SCHWAB CHARLES CORP [SCHW-PD] Filings

10-Q 1 schw-20230331.htm 10-Q schw-20230331

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2023


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________ to ________

Commission File Number: 1-9700

THE CHARLES SCHWAB CORPORATION

(Exact name of registrant as specified in its charter)


Delaware									94-3025021
(State or other jurisdiction of incorporation or organization)									(I.R.S. Employer Identification No.)

3000 Schwab Way, Westlake, TX 76262

(Address of principal executive offices and zip code)

Registrant’s telephone number, including area code: (817) 859-5000

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock – $.01 par value per share	SCHW	New York Stock Exchange
Depositary Shares, each representing a 1/40th ownership interest in a share of 5.95% Non-Cumulative Preferred Stock, Series D	SCHW PrD	New York Stock Exchange
Depositary Shares, each representing a 1/40th ownership interest in a share of 4.450% Non-Cumulative Preferred Stock, Series J	SCHW PrJ	New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer ☒ Accelerated filer ☐

Non-accelerated filer ☐ Smaller reporting company ☐

Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

1,769,142,212 shares of $.01 par value Common Stock and 50,893,695 shares of $.01 par value Nonvoting Common Stock outstanding on April 28, 2023

THE CHARLES SCHWAB CORPORATION

Quarterly Report on Form 10-Q

For the Quarter Ended March 31, 2023

Index

Part I - Financial Information

Item 1.

Condensed Consolidated Financial Statements (Unaudited):

Statements of Income

Statements of Comprehensive Income

Balance Sheets

Statements of Stockholders’ Equity

Statements of Cash Flows

29-30

Notes

31-62

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

1-23

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

Item 4.

Controls and Procedures

Part II - Other Information

Item 1.

Legal Proceedings

Item 1A.

Risk Factors

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

Item 3.

Defaults Upon Senior Securities

Item 4.

Mine Safety Disclosures

Item 5.

Other Information

Item 6.

Exhibits

Signature

Part I – FINANCIAL INFORMATION

THE CHARLES SCHWAB CORPORATION

Management’s Discussion and Analysis of Financial Condition and Results of Operations

(Tabular Amounts in Millions, Except Ratios, or as Noted)

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

INTRODUCTION

The Charles Schwab Corporation (CSC) is a savings and loan holding company. CSC engages, through its subsidiaries (collectively referred to as Schwab or the Company), in wealth management, securities brokerage, banking, asset management, custody, and financial advisory services.

Principal business subsidiaries of CSC include the following:

•Charles Schwab & Co., Inc. (CS&Co), incorporated in 1971, a securities broker-dealer;

•TD Ameritrade, Inc., an introducing securities broker-dealer;

•TD Ameritrade Clearing, Inc. (TDAC), a securities broker-dealer that provides trade execution and clearing services to TD Ameritrade, Inc.;

•Charles Schwab Bank, SSB (CSB), our principal banking entity; and

•Charles Schwab Investment Management, Inc. (CSIM), the investment advisor for Schwab’s proprietary mutual funds (Schwab Funds®) and for Schwab’s exchange-traded funds (Schwab ETFs™).

Unless otherwise indicated, the terms “Schwab,” “the Company,” “we,” “us,” or “our” mean CSC together with its consolidated subsidiaries.

Schwab provides financial services to individuals and institutional clients through two segments – Investor Services and Advisor Services. The Investor Services segment provides retail brokerage, investment advisory, and banking and trust services to individual investors, and retirement plan services, as well as other corporate brokerage services, to businesses and their employees. The Advisor Services segment provides custodial, trading, banking and trust, and support services, as well as retirement business services, to independent registered investment advisors (RIAs), independent retirement advisors, and recordkeepers.

Schwab was founded on the belief that all Americans deserve access to a better investing experience. Although much has changed in the intervening years, our purpose remains clear – to champion every client’s goals with passion and integrity. Guided by this purpose and our vision of creating the most trusted leader in investment services, management has adopted a strategy described as “Through Clients’ Eyes.”

This strategy emphasizes placing clients’ perspectives, needs, and desires at the forefront. Because investing plays a fundamental role in building financial security, we strive to deliver a better investing experience for our clients – individual investors and the people and institutions who serve them – by disrupting longstanding industry practices on their behalf and providing superior service. We also aim to offer a broad range of products and solutions to meet client needs with a focus on transparency, value, and trust. In addition, management works to couple Schwab’s scale and resources with ongoing expense discipline to keep costs low and ensure that products and solutions are affordable as well as responsive to client needs. In combination, these are the key elements of our “no trade-offs” approach to serving investors. We believe that following this strategy is the best way to maximize our market valuation and stockholder returns over time.

