SECURITIES AND EXCHANGE COMMISSION
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
|
| |
For the fiscal year ended December 31, 20142017 | Commission file number 1-9700 |
THE CHARLES SCHWAB CORPORATION
(Exact name of registrant as specified in its charter)
|
| |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
211 Main Street, San Francisco, CA 94105
(Address of principal executive offices and zip code)
Registrant’s telephone number, including area code: (415) 667-7000
Securities registered pursuant to Section 12(b) of the Act:
|
| |
| Title of each class | Name of each exchange on which registered |
Common Stock -– $.01 par value per share | New York Stock Exchange |
DepositoryDepositary Shares, each representing a 1/40th ownership interest
| |
share of 6.0%6.00% Non-Cumulative Preferred Stock, Series BC |
|
Depositary Shares, each representing a 1/40th ownership interest in a | |
| share of 5.95% Non-Cumulative Preferred Stock, Series D | New York Stock Exchange
|
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
⌧☒ No ☐Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes
☐ No ⌧☒
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 and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes
⌧☒ No ☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. 10‑K. ☒
⌧Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”filer,” “smaller reporting company,” and “smaller reporting“emerging growth company” in Rule 12b-2 of the Exchange Act.
|
| |
Large accelerated filer ⌧☒ | Accelerated filer ☐ |
Non-accelerated filer ☐ (Do not check if a smaller reporting company) | 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 ⌧☒
As of June 30,
2014,2017, the aggregate market value of the voting stock held by non-affiliates of the registrant was
$30.7$51.2 billion. For purposes of this information, the outstanding shares of Common Stock owned by directors and executive officers of the registrant
and certain investment companies managed by Charles Schwab Investment Management, Inc. were deemed to be shares of the voting stock held by affiliates.
The number of shares of Common Stock outstanding as of January
30, 2015,31, 2018, was
1,311,054,124.1,346,473,499.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this Form 10-K incorporates certain information contained in the registrant’s definitive proxy statement for its annual meeting of stockholders, to be held May
13, 2015,15, 2018, by reference to that document.
THE CHARLES SCHWAB CORPORATION
Annual Report On Form 10-K
For Fiscal Year Ended December 31, 20142017
THE CHARLES SCHWAB CORPORATION
PART I
I
General Corporate Overview
The Charles Schwab Corporation (CSC)
, is a savings and loan holding company, headquartered in San Francisco,
California,California. CSC was incorporated in 1986 and engages, through its subsidiaries
(together(collectively referred to as
Schwab or the
Company, and located in San Francisco except as indicated)Company), in wealth management, securities brokerage, banking,
moneyasset management,
custody, and financial advisory services. At December 31,
2014, the Company2017, Schwab had
$2.46$3.36 trillion in client assets,
9.410.8 million active brokerage accounts,
(a), 1.4 1.6 million corporate retirement plan participants, and 985,0001.2 million banking accounts.
Significant business subsidiaries of CSC include:include the following:
Charles Schwab & Co., Inc. (CS&Co), incorporated in 1971, a securities broker-dealer with over 345 domestic branch offices in 46 states, as well as a branch in the Commonwealth of Puerto Rico. In addition, Schwab serves clients in England, Hong Kong, Singapore, and Australia through various subsidiaries;
Charles Schwab Bank (Schwab Bank), a federal savings bank; and
| ·
|
| • | | Charles Schwab & Co., Inc. (Schwab), which was incorporated in 1971, is a securities broker-dealer with over 325 domestic branch offices in 45 states, as well as a branch in each of the Commonwealth of Puerto Rico and London, England, and serves clients in Hong Kong through one of CSC’s subsidiaries;
|
| ·
| | Charles Schwab Bank (Schwab Bank), which commenced operations in 2003, is a federal savings bank located in Reno, Nevada; and
|
| ·
| | Charles Schwab Investment Management, Inc. (CSIM), which is the investment advisor for Schwab’s proprietary mutual funds referred to as the Schwab(Schwab Funds®,) and Schwab’s exchange-traded funds referred to as the Schwab(Schwab ETFs™). |
The Company
Schwab provides financial services to individuals and institutional clients through two segments – Investor Services and Advisor Services. The Investor Services segment provides retail brokerage and banking services to individual investors
and retirement plan services,
andas well as other corporate brokerage
services.services, to businesses and their employees. The Advisor Services segment provides custodial, trading,
banking, and support services,
to independent investment advisors (IAs), andas well as retirement business services, to independent
registered investment advisors (RIAs), independent retirement
plan advisors, and
recordkeepers whose plan assets are held at Schwab Bank.recordkeepers. These services are further described in the segment discussion below.
For financial information by segment for the three years ended December 31, 2014, see “Item 8 – Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – 23. Segment Information.”
As of December 31,
2014, the Company2017, Schwab had full-time, part-time,
and temporary employees, and persons employed on a contract basis that represented the equivalent of
about 14,600approximately 17,600 full-time employees.
Unless otherwise indicated, the terms “Schwab,” “the Company,” “we,” “us,” or “our” mean CSC together with its consolidated subsidiaries.
Business AcquisitionsIn December 2012, the Company acquired ThomasPartners, Inc., a growth and dividend income-focused asset management firm. For additional information pertaining to the Company’s acquisition of ThomasPartners, Inc., see “Item 8 – Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – 24. Business Acquisition.”
In September 2011, the Company acquired optionsXpress Holdings, Inc. (optionsXpress), an online brokerage firm primarily focused on equity options and futures. The optionsXpress® brokerage platform provides active investors and traders trading tools, analytics and education to execute a variety of investment strategies. optionsXpress, Inc., a wholly-owned subsidiary of optionsXpress, is a securities broker-dealer.
In November 2010, the Company acquired substantially all of the assets of Windward Investment Management, Inc., an investment advisory firm that managed diversified investment portfolios comprised primarily of exchange-traded fund securities. As a result of the acquisition, Windhaven Investment Management, Inc. (Windhaven®) was formed as a wholly-owned subsidiary of Schwab Holdings, Inc.
(a) Accounts with balances or activity within the preceding eight months.
THE CHARLES SCHWAB CORPORATION
Business Strategy and Competitive Environment
The Company’s stated
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 isremains clear – to champion every client’s goals with passion and integrity, believingintegrity. Guided by this purpose and the best long-termaspiration of creating the most trusted leader in investment services, management has adopted a strategy is one that puts clients first.described as “Through Clients’ Eyes.”
Under this approach, our strategic goals are focused on putting clients’ perspectives, needs, and desires at the forefront. Because investing plays a fundamental role in building financial security,
the Company striveswe strive to deliver a better investing experience for
itsour clients – individual investors and the people and institutions who serve them – by disrupting longstanding industry practices on their behalf and providing superior service.
The Company aimsWe aim to offer a broad range of products and solutions to
choose from, including relevant and actionable advice,meet client needs with a focus on transparency and
convenience.value. In addition, management works to
leverage Companycouple Schwab’s scale and resources
as well aswith ongoing expense discipline to
help keep costs low and ensure that
clientproducts and solutions are
both affordable
andas well as responsive to
client needs.
The Finally, we seek to maximize our market valuation and stockholder returns over time.
Management estimates that investable wealth in the U.S. currently exceeds $30 trillion, which means the Company’s $3.36 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, generate earnings growth and build long-term stockholder value.
THE CHARLES SCHWAB CORPORATION
Within Investor Services, our competition in serving individual investors includes a wide range of brokerage, wealth management, and asset management firms, as well as banks and trust companies. In the Advisor Services arena, we compete with institutional custodians, traditional and discount brokers, banks and investment advisory firms, and trust companies.
Across both segments, our key competitive advantages are:
Scale and Size of the Business – As one of the largest investment services firms in the United States (U.S.), we are able to spread operating costs, amortize new investments over a large base of clients, and have the resources to evolve capabilities to meet client needs.
Operating Efficiency – Coupled with scale, our operating efficiency and sharing of infrastructure across different businesses creates a cost advantage that enables us to competitively price products and services while profitably serving these investorsmany different client channels.
Operating Structure – Adding bank and competing forasset management capabilities to the broker-dealers helps serve a wider array of client needs, thereby deepening client relationships, enhancing the stability of client assets, and enabling diversified revenue streams.
Brand and Corporate Reputation – In an industry dependent on trust, Schwab’s reputation and brand across multiple constituents enables us to attract clients and employees while credibly introducing new products to the market.
Service Culture – Delivering a great client experience earns the trust and loyalty of clients and increases the likelihood that those clients will refer others.
Willingness to Disrupt – Management’s willingness to challenge the status quo to benefit clients fosters innovation and continuous improvement, which helps to attract more clients and assets.
Sources of Net Revenues
Our major sources of net revenues are net interest revenue, asset management and administration fees, and trading revenue. These revenue streams are supported by the combination of bank, broker-dealer, and asset management operating subsidiaries, each of which brings specific capabilities that enable us to provide clients with the products and services they are looking for.
Net interest revenue is the difference between interest generated on interest-earning assets and interest paid on funding sources, the majority of which is derived from client cash balances held by Schwab as part of the clients’ overall relationship with the Company. While certain client cash balances are held on CS&Co’s balance sheet or swept to our money market funds, a substantial amount of existing cash balances and most new client cash inflows are swept to a banking subsidiary. Over time, as supporting capital has been available, we have been directing a growing percentageproportion of client cash sweep balances to a banking subsidiary relative to those going to the broker-dealer or money market funds. This shift has been effected through changes to default sweep options and the periodic bulk transfer of larger balances. Bank sweep balances have access to Federal Deposit Insurance Corporation (FDIC) insurance protection, as allowed, and provide us with greater flexibility in terms of options for investing the cash and administering the interest rate paid.
The majority of asset management and administration fees are earned from proprietary money market mutual funds, proprietary and third-party mutual funds and exchange-traded funds (ETFs), and fee-based advisory solutions.
Trading revenue includes commissions earned for executing trades for clients in individual equities, options, futures, fixed income securities, and certain third-party mutual funds and ETFs, as well as principal transaction revenue earned primarily from actions to support client trading in fixed income securities.
Products and Services
We offer a broad range of products to address our clients’ varying investment and financial needs. Examples of these product offerings include the following:
Brokerage – an array of full-feature brokerage accounts with margin lending, options trading, and cash management capabilities including third-party certificates of deposit;
| |
| • | Mutual funds – third-party mutual funds through the Mutual Fund Marketplace®, including no-transaction fee mutual funds through the Mutual Fund OneSource® service, which also includes proprietary mutual funds, plus mutual fund trading and clearing services to broker-dealers; |
THE CHARLES SCHWAB CORPORATION
Exchange-traded funds – an extensive offering of ETFs, including many proprietary and third-party ETFs available without a commission through Schwab ETF OneSource™;
Advice solutions – managed portfolios of both proprietary and third-party mutual funds and ETFs, separately managed accounts, customized personal advice for tailored portfolios, specialized planning, and full-time portfolio management;
Banking – checking and savings accounts, first lien residential real estate mortgage loans (First Mortgages), home equity lines of credit (HELOCs), and pledged asset lines (PALs); and
Trust – trust custody services, personal trust reporting services, and administrative trustee services.
This full array of investing services is made available through two business segments – Investor Services and Advisor Services. Schwab’s major sources of revenues are generated by both of the investable wealthreportable segments. Revenue is attributable to a reportable segment based on which segment has the primary responsibility for serving the client. The accounting policies of the reportable segments are the same as those described in “Item 8 – Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements” (Item 8) – Note 2. For financial information related to the Company’s reportable segments, see “Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Results of Operations” (Item 7) and Item 8 – Note 22.
Investor Services
Charles Schwab initially founded the Company over 40 years ago to provide individual investors with access to the financial markets at a reasonable cost. The Company has been expanding offerings over time in response to client needs, aiming to provide a compelling and often disruptive solution in the U.S.,marketplace. As products and services have evolved over the Company offersyears, the Investor Services segment has expanded and now includes the Retail Investor, Retirement Plan Services, Mutual Fund Clearing Services, and Off-Platform Sales business units.
Through the Retail Investor business unit, we offer individual investors a multi-channel service delivery model, which includes online, mobile, telephonic,telephone, and branch capabilities. Under this model, the Company can offerWe provide personalized service at competitive prices while giving clients the choice of where, when, and how they do business with the Company.us. Financial Consultants (FCs) in Schwab’s branches and regional telephone service centers are staffed with trained and experienced financial consultants (FCs) focusedfocus on building and sustaining client relationships. The Company offersWe have the ability to meet client investing needs through a single ongoing point of contact, even as those needs change over time. In particular, management believesWe believe that the Company’sthis ability to providegive those clients seeking help, guidance, or advice with an integrated, individually tailored solution – ranging from occasional consultations to an ongoing relationship with a Schwab FC or an IAindependent RIA in the Schwab Advisor Network® – is a competitive strength compared to the more fragmented or limited offerings of other firms.The Company’s online, mobile, and telephonic channels provide
Our service delivery model provides quick and efficient access to an extensive array of information, research, tools, trade execution, and administrative services, which clients can access according to their needs. For example, clients that trade more actively can use these channels to access highly competitive pricing, expert tools, and extensive service capabilities – including experienced, knowledgeable teams of trading specialists, and integrated product offerings.
Individuals investing for retirement through 401(k) plans can take advantage of the Company’s bundled offering of multiple investment choices, education, and third-party advice. Management also believes the Company is able to compete with the wide variety of financial services firms striving to attract individual client relationships by complementing these capabilities with
the extensive array of investment, banking, and lending products and services described in the following section.In the IA arena, the Company competes with institutional custodians, traditional and discount brokers, banks, investment advisory firms, and trust companies. Management believes that its Advisor Services segment can maintain its market leadership position primarily through the efforts of its expanded sales and support teams, which are dedicated to helping IAs grow, compete, and succeed in serving their clients. In addition to focusing on superior service, Advisor Services competes by utilizing technology to provide IAs with a highly-developed, scalable platform for administering their clients’ assets easily and efficiently. Advisor Services sponsors a variety of national, regional, and local events designed to help IAs identify and implement better ways to grow and manage their practices efficiently.
Another important aspect of the Company’s ability to compete is its ongoing focus on efficiency and productivity, as lower costs give the Company greater flexibility in its approach to pricing and investing for growth. Management believes that this flexibility remains important in light of the competitive environment, in which a number of competitors offer reduced online trading commission rates and low expense ratios on certain classes of mutual funds and exchange-traded funds. Additionally, the Company’s nationwide marketing effort is an important competitive tool because it reinforces the attributes of the Schwab® brand.
Products and Services
The Company offers a broad range of products to address individuals’ varying investment and financial needs. Examples of these product offerings include:
| ·
| | Brokerage – an array of full-feature brokerage accounts; individual retirement accounts; retirement plans for small to large businesses; 529 college savings accounts; designated brokerage accounts; equity incentive plan accounts; and margin loans, as well as access to fixed income securities, equity and debt offerings, options, and futures;
|
THE CHARLES SCHWAB CORPORATION
| ·
| | Mutual funds – third-party mutual funds through Mutual Fund Marketplace®, including no-load mutual funds through the Mutual Fund OneSource® service, proprietary mutual funds from two fund families – Schwab Funds® and Laudus Funds®, other third-party mutual funds, and mutual fund trading and clearing services to broker-dealers;
|
| ·
| | Exchange-traded funds (ETFs) – third-party and proprietary ETFs, including Schwab ETFs, Schwab ETF OneSource™, and separately managed portfolios of ETFs;
|
| ·
| | Advice solutions – separately managed accounts, customized personal advice for tailored portfolios, and specialized planning and full-time portfolio management;
|
| ·
| | Banking – checking accounts linked to brokerage accounts, savings accounts, certificates of deposit, demand deposit accounts, first lien residential real estate mortgage loans (First Mortgages), home equity loans and lines of credit (HELOCs), personal loans and entity lending collateralized by securities; and
|
| ·
| | Trust – trust custody services, personal trust reporting services, and administrative trustee services.
|
These products, and the Company’s full array of investing services, are made available through its two segments – Investor Services and Advisor Services. The Company’s major sources of revenues are generated by both of the Company’s reportable segments. Revenue is attributable to a reportable segment based on which segment has the primary responsibility for serving the client. The accounting policies of the Company’s reportable segments are the same as those described in “Item 8 – Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – 2. Summary of Significant Accounting Policies.” For financial information related to the Company’s reportable segments, see “Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Results of Operations – Segment Information,” and “Item 8 – Financial Statements and Supplementary Data – Notes to the Consolidated Financial Statements – 23. Segment Information.”
Investor Services
Through the Investor Services segment, the Company provides retail brokerage and banking services to individual investors. The Company offers research, analysis tools, performance reports, market analysis, and educational material to all clients. Clients looking for more guidance have access to online portfolio planning tools, professional advice from Schwab’s portfolio consultants who can help develop an investment strategy and carry out investment and portfolio management decisions, as well as a range of fully delegated managed solutions that provide ongoing portfolio management.
investment and banking products.
Schwab strives to educate and assist clients in the development of investment plans.reaching their financial goals. Educational tools include workshops, webcasts, interactive courses, and online information about investing, from which Schwab does not earn revenue. Additionally, Schwab provideswe provide various internet-basedonline research and analysis tools that are designed to help clients achieve better investment outcomes. As an example of such tools, Schwab Equity Ratings® is a quantitative model-based stock rating system that provides all clients with ratings on approximately 3,000 stocks, assigning each equity a single grade: A, B, C, D, or F. Schwab Equity Ratings International®, an international ranking methodology, covers stocks of approximately 4,000 stocks in 27 foreign equity markets.companies.
Clients may
needseek specific investment recommendations, either from time to time or on an ongoing basis.
The CompanySchwab provides clients seeking advice with
customizedpersonalized solutions.
The Company’sOur approach to advice is based on long-term investment strategies and guidance on portfolio diversification and asset allocation. This approach is designed to be offered consistently across all of Schwab’s delivery channels.
Schwab Private Client
TM features a personal advice relationship with a designated portfolio consultant,Portfolio Consultant, supported by a team of investment professionals who provide individualized service, a customized investment strategy developed in collaboration with the client, and ongoing guidance and execution.
THE CHARLES SCHWAB CORPORATION
For clients seeking a relationship in which investment decisions are fully delegated to a financial professional, the CompanySchwab offers several alternatives. The Company providesWe provide investors access to professional investment management in a diversified account that is invested exclusively in either mutual funds or ETFs through the Schwab Managed PortfoliosTM and Windhaven Investment Management, Inc. (Windhaven®), or equity securities and ETFs through ThomasPartners® programs. The CompanyWe also refersrefer investors who want to utilize a specific third-party money manager to direct a portion of their investment assets to the Schwab Managed Account program. Schwab Intelligent Portfolios®, available since 2015, are for clients who are looking to have their assets professionally managed via a fully automated online investment advisory service. In addition,late 2016, we introduced Schwab Intelligent Advisory® to offer our clients a hybrid advisory service which combines live credentialed professionals and algorithm-driven technology to make financial and investment planning more accessible to investors. Finally, clients who want the assistance of an independent professional in managing their financial affairs may be referred to IAsRIAs in the Schwab Advisor Network®.Network. These IAsRIAs provide personalized portfolio management, financial planning, and wealth management solutions.
THE CHARLES SCHWAB CORPORATION
To meet the specific needs of clients who actively trade, actively, Schwab and optionsXpress, Inc. both offeroffers integrated Web-web- and software-based trading platforms, which incorporate intelligent order routing technology, real-time market data, options trading, premium stock orand futures research, and multi-channel access, as well as sophisticated account and trade management features, risk management tools,and decision support tools, and dedicated personal support.
For
U.S. clients wishing to invest in foreign equities,
the Company offerswe offer a suite of global investing capabilities, including online access to certain foreign equity markets with the ability to trade in their local currencies. In addition,
the CompanySchwab serves both foreign investors and non-English-speaking U.S. clients who wish to trade or invest in U.S. dollar-based securities. In the U.S.,
the CompanySchwab serves
Chinese-Mandarin-, Cantonese-, Spanish-, and Vietnamese-speaking clients through a combination of its branch offices,
and Web-basedweb-based and telephonic services.
The Investor Services segment
We also
includes the Retirement Plan Services, Corporate Brokerage Services, Stock Plan Services, and Compliance Solutions business units. Retirement Plan Services offers a bundled 401(k) retirement plan product that provides plan sponsors a wide array of investment options, trustee or custodial services, and participant-level recordkeeping. Plan design features, which increase plan efficiency and achieve employer goals, are also offered, such as automatic enrollment, automatic fund mapping at conversion, and automatic contribution increases. In 2012, the Company launched Schwab Index Advantage®, a unique 401(k) plan offer designed to lower costs, simplify investing and help workers better prepare for retirement. Services also include support for Roth 401(k) accounts and profit sharing and defined benefit plans. The Company provides a robust suite of tools to plan sponsors to manage their plans, including plan-specific reports, studies and research, access to legislative updates and benchmarking reports that provide perspective on their plan’s features compared with overall industry and segment-specific plans. Participants in bundled plans serviced by the Company receive targeted education materials, have access to electronic tools and resources, may attend onsite and virtual seminars, and can receive third-party advice delivered by Schwab. This third-party advice service is delivered online, by phone, or in person, including recommendations based on the core investment fund choices in their retirement plan and specific recommended savings rates.Corporate Brokerage Services provides specialty brokerage-related services to corporate clients through its Corporate Brokerage Retirement Services business and mutual fund clearing services to banks, brokerage firms and trust companies, and also offers proprietary mutual funds, ETFs, collective trust funds, and investment management outside the Company to institutional channels. Corporate Brokerage Retirement Services serves independent recordkeepers seeking a custodian for retirement plan assets. Schwab provides custody services tailored for retirement plans seeking a low-cost solution. Plans held at Schwab are either self-trusteed or trusteed by a separate, independent trustee. Corporate Brokerage Retirement Services also offers the Schwab Personal Choice Retirement Account®, a self-directed brokerage offering for retirement plans and the Company Retirement Account, a brokerage account designed to hold the assets of an individually designed business retirement plan.
