruals related to an industry-wide regulatory review of off-channel communications and higher exchange processing fees. 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. The Company began in 2023 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-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 - 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) 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 June 30, 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: June 30, 2024 December 31, 2023 Increase of 200 basis points 9.8% 10.8% Increase of 100 basis points 5.2% 5.8% Increase of 50 basis points 2.8% 3.1% Decrease of 50 basis points 0.6% 0.4% Decrease of 100 basis points 0.2% (0.2)% Decrease of 200 basis points (3.2)% (4.2)% The Company’s simulated incremental increases and decreases in market interest rates had a smaller impact on net interest revenue as of June 30, 2024 compared to December 31, 2023. This is primarily due to lower cash balances held at June 30, 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 composition of funding sources, and typically decreases in periods of rising market interest rates and increases in periods of declining market interest rates. - 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) The following table presents the Company’s estimated effective durations, which reflects anticipated future payments, by category: June 30, 2024 June 30, 2023 In years Estimated effective duration, exclusive of derivatives: Consolidated total assets 2.4 2.6 AFS investment securities portfolio 2.3 2.4 AFS and HTM investment securities portfolio 3.9 4.0 Estimated effective duration, inclusive of derivatives (1) : Consolidated total assets 2.4 2.5 AFS investment securities portfolio 2.1 2.2 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 57% of the Company’s consolidated total assets as of June 30, 2024 and 2023, respectively. The estimated effective duration of the remaining balance sheet assets in aggregate was less than one year as of both June 30, 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 June 30, 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, our principal broker-dealer subsidiary; the capital needs of the banking subsidiaries; principal and interest due on corporate debt; and dividend payments on CSC’s preferred and common stock. The liquidity needs of our broker-dealer subsidiary 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 - 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) 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 35.6 million active brokerage accounts. More than 80% of our bank deposits qualified for FDIC insurance as of June 30, 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. - 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 describes external debt facilities available at June 30, 2024: Description Borrower Outstanding Available Maturity of Amounts Outstanding Weighted-Average Interest Rate on Amounts Outstanding FHLB secured credit facilities Banking subsidiaries $ 24,400 $ 54,426 (1) July 2024 - February 2025 5.38% Federal Reserve discount window Banking subsidiaries — 35,870 (1) N/A — Repurchase agreements Banking subsidiaries, CSC 8,996 — (2) July 2024 - February 2025 5.47% 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 1,000 — (3) August 2024 - September 2024 5.70% Secured uncommitted lines of credit with various external banks TDAC — — (3) N/A — Unsecured committed revolving line of credit with various external banks CSC — 2,100 (4) N/A — (1) Amounts shown as available from the FHLB and Federal Reserve facilities represent remaining capacity based on assets pledged as of June 30, 2024. Incremental borrowing capacity may be made available by pledging additional assets, subject to applicable facility terms. See below and Item 1 – Note 8 for additional information. (2) Secured borrowing capacity is made available based on the banking subsidiaries’ or CSC’s ability to provide collateral deemed acceptable by each respective counterparty. See below and Item 1 – Note 12 for additional information. (3) 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. (4) 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 June 30, 2024, the Company had additional investment securities with a par value of approximately $130 billion or a fair value of approximately $119 