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2014
Annual
Report
THE CHARLES SCHWAB
CORPORATION
211 Main Street
San Francisco, CA 94105
(415) 667-7000
Schwab.com
AboutSchwab.com
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linkedin.com/company/CharlesSchwab
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Printed on recycled paper.
©2015 The Charles Schwab Corporation. All rights reserved.
MKT10448-27 (03/15)
00125814
At Schwab,
we believe
in the power
of investing
to transform
people’s lives.
We see investing
as an act of
optimism and a
commitment to
the future.
The Charles Schwab Corporation (NYSE: SCHW) is an investing services firm with a history of innovating and advocating for individual
investors and the advisors and institutions 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,” “will,” “may,”
“should,” “growth,” “commit,” “build,” “deliver,” “continue,” “remain,” “can,” “improve,” “drive,” “potential,” “appear,” “enable,” “opportunity,” “scenario,” “surpass,” “maximize,” 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, an increase in interest rates and the revenue impact; and the company’s growth in client assets, market
share, revenues, earnings, and profits (see “Letter From the Chief Executive Officer” and “Letter From the Chief Financial Officer”); operating efficiency; client demand for advisory
services; and the launch of Schwab Intelligent Portfolios™ and other innovative products, services, and programs (see “Letter From the Chief Executive Officer”); expenses; profit margin;
operating leverage; the impact of fluctuations in the S&P 500® Index, the federal funds rate, and trading activity on the company’s results of operations; the gap between revenue and
expense growth; the percentage of incremental revenue to pre-tax profits/pre-tax earnings; and investment priorities (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 18 in the Form 10-K for a
discussion of important factors that may cause such differences.
CORPORATE INFORMATION / ii
CORPORATE
INFORMATION
THE CHARLES SCHWAB
CORPORATION
211 Main Street
San Francisco, CA 94105
(415) 667-7000
www.aboutschwab.com
The Charles Schwab Corporation (NYSE:
SCHW) is a leading provider of financial
services, with more than 325 offices and
9.4 million active brokerage accounts,
1.4 million corporate retirement plan
participants, 985,000 banking accounts,
and $2.46 trillion in client assets as of
December 31, 2014. Through its operating
subsidiaries, the company provides a
full range of wealth management,
securities brokerage, banking, money
management, and financial advisory
services to individual investors and
independent investment advisors.
Office of the Corporate Secretary
(415) 667-9807
ANNUAL MEETING
The annual meeting of stockholders
will be conducted at 2:00 p.m. (Pacific
Time) on May 13, 2015, at 211 Main
Street, San Francisco, CA, and via
the Internet. To register, visit:
www.schwabevents.com/corporation
PUBLICATIONS
To obtain the company’s annual
report, 10-K, 10-Q, quarterly earnings
release, or monthly activity report
without charge, contact:
Charles Schwab Investor Relations
211 Main Street
San Francisco, CA 94105
(415) 667-1959
These documents may also be
viewed in the Investor Relations
section of the company’s website
at www.aboutschwab.com.
STOCK OWNERSHIP SERVICES
All stockholders of record are welcome
to participate in The Charles Schwab
Corporation Dividend Reinvestment and
Stock Purchase Plan, managed by Wells
Fargo Bank, N.A. For information on
the Dividend Reinvestment and Stock
Purchase Plan, or for assistance on stock
ownership questions, contact: Transfer
Agent & Registrar Wells Fargo Bank, N.A.
Shareowner Services
P.O. Box 64854
St. Paul, MN 55164
(877) 778-6753
www.shareowneronline.com
ABOUT THIS ANNUAL REPORT
CEO and CFO Certifications:
The Charles Schwab Corporation
has included as exhibits to its Annual
Report, on Form 10-K for the year
ended December 31, 2014, filed with the
Securities and Exchange Commission,
certificates of its Chief Executive Officer
and Chief Financial Officer certifying the
quality of the company’s public disclosure.
TRADEMARKS OR
REGISTERED TRADEMARKS
Charles Schwab, Schwab, Own Your
Tomorrow, and other trademarks
appearing herein, which may be indicated
by “®” and “™,” are registered trademarks
or trademarks of Charles Schwab & Co.,
Inc., or an affiliated entity in the U.S. and/
or other countries. These trademarks and
registered trademarks are proprietary to
Charles Schwab & Co., Inc., or an affiliated
entity in the U.S. and/or other countries.
CHARLES SCHWAB FOUNDATION
Carrie Schwab-Pomerantz,
President of Charles Schwab
Foundation and Senior Vice President,
Charles Schwab & Co., Inc.
www.aboutschwab.com/community
Email: charlesschwabfoundation@schwab.com
CUSTOMER SERVICE
Investor Services: (800) 435-4000
www.schwab.com
Advisor Services: (877) 687-4085
www.schwabadvisorcenter.com/public
INVESTOR RELATIONS
Richard G. Fowler, Senior Vice President
(415) 667-1841
Email: investor.relations@schwab.com
LEGISLATIVE & REGULATORY AFFAIRS
Jeffrey T. Brown, Senior Vice President
325 7th Street NW, Suite 200
Washington, DC 20004
(202) 662-4902
MEDIA RELATIONS
Greg Gable, Senior Vice President
Media Hotline: (888) 767-5432
Email: public.relations@schwab.com
www.aboutschwab.com/press
INDEPENDENT AUDITORS
Deloitte & Touche LLP
555 Mission Street
San Francisco, CA 94105
(415) 783-4000
www.deloitte.com
OUTSIDE COUNSEL
Arnold & Porter LLP
Three Embarcadero Center, 10th Floor
San Francisco, CA 94111
www.arnoldporter.com
We share this belief with our clients—those
individual investors and the people and
institutions who serve them—who also
believe that personal engagement, a sense
of ownership, and a commitment to investing
and the future can create personal freedom.
We also believe that the industry too often
gets in the way of investor success.
And so we approach things differently. We strive
to see through the eyes of our clients and to
constantly challenge the industry status quo on
their behalf—serving and solving in ways that
create a better investing experience.
We encourage our clients to ask the tough
questions, get involved, and demand
transparency and accountability from us.
That engagement and sense of partnership
helps us unlock the power of investing.
That’s why we say, “Own your tomorrow™. ”
Investing matters.
Getting it right is more important than ever.
3 Letter From the CEO / 9 Letter From the CFO / 12 Financial Highlights / 13 Growth in Client Assets and Accounts
14 Executive Management / 15 Form 10-K / i Board of Directors / ii Corporate Information
WALT BETTINGER
PRESIDENT AND CHIEF EXECUTIVE OFFICER
LETTER FROM THE CHIEF EXECUTIVE OFFICER / 3
To My Fellow Stockholders
At the close of each year, I am honored
with the opportunity to craft a letter to
you, my fellow stockholders. This letter is
my chance to share perspectives on how
your company performed and offer a
glimpse into our future.
phrases, and meaningless buzzwords. My
commitment to you, as in past years, is to
speak clearly and candidly—as if I were
providing the update to a colleague or
friend—and to keep it straightforward and
free of spin and jargon.
In my opinion, these types of corporate
communications are too frequently
dominated by corporate speak, fancy
In that spirit, three things come to mind
when I think about how to summarize 2014:
success, some frustration, and optimism.
4 / LETTER FROM THE CHIEF EXECUTIVE OFFICER
Success
Any discussion of success at Charles Schwab should start
with a description of our strategy—“Through Clients’
Eyes”—which is the foundation of everything we have
achieved. These three words mean we operate our
business with the interests of our valued clients top of
mind, in the belief they will in turn reward us with more
business and refer others to Schwab.
For example, when we develop new products and services,
the first thing we ask ourselves is what would be ideal for
clients, not how much profit we can earn. We reject the
notion of building complex, illiquid solutions laden with
high fees. Instead, we opt for solutions that are transparent,
liquid, lower in cost, and sensible for investors. I’ve sat in
many product development meetings where the most
important question asked was: “Walt, would you
recommend this to your mother, or to your daughter and
her husband?” Challenging ourselves to put our clients’
interests at the forefront is a rare trait in financial services,
and one we believe makes long-term sense for both clients
and stockholders.
In an era of quarterly earnings pressures and a drive in
many industries to squeeze the last dollar of profit from
every client, some might call our strategy naïve. But the
results it delivers and the success it has helped us attain
prove just how wrong that viewpoint is.
In 2014, we:
• Added $124.8 billion in net new client assets—our third
consecutive year of core net new assets in excess of
$100 billion—a remarkable reflection of investor trust;
• Grew total client assets to $2.46 trillion—within a whisker
of making us the largest publicly traded investment
services firm in the United States;
TOTAL CLIENT ASSETS
(IN BILLIONS AT YEAR-END)
$1,575 $1,678 $1,952 $2,249 $2,464
2012
2013
2014
2011
2010
NET INCOME
(IN MILLIONS)
$454
2010
$864
2011
$928
2012
$1,071 $1,321
2013
2014
• Received top workplace awards in each of our primary
employment locations—capped off by earning the Military
Friendly® Employer title for the third consecutive year;
• Grew revenue 11% over 2013, despite the ongoing low
interest rate environment that is depriving us of billions
of dollars of revenue as it persists;
• Expanded earnings by 23% over 2013 to a record level of
• Continued to win billions of net dollars in client assets
$1.32 billion.
from our competitors to increase our market share;
• Reached record high Client Promoter Scores in our
largest business, Investor Services, with even higher
scores among our more affluent clients and those opting
for our assistance in managing their investments;
By virtually every measure, 2014 was a year of success.
Double-digit growth in revenue, record earnings, growth in
client assets and market share, delighted clients, and
engaged employees across our firm are simply some of the
proof points.
2014 Top Workplace Recognition
We are proud of our culture of service, teamwork, and seeing challenges
and opportunities “Through Clients’ Eyes.” Our culture truly differentiates
Schwab and makes our company a great place to work. We place great
value on the recognition we receive as an employer of choice, particularly
those awards that are based on the feedback of our employees. In 2014,
we were pleased to receive multiple awards.
Regional Awards
“Top Workplace” recognition based
on employee feedback in seven major
markets where Schwab has significant
concentrations of employees: the San
Francisco Bay Area, the state of Arizona,
Denver, Austin, Indianapolis, Cleveland,
and Chicago
Frustration
Although your company enjoyed great success in 2014 and
we have many reasons for optimism that I will discuss
shortly, the past year also had its share of frustration.
Low Interest Rates
2014 was the sixth consecutive full year that the Federal
Reserve experimented with unprecedented approaches to
keeping interest rates at record lows. Those actions cost
us billions of dollars in revenue relative to the historical
interest rate levels measured since the inception of the
Federal Reserve just over a century ago.
Given record low short-term interest rates, we waived
$751 million in money market fund management fees in
2014. We did so to ensure our clients wouldn’t receive
negative interest yields on their money market fund
holdings. To that end, we have waived $3.24 billion in
money market fund management fees since the beginning
of 2009.
In addition, the spread we earned on client cash that is held
on our various corporate-wide balance sheets in 2014 was
1.64%. This compares to the spread of 3.84% we earned in
2008, the last year before the Federal Reserve’s interest
rate experiments began. With total client cash on our
balance sheet of approximately $140 billion as of year-end,
the impact on our revenue is dramatic—and frustrating.
NET INTEREST MARGIN
IN 2008 AND 2014
3.84%
1.64%
2008
2014
LETTER FROM THE CHIEF EXECUTIVE OFFICER / 5
How frustrating? Over the past six years, we have more
than doubled total client assets from about $1.1 trillion to
almost $2.5 trillion. And yet it took until the end of 2013 for
our revenue to return to 2008 levels. This rather astonishing
fact paints a clear picture of the impact the Federal
Reserve’s interest rate policies have had on your company’s
revenue, as well as how much upside revenue potential
exists at Schwab as rates eventually normalize.
Regulatory Environment
We also operate in a rapidly evolving regulatory world.
Virtually everyone who works in the world of banking
and financial services understands and respects the
importance of quality, professional, and balanced
regulation. In a post-Dodd-Frank world, new regulations
and heightened expectations from regulators are a
regular occurrence. Many of these efforts are important
ones that reduce risk to our stockholders and clients.
As a result, we are now spending over $100 million annually
to comply with Dodd-Frank and other new rules. In addition
to increasing our operating costs, these regulatory
expectations divert focus from serving clients, limit other
investments that we would prefer to make in our clients
and employees, and ultimately reduce stockholder returns.
Of course, one of the most important drivers of regulatory
oversight is to ensure financial services firms, and
particularly banks, are well managed and adept at
managing risk. All of us at Schwab support this objective.
Falling Short
And last but not least, any discussion of 2014 should
include areas where we, as a company, fell short of the
standards we set for ourselves. One example is a misstep
we made around requiring our clients to waive their right to
join class action litigation against us and instead rely
exclusively on individual arbitration of disputes. Several
years ago, the United States Supreme Court decided that
businesses could require clients to waive their rights to
participation in class action litigation in favor of arbitration.
After that court decision, we researched the actual client
financial recoveries in actions they had initiated against us
over the years in both arbitration actions and class action
litigation. Our research indicated that our clients benefitted
financially more when they opted for arbitration. That’s
Gallup® Great
Workplace Award
Gallup® Great Workplace
Award for the third consecutive
year, which recognizes the
most productive and engaged
workforces in the world
Military-Friendly
Workplace
Multiple awards recognizing
Schwab as a military-friendly
workplace and our commitment to
hiring veterans, including Military
Times EDGE magazine’s “Best for
Vets” for the fifth consecutive year
Corporate Equality
A 100% rating on the Human Rights
Campaign Corporate Equality Index for
the 11th consecutive year
6 / LETTER FROM THE CHIEF EXECUTIVE OFFICER
because in class action litigation, far too much of any
settlement was lost in fees to class action lawyers, as
opposed to going to our clients.
advisory service. And in 2014 those client assets grew
faster than total client assets at Schwab, reflecting
investors’ desire for more of our help and advice.
As a result, we amended our account agreement to
include a waiver of access to class action litigation in
favor of arbitration. Looking back, this was a mistake. A
combination of our clients, attorneys who specialize in
bringing class action lawsuits, politically driven groups,
and one of our regulators all criticized our decision. When
we stepped back and reviewed the situation, we realized
that some could see it as reducing the available means by
which a client who felt aggrieved could pursue redress.
Our decision was not wholly consistent with our “Through
Clients’ Eyes” strategy—and so we reversed it in 2014.
As always, we will continue to contest the frivolous class
action suits we periodically face, but we have restored our
clients’ options in this area.
Optimism
An optimist by nature, I tend to see the best of any situation
or in any person. Over the years I’ve been accused at times
of being too optimistic. However, there is no doubt in my
mind that as we enter 2015 there are many reasons to be
optimistic about the future of your company.
I’ll discuss three in this letter.
1. We continue to expand our capabilities in ways that a wide
variety of prospects and clients are embracing, thereby
moving further beyond our discount brokerage heritage;
2. We have tremendous scale and efficiency advantages
over many of our competitors;
3. We appear to be closer to a more normalized interest
rate environment than at any time since 2008.
Capabilities
When Chuck Schwab founded your company over 40 years
ago, he brought Wall Street to Main Street with discounted
commissions for buying stocks. As a result, the Schwab
name became synonymous with discount brokerage and
low-cost transactions. We have since moved far beyond
the discount brokerage model. In fact, half of all client
assets at Schwab are now receiving some form of ongoing
As we have expanded our services, we have done so in the
Schwab way: “Through Clients’ Eyes.” We are now a full-
service investment services firm delivering modern wealth
management—all in a way that is designed to minimize
conflicts and that delivers a better value than almost any
national firm.
Over the past quarter century, our services that support
independent investment advisors have helped create a
multi-trillion-dollar industry in which we maintain the
largest market share and continue to grow faster than
any competitor.
Our 401(k) recordkeeper continues to develop innovative,
groundbreaking programs like the first and only 401(k) plan
that offers low-cost exchange-traded funds (ETFs) with
intraday transaction processing within a plan’s core
investment lineup.
And our asset management unit, in addition to being one of
the world’s largest managers of money market funds,
EXPENSES AS A
PERCENTAGE OF AVERAGE
TOTAL CLIENT ASSETS IN 2014
Source: Publicly available company reports
for the period
0.60% 0.56% 0.41% 0.29% 0.17%
Schwab
E*Trade
Financial
TD
Ameritrade
Morgan
Stanley Wealth
Management
Bank of America
Global Wealth
& Investment
Management
2014 Innovation Highlights
Our belief in the power of investing was evident
when Chuck Schwab set out more than 40 years
ago to challenge Wall Street and deliver a better
investing experience. Today, Schwab continues
to challenge the traditional Wall Street model
by innovating and advocating on behalf of
investors, advisors, and employers because
we believe there is a better way to invest. We
continued to uphold that commitment in 2014.
SIA-ETF
Launched the exchange-traded
fund (ETF) version of Schwab
Index Advantage® (SIA), a full-
service 401(k) program based
on fully integrating low-cost
ETFs as core investments in
the plan, and that provides
clients commission-free intraday
investing along with the ability to
transact in partial shares
182 ETFs
Added 65 ETFs to Schwab
ETF OneSource™, the largest
commission-free ETF platform
where investors can now
trade 182 ETFs covering 65
Morningstar Categories for $0
online trade commissions
offers some of the most efficient and lowest cost ETFs in
the industry.
Discount brokerage might be our heritage, but full service
is what we are today and a true cause for optimism about
our future.
Scale and Efficiency
Scale and efficiency are essential in the financial services
industry. Collectively, they allow us to make important
investments and be disruptive with innovative actions that
benefit investors. We operate your company incredibly
efficiently, with a ratio of total expenses to average total
client assets of only 0.17%, a fraction of any publicly
traded competitor. As interest rates rise in the future,
this operating efficiency is a powerful tool that creates
options for us from a competitive standpoint and enables
a continuing stream of client-friendly innovations.
A perfect example of how we can leverage our efficient
model through innovative approaches is our introduction
of Schwab Intelligent Portfolios™—offered through
Schwab Wealth Investment Advisory, Inc.
Schwab
Intelligent Portfolios uses sophisticated
computer algorithms to manage money for investors
based on their selected risk profile. Low-cost ETFs are
used to build the investment portfolios, which are
automatically rebalanced*. Best of all, the annual advisory
fee is zero. That’s right—we don’t charge account service
fees, commissions, or portfolio advisory fees. Period.
Never before have investors, with large and small
balances, been able to receive sophisticated portfolio
management services for nothing more than the low cost
of exchange-traded funds!
Interest Rates
As I write this letter, most observers expect the Federal
Reserve to begin raising interest rates later this year. It is
difficult to overstate the potential impact of this on your
company. As rates rise, our revenue should rise too,
giving us the opportunity to both grow earnings and make
investments that will further enhance our competitive
position. When rates do rise, you should expect us to be
aggressive, putting our structural advantages to work to
build market share and pave the way for future growth.
LETTER FROM THE CHIEF EXECUTIVE OFFICER / 7
Conclusion
In 2015, I will reach my 20th anniversary at Schwab. Over
the past two decades I’ve seen a lot: the impact of
technology on buying and selling stocks and investing; the
Internet and NASDAQ bubble inflating and collapsing;
markets just as volatile as they are proving again now; the
dramatic decline of the cost of equity trade commissions;
and the steady march to this period of historically low
interest rates. I’ve also been privileged to contribute in a
small manner to your company’s growth from an upstart to
one of the largest and most profitable investment services
firms in the world.
And yet, I believe we are just getting started. Our “Through
Clients’ Eyes” strategy is winning in the marketplace. We are
expanding our capabilities and introducing groundbreaking
offerings like Schwab Intelligent Portfolios. Our revenue
streams are diversified and growing, and higher interest
rates appear to be closer than they have been in the
past six years.
Success, frustration, and optimism—three words that sum
up 2014 for your company. But by far and away the most
important of those three is the last one—optimism. There
are so many reasons to be optimistic. Yes, it’s been another
special year for Schwab, but the best is yet to come!
Thank you for your confidence!
Warmly,
Walt Bettinger
March 6, 2015
linkedin.com/in/waltbettinger
twitter.com/waltbettinger
*Automated rebalancing for clients with invested assets of at least $5,000 in
their account.
3- and 4-leg online
options trading
Launched 3- and 4-leg online options
trading capabilities on StreetSmart
Edge®, enabling Schwab clients to trade
sophisticated strategies in a workflow
inspired by optionsXpress’ All-In-One
Trade Ticket® tool
Schwab Advisor
Mobile Connect™
Launched Schwab Advisor Mobile
Connect™, a customizable app that
registered investment advisors can
use to create a turnkey, branded
mobile presence for their firms, as
well as tools that enable secure
electronic signatures and wire
transfer authorizations
Schwab
Intelligent Portfolios™
Announced the planned launch
of Schwab Intelligent Portfolios,
a new automated investment
advisory service that will provide
sophisticated, diversified
portfolios with no advisory fees,
commissions, or account service
fees charged
JOE MARTINETTO
CHIEF FINANCIAL OFFICER
LETTER FROM THE CHIEF FINANCIAL OFFICER / 9
JOE MARTINETTO
CHIEF FINANCIAL OFFICER
Are We There Yet?
Those of you who have been following the
Schwab story since the financial crisis
know that our narrative has taken the form
of a journey. As I look over my letters to
you from the last few years, it’s all there
in the titles. In 2009, we were focused
on “Keeping Our Commitments” around
sustained, profitable growth while coping
with a macroeconomic environment that
severely constrained our revenues. From
2010 through 2012, we moved to carefully
rebuilding our investments in our clients
while basically battling a still-worsening
environment to a draw
in terms of
delivering profitable growth. We remained
optimistic—“Managing Through the Turn,”
“Driving Forward,” “Step by Step”—yet each
of those years was marked by a halting
economic recovery and an interest rate
environment driven by accommodative Fed
policy that masked our progress in building
our business.
In 2013, our story finally returned to “Simply,
Growth” as the recovery gained sufficient
strength for the Fed to start easing off its
rate accommodation and our success with
clients continued. Our financial formula was
once again visibly working—we turned client
growth into revenue growth, maintained the
discipline to grow expenses more slowly
than revenues, and delivered significant
improvements in our pre-tax profit margin
and net income. Heading into 2014, we felt
that a continued economic recovery would
enable us to deliver more of the same for
the year, sending us further on our journey
to higher profitability.
10 / LETTER FROM THE CHIEF FINANCIAL OFFICER
Let’s spend some time reviewing how things turned out,
and then we can turn our attention to the financial picture
for 2015.
Our baseline assumptions for 2014 included a 6.5% rise
in the S&P 500®, no change in interest rates, and client
trading activity basically growing in line with expected
growth in our client base of 5% to 6%. In that
environment, we expected to achieve mid- to high-single-
digit percentage growth in client assets and revenues;
sustained expense discipline would then help us deliver
a 300–500 basis point gap between revenue and expense
growth and a pre-tax profit margin of around 34%. In
hindsight, our baseline scenario may very well strike you
as conservative, but we should remember that we were
coming off several years of what I’ll call “head fakes”—
initial expectations of sustained economic strengthening
interrupted by potential signs of softening or even
weakness. Those head fakes can be very disruptive to our
investment plans as we remain committed to delivering
profitable growth across all environments, so we thought
it advisable not to rely on a stronger environment “lifting”
us out of our spending constraints.
What happened in 2014?
• Equity market returns did indeed show some volatility
during 2014 as the economic picture unfolded, but the
recovery held and the S&P 500 rose more than 11%
overall, helping client asset valuations and asset
management and administration fees top our expectations.
• Interest rates were more or less a mixed bag during
the year, with short-term rates mainly in a holding
pattern and long-term rates popping up early and then
dropping amid fresh concerns around a global economic
slowdown and general “risk-off” sentiment. Our net
interest revenue benefitted from some timely fixed-rate
asset purchases early in the year, as well as higher-
than-expected loan balances.
• Revenue trades did not grow in line with the client base,
but came close enough to keep trading revenue almost
flat from year to year.
• Finally, our $124.8 billion in net new assets were right in
line with our expectations for the year.
Taking these factors together, we exceeded all of our initial
financial expectations for 2014. The environment and our
continued success with clients helped two of our three
main revenue sources—asset management fees and net
interest revenue—surpass initial estimates and pushed
overall revenue growth to approximately 11%. By staying
focused on operating efficiency, we were able to limit
expense growth to approximately 6% even while investing
a record $188 million in client-related projects, thereby
achieving a revenue/expense growth gap of nearly 580
basis points and a pre-tax profit margin of 34.9%, up from
31.4% in 2013.
We think you’ll agree these are impressive results. So now
comes the obvious question—Are we there yet? As we
enter 2015, has our journey brought us to the point where
we should expect to consistently deliver strong revenue
growth tied to growth in our client base, and then achieve
earnings growth meaningfully ahead of that revenue
expansion? In short, are we as profitable as we can be?
The honest answer is that all three basic responses—
yes, no, and maybe—are equally valid at this point in our
progress. Let’s take them in turn.
Yes
As long as the economic environment is stable or
improving, we firmly believe that our strategy and business
model will enable us to attract a growing share of investable
assets in the United States, and then build revenues from
that growth while offering our products and services at a
great value. We also believe we possess the experience
and discipline to intelligently balance our investments to
drive growth with near-term profitability, and to manage
expense growth below that of revenues. We’ve been
focused on this for many years, and frankly our “sideways”
experience of 2009–2012 was the anomaly—with so much
of our revenue taken away by ultra-low interest rates, our
balancing act forced us to hold off on improving operating
leverage in order to invest appropriately and deliver
still-solid profitability. So yes, as 2014 demonstrated, with
10% client asset growth, 11% revenue growth versus 6%
LETTER FROM THE CHIEF FINANCIAL OFFICER / 11
performance and progress even if the environment isn’t
quite as strong as 2014.
To the extent the environment supports increasing rates
in 2015, we’d expect to pass approximately 75% of that
revenue lift to pre-tax profits; we have established a
set of investment priorities that we can pursue with
the remaining 25%, including adding more financial
consultants and retail branches, bolstering our marketing
effort, and funding a variety of client-facing and operating
initiatives to improve efficiency and service quality.