Stock Plan Services offers equity compensation plan sponsors full-service recordkeeping for stock plans:plans, stock options, restricted stock, performance shares, and stock appreciation rights. Specialized services for executive transactions and reporting, grant acceptance tracking, and other services are offered to employers to meet the needs of administering the reporting and compliance aspects of an equity compensation plan.
Compliance Solutions provides solutions In addition, we provide software and services for compliance departments of regulated companies and firms with special requirements to monitor employee personal trading, including trade surveillance technology.
Our Retirement Plan Services business unit offers a bundled 401(k) retirement plan product that provides retirement plan sponsors a wide array of investment options, trustee or custodial services, and participant-level recordkeeping. Retirement plan design features, which increase plan efficiency and achieve employer goals, are also offered, such as automatic enrollment, automatic fund mapping at conversion, and automatic contribution increases. In addition to an open architecture investment platform, we offer access to low cost index mutual funds and ETFs. Individuals investing for retirement through 401(k) plans can take advantage of bundled offerings of multiple investment choices, education, and third-party advice. This third-party advice service is delivered online, by phone, or in person, including recommendations based on the core investment fund choices in their retirement plan and specific recommended savings rates. Services also include support for Roth 401(k) accounts, profit sharing, and defined benefit plans.
Lastly, the Mutual Fund Clearing Services business unit provides custody, recordkeeping, and trading services to banks, brokerage firms, and trust companies, and the Off-Platform Sales business unit offers proprietary mutual funds, ETFs, and collective trust funds outside the Company. They are included within the Investor Services segment given their leveraging of the products and services offered to individual investors.
More than twenty-five years ago, Schwab supported a small group of entrepreneurial advisors who challenged the industry by creating independent firms. Through the Advisor Services segment,
Schwab has become the
Company provideslargest provider of custodial, trading,
banking, and support services to
IAs.To attractRIAs and serve IAs,their clients. We also provide retirement business services to independent retirement advisors and recordkeepers. Management believes that we can maintain our market leadership position primarily through the Company has a dedicatedefforts of our sales, forcesupport, and business consulting service teams, assignedwhich are dedicated to meethelping RIAs grow, compete, and succeed in serving their needs. IAsclients. In addition to focusing on superior service, we utilize technology to provide RIAs with a highly-developed, scalable platform for administering their clients’ assets easily and efficiently. Advisor Services sponsors a variety of national, regional, and local events designed to help RIAs identify and implement better ways to expand and efficiently manage their practices.
THE CHARLES SCHWAB CORPORATION
RIAs who custody client accounts at Schwab may use proprietary software that provides them with up-to-date client account information as well as trading capabilities. The Advisor Services website is the core platform for
IAsRIAs to conduct daily business activities online with Schwab, including
submittingviewing and
retrievingmanaging client account information and
viewingaccessing news and market information.
This platformThe website provides
IAsaccount servicing capabilities for RIAs, including account opening, money movement, transfer of assets, trading, checking status, and communicating with
a comprehensive suite of electronic and paper-based reporting capabilities.our service team. The
Company offers online cashiering services, as well as internet-based eDocuments sites for both IAs and
THE CHARLES SCHWAB CORPORATION
their clients that providesite provides multi-year archiving of online statements, trade confirms, and tax reports, along with document search capabilities.
To help
IAsRIAs grow and manage their practices,
the Company offerswe offer a variety of services, including
accessbusiness management and technology and operations consulting on a variety of topics critical to
insights on practice marketingan RIA’s success including strategic business planning, client segmentation, growth strategies, technological strategies, and
business development, business strategy and planning, and transition support.succession planning. The
Company maintains aAdvisor Services website
that provides interactive tools, educational content, and research reports to assist advisors thinking about establishing and managing their own independent practices.
The Company offers
We also offer an array of services to help advisors establish their own independent practices through the Business Start-up Solutions package.
For some IAs this includesThese services include access to dedicated service teams and outsourcing of back-office operations, as well as third-party firms who provide assistance with real estate, errors and omissions insurance, and company benefits.
The Company offersWe provide a variety of educational materials, programs, and events to IAsRIAs seeking to expand their knowledge of industry issues and trends, as well as sharpen their individual expertise and practice management skills. The Company updatesWe update and sharesshare market research on an ongoing basis, and it holdshold a series of events and conferences every year to discuss topics of interest to IAs,RIAs, including business strategies and best practices. The CompanySchwab sponsors the annual IMPACT® conference, which provides a national forum for the Company, IAs,RIAs, and other industry participants to gather and share information and insights.insights, as well as a multitude of smaller events across the country each year.IAs
RIAs and their clients have access to a broad range of
the Company’sour products and services, including individual securities, mutual funds, ETFs, managed accounts,
cash products, and
cash products.bank lending. By functioning as the custodian, Schwab earns revenue associated with the underlying client assets invested in our products and utilization of the services we provide. In this capacity, we do not charge an explicit custodial fee.
The Advisor Services segment also includes the Retirement Business Services and Corporate Brokerage Retirement Services business unit.units. Retirement Business Services provides trust, custody, and retirement business services to independent retirement plan advisors and independent recordkeepers. PlanRetirement plan assets are held at the Business Trust division of Schwab Bank. The Company and independent retirement plan providers work together to serve plan sponsors,sponsors; combining the consulting and administrative expertise of the administrator with the Company’sour investment, technology, trust, and custodial services. Retirement Business Services also offers the Schwab Personal Choice Retirement Account®, a self-directed brokerage offering for retirement plans.
Corporate Brokerage Retirement Services serves plan sponsors, advisors, and independent recordkeepers seeking a brokerage-based account to hold retirement plan assets. Retirement plans held at Schwab are either self-trusteed or trusteed by a separate, independent trustee. Corporate Brokerage Retirement Services also offers the Schwab Personal Choice Retirement Account®, and the Company Retirement Account, both of which are self-directed brokerage-based solutions designed to hold the assets of company-sponsored retirement plans.
As a participant in the securities, banking and financial services industries, Schwab is subject to extensive regulation under both federal and state laws by governmental agencies, supervisory authorities, and self-regulatory organizations (SROs). We are also subject to oversight by regulatory bodies in other countries in which we operate. These regulations affect our business operations and impose capital, client protection, and market conduct requirements.
As a result of the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010 (Dodd-Frank), the adoption of implementing regulations by the federal regulatory agencies, and other recent regulatory reforms, we have experienced significant changes in the laws and regulations that apply to us, how we are regulated, and regulatory expectations in the areas of compliance, risk management, corporate governance, operations, capital, and liquidity.
THE CHARLES SCHWAB CORPORATION
Holding Company and Bank Regulation
CSC is a savings and loan holding company and Schwab Bank, CSC’s depository institution subsidiary, is a federal savings bank. CSC is subject to supervisionregulated, supervised, and regulationexamined by the Board of Governors of the Federal Reserve System (the Federal(Federal Reserve). CSC’s principal depository institution subsidiary, Schwab Bank, is subject to supervisiona federal savings bank and regulationis regulated, supervised, and examined by the Office of the Comptroller of the Currency (the OCC)(OCC), as its primary regulator, the Federal Deposit Insurance Corporation (FDIC), as its deposit insurer, and the Consumer Financial Protection Bureau (CFPB). Collectively,, and the rules and regulations of these regulators cover safety and soundness and consumer protection.FDIC. CSC and Schwab Bank are also subject to regulation and to various requirements and restrictions under state and other federal laws. For
This regulatory framework is designed to protect depositors and consumers, the safety and soundness of depository institutions and their holding companies, and the stability of the banking system as a whole. This framework affects the activities and investments of CSC and its subsidiaries and gives the regulatory authorities broad discretion in connection with their supervisory, examination and enforcement activities and policies.
Financial Regulatory Reform
Following the enactment of Dodd-Frank, the federal banking agencies have adopted a number of implementing regulations and other regulatory reforms that are significant for CSC and its banking subsidiaries. These regulations are highlighted below.
Basel III Capital and Liquidity Framework
Banking organizations are subject to the regulatory capital rules issued by the Federal Reserve and other U.S. banking regulators, including the OCC and the FDIC. In addition to minimum risk-based capital requirements, banking organizations must hold additional informationcapital, referred to as a capital conservation buffer, to avoid being subject to limits on capital distributions and discretionary bonus payments to executive officers.
The regulatory capital rules provide for a “standardized approach” framework for the regulations applicablecalculation of a banking organization’s regulatory capital and risk-weighted assets. Depository institutions and their holding companies with consolidated total assets of $250 billion or more, or total on-balance-sheet foreign exposure of $10 billion or more, are also required to calculate their regulatory capital and risk-weighted assets using an “advanced approaches” framework and must satisfy the minimum capital requirements under both approaches. Such companies must also maintain a minimum supplementary leverage ratio of at least 3.0%, must include accumulated other comprehensive income (AOCI) in their calculation of their capital ratios, and are subject to certain other enhanced provisions, including additional reporting requirements. CSC Schwab,and its banking subsidiaries are currently only subject to the “standardized approach” framework but will become subject to the “advanced approaches” framework upon exceeding either of the thresholds.
The liquidity coverage ratio (LCR) rule requires banking organizations with consolidated total assets of $250 billion or more, or total on-balance-sheet foreign exposure of $10 billion or more and their depository institution subsidiaries with $10 billion or more in total consolidated assets to hold high quality liquid assets (HQLA) in an amount equal to at least 100% of their projected net cash outflows over the 30-day period, calculated on each business day. Other bank and savings and loan holding companies with total consolidated assets of $50 billion or more are subject to a modified LCR rule requiring them to hold HQLA in an amount equal to at least 70% of their projected net cash outflows over the 30-day period, calculated as of the last business day of the month.
Capital Stress Testing
Savings and loan holding companies and federal savings bank with total consolidated assets of more than $10 billion are required to conduct annual company-run stress tests. Under the Dodd-Frank Act Stress Test (DFAST) rules, CSC (for the first time in 2017) and Schwab Bank
must conduct annual stress tests using certain scenarios and
optionsXpress, Inc., see “Item 8 – Financial Statementsprescribed stress-testing methodologies, report the results to the Federal Reserve and,
Supplementary Data – Notes to Consolidated Financial Statements – 22. Regulatory Requirements.”CSC is required to serve as a source of strength for Schwab Bank. Prior to January 1, 2015, CSC, asBank, the OCC, and publish summaries of the results of their stress tests.
As a savings and loan holding company, wasCSC is not subject to specific statutorythe annual Comprehensive Capital Analysis and Review (CCAR) process, which requires certain financial institutions to submit annual capital requirements. Beginning on January 1, 2015, CSC is subjectplans to new capital requirements set by the Federal Reserve. For further information, see “Item 7 – Management’s DiscussionCSC continues to enhance its stress testing policies, procedures, systems, and Analysisgovernance structures to be consistent with regulatory expectations for a firm of Financial Conditionits size and Resultscomplexity.
THE CHARLES SCHWAB CORPORATION
Insured Depository Institution Resolution Plans
The FDIC requires insured depository institutions with total consolidated assets of
Operations – Current Market and Regulatory Environment and Other Developments.”The securities industry$50 billion or more to submit to the FDIC periodic plans providing for their resolution by the FDIC in the United Statesevent of failure (resolution plans or so-called “living wills”) under the receivership and liquidation provisions of the Federal Deposit Insurance Act. Schwab Bank is required to file with the FDIC an annual resolution plan demonstrating how the bank could be resolved in an orderly and timely manner in the event of receivership such that the FDIC would be able to: ensure that the bank’s depositors receive access to their deposits within one business day; maximize the net present value of the bank’s assets when disposed of; and minimize losses incurred by the bank’s creditors.
Consumer Financial Protection
The CFPB has broad rulemaking, supervisory and enforcement authority for a wide range of federal consumer protection laws relating to financial products. The CFPB has examination and primary enforcement authority over depository institutions with $10 billion or more in consolidated total assets.
Deposit Insurance Assessments
The FDIC’s Deposit Insurance Fund (DIF) provides insurance coverage for certain deposits, generally up to $250,000 per depositor per account ownership type, and is funded by quarterly assessments on insured depository institutions. The FDIC uses a risk-based deposit premium assessment system that, for large insured depository institutions with at least $10 billion in total consolidated assets, uses a scorecard method based on a number of factors, including the institution’s regulatory ratings, asset quality and brokered deposits. The deposit insurance assessment base is calculated as average consolidated total assets minus average tangible equity.
The Dodd-Frank Act (i) raised the minimum reserve ratio for the DIF to 1.35% (from the former minimum of 1.15%) and (ii) required that the DIF’s reserve ratio reach 1.35% by September 30, 2020.
In July 2016, the FDIC imposed a flat-rate quarterly surcharge on insured depository institutions with total assets of $10 billion or more and certain of their bank affiliates to pay for the increase. The surcharge took effect at the same time as a scheduled reduction in the regular FDIC insurance. As a result, Schwab’s banking subsidiaries are now subject to extensive regulation under botha 3 basis point regular assessment on their respective assessment bases (down from 5 basis points) and a new 4.5 basis point surcharge on the amount of their aggregate assessment base in excess of $10 billion that will remain in effect until the earlier of the DIF reaching 1.35% or December 31, 2018. If DIF has not reached 1.35% by such date, the FDIC will impose a shortfall assessment.
Community Reinvestment Act
The Community Reinvestment Act of 1977 (CRA) requires the primary federal bank regulatory agency for each of Schwab’s depository institution subsidiaries to assess the subsidiary’s record in meeting the credit needs of the communities served by the bank, including low- and state laws. CSC’smoderate-income neighborhoods and persons. Institutions are assigned one of four ratings (“outstanding,” “satisfactory,” “needs to improve,” or “substantial noncompliance”). The failure of an institution to receive at least a “satisfactory” rating could inhibit the institution or its holding company from undertaking certain activities, including acquisitions or opening branch offices.
Source of Strength
The Dodd-Frank Act codified the Federal Reserve’s long-held position that a depository institution holding company must serve as a source of financial strength for its subsidiary depository institutions, the so-called “source of strength doctrine.” In effect, the holding company may be compelled to commit resources to support the subsidiary in the event the subsidiary is in financial distress.
THE CHARLES SCHWAB CORPORATION
Broker-Dealer and Investment Advisor Regulation
Schwab’s principal
U.S. broker-dealers are Schwab and optionsXpress, Inc. Schwabbroker-dealer is CS&Co. CS&Co is registered as a broker-dealer with the United States Securities and Exchange Commission (SEC), the fifty states,
and the District of Columbia and Puerto Rico.
optionsXpress, Inc. is registered as a broker-dealer with the SEC, the fifty states, the District of Columbia, Puerto Rico, and the Virgin Islands. SchwabCS&Co and CSIM are registered as investment advisors with the SEC. Additionally,
Schwab and optionsXpress, Inc. areCS&Co is regulated by the Commodities Futures Trading Commission (CFTC) with respect to the commodity
THE CHARLES SCHWAB CORPORATION
futures and commodities trading activities they conductit conducts as an introducing broker and futures commission merchant, respectively.
broker.
Much of the regulation of broker-dealers has been delegated to
self-regulatory organizations (SROs). SchwabSROs. CS&Co is a member of the Financial Industry Regulatory Authority, Inc. (FINRA), the Municipal Securities Rulemaking Board (MSRB), NYSE Arca, and the Chicago Board Options Exchange (CBOE).
optionsXpress, Inc. is also a member of FINRA andIn addition to the
MSRB. TheSEC, the primary regulators of
Schwab and optionsXpress, Inc.CS&Co are FINRA and, for municipal securities, the MSRB. The National Futures Association (NFA) is
Schwab and optionsXpress, Inc.’sCS&Co’s primary regulator for futures and commodities trading activities.
The Company’s business is also subject to oversight by regulatory bodies in other countries in which the Company operates.
The principal purpose of regulating broker-dealers and investment advisors is the protection of clients and
the securities markets. The regulations
to which broker-dealers and investment advisors are subject, cover all aspects of the securities business, including, among other things, sales and trading practices, publication of research, margin lending, uses and safekeeping of clients’ funds and securities, capital adequacy, recordkeeping and reporting, fee arrangements, disclosure to clients, fiduciary duties owed to advisory clients, and the conduct of directors, officers, and employees.
Schwab and optionsXpress, Inc. are both
CS&Co is subject to Rule 15c3-1 under the Securities Exchange Act of 1934 (the Uniform Net Capital Rule) and related SRO requirements. The CFTC and NFA also impose net capital requirements. The Uniform Net Capital Rule specifies minimum capital requirements
that are intended to ensure the general financial soundness and liquidity of broker-dealers.
Because CSC itself is not a registered broker-dealer
and it is not subject to the Uniform Net Capital Rule.
However, if SchwabIf CS&Co fails to maintain specified levels of net capital, such failure could constitute a default by CSC
underof certain debt covenants under
CSC’sits credit agreement.
The Uniform Net Capital Rule
limits broker-dealers’ ability to transfer capital to parent companies and other affiliates. Compliance with the Uniform Net Capital Rule could limit Schwab’s operations and its ability to repay subordinated debt to CSC, which in turn could limit CSC’s ability to repay debt, payprohibits CS&Co from paying cash dividends,
and purchase sharesmaking unsecured advances or loans or repaying subordinated loans if such payment would result in a net capital amount of less than 5% of aggregate debit balances or less than 120% of its
outstanding stock.minimum dollar requirement of $250,000.
In addition to net capital requirements, as
a self-clearing
broker-dealers, Schwab and optionsXpress, Inc. arebroker-dealer, CS&Co is subject to cash deposit and collateral requirements with clearing houses, such as the Depository Trust & Clearing Corporation
(DTCC) and Options Clearing Corporation, which may fluctuate significantly from time to time based upon the nature and size of clients’ trading
activity.Variousactivity and market volatility.
Financial Service Regulation
Bank Secrecy Act of 1970 and USA PATRIOT Act of 2001
CSC and its subsidiaries that conduct financial services activities
of the Company are subject to the Bank Secrecy Act
of 1970 (BSA), as amended by the USA
PatriotPATRIOT Act of 2001, which requires financial institutions to develop
and implement programs reasonably designed to
achieve compliance with these regulations. The BSA and USA PATRIOT Act include a variety of monitoring, recordkeeping and reporting requirements (such as currency transaction reporting and suspicious activity reporting), as well as identity verification and client due diligence requirements which are intended to detect, report and/or prevent money laundering, and the financing of terrorism.
The BSA includes a variety of record-keepingIn addition, CSC and
reporting requirements (such as cash and suspicious activity reporting), as well as due diligence/ know-your-customer documentation requirements. Various activitiesvarious subsidiaries of the Company are
also subject to U.S. sanctions programs administered by the Office of Foreign Assets Control.
Sources of Net RevenuesThe Company’s major sources of net revenues are asset management and administration fees, net interest revenue, and trading revenue. The Company generates asset management and administration fees through its proprietary and third-party mutual fund offerings, as well as fee-based advisory solutions. Net interest revenue is the difference between interest earned on interest-earning assets and interest paid on funding sources, the majority of which is derived from client cash balances. The Company generates trading revenue through commissions earned for executing trades for clients and principal transaction revenue primarily from trading activity in client fixed income securities.
For revenue information by source for the three years ended December 31, 2014, see “Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Results of Operations – Net Revenues.”
The CompanySchwab files annual, quarterly, and current reports, proxy statements, and other information with the SEC. The Company’s SEC filings are available to the public over the Internet on the SEC’s website at http:https://www.sec.gov. You may
THE CHARLES SCHWAB CORPORATION
read and copy any document that the Company files with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at
On the Company’sSchwab’s website, http:https://www.aboutschwab.com, the Company posts the following recent filings as soon as reasonably practicableare posted after they are electronically filed with or furnished to the SEC: the Company’s annual reports on Form 10-K, the Company’s quarterly reports on Form 10-Q, the Company’s current reports on Form 8-K, and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934.
THE CHARLES SCHWAB CORPORATION
In addition, the website also includes the Dodd-Frank stress test results and our regulatory capital disclosures based on Basel III.
All such filings are available free of charge either on the Company’sour website or by request via email (investor.relations@schwab.com), telephone (415-667-1959)(415-667-7000), or mail (Charles Schwab Investor Relations at 211 Main Street, San Francisco, CA 94105).
The Company faces
We face a variety of risks that may affect
itsour operations,
or financial results,
or stock price and many of those risks are driven by factors that
the Companywe cannot control or predict. The following discussion addresses those risks that management believes are the most significant, although there may be other risks that could arise, or may prove to be more significant than expected, that may affect
the Company’sour operations or financial results.
For a discussion of
the Company’sour risk management, including operational risk,
compliance risk, credit risk, market risk,
and liquidity risk,
compliance risk,see Risk Management and
legal risk, see “Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Risk Management.”Capital Management in Part II, Item 7.
