“I created this company
because I believed investors
deserved better. They still do.”
CHUCK SCHWAB
the charles schwab corporation
2012 Annual Report
TablE of CoNTENTS
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i
ii
Letter From the CEO
Letter From the CFO
Financial Highlights
Growth in Client Assets and Accounts
Executive Management
Form 10-K
Board of Directors
Corporate Information
The Charles Schwab Corporation (NYSE: SCHW) is
an investing services firm with a 40-year history of
innovating and advocating for individual investors
and the financial advisors who serve them.
In addition to historical information, this annual Report to Stockholders contains “forward-looking statements,” which are
identified by words such as “believe,” “expect,” “plan,” “will,” “may,” “estimate,” “target,” “should,” “growth,” “commit,”
“build,” “deliver,” “continue,” “remain,” “gain,” “can,” “certain,” and other similar expressions. In addition, any statements
that refer to expectations, projections, or other characterizations of future events or circumstances are forward-looking
statements. These forward-looking statements, which reflect management’s beliefs, objectives, and expectations as of the
date hereof, are necessarily estimates based on the best judgment of the company’s senior management. These statements
relate to, among other things, the company’s growth in market share, revenues, earnings and profits; gathering new assets
(See “letter from the Chief Executive officer” and “letter from the Chief financial officer”); earnings power; launch of a new
401(k) program (See “letter from the Chief Executive officer”); spending; expenses; and impact of fed monetary actions
(See “letter from the Chief financial officer”). 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 annual Report to Stockholders. See “forward-looking Statements” in
Management’s Discussion and analysis of financial Condition and Results of operations on page 44 in the form 10-K for a
discussion of important factors that may cause such differences.
From day one, we knew investing could be different.
We believed investors deserved better prices, better access,
and better service. We believed there was a better way for people
to invest, a better way to build wealth. And after four decades of
pursuing that belief, we know that the clients who choose to work
with us are different, too.
They are the investors and advisors who take control of their lives.
The people who build their own businesses, and the ones who
work hard and help build companies. They are optimistic and
determined, independent and driven — the people who know when
to seek objective advice.
They are the people we listen to closely. And when we see the world
through their eyes, we challenge the way people think about investing.
This helps us deliver a superior experience.
This is what makes Schwab® different. These are our clients’ stories.
2
“The Schwab model was built to
spend less time selling you and
more time giving you choices.”
ALEX TOKAR
Alex Tokar likes to get under the hood and figure things
out for himself. Whether he’s building guitars, repairing
cars, or even doing his own taxes, he takes a hands-
on approach to all aspects of his life, including his
portfolio. “I like understanding the financial machinery.
I may not spend hours and hours doing it, but I do like
to understand how it works: the costs involved, who is
making the decisions, if there is a mutual fund advisor
or someone involved. And I like to think about what’s
going to be effective for me over a long period of time.”
Clients like Alex are why Schwab focuses on providing
information, access, and solutions at a good price.
He’s a driven, independent thinker who is constantly
searching for a smarter, more cost-efficient way to
invest for the long-term: “I believe as long as the
world’s population grows, more people will be buying
groceries and electric razors and furniture in the next
five years than they’re buying now, and that all drives
the economy. And that means investing in the market
is better than saving it in the mattress.”
Hear Alex share his story
at AboutSchwab.com
5
“Schwab wants you to be
informed. They want you to be
smart. They want you to be as
educated as possible.”
RAFAEL BALAGUER
Rafael Balaguer graduated from college in 2009, quite
possibly the worst year to enter the job market, he
thought. But neither fear nor the recession stopped
Rafael from moving to San Francisco and starting a
career. He quickly advanced from a string of retail jobs
to a two-man start-up to a career with an advertising
agency. “Now that I have some money, I try to be smart
with it. I really don’t want to go back to that place where
I was when I was 21.”
With the help of Schwab Mobile apps, he’s still moving
forward. “I’m on the bus. I’m on the train. I’m at the
airport. Anywhere I go I keep track of my finances.”
But for Rafael, it’s about more than convenience. In
addition to the mobile app, he relies on social media
posts, online tutorials, and timely market information.
“It’s all about informing you and teaching you more
about your money, how to save it or how to invest it.”
Rafael’s experience with Schwab reflects a growing
interest in taking control of his financial life. It’s also
a prime example of what he wants from the companies
he chooses to work with: “I always kind of expect
companies that play important roles in people’s lives
to really go above and beyond what is necessary.”
Hear Rafael share his story
at AboutSchwab.com
4
IMPACT®
Every year, Schwab’s commitment
to registered investment advisors
takes center stage at one of the
industry’s leading conferences, IMPACT.
Produced by Schwab Advisor Services,
IMPACT connects independent advisors
with key presenters, exhibitors, and
subject matter experts. The networking
and learning opportunities expose
advisors to the latest trends, ideas,
and industry tools — all designed to
help them build their businesses and
serve their clients better.
7
Hear these stories and more
at AboutSchwab.com
“It is shocking the amount of resources
we get from Schwab.”
MARK SOEHN
FINANCIAL SOLUTIONS ADVISORY GROUP
When Mark Soehn walks the floor at IMPACT, he knows
his decision to go independent was right. “It was the best
decision my partners and I ever made. There’s a sense of
accomplishment in focusing on your clients instead
of internal corporate issues.” Registered independent
advisors such as Mark now represent $2.8 trillion in
assets under management, and every year the number
of advisors deciding to go independent grows.
In addition to the traditional custodial services Schwab
Advisor Services provides, Mark’s firm, Financial
Solutions Advisory Group Inc., has also relied on a wide
range of practice management tools, including Schwab’s
Insight to Action Program on creating a strategic plan.
“That was extremely valuable. It took you through very
detailed pre-work and then gave us an opportunity to
have a very detailed roundtable-like conversation with
other advisors. By the time you left, you had a blueprint,
but it still needed to be revised. The nice thing was,
Schwab continued to follow up with you to make sure
that you actually followed through.”
While Mark appreciates Schwab’s business consulting
services, what his firm truly values is the Schwab culture:
“It’s the help in developing new business. It’s helping us
discover, acquire, and migrate two institutions over the
past 10 years into our firm. It’s all the resources that show
us that Schwab is there, first and foremost, to help us grow.”
“The less time I spend pushing
paper, the more time our company
has to spend where it’s needed:
with our clients.”
JACK OLSON
WETHERBY ASSET MANAGEMENT
Jack Olson, chief compliance officer for Wetherby Asset
Management, describes his firm as “the quarterback of our
clients’ financial lives.” A registered investment advisory
firm like Wetherby delivers personalized financial advice
and wealth management solutions for clients who often
have more complicated financial needs. Each client’s
game plan is different, but, internally, the processes and
procedures that promote transparency remain. That’s where
Jack steps in. Working with Schwab Compliance Solutions,
he can monitor and report on Wetherby’s employee trading
activity, including proactive trade blocking. With automated
systems and reporting tools, Jack can spend less time on
regulatory reporting and more time on activities that build
client trust. As Jack put it: “It’s a trust-based business. If
our clients don’t believe what we’re telling them, then we’re
not going to have a client.”
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“Schwab is almost like that extra
guest at the table because they
want you to be safe and sound.
They’ll listen to you.”
TIM GARCIA AND ANNE HADDAD
At the center of the Garcia household sits a well-worn
kitchen table where Tim, Anne, and their son Rex start
and end their days in Highland Park, an idyllic bedroom
community just north of Chicago. It’s where they drink
their coffee, take their meals, and work on a variety of
projects on the weekends. It’s also where they make their
most important decisions. “We talk about everything at
this table,” Tim says.
Whether it’s about mutual funds or brokerage accounts,
the Garcia family engages in an open conversation
about their financial goals. This conversation is a natural
extension of their long-term ongoing relationship with
Schwab. “I went there when I was 30,” Tim says, “looking
for a best-fit culture, somewhere to roll over a 401(k).
They were approachable; they were honest. In my 40s,
I was looking for better research tools. They offered that
and started me on my financial planning. As I passed into
my 50s, my needs changed again.”
At every stage, Schwab has met the Garcias’ changing
needs: “We wanted to move from a 30-year mortgage to
a 15-year mortgage. Our Schwab consultant directed us
to Quicken® Loans®, and the process was just brilliant.”
The Garcias were able to apply online, conduct follow-up
conversations with Quicken® over the phone, and close
within 45 days. “We closed at the comfort of our kitchen
table on a weeknight at 7 o’clock.”
Refinancing their home is just one example of why the
Garcias chose to plan their future with Schwab. Tim
puts it in simpler terms. “You sit across the dining room
table at night and you know it’s your responsibility to
ensure that everyone’s safe and sound. I feel that way
with Schwab.”
Hear Tim and Anne share their story
at AboutSchwab.com
10
“Schwab’s professionalism is good citizenship. They
take care of your money, and they have a sense of
responsibility to the community. That’s important to me.”
CHICK HODGE
After 35 years with Boeing Co., Charles “Chick”
Hodge had more than earned a comfortable
retirement. But instead of taking it easy, he is
giving back to the community by joining the board
of Tennis Outreach Programs, an organization that
provides tennis, fitness, educational tutoring, and
character development for kids regardless
of economic circumstances.
Helping kids is vital to Chick’s life, and it’s one of
the reasons he works with Schwab: “They take
their citizenship very seriously. It permeates their
entire organization.” In fact, the Schwab branch
in Bellevue, Wash., has gotten directly involved,
offering Schwab MoneyWise® workshops to Tennis
Outreach Programs participants.
That same sense of community also influences
Schwab’s products and services. For example,
Schwab Charitable™, an account with funds
dedicated to charity, gives Chick a simple and
tax-smart way to contribute, invest, and grant.
“It’s an efficient way to send money to a charity.
You do it online. It takes about 30 seconds,
and the money can be invested according to
your wishes.”
Hear these stories and more
at AboutSchwab.com
11
“We always thought we were organized and together as
an organization. Then we started working with Schwab.”
LOU REDA, HANDS ON BAY AREA
Ask Lou Reda, executive director of Hands
On Bay Area (HOBA), to describe Schwab
volunteers, and the first thing he says is “Type A.”
“Schwab brought a level of rigor we didn’t realize
was even possible. It’s amazing the amount
of work they get done.” HOBA is a nonprofit
community-based organization in San Francisco
that mobilizes volunteers on behalf of a wide
variety of organizations, from food banks and
environmental groups to shelters and job training
services. “A lot of nonprofits need human capital.
They’re not able to afford to pay staff members to
do the work. That’s where we step in,” Lou says.
Once a year, Schwab provides an infusion of
human capital in the form of Schwab Volunteer
Week, an all-hands-on-deck event where
“Schwabbies” roll up their sleeves and get out
into the community. But this volunteerism isn’t
limited to just one week. Schwab employees can
be found throughout the year painting classrooms,
sorting donated clothing, and teaching the basics
of managing money to students.
The company’s long-term relationship has also
helped HOBA develop its corporate volunteer
program. “There are a lot of young fast-growing
companies that don’t necessarily understand the
process of engaging in the community. Schwab
gives us a level of credibility.”
13
“I don’t know how many people can
actually say, ‘I like my bank,’ but I
can, which is pretty cool.”
CAITLIN CHILDS
Ask Caitlin Childs where she’s traveled in the past few
years, and she quickly rattles off an impressive list of
foreign destinations. “Germany, Sweden, Honduras,
Ireland, Vietnam.” At 28, Caitlin has taught herself
photography and graphic design, and has graduated
from online “how-to” tutorials to running an entire
marketing department for a nonprofit organization. This
do-it-yourself approach to life is, in many ways, what
led her to Schwab. “I was planning a trip to Vietnam,
and I knew that I needed a bank where I could use my
debit card that didn’t charge foreign transaction fees.
The trip was already expensive enough.” The flexibility of
Schwab Bank enabled Caitlin to securely log on to her
account and check her balance, understand exchange
rates, and travel halfway around the world knowing she
had access to her money when and where she needed
it. This experience has since inspired Caitlin to take
even greater control of her financial life. She’s funded a
brokerage account with Charles Schwab, opened a Roth
IRA, and used Schwab’s online tools to create a long-
term investment plan.
Hear Caitlin share her story
at AboutSchwab.com
“There’s an interest in how you manage your
funds, taking that extra step and going a little
further to find out what your goals are as you
get closer to retirement. With Schwab, I feel
like I have a team behind me. I have a point
person that I can go to anytime.”
JIM VANEK
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“Schwab listens, they learn, and they
react intelligently to concerns of the
clients they work with.”
JEFF FELD
ALLIANCE PENSION CONSULTANTS, LLC
“The 401(k) is the All-American retirement plan,”
Jeff Feld says. “Everyone — government, employers,
employees — has a little bit of skin in the game. When
everyone does as they’re supposed to, it can provide
a comfortable retirement.” Jeff Feld should know.
With more than 30 years’ experience in designing and
administering retirement plans for small and midsize
businesses, Jeff has seen the 401(k) evolve from a
product distributed by insurance companies to a
highly efficient retirement tool. Schwab has played a
big role in that evolution. “Schwab Retirement Business
Services (RBS) was structured to allow organizations
like us to deliver a low-cost option to employers.”
With a commitment to open architecture, RBS also
advanced the industry, helping companies like Jeff’s
give employers and employees greater flexibility and
choice of investment funds: “The concept of having
different funds from different fund families made
theoretical sense, but in terms of execution it was very
difficult. Schwab allowed us to go to clients who might
not have heard of my firm, might not have heard of
open architecture, but when they heard that Schwab
was part of the engine that powered this, that gave
them some level of comfort with this new approach.”
“Schwab treats me like an intelligent
individual and not a chicken to be
plucked. The fundamental message
is respect for the investor.”
EILEEN BIRGE
It’s difficult to imagine Eileen Birge, an experienced
consultant and graduate of Wharton, as anything other
than a sophisticated, well-informed investor. But that’s
exactly why she sought out Schwab in the early 80s.
“We had established a relationship with another broker
who gave us terrible advice and charged us a lot of
money for it. Schwab was one of the first places to offer
competitive commissions.” Cut to 30 years later, and Eileen
is comfortably retired, an active leader in her community,
and enjoying her interests in art, culture, and travel. The
key to getting there was a steady and savvy approach to
saving and investing, and having a resource like Schwab.
“I’ve enjoyed a lot of the educational programs that
Schwab has. I don’t always agree with the speakers, but
it’s always thought provoking and really makes you think
about investing in sort of the larger context.” Whether
it’s the commission structure, approach to service, or
educational opportunities, the fundamental message
Eileen gets from Schwab is respect: “When you have a
level of expertise that’s greater than your client, you can
become arrogant. Schwab honors and respects you.
They’ve managed to avoid that arrogance.”
Hear these stories and more
at AboutSchwab.com
16 Letter from the Chief eXeCUtiVe offiCer
WALT BETTINGER
CHIEF EXECUTIVE OFFICER
“‘Through clients’ eyes’ was Chuck Schwab’s strategy on
Day 1, when he founded this firm to offer a better deal
to investors. It has remained our strategy through four
decades of innovation, and it continues to guide us today.”
TO MY FELLOW STOCKHOLDERS:
n my letter last year, I made a few observations about
the challenges we would likely face in 2012: a bruising
presidential election, ongoing sovereign debt problems
in Europe, continued deleveraging by consumers, and the
Federal Reserve’s doubling down on their extraordinary
efforts to anchor interest rates at record low levels. These
all came to pass, making the environment difficult for our
company and our clients.
For Schwab, this environment once again depressed earnings
to a level below what we expect to deliver to stockholders
in a more normal environment. For investors, the continued
uncertainty prompted a move out of equities in search of
yield and security. Similarly, trading was muted as investors
struggled to see any signs of confidence and conviction in the
equity market. Perhaps the most damaging aspect of 2012
was the ongoing lack of trust that consumers felt toward
financial services firms. According to a recent major survey,
trust in financial services companies ranked near the bottom
among all industries.
For many of our competitors, this lack of trust is a building
crisis. But at Charles Schwab, we see an enormous opportunity.
Our vision is clear: We want to be the most trusted leader in
investment services. Because when investors trust Schwab,
we grow our market share and build robust earnings power for
our stockholders. Building trust with our clients has been the
hallmark of Schwab for 40 years. We build trust by aligning
ourselves with our clients, by seeing the world through their
eyes, and by disrupting the traditional investing and banking
practices on our clients’ behalf.
TRUST MATTERS
Trust matters in our business. Chuck Schwab created this firm
to be safe and dependable, operated with a high level of
integrity, without making compromises at the expense of our
clients. We still believe that’s the way to build client trust, which
leads to growth.
Even in the face of an ongoing difficult economic environment,
in 2012 we continued to grow and prosper. In fact, when 2012
is reviewed years from now, it will go down as an exceptional
year for Charles Schwab. Schwab once again surpassed our
competitors in terms of growth as measured by Net New Assets
(NNA). In the fourth quarter of 2012 alone, clients brought more
than $64.4 billion of their wealth to us, including core NNA of
$47.8 billion. This extraordinary figure is a reflection of the trust
that we have earned among investors with our daily actions.
Letter from the Chief eXeCUtiVe offiCer 17
A growing and engaged client base helped Schwab deliver strong
financial results in 2012.
$1 ,951 .6
• Net revenues increased 4 percent to $4.88 billion
$1 ,574.5
$1 ,677.7
• Net income gained 7 percent to $928 million
TOTAL CLIENT ASSETS
(IN BILLIONS AT YEAR END)
$1 ,422.6
$1 ,137.0
• Pre-tax profit margin of 29.7 percent remained robust
and even with last year
• Diluted earnings of 69 cents per common share compared
to 70 cents per share in 2011
RETHINKING INVESTING
Seeing through clients’ eyes has always been the Schwab
way. By listening thoughtfully to our clients, we’ve been able to
deliver services that make investing more accessible, affordable,
and understandable.
Schwab pioneered discount brokerage and opened investing
to the masses. We created an innovative and convenient way
to invest through a supermarket of no-load, no-transaction-fee
mutual funds. We led the way in online investing. We introduced
institutional-quality investment advisory services for the Main
Street investor. We helped thousands of independent advisors
serve their clients. And we disrupted the 401(k) industry to
deliver a better value for employees.
A lot has changed over the past 40 years, but even more has
stayed the same. Investors can still count on Schwab
to champion their financial goals — and to do so with passion
and integrity.
Today, when we look through the eyes of investors, we continue
to see areas where they feel compromised — areas that present
opportunities for a firm like Schwab to challenge and disrupt the
status quo on their behalf.
Investors deserve better. And at Schwab, we’re constantly
innovating and championing better ways for our clients to reach
their goals. In every business segment, we’re focused on the
things that matter most to our clients — service, value, and
convenient access, all delivered with a high level of ethics and
integrity. Let’s take a closer look at how our client-focused
strategy shapes our beliefs and our actions in each area.
1. Rethinking Service
Clients deserve prompt and personalized service —
whenever and wherever they desire it. Last year, we logged
millions of interactions through multiple touchpoints, serving
all types of clients, including individual investors, registered
investment advisors (RIAs), corporate benefit plan sponsors,
and their employees.
2008
2009
2010
2011
2012
As an innovator focused on transforming the financial services
industry, we continued to invest aggressively in building our
market share across our businesses, and we introduced a
series of new products and services to benefit investors. And
importantly, our stockholders were rewarded with an overall
return for the year of approximately 30 percent from growth in
our share price and reinvestment of dividends. For most firms,
this would be cause for celebration. But for those of us referred
to as “Schwabbies,” we reflect only briefly on the successes of
2012, for we are directing our attention to finding new ways to
delight our valued clients and future clients in 2013 and beyond.
2012 RESULTS
Despite the environmental challenges of 2012, Schwab
continued to grow NNA at a pace unrivaled among our
competitors. How? It’s pretty simple: We strive to see through
our clients’ eyes. But these words are more than a successful
strategy. They are part of our corporate DNA. And they are
what make Schwab different from the traditional model for
investment services. Our strategy provides a sharply focused
lens that helps us make decisions that should lead to long-term
earnings growth and value creation. I invite you to not simply
take my word that a strategy based on seeing through clients’
eyes works. Let’s look at the results.
For the 12 months ended December 31, 2012, The Charles
Schwab Corporation reported a record $1.95 trillion in total
client assets. Core NNA of $112.4 billion was up 37 percent
over the prior year, and we added 900,000 new brokerage
accounts during 2012, bringing active brokerage accounts to
a record 8.8 million, up 3 percent year over year. The number
of banking accounts grew 11 percent to 865,000, and the
number of corporate retirement plan participants increased
5 percent to 1.6 million as of December 31, 2012.
18 Letter from the Chief eXeCUtiVe offiCer
Our online and mobile channels continued to be a go-to
resource, primarily for our self-directed investors. Last year on
Schwab.com, we processed more than 296 million client log-ins
and ranked #1 in the Keynote Brokerage Performance Index for
most weeks in 2012, ending the year with a top index speed of
3.08 seconds to log in and place a stock order.
When clients need personalized assistance, many turn to our
toll-free phone lines. In 2012, Schwab answered 13.4 million
calls in an average time of 22 seconds, with an additional
10.2 million calls handled through automated channels. Our
knowledgeable phone reps also received a 9.8 out of 10.0
satisfaction score in an interactive voice response survey.
Of course, we also provide face-to-face assistance at more than
300 Schwab branches nationwide. Last year, our employees
hosted more than 600,000 in-person client meetings and
presented 56,500 personalized financial and investing plans.
2. Rethinking Value
Every client deserves to know what they’re paying for and
what they will get in return. In an industry where few things are
certain beyond the fees an investor pays, we have dramatically
lowered the cost of investing.
We began 2012 with the launch of Schwab Index Advantage®
— a 401(k) plan offering that provides index mutual funds with
low operating expenses and delivers added value by including
a professional, independent advisory service. Later in the
year, we slashed the operating expense ratios for each of
the Schwab ETFs, offering the lowest OERs in their respective
Lipper categories.
But there’s more to value than just low fees. Delivering great
value means giving clients more than they expect. In our
Advisor Services segment, we conducted free Insight to Action
workshops on business development topics such as strategic
planning, and we continued to expand our Schwab Intelligent
Integration™ platform as a one-stop resource for customer
relationship management.
3. Rethinking Access
Every client deserves convenient access to the products,
services, and information needed to achieve their goals.
A number of launches in 2012 helped make investing easier
and more accessible. We continued to expand our lineup of
mobile apps for both smartphones and tablets, giving investors
and independent advisors convenient access to their Schwab
accounts. We also introduced new tools for options traders
and a cloud version of our StreetSmart Edge® platform for
active traders.
expand client access to growth-oriented investment portfolios
designed to generate dividend streams — a convenient investing
alternative for those nearing or in retirement.
INTEGRITY MATTERS
Clients deserve to work with smart and caring people who have
their interests at heart. It’s not simply what we do that makes
Schwab different. It’s how we do it.
Many third-party awards have acknowledged Schwab’s client-
centric approach. Last year, The Charles Schwab Corporation
received the number-one ranking in the Securities industry
category in FORTUNE magazine’s 2012 list of the World’s Most
Admired Companies.1 Charles Schwab also was named “Highest
in Investor Satisfaction with Self-Directed Services” by J.D.
Power and Associates.2 Also in 2012, for the third straight
year, Schwab ranked number one in customer satisfaction in
an independent survey conducted by the American Customer
Satisfaction Index.
When it comes to service, value, convenience, and integrity, we
want every client to have such a great experience with Schwab
that they recommend us to family and friends. Schwab receives
an astonishing 40 percent of our new clients as a result of
referral from delighted clients.
RISING TO THE CHALLENGE
Our success at building the Schwab franchise in 2012 is clear.
And many of the strong headwinds that have impacted our
earnings the last few years also remain as we move into 2013.
Our nation and its political leaders remain split by competing
views about the role and size of government, the level and
manner of taxing its citizens, and the future means by which we
should meet financial promises made to our citizens. Much of
Europe remains awash in red ink and faces an uncertain fiscal
future. Consumers, although resilient, continue their broad-
based deleveraging from the excesses of the last decade. And
maybe most challenging for Schwab, the Federal Reserve, in its
efforts to drive businesses and consumers to spend and invest,
remains committed to a set of ultra-low interest rates that
obscure market forces.
Serious headwinds? Yes. But at Schwab we keep moving
consistently forward, gathering billions of dollars in new
assets as we gain market share.
As we look to 2013 and beyond, we will continue to challenge
the traditional investing services model — to create a better way
to serve investors and their advisors and to earn their trust. Our
clients depend on us to champion their financial goals. We will
speak up on their behalf, changing what needs to be changed,
and reinventing what no longer works. Schwab has never been
about the status quo and never will be.
Through an agreement with Piper Jaffray, we expanded access
to new-issue municipal bonds via the Schwab BondSource®
platform. And our acquisition of ThomasPartners, Inc. will
Clients tell us what matters most to them. For example, we
plan to open select branches on Saturdays to better serve
Letter from the Chief eXeCUtiVe offiCer 19
MAJOR 2012 INITIATIVES
Mobile Apps. Schwab enhanced its mobile apps with the
release of Schwab Bill Pay® for iPad, iPhone and Android,
and mobile deposit capabilities for iPad users. By year-end,
more than 1.2 million check deposits were made on a mobile
device, up from 426,931 the prior year. In addition, the new
Schwab Advisor Center™ app for both iPhone and iPad gave
independent advisors convenient mobile access to key client
data, such as balances, positions, and transactions.
Schwab Global Account™. Schwab expanded global investing
capabilities with the launch of the Schwab Global Account,
which provides investors with direct, 24/7 online access to
12 foreign equity markets with the ability to trade in their
local currencies whenever the markets are open.
Advisor Technology. Schwab Intelligent Integration
added more third-party software providers to its platform
as it continued to increase integration between various
systems and workflows used by independent advisors.
Schwab Intelligent Technologies also announced the new
Schwab OpenView MarketSquare™ review site, which will
provide ratings and advisor feedback on popular providers.
Practice Management Consulting. Advisor Services
expanded its Insight to Action workshops, offering
independent investment advisors hands-on training and
support. Since its inception in 2011, nearly 900 advisors
have attended workshops on strategic planning, client
profitability, and other topics.
Options Trading. optionsXpress, Inc. introduced two new
tools for options traders — Idea Hub™ and Walk Limit™. Idea
Hub is a new idea-generation tool that filters real-time data
from various sources — including options screeners, strategy
scanner, and earnings calendars — and packages the results
into actionable options trading ideas. Walk Limit tool can
“walk” or adjust an option order’s limit price automatically
to help optimize execution.
StreetSmart Edge® Platform in the Cloud. Schwab put its
most powerful trading platform on the web to be accessed
from any Mac or PC with an internet connection, giving active
traders flexible access to everything that was previously
available only using downloadable software.
Schwab Index Advantage®. Retirement Plan Services
launched a one-of-a-kind 401(k) plan offer designed to
lower costs, simplify investing, and help workers better
prepare for retirement. The offer provides index mutual funds
with low operating expenses bundled with a professional,
independent advisory service that develops a savings and
investment program.
Schwab Compliance Solutions. Schwab brought together
the regulatory compliance software of Compliance11®, which
was acquired in 2011, with the trade monitoring services of
Schwab Designated Brokerage Services to create Schwab
Compliance Solutions. The comprehensive compliance
offering helps companies better meet regulatory requirements,
manage risk, and protect their reputations.
clients who prefer face-to-face contact, while still maintaining
the highest level of service over the phone and online. Clients
want an easier way to invest in ETFs, so we responded with
ground-breaking innovation — our new Schwab ETF OneSource™
platform featuring commission-free trades on ETFs from most
of the major ETF providers. Later in 2013, we plan to introduce
an industry-first full-service 401(k) program that will offer
employees the ability to invest in low-cost, index ETFs.
Schwab will continue being a challenger and innovator,
consistent with our heritage. Ultimately, trust is built when
someone shares your values and puts your interests at the
forefront. And that is what Schwab is all about. Chuck Schwab
reinvented investing once four decades ago, and we are doing
it again... one trusting relationship at a time.
Thank you for your confidence.
Warmly,
WaLt Bettinger
March 8, 2013
(1) From FORTUNE® Magazine March 19, 2012. ©2012 Time Inc. FORTUNE is a registered
trademark of Time Inc. and is used under license. FORTUNE and Time Inc. are not
affiliated with, and do not endorse products or services of, Licensee.
(2) Charles Schwab & Co., Inc. received the highest numerical score among self-directed
investing service providers in the proprietary J.D. Power and Associates 2012
Self-Directed Investor Satisfaction StudySM. Study based on responses from 3,733
investors measuring 10 providers and measures satisfaction of self-directed investors.
Proprietary study results are based on experiences and perceptions of consumers
surveyed in February 2012. Your experiences may vary. Visit jdpower.com
20 Letter from the Chief finanCiaL offiCer
JOE MARTINETTO
CHIEF FINANCIAL OFFICER
STEP BY STEP
t first, one might be tempted to dismiss 2012 as a replay
of 2011 for Schwab. After all, there were many similarities
— a still-tough macro environment with persistently high
70 cents of earnings per share. Not bad when you consider the
environment took away almost $200 million of revenue from our
baseline scenario for the year.
unemployment and a shaky economic recovery, a tense political
debate around fiscal policy, and a sustained effort by the
Federal Reserve to lower long-term interest rates. Even Schwab’s
earnings per share looked about the same from year to year. Yet
we believe the real story for 2012 lies beneath these surface
similarities. It’s a story of remarkable progress in growing
our business in the face of sustained headwinds, of building
momentum with clients as we continue to invest in improving
our ability to serve them, and of our ability to combine careful
balance sheet management and spending discipline to deliver
earnings power that is both growing and progressively less
susceptible to further Fed rate actions. It’s a story that deserves
a closer look, so let’s dig a little deeper.
We planned for a still-tough environment in 2012, with flat
interest rates and some improvement in the equity markets and
trading activity as the year progressed. The equity markets were
indeed in positive territory all year long, ending with double-digit
returns, but trading activity never really picked back up, even
after the election was decided. Additionally, the Fed chose to
extend its quantitative easing activity, which pushed long-term
interest rates down further. Given the way we make money, “still-
tough” ended up being “tougher” and we ended up producing
4 percent revenue growth — not what we’d have done with flat
rates and a recovery in trading, but stronger than we expected
under the circumstances. By adhering to our spending plan, we
kept expense growth below revenues while still investing more
than $160 million in our client initiatives, and were thus able to
hold the line on a 29.7 percent pre-tax profit margin and roughly
NET REVENUES
(IN MILLIONS FOR YEAR ENDED DECEMBER 31)
$5,150
$4,193
$4,248
$4,691
$4,883
2008
2009
2010
2011
2012
Still, sideways is boring, and sideways is not building
stockholder value, but let’s consider the ways in which Schwab
made meaningful progress in 2012. First and foremost,
momentum with clients was far superior. Net new assets totaled
$139.7 billion for the year, $112.4 billion if you look at what
we call core flows, excluding significant one-time items. That’s
37 percent higher than 2011. Importantly, our fourth quarter
core net new assets of $47.8 billion were more than double the
year-earlier level. While we may not be quite ready to claim that
quarterly performance as our new run rate, our asset gathering
Letter from the Chief finanCiaL offiCer 21
PRE-TAX PROFIT MARGIN
39.4%
30.4%
29.7%
29.7%
18.3%
2008
2009
2010
2011
2012
the strength of our brand. At the same time, we’d expect to
accomplish this progress while lagging overall expense growth
behind revenues, thereby delivering an improved profit margin
and earnings growth along with stronger business momentum.
We do recognize that life rarely unfolds exactly as planned.
For example, client trading activity thus far for 2013 remains
relatively muted. To the extent conditions evolve differently
than our baseline scenario, our flexible expense management
philosophy will enable us to adapt our spending as appropriate.
We’ve taken some major steps to continue building stockholder
value. What’s the next step for Schwab? We remain convinced
that the best path forward for the benefit of both clients and
stockholders is the one we’re on — driving strong business
growth by investing in better client service capabilities,
building diversified revenue streams by expanding the products
and services we offer, and sustaining expense discipline by
allocating resources wisely as we balance our initiative spending
with strong profitability. We can’t predict how the environment
will impact our progress on that path, but I’m dead certain
about one thing —
We’re not going sideways.
Joe martinetto
March 8, 2013
has clearly picked up. Remember that in our basic operating
model, client growth turns into earnings growth as long as
economic drivers are stable to improving.
To help solidify and advance our momentum with clients,
we chose to take advantage of the relative strength in 2012
revenues by allocating approximately $20 million more to project
spending than originally planned. The extra allocation helped
us to advance client initiatives across the board, including
more active near-term business development, while making
progress in extending our regulatory compliance infrastructure
as necessary in today’s more complex environment.
We were also active on the financial management front in 2012.
We issued a total of $885 million in preferred stock, which
we view as a cost-effective, non-dilutive way of supporting
our ongoing growth. We redeemed all $202 million of our
remaining Trust Preferred Securities and the underlying 7.50
percent Junior Subordinated Notes given the Federal Reserve’s
proposal to phase out those securities’ eligibility for regulatory
capital treatment. Additionally, we retired all $750 million of
our outstanding 4.95 percent Senior Notes due in 2014 through
a debt exchange offer and the subsequent redemption of the
remaining balance. We issued $256 million of new 10-year
Senior Notes at a reduced cost via the exchange, and we
separately issued $350 million of 3-year Senior Notes with
a 0.85 percent coupon.
These transactions comprise a complicated set of actions
with a very straightforward goal — maximizing the company’s
earnings power by carefully managing both sides of the balance
sheet. We believe the company continues to have the resources
and flexibility to pursue profitable growth in all environments,
particularly given the diminishing effect of incremental Fed
monetary actions in the face of our balance sheet management
efforts and the extremely low level of current interest rates.
We’re neither expecting nor depending on a significant
improvement in the environment during 2013. As long as
the economic picture holds up, we believe we can translate
stable interest rates, modest equity market gains, and a
recovery in trading activity into year-over-year improvement in
all three major sources of revenue — asset management and
administration fees, net interest revenue, and trading revenue —
and overall revenue growth at or near a double-digit percentage.
Under those circumstances, we’d expect to make progress in
normalizing our spending in three key areas: compensation, to
help with hiring and talent retention following a series of years
with tightly capped payouts; projects, to sustain and build
business momentum via a more fully-loaded list of initiatives;
and marketing, to help drive growth, bring our visibility to levels
more appropriate for a highly competitive industry, and build
22 finanCiaL high Lights
FINANCIAL HIGHLIGHTS
(In Millions, Except Per Share Amounts and as Noted)
net revenues
expenses excluding interest
net income available to common stockholders
Basic earnings per common share
Diluted earnings per common share
Dividends declared per common share
Weighted-average common shares
outstanding — diluted
Closing market price per share (at year-end)
Book value per common share (at year-end)
net revenue growth
Pre-tax profit margin
return on average common stockholders’ equity
full-time equivalent employees
(at year-end, in thousands)
net revenues per average
groWth rate
1-year
2011-12
4%
4%
7%
(1%)
(1%)
–
4%
28%
13%
2012
$ 4,883
$ 3,433
$
$
$
$
928
.69
.69
.24
1,275
$ 14.36
$ 6.83
4%
29.7%
11%
2011
$ 4,691
$ 3,299
$ 864
$
$
$
.70
.70
.24
1,229
$ 11.26
$ 6.07
10%
29.7%
12%
2010
$ 4,248
$ 3,469
$ 454
$
$
$
.38
.38
.24
1,194
$ 17.11
$
5.18
1%
18.3%
8%
(2%)
13.8
14.1
12.8
full-time equivalent employee (in thousands)
1%
$ 354
$ 350
$ 337
groWth in CLient assets anD a CCoUnts 23
GROWTH IN CLIENT ASSETS AND ACCOUNTS
groWth rates
ComPoUnDeD
4-year
annUaL
1-year
(In Billions, at Year End, Except as Noted)
2008-12 2011-12
2012
2011
2010
2009
2008
Assets in client accounts
schwab one®, other cash equivalents
and deposits from banking clients
28%
23% $ 119.0
$
96.4
$
81.1 $
65.1
$
44.4
Proprietary funds (schwab funds®
and Laudus funds®):
money market funds
equity and bond funds
total proprietary funds
mutual fund marketplace®(1):
mutual fund onesource®(2)
mutual fund clearing services
(2)
other third-party mutual funds
total mutual fund marketplace
total mutual fund assets
equity and other securities (1)
fixed income securities
margin loans outstanding
Total client assets
Client assets by business
investor services
advisor services
other institutional services
Total client assets
(5%)
10%
(3%)
19%
31%
21%
22%
14%
18%
3%
17%
14%
13%
13%
22%
5%
167.9
159.8
154.5
171.2
209.7
30%
49.6
38.2
46.0
41.6
33.9
10%
217.5
198.0
200.5
212.8
243.6
12%
223.2
198.6
208.6
175.0
110.6
53%
159.1
104.2
42.1
81.8
54.2
18%
360.1
305.9
291.8
243.8
169.1
22%
742.4
608.7
542.5
500.6
333.9
19%
16%
959.9
702.4
806.7
607.9
743.0
589.4
713.4
485.0
577.5
357.2
3%
181.8
176.9
171.3
167.0
164.1
13%
(11.5)
(10.2)
(10.3)
(7.9)
(6.2)
16% $ 1,951.6
$ 1,677.7
$ 1,574.5
$ 1,422.6
$ 1,137.0
11% $ 775.4
$ 697.9
$ 686.5
$ 583.2
$ 482.6
16%
788.5
679.0
654.9
590.4
477.2
29%
387.7
300.8
233.1
249.0
177.2
by business
14%
16% $ 1,951.6
$ 1,677.7
$ 1,574.5
$ 1,422.6
$ 1,137.0
Net growth in assets in client accounts
(for the year ended)
Net new assets
investor services
advisor services
other institutional services
(3)
Total net new assets
net market gains (losses)
Net growth (decline)
New brokerage accounts (4)
(in thousands, for the year ended)
Clients (in thousands)
active brokerage accounts (5 )
Banking accounts (6)
Corporate retirement
(9%)
(2%)
35%
5%
N/M
N/M
$
(4%) $
26%
(22%)
23.6
56.4
59.7
24.6
44.6
76.7
$
13.0
49.3
(35.7)
$
15.3 $
41.3
30.7
87.3
35.1
60.2
18.1
(4%) $ 139.7 $ 145.9 $
26.6
$
$ 113.4
N/M
134.2
(42.7)
125.3
198.3
(421.9)
165% $ 273.9
$ 103.2
$ 151.9
$ 285.6 $ (308.5)
–
(21%)
900
1,138
829
787
889
4%
23%
3%
8,787
8,552
7,998
7,701
7,401
11%
865
780
690
567
377
plan participants
3%
5%
1,571
1,492
1,477
1,465
1,407
(1) Excludes all proprietary money market, equity, and bond funds.
(2) Certain client assets at December 31, 2009, have been reclassified from Mutual Fund OneSource® to other third-party mutual funds.
(3) Includes inflows of approximately $900 million as a result of the acquisition of ThomasPartners, Inc. and $33.1 billion from mutual fund clearing services
clients in 2012. Includes outflows of approximately $100 million as a result of the sale of Open E Cry, LLC, $900 million related to a planned transfer from
Corporate Brokerage Services, and $1.2 billion as a result of the closure of brokersXpress LLC in 2012. Includes inflows of $56.1 from a mutual fund services
client, and $7.5 billion from the acquisition of optionsXpress Holdings, Inc. in 2011. Includes inflows of $2.0 billion from the acquisition of Windhaven Investment
Management, Inc. and $1.2 billion from a mutual fund clearing services client, and outflows of $51.5 billion related to the planned deconversion of a mutual fund
clearing services client in 2010.
(4) Includes 315,000 new brokerage accounts from the acquisition of optionsXpress Holdings, Inc. in 2011.
(5) Removed approximately 30,000 due to escheatment and other factors and reduced by 19,000 as a result of the sale of Open E Cry, LLC, and the closure
of brokersXpress LLC in 2012.
(6) Effective 2010, the number of banking accounts excludes credit cards. Prior period amounts have been recast to reflect this change.
N/M — Not Meaningful
24 eXeCUtiVe management
CHARLES R. SCHWAB
Chairman of the Board
CARRIE E. DWYER
Executive Vice President, General
Counsel and Corporate Secretary
WALTER W. BETTINGER II
President and Chief Executive Officer
JAY L. ALLEN
Executive Vice President, Human
Resources and Employee Services
RON CARTER
Executive Vice President,
Operational Services
STEVEN H. ANDERSON
Executive Vice President,
Retirement Plan Services
MARIE A. CHANDOHA
President and Chief Executive
Officer, Charles Schwab Investment
Management, Inc.
BERNARD J. CLARK
Executive Vice President,
Advisor Services
JOHN S. CLENDENING
Executive Vice President,
Investor Services
JONATHAN M. CRAIG
Executive Vice President and
Chief Marketing Officer
G. ANDREW GILL
Executive Vice President,
Investor Services
LISA KIDD HUNT
Executive Vice President,
International and
Special Business Development
JOSEPH R. MARTINETTO
Executive Vice President and
Chief Financial Officer
JAMES D. McCOOL
Executive Vice President,
Client Solutions
JIM McGUIRE
Executive Vice President and
Chief Information Officer
NIGEL MURTAGH
Executive Vice President,
Corporate Risk
LEONA TANG
Executive Vice President,
Internal Audit
PAUL V. WOOLWAY
Executive Vice President and
President, Charles Schwab Bank
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2012
Commission file number 1-9700
THE CHARLES SCHWAB CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction
of incorporation or organization)
94-3025021
(I.R.S. Employer Identification Number)
211 Main Street, San Francisco, CA 94105
(Address of principal executive offices and zip code)
Registrant’s telephone number, including area code: (415) 667-7000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock - $.01 par value per share
Depository Shares, each representing a 1/40 ownership interest in a
th
share of 6.0% Non-Cumulative Preferred Stock, Series B
Name of each exchange on which registered
New York Stock Exchange
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
⌧
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes
No
(cid:2)
(cid:2)
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.
Yes
No
⌧
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days. Yes
No
⌧
(cid:2)
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or
for such shorter period that the registrant was required to submit and post such files). Yes
No
⌧
(cid:2)
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not
be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K.
⌧
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2
of the Exchange Act.
Large accelerated filer
Non-accelerated filer
⌧
(cid:2)
(Do not check if a smaller reporting company)
Accelerated filer
Smaller reporting company
⌧
(cid:2)
(cid:2)
(cid:2)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
No
As of June 30, 2012, the aggregate market value of the voting stock held by non-affiliates of the registrant was $14.1 billion. For
purposes of this information, the outstanding shares of Common Stock owned by directors and executive officers of the registrant,
and certain investment companies managed by Charles Schwab Investment Management, Inc. were deemed to be shares of the voting
stock held by affiliates.
The number of shares of Common Stock outstanding as of January 31, 2013, was 1,277,985,901.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this Form 10-K incorporates certain information contained in the registrant’s definitive proxy statement for its annual
meeting of stockholders, to be held May 16, 2013, by reference to that document.
THE CHARLES SCHWAB CORPORATION
Annual Report On Form 10-K
For Fiscal Year Ended December 31, 2012
TABLE OF CONTENTS
Part I
Item 1.
Business
General Corporate Overview
Business Acquisitions
Business Strategy and Competitive Environment
Products and Services
Regulation
Sources of Net Revenues
Available Information
Item 1A. Risk Factors
Item 1B. Unresolved Securities and Exchange Commission Staff Comments
Item 2.
Item 3.
Properties
Legal Proceedings
Part II
Item 4.
Item 5.
Item 6.
Item 7.
Mine Safety Disclosures
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
Current Market and Regulatory Environment and Other Developments
Results of Operations
Liquidity and Capital Resources
Risk Management
Fair Value of Financial Instruments
Critical Accounting Estimates
Forward-Looking Statements
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Item 9.
Item 9A. Controls and Procedures
Item 9B. Other Information
Financial Statements and Supplementary Data
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Part III
Item 10. Directors, Executive Officers, and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14. Principal Accountant Fees and Services
Part IV
Item 15. Exhibits and Financial Statement Schedule
Exhibit Index
Signatures
Index to Financial Statement Schedule
1
1
1
1
2
5
6
6
7
13
13
14
14
14
16
17
17
19
20
28
35
42
42
44
47
49
97
97
97
97
99
99
100
100
100
100
106
F-1
THE CHARLES SCHWAB CORPORATION
PART I
Item 1.
Business
General Corporate Overview
The Charles Schwab Corporation (CSC), headquartered in San Francisco, California, was incorporated in 1986 and engages, through
its subsidiaries (together referred to as the Company, and primarily located in San Francisco except as indicated), in securities
brokerage, banking, money management, and financial advisory services. At December 31, 2012, the Company had $1.95 trillion in
client assets, 8.8 million active brokerage accounts , 1.6 million corporate retirement plan participants, and 865,000 banking
accounts.
(a)
Significant business subsidiaries of CSC include:
• Charles Schwab & Co., Inc. (Schwab), which was incorporated in 1971, is a securities broker-dealer with over 300 domestic
branch offices in 45 states, as well as a branch in each of the Commonwealth of Puerto Rico and London, U.K., and serves
clients in Hong Kong through one of CSC’s subsidiaries;
• Charles Schwab Bank (Schwab Bank), which commenced operations in 2003, is a federal savings bank located in Reno,
Nevada; and
• Charles Schwab Investment Management, Inc. (CSIM), which is the investment advisor for Schwab’s proprietary mutual
funds, referred to as the Schwab Funds , and Schwab’s exchange-traded funds, referred to as the Schwab ETFs™.
®
The Company provides financial services to individuals and institutional clients through two segments – Investor Services and
Institutional Services. The Investor Services segment provides retail brokerage and banking services to individual investors. The
Institutional Services segment provides custodial, trading, and support services to independent investment advisors (IAs). The
Institutional Services segment also provides retirement plan services, specialty brokerage services, and mutual fund clearing services.
For financial information by segment for the three years ended December 31, 2012, see “Item 8 – Financial Statements and
Supplementary Data – Notes to Consolidated Financial Statements – 25. Segment Information.”
As of December 31, 2012, the Company had full-time, part-time and temporary employees, and persons employed on a contract basis
that represented the equivalent of about 13,800 full-time employees.
Business Acquisitions
On December 14, 2012, the Company acquired ThomasPartners, Inc., a growth and dividend income-focused asset management firm.
In September 2011, the Company acquired optionsXpress Holdings, Inc. (optionsXpress), an online brokerage firm primarily focused
on equity option securities and futures. The optionsXpress brokerage platform provides active investors and traders trading tools,
®
analytics and education to execute a variety of investment strategies. optionsXpress, Inc., a wholly-owned subsidiary of
optionsXpress, is a securities broker-dealer.
In November 2010, the Company acquired substantially all of the assets of Windward Investment Management, Inc. (Windward), an
investment advisory firm that managed diversified investment portfolios comprised primarily of exchange-traded fund securities. As a
result of the acquisition, Windhaven Investment Management, Inc. (Windhaven) was formed as a wholly-owned subsidiary of
Schwab Holdings, Inc.
Business Strategy and Competitive Environment
The Company’s purpose is to champion every client’s goals with passion and integrity, believing that the best long-term strategy is
one that puts clients first. Seeing the Company’s business “through clients’ eyes” helps it earn its clients’ trust as
(a) Accounts with balances or activity within the preceding eight months.
- 1 -
THE CHARLES SCHWAB CORPORATION
the Company strives daily to fulfill its purpose and act according to its values. The Company’s values are to serve its clients in an
ethical, empathetic and proactive way; to innovate constantly to improve the client experience; to respect fellow employees and
reinforce the power of teamwork; and to be good stewards of the resources entrusted to the Company – client assets, the Company’s
brand, and stockholder value.
The Company’s competition in serving individual investors includes a wide range of brokerage, wealth management, and asset
management firms, as well as banks and trust companies. In serving these investors and competing for a growing percentage of the
investable wealth in the U.S., the Company offers a multi-channel service delivery model, which includes online, mobile, telephonic,
and branch capabilities. Under this model, the Company can offer personalized service at competitive prices while giving clients the
choice of where, when, and how they do business with the Company. Schwab’s branches and regional telephone service centers are
staffed with trained and experienced financial consultants (FCs) focused on building and sustaining client relationships. The
Company offers the ability to meet client investing needs through a single ongoing point of contact, even as those needs change over
time. In particular, management believes that the Company’s ability to provide those clients seeking help, guidance, or advice with an
integrated, individually tailored solution – ranging from occasional consultations to an ongoing relationship with a Schwab FC or an
IA – is a competitive strength compared to the more fragmented offerings of other firms.
The Company’s online, mobile, and telephonic channels provide quick and efficient access to an extensive array of information,
research, tools, trade execution, and administrative services, which clients can access according to their needs. For example, clients
that trade more actively can use these channels to access highly competitive pricing, expert tools, and extensive service capabilities –
including experienced, knowledgeable teams of trading specialists and integrated product offerings. Individuals investing for
retirement through 401(k) plans can take advantage of the Company’s bundled offering of multiple investment choices, education,
and third-party advice. Management also believes the Company is able to compete with the wide variety of financial services firms
striving to attract individual client relationships by complementing these capabilities with the extensive array of investment, banking,
and lending products and services described in the following section.
In the IA arena, the Company competes with institutional custodians, traditional and discount brokers, banks, investment advisory
firms, and trust companies. Management believes that its Institutional Services segment can maintain its market leadership position
primarily through the efforts of its expanded sales and support teams, which are dedicated to helping IAs grow, compete, and succeed
in serving their clients. In addition to focusing on superior service, Institutional Services competes by utilizing technology to provide
IAs with a highly-developed, scalable platform for administering their clients’ assets easily and efficiently. Institutional Services
sponsors a variety of national, regional, and local events designed to help IAs identify and implement better ways to grow and
manage their practices efficiently.
Another important aspect of the Company’s ability to compete is its ongoing focus on efficiency and productivity, as lower costs give
the Company greater flexibility in its approach to pricing and investing for growth. Management believes that this flexibility remains
important in light of the competitive environment, in which a number of competitors offer reduced online trading commission rates
and low expense ratios on certain classes of mutual funds and exchange-traded funds. Additionally, the Company’s nationwide
marketing effort is an important competitive tool because it reinforces the attributes of the Schwab brand.
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Products and Services
The Company offers a broad range of products to address individuals’ varying investment and financial needs. Examples of these
product offerings include:
•
•
Brokerage – an array of brokerage accounts including some with check-writing features, debit card, and billpay; individual
retirement accounts; retirement plans for small to large businesses; 529 college savings accounts; designated brokerage
accounts; equity incentive plan accounts; and margin loans, as well as access to fixed income securities, equity and debt
offerings, options, and futures;
Mutual funds – third-party mutual funds through Mutual Fund Marketplace , including no-load mutual funds through the
Mutual Fund OneSource service, proprietary mutual funds from two fund families – Schwab Funds and Laudus Funds ,
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other third-party mutual funds, and mutual fund trading and clearing services to broker-dealers;
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THE CHARLES SCHWAB CORPORATION
•
•
•
•
Exchange-traded funds (ETFs) – third-party and proprietary ETFs, including Schwab ETFs™, and separately managed
portfolios of ETFs;
Advice solutions – separately managed accounts, customized personal advice for tailored portfolios, and specialized
planning and full-time portfolio management;
Banking – checking accounts linked to brokerage accounts, savings accounts, certificates of deposit, demand deposit
accounts, first lien residential real estate mortgage loans (First Mortgages), home equity lines of credit (HELOCs), personal
loans collateralized by securities, and entity lending; and
Trust – trust custody services, personal trust reporting services, and administrative trustee services.
These products, and the Company’s full array of investing services, are made available through its two segments – Investor Services
and Institutional Services. The Company’s major sources of revenues are generated by both of the Company’s reportable segments.
Revenue is attributable to a reportable segment based on which segment has the primary responsibility for serving the client. The
accounting policies of the Company’s reportable segments are the same as those described in “Item 8 – Financial Statements and
Supplementary Data – Notes to Consolidated Financial Statements – 2. Summary of Significant Accounting Policies.”
Investor Services
Through the Investor Services segment, the Company provides retail brokerage and banking services to individual investors.
The Company offers research, analytic tools, performance reports, market analysis, and educational material to all clients. Clients
looking for more guidance have access to online portfolio planning tools, professional advice from Schwab’s portfolio consultants
who can help develop an investment strategy and carry out investment and portfolio management decisions, as well as a range of fully
delegated managed solutions that provide ongoing portfolio management.
Schwab strives to demystify investing by educating and assisting clients in the development of investment plans. Educational tools
include workshops, interactive courses, and online information about investing, which Schwab does not earn revenue from.
Additionally, Schwab provides various internet-based research and analysis tools that are designed to help clients achieve better
investment outcomes. As an example of such tools, Schwab Equity Ratings is a quantitative model-based stock rating system that
provides all clients with ratings on approximately 3,000 stocks, assigning each equity a single grade: A, B, C, D, or F. Schwab Equity
Ratings International
Stocks are rated based on specific factors relating to fundamentals, valuation, momentum, and risk and ranked so that the number of
‘buy consideration’ ratings – As and Bs – equals the number of ‘sell consideration’ ratings – Ds and Fs.
, an international ranking methodology, covers approximately 4,000 stocks in 28 foreign equity markets.
TM
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Clients may need specific investment recommendations, either from time to time or on an ongoing basis. The Company provides
clients seeking advice with customized solutions. The Company’s approach to advice is based on long-term investment strategies and
guidance on portfolio diversification and asset allocation. This approach is designed to be offered consistently across all of Schwab’s
delivery channels.
Schwab Private Client
investment professionals who provide individualized service, a customized investment strategy developed in collaboration with the
client, and ongoing guidance and execution.
features a personal advice relationship with a designated portfolio consultant, supported by a team of
TM
For clients seeking a relationship in which investment decisions are fully delegated to a financial professional, the Company offers
several alternatives. The Company provides investors access to professional investment management in a diversified account that is
invested exclusively in either mutual funds or ETFs through the Schwab Managed Portfolios
Company also refers investors who want to utilize a specific third-party money manager to direct a portion of their investment assets
to the Schwab Managed Account program. In addition, clients who want the assistance of an independent professional in managing
their financial affairs may be referred to IAs in the Schwab Advisor Network . These IAs provide personalized portfolio
management, financial planning, and wealth management solutions.
and Windhaven programs. The
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TM
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The Company strives to deliver information, education, technology, service, and pricing that meet the specific needs of clients who
trade actively. Schwab and optionsXpress, Inc. both offer integrated Web- and software-based trading platforms, which
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THE CHARLES SCHWAB CORPORATION
incorporate intelligent order routing technology, real-time market data, options trading, premium stock or futures research, and multi-
channel access, as well as sophisticated account and trade management features, risk management tools, decision support tools, and
dedicated personal support.
For clients wishing to invest in foreign equities, the Company offers a suite of global investing capabilities, including on-line access
to certain foreign equity markets with the ability to trade in their local currencies. In addition, the Company serves both foreign
investors and non-English-speaking U.S. clients who wish to trade or invest in U.S. dollar-based securities. In the U.S., the Company
serves Chinese-, Spanish-, and Vietnamese-speaking clients through a combination of its branch offices and Web-based and
telephonic services.
Institutional Services
The Institutional Services segment consists of the following four business units: Advisor Services, Retirement Plan Services,
Retirement Business Services, and Corporate Brokerage Services.
Through the Advisor Services business, Schwab provides custodial, trading, technology, practice management, trust asset, and other
support services to IAs. To attract and serve IAs, Advisor Services has a dedicated sales force and service teams assigned to meet
their needs.
IAs who custody client accounts at Schwab may use proprietary software that provides them with up-to-date client account
information, as well as trading capabilities. The Advisor Services website is the core platform for IAs to conduct daily business
activities online with Schwab, including submitting client account information and retrieving news and market information. This
platform provides IAs with a comprehensive suite of electronic and paper-based reporting capabilities. Advisor Services offers online
cashiering services, as well as internet-based eDocuments sites for both IAs and their clients that provide multi-year archiving of
online statements, trade confirms and tax reports, along with document search capabilities.
To help IAs grow and manage their practices, Advisor Services offers a variety of services, including marketing and business
development, business strategy and planning, and transition support. Regulatory compliance consulting and support services are
available, as well as website design and development capabilities. Advisor Services maintains a website that provides interactive
tools, educational content, and research reports to assist advisors thinking about establishing their own independent practices.
Advisor Services offers an array of services to help advisors establish their own independent practices through the Business Start-up
Solutions package. This includes access to dedicated service teams and outsourcing of back-office operations, as well as third-party
firms who provide assistance with real estate, errors and omissions insurance, and company benefits.
The Company offers a variety of educational materials and events to IAs seeking to expand their knowledge of industry issues and
trends, as well as sharpen their individual expertise and practice management skills. Advisor Services updates and shares market
research on an ongoing basis, and it holds a series of events and conferences every year to discuss topics of interest to IAs, including
business strategies and best practices. The Company sponsors the annual IMPACT conference, which provides a national forum for
the Company, IAs, and other industry participants to gather and share information and insights.
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IAs and their clients have access to a broad range of the Company’s products and services, including individual securities, mutual
funds, ETFs, managed accounts, and cash products.
Retirement Plan Services offers a bundled 401(k) retirement plan product that provides plan sponsors a wide array of investment
options, trustee or custodial services, and participant-level recordkeeping. Plan design features, which increase plan efficiency and
achieve employer goals, are also offered, such as automatic enrollment, automatic fund mapping at conversion, and automatic
contribution increases. In 2012, the Company launched Schwab Index Advantage , a unique 401(k) plan offer designed to lower
costs, simplify investing and help workers better prepare for retirement. Services also include support for Roth 401(k) accounts and
profit sharing and defined benefit plans. The Company provides a robust suite of tools to plan sponsors to manage their plans,
including plan-specific reports, studies and research, access to legislative updates and benchmarking reports that provide perspective
on their plan’s features compared with overall industry and segment-specific
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THE CHARLES SCHWAB CORPORATION
plans. Participants in bundled plans serviced by the Company receive targeted education materials, have access to electronic tools and
resources, may attend onsite and virtual seminars, and can receive third-party advice delivered by Schwab. This third-party advice
service is delivered online, by phone, or in person, including recommendations based on the core investment fund choices in their
retirement plan and specific recommended savings rates.
Through Retirement Business Services, the Company and independent retirement plan providers work together to serve plan
sponsors, combining the consulting and administrative expertise of the administrator with the Company’s investment, technology,
trust, and custodial services. Retirement Business Services also offers the Schwab Personal Choice Retirement Account , a self-
directed brokerage offering for retirement plans.
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Corporate Brokerage Services provides specialty brokerage-related services to corporate clients through its Stock Plan Services and
Designated Brokerage Services businesses. Stock Plan Services offers equity compensation plan sponsors full-service recordkeeping
for stock plans: stock options, restricted stock, performance shares and stock appreciation rights. Specialized services for executive
transactions and reporting, grant acceptance tracking and other services are offered to employers to meet the needs of administering
the reporting and compliance aspects of an equity compensation plan. Designated Brokerage Services provides solutions for
compliance departments of regulated companies and firms with special requirements to monitor employee personal trading, including
trade surveillance technology. The Corporate Brokerage Services unit also provides mutual fund clearing services to banks, brokerage
firms and trust companies and offers proprietary mutual funds, ETFs, collective trust funds, and investment management outside the
Company to institutional channels.
Subsequent Changes to Segment Information
In the first quarter of 2013, the Company realigned its reportable segments as a result of recent organizational changes. The
Institutional segment will be renamed to Advisor Services. The Retirement Plan Services, Corporate Brokerage Retirement Products
(formerly part of Retirement Business Services), and Corporate Brokerage Services business units will be reallocated to the Investor
Services segment. The Company will recast the segment information based on this realignment in the first quarter of 2013.
Regulation
CSC is a savings and loan holding company and Schwab Bank, CSC’s depository institution subsidiary, is a federal savings bank.