Management estimates that investable wealth in the United States (U.S.) (consisting of assets in defined contribution, retail wealth management and brokerage, and registered investment advisor channels, along with bank deposits) currently exceeds $60 trillion, which means the Company’s $7.58 trillion in client assets leaves substantial opportunity for growth. Our strategy is based on the principle that developing trusted relationships will translate into more assets from both new and existing clients, ultimately driving more revenue, and along with expense discipline and thoughtful capital management, will generate earnings growth and build long-term stockholder value.

This Management’s Discussion and Analysis should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended December 31, 2022 (2022 Form 10-K).

On our website, https://www.aboutschwab.com, we post the following filings after they are electronically filed with or furnished to the Securities and Exchange Commission (SEC or Commission): annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports filed or furnished pursuant to Section 13(a)

- 1 -

THE CHARLES SCHWAB CORPORATION

Management’s Discussion and Analysis of Financial Condition and Results of Operations

(Tabular Amounts in Millions, Except Ratios, or as Noted)

or 15(d) of the Securities Exchange Act of 1934. In addition, the website also includes the Dodd-Frank stress test results, our regulatory capital disclosures based on Basel III, and our average liquidity coverage ratio (LCR). The SEC maintains a website at https://www.sec.gov that contains reports, proxy statements, and other information that we file electronically with them.

FORWARD-LOOKING STATEMENTS

In addition to historical information, this Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act, and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements are identified by words such as “believe,” “anticipate,” “expect,” “intend,” “plan,” “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 (see Introduction in Part I – Item 2);

•Business momentum; investments to support growth in our client base; capital return (see Overview);

•Expected timing for the TD Ameritrade client transitions; cost estimates and timing related to the TD Ameritrade integration, including acquisition and integration-related costs and capital expenditures, cost synergies, and exit and other related costs (see Overview and Exit and Other Related Liabilities in Part I – Item 1 – Financial Information – Notes to Condensed Consolidated Financial Statements (Item 1) – Note 10);

•The expected impact of proposed rules (see Current Regulatory and Other Developments);

• The adjustment of rates paid on client-related liabilities; the use and balances of supplemental funding; net interest revenue (see Results of Operations);

•Capital expenditures (see Results of Operations);

•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);

•The phase-out of the use of LIBOR (see Risk Management);

•Sources and uses of liquidity and capital (see Liquidity Risk and Capital Management);

•Capital management; the potential migration of insured deposit account balances (IDA balances) to our balance sheet; expectations about capital requirements, including accumulated other comprehensive income (AOCI); plans regarding capital and dividends (see Capital Management and Commitments and Contingencies in Item 1 – Note 9);

•The expected impact of new accounting standards not yet adopted (see New Accounting Standards in Item 1 – Note 2);

•The likelihood of indemnification and guarantee payment obligations and clients failing to fulfill contractual obligations (see Commitments and Contingencies in Item 1 – Note 9); and

•The impact of legal proceedings and regulatory matters (see Commitments and Contingencies in Item 1 – Note 9 and Legal Proceedings in Part II – Item 1).

Achievement of the expressed beliefs, objectives, and expectations described in these statements is subject to certain risks and uncertainties that could cause actual results to differ materially from the expressed beliefs, objectives, and expectations. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this Quarterly Report on Form 10-Q or, in the case of documents incorporated by reference, as of the date of those documents.

Important factors that may cause actual results to differ include, but are not limited to:

•General market conditions, including equity valuations and the level of interest rates;

•The level and mix of client trading activity;

•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;

•Competitive pressure on pricing, including deposit rates;

•Client sensitivity to rates;

•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;

- 2 -

THE CHARLES SCHWAB CORPORATION

Management’s Discussion and Analysis of Financial Condition and Results of Operations

(Tabular Amounts in Millions, Except Ratios, or as Noted)

•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 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;

•LIBOR trends;

•Adverse developments in litigation or regulatory matters and any related charges; and

•Potential breaches of contractual terms for which we have indemnification and guarantee obligations.

Certain of these factors, as well as general risk factors affecting the Company, are discussed in greater detail in Part I – Item 1A – Risk Factors in the 2022 Form 10-K.

