2018 Annual Report
Letter From the CEO 2
Employer of Choice & Industry Recognition 8
Letter From the CFO 10
Financial Highlights 16
Growth in Client Assets and Accounts 17
Executive Management 18
Form 10-K 19
Board of Directors i
Corporate Information ii
This page: Forging the future of
digital experience in Chicago.
Front cover: 2018 grand opening
of Schwab’s new Austin branch.
“Through Clients’ Eyes”
Guiding Principles that drive our actions for growth.
Trust is everything. Earned over
time. Lost in an instant. We will focus
on anything we do or don’t do that
builds or undermines trust and our
relationship with clients.
Clients deserve efficient
experiences. Every time. We will
respect our clients’ time by ensuring
that every interaction a client has with
us is simple and easy.
Price matters. More than ever. And in
our industry more than most. We will
leverage our scale to deliver industry-
leading pricing without prospects or
clients having to ask or negotiate.
Every prospective or existing client
is critical to our future growth.
No matter how large or small. We
will value and delight them at each
possible opportunity.
Actions matter more than words.
Clients, press, influencers, and
employees will give credit to what we
do vs. what we say. We will challenge
everything we do to ensure it is
consistent with what we believe and
say about ourselves.
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,” “would,” “could,” “should,” “growth,” “build,” “deliver,” “continue,” “remain,” “can,” “drive,” “potential,”
“lead,” “future,” “position,” “target,” “record,” “investment,” “opportunity,” “objective,” “ensure,” “imply,” “ongoing,” “are,” “aim,” “anticipate,”
“maintain,” and other similar expressions. In addition, any statements that refer to expectations, projections, or other characterizations of future
events or circumstances are forward-looking statements. These forward-looking statements, which reflect management’s beliefs, objectives, and
expectations as of the date hereof, are estimates based on the best judgment of the company’s senior management. These statements relate to,
among other things: growth in the company’s client base, accounts, assets, revenues, earnings, and profits; operating efficiency; and investments
to fuel and support growth, serve clients, and drive scale and efficiency (See “Letter From the Chief Executive Officer” and “Letter From the Chief
Financial Officer”); market position; client metrics; stockholder value and rewards; RIA growth; and disruptive actions (See “Letter From the Chief
Executive Officer”); transfers to sweep; expense growth; financial formula; 2019 outlook assumptions and financial expectations; balance sheet
growth; operating leverage; profit margin; Tier 1 Leverage Ratio operating objective; capital returns; and target dividend payout ratio (See “Letter
From the Chief Financial Officer”). Achievement of the expressed beliefs, objectives, and expectations described in these statements is subject
to 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 February 27, 2019 (or such earlier date
as may be specified herein). See “Forward-Looking Statements” in Management’s Discussion and Analysis of Financial Condition and Results of
Operations on page 20 in the Form 10-K section for a discussion of important factors that may cause such differences.
Guiding Principles 1
“Our position in the
marketplace has never
been stronger. Our client
metrics have never been
stronger. And our financials,
both revenue and earnings,
have never been stronger.”
Walt Bettinger
President and Chief Executive Officer
TOTAL CLIENT ASSETS (In Billions At Year-End)
$2,464
2014
$2,514
2015
$2,780
2016
$3,362
2017
$3,252
2018
From a financial standpoint, we achieved similar record
results. In 2018, we achieved our sixth consecutive year of
record revenue and our fifth consecutive year of record net
income. Revenue grew 18% from 2017, while net income
rose 49% from the prior year, aided by tax law changes.
We achieved this while continuing to invest consistently
in capabilities designed to ensure long-term growth and
operating efficiency.
Never More Confident
To my fellow stockholders,
This is my 11th opportunity to have the honor of crafting our
Annual Report letter. As always, my goal is to keep this letter
clear, direct, and free of jargon, corporate speak, and trendy
buzzwords. The litmus test for my letter is whether it reads
as if I were corresponding with a business partner who has
been out of touch for the past year. As always, please let me
know if I’ve achieved this goal.
The year 2018 created a dichotomy, both for your company—
The Charles Schwab Corporation—and for the markets and
economy. Merriam-Webster’s dictionary defines dichotomy
as “a division into two…contradictory groups or entities.”
In 2018, we saw just such a contradiction—between our
business performance and our stockholders’ returns. From a
client growth and metric standpoint, 2018 was our strongest
year in history. By virtually every measure, our clients’ trust
and confidence in us helped lead to record growth:
• Record new-to-retail households, up 20%;
• Record daily average trades, up 26%;
• Record new brokerage accounts of 1,576,000; and
• Record core net new assets of $227.8 billion, with total
client assets at $3.25 trillion.
2 Letter From the Chief Executive Officer
VALUE OF SCHWAB STOCK AND S&P 500® INDEX
$60
$50
W
H
C
S
$40
$30
$20
S&P 500®
SCHW
3,000
2,800
2,600
2,400
2,200
S
&
P
5
0
0
®
Dec-17
Jan-18
Feb-18
Mar-18
Apr-18
May-18
Jun-18
Jul-18
Aug-18
Sept-18
Oct-18
Nov-18
Dec-18
And yet, from a stockholder return standpoint, it was a very
disappointing year. After a five-year period in which our total
returns to stockholders averaged over 30% per year, we saw
our stock price fall in 2018 from a starting point of $51.37
to $41.53, despite our ongoing record-breaking business
performance. Truly a dichotomy.
We were not alone. The performances of the broader
economy and equity markets were similarly contradictory.
Although the year was relatively strong from an economic
standpoint, with record low unemployment and strong
GDP growth, the stock market was highly volatile with the
S&P 500® peaking at 2,931 on September 20th and ending
the year down 6% at 2,507. Truly a dichotomy.
Of course, we recognize that individual stock prices and
the overall equity market respond to a variety of factors.
Nevertheless, I am disappointed that our strong business
and financial results did not lead to stronger 2018 returns
for owners of our stock. It is my responsibility to see that
we make optimal long-term decisions for the benefit of our
stockholders, and I believe we are on the correct long-term
path strategically. But, while I remain convinced that our
long-term stockholders will be rewarded as a result of our
efforts, these decisions did not lead to growth in the value of
our stock price in 2018.
Despite this, I have never been more confident about our
future. Our position in the marketplace has never been
stronger. Our client metrics have never been stronger. And
our financials, both revenue and earnings, have never been
stronger.
“ It is my responsibility to
see that we make optimal
long-term decisions for the
benefit of our stockholders.”
Efficiency and collaboration
drive our growth.
Letter From the Chief Executive Officer 3
SCHWAB’S “VIRTUOUS CYCLE” CONTINUES TO DELIVER STRONG BUSINESS MOMENTUM
$380M*
in Annualized Cost Savings for Clients
C h a l
l e n ge the status quo
t o b e nefit investors
$227.8B
Core Net New Assets
$3.25T
Client Assets
w
i
t
I
n
h
v
e
m
s
o
t
r
o
e
r
s
o
f
r
e
w
a
r
t
h
e
i
r
a
s
s
e
t
s
g t o record
c i a l r e s ults,…
d i n
L e a
n
i n a
f
d
u
s
$10.1B
Revenue
45.0%
Pre-Tax Profit Margin
stments,
ctions to …
e
v
d a
in
r
e
t
a
e
r
G
n
u
f
h
c
h
w
i
O
u
t
s
t
a
n
d
in
v
a
l
u
e, a
g stockholder
…
d
n
12%
Expense Growth
12%
Increase in Project Spending
19%
Return on Equity
52%
Earnings Per Share Growth
Note: All growth metrics are 2018 vs. 2017.
*Estimated annualized cost savings for clients from strategic pricing moves announced in February 2017 and October 2017.
committed to transparency, we share these beliefs publicly
for everyone, even our competitors, to see and evaluate. In
my Annual Report letter last year, I discussed three of the
beliefs we have about the next decade of investing:
• The concept of “beating the market” has given way to
a client focus on financial planning, asset allocation,
tax efficiency, and low-cost investing;
• Fiduciary-standard advice, fee transparency, and low
costs are a fundamental expectation for most clients; and
TOTAL BROKERAGE AND BANKING ACCOUNTS
(In Thousands)
The Future for Schwab—A Winning
Approach
Our business model is relatively simple. It revolves around
the Golden Rule: If we treat prospects and clients the way
we would want to be treated, they will choose to start a
relationship with Schwab and do more business with us. This
approach comes to life through our corporate-wide “Through
Clients’ Eyes” strategy and its execution, which find life in
our “Virtuous Cycle.”
“Through Clients’ Eyes” simply means that we will evaluate
decisions we are faced with by examining: (1) whether they
are likely to attract more prospects to choose Schwab and
encourage clients to do more business with us; and (2) whether
the execution of our decisions through the “Virtuous Cycle” will
reward our clients, employees, stockholders, and communities.
In a world where consumers have more choices than ever, where
transparency is greater than ever, and where the old-fashioned
idea of “price versus quality trade-off” has been proven largely
archaic, we are more confident than ever that our strategy and
execution are ideally positioned for long-term growth.
At Schwab, we have embraced—and even championed—a
“no trade-offs” approach, offering our clients what we
believe is an unparalleled combination of low costs, full
service, and guaranteed satisfaction. And this approach has
contributed to our record-breaking results.
Our strategy is designed around our core beliefs about
investor needs and the future of investing. And as a company
10,371
2014
10,802
2015
11,261
2016
11,952
2017
12,895
2018
4 Letter From the Chief Executive Officer
• Scale is playing an increasingly large role in determining
the “winners” as costs related to cybersecurity,
compliance, and regulatory oversight challenge sub-
scale firms’ ability to compete effectively.
These three beliefs remain valid and central to our view of the
landscape. This year, I’d like to discuss three additional factors
we believe are shaping the investment services industry today
and how we are taking advantage of these changes to better
serve our clients and reward our stockholders:
• Independent registered investment advisors (RIAs) will
continue to grow faster than the industry overall due
to an acceleration in the number of brokers turning
independent and affluent consumers’ expectations for
transparency and a fiduciary-standard experience;
• Clients view robo-advice as a credible investment
product, but investors of all ages will place their long-
term trust in firms that offer a combination of people
and digital experiences; and
• Although brand matters, brand loyalty won’t ensure
client retention as consumers are more willing than
ever to change providers in search of lower cost,
greater transparency, and more objectivity.
Rapid Growth for Independent RIAs
Over 25 years ago, we noticed an unusual phenomenon
at Schwab. Some of the most affluent clients we served
were asking us to allow another individual to access their
investment account. When we dug into the details, we
realized that these investors were hiring independent
professionals to help them manage their money.
“We proudly serve more than 7,500
of these RIA firms, and they entrust
us with over $1.55 trillion of their
clients’ money.”
These professionals were unique in that they did not work on
commissions as most brokers in the industry at that time did.
Rather, they took a “fiduciary” role—they placed their clients’
best interests ahead of their own, and offered advice and
guidance for a clear and understandable fee.
We set to work building an infrastructure to support these
independent investment advisors and make it easier for
them to serve affluent investors. That was the genesis of our
custodial business.
Today, this area is growing rapidly relative to the rest of the
industry, and it is poised for ongoing success. Investors see
ADVISOR SERVICES ASSETS
(In Billions At Year-End)
8%
5-Year Compound
Annual Growth Rate
$1,032
2013
$1,551
2018
enormous value in the relationship-based, fiduciary RIA
model. Prospective RIAs see great potential in exiting the
traditional wirehouse model and working independently to
build their own privately owned firms.
We proudly serve more than 7,500 of these RIA firms,
and they entrust us with over $1.55 trillion of their clients’
money. When appropriate, we even refer Schwab clients to
independent investment advisors.
Our position as the largest provider of custodial services for
independent investment advisors has been an important
driver of our overall growth. The revenue and earnings
derived from serving independent advisors make up about
30% of our overall results. And our advertising efforts are
educating more and more investors about the benefits of
working with an independent investment advisor.
Fiduciary:
It’s the word
independent
advisors
live by.
FindYourIndependentAdvisor.com
Deb K. | Independent
financial advisor
since 1996
We’re supporting RIAs with
national advertising that highlights
the difference they make.
Letter From the Chief Executive Officer 5
Robo-Advice Vs. Professional and
Personal Expertise
Several years ago when the concept of robo-advice—or
advice derived from algorithms and delivered digitally via the
internet or a mobile device—was a relatively new concept,
many proponents suggested that robo-advice would
eliminate the need for investors to work with humans.
We did not fall into the trap of thinking that robo-advice was
an all-or-nothing approach to investing. Rather, we saw it as
an important capability that would supplement the human
side of investment advice, not replace it. Interestingly, many
of the early robo-only proponents now agree with us.
Digitally delivered advice makes sense for many investors.
It can be done at a very low price. It can be delivered
efficiently across time and geographic distance. And it
helps investors consistently stay rebalanced as the market
rises and falls, ensuring that their investments adhere to
their level of risk tolerance.
Robo-advice works so well that our program, Schwab
Intelligent Portfolios®, is the largest truly digital advisory
program in the world in terms of client assets, with well over
$30 billion under management. And it has included access
to live investment professionals from day one.
Combining digital advice with trained and registered
investment professionals ensures clients can access a
calming voice during times of market volatility. At Schwab,
we believe in the power of combining both technology AND
people. In 2018, clients interacted with us digitally 4 billion
unique times, but they also interacted with us over 25 million
times in person or over the phone. Technology is a wonderful
enabler, but when it comes to investing, people matter.
Brand Matters—But Actions That Benefit
Clients Matter More
In recent years, we have been honored to be recognized by
many prestigious third parties such as Fortune magazine,
J.D. Power, Investor’s Business Daily, Barron’s, and many
others. Why does this matter?
Because in the world we live in today—with a 24-hour news
cycle, with overwhelming volumes of social media, with opinion
blogs masquerading as news stories, and with increasingly
sophisticated consumers—the value of what a company says
about itself via advertising has never been lower.
While advertising retains a role in building a company, what
really matters is whether what a company says about itself
publicly is reflected in what it actually does.
For example, every company claims it is “client focused,” but
how many companies have proactively reduced prices by
more than half a billion dollars over the past two years as we
did, compelling our competitors to take similar actions?
6 Letter From the Chief Executive Officer
Every company says it is striving to delight clients, but why
has no other investment services firm instituted a satisfaction
guarantee as we did several years ago?
Every brokerage firm talks about putting their clients’ interests
at the forefront, but why are so many firms reluctant to offer
those clients fee-based, fiduciary investing advice that puts the
clients’ best interests ahead of their own?
At Schwab, we believe that we earn client loyalty through
our actions each and every day. We earn it by making
courageous decisions that others criticize for their own
purposes but that we believe are right in the long run.
Let’s look at how we operate at Schwab in all three areas
touched on by these questions.
Pricing. We have lowered our pricing to clients by more than
a half billion dollars over the past two years. In each primary
case, we did so proactively, motivating competitors to follow
suit. Why? Because one of our core beliefs is that we should
share the benefits of our growth with those making that
growth possible—our clients. It is important to remember that
every dollar an investor doesn’t pay in fees or commissions is
an extra dollar in their pocket—where it belongs.
Satisfaction. A number of years ago we introduced a
satisfaction guarantee for our clients. Why? If we do not
delight our clients, or if they are dissatisfied with any aspect of
our service, don’t they deserve a refund? What surprises me
is that competitors often copy innovative ideas we introduce—
but not this time. At Schwab, we have the courage to stand
behind what we do for clients. Shouldn’t everyone?
Fiduciary Standards. Much has been written in the past
few years about fiduciary investment advice. The concept is
simple. Does the investment provider place client interests
above their own when offering investment advice? When a
client invests in one of our fee-based investment advisory
programs, they can be confident in this: As a fiduciary, we
always act in the best interests of our clients.
INVESTOR SERVICES ASSETS RECEIVING
ONGOING ADVICE (In Billions At Year-End)
12%
5-Year Compound
Annual Growth Rate
$155.1
2013
$272.4
2018
“At Schwab, we believe that we
earn client loyalty through our
actions each and every day. We
earn it by making courageous
decisions that others criticize for
their own purposes but that we
believe are right in the long run.”
Our Commitment
I opened this letter to you, our valued stockholders, by
discussing the dichotomy of this past year. While your
company broke all historical records for client growth in
new-to-firm households, new accounts, and core net new
assets, our stock price ended the year down almost 20%.
And while the economy demonstrated exceptional strength,
with low inflation, record low unemployment, and healthy
GDP growth, the stock market tumbled in the fourth quarter.
A short-term investor might logically ask, “What are you
going to do differently to grow the stock price in 2019?” It’s
a fair question. And my answer is simple: We will not change
our core strategy!
Our “Through Clients’ Eyes” strategy is working—arguably
better than at any time in our 40+ year history. Existing
clients are responding and entrusting us with more of their
hard-earned dollars than ever before. New clients are
trusting Schwab with their money at record levels—younger
investors, older investors, new investors, and highly affluent
investors alike.
Markets go up and down. Interest rates go up and down.
Consumer sentiment ebbs and flows. But a strategy based on
serving others the way we would want to be served is timeless.
Of course, we will continue to change and adapt in
ways that help us better serve clients through digital
platforms, mobile capabilities, ever-improving services,
and professional guidance. But who we are and what
we believe in will not change.
Improving the client experience
through Journey Mapping in Austin.
Our Commitment to Clients: We pledge to deliver
premier service, build trusting client relationships, offer
competitive pricing, and continue the great Schwab
legacy of innovation—both in products and in technology.
Our Commitment to Stockholders: We pledge to
be vigilant in terms of risk management and expense
controls—treating every dollar of expense as if it came from
our own wallet—as we work to enhance stockholder value.
Our Commitment to Employees: We pledge to invest
in our people and in the resources needed to grow this
company for years to come.
As I close my 11th opportunity to share with you, I would
like to reiterate these commitments. We have adhered to
a deeply held set of principles for the last decade, and as
owners you can be confident that these principles remain
at the very core of who we are and what we do every day at
your company.
Thank you for your ongoing trust and confidence!
Warmly,
Walt Bettinger
February 27, 2019
When I crafted my first Annual Report letter at the end of
2008, at the height of the financial crisis, I ended with the
following sentences:
linkedin.com/in/waltbettinger
twitter.com/waltbettinger
I’d like to emphasize the things that remain true
to Schwab, no matter how stormy the external
environment may be.
Letter From the Chief Executive Officer 7
Schwab ranked
as a top place
to work in many
of the places we
call home
State of Arizona
State of Texas
Austin, Texas
Central Florida
Charlotte, North Carolina
Chicago, Illinois
Cleveland, Ohio
Dallas/Fort Worth, Texas
Denver, Colorado
Indianapolis, Indiana
San Francisco, California
As a firm, we have an unshakable
belief in our purpose and in our
culture of service. As an employer,
we are committed to helping
individuals unleash their potential
and achieve their dreams—
challenging themselves as we seek
to challenge the status quo on behalf
of our clients. We place great value
on the recognition we receive as
an employer of choice, particularly
those awards that are based on
feedback from our employees.
Since 2013, Schwab has consistently
been recognized as a top place to
work, based on employee feedback
in major markets where Schwab
has significant concentrations of
employees. In 2018, Schwab’s
accolades expanded to include
national recognition as one of The
50 Best Top-Rated Workplaces
by Indeed, A Best Company for
Women by Fairygodboss, and
a Top Employer by Careers &
the disABLED magazine.
Corporate Equality
Since 2004, Charles Schwab has
received a 100% rating on the
Human Rights Campaign’s Corporate
Equality Index. The index rates
American workplaces on lesbian, gay,
bisexual, and transgender equality.
Military-Friendly Workplace
Since 2012, Schwab has been
recognized annually as a military-
friendly workplace and for its
commitment to hiring veterans by
Military Benefits magazine. And for a
seventh consecutive year, Schwab was
recognized as one of the Best of the
Best Top Veteran-Friendly Companies
by U.S. Veterans Magazine.
Indianapolis Schwabbies
made a big impact during
Schwab Volunteer Week.
8 Employer of Choice & Industry Recognition
2018 Customer
Satisfaction Recognition
J.D. Power
Ranked by J.D. Power “Highest in Investor Satisfaction with Full
Service Brokerage Firms, Three Years in a Row.”
Charles Schwab received the highest numerical score in the J.D. Power 2016–2018 Full
Service Investor Satisfaction Study SM. 2018 study based on 4,419 total responses from 18
firms measuring opinions of investors who used full-service investment institutions, surveyed
November–December 2017. Your experiences may vary. Visit jdpower.com/awards.
FORTUNE
BUSINESS
PERSON OF
THE YEAR
2018 #1 Customer
Service and Trade
Reliability
2018
Best Online
Brokers
2018 Most
Admired Companies
Recognition
2018 Businessperson
of the Year
Walt Bettinger, CEO
Investor’s
Business Daily
Schwab was named #1
in Customer Service
and Trade Reliability
in the 2018 Investor’s
Business Daily “Best
Online Brokers” survey
for the sixth year in a row.
Schwab also received the
highest rating for website
performance for the third
consecutive year.
From Investor’s Business Daily,
January 29, 2018, ©2018 Investor’s
Business Daily Inc. All rights
reserved. Used by permission
and protected by the Copyright
Laws of the United States. The
printing, copying, redistribution,
or retransmission of this Content
without express written permission
is prohibited. Results based on an
Investor’s Business Daily (“IBD”)
and TechnoMetrica survey of 5,946
visitors to the IBD website between
July–August 2017 and September–
November 2017. Those individuals
were asked to name and rate their
primary online broker. Limiting data
analysis only to firms that were
cited by 125 or more participants,
eight online brokers were ranked
based on Customer Experience
Index scores for thirteen separate
attributes. For further information
on how the ratings were calculated,
see IBD’s Criteria and Methodology.
FORTUNE
Selected as one of
The World’s Most
Admired Companies® by
FORTUNE Magazine.
From FORTUNE Magazine, February
2018, ©2018 Fortune Media IP
Limited. FORTUNE and The World’s
Most Admired Companies are
registered trademarks of Fortune
Media IP Limited and are used under
license. FORTUNE and Fortune
Media IP Limited are not affiliated
with, and do not endorse the
products or services of, Charles
Schwab.
FORTUNE
Walt Bettinger, CEO,
was recognized by
FORTUNE Magazine as
a Businessperson of the
Year for the fourth time,
ranking #7 of 20 in 2018.
From FORTUNE ©2018 FORTUNE
Media IP Limited. FORTUNE is
a trademark of FORTUNE Media IP
Limited and is used under license.
FORTUNE and FORTUNE Media IP
Limited are not affiliated with, and
do not endorse the products or
services of, Charles Schwab.
Barron’s
Schwab rated a Top
Online Broker in Barron’s
survey of the Best Online
Brokers, scoring an
overall 4 out of 5 stars.
Barron’s: “2018 Online Broker
Survey,” published March 24, 2018.
Barron’s is a trademark of Dow
Jones & Co., L.P. All rights reserved.
Reprinted with permission of
Barron’s. Schwab received 4
out of 5 stars for the year 2018.
Barron’s evaluated 19 firms in the
following categories of service:
Trading Experience and Technology;
Usability; Mobile; Range of
Offerings; Research Amenities;
Portfolio Analysis and Reports;
Customer Service, Education, and
Security; and Costs.
Employer of Choice & Industry Recognition 9
Is This It?
For those of you who have followed or owned SCHW for more
than a decade, you may recall our reassuring mantra in the
darkest of days: the “coiled spring.” I’ve looked back, and I
believe the first public references to the “coiled spring” were
at our 2009 Business Update and in our 2010 Annual Report—
after that it seemed like it was mentioned at every Business
Update through 2015. Even though our asset growth over
the past decade continued at an impressive enough pace to
earn us the industry moniker “asset-gathering machine,” the
macroeconomic environment did not always convert that strong
business growth into record financial results.
The “coiled spring” referred to the pent-up earnings power in
our model that was poised to occur when the environment
was more favorable. And so, while we waited for rates and
markets to improve, we continued growing assets and exercising
discipline in our model, balancing near-term profitability with
investments for the long-term growth of the business. In eight
of the last 11 years, we generated positive operating leverage, a
noteworthy feat for any financial services company during one of
the most challenging economic environments in history.
In December 2015, at last, the Fed started raising rates, and the
“coiled spring” started to release. From 2016–2018, we not only
drove record asset gathering, we also realized the best years in
our company’s history in terms of revenue, pre-tax profit margin,
and net income. We shared much of that benefit with clients—
nearly $400 million in annualized client cost savings since 2017.
But with money fund fee waivers (which ran at $750 million
a year at their peak) essentially eliminated; with the nine Fed
Funds rate hikes having expanded our net interest margin (NIM)
over 80 bps (from 1.57% in the third quarter of 2015 to 2.39% in
2018); and with transfers of sweep money fund balances to bank
and broker-dealer sweep totaling $81 billion since 2016 (with
the remaining transfers expected by mid-2019), the questions I
am getting from many of you now are: “Is there anything left?”
“Is there still more juice in the orange?” “Has Schwab peaked?”
It’s only natural to wonder this. It reminds me of when a friend
and I decided to cycle across the U.S. from San Francisco to
Boston upon graduating college. Just as we passed through the
western states and rested for a day in the Tetons, we looked at
each other and wondered whether we could sustain the pace
and complete the trip. What we discovered was that while the
next 3,100 miles had different terrain and challenges than the
first part of the trip, we actually increased our pace.
So, is this it for Schwab? We believe, unequivocally, the answer
is no. Let’s examine what led to such remarkable 2018 results,
and then we’ll discuss what’s ahead.
2018 Results
In the 2017 Annual Report, I outlined our initial 2018
performance expectations: assuming 6.5% S&P 500® Index
appreciation, a slight rise in daily average revenue trades
(DARTs) from 2017, one rate hike in June 2018, and an average
10 Letter From the Chief Financial Officer
Peter Crawford
Chief Financial Officer
“ In eight of the last 11 years,
we generated positive
operating leverage, a
noteworthy feat for any
financial services company
during one of the most
challenging economic
environments in history.”
10-year Treasury yield of 2.55%, we believed we could
produce low teens revenue growth, a gap between revenue
and expense growth of 100–200 basis points, and a pre-tax
profit margin of around 43%.
So what happened? 2018 began with strong market
momentum from a historical nine consecutive quarters of
positive returns, but it got interesting in February as the
CBOE Volatility Index® had its largest one-day increase
ever of 116%. And while things seemed to settle down
from March through November, with record highs for most
indices mid-year, the markets certainly went on a wild ride
at the end of the year. As Walt mentioned in his letter, even
though by most economic measures things seemed okay,
the market and the economy took somewhat divergent
paths in 2018, and we finished the year with the S&P down
6%. The Fed raised the target overnight rate not just once,
but four times, affecting broader rates, with an average
1-month LIBOR yield of 2.02% and average 10-year
Treasury yield at 2.91%.
How did we fare amidst this somewhat tumultuous
environment? With our best performance yet. Clients
continued to turn to Schwab, and we gathered a record
$227.8 billion in core net new assets, more than double
those in 2008. With an organic asset growth rate of 7%
and a supportive environment for much of the year, we
crossed the $10 billion revenue mark for the first time,
producing 18% growth over 2017. Net interest revenue
set a record at $5.8 billion, up 36% year-over-year due to
the Fed’s rate normalization and higher interest-earning
assets, which reflect both client cash allocations and the
transfer of sweep money market funds to bank and broker-
dealer sweep. As we progressed with these transfers, the
corresponding money fund revenue naturally declined, yet
positive flows in our advice solutions and other investment
products kept asset management and administration
fees at $3.2 billion, down just 5% from last year. Record
trading activity from our clients resulted in trading revenue
reaching $763 million, up 17% from 2017.
In last year’s letter, I also covered our spending plans and noted
that we would be making significant investments in digital,
technology infrastructure, and business process redesign—to
serve clients better, fuel growth, and also drive efficiency
and scale as we bend our cost curve into the future. These
investments, as well as healthy increases in client-facing
employees and marketing to support and fuel our business
growth, led to a 12% increase in total expenses. The gap
between revenue and expense growth was 550 basis points,
and our expense on client assets (EOCA), a key efficiency
measure and an indicator of one of our core competitive
advantages, remained at 16 basis points—our all-time low and
the best we’ve seen among public investment services firms.
With a more favorable tax environment, our net income was
a record $3.5 billion, up 49% from 2017. And we drove a 19%
return on equity, our highest annual level in ten years.
“ How did we fare amidst this somewhat
tumultuous environment? With our best
performance ever.”
Probably the most notable change in 2018 was our expansion
of capital return. While much of our capital supported
balance sheet growth of 22% (from both sweep transfers and
organic activity), the macroeconomic environment and our
performance left us in an excess capital position. Throughout
2018, we raised the quarterly cash dividend 63%, and after 10
years, we resumed stock repurchases, buying back $1 billion
by year-end. Altogether, our revenue, expenses, and capital
return, along with tax reform, resulted in a 52% increase in
diluted earnings per share (EPS). 2018 was certainly a year
where the Schwab financial formula was not just working, it
was producing record performance.
CORE NET NEW ASSETS AND ORGANIC GROWTH RATE (In Billions At Year-End)
8%
7%
7%
7%
7%
5%
5%
5%
5%
6%
$87.3
2009
$78.1
2010
$82.3
2011
$112.4
2012
$140.8
2013
$124.8
2014
$134.7
2015
$125.5
2016
$198.6
2017
$227.8
2018
Letter From the Chief Financial Officer 11
Our Financial Formula
It probably makes sense to take a moment to review what
we mean by that formula. Although we may seem complex—
with nearly $300 billion in total balance sheet assets and a
broker-dealer, a bank, and an asset manager as our primary
subsidiaries—our financial formula (how we actually operate)
is very straightforward. It all centers on our core strategy:
“Through Clients’ Eyes.” By focusing on our clients’ needs,
we attract assets, and we translate that business growth
into solid revenue growth through multiple sources. With
disciplined expense and capital management, we convert that
revenue growth into higher levels of bottom-line performance.
Historically, we have spoken about our formula as having
the following components: organic asset growth in the
mid-single-digit range and market appreciation at a 6.5%
long-term average together help to create total asset
growth in the upper single-digit or low double-digit range.
We then seek to monetize those assets and, depending on
the environment, we can get to a similar growth range for
revenue. Then we manage our expenses, which we believe
could have a low-to-mid-single-digit growth rate, to create
margin expansion as well as pre-tax income growth that
is stronger than revenue growth. Depending on our capital
needs, we can potentially generate EPS growth at a level
higher than that pre-tax income growth.
When we look at the past 10 years, from 2009 to 2018,
here’s how our actual results line up with the formula:
“THROUGH THE CYCLE” DYNAMICS (2009–2018) 1
NET REVENUES (In Millions At Year-End)
13%
5-Year Compound
Annual Growth Rate
$5,435
2013
$10,132
2018
PRE-TAX PROFIT MARGIN
45.0%
42.4%
40.0%
Results
34.9%
35.7%
Organic Client
Asset Growth
Financial
Formula
5%–7%
Market Appreciation
6.5%
Total Client
Asset Growth
Revenue Growth
Pre-Tax
Income Growth
Pre-Tax
Profit Margin
EPS Growth
High single to
low double-digits
High single to
low double-digits
Stronger than
revenue growth
Flat to
expanding
At least low
double-digits
6%
9%
10%
10%
15%
1500 bps
expansion
15%
2014
2015
2016
2017
2018
RETURN ON EQUITY
19%
15%
14%
1 All growth numbers represent CAGRs except for the Organic Client Asset
Growth, which is the average growth for the period.
So while in any one year the formula might not work
perfectly, you can see that through the cycle, it delivers.
12%
12%
12 Letter From the Chief Financial Officer
2014
2015
2016
2017
2018
What’s Ahead?
So, what’s ahead? First and foremost, the financial formula
should endure. Why? The simple answer is: It works. We
have shown that pursuing our “Through Clients’ Eyes”
strategy drives asset growth. And plenty of opportunity
remains. We estimate total investable wealth (consisting of
assets in defined contribution, retail wealth management
and brokerage, and registered investment advisor channels,
along with bank deposits) exceeds $45 trillion. With a
market share of less than 10%, there are still many investors
who would be better served by working with us. We see
no structural reason why our “asset-gathering machine”
in the next 10 years will be any less effective than in the
past. Schwab is a growth company—it’s in our DNA. We
will remain ever-focused on gathering the largest possible
amount of investable wealth, year after year.
What does this all mean for 2019? First, let’s discuss the
current environment. One word comes to mind: uncertainty.
For 2019, there are several dynamics at play in terms of
rates, the market, DARTs, and cash balances (to name just
a few). So, for simplicity’s sake, let’s assume a 6.5% market
appreciation off of mid-January levels, one Fed rate hike in
June 2019, the average 10-year Treasury yield at 2.80%,
and DARTs up 5%. As client cash is a significant variable,
we should think in terms of a potential range of outcomes.
For example, if clients continue their recent trend of sorting
more transactional cash into higher-yielding alternatives
beyond the first quarter of 2019, our balance sheet could
decline for the year, perhaps by 8% or so. If clients are done
with that process after the first quarter, we could see the
balance sheet grow, perhaps in the low to mid-single-digits.
Given that span of potential balance sheet growth, revenue
growth could range from 7%–11%.
On the expense side, we are convinced we can continue
to bend our cost curve in the future as our investments
focus on driving both growth and efficiency. We often talk
about our expense discipline—knowing when to invest more
and when to pull back. 2016–2018 were examples where
we spent much more, with an average three-year growth
rate of 11%—but it isn’t necessary, realistic, or prudent to
spend at that rate every year. In the long run, we anticipate
expenses growing at the low-to-mid-single-digit rate. But
this doesn’t mean that every year we will generate the
same amount or even any operating leverage. Just as in the
past, there may be years when the revenue environment
is more favorable than others, and that can play a role in
determining our investments and profitability. Our focus is
on operating as efficiently as we can so that EOCA declines
and margins expand over time, eventually reaching a natural
peak margin consistent with sustaining an appropriate level
of investment—rest assured that we are doing nothing to
artificially constrain our profitability.
I’m often asked about our efforts to drive efficiency, given
our already low cost structure and what we’re getting for the
increased spending we’ve been doing the last few years. As
efficient as we are, with the advances in technology and data
analytics, we have an enormous opportunity to drive even
Thoughtfully designed workspaces enhance
our San Francisco employees’ workflow.
“ By focusing on our
clients’ needs, we
attract assets, and
we translate that
business growth
into solid revenue
growth through
multiple sources.”
Letter From the Chief Financial Officer 13
Our new Austin campus is home
to 1,900 employees and is a digital
innovation center of excellence.
“ I see the financial formula
working—evolving to be
not just about growth,
but about growth and
meaningful capital return.”
greater efficiency across our business. We are confident that
our efforts will pay dividends in the years ahead with lower
EOCA, lower expense growth, and a more stable foundation
on which to continue growing.
Amidst all of the uncertainty and potential revenue variability
for 2019, we expect to moderate our expense growth
from its recent double-digit pace to between 6% and 7%,
implying an operating leverage range of 0–500 basis points
and a minimum pre-tax profit margin of 45%. We remain
convinced that our owners would rather see us invest
appropriately in the business—to both support the growth
we have achieved and fuel growth and efficiency in the years
ahead—than manage profit margin to some arbitrary level.
Just as in the past, however, if the environment pans out
even better than our assumptions, then we would expect
stronger revenue to yield a stronger margin. So, our 2019
outlook contemplates profitable growth even if there is no
significant help from DARTs, cash balances, short-term and
long-term rates, or the market.
As we support business growth and aim to keep our
consolidated Tier 1 Leverage Ratio within our 6.75%–7.00%
operating objective, our anticipated capital return priorities
EXPENSE AS A PERCENTAGE OF AVERAGE CLIENT ASSETS (In Basis Points)
24
24
20
19
18
17
17
16
16
16
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
14 Letter From the Chief Financial Officer
will likely encompass both common dividends and share
repurchases. To the extent we’re generating excess capital,
we’d look to maintain our regular cash dividend at the middle
or upper end of our 20%–30% of earnings target range and
to utilize our Board’s recent $4 billion Share Repurchase
authorization opportunistically. Any potential repurchases will
help strengthen EPS as we sustain a healthy balance sheet.
I am fortunate enough to have been with Schwab since
2001 and have experienced nearly two decades of our
challenges and successes. I am excited about what’s
ahead. I see growth—in the retail channel, in the registered
investment advisor channel, in new clients coming to
Schwab, in younger clients, in clients seeking advice, in
our existing branches, in our independent branches. I see
huge efficiency and productivity opportunities—in serving
clients more digitally, in attracting clients more effectively
via our marketing, in driving more scale in our back office,
in helping our frontline employees be more productive, in
broadening the reach of our platforms. I see the financial
formula working—evolving to be not just about growth, but
about growth and meaningful capital return. I see employee
and management commitment—in operating “through
clients’ eyes,” in effective risk management, in maximizing
shareholder value.
So, is this it? Not even close.
Peter Crawford
February 27, 2019
Fueling
Ongoing
Growth
We’ll continue building forward momentum by staying
true to our strategy of seeing “Through Clients’ Eyes” and
anticipating their needs. We are incredibly optimistic about
the opportunities ahead.
Active Brokerage Accounts
Total Employees
+8% 11.6 Million
+11% 19,500
Core Net New Assets
Capital Expenditures
+15% $227.8 Billion +40% $576 Million
All Proprietary Mutual Funds and ETFs
Total Expenses
+1% $348.6 Billion +12% $5.6 Billion
As of December 31, 2018. All percentages refer to the year-over-year change from 2017 to 2018.