CSC is subject to supervision and regulation by the Board of Governors of the Federal Reserve System (the Federal Reserve) and
Schwab Bank is subject to supervision and regulation by the Office of the Comptroller of the Currency (OCC). CSC is currently not
subject to specific statutory capital requirements, however CSC is required to serve as a source of strength for Schwab Bank. Under
the “Dodd-Frank Wall Street Reform and Consumer Protection Act” (the Dodd-Frank Act), CSC will be subject to new minimum
leverage and minimum risk-based capital ratio requirements that will be set by the Federal Reserve that are at least as stringent as the
current requirements generally applicable to insured depository institutions.
Schwab Bank is subject to regulation and supervision and to various requirements and restrictions under federal and state laws,
including regulatory capital guidelines. Among other things, these requirements also restrict and govern the terms of affiliate
transactions, such as extensions of credit and repayment of loans between Schwab Bank and CSC or CSC’s other subsidiaries. In
addition, Schwab Bank is required to provide notice to and may be required to obtain approval of the OCC and the Federal Reserve to
declare dividends to CSC. The federal banking agencies have broad powers to enforce these regulations, including the power to
terminate deposit insurance, impose substantial fines and other civil and criminal penalties, and appoint a conservator or receiver.
Under the Federal Deposit Insurance Act, Schwab Bank could be subject to restrictive actions if it were to fall within one of the
lowest three of five capital categories. Schwab Bank is required to maintain minimum capital levels as specified in federal banking
laws and regulations. Failure to meet the minimum levels could result in certain mandatory, and possibly additional discretionary
actions by the regulators that, if undertaken, could have a direct material effect on Schwab Bank.
The securities industry in the United States is subject to extensive regulation under both federal and state laws. CSC’s principal U.S.
broker-dealers are Schwab and optionsXpress, Inc. Schwab is registered as a broker-dealer with the United States Securities and
Exchange Commission (SEC), the fifty states, and the District of Columbia and Puerto Rico.
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THE CHARLES SCHWAB CORPORATION
optionsXpress, Inc. is registered as a broker-dealer with the SEC, the fifty states, the District of Columbia, Puerto Rico, and the
Virgin Islands. Schwab and CSIM are registered as investment advisors with the SEC. Additionally, Schwab and optionsXpress, Inc.
are regulated by the Commodities Futures Trading Commission (CFTC) with respect to the commodity futures and commodities
trading activities they conduct as an introducing broker and futures commission merchant, respectively.
Much of the regulation of broker-dealers has been delegated to self-regulatory organizations (SROs). Schwab and optionsXpress, Inc.
are members of the Financial Industry Regulatory Authority, Inc. (FINRA), the Municipal Securities Rulemaking Board (MSRB),
NYSE Arca, and the Chicago Board Options Exchange (CBOE). optionsXpress, Inc. is also a member of other exchanges. The
primary regulators of Schwab are FINRA and, for municipal securities, the MSRB. The primary regulators of optionsXpress, Inc. are
FINRA, CBOE, and for municipal securities, the MSRB. The National Futures Association (NFA) is Schwab and optionsXpress,
Inc.’s primary regulator for futures and commodities trading activities. The Company’s business is also subject to oversight by
regulatory bodies in other countries in which the Company operates.
The principal purpose of regulating broker-dealers and investment advisors is the protection of clients and the securities markets. The
regulations to which broker-dealers and investment advisors are subject cover all aspects of the securities business, including, among
other things, sales and trading practices, publication of research, margin lending, uses and safekeeping of clients’ funds and securities,
capital adequacy, recordkeeping and reporting, fee arrangements, disclosure to clients, fiduciary duties owed to advisory clients, and
the conduct of directors, officers and employees.
Schwab and optionsXpress, Inc. are both subject to Rule 15c3-1 under the Securities Exchange Act of 1934 (the Uniform Net Capital
Rule) and related SRO requirements. The CFTC and NFA also impose net capital requirements. The Uniform Net Capital Rule
specifies minimum capital requirements that are intended to ensure the general financial soundness and liquidity of broker-dealers.
Because CSC itself is not a registered broker-dealer, it is not subject to the Uniform Net Capital Rule. However, if Schwab fails to
maintain specified levels of net capital, such failure would constitute a default by CSC under debt covenants under CSC’s credit
agreement.
The Uniform Net Capital Rule limits broker-dealers’ ability to transfer capital to parent companies and other affiliates. Compliance
with the Uniform Net Capital Rule could limit Schwab’s operations and its ability to repay subordinated debt to CSC, which in turn
could limit CSC’s ability to repay debt, pay cash dividends, and purchase shares of its outstanding stock.
Sources of Net Revenues
The Company’s major sources of net revenues are asset management and administration fees, net interest revenue, and trading
revenue. The Company generates asset management and administration fees through its proprietary and third-party mutual fund
offerings, as well as fee-based advisory solutions. Net interest revenue is the difference between interest earned on interest-earning
assets (such as cash, short- and long-term investments, and mortgage and margin loans) and interest paid on funding sources
(including banking deposits and client cash in brokerage accounts and long-term debt). The Company generates trading revenue
through commissions earned for executing trades for clients and principal transaction revenue primarily from trading activity in client
fixed income securities.
For revenue information by source for the three years ended December 31, 2012, see “Item 7 – Management’s Discussion and
Analysis of Financial Condition and Results of Operations – Results of Operations – Net Revenues.”
Available Information
The Company files annual, quarterly, and current reports, proxy statements, and other information with the SEC. The Company’s
SEC filings are available to the public over the Internet on the SEC’s website at http://www.sec.gov. You may read and copy any
document that the Company files with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549.
You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.
On the Company’s Internet website, http://www.aboutschwab.com, the Company posts the following recent filings as soon as
reasonably practicable after they are electronically filed with or furnished to the SEC: the Company’s annual reports on
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THE CHARLES SCHWAB CORPORATION
Form 10-K, the Company’s quarterly reports on Form 10-Q, the Company’s current reports on Form 8-K, and any amendments to
those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934. All such filings are
available free of charge either on the Company’s website or by request via email (investor.relations@schwab.com), telephone (415-
667-1959), or mail (Charles Schwab Investor Relations at 211 Main Street, San Francisco, CA 94105).
Item 1A. Risk Factors
The Company faces a variety of risks that may affect its operations or financial results, and many of those risks are driven by factors
that the Company cannot control or predict. The following discussion addresses those risks that management believes are the most
significant, although there may be other risks that could arise, or may prove to be more significant than expected, that may affect the
Company’s operations or financial results.
For a discussion of the Company’s risk management, including operational risk, credit risk, and market risk, see “Item 7 –
Management’s Discussion and Analysis of Financial Condition and Results of Operations – Risk Management.”
Developments in the business, economic, and geopolitical environment could negatively impact the Company’s business.
The Company’s business can be adversely affected by the general environment – economic, corporate, securities market, regulatory,
and geopolitical developments all play a role in client asset valuations, trading activity, interest rates and overall investor engagement,
and are outside of the Company’s control. Deterioration in the housing and credit markets, reductions in short-term interest rates, and
decreases in securities valuations negatively impact the Company’s net interest revenue, asset management and administration fees,
and capital resources.
A significant decrease in the Company’s liquidity could negatively affect the Company’s business and financial management
as well as reduce client confidence in the Company.
Maintaining adequate liquidity is crucial to the business operations of the Company, including margin lending, mortgage lending, and
transaction settlement, among other liquidity needs. The Company meets its liquidity needs primarily through cash generated by
client activity and operating earnings, as well as cash provided by external financing. Fluctuations in client cash or deposit balances,
as well as changes in market conditions, may affect the Company’s ability to meet its liquidity needs. A reduction in the Company’s
liquidity position could reduce client confidence in the Company, which could result in the loss of client accounts. In addition, if the
Company’s broker-dealer or depository institution subsidiaries fail to meet regulatory capital guidelines, regulators could limit the
subsidiaries’ operations or their ability to upstream funds to CSC, which could reduce CSC’s liquidity and adversely affect its ability
to repay debt and pay cash dividends. In addition, CSC may need to provide additional funding to such subsidiaries.
Factors which may adversely affect the Company’s liquidity position include a reduction in cash held in banking or brokerage client
accounts, a dramatic increase in the Company’s client lending activities (including margin and personal lending), unanticipated
outflows of company cash, increased capital requirements, other regulatory changes or a loss of market or customer confidence in the
Company. Schwab may also experience temporary liquidity demands due to timing differences between clients’ transaction
settlements and the availability of segregated cash balances.
When cash generated by client activity and operating earnings is not sufficient for the Company’s liquidity needs, the Company must
seek external financing. During periods of disruptions in the credit and capital markets, potential sources of external financing could
be reduced, and borrowing costs could increase. Although CSC and Schwab maintain committed and uncommitted, unsecured bank
credit lines and CSC has a commercial paper issuance program, as well as a universal shelf registration statement filed with the SEC,
financing may not be available on acceptable terms or at all due to market conditions or disruptions in the credit markets. In addition,
a significant downgrade in the Company’s credit ratings could increase its borrowing costs and limit its access to the capital markets.
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THE CHARLES SCHWAB CORPORATION
The Company may suffer significant losses from its credit exposures.
The Company’s businesses are subject to the risk that a client, counterparty or issuer will fail to perform its contractual obligations, or
that the value of collateral held to secure obligations will prove to be inadequate. While the Company has policies and procedures
designed to manage this risk, the policies and procedures may not be fully effective. The Company’s exposure mainly results from
margin lending activities, securities lending activities, mortgage lending activities, its role as a counterparty in financial contracts and
investing activities, and indirectly from the investing activities of certain of the proprietary funds that the Company sponsors.
When clients purchase securities on margin, the Company is subject to the risk that clients may default on their obligations when the
value of the securities held as collateral falls below the amount of clients’ indebtedness. Abrupt changes in securities valuations and
the failure of clients to meet margin calls could result in substantial losses.
The Company has exposure to credit risk associated with its securities available for sale and securities held to maturity portfolios,
which include U.S. agency and non-agency mortgage-backed securities, consumer loan asset-backed securities, corporate debt
securities, certificates of deposit, U.S. agency notes, and commercial paper among other investments. These instruments are also
subject to price fluctuations as a result of changes in the financial market’s assessment of issuer credit quality, increases in the
unemployment rate, delinquency and default rates, housing price declines, changes in prevailing interest rates and other economic
factors.
Loss of value of securities available for sale and securities held to maturity can negatively affect earnings if management determines
that such securities are other than temporarily impaired. The evaluation of whether other-than-temporary impairment exists is a matter
of judgment, which includes the assessment of several factors. See “Item 7 – Management’s Discussion and Analysis of Financial
Condition and Results of Operations – Critical Accounting Estimates.” If management determines that a security is other-than-
temporarily impaired, the cost basis of the security may be adjusted and a corresponding loss may be recognized in current earnings.
Certain securities available for sale experienced continued credit deterioration in 2012, which resulted in impairment charges.
Deterioration in the performance of securities available for sale and securities held to maturity could result in the recognition of future
impairment charges.
The Company’s loans to banking clients primarily consist of First Mortgages and HELOCs. Increases in delinquency and default
rates, housing price declines, increases in the unemployment rate, and other economic factors can result in charges for loan loss
reserves and write downs on such loans.
Heightened credit exposures to specific counterparties or instruments (concentration risk) can increase the Company’s risk of loss.
Examples of the Company’s credit concentration risk include:
• large positions in financial instruments collateralized by assets with similar economic characteristics or in securities of a
single issuer or industry;
• mortgage loans and HELOCs to banking clients which are secured by properties in the same geographic region; and
• margin and securities lending activities collateralized by securities of a single issuer or industry.
The Company may also be subject to concentration risk when lending to a particular counterparty, borrower or issuer.
The Company sponsors a number of proprietary money market mutual funds and other proprietary funds. Although the Company has
no obligation to do so, the Company may decide for competitive or other reasons to provide credit, liquidity or other support to its
funds in the event of significant declines in valuation of fund holdings or significant redemption activity that exceeds available
liquidity. Such support could cause the Company to take significant charges, could reduce the Company’s liquidity and, in certain
situations, could, with respect to proprietary funds other than money market mutual funds, result in the Company having to
consolidate a supported fund in its financial statements. If the Company chose not to provide credit, liquidity or other support in such
a situation, the Company could suffer reputational damage and its business could be adversely affected.
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THE CHARLES SCHWAB CORPORATION
Significant interest rate changes could affect the Company’s profitability and financial condition.
The Company is exposed to interest rate risk primarily from changes in the interest rates on its interest-earning assets (such as cash
equivalents, short- and long-term investments, and mortgage and margin loans) relative to changes in the costs of its funding sources
(including deposits in banking and brokerage accounts, short-term borrowings, and long-term debt). Changes in interest rates
generally affect the interest earned on interest-earning assets differently than the interest the Company pays on its interest-bearing
liabilities. In addition, certain funding sources do not bear interest and their cost therefore does not vary. Overall, the Company is
positioned to benefit from a rising interest rate environment; the Company could be adversely affected by a decline in interest rates if
the rates that the Company earns on interest-earning assets decline more than the rates that the Company pays on its funding sources,
or if prepayment rates increase on the mortgages and mortgage-backed securities that the Company holds. With the low interest rate
environment, the Company’s yield on interest-earning assets has been declining more than the average rate that the Company pays on
its funding sources. The Company may also be limited in the amount it can reduce interest rates on deposit accounts and still offer a
competitive return.
To the extent the overall yield on certain Schwab-sponsored money market mutual funds falls to a level at or below the management
fees on those funds, the Company may waive a portion of its fee in order to continue providing some return to clients. As a result of
the low interest rate environment, the Company has been waiving and may continue to waive a portion of its management fees for
certain Schwab-sponsored money market mutual funds. Such fee waivers negatively impact the Company’s asset management and
administration fees.
The Company is subject to litigation and regulatory investigations and proceedings and may not be successful in defending
itself against claims or proceedings.
The financial services industry faces substantial litigation and regulatory risks. The Company is subject to claims and lawsuits in the
ordinary course of business, including arbitrations, class actions and other litigation, some of which include claims for substantial or
unspecified damages. The Company is also the subject of inquiries, investigations, and proceedings by regulatory and other
governmental agencies.
Litigation and arbitration claims include those brought by the Company’s clients and the clients of third party advisors whose assets
are custodied at the Company. Claims from clients of third party advisors may allege losses due to investment decisions made by the
third party advisors or the advisors’ misconduct. Litigation claims also include claims from third parties alleging infringement of their
intellectual property rights (e.g., patents). Such litigation can require the expenditure of significant Company resources. If the
Company were found to have infringed a third-party patent, or other intellectual property rights, it could incur substantial damages,
and in some circumstances could be enjoined from using certain technology, or providing certain products or services.
Actions brought against the Company may result in settlements, awards, injunctions, fines, penalties or other results adverse to the
Company including reputational harm. Even if the Company is successful in defending against these actions, the defense of such
matters may result in the Company incurring significant expenses. Predicting the outcome of matters is inherently difficult,
particularly where claims are brought on behalf of various classes of claimants, claimants seek substantial or unspecified damages, or
when investigations or legal proceedings are at an early stage. A substantial judgment, settlement, fine, or penalty could be material to
the Company’s operating results or cash flows for a particular future period, depending on the Company’s results for that period. In
market downturns, the volume of legal claims and amount of damages sought in litigation and regulatory proceedings against
financial services companies have historically increased. See “Item 8 – Financial Statements and Supplementary Data – Notes to
Consolidated Financial Statements – 15. Commitments and Contingencies.”
Extensive regulation of the Company’s businesses limits the Company’s activities and may subject it to significant penalties.
As a participant in the securities, banking and financial services industries, the Company is subject to extensive regulation under both
federal and state laws by governmental agencies, supervisory authorities, and SROs. Such regulation becomes more extensive and
complex in response to market disruptions. The requirements imposed by the Company’s regulators are designed to ensure the
integrity of the financial markets, the safety and soundness of financial institutions, and the protection of clients. These regulations
often serve to limit the Company’s activities by way of capital, customer protection and market
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THE CHARLES SCHWAB CORPORATION
conduct requirements, and restrictions on the businesses activities that the Company may conduct. Despite the Company’s efforts to
comply with applicable regulations, there are a number of risks, particularly in areas where applicable regulations may be unclear or
where regulators revise their previous guidance. Any enforcement actions or other proceedings brought by the Company’s regulators
against the Company or its affiliates, officers or employees could result in fines, penalties, cease and desist orders, enforcement
actions, suspension or expulsion, or other disciplinary sanctions, including limitations on the Company’s business activities, any of
which could harm the Company’s reputation and adversely affect the Company’s results of operations and financial condition.
Legislation or changes in rules and regulations could negatively impact the Company’s business and financial results.
New legislation, rule changes, or changes in the interpretation or enforcement of existing federal, state and SRO rules and regulations,
including changes relating to money market mutual funds, broker-dealer fiduciary duties and mortgage products and services, may
directly affect the operation and profitability of the Company or its specific business lines. The profitability of the Company could
also be affected by rules and regulations which impact the business and financial communities generally, including changes to the
laws governing taxation, electronic commerce, client privacy and security of client data. In addition, the rules and regulations could
result in limitations on the lines of business the Company conducts, modifications to the Company’s business practices, increased
capital requirements, or additional costs.
Financial reforms and related regulations may affect the Company’s business activities, financial position and profitability.
The Dodd-Frank Act was signed into law in July 2010 and implementation is ongoing. This legislation makes extensive changes to
the laws regulating financial services firms and significant rule-making and interpretation remains. In addition, the legislation
mandates multiple studies, which could result in additional legislative or regulatory action. Among other things, the legislation
authorizes various assessments and fees and requires the establishment of minimum leverage and risk-based capital requirements for
insured depository institutions, and requires the SEC to complete studies and develop rules regarding various investor protection
issues. The legislation also charges the Federal Reserve with drafting enhanced regulatory requirements for non-bank financial
institutions designated as “systemically important.” CSC has not been designated as “systemically important,” but could be
designated in the future. The legislation also eliminated the Office of Thrift Supervision (OTS) effective July 21, 2011 and, as a
result, the Federal Reserve became CSC’s primary regulator and the OCC became the primary regulator of Schwab Bank. CSC is
continuing to review the impact the legislation, studies and related rule-making will have on the Company’s business, financial
condition, and results of operations.
In 2012, the Federal Reserve issued notices of proposed rulemaking (NPRs) to meet certain requirements of the Dodd-Frank Act and
to align current capital rules with the BASEL III capital standards. The NPRs would subject all savings and loan holding companies,
including CSC, to consolidated capital requirements. In addition, the NPRs would establish more restrictive capital definitions, higher
risk-weightings for certain asset classes, higher minimum capital ratios and capital buffers. The Company expects the capital standard
rules to be phased in under an extended timeframe after adoption. The comment period for the NPRs ended on October 22, 2012 and
the NPRs are subject to further modification. CSC continues to monitor developments in order to assess the impact of the NPRs but
does not expect them to have a material impact on the Company’s business, financial condition, and results of operations.
The legislation also established a new independent Consumer Financial Protection Bureau, which has broad rulemaking, supervisory
and enforcement authority over consumer products, including mortgages, home-equity loans and credit cards. States will be permitted
to adopt stricter consumer protection laws and state attorney generals can enforce consumer protection rules issued by the Bureau.
These rules may negatively impact the range of products offered and profitability of our loan products.
The legislation gives the SEC discretion to adopt rules regarding standards of conduct for broker-dealers providing investment advice
to retail customers. The various studies required by the legislation could result in additional rulemaking or legislative action, which
could impact the Company’s business and financial results.
The changes resulting from the legislation may impact the profitability of the Company’s business activities, require changes to
certain of its business practices, impose upon the Company more stringent capital, liquidity and leverage ratio requirements
- 10 -
THE CHARLES SCHWAB CORPORATION
or otherwise adversely affect the Company’s business. These changes may also require the Company to invest significant
management attention and resources to evaluate and make necessary changes.
Technology and operational failures or errors could subject the Company to losses, litigation, and regulatory actions.
The Company faces operational risk, which is the potential for loss due to inadequate or failed internal processes, systems, and firms
or exchanges handling client orders, or from external events and relationships impacting the Company and/or any of its key business
partners and vendors. This risk also includes the risk of human error, execution errors, employee misconduct, unauthorized trading,
external fraud, computer viruses, distributed denial of service attacks, terrorist attacks, natural disaster, capacity constraints and
software flaws. It could take several hours or more to restore full functionality to the Company’s technology or other operating
systems in the event of an unforeseen event which could affect the Company’s ability to process and settle client transactions.
Moreover, instances of fraud or other misconduct, including improper use or disclosure of confidential client, employee, or company
information, might also negatively impact the Company’s reputation and client confidence in the Company, in addition to any direct
losses that might result from such instances. Despite the Company’s efforts to identify areas of risk, oversee operational areas
involving risk, and implement policies and procedures designed to manage these risks, there can be no assurance that the Company
will not suffer unexpected losses, reputational damage or regulatory action due to technology or other operational failures or errors,
including those of its vendors or other third parties.
While the Company devotes substantial attention and resources to the reliability, capacity and scalability of its systems, extraordinary
trading volumes could cause the Company’s computer systems to operate at unacceptably slow speeds or even fail, affecting the
Company’s ability to process client transactions and potentially resulting in some clients’ orders being executed at prices they did not
anticipate. Disruptions in service and slower system response times could result in substantial losses and decreased client satisfaction.
The Company is also dependent on the integrity and performance of securities exchanges, clearing houses and other intermediaries to
which client orders are routed for execution and settlement. Systems failures and constraints and transaction error at such
intermediaries could result in delays and erroneous or unanticipated execution prices, cause substantial losses for the Company and
for its clients, and subject the Company to claims from its clients for damages.
The Company relies on outsourced service providers to perform key functions.
The Company relies on external service providers to perform certain key technology, processing, servicing, and support functions.
These service providers face technology, operating, business, and economic risks, and any significant failures by them, including the
improper use or disclosure of the Company’s confidential client, employee, or company information, could cause the Company to
incur losses and could harm the Company’s reputation. An interruption in or the cessation of service by any external service provider
as a result of systems failures, capacity constraints, financial difficulties or for any other reason, and the Company’s inability to make
alternative arrangements in a timely manner could disrupt the Company’s operations, impact the Company’s ability to offer certain
products and services, and result in financial losses to the Company. Switching to an alternative service provider may require a
transition period and result in less efficient operations.
Security breaches of the Company’s systems, or those of its clients or third parties, may subject the Company to significant
liability and damage the Company’s reputation.
The Company’s business involves the secure processing, storage and transmission of confidential information about the Company and
its clients. Information security risks for financial institutions are increasing, in part because of the use of the internet and mobile
technologies to conduct financial transactions, and the increased sophistication and activities of organized crime, activists, hackers
and other external parties. The Company’s systems and those of other financial institutions have been and are likely to continue to be
the target of cyber attacks, malicious code, computer viruses and denial of service attacks that could result in unauthorized access,
misuse, loss or destruction of data (including confidential customer information), account takeovers, unavailability of service or other
events. Despite the Company’s efforts to ensure the integrity of its systems, the Company may not be able to anticipate or to
implement effective preventive measures against all security breaches of these types, especially because the techniques used change
frequently or are not recognized until launched, and because security attacks can originate from a wide variety of sources. Data
security breaches may also result from non-technical means, for example, actions by a suborned employee.
- 11 -
THE CHARLES SCHWAB CORPORATION
Security breaches, including breaches of the Company’s security measures or those of the Company’s third-party service providers or
clients, could result in a violation of applicable privacy and other laws and could subject the Company to significant liability or loss
that may not be covered by insurance, actions by the Company’s regulators, damage to the Company’s reputation, or a loss of
confidence in the Company’s security measures which could harm the Company’s business. The Company may be required to expend
significant additional resources to modify its protective measures or to investigate and remediate vulnerabilities or other exposures.
The Company also faces risk related to external fraud involving the compromise of clients’ personal electronic devices that can
facilitate the unauthorized access to login and password information for their various online financial accounts, including those at the
Company. Such risk has grown in recent years due to the increased sophistication and activities of organized crime and other external
parties. For example, these parties send fraudulent “phishing” emails to the Company’s clients in order to misappropriate user names,
passwords or other personal information. Losses reimbursed to clients under the Company’s guarantee against unauthorized account
activity could have a negative impact on the Company’s business, financial condition and results of operations.
Potential strategic transactions could have a negative impact on the Company’s financial position.
The Company evaluates potential strategic transactions, including business combinations, acquisitions, and dispositions. Any such
transaction could have a material impact on the Company’s financial position, results of operations, or cash flows. The process of
evaluating, negotiating, and effecting any such strategic transaction may divert management’s attention from other business concerns,
and might cause the loss of key clients, employees, and business partners. Moreover, integrating businesses and systems may result in
unforeseen expenditures as well as numerous risks and uncertainties, including the need to integrate operational, financial, and
management information systems and management controls, integrate relationships with clients and business partners, and manage
facilities and employees in different geographic areas. In addition, an acquisition may cause the Company to assume liabilities or
become subject to litigation. Further, the Company may not realize the anticipated benefits from an acquisition, and any future
acquisition could be dilutive to the Company’s current stockholders’ percentage ownership or to earnings per common share.
The Company’s acquisitions and dispositions are typically subject to closing conditions, including regulatory approvals and the
absence of material adverse changes in the business, operations or financial condition of the entity being acquired or sold. To the
extent the Company enters into an agreement to buy or sell an entity, there can be no guarantee that the transaction will close when
expected, or at all. If a material transaction does not close, the Company’s stock price could decline.
The Company’s industry is characterized by aggressive price competition.
The Company continually monitors its pricing in relation to competitors and periodically adjusts trade commission rates, interest rates
on deposits and loans, fees for advisory services, and other fee structures to enhance its competitive position. Increased price
competition from other financial services firms, such as reduced commissions to attract trading volume or higher deposit rates to
attract client cash balances, could impact the Company’s results of operations and financial condition.
The industry in which the Company competes has undergone a period of consolidation.
The Company faces intense competition for the clients that it serves and the products and services it offers. There has been significant
consolidation as financial institutions with which the Company competes have been acquired by or merged into or acquired other
firms. This consolidation may continue. Competition is based on many factors, including the range of products and services offered,
pricing, customer service, brand recognition, reputation, and perceived financial strength. Consolidations may enable other firms to
offer a broader range of products and services than the Company does, or offer such products at more competitive prices.
The Company faces competition in hiring and retaining qualified employees, especially for employees who are key to the
Company’s ability to build and enhance client relationships.
The market for quality professionals and other personnel in the Company’s business is highly competitive. Competition is particularly
strong for financial consultants who build and sustain the Company’s client relationships. The Company’s ability
- 12 -
THE CHARLES SCHWAB CORPORATION
to continue to compete effectively will depend upon its ability to attract new employees and retain existing employees while
managing compensation costs.
The Company’s stock price has fluctuated historically, and may continue to fluctuate.
The Company’s stock price can be volatile. Among the factors that may affect the volatility of the Company’s stock price are the
following:
• speculation in the investment community or the press about, or actual changes in, the Company’s competitive position,
organizational structure, executive team, operations, financial condition, financial reporting and results, effectiveness of cost
reduction initiatives, or strategic transactions;
• the announcement of new products, services, acquisitions, or dispositions by the Company or its competitors;
• increases or decreases in revenue or earnings, changes in earnings estimates by the investment community, and variations
between estimated financial results and actual financial results.
Changes in the stock market generally or as it concerns the Company’s industry, as well as geopolitical, economic, and business
factors unrelated to the Company, may also affect the Company’s stock price.
Future sales of CSC’s equity securities may adversely affect the market price of CSC’s common stock and result in dilution.
CSC’s certificate of incorporation authorizes CSC’s Board of Directors to, among other things, issue additional shares of common or
preferred stock or securities convertible or exchangeable into equity securities, without stockholder approval. CSC may issue
additional equity or convertible securities to raise additional capital or for other purposes. The issuance of any additional equity or
convertible securities could be substantially dilutive to holders of CSC’s common stock and may adversely affect the market price of
CSC’s common stock.
Item 1B. Unresolved Securities and Exchange Commission Staff Comments
None.
Properties
Item 2.
A summary of the Company’s significant locations at December 31, 2012, is presented in the following table. Locations are leased or
owned as noted below. The square footage amounts are presented net of space that has been subleased to third parties.
(amounts in thousands)
Location
Corporate office space:
San Francisco, CA
(1)
Service centers:
(2)
Phoenix, AZ
Denver, CO
Indianapolis, IN
Austin, TX
Orlando, FL
Richfield, OH
Square Footage
Leased
Owned
779
—
47
383
—
252
148
—
709
—
274
—
—
117
(1)
(2)
Includes the Company’s headquarters.
Includes two data centers.
Substantially all of the Company’s branch offices are located in leased premises. The corporate headquarters, data centers, offices,
and service centers support both of the Company’s segments.
- 13 -
THE CHARLES SCHWAB CORPORATION
Legal Proceedings
Item 3.
For a discussion of legal proceedings, see “Item 8 – Financial Statements and Supplementary Data – Notes to Consolidated Financial
Statements – 15. Commitments and Contingencies.”
Item 4. Mine Safety Disclosures
Not applicable.
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
CSC’s common stock is listed on The New York Stock Exchange under the ticker symbol SCHW. The number of common
stockholders of record as of January 31, 2013, was 7,585. The closing market price per share on that date was $16.53.
The quarterly high and low sales prices for CSC’s common stock and the other information required to be furnished pursuant to this
item are included in “Item 8 – Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – 28.
Quarterly Financial Information (Unaudited) and 20. Employee Incentive, Retirement, and Deferred Compensation Plans.”
The following graph shows a five-year comparison of cumulative total returns for CSC’s common stock, the Dow Jones U.S.
Investment Services Index, and the Standard & Poor’s 500 Index, each of which assumes an initial investment of $100 and
reinvestment of dividends.
December 31,
The Charles Schwab Corporation
Dow Jones U.S. Investment Services Index
Standard & Poor’s 500 Index
2007
2008
2009
61
$ 100 $ 64 $ 76 $ 70 $ 47 $
$ 100 $ 33 $ 52 $ 54 $ 35 $
45
$ 100 $ 63 $ 80 $ 92 $ 94 $ 109
2012
2010
2011
- 14 -
THE CHARLES SCHWAB CORPORATION
Issuer Purchases of Equity Securities
The following table summarizes purchases made by or on behalf of CSC of its common stock for each calendar month in the fourth
quarter of 2012:
Month
October:
Share Repurchase Program
Employee transactions
(2)
(1)
November:
Share Repurchase Program
Employee transactions
(2)
(1)
December:
Share Repurchase Program
Employee transactions
(2)
(1)
Total:
Share Repurchase Program
Employee transactions
(2)
(1)
Total Number
of Shares
Purchased
(in thousands)
Average
Price Paid
per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced
(1)
Program
(in thousands)
Approximate
Dollar Value of
Shares that May
Yet be Purchased
under the Program
(in millions)
—
59
—
752
—
10
—
821
$
$
$
$
$
$
$
$
—
12.89
—
13.62
—
13.36
—
13.57
—
N/A
—
N/A
—
N/A
—
N/A
$
$
$
$
596
N/A
596
N/A
596
N/A
596
N/A
N/A Not applicable.
(1)
There were no share repurchases under the Share Repurchase Program during the fourth quarter. Repurchases under this
(2)
program would occur under two authorizations by CSC’s Board of Directors, each covering up to $500 million of common stock
that were publicly announced by the Company on April 25, 2007, and March 13, 2008. The remaining authorizations do not
have an expiration date.
Includes restricted shares withheld (under the terms of grants under employee stock incentive plans) to offset tax withholding
obligations that occur upon vesting and release of restricted shares. The Company may receive shares delivered or attested to
pay the exercise price and/or to satisfy tax withholding obligations by employees who exercise stock options (granted under
employee stock incentive plans), which are commonly referred to as stock swap exercises.
- 15 -
THE CHARLES SCHWAB CORPORATION
Selected Financial Data
Item 6.
Selected Financial and Operating Data
(In Millions, Except Per Share Amounts, Ratios, or as Noted)
Growth Rates
Compounded
4-Year
2008-2012
(1)
Annual
1-Year
2011-2012
2012
2011
2010
2009
2008
(1%)
2%
(7%)
(6%)
4% $ 4,883
3,433
4% $
$ 4,691
3,299
$
$ 4,248
$ 3,469
$ 4,193
$ 2,917
$ 5,150
$ 3,122
7% $
7% $
928
928
$
$
864
864
$
$
454
454
$
$
787
787
$ 1,230
$ 1,212
(8%)
2% $
883
$
864
$
454
$
787
$ 1,212
Results of Operations
Net revenues
Expenses excluding interest
Income from continuing
operations
Net income
Net income available to
common stockholders
Income from continuing
operations per common
share — basic
Income from continuing
operations per common
share — diluted
Basic earnings per common
share
(2)
Diluted earnings per common
share
(2)
Dividends declared per
common share
Weighted-average common
shares outstanding —
diluted
Asset management and
administration fees as a
percentage of net revenues
Net interest revenue as a
percentage of net revenues
Trading revenue as a
percentage of net
revenues
(3)
Effective income tax rate
Capital expenditures —
purchases of equipment,
office facilities, and
property, net
Capital expenditures, net, as a
percentage of net revenues
Performance Measures
Net revenue growth (decline)
Pre-tax profit margin
Return on average common
stockholders’ equity
(4)
Financial Condition (at year
end)
Total assets
Long-term debt
Stockholders’ equity
(5)
Assets to stockholders’ equity
ratio
(10%)
(1%) $
.69
$
.70
$
.38
$
.68
$
1.07
(10%)
(1%) $
.69
$
.70
$
.38
$
.68
$
1.06
(10%)
(1%) $
.69
$
.70
$
.38
$
.68
$
1.06
(10%)
(1%) $
.69
$
.70
$
.38
$
.68
$
1.05
2%
—
$
.24
$
.24
$
.24
$
.24
$
.22
2%
4%
1,275
1,229
1,194
1,160
1,157
42%
36%
41%
37%
43%
45%
46%
36%
30%
33%
18%
36.0%
20%
37.9%
20%
41.7%
24%
38.3%
21%
39.3%
(8%)
(27%) $
138
$
190
$
127
$
139
$
194
3%
4%
3%
3%
4%
4%
29.7%
10%
29.7%
1%
18.3%
(19%)
30.4%
3%
39.4%
11%
12%
8%
17%
31%
27%
17%
24%
23% $ 133,617
1,632
(18%) $
9,589
24% $
$ 108,553
2,001
$
7,714
$
$ 92,568
$ 2,006
$ 6,226
$ 75,431
$ 1,512
$ 5,073
$ 51,675
$
883
$ 4,061
14
14
15
15
13
Long-term debt to total
financial capital (long-term
debt plus stockholders’
equity)
Employee Information
Full-time equivalent
employees (at year end, in
thousands)
Net revenues per average full-
time equivalent employee
(in thousands)
15%
21%
24%
23%
18%
1%
(2%)
13.8
14.1
12.8
12.4
13.4
(2%)
1% $
354
$
350
$
337
$
338
$
383
Note: Information is presented on a continuing operations basis unless otherwise noted.
(1)
The compounded 4-year growth rate is computed using the following formula: Compound annual growth rate = (Ending Value /
Beginning Value)
.25
- 1
(2)
(3)
(4)
(5)
Both basic and diluted earnings per common share in 2008 include discontinued operations.
Trading revenue includes commission and principal transaction revenues.
Return on average common stockholders’ equity is calculated using net income available to common stockholders divided by
average common stockholders’ equity.
In 2012, the Company issued non-cumulative perpetual preferred stock, Series B, for a total liquidation preference of $485
million and non-cumulative perpetual preferred stock, Series A, with a total liquidation preference of $400 million.
- 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)
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
OVERVIEW
Management of the Company focuses on several key client activity and financial metrics in evaluating the Company’s financial
position and operating performance. Results for the years ended December 31, 2012, 2011, and 2010 are:
(1)
(in thousands)
(3)
(in thousands, at year end)
Year Ended December 31,
Client Activity Metrics:
(in billions)
Net new client assets
Client assets (in billions, at year end)
New brokerage accounts
(2)
Active brokerage accounts
Company Financial Metrics:
Net revenues
Expenses excluding interest
Income before taxes on income
Taxes on income
Net income
Net income available to common stockholders
Earnings per common share – diluted
Net revenue growth from prior year
Pre-tax profit margin
Return on common stockholders’ equity
Net revenue per average full-time equivalent employee (in
(4)
thousands)
Growth Rate
1-Year
2011-2012
2012
2011
2010
(4%)
16%
(21%)
3%
$
139.7
$ 1,951.6
900
8,787
$
145.9
$ 1,677.7
1,138
8,552
$
26.6
$ 1,574.5
829
7,998
4%
4%
4%
(1%)
7%
2%
(1%)
$
$
$
$
$
$
$
$
4,883
3,433
1,450
522
928
883
.69
4%
29.7%
11%
$
$
$
$
4,691
3,299
1,392
528
864
864
.70
10%
29.7%
12%
4,248
3,469
779
325
454
454
.38
1%
18.3%
8%
1%
$
354
$
350
$
337
(1)
(2)
(3)
(4)
2012 includes inflows of $27.7 billion from mutual fund clearing services clients and $900 million from the acquisition of
ThomasPartners, Inc., and outflows of $1.3 billion from the closure and/or sale of certain subsidiaries of optionsXpress
Holdings, Inc. 2011 includes inflows of $56.1 billion from a mutual fund clearing services client and $7.5 billion from the
acquisition of optionsXpress. 2010 includes net outflows of $51.5 billion related to the planned deconversion of a mutual fund
clearing services client.
2011 includes 315,000 new brokerage accounts from the acquisition of optionsXpress Holdings, Inc.
2012 includes the removal of approximately 19,000 accounts as a result of the sale of certain subsidiaries of optionsXpress and
30,000 accounts due to escheatment and other factors.
Calculated as net income available to common stockholders divided by common stockholders’ equity.
• Net new client assets is defined as the total inflows of client cash and securities to the firm less client outflows. Management
believes that this metric depicts how well the Company’s products and services appeal to new and existing clients in a given
operating environment. Core net new client assets is defined as net new client assets before significant one-time flows.
• Client assets is the market value of all client assets custodied at the Company. Management considers client assets to be
indicative of the Company’s appeal in the marketplace. Additionally, fluctuations in certain components of client assets
(e.g., Mutual Fund OneSource funds) directly impact asset management and administration fees.
• New brokerage accounts include all brokerage accounts opened during the period, as well as any accounts added via
acquisition. This metric measures the Company’s effectiveness in attracting new clients and building stronger relationships
with existing clients.
• Active brokerage accounts include accounts with balances or activity within the preceding eight months. This metric is an
indicator of the Company’s success in both attracting and retaining clients.
- 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)
• Management believes that earnings per common share, net revenue growth, pre-tax profit margin, and return on common
stockholders’ equity provide broad indicators of the Company’s overall financial health, operating efficiency, and ability to
generate acceptable returns within the context of a given operating environment.
• Net revenue per average full-time equivalent employee is considered by management to be the Company’s broadest measure
of productivity.
The Company’s major sources of net revenues are asset management and administration fees, net interest revenue, and trading
revenue. The Company generates asset management and administration fees through its proprietary and third-party mutual fund
offerings, as well as fee-based advisory solutions. Net interest revenue is the difference between interest earned on interest-earning
assets and interest paid on funding sources. Asset management and administration fees and net interest revenue are impacted by
securities valuations, interest rates, the amount and mix of interest-earning assets and interest-bearing funding sources, the
Company’s ability to attract new clients, and client activity levels. The Company generates trading revenue through commissions
earned for executing trades for clients and principal transaction revenue primarily from trading activity in client fixed income
securities. Trading revenue is impacted by trading volumes, the volatility of prices in the equity and fixed income markets, and
commission rates.
2012 Compared to 2011
The broad equity markets improved during 2012 compared to 2011, as the Nasdaq Composite Index, Standard & Poor’s 500 Index,
and Dow Jones Industrial Average increased 16%, 13%, and 7%, respectively. While the federal funds target rate remained
unchanged at a range of zero to 0.25%, the average three-month Treasury Bill yield increased by 4 basis points to 0.08% during 2012
compared to 2011. At the same time, the average 10-year Treasury yield decreased by 98 basis points to 1.78%.
Despite continuing economic and interest rate challenges during the year, the Company’s sustained client focus helped deliver strong
key client activity metrics in 2012. While net new client assets decreased slightly by 4% to $139.7 billion in 2012, core net new client
assets totaled $112.4 billion, up 37% from $82.3 billion in 2011. Total client assets ended the year at a record $1.95 trillion, up 16%
from 2011. In addition, the Company added 900,000 new brokerage accounts to its client base during 2012, and active brokerage
accounts reached a record 8.8 million, up 3% from 2011.
Net revenues increased by 4% in 2012 from 2011 primarily due to increases in asset management and administration fees, net interest
revenue, and other revenue – net, partially offset by a decrease in trading revenue. Asset management and administration fees
increased primarily due to increases in advice solutions fees and other asset management and administration fees. Net interest revenue
increased primarily due to higher average balances of interest-earning assets, partially offset by the effect of low overall interest rates
and higher amortization of premiums relating to mortgage-backed securities. Other revenue – net increased primarily due to a pre-tax
gain of $70 million relating to a confidential resolution of a vendor dispute in the second quarter of 2012. Trading revenue decreased
primarily due to lower daily average revenue trades, partially offset by the inclusion of optionsXpress’ trading activity from its
acquisition in September 2011.
Expenses excluding interest were higher by 4% in 2012 compared to 2011 primarily due to the inclusion of a full year of
optionsXpress’ expenses. Taxes on income in 2012 include a non-recurring state tax benefit of $20 million recorded in the third
quarter of 2012. Overall, growth in the Company’s client base and ongoing expense discipline helped the Company increase net
income by 7% in 2012 from 2011, and achieve a pre-tax profit margin of 29.7% and return on common stockholders’ equity of 11%
in 2012.
2011 Compared to 2010
Economic and market conditions were challenging throughout 2011, marked by volatility in the equity markets, lower market
valuations, and further declines in interest rates. The Standard & Poor’s 500 Index, Nasdaq Composite Index, and Dow Jones
Industrial Average decreased on average 6%, 5%, and 4%, respectively, between the first and second halves of the year. The federal
funds target rate remained unchanged during the year at a range of zero to 0.25% and the average three-month Treasury Bill and
average 10-year Treasury yields declined by 8 and 43 basis points to 0.04% and 2.76%, respectively.
- 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 Company’s key client activity metrics in 2011 were stable in the midst of a weakened economic and market environment. Net
new client assets totaled $145.9 billion in 2011. Core net new client assets totaled $82.3 billion in 2011, up 5% from $78.1 billion in
2010. Total client assets ended the year at $1.68 trillion, up 7% from 2010. In addition, the Company added 1.1 million new
brokerage accounts to its client base during 2011 and ended the year serving 8.6 million active brokerage accounts.
Net revenues increased by 10% in 2011 from 2010 due to increases in all of the Company’s major sources of net revenues. Asset
management and administration fees increased primarily due to an increase in advice solutions fees and continued asset inflows,
partially offset by a decrease in net money market mutual fund fees. Net interest revenue increased primarily due to higher average
balances of interest-earning assets during the year, partially offset by the effect of lower interest rate spreads resulting from higher
amortization of premiums relating to residential mortgage-backed securities caused by higher mortgage prepayments in 2011. Trading
revenue increased primarily due to higher daily average revenue trades and the addition of optionsXpress’ trading activity.
While total expenses excluding interest were lower by 5% in 2011 compared to 2010, the Company experienced increases in
compensation and benefits, professional services, occupancy and equipment, and advertising and market development expenses in
aggregate of $266 million in 2011 compared to 2010. Significant charges in 2010 included class action litigation and regulatory
reserves relating to the Schwab YieldPlus Fund , losses recognized for Schwab money market mutual funds, and a charge relating to
the termination of the Company’s Invest First and WorldPoints Visa credit card program for a total of $482 million.
(a)
(b)
®
®
As a result of the Company’s ongoing investment in clients and sustained expense discipline, the Company achieved a pre-tax profit
margin of 29.7% and return on common stockholders’ equity of 12% in 2011.
CURRENT MARKET AND REGULATORY ENVIRONMENT AND OTHER DEVELOPMENTS
As discussed above, interest rates remained at low levels during 2012. To the extent rates remain at these low levels, the Company’s
net interest revenue will continue to be constrained, even as growth in average balances helps to increase such revenue. The low
interest rate environment also affects asset management and administration fees. While net money market mutual fund fees improved
in 2012 from 2011 primarily due to sustained improvement in short-term interest rates, the overall yields on certain Schwab-
sponsored money market mutual funds have remained at levels at or below the management fees on those funds. The Company
continues to waive a portion of its management fees so that the funds can maintain a positive return to clients. These and other money
market mutual funds may not be able to replace maturing securities with securities of equal or higher yields. As a result, the yields on
such funds may remain around or decline from their current levels, and therefore below the management fees on those funds. To the
extent this occurs, asset management and administration fees may be negatively affected.
The Company recorded net impairment losses of $32 million related to certain non-agency residential mortgage-backed securities in
2012 primarily due to further credit deterioration of the securities’ underlying loans. Further deterioration in the performance of the
underlying loans in the Company’s non-agency residential mortgage-backed securities portfolio could result in the recognition of
additional impairment losses.
The Dodd-Frank Act was signed into law in July 2010. Among other things, the legislation transferred the supervision and regulation
of CSC from the OTS to the Federal Reserve and supervision and regulation of Schwab Bank from the OTS to the OCC; both
transfers were effective July 21, 2011. In 2012, the Federal Reserve issued notices of proposed rulemaking (NPRs) to meet certain
requirements of the Dodd-Frank Act and to align current capital rules with the BASEL III capital standards. The NPRs would subject
all savings and loan holding companies, including CSC, to consolidated capital requirements. In
(a)
(b)
WorldPoints is a registered trademark of FIA Card Services, N.A.
Visa is a registered trademark of Visa International Service Association.
- 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)
addition, the NPRs would establish more restrictive capital definitions, higher risk-weightings for certain asset classes, higher
minimum capital ratios, and capital buffers. The Company expects the capital standard rules to be phased in under an extended time
frame after adoption. The comment period for the NPRs ended on October 22, 2012, and the NPRs are subject to further modification.
CSC continues to monitor developments in order to assess the impact of the NPRs but does not expect them to have a material impact
on the Company’s business, financial condition, and results of operations.
The Company is pursuing lawsuits in state court in San Francisco for rescission and damages against issuers, underwriters, and
dealers of individual non-agency residential mortgage-backed securities on which the Company has experienced realized and
unrealized losses. The lawsuits allege that offering documents for the securities contained material untrue and misleading statements
about the securities and the underwriting standards and credit quality of the underlying loans. On January 27, 2012, and July 24, 2012,
the court denied defendants’ motions to dismiss the claims with respect to all but 3 of the 51 securities, and discovery is proceeding.
RESULTS OF OPERATIONS
The following discussion presents an analysis of the Company’s results of operations for the years ended December 31, 2012, 2011,
and 2010.
Net Revenues
The Company’s major sources of net revenues are asset management and administration fees, net interest revenue, and trading
revenue. Asset management and administration fees and net interest revenue increased, while trading revenue decreased in 2012 as
compared to 2011. Asset management and administration fees, net interest revenue, and trading revenue all increased in 2011 as
compared to 2010.
Year Ended December 31,
Growth Rate
2011-2012
Amount
2012
2011
2010
% of
Total Net
Revenues
Amount
% of
Total Net
Revenues
Amount
% of
Total Net
Revenues
Asset management and
administration fees
Schwab money market
funds before fee waivers
Fee waivers
Schwab money market
funds after fee waivers
Equity and bond funds
Mutual Fund OneSource
Total mutual funds
®
Advice solutions
Other
Asset management and
administration fees
Net interest revenue
Interest revenue
Interest expense
Net interest revenue
Trading revenue
Commissions
Principal transactions
Trading revenue
Other – net
Provision for loan losses
Net impairment losses on
securities
Total net revenues
3% $ 891
(587)
3%
$ 865
(568)
$
865
(433)
2%
6%
—
1%
11%
14%
304 6%
3%
125
14%
680
23%
1,109
580
12%
354
7%
297
118
680
1,095
522
311
6%
3%
14%
23%
11%
7%
432 10%
3%
114
14%
608
27%
1,154
9%
384
7%
284
6%
2,043
42%
1,928
41% 1,822
43%
1%
(14%)
2%
1,914
(150)
1,764
(6%)
(15%)
(6%)
60%
(11%)
816
52
868
256
(16)
39%
(3%)
36%
17%
1%
18%
5%
—
1,900
(175)
1,725
866
61
927
160
(18)
41%
(4%)
37%
19%
1%
20%
3%
—
1,723
(199)
1,524
770
60
830
135
(27)
41%
(5%)
36%
18%
2%
20%
3%
(1%)
(32)
3%
4% $ 4,883
(1%)
(31)
100% $ 4,691
(1%)
100% $
(36)
4,248
(1%)
100%
- 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)
Asset Management and Administration Fees
Asset management and administration fees include mutual fund service fees and fees for other asset-based financial services provided
to individual and institutional clients. The Company earns mutual fund service fees for shareholder services, administration, and
investment management provided to its proprietary funds, and recordkeeping and shareholder services provided to third-party funds.
These fees are based upon the daily balances of client assets invested in these funds. The Company also earns asset management fees
for advice solutions, which include advisory and managed account services that are based on the daily balances of client assets subject
to the specific fee for service. The fair values of client assets included in proprietary and third-party mutual funds are based on quoted
market prices and other observable market data. Other asset management and administration fees include various asset based fees,
such as third-party mutual fund service fees, trust fees, 401k record keeping fees, and mutual fund clearing and other service fees.
Asset management and administration fees may vary with changes in the balances of client assets due to market fluctuations and
client activity. For discussion of the impact of current market conditions on asset management and administration fees, see “Current
Market and Regulatory Environment and Other Developments.”
Asset management and administration fees increased by $115 million, or 6%, in 2012 from 2011 primarily due to increases in advice
solutions fees and other asset management and administration fees. Asset management and administration fees increased by
$106 million, or 6%, in 2011 from 2010 primarily due to an increase in advice solutions fees, partially offset by a decrease in mutual
fund service fees.
Mutual fund service fees were relatively flat in 2012 from 2011, which reflected growth in client asset balances invested in money
market mutual funds, equity and bond funds, and Mutual Fund OneSource funds, offset by the effect of lower yields on certain mutual
fund assets. Mutual fund service fees decreased by $59 million, or 5%, in 2011 from 2010 primarily due to a decrease in net money
market mutual fund fees as a result of lower yields on fund assets, partially offset by higher Mutual Fund OneSource fees.
Advice solutions fees increased by $58 million, or 11%, in 2012 from 2011 and by $138 million, or 36%, in 2011 from 2010
primarily due to growth in client assets enrolled in retail advisory and managed account programs, including Windhaven and
Schwab Managed Portfolios
$63 million, which reduced advice solutions fees in 2010 under a rebate program that ended in 2010.
. The increase in advice solutions fees in 2011 from 2010 was also due to temporary fees rebates of
TM
®
Other asset management and administration fees increased by $43 million, or 14%, in 2012 from 2011 primarily due to an increase in
third-party mutual fund service fees as a result of an increase in client asset balances invested in other third-party mutual funds.
Net Interest Revenue
Net interest revenue is the difference between interest earned on interest-earning assets and interest paid on funding sources. Net
interest revenue is affected by changes in the volume and mix of these assets and liabilities, as well as by fluctuations in interest rates
and portfolio management strategies. The Company’s investment strategy is structured to produce an increase in net interest revenue
when interest rates rise and, conversely, a decrease in net interest revenue when interest rates fall (i.e., interest-earning assets
generally reprice more quickly than interest-bearing liabilities). When interest rates fall, the Company may attempt to mitigate some
of this negative impact by extending the maturities of assets in investment portfolios to lock in asset yields, and by lowering rates paid
to clients on interest-bearing liabilities. Since the Company establishes the rates paid on certain brokerage client cash balances and
deposits from banking clients, as well as the rates charged on receivables from brokerage clients, and also controls the composition of
its investment securities, it has some ability to manage its net interest spread. The current low interest rate environment limits the
extent to which the Company can reduce interest expense paid on funding sources. However, the spread is influenced by external
factors such as the interest rate environment and competition. For discussion of the impact of current market conditions on net interest
revenue, see “Current Market and Regulatory Environment and Other Developments.”
- 21 -
THE CHARLES SCHWAB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)
The Company’s interest-earning assets are financed primarily by brokerage client cash balances and deposits from banking clients.
Non-interest-bearing funding sources include non-interest-bearing brokerage client cash balances and proceeds from stock-lending
activities, as well as stockholders’equity.
In clearing their clients’ trades, Schwab and optionsXpress, Inc. hold cash balances payable to clients. In most cases, Schwab and
optionsXpress, Inc. pay their clients interest on cash balances awaiting investment, and in turn invest these funds and earn interest
revenue. Receivables from brokerage clients consist primarily of margin loans to brokerage clients. Margin loans are loans made to
clients on a secured basis to purchase securities. Pursuant to applicable regulations, client cash balances that are not used for margin
lending are generally segregated into investment accounts that are maintained for the exclusive benefit of clients, which are recorded
in cash and investments segregated on the Company’s consolidated balance sheet. When investing segregated client cash balances,
Schwab and optionsXpress, Inc. must adhere to applicable regulations that restrict investments to securities guaranteed by the full
faith and credit of the U.S. government, participation certificates, mortgage-backed securities guaranteed by the Government National
Mortgage Association, deposits held at U.S. banks and thrifts, and resale agreements collateralized by qualified securities.
Additionally, Schwab and optionsXpress, Inc. have established policies for the minimum credit quality and maximum maturity of
these investments.
Schwab Bank maintains investment portfolios for liquidity as well as to invest funds from deposits in excess of loans to banking
clients and liquidity limits. Schwab Bank’s securities available for sale include mortgage-backed securities, asset-backed securities,
corporate debt securities, certificates of deposit, U.S. agency notes, commercial paper, and other securities. Schwab Bank’s securities
held to maturity include mortgage-backed and other securities. Schwab Bank lends funds to banking clients primarily in the form of
mortgage loans and HELOCs. These loans are largely funded by interest-bearing deposits from banking clients.
The following table presents net interest revenue information corresponding to interest-earning assets and funding sources on the
consolidated balance sheet:
Year Ended December 31,
(1)
Interest-earning assets:
Cash and cash equivalents
Cash and investments segregated
Broker-related receivables
Receivables from brokerage clients
(1)
Other securities owned
Securities available for sale
Securities held to maturity
Loans to banking clients
Loans held for sale
(2)
Total interest-earning assets
Other interest revenue
Total interest-earning assets
Funding sources:
Deposits from banking clients
Payables to brokerage clients
Long-term debt
Total interest-bearing liabilities
Non-interest-bearing funding sources
Other interest expense
Total funding sources
Net interest revenue
2012
Interest
Revenue/
Expense
Average
Yield/
Rate
Average
Balance
2011
Interest
Revenue/
Expense
Average
Yield/
Rate
Average
Balance
2010
Interest
Revenue/
Expense
Average
Yield/
Rate
Average
Balance
$
7,130 $
25,263
351
10,928
—
39,745
15,371
10,053
18
108,859
18
46
—
446
—
583
397
309
1
1,800
114
0.25% $
0.18%
0.04%
4.08%
—
1.47%
2.58%
3.07%
4.12%
1.65%
5,554 $
25,831
310
10,637
—
27,486
16,050
9,472
65
95,405
13
39
—
467
—
456
492
310
3
1,780
120
0.23% $
0.15%
0.05%
4.39%
—
1.66%
3.07%
3.27%
4.62%
1.87%
7,269 $
19,543
317
8,981
74
24,209
10,440
7,987
80
78,900
19
57
—
437
—
486
361
275
4
1,639
84
0.26%
0.29%
0.28%
4.87%
0.45%
2.01%
3.46%
3.44%
5.00%
2.08%
$ 108,859 $ 1,914 1.76% $ 95,405 $ 1,900 1.99% $ 78,900 $ 1,723 2.18%
$
65,546 $
29,831
1,934
97,311
11,548
$ 108,859 $
42
3
103
148
2
150
0.06% $
0.01%
5.33%
0.15%
52,701 $
29,992
2,004
84,697
10,708
0.14% $
95,405 $
62
3
108
173
2
175
0.12% $
0.01%
5.39%
0.20%
44,858 $
22,715
1,648
69,221
9,679
0.18% $
78,900 $
105
2
92
199
—
199
$
1,764
1.62%
$
1,725
1.81%
$
1,524
0.23%
0.01%
5.58%
0.29%
0.25%
1.93%
(1)
(2)
Interest revenue was less than $500,000 in the period or periods presented.
Amounts have been calculated based on amortized cost.
Net interest revenue increased in 2012 from 2011 primarily due to higher average balances of interest-earning assets, primarily
securities available for sale, partially offset by the effect of low overall interest rates and higher amortization of premiums
- 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)
relating to mortgage-backed securities. Growth in the average deposit balances from banking clients funded the increase in the
balance of securities available for sale.
Net interest revenue increased in 2011 from 2010 primarily due to higher average balances of interest-earning assets, partially offset
by the effect of lower interest rate spreads resulting from higher amortization of premiums relating to residential mortgage-backed
securities. The growth in average balances of deposits from banking clients and payables to brokerage clients funded the increases in
the balances of receivables from brokerage clients, securities available for sale, and securities held to maturity. Further declines in
interest rates in 2011 accelerated the prepayment activity in the Company’s portfolio of residential mortgage-backed securities, which
resulted in higher premium amortization.
Trading Revenue
Trading revenue includes commission and principal transaction revenues. Commission revenue is affected by the number of revenue
trades executed and the average revenue earned per revenue trade. Principal transaction revenue is primarily comprised of revenue
from trading activity in client fixed income securities. To accommodate clients’ fixed income trading activity, the Company maintains
positions in fixed income securities, including state and municipal debt obligations, U.S. Government, corporate debt, and other
securities. The difference between the price at which the Company buys and sells securities to and from its clients and other broker-
dealers is recognized as principal transaction revenue. Principal transaction revenue also includes unrealized gains and losses on these
securities positions. Factors that influence principal transaction revenue include the volume of client trades and market price
volatility.
Trading revenue decreased by $59 million, or 6%, in 2012 from 2011 primarily due to lower daily average revenue trades, partially
offset by the inclusion of optionsXpress’ trading activity for the full year. Trading revenue increased by $97 million, or 12%, in 2011
from 2010 primarily due to higher daily average revenue trades and the addition of optionsXpress’ trading activity starting in
September 2011.
Daily average revenue trades decreased by 7% in 2012 from 2011 primarily due to a lower volume of equity and mutual fund trades,
partially offset by a higher volume of option and future trades as a result of the inclusion of optionsXpress. Daily average revenue
trades increased by 12% in 2011 from 2010 primarily due to a higher volume of option, equity, and mutual fund trades. Average
revenue per revenue trade remained relatively flat in 2012 and 2011.
Year Ended December 31,
Daily average revenue trades
Clients’ daily average trades
Number of trading days
Average revenue per revenue trade
(2)
(1)
(3)
(in thousands)
(in thousands)
Growth Rate
2011-2012
(7%)
(2%)
(1%)
2%
2012
2011
2010
282.7
440.9
248.5
270.7
399.7
251.5
$ 12.35 $ 12.15 $ 12.28
303.8
451.1
251.5
(1)
(2)
Includes all client trades that generate trading revenue (i.e., commission revenue or revenue from fixed income securities
trading).
Includes daily average revenue trades, trades by clients in asset-based pricing relationships, and all commission-free trades,
including the Company’s Mutual Fund OneSource funds and ETFs, and other proprietary products. Clients’ daily average trades
is an indicator of client engagement with securities markets.
(3)
October 29 and 30, 2012, were not included as trading days due to weather-related market closures.
Other Revenue – Net
Other revenue – net includes nonrecurring gains and losses, realized gains and losses on sales of securities available for sale, order
flow revenue, software fees from the Company’s portfolio management services, exchange processing fees, and other service fees.