- 3 -

THE CHARLES SCHWAB CORPORATION

Management’s Discussion and Analysis of Financial Condition and Results of Operations

(Tabular Amounts in Millions, Except Ratios, or as Noted)

OVERVIEW

Management focuses on several client activity and financial metrics in evaluating Schwab’s financial position and operating performance. Results for the first quarter of 2023 and 2022 are as follows:


	Three Months Ended March 31,						Percent Change
	2023			2022
Client Metrics
Net new client assets (in billions) (1)	$	150.7		$	120.5		25	%
Core net new client assets (in billions)	$	131.7		$	120.5		9	%
Client assets (in billions, at quarter end)	$	7,580.0		$	7,862.1		(4)	%
Average client assets (in billions)	$	7,385.4		$	7,766.4		(5)	%
New brokerage accounts (in thousands)	1,042			1,202			(13)	%
Active brokerage accounts (in thousands, at quarter end)	34,120			33,577			2	%
Assets receiving ongoing advisory services (in billions, at quarter end)	$	3,895.5		$	3,943.5		(1)	%
Client cash as a percentage of client assets (at quarter end)	11.6		%	11.4		%
Company Financial Information and Metrics
Total net revenues	$	5,116		$	4,672		10	%
Total expenses excluding interest	3,006			2,833			6	%
Income before taxes on income	2,110			1,839			15	%
Taxes on income	507			437			16	%
Net income	1,603			1,402			14	%
Preferred stock dividends and other	70			124			(44)	%
Net income available to common stockholders	$	1,533		$	1,278		20	%
Earnings per common share — diluted	$	.83		$	.67		24	%
Net revenue growth from prior year	10		%	(1)		%
Pre-tax profit margin	41.2		%	39.4		%
Return on average common stockholders’ equity (annualized)	23		%	12		%
Expenses excluding interest as a percentage of average client assets (annualized)	0.17		%	0.15		%
Consolidated Tier 1 Leverage Ratio (at quarter end)	7.1		%	6.1		%
Non-GAAP Financial Measures (2)
Adjusted total expenses (3)	$	2,773		$	2,583
Adjusted diluted EPS	$	.93		$	.77
Return on tangible common equity	83		%	26		%

(1) The first quarter of 2023 includes inflows of $19.0 billion from off-platform certificates of deposit (CDs) issued by CSB.

(2) See Non-GAAP Financial Measures for further details and a reconciliation of such measures to GAAP reported results.

(3) Adjusted total expenses is a non-GAAP financial measure adjusting total expenses excluding interest. See Non-GAAP Financial Measures.

The first quarter of 2023 presented a mixed macroeconomic background for our clients. While equity markets increased from year-end 2022 levels, investor sentiment remained bearish, especially following the onset of the banking industry turmoil in early March. Fixed income markets also reflected growing fears of an economic downturn as the 10-year U.S. Treasury yield declined approximately 50 basis points from its intra-quarter peak to end March just under 3.50%. The Federal Reserve continued its monetary tightening cycle, increasing the Federal Funds rate twice for a total of 50 basis points in the first quarter of 2023.

Throughout this environment, Schwab remained a trusted partner to investors. Core net new assets totaled $131.7 billion in the first quarter of 2023, representing an annualized organic growth rate of over 7%, and total client assets were $7.58 trillion at March 31, 2023, up 8% from year-end 2022. Clients’ daily average trades (DATs) were 5.9 million in the first quarter of 2023, down 10% from the prior year amid softer investor sentiment. Clients opened 1.0 million new brokerage accounts in the first quarter of 2023, bringing active brokerage accounts to 34.1 million at quarter-end, up 2% year-over-year.

Schwab’s financial results in the first quarter of 2023 reflected the Company’s sustained business momentum and the benefits of rising interest rates, partially offset by clients’ asset allocation decisions. Net income totaled $1.6 billion in the first quarter of 2023, rising 14% from the first quarter of 2022, and the Company produced diluted earnings per common share (EPS) of $.83,

- 4 -

THE CHARLES SCHWAB CORPORATION

Management’s Discussion and Analysis of Financial Condition and Results of Operations

(Tabular Amounts in Millions, Except Ratios, or as Noted)

up 24% from the first quarter of 2022. Adjusted diluted EPS (1), which excludes acquisition and integration-related costs, amortization of acquired intangible assets, and related income tax effects, was $.93, increasing 21% from the first quarter of 2022.

Total net revenues rose 10% year-over-year to $5.1 billion in the first quarter of 2023. Net interest revenue increased to $2.8 billion, up 27% from the first quarter of 2022 as higher yields on interest-earning assets more than offset higher funding costs and lower average interest-earning assets. Asset management and administration fees totaled $1.1 billion in the first quarter of 2023, rising 5% year-over-year as growth in money market funds and the elimination of fee waivers more than offset lower average client asset balances due to declines in equity markets relative to the first quarter of 2022. Trading revenue was $892 million in the first quarter of 2023, decreasing 7% year-over-year due primarily to lower trading volume and changes in mix of client trading activity. Bank deposit account fee revenue was $151 million in the first quarter of 2023, down 49% due in part to $97 million in one-time breakage fees relating to ending our arrangements with certain third-party banks (see Results of Operations – Bank Deposit Account Fees). BDA balances totaled $106.5 billion at March 31, 2023, down 16% from year-end 2022 due primarily to client cash allocation decisions.

