SCHW 10-K diff: FY 2023-12-31 → FY 2025-12-31
Paragraph-level diff of Risk Factors (Item 1A) and Management's Discussion & Analysis (Item 7).
Item 1A · Risk Factors
+61 paragraphs −60 paragraphs ~60 changed
FY 2023-12-31 (earlier)
Item 1A. Risk FactorsWe 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 governance and processes, including operational risk, compliance risk, credit risk, market risk, and liquidity risk, see Risk Management and Capital Management in Part II – Item 7. For additional information regarding cybersecurity risk, see Item 1C. Cybersecurity.Economic and Market Risks
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 and decreases in securities valuations negatively impact our results of operations and capital resources.The monetary policies of the Federal Reserve, which regulates the supply of money and credit in the United States, have a significant effect on our operating results. Actions taken by the Federal Reserve, including changes in its target funds rate and its own balance sheet management, are difficu lt to predict and can affect our financial results, including net interest revenue and bank deposit account fees. These policies can have implications for clients’ allocation to cash as we experienced in 2022 and 2023, and higher or lower client cash balances have an impact on our capital requirements, as well as liquidity implications if such changes in allocation are sudden. Investor sentiment and market and trading dynamics can affect client preferences and security selection, and can impact transactions and asset-based revenues.
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THE CHARLES SCHWAB CORPORATIONA significant change in client cash allocations could negatively impact our income.We rely heavily on client cash balances to generate revenue. Cash awaiting investment in a portion of our client brokerage accounts is swept to our banking subsidiaries and those bank deposits are then used to extend loans to clients and purchase investment securities. We also sweep a portion of such cash to the TD Depository Institutions pursuant to the 2023 IDA agreement, through which we earn bank deposit account fees. 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, would likely reduce our income. As a result of the rapid increases in short-term interest rates in 2022 and 2023, the Company saw a significant decrease in clients’ asset allocation to sweep cash and greater client investment in higher-yielding alternatives at Schwab such as fixed income investments and proprietary purchased money market funds. To help facilitate these changes in client cash allocations, the Company has utilized higher-cost supplemental funding sources, which has negatively impacted the Company’s net income.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 and our bank deposit account fee revenue. The Company’s interest-earning assets include significant holdings of investment securities, which include fixed- and floating-rate debt securities, including substantial holdings of mortgage-backed securities, as well as mortgages. The Company could be adversely affected by a decline in interest rates if the rates that the Company earns on interest-earning assets decline more than the rates that the Company pays on its funding sources, or if prepayment rates increase on the mortgages and mortgage-backed securities that the Company holds. A low interest rate environment may also have a negative impact on our asset management and administration fee revenues when we have to waive a portion of our management fees, as we experienced in 2020 and 2021, for certain Schwab-sponsored money market mutual funds in order to continue providing a positive return to clients. A decline in interest rates may also negatively impact our bank deposit account fee revenue, which is earned primarily pursuant to the 2023 IDA agreement.
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, which can reduce the benefit of higher market interest rates to our net interest revenue, as we experienced in 2022 and 2023. The rapid increases in market interest rates recently experienced have also contributed to increased unrealized losses on our investment securities portfolios. Increased unrealized losses on investment securities or other assets on our balance sheet can reduce market or client confidence in us, which could limit our ability to attract new client assets and accounts or result in the transfer of client assets and accounts from the Company.
A rise in interest rates may also reduce our bank deposit account fee revenue, as clients may reallocate assets out of bank deposit account balances and into higher-yielding investment alternatives, as we experienced in 2022 and 2023. The 2023 IDA agreement involves certain commitments, including the maintenance of prescribed minimum and maximum IDA balances, that limit our ability to respond to changes in interest rates and may impact our profitability and bank deposit account fee revenue. The bank deposit account fee revenue that we earn related to the IDA agreement may be less than the net interest revenue that we could have earned if the deposit balances were swept to our banking subsidiaries rather than the TD Depository Institutions. When we are permitted to reduce the IDA balances, we can only move the balances to our banking subsidiaries if we have sufficient capital.
Problems encountered by other financial institutions and responsive measures to manage such problems could adversely affect financial markets generally, could have an adverse effect on our financial position or results of operations, and have indirect adverse effects on us.
Concerns regarding the soundness or creditworthiness of other financial institutions can cause substantial disruption within the financial markets and have negative impacts for us and our industry, including reductions in availability of liquidity, higher borrowing costs, and higher costs of capital. Such concerns regarding one or more financial institutions may also advance public concerns regarding Schwab or the financial services industry more broadly, which could harm our reputation and adversely affect our results of operations and financial condition, even if underlying matters impacting other financial institutions are of limited or no direct applicability to us. Financial institutions are interrelated through trading, clearing, or other relationships, and, as a result, concerns about the financial condition of one or more institutions could lead to significant market-wide liquidity and credit problems, losses, or defaults by other institutions. This risk may adversely affect financial intermediaries, such as broker-dealers, banks, clearing houses, securities exchanges, market makers, and others, with which we interact on a daily basis, and therefore, could adversely affect us.
- 13 -THE CHARLES SCHWAB CORPORATIONEvents affecting the financial services industry may also result in potentially adverse changes to laws or regulations governing banks and savings and loan holding companies or result in the imposition of restrictions through supervisory or enforcement activities, including higher capital or liquidity requirements, which could have a material impact on our business. Following the failure of several U.S. banks in 2023, the U.S. federal banking agencies proposed rules that would significantly impact our regulatory capital requirements, including requiring us to include AOCI in regulatory capital, as well as rules that would require minimum levels of eligible long-term debt at CSC and our banking subsidiaries. As a result of increased regulatory expectations regarding capital requirements applicable to the Company, we have been taking, and continue to take, measures to increase our capital, including the cessation of share repurchases. In addition, the cost of resolving the recent bank failures has resulted in increased FDIC costs and may prompt the FDIC to further increase its premiums or to issue additional special assessments, which could have a material negative impact on our profitability and our business.Liquidity Risk
A significant decrease in our liquidity could negatively affect our business as well as reduce client confidence in us.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 us, which could result in the transfer out 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, or if a depository institution subsidiary is unable to obtain regulatory approval, when required, to declare a dividend, regulators could limit the subsidiaries’ ability to upstream funds to CSC or limit their operations, which could reduce CSC’s liquidity and adversely affect its ability to repay debt, pay dividends on CSC’s preferred stock and common stock, repurchase its shares, or redeem its preferred stock. In addition, CSC may need to provide additional funding to such subsidiaries.
Factors which may adversely affect our liquidity position include CS&Co and TDAC having temporary liquidity demands due to timing differences between brokerage transaction settlements and the availability of segregated cash balances, fluctuations in cash held in banking or brokerage client accounts, such as the significant client reallocation from sweep cash to higher-yielding investments that we experienced in 2022 and 2023 in response to rapid interest rate increases, 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 us resulting in unanticipated withdrawals of client funds. As a member firm of securities and derivatives clearing houses, we are required to deposit cash, stock and/or government securities for margin requirements and to clearing funds. The margin requirements may fluctuate significantly from time to time based upon the nature and size of clients’ trading activity and market volatility, and member firms like us have been required to deposit additional funds. Clearing houses could also require additional funds from member firms if a clearing member defaults on its obligations to the clearing house in an amount larger than its own margin and clearing fund deposits.
When available cash is not sufficient for our liquidity needs, we may be required to 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, CS&Co, and TDAC maintain 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 downgrade in the Company’s credit ratings could increase its borrowing costs and limit its access to the capital markets.
When short-term interest rates rapidly increase, as they did in 2022 and 2023, client movement of certain cash balances out of our sweep features and into higher-yielding alternatives generally increases. When these outflows outpace excess cash on hand and cash generated by maturities and paydowns on our investment and loan portfolios, as they did in 2022 and 2023, we may need to rely on temporary supplemental funding, such as advances under Federal Home Loan Bank (FHLB) secured credit facilities, borrowings under repurchase agreements with external financial institutions, issuances of brokered certificates of deposit (CDs), or other sources of funding, which have higher costs and could be subject to limitations on availability. In addition, to access new FHLB advances or roll over existing advances, our banking subsidiaries must maintain positive tangible capital, as defined by the Federal Housing Finance Agency. Larger unrealized losses on our available for sale (AFS) portfolio due to higher market interest rates negatively impact our capital position inclusive of AOCI, including our tangible capital.
- 14 -THE CHARLES SCHWAB CORPORATIONCompliance Risks
Extensive regulatory supervision 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 prote ction, and market conduct requirements on us as well as restrictions on the activities that we are allowed to conduct. We become subject to increasing regulatory scrutiny as we grow.
Regulators have broad discretion in connection with their supervisory and enforcement activities and examination policies, and could prevent us from pursuing our business strategy. Regulators could also limit our ability to grow, including adding assets, launching new products, making acquisitions, and undertaking strategic investments. Our banking regulators 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. 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.
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, money market funds, standards of conduct with clients, conflicts of interest, regulatory treatment of deposit accounts, CRA, changes in required minimum capital and capital structure, and changes in equity market structure, including rules relating to order routing and order-related revenues, may directly affect our operations and profitability or our specific business lines. Recently, the SEC has proposed or adopted a number of new rules, and these new or proposed rules involve sweeping changes that could require significant shifts in industry operations and practices, thereby increasing uncertainty for markets and investors. The U.S. federal banking agencies have recently proposed rules regarding regulatory capital and long-term debt, and compliance with these proposed rules may result in increased costs and reduce our net income. In addition, the U.S. Department of Labor recently proposed rules to significantly broaden the definition of “fiduciary” under the Employee Retirement Income Security Act of 1974, which, among other requirements, would subject broker-dealers who provide non-discretionary investment advice to retirement plans to a “best interest” standard. 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, broker-dealer, and FCM/FDM subsidiaries, must meet certain capital and liquidity standards, subject to qualitative judgments by regulators about the adequacy of our capital and our internal assessment of our capital needs. The Uniform Net Capital Rule limits the ability of our broker-dealer entities to transfer capital to CSC and other affiliates. New regulatory capital, liquidity, capital planning, 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
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THE CHARLES SCHWAB CORPORATION
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 stress capital buffer (CSC) or capital conservation buffer (banking subsidiaries) 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.
CSC is subject to the CCAR process, which requires submission of an annual capital plan, and determination of CSC’s stress capital buffer. The plan must include a description of all planned capital actions, including dividends or stock repurchases, over a nine-quarter planning horizon beginning with the first quarter of the calendar year the capital plan is submitted. CSC’s risk-based capital ratios must exceed the regulatory minimum plus the stress capital buffer. The stress capital buffer could make us subject to progressively more stringent constraints on capital actions if we approach our minimum ratios. This could lead to restrictions on our ability to pay or increase dividends or otherwise return capital to stockholders.
If the average of CSC’s total consolidated assets for four consecutive calendar quarters reaches $700 billion, or if the average of cross-jurisdictional activity for four consecutive calendar quarters reaches $75 billion, CSC will become subject to more stringent Category II requirements, including annual stress testing, the advanced approaches framework, and the inability to opt out of including AOCI in regulatory capital calculations. At December 31, 2023, CSC had approximately $493 billion in total assets and cross-jurisdictional activity of approximately $25 billion. See also Part II – Item 7 – Current Regulatory and Other Developments for discussion of regulatory proposals that could, among other things, require the Company to include AOCI in its regulatory capital calculations.
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 with us. 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. We may also determine that it is in the Company’s best interests to settle a matter, such as to avoid protracted litigation, even though the Company may have strong defenses. 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.Operational Risk
Security breaches of our systems, or those of our clients or third parties, may subject us to significant liability and damage our 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 and cloud technologies to conduct financial transactions, and the increased sophistication and activities, including the use of artificial intelligence technologies, of organized crime, activists, hackers and other external parties, including foreign state actors. Our systems and those of other financial institutions, as well as those of our third-party service providers, have been and will continue to be the target of cyber attacks, malicious code, computer viruses, ransomware, and denial of service attacks that could
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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, including cloud service providers, 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 our 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 may also be required to pay ransom to threat actors to restore or prevent dissemination of data.
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 our clients’ financial accounts. 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. Additionally, data exposure can result from a failure to adequately destroy data during system or asset decommissioning, which might result in client or Company information being made available to external parties in error. Such risks have 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 and other operational risks 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, 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, extreme weather, power outage, capacity constraints, software flaws, events impacting key business partners and vendors, and similar events. For example, we 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. Cloud technologies are critical to the operation of our systems and platforms and our reliance on cloud technologies is growing. Cloud service disruptions may lead to delays in accessing data that is important to our businesses and may hinder our clients’ access to our platforms. 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. 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, we occasionally experience extraordinary trading volumes, which have caused and 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, decreased client satisfaction, reputational damage, and regulatory inquiries. We are also dependent on the integrity and performance of securities exchanges, clearing houses, market makers, dealers, and other intermediaries to which client orders are
- 17 -THE CHARLES SCHWAB CORPORATIONrouted for execution and settlement. System failures and constraints and transaction errors at such intermediaries could result in delays and erroneous or unanticipated execution prices and cancelled orders, cause substantial losses for us and for our clients, and subject us to claims from our clients for damages, and cause reputational harm.Certain events could increase our client service and processing times due to staffing shortages, remote work or the temporary loss of services from outsourced service providers, such as occurred during the COVID-19 pandemic. We consider service quality to be an important part of the client experience and our failure to meet client expectations could result in decreased client satisfaction.We take steps to prevent and detect fraud but the ways that fraudulent activity is attempted is continuously evolving. Although we monitor for new types of fraud, there may be a delay in recognizing the fraud is happening. Besides potential losses, shutting down fraudulent activity often requires a balance with client experience. Instances of fraud might negatively impact our reputation and client confidence in the Company, in addition to any direct losses that might result from such instances.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.We rely on outsourced service providers to perform key functions.
We rely on external service providers to perform certain key technology, cloud infrastructure, 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 our reputation. An interruption in or the cessation of service by any external service provider as a result of systems failures, capacity constraints, financial difficulties, natural disasters, extreme weather, power outage, public health crises, political developments, war, international disputes, 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. We temporarily lost the services from some of our outsourced service providers during the COVID-19 pandemic which contributed to increased client service response and processing times. Following Russia’s invasion of Ukraine, we had to replace certain vendor resources which added incremental complexity in earlier phases of our TD Ameritrade conversion work. Switching to an alternative service provider may require a transition period and result in less efficient operations.
We rely on financial intermediaries to execute and settle client orders and transactions with financial intermediaries are a significant source of revenue.
We rely on market makers, dealers, securities exchanges, clearing houses, and other financial intermediaries to execute and settle our clients’ orders. In addition, payments received from market makers and exchanges in connection with the execution of client equity and options trades, and from dealers and other counterparties in connection with securities lending, account for significant revenue. The unwillingness or inability of any of these parties to perform their usual functions coupled with the unavailability of alternative arrangements could result in our clients’ orders not getting executed or settled. This may be due to market volatility, uneconomic trading conditions, capacity constraints, financial constraints, system failures, unanticipated trading halts invoked by securities exchanges, market closures, or other reasons. Our inability to get client orders executed or settled because of the unwillingness or inability of these parties to perform their usual functions could result in client dissatisfaction and reputational harm and expose us to client claims for damages.
- 18 -THE CHARLES SCHWAB CORPORATIONCredit Risk
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 that the Company sponsors.
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. Our margin, options and futures business has materially increased as a result of our TD Ameritrade acquisition, and market liquidity represents an increased risk. Abrupt changes in securities valuations and the failure of clients to meet margin calls could result in substantial losses, especially if there is a lack of liquidity.
We have exposure to credit risk associated with our investments. Those investments are subject to price fluctuations. Loss of value of securities can negatively affect earnings if management determines that such loss of value has resulted from a credit loss. The evaluation of whether a credit loss exists is a matter of judgment, which includes the assessment of multiple factors. If management determines that a security’s decline in fair value is the result of a credit loss, an allowance for credit losses on the security will be recorded and a corresponding loss will be recognized in current earnings. Even if a decline in fair value of a security is not determined to have resulted from a credit loss, 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, PALs, and HELOCs. Increases in delinquency and default rates, housing and stock price declines, increases in the unemployment rate, and other economic factors, can result in increases in allowances for credit losses and related credit loss expense, as well as 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.The Company sponsors a number of proprietary money market mutual funds and other proprietary funds. Although the Company has no obligation to do so, the Company may decide for competitive or other reasons to provide credit, liquidity or other support to 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 the Company to take significant charges, could reduce the Company’s liquidity and, in certain situations, could, with respect to proprietary funds other than money market mutual funds, result in the Company having to consolidate one or more funds in its financial statements. If the Company were to choose not to provide credit, liquidity or other support in such a situation, the Company could suffer reputational damage and its business could be adversely affected.
Risks Related to Our TD Ameritrade Integration
We are working to complete one of the largest brokerage account conversions and could experience unanticipated issues.
As part of our integration of TD Ameritrade, the Company expects to complete the remaining client transitions from TD Ameritrade to Schwab in a final transition group in May of 2024. This final transition group includes our most active trader accounts which drive significant revenue for TD Ameritrade and are, therefore, important to the revenue of the combined company. Although we have undertaken extensive planning and testing, the account transitions are complicated and we could experience issues which cause the final transition group or the remaining integration work to be delayed, or negatively impact the client experience. Such issues could adversely impact client retention, integration-related costs, the timing for realizing synergies including those dependent on the wind-down of the operations of the TD Ameritrade broker-dealers, our reputation, and compliance with regulatory requirements.
- 19 -THE CHARLES SCHWAB CORPORATIONWe have experienced unanticipated issues earlier in the integration process that added complexity to our conversion work, including a need to increase capacity of our systems earlier in the integration process beyond our original technology build-out plan and other complexities of technology development. Though technology development to support the remaining client account transitions is now substantially complete, unanticipated issues could arise, including in relation to the wind-down of certain technology used by our broker-dealer subsidiaries.
In connection with the completed 2023 transitions, the Company experienced attrition in client assets from former TD Ameritrade retail accounts and RIAs that was within our initial estimates when we announced the acquisition. It is possible that the remaining integration process could result in the loss of clients, including to a greater degree than previously planned or experienced in relation to the 2023 client account conversions.
We expect to continue to incur significant costs in 2024 to finish combining the operations of Schwab and TD Ameritrade, including workforce, technology-related, and facilities consolidation costs. Additional unanticipated costs may be incurred in the integration process. If we are not able to successfully transition the remaining client accounts, and complete planned technology wind-down activities, within the anticipated time frames, the anticipated cost savings and other benefits of the merger may not be realized fully or may take longer to realize than expected.Other Business Risks
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, effecting, and integrating 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. The integration process could result in the disruption of ongoing businesses or changes to inconsistent standards, controls, procedures and policies that could adversely affect our ability to maintain relationships with clients, employees, outsourced service providers and vendors. In addition, an acquisition may cause us to assume liabilities or become subject to litigation or regulatory proceedings or require the amortization of a large amount of acquired intangible assets. Further, we may not realize the anticipated benefits from an acquisition (including without limitation the acquisition of TD Ameritrade) in a timely manner or at all, 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 or part of an entity being acquired or sold. To the extent we enter into an agreement to buy or sell an entity or part of 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.Our industry is highly competitive and characterized by aggressive price competition.
We operate in a highly competitive environment with a broad array of competitors from large integrated banks to venture-capital backed private companies. We continually monitor our pricing in relation to competitors and periodically adjust interest rates on deposits and loans, fees for advisory services, expense ratios on mutual funds and ETFs, trade commission rates, and other pricing and incentives to sustain our competitive position. Increased price competition from other financial services firms to attract clients, such as reduced commissions, higher deposit rates, reduced mutual fund or ETF expense ratios, or the increased use of incentives, 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.
- 20 -THE CHARLES SCHWAB CORPORATIONOur 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:
• 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, strategic transactions, the expected benefits from our TD Ameritrade acquisition, or ratings from third parties;• The announcement of new products, services, acquisitions, or dispositions by us or our competitors;• Increases or decreases in revenue or earnings, changes in earnings estimates by the investment community, and variations between estimated financial results and actual financial results;
• Business metrics, such as client cash and net new client assets; and
• Sales of a substantial number of shares of our common stock by large stockholders.
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.
Our ongoing relationships with The Toronto-Dominion Bank and its affiliates could have a negative impact on us.
Although our acquisition of TD Ameritrade was structured such that completion of the merger would not result in CSC either (i) being deemed to be “controlled” (as that term is interpreted by the Federal Reserve under the BHC Act or HOLA) by The Toronto-Dominion Bank (TD Bank) or (ii) being deemed to be in “control” of any of TD Bank’s depository institutions, changes in circumstances could trigger presumptions of control under the Federal Reserve’s regulations. This could occur if TD Bank and its affiliates own more than 9.9% of Schwab common stock, as interpreted in accordance with the applicable rules of the Federal Reserve. While the Stockholder Agreement between CSC and TD Bank prohibits TD Bank and its affiliates from exceeding the 9.9% threshold, it could happen unintentionally. This presumption of control could also be triggered if the revenue generated to either us or to any of the TD Bank depository institutions exceeds a certain percentage. The Stockholder Agreement contains provisions to address such situations.
FY 2025-12-31 (later)
Item 1A. Risk FactorsWe 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 governance and processes, including operational risk, compliance risk, credit risk, market risk, and liquidity risk, see Risk Management and Capital Management in Part II – Item 7. For additional information regarding cybersecurity risk, see Item 1C. Cybersecurity.
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THE CHARLES SCHWAB CORPORATIONEconomic and Market Risks
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 and decreases in securities valuations negatively impact our results of operations and capital resources.The monetary policies of the Federal Reserve, which regulates the supply of money and credit in the United States, have a significant effect on our operating results. Actions taken by the Federal Reserve, including changes in its target funds rate and its own balance sheet management, are difficu lt to predict and can affect our financial results, including net interest revenue and bank deposit account fees, and the market value of our investment securities. These policies can have implications for clients’ allocation to cash as we experienced in recent years, and higher or lower client cash balances have an impact on our capital requirements, as well as liquidity implications if such changes in allocation are sudden. Investor sentiment and market and trading dynamics can affect client preferences and security selection, and can impact transactions and asset-based revenues. Market-driven changes, such as declines in equity markets, can also reduce client demand for margin lending, which is a significant source of net interest revenue.A significant change in client cash allocations could negatively impact our income.Client cash balances are a significant funding source for the generation of the Company’s revenue. Cash awaiting investment may be used to extend margin loans to clients or be swept to our banking subsidiaries and those bank deposits are then used to extend loans to clients and purchase investment securities. We also sweep a portion of such cash to the TD Depository Institutions pursuant to the 2023 IDA agreement, through which we earn bank deposit account fees. 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, would likely reduce our income. For example, as a result of rapid increases in short-term interest rates in 2022 and 2023, the Company saw a significant decrease in clients’ asset allocation to sweep cash and greater client investment in higher-yielding alternatives at Schwab such as fixed income investments and proprietary purchased money market funds. To help support these changes in client cash allocations, the Company extensively utilized higher-cost funding sources, which negatively impacted the Company’s net income.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 and our bank deposit account fee revenue. The Company’s interest-earning assets include significant holdings of investment securities, which include fixed- and floating-rate debt securities, including substantial holdings of mortgage-backed securities, as well as margin loans, mortgages, and PALs. The Company could be adversely affected by a decline in interest rates if the rates that the Company earns on interest-earning assets decline more than the rates that the Company pays on its funding sources, or if prepayment rates increase on the mortgages and mortgage-backed securities that the Company holds. A low interest rate environment may also have a negative impact on our asset management and administration fee revenues when we have to waive a portion of our management fees, as we experienced in 2020 and 2021, for certain Schwab-sponsored money market mutual funds in order to continue providing a positive return to clients. A decline in interest rates may also negatively impact our bank deposit account fee revenue, pursuant to the 2023 IDA agreement.
Though the Company may benefit from a rising interest rate environment, a rise in interest rates may cause our funding costs to increase. The competitive environment may induce us to raise our interest rates to avoid losing deposits, or we may need to replace deposits with higher-cost funding sources as we experienced in recent years. In such situations, without offsetting increases in yields on interest-earning assets, the benefit of higher market interest rates to our net interest revenue may be reduced. The rapid increases in market interest rates experienced in 2022 and 2023 also contributed to increased unrealized losses on our investment securities portfolios. Increased unrealized losses on investment securities or other assets on our balance sheet can reduce market or client confidence in us, which could limit our ability to attract new client assets and accounts or result in the transfer of client assets and accounts from the Company.
A rise in interest rates may also reduce our bank deposit account fee revenue, as clients may reallocate assets out of bank deposit account balances and into higher-yielding investment alternatives, as we experienced in recent years. The 2023 IDA agreement involves certain commitments, including the maintenance of prescribed minimum and maximum insured deposit account balances (IDA balances), that limit our ability to respond to changes in interest rates and may impact our profitability and bank deposit account fee revenue. The bank deposit account fee revenue that we earn related to the 2023 IDA agreement may be less
- 11 -THE CHARLES SCHWAB CORPORATIONthan the net interest revenue that we could have earned if the deposit balances were used to extend margin loans or swept to our banking subsidiaries rather than the TD Depository Institutions.
Problems encountered by other financial institutions and responsive measures to manage such problems could have direct adverse effects on financial markets generally and our financial position or results of operations, as well as indirect adverse effects on us.
Concerns regarding the soundness or creditworthiness of other financial institutions can cause substantial disruption within the financial markets and have negative impacts for us and our industry, including reductions in availability of liquidity, higher borrowing costs, and higher costs of capital. Such concerns regarding one or more financial institutions may also advance public concerns regarding Schwab or the financial services industry more broadly, which could harm our reputation and adversely affect our results of operations and financial condition, even if underlying matters impacting other financial institutions are of limited or no direct applicability to us. Financial institutions are interrelated through trading, clearing, custody, or other relationships, and, as a result, concerns about the financial condition of one or more institutions could lead to significant market-wide liquidity and credit problems, losses, or defaults by other institutions. This risk may adversely affect financial intermediaries, such as broker-dealers, banks, clearing houses, securities exchanges, market makers, and others, with which we interact on a daily basis, and therefore, could adversely affect us.
Events affecting the financial services industry may also result in potentially adverse changes to laws or regulations governing banks and savings and loan holding companies or result in the imposition of restrictions through supervisory or enforcement activities, including higher capital or liquidity requirements or increased FDIC premiums and special assessments, which could have a material impact on our business. Following the failure of several U.S. banks in 2023, the U.S. federal banking agencies proposed rules that would significantly impact our regulatory capital requirements, including requiring us to include AOCI in regulatory capital, as well as rules that would require minimum levels of eligible long-term debt at CSC and our banking subsidiaries. As a result of heightened regulatory focus on capital requirements, the Company took measures to increase its capital, including revising its long-term operating objective. In addition, the cost of resolving the 2023 bank failures resulted in increased FDIC costs, and potential future bank failures or other similar events may prompt the FDIC to further increase its premiums or to issue additional special assessments, which could have a material negative impact on our profitability and our business.Liquidity Risk
A significant decrease in our liquidity could negatively affect our business as well as reduce client confidence in us.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. While Schwab maintains diversified sources of funding, a reduction in our liquidity position could reduce client confidence in us, which could result in the transfer out 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, or if a depository institution subsidiary is unable to obtain regulatory approval, when required, to declare a dividend, regulators could limit the subsidiaries’ ability to upstream funds to CSC or limit their operations, which could reduce CSC’s liquidity and adversely affect its ability to repay debt, pay dividends on CSC’s preferred stock and common stock, repurchase its shares, or redeem its preferred stock. 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 held in banking or brokerage client accounts, such as significant client reallocation from sweep cash to higher-yielding investments as we experienced in recent years in response to rapid interest rate increases, 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 us resulting in unanticipated withdrawals of client funds. The Company’s margin lending activity has significantly increased in recent years due to market-driven factors and overall growth of our business.
As a member firm of securities and derivatives clearing houses, we are required to deposit cash, stock and/or government securities for margin requirements and to clearing funds. The margin requirements may fluctuate significantly from time to time based upon the nature and size of clients’ trading activity and market volatility, and member firms like us have been required to
- 12 -THE CHARLES SCHWAB CORPORATIONdeposit additional funds. Clearing houses could also require additional funds from member firms if a clearing member defaults on its obligations to the clearing house in an amount larger than its own margin and clearing fund deposits.
As a participant in the financial services industry, Schwab relies on access to external financing in the normal course of business. During periods of disruptions in the credit and capital markets, potential sources of external financing could be reduced, and borrowing costs could increase. CSC, CS&Co, and our banking subsidiaries maintain multiple sources of external financing including repurchase agreements and securities lending, secured lines of credit and unsecured uncommitted 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 downgrade in the Company’s credit ratings could increase its borrowing costs and limit its access to the capital markets.
When short-term interest rates rapidly increase, client movement of certain cash balances out of our sweep features and into higher-yielding alternatives generally increases. When these outflows outpace excess cash on hand and cash generated by maturities and paydowns on our investment and loan portfolios, as we experienced in 2022 and 2023, we may need to rely on increased levels of higher-cost funding, which could be subject to limitations on availability and additional regulatory requirements.Operational Risk
Security breaches of our systems, or those of our clients or third parties, may subject us to significant liability and damage our 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 and cloud technologies to conduct financial transactions, and the increased sophistication and activities, including the use of artificial intelligence technologies, of organized crime, activists, hackers and other external parties, including foreign state actors. Our systems and those of other financial institutions, as well as those of our third-party service providers, have been and will continue to be the frequent target of cyber attacks, malicious code, computer viruses, ransomware, 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 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 employee misconduct. Data exposure may also result from a failure to adequately destroy data during system or asset decommissioning, which might result in client or Company information being made available to external parties in error.
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, including cloud service providers, 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, 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 our 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 may also be required to pay ransom to threat actors to restore operations or prevent dissemination of sensitive data.Technology and operational failures or errors and other operational risks 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, errors or downtime can result from a variety of causes, including changes in client use patterns, technological failure, changes to our
- 13 -THE CHARLES SCHWAB CORPORATIONsystems, 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, extreme weather, power outage, capacity constraints, software flaws, events impacting key business partners and vendors, and similar events. For example, we 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. Cloud technologies are critical to the operation of our systems and platforms and our reliance on cloud technologies is growing. We have experienced, and could, in the future, experience cloud service disruptions that lead to delays in accessing data that is important to our businesses. Such disruptions, such as the broad-reaching cloud platform outages that impacted multiple industries in recent years, can and have hindered our clients’ access to our platforms. 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. 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, we occasionally experience extraordinary trading volumes, which have caused and 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, decreased client satisfaction, reputational damage, and regulatory inquiries. We are also dependent on the integrity and performance of securities exchanges, clearing houses, market makers, dealers, custodians, 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 and cancelled orders, cause substantial losses for us and for our clients, and subject us to claims from our clients for damages, and cause reputational harm. We have experienced in recent years technology outages of client websites, mobile applications, and certain corporate technology as a result of technological issues with third-party service providers that we use to support websites and mobile applications used by us and our clients. An internal issue or issues with vendor or industry systems and connectivity could materially impact our operations and ability to service clients, subject us to material losses, and cause reputational harm.Certain events could increase our client service and processing times due to staffing shortages, remote work or the temporary loss of services from outsourced service providers, such as occurred during the COVID-19 pandemic. We consider service quality to be an important part of the client experience and our failure to meet client expectations could result in decreased client satisfaction.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.We rely on outsourced service providers and financial intermediaries to perform key functions, and failure of these entities to perform as expected could result in financial or reputational harm to us or financial harm to our clients.
We rely on external service providers to perform certain key technology, cloud infrastructure, processing, servicing, support, and custody 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 our reputation. An interruption in or the cessation of service by any external service provider as a result of systems failures, capacity constraints, financial difficulties, natural disasters, extreme weather, power outage, public
- 14 -THE CHARLES SCHWAB CORPORATIONhealth crises, political developments, war, international disputes, 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. As a result of both broad-reaching and company-specific technology impacts from our third-party service providers, we have experienced in recent years outages of client websites, mobile applications, and certain corporate technology. During the COVID-19 pandemic, we temporarily lost the services from some of our outsourced service providers which contributed to increased client service response and processing times. Switching to an alternative service provider may require a transition period and result in increased costs and less efficient operations. In addition, if custodians holding Schwab’s or our clients’ collateral were to fail to return such collateral when required due to insolvency, operational deficiencies, legal proceedings, or other events, we could incur financial loss.
We rely on market makers, dealers, securities exchanges, clearing houses, custodians, and other financial intermediaries to execute and settle our clients’ orders. In addition, payments received from market makers and exchanges in connection with the execution of client equity and options trades, and from dealers and other counterparties in connection with securities lending, account for significant revenue. The unwillingness or inability of any of these parties to perform their usual functions coupled with the unavailability of alternative arrangements could result in our clients’ orders not getting executed or settled. This may be due to market volatility, uneconomic trading conditions, capacity constraints, financial constraints, system failures, unanticipated trading halts invoked by securities exchanges, market closures, or other reasons. Our inability to get client orders executed or settled because of the unwillingness or inability of these or similar parties to perform their usual functions could result in client dissatisfaction and reputational harm and expose us to client claims for damages.
We may suffer financial loss from fraud and financial crime.
The risk of fraud for financial institutions has significantly increased in recent years, in part because of the proliferation of new technologies and the increased sophistication and activities of organized crime and hackers, and other parties. Any of these parties may attempt to fraudulently induce employees, clients, vendors, or other third parties to disclose sensitive information that could lead to the misappropriation and use of clients’ user names, passwords or other personal information to gain access to our clients’ financial accounts. Through our clients’ accounts, fraudsters may seek to engage in unauthorized securities transactions or money movement involving, for example, wire transfers, automated clearinghouse (ACH) transactions, debit cards, and checks, as well as fraudulent or unauthorized new account openings. Such fraud may occur from the compromise of clients’ personal electronic devices, social engineering, phishing scams, 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. Any of these strategies can compromise credentials or be used to facilitate fraud. Increasing sophistication in artificial intelligence and broad public availability of such technologies, including to organizations and individuals seeking to commit fraud, has resulted in increased risk of external fraud by enhanced or novel techniques, including those involving impersonation to gain access to client accounts or convince clients to initiate fraudulent transactions.