One more thing to keep in mind: With the ultra-low
interest rate environment dragging on, we’ve been talking
about allowing at least 75% of any rate-related surge
in revenues to drop to pre-tax earnings for a few years
now, starting back when our margins were hovering below
30%. With those margins now well into the mid-30s and
likely to continue building even without rising rates, the
relationship between reinvestment rates and incremental
profit margin will probably need to evolve over time. We
see no structural impediments to matching and then
surpassing our prior record margin of 39.4%, which was
set back in 2008. To the extent interest rates do return
to longer-term norms, supporting and enhancing our
business growth into the future may call for a greater share
of that incremental rate-driven revenue to be reinvested
in the business, but rest assured we remain committed to
reaching the highest sustainable margin consistent with
delivering that growth.
Are we there yet? Yes, no, and maybe, but that’s fine.
We view 2015 with confidence and optimism and see
great opportunities ahead. Whatever the future has
in store for us environmentally, you can expect us to
remain focused on keeping Schwab’s core financial
story as simple as possible—solid business growth, solid
revenue growth through diversified sources, and expense
discipline leading to improved performance. We are
committed to being good stewards of your capital and
to maximizing the return on that capital over the long
term. We recognize that your ongoing support is crucial
to our ability to take that long-term view, and we hope
to continue earning your support in the months and
years ahead.
Joe Martinetto
March 6, 2015
expense growth, a 350 basis point improvement in our
pre-tax profit margin, and a 23% rise in net income, our
financial formula has returned to stride.
Something to keep in mind: After years of environmental
for
headwinds negating our progress, we aimed
extraordinary improvement in our profit margin in 2014 to
help accelerate Schwab’s return to the level of financial
performance we and you have come to expect. With
U.S. investable wealth at $30+ trillion and growing, we
have tremendous opportunities still ahead, and it may
not be practical or wise to deliver margin improvement of
2014’s magnitude every year as we invest to pursue those
opportunities. That said, we expect to continue producing
meaningful operating leverage on a consistent basis.
No
We achieved our record financial performance in 2014
in the face of an enormous impediment that remains
in place to this day—abnormally low interest rates. The
low rate environment caused us to waive $751 million
in money market fund fees, and our net interest margin
(NIM) on $139 billion of average interest-earning assets
was 164 basis points versus the NIMs of 300–400 basis
points or more that we were earning before the Fed
began lowering rates. So we are not there yet in
terms of demonstrating our earnings power in anything
approaching a normalized rate environment.
Something else to keep in mind: Regardless of when rates
do rise, the recovery of that earnings power does not
mark the limit of our growth opportunities—the two are
completely unrelated. What it will mark is the advent of
more fully profitable client relationships and a substantial
lift in our overall profit margin. We expect to drive strong
growth in our business for years to come. Normalizing
rates will improve our flexibility in making investment
and pricing decisions to pursue that growth while also
enabling us to build our profit margins toward sustainably
higher levels.
Maybe
As I’m writing this to you, there’s a pretty broad
consensus that the economic recovery is progressing in
a way that will push the Fed to begin raising rates before
the end of 2015, a consensus that we find credible. So
this might well be the year our full earnings power begins
to emerge. I have to say, though, that we remain wary
of those head fakes—having to reset a spending plan
midstream yet again would be inefficient, disruptive, and
dispiriting. So our baseline scenario for 2015 assumes
the recovery continues and the S&P 500® rises another
6.5%. The scenario also includes modest growth in
client revenue trades. The rate environment, however,
is assumed to remain unchanged from late-2014 levels.
Under this scenario, we’d expect to produce mid- to
upper-single-digit revenue growth, a gap between
revenue and expense growth of at least 150 basis points,
and a pre-tax profit margin of around 36%. Conservative
again? It may seem so now, but it still represents solid
12 / FINANCIAL HIGHLIGHTS
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)
GROWTH RATE
1-YEAR
2013–14
11%
6%
25%
23%
22%
—
2%
16%
14%
6%
$
$
$
$
$
$
$
$
2014
6,058
3,943
1,261
.96
.95
.24
1,315
30.19
8.34
11%
34.9%
12%
14.6
$
$
$
$
$
$
$
$
2013
5,435
3,730
1,010
.78
.78
.24
1,293
26.00
7.33
11%
31.4%
11%
13.8
$
$
$
$
$
$
$
$
2012
4,883
3,433
883
.69
.69
.24
1,275
14.36
6.83
4%
29.7%
11%
13.8
GROWTH IN CLIENT ASSETS AND ACCOUNTS / 13
GROWTH IN CLIENT ASSETS AND ACCOUNTS
GROWTH RATES
COMPOUNDED
4-YEAR
ANNUAL
1-YEAR
(In Billions, at Year-End, Except As Noted)
Assets in client accounts
Schwab One®, other cash equivalents
and deposits from banking clients
Proprietary mutual funds (Schwab Funds® and Laudus Funds®):
2010–14 2013–14
2014
2013
2012
2011
2010
14%
7% $
136.0
$
127.3
$
119.0
$
96.4
$
81.1
Money market funds
Equity and bond funds (1)
Total proprietary mutual funds
Mutual Fund Marketplace® (2)
Mutual Fund OneSource®
Mutual fund clearing services
Other third-party mutual funds
Total Mutual Fund Marketplace
Total mutual fund assets
Exchange-traded funds (ETFs) (1)
Proprietary ETFs
ETF OneSource™ (2)
Other third-party ETFs
Total ETF assets
Equity and other securities (1)
Fixed income securities
Margin loans outstanding
Total client assets
Client assets by business (3)
Investor Services
Advisor Services
Total client assets
Net growth in assets in client accounts
(for the year ended)
Net new assets by business (3)
Investor Services (4,5)
Advisor Services (6)
Total net new assets
Net market gains (losses)
Net growth
New brokerage accounts (7)
( in thousands, for the year ended)
Clients ( in thousands)
Active Brokerage Accounts (8)
Banking Accounts
Corporate Retirement Plan Participants (4)
2%
9%
4%
6%
41%
12%
13%
11%
78%
N/M
15%
20%
14%
2%
9%
12%
13%
10%
12%
N/M
6%
47%
(8%)
9%
4%
4%
9%
(1%)
—
13%
3% $
167.9
61.5
229.4
$
167.7
54.4
222.1
$
—
12%
10%
7%
6%
260.5
164.7
461.9
887.1
1,116.5
260.5
147.4
420.9
828.8
1,050.9
$
$
167.9
41.1
209.0
223.2
159.1
368.6
750.9
959.9
159.8
33.2
193.0
198.6
104.2
310.9
613.7
806.7
154.5
43.3
197.8
208.6
42.1
294.5
545.2
743.0
26.9
60%
14.7
73%
194.7
9%
236.3
16%
800.4
14%
188.7
6%
(14.3)
13%
10% $ 2,463.6
16.8
8.5
179.0
204.3
702.0
177.5
(12.6)
$ 2,249.4
8.5
—
145.6
154.1
548.3
181.8
(11.5)
$ 1,951.6
5.0
—
117.8
122.8
485.1
176.9
(10.2)
$ 1,677.7
2.7
—
110.7
113.4
476.0
171.3
(10.3)
$ 1,574.5
9% $ 1,351.5
10% $ 1,112.1
10% $ 2,463.6
$ 1,241.5
$ 1,007.9
$ 2,249.4
$ 1,112.1
$
839.5
$ 1,951.6
955.3
$
$
722.4
$ 1,677.7
825.1
$
$
749.4
$ 1,574.5
N/M $
10%
200% $
(65%)
(28%) $
59.1
65.7
124.8
89.4
214.2
$
$
$
(18.2)
59.8
41.6
256.2
297.8
$
$
$
79.7
60.0
139.7
134.2
273.9
$
$
$
97.4
48.5
145.9
(42.7)
103.2
$
$
$
(25.6)
52.2
26.6
125.3
151.9
1%
3%
8%
9%
972
960
900
1,138
829
9,386
985
1,428
9,093
916
1,305
8,787
865
1,571
8,552
780
1,492
7,998
690
1,477
(1) Beginning in 2014, exchange-traded funds (ETFs) are presented separately; they were previously included in equity and bond funds and equity and other securities. Prior period
information has been recast to reflect this change.
(2) Excludes all proprietary mutual funds and ETFs.
(3) In 2013, the Company realigned its reportable segments as a result of organizational changes. The segment formerly reported as Institutional Services was renamed to Advisor
Services. Additionally, the Retirement Plan Services and Corporate Brokerage Services business units are now part of the Investor Services segment. Prior period segment
information has been recast to reflect these changes.
(4) In 2013, the Company reduced its reported totals for overall client assets and retirement plan participants by $24.7 billion and 317,000, respectively, to reflect the estimated
impact of the consolidation of its retirement plan recordkeeping platforms and subsequent resignation from certain retirement plan clients.
(5) 2014 includes inflows of $10.2 billion and an outflow of $3.4 billion from certain mutual fund clearing services clients. 2013 includes outflows of $74.5 billion relating to
the planned transfer of a mutual fund clearing services client and $2.1 billion from another mutual fund clearing services client. 2013 also includes inflows of $35.8 billion
from certain mutual fund clearing services clients. 2012 includes inflows of $33.1 billion from certain mutual fund clearing services clients. 2012 also includes outflows of
approximately $100 million from the sale of Open E Cry, LLC, and $900 million relating to a planned transfer from Corporate Brokerage Services. 2011 includes inflows of $56.1
billion from a mutual fund clearing services client and $7.5 billion from the acquisition of optionsXpress Holdings, Inc. 2010 includes outflows of $51.5 billion relating to the
planned deconversion of a mutual fund clearing services client, and inflows of $500 million from the acquisition of Windhaven Investment Management, Inc., and $1.2 billion from
a mutual fund clearing services client.
(6) 2012 includes inflows of approximately $900 million from the acquisition of ThomasPartners, Inc., and outflows of $1.2 billion from the closure of brokersXpress LLC. 2010
includes inflows of $1.5 billion from the acquisition of Windhaven Investment Management, Inc.
(7) 2011 includes 315,000 new brokerage accounts from the acquisition of optionsXpress Holdings, Inc.
(8) In 2012, the Company removed approximately 30,000 brokerage accounts due to escheatment and other factors and reduced accounts by 19,000 from the sale of Open E Cry,
LLC, and the closure of brokersXpress LLC.
N/M = Not Meaningful
14 / EXECUTIVE MANAGEMENT
EXECUTIVE
MANAGEMENT
CHARLES R. SCHWAB
Chairman of the Board
WALTER W. BETTINGER II
President and Chief Executive Officer
JAY L. ALLEN
Executive Vice President and
Chief Administrative Officer
STEVEN H. ANDERSON
Executive Vice President,
Retirement Plan Services
RON CARTER
Executive Vice President,
Operational Services
JONATHAN M. CRAIG
Executive Vice President and
Chief Marketing Officer
DAVID R. GARFIELD
Executive Vice President,
General Counsel and
Corporate Secretary
G. ANDREW GILL
Executive Vice President,
Investment Management Services
NAUREEN HASSAN
Executive Vice President,
Investor Services Strategy,
Segments and Platforms
MARIE A. CHANDOHA
President and Chief Executive
Officer, Charles Schwab Investment
Management, Inc.
LISA KIDD HUNT
Executive Vice President,
International Services and
Special Business Development
BERNARD J. CLARK
Executive Vice President,
Advisor Services
TERRI R. KALLSEN
Executive Vice President,
Investor Services
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 J. 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, 2014
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 No.)
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 1/40th ownership interest
in a 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
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
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
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 (Do not check if a smaller reporting company)
Accelerated filer
Smaller reporting company
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, 2014, the aggregate market value of the voting stock held by non-affiliates of the registrant was $30.7 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 30, 2015, was 1,311,054,124.
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 13, 2015, by reference to that document.
THE CHARLES SCHWAB CORPORATION
Annual Report On Form 10-K
For Fiscal Year Ended December 31, 2014
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
Risk Factors
Unresolved Securities and Exchange Commission Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Part II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
Item 6.
Item 7.
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
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
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Directors, Executive Officers, and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accountant Fees and Services
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Part III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Part IV
Item 15.
Exhibits and Financial Statement Schedule
Exhibit Index
Signatures
Index to Financial Statement Schedule
1
1
1
2
2
5
6
6
7
13
14
14
14
15
17
18
18
20
22
24
32
37
45
45
48
50
96
96
96
96
98
98
98
98
99
99
103
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 located in San Francisco except as indicated), in wealth
management, securities brokerage, banking, money management, and financial advisory services. At December 31, 2014, the
Company had $2.46 trillion in client assets, 9.4 million active brokerage accounts(a), 1.4 million corporate retirement plan
participants, and 985,000 banking accounts.
Significant business subsidiaries of CSC include:
• Charles Schwab & Co., Inc. (Schwab), which was incorporated in 1971, is a securities broker-dealer with over 325
domestic branch offices in 45 states, as well as a branch in each of the Commonwealth of Puerto Rico and London,
England, 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 Advisor Services. The Investor Services segment provides retail brokerage and banking services to individual investors,
retirement plan services, and corporate brokerage services. The Advisor Services segment provides custodial, trading, and
support services to independent investment advisors (IAs), and retirement business services to independent retirement plan
advisors and recordkeepers whose plan assets are held at Schwab Bank. These services are further described in the segment
discussion below. For financial information by segment for the three years ended December 31, 2014, see “Item 8 –
Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – 23. Segment Information.”
As of December 31, 2014, the Company had full-time, part-time and temporary employees, and persons employed on a
contract basis that represented the equivalent of about 14,600 full-time employees.
Business Acquisitions
In December 2012, the Company acquired ThomasPartners, Inc., a growth and dividend income-focused asset management
firm. For additional information pertaining to the Company’s acquisition of ThomasPartners, Inc., see “Item 8 – Financial
Statements and Supplementary Data – Notes to Consolidated Financial Statements – 24. Business Acquisition.”
In September 2011, the Company acquired optionsXpress Holdings, Inc. (optionsXpress), an online brokerage firm primarily
focused on equity options 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., 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.
(a) Accounts with balances or activity within the preceding eight months.
- 1 -
THE CHARLES SCHWAB CORPORATION
Business Strategy and Competitive Environment
The Company’s stated purpose is to champion every client’s goals with passion and integrity, believing the best long-term
strategy is one that puts clients first. Because investing plays a fundamental role in building financial security, the Company
strives to deliver a better investing experience for its clients – individual investors and the people and institutions who serve
them – by disrupting longstanding industry practices on their behalf and providing superior service. The Company aims to
offer a broad range of products and solutions to choose from, including relevant and actionable advice, with a focus on
transparency and convenience. In addition, management works to leverage Company scale and resources, as well as expense
discipline, to help keep costs low and ensure that client solutions are both affordable and responsive to needs.
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 or limited 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 Advisor 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, Advisor Services competes
by utilizing technology to provide IAs with a highly-developed, scalable platform for administering their clients’ assets easily
and efficiently. Advisor 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.
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 full-feature brokerage accounts; 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;
- 2 -
THE CHARLES SCHWAB CORPORATION
• 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®, other third-party mutual funds, and mutual fund trading and clearing services to broker-dealers;
• Exchange-traded funds (ETFs) – third-party and proprietary ETFs, including Schwab ETFs, Schwab ETF
OneSource™, 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 loans and lines of credit
(HELOCs), personal loans and entity lending collateralized by securities; 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 Advisor 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.” For financial information related to the Company’s reportable segments, see “Item 7 –
Management’s Discussion and Analysis of Financial Condition and Results of Operations – Results of Operations – Segment
Information,” and “Item 8 – Financial Statements and Supplementary Data – Notes to the Consolidated Financial Statements
– 23. Segment Information.”
Investor Services
Through the Investor Services segment, the Company provides retail brokerage and banking services to individual investors.
The Company offers research, analysis 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 educate and assist clients in the development of investment plans. Educational tools include workshops,
interactive courses, and online information about investing, from which Schwab does not earn revenue. 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®, an international ranking methodology, covers approximately 4,000 stocks in 27
foreign equity markets.
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 ClientTM features a personal advice relationship with a designated portfolio consultant, supported by a team
of investment professionals who provide individualized service, a customized investment strategy developed in collaboration
with the client, and ongoing guidance and execution.
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 PortfoliosTM and
Windhaven, or equity securities through ThomasPartners® programs. The 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.
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THE CHARLES SCHWAB CORPORATION
To meet the specific needs of clients who trade actively, Schwab and optionsXpress, Inc. both offer integrated Web- and
software-based trading platforms, which 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 online
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.
The Investor Services segment also includes the Retirement Plan Services, Corporate Brokerage Services, Stock Plan
Services, and Compliance Solutions business units. 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 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.
Corporate Brokerage Services provides specialty brokerage-related services to corporate clients through its Corporate
Brokerage Retirement Services business and mutual fund clearing services to banks, brokerage firms and trust companies,
and also offers proprietary mutual funds, ETFs, collective trust funds, and investment management outside the Company to
institutional channels. Corporate Brokerage Retirement Services serves independent recordkeepers seeking a custodian for
retirement plan assets. Schwab provides custody services tailored for retirement plans seeking a low-cost solution. Plans held
at Schwab are either self-trusteed or trusteed by a separate, independent trustee. Corporate Brokerage Retirement Services
also offers the Schwab Personal Choice Retirement Account®, a self-directed brokerage offering for retirement plans and the
Company Retirement Account, a brokerage account designed to hold the assets of an individually designed business
retirement plan.
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.
Compliance Solutions provides solutions for compliance departments of regulated companies and firms with special
requirements to monitor employee personal trading, including trade surveillance technology.
Advisor Services
Through the Advisor Services segment, the Company provides custodial, trading, and support services to IAs.
To attract and serve IAs, the Company 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 and retrieving client account information and viewing news and
market information. This platform provides IAs with a comprehensive suite of electronic and paper-based reporting
capabilities. The Company offers online cashiering services, as well as internet-based eDocuments sites for both IAs and
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THE CHARLES SCHWAB CORPORATION
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, the Company offers a variety of services, including access to insights on
practice marketing and business development, business strategy and planning, and transition support. The Company
maintains a website that provides interactive tools, educational content, and research reports to assist advisors thinking about
establishing and managing their own independent practices.
The Company offers an array of services to help advisors establish their own independent practices through the Business
Start-up Solutions package. For some IAs 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, programs, 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. The Company
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.
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.
The Advisor Services segment also includes the Retirement Business Services business unit. Retirement Business Services
provides trust, custody, and retirement business services to independent retirement plan advisors and independent
recordkeepers. Plan assets are held at the Business Trust division of Schwab Bank. 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® for retirement plans.
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). Schwab Bank is subject to supervision and regulation by the Office of the Comptroller of the Currency (the OCC),
as its primary regulator, the Federal Deposit Insurance Corporation (FDIC), as its deposit insurer, and the Consumer
Financial Protection Bureau (CFPB). Collectively, the rules and regulations of these regulators cover safety and soundness
and consumer protection. CSC and Schwab Bank are also subject to regulation and to various requirements and restrictions
under state and other federal laws. For additional information on the regulations applicable to CSC, Schwab, Schwab Bank,
and optionsXpress, Inc., see “Item 8 – Financial Statements and Supplementary Data – Notes to Consolidated Financial
Statements – 22. Regulatory Requirements.”
CSC is required to serve as a source of strength for Schwab Bank. Prior to January 1, 2015, CSC, as a savings and loan
holding company, was not subject to specific statutory capital requirements. Beginning on January 1, 2015, CSC is subject to
new capital requirements set by the Federal Reserve. For further information, see “Item 7 – Management’s Discussion and
Analysis of Financial Condition and Results of Operations – Current Market and Regulatory Environment and Other
Developments.”
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.
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
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THE CHARLES SCHWAB CORPORATION
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 is a member 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 FINRA and the MSRB.
The primary regulators of Schwab and optionsXpress, Inc. are FINRA 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 could 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.
In addition to net capital requirements, as self-clearing broker-dealers, Schwab and optionsXpress, Inc. are subject to cash
deposit and collateral requirements with clearing houses, such as the Depository Trust & Clearing Corporation (DTCC) and
Options Clearing Corporation, which may fluctuate significantly from time to time based upon the nature and size of clients’
trading activity.
Various activities of the Company are subject to the Bank Secrecy Act (BSA), as amended by the USA Patriot Act of 2001,
which requires financial institutions to develop programs reasonably designed to prevent money laundering and the financing
of terrorism. The BSA includes a variety of record-keeping and reporting requirements (such as cash and suspicious activity
reporting), as well as due diligence/ know-your-customer documentation requirements. Various activities of the Company are
also subject to U.S. sanctions programs administered by the Office of Foreign Assets Control.
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 and interest paid on funding sources, the majority of which is derived from client cash balances.
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, 2014, 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
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THE CHARLES SCHWAB CORPORATION
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 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
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, market risk, liquidity risk,
compliance risk, and legal 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 results of operations and
capital resources.
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 continues to
grow more extensive and complex, and regulatory proceedings continue to become more frequent and sanctions more severe.
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 conduct requirements, and restrictions on the
business activities that the Company may conduct.
In addition to specific banking laws and regulations, the Company’s banking regulators have broad discretion in connection
with their supervisory and enforcement activities and examination policies and could require CSC and/or Schwab Bank to
hold more capital, increase liquidity, or limit their ability to pay dividends or CSC’s ability to repurchase shares. The banking
regulators could also limit the Company’s ability to grow, including adding assets, launching new products, and undertaking
strategic investments.
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,
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THE CHARLES SCHWAB CORPORATION
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.
While the Company maintains systems and procedures designed to ensure that it complies with applicable laws and
regulations, violations could occur. In addition, some legal/regulatory frameworks provide for the imposition of fines or
penalties for noncompliance even though the noncompliance was inadvertent or unintentional and even though systems and
procedures reasonably designed to prevent violations were in place at the time. There may be other negative consequences
resulting from a finding of noncompliance, including restrictions on certain activities. Such a finding may also damage the
Company’s reputation and could restrict the ability of institutional investment managers to invest in the Company’s
securities.
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 and broker-dealer fiduciary duties, 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.
There have been extensive changes to the laws regulating financial services firms as a result of the enactment of the “Dodd-
Frank Wall Street Reform and Consumer Protection Act” (the Dodd-Frank Act). Among other changes:
• New regulatory capital rules were implemented. The rules, which apply to CSC and Schwab Bank, became effective
on January 1, 2015, with certain provisions subject to phase-in periods. The rules establish more restrictive capital
definitions, higher risk-weightings for certain asset classes, higher minimum capital ratios and capital buffers.
Failure to meet the minimum capital requirements could result in certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a negative impact on the Company. In addition,
failure to meet the capital buffer (when phased in) will result in restrictions on capital distributions and discretionary
cash bonus payments to executive officers.
• The Federal Reserve issued a modified liquidity coverage ratio (LCR) that applies to CSC. Under the modified LCR,
a depository institution holding company is required to maintain high-quality liquid assets in an amount related to its
total estimated net cash outflows over a prospective period. The transition period for the modified LCR begins on
January 1, 2016 and CSC is required to be fully compliant by January 1, 2017.
• Schwab Bank is required to conduct annual capital adequacy stress tests on its operations and beginning in 2015,
publicly disclose a summary of the results. CSC expects to become subject to a similar rule in the future.
• The CFPB was established, which has broad rulemaking, supervisory and enforcement authority over consumer
products, including deposit products, mortgages and home-equity loans. States are permitted to adopt stricter
consumer protection laws and state attorney generals can enforce consumer protection rules issued by the CFPB.
Implementation of the legislation is ongoing and significant rule-making and interpretations remain to be completed. For
example, rules relating to a minimum net stable funding ratio which will require financial institutions to have a stable funding
structure over a one-year horizon have not yet been proposed. In addition, the legislation mandates multiple studies, which
could result in additional legislative or regulatory action. CSC will continue to review the impact that proposed rule-making
will have on the Company’s business, financial condition, and results of operations, as such rule-making is issued.
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
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THE CHARLES SCHWAB CORPORATION
requirements 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, errors in models
such as those used for asset management, capital management, risk management and compliance, employee misconduct,
unauthorized trading, external fraud, computer viruses, distributed denial of service attacks, terrorist attacks, natural disaster,
power outage, capacity constraints, software flaws and similar events. For example, the Company and other financial
institutions have been the target of various denial of service attacks that have, in certain circumstances, made websites,
mobile applications and email unavailable for periods of time. 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.
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, mortgage-related,
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
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THE CHARLES SCHWAB CORPORATION
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.
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, clients’ options trading, securities lending, mortgage lending, 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 or trade options or futures, the Company is subject to the risk that clients may
default on their obligations when the value of the securities and cash in their accounts 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, asset-backed securities, corporate debt
securities, U.S. agency notes, certificates of deposit, 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. A failure to raise the U.S. debt limit and/or a downgrade of the U.S. government’s credit rating could
decrease the value of the Company’s securities in both the available for sale and held to maturity portfolios.
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 2014, 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
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THE CHARLES SCHWAB CORPORATION
provide credit, liquidity or other support in such a situation, the Company could suffer reputational damage and its business
could be adversely affected.
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 uninvested cash in 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. The Company may also be limited in the amount it can reduce interest
rates on funding sources, such as deposit accounts, and still offer a competitive return.
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. 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. 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 – 14. Commitments and
Contingencies.”
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
- 11 -
THE CHARLES SCHWAB CORPORATION
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.
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, including foreign state-sponsored 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.
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.
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 or regulatory proceedings. 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.
- 12 -
THE CHARLES SCHWAB CORPORATION
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.
To the extent that any of our competitors acquires or is acquired by another institution, that firm may be able to offer
products and services at lower prices and/or promote those products and services more aggressively.
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
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,
expense discipline, 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.
- 13 -
THE CHARLES SCHWAB CORPORATION
Item 2.
Properties
A summary of the Company’s significant locations at December 31, 2014, 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 and other office space:
Denver, CO (2)
Phoenix, AZ (2)
Indianapolis, IN
Austin, TX
Orlando, FL
Richfield, OH
El Paso, TX
(1)
(2)
Includes the Company’s headquarters.