Total expenses excluding interest were $3.0 billion in the first quarter of 2023, increasing 6% from the first quarter of 2022. Adjusted total expenses (1) were $2.8 billion, increasing 7% from the first quarter of 2022. These increases reflected higher compensation and benefits expense, higher occupancy and equipment expense, and higher depreciation and amortization expense, as we continued to invest in our people and technology to support ongoing growth in our client base. Acquisition and integration-related costs and amortization of acquired intangible assets were $98 million and $135 million, respectively, in the first quarter of 2023, up 2% and down 12%, respectively, from the first quarter of 2022. Amortization of acquired intangible assets decreased as certain assets from the TDA acquisition were fully amortized by the beginning of the fourth quarter of 2022.

Return on average common stockholders’ equity increased to 23% in the first quarter of 2023 compared with 12% in the first quarter of 2022. Return on tangible common equity (1) (ROTCE) was 83% in the first quarter of 2023 compared with 26% in the first quarter of 2022. The increases in both return on average common stockholders’ equity and ROTCE were due primarily to lower stockholders’ equity and higher net income. Stockholders’ equity was lower in the first quarter of 2023 due to a year-over-year decrease in AOCI, as higher market interest rates resulted in larger unrealized losses on our available for sale (AFS) portfolio in the first quarter of 2023 compared with the first quarter of 2022.

The Company continued its diligent approach to balance sheet management in the first quarter of 2023 to maintain capital and liquidity required to support Schwab’s long-term growth. Total balance sheet assets decreased 3% from year-end 2022 to March 31, 2023. With further increases in market interest rates in the first quarter of 2023 as the Federal Reserve continued its monetary tightening cycle, clients allocated more assets to higher yielding cash and fixed income alternatives. To facilitate these client cash movements and help build available cash, the Company utilized additional temporary funding sources including Federal Home Loan Bank (FHLB) borrowings and issuances of brokered CDs during the first quarter of 2023.

During the first quarter of 2023, we increased our quarterly common dividend by 14% to $.25 per share, and returned capital via common and preferred stock repurchases, which totaled $2.8 billion and $467 million, respectively, during the first quarter of 2023. Inclusive of these actions, the Company’s Tier 1 Leverage Ratio finished the first quarter of 2023 at 7.1%. The Company suspended its active share repurchase program during the first quarter of 2023 in light of anticipated changes to regulatory expectations and capital requirements, though opportunistic capital return remains an important component of our ‘through the cycle’ financial formula.

(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.

Integration of TD Ameritrade

Effective October 6, 2020, the Company completed its acquisition of TD Ameritrade Holding Corporation (TDA Holding) and its consolidated subsidiaries (collectively referred to as “TD Ameritrade” or “TDA”). Integration work continued during the first three months of 2023, including the completion of the first client transition group in February 2023. The Company expects to complete most remaining client transitions from TD Ameritrade to Schwab across multiple groups over the course of 2023, with the transition of a small client group in the first half of 2024. We expect to incur total acquisition and integration-related costs and capital expenditures of between $2.4 billion and $2.5 billion.

- 5 -

THE CHARLES SCHWAB CORPORATION

Management’s Discussion and Analysis of Financial Condition and Results of Operations

(Tabular Amounts in Millions, Except Ratios, or as Noted)

The Company’s estimates of the nature, amounts, and timing of recognition of acquisition and integration-related costs remain subject to change based on a number of factors, including the expected duration and complexity of the 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 include the level of employee attrition and availability of third-party labor, workforce redeployment from eliminated positions into open roles, changes in the levels of client activity, as well as changes in the scope and cost of technology and real estate-related exit cost variability due to effects of changes in remote working trends.

Acquisition and integration-related costs, which are inclusive of related exit costs, totaled $98 million and $96 million for the first quarters of 2023 and 2022, respectively. Over the course of the integration, we expect to realize annualized cost synergies of between $1.8 billion and $2.0 billion, and, through March 31, 2023, we have achieved approximately 75% of this amount on an annualized run-rate basis. The Company expects to realize the vast majority of the remaining estimated cost synergies by the end of 2024, with anticipated full year synergy realization beginning in 2025. Estimated timing and amounts of synergy realization are subject to change as we progress in the integration. Refer to Part II – Item 7 – Overview in our 2022 Form 10-K, Results of Operations – Total Expenses Excluding Interest, Non-GAAP Financial Measures, and Item 1 – Note 10 for additional information regarding our integration of TD Ameritrade.