Letter From the Chief Financial Officer 15
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)
SCHW Stock Price At Year-End For The Past Ten Years
$60
$50
$40
$30
$20
$10
GROWTH RATE
1-YEAR
2018–2017
18%
12%
53%
52%
52%
44%
1%
(19%)
2018
$ 10,132
$ 5,570
$ 3,329
$ 2.47
$ 2.45
.46
$
1,361
$ 41.53
2017
$ 8,618
$ 4,968
$ 2,180
1.63
$
1.61
$
.32
$
1,353
$ 51.37
2016
$ 7,478
$ 4,485
$ 1,746
1.32
$
1.31
$
.27
$
1,334
$ 39.47
15%
$ 13.42
$ 11.70
$ 10.23
18%
45.0%
19%
19.5
15%
42.4%
15%
17.6
17%
40.0%
14%
16.2
11%
$41.53
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
16 Financial Highlights
Growth in
Client Assets
and Accounts
(In Billions, at Year-End, Except As Noted)
Assets in client accounts
Schwab One®, certain cash equivalents and bank deposits
Proprietary mutual funds (Schwab Funds® and Laudus Funds®):
Money market funds
Equity and bond funds (1,2)
Total proprietary mutual funds
Mutual Fund Marketplace® (3):
Mutual Fund OneSource® and other non-transaction fee funds (4)
Mutual fund clearing services
Other third-party mutual funds (4)
Total Mutual Fund Marketplace
Total mutual fund assets
Exchange-traded funds (ETFs) (1)
Proprietary ETFs (2)
ETF OneSource (3)
Other third-party ETFs
Total ETF assets
Equity and other securities (1,4)
Fixed income securities
Margin loans outstanding
Total client assets
Client assets by business (5)
Investor Services
Advisor Services
Total client assets
GROWTH RATES
COMPOUNDED
4-YEAR
ANNUAL
1-YEAR
2014–18 2017–18
2018
2017
2016
2015
2014
18%
32% $ 261.2 $
198.6 $
197.4 $
161.1 $
136.0
(2%)
7%
-
(6%)
-
8%
3%
2%
44%
20%
12%
18%
6%
13%
8%
7%
6%
8%
7%
(6%)
(3%)
(5%)
(20%)
(38%)
(5%)
(15%)
(13%)
153.5
79.9
233.4
180.5
164.4
650.4
995.3
1,228.7
163.6
82.5
246.1
225.2
265.4
682.6
1,173.2
1,419.3
163.5
66.1
229.6
198.9
196.6
558.2
953.7
1,183.3
166.1
62.4
228.5
207.7
186.5
496.4
890.6
1,119.1
167.9
61.5
229.4
234.4
164.7
486.2
885.3
1,114.7
16%
7%
-
4%
(6%)
25%
5%
26.9
14.7
194.7
236.3
802.2
188.7
(14.3)
(3%) $ 3,252.2 $ 3,361.8 $ 2,779.5 $ 2,513.8 $ 2,463.6
115.2
30.6
309.9
455.7
1,019.8
306.1
(19.3)
99.1
28.7
308.8
436.6
1,080.0
245.6
(18.3)
59.8
21.2
238.3
319.3
886.5
208.3
(15.3)
39.7
16.1
207.4
263.2
799.0
187.2
(15.8)
(6%) $ 1,701.7 $ 1,810.9 $ 1,495.4 $ 1,358.6 $ 1,325.2
1,138.4
(3%) $ 3,252.2 $ 3,361.8 $ 2,779.5 $ 2,513.8 $ 2,463.6
1,550.5
1,550.9
1,284.1
1,155.2
-
Net growth in assets in client accounts (for the year ended)
Net new assets by business (5)
Investor Services (6,7)
Advisor Services (8)
Total net new assets
Net market (losses) gains
Net (decline) growth
New brokerage accounts (in thousands, for the year ended)
Clients (in thousands)
Active Brokerage Accounts (9)
Banking Accounts
Corporate Retirement Plan Participants (6)
(24%)
14%
2%
(84%) $
5%
19.4 $
114.5
(43%) $ 133.9 $
(243.5)
$ (109.6) $
123.7 $
109.4
233.1 $
349.2
582.3 $
58.4 $
67.1
125.5 $
140.2
265.7 $
84.1 $
55.3
139.4 $
(89.2)
50.2 $
13%
5%
7%
4%
9%
8%
9%
6%
1,576
1,441
1,093
1,070
11,593
1,302
1,655
10,755
1,197
1,568
10,155
1,106
1,543
9,769
1,033
1,519
57.4
67.4
124.8
89.4
214.2
972
9,386
985
1,428
(1) Effective 2014, 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) Includes proprietary equity and bond funds and ETFs held on and off the Schwab platform. As of December 31, 2018, off-platform equity and bond funds and ETFs were $10.4 billion
and $30.1 billion, respectively.
(3) Excludes all proprietary mutual funds and ETFs.
(4) In 2015, certain Mutual Fund OneSource® balances were reclassified to Other third-party mutual funds and Equity and other securities. Prior period information has been recast to
reflect this change.
(5) In 2015, the company realigned its reportable segments as a result of organizational changes. The Corporate Brokerage Retirement Services business was transferred from the Investor
Services segment to the Advisor Services segment. Prior period segment information has been recast to reflect this change.
(6) In 2015, the company increased its reported totals for overall client assets and retirement plan participants by $6.1 billion and 35,000, respectively, to reflect the final impact of the
consolidation of its retirement plan recordkeeping platforms as previously announced in 2013.
(7) 2018 includes outflows of $93.9 billion from certain mutual fund clearing services clients. 2017 includes inflows of $34.5 billion from certain mutual fund clearing services clients and
an outflow of $9.0 billion from a mutual fund clearing services client. 2016 includes an inflow of $2.7 billion from a mutual fund clearing services client. 2015 includes inflows of $32.5
billion from certain mutual fund clearing service clients. 2014 includes inflows of $10.2 billion and an outflow of $3.4 billion from certain mutual fund clearing services clients.
(8) 2015 includes an outflow of $11.6 billion relating to the company’s planned resignation from an Advisor Services cash management relationship.
(9) Periodically, the company reviews its active account base. In 2018, the definition of active brokerage accounts was standardized across all account types as accounts with activity
within the preceding 270 days. This change increased active accounts by approximately 63,000. In 2017, active brokerage accounts were reduced by approximately 48,000 as a result of
low-balance closures.
Growth in Client Assets and Accounts 17
Executive
Management
Charles R. Schwab
Chairman of the Board
Jonathan M. Craig
Senior Executive Vice President
Walter W. Bettinger II
President and Chief Executive Officer
Steven H. Anderson
Executive Vice President,
Retirement Plan Services
Catherine Casey
Executive Vice President,
Human Resources
Marie A. Chandoha
Chief Executive Officer,
Charles Schwab Investment
Management, Inc.
Jason Clague
Executive Vice President,
Operational Services
Bernard J. Clark
Executive Vice President,
Advisor Services
Peter Crawford
Executive Vice President and
Chief Financial Officer
David R. Garfield
Executive Vice President, General
Counsel and Corporate Secretary
G. Andrew Gill
Executive Vice President
and Chief Marketing Officer
Neesha Hathi
Executive Vice President and
Chief Digital Officer
Tim Heier
Executive Vice President and
Chief Technology Officer
Dennis Howard
Executive Vice President and
Chief Information Officer
Lisa Kidd Hunt
Executive Vice President,
International Services and
Business Initiatives
Terri R. Kallsen
Executive Vice President,
Investor Services
Mitch Mantua
Executive Vice President, Internal Audit
Joseph R. Martinetto
Senior Executive Vice President and
Chief Operating Officer
Nigel J. Murtagh
Executive Vice President,
Corporate Risk
Paul V. Woolway
President and Chief Executive Officer,
Charles Schwab Bank
18 Executive Management
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, 2018
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
Depositary Shares, each representing a 1/40th ownership interest in a
share of 6.00% Non-Cumulative Preferred Stock, Series C
Depositary Shares, each representing a 1/40th ownership interest in a
Name of each exchange on which registered
New York Stock Exchange
New York Stock Exchange
share of 5.95% Non-Cumulative Preferred Stock, Series D
New York Stock Exchange
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
Securities registered pursuant to Section 12(g) of the Act: None
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 every Interactive Data File required to be submitted 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 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, a smaller reporting company, or emerging
growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule
12b-2 of the Exchange Act.
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or
revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
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, 2018, the aggregate market value of the voting stock held by non-affiliates of the registrant was $62.1 billion. For purposes of this information,
the outstanding shares of Common Stock owned by directors and executive officers of the registrant were deemed to be shares of the voting stock held by
affiliates.
The number of shares of Common Stock outstanding as of January 31, 2019, was 1,332,893,531.
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 15, 2019, by reference to that document.
THE CHARLES SCHWAB CORPORATION
Annual Report On Form 10-K
For Fiscal Year Ended December 31, 2018
TABLE OF CONTENTS
Part I
Item 1.
Business
General Corporate Overview
Business Strategy and Competitive Environment
Sources of Net Revenues
Products and Services
Regulation
Available Information
Risk Factors
Unresolved 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
Glossary of Terms
Overview
Current Regulatory Environment and Other Developments
Results of Operations
Risk Management
Capital 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, Financial Statement Schedules
Exhibit Index
Signatures
Statistical Disclosure by Bank Holding Companies
1
1
1
2
2
5
8
9
15
16
16
16
17
19
20
20
22
25
27
28
35
42
46
46
48
49
105
105
105
105
108
108
108
108
109
110
114
F-1
THE CHARLES SCHWAB CORPORATION
PART I
Item 1. Business
General Corporate Overview
The Charles Schwab Corporation (CSC) is a savings and loan holding company, headquartered in San Francisco, California.
CSC was incorporated in 1986 and engages, through its subsidiaries (collectively referred to as Schwab or the Company), in
wealth management, securities brokerage, banking, asset management, custody, and financial advisory services. At
December 31, 2018, Schwab had $3.25 trillion in client assets, 11.6 million active brokerage accounts, 1.7 million corporate
retirement plan participants, and 1.3 million banking accounts.
Significant business subsidiaries of CSC include the following:
• Charles Schwab & Co., Inc. (CS&Co), incorporated in 1971, a securities broker-dealer with over 355 domestic
branch offices in 47 states, as well as a branch in the Commonwealth of Puerto Rico. In addition, Schwab serves
clients through branch offices in the United Kingdom (U.K.), Hong Kong, Singapore, and Australia through
various subsidiaries;
• Charles Schwab Bank (CSB), a federal savings bank; and
• Charles Schwab Investment Management, Inc. (CSIM), the investment advisor for Schwab’s proprietary mutual
funds (Schwab Funds®) and Schwab’s exchange-traded funds (Schwab ETFs™).
Schwab 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, and
retirement plan services, as well as other corporate brokerage services, to businesses and their employees. The Advisor
Services segment provides custodial, trading, banking, and support services, as well as retirement business services, to
independent registered investment advisors (RIAs), independent retirement advisors, and recordkeepers. These services are
further described in the segment discussion below.
As of December 31, 2018, Schwab had full-time, part-time, temporary employees, and persons employed on a contract basis
that represented the equivalent of approximately 19,500 full-time employees.
Unless otherwise indicated, the terms “Schwab,” “the Company,” “we,” “us,” or “our” mean CSC together with its
consolidated subsidiaries.
Business Strategy and Competitive Environment
Schwab was founded on the belief that all Americans deserve access to a better investing experience. Although much has
changed in the intervening years, our purpose remains clear – to champion every client’s goals with passion and integrity.
Guided by this purpose and our vision of creating the most trusted leader in investment services, management has adopted a
strategy described as “Through Clients’ Eyes.”
This strategy emphasizes placing clients’ perspectives, needs, and desires at the forefront. Because investing plays a
fundamental role in building financial security, we strive to deliver a better investing experience for our clients – individual
investors and the people and institutions who serve them – by disrupting longstanding industry practices on their behalf and
providing superior service. We also aim to offer a broad range of products and solutions to meet client needs with a focus on
transparency, value, and trust. In addition, management works to couple Schwab’s scale and resources with ongoing expense
discipline to keep costs low and ensure that products and solutions are affordable as well as responsive to client needs. In
combination, these are the key elements of our “no trade-offs” approach to serving investors. We believe that following this
strategy is the best way to maximize our market valuation and stockholder returns over time.
Management estimates that investable wealth in the United States (U.S.) (consisting of assets in defined contribution, retail
wealth management and brokerage, and registered investment advisor channels, along with bank deposits) currently exceeds
$45 trillion, which means the Company’s $3.25 trillion in client assets leaves substantial opportunity for growth. Our
strategy is based on the principle that developing trusted relationships will translate into more assets from both new and
- 1 -
THE CHARLES SCHWAB CORPORATION
existing clients, ultimately driving more revenue, and along with expense discipline and thoughtful capital management, will
generate earnings growth and build long-term stockholder value.
Within Investor Services, our competition in serving individual investors spans brokerage, wealth management, and asset
management firms, as well as banks and trust companies. In the Advisor Services arena, we compete with institutional
custodians, traditional and discount brokers, banks, and trust companies.
Across both segments, our key competitive advantages are:
Scale and Size of the Business – As one of the largest investment services firms in the U.S., we are able to spread
operating costs and amortize new investments over a large base of clients, and harness the resources to evolve
capabilities to meet client needs.
• Operating Efficiency – Coupled with scale, our operating efficiency and sharing of infrastructure across different
businesses creates a cost advantage that enables us to competitively price products and services while profitably
serving many different client channels.
• Operating Structure – Providing bank and asset management services to broker-dealer clients helps serve a wider
array of needs, thereby deepening relationships, enhancing the stability of client assets, and enabling diversified
revenue streams.
• Brand and Corporate Reputation – In an industry dependent on trust, Schwab’s reputation and brand across
multiple constituents enables us to attract clients and employees while credibly introducing new products to the
market.
• Service Culture – Delivering a great client experience earns the trust and loyalty of clients and increases the
likelihood that those clients will refer others.
• Willingness to Disrupt – Management’s willingness to challenge the status quo, including our own business
practices, to benefit clients fosters innovation and continuous improvement, which helps to attract more clients and
assets.
Sources of Net Revenues
Our major sources of net revenues are net interest revenue, asset management and administration fees, and trading revenue.
These revenue streams are supported by the combination of bank, broker-dealer, and asset management operating
subsidiaries, each of which brings specific capabilities that enable us to provide clients with the products and services
they are looking for.
Net interest revenue is the difference between interest generated on interest-earning assets and interest paid on funding
sources, the majority of which is derived from client cash balances awaiting investment, held by Schwab as part of clients’
overall relationship with the Company. While certain of these client cash balances are held on CS&Co’s balance sheet or
swept to our money market funds, a substantial amount of existing balances – and most new inflows of cash awaiting
investment – are swept to a banking subsidiary. Interest-earning assets are primarily comprised of high-quality fixed income
securities, margin loans, and bank loans.
The majority of asset management and administration fees are earned from proprietary money market mutual funds,
proprietary and third-party mutual funds and exchange-traded funds (ETFs), and fee-based advisory solutions.
Trading revenue includes commissions earned for executing trades for clients in individual equities, options, futures, fixed
income securities, and certain third-party mutual funds and ETFs, as well as principal transaction revenue earned primarily
from actions to support client trading in fixed income securities.
Products and Services
We offer a broad range of products through intuitive end-to-end solutions, including robust digital capabilities, to address
our clients’ varying investment and financial needs. Examples of these product offerings include the following:
• Brokerage – an array of full-feature brokerage accounts with equity and fixed income trading, margin lending,
options trading, and cash management capabilities including third-party certificates of deposit;
- 2 -
THE CHARLES SCHWAB CORPORATION
• Mutual funds – third-party mutual funds through the Mutual Fund Marketplace®, including non-transaction fee
mutual funds through the Mutual Fund OneSource® service, which also includes proprietary mutual funds, plus
mutual fund trading and clearing services to broker-dealers;
• Exchange-traded funds – an extensive offering of ETFs, including many proprietary and third-party ETFs available
without a commission through Schwab ETF OneSource™;
• Advice solutions – managed portfolios of both proprietary and third-party mutual funds and ETFs, separately
managed accounts, customized personal advice for tailored portfolios, specialized planning, and full-time portfolio
management;
• Banking – checking and savings accounts, first lien residential real estate mortgage loans (First Mortgages), home
equity lines of credit (HELOCs), and pledged asset lines (PALs); and
• Trust – trust custody services, personal trust reporting services, and administrative trustee services.
These investing services are made available through two business segments – Investor Services and Advisor Services.
Schwab’s major sources of revenues are generated by both of the reportable segments, based on their respective levels of
client assets and activity. Revenue is attributable to a reportable segment based on which segment has the primary
responsibility for serving the client. The accounting policies of the reportable segments are the same as those described in
“Item 8 – Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements” (Item 8) – Note 2.
Investor Services
Charles Schwab initially founded the Company over 40 years ago to provide individual investors with access to the financial
markets at a reasonable cost. The Company has been expanding offerings over time in response to client needs, aiming to
provide a compelling and often disruptive solution in the marketplace. As products and services have evolved over the years,
the Investor Services segment has expanded and now includes the Retail Investor, Retirement Plan Services, Mutual Fund
Clearing Services, and Off-Platform Sales business units.
Through the Retail Investor business unit, we offer individual investors a multi-channel service delivery model, which
includes online, mobile, telephone, and branch capabilities. We provide personalized service at competitive prices while
giving clients the choice of where, when, and how they do business with us. Financial Consultants (FCs) in Schwab’s
branches and regional telephone service centers focus on building and sustaining client relationships. We have the ability to
meet client investing needs through a single ongoing point of contact, even as those needs change over time. We believe that
this ability to give those clients seeking help, guidance, or advice with an individually tailored solution – ranging from
occasional consultations to an ongoing relationship with a Schwab FC or an independent RIA in the Schwab Advisor
Network® – is a competitive strength compared to the more fragmented or limited offerings of other firms.
Our service delivery model provides quick and efficient access to a broad lineup 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. 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 a range of investment and banking products.
Schwab strives to educate and assist clients in reaching their financial goals. Educational tools include workshops, webcasts,
interactive courses, and online information about investing, from which Schwab does not earn revenue. Additionally, we
provide various online 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 stocks of approximately 4,000 foreign companies.
Clients may seek specific investment recommendations, either from time to time or on an ongoing basis. Schwab provides
clients seeking advice with personalized solutions. Our 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.
- 3 -
THE CHARLES SCHWAB CORPORATION
Schwab Private Client™ 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, Schwab
offers several alternatives. We provide investors access to professional investment management in a diversified account that
is invested exclusively in either mutual funds or ETFs through the Schwab Managed Portfolios and the Windhaven
Investment Management® Strategies, or equity securities and ETFs through the ThomasPartners Investment Management®
Strategies. We also refer 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. Schwab Intelligent Portfolios®, available since 2015, are for
clients who are looking to have their assets professionally managed via a fully automated online investment advisory
service. In late 2016, we introduced Schwab Intelligent Advisory® to offer our clients a hybrid advisory service which
combines live credentialed professionals and algorithm-driven technology to make financial and investment planning more
accessible to investors. Finally, clients who want the assistance of an independent professional in managing their financial
affairs may be referred to RIAs in the Schwab Advisor Network. These RIAs provide personalized portfolio management,
financial planning, and wealth management solutions.
To meet the specific needs of clients who actively trade, Schwab offers integrated web- and software-based trading
platforms, real-time market data, options trading, premium stock and futures research, and multi-channel access, as well as
sophisticated account and trade management features, risk management and decision support tools, and dedicated personal
support.
For U.S. clients wishing to invest in foreign equities, we offer 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, Schwab 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.,
Schwab serves Mandarin-, Cantonese-, Spanish-, and Vietnamese-speaking clients through a combination of its branch
offices, web-based and telephonic services.
We also offer 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. In addition, we provide software and services for compliance
departments of regulated companies and firms with special requirements to monitor employee personal trading, including
trade surveillance technology.
Our Retirement Plan Services business unit offers a bundled 401(k) retirement plan product that provides retirement plan
sponsors with extensive investment options, trustee or custodial services, and participant-level recordkeeping. Retirement
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 addition to an open architecture
investment platform, we offer access to low cost index mutual funds and ETFs. Individuals investing for retirement through
401(k) plans can take advantage of bundled offerings of multiple investment choices, education, and third-party advice. 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. Services also include support for
Roth 401(k) accounts, profit sharing, and defined benefit plans.
Lastly, the Mutual Fund Clearing Services business unit provides custody, recordkeeping, and trading services to banks,
brokerage firms, and trust companies, and the Off-Platform Sales business unit offers proprietary mutual funds, ETFs, and
collective trust funds outside the Company. They are included within the Investor Services segment given their leveraging of
the products and services offered to individual investors.
Advisor Services
More than thirty years ago, Schwab supported a small group of entrepreneurial advisors who challenged the industry by
creating independent firms. Through the Advisor Services segment, Schwab has become the largest provider of custodial,
trading, banking, and support services to RIAs and their clients. We also provide retirement business services to independent
retirement advisors and recordkeepers. Management believes that we can maintain our market leadership position primarily
- 4 -
THE CHARLES SCHWAB CORPORATION
through the efforts of our sales, support, technology, and business consulting service teams, which are dedicated to helping
RIAs grow, compete, and succeed in serving their clients. In addition to focusing on superior service, we utilize technology
to provide RIAs with a highly-developed, scalable platform for administering their clients’ assets easily and efficiently.
Advisor Services sponsors and hosts a variety of national, regional, and local events designed to help RIAs identify and
implement better ways to expand and efficiently manage their practices.
RIAs 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 RIAs to conduct daily
business activities online with Schwab, including viewing and managing client account information and accessing news and
market information. The website provides account servicing capabilities for RIAs, including account opening, money
movement, transfer of assets, trading, checking status, and communicating with our service team. The site provides multi-
year archiving of statements, trade confirms, and tax reports, along with document search capabilities. We also provide
access to integrations with select third-party platforms, which support a variety of advisor needs including client relationship
management, portfolio management systems, trade order management, and financial planning.
The Advisor Services website also provides interactive tools, educational content, and thought leadership for advisors
turning independent. We offer a variety of services to help RIAs grow and manage their practices, including business,
technology, and operations consulting on a variety of topics critical to an RIA’s success, as well as an annual RIA
benchmarking study to help firms understand key business metrics relative to peers. We also offer an array of services to
help advisors establish their own independent practices through a robust prospect consulting offer. To support them
throughout their transition, we offer access to business start-up and transition consultants, technology engineers, and
dedicated service teams.
Schwab provides a variety of educational materials, programs, and events to RIAs seeking to expand their knowledge of
industry issues and trends, as well as sharpen their individual expertise and practice management skills. We update and share
market research on an ongoing basis, and hold a series of events and conferences every year to discuss topics of interest to
RIAs, including business strategies and best practices. Schwab sponsors and hosts the annual IMPACT® conference, which
provides a national forum for the Company, RIAs, and other industry participants to gather and share information and
insights, as well as a multitude of smaller events across the country each year.
RIAs and their clients have access to our broad range of products and services, including individual securities, mutual funds,
ETFs, fixed income products, managed accounts, cash products, bank lending, and trust services. By functioning as the
custodian, Schwab earns revenue associated with the underlying client assets invested in our products and utilization of the
services we provide. In this capacity, we do not charge an explicit custodial fee.
The Advisor Services segment also includes the Retirement Business Services and Corporate Brokerage Retirement Services
business units. Retirement Business Services provides trust, custody, and retirement business services to independent
retirement plan advisors and independent recordkeepers. Retirement plan assets are held at the Business Trust division of
CSB. The Company and independent retirement plan providers work together to serve plan sponsors, combining the
consulting and administrative expertise of the administrator with our investment, technology, trust, and custodial services.
Retirement Business Services also offers the Schwab Personal Choice Retirement Account®, a self-directed brokerage
offering for retirement plans.
Corporate Brokerage Retirement Services serves plan sponsors, advisors, and independent recordkeepers seeking a
brokerage-based account to hold retirement plan assets. Retirement 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®, and the Company Retirement Account, both of which are self-directed brokerage-based solutions
designed to hold the assets of company-sponsored retirement plans.
Regulation
As a participant in the securities, banking and financial services industries, Schwab is subject to extensive regulation under
both federal and state laws by governmental agencies, supervisory authorities, and self-regulatory organizations (SROs). We
are also subject to oversight by regulatory bodies in other countries in which we operate. These regulations affect our
business operations and impose capital, client protection, and market conduct requirements.
- 5 -
THE CHARLES SCHWAB CORPORATION
Holding Company and Bank Regulation
CSC is a savings and loan holding company and is regulated, supervised, and examined by the Board of Governors of the
Federal Reserve System (Federal Reserve). CSC’s principal depository institution subsidiary, CSB, is a federal savings bank
and is regulated, supervised, and examined by the Office of the Comptroller of the Currency (OCC), the Consumer Financial
Protection Bureau (CFPB), and the Federal Deposit Insurance Corporation (FDIC). CSC and CSB are also subject to
regulation and various requirements and restrictions under state and other federal laws.
This regulatory framework is designed to protect depositors and consumers, the safety and soundness of depository
institutions and their holding companies, and the stability of the banking system as a whole. This framework affects the
activities and investments of CSC and its subsidiaries and gives the regulatory authorities broad discretion in connection
with their supervisory, examination and enforcement activities and policies. Below is a discussion of significant regulations.
Also see “Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Current
Regulatory Environment and Other Developments” for information regarding significant proposed rulemaking related to our
regulation.
Basel III Capital and Liquidity Framework
Banking organizations are subject to the regulatory capital rules issued by the Federal Reserve and other U.S. banking
regulators, including the OCC and the FDIC. In addition to minimum risk-based capital requirements, banking organizations
must hold additional capital, referred to as a capital conservation buffer, to avoid being subject to limits on capital
distributions and discretionary bonus payments to executive officers.
For the calculation of a banking organization’s regulatory capital and risk-weighted assets, the regulatory capital rules
provide for a “standardized approach” framework and an “advanced approaches” framework. Depository institutions and
their holding companies with consolidated total assets of $250 billion or more, or total on-balance-sheet foreign exposure of
$10 billion or more, are required to calculate their regulatory capital and risk-weighted assets using an “advanced
approaches” framework and must satisfy the minimum capital requirements under both approaches. Such companies must
also maintain a minimum supplementary leverage ratio of at least 3.0%, must include accumulated other comprehensive
income (AOCI) in their calculation of their capital ratios, are subject to an incremental capital buffer of up to 2.5% of
common equity Tier 1 capital if imposed by the banking agencies, referred to as the countercyclical capital buffer, and are
subject to certain other enhanced provisions, including additional reporting requirements. Once a banking organization
becomes subject to the “advanced approaches” framework, the banking organization and its subsidiary depository
institutions must adopt written implementation plans and complete satisfactory parallel runs of at least four consecutive
quarters during which they must calculate their risk-weighted assets under both the “advanced approaches” and
“standardized approach” framework. The Federal banking agencies will notify the banking organization and its subsidiaries
when they determine that the banking organization and its subsidiaries have completed satisfactory parallel runs, which may
take several years. The Federal Reserve, OCC, and FDIC have recently granted extensions and exemptions to CSC and its
banking subsidiaries such that they will not be required to submit implementation plans until June 30, 2020. As a result of
crossing the $250 billion threshold in 2018, CSC and its banking subsidiaries are subject to all other advanced approaches
requirements – the supplementary leverage ratio, the inclusion of AOCI in the calculation of capital ratios, and the
countercyclical capital buffer, which is currently 0%.
The liquidity coverage ratio (LCR) rule requires banking organizations with consolidated total assets of $250 billion or
more, or total on-balance-sheet foreign exposure of $10 billion or more and their depository institution subsidiaries with
$10 billion or more in total consolidated assets to hold high quality liquid assets (HQLA) in an amount equal to at least
100% of their projected net cash outflows over a prospective 30-calendar-day period of acute liquidity stress, calculated on
each business day. Other bank and savings and loan holding companies with total consolidated assets of $50 billion or more
are subject to a modified LCR rule requiring them to hold HQLA in an amount equal to at least 70% of their projected net
cash outflows over the 30-day period, calculated as of the last business day of the month. While we are currently subject to
the modified LCR rule, we will become subject to the full LCR rule at the beginning of the second quarter of 2019.
- 6 -
THE CHARLES SCHWAB CORPORATION
Capital Stress Testing
Savings and loan holding companies and federal savings banks with total consolidated assets of more than $10 billion are
required to conduct annual company-run stress tests using certain scenarios and prescribed stress-testing methodologies
under the Dodd-Frank Act Stress Test (DFAST) rules. CSC reports the results to the Federal Reserve and CSB reports to the
OCC. Both publish summaries of their stress test results.
As a savings and loan holding company, CSC is not subject to the annual Comprehensive Capital Analysis and Review
(CCAR) process, which requires certain financial institutions to submit annual capital plans to the Federal Reserve.
Insured Depository Institution Resolution Plans
The FDIC requires insured depository institutions with total consolidated assets of $50 billion or more to submit to the
FDIC periodic plans providing for their resolution by the FDIC in the event of failure (resolution plans or so-called “living
wills”) under the receivership and liquidation provisions of the Federal Deposit Insurance Act. CSB is required to file with
the FDIC a periodic resolution plan demonstrating how the bank could be resolved in an orderly and timely manner in the
event of receivership such that the FDIC would be able to: ensure that the bank’s depositors receive access to their deposits
within one business day; maximize the net present value of the bank’s assets when disposed of; and minimize losses
incurred by the bank’s creditors.
Consumer Financial Protection
The CFPB has broad rulemaking, supervisory and enforcement authority for a wide range of federal consumer protection
laws relating to financial products. The CFPB has examination and primary enforcement authority over depository
institutions with $10 billion or more in consolidated total assets.
Deposit Insurance Assessments
The FDIC’s Deposit Insurance Fund (DIF) provides insurance coverage for certain deposits, generally up to $250,000 per
depositor per account ownership type, and is funded by quarterly assessments on insured depository institutions. The FDIC
uses a risk-based deposit premium assessment system that, for large insured depository institutions with at least $10 billion
in total consolidated assets, uses a scorecard method based on a number of factors, including the institution’s regulatory
ratings, asset quality and brokered deposits. The deposit insurance assessment base is calculated as average consolidated
total assets minus average tangible equity.
In July 2016, the FDIC imposed a flat-rate quarterly surcharge on insured depository institutions with total assets of
$10 billion or more and certain of their bank affiliates to pay for an increase to the DIF from 1.15% to 1.35% of the
assessment base. As a result, Schwab’s banking subsidiaries became subject to an additional 4.5 basis point surcharge on the
amount of their aggregate assessment base in excess of $10 billion. In the third quarter of 2018, the DIF ratio exceeded
1.35%, and the FDIC eliminated the surcharge beginning in the fourth quarter.
Community Reinvestment Act
The Community Reinvestment Act of 1977 (CRA) requires the primary federal bank regulatory agency for each of
Schwab’s depository institution subsidiaries to assess the subsidiary’s record in meeting the credit needs of the communities
served by the bank, including low- and moderate-income neighborhoods and persons. Institutions are assigned one of four
ratings (“outstanding,” “satisfactory,” “needs to improve,” or “substantial noncompliance”). The failure of an institution to
receive at least a “satisfactory” rating could inhibit the institution or its holding company from undertaking certain activities,
including acquisitions or opening branch offices.
Source of Strength
The Dodd-Frank Act codified the Federal Reserve’s long-held position that a depository institution holding company must
serve as a source of financial strength for its subsidiary depository institutions, the so-called “source of strength doctrine.” In
effect, the holding company may be compelled to commit resources to support the subsidiary in the event the subsidiary is in
financial distress.
- 7 -
THE CHARLES SCHWAB CORPORATION
Broker-Dealer and Investment Advisor Regulation
Schwab’s principal broker-dealer is CS&Co. CS&Co is registered as a broker-dealer with the U.S. Securities and Exchange
Commission (SEC), the fifty states, the District of Columbia and Commonwealth of Puerto Rico. CS&Co and CSIM are
registered as investment advisors with the SEC. Additionally, CS&Co is regulated by the Commodities Futures Trading
Commission (CFTC) with respect to the commodity futures and trading activities it conducts as an introducing broker.
Much of the regulation of broker-dealers has been delegated to SROs. CS&Co 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). In addition to the SEC, the primary regulators of CS&Co are FINRA and, for municipal
securities, the MSRB. The National Futures Association (NFA) is CS&Co’s primary regulator for futures and commodities
trading activities.
The principal purpose of regulating broker-dealers and investment advisors is the protection of clients and securities
markets. The regulations 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, and the conduct of directors, officers,
and employees.
CS&Co is 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 intended to ensure the general financial soundness and liquidity of broker-dealers. CSC itself
is not a registered broker-dealer and it is not subject to the Uniform Net Capital Rule. If CS&Co fails to maintain specified
levels of net capital, such failure could constitute a default by CSC of certain debt covenants under its credit agreement.
The Uniform Net Capital Rule prohibits CS&Co from paying cash dividends, making unsecured advances or loans or
repaying subordinated loans 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.
In addition to net capital requirements, as a self-clearing broker-dealer, CS&Co is subject to cash deposit and collateral
requirements with clearing houses, such as the Depository Trust & Clearing Corporation and Options Clearing Corporation,
which may fluctuate significantly from time to time based upon the nature and size of clients’ trading activity and market
volatility.
As a result of our operations in countries outside the U.S., we are also subject to rules and regulations issued by certain
foreign authorities, including the Financial Conduct Authority (FCA) in the U.K., the Securities and Futures Commission
(SFC) in Hong Kong, the Monetary Authority of Singapore (MAS) in Singapore, and the Australian Securities and
Investments Commission (ASIC) in Australia.
Financial Services Regulation
Bank Secrecy Act of 1970 and USA PATRIOT Act of 2001
CSC and its subsidiaries that conduct financial services activities are subject to the Bank Secrecy Act of 1970 (BSA), as
amended by the USA PATRIOT Act of 2001, which requires financial institutions to develop and implement programs
reasonably designed to achieve compliance with these regulations. The BSA and USA PATRIOT Act include a variety of
monitoring, recordkeeping and reporting requirements (such as currency transaction reporting and suspicious activity
reporting), as well as identity verification and client due diligence requirements which are intended to detect, report and/or
prevent money laundering, and the financing of terrorism. In addition, CSC and various subsidiaries of the Company are
subject to U.S. sanctions programs administered by the Office of Foreign Assets Control.
Available Information
Schwab files annual, quarterly, and current reports, proxy statements, and other information with the SEC. The SEC filings
are available to the public over the internet on the SEC’s website at https://www.sec.gov.
- 8 -
THE CHARLES SCHWAB CORPORATION
On our website, https://www.aboutschwab.com, we post the following filings after they are electronically filed with or
furnished to the SEC: annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any
amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934. In
addition, the website also includes the Dodd-Frank stress test results, our regulatory capital disclosures based on Basel III,
and our quarterly average LCR.
All such filings are available free of charge either on our website or by request via email (investor.relations@schwab.com),
telephone (415-667-7000), or mail (Charles Schwab Investor Relations at 211 Main Street, San Francisco, CA 94105).
Item 1A. Risk Factors
We face a variety of risks that may affect our operations, financial results, or stock price and many of those risks are driven
by factors that we 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 our operations or financial results.
For a discussion of our risk management, including operational risk, compliance risk, credit risk, market risk, and liquidity
risk, see Risk Management and Capital Management in Part II, Item 7.
Developments in the business, economic, and geopolitical environment could negatively impact our business.
Our 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 our control. Deterioration in the housing and credit markets, reduction in short-term interest
rates, and decreases in securities valuations negatively impact our results of operations and capital resources.
Extensive regulation of our businesses may subject us to significant penalties or limitations on business activities.
As a participant in the securities, banking, and financial services industries, we are subject to extensive regulation under
federal, state, and foreign laws by governmental agencies, supervisory authorities and SROs. The costs and uncertainty
related to complying with such regulations continue to increase. These regulations affect our business operations and impose
capital, client protection, and market conduct requirements on us.
In addition to specific banking laws and regulations, our banking regulators have broad discretion in connection with their
supervisory and enforcement activities and examination policies and could require CSC and/or our banking subsidiaries to
hold more capital, increase liquidity, or limit their ability to pay dividends or CSC’s ability to repurchase or redeem shares.
The banking regulators could also limit our ability to grow, including adding assets, launching new products, making
acquisitions, and undertaking strategic investments. Other potential regulatory actions include limiting our banking
subsidiaries’ ability to accept deposits swept from client brokerage accounts and brokered deposits and preventing us from
pursuing our business strategy.
Despite our efforts to comply with applicable legal requirements, there are a number of risks, particularly in areas where
applicable laws or regulations may be unclear or where regulators could revise their previous guidance. Any enforcement
actions or other proceedings brought by our regulators against us or our affiliates, officers or employees could result in fines,
penalties, cease and desist orders, enforcement actions, suspension, disqualification or expulsion, or other disciplinary
sanctions, including limitations on our business activities, any of which could harm our reputation and adversely affect our
results of operations and financial condition.
While we maintain systems and procedures designed to ensure that we comply 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 our reputation
and our relationships with our regulators and could restrict the ability of institutional investment managers to invest in our
securities.
- 9 -
THE CHARLES SCHWAB CORPORATION
Legislation or changes in rules and regulations could negatively affect our business and financial results.
New legislation, rules, regulations and guidance, or changes in the interpretation or enforcement of existing federal, state,
foreign and SRO rules, regulations and guidance, including changes relating to mutual funds, broker-dealer fiduciary duties
and regulatory treatment of deposit accounts, may directly affect the operation and profitability of Schwab or its specific
business lines. Our profitability could also be affected by rules and regulations that 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 we conduct,
modifications to our business practices, more stringent capital and liquidity requirements, increased deposit insurance
assessments or additional costs and could limit our ability to return capital to stockholders. These changes may also require
us to invest significant management attention and resources to evaluate and make necessary changes to our compliance, risk
management, treasury and operations functions.
Failure to meet capital adequacy and liquidity guidelines could affect our financial condition.
CSC, together with its banking and broker-dealer subsidiaries, must meet certain capital and liquidity standards, subject to
qualitative judgments by regulators about the adequacy of Schwab’s capital and Schwab’s internal assessment of its capital
needs. The Uniform Net Capital Rule limits CS&Co’s ability to transfer capital to CSC and other affiliates. New regulatory
capital, liquidity, and stress testing requirements may limit or otherwise restrict how we utilize our capital, including paying
dividends, stock repurchases, and redemptions, and may require us to increase our capital and/or liquidity or to limit our
growth. Failure by either CSC or its banking subsidiaries to meet minimum capital requirements could result in certain
mandatory and additional discretionary actions by regulators that, if undertaken, could have a negative impact on us. In
addition, failure by CSC or our banking subsidiaries to maintain a sufficient amount of capital to satisfy their capital
conservation buffer and countercyclical capital buffer requirements would result in restrictions on our ability to make capital
distributions and discretionary cash bonus payments to executive officers. Any requirement that we increase our regulatory
capital, replace certain capital instruments which presently qualify as Tier 1 Capital, or increase regulatory capital ratios or
liquidity, could require us to liquidate assets, deleverage or otherwise change our business and/or investment plans, which
may adversely affect our financial results. Issuing additional common stock would dilute the ownership of existing
stockholders.
In 2018, we crossed the threshold for becoming subject to the “advanced approaches” framework. We are currently subject
to a supplementary leverage ratio and related disclosure requirements, the inclusion of AOCI in regulatory capital, and the
countercyclical capital buffer, and will become subject to the full LCR in the second quarter of 2019. In addition, federal
banking agencies have broad discretion and could require CSC or its banking subsidiaries to hold higher levels of capital or
increase liquidity above the applicable regulatory requirements.
Significant interest rate changes could affect our profitability.
The direction and level of interest rates are important factors in our earnings. A decline in interest rates may have a negative
impact on our net interest revenue. A low interest rate environment may also have a negative impact on our asset
management and administration fee revenues if we have to waive a portion of our management fees for certain Schwab-
sponsored money market mutual funds in order to continue providing a positive return to clients.
Although we believe we are positioned to benefit from a rising interest rate environment, a rise in interest rates may cause
our funding costs to increase if market conditions or the competitive environment induces us to raise our interest rates to
avoid losing deposits, or replace deposits with higher cost funding sources without offsetting increases in yields on interest-
earning assets can reduce our net interest revenue.
The expected phase-out of LIBOR could negatively impact our net interest revenue and require significant
operational work.
Certain securities in our investment portfolio and the floating rate loans we offer reference LIBOR as the benchmark rate to
determine the applicable interest rate or payment amount. We also use LIBOR in many of our financial models, such as
those used for capital stress testing, and to determine the dividend rates for certain of our series of preferred stock which
begin to float in 2022 and later. If LIBOR is discontinued after 2021 as expected, there will be uncertainty or differences in
the calculation of the applicable interest rate or payment amount depending on the terms of the governing instruments and
- 10 -
THE CHARLES SCHWAB CORPORATION
there will be significant work required to transition to using the new benchmark rates and implement necessary changes to
our systems and financial models. This could result in different financial performance for previously booked transactions
and may impact our existing transaction data, products, systems, operations, and pricing processes. The calculation of
interest rates under the replacement benchmarks could also impact our net interest revenue. In addition, LIBOR may
perform differently during the phase-out period than in the past which could result in lower interest payments and a
reduction in the value of certain securities in our investment portfolio.