We also face risks arising from clients who intentionally engage in fraudulent or deceptive conduct. In some instances, clients may knowingly authorize or initiate transactions under false pretenses, misuse payment channels, submit fraudulent checks or ACH items, or provide misleading information to facilitate fraudulent transfers or trading activity. Schwab also faces risk of fraud by employees who misuse authorized access to critical information or systems. Such insider misconduct may involve misappropriation of Company or client assets, misuse or theft of Company or client information, insider trading, operational sabotage, circumvention of internal controls, or other actions that could harm the Company or our clients.
We continue to take steps to implement new controls, strengthen capabilities in how we authenticate our clients, and enhance monitoring protocols to help prevent and detect fraud and ultimately protect our clients, but the ways that fraudulent activity is attempted are continuously evolving. Although we monitor for new types of fraud, there may be a delay in recognizing such activity. 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. Instances of fraud might negatively impact our reputation and client confidence in the Company, in addition to any direct losses that might result from such instances.Credit Risk
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
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THE CHARLES SCHWAB CORPORATION
financial contracts and investing activities, and indirectly from the investing activities of certain of the proprietary funds that the Company sponsors.
When clients purchase securities on margin, 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. Our margin, options and futures business has materially increased in recent years as a result of market-driven factors and overall growth of our business including growth in our trader client base, and market liquidity represents an increased risk. Abrupt changes in securities valuations and the failure of clients to meet margin calls could result in substantial losses, especially if there is a lack of liquidity.
We have exposure to credit risk associated with our investments, which are subject to price fluctuations. Loss of value of securities can negatively affect earnings if management determines that such loss of value has resulted from a credit loss. The evaluation of whether a credit loss exists is a matter of judgment, which includes the assessment of multiple factors. If management determines that a security’s decline in fair value is the result of a credit loss, an allowance for credit losses on the security will be recorded and a corresponding loss will be recognized in current earnings. Even if a decline in fair value of a security is not determined to have resulted from a credit loss, 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, PALs, and HELOCs. Increases in delinquency and default rates, housing and stock price declines, increases in the unemployment rate, and other economic factors, can result in increases in allowances for credit losses and related credit loss expense, as well as 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.The Company sponsors a number of proprietary money market mutual funds and other proprietary funds. Although the Company has no obligation to do so, the Company may decide for competitive or other reasons to provide credit, liquidity or other support to 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 the Company to take significant charges, could reduce the Company’s liquidity, and, in certain situations, could, with respect to proprietary funds other than money market mutual funds, result in the Company having to consolidate one or more funds in its financial statements. If the Company were to choose not to provide credit, liquidity or other support in such a situation, the Company could suffer reputational damage and its business could be adversely affected.
Compliance Risks
Extensive regulatory supervision 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 prote ction, and market conduct requirements on us as well as restrictions on the activities that we are allowed to conduct. We become subject to increasing regulatory scrutiny as we grow and expand client offerings.
Regulators have broad discretion in connection with their supervisory and enforcement activities and examination policies, and could prevent us from pursuing our business strategy. Regulators could also limit our ability to grow, including adding assets, launching new products, making acquisitions, and undertaking strategic investments. Our banking regulators 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. 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,
- 16 -THE CHARLES SCHWAB CORPORATIONor 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.
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, money market funds, standards of conduct with clients, conflicts of interest, regulatory treatment of deposit accounts, CRA, changes in required minimum capital and capital structure, changes in equity market structure, including rules relating to order routing and order-related revenues, and digital assets may directly affect our operations and profitability or our specific business lines. The Company anticipates it will begin providing increased access for clients to trade in digital assets including select cryptocurrencies. While some legislative and regulatory details have emerged, laws and regulations related to transactions in these asset types are still pending further development, which could negatively impact our ability to launch these products or services or limit the profitability of transacting with these assets. 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, broker-dealer, and FCM/FDM subsidiaries, must meet certain capital and liquidity standards, subject to qualitative judgments by regulators about the adequacy of our capital and our internal assessment of our capital needs. The Uniform Net Capital Rule limits the ability of our broker-dealer subsidiary to transfer capital to CSC and other affiliates. New regulatory capital, liquidity, capital planning, 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 stress capital buffer (CSC) or capital conservation buffer (banking subsidiaries) 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.
CSC is subject to the CCAR process, which requires submission of an annual capital plan, and determination of CSC’s stress capital buffer. The plan must include a description of all planned capital actions, including dividends or stock repurchases, over a nine-quarter planning horizon beginning with the first quarter of the calendar year the capital plan is submitted. CSC’s risk-based capital ratios must exceed the regulatory minimum plus the stress capital buffer. The stress capital buffer could make us subject to progressively more stringent constraints on capital actions if we approach our minimum ratios. This could lead to restrictions on our ability to pay or increase dividends or otherwise return capital to stockholders.
If the average of CSC’s total consolidated assets for four consecutive calendar quarters reaches $700 billion, or if the average of cross-jurisdictional activity for four consecutive calendar quarters reaches $75 billion, CSC will become subject to more stringent Category II requirements, including annual stress testing, the advanced approaches framework, and the inability to opt out of including AOCI in regulatory capital calculations. At December 31, 2025, CSC had approximately $491 billion in total assets and cross-jurisdictional activity of approximately $31 billion. See also Part II – Item 7 – Current Regulatory and Other Developments for discussion of regulatory proposals that could, among other things, require the Company to include AOCI in its regulatory capital calculations.
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THE CHARLES SCHWAB CORPORATION
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 with us. 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. We may also determine that it is in the Company’s best interests to settle a matter, such as to avoid protracted litigation, even though the Company may have strong defenses. 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.Other Business Risks
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, including our acquisition of Forge, could have a material impact on our financial position, results of operations, or cash flows. The process of evaluating, negotiating, effecting, and integrating 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. The integration process could result in the disruption of ongoing businesses or changes to inconsistent standards, controls, procedures and policies that could adversely affect our ability to maintain relationships with clients, employees, outsourced service providers and vendors. In addition, an acquisition may cause us to assume liabilities or become subject to litigation or regulatory proceedings or require the amortization of a large amount of acquired intangible assets. Further, we may not realize the anticipated benefits from an acquisition, including our acquisition of Forge, in a timely manner or at all, 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 or part of an entity being acquired or sold. To the extent we enter into an agreement to buy or sell an entity or part of 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.We intend to offer clients direct access to select digital assets, which exposes us to new and uncertain financial, operational, legal, and regulatory risks that could adversely affect our business and financial results.
In 2026, the Company anticipates it will begin offering expanded client access to trading in digital assets including spot trading in select cryptocurrencies. Expansion of digital asset client offerings presents significant new risks to the Company, including risks related to digital asset custody, trading, settlement, and liquidity, and increased risk related to fraud and other illicit activity. Client demand for digital assets is uncertain and may fluctuate significantly due to market volatility, regulatory developments, or changes in investor sentiment. The regulatory landscape for cryptocurrencies is evolving and uncertain, and changes in laws, regulations, or regulatory interpretations could prohibit or limit our ability to offer these products, increase compliance costs, or expose us to increased regulatory scrutiny.
Digital assets function as bearer instruments controlled with private keys, and transactions in digital assets are generally irreversible. Due to the unique nature of digital assets, the loss, theft, compromise, or destruction of private keys could result in
- 18 -THE CHARLES SCHWAB CORPORATIONthe permanent loss of digital assets with no practical means of recovery. Because blockchain technology is relatively new, it is difficult to predict how it might be vulnerable to cybersecurity and fraud risks that could affect our business.
We expect to engage with third-party service providers to facilitate certain activities related to digital assets. These relationships present additional risks, including operational, reputational, and compliance risks that could adversely affect our business. Internal and third-party systems needed to effect client activity in digital assets are vulnerable to operational failures, cyberattacks, and fraud, and we may be held responsible for deficiencies in the controls or regulatory compliance of third-party service providers, even where we do not have direct oversight of their operations. Failure or breach of our or third-party service providers’ systems, cybersecurity controls, or operational processes could result in loss of client digital assets, which may not be recoverable in full or at all. Many crypto industry participants are relatively early-stage companies with limited history. There is no guarantee they will perform as reliably or efficiently as anticipated. Regulatory change could also affect the ability of third-party service providers to continue to operate or provide services for Schwab clients. Such events could result in material financial losses, legal or regulatory claims, and reputational harm, even if we are not at fault.
Our industry is highly competitive and characterized by aggressive price competition.
We operate in a highly competitive environment with a broad array of competitors from large integrated banks to venture-capital-backed private companies. We continually monitor our pricing in relation to competitors and periodically adjust interest rates on deposits and loans, fees for advisory services, expense ratios on mutual funds and ETFs, trade commission rates, and other pricing and incentives to sustain our competitive position. Increased price competition from other financial services firms to attract clients, such as reduced commissions, higher deposit rates, reduced mutual fund or ETF expense ratios, or the increased use of incentives, could impact our results of operations and financial condition.Our stock price has fluctuated historically, and may continue to fluctuate.Factors that may affect trading and the volatility of our stock price include:
• Financial results;
• Business metrics, such as client cash and net new client assets;
• Projections or the failure to meet projections;
• Securities analyst coverage, estimates and results versus estimates;• The announcement of new products, services, acquisitions, or dispositions by us or our competitors;• Declaration of dividends and purchases under the Company’s share repurchase program;
• Sales of a substantial number of shares by large stockholders;
• General stock market activity and industry developments; and
• Other Risk Factors described in this section.
Return of capital to stockholders may depend on our capital position, financial results, market conditions, legal restrictions, and other considerations, and the Company may not complete its full share repurchase authorization. In addition, issuance of additional shares of common or preferred stock or securities convertible or exchangeable into equity securities, including under incentive compensation plans or for acquisitions, could be substantially dilutive to holders of CSC’s common stock.
Item 7 · Management's Discussion & Analysis
+501 paragraphs −525 paragraphs ~501 changed
FY 2023-12-31 (earlier)
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
FORWARD-LOOKING STATEMENTSIn 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,” “expand,” “aim,” “maintain,” “continue,” “seek,” and other similar expressions. In addition, any statements that refer to expectations, projections, or other characterizations of future events or circumstances are forward-looking statements.
These forward-looking statements, which reflect management’s beliefs, objectives, and expectations as of the date hereof, are estimates based on the best judgment of Schwab’s senior management. These statements relate to, among other things:
• Maximizing our market valuation and stockholder returns over time; 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 maintaining our competitive position (see Business Strategy and Competitive Environment, and Products and Services in Part I – Item 1);
• The impact from adjustments related to the Market Risk Rule (see Regulation in Part I – Item 1);
• Expected benefits from the TD Ameritrade acquisition; expected timing for the TD Ameritrade client transitions; deal-related asset attrition; and cost estimates and timing, including acquisition and integration-related costs, capital expenditures, cost synergies, and exit and other related costs (see Business Acquisition in Part I – Item 1; Overview –Integration of TD Ameritrade in Part II – Item 7; and Exit and Other Related Liabilities in Part II – Item 8 – Note 15);
• Actions to streamline our operations and our expectation of incremental run-rate cost savings and the timing and amount of associated exit and related costs (see Overview – Other in Part II – Item 7; and Exit and Other Related Liabilities in Part II – Item 8 – Note 15);
• The outcome and impact of legal proceedings and regulatory matters (see Legal Proceedings in Part I – Item 3; and Commitments and Contingencies in Part II – Item 8 – Note 14);
• Anticipated expenses and investments to support business growth and growth in our client base (see Overview and Results of Operations – Total Expenses Excluding Interest in Part II – Item 7);
• The expected impact of proposed and final rules (see Regulation in Part I – Item 1; and Current Regulatory and Other Developments in Part II – Item 7);
• Net interest revenue; the adjustment of rates paid on client-related liabilities; and outstanding balances and the use of supplemental funding (see Results of Operations – Net Interest Revenue in Part II – Item 7);
• Capital expenditures (see Results of Operations – Total Expenses Excluding Interest in Part II – Item 7);
• Impact from the phase-out of LIBOR (see Risk Management – Phase-out of LIBOR in Part II – Item 7);
• Management of interest rate risk; the impact of changes in interest rates on net interest margin and revenue, bank deposit account fee revenue, economic value of equity, and liability and asset duration (see Risk Management in Part II – Item 7);
• Sources and uses of liquidity and capital; and Tier 1 Leverage Ratio operating objective (see Liquidity Risk, Capital Management, Regulatory Capital Requirements, and Dividends in Part II – Item 7);
• Capital management; the return of capital to stockholders; the migration of IDA balances to our balance sheet; expectations about capital requirements, including AOCI, and meeting those requirements; and plans regarding capital and dividends (see Capital Management – Regulatory Capital Requirements in Part II – Item 7; and Commitments and Contingencies in Part II – Item 8 – Note 14);
• The expected impact of new accounting standards not yet adopted (see Summary of Significant Accounting Policies in Part II – Item 8 – Note 2); and
• The likelihood of indemnification and guarantee payment obligations and clients failing to fulfill contractual obligations (see Commitments and Contingencies in Part II – Item 8 – Note 14 and Financial Instruments Subject to Off-Balance Sheet Credit Risk – Client Trade Settlement in Note 17).
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.
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THE CHARLES SCHWAB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)Important factors that may cause actual results to differ include, but are not limited to:• General market conditions, including the level of interest rates and equity market valuations;• Our ability to attract and retain clients, develop trusted relationships, and grow client assets;
• Client use of our advisory and lending solutions and other products and services;• The level of client assets, including cash balances;• Client sensitivity to deposit rates;• Competitive pressure on pricing, including deposit rates;
• The level and mix of client trading activity, including daily average trades, margin balances, and balance sheet cash;
• Regulatory guidance and adverse impacts from new or changed legislation, rulemaking or regulatory expectations;
• Capital and liquidity needs and management;
• Our ability to manage expenses;
• Our ability to attract and retain talent;
• Our ability to develop and launch new and enhanced products, services, and capabilities, as well as enhance our infrastructure, in a timely and successful manner;• Our ability to monetize client assets;
• Our ability to support client activity levels;• The risk that expected cost synergies and other benefits from the TD Ameritrade acquisition may not be fully realized or may take longer to realize than expected and that integration-related expenses may be higher than expected;
• Increased compensation and other costs due to inflationary pressures;
• The ability to successfully implement integration strategies and plans relating to TD Ameritrade, including client account transitions;
• The timing and scope of integration-related and other technology projects;• Real estate and workforce decisions;• Client cash allocations;
• Migrations of bank deposit account balances (BDA balances);• Balance sheet positioning relative to changes in interest rates;• Interest earning asset mix and growth;
• Our ability to access and use supplemental funding sources;• Prepayment levels for mortgage-backed securities;• Adverse developments in litigation or regulatory matters and any related charges; and
• Potential breaches of contractual terms for which we have indemnification and guarantee obligations.
Certain of these factors, as well as general risk factors affecting the Company, are discussed in greater detail in Risk Factors in Part I – Item 1A.
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 primarily includes unrealized gains and losses on AFS securities and securities transferred from the AFS category to the held to maturity (HTM) category.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 advice solutions at the end of the reporting period.
Bank deposit account balances (BDA balances): Clients’ uninvested cash balances held off-balance sheet in deposit accounts at unconsolidated third-party financial institutions, pursuant to the IDA agreement and agreements formerly in effect with other third-party financial institutions. Average BDA balances represent the daily average balance for the reporting period.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 1/100 th of 1%, or 0.01%.- 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)Client assets: The market value, as of the end of the reporting period, of all client assets in our custody, BDA balances, and proprietary products, which includes both cash and securities. Average client assets are the daily average client asset balance for the reporting period.
Client cash as a percentage of client assets: Calculated as the value, at the end of the reporting period, of all money market fund balances, bank deposits excluding brokered CDs issued by CSB, Schwab One ® balances, BDA balances, and certain cash equivalents divided by client assets.
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. As a Category III banking organization, CSC has elected to exclude AOCI from 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, and activity from off-platform brokered CDs issued by CSB. These flows may span multiple reporting periods.Customer Protection Rule: Refers to Rule 15c3-3 of the Securities Exchange Act of 1934.Daily Average Trades (DATs): Includes daily average revenue trades by clients, trades by clients in asset-based pricing relationships, and all commission-free trades.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 Act): 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.
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): HQLA is defined by the Federal Reserve, but includes assets that are actively traded and readily convertible to cash in times of stress.Interest-bearing liabilities: Primarily includes bank deposits, payables to brokerage clients, Federal Home Loan Bank borrowings, other short-term borrowings, and long-term debt on which Schwab pays interest.Interest-earning assets: Primarily includes cash and cash equivalents, cash and investments segregated, 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 “Baa3” 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.- 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)Margin loans: Money borrowed against the value of certain stocks, bonds, and mutual funds in a client portfolio. The borrowed money can be used to purchase additional securities or to meet short-term financial needs.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): The ratio of the amount of available stable funding relative to the amount of required stable funding.
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: Payments received from trade execution venues to which our broker-dealer subsidiaries send equity and option orders.Pledged Asset Line ® (PAL): A non-purpose revolving line of credit from a banking subsidiary 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.
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 period.
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 Office of the Comptroller of the Currency, 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.- 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)
OVERVIEWManagement 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, 2023, 2022, and 2021 are as follows:
Percent Change 2022-2023 2023 2022 2021Client Metrics
Net new client assets (in billions) (1)(17)% $ 337.2 $ 406.9 $ 516.2
Core net new client assets (in billions) (29)% $ 305.7 $ 427.7 $ 558.2
Client assets (in billions, at year end) 21% $ 8,516.6 $ 7,049.8 $ 8,138.0
Average client assets (in billions) 7% $ 7,793.8 $ 7,292.8 $ 7,493.8
New brokerage accounts (in thousands)
(6)% 3,806 4,044 7,306
Active brokerage accounts (in thousands, at year end) 3% 34,838 33,758 33,165
Assets receiving ongoing advisory services (in billions, at year end) 18% $ 4,338.8 $ 3,673.2 $ 4,064.4
Client cash as a percentage of client assets (at year end) (2)
10.5 % 12.2 % 10.9 %Company Financial Information and MetricsTotal net revenues (9)% $ 18,837 $ 20,762 $ 18,520
Total expenses excluding interest 10% 12,459 11,374 10,807
Income before taxes on income (32)% 6,378 9,388 7,713
Taxes on income (41)% 1,311 2,205 1,858
Net income (29)% $ 5,067 $ 7,183 $ 5,855
Preferred stock dividends and other (24)% 418 548 495
Net income available to common stockholders (30)% $ 4,649 $ 6,635 $ 5,360
Earnings per common share — diluted (27)% $ 2.54 $ 3.50 $ 2.83
Net revenue growth from prior year (9) % 12 % 58 %
Pre-tax profit margin 33.9 % 45.2 % 41.6 %
Return on average common stockholders’ equity 16 % 18 % 11 %
Expenses excluding interest as a percentage of average client assets 0.16 % 0.16 % 0.14 %
Consolidated Tier 1 Leverage Ratio (at year end) 8.5 % 7.2 % 6.2 %
Non-GAAP Financial Measures (3)
Adjusted total expenses (4)
$ 11,029 $ 10,386 $ 9,724
Adjusted diluted EPS $ 3.13 $ 3.90 $ 3.25
Return on tangible common equity 54 % 42 % 22 %
(1) 2023 includes net inflows of $32.5 billion from off-platform brokered CDs issued by CSB and $12.0 billion from a mutual fund clearing services client and outflows of $13.0 billion from an international relationship. 2022 includes outflows of $20.8 billion from certain mutual fund clearing services clients. 2021 includes outflows of $42.0 billion from certain mutual fund clearing services clients.
(2) Beginning in 2023, client cash as a percentage of client assets excludes brokered CDs issued by CSB. Prior periods have been recast to reflect this change.
(3) Beginning in 2023, adjustments made to GAAP financial measures also include restructuring costs. See Non-GAAP Financial Measures for further details and a reconciliation of such measures to GAAP reported results.
(4) Adjusted total expenses is a non-GAAP financial measure adjusting total expenses excluding interest. See Non-GAAP Financial Measures.
2023 Compared to 2022
Through an uneven environment in 2023, with shifting views on the trajectory of the U.S. economy, persistent geopolitical unrest, and turmoil beginning early in the year within the banking sector, our “no trade-offs” value proposition continued to
- 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)resonate with investors. The Federal Reserve raised the Federal Funds rate four times in the first three quarters of 2023 for a total of 100 basis points before holding rates unchanged since July. Although equity markets were volatile during 2023,
ultimate returns were strong with the S&P 500 ® rising 24% and the NASDAQ Composite ® increasing 43%. Investor sentiment was also volatile throughout 2023; strongly bearish in the first quarter before recovering in the second, then declining again in the third quarter. Investor sentiment recovered significantly in the fourth quarter to end the year with a solid bullish viewpoint.
Despite this mixed sentiment, our clients remained engaged with the markets and with Schwab. Clients entrusted us with $305.7 billion in core net new assets in 2023. Total client assets reached $8.52 trillion as of December 31, 2023, rising 21% from year-end 2022 as a result of asset gathering and market gains, partially offset by some expected deal-related attrition from clients originating at TD Ameritrade. Trading volume declined somewhat from the prior year, as DATs were 5.4 million in 2023, down 9% from 2022. Clients opened 3.8 million new brokerage accounts, bringing active brokerage accounts to 34.8 million at year-end, up 3% year-over-year. Clients sought to take advantage of higher market interest rates in 2023, and we saw significant client cash reallocation from our sweep products into higher-yielding alternatives offered by Schwab. While bank sweep deposits and payables to brokerage clients decreased by a total of $126.1 billion during 2023, client assets invested in Schwab’s proprietary money market funds and fixed income securities increased by a total of $383.8 billion.
Schwab’s financial performance during 2023 reflected the challenges of navigating a market environment shaped by the Federal Reserve’s interest rate tightening policy and the follow-on effects stemming from the regional banking crisis beginning in March. Schwab’s net income totaled $5.1 billion in 2023 and diluted EPS was $2.54, down 29% and 27%, respectively, from the prior year. Adjusted diluted EPS (1) was $3.13 in 2023, down 20% from $3.90 in 2022.
Total net revenues were $18.8 billion in 2023, down 9% from the prior year as client cash realignment activity impacted our net interest revenue. Net interest revenue was $9.4 billion in 2023, down 12% from the prior year, as the benefits of rising rates were more than offset by increased utilization of higher-cost supplemental funding and lower interest-earning assets. Asset management and administration fees totaled $4.8 billion in 2023, rising 13% from 2022, primarily as a result of growth in money market funds, as well as improvement in equity markets and growth in our other proprietary fund products, partially offset by lower balances of certain third-party funds. Trading revenue was $3.2 billion in 2023, down 12% from 2022, due primarily to mix of client trading activity and overall lower trading volume. Bank deposit account fee revenue was $705 million in 2023, down 50% from the prior year due to lower average BDA balances and lower net yields, as well as $97 million in one-time breakage fees related to ending our arrangements with certain third-party banks in the first quarter of 2023. BDA balances totaled $97.5 billion at December 31, 2023, down 23% from year-end 2022 due primarily to client cash allocation decisions.
Total expenses excluding interest were $12.5 billion in 2023, increasing 10% from 2022. This increase was due primarily to restructuring charges incurred in the second half of 2023, higher regulatory fees and assessments due primarily to an increase in FDIC assessments including the recognition of a $172 million special assessment in the fourth quarter, as well as higher expenses for compensation and benefits and depreciation and amortization, due primarily to growth in average headcount and investment in technology to support growth in our client base and the TD Ameritrade integration. Adjusted total expenses (1) were $11.0 billion in 2023, higher by 6% from 2022. Acquisition and integration-related costs were $401 million in 2023, up 2% from 2022, and amortization of acquired intangibles was $534 million, down 10% from 2022 as certain assets from the TD Ameritrade acquisition were fully amortized beginning in the fourth quarter of 2022. Beginning in the third quarter of 2023, adjusted total expenses (1) also excludes restructuring costs, which totaled $495 million in 2023, related to efforts to achieve run-rate cost savings in preparation for post-integration of TD Ameritrade.
Return on average common stockholders’ equity was 16% for 2023, down from 18% in 2022. Return on tangible common equity (1) (ROTCE) was 54% in 2023, up from 42% in 2022. These changes primarily reflected lower average stockholders’ equity and lower net income in 2023. Average stockholders’ equity was lower in 2023 due to a year-over-year decrease in average AOCI driven by unrealized losses on our AFS investment securities portfolio and securities transferred from AFS to HTM in 2022 (see Item 8 – Note 5).
Throughout 2023, the Company continued its diligent approach to balance sheet management and sought to prioritize flexibility. During 2023, we issued $6.2 billion in senior notes to prepare for upcoming maturities as well as provide additional liquidity during the larger TD Ameritrade conversion weekends. Total balance sheet assets decreased 11% from year-end 2022 to $493.2 billion at December 31, 2023, due primarily to client cash realignment amid the higher interest rate environment. To assist in facilitating these client cash movements from sweep products to high-yielding cash and fixed income alternatives, the
(1) Adjusted diluted EPS, adjusted total expenses, and return on tangible common equity are non-GAAP financial measures. See Non-GAAP Financial Measures for further details and a reconciliation of such measures to GAAP reported results.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)Company utilized supplemental funding sources, including FHLB borrowings and issuances of brokered CDs. As realignment activity significantly decreased in the second half of the year, by year-end, we reduced the total outstanding balance of such supplemental sources by approximately 18% from the peak balances reached in May 2023. Driven by a combination of the Company’s net income and also a smaller balance sheet in 2023, our consolidated Tier 1 Leverage Ratio increased to 8.5% as of year-end.
2022 Compared to 2021
Schwab’s 2022 financial results reflected strong performance against a challenging economic backdrop. Our clients faced a very difficult environment throughout the year, encountering inflation and global economic concerns, with Russia’s invasion of Ukraine exacerbating the impact. Equity markets suffered their worst year since 2008, with the S&P 500 ® and NASDAQ Composite ® contracting 19% and 33%, respectively, in 2022, while investor sentiment remained bearish throughout the year. At the same time, the Federal Reserve raised short-term rates at the fastest pace in 40 years, ultimately increasing the Fed Funds rate seven times to reach an upper bound of 4.50% in December. Additionally, uncertainty around future macroeconomic growth increased in the second half of the year, weighing on longer-term rates and leading to an inverted yield curve.
Through these challenges, clients continued to turn to Schwab for help in achieving their financial goals. Core net new assets in 2022 totaled $427.7 billion, representing an organic growth rate of 5%, which included significant tax-related outflows in April. Total client assets were $7.05 trillion at December 31, 2022, down 13% from year-end 2021, as market value declines of approximately $1.5 trillion in client assets more than offset the Company’s continued asset gathering during the year. DATs in 2022 were 5.9 million, down 9% from the prior year, as trading volume subsided from the extraordinary levels seen in 2021. New brokerage accounts were also down from the prior year, as clients opened 4.0 million new brokerage accounts in 2022; active brokerage accounts totaled 33.8 million at December 31, 2022, up 2% from year-end 2021.
Schwab’s financial performance in 2022 reflected the resiliency of our diversified financial model in a challenging macroeconomic environment and impacts from higher market interest rates. Net income totaled $7.2 billion in 2022 and diluted EPS was $3.50, representing year-over-year growth of 23% and 24%, respectively. Adjusted diluted EPS (1) was $3.90 in 2022, up from $3.25 in 2021.
Total net revenues rose 12% year-over-year to $20.8 billion in 2022. Net interest revenue increased to $10.7 billion, rising 33% from 2021 as significantly higher market rates more than offset the impact of balance sheet contraction due to client cash allocation decisions. Asset management and administration fees totaled $4.2 billion in 2022, down 1% year-over-year as lower market valuations throughout the year offset the benefit of lower money market fund fee waivers. Trading revenue declined by 12% to $3.7 billion in 2022, due to lower DATs relative to the extraordinary trading volume seen in 2021 and changes in mix of client trading activity. Bank deposit account fee revenue was $1.4 billion in 2022, up 7% from 2021 as higher average net yields more than offset lower average BDA balances. BDA balances totaled $126.6 billion at December 31, 2022, down 20% from year-end 2021, reflecting client cash allocation decisions and migrations to our balance sheet.
Total expenses excluding interest amounted to $11.4 billion in 2022, increasing 5% from 2021, and adjusted total expenses (1) were $10.4 billion, up 7% from the prior year. These increases reflected higher compensation and benefits expense and higher occupancy and equipment expense, as we continued to invest in our people and technology to support ongoing growth in our client base. These increases were partially offset by lower other expense, which included a charge of approximately $200 million in 2021 for a regulatory matter settled in 2022. Acquisition and integration-related costs and amortization of acquired intangibles were $392 million and $596 million, respectively, in 2022, compared with $468 million and $615 million, respectively, in 2021.
Return on average common stockholders’ equity grew to 18% in 2022 from 11% in 2021, while ROTCE (1) increased to 42% in 2022 compared with 22% in 2021. The increases in both return on average common stockholders’ equity and ROTCE were due primarily to lower stockholders’ equity and growth in net income. Stockholders’ equity declined in 2022 primarily due to a significant decrease in AOCI, as higher market interest rates resulted in larger unrealized losses on our AFS investment securities portfolio. In January and November 2022, the Company transferred $108.8 billion and $79.8 billion, respectively, of investment securities from the AFS category to the HTM category (see Capital Management and Item 8 – Note 5).
(1) Adjusted diluted EPS, adjusted total expenses, and return on tangible common equity are non-GAAP financial measures. See Non-GAAP Financial Measures for further details and a reconciliation of such measures to GAAP reported results.
- 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)The Company continued its diligent approach to balance sheet management in 2022, maintaining appropriate capital and liquidity to support client activity and returning excess capital to stockholders. As market rates rose from near-zero levels at the
beginning of the year, clients allocated a growing portion of their assets to higher-yielding cash and fixed income alternatives.
Total balance sheet assets decreased 17% year-over-year to $551.8 billion at December 31, 2022 as a result of these client cash allocation decisions and unrealized losses on AFS securities, both resulting primarily from higher market interest rates. To facilitate these client cash movements, we took steps to enhance our liquidity by limiting new portfolio investments to help build available cash and utilizing supplemental funding sources including FHLB advances and brokered CDs.
We increased our common stock dividend by 22% during 2022, and implemented a $15 billion share repurchase authorization in July. Repurchases under this new authorization totaled 47 million shares for $3.4 billion in 2022. The Company issued $750 million in preferred stock in the first quarter of 2022, and redeemed a total of $1.0 billion of preferred stock during the second half of the year. Inclusive of these actions, the Company’s Tier 1 Leverage Ratio finished the year at 7.2%.
Integration of TD Ameritrade
The Company has made significant progress in its integration of TD Ameritrade. Over the course of 2023, the Company transitioned approximately $1.6 trillion in client assets across more than 15 million client accounts, including 7,000 RIAs, from TD Ameritrade to the Schwab platform across four transition groups. The Company has now completed the transition of RIAs and approximately 90% of all TD Ameritrade client accounts. In connection with the completed 2023 transitions, we have experienced some deal-related attrition of client assets from retail accounts and RIAs, which have been below our initial estimates when we announced the acquisition. The Company expects to complete the remaining client transitions from TD Ameritrade to Schwab in a final transition group in May 2024.
The Company continues to expect total acquisition and integration-related costs and capital expenditures will be between $2.4 billion and $2.5 billion. The Company’s estimates of the nature, amounts, and timing of recognition of acquisition and integration-related costs remain subject to change based on certain factors, including the duration and complexity of the remaining integration process and the continued uncertainty of the economic environment. More specifically, factors that could cause variability in our expected acquisition and integration-related costs as we prepare for the last transition group and remaining integration work include the level of employee attrition, the complexity to wind-down the operations of the TD Ameritrade broker-dealers and related technology, and real estate-related exit cost variability.
Acquisition and integration-related costs, which are inclusive of related exit costs, totaled $401 million, $392 million, and $468 million in 2023, 2022, and 2021, respectively, and the Company expects to incur acquisition and integration-related costs of approximately $200 million in 2024. Over the course of the integration, we continue to expect to realize annualized cost synergies of between $1.8 billion and $2.0 billion, and, through December 31, 2023, we have achieved approximately 80% of this amount on an annualized run-rate basis. The Company expects to achieve the vast majority of the remaining estimated cost synergies by the end of 2024, with anticipated full year synergy realization beginning in 2025. The estimated timing and amounts of synergy realization remain subject to change as we progress through the remaining stages of the integration. See also Results of Operations – Total Expenses Excluding Interest, Non-GAAP Financial Measures, and Item 8 – Note 15.
Other
In addition to cost synergies directly related to the integration of TD Ameritrade, the Company has taken incremental actions to streamline its operations to prepare for post-integration, including through position eliminations and decreasing its real estate footprint. Through these actions, the Company expects to realize at least $500 million of incremental run-rate cost savings in addition to integration synergies. In order to achieve these cost savings, the Company expects to incur total exit and related costs, primarily related to employee compensation and benefits and facility exit costs of approximately $500 million, inclusive of costs recognized through December 31, 2023 of $495 million. The Company anticipates the remaining costs, primarily related to real estate, will be incurred during 2024. Refer to Results of Operations – Total Expenses Excluding Interest and Item 8 – Note 15 for additional information.
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THE CHARLES SCHWAB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)CURRENT REGULATORY AND OTHER DEVELOPMENTSIn November 2023, the FDIC approved a final special assessment to recover losses incurred by the DIF to protect uninsured depositors due to the March 2023 closures of two banks. The pre-tax impact of the final rule was $172 million. This special assessment is tax deductible and was recognized fully in earnings in the fourth quarter of 2023. The special assessment will be paid over eight quarters beginning in the first quarter of 2024, subject to potential extension and a potential one-time final special assessment for any shortfall in the DIF.
In October 2023, following previous attempts to expand fiduciary regulation for broker-dealers, the U.S. Department of Labor released another proposed rule to significantly broaden the definition of “fiduciary” under the Employee Retirement Income Security Act of 1974. Among other requirements, the rule would subject broker-dealers who provide non-discretionary investment advice to retirement plans and accounts to a “best interest” standard. The rule could significantly impact the products, services, and support that firms can make available to retirement investors, and the Company continues to evaluate such impacts and the related implementation and operational issues, pending final adoption.