Includes two data centers.
Square Footage
Leased
Owned
772
247
37
-
258
148
-
-
-
527
669
274
-
-
117
105
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.
Item 3.
Legal Proceedings
For a discussion of legal proceedings, see “Item 8 – Financial Statements and Supplementary Data – Notes to Consolidated
Financial Statements – 14. Commitments and Contingencies.”
Item 4. Mine Safety Disclosures
Not applicable.
- 14 -
THE CHARLES SCHWAB CORPORATION
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 30, 2015, was 6,869. The closing market price per share on that date was $25.98.
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 – 27. Quarterly Financial Information (Unaudited) and 19. 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.
$250
$200
$150
$100
$50
The Charles Schwab Corporation
Dow Jones U.S. Investment Services Index
Standard & Poor's 500 Index
$0
12/31/09
12/31/10
12/31/11
12/31/12
12/31/13
12/31/14
December 31,
The Charles Schwab Corporation
Dow Jones U.S. Investment Services Index
Standard & Poor’s 500 Index
2009
100 $
100 $
100 $
$
$
$
2010
2011
2012
92 $
103 $
115 $
62 $
67 $
117 $
80 $
86 $
136 $
2013
147 $
138 $
180 $
2014
172
158
205
- 15 -
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 2014:
Month
October:
Share Repurchase Program (1)
Employee transactions (2)
November:
Share Repurchase Program (1)
Employee transactions (2)
December:
Share Repurchase Program (1)
Employee transactions (2)
Total:
Share Repurchase Program (1)
Employee transactions (2)
Total Number of
Shares Purchased
(in thousands)
Average
Price Paid
per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Program (1)
(in thousands)
Approximate Dollar
Value of Shares that
May Yet be Purchased
under the Program
(in millions)
-
21
-
1,132
-
5
-
1,158
$
-
$ 29.21
$
-
$ 28.59
-
$
$ 28.00
$
-
$ 28.60
-
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. There were two
(2)
authorizations under this program 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.
- 16 -
THE CHARLES SCHWAB CORPORATION
Item 6.
Selected Financial Data
Selected Financial and Operating Data
(In Millions, Except Per Share Amounts, Ratios, or as Noted)
Growth Rates
Compounded Annual
1-Year
4-Year (1)
2010-2014 2013-2014
2014
2013
2012
2011
2010
Results of Operations
Net revenues
Expenses excluding interest
Net income
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
Asset management and administration fees as a
9%
3%
31%
29%
26%
26%
-
2%
percentage of net revenues
Net interest revenue as a percentage of net revenues
Trading revenue as a percentage of net revenues (2)
Effective income tax rate
Capital expenditures — purchases of equipment,
office facilities, and property, net
Capital expenditures, net of disposals, as a
percentage of net revenues
Performance Measures
Net revenue growth
Pre-tax profit margin
Return on average common stockholders’ equity (3)
Financial Condition (at year end)
Total assets
Long-term debt
Stockholders’ equity (4)
Assets to stockholders’ equity ratio
Long-term debt to total financial capital
(long-term debt plus stockholders’ equity)
Employee Information
Full-time equivalent employees (in thousands,
11%
6%
23%
25%
23%
22%
-
2%
$
$
$
$
$
$
$
6,058
3,943
1,321
1,261
.96
.95
.24
1,315
$
$
$
$
$
$
$
5,435
3,730
1,071
1,010
.78
.78
.24
1,293
$
$
$
$
$
$
$
4,883
3,433
928
883
.69
.69
.24
1,275
$
$
$
$
$
$
$
42%
38%
15%
37.5%
43%
36%
17%
37.2%
42 %
36 %
18 %
36.0 %
4,691
3,299
864
864
.70
.70
.24
1,229
$
$
$
$
$
$
$
41%
37%
20%
37.9%
4,248
3,469
454
454
.38
.38
.24
1,194
43%
36%
20%
41.7%
34%
50%
$
404
$
269
$
138
$
190
$
127
7%
5%
3 %
4%
3%
11%
34.9%
12%
11%
31.4%
11%
4 %
29.7 %
11 %
10%
29.7%
12%
1%
18.3%
8%
14%
(1)%
17%
8%
-
14%
$ 154,642
1,899
$
11,803
$
13
$ 143,642
1,903
$
10,381
$
14
$ 133,617
1,632
$
9,589
$
14
$
$
$
108,553
2,001
7,714
14
$ 92,568
2,006
$
6,226
$
15
14%
15%
15 %
21%
24%
(1)
(2)
(3)
(4)
at year end)
14.1
The compounded 4-year growth rate is computed using the following formula: Compound annual growth rate = (Ending Value / Beginning Value) .25 - 1.
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.
12.8
13.8
13.8
14.6
3%
6%
- 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)
Item 7. 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.
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 and maintain its market leadership position (see “Part I – Item
1. – Business – Business Strategy and Competitive Environment”);
the expected impact of the new regulatory capital and LCR rules (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 –14. 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 – 5. 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 – 22. Regulatory Requirements”);
target capital and debt ratios (see “Liquidity and Capital Resources” and “Item 8 – Financial Statements and
Supplementary Data – Notes to Consolidated Financial Statements – 22. Regulatory Requirements”);
capital expenditures (see “Liquidity and Capital Resources – Capital Resources – Capital Expenditures”);
the impact of the revised underwriting criteria on the credit quality of the Company’s mortgage portfolio (see “Risk
Management – Credit Risk”);
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 – 14. 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 – 19. 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;
- 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)
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
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, including Schwab Intelligent Portfolios™;
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;
investment, structural and capital adjustments made by the Company in connection with the new LCR rule;
the amount of loans to the Company’s brokerage and banking clients;
the extent to which past performance of the Company’s mortgage portfolio is indicative of future performance;
the level of the Company’s stock repurchase activity;
the level of brokerage client cash balances and deposits from banking clients;
the availability and terms of external financing;
capital needs and management;
timing and amount of severance and other costs related to reducing the Company’s San Francisco footprint;
the Company’s ability to manage expenses;
regulatory guidance;
the level of client assets, including cash balances;
competitive pressures on rates and fees;
acquisition integration costs;
the timing and impact of changes in the Company’s level of investments in buildings, land, and leasehold
improvements;
potential breaches of contractual terms for which the Company has indemnification and guarantee obligations; and
client use of the Company’s investment advisory services and other products and services.
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.”
- 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)
OVERVIEW
Management of the Company focuses on several key client activity and financial metrics in evaluating the Company’s
financial position and operating performance. Management believes that net revenue growth, pre-tax profit margin, earnings
per common share, 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.
Expenses excluding interest as a percentage of average client assets is considered by management to be a measure of
operating efficiency. Results for the years ended December 31, 2014, 2013, and 2012 are:
Year Ended December 31,
Client Metrics:
Net new client assets (1) (in billions)
Client assets (2) (in billions, at year end)
New brokerage accounts (3) (in thousands)
Active brokerage accounts (4) (in thousands, at year end)
Assets receiving ongoing advisory services (5)
(in billions, at year end)
Client cash as a percentage of client assets (6)
(at year end)
Company Financial Metrics:
Net revenues
Expenses excluding interest
Income before taxes on income
Taxes on income
Net income
Preferred stock dividends
Net income available to common stockholders
Earnings per common share – diluted
Net revenue growth from prior year
Pre-tax profit margin
Return on average common stockholders’ equity (7)
Expenses excluding interest as a percentage of
Growth Rate
1-Year
2013-2014
2014
2013
2012
N/M
10 %
1 %
3 %
$
124.8
$ 2,463.6
972
9,386
$
41.6
$ 2,249.4
960
9,093
$
139.7
$ 1,951.6
900
8,787
12 %
$ 1,228.1
$ 1,101.4
$
915.2
11 %
6 %
24 %
25 %
23 %
(2)%
25 %
22 %
$
$
$
$
12.3 %
13.1 %
14.7 %
$
$
$
$
6,058
3,943
2,115
794
1,321
60
1,261
.95
11 %
34.9 %
12 %
$
$
$
$
5,435
3,730
1,705
634
1,071
61
1,010
.78
11 %
31.4 %
11 %
4,883
3,433
1,450
522
928
45
883
.69
4 %
29.7 %
11 %
average client assets
0.19 %
(1) 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, along with core net new assets, depicts how well the Company’s products and services appeal to new and existing
clients. Core net new assets totaled $124.8 billion, $140.8 billion, and $112.4 billion in 2014, 2013, and 2012, respectively. See below
for items excluded from core net new assets.
0.17 %
0.18 %
(2) Client assets represent 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.
(3) 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.
(4) 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.
(5) Assets receiving ongoing advisory services include relationships under the guidance of independent advisors and assets enrolled in
one of the Company’s retail or other advisory solutions. This metric depicts how well the Company’s advisory products and services
appeal to new and existing clients.
(6) Client cash as a percentage of client assets includes Schwab One®, certain cash equivalents, deposits from banking clients and money
market fund balances, as a percentage of client assets. This measure is an indicator of clients’ engagement in the fixed income and
equity markets.
(7) Calculated as net income available to common stockholders divided by average common stockholders’ equity.
N/M Not meaningful.
- 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)
Core net new client assets is defined as net new client assets before significant one-time flows. Management considers this to
be a useful metric when comparing period-to-period client asset flows. The following one-time flows were excluded from
core net new assets.
•
•
2013 excludes outflows of $74.5 billion relating to the planned transfer of a mutual fund clearing services client.
The Company also reduced its reported total for overall client assets by $24.7 billion in 2013 to reflect the estimated
impact of the consolidation of its retirement plan recordkeeping technology platforms and subsequent resignation
from certain retirement plan clients.
2012 excludes 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.
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, the majority of which is derived from client cash balances.
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.
2014 Compared to 2013
The Company operated in an environment of mixed market conditions during 2014 compared to 2013, as the Nasdaq
Composite Index, Standard & Poor’s 500 Index, and Dow Jones Industrial Average showed periods of volatility before
ending the year up 13%, 11%, and 8%, respectively. The federal funds target rate remained unchanged at a range of zero to
0.25% during 2014. The average 10-year Treasury yield increased by 20 basis points to 2.53% during 2014 compared to
2013, while the yield ended the year down 86 basis points to 2.17%. In the same period, the average three-month Treasury
Bill yield decreased by 3 basis points to 0.02%.
The Company’s steady focus on serving investor needs through its full-service investing model continued to drive growth
during 2014. Total client assets ended the year at $2.46 trillion, up 10% from 2013, reflecting net new client assets of
$124.8 billion and a rising equity market environment. In addition, the Company added almost 1 million new brokerage
accounts to its client base during 2014. Active brokerage accounts reached 9.4 million in 2014, up 3% from 2013.
As a result of the Company’s strong key client activity metrics, the Company achieved a pre-tax profit margin of 34.9% in
2014. Overall, net income increased by 23% in 2014 from 2013 and the return on average common stockholders’ equity was
12% in 2014.
Overall, net revenues increased by 11% in 2014 from 2013, primarily due to increases in net interest revenue, asset
management and administration fees, and other revenue – net. Net interest revenue increased primarily due to higher balances
of interest-earning assets, including margin loans and the Company’s investment portfolio (securities available for sale and
securities held to maturity), and the effect higher average interest rates on securities held to maturity had on the Company’s
average net interest margin. Asset management and administration fees increased due to fees from mutual fund services,
advice solutions, and other asset management and administration services. Other revenue – net increased primarily due to a
net insurance settlement of $45 million, net litigation proceeds of $28 million related to the Company’s non-agency
residential mortgage-backed securities portfolio, and increases in order flow revenue.
Expenses excluding interest increased by 6% in 2014 from 2013 primarily due to an increase in compensation and benefits
expense as a result of a charge of $68 million for estimated future severance benefits resulting from changes in the
Company’s geographic footprint and an increase in professional services expense.
- 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)
2013 Compared to 2012
Valuations in the broad equity markets improved during 2013 compared to 2012, as the Nasdaq Composite Index, Standard
& Poor’s 500 Index, and Dow Jones Industrial Average increased 38%, 30%, and 26%, respectively. While the federal funds
target rate remained unchanged at a range of zero to 0.25%, the average 10-year Treasury yield increased by 55 basis points
to 2.33% during 2013 compared to 2012. In the same period however, the average three-month Treasury Bill yield decreased
by 3 basis points to 0.05%.
The Company continued to experience growth in its client base during 2013 – core net new client assets totaled
$140.8 billion, up 25% from $112.4 billion in 2012. Total client assets ended the year at a record $2.25 trillion, up 15% from
2012. In addition, the Company added almost 1 million new brokerage accounts during 2013, and active brokerage accounts
reached 9.1 million, up 3% from 2012.
As a result of the Company’s strong key client activity metrics, the Company achieved a pre-tax profit margin of 31.4% in
2013. Overall, net income increased by 15% in 2013 from 2012 and the return on average common stockholders’ equity was
11% in 2013.
Along with the growth in its client base, enrollments in client advisory solutions and stability in the economic environment
helped the Company achieve increases in all three major revenue lines in 2013 compared to 2012. Overall, net revenues
increased by 11% in 2013 from 2012, primarily due to increases in asset management and administration fees, net interest
revenue, and trading revenue, partially offset by a decrease in other revenue – net. Asset management and administration fees
increased primarily due to increases in mutual fund service fees and advice solutions fees. Net interest revenue increased
primarily due to higher balances of interest-earning assets and higher interest rates on new fixed-rate investments. This
increase was partially offset by the effect lower average short-term interest rates and the maturity of short-term interest-
earning assets had on the Company’s average net interest margin. Trading revenue increased primarily due to higher daily
average revenue trades and two additional trading days during the year. Other revenue – net decreased primarily due to a non-
recurring gain of $70 million relating to a confidential resolution of a vendor dispute in 2012.
Expenses excluding interest increased by 9% in 2013 from 2012 primarily due to increases in compensation and benefits,
professional services, advertising and market development, and other expense. Compensation and benefits expense increased
in 2013 from 2012 primarily due to higher incentive compensation relating to the transition to a new payout schedule for field
incentive plans, increased individual sales performance compensation as a result of field sales volume, increased and
accelerated health savings account (HSA) contributions, equity incentive plan changes to vesting for retirement-eligible
employees, and increased funding for the corporate bonus plan commensurate with achieving higher earnings per common
share. Advertising and market development expense increased primarily due to investment in the Company’s new advertising
and branding initiative, Own your tomorrow™.
CURRENT MARKET AND REGULATORY ENVIRONMENT AND OTHER DEVELOPMENTS
To the extent short-term interest rates remain at current 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 short-term interest rate environment
also affects asset management and administration fees. The Company continues to waive a portion of its management fees, as
the overall yields on certain Schwab-sponsored money market mutual funds have remained at levels at or below the
management fees on those funds. These and certain other Schwab-sponsored 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 stated management fees on those funds. To the extent this occurs,
asset management and administration fees may continue to be negatively affected.
In July 2013, the U.S. banking agencies issued regulatory capital rules that implemented BASEL III and relevant provisions
of the Dodd-Frank Act (Final Regulatory Capital Rules), which are applicable to savings and loan holding companies, such
as CSC, and federal savings banks, such as Schwab Bank. The implementation of the rules began on January 1, 2015. The
- 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)
Company does not expect the Final Regulatory Capital Rules to have a material impact on the Company’s business, financial
condition, and results of operations.
The Final Regulatory Capital Rules, among other things:
•
•
•
•
subject savings and loan holding companies to consolidated capital requirements;
revise the required minimum risk-based and leverage capital requirements by (1) establishing a new minimum
Common Equity Tier 1 Risk-Based Capital Ratio (common equity Tier 1 capital to total risk-weighted assets) of
4.5%; (2) raising the minimum Tier 1 Risk-Based Capital Ratio from 4.0% to 6.0%; (3) maintaining the minimum
Total Risk-Based Capital Ratio of 8.0%; and (4) maintaining a minimum Tier 1 Leverage Ratio (Tier 1 capital to
adjusted average consolidated assets) of 4.0%;
add a requirement to maintain a minimum capital conservation buffer, composed of common equity Tier 1 capital,
of 2.5% of risk-weighted assets, which means that banking organizations, on a fully phased-in basis no later than
January 1, 2019, must maintain a Common Equity Tier 1 Risk-Based Capital Ratio greater than 7.0%; a Tier 1 Risk-
Based Capital Ratio greater than 8.5% and a Total Risk-Based Capital Ratio greater than 10.5%; and
change the definition of capital categories for insured depository: to be considered “well-capitalized”, Schwab Bank
must have a Common Equity Tier 1 Risk-Based Capital Ratio of at least 6.5%, a Tier 1 Risk-Based Capital Ratio of
at least 8%, a Total Risk-Based Capital Ratio of at least 10% and a Tier 1 Leverage Ratio of at least 5%.
The new minimum regulatory capital ratios and changes to the calculation of risk-weighted assets were effective beginning
January 1, 2015. The required minimum capital conservation buffer will be phased in incrementally, starting at 0.625% on
January 1, 2016 and increasing to 1.25% on January 1, 2017, 1.875% on January 1, 2018 and 2.5% on January 1, 2019.
The Final Regulatory Capital Rules provide that the failure to maintain the minimum capital conservation buffer will result in
restrictions on capital distributions and discretionary cash bonus payments to executive officers.
In September 2014, the Federal Reserve, in collaboration with the OCC and the FDIC, issued a rule implementing a
quantitative liquidity requirement generally consistent with the LCR standard established by Basel III. The LCR applies to all
internationally active banking organizations. The Federal Reserve also issued a modified LCR that applies to the Company.
Under the modified LCR, a depository institution holding company is required to maintain high-quality liquid assets in an
amount related to its total estimated net cash outflows over a prospective period. The modified LCR will be phased in
beginning on January 1, 2016, with a minimum requirement of 90%, increasing to 100% at January 1, 2017. The Company is
currently evaluating the impact of the final rule but does not expect a material impact to 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 and discovery is proceeding. To date, the
Company has realized $28 million in net settlement proceeds on such claims, and an initial trial date relating to certain of the
defendants who remain in the case is set for August 2015.
- 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)
RESULTS OF OPERATIONS
The following discussion is an analysis of the Company’s results of operations for the years ended December 31, 2014, 2013,
and 2012.
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
remained relatively flat in 2014 as compared to 2013. Asset management and administration fees, net interest revenue, and
trading revenue all increased in 2013 as compared to 2012.
Year Ended December 31,
2014
2013
2012
Growth Rate
2013-2014
Amount
% of
Total Net
Revenues
% of
Total Net
Revenues
Amount
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 fund service fees
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
Asset Management and Administration Fees
2 %
11 %
(21)%
22 %
8 %
4 %
17 %
13 %
9 %
14 %
(3)%
15 %
(1)%
2 %
(1)%
45 %
N/M
(90)%
11 %
$
$
957
(751)
206
192
839
1,237
840
456
2,533
2,374
(102)
2,272
857
50
907
343
4
(1)
6,058
$
3 %
3 %
14 %
20 %
14 %
8 %
42 %
39 %
(1)%
38 %
14 %
1 %
15 %
5 %
-
-
100 % $
936
(674)
262
157
774
1,193
718
404
2,315
2,085
(105)
1,980
864
49
913
236
1
(10)
5,435
$
5 %
3 %
14 %
22 %
13 %
8 %
43 %
38 %
(2)%
36 %
16 %
1 %
17 %
4 %
-
-
100 % $
891
(587)
304
125
680
1,109
580
354
2,043
1,914
(150)
1,764
816
52
868
256
(16)
(32)
4,883
6 %
3 %
14 %
23 %
12 %
7 %
42 %
39 %
(3)%
36 %
17 %
1 %
18 %
5 %
-
(1)%
100 %
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,
401(k) record keeping fees, and mutual fund clearing and other service fees. Asset management and administration fees vary
with changes in the balances of client assets due to market fluctuations and client activity. For a 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 $218 million, or 9%, in 2014 from 2013 due to fees from mutual
fund services, advice solutions, and other asset management and administration services. Asset management and
- 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)
administration fees increased by $272 million, or 13%, in 2013 from 2012 primarily due to fees from mutual fund services
and advice solutions.
Mutual fund service fees increased by $44 million, or 4%, in 2014 from 2013 and by $84 million, or 8%, in 2013 from 2012,
due to growth in client assets invested in the Company’s Mutual Fund OneSource funds and equity and bond funds, partially
offset by a decrease in net money market mutual fund fees as a result of continued low yields on fund assets.
Advice solutions fees increased by $122 million, or 17%, in 2014 from 2013 due to growth in client assets enrolled in
advisory offers, including Schwab Private Client™, ThomasPartners®, and Schwab Managed Portfolios™. Advice solutions
fees increased by $138 million, or 24%, in 2013 from 2012 primarily due to growth in client assets enrolled in advisory
offers, including Windhaven®, Schwab Private Client™, and ThomasPartners®.
Other asset management and administration fees increased by $52 million, or 13%, in 2014 from 2013 and $50 million, or
14%, in 2013 from 2012 primarily due to third-party mutual fund service fees on higher 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 majority of the Company’s interest-earnings assets and interest-
bearing liabilities are sensitive to changes in short-term interest rates. 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, from current levels. 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. However, the spread is
influenced by external factors such as the interest rate environment and competition. The current low interest rate
environment limits the extent to which the Company can reduce interest expense paid on funding sources. To a lesser degree,
the Company is sensitive to changes in long-term interest rates through some of its investment portfolios. To mitigate the
related risk, the Company may alter the types of investments purchased. For discussion of the impact of current market
conditions on net interest revenue, see “Current Market and Regulatory Environment and Other Developments.”
The Company’s interest-earning assets are financed primarily by brokerage client cash balances and Schwab Bank deposits.
Non-interest-bearing funding sources include non-interest-bearing brokerage client cash balances, stockholders’ equity, and
proceeds from stock-lending activities. Revenue from stock-lending activities is included in other interest revenue.
Schwab Bank maintains available for sale and held to maturity investment portfolios for liquidity as well as to earn interest
by investing funds from deposits that are in excess of loans to banking clients and liquidity requirements. Schwab Bank lends
funds to banking clients primarily in the form of mortgage loans, HELOCs, and personal loans secured by securities. These
loans are largely funded by interest-bearing deposits from banking clients.
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
sheets. 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.
- 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)
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.
The following table presents net interest revenue information corresponding to interest-earning assets and funding sources on
the consolidated balance sheets:
Year Ended December 31,
2014
Interest Average
2013
Interest Average
Average
Balance
Revenue/ Yield/
Rate
Expense
Average
Balance
Revenue/
Expense
Yield/
Rate
Average
Balance
2012
Interest Average
Revenue/ Yield/
Rate
Expense
Interest-earning assets:
Cash and cash equivalents
Cash and investments segregated
Broker-related receivables (1)
Receivables from brokerage clients
Securities available for sale (2)
Securities held to maturity
Loans to banking clients
Loans held for sale
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 (3)
Total funding sources
Net interest revenue
$
$
7,179 $
20,268
325
13,778
52,057
32,361
12,906
-
138,874
$
138,874 $
16
24
-
482
546
828
355
-
2,251
123
2,374
0.22 % $
0.12 %
0.09 %
3.50 %
1.05 %
2.56 %
2.75 %
-
1.62 %
6,943 $
25,419
377
11,800
49,114
24,915
11,758
-
130,326
1.71 % $
130,326 $
16
35
-
434
557
610
329
-
1,981
104
2,085
0.23 % $
0.14 %
0.04 %
3.68 %
1.13 %
2.45 %
2.80 %
-
1.52 %
7,130 $
25,263
351
10,928
39,745
15,371
10,053
18
108,859
1.60 % $
108,859 $
18
46
-
446
583
397
309
1
1,800
114
1,914
0.25 %
0.18 %
0.04 %
4.08 %
1.47 %
2.58 %
3.07 %
4.12 %
1.65 %
1.76 %
$
95,842 $
26,731
1,901
124,474
14,400
138,874 $
$
30
2
73
105
0.03 % $
0.01 %
3.84 %
0.08 %
85,465 $
30,258
1,751
117,474
12,852
31
3
69
103
0.04 % $
0.01 %
3.94 %
0.09 %
65,546 $
29,831
1,934
97,311
11,548
(3)
102
2,272
0.07 % $
1.64 %
130,326 $
$
2
105
1,980
0.08 % $
1.52 %
108,859 $
$
42
3
103
148
0.06 %
0.01 %
5.33 %
0.15 %
2
150
1,764
0.14 %
1.62 %
Interest revenue was less than $500,000 in the periods presented.
(1)
(2) Amounts have been calculated based on amortized cost.
(3)
Includes the impact of capitalizing interest on building construction and software development.
Net interest revenue increased in 2014 from 2013 primarily due to higher balances of interest-earning assets, including
margin loans and the Company’s investment portfolio, and the effect higher average interest rates on securities held to
maturity had on the Company’s average net interest margin. The growth in the average balance of deposits from banking
clients funded the increase in the balances of securities held to maturity and securities available for sale.
Net interest revenue increased in 2013 from 2012 primarily due to higher balances of interest-earning assets and higher
interest rates on new fixed-rate investments, including securities available for sale and securities held to maturity, partially
offset by the effect lower average short-term interest rates and the maturity of short-term interest-earning assets had on the
Company’s average net interest margin. The growth in the average balance of deposits from banking clients funded the
increase in the balance of securities available for sale and securities held to maturity. Net interest revenue also increased due
to the redemption of higher rate trust preferred securities and the exchange of higher rate Senior Notes during the third
quarter of 2012.
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
- 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)
revenue also includes adjustments to the fair value of these securities positions. Factors that influence principal transaction
revenue include the volume of client trades and market price volatility.
Trading revenue remained relatively flat in 2014 from 2013. Trading revenue increased by $45 million, or 5%, in 2013 from
2012 primarily due to higher daily average revenue trades and two additional trading days in 2013.
Daily average revenue trades were relatively flat in 2014 from 2013 primarily due to a higher volume of equity trades, offset
by a lower volume of mutual fund trades. Daily average revenue trades increased by 4% in 2013 from 2012 primarily due to
a higher volume of equity and mutual fund trades, partially offset by a lower volume of future and option trades. Average
revenue per revenue trade remained relatively flat from 2012 to 2014.