Subsequent Events

On May 4, 2023, the Company executed a Second Amended and Restated Insured Deposit Account Agreement (2023 IDA agreement) with TD Bank USA, National Association and TD Bank, National Association (together, the TD Depository Institutions) that replaces and supersedes the previous amended and restated insured deposit account agreement dated November 24, 2019 that became effective October 6, 2020, as amended (the 2019 IDA agreement, and together with the 2023 IDA agreement, the IDA agreements). In accordance with the IDA agreements, cash held in eligible brokerage client accounts is swept off-balance sheet to deposit accounts at the TD Depository Institutions. Schwab provides recordkeeping and support services to the TD Depository Institutions with respect to the deposit accounts for which Schwab receives an aggregate monthly fee. Under the 2023 IDA agreement, the service fee on client cash deposits held at the TD Depository Institutions remains at 15 basis points, as it was in the 2019 IDA agreement.

As the 2023 IDA agreement was entered into on May 4, 2023, the results included in this Quarterly Report on Form 10-Q are pursuant to the 2019 IDA agreement. Disclosures regarding the Company’s future obligations reflect the terms of the 2023 IDA agreement.

See Capital Management and Commitments and Contingencies in Item 1 – Note 9 for additional information on the IDA agreements.

Current Regulatory and Other Developments

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.

The comment periods for the proposed rules ended on March 31, 2023 and the impact to Schwab cannot be assessed until the final rules are released.

- 6 -

THE CHARLES SCHWAB CORPORATION

Management’s Discussion and Analysis of Financial Condition and Results of Operations

(Tabular Amounts in Millions, Except Ratios, or as Noted)

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 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 for the order to 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 and the impact to Schwab cannot be assessed until the final rule is released.

In May 2022, the federal banking agencies issued a joint notice of proposed rulemaking that would substantially revise how an insured depository institution’s Community Reinvestment Act (CRA) performance is evaluated. The proposed rule includes revisions relating to 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. The comment period for the proposed rule ended on August 5, 2022 and the impact to Schwab cannot be assessed until the final rule is released.

RESULTS OF OPERATIONS

Total Net Revenues

The following table presents a comparison of revenue by category:


			2023				2022
Three Months Ended March 31,	Percent Change		Amount		% of Total Net Revenues		Amount		% of Total Net Revenues
Net interest revenue
Interest revenue	73	%	$	4,016	78	%	$	2,319	50	%
Interest expense	N/M		(1,246)		(24)	%	(136)		(3)	%
Net interest revenue	27	%	2,770		54	%	2,183		47	%
Asset management and administration fees
Mutual funds, exchange-traded funds (ETFs), and collective trust funds (CTFs)	20	%	585		11	%	489		10	%
Advice solutions	(9)	%	453		9	%	496		11	%
Other	(4)	%	80		2	%	83		2	%
Asset management and administration fees	5	%	1,118		22	%	1,068		23	%
Trading revenue
Commissions	(13)	%	422		8	%	484		10	%
Order flow revenue	(12)	%	414		8	%	470		10	%
Principal transactions	N/M		56		1	%	9		—
Trading revenue	(7)	%	892		17	%	963		20	%
Bank deposit account fees	(49)	%	151		3	%	294		6	%
Other	13	%	185		4	%	164		4	%

Total net revenues	10	%	$	5,116	100	%	$	4,672	100	%

N/M Not meaningful. Percent changes greater than 200% are presented as not meaningful.

Net Interest Revenue

Revenue on interest-earning assets is affected by various factors, such as the composition of assets, prevailing interest rates and spreads at the time of origination or purchase, changes in interest rates on 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-

- 7 -

THE CHARLES SCHWAB CORPORATION

Management’s Discussion and Analysis of Financial Condition and Results of Operations

(Tabular Amounts in Millions, Except Ratios, or as Noted)

related liabilities, and management expects that it will generally adjust the rates paid on these liabilities at some fraction of any movement in short-term rates. Interest expense on long-term debt, FHLB borrowings, other short-term borrowings, and other funding sources is impacted by market interest rates at the time of borrowing and changes in interest rates on floating-rate liabilities. See also Risk Management – Interest Rate Risk Simulations.

Interest rates increased significantly beginning late in the first quarter of 2022 through the first quarter of 2023. Short-term rates were near zero until the Federal Reserve began its aggressive tightening cycle in March 2022 in response to rising inflation, ultimately increasing the federal funds target overnight rate nine times between March 2022 and March 2023 for a total increase of 475 basis points. Long-term interest rates increased throughout 2022 and the first three months of 2023, though at a slower pace, leading to an inverted yield curve.

Schwab’s average interest-earning assets in the first quarter of 2023 were lower compared with the first quarter of 2022 due primarily to client cash allocation movement to higher yielding investment solutions beginning in the second quarter of 2022 through the first quarter of 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 utilized temporary supplemental funding in the fourth quarter of 2022 and first quarter of 2023, including drawing upon FHLB secured lending facilities and issuing brokered CDs.

