THE CHARLES SCHWAB CORPORATION
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted)
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| First Mortgages Amortized Cost Basis by Origination Year | | | | |
December 31, 2021 | 2021 | 2020 | 2019 | 2018 | pre-2018 | Total First Mortgages | Revolving HELOCs amortized cost basis | HELOCs converted to term loans | Total HELOCs |
Origination FICO | | | | | | | | | |
<620 | $ | 1 | | $ | 1 | | $ | — | | $ | — | | $ | 1 | | $ | 3 | | $ | — | | $ | — | | $ | — | |
620 – 679 | 34 | | 25 | | 5 | | 1 | | 25 | | 90 | | — | | 2 | | 2 | |
680 – 739 | 1,306 | | 524 | | 146 | | 41 | | 313 | | 2,330 | | 61 | | 60 | | 121 | |
≥740 | 11,649 | | 4,454 | | 1,049 | | 165 | | 1,350 | | 18,667 | | 308 | | 217 | | 525 | |
Total | $ | 12,990 | | $ | 5,004 | | $ | 1,200 | | $ | 207 | | $ | 1,689 | | $ | 21,090 | | $ | 369 | | $ | 279 | | $ | 648 | |
Origination LTV | | | | | | | | | |
≤70% | $ | 11,234 | | $ | 4,159 | | $ | 948 | | $ | 160 | | $ | 1,260 | | $ | 17,761 | | $ | 305 | | $ | 199 | | $ | 504 | |
>70% – ≤90% | 1,756 | | 845 | | 252 | | 47 | | 426 | | 3,326 | | 64 | | 78 | | 142 | |
>90% – ≤100% | — | | — | | — | | — | | 3 | | 3 | | — | | 2 | | 2 | |
Total | $ | 12,990 | | $ | 5,004 | | $ | 1,200 | | $ | 207 | | $ | 1,689 | | $ | 21,090 | | $ | 369 | | $ | 279 | | $ | 648 | |
Updated FICO | | | | | | | | | |
<620 | $ | 5 | | $ | 2 | | $ | 1 | | $ | — | | $ | 14 | | $ | 22 | | $ | 2 | | $ | 6 | | $ | 8 | |
620 – 679 | 96 | | 69 | | 19 | | 7 | | 38 | | 229 | | 6 | | 14 | | 20 | |
680 – 739 | 1,265 | | 421 | | 115 | | 24 | | 202 | | 2,027 | | 51 | | 39 | | 90 | |
≥740 | 11,624 | | 4,512 | | 1,065 | | 176 | | 1,435 | | 18,812 | | 310 | | 220 | | 530 | |
Total | $ | 12,990 | | $ | 5,004 | | $ | 1,200 | | $ | 207 | | $ | 1,689 | | $ | 21,090 | | $ | 369 | | $ | 279 | | $ | 648 | |
Estimated Current LTV (1) | | | | | | | | | |
≤70% | $ | 11,707 | | $ | 4,961 | | $ | 1,196 | | $ | 206 | | $ | 1,684 | | $ | 19,754 | | $ | 368 | | $ | 277 | | $ | 645 | |
>70% – ≤90% | 1,283 | | 43 | | 4 | | 1 | | 5 | | 1,336 | | 1 | | 2 | | 3 | |
>90% – ≤100% | — | | — | | — | | — | | — | | — | | — | | — | | — | |
>100% | — | | — | | — | | — | | — | | — | | — | | — | | — | |
Total | $ | 12,990 | | $ | 5,004 | | $ | 1,200 | | $ | 207 | | $ | 1,689 | | $ | 21,090 | | $ | 369 | | $ | 279 | | $ | 648 | |
Percent of Loans on Nonaccrual Status | 0.03 | % | 0.10 | % | 0.03 | % | 0.03 | % | 1.03 | % | 0.12 | % | 0.64 | % | 2.33 | % | 1.39 | % |
(1) Represents the LTV for the full line of credit (drawn and undrawn) for revolving HELOCs.
At June 30, 2022, First Mortgage loans of $19.2 billion had adjustable interest rates. Substantially all of these mortgages have initial fixed interest rates for three to ten years and interest rates that adjust annually thereafter. Approximately 28% of the balance of these mortgages consisted of loans with interest-only payment terms. The interest rates on approximately 92% of the balance of these interest-only loans are not scheduled to reset for three or more years. Schwab’s mortgage loans do not include interest terms described as temporary introductory rates below current market rates.
At June 30, 2022 and December 31, 2021, Schwab had $83 million and $57 million, respectively, of accrued interest on bank loans, which is excluded from the amortized cost basis of bank loans and included in other assets on the condensed consolidated balance sheets.
The HELOC product has a 30-year loan term with an initial draw period of ten years from the date of origination. After the initial draw period, the balance outstanding at such time is converted to a 20-year amortizing loan. The interest rate during the initial draw period and the 20-year amortizing period is a floating rate based on the prime rate plus a margin.
THE CHARLES SCHWAB CORPORATION
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted)
(Unaudited)
The following table presents HELOCs converted to amortizing loans during each period presented:
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, | | |
| 2022 | | 2021 | | 2022 | | 2021 | | | | |
HELOCs converted to amortizing loans | $ | 2 | | | $ | 7 | | | $ | 4 | | | $ | 14 | | | | | |
The following table presents when current outstanding HELOCs will convert to amortizing loans:
| | | | | | | | |
June 30, 2022 | | Balance |
Converted to an amortizing loan by period end | | $ | 241 | |
Within 1 year | | 28 | |
> 1 year – 3 years | | 59 | |
> 3 years – 5 years | | 64 | |
> 5 years | | 228 | |
Total | | $ | 620 | |
At June 30, 2022, $475 million of the HELOC portfolio was secured by second liens on the associated properties. Second lien mortgage loans typically possess a higher degree of credit risk given the subordination to the first lien holder in the event of default. In addition to the credit monitoring activities described previously, Schwab also monitors credit risk by reviewing the delinquency status of the first lien loan on the associated property. At June 30, 2022, the borrowers on approximately 44% of HELOC loan balances outstanding only paid the minimum amount due.
6. Variable Interest Entities
As of June 30, 2022 and December 31, 2021, all of Schwab’s involvement with variable interest entities (VIEs) is through CSB’s Community Reinvestment Act (CRA)-related investments and most of these are related to LIHTC investments. As part of CSB’s community reinvestment initiatives, CSB invests in funds that make equity investments in multifamily affordable housing properties and receives tax credits and other tax benefits for these investments.
Aggregate assets, liabilities, and maximum exposure to loss
The aggregate assets, liabilities, and maximum exposure to loss from those VIEs in which Schwab holds a variable interest, but is not the primary beneficiary, are summarized in the table below:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | June 30, 2022 | | December 31, 2021 |
| | Aggregate assets | | Aggregate liabilities | | Maximum exposure to loss | | Aggregate assets | | Aggregate liabilities | | Maximum exposure to loss |
LIHTC investments (1) | | $ | 968 | | | $ | 553 | | | $ | 968 | | | $ | 915 | | | $ | 530 | | | $ | 915 | |
Other CRA investments (2) | | 179 | | | — | | | 217 | | | 161 | | | — | | | 211 | |
Total | | $ | 1,147 | | | $ | 553 | | | $ | 1,185 | | | $ | 1,076 | | | $ | 530 | | | $ | 1,126 | |
(1) Aggregate assets and aggregate liabilities are included in other assets and accrued expenses and other liabilities, respectively, on the condensed consolidated balance sheets.
(2) Other CRA investments are accounted for as loans at amortized cost, equity method investments, AFS securities, or using the adjusted cost method. Aggregate assets are included in AFS securities, bank loans – net, or other assets on the condensed consolidated balance sheets.
Schwab’s maximum exposure to loss would result from the loss of the investments, including any committed amounts. CSB’s funding of these remaining commitments is dependent upon the occurrence of certain conditions, and CSB expects to pay substantially all of these commitments between 2022 and 2025. During the six months ended June 30, 2022 and year ended December 31, 2021, Schwab did not provide or intend to provide financial or other support to the VIEs that it was not contractually required to provide.
THE CHARLES SCHWAB CORPORATION
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted)
(Unaudited)
7. Bank Deposits
Bank deposits consist of interest-bearing and non-interest-bearing deposits as follows:
| | | | | | | | | | | | | | |
| | June 30, 2022 | | December 31, 2021 |
Interest-bearing deposits: | | | | |
Deposits swept from brokerage accounts | | $ | 412,963 | | | $ | 412,287 | |
Checking | | 21,070 | | | 22,786 | |
Savings and other | | 6,871 | | | 7,234 | |
Total interest-bearing deposits | | 440,904 | | | 442,307 | |
Non-interest-bearing deposits | | 1,099 | | | 1,471 | |
Total bank deposits | | $ | 442,003 | | | $ | 443,778 | |
8. Borrowings
CSC Senior Notes
CSC’s Senior Notes are unsecured obligations. CSC may redeem some or all of the Senior Notes of each series prior to their maturity, subject to certain restrictions, and the payment of an applicable make-whole premium in certain instances. Interest is payable semi-annually for the fixed-rate Senior Notes and quarterly for the floating-rate Senior Notes.
TDA Holding Senior Notes
TDA Holding’s Senior Notes are unsecured obligations. TDA Holding may redeem some or all of the Senior Notes of each series prior to their maturity, subject to certain restrictions, and the payment of an applicable make-whole premium in certain instances. Interest is payable semi-annually for the fixed-rate Senior Notes.