A significant change in client cash allocations could negatively impact our net interest revenue.
We rely heavily on bank deposits as a low cost source of funding to extend loans to clients and purchase investment
securities. Our bank deposits are primarily driven by our bank sweep feature when cash awaiting investment in our client
brokerage accounts is swept to our banking subsidiaries. A significant reduction in our clients’ allocation to cash, a change in
the allocation of that cash, or a transfer of cash away from the Company, could reduce net interest revenue.
Security breaches of our systems, or those of our clients or third parties, may subject us to significant liability and
damage Schwab’s reputation.
Our business involves the secure processing, storage, and transmission of confidential information about our clients and us.
Information security risks for financial institutions are increasing, in part because of the use of the internet and mobile
technologies to conduct financial transactions, and the increased sophistication and activities of organized crime, activists,
hackers and other external parties, including foreign state actors. Our 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 client
information), account takeovers, unavailability of service or other events. Despite our efforts to ensure the integrity of our
systems, we 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, employee misconduct.
Given the high volume of transactions that we process, the large number of clients, counterparties and third-party service
providers with which we do business and the increasing sophistication of cyber attacks, a cyber attack could occur and
persist for an extended period of time before being detected. The extent of a particular cyber attack and the steps we may
need to take to investigate the attack may not be immediately clear, and it may take a significant amount of time before an
investigation is completed and full and reliable information about the attack is known. During such time we would not
necessarily know the extent of the harm or how best to remediate it, and certain errors or actions could be repeated or
compounded before they are discovered and remediated, all or any of which would further increase the costs and
consequences of a cyber attack.
Security breaches, including breaches of our security measures or those of our third-party service providers or clients, could
result in a violation of applicable privacy and other laws and could subject us to significant liability or loss that may not be
covered by insurance, actions by our regulators, damage to Schwab’s reputation, or a loss of confidence in our security
measures which could harm our business. We may be required to expend significant additional resources to modify our
protective measures or to investigate and remediate vulnerabilities or other exposures.
We also face risk related to external fraud involving the misappropriation and use of clients’ user names, passwords or other
personal information to gain access to clients’ financial accounts at Schwab. This could occur from the compromise of
clients’ personal electronic devices or as a result of a data security breach at an unrelated company where clients’ personal
information is taken and then made available to fraudsters. 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. Losses
reimbursed to clients under our guarantee against unauthorized account activity could have a negative impact on our
business, financial condition and results of operations.
Technology and operational failures or errors could subject us to losses, litigation, regulatory actions, and
reputational damage.
We must process, record and monitor a large number of transactions and our operations are highly dependent on the integrity
of our technology systems and our ability to make timely enhancements and additions to our systems. System interruptions,
- 11 -
THE CHARLES SCHWAB CORPORATION
errors or downtime can result from a variety of causes, including changes in client use patterns, technological failure,
changes to our systems, linkages with third-party systems and power failures and can have a significant impact on our
business and operations. Our systems are vulnerable to disruptions from human error, execution errors, errors in models
such as those used for asset management, capital planning and management, risk management, stress testing and
compliance, employee misconduct, unauthorized trading, external fraud, computer viruses, distributed denial of service
attacks, cyber attacks, terrorist attacks, natural disaster, power outage, capacity constraints, software flaws, events impacting
key business partners and vendors, and similar events. For example, Schwab 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 an extended period of time to restore full functionality to our technology or
other operating systems in the event of an unforeseen occurrence, which could affect our ability to process and settle client
transactions. Moreover, instances of fraud or other misconduct might also negatively impact Schwab’s reputation and client
confidence in the Company, in addition to any direct losses that might result from such instances. Despite our 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 we will not suffer unexpected losses, reputational damage or regulatory action due
to technology or other operational failures or errors, including those of our vendors or other third parties.
While we devote substantial attention and resources to the reliability, capacity and scalability of our systems, extraordinary
trading volumes could cause our computer systems to operate at unacceptably slow speeds or even fail, affecting our 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. We are 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. System failures and constraints and transaction
errors at such intermediaries could result in delays and erroneous or unanticipated execution prices, cause substantial losses
for us and for our clients, and subject us to claims from our clients for damages.
Our investment management operations may subject us to fiduciary or other legal liability for client losses.
Fund and trust management and administration are complex activities and include functions such as recordkeeping and
accounting, security pricing, corporate actions, compliance with investment restrictions, daily net asset value computations,
account reconciliations, and required distributions to fund shareholders. Failure to properly perform operational tasks, or the
misrepresentation of our services and products could subject us to regulatory sanctions, penalties or litigation and result in
reputational damage, liability to clients, and the termination of investment management or administration agreements and
the withdrawal of assets under our management.
In the management and administration of funds and client accounts, we use quantitative models and other tools and
resources to support investment decisions and processes, including those related to risk assessment, portfolio management,
trading and hedging activities and product valuations. Errors in the design, function, or underlying assumptions used in these
models and tools, particularly if we fail to detect the errors over an extended period, could subject us to claims of a breach
of fiduciary duty and potentially large liabilities for make-whole payments, litigation, and/or regulatory fines.
A significant decrease in our liquidity could negatively affect our business as well as reduce client confidence in
Schwab.
Maintaining adequate liquidity is crucial to our business operations, including transaction settlement, custody requirements,
and lending commitments, among other liquidity needs. We meet our liquidity needs primarily from working capital and
cash generated by client activity, as well as external financing. Fluctuations in client cash or deposit balances, as well as
market conditions or changes in regulatory treatment of client deposits, may affect our ability to meet our liquidity needs. A
reduction in our liquidity position could reduce client confidence in Schwab, which could result in the transfer of client
assets and accounts, or could cause us to fail to satisfy our liquidity requirements, including the LCR. In addition, if our
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, pay dividends on CSC’s preferred stock, or return capital to common stockholders. In addition, CSC
may need to provide additional funding to such subsidiaries.
Factors which may adversely affect our liquidity position include CS&Co having temporary liquidity demands due to timing
differences between brokerage transaction settlements and the availability of segregated cash balances, fluctuations in cash
- 12 -
THE CHARLES SCHWAB CORPORATION
held in banking or brokerage client accounts, a dramatic increase in our lending activities (including margin, mortgage-
related, and personal lending), increased capital requirements, changes in regulatory guidance or interpretations, other
regulatory changes, or a loss of market or client confidence in Schwab resulting in unanticipated withdrawals of client
funds.
When available cash is not sufficient for our liquidity needs, we may 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 CS&Co maintain committed and uncommitted, unsecured bank credit lines and CSC has a
commercial paper issuance program, as well as a universal shelf registration statement filed with the SEC which can be used
to sell securities, 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.
We may suffer significant losses from our credit exposures.
Our 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 we have policies and procedures
designed to manage this risk, the policies and procedures may not be fully effective. Our exposure mainly results from
margin lending, clients’ options and futures trading, securities lending, mortgage lending, pledged asset lending, our role as
a counterparty in financial contracts and investing activities, and indirectly from the investing activities of certain of the
proprietary funds we sponsor.
When clients purchase securities on margin, borrow on lines of credit collateralized by securities, or trade options or futures,
we are 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.
We have exposure to credit risk associated with our investments. Those investments are subject to price fluctuations as a
result of changes in the financial market’s assessment of credit quality. Loss of value of securities can negatively affect
earnings if management determines that such securities are other than temporarily impaired. The evaluation of whether
other-than-temporary impairment (OTTI) exists is a matter of judgment, which includes the assessment of several factors. If
management determines that a security is OTTI, the cost basis of the security may be adjusted and a corresponding loss may
be recognized in current earnings. Deterioration in the performance of available for sale (AFS) and held to maturity (HTM)
securities could result in the recognition of future impairment charges. Even if a security is not considered OTTI, if we were
ever forced to sell the security sooner than intended prior to maturity due to liquidity needs, we would have to recognize any
unrealized losses at that time.
Our bank loans primarily consist of First Mortgages, HELOCs, and PALs. Increases in delinquency and default rates,
housing and stock 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 can increase our risk of loss. Examples 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
• Client margins, options or futures, pledged assets, and securities lending activities collateralized by or linked to
securities of a single issuer, index, or industry.
We sponsor a number of proprietary money market mutual funds and other proprietary funds. Although we have no
obligation to do so, we may decide for competitive or other reasons to provide credit, liquidity or other support to our funds
in the event of significant declines in valuation of fund holdings or significant redemption activity that exceeds available
liquidity. Such support could cause us to take significant charges, could reduce our liquidity and, in certain situations, could,
with respect to proprietary funds other than money market mutual funds, result in us having to consolidate one or more
- 13 -
THE CHARLES SCHWAB CORPORATION
funds in our financial statements. If we choose not to provide credit, liquidity or other support in such a situation, Schwab
could suffer reputational damage and its business could be adversely affected.
We are subject to litigation and regulatory investigations and proceedings and may not be successful in defending
against claims or proceedings.
The financial services industry faces significant litigation and regulatory risks. We are 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. We are also the subject of inquiries, investigations, and proceedings by regulatory and
other governmental agencies.
Litigation and arbitration claims include those brought by our clients and the clients of third party advisors whose assets are
custodied at Schwab. 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 we were found to have infringed on a third-party patent, or other intellectual property rights, we could
incur substantial damages, and in some circumstances could be enjoined from using certain technology, or providing certain
products or services.
Actions brought against us may result in settlements, awards, injunctions, fines, penalties or other results adverse to us,
including reputational harm. Even if we are successful in defending against these actions, the defense of such matters may
result in us incurring significant expenses. A substantial judgment, settlement, fine, or penalty could be material to our
operating results or cash flows for a particular future period, depending on our results for that period. In market downturns
and periods of heightened volatility, the volume of legal claims and amount of damages sought in litigation and regulatory
proceedings against financial services companies have historically increased.
We rely on outsourced service providers to perform key functions.
We rely 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 our confidential client, employee, or company information, could cause us to incur losses
and could harm Schwab’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 our inability to make
alternative arrangements in a timely manner could disrupt our operations, impact our ability to offer certain products and
services, and result in financial losses to us. 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 our financial position.
We evaluate potential strategic transactions, including business combinations, acquisitions, and dispositions. Any such
transaction could have a material impact on our 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 us to assume liabilities or become subject to litigation or regulatory proceedings. Further, we may not realize the
anticipated benefits from an acquisition, and any future acquisition could be dilutive to our current stockholders’ percentage
ownership or to earnings per common share (EPS).
Our 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 we enter 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, our stock price could decline.
- 14 -
THE CHARLES SCHWAB CORPORATION
Our industry is characterized by aggressive price competition.
We continually monitor our pricing in relation to competitors and periodically adjust trade commission rates, interest rates
on deposits and loans, fees for advisory services, expense ratios on mutual funds and ETFs, and other pricing to enhance our
competitive position. Increased price competition from other financial services firms to attract clients, such as reduced
commissions, higher deposit rates, or reduced mutual fund or ETF expense ratios, could impact our results of operations and
financial condition.
We face competition in hiring and retaining qualified employees.
The market for qualified personnel in our business is highly competitive. At various times, different functions and roles are
in especially high demand in the market, compelling us to pay more to attract talent. Our ability to continue to compete
effectively will depend upon our ability to attract new employees and retain existing employees while managing
compensation costs.
Our stock price has fluctuated historically, and may continue to fluctuate.
Our stock price can be volatile. Among the factors that may affect the volatility of our stock price are the following:
• Our exposure to changes in interest rates;
• Speculation in the investment community or the press about, or actual changes in, our 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 us or our competitors; and
•
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 our industry, as well as geopolitical, corporate, regulatory, business,
and economic factors may also affect our 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, among other things, to 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 Staff Comments
None.
- 15 -
THE CHARLES SCHWAB CORPORATION
Item 2. Properties
A summary of Schwab’s significant locations 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.
December 31, 2018
(amounts in thousands)
Location
Corporate headquarters:
San Francisco, CA
Service and other office space:
Phoenix, AZ
Denver, CO
Austin, TX
Dallas, TX
Indianapolis, IN
Orlando, FL
Chicago, IL
Richfield, OH
El Paso, TX
Square Footage
Leased
Owned
662
28
—
83
318
—
159
145
—
—
—
728
731
452
—
161
—
—
117
105
Substantially all of our branch offices are located in leased premises. The corporate headquarters, data centers, offices, and
service centers support both of our segments.
?
Item 3. Legal Proceedings
For a discussion of legal proceedings, see Item 8 – Note 14.
Item 4. Mine Safety Disclosures
Not applicable.
- 16 -
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 31, 2019, was 5,803. The closing market price per share on that date was $46.77.
The following graph shows a five-year comparison of cumulative total returns for CSC’s common stock, the Standard &
Poor’s 500 Index, and the Dow Jones U.S. Investment Services Index, each of which assumes an initial investment of $100
and reinvestment of dividends.
$250
$200
$150
$100
$50
The Charles Schwab Corporation
Standard & Poor’s 500 Index
Dow Jones U.S. Investment Services
Index
$0
12/31/13
12/31/14
12/31/15
12/31/16
12/31/17
12/31/18
December 31,
The Charles Schwab Corporation
Standard & Poor’s 500 Index
Dow Jones U.S. Investment Services Index
2013
2014
2015
2016
2017
2018
$
$
$
100
100
100
$
$
$
117
114
115
$
$
$
129
115
114
$
$
$
156
129
144
$
$
$
204
157
180
$
$
$
167
150
159
- 17 -
117478_PG17_YE 2018 Form 10-K-FINALwithout Exhibits_R2.indd 1
2/25/19 9:48 PM
THE CHARLES SCHWAB CORPORATION
Issuer Purchases of Equity Securities
On October 25, 2018, CSC publicly announced that its Board of Directors authorized the repurchase of up to $1.0 billion of
common stock, which was completed as of December 31, 2018 (see Item 8 – Note 17).
On January 30, 2019, CSC publicly announced that its Board of Directors authorized the repurchase of up to $4.0 billion of
common stock. The authorization does not have an expiration date.
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 2018 (in millions, except number of shares, which are in thousands, and per share amounts):
Month
October:
Share repurchase program
Employee transactions (1)
November:
Share repurchase program
Employee transactions (1)
December:
Share repurchase program
Employee transactions (1)
Total:
Share repurchase program
Employee transactions (1)
Total Number
of Shares
Purchased
Average
Price Paid
per Share
Total Number
of Shares
Purchased as
Part of Publicly
Announced
Program
Approximate
Dollar Value of
Shares That May
Yet Be Purchased
Under the Publicly
Announced
Program (2)
3,831
5
11,862
651
6,643
269
22,336
$
$
$
$
$
$
$
45.02
49.67
47.03
46.59
40.52
45.86
3,831
$
N/A
11,862
$
N/A
6,643
$
N/A
44.75
22,336
$
827
N/A
269
N/A
—
N/A
—
?
N/A
(1) Includes restricted shares withheld (under the terms of grants under employee stock incentive plans) to offset tax withholding obligations that occur upon
46.40
N/A
925
$
vesting and release of restricted shares. CSC 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.
(2) All repurchases under the 2018 share repurchase program authorization were completed by the end of 2018.
- 18 -
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
4-Year
2014-2018 (1)
Annual
1-Year
2017-2018
Results of Operations
Net revenues
Expenses excluding interest
Net income
Net income available to common stockholders
Earnings per common share:
Basic
Diluted
Dividends declared per common share
Weighted average common shares outstanding:
Basic
Diluted
Net interest revenue as a percentage of net revenues
Asset management and administration fees as a
percentage of net revenues
Trading revenue as a percentage of net revenues
Effective income tax rate
Performance Measures
Net revenue growth
Pre-tax profit margin
Return on average common stockholders’ equity
Financial Condition (at year end)
Total assets
Short-term borrowings
Long-term debt
Preferred stock
Total stockholders’ equity
Assets to stockholders’ equity ratio
Debt to total capital ratio (2)
Employee Information
Full-time equivalent employees (in thousands,
at year end)
14%
9%
28%
27%
27%
27%
18%
1%
1%
18%
N/M
38%
34%
15%
2018
2017
2016
2015
2014
$ 10,132
$
$
$
$
$
$
5,570
3,507
3,329
2.47
2.45
.46
1,348
1,361
$
$
$
$
$
$
$
8,618
4,968
2,354
2,180
1.63
1.61
.32
1,339
1,353
$
$
$
$
$
$
$
7,478
4,485
1,889
1,746
1.32
1.31
.27
1,324
1,334
$
$
$
$
$
$
$
6,380
4,101
1,447
1,364
1.04
1.03
.24
1,315
1,327
$
$
$
$
$
$
$
6,058
3,943
1,321
1,261
.96
.95
.24
1,303
1,315
57%
32%
8%
50%
39%
8%
44%
41%
11%
40%
41%
14%
38%
42%
15%
23.1%
35.5%
36.9%
36.5%
37.5%
18%
45.0%
19%
15%
42.4%
15%
17%
40.0%
14%
5%
35.7%
12%
11%
34.9%
12%
22%
$296,482
$243,274
$223,383
$183,705
$154,635
(100)%
— $ 15,000
$
$
6,878
2,793
$
$
4,753
2,793
$
$
—
2,876
2,783
—
2,877
1,459
$
$
—
1,892
872
$
$
$ 20,670
$ 18,525
$ 16,421
$ 13,402
$ 11,803
14
25%
13
52%
14
15%
14
18%
13
14%
18%
12%
49%
53%
52%
52%
44%
1%
1%
45%
—
12%
8%
11%
19.5
17.6
16.2
15.3
14.6
(1) The Compounded 4-year growth rate is computed using the formula: Compound annual growth rate = (Ending Value / Beginning Value) .25 – 1.
(2) The Debt to total capital ratio is computed using the formula: Total Debt (short and long-term) / (Total Debt + Stockholders’ Equity).
N/M Not meaningful.
- 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)
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,” “could,” “would,” and other similar expressions. In addition, any statements that refer to expectations, projections,
or other characterizations of future events or circumstances are forward-looking statements.
These forward-looking statements, which reflect management’s beliefs, objectives, and expectations as of the date hereof,
are estimates based on the best judgment of Schwab’s senior management. These statements relate to, among other things:
• Maximizing our market valuation and stockholder returns over time; our belief that developing trusted relationships
will translate into more client assets which drives revenue and, along with expense discipline and thoughtful capital
management, generates earnings growth and builds stockholder value; and Schwab’s ability to pursue its business
strategy and maintain its market leadership position; (see Business Strategy and Competitive Environment in Part I,
Item 1);
• The impact of legal proceedings and regulatory matters (see Item 8 – Note 14);
• Effective capital management supporting business growth and capital returns to stockholders (see Overview in Part
II, Item 7);
• The adjustment of rates paid on client-related liabilities; the stability, rate sensitivity, and duration of client-related
liabilities; managing the duration of interest-earning assets; and Schwab’s positioning to benefit from an increase in
interest rates and limit its exposure to falling rates (see Net Interest Revenue in Part II, Item 7);
• 2019 capital expenditures (see Total Expenses Excluding Interest in Part II, Item 7);
• Sources of liquidity, capital, and level of dividends (see Liquidity Risk in Part II, Item 7);
• Capital ratios (see Regulatory Capital Requirements in Part II, Item 7);
• The impact of changes in management’s estimates on Schwab’s results of operations (see Critical Accounting
Estimates in Part II, Item 7);
• The expected impact of new accounting standards not yet adopted (see Item 8 – Note 2); and
• The impact of changes in the likelihood of indemnification and guarantee payment obligations on Schwab’s results
of operations (see Item 8 – Note 14).
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:
General market conditions, including the level of interest rates, equity valuations and trading activity;
• Our ability to attract and retain clients, develop trusted relationships, and grow client assets;
• Client use of our advisory solutions and other products and services;
• The level of client assets, including cash balances;
• Competitive pressure on pricing, including deposit rates;
• Client sensitivity to interest rates;
• Regulatory guidance;
• Timing and amount of transfers to bank sweep deposits;
• Capital and liquidity needs and management;
• Our ability to manage expenses;
• Our ability to develop and launch new products, services, and capabilities, as well as implement infrastructure, in a
timely and successful manner;
• The timing of campus expansion work and technology projects;
• The effect of adverse developments in litigation or regulatory matters and the extent of any related charges; and
• Potential breaches of contractual terms for which we have indemnification and guarantee obligations.
- 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)
Certain of these factors, as well as general risk factors affecting the Company, are discussed in greater detail in Risk Factors
in Part I, Item 1A.
- 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)
GLOSSARY OF TERMS
Active brokerage accounts: Brokerage accounts with activity within the preceding 270 days.
Accumulated Other Comprehensive Income (AOCI): A component of stockholders’ equity which includes unrealized
gains and losses on AFS securities and net gains or losses associated with pension obligations.
Asset-backed securities: Debt securities backed by financial assets such as loans or receivables.
Assets receiving ongoing advisory services: Market value of all client assets custodied at the Company under the guidance
of an independent advisor or enrolled in one of Schwab’s retail or other advisory solutions.
Basel III: Global regulatory standards on bank capital adequacy and liquidity issued by the Basel Committee on Banking
Supervision.
Basis point: One basis point equals 1/100th of 1%, or 0.01%.
Client assets: The market value, as of the end of the reporting period, of all client assets in our custody and proprietary
products, which includes both cash and securities. Average client assets are the daily average client asset balance for the
period.
Client cash as a percentage of client assets: Calculated as money market fund balances, bank deposits, Schwab One®
balances, and certain cash equivalents as a percentage of client assets.
Clients’ daily average trades: Includes daily average revenue trades by clients, trades by clients in asset-based pricing
relationships, and all commission-free trades.
Common Equity Tier 1 (CET1) Capital: The sum of common stock and related surplus net of treasury stock, retained
earnings, AOCI and qualifying minority interests, less applicable regulatory adjustments and deductions. Schwab made a
one-time election to opt-out of the requirement to include most components of AOCI in CET1 Capital under the
“standardized approach” framework. Beginning in 2019, Schwab must include AOCI in CET1 Capital.
Common Equity Tier 1 Risk-Based Capital Ratio: The ratio of CET1 Capital to total risk-weighted assets as of the end of
the period.
Core net new client assets: Net new client assets before significant one-time inflows or outflows, such as acquisitions/
divestitures or extraordinary flows (generally greater than $10 billion) relating to a specific client. These flows may span
multiple reporting periods.
Customer Protection Rule: Refers to Rule 15c3-3 of the Securities Exchange Act of 1934.
Daily Average Revenue Trades (DARTs): Total revenue trades during a certain period, divided by the number of trading
days in that period. Revenue trades include all client trades that generate trading revenue (i.e., commission revenue or
principal transaction revenue).
Debt to total capital ratio: Calculated as total debt divided by stockholders’ equity and total debt.
Delinquency roll rates: The rates at which loans transition through delinquency stages, ultimately resulting in a loss.
Schwab considers a loan to be delinquent if it is 30 days or more past due.
Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank): Regulatory reform legislation containing
numerous provisions which expanded prudential regulation of large financial services companies.
Duration: Duration is typically used to measure the expected change in value of a financial instrument for a 1% change in
interest rates, expressed in years.
- 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)
Final Regulatory Capital Rules: Refers to the regulatory capital rules issued by U.S. banking agencies which implemented
Basel III and relevant provisions of Dodd-Frank, which apply to savings and loan holding companies, as well as federal
savings banks.
First mortgages: Refers to first lien residential real estate mortgage loans.
Full-time equivalent employees: Represents the total number of hours worked divided by a 40-hour work week for the
following categories: full-time, part-time and temporary employees and persons employed on a contract basis.
High Quality Liquid Assets (HQLA): Assets with a high potential to be converted easily and quickly into cash.
Interest-bearing liabilities: Includes bank deposits, payables to brokerage clients, short-term borrowings, and long-term
debt on which Schwab pays interest.
Interest-earning assets: Includes cash and cash equivalents, cash and investments segregated, broker-related receivables,
receivables from brokerage clients, investment securities, and bank loans on which Schwab earns interest.
Investment grade: Defined as a rating equivalent to a Moody’s Investors Service (Moody’s) rating of “Baa” or higher, or a
Standard & Poor’s Rating Group (Standard & Poor’s) or Fitch Ratings, Ltd (Fitch) rating of “BBB-” or higher.
Liquidity Coverage Ratio (LCR): The ratio of HQLA to projected net cash outflows during a 30-day stress scenario.
Loan-To-Value (LTV) ratio: Calculated as the principal amount of a loan divided by the value of the collateral securing the
loan.
Margin loans: Advances made to brokerage clients on a secured basis to purchase securities reflected in receivables from
brokerage clients on the consolidated balance sheets.
Master netting arrangement: An agreement between two counterparties that have multiple contracts with each other that
provides for net settlement of all contracts through a single cash payment in the event of default or termination of any one
contract.
Mortgage-backed securities: A type of asset-backed security that is secured by a mortgage or group of mortgages.
Net interest margin: Net interest revenue (annualized for interim periods) divided by average interest-earning assets.
Net new client assets: Total inflows of client cash and securities to Schwab less client outflows. Inflows include dividends
and interest; outflows include commissions and fees. Capital gains distributions are excluded.
Net Stable Funding Ratio (NSFR): Measures an organization’s “available” amount of stable funding relative to its
“required” amount of stable funding over a one-year time horizon.
New brokerage accounts: All brokerage accounts opened during the period, as well as any accounts added via acquisition.
Nonperforming assets: The total of nonaccrual loans and other real estate owned.
Order flow revenue: Net compensation received from markets and firms to which CS&Co sends equity and options orders.
The amount reflects rebates received for certain types of orders, less fees paid for orders where exchange fees or other
charges apply.
Pledged Asset Line® (PAL): A non-purpose revolving line of credit from CSB secured by eligible assets held in a separate
pledged brokerage account maintained at CS&Co.
Return on average common stockholders’ equity: Calculated as net income available to common stockholders
(annualized for interim periods) divided by average common stockholders’ equity.
- 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)
Risk-weighted assets: Computed by assigning specific risk-weightings to assets and off-balance sheet instruments for
capital adequacy calculations.
Tier 1 Capital: The sum of CET1 Capital and additional Tier 1 Capital instruments and related surplus, less applicable
adjustments and deductions.
Tier 1 Leverage Ratio: End-of-period Tier 1 Capital divided by adjusted average total consolidated assets for the quarter.
Trading days: Days in which the markets/exchanges are open for the buying and selling of securities. Early market closures
are counted as half-days.
U.S. federal banking agencies: Refers to the Federal Reserve, the OCC, the FDIC, and the CFPB.
Uniform Net Capital Rule: Refers to Rule 15c3-1 under the Securities Exchange Act of 1934, which specifies minimum
capital requirements that are intended to ensure the general financial soundness and liquidity of broker-dealers at all times.
- 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)
OVERVIEW
Management focuses on several client activity and financial metrics in evaluating Schwab’s financial position and operating
performance. We believe that metrics relating to net new and total client assets, as well as client cash levels and utilization
of advisory services, offer perspective on our business momentum and client engagement. Data on new and total client
brokerage accounts provides additional perspective on our ability to attract and retain new business. Total net revenue
growth, pre-tax profit margin, EPS, return on average common stockholders’ equity, and the Consolidated Tier 1 Leverage
Ratio provide broad indicators of Schwab’s overall financial health, operating efficiency, and ability to generate acceptable
returns. Total expenses, excluding interest, as a percentage of average client assets, is a measure of operating efficiency.
Results for the years ended December 31, 2018, 2017, and 2016 are as follows:
Client Metrics
Net new client assets (in billions) (1)
Core net new client assets (in billions)
Client assets (in billions, at year end)
Average client assets (in billions)
New brokerage accounts (in thousands)
Active brokerage accounts (in thousands, at year end)
Assets receiving ongoing advisory services (in billions, at year end)
Client cash as a percentage of client assets (at year end)
Company Financial Metrics
Total net revenues
Total expenses excluding interest
Income before taxes on income
Taxes on income
Net income
Preferred stock dividends and other
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
Expenses excluding interest as a percentage of average client assets
Growth Rate
1-Year
2017-2018
2018
2017
2016
(43)%
15%
(3)%
11%
9%
8%
1%
18%
12%
25%
(19)%
49%
2%
53%
52%
$
$
$
$
133.9
227.8
3,252.2
3,409.6
1,576
11,593
$
$
$
$
233.1
198.6
3,361.8
3,060.2
1,441
10,755
$
$
$
$
125.5
125.5
2,779.5
2,614.7
1,093
10,155
$
1,708.5
$
1,699.8
$
1,401.4
12.8%
10.8%
13.0%
$
10,132
$
$
$
$
$
$
$
5,570
4,562
1,055
3,507
178
3,329
2.45
18%
45.0%
19%
0.16%
$
$
$
$
8,618
4,968
3,650
1,296
2,354
174
2,180
1.61
15%
42.4%
15%
0.16%
7,478
4,485
2,993
1,104
1,889
143
1,746
1.31
17%
40.0%
14%
0.17%
Consolidated Tier 1 Leverage Ratio (at year end)
(1) 2018 includes outflows of $93.9 billion from certain mutual fund clearing services clients. 2017 includes inflows of $34.5 billion from certain mutual
7.1%
7.6%
7.2%
fund clearing services clients.
2018 Compared to 2017
Net income increased by $1.2 billion, or 49%, in 2018, driven primarily by business momentum, a supportive economic
environment for much of the year, and lower corporate tax rates. Continued execution of our ‘Through Clients’ Eyes’
strategy helped us succeed with clients. In 2018, clients opened 1.6 million new brokerage accounts, helping bring active
brokerage accounts to 11.6 million at the end of the year, and core net new assets totaled $227.8 billion, up 15% from the
2017 total. Our strong net new assets largely offset lower market valuations, and we ended 2018 at $3.25 trillion in total
client assets.
Total net revenue grew by $1.5 billion, or 18%, in 2018 primarily due to an increase of $1.5 billion, or 36%, in net interest
revenue. The Fed raised the overnight federal funds target interest rate four times in 2018 for a total of 100 basis points. The
growth of total net revenue resulted from higher interest rates due to the Fed’s rate normalization, and also from higher
- 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)
interest-earning assets, which reflect both client cash allocations and the transfer of sweep money market funds to bank and
broker-dealer sweep. As we progressed with these transfers, the corresponding money market fund asset management and
administration fee revenue naturally declined, yet positive inflows in advice solutions, Schwab equity and bond funds and
ETFs, and other third-party mutual funds and ETFs kept asset management fees at $3.2 billion, limiting the decrease to 5%
from 2017. Record trading activity from our clients resulted in trading revenue reaching $763 million, an increase of 17%
from the prior year.
Our increase in total expenses excluding interest of $602 million, or 12%, reflected our 2018 investments to support and fuel
our business growth, including hiring additional client-facing and other employees and technology project spending, as well
as an increase in marketing and a special stock award of $36 million to our employees. Even with these increases, expenses
as a percentage of client assets remained consistent at 16 basis points, and pre-tax income increased 25% to $4.6 billion in
2018, resulting in a pre-tax profit margin of 45.0%. As a result of the Tax Cuts and Jobs Act of 2017 (the Tax Act), taxes on
income decreased 19% in 2018, resulting in an effective tax rate of 23.1%. Overall, we generated a 19% return on equity
and diluted EPS of $2.45 for the year.
During 2018, the Board of Directors raised the quarterly cash dividend 63% to $0.13 per share and authorized a $1.0 billion
Share Repurchase Program, which we completed during the fourth quarter. These actions reflected the Company’s strong
financial performance and our confidence in its long-term success; they also demonstrated that effective capital management
at Schwab can support both healthy business growth and more meaningful capital returns to stockholders.
2017 Compared to 2016
Net income available to common stockholders rose in 2017 by $434 million, or 25%, from the prior year, resulting in diluted
EPS of $1.61 in 2017 – an increase of 23% compared to $1.31 in 2016. Net revenues improved by $1.1 billion, or 15%,
while expenses excluding interest increased $483 million, or 11%, compared to 2016.
Our steady focus on operating ‘through clients’ eyes’ and our goal to continually challenge the status quo helped Schwab
achieve another strong growth year in 2017. Clients opened 1.4 million new brokerage accounts in 2017 and trusted Schwab
with $198.6 billion of core net new assets in 2017, up 58% from 2016. Total assets receiving ongoing advisory services
grew 21% in 2017 to $1.70 trillion. Our success with clients was bolstered by strength in the equity markets – the Standard
& Poor’s 500® Index (S&P 500) finished 2017 up 19% from the prior year end. Also in 2017, the Federal Reserve increased
the overnight federal funds target interest rate three times for a total of 75 basis points. Strong client activity and the positive
economic environment resulted in total client assets rising to $3.36 trillion as of December 31, 2017 – a 21% increase since
the end of 2016.
Schwab’s 2017 financial results demonstrate the power of our financial formula working as designed: our robust business
growth supported strong revenue growth through multiple sources in 2017, which we combined with continued expense
discipline to drive significantly improved profitability.
Net revenues grew by 15% in 2017 compared to 2016 through contributions from our two largest revenue sources. Net
interest revenue rose 29% while asset management and administration fees grew 11% in 2017 when compared to the prior
year. Trading revenue declined in 2017 by 21% due to price reductions announced early in 2017.
Consistent with our expectations, expenses grew 11% in 2017 compared to the prior year. This increase was primarily due to
higher incentive compensation and higher staffing related to our strong asset gathering, as well as expenses related to project
spending and third-party fees tied to higher balances in our asset management business.
This combination of revenue growth and expense discipline drove the pre-tax profit margin to 42.4% – an increase of
240 basis points over the prior year. Earnings before income taxes rose 22% to $3.7 billion in 2017 compared to $3.0 billion
in the prior year.
The effective tax rate in 2017 was 35.5% compared to 36.9% in 2016 reflecting the benefit from the adoption of new
accounting standards requiring the recognition of a portion of tax deductions related to equity compensation partially offset
by the remeasurement of deferred tax assets and other tax adjustments associated with the 2017 enactment of the Tax Act.
- 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)
Subsequent Event
On January 30, 2019, CSC publicly announced that its Board of Directors authorized a new Share Repurchase Program to
repurchase up to $4.0 billion of common stock, and declared a four cent, or 31%, increase in the quarterly cash dividend to
$0.17 per common share. The share repurchase authorization does not have an expiration date.
Current Regulatory Environment and Other Developments
On October 31, 2018, the Federal Reserve issued a notice of proposed rulemaking and the Federal Reserve, the OCC and the
FDIC jointly issued another notice of proposed rulemaking. The two proposals would establish a revised framework for
applying enhanced prudential standards to large U.S. banking organizations, with four categories of standards that reflect the
risks of banking organizations in each group. CSC would be in Category III based on having $250 billion – $700 billion in
total assets.
The Federal Reserve proposal, which would make large savings and loan holding companies such as CSC subject to
enhanced prudential standards, would tailor those regulatory requirements relating to capital stress testing, risk management,
liquidity risk management, and single-counterparty credit limits based on the category of the banking organization. The
proposal provides that Category III banking organizations would be subject to annual supervisory stress testing and biennial
company-run stress testing. The interagency proposal would similarly tailor requirements under the agencies’ capital rule,
LCR rule, and the proposed net stable funding ratio rule for banking organizations in each category. Under the proposal,
banking organizations in Category III would not be required to calculate their risk-weighted assets using the “advanced
approaches” framework or to include AOCI in calculating their regulatory capital; however, they would continue to be
subject to the supplementary leverage ratio and any future countercyclical capital buffer imposed by the banking agencies.
Although the Federal Reserve announced in its proposal that additional capital planning and resolution planning proposals
would be issued at a later date, the agency did indicate that all Category III firms, including savings and loan holding
companies, would be required to submit annual capital plans that would be subject to qualitative and quantitative
assessments evaluated as part of the CCAR process.
The comment period for both proposed rules ended on January 22, 2019 and the impact to Schwab cannot be assessed until
the final rule is released.
On December 22, 2017, P.L.115-97, the Tax Act, was signed into law, and became effective on January 1, 2018. Among
other things, the Tax Act lowered the federal corporate income tax rate from 35% to 21%.
As a result of the reduction of the federal corporate income tax rate, generally accepted accounting principles in the U.S.
(GAAP) require companies to remeasure their deferred tax assets and deferred tax liabilities as of the date of enactment,
with the resulting tax effects accounted for in the reporting period of enactment. Schwab recorded a one-time non-cash
charge to taxes on income associated with the remeasurement of net deferred tax assets and other tax adjustments related to
the tax reform legislation in the fourth quarter of 2017. Our 2018 effective income tax rate was reduced as a result of these
changes.
In May 2016, the Federal Reserve, the OCC and the FDIC jointly issued a notice of proposed rulemaking that would
impose a minimum NSFR on certain banking organizations, including CSC. The comment period for the proposed rule
ended on August 5, 2016 and the impact to the Company cannot be assessed until the final rule is released.
- 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)
RESULTS OF OPERATIONS
Total Net Revenues
Total net revenues of $10.1 billion and $8.6 billion for the years ended December 31, 2018 and 2017, respectively,
represented growth of 18% and 15% from the prior periods, primarily due to increases in net interest revenue.
Year Ended December 31,
2018
2017
2016
Growth Rate
2017-2018
Amount
% of
Total Net
Revenues
% of
Total Net
Revenues
% of
Total Net
Revenues
Amount
Amount
Net interest revenue
Interest revenue
Interest expense
Net interest revenue
Asset management and administration fees
Mutual fund and ETF service fees
Advice solutions
Other
Asset management and administration fees
Trading revenue
Commissions
Principal transactions
Trading revenue
Other
Total net revenues
Net Interest Revenue
44% $
151%
36%
6,680
(857)
5,823
66% $
(9)%
57%
4,624
(342)
4,282
54% $
(4)%
50%
3,493
(171)
3,322
(12)%
9%
(2)%
(5)%
1,793
1,139
297
3,229
685
14%
78
44%
763
17%
9%
317
18% $ 10,132
18%
11%
3%
32%
7%
1%
8%
3%
100% $
2,045
1,043
304
3,392
600
54
654
290
8,618
24%
12%
3%
39%
7%
1%
8%
3%
100% $
1,853
915
287
3,055
779
46
825
276
7,478
46%
(2)%
44%
25%
12%
4%
41%
10%
1%
11%
4%
100%
Schwab’s primary interest-earning assets include cash and cash equivalents; cash and investments segregated; margin loans,
which constitute the majority of receivables from brokerage clients; investment securities; and bank loans. Revenue on
interest-earning assets is affected by various factors, such as the composition of assets, prevailing interest rates at the time of
origination or purchase, changes in interest rates on floating rate securities and loans, and changes in prepayment levels for
mortgage-related securities and loans. Fees earned on securities borrowing and lending activities, which are conducted by
CS&Co using assets held in client brokerage accounts, are included in other interest revenue and expense.
Schwab’s interest-bearing liabilities include bank deposits, payables to brokerage clients, short-term borrowings, and long-
term debt. We establish the rates paid on client-related liabilities, and management expects that it will generally adjust the
rates paid on these liabilities at some fraction of any movement in short-term rates. During 2018, these liabilities rose by a
total of $63.3 billion, largely reflecting the effect of: our transferring a total of $72 billion sweep money market funds to
bank and broker-dealer sweep; clients choosing to reallocate assets between cash, equities, fixed income and other
investments; and the Company gathering additional flows from new and current clients.
