Charles Schwab (SCHW)

Management Discussion

• 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.
• Interest rates increased significantly from year-end 2021 through June 30, 2022. Short-term rates were near zero until the Federal Reserve began its tightening cycle in March 2022, ultimately increasing the federal funds target overnight rate three times between March and June 2022 for a total increase of 150 basis points, while long-term interest rates increased throughout the first six months of the year. Despite significant seasonal tax-related client cash outflows in the second quarter, Schwab continued to see strength in net new client assets throughout the first six months of 2022, which, along with transfers of BDA balances to the Company’s balance sheet (see Bank Deposit Account Fees), drove growth in Schwab’s interest-earning assets. Partially offsetting this growth, sustained equity market volatility and softening investor sentiment during the second quarter and the first six months of 2022 reduced demand for margin loans, which declined 16% from year-end 2021. In addition, over recent quarters, the Company has increased its cash holdings and reduced the duration of incremental investment securities purchases to provide flexibility to support changes in client cash allocations associated with higher short-term interest rates. These steps also help keep Schwab positioned to benefit from interest rate increases.
• (1) Amounts have been calculated based on amortized cost. Interest revenue on investment securities is presented net of related premium amortization.