Developments in the business, economic, and geopolitical environment could negatively impact
the Company’sour business.
The Company’s
Our business can be adversely affected by the general environment – economic, corporate, securities market, regulatory, and geopolitical developments all play a role in client asset valuations, trading activity, interest rates, and overall investor engagement, and are outside of
the Company’sour control. Deterioration in the housing and credit markets,
reductionsreduction in short-term interest rates, and decreases in securities valuations negatively impact
the Company’sour results of operations and capital resources.
Extensive regulation of the Company’sour businesses limits the Company’s activities and may subject itus to significant penalties.penalties
or limitations on business activities.
As a participant in the securities, banking, and financial services industries,
the Company iswe are subject to extensive regulation under
both federal,
state, and
stateforeign laws by governmental agencies, supervisory authorities and SROs.
Such regulation continuesThe costs and uncertainty related to
grow more extensive and complex, and regulatory proceedingscomplying with such regulations continue to
become more frequent and sanctions more severe. The requirements imposed by the Company’s regulators are designed to ensure the integrity of the financial markets, the safety and soundness of financial institutions, and the protection of clients.increase. These regulations
often serve to limit the Company’s activities by way ofaffect our business operations and impose capital,
customerclient protection, and market conduct requirements
and restrictions on
the business activities that the Company may conduct.us.
In addition to specific banking laws and regulations,
the Company’sour banking regulators have broad discretion in connection with their supervisory and enforcement activities and examination policies and could require CSC and/or
Schwab Bankour banking subsidiaries to hold more capital, increase liquidity, or limit their ability to pay dividends or CSC’s ability to repurchase
or redeem shares. The banking regulators could also limit
the Company’sour ability to grow, including adding assets, launching new products,
making acquisitions, and undertaking strategic
investments.investments, could limit our banking subsidiaries’ ability to accept deposits swept from client brokerage accounts and brokered deposits and could prevent us from pursuing our business strategy.
Despite
the Company’sour efforts to comply with applicable
regulations,legal requirements, there are a number of risks, particularly in areas where applicable
laws or regulations may be unclear or where regulators
could revise their previous guidance. Any enforcement actions or other proceedings brought by
the Company’sour regulators against
the Companyus or
itsour affiliates, officers or employees could result in fines, penalties, cease and desist orders, enforcement actions, suspension,
disqualification or expulsion, or other disciplinary sanctions,
THE CHARLES SCHWAB CORPORATION
including limitations on the Company’sour business activities, any of which could harm the Company’sour reputation and adversely affect the Company’sour results of operations and financial condition.
While
the Company maintainswe maintain systems and procedures designed to ensure that
it complieswe comply with applicable laws and regulations, violations could occur. In addition, some legal/regulatory frameworks provide for the imposition of fines or penalties for noncompliance even though the noncompliance was inadvertent or unintentional and even though systems and procedures reasonably designed to prevent violations were in place at the time. There may be other negative consequences resulting from a finding of noncompliance, including restrictions on certain activities. Such a finding may also damage
the Company’sour reputation
and our relationships with our regulators and could restrict the ability of institutional investment managers to invest in
the Company’sour securities.
THE CHARLES SCHWAB CORPORATION
Legislation or changes in rules and regulations could negatively
impact the Company’saffect our business and financial results.
New legislation,
rule changes,rules, regulations and guidance, or changes in the interpretation or enforcement of existing federal, state,
foreign and SRO rules,
regulations and
regulations,guidance, including changes relating to
money market mutual funds,
and broker-dealer fiduciary duties
and regulatory treatment of deposit accounts, may directly affect the operation and profitability of
the CompanySchwab or its specific business lines.
TheOur profitability
of the Company could also be affected by rules and regulations
whichthat impact the business and financial communities generally, including changes to the laws governing taxation, electronic commerce, client privacy and security of client data. In addition, the rules and regulations could result in limitations on the lines of business
the Company conducts,we conduct, modifications to
the Company’sour business practices,
increased capital requirements, or additional costs.Financial reforms and related regulations may affect the Company’s business activities, financial position and profitability.
There have been extensive changes to the laws regulating financial services firms as a result of the enactment of the “Dodd-Frank Wall Street Reform and Consumer Protection Act” (the Dodd-Frank Act). Among other changes:
| ·
| | New regulatory capital rules were implemented. The rules, which apply to CSC and Schwab Bank, became effective on January 1, 2015, with certain provisions subject to phase-in periods. The rules establish more restrictive capital definitions, higher risk-weightings for certain asset classes, higher minimum capital ratios and capital buffers. Failure to meet the minimum capital requirements could result in certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a negative impact on the Company. In addition, failure to meet the capital buffer (when phased in) will result in restrictions on capital distributions and discretionary cash bonus payments to executive officers.
|
| ·
| | The Federal Reserve issued a modified liquidity coverage ratio (LCR) that applies to CSC. Under the modified LCR, a depository institution holding company is required to maintain high-quality liquid assets in an amount related to its total estimated net cash outflows over a prospective period. The transition period for the modified LCR begins on January 1, 2016 and CSC is required to be fully compliant by January 1, 2017.
|
| ·
| | Schwab Bank is required to conduct annual capital adequacy stress tests on its operations and beginning in 2015, publicly disclose a summary of the results. CSC expects to become subject to a similar rule in the future.
|
| ·
| | The CFPB was established, which has broad rulemaking, supervisory and enforcement authority over consumer products, including deposit products, mortgages and home-equity loans. States are permitted to adopt stricter consumer protection laws and state attorney generals can enforce consumer protection rules issued by the CFPB.
|
Implementation of the legislation is ongoing and significant rule-making and interpretations remain to be completed. For example, rules relating to a minimum net stable funding ratiowhich will require financial institutions to have a stable funding structure over a one-year horizon have not yet been proposed. In addition, the legislation mandates multiple studies, which could result in additional legislative or regulatory action. CSC will continue to review the impact that proposed rule-making will have on the Company’s business, financial condition, and results of operations, as such rule-making is issued.
The legislation gives the SEC discretion to adopt rules regarding standards of conduct for broker-dealers providing investment advice to retail customers. The various studies required by the legislation could result in additional rulemaking or legislative action, which could impact the Company’s business and financial results.
The changes resulting from the legislation may impact the profitability of the Company’s business activities, require changes to certain of its business practices, impose upon the Company more stringent capital and liquidity and leverage ratio
THE CHARLES SCHWAB CORPORATION
requirements, increased deposit insurance assessments or otherwise adversely affect the Company’s business.additional costs. These changes may also require the Companyus to invest significant management attention and resources to evaluate and make necessary changes.
Technologychanges to our compliance, risk management, treasury and operational failures or errorsoperations functions.
Failure to meet capital adequacy and liquidity guidelines could affect our financial condition.
CSC, together with its banking and broker-dealer subsidiaries, must meet certain capital and liquidity standards, subject
to qualitative judgments by regulators about the
Company to losses, litigation,adequacy of Schwab’s capital and
regulatory actions.The Company faces operational risk, which is the potential for loss due to inadequate or failedSchwab’s internal processes, systems, and firms or exchanges handling client orders, or from external events and relationships impacting the Company and/or anyassessment of its key business partners and vendors. This risk also includes the risk of human error, execution errors, errors in models such as those used for asset management, capital management, risk management and compliance, employee misconduct, unauthorized trading, external fraud, computer viruses, distributed denial of service attacks, terrorist attacks, natural disaster, power outage, capacity constraints, software flaws and similar events. For example, the Companyneeds. The Uniform Net Capital Rule limits CS&Co’s ability to transfer capital to CSC and other financial institutions have been the target of various denial of service attacks that have, in certain circumstances, made websites, mobile applicationsaffiliates. New regulatory capital, liquidity, and email unavailable for periods of time. It could take several hoursstress testing requirements may limit or moreotherwise restrict how we utilize our capital, including paying dividends, stock repurchases, and redemptions, and may require us to restore full functionalityincrease our capital and/or liquidity or to the Company’s technologylimit our growth. Failure by either CSC or other operating systems in the event of an unforeseen event which could affect the Company’s abilityits banking subsidiaries to process and settle client transactions. Moreover, instances of fraud or other misconduct, including improper use or disclosure of confidential client, employee, or company information, might also negatively impact the Company’s reputation and client confidence in the Company, in addition to any direct losses that might result from such instances. Despite the Company’s efforts to identify areas of risk, oversee operational areas involving risk, and implement policies and procedures designed to manage these risks, there can be no assurance that the Company will not suffer unexpected losses, reputational damage or regulatory action due to technology or other operational failures or errors, including those of its vendors or other third parties.
While the Company devotes substantial attention and resources to the reliability, capacity and scalability of its systems, extraordinary trading volumes could cause the Company’s computer systems to operate at unacceptably slow speeds or even fail, affecting the Company’s ability to process client transactions and potentially resulting in some clients’ orders being executed at prices they did not anticipate. Disruptions in service and slower system response timesmeet minimum capital requirements could result in substantial lossescertain mandatory and decreased client satisfaction. The Company is also dependentadditional discretionary actions by regulators that, if undertaken, could have a negative impact on the integrity and performanceus. In addition, failure by CSC or our banking subsidiaries to maintain a sufficient amount of securities exchanges, clearing houses and other intermediariescapital to which client orders are routed for execution and settlement. Systems failures and constraints and transaction error at such intermediaries couldsatisfy their capital conservation buffer requirements (as phased in) would result in delaysrestrictions on our ability to make capital distributions and erroneousdiscretionary cash bonus payments to executive officers. Any requirement that we increase our regulatory capital, replace certain capital instruments which presently qualify as Tier 1 capital, or unanticipated execution prices, cause substantial losses for the Company and for its clients, and subject the Company to claims from its clients for damages.
A significant decrease in the Company’sincrease regulatory capital ratios or liquidity, could negatively affect the Company’srequire us to liquidate assets, deleverage or otherwise change our business and financial management as well as reduce client confidence in the Company.
Maintaining adequate liquidity is crucial to the business operations of the Company, including margin lending, mortgage lending, and transaction settlement, among other liquidity needs. The Company meets its liquidity needs primarily through cash generated by client activity and operating earnings, as well as cash provided by external financing. Fluctuations in client cash and/or deposit balances, as well as changes in market conditions, may affect the Company’s ability to meet its liquidity needs. A reduction in the Company’s liquidity position could reduce client confidence in the Company, which could result in the loss of client accounts. In addition, if the Company’s broker-dealer or depository institution subsidiaries fail to meet regulatory capital guidelines, regulators could limit the subsidiaries’ operations or their ability to upstream funds to CSC, which could reduce CSC’s liquidity and adversely affect its ability to repay debt and pay cash dividends. In addition, CSC may need to provide additional funding to such subsidiaries.
Factorsinvestment plans, which may adversely affect our financial results. Issuing additional common stock would dilute the Company’s liquidity position include a reductionownership of existing stockholders.
With $243.3 billion in
cash held in banking or brokerage client accounts, a dramatic increase in the Company’s client lending activities (including margin, mortgage-related, and personal lending), unanticipated outflows of company cash, increased capital requirements, other regulatory changes or a loss of market or customer confidence in the Company. Schwab may also experience temporary liquidity demands due to timing differences between clients’ transaction settlements and the availability of segregated cash balances.When cash generated by client activity and operating earnings is not sufficient for the Company’s liquidity needs, the Company must seek external financing. During periods of disruptions in the credit and capital markets, potential sources of external financing could be reduced, and borrowing costs could increase. Although CSC and Schwab maintain committed and uncommitted, unsecured bank credit lines and CSC has a commercial paper issuance program, as well as a universal
THE CHARLES SCHWAB CORPORATION
shelf registration statement filed with the SEC, financing may not be available on acceptable terms orconsolidated total assets at all due to market conditions or disruptions in the credit markets. In addition, a significant downgrade in the Company’s credit ratings could increase its borrowing costs and limit its access to the capital markets.
The Company may suffer significant losses from its credit exposures.
The Company’s businessesDecember 31, 2017, we are currently only subject to the risk that a client, counterparty“standardized approach” capital framework of Basel III and modified liquidity requirements. When our consolidated total assets equal or issuerexceed $250 billion, we will fail to perform its contractual obligations, or that the value of collateral held to secure obligations will prove to be inadequate. While the Company has policies and procedures designed to manage this risk, the policies and procedures may not be fully effective. The Company’s exposure mainly results from margin lending, clients’ options trading, securities lending, mortgage lending, its role as a counterparty in financial contracts and investing activities, and indirectly from the investing activities of certain of the proprietary funds that the Company sponsors.
When clients purchase securities on margin or trade options or futures, the Company isbecome subject to the “advanced approaches” framework, including being subject to a supplementary leverage ratio, the inclusion of AOCI in regulatory capital, the unmodified LCR, enhanced Basel III disclosures, and a more complex calculation of risk weighted assets that clients may default on their obligations when the valueincludes an assessment of the securitiesimpact of operational risk. In addition, federal banking agencies have broad discretion and cash in their accounts falls belowcould require CSC or its banking subsidiaries to hold higher levels of capital or increase liquidity above the amount of clients’ indebtedness. Abrupt changes in securities valuations and the failure of clients to meet margin calls could result in substantial losses.
The Company has exposure to credit risk associated with its securities available for sale and securities held to maturity portfolios, which include U.S. agency and non-agency mortgage-backed securities, asset-backed securities, corporate debt securities, U.S. agency notes, certificates of deposit, and commercial paper among other investments. These instruments are also subject to price fluctuations as a result of changes in the financial market’s assessment of issuer credit quality, increases in the unemployment rate, delinquency and default rates, housing price declines, changes in prevailing interest rates and other economic factors. A failure to raise the U.S. debt limit and/or a downgrade of the U.S. government’s credit rating could decrease the value of the Company’s securities in both the available for sale and held to maturity portfolios.
Loss of value of securities available for sale and securities held to maturity can negatively affect earnings if management determines that such securities are other than temporarily impaired. The evaluation of whether other-than-temporary impairment exists is a matter of judgment, which includes the assessment of several factors. See “Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Estimates.” If management determines that a security is other-than-temporarily impaired, the cost basis of the security may be adjusted and a corresponding loss may be recognized in current earnings. Certain securities available for sale experienced continued credit deterioration in 2014, which resulted in impairment charges. Deterioration in the performance of securities available for sale and securities held to maturity could result in the recognition of future impairment charges.
The Company’s loans to banking clients primarily consist of First Mortgages and HELOCs. Increases in delinquency and default rates, housing price declines, increases in the unemployment rate, and other economic factors can result in charges for loan loss reserves and write downs on such loans.
Heightened credit exposures to specific counterparties or instruments (concentration risk) can increase the Company’s risk of loss. Examples of the Company’s credit concentration risk include:
| ·
| | large positions in financial instruments collateralized by assets with similar economic characteristics or in securities of a single issuer or industry;
|
applicable regulatory requirements. | ·
| | mortgage loans and HELOCs to banking clients which are secured by properties in the same geographic region; and
|
| ·
| | margin and securities lending activities collateralized by securities of a single issuer or industry.
|
The Company may also be subject to concentration risk when lending to a particular counterparty, borrower or issuer.
The Company sponsors a number of proprietary money market mutual funds and other proprietary funds. Although the Company has no obligation to do so, the Company may decide for competitive or other reasons to provide credit, liquidity or other support to its funds in the event of significant declines in valuation of fund holdings or significant redemption activity that exceeds available liquidity. Such support could cause the Company to take significant charges, could reduce the Company’s liquidity and, in certain situations, could, with respect to proprietary funds other than money market mutual funds, result in the Company having to consolidate a supported fund in its financial statements. If the Company chose not to
THE CHARLES SCHWAB CORPORATION
provide credit, liquidity or other support in such a situation, the Company could suffer reputational damage and its business could be adversely affected.
Significant interest rate changes could affect the Company’s profitabilityour profitability.
The direction and
financial condition.The Company is exposed to interest rate risk primarily from changes in thelevel of interest rates on its interest-earning assets (such as cash equivalents, short- and long-term investments, and mortgage and margin loans) relative to changesare important factors in the costs of its funding sources (including deposits in banking and uninvested cash in brokerage accounts, short-term borrowings, and long-term debt). Changesour earnings. A decline in interest rates generally affect themay have a negative impact on our net interest earnedrevenue. A low interest rate environment may also have a negative impact on interest-earning assets differently than the interest the Company pays on its interest-bearing liabilities. In addition,our asset management and administration fee revenues if we have to waive a portion of our management fees for certain funding sources do not bear interest and their cost therefore does not vary. Schwab-sponsored money market mutual funds in order to continue providing a positive return to clients.
Overall, the Company iswe are positioned to benefit from a rising interest rate environment;environment. A rise in interest rates may cause our funding costs to increase if market conditions or the competitive environment forces us to raise our interest rates to avoid losing deposits. Higher funding costs without offsetting increases in yields on interest-earning assets can reduce our net interest revenue.
The manner in which interest rates are calculated could also impact our net interest revenue. For example, certain securities in Schwab’s investment portfolios have floating interest rates based on benchmarks like the one-month LIBOR, which has been the subject of recent regulatory guidance and proposals for reform. These reforms may cause LIBOR to perform differently than in the past, or be replaced as a benchmark, and could result in lower interest payments and a reduction in the value of the securities.
THE CHARLES SCHWAB CORPORATION
A significant change in client cash allocations could negatively impact our net interest revenue.
We rely heavily on bank deposits as a low cost source of funding to extend loans to clients and purchase investment securities. Our bank deposits are primarily driven by our bank sweep feature: uninvested cash balances in our client brokerage accounts are swept to our banking subsidiaries. A significant reduction in our clients’ allocation to cash, a change in the allocation of that cash, or a transfer of cash away from the Company, could
be adversely affected by a decline inreduce net interest
rates if the rates that the Company earns on interest-earning assets decline more than the rates that the Company pays on its funding sources, or if prepayment rates increase on the mortgages and mortgage-backed securities that the Company holds. The Company may also be limited in the amount it can reduce interest rates on funding sources, such as deposit accounts, and still offer a competitive return.As a result of the low interest rate environment, the Company has been waiving and may continue to waive a portion of its management fees for certain Schwab-sponsored money market mutual funds. To the extent the overall yield on certain Schwab-sponsored money market mutual funds falls to a level at or below the management fees on those funds, the Company may waive a portion of its fee in order to continue providing some return to clients. Such fee waivers negatively impact the Company’s asset management and administration fees.
The Company is subject to litigation and regulatory investigations and proceedings and may not be successful in defending itself against claims or proceedings.
The financial services industry faces substantial litigation and regulatory risks. The Company 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.
Litigation and arbitration claims include those brought by the Company’s clients and the clients of third party advisors whose assets are custodied at the Company. Claims from clients of third party advisors may allege losses due to investment decisions made by the third party advisors or the advisors’ misconduct. Litigation claims also include claims from third parties alleging infringement of their intellectual property rights (e.g., patents). Such litigation can require the expenditure of significant Company resources. If the Company were found to have infringed a third-party patent, or other intellectual property rights, it could incur substantial damages, and in some circumstances could be enjoined from using certain technology, or providing certain products or services.
Actions brought against the Company may result in settlements, awards, injunctions, fines, penalties or other results adverse to the Company including reputational harm. Even if the Company is successful in defending against these actions, the defense of such matters may result in the Company incurring significant expenses. Predicting the outcome of matters is inherently difficult, particularly where claims are brought on behalf of various classes of claimants, claimants seek substantial or unspecified damages, or when investigations or legal proceedings are at an early stage. A substantial judgment, settlement, fine, or penalty could be material to the Company’s operating results or cash flows for a particular future period, depending on the Company’s results for that period. In market downturns, the volume of legal claims and amount of damages sought in litigation and regulatory proceedings against financial services companies have historically increased. See “Item 8 – Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – 14. Commitments and Contingencies.”
revenue.
Security breaches of
the Company’sour systems, or those of
itsour clients or third parties, may subject
the Companyus to significant liability and damage
the Company’sSchwab’s reputation.
The Company’s
Our business involves the secure processing, storage, and transmission of confidential information about the Companyour clients and its clients.us. Information security risks for financial institutions are increasing, in part because of the use of the internet and mobile technologies to conduct financial transactions, and the increased sophistication and activities of organized
THE CHARLES SCHWAB CORPORATION
crime, activists, hackers and other external parties. The Company’sparties, including foreign state actors. Our systems and those of other financial institutions have been and are likely to continue to be the target of cyber attacks, malicious code, computer viruses
and denial of service attacks that could result in unauthorized access, misuse, loss or destruction of data (including confidential customerclient information), account takeovers, unavailability of service or other events. Despite the Company’sour efforts to ensure the integrity of itsour systems, the Companywe may not be able to anticipate or to implement effective preventive measures against all security breaches of these types, especially because the techniques used change frequently or are not recognized until launched, and because security attacks can originate from a wide variety of sources. Data security breaches may also result from non-technical means, for example, employee misconduct.
Given the high volume of transactions that we process, the large number of clients, counterparties and third-party service providers with which we do business and the increasing sophistication of cyber attacks, a cyber attack could occur and persist for an extended period of time before being detected. The extent of a particular cyber attack and the steps we may need to take to investigate the attack may not be immediately clear, and it may take a significant amount of time before an investigation is completed and full and reliable information about the attack is known. During such time we would not necessarily know the extent of the harm or how best to remediate it, and certain errors or actions
bycould be repeated or compounded before they are discovered and remediated, all or any of which would further increase the costs and consequences of a
suborned employee.cyber attack.