THE CHARLES SCHWAB CORPORATION
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted)
(Unaudited)
The following table lists long-term debt by instrument outstanding as of June 30, 2022 and December 31, 2021.
| | | | | | | | | | | |
| Date of Issuance | Principal Amount Outstanding |
| June 30, 2022 | December 31, 2021 |
CSC Fixed-rate Senior Notes: | | | |
| | | |
3.225% due September 1, 2022 | 08/29/12 | $ | 256 | | $ | 256 | |
2.650% due January 25, 2023 | 12/07/17 | 800 | | 800 | |
3.550% due February 1, 2024 | 10/31/18 | 500 | | 500 | |
0.750% due March 18, 2024 | 03/18/21 | 1,500 | | 1,500 | |
3.750% due April 1, 2024 | 09/24/21 | 350 | | 350 | |
3.000% due March 10, 2025 | 03/10/15 | 375 | | 375 | |
4.200% due March 24, 2025 | 03/24/20 | 600 | | 600 | |
3.625% due April 1, 2025 | 09/24/21 | 418 | | 418 | |
3.850% due May 21, 2025 | 05/22/18 | 750 | | 750 | |
3.450% due February 13, 2026 | 11/13/15 | 350 | | 350 | |
0.900% due March 11, 2026 | 12/11/20 | 1,250 | | 1,250 | |
1.150% due May 13, 2026 | 05/13/21 | 1,000 | | 1,000 | |
3.200% due March 2, 2027 | 03/02/17 | 650 | | 650 | |
2.450% due March 3, 2027 | 03/03/22 | 1,500 | | — | |
3.300% due April 1, 2027 | 09/24/21 | 744 | | 744 | |
3.200% due January 25, 2028 | 12/07/17 | 700 | | 700 | |
2.000% due March 20, 2028 | 03/18/21 | 1,250 | | 1,250 | |
4.000% due February 1, 2029 | 10/31/18 | 600 | | 600 | |
3.250% due May 22, 2029 | 05/22/19 | 600 | | 600 | |
2.750% due October 1, 2029 | 09/24/21 | 475 | | 475 | |
4.625% due March 22, 2030 | 03/24/20 | 500 | | 500 | |
1.650% due March 11, 2031 | 12/11/20 | 750 | | 750 | |
2.300% due May 13, 2031 | 05/13/21 | 750 | | 750 | |
1.950% due December 1, 2031 | 08/26/21 | 850 | | 850 | |
2.900% due March 3, 2032 | 03/03/22 | 1,000 | | — | |
CSC Floating-rate Senior Notes: | | | |
| | | |
SOFR + 0.500% due March 18, 2024 | 03/18/21 | 1,250 | | 1,250 | |
SOFR + 0.520% due May 13, 2026 | 05/13/21 | 500 | | 500 | |
SOFR + 1.050% due March 3, 2027 | 03/03/22 | 500 | | — | |
Total CSC Senior Notes | | 20,768 | | 17,768 | |
TDA Holding Fixed-rate Senior Notes: | | | |
2.950% due April 1, 2022 | 03/09/15 | — | | 750 | |
3.750% due April 1, 2024 | 11/01/18 | 50 | | 50 | |
3.625% due April 1, 2025 | 10/22/14 | 82 | | 82 | |
3.300% due April 1, 2027 | 04/27/17 | 56 | | 56 | |
2.750% due October 1, 2029 | 08/16/19 | 25 | | 25 | |
| | | |
| | | |
Total TDA Holding Senior Notes | | 213 | | 963 | |
Finance lease liabilities | | 84 | | 94 | |
Unamortized premium — net | | 152 | | 180 | |
Debt issuance costs | | (105) | | (91) | |
Total long-term debt | | $ | 21,112 | | $ | 18,914 | |
THE CHARLES SCHWAB CORPORATION
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted)
(Unaudited)
Annual maturities on all long-term debt outstanding at June 30, 2022 are as follows:
| | | | | |
| Maturities |
2022 | $ | 271 | |
2023 | 832 | |
2024 | 3,675 | |
2025 | 2,237 | |
2026 | 3,100 | |
Thereafter | 10,950 | |
Total maturities | 21,065 | |
Unamortized premium— net | 152 | |
Debt issuance costs | (105) | |
Total long-term debt | $ | 21,112 | |
Short-term borrowings: CSC has the ability to issue up to $5.0 billion of commercial paper notes with maturities of up to 270 days; and had $600 million outstanding at June 30, 2022 and $3.0 billion at December 31, 2021. CSC and CS&Co also have access to uncommitted lines of credit with external banks with total borrowing capacity of $1.5 billion; no amounts were outstanding as of June 30, 2022 or December 31, 2021.
Our banking subsidiaries maintain secured credit facilities with the FHLB. Amounts available under these facilities are dependent on the amount of bank loans and the fair value of certain investment securities that are pledged as collateral. As of June 30, 2022 and December 31, 2021, the collateral pledged provided a total borrowing capacity of $64.7 billion and $63.5 billion, respectively, of which no amounts were outstanding at the end of either period.
Our banking subsidiaries have access to funding through the Federal Reserve discount window. Amounts available are dependent upon the fair value of certain investment securities that are pledged as collateral. As of June 30, 2022 and December 31, 2021, our collateral pledged provided total borrowing capacity of $9.7 billion and $12.0 billion, respectively, of which no amounts were outstanding at the end of either period.
Our banking subsidiaries may engage with external banks in repurchase agreements collateralized by investment securities as another source of short-term liquidity. The Company had no borrowings outstanding pursuant to such repurchase agreements at June 30, 2022 or December 31, 2021.
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. There was $750 million and $1.9 billion outstanding under the secured uncommitted lines of credit as of June 30, 2022 and December 31, 2021, respectively. See Note 11 for additional information.
TDAC maintained one senior unsecured committed revolving credit facility as of December 31, 2021 with an aggregate borrowing capacity of $600 million which matured in April 2022 and was not renewed. There were no borrowings outstanding under the TDAC senior revolving facility as of December 31, 2021.
THE CHARLES SCHWAB CORPORATION
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted)
(Unaudited)
9. Commitments and Contingencies
Loan Portfolio: CSB provides a co-branded loan origination program for CSB clients (the Program) with Rocket Mortgage, LLC (Rocket Mortgage®). Pursuant to the Program, Rocket Mortgage originates and services First Mortgages and HELOCs for CSB clients. Under the Program, CSB purchases certain First Mortgages and HELOCs that are originated by Rocket Mortgage. CSB purchased First Mortgages of $2.0 billion and $4.0 billion during the second quarters of 2022 and 2021, respectively, and $4.7 billion and $6.8 billion during the first six months of 2022 and 2021, respectively. CSB purchased HELOCs with commitments of $70 million and $114 million during the second quarters of 2022 and 2021, respectively, and $160 million and $213 million during the first six months of 2022 and 2021, respectively.
The Company’s commitments to extend credit on bank lines of credit and to purchase First Mortgages are as follows:
| | | | | | | | | | | |
| June 30, 2022 | | December 31, 2021 |
Commitments to extend credit related to unused HELOCs, PALs, and other lines of credit | $ | 5,271 | | | $ | 6,193 | |
Commitments to purchase First Mortgage loans | 1,068 | | | 1,824 | |
Total | $ | 6,339 | | | $ | 8,017 | |
Guarantees and indemnifications: Schwab has clients that sell (i.e., write) listed option contracts that are cleared by the Options Clearing Corporation – a clearing house that establishes margin requirements on these transactions. We partially satisfy the margin requirements by arranging unsecured standby letter of credit agreements (LOCs), in favor of the Options Clearing Corporation, which are issued by several banks. At June 30, 2022, the aggregate face amount of these LOCs totaled $15 million. There were no funds drawn under any of these LOCs at June 30, 2022. In connection with its securities lending activities, Schwab is required to provide collateral to certain brokerage clients. The Company satisfies the collateral requirements by providing cash as collateral.
The Company also provides guarantees to securities clearing houses and exchanges under standard membership agreements, which require members to guarantee the performance of other members. Under the agreements, if another member becomes unable to satisfy its obligations to the clearing houses and exchanges, other members would be required to meet shortfalls. The Company’s liability under these arrangements is not quantifiable and may exceed the amounts it has posted as collateral. The Company also engages third-party firms to clear clients’ futures and options on futures transactions and to facilitate clients’ foreign exchange trading, and has agreed to indemnify these firms for any losses that they may incur from the client transactions introduced to them by the Company. The potential requirement for the Company to make payments under these arrangements is remote. Accordingly, no liability has been recognized for these guarantees.
IDA agreement: The Company’s IDA agreement with the TD Depository Institutions became effective on October 6, 2020. The IDA agreement creates responsibilities of the Company and certain contingent obligations. Pursuant to the IDA agreement, uninvested cash within 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. Though unlikely, in the event the sweep arrangement fee computation were to result in a negative amount in any given month, Schwab would be required to pay the TD Depository Institutions.
The IDA agreement provides that, as of July 1, 2021, Schwab has the option to migrate up to $10 billion of IDA balances every 12 months to Schwab’s balance sheet, subject to certain limitations and adjustments. 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 and certain binding limitations specified in the IDA agreement, including the requirement that Schwab can only move IDA balances designated as floating-rate obligations. In addition, Schwab also must maintain a minimum $50 billion IDA balance through June 2031, and at least 80% of the IDA balances must be designated as fixed-rate obligations through June 2026.
The total ending IDA balance was $144.3 billion as of June 30, 2022 and $147.2 billion as of December 31, 2021. If IDA balances were to decline below the required IDA balance minimum, Schwab could be required to direct additional sweep cash from its balance sheet to the IDA program. During the first six months of 2022, Schwab moved $14.6 billion of IDA balances to its balance sheet.