Overall, management believes that the extended period of extraordinarily low interest rates running from the financial crisis
until recently has likely resulted in certain sweep cash balances retaining some level of latent rate sensitivity. With the
Federal Funds Target Rate having increased to 2.25 – 2.50%, management expects some sweep cash balances could migrate
to alternatives, including purchased money market funds, that offer higher yields to clients but lower revenue to Schwab.
Given the general stability and relatively low rate sensitivity of client-related liabilities, management believes their duration
is at least several years. We have positioned Schwab to benefit from an increase in interest rates, especially short-term
interest rates, by managing the duration of interest-earning assets to be shorter than that of interest-bearing liabilities, so that
asset yields are expected to move faster than liability costs.
- 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)
In order to keep interest-rate sensitivity within established limits, management monitors and responds to changes in the
balance sheet. As Schwab builds its client base, we attract new client sweep cash, which, along with the transfers of existing
sweep cash balances from money market funds, is a primary driver of balance sheet growth. By managing the duration of
interest-earning assets as necessary, we are positioned to continue to gain from increasing rates while limiting exposure to
falling rates to an acceptable level. Approximately half of our interest earning assets re-price or reset based on short-term
interest rates such as one-month LIBOR.
Non-interest-bearing funding sources include certain cash balances, stockholders’ equity and other miscellaneous assets and
liabilities.
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,
2018
Interest
Revenue/
Expense
Average
Balance
Average
Yield/
Rate
Average
Balance
2017
Interest
Revenue/
Expense
Average
Yield/
Rate
Average
Balance
2016
Interest
Revenue/
Expense
Average
Yield/
Rate
Interest-earning assets
Cash and cash equivalents
$ 17,783
$
Cash and investments segregated
Broker-related receivables
Receivables from brokerage clients
Available for sale securities (1)
Held to maturity securities
Bank loans
Total interest-earning assets
Other interest revenue
11,461
303
19,870
54,542
131,794
16,554
252,307
348
206
6
830
1,241
3,348
559
6,538
142
1.93% $
9,931
$
1.78%
2.09%
4.12%
2.26%
18,525
430
16,269
53,040
2.53%
103,599
3.37%
15,919
2.57%
217,713
109
166
3
575
815
2,354
472
4,494
130
1.10% $ 11,143
$
0.90%
0.70%
3.53%
1.54%
2.27%
2.97%
20,104
558
15,001
72,586
57,451
14,715
2.06%
191,558
57
93
1
497
883
1,402
400
3,333
160
0.51%
0.46%
0.22%
3.31%
1.22%
2.44%
2.72%
1.74%
Total interest-earning assets
$ 252,307
$
6,680
2.63% $ 217,713
$
4,624
2.12% $ 191,558
$
3,493
1.82%
Funding sources
Bank deposits
Payables to brokerage clients
Short-term borrowings
Long-term debt
Total interest-bearing liabilities
Non-interest-bearing funding sources
Other interest expense
Total funding sources
$ 199,139
$
545
0.27% $ 163,998
$
148
0.09% $ 141,432
$
21,178
3,359
5,423
229,099
23,208
$ 252,307
$
56
54
190
845
12
857
0.27%
1.59%
3.50%
0.37%
25,403
3,503
3,431
196,335
21,378
0.34% $ 217,713
16
41
119
324
18
342
0.06%
1.17%
3.47%
0.17%
26,311
1,864
2,876
172,483
19,075
0.15% $ 191,558
4,282
1.97%
$
$
37
3
9
104
153
18
171
3,322
$
$
0.03%
0.01%
0.48%
3.62%
0.09%
0.09%
1.73%
Net interest revenue
$
(1) Amounts have been calculated based on amortized cost.
5,823
2.29%
Net interest revenue increased $1.5 billion or 36%, in 2018 from 2017, and $960 million, or 29%, in 2017 from 2016,
primarily due to higher interest rates and growth in interest-earning assets.
Our net interest margin improved 32 basis points to 2.29% in 2018, primarily as a result of the Federal Reserve’s 2017 and
2018 interest rate increases, partially offset by higher interest rates paid on bank deposits and other interest-bearing
liabilities. Our net interest margin was 1.97% in 2017, representing an improvement of 24 basis points compared to 2016,
primarily due to the Federal Reserve’s interest rate increases in 2016 and 2017.
Average interest earning assets grew 16% and 14% during 2018 and 2017, respectively, compared with the sequential prior
years. These increases primarily reflect higher bank deposits due to transfers from sweep money market funds to bank
sweep balances, as well as changes in client cash allocations, partially offset by client purchases of other assets.
In March 2017, $24.7 billion of debt securities were transferred from the AFS category to the HTM category. The transfer
had no effect on the overall net interest margin. For additional information on the transfer, see Item 8 – Note 6.
- 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)
Asset Management and Administration Fees
Asset management and administration fees include mutual fund and ETF service fees and fees for other asset-based
financial services provided to individual and institutional clients. Schwab earns mutual fund and ETF service fees for
shareholder services, administration, and investment management provided to its proprietary funds, and recordkeeping and
shareholder services provided to third-party funds. Asset management and administration fees are based upon the daily
balances of client assets invested in these funds and do not include securities lending revenues earned by proprietary mutual
funds and ETFs, as those amounts, net of program fees, are credited to the fund shareholders. The fair values of client assets
included in proprietary and third-party mutual funds and ETFs are based on quoted market prices and other observable
market data.
We also earn asset management fees for advice solutions, which include managed portfolios, specialized strategies, and
customized investment advice. Other asset management and administration fees include various asset-based fees such as
trust fees, 401(k) recordkeeping fees, mutual fund clearing fees, collective trust fund fees, and non-balance based service
and transaction fees.
Asset management and administration fees vary with changes in the balances of client assets due to market fluctuations and
client activity.
The following table presents asset management and administration fees, average client assets, and average fee yields:
Year Ended December 31,
2018
2017
2016
Average
Client
Assets
Revenue
Average
Fee
Average
Client
Assets
Revenue
Average
Fee
Average
Client
Assets
Revenue
Average
Fee
Schwab money market funds before fee
waivers
$ 141,018
$
Fee waivers
Schwab money market funds
Schwab equity and bond funds and ETFs
Mutual Fund OneSource® and other non-
transaction fee funds
Other third-party mutual funds and ETFs (1)
Total mutual funds and ETFs (2)
Advice solutions (2)
Fee-based
Non-fee-based
Total advice solutions
Other balance-based fees (3)
Other (4)
0.54% $ 164,120
$
962
0.59%
568
—
568
258
680
287
0.40% $ 160,735
$
0.40%
0.12%
160,735
158,625
0.32%
215,333
0.09%
286,111
875
(10)
865
223
706
251
0.54%
0.14%
164,120
115,849
0.33%
199,389
0.09%
254,584
(224)
738
217
676
222
141,018
207,385
210,429
328,150
$ 886,982
1,793
0.20% $ 820,804
2,045
0.25% $ 733,942
1,853
$ 227,790
1,139
0.50% $ 203,794
1,043
0.51% $ 177,409
62,813
—
—
48,936
—
—
35,262
$ 290,603
1,139
0.39% $ 252,730
1,043
0.41% $ 212,671
398,495
250
47
0.06%
417,659
0.06%
339,071
258
46
915
—
915
235
52
0.45%
0.19%
0.34%
0.09%
0.25%
0.52%
—
0.43%
0.07%
Total asset management and administration
fees
(1) Includes Schwab ETF OneSource™.
(2) Beginning in the fourth quarter of 2017, a change was made to add non-fee based average assets from managed portfolios. Average client assets for
$ 3,229
$ 3,055
3,392
$
advice solutions may also include the asset balances contained in the mutual fund and/or ETF categories listed above. Prior periods have been adjusted
to accommodate this change.
(3) Includes various asset-related fees, such as trust fees, 401(k) recordkeeping fees, and mutual fund clearing fees and other service fees. Beginning in the
first quarter of 2017, a prospective methodology change was made to average client assets relating to 401(k) recordkeeping fees to provide improved
insight into the associated fee driver, which resulted in an increase of approximately $25 billion. There was no impact to revenue or the average fee.
(4) Includes miscellaneous service and transaction fees relating to mutual funds and ETFs that are not balance-based.
Asset management and administration fees decreased by $163 million, or 5%, in 2018 from 2017, primarily due to lower
money market fund revenue as a result of transfers to bank sweep, client asset allocation choices, and our 2017 fee
reductions. Part of the decline was offset by revenue from growing asset balances in advice solutions, Schwab equity and
bond funds and ETFs, and other third-party mutual funds and ETFs.
- 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)
Asset management and administration fees increased by $337 million, or 11%, in 2017 from 2016 due to higher average
client assets invested in advice solutions, mutual funds and ETFs, and lower fee waivers on money market funds. Partially
offsetting these increases were lower fee rates on proprietary money funds and other indexed mutual funds and ETFs due to
fee reductions implemented by Schwab in 2017.
The following table presents a roll forward of client assets for the Schwab money market funds, Schwab equity and bond
funds and ETFs, and Mutual Fund OneSource® and other non-transaction fee (NTF) funds. The following funds generated
47%, 53%, and 53% of the asset management and administration fees earned during 2018, 2017, and 2016, respectively:
Schwab Money
Market Funds
Schwab Equity and
Mutual Fund OneSource®
Bond Funds and ETFs
and Other NTF Funds
Year Ended December 31,
2018
2017
2016
2018
2017
2016
2018
2017
2016
Balance at beginning of period
$163,650
$163,495
$166,148
$181,608
$125,813
$102,112
$225,202
$198,924
$207,654
Net inflows (outflows)
Net market gains (losses) and other (1)
(11,641)
(486)
(2,765)
31,091
30,771
13,858
(37,513)
(27,485)
(22,469)
1,463
641
112
(17,589)
25,024
9,843
(7,157)
53,763
13,739
Balance at end of period
$125,813
(1) Includes net inflows from other third-party mutual funds to Mutual Fund OneSource® in the second quarter of 2017.
$181,608
$195,110
$163,495
$153,472
$163,650
$180,532
$225,202
$198,924
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 fixed income securities with clients. To accommodate clients’ fixed income
trading activity, Schwab maintains positions in fixed income securities, including U.S. state and municipal debt obligations,
U.S. Government and 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.
The following table presents trading revenue and the related drivers:
Year Ended December 31,
DARTs (in thousands)
Clients’ daily average trades (in thousands)
Number of trading days
Daily average revenue per revenue trade
Trading revenue
Growth Rate
2017-2018
31%
26%
—
(12)% $
17% $
2018
420.9
765.4
249.5
7.23
763
2017
321.3
608.8
250.0
8.20
654
2016
291.6
561.8
251.5
11.23
825
$
$
$
$
Trading revenue increased by $109 million, or 17%, in 2018 compared to 2017. DART volumes increased 31% in 2018,
which more than offset Schwab’s commission pricing reductions implemented in the first quarter of 2017. Trading revenue
decreased by $171 million in 2017 from 2016, primarily due to lower commissions rates on DARTs.
During the first quarter of 2017, we announced two trading price reductions which lowered standard equity, ETF, and option
trade commissions from $8.95 to $4.95 and lowered the per contract option fee from $.75 to $.65. These reductions in
commission rates reflect our continuing belief that pricing should never be an obstacle for choosing Schwab and our
commitment to share the benefits of scale with clients.
With these changes, trading revenue has declined from a peak of 50%-60% of total revenue in the early 1990’s to the current
low of 8% in 2018, 8% in 2017, and 11% in 2016.
Other Revenue
Other revenue includes order flow revenue, other service fees, software fees from our portfolio management solutions,
exchange processing fees, and non-recurring gains. Order flow revenue was $139 million during 2018, $114 million for
2017, and $103 million in 2016. These increases were primarily due to higher rebate rates received on certain types of
- 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)
orders and higher volume of trades. In 2016, other revenue also included net litigation proceeds of $16 million related to our
non-agency residential mortgage-backed securities portfolios.
Total Expenses Excluding Interest
The following table shows a comparison of total expenses excluding interest:
Compensation and benefits
Salaries and wages
Incentive compensation
Employee benefits and other
Total compensation and benefits
Professional services
Occupancy and equipment
Advertising and market development
Communications
Depreciation and amortization
Regulatory fees and assessments
Other
Total expenses excluding interest
Expenses as a percentage of total net revenues
Compensation and benefits
Advertising and market development
Full-time equivalent employees (in thousands)
At year end
Average
?
Growth
Rate
2017-2018
2018
2017
2016
13% $
1,692
$
1,496
$
1,368
7%
15%
855
510
797
444
689
409
12% $
3,057
$
2,737
$
2,466
13%
14%
17%
5%
14%
6%
17%
654
496
313
242
306
189
313
580
436
268
231
269
179
268
506
398
265
237
234
144
235
12% $
5,570
$
4,968
$
4,485
30%
3%
19.5
18.7
32%
3%
17.6
16.9
33%
4%
16.2
15.9
11%
11%
Expenses excluding interest increased in 2018 and 2017 from the prior years by 12% and 11%, respectively. The largest
drivers of the increase in both years were compensation and benefits and professional services.
Total compensation and benefits increased in 2018 and 2017 from prior years, primarily due to increases in employee
headcount to support our expanding client base. Additionally, in 2018 non-officer employees were issued special stock
awards totaling $36 million.
Professional services expense increased in 2018 and 2017 from the prior years, primarily due to higher spending on
technology projects as well as an increase in asset management and administration related expenses resulting from growth in
the Schwab Funds® and Schwab ETFs™.
Occupancy and equipment expense increased in 2018 and 2017 from the prior years, primarily due to an increase in
software maintenance expenses and additional licenses to support growth in the business.
Advertising and market development expense rose in 2018, primarily reflecting management’s decision to increase
television advertising and digital media spending in the fourth quarter.
Depreciation and amortization expenses grew in 2018 and 2017 from the prior years, primarily due to higher amortization of
internally developed software associated with our investments in software and technology enhancements.
- 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)
Regulatory fees assessments increased in 2018 and 2017 from the prior years, due to an increase in FDIC insurance
assessments which rose as a result of higher average assets in deposit balances. This increase in 2018 was partially offset by
the elimination of the FDIC surcharge in the fourth quarter of 2018.
Other expenses increased in 2018 from 2017 due to travel and entertainment and miscellaneous items due to overall growth
in our business. Other expenses increased in 2017 from 2016 due to travel and entertainment, asset volume-related
increases, and some miscellaneous items.
Capital expenditures were $576 million, $412 million, and $353 million in 2018, 2017, and 2016, respectively. The increase
in capital expenditures in both 2018 and 2017 from the prior years was primarily due to the expansion of our campuses in
the U.S. and investments in technology projects. The largest component of capital expenditures in 2018 was investment in
buildings of $253 million. Capitalized costs for developing internal-use software totaled $167 million, $157 million, and
$130 million in 2018, 2017, and 2016, respectively. Our capital expenditures for 2018 came in at the lower end of our
estimated range of 6-7% of total net revenues, largely due to the timing of our campus expansion work. As we carry this
work forward in 2019 and invest further in technology projects, we anticipate capital expenditures for the year will reach
approximately 7-9% of total net revenues. Our longer term expectation for capital expenditures remains in the range of
3-5% of total net revenues.
Taxes on Income
As previously discussed under Current Regulatory Environment and Other Developments, the Tax Act was signed into law
during 2017. Among other things, the Tax Act lowered the federal corporate income tax rate from 35% to 21%, beginning in
2018.
Also as a result of the Tax Act, Schwab recognized a $46 million one-time non-cash charge to taxes on income in the fourth
quarter of 2017 associated with the remeasurement of net deferred tax assets and other tax adjustments related to the Tax
Act.
Effective January 1, 2017, Schwab adopted Accounting Standards Update (ASU) 2016-09, which prospectively changed the
accounting treatment of a portion of the tax deductions relating to equity compensation. These deductions were previously
reflected directly in additional paid-in capital, a component of stockholders’ equity, and are now included in taxes on
income, a component of net income. As a result of this change, our tax expense was reduced by approximately $46 million
and $87 million in 2018 and 2017, respectively. Future effects will depend on our share price, restricted stock vesting, and
the volume of equity incentive options exercised.
Schwab’s effective income tax rate on income before taxes was 23.1% in 2018, 35.5% in 2017, and 36.9% in 2016. The
decrease in rates over this three-year time period was primarily due to the net impact of the above items.
Segment Information
Schwab 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, retirement plan services,
and other corporate brokerage services to individual investors. The Advisor Services segment provides custodial, trading,
banking, and support services as well as retirement business services to independent RIAs, independent retirement advisors
and recordkeepers. Revenues and expenses are attributed to the two segments based on which segment services the client.
Management evaluates the performance of the segments on a pre-tax basis. Segment assets and liabilities are not used for
evaluating segment performance or in deciding how to allocate resources to segments. Net revenues in both segments are
generated from the underlying client assets and trading activity; differences in the composition of net revenues between the
segments are based on the composition of client assets, client trading frequency, and pricing unique to each. While both
segments leverage the scale and efficiency of our platforms, segment expenses reflect the dynamics of serving millions of
clients in Investor Services versus the thousands of RIAs on the advisor platform.
- 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)
Financial information for our segments is presented in the following table:
Investor Services
Advisor Services
Total
Growth
Rate
2017-2018
2018
2017
2016
Growth
Rate
2017-2018
2018
2017
2016
Growth
Rate
2017-2018
2018
2017
2016
Year Ended
December 31,
Net Revenues
Net interest revenue
34% $ 4,341
$3,231
$2,591
41% $ 1,482
$ 1,051
$
731
36% $ 5,823
$ 4,282
$ 3,322
Asset management and
administration fees
Trading revenue
Other
Total net revenues
Expenses Excluding
Interest
Income before taxes
on income
Investor Services
(4)%
2,260
2,344
2,093
16%
13%
18%
475
245
408
217
524
203
7,321
6,200
5,411
(8)%
17%
(1)%
16%
969
288
72
1,048
246
73
962
301
73
2,811
2,418
2,067
(5)%
3,229
3,392
3,055
17%
9%
18%
763
317
654
290
825
276
10,132
8,618
7,478
11%
4,145
3,725
3,380
15%
1,425
1,243
1,105
12%
5,570
4,968
4,485
28% $ 3,176
$2,475
$2,031
18% $ 1,386
$ 1,175
$
962
25% $ 4,562
$ 3,650
$ 2,993
Total net revenues increased by $1.1 billion, or 18%, in 2018 from 2017 primarily due to an increase in net interest revenue,
partially offset by lower asset management and administration fees. Net interest revenue increased primarily due to higher
net interest margins and higher balances of interest-earning assets. Asset management and administration fees decreased
primarily due to lower money market fund revenue as a result of transfers to bank sweep, client asset allocation choices, and
our 2017 fee reductions. Expenses excluding interest increased by $420 million, or 11%, in 2018 from 2017 primarily due to
higher compensation and benefits, technology project spend, and asset management and administration related expenses to
support our expanding client base.
Total net revenues increased by $789 million, or 15%, in 2017 from 2016 primarily due to increases in net interest revenue
and asset management and administration fees, partially offset by a decrease in trading revenue. Net interest revenue
increased primarily due to higher net interest margins and higher balances of interest-earning assets. Asset management and
administration fees increased primarily due to higher client assets enrolled in advisory solutions and higher net fees on
money market fund assets. Trading revenue decreased primarily due to lower commission rates. Expenses excluding interest
increased by $345 million, or 10%, in 2017 from 2016 primarily due to higher compensation and benefits, technology
project spend, asset management and administration related expenses, and regulatory fee assessments.
Advisor Services
Total net revenues increased by $393 million or 16%, in 2018 from 2017 primarily due to an increase in net interest revenue,
partially offset by lower asset management and administration fees. Net interest revenue increased primarily due to higher
net interest margins and higher balances of interest-earning assets. Asset management and administration fees decreased
primarily due to lower money market fund revenue as a result of transfers to bank sweep, client asset allocation choices, and
our 2017 fee reductions. Expenses excluding interest increased by $182 million, or 15%, in 2018 from 2017 primarily due to
higher compensation and benefits, technology project spend, and asset management and administration related expenses to
support our expanding client base.
Total net revenues increased by $351 million, or 17%, in 2017 from 2016 primarily due to increases in net interest revenue
and asset management and administration fees, partially offset by a decrease in trading revenue. Net interest revenue
increased primarily due to higher balances of interest-earning assets and higher net interest margins. Asset management and
administration fees increased primarily due to higher fees from growth in client assets invested in ETFs and equity and bond
funds, and higher net fees on money market fund assets. Trading revenue decreased primarily due to lower commission
rates. Expenses excluding interest increased by $138 million, or 12%, in 2017 from 2016 primarily due to higher
compensation and benefits, technology project spend, asset management and administration related expenses, and regulatory
fee assessments.
- 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)
RISK MANAGEMENT
Schwab’s business activities expose it to a variety of risks, including operational, credit, market, liquidity, and compliance
risks. The Company has a comprehensive risk management program to identify and manage these risks and their associated
potential for financial and reputational impact. Despite our efforts to identify areas of risk and implement risk management
policies and procedures, there can be no assurance that Schwab will not suffer unexpected losses due to these risks.
Our risk management process is comprised of risk identification and assessment, risk measurement, risk monitoring and
reporting, and risk mitigation. The activities and governance that comprise the risk management process are described
below.
Culture
The Board of Directors has approved an Enterprise Risk Management (ERM) framework that incorporates our purpose,
vision, and values, which form the bedrock of our corporate culture and set the tone for the organization.
We designed the ERM Framework to enable a comprehensive approach to managing risks encountered by Schwab in its
business activities. The framework incorporates key concepts commensurate with the size, risk profile, complexity, and
continuing growth of the Company. Risk appetite, which is defined as the amount of risk the Company is willing to accept
in pursuit of its corporate strategy, is developed by executive management and approved by the Board of Directors.
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 organization, and escalating significant issues to the
Board of Directors.
We have established risk metrics and reporting that enable 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.
The Chief Risk Officer regularly reports activities of the Global Risk Committee to the Risk Committee of the Board of
Directors. The Board Risk Committee in turn assists the Board of Directors in fulfilling its oversight responsibilities with
respect to our risk management program, including approving risk appetite statements and related key risk appetite metrics
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 to the Global Risk Committee. These sub-
committees include the:
• Compliance Risk Committee – provides oversight of compliance risk management programs and policies providing
an aggregate view of compliance risk exposure, and includes a subcommittee covering Fiduciary Risk;
• Financial Risk Oversight Committee – provides oversight of and approves capital, credit, liquidity, and market risk
policies, limits, and exposures;
• New Products and Services Risk Oversight Committee – provides oversight of, and approves corporate policy and
procedures relating to the risk governance of new products and services; and
• Operational Risk Oversight Committee – provides oversight of and approves operational risk management policies,
risk tolerance levels, and operational risk governance processes, and includes sub-committees covering Fraud,
Data, Information Security, Model Governance, and Third-Party risk.
- 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)
Senior management has also created an Incentive Compensation Risk Oversight Committee, which establishes policy and
reviews and approves the Annual Risk Assessment of incentive compensation plans, and reports directly to the
Compensation Committee of the Board of Directors.
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 risk management.
In addition, the Disclosure Committee is responsible for monitoring and evaluating the effectiveness of our disclosure
controls and procedures and internal control over financial reporting as of the end of each fiscal quarter. The Disclosure
Committee reports on this evaluation to the CEO and CFO prior to their certification required by Sections 302 and 906 of
the Sarbanes Oxley Act of 2002.
Operational Risk
Operational risks arise due to potential inadequacies or failures related to people, internal processes, and systems, or from
external events or relationships impacting the Company and/or any of its key business partners and third parties. While
operational risk is inherent in all business activities, we rely on a system of internal controls and risk management practices
designed to keep operational risk and operational losses within the Company’s risk appetite. We have specific policies and
procedures to identify and manage operational risk, and use periodic risk and control self-assessments, control testing
programs, and internal audit reviews to evaluate the effectiveness of these internal controls. Where appropriate, we manage
the impact of operational loss and litigation expense through the purchase of insurance. The insurance program is
specifically designed to address our key operational risks and to maintain compliance with local laws and regulation.
Schwab’s operations are highly dependent on the integrity and resilience of our critical business functions and technology
systems. To the extent Schwab experiences business or system interruptions, errors or downtime (which could result from a
variety of causes, including natural disasters, terrorist attacks, technological failure, cyber attacks, changes to systems,
linkages with third-party systems, and power failures), our business and operations could be negatively impacted. To
minimize business interruptions and ensure the capacity to continue operations during an incident regardless of duration,
Schwab maintains a backup and recovery infrastructure which includes facilities for backup and communications, a
geographically dispersed workforce, and routine testing of business continuity and disaster recovery plans and a well-
established incident management program.
Information Security risk is the risk of unauthorized access, use, disclosure, disruption, modification, recording or
destruction of the firm’s information or systems. We have designed and implemented an information security program that
knits together complementary tools, controls and technologies to protect systems, client accounts and data. We continuously
monitor the systems and work collaboratively with government agencies, law enforcement and other financial institutions to
address potential threats. We use advanced monitoring systems to identify suspicious activity and deter unauthorized access
by internal or external actors. We limit the number of employees who have access to clients’ personal information and
internal authentication measures are enforced to protect against the potential for social engineering. All employees who
handle sensitive information are trained in privacy and security. Schwab’s fraud and cyber security teams monitor activity
looking for suspicious behavior. These capabilities allow us to identify and quickly act on any attempted intrusions.
Schwab also faces operational risk when we employ the services of various third parties, including domestic and
international outsourcing of certain technology, processing, servicing, and support functions. We manage the exposure to
third party risk and promote a culture of resiliency through contractual provisions, control standards, ongoing monitoring of
third party performance, and appropriate testing. We maintain policies and procedures regarding the standard of care
expected with all data, whether the data is internal company information, employee information, or non-public client
information. We clearly define for employees, contractors, and third parties the expected standards of care for confidential
data. We also provide regular training on data security.
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 organization, 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. We have established a policy to describe the roles and responsibilities of all key stakeholders in model
development, management, and use. All models are registered in a centralized database and classified into different risk
- 36 -
THE CHARLES SCHWAB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)
ratings depending on their potential financial, reputational, or regulatory impact to the Company. The model risk rating
determines the scope of model governance activities.
Compliance Risk
Schwab faces compliance risk which is the potential exposure to 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 products and services, supervision of employees, and the adequacy
of our controls. The Company and its affiliates are subject to extensive regulation by federal, state and foreign regulatory
authorities, including SROs.
We 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.
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. We manage this risk by establishing policy and 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 policy and 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 on its contractual obligations.
Our exposure to credit risk mainly results from investing activities in our liquidity and investment portfolios, mortgage
lending, margin lending and client option and futures activities, pledged asset lending, securities lending activities, and our
role as a counterparty in other financial contracts. To manage the risks of such losses, we have established policies and
procedures, which include establishing and reviewing credit limits, monitoring of credit limits and quality of counterparties,
and adjusting margin, PAL, option, and futures requirements for certain securities and instruments.
Liquidity and Investment Portfolios
Schwab has exposure to credit risk associated with its investment portfolios, which include U.S. agency, and non-agency
mortgage-backed securities, asset-backed securities, corporate debt securities, U.S. agency notes, U.S. Treasury securities,
certificates of deposit, U.S. state and municipal securities, commercial paper, and foreign government agency securities.
At December 31, 2018, substantially all securities in the investment portfolios were rated investment grade. 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 or U.S. government-sponsored
enterprises.
Mortgage Lending Portfolio
The bank loan portfolio includes First Mortgages, HELOCs, and other loans. The credit risk exposure related to loans is
actively managed through individual loan and portfolio reviews. 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.
Our residential loan underwriting guidelines include maximum 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 size is conforming or
jumbo).
- 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)
Schwab does not originate or purchase residential loans that allow for negative amortization and does not originate or
purchase subprime loans (generally defined as extensions of credit to borrowers with a FICO score of less than 620 at
origination), unless the borrower has compensating credit factors. For more information on credit quality indicators relating
to Schwab’s bank loans, see Item 8 – Note 7.
Securities and Instrument-Based Lending Portfolios
Collateral arrangements relating to margin loans, PALs, option and futures positions, securities lending agreements, and
resale agreements include provisions that require additional collateral in the event of market fluctuations. Additionally, for
margin loans, PALs, options and futures positions, and securities lending agreements, collateral arrangements require that
the fair value of such collateral sufficiently exceeds the credit exposure in order to maintain a fully secured position.
Other Counterparty Exposures
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 clients or a counterparty fail to meet their obligations to Schwab.
Market Risk
Market risk is the potential for changes in earnings or the value of financial instruments held by Schwab as a result of
fluctuations in interest rates, equity prices, or market conditions. We are exposed to interest rate risk primarily from changes
in market interest rates on our interest-earning assets relative to changes in the costs of its funding sources that finance these
assets.
Net interest revenue is affected by various factors, such as the distribution and composition of interest-earning assets and
interest-bearing liabilities, the spread between yields earned on interest-earning assets and rates paid on interest-bearing
liabilities, which may reprice at different times or by different amounts, and the spread between short and long-term interest
rates. Interest-earning assets primarily include investment securities, margin loans and bank loans. These assets are sensitive
to changes in interest rates and changes in prepayment levels that tend to increase in a declining rate environment and
decrease in a rising rate environment. Because we establish the rates paid on certain brokerage client cash balances and bank
deposits and the rates charged on certain margin and bank loans, and control the composition of our investment securities,
we have some ability to manage our net interest spread, depending on competitive factors and market conditions.
To mitigate the risk of declining interest revenue, we have 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 our
interest-earning assets and funding sources. To remain within these guidelines, we manage the maturity, repricing, and cash
flow characteristics of the investment portfolios.
Financial instruments are also subject to the risk that valuations will be negatively affected by changes in demand and the
underlying market for a financial instrument. We are 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 client
securities loaned out as part of the brokerage securities lending activities. Equity market valuations may also affect the level
of brokerage client trading activity, margin borrowing, and overall client engagement with Schwab. Additionally, we earn
mutual fund and ETF 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 we earn.
Our market risk related to financial instruments held for trading is not material.
Net Interest Revenue Simulation
For Schwab’s net interest revenue sensitivity analysis, we use 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 product
pricing assumptions. The simulations involve assumptions that are inherently uncertain and, as a result, cannot precisely
estimate the impact of changes in interest rates on net interest revenue. Actual results may differ from simulated results due
- 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)
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 our guidelines for net interest revenue sensitivity are breached, management must report the breach to the Financial Risk
Oversight Committee and establish a plan to address the interest rate risk. There were no breaches of Schwab’s net interest
revenue sensitivity risk limits during the years ended December 31, 2018 or 2017.
As represented by the simulations presented below, our 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 sheets would
not be changed as a result of the simulated changes in interest rates. As we actively manage the consolidated balance sheets
and interest rate exposure, in all likelihood we would take steps to manage additional interest rate exposure that could result
from changes in the interest rate environment. The following table shows the simulated net interest revenue change over the
next 12 months beginning December 31, 2018 and 2017 of a gradual 100 basis point increase or decrease in market interest
rates relative to prevailing market rates at the end of each reporting period.
December 31,
Increase of 100 basis points
Decrease of 100 basis points
2018
4.4%
(4.9)%
2017
3.3%
(6.2)%
The year-over-year change in net interest revenue sensitivities reflects higher interest rates across the yield curve, and
particularly, higher short-term interest rates.
Liquidity Risk
Liquidity risk is the potential that Schwab will be unable to meet cash flow obligations when they come due without
incurring unacceptable losses.
Due to its role as a source of financial strength, CSC’s liquidity needs are primarily driven by the liquidity and capital needs
of CS&Co, the capital needs of the banking subsidiaries, principal and interest due on corporate debt, dividend payments on
CSC’s preferred stock, and returns of capital to common stockholders. The liquidity needs of CS&Co are primarily driven
by client activity including trading and margin borrowing activities and capital expenditures. The capital needs of the
banking subsidiaries are primarily driven by client deposits. We have established liquidity policies to support the successful
execution of business strategies, while ensuring ongoing and sufficient liquidity to meet operational needs and satisfy
applicable regulatory requirements under both normal and stressed conditions. We seek to maintain client confidence in the
balance sheet and the safety of client assets by maintaining liquidity and diversity of funding sources to allow the Company
to meet its obligations. To this end, we have established limits and contingency funding scenarios to support liquidity levels
during both business as usual and stressed conditions.
We employ a variety of methodologies to monitor and manage liquidity. We conduct regular liquidity stress testing to
develop a consolidated view of liquidity risk exposures and to ensure our ability to maintain sufficient liquidity during
market-related or company-specific liquidity stress events. Liquidity is also tested at key subsidiaries and results are
reported to the Financial Risk Oversight Committee. A number of early warning indicators are monitored to help identify
emerging liquidity stresses in the market or within the organization and are reviewed with management as appropriate.
- 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)
The Company was subject to, and was in compliance with, the modified LCR rule at December 31, 2018. As Schwab’s
consolidated balance sheet assets were above $250 billion at December 31, 2018, Schwab will become subject to the full
LCR rule in the second quarter of 2019. The table below presents information about our average LCR:
Total eligible HQLA
Net cash outflows (1)
LCR
(1) This amount represents modified net cash outflows as defined by the LCR rule, which requires that HQLA cover 70% of total stressed net cash
$
35,191
111%
Average for the
Three Months Ended
December 31, 2018
38,881
$
outflows.
Primary Funding Sources
Schwab’s primary source of funds is cash generated by client activity which includes bank deposits and cash balances in
client brokerage accounts. These funds are used to purchase investment securities and extend loans to clients.
Other sources of funds may include cash flows from operations, maturities and sales of investment securities, repayments on
loans, securities lending of assets held in client brokerage accounts, repurchase agreements, and cash provided by external
financing.
To meet daily funding needs, we maintain liquidity in the form of overnight cash deposits and short-term investments. For
unanticipated liquidity needs, a buffer of highly liquid investments, currently comprised of U.S. Treasury notes, is also
maintained.
Additional Funding Sources
In addition to internal sources of liquidity, Schwab has access to external funding. The need for short-term borrowings from
these facilities arises primarily from timing differences between cash flow requirements, scheduled liquidation of interest-
earning investments, movements of cash to meet regulatory brokerage client cash segregation requirements and general
corporate purposes. We maintain policies and procedures necessary to access funding and test discount window borrowing
procedures on a periodic basis.
The following table describes external debt facilities available at December 31, 2018:
Description
Federal Home Loan Bank secured credit facility (1)
Borrower
Outstanding
Available
Banking subsidiaries $
— $
35,528
Uncommitted, unsecured lines of credit with various external banks
Unsecured commercial paper (2)
Committed, unsecured credit facility with various external banks (3)
Federal Reserve Bank discount window (4)
(1) Amounts available are dependent on the amount of First Mortgages, HELOCs, and the fair value of certain investment securities that are pledged as
CSC, CS&Co
CSC
CSC
CSB
—
—
—
—
1,432
750
750
7,865
collateral.
(2) CSC has authorization from its Board of Directors to issue Commercial Paper Notes to not exceed $1.5 billion. Management has set a current limit not to
exceed the amount of the committed, unsecured credit facility.
(3) Other than an overnight borrowing to test availability, this facility was unused during 2018.
(4) Amounts available are dependent on the fair value of certain investment securities that are pledged as collateral.
Certain banking subsidiaries maintain secured credit facilities with the Federal Home Loan Bank of San Francisco (FHLB).
Amounts available under these facilities are dependent on the value of our First Mortgages, HELOCs, and the fair value of
certain of our investment securities that are pledged as collateral. During 2018, CSB used borrowings under this agreement
to purchase investment securities in advance of bank sweep transfers. This credit facility is also available as backup
financing in the event the outflow of client cash from the banking subsidiaries’ respective balance sheets is greater than
maturities and paydowns on investment securities and bank loans.
- 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)
CSB also has access to short-term secured funding through the Federal Reserve’s discount window. Amounts available
under the Federal Reserve discount window are dependent on the fair value of certain investment securities that are pledged
as collateral.
CSC has a commercial paper program of which proceeds are used for general corporate purposes. The maturities of the
Commercial Paper Notes may vary, but are not to exceed 270 days from the date of issue. CSC’s ratings for these short-term
borrowings are P1 by Moody’s, A1 by Standard & Poor’s, and F1 by Fitch. CSC had no Commercial Paper Notes
outstanding at December 31, 2018 or 2017.
The financial covenants for the $750 million committed credit facility require CS&Co to maintain a minimum net capital
ratio, CSB to be well capitalized, and CSC to maintain a minimum level of stockholders’ equity, adjusted to exclude AOCI.
At December 31, 2018, the minimum level of stockholders’ equity required under this facility was $14.5 billion (CSC’s
stockholders’ equity, excluding AOCI, at December 31, 2018 was $20.9 billion). Management believes these restrictions
will not have a material effect on CSC’s ability to meet foreseeable dividend or funding requirements.
To partially satisfy the margin requirement of client option transactions with the Options Clearing Corporation, CS&Co has
unsecured standby letter of credit agreements (LOCs) with several banks in favor of the Options Clearing Corporation
aggregating $225 million at December 31, 2018. There were no funds drawn under any of these LOCs during 2018 or 2017.
In connection with its securities lending activities, the Company is required to provide collateral to certain brokerage clients.
The collateral requirements were satisfied by providing cash as collateral.
CSC has a universal automatic shelf registration statement (Shelf Registration Statement) on file with the SEC, which
enables it to issue debt, equity, and other securities.
Borrowings
Long-term debt outstanding was $6.9 billion and $4.8 billion at December 31, 2018 and 2017, respectively. No short-term
borrowings were outstanding as of December 31, 2018. Short-term borrowings outstanding from the FHLB were
$15.0 billion at December 31, 2017.
The following are details of the Senior Notes:
December 31, 2018
Senior Notes
New Debt Issuances
Par
Outstanding
Maturity
Weighted Average
Interest Rate
Moody’s
Standard
& Poor’s
$
6,881
2020 - 2029
3.42%
A2
A
Fitch
A
All debt issuances in 2018 and 2017 were senior unsecured obligations with interest payable quarterly or semi-annually.
Additional details are as follows:
Issuance Date
March 2, 2017
December 7, 2017
December 7, 2017
May 22, 2018
May 22, 2018
May 22, 2018
October 31, 2018
October 31, 2018
Issuance
Amount
Maturity Date
Interest Rate
Interest Payable
650
700
800
600
600
750
500
600
3/2/2027
1/25/2028
1/25/2023
5/21/2021
5/21/2021
5/21/2025
2/1/2024
2/1/2029
3.200%
3.200%
2.650%
Three-month LIBOR
+ 0.32%
3.250%
3.850%
3.550%
4.000%
Semi-annually
Semi-annually
Semi-annually
Quarterly
Semi-annually
Semi-annually
Semi-annually
Semi-annually
$
$
$
$
$
$
$
$
- 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)
Equity Issuances and Redemptions
CSC did not issue any equity through external offerings during the year ended December 31, 2018. CSC’s preferred stock
issued and net proceeds for the year ended December 31, 2017 are as follows:
Series F
Date Issued and Sold
Net
Proceeds
October 31, 2017
$
492
On December 1, 2017, CSC redeemed all of the 485,000 outstanding shares of its 6.00% Non-Cumulative Perpetual
Preferred Stock, Series B (“Series B Preferred Stock”), and the corresponding 19,400,000 depositary shares, each
representing a 1/40th interest in a share of the Series B Preferred Stock.
For further discussion of CSC’s long-term debt and information on the equity offerings, see Item 8 – Note 13 and Note 17.