Year Ended December 31,
Daily average revenue trades (1) (in thousands)
Clients’ daily average trades (2) (in thousands)
Number of trading days (3)
Average revenue per revenue trade
(1)
Growth Rate
2013-2014
1 %
5 %
-
(1)%
$
2014
298.2
516.8
250.5
12.13
2013
295.0
490.5
250.5
12.31
$
2012
282.7
440.9
248.5
12.35
$
(2)
Includes all client trades that generate trading revenue (i.e., commission revenue or principal transaction revenue).
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 order flow revenue, nonrecurring gains, software fees from the Company’s portfolio
management services, exchange processing fees, realized gains or losses on sales of securities available for sale, and other
service fees.
Other revenue – net increased by $107 million, or 45%, in 2014 compared to 2013 primarily due to a net insurance settlement
of $45 million, net litigation proceeds of $28 million related to the Company’s non-agency residential mortgage-backed
securities portfolio, and increases in order flow revenue.
Other revenue – net decreased by $20 million, or 8%, in 2013 compared to 2012 primarily due to a non-recurring gain of
$70 million relating to a confidential resolution of a vendor dispute in the second quarter of 2012 and realized gains of
$35 million from the sales of securities available for sale in 2012, partially offset by an increase in order flow revenue that
Schwab began receiving in November 2012.
Provision for Loan Losses
The provision for loan losses decreased by $3 million in 2014, from $(1) million to $(4) million in 2013 and 2014,
respectively, primarily due to improved residential real estate mortgage and HELOC credit quality in the Company’s loan
portfolio. Charge-offs were $5 million, $11 million, and $16 million in 2014, 2013, and 2012, 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 – 6. Loans to Banking Clients
and Related Allowance for Loan Losses.”
Net Impairment Losses on Securities
Net impairment losses on securities were $1 million, $10 million, and $32 million in 2014, 2013, and 2012, respectively.
These charges were lower in 2014 compared to 2013, reflecting a stabilization of the credit characteristics of certain non-
agency residential mortgage-backed securities’ underlying loans. For further discussion, see “Item 8 – Financial Statements
- 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)
and Supplementary Data – Notes to Consolidated Financial Statements – 5. Securities Available for Sale and Securities Held
to Maturity.”
Expenses Excluding Interest
As shown in the table below, expenses excluding interest were higher in 2014 compared to 2013 primarily due to increases in
compensation and benefits and professional services expense. Expenses excluding interest were higher in 2013 compared to
2012 primarily due to increases in compensation and benefits, professional services, advertising and market development,
and other expense.
Year Ended December 31,
Compensation and benefits
Professional services
Occupancy and equipment
Advertising and market development
Communications
Depreciation and amortization
Other
Total expenses excluding interest
Expenses as a percentage of total net revenues:
Compensation and benefits
Advertising and market development
Compensation and Benefits
Growth Rate
2013-2014
8 %
10 %
5 %
(5)%
1 %
(1)%
4 %
6 %
$
$
2014
2013
2,184 $
457
324
245
223
199
311
3,943 $
2,027 $
415
309
257
220
202
300
3,730 $
2012
1,803
388
311
241
220
196
274
3,433
36 %
4 %
37 %
5 %
37 %
5 %
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 and restricted
stock.
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
Full-time equivalent employees (in thousands) (1)
At year end
Average
Growth Rate
2013-2014
12 %
1 %
5 %
8 %
$
$
2014
2013
1,245 $
605
334
2,184 $
1,110 $
599
318
2,027 $
2012
1,043
466
294
1,803
6 %
2 %
14.6
14.2
13.8
13.9
13.8
13.8
(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 2014 from 2013 primarily due to a $68 million charge in 2014 for estimated future severance
benefits resulting from changes in the Company’s geographic footprint and due to annual salary increases. Incentive
compensation was relatively flat in 2014 from 2013 primarily due to an increase in discretionary bonus costs, offset by higher
2013 expense related to a new payout schedule for field incentive plans.
- 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)
Salaries and wages increased in 2013 from 2012 primarily due to annual salary increases. Incentive compensation increased
in 2013 from 2012 primarily due to the transition to a new payout schedule for field incentive plans, increased individual
sales performance compensation as a result of higher field sales volume, and increased funding for the corporate bonus plan
commensurate with achieving higher earnings per common share. Employee benefits and other expense increased in 2013
from 2012 primarily due to payroll taxes related to the increase in incentive compensation, and increased contributions to
new employee HSAs. The Company was converting to HSA-based healthcare and employee enrollment in these plans rose
significantly in 2013.
Expenses Excluding Compensation and Benefits
Professional services expense increased in 2014 from 2013 primarily due to higher spending on technology services and an
increase in fees paid to outsourced service providers and consultants. Professional services expense increased in 2013 from
2012 primarily due to an increase in fees paid to outsourced service providers and consultants and higher spending on
printing and fulfillment services.
Occupancy and equipment expense increased in 2014 from 2013 primarily due to an increase in software maintenance
expense relating to the Company’s information technology systems. Occupancy and equipment expense was relatively flat in
2013 compared to 2012.
Advertising and market development expense decreased in 2014 from 2013 primarily due to production costs incurred in
2013 relating to the development of the Company’s advertising and branding initiative, Own your tomorrowTM, partially
offset by higher 2014 spending on customer promotions. Advertising and market development expense increased in 2013
from 2012 primarily due to higher spending on media relating to the launch of the Company’s new advertising and branding
initiative, Own your tomorrowTM.
Other expense increased in 2014 from 2013 primarily due to an increase in travel costs as a result of increased employee
headcount and travel. Other expense increased in 2013 from 2012 primarily due to an increase in regulatory assessments.
Taxes on Income
The Company’s effective income tax rate on income before taxes was 37.5% in 2014, 37.2% in 2013, and 36.0% in 2012.
The increase in 2014 from 2013 was primarily due to the impact of a non-recurring state tax benefit of $4 million from 2013.
The increase in 2013 from 2012 was primarily due to the impact of a non-recurring state tax benefit of $20 million in 2012,
partially offset by the recognition of the additional state tax benefit of $4 million in 2013.
Segment Information
The Company provides financial services to individuals and institutional clients through two segments – Investor Services
and Advisor Services. The Investor Services segment provides retail brokerage and banking services to individual investors,
retirement plan services, and corporate brokerage services. The Advisor Services segment provides custodial, trading, and
support services to independent investment advisors, and retirement business services to independent retirement plan advisors
and recordkeepers whose plan assets are held at Schwab Bank. 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 other charges. Segment assets and
liabilities are not used for evaluating segment performance or in deciding how to allocate resources to segments.
- 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)
Financial information for the Company’s reportable segments is presented in the following tables:
Year Ended December 31,
Growth Rate
2013-2014
2014
2013
2012
Growth Rate
2013-2014
2014
2013
2012
Investor Services
Advisor Services
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
9 % $ 1,775 $ 1,627 $ 1,436
1,559
16 %
612
-
123
24 %
(15)
N/M
2,030
618
221
4
1,756
621
178
1
10 % $
8 %
(1)%
25 %
-
758 $
242
289
71
-
689 $
224
292
57
-
607
205
255
62
(1)
(89) %
11 %
(1)
4,647
(9)
4,174
(29)
3,686
(100)%
8 %
-
1,360
(1)
1,261
(3)
1,125
3 %
2,974
2,899
2,693
8 %
901
831
739
31 % $ 1,673 $ 1,275 $
993
7 % $
459 $
430 $
386
Year Ended December 31,
Growth Rate
2013-2014
2014
2013
2012
Growth Rate
2013-2014
2014
2013
2012
Unallocated
Total
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
N/M Not meaningful.
N/M $
N/M
N/M
N/M
N/M
- $
-
-
51
-
(1) $
-
-
1
-
N/M
N/M
-
51
N/M
68
-
-
-
-
-
1
71
-
-
72
9 % $ 2,533 $ 2,315 $ 2,043
1,764
15 %
868
(1)%
256
45 %
(16)
N/M
2,272
907
343
4
1,980
913
236
1
(90)%
11 %
(1)
6,058
(10)
5,435
(32)
4,883
1
6 %
3,943
3,730
3,433
N/M $
(17) $
- $
71
24 % $ 2,115 $ 1,705 $ 1,450
Investor Services
Net revenues increased by $473 million, or 11%, in 2014 from 2013 primarily due to increases in net interest revenue, asset
management and administration fees, and other revenue – net. Net interest revenue increased primarily due to higher balances
of interest-earning assets, including margin loans and the Company’s investment portfolio, and the effect higher average
interest rates on securities held to maturity had on the Company’s average net interest margin. Asset management and
administration fees increased due to fees from mutual fund services, advice solutions, and other asset management and
administration services. Mutual fund service fees increased due to growth in client assets invested in the Company’s Mutual
Fund OneSource funds and equity and bond funds, partially offset by a decrease in net money market mutual fund fees as a
result of continued low yields on fund assets. Advice solution fees increased due to growth in client assets enrolled in advisory
offers. Other asset management and administration fees increased primarily due to third-party mutual fund service fees on
higher client asset balances invested in other third-party mutual funds. Other revenue – net increased primarily due to
litigation proceeds related to the Company’s non-agency residential mortgage-backed securities portfolio and increases in
- 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)
order flow revenue. Expenses excluding interest increased by $75 million, or 3%, in 2014 from 2013 primarily due to
increases in compensation and benefits and professional services expense, partially offset by a decrease in advertising and
market development expense.
Net revenues increased by $488 million, or 13%, in 2013 from 2012 primarily due to increases in net interest revenue, asset
management and administration fees, and other revenue. Net interest revenue increased primarily due to higher balances of
interest-earning assets, partially offset by the effect lower average short-term interest rates had on the Company’s average net
interest margin. Asset management and administration fees increased primarily due to increases in advice solutions fees and
mutual fund service fees. Advice solutions fees increased due to growth in client assets enrolled in advisory offers, including
Windhaven and Schwab Private Client. Mutual fund service fees increased due to market appreciation and growth in client
assets invested in the Company’s Mutual Fund OneSource funds, and equity and bond funds, partially offset by a decrease in
net money market mutual fund fees as a result of lower yields on fund assets. Other revenue – net increased primarily due to
an increase in order flow revenue that Schwab began receiving in November 2012. Expenses excluding interest increased by
$206 million, or 8%, in 2013 from 2012 primarily due to increases in compensation and benefits, professional services,
advertising and market development, and other expenses.
Advisor Services
Net revenues increased by $99 million, or 8%, in 2014 from 2013 primarily due to an increase in asset management and
administration fees, net interest revenue, and other revenue – net. Asset management and administration fees increased due to
fees from mutual fund services, advice solutions, and other asset management and administration services. Mutual fund
service fees increased due to growth in client assets invested in the Company’s Mutual Fund OneSource funds and equity and
bond funds, partially offset by a decrease in net money market mutual fund fees as a result of continued low yields on fund
assets. Advice solutions fees increased due to growth in client assets enrolled in advisory offers. Other asset management and
administration fees increased primarily due to third-party mutual fund service fees on higher client asset balances invested in
other third-party mutual funds. Net interest revenue increased primarily due to higher balances of interest-earning assets,
including margin loans and the Company’s investment portfolio, and the effect higher average interest rates on securities held
to maturity had on the Company’s average net interest margin. Other revenue – net increased primarily due to increases in
order flow revenue. Expenses excluding interest increased by $70 million, or 8%, in 2014 from 2013 primarily due to
increases in compensation and benefits and professional services expense.
Net revenues increased by $136 million, or 12%, in 2013 from 2012 primarily due to increases in asset management and
administration fees, trading revenue, and net interest revenue. Asset management and administration fees increased primarily
due to increases in mutual fund service fees and advice solutions fees. Mutual fund service fees increased due to market
appreciation and growth in client assets invested in the Company’s Mutual Fund OneSource funds, and equity and bond
funds. Advice solutions fees increased due to growth in client assets enrolled in advisory offers. Trading revenue increased
primarily due to higher daily average revenue trades and two additional trading days in 2013. Net interest revenue increased
primarily due to higher balances of interest-earning assets, partially offset by the effect lower average short-term interest rates
had on the Company’s average net interest margin. Expenses excluding interest increased by $92 million, or 12%, in 2013
from 2012 primarily due to increases in compensation and benefits, professional services, advertising and market development
expenses, and other expenses.
Unallocated
Other revenue – net in 2014 includes a net insurance settlement of $45 million.
Other revenue – net in 2012 includes a non-recurring gain of $70 million relating to a confidential resolution of a vendor
dispute.
Expenses excluding interest increased in 2014 from 2013 as a result of a charge of $68 million in the third quarter of 2014 for
estimated future severance benefits resulting from changes in the Company’s geographic footprint.
- 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)
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.
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.
On July 25, 2013, CSC issued $275 million of Senior Notes that mature in 2018 under its Shelf Registration Statement. The
Senior Notes have a fixed interest rate of 2.20% with interest payable semi-annually.
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 for CSC, as currently defined by the Federal Reserve, of at least 6%. At December 31, 2014, CSC’s Tier 1
Leverage Ratio was 6.9%, Tier 1 Capital Ratio was 18.0%, and Total Capital Ratio was 18.1%. Prior to January 1, 2015,
CSC, as a savings and loan holding company, was not subject to specific statutory capital requirements. Beginning on
January 1, 2015, CSC is subject to new capital requirements set by the Federal Reserve.
The following are details of CSC’s long-term debt:
December 31, 2014
Senior Notes
Medium-Term Notes
Par
Outstanding
$ 1,581
250
$
Maturity
2015 – 2022
2017
Interest Rate
0.850% to 4.45% fixed
6.375% fixed
Moody’s
A2
A2
Standard
& Poor’s
A
A
Fitch
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. There were no borrowings of Commercial Paper Notes outstanding at December 31,
2014. CSC’s ratings for these short-term borrowings are P1 by Moody’s, A1 by Standard & Poor’s, and F1 by Fitch.
- 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)
CSC maintains an $800 million committed, unsecured credit facility with a group of 12 banks, which is scheduled to expire
in June 2015. This facility replaced a similar facility that expired in June 2014 and both facilities were unused during 2014.
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, excluding accumulated other comprehensive income. At December 31,
2014, the minimum level of stockholders’ equity required under this facility was $7.8 billion (CSC’s stockholders’ equity,
excluding accumulated other comprehensive income, at December 31, 2014, was $11.6 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 certain of the 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 2014.
In addition, Schwab provided CSC with a $1.0 billion credit facility, which was scheduled to expire in December 2014.
Schwab terminated this credit facility in July 2014.
Schwab
Schwab’s liquidity needs relating to client trading and margin borrowing activities are met primarily through cash balances in
brokerage client accounts, which were $32.0 billion and $33.2 billion at December 31, 2014 and 2013, 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 of Rule 15c3-1 under the Securities Exchange Act of 1934 (the Uniform Net
Capital Rule) 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, 2014, Schwab’s net
capital was $1.6 billion (10% of aggregate debit balances), which was $1.2 billion in excess of its minimum required net
capital and $739 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 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 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 $83 million at December 31, 2014, is being reduced by a portion of the lease payments over the remaining
lease term of ten years.
To manage short-term liquidity, Schwab maintains uncommitted, unsecured bank credit lines with a group of banks. 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 2014, with average daily amounts borrowed of $25 million.
There were no borrowings outstanding under these lines at December 31, 2014.
- 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)
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 $225 million at December 31, 2014. There were no funds drawn under any of these LOCs during 2014. In
connection with its securities lending activities, Schwab is required to provide collateral to certain brokerage clients. Schwab
satisfies the collateral requirements by providing cash as collateral.
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 2016. The amount outstanding under this facility at December 31, 2014, 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. In December 2014, CSC and Schwab agreed to extend
the expiration date of this facility from December 2014 to December 2017. Borrowings under this facility do not qualify as
regulatory capital for Schwab. There were no funds drawn under this facility at December 31, 2014.
Schwab Bank
Schwab Bank’s liquidity needs are met through deposits from banking clients and equity capital.
Deposits from banking clients at December 31, 2014 were $102.8 billion, which includes the excess cash held in certain
Schwab and optionsXpress, Inc. brokerage accounts that is swept into deposit accounts at Schwab Bank. At December 31,
2014, these balances totaled $82.1 billion.
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.
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. The Company currently utilizes a target Tier 1 Leverage
Ratio for Schwab Bank of at least 6.25%. Beginning on January 1, 2015, Schwab Bank is subject to new capital requirements
set by the OCC. Based on its regulatory capital ratios at December 31, 2014, Schwab Bank is considered well capitalized.
Schwab Bank’s regulatory capital and ratios are as follows:
December 31, 2014
Tier 1 Risk-Based Capital
Total Risk-Based Capital
Tier 1 Leverage
Tangible Equity
N/A Not applicable.
Actual
Amount
7,700
7,744
7,700
7,700
$
$
$
$
Ratio
22.1 %
22.2 %
6.9 %
6.9 %
$
$
$
Minimum to be
Well Capitalized
Ratio
6.0 %
10.0 %
5.0 %
Amount
2,095
3,492
5,548
N/A
Minimum Capital
Requirement
Amount
1,397
2,793
4,438
2,219
$
$
$
$
Ratio
4.0 %
8.0 %
4.0 %
2.0 %
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 to the FRB. Schwab Bank maintains policies
and procedures necessary to access this funding and tests discount window borrowing procedures annually. At December 31,
2014, $2.3 billion was available under this arrangement. There were no funds drawn under this arrangement during 2014.
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.
- 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)
Schwab Bank maintains policies and procedures necessary to access this funding and tests borrowing procedures annually. At
December 31, 2014, $9.0 billion was available under this facility. There were no funds drawn under this facility during 2014.
optionsXpress, Inc.
optionsXpress, Inc.’s liquidity needs relating to client trading and margin borrowing activities are met primarily through cash
balances in brokerage client accounts, which were $942 million at December 31, 2014. Management believes that brokerage
client cash balances and operating earnings will continue to be the primary sources of liquidity for optionsXpress, Inc.
optionsXpress, Inc., is subject to regulatory requirements of the Uniform Net Capital Rule 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, 2014, optionsXpress Inc.’s net capital was $123 million (38% of aggregate debit balances), which was
$117 million in excess of its minimum required net capital and $107 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
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). At
December 31, 2014, optionsXpress, Inc. met the requirements of 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.
To partially satisfy the margin requirement of client option transactions with the Options Clearing Corporation,
optionsXpress, Inc. has an unsecured standby LOC with one bank in favor of the Options Clearing Corporation in the amount
of $15 million at December 31, 2014. There were no funds drawn under this LOC during 2014.
CSC provides optionsXpress, Inc. with a $200 million credit facility. In December 2014, CSC and optionsXpress, Inc. agreed
to extend the expiration date of this facility from December 2014 to December 2016. Borrowings under this facility do not
qualify as regulatory capital for optionsXpress, Inc. There were no borrowings outstanding under this facility at
December 31, 2014.
optionsXpress has a term loan with CSC, of which $12 million was outstanding at December 31, 2014, and it matures in
December 2017.
Capital Resources
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.
- 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)
The Company monitors both the relative composition and absolute level of its capital structure. Management is focused on
optimizing 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, 2014 was
$13.7 billion, up $1.4 billion, or 12%, from December 31, 2013.
Long-term Debt
At December 31, 2014, the Company had long-term debt of $1.9 billion, or 14% of total financial capital, that bears interest
at a weighted-average rate of 3.60%. At December 31, 2013, the Company had long-term debt of $1.9 billion, or 15% of total
financial capital. On July 25, 2013, CSC issued $275 million of Senior Notes that mature in 2018 under its Shelf Registration
Statement. The Senior Notes have a fixed interest rate of 2.20% with interest payable semi-annually. The Company repaid
$6 million of other long-term debt in 2014. 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 – 13. Borrowings.”
Capital Expenditures
The Company’s capital expenditures were $405 million (7% of net revenues) and $270 million (5% of net revenues) in 2014
and 2013, respectively. Capital expenditures in 2014 were primarily for buildings and land relating to changes in the
Company’s geographic footprint, developing internal-use software, and software and equipment relating to the Company’s
information technology systems. Capital expenditures in 2013 were primarily for buildings and land, capitalized costs for
developing internal-use software, and software and equipment relating to the Company’s information technology systems.
Capitalized costs for developing internal-use software were $81 million and $74 million in 2014 and 2013, respectively.
Management currently anticipates that 2015 capital expenditures will be approximately 15% lower than 2014 primarily due
to decreased spending on buildings and furniture and equipment. A majority of this decrease is due to the construction of the
Company’s new office campus in Denver, Colorado in 2014. 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.
Dividends
CSC paid common stock cash dividends of $316 million ($0.24 per share) and $311 million ($0.24 per share) in 2014 and
2013, respectively. Since the initial dividend in 1989, CSC has paid 103 consecutive quarterly dividends and has increased
the quarterly dividend rate 19 times, resulting in a 21% 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 common stock cash dividend
at approximately 20% to 30% of net income.
CSC paid Series A Preferred Stock cash dividends of $28 million ($70.00 per share) in 2014 and 2013, respectively. CSC
paid Series B Preferred Stock cash dividends of $29 million ($60.00 per share) in 2014 and 2013, respectively.
Share Repurchases
There were no repurchases of CSC’s common stock in 2014 or 2013. As of December 31, 2014, CSC had remaining
authority from the Board of Directors to repurchase up to $596 million of its common stock, which is not subject to
expiration.
Business Acquisition
On December 14, 2012, the Company acquired ThomasPartners, Inc., a growth and dividend income-focused asset
management firm, for $85 million in cash.
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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 this acquisition, see “Item 8 – Financial Statements and Supplementary Data – Notes to
Consolidated Financial Statements – 24. Business Acquisition.”
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 – 14. Commitments and Contingencies and 15. Financial Instruments Subject to Off-Balance Sheet Credit Risk or
Concentration Risk.”
Contractual Obligations
The Company’s principal contractual obligations as of December 31, 2014, 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).
Credit-related financial instruments (1)
Long-term debt (2)
Leases (3)
Purchase obligations (4)
Total
Less than
1 Year
1-3
Years
3-5
Years
More than
5 Years
Total
$
$
868 $
414
95
165
1,542 $
915 $
373
162
210
1,660 $
3,119 $
360
107
37
3,623 $
2,063 $
1,013
162
230
6,965
2,160
526
642
3,468 $ 10,293
(1) Represents Schwab Bank’s commitments to extend credit to banking clients and purchase mortgage loans.
(2)
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.
(3) 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.
(4) 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
The Company’s business activities expose it to a variety of risks, including operational, credit, market, liquidity, compliance
and legal risk. The Company has a comprehensive risk management program to identify and manage these risks and their
associated potential for financial and reputational impact. 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 these risks.
The Company’s risk management process is comprised of risk identification and assessment, risk measurement, risk
monitoring and reporting and risk mitigation. The activities and organizations that comprise the risk management process are
described below.
Risk Culture
The Company’s Board of Directors sets the tone for effective risk management and has approved an Enterprise Risk
Management (ERM) Framework commensurate with the size, risk profile, complexity, and continuing growth of the
- 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)
Company. The ERM Framework and governance structure constitute a comprehensive approach to managing risks
encountered by the Company in its business activities. Risk appetite, which is defined as the amount of risk the Company is
willing to accept in pursuit of its corporate strategy, is set by executive management and approved by the Board of Directors.
The Company has established risk metrics and reporting that enable the measurement of the impact of strategy execution
against risk appetite. The risk metrics, with risk limits and tolerance levels, are established for key risk categories by the
Global Risk Committee and its functional risk sub-committees.
Risk Governance
Senior management takes an active role in the risk management process and has developed policies and procedures under
which specific business and control units are responsible for identifying, measuring and controlling risks.
The Global Risk Committee, which is comprised of senior executives from each major business and control function, is
responsible for the oversight of risk management. This includes identifying emerging risks, assessing risk management
practices and the control environment, reinforcing business accountability for risk management, supervisory controls and
regulatory compliance, supporting resource prioritization across the Company, and escalating significant issues to the Board
of Directors.
The Global Risk Committee reports regularly to the Risk Committee of the Board of Directors. The Risk Committee assists
the Board of Directors in fulfilling its oversight responsibilities with respect to the Company’s risk management program,
including approving risk appetite statements and reviewing reports relating to risk issues from functional areas of risk
management, legal, compliance, and internal audit.
Functional risk sub-committees focusing on specific areas of risk report into the Global Risk Committee. These sub-
committees include the:
• Asset-Liability Management and Pricing Committee, which establishes strategies and policies for the management
of corporate capital, liquidity, interest rate risk, and investments;
• Credit and Market Risk Oversight Committee, which provides oversight of and approves credit and market risk
policies, limits, and exposures in loan, investment, and positioning portfolios;
• New Products and Services Risk Oversight Committee, which provides oversight of, and approves corporate policy
and procedures relating to the risk governance of new products and services; and the
• 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 sub-
committees:
o Client Fiduciary Risk Sub-Committee, which provides oversight of fiduciary risk throughout the Company;
o
Information Security and Privacy Sub-Committee, which provides oversight of the information security and
privacy programs and policies;
o Model Governance Sub-Committee, which provides oversight of model risk throughout the Company; and
the
o Vendor Management Sub-Committee, which provides oversight of the Company’s vendor management and
outsourcing program and policies.
Senior management has also created an Incentive Compensation Risk Oversight Committee, which establishes policy and
provides oversight of incentive compensation risk. The committee reviews and approves the Annual Risk Assessment of
incentive compensation plans, and reports directly to the Board Compensation Committee.
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.
In addition, 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
- 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)
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.
Operational Risk
Operational risks arise due to potentially inadequate or failed internal processes, people, and systems or from external events
and relationships impacting the Company and/or any of its key business partners and vendors. Operational risk includes
model and fiduciary risk, and each is 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, cyber 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 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.
- 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)
Model Risk
Model risk is the potential for adverse consequences from decisions based on incorrect or misused model outputs and reports.