THE CHARLES SCHWAB CORPORATION
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted)
(Unaudited)
Legal contingencies: Schwab is subject to claims and lawsuits in the ordinary course of business, including arbitrations, class actions and other litigation, some of which include claims for substantial or unspecified damages. The Company is also the subject of inquiries, investigations, and proceedings by regulatory and other governmental agencies.
Predicting the outcome of a litigation or regulatory matter is inherently difficult, requiring significant judgment and evaluation of various factors, including the procedural status of the matter and any recent developments; prior experience and the experience of others in similar cases; available defenses, including potential opportunities to dispose of a case on the merits or procedural grounds before trial (e.g., motions to dismiss or for summary judgment); the progress of fact discovery; the opinions of counsel and experts regarding potential damages; and potential opportunities for settlement and the status of any settlement discussions. It may not be reasonably possible to estimate a range of potential liability until the matter is closer to resolution – pending, for example, further proceedings, the outcome of key motions or appeals, or discussions among the parties. Numerous issues may have to be developed, such as discovery of important factual matters and determination of threshold legal issues, which may include novel or unsettled questions of law. Reserves are established or adjusted or further disclosure and estimates of potential loss are provided as the matter progresses and more information becomes available.
Schwab believes it has strong defenses in all significant matters currently pending and is contesting liability and any damages claimed. Nevertheless, some of these matters may result in adverse judgments or awards, including penalties, injunctions or other relief, and the Company may also determine to settle a matter because of the uncertainty and risks of litigation. Described below are matters in which there is a reasonable possibility that a material loss could be incurred or where the matter may otherwise be of significant interest to stockholders. Unless otherwise noted, the Company is unable to provide a reasonable estimate of any potential liability given the stage of proceedings in the matter. With respect to all other pending matters, based on current information and consultation with counsel, it does not appear reasonably possible that the outcome of any such matter would be material to the financial condition, operating results, or cash flows of the Company.
Schwab Intelligent Portfolios® SEC Investigation: As disclosed on July 1, 2021, Schwab’s second quarter 2021 financial results included a liability and related charge of approximately $200 million in connection with a tentative agreement reached with SEC staff to resolve an enforcement investigation into past disclosures for the Schwab Intelligent Portfolios digital advisory solution. On June 13, 2022, the SEC announced the settlement under which CS&Co, Charles Schwab Investment Advisory, Inc., and Schwab Wealth Investment Advisory, Inc., without admitting or denying the SEC’s findings, resolved the matter and agreed to pay $186.5 million for deposit into a Fair Fund account for distribution to affected investors.
TD Ameritrade Acquisition Litigation: As disclosed previously, on May 12, 2020, a putative class action lawsuit related to the acquisition was filed in the Delaware Court of Chancery (Hawkes v. Bettino et al.) on behalf of a proposed class of TD Ameritrade’s stockholders, excluding, among others, TD Bank. On February 5, 2021, plaintiff filed an amended complaint naming an officer and certain directors of TD Ameritrade at the time the acquisition was approved, as well as TD Bank, certain TD Bank related entities, and Schwab. The amended complaint asserts separate claims for breach of fiduciary duty by the TD Ameritrade officer, certain members of the TD Ameritrade board and TD Bank, and against Schwab for aiding and abetting such breaches, the allegation being that the amendment of the IDA agreement TD Bank negotiated directly with Schwab allowed TD Bank to divert merger consideration from TD Ameritrade’s minority public stockholders. Plaintiff seeks to recover monetary damages, costs and attorneys’ fees. Schwab and the other defendants consider the allegations to be entirely without merit and on April 29, 2021, the defendants filed motions to dismiss the amended complaint. On March 25, 2022, the parties filed a joint stipulation proposing a settlement of the lawsuit on a class basis. A settlement hearing has been rescheduled for September 28, 2022. If the settlement is approved, Schwab will pay an immaterial amount on behalf of the former TD Ameritrade officer and director defendants pursuant to indemnification obligations.
Crago Order Routing Litigation: On July 13, 2016, a securities class action lawsuit was filed in the U.S. District Court for the Northern District of California on behalf of a putative class of customers executing equity orders through CS&Co. The lawsuit names CS&Co and CSC as defendants and alleges that an agreement under which CS&Co routed orders to UBS Securities LLC between July 13, 2011 and December 31, 2014 violated CS&Co’s duty to seek best execution. Plaintiffs seek unspecified damages, interest, injunctive and equitable relief, and attorneys’ fees and costs. Defendants consider the allegations to be entirely without merit and have been vigorously contesting the lawsuit. After a first amended complaint was dismissed with leave to amend, plaintiffs filed a second amended complaint on August 14, 2017. Defendants again moved to dismiss, and in a decision issued December 5, 2017, the court denied the motion. Plaintiffs filed a motion for class certification on April 30, 2021, and in a decision on October 27, 2021, the court denied the motion and held that certification of a class action is inappropriate. Plaintiffs sought review of the order denying class certification by the Ninth Circuit Court of Appeals, which was denied, and on February 3, 2022, plaintiffs filed a motion for reconsideration of that denial, which is pending.
THE CHARLES SCHWAB CORPORATION
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted)
(Unaudited)
Ford Order Routing Litigation: On September 15, 2014, TDA Holding, TD Ameritrade, Inc. and its former CEO, Frederick J. Tomczyk, were sued in the U.S. District Court for the District of Nebraska on behalf of a putative class of TD Ameritrade, Inc. clients alleging that defendants failed to seek best execution and made misrepresentations and omissions regarding its order routing practices. Plaintiffs seek unspecified damages and injunctive and other relief. Defendants consider the allegations to be entirely without merit and have been vigorously contesting the lawsuit. On September 14, 2018, the District Court granted plaintiffs’ motion for class certification, and defendants petitioned for an immediate appeal of the District Court’s class certification decision. On April 23, 2021, the U.S. Court of Appeals, 8th Circuit, issued a decision reversing the District Court’s certification of a class and remanding the case back to the District Court for further proceedings. Plaintiff has renewed his motion for class certification with the District Court, and a motion by defendants to compel the case to arbitration is pending with the District Court as premature.
10. Exit and Other Related Liabilities
The Company completed its acquisition of TD Ameritrade effective October 6, 2020 and integration work continued during the first six months of 2022. Based on our current integration plans and expanded scope of technology work, the Company continues to expect to complete client conversions across multiple groups over the course of 2023, ending in the fourth quarter.
To achieve our integration objectives, the Company expects to recognize significant additional acquisition and integration-related costs and capital expenditures throughout the integration process. Such acquisition and integration-related costs have included, and are expected to continue to include professional fees, such as legal, advisory, and accounting fees, compensation and benefits expenses for employees and contractors involved in the integration work, and costs for technology enhancements.
The Company’s acquisition and integration-related spending also includes exit and other related costs, which are primarily comprised of employee compensation and benefits such as severance pay, other termination benefits, and retention costs, as well as costs related to facility closures, such as accelerated amortization and depreciation or impairments of assets in those locations. Exit and other related costs are a component of the Company’s overall acquisition and integration-related spending, and support the Company’s ability to achieve integration objectives including expected synergies.
Our 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 the effects of changes in remote working trends.
Inclusive of costs recognized through June 30, 2022, Schwab currently expects to incur total exit and other related costs for the integration of TD Ameritrade ranging from $500 million to $700 million, consisting of employee compensation and benefits, facility exit costs, and certain other costs. During the three months ended June 30, 2022 and 2021, the Company recognized $8 million and $47 million of acquisition-related exit costs, respectively. During the six months ended June 30, 2022 and 2021, the Company recognized $20 million and $90 million of acquisition-related exit costs, respectively. The Company expects the remaining exit and other related costs will be incurred and charged to expense over the next 15 to 27 months; some costs are expected to be incurred after client conversion. In addition to ASC 420 Exit or Disposal Cost Obligations, certain of the costs associated with these activities are accounted for in accordance with ASC 360 Property, Plant and Equipment, ASC 712 Compensation – Nonretirement Post Employment Benefits, ASC 718 Compensation – Stock Compensation, and ASC 842 Leases.
THE CHARLES SCHWAB CORPORATION
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted)
(Unaudited)
The following is a summary of the Company’s exit and other related liabilities as of June 30, 2022 and activity for the six months ended June 30, 2022:
| | | | | | | | | | | | | | | | | |
| | | | |
| Investor Services Employee Compensation and Benefits | | Advisor Services Employee Compensation and Benefits | | Total |
| | | | | |
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| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
Balance at December 31, 2021 (1) | $ | 28 | | | $ | 7 | | | $ | 35 | |
| | | | | |
Amounts recognized in expense (2) | 13 | | | 4 | | | 17 | |
Costs paid or otherwise settled | (10) | | | (3) | | | (13) | |
Balance at June 30, 2022 (1) | $ | 31 | | | $ | 8 | | | $ | 39 | |
(1) Included in accrued expenses and other liabilities on the condensed consolidated balance sheets.
(2) Amounts recognized in expense for severance pay and other termination benefits, as well as retention costs, are primarily included in compensation and benefits on the condensed consolidated statements of income.