The following table presents net interest revenue information corresponding to interest-earning assets and funding sources on the condensed consolidated balance sheets:


	2023						2022
Three Months Ended March 31,	Average Balance		Interest Revenue/ Expense		Average Yield/Rate		Average Balance		Interest Revenue/ Expense		Average Yield/Rate
Interest-earning assets
Cash and cash equivalents	$	37,056	$	413	4.46	%	$	72,465	$	34	0.19	%
Cash and investments segregated	40,068		432		4.31	%	51,913		15		0.11	%

Receivables from brokerage clients	60,543		1,084		7.16	%	84,204		626		2.97	%
Available for sale securities (1)	155,791		825		2.12	%	284,526		947		1.33	%
Held to maturity securities (1)	170,889		746		1.75	%	103,416		378		1.46	%
Bank loans	40,248		391		3.92	%	35,852		187		2.10	%
Total interest-earning assets	504,595		3,891		3.09	%	632,376		2,187		1.38	%
Securities lending revenue			112						129
Other interest revenue			13						3
Total interest-earning assets	$	504,595	$	4,016	3.19	%	$	632,376	$	2,319	1.47	%
Funding sources
Bank deposits	$	343,105	$	618	0.73	%	$	452,692	$	16	0.01	%
Payables to brokerage clients	77,169		75		0.39	%	105,929		2		0.01	%
Other short-term borrowings (2)	6,917		86		5.05	%	4,717		4		0.33	%
Federal Home Loan Bank borrowings (2,3)	24,458		304		5.05	%	—		—		—
Long-term debt	20,290		139		2.74	%	19,864		108		2.18	%
Total interest-bearing liabilities	471,939		1,222		1.05	%	583,202		130		0.09	%
Non-interest-bearing funding sources	32,656						49,174
Securities lending expense			22						7
Other interest expense			2						(1)
Total funding sources	$	504,595	$	1,246	1.00	%	$	632,376	$	136	0.09	%
Net interest revenue			$	2,770	2.19	%			$	2,183	1.38	%

(1) Amounts have been calculated based on amortized cost. Interest revenue on investment securities is presented net of related premium amortization.

(2) Beginning in the first quarter of 2023, Federal Home Loan Bank borrowings are presented separately from other short-term borrowings. Prior period amounts have been reclassified to reflect this change.

(3) Average balance and interest expense was less than $500 thousand in the prior period.

- 8 -

THE CHARLES SCHWAB CORPORATION

Management’s Discussion and Analysis of Financial Condition and Results of Operations

(Tabular Amounts in Millions, Except Ratios, or as Noted)

Net interest revenue increased $587 million, or 27%, in the first quarter of 2023 compared to the same period in 2022. This increase was due primarily to higher average yields on interest-earning assets as a result of higher market interest rates. With the increases in market interest rates, net premium amortization of investment securities decreased to $185 million in the first quarter of 2023 from $486 million in the first quarter of 2022. These benefits were partially offset by higher rates paid on funding sources, increased usage of FHLB borrowings, other short-term borrowings, and brokered CDs to support client cash allocations in the rising rate environment, and lower balances of interest-earning assets.

Average interest-earning assets for the first quarter of 2023 were lower by 20% compared to the same period in 2022. This decrease was primarily due to lower bank deposits and payables to brokerage clients as a result of changes in client cash allocations due to higher market interest rates.

Net interest margin increased to 2.19% during the first quarter of 2023 from 1.38% during the same period in 2022. 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 the first quarter of 2023 of FHLB borrowings, other short-term borrowings, and brokered CDs resulted in higher funding costs. The Company expects to continue using these temporary funding sources to support clients’ cash allocation movement, with balances of supplemental funding sources expected to peak in 2023 and then decrease in 2024, with a limited portion remaining outstanding in early 2025. The usage of these higher-cost funding sources is expected to reduce net interest revenue in coming quarters. See also Risk Management – Liquidity Risk, Item 1 – Note 7 Bank Deposits, and Item 1 – Note 8 Borrowings for additional information on these and other funding sources.

Asset Management and Administration Fees

The following table presents asset management and administration fees, average client assets, and average fee yields:


Three Months Ended March 31,	2023						2022
	Average Client Assets		Revenue		Average Fee		Average Client Assets		Revenue		Average Fee
Schwab money market funds before fee waivers	$	316,391	$	213	0.27	%	$	144,732	$	102	0.29	%
Fee waivers			—						(54)
Schwab money market funds	316,391		213		0.27	%	144,732		48		0.13	%
Schwab equity and bond funds, ETFs, and CTFs	450,581		91		0.08	%	456,326		97		0.09	%
Mutual Fund OneSource® and other no-transaction-fee (NTF) funds (1)	222,437		148		0.27	%	212,641		165		0.31	%
Other third-party mutual funds and ETFs (1)	676,344		133		0.08	%	872,212		179		0.08	%
Total mutual funds, ETFs, and CTFs (2)	$	1,665,753	585		0.14	%	$	1,685,911	489		0.12	%
Advice solutions (2)
Fee-based	$	443,027	453		0.41	%	$	469,325	496		0.43	%
Non-fee-based	94,469		—		—		90,335		—		—