Models are owned by several business units throughout the Company, and are used for a variety of purposes. Model use
includes, but is not limited to, calculating capital requirements for hypothetical stressful environments, estimating interest and
credit risk for loans and other balance sheet assets, and providing guidance in the management of client portfolios. The
Company has established a policy to describe the roles and responsibilities of all key stakeholders in model development,
management, and use. All models at the Company are registered in a centralized database and classified into different risk
ratings depending on their potential financial, reputational, or regulatory impact to the Company. The model risk rating
informs the scope of all model governance activities.
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.
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 and client option and futures 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,
option, and futures requirements for certain securities. Collateral arrangements relating to margin loans, option positions,
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.
The Company’s mortgage loan portfolios primarily include First Mortgages of $8.1 billion and HELOCs of $3.0 billion at
December 31, 2014.
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. In January 2014, the Company revised its First Mortgage underwriting
criteria in conformance with the CFPB’s new guidance on Qualified Mortgage lending and a borrower’s ability to repay.
Revisions were made to requirements affecting debt to income ratio, loan to value ratio, and liquid asset holdings. These
revised underwriting criteria are not expected to have a material impact on the credit quality of the Company’s First
Mortgage or HELOC portfolios. The Company does not purchase loans that allow for negative amortization and does not
purchase subprime loans (generally defined as extensions of credit to borrowers with a FICO score of less than 620 at
origination), unless the borrower has compensating credit factors. At December 31, 2014, approximately 1% of both the First
Mortgage and HELOC portfolios consisted of loans to borrowers with updated FICO scores of less than 620.
- 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)
At December 31, 2014, the weighted-average originated LTV ratio was 59% for both the First Mortgage and HELOC
portfolios. 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, 2014, 21% of HELOCs ($635 million of the HELOC portfolio)
were in a first lien position. The weighted-average originated FICO score was 770 and 769 for the First Mortgage and
HELOC portfolios, respectively.
The Company monitors the estimated current LTV ratios of its First Mortgage and HELOC portfolios on an ongoing basis.
At December 31, 2014, the weighted-average estimated current LTV ratios were 50% and 55% 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, 2014, the weighted-
average updated FICO scores were 773 and 769 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
December 31, 2014, $2.3 billion, or 79%, 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. Additionally, at December 31, 2014, approximately 30%
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 – 6. 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 (1)
Nonaccrual loans
Allowance for loan losses
(1) Loan delinquencies include loans that are 30 days or more past due and other nonaccrual loans.
2014
0.27 %
0.26 %
0.31 %
2013
0.48 %
0.39 %
0.39 %
The Company has exposure to credit risk associated with its securities available for sale and securities held to maturity
portfolios, whose fair values totaled $54.8 billion and $34.7 billion at December 31, 2014, respectively. These portfolios
include U.S. agency and non-agency mortgage-backed securities, asset-backed securities, corporate debt securities, U.S.
agency notes, certificates of deposit, and treasury 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.
At December 31, 2014, with the exception of certain non-agency residential mortgage-backed securities, all securities in the
available for sale and held to maturity portfolios 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). In the fourth quarter of 2014, the Company
sold $504 million of its non-agency residential mortgage-backed securities, resulting in a net realized loss of $8 million. The
Company marked the remaining $15 million of these securities to market and recorded a $0.6 million other-than-temporary
impairment charge in the fourth quarter. The decision was made to sell the securities in the fourth quarter as market
valuations on these non-agency residential mortgage-backed securities became more consistent with actual performance. In
addition, the Company has reached an initial settlement in legal claims it is pursuing to recover losses relating to certain of
these securities.
- 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)
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.
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 within a particular industry.
The fair value of the Company’s investments in mortgage-backed securities totaled $53.8 billion at December 31, 2014. Of
these, $52.5 billion were issued by U.S. agencies and $1.3 billion were issued by private entities (non-agency securities).
These U.S. agency and non-agency securities are included in securities available for sale and securities held to maturity.
The fair value of the Company’s investments in asset-backed securities totaled $19.4 billion at December 31, 2014. Of these,
$11.7 billion were securities backed by student loans, the majority of which are guaranteed by the U.S. federal government.
These asset-backed securities are included in securities available for sale.
The fair value of the Company’s investments in corporate debt securities and commercial paper totaled $8.1 billion at
December 31, 2014, with the majority issued by institutions in the financial services industry. These securities are included in
securities available for sale, cash and cash equivalents, and other securities owned in the Company’s consolidated balance
sheets. Issuer, geographic, and sector concentrations are controlled by established credit policy limits to each concentration
type.
The Company’s loans to banking clients include $7.4 billion of adjustable rate First Mortgage loans at December 31, 2014.
The Company’s adjustable rate mortgages have initial fixed interest rates for three to ten years and interest rates that adjust
annually thereafter. Approximately 40% 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.
The Company’s HELOC product has a 30-year loan term with an initial draw period of ten 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.
HELOCs that convert to an amortizing loan may experience higher delinquencies and higher loss rates than those in the
initial draw period. The Company’s allowance for loan loss methodology takes this increased inherent risk into consideration.
The following table presents when current outstanding HELOCs will convert to amortizing loans:
December 31, 2014
Converted to amortizing loan by period end
Within 1 year
> 1 year – 3 years
> 3 years – 5 years
> 5 years
Total
Balance
307
274
356
1,139
879
2,955
$
$
The Company also has exposure to concentration risk from its margin and securities lending and client option and futures
activities collateralized by or referencing securities of a single issuer, an index, or within a single 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
$10.4 billion at December 31, 2014.
- 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)
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, 2014.
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.
Fair Value as of December 31, 2014
Cash equivalents
Securities available for sale
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
France
200
86
286
285
200
-
-
-
86
286
$
$
$
$
$
$
Netherlands
-
35
35
35
$
$
$
$
-
-
-
-
35
35
Norway
-
75
75
75
-
-
-
-
75
75
$
$
$
$
$
$
$
$
$
$
Sweden
-
521
521
520
$
Switzerland
-
509
509
509
$
$
-
-
-
371
150
521
$
$
-
184
275
50
-
509
United
Kingdom
-
500
500
500
-
-
150
200
150
500
$
$
$
$
$
Total
200
1,726
1,926
1,924
200
184
425
621
496
1,926
$
$
$
$
$
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, 2014, the Company had $224 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 financial issuers and counterparties the Company has exposure to through its
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) establishing and monitoring aggregate credit limits by geography and
sector.
Market Risk
Market risk is the potential for changes in earnings or the value of financial instruments held by the Company as a result of
fluctuations in interest rates, equity prices or market conditions. Included in market risk is interest rate risk, which is the risk
- 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)
to earnings or capital arising from movement of interest rates. For discussion of the Company’s market risk, see “Item 7A –
Quantitative and Qualitative Disclosures About Market Risk.”
Liquidity Risk
Liquidity risk arises from the inability to meet obligations when they come due without incurring unacceptable losses. It is
the risk that valuations will be negatively affected by changes in demand and the underlying market for a financial
instrument. Limits and contingency funding scenarios have been established for the Company to support liquidity levels and
quality during both expected and stressed scenarios. The Company seeks to maintain client confidence in its balance sheet
and the safety of client assets by maintaining liquidity and diversity of funding sources to allow the firm to meet its
obligations under both expected and stressed scenarios. See “Liquidity and Capital Resources” for additional detail on the
Company’s liquidity requirements.
Compliance Risk
The Company faces significant compliance risk in its business, that is, the risk of legal or regulatory sanctions, fines or
penalties, financial loss, or damage to reputation resulting from the failure to comply with laws, regulations, rules, or other
regulatory requirements. Among other things, compliance 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. The Company and its affiliates are subject to extensive regulation by federal,
state and foreign regulatory authorities, including SROs. Such regulation is becoming increasingly extensive and complex,
and regulatory proceedings and sanctions against financial services firms continue to increase.
The Company attempts to manage compliance risk through policies, procedures and controls reasonably designed to achieve
and/or monitor compliance with 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, client funds and
securities, books and records, anti-money laundering, client privacy, and employment policies. 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.
Legal Risk
Legal risk is a consequence of operational failure – the risk of a claim for damages brought by clients, employees or other
third parties, alleging error that amounts to a breach of legal requirements or other duties under law. The financial services
industry is subject to substantial litigation risk, and the firm incurs legal claims in the ordinary course of business. Increased
litigation costs or substantial legal liability relating to an extraordinary claim or incidence of claims could have a material
adverse effect on the Company’s business and financial condition. For information about the Company’s legal risk, see “Item
1A – Risk Factors,” and “Item 8 – Financial Statements and Supplementary Data – Notes to Consolidated Financial
Statements – 14. Commitments and Contingencies.”
Capital Planning
The capital plan considers significant risks to meeting the Company’s capital goals over time and through evolving
economic, financial, and business environments. Internal guidelines are set, for both the Company and regulated subsidiaries,
to ensure continued regulatory compliance as well as to meet expectations of investors and rating agencies.
The capital plan also considers the potential effects of a sudden and sustained systemic economic downturn, idiosyncratic
events which are uniquely impactful to the Company, and sensitivity analyses applied to significant assumptions that are
either quantitative or qualitative in nature. The comprehensive Capital Contingency Plan was developed by the Company to
address the action plans for certain capital events with low probability, but high severity, that the Company might face. The
Capital Contingency Plan is issued under the authority of the Asset-Liability Management and Pricing Committee and
provides guidelines for sustained capital events. It does not specifically address every contingency, but is designed to provide
a framework for responding to any capital stress.
- 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)
Capital forecasts are reviewed monthly at Capital Planning and Asset-Liability Management and Pricing Committee meetings
and semi-annually at the Company’s Board of Directors meetings. Exceptions to internal guidelines are also reviewed at
quarterly Global Risk Committee meetings.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company uses the market and income approaches to determine the fair value of certain financial assets and liabilities
recorded at fair value, and to determine fair value disclosures. See “Item 8 – Financial Statements and Supplementary Data –
Notes to Consolidated Financial Statements – 2. Summary of Significant Accounting Policies and 16. 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, 2014 and 2013, 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 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 before 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, the
impairment recognized in earnings represents estimated credit loss, and is measured by the difference between the present
value of expected cash flows and the amortized cost of the security. Management utilizes cash flow models to estimate the
expected future cash flow from the securities and to estimate the credit loss. Expected cash flows are discounted using the
security’s effective interest rate.
- 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 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 1st. In testing for a potential impairment of goodwill on
April 1, 2014, management performed an assessment of each of the Company’s reporting units (generally defined as the
Company’s businesses for which financial information is available and reviewed regularly by management) and concluded
that goodwill was not impaired.
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 related to the First Mortgage and HELOC portfolio 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, 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, and geographical distribution of collateral.
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 and the current state of delinquencies unique to the Company’s First Mortgage and
- 46 -
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)
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 allowance for personal loans secured by securities is established on a loan by loan basis. The market value of collateral
pledged by borrowers is regularly reviewed to ensure the Company’s commitment to extend credit is over-collateralized. If
collateral is in danger of falling below specified levels, the Company may reduce a borrower’s committed line or may
liquidate collateral. At December 31, 2014 and 2013, the allowance for loan losses related to personal loans secured by
securities was immaterial.
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.
- 47 -
THE CHARLES SCHWAB CORPORATION
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Market risk is the potential for changes in earnings or the value of financial instruments held by the Company as a result of
fluctuations in interest rates, equity prices or market conditions.
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. The majority of the Company’s interest-
earning assets and interest-bearing liabilities are sensitive to changes in short-term interest rates. To a lesser degree, the
Company is sensitive to changes in long-term interest rates through some of its investment portfolios. To manage the
Company’s market risk related to interest rates, management utilizes simulation models, which include the net interest
revenue sensitivity analysis described below.
Net interest revenue is affected by various factors, such as the distribution and composition of interest-earning assets and
interest-bearing liabilities, the spread between yields earned on interest-earning assets and rates paid on interest-bearing
liabilities, which may reprice at different times or by different amounts, and the spread between short and long-term interest
rates. Interest-earning assets include residential real estate loans and mortgage-backed securities. These assets are sensitive to
changes in interest rates and to changes to prepayment levels that tend to increase in a declining rate environment and
decrease in a rising rate environment. Because the Company establishes the rates paid on certain brokerage client cash
balances and deposits from banking clients and the rates charged on margin loans and loans to banking clients, 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.
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.
The Company is also subject to market risk as a result of fluctuations in option and equity prices. The Company’s direct
holdings of option and equity securities and its associated exposure to option and equity prices are not material. The
Company is indirectly exposed to option, futures, and equity market fluctuations in connection with client option and futures
accounts, 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. Current 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.
For discussion of the impact of current market conditions on asset management and administration fees and net interest
revenue, 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
For the Company’s net interest revenue sensitivity analysis, the Company uses net interest revenue simulation modeling
techniques to evaluate and manage the effect of changing interest rates. The simulation includes all interest-sensitive assets
and liabilities. Key variables in the simulation include the repricing of financial instruments, prepayment, reinvestment, and
- 48 -
THE CHARLES SCHWAB CORPORATION
product pricing assumptions. The Company uses constant balances and market rates in the simulation 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 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.
If the Company’s guidelines for its net interest revenue sensitivity are breached, management must report the breach to the
Company’s Corporate Asset-Liability Management and Pricing Committee (Corporate ALCO) and establish a plan to address
the interest rate risk. This plan could include, but is not limited to, rebalancing certain investment portfolios or using
derivative instruments to mitigate the interest rate risk. Depending on the severity and expected duration of the breach, as
well as the then current interest rate environment, the plan could also be to take no action. Any plan that recommends taking
action is required to be approved by the Company’s Corporate ALCO. There were no breaches of the Company’s net interest
revenue sensitivity guidelines during the years ended December 31, 2014 or 2013.
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.
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, 2014 and 2013.
December 31,
Increase of 100 basis points
Decrease of 100 basis points
2014
11.8 %
(4.9) %
2013
11.0 %
(4.5)%
The sensitivities shown in the simulation reflect the fact that short-term interest rates in 2014 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. A decline in
interest rates could 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.
- 49 -
THE CHARLES SCHWAB CORPORATION
Item 8.
Financial Statements and Supplementary Data
TABLE OF CONTENTS
Introduction and Basis of Presentation
Summary of Significant Accounting Policies
Receivables from Brokerage Clients
Other Securities Owned
Securities Available for Sale and Securities Held to Maturity
Loans to Banking Clients and Related Allowance for Loan Losses
Equipment, Office Facilities, and Property
Intangible Assets and Goodwill
Other Assets
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.
Note 2.
Note 3.
Note 4.
Note 5.
Note 6.
Note 7.
Note 8.
Note 9.
Note 10. Deposits from Banking Clients
Note 11.
Note 12.
Note 13. Borrowings
Note 14. Commitments and Contingencies
Note 15.
Note 16.
Note 17.
Note 18. Accumulated Other Comprehensive Income
Note 19. Employee Incentive, Retirement, and Deferred Compensation Plans
Note 20. Taxes on Income
Note 21. Earnings Per Common Share
Note 22. Regulatory Requirements
Note 23.
Segment Information
Note 24. Business Acquisition
Note 25.
Note 26. The Charles Schwab Corporation – Parent Company Only Financial Statements
Note 27. Quarterly Financial Information (Unaudited)
Report of Independent Registered Public Accounting Firm
Management’s Report on Internal Control Over Financial Reporting
Payables to Brokers, Dealers, and Clearing Organizations
Payables to Brokerage Clients
Subsequent Events
Financial Instruments Subject to Off-Balance Sheet Credit Risk or Concentration Risk
Fair Values of Assets and Liabilities
Stockholders’ Equity
51
52
53
54
55
56
56
56
62
63
63
66
70
70
71
71
71
72
72
73
75
77
81
82
83
85
87
87
89
90
90
90
93
94
95
- 50 -
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
Other
Total expenses excluding interest
Income before taxes on income
Taxes on income
Net Income
Preferred stock dividends
Net Income Available to Common Stockholders
Weighted-Average Common Shares Outstanding — Diluted
Earnings Per Common Share — Basic
Earnings Per Common Share — Diluted
Dividends Declared Per Common Share
$
$
$
$
2014
2013
2012
2,533
2,374
(102)
2,272
907
343
4
(1)
6,058
2,184
457
324
245
223
199
311
3,943
2,115
794
1,321
60
1,261
1,315
.96
.95
.24
$
$
$
$
$
2,315
2,085
(105)
1,980
913
236
1
(10)
5,435
2,027
415
309
257
220
202
300
3,730
1,705
634
1,071
61
1,010
1,293
.78
.78
.24
$
$
$
$
$
2,043
1,914
(150)
1,764
868
256
(16)
(32)
4,883
1,803
388
311
241
220
196
274
3,433
1,450
522
928
45
883
1,275
.69
.69
.24
(1) Net impairment losses on securities include total other-than-temporary impairment losses of $1 million, $2 million, and
$15 million recognized in other comprehensive income, net of less than $1 million, $(8) million, and $(17) million
reclassified from other comprehensive income in 2014, 2013, and 2012, respectively.
See Notes to Consolidated Financial Statements.
- 51 -
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 net
impairment losses on securities
Other reclassifications included in other revenue
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.
2014
1,321
2013
1,071
$
2012
928
$
$
255
1
(7)
-
249
(93)
156
1,477
(468)
10
(7)
1
(464)
175
(289)
782
470
32
(38)
1
465
(175)
290
1,218
$
$
$
- 52 -
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 $10,186 and $14,016 at December 31, 2014
and 2013, 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 — $34,743 and $29,490 at December 31,
2014 and 2013, respectively)
Loans to banking clients — net
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
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 — 176,821,202 shares and 190,657,263 shares
at December 31, 2014 and 2013, respectively
Accumulated other comprehensive income
Total stockholders’ equity
Total liabilities and stockholders’ equity
See Notes to Consolidated Financial Statements.
2014
2013
$
11,363
$
7,728
20,781
469
15,669
516
54,783
34,389
13,399
1,039
1,227
227
780
$ 154,642
$ 102,815
2,004
34,305
1,816
1,899
142,839
23,553
509
13,951
517
51,618
30,318
12,419
790
1,227
266
746
$ 143,642
$
92,972
1,467
35,333
1,586
1,903
133,261
872
15
4,050
10,198
869
15
3,951
9,253
(3,497)
165
11,803
$ 154,642
(3,716)
9
10,381
$ 143,642
- 53 -
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 operating activities:
Provision for loan losses
Net impairment losses on securities
Stock-based compensation
Depreciation and amortization
(Benefit) Provision 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 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 in business acquisitions
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
Repayment of commercial paper
Issuance of long-term debt
Repayment of long-term debt
Premium paid on debt exchange
Net proceeds from preferred stock offerings
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
Income taxes
Non-cash investing activity:
Securities purchased during the year but settled after year end
Non-cash financing activity:
Exchange of Senior Notes
See Notes to Consolidated Financial Statements.
- 54 -
2014
2013
2012
$
1,321
$
1,071
$
928
(4)
1
115
199
(25)
125
(7)
-
-
2,772
44
(1,725)
1
(30)
393
(1,028)
196
2,348
(15,134)
6,556
5,843
(6,920)
2,687
(1,016)
(400)
-
(11)
(8,395)
9,843
-
-
-
(6)
-
-
(373)
189
29
9,682
3,635
7,728
$ 11,363
$
$
$
$
103
778
143
-
(1)
10
116
202
(21)
162
15
-
-
4,916
(175)
(496)
119
17
318
(4,997)
400
1,656
(22,942)
6,167
10,772
(16,061)
3,895
(1,634)
(249)
-
2
(20,050)
13,595
-
(300)
275
(6)
-
-
(368)
258
5
13,459
(4,935)
12,663
7,728
99
624
81
-
$
$
$
$
$
16
32
105
196
5
222
26
(441)
513
(2,549)
(104)
(2,391)
(43)
10
28
4,950
(237)
1,266
(29,035)
3,336
13,867
(8,678)
5,453
(978)
(148)
(80)
3
(16,260)
18,523
300
-
350
(732)
(19)
863
(337)
35
(5)
18,978
3,984
8,679
$ 12,663
$
$
$
$
143
508
-
256
THE CHARLES SCHWAB CORPORATION
Consolidated Statements of Stockholders’ Equity
(In Millions)
Balance at December 31, 2011
Net income
Other comprehensive income, net of tax
Issuance of preferred stock
Dividends declared on preferred stock
Dividends declared on common stock
Stock option exercises and other
Stock-based compensation and
related tax effects
Other
Balance at December 31, 2012
Net income
Other comprehensive loss, net of tax
Dividends declared on preferred stock
Dividends declared on common stock
Stock option exercises and other
Stock-based compensation and
related tax effects
Other
Balance at December 31, 2013
Net income
Other comprehensive income, net of tax
Dividends declared on preferred stock
Dividends declared on common stock
Stock option exercises and other
Stock-based compensation and
related tax effects
Other
Balance at December 31, 2014
$
Preferred
Stock
-
-
-
863
-
-
-
Common Stock
Shares Amount
15
-
-
-
-
-
-
1,488 $
-
-
-
-
-
-
-
2
865
-
-
-
-
-
-
4
869
-
-
-
-
-
-
3
872
-
-
1,488
-
-
-
-
-
-
-
1,488
-
-
-
-
-
-
-
1,488 $
-
-
15
-
-
-
-
-
-
-
15
-
-
-
-
-
-
-
15
$
Additional
Paid-In
Capital
$
Retained
Earnings
7,978
928
-
-
(43)
(308)
-
3,826 $
-
-
-
-
-
(40)
98
(3)
3,881
-
-
-
-
(54)
119
5
3,951
-
-
-
-
(53)
-
(1)
8,554
1,071
-
(57)
(311)
-
-
(4)
9,253
1,321
-
(57)
(316)
-
Treasury Stock,
at cost
$
(4,113)
-
-
-
-
-
76
-
13
(4,024)
-
-
-
-
314
-
(6)
(3,716)
-
-
-
-
240
139
13
-
(3)
4,050 $ 10,198
$
$
-
(21)
(3,497)
$
Accumulated
Other
Comprehensive
Income (Loss)
$
8
-
290
-
-
-
-
$
Total
7,714
928
290
863
(43)
(308)
36
98
11
9,589
1,071
(289)
(57)
(311)
260
119
(1)
10,381
1,321
156
(57)
(316)
187
139
(8)
$ 11,803
-
-
298
-
(289)
-
-
-
-
-
9
-
156
-
-
-
-
-
165
See Notes to Consolidated Financial Statements.
- 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)
1.
Introduction and Basis of Presentation
The Charles Schwab Corporation (CSC) is a savings and loan holding company engaged, through its subsidiaries, in wealth
management, securities brokerage, banking, money management, and financial advisory services. Charles Schwab & Co.,
Inc. (Schwab) is a securities broker-dealer with over 325 domestic branch offices in 45 states, as well as a branch in each of
the Commonwealth of Puerto Rico and London, England. 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 ETFsTM.
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.
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’s policy is to recognize revenue subject to refunds because
management can estimate refunds based on Company specific experience. Actual refunds were not material as of
December 31, 2014. 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 from advisory offers 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 2014, 2013, and 2012, 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.
- 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)
Principal transaction revenue is primarily comprised of revenue 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 adjustments to the fair
value of 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 and U.S. Government securities.
Certificates of deposit and U.S. Government 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 or other observable market data. 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 before 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 all of the amortized cost of the security. In this
circumstance, the impairment recognized in earnings represents estimated credit loss, and is measured by the difference
between the present value of expected cash flows and the amortized cost of the security. Management utilizes cash flow
- 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)
models to estimate the expected future cash flow from the securities to estimate the credit loss. 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 loans and 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, and geographical distribution of collateral.
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
- 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)
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 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, including loans to borrowers who have filed for bankruptcy. 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, 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 first mortgages and HELOC
loans is to assess the value of the property when the loan has been delinquent for 180 days or has been discharged in
bankruptcy proceedings, 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 five 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.
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. The
Company’s annual impairment testing date is April 1st. The Company can elect to qualitatively assess goodwill for
- 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)
impairment if it is more likely than not that the fair value of a reporting unit exceeds its carrying value. A qualitative
assessment may consider macroeconomic and other industry-specific factors, such as trends in short-term and long-term
interest rates and the ability to access capital, or Company specific factors such as market capitalization in excess of net
assets, trends in revenue generating activities, and merger or acquisition activity.
If the Company elects to bypass qualitatively assessing goodwill, or it is not more likely than not that the fair value of a
reporting unit exceeds its carrying value, 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 an income
approach based on a discounted cash flow model that includes significant assumptions about the future operating results and
cash flows of each reporting unit, a market approach which compares each reporting unit to comparable companies in their
respective industries, and a market capitalization analysis. Based on the Company’s analysis, fair value significantly
exceeded the carrying value for all reporting units as of its annual testing date.
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.
- 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)
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
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.
- 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)
• 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.
• 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.
• 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.
New Accounting Standards Not Yet Adopted
In January 2014, the Financial Accounting Standards Board (FASB) issued new guidance for creditors of consumer mortgage
loans, which is effective January 1, 2015. The guidance clarifies when physical possession of a property underlying a
consumer mortgage loan transfers to the creditor, and therefore when a loan receivable should be derecognized and the real
estate property underlying the loan should be recognized. The adoption of this new guidance is not expected to have a
material impact on the Company’s financial statements or earnings per common share (EPS).
In May 2014, the FASB issued new guidance on revenue recognition, which is effective January 1, 2017. The guidance
clarifies that revenue from contracts with customers should be recognized in a manner that depicts the timing of the transfer
of goods or performance of services at an amount that reflects the expected consideration. The Company is currently
evaluating the impact of this new guidance on its financial statements and EPS.
3.
Receivables from Brokerage Clients
Receivables from brokerage clients consist primarily of margin loans to brokerage clients of $14.3 billion and $12.8 billion at
December 31, 2014 and 2013, 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 3.50%
and 3.68% in 2014 and 2013, respectively.
- 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)
4.
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
2014
224
215
51
26
516
$
$
2013
261
208
32
16
517
$
$
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.
5.