In October 2023, the U.S. federal banking agencies issued a final rule that makes extensive revisions to the regulations implementing the CRA. These revisions include the delineation of assessment areas, the overall evaluation framework and performance standards and metrics, the definition of community development activities and data collection and reporting, and requires significant new lending by banks to low-and-moderate income communities. The new rule generally becomes effective on January 1, 2026, with its additional data collection and reporting requirements effective January 1, 2027. The Company has begun to prepare for complying with the requirements included in the new rule by the applicable effective dates. We do not expect the new rule will have a material impact on the Company’s business, financial condition, or results of operations.
In August 2023, the U.S. federal banking agencies issued a proposed rulemaking on long-term debt requirements for certain large banking organizations. Among other things, the proposed rule would require CSC to maintain outstanding minimum levels of eligible long-term debt, as defined by the proposed rule, issued externally. The proposed rule would also require our banking subsidiaries to maintain outstanding minimum levels of eligible long-term debt, which our banking subsidiaries would be required to issue internally to CSC. The proposed rule would be phased-in over a three-year transition period. The comment period for the proposed rule ended on January 16, 2024 and the rule proposal is subject to further modification. The proposed rule could have a significant impact on the amount of debt that CSC and our banking subsidiaries are required to maintain.
In July 2023, the U.S. federal banking agencies issued a notice of proposed rulemaking with amendments to the regulatory capital rules. Among other things, the proposed rules would require us to include AOCI in regulatory capital and to calculate our risk-weighted assets using a revised risk-based approach, a component of which is based on operational risk, phased in over a three-year transition period beginning July 1, 2025 and ending July 1, 2028. The comment period for the proposed rules ended on January 16, 2024. The impact of the proposal would be significant to Schwab, as the proposed rules could increase regulatory capital requirements for consolidated CSC and our banking subsidiaries. In anticipation of the rules being adopted, the Company’s capital management for consolidated CSC and our banking subsidiaries now incorporates measures that are inclusive of AOCI. See Capital Management for additional information.
In December 2022, the SEC proposed a set of four related equity market structure rules that would make significant changes to how national market system (NMS) stock orders are priced, executed and reported. The four proposed rules are described below.
• The “Order Competition Rule” would require that, before most individual investors’ orders could be executed internally by a trading center (like wholesaler market makers), those orders must first be exposed to a qualifying order-by-order auction in which both market makers and institutional investors can participate.
• “Regulation Best Execution” would establish an SEC-level best execution standard (in addition to the existing FINRA and MSRB best execution rules) for broker-dealers and require them to establish, maintain, and enforce written policies and procedures addressing how the broker-dealer will comply with the best execution standard and make routing or execution decisions for customer orders. Regulation Best Execution would apply not only to equities, but to all securities.
• Amendments to Rule 605 of Regulation NMS requiring enhanced disclosures of order execution quality for large brokers that handle retail orders.
• A rule to (i) amend minimum pricing increments (or tick sizes) that would apply to both the quoting and trading of NMS stocks, (ii) reduce the exchange access fee caps, and (iii) require transparency of odd-lots.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)The comment periods for the proposed rules ended on March 31, 2023. While the impacts to Schwab of the proposed rules cannot be fully assessed until final rules are released, as proposed, the rules would have a significant impact to numerous aspects of critical equity market structure and the execution of orders for retail investors. Among other impacts, certain of the proposed rules would likely result in increased transaction costs for retail investors which could affect client investment and trading decisions, and would require substantial operational changes for financial intermediaries including the Company.
In November 2022, the SEC proposed a rule that would require substantial changes to the liquidity risk management programs for open-end mutual funds other than money market funds (funds) and require them to implement “swing pricing” and impose a “hard close” on the acceptance of purchase and redemption orders. Swing pricing would require funds that are not exchange-traded funds or money market funds to adjust the fund’s current net asset value (NAV) per share by a “swing factor” if the fund has either (i) net redemptions (no threshold) or (ii) net purchases that exceed a specified threshold (2% of the fund’s net assets). To implement the swing pricing requirements, the proposed rule also would require that a fund, its transfer agent, or a registered clearing agency receive purchase and redemption orders prior to the time the fund has established for determining the NAV, typically market close, in order to receive a given day’s NAV (a “hard close”). Current practices permit fund orders received by a financial intermediary prior to the fund cut-off time to be transmitted to the fund after the fund cut-off time and still receive that day’s NAV. Under the proposed rule, orders received by the fund, its transfer agent or registered clearing agency after the fund cut-off time would receive the next day’s NAV. The comment period for the proposed rule ended on February 14, 2023. While the impacts to Schwab of the proposed rule cannot be fully assessed until the final rule is released, we believe the proposed rule could impact investor interest in mutual funds, which could lead to changes in investor behavior. In addition, implementation of the proposed rule would require that financial intermediaries, including the Company, modify order entry systems and operational workflow to comply with the requirements.RESULTS OF OPERATIONS
Total Net Revenues
The following table presents a comparison of revenue by category:Year Ended December 31, 2023 2022 2021
Percent Change 2022-2023 Amount % of Total Net Revenues Amount % of Total Net Revenues Amount % of Total Net RevenuesNet interest revenueInterest revenue 32 % $ 16,111 86 % $ 12,227 59 % $ 8,506 46 %
Interest expense N/M (6,684) (36) % (1,545) (8) % (476) (3) %
Net interest revenue (12) % 9,427 50 % 10,682 51 % 8,030 43 %Asset management and administration feesMutual funds, ETFs, and collective trust funds (CTFs)
25 % 2,563 13 % 2,055 10 % 1,961 11 %
Advice solutions 1 % 1,868 10 % 1,854 9 % 1,993 11 %
Other 6 % 325 2 % 307 1 % 320 1 %
Asset management and administration fees 13 % 4,756 25 % 4,216 20 % 4,274 23 %Trading revenueCommissions (10) % 1,601 9 % 1,787 9 % 2,050 11 %
Order flow revenue (19) % 1,404 7 % 1,738 8 % 2,053 11 %
Principal transactions 52 % 225 1 % 148 1 % 49 —
Trading revenue
(12) % 3,230 17 % 3,673 18 % 4,152 22 %
Bank deposit account fees (50) % 705 4 % 1,409 7 % 1,315 7 %
Other (8) % 719 4 % 782 4 % 749 5 %
Total net revenues (9) % $ 18,837 100 % $ 20,762 100 % $ 18,520 100 %
N/M Not meaningful. Percentage changes greater than 200% are presented as not meaningful.Net Interest RevenueSchwab’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. Fees earned and expenses incurred on securities lending and borrowing activities are conducted by our broker-dealer subsidiaries using assets held in client brokerage accounts. Schwab’s interest-bearing liabilities are comprised of bank deposits, which include brokered
- 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)CDs issued by CSB; payables to brokerage clients; FHLB borrowings, other short-term borrowings (e.g., commercial paper, repurchase agreements, other secured borrowings); and long-term debt. Schwab deploys the funds from these sources into the assets outlined above.
As Schwab builds its client base, we attract new client sweep cash, which is a primary driver of funding balance sheet growth. We do not use short-term, wholesale borrowings to support our long-term investment activity, but may use such funding for short-term liquidity purposes or to provide temporary funding as we have in 2022 and 2023. Non-interest-bearing funding sources include stockholders’ equity, certain client cash balances, and other miscellaneous liabilities.
Revenue on interest-earning assets is affected by various factors, such as the composition of assets, prevailing interest rates and spreads at the time of origination or purchase, changes in interest rates on cash and cash equivalents, floating-rate securities and loans, and changes in prepayment levels for mortgage-backed and other asset-backed securities and loans. Schwab establishes the rates paid on client-related liabilities, and management expects that it will generally adjust the rates paid on these liabilities at some fraction of any movement in short-term rates. Interest expense on long-term debt, FHLB borrowings, other short-term borrowings, and other funding sources is impacted by market interest rates at the time of borrowing and changes in interest rates on floating-rate liabilities. See also Risk Management – Market Risk.
Interest rates increased significantly beginning late in the first quarter of 2022 through the third quarter of 2023. Short-term rates were near zero until the Federal Reserve began an aggressive tightening cycle in March 2022 in response to rising inflation, ultimately increasing the federal funds target overnight rate eleven times between March 2022 and July 2023 for a total increase of 525 basis points and maintaining the upper bound of the target overnight rate at 5.50% through year-end 2023. Long-term rates increased throughout 2022 and 2023, generally at a slower pace, thus leading to an inverted yield curve.
Schwab’s average interest-earning assets in 2023 were lower compared with 2022, primarily due to clients’ reallocation of cash from sweep products to higher-yielding investment solutions in the second half of 2022 and during 2023, which resulted primarily from the rapid increases to the federal funds overnight rate. These changes in client cash allocations reduced average balances of bank deposits and payables to brokerage clients. To support this client cash allocation activity, the Company has been utilizing temporary supplemental funding beginning in the fourth quarter of 2022 and throughout 2023, including drawing upon FHLB secured lending facilities and issuing brokered CDs. The average pace of client cash allocation out of sweep products into higher-yielding investment solutions decreased significantly beginning in the second quarter of 2023, and, apart from an increase in August following the Federal Reserve’s July rate increase, continued to decline during the second half of 2023. In the fourth quarter of 2023, the Company saw bank deposits and payables to brokerage clients increase by a total of $17.5 billion, or 5%, due in part to typical seasonal cash inflows near year-end.
Schwab saw strength in net new client assets during 2022, which, along with transfers of BDA balances to the Company’s balance sheet (see Bank Deposit Account Fees), drove growth in Schwab’s average interest-earning assets in 2022 relative to 2021. Partially offsetting this growth, we experienced significant seasonal tax outflows in the second quarter of 2022, and, due to the rapid increases to the federal funds overnight rate, changes in client cash allocations increased in the second half of 2022 which resulted in a total decrease in bank deposits and payables to brokerage clients of 18% since year-end 2021. During 2022, the Company increased its cash holdings and reduced the duration of incremental investment securities purchases to provide flexibility to help support such changes in client cash allocations associated with higher short-term interest rates.
- 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)
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, 2023 2022 2021Average Balance Interest Revenue/ Expense Average Yield/ Rate Average Balance Interest Revenue/ Expense Average Yield/ Rate Average Balance Interest Revenue/ Expense Average Yield/ Rate
Interest-earning assetsCash and cash equivalents $ 37,846 $ 1,894 4.94 % $ 57,163 $ 812 1.40 % $ 40,325 $ 40 0.10 %
Cash and investments segregated 28,259 1,355 4.73 % 49,430 691 1.38 % 43,942 24 0.05 %
Receivables from brokerage clients 61,914 4,793 7.64 % 75,614 3,321 4.33 % 77,768 2,455 3.11 %
Available for sale securities (1,2)
137,178 2,987 2.17 % 260,392 4,139 1.58 % 357,122 4,641 1.30 %
Held to maturity securities (1,2)
165,634 2,872 1.73 % 112,357 1,688 1.50 % — — —
Bank loans 40,234 1,664 4.14 % 38,816 1,083 2.79 % 28,789 620 2.15 %
Total interest-earning assets 471,065 15,565 3.28 % 593,772 11,734 1.96 % 547,946 7,780 1.41 %
Securities lending revenue 419 471 720
Other interest revenue 127 22 6
Total interest-earning assets $ 471,065 $ 16,111 3.39 % $ 593,772 $ 12,227 2.04 % $ 547,946 $ 8,506 1.54 %Funding sources
Bank deposits (3)$ 306,505 $ 3,363 1.10 % $ 424,168 $ 723 0.17 % $ 381,549 $ 54 0.01 %
Payables to brokerage clients 66,842 271 0.41 % 97,825 123 0.13 % 91,667 9 0.01 %
Other short-term borrowings (5)
7,144 375 5.25 % 2,719 48 1.75 % 3,040 9 0.30 %
Federal Home Loan Bank borrowings (4,5)
34,821 1,810 5.14 % 2,274 106 4.59 % — — —
Long-term debt 22,636 715 3.16 % 20,714 498 2.40 % 17,704 384 2.17 %
Total interest-bearing liabilities 437,948 6,534 1.49 % 547,700 1,498 0.27 % 493,960 456 0.09 %
Non-interest-bearing funding sources 33,117 46,072 53,986
Securities lending expense 147 48 24
Other interest expense 3 (1) (4)
Total funding sources $ 471,065 $ 6,684 1.41 % $ 593,772 $ 1,545 0.26 % $ 547,946 $ 476 0.09 %
Net interest revenue $ 9,427 1.98 % $ 10,682 1.78 % $ 8,030 1.45 %
(1) Amounts have been calculated based on amortized cost. Interest revenue on investment securities is presented net of related premium amortization.
(2) During 2022, the Company transferred a portion of its investment securities designated as AFS to the HTM category, as described in Item 8 – Note 5.
(3) Average balance includes $36.0 billion and $437 million of brokered CDs in 2023 and 2022, respectively.
(4) Average balance and interest revenue/expense was less than $500 thousand in the period or periods presented.
(5) Beginning in 2023, FHLB borrowings are presented separately from other short-term borrowings. Prior period amounts have been reclassified to reflect this change.
Net interest revenue decreased $1.3 billion, or 12%, in 2023 from 2022 primarily due to increased utilization of higher-cost supplemental funding sources to support client cash allocations in the rising rate environment, and lower average interest-earning assets, which more than offset the benefits of higher average yields on interest-earning assets. Net premium amortization of investment securities decreased to $830 million in 2023 from $1.4 billion in 2022 as a result of increases in market interest rates and a smaller investment securities portfolio. Average interest-earning assets for 2023 were lower by 21% compared to 2022, which was primarily due to lower bank deposits and payables to brokerage clients as a result of clients allocating cash out of sweep products into higher-yielding investment solutions due to higher market interest rates.
Net interest margin increased to 1.98% in 2023, from 1.78% in 2022, as higher market interest rates improved yields on interest-earning assets, which more than offset the higher rates paid across interest-bearing funding sources.
The Company’s higher average balances in 2023 relative to 2022 of FHLB borrowings, repurchase agreements, and brokered CDs resulted in higher funding costs. The Company prioritizes repayment of the outstanding balances of its supplemental funding sources, and during the second half of 2023, the total outstanding balance of these funding sources decreased by $17.5 billion. Our use and the financial impacts of such supplemental funding is dependent on several factors, including the volume and pace of clients’ cash allocation activity, which is driven primarily by changes in market interest rates, as well as asset gathering. While client cash realignment activity has slowed significantly since the second quarter of 2023, continued uncertainty remains, including in regard to the path of market interest rates and client behavior, which will significantly impact our utilization of supplemental funding sources. The impacts to net interest revenue of using supplemental funding sources also depend on the type of funding source used and levels of interest rates. The Company currently expects its outstanding balances of supplemental funding sources to decrease over time. Certain amounts outstanding at December 31, 2023 will require rollover into new borrowings, the amount and costs of which will depend on the above noted factors. See also Risk Management –
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Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)Liquidity Risk, Item 8 – Note 11 Bank Deposits, and Item 8 – Note 12 Borrowings for additional information on these and other funding sources.
Net interest revenue increased $2.7 billion, or 33%, in 2022 from 2021 primarily due to higher average yields on interest-earning assets as a result of higher market interest rates. Net premium amortization of investment securities decreased to $1.4 billion in 2022 from $2.3 billion in 2021. These benefits were partially offset by higher rates paid on funding sources, higher average FHLB borrowings and long-term debt outstanding, and lower balances of margin loans and lower securities lending revenue due to decreased market demand.
Average interest-earning assets for 2022 were higher by 8%, compared to 2021. This increase was primarily due to higher average balances of bank deposits and payables to brokerage clients, which resulted from net new client asset inflows as well as transfers of BDA balances to our balance sheet during 2022. These year-over-year increases in average balances were offset by client cash allocation decisions in response to higher short-term market interest rates during 2022, as clients moved certain cash balances out of bank deposits and payables to brokerage clients.
Net interest margin increased to 1.78% in 2022, from 1.45% in 2021. Higher market interest rates improved yields on interest-earning assets, which more than offset the higher rates paid across interest-bearing funding sources.Asset Management and Administration Fees
Asset management and administration fees include mutual fund, ETF, and CTF service fees and fees for other asset-based financial services provided to individual and institutional clients. Schwab earns mutual fund, ETF, and CTF 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, ETFs, and CTFs, as those amounts, net of program fees, are credited to the fund shareholders. Proprietary CTFs may, but generally do not, directly participate in securities lending. The fair values of client assets included in proprietary and third-party mutual funds, ETFs, and CTFs 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, 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.- 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)The following table presents asset management and administration fees, average client assets, and average fee yields:Year Ended December 31, 2023 2022 2021Average Client Assets Revenue Average Fee Average Client Assets Revenue Average Fee Average Client Assets Revenue Average FeeSchwab money market funds before fee waivers $ 391,864 $ 1,034 0.26 % $ 179,791 $ 499 0.28 % $ 155,821 $ 457 0.29 %
Fee waivers — (57) (326)
Schwab money market funds 391,864 1,034 0.26 % 179,791 442 0.25 % 155,821 131 0.08 %
Schwab equity and bond funds, ETFs, and CTFs 471,832 382 0.08 % 433,005 364 0.08 % 423,999 380 0.09 %Mutual Fund OneSource ® and other NTF funds (1)249,131 657 0.26 % 202,015 602 0.30 % 229,342 724 0.32 %Other third-party mutual funds and ETFs (1)640,689 490 0.08 % 768,871 647 0.08 % 898,248 726 0.08 %Total mutual funds, ETFs, and CTFs (2)$ 1,753,516 2,563 0.15 % $ 1,583,682 2,055 0.13 % $ 1,707,410 1,961 0.11 %
Advice solutions (2)
Fee-based $ 458,114 1,868 0.41 % $ 441,336 1,854 0.42 % $ 452,503 1,993 0.44 %
Non-fee-based 96,633 — — 89,525 — — 89,911 — —
Total advice solutions $ 554,747 1,868 0.34 % $ 530,861 1,854 0.35 % $ 542,414 1,993 0.37 %Other balance-based fees (3)608,170 254 0.04 % 561,416 244 0.04 % 614,787 259 0.04 %Other (4)71 63 61
Total asset management and administration fees $ 4,756 $ 4,216 $ 4,274
(1) In 2022 and 2023, includes transfers from other third-party mutual funds and ETFs to Mutual Fund OneSource ® and other NTF funds.
(2) Average client assets for advice solutions may also include the asset balances contained in the mutual fund and/or ETF categories listed above.(3) Includes various asset-related fees, such as trust fees, 401(k) recordkeeping fees, and mutual fund clearing fees and other service fees.
(4) Includes miscellaneous service and transaction fees relating to mutual funds and ETFs that are not balance-based.Asset management and administration fees increased by $540 million, or 13%, in 2023 from 2022, primarily as a result of higher balances in Schwab money market funds and the elimination of fee waivers on those funds as well as higher average client asset balances due to stronger equity markets. Money market fund balances increased in 2023 as clients shifted their cash allocations to higher-yielding investment solutions, and money market fund fee waivers were eliminated during 2022, both due primarily to the Federal Reserve’s increases to the federal funds target overnight rate. The increases in asset management and administration fees in 2023 were also due to growth in Schwab equity and bond funds, ETFs, and CTFs, partially offset by lower balances of certain third-party mutual funds and ETFs.
Asset management and administration fees declined by $58 million, or 1%, in 2022 from 2021, due to lower balances in Mutual Fund OneSource ® and other third-party mutual funds, as well as advice solutions, relative to 2021. Balances declined primarily due to equity market weakness during 2022, which negatively impacted client asset valuations. These decreases offset the benefit of lower money market fund fee waivers, which were eliminated during the second quarter of 2022 as a result of the Federal Reserve’s increases to the federal funds target overnight rate.
The following table presents a roll forward of client assets for the Schwab money market funds, Schwab equity and bond funds, ETFs, and CTFs, and Mutual Fund OneSource ® and other NTF funds. The following funds generated 44%, 33%, and 29% of the asset management and administration fees earned during 2023, 2022, and 2021, respectively:Schwab Money Schwab Equity and Mutual Fund OneSource ®
Market Funds Bond Funds, ETFs, and CTFs and Other NTF FundsYear Ended December 31, 2023 2022 2021 2023 2022 2021 2023 2022 2021
Balance at beginning of period $ 278,926 $ 146,509 $ 176,089 $ 412,942 $ 454,864 $ 341,689 $ 235,738 $ 234,940 $ 223,857
Net inflows (outflows) 180,513 130,483 (29,621) 23,301 35,156 48,291 (28,741) (43,851) (15,760)Net market gains (losses) and other (1)16,970 1,934 41 69,906 (77,078) 64,884 99,225 44,649 26,843
Balance at end of period $ 476,409 $ 278,926 $ 146,509 $ 506,149 $ 412,942 $ 454,864 $ 306,222 $ 235,738 $ 234,940
(1) Includes $39.8 billion and $77.7 billion of transfers from other third-party mutual funds and ETFs to Mutual Fund OneSource ® and Other NTF Funds in 2023 and 2022, respectively.Trading RevenueTrading revenue includes commissions, order flow revenue, and principal transaction revenues. Commission revenue is affected by volume and mix of trades executed. Order flow revenue is comprised of payments received from trade execution venues to which our broker-dealer subsidiaries send equity and option orders. Order flow revenue is affected by volume and mix of client trades, as well as pricing received from trade execution venues. Principal transactions revenue is recognized primarily as a result of accommodating clients’ fixed income trading activity, and includes adjustments to the fair value of securities positions
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THE CHARLES SCHWAB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)
held to facilitate such client trading activity. Principal transactions revenue also includes unrealized gains and losses on cash and investments segregated for regulatory purposes.
The following tables present trading revenue, trade details, and related information:
Year Ended December 31, Percent Change 2022-2023 2023 2022 2021
Commissions (10) % $ 1,601 $ 1,787 $ 2,050Order flow revenueOptions (19) % 949 1,170 1,320
Equities (20) % 455 568 733
Total order flow revenue (19) % 1,404 1,738 2,053
Principal transactions 52 % 225 148 49
Total trading revenue (12) % $ 3,230 $ 3,673 $ 4,152
Year Ended December 31, Percent Change 2022-2023
2023 2022 2021
DATs (in thousands) (9) % 5,394 5,925 6,507Product as a percentage of DATsEquities 49 % 50 % 61 %
Derivatives 23 % 23 % 21 %
ETFs 20 % 21 % 13 %
Mutual funds 6 % 5 % 4 %
Fixed income 2 % 1 % 1 %
Number of trading days (1) % 249.0 250.5 251.5Revenue per trade (1)(2) % $ 2.41 $ 2.47 $ 2.54
(1) Revenue per trade is calculated as trading revenue divided by DATs multiplied by the number of trading days.
Trading revenue decreased $443 million, or 12%, in 2023 compared to 2022, primarily due to lower options order flow revenue from changes in the mix of client trading activity and narrower quoted spreads in the options market, and lower equity order flow revenue reflecting a shift toward more low-price securities and lower equity trading activity overall. Additionally, commissions decreased as a result of lower client trading activity and fewer trading days. Partially offsetting the decrease in 2023 compared to 2022, principal transactions revenue increased as a result of higher volume in clients’ fixed income trading and higher market interest rates.
Trading revenue decreased $479 million, or 12%, in 2022 compared to 2021, primarily due to lower client trading activity in 2022 relative to 2021, driven by the extraordinary trading volume experienced during the first quarter of 2021, as well as changes in the mix of client trading activity toward more ETFs and fewer single stocks, and toward more index options and futures and fewer single stock options. These factors drove lower commissions and order flow revenue in 2022 relative to 2021. Partially offsetting these decreases, principal transactions revenue increased as a result of higher volume in clients’ fixed income trading and higher market interest rates.
Bank Deposit Account Fees
The Company earns bank deposit account fee revenue from the TD Depository Institutions. These fees are affected by changes in interest rates and the composition of balances designated as fixed- and floating-rate obligation amounts.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)The following table presents bank deposit account fee revenue, average BDA balances, average net yield, and average balances earning fixed- and floating-rate yields:
Year Ended December 31, Percent Change 2022-2023 2023 2022 2021
Bank deposit account fees (50) % $ 705 $ 1,409 $ 1,315
Average BDA balances (29) % $ 104,227 $ 147,273 $ 158,434
Average net yield 0.68 % 0.96 % 0.83 %Percentage of average BDA balances designated as:Fixed-rate balances 92 % 79 % 79 %
Floating-rate balances 8 % 21 % 21 %
In January 2023, the Company ended its arrangements with other third-party banks to simplify bank sweep operations ahead of the first TD Ameritrade client transition group in February 2023. In addition, the FDIC implemented a 2-basis-point increase to the initial base deposit insurance assessment rate, which became effective for the first quarterly assessment period in 2023. This increase in the FDIC’s deposit insurance assessment results in a decrease to bank deposit account fee revenue, dependent on BDA balance levels.
Bank deposit account fees decreased $704 million, or 50%, in 2023 compared to 2022. The decrease was primarily due to lower average BDA balances, an increase in the amount paid to clients due to higher interest rates, and breakage fees of $97 million incurred during the first quarter of 2023 as a result of ending the other third-party bank arrangements. These factors also contributed to the decrease in average net yield in 2023 compared to 2022. The decrease in average BDA balances in 2023 compared to 2022 was primarily due to client cash allocation decisions in response to rising short-term market interest rates throughout 2022 and through the first three quarters of 2023. The percentages of BDA balances designated as fixed-rate and floating-rate obligation amounts as of December 31, 2023 were 86% and 14%, respectively.
Bank deposit account fees increased $94 million, or 7%, in 2022 compared to 2021. This was primarily due to higher market interest rates, which helped to increase the average net yield in 2022. The Company transferred net amounts of $21.0 billion and $10.6 billion of BDA balances to its balance sheet from the TD Depository Institutions and other third-party banks during 2022 and 2021, respectively. The transfer of these balances to our balance sheet, as well as client cash allocation decisions in response to higher short-term market interest rates in 2022, led to the decrease in average BDA balances in 2022 compared to 2021. The percentages of BDA balances designated as fixed-rate and floating-rate obligations as of December 31, 2022 were 87% and 13%, respectively.Other RevenueOther revenue includes exchange processing fees, certain service fees, other gains and losses from the sale of assets, and the provision for credit losses on bank loans.
Other revenue decreased $63 million, or 8%, in 2023 compared to 2022 primarily due to lower exchange processing fees, net losses on sales of AFS securities, and certain lower service fees, partially offset by lower provision for credit losses on bank loans. Exchange processing fees decreased primarily due to a decrease in the SEC fee rate which became effective in the first quarter of 2023 and lower year-to-date options volume. The provision for credit losses on bank loans was lower as loan loss factors decreased while the total balance of First Mortgages increased slightly compared to year-end 2022. The Company’s provision for credit losses on bank loans in 2022 reflected increased loan loss factors driven primarily by higher forecasted interest rates earlier in the Federal Reserve’s monetary tightening, as well as growth in the loan portfolio. In addition, other revenue in 2022 included $46 million in gains on the sale of Schwab Compliance Technologies, Inc. and certain investments. Other revenue increased $33 million, or 4%, in 2022 compared to 2021 primarily due to these gains and higher exchange processing fees, partially offset by a higher provision for credit losses on bank loans, certain lower service fees due to lower trading volume, and net losses on sales of AFS securities in 2022. Exchange processing fees had increased in 2022 as a result of an SEC fee rate increase which became effective in the second quarter of 2022.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)
Total Expenses Excluding Interest
The following table shows a comparison of total expenses excluding interest:Percent Change 2022-2023 2023 2022 2021Compensation and benefitsSalaries and wages 15 % $ 4,046 $ 3,527 $ 3,161
Incentive compensation (15) % 1,239 1,458 1,443
Employee benefits and other 8 % 1,030 951 846
Total compensation and benefits 6 % $ 6,315 $ 5,936 $ 5,450
Professional services 3 % 1,058 1,032 994
Occupancy and equipment 7 % 1,254 1,175 976
Advertising and market development (5) % 397 419 485
Communications 7 % 629 588 587
Depreciation and amortization 23 % 804 652 549
Amortization of acquired intangible assets (10) % 534 596 615
Regulatory fees and assessments 109 % 547 262 275
Other 29 % 921 714 876
Total expenses excluding interest 10 % $ 12,459 $ 11,374 $ 10,807Expenses as a percentage of total net revenuesCompensation and benefits 34 % 29 % 29 %
Advertising and market development 2 % 2 % 3 %Full-time equivalent employees (in thousands)At year end (7) % 33.0 35.3 33.4
Average 2 % 35.4 34.7 32.5
Total expenses excluding interest increased $1.1 billion, or 10%, in 2023 from 2022, and $567 million, or 5%, in 2022 from 2021. Adjusted total expenses, which excludes acquisition and integration-related costs, amortization of acquired intangible assets, and, beginning in the third quarter of 2023, restructuring costs, increased $643 million, or 6%, in 2023 from 2022 and $662 million, or 7%, in 2022 from 2021. See Non-GAAP Financial Measures for further details and a reconciliation of such measures to GAAP reported results. The Company began incurring restructuring costs in the third quarter of 2023 in connection with actions to streamline its operations to prepare for post-integration of TD Ameritrade (see below and Overview – Other for additional information). The Company currently anticipates total expenses excluding interest in full-year 2024 will be generally consistent with full-year 2023 levels, except in regard to acquisition and integration-related costs and restructuring costs. See Overview for additional information regarding these costs, and below for discussion of current and prior year results.
Total compensation and benefits increased in 2023 from 2022 due to restructuring costs recognized during the second half of 2023 related to position eliminations, higher average employee headcount to support TDA client account transitions, and annual merit increases, partially offset by lower incentive compensation. The 2022 increase was a result of growth in employee headcount to support our expanding client base, annual merit increases, as well as a 5% employee salary increase and other targeted compensation adjustments that went into effect in late 2021. Compensation and benefits included acquisition and integration-related costs of $187 million, $220 million, and $283 million in 2023, 2022, and 2021, respectively. Compensation and benefits also included restructuring costs of $292 million in 2023.
Professional services expense slightly increased in 2023 from 2022, primarily due to increased utilization of professional services to support overall growth of the business. The increase in 2022 from 2021 was primarily due to increased utilization of technology-related and other professional services to support overall growth of the business and enhancement to technological infrastructure to support our expanding client base, as well as the integration of TD Ameritrade. Professional services included acquisition and integration-related costs of $135 million, $140 million, and $132 million in 2023, 2022, and 2021, respectively.
Occupancy and equipment expense increased in 2023 from 2022, and in 2022 from 2021, primarily due to an increase in software maintenance and other agreements as well as other technology equipment costs to support growth of the business and the integration of TD Ameritrade. Occupancy and equipment included acquisition and integration-related costs of $28 million, $21 million, and $39 million in 2023, 2022, and 2021, respectively. Occupancy and equipment also included restructuring costs of $17 million in 2023.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)Advertising and market development expense decreased in 2023 from 2022, primarily as a result of lower advertising costs and lower client promotional spending for TD Ameritrade. The decrease in 2022 from 2021 was also primarily due to lower spending for marketing communications for TD Ameritrade.
Communications expense increased in 2023 compared to 2022, primarily as a result of client communications related to TDA account transitions completed during 2023. Communications expense was flat in 2022 compared to 2021.
Depreciation and amortization expense increased in 2023 from 2022, and in 2022 from 2021, primarily as a result of higher amortization of purchased and internally developed software and higher depreciation of hardware, driven by capital expenditures to support the TDA integration and enhance our technological infrastructure to support growth of the business.
Amortization of acquired intangible assets decreased in 2023 from 2022, and in 2022 from 2021, as certain assets from the TDA acquisition were fully amortized by the beginning of the fourth quarter of 2022.
Regulatory fees and assessments increased in 2023 from 2022, primarily as a result of an FDIC special assessment of $172 million recorded during the fourth quarter of 2023 and higher FDIC deposit insurance assessments during 2023, reflecting greater use of brokered CDs and a 2-basis point increase to the FDIC deposit insurance assessment rate, which became effective for the first quarterly assessment period in 2023. These increases were partially offset by a lower assessment base. See Current Regulatory and Other Developments for discussion of the FDIC special assessment. The decrease in 2022 from 2021 was primarily due to lower client trading activity, partially offset by higher FDIC assessments and other regulatory assessments due to year-over-year average asset growth and overall growth of the business.
Other expense increased in 2023 from 2022, primarily due to impairment charges in 2023 related to closing certain leased corporate offices for restructuring and TDA integration. The decrease in 2022 from 2021 was primarily due to the recognition of a charge of approximately $200 million in 2021 for a regulatory matter settled in 2022, partially offset by higher exchange processing fees as a result of fee rate increases beginning in the second quarter of 2022 and also higher clearing charges. Other expense included acquisition and integration-related costs of $27 million and restructuring costs of $181 million in 2023.
Capital expenditures primarily include capitalized software costs, information technology and telecommunications equipment, and buildings. Total capital expenditures were $804 million, $952 million, and $1,041 million in 2023, 2022, and 2021, respectively. Capital expenditures decreased 16% in 2023 compared to 2022, as lower capitalized information technology equipment and buildings more than offset an increase in capitalized software costs. We continued to invest in our technological infrastructure in 2023 to support the TDA integration as well as greater capacity for our expanding client base. Capital expenditures decreased in 2022 compared to 2021, as higher capitalized software costs were offset by lower building expansion and capitalized information technology equipment.
Capital expenditures were 4.3% of total net revenues in 2023, slightly above our estimated range for the year. As we complete the TDA client transitions and the rest of the integration in 2024, we anticipate capital expenditures for the year to be within our longer term expectation of 3-5% of total net revenues.Taxes on IncomeSchwab’s effective income tax rate on income before taxes was 20.6% in 2023, 23.5% in 2022, and 24.1% in 2021. The decrease in the effective tax rate in 2023 from 2022 was primarily related to a decrease in state tax expense and the recognition of certain tax credits in 2023, partially offset by an increase in non-deductible FDIC deposit insurance assessments and a decrease in equity compensation tax deduction benefits. The decrease in the effective tax rate in 2022 from 2021 was primarily related to reversal of tax reserves in 2022 due to the resolution of certain state tax matters and tax benefits recognized on the portion of the 2021 charge for a regulatory matter settled in 2022 that was determined upon final settlement to be deductible. Partially offsetting the decreases in the effective tax rate from these items was a decrease in equity compensation tax deduction benefits, higher state income tax rates, and an increase in non-deductible compensation in 2022.