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 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 six months of 2024 and there were no amounts outstanding at June 30, 2024. CSC maintains a standing bilateral repurchase agreement with an external bank. Other than de minimis tests, this facility was not used during the first six months of 2024 and there were no amounts outstanding under this facility at June 30, 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 June 30, 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. Beginning in 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 six months of 2024. - 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) 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. CSB issues brokered CDs as a supplemental funding source. The following table provides information about brokered CDs issued by CSB and outstanding as of June 30, 2024: Amount Outstanding Maturity Weighted-Average Interest Rate Brokered CDs $ 40,308 August 2024 - June 2025 5.26% 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 half of 2024. During the second quarter of 2024, bank deposits decreased $17.0 billion, which resulted primarily from a decrease of $16.7 billion in deposits swept from brokerage accounts, partially offset by a net increase in brokered CDs of $1.2 billion. The decrease in deposits swept from brokerage accounts reflected client cash reallocations, strong client engagement in equity markets, seasonal tax payments, and retention of amounts on our broker-dealer to support margin loan demand. As a result of these factors, FHLB borrowings and other short-term borrowings increased by $1.7 billion during the quarter. During the first six months of 2024, the Company’s cash and cash equivalents decreased $18.0 billion from year-end 2023 to $25.4 billion at June 30, 2024; cash and cash equivalents, including amounts restricted, decreased $27.4 billion to $47.1 billion at June 30, 2024. These decreases reflected net repayments of supplemental funding balances of $5.9 billion and maturities of long-term debt of $3.7 billion. Bank deposits decreased during the first six months of 2024 by $37.5 billion, resulting from a decrease of $28.1 billion in deposits swept from brokerage accounts due to client cash allocations and a decrease in brokered CDs of $8.0 billion. Partially offsetting the decrease in bank deposits and repayment of borrowings, net investing cash flows from our AFS and HTM securities totaled $21.3 billion in the first six 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 June 30, 2024, and the table below presents information about our average daily LCR: Average for the Three Months Ended June 30, 2024 March 31, 2024 Total eligible HQLA $ 53,815 $ 58,841 Net cash outflows 45,086 45,195 LCR 120 % 130 % To support growth in margin loan balances at our broker-dealer subsidiary 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 subsidiary may also retain client cash balances rather than sweeping such balances to our banking subsidiaries. - 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) 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 June 30, 2024, and the table below presents information about our average NSFR: Average for the Three Months Ended June 30, 2024 March 31, 2024 ASF $ 193,668 $ 197,076 RSF 151,514 150,708 NSFR 128 % 131 % Long-Term Borrowings The Company’s long-term debt is primarily comprised of Senior Notes and totaled $22.4 billion and $26.1 billion at June 30, 2024 and December 31, 2023, respectively. The following table provides information about our Senior Notes outstanding at June 30, 2024: June 30, 2024 Par Outstanding Maturity Weighted Average Interest Rate Moody’s Standard & Poor’s Fitch CSC Senior Notes $ 22,262 2025 - 2034 3.71% A2 A- A Ameritrade Holding LLC Senior Notes 163 2025 - 2029 3.38% A2 A- — New Debt Issuances There were no new debt issuances of senior unsecured obligations in the first six 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 the Company’s 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 June 30, 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. - 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 table details the capital ratios for CSC consolidated and CSB: June 30, 2024 December 31, 2023 CSC CSB CSC CSB Total stockholders’ equity $ 43,953 $ 17,384 $ 40,958 $ 16,079 Less: Preferred stock 9,191 — 9,191 — Common Equity Tier 1 Capital before regulatory adjustments $ 34,762 $ 17,384 $ 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 6,450 — 6,664 — Deferred tax assets, net of valuation allowances and deferred tax liabilities 41 35 41 35 AOCI adjustment (1) (16,926) (14,755) (18,131) (15,746) Common Equity Tier 1 Capital $ 33,433 $ 32,091 $ 31,411 $ 31,777 Tier 1 Capital $ 42,624 $ 32,091 $ 40,602 $ 31,777 Total Capital 42,650 32,111 40,645 31,816 Risk-Weighted Assets 115,334 80,450 128,230 83,809 Average Assets with regulatory adjustments 451,304 294,465 476,069 315,851 Total Leverage Exposure 454,433 296,450 479,302 318,007 Common Equity Tier 1 Capital/Risk-Weighted Assets 29.0 % 39.9 % 24.5 % 37.9 % Tier 1 Capital/Risk-Weighted Assets 37.0 % 39.9 % 31.7 % 37.9 % Total Capital/Risk-Weighted Assets 37.0 % 39.9 % 31.7 % 38.0 % Tier 1 Leverage Ratio 9.4 % 10.9 % 8.5 % 10.1 % Supplementary Leverage Ratio 9.4 % 10.8 % 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 9.4% at June 30, 2024 from 8.8% at March 31, 2024 and 8.5% at year-end 2023. This increase during the second 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 $19.1 billion, or 4%, during the second quarter of 2024 due primarily to a decrease of $17.0 billion, or 6%, in total bank deposits. CSB’s Tier 1 Leverage Ratio increased from 10.4% at March 31, 2024 and 10.1% at year-end 2023, ending the second quarter of 2024 at 10.9% 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. During the second quarter of 2024, Schwab updated its long-term operating objective to be its consolidated adjusted Tier 1 Leverage Ratio of 6.75% - 7.00%. As of June 30, 2024, our adjusted Tier 1 Leverage Ratio, which includes AOCI in the ratio, was 5.9% for CSC consolidated and 6.2% for CSB (see Non-GAAP Financial Measures for further details and a reconciliation of such measures to GAAP reported results). In working toward our long-term operating objective, the Company is continuing to retain and accrete capital organically. The Company will continue to manage its capital as described above. In evaluating returns of excess capital to stockholders, we may consider the amount of supplemental funding outstanding, and Schwab may choose to utilize the liquidity we would otherwise use for capital returns to repay outstanding supplemental balances. IDA Agreement Certain brokerage client deposits are swept off-balance sheet to the TD Depository Institutions pursuant to the 2023 IDA agreement. During the first six months of 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. - 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) Dividends Cash dividends paid and per share amounts, exclusive of amounts related to preferred stock repurchases, for the first six months of 2024 and 2023 are as follows: 2024 2023 Six Months Ended June 30, Cash Paid Per Share Amount Cash Paid Per Share Amount Common and Nonvoting Common Stock $ 919 $ .50 $ 921 $ .50 Preferred Stock: Series D (1) 22 29.76 22 29.76 Series F (2) 12 2,500.00 12 2,500.00 Series G (1) 66 2,687.50 67 2,687.50 Series H (1) 45 2,000.00 46 2,000.00 Series I (1) 41 2,000.00 42 2,000.00 Series J (1) 13 22.26 13 22.26 Series K (1) 19 2,500.00 19 2,500.00 (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 and six months ended June 30, 2024, and for the three months ended June 30, 2023. CSC repurchased 37 million shares of its common stock for $2.8 billion during the six months ended June 30, 2023. As of June 30, 2024, approximately $8.7 billion remained on the authorization. There were no repurchases of CSC’s preferred stock during the three and six months ended June 30, 2024, and for the three months ended June 30, 2023 . During the six months ended June 30, 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 June 30, 2024, Schwab had exposure to non-sovereign financial and non-financial institutions in foreign countries, as well as agencies of foreign governments. At June 30, 2024, the fair value of these holdings totaled $13.3 billion, with the top three exposures being to issuers and counterparties domiciled in France at $4.9 billion, the United Kingdom at $4.1 billion, and Canada at $895 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 $3.2 billion and $2.5 billion at June 30, 2024 and December 31, 2023, respectively. - 25 - THE CHARLES SCHWAB CORPORATION Management’s