Off-Balance Sheet Arrangements
Schwab enters into various off-balance sheet arrangements in the ordinary course of business, primarily to meet the needs of
our clients. These arrangements include firm commitments to extend credit. Additionally, Schwab enters into guarantees and
other similar arrangements in the ordinary course of business. For information on each of these arrangements, see Item 8 –
Note 7, Note 11, Note 13, Note 14, and Note 15.
Contractual Obligations
Schwab’s principal contractual obligations as of December 31, 2018 are shown in the following table. Excluded from this
table are liabilities recorded on the consolidated balance sheets that are generally short-term in nature (e.g., payables to
brokers, dealers, and clearing organizations and short-term borrowings) or without contractual payment terms (e.g., bank
deposits, payables to brokerage clients, and deferred compensation).
December 31, 2018
Credit-related financial instruments (1)
Long-term debt (2)
Purchase obligations (3)
Leases (4)
Less than
1 Year
1-3
Years
3-5
Years
More than
5 Years
Total
$
1,592
$
3,162
$
5,093
$
1,698
$
11,545
237
475
128
2,325
303
219
1,370
54
150
4,330
170
282
8,262
1,002
779
Total
$
2,432
$
6,009
$
6,667
$
6,480
$
21,588
(1) Represents CSB’s commitments to extend credit to banking clients, purchase mortgage loans, and commitments to fund CRA investments.
(2) Includes estimated future interest payments through 2029 for Senior Notes. Amounts exclude maturities under a finance lease obligation and
unamortized discounts and premiums.
(3) Consists of purchase obligations for services such as advertising and marketing, telecommunications, professional services, and hardware- and software-
related agreements.
(4) Represents minimum rental commitments, net of sublease commitments, and includes facilities under past restructuring initiatives and rental
commitments under a finance lease obligation.
CAPITAL MANAGEMENT
Schwab seeks to manage capital to a level and composition sufficient to support execution of our business strategy,
including anticipated balance sheet growth, providing financial support to the subsidiaries, and sustained access to the
capital markets, while at the same time meeting our regulatory capital requirements and serving as a source of financial
strength to our banking subsidiaries. Schwab’s primary sources of capital are funds generated by the operations of
subsidiaries and securities issuances by CSC in the capital markets. To ensure that Schwab has sufficient capital to absorb
unanticipated losses or declines in asset values, we have adopted a policy to remain well capitalized even in stressed
scenarios.
- 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)
Internal guidelines are set, for both CSC and its regulated subsidiaries, to ensure capital levels are in line with our strategy
and regulatory requirements. Capital forecasts are reviewed monthly at Asset-Liability Management and Pricing Committee
and Financial Risk Oversight Committee meetings. A number of early warning indicators are monitored to help identify
potential problems that could impact capital. In addition, we monitor the subsidiaries’ capital levels and requirements.
Subject to regulatory capital requirements and any required approvals, any excess capital held by subsidiaries is transferred
to CSC in the form of dividends and returns of capital. When subsidiaries have need of additional capital, funds are provided
by CSC as equity investments and also as subordinated loans (in a form approved as regulatory capital by regulators) for
CS&Co. The details and method used for each cash infusion are based on an analysis of the particular entity’s needs and
financing alternatives. The amounts and structure of infusions must take into consideration maintenance of regulatory
capital requirements, debt/equity ratios, and equity double leverage ratios.
Schwab conducts regular capital stress testing to assess the potential financial impacts of various adverse macroeconomic
and company-specific events to which the Company could be subjected. The objective of the capital stress testing is (1) to
explore various potential outcomes – including rare and extreme events and (2) to assess impacts of potential stressful
outcomes on both capital and liquidity. Additionally, we have a comprehensive Capital Contingency Plan to provide action
plans for certain low probability/high impact capital events that the Company might face. The Capital Contingency Plan is
issued under the authority of the Financial Risk Oversight 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.
The results of the stress testing indicate there are two scenarios which could stress the Company’s capital: (1) inflows of
balance sheet cash during a period of very low interest rates and (2) outflows of balance sheet cash when other sources of
financing are not available and the Company is required to sell assets to fund the flows at a loss. The Capital Contingency
Plan is reviewed annually and updated as appropriate.
For additional information, see Business – Regulation in Part I, Item 1.
Regulatory Capital Requirements
CSC is subject to capital requirements set by the Federal Reserve and is required to serve as a source of strength for our
banking subsidiaries and to provide financial assistance if our banking subsidiaries experience financial distress. Schwab is
required to maintain a Tier 1 Leverage Ratio for CSC of at least 4%; however, management seeks to maintain the ratio of at
least 6%. Due to the relatively low risk of our balance sheet assets and risk-based capital ratios at CSC and CSB that are
well in excess of regulatory requirements, the Tier 1 Leverage Ratio is the most restrictive capital constraint on CSC’s asset
growth.
Our banking subsidiaries are subject to capital requirements set by their regulators that are substantially similar to those
imposed on CSC by the Federal Reserve. Our banking subsidiaries’ failure to remain well capitalized could result in certain
mandatory and possibly additional discretionary actions by the regulators that could have a direct material effect on the
banks. Schwab’s principal banking subsidiary, CSB, is required to maintain a Tier 1 Leverage Ratio of at least 5% to be well
capitalized, but seeks to maintain the ratio of at least 6.25%. Based on its regulatory capital ratios at December 31, 2018,
CSB is considered well capitalized.
- 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)
The following table details CSC’s consolidated and CSB’s capital ratios:
December 31,
Total stockholders’ equity
Less:
Preferred Stock
Common Equity Tier 1 Capital before regulatory adjustments
Less:
Goodwill, net of associated deferred tax liabilities
Other intangible assets, net of associated deferred tax liabilities
Deferred tax assets, net of valuation allowances and deferred tax liabilities
AOCI adjustment (1)
Common Equity Tier 1 Capital
Tier 1 Capital
Total Capital
Risk-Weighted Assets
Common Equity Tier 1 Capital/Risk-Weighted Assets
Tier 1 Capital/Risk-Weighted Assets
Total Capital/Risk-Weighted Assets
2018
2017
CSC
CSB
CSC
CSB
$
20,670
$
15,615
$
18,525
$
13,224
$
$
$
$
$
$
$
$
2,793
17,877
1,188
125
3
(252)
16,813
19,606
19,628
95,441
17.6%
20.5%
20.6%
$
$
$
$
—
15,615
13
—
1
(231)
15,832
15,832
15,853
80,513
19.7%
19.7%
19.7%
$
$
$
$
2,793
15,732
1,191
61
2
(152)
14,630
17,423
17,452
75,866
19.3%
23.0%
23.0%
—
13,224
13
—
—
(144)
13,355
13,355
13,382
66,519
20.1%
20.1%
20.1%
Tier 1 Leverage Ratio
(1) CSC and CSB elected to opt-out of the requirement to include most components of AOCI in CET1 Capital. Beginning in 2019, CSC is required to
7.1%
7.6%
7.2%
7.1%
include all components of AOCI in regulatory capital.
CSB is also subject to regulatory requirements that restrict and govern the terms of affiliate transactions. In addition, CSB is
required to provide notice to, and may be required to obtain approval from, the OCC and the Federal Reserve to declare
dividends to CSC.
As a broker-dealer, CS&Co is subject to regulatory requirements of the Uniform Net Capital Rule, which is intended to
ensure the general financial soundness and liquidity of broker-dealers. These regulations prohibit CS&Co from paying cash
dividends, making unsecured advances and loans to the parent company and employees, and repaying subordinated
borrowings from CSC if such payment would result in a net capital amount below prescribed thresholds. At December 31,
2018, CS&Co was in compliance with its net capital requirements.
In addition to the capital requirements above, Schwab’s subsidiaries are subject to other regulatory requirements intended to
ensure financial soundness and liquidity. See Item 8 – Note 21 for additional information on the components of stockholders’
equity and information on the capital requirements of significant subsidiaries.
Dividends
Since the initial dividend in 1989, CSC has paid 119 consecutive quarterly dividends and has increased the quarterly
dividend rate 23 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, CSC currently targets its common stock cash dividend at approximately 20% to
30% of net income.
- 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)
The Board of Directors of the Company declared quarterly cash dividend increases per common share during 2017 and 2018
as shown below:
Date of Declaration
January 26, 2017
January 25, 2018
July 25, 2018
Quarterly Cash Increase
New Quarterly Dividend
Per Common Share
% Increase
Per Common Share
$
0.01
0.02
0.03
14% $
25%
30%
0.08
0.10
0.13
In addition, on January 30, 2019, the Board of Directors of the Company declared a four cent, or 31%, increase in the
quarterly cash dividend to $0.17 per common share.
The following table details the CSC cash dividends paid and per share amounts:
Year Ended December 31,
2018
2017
Cash Paid
Per Share
Amount
Cash Paid
Per Share
Amount
$
$
28
0.46
623 $
Common Stock
Series A Preferred Stock (1)
Series B Preferred Stock (2,5)
Series C Preferred Stock (2)
Series D Preferred Stock (2)
Series E Preferred Stock (3)
Series F Preferred Stock (4)
(1) Dividends paid semi-annually until February 1, 2022 and quarterly thereafter.
(2) Dividends paid quarterly.
(3) Dividends paid semi-annually until March 1, 2022 and quarterly thereafter.
(4) Series F Preferred Stock was issued on October 31, 2017. Dividends paid semi-annually beginning on June 1, 2018 until December 1, 2027, and
4,625.00
5,430.56
431 $
59.52
60.00
70.00
N/A
N/A
N/A
36
45
28
29
36
45
27
28
23
0.32
70.00
60.00
60.00
59.52
3,867.01
N/A
quarterly thereafter.
(5) Series B Preferred Stock was redeemed on December 1, 2017.
N/A Not applicable.
Share Repurchases
On October 25, 2018, CSC publicly announced that its Board of Directors terminated the existing two share repurchase
authorizations and replaced them with a new authorization to repurchase up to $1.0 billion of common stock. CSC
repurchased 22 million shares of its common stock for $1.0 billion in 2018, completing all repurchases under this
authorization. There were no repurchases of CSC’s common stock in 2018 prior to the fourth quarter, or in 2017.
On January 30, 2019, CSC publicly announced that its Board of Directors authorized the repurchase of up to $4.0 billion of
common stock. The authorization does not have an expiration date.
FOREIGN HOLDINGS
At December 31, 2018, Schwab had exposure to non-sovereign financial and non-financial institutions in foreign countries,
as well as agencies of foreign governments. At December 31, 2018, the fair value of these holdings totaled $7.6 billion, with
the top three exposures being to issuers and counterparties domiciled in France at $2.8 billion, Sweden at $1.3 billion, and
Canada at $0.8 billion.
In addition to the direct holdings in foreign companies and securities issued by foreign government agencies, Schwab has
indirect exposure to foreign countries through its investments in CSIM money market funds (collectively, the Funds)
resulting from brokerage clearing activities. At December 31, 2018, the Company had $21 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 foreign countries. Schwab had outstanding margin loans to foreign residents of
$746 million at December 31, 2018.
- 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)
FAIR VALUE OF FINANCIAL INSTRUMENTS
Schwab uses the market approach to determine the fair value of certain financial assets and liabilities recorded at fair value,
and to determine fair value disclosures. See Item 8 – Note 2 and Note 16 for more information on our assets and liabilities
recorded at fair value.
When available, Schwab uses quoted prices in active markets to measure the fair value of assets and liabilities. When
utilizing market data and bid-ask spread, we use the price within the bid-ask spread that best represents fair value. When
quoted prices do not exist, prices are obtained from independent third-party pricing services to measure the fair value of
investment assets. We generally obtain prices from three independent pricing sources for assets recorded at fair value. Our
primary third-party 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. We compare the prices obtained from the
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. Schwab 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 material differences in the amounts recorded. At December 31, 2018 and 2017, we did not adjust prices received from the
primary independent third-party pricing service.
CRITICAL ACCOUNTING ESTIMATES
The consolidated financial statements of Schwab have been prepared in accordance with GAAP. Item 8 – Note 2 contains
more information on our significant accounting policies made in connection with its application of these accounting
principles.
While the majority of the 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 Schwab’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 financial statements for reasonableness and adequacy.
Management has discussed the development and selection of these critical accounting estimates with the Audit Committee
of the Board of Directors. 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.
Income Taxes
Schwab estimates income tax expense based on amounts expected to be owed to the various tax jurisdictions in which we
operate, including federal, state and local domestic jurisdictions, and immaterial amounts owed to several foreign
jurisdictions. The estimated income tax expense is reported in the consolidated statements of income in taxes on income.
Accrued taxes are reported in other assets or accrued expenses and other liabilities on the consolidated balance sheets and
represent the net estimated amount due to or to be received from taxing jurisdictions either currently or deferred to future
periods. Deferred taxes arise from differences between assets and liabilities measured for financial reporting purposes versus
income tax reporting purposes. Deferred tax assets are recognized if, in management’s judgment, their realizability is
determined to be more likely than not. Uncertain tax positions that meet the more likely than not recognition threshold are
measured to determine the amount of benefit to recognize. An uncertain tax position is measured at the largest amount of
benefit management believes is more likely than not to be realized upon settlement. In estimating accrued taxes, we assess
the relative merits and risks of the appropriate tax treatment considering statutory, judicial and regulatory guidance in the
context of the tax position. Because of the complexity of tax laws and regulations, interpretation can be difficult and subject
to legal judgment given specific facts and circumstances.
Changes in the estimate of accrued taxes occur periodically due to changes in tax rates, interpretations of tax laws, the status
of examinations being conducted by various taxing authorities, and newly enacted statutory, judicial and regulatory guidance
that impacts the relative merits and risks of tax positions. These changes, when they occur, affect accrued taxes and can be
- 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)
significant to the operating results of the Company. See Item 8 – Note 20 for more information on the Company’s income
taxes.
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, 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.
Significant judgment is required in making these estimates, and the actual cost of resolving a matter may ultimately differ
materially from the amount reserved. See Item 8 – Note 14 for more information on the Company’s contingencies related to
legal and regulatory reserves.
- 47 -
THE CHARLES SCHWAB CORPORATION
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
For a discussion of the quantitative and qualitative disclosures about market risk, see Risk Management in Part II, Item 7.
?
- 48 -
THE CHARLES SCHWAB CORPORATION
Item 8. Financial Statements and Supplementary Data
TABLE OF CONTENTS
Consolidated Statements of Income
Consolidated Statements of Comprehensive Income
Consolidated Balance Sheets
Consolidated Statements of Cash Flows
Consolidated Statements of Stockholders’ Equity
Notes to Consolidated Financial Statements
Note 1.
Note 2.
Note 3.
Note 4.
Note 5.
Note 6.
Note 7.
Note 8.
Note 9.
Note 10.
Note 11.
Note 12.
Note 13.
Note 14.
Note 15.
Note 16.
Note 17.
Note 18.
Note 19.
Note 20.
Note 21.
Note 22.
Note 23.
Note 24.
Note 25.
Report of Independent Registered Public Accounting Firm
Management’s Report on Internal Control Over Financial Reporting
Introduction and Basis of Presentation
Summary of Significant Accounting Policies
Revenue Recognition
Receivables from and Payables to Brokerage Clients
Other Securities Owned
Investment Securities
Bank Loans and Related Allowance for Loan Losses
Equipment, Office Facilities, and Property
Goodwill
Other Assets
Variable Interest Entities
Bank Deposits
Borrowings
Commitments and Contingencies
Financial Instruments Subject to Off-Balance Sheet Credit Risk
Fair Values of Assets and Liabilities
Stockholders’ Equity
Accumulated Other Comprehensive Income
Employee Incentive, Retirement, Deferred Compensation, and Career Achievement Plans
Taxes on Income
Regulatory Requirements
Segment Information
The Charles Schwab Corporation – Parent Company Only Financial Statements
Quarterly Financial Information (Unaudited)
Subsequent Event
50
51
52
53
55
56
56
57
67
69
69
70
74
78
79
79
79
80
81
82
84
87
91
92
93
95
97
99
100
102
102
103
104
- 49 -
THE CHARLES SCHWAB CORPORATION
Consolidated Statements of Income
(In Millions, Except Per Share Amounts)
Year Ended December 31,
Net Revenues
Interest revenue
Interest expense
Net interest revenue
Asset management and administration fees (1)
Trading revenue
Other
Total net revenues
Expenses Excluding Interest
Compensation and benefits
Professional services
Occupancy and equipment
Advertising and market development
Communications
Depreciation and amortization
Regulatory fees and assessments
Other
Total expenses excluding interest
Income before taxes on income
Taxes on income
Net Income
Preferred stock dividends and other (2)
Net Income Available to Common Stockholders
Weighted-Average Common Shares Outstanding:
Basic
Diluted (3)
Earnings Per Common Shares Outstanding:
2018
2017
2016
$
$
$
6,680
(857)
5,823
3,229
763
317
10,132
$
4,624
(342)
4,282
3,392
654
290
8,618
3,057
654
496
313
242
306
189
313
5,570
4,562
1,055
3,507
178
3,329
1,348
1,361
$
2,737
580
436
268
231
269
179
268
4,968
3,650
1,296
2,354
174
2,180
1,339
1,353
$
3,493
(171)
3,322
3,055
825
276
7,478
2,466
506
398
265
237
234
144
235
4,485
2,993
1,104
1,889
143
1,746
1,324
1,334
Basic
Diluted (3)
1.32
1.31
(1) Includes fee waivers of $0, $10 million, and $224 million during the years ended December 31, 2018, 2017, and 2016, respectively, relating to Schwab-
1.63
1.61
2.47
2.45
$
$
$
$
$
$
sponsored money market funds.
(2) Includes preferred stock dividends and undistributed earnings and dividends allocated to non-vested restricted stock units.
(3) Antidilutive stock options and restricted stock units excluded from the calculation of diluted EPS totaled 18 million, 15 million, and 26 million shares in
2018, 2017, and 2016, respectively.
See Notes to Consolidated Financial Statements.
- 50 -
THE CHARLES SCHWAB CORPORATION
Consolidated Statements of Comprehensive Income
(In Millions)
Year Ended December 31,
Net income
Other comprehensive income (loss), before tax:
Change in net unrealized gain (loss) on available for sale securities:
Net unrealized gain (loss)
Reclassification of net unrealized loss transferred to held to maturity
Other reclassifications included in other revenue
Change in net unrealized gain (loss) on held to maturity securities:
Reclassification of net unrealized loss transferred from available for sale
Amortization of amounts previously recorded upon transfer from available for sale
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.
?
2018
2017
2016
$
3,507
$
2,354
$
1,889
(123)
—
—
—
35
(1)
(89)
22
(67)
13
227
(12)
(227)
31
(11)
21
(10)
11
(44)
—
(4)
—
—
1
(47)
18
(29)
$
3,440
$
2,365
$
1,860
- 51 -
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 $7,195 and $6,596 at December 31, 2018 and 2017, respectively)
Receivables from brokers, dealers, and clearing organizations
Receivables from brokerage clients — net
Other securities owned — at fair value
Available for sale securities
Held to maturity securities
Bank loans — net
Equipment, office facilities, and property — net
Goodwill
Other assets
Total assets
Liabilities and Stockholders’ Equity
Bank deposits
Payables to brokers, dealers, and clearing organizations
Payables to brokerage clients
Accrued expenses and other liabilities
Short-term borrowings
Long-term debt
Total liabilities
Stockholders’ equity:
Preferred stock — $.01 par value per share; aggregate liquidation preference of $2,850
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 — 155,116,695 and 142,210,890 shares at December 31, 2018 and 2017,
respectively
Accumulated other comprehensive income (loss)
Total stockholders’ equity
2018
2017
$
27,938
$
14,217
13,563
553
21,651
539
66,578
144,009
16,609
1,769
1,227
2,046
15,139
649
20,576
539
49,995
120,926
16,478
1,471
1,227
2,057
$
$
296,482
$
243,274
231,423
$
169,656
1,831
32,726
2,954
—
6,878
1,287
31,243
2,810
15,000
4,753
275,812
224,749
2,793
15
4,499
17,329
(3,714)
(252)
20,670
2,793
15
4,353
14,408
(2,892)
(152)
18,525
Total liabilities and stockholders’ equity
$
296,482
$
243,274
See Notes to Consolidated Financial Statements.
- 52 -
THE CHARLES SCHWAB CORPORATION
Consolidated Statements of Cash Flows
(In Millions)
Year Ended December 31,
Cash Flows from Operating Activities
Net income
Adjustments to reconcile net income to net cash provided by (used for) operating activities:
Share-based compensation
Depreciation and amortization
Provision (benefit) for deferred income taxes
Premium amortization, net, on available for sale and held to maturity securities
Other
Net change in:
Investments segregated and on deposit for regulatory purposes
Receivables from brokers, dealers, and clearing organizations
Receivables from brokerage clients
Other securities owned
Other assets
Payables to brokers, dealers, and clearing organizations
Payables to brokerage clients
Accrued expenses and other liabilities
Net cash provided by (used for) operating activities
Cash Flows from Investing Activities
Purchases of available for sale securities
Proceeds from sales of available for sale securities
Principal payments on available for sale securities
Purchases of held to maturity securities
Principal payments on held to maturity securities
Net increase in bank loans
Purchases of equipment, office facilities, and property
Purchases of Federal Home Loan Bank stock
Proceeds from sales of Federal Home Loan Bank stock
Other investing activities
2018
2017 (1)
2016 (1)
$
3,507 $
2,354 $
1,889
197
306
49
350
137
6,922
96
(1,100)
—
(104)
573
1,483
40
12,456
(32,801)
115
16,016
(40,873)
17,410
(129)
(570)
(156)
529
(96)
153
269
58
342
51
4,933
74
(3,428)
(90)
(177)
(1,148)
(4,651)
421
(839)
(15,033)
8,617
9,095
(32,925)
11,627
(1,071)
(400)
(430)
106
(59)
141
234
15
266
4
(1,635)
(147)
150
84
(93)
(181)
2,709
167
3,603
(29,248)
5,537
11,903
(31,162)
5,747
(1,103)
(346)
(152)
88
(39)
Net cash provided by (used for) investing activities
(40,555)
(20,473)
(38,775)
Cash Flows from Financing Activities
Net change in bank deposits (2)
Net change in short-term borrowings
Issuance of long-term debt
Repayment of long-term debt
Repurchases of common stock
Net proceeds from preferred stock offerings
Redemption of preferred stock
Dividends paid
Proceeds from stock options exercised
Other financing activities
Net cash provided by (used for) financing activities
Increase (Decrease) in Cash and Cash Equivalents, including Amounts Restricted
Cash and Cash Equivalents including Amounts Restricted at Beginning of Year
61,767
(15,000)
3,024
(909)
(1,000)
—
—
(787)
125
(54)
47,166
19,067
19,160
6,186
15,000
2,129
(257)
—
492
(485)
(592)
171
(45)
22,599
1,287
17,873
Cash and Cash Equivalents, including Amounts Restricted at End of Year
$
38,227 $
19,160 $
Continued on following page
- 53 -
33,952
—
—
(7)
—
1,316
—
(486)
144
44
34,963
(209)
18,082
17,873
THE CHARLES SCHWAB CORPORATION
Continued from previous page
Year Ended December 31,
Supplemental Cash Flow Information
Cash paid during the year for:
Interest
Income taxes
Non-cash investing activity:
Securities purchased during the period but settled after period end
2018
2017 (1)
2016 (1)
$
$
$
798 $
927 $
327 $
1,212 $
— $
29 $
160
991
—
December 31,
2018
2017
2016
Reconciliation of cash, cash equivalents and amounts reported within the balance sheet (3)
Cash and cash equivalents
$
27,938 $
14,217 $
10,828
Restricted cash and cash equivalents amounts included in cash and investments segregated
and on deposit for regulatory purposes
10,289
4,943
7,045
Total cash and cash equivalents, including amounts restricted shown in the
statement of cash flows
(1) Adjusted for the retrospective adoption of ASU 2016-18. See Note 2.
(2) Includes transfers from other sweep features to bank sweep of $72 billion, $5 billion and $8 billion for the years ended December 31, 2018, 2017 and
19,160 $
38,227 $
$
17,873
2016, respectively.
(3) For more information on the nature of restrictions on restricted cash and cash equivalents see Note 21.
See Notes to Consolidated Financial Statements.
- 54 -
THE CHARLES SCHWAB CORPORATION
Consolidated Statements of Stockholders’ Equity
(In Millions)
Preferred
Stock
Common Stock
Shares Amount
Additional
Paid-In
Capital
Retained
Earnings
Treasury
Stock,
at cost
Accumulated
Other
Comprehensive
Income (Loss)
Total
Balance at December 31, 2015
$
1,459
1,488
$
Net income
Other comprehensive income (loss), net of tax
Issuance of preferred stock, net
Dividends declared on preferred stock
Dividends declared on common stock — $.27
per share
Stock option exercises and other
Share-based compensation and related tax
effects
Other
—
—
1,324
—
—
—
—
—
—
—
—
—
—
—
—
—
Balance at December 31, 2016
2,783
1,488
Net income
Other comprehensive income (loss), net of tax
Issuance of preferred stock, net
Redemption of preferred stock
Dividends declared on preferred stock
Dividends declared on common stock — $.32
per share
Stock option exercises and other
Share-based compensation
Other
—
—
492
(482)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Balance at December 31, 2017
2,793
1,488
Adoption of accounting standards (Note 2)
Net income
Other comprehensive income (loss), net of tax
Dividends declared on preferred stock
Dividends declared on common stock — $.46
per share
Repurchase of common stock
Stock option exercises and other
Share-based compensation
Other
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Balance at December 31, 2018
$
2,793
1,488
$
See Notes to Consolidated Financial Statements.
15
—
—
—
—
—
—
—
—
15
—
—
—
—
—
—
—
—
—
15
—
—
—
—
—
—
—
—
—
15
$
4,152
$ 11,253
$
(3,343) $
(134) $ 13,402
—
—
—
—
—
(80)
177
18
4,267
—
—
—
—
—
—
(88)
144
30
1,889
—
—
(126)
(360)
—
—
(7)
12,649
2,354
—
—
(3)
(161)
(431)
—
—
—
—
—
—
—
—
224
—
(11)
—
(29)
—
—
—
—
—
—
1,889
(29)
1,324
(126)
(360)
144
177
—
(3,130)
(163)
16,421
—
—
—
—
—
—
259
—
(21)
—
11
—
—
—
—
—
—
—
2,354
11
492
(485)
(161)
(431)
171
144
9
4,353
14,408
(2,892)
(152)
18,525
—
—
—
—
—
—
(84)
188
42
200
3,507
—
(164)
(624)
—
—
—
2
—
—
—
—
—
(1,000)
209
—
(31)
(33)
—
(67)
—
—
—
—
—
—
167
3,507
(67)
(164)
(624)
(1,000)
125
188
13
$
4,499
$ 17,329
$
(3,714) $
(252) $ 20,670
- 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, headquartered in San Francisco, California.
CSC was incorporated in 1986 and engages, through its subsidiaries, in wealth management, securities brokerage, banking,
asset management, custody, and financial advisory services.
Significant business subsidiaries of CSC include the following:
• Charles Schwab & Co., Inc. (CS&Co) is a securities broker-dealer with over 355 domestic branch offices in 47
states, as well as a branch in the Commonwealth of Puerto Rico. In addition, Schwab serves clients through branch
offices in the U.K., Hong Kong, Singapore, and Australia through various subsidiaries;
• Charles Schwab Bank (CSB), a federal savings bank; and
• Charles Schwab Investment Management, Inc. (CSIM), the investment advisor for Schwab’s proprietary mutual
funds (Schwab Funds®), and for Schwab’s exchange-traded funds (Schwab ETFs™).
Unless otherwise indicated, the terms “Schwab,” “the Company,” “we,” “us,” or “our” mean CSC together with its
consolidated subsidiaries.
The accompanying consolidated financial statements include CSC and its subsidiaries. Intercompany balances and
transactions have been eliminated. These consolidated financial statements have been prepared in conformity with GAAP,
which require management to make certain estimates and assumptions that affect the reported amounts in the accompanying
financial statements and in the related disclosures. These estimates are based on information available as of the date of the
consolidated financial statements. While management makes its best judgment, actual amounts or results could differ from
those estimates. Certain estimates relate to taxes on income and legal and regulatory reserves. Actual results may differ from
those estimates.
Principles of Consolidation
Schwab evaluates all entities in which it has financial interests for consolidation, except for money market funds, which are
specifically excluded from consolidation guidance. When an entity is evaluated for consolidation, Schwab determines
whether its interest in the entity constitutes a controlling financial interest under either the variable interest entity (VIE)
model or the voting interest entity (VOE) model. In evaluating whether Schwab’s interest in a VIE is a controlling financial
interest, we consider whether our involvement in the context of the design, purpose, and risks of the VIE, as well as any
involvement of related parties, provides us with (i) the power to direct the most significant activities of the VIE, and (ii) the
obligation to absorb losses or receive benefits that are significant to the VIE. If both of these conditions exist, then Schwab
would be the primary beneficiary of that VIE, and consolidate it. Based upon the assessments for all of our interests in VIEs,
there are no cases where the Company is the primary beneficiary; therefore, we are not required to consolidate any VIEs.
See Note 11 for further information about VIEs. Schwab consolidates all VOEs in which it has majority-voting interests.
Investments in entities in which Schwab does not have a controlling financial interest are accounted for under the equity
method of accounting when we have the ability to exercise significant influence over operating and financing decisions of
the entity. Investments in entities for which Schwab does not have the ability to exercise significant influence are generally
carried at cost and adjusted for impairment and observable price changes of the identical or similar investments of the same
issuer (adjusted cost method), except for certain investments in qualified affordable housing projects which are accounted
for under the proportional amortization method. All equity method, adjusted cost method, and proportional amortization
method investments are included in other assets on the consolidated balance sheets.
- 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)
2.
Summary of Significant Accounting Policies
Revenue recognition
Schwab’s accounting policies for revenue recognition are discussed in Note 3.
Cash and cash equivalents
Schwab considers all highly liquid investments that mature in three months or less from the time of acquisition and that are
not segregated and on deposit for regulatory purposes to be cash and cash equivalents. Cash and cash equivalents include
money market funds, deposits with banks, certificates of deposit, commercial paper, and U.S. Treasury securities. Cash and
cash equivalents also include balances that our banking subsidiaries maintain at the Federal Reserve.
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 financing transactions that are recorded at their contractual amounts plus accrued interest.
The Company obtains 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 the SEC’s Customer Protection
Rule, cash balances not collateralizing margin positions and not swept to money market funds or bank deposit accounts, are
segregated by Schwab for the exclusive benefit of clients.
Receivables from brokerage clients
Receivables from brokerage clients include margin loans to securities brokerage clients and other trading receivables from
clients. Margin loans are collateralized by client securities and are carried at the amount receivable, net of an allowance for
doubtful accounts. The Company monitors margin levels and requires clients to deposit additional collateral, or reduce
margin positions, to meet minimum collateral requirements if the fair value of the collateral changes. Receivables from
brokerage clients that remain unsecured or partially secured for more than 30 days are fully reserved for in the allowance for
doubtful accounts, except in the case of confirmed fraud, which is reserved immediately. Clients with margin loans have
agreed to allow Schwab to pledge collateralized securities in accordance with federal regulations. The collateral is not
reflected in the consolidated financial statements. The allowance for doubtful accounts for brokerage clients and related
activity was immaterial for all periods presented.
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 earnings.
Investment securities
AFS securities are recorded at fair value and unrealized gains and losses are reported, net of taxes, in AOCI included in
stockholders’ equity. HTM securities 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 AFS securities are determined on a specific
identification basis and are included in other revenue.
Management evaluates whether investment securities are 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 amortized cost and fair
value.
- 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)
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 the estimated credit loss, and is measured by the difference
between the present value of expected cash flows and the amortized cost of the security. Where appropriate, models are
utilized to estimate the credit loss on a discounted cash flow basis using the security’s effective interest rate.
The evaluation of whether we expect to recover the amortized cost of a security is inherently judgmental. The evaluation
considers multiple factors including: the magnitude and duration of the unrealized loss; the financial condition of the issuer;
the payment structure of the security; external credit ratings; our internal credit ratings; for asset-backed securities, the
amount of credit support provided by the structure of the security to absorb credit losses on the underlying collateral; recent
events specific to the issuer and the issuer’s industry; and whether all scheduled principal and interest payments have been
received.
Securities borrowed and securities loaned
Securities borrowed transactions require Schwab to deliver cash to the lender in exchange for securities; the receivables
from these transactions are included in receivables from brokers, dealers, and clearing organizations. For securities loaned,
Schwab receives collateral in the form of cash in an amount equal to or greater than the market value of securities loaned;
the payables from these transactions are included in payables to brokers, dealers, and clearing organizations. The market
value of securities borrowed and loaned are monitored, with additional collateral obtained or refunded to ensure full
collateralization. Fees received or paid are recorded in interest revenue or interest expense.
Bank loans and related allowance for loan losses
Bank loans are recorded at their contractual principal amounts and include unamortized direct origination costs or net
purchase discounts or premiums. Direct origination costs and premiums and discounts are recognized in interest revenue
using the effective interest method over the contractual life of the loan and are adjusted for actual prepayments.
Additionally, loans are recorded net of an allowance for loan losses. The loan portfolio includes four loan types: First
Mortgages, HELOCs, PALs, and other loans. We use these segments when developing and documenting our methodology
for determining the allowance for loan losses.
PALs are collateralized by marketable securities with liquid markets. Credit lines are over-collateralized dependent on the
type of security pledged. Collateral market value is monitored on a daily basis and a borrower’s committed line may be
reduced or collateral may be liquidated if the collateral is in danger of falling below specified levels. As such, the loss
inherent within this portfolio is limited.
Schwab records an allowance for loan losses through a charge to earnings based on our estimate of probable losses in the
existing portfolio. We review 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, LTV ratios, past loss experience,
estimates of future loss severities, borrower credit risk, and the adequacy of collateral. The methodology also evaluates
concentrations in the loan types, including loan products within those types, 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 (Estimated Current LTV) of each loan, the term and structure of each loan, current key interest
rates including U.S. Treasury and 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 our historical loss experience
adjusted for current trends and market information. Loss severity estimates are based on our historical loss experience and
- 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)
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. This
methodology results in loss factors that are applied to the outstanding balances to determine the allowance for loan loss for
each loan type.
Schwab considers loan modifications in which it makes an economic concession to a borrower experiencing financial
difficulty to be troubled debt restructurings (TDRs).
Nonaccrual, Nonperforming and Impaired loans
First Mortgages, HELOCs, PALs, 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. HELOC loans secured
by a second lien are placed on non-accrual status if the associated first lien 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 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. Loans on nonaccrual status and other real estate owned are considered
nonperforming assets. Nonaccrual loans, other real estate owned, and TDRs are considered impaired assets, as it is probable
we will not collect all amounts due.
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. Our charge-off policy for First Mortgage 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 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, office facilities, and property include certain capitalized costs of acquired or
internally developed software. Costs for internally developed software are capitalized when the costs relate to development
of approved projects for our internal needs that result in additional functionality. Costs related to preliminary project and
post-project activities are expensed as incurred. Equipment, office facilities, and property (other than land) are depreciated
on a straight-line basis over their estimated useful lives. Estimated useful lives are as follows:
Equipment and office facilities
Buildings
Software
Leasehold improvements
(1) Amortized over contractual term if less than three years.
5 to 10 years
20 to 40 years
3 to 10 years (1)
Lesser of useful life or lease term
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.
- 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)
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.
Impairment exists when the carrying amount of goodwill exceeds its implied fair value, resulting in an impairment charge
for this excess. Our annual impairment testing date is April 1st. Schwab can elect to qualitatively assess goodwill for
impairment if it is more likely than not that the fair value of a reporting unit exceeds its carrying value. A qualitative
assessment considers macroeconomic and other industry-specific factors, such as trends in short-term and long-term interest
rates and the ability to access capital, and 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, as well as a market capitalization analysis.
Intangible assets
Finite-lived intangible assets are amortized over their useful lives in a manner that best reflects their economic benefit. All
intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying
amount of such assets may not be recoverable.
Low-Income Housing Tax Credit (LIHTC) Investments
We account for investments in qualified affordable housing projects using the proportional amortization method if the
applicable requirements are met. The proportional amortization method amortizes the cost of the investment over the period
in which the investor expects to receive tax credits and other tax benefits, and the resulting amortization is recognized as a
component of taxes on income. The carrying value of LIHTC investments is included in other assets on the consolidated
balance sheets. Unfunded commitments related to LIHTC investments are included in accrued expenses and other liabilities
on the consolidated balance sheets.
Guarantees and indemnifications
Schwab 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 obligations relating to guarantees are estimated based on transactions for similar
guarantees or expected present value measures.
Advertising and market development
Advertising and market development activities include the cost to produce and distribute marketing campaigns as well as
client incentives and discounts. Such costs are generally expensed when incurred.
Income taxes
Schwab 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. Uncertain tax positions are
evaluated to determine whether they are more likely than not to be sustained upon examination. When tax positions are
more likely than not to be sustained upon examination the difference between positions taken on tax return filings and
estimated potential tax settlement outcomes are recognized in accrued expenses and other liabilities. If a position is not more
likely than not to be sustained, then none of the tax benefit is recognized in Schwab’s financial statements. Accrued interest
- 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)
and penalties relating to unrecognized tax benefits is recorded in taxes on income. Schwab records amounts within AOCI
net of taxes. Income tax effects are released from AOCI using the specific-identification approach.
Share-based compensation
Share-based compensation includes employee and board of director stock options and restricted stock units. Schwab
measures compensation expense for these share-based payment arrangements based on their estimated fair values as of the
grant date. The fair value of the share-based award is recognized over the vesting period as share-based compensation.
Share-based compensation expense is based on options or units expected to vest and therefore is reduced for estimated
forfeitures. Per the Company’s accounting policy election, forfeitures are estimated at the time of grant and reviewed
annually based on the Company’s historical forfeiture experience. Share-based compensation expense is adjusted in
subsequent periods if actual forfeitures differ from estimated forfeitures. Beginning January 1, 2017, the excess tax benefits
or deficiencies from the exercise of stock options and the vesting of restricted stock units are recorded in taxes on income.
Earnings per common share
EPS is computed using the two-class method. Preferred stock dividends and undistributed earnings and dividends allocated
to participating securities are subtracted from net income in determining net income available to common stockholders.
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 non-vested restricted stock units.
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 third-party 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 measured at fair value on a recurring basis
Schwab’s assets and liabilities measured at fair value on a recurring basis include: certain cash equivalents, certain
investments segregated and on deposit for regulatory purposes, other securities owned, and AFS securities. The Company
uses the market approach to determine the fair value of assets and liabilities. When available, the Company uses quoted
- 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)
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.
We generally obtain prices from three independent third-party pricing sources for assets recorded at fair value.
Our 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. We compare the prices obtained
from the 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. Schwab 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 material differences in the amounts recorded.
- 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)
New Accounting Standards
Adoption of New Accounting Standards
Standard
Description
Accounting
Standards Update
(ASU) 2014-09,
“Revenue from
Contracts with
Customers (Topic
606)” and related
ASUs
ASU 2016-01,
“Financial
Instruments –
Overall (Subtopic
825-10)” and ASU
2018-03,
“Technical
Corrections and
Improvements to
Financial
Instruments –
Overall (Subtopic
825-10)”
ASU 2016-18,
“Statement of Cash
Flows (Topic 230)
– Restricted Cash a
Consensus of the
Emerging Issues
Task Force”
Clarifies that revenue from contracts
with clients should be recognized in a
manner that depicts the timing of the
related transfer of goods or
performance of services at an amount
that reflects the expected
consideration.