Segment Information
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
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Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)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 Services platform.Financial information for our segments is presented in the following table:
Investor Services Advisor Services TotalPercent Change 2022-2023 2023 2022 2021 Percent Change 2022-2023 2023 2022 2021 Percent Change 2022-2023 2023 2022 2021Year Ended December 31,
Net RevenuesNet interest revenue (9)% $ 7,095 $ 7,819 $ 6,052 (19)% $ 2,332 $ 2,863 $ 1,978 (12)% $ 9,427 $ 10,682 $ 8,030
Asset management and administration fees 11% 3,398 3,049 3,130 16% 1,358 1,167 1,144 13% 4,756 4,216 4,274
Trading revenue (12)% 2,806 3,181 3,753 (14)% 424 492 399 (12)% 3,230 3,673 4,152
Bank deposit account fees (43)% 524 916 964 (63)% 181 493 351 (50)% 705 1,409 1,315
Other (4)% 582 605 562 (23)% 137 177 187 (8)% 719 782 749
Total net revenues (7)% 14,405 15,570 14,461 (15)% 4,432 5,192 4,059 (9)% 18,837 20,762 18,520
Expenses Excluding Interest 8% 9,217 8,514 8,289 13% 3,242 2,860 2,518 10% 12,459 11,374 10,807
Income before taxes on income (26)% $ 5,188 $ 7,056 $ 6,172 (49)% $ 1,190 $ 2,332 $ 1,541 (32)% $ 6,378 $ 9,388 $ 7,713Net new client assets
(in billions) (1)(8)% $ 169.0 $ 182.8 $200.9 (25)% $ 168.2 $ 224.1 $ 315.3 (17)% $ 337.2 $ 406.9 $ 516.2
(1) In 2023, Investor Services includes net inflows of $32.5 billion from off-platform brokered CDs issued by CSB, inflows of $12.0 billion from a mutual fund clearing services client, and outflows of $5.8 billion from an international relationship. In 2022 and 2021, Investor Services includes outflows of $20.8 billion and $42.0 billion, respectively, from mutual fund clearing services clients. In 2023, Advisor Services includes outflows of $7.2 billion from an international relationship.Segment Net RevenuesInvestor Services and Advisor Services total net revenues decreased by 7% and 15%, respectively, in 2023 compared to 2022. Net interest revenue decreased for both segments due to higher-cost funding sources and lower average interest-earning asset balances, as described above. Both segments saw a decrease in bank deposit account fees due to lower average BDA balances and higher yields paid to clients, as well as breakage fees incurred as a result of ending certain third-party bank arrangements. Trading revenue decreased for both segments, primarily as a result of lower order flow revenue and commissions, due to lower client trading activity and pricing, partially offset by higher fixed income trading activity. Other revenue decreased for both segments primarily due to lower exchange processing fees, net losses on sales of AFS securities, and gains on the sale of certain investments in 2022, partially offset by lower provision for credit losses on bank loans. These decreases were partially offset by higher asset management and administration fees in both segments, primarily as a result of higher money market fund balances and the elimination of money market fund fee waivers during 2022 and growth in Schwab proprietary fund products, partially offset by lower balances in certain third-party funds.
Investor Services and Advisor Services total net revenues increased by 8% and 28%, respectively, in 2022 compared to 2021. Investor Services growth was primarily driven by increases in net interest revenue as described above, partially offset by decreases in trading revenue due to lower client trading activity and changes in the mix of trading activity, resulting in lower commissions and order flow revenue, and a decrease in bank deposit account fees. Advisor Services growth was primarily driven by increases in net interest revenue as described above, as well as increases in trading revenue primarily due to higher trading volume amid market volatility and bank deposit account fees primarily due to a rising interest rate environment. Asset management and administration fees were essentially flat for Advisor Services, while declining slightly for Investor Services as equity market weakness during 2022 weighed on client asset valuations, partially offset by the elimination of money market fund fee waivers. Other revenues increased for Investor Services in 2022 from 2021 due to higher exchange processing fees, partially offset by a higher provision for credit losses on bank loans, certain lower service fees, and lower net gains on sales of AFS securities.
Segment Expenses Excluding Interest
Investor Services and Advisor Services total expenses excluding interest increased by 8% and 13%, respectively, in 2023 compared to 2022. Both segments saw higher compensation and benefits expenses due to restructuring costs recognized in the
- 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)second half of 2023, higher average headcount to support TDA client account transitions, and annual merit increases, partially offset by lower incentive compensation. Regulatory fees and assessments increased in both segments, primarily due to an FDIC special assessment recorded during the fourth quarter of 2023 and higher FDIC deposit insurance assessments as described above. Other expenses were also higher for both segments, primarily driven by impairment of certain leased corporate offices related to restructuring and TDA integration. Depreciation and amortization increased for both segments primarily due to higher amortization of purchased and internally developed software and higher depreciation of hardware, driven by capital expenditures in 2022 and 2023 to enhance our technological infrastructure to support the TDA integration and growth of the business.
Investor Services and Advisor Services total expenses excluding interest increased by 3% and 14%, respectively, in 2022 compared to 2021. Both segments saw higher compensation and benefits expenses due to increases in headcount to support our expanding client base, annual merit increases, as well as a 5% employee salary increase and other targeted compensation adjustments that went into effect in late 2021. Occupancy and equipment expenses increased in both segments, primarily due to an increase in software maintenance and other agreements as well as other technology equipment costs to support growth of the business and the integration of TD Ameritrade. In addition, depreciation and amortization increased for both segments primarily due to higher amortization of purchased and internally developed software and higher depreciation of hardware, driven by capital expenditures in 2022 and 2021 to enhance our technological infrastructure to support growth of the business. For Investor Services, these increases were partially offset by lower other expenses due to a charge of approximately $200 million in 2021 for a regulatory matter settled in 2022, partially offset by higher exchange fees and clearing charges, and lower advertising and market development expense due to reduced spending for marketing communications for TD Ameritrade.RISK MANAGEMENT
Schwab’s business activities expose it to a variety of risks, including operational, compliance, credit, market, and liquidity risks. The Company has a comprehensive risk management program to identify and manage these risks and their associated potential for financial and reputational impact. Our risk management process is comprised of risk identification and assessment, risk response, risk measurement and monitoring, and risk reporting and escalation. We use periodic risk and control self-assessments, control testing programs, and our internal audit department performs evaluations of our risk management processes and controls.
CultureA fundamental commitment to strong and effective risk management is core to Schwab’s business strategy. Risk management is an integrated and foundational part of our culture and a duty of every employee. 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 ERM Framework incorporates key concepts commensurate with the size, risk profile, complexity, and continuing growth of the Company. While all personnel are responsible for risk management, the Company’s 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.
The Company’s “Through Clients’ Eyes” strategy guides our actions and behaviors at Schwab, and informs our corporate culture, our risk appetite, and approach to risk management. Schwab is committed to the highest standards of ethical conduct and compliance with applicable laws, rules, and regulations, and our Code of Business Conduct and Ethics outlines the ethical conduct that we must demonstrate to deliver our strategy while retaining the trust of our stakeholders.
As part of our integration of TD Ameritrade, the Company has aligned TD Ameritrade’s risk management practices with Schwab’s risk appetite. Our integration work included evaluating new or changed risks impacting the combined company and taking action through various means. Though integration work continues, the Company’s operations, inclusive of TD Ameritrade, remain consistent with our ERM Framework.
Risk Governance
Schwab maintains an integrated risk governance structure that directs Company-wide execution of the risk management process. The risk governance structure includes the Board of Directors, designated committees of the Board, and management risk committees.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)CSC’s Board of Directors sets the tone and culture of effective risk management. The Board has a Risk Committee that assists the Board in setting the type and level of risks that the Company is willing to take and supports the independence and stature of independent risk management. The Board Risk Committee also assists the Board in overseeing and holding senior management accountable for implementing the Board’s approved risk tolerance, maintaining the Company’s risk management and control program, and managing the Company’s activities in a safe and sound manner, and in compliance with applicable laws and regulations. The Board Risk Committee also approves risk appetite statements and related key risk appetite metrics, key risk policies, and reviews reports relating to risk issues from functional areas of corporate risk management, legal, and internal audit.
The Audit Committee of the Board of Directors assists the Board in fulfilling its oversight responsibilities by reviewing the integrity of the Company’s financial statements and financial reporting processes, the qualifications and independence of the independent auditors and performance of the Company’s internal audit function and independent auditors, compliance with legal and regulatory requirements, processes to assess and manage risk exposures, and other matters as directed by the Board. The Compensation Committee of the Board of Directors assists the Board in oversight of compensation of the Company’s directors, executive officers, and other senior officers. The Board Nominating and Corporate Governance Committee assists the Board in its oversight responsibilities regarding Board composition, performance, and developing corporate governance principles, policies and procedures.
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 risk identification and assessment, risk response, risk measurement and monitoring, and risk reporting and escalation. 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. The Chief Risk Officer regularly reports activities of the Global Risk Committee to the Risk Committee of 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. Functional risk sub-committees focusing on specific areas of risk report to the Global Risk Committee. These sub-committees include the:
• 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 Information Security and Cybersecurity, Technology, Fraud, Third-Party Risk, Data Integrity, and Model Governance;
• Compliance Risk Committee – provides oversight of compliance risk management (inclusive of compliance programs for Schwab’s regulated entities, Anti-Money Laundering/Sanctions, Conduct, Fiduciary, Conflicts of Interest, and Privacy), policies, and risk tolerance levels providing an aggregate view of compliance risk exposure and employee conduct, including subcommittees covering Fiduciary and Conflicts of Interest Risk;
• Financial Risk Oversight Committee – provides oversight of and approves credit, market, liquidity, and capital risk policies, limits, and exposures and includes the Liquidity and Capital Subcommittee; and• New Products and Services Risk Oversight Committee – provides oversight of, and approves new products, including the policy, program, and process designed to oversee new products and services risks prior to and post launch.
Senior management has also created an Incentive Compensation Risk Oversight Committee to provide oversight of incentive compensation risks and achieve sound incentive compensation risk management practices; it reports directly to the Compensation Committee of the Board of Directors.
The Company’s 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.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)Operational RiskOperational risk arises due to potential inadequacies or failures related to internal processes, people, and systems, or from external events or relationships impacting the Company and/or any of its key business partners and vendors. While operational risk is inherent in all business activities, the Company has established 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 perform periodic testing to evaluate the effectiveness of relevant 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 regulations.
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, extreme weather, 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. Please see Part I – Item 1C. Cybersecurity for additional information regarding Information Security risk, including cybersecurity risk management.
Fraud risk arises from attempted or actual theft of financial assets or other property of any client or the Company. Schwab is committed to protecting the Company’s and its clients’ assets from fraud and complying with all applicable laws and regulations to prevent, detect and report fraudulent activity. Schwab manages fraud risk through policies, procedures and controls. We also take affirmative steps to prevent and detect fraud and report, to appropriate authorities, any known or suspected acts of fraud in accordance with existing laws and requirements.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 internal policies, procedures and controls, and contractual provisions, control standards, ongoing monitoring of third-party performance, and appropriate testing with third-party service providers.Model risk is the potential for adverse consequences from decisions based on incorrect or misused model outputs and reports. Model uses at Schwab include, but are not limited to, calculating capital requirements for hypothetical stressful environments, estimating interest and credit risk for loans and other balance sheet assets, identifying and preventing fraud and other financial crimes, and providing guidance in the management of client portfolios. Schwab has established a policy that aligns with regulatory guidance to describe the roles and responsibilities of all key stakeholders in model development, management, and use. Schwab registers models in a centralized database, performs risk assessment of models based on their potential financial, reputational, or regulatory impact to the Company. The model risk rating determines the scope of model governance activities such as independent model validations, model annual reviews, and model performance monitoring.
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 conduct and ethics, sales and trading practices, marketing and communications, extension of credit, client funds and securities, books and records, anti-money laundering, privacy, and employment policies.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)Privacy risk is the risk of unauthorized collection, use, storage, or sharing of personal information, including data incidents and other mismanagement of personal information. We manage privacy risk through policies, procedures, and controls reasonably designed to achieve and/or monitor compliance with these laws and regulations.
Anti-money laundering/sanctions risk is the risk of legal or regulatory sanctions, fines or penalties, financial loss, or damage to reputation resulting from the failure to comply with the Bank Secrecy Act/Anti-Money Laundering (BSA/AML) and Office of Foreign Assets Control (OFAC)/global sanctions (collectively, “AML”) laws, regulations, rules, or other regulatory requirements. Schwab manages this risk through daily monitoring, a system of internal controls, education and training for appropriate personnel, and developing risk-based procedures for conducting ongoing customer due diligence and complying with beneficial ownership requirements for legal entity customers.Conduct risk arises from inappropriate, unethical, or unlawful behavior of the Company, its employees or third parties acting on the Company’s behalf that may result in detriment to the Company’s clients, financial markets, the Company, and/or the Company’s employees. We manage this risk through policies, procedures, a system of internal controls, including personnel monitoring and surveillance. Conduct-related matters are escalated through appropriate channels by the Company’s Corporate Responsibility Officer.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.
Incentive Compensation risk is the potential for adverse consequences resulting from compensation plans that do not balance the execution of our strategy with risk and financial rewards, potentially encouraging imprudent risk-taking by employees. We have implemented risk management processes, including a policy, to identify, evaluate, assess, and manage risks associated with incentive compensation plans and the activities of certain employees, defined as Covered Employees, who have the authority to expose the Company to material amounts of risk.
Credit RiskCredit risk is the potential for loss due to a borrower, counterparty, or issuer failing to perform 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 setting 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, 2023, 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, PALs (discussed below), 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 credit losses.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)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).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 6.Securities and Instrument-Based Lending Portfolios
Collateral arrangements relating to margin loans, PALs, option and futures positions, securities lending agreements, and securities purchased under agreements to resell (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 the Company.
Market Risk
Market risk is the potential for changes in earnings or the value of financial instruments held by Schwab as a result of fluctuations in interest rates, equity prices, or market conditions. Schwab is exposed to market risk primarily from changes in interest rates within our interest-earning assets relative to changes in the costs of funding sources that finance these assets.To manage interest rate risk, we have established policies and procedures, which include setting limits on net interest revenue risk and economic value of equity (EVE) risk. To remain within these limits, we manage the maturity, repricing, and cash flow characteristics of the investment portfolios. Management monitors established guidelines to stay within the Company’s risk appetite. In 2023, the Company began to utilize interest rate swap derivative instruments to assist with managing interest rate risk, the effects of which are incorporated into the Company’s net interest revenue and EVE analyses. For further information on our interest rate risk management strategies utilizing interest rate swaps, see Item 8 – Note 16.
Our measurement of interest rate risk involves assumptions that are inherently uncertain and, as a result, cannot precisely estimate the impact of changes in interest rates on net interest revenue, bank deposit account fees, or EVE. Actual results may differ from simulated results due to balance growth or decline and the timing, magnitude, and frequency of interest rate changes, as well as changes in market conditions and management strategies, including changes in asset and liability mix. 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 SimulationFor our net interest revenue sensitivity analysis, we use net interest revenue simulation modeling techniques to evaluate and manage the effect of changing interest rates. The simulations include all balance sheet interest rate-sensitive assets and
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Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)liabilities, and include derivative instruments. Key assumptions include the projection of interest rate scenarios with rate floors, rates and balances of non-maturity client cash held on the balance sheet, prepayment speeds of mortgage-related investments, repricing of financial instruments, and reinvestment of matured or paid-down securities and loans. We use independent third-party models to simulate net interest revenue sensitivity and related analyses. Fixed income analytical vendors provide term structure models, prepayment speed models for mortgage-backed securities and mortgage loans, and cash flow projections based on interest income, contractual maturities, and prepayments. Consistent with our policies related to the management of interest rate risk, the Company’s net interest revenue sensitivity analysis primarily involves gradual parallel increases/decreases in interest rates over a twelve-month period, though we also regularly simulate the effects of non-parallel shifts and instantaneous shifts of interest rates on net interest revenue.
Net interest revenue is affected by various factors, such as the distribution and composition of interest-earning assets and interest-bearing liabilities, the spread between yields earned on interest-earning assets and rates paid on interest-bearing liabilities, which may reprice at different times or by different amounts, and the spread between short- and long-term interest rates. Interest-earning assets include investment securities, margin loans, bank loans, and cash and cash equivalents. These assets are sensitive to changes in interest rates and changes in prepayment levels that tend to increase in a declining rate environment and decrease in a rising rate environment. Because we establish the rates paid on certain brokerage client cash balances and bank deposits and the rates charged on certain margin and bank loans, and control the composition of our investment securities, we have some ability to manage our net interest spread, depending on competitive factors and market conditions. When we have liquidity needs that exceed our primary sources of funding, the Company has needed to utilize higher-cost funding sources, which can reduce net interest margin and net interest revenue.
Higher prevailing short-term interest rates generally improve yields on shorter duration interest-earning assets. During periods of rapidly rising interest rates, clients tend to reallocate cash out of sweep products into higher-yielding, off-balance sheet, fixed income securities and money market funds within Schwab’s product offerings. This can result in lower interest-earning assets and/or may require replacement funding with higher funding costs, which therefore tend to constrain net interest revenue when interest rates are moving rapidly higher. A decline in short-term interest rates could also negatively impact the yield on the Company’s investment and loan portfolios to a greater degree than any offsetting reduction in interest expense from funding sources, compressing net interest margin.
Net interest revenue sensitivity analysis assumes the asset and liability structure of the consolidated balance sheet would not be changed as a result of the simulated changes in interest rates. While this approach is useful to isolate the impact of changes in interest rates on a statically-sized asset and liability structure, it does not capture changes to client cash allocations. We conduct simulations on EVE to capture the impact of client cash allocation changes on our balance sheet. As we actively manage the consolidated balance sheet and interest rate exposure, we have taken and would typically seek to take steps to manage additional interest rate exposure that could result from changes in the interest rate environment.
As part of the Company’s ongoing evaluation of its modeling, in the fourth quarter of 2023, the Company updated deposit beta assumptions in a declining market interest rate environment for its net interest revenue simulation model. The following table shows simulated changes to net interest revenue over the next 12 months beginning December 31, 2023 and 2022 of a gradual increase or decrease in market interest rates relative to prevailing market rates at the end of each reporting period:
December 31, 2023 (1)
2022Increase of 200 basis points10.8% 7.3%
Increase of 100 basis points 5.8% 3.6%Increase of 50 basis points3.1% 1.7%Decrease of 50 basis points0.4% (1.5)%
Decrease of 100 basis points (0.2)% (3.2)%Decrease of 200 basis points(4.2)% (6.7)%
(1) Reflects the impact of the assumption updates implemented in the fourth quarter of 2023. The prior period has not been recast.
The Company’s simulated incremental increases in market interest rates had a larger impact on net interest revenue as of December 31, 2023 compared to December 31, 2022 primarily due to higher margin loan and cash balances, which was partially offset by an increased allocation to FHLB borrowings and other short-term borrowings across the Company’s banking subsidiaries. In the absence of the assumption updates, simulated decreases of 50, 100, and 200 basis points as of December 31, 2023 would have reduced net interest revenue by 1.7%, 3.8%, and 8.3%, respectively. Simulated incremental decreases in market interest rates had a lesser impact on net interest revenue as of December 31, 2023 compared to December 31, 2022 due primarily to the change in assumptions for deposit betas, which, along with a lower rate environment, drove greater expense
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THE CHARLES SCHWAB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)
savings across non-maturity deposits and an increased allocation to shorter-term liabilities, partially offset by higher concentrations of margin loan and cash balances.Effective DurationEffective duration measures price sensitivity relative to a change in prevailing interest rates, taking account of amortizing cash flows and prepayment optionality for mortgage-related securities and loans. Duration is measured in years and commonly interpreted as the average timing of principal and interest cash flows. We seek to manage the Company’s asset duration in relation to management’s estimate of the Company’s liability duration. The Company’s liability duration is impacted by the composition of funding sources, and typically decreases in periods of rising market interest rates and increases in periods of declining market interest rates.
The Company’s estimated effective duration of consolidated total assets was approximately 2.4 years at December 31, 2023 (inclusive of the impact of derivative instruments) and 2.6 years at December 31, 2022. The estimated effective duration of our AFS investment securities portfolio was approximately 2.5 years (2.2 years inclusive of the impact of derivative instruments) as of December 31, 2023 and 2.4 years as of December 31, 2022. The estimated effective duration for the Company’s total AFS and HTM investment securities portfolio was approximately 4.0 years as of both December 31, 2023 and 2022 (3.9 years inclusive of the impact of derivative instruments on AFS securities as of December 31, 2023). AFS and HTM securities comprised approximately 54% and 58% of the Company’s consolidated total assets as of December 31, 2023 and 2022, respectively. The estimated effective duration of the remaining balance sheet assets in aggregate was less than one year as of both December 31, 2023 and 2022.Economic Value of Equity SimulationManagement also uses EVE simulations to measure interest rate risk. EVE sensitivity measures the long-term impact of interest rate changes on the net present value of assets and liabilities, and includes the impact of derivative instruments. While EVE does not have a direct accounting relationship, the measure aims to capture a theoretical value of assets and liabilities under a variety of interest rate environments. EVE is calculated by subjecting the balance sheet to hypothetical instantaneous shifts in the level of interest rates. This analysis is highly dependent upon asset and liability assumptions based on historical behaviors. Key assumptions in our EVE calculation include projection of interest rate scenarios with rate floors, prepayment speeds of mortgage-related investments, term structure models of interest rates, behavior of non-maturity client cash held on the balance sheet, and pricing assumptions. We use both proprietary and independent third-party models to simulate EVE sensitivity and related analyses. We develop and maintain client credits and deposits run-off models internally based on historical experience and prevailing client cash realignment behaviors. We rely on third-party models for term structure modeling, prepayment speed modeling for mortgage-backed securities and mortgage loans, and cash flow projections based on interest income, contractual maturities, and prepayments.
As interest rates rose throughout 2023, EVE sensitivity generally trended higher due to a shortening of liability duration. While the Company’s asset duration remained largely stable during the period of rising interest rates, liability duration shortened significantly and is now shorter than asset duration.
Bank Deposit Account Fees Simulation
Consistent with the presentation on the consolidated statement of income, the sensitivity of bank deposit account fee revenue to interest rate changes is assessed separately from the net interest revenue simulation described above. As of December 31, 2023 and 2022, simulated changes in bank deposit account fee revenue from gradual changes in market interest rates relative to prevailing market rates, under the interest rate scenarios described above for net interest revenue, did not have a significant impact on the Company’s total net revenues. Our net interest revenue, EVE, and bank deposit account fee revenue simulations reflect the assumption of non-negative investment yields.
Phase-out of LIBOR
Effective June 30, 2023, publication of the London Interbank Offered Rate (LIBOR) ceased. Schwab completed all LIBOR transition work that could be done prior to June 30, 2023, though we have continued to monitor and manage the LIBOR substitution for the portfolio of legacy loans that we have for which scheduled interest rate resets or related interest rate transitions will occur in future periods. Certain of the Company’s technology systems and financial models have historically utilized LIBOR. We’ve transitioned our financial models and systems to alternative reference rates, and we continue to monitor
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Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)our financial models and systems that previously referenced LIBOR. In addition, we have transitioned the Company’s IDA agreement and certain intercompany lending agreements that previously were tied to LIBOR to other appropriate reference rates. The Company’s investment securities that previously referenced LIBOR have transitioned to applicable alternative benchmark indices. The Company’s work to transition from LIBOR is now substantially complete, and we do not expect the phase-out of LIBOR will have a material impact to the Company going forward.Liquidity RiskLiquidity risk is the potential that Schwab will be unable to sell assets or meet cash flow obligations when they come due without incurring unacceptable losses.
Due to its role as a source of financial strength, CSC’s liquidity needs are primarily driven by the liquidity and capital needs of: CS&Co, TD Ameritrade, Inc., and TDAC, our principal broker-dealer subsidiaries; the capital needs of the banking subsidiaries; principal and interest due on corporate debt, and dividend payments on CSC’s preferred and common stock. The liquidity needs of our broker-dealer subsidiaries are primarily driven by client activity including trading and margin lending activities and capital expenditures. The capital needs of the banking subsidiaries are primarily driven by client deposit levels and other borrowings. We have established liquidity policies to support the successful execution of business strategies, while ensuring ongoing and sufficient liquidity to meet operational needs and satisfy applicable regulatory requirements under both normal and stressed conditions. We seek to maintain client confidence in the balance sheet and the safety of client assets by maintaining liquidity and diversity of funding sources to allow the Company to meet its obligations. To this end, we have established limits and contingency funding plans to support liquidity levels during both business as usual and stressed conditions.We employ a variety of metrics to monitor and manage liquidity. We conduct regular liquidity stress testing to develop a view of liquidity risk exposures and to ensure our ability to maintain sufficient liquidity during market-related or company-specific liquidity stress events. Liquidity sources are also tested periodically and results are reported to the Financial Risk Oversight Committee. A number of early warning indicators are monitored to help identify emerging liquidity stresses in the market or within the organization and are reviewed with management periodically.
Funding SourcesSchwab’s primary source of funds is cash generated by client activity which includes bank deposits and cash balances in client brokerage accounts. These funds are used to purchase investment securities and extend loans to clients. Other sources of funds may include cash flows from operations, maturities and sales of investment securities, repayments on loans, securities lending of assets held in client brokerage accounts, FHLB borrowings, issuance of CDs, cash provided by securities issuances by CSC in the capital markets, and other facilities described below.
To meet daily funding needs, we maintain liquidity in the form of overnight cash deposits and short-term investments. For unanticipated liquidity needs, we also maintain a buffer of highly liquid investments, including U.S. Treasury securities.
Our clients’ bank deposits and brokerage cash balances primarily originate from our 34.8 million active brokerage accounts. More than 80% of our bank deposits qualified for FDIC insurance as of December 31, 2023. Our clients’ allocation of cash held on our balance sheet as bank deposits or payables to brokerage clients is sensitive to interest rate levels, with clients typically increasing their utilization of investment cash solutions such as purchased money market funds and certain fixed income products when those yields are higher than those of cash sweep features.
Schwab’s need for borrowings from external debt facilities arises primarily from timing differences between cash flow requirements, including in the event the outflow of client cash from the balance sheet is greater than cash flows from operations and investment securities and bank loans; payments on interest-earning investments; movements of cash to meet regulatory brokerage client cash segregation requirements; and general corporate purposes. We maintain policies and procedures necessary to access funding, and test borrowing procedures on a periodic basis. Rollover risk is the risk that we will not be able to refinance or payoff borrowings as they mature. We manage rollover risk on borrowings, taking into account expected principal paydowns on our investment and loan portfolios along with expected deposit flows.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)The following table describes external debt facilities available at December 31, 2023:Description Borrower Outstanding Available Maturity of Amounts Outstanding Weighted-Average Interest Rate on Amounts OutstandingFHLB secured credit facilities
Banking subsidiaries $ 26,400 $ 63,102 (1)
January 2024 - November 2024 5.34%
Federal Reserve discount window Banking subsidiaries — 6,248 (1)N/A —Federal Reserve Bank Term Funding Program Banking subsidiaries — 39,170 (1)
N/A —
Repurchase agreements Banking subsidiaries, CSC
4,903 — (2)
January 2024 - July 2024 5.53%
Uncommitted, unsecured lines of credit with various external banks CSC, CS&Co — 1,767 N/A —
Unsecured commercial paper CSC — 5,000 N/A —
Secured uncommitted lines of credit with various external banks CS&Co 950 — (3)
January 2024 - February 2024 5.70%
Secured uncommitted lines of credit with various external banks TDAC 700 — (3)
January 2024 - February 2024 5.72%
(1) Amounts shown as available from the FHLB and Federal Reserve facilities represent remaining capacity based on assets pledged as of December 31, 2023. Incremental borrowing capacity may be made available by pledging additional assets, subject to applicable facility terms. See below and Item 8 – Note 12 for additional information.
(2) Secured borrowing capacity is made available based on the banking subsidiaries’ or CSC’s ability to provide collateral deemed acceptable by each respective counterparty. See Item 8 – Note 17 for additional information.
(3) Secured borrowing capacity is made available based on CS&Co’s or TDAC’s ability to provide acceptable collateral to the lenders as determined by the credit agreements.N/A Not applicable.Available borrowing capacity from the FHLB and Federal Reserve facilities maintained by our banking subsidiaries is dependent on the value of assets pledged and the terms of the borrowing arrangements. As of December 31, 2023, the Company had additional investment securities with a par value of approximately $142 billion or a fair value of approximately $131 billion available to be pledged to obtain additional capacity. These securities could be used to provide additional borrowing capacity of up to $142 billion as of December 31, 2023, dependent on the facility utilized. Additional details regarding availability and use of these facilities is described below.Amounts available under secured credit facilities with the FHLB are dependent on the value of our First Mortgages, HELOCs, and the value of certain of our investment securities that are pledged as collateral. These credit facilities are also available as backup financing in the event the outflow of client cash from the banking subsidiaries’ respective balance sheets is greater than maturities and paydowns on investment securities and bank loans. CSC’s banking subsidiaries must each maintain positive tangible capital, as defined by the Federal Housing Finance Agency, in order to place new draws upon these credit facilities, and the Company manages capital with consideration of minimum tangible capital ratios at our banking subsidiaries. Tangible capital pursuant to the requirements of the FHLB borrowing facilities for our banking subsidiaries is common equity less goodwill and intangible assets.Our banking subsidiaries also have access to short-term secured funding through the Federal Reserve discount window. Amounts available under the Federal Reserve discount window are dependent on the fair value of certain investment securities that are pledged as collateral. Our banking subsidiaries may also engage with external financial institutions in repurchase agreements collateralized by investment securities as another source of short-term liquidity. In addition, our banking subsidiaries are counterparties to the standing repo facility with the Federal Reserve Bank of New York; other than de minimis tests performed to satisfy the Federal Reserve Bank of New York’s testing requirements, this facility was not used during 2023 and there were no amounts outstanding at December 31, 2023. Beginning in 2023, CSC maintains a standing bilateral repurchase agreement with an external bank. Other than de minimis tests, this facility was not used during 2023 and there were no amounts outstanding under this facility at December 31, 2023.
On March 12, 2023, the Federal Reserve Board announced the creation of a new Bank Term Funding Program, offering loans through March 11, 2024 of up to one year in length to eligible financial institutions with U.S. Treasury securities, agency debt, mortgage-backed securities, and other qualifying assets pledged as collateral. Borrowing capacity available under this program is dependent upon the par value of the investment securities that are pledged as collateral. The Company is eligible to obtain advances under this program. This facility was not used during 2023.
CSC’s ratings for Commercial Paper Notes were P1 by Moody’s Investor Service (Moody’s), A2 by Standard & Poor’s Rating Group (Standard & Poor’s), and F1 by Fitch Ratings, Ltd (Fitch) at December 31, 2023. During the second quarter of 2023,
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Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)Standard & Poor’s downgraded its rating of CSC’s Commercial Paper Notes from A1 to A2, and Moody’s changed its outlook from positive to stable.
CSC also has a universal automatic shelf registration statement on file with the SEC, which enables it to issue debt, equity, and other securities.
CS&Co maintains uncommitted, unsecured bank credit lines with a group of banks as a source of short-term liquidity, which can also be accessed by CSC. CS&Co also maintains secured, uncommitted lines of credit, under which CS&Co may borrow on a short-term basis and pledge either client margin securities or firm securities as collateral, based on the terms of the agreements. TDAC maintains secured uncommitted lines of credit, under which TDAC borrows on either a demand or short-term basis and pledges client margin securities as collateral.
In the fourth quarter of 2022 and in 2023, CSB issued brokered CDs as a supplemental funding source. The following table provides information about brokered CDs issued by CSB and outstanding as of December 31, 2023:
Amount Outstanding Maturity Weighted-Average Interest Rate
Brokered CDs $ 48,297 January 2024 - April 2025 5.15%Cash Flow ActivityAs a result of rapidly increasing short-term interest rates beginning in 2022, the Company saw an increase in the pace at which clients moved certain cash balances out of our sweep features and into higher-yielding alternatives at Schwab. As a result of these outflows, our banking subsidiaries have supplemented excess cash on hand and cash generated by maturities and paydowns on our investment securities portfolios with fixed- and floating-rate FHLB advances, repurchase agreements, and issuances of brokered CDs. The average pace of client cash allocations out of sweep products into higher-yielding investment solutions decreased significantly beginning in the second quarter of 2023, and, apart from an increase in August following the Federal Reserve’s July rate increase, continued to decline during the second half of 2023. See also Results of Operations – Net Interest Revenue.
In the fourth quarter of 2023, the Company’s FHLB borrowings and total other short-term borrowings decreased by $6.4 billion as a result of repayments during the period. Bank deposits increased during the fourth quarter of 2023 by $5.5 billion, resulting from an increase of $2.8 billion in deposits swept from brokerage accounts due to the slowed pace of client cash realignment decisions and seasonal cash inflows near year-end, as well as an increase of $2.9 billion in brokered CDs.
Cash and cash equivalents increased $3.1 billion from year-end 2022 to $43.3 billion at December 31, 2023; cash and cash equivalents, including amounts restricted, increased $15.8 billion to $74.5 billion as of year-end 2023. This increase was driven by net cash provided by investing and operating activities, partially offset by net cash used for financing activities. Bank deposits decreased $76.8 billion in 2023, resulting primarily from a decrease of $113.5 billion in deposits swept from brokerage accounts due to client cash allocation decisions, partially offset by a net increase in brokered CDs of $42.3 billion. Offsetting the decrease in bank deposits, investing cash flows from our AFS and HTM securities totaled $58.9 billion in 2023, cash flows from operating activities totaled $19.6 billion, and the Company increased FHLB borrowings and other short-term borrowings by a total of $15.9 billion in 2023.