Discussion and Analysis of Financial Condition and Results of Operations (Tabular Amounts in Millions, Except Ratios, or as Noted) 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 six 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. Additionally, the Company uses adjusted Tier 1 Leverage Ratio in managing capital, including its use of the measure as its long-term operating objective. - 26 - THE CHARLES SCHWAB CORPORATION Management’s Discussion and Analysis of Financial Condition and Results of Operations (Tabular Amounts in Millions, Except Ratios, or as Noted) The following tables present reconciliations of GAAP measures to non-GAAP measures: Three Months Ended June 30, Six Months Ended June 30, 2024 2023 2024 2023 Total expenses excluding interest (GAAP) $ 2,943 $ 2,965 $ 5,885 $ 5,971 Acquisition and integration-related costs (1) (36) (130) (74) (228) Amortization of acquired intangible assets (129) (134) (259) (269) Restructuring costs (2) (10) — 18 — Adjusted total expenses (non-GAAP) $ 2,768 $ 2,701 $ 5,570 $ 5,474 (1) Acquisition and integration-related costs for the three and six months ended June 30, 2024 primarily consist of $18 million and $35 million of compensation and benefits, $12 million and $29 million of professional services, and $5 million of depreciation and amortization. Acquisition and integration-related costs for the three and six months ended June 30, 2023 primarily consist of $48 million and $106 million of compensation and benefits, $41 million and $74 million of professional services, and $10 million and $14 million of occupancy and equipment, and $20 million and $22 million of other. (2) Restructuring costs for the three and six months ended June 30, 2024 reflect a change in estimate of $3 million and $34 million in compensation and benefits, offset by $1 million and $3 million of occupancy and equipment and $12 million and $13 million of other expense for the periods. There were no restructuring costs for the three and six months ended June 30, 2023. Three Months Ended June 30, Six Months Ended June 30, 2024 2023 2024 2023 Amount Diluted EPS Amount Diluted EPS Amount Diluted EPS Amount Diluted EPS Net income available to common stockholders (GAAP), Earnings per common share — diluted (GAAP) $ 1,211 $ .66 $ 1,173 $ .64 $ 2,462 $ 1.34 $ 2,706 $ 1.48 Acquisition and integration-related costs 36 .02 130 .07 74 .04 228 .12 Amortization of acquired intangible assets 129 .07 134 .07 259 .14 269 .15 Restructuring costs 10 .01 — — (18) (.01) — — Income tax effects (1) (42) (.03) (64) (.03) (75) (.04) (120) (.07) Adjusted net income available to common stockholders (non-GAAP), Adjusted diluted EPS (non-GAAP) $ 1,344 $ .73 $ 1,373 $ .75 $ 2,702 $ 1.47 $ 3,083 $ 1.68 (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 June 30, Six Months Ended June 30, 2024 2023 2024 2023 Return on average common stockholders’ equity (GAAP) 14 % 17 % 15 % 20 % Average common stockholders’ equity $ 33,991 $ 27,556 $ 33,264 $ 27,429 Less: Average goodwill (11,951) (11,951) (11,951) (11,951) Less: Average acquired intangible assets — net (8,067) (8,591) (8,132) (8,657) Plus: Average deferred tax liabilities related to goodwill and acquired intangible assets — net 1,747 1,834 1,753 1,837 Average tangible common equity $ 15,720 $ 8,848 $ 14,934 $ 8,658 Adjusted net income available to common stockholders (1) $ 1,344 $ 1,373 $ 2,702 $ 3,083 Return on tangible common equity (non-GAAP) 34 % 62 % 36 % 71 % (1) See table above for the reconciliation of net income available to common stockholders to adjusted net income available to common stockholders (non-GAAP). - 27 - THE CHARLES SCHWAB CORPORATION Management’s Discussion and Analysis of Financial Condition and Results of Operations (Tabular Amounts in Millions, Except Ratios, or as Noted) June 30, 2024 December 31, 2023 CSC CSB CSC CSB Tier 1 Leverage Ratio (GAAP) 9.4 % 10.9 % 8.5 % 10.1 % Tier 1 Capital $ 42,624 $ 32,091 $ 40,602 $ 31,777 Plus: AOCI adjustment (16,926) (14,755) (18,131) (15,746) Adjusted Tier 1 Capital 25,698 17,336 22,471 16,031 Average assets with regulatory adjustments 451,304 294,465 476,069 315,851 Plus: AOCI adjustment (17,301) (15,251) (19,514) (17,194) Adjusted average assets with regulatory adjustments $ 434,003 $ 279,214 $ 456,555 $ 298,657 Adjusted Tier 1 Leverage Ratio (non-GAAP) 5.9 % 6.2 % 4.9 % 5.4 %