Adoption allows either full or modified
retrospective transition. Full
retrospective transition required a
cumulative effect adjustment to
retained earnings as of the earliest
comparative period presented.
Modified retrospective transition
required a cumulative effect
adjustment to retained earnings as of
the beginning of the reporting period in
which the entity first applies the new
guidance.
Requires: (i) equity investments to be
measured at fair value, with changes in
fair value recognized in net income,
unless the equity method is applied or
the equity investments do not have
readily determinable fair values in
which case a practical alternative may
be elected; (ii) use of an exit price
when measuring the fair value of
financial instruments for disclosures;
(iii) separate presentation of financial
assets and liabilities by measurement
category and form of instrument on the
balance sheet or in the accompanying
notes.
Adoption requires a cumulative effect
adjustment to the balance sheet as of
the beginning of the year of initial
application, except for certain changes
that require prospective adoption.
Requires that the statement of cash
flows explain the change during the
period in the total cash and cash
equivalents, including restricted cash
and cash equivalents.
Adoption requires retrospective
presentation of the statement of cash
flows to include restricted cash and
cash equivalents in the beginning and
ending amounts.
Date of
Adoption
January 1,
2018
January 1,
2018
Effects on the Financial Statements or Other
Significant Matters
The guidance does not apply to revenue earned
from the Company’s loans and securities.
Accordingly, net interest revenue was not
impacted. The primary impact for the Company
was the capitalization on the consolidated
balance sheets of sales commissions paid to
employees for obtaining new contracts with
clients. These capitalized costs resulted in an
asset of $219 million and a related deferred tax
liability of $52 million upon adoption. The asset
is being amortized to expense over time as the
related revenues are recognized.
The Company adopted the revenue recognition
guidance using the modified retrospective
method for all contracts that were not completed
as of January 1, 2018. Further details of the
impact of adoption are included below in this
Note as well as in Note 3.
The Company adopted this guidance on a
prospective basis for its equity securities that do
not have readily determinable fair values. No
other significant changes resulted from adoption.
Therefore, there was no material impact on the
Company’s financial statements.
The Company elected to use the alternative to
fair value measurement for its equity securities
that do not have readily determinable fair values.
These equity securities will be adjusted for
impairment and observable price changes of the
identical or similar investments of the same
issuer, as applicable. Schwab refers to this
approach as the adjusted cost method. This
method was applied to an immaterial amount of
Community Reinvestment Act (CRA)
investments included in other assets on the
consolidated balance sheets.
January 1,
2018
The Company adopted this guidance on a
retrospective basis. The Company has significant
amounts of restricted cash and cash equivalents
due to its business as a broker-dealer.
As a result of the adoption, changes in restricted
cash and cash equivalents included within cash
and investments segregated and on deposit for
regulatory purposes in the consolidated balance
sheets are now presented with changes in cash
and cash equivalents throughout the consolidated
statements of cash flows. The amount of
restricted cash and cash equivalents is included
in a separate table in the consolidated statement
of cash flows.
- 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)
Date of
Adoption
January 1,
2018
Effects on the Financial Statements or
Other Significant Matters
The Company adopted this guidance as of
January 1, 2018. The Company elected to
reclassify the income tax effects of the Tax Act
from items in AOCI into retained earnings as
of the beginning of the period of adoption.
Adoption resulted in a reduction in AOCI and
a corresponding increase in retained earnings
of $33 million.
Required
Date of
Adoption
January 1,
2019
Effects on the Financial Statements or
Other Significant Matters
The Company adopted the new lease
accounting guidance prospectively as of
January 1, 2019, which will result in a gross
up of the consolidated balance sheet due to
recognition of right-of-use assets and lease
liabilities primarily related to CS&Co leases of
office space and branches. These amounts will
be based on the present value of our remaining
operating lease payments. The Company's
right of use assets and related lease liabilities
upon adoption will be $596 million and $662
million, respectively.
Standard
ASU 2018-02,
“Income Statement
– Reporting
Comprehensive
Income (Topic
220):
Reclassification of
Certain Tax Effects
from Accumulated
Other
Comprehensive
Income”
Description
Permits reclassification of the impacts
on certain tax affected items included in
AOCI that were adjusted through
income from continuing operations
rather than AOCI upon the effective
date of the Tax Act.
Adoption provides for retrospective
adoption to all periods presented and
impacted by the Tax Act or as of the
beginning of the period of adoption.
New Accounting Standards Not Yet Adopted
Standard
Description
ASU 2016-02,
“Leases (Topic
842)”
Amends the accounting for leases by
lessees and lessors. The primary change
from the new guidance is the
recognition of right-of-use assets and
lease liabilities by lessees for those
leases classified as operating leases.
Additional changes include accounting
for lease origination and executory
costs, required lessee reassessments
during the lease term due to changes in
circumstances, and expanded lease
disclosures.
Adoption provides for modified
retrospective transition as of the
beginning of the earliest comparative
period presented in the financial
statements in which the entity first
applies the new standard or
prospectively with an adjustment as of
the beginning of the period of adoption.
Certain transition relief is permitted if
elected by the entity.
- 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)
Required
Date of
Adoption
January 1,
2020
(early
adoption
permitted)
Effects on the Financial Statements or
Other Significant Matters
The Company continues to evaluate the impact
of this guidance on its financial statements.
The Company has finished the majority of its
scoping work and assessment of the current
state of data and systems. Work is transitioning
to designing and building out approaches to
address certain asset classes with a focus
primarily on a subset of our securities,
including corporate debt securities. The
Company expects that a large portion of its
securities will have zero expectation of credit
losses based on industry and regulator views
for U.S. treasury and certain government
agency-backed securities. We are currently
working on in-depth analysis for the other
asset types that do not have zero expectation of
credit losses to determine our methods and any
needed changes to policies and procedures.
Standard
Description
ASU 2016-13,
“Financial
Instruments –
Credit Losses
(Topic 326):
Measurement of
Credit Losses on
Financial
Instruments”
Provides guidance for recognizing
impairment of most debt instruments
measured at amortized cost, including
loans and HTM debt securities.
Requires estimating current expected
credit losses (CECL) over the remaining
life of an instrument or a portfolio of
instruments with similar risk
characteristics based on relevant
information about past events, current
conditions, and reasonable forecasts.
The initial estimate of, and the
subsequent changes in, CECL will be
recognized as credit loss expense
through current earnings and will be
reflected as an allowance for credit
losses offsetting the carrying value of
the financial instrument(s) on the
balance sheet. Amends the OTTI model
for AFS debt securities by requiring the
use of an allowance, rather than directly
reducing the carrying value of the
security, and eliminating consideration
of the length of time such security has
been in an unrealized loss position as a
factor in concluding whether a credit
loss exists.
Adoption requires a cumulative-effect
adjustment to retained earnings as of the
beginning of the first reporting period in
which the entity applies the new
guidance except that a prospective
transition is required for AFS debt
securities for which an OTTI has been
recognized prior to the effective date.
January 1,
2019
(early
adoption
permitted)
The Company adopted this guidance as of
January 1, 2019 using the modified
retrospective method. Adoption resulted in an
immaterial cumulative-effect adjustment to the
opening balance of retained earnings as of the
beginning of the period of adoption.
ASU 2017-08,
“Receivables –
Nonrefundable Fees
and Other Costs
(Subtopic 310-20):
Premium
Amortization on
Purchased Callable
Debt Securities”
Shortens the amortization period for the
premium on certain callable debt
securities to the earliest call date. The
amendments are applicable to any
purchased individual debt security with
an explicit and noncontingent call
feature with a fixed price on a preset
date. ASU 2017-08 does not impact the
accounting for callable debt securities
held at a discount.
Adoption requires modified
retrospective transition as of the
beginning of the period of adoption
through a cumulative-effect adjustment
to retained earnings.
- 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)
Required
Date of
Adoption
January 1,
2020
(early
adoption
permitted)
Effects on the Financial Statements or
Other Significant Matters
Historically, Schwab has expensed
implementation costs as they are incurred for
CCAs that are service contracts. Therefore,
adopting this guidance will change the
Company’s accounting treatment for these
types of implementation costs. The Company
is evaluating the impacts of this guidance on
its financial statements.
Standard
Description
ASU 2018-15,
“Intangibles–
Goodwill and
Other–Internal-Use
Software (Subtopic
350-40):
Customer’s
Accounting for
Implementation
Costs Incurred in a
Cloud Computing
Arrangement That
Is a Service
Contract (a
consensus of the
FASB Emerging
Issues Task Force)”
Aligns the criteria for capitalizing
implementation costs for cloud
computing arrangements (CCA) that are
service contracts with internal-use
software that is developed or purchased
and CCAs that include an internal-use
software license. This guidance requires
that the capitalized implementation
costs be recognized over the period of
the CCA service contract, subject to
impairment evaluation on an ongoing
basis.
The guidance prescribes the balance
sheet, income statement, and statement
of cash flow classification of the
capitalized implementation costs and
related amortization expense, and
requires additional quantitative and
qualitative disclosures.
Adoption provides for retrospective or
prospective application to all
implementation costs incurred after the
date of adoption.
The cumulative effect of the changes made to our consolidated January 1, 2018 balance sheet for the adoption of ASU
2014-09, “Revenue – Revenue from Contracts with Customers” and ASU 2018-02, “Other Comprehensive Income –
Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income” were as follows:
Assets
Other assets (1)
Stockholders’ Equity
Retained earnings
Accumulated other comprehensive income
Balance at
December 31, 2017
Adjustments
Due to ASU
2014-09
Adjustments Due to
ASU 2018-02
Balance at
January 1, 2018
$
2,057
$
167
$
— $
2,224
14,408
(152)
167
—
33
(33)
14,608
(185)
(1) Adjustment is comprised of an increase in capitalized contract costs of $219 million, partially offset by an increase in deferred tax liabilities of
$52 million.
In accordance with the new revenue standard requirements, the disclosure of the impact of adoption on our consolidated
statement of income and consolidated balance sheet were as follows:
Statement of Income
Expenses Excluding Interest
Compensation and benefits
Taxes on income
Net Income
Year Ended December 31, 2018
As Reported
Balances Without
Adoption of ASU
2014-09
Effect of Change
Higher/(Lower)
$
3,057
$
3,088
$
1,055
3,507
1,047
3,484
(31)
8
23
- 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)
As of December 31, 2018
As Reported
Balances Without
Adoption of ASU
2014-09
Effect of Change
Higher/(Lower)
$
2,046
$
1,851
$
Balance Sheet
Assets
Other assets (1)
Liabilities
Accrued expenses and other liabilities (1)
2,954
2,949
Stockholders’ Equity
Retained earnings
17,329
17,139
(1) Adjustment is comprised of an increase in capitalized contract costs of $250 million, partially offset by an increase in deferred tax liabilities of
$60 million.
3.
Revenue Recognition
Disaggregated Revenue
Disaggregation of Schwab’s revenue by major source is as follows:
Year Ended December 31,
Net interest revenue
Interest revenue
Interest expense
Net interest revenue
Asset management and administration fees
Mutual funds and ETF service fees
Advice solutions
Other
Asset management and administration fees
Trading revenue
Commissions
Principal transactions
Trading revenue
Other
Total net revenues
2018
2017
2016
$
6,680
$
4,624
$
(857)
5,823
1,793
1,139
297
3,229
685
78
763
317
(342)
4,282
2,045
1,043
304
3,392
600
54
654
290
$
10,132
$
8,618
$
7,478
For a summary of revenue provided by our reportable segments, see Note 22. The recognition of revenue is not impacted by
the operating segment in which revenue is generated.
- 67 -
195
5
190
3,493
(171)
3,322
1,853
915
287
3,055
779
46
825
276
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
Net interest revenue
Net interest revenue, which is generated from financial instruments covered by various other areas of GAAP, is not within
the scope of Accounting Standards Codification (ASC) 606, Revenue From Contracts With Customers (ASC 606), and is
included in the table above in order to reconcile to total net revenues per the consolidated statements of income. Net interest
revenue is the difference between interest generated on interest earning assets and interest paid on funding sources. Our
primary interest earning assets include cash and cash equivalents; segregated cash and investments; margin loans, which
constitute the majority of receivables from brokerage clients; investment securities; and bank loans. Revenue on interest
earning assets is affected by various factors, such as the composition of assets, prevailing interest rates at the time of
origination or purchase, changes in interest rates on floating rate securities and loans, and changes in prepayment levels for
mortgage related securities and loans. Fees earned and incurred on securities borrowing and lending activities, which are
conducted by CS&Co on assets held in client brokerage accounts, are also included in interest revenue and expense.
Asset management and administration fees
The majority of asset management and administration fees are generated through our proprietary and third-party mutual
fund and ETF offerings, as well as fee-based advisory solutions. Mutual fund and ETF service fees are charged for
investment management, shareholder, and administration services provided to Schwab Funds® and Schwab ETFs™, as well
as recordkeeping, shareholder, and administration services provided to third-party funds. Advice solutions fees are charged
for brokerage and asset management services provided to advice solutions clients. Both mutual fund and ETF service fees
and advice solutions fees are earned and recognized over time. Fees are generally based on a percentage of the daily value of
assets under management and are collected on a monthly or quarterly basis.
Trading revenue
Substantially all trading revenue is generated through commissions earned for executing trades for clients in individual
equities, options, fixed income securities, and certain third-party mutual funds and ETFs. This revenue is earned and
collected when the trades are executed.
Other revenue
Other revenue includes order flow revenue, other service fees, software fees from our portfolio management solutions,
exchange processing fees, and nonrecurring gains. Generally, the most significant portion of other revenue is order flow
revenue, which is comprised of rebate payments received from execution venues to which CS&Co sends equity and option
orders. Order flow revenue is recognized when the trades are executed.
Capitalized contract costs
Capitalized contract costs relate to sales commissions paid to employees for obtaining contracts with clients and are
included in other assets on the consolidated balance sheets. These costs are amortized to expense on a straight-line basis
over a period that is consistent with how the related revenue is recognized. At December 31, 2018 and January 1, 2018, we
had $250 million and $219 million of capitalized contract costs, respectively. Amortization expense related to capitalized
contract costs was $47 million in 2018, which was recorded in compensation and benefits expense on the consolidated
statements of income.
Contract balances
Receivables from contracts with customers within the scope of ASC 606 were $307 million at December 31, 2018 and
$353 million at January 1, 2018 and were recorded in other assets on the consolidated balance sheets. Schwab does not have
any other significant contract assets or contract liability balances as of December 31, 2018 and January 1, 2018.
Unsatisfied performance obligations
We do not have any unsatisfied performance obligations other than those that are subject to an elective practical expedient
under ASC 606. The practical expedient applies to and is elected for contracts where we recognize revenue at the amount to
which we have the right to invoice for services performed.
- 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)
4.
Receivables from and Payables to Brokerage Clients
Receivables from and payables to brokerage clients are detailed below:
December 31,
Receivables
Margin loans, net of allowance for doubtful accounts
Other brokerage receivables
Receivables from brokerage clients — net
Payables
Interest-bearing payables
Non-interest-bearing payables
Payables to brokerage clients
2018
2017
$
$
$
$
19,273
2,378
21,651
21,990
10,736
32,726
$
$
$
$
18,331
2,245
20,576
22,840
8,403
31,243
At December 31, 2018 and 2017, approximately 22% of CS&Co’s total client accounts were located in California.
5.
Other Securities Owned
A summary of securities owned is as follows:
December 31,
Equity and bond mutual funds
State and municipal debt obligations
Equity, U.S. Government and corporate debt, and other securities
Schwab Funds® money market funds
Total other securities owned
2018
2017
441
$
39
33
26
539
$
318
52
34
135
539
$
$
Equity and bond mutual funds include inventory maintained to facilitate clients’ transactions in certain Schwab Funds and
third-party mutual funds, and investments made relating to our deferred compensation plan. State and municipal debt
obligations, equity, U.S. Government and corporate debt, and other securities include securities to meet clients’ trading
activities. The positions in Schwab Funds® money market funds arise from certain overnight funding of clients’ redemption,
check-writing, and debit card activities.
- 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)
6.
Investment Securities
The amortized cost, gross unrealized gains and losses, and fair value of AFS and HTM securities are as follows:
December 31, 2018
Available for sale securities
Amortized
Cost
Gross Unrealized
Gains
Gross Unrealized
Losses
Fair
Value
U.S. agency mortgage-backed securities
$
25,594
$
U.S. Treasury securities
Asset-backed securities (1)
Corporate debt securities (2)
Certificates of deposit
U.S. agency notes
Commercial paper (2,3)
Foreign government agency securities
Non-agency commercial mortgage-backed securities
Total available for sale securities
Held to maturity securities
U.S. agency mortgage-backed securities
Asset-backed securities (1)
Corporate debt securities (2)
U.S. state and municipal securities
Non-agency commercial mortgage-backed securities
U.S. Treasury securities
Certificates of deposit
Foreign government agency securities
Other
18,410
10,086
7,477
3,682
900
522
50
14
$
66,735
$ 118,064
$
$
18,502
4,477
1,327
1,156
223
200
50
10
$
$
$
44
—
14
10
4
—
—
—
—
72
217
83
2
24
3
—
1
—
—
82
$
108
15
20
1
2
—
1
—
229
2,188
$
$
39
47
3
17
6
—
1
—
25,556
18,302
10,085
7,467
3,685
898
522
49
14
66,578
116,093
18,546
4,432
1,348
1,142
217
201
49
10
Total held to maturity securities
$ 144,009
$
330
$
2,301
$
142,038
December 31, 2017
Available for sale securities
U.S. agency mortgage-backed securities
$
20,915
$
U.S. Treasury securities
Asset-backed securities (1)
Corporate debt securities (2)
Certificates of deposit
U.S. agency notes
Commercial paper (2)
Foreign government agency securities
Non-agency commercial mortgage-backed securities
Total available for sale securities
Held to maturity securities
U.S. agency mortgage-backed securities
Asset-backed securities (1)
Corporate debt securities (2)
U.S. state and municipal securities
Non-agency commercial mortgage-backed securities
U.S. Treasury securities
Certificates of deposit
Foreign government agency securities
Total held to maturity securities
9,583
9,019
6,154
2,040
1,914
313
51
40
50,029
$
$ 101,197
$
$
12,937
4,078
1,247
994
223
200
50
$
$
$
53
—
34
16
2
—
—
—
—
105
290
127
13
57
10
—
—
—
39
83
6
1
1
8
—
1
—
139
1,034
2
5
—
5
3
—
1
$
20,929
9,500
9,047
6,169
2,041
1,906
313
50
40
49,995
100,453
13,062
4,086
1,304
999
220
200
49
$
$
$ 120,926
$
497
$
1,050
$
120,373
(1) Approximately 36% and 42% of asset-backed securities held as of December 31, 2018 and 2017, respectively, were Federal Family Education Loan
Program Asset-Backed Securities. Asset-backed securities collateralized by credit card receivables represented approximately 42% and 40% of the asset-
backed securities held as of December 31, 2018 and 2017, respectively.
(2) As of December 31, 2018 and 2017, approximately 26% and 41%, respectively, of the total AFS and HTM investments in corporate debt securities and
commercial paper were issued by institutions in the financial services industry. Approximately 18% and 22% of the holdings of these securities were
issued by institutions in the information technology industry as of December 31, 2018 and 2017, respectively.
(3) Included in cash and cash equivalents on the consolidated balance sheet, but excluded from this table is $4.9 billion of AFS commercial paper. These
holdings have maturities of three months or less and an aggregate market value equal to amortized cost.
- 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)
During 2017, the Company transferred $24.7 billion of investment securities from the AFS category to the HTM category.
These securities had a total net unrealized loss of $227 million before income tax in AOCI on the date of transfer. The
transfer was made to mitigate the potential volatility in regulatory capital from changes in market values in the AFS
securities portfolio and the related impact to AOCI in anticipation of Schwab crossing $250 billion in consolidated assets,
which occurred in the second quarter of 2018. The year after a company surpasses $250 billion in consolidated assets, it can
no longer exclude AOCI from regulatory capital. The transfer included U.S. agency mortgage-backed securities, asset-
backed securities, corporate debt securities, and U.S. state and municipal securities. The unrealized holding gains and losses
on the date of transfer, are reported as a separate component of AOCI and as an adjustment to the purchase premium and
discount on the securities transferred. The separate component of AOCI is amortized or accreted into interest income over
the remaining life of the securities transferred, offsetting the revised premium or discount amortization or accretion on the
transferred assets.
At December 31, 2018, certain banking subsidiaries had pledged securities with a fair value of $27.2 billion as collateral to
secure borrowing capacity on secured credit facilities with the FHLB (see Note 13). CSB also pledges certain investment
securities as collateral to secure borrowing capacity at the Federal Reserve Bank discount window, and had pledged
securities with a fair value of $7.9 billion as collateral for this facility at December 31, 2018. CSB also pledges securities
issued by federal agencies to secure certain trust deposits. The fair value of these pledged securities was $906 million at
December 31, 2018.
- 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)
Securities with unrealized losses, aggregated by category and period of continuous unrealized loss, are as follows:
December 31, 2018
Available for sale securities
Less than
12 months
12 months
or longer
Total
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
U.S. agency mortgage-backed securities
$
9,529
$
32
$
4,257
$
50
$
13,786
$
82
108
15
20
1
2
1
229
2,188
39
47
3
17
6
1
39
83
6
1
1
8
1
U.S. Treasury securities
Asset-backed securities
Corporate debt securities
Certificates of deposit
U.S. agency notes
Foreign government agency securities
Total
Held to maturity securities
U.S. agency mortgage-backed securities
Asset-backed securities
Corporate debt securities
U.S. state and municipal securities
Non-agency commercial mortgage-backed securities
U.S. Treasury securities
Foreign government agency securities
Total
Total securities with unrealized losses (1)
December 31, 2017
Available for sale securities
$
$
4,951
4,050
3,561
1,217
195
—
23,503
29,263
6,795
2,909
77
283
—
—
$
$
6
9
19
1
—
—
67
222
35
29
2
2
—
—
7,037
102
11,988
$
$
837
254
150
304
49
12,888
56,435
376
1,066
18
632
218
49
$
$
6
1
—
2
1
162
1,966
4
18
1
15
6
1
$
$
4,887
3,815
1,367
499
49
36,391
85,698
7,171
3,975
95
915
218
49
$
$
$
$
39,327
62,830
$
$
290
357
$
$
58,794
71,682
$
$
2,011
$
98,121
2,173
$ 134,512
$
$
2,301
2,530
U.S. agency mortgage-backed securities
$
5,696
$
U.S. Treasury securities
Asset-backed securities
Corporate debt securities
Certificates of deposit
U.S. agency notes
Foreign government agency securities
Total
Held to maturity securities
U.S. agency mortgage-backed securities
Asset-backed securities
Corporate debt securities
Non-agency commercial mortgage-backed securities
U.S. Treasury securities
Foreign government agency securities
4,625
904
736
799
99
50
12,909
42,102
1,124
1,078
607
220
49
$
$
$
$
21
11
3
1
1
—
1
38
310
2
5
5
3
1
$
2,548
$
4,875
424
120
—
1,807
—
9,774
24,753
72
—
—
—
—
$
$
$
$
18
72
3
—
—
8
—
101
724
—
—
—
—
—
Total
$
45,180
$
326
$
24,825
$
724
Total securities with unrealized losses (2)
(1) The number of investment positions with unrealized losses totaled 441 for AFS securities and 1,524 for HTM securities.
(2) The number of investment positions with unrealized losses totaled 251 for AFS securities and 938 for HTM securities.
58,089
34,599
364
$
$
$
$
825
- 72 -
$
8,244
$
9,500
1,328
856
799
1,906
50
22,683
66,855
1,196
1,078
607
220
49
$
$
$
$
139
1,034
2
5
5
3
1
$
$
70,005
92,688
$
$
1,050
1,189
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
At December 31, 2018, substantially all securities in the investment portfolios were rated investment grade. 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 or U.S. government-sponsored
enterprises.
Management evaluates whether investment securities are OTTI on a quarterly basis as described in Note 2. Amounts
recognized as OTTI in earnings or other comprehensive income were immaterial in 2018, 2017, and 2016. As of
December 31, 2018 and 2017, the Company did not hold any securities on which OTTI was previously recognized.
In the below table, mortgage-backed securities have been allocated to maturity groupings based on final contractual
maturities. As borrowers may have the right to call or prepay certain obligations underlying our investment securities, actual
maturities may differ from the scheduled contractual maturities presented below.
The maturities of AFS and HTM securities are as follows:
December 31, 2018
Available for sale securities
Within
1 year
After 1 year
through
5 years
After 5 years
through
10 years
After
10 years
Total
U.S. agency mortgage-backed securities
$
153
$
U.S. Treasury securities
Asset-backed securities
Corporate debt securities
Certificates of deposit
U.S. agency notes
Commercial paper
Foreign government agency securities
Non-agency commercial mortgage-backed securities
Total fair value
Total amortized cost
Weighted-average yield (1)
Held to maturity securities
U.S. agency mortgage-backed securities
Asset-backed securities
Corporate debt securities
U.S. state and municipal securities
Non-agency commercial mortgage-backed securities
U.S. Treasury securities
Certificates of deposit
Foreign government agency securities
Other
Total fair value
$
$
$
14,164
—
1,755
1,984
499
522
—
—
19,077
19,111
1.80%
256
—
137
—
—
—
—
—
—
$
$
$
$
393
$
Total amortized cost
Weighted-average yield (1)
(1) The weighted-average yield is computed using the amortized cost at December 31, 2018.
1.97%
395
$
$
3,481
4,138
8,445
5,712
1,701
399
—
49
—
$
12,100
$
9,822
$
—
1,240
—
—
—
—
—
—
—
400
—
—
—
—
—
14
25,556
18,302
10,085
7,467
3,685
898
522
49
14
23,925
24,010
$
$
13,340
13,382
$
$
10,236
10,232
$
$
66,578
66,735
2.71%
2.61%
2.70%
2.43%
14,960
$
34,008
$
66,869
$
116,093
2,106
3,550
59
356
—
201
49
—
9,144
7,296
745
309
—
217
—
—
—
—
980
786
—
—
—
10
18,546
4,432
1,348
1,142
217
201
49
10
21,281
21,446
$
$
44,423
44,925
$
$
75,941
77,243
$
$
142,038
144,009
2.56%
2.69%
2.63%
2.63%
Proceeds and gross realized gains and losses from sales of AFS securities are as follows:
Year Ended December 31,
Proceeds
Gross realized gains
Gross realized losses
2018
2017
2016
$
115
$
8,617
$
5,537
—
—
12
—
4
—
- 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)
7.
Bank Loans and Related Allowance for Loan Losses
The composition of bank loans and delinquency analysis by loan type is as follows:
Current
30-59 days
past due
60-89 days
past due
>90 days
past
due and
other
nonaccrual
loans (3)
Total past
due and
other
nonaccrual
loans
$ 10,349
$
21
$
December 31, 2018
First Mortgages (1,2)
HELOCs (1,2)
Pledged asset lines
Other
1,493
4,558
180
Total bank loans
$ 16,580
$
December 31, 2017
First Mortgages (1,2)
HELOCs (1,2)
Pledged asset lines
Other
$
9,983
$
1,928
4,361
176
3
3
—
27
14
—
4
—
$
$
$
$
$
2
1
—
—
3
2
3
4
—
12
$
8
—
—
20
17
12
—
—
$
$
35
12
3
—
50
33
15
8
—
Total
loans
Allowance
for loan
losses
Total
bank
loans – net
$
10,384
$
14
$
10,370
1,505
4,561
180
$
16,630
$
5
—
2
21
1,500
4,561
178
$
16,609
$
10,016
$
16
$
10,000
1,943
4,369
176
8
—
2
1,935
4,369
174
Total bank loans
16,478
9
(1) First Mortgages and HELOCs include unamortized premiums and discounts and direct origination costs of $73 million and $77 million at December 31,
$ 16,448
16,504
18
56
26
29
$
$
$
$
$
$
$
2018 and 2017, respectively.
(2) At December 31, 2018 and 2017, 47% and 48%, respectively, of the First Mortgage and HELOC portfolios were concentrated in California. These loans
have performed in a manner consistent with the portfolio as a whole.
(3) There were no loans accruing interest that were contractually 90 days or more past due at December 31, 2018 or 2017.
At December 31, 2018, CSB had pledged $11.1 billion of First Mortgages and HELOCs as collateral to secure borrowing
capacity on a secured credit facility with the FHLB (see Note 13).
Substantially all of the bank loans were collectively evaluated for impairment at both December 31, 2018 and 2017.
Changes in the allowance for loan losses were as follows:
December 31, 2018
December 31, 2017
December 31, 2016
First
Mortgages
HELOCs
Other
Total (1)
First
Mortgages
HELOCs
Other
Total (1)
First
Mortgages
HELOCs
Other Total (1)
$
8
$
2
$
26
$
17
$
8
$
1
$
26
$
20
$
Balance at beginning of year
$
Charge-offs
Recoveries
Provision for loan losses
16
—
1
(3)
—
1
(4)
(1)
—
1
2
(1)
2
(6)
$
21
$
(2)
1
—
16
(1)
1
—
—
1
—
$
8
$
2
$
(3)
3
—
26
11
(1)
1
(3)
— $
31
—
—
1
(2)
2
(5)
(1)
1
(3)
Balance at end of year
$
14
$
5
$
$
17
$
8
$
1 $
26
(1) All PALs were fully collateralized by securities with fair values in excess of borrowings at December 31, 2018, 2017, and 2016.
A summary of impaired bank loan-related assets is as follows:
December 31,
Nonaccrual loans (1)
Other real estate owned (2)
Total nonperforming assets
Troubled debt restructurings
Total impaired assets
(1) Nonaccrual loans include nonaccrual troubled debt restructurings.
(2) Included in Other assets on the consolidated balance sheets.
- 74 -
2018
2017
21
$
3
24
4
28
$
28
3
31
11
42
$
$
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
Credit Quality
In addition to monitoring delinquency, Schwab monitors the credit quality of First Mortgages and HELOCs by stratifying
the portfolios by the following:
• Year of origination;
• Borrower FICO scores at origination (Origination FICO);
• Updated borrower FICO scores (Updated FICO);
• Loan-to-value (LTV) ratios at origination (Origination LTV); and
• Estimated current LTV ratios (Estimated Current LTV).
Borrowers’ FICO scores are provided by an independent third-party credit reporting service and updated quarterly. The
Origination LTV and Estimated Current LTV 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 updated on a monthly basis by
reference to a home price appreciation index.
- 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)
The credit quality indicators of the bank loan portfolio are detailed below:
Balance
Weighted Average
Updated FICO
Percent of Loans
that are on
Nonaccrual Status
9,396
985
2
1
10,384
1,416
80
6
3
1,505
4,561
776
769
717
753
775
770
752
729
702
769
766
0.04%
0.41%
—
—
0.07%
0.13%
0.60%
3.36%
—
0.17%
—
Balance
Weighted Average
Updated FICO
Percent of Loans
that are on
Nonaccrual Status
9,046
961
5
4
10,016
1,773
148
14
8
1,943
4,369
775
769
714
713
775
772
755
742
718
770
765
0.09%
0.46%
10.49%
6.23%
0.14%
0.18%
0.84%
2.85%
4.91%
0.27%
—
$
$
$
$
$
$
$
$
$
$
December 31, 2018
First Mortgages
Estimated Current LTV
<70%
>70% – <90%
>90% – <100%
>100%
Total
HELOCs
Estimated Current LTV (1)
<70%
>70% – <90%
>90% – <100%
>100%
Total
Pledged asset lines
Weighted Average LTV (1)
=70%
December 31, 2017
First Mortgages
Estimated Current LTV
<70%
>70% – <90%
>90% – <100%
>100%
Total
HELOCs
Estimated Current LTV (1)
<70%
>70% – <90%
>90% – <100%
>100%
Total
Pledged asset lines
Weighted Average LTV (1)
=70%
(1) Represents the LTV for the full line of credit (drawn and undrawn).
- 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)
December 31, 2018
Year of origination
Pre-2014
2014
2015
2016
2017
2018
Total
Origination FICO
<620
620 – 679
680 – 739
>740
Total
Origination LTV
<70%
>70% – <90%
>90% – <100%
Total
December 31, 2017
Year of origination
Pre-2014
2014
2015
2016
2017
Total
Origination FICO
<620
620 – 679
680 – 739
>740
Total
Origination LTV
<70%
>70% – <90%
>90% – <100%
Total
First
Mortgages
HELOCs
$
1,979
$
1,051
408
1,050
2,606
2,366
1,975
10,384
5
83
1,626
8,670
10,384
7,815
2,564
5
$
$
$
$
10,384
$
89
106
95
99
65
1,505
—
8
282
1,215
1,505
1,064
434
7
1,505
First
Mortgages
HELOCs
2,804
$
1,496
530
1,218
2,886
2,578
10,016
6
89
1,569
8,352
10,016
7,569
2,441
6
$
$
$
$
10,016
$
116
128
111
92
1,943
1
10
365
1,567
1,943
1,360
574
9
1,943
$
$
$
$
$
$
$
$
$
$
$
At December 31, 2018, First Mortgage loans of $9.4 billion had adjustable interest rates. Substantially all of these
mortgages have initial fixed interest rates for three to ten years and interest rates that adjust annually thereafter.
Approximately 31% of the balance of these mortgages consisted of loans with interest-only payment terms. The interest
rates on approximately 64% of the balance of these interest-only loans are not scheduled to reset for three or more years.
Schwab’s mortgage loans do not include interest terms described as temporary introductory rates below current market rates.
- 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)
The 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 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, 2018
Converted to amortizing loan by period end
Within 1 year
> 1 year – 3 years
> 3 years – 5 years
> 5 years
Total
$
Balance
677
83
118
173
454
$
1,505
At December 31, 2018, $1.2 billion of the HELOC portfolio was secured by second liens on the associated properties.
Second lien mortgage loans typically possess a higher degree of credit risk given the subordination to the first lien holder in
the event of default. In addition to the credit monitoring activities described previously, Schwab also monitors credit risk by
reviewing the delinquency status of the first lien loan on the associated property. At December 31, 2018, the borrowers on
approximately 51% of HELOC loan balances outstanding only paid the minimum amount due.
8.
Equipment, Office Facilities, and Property
Equipment, office facilities, and property are detailed below:
December 31,
Software
Buildings
Leasehold improvements
Construction in progress
Furniture and equipment
Information technology equipment
Land
Telecommunications equipment
Total equipment, office facilities, and property
Accumulated depreciation and amortization
2018
2017
$
1,699
$
1,490
945
367
248
219
206
179
69
3,932
(2,163)
810
357
142
193
326
167
66
3,551
(2,080)
1,471
Total equipment, office facilities, and property — net
$
1,769
$
Depreciation and amortization expense for equipment, office facilities, and property was $277 million, $232 million, and
$197 million in 2018, 2017, and 2016, respectively.
- 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)
9.
Goodwill
The changes in the carrying amount of goodwill, as allocated to our reportable segments, are presented in the following
table:
Balance at December 31, 2016
Goodwill acquired and other changes during the period
Balance at December 31, 2017
Goodwill acquired and other changes during the period
Balance at December 31, 2018
Investor
Services
Advisor
Services
Total
$
$
1,096
$
131
$
—
1,096
—
—
131
—
1,096
$
131
$
1,227
—
1,227
—
1,227
As of our annual testing date, we performed a qualitative assessment of each of the Company’s reporting units. Based on the
Company’s analysis, fair value significantly exceeded the carrying value for all reporting units and we concluded that
goodwill was not impaired. Schwab did not recognize any goodwill impairment in any of the years presented.
10.
Other Assets
The components of other assets are as follows:
December 31,
Interest and dividends receivable
Other investments (1)
Accounts receivable (2)
Capitalized contract costs, net
Intangible assets, net of accumulated amortization of $299 and $270 (3)
Prepaid expenses
FHLB stock (4)
Deferred tax asset — net
Other
Total other assets
$
2018
2017
$
586
428
410
250
152
122
32
3
63
413
376
461
—
108
126
405
76
92
$
2,046
$
2,057
(1) Predominantly CRA-related, including LIHTC investments.
(2) Accounts receivable predominantly includes receivables from contracts with customers and a receivable from our loan servicer.
(3) Exclusive of indefinite-lived intangible assets of $74 million and $1 million at December 31, 2018 and 2017, respectively, future amortization over the
next five years and thereafter is expected to total $77 million. Amortization expense for intangible assets was $29 million in 2018, and $37 million in
both 2017 and 2016.
(4) Investments in stock of the FHLB can only be sold to the issuer at its par value. Any cash dividends received from these investments are recognized as
interest revenue in the consolidated statements of income.
11.
Variable Interest Entities
As of December 31, 2018 and 2017, all of Schwab’s involvement with VIEs is through CSB’s CRA-related investments and
most of those related to LIHTC investments. As part of CSB’s community reinvestment initiatives, CSB invests in funds that
make equity investments in multifamily affordable housing properties. CSB receives tax credits and other tax benefits for
these investments.
- 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)
Aggregate assets, liabilities and maximum exposure to loss
The aggregate assets, liabilities, and maximum exposure to loss from those VIEs in which Schwab holds a variable interest,
but is not the primary beneficiary, are summarized in the table below:
December 31, 2018
December 31, 2017
Aggregate
assets
Aggregate
liabilities
Maximum
exposure
to loss
Aggregate
assets
Aggregate
liabilities
Maximum
exposure to
loss
LIHTC Investments (1)
Other CRA Investments (2)
$
338
$
188
$
70
—
338
124
$
304
$
203
$
69
—
Total
$
(1) Aggregate assets and aggregate liabilities are included in other assets and accrued expenses and other liabilities, respectively, on the consolidated
462
408
373
188
203
$
$
$
$
$
304
125
429
balance sheets.
(2) Other CRA investments are recorded using either the adjusted cost method, equity method, or as HTM securities. Aggregate assets are included in HTM
securities, bank loans – net, or other assets on the consolidated balance sheets.
Schwab’s maximum exposure to loss would result from the loss of the investments, including any committed amounts.
During the years ended December 31, 2018 and 2017, Schwab did not provide or intend to provide financial or other support
to the VIEs that it was not contractually required to provide. CSB’s funding of these remaining commitments is dependent
upon the occurrence of certain conditions, and CSB expects to pay substantially all of these commitments between 2019 and
2022.
12.
Bank Deposits
Bank deposits consist of interest-bearing and non-interest-bearing deposits as follows:
December 31,
Interest-bearing deposits:
2018
2017
Deposits swept from brokerage accounts
$
212,311
$
148,212
Checking
Savings and other
Total interest-bearing deposits
Non-interest-bearing deposits
Total bank deposits
12,523
5,827
230,661
762
13,388
7,264
168,864
792
$
231,423
$
169,656
- 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)
13.
Borrowings
CSC’s Senior Notes are unsecured obligations and rank equally with the other unsecured senior debt. CSC may redeem
some or all of the Senior Notes of each series prior to their maturity, subject to certain restrictions, and the payment of an
applicable make-whole premium in certain instances. Interest is payable semi-annually for the fixed-rate Senior Notes and
quarterly for the floating-rate Senior Notes. The following table lists long-term debt by instrument outstanding as of
December 31, 2018 and 2017.