Other revenue – net increased by $96 million, or 60%, in 2012 compared to 2011 primarily due to a pre-tax gain of $70 million
relating to a confidential resolution of a vendor dispute in the second quarter of 2012. In November 2012, the
- 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)
Company began receiving additional order flow rebates from market venues to which client orders are routed for execution. Order
flow revenue increased by $23 million due to this revenue and the inclusion of a full year of optionsXpress’ order flow revenue. In
December 2012, CSC redeemed the remaining outstanding portion of its 4.950% Senior Notes of $494 million that were due in 2014,
which resulted in the payment of a make-whole premium of $31 million that was recorded in other revenue – net. Other revenue – net
also included realized gains of $35 million from the sales of securities available for sale.
Other revenue – net increased by $25 million, or 19%, in 2011 compared to 2010 primarily due to increases in software and exchange
processing fees, as well as the addition of education services revenue from the acquisition of optionsXpress.
Provision for Loan Losses
The provision for loan losses was relatively flat in 2012 from 2011, reflecting stable levels of delinquencies and nonaccrual loans
experienced in 2012. The provision for loan losses decreased by $9 million, or 33%, in 2011 from 2010 due to a decrease in overall
expected loss rates resulting primarily from a decrease in first mortgage loan delinquencies. Charge-offs were $16 million,
$19 million, and $20 million in 2012, 2011, and 2010, respectively. For further discussion on the Company’s credit risk and the
allowance for loan losses, see “Risk Management – Credit Risk” and “Item 8 – Financial Statements and Supplementary Data – Notes
to Consolidated Financial Statements – 7. Loans to Banking Clients and Related Allowance for Loan Losses.”
Net Impairment Losses on Securities
Net impairment losses on securities were $32 million, $31 million, and $36 million in 2012, 2011, and 2010, respectively. These
charges relate to certain non-agency residential mortgage-backed securities, which experienced further credit deterioration of the
securities’ underlying loans. For further discussion, see “Item 8 – Financial Statements and Supplementary Data – Notes to
Consolidated Financial Statements – 6. Securities Available for Sale and Securities Held to Maturity.”
Expenses Excluding Interest
As shown in the table below, expenses excluding interest were higher in 2012 compared to 2011, which was primarily due to the
inclusion of a full year of optionsXpress’ expenses and amortization of intangible assets relating to the optionsXpress acquisition.
Expenses excluding interest were lower in 2011 compared to 2010 primarily due to certain significant charges in 2010, including
class action litigation and regulatory reserves relating to the Schwab YieldPlus Fund and losses recognized for Schwab money market
mutual funds. The decrease in expenses excluding interest caused by these charges in 2010 was offset by increases in compensation
and benefits, professional services, occupancy and equipment, and advertising and market development expenses in 2011.
Year Ended December 31,
Compensation and benefits
Professional services
Occupancy and equipment
Advertising and market development
Communications
Depreciation and amortization
Class action litigation and regulatory reserve
Money market mutual fund charges
Other
Total expenses excluding interest
Expenses as a percentage of total net revenues:
Total expenses excluding interest
Advertising and market development
N/M Not meaningful.
Growth Rate
2011-2012
4%
—
3%
6%
—
26%
N/M
—
2%
4%
2012
$
1,803
388
311
241
220
196
—
—
274
$ 3,433
2011
$
1,732
387
301
228
220
155
7
—
269
$ 3,299
2010
$
1,573
341
272
196
207
146
320
132
282
$ 3,469
70%
5%
70%
5%
82%
5%
- 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)
Compensation and Benefits
Compensation and benefits expense includes salaries and wages, incentive compensation, and related employee benefits and taxes.
Incentive compensation includes variable compensation, discretionary bonuses, and stock-based compensation. Variable
compensation includes payments to certain individuals based on their sales performance. Discretionary bonuses are based on the
Company’s overall performance as measured by earnings per common share, and therefore will fluctuate with this measure. Stock-
based compensation primarily includes employee and board of director stock options, restricted stock units, and restricted stock
awards.
Compensation and benefits expense increased by $71 million, or 4%, in 2012 from 2011 due to increases in salaries and wages,
incentive compensation and employee benefits and other expense. Compensation and benefits expense increased by $159 million, or
10%, in 2011 from 2010 primarily due to increases in salaries and wages and incentive compensation. The following table shows a
comparison of certain compensation and benefits components and employee data:
Year Ended December 31,
Salaries and wages
Incentive compensation
Employee benefits and other
Total compensation and benefits expense
Growth Rate
2011-2012
3%
5%
7%
4%
2012
$
1,043
466
294
$ 1,803
2011
$
1,012
444
276
$ 1,732
2010
$
931
386
256
$ 1,573
Compensation and benefits expense as a percentage of total
net revenues:
Salaries and wages
Incentive compensation
Employee benefits and other
Total compensation and benefits expense
Full-time equivalent employees (in thousands)
At year end
Average
21%
10%
6%
37%
(1)
(2%)
3%
13.8
13.8
22%
9%
6%
37%
14.1
13.4
22%
9%
6%
37%
12.8
12.6
(1)
Includes full-time, part-time and temporary employees, and persons employed on a contract basis, and excludes employees of
outsourced service providers.
Salaries and wages increased in 2012 from 2011 primarily due to an increase in average full-time employees from the inclusion of a
full year of optionsXpress’ employees. The increase in salaries and wages was partially offset by a decrease in persons employed on a
contract basis. Incentive compensation increased in 2012 from 2011 primarily due to higher variable compensation resulting from
product sales performance in the Company’s branch offices. Employee benefits and other expense increased in 2012 from 2011
primarily due to increases in payroll taxes and the Company’s 401(k) plan contribution expense due to increases in average full-time
employees and incentive compensation, and an increase in the Company’s deferred compensation plan expense as a result of
improvement in the broad equity markets.
Salaries and wages increased in 2011 from 2010 primarily due to increases in full-time employees and persons employed on a
contract basis. The increase in full-time employees was partially due to the addition of full-time employees from the optionsXpress
acquisition. Incentive compensation increased in 2011 from 2010 primarily due to an increase in discretionary bonuses and higher
variable compensation. Discretionary bonuses increased based on the Company’s overall performance in 2011, as well as an increase
in full time employees. Variable compensation was higher primarily due to the integration of Windhaven, which was acquired in
November 2010. Employee benefits and other expense increased in 2011 from 2010 primarily due to increases in payroll taxes and
the Company’s 401(k) plan contribution expense as a result of increases in incentive compensation and full-time employees.
- 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)
Expenses Excluding Compensation and Benefits
Professional services expense increased in 2011 from 2010 primarily due to an increase in fees relating to the Company’s technology
investments and client facing infrastructure, and approximately $10 million in costs relating to the integration of optionsXpress.
Occupancy and equipment expense increased in 2012 from 2011 primarily due to an increase in software maintenance expense
relating to the Company’s information technology systems. Occupancy and equipment expense increased in 2011 from 2010
primarily due to an increase in the Company’s investments in data processing equipment.
Advertising and market development expense increased in 2012 from 2011 primarily due to the inclusion of a full year of
optionsXpress’ expenses, which includes media, and the Company’s increased spending on customer promotions. Advertising and
market development expense increased in 2011 from 2010 primarily due to higher spending on customer and branch promotions and
electronic media.
Communications expense increased in 2011 from 2010 primarily due to higher telephone service expense and third-party news and
information expense.
Depreciation and amortization expense increased in 2012 and 2011 primarily due to the amortization of intangible assets relating to
the optionsXpress acquisition. The increase in 2011 from 2010 was also due to the amortization of intangible assets resulting from the
Windhaven acquisition.
In 2011 and 2010, the Company recorded class action litigation and regulatory reserves relating to the Schwab YieldPlus Fund. For
further discussion of the Schwab YieldPlus Fund litigation and regulatory matters, see “Item 8 – Financial Statements and
Supplementary Data – Notes to Consolidated Financial Statements – 21. Class Action Litigation and Regulatory Reserve and Money
Market Mutual Fund Charges.”
In 2010, the Company decided to cover the net remaining losses of $132 million recognized by Schwab money market mutual funds
as a result of their investments in a single structured investment vehicle that defaulted in 2008.
Other expense was lower in 2011 compared to 2010 primarily due to a charge of $30 million in 2010, relating to the Company’s
former Invest First and WorldPoints Visa credit cards, as the Company ended its sponsorship due to challenging credit card industry
economics.
Taxes on Income
The Company’s effective income tax rate on income before taxes was 36.0% in 2012, 37.9% in 2011, and 41.7% in 2010. The
decrease in 2012 from 2011 was primarily due to the recognition of a non-recurring state tax benefit of $20 million in the third quarter
of 2012. The decrease in 2011 from 2010 was due to a lower effective state income tax rate in 2011 and the impact of non-deductible
penalties relating to the Schwab YieldPlus Fund regulatory settlements in 2010.
Segment Information
The Company provides financial services to individuals and institutional clients through two segments – Investor Services and
Institutional Services. The Investor Services segment provides retail brokerage and banking services to individual investors. The
Institutional Services segment provides custodial, trading, and support services to independent investment advisors. The Institutional
Services segment also provides retirement plan services, specialty brokerage services, and mutual fund clearing services, and supports
the availability of Schwab proprietary mutual funds and collective trust funds on third-party platforms. Banking revenues and
expenses are allocated to the Company’s two segments based on which segment services the client. The Company evaluates the
performance of its segments on a pre-tax basis, excluding items such as significant nonrecurring gains, impairment charges on non-
financial assets, discontinued operations, extraordinary items, and significant restructuring and
- 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)
other charges. Segment assets and liabilities are not disclosed because the balances are not used for evaluating segment performance
and deciding how to allocate resources to segments.
Financial information for the Company’s reportable segments is presented in the following tables:
Year Ended December 31,
Net Revenues
Asset management and
administration fees
Net interest revenue
Trading revenue
Other – net
Provision for loan losses
Net impairment losses on securities
Total net revenues
Expenses Excluding Interest
Income before taxes on income
Year Ended December 31,
Net Revenues
Asset management and
administration fees
Net interest revenue
Trading revenue
Other – net
Provision for loan losses
Net impairment losses on securities
Total net revenues
Expenses Excluding Interest
Income before taxes on income
Taxes on income
Net Income
N/M Not meaningful.
Investor Services
Institutional Services
Growth Rate
2011-2012
2012
2011
2010
Growth Rate
2011-2012
2012
2011
2010
1,468
625
85
(15)
(27)
5% $1,109 $1,053 $ 976
1,297
1% 1,479
557
(8%) 574
70
27% 108
(23)
(14)
(7%)
4%
(32)
(28)
1% 3,228 3,189 2,845
2,065
5% 2,363
(7%) $ 865 $ 928 $ 780
2,261
7% $
11%
(3%)
3%
(33%)
—
5%
3%
11% $
934 $ 875 $
285 257
293 302
75
77
(3)
(2)
(4)
(4)
1,583 1,502
1,069 1,039
514 $ 463 $
846
227
273
65
(4)
(4)
1,403
960
443
Unallocated
Total
Growth Rate
2011-2012
2012
2011
2010
Growth Rate
2011-2012
2012
2011
2010
N/M
N/M
N/M
N/M
N/M
N/M
N/M
N/M
N/M
$ — $ — $ —
—
—
—
—
1
—
—
71
—
—
—
—
—
—
—
—
72
—
(1)
1
444
1 $ (444)
71 $
$
6% $ 2,043 $1,928 $ 1,822
1,524
1,764 1,725
2%
830
868 927
(6%)
135
256 160
60%
(27)
(18)
(16)
(11%)
(36)
(31)
(32)
3%
4,248
4,883 4,691
4%
3,469
4%
3,433 3,299
779
4% $ 1,450 $1,392 $
325
454
522 528
928 $ 864 $
$
Investor Services
Net revenues were relatively flat in 2012 compared to 2011 as the increases in asset management and administration fees, net interest
revenue, and other revenue – net were largely offset by a decrease in trading revenue. Asset management and administration fees
increased primarily due to an increase in advice solutions fees relating to Windhaven, partially offset by a decrease in net money
market mutual fund fees. Net interest revenue increased primarily due to higher average balances of interest-earning assets, partially
offset by the effect of low overall interest rates and higher amortization of premiums relating to mortgage-backed securities. Other
revenue – net increased primarily due to the inclusion of a full year of optionsXpress’ order flow revenue and other fees. Trading
revenue decreased primarily due to lower daily average revenue trades, partially offset by the inclusion of optionsXpress’ trading
activity for the full year. Expenses excluding interest increased by
- 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)
$102 million, or 5%, in 2012 from 2011 primarily due to the inclusion of a full year of optionsXpress’ compensation and benefits,
advertising and market development, and depreciation and amortization expenses.
Net revenues increased by $344 million, or 12%, in 2011 from 2010 primarily due to increases in net interest revenue, asset
management and administration fees, and trading revenue. Net interest revenue increased primarily due to higher average balances of
interest-earning assets during the year, partially offset by the effect of higher premium amortization relating to residential mortgage-
backed securities caused by higher mortgage prepayments in 2011. Asset management and administration fees increased primarily
due to an increase in advice solutions fees and continued asset inflows, partially offset by decrease in net money market mutual fund
fees. Trading revenue increased primarily due to higher daily average revenue trades and the addition of optionsXpress. Expenses
excluding interest increased by $196 million, or 9%, in 2011 from 2010 primarily due to increases in compensation and benefits,
professional services, and advertising and market development expenses, which included the integration of optionsXpress.
Institutional Services
Net revenues increased by $81 million, or 5%, in 2012 from 2011 primarily due to increases in asset management and administration
fees and net interest revenue, partially offset by a decrease in trading revenue. Asset management and administration fees increased
primarily due to an increase in third-party mutual fund service fees. Net interest revenue increased primarily due to higher average
balances of interest-earning assets, partially offset by the effect of low overall interest rates and higher amortization of premiums
relating to mortgage-backed securities. Trading revenue decreased primarily due to lower daily average revenue trades. Expenses
excluding interest increased by $30 million, or 3%, in 2012 from 2011 primarily due to increases in compensation and benefits and
occupancy and equipment expenses.
Net revenues increased by $99 million, or 7%, in 2011 from 2010 primarily due to increases in net interest revenue, asset
management and administration fees, and trading revenue. Net interest revenue increased primarily due to higher average balances of
interest-earning assets during the year, partially offset by the effect of higher premium amortization relating to residential mortgage-
backed securities caused by higher mortgage prepayments in 2011. Asset management and administration fees increased primarily
due to an increase in mutual fund service fees relating to the Company’s Mutual Fund OneSource funds as a result of continued asset
inflows, offset by net money market mutual fund fees waivers. Trading revenue increased primarily due to higher daily average
revenue trades. Expenses excluding interest increased by $79 million, or 8%, in 2011 from 2010 primarily due to increases in
compensation and benefits and professional services expenses.
Unallocated
Other revenue – net in 2012 includes a pre-tax gain of $70 million relating to a confidential resolution of a vendor dispute in the
second quarter of 2012. Expenses excluding interest in 2010 include class action litigation and regulatory reserves relating to the
Schwab YieldPlus Fund and a charge relating to the Company’s decision to cover the net remaining losses recognized by Schwab
money market mutual funds as a result of their investments in a single structured investment vehicle that defaulted in 2008.
Subsequent Changes to Segment Information
In the first quarter of 2013, the Company realigned its reportable segments as a result of recent organizational changes. The
Institutional segment will be renamed to Advisor Services. The Retirement Plan Services, Corporate Brokerage Retirement Products
(formerly part of Retirement Business Services), and Corporate Brokerage Services business units will be reallocated to the Investor
Services segment. The Company will recast the segment information based on this realignment in the first quarter of 2013.
LIQUIDITY AND CAPITAL RESOURCES
CSC conducts substantially all of its business through its wholly-owned subsidiaries. The Company’s capital structure is designed to
provide each subsidiary with capital and liquidity to meet its operational needs and regulatory requirements.
- 28 -
THE CHARLES SCHWAB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)
CSC is a savings and loan holding company and Schwab Bank, CSC’s depository institution, is a federal savings bank. CSC is subject
to supervision and regulation by the Federal Reserve and Schwab Bank is subject to supervision and regulation by the OCC.
Liquidity
CSC
CSC’s liquidity needs arise from funding its subsidiaries’ operations, including margin and mortgage lending, and transaction
settlement, in addition to funding cash dividends, acquisitions, investments, short- and long-term debt, and managing statutory capital
requirements.
CSC’s liquidity needs are generally met through cash generated by its subsidiaries, as well as cash provided by external financing.
CSC has a universal automatic shelf registration statement (Shelf Registration Statement) on file with the SEC which enables CSC to
issue debt, equity and other securities. CSC maintains excess liquidity in the form of overnight cash deposits and short-term
investments to cover daily funding needs and to support growth in the Company’s business. Generally, CSC does not hold liquidity at
its subsidiaries in excess of amounts deemed sufficient to support the subsidiaries’ operations, including any regulatory capital
requirements. Schwab, Schwab Bank, and optionsXpress, Inc. are subject to regulatory requirements that may restrict them from
certain transactions with CSC, as further discussed below. Management believes that funds generated by the operations of CSC’s
subsidiaries will continue to be the primary funding source in meeting CSC’s liquidity needs, providing adequate liquidity to meet
Schwab Bank’s capital guidelines, and maintaining Schwab and optionsXpress, Inc.’s net capital.
While CSC is not currently subject to specific statutory capital requirements, CSC is required to serve as a source of strength for
Schwab Bank and must have the ability to provide financial assistance if Schwab Bank experiences financial distress. To manage
capital adequacy, the Company currently utilizes a target Tier 1 Leverage Ratio, as defined by the Federal Reserve, of at least 6%. At
December 31, 2012, the Company’s Tier 1 Leverage Ratio was 6.5%, Tier 1 Capital Ratio was 16.9%, and Total Capital Ratio was
17.0%.
In January and June 2012, the Company completed offerings of its Series A and Series B preferred stock under the Shelf Registration
Statement, with an aggregate liquidation preference of $885 million. CSC’s preferred stock is rated Baa2 by Moody’s Investors
Service (Moody’s), BBB+ by Standard & Poor’s Ratings Group (Standard & Poor’s), and BB+ by Fitch Ratings, Ltd (Fitch). For
further discussion of these equity offerings, see “Item 8 – Financial Statements and Supplementary Data – Notes to Consolidated
Financial Statements – 18. Stockholders’ Equity.”
In August 2012, CSC completed an exchange offer with certain eligible holders of its 4.950% Senior Notes due 2014 (Old Senior
Notes), whereby Old Senior Notes in an aggregate principal amount of $256 million were exchanged for the same aggregate principal
amount of 3.225% Senior Notes due 2022 (New Senior Notes) and cash consideration of $19 million. On December 6, 2012, CSC
issued $350 million of additional Senior Notes that mature in 2015 under the Shelf Registration Statement, which have a fixed interest
rate of 0.850% with interest payable semi-annually. Additionally, on December 21, 2012, CSC redeemed all of its remaining
outstanding Old Senior Notes of $494 million. In connection with the redemption, CSC paid the holders of the Old Senior Notes a
make-whole premium of $31 million in addition to the $494 million principal payment. For further discussion of the Senior Notes, see
“Item 8 – Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – 14. Borrowings.”
On August 31, 2012, CSC redeemed all of the fixed-to-floating rate trust preferred securities issued by Schwab Capital Trust (Trust)
of which $202 million in principal was outstanding for $207 million. The trust preferred securities were redeemed, along with the
common securities issued by the Trust and held by CSC, as a result of the concurrent redemption in whole by CSC of the Junior
Subordinated Notes held by the Trust which underlay the trust preferred securities. For further discussion of this redemption, see
“Item 8 – Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – 14. Borrowings.”
- 29 -
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 are details of CSC’s long-term debt:
Par
December 31, 2012
Senior Notes
Medium Term Notes
Outstanding
Moody’s
$ 1,306 2015 – 2022 0.850% to 4.45% fixed A2
A2
$
6.375% fixed
Interest Rate
250
Maturity
2017
Standard
& Poor’s Fitch
A A
A A
CSC has authorization from its Board of Directors to issue unsecured commercial paper notes (Commercial Paper Notes) not to
exceed $1.5 billion. Management has set a current limit for the commercial paper program of $800 million. The maturities of the
Commercial Paper Notes may vary, but are not to exceed 270 days from the date of issue. The commercial paper is not redeemable
prior to maturity and cannot be voluntarily prepaid. The proceeds of the commercial paper program are to be used for general
corporate purposes. At December 31, 2012, the amount of Commercial Paper Notes outstanding was $300 million, which is included
in accrued expenses and other liabilities in the Company’s consolidated balance sheets. The amount outstanding was repaid on
January 2, 2013. CSC’s ratings for these short-term borrowings are P1 by Moody’s, A1 by Standard & Poor’s, and F1 by Fitch.
CSC maintains an $800 million committed, unsecured credit facility with a group of 11 banks, which is scheduled to expire in
June 2013. This facility replaced a similar facility that expired in June 2012 and was unused in 2012. The funds under this facility are
available for general corporate purposes. The financial covenants under this facility require Schwab to maintain a minimum net
capital ratio, as defined, Schwab Bank to be well capitalized, as defined, and CSC to maintain a minimum level of stockholders’
equity. At December 31, 2012, the minimum level of stockholders’ equity required under this facility was $5.8 billion (CSC’s
stockholders’ equity at December 31, 2012, was $9.6 billion). Management believes that these restrictions will not have a material
effect on CSC’s ability to meet foreseeable dividend or funding requirements.
CSC also has direct access to $642 million of the $842 million uncommitted, unsecured bank credit lines discussed below, that are
primarily utilized by Schwab to manage short-term liquidity. These lines were not used by CSC during 2012.
In addition, Schwab provides CSC with a $1.0 billion credit facility maturing in December 2014. There were no funds drawn under
this facility at December 31, 2012.
Schwab
Liquidity needs relating to client trading and margin borrowing activities are met primarily through cash balances in brokerage client
accounts, which were $37.4 billion and $33.5 billion at December 31, 2012 and 2011, respectively. Management believes that
brokerage client cash balances and operating earnings will continue to be the primary sources of liquidity for Schwab.
Schwab is subject to regulatory requirements that are intended to ensure the general financial soundness and liquidity of broker-
dealers. These regulations prohibit Schwab from repaying subordinated borrowings from CSC, paying cash dividends, or making
unsecured advances or loans to its parent company or employees if such payment would result in a net capital amount of less than 5%
of aggregate debit balances or less than 120% of its minimum dollar requirement of $250,000. At December 31, 2012, Schwab’s net
capital was $1.4 billion (9% of aggregate debit balances), which was $1.1 billion in excess of its minimum required net capital and
$623 million in excess of 5% of aggregate debit balances.
Schwab is also subject to Rule 15c3-3 under the Securities Exchange Act of 1934 and other applicable regulations that require it to
maintain cash or qualified securities in a segregated reserve account for the exclusive benefit of clients. These funds are included in
cash and investments segregated and on deposit for regulatory purposes in the Company’s consolidated balance sheets and are not
available as a general source of liquidity.
Most of Schwab’s assets are readily convertible to cash, consisting primarily of short-term (i.e., less than 150 days) investment-grade,
interest-earning investments (the majority of which are segregated for the exclusive benefit of clients pursuant to regulatory
requirements), receivables from brokerage clients, and receivables from brokers, dealers, and clearing
- 30 -
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)
organizations. Client margin loans are demand loan obligations secured by readily marketable securities. Receivables from and
payables to brokers, dealers, and clearing organizations primarily represent current open transactions, which usually settle, or can be
closed out, within a few business days.
Schwab has a finance lease obligation related to an office building and land under a 20-year lease. The remaining finance lease
obligation of $95 million at December 31, 2012, is being reduced by a portion of the lease payments over the remaining lease term of
12 years.
To manage short-term liquidity, Schwab maintains uncommitted, unsecured bank credit lines with a group of six banks totaling
$842 million at December 31, 2012. The need for short-term borrowings arises primarily from timing differences between cash flow
requirements, scheduled liquidation of interest-earnings investments, and movements of cash to meet regulatory brokerage client cash
segregation requirements. Schwab used such borrowings for three days in 2012, with average daily amounts borrowed of $62 million.
There were no borrowings outstanding under these lines at December 31, 2012.
To partially satisfy the margin requirement of client option transactions with the Options Clearing Corporation, Schwab has
unsecured standby letter of credit agreements (LOCs) with five banks in favor of the Options Clearing Corporation aggregating
$325 million at December 31, 2012. In connection with its securities lending activities, Schwab is required to provide collateral to
certain brokerage clients. Schwab satisfies the collateral requirements by arranging LOCs, in favor of these brokerage clients, which
are issued by multiple banks. At December 31, 2012, the aggregate face amount of these LOCs totaled $74 million. There were no
funds drawn under any of these LOCs during 2012.
To manage Schwab’s regulatory capital requirement, CSC provides Schwab with a $1.4 billion subordinated revolving credit facility,
which is scheduled to expire in March 2014. The amount outstanding under this facility at December 31, 2012, was $315 million.
Borrowings under this subordinated lending arrangement qualify as regulatory capital for Schwab.
In addition, CSC provides Schwab with a $2.5 billion credit facility, which is scheduled to expire in December 2014. Borrowings
under this facility do not qualify as regulatory capital for Schwab. There were no funds drawn under this facility at December 31,
2012.
Schwab Bank
Schwab Bank’s liquidity needs are met through deposits from banking clients and equity capital.
The excess cash held in certain Schwab brokerage client accounts is swept into deposit accounts at Schwab Bank. At December 31,
2012, these balances totaled $56.9 billion. Beginning in the fourth quarter of 2012, the excess cash held in certain optionsXpress, Inc.
brokerage accounts was swept into deposit accounts at Schwab Bank, which totaled $1.3 billion at December 31, 2012.
Schwab Bank is subject to regulatory requirements that restrict and govern the terms of affiliate transactions, such as extensions of
credit and repayment of loans between Schwab Bank and CSC or CSC’s other subsidiaries. In addition, Schwab Bank is required to
provide notice to and may be required to obtain approval of the OCC and the Federal Reserve to declare dividends to CSC.
- 31 -
THE CHARLES SCHWAB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)
Schwab Bank is required to maintain capital levels as specified in federal banking laws and regulations. Failure to meet the minimum
levels could result in certain mandatory, and possibly additional discretionary actions by the regulators that, if undertaken, could have
a direct material effect on Schwab Bank. Based on its regulatory capital ratios at December 31, 2012, Schwab Bank is considered well
capitalized. Schwab Bank’s regulatory capital and ratios at December 31, 2012, are as follows:
Tier 1 Risk-Based Capital
Total Risk-Based Capital
Tier 1 Leverage
Tangible Equity
N/A Not applicable.
Actual
Amount
$ 5,707
$ 5,760
$ 5,707
$ 5,707
Minimum Capital
Requirement
Minimum to be
Well Capitalized
Ratio
Amount
Ratio
Amount
Ratio
20.0% $ 1,139
20.2% $ 2,279
6.7% $ 3,412
6.7% $ 1,706
4.0% $ 1,709
6.0%
8.0% $ 2,848 10.0%
4.0% $ 4,266
5.0%
2.0%
N/A
In the third quarter of 2012, management lowered its target Tier 1 Leverage Ratio for Schwab Bank from at least 7.5% to at least
6.25%. This change reflects Schwab Bank’s approach to lending and investing, which results in a lower risk profile relative to the
industry and risk-based capital ratios significantly in excess of well capitalized levels. This allows greater flexibility in managing
capital resources to either support Schwab Bank’s balance sheet growth or return capital to CSC.
Schwab Bank has access to traditional funding sources such as deposits, federal funds purchased, and repurchase agreements.
Additionally, Schwab Bank has access to short-term funding through the Federal Reserve Bank (FRB) discount window. Amounts
available under the FRB discount window are dependent on the fair value of certain of Schwab Bank’s securities available for sale
and/or securities held to maturity that are pledged as collateral. Schwab Bank maintains policies and procedures necessary to access
this funding and tests discount window borrowing procedures annually. At December 31, 2012, $2.8 billion was available under this
arrangement. There were no funds drawn under this arrangement during 2012.
Schwab Bank maintains a credit facility with the Federal Home Loan Bank System. Amounts available under this facility are
dependent on the amount of Schwab Bank’s residential real estate mortgages and HELOCs that are pledged as collateral. At
December 31, 2012, $5.5 billion was available under this facility. There were no funds drawn under this facility during 2012.
CSC provides Schwab Bank with a $100 million short-term credit facility, which is scheduled to expire in December 2014.
Borrowings under this facility do not qualify as regulatory capital for Schwab Bank. There were no funds drawn under these facilities
during 2012.
optionsXpress
Liquidity needs relating to client trading and margin borrowing activities are met primarily through cash balances in brokerage client
accounts, which were $1.1 billion at December 31, 2012. Management believes that brokerage client cash balances and operating
earnings will continue to be the primary sources of liquidity for optionsXpress, Inc.
optionsXpress, Inc., a wholly-owned subsidiary of optionsXpress, is a registered broker-dealer and is subject to regulatory
requirements that are intended to ensure the general financial soundness and liquidity of broker-dealers. These regulations prohibit
optionsXpress, Inc. from paying cash dividends or making unsecured advances or loans to its parent company or employees if such
payment would result in a net capital amount of less than 5% of aggregate debit balances or less than 120% of its minimum dollar
requirement of $250,000. At December 31, 2012, optionsXpress Inc.’s net capital was $87 million (40% of aggregate debit balances),
which was $82 million in excess of its minimum required net capital and $76 million in excess of 5% of aggregate debit balances.
optionsXpress, Inc. is also subject to Commodity Futures Trading Commission Regulation 1.17 (Reg. 1.17) under the Commodity
Exchange Act, which also requires the maintenance of minimum net capital. optionsXpress, Inc. as a futures commission merchant, is
required to maintain minimum net capital equal to the greater of its net capital requirement under
- 32 -
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)
Reg. 1.17 ($1 million), or the sum of 8% of the total risk margin requirements for all positions carried in customer accounts and 8%
of the total risk margin requirements for all positions carried in non-customer accounts (as defined in Reg. 1.17).
Additionally, optionsXpress, Inc. is subject to Rule 15c3-3 under the Securities Exchange Act of 1934 and other applicable
regulations that require it to maintain cash or qualified securities in a segregated reserve account for the exclusive benefit of clients.
These funds are included in cash and investments segregated and on deposit for regulatory purposes in the Company’s consolidated
balance sheets and are not available as a general source of liquidity.
CSC provides optionsXpress, Inc. with a $200 million credit facility, which is scheduled to expire in December 2014. There were no
borrowings outstanding under this facility at December 31, 2012. Borrowings under this facility do not qualify as regulatory capital
for optionsXpress, Inc.
optionsXpress has a term loan with CSC, of which $89 million was outstanding at December 31, 2012, and it matures in
December 2017.
Capital Resources
The Company monitors both the relative composition and absolute level of its capital structure. Management is focused on limiting
the Company’s use of capital and currently targets a long-term debt to total financial capital ratio not to exceed 30%. The Company’s
total financial capital (long-term debt plus stockholders’ equity) at December 31, 2012, was $11.2 billion, up $1.5 billion, or 16%,
from December 31, 2011.
The Company’s cash position (reported as cash and cash equivalents on its consolidated balance sheets) and cash flows are affected
by changes in brokerage client cash balances and the associated amounts required to be segregated under regulatory guidelines.
Timing differences between cash and investments actually segregated on a given date and the amount required to be segregated for
that date may arise in the ordinary course of business and are addressed by the Company in accordance with applicable regulations.
Other factors which affect the Company’s cash position and cash flows include investment activity in security portfolios, levels of
capital expenditures, acquisition and divestiture activity, banking client deposit activity, brokerage and banking client loan activity,
financing activity in long-term debt, payments of dividends, and repurchases and issuances of CSC’s preferred and common stock.
The combination of these factors can cause significant fluctuations in the cash position during specific time periods.
Long-term Debt
At December 31, 2012, the Company had long-term debt of $1.6 billion, or 15% of total financial capital, that bears interest at a
weighted-average rate of 3.85%. At December 31, 2011, the Company had long-term debt of $2.0 billion, or 21% of total financial
capital. For further discussion of the Company’s long-term debt, see “Liquidity and Capital Resources – Liquidity” and “Item 8 –
Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – 14. Borrowings.”
In addition, the Company repaid $5 million of other long-term debt in 2012. The Company repaid $116 million of long-term debt in
2011, which included the pay off of long-term debt acquired from optionsXpress of $110 million subsequent to the acquisition date.
Capital Expenditures
The Company’s capital expenditures were $138 million (3% of net revenues) and $190 million (4% of net revenues) in 2012 and
2011, respectively. Capital expenditures in 2012 and 2011 were primarily for capitalized costs for developing internal-use software,
software and equipment relating to the Company’s information technology systems, and leasehold improvements. Capitalized costs
for developing internal-use software were $61 million and $57 million in 2012 and 2011, respectively.
Management currently anticipates that 2013 capital expenditures will be approximately 85% higher than 2012 primarily due to
increased spending on buildings, leasehold improvements, and software and equipment relating to the Company’s information
- 33 -
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)
technology systems. A majority of this increase is planned to be spent on buildings and leasehold improvements related to the
consolidation and relocation of the Company’s existing office campus in Denver, Colorado. As in recent years, the Company adjusts
its capital expenditures periodically as business conditions change. Management believes that funds generated by its operations will
continue to be the primary funding source of its capital expenditures.
Equity Offerings
In January 2012, the Company issued and sold 400,000 shares of fixed-to-floating rate (currently fixed at 7.000%) non-cumulative
perpetual preferred stock, Series A, with a liquidation preference of $1,000 per share for net proceeds of $394 million (Series A
Preferred Stock). In June 2012, the Company issued and sold 485,000 shares of 6.00% non-cumulative perpetual preferred stock,
Series B, with a liquidation preference of $1,000 per share for net proceeds of $469 million (Series B Preferred Stock). Net proceeds
received from these sales were used for general corporate purposes. For further discussion of these equity offerings, see “Item 8 –
Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – 18. Stockholders’ Equity.”
Dividends
CSC paid common stock cash dividends of $308 million ($0.24 per share) and $295 million ($0.24 per share) in 2012 and 2011,
respectively. Since the initial dividend in 1989, CSC has paid 95 consecutive quarterly dividends and has increased the quarterly
dividend rate 19 times, including a 20% increase in the third quarter of 2008. Since 1989, dividends have increased by a 23%
compounded annual growth rate, excluding the special cash dividend of $1.00 per common share in 2007. While the payment and
amount of dividends are at the discretion of the Board of Directors, subject to certain regulatory and other restrictions, the Company
currently targets its cash dividend at approximately 20% to 30% of net income.
CSC paid Series A Preferred Stock cash dividends of $14 million ($36.17 per share) and Series B Preferred Stock cash dividends of
$14 million ($29.17 per share) in 2012. On December 12, 2012, CSC declared a semi-annual dividend of $35.00 per share of Series A
Preferred Stock that is payable February 1, 2013, to stockholders of record on January 17, 2013. Under the respective terms of the
Series A Preferred Stock and Series B Preferred Stock, the Company’s ability to pay dividends on, make distributions with respect to,
or to repurchase, redeem or acquire its common stock or any preferred stock ranking on parity with or junior to the relevant series of
preferred stock, is subject to restrictions in the event that the Company does not declare and either pay or set aside a sum sufficient for
payment of dividends on the relevant series of preferred stock for the immediately preceding dividend period. For further discussion
of the Series A and Series B Preferred Stock offerings, see “Item 8 – Financial Statements and Supplementary Data – Notes to
Consolidated Financial Statements – 18. Stockholders’ Equity.”
Share Repurchases
There were no repurchases of CSC’s common stock in 2012 or 2011. As of December 31, 2012, CSC had remaining authority from
the Board of Directors to repurchase up to $596 million of its common stock, which does not have an expiration date.
Business Acquisitions
On December 14, 2012, the Company acquired ThomasPartners, Inc., a growth and dividend income-focused asset management firm,
for $85 million in cash.
On September 1, 2011, the Company acquired optionsXpress, an online brokerage firm primarily focused on equity option securities
and futures, for total consideration of $714 million. Under the terms of the merger agreement, optionsXpress stockholders received
1.02 shares of the Company’s common stock for each share of optionsXpress stock. As a result, the Company issued 59 million
shares of the Company’s common stock valued at $710 million, based on the closing price of the Company’s common stock on
September 1, 2011. The Company also assumed optionsXpress’ stock-based compensation awards valued at $4 million.
- 34 -
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)
For more information on these acquisitions, see “Item 8 – Financial Statements and Supplementary Data – Notes to Consolidated
Financial Statements – 3. Business Acquisitions.”
Off-Balance Sheet Arrangements
The Company enters into various off-balance sheet arrangements in the ordinary course of business, primarily to meet the needs of its
clients. These arrangements include firm commitments to extend credit. Additionally, the Company enters into guarantees and other
similar arrangements as part of transactions in the ordinary course of business. For information on each of these arrangements, see
“Item 8 – Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – 15. Commitments and
Contingencies.”
Contractual Obligations
The Company’s principal contractual obligations as of December 31, 2012, are shown in the following table. Management believes
that funds generated by its continuing operations, as well as cash provided by external financing, will continue to be the primary
funding sources in meeting these obligations. Excluded from this table are liabilities recorded on the consolidated balance sheet that
are generally short-term in nature (e.g., payables to brokers, dealers, and clearing organizations) or without contractual payment terms
(e.g., deposits from banking clients, payables to brokerage clients, and deferred compensation).
Less than
1 Year
1-3
Years
3-5
Years
More than
5 Years
Total
Credit-related financial instruments
Long-term debt
(2)
Leases
(3)
Purchase obligations
(4)
(1)
Total
$ 1,395 $
1,061 $ 2,975 $ 6,412
1,977
1,091
512
166
306
1
$ 1,703 $ 1,735 $ 1,536 $ 4,233 $ 9,207
981 $
467
148
139
361
107
7
58
91
159
(1)
(2)
(3)
(4)
Represents Schwab Bank’s commitments to extend credit to banking clients and purchase mortgage loans.
Includes estimated future interest payments through 2017 for Medium-Term Notes and through 2022 for Senior Notes. Amounts
exclude maturities under a finance lease obligation and unamortized discounts and premiums.
Represents minimum rental commitments, net of sublease commitments, and includes facilities under the Company’s past
restructuring initiatives and rental commitments under a finance lease obligation.
Consists of purchase obligations for services such as advertising and marketing, telecommunications, professional services, and
hardware- and software-related agreements. Includes purchase obligations that can be canceled by the Company without penalty.
RISK MANAGEMENT
Overview
The Company’s business activities expose it to a variety of risks, including operational, credit, market, liquidity, and reputational risk.
Identification and management of these risks are essential to the success and financial soundness of the Company.
The Board of Directors has approved an enterprise risk management framework that is commensurate with the size, risk profile,
complexity, and continuing growth of the Company. Senior management takes an active role in the Company’s risk management
process and has developed policies and procedures under which specific business and control units are responsible for identifying,
measuring, and controlling various risks. The Global Risk Committee, which is comprised of senior managers of major business and
control functions, is responsible for reviewing and monitoring the Company’s risk exposures and leading the continued development
of the Company’s risk management policies and practices.
- 35 -
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)
Functional risk sub-committees focusing on specific areas of risk report into the Global Risk Committee. These sub-committees
include the:
• Corporate Asset-Liability Management and Pricing Committee, which focuses on the Company’s liquidity, capital
resources, interest rate risk, and investments;
• Credit and Market Risk Oversight Committee, which focuses on credit exposures resulting from client borrowing activity
(e.g., margin lending activities and loans to banking clients), investing activities of certain of the Company’s proprietary
funds, corporate credit and investment activity, and market risk resulting from the Company taking positions in certain
securities to facilitate client trading activity;
• New Products & Services Subcommittee, which reviews the risks associated with the launch of new product classes,
services and offers;
• Operational Risk Oversight Committee, which provides oversight of and approves operational risk management policies,
risk tolerance levels, and operational risk governance processes, and includes the following subcommittees:
•
•
Information Security and Privacy Committee, which oversees information security and privacy policies,
procedures and controls; and the
Model Governance Committee, which provides oversight of model risk throughout the Company.
The Global Risk Committee reports regularly to the Audit and Risk Committees of the Board of Directors, which review major risk
exposures and the steps management has taken to monitor and control such exposures.
The Company’s Disclosure Committee is responsible for monitoring and evaluating the effectiveness of the Company’s (a) disclosure
controls and procedures and (b) internal control over financial reporting as of the end of each fiscal quarter. The Disclosure
Committee reports on this evaluation to the CEO and CFO prior to their certification required by Sections 302 and 906 of the
Sarbanes Oxley Act of 2002.
The Company’s compliance, finance, internal audit, legal, and corporate risk management departments assist management and the
various risk committees in evaluating, testing, and monitoring the Company’s risk management.
Risk is inherent in the Company’s business. Consequently, despite the Company’s efforts to identify areas of risk and implement risk
management policies and procedures, there can be no assurance that the Company will not suffer unexpected losses due to operational
or other risks. The following discussion highlights the Company’s policies and procedures for identification, assessment, and
management of the principal areas of risk in its operations.
Operational Risk
Operational risk is the potential for loss due to inadequate or failed internal processes, people, and systems or from external events
and relationships impacting CSC and/or any of its key business partners and vendors. Operational risk includes fiduciary, legal and
compliance risk, and each are also described in detail below.
The Company’s operations are highly dependent on the integrity of its technology systems and the Company’s success depends, in
part, on its ability to make timely enhancements and additions to its technology in anticipation of evolving client needs. To the extent
the Company experiences system interruptions, errors or downtime (which could result from a variety of causes, including changes in
client use patterns, technological failure, changes to its systems, linkages with third-party systems, and power failures), the
Company’s business and operations could be significantly negatively impacted. To minimize business interruptions, Schwab has two
data centers intended, in part, to further improve the recovery of business processing in the event of an emergency. The Company is
committed to an ongoing process of upgrading, enhancing, and testing its technology systems. This effort is focused on meeting client
needs, meeting market and regulatory changes, and deploying standardized technology platforms.
Operational risk also includes the risk of human error, employee misconduct, external fraud, computer viruses, distributed denial of
service attacks, terrorist attacks, and natural disaster. Employee misconduct could include fraud and misappropriation of client or
Company assets, improper use or disclosure of confidential client or Company information, and unauthorized activities, such as
transactions exceeding acceptable risks or authorized limits. External fraud includes
- 36 -
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)
misappropriation of client or Company assets by third parties, including through unauthorized access to Company systems and data
and client accounts. The frequency and sophistication of such fraud attempts continue to increase.
Operational risk is mitigated through a system of internal controls and risk management practices that are designed to keep
operational risk and operational losses at levels appropriate to the inherent risk of the business in which the Company operates. The
Company has specific policies and procedures to identify and manage operational risk, and uses periodic risk self-assessments and
internal audit reviews to evaluate the effectiveness of these internal controls. The Company maintains backup and recovery functions,
including facilities for backup and communications, and conducts periodic testing of disaster recovery plans. The Company also
maintains policies and procedures and technology to protect against fraud and unauthorized access to systems and data.
Despite the Company’s risk management efforts, it is not always possible to deter or prevent technological or operational failure, or
fraud or other misconduct, and the precautions taken by the Company may not be effective in all cases. The Company may be subject
to litigation, losses, and regulatory actions in such cases, and may be required to expend significant additional resources to remediate
vulnerabilities or other exposures.
The Company also faces operational risk when it employs the services of various external vendors, including domestic and
international outsourcing of certain technology, processing, servicing, and support functions. The Company manages its exposure to
external vendor risk through contractual provisions, control standards, and ongoing monitoring of vendor performance. The Company
maintains policies and procedures regarding the standard of care expected with Company data, whether the data is internal company
information, employee information, or non-public client information. The Company clearly defines for employees, contractors, and
vendors the Company’s expected standards of care for confidential data. Regular training is provided by the Company in regard to
data security.
The Company is actively engaged in the research and development of new technologies, services, and products. The Company
endeavors to protect its research and development efforts, and its brands, through the use of copyrights, patents, trade secrets, and
contracts.
Fiduciary Risk
Fiduciary risk is the potential for financial or reputational loss through breach of fiduciary duties to a client. Fiduciary activities
include, but are not limited to, individual and institutional trust, investment management, custody, and cash and securities processing.
The Company attempts to manage this risk by establishing procedures to ensure that obligations to clients are discharged faithfully
and in compliance with applicable legal and regulatory requirements. Business units have the primary responsibility for adherence to
the procedures applicable to their business. Guidance and control are provided through the creation, approval, and ongoing review of
applicable policies by business units and various risk committees.
Legal and Compliance Risk
The Company faces significant legal and compliance risk in its business, and the volume of litigation and regulatory proceedings
against financial services firms and the amount of damages claimed have been increasing. Among other things, these risks relate to
the suitability of client investments, conflicts of interest, disclosure obligations and performance expectations for Company products
and services, supervision of employees, and the adequacy of the Company’s controls. Claims against the Company may increase due
to a variety of factors, such as if clients suffer losses during a period of deteriorating equity market conditions, as the Company
increases the level of advice it provides to clients, and as the Company enhances the services it provides to IAs. In addition, the
Company and its affiliates are subject to extensive regulation by federal, state and foreign regulatory authorities, and SROs, and such
regulation is becoming increasingly extensive and complex.
The Company attempts to manage legal and compliance risk through policies and procedures reasonably designed to avoid litigation
claims and prevent or detect violations of applicable legal and regulatory requirements. These procedures address issues such as
business conduct and ethics, sales and trading practices, marketing and communications, extension of credit,
- 37 -
THE CHARLES SCHWAB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)
client funds and securities, books and records, anti-money laundering, client privacy, employment policies, and contracts
management. Despite the Company’s efforts to maintain an effective compliance program and internal controls, legal breaches and
rule violations could result in reputational harm, significant losses and disciplinary sanctions, including limitations on the Company’s
business activities.
Credit Risk
Credit risk is the potential for loss due to a borrower, counterparty, or issuer failing to perform its contractual obligations. The
Company’s direct exposure to credit risk mainly results from margin lending activities, securities lending activities, mortgage lending
activities, its role as a counterparty in financial contracts and other investing activities. To manage the risks of such losses, the
Company has established policies and procedures which include: establishing and reviewing credit limits, monitoring of credit limits
and quality of counterparties, and adjusting margin requirements for certain securities. Collateral arrangements relating to margin
loans, securities lending agreements, and resale agreements include provisions that require additional collateral in the event that
market fluctuations result in declines in the value of collateral received. Additionally, for margin loan and securities lending
agreements, collateral arrangements require that the fair value of such collateral exceeds the amounts loaned.
The Company’s credit risk exposure related to loans to banking clients is actively managed through individual and portfolio reviews
performed by management. Management regularly reviews asset quality including concentrations, delinquencies, nonaccrual loans,
charge-offs, and recoveries. All are factors in the determination of an appropriate allowance for loan losses, which is reviewed
quarterly by management. The Company’s mortgage loan portfolios primarily include First Mortgages of $6.5 billion and HELOCs of
$3.3 billion at December 31, 2012.
The Company’s First Mortgage portfolio underwriting requirements are generally consistent with the underwriting requirements in
the secondary market for loan portfolios. The Company’s underwriting guidelines include maximum loan-to-value (LTV) ratios, cash
out limits, and minimum Fair Isaac Corporation (FICO) credit scores. The specific guidelines are dependent on the individual
characteristics of a loan (for example, whether the property is a primary or secondary residence, whether the loan is for investment
property, whether the loan is for an initial purchase of a home or refinance of an existing home, and whether the loan is conforming or
jumbo). These credit underwriting standards have limited the exposure to the types of loans that experienced high foreclosures and
loss rates elsewhere in the industry in recent years. There have been no significant changes to the LTV ratio or FICO credit score
underwriting guidelines related to the Company’s First Mortgage or HELOC portfolios during 2012. The Company does not offer
loans that allow for negative amortization and does not originate or purchase subprime loans (generally defined as extensions of credit
to borrowers with a FICO credit score of less than 620 at origination), unless the borrower has compensating credit factors. At
December 31, 2012, approximately 1% of both the First Mortgage and HELOC portfolios consisted of loans to borrowers with
updated FICO credit scores of less than 620.
At December 31, 2012, the weighted-average originated LTV ratios were 60% and 59% for the First Mortgage and HELOC
portfolios, respectively. The computation of the origination LTV ratio for a HELOC includes any first lien mortgage outstanding on
the same property at the time of origination. At December 31, 2012, 22% of HELOCs ($725 million of the HELOC portfolio) were in
a first lien position. The weighted-average originated FICO credit score was 768 for both the First Mortgage and HELOC portfolios.
The Company monitors the estimated current LTV ratios of its First Mortgage and HELOC portfolios on an ongoing basis. At
December 31, 2012, the weighted-average estimated current LTV ratios were 62% and 72% for the First Mortgage and HELOC
portfolios, respectively. The computation of the estimated current LTV ratio for a HELOC includes any first lien mortgage
outstanding on the same property at the time of the HELOC’s origination. The Company estimates the current LTV ratio for each loan
by reference to a home price appreciation index. The Company also monitors updated borrower FICO scores, delinquency trends, and
verified liquid assets held by individual borrowers. At December 31, 2012, the weighted-average updated FICO scores were 768 and
767 for the First Mortgage and HELOC portfolios, respectively.
A portion of the Company’s HELOC portfolio is secured by second liens on the associated properties. Second lien mortgage loans
possess a higher degree of credit risk given the subordination to the first lien holder in the event of default. At
- 38 -
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)
December 31, 2012, $2.6 billion, or 78%, of the HELOC portfolio was in a second lien position. In addition to the credit monitoring
activities described above, the Company also monitors credit risk on second lien HELOC loans by reviewing the delinquency status
of the first lien loan on the associated property, when such status is available. The portion of the Company’s second lien HELOC
portfolio for which the Company either holds the first lien or has the ability to monitor the delinquency status of the related first
mortgage was $477 million, or 15%, of the HELOC portfolio at December 31, 2012. Additionally, at December 31, 2012,
approximately 35% of the HELOC borrowers that had a balance only paid the minimum amount due.
For more information on the Company’s credit quality indicators relating to its First Mortgage and HELOC portfolios, including
delinquency characteristics, borrower FICO scores at origination, updated borrower FICO scores, LTV ratios at origination, and
estimated current LTV ratios, see “Item 8 – Financial Statements and Supplementary Data – Notes to Consolidated Financial
Statements – 7. Loans to Banking Clients and Related Allowance for Loan Losses.”
The following table presents certain of the Company’s loan quality metrics as a percentage of total outstanding loans:
December 31,
Loan delinquencies
Nonaccrual loans
Allowance for loan losses
(1)
2012
0.77%
0.45%
0.52%
2011
0.81%
0.53%
0.55%
(1)
Loan delinquencies are defined as loans that are 30 days or more past due.
The Company has exposure to credit risk associated with its securities available for sale and securities held to maturity portfolios,
whose fair values totaled $46.1 billion and $18.7 billion at December 31, 2012, respectively. These portfolios include U.S. agency
and non-agency mortgage-backed securities, asset-backed securities, corporate debt securities, certificates of deposit, U.S. agency
notes, commercial paper, and other securities. U.S. agency mortgage-backed securities do not have explicit credit ratings, however,
management considers these to be of the highest credit quality and rating given the guarantee of principal and interest by the U.S.
government-sponsored enterprises. Included in non-agency residential mortgage-backed securities are securities collateralized by
loans that are considered to be “Prime” (defined by the Company as loans to borrowers with a FICO credit score of 620 or higher at
origination), and “Alt-A” (defined by the Company as Prime loans with reduced documentation at origination).
Residential mortgage-backed securities, particularly Alt-A securities, experienced continued credit deterioration in 2012, including
increased payment delinquency rates and losses on foreclosures of underlying mortgages. For a discussion of the impact of current
market conditions on residential mortgage-backed securities, see “Current Market and Regulatory Environment and Other
Developments.” At December 31, 2012, the amortized cost of non-agency residential mortgage-backed securities represented 2% of
the total mortgage-backed securities portfolio. These securities were originated between 2003 and 2007. At December 31, 2012, all of
the corporate debt securities and non-mortgage asset-backed securities were rated investment grade (defined as a rating equivalent to
a Moody’s rating of “Baa” or higher, or a Standard & Poor’s rating of “BBB-” or higher).
Schwab performs clearing services for all securities transactions in its client accounts. Schwab has exposure to credit risk due to its
obligation to settle transactions with clearing corporations, mutual funds, and other financial institutions even if Schwab’s client or a
counterparty fails to meet its obligations to Schwab.
The Company sponsors a number of proprietary money market mutual funds and other proprietary funds. Although the Company has
no obligation to do so, the Company may decide for competitive reasons to provide credit, liquidity or other support to its funds in the
event of significant declines in valuation of fund holdings or significant redemption activity that exceeds available liquidity. Such
support could cause the Company to take significant charges and could reduce the Company’s liquidity. If the Company chose not to
provide credit, liquidity or other support in such a situation, the Company could suffer reputational damage and its business could be
adversely affected.
- 39 -
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)
Concentration Risk
The Company has exposure to concentration risk when holding large positions in financial instruments collateralized by assets with
similar economic characteristics or in securities of a single issuer or industry.
The fair value of the Company’s investments in mortgage-backed securities totaled $39.5 billion at December 31, 2012. Of these,
$38.8 billion were issued by U.S. agencies and $733 million were issued by private entities (non-agency securities). The U.S. agency
securities are included in securities available for sale and securities held to maturity and the non-agency securities are included in
securities available for sale. Included in non-agency residential mortgage-backed securities are securities collateralized by Alt-A
loans. At December 31, 2012, the amortized cost and fair value of Alt-A mortgage-backed securities were $308 million and
$269 million, respectively.
The Company’s investments in corporate debt securities and commercial paper totaled $8.0 billion at December 31, 2012, with the
majority issued by institutions in the financial services industry. These securities are included in securities available for sale,
securities held to maturity, cash and cash equivalents, and other securities owned in the Company’s consolidated balance sheets.
The Company’s loans to banking clients include $6.0 billion of adjustable rate first lien residential real estate mortgage loans at
December 31, 2012. The Company’s adjustable rate mortgages have initial fixed interest rates for three to ten years and interest rates
that adjust annually thereafter. Approximately 50% of these mortgages consisted of loans with interest-only payment terms. The
interest rates on approximately 65% of these interest-only loans are not scheduled to reset for three or more years. The Company’s
mortgage loans do not include interest terms described as temporary introductory rates below current market rates. At December 31,
2012, 45% of the residential real estate mortgages and 50% of the HELOC balances were secured by properties which are located in
California.
The Company’s HELOC product has a 30-year loan term with an initial draw period of 10 years from the date of origination. After
the initial draw period, the balance outstanding at such time is converted to a 20-year amortizing loan. The interest rate during the
initial draw period and the 20-year amortizing period is a floating rate based on the prime rate plus a margin. The following table
presents when current outstanding HELOCs will convert to amortizing loans:
December 31, 2012
Within 1 year
> 1 year – 3 years
> 3 years – 5 years
> 5 years
Total
Balance
$
152
598
436
2,101
$ 3,287
As of December 31, 2012, all of the Company’s HELOC loans are within the 10-year initial draw period, and as such, none of the
HELOCs have converted to an amortizing loan.
The Company also has exposure to concentration risk from its margin and securities lending activities collateralized by securities of a
single issuer or industry. This concentration risk is mitigated by collateral arrangements that require the fair value of such collateral
exceeds the amounts loaned.
The Company has indirect exposure to U.S. Government and agency securities held as collateral to secure its resale agreements. The
Company’s primary credit exposure on these resale transactions is with its counterparty. The Company would have exposure to the
U.S. Government and agency securities only in the event of the counterparty’s default on the resale agreements. The fair value of U.S.
Government and agency securities held as collateral for resale agreements totaled $19.7 billion at December 31, 2012.
- 40 -
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)
European Holdings
The Company has exposure to non-sovereign financial and non-financial institutions in Europe. The following table shows the
balances of this exposure by each country in Europe in which the issuer or counterparty is domiciled. The Company has no direct
exposure to sovereign governments in Europe. The Company does not have unfunded commitments to counterparties in Europe, nor
does it have exposure as a result of credit default protection purchased or sold separately as of December 31, 2012.
The determination of the domicile of exposure varies by the type of investment. For time deposits and certificates of deposit, the
exposure is grouped in the country in which the financial institution is chartered under the regulatory framework of the European
country. For asset-backed commercial paper, the exposure is grouped by the country of the sponsoring bank that provides the credit
and liquidity support for such instruments. For corporate debt securities, the exposure is grouped by the country in which the issuer is
domiciled. In situations in which the Company invests in a corporate debt security of a U.S. subsidiary of a European parent
company, such holdings will be attributable to the European country only if significant reliance is placed on the European parent
company for credit support underlying the security. For substantially all of the holdings listed below, the issuers or counterparties
were financial institutions. All of the Company’s resale agreements, which are included in investments segregated and on deposit for
regulatory purposes, are collateralized by U.S. government securities. Additionally, the Company’s securities lending activities are
collateralized by cash. Therefore, the Company’s resale agreements and securities lending activities are not included in the table
below even if the counterparty is a European institution.
Cash equivalents:
Time deposits
Commercial paper
Cash and investments segregated and
Denmark France Germany Italy Netherlands Norway Sweden Switzerland
(1)
United
Kingdom Total
Fair Value as of December 31, 2012
$
— $ 500 $ — $ — $
—
— 100
45
— $ — $ — $
— — —
— $ 200 $ 700
245
100
—
on deposit for regulatory purposes:
Trust deposits
Securities available for sale:
Certificates of deposit
Corporate debt securities
Commercial paper
Securities held to maturity:
Corporate debt securities
Total fair value
Total amortized cost
Maturities:
Overnight
1 day – < 6 months
6 months – < 1 year
1 year – 2 years
> 2 years
Total fair value
— —
400 —
— — —
— —
400
— 100
213 —
— 100
300 —
— —
— —
200 1,201
100
101
193 —
— — —
802 1,100 3,803
814
307
—
500
400
—
— —
213 $ 745 $
212 $ 745 $
— —
700 $100 $
700 $100 $
— — —
293 $ 200 $1,302 $
292 $ 200 $1,300 $
100 —
100
902 $ 2,107 $6,562
900 $ 2,103 $6,552
— $ 500 $
113 245
100 —
— —
— —
213 $ 745 $
400 $ — $
300 100
— —
— —
— —
700 $100 $
— $ — $ — $
200
70
100
501
123 —
100
601
100
— — —
293 $ 200 $1,302 $
— $ 200 $1,100
225 1,201 2,554
298 1,523
501
304 1,281
176
104
104
—
902 $ 2,107 $6,562
$
$
$
$
(1)
The exposures in Denmark are also backed by the full faith and credit of the Danish government.
- 41 -
THE CHARLES SCHWAB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)
In addition to the direct holdings of European companies listed above, the Company also has indirect exposure to Europe through its
investments in Schwab sponsored money market funds (collectively, the Funds) resulting from clearing activities. At December 31,
2012, the Company had $329 million in investments in these Funds. Certain of the Funds’ positions include certificates of deposits,
time deposits, commercial paper and corporate debt securities issued by counterparties in Europe.
Management mitigates exposure to European holdings by employing a separate team of credit analysts that evaluate each issuer,
counterparty, and country. Management monitors its exposure to European issuers by 1) performing risk assessments of the foreign
countries, which include evaluating the size of the country and economy, currency trends, political landscape and the countries’
regulatory environment and developments, 2) performing ad hoc stress tests that evaluate the impact of sovereign governments’ debt
write-downs on the issuers and counterparties to our investments, 3) reviewing publicly available stress tests that are published by
various regulators in the European market, 4) establishing credit and maturity limits by issuer, and 5) monitoring aggregate exposures
by country.
Market Risk
Market risk is the potential for changes in revenue or the value of financial instruments held by the Company as a result of
fluctuations in interest rates, equity prices or market conditions. For discussion of the Company’s market risk, see “Item 7A –
Quantitative and Qualitative Disclosures About Market Risk.”
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company uses fair value measurements to record certain financial assets and liabilities at fair value, and to determine fair value
disclosures. Assets are measured at fair value using quoted prices or market-based information and accordingly are classified as Level
1 or Level 2 measurements in accordance with the fair value hierarchy described in fair value measurement accounting guidance.