In 2022, cash and cash equivalents decreased $22.8 billion to end the year at $40.2 billion. Cash and cash equivalents, including amounts restricted, decreased $34.6 billion during 2022 to $58.7 billion at December 31, 2022. This decrease was driven primarily by net cash used for financing activities, partially offset by net cash provided by investing activities. Bank deposits decreased $77.1 billion in 2022, primarily due to a decrease of $78.5 billion in deposits swept from brokerage accounts due to client cash allocation decisions, partially offset by the issuance of $6.0 billion of brokered CDs. In 2022, FHLB borrowings and other short-term borrowings increased $12.2 billion, and investing cash flows from AFS and HTM securities were $39.4 billion.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)Liquidity Coverage Ratio
Schwab is subject to the full LCR rule, which requires the Company to hold HQLA in an amount equal to at least 100% of the Company’s projected net cash outflows over a prospective 30-calendar-day period of acute liquidity stress, calculated on each business day. See Part I – Item 1 – Regulation for additional information. The Company was in compliance with the LCR rule at December 31, 2023, and the table below presents information about our average daily LCR:
Average for the Three Months Ended
December 31, 2023 September 30, 2023
Total eligible HQLA $ 58,056 $ 60,781
Net cash outflows 44,793 51,351
LCR 130 % 119 %
To support growth in margin loan balances at our broker-dealer subsidiaries while meeting our LCR requirements, the Company may issue commercial paper or draw on secured lines of credit, in addition to capital markets issuances.Net Stable Funding RatioSchwab is subject to disclosure requirements under the NSFR rule, which requires the semi-annual public disclosure of its NSFR levels beginning in the second quarter of 2023. The NSFR rule stipulates that the Company’s available stable funding (ASF) must be at least 100% of the Company’s required stable funding (RSF). ASF is calculated by assessing the stability of the Company’s funding sources and RSF is calculated by evaluating the characteristics of the Company’s assets, derivatives, and off-balance-sheet exposures. The Company was in compliance with the NSFR rule at December 31, 2023, and the table below presents information about our average NSFR:Average for the Three Months EndedDecember 31, 2023 September 30, 2023
ASF $ 197,756 $ 202,775
RSF 157,560 161,270
NSFR 126 % 126 %Long-Term BorrowingsThe Company’s long-term debt is primarily comprised of Senior Notes and totaled $26.1 billion and $20.8 billion at December 31, 2023 and 2022, respectively.
The following table provides information about our Senior Notes outstanding at December 31, 2023:
Par Outstanding Maturity Weighted-Average Interest Rate Moody’s Standard & Poor’s Fitch
CSC Senior Notes $ 25,862 2024 - 2034 3.64% A2 A- A
TDA Holding Senior Notes $ 213 2024 - 2029 3.47% A2 A- —
During the second quarter of 2023, Standard and Poor’s downgraded CSC’s and TDA Holding’s long-term issuer credit and senior unsecured debt ratings from A to A- and affirmed its outlook remained stable. Moody’s also affirmed its rating of A2 for CSC and TDA Holding and changed its outlook from positive to stable.
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THE CHARLES SCHWAB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)New Debt IssuancesThe below debt issuances in 2023, 2022, and 2021 were senior unsecured obligations. Additional details are as follows:Issuance Date Issuance Amount Maturity Date Interest Rate Interest PayableMarch 18, 2021 $ 1,250 3/18/2024 SOFR + 0.500% Quarterly (1)
March 18, 2021 $ 1,500 3/18/2024 0.750% Semi-annually
March 18, 2021 $ 1,250 3/20/2028 2.000% Semi-annually
May 13, 2021 $ 500 5/13/2026 SOFR + 0.520% Quarterly
May 13, 2021 $ 1,000 5/13/2026 1.150% Semi-annually
May 13, 2021 $ 750 5/13/2031 2.300% Semi-annually
August 26, 2021 $ 850 12/1/2031 1.950% Semi-annually
March 3, 2022 $ 500 3/3/2027 SOFR + 1.050% Quarterly
March 3, 2022 $ 1,500 3/3/2027 2.450% Semi-annually
March 3, 2022 $ 1,000 3/3/2032 2.900% Semi-annually
May 19, 2023 $ 1,200 5/19/2029 5.643% Semi-annually (2)
May 19, 2023 $ 1,300 5/19/2034 5.853% Semi-annually (2)
August 24, 2023 $ 1,350 8/24/2034 6.136% Semi-annually (2)August 24, 2023 $ 1,000 8/24/2026 5.875% Semi-annuallyNovember 17, 2023 $ 1,300 11/17/2029 6.196% Semi-annually (2)
(1) On February 18, 2024, the Company redeemed all of these outstanding floating-rate Senior Notes.
(2) Interest rates presented are those in effect at December 31, 2023. For additional information regarding future interest rates on fixed-to-floating rate Senior Notes, see Item 8 – Note 12.
During 2021, we completed a debt exchange offer related to certain senior notes issued by TDA Holding for an equivalent amount of senior notes issued by CSC. For further discussion of the exchange, see Item 8 – Note 12.Equity Issuances and RedemptionsCSC’s preferred stock issued and net proceeds for 2023, 2022, and 2021 are shown below:
Date Issued and Sold Net Proceeds
Series I March 18, 2021 $ 2,222
Series J March 30, 2021 $ 584
Series K March 4, 2022 $ 740
On June 1, 2021, the Company redeemed all of the outstanding shares of its 6.00% Non-Cumulative Perpetual Preferred Stock, Series C, and the corresponding depositary shares. The depositary shares were redeemed at a redemption price of $25 per depositary share for a total of $600 million. The redemption was funded with the net proceeds from the Series J preferred stock offering. On November 1, 2022, the Company redeemed all of the outstanding shares of its Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock, Series A at a redemption price of $1,000 per share for a total of $400 million. On December 1, 2022, the Company redeemed all of the Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock, Series E, and the corresponding depositary shares. The depositary shares were redeemed at a redemption price of $1,000 per depositary share for a total of $600 million.
For further discussion, see Item 8 – Note 11 for the Company’s bank deposits, Item 8 – Note 12 for the Company’s outstanding debt and borrowing facilities, and Item 8 – Note 19 for equity outstanding balances and activity.
Contractual Obligations
Schwab’s principal contractual obligations as of December 31, 2023 include payments on brokered CDs; payments on FHLB borrowings, other short-term borrowings, and long-term debt; lease payments including legally-binding minimum lease payments for leases signed but not yet commenced; credit-related financial instruments, representing our banking subsidiaries’ commitments to extend credit to banking clients, purchase mortgage loans, and fund CRA investments; and purchase obligations for services such as advertising and marketing, telecommunications, hardware- and software-related agreements, and professional services. For information on our contractual obligations for brokered CDs, FHLB borrowings, other short-term borrowings, long-term debt, leases, and credit-related financial instruments, see Item 8 – Notes 11, 12, 13, and 14. As of
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Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)December 31, 2023, the Company had total short-term purchase obligations of $537 million and total long-term purchase obligations of $439 million.
Schwab also enters into guarantees and other similar arrangements in the ordinary course of business. For information on these arrangements, see Item 8 – Notes 5, 6, 10, 12, 14, and 17. Pursuant to the 2023 IDA agreement, certain brokerage client deposits are required to be swept off-balance sheet to the TD Depository Institutions. See Item 8 – Note 14 for additional information on the 2023 IDA agreement.CAPITAL MANAGEMENTSchwab seeks to manage capital to a level and composition sufficient to support execution of our business strategy, inclusive of balance sheet growth over time, management of the 2023 IDA agreement, financial support to our subsidiaries, sustained access to the capital markets, and regulatory capital requirements. Schwab also seeks to return excess capital to stockholders. We may return excess capital through such activities as dividends, repurchases of common shares, preferred stock redemptions, and repurchases of our preferred stock represented by depositary shares. Schwab’s primary sources of capital are funds generated by the operations of subsidiaries and securities issuances by CSC in the capital markets.
To ensure that Schwab has sufficient capital to absorb unanticipated losses or declines in asset values, we have adopted a policy to remain well capitalized even in stressed scenarios. 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 and regularly at meetings of the Board of Directors. A number of early warning indicators are monitored to help identify potential developments that could negatively 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. At the banking subsidiaries, dividends and returns of capital are managed with consideration of minimum tangible common equity and regulatory capital requirements. When subsidiaries have need of additional capital, funds are provided by CSC as equity investments and also as subordinated loans. 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 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 (see also Risk Management – Liquidity Risk for discussion of liquidity stress testing). 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 RequirementsCSC 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%, and has maintained a long-term operating objective for the consolidated Tier 1 Leverage Ratio of 6.50%-6.75%. Due to the relatively low credit risk of our balance sheet assets and risk-based capital ratios at CSC and CSB that are 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
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Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)capitalized, but has sought to maintain a ratio of at least 6.25%. Based on its regulatory capital ratios at December 31, 2023, CSB is considered well capitalized.
In July 2023, the Federal Reserve issued a notice of proposed changes to the regulatory capital rules that would require us to include AOCI in regulatory capital, phased in over a three-year transition period beginning July 1, 2025 (see Current Regulatory and Other Developments). In anticipation of the rules being adopted, the Company’s capital management for consolidated CSC, CSB, and our other banking subsidiaries now incorporates measures that are inclusive of AOCI. See below and Non-GAAP Financial Measures for additional information.
Our banking subsidiaries are required to provide notice to, and may be required to obtain approval from, the Federal Reserve and the banking subsidiaries’ state regulators in order to declare and pay dividends to CSC. In future periods, we may be required to obtain approval from the Federal Reserve for our banking subsidiaries to declare and pay dividends in excess of the amount of recent net income and retained earnings.
As broker-dealers, CS&Co, TDAC, and TD Ameritrade, Inc., are 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 the broker-dealer subsidiaries from paying cash dividends, making unsecured advances and loans to CSC and employees, and repaying subordinated borrowings from CSC if such payment would result in a net capital amount below prescribed thresholds. At December 31, 2023, CS&Co, TDAC, and TD Ameritrade, Inc. were in compliance with their respective 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 – Notes 19 and 23 for additional information on the components of stockholders’ equity and information on the capital requirements of significant subsidiaries and CSC consolidated.
The following table details the capital ratios for CSC consolidated and CSB:
December 31, 2023
2022CSC CSB CSC CSBTotal stockholders’ equity $ 40,958 $ 16,079 $ 36,608 $ 7,664Less:Preferred stock 9,191 — 9,706 —
Common Equity Tier 1 Capital before regulatory adjustments $ 31,767 $ 16,079 $ 26,902 $ 7,664Less:Goodwill, net of associated deferred tax liabilities $ 11,782 $ 13 $ 11,816 $ 13
Other intangible assets, net of associated deferred tax liabilities 6,664 — 7,079 —
Deferred tax assets, net of valuation allowances and deferred tax liabilities 41 35 37 35AOCI adjustment (1)(18,131) (15,746) (22,620) (19,680)
Common Equity Tier 1 Capital $ 31,411 $ 31,777 $ 30,590 $ 27,296
Tier 1 Capital $ 40,602 $ 31,777 $ 40,296 $ 27,296
Total Capital 40,645 31,816 40,376 27,370
Risk-Weighted Assets 128,230 83,809 139,657 99,631
Average Assets with regulatory adjustments 476,069 315,851 562,803 372,802
Total Leverage Exposure 479,302 318,007 566,809 375,846
Common Equity Tier 1 Capital/Risk-Weighted Assets 24.5 % 37.9 % 21.9 % 27.4 %
Tier 1 Capital/Risk-Weighted Assets 31.7 % 37.9 % 28.9 % 27.4 %
Total Capital/Risk-Weighted Assets 31.7 % 38.0 % 28.9 % 27.5 %
Tier 1 Leverage Ratio 8.5 % 10.1 % 7.2 % 7.3 %
Supplementary Leverage Ratio 8.5 % 10.0 % 7.1 % 7.3 %
(1) Changes in market interest rates can result in unrealized gains or losses on AFS securities, which are included in AOCI. As a Category III banking organization, CSC has elected to exclude AOCI from regulatory capital.
The Company’s consolidated Tier 1 Leverage Ratio increased to 8.5% at December 31, 2023 from 7.2% at year-end 2022. This increase was due primarily to a decrease in the Company’s total assets and 2023 net income. Total balance sheet assets decreased $58.6 billion, or 11%, during 2023 primarily driven by a decrease of $89.4 billion, or 19%, in total bank deposits and payables to brokerage clients due to client cash allocation decisions resulting from the rising interest rate environment. CSB’s
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THE CHARLES SCHWAB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)
Tier 1 Leverage Ratio also increased from year-end 2022, ending 2023 at 10.1% primarily as a result of lower total assets and capital contributions from CSC as well as 2023 net income.
In light of the Federal Reserve’s 2023 regulatory capital rule proposal, which among other things, would require the Company to include AOCI in regulatory capital, the Company has developed an adjusted Tier 1 Leverage Ratio, which is a non-GAAP financial measure that includes AOCI in the ratio. The primary component of AOCI for Schwab is unrealized gains and losses on our AFS investment securities portfolio and on securities transferred from AFS to the HTM category. As of December 31, 2023, our adjusted Tier 1 Leverage Ratio, which includes AOCI in the ratio, was 4.9% for CSC consolidated and 5.4% for CSB (see Non-GAAP Financial Measures for further details and a reconciliation of such measures to GAAP reported results). The Company is continuing to retain and accrete capital organically well ahead of the Federal Reserve’s proposed regulatory capital rules’ transition period.
During 2022, the Company transferred investment securities from the AFS category to the HTM category, with aggregate fair values of $188.6 billion and net unrealized losses at the time of transfer of $18.2 billion. The transfer of these securities to the HTM category reduces the Company’s exposure to fluctuations in AOCI that can result from unrealized gains and losses on AFS securities due to changes in market interest rates. The unrealized loss at the time of transfer is amortized over the remaining life of the security, offsetting the amortization of the security’s premium or discount, and resulting in no impact to net income.
IDA Agreement
Certain brokerage client deposits are swept off-balance sheet to the TD Depository Institutions pursuant to the 2023 IDA agreement. During 2023, Schwab did not move IDA balances to its balance sheet, and during 2022, Schwab moved net amounts of $13.7 billion of IDA balances to its balance sheet. The Company’s overall capital management strategy includes supporting migration of IDA balances in future periods as available pursuant to the terms of the 2023 IDA agreement. The Company’s ability to migrate these balances to its balance sheet is dependent upon multiple factors including having sufficient capital levels to sustain these incremental deposits. See Item 8 – Note 14 for further information on the 2023 IDA agreement.DividendsSince the initial dividend in 1989, and as of December 31, 2023, CSC has paid 139 consecutive quarterly dividends and has increased the quarterly dividend rate 28 times, resulting in a 20% 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 and nonvoting common stock cash dividend at approximately 20% to 30% of net income.
The Board of Directors of the Company declared a quarterly cash dividend increase per common share during 2023 as shown below:Date of Declaration Quarterly Cash Increase Per Common Share % Increase New Quarterly Dividend Per Common ShareJanuary 26, 2023 $ .03 14 % $ .25
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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 cash dividends paid and per share amounts:Year Ended December 31, 2023 2022Cash Paid Per Share Amount Cash Paid Per Share AmountCommon and Nonvoting Common Stock $ 1,838 $ 1.00 $ 1,591 $ .84Preferred Stock:Series A (1)
N/A N/A 33 82.73Series D (2)
45 59.52 45 59.52Series E (3)
N/A N/A 37 6,161.42
Series F (4)
24 5,000.00 25 5,000.00
Series G (2)
132 5,375.00 134 5,375.00Series H (2)90 4,000.00 100 4,000.00Series I (2)83 4,000.00 90 4,000.00Series J (2)
27 44.52 27 44.52Series K (5)
37 5,000.00 28 3,708.33
(1) Series A was redeemed on November 1, 2022. Prior to redemption, dividends were paid semi-annually until February 1, 2022 and quarterly thereafter. The final dividend was paid on November 1, 2022.(2) Dividends are paid quarterly.(3) Series E was redeemed on December 1, 2022. Prior to redemption, dividends were paid semi-annually until March 1, 2022 and quarterly thereafter. The final dividend was paid on December 1, 2022.
(4) Dividends are paid semi-annually until December 1, 2027 and quarterly thereafter.
(5) Series K was issued on March 4, 2022. Dividends are paid quarterly, and the first dividend was paid on June 1, 2022.
N/A Not applicable.
In addition, on January 24, 2024, the Board of Directors of the Company declared a dividend of $.25 per common share.Share RepurchasesOn July 27, 2022, CSC publicly announced that its Board of Directors approved a new share repurchase authorization to repurchase up to $15.0 billion of common stock, replacing the previous and now terminated share repurchase authorization of up to $4.0 billion of common stock. The new share repurchase authorization does not have an expiration date. On August 1, 2022, CSC purchased, directly from an affiliate of TD Bank, 15 million shares of nonvoting common stock for a total of $1.0 billion, or approximately $66.53 per share. The shares of nonvoting common stock automatically converted into common stock and were purchased under CSC’s new share repurchase authorization. The purchase price paid by CSC was equal to the lowest price per share that the affiliate of TD Bank received in a contemporaneous share sale facilitated by a third-party market maker, which resulted in a purchase price lower than the closing price on August 1, 2022. CSC repurchased an additional 32 million shares of its common stock under the new authorization for $2.4 billion during the year ended December 31, 2022. CSC repurchased 37 million shares of its common stock under the new authorization for $2.8 billion during 2023; we did not initiate repurchases after the first quarter of 2023. As of December 31, 2023, approximately $8.7 billion remained on the new authorization. There were no repurchases of CSC’s common stock under the terminated authorization during 2022.
The Company repurchased 11,620 depositary shares representing interests in Series F preferred stock for $11 million, 42,036 depositary shares representing interests in Series G preferred stock for $42 million, 273,251 depositary shares representing interests in Series H preferred stock for $235 million, and 194,567 depositary shares representing interests in Series I preferred stock for $179 million on the open market during 2023; we did not initiate repurchases after the first quarter of 2023 . The repurchase prices are inclusive of $3 million of dividends accrued by the stockholders as of the repurchase date.
Beginning in 2023, share repurchases, net of issuances, are subject to a nondeductible 1% excise tax which was recognized as a direct and incremental cost associated with these transactions. For repurchases of common stock, the tax is recorded as part of the cost basis of the treasury stock repurchased, resulting in no impact to the consolidated statement of income. For repurchases of preferred stock, the tax impact is included within preferred stock dividends and other on the consolidated statement of income.
FOREIGN EXPOSURE
At December 31, 2023, Schwab had exposure to non-sovereign financial and non-financial institutions in foreign countries, as well as agencies of foreign governments. At December 31, 2023, the fair value of these holdings totaled $12.8 billion, with the top three exposures being to issuers and counterparties domiciled in the United Kingdom at $5.0 billion, France at $3.2 billion,
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Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)and Canada at $1.5 billion. At December 31, 2022, the fair value of these holdings totaled $16.4 billion, with the top three exposures being to issuers and counterparties domiciled in France at $5.1 billion, the United Kingdom at $4.8 billion, and Canada at $1.7 billion. In addition, Schwab had outstanding margin loans to foreign residents of $2.5 billion at both December 31, 2023 and 2022.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 – Notes 2 and 18 for more information on our assets and liabilities recorded at fair value.
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 applying 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 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 TaxesSchwab 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 significant to the operating results of the Company. See Item 8 – Note 22 for more information on the Company’s income taxes.
Legal and Regulatory ReservesReserves 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.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)NON-GAAP FINANCIAL MEASURES
In addition to disclosing financial results in accordance with generally accepted accounting principles in the U.S. (GAAP), Management’s Discussion and Analysis of Financial Condition and Results of Operations contain references to the non-GAAP financial measures described below. We believe these non-GAAP financial measures provide useful supplemental information about the financial performance of the Company, and facilitate meaningful comparison of Schwab’s results in the current period to both historic and future results. These non-GAAP measures should not be considered a substitute for, or superior to, financial measures calculated in accordance with GAAP, and may not be comparable to non-GAAP financial measures presented by other companies.Schwab’s use of non-GAAP measures is reflective of certain adjustments made to GAAP financial measures as described below. Beginning in the third quarter of 2023, these adjustments also include restructuring costs, which the Company began incurring in connection with its previously announced plans to streamline its operations to prepare for post-integration of TD Ameritrade. See Item 8 – Note 15 for additional information.Non-GAAP Adjustment or Measure Definition Usefulness to Investors and Uses by ManagementAcquisition and integration-related costs, amortization of acquired intangible assets and restructuring costs
Schwab adjusts certain GAAP financial measures to exclude the impact of acquisition and integration-related costs incurred as a result of the Company’s acquisitions, amortization of acquired intangible assets, restructuring costs and, where applicable, the income tax effect of these expenses.Adjustments made to exclude amortization of acquired intangible assets are reflective of all acquired intangible assets, which were recorded as part of purchase accounting. These acquired intangible assets contribute to the Company’s revenue generation. Amortization of acquired intangible assets will continue in future periods over their remaining useful lives.We exclude acquisition and integration-related costs, amortization of acquired intangible assets and restructuring costs for the purpose of calculating certain non-GAAP measures because we believe doing so provides additional transparency of Schwab’s ongoing operations, and is useful in both evaluating the operating performance of the business and facilitating comparison of results with prior and future periods.Costs related to acquisition and integration or restructuring fluctuate based on the timing of acquisitions, integration and restructuring activities, thereby limiting comparability of results among periods, and are not representative of the costs of running the Company’s ongoing business. Amortization of acquired intangible assets is excluded because management does not believe it is indicative of the Company’s underlying operating performance.Return on tangible common equity Return on tangible common equity represents annualized adjusted net income available to common stockholders as a percentage of average tangible common equity. Tangible common equity represents common equity less goodwill, acquired intangible assets — net, and related deferred tax liabilities.
Acquisitions typically result in the recognition of significant amounts of goodwill and acquired intangible assets. We believe return on tangible common equity may be useful to investors as a supplemental measure to facilitate assessing capital efficiency and returns relative to the composition of Schwab’s balance sheet.Adjusted Tier 1 Leverage Ratio Adjusted Tier 1 Leverage Ratio represents the Tier 1 Leverage Ratio as prescribed by bank regulatory guidance for the consolidated company and for CSB, adjusted to reflect the inclusion of AOCI in the ratio. Inclusion of the impacts of AOCI in the Company’s Tier 1 Leverage Ratio provides additional information regarding the Company’s current capital position. We believe Adjusted Tier 1 Leverage Ratio may be useful to investors as a supplemental measure of the Company’s capital levels.The Company also uses adjusted diluted EPS and return on tangible common equity as components of performance criteria for employee bonus and certain executive management incentive compensation arrangements. The Compensation Committee of CSC’s Board of Directors maintains discretion in evaluating performance against these criteria.
- 62 -THE CHARLES SCHWAB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)
The following tables present reconciliations of GAAP measures to non-GAAP measures:
Year Ended December 31,2023 2022 2021
Total expenses excluding interest (GAAP) $ 12,459 $ 11,374 $ 10,807Acquisition and integration-related costs (1)(401) (392) (468)
Amortization of acquired intangible assets (534) (596) (615)Restructuring costs (2)(495) — —
Adjusted total expenses (non-GAAP) $ 11,029 $ 10,386 $ 9,724
(1) Acquisition and integration-related costs for 2023 primarily consist of $187 million of compensation and benefits, $135 million of professional services,
$28 million of occupancy and equipment, and $27 million of other. Acquisition and integration-related costs for 2022 primarily consist of $220 million of compensation and benefits, $140 million of professional services, and $21 million of occupancy and equipment. Acquisition and integration-related costs for 2021 primarily consist of $283 million of compensation and benefits, $132 million of professional services, and $39 million of occupancy and equipment.
(2) Restructuring costs for 2023 primarily consist of $292 million of compensation and benefits, $17 million of occupancy and equipment, and $181 million of other. There were no restructuring costs for 2022 and 2021.Year Ended December 31,2023 2022 2021Amount Diluted EPS Amount Diluted EPS Amount Diluted EPSNet income available to common stockholders (GAAP), Earnings per common share — diluted (GAAP) $ 4,649 $ 2.54 $ 6,635 $ 3.50 $ 5,360 $ 2.83
Acquisition and integration-related costs 401 .22 392 .21 468 .25
Amortization of acquired intangible assets 534 .29 596 .31 615 .32
Restructuring costs
495 .27 — — — —Income tax effects (1)(338) (.19) (237) (.12) (268) (.15)
Adjusted net income available to common stockholders (non-GAAP), Adjusted diluted EPS (non-GAAP) $ 5,741 $ 3.13 $ 7,386 $ 3.90 $ 6,175 $ 3.25
(1) The income tax effects of the non-GAAP adjustments are determined using an effective tax rate reflecting the exclusion of non-deductible acquisition costs and are used to present the acquisition and integration-related costs, amortization of acquired intangible assets and restructuring costs on an after-tax basis.Year Ended December 31,2023 2022 2021
Return on average common stockholders’ equity (GAAP) 16 % 18 % 11 %
Average common stockholders’ equity $ 29,334 $ 36,605 $ 47,318
Less: Average goodwill (11,951) (11,952) (11,952)
Less: Average acquired intangible assets — net (8,524) (9,084) (9,685)
Plus: Average deferred tax liabilities related to goodwill and acquired intangible assets — net 1,805 1,870 1,919
Average tangible common equity $ 10,664 $ 17,439 $ 27,600Adjusted net income available to common stockholders (1)$ 5,741 $ 7,386 $ 6,175
Return on tangible common equity (non-GAAP) 54 % 42 % 22 %(1) See table above for the reconciliation of net income available to common stockholders to adjusted net income available to common stockholders (non-GAAP).December 31, 2023
CSC CSB
Tier 1 Leverage Ratio (GAAP) 8.5 % 10.1 %
Tier 1 Capital $ 40,602 $ 31,777
Plus: AOCI adjustment (18,131) (15,746)
Adjusted Tier 1 Capital 22,471 16,031
Average assets with regulatory adjustments 476,069 315,851
Plus: AOCI adjustment (19,514) (17,194)
Adjusted average assets with regulatory adjustments $ 456,555 $ 298,657
Adjusted Tier 1 Leverage Ratio (non-GAAP) 4.9 % 5.4 %
- 63 -
THE CHARLES SCHWAB CORPORATION
FY 2025-12-31 (later)
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
FORWARD-LOOKING STATEMENTSIn 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,” “prioritize,” “will,” “may,” “estimate,” “appear,” “could,” “would,” “expand,” “aim,” “maintain,” “continue,” “seek,” and other similar expressions. In addition, any statements that refer to expectations, strategy, objectives, projections, or other characterizations of future events or circumstances are forward-looking statements.
These forward-looking statements, which reflect management’s expectations and objectives as of the date hereof, are based on the best judgment of Schwab’s senior management. These statements relate to, among other things:
• Maximizing our market valuation and stockholder returns over time; and our belief that developing trusted relationships will translate into more client assets which drives revenue and, along with expense discipline and thoughtful capital management, generates earnings growth and builds stockholder value (see Business Strategy and Competitive Environment, and Products and Services in Part I – Item 1);
• Industry and competitive trends including artificial intelligence, digital assets, private company securities and other alternative investments;
• The Company’s plan to provide increased access for clients to trade in digital assets including select cryptocurrencies (see Products and Services in Part I – Item 1);
• The acquisition and integration of Forge and its private markets capabilities (see Business Acquisition in Part I – Item 1; Overview in Part II – Item 7, and Results of Operations in Part II – Item 7);
• Capital expenditures and expense management (see Results of Operations in Overview and Results of Operations – Total Expenses Excluding Interest in Part II – Item 7);
• Net interest revenue, client cash allocation behavior, and adjustment of rates paid on client-related liabilities (see Results of Operations – Net Interest Revenue in Part II – Item 7);
• Wholesale funding and funding strategy (see Results of Operations in Part II – Item 7, and Liquidity Risk in Part II – Item 7);
• Management of interest rate risk; modeling and assumptions, the impact of changes in interest rates on net interest margin and revenue, bank deposit account fee revenue, economic value of equity (EVE), and liability and asset duration (see Risk Management in Part II – Item 7);
• Sources and uses of liquidity (see Liquidity Risk in Part II – Item 7);
• Capital management; long-term operating objective; and uses of capital and return of excess capital to stockholders (see Capital Management in Part II – Item 7; and Commitments and Contingencies in Part II – Item 8 – Note 15);
• The expected impact of proposed and final rules (see Current Regulatory and Other Developments in Part II – Item 7 and Regulation in Part I – Item 1);
• The expected impact of new accounting standards not yet adopted (see Summary of Significant Accounting Policies in Part II – Item 8 – Note 2);
• The likelihood of indemnification and guarantee payment obligations and clients failing to fulfill contractual obligations (see Commitments and Contingencies in Part II – Item 8 – Note 15, and Financial Instruments Subject to Off-Balance Sheet Credit Risk – Note 17); and
• The outcome and impact of legal proceedings and regulatory matters (see Commitments and Contingencies in Part II – Item 8 – Note 15, and Legal Proceedings in Part I – Item 3).
Achievement of these expectations and objectives is subject to certain risks and uncertainties that could cause actual results to differ materially. 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 economic and market conditions, including the level of interest rates, equity market valuations and volatility;
• The impact of new and emerging technologies;• Our ability to attract and retain clients, develop trusted relationships, and grow client assets;
• Client use of our advisory and lending solutions and other products and services;- 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)• The level of client assets, including cash balances;• Client cash allocations and sensitivity to deposit rates;• Competitive pressure on pricing, including deposit rates;
• The level and mix of client trading activity, including daily average trades, margin balances, and balance sheet cash;
• Regulatory guidance and adverse impacts from new or changed legislation, rulemaking or regulatory expectations;
• Capital and liquidity needs and management;
• Our ability to manage expenses;
• Our ability to attract and retain talent;
• Our ability to develop and launch new and enhanced products, services, and capabilities, as well as enhance our infrastructure, in a timely and successful manner;• Management’s ability to close the acquisition of Forge on the anticipated terms and timing;• Our ability to monetize client assets;
• Our ability to support client activity levels;• Increased compensation and other costs;• Real estate and workforce decisions;• The timing and scope of technology projects;• Balance sheet positioning relative to changes in interest rates;• Interest-earning asset mix and growth;
• Our ability to access funding sources;• Prepayment levels for mortgage-backed securities;• Balance sheet positioning relative to changes in interest rates;
• Regulatory and legislative developments;• Adverse developments in litigation or regulatory matters and any related charges; and
• Potential breaches of contractual terms for which we have indemnification and guarantee obligations.
Certain of these factors, as well as general risk factors affecting the Company, are discussed in greater detail in Risk Factors in Part I – Item 1A.
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 primarily includes unrealized gains and losses on available for sale (AFS) securities and securities transferred from the AFS category to the held to maturity (HTM) category.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 managed investing solutions at the end of the reporting period.
Bank deposit account balances (BDA balances): Clients’ uninvested cash balances held off-balance sheet in deposit accounts at unconsolidated third-party financial institutions, pursuant to the 2023 IDA agreement or agreements with other third-party financial institutions. Average BDA balances represent the daily average balance for the reporting period.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 1/100 th 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, BDA balances, and proprietary products, which includes both cash and securities. Average client assets are the daily average client asset balance for the reporting period.
Client cash as a percentage of client assets: Calculated as the value, at the end of the reporting period, of all money market fund balances, bank deposits excluding brokered CDs issued by CSB, Schwab One ® balances, BDA balances, and certain cash equivalents divided by client assets.
- 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)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. As a Category III banking organization, CSC has elected to exclude most components of AOCI from 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 $25 billion ($10 billion prior to 2025)) relating to a specific client, and activity from off-platform brokered CDs issued by CSB. These flows may span multiple reporting periods.Customer Protection Rule: Refers to Rule 15c3-3 of the Securities Exchange Act of 1934.Daily Average Trades (DATs): Includes daily average revenue trades by clients, trades by clients in asset-based pricing relationships, commission-free trades, and allocated trades by investment advisors.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 Act): 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.
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): HQLA is defined by the Federal Reserve, but includes assets that are actively traded and readily convertible to cash in times of stress.Industry Fees: Includes fees collected from clients for certain securities transactions to offset, as applicable, charges assessed on the Company by SROs and foreign governments. Such charges include Section 31 fees, FINRA trading activity fees, options regulatory fees, proprietary index options fees, and foreign transaction tax on American Depositary Receipts.
Interest-bearing liabilities: Primarily includes bank deposits, payables to brokerage clients, payables to brokers, dealers, and clearing organizations, Federal Home Loan Bank (FHLB) borrowings, other short-term borrowings, and long-term debt on which Schwab pays interest.Interest-earning assets: Primarily includes cash and cash equivalents, cash and investments segregated, 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 “Baa3” or higher, or a Standard & Poor’s Rating Group (Standard & Poor’s) or Fitch Ratings, Inc. (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: Money borrowed against the value of certain stocks, bonds, and mutual funds in a client portfolio. The borrowed money can be used to purchase additional securities or to meet short-term financial needs.
- 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)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): The ratio of the amount of available stable funding relative to the amount of required stable funding.
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: Payments received from trade execution venues to which our broker-dealer subsidiary sends equity and option orders.Pledged Asset Line ® (PAL): A non-purpose revolving line of credit from a banking subsidiary 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.
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 period.