The following table summarizes the exit and other related costs recognized in expense for the three and six months ended June 30, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Investor Services | | Advisor Services | | |
Three Months Ended June 30, | Employee Compensation and Benefits | | Facility Exit Costs (1) | | Investor Services Total | | Employee Compensation and Benefits | | Facility Exit Costs (1) | | Advisor Services Total | | Total |
| | | | | | | | | | | | | |
Compensation and benefits | $ | 5 | | | $ | — | | | $ | 5 | | | $ | 2 | | | $ | — | | | $ | 2 | | | $ | 7 | |
| | | | | | | | | | | | | |
Occupancy and equipment | — | | | 1 | | | 1 | | | — | | | — | | | — | | | 1 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Total | $ | 5 | | | $ | 1 | | | $ | 6 | | | $ | 2 | | | $ | — | | | $ | 2 | | | $ | 8 | |
| | | | | | | | | | | | | |
| Investor Services | | Advisor Services | | |
Six Months Ended June 30, | Employee Compensation and Benefits | | Facility Exit Costs (1) | | Investor Services Total | | Employee Compensation and Benefits | | Facility Exit Costs (1) | | Advisor Services Total | | Total |
| | | | | | | | | | | | | |
Compensation and benefits | $ | 13 | | | $ | — | | | $ | 13 | | | $ | 4 | | | $ | — | | | $ | 4 | | | $ | 17 | |
| | | | | | | | | | | | | |
Occupancy and equipment | — | | | 2 | | | 2 | | | — | | | 1 | | | 1 | | | 3 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Total | $ | 13 | | | $ | 2 | | | $ | 15 | | | $ | 4 | | | $ | 1 | | | $ | 5 | | | $ | 20 | |
(1) Costs related to facility closures. These costs, which are comprised of accelerated amortization of right-of-use (ROU) assets, relate to the impact of abandoning leased properties.
The following table summarizes the exit and other related costs recognized in expense for the three and six months ended June 30, 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Investor Services | | Advisor Services | | |
Three Months Ended June 30, | Employee Compensation and Benefits | | Facility Exit Costs (1) | | Investor Services Total | | Employee Compensation and Benefits | | Facility Exit Costs (1) | | Advisor Services Total | | Total |
| | | | | | | | | | | | | |
Compensation and benefits | $ | 35 | | | $ | — | | | $ | 35 | | | $ | 9 | | | $ | — | | | $ | 9 | | | $ | 44 | |
Occupancy and equipment | — | | | 3 | | | 3 | | | — | | | — | | | — | | | 3 | |
Total | $ | 35 | | | $ | 3 | | | $ | 38 | | | $ | 9 | | | $ | — | | | $ | 9 | | | $ | 47 | |
| | | | | | | | | | | | | |
| Investor Services | | Advisor Services | | |
Six Months Ended June 30, | Employee Compensation and Benefits | | Facility Exit Costs (1) | | Investor Services Total | | Employee Compensation and Benefits | | Facility Exit Costs (1) | | Advisor Services Total | | Total |
| | | | | | | | | | | | | |
Compensation and benefits | $ | 57 | | | $ | — | | | $ | 57 | | | $ | 15 | | | $ | — | | | $ | 15 | | | $ | 72 | |
Occupancy and equipment | — | | | 13 | | | 13 | | | — | | | 3 | | | 3 | | | 16 | |
Professional services | — | | | 1 | | | 1 | | | — | | | — | | | — | | | 1 | |
Other | — | | | 1 | | | 1 | | | — | | | — | | | — | | | 1 | |
Total | $ | 57 | | | $ | 15 | | | $ | 72 | | | $ | 15 | | | $ | 3 | | | $ | 18 | | | $ | 90 | |
(1) Costs related to facility closures. These costs, which are primarily comprised of accelerated amortization of ROU assets, relate to the impact of abandoning leased properties.
THE CHARLES SCHWAB CORPORATION
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted)
(Unaudited)
The following table summarizes the exit and other related costs incurred from October 6, 2020 through June 30, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Investor Services | | Advisor Services | | |
| Employee Compensation and Benefits | | Facility Exit Costs (1) | | Investor Services Total | | Employee Compensation and Benefits | | Facility Exit Costs (1) | | Advisor Services Total | | Total |
Compensation and benefits | $ | 217 | | | $ | — | | | $ | 217 | | | $ | 59 | | | $ | — | | | $ | 59 | | | $ | 276 | |
| | | | | | | | | | | | | |
Occupancy and equipment | — | | | 26 | | | 26 | | | — | | | 6 | | | 6 | | | 32 | |
Depreciation and amortization | — | | | 2 | | | 2 | | | — | | | 1 | | | 1 | | | 3 | |
Professional services | — | | | 1 | | | 1 | | | — | | | — | | | — | | | 1 | |
Other | — | | | 2 | | | 2 | | | — | | | — | | | — | | | 2 | |
Total | $ | 217 | | | $ | 31 | | | $ | 248 | | | $ | 59 | | | $ | 7 | | | $ | 66 | | | $ | 314 | |
(1) Costs related to facility closures. These costs, which are primarily comprised of accelerated amortization of ROU assets and accelerated depreciation of fixed assets, relate to the impact of abandoning leased and other properties.
11. Financial Instruments Subject to Off-Balance Sheet Credit Risk
Resale agreements: Schwab enters into collateralized resale agreements principally with other broker-dealers, which could result in losses in the event the counterparty fails to purchase the securities held as collateral for the cash advanced and the fair value of the securities declines. To mitigate this risk, Schwab requires that the counterparty deliver securities to a custodian, to be held as collateral, with a fair value at or in excess of the resale price. Schwab also sets standards for the credit quality of the counterparty, monitors the fair value of the underlying securities as compared to the related receivable, including accrued interest, and requires additional collateral where deemed appropriate. The collateral provided under these resale agreements is utilized to meet obligations under broker-dealer client protection rules, which place limitations on our ability to access such segregated securities. For Schwab to repledge or sell this collateral, we would be required to deposit cash and/or securities of an equal amount into our segregated reserve bank accounts in order to meet our segregated cash and investments requirement. Schwab’s resale agreements as of June 30, 2022 and December 31, 2021 were not subject to master netting arrangements.
Securities lending: Schwab loans brokerage client securities temporarily to other brokers and clearing houses in connection with its securities lending activities and receives cash as collateral for the securities loaned. Increases in security prices may cause the fair value of the securities loaned to exceed the amount of cash received as collateral. In the event the counterparty to these transactions does not return the loaned securities or provide additional cash collateral, we may be exposed to the risk of acquiring the securities at prevailing market prices in order to satisfy our client obligations. Schwab mitigates this risk by requiring credit approvals for counterparties, monitoring the fair value of securities loaned, and requiring additional cash as collateral when necessary. In addition, most of our securities lending transactions are through a program with a clearing organization, which guarantees the return of cash to us. We also borrow securities from other broker-dealers to fulfill short sales by brokerage clients and deliver cash to the lender in exchange for the securities. The fair value of these borrowed securities was $851 million and $566 million at June 30, 2022 and December 31, 2021, respectively. Our securities lending transactions are subject to enforceable master netting arrangements with other broker-dealers; however, we do not net securities lending transactions. Therefore, the securities loaned and securities borrowed are presented gross in the condensed consolidated balance sheets.
THE CHARLES SCHWAB CORPORATION
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted)
(Unaudited)
The following table presents information about our resale agreements, securities lending, and other activity depicting the potential effect of rights of setoff between these recognized assets and recognized liabilities.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Gross Assets/ Liabilities | | Gross Amounts Offset in the Condensed Consolidated Balance Sheets | | Net Amounts Presented in the Condensed Consolidated Balance Sheets | | Gross Amounts Not Offset in the Condensed Consolidated Balance Sheets | | Net Amount |
| | | | Counterparty Offsetting | | Collateral | |
June 30, 2022 | | | | | | | | | | | | | |
Assets | | | | | | | | | | | | | |
Resale agreements (1) | | $ | 17,614 | | | $ | — | | | $ | 17,614 | | | $ | — | | | $ | (17,614) | | (2) | | $ | — | |
Securities borrowed (3) | | 878 | | | — | | | 878 | | | (713) | | | (160) | | | | 5 | |
Total | | $ | 18,492 | | | $ | — | | | $ | 18,492 | | | $ | (713) | | | $ | (17,774) | | | | $ | 5 | |
Liabilities | | | | | | | | | | | | | |
Securities loaned (4,5) | | $ | 5,833 | | | $ | — | | | $ | 5,833 | | | $ | (713) | | | $ | (4,305) | | | | $ | 815 | |
Secured short-term borrowings (6) | | 750 | | | — | | | 750 | | | — | | | (750) | | | | — | |
Total | | $ | 6,583 | | | $ | — | | | $ | 6,583 | | | $ | (713) | | | $ | (5,055) | | | | $ | 815 | |
| | | | | | | | | | | | | |
December 31, 2021 | | | | | | | | | | | | | |
Assets | | | | | | | | | | | | | |
Resale agreements (1) | | $ | 13,096 | | | $ | — | | | $ | 13,096 | | | $ | — | | | $ | (13,096) | | (2) | | $ | — | |
Securities borrowed (3) | | 582 | | | — | | | 582 | | | (383) | | | (195) | | | | 4 | |
Total | | $ | 13,678 | | | $ | — | | | $ | 13,678 | | | $ | (383) | | | $ | (13,291) | | | | $ | 4 | |
Liabilities | | | | | | | | | | | | | |
Securities loaned (4,5) | | $ | 7,158 | | | $ | — | | | $ | 7,158 | | | $ | (383) | | | $ | (6,015) | | | | $ | 760 | |
Secured short-term borrowings (6) | | 1,850 | | | — | | | 1,850 | | | — | | | (1,850) | | | | — | |
Total | | $ | 9,008 | | | $ | — | | | $ | 9,008 | | | $ | (383) | | | $ | (7,865) | | | | $ | 760 | |
(1) Included in cash and investments segregated and on deposit for regulatory purposes in the condensed consolidated balance sheets.