Security breaches, including breaches of
the Company’sour security measures or those of
the Company’sour third-party service providers or clients, could result in a violation of applicable privacy and other laws and could subject
the Companyus to significant liability or loss that may not be covered by insurance, actions by
the Company’sour regulators, damage to
the Company’sSchwab’s reputation, or a loss of confidence in
the Company’sour security measures which could harm
the Company’sour business.
The CompanyWe may be required to expend significant additional resources to modify
itsour protective measures or to investigate and remediate vulnerabilities or other exposures.
The Company
We also
facesface risk related to external fraud involving the
misappropriation and use of clients’ user names, passwords or other personal information to gain access to clients’ financial accounts at Schwab. This could occur from the compromise of clients’ personal electronic devices
that can facilitate the unauthorized accessor as a result of a data security breach at an unrelated company where clients’ personal information is taken and then made available to
login and password information for their various online financial accounts, including those at the Company.fraudsters. Such risk has grown in recent years due to the increased sophistication and activities of organized crime and other external parties, including foreign state-sponsored parties.
For example, these parties send fraudulent “phishing” emails to the Company’s clients in order to misappropriate user names, passwords or other personal information. Losses reimbursed to clients under
the Company’sour guarantee against unauthorized account activity could have a negative impact on
the Company’sour business, financial condition and results of operations.
Technology and operational failures or errors could subject us to losses, litigation, regulatory actions, and reputational damage.
We must process, record and monitor a large number of transactions and our operations are highly dependent on the integrity of our technology systems and our ability to make timely enhancements and additions to our systems. System interruptions, errors or downtime can result from a variety of causes, including changes in client use patterns, technological failure, changes to our systems, linkages with third-party systems and power failures and can have a significant impact on our business and operations. Our systems are vulnerable to disruptions from human error, execution errors, errors in models such as those used for asset management, capital planning and management, risk management, stress testing and compliance, employee misconduct, unauthorized trading, external fraud, computer viruses, distributed denial of service attacks, cyber attacks, terrorist attacks, natural disaster, power outage, capacity constraints, software flaws, events impacting key business partners and vendors, and similar events. For example, Schwab and other financial institutions have been the
THE CHARLES SCHWAB CORPORATION
target of various denial of service attacks that have, in certain circumstances, made websites, mobile applications and email unavailable for periods of time. It could take an extended period of time to restore full functionality to our technology or other operating systems in the event of an unforeseen occurrence, which could affect our ability to process and settle client transactions. Moreover, instances of fraud or other misconduct might also negatively impact Schwab’s reputation and client confidence in the Company, in addition to any direct losses that might result from such instances. Despite our efforts to identify areas of risk, oversee operational areas involving risk, and implement policies and procedures designed to manage these risks, there can be no assurance that we will not suffer unexpected losses, reputational damage or regulatory action due to technology or other operational failures or errors, including those of our vendors or other third parties.
While we devote substantial attention and resources to the reliability, capacity and scalability of our systems, extraordinary trading volumes could cause our computer systems to operate at unacceptably slow speeds or even fail, affecting our ability to process client transactions and potentially resulting in some clients’ orders being executed at prices they did not anticipate. Disruptions in service and slower system response times could result in substantial losses and decreased client satisfaction. We are also dependent on the integrity and performance of securities exchanges, clearing houses and other intermediaries to which client orders are routed for execution and settlement. System failures and constraints and transaction errors at such intermediaries could result in delays and erroneous or unanticipated execution prices, cause substantial losses for us and for our clients, and subject us to claims from our clients for damages.
A significant decrease in our liquidity could negatively affect our business and financial management as well as reduce client confidence in Schwab.
Maintaining adequate liquidity is crucial to our business operations, including margin lending, mortgage lending, and transaction settlement, among other liquidity needs. We meet our liquidity needs primarily through cash generated by client activity and operating earnings, as well as cash provided by external financing. Fluctuations in client cash or deposit balances, as well as changes in regulatory treatment of client deposits or market conditions, may affect our ability to meet our liquidity needs. A reduction in our liquidity position could reduce client confidence in Schwab, which could result in the loss of client accounts, or could cause us to fail to satisfy our liquidity requirements, including the modified LCR. In addition, if our broker-dealer or depository institution subsidiaries fail to meet regulatory capital guidelines, regulators could limit the subsidiaries’ operations or their ability to upstream funds to CSC, which could reduce CSC’s liquidity and adversely affect its ability to repay debt and pay cash dividends. In addition, CSC may need to provide additional funding to such subsidiaries.
Factors which may adversely affect our liquidity position include CS&Co having temporary liquidity demands due to timing differences between brokerage transaction settlements and the availability of segregated cash balances, unanticipated outflows of company cash, fluctuations in cash held in banking or brokerage client accounts, a dramatic increase in our client lending activities (including margin, mortgage-related, and personal lending), increased capital requirements, changes in regulatory guidance or interpretations, other regulatory changes, or a loss of market or client confidence in Schwab.
When cash generated by client activity and operating earnings is not sufficient for our liquidity needs, we may seek external financing. During periods of disruptions in the credit and capital markets, potential sources of external financing could be reduced, and borrowing costs could increase. Although CSC and CS&Co maintain committed and uncommitted, unsecured bank credit lines and CSC has a commercial paper issuance program, as well as a universal shelf registration statement filed with the SEC which can be used to sell securities, financing may not be available on acceptable terms or at all due to market conditions or disruptions in the credit markets. In addition, a significant downgrade in the Company’s credit ratings could increase its borrowing costs and limit its access to the capital markets.
We may suffer significant losses from our credit exposures.
Our businesses are subject to the risk that a client, counterparty or issuer will fail to perform its contractual obligations, or that the value of collateral held to secure obligations will prove to be inadequate. While we have policies and procedures designed to manage this risk, the policies and procedures may not be fully effective. Our exposure mainly results from margin lending, clients’ options trading, futures activities, securities lending, mortgage lending, pledged asset lending, our role as a counterparty in financial contracts and investing activities, and indirectly from the investing activities of certain of the proprietary funds we sponsor.
When clients purchase securities on margin, borrow on lines of credit collateralized by securities, or trade options or futures, we are subject to the risk that clients may default on their obligations when the value of the securities and cash in their
THE CHARLES SCHWAB CORPORATION
accounts falls below the amount of clients’ indebtedness. Abrupt changes in securities valuations and the failure of clients to meet margin calls could result in substantial losses.
We have exposure to credit risk associated with our investments. Those investments are subject to price fluctuations as a result of changes in the financial market’s assessment of credit quality. Loss of value of securities can negatively affect earnings if management determines that such securities are other than temporarily impaired. The Company reliesevaluation of whether other-than-temporary impairment (OTTI) exists is a matter of judgment, which includes the assessment of several factors. If management determines that a security is OTTI, the cost basis of the security may be adjusted and a corresponding loss may be recognized in current earnings. Deterioration in the performance of available for sale (AFS) and held to maturity (HTM) securities could result in the recognition of future impairment charges. Even if a security is not considered OTTI, if we were ever forced to sell the security sooner than intended prior to maturity due to liquidity needs, we would have to recognize any unrealized losses at that time.
Our bank loans primarily consist of First Mortgages, HELOCs, and PALs. Increases in delinquency and default rates, housing and stock price declines, increases in the unemployment rate, and other economic factors can result in charges for loan loss reserves and write downs on such loans.
Heightened credit exposures to specific counterparties or instruments can increase our risk of loss. Examples include:
Large positions in financial instruments collateralized by assets with similar economic characteristics or in securities of a single issuer or industry;
Mortgage loans and HELOCs to banking clients which are secured by properties in the same geographic region; and
Client margins, options or futures, pledged assets, and securities lending activities collateralized by or linked to securities of a single issuer, index, or industry.
We sponsor a number of proprietary money market mutual funds and other proprietary funds. Although we have no obligation to do so, we may decide for competitive or other reasons to provide credit, liquidity or other support to our funds in the event of significant declines in valuation of fund holdings or significant redemption activity that exceeds available liquidity. Such support could cause us to take significant charges, could reduce our liquidity and, in certain situations, could, with respect to proprietary funds other than money market mutual funds, result in us having to consolidate a supported fund in our financial statements. If we chose not to provide credit, liquidity or other support in such a situation, Schwab could suffer reputational damage and its business could be adversely affected.
We are subject to litigation and regulatory investigations and proceedings and may not be successful in defending against claims or proceedings.
The financial services industry faces significant litigation and regulatory risks. We are subject to claims and lawsuits in the ordinary course of business, including arbitrations, class actions and other litigation, some of which include claims for substantial or unspecified damages. We are also the subject of inquiries, investigations, and proceedings by regulatory and other governmental agencies.
Litigation and arbitration claims include those brought by our clients and the clients of third party advisors whose assets are custodied at Schwab. Claims from clients of third party advisors may allege losses due to investment decisions made by the third party advisors or the advisors’ misconduct. Litigation claims also include claims from third parties alleging infringement of their intellectual property rights (e.g., patents). Such litigation can require the expenditure of significant company resources. If we were found to have infringed on a third-party patent, or other intellectual property rights, we could incur substantial damages, and in some circumstances could be enjoined from using certain technology, or providing certain products or services.
Actions brought against us may result in settlements, awards, injunctions, fines, penalties or other results adverse to us, including reputational harm. Even if we are successful in defending against these actions, the defense of such matters may result in us incurring significant expenses. A substantial judgment, settlement, fine, or penalty could be material to our operating results or cash flows for a particular future period, depending on our results for that period. In market downturns, the volume of legal claims and amount of damages sought in litigation and regulatory proceedings against financial services companies have historically increased.
THE CHARLES SCHWAB CORPORATION
We rely on outsourced service providers to perform key functions.
The Company relies
We rely on external service providers to perform certain key technology, processing, servicing, and support functions. These service providers face technology, operating, business, and economic risks, and any significant failures by them, including the improper use or disclosure of
the Company’sour confidential client, employee, or company information, could cause
the Companyus to incur losses and could harm
the Company’sSchwab’s reputation. An interruption in or the cessation of service by any external service provider as a result of systems failures, capacity constraints, financial difficulties or for any other reason, and
the Company’sour inability to make alternative arrangements in a timely manner could disrupt
the Company’sour operations, impact
the Company’sour ability to offer certain products and services, and result in financial losses to
the Company.us. Switching to an alternative service provider may require a transition period and result in less efficient operations.
Potential strategic transactions could have a negative impact on
the Company’sour financial position.
The Company evaluates
We evaluate potential strategic transactions, including business combinations, acquisitions, and dispositions. Any such transaction could have a material impact on
the Company’sour financial position, results of operations, or cash flows. The process of evaluating, negotiating, and effecting any such strategic transaction may divert management’s attention from other business concerns, and might cause the loss of key clients, employees, and business partners. Moreover, integrating businesses and systems may result in unforeseen expenditures as well as numerous risks and uncertainties, including the need to integrate operational, financial, and management information systems and management controls, integrate relationships with clients and business partners, and manage facilities and employees in different geographic areas. In addition, an acquisition may cause
the Companyus to assume liabilities or become subject to litigation or regulatory proceedings. Further,
the Companywe may not realize the anticipated benefits from an acquisition, and any future acquisition could be dilutive to
the Company’sour current stockholders’ percentage ownership or to earnings per common
share.The Company’sshare (EPS).
Our acquisitions and dispositions are typically subject to closing conditions, including regulatory approvals and the absence of material adverse changes in the business, operations or financial condition of the entity being acquired or sold. To the extent
the Company enterswe enter into an agreement to buy or sell an entity, there can be no guarantee that the transaction will close when expected, or at all. If a material transaction does not close,
the Company’sour stock price could decline.
THE CHARLES SCHWAB CORPORATION
The Company’sOur industry is characterized by aggressive price competition.
The Company
We continually
monitors itsmonitor our pricing in relation to competitors and periodically
adjustsadjust trade commission rates, interest rates on deposits and loans, fees for advisory services,
expense ratios on mutual funds and ETFs, and other
fee structurespricing to enhance
itsour competitive position. Increased price competition from other financial services firms, such as reduced commissions to attract trading volume,
or higher deposit rates to attract client cash balances
or reduced expense ratios to attract mutual fund or ETF investments, could impact
the Company’sour results of operations and financial condition.
To the extent that any of our competitors acquires or is acquired by another institution, that firm may be able to offer products and services at lower prices and/or promote those products and services more aggressively.The Company faces
We face competition in hiring and retaining qualified
employees, especially for employees who are key to the Company’s ability to build and enhance client relationships.employees.
The market for
quality professionals and otherqualified personnel in
the Company’sour business is highly competitive.
Competition is particularly strong for financial consultants who buildAt various times, different functions and
sustainroles are in especially high demand in the
Company’s client relationships. The Company’smarket, compelling us to pay more to attract talent. Our ability to continue to compete effectively will depend upon
itsour ability to attract new employees and retain existing employees while managing compensation costs.
The Company’s
Our stock price has fluctuated historically, and may continue to fluctuate.
The Company’s
Our stock price can be volatile. Among the factors that may affect the volatility of
the Company’sour stock price are the following:
| ·
| | speculation in the investment community or the press about, or actual changes in, the Company’s competitive position, organizational structure, executive team, operations, financial condition, financial reporting and results, expense discipline, or strategic transactions;
|
| ·
| | the announcement of new products, services, acquisitions, or dispositions by the Company or its competitors;
|
| ·
| | increases or decreases in revenue or earnings, changes in earnings estimates by the investment community, and variations between estimated financial results and actual financial results.
|
Our exposure to changes in interest rates;Speculation in the investment community or the press about, or actual changes in, our competitive position, organizational structure, executive team, operations, financial condition, financial reporting and results, expense discipline, or strategic transactions;
The announcement of new products, services, acquisitions, or dispositions by us or our competitors; and
Increases or decreases in revenue or earnings, changes in earnings estimates by the investment community, and variations between estimated financial results and actual financial results.
THE CHARLES SCHWAB CORPORATION
Changes in the stock market generally, or as it concerns
the Company’sour industry, as well as geopolitical,
corporate, regulatory, business, and economic
and business factors
unrelated to the Company, may also affect
the Company’sour stock price.
Future sales of CSC’s equity securities may adversely affect the market price of CSC’s common stock and result in dilution.
CSC’s certificate of incorporation authorizes CSC’s Board of Directors, to, among other things, to issue additional shares of common or preferred stock or securities convertible or exchangeable into equity securities, without stockholder approval.
CSC may issue additional equity or convertible securities to raise additional capital or for other purposes. The issuance of any additional equity or convertible securities could be substantially dilutive to holders of CSC’s common stock and may adversely affect the market price of CSC’s common stock.
| |
Item 1B.
| Unresolved Securities and Exchange Commission Staff Comments
|
None.
THE CHARLES SCHWAB CORPORATION
Item 1B. Unresolved Securities and Exchange Commission Staff Comments
None.
Item 2. Properties
A summary of
the Company’sSchwab’s significant locations
at December 31, 2014, is presented in the following table. Locations are leased or owned as noted below. The square footage amounts are presented net of space that has been subleased to third parties.
| | | | |
| Square Footage |
(amounts in thousands) | Leased | | Owned | |
Location | | | | |
Corporate office space: | | | | |
San Francisco, CA (1) | 772 | | - | |
Service and other office space: | | | | |
Denver, CO (2) | 247 | | 527 | |
Phoenix, AZ (2) | 37 | | 669 | |
Indianapolis, IN | - | | 274 | |
Austin, TX | 258 | | - | |
Orlando, FL | 148 | | - | |
Richfield, OH | - | | 117 | |
El Paso, TX | - | | 105 | |
(1)
| Includes the Company’s headquarters.
|
(2)
| Includes two data centers.
|
|
| | |
| December 31, 2017 | Square Footage |
| (amounts in thousands) | Leased | Owned |
| Location | | |
| Corporate headquarters: | | |
| San Francisco, CA | 569 | — |
| Service and other office space: | | |
| Phoenix, AZ | 28 | 720 |
| Denver, CO | — | 731 |
| Austin, TX | 219 | 191 |
| Dallas, TX | 188 | — |
| Indianapolis, IN | — | 161 |
| Orlando, FL | 148 | — |
| Richfield, OH | — | 117 |
| El Paso, TX | — | 105 |
| Chicago, IL | 104 | — |
Substantially all of
the Company’sour branch offices are located in leased premises. The corporate headquarters, data centers, offices, and service centers support both of
the Company’sour segments.
For a discussion of legal proceedings, see
“ItemItem 8 –
Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – 14. Commitments and Contingencies.”Note 13.
| |
| Item 4. | Mine Safety Disclosures |
THE CHARLES SCHWAB CORPORATION
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters,and Issuer Purchases of Equity Securities Item 5.
| Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
|
| Purchases of Equity Securities
|
CSC’s common stock is listed on The New York Stock Exchange under the ticker symbol SCHW. The number of common stockholders of record as of January
30, 2015,31, 2018, was
6,869.6,055. The closing market price per share on that date was
$25.98. $53.34.
The quarterly high and low sales prices for CSC’s common stock and the other information required to be furnished pursuant to this item are included in
“ItemItem 8 –
Financial StatementsNote 18 and
Supplementary Data – Notes to Consolidated Financial Statements – 27. Quarterly Financial Information (Unaudited) and 19. Employee Incentive, Retirement, and Deferred Compensation Plans.”Note 24.
The following graph shows a five-year comparison of cumulative total returns for CSC’s common stock, the Dow Jones U.S. Investment Services Index, and the Standard & Poor’s 500 Index, each of which assumes an initial investment of $100 and reinvestment of dividends.
| | | | | | | | | | | | | | | | | | | | | | | | |
December 31, | | | 2009 | | | 2010 | | | 2011 | | | 2012 | | | 2013 | | | 2014 |
The Charles Schwab Corporation | | $ | 100 | | | $ | 92 | | | $ | 62 | | | $ | 80 | | | $ | 147 | | | $ | 172 | |
Dow Jones U.S. Investment Services Index | | $ | 100 | | | $ | 103 | | | $ | 67 | | | $ | 86 | | | $ | 138 | | | $ | 158 | |
Standard & Poor’s 500 Index | | $ | 100 | | | $ | 115 | | | $ | 117 | | | $ | 136 | | | $ | 180 | | | $ | 205 | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, | 2012 |
| | 2013 |
| | 2014 |
| | 2015 |
| | 2016 |
| | 2017 |
|
| The Charles Schwab Corporation | $ | 100 |
| | $ | 183 |
| | $ | 215 |
| | $ | 236 |
| | $ | 286 |
| | $ | 375 |
|
| Standard & Poor’s 500 Index | $ | 100 |
| | $ | 132 |
| | $ | 151 |
| | $ | 153 |
| | $ | 171 |
| | $ | 208 |
|
| Dow Jones U.S. Investment Services Index | $ | 100 |
| | $ | 162 |
| | $ | 185 |
| | $ | 184 |
| | $ | 233 |
| | $ | 290 |
|
THE CHARLES SCHWAB CORPORATION
Issuer Purchases of Equity Securities
At December 31, 2017, approximately $596 million of future share repurchases are authorized under the Share Repurchase Program. There were no share repurchases during the fourth quarter. There were two authorizations under this program by CSC’s Board of Directors, each covering up to $500 million of common stock that were publicly announced by CSC on April 25, 2007, and March 13, 2008. The remaining authorizations do not have an expiration date.
The following table summarizes purchases made by or on behalf of CSC of its common stock for each calendar month in the fourth quarter of
2014:2017: | | | | | | | | | | | | | | | | |
| | | | | | | | | Total Number of | | Approximate Dollar |
| | | | | | | | | Shares Purchased | | Value of Shares that |
| | Total Number of | | Average | | as Part of Publicly | | May Yet be Purchased |
| | Shares Purchased | | Price Paid | | Announced Program (1) | | under the Program |
Month | | (in thousands) | | per Share | | (in thousands) | | (in millions) |
October: | | | | | | | | | | | | | | | | |
Share Repurchase Program (1) | | | - | | | $ | - | | | - | | | | $ | 596 | |
Employee transactions (2) | | | 21 | | | $ | 29.21 | | | N/A | | | | | N/A | |
November: | | | | | | | | | | | | | | | | |
Share Repurchase Program (1) | | | - | | | $ | - | | | - | | | | $ | 596 | |
Employee transactions (2) | | | 1,132 | | | $ | 28.59 | | | N/A | | | | | N/A | |
December: | | | | | | | | | | | | | | | | |
Share Repurchase Program (1) | | | - | | | $ | - | | | - | | | | $ | 596 | |
Employee transactions (2) | | | 5 | | | $ | 28.00 | | | N/A | | | | | N/A | |
Total: | | | | | | | | | | | | | | | | |
Share Repurchase Program (1) | | | - | | | $ | - | | | - | | | | $ | 596 | |
Employee transactions (2) | | | 1,158 | | | $ | 28.60 | | | N/A | | | | | N/A | |
N/A Not applicable.