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 Office of the Comptroller of the Currency, 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.- 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)
OVERVIEWManagement 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, 2025, 2024, and 2023 are as follows:
Percent Change 2025-2024 2025 2024 2023Client Metrics
Net new client assets (in billions) (1)38 % $ 498.6 $ 361.6 $ 337.2
Core net new client assets (in billions) 42 % $ 519.4 $ 366.9 $ 305.7
Client assets (in billions, at year end) 18 % $ 11,903.0 $ 10,101.3 $ 8,516.6
Average client assets (in billions) 15 % $ 10,809.0 $ 9,400.4 $ 7,793.8
New brokerage accounts (in thousands) 13 % 4,692 4,170 3,806
Active brokerage accounts (in thousands, at year end) 6 % 38,506 36,456 34,838
Assets receiving ongoing advisory services (in billions, at year end) 19 % $ 6,020.3 $ 5,061.7 $ 4,338.8
Client cash as a percentage of client assets (at year end) 9.7 % 10.1 % 10.5 %Company Financial Information and MetricsTotal net revenues 22 % $ 23,921 $ 19,606 $ 18,837
Total expenses excluding interest 5 % 12,462 11,914 12,459
Income before taxes on income 49 % 11,459 7,692 6,378
Taxes on income 49 % 2,607 1,750 1,311
Net income 49 % 8,852 5,942 5,067
Preferred stock dividends and other (6) % 435 464 418
Net income available to common stockholders 54 % $ 8,417 $ 5,478 $ 4,649
Earnings per common share — diluted 56 % $ 4.65 $ 2.99 $ 2.54
Net revenue growth from prior year 22 % 4 % (9) %
Pre-tax profit margin 47.9 % 39.2 % 33.9 %
Return on average common stockholders’ equity 21 % 15 % 16 %
Expenses excluding interest as a percentage of average client assets 0.12 % 0.13 % 0.16 %
Consolidated Tier 1 Leverage Ratio (at year end) 9.3 % 9.9 % 8.5 %
Non-GAAP Financial Measures (2)
Adjusted total expenses $ 11,950 $ 11,269 $ 11,029
Adjusted diluted EPS $ 4.87 $ 3.25 $ 3.13
Return on tangible common equity 38 % 35 % 54 %
Adjusted tier 1 leverage ratio (consolidated)
7.1 % 6.8 % 4.9 %
(1) 2025 includes net outflows of $20.8 billion from off-platform brokered CDs issued by CSB. 2024 includes net outflows of $14.6 billion from off-platform brokered CDs issued by CSB, an inflow of $10.3 billion from a mutual fund clearing services client, and an outflow of $1.0 billion from an international relationship. 2023 includes net inflows of $32.5 billion from off-platform brokered CDs issued by CSB and $12.0 billion from a mutual fund clearing services client and outflows of $13.0 billion from an international relationship.
(2) See Non-GAAP Financial Measures for further details and a reconciliation of such measures to GAAP reported results.
- 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)2025 Compared to 2024
Guided by our “Through Clients’ Eyes” strategy, and with a generally supportive market and engaged clients, Schwab delivered growth in 2025 across multiple client metrics and in our financial results, and we continued to innovate to help our clients achieve their financial goals. Equity markets finished 2025 with significant full-year gains, as the S&P 500 ® rose 16% in 2025, and the NASDAQ Composite ® rose 20% during the year. The Federal Reserve reduced the target federal funds rate by a total of 75 basis points in the third and fourth quarters.
With equity market gains and strong client asset gathering, Schwab’s total client assets reached $11.90 trillion at December 31, 2025, up 18% on the year. Core net new assets for 2025 totaled $519.4 billion, increasing 42% from the prior year, and resulting in an annualized organic growth rate of 5.1%. In 2025, clients opened 4.7 million new brokerage accounts, an increase of 13% from the prior year, and active brokerage accounts totaled 38.5 million as of December 31, 2025, up 6% from year-end 2024. Our clients were highly engaged with the markets in 2025; clients’ DATs were 7.7 million for full-year 2025 and 8.3 million in the fourth quarter, increasing 31% over both the prior year-to-date and fourth-quarter periods.
Schwab’s financial performance in 2025 reflected strong asset gathering, sustained client engagement and equity market appreciation, continued demand for Schwab’s lending offerings and managed investing solutions, as well as reduction of higher-cost funding and balanced expense management. Net income reached $8.9 billion in 2025, rising 49% from 2024, and diluted EPS was $4.65, an increase of 56% over the prior year. Adjusted diluted EPS (1) rose to $4.87 in 2025, higher by 50% from 2024.
Total net revenues increased 22% year-over-year to $23.9 billion in 2025. Net interest revenue was $11.8 billion in 2025, up 28% from 2024, due primarily to lower interest expense from reductions in bank supplemental funding and lower rates on funding sources, as well as growth in margin and bank lending and higher segregated cash and investments, which more than offset lower yields on interest-earning assets due to lower market rates. Asset management and administration fees totaled $6.5 billion in 2025, increasing 14% from 2024, due primarily to higher client asset balances, reflecting market appreciation, asset gathering, and growth in managed investing solutions and money market funds. Trading revenue was $3.9 billion in 2025, rising 20% from 2024, due primarily to higher trading volume. Bank deposit account fee revenue increased to $977 million in 2025, up 34% from the prior year, due primarily to higher net yields, partially offset by lower BDA balances.
Total expenses excluding interest were $12.5 billion in 2025, higher by 5% from 2024, and adjusted total expenses (1) were $12.0 billion in 2025, increasing 6% from the prior year. These increases reflect ongoing investments to support growth of the business and enhance client-serving capabilities while driving incremental efficiencies across the Company. The year-over-year changes in expenses were primarily attributable to higher compensation and benefits and higher professional services expense, due largely to growth in the business and volume-related costs, including higher incentive compensation driven by the Company’s financial performance, partially offset by lower regulatory fees and assessments due to lower FDIC assessments.
Return on average common stockholders’ equity was 21% in 2025, rising from 15% in 2024 as a result of higher net income, which more than offset higher average common stockholders’ equity. Return on tangible common equity (1) (ROTCE) was 38% in 2025, up from 35% in 2024, as growth in adjusted net income available to common stockholders (1) more than offset growth in average common stockholders’ equity. Average common stockholders equity increased primarily as a result of growth in retained earnings and improved average AOCI, partially offset by higher treasury stock due to common stock repurchases in 2025. The improvement in average AOCI was due to lower unrealized losses on AFS investment securities and securities previously transferred from AFS to HTM, reflecting decreases in market interest rates and lower investment holdings in 2025.
Schwab supported strong client demand for margin and bank lending in 2025, while significantly reducing bank supplemental funding to within a range generally consistent with our diversified funding strategy. Balance sheet assets totaled $491.0 billion as of December 31, 2025, higher by 2% from year-end 2024. Principal and interest from our AFS and HTM securities portfolios along with normal client cash behavior supported reduction of bank supplemental funding, which has included brokered CDs, FHLB borrowings, and borrowings under repurchase agreements at our banks. The Company reduced bank supplemental funding in 2025 by $44.8 billion, or 90%, to $5.1 billion at year-end 2025. Client sweep cash trends improved in 2025, with bank sweep deposits and payables to brokerage clients increasing by a total of $36.6 billion, or 12%. Client demand for margin loans increased significantly in 2025, with margin loans ending the year at $112.3 billion, up 34% from year-end 2024 and up 16% during the fourth quarter alone, supported by growth in bank and broker-dealer sweep cash, as well as wholesale funding. The growth in margin lending in 2025 reflects strong client demand and engagement amid rising equity markets and long/short strategies implemented by RIA clients. Bank loans totaled $58.0 billion at year-end 2025, increasing 28% during the year due primarily to growth of PALs and First Mortgages, which ended the year at $26.6 billion and $30.5 billion, respectively.
- 29 -THE CHARLES SCHWAB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)The Company returned meaningful excess capital in 2025. Total common stock repurchased during the year amounted to $7.3 billion. In addition, the Company increased its common dividend by 8% to $.27 per share in the first quarter of 2025, and redeemed its Series G preferred stock for $2.5 billion in the second quarter. Inclusive of these capital actions and organic capital generation from net income, the Company’s consolidated Tier 1 Leverage Ratio was 9.3% at year-end 2025, down from 9.9% at December 31, 2024. Our consolidated adjusted Tier 1 Leverage Ratio (1) increased to 7.1% at December 31, 2025 from 6.8% at the prior year-end, driven by net income and improvement in AOCI in 2025.
Planned Acquisition of Forge
On November 6, 2025, Schwab announced that it had entered into a definitive agreement to acquire Forge, operator of a leading private market platform and trading marketplace, in a transaction valued at approximately $660 million. The Company anticipates that incorporating Forge’s private company investment capabilities will enhance Schwab’s ability to meet the evolving needs of investors across our growing client base. The transaction was approved by Forge’s stockholders in January 2026, and is expected to close in March 2026, subject to customary closing conditions, including regulatory approvals.
2024 Compared to 2023
Through an evolving macroeconomic landscape in 2024, Schwab continued its “Through Clients’ Eyes” strategy, striving to meet the needs of our diverse client base, while driving growth across multiple fronts and successfully completing the integration of Ameritrade Holding LLC and its consolidated subsidiaries (collectively referred to as Ameritrade). Amid easing inflation, the Federal Reserve began in September to cut interest rates for the first time in over four years, reducing the federal funds overnight rate by a total of 100 basis points in the third and fourth quarters. Equity markets were positive for the year in 2024, with the S&P 500 ® and the NASDAQ Composite ® finishing the year higher by 23% and 29%, respectively.
Reflecting the strength of equity markets and organic asset gathering, total client assets rose to $10.10 trillion as of year-end 2024, up 19% from year-end 2023. Core net new assets totaled $366.9 billion in 2024, up 20% from 2023, and representing an annualized growth rate of 4.3%. Following the successful completion of our final Ameritrade client conversion in May, our organic growth trends strengthened, and core net new assets for the fourth quarter of 2024 were $114.8 billion, up 51% from the fourth quarter of 2023. We saw strong client engagement in the markets throughout 2024, with acceleration in the fourth quarter; clients’ DATs were 5.9 million in full-year 2024 and 6.3 million in the fourth quarter, increasing 9% and 22%, respectively, from the same periods in 2023. Clients opened 4.2 million new brokerage accounts in 2024, a year-over-year increase of 10%, and active brokerage accounts ended 2024 at 36.5 million, up 5% on the year.
The Company’s financial results in 2024 reflected the impact of positive equity markets, solid asset gathering, sustained client engagement, and improvement in client cash trends. Net income totaled $5.9 billion in 2024, up 17% year-over-year, and diluted EPS was $2.99, an increase of 18% over the prior year. Adjusted diluted EPS (1) was $3.25 in 2024, up 4% from $3.13 in 2023.
Total net revenues rose 4% year-over-year to $19.6 billion in 2024. Net interest revenue was $9.1 billion in 2024, down 3% from 2023, which reflected lower average interest-earning assets and higher rates on funding sources, partially offset by growth in margin and bank lending and lower bank supplemental funding. Client cash realignment activity continued to decelerate in 2024, and principal and interest payments on the AFS and HTM investment securities portfolios supported reductions in bank supplemental funding balances. Asset management and administration fees were $5.7 billion in 2024, increasing 20% from the prior year primarily as a result of growth in money market funds, equity market gains, and growth in managed investing solutions. Trading revenue was $3.3 billion in 2024, up 1% from the prior year, reflecting higher volume and changes in mix of client trading activity. Bank deposit account fee revenue totaled $729 million in 2024, up 3% year-over-year, due primarily to $97 million in breakage fees recognized in 2023, partially offset by lower average BDA balances. BDA balances totaled $87.6 billion at December 31, 2024, down 10% from year-end 2023 primarily resulting from lower client cash allocations.
Total expenses excluding interest were $11.9 billion in 2024, down 4% from 2023. This decrease reflected lower restructuring costs, lower acquisition and integration-related costs, and lower regulatory fees and assessments due primarily to a $172 million FDIC special assessment recognized in the fourth quarter of 2023. These lower expenses were partially offset by higher incentive compensation, higher depreciation and amortization due to continued investment to support growth of the business, and higher other expense. Other expense reflected higher industry fees resulting from the SEC’s May 2024 fee rate increase. Adjusted total expenses (1) were $11.3 billion in 2024, up 2% from 2023. Acquisition and integration-related costs, amortization of acquired intangible assets, and restructuring costs totaled $645 million in 2024, down 55% from 2023, as substantially all of the Company’s costs related to its restructuring were incurred in 2023, and spending for the Ameritrade integration decreased in 2024 as we completed the final integration activities.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)Return on average common stockholders’ equity was 15% in 2024, down from 16% in 2023, and ROTCE (1) was 35% in 2024, down from 54% in 2023. These changes reflect the benefit of higher net income in 2024 offset by higher average common stockholders’ equity. Average common stockholders’ equity was higher year-over-year due to higher retained earnings as well as higher average AOCI. The increase in average AOCI was driven by lower unrealized losses on our AFS investment securities portfolio and securities transferred in 2022 from AFS to HTM.
Employing our diligent approach to managing the balance sheet, Schwab supported client-driven growth in margin and bank lending, while reducing our bank supplemental funding in 2024. Total balance sheet assets decreased 3% during the year, though margin lending grew to $83.8 billion at year-end 2024, up 34%, and bank loans increased to $45.2 billion, rising 12% during the year. Principal and interest from our AFS and HTM securities portfolios, along with deceleration of client cash realignment from sweep products to higher-yielding investment solutions, supported a reduction in bank supplemental funding. Total bank supplemental funding ended 2024 at $49.9 billion, down $29.7 billion, or 37%, from year-end 2023, and down 49% from peak levels in May 2023. Supported by strength of net income, our consolidated Tier 1 Leverage Ratio increased to 9.9% as of December 31, 2024, and our consolidated adjusted Tier 1 Leverage Ratio (1) rose to 6.8%, ending the year within our long-term operating objective of 6.75% - 7.00%.
(1) Adjusted diluted EPS, adjusted total expenses, return on tangible common equity, adjusted net income available to common stockholders, and adjusted Tier 1 Leverage Ratio are non-GAAP financial measures. See Non-GAAP Financial Measures for further details and a reconciliation of such measures to GAAP reported results.
Integration of Ameritrade and Other Restructuring
The Company’s integration of Ameritrade was completed as of December 31, 2024. Over the course of five client transition groups in 2023 and 2024, we converted approximately $1.9 trillion in client assets across more than 17 million client accounts, including 7,000 RIAs, from Ameritrade to the Schwab platform. In connection with these transitions, we experienced some expected attrition of client assets from retail accounts and RIAs, though such attrition was below our initial estimates when we announced the acquisition. Throughout the integration, the Company incurred total acquisition and integration-related costs and capital expenditures of approximately $2.5 billion. Acquisition and integration-related costs, which are inclusive of related exit costs, totaled $117 million and $401 million in 2024 and 2023, respectively. Over the course of the integration, we realized annualized run-rate cost synergies of approximately $2.0 billion.
In addition to cost synergies directly related to the integration of Ameritrade, the Company took incremental actions in 2023 and 2024 to streamline its operations to prepare for post-integration, including through position eliminations and decreasing its real estate footprint. Through these actions, the Company has realized approximately $500 million of incremental run-rate cost savings in addition to integration synergies. In order to achieve these cost savings, the Company incurred total exit and related costs, primarily related to employee compensation and benefits and facility exit costs, of approximately $500 million. Substantially all of these costs were recognized in 2023 and actions under the plan were completed as of December 31, 2024.CURRENT REGULATORY AND OTHER DEVELOPMENTSOn June 12, 2025, the SEC withdrew certain notices of proposed rulemaking issued between March 2022 and November 2023, which the Company had been evaluating. The withdrawn proposals included the December 2022 equity market structure rule proposals, “Order Competition Rule” and “Regulation Best Execution”.
On March 3, 2025, the FDIC also withdrew certain notices of proposed rulemaking issued in 2023 and 2024 that the Company had been evaluating, including the July 2024 proposal related to the brokered deposits framework.
In April 2024, the U.S. Department of Labor adopted a final rule to significantly broaden the definition of “fiduciary” under the Employee Retirement Income Security Act of 1974. Among other requirements, the rule, in conjunction with associated prohibited transaction exemptions (PTEs), subjects broker-dealers who provide non-discretionary investment advice to retirement plans and accounts to a “best interest” standard. The rule was scheduled to take effect September 23, 2024, with a one-year transition period for certain PTE provisions. In July 2024, in two separate industry lawsuits seeking to vacate the rule, federal district court judges stayed effectiveness of the rule pending resolution of litigation. The stay was appealed by the Department of Labor in late 2024, and in November 2025 the Department of Labor formally withdrew its appeal and the stay remains in place.
In November 2023, the FDIC approved a special assessment to recover losses incurred by the DIF to protect uninsured depositors due to the March 2023 closures of two banks. The Company recognized a charge of $172 million in 2023 for its
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Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)estimated portion of this special assessment. The FDIC has since provided updates to its estimated losses to recover. The Company has revised its estimates accordingly, resulting in an additional charge of $30 million recognized in 2024 and a subsequent reduction of $32 million recognized in 2025.
In August 2023, the U.S. federal banking agencies issued a proposed rulemaking on long-term debt requirements for certain large banking organizations. Among other things, the proposed rule would require CSC and our banking subsidiaries to maintain outstanding minimum levels of eligible long-term debt. The comment period for the proposed rule ended on January 16, 2024 and the rule proposal is subject to further modification. The proposed rule could have a significant impact on the amount of debt that CSC and our banking subsidiaries are required to maintain.
In July 2023, the U.S. federal banking agencies issued a notice of proposed rulemaking with amendments to the regulatory capital rules. Among other things, the proposed rules would require us to include AOCI in regulatory capital and to calculate our risk-weighted assets using a revised risk-based approach, a component of which is based on operational risk, phased in over a three-year transition period. The comment period for the proposed rules ended on January 16, 2024. The Company’s capital management for consolidated CSC and our banking subsidiaries now incorporates measures that are inclusive of AOCI. See Capital Management for additional information.RESULTS OF OPERATIONS
Total Net Revenues
The following table presents a comparison of revenue by category:Year Ended December 31, 2025 2024 2023
Percent Change 2025-2024 Amount % of Total Net Revenues Amount % of Total Net Revenues Amount % of Total Net RevenuesNet interest revenueInterest revenue — $ 15,504 65 % $ 15,537 79 % $ 16,111 86 %
Interest expense (41) % (3,754) (16) % (6,393) (32) % (6,684) (36) %
Net interest revenue 28 % 11,750 49 % 9,144 47 % 9,427 50 %Asset management and administration feesMutual funds, ETFs, and CTFs 14 % 3,665 15 % 3,221 16 % 2,563 13 %
Managed investing solutions 15 % 2,440 10 % 2,129 11 % 1,868 10 %
Other 10 % 401 2 % 366 2 % 325 2 %
Asset management and administration fees 14 % 6,506 27 % 5,716 29 % 4,756 25 %Trading revenueCommissions 13 % 1,797 8 % 1,591 8 % 1,601 9 %
Order flow revenue
31 % 1,930 8 % 1,477 7 % 1,404 7 %
Principal transactions (1) % 194 1 % 196 1 % 225 1 %
Trading revenue 20 % 3,921 17 % 3,264 16 % 3,230 17 %
Bank deposit account fees 34 % 977 4 % 729 4 % 705 4 %
Other 2 % 767 3 % 753 4 % 719 4 %
Total net revenues 22 % $ 23,921 100 % $ 19,606 100 % $ 18,837 100 %Net Interest RevenueSchwab’s primary interest-earning assets include cash and cash equivalents; cash and investments segregated; margin loans; investment securities; and bank loans. Schwab’s interest-bearing liabilities are comprised of bank deposits and payables to brokerage clients, which together are the Company’s primary funding source; payables to brokers, dealers, and clearing organizations (e.g., securities lending, broker-dealer repurchase agreements); FHLB borrowings; other short-term borrowings (e.g., commercial paper, bank repurchase agreements, other secured borrowings); and long-term debt. Schwab deploys the funds from these sources into the aforementioned interest-earning assets.
Revenue on interest-earning assets is affected by various factors, such as the composition of assets, prevailing interest rates and spreads at the time of origination or purchase, changes in interest rates on cash and cash equivalents, floating-rate securities and
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Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)loans, and changes in prepayment levels for mortgage-backed and other asset-backed securities and loans. Schwab establishes the rates paid on client-related liabilities, and management expects that it will generally adjust the rates paid on these liabilities at some fraction of any movement in short-term rates. Interest expense on long-term debt, FHLB borrowings, other short-term borrowings, and other funding sources is impacted by market interest rates at the time of borrowing and changes in interest rates on floating-rate liabilities. Schwab’s use and the financial impacts of the Company’s various funding sources are dependent on a number of market and client activity factors. Net interest revenue also reflects the impacts of derivatives used to manage interest rate risk. See also Risk Management – Market Risk and Item 8 – Note 16 for additional information.
The Federal Reserve maintained the upper bound of the target overnight rate at 4.50% for most of the first nine months of 2025 before reducing the rate by 25 basis points in the third quarter and an additional 50 basis points across two cuts in the fourth quarter of 2025.
Schwab’s average interest-earning assets in 2025 were relatively consistent in aggregate with 2024, while the mix of interest-earning assets shifted year-over-year to reflect higher margin and bank lending, higher cash and investments segregated, and lower balances of AFS and HTM securities. Client demand for margin and bank lending was strong during 2025, reflecting positive equity market performance and client engagement, as margin loan balances rebounded following market volatility in late March and early April, increasing in the third quarter and through the end of 2025. Margin loan balances ended the year at $112.3 billion, increasing 34% from year-end 2024. Total bank loans rose to $58.0 billion at year-end 2025, higher by 28% from December 31, 2024, due primarily to growth in PALs and First Mortgages.
Cash activity during 2025 reflected normal client cash behavior, inclusive of organic growth, and engagement in equity markets. Bank sweep deposits and payables to brokerage clients increased by a total of $36.6 billion, or 12% during 2025. Principal and interest payments on AFS and HTM securities, as well as transfers of $6.7 billion of BDA balances to our balance sheet (see Results of Operations – Bank Deposit Account Fees and Item 8 – Note 15), supported paydowns in bank supplemental funding of $44.8 billion, or 90% during 2025.
The Federal Reserve maintained the upper bound of the target overnight rate at 5.50% through most of 2024 before reducing the rate by 50 basis points during the third quarter and another 50 basis points across two cuts during the fourth quarter of 2024.
Average interest-earning assets decreased $45.6 billion in 2024 from 2023; however, Schwab saw strong client demand for margin and bank lending, which grew by 34% and 12%, respectively. Even as higher interest rates continued for much of the year, the pace of clients’ reallocation of cash from sweep products to higher-yielding investment solutions further decelerated in 2024, particularly in the second half of the year. Bank sweep deposits and payables to brokerage clients increased by a total of $9.8 billion, or 4%, during the third quarter, and $30.1 billion, or 11%, in the fourth quarter of 2024, inclusive of typical seasonal cash inflows near year-end. Deceleration of client cash reallocation activity, along with principal and interest payments on the AFS and HTM securities portfolios, supported a reduction in bank supplemental funding of $14.9 billion, or 23%, during the fourth quarter and $29.7 billion, or 37%, for the full year ended December 31, 2024.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)
The following table presents net interest revenue information corresponding to interest-earning assets and funding sources on the consolidated balance sheets:Year Ended December 31, 2025 2024 2023Average Balance Interest Revenue/ Expense Average Yield/ Rate Average Balance Interest Revenue/ Expense Average Yield/ Rate Average Balance Interest Revenue/ Expense Average Yield/ Rate
Interest-earning assetsCash and cash equivalents $ 28,054 $ 1,189 4.18 % $ 29,676 $ 1,539 5.10 % $ 37,846 $ 1,894 4.94 %
Cash and investments segregated 44,359 1,862 4.14 % 28,450 1,443 4.99 % 28,259 1,355 4.73 %
Receivables from brokerage clients (1)
87,300 5,700 6.44 % 70,811 5,420 7.53 % 61,914 4,793 7.64 %
Available for sale securities (2)
74,478 1,538 2.06 % 101,659 2,166 2.12 % 137,178 2,987 2.17 %
Held to maturity securities (2)
139,447 2,386 1.71 % 152,566 2,636 1.72 % 165,634 2,872 1.73 %
Bank loans 50,595 2,168 4.28 % 42,255 1,867 4.42 % 40,234 1,664 4.14 %
Total interest-earning assets 424,233 14,843 3.47 % 425,417 15,071 3.51 % 471,065 15,565 3.28 %
Securities lending revenue 437 330 419
Other interest revenue (1)
224 136 127
Total interest-earning assets $ 424,233 $ 15,504 3.62 % $ 425,417 $ 15,537 3.61 % $ 471,065 $ 16,111 3.39 %Funding sources
Bank deposits (3)$ 238,088 $ 1,185 0.50 % $ 256,212 $ 3,152 1.23 % $ 306,505 $ 3,363 1.10 %
Payables to brokers, dealers, and clearing organizations 18,236 701 3.79 % 8,522 372 4.30 % 4,477 147 3.23 %
Payables to brokerage clients (1)
94,884 244 0.26 % 72,776 272 0.37 % 66,842 271 0.41 %
Other short-term borrowings 7,020 324 4.60 % 9,146 504 5.51 % 7,144 375 5.25 %
Federal Home Loan Bank borrowings 7,682 356 4.57 % 23,102 1,245 5.32 % 34,821 1,810 5.14 %
Long-term debt 21,093 836 3.91 % 23,083 846 3.66 % 22,636 715 3.16 %
Total interest-bearing liabilities 387,003 3,646 0.94 % 392,841 6,391 1.62 % 442,425 6,681 1.51 %
Non-interest-bearing funding sources 37,230 32,576 28,640
Other interest expense (1)
108 2 3
Total funding sources $ 424,233 $ 3,754 0.88 % $ 425,417 $ 6,393 1.49 % $ 471,065 $ 6,684 1.41 %
Net interest revenue $ 11,750 2.74 % $ 9,144 2.12 % $ 9,427 1.98 %
(1) Beginning in the fourth quarter of 2025, average balances of client margin loans and short credits related to certain client long/short strategies from which the Company earns a fixed net yield are excluded from interest-earning assets and funding sources. Average margin loans and average short credits related to these client strategies totaled $2.8 billion for the year ended December 31, 2025. Interest revenue and expense related to these client strategies are presented in other interest revenue and other interest expense, respectively. The amounts and average yields for 2025 have been reclassified and recalculated to reflect this change. Prior-year amounts were not impacted by this change.
(2) Amounts have been calculated based on amortized cost. Interest revenue on investment securities is presented net of related premium amortization.
(3) Average balance includes $15.0 billion, $37.4 billion, and $36.0 billion of brokered CDs in 2025, 2024 and 2023, respectively.
Net interest revenue increased $2.6 billion, or 28%, in 2025 from 2024 primarily due to lower balances of bank supplemental funding, lower average rates paid on funding sources, growth in margin and bank lending, and increases in securities lending revenue, partially offset by lower yields on floating-rate assets due to lower market rates. Average interest-earning assets for 2025 decreased slightly compared to 2024. This decrease was primarily due to lower average balances in AFS and HTM securities, as cash inflows from investment securities were used to pay down bank supplemental funding, largely offset by higher balances of cash and investments segregated, growth in margin lending which was supported by higher payables to brokerage clients and payables to brokers, dealers, and clearing organizations, and increased bank lending.
Net interest margin increased to 2.74% in 2025, from 2.12% in 2024, as reduced balances of bank supplemental funding and lower rates paid on funding sources more than offset lower yields on floating-rate assets due to lower market interest rates.
With the paydowns of bank supplemental funding during 2025, the outstanding balance of $5.1 billion as of December 31, 2025 is within a range generally consistent with our diversified funding strategy. See also Risk Management – Liquidity Risk and Item 8 – Notes 12, 13, and 17 for additional information on these and other funding sources.
Net interest revenue decreased $283 million, or 3%, in 2024 from 2023 primarily due to lower average interest-earning assets, higher average rates paid on most funding sources, and lower net interest revenue contributed from securities lending, partially offset by growth in margin and bank lending and lower bank supplemental funding. Average interest-earning assets for 2024 were lower by 10% compared to 2023. This decrease was primarily due to lower average bank sweep deposits, reflecting client cash reallocation and strong client engagement in the equity markets, as well as reduction in bank supplemental funding. The decreases in average interest-earning assets in 2024 were partially offset by growth in margin lending, which was supported by higher payables to brokerage clients and increased securities lending, and growth in bank loans. Net interest margin increased to
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Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)2.12% in 2024, from 1.98% in 2023, as improved average yields on interest-earning assets offset higher rates paid across interest-bearing funding sources.Asset Management and Administration Fees
Asset management and administration fees include mutual fund, ETF, and CTF service fees and fees for other asset-based financial services provided to individual and institutional clients. Schwab earns mutual fund, ETF, and CTF 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, ETFs, and CTFs, as those amounts, net of program fees, are credited to the fund shareholders. Proprietary CTFs may, but generally do not, directly participate in securities lending. The fair values of client assets included in proprietary and third-party mutual funds, ETFs, and CTFs are based on quoted market prices and other observable market data.We also earn asset management fees for managed investing 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, 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, 2025 2024 2023Average Client Assets Revenue Average Fee Average Client Assets Revenue Average Fee Average Client Assets Revenue Average FeeSchwab money market funds $ 652,798 $ 1,783 0.27 % $ 539,113 $ 1,461 0.27 % $ 391,864 $ 1,034 0.26 %
Schwab equity and bond funds, ETFs, and CTFs 708,243 516 0.07 % 588,999 462 0.08 % 471,832 382 0.08 %Mutual Fund OneSource ® and other NTF funds (1)404,065 966 0.24 % 342,615 878 0.26 % 249,131 657 0.26 %Other third-party mutual funds and ETFs (1)620,042 400 0.06 % 611,999 420 0.07 % 640,689 490 0.08 %Total mutual funds, ETFs, and CTFs (2)$ 2,385,148 $ 3,665 0.15 % $ 2,082,726 $ 3,221 0.15 % $ 1,753,516 $ 2,563 0.15 %
Managed investing solutions (2) :
Fee-based $ 633,960 $ 2,440 0.38 % $ 542,253 $ 2,129 0.39 % $ 458,114 $ 1,868 0.41 %
Non-fee-based 125,333 — — 111,571 — — 96,633 — —
Total managed investing solutions $ 759,293 $ 2,440 0.32 % $ 653,824 $ 2,129 0.33 % $ 554,747 $ 1,868 0.34 %Other balance-based fees (3)893,953 318 0.04 % 776,715 286 0.04 % 608,170 254 0.04 %Other (4)83 80 71
Total asset management and administration fees $ 6,506 $ 5,716 $ 4,756
(1) 2025 and 2023 include transfers from other third-party mutual funds and ETFs to Mutual Fund OneSource ® and other NTF funds.
(2) Average client assets for managed investing solutions may also include the asset balances contained in the mutual fund and/or ETF categories listed above.(3) Includes various asset-related fees, such as trust fees, 401(k) recordkeeping fees, and mutual fund clearing fees and other service fees.
(4) Includes miscellaneous service and transaction fees relating to mutual funds and ETFs that are not balance-based.Asset management and administration fees increased by $790 million, or 14%, in 2025 from 2024, due primarily to growth in Schwab money market funds and f ee-based managed investing solutions, as well as growth in Mutual Fund OneSource ® , and Schwab equity and bond funds, ETFs, and CTFs. This growth was driven primarily by higher client asset balances, reflecting year-over-year equity market appreciation, the Company’s asset gathering, and net inflows into managed investing solutions.
Asset management and administration fees increased by $960 million, or 20%, in 2024 from 2023, primarily as a result of higher balances in Schwab money market funds as clients shifted their cash allocations to higher-yielding investment solutions. The increase in asset management and administration fees in 2024 was also due to growth in balances in fee-based managed investing solutions and Mutual Fund OneSource, as a result of strong equity markets and, for managed investing solutions, net inflows of client assets.
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THE CHARLES SCHWAB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)
The following table presents a roll forward of client assets for the Schwab money market funds, Schwab equity and bond funds, ETFs, and CTFs, and Mutual Fund OneSource ® and other NTF funds. The following funds generated 50%, 49%, and 44% of the asset management and administration fees earned during 2025, 2024, and 2023, respectively:Schwab Money Schwab Equity and Mutual Fund OneSource ®
Market Funds Bond Funds, ETFs, and CTFs and Other NTF FundsYear Ended December 31, 2025 2024 2023 2025 2024 2023 2025 2024 2023
Balance at beginning of period $ 596,531 $ 476,409 $ 278,926 $ 627,166 $ 506,149 $ 412,942 $ 347,798 $ 306,222 $ 235,738
Net inflows (outflows) 71,375 98,224 180,513 48,871 38,138 23,301 (30,827) (24,445) (28,741)Net market gains (losses) and other (1)25,909 21,898 16,970 96,649 82,879 69,906 137,236 66,021 99,225
Balance at end of period $ 693,815 $ 596,531 $ 476,409 $ 772,686 $ 627,166 $ 506,149 $ 454,207 $ 347,798 $ 306,222
(1) 2025 and 2023 include $63.3 billion and $39.8 billion, respectively, of transfers from other third-party mutual funds and ETFs to Mutual Fund OneSource ® and Other NTF Funds.Trading RevenueTrading revenue includes commissions, order flow revenue, and principal transactions revenue. Commission revenue is affected by volume and mix of trades executed. Order flow revenue is comprised of payments received from trade execution venues to which our broker-dealer subsidiary sends equity and option orders. Order flow revenue is affected by volume and mix of client trades, as well as pricing received from trade execution venues. Principal transactions revenue is recognized primarily as a result of accommodating clients’ fixed income trading activity, and includes adjustments to the fair value of securities positions held to facilitate such client trading activity. Principal transactions revenue also includes unrealized gains and losses on cash and investments segregated for regulatory purposes.
The following tables present trading revenue, client trading activity, and related information:
Year Ended December 31, Percent Change 2025-2024 2025 2024 2023
Commissions 13 % $ 1,797 $ 1,591 $ 1,601Order flow revenueOptions 16 % 1,167 1,010 949
Equities 63 % 763 467 455
Total order flow revenue 31 % 1,930 1,477 1,404
Principal transactions (1) % 194 196 225
Total trading revenue 20 % $ 3,921 $ 3,264 $ 3,230
Year Ended December 31, Percent Change 2025-2024 2025 2024 2023
DATs (in thousands) 31 % 7,667 5,862 5,394Product as a percentage of DATsEquities 55 % 53 % 49 %
Derivatives 21 % 21 % 23 %
ETFs 18 % 19 % 20 %
Mutual funds 5 % 6 % 6 %
Fixed income 1 % 1 % 2 %
Number of trading days (1) % 248.5 250.5 249.0Revenue per trade (1)(7) % $ 2.06 $ 2.22 $ 2.41
(1) Revenue per trade is calculated as trading revenue divided by the product of DATs multiplied by the number of trading days.
Trading revenue increased $657 million, or 20%, in 2025 compared to 2024, driven by an increase in order flow and commission revenue due primarily to higher client trading volume.