(2) Actual collateral was greater than or equal to the value of the related assets. At June 30, 2022 and December 31, 2021, the fair value of collateral received in connection with resale agreements that are available to be repledged or sold was $18.1 billion and $13.4 billion, respectively.
(3) Included in other assets in the condensed consolidated balance sheets.
(4) Included in accrued expenses and other liabilities in the condensed consolidated balance sheets. The cash collateral received from counterparties under securities lending transactions was equal to or greater than the market value of the securities loaned at June 30, 2022 and December 31, 2021.
(5) Securities loaned are predominantly comprised of equity securities held in client brokerage accounts with overnight and continuous remaining contractual maturities.
(6) Included in short-term borrowings in the condensed consolidated balance sheets. See below for collateral pledged and Note 8 for additional information.
Margin lending: Clients with margin loans have agreed to allow Schwab to pledge collateralized securities in their brokerage accounts in accordance with federal regulations. The following table summarizes the fair value of client securities that were available, under such regulations, that could have been used as collateral, as well as the fair value of securities that we had pledged under such regulations and from securities borrowed transactions:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | June 30, 2022 | | December 31, 2021 |
Fair value of client securities available to be pledged | | $ | 100,679 | | | $ | 120,306 | |
Fair value of securities pledged for: | | | | |
Fulfillment of requirements with the Options Clearing Corporation (1) | | $ | 17,866 | | | $ | 16,829 | |
Fulfillment of client short sales | | 4,351 | | | 5,934 | |
Securities lending to other broker-dealers | | 4,745 | | | 6,269 | |
Collateral for short-term borrowings | | 1,740 | | | 2,390 | |
Total collateral pledged to third parties | | $ | 28,702 | | | $ | 31,422 | |
Note: Excludes amounts available and pledged for securities lending from fully-paid client securities. The fair value of fully-paid client securities available and pledged was $249 million as of June 30, 2022 and $118 million as of December 31, 2021.
(1) Securities pledged to fulfill client margin requirements for open option contracts established with the Options Clearing Corporation.
THE CHARLES SCHWAB CORPORATION
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted)
(Unaudited)
12. Fair Values of Assets and Liabilities
Assets and liabilities measured at fair value on a recurring basis
Schwab’s assets and liabilities measured at fair value on a recurring basis include: certain cash equivalents, certain investments segregated and on deposit for regulatory purposes, AFS securities, and certain other assets and accrued expenses and other liabilities. The Company uses the market approach to determine the fair value of assets and liabilities. When available, the Company uses quoted prices in active markets to measure the fair value of assets and liabilities. Quoted prices for investments in exchange-traded securities represent end-of-day close prices published by exchanges. Quoted prices for money market funds and other mutual funds represent reported net asset values. When utilizing market data and bid-ask spread, the Company uses the price within the bid-ask spread that best represents fair value. When quoted prices in active markets do not exist, the Company uses prices obtained from independent third-party pricing services to measure the fair value of investment assets. We generally obtain prices from three independent third-party pricing sources for assets recorded at fair value.
Our primary independent pricing service provides prices for our fixed income investments such as commercial paper; certificates of deposit; U.S. government and agency securities; state and municipal securities; corporate debt securities; asset-backed securities; foreign government agency securities; and non-agency commercial mortgage-backed securities. Such prices are based on observable trades, broker/dealer quotes, and discounted cash flows that incorporate observable information such as yields for similar types of securities (a benchmark interest rate plus observable spreads) and weighted-average maturity for the same or similar “to-be-issued” securities. We compare the prices obtained from the primary independent pricing service to the prices obtained from the additional independent pricing services to determine if the price obtained from the primary independent pricing service is reasonable. Schwab does not adjust the prices received from independent third-party pricing services unless such prices are inconsistent with the definition of fair value and result in material differences in the amounts recorded.
Liabilities measured at fair value on a recurring basis include repurchase liabilities related to client-held fractional shares of equities, ETFs, and other securities, which are included in other assets on the condensed consolidated balance sheets. The Company has elected the fair value option pursuant to ASC 825 Financial Instruments for the repurchase liabilities to match the measurement and accounting of the related client-held fractional shares. The fair values of the repurchase liabilities are based on quoted market prices or other observable market data consistent with the related client-held fractional shares. Gains and losses on client-held fractional shares offset the gains and losses on the corresponding repurchase liabilities, resulting in no impact to the consolidated statements of income. The Company’s liabilities to repurchase client-held fractional shares do not have credit risk, and, as a result, the Company has not recognized any gains or losses in the condensed consolidated statements of income or comprehensive income attributable to instrument-specific credit risk for these repurchase liabilities. The repurchase liabilities are included in accrued expenses and other liabilities on the condensed consolidated balance sheets.
For a description of the fair value hierarchy and Schwab’s fair value methodologies, see Item 8 – Note 2 in the 2021 Form 10-K. The Company did not adjust prices received from the primary independent third-party pricing service at June 30, 2022 or December 31, 2021.
THE CHARLES SCHWAB CORPORATION
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted)
(Unaudited)
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following tables present the fair value hierarchy for assets and liabilities measured at fair value on a recurring basis:
| | | | | | | | | | | | | | | | | | | | | | | |
June 30, 2022 | Level 1 | | Level 2 | | Level 3 | | Balance at Fair Value |
Cash equivalents: | | | | | | | |
Money market funds | $ | 9,339 | | | $ | — | | | $ | — | | | $ | 9,339 | |
Commercial paper | — | | | 2,296 | | | — | | | 2,296 | |
| | | | | | | |
Total cash equivalents | 9,339 | | | 2,296 | | | — | | | 11,635 | |
Investments segregated and on deposit for regulatory purposes: | | | | | | | |
Certificates of deposit | — | | | 348 | | | — | | | 348 | |
U.S. Government securities | — | | | 30,794 | | | — | | | 30,794 | |
Total investments segregated and on deposit for regulatory purposes | — | | | 31,142 | | | — | | | 31,142 | |
Available for sale securities: | | | | | | | |
U.S. agency mortgage-backed securities | — | | | 184,686 | | | — | | | 184,686 | |
U.S. Treasury securities | — | | | 40,795 | | | — | | | 40,795 | |
Asset-backed securities | — | | | 19,123 | | | — | | | 19,123 | |
Corporate debt securities | — | | | 14,303 | | | — | | | 14,303 | |
U.S. state and municipal securities | — | | | 1,510 | | | — | | | 1,510 | |
Non-agency commercial mortgage-backed securities | — | | | 1,079 | | | — | | | 1,079 | |
Certificates of deposit | — | | | 2,379 | | | — | | | 2,379 | |
Foreign government agency securities | — | | | 1,086 | | | — | | | 1,086 | |
| | | | | | | |
| | | | | | | |
Other | — | | | 316 | | | — | | | 316 | |
Total available for sale securities | — | | | 265,277 | | | — | | | 265,277 | |
Other assets: | | | | | | | |
Equity, corporate debt, and other securities | 729 | | | 73 | | | — | | | 802 | |
Mutual funds and ETFs | 534 | | | — | | | — | | | 534 | |
State and municipal debt obligations | — | | | 9 | | | — | | | 9 | |
U.S. Government securities | — | | | 1 | | | — | | | 1 | |
Total other assets | 1,263 | | | 83 | | | — | | | 1,346 | |
Total assets | $ | 10,602 | | | $ | 298,798 | | | $ | — | | | $ | 309,400 | |
Accrued expenses and other liabilities | $ | 1,135 | | | $ | 53 | | | $ | — | | | $ | 1,188 | |
Total liabilities | $ | 1,135 | | | $ | 53 | | | $ | — | | | $ | 1,188 | |
THE CHARLES SCHWAB CORPORATION
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted)
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2021 | Level 1 | | Level 2 | | Level 3 | | Balance at Fair Value |
Cash equivalents: | | | | | | | |