Liabilities recorded at fair value were not material at December 31, 2012 or 2011. See “Item 8 – Financial Statements and
Supplementary Data – Notes to Consolidated Financial Statements – 2. Summary of Significant Accounting Policies and 17. Fair
Values of Assets and Liabilities” for more information on the Company’s assets and liabilities recorded at fair value.
When available, the Company uses quoted prices in active markets to measure the fair value of assets and liabilities. When utilizing
market data with a bid-ask spread, the Company uses the price within the bid-ask spread that best represents fair value. When quoted
prices do not exist, the Company uses prices obtained from independent third-party pricing services to measure the fair value of
investment assets. The Company generally obtains prices from at least three independent pricing sources for assets recorded at fair
value and may obtain up to five prices on assets with higher risk of limited observable information, such as non-agency residential
mortgage-backed securities. The Company’s primary independent pricing service provides prices based on observable trades and
discounted cash flows that incorporate observable information such as yields for similar types of securities (a benchmark interest rate
plus observable spreads) and weighted-average maturity for the same or similar “to-be-issued” securities. The Company compares the
prices obtained from its primary independent pricing service to the prices obtained from the additional independent pricing services to
determine if the price obtained from the primary independent pricing service is reasonable. The Company does not adjust the prices
received from independent third-party pricing services unless such prices are inconsistent with the definition of fair value and result in
a material difference in the recorded amounts. At December 31, 2012 and 2011, the Company did not adjust prices received from the
primary independent third-party pricing service.
CRITICAL ACCOUNTING ESTIMATES
The consolidated financial statements of the Company have been prepared in accordance with accounting principles generally
accepted in the U.S. While the majority of the Company’s revenues, expenses, assets and liabilities are not based on estimates, there
are certain accounting principles that require management to make estimates regarding matters that are uncertain and susceptible to
change where such change may result in a material adverse impact on the Company’s financial position and
- 42 -
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)
reported financial results. These critical accounting estimates are described below. Management regularly reviews the estimates and
assumptions used in the preparation of the Company’s financial statements for reasonableness and adequacy.
Other-than-Temporary Impairment of Securities Available for Sale and Securities Held to Maturity
Management evaluates whether securities available for sale and securities held to maturity are other-than-temporarily impaired
(OTTI) on a quarterly basis. Debt securities with unrealized losses are considered OTTI if the Company intends to sell the security or
if it is more likely than not that the Company will be required to sell such security prior to any anticipated recovery. If management
determines that a security is OTTI under these circumstances, the impairment recognized in earnings is measured as the entire
difference between the amortized cost and the then-current fair value.
A security is also OTTI if management does not expect to recover the amortized cost of the security. In this circumstance,
management utilizes cash flow models to estimate the expected future cash flow from the securities and to estimate the credit loss.
The impairment recognized in earnings is measured by the difference between the present value of expected cash flows and the
amortized cost of the security. Expected cash flows are discounted using the security’s effective interest rate.
The evaluation of whether the Company expects to recover the amortized cost of a security is inherently judgmental. The evaluation
includes the assessment of several bond performance indicators including: the portion of the underlying loans that are delinquent (30
days, 60 days, 90+ days), in bankruptcy, in foreclosure or converted to real estate owned; the actual amount of loss incurred on the
underlying loans in which the property has been foreclosed and sold; the amount of credit support provided by the structure of the
security available to absorb credit losses on the underlying loans; the current price and magnitude of the unrealized loss; and whether
the Company has received all scheduled principal and interest payments. Management uses cash flow models to further assess the
likelihood of other-than-temporary impairment for the Company’s non-agency residential mortgage-backed securities. To develop the
cash flow models, the Company uses forecasted loss severity, prepayment speeds (i.e. the rate at which the principal on underlying
loans are paid down), and default rates over the securities’ expected remaining maturities.
Valuation of Goodwill
The Company tests goodwill for impairment at least annually, or whenever indications of impairment exist. Impairment exists when
the carrying amount of goodwill exceeds its implied fair value, resulting in an impairment charge for this excess. Adverse changes in
the Company’s planned business operations such as unanticipated competition, a loss of key personnel, the sale of a reporting unit or
a significant portion of a reporting unit, or other unforeseen developments could result in an impairment of the Company’s recorded
goodwill.
The Company’s annual goodwill impairment testing date is April 1 . In testing for a potential impairment of goodwill on April 1,
2012, the fair values of the Company’s reporting units (generally defined as the Company’s businesses for which financial
information is available and reviewed regularly by management) substantially exceeded their carrying values, and therefore
management concluded that no amount of goodwill was impaired. The estimated fair values of the reporting units were established
using a discounted cash flow model that includes significant assumptions about the future operating results and cash flows of each
reporting unit and a market capitalization analysis. As allowed by applicable accounting standards, the Company can elect to
qualitatively assess goodwill for impairment if it is more likely than not that the fair value of a reporting unit exceeds its carrying
value.
st
Allowance for Loan Losses
The appropriateness of the allowance is reviewed quarterly by management, taking into consideration current economic conditions,
the existing loan portfolio composition, past loss experience, and risks inherent in the portfolio.
The methodology to establish an allowance for loan losses utilizes statistical models that estimate prepayments, defaults, and probable
losses for the loan segments based on predicted behavior of individual loans within the segments. The methodology considers the
effects of borrower behavior and a variety of factors including, but not limited to, interest rates, housing price
- 43 -
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)
movements as measured by a housing price index, economic conditions, estimated defaults and foreclosures measured by historical
and expected delinquencies, changes in prepayment speeds, loan-to-value (LTV) ratios, past loss experience, estimates of future loss
severities, borrower credit risk measured by FICO scores, and the adequacy of collateral. The methodology also evaluates
concentrations in the loan segments including loan products, year of origination, geographical distribution of collateral, and the
portion of borrowers who have other client relationships with the Company.
Probable losses are forecast using a loan-level simulation of the delinquency status of the loans over the term of the loans. The
simulation starts with the current relevant risk indicators, including the current delinquent status of each loan, the estimated current
LTV ratio of each loan, the term and structure of each loan, current key interest rates including U.S. Treasury and London Interbank
Offered Rate (LIBOR) rates, and borrower FICO scores. The more significant variables in the simulation include delinquency roll
rates, loss severity, housing prices, and interest rates. Delinquency roll rates (i.e., the rates at which loans transition through
delinquency stages and ultimately result in a loss) are estimated from the Company’s historical loss experience adjusted for current
trends and market information. Further, the delinquency roll rates within the loan-level simulation discussed above are calibrated to
match a moving average of the delinquency roll rates actually experienced in the respective First Mortgage and HELOC portfolios.
Loss severity estimates are based on the Company’s historical loss experience and market trends. The estimated loss severity (i.e. loss
given default) used in the allowance for loan loss methodology for HELOCs is higher than that used in the methodology for First
Mortgages. Housing price trends are derived from historical home price indices and econometric forecasts of future home values.
Factors affecting the home price index include: housing inventory, unemployment, interest rates, and inflation expectations. Interest
rate projections are based on the current term structure of interest rates and historical volatilities to project various possible future
interest rate paths. As a result, the current state of house prices, including the decrease in general house prices experienced over the
last several years, as well as the current state of delinquencies unique to the Company’s First Mortgage and HELOC portfolios, are
considered in the allowance for loan loss methodology.
This methodology results in loss factors that are applied to the outstanding balances to determine the allowance for loan loss for each
loan segment.
Legal and Regulatory Reserves
Reserves for legal and regulatory claims and proceedings reflect an estimate of probable losses for each matter, after considering,
among other factors, the progress of the case, prior experience and the experience of others in similar cases, available defenses,
insurance coverage and indemnification, and the opinions and views of legal counsel. In many cases, including most class action
lawsuits, it is not possible to determine whether a loss will be incurred, or to estimate the range of that loss, until the matter is close to
resolution, in which case no accrual is made until that time. Reserves are adjusted as more information becomes available or when an
event occurs requiring a change. Significant judgment is required in making these estimates, and the actual cost of resolving a matter
may ultimately differ materially from the amount reserved.
The Company’s management has discussed the development and selection of these critical accounting estimates with the Audit
Committee. Additionally, management has reviewed with the Audit Committee the Company’s significant estimates discussed in this
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
FORWARD-LOOKING STATEMENTS
In addition to historical information, this Annual Report on Form 10-K contains “forward-looking statements” within the meaning of
Section 27A of the Securities Act, and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements are identified
by words such as “believe,” “anticipate,” “expect,” “intend,” “plan,” “will,” “may,” “estimate,” “appear,” “aim,” “target,” “could,”
and other similar expressions. In addition, any statements that refer to expectations, projections, or other characterizations of future
events or circumstances are forward-looking statements.
- 44 -
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)
These forward-looking statements, which reflect management’s beliefs, objectives, and expectations as of the date hereof, are
necessarily estimates based on the best judgment of the Company’s senior management. These statements relate to, among other
things:
• the Company’s ability to pursue its business strategy (see “Part I – Item 1. – Business – Business Strategy and Competitive
Environment”);
• the expected impact of the Federal Reserve’s NPRs (see “Part I – Item 1A. – Risk Factors” and “Current Market and
Regulatory Environment and Other Developments”);
• the impact of legal proceedings and regulatory matters (see “Part I – Item 3. – Legal Proceedings” and “Item 8 – Financial
Statements and Supplementary Data – Notes to Consolidated Financial Statements –15. Commitments and Contingencies –
Legal Contingencies”);
• the impact of current market conditions on the Company’s results of operations (see “Current Market and Regulatory
Environment and Other Developments,” “Results of Operations – Net Interest Revenue,” and “Item 8 – Financial Statements
and Supplementary Data – Notes to Consolidated Financial Statements – 6. Securities Available for Sale and Securities Held
to Maturity”);
• sources of liquidity, capital, and level of dividends (see “Part I – Item 1. – Business – Regulation,” “Liquidity and Capital
Resources,” “Contractual Obligations,” and “Item 8 – Financial Statements and Supplementary Data – Notes to
Consolidated Financial Statements – 24. Regulatory Requirements”);
• target capital ratios (see “Liquidity and Capital Resources” and “Item 8 – Financial Statements and Supplementary Data –
Notes to Consolidated Financial Statements – 24. Regulatory Requirements”);
• capital expenditures (see “Liquidity and Capital Resources – Capital Resources – Capital Expenditures”);
• the impact of changes in management’s estimates on the Company’s results of operations (see “Critical Accounting
Estimates”);
• the impact of changes in the likelihood of indemnification and guarantee payment obligations on the Company’s results of
operations (see “Item 8 – Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements –
15. Commitments and Contingencies”); and
• the impact on the Company’s results of operations of recording stock option expense (see “Item 8 – Financial Statements
and Supplementary Data – Notes to Consolidated Financial Statements – 20. Employee Incentive, Retirement, and Deferred
Compensation Plans”).
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 Annual Report on
Form 10-K 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:
• changes in general economic and financial market conditions;
• changes in revenues and profit margin due to changes in interest rates;
• adverse developments in litigation or regulatory matters;
• the extent of any charges associated with litigation and regulatory matters;
• amounts recovered on insurance policies;
• the Company’s ability to attract and retain clients and grow client assets and relationships;
• the Company’s ability to develop and launch new products, services and capabilities in a timely and successful manner;
• fluctuations in client asset values due to changes in equity valuations;
• the Company’s ability to monetize client assets;
• the performance or valuation of securities available for sale and securities held to maturity;
• trading activity;
• the level of interest rates, including yields available on money market mutual fund eligible instruments;
• the adverse impact of financial reform legislation and related regulations;
• the amount of loans to the Company’s brokerage and banking clients;
• the level of the Company’s stock repurchase activity;
• the level of brokerage client cash balances and deposits from banking clients;
- 45 -
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 availability and terms of external financing;
• capital needs;
• level of expenses;
• competitive pressures on rates and fees;
• acquisition integration costs;
• the timing and impact of changes in the Company’s level of investments in buildings, leasehold improvements, and software
and equipment relating to its information technology systems; and
• potential breaches of contractual terms for which the Company has guarantee obligations.
Certain of these factors, as well as general risk factors affecting the Company, are discussed in greater detail in this Annual Report on
Form 10-K, including “Item 1A – Risk Factors.”
- 46 -
THE CHARLES SCHWAB CORPORATION
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Market risk is the potential for changes in revenue or the value of financial instruments held by the Company as a result of
fluctuations in interest rates, equity prices or market conditions.
For the Company’s market risk related to interest rates, a sensitivity analysis, referred to as a net interest revenue simulation model, is
shown below. The Company is exposed to interest rate risk primarily from changes in market interest rates on its interest-earning
assets relative to changes in the costs of its funding sources that finance these assets.
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
re-price at different times or by different amounts, and the spread between short and long-term interest rates. Interest-earning assets
include residential real estate loans and mortgage-backed securities. These assets are sensitive to changes in interest rates and to
changes to prepayment levels, which tend to increase in a declining rate environment.
To mitigate the risk of loss, the Company has established policies and procedures which include setting guidelines on the amount of
net interest revenue at risk, and monitoring the net interest margin and average maturity of its interest-earning assets and funding
sources. To remain within these guidelines, the Company manages the maturity, repricing, and cash flow characteristics of the
investment portfolios. Because the Company establishes the rates paid on certain brokerage client cash balances and deposits from
banking clients, the rates charged on margin loans, and controls the composition of its investment securities, it has some ability to
manage its net interest spread, depending on competitive factors and market conditions.
The Company is also subject to market risk as a result of fluctuations in equity prices. The Company’s direct holdings of equity
securities and its associated exposure to equity prices are not material. The Company is indirectly exposed to equity market
fluctuations in connection with securities collateralizing margin loans to brokerage customers, and customer securities loaned out as
part of the Company’s securities lending activities. Equity market valuations may also affect the level of brokerage client trading
activity, margin borrowing, and overall client engagement with the Company. Additionally, the Company earns mutual fund service
fees and asset management fees based upon daily balances of certain client assets. Fluctuations in these client asset balances caused
by changes in equity valuations directly impact the amount of fee revenue earned by the Company.
Financial instruments held by the Company are also subject to liquidity risk – that is, the risk that valuations will be negatively
affected by changes in demand and the underlying market for a financial instrument. Recent conditions in the credit markets have
significantly reduced market liquidity in a wide range of financial instruments, including the types of instruments held by the
Company, and fair value can differ significantly from the value implied by the credit quality and actual performance of the
instrument’s underlying cash flows.
Financial instruments held by the Company are also subject to valuation risk as a result of changes in valuations of the underlying
collateral, such as housing prices in the case of residential real estate loans and mortgage-backed securities.
For discussion of the impact of current market conditions on asset management and administration fees, net interest revenue, and
securities available for sale, see “Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations –
Current Market and Regulatory Environment and Other Developments.”
The Company’s market risk related to financial instruments held for trading is not material.
Net Interest Revenue Simulation
The Company uses net interest revenue simulation modeling techniques to evaluate and manage the effect of changing interest rates.
The simulation model (the model) includes all interest-sensitive assets and liabilities. Key variables in the model include the repricing
of financial instruments, prepayment, reinvestment, and product pricing assumptions. The Company uses constant balances and
market rates in the model assumptions in order to minimize the number of variables and to better isolate risks. The simulations
involve assumptions that are inherently uncertain and, as a result, cannot precisely estimate net interest revenue or predict the impact
of changes in interest rates on net interest revenue. Actual results may differ from simulated
- 47 -
THE CHARLES SCHWAB CORPORATION
results due to balance growth or decline and the timing, magnitude, and frequency of interest rate changes, as well as changes in
market conditions and management strategies, including changes in asset and liability mix.
As represented by the simulations presented below, the Company’s investment strategy is structured to produce an increase in net
interest revenue when interest rates rise and, conversely, a decrease in net interest revenue when interest rates fall (i.e., interest-
earning assets generally reprice more quickly than interest-bearing liabilities).
The simulations in the following table assume that the asset and liability structure of the consolidated balance sheet would not be
changed as a result of the simulated changes in interest rates. As the Company actively manages its consolidated balance sheet and
interest rate exposure, in all likelihood the Company would take steps to manage any additional interest rate exposure that could result
from changes in the interest rate environment. The following table shows the results of a gradual 100 basis point increase or decrease
in market interest rates relative to the Company’s current market rates forecast on simulated net interest revenue over the next 12
months beginning December 31, 2012 and 2011.
December 31,
Increase of 100 basis points
Decrease of 100 basis points
2012
19.2%
(10.0%)
2011
19.1%
(8.1%)
The sensitivities shown in the simulation reflect the fact that short-term interest rates in 2012 remained at historically low levels,
including the federal funds target rate, which was unchanged at a range of zero to 0.25%. The current low interest rate environment
limits the extent to which the Company can reduce interest expense paid on funding sources in a declining interest rate scenario. A
decline in interest rates could therefore negatively impact the yield on the Company’s investment portfolio to a greater degree than
any offsetting reduction in interest expense, further compressing net interest margin. Any increases in short-term interest rates result
in a greater impact as yields on interest-earning assets are expected to rise faster than the cost of funding sources.
- 48 -
THE CHARLES SCHWAB CORPORATION
Item 8.
Financial Statements and Supplementary Data
TABLE OF CONTENTS
Consolidated Statements of Income
Consolidated Statements of Comprehensive Income
Consolidated Balance Sheets
Consolidated Statements of Cash Flows
Consolidated Statements of Stockholders’ Equity
Notes to Consolidated Financial Statements
Note 1. Introduction and Basis of Presentation
Note 2. Summary of Significant Accounting Policies
Note 3. Business Acquisitions
Note 4. Receivables from Brokerage Clients
Note 5. Other Securities Owned
Note 6. Securities Available for Sale and Securities Held to Maturity
Note 7. Loans to Banking Clients and Related Allowance for Loan Losses
Note 8. Equipment, Office Facilities, and Property
Note 9. Intangible Assets and Goodwill
Note 10. Other Assets
Note 11. Deposits from Banking Clients
Note 12. Payables to Brokers, Dealers, and Clearing Organizations
Note 13. Payables to Brokerage Clients
Note 14. Borrowings
Note 15. Commitments and Contingencies
Note 16. Financial Instruments Subject to Off-Balance Sheet Risk, Credit Risk, or Market Risk
Note 17. Fair Values of Assets and Liabilities
Note 18. Stockholders’ Equity
Note 19. Accumulated Other Comprehensive Income (Loss)
Note 20. Employee Incentive, Retirement, and Deferred Compensation Plans
Note 21. Class Action Litigation and Regulatory Reserve and Money Market Mutual Fund Charges
Note 22. Taxes on Income
Note 23. Earnings Per Common Share
Note 24. Regulatory Requirements
Note 25. Segment Information
Note 26. Subsequent Events
Note 27. The Charles Schwab Corporation – Parent Company Only Financial Statements
Note 28. Quarterly Financial Information (Unaudited)
Report of Independent Registered Public Accounting Firm
Management’s Report on Internal Control Over Financial Reporting
- 49 -
50
51
52
53
54
55
55
55
61
63
64
64
68
72
72
73
73
73
74
74
76
78
80
83
84
84
87
87
88
89
90
91
92
94
95
96
THE CHARLES SCHWAB CORPORATION
Consolidated Statements of Income
(In Millions, Except Per Share Amounts)
Year Ended December 31,
Net Revenues
Asset management and administration fees
Interest revenue
Interest expense
Net interest revenue
Trading revenue
Other — net
Provision for loan losses
Net impairment losses on securities
(1)
Total net revenues
Expenses Excluding Interest
Compensation and benefits
Professional services
Occupancy and equipment
Advertising and market development
Communications
Depreciation and amortization
Class action litigation and regulatory reserve
Money market mutual fund charges
Other
Total expenses excluding interest
Income before taxes on income
Taxes on income
Net Income
Preferred stock dividends
Net Income Available to Common Stockholders
2012
2011
2010
$ 2,043 $ 1,928 $ 1,822
1,914
(150)
1,764
868
256
(16)
(32)
4,883
1,900
(175)
1,725
927
160
(18)
(31)
4,691
1,803
388
311
241
220
196
—
—
274
3,433
1,450
522
928
45
883 $
1,732
387
301
228
220
155
7
—
269
3,299
1,392
528
864
—
864 $
1,723
(199)
1,524
830
135
(27)
(36)
4,248
1,573
341
272
196
207
146
320
132
282
3,469
779
325
454
—
454
$
Weighted-Average Common Shares Outstanding — Diluted
1,275
1,229
1,194
Earnings Per Common Share — Basic
Earnings Per Common Share — Diluted
$
$
.69 $
.69 $
.70 $
.70 $
.38
.38
(1)
Net impairment losses on securities include total other-than-temporary impairment losses of $15 million, $18 million, and $41
million, net of $(17) million, $(13) million, and $5 million recognized in other comprehensive income in 2012, 2011, and 2010,
respectively.
See Notes to Consolidated Financial Statements.
- 50 -
THE CHARLES SCHWAB CORPORATION
Consolidated Statements of Comprehensive Income
(In Millions)
Year Ended December 31,
Net income
Other comprehensive income (loss), before tax:
Change in net unrealized gain on securities available for sale:
Net unrealized gain (loss)
Reclassification of impairment charges included in earnings
Other reclassifications included in earnings
Other
Other comprehensive income (loss), before tax
Income tax effect
Other comprehensive income (loss), net of tax
Comprehensive Income
See Notes to Consolidated Financial Statements.
- 51 -
2012
2011
2010
$
928 $
864 $
454
470
32
(38)
1
465
175
290
(43)
31
1
(1)
(12)
(4)
(8)
300
36
1
(1)
336
129
207
$ 1,218 $ 856 $ 661
THE CHARLES SCHWAB CORPORATION
Consolidated Balance Sheets
(In Millions, Except Per Share and Share Amounts)
December 31,
Assets
Cash and cash equivalents
Cash and investments segregated and on deposit for regulatory purposes (including resale
agreements of $19,325 and $17,899 at December 31, 2012 and 2011, respectively)
Receivables from brokers, dealers, and clearing organizations
Receivables from brokerage clients — net
Other securities owned — at fair value
Securities available for sale
Securities held to maturity (fair value — $18,732 and $15,539 at December 31, 2012 and 2011,
respectively)
Loans to banking clients — net
Loans held for sale
Equipment, office facilities, and property — net
Goodwill
Intangible assets — net
Other assets
Total assets
Liabilities and Stockholders’ Equity
Deposits from banking clients
Payables to brokers, dealers, and clearing organizations
Payables to brokerage clients
Accrued expenses and other liabilities
Long-term debt
Total liabilities
Stockholders’ equity:
Preferred stock — $.01 par value per share; aggregate liquidation preference of $885 and $0
at December 31, 2012 and 2011, respectively
Common stock — 3 billion shares authorized; $.01 par value per share; 1,487,543,446 shares
issued
Additional paid-in capital
Retained earnings
Treasury stock, at cost — 210,014,305 shares and 216,378,623 shares at December 31, 2012
and 2011, respectively
Accumulated other comprehensive income
Total stockholders’ equity
Total liabilities and stockholders’ equity
See Notes to Consolidated Financial Statements.
- 52 -
2012
2011
$
12,663
$
8,679
28,469
333
13,458
636
46,123
18,194
10,726
—
675
1,228
319
813
$ 133,637
$
79,377
1,068
40,330
1,641
1,632
124,048
26,034
230
11,072
593
33,965
15,108
9,812
70
685
1,161
326
818
$ 108,553
$
60,854
1,098
35,489
1,397
2,001
100,839
865
15
3,881
8,554
—
15
3,826
7,978
(4,024)
298
9,589
$ 133,637
(4,113)
8
7,714
$ 108,553
THE CHARLES SCHWAB CORPORATION
Consolidated Statements of Cash Flows
(In Millions)
Year Ended December 31,
Cash Flows from Operating Activities
Net income
Adjustments to reconcile net income to net cash provided by (used for) operating
activities:
Provision for loan losses
Net impairment losses on securities
Stock-based compensation
Depreciation and amortization
Provision (benefit) for deferred income taxes
Premium amortization, net, on securities available for sale and securities held to
maturity
Other
Originations of loans held for sale
Proceeds from sales of loans held for sale
Net change in:
Cash and investments segregated and on deposit for regulatory purposes
Receivables from brokers, dealers, and clearing organizations
Receivables from brokerage clients
Other securities owned
Other assets
Payables to brokers, dealers, and clearing organizations
Payables to brokerage clients
Accrued expenses and other liabilities
Net cash provided by (used for) operating activities
Cash Flows from Investing Activities
Purchases of securities available for sale
Proceeds from sales of securities available for sale
Principal payments on securities available for sale
Purchases of securities held to maturity
Principal payments on securities held to maturity
Net increase in loans to banking clients
Purchase of equipment, office facilities, and property
Cash (paid) acquired in business acquisitions — net
Other investing activities
Net cash used for investing activities
Cash Flows from Financing Activities
Net change in deposits from banking clients
Issuance of commercial paper
Issuance of long-term debt
Repayment of long-term debt
Premium paid on debt exchange
Net proceeds from preferred stock offerings
Net proceeds from common stock offering
Dividends paid
Proceeds from stock options exercised and other
Other financing activities
Net cash provided by financing activities
Increase (Decrease) in Cash and Cash Equivalents
Cash and Cash Equivalents at Beginning of Year
Cash and Cash Equivalents at End of Year
Supplemental Cash Flow Information
Cash paid during the year for:
Interest
2012
2011
2010
$
928 $
864 $
454
16
32
105
196
5
222
26
(441)
513
(2,549)
(104)
(2,391)
(43)
10
28
4,950
(237)
1,266
18
31
99
155
52
136
9
(1,574)
1,703
(2,211)
220
341
(231)
(15)
(357)
3,407
(183)
2,464
(29,035) (18,434)
500
7,978
(2,253)
4,786
(1,125)
(180)
54
7
(8,667)
3,336
13,867
(8,678)
5,453
(978)
(148)
(80)
3
(16,260)
18,523 10,264
—
—
(116)
—
—
—
(295)
96
2
9,951
3,748
4,931
8,679 $
300
350
(732)
(19)
863
—
(337)
35
(5)
18,978
3,984
8,679
$ 12,663 $
27
36
87
146
(51)
35
(3)
(2,015)
1,943
(4,376)
148
(2,612)
581
133
283
4,886
289
(9)
(15,697)
871
13,261
(14,906)
2,672
(1,443)
(129)
(44)
5
(15,410)
11,328
—
701
(205)
—
—
543
(288)
35
(5)
12,109
(3,310)
8,241
4,931
$
143 $
168 $
178
Income taxes
Non-cash investing activities:
Common stock issued and equity awards assumed for business acquisitions (See note
“3 – Business Acquisitions”)
Securities purchased during the year but settled after year end
Non-cash financing activity:
Transfer of trust related balances to deposits from banking clients
Exchange of Senior Notes (See note “14 – Borrowings”)
See Notes to Consolidated Financial Statements.
- 53 -
$
508 $
517 $
327
$
$
$
$
— $
— $
714 $
58 $
— $
256 $
— $
— $
106
—
442
—
Consolidated Statements of Stockholders’ Equity
(In Millions)
THE CHARLES SCHWAB CORPORATION
Preferred Common Stock
Additional
Paid-In
Stock Shares Amount Capital
Retained
Earnings
$ — 1,392 $ 14 $ 2,298 $ 7,243 $
— — —
454
—
Treasury Stock,
at cost
(4,291) $
Accumulated
Other
Comprehensive
Income (Loss)
Balance at December 31, 2009
Net income
Other comprehensive income, net
of tax
Issuance of common stock
Issuance of common stock for
business acquisition
Dividends declared on common
stock
Stock option exercises and other
Stock-based compensation and
related tax effects
Other
Balance at December 31, 2010
Net income
Other comprehensive income, net
Issuance of common stock for
business acquisition
Dividends declared on common
of tax
stock
Stock option exercises and other
Stock-based compensation and
related tax effects
Other
Balance at December 31, 2011
Net income
Other comprehensive income, net
Issuance of preferred stock
Dividends declared on preferred
Dividends declared on common
Stock option exercises and other
Stock-based compensation and
related tax effects
Other
Balance at December 31, 2012
of tax
stock
stock
— — —
30 —
—
—
543
—
7 —
106
— — —
— — —
— — —
— — —
— 1,429
14
— — —
—
(4)
87
4
3,034
—
— — —
—
—
59
1
713
— — —
— — —
— — —
— — —
— 1,488
15
— — —
— — —
863 — —
— — —
— — —
— — —
—
(24)
99
4
3,826
—
—
—
—
—
(40)
—
—
—
(288)
—
—
—
7,409
864
—
—
(295)
—
—
—
7,978
928
—
—
(43)
(308)
—
Total
(191) $ 5,073
454
—
207
—
—
—
—
—
—
16
—
(8)
—
—
—
—
—
8
—
290
—
—
—
—
207
543
106
(288)
35
87
9
6,226
864
(8)
714
(295)
98
99
16
7,714
928
290
863
(43)
(308)
36
—
—
—
—
—
39
—
5
(4,247)
—
—
—
—
122
—
12
(4,113)
—
—
—
—
—
76
— — —
2 — —
$
865 1,488 $
98
(3)
15 $ 3,881 $ 8,554 $
—
(1)
—
13
(4,024) $
98
—
11
—
298 $ 9,589
See Notes to Consolidated Financial Statements.
- 54 -
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
1. Introduction and Basis of Presentation
The Charles Schwab Corporation (CSC) is a savings and loan holding company engaged, through its subsidiaries, in securities
brokerage, banking, money management, and financial advisory services. Charles Schwab & Co., Inc. (Schwab) is a securities broker-
dealer with over 300 domestic branch offices in 45 states, as well as a branch in each of the Commonwealth of Puerto Rico and
London, U.K. In addition, Schwab serves clients in Hong Kong through one of CSC’s subsidiaries. Other subsidiaries include Charles
Schwab Bank (Schwab Bank), a federal savings bank, and Charles Schwab Investment Management, Inc. (CSIM), the investment
advisor for Schwab’s proprietary mutual funds, which are referred to as the Schwab Funds , and for Schwab’s exchange-traded funds,
which are referred to as the Schwab ETFs
TM
®
.
The accompanying consolidated financial statements include CSC and its majority-owned subsidiaries (collectively referred to as the
Company). Intercompany balances and transactions have been eliminated. These consolidated financial statements have been
prepared in conformity with accounting principles generally accepted in the United States (U.S.), which require management to make
certain estimates and assumptions that affect the reported amounts in the accompanying financial statements. Certain estimates relate
to other-than-temporary impairment of securities available for sale and securities held to maturity, valuation of goodwill, allowance
for loan losses, and legal and regulatory reserves. Actual results may differ from those estimates. Certain prior-period amounts have
been reclassified to conform to the current period presentation.
2. Summary of Significant Accounting Policies
Asset management and administration fees
Asset management and administration fees include mutual fund service fees and fees for other asset-based financial services provided
to individual and institutional clients, and are recognized as revenue over the period that the related service is provided, based upon
average asset balances. The Company earns mutual fund service fees for shareholder services, administration, and investment
management provided to its proprietary funds, and recordkeeping and shareholder services provided to third-party funds. These fees
are based upon the daily balances of client assets invested in these funds. The Company also earns asset management fees for advice
solutions, which include advisory and managed account services that are based on the daily balances of client assets subject to the
specific fee for service. The fair values of client assets included in proprietary and third-party mutual funds are based on quoted
market prices and other observable market data. Other asset management and administration fees include various asset based fees,
such as third-party mutual fund service fees, trust fees, 401(k) record keeping fees, and mutual fund clearing and other service fees.
In 2012, 2011, and 2010, the Company waived a portion of its asset management fees earned from certain Schwab-sponsored money
market mutual funds in order to provide a positive return to clients. Under agreements with these funds, the Company may recover
such fee waivers depending on the future performance of the funds and approval by the boards of the respective funds until the third
anniversary of the end of the fiscal year in which such fee waiver occurs, subject to certain limitations. Recoveries of previously-
waived asset management fees are recognized as revenue when substantially all uncertainties about timing and amount of realization
are resolved.
Interest revenue
Interest revenue represents interest earned on cash and cash equivalents, cash and investments segregated, receivables from brokers,
dealers, and clearing organizations, receivables from brokerage clients, other securities owned, securities available for sale, securities
held to maturity, and loans to banking clients. Interest revenue is recognized in the period earned based upon average or daily asset
balances and respective interest rates.
Trading revenue
Trading revenue includes commission and principal transaction revenues. Clients’ securities transactions are recorded on the date that
they settle, while the related commission revenues and expenses are recorded on the date that the trade occurs.
- 55 -
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
Principal transaction revenues are primarily comprised of revenues from trading activity in client fixed income securities, which is
recorded on a trade date basis. To accommodate clients’ fixed income trading activity, the Company maintains positions in fixed
income securities, including state and municipal debt obligations, U.S. Government, corporate debt and other securities. The
difference between the price at which the Company buys and sells securities to and from its clients and other broker-dealers is
recognized as principal transaction revenue. Principal transaction revenue also includes unrealized gains and losses on these securities
positions.
Cash and cash equivalents
The Company considers all highly liquid investments with original maturities of three months or less that are not segregated and on
deposit for regulatory purposes to be cash equivalents. Cash and cash equivalents include money market funds, deposits with banks,
certificates of deposit, commercial paper, and treasury securities. Cash and cash equivalents also include balances that Schwab Bank
maintains at the Federal Reserve Bank.
Cash and investments segregated and on deposit for regulatory purposes
Cash and investments segregated and on deposit for regulatory purposes include securities purchased under agreements to resell
(resale agreements), which are collateralized by U.S. Government and agency securities. Resale agreements are accounted for as
collateralized investing transactions that are recorded at their contractual amounts plus accrued interest. The Company obtains control
of collateral with a market value equal to or in excess of the principal amount loaned and accrued interest under resale agreements.
Collateral is valued daily by the Company, with additional collateral obtained to ensure full collateralization. Cash and investments
segregated also include certificates of deposit, U.S. Government securities, and corporate debt securities. Certificates of deposit, U.S.
Government securities, and corporate debt securities are recorded at fair value. Pursuant to applicable regulations, client cash balances
that are not used for margin lending are generally segregated into investment accounts that are maintained for the exclusive benefit of
clients.
Receivables from brokerage clients
Receivables from brokerage clients include margin loans to clients and are recorded net of an allowance for doubtful accounts.
Receivables from brokerage clients that remain unsecured or partially secured for more than 30 days are fully reserved.
Other securities owned
Other securities owned are recorded at fair value based on quoted market prices. Unrealized gains and losses are included in trading
revenue.
Securities available for sale and securities held to maturity
Securities available for sale are recorded at fair value and unrealized gains and losses are reported, net of taxes, in accumulated other
comprehensive income (loss) included in stockholders’ equity. Securities held to maturity are recorded at amortized cost based on the
Company’s positive intent and ability to hold these securities to maturity. Realized gains and losses from sales of securities available
for sale are determined on a specific identification basis and are included in other revenue – net.
Management evaluates whether securities available for sale and securities held to maturity are other-than-temporarily impaired
(OTTI) on a quarterly basis. Debt securities with unrealized losses are considered OTTI if the Company intends to sell the security or
if it is more likely than not that the Company will be required to sell such security prior to any anticipated recovery. If management
determines that a security is OTTI under these circumstances, the impairment recognized in earnings is measured as the entire
difference between the amortized cost and the then-current fair value.
A security is also OTTI if management does not expect to recover the amortized cost of the security. In this circumstance,
management utilizes cash flow models to estimate the expected future cash flow from the securities to estimate the credit loss.
- 56 -
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
The impairment recognized in earnings is measured by the difference between the present value of expected cash flows and the
amortized cost of the security. Expected cash flows are discounted using the security’s effective interest rate.
The evaluation of whether the Company expects to recover the amortized cost of a security is inherently judgmental. The evaluation
includes the assessment of several bond performance indicators including: the portion of the underlying loans that are delinquent
(30 days, 60 days, 90+ days), in bankruptcy, in foreclosure or converted to real estate owned; the actual amount of loss incurred on
the underlying loans in which the property has been foreclosed and sold; the amount of credit support provided by the structure of the
security available to absorb credit losses on the underlying loans; the current price and magnitude of the unrealized loss; and whether
the Company has received all scheduled principal and interest payments. Management uses cash flow models to further assess the
likelihood of other-than-temporary impairment for the Company’s non-agency residential mortgage-backed securities. To develop the
cash flow models, the Company uses forecasted loss severity, prepayment speeds (i.e. the rate at which the principal on underlying
loans are paid down), and default rates over the securities’ expected remaining maturities.
Securities borrowed and securities loaned
Securities borrowed require the Company to deliver cash to the lender in exchange for securities and are included in receivables from
brokers, dealers, and clearing organizations. For securities loaned, the Company receives collateral in the form of cash in an amount
equal to or greater than the market value of securities loaned. Securities loaned are included in payables to brokers, dealers, and
clearing organizations. The Company monitors the market value of securities borrowed and loaned, with additional collateral obtained
or refunded to ensure full collateralization. Fees received or paid are recorded in interest revenue or interest expense.
Loans to banking clients and related allowance for loan losses
Loans to banking clients are recorded at their contractual principal amounts and include unamortized direct origination costs or net
purchase premiums. Additionally, loans are recorded net of an allowance for loan losses. The Company’s loan portfolio includes four
loan segments: residential real estate mortgages, home equity lines of credit (HELOC), personal loans secured by securities and other
loans. Residential real estate mortgages include two loan classes: first mortgages and purchased first mortgages. Loan segments are
defined as the level to which the Company disaggregates its loan portfolio when developing and documenting a methodology for
determining the allowance for loan losses. A loan class is defined as a group of loans within a loan segment that has homogeneous
risk characteristics.
The Company records an allowance for loan losses through a charge to earnings based on management’s estimate of probable losses
in the existing portfolio. Management reviews the allowance for loan losses quarterly, taking into consideration current economic
conditions, the composition of the existing loan portfolio, past loss experience, and risks inherent in the portfolio to ensure that the
allowance for loan losses is maintained at an appropriate level.
The methodology to establish an allowance for loan losses utilizes statistical models that estimate prepayments, defaults, and probable
losses for the loan segments based on predicted behavior of individual loans within the segments. The methodology considers the
effects of borrower behavior and a variety of factors including, but not limited to, interest rates, housing price movements as
measured by a housing price index, economic conditions, estimated defaults and foreclosures measured by historical and expected
delinquencies, changes in prepayment speeds, loan-to-value (LTV) ratios, past loss experience, estimates of future loss severities,
borrower credit risk measured by Fair Isaac Corporation (FICO) scores, and the adequacy of collateral. The methodology also
evaluates concentrations in the loan segments, including loan products, year of origination, geographical distribution of collateral, and
the portion of borrowers who have other client relationships with the Company.
Probable losses are forecast using a loan-level simulation of the delinquency status of the loans over the term of the loans. The
simulation starts with the current relevant risk indicators, including the current delinquent status of each loan, the estimated current
LTV ratio of each loan, the term and structure of each loan, current key interest rates including U.S. Treasury and London Interbank
Offered Rate (LIBOR) rates, and borrower FICO scores. The more significant variables in the simulation
- 57 -
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
include delinquency roll rates, loss severity, housing prices, and interest rates. Delinquency roll rates (i.e., the rates at which loans
transition through delinquency stages and ultimately result in a loss) are estimated from the Company’s historical loss experience
adjusted for current trends and market information. Further, the delinquency roll rates within the loan-level simulation discussed
above are calibrated to match a moving average of the delinquency roll rates actually experienced in the respective first lien
residential real estate mortgage loan (First Mortgage) and home equity line of credit (HELOC) portfolios. Loss severity estimates are
based on the Company’s historical loss experience and market trends. The estimated loss severity (i.e. loss given default) used in the
allowance for loan loss methodology for HELOC loans is higher than that used in the methodology for First Mortgages. Housing
price trends are derived from historical home price indices and econometric forecasts of future home values. Factors affecting the
home price index include: housing inventory, unemployment, interest rates, and inflation expectations. Interest rate projections are
based on the current term structure of interest rates and historical volatilities to project various possible future interest rate paths. As a
result, the current state of house prices, including the decrease in general house prices experienced over the last several years, as well
as the current state of delinquencies unique to the Company’s First Mortgage and HELOC portfolios, are considered in the allowance
for loan loss methodology.
This methodology results in loss factors that are applied to the outstanding balances to determine the allowance for loan loss for each
loan segment.
The Company considers loan modifications in which it makes an economic concession to a borrower experiencing financial difficulty
to be a troubled debt restructuring.
Nonaccrual loans
Residential real estate mortgages, HELOC, personal, and other loans are placed on nonaccrual status upon becoming 90 days past due
as to interest or principal (unless the loans are well-secured and in the process of collection), or when the full timely collection of
interest or principal becomes uncertain. For the portion of the HELOC portfolio for which the Company is able to track the
delinquency status on the associated first lien loan, the Company places a HELOC on non-accrual status if the associated first
mortgage is 90 days or more delinquent, regardless of the payment status of the HELOC. When a loan is placed on nonaccrual status,
the accrued and unpaid interest receivable is reversed and the loan is accounted for on the cash or cost recovery method thereafter,
until qualifying for return to accrual status. Generally, a nonaccrual loan may be returned to accrual status when all delinquent interest
and principal is repaid and the borrower demonstrates a sustained period of performance of twelve consecutive months of repayments,
or when the loan is both well-secured and in the process of collection and collectability is no longer doubtful.
Loan Charge-Offs
The Company charges off a loan in the period that it is deemed uncollectible and records a reduction in the allowance for loan losses
and the loan balance. The Company’s charge-off policy for residential real estate mortgages and HELOC loans is to assess the value
of the property when the loan has been delinquent for 180 days or it is in bankruptcy, regardless of whether or not the property is in
foreclosure, and charge-off the amount of the loan balance in excess of the estimated current value of the underlying property less
estimated costs to sell.
Equipment, office facilities, and property
Equipment, office facilities, and property are recorded at cost net of accumulated depreciation and amortization, except for land,
which is recorded at cost. Equipment and office facilities are depreciated on a straight-line basis over an estimated useful life of three
to ten years. Buildings are depreciated on a straight-line basis over 20 to 40 years. Leasehold improvements are amortized on a
straight-line basis over the shorter of the estimated useful life of the asset or the term of the lease. Software and certain costs incurred
for purchasing or developing software for internal use are amortized on a straight-line basis over an estimated useful life of three or
five years. Equipment, office facilities, and property are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of such assets may not be recoverable.
- 58 -
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
Goodwill
Goodwill represents the fair value of acquired businesses in excess of the fair value of the individually identified net assets acquired.
Goodwill is not amortized but is tested for impairment annually or whenever indications of impairment exist. In testing for potential
impairment of goodwill, management estimates the fair values of each of the Company’s reporting units (defined as the Company’s
businesses for which financial information is available and reviewed regularly by management) and compares it to their carrying
values. The estimated fair values of the reporting units are established using a discounted cash flow model that includes significant
assumptions about the future operating results and cash flows of each reporting unit and a market capitalization analysis. As allowed
by applicable accounting standards, the Company can elect to qualitatively assess goodwill for impairment if it is more likely than not
that the fair value of a reporting unit exceeds its carrying value. The Company’s annual impairment testing date is April 1 .
st
Intangible assets
Intangible assets are amortized over their useful lives in a manner that best reflects their economic benefit. Intangible assets are
reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be
recoverable. The Company does not have any indefinite-lived intangible assets.
Guarantees and indemnifications
The Company recognizes, at the inception of a guarantee, a liability equal to the estimated fair value of the obligation undertaken in
issuing the guarantee. The fair values of the obligations relating to standby letter of credit agreements (LOCs) are estimated based on
fees charged to enter into similar agreements, considering the creditworthiness of the counterparties. The fair values of the obligations
relating to other guarantees are estimated based on transactions for similar guarantees or expected present value measures.
Income taxes
The Company provides for income taxes on all transactions that have been recognized in the consolidated financial statements.
Accordingly, deferred tax assets are adjusted to reflect the tax rates at which future taxable amounts will likely be settled or realized.
The effects of tax rate changes on future deferred tax assets and deferred tax liabilities, as well as other changes in income tax laws,
are recorded in earnings in the period during which such changes are enacted. The Company’s unrecognized tax benefits, which are
included in accrued expenses and other liabilities, represent the difference between positions taken on tax return filings and estimated
potential tax settlement outcomes. Interest and penalties relating to unrecognized tax benefits are recorded in income tax expense.
Stock-based compensation
Stock-based compensation includes employee and board of director stock options, restricted stock units, and restricted stock awards.
The Company measures compensation expense for these share-based payment arrangements based on their estimated fair values as of
the awards’ grant date. The fair value of the share-based award is recognized over the vesting period as stock-based compensation.
Stock-based compensation expense is based on awards expected to vest and therefore is reduced for estimated forfeitures. Forfeitures
are estimated at the time of grant based on the Company’s historical forfeiture experience and revised in subsequent periods if actual
forfeitures differ from those estimates. The excess tax benefits from the exercise of stock options and the vesting of restricted stock
awards are recorded in additional paid-in capital.
Fair values of assets and liabilities
Fair value is defined as the price that would be received to sell an asset or the price paid to transfer a liability in an orderly transaction
between market participants at the measurement date. Fair value measurement accounting guidance describes the fair value hierarchy
for disclosing assets and liabilities measured at fair value based on the inputs used to value them. The fair value hierarchy maximizes
the use of observable inputs and minimizes the use of unobservable inputs. Observable inputs are
- 59 -
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
based on market pricing data obtained from sources independent of the Company. A quoted price in an active market provides the
most reliable evidence of fair value and is generally used to measure fair value whenever available. Unobservable inputs reflect
management’s judgment about the assumptions market participants would use in pricing the asset or liability. Where inputs used to
measure fair value of an asset or liability are from different levels of the hierarchy, the asset or liability is categorized based on the
lowest level input that is significant to the fair value measurement in its entirety. Assessing the significance of a particular input
requires judgment. The fair value hierarchy includes three levels based on the objectivity of the inputs as follows:
• Level 1 inputs are quoted prices in active markets as of the measurement date for identical assets or liabilities that the
Company has the ability to access.
• Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either
directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active markets, and inputs other
than quoted prices that are observable for the asset or liability, such as interest rates, benchmark yields, issuer spreads, new
issue data, and collateral performance.
• Level 3 inputs are unobservable inputs for the asset or liability, and include situations where there is little, if any, market
activity for the asset or liability.
Assets and liabilities recorded at fair value
The Company uses the market and income approaches to determine the fair value of assets and liabilities. When available, the
Company uses quoted prices in active markets to measure the fair value of assets and liabilities. When utilizing market data and bid-
ask spread, the Company uses the price within the bid-ask spread that best represents fair value. When quoted prices do not exist, the
Company uses prices obtained from independent third-party pricing services to measure the fair value of investment assets. The
Company generally obtains prices from at least three independent pricing sources for assets recorded at fair value and may obtain up
to five prices on assets with higher risk of limited observable information, such as non-agency residential mortgage-backed securities.
The Company’s primary independent pricing service provides prices based on observable trades and discounted cash flows that
incorporate observable information such as yields for similar types of securities (a benchmark interest rate plus observable spreads)
and weighted-average maturity for the same or similar “to-be-issued” securities. The Company compares the prices obtained from its
primary independent pricing service to the prices obtained from the additional independent pricing services to determine if the price
obtained from the primary independent pricing service is reasonable. The Company does not adjust the prices received from
independent third-party pricing services unless such prices are inconsistent with the definition of fair value and result in a material
difference in the recorded amounts.
Financial instruments not recorded at fair value
Descriptions of the valuation methodologies and assumptions used to estimate the fair value of financial instruments not recorded at
fair value are described below. The Company’s financial instruments not recorded at fair value but for which fair value can be
approximated and disclosed include:
• Cash and cash equivalents are short-term in nature and accordingly are recorded at amounts that approximate fair value.
• Cash and investments segregated and on deposit for regulatory purposes include cash and securities purchased under resale
agreements. Securities purchased under resale agreements are short-term in nature and are backed by collateral that both
exceeds the carrying value of the resale agreement and is highly liquid in nature. Accordingly, the carrying value
approximates fair value.
• Receivables from/payables to brokers, dealers, and clearing organizations are recorded at contractual amounts and
historically have been settled at those values and are short-term in nature, and therefore approximate fair value.
- 60 -
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
• Receivables from/payables to brokerage clients – net are recorded at contractual amounts and historically have been settled
at those values and are short-term in nature, and therefore approximate fair value.
• Securities held to maturity – The fair values of securities held to maturity are obtained using an independent third-party
pricing service similar to investment assets recorded at fair value as discussed above.
• Loans to banking clients – The fair values of the Company’s loans to banking clients are estimated based on prices of
mortgage-backed securities collateralized by similar types of loans.
• Loans held for sale at December 31, 2011, were recorded at the lower of cost or fair value. The fair value of the Company’s
loans held for sale was estimated using quoted market prices for securities backed by similar types of loans.
• Financial instruments included in other assets primarily consist of cost method investments and Federal Home Loan Bank
(FHLB) stock, whose carrying values approximate their fair values. FHLB stock is recorded at par, which approximates fair
value.
• Deposits from banking clients have no stated maturity and are recorded at the amount payable on demand as of the balance
sheet date. The Company considers the carrying value of these deposits to approximate their fair values.
• Financial instruments included in accrued expenses and other liabilities consist of commercial paper, drafts payable and
certain amounts due under contractual obligations which are short-term in nature and accordingly are recorded at amounts
that approximate fair value.
• Long-term debt – Except for the finance lease obligation, the fair values of long-term debt are estimated using indicative,
non-binding quotes from independent brokers. The Company validates indicative prices for its debt through comparison to
other independent non-binding quotes. The finance lease obligation is recorded at carrying value, which approximates fair
value.
• Firm commitments to extend credit – The Company extends credit to banking clients through HELOC and personal loans
secured by securities. The Company considers the fair value of these unused commitments to be not material because the
interest rates earned on these balances are based on floating interest rates that reset monthly. The Company does not charge
a fee to maintain a HELOC or personal loan.
Adoption of New Accounting Standards
Testing Goodwill for Impairment: In September 2011, the Financial Accounting Standards Board issued new guidance allowing
companies to consider qualitative factors before performing a quantitative assessment when determining whether goodwill is
impaired, which is effective for goodwill impairment tests performed after January 1, 2012. Specifically, there is no longer a
requirement to perform the two-step goodwill impairment test unless the entity determines that based on qualitative factors, it is more
likely than not that the fair value of a reporting unit is less than its carrying amount. The adoption of this new guidance did not have a
material impact on the Company’s financial position, results of operations, earnings per common share (EPS), or cash flows.
3.
Business Acquisitions
optionsXpress Holdings, Inc.
On September 1, 2011, the Company acquired optionsXpress Holdings, Inc. (optionsXpress) for total consideration of $714 million.
optionsXpress is an online brokerage firm primarily focused on equity option securities and futures. The optionsXpress brokerage
platform provides active investors and traders trading tools, analytics and education to execute a
®
- 61 -
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
variety of investment strategies. The combination of optionsXpress and Schwab offers active investors an additional level of service
and platform capabilities.
Under the terms of the merger agreement, optionsXpress stockholders received 1.02 shares of the Company’s common stock for each
share of optionsXpress stock. As a result, the Company issued 59 million shares of the Company’s common stock valued at
$710 million, based on the closing price of the Company’s common stock on September 1, 2011. The Company also assumed
optionsXpress’ stock-based compensation awards valued at $4 million.
The results of optionsXpress’ operations have been included in the Company’s consolidated statement of income for the year ended
December 31, 2012 and 2011, from the date of acquisition. optionsXpress’ net revenues and net income were $179 million and
$6 million, respectively, in 2012. optionsXpress’ net revenues were $68 million and their net loss was not material for the period
September 1, 2011 through December 31, 2011.
The following table summarizes the allocation of the purchase price to the net assets of optionsXpress:
Fair value of common stock issued
Fair value of equity awards assumed
Total consideration paid
Fair value of net assets acquired
Acquisition-related goodwill
(1)
(1)
Represents a non-cash investing activity.
The following table summarizes the fair values of the assets acquired and liabilities assumed as of the acquisition date:
Assets
Cash and cash equivalents
Cash and investments segregated and on deposit for regulatory purposes
Receivables from brokers, dealers, and clearing organizations
Receivables from brokerage clients
Other securities owned - at fair value
Intangible assets
Other assets
Total assets acquired
(1)
Liabilities
Payables to brokerage clients
Deferred tax liability
Long-term debt
Accrued expenses and other liabilities
(2)
Total liabilities assumed
(1)
Net assets acquired
$ 710
4
$ 714
$ 203
$ 511
September 1,
2011
$
$
$
$
$
84
1,074
40
185
32
285
25
1,725
1,221
95
110
96
1,522
203
(1)
(2)
All assets and liabilities, except for cash and cash equivalents, represent non-cash investing activities.
The Company paid off long-term debt acquired from optionsXpress subsequent to the date of acquisition in September 2011.
Goodwill of $511 million was assigned to the Investor Services segment and will not be deductible for tax purposes.
- 62 -
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
The Company recorded intangible assets of $285 million, which are subject to amortization and will be amortized over their estimated
useful lives. The following table summarizes the estimated fair value and useful lives of the intangible assets.
September 1, 2011
Customer relationships
Technology
Trade name
Total intangible assets
Estimated
Useful Life
(In Years)
11
9
9
Estimated
Fair Value
200
$
70
15
$ 285
Pro Forma Financial Information (Unaudited)
The following table presents unaudited pro forma financial information as if optionsXpress had been acquired prior to January 1,
2010. Pro forma net income for the year ended December 31, 2011, was adjusted to exclude $16 million, after tax, of acquisition
related costs incurred by the Company in 2011. Additionally, pro forma net income below excludes $15 million, before tax, of
acquisition related costs because these costs were incurred by optionsXpress prior to the acquisition date. Pro forma net income also
reflects the impact of amortizing purchase accounting adjustments relating to intangible assets, net of tax, of $20 million and
$22 million, for the years ended December 31, 2011 and 2010, respectively.
Year Ended December 31,
Net revenues
Net income
Basic EPS
Diluted EPS
2011
2010
$ 4,857 $ 4,479
481
896 $
$
.39
.71 $
$
.38
.71 $
$
The unaudited pro forma financial information above is presented for illustrative purposes only and is not necessarily indicative of the
results that actually would have occurred had the acquisition been completed prior to January 1, 2010, nor is it indicative of the results
of operations for future periods.
Other Business Acquisitions
On December 14, 2012, the Company acquired ThomasPartners, Inc., a growth and dividend income-focused asset management firm,
for $85 million in cash. As a result of a preliminary allocation of the purchase price, the Company recorded goodwill of $68 million
and intangible assets of $36 million. The intangible assets primarily relate to customer relationships and will be amortized over 11
years. The preliminary goodwill was allocated to the Investor Services and Institutional Services segments in the amounts of
$44 million and $24 million, respectively.
On November 9, 2010, the Company acquired substantially all of the assets of Windward Investment Management, Inc. (Windward)
for $106 million in common stock and $44 million in cash. Windward was an investment advisory firm that managed diversified
investment portfolios comprised primarily of exchange-traded fund securities. As a result of the acquisition, Windhaven Investment
Management, Inc. was formed as a wholly-owned subsidiary of Schwab Holdings, Inc.
4. Receivables from Brokerage Clients
Receivables from brokerage clients consist primarily of margin loans to brokerage clients of $11.6 billion and $10.2 billion at
December 31, 2012 and 2011, respectively. Securities owned by brokerage clients are held as collateral for margin loans. Such
collateral is not reflected in the consolidated financial statements. The average yield earned on margin loans was 4.08% and 4.39% in
2012 and 2011, respectively.
- 63 -
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
5. Other Securities Owned
A summary of other securities owned is as follows:
December 31,
Schwab Funds money market funds
®
Equity and bond mutual funds
State and municipal debt obligations
Equity, U.S. Government and corporate debt, and other securities
Total other securities owned
2012
2011
$ 329 $ 332
183
46
32
$ 636 $ 593
217
48
42
The Company’s positions in Schwab Funds money market funds arise from certain overnight funding of clients’ redemption, check-
writing, and debit card activities. Equity and bond mutual funds include mutual fund investments held at CSC, investments made by
the Company relating to its deferred compensation plan, and inventory maintained to facilitate certain Schwab Funds and third-party
mutual fund clients’ transactions. State and municipal debt obligations, equity, U.S. Government and corporate debt, and other
securities include securities held to meet clients’ trading activities.
®
Securities Available for Sale and Securities Held to Maturity
6.
The amortized cost, gross unrealized gains and losses, and fair value of securities available for sale and securities held to maturity are
as follows:
December 31, 2012
Securities available for sale:
U.S. agency mortgage-backed securities
Asset-backed securities
Corporate debt securities
Certificates of deposit
U.S. agency notes
Non-agency residential mortgage-backed securities
Commercial paper
Other securities
Total securities available for sale
Securities held to maturity:
U.S. agency mortgage-backed securities
Other securities
Total securities held to maturity
- 64 -
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
$ 20,080 $
8,104
6,197
6,150
3,465
796
574
278
$ 45,644 $
396 $
62
61
12
2
2
—
17
552 $
— $ 20,476
8,164
2
6,256
2
6,161
1
3,464
3
733
65
574
—
—
295
73 $ 46,123
$ 17,750 $
19 $ 18,289
558 $
443
1
—
$ 18,194 $ 558 $ 20 $ 18,732
444
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
December 31, 2011
Securities available for sale:
U.S. agency mortgage-backed securities
Asset-backed securities
Corporate debt securities
Certificates of deposit
U.S. agency notes
Non-agency residential mortgage-backed securities
Commercial paper
Other securities
Total securities available for sale
Securities held to maturity:
U.S. agency mortgage-backed securities
Other securities
Total securities held to maturity
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
$ 20,666 $
2,638
3,592
3,623
1,795
1,130
225
281
$ 33,950 $
269 $
4
5
2
5
—
—
3
14 $ 20,921
2,635
7
3,571
26
3,622
3
1,800
—
907
223
225
—
284
—
288 $ 273 $ 33,965
$ 14,770 $
430 $
3
$ 15,108 $ 433 $
338
2 $ 15,198
—
341
2 $ 15,539
A summary of securities with unrealized losses, aggregated by category and period of continuous unrealized loss, is as follows:
December 31, 2012
Securities available for sale:
Asset-backed securities
Corporate debt securities
Certificates of deposit
U.S. agency notes
Non-agency residential mortgage-backed securities
$
Total
Securities held to maturity:
U.S. agency mortgage-backed securities
Other securities
Total
Total securities with unrealized losses
(1)
Less than
12 months
12 months
or longer
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Total
Unrealized
Losses
— $ — $
878
599
2,102
46
801 $
—
—
—
549
2
1
3
1
7 $ 1,350 $
$ 3,625 $
2 $
—
—
—
64
66 $ 4,975 $
801 $
878
599
2,102
595
2
2
1
3
65
73
240
$ 2,680 $
19
1
$ 2,920 $
20
$ 6,545 $ 27 $ 1,350 $ 66 $ 7,895 $ 93
— $ — $ 2,680 $
—
— $ — $ 2,920 $
19 $
1
20 $
240
—
(1)
The number of investment positions with unrealized losses totaled 139 for securities available for sale and 24 for securities held
to maturity.
- 65 -
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
December 31, 2011
Securities available for sale:
U.S. agency mortgage-backed securities
Asset-backed securities
Corporate debt securities
Certificates of deposit
Non-agency residential mortgage-backed securities
Total
Securities held to maturity:
U.S. agency mortgage-backed securities
Total
Total securities with unrealized losses
(1)
Less than
12 months
12 months
or longer
Total
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
$
5,551 $
1,368
1,888
2,158
121
$ 11,086 $
14 $
6
26
3
8
57 $
— $
152
—
—
746
898 $
— $
1
—
—
215
216 $ 11,984 $
5,551 $
1,520
1,888
2,158
867
14
7
26
3
223
273
384 $
384 $
2
— $
$
$
2
— $
$ 11,470 $ 59 $ 898 $ 216 $ 12,368 $ 275
384 $
384 $
— $
— $
2 $
2 $
(1)
The number of investment positions with unrealized losses totaled 296 for securities available for sale and 3 for securities held
to maturity.