(1)
| There were no share repurchases under the Share Repurchase Program during the fourth quarter. There were two authorizations under this program by CSC’s Board of Directors, each covering up to $500 million of common stock that were publicly announced by the Company on April 25, 2007, and March 13, 2008. The remaining authorizations do not have an expiration date.
|
(2)
| Includes restricted shares withheld (under the terms of grants under employee stock incentive plans) to offset tax withholding obligations that occur upon vesting and release of restricted shares. The Company may receive shares delivered or attested to pay the exercise price and/or to satisfy tax withholding obligations by employees who exercise stock options (granted under employee stock incentive plans), which are commonly referred to as stock swap exercises.
|
|
| | | | | | |
| Month | Total Number of Shares Purchased
(in thousands) | | Average
Price Paid
per Share |
| October: | | | |
Employee transactions (1) | 4 |
| | $ | 44.12 |
|
| November: | | | |
Employee transactions (1) | 779 |
| | $ | 44.70 |
|
| December: | | | |
Employee transactions (1) | 2 |
| | $ | 48.97 |
|
| Total: | | | |
Employee transactions (1) | 785 |
| | $ | 44.71 |
|
(1) Includes restricted shares withheld (under the terms of grants under employee stock incentive plans) to offset tax withholding obligations that occur upon vesting and release of restricted shares. CSC may receive shares delivered or attested to pay the exercise price and/or to satisfy tax withholding obligations by employees who exercise stock options granted under employee stock incentive plans, which are commonly referred to as stock swap exercises.
THE CHARLES SCHWAB CORPORATION
| |
| Item 6. | Selected Financial Data |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Selected Financial and Operating Data | | | | | | | | | | | | | | | | | | | | | | | | | |
(In Millions, Except Per Share Amounts, Ratios, or as Noted) | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Growth Rates | | | | | | | | | | | | | | | | | | | | |
| Compounded | | Annual | | | | | | | | | | | | | | | | | | | | |
| 4-Year (1) | | 1-Year | | | | | | | | | | | | | | | | | | | | |
| 2010-2014 | | 2013-2014 | | | 2014 | | | 2013 | | | 2012 | | | 2011 | | | 2010 |
Results of Operations | | | | | | | | | | | | | | | | | | | | | | | | | |
Net revenues | 9 | % | | 11 | % | | $ | 6,058 | | | $ | 5,435 | | | $ | 4,883 | | | $ | 4,691 | | | $ | 4,248 | |
Expenses excluding interest | 3 | % | | 6 | % | | $ | 3,943 | | | $ | 3,730 | | | $ | 3,433 | | | $ | 3,299 | | | $ | 3,469 | |
Net income | 31 | % | | 23 | % | | $ | 1,321 | | | $ | 1,071 | | | $ | 928 | | | $ | 864 | | | $ | 454 | |
Net income available to common stockholders | 29 | % | | 25 | % | | $ | 1,261 | | | $ | 1,010 | | | $ | 883 | | | $ | 864 | | | $ | 454 | |
Basic earnings per common share | 26 | % | | 23 | % | | $ | .96 | | | $ | .78 | | | $ | .69 | | | $ | .70 | | | $ | .38 | |
Diluted earnings per common share | 26 | % | | 22 | % | | $ | .95 | | | $ | .78 | | | $ | .69 | | | $ | .70 | | | $ | .38 | |
Dividends declared per common share | - | | | - | | | $ | .24 | | | $ | .24 | | | $ | .24 | | | $ | .24 | | | $ | .24 | |
Weighted-average common shares outstanding — diluted | 2 | % | | 2 | % | | | 1,315 | | | | 1,293 | | | | 1,275 | | | | 1,229 | | | | 1,194 | |
Asset management and administration fees as a | | | | | | | | | | | | | | | | | | | | | | | | | |
percentage of net revenues | | | | | | | | 42 | % | | | 43 | % | | | 42 | % | | | 41 | % | | | 43 | % |
Net interest revenue as a percentage of net revenues | | | | | | | | 38 | % | | | 36 | % | | | 36 | % | | | 37 | % | | | 36 | % |
Trading revenue as a percentage of net revenues (2) | | | | | | | | 15 | % | | | 17 | % | | | 18 | % | | | 20 | % | | | 20 | % |
Effective income tax rate | | | | | | | | 37.5 | % | | | 37.2 | % | | | 36.0 | % | | | 37.9 | % | | | 41.7 | % |
Capital expenditures — purchases of equipment, | | | | | | | | | | | | | | | | | | | | | | | | | |
office facilities, and property, net | 34 | % | | 50 | % | | $ | 404 | | | $ | 269 | | | $ | 138 | | | $ | 190 | | | $ | 127 | |
Capital expenditures, net of disposals, as a | | | | | | | | | | | | | | | | | | | | | | | | | |
percentage of net revenues | | | | | | | | 7 | % | | | 5 | % | | | 3 | % | | | 4 | % | | | 3 | % |
Performance Measures | | | | | | | | | | | | | | | | | | | | | | | | | |
Net revenue growth | | | | | | | | 11 | % | | | 11 | % | | | 4 | % | | | 10 | % | | | 1 | % |
Pre-tax profit margin | | | | | | | | 34.9 | % | | | 31.4 | % | | | 29.7 | % | | | 29.7 | % | | | 18.3 | % |
Return on average common stockholders’ equity (3) | | | | | | | | 12 | % | | | 11 | % | | | 11 | % | | | 12 | % | | | 8 | % |
Financial Condition (at year end) | | | | | | | | | | | | | | | | | | | | | | | | | |
Total assets | 14 | % | | 8 | % | | $ | 154,642 | | | $ | 143,642 | | | $ | 133,617 | | | $ | 108,553 | | | $ | 92,568 | |
Long-term debt | (1) | % | | - | | | $ | 1,899 | | | $ | 1,903 | | | $ | 1,632 | | | $ | 2,001 | | | $ | 2,006 | |
Stockholders’ equity (4) | 17 | % | | 14 | % | | $ | 11,803 | | | $ | 10,381 | | | $ | 9,589 | | | $ | 7,714 | | | $ | 6,226 | |
Assets to stockholders’ equity ratio | | | | | | | | 13 | | | | 14 | | | | 14 | | | | 14 | | | | 15 | |
Long-term debt to total financial capital | | | | | | | | | | | | | | | | | | | | | | | | | |
(long-term debt plus stockholders’ equity) | | | | | | | | 14 | % | | | 15 | % | | | 15 | % | | | 21 | % | | | 24 | % |
Employee Information | | | | | | | | | | | | | | | | | | | | | | | | | |
Full-time equivalent employees (in thousands, | | | | | | | | | | | | | | | | | | | | | | | | | |
at year end) | 3 | % | | 6 | % | | | 14.6 | | | | 13.8 | | | | 13.8 | | | | 14.1 | | | | 12.8 | |
(1)
| The compounded 4-year growth rate is computed using the following formula: Compound annual growth rate = (Ending Value / Beginning Value) .25 - 1.
|
(2)
| Trading revenue includes commission and principal transaction revenues.
|
(3)
| Return on average common stockholders’ equity is calculated using net income available to common stockholders divided by average common stockholders’ equity.
|
(4)
| In 2012, the Company issued non-cumulative perpetual preferred stock, Series B, for a total liquidation preference of $485 million and non-cumulative perpetual preferred stock, Series A, with a total liquidation preference of $400 million.
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Selected Financial and Operating Data | | | | | | | | | | | | | |
| (In Millions, Except Per Share Amounts, Ratios, or as Noted) | | | | | | | | | | | | |
| | Growth Rates | | | | | | | | | | |
| | Compounded 4-Year (1) 2013-2017 | | Annual
1-Year
2016-2017 | | 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
| Results of Operations | | | | | | | | | | | | | |
| Net revenues | 12% | | 15% | | $ | 8,618 |
| | $ | 7,478 |
| | $ | 6,380 |
| | $ | 6,058 |
| | $ | 5,435 |
|
| Expenses excluding interest | 7% | | 11% | | $ | 4,968 |
| | $ | 4,485 |
| | $ | 4,101 |
| | $ | 3,943 |
| | $ | 3,730 |
|
| Net income | 22% | | 25% | | $ | 2,354 |
| | $ | 1,889 |
| | $ | 1,447 |
| | $ | 1,321 |
| | $ | 1,071 |
|
| Net income available to common stockholders | 21% | | 25% | | $ | 2,180 |
| | $ | 1,746 |
| | $ | 1,364 |
| | $ | 1,261 |
| | $ | 1,010 |
|
| Earnings per common share: | | | | | | | | | | | | | |
| Basic | 20% | | 23% | | $ | 1.63 |
| | $ | 1.32 |
| | $ | 1.04 |
| | $ | .96 |
| | $ | .78 |
|
| Diluted | 20% | | 23% | | $ | 1.61 |
| | $ | 1.31 |
| | $ | 1.03 |
| | $ | .95 |
| | $ | .78 |
|
| Dividends declared per common share | | | | | $ | .32 |
| | $ | .27 |
| | $ | .24 |
| | $ | .24 |
| | $ | .24 |
|
| Weighted average common shares outstanding: | | | | | | | | | | | | | |
| Basic | 1% | | 1% | | 1,339 |
| | 1,324 |
| | 1,315 |
| | 1,303 |
| | 1,285 |
|
| Diluted | 1% | | 1% | | 1,353 |
| | 1,334 |
| | 1,327 |
| | 1,315 |
| | 1,293 |
|
Net interest revenue as a percentage of net revenues
| | | | | 50 | % | | 44 | % | | 40 | % | | 38 | % | | 36 | % |
Asset management and administration fees as a
percentage of net revenues
| | | | | 39 | % | | 41 | % | | 41 | % | | 42 | % | | 43 | % |
| Trading revenue as a percentage of net revenues | | | | | 8 | % | | 11 | % | | 14 | % | | 15 | % | | 17 | % |
| Effective income tax rate | | | | | 35.5 | % | | 36.9 | % | | 36.5 | % | | 37.5 | % | | 37.2 | % |
| Performance Measures | | | | | | | | | | | | | |
| Net revenue growth | | | | | 15 | % | | 17 | % | | 5 | % | | 11 | % | | 11 | % |
| Pre-tax profit margin | | | | | 42.4 | % | | 40.0 | % | | 35.7 | % | | 34.9 | % | | 31.4 | % |
| Return on average common stockholders’ equity | | | | | 15 | % | | 14 | % | | 12 | % | | 12 | % | | 11 | % |
Financial Condition (at year end) | | | | | | | | | | | | | |
| Total assets | 14% | | 9% | | $ | 243,274 |
| | $ | 223,383 |
| | $ | 183,705 |
| | $ | 154,635 |
| | $ | 143,633 |
|
| Short-term borrowings | N/M | | N/M | | $ | 15,000 |
| | — |
| | — |
| | — |
| | — |
|
| Long-term debt | 26% | | 65% | | $ | 4,753 |
| | $ | 2,876 |
| | $ | 2,877 |
| | $ | 1,892 |
| | $ | 1,894 |
|
| Preferred stock | 34% | | — | | $ | 2,793 |
| | $ | 2,783 |
| | $ | 1,459 |
| | $ | 872 |
| | $ | 869 |
|
| Total stockholders’ equity | 16% | | 13% | | $ | 18,525 |
| | $ | 16,421 |
| | $ | 13,402 |
| | $ | 11,803 |
| | $ | 10,381 |
|
| Assets to stockholders’ equity ratio | | | | | 13 |
| | 14 |
| | 14 |
| | 13 |
| | 14 |
|
Debt to total capital ratio (2) | | | | | 52 | % | | 15 | % | | 18 | % | | 14 | % | | 15 | % |
| Employee Information | | | | | | | | | | | | | |
Full-time equivalent employees (in thousands,
at year end) | 6% | | 9% | | 17.6 |
| | 16.2 |
| | 15.3 |
| | 14.6 |
| | 13.8 |
|
(1) The Compounded 4-year growth rate is computed using the formula: Compound annual growth rate = (Ending Value / Beginning Value) .25– 1.
(2) The Debt to total capital ratio is computed using the formula: Total Debt (short and long-term) / (Total Debt + Stockholders’ Equity).
N/M Not meaningful.
THE CHARLES SCHWAB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)
| |
Item 7. |
Management’s Discussion and Analysisof Financial Condition and Results of Operations |
| Operations
|
FORWARD-LOOKING STATEMENTS
In addition to historical information, this Annual Report on Form 10-K contains “forward-looking statements” within the meaning of Section 27A of the Securities Act, and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements are identified by words such as “believe,” “anticipate,” “expect,” “intend,” “plan,” “will,” “may,” “estimate,” “appear,” “aim,” “target,”
“seek”, “could,
” “would,” “continue,” 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
necessarily estimates based on the best judgment of
the Company’sSchwab’s senior management. These statements relate to, among other things:
| ·
| | the Company’s ability to pursue its business strategy and maintain its market leadership position (see “Part I – Item 1. – Business – Business Strategy and Competitive Environment”);
|
| ·
| | the expected impact of the new regulatory capital and LCR rules (see “Part I – Item 1A. – Risk Factors” and “Current Market and Regulatory Environment and Other Developments”);
|
| ·
| | the impact of legal proceedings and regulatory matters (see “Part I – Item 3. – Legal Proceedings” and “Item 8 – Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements –14. Commitments and Contingencies – Legal contingencies”)Schwab seeking to maximize its market valuation and stockholder returns over time; the belief that developing trusted relationships will translate into more client assets which drives revenue and, along with expense discipline, generates earnings growth and builds stockholder value; and Schwab’s ability to pursue its business strategy and maintain its market leadership position; (see Business Strategy and Competitive Environment in Part I, Item 1);
|
| ·
| | the impact of current market conditions on the Company’s results of operations (see “Current Market and Regulatory Environment and Other Developments,” “Results of Operations – Net Interest Revenue,” and “Item 8 – Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – 5. Securities Available for Sale and Securities Held to Maturity”)The impact of legal proceedings and regulatory matters (see Legal Proceedings in Part I, Item 3 and Item 8 – Note 13);
|
| ·
| | sources of liquidity, capital, and level of dividends (see “Part I – Item 1. – Business – Regulation,” “Liquidity and Capital Resources,” “Contractual Obligations,” and “Item 8 – Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – 22. Regulatory Requirements”)The adjustment of rates paid on client-related liabilities; the stability, rate sensitivity, and duration of client-related liabilities; the opportunity to migrate non-rate sensitive cash in sweep money market funds to banking subsidiaries; increasing the duration of interest-earning assets; and Schwab’s positioning to benefit from an increase in interest rates and limit its exposure to falling rates; (see Net Interest Revenue in Part II, Item 7);
|
| ·
| | target capital and debt ratios (see “Liquidity and Capital Resources” and “Item 8 – Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – 22. Regulatory Requirements”)The estimated net reduction in Schwab’s effective income tax rate for 2018; (see Taxes on Income in Part II, Item 7);
|
| ·
| | capital expenditures (see “Liquidity and Capital Resources – Capital Resources – Capital Expenditures”)Sources of liquidity, capital, and level of dividends (see Liquidity Risk in Part II, Item 7);
|
| ·
| | the impact of the revised underwriting criteria on the credit quality of the Company’s mortgage portfolio (see “Risk Management – Credit Risk”)Capital ratios (see Regulatory Capital Requirements in Part II, Item 7);
|
| ·
| | the impact of changes in management’s estimates on the Company’s results of operations (see “Critical Accounting Estimates”)The impact of changes in management’s estimates on Schwab’s results of operations (see Critical Accounting Estimates in Part II, Item 7);
|
| ·
| | the impact of changes in the likelihood of indemnification and guarantee payment obligations on the Company’s results of operations (see “Item 8 – Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – 14. Commitments and Contingencies”)The expected impact of new accounting standards not yet adopted (see Item 8 – Note 2); and
|
| ·
| | the impact on the Company’s results of operations of recording stock option expense (see “Item 8 – Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – 19. Employee Incentive, Retirement, and Deferred Compensation Plans”)The impact of changes in the likelihood of indemnification and guarantee payment obligations on Schwab’s results of operations (see Item 8 – Note 13).
|
Achievement of the expressed beliefs, objectives and expectations described in these statements is subject to certain risks and uncertainties that could cause actual results to differ materially from the expressed beliefs, objectives, and expectations. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this Annual Report on Form 10-K or, in the case of documents incorporated by reference, as of the date of those documents.
Important factors that may cause actual results to differ include, but are not limited to:
| ·
| | changes in general economic and financial market conditions;
|
| ·
| | changes in revenues and profit margin due to changes in interest rates;
|
General market conditions, including the level of interest rates, equity valuations and trading activity; | ·
| | adverse developments in litigation or regulatory matters;
|
Our ability to attract and retain clients, develop trusted relationships, and grow client assets; | ·
| | the extent of any charges associated with litigation and regulatory matters;
|
Client use of our investment advisory services and other products and services;- 18 -
The level of client assets, including cash balances;
Competitive pressure on pricing, including deposit rates;
Client sensitivity to interest rates;
Regulatory guidance;
Timing, amount, and impact of the migration of certain balances from sweep money market funds into Schwab Bank;
Changes to tax deductions;
Capital and liquidity needs and management;
Our ability to manage expenses;
The effect of adverse developments in litigation or regulatory matters and the extent of any related charges;
The availability and terms of external financing;
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)
| ·
| | amounts recovered on insurance policies;
|
| ·
| | the Company’s ability to attract and retain clients and grow client assets and relationships;
|
| ·
| | the Company’s ability to developPotential breaches of contractual terms for which we have indemnification and guarantee obligations; and launch new products, services and capabilities in a timely and successful manner, including Schwab Intelligent Portfolios™;
|
| ·
| | fluctuations in client asset values due to changes in equity valuations;
|
Our ability to develop and launch new products, services and capabilities in a timely and successful manner. | ·
| | the Company’s ability to monetize client assets;
|
| ·
| | the performance or valuation of securities available for sale and securities held to maturity;
|
| ·
| | the level of interest rates, including yields available on money market mutual fund eligible instruments;
|
| ·
| | the adverse impact of financial reform legislation and related regulations;
|
| ·
| | investment, structural and capital adjustments made by the Company in connection with the new LCR rule;
|
| ·
| | the amount of loans to the Company’s brokerage and banking clients;
|
| ·
| | the extent to which past performance of the Company’s mortgage portfolio is indicative of future performance;
|
| ·
| | the level of the Company’s stock repurchase activity;
|
| ·
| | the level of brokerage client cash balances and deposits from banking clients;
|
| ·
| | the availability and terms of external financing;
|
| ·
| | capital needs and management;
|
| ·
| | timing and amount of severance and other costs related to reducing the Company’s San Francisco footprint;
|
| ·
| | the Company’s ability to manage expenses;
|
| ·
| | the level of client assets, including cash balances;
|
| ·
| | competitive pressures on rates and fees;
|
| ·
| | acquisition integration costs;
|
| ·
| | the timing and impact of changes in the Company’s level of investments in buildings, land, and leasehold improvements;
|
| ·
| | potential breaches of contractual terms for which the Company has indemnification and guarantee obligations; and
|
| ·
| | client use of the Company’s investment advisory services and other products and services.
|
Certain of these factors, as well as general risk factors affecting the Company, are discussed in greater detail in this Annual Report on Form 10-K, including “Item 1A – Risk Factors.”
Factors in Part I, Item 1A.
- 19 -
THE CHARLES SCHWAB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)
OVERVIEW
Management
GLOSSARY OF TERMS
Active brokerage accounts: Brokerage accounts with activity within the preceding eight months.
Accumulated other comprehensive income (AOCI): A component of stockholders’ equity which includes unrealized gains and losses on AFS securities and net gains or losses associated with pension obligations.
Asset-backed securities: Debt securities backed by financial assets such as loans or receivables.
Assets receiving ongoing advisory services: Client relationships under the guidance of independent advisors and assets enrolled in one of Schwab’s retail or other advisory solutions.
Basel III: Global regulatory standards on bank capital adequacy and liquidity issued by the Basel Committee on Banking Supervision.
Basis point: One basis point equals 1/100th of 1%, or 0.01%.
Client assets: The market value of all client assets in our custody and proprietary products, which includes both cash and securities. Average client assets are the daily average client asset balance for the period.
Client cash as a percentage of client assets: Calculated as money market fund balances, bank deposits, Schwab One® balances, and certain cash equivalents as a percentage of client assets.
Clients’ daily average trades: Includes daily average revenue trades by clients, trades by clients in asset-based pricing relationships, and all commission-free trades.
Common Equity Tier 1Capital(CET1): The sum of common stock and related surplus net of treasury stock, retained earnings, AOCI and qualifying minority interests, less applicable regulatory adjustments and deductions. Schwab made a one-time election to opt-out of the Companyrequirement to include most components of AOCI in CET1 Capital under the “standardized approach” framework.
Common Equity Tier 1 Risk-Based Capital Ratio: The ratio of CET1 Capital to total risk-weighted assets.
Core net new client assets: Net new client assets before significant one-time inflows or outflows, such as acquisitions/divestitures or extraordinary flows (generally greater than $10 billion) relating to a specific client.
Customer Protection Rule: Refers to Rule 15c3-3 of the Securities Exchange Act of 1934.
Daily average revenue trades (DARTs): Total revenue trades during a certain period, divided by the number of trading days in that period. Revenue trades include all client trades that generate trading revenue (i.e., commission revenue or principal transaction revenue).
Debt to total capital ratio: Calculated as total debt divided by stockholders’ equity and total debt.
Delinquency roll rates: The rates at which loans transition through delinquency stages, ultimately resulting in a loss. Schwab considers a loan to be delinquent if it is 30 days or more past due.
Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank): Regulatory reform legislation containing numerous provisions which expanded prudential regulation of large financial services companies.