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:
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
$
19,320
18,487
8,023
3,839
2,993
1,533
310
15
54,520
$
$
$
$
64
242
30
-
2
1
7
-
346
531
11
542
$
$
$
$
18 $
12
8
44
1
-
-
-
83 $
19,366
18,717
8,045
3,795
2,994
1,534
317
15
54,783
174
14
188
$
$
33,745
998
34,743
December 31, 2014
Securities available for sale:
Asset-backed securities
U.S. agency mortgage-backed securities
Corporate debt securities
U.S. agency notes
Treasury securities
Certificates of deposit
Non-agency commercial mortgage-backed securities
Other securities
Total securities available for sale
$
Securities held to maturity:
U.S. agency mortgage-backed securities
Non-agency commercial mortgage-backed securities
Total securities held to maturity
$
$
33,388
1,001
34,389
- 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)
December 31, 2013
Securities available for sale:
U.S. agency mortgage-backed securities
Asset-backed securities
Corporate debt securities
U.S. agency notes
Certificates of deposit
Non-agency residential mortgage-backed securities
Non-agency commercial mortgage-backed securities
Other securities
Total securities available for sale
Securities held to maturity:
U.S. agency mortgage-backed securities
Non-agency commercial mortgage-backed securities
Other securities
Total securities held to maturity
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
$
$
$
$
18,554 $
15,201
8,973
4,239
3,650
616
271
100
51,604 $
$
29,260
958
100
30,318 $
140
42
49
1
4
11
8
-
255
161
-
-
161
$
$
$
$
49
37
15
104
2
34
-
-
241
921
68
-
989
$
$
$
$
18,645
15,206
9,007
4,136
3,652
593
279
100
51,618
28,500
890
100
29,490
Schwab Bank pledges securities issued by federal agencies to secure certain trust deposits. The fair value of these pledged
securities was $132 million at December 31, 2014.
A summary of securities with unrealized losses, aggregated by category and period of continuous unrealized loss, is as
follows:
December 31, 2014
Securities available for sale:
Asset-backed securities
U.S agency mortgage-backed securities
Corporate debt securities
U.S. agency notes
Treasury securities
Total
Less than
12 months
12 months
or longer
Total
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
$
5,754 $
2,247
1,781
-
1,246
$ 11,028 $
15 $
5
4
-
1
25 $
792 $
1,767
552
3,696
-
6,807 $
3 $
7
4
44
-
6,546 $
4,014
2,333
3,696
1,246
58 $ 17,835 $
18
12
8
44
1
83
Securities held to maturity:
U.S. agency mortgage-backed securities
Non-agency commercial mortgage-backed
$
264 $
1 $ 10,415 $
173 $ 10,679 $
174
securities
Total
Total securities with unrealized losses (1)
-
264 $
$
$ 11,292 $
660
-
1 $ 11,075 $
26 $ 17,882 $
14
660
187 $ 11,339 $
245 $ 29,174 $
14
188
271
(1) The number of investment positions with unrealized losses totaled 173 for securities available for sale and 111 for
securities held to maturity.
- 64 -
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
Less than
12 months
12 months
or longer
Total
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
December 31, 2013
Securities available for sale:
U.S agency mortgage-backed securities
Asset-backed securities
Corporate debt securities
U.S. agency notes
Certificates of deposit
Non-agency residential mortgage-backed
securities
Total
$
5,044 $
6,391
1,802
3,636
-
89
$ 16,962 $
47
33
14
104
-
2
200
Securities held to maturity:
U.S. agency mortgage-backed securities
Non-agency commercial mortgage-backed
$ 19,175
$
698
securities
Total
Total securities with unrealized losses (1)
630
$ 19,805 $
$ 36,767 $
43
741
941
$
$
$
$
$
93
591
499
-
299
374
1,856
2,345
260
2,605
4,461
$
$
$
$
$
2 $
4
1
-
2
5,137 $
6,982
2,301
3,636
299
32
41 $ 18,818 $
463
49
37
15
104
2
34
241
223
$ 21,520
$
921
890
25
248 $ 22,410 $
289 $ 41,228 $
68
989
1,230
(1) The number of investment positions with unrealized losses totaled 273 for securities available for sale and 193 for
securities held to maturity.
Management evaluates whether securities available for sale and securities held to maturity are OTTI on a quarterly basis as
described in note “2 – Summary of Significant Accounting Policies.”
Non-agency residential mortgage-backed securities include securities collateralized by loans that are considered to be
“Prime” (defined as loans to borrowers with a Fair Isaac Corporation (FICO) credit score of 620 or higher at origination), and
“Alt-A” (defined as Prime loans with reduced documentation at origination). Management determined that it does not expect
to recover all of the amortized cost of certain of its Alt-A and Prime residential mortgage-backed securities and therefore
determined that these securities were OTTI. The Company recognized an impairment charge equal to the securities’ expected
credit losses of $1 million in 2014, based on the Company’s cash flow projections for these securities. The expected credit
losses are measured as the difference between the present value of expected cash flows and the amortized cost of the
securities. In the fourth quarter of 2014, the Company sold $504 million of its non-agency residential mortgage-backed
securities portfolio, resulting in a net realized loss of $8 million. The Company marked the remaining $15 million of these
securities to market and recorded a $0.6 million OTTI charge in the fourth quarter.
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 reclassified from or recognized in other
comprehensive income (loss):
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
Reductions due to sale of debt securities for which an other-than-temporary
impairment was previously recognized
Balance at end of year
2014
169
2013
159
$
2012
127
$
$
1
-
1
9
6
26
(168)
2
$
-
169
$
-
159
$
- 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)
The maturities of securities available for sale and securities held to maturity at December 31, 2014, are as follows:
After 1 year After 5 years
Within
1 year
through
5 years
through
10 years
After
10 years
Total
Securities available for sale:
Asset-backed securities
U.S. agency mortgage-backed securities (1)
Corporate debt securities
U.S. agency notes
Treasury securities
Certificates of deposit
Non-agency commercial mortgage-backed
securities (1)
Other securities
Total fair value
Total amortized cost
Securities held to maturity:
U.S. agency mortgage-backed securities (1)
Non-agency commercial mortgage-backed
securities (1)
Total fair value
Total amortized cost
$
$
$
$
$
$
$
- $
-
999
-
-
624
2,946
1,281
7,046
3,795
2,994
910
5,062 $ 11,358 $ 19,366
18,717
12,240
5,196
8,045
-
-
3,795
-
-
2,994
-
-
1,534
-
-
-
-
-
-
1,623 $ 18,972
$ 18,981
1,621
-
-
317
15
$ 10,258 $ 23,930 $ 54,783
$ 54,520
$ 10,168
317
15
$ 23,750
-
$
857
$ 15,618
$ 17,270
$ 33,745
-
-
-
$
$
-
857
853
359
$ 15,977
$ 15,789
639
$ 17,909
$ 17,747
998
$ 34,743
$ 34,389
(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 and losses from sales of securities available for sale are as follows:
Year Ended December 31,
Proceeds
Gross realized gains
Gross realized losses
2014
$ 6,556
$
$
30
23
2013
$ 6,167
$
$
7
-
2012
$ 3,336
35
$
-
$
6.
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 loans and 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.
2014
$ 8,127
2,955
2,320
39
13,441
(42)
$ 13,399
2013
$ 8,006
3,041
1,384
36
12,467
(48)
$ 12,419
The Company has commitments to extend credit related to unused HELOCs, personal loans secured by securities, and other
lines of credit, which totaled $6.7 billion and $5.7 billion at December 31, 2014 and 2013, respectively. All personal loans
were fully collateralized by securities with fair values in excess of borrowings at December 31, 2014 and 2013.
- 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)
Schwab Bank provides 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 Mortgages and HELOCs for
Schwab Bank clients. Under the Program, Schwab Bank purchases certain First Mortgages and HELOCs that are originated
by Quicken Loans. Schwab Bank purchased First Mortgages of $1.4 billion and $3.5 billion during 2014 and 2013,
respectively. Schwab Bank purchased HELOCs with commitments of $664 million and $917 million during 2014 and 2013,
respectively.
Credit Quality
Changes in the allowance for loan losses were as follows:
Year Ended
December 31, 2014
Residential Home equity
real estate
mortgages
loans and
lines of credit
December 31, 2013
December 31, 2012
Residential Home equity
real estate
loans and
Total
mortgages lines of credit
Total
Residential Home equity
loans and
real estate
mortgages lines of credit
Total
Balance at beginning of year $
Charge-offs
Recoveries
Provision for loan losses
Balance at end of year
$
34
(3)
2
(4)
29
$
$
14
(2)
1
-
13
$
$
48
(5)
3
(4)
42
$
$
36
(5)
2
1
34
$
$
20
(6)
2
(2)
14
$
$
56
(11)
4
(1)
48
$
$
40
(7)
2
1
36
$
$
14 $
(9)
-
15
20 $
54
(16)
2
16
56
The delinquency analysis by loan class is as follows:
December 31, 2014
Residential real estate mortgages
Home equity loans and lines of credit
Personal loans secured by securities
Other
Total loans to banking clients
Current
$
8,092 $
2,942
2,320
38
$ 13,392 $
30-59 days
past due
9
1
-
1
11
$
60-89 days
past due
2
1
-
-
3
$
December 31, 2013
Residential real estate mortgages
Home equity loans and lines of credit
Personal loans secured by securities
Other
Total loans to banking clients
$
7,962 $
3,025
1,384
36
$ 12,407 $
4
2
-
-
6
$
$
4
2
-
-
6
>90 days past
due and other
Total past due
and other
nonaccrual loans nonaccrual loans
$
$
$
$
24
11
-
-
35
36
12
-
-
48
$
$
$
$
Total
loans
$ 8,127
2,955
2,320
39
$ 13,441
35
13
-
1
49
44
16
-
-
60
$ 8,006
3,041
1,384
36
$ 12,467
There were no loans accruing interest that were contractually 90 days or more past due at December 31, 2014 or 2013.
Nonperforming assets, which include nonaccrual loans and other real estate owned, totaled $44 million and $53 million at
December 31, 2014 and 2013, respectively. Troubled debt restructurings were not material at December 31, 2014 or 2013,
respectively.
In addition to monitoring delinquency, 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 2014. 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.
- 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)
December 31, 2014
Residential real estate mortgages:
Estimated Current LTV
<70%
>70% – <90%
>90% – <100%
>100%
Total
Home equity loans and lines of credit:
Estimated Current Combined LTV
<70%
>70% – <90%
>90% – <100%
>100%
Total
Weighted
Average
Updated FICO
Utilization
Rate (1)
Percent of Loans
that are on
Nonaccrual Status
Balance
$
$
$
$
7,131
882
61
53
8,127
2,282
526
81
66
2,955
774
765
740
726
773
773
762
749
742
769
N/A
N/A
N/A
N/A
N/A
36 %
48 %
61 %
63 %
39 %
0.04 %
0.50 %
2.95 %
10.95 %
0.18 %
0.08 %
0.34 %
1.67 %
1.54 %
0.20 %
(1) The Utilization Rate is calculated using the outstanding HELOC balance divided by the associated total line of credit.
N/A Not applicable.
December 31, 2014
Year of origination
Pre-2010
2010
2011
2012
2013
2014
Total
Origination FICO
<620
620 – 679
680 – 739
>740
Total
Origination LTV
<70%
>70% – <90%
>90% – <100%
Total
Residential
real estate
mortgages
Home equity
loans and
lines of credit
$
$
$
$
$
$
749
370
588
2,107
3,047
1,266
8,127
10
97
1,366
6,654
8,127
5,572
2,538
17
8,127
$
$
$
$
$
$
2,076
168
137
147
250
177
2,955
-
18
549
2,388
2,955
1,979
955
21
2,955
- 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)
December 31, 2013
Residential real estate mortgages:
Estimated Current LTV
<70%
>70% – <90%
>90% – <100%
>100%
Total
Home equity loans and lines of credit:
Estimated Current Combined LTV
<70%
>70% – <90%
>90% – <100%
>100%
Total
Balance
Weighted
Average
Updated FICO
Utilization
Rate (1)
Percent of Loans
that are on
Nonaccrual Status
$
$
$
$
6,649
1,181
86
90
8,006
2,127
664
127
123
3,041
775
763
732
730
772
773
762
752
743
769
N/A
N/A
N/A
N/A
N/A
36 %
48 %
59 %
63 %
39 %
0.05 %
0.34 %
4.77 %
10.50 %
0.26 %
0.13 %
0.22 %
1.22 %
1.34 %
0.24 %
(1) The Utilization Rate is calculated using the outstanding HELOC balance divided by the associated total line of credit.
N/A Not applicable.
December 31, 2013
Year of origination
Pre-2010
2010
2011
2012
2013
Total
Origination FICO
<620
620 – 679
680 – 739
>740
Total
Origination LTV
<70%
>70% – <90%
>90% – <100%
Total
Residential
real estate
mortgages
Home equity
loans and
lines of credit
$
$
$
$
$
$
914
510
771
2,429
3,382
8,006
11
110
1,384
6,501
8,006
5,416
2,568
22
8,006
$
$
$
$
$
$
2,304
191
155
162
229
3,041
-
20
576
2,445
3,041
2,040
977
24
3,041
- 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)
7.
Equipment, Office Facilities, and Property
Equipment, office facilities, and property are detailed below:
December 31,
Software
Buildings
Leasehold improvements
Information technology equipment
Furniture and equipment
Telecommunications equipment
Construction in progress
Land
Total equipment, office facilities, and property
Accumulated depreciation and amortization
Total equipment, office facilities, and property – net
2014
1,281
673
310
257
154
83
64
107
2,929
(1,890)
1,039
2013
1,177
460
300
245
131
102
95
70
2,580
(1,790)
790
$
$
$
$
Depreciation and amortization expense for equipment, office facilities, and property was $155 million, $154 million,
$149 million in 2014, 2013, and 2012, respectively.
8.
Intangible Assets and Goodwill
The gross carrying value of intangible assets and accumulated amortization was:
December 31, 2014
December 31, 2013
Gross
Net
Gross
Net
Carrying Accumulated Carrying Carrying Accumulated Carrying
Value
Amortization
Value
Value
Amortization
Value
Customer relationships
Technology
Trade name
Other
$
Total intangible assets
$
274 $
89
17
7
387 $
116
37
6
1
160
$
$
158 $
52
11
6
227 $
274 $
89
17
2
382 $
84
27
4
1
116
$
$
190
62
13
1
266
Amortization expense for intangible assets was $44 million, $48 million, and $47 million in 2014, 2013, and 2012,
respectively.
Estimated future annual amortization expense for intangible assets as of December 31, 2014, is as follows:
2015
2016
2017
2018
2019
Thereafter
Total intangible assets
$
$
45
37
34
31
29
51
227
- 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)
Goodwill impairment charges since January 1, 2002 are immaterial. 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, 2012
Goodwill acquired and other changes during the period
Balance at December 31, 2013
Goodwill acquired and other changes during the period
Balance at December 31, 2014
Investor
Services
$ 1,128
(1)
1,127
-
$ 1,127
Advisor
Services
100
$
-
100
-
100
$
Total
$ 1,228
(1)
1,227
-
$ 1,227
In testing for potential impairment of goodwill on April 1, 2014, management performed an assessment of each of the
Company’s reporting units. As a result of this assessment, management concluded that goodwill was not impaired. The
Company did not recognize any goodwill impairment in 2013 or 2012.
9.
Other Assets
The components of other assets are as follows:
December 31,
Accounts receivable (1)
Interest and dividends receivable
Prepaid expenses
Other investments
Deferred tax asset – net
Other
Total other assets
2014
359 $
180
110
72
-
59
780 $
2013
328
171
85
59
28
75
746
$
$
(1) Accounts receivable includes accrued service fee income and a receivable from the Company’s loan servicer.
10.
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
2014
2013
$
82,101 $ 72,166
12,053
12,318
8,232
7,832
92,451
102,251
521
564
$ 102,815 $ 92,972
11.
Payables to Brokers, Dealers, and Clearing Organizations
Payables to brokers, dealers, and clearing organizations include securities loaned of $1.5 billion and $1.2 billion at
December 31, 2014 and 2013, 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, 2014 and 2013.
- 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)
12.
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 $27.6 billion and
$28.8 billion at December 31, 2014 and 2013, respectively. The average rate paid on cash balances in interest-bearing
brokerage client accounts was 0.01% in 2014 and 2013.
13.
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
Total long-term debt
2014
$
$
1,567 $
249
83
1,899 $
2013
1,565
249
89
1,903
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, 2014, have maturities ranging from 2015 to 2022 and fixed interest rates
ranging from 0.850% to 4.45% with interest payable semi-annually.
On July 25, 2013, CSC issued $275 million of Senior Notes that mature in 2018 under its Shelf Registration Statement. The
Senior Notes have a fixed interest rate of 2.20% with interest payable semi-annually.
The Senior Medium-Term Notes, Series A (Medium-Term Notes) outstanding at December 31, 2014, mature in 2017 and
have a fixed interest rate of 6.375% with interest payable semi-annually.
Schwab has a finance lease obligation related to an office building and land under a 20-year lease. The remaining finance
lease obligation of $83 million at December 31, 2014, is being reduced by a portion of the lease payments over the remaining
lease term of 10 years.
Annual maturities on long-term debt outstanding at December 31, 2014, are as follows:
2015
2016
2017
2018
2019
Thereafter
Total maturities
Unamortized discount, net
Total long-term debt
$
$
357
7
258
283
8
1,001
1,914
(15)
1,899
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. There were no borrowings of Commercial Paper Notes outstanding at December 31,
2014 or 2013.
- 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)
CSC maintains an $800 million committed, unsecured credit facility with a group of 12 banks, which is scheduled to expire
in June 2015. This facility replaced a similar facility that expired in June 2014. 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, excluding accumulated other comprehensive income. At December 31, 2014, the minimum level of stockholders’
equity required under this facility was $7.8 billion (CSC’s stockholders’ equity, excluding accumulated other comprehensive
income, at December 31, 2014, was $11.6 billion). There were no borrowings outstanding under these facilities at
December 31, 2014 or 2013.
To manage short-term liquidity, Schwab maintains uncommitted, unsecured bank credit lines with a group of banks. There
were no borrowings outstanding under these lines at December 31, 2014 or 2013.
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 $225 million at
December 31, 2014. There were no funds drawn under any of these LOCs at December 31, 2014 or 2013. In connection with
its securities lending activities, Schwab is required to provide collateral to certain brokerage clients. Schwab satisfies the
collateral requirements by providing cash as collateral.
To partially satisfy the margin requirement of client option transactions with the Options Clearing Corporation,
optionsXpress, Inc. has an unsecured standby LOC with one bank in favor of the Options Clearing Corporation in the amount
of $15 million at December 31, 2014. There were no funds drawn under this LOC during 2014.
14.
Commitments and Contingencies
Operating leases: 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, 2014, are as follows:
2015
2016
2017
2018
2019
Thereafter
Total
Operating
Leases
Subleases
Net
$
$
120
109
93
55
39
120
536
$
$
35
34
28
6
2
6
111
$
$
85
75
65
49
37
114
425
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 $214 million, $208 million, and $203 million in 2014, 2013, and 2012,
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, 2014, the
Company has purchase obligations as follows:
2015
2016
2017
2018
2019
Thereafter
Total
$
$
165
143
67
19
18
230
642
- 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)
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 the Options Clearing Corporation – a
clearing house that establishes margin requirements on these transactions. The Company partially satisfies the margin
requirements by arranging unsecured standby LOCs, in favor of the Options Clearing Corporation, which are issued by
multiple banks. At December 31, 2014, the aggregate face amount of these LOCs totaled $240 million. There were no funds
drawn under any of these LOCs at December 31, 2014. In connection with its securities lending activities, the Company is
required to provide collateral to certain brokerage clients. The Company satisfies the collateral requirements by providing
cash as collateral.
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 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. Unless otherwise noted, the Company is unable
to provide a reasonable estimate of any potential liability given the stage of proceedings in the matter.
With respect to all other pending matters, based on current information and consultation with counsel, it does not appear
reasonably possible that the outcome of any such matter would 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. It may not be 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: As disclosed previously, Schwab has been responding to a civil complaint filed on August 17, 2009,
in New York state court by the Attorney General of the State of New York (NYAG) alleging misrepresentations in sales of
auction rate securities to clients. In 2011, the court granted Schwab’s motion to dismiss the complaint with prejudice. After
part of the case was reinstated on appeal in 2013, Schwab filed a motion for summary judgment of the NYAG’s remaining
- 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)
causes of action. On February 3, 2015, the parties entered into a settlement agreement under which the NYAG’s complaint
will be voluntarily dismissed and discontinued with prejudice. The Company’s liability with respect to resolution of the
matter is not material.
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™. 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.
Other Regulatory Matters: On April 16, 2012, optionsXpress, Inc. was charged by the SEC in an administrative proceeding
alleging violations of the firm’s close-out obligations under Regulation SHO (short sale delivery rules) in connection with
certain customer trading activity. Following trial, in a decision issued June 7, 2013, the judge held that the firm had violated
Regulation SHO and aided and abetted fraudulent trading activity by its customer, and ordered the firm and the customer to
pay disgorgement and penalties in an amount which would not be material. The Company continues to dispute the allegations
and is appealing the decision.
15.
Financial Instruments Subject to Off-Balance Sheet Credit Risk or Concentration Risk
Off-Balance Sheet Credit Risk
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
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, 2014
and 2013, the fair value of collateral received in connection with resale agreements that are available to be repledged or sold
was $10.4 billion and $14.3 billion, respectively. Schwab utilizes the collateral provided under these resale 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. The
Company’s resale agreements are not subject to master netting arrangements.
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
$1.3 billion and $1.1 billion at December 31, 2014 and 2013, respectively. The Company has also pledged a portion of its
securities owned in connection with securities lending transactions to other broker-dealers. Additionally, the Company
borrows securities from other broker-dealers to fulfill short sales by clients and delivers cash to the lender in exchange for the
securities. The fair value of these borrowed securities was $88 million and $276 million at December 31, 2014 and 2013,
respectively. All of the Company’s securities lending transactions are subject to enforceable master netting arrangements
- 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)
with other broker-dealers. However, the Company does not net securities lending transactions and therefore, the Company’s
securities loaned and securities borrowed are presented gross in the consolidated balance sheets.
The following table presents information about the Company’s resale agreements and securities lending activity to enable the
users of the Company’s financial statements to evaluate the potential effect of rights of setoff between these recognized assets
and recognized liabilities at December 31, 2014 and 2013.
Gross Amounts Net Amounts
Consolidated Balance Sheet
Gross Amounts Not Offset in the
Gross
Assets /
Liabilities
Offset in the
Consolidated
Balance Sheet
Presented in the
Consolidated
Balance Sheet
Counterparty
Net
Offsetting
Collateral
Amount
December 31, 2014
Assets:
Resale agreements (1)
Securities borrowed (3)
Total
Liabilities:
Securities loaned (4)
Total
December 31, 2013
Assets:
Resale agreements (1)
Securities borrowed (3)
Total
Liabilities:
Securities loaned (4)
Total
$
$
$
$
$
$
$
$
10,186
187
10,373
1,477
1,477
14,016
349
14,365
1,187
1,187
$
$
$
$
$
$
$
$
-
-
-
-
-
-
-
-
-
-
$
$
$
$
$
$
$
$
10,186
187
10,373
1,477
1,477
14,016
349
14,365
1,187
1,187
$
$
$
$
$
$
$
$
-
(69)
(69)
(69)
(69)
-
(88)
(88)
(88)
(88)
$ (10,186) (2)
(117)
$ (10,303)
$
$
(1,293)
(1,293)
$ (14,016) (2)
(257)
$ (14,273)
$
$
(1,019)
(1,019)
$
$
$
$
$
$
$
$
-
1
1
115
115
-
4
4
80
80
(1)
Included in cash and investments segregated and on deposit for regulatory purposes in the Company’s consolidated
balance sheets.
(2) Actual collateral was greater than 102% of the related assets.
(3)
Included in receivables from brokers, dealers, and clearing organizations in the Company’s consolidated balance sheets.
Included in payables to brokers, dealers, and clearing organizations in the Company’s consolidated balance sheets.
(4)
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. The contractual value of margin loans to clients was $14.3 billion and $12.8 billion at December 31,
2014 and 2013, respectively.
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 $20.4 billion and $18.2 billion at December 31, 2014 and 2013, respectively. The fair value of client securities pledged to
fulfill the short sales of its clients was $1.5 billion and $1.6 billion at December 31, 2014 and 2013, respectively. The fair
- 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)
value of client securities pledged to fulfill the Company’s proprietary short sales, which resulted from facilitating clients’
dividend reinvestment elections, was $216 million and $130 million at December 31, 2014 and 2013, respectively. 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 $1.3 billion and $1.3 billion at December 31, 2014 and 2013,
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, 2014 and 2013,
the Company had commitments to purchase First Mortgage loans of $226 million and $208 million, respectively. 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 $6.7 billion and $5.7 billion at December 31, 2014 and 2013, respectively. See also note
“6 – Loans to Banking Clients and Related Allowance for Loan Losses.”
Financial Guarantees: See note “14 – Commitments and Contingencies.”
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.
The fair value of the Company’s investments in mortgage-backed securities totaled $53.8 billion at December 31, 2014. Of
these, $52.5 billion were issued by U.S. agencies and $1.3 billion were issued by private entities (non-agency securities). The
fair value of the Company’s investments in mortgage-backed securities totaled $48.9 billion at December 31, 2013. Of these,
$47.1 billion were issued by U.S. agencies and $1.8 billion were non-agency securities. These U.S. agency and non-agency
securities are included in securities available for sale and securities held to maturity.
The fair value of the Company’s investments in corporate debt securities and commercial paper totaled $8.1 billion and
$9.2 billion at December 31, 2014 and 2013, respectively, with the majority issued by institutions in the financial services
industry. These securities are included in securities available for sale, cash and cash equivalents, and other securities owned.
The fair value of the Company’s investments in asset-backed securities totaled $19.4 billion and $15.2 billion at
December 31, 2014 and 2013, respectively, with the majority serviced by a single servicer.