Unrealized losses in securities available for sale of $73 million as of December 31, 2012, were concentrated in non-agency residential
mortgage-backed securities. Included in non-agency residential mortgage-backed securities are securities collateralized by loans that
are considered to be “Prime” (defined as loans to borrowers with a FICO credit score of 620 or higher at origination), and “Alt-
A” (defined as Prime loans with reduced documentation at origination). At December 31, 2012, the amortized cost and fair value of
Alt-A residential mortgage-backed securities were $308 million and $269 million, respectively.
Management evaluates whether securities available for sale and securities held to maturity are other-than-temporarily impaired
(OTTI) on a quarterly basis as described in note “2 – Summary of Significant Accounting Policies.”
Certain Alt-A and Prime residential mortgage-backed securities experienced continued credit deterioration in 2012, including
increased payment delinquency rates and losses on foreclosures of underlying mortgages. In addition, during 2012 the Company
increased the projected default rates for modified loans underlying the securities. Based on the Company’s cash flow projections,
management determined that it does not expect to recover all of the amortized cost of these securities and therefore determined that
these securities were OTTI. The Company employs a buy and hold strategy relative to its mortgage-related securities, and does not
intend to sell these securities and will not be required to sell these securities before anticipated recovery of the unrealized losses on
these securities. Further, the Company has adequate liquidity at December 31, 2012, with cash and cash equivalents totaling
$12.7 billion, a loan-to-deposit ratio of 14%, adequate access to short-term borrowing facilities and regulatory capital ratios in excess
of “well capitalized” levels. Because the Company does not intend to sell these securities and it is not “more likely than not” that the
Company will be required to sell these securities, the Company recognized an impairment charge equal to the securities’ expected
credit losses of $32 million in 2012. The expected credit losses were measured as the difference between the present value of
expected cash flows and the amortized cost of the securities. Further deterioration in the performance of the underlying loans in the
Company’s non-agency residential mortgage-backed securities portfolio could result in the recognition of additional impairment
losses.
- 66 -
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
The following table is a rollforward of the amount of credit losses recognized in earnings for OTTI securities held by the Company
during the period for which a portion of the impairment was recognized in other comprehensive income:
Year Ended December 31,
Balance at beginning of year
Credit losses recognized into current year earnings on debt securities for which an other-than-
temporary impairment was not previously recognized
Credit losses recognized into current year earnings on debt securities for which an other-than-
temporary impairment was previously recognized
Balance at end of year
2012
$ 127 $
2011
2010
96 $
60
6
6
7
26
29
$ 159 $ 127 $ 96
25
The maturities of securities available for sale and securities held to maturity at December 31, 2012, are as follows:
(1)
Securities available for sale:
U.S. agency mortgage-backed securities
Asset-backed securities
Corporate debt securities
Certificates of deposit
U.S. agency notes
Non-agency residential mortgage-backed securities
Commercial paper
Other securities
(1)
Total fair value
Total amortized cost
Securities held to maturity:
U.S. agency mortgage-backed securities
Other securities
(1)
Total fair value
Total amortized cost
Within
1 year
After 1 year
through
5 years
After 5 years
through
10 years
After
10 years
Total
$
40 $
438
4,883
1,604
1,300
—
—
—
$
8,265 $
$ 6,268 $ 8,201 $
— $
—
1,149
4,557
—
—
574
—
6,280 $
20,476
16,386 $
4,050 $
8,164
6,941
785
6,256
—
224
6,161
—
—
3,464
—
2,164
733
726
7
574
—
—
295
295
—
7,230 $
46,123
24,348 $
7,062 $ 24,113 $ 45,644
$
$
$
— $
—
— $
— $
9,956 $
292
— $
100
100 $ 10,248 $
9,911 $
100 $
8,333 $
51
8,384 $
8,183 $
18,289
443
18,732
18,194
(1)
Mortgage-backed securities have been allocated to maturity groupings based on final contractual maturities. Actual maturities
will differ from final contractual maturities because borrowers on a certain portion of loans underlying these securities have the
right to prepay their obligations.
Proceeds and gross realized gains from sales of securities available for sale are as follows:
Year Ended December 31,
Proceeds
Gross realized gains
2012
2011
$ 3,336 $ 500 $ 871
1
$
35 $
1 $
2010
There were no realized losses from the sales of securities available for sale in 2012, 2011, or 2010.
- 67 -
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
7.
Loans to Banking Clients and Related Allowance for Loan Losses
The composition of loans to banking clients by loan segment is as follows:
December 31,
Residential real estate mortgages
Home equity lines of credit
Personal loans secured by securities
Other
Total loans to banking clients
(1)
Allowance for loan losses
Total loans to banking clients – net
(1)
Loans are evaluated for impairment by loan segment.
2012
$
6,507
3,287
963
25
10,782
(56)
$ 10,726
2011
$
5,596
3,509
742
19
9,866
(54)
$ 9,812
The Company records an allowance for loan losses through a charge to earnings based on management’s estimate of probable losses
in the existing portfolio. Management reviews the allowance for loan losses quarterly, taking into consideration current economic
conditions, the composition of the existing loan portfolio, past loss experience, and risks inherent in the portfolio, as described in note
“2 – Summary of Significant Accounting Policies.”
Changes in the allowance for loan losses were as follows:
Year Ended
Residential
real estate
mortgages
December 31, 2012
Home
equity lines
of credit
Total
Residential
real estate
mortgages
December 31, 2011
Home
equity lines
of credit
Total
December 31,
2010
Balance at beginning of period $
Charge-offs
Recoveries
Provision for loan losses
Balance at end of period
40 $
(7)
2
1
14 $
(9)
—
15
54 $
(16)
2
16
38 $
(11)
1
12
15 $
(8)
1
6
53 $
(19)
2
18
$ 36 $ 20 $ 56 $ 40 $ 14 $ 54 $
45
(20)
1
27
53
Included in the loan portfolio are nonaccrual loans totaling $48 million and $52 million at December 31, 2012 and 2011, respectively.
There were no loans accruing interest that were contractually 90 days or more past due at December 31, 2012 or 2011.
Nonperforming assets, which include nonaccrual loans and other real estate owned, totaled $54 million and $56 million at
December 31, 2012 and 2011, respectively.
- 68 -
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
As of December 31, 2012, Schwab Bank no longer originates First Mortgage loans or HELOCs. In 2012, Schwab Bank launched a
co-branded loan origination program for Schwab Bank clients (the Program) with Quicken Loans, Inc. (Quicken Loans ). Pursuant
to the Program, Quicken Loans originates and services First Mortgage loans and HELOCs for Schwab Bank clients. Under the
Program, Schwab Bank purchases certain First Mortgage loans and HELOCs that are originated by Quicken Loans. Schwab Bank sets
the underwriting guidelines and pricing for all loans it intends to purchase for its portfolio. The First Mortgage loans purchased under
the Program are included in the first mortgages loan class as of December 31, 2012, in the table below.
®
®
The delinquency aging analysis by loan class is as follows:
December 31, 2012
Residential real estate mortgages:
First mortgages
Purchased first mortgages
Home equity lines of credit
Personal loans secured by securities
Other
Current
30-59 days
past due
60-89 days
past due
Greater than
90 days
Total
past due
Total
loans
$
6,291 $
154
3,269
963
22
22 $
1
5
—
3
2 $
—
2
—
—
4 $
6,348
33 $
159
4
3,287
11
963
—
—
25
48 $ 83 $ 10,782
57 $
5
18
—
3
Total loans to banking clients
$ 10,699 $ 31 $
December 31, 2011
Residential real estate mortgages:
First mortgages
Purchased first mortgages
Home equity lines of credit
Personal loans secured by securities
Other
Total loans to banking clients
$
$
5,380 $
152
3,494
741
19
9,786 $
16 $ 2 $
2
5
1
—
24 $
—
2
—
—
4 $
39 $
5
8
—
—
52 $
57 $
7
15
1
—
80 $
5,437
159
3,509
742
19
9,866
In addition to monitoring the delinquency characteristics, the Company monitors the credit quality of residential real estate mortgages
and HELOCs by stratifying the portfolios by the year of origination, borrower FICO scores at origination (Origination FICO),
updated borrower FICO scores (Updated FICO), LTV ratios at origination (Origination LTV), and estimated current LTV ratios
(Estimated Current LTV), as presented in the following tables. Borrowers’ FICO scores are provided by an independent third party
credit reporting service and were last updated in December 2012. The Origination LTV and Estimated Current LTV ratios for a
HELOC include any first lien mortgage outstanding on the same property at the time of the HELOC’s origination. The Estimated
Current LTV for each loan is estimated by reference to a home price appreciation index.
- 69 -
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
December 31, 2012
Year of origination
Pre-2008
2008
2009
2010
2011
2012
Total
Origination FICO
<620
620 - 679
680 - 739
≥740
Total
Updated FICO
<620
620 - 679
680 - 739
≥740
Total
Origination LTV
≤70%
>70% - ≤90%
>90% - ≤100%
Total
December 31, 2012
Residential real estate mortgages:
Estimated Current LTV
≤70%
>70% - ≤90%
>90% - ≤100%
>100%
Total
Home equity lines of credit:
Estimated Current LTV
≤70%
>70% - ≤90%
>90% - ≤100%
>100%
Total
First
mortgages
Residential real estate mortgages
Purchased first
mortgages
Total
Home equity
lines of credit
$
$
$
$
$
$
$
$
$
$
$
$
465
402
305
909
1,270
2,997
6,348
10
98
1,141
5,099
6,348
54
191
940
5,163
6,348
4,189
2,142
17
6,348
$
$
$
$
$
$
$
$
56
6
6
12
53
26
159
1
16
40
102
159
6
13
34
106
159
97
54
8
159
$
$
$
$
$
$
$
$
521
408
311
921
1,323
3,023
6,507
11
114
1,181
5,201
6,507
60
204
974
5,269
6,507
4,286
2,196
25
6,507
$
$
$
$
$
$
$
$
1,187
1,151
338
249
198
164
3,287
—
23
633
2,631
3,287
49
117
510
2,611
3,287
2,225
1,036
26
3,287
Balance
Updated FICO
Weighted
Average
Utilization
Rate
(1)
4,162
1,841
168
336
6,507
1,559
1,020
267
441
3,287
772
764
750
741
768
773
766
759
753
767
N/A
N/A
N/A
N/A
N/A
36%
46%
54%
59%
42%
Percent of Loans
that are 90+ Days
Past Due and
Less than 90 Days
Past Due but on
Nonaccrual Status
0.05%
0.22%
0.51%
5.34%
0.38%
0.14%
0.18%
0.44%
1.06%
0.31%
The Utilization Rate is calculated using the outstanding HELOC balance divided by the associated total line of credit.
(1)
N/A Not applicable.
- 70 -
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
December 31, 2011
Year of origination
Pre-2008
2008
2009
2010
2011
Total
Origination FICO
<620
620 - 679
680 - 739
≥740
Total
Updated FICO
<620
620 - 679
680 - 739
≥740
Total
Origination LTV
≤70%
>70% - ≤90%
>90% - ≤100%
Total
December 31, 2011
Residential real estate mortgages:
Estimated Current LTV
≤70%
>70% - ≤90%
>90% - ≤100%
>100%
Total
Home equity lines of credit:
Estimated Current LTV
≤70%
>70% - ≤90%
>90% - ≤100%
>100%
Total
First
mortgages
Residential real estate mortgages
Purchased first
mortgages
Total
Home equity
lines of credit
$
$
$
$
$
$
$
$
$
$
$
$
569
538
553
1,757
2,020
5,437
9
108
1,030
4,290
5,437
55
162
831
4,389
5,437
3,507
1,904
26
5,437
$
$
$
$
$
$
$
$
60
8
10
17
64
159
2
19
43
95
159
7
11
44
97
159
91
60
8
159
$
$
$
$
$
$
$
$
629
546
563
1,774
2,084
5,596
11
127
1,073
4,385
5,596
62
173
875
4,486
5,596
3,598
1,964
34
5,596
Balance
Updated FICO
Weighted
Average
Utilization
Rate
(1)
$
$
$
$
$
$
$
$
1,306
1,262
412
311
218
3,509
—
24
667
2,818
3,509
49
112
520
2,828
3,509
2,378
1,091
40
3,509
Percent of Loans
that are 90+ Days
Past Due and
Less than 90 Days
Past Due but on
Nonaccrual Status
3,200
1,764
241
391
5,596
1,561
1,099
328
521
3,509
773
766
758
748
768
774
769
765
755
769
N/A
N/A
N/A
N/A
N/A
37%
46%
54%
58%
43%
0.27%
0.41%
1.33%
2.34%
0.50%
0.09%
0.26%
0.16%
0.75%
0.25%
The Utilization Rate is calculated using the outstanding HELOC balance divided by the associated total line of credit.
(1)
N/A Not applicable.
- 71 -
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
The Company monitors the credit quality of personal loans secured by securities by reviewing the fair value of collateral to ensure
adequate collateralization of at least 100% of the principal amount of the loans. All of these personal loans were fully collateralized
by securities with fair values in excess of borrowings at December 31, 2012 and 2011.
Equipment, Office Facilities, and Property
8.
Equipment, office facilities, and property are detailed below:
December 31,
Software
Buildings
Information technology equipment
Leasehold improvements
Furniture and equipment
Telecommunications equipment
Land
Construction in progress
Total equipment, office facilities, and property
Accumulated depreciation and amortization
Total equipment, office facilities, and property – net
Intangible Assets and Goodwill
9.
The gross carrying value of intangible assets and accumulated amortization was:
2012
$ 1,067
456
398
287
133
95
59
7
2,502
(1,827)
$ 675
2011
993
$
446
430
307
131
104
59
17
2,487
(1,802)
$ 685
Customer relationships
Technology
Trade name
Other
Total intangible assets
December 31, 2012
December 31, 2011
Gross
Carrying
Value
Accumulated
Amortization
Net
Carrying
Value
Gross
Carrying
Value
Accumulated
Amortization
Net
Carrying
Value
$
$
279 $
89
17
5
390 $
51 $
16
2
2
71 $
228 $
73
15
3
319 $
245 $
88
15
2
350 $
17 $
6
1
—
24 $
228
82
14
2
326
Amortization expense for intangible assets was $47 million and $20 million in 2012 and 2011, respectively.
Estimated future annual amortization expense for intangible assets as of December 31, 2012, is as follows:
2013
2014
2015
2016
2017
Thereafter
49
$
43
$
40
$
38
$
$
35
$ 114
- 72 -
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
The changes in the carrying amount of goodwill, as allocated to the Company’s reportable segments for purposes of testing goodwill
for impairment going forward, are presented in the following table:
Balance at December 31, 2011
Goodwill acquired and other changes during the period
Balance at December 31, 2012
Investor
Services
Institutional
Services
$
953
45
$ 998
$
$
208
22
230
Total
$
1,161
67
$ 1,228
In testing for potential impairment of goodwill on April 1, 2012, the Company used a discounted cash flow model instead of the
qualitative assessment methodology allowed by applicable accounting standards. As a result of this test, the fair values of the
Company’s reporting units, as indicated by a discounted cash flow model, substantially exceeded their fair values and therefore
management concluded that no amount of goodwill was impaired in 2012. The Company did not recognize any goodwill impairment
in 2011 or 2010.
10. Other Assets
The components of other assets are as follows:
(1)
December 31,
Accounts receivable
Interest and dividends receivable
Prepaid expenses
Other investments
Deferred tax asset – net
Other
Total other assets
2012
2011
$
417 $
150
114
59
—
73
330
142
153
57
27
109
$ 813 $ 818
(1)
Accounts receivable includes accrued service fee income and a receivable from the Company’s loan servicer.
11. Deposits from Banking Clients
Deposits from banking clients consist of interest-bearing and non-interest-bearing deposits as follows:
December 31,
Interest-bearing deposits:
Deposits swept from brokerage accounts
Checking
Savings and other
Total interest-bearing deposits
Non-interest-bearing deposits
Total deposits from banking clients
2012
2011
$ 58,229 $ 40,617
10,765
8,997
60,379
475
$ 79,377 $ 60,854
11,632
9,089
78,950
427
12. Payables to Brokers, Dealers, and Clearing Organizations
Payables to brokers, dealers, and clearing organizations include securities loaned of $882 million and $852 million at December 31,
2012 and 2011, respectively. The cash collateral received from counterparties under securities lending transactions was equal to or
greater than the market value of the securities loaned at December 31, 2012 and 2011.
- 73 -
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
13. Payables to Brokerage Clients
The principal source of funding for Schwab’s margin lending is cash balances in brokerage client accounts, which are included in
payables to brokerage clients. Cash balances in interest-bearing brokerage client accounts were $32.6 billion and $30.6 billion at
December 31, 2012 and 2011, respectively. The average rate paid on cash balances in interest-bearing brokerage client accounts was
0.01% in 2012 and 2011.
14. Borrowings
Long-term debt including unamortized debt discounts and premiums, where applicable, consists of the following:
December 31,
Senior Notes
Senior Medium-Term Notes, Series A
Finance lease obligation
Junior Subordinated Notes
Total long-term debt
2012
2011
$ 1,288 $ 1,450
249
100
202
$ 1,632 $ 2,001
249
95
—
CSC has a universal automatic shelf registration statement (Shelf Registration Statement) on file with the Securities and Exchange
Commission (the SEC), which enables CSC to issue debt, equity and other securities.
The Senior Notes outstanding at December 31, 2012, have maturities ranging from 2015 to 2022 and fixed interest rates ranging from
0.850% to 4.45% with interest payable semi-annually.
In August 2012, CSC completed an exchange offer with certain eligible holders of its 4.950% Senior Notes due 2014 (Old Senior
Notes), whereby Old Senior Notes in an aggregate principal amount of $256 million were exchanged for the same aggregate principal
amount of 3.225% Senior Notes due 2022 (New Senior Notes) and cash consideration of $19 million. Pursuant to an exchange and
registration rights agreement (Registration Rights Agreement), CSC filed an exchange registration with the SEC and launched an
exchange offer on December 11, 2012, to allow the holders of the New Senior Notes to exchange such New Senior Notes for an equal
principal amount of notes with substantially identical terms, except that they are generally freely transferable under the Securities Act
of 1933. The exchange offer was completed on January 23, 2013 and substantially all of the New Senior Notes were exchanged.
These notes have a fixed interest rate of 3.225% with interest payable semiannually.
On December 6, 2012, CSC issued $350 million of additional Senior Notes that mature in 2015 under the Shelf Registration
Statement, which have a fixed interest rate of 0.850% with interest payable semi-annually.
On December 21, 2012, CSC redeemed all of its remaining outstanding Old Senior Notes of $494 million. In connection with the
redemption, CSC paid the holders of the Old Senior Notes a make-whole premium of $31 million in addition to the $494 million
principal payment. The make-whole premium was recorded in other revenue – net.
The Senior Medium-Term Notes, Series A (Medium-Term Notes) outstanding at December 31, 2012, mature in 2017 and have a
fixed interest rate of 6.375% with interest payable semi-annually.
CSC and Schwab Capital Trust I, a statutory trust formed under the laws of the State of Delaware (Trust), previously closed a public
offering of $300 million of the Trust’s fixed to floating-rate trust preferred securities. The proceeds from the sale of the trust preferred
securities were invested by the Trust in fixed to floating rate Junior Subordinated Notes issued by CSC, of which $202 million
remained outstanding at August 30, 2012. On August 31, 2012, CSC redeemed all of the outstanding fixed-to-floating rate trust
preferred securities issued by the Trust for $207 million. The trust preferred securities were redeemed, along with the common
securities issued by the Trust and held by CSC, as a result of the concurrent redemption in
- 74 -
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
whole by CSC of the Junior Subordinated Notes held by the Trust which underlay the trust preferred securities. The redemption price
represented 100% of the liquidation amount of each trust preferred security, plus accumulated and unpaid distributions up to and
including the redemption date.
Schwab has a finance lease obligation related to an office building and land under a 20-year lease. The remaining finance lease
obligation of $95 million at December 31, 2012, is being reduced by a portion of the lease payments over the remaining lease term of
12 years.
Annual maturities on long-term debt outstanding at December 31, 2012, are as follows:
2013
2014
2015
2016
2017
Thereafter
Total maturities
Unamortized discount, net
Total long-term debt
$
6
6
357
7
258
1,017
1,651
(19)
$ 1,632
CSC has authorization from its Board of Directors to issue unsecured commercial paper notes (Commercial Paper Notes) not to
exceed $1.5 billion. Management has set a current limit for the commercial paper program of $800 million. The maturities of the
Commercial Paper Notes may vary, but are not to exceed 270 days from the date of issue. The commercial paper is not redeemable
prior to maturity and cannot be voluntarily prepaid. The proceeds of the commercial paper program are to be used for general
corporate purposes. At December 31, 2012, the amount of Commercial Paper Notes outstanding was $300 million, which is included
in accrued expenses and other liabilities. The amount outstanding was repaid on January 2, 2013. There were no borrowings of
Commercial Paper Notes outstanding at December 31, 2011.
CSC maintains an $800 million committed, unsecured credit facility with a group of 11 banks, which is scheduled to expire in
June 2013. This facility replaced a similar facility that expired in June 2012. The funds under this facility are available for general
corporate purposes. The financial covenants under this facility require Schwab to maintain a minimum net capital ratio, as defined,
Schwab Bank to be well capitalized, as defined, and CSC to maintain a minimum level of stockholders’ equity. At December 31,
2012, the minimum level of stockholders’ equity required under this facility was $5.8 billion (CSC’s stockholders’ equity at
December 31, 2012, was $9.6 billion). There were no borrowings outstanding under this facility at December 31, 2012 or 2011.
To manage short-term liquidity, Schwab maintains uncommitted, unsecured bank credit lines with a group of six banks totaling
$842 million at December 31, 2012. CSC has direct access to $642 million of these credit lines. There were no borrowings
outstanding under these lines at December 31, 2012 or 2011.
To partially satisfy the margin requirement of client option transactions with the Options Clearing Corporation, Schwab has
unsecured standby LOCs with five banks in favor of the Options Clearing Corporation aggregating $325 million at December 31,
2012. In connection with its securities lending activities, Schwab is required to provide collateral to certain brokerage clients. Schwab
satisfies the collateral requirements by arranging LOCs, in favor of these brokerage clients, which are issued by multiple banks. At
December 31, 2012, the aggregate face amount of these LOCs totaled $74 million. There were no funds drawn under any of these
LOCs at December 31, 2012 or 2011.
- 75 -
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
15. Commitments and Contingencies
Operating leases and other commitments: The Company has non-cancelable operating leases for office space and equipment. Future
annual minimum rental commitments under these leases, net of contractual subleases, at December 31, 2012, are as follows:
2013
2014
2015
2016
2017
Thereafter
Total
Operating
Leases
Subleases
Net
$
112 $
97
85
74
62
108
81
69
57
46
40
97
$ 538 $ 148 $ 390
31 $
28
28
28
22
11
Certain leases contain provisions for renewal options, purchase options, and rent escalations based on increases in certain costs
incurred by the lessor. Rent expense was $203 million, $187 million, and $168 million in 2012, 2011, and 2010, respectively.
Purchase obligations: The Company has purchase obligations for services such as advertising and marketing, telecommunications,
professional services, and hardware- and software-related agreements. At December 31, 2012, the Company has purchase obligations
as follows:
2013
2014
2015
2016
2017
Thereafter
Total
$ 159
104
35
7
—
1
$ 306
Guarantees and indemnifications: In the normal course of business, the Company provides certain indemnifications (i.e., protection
against damage or loss) to counterparties in connection with the disposition of certain of its assets. Such indemnifications are
generally standard contractual terms with various expiration dates and typically relate to title to the assets transferred, ownership of
intellectual property rights (e.g., patents), accuracy of financial statements, compliance with laws and regulations, failure to pay,
satisfy or discharge any liability, or to defend claims, as well as errors, omissions, and misrepresentations. The maximum potential
future liability under these indemnifications cannot be estimated. The Company has not recorded a liability for these indemnifications
and believes that the occurrence of events that would trigger payments under these agreements is remote.
The Company has clients that sell (i.e., write) listed option contracts that are cleared by various clearing houses. The clearing houses
establish margin requirements on these transactions. The Company partially satisfies the margin requirements by arranging unsecured
standby LOCs, in favor of the clearing houses, which are issued by multiple banks. At December 31, 2012, the aggregate face amount
of these LOCs totaled $325 million. In connection with its securities lending activities, Schwab is required to provide collateral to
certain brokerage clients. Schwab satisfies the collateral requirements by arranging LOCs in favor of these brokerage clients, which
are issued by multiple banks. At December 31, 2012, the aggregate face amount of these LOCs totaled $74 million. There were no
funds drawn under any of these LOCs at December 31, 2012.
The Company also provides guarantees to securities clearing houses and exchanges under standard membership agreements, which
require members to guarantee the performance of other members. Under the agreements, if another member becomes unable to satisfy
its obligations to the clearing houses and exchanges, other members would be required to meet shortfalls. The
- 76 -
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
Company’s liability under these arrangements is not quantifiable and may exceed the cash and securities it has posted as collateral.
However, the potential requirement for the Company to make payments under these arrangements is remote. Accordingly, no liability
has been recognized for these guarantees.
Legal contingencies: The Company is subject to claims and lawsuits in the ordinary course of business, including arbitrations, class
actions and other litigation, some of which include claims for substantial or unspecified damages. The Company is also the subject of
inquiries, investigations, and proceedings by regulatory and other governmental agencies.
The Company believes it has strong defenses in all significant matters currently pending and is contesting liability and any damages
claimed. Nevertheless, some of these matters may result in adverse judgments or awards, including penalties, injunctions or other
relief, and the Company may also determine to settle a matter because of the uncertainty and risks of litigation. Described below are
certain matters in which there is a reasonable possibility that a material loss could be incurred or where the matter may otherwise be
of significant interest to stockholders. With respect to all other pending matters, based on current information and consultation with
counsel, it does not appear that the outcome of any such matter could be material to the financial condition, operating results or cash
flows of the Company. However, predicting the outcome of a litigation or regulatory matter is inherently difficult, requiring
significant judgment and evaluation of various factors, including the procedural status of the matter and any recent developments;
prior experience and the experience of others in similar cases; available defenses, including potential opportunities to dispose of a
case on the merits or procedural grounds before trial (e.g., motions to dismiss or for summary judgment); the progress of fact
discovery; the opinions of counsel and experts regarding potential damages; potential opportunities for settlement and the status of
any settlement discussions; and potential insurance coverage and indemnification. Often, as in the case of the Auction Rate Securities
Regulatory Inquiries and Total Bond Market Fund Litigation matters described below, it is not possible to reasonably estimate
potential liability, if any, or a range of potential liability until the matter is closer to resolution – pending, for example, further
proceedings, the outcome of key motions or appeals, or discussions among the parties. Numerous issues may have to be developed,
such as discovery of important factual matters and determination of threshold legal issues, which may include novel or unsettled
questions of law. Reserves are established or adjusted or further disclosure and estimates of potential loss are provided as the matter
progresses and more information becomes available.
Auction Rate Securities Regulatory Inquiries: Schwab has been responding to industry wide inquiries from federal and state
regulators regarding sales of auction rate securities to clients who were unable to sell their holdings when the normal auction process
for those securities froze unexpectedly in February 2008. On August 17, 2009, a civil complaint was filed against Schwab in New
York state court by the Attorney General of the State of New York (NYAG) alleging material misrepresentations and omissions by
Schwab regarding the risks of auction rate securities, and seeking restitution, disgorgement, penalties and other relief, including
repurchase of securities held in client accounts. As reflected in a statement issued August 17, 2009, Schwab has responded that the
allegations are without merit, and has been contesting all charges. By order dated October 24, 2011, the court granted Schwab’s
motion to dismiss the complaint with prejudice. The NYAG has appealed to the Appellate Division, where the case is currently
pending.
Total Bond Market Fund Litigation: On August 28, 2008, a class action lawsuit was filed in the U.S. District Court for the Northern
District of California on behalf of investors in the Schwab Total Bond Market Fund™ (Northstar lawsuit). The lawsuit, which alleges
violations of state law and federal securities law in connection with the fund’s investment policy, names Schwab Investments
(registrant and issuer of the fund’s shares) and CSIM as defendants. Allegations include that the fund improperly deviated from its
stated investment objectives by investing in collateralized mortgage obligations (CMOs) and investing more than 25% of fund assets
in CMOs and mortgage-backed securities without obtaining a shareholder vote. Plaintiffs seek unspecified compensatory and
rescission damages, unspecified equitable and injunctive relief, costs and attorneys’ fees. Plaintiffs’ federal securities law claim and
certain of plaintiffs’ state law claims were dismissed in proceedings before the court and following a successful petition by defendants
to the Ninth Circuit Court of Appeals. On August 8, 2011, the court dismissed plaintiffs’ remaining claims with prejudice. Plaintiffs
have again appealed to the Ninth Circuit, where the case is currently pending.
optionsXpress Regulatory Matters: optionsXpress entities and individual employees have been responding to certain pending
regulatory matters which predate the Company’s acquisition of optionsXpress. On April 16, 2012, optionsXpress, Inc. was
- 77 -
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
charged by the SEC in an administrative proceeding alleging violations of the firm’s close-out obligations under SEC Regulation
SHO (short sale delivery rules) in connection with certain customer trading activity. Trial in the administrative proceeding
commenced September 5, 2012. The Company disputes the allegations and is contesting the charges. Separately, on April 19, 2012,
the SEC instituted an administrative proceeding alleging violations of the broker-dealer registration requirements by an unregistered
optionsXpress entity. On September 5, 2012, the administrative law judge hearing the case ruled on summary disposition that
applicable registration requirements were violated. Certain other issues, including relief, remain to be determined at trial. The
Company continues to dispute the allegations and is contesting the charges. The Company recorded a contingent liability associated
with the two separate matters, which was not material at December 31, 2012.
16. Financial Instruments Subject to Off-Balance Sheet Risk, Credit Risk, or Market Risk
Securities lending: The Company loans client securities temporarily to other brokers in connection with its securities lending
activities and receives cash as collateral for the securities loaned. Increases in security prices may cause the fair value of the securities
loaned to exceed the amount of cash received as collateral. In the event the counterparty to these transactions does not return the
loaned securities or provide additional cash collateral, the Company may be exposed to the risk of acquiring the securities at
prevailing market prices in order to satisfy its client obligations. The Company mitigates this risk by requiring credit approvals for
counterparties, monitoring the fair value of securities loaned, and requiring additional cash as collateral when necessary. The fair
value of client securities pledged in securities lending transactions to other broker-dealers was $852 million and $783 million at
December 31, 2012 and 2011, respectively. Additionally, the Company borrows securities from other broker-dealers to fulfill short
sales by clients. The fair value of these borrowed securities was $121 million and $44 million at December 31, 2012 and 2011,
respectively.
Client trade settlement: The Company is obligated to settle transactions with brokers and other financial institutions even if the
Company’s clients fail to meet their obligations to the Company. Clients are required to complete their transactions on settlement
date, generally three business days after the trade date. If clients do not fulfill their contractual obligations, the Company may incur
losses. The Company has established procedures to reduce this risk by requiring deposits from clients in excess of amounts prescribed
by regulatory requirements for certain types of trades, and therefore the potential to make payments under these client transactions is
remote. Accordingly, no liability has been recognized for these transactions.
Margin lending: The Company provides margin loans to its clients which are collateralized by securities in their brokerage accounts
and may be liable for the margin requirement of its client margin securities transactions. As clients write options or sell securities
short, the Company may incur losses if the clients do not fulfill their obligations and the collateral in client accounts is insufficient to
fully cover losses which clients may incur from these strategies. To mitigate this risk, the Company monitors required margin levels
and requires clients to deposit additional collateral, or reduce positions to meet minimum collateral requirements.
Clients with margin loans have agreed to allow the Company to pledge collateralized securities in their brokerage accounts in
accordance with federal regulations. Under such regulations, the Company was allowed to pledge securities with a fair value of
$17.1 billion and $14.7 billion at December 31, 2012 and 2011, respectively. The fair value of client securities pledged to fulfill the
short sales of its clients was $1.2 billion at both December 31, 2012 and 2011. The fair value of client securities pledged to fulfill the
Company’s proprietary short sales, which resulted from facilitating clients’ dividend reinvestment elections, was $109 million and
$101 million at December 31, 2012 and 2011, respectively. The Company has also pledged a portion of its securities owned in order
to fulfill the short sales of clients and in connection with securities lending transactions to other broker-dealers. The Company may
also pledge client securities to fulfill client margin requirements for open option contracts established with the OCC. The fair value of
these pledged securities to the OCC was $1.9 billion and $1.3 billion at December 31, 2012 and 2011, respectively.
Resale and repurchase agreements: Schwab enters into collateralized resale agreements principally with other broker-dealers, which
could result in losses in the event the counterparty fails to purchase the securities held as collateral for the cash advanced and the fair
value of the securities declines. To mitigate this risk, Schwab requires that the counterparty deliver
- 78 -
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
securities to a custodian, to be held as collateral, with a fair value in excess of the resale price. Schwab also sets standards for the
credit quality of the counterparty, monitors the fair value of the underlying securities as compared to the related receivable, including
accrued interest, and requires additional collateral where deemed appropriate. At December 31, 2012 and 2011, the fair value of
collateral received in connection with resale agreements that are available to be repledged or sold was $19.7 billion and $18.3 billion,
respectively. Schwab utilizes the collateral provided under repurchase agreements to meet obligations under broker-dealer client
protection rules, which place limitations on its ability to access such segregated securities. For Schwab to repledge or sell this
collateral, it would be required to deposit cash and/or securities of an equal amount into its segregated reserve bank accounts in order
to meet its segregated cash and investment requirement.
Concentration risk: The Company has exposure to concentration risk when holding large positions of financial instruments
collateralized by assets with similar economic characteristics or in securities of a single issuer or industry. For discussion on the
Company’s exposure to concentration risk relating to residential mortgage-backed securities, see note “6 – Securities Available for
Sale and Securities Held to Maturity.”
The Company’s investments in corporate debt securities and commercial paper totaled $8.0 billion and $5.6 billion at December 31,
2012 and 2011, respectively, with the majority issued by institutions in the financial services industry. These securities are included in
securities available for sale, securities held to maturity, cash and investments segregated and on deposit for regulatory purposes, cash
and cash equivalents, and other securities owned. At December 31, 2011, the Company held $867 million of corporate debt securities
issued by financial institutions and guaranteed under the FDIC Temporary Liquidity Guarantee Program. At December 31, 2012, the
Company did not hold any of these securities.
The Company’s loans to banking clients include $6.0 billion and $5.6 billion of adjustable rate first lien residential real estate
mortgage loans at December 31, 2012 and 2011, respectively. The Company’s adjustable rate mortgages have initial fixed interest
rates for three to ten years and interest rates that adjust annually thereafter. At December 31, 2012, approximately 50% of these
mortgages consisted of loans with interest-only payment terms. At December 31, 2012, the interest rates on approximately 65% of
these interest-only loans are not scheduled to reset for three or more years. The Company’s mortgage loans do not include interest
terms described as temporary introductory rates below current market rates. At December 31, 2012, 45% of the residential real estate
mortgages and 50% of the HELOC balances were secured by properties which are located in California. At December 31, 2011, 44%
of the residential real estate mortgages and 50% of the HELOC balances were secured by properties which are located in California.
The Company also has exposure to concentration risk from its margin and securities lending activities collateralized by securities of a
single issuer or industry. This concentration risk is mitigated by collateral arrangements that require the fair value of such collateral
exceeds the amounts loaned.
The Company has indirect exposure to U.S. Government and agency securities held as collateral to secure its resale agreements. The
Company’s primary credit exposure on these resale transactions is with its counterparty. The Company would have exposure to the
U.S. Government and agency securities only in the event of the counterparty’s default on the resale agreements. The fair value of U.S.
Government and agency securities held as collateral for resale agreements totaled $19.7 billion and $18.3 billion at December 31,
2012 and 2011, respectively.
Commitments to extend credit: Schwab Bank enters into commitments to extend credit to banking clients. Schwab Bank also has
commitments to purchase certain First Mortgage loans and HELOCs under the Program with Quicken Loans, which began in 2012.
The credit risk associated with these commitments varies depending on the creditworthiness of the client and the value of any
collateral expected to be held. Collateral requirements vary by type of loan. At December 31, 2012, the Company had commitments
to purchase First Mortgage loans of $867 million. Schwab Bank also has commitments to extend credit related to its clients’ unused
HELOCs, personal loans secured by securities, and other lines of credit, which totaled $5.4 billion and $5.2 billion at December 31,
2012 and 2011, respectively.
- 79 -
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
17. Fair Values of Assets and Liabilities
For a description of the fair value hierarchy and the Company’s fair value methodologies, including the use of independent third-party
pricing services, see note “2 – Summary of Significant Accounting Policies.” The Company did not transfer any assets or liabilities
between Level 1 and Level 2 during 2012 or 2011. In addition, the Company did not adjust prices received from the primary
independent third-party pricing service at December 31, 2012 or 2011.
Financial Instruments Recorded at Fair Value
The following tables present the fair value hierarchy for assets measured at fair value. Liabilities recorded at fair value were not
material, and therefore are not included in the following tables:
Quoted Prices
in Active Markets
for Identical
Assets
(Level 1)
Significant
Other Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Balance at
Fair Value
$
$
—
1,076
1,076
$
—
—
—
December 31, 2012
Cash equivalents:
Money market funds
Commercial paper
Total cash equivalents
Investments segregated and on deposit for
regulatory purposes:
Certificates of deposit
U.S. Government securities
Total investments segregated and on deposit
for regulatory purposes
Other securities owned:
Schwab Funds money market funds
®
Equity and bond mutual funds
State and municipal debt obligations
Equity, U.S. Government and corporate debt,
and other securities
Total other securities owned
Securities available for sale:
U.S. agency mortgage-backed securities
Asset-backed securities
Corporate debt securities
Certificates of deposit
U.S. agency notes
Non-agency residential mortgage-backed
securities
Commercial paper
Other securities
Total securities available for sale
Total
$
$
413
—
413
—
—
—
329
217
—
2
548
—
—
—
—
—
413
1,076
1,489
2,976
1,767
4,743
329
217
48
42
636
20,476
8,164
6,256
6,161
3,464
2,976
1,767
4,743
—
—
48
40
88
20,476
8,164
6,256
6,161
3,464
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
733
574
295
46,123
$ 52,030
$
—
—
—
—
961
- 80 -
733
574
295
46,123
$ 52,991
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
Quoted Prices
in Active Markets
for Identical
Assets
(Level 1)
Significant
Other Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Balance at
Fair Value
December 31, 2011
Cash equivalents:
Money market funds
Commercial paper
Total cash equivalents
Investments segregated and on deposit for
regulatory purposes:
Certificates of deposit
Corporate debt securities
U.S. Government securities
Total investments segregated and on
deposit for regulatory purposes
Other securities owned:
Schwab Funds money market funds
®
Equity and bond mutual funds
State and municipal debt obligations
Equity, U.S. Government and corporate debt,
and other securities
Total other securities owned
Securities available for sale:
U.S. agency mortgage-backed securities
Asset-backed securities
Corporate debt securities
Certificates of deposit
U.S. agency notes
Non-agency residential mortgage-backed
securities
Commercial paper
Other securities
Total securities available for sale
Total
$
$
—
814
814
$
8
—
8
—
—
—
—
332
183
—
12
527
—
—
—
—
—
—
—
—
—
535
- 81 -
$
$
2,374
767
650
3,791
—
—
46
20
66
20,921
2,635
3,571
3,622
1,800
907
225
284
33,965
38,636
$
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
8
814
822
2,374
767
650
3,791
332
183
46
32
593
20,921
2,635
3,571
3,622
1,800
—
—
—
—
—
$
907
225
284
33,965
$ 39,171
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
Financial Instruments Not Recorded at Fair Value
Descriptions of the valuation methodologies and assumptions used to estimate the fair value of financial instruments not recorded at
fair value are also described in note “2 – Summary of Significant Accounting Policies.” There were no significant changes in these
methodologies or assumptions during 2012. The following table presents the fair value hierarchy for financial instruments not
recorded at fair value at December 31, 2012:
Assets:
Cash and cash equivalents
Cash and investments segregated and on
deposit for regulatory purposes
Receivables from brokers, dealers, and
clearing organizations
Receivables from brokerage clients – net
Securities held to maturity:
U.S. agency mortgage-backed securities
Other securities
Total securities held to maturity
Loans to banking clients – net:
Residential real estate mortgages
Home equity lines of credit
Personal loans secured by securities
Other
Total loans to banking clients – net
Other assets
Total
Liabilities:
Deposits from banking clients
Payables to brokers, dealers, and clearing
organizations
Payables to brokerage clients
Accrued expenses and other liabilities
Long-term debt
Total
Quoted Prices
in Active Markets
for Identical
Assets
(Level 1)
Significant
Other Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Carrying
Amount
Balance at
Fair Value
$
11,174 $
— $
11,174 $
— $
11,174
23,723
333
13,453
17,750
444
18,194
6,471
3,267
963
25
10,726
64
77,667 $
—
—
—
—
—
—
—
—
—
—
—
—
— $
23,723
333
13,453
18,289
443
18,732
6,687
3,295
963
24
10,969
64
78,448 $
—
—
—
—
—
—
—
—
—
—
—
—
— $
23,723
333
13,453
18,289
443
18,732
6,687
3,295
963
24
10,969
64
78,448
79,377 $
— $
79,377 $
— $
79,377
$
$
1,068
40,330
353
1,632
—
—
—
—
$ 122,760 $
— $
1,068
40,330
353
1,782
1,068
40,330
353
1,782
122,910 $ — $ 122,910
—
—
—
—
The table below presents the Company’s fair value estimates for financial instruments not recorded at fair value at December 31,
2011. The table excludes short-term financial assets and liabilities, for which carrying amounts approximate fair value, and financial
instruments recorded at fair value.
Financial Assets:
Securities held to maturity
Loans to banking clients – net
Loans held for sale
Financial Liabilities:
Long-term debt
- 82 -
Carrying
Amount
Fair
Value
$ 15,108 $ 15,539
9,671
$
73
$
9,812 $
70 $
$
2,001 $
2,159
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
18. Stockholders’ Equity
Preferred Stock
The Company was authorized to issue 9,940,000 shares of preferred stock, $0.01 par value, at December 31, 2012 and 2011. There
were no shares of preferred stock issued and outstanding at December 31, 2011. The Company’s preferred stock issued and
outstanding as of December 31, 2012, are as follows:
Series A
Series B
Total Preferred Stock
Shares
Issued and
Outstanding
(In thousands)
Liquidation
Preference
Per Share
400 $ 1,000 $
485 $
885
1,000
Liquidation
Preference
Carrying
Value
394
471
$ 885 $ 865
400 $
485
In January 2012, the Company issued and sold 400,000 shares of fixed-to-floating rate non-cumulative perpetual preferred stock,
Series A (Series A Preferred Stock). Net proceeds received from the sale were $394 million. The Series A Preferred Stock has no
stated maturity and has a fixed dividend rate of 7.000% until February 2022 and a floating rate equal to three-month LIBOR plus
4.820% thereafter. During the fixed rate period, dividends, if declared, will be payable semi-annually in arrears. During the floating
rate period, dividends, if declared, will be payable quarterly in arrears. Dividends are not cumulative. Under the terms of the Series A
Preferred Stock, the Company’s ability to pay dividends on, make distributions with respect to, or to repurchase, redeem or acquire its
common stock or any preferred stock ranking on parity with or junior to the Series A Preferred Stock, is subject to restrictions in the
event that the Company does not declare and either pay or set aside a sum sufficient for payment of dividends on the Series A
Preferred Stock for the immediately preceding dividend period. The Series A Preferred Stock is redeemable at the Company’s option,
in whole or in part, on any dividend payment date on or after February 1, 2022 or, in whole but not in part, within 90 days following a
regulatory capital treatment event as defined in its Certificate of Designations.
In June 2012, the Company issued and sold 19,400,000 depositary shares, each representing a 1/40 ownership interest in a share of
6.00% non-cumulative perpetual preferred stock, Series B, equivalent to $25 per depositary share (Series B Preferred Stock). Net
proceeds received from the sale were $469 million. The Series B Preferred Stock has no stated maturity and has a fixed dividend rate
of 6.00%. Dividends, if declared, will be payable quarterly in arrears. Dividends are not cumulative. Under the terms of the Series B
Preferred Stock, the Company’s ability to pay dividends on, make distributions with respect to, or to repurchase, redeem or acquire its
common stock or any preferred stock ranking on parity with or junior to the Series B Preferred Stock, is subject to restrictions in the
event that the Company does not declare and either pay or set aside a sum sufficient for payment of dividends on the Series B
Preferred Stock for the immediately preceding dividend period. The Series B Preferred Stock is redeemable at the Company’s option,
in whole or in part, on any dividend payment date on or after September 1, 2017 or, in whole but not in part, within 90 days following
a regulatory capital treatment event as defined in its Certificate of Designations.
th
Common Stock
On January 26, 2010, the Company sold 29,670,300 shares of its common stock, $.01 par value, at a public offering price of $19.00
per share. Net proceeds received from the offering were $543 million and were used to support the Company’s balance sheet growth,
including expansion of its deposit base and migration of certain client balances from money market funds into deposit accounts at
Schwab Bank.
- 83 -
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
19. Accumulated Other Comprehensive Income (Loss)
Accumulated other comprehensive income (loss) represents cumulative gains and losses that are not reflected in earnings. The
components of other comprehensive income (loss) are as follows:
Year Ended December 31,
Before
tax
2012
Tax
effect
Net of
tax
Before
tax
2011
Tax
effect
Net of
tax
Before
tax
2010
Tax
effect
Net of
tax
Change in net unrealized gain on
Securities available for sale:
Net unrealized gain
Reclassification of impairment
$ 470 $ (177) $ 293 $ (43) $ 16 $ (27) $ 300 $ (115) $ 185
charges included in
earnings
Other reclassifications
included in earnings
Change in net unrealized gain on
securities available for sale
Other
Other comprehensive (loss)
income
32
(12)
20
31
(12)
19
36
(14)
(38)
14
(24)
1
464
1
(175)
—
289
1
(11)
(1)
—
4
—
1
1
—
(7)
(1)
337
(1)
(129)
—
22
1
208
(1)
$ 465 $ (175) $ 290 $ (12) $
4 $ (8) $ 336 $ (129) $ 207
Accumulated other comprehensive income (loss) balances are as follows:
Balance at December 31, 2009
Other net changes
Balance at December 31, 2010
Other net changes
Balance at December 31, 2011
Other net changes
Balance at December 31, 2012
Net unrealized
gain on
securities
available for sale
$
(191)
208
17
(7)
10
289
299
$
$
$
Total
accumulated
other
comprehensive
income
$
$
$
$
(191)
207
16
(8)
8
290
298
$
Other
$ —
(1)
(1)
(1)
(2)
1
(1)
$
$
20. Employee Incentive, Retirement, and Deferred Compensation Plans
The Company’s stock incentive plans provide for granting options, restricted stock units, and restricted stock awards to employees,
officers, and directors. In addition, the Company offers retirement and employee stock purchase plans to eligible employees and
sponsors deferred compensation plans for eligible officers and non-employee directors.
A summary of the Company’s stock-based compensation and related income tax benefit is as follows:
Year Ended December 31,
Stock option expense
Restricted stock unit expense
Restricted stock award expense
Employee stock purchase plan expense
Total stock-based compensation expense
Income tax benefit on stock-based compensation
- 84 -
$
2012
2011
57 $
40
5
3
2010
53
10
21
3
87
$ 105 $
$ (39) $ (37) $ (33)
61 $
23
12
3
99 $
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
The Company issues shares for stock options and restricted stock awards from treasury stock. At December 31, 2012, the Company
was authorized to grant up to 45 million common shares under its existing stock incentive plans. Additionally, at December 31, 2012,
the Company had 43 million shares reserved for future issuance under its employee stock purchase plan.
As of December 31, 2012, there was $191 million of total unrecognized compensation cost, net of forfeitures, related to outstanding
stock options, restricted stock awards, and restricted stock units, which is expected to be recognized through 2016 with a remaining
weighted-average service period of 2.8 years.
Stock Option Plan
Options are granted for the purchase of shares of common stock at an exercise price not less than market value on the date of grant,
and expire within seven or ten years from the date of grant. Options generally vest annually over a three- to five-year period from the
date of grant. Certain options were granted at an exercise price above the market value of common stock on the date of grant (i.e.,
premium-priced options).
The Company’s stock option activity is summarized below:
Outstanding at December 31, 2011
Granted
Exercised
Forfeited
Expired
Outstanding at December 31, 2012
Vested and expected to vest at December 31, 2012
Vested and exercisable at December 31, 2012
Number
of Options
Weighted-
Average
Exercise Price
per Share
Weighted-
Average
Remaining
Contractual
Life
(in years)
Aggregate
Intrinsic
Value
58 $
11 $
(4) $
(2) $
(6) $
57 $
54 $
31 $
16.20
13.51
10.81
13.99
16.80
16.04
16.16
17.73
6.70 $
6.59 $
5.11 $
39
36
13
The aggregate intrinsic value in the table above represents the difference between CSC’s closing stock price and the exercise price of
each in-the-money option on the last trading day of the period presented.
Information on stock options granted and exercised is presented below:
Year Ended December 31,
Weighted-average fair value of options granted per share
Cash received from options exercised
Tax benefit realized on options exercised
Aggregate intrinsic value of options exercised
- 85 -
2012
$ 4.07
35
$
1
$
9
$
2011
$ 4.16
96
$
7
$
38
$
2010
$ 5.36
35
$
5
$
17
$
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
Management uses a binomial option pricing model to estimate the fair value of options granted. The binomial model takes into
account the contractual term of the stock option, expected volatility, dividend yield, and risk-free interest rate. Expected volatility is
based on the implied volatility of publicly-traded options on CSC’s stock. Dividend yield is based on the average historical CSC
dividend yield. The risk-free interest rate is based on the yield of a U.S. Treasury zero-coupon issue with a remaining term similar to
the contractual term of the option. Management uses historical option exercise data, which includes employee termination data to
estimate the probability of future option exercises. Management uses the Black-Scholes model to solve for the expected life of options
valued with the binomial model presented below. The assumptions used to value the Company’s options granted during the years
presented and their expected lives were as follows:
Year Ended December 31,
Weighted-average expected dividend yield
Weighted-average expected volatility
Weighted-average risk-free interest rate
Expected life (in years)
2012
2011
2010
.99%
31%
1.8%
.85%
36%
2.1%
.71%
35%
2.8%
3.0 – 6.7
0.0 – 6.3
3.0 – 5.9
Restricted Stock Units
Restricted stock units are awards that entitle the holder to receive shares of CSC’s common stock following a vesting period.
Restricted stock units are restricted from transfer or sale and generally vest annually over a three- to five-year period, while some vest
based upon the Company achieving certain financial or other measures. The fair value of restricted stock units is based on the market
price of the Company’s stock on the date of grant. The grant date fair value is amortized to compensation expense on a straight-line
basis over the requisite service period. The fair value of the restricted stock units that vested during each of the years 2012, 2011, and
2010 was $30 million, $13 million, and $6 million, respectively.
The Company’s restricted stock units activity is summarized below:
Outstanding at December 31, 2011
Granted
Vested
Forfeited
Outstanding at December 31, 2012
Number
of Units
Weighted-
Average Grant
Date Fair Value
per Unit
8
6
(2)
(1)
11
$
$
$
$
$
13.23
13.60
13.55
13.29
13.34
Retirement Plan
Upon completing three months of consecutive service, employees of the Company can participate in the Company’s qualified
retirement plan, the SchwabPlan Retirement Savings and Investment Plan. The Company may match certain employee contributions
or make additional contributions to this plan at its discretion. The Company’s total contribution expense was $59 million, $53 million,
and $50 million in 2012, 2011, and 2010, respectively.
®
Deferred Compensation Plans
The Company’s deferred compensation plan for officers permits participants to defer the receipt of certain cash compensation. The
deferred compensation liability was $127 million and $128 million at December 31, 2012 and 2011, respectively. The Company’s
deferred compensation plan for non-employee directors permits participants to defer receipt of all or a portion of their director fees
and to receive either a grant of stock options, or upon ceasing to serve as a director, the number of shares of CSC’s common stock
that would have resulted from investing the deferred fee amount into CSC’s common stock.
- 86 -
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
21. Class Action Litigation and Regulatory Reserve and Money Market Mutual Fund Charges
As disclosed previously, the Company recorded total charges in 2010 of $320 million for settlements to resolve class action litigation
and regulatory matters relating to the Schwab YieldPlus Fund .
®
In 2010, the Company decided to cover the net remaining losses recognized by Schwab money market mutual funds as a result of
their investments in a single structured investment vehicle that defaulted in 2008 and recorded a charge of $132 million.
22. Taxes on Income
The components of income tax expense are as follows:
Year Ended December 31,
Current:
Federal
State
Total current
Deferred:
Federal
State
Total deferred
Taxes on income
The temporary differences that created deferred tax assets and liabilities are detailed below:
December 31,
Deferred tax assets:
Employee compensation, severance, and benefits
Reserves and allowances
Facilities lease commitments
Net operating loss carryforwards
State and local taxes
Other
Total deferred tax assets
Valuation allowance
Deferred tax assets – net of valuation allowance
Deferred tax liabilities:
Net unrealized gain on securities available for sale
Depreciation and amortization
Capitalized internal-use software development costs
Deferred loan costs
Deferred cancellation of debt income
Deferred Senior Note exchange
Other
Total deferred tax liabilities
Deferred tax (liability) asset – net
(1)
2012
2011
2010
$
489 $ 424 $ 326
52
28
50
376
476
517
5
—
5
(43)
44
(8)
8
(51)
52
522 $ 528 $ 325
$
2012
2011
$
189 $ 173
40
37
37
35
5
6
8
—
5
—
268
267
(3)
(1)
267
264
(179)
(166)
(50)
(15)
(11)
(6)
(7)
(434)
(5)
(162)
(42)
(20)
(11)
—
—
(240)
$ (170) $
27
(1)
Amounts are included in accrued expenses and other liabilities and other assets at December 31, 2012 and 2011, respectively.
- 87 -
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
A reconciliation of the federal statutory income tax rate to the effective income tax rate is as follows:
Year Ended December 31,
Federal statutory income tax rate
State income taxes, net of federal tax benefit
Non-deductible penalties
Other
(2)
(1)
Effective income tax rate
2012
35.0%
1.2
—
(0.2)
36.0%
2011
35.0%
2.5
—
0.4
37.9%
2010
35.0%
3.3
2.7
0.7
41.7%
(1)
(2)
Includes the impact of a non-recurring state tax benefit of $20 million recorded in the third quarter of 2012.
Includes the impact of regulatory settlements relating to the Schwab YieldPlus Fund in 2010.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
December 31,
Balance at beginning of year
Additions for tax positions related to the current year
Additions for tax positions related to prior years
Reductions due to lapse of statute of limitations
Reductions for settlements with tax authorities
Balance at end of year
2012
2011
$ 13 $ 11
1
1
2
1
(2)
(1)
(1) —
$ 12 $ 13
Resolving the above uncertain tax matters as of December 31, 2012, in the Company’s favor would reduce taxes on income by
$8 million, net of the federal tax benefit.
Federal tax examinations for all years ending through December 31, 2007, have been completed. The years open to examination by
state and local governments vary by jurisdiction.
23. Earnings Per Common Share
Basic EPS is computed by dividing net income available to common stockholders by the weighted-average number of common shares
outstanding during the period. The computation of diluted EPS is similar to the computation of basic EPS except that the denominator
is increased to include the number of additional common shares that would have been outstanding if dilutive potential common shares
had been issued. Dilutive potential common shares include the effect of outstanding stock options and unvested restricted stock
awards and units. EPS under the basic and diluted computations is as follows:
Year Ended December 31,
Net income
Preferred stock dividends
Net income available to common stockholders
Weighted-average common shares outstanding — basic
Common stock equivalent shares related to stock incentive plans
Weighted-average common shares outstanding — diluted
Basic EPS
Diluted EPS
(1)
2011
2012
$
928 $
(45)
883 $
864 $
—
864 $
$
1,274 1,227
2
1
1,275 1,229
.69 $
$
.69 $
$
.70 $
.70 $
2010
454
—
454
1,191
3
1,194
.38
.38
(1)
Antidilutive stock options and restricted stock awards excluded from the calculation of diluted EPS totaled 74 million,
63 million, and 52 million shares in 2012, 2011, and 2010, respectively.
- 88 -
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
24. Regulatory Requirements
CSC is a savings and loan holding company and Schwab Bank, CSC’s depository institution subsidiary, is a federal savings bank.
CSC is subject to supervision and regulation by the Board of Governors of the Federal Reserve System (the Federal Reserve) and
Schwab Bank is subject to supervision and regulation by the Office of the Comptroller of the Currency (the OCC). CSC is currently
not subject to specific statutory capital requirements, however CSC is required to serve as a source of strength for Schwab Bank.
Under the “Dodd-Frank Wall Street Reform and Consumer Protection Act,” CSC will be subject to new minimum leverage and
minimum risk-based capital ratio requirements that will be set by the Federal Reserve that are at least as stringent as the current
requirements generally applicable to insured depository institutions.
Schwab Bank is subject to regulation and supervision and to various requirements and restrictions under federal and state laws,
including regulatory capital guidelines. Among other things, these requirements also restrict and govern the terms of affiliate
transactions, such as extensions of credit and repayment of loans between Schwab Bank and CSC or CSC’s other subsidiaries. In
addition, Schwab Bank is required to provide notice to and may be required to obtain approval of the OCC and the Federal Reserve to
declare dividends to CSC. The federal banking agencies have broad powers to enforce these regulations, including the power to
terminate deposit insurance, impose substantial fines and other civil and criminal penalties, and appoint a conservator or receiver.
Under the Federal Deposit Insurance Act, Schwab Bank could be subject to restrictive actions if it were to fall within one of the
lowest three of five capital categories. Schwab Bank is required to maintain minimum capital levels as specified in federal banking
laws and regulations. Failure to meet the minimum levels could result in certain mandatory, and possibly additional discretionary
actions by the regulators that, if undertaken, could have a direct material effect on Schwab Bank. At December 31, 2012, CSC and
Schwab Bank met the capital level requirements.
The regulatory capital and ratios for Schwab Bank are as follows:
December 31, 2012
Tier 1 Risk-Based Capital
Total Risk-Based Capital
Tier 1 Leverage
Tangible Equity
December 31, 2011
Tier 1 Risk-Based Capital
Total Risk-Based Capital
Tier 1 Leverage
Tangible Equity
N/A Not applicable.
Actual
Minimum Capital
Requirement
Minimum to be
Well Capitalized
Amount
$ 5,707
$ 5,760
$ 5,707
$ 5,707
$ 4,984
$ 5,036
$ 4,984
$ 4,984
Ratio
Amount
20.0% $ 1,139
20.2% $ 2,279
6.7% $ 3,412
6.7% $ 1,706
Ratio
Amount
4.0% $ 1,709
8.0% $ 2,848
4.0% $ 4,266
N/A
2.0%
Ratio
6.0%
10.0%
5.0%
23.4% $
850
23.7% $ 1,701
7.5% $ 2,642
7.5% $ 1,321
4.0% $ 1,276
8.0% $ 2,126
4.0% $ 3,302
N/A
2.0%
6.0%
10.0%
5.0%
Based on its regulatory capital ratios at December 31, 2012 and 2011, Schwab Bank is considered well capitalized (the highest
category) pursuant to banking regulatory guidelines. There are no conditions or events since December 31, 2012, that management
believes have changed Schwab Bank’s capital category.
The Federal Reserve requires Schwab Bank to maintain reserve balances at the Federal Reserve Bank based on certain deposit levels.
Schwab Bank’s average reserve requirement was $1.1 billion in both 2012 and 2011.