Fixed-Rate Senior Notes:
1.500% due March 10, 2018 (1)
2.200% due July 25, 2018 (2)
4.450% due July 22, 2020
3.250% due May 21, 2021
3.225% due September 1, 2022
2.650% due January 25, 2023
3.550% due February 1, 2024
3.000% due March 10, 2025
3.850% due May 21, 2025
3.450% due February 13, 2026
3.200% due March 2, 2027
3.200% due January 25, 2028
4.000% due February 1, 2029
Floating-rate Senior Notes:
Three-month LIBOR + 0.32% due May 21, 2021
Total Senior Notes
5.450% Finance lease obligation (3)
Unamortized discount — net
Debt issuance costs
Total long-term debt
?
Date of
Issuance
Principal Amount Outstanding
2018
2017
03/10/15 $
— $
07/25/13
07/22/10
05/22/18
08/29/12
12/07/17
10/31/18
03/10/15
05/22/18
11/13/15
03/02/17
12/07/17
10/31/18
05/22/18
06/04/04
—
700
600
256
800
500
375
750
350
650
700
600
600
6,881
52
(15)
(40)
625
275
700
—
256
800
—
375
—
350
650
700
—
—
4,731
61
(14)
(25)
$
6,878 $
4,753
(1) Redeemed on February 8, 2018.
(2) Redeemed on June 25, 2018.
(3) Schwab has a finance lease obligation related to an office building and land under a 20-year lease. The remaining finance lease obligation is being
reduced by a portion of the lease payments over the remaining lease term through June 30, 2024.
- 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)
Annual maturities on long-term debt outstanding at December 31, 2018, are as follows:
2019
2020
2021
2022
2023
Thereafter
Total maturities
Unamortized discount — net
Debt issuance costs
Total long-term debt
$
Maturities
8
709
1,209
266
810
3,931
6,933
(15)
(40)
$
6,878
Short-term borrowings: Certain banking subsidiaries maintain secured credit facilities with the FHLB. Amounts available
under these facilities are dependent on the amount of our First Mortgages, HELOCs, and the fair value of certain of their
investment securities that are pledged as collateral. As of December 31, 2018, the collateral pledged provided a total
borrowing capacity of $35.5 billion of which no amounts were outstanding. As of December 31, 2017, the collateral pledged
provided a total borrowing capacity of $32.3 billion of which $15.0 billion was outstanding, with a 1.53% weighted average
fixed interest rate. The Company could increase its borrowing capacity by pledging additional securities.
As a condition of the FHLB borrowings, we are required to hold FHLB stock, with the investment recorded in other assets
on the consolidated balance sheets. The investment in FHLB was $32 million and $405 million at December 31, 2018 and
2017, respectively.
14.
Commitments and Contingencies
Loan Portfolio: CSB provides a co-branded loan origination program for CSB clients (the Program) with Quicken Loans,
Inc. (Quicken Loans®). Pursuant to the Program, Quicken Loans originates and services First Mortgages and HELOCs for
CSB clients. Under the Program, CSB purchases certain First Mortgages and HELOCs that are originated by Quicken
Loans. CSB purchased First Mortgages of $2.1 billion and $2.8 billion during 2018 and 2017, respectively. CSB purchased
HELOCs with commitments of $395 million and $461 million during 2018 and 2017, respectively.
The Company’s commitments to extend credit on bank lines of credit and to purchase First Mortgages are as follows:
December 31,
Commitments to extend credit related to unused HELOCs, PALs, and other lines of credit
Commitments to purchase First Mortgage loans
Total
2018
2017
$
$
11,046 $
268
11,314 $
10,060
308
10,368
- 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)
Operating leases: Schwab has non-cancelable operating leases for office space and equipment. As of December 31, 2018,
future annual minimum rental commitments under these leases, net of contractual subleases are as follows:
2019
2020
2021
2022
2023
Thereafter
Total
Operating
Leases
Subleases
Net
$
131 $
4 $
125
101
79
72
282
$
790 $
4
4
2
1
—
15 $
127
121
97
77
71
282
775
Certain leases contain provisions for renewal options, purchase options, and rent escalations based on increases in certain
costs incurred by the lessor. Rent expense relating to operating leases was $146 million, $136 million, and $123 million in
2018, 2017, and 2016, respectively.
Purchase obligations: Schwab has purchase obligations for services such as advertising and marketing, telecommunications,
professional services, and hardware- and software-related agreements. As of December 31, 2018, the Company has purchase
obligations as follows:
2019
2020
2021
2022
2023
Thereafter
Total
$
$
475
232
71
32
22
170
1,002
Guarantees and indemnifications: Schwab 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. We partially
satisfy the margin requirements by arranging unsecured standby LOCs, in favor of the Options Clearing Corporation, which
are issued by several banks. At December 31, 2018, the aggregate face amount of these LOCs totaled $225 million. There
were no funds drawn under any of these LOCs at December 31, 2018. In connection with its securities lending activities,
Schwab is required to provide collateral to certain brokerage clients. The Company satisfies the collateral requirements by
providing cash as collateral.
Schwab 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.
Schwab’s liability under these arrangements is not quantifiable and may exceed the cash and securities it has posted as
collateral. 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: Schwab 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.
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; and potential opportunities for settlement and the status of
- 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)
any settlement discussions. It may not be reasonably possible to estimate 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.
Schwab 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.
Crago Order Routing Litigation: On July 13, 2016, a securities class action lawsuit was filed in the U.S. District Court for
the Northern District of California on behalf of a putative class of customers executing equity orders through CS&Co. The
lawsuit names CS&Co and CSC as defendants and alleges that an agreement under which CS&Co routed orders to UBS
Securities LLC between July 13, 2011 and December 31, 2014 violated CS&Co’s duty to seek best execution. Plaintiffs seek
unspecified damages, interest, injunctive and equitable relief, and attorneys’ fees and costs. After a first amended complaint
was dismissed with leave to amend, plaintiffs filed a second amended complaint on August 14, 2017. Defendants again
moved to dismiss, and in a decision issued December 5, 2017, the court denied the motion. Defendants have answered the
complaint to deny all allegations, and intend to vigorously contest the lawsuit.
Total Bond Market Fund™ Litigation: As disclosed previously, the Company had been responding to a class action lawsuit
in the U.S. District Court for the Northern District of California on behalf of investors in the Schwab Total Bond Market
Fund. On December 13, 2018, following dismissal of its fourth amended complaint and unsuccessful appeals to the Ninth
Circuit Court of Appeals, plaintiff stipulated and agreed to dismissal of all claims, concluding the case.
15.
Financial Instruments Subject to Off-Balance Sheet Credit Risk
Off-Balance Sheet Credit Risk
Resale 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 at or 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. The collateral provided under these
resale agreements is utilized to meet obligations under broker-dealer client protection rules, which place limitations on our
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. Schwab’s resale agreements are not subject to master netting arrangements.
Securities lending: Schwab loans brokerage client securities temporarily to other brokers and clearing houses 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, we may be exposed to the
risk of acquiring the securities at prevailing market prices in order to satisfy our client obligations. Schwab mitigates this
risk by requiring credit approvals for counterparties, monitoring the fair value of securities loaned, and requiring additional
cash as collateral when necessary. We also borrow securities from other broker-dealers to fulfill short sales by brokerage
clients and deliver cash to the lender in exchange for the securities. The fair value of these borrowed securities was
$99 million and $215 million at December 31, 2018 and 2017, respectively. All of our securities lending transactions are
- 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)
through a program with a clearing organization, which guarantees the return of cash to us and is subject to enforceable
master netting arrangements with other broker-dealers; however, we do not net securities lending transactions. Therefore,
the securities loaned and securities borrowed are presented gross in the consolidated balance sheets.
The following table presents information about our resale agreements and securities lending activity depicting the potential
effect of rights of setoff between these recognized assets and recognized liabilities at December 31, 2018 and 2017.
Gross Amounts Not Offset in the
Consolidated Balance Sheets
Gross
Assets/
Liabilities
Gross Amounts
Offset in the
Consolidated
Balance Sheets
Net Amounts
Presented in the
Consolidated
Balance Sheets
Counterparty
Offsetting
Collateral
Net
Amount
December 31, 2018
Assets
Resale agreements (1)
Securities borrowed (3)
Total
Liabilities
Securities loaned (4,5)
Total
December 31, 2017
Assets
Resale agreements (1)
Securities borrowed (3)
Total
Liabilities
Securities loaned (4,5)
$
$
$
$
$
$
$
7,195 $
101
7,296 $
1,184 $
1,184 $
6,596 $
222
6,818 $
966 $
— $
—
— $
— $
— $
— $
—
— $
— $
7,195 $
101
7,296 $
1,184 $
1,184 $
— $
(98)
(7,195) (2)
(3)
$ —
—
(98) $
(7,198)
$ —
(98) $
(98) $
(975)
(975)
$
$
111
111
$ —
6,596 $
222
6,818 $
— $
(199)
(6,596) (2)
(22)
(199) $
(6,618)
966 $
(199) $
(670)
$
$
1
1
97
97
Total
(199) $
(1) Included in cash and investments segregated and on deposit for regulatory purposes in the consolidated balance sheets.
(2) Actual collateral was greater than or equal to 102% of the related assets. At December 31, 2018 and 2017, the fair value of collateral received in
966 $
966 $
— $
(670)
$
$
connection with resale agreements that are available to be repledged or sold was $7.4 billion and $6.7 billion, respectively.
(3) Included in receivables from brokers, dealers, and clearing organizations in the consolidated balance sheets.
(4) Included in payables to brokers, dealers, and clearing organizations in the consolidated balance sheets. 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, 2018 and 2017.
(5) Securities loaned are predominantly comprised of equity securities held in client brokerage accounts with overnight and continuous remaining
contractual maturities.
Client trade settlement: Schwab is obligated to settle transactions with brokers and other financial institutions even if our
clients fail to meet their obligations to us. Clients are required to complete their transactions on settlement date, generally
two business days after the trade date. If clients do not fulfill their contractual obligations, we may incur losses. We have
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.
- 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)
Margin lending: Clients with margin loans have agreed to allow Schwab to pledge collateralized securities in their
brokerage accounts in accordance with federal regulations. The following table summarizes the fair value of client securities
that were available, under such regulations, that could have been used as collateral, and the amounts that we had pledged:
December 31,
Fair value of client securities available to be pledged
Fair value of client securities pledged for:
Fulfillment of requirements with the Options Clearing Corporation (1)
Fulfillment of client short sales
Securities lending to other broker-dealers
Total collateral pledged
2018
2017
$
26,628 $
25,905
2,315
1,292
974
$
4,581 $
2,280
2,011
784
5,075
Note: Excludes amounts available and pledged for securities lending from fully-paid client securities. The fair value of fully-paid client securities available
(1)
and pledged was $97 million as of December 31, 2018 and $78 million as of December 31, 2017.
Client securities pledged to fulfill client margin requirements for open option contracts established with the Options Clearing Corporation.
- 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)
16.
Fair Values of Assets and Liabilities
For a description of the fair value hierarchy and Schwab’s fair value methodologies, including the use of independent third-
party pricing services, see Note 2. The Company did not adjust prices received from the primary independent third-party
pricing service at December 31, 2018 or 2017.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following tables present the fair value hierarchy for assets measured at fair value on a recurring basis. Liabilities
recorded at fair value were not material, and therefore are not included in the following tables:
December 31, 2018
Cash equivalents:
Money market funds
Commercial paper
Total cash equivalents
Investments segregated and on deposit for regulatory purposes:
Certificates of deposit
U.S. Government securities
Total investments segregated and on deposit for regulatory purposes
Other securities owned:
Equity and bond mutual funds
State and municipal debt obligations
Equity, U.S. Government and corporate debt, and other securities
Schwab Funds® money market funds
Total other securities owned
Available for sale securities:
U.S. agency mortgage-backed securities
U.S. Treasury securities
Asset-backed securities
Corporate debt securities
Certificates of deposit
U.S. agency notes
Commercial paper
Foreign government agency securities
Non-agency commercial mortgage-backed securities
Total available for sale securities
Level 1
Level 2
Level 3
Balance at
Fair Value
$
3,429 $
— $
— $
—
3,429
—
—
—
441
—
3
26
470
—
—
—
—
—
—
—
—
—
—
4,863
4,863
1,396
3,275
4,671
—
39
30
—
69
25,556
18,302
10,085
7,467
3,685
898
522
49
14
66,578
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
3,429
4,863
8,292
1,396
3,275
4,671
441
39
33
26
539
25,556
18,302
10,085
7,467
3,685
898
522
49
14
66,578
80,080
Total
$
3,899 $
76,181 $
— $
- 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)
December 31, 2017
Cash equivalents:
Money market funds
Total cash equivalents
Investments segregated and on deposit for regulatory purposes:
Certificates of deposit
U.S. Government securities
Total investments segregated and on deposit for regulatory purposes
Other securities owned:
Equity and bond mutual funds
Schwab Funds® money market funds
State and municipal debt obligations
Equity, U.S. Government and corporate debt, and other securities
Total other securities owned
Available for sale securities:
U.S. agency mortgage-backed securities
U.S. Treasury securities
Asset-backed securities
Corporate debt securities
Certificates of deposit
U.S. agency notes
Commercial paper
Foreign government mortgage-backed securities
Non-agency commercial mortgage-backed securities
Total available for sale securities
Level 1
Level 2
Level 3
Balance at
Fair Value
$
2,727 $
2,727
— $
—
—
—
—
318
135
—
2
455
—
—
—
—
—
—
—
—
—
—
2,198
3,658
5,856
—
—
52
32
84
20,929
9,500
9,047
6,169
2,041
1,906
313
50
40
49,995
— $
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
2,727
2,727
2,198
3,658
5,856
318
135
52
34
539
20,929
9,500
9,047
6,169
2,041
1,906
313
50
40
49,995
59,117
Total
$
3,182 $
55,935 $
— $
- 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)
Fair Value of Other Financial Instruments
The following tables present the fair value hierarchy for other financial instruments:
December 31, 2018
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
Held to maturity securities:
U.S. agency mortgage-backed securities
Asset-backed securities
Corporate debt securities
U.S. state and municipal securities
Non-agency commercial mortgage-backed securities
U.S. Treasury securities
Certificates of deposit
Foreign government agency securities
Other
Carrying
Amount
Level 1
Level 2
Level 3
Balance at
Fair Value
$
19,646 $
— $
19,646 $
— $
19,646
8,886
553
21,641
118,064
18,502
4,477
1,327
1,156
223
200
50
10
—
—
—
8,886
553
21,641
—
—
—
8,886
553
21,641
— 116,093
— 116,093
—
—
—
—
—
—
—
—
18,546
4,432
1,348
1,142
217
201
49
10
—
—
—
—
—
—
—
—
18,546
4,432
1,348
1,142
217
201
49
10
Total held to maturity securities
144,009
— 142,038
— 142,038
Bank loans — net:
First Mortgages
HELOCs
Pledged asset lines
Other
Total bank loans — net
Other assets
Total
Liabilities
Bank deposits
Payables to brokers, dealers, and clearing organizations
Payables to brokerage clients
Accrued expenses and other liabilities
Long-term debt
Total
10,370
1,500
4,561
178
16,609
460
—
—
—
—
—
—
10,193
1,583
4,561
178
16,515
460
—
—
—
—
—
—
10,193
1,583
4,561
178
16,515
460
$ 211,804 $
— $ 209,739 $
— $ 209,739
$ 231,423 $
— $ 231,423 $
— $ 231,423
1,831
32,726
1,370
6,878
—
—
—
—
1,831
32,726
1,370
6,827
—
—
—
—
1,831
32,726
1,370
6,827
$ 274,228 $
— $ 274,177 $
— $ 274,177
- 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)
December 31, 2017
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
Held to maturity securities:
U.S. agency mortgage-backed securities
Asset-backed securities
Corporate debt securities
U.S. state and municipal securities
Non-agency commercial mortgage-backed securities
U.S. Treasury securities
Certificates of deposit
Foreign government agency securities
Total held to maturity securities
Bank loans — net:
First Mortgages
HELOCs
Pledged asset lines
Other
Total bank loans — net
Other assets
Total
Liabilities
Bank deposits
Payables to brokers, dealers, and clearing organizations
Payables to brokerage clients
Accrued expenses and other liabilities
Short-term borrowings
Long-term debt
Total
Carrying
Amount
Level 1
Level 2
Level 3
Balance at
Fair Value
$
11,490 $
— $
11,490 $
— $
11,490
9,277
649
20,568
101,197
12,937
4,078
1,247
994
223
200
50
—
—
—
9,277
649
20,568
—
—
—
9,277
649
20,568
— 100,453
— 100,453
—
—
—
—
—
—
—
13,062
4,086
1,304
999
220
200
49
—
—
—
—
—
—
—
13,062
4,086
1,304
999
220
200
49
120,926
— 120,373
— 120,373
10,000
1,935
4,369
174
16,478
781
—
—
—
—
—
—
9,917
2,025
4,369
174
16,485
781
—
—
—
—
—
—
9,917
2,025
4,369
174
16,485
781
$ 180,169 $
— $ 179,623 $
— $ 179,623
$ 169,656 $
— $ 169,656 $
— $ 169,656
1,287
31,243
1,463
15,000
4,753
—
—
—
—
—
1,287
31,243
1,463
15,000
4,811
—
—
—
—
—
1,287
31,243
1,463
15,000
4,811
$ 223,402 $
— $ 223,460 $
— $ 223,460
- 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)
17.
Stockholders’ Equity
CSC did not issue any shares of common stock through external offerings during 2018, 2017, or 2016.
On October 25, 2018, CSC publicly announced that its Board of Directors terminated the existing two share repurchase
authorizations and replaced them with a new authorization to repurchase up to $1.0 billion of common stock. CSC
repurchased 22 million shares for $1.0 billion in 2018, completing all repurchases under this authorization. There were no
repurchases of CSC’s common stock in 2018 prior to the fourth quarter, or in 2017.
CSC was authorized to issue 9,940,000 shares of preferred stock, $0.01 par value, at December 31, 2018 and 2017. The
following is a summary of CSC’s non-cumulative perpetual preferred stock outstanding as of such dates:
Shares Issued and
Outstanding (In
thousands) at
December 31,
2018 (1)
2017 (1)
Liquidation
Preference
Per Share
Carrying Value at
December 31,
2018
2017
Issue Date
Dividend Rate
in Effect at
December 31,
2018
Earliest
Redemption
Date
Date at
Which
Dividend
Rate
Becomes
Floating
Floating
Annual
Rate of
Three-
month
LIBOR
plus:
Fixed-rate:
Series C
Series D
Fixed-to-floating-rate:
Series A
Series E
Series F
600
750
600
750
$
1,000 $
1,000
400
400
6
5
6
5
1,000
100,000
100,000
585
728
397
591
492
$
585
728
397
591
492
08/03/15
03/07/16
01/26/12
10/31/16
10/31/17
6.000%
12/01/20
5.950%
06/01/21
N/A
N/A
N/A
N/A
7.000%
02/01/22
02/01/22
4.625%
03/01/22
03/01/22
5.000%
12/01/27
12/01/27
4.820%
3.315%
2.575%
Total Preferred Stock
(1) Represented by depositary shares, except for Series A.
N/A Not applicable.
1,761
1,761
$ 2,793
$ 2,793
Dividends on CSC’s preferred stock are not cumulative and will only be paid on a series of preferred stock for a dividend
period if declared by CSC’s Board of Directors. Under the terms of each series of preferred stock, CSC’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 of preferred stock, is subject to restrictions in the event that CSC does not
declare and either pay or set aside a sum sufficient for payment of dividends on the series of preferred stock for the
immediately preceding dividend period.
Dividends on fixed-rate preferred stock are payable quarterly. Dividends on fixed-to-floating-rate preferred stock are
payable semiannually while at a fixed rate, and will become payable quarterly after converting to a floating rate.
Redemption Rights
Each series of CSC’s stock may be redeemed at CSC’s option on any dividend payment date on or after the earliest
redemption date for that series. All outstanding preferred stock series may also be redeemed following a “capital treatment
event,” as described in the terms of each series set forth in the relevant certificate of designations. Any redemption of CSC’s
preferred stock is subject to approval from the Federal Reserve.
- 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)
18.
Accumulated Other Comprehensive Income
AOCI 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,
Change in net unrealized gain (loss) on available for
sale securities:
2018
Tax
effect
Before
tax
Net of
tax
Before
tax
2017
Tax
effect
Net of
tax
Before
tax
2016
Tax
effect
Net of
tax
Net unrealized gain (loss)
$ (123) $
30 $
(93) $
13 $
(7) $
6
$
(44) $
16 $
(28)
Reclassification of net unrealized loss on securities transferred
to held to maturity (1)
Other reclassifications included in other revenue
Change in net unrealized gain (loss) on held to maturity
securities:
Reclassification of net unrealized loss on securities transferred
from available for sale (1)
Amortization of amounts previously recorded upon transfer
from available for sale
Other
—
—
—
35
(1)
—
—
—
(8)
—
—
—
—
27
(1)
227
(12)
(85)
142
4
(8)
—
(4)
(227)
85
(142)
31
(11)
(11)
4
20
(7)
—
—
1
Other comprehensive income (loss)
$
(1) See Note 6 for discussion of the transfer of securities from the AFS category to the HTM category during the first quarter of 2017.
(67) $
(10) $
(89) $
22 $
21 $
11
$
(47) $
—
2
—
—
—
—
(2)
—
—
1
18 $
(29)
AOCI balances are as follows:
Balance at December 31, 2015
Net unrealized gain (loss) on available for sale securities
Other changes
Balance at December 31, 2016
Available for sale securities:
Net unrealized gain (loss)
Reclassification of net unrealized loss on securities transferred to held to maturity
Other reclassifications included in other revenue
Held to maturity securities:
Reclassification of net unrealized loss on securities transferred from available for sale
Amortization of amounts previously recorded upon transfer to held to maturity from available for sale
Other
Balance at December 31, 2017
Adoption of accounting standards (Note 2)
Available for sale securities:
Net unrealized gain (loss)
Held to maturity securities:
Amortization of amounts previously recorded upon transfer to held to maturity from available for sale
Other
Balance at December 31, 2018
Total AOCI
(134)
(30)
1
(163)
6
142
(8)
(142)
20
(7)
(152)
(33)
(93)
27
(1)
(252)
$
$
$
$
- 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)
19.
Employee Incentive, Retirement, Deferred Compensation, and Career Achievement Plans
Schwab’s share-based incentive plans provide for granting options and restricted stock units to employees, officers, and
directors. In addition, we offer retirement and employee stock purchase plans to eligible employees and sponsor deferred
compensation plans for eligible officers and non-employee directors.
A summary of share-based compensation expense and related income tax benefit is as follows:
Year Ended December 31,
Stock option expense
Restricted stock unit expense (1)
Employee stock purchase plan expense
Total share-based compensation expense
2018
2017
2016
$
$
51
$
136
10
$
50
94
9
197
$
153
$
Income tax benefit on share-based compensation expense (2)
(1) Restricted stock unit expense in 2018 includes $36 million related to special stock awards issued to non-officer employees.
(2) Excludes income tax benefits due to the adoption of ASU 2016-09 of $46 million and $87 million in 2018 and 2017, respectively.
(47) $
$
(57) $
45
89
7
141
(53)
The Company issues shares for stock options and restricted stock units from treasury stock. At December 31, 2018, the
Company was authorized to grant up to 68 million common shares under its existing stock incentive plans. Additionally, at
December 31, 2018, the Company had 36 million shares reserved for future issuance under its employee stock purchase
plan.
As of December 31, 2018, there was $294 million of total unrecognized compensation cost related to outstanding stock
options and restricted stock units, which is expected to be recognized through 2022 with a remaining weighted-average
service period of 1.8 years for stock options, 2.4 years for restricted stock units, and 0.3 years for performance stock units.
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 ten years from the date of grant. Options generally vest annually over a one- to four-year period from
the date of grant.
Stock option activity is summarized below:
Outstanding at December 31, 2017
Granted
Exercised
Forfeited (1)
Expired (1)
Outstanding at December 31, 2018
Vested and expected to vest at December 31, 2018
Vested and exercisable at December 31, 2018
(1) Number of options were less than 500 thousand.
Number
of Options
(In millions)
Weighted-
Average
Exercise Price
per Share
32
4
(6)
—
—
30
30
19
$
$
$
$
26.16
47.98
21.65
36.05
19.05
30.19
30.05
23.70
Weighted-
Average
Remaining
Contractual
Life (in years)
Aggregate
Intrinsic
Value
6.38
$
814
6.27
6.24
4.86
$
$
$
373
373
331
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.
- 93 -
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
Information on stock options granted and exercised is presented below:
Year Ended December 31,
2018
2017
2016
Weighted-average fair value of options granted per share
$
14.16
$
13.04
$
Cash received from options exercised
Tax benefit realized on options exercised
Aggregate intrinsic value of options exercised
125
35
189
171
70
241
8.73
144
38
149
We use an option pricing model to estimate the fair value of options granted. The model takes into account the contractual
term of the stock option, expected volatility, dividend yield, and the 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. We use historical option exercise data, which includes employee termination data, to
estimate the probability of future option exercises. The assumptions used to value the 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
2018
2017
2016
1.42%
33%
3.0%
1.06%
34%
2.1%
1.22%
30%
1.8%
4.0 - 5.2
4.1 - 5.3
4.7 - 7.3
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 one- to four-year period, while
performance-based restricted stock units also require the Company achieve certain financial or other measures prior to
vesting. 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 2018, 2017, and 2016 was $166 million, $127 million,
and $105 million, respectively.
The Company’s restricted stock units activity is summarized below:
Outstanding at December 31, 2017
Granted (1)
Vested (1)
Forfeited (2)
Number
of Units
(In millions)
Weighted-
Average Grant
Date Fair Value
per Unit
$
7
3
(3)
—
35.16
47.03
35.95
36.10
Outstanding at December 31, 2018
(1) Includes 781 thousand units related to special non-officer employee stock awards, with a weighted-average grant date fair value of $45.87. All units
7
$
40.64
granted vested immediately.
(2) Number of units were less than 500 thousand.
Retirement Plan
Employees can participate in Schwab’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 $105 million, $92 million, and $83 million in 2018, 2017, and 2016, respectively.
- 94 -
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
Deferred Compensation Plans
Schwab’s deferred compensation plan for officers permits participants to defer the receipt of certain cash compensation. The
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 service 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 $144 million and $160 million at December 31, 2018 and 2017, respectively.
FC Career Achievement Plan
The FC career achievement plan is a noncontributory, unfunded, nonqualified plan for eligible FCs. An FC is eligible for
earned cash payments after retirement contingent upon meeting certain performance levels, tenure, age, and client
transitioning requirements. Allocations to the plan are calculated annually based on performance levels achieved and eligible
compensation and are subject to general creditors of the Company. Full vesting occurs when an FC reaches 60 years of age
and has at least ten years of service with the Company.
The following table presents the changes in projected benefit obligation:
December 31,
Projected benefit obligation at beginning of year
Benefit cost (1)
Actuarial (gain)/loss (2)
2018
2017
$
$
44
11
1
26
9
9
Projected benefit obligation at end of year (3)
44
(1) Includes service cost and interest cost, which are recognized in compensation and benefits expense and other expense, respectively, in the consolidated
56
$
$
statements of income.
(2) Actuarial (gain)/loss is reflected in the consolidated statements of comprehensive income and is included in AOCI on the consolidated balance sheets.
(3) This amount is recognized as a liability on the consolidated balance sheets and also depicts the accumulated benefit obligation.
20.
Taxes on Income
On December 22, 2017, the Tax Act was signed into law. Among other things, the Tax Act lowered the federal corporate
income tax rate from 35% to 21%, effective for tax years including or commencing January 1, 2018. Schwab’s effective tax
rate for the years ended December 31, 2018, 2017, and 2016 was 23.1%, 35.5%, and 36.9%, respectively, resulting from the
impact of the Tax Act of 2017.
Also as a result of the Tax Act, Schwab recognized a $46 million one-time non-cash charge to taxes on income in the fourth
quarter of 2017 associated with the remeasurement of net deferred tax assets and other tax adjustments related to the Tax
Act. During 2018, we concluded our analysis and accounting for all remaining impacts of the Tax Act, including the state
tax effect of adjustments made to federal temporary differences, resulting in no additional material impacts.
As of January 1, 2018, Schwab adopted new accounting guidance that decreased AOCI and increased retained earnings by
$33 million for the reclassification of certain impacts of the Tax Act as described in Note 2. Schwab also adopted new
revenue recognition guidance as of January 1, 2018, which resulted in recording an asset for capitalized contract costs of
$219 million and a related deferred tax liability of $52 million as described in Note 2. As of December 31, 2018, the
deferred tax liability related to the capitalized contract costs was $60 million.
- 95 -
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 components of taxes on income are as follows:
Year Ended December 31,
2018
2017
2016
Current:
Federal
State
Total current
Deferred:
Federal
State
Total deferred
Taxes on income
$
847
159
1,006
42
7
49
$
1,132
$
106
1,238
58
—
58
980
109
1,089
13
2
15
$
1,055
$
1,296
$
1,104
The temporary differences that created deferred tax assets and liabilities are detailed below:
December 31,
Deferred tax assets:
Employee compensation, severance, and benefits
Net unrealized loss on available for sale securities
Reserves and allowances
Facilities lease commitments
State and local taxes
Net operating loss carryforwards
Other
Total deferred tax assets
Valuation allowance
Deferred tax assets — net of valuation allowance
Deferred tax liabilities:
Capitalized internal-use software development costs
Depreciation and amortization
Capitalized contract costs
Total deferred tax liabilities
2018
2017
$
132
$
133
79
13
12
21
5
6
268
(3)
265
(98)
(108)
(60)
(266)
57
15
14
12
5
3
239
(2)
237
(89)
(72)
—
(161)
Deferred tax asset/(liability) — net (1)
76
(1) Amounts are included in accrued expenses and other liabilities and in other assets on the consolidated balance sheets at December 31, 2018 and in other
(1) $
$
assets at December 31, 2017.
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
Equity compensation benefit
Other (1)
Effective income tax rate
(1) 2017 includes the impact of one-time charge to taxes on income associated with the Tax Act.
2018
2017
2016
21.0%
3.0
(1.0)
0.1
23.1%
35.0%
2.2
(2.4)
0.7
35.5%
35.0%
2.4
—
(0.5)
36.9%
- 96 -
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
A reconciliation of the 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 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
2018
2017
$
111
$
3
3
(4)
—
(1)
$
112
$
93
22
15
(2)
—
(17)
111
Unrecognized tax benefits totaled $112 million and $111 million as of December 31, 2018 and 2017, respectively,
$108 million and $104 million of which if recognized, would affect the annual effective tax rate.
Interest and penalties were accrued related to unrecognized tax benefits in tax expense. At December 31, 2018 and 2017, we
had accrued approximately $9 million and $5 million, respectively, for the payment of interest and penalties.
The Company and its subsidiaries are subject to routine examinations by the respective federal, state and applicable local
jurisdictions’ taxing authorities. Federal returns for 2011 through 2017 remain subject to examination. The years open to
examination by state and local governments vary by jurisdiction.
21.
Regulatory Requirements
CSC is a savings and loan holding company and CSB, CSC’s primary depository institution subsidiary, is a federal savings
bank. CSC is subject to examination, supervision, and regulation by the Federal Reserve. CSB is subject to examination,
supervision, and regulation by the OCC, as its primary regulator, the FDIC as its deposit insurer, and the CFPB. CSC is
required to serve as a source of strength for CSB.
CSB is subject to various requirements and restrictions under federal and state laws, including regulatory capital
requirements and requirements that restrict and govern the terms of affiliate transactions, such as extensions of credit to, or
asset purchases from CSC or its other subsidiaries by CSB. In addition, CSB 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, CSB
could be subject to restrictive actions if it were to fall within one of the lowest three of five capital categories. CSC and CSB
are required to maintain minimum capital levels as specified in federal banking 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 CSB. At December 31, 2018, both CSC and CSB met all of their respective
capital requirements.
- 97 -
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 CSC (consolidated) and CSB are as follows:
December 31, 2018
CSC
Actual
Minimum to be
Well Capitalized
Minimum Capital
Requirement
Amount
Ratio
Amount
Ratio
Amount
Ratio (1)
Common Equity Tier 1 Risk-Based Capital
$
16,813
Tier 1 Risk-Based Capital
Total Risk-Based Capital
Tier 1 Leverage
CSB
19,606
19,628
19,606
17.6%
20.5%
20.6%
7.1%
Common Equity Tier 1 Risk-Based Capital
$
15,832
19.7% $
Tier 1 Risk-Based Capital
Total Risk-Based Capital
Tier 1 Leverage
December 31, 2017
CSC
15,832
15,853
15,832
Common Equity Tier 1 Risk-Based Capital
$
14,630
Tier 1 Risk-Based Capital
Total Risk-Based Capital
Tier 1 Leverage
CSB
17,423
17,452
17,423
19.7%
19.7%
7.2%
19.3%
23.0%
23.0%
7.6%
Common Equity Tier 1 Risk-Based Capital
$
13,355
20.1% $
Tier 1 Risk-Based Capital
Total Risk-Based Capital
13,355
13,382
20.1%
20.1%
N/A
N/A
N/A
N/A
5,233
6,441
8,051
11,044
N/A
N/A
N/A
N/A
4,324
5,321
6,652
$
6.5% $
8.0%
10.0%
5.0%
$
6.5% $
8.0%
10.0%
4,295
5,726
7,635
11,058
3,623
4,831
6,441
8,836
3,414
4,552
6,069
9,218
2,993
3,991
5,321
4.5%
6.0%
8.0%
4.0%
4.5%
6.0%
8.0%
4.0%
4.5%
6.0%
8.0%
4.0%
4.5%
6.0%
8.0%
Tier 1 Leverage
(1) Under the Basel III capital rule, CSC and CSB are also required to maintain a capital conservation buffer above the regulatory minimum capital ratios.
The capital conservation buffer was 1.875% in 2018, and became 2.5% on January 1, 2019. If the capital conservation buffer falls below the minimum
requirement, the Company would be subject to limits on capital distributions and discretionary bonus payments to executive officers. For 2018, the
minimum capital requirement plus capital conservation buffer for Common Equity Tier 1 Risk-Based Capital, Tier 1 Risk-Based Capital, and Total Risk-
Based Capital ratios were 6.375%, 7.875%, and 9.875%, respectively. At December 31, 2018, both CSC’s and CSB’s capital levels exceeded the fully
implemented capital conservation buffer requirement.
13,355
9,462
7,569
7.1%
5.0%
4.0%
N/A Not applicable.
Based on its regulatory capital ratios at December 31, 2018, CSB is considered well capitalized (the highest category) under
its respective regulatory capital rules. There are no conditions or events since December 31, 2018 that management believes
have changed CSB’s capital category.
The Federal Reserve requires CSB to maintain reserve balances at the Federal Reserve based on its deposits that are
considered to be transaction accounts. CSB’s average reserve requirement was $1.6 billion in 2018 and 2017. In late 2017,
Schwab acquired a federal savings bank charter which is now called Charles Schwab Premier Bank (formerly known as
Charles Schwab Signature Bank). At December 31, 2018, the balance sheet of Charles Schwab Premier Bank consisted
primarily of investment securities, and held total assets of $15.2 billion. Charles Schwab Premier Bank is subject to similar
regulatory guidelines and requirements, and seeks to maintain a Tier 1 Leverage Ratio similar to CSB.
CS&Co, a securities broker-dealer, is subject to the Uniform Net Capital Rule. CS&Co computes its 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 of $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 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.
- 98 -
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
Net capital and net capital requirements for CS&Co are as follows:
December 31,
Net capital
Minimum net capital required
2% of aggregate debit balances
Net capital in excess of required net capital
2018
2017
$
2,304
$
0.250
436
2,118
0.250
435
$
1,868
$
1,683
In accordance with the SEC Customer Protection Rule, CS&Co had portions of its cash and investments segregated for the
exclusive benefit of clients at December 31, 2018. The SEC Customer Protection Rule requires broker-dealers to segregate
client fully-paid securities and cash balances not collateralizing margin positions and not swept to money market funds or
bank deposit accounts. Amounts included in cash and investments segregated and on deposit for regulatory purposes
represent actual balances on deposit, whereas cash and investments required to be segregated and on deposit for regulatory
purposes at December 31, 2018 for CS&Co totaled $16.7 billion. As of January 3, 2019, CS&Co had deposited $3.7 billion
of cash and qualified securities into its segregated reserve accounts. Cash and investments required to be segregated and on
deposit for regulatory purposes at December 31, 2017 for CS&Co totaled $15.3 billion. On January 3, 2018, $704 million of
cash and qualified securities was deposited into the segregated reserve accounts.
22.
Segment Information
Schwab’s two reportable segments are Investor Services and Advisor Services. Schwab structures the 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 and retirement plan services, as well as other corporate brokerage services, to
businesses and their employees. The Advisor Services segment provides custodial, trading, banking, and support services, as
well as retirement business services, to independent RIAs, independent retirement advisors, and recordkeepers. Revenues
and expenses are allocated to the two segments based on which segment services the client.
The accounting policies of the segments are the same as those described in Note 2. For the computation of its segment
information, Schwab 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.
Management evaluates the performance of its segments on a pre-tax basis. Segment assets and liabilities are not used for
evaluating segment performance or in deciding how to allocate resources to segments. There are no revenues from
transactions between the segments.
Financial information for the segments is presented in the following table:
Year Ended December 31,
2018
2017
2016
2018
2017
2016
2018
Investor Services
Advisor Services
Total
2017
2016
Net Revenues
Net interest revenue
$ 4,341
$ 3,231
$ 2,591
$ 1,482
$ 1,051
$
Asset management and administration fees
2,260
2,344
2,093
Trading revenue
Other
Total net revenues
Expenses Excluding Interest
475
245
7,321
4,145
408
217
6,200
3,725
524
203
5,411
3,380
969
288
72
2,811
1,425
1,048
246
73
2,418
1,243
Income before taxes on income
$ 3,176
$ 2,475
$ 2,031
$ 1,386
$ 1,175
Capital expenditures
Depreciation and amortization
$
$
390
186
$
$
265
203
$
$
234
180
$
$
186
120
$
$
147
66
$
$
$
731
962
301
73
2,067
1,105
962
119
54
$ 5,823
$ 4,282
$ 3,322
3,229
3,392
3,055
763
317
10,132
5,570
654
290
8,618
4,968
825
276
7,478
4,485
$ 4,562
$ 3,650
$ 2,993
$
$
576
306
$
$
412
269
$
$
353
234
- 99 -
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
23.
The Charles Schwab Corporation – Parent Company Only Financial Statements
Condensed Statements of Income
Year Ended December 31,
Interest revenue
Interest expense
Net interest expense
Other
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 subsidiaries
Dividends from non-bank subsidiaries
Net Income
Preferred stock dividends and other (1)
Net Income Available to Common Stockholders
(1) Includes preferred stock dividends and undistributed earnings and dividends allocated to non-vested restricted stock units.