Total advice solutions	$	537,496	453		0.34	%	$	559,660	496		0.36	%
Other balance-based fees (3)	561,788		62		0.04	%	616,679		67		0.04	%
Other (4)			18						16
Total asset management and administration fees			$	1,118					$	1,068

(1) The first quarter of 2022 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 $50 million, or 5%, in the first quarter of 2023 compared to the same period in 2022. The increase in the first quarter of 2023 was primarily a result of higher balances in Schwab money market funds and the elimination of fee waivers on those funds. Money market fund balances increased as clients shifted their cash allocations to higher yielding investment solutions, and money market fund fee waivers were eliminated during 2022 as a result of the Federal Reserve’s increases to the federal funds target overnight rate. These increases were partially offset by lower balances in other third-party mutual funds and advice solutions, primarily due to equity market weakness, which negatively impacted client asset valuations since the first quarter of 2022.

- 9 -

THE CHARLES SCHWAB CORPORATION

Management’s Discussion and Analysis of Financial Condition and Results of Operations

(Tabular Amounts in Millions, Except Ratios, or as Noted)

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. These funds generated 40% and 29% of the asset management and administration fees earned in the first quarter of 2023 and 2022, respectively:


	Schwab Money Market Funds				Schwab Equity and Bond Funds, ETFs, and CTFs				Mutual Fund OneSource® and Other NTF funds
Three Months Ended March 31,	2023		2022		2023		2022		2023		2022
Balance at beginning of period	$	278,926	$	146,509	$	412,942	$	454,864	$	235,738	$	234,940
Net inflows (outflows)	75,036		(3,420)		10,344		9,461		(4,629)		(8,556)
Net market gains (losses) and other (1)	3,860		16		20,433		(20,048)		13,153		9,081
Balance at end of period	$	357,822	$	143,105	$	443,719	$	444,277	$	244,262	$	235,465

(1) Includes $14.2 billion of transfers from other third-party mutual funds and ETFs to Mutual Fund OneSource® and Other NTF Funds in 2022.

Trading Revenue

Trading 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 transaction 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, trade details, and related information:


	Three Months Ended March 31,				Percent Change
	2023		2022
Commissions	$	422	$	484	(13)	%
Order flow revenue
Options	281		317		(11)	%
Equities	133		153		(13)	%
Total order flow revenue	414		470		(12)	%
Principal transactions	56		9		N/M
Total trading revenue	$	892	$	963	(7)	%

N/M Not meaningful. Percent changes greater than 200% are presented as not meaningful.


	Three Months Ended March 31,						Percent Change
	2023			2022
Clients' daily average trades (DATs) (in thousands)	5,895			6,578			(10)	%
Product as a percentage of DATs
Equities	49		%	52		%
Derivatives	23		%	23		%
ETFs	21		%	19		%
Mutual funds	5		%	5		%
Fixed Income	2		%	1		%

Number of trading days	62.0			62.0			—
Revenue per trade (1)	$	2.44		$	2.36		3%

(1) Revenue per trade is calculated as trading revenue divided by DATs multiplied by the number of trading days.

- 10 -

THE CHARLES SCHWAB CORPORATION

Management’s Discussion and Analysis of Financial Condition and Results of Operations

(Tabular Amounts in Millions, Except Ratios, or as Noted)

Trading revenue decreased $71 million in the first quarter of 2023 compared to the same period in 2022, primarily due to a decrease in commissions revenue resulting from lower client trading activity as well as changes in the mix of activity toward more ETFs and fewer single stocks. Additionally, order flow revenue decreased due to a shift in the mix of client trading activity toward more lower-dollar equity trades and index options and futures and fewer single stocks. Partially offsetting these decreases, principal transactions revenue increased as a result of higher volume in 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.

The following table presents bank deposit account fee revenue, average BDA balances, average net yield, and average balances earning fixed- and floating-rate yields:


	Three Months Ended March 31,						Percent Change
	2023			2022
Bank deposit account fees	$	151		$	294		(49)	%
Average BDA balances	$	115,877		$	155,809		(26)	%
Average net yield	0.52		%	0.75		%
Percentage of average BDA balances designated as:
Fixed-rate balances	92		%	77		%
Floating-rate balances	8		%	23		%

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 $143 million, or 49%, in the first quarter of 2023 compared to the same period in 2022, primarily due to breakage fees of $97 million incurred as a result of ending the other third-party bank arrangements, the decrease in average floating-rate BDA balances, and an increase in the amount paid to clients due to higher interest rates. These factors contributed to the decrease in average net yield in the first quarter of 2023 compared to the same period in 2022. The decrease in average BDA balances in the first quarter of 2023 compared with the first quarter of 2022 was primarily due to client cash allocation decisions in response to rising short-term market interest rates throughout 2022 and into the first quarter of 2023. The percentages of BDA balances designated as fixed-rate and floating-rate obligation amounts as of March 31, 2023 were 98% and 2%, respectively.