Money market funds | $ | 11,719 | | | $ | — | | | $ | — | | | $ | 11,719 | |
| | | | | | | |
Total cash equivalents | 11,719 | | | — | | | — | | | 11,719 | |
Investments segregated and on deposit for regulatory purposes: | | | | | | | |
Certificates of deposit | — | | | 350 | | | — | | | 350 | |
U.S. Government securities | — | | | 36,349 | | | — | | | 36,349 | |
Total investments segregated and on deposit for regulatory purposes | — | | | 36,699 | | | — | | | 36,699 | |
Available for sale securities: | | | | | | | |
U.S. agency mortgage-backed securities | — | | | 334,355 | | | — | | | 334,355 | |
U.S. Treasury securities | — | | | 21,282 | | | — | | | 21,282 | |
Asset-backed securities | — | | | 17,546 | | | — | | | 17,546 | |
Corporate debt securities | — | | | 12,344 | | | — | | | 12,344 | |
U.S. state and municipal securities | — | | | 1,687 | | | — | | | 1,687 | |
Non-agency commercial mortgage-backed securities | — | | | 1,190 | | | — | | | 1,190 | |
Certificates of deposit | — | | | 999 | | | — | | | 999 | |
Foreign government agency securities | — | | | 425 | | | — | | | 425 | |
Commercial paper | — | | | 200 | | | — | | | 200 | |
Other | — | | | 26 | | | — | | | 26 | |
Total available for sale securities | — | | | 390,054 | | | — | | | 390,054 | |
Other assets: | | | | | | | |
Equity, corporate debt, and other securities | 854 | | | 59 | | | — | | | 913 | |
Mutual funds and ETFs | 636 | | | — | | | — | | | 636 | |
State and municipal debt obligations | — | | | 32 | | | — | | | 32 | |
U.S. Government securities | — | | | 3 | | | — | | | 3 | |
Total other assets | 1,490 | | | 94 | | | — | | | 1,584 | |
Total assets | $ | 13,209 | | | $ | 426,847 | | | $ | — | | | $ | 440,056 | |
Accrued expenses and other liabilities | $ | 1,354 | | | $ | 45 | | | $ | — | | | $ | 1,399 | |
Total liabilities | $ | 1,354 | | | $ | 45 | | | $ | — | | | $ | 1,399 | |
THE CHARLES SCHWAB CORPORATION
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted)
(Unaudited)
Fair Value of Other Financial Instruments
The following tables present the fair value hierarchy for other financial instruments:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
June 30, 2022 | Carrying Amount | | Level 1 | | Level 2 | | Level 3 | | Balance at Fair Value |
Assets | | | | | | | | | |
Cash and cash equivalents | $ | 52,915 | | | $ | 52,915 | | | $ | — | | | $ | — | | | $ | 52,915 | |
Cash and investments segregated and on deposit for regulatory purposes | 22,306 | | | 4,706 | | | 17,600 | | | — | | | 22,306 | |
| | | | | | | | | |
Receivables from brokerage clients — net | 76,123 | | | — | | | 76,123 | | | — | | | 76,123 | |
Held to maturity securities: | | | | | | | | | |
U.S. agency mortgage-backed securities | 100,117 | | | — | | | 89,913 | | | — | | | 89,913 | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
Total held to maturity securities | 100,117 | | | — | | | 89,913 | | | — | | | 89,913 | |
Bank loans — net: | | | | | | | | | |
First Mortgages | 23,898 | | | — | | | 21,805 | | | — | | | 21,805 | |
HELOCs | 617 | | | — | | | 663 | | | — | | | 663 | |
Pledged asset lines | 14,844 | | | — | | | 14,844 | | | — | | | 14,844 | |
Other | 205 | | | — | | | 205 | | | — | | | 205 | |
Total bank loans — net | 39,564 | | | — | | | 37,517 | | | — | | | 37,517 | |
Other assets | 4,034 | | | — | | | 4,034 | | | — | | | 4,034 | |
| | | | | | | | | |
Liabilities | | | | | | | | | |
Bank deposits | $ | 442,003 | | | $ | — | | | $ | 442,003 | | | $ | — | | | $ | 442,003 | |
| | | | | | | | | |
Payables to brokerage clients | 114,880 | | | — | | | 114,880 | | | — | | | 114,880 | |
Accrued expenses and other liabilities | 7,243 | | | — | | | 7,243 | | | — | | | 7,243 | |
Short-term borrowings | 1,350 | | | — | | | 1,350 | | | — | | | 1,350 | |
Long-term debt | 21,028 | | | — | | | 19,730 | | | — | | | 19,730 | |
| | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2021 | Carrying Amount | | Level 1 | | Level 2 | | Level 3 | | Balance at Fair Value |
Assets | | | | | | | | | |
Cash and cash equivalents | $ | 51,256 | | | $ | 51,256 | | | $ | — | | | $ | — | | | $ | 51,256 | |
Cash and investments segregated and on deposit for regulatory purposes | 17,246 | | | 4,151 | | | 13,095 | | | — | | | 17,246 | |
| | | | | | | | | |
Receivables from brokerage clients — net | 90,560 | | | — | | | 90,560 | | | — | | | 90,560 | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
Bank loans — net: | | | | | | | | | |
First Mortgages | 21,077 | | | — | | | 21,027 | | | — | | | 21,027 | |
HELOCs | 646 | | | — | | | 668 | | | — | | | 668 | |
Pledged asset lines | 12,709 | | | — | | | 12,709 | | | — | | | 12,709 | |
Other | 204 | | | — | | | 204 | | | — | | | 204 | |
Total bank loans — net | 34,636 | | | — | | | 34,608 | | | — | | | 34,608 | |
Other assets | 3,561 | | | — | | | 3,561 | | | — | | | 3,561 | |
| | | | | | | | | |
Liabilities | | | | | | | | | |
Bank deposits | $ | 443,778 | | | $ | — | | | $ | 443,778 | | | $ | — | | | $ | 443,778 | |
| | | | | | | | | |
Payables to brokerage clients | 125,671 | | | — | | | 125,671 | | | — | | | 125,671 | |
Accrued expenses and other liabilities | 8,327 | | | — | | | 8,327 | | | — | | | 8,327 | |
Short-term borrowings | 4,855 | | | — | | | 4,855 | | | — | | | 4,855 | |
Long-term debt | 18,820 | | | — | | | 19,383 | | | — | | | 19,383 | |
| | | | | | | | | |
THE CHARLES SCHWAB CORPORATION
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted)
(Unaudited)
13. Stockholders’ Equity
On March 4, 2022, the Company issued and sold 750,000 depositary shares, each representing a 1/100th ownership interest in a share of 5.000% fixed-rate reset non-cumulative perpetual preferred stock, Series K, $.01 par value, with a liquidation preference of $100,000 per share (equivalent of $1,000 per depositary share). The net proceeds of the offering were $740 million, after deducting the underwriting discount and offering expenses.
On January 30, 2019, CSC publicly announced that its Board of Directors authorized a share repurchase program to repurchase up to $4.0 billion of common stock. There were no repurchases of CSC’s common stock under this authorization during the six months ended June 30, 2022 and 2021. As of June 30, 2022, $1.8 billion remained on the authorization.
Subsequent to June 30, 2022, on July 27, 2022, CSC publicly announced that its Board of Directors terminated the existing share repurchase authorization and replaced it with a new authorization to repurchase up to $15.0 billion of common stock. The 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.
The Company’s preferred stock issued and outstanding is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Liquidation Preference Per Share | | | | Dividend Rate in Effect at June 30, 2022 | Earliest Redemption Date | Date at Which Dividend Rate Resets or Becomes Floating | Reset / Floating Rate | Margin Over Reset / Floating Rate |
| Shares Issued and Outstanding (in ones) at | Carrying Value at | |
| June 30, 2022 (1) | December 31, 2021 (1) | June 30, 2022 | December 31, 2021 | Issue Date |
Fixed-rate: | | | | | | | | | | | |
Series D | 750,000 | | 750,000 | | $ | 1,000 | | $ | 728 | | $ | 728 | | 03/07/16 | 5.950 | % | 06/01/21 | N/A | N/A | N/A |
Series J | 600,000 | | 600,000 | | 1,000 | | 584 | | 584 | | 03/30/21 | 4.450 | % | 06/01/26 | N/A | N/A | N/A |
Fixed-to-floating-rate/Fixed-rate reset: | | | | | | | | | |
Series A | 400,000 | | 400,000 | | 1,000 | | 397 | | 397 | | 01/26/12 | 6.106 | % | 02/01/22 | 02/01/22 | 3M LIBOR | 4.820 | % |
Series E | 6,000 | | 6,000 | | 100,000 | | 591 | | 591 | | 10/31/16 | 4.913 | % | 03/01/22 | 03/01/22 | 3M LIBOR | 3.315 | % |
Series F | 5,000 | | 5,000 | | 100,000 | | 492 | | 492 | | 10/31/17 | 5.000 | % | 12/01/27 | 12/01/27 | 3M LIBOR | 2.575 | % |
Series G (2) | 25,000 | | 25,000 | | 100,000 | | 2,470 | | 2,470 | | 04/30/20 | 5.375 | % | 06/01/25 | 06/01/25 | 5-Year Treasury | 4.971 | % |
Series H (3) | 25,000 | | 25,000 | | 100,000 | | 2,470 | | 2,470 | | 12/11/20 | 4.000 | % | 12/01/30 | 12/01/30 | 10-Year Treasury | 3.079 | % |
Series I (2) | 22,500 | | 22,500 | | 100,000 | | 2,222 | | 2,222 | | 03/18/21 | 4.000 | % | 06/01/26 | 06/01/26 | 5-Year Treasury | 3.168 | % |
Series K (4) | 7,500 | | — | | 100,000 | | 740 | | — | | 03/04/22 | 5.000 | % | 06/01/27 | 06/01/27 | 5-Year Treasury | 3.256 | % |
Total preferred stock | 1,841,000 | | 1,833,500 | | | $ | 10,694 | | $ | 9,954 | | | | | | | |
(1) Represented by depositary shares, except for Series A.
(2) The dividend rate for Series G and Series I resets on each five-year anniversary from the first reset date.
(3) The dividend rate for Series H resets on each ten-year anniversary from the first reset date.
(4) The dividend rate for Series K resets on each five-year anniversary beginning on June 1, 2027 based on a five-year Treasury rate, representing the average of the yields on actively traded U.S. Treasury securities adjusted to constant maturity for five-year maturities. Series K is only redeemable on dividend payment dates on or after the first reset date.
N/A Not applicable.