Duration: The expected change in value of a financial instrument for a 1% change in interest rates, expressed in years.
Final Regulatory Capital Rules: Refers to the regulatory capital rules issued by U.S. banking agencies which implemented Basel III and relevant provisions of Dodd-Frank, which apply to savings and loan holding companies, as well as federal savings banks.
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)
First mortgages: Refers to first lien residential real estate mortgage loans.
Full-time equivalent employees: Represents the total number of hours worked divided by a 40-hour work week for the following categories: full-time, part-time and temporary employees and persons employed on a contract basis.
High quality liquid assets (HQLA): Assets with a high potential to be converted easily and quickly into cash.
Interest-bearing liabilities: Includes bank deposits, payables to brokerage clients, short-term borrowings, and long-term debt on which Schwab pays interest.
Interest-earning assets: Includes cash and cash equivalents, cash and investments segregated, broker-related receivables, receivables from brokerage clients, investment securities, and bank loans on which Schwab earns interest.
Investment grade: Defined as a rating equivalent to a Moody’s Investors Service (Moody’s) rating of “Baa” or higher, or a Standard & Poor’s Rating Group (Standard & Poor’s) or Fitch Ratings, Ltd (Fitch) rating of “BBB-” or higher.
Liquidity Coverage Ratio (LCR): The ratio of HQLA to projected net cash outflows during a 30-day stress scenario.
Loan-to-value(LTV)ratio: Calculated as the principal amount of a loan divided by the value of the collateral securing the loan.
Margin loans: Advances made to brokerage clients on a secured basis to purchase securities reflected in receivables from brokerage clients on the consolidated balance sheets.
Master netting arrangement: An agreement between two counterparties that have multiple contracts with each other that provides for net settlement of all contracts through a single cash payment in the event of default or termination of any one contract.
Mortgage-backed securities: A type of asset-backed security that is secured by a mortgage or group of mortgages.
Net interest margin: Net interest revenue divided by average interest-earning assets.
Net new client assets: Total inflows of client cash and securities to Schwab less client outflows. Inflows include dividends and interest; outflows include commissions and fees. Capital gains distributions are excluded.
Net Stable Funding Ratio (NSFR): Measures an organization’s “available” amount of stable funding relative to its “required” amount of stable funding over a one-year time horizon.
New brokerage accounts: All brokerage accounts opened during the period, as well as any accounts added via acquisition.
Nonperforming assets: The total of nonaccrual loans and other real estate owned.
Order flow revenue: Net compensation received from markets and firms to which the broker-dealer subsidiaries send equity and options orders. Reflects rebates received for certain types of orders, minus fees paid for types of orders for which exchange fees or other charges apply.
Pledged Asset Line® (PAL): A non-purpose revolving line of credit from Schwab Bank secured by eligible assets held in a separate pledged brokerage account maintained at the broker-dealer subsidiaries.
Return on average common stockholders’ equity: Calculated as net income available to common stockholders annualized divided by average common stockholders’ equity.
Risk-weighted assets: Computed by assigning specific risk-weightings to assets and off-balance sheet instruments for capital adequacy calculations.
THE CHARLES SCHWAB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)
Tier 1 Capital: The sum of CET1 Capital and additional Tier 1 Capital instruments and related surplus, less applicable adjustments and deductions.
Tier 1 Leverage Ratio: Tier 1 end of period capital divided by adjusted average total consolidated assets for the quarter.
Trading days: Days in which the markets/exchanges are open for the buying and selling of securities. Early market closures are counted as half-days.
U.S. federal banking agencies: Refers to the Federal Reserve, the OCC, the FDIC, and the CFPB.
Uniform Net Capital Rule: Refers to Rule 15c3-1 under the Securities Exchange Act of 1934, which specifies minimum capital requirements that are intended to ensure the general financial soundness and liquidity of broker-dealers.
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
key client activity and financial metrics in evaluating
the Company’sSchwab’s financial position and operating performance.
Management believesWe believe that
metrics relating to net new and total client assets, as well as client cash levels and utilization of advisory services, offer perspective on our business momentum and client engagement. Data on new and total client brokerage accounts provides additional perspective on our ability to attract and retain new business. Total net revenue growth, pre-tax profit margin,
earnings per common share,EPS, and return on
average common stockholders’ equity provide broad indicators of
the Company’sSchwab’s overall financial health, operating efficiency, and ability to generate acceptable
returns within the context of a given operating environment. Expensesreturns. Total expenses, excluding interest, as a percentage of average client assets, is
considered by management to be a measure of operating efficiency.
Finally, management believes the Consolidated Tier 1 Leverage Ratio is the most restrictive capital constraint currently imposed by regulators. Results for the years ended December 31,
2014, 2013,2017, 2016, and
20122015 are:
| | | | | | | | | | | | | | | |
| Growth Rate | | | | | | | | | | | | |
| 1-Year | | | | | | | | | | | | |
Year Ended December 31, | 2013-2014 | | | 2014 | | | 2013 | | | 2012 |
Client Metrics: | | | | | | | | | | | | | | | |
Net new client assets (1) (in billions) | | N/M | | | $ | 124.8 | | | $ | 41.6 | | | $ | 139.7 | |
Client assets (2) (in billions, at year end) | | 10 | % | | $ | 2,463.6 | | | $ | 2,249.4 | | | $ | 1,951.6 | |
New brokerage accounts (3) (in thousands) | | 1 | % | | | 972 | | | | 960 | | | | 900 | |
Active brokerage accounts (4) (in thousands, at year end) | | 3 | % | | | 9,386 | | | | 9,093 | | | | 8,787 | |
Assets receiving ongoing advisory services (5) | | | | | | | | | | | | | | | |
(in billions, at year end) | | 12 | % | | $ | 1,228.1 | | | $ | 1,101.4 | | | $ | 915.2 | |
Client cash as a percentage of client assets (6) | | | | | | | | | | | | | | | |
(at year end) | | | | | | 12.3 | % | | | 13.1 | % | | | 14.7 | % |
Company Financial Metrics: | | | | | | | | | | | | | | | |
Net revenues | | 11 | % | | $ | 6,058 | | | $ | 5,435 | | | $ | 4,883 | |
Expenses excluding interest | | 6 | % | | | 3,943 | | | | 3,730 | | | | 3,433 | |
Income before taxes on income | | 24 | % | | | 2,115 | | | | 1,705 | | | | 1,450 | |
Taxes on income | | 25 | % | | | 794 | | | | 634 | | | | 522 | |
Net income | | 23 | % | | $ | 1,321 | | | $ | 1,071 | | | $ | 928 | |
Preferred stock dividends | | (2) | % | | | 60 | | | | 61 | | | | 45 | |
Net income available to common stockholders | | 25 | % | | $ | 1,261 | | | $ | 1,010 | | | $ | 883 | |
Earnings per common share – diluted | | 22 | % | | $ | .95 | | | $ | .78 | | | $ | .69 | |
Net revenue growth from prior year | | | | | | 11 | % | | | 11 | % | | | 4 | % |
Pre-tax profit margin | | | | | | 34.9 | % | | | 31.4 | % | | | 29.7 | % |
Return on average common stockholders’ equity (7) | | | | | | 12 | % | | | 11 | % | | | 11 | % |
Expenses excluding interest as a percentage of | | | | | | | | | | | | | | | |
average client assets | | | | | | 0.17 | % | | | 0.18 | % | | | 0.19 | % |
(1)
| Net new client assets is defined as the total inflows of client cash and securities to the firm less client outflows. Management believes that this metric, along with core net new assets, depicts how well the Company’s products and services appeal to new and existing clients. Core net new assets totaled $124.8 billion, $140.8 billion, and $112.4 billion in 2014, 2013, and 2012, respectively. See below for items excluded from core net new assets.
|
(2)
| Client assets represent the market value of all client assets custodied at the Company. Management considers client assets to be indicative of the Company’s appeal in the marketplace. Additionally, fluctuations in certain components of client assets (e.g., Mutual Fund OneSource® funds) directly impact asset management and administration fees.
|
(3)
| New brokerage accounts include all brokerage accounts opened during the period, as well as any accounts added via acquisition. This metric measures the Company’s effectiveness in attracting new clients and building stronger relationships with existing clients.
|
(4)
| Active brokerage accounts include accounts with balances or activity within the preceding eight months. This metric is an indicator of the Company’s success in both attracting and retaining clients.
|
(5)
| Assets receiving ongoing advisory services include relationships under the guidance of independent advisors and assets enrolled in one of the Company’s retail or other advisory solutions. This metric depicts how well the Company’s advisory products and services appeal to new and existing clients.
|
(6)
| Client cash as a percentage of client assets includes Schwab One®, certain cash equivalents, deposits from banking clients and money market fund balances, as a percentage of client assets. This measure is an indicator of clients’ engagement in the fixed income and equity markets.
|
(7)
| Calculated as net income available to common stockholders divided by average common stockholders’ equity.
|
|
| | | | | | | | | | | | | |
| | Growth Rate
1-Year
2016-2017 | | 2017 | | 2016 | | 2015 |
| Client Metrics: | | | | | | | |
| Net new client assets (in billions) | 86% | | $ | 233.1 |
| | $ | 125.5 |
| | $ | 139.4 |
|
Core net new client assets (in billions) (1) | 58% | | $ | 198.6 |
| | $ | 125.5 |
| | $ | 134.7 |
|
| Client assets (in billions, at year end) | 21% | | $ | 3,361.8 |
| | $ | 2,779.5 |
| | $ | 2,513.8 |
|
| Average client assets (in billions) | 17% | | $ | 3,060.2 |
| | $ | 2,614.7 |
| | $ | 2,531.8 |
|
| New brokerage accounts (in thousands) | 32% | | 1,441 |
| | 1,093 |
| | 1,070 |
|
| Active brokerage accounts (in thousands, at year end) | 6% | | 10,755 |
| | 10,155 |
| | 9,769 |
|
Assets receiving ongoing advisory services (in billions, at year end)
| 21% | | $ | 1,699.8 |
| | $ | 1,401.4 |
| | $ | 1,253.7 |
|
| Client cash as a percentage of client assets (at year end) | | | 10.8 | % | | 13.0 | % | | 13.0 | % |
| Company Financial Metrics: | | | | | | | |
| Total net revenues | 15% | | $ | 8,618 |
| | $ | 7,478 |
| | $ | 6,380 |
|
| Total expenses excluding interest | 11% | | 4,968 |
| | 4,485 |
| | 4,101 |
|
| Income before taxes on income | 22% | | 3,650 |
| | 2,993 |
| | 2,279 |
|
| Taxes on income | 17% | | 1,296 |
| | 1,104 |
| | 832 |
|
| Net income | 25% | | $ | 2,354 |
| | $ | 1,889 |
| | $ | 1,447 |
|
| Preferred stock dividends and other | 22% | | 174 |
| | 143 |
| | 83 |
|
| Net income available to common stockholders | 25% | | $ | 2,180 |
| | $ | 1,746 |
| | $ | 1,364 |
|
Earnings per common share — diluted | 23% | | $ | 1.61 |
| | $ | 1.31 |
| | $ | 1.03 |
|
| Net revenue growth from prior year | | | 15 | % | | 17 | % | | 5 | % |
| Pre-tax profit margin | | | 42.4 | % | | 40.0 | % | | 35.7 | % |
| Return on average common stockholders’ equity | | | 15 | % | | 14 | % | | 12 | % |
Expenses excluding interest as a percentage of average client assets
| | | 0.16 | % | | 0.17 | % | | 0.16 | % |
| Consolidated Tier 1 Leverage Ratio (at year end) | | | 7.6 | % | | 7.2 | % | | 7.1 | % |
N/M Not meaningful.
- 20 -
(1) 2017 excludes an inflow of $34.5 billion relating to mutual fund clearing services clients. 2015 excludes an inflow of $6.1 billion to reflect the final impact of the consolidation of its retirement plan recordkeeping platforms, an inflow of $10.2 billion relating to a mutual fund clearing services client, and an outflow of $11.6 billion relating to the Company’s planned resignation from an Advisor Services cash management relationship netting to an adjustment of ($4.7) billion.
2017 Compared to 2016
Net income available to common stockholders rose in 2017 by $434 million, or 25%, from the prior year, resulting in diluted EPS of $1.61 in 2017 – an increase of 23% compared to $1.31 in 2016. Net revenues improved by $1.1 billion, or 15%, while expenses excluding interest increased $483 million, or 11%, compared to 2016.
Our steady focus on operating ‘through clients’ eyes’ and our goal to continually challenge the status quo helped Schwab achieve another strong growth year in 2017. Clients opened 1.4 million new brokerage accounts in 2017 and trusted Schwab with $198.6 billion of core net new assets in 2017, up 58% from 2016. Total assets receiving ongoing advisory services grew 21% in 2017 to $1.70 trillion. Our success with clients was bolstered by strength in the equity markets – the Standard & Poor’s 500® Index (S&P 500) finished 2017 up 19% from the prior year end. Also in 2017, the Federal Reserve increased
THE CHARLES SCHWAB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)
Core net new
the overnight federal funds target interest rate three times for a total of 75 basis points. Strong client activity and the positive economic environment resulted in total client assets is definedrising to $3.36 trillion as net new client assets before significant one-time flows. Management considers thisof December 31, 2017 – a 21% increase since the end of 2016.
Schwab’s 2017 financial results demonstrate the power of our financial formula working as designed: our robust business growth supported strong revenue growth through multiple sources in 2017, which we combined with continued expense discipline to be a useful metric when comparing period-to-period client asset flows. The following one-time flows were excludeddrive significantly improved profitability.
Net revenues grew by 15% in 2017 compared to 2016 through contributions from
core net new assets. | ·
| | 2013 excludes outflows of $74.5 billion relating to the planned transfer of a mutual fund clearing services client. The Company also reduced its reported total for overall client assets by $24.7 billion in 2013 to reflect the estimated impact of the consolidation of its retirement plan recordkeeping technology platforms and subsequent resignation from certain retirement plan clients.
|
| ·
| | 2012 excludes inflows of $27.7 billion from mutual fund clearing services clients and $900 million from the acquisition of ThomasPartners, Inc., and outflows of $1.3 billion from the closure and/or sale of certain subsidiaries of optionsXpress.
|
The Company’s major sources of net revenues areour two largest revenue sources. Net interest revenue rose 29% while asset management and administration fees grew 11% in 2017 when compared to the prior year. Trading revenue declined in 2017 by 21% due to price reductions announced early in 2017.
Consistent with our expectations, expenses grew 11% in 2017 compared to the prior year. This increase was primarily due to higher incentive compensation and higher staffing related to our strong asset gathering, as well as expenses related to project spending and third-party fees tied to higher balances in our asset management business.
This combination of revenue growth and expense discipline drove the pre-tax profit margin to 42.4% – an increase of 240 basis points over the prior year. Earnings before income taxes rose 22% to $3.7 billion in 2017 compared to $3.0 billion in the prior year.
The effective tax rate in 2017 was 35.5% compared to 36.9% in 2016 reflecting the benefit from the adoption of new accounting standards requiring the recognition of a portion of tax deductions related to equity compensation partially offset by the remeasurement of deferred tax assets and other tax adjustments associated with the enactment in 2017 of a new tax act (see Current Regulatory Environment and Other Developments for more information).
2016 Compared to 2015
In 2016, net income available to common stockholders increased $382 million, or 28%, from the prior year, resulting in diluted EPS of $1.31 in 2016 compared to $1.03 in 2015. Net revenues improved by $1.1 billion, or 17%, while expenses excluding interest increased $384 million, or 9%, compared to 2015.
Strong client momentum continued as our innovative, full-service model resonated with clients and drove growth during the year. We added 1.1 million new brokerage accounts to our client base during 2016, which contributed to bringing the total active brokerage accounts to 10.2 million by year-end. Core net new assets from new and existing clients totaled $125.5 billion in 2016, which helped grow total client assets to $2.78 trillion as of December 31, 2016. Also during 2016, investors increasingly turned to Schwab’s advice offerings resulting in a 12% increase in client assets enrolled in one of our retail advisory solutions and those guided by independent advisors, to $1.40 trillion at the end of the year.
Client assets grew by 11% during an environment that had periods of marked volatility, but ultimately included improving economic conditions. The S&P 500 ended 2016 10% higher than the prior year end. After years of ultra-low interest rates, the Federal Reserve’s move to increase the overnight federal funds target rate by 25 basis points in December 2015 helped throughout 2016; the Federal Reserve’s subsequent additional 25 basis point increase in December 2016 had little time to impact 2016 results. Other short-term rates also rose in 2016. The one-month London Interbank Offered Rate (LIBOR) improved 34 basis points to .77% at December 31, 2016 compared to December 31, 2015.
These external drivers and the solid client growth helped produce strong net revenue growth. Schwab’s 17% net revenue growth was led by increased net interest revenue and trading revenue. The Company generates asset management and administration fees, through its proprietarywhich more than offset lower revenue from trading and third-party mutual fund offerings, as well as fee-based advisory solutions.other revenue. Net interest revenue is the difference between interest earned on interest-earning assetsimproved $797 million, or 32%, in 2016 compared to 2015, and interest paid on funding sources, the majority of which is derived from client cash balances. Assetasset management and administration fees improved $405 million, or 15%.
Strong net revenue growth provided room for increased investment in people and
technology, resulting in a 9% expense growth for 2016. This increase allowed for a 780 basis point gap between net
interest revenue
are impacted by securities valuations, interest rates, the amount and mix of interest-earning assetsexpense growth and interest-bearing funding sources, the Company’s ability to attract new clients, and client activity levels. The Company generates trading revenue through commissions earned for executing trades for clients and principal transaction revenue primarily from trading activity in client fixed income securities. Trading revenue is impacted by trading volumes, the volatility of prices in the equity and fixed income markets, and commission rates.2014 Compared to 2013
The Company operated in an environment of mixed market conditions during 2014 compared to 2013, as the Nasdaq Composite Index, Standard & Poor’s 500 Index, and Dow Jones Industrial Average showed periods of volatility before ending the year up 13%, 11%, and 8%, respectively. The federal funds target rate remained unchanged at a range of zero to 0.25% during 2014. The average 10-year Treasury yield increased by 20 basis points to 2.53% during 2014 compared to 2013, while the yield ended the year down 86 basis points to 2.17%. In the same period, the average three-month Treasury Bill yield decreased by 3 basis points to 0.02%.
The Company’s steady focus on serving investor needs through its full-service investing model continued to drive growth during 2014. Total client assets ended the year at $2.46 trillion, up 10% from 2013, reflecting net new client assets of $124.8 billion and a rising equity market environment. In addition, the Company added almost 1 million new brokerage accounts to its client base during 2014. Active brokerage accounts reached 9.4 million in 2014, up 3% from 2013.
As a result of the Company’s strong key client activity metrics, the Company achieved a pre-tax profit margin of 34.9%40.0% in 2014. Overall, net income increased by 23%2016, compared to 35.7% in 2014 from 2013 and the return on average common stockholders’ equity was 12% in 2014.
Overall, net revenues increased by 11% in 2014 from 2013, primarily due to increases in net interest revenue, asset management and administration fees, and other revenue – net. Net interest revenue increased primarily due to higher balances of interest-earning assets, including margin loans and the Company’s investment portfolio (securities available for sale and securities held to maturity), and the effect higher average interest rates on securities held to maturity had on the Company’s average net interest margin. Asset management and administration fees increased due to fees from mutual fund services, advice solutions, and other asset management and administration services. Other revenue – net increased primarily due to a net insurance settlement of $45 million, net litigation proceeds of $28 million related to the Company’s non-agency residential mortgage-backed securities portfolio, and increases in order flow revenue.
Expenses excluding interest increased by 6% in 2014 from 2013 primarily due to an increase in compensation and benefits expense as a result of a charge of $68 million for estimated future severance benefits resulting from changes in the Company’s geographic footprint and an increase in professional services expense.
2015.
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)
2013 Compared to 2012
Valuations in
Subsequent Event
On February 8, 2018, CSC redeemed all of its outstanding 1.500% Senior Notes due March 10, 2018. The aggregate principal amount of the broad equity markets improved during 2013 compared to 2012,notes was $625 million.
Current Regulatory Environment and Other Developments
On December 22, 2017, P.L.115-97, known as the
Nasdaq Composite Index, Standard & Poor’s 500 Index,Tax Cuts and
Dow Jones Industrial Average increased 38%Jobs Act (the Tax Act),
30%, and 26%, respectively. Whilewas signed into law. Among other things, the Tax Act lowers the federal
funds targetcorporate income tax rate
remained unchanged at a range of zerofrom 35% to
0.25%21%,
the average 10-year Treasury yield increased by 55 basis points to 2.33% during 2013 compared to 2012. In the same period however, the average three-month Treasury Bill yield decreased by 3 basis points to 0.05%.The Company continued to experience growth in its client base during 2013 – core net new client assets totaled $140.8 billion, up 25% from $112.4 billion in 2012. Total client assets ended the year at a record $2.25 trillion, up 15% from 2012. In addition, the Company added almosteffective for tax years including or commencing January 1, million new brokerage accounts during 2013, and active brokerage accounts reached 9.1 million, up 3% from 2012.
2018.