The Company’s loans to banking clients include $7.4 billion and $7.3 billion of adjustable rate First Mortgages at
December 31, 2014 and 2013, respectively. At December 31, 2014, approximately 40% of these mortgages consisted of loans
with interest-only payment terms. At December 31, 2014, the interest rates on approximately 65% of these interest-only loans
are not scheduled to reset for three or more years. For additional detail on concentrations in loans to banking clients, see note
“6 – Loans to Banking Clients and Related Allowance for Loan Losses.”
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, as described above.
16.
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, Level 2, or Level 3 during 2014 or 2013. In addition, the Company did not adjust prices
received from the primary independent third-party pricing service at December 31, 2014 or 2013.
- 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)
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
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
$
$
2,142
32
2,174
4,125
2,186
6,311
224
215
51
26
516
19,366
18,717
8,045
3,795
2,994
1,534
317
15
54,783
63,784
December 31, 2014
Cash equivalents:
Money market funds
Commercial paper
Total cash equivalents
$
$
2,142
-
2,142
$
-
32
32
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:
Asset-backed securities
U.S. agency mortgage-backed securities
Corporate debt securities
U.S. agency notes
Treasury securities
Certificates of deposit
Non-agency commercial mortgage-backed securities
Other securities
Total securities available for sale
Total
$
-
-
-
224
215
-
2
441
-
-
-
-
-
-
-
-
-
2,583
4,125
2,186
6,311
-
-
51
24
75
19,366
18,717
8,045
3,795
2,994
1,534
317
15
54,783
61,201
$
$
- 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)
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
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
$
$
1,141
22
1,163
2,737
2,539
5,276
261
208
32
16
517
18,645
15,206
9,007
4,136
3,652
593
279
100
51,618
58,574
December 31, 2013
Cash equivalents:
Money market funds
Commercial paper
Total cash equivalents
$
$
1,141
-
1,141
$
-
22
22
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
U.S. agency notes
Certificates of deposit
Non-agency residential mortgage-backed securities
Non-agency commercial mortgage-backed securities
Other securities
Total securities available for sale
Total
$
-
-
-
261
208
-
1
470
-
-
-
-
-
-
-
-
-
1,611
2,737
2,539
5,276
-
-
32
15
47
18,645
15,206
9,007
4,136
3,652
593
279
100
51,618
56,963
$
$
- 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)
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 2014. The following tables present the fair value hierarchy for
financial instruments not recorded at fair value:
December 31, 2014
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
Non-agency commercial mortgage-backed
securities
Total securities held to maturity
Loans to banking clients: (1)
Residential real estate mortgages
Home equity loans and lines of credit
Personal loans secured by securities
Other
Total loans to banking clients
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)
Carrying
Amount
Significant
Other Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Balance at
Fair Value
$
9,189
$
-
$
9,189
$
-
$
9,189
14,466
469
15,666
33,388
1,001
34,389
8,127
2,955
2,320
39
13,441
76
$ 87,696
$ 102,815
2,004
34,305
687
1,899
$ 141,710
$
$
$
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
14,466
469
15,666
33,745
998
34,743
8,158
3,026
2,320
38
13,542
76
$ 88,151
$
$ 102,815
$
2,004
34,305
687
2,010
$ 141,821
$
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
14,466
469
15,666
33,745
998
34,743
8,158
3,026
2,320
38
13,542
76
$ 88,151
$ 102,815
2,004
34,305
687
2,010
$ 141,821
(1) The carrying value of loans to banking clients excludes the allowance for loan losses of $42 million at December 31,
2014.
- 80 -
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, 2013
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
Non-agency commercial mortgage-backed
securities
Other securities
Total securities held to maturity
Loans to banking clients: (1)
Residential real estate mortgages
Home equity loans and lines of credit
Personal loans secured by securities
Other
Total loans to banking clients
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)
Carrying
Amount
Significant
Significant
Other Observable Unobservable
Inputs
(Level 2)
Inputs
(Level 3)
Balance at
Fair Value
$
6,565
$
18,273
509
13,949
29,260
958
100
30,318
8,006
3,041
1,384
36
12,467
64
$ 82,145
$
$ 92,972
$
1,467
35,333
680
1,903
$ 132,355
$
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
$
6,565
$
18,273
509
13,949
28,500
890
100
29,490
7,930
3,043
1,384
35
12,392
64
$ 81,242
$
$ 92,972
$
1,467
35,333
680
1,989
$ 132,441
$
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
$
6,565
18,273
509
13,949
28,500
890
100
29,490
7,930
3,043
1,384
35
12,392
64
$ 81,242
$ 92,972
1,467
35,333
680
1,989
$ 132,441
(1) The carrying value of loans to banking clients excludes the allowance for loan losses of $48 million at December 31,
2013.
17.
Stockholders’ Equity
The Company did not issue any shares of common stock during 2014, 2013, or 2012, respectively.
The Company was authorized to issue 9,940,000 shares of preferred stock, $0.01 par value, at December 31, 2014 and 2013.
The Company’s preferred stock issued and outstanding is as follows:
December 31,
2014
Shares
Issued and
Outstanding Preference Liquidation Carrying
Value
(In thousands) Per Share Preference
Liquidation
2013
Shares
Issued and
Liquidation
Outstanding Preference Liquidation Carrying
Value
(In thousands) Per Share Preference
Series A
Series B
Total Preferred Stock
400
485
885
$
$
1,000 $
1,000
$
400 $
485
885 $
395
477
872
400
485
885
$
$
1,000 $
1,000
$
400 $
485
885 $
395
474
869
- 81 -
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 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.
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.
18.
Accumulated Other Comprehensive Income
Accumulated other comprehensive income 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
2014
Tax
effect
Net of Before
tax
tax
2013
Tax
effect
Net of Before
tax
tax
2012
Tax
effect
Net of
tax
Change in net unrealized gain on
securities available for sale:
Net unrealized gain (loss)
$
Reclassification of impairment charges
included in net impairment losses on
securities
Other reclassifications included in
255 $
(95) $
160 $ (468) $
176 $ (292) $
470 $ (177) $
293
1
(1)
-
10
(4)
6
32
(12)
20
other revenue
(7)
3
(4)
(7)
3
(4)
(38)
14
(24)
Change in net unrealized gain on
securities available for sale
Other
Other comprehensive income (loss)
249
-
249 $
(93)
-
(93) $
$
156
-
(465)
1
175
-
(290)
1
156 $ (464) $
175 $ (289) $
464
1
465
(175)
-
$ (175) $
289
1
290
- 82 -
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
Accumulated other comprehensive income balances are as follows:
Balance at December 31, 2011
Other net changes
Balance at December 31, 2012
Other net changes
Balance at December 31, 2013
Other net changes
Balance at December 31, 2014
Net unrealized
gain on securities
available for sale
Total
accumulated other
Other
comprehensive income
$
$
$
$
10
289
299
(290)
9
156
165
$
$
$
$
(2)
1
(1)
1
-
-
-
$
$
$
$
8
290
298
(289)
9
156
165
19.
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
2014
2013
44 $
66
-
5
115 $
$
(43)
52 $
60
-
4
116 $
$
(43)
2012
57
40
5
3
105
(39)
$
$
$
The Company issues shares for stock options and restricted stock awards from treasury stock. At December 31, 2014, the
Company was authorized to grant up to 59 million common shares under its existing stock incentive plans. Additionally, at
December 31, 2014, the Company had 41 million shares reserved for future issuance under its employee stock purchase plan.
As of December 31, 2014, there was $206 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
2018 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).
- 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)
The Company’s stock option activity is summarized below:
Outstanding at December 31, 2013
Granted
Exercised
Forfeited
Expired
Outstanding at December 31, 2014
Vested and expected to vest at December 31, 2014
Vested and exercisable at December 31, 2014
Weighted-
Average
Exercise Price
per Share
16.74
27.96
19.04
16.66
20.19
17.74
17.62
15.76
$
$
$
$
$
$
$
$
Number
of Options
46
6
(10)
(1)
-
41
40
24
Weighted-
Average
Remaining
Contractual
Life (in years)
Aggregate
Intrinsic
Value
7.02
6.96
5.92
$
$
$
513
497
342
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
2014
7.82 $
189 $
8 $
86 $
2013
6.33 $
258 $
- $
82 $
2012
4.07
35
1
9
$
$
$
$
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)
Restricted Stock Units
2014
1.20 %
28 %
2.4 %
4.4 – 7.2
2013
1.13 %
28 %
2.5 %
4.6 – 7.9
2012
.99 %
31 %
1.8 %
3.0 – 6.7
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 2014, 2013, and 2012 was $116 million, $78 million, and $30 million, respectively.
- 84 -
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’s restricted stock units activity is summarized below:
Outstanding at December 31, 2013
Granted
Vested
Forfeited
Outstanding at December 31, 2014
Retirement Plan
Number
of Units
11
3
(4)
-
10
Weighted-
Average Grant
Date Fair Value
per Unit
16.11
$
28.09
$
15.63
$
16.50
$
20.66
$
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 expense was $68 million,
$63 million, and $59 million in 2014, 2013, and 2012, respectively.
Deferred Compensation Plans
The Company’s deferred compensation plan for officers permits participants to defer the receipt of certain cash
compensation. 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. The deferred compensation liability was $132 million and $135 million at December 31, 2014 and 2013,
respectively.
20.
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
2014
2013
2012
$
747 $
72
819
598 $
57
655
(23)
(2)
(25)
794 $
(20)
(1)
(21)
634 $
$
489
28
517
5
-
5
522
- 85 -
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 temporary differences that created deferred tax assets and liabilities are detailed below:
December 31,
Deferred tax assets:
Employee compensation, severance, and benefits
Facilities lease commitments
Reserves and allowances
State and local taxes
Net operating loss carryforwards
Total deferred tax assets
Valuation allowance
Deferred tax assets – net of valuation allowance
Deferred tax liabilities:
Depreciation and amortization
Net unrealized gain on securities available for sale
Capitalized internal-use software development costs
Deferred cancellation of debt income
Deferred loan costs
Deferred Senior Note exchange
Other
Total deferred tax liabilities
Deferred tax (liability) asset – net (1)
2014
2013
213 $
30
25
12
6
286
(4)
282
(125)
(98)
(76)
(9)
(7)
(6)
-
(321)
(39)
$
190
33
30
12
6
271
(4)
267
(142)
(5)
(62)
(11)
(10)
(7)
(2)
(239)
28
$
$
(1) Amounts are included in other assets and in accrued expenses and other liabilities at December 31, 2014 and 2013,
respectively.
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 (1)
Other
Effective income tax rate
2014
35.0 %
2.3
0.2
37.5 %
2013
35.0 %
2.3
(0.1)
37.2 %
2012
35.0 %
1.2
(0.2)
36.0 %
(1)
Includes the impact of a non-recurring state tax benefit of which $4 million and $20 million were recorded in 2013 and
2012, respectively.
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
2014
10
1
1
(1)
-
11
$
$
2013
12
1
-
(2)
(1)
10
$
$
The federal returns for 2011 through 2013 remain open to Federal tax examinations. The years open to examination by state
and local governments vary by jurisdiction.
- 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.
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, if dilutive, the
effect of outstanding stock options and unvested restricted stock awards and units. EPS under the basic and diluted
computations is as follows:
2014
2012
Year Ended December 31,
928
Net income
(45)
Preferred stock dividends
883
Net income available to common stockholders
1,274
Weighted-average common shares outstanding — basic
1
Common stock equivalent shares related to stock incentive plans
Weighted-average common shares outstanding — diluted (1)
1,275
.69
Basic EPS
Diluted EPS
.69
(1) Antidilutive stock options and restricted stock awards excluded from the calculation of diluted EPS totaled 24 million,
1,261 $
1,303
12
1,315
.96
$
.95 $
2013
1,071
(61)
1,010
1,285
8
1,293
.78
.78
1,321 $
$
$
$
$
$
$
(60)
$
$
34 million, and 74 million shares in 2014, 2013, and 2012, respectively.
22.
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). Schwab Bank is subject to supervision and regulation by the Office of the Comptroller of the Currency (the OCC),
as its primary regulator, the Federal Deposit Insurance Corporation, as its deposit insurer, and the Consumer Financial
Protection Bureau. CSC is required to serve as a source of strength for Schwab Bank. Prior to January 1, 2015, CSC, as a
savings and loan holding company, was not subject to specific statutory capital requirements. Beginning on January 1, 2015,
CSC is subject to new capital requirements set by the Federal Reserve.
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. CSC and Schwab Bank are
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 CSC and Schwab Bank. At December 31, 2014, Schwab Bank met the
capital level requirements.
- 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)
The regulatory capital and ratios for Schwab Bank are as follows:
Actual
Amount
Ratio
Minimum to be
Well Capitalized
Ratio
Amount
Minimum Capital
Requirement
Amount
Ratio
$ 7,700
$ 7,744
$ 7,700
$ 7,700
$ 6,550
$ 6,599
$ 6,550
$ 6,550
22.1 %
22.2 %
6.9 %
6.9 %
19.0 %
19.1 %
6.6 %
6.6 %
$ 2,095
$ 3,492
$ 5,548
N/A
$ 2,074
$ 3,457
$ 4,993
N/A
6.0 %
10.0 %
5.0 %
6.0 %
10.0 %
5.0 %
$ 1,397
$ 2,793
$ 4,438
$ 2,219
$ 1,383
$ 2,766
$ 3,994
$ 1,997
4.0 %
8.0 %
4.0 %
2.0 %
4.0 %
8.0 %
4.0 %
2.0 %
December 31, 2014
Tier 1 Risk-Based Capital
Total Risk-Based Capital
Tier 1 Leverage
Tangible Equity
December 31, 2013
Tier 1 Risk-Based Capital
Total Risk-Based Capital
Tier 1 Leverage
Tangible Equity
N/A Not applicable.
Based on its regulatory capital ratios at December 31, 2014 and 2013, Schwab Bank is considered well capitalized (the
highest category) pursuant to banking regulatory guidelines. There are no conditions or events since December 31, 2014, 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 $1.3 billion and $1.2 billion in 2014 and 2013, respectively.
CSC’s principal U.S. broker-dealers are Schwab and optionsXpress, Inc. 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), which is based on the type of business conducted by the broker-
dealer. Under the alternative method, a broker-dealer may not 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, 2014, are as follows:
Net Capital
% of
Aggregate
Debit Balances
Minimum
Net Capital
Required Debit Balances
2% of
Aggregate
Net Capital
in Excess of
Required
Net Capital
Schwab
optionsXpress, Inc.
$
$
1,550
123
10 %
38 %
$ 0.250
1
$
$ 324
6
$
$
$
1,226
117
Net Capital
in Excess of 5%
of Aggregate
Debit Balances
$
$
739
107
Schwab and optionsXpress, Inc. are also subject to Rule 15c3-3 under the Securities Exchange Act of 1934 and 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, 2014. Amounts included in cash and investments
segregated and on deposit for regulatory purposes represent actual balances on deposit, whereas cash and investments
- 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)
required to be segregated and on deposit for regulatory purposes at December 31, 2014 for Schwab and optionsXpress, Inc.
totaled $21.9 billion. On January 5, 2015, Schwab and optionsXpress, Inc. deposited a net amount of $1.7 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, 2013 for Schwab and optionsXpress, Inc. totaled $24.0 billion. On January 3, 2014, Schwab and
optionsXpress, Inc. deposited a net amount of $965 million of cash into their segregated reserve bank accounts.
23.
Segment Information
The Company’s two reportable segments are Investor Services and Advisor Services. The Company structures its operating
segments according to its clients and the services provided to those clients. The Investor Services segment provides retail
brokerage and banking services to individual investors, retirement plan services, and corporate brokerage services. The
Advisor Services segment provides custodial, trading, and support services to independent investment advisors, and
retirement business services to independent retirement plan advisors and recordkeepers whose plan assets are held at Schwab
Bank. 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.
The Company evaluates the performance of its segments on a pre-tax basis, excluding extraordinary or significant non-
recurring items and results of discontinued operations. 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 between the segments. 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:
Investor Services
2013
2014
2012
2014
Advisor Services
2013
2012
2014
Unallocated
2013
2012
2014
Total
2013
2012
Year Ended December 31,
Net Revenues:
Asset management and
administration fees
Net interest revenue
Trading revenue
Other – net (1)
Provision for loan losses
Net impairment losses
on securities
Total net revenues
$
$ 1,775
2,030
618
221
4
$ 1,627
1,756
621
178
1
$ 1,436
1,559
612
123
(15)
758 $
242
289
71
-
689 $
224
292
57
-
607 $
205
255
62
(1)
(1)
4,647
(9)
4,174
(29)
3,686
-
1,360
(1)
1,261
(3)
1,125
- $
-
-
51
-
-
51
Expenses Excluding Interest (2)
2,974
Income before taxes on income $ 1,673
2,899
$ 1,275
2,693
993
$
$
901
459 $
831
430 $
739
386 $
68
(17) $
Capital expenditures
Depreciation and amortization
$
$
271 $
154 $
190 $
155 $
98 $
157 $
134 $
45 $
80 $
47 $
40 $
39 $
- $
- $
(1) $
-
-
1
-
-
-
-
- $
- $
- $
- $ 2,533
-
2,272
907
1
343
71
-
4
$ 2,315 $ 2,043
1,764
868
256
(16)
1,980
913
236
1
-
72
(1)
6,058
(10)
5,435
(32)
4,883
1
71
3,943
$ 2,115
3,730
3,433
$ 1,705 $ 1,450
- $
- $
405 $
199 $
270 $
202 $
138
196
(1) Unallocated amount includes a net insurance settlement of $45 million in 2014 and a non-recurring gain of $70 million relating to a confidential
resolution of a vendor dispute in 2012.
(2) Unallocated amount includes a charge of $68 million for estimated future severance benefits resulting from changes in the Company’s geographic
footprint in 2014.
Fees received from Schwab’s proprietary mutual funds represented 7%, 9%, and 10% of the Company’s net revenues in
2014, 2013, and 2012, respectively. 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 2014, 2013, or
2012. 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, 2014, 2013, and 2012.
- 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)
24.
Business Acquisition
On December 14, 2012, the Company acquired ThomasPartners, Inc., a growth and dividend income-focused asset
management firm, for $85 million in cash. The Company recorded goodwill of $68 million and intangible assets of
$32 million. The intangible assets primarily relate to customer relationships and are being amortized over 11 years. The
goodwill was allocated to the Investor Services and Advisor Services segments in the amounts of $54 million and
$14 million, respectively.
25.
Subsequent Events
The Company has evaluated the impact of events that have occurred subsequent to December 31, 2014, 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.
26.
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 revenue – 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
2014
2
(64)
(62)
1
(24)
(85)
32
(53)
1,157
45
172
1,321
60
1,261
$
$
$
$
2013
4
(65)
(61)
-
(28)
(89)
38
(51)
830
163
129
1,071
61
1,010
$
$
2012
6
(97)
(91)
(30)
(23)
(144)
58
(86)
662
50
302
928
45
883
- 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)
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
2014
2013
$
1,043
360
74
327
4,083
7,883
68
$ 13,838
$
700
162
80
980
3,828
6,576
65
$ 12,391
$
185
34
1,816
2,035
11,803
$ 13,838
$
187
9
1,814
2,010
10,381
$ 12,391
- 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)
Condensed Statements of Cash Flows
Year Ended December 31,
2014
2013
2012
Cash Flows from Operating Activities
Net income
Adjustments to reconcile net income to net cash provided by
$
1,321
$
1,071
$
928
operating activities:
Equity in undistributed earnings of subsidiaries
Provision for deferred income taxes
Other
Net change in:
Other securities owned
Other assets
Accrued expenses and other liabilities
Net cash provided by operating activities
Cash Flows from Investing Activities
Due from (Due to) subsidiaries – net
Increase in investments in subsidiaries
Other investing activities
Net cash provided by (used for) investing activities
Cash Flows from Financing Activities
Issuance of commercial paper
Repayment of commercial paper
Issuance of long-term debt
Repayment of long-term debt
Premium paid on debt exchange
Net proceeds from preferred stock offering
Dividends paid
Proceeds from stock options exercised and other
Other financing activities
Net cash (used for) 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
(1,157)
4
(23)
5
(9)
(1)
140
607
(249)
-
358
-
-
-
-
-
-
(373)
189
29
(155)
343
700
1,043
$
$
(830)
(11)
(4)
(5)
29
13
263
(546)
(225)
(1)
(772)
-
(300)
275
-
-
-
(368)
258
5
(130)
(639)
1,339
700
$
(662)
9
39
3
(21)
(5)
291
43
(307)
-
(264)
300
-
350
(727)
(19)
863
(337)
35
(5)
460
487
852
1,339
- 92 -
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.
Quarterly Financial Information (Unaudited)
Fourth
Quarter
Third
Quarter
Second
Quarter
First
Quarter
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
1,478
956
326
318
1,311
.24
.24
.06
29.13
23.56
33
27
1,290
959
206
198
1,282
.15
.15
.06
18.11
15.05
26
22
Year Ended December 31, 2014:
$
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:
1,551 $
997 $
350 $
329 $
1,320
.25 $
.25 $
.06 $
1,551 $
1,033 $
321 $
312 $
1,316
.24 $
.24 $
.06 $
1,478
957
324
302
1,313
.23
.23
.06
$
$
30.89 $
23.35 $
31.00 $
26.44 $
28.04
24.56
High
Low
Range of Price/Earnings Ratio (1):
High
Low
Year Ended December 31, 2013:
$
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:
32
24
33
28
1,435 $
937 $
319 $
297 $
1,304
.23 $
.23 $
.06 $
1,373 $
909 $
290 $
282 $
1,296
.22 $
.22 $
.06 $
30
27
1,337
925
256
233
1,288
.18
.18
.06
High
Low
Range of Price/Earnings Ratio (1):
High
Low
$
$
26.00 $
20.57 $
22.69 $
20.74 $
21.23
16.21
33
26
32
30
32
24
(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.
- 93 -
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, 2014 and 2013, 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, 2014. 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, 2014, based on
criteria established in Internal Control – Integrated Framework (2013) 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, 2014 and 2013, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 2014, 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, 2014, based on the criteria
established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway
Commission.
/s/ Deloitte & Touche LLP
San Francisco, California
February 23, 2015
- 94 -
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, 2014, 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 (2013) 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, 2014.
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, 2014, has been audited by Deloitte &
Touche LLP, an independent registered public accounting firm, as stated in their report appearing on the previous page.
- 95 -
THE CHARLES SCHWAB CORPORATION
Item 9.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
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, 2014.
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, 2014.
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, 2014, 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, 2015 (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.
- 96 -
THE CHARLES SCHWAB CORPORATION
Schwab Executive Officers of the Registrant
The following table provides certain information about each of the Company’s executive officers as of December 31, 2014.
Executive Officers of the Registrant
Name
Charles R. Schwab
Walter W. Bettinger II
Jay L. Allen
Bernard J. Clark
David R. Garfield
Terri R. Kallsen
Joseph R. Martinetto
James D. McCool
Age
77
54
58
56
58
46
52
55
Title
Chairman of the Board
President and Chief Executive Officer
Executive Vice President and Chief Administrative Officer
Executive Vice President – Advisor Services
Executive Vice President, General Counsel and Corporate Secretary
Executive Vice President – Investor Services
Executive Vice President and Chief Financial Officer
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 Chairman and 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 and Chief Administrative Officer of CSC and Schwab since April 2014. He
served as Executive Vice President – Human Resources and Employee Services of CSC and Schwab from 2007 until
April 2014. 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 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.
Mr. Garfield has been Executive Vice President, General Counsel and Corporate Secretary of CSC and Executive Vice
President of Schwab since October 2014. Mr. Garfield served as Deputy General Counsel of Wells Fargo & Company from
1998 until he joined Schwab in October 2014.
Ms. Kallsen has been Executive Vice President – Investor Services of CSC and Schwab since December 2014. She served as
Senior Vice President – Portfolio Consulting of Schwab from 2012 until June 2014 and as Senior Vice President – Branch
Network from June 2014 until December 2014. Prior to joining Schwab, Ms. Kallsen served as Executive Vice President of
First Command Financial Services from 2009 until 2012 and as Senior Vice President of USAA from 2004 until 2009.
- 97 -
THE CHARLES SCHWAB CORPORATION
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 2012. He served as Executive
Vice President – Institutional Services of CSC and Schwab from 2008 until 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.
Item 11.
Executive Compensation
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 – 2014 Summary
Compensation Table,” “Executive Compensation Tables – 2014 Grants of Plan-Based Awards Table,” “Executive
Compensation Tables – Narrative to Summary Compensation and Grants of Plan-Based Awards Tables,” “Executive
Compensation Tables – 2014 Termination and Change in Control Benefits Table,” “Executive Compensation Tables –
Outstanding Equity Awards as of December 31, 2014,” “Executive Compensation Tables – 2014 Option Exercises and Stock
Vested Table,” “Executive Compensation Tables – 2014 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.
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
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.”
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.”
- 98 -
THE CHARLES SCHWAB CORPORATION
PART IV
Item 15.
Exhibits and Financial Statement Schedule
(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
2.1
3.11
3.14
3.15
3.16
4.1
Exhibit
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.
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.
- 99 -
THE CHARLES SCHWAB CORPORATION
Exhibit
Number
4.2
10.4
10.57
10.72
10.271
10.272
10.302
10.314
10.317
10.322
10.331
10.338
10.349
Exhibit
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.
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.
The Charles Schwab Corporation Directors’ Deferred Compensation Plan, as amended through
December 8, 2004.
The Charles Schwab Corporation Deferred Compensation Plan, as amended through December 8,
2004.
The Charles Schwab Corporation 2001 Stock Incentive Plan, as amended and restated as of
December 12, 2007, filed as Exhibit 10.302 to the Registrant’s Form 10-K for the year ended
December 31, 2012, and incorporated herein by reference.
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, 2013, 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, 2013, 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, 2013, 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.
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.
The Charles Schwab Severance Pay Plan, as Amended and Restated Effective May 1, 2012, filed as
Exhibit 10.349 to the Registrant’s Form 10-Q for the quarter ended June 30, 2012, and incorporated
herein by reference.