CSC’s principal U.S. broker-dealers are Schwab and optionsXpress, Inc. optionsXpress, Inc. is a wholly-owned subsidiary of
optionsXpress. Schwab and optionsXpress, Inc. are both subject to Rule 15c3-1 under the Securities Exchange Act of 1934 (the
Uniform Net Capital Rule). Schwab and optionsXpress, Inc. compute net capital under the alternative method permitted by the
Uniform Net Capital Rule. This method requires the maintenance of minimum net capital, as defined, of the greater of 2% of
aggregate debit balances arising from client transactions or a minimum dollar requirement ($250,000 for Schwab), which is based on
the type of business conducted by the broker-dealer. Under the alternative method, a broker-dealer may not
- 89 -
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
repay subordinated borrowings, pay cash dividends, or make any unsecured advances or loans to its parent company or employees if
such payment would result in a net capital amount of less than 5% of aggregate debit balances or less than 120% of its minimum
dollar requirement.
optionsXpress, Inc. is also subject to Commodity Futures Trading Commission Regulation 1.17 (Reg. 1.17) under the Commodity
Exchange Act, which also requires the maintenance of minimum net capital. optionsXpress, Inc., as a futures commission merchant,
is required to maintain minimum net capital equal to the greater of its net capital requirement under Reg. 1.17 ($1 million), or the sum
of 8% of the total risk margin requirements for all positions carried in client accounts and 8% of the total risk margin requirements for
all positions carried in non-client accounts (as defined in Reg. 1.17).
Net capital and net capital requirements for Schwab and optionsXpress, Inc. at December 31, 2012, are as follows:
Schwab
optionsXpress, Inc.
% of
Aggregate
Debit Balances
Net Capital
in Excess of
5% of
Aggregate
Debit Balances
9% $ 0.250 $ 297 $ 1,068 $ 623
76
40% $
2% of
Aggregate
Debit Balances
Net Capital
in Excess of
Required
Net Capital
Minimum
Net Capital
Required
82 $
5 $
1 $
Net Capital
$ 1,365
87
$
Schwab and optionsXpress, Inc. are also subject to Rule 15c3-3 under the Securities Exchange Act of 1934 and/or other applicable
regulations, which require them to maintain cash or qualified securities in a segregated reserve account for the exclusive benefit of
clients. In accordance with Rule 15c3-3, Schwab and optionsXpress, Inc. had portions of their cash and investments segregated for
the exclusive benefit of clients at December 31, 2012. Amounts included in cash and investments segregated and on deposit for
regulatory purposes represent actual balances on deposit, whereas cash and investments required to be segregated and on deposit for
regulatory purposes at December 31, 2012 for Schwab and optionsXpress, Inc. totaled $29.2 billion. On January 3, 2013, Schwab and
optionsXpress, Inc. deposited a net amount of $1.2 billion of cash into their segregated reserve bank accounts. Cash and investments
required to be segregated and on deposit for regulatory purposes at December 31, 2011 for Schwab and optionsXpress, Inc. totaled
$26.3 billion. On January 4, 2012, Schwab and optionsXpress, Inc. deposited a net amount of $1.1 billion of cash into their segregated
reserve bank accounts.
25. Segment Information
Operating segments are defined as components of a company in which separate financial information is evaluated regularly by the
chief operating decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance. The
Company structures its operating segments according to its clients and the services provided to those clients. The Company’s two
reportable segments are Investor Services and Institutional Services.
The Investor Services segment provides retail brokerage and banking services to individual investors. The Institutional Services
segment provides custodial, trading, and support services to independent investment advisors. The Institutional Services segment also
provides retirement plan services, specialty brokerage services, and mutual fund clearing services, and supports the availability of
Schwab proprietary mutual funds and collective trust funds on third-party platforms. Banking revenues and expenses are allocated to
the Company’s two segments based on which segment services the client.
The accounting policies of the segments are the same as those described in note “2 – Summary of Significant Accounting Policies.”
Financial information for the Company’s reportable segments is presented in the following table. For the computation of its segment
information, the Company utilizes an activity-based costing model to allocate traditional income statement line item expenses (e.g.,
compensation and benefits, depreciation and amortization, and professional services) to the business activities driving segment
expenses (e.g., client service, opening new accounts, or business development) and a funds transfer pricing methodology to allocate
certain revenues.
- 90 -
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
The Company evaluates the performance of its segments on a pre-tax basis, excluding items such as significant nonrecurring gains,
impairment charges on non-financial assets, discontinued operations, extraordinary items, and significant restructuring and other
charges. Segment assets and liabilities are not used for evaluating segment performance or in deciding how to allocate resources to
segments. However, capital expenditures are used in resource allocation and are therefore disclosed. There are no revenues from
transactions with other segments within the Company. Capital expenditures are reported gross, and are not net of proceeds from the
sale of fixed assets.
Financial information for the Company’s reportable segments is presented in the following table:
Year Ended December 31,
Net Revenues
Asset management and administration fees
Net interest revenue
Trading revenue
(1)
Other – net
Provision for loan losses
Net impairment losses on securities
Total net revenues
(2)
Expenses Excluding Interest
Income before taxes on income
Taxes on income
Net Income
Capital expenditures
Depreciation and amortization
Investor Services
Institutional Services
Unallocated
Total
2012 2011 2010 2012 2011 2010 2012 2011 2010 2012 2011 2010
574
108
(14)
(28)
285
293
77
(2)
(4)
1,479 1,468 1,297
557
625
70
85
(23)
(15)
(32)
(27)
$ 1,109 $1,053 $ 976 $ 934 $ 875 $ 846 $ — $ — $ — $2,043 $1,928 $1,822
227 — — — 1,764 1,725 1,524
1 — —
830
273
135
— —
65
(27)
(4)
— —
(36)
(4) — — —
72 — — 4,883 4,691 4,248
444 3,433 3,299 3,469
(1)
1 $ (444) $1,450 $1,392 $ 779
325
522
$ 928 $ 864 $ 454
3,228 3,189 2,845 1,583 1,502 1,403
960
2,363 2,261 2,065 1,069 1,039
865 $ 928 $ 780 $ 514 $ 463 $ 443 $
257
302
75
(3)
(4)
927
160
(18)
(31)
868
256
(16)
(32)
1
71 $
71
—
528
$
$
$
91 $ 120 $
148 $ 108 $
91 $
93 $
47 $
48 $
70 $
47 $
36 $ — $ — $ — $ 138 $ 190 $ 127
1 $ 196 $ 155 $ 146
52 $ — $ — $
(1)
(2)
Unallocated amount includes a pre-tax gain of $70 million relating to a confidential resolution of a vendor dispute in 2012.
Unallocated amount primarily includes class action litigation and regulatory reserves of $320 million and money market mutual fund charges of $132 million in 2010.
Fees received from Schwab’s proprietary mutual funds represented 10% of the Company’s net revenues in both 2012 and 2011, and
14% in 2010. Except for Schwab’s proprietary mutual funds, which are considered a single client for purposes of this computation, no
single client accounted for more than 10% of the Company’s net revenues in 2012, 2011, or 2010. Substantially all of the Company’s
revenues and assets are generated or located in the U.S. The percentage of Schwab’s total client accounts located in California was
23% at December 31, 2012, 2011, and 2010.
In the first quarter of 2013, the Company realigned its reportable segments as a result of recent organizational changes. The
Institutional segment will be renamed to Advisor Services. The Retirement Plan Services, Corporate Brokerage Retirement Products
(formerly part of Retirement Business Services), and Corporate Brokerage Services business units will be reallocated to the Investor
Services segment. The Company will recast the segment information based on this realignment in the first quarter of 2013.
26. Subsequent Events
The Company has evaluated the impact of events that have occurred subsequent to December 31, 2012, through the date the
consolidated financial statements were filed with the SEC. Based on this evaluation, other than as recorded or disclosed within these
consolidated financial statements and related notes, the Company has determined none of these events were required to be recognized
or disclosed.
- 91 -
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
27. The Charles Schwab Corporation – Parent Company Only Financial Statements
Condensed Statements of Income
Year Ended December 31,
Interest revenue
Interest expense
Net interest revenue
Other revenues – net
Expenses excluding interest
Loss before income tax benefit and equity in net income of subsidiaries
Income tax benefit
Loss before equity in net income of subsidiaries
Equity in net income of subsidiaries:
Equity in undistributed net income of subsidiaries
Dividends from bank subsidiary
Dividends from non-bank subsidiaries
Net Income
Preferred stock dividends
Net Income Available to Common Stockholders
Condensed Balance Sheets
December 31,
Assets
Cash and cash equivalents
Receivables from subsidiaries
Other securities owned – at fair value
Loans to non-bank subsidiaries
Investment in non-bank subsidiaries
Investment in bank subsidiary
Other assets
Total assets
Liabilities and Stockholders’ Equity
Accrued expenses and other liabilities
Payables to subsidiaries
Long-term debt
Total liabilities
Stockholders’ equity
Total liabilities and stockholders’ equity
- 92 -
2012
2011
2010
$
6 $
(97)
(91)
(30)
(23)
(144)
58
(86)
4 $
(103)
(99)
8
(30)
(121)
43
(78)
3
(86)
(83)
6
(18)
(95)
36
(59)
662
50
302
928
45
478
—
35
454
—
$ 883 $ 864 $ 454
600
150
192
864
—
2012
2011
$
1,339 $
80
74
404
3,615
6,022
88
$ 11,622 $
852
57
77
363
3,363
5,009
68
9,789
$
482 $
14
1,537
2,033
9,589
158
16
1,901
2,075
7,714
$ 11,622 $ 9,789
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
Condensed Statements of Cash Flows
Year Ended December 31,
Cash Flows from Operating Activities
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Equity in undistributed earnings of subsidiaries
Provision for deferred income taxes
Other
Net change in:
Receivables from brokers, dealers, and clearing organizations
Other securities owned
Other assets
Accrued expenses and other liabilities
Net cash provided by operating activities
Cash Flows from Investing Activities
Due from subsidiaries – net
Increase in investments in subsidiaries
Other investing activities
Net cash used for investing activities
Cash Flows from Financing Activities
Issuance of commercial paper
Issuance of long-term debt
Repayment of long-term debt
Premium paid on debt exchange
Net proceeds from preferred stock offering
Net proceeds from common stock offering
Dividends paid
Proceeds from stock options exercised and other
Other financing activities
Net cash provided by (used for) financing activities
Increase (Decrease) in Cash and Cash Equivalents
Cash and Cash Equivalents at Beginning of Year
Cash and Cash Equivalents at End of Year
- 93 -
2012
2011
2010
$
928 $
864 $
454
(662)
9
39
(591)
3
1
—
3
(21)
(5)
291
—
6
26
(76)
233
(478)
3
(3)
11
422
40
(2)
447
43
(307)
—
(264)
24
(366)
8
(334)
63
(1,025)
4
(958)
300
350
(727)
(19)
863
—
(337)
35
(5)
460
487
852
—
701
(200)
—
—
543
(288)
35
(6)
785
274
875
$ 1,339 $ 852 $ 1,149
—
—
—
—
—
—
(295)
96
3
(196)
(297)
1,149
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
28. Quarterly Financial Information (Unaudited)
Year Ended December 31, 2012:
Net Revenues
Expenses Excluding Interest
Net Income
Net Income Available to Common Stockholders
Weighted Average Common Shares Outstanding – Diluted
Basic Earnings Per Common Share
Diluted Earnings Per Common Share
Dividends Declared Per Common Share
Range of Common Stock Price Per Share:
Year Ended December 31, 2011:
Net Revenues
Expenses Excluding Interest
Net Income
Net Income Available to Common Stockholders
Weighted Average Common Shares Outstanding – Diluted
Basic Earnings Per Common Share
Diluted Earnings Per Common Share
Dividends Declared Per Common Share
Range of Common Stock Price Per Share:
Fourth
Quarter
Third
Quarter
Second
Quarter
First
Quarter
871 $
211 $
189 $
$ 1,215 $ 1,196 $ 1,283 $ 1,189
876
835 $
$
195
247 $
$
195
238 $
$
1,273
.15
.15
.06
851 $
275 $
261 $
.19 $
.19 $
.06 $
.15 $
.15 $
.06 $
.20 $
.20 $
.06 $
$
$
$
1,274
1,275
1,278
861 $
163 $
163 $
$ 1,113 $ 1,181 $ 1,190 $ 1,207
813
821 $
$
243
220 $
$
243
220 $
$
1,207
.20
.20
.06
804 $
238 $
238 $
.13 $
.13 $
.06 $
.18 $
.18 $
.06 $
.20 $
.20 $
.06 $
$
$
$
1,210
1,229
1,271
High
Low
Range of Price/Earnings Ratio
(1)
High
Low
:
$ 14.47 $ 14.43 $ 14.76 $ 15.38
$ 12.50 $ 12.14 $ 11.83 $ 11.61
21
18
22
18
22
18
23
18
High
Low
Range of Price/Earnings Ratio
(1)
High
Low
:
$ 13.41 $ 16.72 $ 18.72 $ 19.45
$ 10.75 $ 11.03 $ 15.78 $ 17.16
19
15
25
16
31
26
34
30
(1)
Price/earnings ratio is computed by dividing the high and low market prices by diluted earnings per common share for the
preceding 12-month period ending on the last day of the quarter presented.
- 94 -
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of The Charles Schwab Corporation:
We have audited the accompanying consolidated balance sheets of The Charles Schwab Corporation and subsidiaries (the Company)
as of December 31, 2012 and 2011, and the related consolidated statements of income, comprehensive income, stockholders’ equity,
and cash flows for each of the three years in the period ended December 31, 2012. Our audits also included the financial statement
schedule of the Company on page F-2. We also have audited the Company’s internal control over financial reporting as of
December 31, 2012, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. The Company’s management is responsible for these financial statements and financial
statement schedule, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of
internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial
Reporting. Our responsibility is to express an opinion on these financial statements and financial statement schedule and an opinion
on the Company’s internal control over financial reporting based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the
overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of
internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and
operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as
we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal
executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors,
management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal
control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles and that receipts and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial
statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper
management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis.
Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to
the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies
or procedures may deteriorate.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of
The Charles Schwab Corporation and subsidiaries as of December 31, 2012 and 2011, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 2012, in conformity with accounting principles generally
accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the
basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of
December 31, 2012, based on the criteria established in Internal Control – Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission.
/s/ Deloitte & Touche LLP
San Francisco, California
February 21, 2013
- 95 -
THE CHARLES SCHWAB CORPORATION
Management’s Report on Internal Control Over Financial Reporting
Management of The Charles Schwab Corporation, together with its subsidiaries (the Company), is responsible for establishing and
maintaining adequate internal control over financial reporting. The Company’s internal control over financial reporting is a process
designed under the supervision of and effected by the Company’s chief executive officer and chief financial officer to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of published financial statements in
accordance with accounting principles generally accepted in the United States of America.
As of December 31, 2012, management conducted an assessment of the effectiveness of the Company’s internal control over financial
reporting based on the framework established in Internal Control – Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on this assessment, management has determined that the Company’s internal
control over financial reporting was effective as of December 31, 2012.
The Company’s internal control over financial reporting includes policies and procedures that pertain to the maintenance of records
that, in reasonable detail, accurately and fairly reflect transactions and dispositions of assets; provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America, and that receipts and expenditures are being made only in accordance with
authorizations of management and the directors of the Company; and provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the Company’s
financial statements.
The Company’s internal control over financial reporting as of December 31, 2012, has been audited by Deloitte & Touche LLP, an
independent registered public accounting firm, as stated in their report appearing on the previous page.
- 96 -
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
THE CHARLES SCHWAB CORPORATION
Item 9.
None.
Item 9A. Controls and Procedures
Evaluation of disclosure controls and procedures: The management of the Company, with the participation of the Company’s Chief
Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures
(as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of December 31, 2012. Based on this evaluation, the
Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and
procedures were effective as of December 31, 2012.
Changes in internal control over financial reporting: No change in the Company’s internal control over financial reporting (as
defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) was identified during the quarter ended December 31, 2012,
that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
Management’s Report on Internal Control Over Financial Reporting and the Report of Independent Registered Public Accounting
Firm are included in “Item 8 – Financial Statements and Supplementary Data.”
Item 9B. Other Information
None.
PART III
Item 10. Directors, Executive Officers, and Corporate Governance
The information relating to directors of CSC required to be furnished pursuant to this item is incorporated by reference from portions
of the Company’s definitive proxy statement for its annual meeting of stockholders to be filed with the SEC pursuant to
Regulation 14A by April 30, 2013 (the Proxy Statement) under “Members of the Board of Directors,” “Corporate Governance
Information,” “Director Nominations,” and “Section 16(a) Beneficial Ownership Reporting Compliance.” The Company’s Code of
Conduct and Business Ethics, applicable to directors and all employees, including senior financial officers, is available on the
Company’s website at http://www.aboutschwab.com/governance. If the Company makes any amendments to or grants any waivers
from its Code of Conduct and Business Ethics, which are required to be disclosed pursuant to the Securities Exchange Act of 1934,
the Company will make such disclosures on this website.
- 97 -
Executive Officers of the Registrant
The following table provides certain information about each of the Company’s executive officers as of December 31, 2012.
THE CHARLES SCHWAB CORPORATION
Name
Age Title
Executive Officers of the Registrant
75 Chairman of the Board
Charles R. Schwab
Walter W. Bettinger II 52 President and Chief Executive Officer
Jay L. Allen
Bernard J. Clark
John S. Clendening
Carrie E. Dwyer
55 Executive Vice President – Advisor Services
50 Executive Vice President – Investor Services
62 Executive Vice President, General Counsel and Corporate Secretary
56 Executive Vice President – Human Resources and Employee Services
George A. (Andy) Gill 50 Executive Vice President – Investor Services
Joseph R. Martinetto 51 Executive Vice President and Chief Financial Officer
James D. McCool
54 Executive Vice President – Client Solutions
Mr. Schwab has been Chairman of the Board and a director of CSC since its incorporation in 1986. He also served as Chief
Executive Officer of CSC from 1986 to 1997, and as Co-Chief Executive Officer from 1998 until 2003. He was re-appointed Chief
Executive Officer in 2004 and served in that role until 2008. Mr. Schwab is also Chairman of Charles Schwab & Co., Inc. and Charles
Schwab Bank, and a trustee of The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust, Schwab Annuity
Portfolios, Laudus Trust, and Laudus Institutional Trust, all registered investment companies.
Mr. Bettinger has been President and Chief Executive Officer of CSC since 2008. He also serves on the Board of Directors of CSC,
Charles Schwab & Co., Inc. and Charles Schwab Bank, and as a trustee of The Charles Schwab Family of Funds, Schwab
Investments, Schwab Capital Trust, Schwab Annuity Portfolios, Laudus Trust, Laudus Institutional Trust, and Schwab Strategic
Trust, all registered investment companies. Prior to assuming his current role, Mr. Bettinger served as President and Chief Operating
Officer of CSC from 2007 until 2008 and as Executive Vice President and President – Schwab Investor Services of CSC and Schwab
from 2005 to 2007. He served as Executive Vice President and Chief Operating Officer – Individual Investor Enterprise of CSC and
Schwab from 2004 until 2005, and Executive Vice President – Corporate Services of Schwab from 2002 until 2004. Mr. Bettinger
joined Schwab in 1995.
Mr. Allen has been Executive Vice President – Human Resources and Employee Services of CSC and Schwab since 2007. He served
as Senior Vice President – Human Resources of Schwab Investor Services from 2004 to 2007. Mr. Allen joined Schwab in 2003 as
Vice President – Human Resources of Schwab Investor Services.
Mr. Clark has been Executive Vice President – Advisor Services of CSC since December 2012. Mr. Clark has served as Executive
Vice President – Advisor Services of Schwab since 2010. From 2006 until 2010, Mr. Clark served as Senior Vice President – Schwab
Institutional Sales of Schwab. During 2005 and 2006, he served as Senior Vice President – Client Service of Schwab. Mr. Clark
joined Schwab in 1998.
- 98 -
THE CHARLES SCHWAB CORPORATION
Mr. Clendening has been Executive Vice President and co-leader – Investor Services of Schwab since March 2012. Mr. Clendening
served as Executive Vice President – Shared Strategic Services of CSC and Schwab from 2009 to 2012. He served as Executive Vice
President – Solution Services of CSC and Schwab from 2008 to 2009 and as Executive Vice President – Client Experience, Schwab
Investor Services of CSC in 2007 and of Schwab from 2006 to 2008. Mr. Clendening served as Executive Vice President and
President – Individual Investor Enterprise Marketing of Schwab from 2005 to 2007. He joined Schwab in 2004 as Senior Vice
President – Individual Investor Enterprise Marketing.
Ms. Dwyer has been Executive Vice President, General Counsel and Corporate Secretary of CSC and Executive Vice President –
Corporate Oversight of Schwab since 1996. Ms. Dwyer joined Schwab in 1996.
Mr. Gill has been Executive Vice President and co-leader – Investor Services of CSC since March 2012. He has served as Executive
Vice President – Investor Services of Schwab since 2011. Mr. Gill served as Senior Vice President – Fixed Income of Schwab from
2009 until 2011 and as Senior Vice President – Investor Services of Schwab from 2006 until 2009. Mr. Gill joined Schwab in 2001.
Mr. Martinetto has been Executive Vice President and Chief Financial Officer of CSC and Schwab since 2007. He has served as
Chief Executive Officer of Charles Schwab Bank since December 2012. Mr. Martinetto served as Senior Vice President and
Treasurer of CSC and Schwab from 2003 to 2007 and Senior Vice President – Individual Investor Finance of Schwab from 2002 to
2003. Mr. Martinetto joined Schwab in 1997.
Mr. McCool has been Executive Vice President – Clients Solutions of CSC and Schwab since December 2012. He served as
Executive Vice President – Institutional Services of CSC and Schwab from 2008 until December 2012. Mr. McCool served as
Executive Vice President – Schwab Corporate and Retirement Services of CSC from 2007 until 2008 and of Schwab from 2006 until
2008. Mr. McCool served as Senior Vice President – Corporate Services of Schwab from 2004 until 2006. Mr. McCool also served as
President and Chief Executive Officer of The Charles Schwab Trust Company (CSTC) from 2005 until 2007. Mr. McCool served as
Senior Vice President – Plan Administrative Services of CSTC from 2004 until 2005, Chief Operating Officer of CSTC from 2003
until 2004, and Vice President – Development and Business Technology of CSTC from 2002 until 2003. Mr. McCool joined Schwab
in 1995.
Executive Compensation
Item 11.
The information required to be furnished pursuant to this item is incorporated by reference from portions of the Proxy Statement
under “Compensation Discussion and Analysis,” “Executive Compensation Tables – 2012 Summary Compensation Table,”
“Executive Compensation Tables – 2012 Grants of Plan-Based Awards Table,” “Executive Compensation Tables – Narrative to
Summary Compensation and Grants of Plan-Based Awards Tables,” “Executive Compensation Tables – 2012 Termination and
Change in Control Benefits Table,” “Executive Compensation Tables – Outstanding Equity Awards as of December 31, 2012,”
“Executive Compensation Tables – 2012 Option Exercises and Stock Vested Table,” “Executive Compensation Tables – 2012
Nonqualified Deferred Compensation Table,” “Director Compensation,” and “Compensation Committee Interlocks and Insider
Participation.” In addition, the information from a portion of the Proxy Statement under “Compensation Committee Report,” is
incorporated by reference from the Proxy Statement and furnished on this Form 10-K, and shall not be deemed “filed” for purposes of
Section 18 of the Securities Exchange Act of 1934, nor shall it be deemed incorporated by reference in any filing under the Securities
Act of 1933.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 12.
The information required to be furnished pursuant to this item is incorporated by reference from portions of the Proxy Statement
under “Security Ownership of Certain Beneficial Owners and Management,” and “Securities Authorized for Issuance under Equity
Compensation Plans.”
- 99 -
THE CHARLES SCHWAB CORPORATION
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required to be furnished pursuant to this item is incorporated by reference from portions of the Proxy Statement
under “Transactions with Related Persons” and “Director Independence.”
Item 14.
Principal Accountant Fees and Services
The information required to be furnished pursuant to this item is incorporated by reference from a portion of the Proxy Statement
under “Auditor Fees.”
PART IV
Exhibits and Financial Statement Schedule
Item 15.
(a) Documents filed as part of this Report
1. Financial Statements
The financial statements and independent auditors’ report are included in “Item 8 – Financial Statements and Supplementary Data”
and are listed below:
Consolidated Statements of Income
Consolidated Statements of Comprehensive Income
Consolidated Balance Sheets
Consolidated Statements of Cash Flows
Consolidated Statements of Stockholders’ Equity
Notes to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
2. Financial Statement Schedule
The financial statement schedule required to be furnished pursuant to this item is listed in the accompanying index appearing on page
F-1.
(b) Exhibits
The exhibits listed below are filed as part of this annual report on Form 10-K.
Exhibit
Number
1.1
2.1
Exhibit
Underwriting Agreement, dated December 3, 2012, among the Company and Citigroup Global Markets Inc. and
Goldman, Sachs & Co., as representatives of the several underwriters named therein, filed as Exhibit 1.1 to the
Registrant’s Form 8-K dated December 3, 2012, and incorporated herein by reference.
Agreement and Plan of Merger, dated March 18, 2011, by and among The Charles Schwab Corporation, Neon
Acquisition Corp. and optionsXpress Holdings, Inc., filed as Exhibit 2.1 to the Registrant’s Form 8-K dated March 18,
2011, and incorporated herein by reference.
- 100 -
Exhibit
Number
3.11
3.14
3.15
3.16
4.1
4.2
4.28
10.4
10.57
10.72
10.271
10.272
10.288
10.290
THE CHARLES SCHWAB CORPORATION
Exhibit
Fifth Restated Certificate of Incorporation, effective May 7, 2001, of the Registrant, filed as Exhibit 3.11 to the
Registrant’s Form 10-Q for the quarter ended September 30, 2011, and incorporated herein by reference.
Fourth Restated Bylaws, as amended on January 27, 2010, of the Registrant, filed as Exhibit 3.1 to the Registrant’s
Form 8-K dated January 27, 2010, and incorporated herein by reference.
Certificate of Designations of Fixed to Floating Rate Non-Cumulative Perpetual Preferred Stock, Series A of The
Charles Schwab Corporation filed as Exhibit 3.15 to the Registrant’s Form 8-K dated January 24, 2012, and
incorporated herein by reference.
Certificate of Designations of 6.00% Non-Cumulative Perpetual Preferred Stock, Series B, of the Charles Schwab
Corporation filed as Exhibit 3.1 to the Registrant’s Form 8-K dated May 31, 2012, and incorporated herein by
reference.
Deposit Agreement, dated June 6, 2012, between the Company and Wells Fargo Bank, N.A., as Depositary
(including the form of Depositary Share Receipt attached as Exhibit A thereto), filed as Exhibit 4.1 to the Registrant’s
Form 8-K dated May 31, 2012, and incorporated herein by reference.
Neither the Registrant nor its subsidiaries are parties to any instrument with respect to long-term debt for which
securities authorized thereunder exceed 10% of the total assets of the Registrant and its subsidiaries on a consolidated
basis. Copies of instruments with respect to long-term debt of lesser amounts will be provided to the SEC upon
request.
Exchange and Registration Rights Agreement, dated August 27, 2012, by and among the Company and Citigroup
Global Markets Inc., Goldman Sachs & Co. and Wells Fargo Securities, LLC, filed as Exhibit 4.28 to the Registrant’s
Form 8-K dated August 27, 2012, and incorporated herein by reference.
Form of Release Agreement dated as of March 31, 1987 among BAC, Registrant, Schwab Holdings, Inc., Charles
Schwab & Co., Inc. and former shareholders of Schwab Holdings, Inc., filed as the identically-numbered exhibit to
Registrant’s Registration Statement No. 33-16192 on Form S-1 and incorporated herein by reference.
Registration Rights and Stock Restriction Agreement, dated as of March 31, 1987, between the Registrant and the
holders of the Common Stock, filed as Exhibit 4.23 to Registrant’s Registration Statement No. 33-16192 on Form S-1
and incorporated herein by reference.
Restatement of Assignment and License, as amended January 25, 1988, among Charles Schwab & Co., Inc., Charles
R. Schwab and the Registrant, filed as Exhibit 10.72 to the Registrant’s Form 10-K for the year ended December 31,
2009, and incorporated herein by reference.
The Charles Schwab Corporation Directors’ Deferred Compensation Plan, as amended through December 8, 2004,
filed as Exhibit 10.271 to the Registrant’s Form 10-K for the year ended December 31, 2009, and incorporated herein
by reference.
The Charles Schwab Corporation Deferred Compensation Plan, as amended through December 8, 2004, filed as
Exhibit 10.272 to the Registrant’s Form 10-K for the year ended December 31, 2009, and incorporated herein by
reference.
Stock Purchase Agreement by and between the Registrant and Bank of America Corporation, dated as of
November 19, 2006, and incorporated herein by reference.
Summary of Non-Employee Director Compensation, filed as Exhibit 10.290 to the Registrant’s Form 10-Q for the
quarter ended March 31, 2007, and incorporated herein by reference.
(2)
(2)
(2)
- 101 -
THE CHARLES SCHWAB CORPORATION
Exhibit
Exhibit
Number
10.295
10.298
Form of Notice and Nonqualified Stock Option Agreement for Joseph R. Martinetto under The Charles Schwab
Corporation 2004 Stock Incentive Plan dated May 18, 2007, filed as Exhibit 10.295 to the Registrant’s Form 10-Q for
the quarter ended June 30, 2012, and incorporated herein by reference.
Directed Employee Benefit Trust Agreement under the SchwabPlan Retirement Savings and Investment Plan dated
August 17, 2007, filed as Exhibit 10.298 to the Registrant’s Form 10-Q for the quarter ended September 30, 2012,
and incorporated herein by reference.
(2)
10.300 The Charles Schwab Corporation Employee Stock Incentive Plan, as amended and restated as of December 12, 2007. (2)
(2)
10.302 The Charles Schwab Corporation 2001 Stock Incentive Plan, as amended and restated as of December 12, 2007.
(2)
10.307
10.309
(2)
Form of Notice and Restricted Stock Agreement under The Charles Schwab Corporation 2004 Stock Incentive Plan.
Form of Notice and Premium-Priced Stock Option Agreement under The Charles Schwab Corporation 2004 Stock
Incentive Plan.
Employment Agreement dated as of March 13, 2008, between the Registrant and Charles R. Schwab, filed as
Exhibit 10.314 to the Registrant’s Form 10-Q for the quarter ended March 31, 2008, and incorporated herein by
reference.
Form of Notice and Restricted Stock Agreement for Walter W. Bettinger under the Charles Schwab Corporation
2004 Stock Incentive Plan dated October 1, 2008, filed as Exhibit 10.316 to the Registrant’s Form 10-Q for the
quarter ended September 30, 2008, and incorporated herein by reference.
Form of Notice and Nonqualified Stock Option Agreement for Walter W. Bettinger under The Charles Schwab
Corporation 2004 Stock Incentive Plan dated October 1, 2008, filed as Exhibit 10.317 to the Registrant’s Form 10-Q
for the quarter ended September 30, 2008, and incorporated herein by reference.
Form of Notice and Performance-Based Restricted Stock Agreement under the Charles Schwab Corporation 2004
Stock Incentive Plan, filed as Exhibit 10.318 to the Registrant’s Form 10-K for the year ended December 31, 2008,
and incorporated herein by reference.
The Charles Schwab Corporation Long Term Incentive Plan, as amended and restated as of October 23, 2008, filed as
Exhibit 10.321 to the Registrant’s Form 10-K for the year ended December 31, 2008, and incorporated herein by
reference.
The Charles Schwab Corporation Deferred Compensation Plan II, as amended and restated as of October 23, 2008,
filed as Exhibit 10.322 to the Registrant’s Form 10-K for the year ended December 31, 2008, and incorporated herein
by reference.
The Charles Schwab Corporation Directors’ Deferred Compensation Plan II, as amended and restated as of
October 23, 2008, filed as Exhibit 10.323 to the Registrant’s Form 10-K for the year ended December 31, 2008, and
incorporated herein by reference.
The Charles Schwab Corporation Corporate Executive Bonus Plan, restated to include amendments approved at the
Annual Meeting of Stockholders on May 13, 2010, filed as Exhibit 10.331 to the Registrant’s Form 10-Q for the
quarter ended June 30, 2010, and incorporated herein by reference.
(2)
(2)
(2)
(2)
(2)
(2)
(2)
(2)
(2)
10.314
10.316
10.317
10.318
10.321
10.322
10.323
10.331
- 102 -
Exhibit
Number
10.338
10.339
10.340
10.341
10.342
10.343
10.344
10.345
10.346
10.347
10.348
10.349
10.350
10.351
THE CHARLES SCHWAB CORPORATION
Exhibit
The Charles Schwab Corporation 2004 Stock Incentive Plan, as approved at the Annual Meeting of Stockholders on
May 17, 2011, filed as Exhibit 10.338 to the Registrant’s Form 10-Q for the quarter ended June 30, 2011, and
incorporated herein by reference.
Credit Agreement (364 – Day Commitment) dated as of June 10, 2011, between the Registrant and financial
institutions listed therein, filed as Exhibit 10.339 to the Registrant’s Form 10-Q for the quarter ended June 30, 2011,
and incorporated herein by reference.
The Charles Schwab Severance Pay Plan, as Amended and Restated Effective January 1, 2012, filed as Exhibit
10.340 to the Registrant’s Form 10-K for the year ended December 31, 2011, and incorporated herein by reference.
Form of Notice and Restricted Stock Unit Agreement for Non-Employee Directors under The Charles Schwab
Corporation 2004 Stock Incentive Plan, filed as Exhibit 10.341 to the Registrant’s Form 10-K for the year ended
December 31, 2011, and incorporated herein by reference.
Form of Notice and Retainer Stock Option Agreement for Non-Employee Directors under The Charles Schwab
Corporation 2004 Stock Incentive Plan, filed as Exhibit 10.342 to the Registrant’s Form 10-K for the year ended
December 31, 2011, and incorporated herein by reference.
Form of Notice and Performance-Based Restricted Stock Unit Agreement under The Charles Schwab Corporation
2004 Stock Incentive Plan, filed as Exhibit 10.343 to the Registrant’s Form 10-K for the year ended December 31,
2011, and incorporated herein by reference.
Form of Notice and Retainer Restricted Stock Unit Agreement for Non-Employee Directors under The Charles
Schwab Corporation 2004 Stock Incentive Plan, filed as Exhibit 10.344 to the Registrant’s Form 10-K for the year
ended December 31, 2011, and incorporated herein by reference.
Form of Notice and Nonqualified Stock Option Agreement under The Charles Schwab Corporation 2004 Stock
Incentive Plan, filed as Exhibit 10.345 to the Registrant’s Form 10-K for the year ended December 31, 2011, and
incorporated herein by reference.
Form of Notice and Restricted Stock Unit Agreement under The Charles Schwab Corporation 2004 Stock Incentive
Plan, filed as Exhibit 10.346 to the Registrant’s Form 10-K for the year ended December 31, 2011, and incorporated
herein by reference.
Form of Notice and Stock Option Agreement for Non-Employee Directors under The Charles Schwab Corporation
Directors’ Deferred Compensation Plan II, filed as Exhibit 10.347 to the Registrant’s Form 10-K for the year ended
December 31, 2011, and incorporated herein by reference.
Separation Agreement, General Release and Waiver of Claims by and between Mr. Brigeman and the Company, filed
as Exhibit 10.348 to the Registrant’s Form 8-K dated March 7, 2012, and incorporated herein by reference.
The Charles Schwab Severance Pay Plan, as Amended and Restated Effective May 1, 2012 (supersedes
Exhibit 10.340), filed as Exhibit 10.349 to the Registrant’s Form 10-Q for the quarter ended June 30, 2012, and
incorporated herein by reference.
Credit Agreement (364 – Day Commitment) dated as of June 8, 2012, between the Registrant and financial
institutions listed therein (supersedes Exhibit 10.339), filed as Exhibit 10.350 to the Registrant’s Form 10-Q for the
quarter ended June 30, 2012, and incorporated herein by reference.
Summary of Non-Employee Director Compensation (supersedes Exhibit 10.290).
(2)
(2)
(2)
(2)
(2)
(2)
(2)
(2)
(2)
(2)
(2)
(2)
- 103 -
Exhibit
Number
10.352
10.353
10.354
10.355
10.356
10.357
10.358
10.359
12.1
21.1
23.1
31.1
31.2
32.1
THE CHARLES SCHWAB CORPORATION
Exhibit
Form of Performance-Based Cash Long-Term Incentive Award Agreement under The Charles Schwab Corporation
2004 Stock Incentive Plan and successor plans, filed as Exhibit 10.352 to the Registrant’s Form 8-K dated
January 24, 2013, and incorporated herein by reference.
Form of Notice and Performance-Based Restricted Stock Unit Agreement under The Charles Schwab Corporation
2004 Stock Incentive Plan and successor plans (supersedes Exhibit 10.343), filed as Exhibit 10.353 to the
Registrant’s Form 8-K dated January 24, 2013, and incorporated herein by reference.
Form of Notice and Nonqualified Stock Option Agreement under The Charles Schwab Corporation 2004 Stock
Incentive Plan and successor plans (supersedes Exhibit 10.345), filed as Exhibit 10.354 to the Registrant’s Form 8-K
dated January 24, 2013, and incorporated herein by reference.
Form of Notice and Restricted Stock Unit Agreement under The Charles Schwab Corporation 2004 Stock Incentive
Plan and successor plans (supersedes Exhibit 10.346), filed as Exhibit 10.355 to the Registrant’s Form 8-K dated
January 24, 2013, and incorporated herein by reference.
Form of Notice and Retainer Stock Option Agreement for Non-Employee Directors under The Charles Schwab
Corporation 2004 Stock Incentive Plan and successor plans (supersedes Exhibit 10.342), filed as Exhibit 10.356 to
the Registrant’s Form 8-K dated January 24, 2013, and incorporated herein by reference.
Form of Notice and Retainer Restricted Stock Unit Agreement for Non-Employee Directors under The Charles
Schwab Corporation 2004 Stock Incentive Plan and successor plans (supersedes Exhibit 10.344), filed as
Exhibit 10.357 to the Registrant’s Form 8-K dated January 24, 2013, and incorporated herein by reference.
Form of Notice and Stock Option Agreement for Non-Employee Directors under The Charles Schwab Corporation
Directors’ Deferred Compensation Plan II and The Charles Schwab Corporation 2004 Stock Incentive Plan and
successor plans (supersedes Exhibit 10.347), filed as Exhibit 10.358 to the Registrant’s Form 8-K dated January 24,
2013, and incorporated herein by reference.
Form of Notice and Restricted Stock Unit Agreement for Non-Employee Directors under The Charles Schwab
Corporation Directors’ Deferred Compensation Plan II and The Charles Schwab Corporation 2004 Stock Incentive
Plan and successor plans (supersedes Exhibit 10.341), filed as Exhibit 10.359 to the Registrant’s Form 8-K dated
January 24, 2013, and incorporated herein by reference.
Computation of Ratio of Earnings to Fixed Charges and Ratio of Earnings to Fixed Charges and Preferred Stock
Dividends.
Subsidiaries of the Registrant.
Independent Registered Public Accounting Firm’s Consent.
Certification Pursuant to Rule 13a-14(a)/15d-14(a), As Adopted Pursuant to Section 302 of The Sarbanes-Oxley Act
of 2002.
Certification Pursuant to Rule 13a-14(a)/15d-14(a), As Adopted Pursuant to Section 302 of The Sarbanes-Oxley Act
of 2002.
Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act
of 2002.
(2)
(2)
(2)
(2)
(2)
(2)
(2)
(2)
(1)
- 104 -
THE CHARLES SCHWAB CORPORATION
Exhibit
Number
32.2
Exhibit
Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act
of 2002.
101.INS XBRL Instance Document
101.SCH XBRL Taxonomy Extension Schema
101.CAL XBRL Taxonomy Extension Calculation
101.DEF XBRL Extension Definition
101.LAB XBRL Taxonomy Extension Label
101.PRE XBRL Taxonomy Extension Presentation
(1)
(3)
(3)
(3)
(3)
(3)
(3)
(1) Furnished as an exhibit to this annual report on Form 10-K.
(2) Management contract or compensatory plan.
(3) Attached as Exhibit 101 to this Annual Report on Form 10-K for the annual period ended December 31, 2012, are the following
materials formatted in XBRL (Extensible Business Reporting Language) (i) the Consolidated Statements of Income, (ii) the
Consolidated Statements of Comprehensive Income, (iii) the Consolidated Balance Sheets, (iv) the Consolidated Statements of
Cash Flows, (v) the Consolidated Statements of Stockholders’ Equity, and (vi) Notes to Consolidated Financial Statements.
- 105 -
THE CHARLES SCHWAB CORPORATION
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized, on February 21, 2013.
THE CHARLES SCHWAB CORPORATION
(Registrant)
BY: /s/ Walter W. Bettinger II
Walter W. Bettinger II
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on
behalf of the registrant and in the capacities indicated, on February 21, 2013.
Signature / Title
Signature / Title
/s/ Walter W. Bettinger II
Walter W. Bettinger II,
President and Chief Executive Officer
/s/ Charles R. Schwab
Charles R. Schwab, Chairman of the Board
/s/ C. Preston Butcher
C. Preston Butcher, Director
/s/ Mark A. Goldfarb
Mark A. Goldfarb, Director
/s/ Stephen T. McLin
Stephen T. McLin, Director
/s/ Paula A. Sneed
Paula A. Sneed, Director
/s/ Robert N. Wilson
Robert N. Wilson, Director
/s/ Joseph R. Martinetto
Joseph R. Martinetto,
Executive Vice President
and Chief Financial Officer
(principal financial and accounting officer)
/s/ Nancy H. Bechtle
Nancy H. Bechtle, Director
/s/ Stephen A. Ellis
Stephen A. Ellis, Director
/s/ Frank C. Herringer
Frank C. Herringer, Director
/s/ Arun Sarin
Arun Sarin, Director
/s/ Roger O. Walther
Roger O. Walther, Director
- 106 -
THE CHARLES SCHWAB CORPORATION
Index to Financial Statement Schedule
Schedule II - Valuation and Qualifying Accounts
Supplemental Financial Data for Charles Schwab Bank (Unaudited)
Page
F-2
F-3 – F-9
Schedules not listed are omitted because of the absence of the conditions under which they are required or because the information is
included in the Company’s consolidated financial statements and notes in “Item 8 – Financial Statements and Supplementary Data.”
F-1
THE CHARLES SCHWAB CORPORATION
Valuation and Qualifying Accounts
(In millions)
SCHEDULE II
Description
For the year ended December 31, 2012:
Allowance for doubtful accounts of
brokerage clients
(2)
For the year ended December 31, 2011:
Allowance for doubtful accounts of
brokerage clients
(2)
For the year ended December 31, 2010:
Allowance for doubtful accounts of
brokerage clients
(2)
Balance at
Beginning of
Year
Additions
Charged
to Expense
Other
(1)
Written off
Balance at
End
of Year
$
$
$
2
1
2
$
$
$
4
6
3
$
$
$
—
3
—
$
$
$
(5)
(8)
(4)
$
$
$
1
2
1
(1)
(2)
Includes collections of previously written-off accounts.
Excludes banking-related valuation and qualifying accounts. See “Item 8 - Financial Statements and Supplementary Data -
Notes to Consolidated Financial Statements - 7. Loans to Banking Clients and Related Allowance for Loan Losses.”
F-2
THE CHARLES SCHWAB CORPORATION
Supplemental Financial Data for Charles Schwab Bank (Unaudited)
(Dollars in Millions)
The following supplemental financial data is consistent with the Securities Exchange Act of 1934, Industry Guide 3 – Statistical
Disclosure by Bank Holding Companies. The accompanying unaudited financial information represents Charles Schwab Bank
(Schwab Bank), which is a subsidiary of The Charles Schwab Corporation (CSC). CSC is a savings and loan holding company and
Schwab Bank is a federal savings bank. The following information excludes intercompany balances and transactions with CSC and its
affiliates.
1.
Three-year Net Interest Revenue and Average Balances
For the Year Ended December 31,
Assets:
Cash and cash equivalents
Securities available for
(1)
$
sale
(2)
Securities held to maturity
Loans to banking clients
(3)
Loans held for sale
Other interest-earning assets
Total interest-earning assets
Net unrealized gain (loss) on
securities available for
sale
Noninterest-earning assets
Total Assets
Liabilities and
Stockholder’s Equity:
Average
Balance
2012
Interest
Average
Rate
Average
Balance
2011
Interest
Average
Rate
Average
Balance
2010
Interest
Average
Rate
5,575 $
15 0.27% $
4,142 $
11
0.27% $
5,890 $
16
0.27%
39,739
15,371
10,050
18
54
70,807
583 1.47%
397 2.58%
309 3.07%
1 4.12%
1 1.85%
1,306 1.84%
27,477
16,050
9,468
65
50
57,252
456
492
310
3
1
1,273
1.66%
3.07%
3.27%
4.62%
2.00%
2.22%
24,209
10,440
7,983
80
51
48,653
486
361
275
4
1
1,143
2.01%
3.46%
3.44%
5.00%
1.96%
2.35%
275
566
$ 71,648
64
212
$ 57,528
(109)
297
$ 48,841
Interest-bearing banking
deposits
$ 65,546
42 0.06% $ 52,701
62
0.12% $ 44,858
105
0.23%
Total sources on which
interest is paid
Noninterest-bearing
liabilities
Stockholder’s equity
Total Liabilities and
Stockholder’s Equity
65,546
42 0.06%
52,701
62
0.12%
44,858
105
0.23%
577
5,525
345
4,482
299
3,684
$ 71,648
$ 57,528
$ 48,841
Net interest revenue
Net yield on interest-earning
assets
$ 1,264
$ 1,211
$ 1,038
1.79%
2.12%
2.13%
(1)
(2)
(3)
Includes deposits with banks, short-term investments, and federal funds sold.
Amounts have been calculated based on amortized cost.
Includes average principal balances of nonaccrual loans.
F-3
THE CHARLES SCHWAB CORPORATION
Supplemental Financial Data for Charles Schwab Bank (Unaudited)
(Dollars in Millions)
2. Analysis of Change in Net Interest Revenue
An analysis of the year-to-year changes in the categories of interest revenue and interest expense resulting from changes in volume
and rate is as follows:
(2)
Interest-earning assets:
Cash and cash equivalents
(1)
Securities available for sale
Securities held to maturity
Loans to banking clients
(3)
Loans held for sale
Total interest-earning assets
Interest-bearing sources of funds:
Interest-bearing banking deposits
Total sources on which interest is paid
Change in net interest revenue
2012 Compared to 2011
Increase (Decrease) Due to
Change in:
Average
Rate
Total
Average
Volume
2011 Compared to 2010
Increase (Decrease) Due to
Change in:
Average
Rate
Average
Volume
Total
$
4 $ — $
4 $
203
(21)
19
(2)
203 $
(76)
(74)
(20)
—
(170) $
$
(1) $
(4) $
65
194
51
(1)
127
(95)
(1)
(2)
33 $ 305 $
(95)
(63)
(16)
—
(175) $
(5)
(30)
131
35
(1)
130
15 $
$
$
15 $
$ 188 $
(20) $
(35) $
(20) $
(35) $
(135) $ 53 $
18 $
18 $
287 $
(61) $
(61) $
(43)
(43)
(114) $ 173
Changes that are not due solely to volume or rate have been allocated to rate.
(1)
Includes deposits with banks and short-term investments.
(2)
(3)
Amounts have been calculated based on amortized cost.
Includes average principal balances of nonaccrual loans.
F-4
THE CHARLES SCHWAB CORPORATION
Supplemental Financial Data for Charles Schwab Bank (Unaudited)
(Dollars in Millions)
3.
Securities Available for Sale and Securities Held to Maturity
The amortized cost, gross unrealized gains and losses, and fair value of securities available for sale and securities held to maturity are
as follows:
December 31, 2012
Securities available for sale:
U.S. agency mortgage-backed securities
Asset-backed securities
Corporate debt securities
Certificates of deposit
U.S. agency notes
Non-agency residential mortgage-backed securities
Commercial paper
Other securities
Total securities available for sale
Securities held to maturity:
U.S. agency mortgage-backed securities
Other securities
Total securities held to maturity
December 31, 2011
Securities available for sale:
U.S. agency mortgage-backed securities
Asset-backed securities
Corporate debt securities
Certificates of deposit
U.S. agency notes
Non-agency residential mortgage-backed securities
Commercial paper
Other securities
Total securities available for sale
Securities held to maturity:
U.S. agency mortgage-backed securities
Other securities
Total securities held to maturity
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
$
20,080 $
8,104
6,197
6,150
3,465
796
574
273
20,476
8,164
6,256
6,161
3,464
733
574
289
$ 45,639 $ 551 $ 73 $ 46,117
396 $
62
61
12
2
2
—
16
— $
2
2
1
3
65
—
—
$
$
17,750 $
444
18,194 $
558 $
—
558 $
19 $
1
20 $
18,289
443
18,732
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
$
20,666 $
2,638
3,592
3,623
1,795
1,130
225
273
20,921
269 $
2,635
4
3,571
5
3,622
2
1,800
5
907
—
225
—
276
3
$ 33,942 $ 288 $ 273 $ 33,957
14 $
7
26
3
—
223
—
—
$
$
14,770 $
338
15,108 $
430 $
3
433 $
2 $
—
2 $
15,198
341
15,539
F-5
THE CHARLES SCHWAB CORPORATION
Supplemental Financial Data for Charles Schwab Bank (Unaudited)
(Dollars in Millions)
December 31, 2010
Securities available for sale:
U.S. agency mortgage-backed securities
Asset-backed securities
Corporate debt securities
Certificates of deposit
U.S. agency notes
Non-agency residential mortgage-backed securities
Total securities available for sale
Securities held to maturity:
U.S. agency mortgage-backed securities
Other securities
Total securities held to maturity
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
$
12,879 $
2,495
2,261
1,874
2,757
1,701
3 $ 13,098
222 $
2,502
2
9
2,268
1
8
1,875
—
1
2,780
—
23
1,470
234
3
$ 23,967 $ 266 $ 240 $ 23,993
$
$
16,722 $
1,040
17,762 $
209 $
14
223 $
137 $ 16,794
—
1,054
137 $ 17,848
The maturities and related weighted-average yields of securities available for sale and securities held to maturity at December 31,
2012, are as follows:
(1)
Securities available for sale:
U.S. agency mortgage-backed securities
Asset-backed securities
Corporate debt securities
Certificates of deposit
U.S. agency notes
Non-agency residential mortgage-backed securities
Commercial paper
Other securities
Total fair value
Total amortized cost
Weighted-average yield
Securities held to maturity:
U.S. agency mortgage-backed securities
Other securities
Total fair value
Total amortized cost
Weighted-average yield
(2)
(1)
(2)
(1)
Within
1 year
After 1 year
through
5 years
After 5 years
through 10
years
After
10 years
Total
$
—
—
1,149
4,557
—
—
574
—
$
6,280
$ 6,268
$
40
438
4,883
1,604
1,300
—
—
—
$
8,265
$ 8,201
$
$
$
0.85%
1.17%
$ 16,386
6,941
—
—
—
726
—
289
$ 24,342
$ 24,108
4,050
785
224
—
2,164
7
—
—
7,230
7,062
1.31%
$ 20,476
8,164
6,256
6,161
3,464
733
574
289
$ 46,117
$ 45,639
1.25%
1.19%
$
$
$
$
—
—
— $
—
$
—
$
$
9,956
—
100
292
$
100 $ 10,248
9,911
100
$
2.36%
3.00%
$
$ 18,289
443
$ 18,732
$ 18,194
8,333
51
8,384
8,183
2.19%
2.29%
(1)
(2)
Mortgage-backed securities have been allocated to maturity groupings based on final contractual maturities. Actual maturities
will differ from final contractual maturities because borrowers on a certain portion of loans underlying these securities have the
right to prepay their obligations.
The weighted-average yield is computed using the amortized cost at December 31, 2012.
F-6
THE CHARLES SCHWAB CORPORATION
Supplemental Financial Data for Charles Schwab Bank (Unaudited)
(Dollars in Millions)
4. Cross-border Holdings
The tables below set forth the amount of Schwab Bank’s cross-border holdings, based on carrying value, as of December 31, 2012
and 2011. Such holdings, by country, that exceed 1% of total assets are disclosed separately, and such holdings, by country, that are
between 0.75% and 1% of total assets are listed in the aggregate. Cross-border holdings are comprised of cash equivalents, securities
available for sale, and securities held to maturity.
December 31, 2012
Country:
Australia
United Kingdom
Canada
Sweden
Switzerland
Japan
Total
December 31, 2011
Country:
United Kingdom
Canada
Sweden
Switzerland, France and Australia
Total
Banks and other
financial institutions
Commercial and
industrial
institutions
Total
Exposure as a %
of total assets
$
$
2,300 $
1,556
1,732
1,302
902
800
8,592 $
— $
351
—
—
—
—
351 $
2,300
1,907
1,732
1,302
902
800
8,943
2.7%
2.2%
2.0%
1.5%
1.1%
0.9%
Banks and other
financial institutions
Exposure as a %
of total assets
$
$
1,450
1,098
712
1,849
5,109
2.2%
1.7%
1.1%
2.8%
As of December 31, 2010, cross-border holdings in the United Kingdom were $1.5 billion (2.7% of total assets).
Loans to Banking Clients and Related Allowance for Loan Losses
5.
The composition of the loan portfolio is as follows:
December 31,
Residential real estate mortgages
Home equity lines of credit
Personal loans secured by securities
Other
Total loans to banking clients
An analysis of nonaccrual loans is as follows:
December 31,
Nonaccrual loans
Average nonaccrual loans
F-7
2012
2011
2010
2009
2008
$
6,507 $
3,287
963
22
3,195
2,662
187
18
$ 10,779 $ 9,863 $ 8,773 $ 7,391 $ 6,062
3,710 $
3,304
366
11
4,695 $
3,500
562
16
5,596 $
3,509
742
16
2012
2011
2010
2009
2008
8
$
$ 48 $ 51 $ 40 $ 17 $ 6
52 $
48 $
51 $
34 $
THE CHARLES SCHWAB CORPORATION
Supplemental Financial Data for Charles Schwab Bank (Unaudited)
(Dollars in Millions)
Changes in the allowance for loan losses were as follows:
December 31,
Balance at beginning of year
Charge-offs
Recoveries
Provision for loan losses
Balance at end of year
2012
2011
2010
2009
2008
$
54 $
(16)
2
16
7
(4)
—
17
$ 56 $ 54 $ 53 $ 45 $ 20
53 $
(19)
2
18
20 $
(13)
—
38
45 $
(20)
1
27
The maturities of the loan portfolio at December 31, 2012, are as follows:
Within
1 year
Residential real estate mortgages
Home equity lines of credit
Personal loans secured by securities
Other
(1)
(2)
Total
(1)
(2)
Maturities are based upon the contractual terms of the loans.
Maturities are based on an initial draw period of 10 years.
After 1 year
through
5 years
After
5 years
— $ 6,507 $
Total
$
— $
150
150
11
6,507
3,287
963
22
$ 311 $ 1,858 $ 8,610 $ 10,779
2,092
—
11
1,045
813
—
The interest sensitivity of loans with contractual maturities in excess of one year at December 31, 2012, is as follows:
Loans with predetermined interest rates
Loans with floating or adjustable interest rates
Total
6.
Summary of Loan Loss on Banking Loans Experience
After
1 year
$
520
9,948
$ 10,468
December 31,
Average loans
Allowance to year end loans
Allowance to nonperforming loans
Nonperforming assets to average loans and real estate owned
2012
$ 10,050
2011
$ 9,468
2010
$ 7,983
2009
$ 6,668
2008
$ 4,831
.52%
117%
.54%
.55%
104%
.59%
.60%
104%
.68%
.61%
132%
.51%
.33%
235%
.18%
7. Deposits from Banking Clients
Analysis of average daily deposits:
Certificates of deposit of $100,000 or more
Money market and other savings deposits
Interest-bearing demand deposits
Total deposits
2012
2011
2010
Amount
Rate
Amount
Rate
Amount
Rate
$
1.46% $
1
0.05%
54,318
11,227 0.13%
—
$
—
0.09%
42,342
10,359 0.22%
—
—
0.18%
35,794
9,064 0.45%
$ 65,546
$ 52,701
$ 44,858
F-8
THE CHARLES SCHWAB CORPORATION
Supplemental Financial Data for Charles Schwab Bank (Unaudited)
(Dollars in Millions)
At December 31, 2012, Schwab Bank had two certificates of deposit of $100,000 or more, in the amount of $709,914, with a
contractual maturity of over twelve months.
8. Ratios
December 31,
Return on average stockholder’s equity
Return on average total assets
Average stockholder’s equity as a percentage of average total assets
F-9
2012
11.82%
0.91%
7.71%
2011
13.99%
1.10%
7.83%
2010
14.22%
1.07%
7.54%
THE CHARLES SCHWAB CORPORATION
EMPLOYEE STOCK INCENTIVE PLAN
Amended and Restated December 12, 2007
Exhibit 10.300
Article 1. Introduction.
The Plan was adopted by the Board of Directors on October 22, 1997. The purpose of the Plan is to promote the long-term
success of the Company and the creation of incremental stockholder value by (a) encouraging Employees to focus on long-range
objectives, (b) encouraging the attraction and retention of Employees with exceptional qualifications and (c) linking Employees
directly to stockholder interests. The Plan seeks to achieve this purpose by providing for Awards in the form of Restricted Shares or
Options. The Plan shall be governed by, and construed in accordance with, the laws of the State of Delaware.
Article 2. Administration.
2.1 The Committee. The Plan shall be administered by the Committee. The Committee shall consist of two or more non-
employee Directors, who shall be appointed by the Board.
2.2 Committee Responsibilities. The Committee shall select the Employees who are to receive Awards under the Plan,
determine the amount, vesting requirements and other conditions of such Awards, may interpret the Plan, and make all other decisions
relating to the operation of the Plan. The Committee may adopt such rules or guidelines as it deems appropriate to implement the
Plan, and may, in its discretion, delegate any of its responsibilities to such parties as it deems proper. The Committee’s determinations
under the Plan shall be final and binding on all persons.
Article 3. Limitation on Awards.
The aggregate number of Restricted Shares and Options awarded under the Plan shall be determined by the Board from time to
time. If any Restricted Shares or Options are forfeited, or if any Options terminate for any other reason before being exercised, then
such Restricted Shares or Options shall again become available for Awards under the Plan. The limitation of this Article 3 shall be
subject to adjustment pursuant to Article 10. Any Common Shares issued pursuant to the Plan may be authorized but unissued shares
or treasury shares.
Article 4. Eligibility.
General Rule. The Committee shall make all determinations concerning the Employees who shall be eligible to participate in the
Plan, and the awards to each Participant.
Article 5. Options.
5.1 Stock Option Agreement. Each grant of an Option under the Plan shall be evidenced by a Stock Option Agreement between
the Optionee and the Company. Such Option shall be subject to all applicable terms and conditions of the Plan, and may be subject to
any other terms and conditions which are not inconsistent with the Plan and which the Committee deems appropriate for inclusion in
a Stock Option Agreement. The provisions of the various Stock Option Agreements entered into under the Plan need not be identical.
In the case of an Employee who is subject to the tax laws of a foreign jurisdiction, the Committee may designate all or any part of an
Option as an option qualifying for favorable tax treatment under the laws of such foreign jurisdiction.
5.2 Options Nontransferability. No Option granted under the Plan shall be transferable by the Optionee other than by will or the
laws of descent and distribution. An Option may be exercised during the lifetime of the Optionee only by him or her. No Option or
interest therein may be transferred, assigned,
pledged or hypothecated by the Optionee during his or her lifetime, whether by operation of law or otherwise, or be made subject to
execution, attachment or similar process.
5.3 Number of Shares. Each Stock Option Agreement shall specify the number of Common Shares subject to the Option and
shall provide for the adjustment of such number in accordance with Article 10.