3,329
$
$
Condensed Balance Sheets
December 31,
Assets
Cash and cash equivalents
Receivables from subsidiaries
Available for sale securities
Held to maturity securities
Other securities owned — at fair value
Loans to non-bank subsidiaries
Investment in non-bank subsidiaries
Investment in bank subsidiaries
Other assets
Total assets
Liabilities and Stockholders’ Equity
Accrued expenses and other liabilities
Payables to subsidiaries
Long-term debt
Total liabilities
Stockholders’ equity
2018
2017
2016
$
88
$
33
$
(184)
(96)
1
(85)
(180)
20
(160)
2,590
750
327
3,507
178
(114)
(81)
3
(32)
(110)
27
(83)
1,479
625
333
2,354
174
2,180
$
22
(100)
(78)
1
(21)
(98)
34
(64)
1,690
—
263
1,889
143
1,746
571
573
223
76
448
5,393
13,224
160
23,493
276
—
4,692
4,968
18,525
23,493
2018
2017
$
2,092
$
2,825
784
1,754
223
109
185
5,507
16,995
228
27,877
$
379
$
2
6,826
7,207
20,670
$
$
Total liabilities and stockholders’ equity
$
27,877
$
- 100 -
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
Condensed Statements of Cash Flows
Year Ended December 31,
Cash Flows from Operating Activities
Net income
2018
2017
2016
$
3,507
$
2,354
$
1,889
Adjustments to reconcile net income to net cash provided by (used for) operating activities:
Equity in undistributed earnings of subsidiaries
(2,590)
(1,479)
Other
Net change in:
Other securities owned
Other assets
Accrued expenses and other liabilities
Net cash provided by (used for) operating activities
Cash Flows from Investing Activities
Due from (to) subsidiaries — net
Increase in investments in subsidiaries
Repayments (Advances) of subordinated loan to CS&Co
Purchases of available for sale securities
Proceeds from sales of available for sale securities
Principal payments on available for sale securities
Other investing activities
Net cash provided by (used for) investing activities
Cash Flows from Financing Activities
Issuance of long-term debt
Repayment of long-term debt
Repurchases of common stock
Net proceeds from preferred stock offerings
Redemption of preferred stock
Dividends paid
Proceeds from stock options exercised and other
Other financing activities
Net cash provided by (used for) financing activities
Increase (Decrease) in Cash and Cash Equivalents
Cash and Cash Equivalents at Beginning of Year
Cash and Cash Equivalents at End of Year
13
(33)
28
28
953
408
(1,188)
(185)
(1,751)
—
573
(5)
(2,148)
3,024
(900)
(1,000)
—
—
(787)
125
—
462
(733)
2,825
5
(1)
(26)
44
897
(374)
(342)
—
(201)
197
—
(6)
(726)
2,129
(250)
—
492
(485)
(592)
171
—
1,465
1,636
1,189
$
2,092
$
2,825
$
(1,690)
(37)
(10)
(27)
30
155
95
(1,547)
465
(2)
2
—
(4)
(991)
—
—
—
1,316
—
(486)
144
44
1,018
182
1,007
1,189
- 101 -
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.
Quarterly Financial Information (Unaudited)
Year Ended December 31, 2018:
Total Net Revenues
Total Expenses Excluding Interest
Net Income
Net Income Available to Common Stockholders
Weighted-Average Common Shares Outstanding — Basic
Weighted-Average Common Shares Outstanding — Diluted
Earnings Per Common Share — Basic
Earnings Per Common Share — Diluted
Dividends Declared Per Common Share
Year Ended December 31, 2017:
Total Net Revenues
Total Expenses Excluding Interest
Net Income
Net Income Available to Common Stockholders
Weighted-Average Common Shares Outstanding — Basic
Weighted-Average Common Shares Outstanding — Diluted
Earnings Per Common Share — Basic
Earnings Per Common Share — Diluted
Dividends Declared Per Common Share
?
25.
Subsequent Event
Fourth
Quarter
Third
Quarter
Second
Quarter
First
Quarter
$
$
$
$
$
$
$
$
$
$
$
$
$
$
2,669
1,459
935
885
1,343
1,354
.66
.65
.13
2,242
1,289
597
550
1,343
1,358
.41
.41
.08
$
$
$
$
$
$
$
$
$
$
$
$
$
$
2,579
1,360
923
885
1,351
1,364
.66
.65
.13
2,165
1,220
618
575
1,339
1,353
.43
.42
.08
$
$
$
$
$
$
$
$
$
$
$
$
$
$
2,486
1,355
866
813
1,350
1,364
.60
.60
.10
2,130
1,221
575
530
1,338
1,351
.40
.39
.08
$
$
$
$
$
$
$
$
$
$
$
$
$
$
2,398
1,396
783
746
1,347
1,362
.55
.55
.10
2,081
1,238
564
525
1,336
1,351
.39
.39
.08
On January 30, 2019, CSC publicly announced that its Board of Directors authorized a new Share Repurchase Program to
repurchase up to $4.0 billion of common stock, and declared a four cent, or 31%, increase in the quarterly cash dividend to
$0.17 per common share. The share repurchase authorization does not have an expiration date.
- 102 -
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of The Charles Schwab Corporation:
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of The Charles Schwab Corporation and subsidiaries (the "Company") as
of December 31, 2018 and 2017, 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, 2018, and the related notes (collectively referred to as the "financial
statements"). We also have audited the Company’s internal control over financial reporting as of December 31, 2018, based on criteria
established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO).
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as
of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended
December 31, 2018, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the
Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on
criteria established in Internal Control—Integrated Framework (2013) issued by COSO.
Basis for Opinions
The Company’s management is responsible for these financial statements, 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 an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm
registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with
respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and
Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and
whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial
statements, whether due to error or fraud, and performing procedures to respond to those risks. Such procedures included examining, on a
test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting
principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements.
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.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed 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 its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of
any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ DELOITTE & TOUCHE LLP
San Francisco, California
February 22, 2019
We have served as the Company's auditor since 1976.
- 103 -
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, 2018, 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, 2018.
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, 2018, has been audited by Deloitte &
Touche LLP, an independent registered public accounting firm, as stated in their report appearing on the previous page.
- 104 -
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, 2018. 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, 2018.
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, 2018, 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.
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, 2019 (the Proxy Statement) under “Members of the Board of Directors,”
“Corporate Governance,” “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 https://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.
- 105 -
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, 2018.
Executive Officers of the Registrant
Name
Age
Title
Charles R. Schwab
Walter W. Bettinger II
Marie A. Chandoha
Bernard J. Clark
Jonathan M. Craig
Peter B. Crawford
David R. Garfield
Terri R. Kallsen
Joseph R. Martinetto
Nigel J. Murtagh
81
58
57
60
47
50
62
50
56
55
Chairman of the Board
President and Chief Executive Officer
Chief Executive Officer – Charles Schwab Investment Management, Inc.
Executive Vice President – Advisor Services
Senior Executive Vice President
Executive Vice President and Chief Financial Officer
Executive Vice President, General Counsel and Corporate Secretary
Executive Vice President – Investor Services
Senior Executive Vice President and Chief Operating Officer
Executive Vice President – Corporate Risk
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. He served as Chairman of the Board and a director of
CS&Co until 2018. Mr. Schwab is also Chairman of CSB.
Mr. Bettinger has been President and Chief Executive Officer of CSC since 2008. He serves on the Board of Directors of
CSC and CSB, and is Chairman of CS&Co, as well as Chairman and trustee of The Charles Schwab Family of Funds,
Schwab Investments, Schwab Capital Trust, Schwab Annuity Portfolios, Laudus Trust, and Schwab Strategic Trust, all
registered investment companies and affiliates of CSC. 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 CS&Co
from 2005 to 2007. Mr. Bettinger joined Schwab in 1995.
Ms. Chandoha has been Chief Executive Officer of CSIM since 2011 and served as President of CSIM from 2011 until
October 2018. She serves as a trustee of The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust,
Schwab Annuity Portfolios, Laudus Trust, and Schwab Strategic Trust. On September 25, 2018, Ms. Chandoha announced
her decision to retire on March 29, 2019. Ms. Chandoha joined Schwab in 2010.
Mr. Clark has been Executive Vice President – Advisor Services of CSC since 2012. Mr. Clark has served as Executive
Vice President – Advisor Services of CS&Co since 2010. From 2006 until 2010, Mr. Clark served as Senior Vice President –
Schwab Institutional Sales of Charles Schwab & Co., Inc. Mr. Clark joined Schwab in 1998.
Mr. Craig has been Senior Executive Vice President of CSC and CS&Co since 2018. He served as Executive Vice President
– Client and Marketing Solutions for CSC from 2017 until 2018 and served as Executive Vice President and Chief
Marketing Officer of CS&Co from 2012 until 2018. Mr. Craig joined Schwab in 2000.
Mr. Crawford has been Executive Vice President and Chief Financial Officer of CSC and CS&Co since 2017. Prior to his
appointment as Chief Financial Officer, Mr. Crawford was Executive Vice President of Finance from 2015 to 2017. He
served as Senior Vice President of Schwab’s asset management and client solutions organization from 2008 to 2015. He has
served on the Board of Directors of CS&Co since 2018. Mr. Crawford joined Schwab in 2001.
Mr. Garfield has been Executive Vice President, General Counsel and Corporate Secretary of CSC since 2014 and
Executive Vice President and Corporate Secretary of CS&Co since 2015. Mr. Garfield served as Deputy General Counsel of
Wells Fargo & Company from 1998 to 2014. Mr. Garfield joined Schwab in 2014.
- 106 -
THE CHARLES SCHWAB CORPORATION
Ms. Kallsen has been Executive Vice President – Investor Services of CSC and CS&Co since 2014. She served as Senior
Vice President – Portfolio Consulting of CS&Co from 2012 until 2014 and as Senior Vice President – Branch Network from
June 2014 until December 2014. Ms. Kallsen joined Schwab in 2012.
Mr. Martinetto has been Senior Executive Vice President of CSC and CS&Co since 2015, and Chief Operating Officer of
CSC and CS&Co since 2018. He served as Chief Financial Officer of CSC and CS&Co from 2007 until 2017, and
Executive Vice President of CSC and CS&Co from 2007 until 2015. He also serves on the Board of Directors of CS&Co
and CSB. Additionally, Mr. Martinetto is a trustee of The Charles Schwab Family of Funds, Schwab Investments, Schwab
Capital Trust, Schwab Annuity Portfolios, Laudus Trust, and Schwab Strategic Trust. Mr. Martinetto joined Schwab in 1997.
Mr. Murtagh has been Executive Vice President – Corporate Risk of CSC and CS&Co since 2012. He has served as
Executive Vice President and Chief Risk Officer of CSB since 2018. He served as Senior Vice President and Chief Credit
Officer of CS&Co from 2002 until 2012 and of CSC from 2008 until 2012. Mr. Murtagh joined Schwab in 2000.
- 107 -
THE CHARLES SCHWAB CORPORATION
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 – 2018 Summary
Compensation Table,” “Executive Compensation Tables – 2018 Grants of Plan-Based Awards Table,” “Executive
Compensation Tables – Narrative to Summary Compensation and Grants of Plan-Based Awards Tables,” “Executive
Compensation Tables – 2018 Termination and Change in Control Benefits Table,” “Executive Compensation Tables –
Outstanding Equity Awards as of December 31, 2018,” “Executive Compensation Tables – 2018 Option Exercises and Stock
Vested Table,” “Executive Compensation Tables – 2018 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.”
- 108 -
THE CHARLES SCHWAB CORPORATION
PART IV
Item 15. Exhibits, Financial Statement Schedules
(a) Documents filed as part of this Report
1. Financial Statements
The financial statements and independent auditors’ report are included in Item 8 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 Schedules
Other financial statement schedules required pursuant to this Item are omitted because of the absence of conditions under
which they are required or because the information is included in the Company’s consolidated financial statements and notes
in Item 8.
- 109 -
THE CHARLES SCHWAB CORPORATION
(b) Exhibits
The exhibits listed below are filed as part of this annual report on Form 10-K.
Exhibit
Number
Exhibit
3.11
3.14
3.15
3.17
3.18
3.19
3.20
4.2
4.3
4.4
4.5
4.6
10.4
10.57
Fifth Restated Certificate of Incorporation, effective May 7, 2001, of the Registrant, filed as
Exhibit 3.11 to the Registrant’s Form 10-K for the year ended December 31, 2016, and
incorporated herein by reference.
Fourth Restated Bylaws, as amended on January 27, 2010, of the Registrant, filed as Exhibit 3.14
to the Registrant’s Form 10-K for the year ended December 31, 2016, 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 10-K
for the year ended December 31, 2016, and incorporated herein by reference.
Certificate of Designations of 6.00% Non-Cumulative Perpetual Preferred Stock, Series C, of The
Charles Schwab Corporation, filed as Exhibit 3.1 to the Registrant’s Form 8-K dated August 3,
2015, and incorporated herein by reference.
Certificate of Designations of 5.95% Non-Cumulative Perpetual Preferred Stock, Series D, of The
Charles Schwab Corporation, filed as Exhibit 3.1 to the Registrant’s Form 8-K dated March 7,
2016, and incorporated herein by reference.
Certificate of Designations of 4.625% Fixed-to-Floating Rate Non-Cumulative Perpetual
Preferred Stock, Series E, of The Charles Schwab Corporation, filed as Exhibit 3.1 to the
Registrant’s Form 8-K dated October 31, 2016, and incorporated herein by reference.
Certificate of Designations of 5.00% Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred
Stock, Series F, of The Charles Schwab Corporation, filed as Exhibit 3.1 to the Registrant’s Form
8-K dated October 31, 2017, and incorporated herein by reference.
Deposit Agreement, dated August 3, 2015, 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 August 3, 2015 and incorporated herein by
reference.
Deposit Agreement, dated March 7, 2016, 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 March 7, 2016, and incorporated herein by
reference.
Deposit Agreement, dated October 31, 2016, 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 October 31, 2016, and incorporated herein
by reference.
Deposit Agreement, dated October 31, 2017, 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 October 31, 2017, and incorporated herein
by reference.
Neither the Registrant nor its subsidiaries are parties to any instrument with respect to long-term
debt for which securities authorized thereunder exceed 10% of the total assets of the Registrant
and its subsidiaries on a consolidated basis. Copies of instruments with respect to long-term debt
of lesser amounts will be provided to the SEC upon request.
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.
- 110 -
Exhibit
Number
10.72
10.271
10.272
10.314
10.338
10.349
10.362
10.376
10.381
10.382
10.383
10.384
10.385
10.386
10.387
10.388
THE CHARLES SCHWAB CORPORATION
Exhibit
Restatement of Assignment and License, as amended January 25, 1988, among Charles Schwab
& Co., Inc., Charles R. Schwab and the Registrant, filed as Exhibit 10.72 to the Registrant’s Form
10-K for the year ended December 31, 2014 and incorporated herein by reference.
The Charles Schwab Corporation Directors’ Deferred Compensation Plan, as amended through
December 8, 2004, filed as Exhibit 10.271 to the Registrant’s Form 10-K for the year ended
December 31, 2014, and incorporated herein by reference.
The Charles Schwab Corporation Deferred Compensation Plan, as amended through December 8,
2004, filed as Exhibit 10.272 to the Registrant’s Form 10-K for the year ended December 31,
2014, and incorporated herein by reference.
(2)
(2)
Employment Agreement dated as of March 13, 2008, between the Registrant and Charles R.
Schwab.
(1),(2)
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, 2016, 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, 2017, and
incorporated herein by reference.
(2)
(2)
The Charles Schwab Corporation Directors’ Deferred Compensation Plan II, as amended and
restated as of April 24, 2013.
(1),(2)
Credit Agreement (364 – Day Commitment) dated as of June 2, 2017, between the Registrant and
financial institutions therein, filed as Exhibit 10.376 to the Registrant’s Form 10-Q for the quarter
ended June 30, 2017, and incorporated herein by reference.
Form of Notice and Retainer Stock Option Agreement for Non-Employee Directors under The
Charles Schwab Corporation 2013 Stock Incentive Plan and successor plans, filed as Exhibit
10.381 to the Registrant’s Form 10-Q for the quarter ended September 30, 2017, and incorporated
herein by reference.
Form of Notice and Retainer Restricted Stock Unit Agreement for Non-Employee Directors under
The Charles Schwab Corporation 2013 Stock Incentive Plan and successor plans, filed as Exhibit
10.382 to the Registrant’s Form 10-Q for the quarter ended September 30, 2017, 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 successor plans, filed as
Exhibit 10.383 to the Registrant’s Form 10-Q for the quarter ended September 30, 2017, 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 successor plans, filed
as Exhibit 10.384 to the Registrant’s Form 10-Q for the quarter ended September 30, 2017, and
incorporated herein by reference.
The Charles Schwab Corporation Deferred Compensation Plan II, as amended and restated as of
December 13, 2017, filed as Exhibit 10.385 to the Registrant’s Form 10-K for the year ended
December 31, 2017, and incorporated herein by reference.
Form of Notice and Performance-Based Restricted Stock Unit Agreement under The Charles
Schwab Corporation 2013 Stock Incentive Plan and successor plans, filed as Exhibit 10.386 to the
Registrant’s Form 10-K for the year ended December 31, 2017, and incorporated herein by
reference.
Form of Notice and Nonqualified Stock Option Agreement under The Charles Schwab
Corporation 2013 Stock Incentive Plan and successor plans, filed as Exhibit 10.387 to the
Registrant’s Form 10-K for the year ended December 31, 2017, and incorporated herein by
reference.
Form of Notice and Restricted Stock Unit Agreement under The Charles Schwab Corporation
2013 Stock Incentive Plan and successor plans, filed as Exhibit 10.388 to the Registrant’s Form
10-K for the year ended December 31, 2017, and incorporated herein by reference.
(2)
(2)
(2)
(2)
(2)
(2)
(2)
(2)
(2)
- 111 -
THE CHARLES SCHWAB CORPORATION
Exhibit
The Charles Schwab Corporation Corporate Executive Bonus Plan, restated to include
amendments approved at the Annual Meeting of Stockholders on May 13, 2015, as amended and
restated as of December 13, 2017, filed as Exhibit 10.389 to the Registrant’s Form 10-K for the
year ended December 31, 2017 and incorporated herein by reference.
Summary of Non-Employee Director Compensation, filed as Exhibit 10.390 to the Registrant’s
Form 10-k for the year ended December 31, 2017, and incorporated herein by reference.
2013 Stock Incentive Plan, as amended and restated, filed as Exhibit 10.391 to the Registrant’s
Form 8-K dated May 15, 2018, and incorporated herein by reference.
Credit Agreement (364 – Day Commitment) dated as of June 1, 2018, between the Registrant and
financial institutions therein (supersedes Exhibit 10.376), filed as Exhibit 10.392 to the
Registrant’s Form 8-K dated October 31, 2018, and incorporated herein by reference.
Form of Notice and Nonqualified Stock Option Agreement under The Charles Schwab
Corporation 2013 Stock Incentive Plan and successor plans (supersedes Exhibit 10.387).
Form of Notice and Restricted Stock Unit Agreement under The Charles Schwab Corporation
2013 Stock Incentive Plan and successor plans (supersedes Exhibit 10.388).
(2)
(2)
(2)
(1),(2)
(1),(2)
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.
Exhibit
Number
10.389
10.390
10.391
10.392
10.393
10.394
21.1
23.1
31.1
31.2
32.1
32.2
(1)
(1)
(3)
(3)
(3)
(3)
(3)
(3)
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
- 112 -
THE CHARLES SCHWAB CORPORATION
Exhibit
Number
(1)
(2)
(3)
Exhibit
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, 2018, 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.
- 113 -
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 22, 2019.
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 22, 2019.
Signature / Title
Signature / Title
/s/ Walter W. Bettinger II
Walter W. Bettinger II,
President and Chief Executive Officer
and Director
/s/ Charles R. Schwab
Charles R. Schwab, Chairman of the Board
/s/ Joan T. Dea
Joan T. Dea, 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/ Arun Sarin
Arun Sarin, Director
/s/ Roger O. Walther
Roger O. Walther, Director
- 114 -
/s/ Peter Crawford
Peter Crawford,
Executive Vice President
and Chief Financial Officer
(principal financial and accounting officer)
/s/ John K. Adams, Jr.
John K. Adams, Jr., 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/ Charles A. Ruffel
Charles A. Ruffel, Director
/s/ Paula A. Sneed
Paula A. Sneed, Director
THE CHARLES SCHWAB CORPORATION
STATISTICAL DISCLOSURE BY BANK HOLDING COMPANIES
The following table outlines the information required by the SEC’s Industry Guide 3, “Statistical Disclosure by Bank
Holding Companies,” which is presented at the consolidated holding company level.
Required Disclosure
Distribution of Assets, Liabilities and Stockholders’ Equity; Interest Rates and Interest Differential
Investment Portfolio
Risk Elements – Cross-border Holdings
Loan Portfolio
Summary of Loan Loss Experience
Deposits
Return on Equity and Assets
Page
F-2 – F-3
F-4
F-5
F-6 – F-7
F-7
F-7
F-7
??
F-1
THE CHARLES SCHWAB CORPORATION
Supplemental Financial Data (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.
1.
Three-year Net Interest Revenue and Average Balances
For the Year Ended December 31,
2018
2017
2016
Average
Average
Average
Average
Average
Average
Balance
Interest
Rate
Balance
Interest
Rate
Balance
Interest
Rate
Assets:
Cash and cash equivalents
$
17,783
$
Total interest-earning assets
252,307
6,538
2.57% 217,713
4,494
2.06% 191,558
3,333
Cash and investments segregated
Broker-related receivables
Receivables from brokerage clients
Available for sale securities (1)
Held to maturity securities
Bank loans (5)
Other interest revenue
Total interest-earning assets
Noninterest-earning assets (2,3)
Total assets
Liabilities and Stockholders’ Equity:
Bank deposits
Payables to brokerage clients
Short-term borrowings
Long-term debt
Total interest-bearing liabilities
Other interest expense
Noninterest-bearing liabilities (2,4)
Total liabilities (6)
Stockholders’ equity (2)
11,461
303
19,870
54,542
131,794
348
206
6
830
1,241
3,348
1.93% $
9,931
$
1.78%
2.09%
4.12%
2.26%
18,525
430
16,269
53,040
109
166
3
575
815
2.53% 103,599
2,354
16,554
559
3.37%
15,919
472
1.10% $ 11,143
$
0.90%
0.70%
3.53%
1.54%
2.27%
2.97%
20,104
558
15,001
72,586
57,451
14,715
57
93
1
497
883
1,402
400
0.51%
0.46%
0.22%
3.31%
1.22%
2.44%
2.72%
1.74%
142
130
160
252,307
6,680
2.63% 217,713
4,624
2.12% 191,558
3,493
1.82%
11,681
$ 263,988
9,968
$ 227,681
9,354
$ 200,912
$ 199,139
$
545
0.27% $ 163,998
$
148
0.09% $ 141,432
$
37
21,178
3,359
5,423
229,099
14,883
56
54
190
845
12
0.27%
1.59%
3.50%
25,403
3,503
3,431
0.37% 196,335
16
41
119
324
18
0.06%
1.17%
3.47%
26,311
1,864
2,876
0.17% 172,483
3
9
104
153
18
13,787
13,375
0.03%
0.01%
0.48%
3.62%
0.09%
243,982
857
0.34% 210,122
342
0.15% 185,858
171
0.09%
Total liabilities and stockholders’ equity
$ 263,988
20,006
17,559
$ 227,681
15,054
$ 200,912
Net interest revenue
$ 5,823
$ 4,282
$ 3,322
Net yield on interest-earning assets
(1) Amounts calculated based on amortized cost.
(2) Average balance calculation based on month end balances.
(3) Noninterest-earning assets include equipment, office facilities, and property – net, goodwill, and other assets that do not generate interest income.
(4) Noninterest-bearing liabilities consist of other liabilities that do not generate interest expense.
(5) Includes average principal balances of nonaccrual loans.
(6) Average rate calculation based on total funding sources.
1.97%
2.29%
1.73%
F-2
THE CHARLES SCHWAB CORPORATION
Supplemental Financial Data (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:
2018 Compared to 2017
Increase (Decrease) Due to
Change in:
2017 Compared to 2016
Increase (Decrease) Due to
Change in:
Average
Volume
Average
Rate
Total
Average
Volume
Average
Rate
Total
Interest-earning assets:
Cash and cash equivalents (1)
Cash and investments segregated
Broker-related receivables
Receivables from brokerage clients
Available for sale securities (2)
Held to maturity securities
Bank loans (3)
Other interest revenue
Total interest-earning assets
Interest-bearing sources of funds:
Bank deposits
Payables to brokerage clients
Short-term borrowings
Long-term debt
Other interest expense
Total sources on which interest is paid
$
86
$
(64)
(1)
127
23
640
19
—
830
32
(3)
(2)
69
—
96
$
$
$
$
Change in net interest revenue
$
734
$
Changes that are not due solely to volume or rate have been allocated to rate.
(1) Includes deposits with banks and short-term investments.
(2) Amounts have been calculated based on amortized cost.
(3) Includes average principal balances of nonaccrual loans.
?
153
104
4
128
403
354
68
12
1,226
365
43
15
2
(6)
419
807
$
239
$
(6) $
40
3
255
426
994
87
12
2,056
397
40
13
71
(6)
515
$
$
(7)
—
42
(238)
1,126
33
—
950
7
—
8
20
—
35
$
$
$
$
$
$
$
58
80
2
36
170
(174)
39
(30)
181
104
13
24
(5)
—
136
$
1,541
$
915
$
45
$
52
73
2
78
(68)
952
72
(30)
1,131
111
13
32
15
—
171
960
F-3
THE CHARLES SCHWAB CORPORATION
Supplemental Financial Data (Unaudited)
(Dollars in Millions)
3.
Investment Securities
The amortized cost, gross unrealized gains and losses, and fair value of AFS and HTM securities for 2016 are as follows:
December 31, 2016
Available for sale securities:
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
U.S. agency mortgage-backed securities
$
33,167
$
120
$
Asset-backed securities
Corporate debt securities
U.S. Treasury securities
Certificates of deposit
U.S. agency notes
U.S. state and municipal securities
Commercial paper
Non-agency commercial mortgage-backed securities
Total available for sale securities
Held to maturity securities:
U.S. agency mortgage-backed securities
Non-agency commercial mortgage-backed securities
Asset-backed securities
Corporate debt securities
U.S. Treasury securities
Commercial paper
U.S. state and municipal securities
Total held to maturity securities
92
$
214
33,195
20,335
20,520
9,850
8,679
2,070
1,915
1,167
214
45
29
20
3
2
—
2
—
—
18
59
1
8
46
—
—
$
$
77,627
72,439
$
$
176
324
$
$
438
1,086
$
$
997
941
436
223
99
68
11
—
—
—
—
1
4
—
—
4
—
1
9,852
8,623
2,071
1,907
1,123
214
45
77,365
71,677
1,004
941
436
219
99
68
$
75,203
$
336
$
1,095
$
74,444
For additional information on 2018 and 2017 investments, see Item 8 – Note 6.
As of December 31, 2018, in addition to holdings of securities issued by the U.S. Government and U.S. Government
agencies and corporations, the Company’s holdings of investment securities from single issuers with aggregate book values
in excess of ten percent of stockholders’ equity are detailed in the table below. These securities have performed in a manner
consistent with the investment securities portfolio as a whole.
Issuer
Discover Card Execution Note Trust (1)
American Express Credit Account Master Trust Class A(1)
Capital One Multi-Asset Execution Trust Class A(1)
(1) Included in AFS and HTM securities in the Company’s consolidated balance sheets.
?
Aggregate
Amortized
Cost
Aggregate
Fair Value
$
$
$
2,300
2,251
2,140
$
$
$
2,295
2,241
2,140
F-4
THE CHARLES SCHWAB CORPORATION
Supplemental Financial Data (Unaudited)
(Dollars in Millions)
4.
Cross-border Holdings
The below information describes Schwab’s cross-border holdings, based on fair value, as of December 31, 2018, 2017, and
2016. Such holdings, by country, that exceed 0.75% of total assets are disclosed separately.
December 31, 2018
Country:
France
Total
Banks and other
financial institutions
Commercial and
industrial institutions
Total
Exposure as a %
of total assets
$
$
2,793
2,793
$
$
— $
— $
2,793
2,793
0.9%
There were no cross-border holdings that exceeded 0.75% of total assets at December 31, 2017.
December 31, 2016
Country:
France
Total
Banks and other
financial institutions
Commercial and
industrial institutions
Total
Exposure as a %
of total assets
$
$
1,784
1,784
$
$
110
110
$
$
1,894
1,894
0.8%
F-5
THE CHARLES SCHWAB CORPORATION
Supplemental Financial Data (Unaudited)
(Dollars in Millions)
5.
Bank Loans and Related Allowance for Loan Losses
The composition of the loan portfolio is as follows:
December 31,
First Mortgages
HELOCs
Pledged asset lines
Other
Total bank loans
An analysis of nonaccrual loans is as follows:
December 31,
Nonaccrual loans
Average nonaccrual loans
2018
2017
2016
2015
2014
$ 10,384
$ 10,016
$
9,134
$
8,334
$
8,127
1,505
4,561
180
1,943
4,369
176
2,350
3,851
94
2,735
3,232
64
2,955
2,320
39
$ 16,630
$ 16,504
$ 15,429
$ 14,365
$ 13,441
2018
2017
2016
2015
2014
$
$
21
25
$
$
28
27
$
$
26
27
$
$
28
30
$
$
35
39
There were no loans accruing interest that were contractually 90 days or more past due as of any period presented.
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
2018
2017
2016
2015
2014
26
$
26
$
31
$
42
$
(1)
2
(6)
21
$
(3)
3
—
26
(2)
2
(5)
(3)
3
(11)
$
26
$
31
$
48
(5)
3
(4)
42
$
$
The maturities of the loan portfolio are as follows:
December 31, 2018
First Mortgages (1)
HELOCs (2)
Pledged asset lines
Other
Total
Within
1 year
After 1 year
through
5 years
After
5 years
Total
$
$
— $
— $
10,384
$
10,384
760
679
6
291
3,869
169
454
13
5
1,505
4,561
180
1,445
$
4,329
$
10,856
$
16,630
(1) Maturities are based upon the contractual terms of the loans.
(2) Maturities are based on an initial draw period of ten years.
The interest sensitivity of loans with contractual maturities in excess of one year is as follows:
December 31, 2018
Loans with floating or adjustable interest rates
Loans with predetermined interest rates
Total
After
1 year
$
$
14,175
1,010
15,185
F-6
THE CHARLES SCHWAB CORPORATION
Supplemental Financial Data (Unaudited)
(Dollars in Millions)
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
2018
2017
2016
2015
2014
$
16,554
$
15,919
$
14,715
$
13,973
$
12,906
.13%
100%
.14%
.16%
93%
.20%
.17%
101%
.21%
.21%
110%
.26%
.31%
120%
.31%
7.
Bank Deposits
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:
December 31,
2018
2017
2016
Amount
Rate
Amount
Rate
Amount
Rate
Analysis of average daily deposits:
Money market and other savings deposits
$
184,039
0.28% $
148,679
0.09% $
126,719
Interest-bearing demand deposits
15,100
0.25%
15,319
0.14%
14,713
0.02%
0.07%
Total
$
199,139
$
163,998
$
141,432
At December 31, 2018, there were no certificates of deposit of $100,000 or more included in bank deposits.
8.
Ratios
December 31,
Return on average total stockholders’ equity
Return on average total assets
Average total stockholders’ equity as a percentage of average total assets
Dividend payout ratio (1)
Note: Average balance calculations based on month end balances.
(1)
Dividends declared per common share divided by diluted EPS.
2018
2017
2016
17.53%
13.41%
12.55%
1.33%
7.58%
1.03%
7.71%
0.94%
7.49%
18.78%
19.88%
20.61%
F-7
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, 2018.
The following is a listing of the significant and certain other 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 bank
Charles Schwab Investment Management, Inc.,* a Delaware corporation
Charles Schwab Futures, Inc., a Delaware corporation
Charles Schwab Premier Bank, a federal savings bank
Charles Schwab Trust Bank, a Nevada-chartered state savings bank
* Significant subsidiary
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 22, 2019,
relating to the consolidated financial statements 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, 2018:
Filed on Form S-3:
Registration Statement No. 333-222063
(Debt Securities, Preferred Stock, Depositary Shares, Common Stock,
Purchase Contracts, Warrants, and Units Consisting of Two or More
Securities)
Filed on Form S-8:
Registration Statement No. 333-205862
(The Charles Schwab Corporation 2013 Stock Incentive Plan)
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. 2005 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 22, 2019
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)
b)
c)
d)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in
which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting
to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles;
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation; and
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred
during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control
over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons
performing the equivalent functions):
a)
b)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize
and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in
the registrant’s internal control over financial reporting.
Date:
February 22, 2019
/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, Peter Crawford, 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)
b)
c)
d)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in
which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting
to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles;
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation; and
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred
during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control
over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons
performing the equivalent functions):
a)
b)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize
and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in
the registrant’s internal control over financial reporting.
Date: February 22, 2019
/s/ Peter Crawford
Peter Crawford
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, 2018 (the Report), I, Walter W. Bettinger II, President and Chief Executive Officer of the Company, hereby certify,
pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my
knowledge:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of
operations of the Company for the periods presented therein.
/s/ Walter W. Bettinger II
Walter W. Bettinger II
President and Chief Executive Officer
Date: February 22, 2019
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, 2018 (the Report), I, Peter Crawford, Executive Vice President and Chief Financial Officer of the Company,
hereby certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that
to the best of my knowledge:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of
operations of the Company for the periods presented therein.
/s/ Peter Crawford
Date: February 22, 2019
Peter Crawford
Executive Vice President and Chief Financial Officer
A signed original of this written statement required by Section 906 has been provided to The Charles Schwab Corporation and
will be retained by The Charles Schwab Corporation and furnished to the Securities and Exchange Commission or its staff upon
request.
Board of
Directors
Charles R. Schwab
Chairman of the Board,
The Charles Schwab Corporation
Age: 81. Director since 1986.
Term expires in 2019.
John K. Adams, Jr.
Former Managing Director, Financial
Institutions Group, UBS Investment
Bank, a financial services firm
Age: 63. Director since 2015.
Term expires in 2019.
Member of the Audit Committee;
Risk Committee.
Walter W. Bettinger II
President and Chief Executive Officer,
The Charles Schwab Corporation
Age: 58. Director since 2008.
Term expires in 2021.
Joan T. Dea
Founder and Managing Director,
Beckwith Investments, a private
investment and consulting firm
Age: 55. Director since 2017.
Term expires in 2021.
Member of the Compensation
Committee; Nominating and
Corporate Governance Committee.
Christopher V. Dodds
Senior Advisor, The Cynosure Group,
a private equity firm
Age: 59. Director since 2014.
Term expires in 2021.
Chairman of the Risk Committee;
member of the Audit Committee.
Stephen A. Ellis
Managing Partner, TPG, a private
equity and alternative investment firm
Age: 56. Director since 2012.
Term expires in 2019.
Member of the Audit Committee;
Nominating and Corporate
Governance Committee.
Mark A. Goldfarb
Managing Partner, BDO USA, LLP,
an accounting and consulting firm
Age: 67. Director since 2012.
Term expires in 2021.
Chairman of the Audit Committee.
William S. Haraf
Special Advisor, Promontory Financial
Group, a financial consulting firm
Age: 70. Director since 2015.
Term expires in 2020.
Member of the Audit Committee;
Risk Committee.
Frank C. Herringer
Retired, Chairman of the Board and
Chief Executive Officer, Transamerica
Corporation, a financial services
company
Age: 76. Director since 1996.
Term expires in 2020.
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: 72. Director since 1988.
Term expires in 2020.
Member of the Risk Committee.
Charles A. Ruffel
Managing Partner, Kudu Investment
Management, LLC, a private equity firm
Age: 63. Director since 2018.
Term expires in 2021.
Member of the Risk Committee.
Arun Sarin
Former Chief Executive Officer,
Vodafone Group Plc, a mobile
telecommunications company
Age: 64. Director since 2009.
Term expires in 2019.
Member of the Risk 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: 71. Director since 2002.
Term expires in 2019.
Member of the Compensation
Committee.
Roger O. Walther
Chairman and Chief Executive Officer,
Tusker Corporation, a real estate and
business management company
Age: 83. Director since 1989.
Term expires in 2020.
Chairman of the Compensation
Committee.
i Board of Directors
Stock Ownership Services
All stockholders of record are welcome
to participate in The Charles Schwab
Corporation Dividend Reinvestment
and Stock Purchase Plan, managed by
Equiniti Trust Company. For information
on the Dividend Reinvestment and
Stock Purchase Plan, or for assistance
on stock ownership questions, contact:
Transfer Agent & Registrar, EQ
Shareowner Services.
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, 2018, 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, Schwab
Bank, 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.
Third-party trademarks appearing in
this report are the property of their
respective owners.
Customer Service
Investor Services: (800) 435-4000
www.schwab.com
Advisor Services: (877) 687-4085
www.advisorservices.schwab.com
Investor Relations
Richard G. Fowler, Senior Vice President
(415) 667-1841
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
Corporate Communications
Joe Carberry, Senior Vice President
Media Hotline: (888) 767-5432
public.relations@schwab.com
Charles Schwab Foundation
Carrie Schwab-Pomerantz,
Chairman and President of Charles
Schwab Foundation and Senior Vice
President, Charles Schwab & Co., Inc.
charlesschwabfoundation@schwab.com
Independent Auditors
Deloitte & Touche LLP
555 Mission Street
San Francisco, CA 94105
(415) 783-4000
www.deloitte.com
Outside Counsel
Arnold & Porter
Three Embarcadero Center, 10th Floor
San Francisco, CA 94111-4024
(415) 471-3100
www.arnoldporter.com
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 355
offices, 11.6 million active brokerage
accounts, 1.7 million corporate
retirement plan participants, 1.3 million
banking accounts, and $3.25 trillion in
client assets as of December 31, 2018.
Through its operating subsidiaries,
the company provides a full range of
securities brokerage, banking, money
management, and financial advisory
services to individual investors and
independent investment advisors.
Office of the Corporate Secretary
(415) 667-9979
Annual Meeting
The annual meeting of stockholders
will be conducted at 2:00 p.m. (Pacific
Time) on May 15, 2019, 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
investor.relations@schwab.com
These documents may also be
viewed in the Investor Relations
section of the company’s website at
www.aboutschwab.com.
Corporate Information
ii
“Always put the client first.”
Chuck Schwab
Since day one, we’ve set out to challenge the
status quo, looking for ways to offer our clients
more value and a better experience. We’re
confident our approach can help people
take ownership of their financial futures.
We believe in the power of investing, which
helps turn earners into owners. Investing can
be truly transformative when investors actively
engage and when they work collaboratively
with the right financial provider.
We are champions of investors and those
who serve them. We look at the world through
our clients’ eyes and keep that perspective
at the heart of everything we do.
We offer investors a contemporary, full-service
approach to build and manage their wealth.
We help investors either directly as Schwab
clients or through one of the thousands of
independent advisors and employers we serve.
This is how we help investors, advisors, employers,
and employees take ownership of their futures.
The Charles Schwab Corporation
211 Main Street
San Francisco, CA 94105
(415) 667–7000
Schwab.com
AboutSchwab.com
facebook.com/CharlesSchwab
instagram.com/CharlesSchwab
linkedin.com/company/Charles-Schwab
twitter.com/CharlesSchwab
youtube.com/user/CharlesSchwab
Printed on recycled paper. ©2019 The Charles Schwab Corporation. All rights reserved. MKT10448FM-31 (04/19) 00224735