Trading revenue increased $34 million, or 1%, in 2024 compared to 2023, driven by an increase in order flow revenue reflecting higher volume and changes in the mix of client trading activity. This increase was offset by a decrease in principal transactions revenue due to lower volume in fixed income trading and lower market interest rates. Commission revenue was relatively flat due to higher volume offset by changes in the mix of client trading activity.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)Bank Deposit Account Fees
The Company earns bank deposit account fee revenue from the TD Depository Institutions, in accordance with the 2023 IDA agreement. Bank deposit account fee revenue is presented net of interest paid to clients, and other applicable fees, and is affected by changes in interest rates and the composition of balances designated as fixed- and floating-rate obligation amounts. See Item 8 – Note 15 for additional information.
The following table presents bank deposit account fee revenue and related information:
Year Ended December 31, Percent Change 2025-2024 2025 2024 2023
Bank deposit account fees 34 % $ 977 $ 729 $ 705
Average BDA balances (8) % $ 80,329 $ 86,846 $ 104,227
Average net yield 1.22 % 0.84 % 0.68 %Percentage of average BDA balances designated as:Fixed-rate balances 78 % 86 % 92 %
Floating-rate balances 22 % 14 % 8 %
Bank deposit account fees increased $248 million, or 34%, in 2025 compared to 2024, primarily due to a decrease in the amount paid to clients as a result of lower interest rates. This was partially offset by lower average BDA balances, which reduced the base on which bank deposit account fees are earned. The decrease in average BDA balances in 2025 compared to 2024 was primarily due to the transfer of $6.7 billion of BDA balances to Schwab’s balance sheet after September 10, 2025, as well as client cash allocation decisions in 2024 in response to elevated short-term market interest rates through most of 2024. Pursuant to the 2023 IDA agreement, after September 10, 2025, Schwab has broader discretion to withdraw balances, subject to certain constraints, as described in Item 8 – Note 15. Transfers of BDA balances to Schwab’s balance sheet result in lower balances upon which bank deposit account fee revenue is earned but provide a source of funding to invest in interest-earning assets or reduce reliance on borrowings to increase net interest revenue.
Average net yield increased in 2025 compared to 2024 due to an increase in the average amount of floating-rate BDA balances, which earned higher net yields relative to fixed-rate balances. This was partially offset by a decrease in the average net yields earned on both fixed-rate and floating-rate BDA balances compared to 2024. The percentages of BDA balances designated as fixed-rate and floating-rate obligation amounts as of December 31, 2025 were 78% and 22%, respectively.
Bank deposit account fees increased $24 million, or 3%, in 2024 compared to 2023. This increase reflected the impact of breakage fees of $97 million incurred in 2023 as a result of ending other third-party bank arrangements and a decrease in the amount paid to clients due to interest rates declining in the third and fourth quarters of 2024, partially offset by lower average BDA balances. The decrease in average BDA balances in 2024 compared to 2023 was primarily due to client cash allocation decisions in response to higher short-term market interest rates. Average net yield increased in 2024 compared to 2023 due to the breakage fees incurred in 2023 and an increase in the average amount of and average net yield on floating-rate BDA balances, which was partially offset by a decrease in average net yield on fixed-rate BDA balances. The percentages of BDA balances designated as fixed-rate and floating-rate obligation amounts as of December 31, 2024 were 76% and 24%, respectively.Other RevenueOther revenue includes industry fees, certain service fees, other gains and losses from the sale of assets, and the provision for credit losses on bank loans.
Other revenue increased $14 million, or 2%, in 2025 compared to 2024, primarily due to higher other service fees and gains recognized on certain equity investments, partially offset by higher losses recognized on sales of AFS securities, higher provision for credit losses on bank loans, and lower industry fees. Effective May 14, 2025, the SEC decreased the fee rate applicable to most securities transactions to zero from the rate in effect since May 22, 2024. This change resulted in lower industry fees in 2025 compared to 2024.
Other revenue increased $34 million, or 5%, in 2024 compared to 2023 primarily due to higher industry fees and lower losses recognized on sales of AFS securities, partially offset by certain lower service and other fees and a smaller release from the provision for credit losses on bank loans. Industry fees increased in 2024 due to higher average SEC fee rates in effect during 2024 compared to 2023. Effective May 22, 2024, the SEC increased its fee rate applicable to most securities transactions from the rate in effect since late February 2023.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)
Total Expenses Excluding Interest
The following table shows a comparison of total expenses excluding interest:Percent Change 2025-2024 2025 2024 2023Compensation and benefitsSalaries and wages 7 % $ 3,770 $ 3,530 $ 4,046
Incentive compensation 5 % 1,565 1,488 1,239
Employee benefits and other 13 % 1,156 1,025 1,030
Total compensation and benefits 7 % $ 6,491 $ 6,043 $ 6,315
Professional services 14 % 1,197 1,053 1,058
Occupancy and equipment 5 % 1,117 1,060 1,254
Advertising and market development 6 % 420 397 397
Communications 5 % 620 591 629
Depreciation and amortization (7) % 850 916 804
Amortization of acquired intangible assets (1) % 512 519 534
Regulatory fees and assessments (28) % 287 398 547
Other 3 % 968 937 921
Total expenses excluding interest 5 % $ 12,462 $ 11,914 $ 12,459Expenses as a percentage of total net revenuesCompensation and benefits 27 % 31 % 34 %
Advertising and market development 2 % 2 % 2 %Full-time equivalent employees (in thousands)At year end 3 % 33.0 32.1 33.0
Average 1 % 32.6 32.3 35.4
Total expenses excluding interest increased $548 million, or 5%, in 2025 from 2024, and decreased $545 million, or 4%, in 2024 from 2023. Adjusted total expenses, which excludes acquisition and integration-related costs, amortization of acquired intangible assets, and restructuring costs, increased $681 million, or 6%, in 2025 from 2024 and $240 million, or 2%, in 2024 from 2023. See Non-GAAP Financial Measures for further details and a reconciliation of such measures to GAAP reported results. We currently anticipate total expenses excluding interest in full-year 2026 will increase approximately 5.5% to 6.5% from 2025. We currently expect the Company’s acquisition of Forge to close in March 2026, and costs related to the operations and integration of Forge would be in addition to the 5.5% to 6.5% expected growth in expenses.
Total compensation and benefits expense increased in 2025 compared to 2024, primarily due to annual merit increases and growth in headcount, higher incentive compensation, and higher other employee-related costs. These increases reflect investments to support growth of the business and enhance client-serving capabilities, as well as higher incentive compensation driven by the Company’s financial performance. Total compensation and benefits decreased in 2024 from 2023 primarily due to restructuring costs recognized in 2023, as well as lower headcount as a result of position eliminations from the restructuring and Ameritrade integration. These decreases were partially offset by higher incentive compensation and annual merit increases. Compensation and benefits included acquisition and integration-related costs of $54 million and $187 million in 2024 and 2023, respectively. Compensation and benefits also included a $34 million benefit in 2024, due to a change in estimated restructuring costs, and included restructuring costs of $292 million in 2023.
Professional services expense increased in 2025 compared to 2024, reflecting overall growth of the business and increased utilization of technology and other professional services. Professional services expense remained consistent in 2024 compared to 2023. Professional services included acquisition and integration-related costs of $36 million and $135 million in 2024 and 2023, respectively.
Occupancy and equipment expense increased in 2025 compared to 2024, primarily driven by higher technology equipment and software costs, as well as building expenses, related to growth of the business, and a benefit related to property taxes reflected in 2024. Occupancy and equipment expense decreased in 2024 from 2023, due to lower technology equipment and software costs, lower property tax expense, and lower occupancy costs as a result of facility closures in 2023 related to restructuring and the Ameritrade integration. Occupancy and equipment included restructuring costs of $5 million and $17 million in 2024 and 2023, respectively, and acquisition and integration-related costs of $28 million in 2023.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)Advertising and market development expense increased in 2025 compared to 2024, primarily due to higher client promotional spending and digital advertising costs. Advertising and market development expense remained consistent in 2024 compared to 2023, as higher client promotional spending was offset by lower spending on digital advertising.
Communications expense increased in 2025 compared to 2024 primarily due to higher exchange quotation services and proxy-related expenses, reflecting growth in the business, partially offset by lower telecommunications expenses. Communications expense decreased in 2024 compared to 2023 due to lower exchange quotation services expenses.
Depreciation and amortization expense decreased in 2025 compared to 2024 primarily due to lower depreciation on equipment due to abandonment of certain data centers in 2024 related to the integration of Ameritrade, lower software amortization and lower finance lease amortization as a result of terminations in 2024. Depreciation and amortization expense increased in 2024 from 2023 primarily as a result of higher amortization of purchased and internally developed software and higher depreciation of hardware, driven by capital expenditures to support growth of the business.
Amortization of acquired intangible assets was largely consistent in 2025 compared to 2024. Amortization of acquired intangible assets decreased in 2024 from 2023, primarily as certain assets from the Ameritrade acquisition were fully amortized during 2023.
Regulatory fees and assessments decreased in 2025 compared to 2024 primarily due to $32 million of reductions in the FDIC special assessment in 2025 and $30 million of incremental FDIC special assessments in 2024, coupled with lower FDIC deposit insurance assessments primarily due to lower assessment rates driven by a decrease in brokered CDs. Regulatory fees and assessments decreased in 2024 from 2023, primarily due to a $172 million FDIC special assessment recorded during the fourth quarter of 2023, partially offset by $30 million of incremental FDIC special assessments in 2024. See Current Regulatory and Other Developments for discussion of the FDIC special assessments.
Other expense increased in 2025 compared to 2024, due to certain higher costs resulting from growth of the business and increased trading volume. The increase was partially offset by a charge recognized in the second quarter of 2024 for the SEC’s industry-wide review of off-channel communications, and lower industry fees in 2025 compared to 2024 due to lower average fee rates stemming from the SEC decreasing the fee rate applicable to most securities transactions to zero effective May 14, 2025. Other expense increased in 2024 from 2023, primarily due to higher industry fees, partially offset by impairment charges recorded in 2023 related to restructuring. Industry fees increased primarily due to higher average SEC fee rates in effect during 2024 compared to 2023. Effective May 22, 2024, the SEC increased its fee rate applicable to most securities transactions from the rate in effect since late February 2023. Other expense included restructuring costs of $37 million and $181 million in 2024 and 2023, respectively, and acquisition and integration-related costs of $27 million in 2023.
Capital expenditures primarily include capitalized software costs, information technology and telecommunications equipment, and buildings. Total capital expenditures were $602 million, $607 million, and $804 million in 2025, 2024, and 2023, respectively. Capital expenditures decreased 1% in 2025 compared to 2024, primarily due to t he completion of certain construction projects in 2024 resulting in a decrease of land and building-related capital expenditures, offset by higher investment in purchased and internally developed software and telecommunications and information technology equipment. Capital expenditures decreased 25% in 2024 compared to 2023, primarily due to lower purchased and internally developed software as we completed Ameritrade client account transitions in the second quarter of 2024 and completed the Ameritrade integration, partially offset by higher investment in buildings.
Capital expenditures were 2.5% of total net revenues in 2025, slightly lower than our previously disclosed expected range of approximately 3-5% of total net revenues. We anticipate capital expenditures for 2026 to be within our longer term expectation of 3-5% of total net revenues.Taxes on IncomeTaxes on income were $2.6 billion, $1.8 billion, and $1.3 billion for 2025, 2024, and 2023, respectively, resulting in effective tax rates of 22.8% in 2025 and 2024, and 20.6% in 2023. The effective tax rate in 2025 remained consistent with 2024 primarily due to a decrease in the state tax rate and in non-deductible FDIC deposit insurance assessments, offset by an increase in state tax reserves and a decrease in certain tax credits. The increase in the effective tax rate in 2024 from 2023 was primarily due to an increase in state tax expense and the recognition of certain tax credits during 2023, partially offset by additional tax credits recognized and the reversal of tax reserves due to the resolution of certain state tax matters during 2024.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)Segment Information
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 Services platform. See Item 8 – Note 24 for additional segment information.Financial information for our segments is presented in the following table:
Investor Services Advisor Services TotalPercent Change 2025-2024 2025 2024 2023 Percent Change 2025-2024 2025 2024 2023 Percent Change 2025-2024 2025 2024 2023Year Ended December 31,
Net RevenuesNet interest revenue 27% $ 9,328 $ 7,317 $ 7,193 33% $ 2,422 $ 1,827 $ 2,234 28% $ 11,750 $ 9,144 $ 9,427
Asset management and administration fees 15% 4,756 4,146 3,492 11% 1,750 1,570 1,264 14% 6,506 5,716 4,756
Trading revenue 22% 3,525 2,895 2,821 7% 396 369 409 20% 3,921 3,264 3,230
Bank deposit account fees
35% 766 568 546 31% 211 161 159 34% 977 729 705
Other (1)% 624 632 598 18% 143 121 121 2% 767 753 719
Total net revenues 22% 18,999 15,558 14,650 22% 4,922 4,048 4,187 22% 23,921 19,606 18,837
Expenses Excluding Interest
Compensation and benefits 8% 5,025 4,656 4,779 6% 1,466 1,387 1,536 7% 6,491 6,043 6,315
Professional services 14% 953 834 824 11% 244 219 234 14% 1,197 1,053 1,058
Occupancy and equipment 6% 876 823 951 2% 241 237 303 5% 1,117 1,060 1,254
Advertising and market development 9% 280 256 296 (1)% 140 141 101 6% 420 397 397
Communications 6% 439 415 441 3% 181 176 188 5% 620 591 629
Depreciation and amortization (10)% 644 716 609 3% 206 200 195 (7)% 850 916 804
Amortization of acquired intangible assets (6)% 418 445 449 27% 94 74 85 (1)% 512 519 534
Regulatory fees and assessments (24)% 237 311 387 (43)% 50 87 160 (28)% 287 398 547
Other 3% 806 782 703 5% 162 155 218 3% 968 937 921
Total expenses excluding interest 5% 9,678 9,238 9,439 4% 2,784 2,676 3,020 5% 12,462 11,914 12,459
Income before taxes on income 47% $ 9,321 $ 6,320 $ 5,211 56% $ 2,138 $ 1,372 $ 1,167 49% $ 11,459 $ 7,692 $ 6,378Net new client assets
(in billions) (1)33% $ 213.8 $ 161.1 $ 181.3 42% $ 284.8 $ 200.5 $ 155.9 38% $ 498.6 $ 361.6 $ 337.2
(1) In 2025, Investor Services includes net outflows of $20.8 billion from off-platform brokered CDs issued by CSB. In 2024, Investor Services includes net outflows of $14.6 billion from off-platform brokered CDs issued by CSB, an inflow of $10.3 billion from a mutual fund clearing services client, and outflows of $0.7 billion from an international relationship. In 2023, Investor Services includes net inflows of $32.5 billion from off-platform brokered CDs issued by CSB, inflows of $12.0 billion from a mutual fund clearing services client, and outflows of $5.8 billion from an international relationship. In 2024 and 2023, Advisor Services includes outflows of $0.3 billion and $7.2 billion, respectively, from an international relationship.Segment Net RevenuesTotal net revenues increased by 22% for both Investor Services and Advisor Services in 2025 compared to 2024. Net interest revenue increased for both segments primarily due to reductions in bank supplemental funding, lower average rates paid on funding sources, and growth of margin and bank lending balances, partially offset by lower yields on interest-earning assets. Asset management and administration fees increased for both segments primarily due to higher balances in money market funds, Schwab equity and bond funds, ETFs, and CTFs, and Mutual Fund OneSource ® , and, additionally for Investor Services, managed investing solutions. Trading revenue increased for both segments primarily due to higher order flow revenue and commission revenue reflecting higher trading volume. Bank deposit account fees increased for both segments primarily due to improved net yields partially offset by lower average BDA balances. Other revenue was largely flat for Investor Services and increased for Advisor Services, due to higher other service fees and gains recognized on certain equity investments, partially
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Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)offset by losses recognized on the sale of AFS securities, higher provision for credit losses on bank loans, and lower industry fees.
Investor Services total net revenues increased by 6% in 2024 compared to 2023. Net interest revenue increased for Investor Services primarily due to growth of margin lending and lower average balances of FHLB borrowings, partially offset by lower average interest-earning assets and higher average rates paid on most funding sources. Trading revenue increased for Investor Services due to higher order flow revenue as a result of increased trading volumes and changes in the mix of trading activity. Other revenue increased for Investor Services primarily due to higher industry fees and lower losses recognized on sales of AFS securities. Advisor Services total net revenues decreased by 3% in 2024 compared to 2023. Net interest revenue decreased for Advisor Services primarily as a result of lower average interest-earning assets and higher average rates paid on most funding sources, partially offset by lower average balances of FHLB borrowings, and trading revenue decreased for Advisor Services, primarily due to lower order flow revenue as a result of changes in the mix of client trading activity. Asset management and administration fees increased for both segments, primarily as a result of higher balances in money market funds and Mutual Fund OneSource ® , and, additionally for Investor Services, fee-based managed investing solutions. Additionally, bank deposit account fees increased for both segments, primarily due to breakage fees incurred that resulted in lower bank deposit account fee revenue in 2023, partially offset by lower BDA balances.
Segment Expenses Excluding Interest
Investor Services and Advisor Services total expenses excluding interest increased by 5% and 4%, respectively, in 2025 compared to 2024. Compensation and benefits expense increased in both segments primarily due to annual merit increases, higher incentive compensation, and higher employee-related costs. Professional services expense increased in both segments due to overall growth of the business and increased utilization of technology and other professional services. Occupancy and equipment expense increased in both segments primarily due to higher technology equipment and software costs related to growth of the business, as well as building expenses, and a property tax benefit reflected in 2024. Regulatory fees and assessments decreased in both segments, primarily due to a reduction in FDIC assessments in 2025 and lower FDIC special assessments from 2024 to 2025.
Investor Services and Advisor Services total expenses excluding interest decreased 2% and 11%, respectively, in 2024 compared to 2023. Compensation and benefits expense decreased in both segments, primarily due to restructuring costs recognized in 2023 and lower headcount as a result of position eliminations, partially offset by higher incentive compensation and annual merit increases. Occupancy and equipment expense decreased in both segments, primarily due to lower technology equipment and software costs, lower property tax expense, and facility closures in 2023 related to restructuring and the Ameritrade integration. For Investor Services, depreciation and amortization expense increased, primarily due to higher amortization of purchased and internally developed software, driven by capital expenditures in 2023 and 2024 to enhance our technological infrastructure to support growth of the business. Regulatory fees and assessments decreased in both segments in 2024, primarily due to an FDIC special assessment recorded during the fourth quarter of 2023, partially offset by additional FDIC special assessments in 2024, as described above. Other expense increased for Investor Services primarily due to higher industry fees, partially offset by impairment charges recorded in 2023 related to restructuring. Other expense decreased for Advisor Services primarily due to impairment charges recorded in 2023 related to restructuring and lower clearing charges.RISK MANAGEMENT
Schwab’s business activities expose it to a variety of risks, including operational, compliance, credit, market, and liquidity risks. The Company has a comprehensive risk management program to identify and manage these risks and their associated potential for financial and reputational impact. Our risk management process is comprised of risk identification and assessment, risk response, risk measurement and monitoring, and risk reporting and escalation. We use periodic risk and control self-assessments, control testing programs, and our internal audit department performs evaluations of our risk management processes and controls.
CultureA fundamental commitment to strong and effective risk management is core to Schwab’s business strategy. Risk management is an integrated and foundational part of our culture and a duty of every employee. 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 ERM Framework incorporates key concepts commensurate with the size, risk profile, complexity, and continuing growth of the Company. While all personnel are
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Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)responsible for risk management, the Company’s 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.
The Company’s “Through Clients’ Eyes” strategy guides our actions and behaviors at Schwab, and informs our corporate culture, our risk appetite, and approach to risk management. Schwab is committed to the highest standards of ethical conduct and compliance with applicable laws, rules, and regulations, and our Code of Business Conduct and Ethics outlines the ethical conduct that we must demonstrate to deliver our strategy while retaining the trust of our stakeholders.
Risk Governance
Schwab maintains an integrated risk governance structure that directs Company-wide execution of the risk management process. The risk governance structure includes the Board of Directors, designated committees of the Board, and management risk committees.
CSC’s Board of Directors sets the tone and culture of effective risk management. The Board has a Risk Committee that assists the Board in setting the type and level of risks that the Company is willing to take and supports the independence and stature of independent risk management. The Board Risk Committee also assists the Board in overseeing and holding senior management accountable for implementing the Board’s approved risk appetite, maintaining the Company’s risk management and control processes, and managing the Company’s activities in a safe and sound manner, and in compliance with applicable laws and regulations. The Board Risk Committee also approves risk appetite statements and related key risk appetite metrics, key risk policies, and reviews information relating to risk issues from functional areas of corporate risk management, legal, and internal audit.
The Audit Committee of the Board of Directors assists the Board in fulfilling its oversight responsibilities by reviewing the integrity of the Company’s financial statements and financial reporting processes, the qualifications and independence of the independent auditors and performance of the Company’s internal audit function and independent auditors, compliance with legal and regulatory requirements, processes to assess and manage risk exposures, and other matters as directed by the Board. The Compensation Committee of the Board of Directors assists the Board in oversight of compensation of the Company’s directors, executive officers, and other senior officers. The Board Nominating and Corporate Governance Committee assists the Board in its oversight responsibilities regarding Board composition, performance, and developing corporate governance principles, policies, and procedures.
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 risk identification and assessment, risk response, risk measurement and monitoring, and risk reporting and escalation. The Global Risk Committee, which is comprised of senior executives from each client enterprise and support 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. The Chief Risk Officer regularly reports activities of the Global Risk Committee to the Risk Committee of 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. Functional risk sub-committees focusing on specific areas of risk report to the Global Risk Committee. These sub-committees include the:
• 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 Information Security and Cybersecurity, Technology, Fraud, Third-Party Risk, Data Integrity, and Model Governance;
• Compliance Risk Committee – provides oversight of compliance risk management (inclusive of compliance programs for Schwab’s regulated entities, Anti-Money Laundering/Sanctions, Conduct, Fiduciary, Conflicts of Interest, and Privacy), policies, and risk tolerance levels providing an aggregate view of compliance risk exposure and employee conduct, including subcommittees covering Fiduciary and Conflicts of Interest Risk;
• Financial Risk Oversight Committee – provides oversight of and approves credit, market, liquidity, and capital risk policies, limits, and exposures and includes the Liquidity and Capital Subcommittee; and• New Products and Services Risk Oversight Committee – provides oversight of and approves new products, including the policy, program, and process designed to oversee new products and services risks prior to and post launch.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)Senior management created the Incentive Compensation Risk Oversight Committee to provide oversight of incentive compensation risks and achieve sound incentive compensation risk management practices; it reports directly to the Compensation Committee of the Board of Directors.
The Company’s 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 Chief Executive Officer and Chief Financial Officer prior to their certification required by Sections 302 and 906 of the Sarbanes Oxley Act of 2002.Operational RiskOperational risk arises due to potential inadequacies or failures related to internal processes, people, and systems, or from external events or relationships impacting the Company and/or any of its key business partners and vendors. While operational risk is inherent in all business activities, the Company has established 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 perform periodic testing to evaluate the effectiveness of relevant 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 regulations.
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, extreme weather, 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. See Part I – Item 1C. Cybersecurity for additional information regarding information security risk, including cybersecurity risk management.
Fraud risk arises from attempted or actual theft of financial assets or other property of any client or the Company. Fraud risk includes internal fraud, or the risk arising from personnel attempting or committing theft of financial assets or other property of any client or the Company. Schwab is committed to protecting the Company’s and its clients’ assets from fraud and complying with all applicable laws and regulations to prevent, detect, and report fraudulent activity. Schwab manages fraud risk through policies, procedures, and controls. We also take affirmative steps to prevent and detect fraud and report, to appropriate authorities, any known or suspected acts of fraud in accordance with existing laws and requirements.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 internal policies, procedures and controls, and contractual provisions, control standards, ongoing monitoring of third-party performance, and appropriate testing with third-party service providers.Model risk is the potential for adverse consequences from decisions based on incorrect or misused model outputs and reports. Model uses at Schwab include, but are not limited to, calculating capital requirements for hypothetical stressful environments, estimating interest and credit risk for loans and other balance sheet assets, identifying and preventing fraud and other financial crimes, and providing guidance in the management of client portfolios. Schwab manages model risk, including use of artificial intelligence, through use of policies, standards, and controls which evaluate the conceptual and technical soundness of models used by the Company. Prior to the use of any artificial intelligence, we employ procedures which require cross-functional review from applicable oversight functions. We maintain a model inventory that includes a distinct record and risk rating for each model, and we conduct independent validations, annual reviews, and performance monitoring of the Company’s models.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)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, consumer protection, conflicts of interest, disclosure obligations and performance expectations for products and services, supervision of employees, the retention of required records, 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 conduct and ethics, sales and trading practices, marketing and communications, extension of credit, client funds and securities, books and records, anti-money laundering, privacy, and employment policies.Privacy risk is the risk of unauthorized collection, use, storage, or sharing of personal information, including data incidents and other mismanagement of personal information. We manage privacy risk through policies, procedures, and controls reasonably designed to achieve and/or monitor compliance with these laws and regulations.
Anti-money laundering/sanctions risk is the risk of legal or regulatory sanctions, fines or penalties, financial loss, or damage to reputation resulting from the failure to comply with the Bank Secrecy Act/Anti-Money Laundering (BSA/AML) and Office of Foreign Assets Control (OFAC)/global sanctions (collectively, “AML”) laws, regulations, rules, or other regulatory requirements. Schwab manages this risk through daily monitoring, a system of internal controls, education and training for appropriate personnel, and developing risk-based procedures for conducting ongoing customer due diligence and complying with beneficial ownership requirements for legal entity customers.Conduct risk arises from inappropriate, unethical, or unlawful behavior of the Company, its employees or third parties acting on the Company’s behalf that may result in detriment to the Company’s clients, financial markets, the Company, and/or the Company’s employees. We manage this risk through policies, procedures, and a system of internal controls, including personnel monitoring and surveillance. Conduct-related matters are escalated through appropriate channels by the Company’s Corporate Responsibility Officer.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.
Incentive Compensation risk is the potential for adverse consequences resulting from compensation plans that do not balance the execution of our strategy with risk and financial rewards, potentially encouraging imprudent risk-taking by employees. We have implemented risk management processes, including a policy, to identify, evaluate, assess, and manage risks associated with incentive compensation plans and the activities of certain employees, defined as Covered Employees, who have the authority to expose the Company to material amounts of risk.
Credit RiskCredit risk is the potential for loss due to a borrower, counterparty, or issuer failing to perform 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 setting and reviewing credit limits, monitoring credit limits and quality of counterparties, and adjusting margin, PAL, option, and futures requirements for certain securities and instruments.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)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, CDs, U.S. state and municipal securities, commercial paper, and foreign government agency securities.
At December 31, 2025, 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, PALs (discussed below), 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 credit 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).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 securities purchased under agreements to resell (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 the Company.
Market Risk
Market risk is the potential for changes in earnings or the value of financial instruments held by Schwab as a result of fluctuations in interest rates, equity prices, or market conditions. Schwab is exposed to market risk primarily from changes in interest rates within our interest-earning assets relative to changes in the costs of funding sources that finance these assets.To manage interest rate risk, we have established policies and procedures, which include setting limits on net interest revenue risk and EVE risk. To remain within these limits, we manage the maturity, repricing, and cash flow characteristics of the investment portfolios. Management monitors established guidelines to stay within the Company’s risk appetite. The Company utilizes interest rate swap derivative instruments to assist with managing interest rate risk, the effects of which are incorporated into the Company’s net interest revenue and EVE analyses. For further information on our interest rate risk management strategies utilizing interest rate swaps, see Item 8 – Note 16.
Our measurement of interest rate risk involves assumptions that are inherently uncertain and, as a result, cannot precisely estimate the impact of changes in interest rates on net interest revenue, bank deposit account fees, or EVE. Actual results may
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THE CHARLES SCHWAB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)
differ from simulated results due to balance growth or decline and the timing, magnitude, and frequency of interest rate changes, as well as changes in market conditions and management strategies, including changes in asset and liability mix. 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 used in securities lending and similar 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 SimulationFor our net interest revenue sensitivity analysis, we use net interest revenue simulation modeling techniques to evaluate and manage the effect of changing interest rates. The simulations include all balance sheet interest rate-sensitive assets and liabilities, and include derivative instruments. Key assumptions include the projection of interest rate scenarios with rate floors, rates and balances of non-maturity client cash held on the balance sheet, prepayment speeds of mortgage-related investments, repricing of financial instruments, and reinvestment of matured or paid-down securities and loans. We use both proprietary and independent third-party models to simulate net interest revenue sensitivity and related analyses. Fixed income analytical vendors provide term structure models, prepayment speed models for mortgage-backed securities and mortgage loans, and cash flow projections based on interest income, contractual maturities, and prepayments. The Company’s net interest revenue sensitivity analyses utilize gradual parallel increases/decreases in interest rates over a twelve month period, though we also regularly simulate the effects of non-parallel shifts and instantaneous shifts of interest rates on net interest revenue.
Net interest revenue is affected by various factors, such as the distribution and composition of interest-earning assets and interest-bearing liabilities, the spread between yields earned on interest-earning assets and rates paid on interest-bearing liabilities, which may reprice at different times or by different amounts, and the spread between short- and long-term interest rates. Interest-earning assets include investment securities, margin loans, bank loans, cash and investments segregated, and cash and cash equivalents. These assets are sensitive to changes in interest rates and changes in prepayment levels that tend to increase in a declining rate environment and decrease in a rising rate environment. Because we establish the rates paid on certain brokerage client cash balances and bank deposits and the rates charged on certain margin and bank loans, and control the composition of our investment securities, we are able to take certain actions to manage our net interest spread, depending on competitive factors and market conditions. When liquidity needs exceed our primary sources of funding, the Company will utilize higher-cost funding sources, which can reduce net interest margin and net interest revenue.
Higher prevailing short-term interest rates generally improve yields on shorter duration interest-earning assets. During periods of rapidly rising interest rates, clients tend to reallocate cash out of sweep products into higher-yielding, off-balance sheet, fixed income investments and money market funds within Schwab’s product offerings. This can result in lower interest-earning assets and/or may require increased use of higher-cost funding sources, which therefore tend to constrain net interest revenue when interest rates are moving rapidly higher. A decline in short-term interest rates could negatively impact the yield on the Company’s investment and loan portfolios to a greater degree than any offsetting reduction in interest expense from funding sources, compressing net interest margin.
Net interest revenue sensitivity analyses assume both statically and dynamically-sized balance sheet composition. Statically-sized balance sheet modeling assumes the asset and liability structure of the consolidated balance sheet would not be changed as a result of the simulated changes in interest rates. While this approach is useful to isolate the impact of changes in interest rates on a statically-sized asset and liability structure, it does not capture changes to client cash allocations. We therefore also conduct dynamically-sized balance sheet compositions as a function of interest rates. Dynamic net interest revenue simulations assume runoff of bank deposit and payables to brokerage client balances is supplemented with wholesale borrowing when needed to fund assets through the simulation horizon. We also conduct similar simulations on EVE to capture the impact of client cash allocation changes on our balance sheet. As we actively manage the consolidated balance sheet and interest rate exposure, we have taken and would typically seek to take steps to manage additional interest rate exposure that could result from changes in the interest rate environment.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)The following table assumes a statically-sized balance sheet with simulated changes to net interest revenue over the next twelve months beginning December 31, 2025 and 2024 of a gradual increase or decrease in market interest rates relative to prevailing market rates at the end of each reporting period:
December 31, 2025
2024Increase of 200 basis points8.6% 8.6%
Increase of 100 basis points 4.1% 4.6%Increase of 50 basis points1.7% 2.5%Decrease of 50 basis points(2.2)% (2.3)%
Decrease of 100 basis points (4.4)% (4.6)%Decrease of 200 basis points(8.8)% (9.3)%
The Company’s simulated incremental increases and decreases in market interest rates had an overall smaller impact on net interest revenue as of December 31, 2025 compared to December 31, 2024. These changes were primarily due to the use of cash flow hedges related to PALs beginning in 2025 and additional hedging of Senior Notes, partially offset by higher concentrations of both margin loan and cash balances.Effective DurationEffective duration measures price sensitivity relative to a change in prevailing interest rates, taking account of amortizing cash flows and prepayment optionality for mortgage-related securities and loans. Duration is measured in years and commonly interpreted as the average timing of principal and interest cash flows. We seek to manage the Company’s asset duration in relation to management’s estimate of the Company’s liability duration. The Company’s liability duration is impacted by the composition of funding sources and typically decreases in periods of rising market interest rates and increases in periods of declining market interest rates. The Company also utilizes derivative hedging instruments such as interest rate swaps in managing its asset and liability duration.
The following table presents the Company’s estimated effective durations, which reflect anticipated future payments, by category:
December 31, 2025 December 31, 2024
In years
Estimated effective duration, exclusive of derivatives:
Consolidated total assets 1.8 2.1
AFS investment securities portfolio 2.4 2.3
AFS and HTM investment securities portfolios 3.9 3.9
Pledged asset lines (1)
0.1 —
Long-term debt CSC Senior Notes
3.0 3.2
Estimated effective duration, inclusive of derivatives (2) :
Consolidated total assets 1.9 2.0
AFS investment securities portfolio 2.0 1.8
AFS and HTM investment securities portfolios 3.7 3.7
Pledged asset lines (1)
1.2 —
Long-term debt CSC Senior Notes
1.9 2.3
(1) The duration of PALs was less than 0.1 years at December 31, 2024.
(2) See Item 8 – Note 16 for additional discussion of the Company’s derivatives.
AFS and HTM securities comprised approximately 40% and 48% of the Company’s consolidated total assets as of December 31, 2025 and 2024, respectively. The estimated effective duration of the remaining balance sheet assets, excluding the effect of hedging, in aggregate was less than one year as of both December 31, 2025 and 2024.Economic Value of Equity SimulationManagement also uses EVE simulations to measure interest rate risk. EVE sensitivity measures the long-term impact of interest rate changes on the net present value of assets and liabilities, and includes the impact of derivative instruments. While EVE does not have a direct accounting relationship, the measure aims to capture a theoretical value of assets and liabilities under a variety of interest rate environments. EVE sensitivity is calculated by subjecting the balance sheet to hypothetical instantaneous shifts in
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Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)the level of interest rates. This analysis is highly dependent upon asset and liability assumptions based on historical and certain expected behaviors. Key assumptions in our EVE calculation include projection of interest rate scenarios with rate floors, prepayment speeds of mortgage-related investments, term structure models of interest rates, behavior of non-maturity client cash held on the balance sheet, and pricing assumptions. We use both proprietary and independent third-party models to simulate EVE sensitivity and related analyses. We develop and maintain client credits and deposits run-off models internally based on historical experience and prevailing client cash realignment behaviors. We rely on third-party models for interest rate term structure modeling, prepayment speed modeling for mortgage-backed securities and mortgage loans, and cash flow projections based on interest income, and contractual maturities.