See also Capital Management and Item 1 – Note 9 for discussion of the IDA agreements and the potential to move IDA balances to Schwab’s balance sheet.

Other Revenue

Other revenue includes exchange processing fees, certain service fees, other gains and losses from the sale of assets, and the provision for credit losses on bank loans.

Other revenue increased $21 million in the first quarter of 2023 compared to the same period in 2022, primarily due to higher exchange processing fees and lower provision for credit losses on bank loans. Exchange processing fees increased as a result of higher average SEC fee rates. The provision for credit losses on bank loans was lower in the first quarter of 2023 compared with the first quarter of 2022, as during the first quarter of 2023, loan loss factors and the total balance of first lien residential real estate mortgage loans (First Mortgages) remained consistent with year-end 2022. The Company’s provision for credit losses on bank loans in the first quarter of 2022 reflected increased loan loss factors driven primarily by higher forecasted interest rates at the start of the Federal Reserve’s monetary tightening, as well as growth in the loan portfolio.

- 11 -

THE CHARLES SCHWAB CORPORATION

Management’s Discussion and Analysis of Financial Condition and Results of Operations

(Tabular Amounts in Millions, Except Ratios, or as Noted)

Effective February 27, 2023, the SEC decreased its exchange processing fee rates by approximately 65% from the rate in effect since May 2022. This change will result in lower exchange processing fees per security transaction in other revenue and a corresponding decrease in other expense for the remainder of the year, resulting in no impact to net income.

Total Expenses Excluding Interest

The following table shows a comparison of expenses excluding interest:


	Three Months Ended March 31,						Percent Change
	2023			2022
Compensation and benefits
Salaries and wages	$	972		$	853		14	%
Incentive compensation	364			417			(13)	%
Employee benefits and other	302			276			9	%
Total compensation and benefits	$	1,638		$	1,546		6	%
Professional services	258			244			6	%
Occupancy and equipment	299			269			11	%
Advertising and market development	88			102			(14)	%
Communications	146			144			1	%
Depreciation and amortization	177			150			18	%
Amortization of acquired intangible assets	135			154			(12)	%
Regulatory fees and assessments	83			68			22	%
Other	182			156			17	%
Total expenses excluding interest	$	3,006		$	2,833		6	%
Expenses as a percentage of total net revenues
Compensation and benefits	32		%	33		%
Advertising and market development	2		%	2		%

SCHWAB CHARLES CORP [SCHW-PD] Filings
SCHWAB CHARLES CORP [SCHW] Filings
SCHWAB CHARLES CORP [SCHW-PJ] Filings
10-Q	[2023-05-08]
10-K	[2023-02-24]
10-Q	[2022-11-08]
10-Q	[2022-08-08]
10-Q	[2022-05-09]
10-K	[2022-02-24]
10-Q	[2021-11-08]
10-Q	[2021-08-06]
10-Q	[2021-05-07]
10-K	[2021-02-24]
10-Q	[2020-11-09]
10-Q	[2020-08-07]
10-Q	[2020-05-08]
10-K	[2020-02-26]
10-Q	[2019-11-07]
10-Q	[2019-08-07]
10-Q	[2019-05-08]
10-K	[2019-02-22]
10-Q	[2018-11-07]
10-Q	[2018-08-08]
10-Q	[2018-05-09]
10-K	[2018-02-22]
10-Q	[2017-11-07]
10-Q	[2017-08-07]
10-Q	[2017-05-08]
10-K	[2017-02-23]
10-Q	[2016-11-07]
10-Q	[2016-08-05]
10-Q	[2016-05-06]
10-K	[2016-02-24]
10-Q	[2015-11-05]
10-Q	[2015-08-06]
10-Q	[2015-05-07]
10-K	[2015-02-23]
10-Q	[2014-11-06]
10-Q	[2014-08-07]
10-Q	[2014-05-07]
10-K	[2014-02-24]
10-Q	[2013-11-06]
10-Q	[2013-08-06]
10-Q	[2013-05-07]
10-K	[2013-02-22]
10-Q	[2012-11-06]
10-Q	[2012-08-06]
10-Q	[2012-05-07]
10-K	[2012-02-24]

SCHWAB CHARLES CORP [SCHW-PD] Filings

SCHWAB CHARLES CORP [SCHW] Filings

SCHWAB CHARLES CORP [SCHW-PJ] Filings