5.4 Exercise Price. Each Stock Option Agreement shall specify the Exercise Price. The Exercise Price under an Option shall not
be less than 100 percent of the Fair Market Value of a Common Share on the date of grant. Subject to the preceding sentence, the
Exercise Price under any Option shall be determined by the Committee. The Exercise Price shall be payable in accordance with
Article 6.
5.5 Exercisability and Term. Each Stock Option Agreement shall specify the date when all or any installment of the Option is to
become exercisable. The Stock Option Agreement shall also specify the term of the Option. Subject to the preceding sentence, the
Committee shall determine when all or any part of an Option is to become exercisable and when such Option is to expire; provided
that, in appropriate cases, the Company shall have the discretion to extend the term of an Option or the time within which, following
termination of employment, an Option may be exercised, or to accelerate the exercisability of an Option; provided further, however,
that with respect to Options granted or vested after December 31, 2004, the exercise period of an Option may be extended to a date no
later than the earlier of the latest date upon which the Option would have expired by its original terms under any circumstances or the
tenth anniversary of the original date of grant of the Option. A Stock Option Agreement may provide for expiration prior to the end of
its term in the event of the termination of the Optionee’s employment and may provide for the suspension of vesting when an
employee is on a leave of absence for a period in excess of six months in appropriate cases; provided that the exercisability of Options
shall be accelerated in the event of the Participant’s death or Disability and, in the case of Retirement, the exercisability of all
outstanding Options shall be accelerated, other than any Options that had been granted within two years of the date of the Optionee’s
Retirement. With respect to Options and Restricted Shares that are granted and vested on or before December 31, 2004, Options may
also be awarded in combination with Restricted Shares, and such an Award may provide that the Options will not be exercisable
unless the related Restricted Shares are forfeited. In addition, Options granted under this Section 5 may be granted subject to
forfeiture provisions which provide for forfeiture of the Option upon the exercise of tandem awards, the terms of which are
established in other programs of the Company.
5.6 Effect of Change in Control. The Committee (in its sole discretion) may determine, at the time of granting an Option, that
such Option shall become fully exercisable as to all Common Shares subject to such Option immediately preceding any Change in
Control with respect to the Company.
5.7 Restrictions on Transfer of Common Shares. Any Common Shares issued upon exercise of an Option shall be subject to such
special forfeiture conditions, rights of repurchase, rights of first refusal and other transfer restrictions as the Committee may
determine. Such restrictions shall be set forth in the applicable Stock Option Agreement and shall apply in addition to any general
restrictions that may apply to all holders of Common Shares.
5.8 Authorization of Replacement Options. Concurrently with the grant of any Option to a Participant, the Committee may
authorize the grant of Replacement Options. If Replacement Options have been authorized by the Committee with respect to a
particular award of Options (the “Underlying Options”), the Option Agreement with respect to the Underlying Options shall so state,
and the terms and conditions of the Replacement Options shall be provided therein. The grant of any Replacement Options shall be
effective only upon the exercise of the Underlying Options through the use of Common Shares pursuant to Section 6.2 or Section 6.3.
The number of Replacement Options shall equal the number of Common Shares used to exercise the Underlying Options, and, if the
Option Agreement so provides, the number of Common Shares used to satisfy any tax withholding requirements incident to the
exercise of the Underlying Options in accordance with Section 13.2. Upon the exercise of the Underlying Options, the Replacement
Options shall be evidenced by an amendment to the Underlying Option Agreement. The Exercise Price of a Replacement Option shall
be no less than the Fair Market Value of a Common Share on the date the grant of the Replacement Option becomes effective. The
term of each Replacement Option shall be equal to the
remaining term of the Underlying Option. No Replacement Options shall be granted to Optionees when Underlying Options are
exercised pursuant to the terms of the Plan and the Underlying Option Agreement following termination of the Optionee’s
employment. The Committee, in its sole discretion, may establish such other terms and conditions for Replacement Options as it
deems appropriate.
5.9 Options Granted to Non-United States Employees. In the case of Employees who are subject to the tax laws of a foreign
jurisdiction, the Company may issue Options to such Employees that contain terms required to conform with any requirements for
favorable tax treatment imposed by the laws of such foreign jurisdiction, or as otherwise may be required by the laws of such foreign
jurisdiction. The terms of any such Options shall be governed by the Plan, subject to the terms of any Addendum to the Plan
specifically applicable to such Options.
5.10 Effect of Job Elimination. Notwithstanding anything to the contrary contained in the Plan or in any Stock Option
Agreement or Stock Award Agreement entered into with respect to an Award pursuant to the Plan, in the case of a Participant who is
an Officer, and who becomes entitled to receive payments with respect to a Severance Period pursuant to the Charles Schwab
Severance Pay Plan (the “Severance Plan”) on account of a Job Elimination, the terms of the Plan and any Stock Option Agreement
or Stock Award Agreement entered into with respect to an Award shall be applied by treating the Participant as if the Participant had
terminated employment on the Participant’s Termination Date. For purposes of applying this Section, the terms Officer, Severance
Period, Termination Date, and Job Elimination shall have the meanings set forth in the Severance Plan.
Article 6. Payment for Option Shares.
6.1 General Rule. The entire Exercise Price of Common Shares issued upon exercise of Options shall be payable in cash at the
time when such Common Shares are purchased, except that the Committee may at any time accept payment pursuant to Section 6.2 or
6.3.
6.2 Surrender of Stock. To the extent that this Section 6.2 is applicable, payment for all or any part of the Exercise Price may be
made with Common Shares which are surrendered to the Company. Such Common Shares shall be valued at their Fair Market Value
on the date when the new Common Shares are purchased under the Plan. In the event that the Common Shares being surrendered are
Restricted Shares that have not yet become vested, the same restrictions shall be imposed upon the new Common Shares being
purchased.
6.3 Exercise/Sale. To the extent this Section 6.3 is applicable, payment may be made by the delivery (on a form prescribed by
the Company) of an irrevocable direction to Charles Schwab & Co., Inc. to sell Common Shares (including the Common Shares to be
issued upon exercise of the Options) and to deliver all or part of the sales proceeds to the Company in payment of all or part of the
Exercise Price and any withholding taxes.
Article 7. Restricted Shares.
7.1 Time, Amount and Form of Awards. The Committee may grant Restricted Shares with respect to an Award Year during such
Award Year or at any time thereafter. Each such Award shall be evidenced by a Stock Award Agreement between the Award
recipient and the Company. The amount of each Award of Restricted Shares shall be determined by the Committee. With respect to
Restricted Shares and Options that are granted and vested on or before December 31, 2004, Restricted Shares may also be awarded in
combination with Options, and such an Award may provide that the Restricted Shares will be forfeited in the event that the related
Options are exercised.
7.2 Payment for Restricted Share Awards. To the extent that an Award is granted in the form of Restricted Shares, the Award
recipient, as a condition to the grant of such Award, shall be required to pay the Company in cash an amount equal to the par value of
such Restricted Shares.
7.3 Vesting or Issuance Conditions. Each Award of Restricted Shares shall become vested, in full or in installments, upon
satisfaction of the conditions specified in the Stock Award Agreement. The Committee
shall select the vesting conditions in the case of Restricted Shares which may be based upon the Participant’s service, the Participant’s
performance, the Company’s performance or such other criteria as the Committee may adopt; provided that, in the case of an Award
of Restricted Shares where vesting is based entirely on the Participant’s service, (i) vesting shall be accelerated in the event of the
Participant’s death or Disability; (ii) in the case of Retirement, vesting shall be accelerated for all Restricted Shares that had been
granted more than two years prior to the date of the Participant’s Retirement; and (iii) vesting shall be suspended when an employee
is on a leave of absence for a period in excess of six months in appropriate cases, as determined by the Company. The Committee, in
its sole discretion, may determine, at the time of making an Award of Restricted Shares, that such Award shall become fully vested in
the event that a Change in Control occurs with respect to the Company.
Article 8. Claims Procedures.
Claims for benefits under the Plan shall be filed in writing with the Committee on forms supplied by the Committee. Written
notice of the disposition of a claim shall be furnished to the claimant within 90 days after the claim is filed. If the claim is denied, the
notice of disposition shall set forth the specific reasons for the denial, citations to the pertinent provisions of the Plan, and, where
appropriate, an explanation as to how the claimant can perfect the claim. If the claimant wishes further consideration of his or her
claim, the claimant may appeal a denied claim to the Committee (or to a person designated by the Committee) for further review.
Such appeal shall be filed in writing with the Committee on a form supplied by the Committee, together with a written statement of
the claimant’s position, no later than 90 days following receipt by the claimant of written notice of the denial of his or her claim. If
the claimant so requests, the Committee shall schedule a hearing. A decision on review shall be made after a full and fair review of
the claim and shall be delivered in writing to the claimant no later than 60 days after the Committee’s receipt of the notice of appeal,
unless special circumstances (including the need to hold a hearing) require an extension of time for processing the appeal, in which
case a written decision on review shall be delivered to the claimant as soon as possible but not later than 120 days after the
Committee’s receipt of the appeal notice. The claimant shall be notified in writing of any such extension of time. The written decision
on review shall include specific reasons for the decision, written in a manner calculated to be understood by the claimant, and shall
specifically refer to the pertinent Plan provisions on which it is based. All determinations of the Committee shall be final and binding
on Participants and their beneficiaries.
Article 9. Voting Rights and Dividends.
All holders of Restricted Shares shall have the same voting, dividend, and other rights as the Company’s other stockholders.
Article 10. Protection Against Dilution; Adjustment of Awards.
10.1 General. In the event of a subdivision of the outstanding Common Shares, a declaration of a dividend payable in Common
Shares, a declaration of a dividend payable in a form other than Common Shares, a combination or consolidation of the outstanding
Common Shares (by reclassification or otherwise) into a lesser number of Common Shares, a recapitalization, a spinoff or a similar
occurrence, the Committee shall make appropriate adjustments in one or more of (a) the number of Options and Restricted Shares
available for future Awards under Article 3, (b) the number of Common Shares covered by each outstanding Option or (c) the
Exercise Price under each outstanding Option.
10.2 Reorganizations. In the event that the Company is a party to a merger or other reorganization, outstanding Options and
Restricted Shares shall be subject to the agreement of merger or reorganization. Such agreement may provide, without limitation, for
the assumption of outstanding Awards by the surviving corporation or its parent, for their continuation by the Company (if the
Company is a surviving corporation), for accelerated vesting or for settlement in cash.
10.3 Reservation of Rights. Except as provided in this Article 10, a Participant shall have no rights by reason of any subdivision
or consolidation of shares of stock of any class, the payment of any stock dividend or any other increase or decrease in the number of
shares of stock of any class. Any issue by the
Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall not affect, and no adjustment
by reason thereof shall be made with respect to, the number or Exercise Price of Common Shares subject to an Option. The grant of
an Award pursuant to the Plan shall not affect in any way the right or power of the Company to make adjustments, reclassifications,
reorganizations or changes of its capital or business structure, to merge or consolidate or to dissolve, liquidate, sell or transfer all or
any part of its business or assets.
Article 11. Limitation of Rights.
11.1 Employment Rights. Neither the Plan nor any Award granted under the Plan shall be deemed to give any individual a right
to remain employed by the Company or any Subsidiary. The Company and its Subsidiaries reserve the right to terminate the
employment of any employee at any time, with or without cause, subject only to a written employment agreement (if any).
11.2 Stockholders’ Rights. A Participant shall have no dividend rights, voting or other rights as a stockholder with respect to any
Common Shares covered by his or her Award prior to the issuance of such Common Shares, whether by issuance of a certificate,
book entry or other procedure. No adjustment shall be made for cash dividends or other rights for which the record date is prior to the
date when such certificate is issued, except as expressly provided in Articles 7, 9 and 10.
11.3 Government Regulations. Any other provision of the Plan notwithstanding, the obligations of the Company with respect to
Common Shares to be issued pursuant to the Plan shall be subject to all applicable laws, rules and regulations, and such approvals by
any governmental agencies as may be required. The Company reserves the right to restrict, in whole or in part, the delivery of
Common Shares pursuant to any Award until such time as:
(a) Any legal requirements or regulations have been met relating to the issuance of such Common Shares or to their registration,
qualification or exemption from registration or qualification under the Securities Act of 1933, as amended, or any applicable state
securities laws; and
(b) Satisfactory assurances have been received that such Common Shares, when issued, will be duly listed on the New York
Stock Exchange or any other securities exchange on which Common Shares are then listed.
Article 12. Withholding Taxes.
12.1 General. To the extent required by applicable federal, state, local or foreign law, the recipient of any payment or
distribution under the Plan shall make arrangements satisfactory to the Company for the satisfaction of any withholding tax
obligations that arise by reason of such payment or distribution. The Company shall not be required to make such payment or
distribution until such obligations are satisfied.
12.2 Withholding On Options or Restricted Shares. The Committee may permit an Optionee who exercises Options, or who
receives Awards of Restricted Shares, to satisfy all or part of his or her withholding tax obligations by having the Company withhold
a portion of the Common Shares that otherwise would be issued to him or her under such Awards. Such Common Shares shall be
valued at their Fair Market Value on the date when taxes otherwise would be withheld in cash. The payment of withholding taxes by
surrendering Common Shares to the Company, if permitted by the Committee, shall be subject to such restrictions as the Committee
may impose, including any restrictions required by rules of the Securities and Exchange Commission.
Article 13. Assignment or Transfer of Award.
Any Award granted under the Plan shall not be anticipated, assigned, attached, garnished, optioned, transferred or made subject
to any creditor’s process, whether voluntarily, involuntarily or by operation of law. However, this Article 13 shall not preclude (i) a
Participant from designating a beneficiary to succeed, after the Participant’s death, to those of the Participant’s Awards (including
without limitation, the right to
exercise any unexercised Options) as may be determined by the Company from time to time in its sole discretion, or (ii) a transfer of
any Award hereunder by will or the laws of descent or distribution.
Article 14. Future of Plans.
14.1 Term of the Plan. The Plan, as set forth herein, shall become effective on October 22, 1997. The Plan shall remain in effect
until it is terminated under Section 14.2.
14.2 Amendment or Termination. The Committee may, at any time and for any reason, amend or terminate the Plan.
14.3 Effect of Amendment or Termination. No Award shall be made under the Plan after the termination thereof. The
termination of the Plan, or any amendment thereof, shall not adversely affect the rights of any holder of any Option or Restricted
Shares previously granted under the Plan.
Article 15. Definitions.
15.1 “Award” means any award of an Option or a Restricted Share under the Plan.
15.2 “Award Year” means a fiscal year beginning January 1 and ending December 31 with respect to which an Award may be
granted.
15.3 “Board” means the Company’s Board of Directors, as constituted from time to time.
15.4 “Change in Control” means the occurrence of any of the following events after the effective date of the Plan as set out in
Section 14.1:
(a) A change in control required to be reported pursuant to Item 6(e) of Schedule 14A of Regulation 14A under the Exchange
Act;
(b) A change in the composition of the Board, as a result of which fewer than two-thirds of the incumbent directors are directors
who either (i) had been directors of the Company 24 months prior to such change or (ii) were elected, or nominated for election, to the
Board with the affirmative votes of at least a majority of the directors who had been directors of the Company 24 months prior to such
change and who were still in office at the time of the election or nomination;
(c) Any “person” (as such term is used in sections 12(d) and 13(d) of the Exchange Act) becomes the beneficial owner, directly
or indirectly, of securities of the Company representing 20 percent or more of the combined voting power of the Company’s then
outstanding securities ordinarily (and apart from rights accruing under special circumstances) having the right to vote at elections of
directors (the “Base Capital Stock”); provided, however, that any change in the relative beneficial ownership of securities of any
person resulting solely from a reduction in the aggregate number of outstanding shares of Base Capital Stock, and any decrease
thereafter in such person’s ownership of securities, shall be disregarded until such person increases in any manner, directly or
indirectly, such person’s beneficial ownership of any securities of the Company.
15.5 “Code” means the Internal Revenue Code of 1986, as amended.
15.6 “Committee” means the Compensation Committee of the Board, as constituted from time to time.
15.7 “Common Share” means one share of the common stock of the Company.
15.8 “Company” means The Charles Schwab Corporation, a Delaware corporation.
15.9 “Disability” means the inability to engage in any substantial gainful activity considering the Participant’s age, education
and work experience by reason of any medically determined physical or mental impairment that has continued without interruption
for a period of at least six months and that can be
expected to be of long, continued and indefinite duration. All determinations as to whether a Participant has incurred a Disability shall
be made by the Committee, the findings of which shall be final, binding and conclusive.
15.10 “Employee” means a common-law employee, other than an officer of the Company or any Subsidiary, as determined by
the Committee.
15.11 “ERISA” means the Employee Retirement Income Security Act of 1974, as amended.
15.12 “Exchange Act” means the Securities Exchange Act of 1934, as amended.
15.13 “Exercise Price” means the amount for which one Common Share may be purchased upon exercise of an Option, as
specified by the Committee in the applicable Stock Option Agreement.
15.14 “Fair Market Value” means the market price of a Common Share, determined by the committee as follows:
(a) If the Common Share was traded on a stock exchange on the date in question, then the Fair Market Value shall be equal to
the closing price reported by the applicable composite-transactions report for such date;
(b) If the Common Share was traded over-the-counter on the date in question and was classified as a national market issue, then
the Fair Market Value shall be equal to the last transaction price quoted by the NASDAQ system for such date;
(c) If the Common Share was traded over-the-counter on the date in question but was not classified as a national market issue,
then the Fair Market Value shall be equal to the mean between the last reported representative bid and asked prices quoted by the
NASDAQ system for such date; and
(d) If none of the foregoing provisions is applicable, then the Fair Market Value shall be determined by the Committee in good
faith on such basis as it deems appropriate.
15.15 “Option” means an employee stock option, other than an option described in sections 422 through 424 of the Code,
including a Replacement Option, granted under the Plan and entitling the holder to purchase one Common Share.
15.16 “Optionee” means an individual, or his or her estate, legatee or heirs at law that holds an Option.
15.17 “Participant” means an Employee who has received an Award.
15.18 “Plan” means this Charles Schwab Employee Stock Incentive Plan, as it may be amended from time to time.
15.19 “Replacement Option” means an Option that is granted when a Participant uses a Common Share held or to be acquired
by the Participant to exercise an Option and/or to satisfy tax withholding requirements incident to the exercise of an Option.
15.20 “Restricted Share” means a Common Share awarded to a Participant under the Plan.
15.21. “Retirement” shall mean any termination of employment of an Optionee for any reason other than death at any time after
the Optionee has attained fifty (50), but only if, at the time of such termination, the Participant has been credited with at least seven
(7) Years of Service under the Charles Schwab Profit Sharing and Employee Stock Ownership Plan. The foregoing definition shall
apply to all Stock Option Agreements entered into pursuant to the Plan, irrespective of any definition to the contrary contained in any
such Stock Option Agreement.
15.22 “Stock Award Agreement” means the agreement between the Company and the recipient of a Restricted Share which
contains the terms, conditions and restrictions pertaining to such Restricted Share.
15.23 “Stock Option Agreement” means the agreement between the Company and an Optionee which contains the terms,
conditions and restrictions pertaining to his or her option.
15.24 “Subsidiary” means any corporation, if the Company and/or one or more other Subsidiaries own not less than 50 percent
of the total combined voting power of all classes of outstanding stock of such corporation. A corporation that attains the status of a
Subsidiary on a date after the adoption of the Plan shall be considered a Subsidiary commencing as of such date.
ADDENDUM
THE UNITED KINGDOM 2001 EMPLOYEE SHARE OPTION SCHEME
OF THE CHARLES SCHWAB CORPORATION
This Addendum to The Charles Schwab Corporation Employee Stock Incentive Plan (the “Employee Plan”) shall constitute the rules
of the United Kingdom 2001 Employee Share Option Scheme (“Scheme”) of The Charles Schwab Corporation (the “Company”), as
approved by the United Kingdom’s Board of Inland Revenue (“Inland Revenue”) under Schedule 9 to the United Kingdom’s Income
and Corporation Taxes Act 1988 (the “Act”).
Definitions
1
Except as specifically set forth in this Addendum, the terms and conditions of the Employee Plan shall apply to the
Scheme. In addition, the following definitions will apply to this Scheme:
1.1
1.2
1.3
1.4
1.5
References to the “Act” are to the United Kingdom’s Income and Corporation Taxes Act 1998.
The expression “New Option” means an Option over shares in the Acquiring Company (as defined in rule 5.2) or
some other company falling within paragraph 10(b) or 10(c) of Schedule 9 to the Act, meeting the requirements of
sub-paragraphs 15(3)(a) to (d) of Schedule 9 to the Act, granted in consideration of the release of a subsisting
Option within the “appropriate period” (as defined by paragraph 15(2) of Schedule 9 to the Act).
The expression “Option-holder” means the person to whom an option has been granted under this Scheme and
references to “Optionee” in the Employee Plan shall be construed accordingly.
The expression “Participating Company” means the Company and any company which is under the control of the
Company, within the meaning of section 840 of the Act, and to which the Committee shall have resolved that this
Scheme shall for the time being extend.
References to “Qualifying Shares” in this Addendum are references to Shares which satisfy the requirements of
paragraphs 10 to 14 of Schedule 9 to the Act.
1.6
References to “Shares” in this addendum are references to shares or shares of Common Stock in the Company.
Eligibility and Grant
2.1 Options may be granted under the Scheme to a person who is an employee (other than one who is a director) or a full-time
director of a Participating Company, and for this purpose a person shall be treated as a full-time director of a Participating
Company if he is obliged to devote not less than 25 hours a week, excluding meal breaks, to the performance of the duties
of his office or employment with that company (or with that company and any other company which is a Participating
Company). References in the Employee Plan to “employee” shall be construed accordingly.
2.2 No Options under this Scheme may be granted to, or exercised by, a person who is not eligible to participate by virtue of
paragraph 8 of Schedule 9 to the Act, as modified by section 187 (3) (a) of the Act.
2.3 No Option may be granted at a time when the Shares over which it is granted are not Qualifying Shares.
2.4 For the purposes of Article 5.4, the Fair Market Value, as determined by the Committee in respect of any Option under this
Scheme, shall be as defined in Article 15.14(a) of the Employee Plan if the Stock Exchange referred to in that Article is the
New York Stock Exchange and the closing price referred to in that Article is the closing price on the New York Stock
Exchange and in any other case shall be not less than the market value of the shares as agreed in advance with the United
Kingdom Inland Revenue Shares Valuation Division.
2.5 Only Options (as defined in the Employee Plan) shall be granted under this Scheme and no Replacement Options or
Restricted Shares as outlined in Articles 5.8 and 7 respectively of the Employee Plan shall be granted under this Scheme.
Articles 5.8, 7 and 9 of the Employee Plan shall not apply for the purposes of this Scheme.
2.6 No Option granted under this Scheme shall be exercisable more than ten years after the date the Option is granted. Article
5.5 of the Employee Plan shall be constructed accordingly.
Limitation on Awards
3.
For the purposes of Article 3 of the Employee Plan, any Option granted under this Scheme to any person shall be limited
and take effect so that the sterling equivalent of the amount payable on the exercise of such Option, when added to the
aggregate sterling equivalent of Shares which are capable of being acquired under subsisting rights obtained by the
Participant under this Scheme or any other share option scheme established by the Company or any associated company
(within the meaning contained in section 416 of the Act) of the Company and approved under Schedule 9 to the Act (but
excluding any rights obtained under a savings related share option scheme) shall not exceed the limit set out in paragraph
28 of Schedule 9 to the Act.
For the purposes of this Scheme, the sterling equivalent of any amount payable on the exercise of an option shall be the
amount converted into pounds sterling at the highest buying rate shown in the day’s spread as published in the Financial
Times for the date of grant of such option or at such other rate as may be agreed from time to time with the United
Kingdom Inland Revenue Shares Valuation Division.
Exercise
4.1 No Option may be exercised whilst this Scheme is and is intended to remain approved by the Inland Revenue unless the
Shares which would be acquired are Qualifying Shares.
4.2 Any terms and conditions imposed by the Committee under Article 5.1 of the Employee Plan for the exercise of Options
granted under this Scheme shall be factual and objective, laid down at the time of grant, and shall not be amended or
waived after the time of grant unless event or events have occurred such that the Committee reasonably believes that the
original conditions as amended or waived will be a fairer measure and would not be less difficult to satisfy than the original
condition. Any conditions imposed shall not be effective until approved by the United Kingdom Inland Revenue. Any
other terms determined by the Company may only be imposed if they otherwise comply with the requirements set out in
Schedule 9 to the Act.
4.3 Notwithstanding Article 5.2 of the Employee Plan, no Option may be transferred by will, and on the death of the Option-
holder any subsisting Option may be exercised by his personal representatives not later than one year after the date of his
death. The proviso in Article 13 of the Employee Plan shall not apply.
4.4 Article 5.5 of the Employee Plan shall not apply to this Scheme. Each Stock Option Agreement
shall specify the date when all or any installment of the Option is to become exercisable (the vesting of the Option). The
Stock Option Agreement shall also specify the term of the Option. Any subsisting Options may be exercised by the
Participant or, if deceased, by his personal representatives in whole or in part (including any unvested part) at the time of
or, subject to rule 4.5, at any time following the occurrence of the earliest of the following events:
(i)
(ii)
the death of the Participant; and
upon the Participant ceasing to be a director or employee of a Participating Company or the Company or any
Subsidiary as defined in Article 15.24 of the Employee Plan where that cessation was by reason of Disability, injury
or Retirement.
4.5 An Option shall lapse and become thereafter incapable of exercise on the earliest of the following events:
(i)
(ii)
the tenth anniversary of the date the Option is granted;
where a Participant ceases to be a director or employee of a Participating Company or the Company or any
Subsidiary as defined in Article 15.24 of the Employee Plan by reason of death, Disability or injury, the first
anniversary following such cessation;
(iii) where a Participant ceases to be a director or employee of a Participating Company or the Company or any
Subsidiary as defined in Article 15.24 of the Employee Plan by reason of Retirement, the second anniversary
following such cessation; and
(iv)
the end of the period of exercisability determined in accordance with rule 5.
4.6 Payment for Shares on the exercise of Options granted under this Scheme shall be in cash and not through the delivery of
Shares of Common Stock or otherwise as described in Articles 6.2 and 6.3 of the Employee Plan.
4.7 Shares shall be issued and the Option-holder registered as a shareholder within 30 days of receipt of a valid exercise notice.
4.8 Notwithstanding the provisions of Article 5.7 or 6.2 of the Employee Plan, any Shares issued upon the exercise of an
Option under this Scheme shall not be subject to any forfeiture conditions, rights of repurchase, rights of first refusal or any
other transfer restrictions that do not apply to all holders of Shares.
4.9 Article 12.2 shall apply so that the Company shall not be obliged to issue the shares until the obligations are satisfied.
4.10 The Company shall keep available sufficient unissued Shares or Shares in the Treasury to satisfy the exercise in full of all
Options granted under this Scheme and for the time being remaining capable of being exercised.
Takeover, Change of Control
5.1 If any person obtains control of the Company (within the meaning of section 840 of the Act) as a result of making:
(i)
(ii)
a general offer to acquire the whole of the issued share capital of the Company (other than that which is already
owned by him) which is unconditional or which is made on a condition such that if it is satisfied the person making
the offer will have control of the Company; or
a general offer to acquire all the shares (other than shares which are already owned by him) in the Company which
are of the same class as Shares subject to a subsisting Option, then the Committee shall notify all Participants as
soon as is practicable after the change of control. Any subsisting Option may be exercised from the date of the
receipt of that notification up to the expiry of a period ending six months from the time when the person making the
offer has obtained control of the Company and any condition subject to which the offer is made has been satisfied.
5.2 If as a result of the events specified in rule 5.1 an “Acquiring Company” (as defined in paragraph 15 of Schedule 9 to the
Act) has obtained control of the Company, the Participant may, if the Acquiring Company so agrees, release any subsisting
Option he holds in consideration for the grant of a New Option.
5.3 Where the circumstances noted in rule 5.2 apply, New Options may be granted within the terms of paragraph 15(1) of
Schedule 9 to the Act in consideration for the release of Options previously granted under this Scheme. Such New Options
are deemed to be equivalent to the old Options and to have been granted within the terms of this Scheme, provided the
New Options satisfy the conditions in paragraph 15(3) of Schedule 9 to the Act and the release of the Option takes place
within six months of the date the Acquiring Company obtains control of the Company. A New Option issued in
consideration of the release of an Option shall be evidenced by an option which shall import the relevant provisions of this
Scheme.
5.4 A New Option shall, for all other purposes of this Scheme, be treated as having been acquired at the same time as the
corresponding released Option.
5.5 If any person obtains control of the Company other than as a result of the events specified in rule 5.1, then the Committee
shall notify all Participants as soon as practicable after the change of control. Any subsisting Option may be exercised from
the date of the receipt of that notification up to the expiry of a period ending six months from the time when the person
obtains control of the Company.
5.6 If, as a result of the events specified in rules 5.1 or 5.3, a company has obtained control of the Company, the Committee
shall be entitled at any time to require all holders of subsisting Options to exercise those Options within 30 days by notice
in writing to the Participant to this effect.
5.7 The periods of exercisability under this rule 5 and the date of lapse under rule 4.5 are those of whichever of the pre-
conditions of rules 5.1, 5.3 or 5.4 are first achieved. The subsequent achievement of any other pre-conditions will not cause
a period of exercisability to begin nor a date of lapse to arise.
5.8 For the purpose of this rule 5 other than rule 5.2, a person shall be deemed to have obtained control of the Company if he
and others acting in concert with him have together obtained control of it.
5.9 The exercise of an Option pursuant to the preceding provisions of this rule 5 shall not be subject to any conditions imposed
pursuant to Article 5.1 of the Employee Plan as amended by rule 4.2.
Employment Relationship
6. With respect to Options granted pursuant to he Scheme, Article 11 of the Employee Plan shall be subject to the following:
Any Participant or Employee shall waive any and all rights to compensation or damages on the termination of his office or
employment with any past or present Participating Company or Subsidiary for any reason whatsoever insofar as those
rights arise or may arise from his ceasing to have rights under or to be entitled to exercise any Option under this Scheme as
a result of the termination. Neither the grant of an Option nor any benefit which may accrue to a Participant on the exercise
of an Option shall form part of that Participant’s remuneration entitlement from his office or employment, nor shall the
grant of an Option create any right or entitlement on the Participant to have any further Options granted to him under this
Scheme if at all.
Protection Against Dilution: Variation of Share Capital
7. With respect to Options granted pursuant to he Scheme, Article 10.1 of the Employee Plan shall apply, but (i)_ with the
omission of the following words and phrases : “a declaration of a dividend payable in Common Shares (other than a bonus
issue of shares with no cash alternative)”, “a declaration of a dividend payable in a form other than Common Shares”, “a
spin-off or similar occurrence;” and (ii) as if the following words were added “or any other variation of the issued
Common Shares” before the words “the Committee”. Adjustments to Options, as described in Article 10 of the Employee
Plan, shall be at the discretion of the Committee and shall not be effective under this Scheme until approved by the United
Kingdom Inland Revenue.
Alteration of Scheme rules
8.
The Committee may make such alterations to the provisions of this Scheme as may be permitted by Article 14.2 of the
Employee Plan, provided that any such alteration made at a time when this Scheme is to remain approved by the United
Kingdom Inland Revenue shall not have effect unless and until the alteration has the prior approval in writing of the United
Kingdom Inland Revenue.
THE CHARLES SCHWAB CORPORATION
2001 STOCK INCENTIVE PLAN
(Amended and Restated December 12, 2007)
Exhibit 10.302
Article 1. Introduction.
The Plan was adopted by the Board of Directors on February 28, 2001. The purpose of this Plan is to promote the long-term
success of the Company and the creation of incremental stockholder value by (a) encouraging Non-Employee Directors and Key
Employees to focus on long-range objectives, (b) encouraging the attraction and retention of Non-Employee Directors and Key
Employees with exceptional qualifications and (c) linking Non-Employee Directors and Key Employees directly to stockholder
interests. The Plan seeks to achieve this purpose by providing for Awards in the form of Restricted Shares, Performance Share
Awards or Options, which may constitute incentive stock options or nonstatutory stock options. The Plan shall be governed by, and
construed in accordance with, the laws of the State of Delaware.
Article 2. Administration.
2.1 The Committee. The Plan shall be administered by the Committee. The Committee shall consist of two or more Directors,
who shall be appointed by the Board.
2.2 Committee Responsibilities. The Committee shall select the Key Employees who are to receive Awards under the Plan,
determine the amount, vesting requirements and other conditions of such Awards, may interpret the Plan, and make all other decisions
relating to the operation of the Plan. The Committee may adopt such rules or guidelines as it deems appropriate to implement the
Plan. The Committee’s determinations under the Plan shall be final and binding on all persons.
Article 3. Limitations on Awards.
The aggregate number of Restricted Shares, Performance Share Awards and Options awarded under the Plan shall not exceed
70,000,000. If any Restricted Shares, Performance Share Awards or Options are forfeited, or if any Performance Share Awards
terminate for any other reason without the associated Common Shares being issued, or if any Options terminate for any other reason
before being exercised, then such Restricted Shares, Performance Share Awards or Options shall again become available for Awards
under the Plan.
Subject to the overall limit on the aggregate shares set forth above, the following limitations shall apply: (a) The maximum
number of Common Shares which may be granted subject to an Option to any one Participant in any one fiscal year shall be
5,000,000; and (b) The maximum number of Restricted Shares or Performance Share Awards which may be granted to any one
Participant in any one fiscal year shall be 1,000,000. The limitations set forth in the preceding sentence shall be subject to adjustment
pursuant to Article 10; and
The limitations of this Article 3 shall each be subject to adjustment pursuant to Article 10. Any Common Shares issued pursuant
to the Plan may be authorized but unissued shares or treasury shares.
1
Article 4. Eligibility.
4.1 General Rule. Key Employees and Non-Employee Directors shall be eligible for designation as Participants by the
Committee.
4.2 Non-Employee Directors. In addition to any awards pursuant to Section 4.1, Non-Employee Directors shall be entitled to
receive the automatic Awards described in this Section 4.2.
(a) Each Non-Employee Director shall receive a NQSO covering 5,000 Common Shares for each Award Year with respect to
which he or she serves as a Non-Employee Director on the grant date described in subsection (d) below and subject to the other
conditions set forth in subsection (d); and
(b) Each Non-Employee Director shall receive an automatic award of Restricted Shares covering a number of Shares for each
Award Year with respect to which he or she serves as a Non-Employee Director on the grant date described in subsection (d) below,
to be calculated by dividing $50,000 by the Fair Market Value of the Restricted Shares on the grant date described in subsection
(d) below; and
(c) Upon joining the Board, each Non-Employee Director shall become entitled to receive a NQSO covering 5,000 Common
Shares. Such NQSO shall be granted on the date of the first meeting of the Board of Directors following the date such individual
becomes a Director, shall be exercisable in full at all times during its term, and shall be subject to the conditions (other than date of
grant) set forth in subsection (d).
(d) The Awards described in subsections (a) and (b) for a particular Award Year shall be granted to each Non-Employee
Director as of May 15 of each Award Year, and if May 15 is not a business day, then the Award shall be granted on and as of the next
succeeding business day.
Each NQSO shall be subject to the following terms and conditions:
(1) The term of each NQSO shall be 10 years; provided, however, that any unexercised NQSO shall expire on the earlier of
the date 10 years after the date of grant or three (3) months following the date that the Optionee ceases to be a Non-Employee
Director or a Key Employee for any reason other than retirement, death or disability. If an Optionee ceases to be a Non-
Employee Director or Key Employee on account of death or disability, any unexercised NQSO shall expire on the earlier of the
date 10 years after the date of grant or one year after the date of death or disability of such Director, and if an Optionee ceases to
be a Non-Employee Director or Key Employee on account of retirement, any unexercised NQSO shall expire on the earlier of
the date 10 years after the date of grant or two years after the date of retirement of such Director; and
(2) The Exercise Price under each NQSO shall be equal to the Fair Market Value on the date of grant and shall be payable
in any of the forms described in Article 6.
(e) The Awards described in subsections (a) and (b) shall become vested and exercisable in accordance with the following
schedule:
1st anniversary of grant date: 25%
2nd anniversary of grant date: 50%
2
3rd anniversary of grant date: 100%
Provided that Awards will become 100% vested on a Director’s death, disability or retirement from the Board. For purposes of
this Section 4.2, retirement shall mean a Director’s resignation or removal from the Board at any time after the Director has
either attained age 70 or completed five years of service as a Director.
4.3 Ten-Percent Stockholders. A Key Employee who owns more than 10 percent of the total combined voting power of all
classes of outstanding stock of the Company or any of its Subsidiaries shall not be eligible for the grant of an ISO unless (a) the
Exercise price under such ISO is at least 110 percent of the Fair Market Value of a Common Share on the date of grant and (b) such
ISO by its terms is not exercisable after the expiration of five years from the date of grant.
4.4 Attribution Rules. For purposes of Section 4.3, in determining stock ownership, a Key Employee shall be deemed to own the
stock owned, directly or indirectly, by or for his or her brothers, sisters, spouse, ancestors or lineal descendants. Stock owned, directly
or indirectly, by or for a corporation, partnership, estate or trust shall be deemed to be owned proportionately by or for its
stockholders, partners or beneficiaries. Stock with respect to which the Key Employee holds an option shall not be counted.
4.5 Outstanding Stock. For purposes of Section 4.3, “outstanding stock” shall include all stock actually issued and outstanding
immediately after the grant of the ISO to the Key Employee. “Outstanding stock” shall not include treasury shares or shares
authorized for issuance under outstanding options held by the Key Employee or by any other person.
4.6 Options Issued To Non-Employee Directors In Lieu of Fee Deferrals. In addition to any awards pursuant to Sections 4.1 and
4.2, a Non-Employee Director who elects to defer the receipt of amounts pursuant to Section 5.1 of The Charles Schwab Corporation
Directors’ Deferred Compensation Plan (the “Directors Deferred Compensation Plan”) and elects to receive stock options in lieu of a
Deferral Account balance pursuant to Section 5.4(2) of the Directors Deferred Compensation Plan, shall be entitled to receive a grant
of NQSOs hereunder on the date the amounts would have been payable to the Non-Employee Director if the Non-Employee Director
had not made such deferral election. Any NQSOs issued pursuant to this Section shall be issued pursuant to the terms set forth in
subsections (c), (d) and (e) of Section 4.2 hereof.
4.7 Performance Shares Issued To Non-Employee Directors Pursuant to Fee Deferrals. In addition to any awards pursuant to
Sections 4.1 and 4.2, a Non-Employee Director who elects to defer the receipt of amounts pursuant to Section 5.1 of The Directors’
Deferred Compensation Plan and elects to receive payment in Shares pursuant to Section 5.4(1) of the Directors Deferred
Compensation Plan, shall be entitled to receive a grant of Performance Shares hereunder on the date the amounts would have been
payable to the Non-Employee Director if the Non-Employee Director had not made such deferral election. For purposes of this
section, the term Non-Employee Director shall also include non-employee directors of any Subsidiary, if the Committee has approved
participation in the Directors Deferred Compensation Plan for such Subsidiary’s non-employee directors.
Article 5. Options.
5.1 Stock Option Agreement. Each grant of an Option under the Plan shall be evidenced by a Stock Option Agreement between
the Optionee and the Company. Such Option shall be subject to all applicable terms and conditions of
3
the Plan, and may be subject to any other terms and conditions which are not inconsistent with the Plan and which the Committee
deems appropriate for inclusion in a Stock Option Agreement. The provisions of the various Stock Option Agreements entered into
under the Plan need not be identical. The Committee may designate all or any part of an Option as an ISO (or, in the case of a Key
Employee who is subject to the tax laws of a foreign jurisdiction, as an option qualifying for favorable tax treatment under the laws of
such foreign jurisdiction), except for Options granted to Non-Employee Directors.
5.2 Options Nontransferability. Subject to the provisions of Section 14.2, no Option granted under the Plan shall be transferable
by the Optionee other than by will or the laws of descent and distribution. An Option may be exercised during the lifetime of the
Optionee only by him or her. No Option or interest therein may be transferred, assigned, pledged or hypothecated by the Optionee
during his or her lifetime, whether by operation of law or otherwise, or be made subject to execution, attachment or similar process.
5.3 Number of Shares. Each Stock Option Agreement shall specify the number of Common Shares subject to the Option and
shall provide for the adjustment of such number in accordance with Article 10. Each Stock Option Agreement shall also specify
whether the Option is an ISO or an NQSO.
5.4 Exercise Price. Each Stock Option Agreement shall specify the Exercise Price. The Exercise Price under an Option shall not
be less than 100 percent of the Fair Market Value of a Common Share on the date of grant, except as otherwise provided in
Section 4.3. Subject to the preceding sentence, the Exercise Price under any Option shall be determined by the Committee. The
Exercise Price shall be payable in accordance with Article 6.
5.5 Exercisability and Term. Each Stock Option Agreement shall specify the date when all or any installment of the Option is to
become exercisable. The Stock Option Agreement shall also specify the term of the Option. The term of an ISO shall in no event
exceed 10 years from the date of grant, and Section 4.3 may require a shorter term. Subject to the preceding sentence, the Committee
shall determine when all or any part of an Option is to become exercisable and when such Option is to expire; provided that, in
appropriate cases, the Company shall have the discretion to extend the term of an Option or the time within which, following
termination of employment, an Option may be exercised, or to accelerate the exercisability of an Option; provided further, however,
that with respect to Options granted or vested after December 31, 2004, the exercise period of an Option may be extended to a date no
later than the earlier of the latest date upon which the Option would have expired by its original terms under any circumstances or the
tenth anniversary of the original date of grant of the Option. A Stock Option Agreement may provide for expiration prior to the end of
its term in the event of the termination of the Optionee’s employment and shall provide for the suspension of vesting when an
employee is on a leave of absence for a period in excess of six months in appropriate cases, as determined by the Company; provided
that, except to the extent otherwise specified by the Committee at the time of grant, (i) the exercisability of Options shall be
accelerated in the event of the Participant’s death or Disability; (ii) in the case of Retirement, the exercisability of all outstanding
Options shall be accelerated, other than any Options that had been granted within two years of the date of the Optionee’s Retirement;
and (iii) vesting shall be suspended when an employee is on a leave of absence for a period in excess of six months in appropriate
cases, as determined by the Company. Except as provided in Section 4.2, with respect to NQSOs and Restricted Shares that are
granted and vested on or before December 31, 2004, NQSOs may also be awarded in combination with Restricted Shares, and such an
Award may provide that the NQSOs will not be exercisable unless the related Restricted Shares are forfeited. In addition, NQSOs
granted under this Section 5 may be granted subject to forfeiture provisions which provide
4
for forfeiture of the Option upon the exercise of tandem awards, the terms of which are established in other programs of the
Company.
5.6 Limitation on Amount of ISOs. The aggregate fair market value (determined at the time the ISO is granted) of the Common
Shares with respect to which ISOs are exercisable for the first time by the Optionee during any calendar year (under all incentive
stock option plans of the Company) shall not exceed $100,000; provided, however, that all or any portion of an Option which cannot
be exercised as an ISO because of such limitation shall be treated as an NQSO.
5.7 Effect of Change in Control. The Committee (in its sole discretion) may determine, at the time of granting an Option, that
such Option shall become fully exercisable as to all Common Shares subject to such Option immediately preceding any Change in
Control with respect to the Company.
5.8 Restrictions on Transfer of Common Shares. Any Common Shares issued upon exercise of an Option shall be subject to such
special forfeiture conditions, rights of repurchase, rights of first refusal and other transfer restrictions as the Committee may
determine. Such restrictions shall be set forth in the applicable Stock Option Agreement and shall apply in addition to any general
restrictions that may apply to all holders of Common Shares.
5.9 Authorization of Replacement Options. Concurrently with the grant of any Option to a Participant (other than NQSOs
granted pursuant to Section 4.2), the Committee may authorize the grant of Replacement Options. If Replacement Options have been
authorized by the Committee with respect to a particular award of Options (the “Underlying Options”), the Option Agreement with
respect to the Underlying Options shall so state, and the terms and conditions of the Replacement Options shall be provided therein.
The grant of any Replacement Options shall be effective only upon the exercise of the Underlying Options through the use of
Common Shares pursuant to Section 6.2 or Section 6.3. The number of Replacement Options shall equal the number of Common
Shares used to exercise the Underlying Options, and, if the Option Agreement so provides, the number of Common Shares used to
satisfy any tax withholding requirements incident to the exercise of the Underlying Options in accordance with Section 13.2. Upon
the exercise of the Underlying Options, the Replacement Options shall be evidenced by an amendment to the Underlying Option
Agreement. Notwithstanding the fact that the Underlying Option may be an ISO, a Replacement Option is not intended to qualify as
an ISO. The Exercise Price of a Replacement Option shall be no less than the Fair Market Value of a Common Share on the date the
grant of the Replacement Option becomes effective. The term of each Replacement Option shall be equal to the remaining term of the
Underlying Option. No Replacement Options shall be granted to Optionees when Underlying Options are exercised pursuant to the
terms of the Plan and the Underlying Option Agreement following termination of the Optionee’s employment. The Committee, in its
sole discretion, may establish such other terms and conditions for Replacement Options as it deems appropriate.
5.10 Options Granted to Non-United States Key Employees. In the case of Key Employees who are subject to the tax laws of a
foreign jurisdiction, the Company may issue Options to such Key Employees that contain terms required to conform to any
requirements for favorable tax treatment imposed by the laws of such foreign jurisdiction, or as otherwise may be required by the
laws of such foreign jurisdiction. The terms of any such Options shall be governed by the Plan, subject to the terms of any Addendum
to the Plan specifically applicable to such Options.
5.11 Effect of Job Elimination. Notwithstanding anything to the contrary contained in the Plan or in any Stock Option
Agreement or Stock Award
5
Agreement entered into with respect to an Award pursuant to the Plan, in the case of a Participant who is an Officer, and who
becomes entitled to receive payments with respect to a Severance Period pursuant to the Charles Schwab Severance Pay Plan (the
“Severance Plan”) on account of a Job Elimination, the terms of the Plan and any Stock Option Agreement or Stock Award
Agreement entered into with respect to an Award shall be applied by treating the Participant as if the Participant had terminated
employment on the Participant’s Termination Date. For purposes of applying this Section, the terms Officer, Severance Period,
Termination Date, and Job Elimination shall have the meanings set forth in the Severance Plan.
Article 6. Payment for Option Shares.
6.1 General Rule. The entire Exercise Price of Common Shares issued upon exercise of Options shall be payable in cash at the
time when such Common Shares are purchased, except that the Company may at any time accept payment pursuant to Section 6.2 or
6.3.
6.2 Surrender of Stock. To the extent that this Section 6.2 is applicable, payment for all or any part of the Exercise Price may be
made with Common Shares which are surrendered to the Company. Such Common Shares shall be valued at their Fair Market Value
on the date when the new Common Shares are purchased under the Plan. In the event that the Common Shares being surrendered are
Restricted Shares that have not yet become vested, the same restrictions shall be imposed upon the new Common Shares being
purchased.
6.3 Exercise/Sale. To the extent this Section 6.3 is applicable, payment may be made by the delivery (in a manner prescribed by
the Company) of an irrevocable direction to Charles Schwab & Co., Inc. to sell Common Shares (including the Common Shares to be
issued upon exercise of the Options) and to deliver all or part of the sales proceeds to the Company in payment of all or part of the
Exercise Price and any withholding taxes.
Article 7. Restricted Shares and Performance Share Awards.
7.1 Time, Amount and Form of Awards. The Committee may grant Restricted Shares or Performance Share Awards with respect
to an Award Year during such Award Year or at any time thereafter. Each such Award shall be evidenced by a Stock Award
Agreement between the Award recipient and the Company. The amount of each Award of Restricted Shares or Performance Share
Awards shall be determined by the Committee. Awards under the Plan may be granted in the form of Restricted Shares or
Performance Share Awards or in any combination thereof, as the Committee shall determine at its sole discretion at the time of the
grant. With respect to Restricted Shares, Performance Shares and NQSOs that are granted and vested on or before December 31,
2004, Restricted Shares or Performance Share Awards may also be awarded in combination with NQSOs, and such an Award may
provide that the Restricted Shares or Performance Share Awards will be forfeited in the event that the related NQSOs are exercised.
7.2 Payment for Restricted Share Awards. To the extent that an Award is granted in the form of Restricted Shares, the Award
recipient, as a condition to the grant of such Award, shall be required to pay the Company in cash an amount equal to the par value of
such Restricted Shares.
7.3 Vesting or Issuance Conditions. Each Award of Restricted Shares shall become vested, in full or in installments, upon
satisfaction of the conditions specified in the Stock Award Agreement. Common Shares shall be issued pursuant to Performance
Share Awards in full or in installments upon satisfaction of the issuance conditions specified in the Stock Award Agreement. The
Committee shall select the vesting conditions in the case of Restricted
6
Shares, or issuance conditions in the case of Performance Share Awards, which may be based upon the Participant’s service, the
Participant’s performance, the Company’s performance or such other criteria as the Committee may adopt; provided that, in the case
of an Award of Restricted Shares where vesting is based entirely on the Participant’s service (except to the extent otherwise specified
by the Committee at the time of grant), (i) vesting shall be accelerated in the event of the Participant’s death or Disability; (ii) in the
case of Retirement, vesting shall be accelerated for all Restricted Shares that had been granted more than two years prior to the date of
the Participant’s Retirement; and (iii) vesting shall be suspended when an employee is on a leave of absence for a period in excess of
six months in appropriate cases, as determined by the Company. The Committee, in its sole discretion, may determine, at the time of
making an Award of Restricted Shares, that such Award shall become fully vested in the event that a Change in Control occurs with
respect to the Company. The Committee, in its sole discretion, may determine, at the time of making a Performance Share Award,
that the issuance conditions set forth in such Award shall be waived in the event that a Change in Control occurs with respect to the
Company.
7.4 Form of Settlement of Performance Share Awards. Settlement of Performance Share Awards shall only be made in the form
of Common Shares. Until a Performance Share Award is settled, the number of Performance Share Awards shall be subject to
adjustment pursuant to Article 10.
7.5 Death of Recipient. Any Common Shares that are to be issued pursuant to a Performance Share Award after the recipient’s
death shall be delivered or distributed to the recipient’s beneficiary or beneficiaries. Each recipient of a Performance Share Award
under the Plan shall designate one or more beneficiaries for this purpose by filing the prescribed form with the Company. A
beneficiary designation may be changed by filing the prescribed form with the Company at any time before the Award recipient’s
death. If no beneficiary was designated or if no designated beneficiary survives the Award recipient, then any Common Shares that
are to be issued pursuant to a Performance Share Award after the recipient’s death shall be delivered or distributed to the recipient’s
estate. The Committee, in its sole discretion, shall determine the form and time of any distribution(s) to a recipient’s beneficiary or
estate.
Article 8. Claims Procedures.
Claims for benefits under the Plan shall be filed in writing with the Committee on forms supplied by the Committee. Written
notice of the disposition of a claim shall be furnished to the claimant within 90 days after the claim is filed. If the claim is denied, the
notice of disposition shall set forth the specific reasons for the denial, citations to the pertinent provisions of the Plan, and, where
appropriate, an explanation as to how the claimant can perfect the claim. If the claimant wishes further consideration of his or her
claim, the claimant may appeal a denied claim to the Committee (or to a person designated by the Committee) for further review.
Such appeal shall be filed in writing with the Committee on a form supplied by the Committee, together with a written statement of
the claimant’s position, no later than 90 days following receipt by the claimant of written notice of the denial of his or her claim. If
the claimant so requests, the Committee shall schedule a hearing. A decision on review shall be made after a full and fair review of
the claim and shall be delivered in writing to the claimant no later than 60 days after the Committee’s receipt of the notice of appeal,
unless special circumstances (including the need to hold a hearing) require an extension of time for processing the appeal, in which
case a written decision on review shall be delivered to the claimant as soon as possible but not later than 120 days after the
Committee’s receipt of the appeal notice. The claimant shall be notified in writing of any such extension of time. The written decision
on review shall include specific reasons
7
for the decision, written in a manner calculated to be understood by the claimant, and shall specifically refer to the pertinent Plan
provisions on which it is based. All determinations of the Committee shall be final and binding on Participants and their beneficiaries.
Article 9. Voting Rights and Dividends.
9.1 Restricted Shares. All holders of Restricted Shares shall have the same voting, dividend, and other rights as the Company’s
other stockholders.
9.2 Performance Share Awards. The holders of Performance Share Awards shall have no voting or dividend rights until such
time as any Common Shares are issued pursuant thereto, at which time they shall have the same voting, dividend and other rights as
the Company’s other stockholders.
Article 10. Protection Against Dilution; Adjustment of Awards.
10.1 General. In the event of a subdivision of the outstanding Common Shares, a declaration of a dividend payable in Common
Shares, a declaration of a dividend payable in a form other than Common Shares, a combination or consolidation of the outstanding
Common Shares (by reclassification or otherwise) into a lesser number of Common Shares, a recapitalization, a spinoff or a similar
occurrence, the Committee shall make appropriate adjustments in one or more of (a) the number of Options, Restricted Shares and
Performance Share Awards available for future Awards under Article 3, (b) the maximum number of Common Shares which may be
granted under Article 3 to any one Participant in any one fiscal year either subject to an Option or as Restricted Shares or
Performance Share Awards, (c) the number of Performance Share Awards included in any prior Award which has not yet been
settled, (d) the number of Common Shares covered by each outstanding Option or (e) the Exercise Price under each outstanding
Option.
10.2 Reorganizations. Subject to the provisions of Section 5.7, in the event that the Company is a party to a merger or other
reorganization, outstanding Options, Restricted Shares and Performance Share Awards shall be subject to the agreement of merger or
reorganization. Such agreement may provide, without limitation, for the assumption of outstanding Awards by the surviving
corporation or its parent, for their continuation by the Company (if the Company is a surviving corporation), for accelerated vesting or
for settlement in cash.
10.3 Reservation of Rights. Except as provided in this Article 10, a Participant shall have no rights by reason of any subdivision
or consolidation of shares of stock of any class, the payment of any stock dividend or any other increase or decrease in the number of
shares of stock of any class. Any issue by the Company of shares of stock of any class, or securities convertible into shares of stock of
any class, shall not affect, and no adjustment by reason thereof shall be made with respect to, the number or Exercise Price of
Common Shares subject to an Option. The grant of an Award pursuant to the Plan shall not affect in any way the right or power of the
Company to make adjustments, reclassifications, reorganizations or changes of its capital or business structure, to merge or
consolidate or to dissolve, liquidate, sell or transfer all or any part of its business or assets.
Article 11. Limitation of Rights.
11.1 Employment Rights. Neither the Plan nor any Award granted under the Plan shall be deemed to give any individual a right
to remain employed by the Company or any Subsidiary. The Company and its Subsidiaries reserve the right to terminate the
employment of any employee at any time, with or without cause, subject only to a written employment agreement (if any).
8
11.2 Stockholders’ Rights. A Participant shall have no dividend rights, voting or other rights as a stockholder with respect to any
Common Shares covered by his or her Award prior to the issuance of such Common Shares, whether by issuance of a certificate,
book entry or other procedure. No adjustment shall be made for cash dividends or other rights for which the record date is prior to the
date when such certificate is issued, except as expressly provided in Articles 7, 9 and 10.
11.3 Creditors’ Rights. A holder of Performance Share Awards shall have no rights other than those of a general creditor of the
Company. Performance Share Awards represent unfunded and unsecured obligations of the Company, subject to the terms and
conditions of the applicable Stock Award Agreement.
11.4 Government Regulations. Any other provision of the Plan notwithstanding, the obligations of the Company with respect to
Common Shares to be issued pursuant to the Plan shall be subject to all applicable laws, rules and regulations, and such approvals by
any governmental agencies as may be required. The Company reserves the right to restrict, in whole or in part, the delivery of
Common Shares pursuant to any Award until such time as:
(a) Any legal requirements or regulations have been met relating to the issuance of such Common Shares or to their registration,
qualification or exemption from registration or qualification under the Securities Act of 1933, as amended, or any applicable
state securities laws; and
(b) Satisfactory assurances have been received that such Common Shares, when issued, will be duly listed on the New York
Stock Exchange or any other securities exchange on which Common Shares are then listed.
Article 12. Limitation of Payments.
12.1 Basic Rule. Any provision of the Plan to the contrary notwithstanding, in the event that the independent auditors most
recently selected by the Board (the “Auditors”) determine that any payment or transfer in the nature of compensation to or for the
benefit of a Participant, whether paid or payable (or transferred or transferable) pursuant to the terms of this Plan or otherwise (a
“Payment”), would be nondeductible for federal income tax purposes because of the provisions concerning “excess parachute
payments” in section 280G of the Code, then the aggregate present value of all Payments shall be reduced (but not below zero) to the
Reduced Amount; provided, however, that the Committee, at the time of making an Award under this Plan or at any time thereafter,
may specify in writing that such Award shall not be so reduced and shall not be subject to this Article 12. For purposes of this Article
12, the “Reduced Amount” shall be the amount, expressed as a present value, which maximizes the aggregate present value of the
Payments without causing any Payment to be nondeductible by the Company because of section 280G of the Code.
12.2 Reduction of Payments. If the Auditors determine that any Payment would be nondeductible because of section 280G of the
Code, then the Company shall promptly give the Participant notice to that effect and a copy of the detailed calculation thereof and of
the Reduced Amount, and the Participant may then elect, in his or her sole discretion, which and how much of the Payments shall be
eliminated or reduced (as long as after such election, the aggregate present value of the Payments equals the Reduced Amount) and
shall advise the Company in writing of his or her election within 10 days of receipt of notice. If no such election is made by the
Participant within such 10-day period, then the Company may elect which and how much of the Payments shall be eliminated or
9
reduced (as long as after such election the aggregate present value of the Payments equals the Reduced Amount) and shall notify the
Participant promptly of such election. For purposes of this Article 12, present value shall be determined in accordance with section
280G(d)(4) of the Code. All determinations made by the Auditors under this Article 12 shall be binding upon the Company and the
Participant and shall be made within 60 days of the date when a Payment becomes payable or transferable. As promptly as practicable
following such determination and the elections hereunder, the Company shall pay or transfer to or for the benefit of the Participant
such amounts as are then due to him or her under the Plan, and shall promptly pay or transfer to or for the benefit of the Participant in
the future such amounts as become due to him or her under the Plan.
12.3 Overpayments and Underpayments. As a result of uncertainty in the application of section 280G of the Code at the time of
an initial determination by the Auditors hereunder, it is possible that Payments will have been made by the Company which should
not have been made (an “Overpayment”) or that additional Payments which will not have been made by the Company could have
been made (an “Underpayment”), consistent in each case with the calculation of the Reduced Amount hereunder. In the event that the
Auditors, based upon the assertion of a deficiency by the Internal Revenue Service against the Company or the Participant which the
Auditors believe has a high probability of success, determine that an Overpayment has been made, such Overpayment shall be treated
for all purposes as a loan to the Participant which he or she shall repay to the Company on demand, together with interest at the
applicable federal rate provided in section 7872(f)(2) of the Code; provided, however, that no amount shall be payable by the
Participant to the Company if and to the extent that such payment would not reduce the amount which is subject to taxation under
section 4999 of the Code. In the event that the Auditors determine that an Underpayment has occurred, such Underpayment shall
promptly be paid or transferred by the Company to or for the benefit of the Participant, together with interest at the applicable federal
rate provided in section 7872(f)(2) of the Code.
12.4 Related Corporations. For purposes of this Article 12, the term “Company” shall include affiliated corporations to the
extent determined by the Auditors in accordance with section 280G(d)(5) of the Code.
Article 13. Withholding Taxes.
13.1 General. To the extent required by applicable federal, state, local or foreign law, the recipient of any payment or
distribution under the Plan shall make arrangements satisfactory to the Company for the satisfaction of any withholding tax
obligations that arise by reason of such payment or distribution. The Company shall not be required to make such payment or
distribution until such obligations are satisfied.