10.351
Summary of Non-Employee Director Compensation, filed as Exhibit 10.351 to the Registrant’s
Form 10-K for the year ended December 31, 2012, and incorporated herein by reference.
(2)
(2)
(2)
(2)
(2)
(2)
(2)
(2)
(2)
(2)
- 100 -
THE CHARLES SCHWAB CORPORATION
Exhibit
Number
10.352
10.353
10.354
10.355
10.356
10.357
10.358
10.359
10.360
10.361
10.362
10.363
10.364
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, 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, 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, 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, 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, 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, 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, filed as Exhibit 10.359 to the Registrant’s Form 8-K
dated January 24, 2013, and incorporated herein by reference.
The Charles Schwab Corporation 2013 Stock Incentive Plan, as approved at the Annual Meeting of
Stockholders on May 16, 2013, filed as Exhibit 10.360 to the Registrant’s Form 8-K dated May 16,
2013, and incorporated herein by reference.
Credit Agreement (364 – Day Commitment) dated as of June 7, 2013, between the Registrant and
financial institutions therein, filed as Exhibit 10.361 to the Registrant’s Form 10-Q for the quarter
ended June 30, 2013, and incorporated herein by reference.
(2)
(2)
(2)
(2)
(2)
(2)
(2)
(2)
(2)
The Charles Schwab Corporation Directors’ Deferred Compensation Plan II, as amended and restated
as of April 24, 2013, filed as Exhibit 10.362 to the Registrant’s Form 10-Q for the quarter ended
June 30, 2013, and incorporated herein by reference.
(2)
Credit Agreement (364 – Day Commitment) dated as of June 6, 2014, between the Registrant and
financial institutions therein (supersedes Exhibit 10.361), filed as Exhibit 10.363 to the Registrant’s
Form 10-Q for the quarter ended June 30, 2014, and incorporated herein by reference.
Separation Agreement, General Release and Waiver of Claims by and between Mr. Clendening and
CSC, filed as Exhibit 10.364 to the Registrant’s Form 8-K/A dated December 10, 2014, and
incorporated herein by reference.
(2)
- 101 -
THE CHARLES SCHWAB CORPORATION
Exhibit
Number
Exhibit
12.1
21.1
23.1
31.1
31.2
32.1
32.2
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.
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)
(2)
(3)
Furnished as an exhibit to this annual report on Form 10-K.
Management contract or compensatory plan.
Attached as Exhibit 101 to this Annual Report on Form 10-K for the annual period ended
December 31, 2014, 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.
(1)
(1)
(3)
(3)
(3)
(3)
(3)
(3)
- 102 -
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 23, 2015.
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 23, 2015.
Signature / Title
Signature / Title
/s/ Walter W. Bettinger II
Walter W. Bettinger II,
President and Chief Executive Officer
/s/ Joseph R. Martinetto
Joseph R. Martinetto,
Executive Vice President
and Chief Financial Officer
(principal financial and accounting officer)
/s/ Charles R. Schwab
Charles R. Schwab, Chairman of the Board
/s/ John K. Adams, Jr.
John K. Adams, Jr., Director
/s/ Nancy H. Bechtle
Nancy H. Bechtle, Director
/s/ Christopher V. Dodds
Christopher V. Dodds, Director
/s/ Mark A. Goldfarb
Mark A. Goldfarb, Director
/s/ Frank C. Herringer
Frank C. Herringer, Director
/s/ Arun Sarin
Arun Sarin, Director
/s/ Roger O. Walther
Roger O. Walther, Director
/s/ C. Preston Butcher
C. Preston Butcher, Director
/s/ Stephen A. Ellis
Stephen A. Ellis, Director
/s/ William S. Haraf
William S. Haraf, 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
- 103 -
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
SCHEDULE II
Valuation and Qualifying Accounts
(In millions)
Description
Balance at
Beginning
of Year
Additions
Charged
to Expense
Other (1)
Written off
Balance at
End
of Year
For the year ended December 31, 2014:
Allowance for doubtful accounts of
brokerage clients (2)
For the year ended December 31, 2013:
Allowance for doubtful accounts of
brokerage clients (2)
For the year ended December 31, 2012:
Allowance for doubtful accounts of
brokerage clients (2)
$
$
$
-
$
6
$
1
$
(5)
$
2
1
$
2
$
1
$
(4)
$
-
2
$
4
$
-
$
(5)
$
1
Includes collections of previously written-off accounts.
(1)
(2) Excludes banking-related valuation and qualifying accounts. See “Item 8 – Financial Statements and Supplementary
Data – Notes to Consolidated Financial Statements – 6. 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,
2014
2013
2012
Average
Balance
Interest
Average
Rate
Average
Balance
Interest
Average
Rate
Average
Balance
Interest
Average
Rate
Assets:
Cash and cash equivalents (1)
Securities available for 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 on
securities available for sale
Noninterest-earning assets
Total Assets
$
5,871 $
52,056
32,361
12,903
-
63
103,254
15
546
828
354
-
6
1,749
0.26 %
1.05 %
2.56 %
2.74 %
-
9.52 %
1.69 %
$
5,626 $
49,112
24,915
11,756
-
53
91,462
15
557
610
329
-
2
1,513
0.27 %
1.13 %
2.45 %
2.80 %
-
3.77 %
1.65 %
$
5,575 $
39,739
15,371
10,050
18
54
70,807
15
583
397
309
1
1
1,306
0.27 %
1.47 %
2.58 %
3.07 %
4.12 %
1.85 %
1.84 %
229
525
$ 104,008
252
671
$ 92,385
275
566
$ 71,648
Liabilities and Stockholder’s Equity:
Interest-bearing banking deposits
Total sources on which interest is paid
$
95,842
95,842
30
30
0.03 %
0.03 %
$ 85,465
85,465
31
31
0.04 %
0.04 %
$ 65,546
65,546
42
42
0.06 %
0.06 %
Noninterest-bearing liabilities
Stockholder’s equity
Total Liabilities and Stockholder’s Equity
723
7,443
$ 104,008
650
6,270
$ 92,385
577
5,525
$ 71,648
Net interest revenue
$ 1,719
$ 1,482
$ 1,264
Net yield on interest-earning assets
1.66 %
Includes deposits with banks, short-term investments, and federal funds sold.
(1)
(2) Amounts have been calculated based on amortized cost.
(3)
Includes average principal balances of nonaccrual loans.
1.62 %
1.79 %
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:
2014 Compared to 2013
Increase (Decrease) Due to
Change in:
2013 Compared to 2012
Increase (Decrease) Due to
Change in:
Average
Volume
Average
Rate
Total
Average
Volume
Average
Rate
Total
Interest-earning assets:
Cash and cash equivalents (1)
Securities available for sale (2)
Securities held to maturity
Loans to banking clients (3)
Loans held for sale
Other interest-earning assets
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
$
$
$
$
$
-
33
182
32
-
-
247
4
4
243
$
$
$
$
$
-
(44)
36
(7)
-
4
(11)
(5)
(5)
(6)
$
$
$
$
$
-
(11)
218
25
-
4
236
(1)
(1)
237
$
$
$
$
$
-
137
247
52
(1)
-
435
12
12
423
$
$
$
$
$
-
(163)
(34)
(32)
-
1
(228)
(23)
(23)
(205)
$
$
$
$
$
-
(26)
213
20
(1)
1
207
(11)
(11)
218
Changes that are not due solely to volume or rate have been allocated to rate.
Includes deposits with banks and short-term investments.
(1)
(2) Amounts have been calculated based on amortized cost.
(3)
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, 2014
Securities available for sale:
Asset-backed securities
U.S. agency mortgage-backed securities
Corporate debt securities
U.S. agency notes
Treasury securities
Certificates of deposit
Non-agency commercial mortgage-backed securities
Other securities
Total securities available for sale
Securities held to maturity:
U.S. agency mortgage-backed securities
Non-agency commercial mortgage-backed securities
Total securities held to maturity
December 31, 2013
Securities available for sale:
U.S. agency mortgage-backed securities
Asset-backed securities
Corporate debt securities
U.S. agency notes
Certificates of deposit
Non-agency residential mortgage-backed securities
Non-agency commercial mortgage-backed securities
Other securities
Total securities available for sale
Securities held to maturity:
U.S. agency mortgage-backed securities
Non-agency commercial mortgage-backed securities
Other securities
Total securities held to maturity
Gross
Gross
Amortized
Unrealized
Unrealized
Cost
Gains
Losses
Fair
Value
$
$
$
$
19,320 $
18,487
8,023
3,839
2,993
1,533
310
15
54,520 $
33,388 $
1,001
34,389 $
64 $
242
30
-
2
1
7
-
346 $
531 $
11
542 $
18 $
12
8
44
1
-
-
-
83 $
19,366
18,717
8,045
3,795
2,994
1,534
317
15
54,783
174 $
14
188 $
33,745
998
34,743
Gross
Gross
Amortized
Unrealized
Unrealized
Cost
Gains
Losses
Fair
Value
$
$
$
$
18,554 $
15,201
8,973
4,239
3,650
616
271
100
51,604 $
29,260 $
958
100
30,318 $
140 $
42
49
1
4
11
8
-
255 $
161 $
-
-
161 $
49 $
37
15
104
2
34
-
-
241 $
921 $
68
-
989 $
18,645
15,206
9,007
4,136
3,652
593
279
100
51,618
28,500
890
100
29,490
F-5
THE CHARLES SCHWAB CORPORATION
Supplemental Financial Data for Charles Schwab Bank (Unaudited)
(Dollars in Millions)
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
Gross
Gross
Amortized
Unrealized
Unrealized
Cost
Gains
Losses
Fair
Value
$
$
$
$
20,080 $
8,104
6,197
6,150
3,465
796
574
273
45,639 $
17,750 $
444
18,194 $
396 $
62
61
12
2
2
-
16
551 $
558 $
-
558 $
- $
2
2
1
3
65
-
-
73 $
20,476
8,164
6,256
6,161
3,464
733
574
289
46,117
19 $
1
20 $
18,289
443
18,732
The maturities and related weighted-average yields of securities available for sale and securities held to maturity at
December 31, 2014, are as follows:
Securities available for sale:
Asset-backed securities
U.S. agency mortgage-backed securities (1)
Corporate debt securities
U.S. agency notes
Treasury securities
Certificates of deposit
Non-agency commercial mortgage-backed
securities (1)
Other securities
Total fair value
Total amortized cost
Weighted-average yield (2)
Securities held to maturity:
U.S. agency mortgage-backed securities (1)
Non-agency commercial mortgage-backed
After 1 year After 5 years
Within
1 year
through
5 years
through
10 years
After
10 years
Total
$
$
-
-
999
-
-
624
$ 2,946
1,281
7,046
3,795
2,994
910
5,062
5,196
-
-
-
-
$ 11,358 $ 19,366
18,717
8,045
3,795
2,994
1,534
12,240
-
-
-
-
-
-
-
-
317
15
$ 1,623 $ 18,972 $ 10,258 $ 23,930 $ 54,783
$ 1,621 $ 18,981 $ 10,168 $ 23,750 $ 54,520
0.97 %
317
15
0.88 %
1.08 %
0.90 %
1.00 %
-
-
$
- $
857 $ 15,618 $ 17,270 $ 33,745
securities (1)
Total fair value
Total amortized cost
Weighted-average yield (2)
(1) Mortgage-backed securities have been allocated to maturity groupings based on final contractual maturities. Actual
998
857 $ 15,977 $ 17,909 $ 34,743
853 $ 15,789 $ 17,747 $ 34,389
2.53 %
1.98 %
-
- $
- $
-
2.46 %
2.64 %
359
639
-
$
$
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.
(2) The weighted-average yield is computed using the amortized cost at December 31, 2014.
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,
2014, 2013, and 2012. 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 and securities available for sale.
December 31, 2014
Country:
Canada
Australia
Total
December 31, 2013
Country:
Canada
Australia
United Kingdom
Sweden
Switzerland
Total
December 31, 2012
Country:
Australia
United Kingdom
Canada
Sweden
Switzerland
Japan
Total
Banks and other
financial institutions
Commercial and
industrial institutions
Total
Exposure as a %
of total assets
$
$
1,437
1,182
2,619
$
$
-
-
-
Banks and other
financial institutions
Commercial and
industrial institutions
$
$
2,408
1,563
1,262
1,247
825
7,305
$
$
-
-
140
-
-
140
Banks and other
financial institutions
Commercial and
industrial institutions
$
$
2,300
1,556
1,732
1,302
902
800
8,592
$
$
-
351
-
-
-
-
351
$
$
$
$
$
$
1,437
1,182
2,619
1.3 %
1.1 %
Total
Exposure as a %
of total assets
2,408
1,563
1,402
1,247
825
7,445
2.4 %
1.6 %
1.4 %
1.2 %
0.8 %
Total
Exposure as a %
of total assets
2,300
1,907
1,732
1,302
902
800
8,943
2.7 %
2.2 %
2.0 %
1.5 %
1.1 %
0.9 %
5.
Loans to Banking Clients and Related Allowance for Loan Losses
The composition of the loan portfolio is as follows:
December 31,
Residential real estate mortgages
Home equity loans and lines of credit
Personal loans secured by securities
Other
Total loans to banking clients
2014
2013
2012
2011
2010
$
$
8,127 $
2,955
2,320
36
13,438 $
8,006 $
3,041
1,384
34
12,465 $
6,507 $
3,287
963
22
10,779 $
5,596 $
3,509
742
16
9,863 $
4,695
3,500
562
16
8,773
F-7
THE CHARLES SCHWAB CORPORATION
Supplemental Financial Data for Charles Schwab Bank (Unaudited)
(Dollars in Millions)
An analysis of nonaccrual loans is as follows:
December 31,
Nonaccrual loans
Average nonaccrual loans
2014
2013
2012
2011
2010
$
$
35 $
39 $
48 $
43 $
48 $
48 $
52 $
51 $
51
40
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
2014
2013
2012
2011
2010
$
$
48 $
(5)
3
(4)
42 $
56 $
(11)
4
(1)
48 $
54 $
(16)
2
16
56 $
53 $
(19)
2
18
54 $
45
(20)
1
27
53
The maturities of the loan portfolio at December 31, 2014, are as follows:
Residential real estate mortgages (1)
Home equity loans and lines of credit (2)
Personal loans secured by securities
Other
Total
After 1 year
Within
1 year
$
$
- $
574
127
7
708 $
through
5 years
-
1,500
2,193
26
3,719
After
5 years
8,127
881
$
$
$
3
9,011
$
Total
8,127
2,955
2,320
36
13,438
(1) Maturities are based upon the contractual terms of the loans.
(2) Maturities are based on an initial draw period of 10 years.
The interest sensitivity of loans with contractual maturities in excess of one year at December 31, 2014, 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
December 31,
Average loans
Allowance to year end loans
Allowance to nonperforming loans
Nonperforming assets to average loans
and real estate owned
2014
2013
2012
$ 12,904 $ 11,756 $ 10,050 $
.52 %
117 %
.39 %
100 %
.31 %
120 %
After
1 year
11,974
756
12,730
$
$
2011
9,468 $
.55 %
104 %
2010
7,983
.60 %
104 %
.31 %
.45 %
.54 %
.59 %
.68 %
F-8
THE CHARLES SCHWAB CORPORATION
Supplemental Financial Data for Charles Schwab Bank (Unaudited)
(Dollars in Millions)
7.
Deposits from Banking Clients
The following table presents the average amount of and the average rate paid on deposit categories that are in excess of ten
percent of average total deposits from banking clients:
2014
Amount Rate
2013
2012
Amount Rate
Amount Rate
Analysis of average daily deposits:
Money market and other savings deposits
Interest-bearing demand deposits
$ 82,927
12,915
0.01 % $ 73,167
12,298
0.09 %
0.03 % $
0.10 %
Total
$ 95,842
$ 85,465
$
54,318
11,227
65,545
0.05 %
0.13 %
At December 31, 2014, deposits from banking clients included one domestic-issued certificate of deposit of $100,000 or
more, in the amount of $524,765, with a contractual maturity of less than 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
2014
12.71 %
0.91 %
7.15 %
2013
12.46 %
0.85 %
6.79 %
2012
11.82 %
0.91 %
7.71 %
F-9
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,
2014
2013
2012
2011
2010
Earnings before taxes on earnings
$ 2,115 $ 1,705 $ 1,450 $
1,392 $
779
Fixed charges
Interest expense:
Deposits from banking clients
Payables to brokerage clients
Long-term debt
Other
Total
Interest portion of rental expense
Total fixed charges (A)
30
2
73
(3)
102
71
173
31
3
69
2
105
69
174
42
3
103
2
150
68
218
62
3
108
2
175
62
237
105
2
92
-
199
56
255
Earnings before taxes on earnings and fixed charges (B)
$ 2,288 $ 1,879 $ 1,668 $
1,629 $ 1,034
Ratio of earnings to fixed charges (B) ÷ (A) (1)
13.2
10.8
7.7
6.9
4.1
Ratio of earnings to fixed charges, excluding deposits from banking
clients and payables to brokerage clients interest expense (2)
16.0
13.2
9.4
9.1
6.3
Total fixed charges
Preferred stock dividends (3)
Total fixed charges and preferred stock dividends (C)
$
$
173 $
174 $
218 $
237 $
96
269 $
97
271 $
70
288 $
-
237 $
255
-
255
Ratio of earnings to fixed charges and preferred stock
dividends (B) ÷ (C) (1)
8.5
6.9
5.8
6.9
4.1
Ratio of earnings to fixed charges and preferred stock dividends,
excluding deposits from banking clients and payables to
brokerage clients interest expense (2)
9.5
7.8
6.7
9.1
6.3
(1) 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 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.
(2) 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.
(3) 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
EXHIBIT 21.1
Subsidiaries of the Registrant
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, 2014.
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 23, 2015,
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, 2014.
Filed on Form S-3:
Registration Statement No. 333-200939
Filed on Form S-8:
(Debt Securities, Preferred Stock, Depository Shares, Common Stock,
Purchase Contracts, Warrants, and Units Consisting of Two or More
Securities)
Registration Statement No. 333-192893
(The Charles Schwab Corporation Financial Consultant Career
Achievement Award Program)
Registration Statement No. 333-189553
(The Charles Schwab Corporation 2013 Stock Incentive Plan)
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. 333-71322
(The SchwabPlan Retirement Savings and Investment Plan)
Registration Statement No. 333-63448
(The Charles Schwab Corporation 2004 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 23, 2015
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. 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;
3. 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;
4. 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) 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;
b) 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;
c) 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
d) 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) 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
b) 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 23, 2015
/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. 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;
3. 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;
4. 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) 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;
b) 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;
c) 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
d) 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) 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
b) 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 23, 2015
/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, 2014 (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)
(2)
The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities
Exchange Act of 1934; and
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 23, 2015
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, 2014 (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)
(2)
The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities
Exchange Act of 1934; and
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 23, 2015
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.
i / BOARD OF DIRECTORS
BOARD OF
DIRECTORS
CHARLES R. SCHWAB
Chairman of the Board,
The Charles Schwab Corporation
Age: 77. Director since 1986.
Term expires in 2016.
JOHN K. ADAMS, JR.
Former Managing Director,
Financial Institutions Group,
UBS Investment Bank,
a financial services firm
Age: 59. Director since January
2015. Term expires in 2016.
Member of the Audit Committee;
Nominating and Corporate
Governance Committee;
Risk Committee.
NANCY H. BECHTLE
Chairman, Sugar Bowl Corporation,
a ski resort operator
Age: 77. 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: 54. 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: 76. Director since 1988.
Term expires in 2015.
Member of the Audit Committee;
Nominating and Corporate
Governance Committee.
CHRISTOPHER V. DODDS
Senior Advisor, Carlyle Group,
a private equity firm
Age: 55. Director since 2014.
Term expires in 2015.
Member of the Risk Committee.
ARUN SARIN
Former Chief Executive Officer,
Vodafone Group Plc, a mobile
telecommunications company
Age: 60. Director since 2009.
Term expires in 2016.
Member of the Audit Committee;
Nominating and Corporate
Governance Committee.
PAULA A. SNEED
Chairman and Chief Executive Officer,
Phelps Prescott Group, LLC, a strategy
and management consulting firm
Age: 67. Director since 2002.
Term expires in 2016.
Member of the Compensation
Committee; Nominating and
Corporate Governance Committee.
ROGER O. WALTHER
Chairman and Chief Executive Officer,
Tusker Corporation, a real estate and
business management company
Age: 79. Director since 1989.
Term expires in 2017.
Chairman of the Compensation
Committee; member of the Nominating
and Corporate Governance Committee.
ROBERT N. WILSON
Chairman, Mevion Medical Systems, Inc.,
a medical device company
Age: 74. Director since 2003.
Term expires in 2017.
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: 52. Director since 2012.
Term expires in 2016.
Member of the Nominating and
Corporate Governance Committee;
Risk Committee.
MARK A. GOLDFARB
Managing Director, BDO USA, LLP,
an accounting and consulting firm
Age: 63. Director since 2012.
Term expires in 2015.
Chairman of the Audit Committee;
member of the Nominating and
Corporate Governance Committee.
WILLIAM S. HARAF
Special Advisor, Promontory
Financial Group, a financial consulting firm
Age: 66. Director since January
2015. Term expires in 2017. Member
of the Audit Committee; Nominating
and Corporate Governance Committee;
Risk Committee.
FRANK C. HERRINGER
Chairman of the Board, Transamerica
Corporation, a financial services company
Age: 72. Director since 1996.
Term expires in 2017.
Chairman of the Nominating
and Corporate Governance
Committee; member of the
Compensation Committee.
STEPHEN T. McLIN
Chairman and Chief Executive
Officer, STM Holdings LLC, which
offers merger and acquisition advice
Age: 68. Director since 1988.
Term expires in 2017.
Member of the Risk Committee
(Chairman in 2014); Nominating and
Corporate Governance Committee.
CORPORATE INFORMATION / ii
CORPORATE
INFORMATION
THE CHARLES SCHWAB
CORPORATION
211 Main Street
San Francisco, CA 94105
(415) 667-7000
www.aboutschwab.com
The Charles Schwab Corporation (NYSE:
SCHW) is a leading provider of financial
services, with more than 325 offices and
9.4 million active brokerage accounts,
1.4 million corporate retirement plan
participants, 985,000 banking accounts,
and $2.46 trillion in client assets as of
December 31, 2014. Through its operating
subsidiaries, the company provides a
full range of wealth management,
securities brokerage, banking, money
management, and financial advisory
services to individual investors and
independent investment advisors.
Office of the Corporate Secretary
(415) 667-9807
ANNUAL MEETING
The annual meeting of stockholders
will be conducted at 2:00 p.m. (Pacific
Time) on May 13, 2015, at 211 Main
Street, San Francisco, CA, and via
the Internet. To register, visit:
www.schwabevents.com/corporation
PUBLICATIONS
To obtain the company’s annual
report, 10-K, 10-Q, quarterly earnings
release, or monthly activity report
without charge, contact:
Charles Schwab Investor Relations
211 Main Street
San Francisco, CA 94105
(415) 667-1959
These documents may also be
viewed in the Investor Relations
section of the company’s website
at www.aboutschwab.com.
STOCK OWNERSHIP SERVICES
All stockholders of record are welcome
to participate in The Charles Schwab
Corporation Dividend Reinvestment and
Stock Purchase Plan, managed by Wells
Fargo Bank, N.A. For information on
the Dividend Reinvestment and Stock
Purchase Plan, or for assistance on stock
ownership questions, contact: Transfer
Agent & Registrar Wells Fargo Bank, N.A.
Shareowner Services
P.O. Box 64854
St. Paul, MN 55164
(877) 778-6753
www.shareowneronline.com
ABOUT THIS ANNUAL REPORT
CEO and CFO Certifications:
The Charles Schwab Corporation
has included as exhibits to its Annual
Report, on Form 10-K for the year
ended December 31, 2014, filed with the
Securities and Exchange Commission,
certificates of its Chief Executive Officer
and Chief Financial Officer certifying the
quality of the company’s public disclosure.
TRADEMARKS OR
REGISTERED TRADEMARKS
Charles Schwab, Schwab, Own Your
Tomorrow, and other trademarks
appearing herein, which may be indicated
by “®” and “™,” are registered trademarks
or trademarks of Charles Schwab & Co.,
Inc., or an affiliated entity in the U.S. and/
or other countries. These trademarks and
registered trademarks are proprietary to
Charles Schwab & Co., Inc., or an affiliated
entity in the U.S. and/or other countries.
CHARLES SCHWAB FOUNDATION
Carrie Schwab-Pomerantz,
President of Charles Schwab
Foundation and Senior Vice President,
Charles Schwab & Co., Inc.
www.aboutschwab.com/community
Email: charlesschwabfoundation@schwab.com
CUSTOMER SERVICE
Investor Services: (800) 435-4000
www.schwab.com
Advisor Services: (877) 687-4085
www.schwabadvisorcenter.com/public
INVESTOR RELATIONS
Richard G. Fowler, Senior Vice President
(415) 667-1841
Email: investor.relations@schwab.com
LEGISLATIVE & REGULATORY AFFAIRS
Jeffrey T. Brown, Senior Vice President
325 7th Street NW, Suite 200
Washington, DC 20004
(202) 662-4902
MEDIA RELATIONS
Greg Gable, Senior Vice President
Media Hotline: (888) 767-5432
Email: public.relations@schwab.com
www.aboutschwab.com/press
INDEPENDENT AUDITORS
Deloitte & Touche LLP
555 Mission Street
San Francisco, CA 94105
(415) 783-4000
www.deloitte.com
OUTSIDE COUNSEL
Arnold & Porter LLP
Three Embarcadero Center, 10th Floor
San Francisco, CA 94111
www.arnoldporter.com
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Annual
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THE CHARLES SCHWAB
CORPORATION
211 Main Street
San Francisco, CA 94105
(415) 667-7000
Schwab.com
AboutSchwab.com
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©2015 The Charles Schwab Corporation. All rights reserved.
MKT10448-27 (03/15)
00125814