Schwab’s EVE profile is characterized by a more stable asset duration relative to liabilities in both higher and lower interest rate environments. Currently, the EVE exposure to rates increasing or decreasing in a similar magnitude shows that there is greater exposure to rates decreasing.
Bank Deposit Account Fees Simulation
Consistent with the presentation on the consolidated statement of income, the sensitivity of bank deposit account fee revenue to interest rate changes is assessed separately from the net interest revenue simulation described above. As of December 31, 2025 and 2024, simulated changes in bank deposit account fee revenue from gradual changes in market interest rates relative to prevailing market rates, under the interest rate scenarios described above for net interest revenue, did not have a significant impact on the Company’s total net revenues. Our net interest revenue, EVE, and bank deposit account fee revenue simulations reflect the assumption of non-negative investment yields.Liquidity RiskLiquidity 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, our principal broker-dealer subsidiary; the capital needs of the banking subsidiaries; principal and interest due on corporate debt; and dividend payments on CSC’s preferred and common stock. The liquidity needs of our broker-dealer subsidiary are primarily driven by client activity, including trading and margin lending activities, and capital expenditures. The capital needs of the banking subsidiaries are primarily driven by client deposit levels and other borrowings. We have established liquidity policies to support the successful execution of business strategies, while ensuring ongoing and sufficient liquidity to meet operational needs and satisfy applicable regulatory requirements under both normal and stressed conditions. We seek to maintain client confidence in the balance sheet and the safety of client assets by maintaining liquidity and diversity of funding sources to allow the Company to meet its obligations. To this end, we have established limits and contingency funding plans to support liquidity levels during both business as usual and stressed conditions.We employ a variety of metrics to monitor and manage liquidity. We conduct regular liquidity stress testing to develop a view of liquidity risk exposures and to ensure our ability to maintain sufficient liquidity during market-related or company-specific liquidity stress events. Liquidity sources are also tested periodically and results are reported to the Financial Risk Oversight Committee. A number of early warning indicators are monitored to help identify emerging liquidity stresses in the market or within the organization and are reviewed with management periodically.
Funding SourcesSchwab’s primary source of funds is cash generated by client activity which includes bank deposits and cash balances in client brokerage accounts. These funds are used to purchase investment securities and extend loans to clients. Other sources of funds may include cash flows from operations, maturities and sales of investment securities, repayments on loans, securities lending of assets held in client brokerage accounts, FHLB borrowings, borrowings under repurchase agreements with external financial institutions and the Fixed Income Clearing Corporation (FICC), issuance of CDs, cash provided by securities issuances by CSC in the capital markets, and other facilities described below.
To meet daily funding needs, we maintain liquidity in the form of overnight cash deposits and short-term investments. For unanticipated liquidity needs, we also maintain a buffer of highly liquid investments, including U.S. Treasury securities. Our clients’ bank deposits and brokerage cash balances primarily originate from our 38.5 million active brokerage accounts. More than 80% of our bank deposits qualified for FDIC insurance as of December 31, 2025. Our clients’ allocation of cash held on our
- 48 -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)balance sheet as bank deposits or payables to brokerage clients is sensitive to interest rate levels, with clients typically increasing their utilization of investment cash solutions, such as purchased money market funds and certain fixed income products when those yields are higher than those of cash sweep features.
As a participant in the financial services industry, Schwab relies on access to external financing in the normal course of business. Schwab’s use of external debt facilities may arise from timing differences between cash flow requirements, such as client cash outflows, cash flows from operations, payments on interest-earning assets, movements of cash to meet regulatory brokerage client cash segregation requirements, and general corporate purposes. Rollover risk is the risk that we will not be able to refinance or payoff borrowings as they mature. We maintain policies and procedures necessary to access funding and test borrowing procedures on a periodic basis. We manage rollover risk on borrowings, taking into account expected principal paydowns on our investment and loan portfolios along with expected deposit flows.
The following table describes certain external debt facilities available at December 31, 2025:Description Borrower Outstanding Available Maturity of Amounts Outstanding Weighted-Average Interest Rate on Amounts OutstandingFHLB secured credit facilities Banking subsidiaries $ 1,850 $ 74,226 (1)
February 2026 - March 2026 3.90%
Federal Reserve discount window Banking subsidiaries — 29,327 (1)N/A —Repurchase agreements Banking subsidiaries, CSC, CS&Co 1,301 — (2)
February 2026 - April 2026 (3)
3.94%
Unsecured uncommitted lines of credit with various external banks CSC, CS&Co — 1,892 N/A —
Unsecured commercial paper CSC 1,894 3,106 (4)
May 2026 - July 2026 4.03%
Secured uncommitted lines of credit with various external banks CS&Co 3,800 — (5)
February 2026 - May 2026 4.18%
(1) Amounts shown as available from the FHLB and Federal Reserve facilities represent remaining capacity based on assets pledged as of December 31, 2025. Incremental borrowing capacity may be made available by pledging additional assets, subject to applicable facility terms. See below and Item 8 – Note 13 for additional information.
(2) Secured borrowing capacity is made available based on our borrower’s ability to provide collateral deemed acceptable by each respective counterparty. See below and Item 8 – Note 17 for additional information.
(3) Repurchase agreements outstanding as of December 31, 2025 at CS&Co maintain continuous contractual maturities of 35 days and are included in payables to brokers, dealers, and clearing organizations on the consolidated balance sheets.
(4) Outstanding balance of unsecured commercial paper as of December 31, 2025 represents the gross par value before discount of $32 million.
(5) Secured borrowing capacity is made available based on CS&Co’s ability to provide acceptable collateral to the lenders as determined by the credit agreements.N/A Not applicable.Available borrowing capacity from the FHLB and Federal Reserve facilities maintained by our banking subsidiaries is dependent on the value of assets pledged and the terms of the borrowing arrangements. As of December 31, 2025, the Company had additional investment securities with a par value of approximately $103 billion, or a fair value of approximately $97 billion, available to be pledged to obtain additional capacity. Additional details regarding these facilities is described below.Amounts available under secured credit facilities with the FHLB are dependent on the value of our First Mortgages, HELOCs, and the value of certain of our investment securities that are pledged as collateral. These credit facilities are also available as backup financing in the event the outflow of client cash from the banking subsidiaries’ respective balance sheets is greater than maturities and paydowns on investment securities and bank loans. CSC’s banking subsidiaries must each maintain positive tangible capital, as defined by the Federal Housing Finance Agency, in order to place new draws upon these credit facilities, and the Company manages capital with consideration of minimum tangible capital ratios at our banking subsidiaries. Tangible capital pursuant to the requirements of the FHLB borrowing facilities for our banking subsidiaries is common equity less goodwill and intangible assets.Our banking subsidiaries also have access to short-term secured funding through the Federal Reserve discount window and the Standing Repo Facility with the Federal Reserve Bank of New York. Amounts available under the Federal Reserve discount window are dependent on the value of certain investment securities that are pledged as collateral. Our banking subsidiaries may also engage with external financial institutions and the FICC in repurchase agreements and resale agreements collateralized by investment securities as another source of short-term liquidity and to monetize certain balance sheet assets. CSC maintains standing bilateral repurchase agreements with external banks.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)CSC’s ratings for Commercial Paper Notes were P1 by Moody’s, A2 by Standard & Poor’s, and F1 by Fitch at December 31, 2025. CSC has a universal automatic shelf registration statement on file with the SEC, which enables it to issue debt, equity, and other securities.
CS&Co maintains unsecured uncommitted bank credit lines with a group of banks as a source of short-term liquidity, which can also be accessed by CSC. CS&Co also maintains secured uncommitted lines of credit, under which CS&Co may borrow on a short-term basis and pledge either client margin securities or firm securities as collateral, based on the terms of the agreements. CS&Co also engages with external financial institutions in repurchase agreements collateralized by client margin securities as a source of liquidity. Additionally, CS&Co is able to lend eligible securities held in client brokerage accounts in exchange for cash collateral as a source of short-term liquidity. As of December 31, 2025, liabilities for securities loaned totaled $25.1 billion and are included in payables to brokers, dealers, and clearing organizations on the consolidated balance sheets. At December 31, 2025, $15.0 billion of securities loaned had overnight and continuous remaining contractual maturities; $10.1 billion of securities loaned had contractual maturities of 35-95 days and had a weighted-average interest rate of 3.97%. See Item 8 – Note 17 for additional information on securities lending activities.
CSB issues brokered CDs as a source of funding. As of December 31, 2025, there were $2.0 billion brokered CDs issued by CSB outstanding with maturities ranging from January 2026 to March 2026 and a weighted-average interest of 4.03%.Cash Flow ActivityThe Company’s cash and cash equivalents increased $3.9 billion from year-end 2024 to $46.0 billion at December 31, 2025; cash and cash equivalents, including amounts restricted, increased $4.1 billion from year-end 2024 to $69.7 billion at December 31, 2025. These increases were due to net investing cash inflows of $24.5 billion, which were driven by net inflows of $37.6 billion from our AFS and HTM securities, partially offset by net outflows of $12.8 billion due to strong growth in bank loans. Net cash inflows from operations during 2025 were $9.3 billion. Increases in investing and operating cash flows were partially offset by net financing outflows of $29.7 billion, primarily due to paydowns of FHLB borrowings and other short-term borrowings by a net total of $14.0 billion, repurchases of common and nonvoting common stock for $7.3 billion, and the redemption of Series G preferred stock for $2.5 billion. Additionally, net financing outflows related to decreases in bank deposits during 2025 were $3.4 billion, primarily due to a decrease of $25.7 billion in brokered CDs, partially offset by a $21.8 billion increase in deposits swept from brokerage accounts.
The Company’s cash and cash equivalents decreased $1.3 billion from year-end 2023 to $42.1 billion at December 31, 2024; cash and cash equivalents, including amounts restricted, decreased $9.0 billion from year-end 2023 to $65.5 billion at December 31, 2024. These decreases reflected a net reduction of bank supplemental funding balances of $29.7 billion and maturities of long-term debt of $3.7 billion. Bank deposits decreased in 2024 by $30.8 billion, which reflected a net decrease in brokered CDs of $20.6 billion, as well as a $9.7 billion decrease in deposits swept from brokerage accounts due to client cash allocations and engagement with equity markets. The average pace of client cash allocations out of sweep products into higher-yielding investment solutions decreased in 2024. The Company reduced FHLB borrowings and other short-term borrowings by a net total of $10.3 billion. Partially offsetting the decrease in bank deposits and repayment of borrowings, net investing cash inflows from our AFS and HTM securities totaled $40.9 billion in 2024 and net cash inflows from operations totaled $2.7 billion.
Liquidity Coverage Ratio
Schwab is subject to the full LCR rule, which requires the Company to hold HQLA in an amount equal to at least 100% of the Company’s projected net cash outflows over a prospective 30-calendar-day period of acute liquidity stress, calculated on each business day. See Part I – Item 1 – Regulation for additional information. The Company was in compliance with the LCR rule at December 31, 2025, and the table below presents information about our average daily LCR:
Average for the Three Months Ended
December 31, 2025 September 30, 2025
Total eligible HQLA $ 55,450 $ 53,281
Net cash outflows 42,415 39,814
LCR 131 % 134 %
To support growth in margin loan balances at our broker-dealer subsidiary while meeting our LCR requirements, the Company may utilize wholesale funding sources, such as issuing commercial paper, drawing on secured lines of credit, borrowing under
- 50 -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)repurchase agreements, or engaging in securities lending, in addition to capital markets issuances. In managing compliance with our LCR requirements, the broker-dealer subsidiary may also retain client cash balances rather than sweeping such balances to our banking subsidiaries.Net Stable Funding RatioSchwab is subject to disclosure requirements under the NSFR rule, which requires the semi-annual public disclosure of its NSFR levels. The NSFR rule stipulates that the Company’s ASF must be at least 100% of the Company’s RSF. ASF is calculated by assessing the stability of the Company’s funding sources and RSF is calculated by evaluating the characteristics of the Company’s assets, derivatives, and off-balance-sheet exposures. The Company was in compliance with the NSFR rule at December 31, 2025, and the table below presents information about our average NSFR:Average for the Three Months EndedDecember 31, 2025 September 30, 2025
ASF $ 206,100 $ 202,100
RSF 159,369 154,754
NSFR 129 % 131 %Long-Term BorrowingsThe Company’s long-term debt is primarily comprised of Senior Notes and totaled $22.2 billion and $22.4 billion at December 31, 2025 and 2024, respectively.
The following table provides information about our Senior Notes outstanding at December 31, 2025:
December 31, 2025 Par Outstanding Maturity Weighted-Average
Interest Rate (1)
Moody’s Standard & Poor’s Fitch
CSC Senior Notes $ 22,119 2026 - 2036 3.73% A2 A- A
Ameritrade Holding LLC Senior Notes 81 2027 - 2029 3.13% A2 A- —
(1) Weighted-average interest rates presented here exclude the impact of derivatives. See Item 1 – Note 16 for information on the Company’s hedging of Senior Notes.New Debt IssuancesThe long-term debt issuances below in 2025 and 2023 were senior unsecured obligations issued by CSC. During 2024, no new long-term debt was issued by the Company. Additional details are as follows:Issuance Date Issuance Amount Maturity Date Interest Rate Interest PayableNovember 14, 2025 $ 1,000 11/14/2031 4.343% (1)
Semi-annually
November 14, 2025 $ 1,000 11/14/2036 4.914% (1)
Semi-annually
November 17, 2023 $ 1,300 11/17/2029 6.196% (1)
Semi-annually
August 24, 2023 $ 1,350 8/24/2034 6.136% (1)
Semi-annuallyAugust 24, 2023 $ 1,000 8/24/2026 5.875% Semi-annuallyMay 19, 2023 $ 1,200 5/19/2029 5.643% (1)
Semi-annually
May 19, 2023 $ 1,300 5/19/2034 5.853% (1)
Semi-annually
(1) Interest rates presented are those in effect at December 31, 2025. For additional information regarding future interest rates on fixed-to-floating rate Senior Notes, see Item 8 – Note 13.Equity Issuances and RedemptionsDuring 2025, 2024, and 2023, CSC did not issue preferred stock.
On June 2, 2025, the Company redeemed all of the 24,580 outstanding shares of its fixed-rate reset non-cumulative perpetual preferred stock, Series G, and the corresponding 2,457,964 depositary shares. The depositary shares were redeemed at a redemption price of $1,000 per depositary share for a total of $2.5 billion.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)See also Item 8 – Consolidated Statements of Cash Flows, Item 8 – Note 12 for the Company’s bank deposits, Item 8 – Note 13 for the Company’s debt and borrowing facilities, Item 8 – Note 17 for the Company’s securities lending and collateralized financing activities, and Item 8 – Note 19 for the Company’s equity outstanding balances and activity.
Contractual Obligations
Schwab’s principal contractual obligations as of December 31, 2025 include payments on long-term debt; payments on securities lending and wholesale borrowings, including brokered CDs, FHLB borrowings, and other short-term borrowings; lease payments including legally-binding minimum lease payments for leases signed but not yet commenced; credit-related financial instruments, representing our banking subsidiaries’ commitments to extend credit to banking clients, purchase mortgage loans, and fund CRA investments; and purchase obligations for services such as advertising and marketing, telecommunications, hardware- and software-related agreements, and professional services. For information on our contractual obligations for brokered CDs, FHLB borrowings, other short-term borrowings, long-term debt, leases, and credit-related financial instruments, see Item 8 – Notes 12, 13, 14, 15, 16, and 17. As of December 31, 2025, the Company had total short-term purchase obligations of $687 million and total long-term purchase obligations of $613 million.
Schwab enters into guarantees and other similar arrangements in the ordinary course of business. For information on these arrangements, see Item 8 – Notes 6, 7, 11, 13, 15, and 17. Pursuant to the 2023 IDA agreement, certain brokerage client deposits are required to be swept off-balance sheet to the TD Depository Institutions. See Item 8 – Note 15 for additional information.CAPITAL MANAGEMENTSchwab seeks to manage capital to a level and composition sufficient to support execution of our business strategy, inclusive of balance sheet growth, financial support to our subsidiaries, sustained access to the capital markets, and regulatory capital requirements. Schwab also seeks to return excess capital to stockholders. We may return excess capital through dividends, repurchases of common shares, preferred stock redemptions, and repurchases of our preferred stock represented by depositary shares. Schwab’s primary sources of capital are funds generated by the operations of subsidiaries and securities issuances by CSC in the capital markets.
To ensure that Schwab has sufficient capital to absorb unanticipated losses, balance sheet growth, or declines in asset values, we have adopted a policy to remain well capitalized even in stressed scenarios. 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 Committee meetings and regularly at meetings of the Board of Directors. A number of early warning indicators are monitored to help identify potential developments that could negatively 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. At the banking subsidiaries, dividends and returns of capital are managed with consideration of minimum tangible common equity and regulatory capital requirements. When subsidiaries have need of additional capital, funds are provided by CSC as equity investments and also as subordinated loans. 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 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 (see also Risk Management – Liquidity Risk for discussion of liquidity stress testing). 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 at a loss to fund the outflows. The Capital Contingency Plan is reviewed annually and updated as appropriate.For additional information, see Business – Regulation in Part I – Item 1.- 52 -
THE CHARLES SCHWAB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)Regulatory Capital RequirementsCSC 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%. Due to the relatively low credit risk of our balance sheet assets and risk-based capital ratios at CSC and CSB that are 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 a ratio of at least 6.5%. Based on its regulatory capital ratios at December 31, 2025, CSB is considered well capitalized.
As a supplemental measure of capital, the Company utilizes an adjusted Tier 1 Leverage Ratio, which is a non-GAAP financial measure that includes AOCI in the ratio. The primary component of AOCI for Schwab is unrealized gains and losses on our AFS investment securities portfolio and on securities transferred from AFS to the HTM category. The Company maintains a long-term operating objective for its consolidated adjusted Tier 1 Leverage Ratio of 6.75% - 7.00% (see Non-GAAP Financial Measures for further details and a reconciliation to GAAP reported results).
The ability of our banking subsidiaries to distribute dividends to CSC is subject to regulatory oversight. Our banking subsidiaries are required to notify, and in certain cases obtain approval from, the Federal Reserve and applicable state banking regulators prior to declaring or paying dividends. For example, the Federal Reserve requires approval to declare or pay dividends that would be in excess of recent net income and retained earnings.
As a broker-dealer, CS&Co is subject to regulatory requirements of the Uniform Net Capital Rule, which are intended to ensure the general financial soundness and liquidity of broker-dealers. These regulations prohibit our broker-dealer subsidiary from paying cash dividends, making unsecured advances and loans to CSC and employees, and repaying subordinated borrowings from CSC, if such payment would result in a net capital amount below prescribed thresholds. At December 31, 2025, 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 – Notes 19 and 23 for additional information on the components of stockholders’ equity and information on the capital requirements of significant subsidiaries and CSC (consolidated).
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Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)The following table details the capital ratios for CSC (consolidated) and CSB:
December 31, 2025 2024CSC CSB CSC CSBTotal stockholders’ equity $ 49,425 $ 18,658 $ 48,375 $ 19,700Less:Preferred stock 6,763 — 9,191 —
Common Equity Tier 1 Capital before regulatory adjustments $ 42,662 $ 18,658 $ 39,184 $ 19,700Less:Goodwill, net of associated deferred tax liabilities $ 11,711 $ 13 $ 11,746 $ 13
Other intangible assets, net of associated deferred tax liabilities 5,811 — 6,232 —
Deferred tax assets, net of valuation allowances and deferred tax liabilities 38 43 50 41AOCI adjustment (1)(10,979) (9,524) (14,839) (12,938)
Common Equity Tier 1 Capital $ 36,081 $ 28,126 $ 35,995 $ 32,584
Tier 1 Capital $ 42,844 $ 28,126 $ 45,186 $ 32,584
Total Capital 42,894 28,163 45,218 32,606
Risk-Weighted Assets 118,782 78,281 113,648 78,134
Average Assets with regulatory adjustments 462,473 252,828 458,119 280,701
Total Leverage Exposure 465,794 254,975 461,200 282,629
Common Equity Tier 1 Capital/Risk-Weighted Assets 30.4 % 35.9 % 31.7 % 41.7 %
Tier 1 Capital/Risk-Weighted Assets 36.1 % 35.9 % 39.8 % 41.7 %
Total Capital/Risk-Weighted Assets 36.1 % 36.0 % 39.8 % 41.7 %
Tier 1 Leverage Ratio 9.3 % 11.1 % 9.9 % 11.6 %
Supplementary Leverage Ratio 9.2 % 11.0 % 9.8 % 11.5 %
(1) Changes in market interest rates can result in unrealized gains or losses on AFS securities, which are included in AOCI. As a Category III banking organization, CSC has elected to exclude most components of AOCI from regulatory capital.
The Company’s consolidated Tier 1 Leverage Ratio decreased to 9.3% at December 31, 2025 from 9.9% at year-end 2024. This decrease reflects returns of excess capital and higher total Company assets, partially offset by organic growth from net income earned during the year. During 2025, the Company repurchased $7.3 billion of total voting and nonvoting common stock, increased its common stock dividend by 8% to $.27 per share, and redeemed its Series G preferred stock for $2.5 billion. CSB’s Tier 1 Leverage Ratio decreased to 11.1% at December 31, 2025 from 11.6% at year-end 2024, primarily as a result of dividends to CSC, partially offset by 2025 net income.
As of December 31, 2025, our adjusted Tier 1 Leverage Ratio (see Non-GAAP Financial Measures for further details and a reconciliation of such measures to GAAP reported results) was 7.1% for CSC (consolidated) and 7.6% for CSB, increasing from 6.8% for CSC (consolidated) and 7.3% for CSB as of year-end 2024. These increases were driven primarily by 2025 net income and improvement in AOCI.DividendsSince the initial dividend in 1989, and as of December 31, 2025, CSC has paid 147 consecutive quarterly dividends and has increased the quarterly dividend rate 29 times, resulting in a 19% 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.
The Board of Directors of the Company declared a quarterly cash dividend increase per common share during 2025 as shown below:Date of Declaration Quarterly Cash Increase Per Common Share % Increase New Quarterly Dividend Per Common ShareJanuary 29, 2025 $ .02 8 % $ .27
In addition, on January 29, 2026, the Board of Directors of the Company declared a five cent, or 19%, increase in the quarterly cash dividend to $.32 per common share.
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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 cash dividends paid and per share amounts:Year Ended December 31, 2025 2024Cash Paid Per Share Amount Cash Paid Per Share AmountCommon and Nonvoting Common Stock (1)
$ 1,958 $ 1.08 $ 1,838 $ 1.00Preferred Stock:Series D (2)
45 59.52 45 59.52Series F (3)
24 5,000.00 24 5,000.00
Series G (4)
66 2,687.50 132 5,375.00Series H (2)89 4,000.00 89 4,000.00Series I (2)83 4,000.00 83 4,000.00Series J (2)
27 44.52 27 44.52Series K (2)
37 5,000.00 37 5,000.00
(1) The Company had no nonvoting common stock outstanding as of the record date for the Company’s 2025 dividends and accordingly, no dividends were paid on nonvoting common stock during the year ended December 31, 2025.(2) Dividends are paid quarterly.(3) Dividends are paid semi-annually until December 1, 2027 and quarterly thereafter.
(4) Series G was redeemed on June 2, 2025. Prior to redemption, dividends were paid quarterly. The final dividend was paid on June 2, 2025.Share RepurchasesOn February 12, 2025, TD Group US Holdings LLC, an affiliate of TD Bank, completed a secondary public offering of the Company’s common shares through which TD Group US Holdings LLC sold 133.8 million shares of the Company’s common stock and 31.7 million shares of the Company’s nonvoting common stock, which automatically converted into common stock, for an aggregate amount of $13.1 billion. The Company did not receive any of the proceeds from the sale of shares.
Concurrent with the completion of the secondary offering, and pursuant to a repurchase agreement dated February 9, 2025, the Company repurchased directly from TD Group US Holdings LLC its remaining 19.2 million shares of nonvoting common stock at a price of $77.982 per share for an aggregate repurchase amount of $1.5 billion, which settled on February 12, 2025. The shares of nonvoting common stock automatically converted into common stock upon repurchase and transferred to treasury stock, reducing the number of shares outstanding. These shares were purchased under CSC’s previous $15 billion share repurchase authorization.
Through the completion of the secondary offering and the Company’s repurchase of nonvoting common stock, TD Bank disposed of all of its common shares of CSC and the Company has no remaining nonvoting common stock outstanding.
CSC repurchased an additional 3.9 million shares of its common stock for $351 million under its previous $15 billion share repurchase authorization during the year ended December 31, 2025.
On July 24, 2025, CSC publicly announced that its Board of Directors approved a share repurchase authorization to repurchase up to $20 billion of common stock, replacing the previous and now terminated share repurchase authorization of up to $15 billion of common stock. The new share repurchase authorization does not have an expiration date. During the year ended December 31, 2025, CSC repurchased 58.2 million shares of its common stock under the new authorization for $5.5 billion. As of December 31, 2025, approximately $14.5 billion remained on the new authorization.
There were no repurchases of CSC’s common stock during the year ended December 31, 2024.
Common stock repurchases, net of issuances, are subject to a nondeductible 1% excise tax which is recognized as a direct and incremental cost associated with these transactions. The tax is recorded as part of the cost basis of the treasury stock repurchased, resulting in no impact to the consolidated statements of income.
See Risk Management – Liquidity Risk for discussion of the 2025 redemption of certain of the Company’s preferred stock. There were no repurchases or redemptions of CSC’s preferred stock during the year ended December 31, 2024.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)FOREIGN EXPOSURE
At December 31, 2025, Schwab had exposure to non-sovereign financial and non-financial institutions in foreign countries. At December 31, 2025, the fair value of these holdings totaled $10.5 billion, with the top three exposures being to issuers and counterparties domiciled in France at $7.4 billion, the United Kingdom at $1.9 billion, and Japan at $600 million. At December 31, 2024, the fair value of these holdings totaled $10.6 billion, with the top three exposures being to issuers and counterparties domiciled in France at $5.1 billion, the United Kingdom at $2.1 billion, and Canada at $889 million. In addition, Schwab had outstanding margin loans to foreign residents of $4.8 billion and $3.5 billion at December 31, 2025 and 2024, respectively.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 – Notes 2 and 18 for more information on our assets and liabilities recorded at fair value.
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 applying 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 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 TaxesSchwab 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 significant to the operating results of the Company. See Item 8 – Note 22 for more information on the Company’s income taxes.
Legal and Regulatory ReservesReserves 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
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Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)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 15 for more information on the Company’s contingencies related to legal and regulatory reserves.NON-GAAP FINANCIAL MEASURES
In addition to disclosing financial results in accordance with generally accepted accounting principles in the U.S. (GAAP), Management’s Discussion and Analysis of Financial Condition and Results of Operations contain references to the non-GAAP financial measures described below. We believe these non-GAAP financial measures provide useful supplemental information about the financial performance of the Company, and facilitate meaningful comparison of Schwab’s results in the current period to both historic and future results. These non-GAAP measures should not be considered a substitute for, or superior to, financial measures calculated in accordance with GAAP, and may not be comparable to non-GAAP financial measures presented by other companies.Schwab’s use of non-GAAP measures is reflective of certain adjustments made to GAAP financial measures as described below.Non-GAAP Adjustment or Measure Definition Usefulness to Investors and Uses by ManagementAcquisition and integration-related costs, amortization of acquired intangible assets, and restructuring costs
Schwab adjusts certain GAAP financial measures to exclude the impact of acquisition and integration-related costs incurred as a result of the Company’s acquisitions, amortization of acquired intangible assets, restructuring costs, and, where applicable, the income tax effect of these expenses.Adjustments made to exclude amortization of acquired intangible assets are reflective of all acquired intangible assets, which were recorded as part of purchase accounting. These acquired intangible assets contribute to the Company’s revenue generation. Amortization of acquired intangible assets will continue in future periods over their remaining useful lives.We exclude acquisition and integration-related costs, amortization of acquired intangible assets, and restructuring costs for the purpose of calculating certain non-GAAP measures because we believe doing so provides additional transparency of Schwab’s ongoing operations, and is useful in both evaluating the operating performance of the business and facilitating comparison of results with prior and future periods.Costs related to acquisition and integration or restructuring fluctuate based on the timing of acquisitions, integration and restructuring activities, thereby limiting comparability of results among periods, and are not representative of the costs of running the Company’s ongoing business. Amortization of acquired intangible assets is excluded because management does not believe it is indicative of the Company’s underlying operating performance.Return on tangible common equity Return on tangible common equity represents annualized adjusted net income available to common stockholders as a percentage of average tangible common equity. Tangible common equity represents common equity less goodwill, acquired intangible assets — net, and related deferred tax liabilities. Acquisitions typically result in the recognition of significant amounts of goodwill and acquired intangible assets. We believe return on tangible common equity may be useful to investors as a supplemental measure to facilitate assessing capital efficiency and returns relative to the composition of Schwab’s balance sheet.Adjusted Tier 1 Leverage Ratio Adjusted Tier 1 Leverage Ratio represents the Tier 1 Leverage Ratio as prescribed by bank regulatory guidance for the consolidated company and for CSB, adjusted to reflect the inclusion of AOCI in the ratio. Inclusion of the impacts of AOCI in the Company’s Tier 1 Leverage Ratio provides additional information regarding the Company’s current capital position. We believe Adjusted Tier 1 Leverage Ratio may be useful to investors as a supplemental measure of the Company’s capital levels.The Company also uses adjusted diluted EPS and return on tangible common equity as components of performance criteria for employee bonus and certain executive management incentive compensation arrangements. The Compensation Committee of CSC’s Board of Directors maintains discretion in evaluating performance against these criteria. Additionally, the Company uses adjusted Tier 1 Leverage Ratio in managing capital, including its use of the measure as its long-term operating objective.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)
The following tables present reconciliations of GAAP measures to non-GAAP measures:
Year Ended December 31,2025 2024 2023
Total expenses excluding interest (GAAP) $ 12,462 $ 11,914 $ 12,459
Amortization of acquired intangible assets (512) (519) (534)Acquisition and integration-related costs (1)— (117) (401)Restructuring costs (2)— (9) (495)
Adjusted total expenses (non-GAAP) $ 11,950 $ 11,269 $ 11,029
(1) Acquisition and integration-related costs for 2024 primarily consist of $54 million of compensation and benefits, $36 million of professional services, and $19 million of depreciation and amortization. Acquisition and integration-related costs for 2023 primarily consist of $187 million of compensation and benefits, $135 million of professional services, $28 million of occupancy and equipment, and $27 million of other expense.
(2) Restructuring costs for 2024 reflect a benefit due to a change in estimate of $34 million in compensation and benefits, offset by $5 million of occupancy and equipment expense and $37 million of other expense. Restructuring costs for 2023 primarily consist of $292 million of compensation and benefits, $17 million of occupancy and equipment, and $181 million of other expense.Year Ended December 31,2025 2024 2023Amount Diluted EPS Amount Diluted EPS Amount Diluted EPSNet income available to common stockholders (GAAP), Earnings per common share — diluted (GAAP) $ 8,417 $ 4.65 $ 5,478 $ 2.99 $ 4,649 $ 2.54
Amortization of acquired intangible assets 512 .29 519 .28 534 .29
Acquisition and integration-related costs — — 117 .06 401 .22
Restructuring costs — — 9 — 495 .27Income tax effects (1)(122) (.07) (154) (.08) (338) (.19)
Adjusted net income available to common stockholders (non-GAAP), Adjusted diluted EPS (non-GAAP) $ 8,807 $ 4.87 $ 5,969 $ 3.25 $ 5,741 $ 3.13
(1) The income tax effects of the non-GAAP adjustments are determined using an effective tax rate reflecting the exclusion of non-deductible acquisition costs and are used to present the acquisition and integration-related costs, amortization of acquired intangible assets, and restructuring costs on an after-tax basis.Year Ended December 31,2025 2024 2023
Return on average common stockholders’ equity (GAAP) 21 % 15 % 16 %
Average common stockholders’ equity $ 40,923 $ 35,475 $ 29,334
Less: Average goodwill (11,951) (11,951) (11,951)
Less: Average acquired intangible assets — net (7,488) (8,002) (8,524)
Plus: Average deferred tax liabilities related to goodwill and acquired intangible assets — net 1,691 1,741 1,805
Average tangible common equity $ 23,175 $ 17,263 $ 10,664Adjusted net income available to common stockholders (1)$ 8,807 $ 5,969 $ 5,741
Return on tangible common equity (non-GAAP) 38 % 35 % 54 %(1) See table above for the reconciliation of net income available to common stockholders to adjusted net income available to common stockholders (non-GAAP).December 31, 2025 December 31, 2024 December 31, 2023
CSC CSB CSC CSB CSC CSB
Tier 1 Leverage Ratio (GAAP) 9.3 % 11.1 % 9.9 % 11.6 % 8.5 % 10.1 %
Tier 1 Capital
$ 42,844 $ 28,126 $ 45,186 $ 32,584 $ 40,602 $ 31,777
Plus: AOCI adjustment (11,017) (9,562) (14,839) (12,938) (18,131) (15,746)
Adjusted Tier 1 Capital 31,827 18,564 30,347 19,646 22,471 16,031
Average assets with regulatory adjustments
462,473 252,828 458,119 280,701 476,069 315,851
Plus: AOCI adjustment (11,333) (9,875) (14,831) (13,037) (19,514) (17,194)
Adjusted average assets with regulatory adjustments $ 451,140 $ 242,953 $ 443,288 $ 267,664 $ 456,555 $ 298,657
Adjusted Tier 1 Leverage Ratio (non-GAAP) 7.1 % 7.6 % 6.8 % 7.3 % 4.9 % 5.4 %