THE CHARLES SCHWAB CORPORATION
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted)
(Unaudited)
Dividends declared on the Company’s preferred stock are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, | | |
| | 2022 | | 2021 | | 2022 | | 2021 | | | | |
| | Total Declared | | Per Share Amount | | Total Declared | | Per Share Amount | | Total Declared | | Per Share Amount | | Total Declared | | Per Share Amount | | | | | | | | |
Series A | | $ | 6.2 | | | $ | 15.60 | | | $ | 14.0 | | | $ | 35.00 | | | $ | 11.2 | | | $ | 28.30 | | | $ | 14.0 | | | $ | 35.00 | | | | | | | | | |
Series C (1) | | — | | | — | | | 9.0 | | | 15.00 | | | — | | | — | | | 18.0 | | | 30.00 | | | | | | | | | |
Series D | | 11.1 | | | 14.88 | | | 11.1 | | | 14.88 | | | 22.3 | | | 29.76 | | | 22.3 | | | 29.76 | | | | | | | | | |
Series E | | 5.9 | | | 980.82 | | | — | | | — | | | 19.8 | | | 3,293.32 | | | 13.9 | | | 2,312.50 | | | | | | | | | |
Series F | | 12.5 | | | 2,500.00 | | | 12.5 | | | 2,500.00 | | | 12.5 | | | 2,500.00 | | | 12.5 | | | 2,500.00 | | | | | | | | | |
Series G | | 33.6 | | | 1,343.75 | | | 33.6 | | | 1,343.75 | | | 67.2 | | | 2,687.50 | | | 67.2 | | | 2,687.50 | | | | | | | | | |
Series H | | 25.0 | | | 1,000.00 | | | 25.0 | | | 1,000.00 | | | 50.0 | | | 2,000.00 | | | 47.2 | | | 1,888.89 | | | | | | | | | |
Series I (2) | | 22.5 | | | 1,000.00 | | | 18.2 | | | 811.11 | | | 45.0 | | | 2,000.00 | | | 18.2 | | | 811.11 | | | | | | | | | |
Series J (3) | | 6.7 | | | 11.13 | | | 4.5 | | | 7.54 | | | 13.4 | | | 22.26 | | | 4.5 | | | 7.54 | | | | | | | | | |
Series K (4) | | 9.1 | | | 1,208.33 | | | — | | | — | | | 9.1 | | | 1,208.33 | | | — | | | — | | | | | | | | | |
Total | | $ | 132.6 | | | | | $ | 127.9 | | | | | $ | 250.5 | | | | | $ | 217.8 | | | | | | | | | | | |
(1) Series C was redeemed on June 1, 2021. Prior to redemption, dividends were paid quarterly and the final dividend was paid on June 1, 2021.
(2) Series I was issued on March 18, 2021. Dividends are paid quarterly, and the first dividend was paid on June 1, 2021.
(3) Series J was issued on March 30, 2021. Dividends are paid quarterly, and the first dividend was paid on June 1, 2021.
(4) Series K was issued on March 4, 2022. Dividends are paid quarterly, and the first dividend was paid on June 1, 2022.
THE CHARLES SCHWAB CORPORATION
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted)
(Unaudited)
14. Accumulated Other Comprehensive Income
AOCI represents cumulative gains and losses that are not reflected in earnings. AOCI balances and the components of other comprehensive income (loss) are as follows:
| | | | | |
| Total AOCI |
Balance at March 31, 2021 | $ | 878 | |
Available for sale securities: | |
Net unrealized gain (loss), net of tax expense (benefit) of $484 | 1,532 | |
Other reclassifications included in other revenue, net of tax expense (benefit) of $(2) | (2) | |
Balance at June 30, 2021 | $ | 2,408 | |
| |
Balance at March 31, 2022 | $ | (11,045) | |
Available for sale securities: | |
Net unrealized gain (loss), net of tax expense (benefit) of $(1,604) | (5,067) | |
Other reclassifications included in other revenue, net of tax expense (benefit) of $(1) | (4) | |
Held to maturity securities: | |
Amortization of amounts previously recorded upon transfer from available for sale, net of tax expense (benefit) of $28 | 94 | |
| |
Balance at June 30, 2022 | $ | (16,022) | |
| |
| Total AOCI |
Balance at December 31, 2020 | $ | 5,394 | |
| |
Available for sale securities: | |
Net unrealized gain (loss), net of tax expense (benefit) of $(925) | (2,976) | |
Other reclassifications included in other revenue, net of tax expense (benefit) of $(4) | (10) | |
| |
| |
| |
Balance at June 30, 2021 | $ | 2,408 | |
| |
Balance at December 31, 2021 | $ | (1,109) | |
| |
Available for sale securities: | |
Net unrealized gain (loss), excluding transfers to held to maturity, net of tax expense (benefit) of $(4,741) | (15,065) | |
Net unrealized loss on securities transferred to held to maturity, net of tax expense (benefit) of $579 (1) | 1,850 | |
Other reclassifications included in other revenue, net of tax expense (benefit) of $(4) | (13) | |
Held to maturity securities: | |
Net unrealized loss on securities transferred from available for sale, net of tax expense (benefit) of $(579) (1) | (1,850) | |
Amortization of amounts previously recorded upon transfer from available for sale, net of tax expense (benefit) of $49 | 165 | |
| |
Balance at June 30, 2022 | $ | (16,022) | |
(1) In January 2022, the Company transferred a portion of its AFS securities to the HTM category. See Note 4 for additional discussion on the transfer of AFS securities to HTM.
THE CHARLES SCHWAB CORPORATION
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted)
(Unaudited)
15. Earnings Per Common Share
For the three and six months ended June 30, 2022 and 2021, the Company had voting and nonvoting common stock outstanding. Since the rights of the voting and nonvoting common stock are identical, except with respect to voting, the net income of the Company has been allocated on a proportionate basis to the two classes. Diluted earnings per share is calculated using the treasury stock method for outstanding stock options and non-vested restricted stock units and the if-converted method for nonvoting common stock. For further details surrounding the EPS computation, see Note 25 in the 2021 Form 10-K.
EPS under the basic and diluted computations for both common stock and nonvoting common stock are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | Six Months Ended June 30, | |
| 2022 | 2021 | 2022 | 2021 | | |
| Common Stock | Nonvoting Common Stock | Common Stock | Nonvoting Common Stock | Common Stock | Nonvoting Common Stock | Common Stock | Nonvoting Common Stock | | | | |
Basic earnings per share: | | | | | | | | | | | | |
Numerator | | | | | | | | | | | | |
Net income | $ | 1,718 | | $ | 75 | | $ | 1,212 | | $ | 53 | | $ | 3,062 | | $ | 133 | | $ | 2,634 | | $ | 115 | | | | | |
Preferred stock dividends and other (1) | (135) | | (6) | | (142) | | (6) | | (254) | | (11) | | (234) | | (10) | | | | | |
Net income available to common stockholders | $ | 1,583 | | $ | 69 | | $ | 1,070 | | $ | 47 | | $ | 2,808 | | $ | 122 | | $ | 2,400 | | $ | 105 | | | | | |
Denominator | | | | | | | | | | | | |
Weighted-average common shares outstanding — basic | 1,817 | | 79 | | 1,807 | | 79 | | 1,816 | | 79 | | 1,805 | | 79 | | | | | |
Basic earnings per share | $ | .87 | | $ | .87 | | $ | .59 | | $ | .59 | | $ | 1.55 | | $ | 1.55 | | $ | 1.33 | | $ | 1.33 | | | | | |
Diluted earnings per share: | | | | | | | | | | | | |
Numerator | | | | | | | | | | | | |
Net income available to common stockholders | $ | 1,583 | | $ | 69 | | $ | 1,070 | | $ | 47 | | $ | 2,808 | | $ | 122 | | $ | 2,400 | | $ | 105 | | | | | |
Reallocation of net income available to common stockholders as a result of conversion of nonvoting to voting shares | 69 | | — | | 47 | | — | | 122 | | — | | 105 | | — | | | | | |
Allocation of net income available to common stockholders: | $ | 1,652 | | $ | 69 | | $ | 1,117 | | $ | 47 | | $ | 2,930 | | $ | 122 | | $ | 2,505 | | $ | 105 | | | | | |
Denominator | | | | | | | | | | | | |
Weighted-average common shares outstanding — basic | 1,817 | | 79 | | 1,807 | | 79 | | 1,816 | | 79 | | 1,805 | | 79 | | | | | |
Conversion of nonvoting shares to voting shares | 79 | | — | | 79 | | — | | 79 | | — | | 79 | | — | | | | | |
Common stock equivalent shares related to stock incentive plans | 8 | | — | | 10 | | — | | 10 | | — | | 10 | | — | | | | | |
Weighted-average common shares outstanding — diluted (2) | 1,904 | | 79 | | 1,896 | | 79 | | 1,905 | | 79 | | 1,894 | | 79 | | | | | |
Diluted earnings per share | $ | .87 | | $ | .87 | | $ | .59 | | $ | .59 | | $ | 1.54 | | $ | 1.54 | | $ | 1.32 | | $ | 1.32 | | | | | |
(1) Includes preferred stock dividends and undistributed earnings and dividends allocated to non-vested restricted stock units.
(2) Antidilutive stock options and restricted stock units excluded from the calculation of diluted EPS totaled 13 million and 14 million for the three and six months ended June 30, 2022, respectively, and 14 million and 15 million for the three and six months ended June 30, 2021, respectively.