As a result of the
Company’s strong key client activity metrics,reduction of the
Company achieved a pre-tax profit marginfederal corporate income tax rate, generally accepted accounting principles in the U.S. (GAAP) require companies to remeasure their deferred tax assets and deferred tax liabilities as of
31.4% in 2013. Overall, net income increased by 15% in 2013 from 2012 and the
return on average common stockholders’ equity was 11% in 2013.Alongdate of enactment, with the growth in its client base, enrollments in client advisory solutions and stabilityresulting tax effects accounted for in the economic environment helpedreporting period of enactment. Schwab has recorded a one-time non-cash charge to taxes on income associated with the Company achieve increases in all three major revenue lines in 2013 compared to 2012. Overall,remeasurement of net revenues increased by 11% in 2013 from 2012, primarily due to increases in asset management and administration fees, net interest revenue, and trading revenue, partially offset by a decrease in other revenue – net. Asset management and administration fees increased primarily due to increases in mutual fund service fees and advice solutions fees. Net interest revenue increased primarily due to higher balances of interest-earningdeferred tax assets and higher interest rates on new fixed-rate investments. This increase was partially offset by the effect lower average short-term interest rates and the maturity of short-term interest-earning assets had on the Company’s average net interest margin. Trading revenue increased primarily due to higher daily average revenue trades and two additional trading days during the year. Other revenue – net decreased primarily due to a non-recurring gain of $70 million relating to a confidential resolution of a vendor dispute in 2012.
Expenses excluding interest increased by 9% in 2013 from 2012 primarily due to increases in compensation and benefits, professional services, advertising and market development, and other expense. Compensation and benefits expense increased in 2013 from 2012 primarily due to higher incentive compensation relatingtax adjustments related to the transition to a new payout schedule for field incentive plans, increased individual sales performance compensationtax reform legislation in the fourth quarter of 2017. Our 2018 effective income tax rate will be reduced as a result of field sales volume, increasedthese changes.
In May 2016, the Federal Reserve, the OCC and accelerated health savings account (HSA) contributions, equity incentive plan changes to vesting for retirement-eligible employees, and increased fundingthe FDIC jointly issued a notice of proposed rulemaking that would impose a minimum NSFR on certain banking organizations, including CSC. The comment period for the corporate bonus plan commensurateproposed rule ended on August 5, 2016 and the impact to the Company cannot be assessed until the final rule is released.
In October 2015, the Federal Reserve issued a notice of proposed rulemaking on Total Loss-Absorbing Capacity and long-term debt that, among other things, would have required certain financial institutions that are subject to the Federal Reserve’s capital rules to deduct from their regulatory capital the amount of any investments in or exposure to unsecured debt issued by U.S. bank holding companies identified as global systemically important banking organizations (GSIBs). In December 2016, the Federal Reserve issued a final rule that did not include this regulatory capital deduction proposal. At the same time, the Federal Reserve did indicate its intent to work with
achieving higher earnings per common share. Advertisingthe OCC and
market development expense increased primarily dueFDIC to
investment indevelop a proposed interagency approach towards the
Company’s new advertising and branding initiative, Own your tomorrow™. CURRENT MARKET AND REGULATORY ENVIRONMENT AND OTHER DEVELOPMENTS
To the extent short-term interest rates remain at current low levels, the Company’s net interest revenue will continue to be constrained, even as growth in average balances helps to increase such revenue. The low short-term interest rate environment also affects asset management and administration fees.regulatory capital treatment of GSIB unsecured debt. The Company continues to waive a portion of its management fees, as the overall yields on certain Schwab-sponsored money market mutual funds have remained at levels at or below the management fees on those funds. These and certain other Schwab-sponsored money market mutual funds may not be able to replace maturing securities with securities of equal or higher yields. As a result, the yields onwill evaluate any such funds may remain around or decline from their current levels, and therefore below the stated management fees on those funds. To the extent this occurs, asset management and administration fees may continue to be negatively affected.
In July 2013, the U.S. banking agencies issued regulatory capital rules that implemented BASEL III and relevant provisions of the Dodd-Frank Act (Final Regulatory Capital Rules), which are applicable to savings and loan holding companies, such as CSC, and federal savings banks, such as Schwab Bank. The implementation of the rules began on January 1, 2015. The
proposal when it is issued. - 22 -
THE CHARLES SCHWAB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)
Company does not expect
RESULTS OF OPERATIONS
Total Net Revenues
Total net revenues of $8.6 billion and $7.5 billion for the Final Regulatory Capital Rules to have a material impactyears ended December 31, 2017 and 2016, respectively, grew 15% and 17% from the prior periods, reflecting significant improvements in both net interest revenue and asset management and administration fees.
|
| | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | | 2017 | | 2016 | | 2015 |
| | Growth Rate
2016-2017 | | Amount | % of
Total Net
Revenues | | Amount | % of
Total Net
Revenues | | Amount | % of
Total Net
Revenues |
| Net interest revenue | | | | | | | | | | |
| Interest revenue | 32 | % | | $ | 4,624 |
| 54 | % | | $ | 3,493 |
| 46 | % | | $ | 2,657 |
| 42 | % |
| Interest expense | 100 | % | | (342 | ) | (4 | )% | | (171 | ) | (2 | )% | | (132 | ) | (2 | )% |
| Net interest revenue | 29 | % | | 4,282 |
| 50 | % | | 3,322 |
| 44 | % | | 2,525 |
| 40 | % |
| Asset management and administration fees | | | | | | | | | | |
| Mutual fund and ETF service fees | 10 | % | | $ | 2,045 |
| 24 | % | | 1,853 |
| 25 | % | | 1,479 |
| 23 | % |
| Advice solutions | 14 | % | | 1,043 |
| 12 | % | | 915 |
| 12 | % | | 898 |
| 14 | % |
| Other | 6 | % | | 304 |
| 3 | % | | 287 |
| 4 | % | | 273 |
| 4 | % |
| Asset management and administration fees | 11 | % | | 3,392 |
| 39 | % | | 3,055 |
| 41 | % | | 2,650 |
| 41 | % |
| Trading revenue | | | | | | | | | | |
| Commissions | (23 | )% | | 600 |
| 7 | % | | 779 |
| 10 | % | | 822 |
| 13 | % |
| Principal transactions | 17 | % | | 54 |
| 1 | % | | 46 |
| 1 | % | | 44 |
| 1 | % |
| Trading revenue | (21 | )% | | 654 |
| 8 | % | | 825 |
| 11 | % | | 866 |
| 14 | % |
| Other | 7 | % | | 290 |
| 3 | % | | 271 |
| 4 | % | | 328 |
| 5 | % |
| Provision for loan losses | (100 | )% | | — |
| — |
| | 5 |
| — |
| | 11 |
| — |
|
| Total net revenues | 15 | % | | $ | 8,618 |
| 100 | % | | $ | 7,478 |
| 100 | % | | $ | 6,380 |
| 100 | % |
Net Interest Revenue
Schwab’s primary interest-earning assets include cash and cash equivalents; cash and investments segregated; margin loans, which constitute the majority of receivables from brokerage clients; investment securities; and bank loans. Revenue on
interest-earning assets is affected by various factors, such as the
Company’s business, financial condition, and resultscomposition of
operations.The Final Regulatory Capital Rules, among other things:
| ·
| | subject savings and loan holding companies to consolidated capital requirements;
|
| ·
| | revise the required minimum risk-based and leverage capital requirements by (1) establishing a new minimum Common Equity Tier 1 Risk-Based Capital Ratio (common equity Tier 1 capital to total risk-weighted assets) of 4.5%; (2) raising the minimum Tier 1 Risk-Based Capital Ratio from 4.0% to 6.0%; (3) maintaining the minimum Total Risk-Based Capital Ratio of 8.0%; and (4) maintaining a minimum Tier 1 Leverage Ratio (Tier 1 capital to adjusted average consolidated assets) of 4.0%;
|
| ·
| | add a requirement to maintain a minimum capital conservation buffer, composed of common equity Tier 1 capital, of 2.5% of risk-weighted assets, which means that banking organizations, on a fully phased-in basis no later than January 1, 2019, must maintain a Common Equity Tier 1 Risk-Based Capital Ratio greater than 7.0%; a Tier 1 Risk-Based Capital Ratio greater than 8.5% and a Total Risk-Based Capital Ratio greater than 10.5%; and
|
| ·
| | change the definition of capital categories for insured depository: to be considered “well-capitalized”, Schwab Bank must have a Common Equity Tier 1 Risk-Based Capital Ratio of at least 6.5%, a Tier 1 Risk-Based Capital Ratio of at least 8%, a Total Risk-Based Capital Ratio of at least 10% and a Tier 1 Leverage Ratio of at least 5%.
|
The new minimum regulatory capital ratiosassets, prevailing interest rates at the time of origination or purchase, changes in interest rates on floating rate securities, and changes in prepayment levels for mortgage-related securities and loans. Fees earned on securities borrowing and lending activities, which are conducted by CS&Co on assets held in client brokerage accounts, are included in other interest revenue and expense.
Schwab’s interest-bearing liabilities include bank deposits, payables to brokerage clients, short-term borrowings, and long-term debt. We establish the rates paid on client-related liabilities, and management expects that it will generally adjust the rates paid on these liabilities at some fraction of any movement in short-term rates. Client-related liabilities have historically been very stable and are largely expected to remain so. Given the stability and low rate sensitivity of these liabilities, management believes their duration is relatively long, somewhere in excess of three and a half years.
Management believes that the extended period of extraordinarily low interest rates running from the financial crisis to the calculationpresent has likely resulted in certain sweep cash balances retaining some level of risk-weightedlatent rate sensitivity. To the extent short-term rates increase, management expects some sweep cash balances to migrate to purchased money market funds or other higher-yielding alternatives. At the same time, Schwab will retain the opportunity to migrate the remaining non-rate sensitive cash in sweep money market funds to bank sweep deposits.
We have positioned Schwab to benefit from an increase in interest rates, especially short-term interest rates, by managing the duration of interest-earning assets were effective beginning January 1, 2015. The required minimum capital conservation bufferto be shorter than that of interest-bearing liabilities, so that asset yields will be phasedmove faster than liability costs.
In order to keep interest-rate sensitivity within established limits, management monitors and responds to changes in
incrementally, starting at 0.625% on January 1, 2016 and increasing to 1.25% on January 1, 2017, 1.875% on January 1, 2018 and 2.5% on January 1, 2019.The Final Regulatory Capital Rules provide that the failure to maintain the minimum capital conservation buffer will result in restrictions on capital distributions and discretionarybalance sheet. As Schwab builds its client base, we attract new client sweep cash, bonus payments to executive officers.
In September 2014, the Federal Reserve, in collaborationwhich, along with the OCC and the FDIC, issued a rule implementing a quantitative liquidity requirement generally consistent with the LCR standard established by Basel III. The LCR applies to all internationally active banking organizations. The Federal Reserve also issued a modified LCR that applies to the Company. Under the modified LCR, a depository institution holding company is required to maintain high-quality liquid assets in an amount related to its total estimated net cash outflows over a prospective period. The modified LCR will be phased in beginning on January 1, 2016, with a minimum requirementbulk transfer of 90%, increasing to 100% at January 1, 2017. The Company is currently evaluating the impact of the final rule but does not expect a material impact to the Company’s business, financial condition, and results of operations.
The Company is pursuing lawsuits in state court in San Francisco for rescission and damages against issuers, underwriters, and dealers of individual non-agency residential mortgage-backed securities on which the Company has experienced realized and unrealized losses. The lawsuits allege that offering documents for the securities contained material untrue and misleading statements about the securities and the underwriting standards and credit quality of the underlying loans. On January 27, 2012, and July 24, 2012, the court denied defendants’ motions to dismiss the claims and discovery is proceeding. To date, the Company has realized $28 million in net settlement proceeds on such claims, and an initial trial date relating to certain of the defendants who remain in the case is set for August 2015.
- 23 -
THE CHARLES SCHWAB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)
RESULTS OF OPERATIONS
existing sweep cash balances from money market funds, is a primary driver of balance sheet growth. As the proportion of sweep cash balances to total liabilities has grown, the measured duration of liabilities has grown as well. By increasing the duration of interest-earning assets as necessary, we are positioned to continue to gain from increasing rates while limiting exposure to falling rates to an acceptable level. Approximately half of our investment securities and loans re-price or reset based on short-term interest rates such as one-month LIBOR.
Non-interest-bearing funding sources include certain cash balances, stockholders’ equity and other miscellaneous assets and liabilities.
The following
discussion is an analysis of the Company’s results of operations for the years ended December 31, 2014, 2013, and 2012.Net Revenues
The Company’s major sources of net revenues are asset management and administration fees,table presents net interest revenue information corresponding to interest-earning assets and trading revenue. Asset management and administration fees and netfunding sources on the consolidated balance sheets:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | 2017 | | 2016 | | 2015 |
| | Average
Balance | | Interest
Revenue/
Expense | | Average
Yield/
Rate | | Average
Balance | | Interest Revenue/
Expense | | Average
Yield/
Rate | | Average
Balance | | Interest Revenue/
Expense | | Average
Yield/
Rate |
| Interest-earning assets: | | | | | | | | | | | | | | | | | |
| Cash and cash equivalents | $ | 9,931 |
| | $ | 109 |
| | 1.10 | % | | $ | 11,143 |
| | $ | 57 |
| | 0.51 | % | | $ | 9,358 |
| | $ | 24 |
| | 0.26 | % |
| Cash and investments segregated | 18,525 |
| | 166 |
| | 0.90 | % | | 20,104 |
| | 93 |
| | 0.46 | % | | 18,606 |
| | 31 |
| | 0.17 | % |
Broker-related receivables (1) | 430 |
| | 3 |
| | 0.70 | % | | 558 |
| | 1 |
| | 0.22 | % | | 274 |
| | — |
| | 0.07 | % |
| Receivables from brokerage clients | 16,269 |
| | 575 |
| | 3.53 | % | | 15,001 |
| | 497 |
| | 3.31 | % | | 15,212 |
| | 502 |
| | 3.30 | % |
Available for sale securities (2) | 53,040 |
| | 815 |
| | 1.54 | % | | 72,586 |
| | 883 |
| | 1.22 | % | | 62,249 |
| | 629 |
| | 1.01 | % |
| Held to maturity securities | 103,599 |
| | 2,354 |
| | 2.27 | % | | 57,451 |
| | 1,402 |
| | 2.44 | % | | 38,280 |
| | 957 |
| | 2.50 | % |
| Bank loans | 15,919 |
| | 472 |
| | 2.97 | % | | 14,715 |
| | 400 |
| | 2.72 | % | | 13,973 |
| | 369 |
| | 2.64 | % |
| Total interest-earning assets | 217,713 |
| | 4,494 |
| | 2.06 | % | | 191,558 |
| | 3,333 |
| | 1.74 | % | | 157,952 |
| | 2,512 |
| | 1.59 | % |
| Other interest revenue | | | 130 |
| | | | | | 160 |
| | | | | | 145 |
| | |
| Total interest-earning assets | $ | 217,713 |
| | $ | 4,624 |
| | 2.12 | % | | $ | 191,558 |
| | $ | 3,493 |
| | 1.82 | % | | $ | 157,952 |
| | $ | 2,657 |
| | 1.68 | % |
| Funding sources: | | | | | | | | | | | | | | | | | |
| Bank deposits | $ | 163,998 |
| | $ | 148 |
| | 0.09 | % | | $ | 141,432 |
| | $ | 37 |
| | 0.03 | % | | $ | 113,464 |
| | $ | 29 |
| | 0.03 | % |
| Payables to brokerage clients | 25,403 |
| | 16 |
| | 0.06 | % | | 26,311 |
| | 3 |
| | 0.01 | % | | 25,651 |
| | 2 |
| | 0.01 | % |
Short-term borrowings (1) | 3,503 |
| | 41 |
| | 1.17 | % | | 1,864 |
| | 9 |
| | 0.48 | % | | 21 |
| | — |
| | 0.27 | % |
| Long-term debt | 3,431 |
| | 119 |
| | 3.47 | % | | 2,876 |
| | 104 |
| | 3.62 | % | | 2,717 |
| | 92 |
| | 3.39 | % |
| Total interest-bearing liabilities | 196,335 |
| | 324 |
| | 0.17 | % | | 172,483 |
| | 153 |
| | 0.09 | % | | 141,853 |
| | 123 |
| | 0.09 | % |
| Non-interest-bearing funding sources | 21,378 |
| | | | | | 19,075 |
| | | | | | 16,099 |
| | | | |
| Other interest expense | | | 18 |
| | | | | | 18 |
| | | | | | 9 |
| | |
| Total funding sources | $ | 217,713 |
| | $ | 342 |
| | 0.15 | % | | $ | 191,558 |
| | $ | 171 |
| | 0.09 | % | | $ | 157,952 |
| | $ | 132 |
| | 0.08 | % |
| Net interest revenue | | | $ | 4,282 |
| | 1.97 | % | | | | $ | 3,322 |
| | 1.73 | % | | | | $ | 2,525 |
| | 1.60 | % |
(1) Interest revenue or expense was less than $500,000 in the period or periods presented.
(2) Amounts calculated based on amortized cost.
Net interest revenue increased while trading revenue remained relatively flat$960 million or 29%, in 2014 as2017 from 2016, and $797 million, or 32%, in 2016 from 2015, primarily due to higher interest rates and growth in interest-earning assets driven by bank deposits.
Higher short-term interest rates reflecting the Federal Reserve’s December, June, and March 2017 and December 2016 interest rate hikes, coupled with growth in interest-earning assets, have resulted in a 24 basis point improvement in net interest margin to 1.97% in 2017. Net interest margin was 1.73% in 2016, representing an improvement of 13 basis points compared to 2013. Asset management2015.
THE CHARLES SCHWAB CORPORATION
Management’s Discussion and administration fees,Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)
In 2017 and 2016, average interest earning assets have grown by 14% and 21%, respectively, from the prior years. This growth has been driven primarily by higher bank deposits, which increased through a combination of:
Gathering additional assets from new and current clients;
Transferring uninvested cash balances in certain client brokerage accounts to the bank sweep feature; and
Establishing the bank sweep feature as the default investment option for uninvested cash balances within all new Investor and Advisor Services brokerage accounts during 2016.
In 2017, clients allocated more of their cash to equity, fixed income and other investments which affected growth in bank sweep deposits.
In March 2017, $24.7 billion of debt securities were transferred from the AFS category to the HTM category. The transfer had no effect on the overall net interest
revenue, and trading revenue all increased in 2013 as compared to 2012.margin. For additional information on the transfer, see Item 8 – Note 5. | | | | | | | | | | | | | | | | | | | | |
Year Ended December 31, | | | | 2014 | | 2013 | | 2012 |
| | | | | | | % of | | | | | % of | | | | | % of |
| Growth Rate | | | | | Total Net | | | | | Total Net | | | | | Total Net |
| 2013-2014 | | | Amount | | Revenues | | | Amount | | Revenues | | | Amount | | Revenues |
Asset management and administration fees | | | | | | | | | | | | | | | | | | | | |
Schwab money market funds before fee waivers | 2 | % | | $ | 957 | | | | | $ | 936 | | | | | $ | 891 | | | |
Fee waivers | 11 | % | | | (751) | | | | | | (674) | | | | | | (587) | | | |
Schwab money market funds after fee waivers | (21) | % | | | 206 | | 3 | % | | | 262 | | 5 | % | | | 304 | | 6 | % |
Equity and bond funds | 22 | % | | | 192 | | 3 | % | | | 157 | | 3 | % | | | 125 | | 3 | % |
Mutual Fund OneSource® | 8 | % | | | 839 | | 14 | % | | | 774 | | 14 | % | | | 680 | | 14 | % |
Total mutual fund service fees | 4 | % | | | 1,237 | | 20 | % | | | 1,193 | | 22 | % | | | 1,109 | | 23 | % |
Advice solutions | 17 | % | | | 840 | | 14 | % | | | 718 | | 13 | % | | | 580 | | 12 | % |
Other | 13 | % | | | 456 | | 8 | % | | | 404 | | 8 | % | | | 354 | | 7 | % |
Asset management and administration fees | 9 | % | | | 2,533 | | 42 | % | | | 2,315 | | 43 | % | | | 2,043 | | 42 | % |
Net interest revenue | | | | | | | | | | | | | | | | | | | | |
Interest revenue | 14 | % | | | 2,374 | | 39 | % | | | 2,085 | | 38 | % | | | 1,914 | | 39 | % |
Interest expense | (3) | % | | | (102) | | (1) | % | | | (105) | | (2) | % | | | (150) | | (3) | % |
Net interest revenue | 15 | % | | | 2,272 | | 38 | % | | | 1,980 | | 36 | % | | | 1,764 | | 36 | % |
Trading revenue | | | | | | | | | | | | | | | | | | | | |
Commissions | (1) | % | | | 857 | | 14 | % | | | 864 | | 16 | % | | | 816 | | 17 | % |
Principal transactions | 2 | % | | | 50 | | 1 | % | | | 49 | | 1 | % | | | 52 | | 1 | % |
Trading revenue | (1) | % | | | 907 | | 15 | % | | | 913 | | 17 | % | | | 868 | | 18 | % |
Other – net | 45 | % | | | 343 | | 5 | % | | | 236 | | 4 | % | | | 256 | | 5 | % |
Provision for loan losses | N/M | | | | 4 | | - | | | | 1 | | - | | | | (16) | | - | |
Net impairment losses on securities | (90) | % | | | (1) | | - | | | | (10) | | - | | | | (32) | | (1) | % |
Total net revenues | 11 | % | | $ | 6,058 | | 100 | % | | $ | 5,435 | | 100 | % | | $ | 4,883 | | 100 | % |
Asset Management and Administration Fees
Asset management and administration fees include mutual fund and ETF service fees and fees for other asset-based financial services provided to individual and institutional clients. The CompanySchwab earns mutual fund and ETF service fees for shareholder services, administration, and investment management provided to its proprietary funds, and recordkeeping and shareholder services provided to third-party funds. TheseAsset management and administration fees are based upon the daily balances of client assets invested in these funds. The Company also earns asset managementfunds and do not include securities lending revenues earned by proprietary mutual funds and ETFs, as those amounts, net of program fees, for advice solutions, which include advisory and managed account services that are based on the daily balances of client assets subjectcredited to the specific fee for service.fund shareholders. The fair values of client assets included in proprietary and third-party mutual funds and ETFs are based on quoted market prices and other observable market data.