13.2 Nonstatutory Options, Restricted Shares or Performance Share Awards. The Committee may permit an Optionee who
exercises NQSOs, or who receives Awards of Restricted Shares, or who receives Common Shares pursuant to the terms of a
Performance Share Award, to satisfy all or part of his or her withholding tax obligations by having the Company withhold a portion
of the Common Shares that otherwise would be issued to him or her under such Awards. Such Common Shares shall be valued at
their Fair Market Value on the date when taxes otherwise would be withheld in cash. The payment of withholding taxes by
surrendering Common Shares to the Company, if permitted by the Committee, shall be subject to such restrictions as the Committee
may impose, including any restrictions required by rules of the Securities and Exchange Commission.
Article 14. Assignment or Transfer of Award.
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14.1 General Rule. Any Award granted under the Plan shall not be anticipated, assigned, attached, garnished, optioned,
transferred or made subject to any creditor’s process, whether voluntarily, involuntarily or by operation of law, except to the extent
specifically permitted by Section 14.2.
14.2 Exceptions to General Rule. Notwithstanding Section 14.1, this Plan shall not preclude (i) a Participant from designating a
beneficiary to succeed, after the Participant’s death, to those of the Participant’s Awards (including without limitation, the right to
exercise any unexercised Options) as may be determined by the Company from time to time in its sole discretion, (ii) a transfer of any
Award hereunder by will or the laws of descent or distribution, or (iii) a voluntary transfer of an Award (other than an ISO) to a trust,
partnership or limited liability company for the benefit of one or more members of the Participant’s family, subject to the prior
approval of the Committee or its designee; provided that, in the case of an Award granted prior to September 25, 2002, such approval
shall not be required for a transfer to a trust or partnership if the Participant has sole investment control over such trust or partnership
Article 15. Future of Plans.
15.1 Term of the Plan. The Plan, as set forth herein, shall become effective on May 7, 2001. The Plan shall remain in effect until
it is terminated under Section 15.2, except that no ISOs shall be granted after May 6, 2011.
15.2 Amendment or Termination. The Committee may, at any time and for any reason, amend or terminate the Plan; provided,
however, that any amendment of the Plan shall be subject to the approval of the Company’s stockholders to the extent required by
applicable laws, regulations or rules.
15.3 Effect of Amendment or Termination. No Award shall be made under the Plan after the termination thereof. The
termination of the Plan, or any amendment thereof, shall not affect any Option, Restricted Share or Performance Share Award
previously granted under the Plan.
Article 16. Definitions.
16.1 “Award” means any award of an Option, a Restricted Share or a Performance Share Award under the Plan.
16.2 “Award Year” means a fiscal year beginning January 1 and ending December 31 with respect to which an Award may be
granted.
16.3 “Board” means the Company’s Board of Directors, as constituted from time to time.
16.4 “Change in Control” means the occurrence of any of the following events after the effective date of the Plan as set out in
Section 15.1:
(a) A change in control required to be reported pursuant to Item 6(e) of Schedule 14A of Regulation 14A under the Exchange
Act;
(b) A change in the composition of the Board, as a result of which fewer than two-thirds of the incumbent directors are directors
who either (i) had been directors of the Company 24 months prior to such change or (ii) were elected, or nominated for election,
to the Board with the affirmative votes of at least a majority of the directors who had been directors of the Company 24 months
prior to such change and who were still in office at the time of the election or nomination;
(c) Any “person” (as such term is used in sections 13(d) and 14(d) of
11
the Exchange Act) becomes the beneficial owner, directly or indirectly, of securities of the Company representing 20 percent or
more of the combined voting power of the Company’s then outstanding securities ordinarily (and apart from rights accruing
under special circumstances) having the right to vote at elections of directors (the “Base Capital Stock”); provided, however,
that any change in the relative beneficial ownership of securities of any person resulting solely from a reduction in the aggregate
number of outstanding shares of Base Capital Stock, and any decrease thereafter in such person’s ownership of securities, shall
be disregarded until such person increases in any manner, directly or indirectly, such person’s beneficial ownership of any
securities of the Company.
16.5 “Code” means the Internal Revenue Code of 1986, as amended.
16.6 “Committee” means the Compensation Committee of the Board, as constituted from time to time.
16.7 “Common Share” means one share of the common stock of the Company.
16.8 “Company” means The Charles Schwab Corporation, a Delaware corporation.
16.9 “Disability” means the inability to engage in any substantial gainful activity considering the Participant’s age, education
and work experience by reason of any medically determined physical or mental impairment that has continued without interruption
for a period of at least six months and that can be expected to be of long, continued and indefinite duration. All determinations as to
whether a Participant has incurred a Disability shall be made by the Employee Benefits Administration Committee of the Company,
the findings of which shall be final, binding and conclusive.
16.10 “ERISA” means the Employee Retirement Income Security Act of 1974, as amended.
16.11 “Exchange Act” means the Securities Exchange Act of 1934, as amended.
16.12 “Exercise Price” means the amount for which one Common Share may be purchased upon exercise of an Option, as
specified by the Committee in the applicable Stock Option Agreement.
16.13 “Fair Market Value” means the market price of a Common Share, determined by the committee as follows:
(a) If the Common Share was traded on a stock exchange on the date in question, then the Fair Market Value shall be equal to
the closing price reported by the applicable composite-transactions report for such date;
(b) If the Common Share was traded over-the-counter on the date in question and was classified as a national market issue, then
the Fair Market Value shall be equal to the last transaction price quoted by the NASDAQ system for such date;
(c) If the Common Share was traded over-the-counter on the date in question but was not classified as a national market issue,
then the Fair Market Value shall be equal to the mean between the last reported representative bid and asked prices quoted by
the NASDAQ system for such date; and
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(d) If none of the foregoing provisions is applicable, then the Fair Market Value shall be determined by the Committee in good
faith on such basis as it deems appropriate.
16.14 “ISO” means an incentive stock option described in section 422(b) of the Code.
16.15 “Key Employee” means (1) a key common-law employee of the Company or any Subsidiary, as determined by the
Committee, or (2) a non-employee director of any Subsidiary, as determined by the Committee.
16.16 “Named Executive Officer” means a Participant who, as of the date of vesting of an Award is one of a group of “covered
employees,” as defined in the Regulations promulgated under Code Section 162(m), or any successor statute.
16.17 “Non-Employee Director” means a member of the Board who is not a common-law employee.
16.18 “NQSO” means an employee stock option not described in sections 422 through 424 of the Code.
16.19 “Option” means an ISO or NQSO or, in the case of a Key Employee who is subject to the tax laws of a foreign
jurisdiction, an option qualifying for favorable tax treatment under the laws of such jurisdiction, including a Replacement Option,
granted under the Plan and entitling the holder to purchase one Common Share.
16.20 “Optionee” means an individual, or his or her estate, legatee or heirs at law that holds an Option.
16.21 “Participant” means a Non-Employee Director or Key Employee who has received an Award.
16.22 “Performance Share Award” means the conditional right to receive in the future one Common Share, awarded to a
Participant under the Plan.
16.23 “Plan” means this 1992 Stock Incentive Plan of The Charles Schwab Corporation, as it may be amended from time to
time.
16.24 “Replacement Option” means an Option that is granted when a Participant uses a Common Share held or to be acquired
by the Participant to exercise an Option and/or to satisfy tax withholding requirements incident to the exercise of an Option.
16.25 “Restricted Share” means a Common Share awarded to a Participant under the Plan.
16.26 “Retirement” shall mean any termination of employment of an Optionee for any reason other than death at any time after
the Optionee has attained Retirement Age. For this purpose, Retirement Age shall mean age fifty (50), but only if, at the time of such
termination, the Participant has been credited with at least seven (7) Years of Service under the SchwabPlan Retirement Savings and
Investment Plan; provided, however, that if at the time of grant of an Option an Optionee is a Participant in a qualified retirement plan
maintained by a Subsidiary (other than the SchwabPlan Retirement Savings and Investment Plan), then Retirement Age shall have the
same meaning as the Normal Retirement Date as defined in such plan.
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16.27 “Stock Award Agreement” means the agreement between the Company and the recipient of a Restricted Share or
Performance Share Award which contains the terms, conditions and restrictions pertaining to such Restricted Share or Performance
Share Award.
16.28 “Stock Option Agreement” means the agreement between the Company and an Optionee which contains the terms,
conditions and restrictions pertaining to his or her option.
16.29 “Subsidiary” means any corporation or other entity, if the Company and/or one or more other Subsidiaries own not less
than 50 percent of the total combined voting power of all classes of outstanding stock of such corporation (or ownership interest of
such other entity). A corporation or other entity that attains the status of a Subsidiary on a date after the adoption of the Plan shall be
considered a Subsidiary commencing as of such date.
ADDENDUM
THE UNITED KINGDOM 2001 OFFICER SHARE OPTION SCHEME
OF THE CHARLES SCHWAB CORPORATION
This Addendum to The Charles Schwab Corporation 2001 Stock Incentive Plan (the “2001 Plan”) shall constitute the rules of the
United Kingdom 2001 Officer Share Option Scheme (“Scheme”) of The Charles Schwab Corporation (the “Company”), as approved
by the United Kingdom’s Board of Inland Revenue (“Inland Revenue”) under Schedule 9 to the United Kingdom’s Income and
Corporation Taxes Act 1988 (the “Act”).
Definitions
1
Except as specifically set forth in this Addendum, the terms and conditions of the 2001 Plan shall apply to the scheme. In
addition, the following definitions will apply to this Scheme:
1.1 References to the “Act” are to the United Kingdom’s Income and Corporation Taxes Act 1998.
1.2 The expression “New Option” means an Option over shares in the Acquiring Company (as defined in rule 5.2) or some
other company falling within paragraph 10(b) or 10(c) of Schedule 9 to the Act, meeting the requirements of sub-
paragraphs 15(3)(a) to (d) of Schedule 9 to the Act, granted in consideration of the release of a subsisting Option within the
“appropriate period” (as defined by paragraph 15(2) of Schedule 9 to the Act).
1.3 The expression “Option-holder” means the person to whom an option has been granted under this Scheme and references
to “Optionee” in the 2001 Plan shall be construed accordingly.
1.4 The expression “Participating Company” means the Company and any company which is under the control of the
Company, within the meaning of section 840 of the Act, and to which the Committee shall have resolved that this Scheme
shall for the time being extend.
1.5 References to “Qualifying Shares” in this Addendum are references to
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Shares which satisfy the requirements of paragraphs 10 to 14 of Schedule 9 to the Act.
1.6 References to “Shares” in this addendum are references to shares or shares of Common Stock in the Company.
Eligibility and Grant
2.1 Options may only be granted under the Scheme to a Key Employee who is an employee (other than one who is a director) or a
full-time director of a Participating Company, and for this purpose a person shall be treated as a full-time director of a
Participating Company if he is obliged to devote not less than 25 hours a week, excluding meal breaks, to the performance of the
duties of his office or employment with that company (or with that company and any other company which is a Participating
Company). References in the 2001 Plan to “employee” shall be construed accordingly.
2.2 No Options under this Scheme may be granted to, or exercised by, a person who is not eligible to participate by virtue of
paragraph 8 of Schedule 9 to the Act, as modified by section 187 (3) (a) of the Act.
2.3 No Option may be granted at a time when the Shares over which it is granted are not Qualifying Shares.
2.4 For the purposes of Article 5.4 of the 2001 Plan, the Fair Market Value, as determined by the Committee in respect of any
Option under this Scheme, shall be as defined in Article16.13(a) of the 2001 Plan if the Stock Exchange referred to in that
Article is the New York Stock Exchange and the closing price referred to in that Article is the closing price on the New York
Stock Exchange and in any other case shall be not less than the market value of the shares on the date of grant(or such earlier
date as may be agreed with the Board of the Inland Revenue) and agreed in advance with the United Kingdom Inland Revenue
Shares Valuation Division.
2.5 Only Options (as defined in the 2001 Plan) shall be granted under this Scheme and no Replacement Options, Restricted Shares
or Performance Share Awards as outlined in Articles 5.9 and 7 of the 2001 Plan shall be granted under this Scheme. Articles 5.9,
7, 9 and 12 of the 2001 Plan shall not apply for the purposes of this Scheme and an Option granted under the Scheme need not
comply with the requirement in the second sentence of Article 5.3. No Options shall be granted under this Scheme pursuant to
Articles 4.6 or 4.7 of the 2001 Plan.
2.6 No Option granted under this Scheme shall be exercisable more than ten years after the date the Option is granted.
Limitation on Awards
3.
For the purposes of Article 3 of the 2001 Plan, any Option granted under this Scheme to any person shall be limited and take
effect so that the sterling equivalent of the amount payable on the exercise of such Option, when added to the aggregate sterling
equivalent of amounts payable on the exercise of options over Shares which are capable of being acquired under subsisting
rights obtained by the Participant under this Scheme or any other share option scheme established by the Company or any
associated company (within the meaning contained in section 416 of the Act) of the Company and approved under Schedule 9 to
the Act (but excluding any rights obtained under a savings related share option scheme) shall not exceed the limit set out in
paragraph 28 of Schedule 9 to the Act.
For the purposes of this Scheme, the sterling equivalent of any amount
15
payable on the exercise of an option shall be the amount converted into pounds sterling at the highest buying rate shown in the
day’s spread as published in the Financial Times for the date of grant of such option or at such other rate as may be agreed from
time to time with the United Kingdom Inland Revenue Shares Valuation Division.
Exercise
4.1 No Option may be exercised whilst this Scheme is and is intended to remain approved by the Inland Revenue unless the Shares
which would be acquired are Qualifying Shares.
4.2 Any terms and conditions imposed by the Committee under Article 5.1 of the 2001 Plan for the exercise of Options granted
under this Scheme shall be factual and objective and laid down at the time of grant. Any such terms or conditions shall not be
amended or waived after the time of grant unless they relate to performance targets and event or events have occurred such that
the Committee reasonably believes that the original conditions as amended or waived will be a fairer measure and would not be
more difficult to satisfy than the original condition. Any other terms determined by the Company may only be imposed if they
otherwise comply with the requirements set out in Schedule 9 to the Act.
4.3 Notwithstanding Article 5.2 of the 2001 Plan, no Option may be transferred by will, and on the death of the Option-holder any
subsisting Option may be exercised by his personal representatives not later than one year after the date of his death. Article 14.2
of the 2001 Plan shall not apply.
4.4 Article 5.5 of the 2001 Plan shall not apply to this Scheme. Each Stock Option Agreement shall specify when issued on grant the
date when all or any installment of the Option is to become exercisable including whether there shall be any acceleration of
vesting on certain events (the vesting of the Option). The Stock Option Agreement shall also specify the term of the Option. Any
subsisting Options may be exercised by the Participant or, if deceased, by his personal representatives in whole or in part
(including any unvested part) at the time of or, subject to rule 4.5, at any time following the occurrence of the earliest of the
following events:
(i)
the death of the Participant; and
(ii) upon the Participant ceasing to be a director or employee of a Participating Company or the Company or any Subsidiary as
defined in Article 16.29 of the 2001 Plan where that cessation was by reason of Disability or injury (in the latter case on
the production of such evidence as the Committee shall reasonably require to show the Option-holder has ceased to
exercise by reason of injury and is incapable of exercising that employment and is likely to remain so incapable for the
foreseeable future) or redundancy as defined in the Employment Rights Act 1996 or Retirement.
4.5 An Option shall lapse and become thereafter incapable of exercise on the earliest of the following events:
(i)
the tenth anniversary of the date the Option is granted;
(ii) where a Participant ceases to be a director or employee of a Participating Company or the Company or any Subsidiary as
defined in Article 16.29 of the 2001 Plan by reason of death or Disability, or injury the first anniversary following such
cessation;
(iii) where a Participant ceases to be a director or employee of a
16
Participating Company or the Company or any Subsidiary as defined in Article 16.29 of the 2001 Plan by reason of
Retirement, the second anniversary following such cessation; and
(iv) where a Participant ceases to be a director or employee of a Participating Company or the Company or any Subsidiary as
defined in Article 16.29 of the 2001 Plan for any reason other than those set out above, including redundancy, three months
following such cessation; and
(v)
the end of the period of exercisability determined in accordance with rule 5.
4.6 Payment for Shares on the exercise of Options granted under this Scheme shall be in cash and not through the delivery of Shares
of Common Stock or otherwise as described in Articles 6.2 and 6.3 of the 2001 Plan.
4.7 Shares shall be issued and the Option-holder registered as a shareholder within 30 days of receipt of a valid exercise notice.
4.8 Notwithstanding the provisions of Article 5.8 or 6.2 of the 2001 Plan, any Shares issued upon the exercise of an Option under
this Scheme shall not be subject to any forfeiture conditions, rights of repurchase, rights of first refusal or any other transfer
restrictions that do not apply to all holders of Shares.
4.9 Article 13 shall apply so that it is a condition of exercise that the obligations are satisfied.
4.10 The Company shall keep available sufficient unissued Shares or Shares in the Treasury to satisfy the exercise in full of all
Options granted under this Scheme and for the time being remaining capable of being exercised.
Takeover, Change of Control
5.1 If any person obtains control of the Company (within the meaning of section 840 of the Act) as a result of making:
(i)
a general offer to acquire the whole of the issued share capital of the Company (other than that which is already owned by
him) which is unconditional or which is made on a condition such that if it is satisfied the person making the offer will
have control of the Company; or
(ii)
a general offer to acquire all the shares (other than shares which are already owned by him) in the Company which are of
the same class as Shares subject to a subsisting Option,
then the Committee shall notify all Participants as soon as is practicable after the change of control. Any subsisting Option may
be exercised from the date of the receipt of that notification up to the expiry of a period ending six months from the time when
the person making the offer has obtained control of the Company and any condition subject to which the offer is made has been
satisfied.
5.2 If as a result of the events specified in rule 5.1 an “Acquiring Company” (as defined in paragraph 15 of Schedule 9 to the Act)
has obtained control of the Company, the Participant may, if the Acquiring Company so agrees, release any subsisting Option he
holds in consideration for the grant of a New Option.
17
5.3 Where the circumstances noted in rule 5.2 apply, New Options may be granted within the terms of paragraph 15(1) of Schedule
9 to the Act in consideration for the release of Options previously granted under this Scheme. Such New Options are deemed to
be equivalent to the old Options and to have been granted within the terms of this Scheme, provided the New Options satisfy the
conditions in paragraph 15(3) of Schedule 9 to the Act and the release of the Option takes place within six months of the date the
Acquiring Company obtains control of the Company. A New Option issued in consideration of the release of an Option shall be
evidenced by an option certificate or agreement which shall import the relevant provisions of this Scheme.
5.4 A New Option shall, for all other purposes of this Scheme, be treated as having been acquired at the same time as the
corresponding released Option.
5.5 If any person obtains control of the Company other than as a result of the events specified in rule 5.1, then the Committee shall
notify all Participants as soon as practicable after the change of control. Any subsisting Option may be exercised from the date
of the receipt of that notification up to the expiry of a period ending six months from the time when the person obtains control of
the Company.
5.6 If, as a result of the events specified in rules 5.1 or 5.3, a company has obtained control of the Company, the Committee shall be
entitled at any time to require all holders of subsisting Options to exercise those Options within 30 days by notice in writing to
the Participant to this effect.
5.7 The periods of exercisability under this rule 5 and the date of lapse under rule 4.5 are those of whichever of the pre-conditions of
rules 5.1, 5.3 or 5.4 are first achieved. The subsequent achievement of any other pre-conditions will not cause a period of
exercisability to begin nor a date of lapse to arise.
5.8 For the purpose of this rule 5 other than rule 5.2, a person shall be deemed to have obtained control of the Company if he and
others acting in concert with him have together obtained control of it.
5.9 The exercise of an Option pursuant to the preceding provisions of this rule 5 shall not be subject to any conditions imposed
pursuant to Article 5.1 of the 2001 Plan as amended by rule 4.2.
Employment Relationship
6. With respect to Options granted pursuant to the Scheme, Article 11 of the 2001 Plan shall be subject to the following: “Any
Participant or Employee shall waive any and all rights to compensation or damages on the termination of his office or
employment with any past or present Participating Company or Subsidiary for any reason whatsoever insofar as those rights
arise or may arise from his ceasing to have rights under or to be entitled to exercise any Option under this Scheme as a result of
the termination. Neither the grant of an Option nor any benefit which may accrue to a Participant on the exercise of an Option
shall form part of that Participant’s remuneration entitlement from his office or employment, nor shall the grant of an Option
create any right or entitlement on the Participant to have any further Options granted to him under this Scheme if at all.”
Protection Against Dilution: Variation of Share Capital
7.1 With respect to Options granted pursuant to the Scheme, Article 10.1 of the 2001 Plan shall apply, but (i) with the omission of
the following words and
18
phrases : “a declaration of a dividend payable in Common Shares”, “a declaration of a dividend payable in a form other than
Common Shares”, “a spin-off or similar occurrence;” and (ii) as if the following words were added “or any other variation of the
issued Common Shares” before the words “the Committee”. Adjustments to Options, as described in Article 10 of the 2001
Plan, shall be at the discretion of the Committee and shall not be effective under this Scheme until approved by the United
Kingdom Inland Revenue.
7.2 Article 10.2 of the 2001 Plan shall apply for the purposes of this Scheme with the exclusion of the words “for accelerated
vesting or for settlement in cash”.
Withholding Taxes
7.3 Article 13.1 of the 2001 Plan shall apply for the purposes of this scheme with the exclusion of the last sentence.
Alteration of Scheme rules
8.
The Committee may make such alterations to the provisions of this Scheme as may be permitted by Article 15.2 of the 2001
Plan, provided that any such alteration made at a time when this Scheme is to remain approved by the United Kingdom Inland
Revenue shall not have effect unless and until the alteration has the prior approval in writing of the United Kingdom Inland
Revenue.
19
THE CHARLES SCHWAB CORPORATION
2004 STOCK INCENTIVE PLAN
NOTICE OF RESTRICTED STOCK AWARD
Exhibit 10.307
You have been granted restricted shares of Common Stock of The Charles Schwab Corporation (“Schwab”) under the Charles
Schwab Corporation 2004 Stock Incentive Plan (the “Plan”) on the following terms:
Name of Recipient:
Total Number of Shares Granted:
Fair Market Value per Share:
Grant Date:
Vesting Schedule:
So long as you remain in service in good standing and subject to the terms of the
Restricted Stock Agreement, the restricted shares subject to this award will become
vested on the following dates and in the following amounts:
Percentage of the Total
Number of Shares
Granted under this
Award That Will Vest
25%
25%
25%
25%
Number of Shares On Vesting Date
Vesting Date
1 Anniversary of Grant Date
st
2 Anniversary of Grant Date
nd
3 Anniversary of Grant Date
rd
4 Anniversary of Grant Date
th
You and Schwab agree that this award is granted under and governed by the terms and conditions of the Plan and the Restricted Stock
Agreement, both of which are made a part of this notice. Please review the Restricted Stock Agreement and the Plan carefully, as they
explain the terms and conditions of this award. You agree that Schwab may deliver electronically all documents relating to the Plan or
this award (including, without limitation, prospectuses required by the Securities and Exchange Commission) and all other documents
that Schwab is required to deliver to its stockholders. By accepting this award, you agree to all of the terms and conditions described
above, in the Restricted Stock Agreement and in the Plan, and you have no right whatsoever to change or negotiate such terms and
conditions.
THE CHARLES SCHWAB CORPORATION
2004 STOCK INCENTIVE PLAN
RESTRICTED STOCK AGREEMENT
Payment for Shares
No payment is required for the shares that you are receiving.
Vesting
Accelerated Vesting
Subject to the provisions of this Agreement, this award becomes vested as provided in the Notice
of Restricted Stock Award, of which this Restricted Stock Agreement is a part. Unvested shares
will be considered “Restricted Shares.” If your service terminates for any reason, then your shares
will be forfeited to the extent that they have not vested before the termination date and do not vest
as a result of the termination. This means that the Restricted Shares will immediately revert to
Schwab. You will receive no payment for Restricted Shares that are forfeited. Schwab determines
when your service terminates for this purpose. For all purposes of this Agreement, “service”
means continuous employment as a common-law employee of Schwab or a parent corporation or
subsidiary of Schwab, and “subsidiary” means a subsidiary corporation as defined in section 424
(f) of the Internal Revenue Code of 1986, as amended (the “Code”).
This award will become fully vested if your service terminates on account of your death or
disability. This award also will become fully vested if your service terminates on account of your
retirement provided that your retirement occurs at least two years after the Grant Date indicated
in the Notice of Restricted Stock Award. If, prior to the date your service terminates, Schwab is
subject to a
2
Definition of Disability
Definition of Retirement
Section 83(b) Election
Shares Restricted
“change in control” (as defined in the Plan document), this award will become fully vested as of
the date that the change in control occurs. If you are entitled to severance benefits under The
Charles Schwab Severance Pay Plan (or any successor plan), then all or a portion of your award
may be eligible for accelerated vesting under the terms of that plan.
For all purposes of this Agreement, “disability” means that you have a disability such that you
have been determined to be eligible for benefits under Schwab’s long-term disability plan.
If you are an employee of Schwab and its subsidiaries, “retirement” means termination of service
for any reason other than death at any time after you attain age 55, but only if, at the time of your
termination, you have been credited with at least 10 years of service.
The phrase “years of service “ above has the same meaning given to it under the SchwabPlan
Retirement Savings and Investment Plan (or any successor plan).
You may make an election pursuant to Section 83(b) of the Code within 30 days of the Grant
Date to be taxed on the Restricted Shares prior to vesting.
You may not sell, transfer, pledge or otherwise dispose of any Restricted Shares without
Schwab’s written consent until they are vested. Restricted Shares will be issued in your name but
held by the Schwab Corporate Secretary as escrow agent. Schwab may instruct the transfer agent
for its stock to place a legend on the certificates representing the Restricted Shares or may note in
its records the applicable restrictions. The escrow agent will deliver Restricted Shares to you only
after they become vested and after all other terms and conditions in this Agreement have been
satisfied.
You may make a gift of Restricted Shares to your spouse, children or grandchildren or to a trust
established by you for the benefit of yourself or your spouse, children or grandchildren. However,
a transferee of Restricted Shares must agree in writing on a form prescribed by Schwab to
3
Committee Discretion
Delivery of Shares After Death
Restrictions on Resale
Withholding Taxes
be bound by all provisions of this Agreement as a condition for the transfer prior to the Restricted
Shares becoming vested.
In its sole discretion, Schwab’s Compensation Committee (or its delegate) (the “Compensation
Committee”) may lift the transfer restrictions or accelerate the vesting of Restricted Shares at any
time.
In the event of your death prior to the date your service terminates, your shares will be delivered
to your beneficiary or beneficiaries. You may designate one or more beneficiaries by filing a
beneficiary designation form. You may change your beneficiary designation by filing a new form
with Schwab at any time prior to your death. If you do not designate a beneficiary or if your
designated beneficiary predeceases you, then your shares will be delivered to your estate. The
Compensation Committee, in its sole discretion, will determine the form and time of the
distribution of shares to your estate.
You agree not to sell any shares at a time when applicable laws, Schwab’s policies or an
agreement between Schwab and its underwriters prohibit a sale. This restriction will apply as long
as your service continues and for such period of time after the termination of your service as
Schwab may specify.
The Restricted Shares will not be released to you unless you have made acceptable arrangements
to pay any applicable withholding of income and employment taxes that may be due as a result of
this award or the vesting of the shares. With Schwab’s consent, these arrangements may include
without limitation withholding shares of Schwab stock that otherwise would be issued to you
when they vest. In its sole discretion, Schwab may withhold the minimum number of whole
shares of Schwab stock, valued at the fair market value on the vesting date, required to satisfy
such applicable withholding taxes. Any residual amount of applicable withholding taxes, i.e.,
amounts of less than the fair market value of a share, may be deducted from your pay.
Stockholder Rights
As a holder of Restricted Shares, you have the same voting, dividend and other rights as
Schwab’s stockholders. Dividends paid in cash shall not be eligible for The
4
Dividend Reinvestment & Stock Purchase Plan.
Contribution of Par Value
On your behalf Schwab will contribute to its capital an amount equal to the par value of the
Restricted Shares issued to you.
No Right to Remain Employee
Limitation on Payments
Nothing in this Agreement will be construed as giving you the right to be retained as an
employee, contingent worker or director of Schwab and its subsidiaries for any specific duration
or at all.
If a payment from the Plan would constitute an excess parachute payment under 280G of the
Code or if there have been certain securities law violations, then your award may be reduced or
forfeited and you may be required to disgorge any profit that you have realized from your award.
If a disqualified individual receives a payment or transfer under the Plan that would constitute an
excess parachute payment under 280G of the Code, such payment will be reduced, as described
below. Generally, someone is a “disqualified individual” if he or she is (a) an officer of Schwab,
(b) a member of the group consisting of the highest paid 1% of the employees of Schwab or, if
less, the highest paid 250 employees of Schwab, or (c) a 1% stockholder of Schwab. For purposes
of the section on “Limitation on Payments,” the term “Schwab” will include affiliated
corporations to the extent determined by the Auditors in accordance with section 280G(d)(5) of
the Code.
In the event that the independent auditors most recently selected by the Schwab Board of
Directors (the “Auditors”) determine that any payment or transfer in the nature of compensation
to or for your benefit, whether paid or payable (or transferred or transferable) pursuant to the
terms of the Plan or otherwise (a “Payment”), would be nondeductible for federal income tax
purposes because of the provisions concerning “excess parachute payments” in section 280G of
the Code, then the aggregate present value of all Payments will be reduced (but not below zero)
to the Reduced Amount; provided, however, that the Compensation Committee may specify in
writing that the award will not be so reduced and will not be subject to reduction under this
section.
5
For this purpose, the “Reduced Amount” will be the amount, expressed as a present value, which maximizes
the aggregate present value of the Payments without causing any Payment to be nondeductible by Schwab
because of section 280G of the Code.
If the Auditors determine that any Payment would be nondeductible because of section 280G of the Code,
then Schwab will promptly give you notice to that effect and a copy of the detailed calculation and of the
Reduced Amount. You may then elect, in your discretion, which and how much of the Payments will be
eliminated or reduced (as long as after such election, the aggregate present value of the Payments equals the
Reduced Amount). You will advise Schwab in writing of your election within 10 days of receipt of the
notice. If you do not make such an election within the 10-day period, then Schwab may elect which and how
much of the Payments will be eliminated or reduced (as long as after such election the aggregate present
value of the Payments equals the Reduced Amount). Schwab will notify you promptly of its election.
Present value will be determined in accordance with section 280G(d)(4) of the Code. The Auditors’
determinations will be binding upon you and Schwab and will be made within 60 days of the date when a
Payment becomes payable or transferable.
As promptly as practicable following these determination and elections, Schwab will pay or transfer to or
for your benefit such amounts as are then due to you under the Plan, and will promptly pay or transfer to or
for your benefit in the future such amounts as become due to you under the Plan.
As a result of uncertainty in the application of section 280G of the Code at the time of an initial
determination by the Auditors, it is possible that Payments will have been made by Schwab which should
not have been made (an “Overpayment”) or that additional Payments which will not have been made by
Schwab could have been made (an “Underpayment”), consistent in each case with the calculation of the
Reduced Amount. In the event that the Auditors, based upon the assertion of a deficiency by the Internal
Revenue Service against you or Schwab which the Auditors believe has a high probability of success,
determine that an Overpayment has been made, such
6
Claims Procedure
Overpayment will be treated for all purposes as a loan to you which you will repay to Schwab on demand,
together with interest at the applicable federal rate provided in section 7872(f)(2) of the Code. However, no
amount will be payable by you to Schwab if and to the extent that such payment would not reduce the
amount which is subject to taxation under section 4999 of the Code. In the event that the Auditors
determine that an Underpayment has occurred, such Underpayment will promptly be paid or transferred by
Schwab to or for your benefit, together with interest at the applicable federal rate provided in section 7872
(f)(2) of the Code.
You may file a claim for benefits under the Plan by following the procedures prescribed by Schwab. If
your claim is denied, generally you will receive written or electronic notification of the denial within 90
days of the date on which you filed the claim. If special circumstances require more time to make a
decision about your claim, you will receive notification of when you may expect a decision. You may
appeal the denial by submitting to the Plan Administrator a written request for review within 30 days of
receiving notification of the denial. Your request should include all facts upon which your appeal is based.
Generally, the Plan Administrator will provide you with written or electronic notification of its decision
within 90 days after receiving the review request. If special circumstances require more time to make a
decision about your request, you will receive notification of when you may expect a decision.
Plan Administration
The Plan Administrator has discretionary authority to make all determinations related to this award and to
construe the terms of the Plan, the Notice of Restricted Stock Award and this Agreement. The Plan
Administrator’s determinations are conclusive and binding on all persons.
Adjustments
Severability
In the event of a stock split, a stock dividend or a similar change in Schwab stock, the number of Restricted
Shares that remain subject to forfeiture will be adjusted accordingly.
In the event that any provision of this Agreement is held invalid or unenforceable, the provision will be
severable from, and such invalidity or unenforceability will not be construed to have any effect on, the
remaining provisions
7
of this Agreement.
Applicable Law
The Plan and Other
Agreements
This Agreement will be interpreted and enforced under the laws of the State of Delaware (without regard to
their choice-of-law provisions), as such laws are applied to contracts entered into and performed in
Delaware.
The text of the Plan is incorporated in this Agreement by reference. This Agreement, the Notice of
Restricted Stock Award and the Plan constitute the entire understanding between you and Schwab
regarding this award. Any prior agreements, commitments or negotiations concerning this award are
superseded. This Agreement may be amended only by another written agreement, signed by both parties
and approved by the Compensation Committee. If there is any inconsistency or conflict between any
provision of this Agreement and the Plan, the terms of the Plan will control.
8
THE CHARLES SCHWAB CORPORATION
2004 STOCK INCENTIVE PLAN
NOTICE OF PREMIUM-PRICED STOCK OPTION GRANT
Exhibit 10.309
You have been granted the following option to purchase Common Stock of The Charles Schwab Corporation (“Schwab”) under the
Charles Schwab Corporation 2004 Stock Incentive Plan (the “Plan”):
Name of Grantee:
Total Number of Shares Granted:
Exercise Price Per Share:
Grant Date:
Expiration Date:
Vesting Schedule:
$
So long as you remain in service in good standing and subject to the terms of the
Premium-Priced Stock Option Agreement, you will acquire the right to exercise this
option (become “vested” in this option) on the following dates and in the following
amounts:
Percentage of the Total
Number of Shares
Granted under this
Option That Will Vest
25%
25%
25%
25%
Number of Shares on Vesting Date
Vesting Date
1 Anniversary of Grant Date
st
2 Anniversary of Grant Date
nd
3 Anniversary of Grant Date
rd
4 Anniversary of Grant Date
th
You and Schwab agree that this option is granted under and governed by the terms and conditions of the Plan and the Premium-Priced
Stock Option Agreement, both of which are made a part of this notice. Please review the Premium-Priced Stock Option Agreement
and the Plan carefully, as they explain the terms and conditions of this option. You agree that Schwab may deliver electronically all
documents relating to the Plan or this option (including, without limitation, prospectuses required by the Securities and Exchange
Commission) and all other documents that Schwab is required to deliver to its stockholders. By accepting this award, you agree to all
of the terms and conditions described above, in the Premium-Priced Stock Option Agreement and in the Plan, and you have no right
whatsoever to change or negotiate such terms and conditions.
Tax Treatment
Vesting
Accelerated Vesting
THE CHARLES SCHWAB CORPORATION
2004 STOCK INCENTIVE PLAN
PREMIUM-PRICED STOCK OPTION AGREEMENT
This option is a nonqualified stock option and is not intended to qualify as an incentive stock
option under federal tax laws.
Subject to the provisions of this Agreement, this option becomes vested as provided in the Notice
of Premium-Priced Stock Option Grant, of which this Premium-Priced Stock Option Agreement
is a part. In no event will additional shares under this option vest after your service terminates for
any reason. For all purposes of this Agreement, “service” means continuous employment as a
common-law employee of Schwab or a parent company or subsidiary of Schwab, and
“subsidiary” means a subsidiary corporation as defined in section 424(f) of the Internal Revenue
Code of 1986, as amended (the “Code”).
This option will become fully exercisable if your service terminates on account of your death or
disability. This option also will become fully exercisable if your service terminates on account of
your retirement provided that your retirement occurs at least two years after the Grant Date
indicated in the Notice of Premium-Priced Stock Option Grant.
If, prior to the date your service terminates, Schwab is subject to a “change in control” (as
defined in the Plan document), this option will become fully exercisable immediately preceding
the change in control. If Schwab’s Compensation Committee (or its delegate) (the “Compensation
Committee”) determines that a change in control is likely to occur, Schwab will advise you and
this option will become fully exercisable as of the date 10 days prior to the anticipated date of the
change in control.
2
Definition of Disability
Definition of Retirement
Exercise Procedures
If you are entitled to severance benefits under The Charles Schwab Severance Pay Plan (or any
successor plan), then all or a portion of your option may be eligible for accelerated vesting under
the terms of that plan.
For all purposes of this Agreement, “disability” means that you have a disability such that you
have been determined to be eligible for benefits under Schwab’s long-term disability plan.
If you are an employee of Schwab and its subsidiaries, retirement” means termination of service
for any reason other than death at any time after you attain age 55, but only if, at the time of your
termination, you have been credited with at least 10 years of service.
The phrase “years of service” above has the same meaning given to it under the SchwabPlan
Retirement Savings and Investment Plan (or any successor plan).
You or your representative may exercise this option by following the procedures prescribed by
Schwab. If this option is being exercised by your representative, your representative must furnish
proof satisfactory to Schwab of your representative’s right to exercise this option. After
completing the prescribed procedures, Schwab will cause to be issued the shares purchased,
which will be registered in the name of the person exercising this option.
Forms of Payment
When you submit your notice of exercise, you must include payment of the option exercise price
for the shares you are purchasing. Payment may be made in one of the following forms:
• Cash, your personal check, a cashier’s check or a money order.
• Shares of Schwab stock that are surrendered to Schwab. These shares will be valued at
their fair market value on the date when the new shares are purchased.
• By delivery (in a manner prescribed by Schwab) of an irrevocable direction to Charles
Schwab & Co., Inc. to sell shares of Schwab stock (including shares to be issued
upon exercise of this option) and to deliver all or part of the sale proceeds to Schwab
in payment of all or part of the exercise price.
Term
This option expires no later than the Expiration Date specified in the Notice of Premium-Priced
Stock Option Grant but may expire earlier upon your termination of service, as described below.
3
Termination of Service
Cancellation of Options
Withholding Taxes and Stock
Withholding
Restrictions on Exercise and
Issuance or Transfer of Shares
Stockholder Rights
This option will expire on the date three months following the date of your termination of service
for any reason other than on account of death, disability or retirement. The terms “service,”
“disability” and “retirement” are defined above.
If your service terminates by reason of your disability or death, then this option will expire on the
first anniversary of the date of your death or disability.
If your service terminates by reason of your retirement, then this option will expire on the second
anniversary of the date of your retirement.
To the fullest extent permitted by applicable laws, this option will immediately be cancelled and
expire in the event that Schwab terminates your employment on account of conduct contrary to
the best interests of Schwab, including, without limitation, conduct constituting a violation of law
or Schwab policy, fraud, theft, conflict of interest, dishonesty or harassment. The determination
whether your employment has been terminated on account of conduct contrary to the best
interests of Schwab shall be made by Schwab in its sole discretion.
You will not be allowed to exercise this option unless you make arrangements acceptable to
Schwab to pay any applicable withholding of income and employment taxes that may be due as a
result of the option exercise. With Schwab’s consent, these arrangements may include without
limitation withholding shares of Schwab stock that otherwise would be issued to you when you
exercise this option.
You cannot exercise this option and no shares of Schwab stock may be issued under this option if
the issuance of shares at that time would violate any applicable law, regulation or rule. Schwab
may impose restrictions upon the sale, pledge or other transfer of shares (including the placement
of appropriate legends on stock certificates) if, in the judgment of Schwab and its counsel, such
restrictions are necessary or desirable to comply with applicable law, regulations or rules.
You, or your estate or heirs, have no rights as a stockholder of Schwab until you have exercised
this option by giving the required notice to Schwab and paying the exercise price. No adjustments
are made for dividends or other rights if the applicable record date occurs before you exercise this
option, except as described in the Plan.
No Right to Employment
Nothing in this Agreement will be construed as giving you the right to be retained as an
employee, consultant or director of Schwab and its subsidiaries for any specific duration or at all.
4
Transfer of Option
Limitation on Payments
In general, only you may exercise this option prior to your death. You may not transfer or assign
this option, except as provided below. For instance, you may not sell this option or use it as
security for a loan. If you attempt to do any of these things, this option will immediately become
invalid. You may, however, dispose of this option in your will or in a beneficiary designation.
You may transfer this option as a gift to one or more family members. For this purpose, “family
member “ means a child, stepchild, grandchild, parent, stepparent, grandparent, spouse, former
spouse, sibling, niece, nephew, mother-in-law, father- in-law, son-in-law, daughter-in-law,
brother-in-law or sister-in-law (including adoptive relationships), any individual sharing your
household, e.g., a domestic partner, other than a tenant or employee, a trust in which one or more
of these individuals have more than 50% of the beneficial interest, a foundation in which you or
one or more of these persons control the management of assets, and any entity in which you or
one or more of these persons own more than 50% of the voting interest.
Schwab may, in its sole discretion, allow you to transfer this option under a domestic relations
order in settlement of marital or domestic property rights.
In order to transfer this option, you and the transferee(s) must execute the forms prescribed by
Schwab, which include the consent of the transferee(s) to be bound by this Agreement.
If a payment from the Plan would constitute an excess parachute payment or if there have been
certain securities law violations, then your award may be reduced or cancelled and you may be
required to disgorge any profit that you have realized from your award.
If a disqualified individual receives a payment or transfer under the Plan that would constitute an
excess parachute payment under the Code, such payment will be reduced, as described below.
Generally, someone is a “disqualified individual” if he or she is (a) an officer of Schwab, (b) a
member of the group consisting of the highest paid 1% of the employees of Schwab or, if less, the
highest paid 250 employees of Schwab, or (c) a 1% stockholder of Schwab. For purposes of the
section on “Limitation on Payments,” the term “Schwab “ will include affiliated corporations to
the extent determined by the Auditors in accordance with section 280G(d)(5) of the Code.
In the event that the independent auditors most recently selected by the Schwab Board of
Directors (the “Auditors”) determine that any payment or transfer in the nature of compensation
to or for your benefit, whether paid or payable (or transferred or transferable) pursuant to the
terms of the Plan or otherwise (a “Payment “), would be
5
nondeductible for federal income tax purposes because of the provisions concerning “excess
parachute payments” in section 280G of the Code, then the aggregate present value of all
Payments will be reduced (but not below zero) to the Reduced Amount; provided, however, that
the Compensation Committee may specify in writing that the award will not be so reduced and
will not be subject to reduction under this section.
For this purpose, the “Reduced Amount” will be the amount, expressed as a present value, which
maximizes the aggregate present value of the Payments without causing any Payment to be
nondeductible by Schwab because of section 280G of the Code.
If the Auditors determine that any Payment would be nondeductible because of section 280G of
the Code, then Schwab will promptly give you notice to that effect and a copy of the detailed
calculation and of the Reduced Amount. You may then elect, in your discretion, which and how
much of the Payments will be eliminated or reduced (as long as after such election, the aggregate
present value of the Payments equals the Reduced Amount). You will advise Schwab in writing
of your election within 10 days of receipt of the notice. If you do not make such an election
within the 10-day period, then Schwab may elect which and how much of the Payments will be
eliminated or reduced (as long as after such election the aggregate present value of the Payments
equals the Reduced Amount). Schwab will notify you promptly of its election. Present value will
be determined in accordance with section 280G(d)(4) of the Code. The Auditors’ determinations
will be binding upon you and Schwab and will be made within 60 days of the date when a
Payment becomes payable or transferable.
As promptly as practicable following these determination and elections, Schwab will pay or
transfer to or for your benefit such amounts as are then due to you under the Plan, and will
promptly pay or transfer to or for your benefit in the future such amounts as become due to you
under the Plan.
As a result of uncertainty in the application of section 280G of the Code at the time of an initial
determination by the Auditors, it is possible that Payments will have been made by Schwab
which should not have been made (an “Overpayment”) or that additional Payments which will not
have been made by Schwab could have been made (an “Underpayment”), consistent in each case
with the calculation of the Reduced Amount. In the event that the Auditors, based upon the
assertion of a deficiency by the Internal Revenue Service against you or Schwab which the
Auditors believe has a high probability of success, determine that an Overpayment has been
made, such Overpayment will be treated for all purposes as a loan to you which you will repay to
6
Schwab on demand, together with interest at the applicable federal rate provided in section 7872
(f)(2) of the Code. However, no amount will be payable by you to Schwab if and to the extent
that such payment would not reduce the amount which is subject to taxation under section 4999
of the Code. In the event that the Auditors determine that an Underpayment has occurred, such
Underpayment will promptly be paid or transferred by Schwab to or for your benefit, together
with interest at the applicable federal rate provided in section 7872(f)(2) of the Code.
You may file a claim for benefits under the Plan by following the procedures prescribed by
Schwab. If your claim is denied, generally you will receive written or electronic notification of
the denial within 90 days of the date on which you filed the claim. If special circumstances
require more time to make a decision about your claim, you will receive notification of when you
may expect a decision. You may appeal the denial by submitting to the Plan Administrator a
written request for review within 30 days of receiving notification of the denial. Your request
should include all facts upon which your appeal is based. Generally, the Plan Administrator will
provide you with written or electronic notification of its decision within 90 days after receiving
the review request. If special circumstances require more time to make a decision about your
request, you will receive notification of when you may expect a decision.
The Plan Administrator has discretionary authority to make all determinations related to this
option and to construe the terms of the Plan, the Notice of Premium- Priced Stock Option Grant
and this Agreement. The Plan Administrator’s determinations are conclusive and binding on all
persons.
In the event of a stock split, a stock dividend or a similar change in Schwab stock, the
Compensation Committee shall adjust the number of shares covered by this option and the
exercise price per share.
In the event that any provision of this Agreement is held invalid or unenforceable, the provision
will be severable from, and such invalidity or unenforceability will not be construed to have any
effect on, the remaining provisions of this Agreement.
This Agreement will be interpreted and enforced under the laws of the State of Delaware (without
regard to their choice-of-law provisions), as such laws are applied to contracts entered into and
performed in Delaware.
Claims Procedure
Plan Administration
Adjustments
Severability
Applicable Law
The Plan and Other
Agreements
The text of the Plan is incorporated in this Agreement by reference. This Agreement and the Plan
constitute the entire understanding
7
between you and Schwab regarding this option. Any prior agreements, commitments or
negotiations concerning this option are superseded. This Agreement may be amended only by
another written agreement approved by the Compensation Committee and signed by both parties.
If there is any inconsistency or conflict between any provision of this Agreement and the Plan,
the terms of the Plan will control. Nothing in this Agreement gives you the ability to negotiate or
change the key terms and conditions described above, in the Notice of Premium-Priced Stock
Option Grant and in the Plan.
8
Exhibit 10.351
SUMMARY OF NON-EMPLOYEE DIRECTOR COMPENSATION
The Board of Directors approved a revised non-employee directors’ compensation program for cash retainers on December 12,
2012. On January 24, 2013, the Board of Directors approved revisions to the equity portion of the compensation program, subject to
stockholder approval at the 2013 Annual Meeting of Stockholders.
Cash Retainers
The cash retainer portion of the revised compensation program was effective for non-employee directors beginning January 1,
2013.
Each non-employee director receives an annual cash retainer in the amount of $100,000. In addition, the Chair of the Audit
Committee receives a supplemental annual cash retainer of $25,000 and each other member of the Audit Committee receives a
supplemental annual cash retainer of $10,000. The Chairs of the Compensation Committee, Nominating and Governance Committee
and Risk Committee each receive a supplemental annual cash retainer of $15,000. Each other member of the Compensation
Committee, Nominating and Corporate Governance Committee and Risk Committee receives a supplemental annual cash retainer of
$5,000. There are no fees paid for attendance at board or committee meetings.
The board retains the discretion to establish special committees in the future and to pay a special retainer to the Chair and the
members of any such special committee.
Equity Grants
Subject to stockholder approval at the 2013 Annual Meeting of Stockholders, each non-employee director would receive an
annual equity grant under the 2013 Stock Incentive Plan with an aggregate value of $140,000. The equity grants would be 50 percent
in stock options and 50 percent in restricted shares.
In the event a new non-employee director is elected to the board during the year, a pro-rata retainer amount would be granted to
that individual.
Pursuant to the 2013 Stock Incentive Plan that is subject to approval by stockholders at the 2013 Annual Meeting of
Stockholders, the equity grants would vest 25% on the first anniversary of the date of grant, 50% on the second anniversary of the
date of grant and 100% on the third anniversary of the date of grant.
THE CHARLES SCHWAB CORPORATION
EXHIBIT 12.1
Computation of Ratio of Earnings to Fixed Charges and
Ratio of Earnings to Fixed Charges and Preferred Stock Dividends
(Dollar amounts in millions)
(Unaudited)
Year Ended December 31,
Earnings from continuing operations before taxes on earnings
2012
2011
2010
2009
2008
$ 1,450 $ 1,392 $
779 $ 1,276 $ 2,028
Fixed charges
Interest expense:
Deposits from banking clients
Payables to brokerage clients
Short-term borrowings
Long-term debt
Other
Total
Interest portion of rental expense
Total fixed charges (A)
42
3
—
103
2
150
68
218
62
3
—
108
2
175
62
237
105
2
—
92
—
199
56
255
107
3
—
71
2
183
71
254
104
55
1
59
7
226
62
288
Earnings from continuing operations before taxes on earnings and
fixed charges (B)
$ 1,668 $ 1,629 $ 1,034 $ 1,530 $ 2,316
Ratio of earnings to fixed charges (B) ÷ (A)
(1)
7.7
6.9
4.1
6.0
8.0
Ratio of earnings to fixed charges, excluding deposits from banking
clients and payables to brokerage clients interest expense
(2)
9.4
9.1
6.3
9.9
16.7
Total fixed charges
Preferred stock dividends
Total fixed charges and preferred stock dividends (C)
(3)
$
$
218 $
70
288 $
237 $
—
237 $
255 $
254 $
—
—
255 $
254 $
288
—
288
Ratio of earnings to fixed charges and preferred stock dividends
(B) ÷ (C)
(1)
Ratio of earnings to fixed charges and preferred stock dividends,
excluding deposits from banking clients and payables to brokerage
clients interest expense
(2)
5.8
6.9
4.1
6.0
8.0
6.7
9.1
6.3
9.9
16.7
(1)
(2)
(3)
The ratios of earnings to fixed charges and earnings to fixed charges and preferred stock dividends are calculated in accordance
with SEC requirements. For such purposes, “earnings” consist of earnings from continuing operations before taxes on earnings
and fixed charges. “Fixed charges” consist of interest expense as listed above, and one-third of rental expense, which is
estimated to be representative of the interest factor.
Because interest expense incurred in connection with both deposits from banking clients and payables to brokerage clients is
completely offset by interest revenue on related investments and loans, the Company considers such interest to be an operating
expense. Accordingly, the ratio of earnings to fixed charges, excluding deposits from banking clients and payables to brokerage
clients interest expense, and the ratio of earnings to fixed charges and preferred stock dividends, excluding deposits from
banking clients and payables to brokerage clients interest expense, reflect the elimination of such interest expense as a fixed
charge.
The preferred stock dividend amounts represent the pre-tax earnings that would be required to pay the dividends on outstanding
preferred stock.
THE CHARLES SCHWAB CORPORATION
Subsidiaries of the Registrant
EXHIBIT 21.1
Pursuant to Item 601 (b)(21)(ii) of Regulation S-K, certain subsidiaries of the Registrant have been omitted which, considered in
the aggregate as a single subsidiary, would not constitute a significant subsidiary (as defined in Rule 1-02(w) of Regulation S-X)
as of December 31, 2012.
The following is a listing of the significant subsidiaries of the Registrant:
Schwab Holdings, Inc. (holding company for Charles Schwab & Co., Inc.), a Delaware corporation
Charles Schwab & Co., Inc., a California corporation
Charles Schwab Bank, a Federal Savings Association
Charles Schwab Investment Management, Inc., a Delaware corporation
THE CHARLES SCHWAB CORPORATION
EXHIBIT 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in the following Registration Statements of our report dated February 21, 2013, relating
to the consolidated financial statements and financial statement schedule of The Charles Schwab Corporation and the effectiveness of
The Charles Schwab Corporation’s internal control over financial reporting, appearing in this Annual Report on Form 10-K of The
Charles Schwab Corporation for the year ended December 31, 2012.
Filed on Form S-3:
Registration Statement No. 333-178525
(Debt Securities, Preferred Stock, Depository Shares, Common Stock, Purchase
Contracts, Warrants, and Units Consisting of Two or More Securities)
Filed on Form S-4:
Registration Statement No. 333-184654 (Offer to Exchange 3.225% Senior Notes due 2022)
Filed on Form S-8:
Registration Statement No. 333-175862 (The Charles Schwab Corporation 2004 Stock Incentive Plan)
Registration Statement No. 333-173635
(optionsXpress Holdings, Inc. 2008 Equity Incentive Plan, optionsXpress
Holdings, Inc. 2005 Equity Incentive Plan, and optionsXpress, Inc. 2001 Equity
Incentive Plan)
Registration Statement No. 333-144303 (The Charles Schwab Corporation Employee Stock Purchase Plan)
Registration Statement No. 333-131502 (The Charles Schwab Corporation Deferred Compensation Plan II)
Registration Statement No. 333-101992 (The Charles Schwab Corporation 2004 Stock Incentive Plan)
Registration Statement No. 333-93125 (The Charles Schwab Corporation Employee Stock Incentive Plan)
Registration Statement No. 333-81840 (The Charles Schwab Corporation Employee Stock Incentive Plan)
Registration Statement No. 333-71322 (The SchwabPlan Retirement Savings and Investment Plan)
Registration Statement No. 333-63452 (The Charles Schwab Corporation Employee Stock Incentive Plan)
Registration Statement No. 333-63448 (The Charles Schwab Corporation 2004 Stock Incentive Plan)
Registration Statement No. 333-59280 (The Charles Schwab Corporation Employee Stock Incentive Plan)
Registration Statement No. 333-48335 (The Charles Schwab Corporation Employee Stock Incentive Plan)
Registration Statement No. 333-47107 (The Charles Schwab Corporation 2004 Stock Incentive Plan)
Registration Statement No. 333-44793 (Charles Schwab Profit Sharing and Employee Stock Ownership Plan)
/s/ Deloitte & Touche LLP
San Francisco, California
February 21, 2013
THE CHARLES SCHWAB CORPORATION
EXHIBIT 31.1
CERTIFICATION PURSUANT TO RULE 13a-14(a)/15d-14(a), AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Walter W. Bettinger II, certify that:
1.
I have reviewed this Annual Report on Form 10-K of The Charles Schwab Corporation;
2.
3.
4.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in
Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)
b)
c)
d)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report
is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles;
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by
this report based on such evaluation; and
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during
the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial
reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing
the equivalent functions):
a)
b)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and
report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Date: February 21, 2013
/s/ Walter W. Bettinger II
Walter W. Bettinger II
President and Chief Executive Officer
THE CHARLES SCHWAB CORPORATION
EXHIBIT 31.2
CERTIFICATION PURSUANT TO RULE 13a-14(a)/15d-14(a), AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Joseph R. Martinetto, certify that:
1.
I have reviewed this Annual Report on Form 10-K of The Charles Schwab Corporation;
2.
3.
4.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in
Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)
b)
c)
d)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report
is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles;
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by
this report based on such evaluation; and
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during
the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial
reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing
the equivalent functions):
a)
b)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and
report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Date: February 21, 2013
/s/ Joseph R. Martinetto
Joseph R. Martinetto
Executive Vice President and Chief Financial Officer
THE CHARLES SCHWAB CORPORATION
EXHIBIT 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of The Charles Schwab Corporation (the Company) on Form 10-K for the year ended
December 31, 2012 (the Report), I, Walter W. Bettinger II, President and Chief Executive Officer of the Company, hereby certify,
pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my
knowledge:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)
The information contained in the Report fairly presents, in all material respects, the financial condition and results of
operations of the Company for the periods presented therein.
/s/ Walter W. Bettinger II
Walter W. Bettinger II
President and Chief Executive Officer
Date: February 21, 2013
A signed original of this written statement required by Section 906 has been provided to The Charles Schwab Corporation and will be
retained by The Charles Schwab Corporation and furnished to the Securities and Exchange Commission or its staff upon request.
THE CHARLES SCHWAB CORPORATION
EXHIBIT 32.2
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of The Charles Schwab Corporation (the Company) on Form 10-K for the year ended
December 31, 2012 (the Report), I, Joseph R. Martinetto, Executive Vice President and Chief Financial Officer of the Company,
hereby certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that to the
best of my knowledge:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)
The information contained in the Report fairly presents, in all material respects, the financial condition and results of
operations of the Company for the periods presented therein.
/s/ Joseph R. Martinetto
Joseph R. Martinetto
Executive Vice President and
Chief Financial Officer
Date: February 21, 2013
A signed original of this written statement required by Section 906 has been provided to The Charles Schwab Corporation and will be
retained by The Charles Schwab Corporation and furnished to the Securities and Exchange Commission or its staff upon request.
BOARD OF DIRECTORS i
CHARLES R. SCHWAB
Chairman of the Board,
The Charles Schwab Corporation
Age: 75. Director since 1986.
Term expires in 2013.
NANCY H. BECHTLE
Chairman, Sugar Bowl Corporation
Age: 75. Director since 1992.
Term expires in 2015.
Member of the Compensation
Committee; Nominating and
Corporate Governance Committee.
WALTER W. BETTINGER II
President and Chief Executive Officer,
The Charles Schwab Corporation
Age: 52. Director since 2008.
Term expires in 2015.
C. PRESTON BUTCHER
Chairman and Chief Executive Officer,
Legacy Partners, a real estate
development and management firm
Age: 74. Director since 1988.
Term expires in 2015.
Member of the Audit Committee;
Nominating and Corporate
Governance Committee.
MARK A. GOLDFARB
Managing Director, SS&G, Inc.,
an independent accounting and
business consulting firm
Age: 61. Director since 2012.
Term expires in 2015.
Chairman of the Audit Committee;
member of the Nominating and
Corporate Governance Committee.
PAULA A. SNEED
Chairman and Chief Executive Officer,
Phelps Prescott Group, LLC, a strategy
and management consulting firm
Age: 65. Director since 2002.
Term expires in 2013.
Member of the Compensation
Committee; Nominating and
Corporate Governance Committee.
FRANK C. HERRINGER
Chairman of the Board, Transamerica
Corporation, a financial services company
Age: 70. Director since 1996.
Term expires in 2014.
Chairman of the Nominating
and Corporate Governance
Committee; member of the
Compensation Committee.
ROGER O. WALTHER
Chairman and Chief Executive Officer,
Tusker Corporation, a real estate and
business management company
Age: 77. Director since 1989.
Term expires in 2014.
Chairman of the Compensation
Committee; member of the Nominating
and Corporate Governance Committee.
STEPHEN T. McLIN
Chairman and Chief Executive
Officer, STM Holdings LLC, which
offers merger and acquisition advice
Age: 66. Director since 1988.
Term expires in 2014.
Chairman of the Risk Committee;
member of the Audit Committee;
Nominating and Corporate
Governance Committee.
ROBERT N. WILSON
Chairman, MEVION Medical Systems,
a medical device company
Age: 72. Director since 2003.
Term expires in 2014.
Member of the Compensation
Committee; Nominating and
Corporate Governance Committee;
Risk Committee.
STEPHEN A. ELLIS
Chief Executive Officer, Asurion, LLC,
a provider of consumer technology
protection services
Age: 50. Director since 2012.
Term expires in 2013.
Member of the Nominating and
Corporate Governance Committee;
Risk Committee.
ARUN SARIN
Former Chief Executive Officer,
Vodafone Group Plc, a mobile
telecommunications company
Age: 58. Director since 2009.
Term expires in 2013.
Member of the Audit Committee;
Nominating and Corporate
Governance Committee.
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