THE CHARLES SCHWAB CORPORATION
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted)
(Unaudited)
16. Regulatory Requirements
At June 30, 2022, CSC and CSB met all of their respective capital requirements. The regulatory capital and ratios for CSC (consolidated) and CSB are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Actual | | Minimum to be Well Capitalized | | Minimum Capital Requirement |
June 30, 2022 | | Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio (1) |
CSC | | | | | | | | | | | | |
Common Equity Tier 1 Risk-Based Capital | | $ | 30,641 | | | 20.9 | % | | N/A | | | | $ | 6,601 | | | 4.5 | % |
Tier 1 Risk-Based Capital | | 41,335 | | | 28.2 | % | | N/A | | | | 8,802 | | | 6.0 | % |
Total Risk-Based Capital | | 41,382 | | | 28.2 | % | | N/A | | | | 11,736 | | | 8.0 | % |
Tier 1 Leverage | | 41,335 | | | 6.4 | % | | N/A | | | | 25,906 | | | 4.0 | % |
Supplementary Leverage Ratio | | 41,335 | | | 6.3 | % | | N/A | | | | 19,568 | | | 3.0 | % |
CSB | | | | | | | | | | | | |
Common Equity Tier 1 Risk-Based Capital | | $ | 31,519 | | | 28.3 | % | | $ | 7,244 | | | 6.5 | % | | $ | 5,015 | | | 4.5 | % |
Tier 1 Risk-Based Capital | | 31,519 | | | 28.3 | % | | 8,916 | | | 8.0 | % | | 6,687 | | | 6.0 | % |
Total Risk-Based Capital | | 31,558 | | | 28.3 | % | | 11,144 | | | 10.0 | % | | 8,916 | | | 8.0 | % |
Tier 1 Leverage | | 31,519 | | | 7.3 | % | | 21,532 | | | 5.0 | % | | 17,226 | | | 4.0 | % |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Supplementary Leverage Ratio | | 31,519 | | | 7.3 | % | | N/A | | | | 13,028 | | | 3.0 | % |
| | | | | | | | | | | | |
December 31, 2021 | | | | | | | | | | | | |
CSC | | | | | | | | | | | | |
Common Equity Tier 1 Risk-Based Capital | | $ | 27,967 | | | 19.7 | % | | N/A | | | | $ | 6,389 | | | 4.5 | % |
Tier 1 Risk-Based Capital | | 37,921 | | | 26.7 | % | | N/A | | | | 8,518 | | | 6.0 | % |
Total Risk-Based Capital | | 37,950 | | | 26.7 | % | | N/A | | | | 11,358 | | | 8.0 | % |
Tier 1 Leverage | | 37,921 | | | 6.2 | % | | N/A | | | | 24,346 | | | 4.0 | % |
Supplementary Leverage Ratio | | 37,921 | | | 6.2 | % | | N/A | | | | 18,434 | | | 3.0 | % |
CSB | | | | | | | | | | | | |
Common Equity Tier 1 Risk-Based Capital | | $ | 28,014 | | | 26.8 | % | | $ | 6,787 | | | 6.5 | % | | $ | 4,698 | | | 4.5 | % |
Tier 1 Risk-Based Capital | | 28,014 | | | 26.8 | % | | 8,353 | | | 8.0 | % | | 6,265 | | | 6.0 | % |
Total Risk-Based Capital | | 28,033 | | | 26.8 | % | | 10,441 | | | 10.0 | % | | 8,353 | | | 8.0 | % |
Tier 1 Leverage | | 28,014 | | | 7.1 | % | | 19,790 | | | 5.0 | % | | 15,832 | | | 4.0 | % |
Supplementary Leverage Ratio | | 28,014 | | | 7.0 | % | | N/A | | | | 12,016 | | | 3.0 | % |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
(1) Under risk-based capital rules, CSC and CSB are also required to maintain additional capital buffers above the regulatory minimum risk-based capital ratios. As of June 30, 2022, CSC was subject to a stress capital buffer of 2.5%. In June 2022, CSC received its 2022 stress capital buffer requirement from the Federal Reserve of 2.5%, which will become effective beginning October 1, 2022. In addition, CSB is required to maintain a capital conservation buffer of 2.5%. CSC and CSB are also required to maintain a countercyclical capital buffer above the regulatory minimum risk-based capital ratios, which was zero for both periods presented. If a buffer falls below the minimum requirement, CSC and CSB would be subject to increasingly strict limits on capital distributions and discretionary bonus payments to executive officers. At June 30, 2022, the minimum capital ratio requirements for both CSC and CSB, inclusive of their respective buffers, were 7.0%, 8.5%, and 10.5% for Common Equity Tier 1 Risk-Based Capital, Tier 1 Risk-Based Capital, and Total Risk-Based Capital, respectively.
N/A Not applicable.
Based on its regulatory capital ratios at June 30, 2022, CSB is considered well capitalized (the highest category) under its respective regulatory capital rules. There are no conditions or events since June 30, 2022 that management believes have changed CSB’s capital category.
At June 30, 2022, the balance sheets of Charles Schwab Premier Bank, SSB (CSPB) and Charles Schwab Trust Bank (Trust Bank) consisted primarily of investment securities, and the entities held total assets of $39.6 billion and $15.5 billion, respectively. Based on their regulatory capital ratios, at June 30, 2022, CSPB and Trust Bank are considered well capitalized under their respective regulatory capital rules.
THE CHARLES SCHWAB CORPORATION
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted)
(Unaudited)
Net capital and net capital requirements for CS&Co, TDAC, and TD Ameritrade, Inc., are as follows:
| | | | | | | | | | | | | | |
| | June 30, 2022 | | December 31, 2021 |
CS&Co | | | | |
Net capital | | $ | 5,171 | | | $ | 5,231 | |
Minimum dollar requirement | | 0.250 | | | 0.250 | |
2% of aggregate debit balances | | 925 | | | 941 | |
Net capital in excess of required net capital | | $ | 4,246 | | | $ | 4,290 | |
TDAC | | | | |
Net capital | | $ | 5,053 | | | $ | 5,337 | |
Minimum dollar requirement | | 1.500 | | | 1.500 | |
2% of aggregate debit balances | | 759 | | | 1,007 | |
Net capital in excess of required net capital | | $ | 4,294 | | | $ | 4,330 | |
TD Ameritrade, Inc. | | | | |
Net capital | | $ | 687 | | | $ | 711 | |
Minimum dollar requirement | | 0.250 | | | 0.250 | |
2% of aggregate debit balances | | — | | | — | |
Net capital in excess of required net capital | | $ | 687 | | | $ | 711 | |
Pursuant to the SEC’s Customer Protection Rule and other applicable regulations, Schwab had cash and investments segregated for the exclusive benefit of clients at June 30, 2022. The SEC’s Customer Protection Rule requires broker-dealers to segregate client fully-paid securities and cash balances not collateralizing margin positions and not swept to money market funds or bank deposit accounts. Amounts included in cash and investments segregated and on deposit for regulatory purposes represent actual balances on deposit. Cash and cash equivalents included in cash and investments segregated and on deposit for regulatory purposes are presented as part of Schwab’s cash balances in the condensed consolidated statements of cash flows.
17. Segment Information
Schwab’s two reportable segments are Investor Services and Advisor Services. Schwab structures the operating segments according to its clients and the services provided to those clients. The Investor Services segment provides retail brokerage, 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 RIAs, independent retirement advisors, and recordkeepers. Revenues and expenses are attributed to the two segments based on which segment services the client.
Management evaluates the performance of the segments on a pre-tax basis. Segment assets and liabilities are not used for evaluating segment performance or in deciding how to allocate resources to segments. There are no revenues from transactions between the segments.
THE CHARLES SCHWAB CORPORATION
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted)
(Unaudited)
Financial information for the segments is presented in the following table:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Investor Services | | Advisor Services | | Total |
Three Months Ended June 30, | 2022 | | 2021 | | 2022 | | 2021 | | 2022 | | 2021 |
Net Revenues | | | | | | | | | | | |
Net interest revenue | $ | 1,834 | | | $ | 1,478 | | | $ | 710 | | | $ | 469 | | | $ | 2,544 | | | $ | 1,947 | |
Asset management and administration fees | 763 | | | 769 | | | 289 | | | 278 | | | 1,052 | | | 1,047 | |
Trading revenue | 763 | | | 861 | | | 122 | | | 94 | | | 885 | | | 955 | |
Bank deposit account fees | 227 | | | 249 | | | 125 | | | 88 | | | 352 | | | 337 | |
Other | 187 | | | 170 | | | 73 | | | 71 | | | 260 | | | 241 | |
Total net revenues | 3,774 | | | 3,527 | | | 1,319 | | | 1,000 | | | 5,093 | | | 4,527 | |
Expenses Excluding Interest | 2,111 | | | 2,188 | | | 708 | | | 620 | | | 2,819 | | | 2,808 | |
Income before taxes on income | $ | 1,663 | | | $ | 1,339 | | | $ | 611 | | | $ | 380 | | | $ | 2,274 | | | $ | 1,719 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Investor Services | | Advisor Services | | Total |
Six Months Ended June 30, | 2022 | | 2021 | | 2022 | | 2021 | | 2022 | | 2021 |
Net Revenues | | | | | | | | | | | |
Net interest revenue | $ | 3,408 | | | $ | 2,932 | | | $ | 1,319 | | | $ | 926 | | | $ | 4,727 | | | $ | 3,858 | |
Asset management and administration fees | 1,544 | | | 1,511 | | | 576 | | | 552 | | | 2,120 | | | 2,063 | |
Trading revenue | 1,607 | | | 1,958 | | | 241 | | | 213 | | | 1,848 | | | 2,171 | |
Bank deposit account fees | 427 | | | 503 | | | 219 | | | 185 | | | 646 | | | 688 | |
Other | 314 | | | 348 | | | 110 | | | 114 | | | 424 | | | 462 | |
Total net revenues | 7,300 | | | 7,252 | | | 2,465 | | | 1,990 | | | 9,765 | | | 9,242 | |
Expenses Excluding Interest | 4,242 | | | 4,297 | | | 1,410 | | | 1,266 | | | 5,652 | | | 5,563 | |
Income before taxes on income | $ | 3,058 | | | $ | 2,955 | | | $ | 1,055 | | | $ | 724 | | | $ | 4,113 | | | $ | 3,679 | |
THE CHARLES SCHWAB CORPORATION
Item 4. Controls and Procedures
Evaluation of disclosure controls and procedures: The management of the Company, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of June 30, 2022. Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were effective as of June 30, 2022.
Changes in internal control over financial reporting: No change in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) was identified during the quarter ended June 30, 2022, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.