We also earn asset management fees for advice solutions, which include managed portfolios, specialized strategies, and customized investment advice. Other asset management and administration fees include various asset basedasset-based fees such as third-party mutual fund service fees, trust fees, 401(k) record keepingrecordkeeping fees, and mutual fund clearing fees, collective trust fund fees, and othernon-balance based service and transaction fees.
Asset management and administration fees vary with changes in the balances of client assets due to market fluctuations and client activity. For
The following table presents a discussionroll forward of client assets for the impactSchwab money market funds, Schwab equity and bond funds and ETFs, and Mutual Fund OneSource® and other non-transaction fee (NTF) funds. The following funds generated 53% of current market conditions onthe asset management and administration fees see “Current Marketearned during 2017 and Regulatory Environment2016 and Other Developments.”Asset management and administration fees increased by $218 million, or 9%, 47% during 2015:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Schwab Money | | Schwab Equity and | | Mutual Fund OneSource® |
| | | Market Funds | | Bond Funds and ETFs | | and Other NTF (1) Funds |
| Year Ended December 31, | | 2017 | | 2016 | | 2015 | | 2017 | | 2016 | | 2015 | | 2017 | | 2016 | | 2015 |
| Balance at beginning of period | | $ | 163,495 |
| | $ | 166,148 |
| | $ | 167,909 |
| | $ | 125,813 |
| | $ | 102,112 |
| | $ | 88,450 |
| | $ | 198,924 |
| | $ | 207,654 |
| | $ | 234,381 |
|
| Net inflows (outflows) | | (486 | ) | | (2,765 | ) | | (1,947 | ) | | 30,771 |
| | 13,858 |
| | 15,542 |
| | (27,485 | ) | | (22,469 | ) | | (23,014 | ) |
Net market gains (losses) and other (2) | | 641 |
| | 112 |
| | 186 |
| | 25,024 |
| | 9,843 |
| | (1,880 | ) | | 53,763 |
| | 13,739 |
| | (3,713 | ) |
| Balance at end of period | | $ | 163,650 |
| | $ | 163,495 |
| | $ | 166,148 |
| | $ | 181,608 |
| | $ | 125,813 |
| | $ | 102,112 |
| | $ | 225,202 |
| | $ | 198,924 |
| | $ | 207,654 |
|
(1) Non-transaction fee.
(2) Includes transfers from other third-party mutual funds to Mutual Fund OneSource® in 2014 from 2013 due to fees from mutual fund services, advice solutions, and other asset management and administration services. Asset management andthe second quarter of 2017. - 24 -
THE CHARLES SCHWAB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)
The following table presents asset management and administration fees, average client assets, and average fee yields:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | 2017 | | 2016 | | 2015 |
| | Average
Client
Assets | | Revenue | | Average
Fee | | Average
Client
Assets | | Revenue | | Average
Fee | | Average
Client
Assets | | Revenue | | Average
Fee |
| Schwab money market funds | | | | | | | | | | | | | | | | | |
| before fee waivers | $ | 160,735 |
| | $ | 875 |
| | 0.54 | % | | $ | 164,120 |
| | $ | 962 |
| | 0.59 | % | | $ | 161,381 |
| | $ | 947 |
| | 0.59 | % |
| Fee waivers | | | (10 | ) | | | | | | (224 | ) | | | | | | (672 | ) | | |
| Schwab money market funds | 160,735 |
| | 865 |
| | 0.54 | % | | 164,120 |
| | 738 |
| | 0.45 | % | | 161,381 |
| | 275 |
| | 0.17 | % |
| Schwab equity and bond funds and ETFs | 158,625 |
| | 223 |
| | 0.14 | % | | 115,849 |
| | 217 |
| | 0.19 | % | | 102,486 |
| | 217 |
| | 0.21 | % |
Mutual Fund OneSource® and other | | | | | | | | | | | | | | | | | |
| NTF funds | 215,333 |
| | 706 |
| | 0.33 | % | | 199,389 |
| | 676 |
| | 0.34 | % | | 225,347 |
| | 764 |
| | 0.34 | % |
Other third-party mutual funds and ETFs (1) | 286,111 |
| | 251 |
| | 0.09 | % | | 254,584 |
| | 222 |
| | 0.09 | % | | 251,491 |
| | 223 |
| | 0.09 | % |
Total mutual funds and ETFs (2) | $ | 820,804 |
| | 2,045 |
| | 0.25 | % | | $ | 733,942 |
| | 1,853 |
| | 0.25 | % | | $ | 740,705 |
| | 1,479 |
| | 0.20 | % |
Advice solutions (2) : | | | | | | | | | | | | | | | | | |
| Fee-based | $ | 203,794 |
| | 1,043 |
| | 0.51 | % | | $ | 177,409 |
| | 915 |
| | 0.52 | % | | $ | 172,302 |
| | 898 |
| | 0.52 | % |
| Non-fee-based | 48,936 |
| | — |
| | — |
| | 35,262 |
| | — |
| | — |
| | 29,118 |
| | — |
| | — |
|
| Total advice solutions | $ | 252,730 |
| | 1,043 |
| | 0.41 | % | | $ | 212,671 |
| | 915 |
| | 0.43 | % | | $ | 201,420 |
| | 898 |
| | 0.45 | % |
Other balance-based fees (3) | 417,659 |
| | 258 |
| | 0.06 | % | | 339,071 |
| | 235 |
| | 0.07 | % | | 324,701 |
| | 226 |
| | 0.07 | % |
Other (4) | | | 46 |
| | | | | | 52 |
| | | | | | 47 |
| | |
| Total asset management | | | | | | | | | | | | | | | | | |
| and administration fees | | | $ | 3,392 |
| | | | | | $ | 3,055 |
| | | | | | $ | 2,650 |
| | |
(1) Includes Schwab ETF OneSource™.
(2) Beginning in the fourth quarter of 2017, a change was made to add non-fee based average assets from managed portfolios. Average client assets for advice solutions may also include the asset balances contained in the mutual fund and/or ETF categories listed above. Prior periods have been adjusted to accommodate this change.
(3) Includes various asset-related fees, such as trust fees, 401(k) recordkeeping fees, and mutual fund clearing fees and other service fees. Beginning in the first quarter of 2017, a prospective methodology change was made to average client assets relating to 401(k) recordkeeping fees to provide improved insight into the associated fee driver, which resulted in an increase of approximately $25 billion. There was no impact to revenue or the average fee.
(4) Includes miscellaneous service and transaction fees relating to mutual funds and ETFs that are not balance-based.
Asset management and administration fees increased by
$272$337 million, or
13%11%, in
20132017 from
20122016, primarily due to
fees from mutual fund services and advice solutions.Mutual fund service fees increased by $44 million, or 4%, in 2014 from 2013 and by $84 million, or 8%, in 2013 from 2012, due to growth inhigher average client assets invested in the Company’s Mutual Fund OneSourceadvice solutions, mutual funds, and equityETFs, and bond funds, partially offset by a decrease in netlower fee waivers on money market funds. Partially offsetting these increases were lower fee rates on proprietary money funds and other indexed mutual fund fees as a result of continued low yields on fund assets.
Advice solutionsfunds and ETFs due to fee reductions implemented by Schwab in 2017.
Asset management and administration fees increased by
$122$405 million, or
17%15%, in
20142016 from
20132015 due to
higher net yields on money market fund assets as short-term interest rates rose in 2016, and growth in client assets enrolled in advisory offers,
including Schwab Private Client™, ThomasPartners®, and Schwab Managed Portfolios™. Advice solutions fees increasedpartially offset by $138 million, or 24%, in 2013 from 2012 primarily due to growtha reduction in client assets enrolled in advisory offers, including Windhaven®, Schwab Private Client™, and ThomasPartners®. Other asset management and administration fees increased by $52 million, or 13%, in 2014 from 2013 and $50 million, or 14%, in 2013 from 2012 primarily due to third-party mutual fund service fees on higher client asset balances invested in other third-party mutual funds.
Net Interest Revenue
Net interest revenue is the difference between interest earned on interest-earning assets and interest paid on funding sources. Net interest revenue is affected by changes in the volume and mix of these assets and liabilities, as well as by fluctuations in interest rates and portfolio management strategies. The majority of the Company’s interest-earnings assets and interest-bearing liabilities are sensitive to changes in short-term interest rates. The Company’s investment strategy is structured to produce an increase in net interest revenue when interest rates rise and, conversely, a decrease in net interest revenue when interest rates fall, from current levels. When interest rates fall, the Company may attempt to mitigate some of this negative impact by extending the maturities of assets in investment portfolios to lock in asset yields, and by lowering rates paid to clients on interest-bearing liabilities. Since the Company establishes the rates paid on certain brokerage client cash balances and deposits from banking clients, as well as the rates charged on receivables from brokerage clients, and also controls the composition of its investment securities, it has some ability to manage its net interest spread. However, the spread is influenced by external factors such as the interest rate environment and competition. The current low interest rate environment limits the extent to which the Company can reduce interest expense paid on funding sources. To a lesser degree, the Company is sensitive to changes in long-term interest rates through some of its investment portfolios. To mitigate the related risk, the Company may alter the types of investments purchased. For discussion of the impact of current market conditions on net interest revenue, see “Current Market and Regulatory Environment and Other Developments.”
The Company’s interest-earning assets are financed primarily by brokerage client cash balances and Schwab Bank deposits. Non-interest-bearing funding sources include non-interest-bearing brokerage client cash balances, stockholders’ equity, and proceeds from stock-lending activities. Revenue from stock-lending activities is included in other interest revenue.
Schwab Bank maintains available for sale and held to maturity investment portfolios for liquidity as well as to earn interest by investing funds from deposits that are in excess of loans to banking clients and liquidity requirements. Schwab Bank lends funds to banking clients primarily in the form of mortgage loans, HELOCs, and personal loans secured by securities. These loans are largely funded by interest-bearing deposits from banking clients.
In clearing their clients’ trades, Schwab and optionsXpress, Inc. hold cash balances payable to clients. In most cases, Schwab and optionsXpress, Inc. pay their clients interest on cash balances awaiting investment, and in turn invest these funds and earn interest revenue. Receivables from brokerage clients consist primarily of margin loans to brokerage clients. Margin loans are loans made to clients on a secured basis to purchase securities. Pursuant to applicable regulations, client cash balances that are not used for margin lending are generally segregated into investment accounts that are maintained for the exclusive benefit of clients, which are recorded in cash and investments segregated on the Company’s consolidated balance sheets. When investing segregated client cash balances, Schwab and optionsXpress, Inc. must adhere to applicable regulations that restrict investments to securities guaranteed by the full faith and credit of the U.S. government, participation certificates, mortgage-backed securities guaranteed by the Government National Mortgage Association, deposits held at U.S.
Mutual Fund OneSource.
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)
banks and thrifts, and resale agreements collateralized by qualified securities. Additionally, Schwab and optionsXpress, Inc. have established policies for the minimum credit quality and maximum maturity of these investments.
The following table presents net interest revenue information corresponding to interest-earning assets and funding sources on the consolidated balance sheets:
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Year Ended December 31, | | 2014 | | 2013 | | 2012 |
| | | | | Interest | | Average | | | | | Interest | | Average | | | | | Interest | | Average |
| | Average | | Revenue/ | | Yield/ | | Average | | Revenue/ | | Yield/ | | Average | | Revenue/ | | Yield/ |
| | Balance | | Expense | | Rate | | Balance | | Expense | | Rate | | Balance | | Expense | | Rate |
Interest-earning assets: | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 7,179 | | $ | 16 | | 0.22 | % | | $ | 6,943 | | $ | 16 | | 0.23 | % | | $ | 7,130 | | $ | 18 | | 0.25 | % |
Cash and investments segregated | | | 20,268 | | | 24 | | 0.12 | % | | | 25,419 | | | 35 | | 0.14 | % | | | 25,263 | | | 46 | | 0.18 | % |
Broker-related receivables (1) | | | 325 | | | - | | 0.09 | % | | | 377 | | | - | | 0.04 | % | | | 351 | | | - | | 0.04 | % |
Receivables from brokerage clients | | | 13,778 | | | 482 | | 3.50 | % | | | 11,800 | | | 434 | | 3.68 | % | | | 10,928 | | | 446 | | 4.08 | % |
Securities available for sale (2) | | | 52,057 | | | 546 | | 1.05 | % | | | 49,114 | | | 557 | | 1.13 | % | | | 39,745 | | | 583 | | 1.47 | % |
Securities held to maturity | | | 32,361 | | | 828 | | 2.56 | % | | | 24,915 | | | 610 | | 2.45 | % | | | 15,371 | | | 397 | | 2.58 | % |
Loans to banking clients | | | 12,906 | | | 355 | | 2.75 | % | | | 11,758 | | | 329 | | 2.80 | % | | | 10,053 | | | 309 | | 3.07 | % |
Loans held for sale | | | - | | | - | | - | | | | - | | | - | | - | | | | 18 | | | 1 | | 4.12 | % |
Total interest-earning assets | | | 138,874 | | | 2,251 | | 1.62 | % | | | 130,326 | | | 1,981 | | 1.52 | % | | | 108,859 | | | 1,800 | | 1.65 | % |
Other interest revenue | | | | | | 123 | | | | | | | | | 104 | | | | | | | | | 114 | | | |
Total interest-earning assets | | $ | 138,874 | | $ | 2,374 | | 1.71 | % | | $ | 130,326 | | $ | 2,085 | | 1.60 | % | | $ | 108,859 | | $ | 1,914 | | 1.76 | % |
Funding sources: | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Deposits from banking clients | | $ | 95,842 | | $ | 30 | | 0.03 | % | | $ | 85,465 | | $ | 31 | | 0.04 | % | | $ | 65,546 | | $ | 42 | | 0.06 | % |
Payables to brokerage clients | | | 26,731 | | | 2 | | 0.01 | % | | | 30,258 | | | 3 | | 0.01 | % | | | 29,831 | | | 3 | | 0.01 | % |
Long-term debt | | | 1,901 | | | 73 | | 3.84 | % | | | 1,751 | | | 69 | | 3.94 | % | | | 1,934 | | | 103 | | 5.33 | % |
Total interest-bearing liabilities | | | 124,474 | | | 105 | | 0.08 | % | | | 117,474 | | | 103 | | 0.09 | % | | | 97,311 | | | 148 | | 0.15 | % |
Non-interest-bearing funding sources | | | 14,400 | | | | | | | | | 12,852 | | | | | | | | | 11,548 | | | | | | |
Other interest expense (3) | | | | | | (3) | | | | | | | | | 2 | | | | | | | | | 2 | | | |
Total funding sources | | $ | 138,874 | | $ | 102 | | 0.07 | % | | $ | 130,326 | | $ | 105 | | 0.08 | % | | $ | 108,859 | | $ | 150 | | 0.14 | % |
Net interest revenue | | | | | $ | 2,272 | | 1.64 | % | | | | | $ | 1,980 | | 1.52 | % | | | | | $ | 1,764 | | 1.62 | % |
(1)
| Interest revenue was less than $500,000 in the periods presented.
|
(2)
| Amounts have been calculated based on amortized cost.
|
(3)
| Includes the impact of capitalizing interest on building construction and software development.
|
Net interest revenue increased in 2014 from 2013 primarily due to higher balances of interest-earning assets, including margin loans and the Company’s investment portfolio, and the effect higher average interest rates on securities held to maturity had on the Company’s average net interest margin. The growth in the average balance of deposits from banking clients funded the increase in the balances of securities held to maturity and securities available for sale.
Net interest revenue increased in 2013 from 2012 primarily due to higher balances of interest-earning assets and higher interest rates on new fixed-rate investments, including securities available for sale and securities held to maturity, partially offset by the effect lower average short-term interest rates and the maturity of short-term interest-earning assets had on the Company’s average net interest margin. The growth in the average balance of deposits from banking clients funded the increase in the balance of securities available for sale and securities held to maturity. Net interest revenue also increased due to the redemption of higher rate trust preferred securities and the exchange of higher rate Senior Notes during the third quarter of 2012.
Trading Revenue
Trading revenue includes commission and principal transaction revenues. Commission revenue is affected by the number of revenue trades executed and the average revenue earned per revenue trade. Principal transaction revenue is primarily comprised of revenue from trading activity in
client fixed income
securities.securities with clients. To accommodate clients’ fixed income trading activity,
the CompanySchwab maintains positions in fixed income securities, including
U.S. state and municipal debt obligations, U.S. Government
and corporate debt, and other securities. The difference between the price at which the Company buys and sells securities to and from its clients and other broker-dealers is recognized as principal transaction revenue. Principal transaction
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)
revenue also includes adjustments to the fair value of these securities positions. Factors that influence principal transaction revenue include the volume of client trades and market price volatility.
Trading revenue remained relatively flat in 2014 from 2013. Trading revenue increased by $45 million, or 5%, in 2013 from 2012 primarily due to higher daily average revenue trades and two additional trading days in 2013.
Daily average revenue trades were relatively flat in 2014 from 2013 primarily due to a higher volume of equity trades, offset by a lower volume of mutual fund trades. Daily average revenue trades increased by 4% in 2013 from 2012 primarily due to a higher volume of equity and mutual fund trades, partially offset by a lower volume of future and option trades. Average revenue per revenue trade remained relatively flat from 2012 to 2014.
| | | | | | | | | | | | | | | | |
| | Growth Rate | | | | | | | | | | | | |
Year Ended December 31, | | 2013-2014 | | | 2014 | | | 2013 | | | 2012 |
Daily average revenue trades (1) (in thousands) | | 1 | % | | | | 298.2 | | | | 295.0 | | | | 282.7 | |
Clients’ daily average trades (2) (in thousands) | | 5 | % | | | | 516.8 | | | | 490.5 | | | | 440.9 | |
Number of trading days (3) | | - | | | | | 250.5 | | | | 250.5 | | | | 248.5 | |
Average revenue per revenue trade | | (1) | % | | | $ | 12.13 | | | $ | 12.31 | | | $ | 12.35 | |
(1)
| Includes all client trades that generate trading revenue (i.e., commission revenue or principal transaction revenue).
|
(2)
| Includes daily average revenue trades, trades by clients in asset-based pricing relationships, and all commission-free trades, including the Company’s Mutual Fund OneSource funds and ETFs, and other proprietary products. Clients’ daily average trades is an indicator of client engagement with securities markets.
|
(3)
| October 29 and 30, 2012, were not included as trading days due to weather-related market closures.
|
Other Revenue – Net
Other revenue – net includes order flow revenue, nonrecurring gains, software fees from the Company’s portfolio management services, exchange processing fees, realized gains or losses on sales of securities available for sale, and other service fees.
Other revenue – net increased by $107 million, or 45%, in 2014 compared to 2013 primarily due to a net insurance settlement of $45 million, net litigation proceeds of $28 million related to the Company’s non-agency residential mortgage-backed securities portfolio, and increases in order flow revenue.
Other revenue – net decreased by $20 million, or 8%, in 2013 compared to 2012 primarily due to a non-recurring gain of $70 million relating to a confidential resolution of a vendor dispute in the second quarter of 2012 and realized gains of $35 million from the sales of securities available for sale in 2012, partially offset by an increase in order flow revenue that Schwab began receiving in November 2012.
Provision for Loan Losses
The provision for loan losses decreased by $3 million in 2014, from $(1) million to $(4) million in 2013 and 2014, respectively, primarily due to improved residential real estate mortgage and HELOC credit quality in the Company’s loan portfolio. Charge-offs were $5 million, $11 million, and $16 million in 2014, 2013, and 2012, respectively. For further discussion on the Company’s credit risk and the allowance for loan losses, see “Risk Management – Credit Risk” and “Item 8 – Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – 6. Loans to Banking Clients and Related Allowance for Loan Losses.”
Net Impairment Losses on Securities
Net impairment losses on securities were $1 million, $10 million, and $32 million in 2014, 2013, and 2012, respectively. These charges were lower in 2014 compared to 2013, reflecting a stabilization of the credit characteristics of certain non-agency residential mortgage-backed securities’ underlying loans. For further discussion, see “Item 8 – Financial Statements
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 trading revenue and Supplementary Data – Notes to Consolidated Financial Statements – 5. Securities Available for Salethe related drivers:
|
| | | | | | | | | | | | | | |
| Year Ended December 31, | Growth Rate
2016-2017 |
| | 2017 |
| | 2016 |
| | 2015 |
|
| DARTs (in thousands) | 10 | % | | 321.3 |
| | 291.6 |
| | 292.0 |
|
| Clients’ daily average trades (in thousands) | 8 | % | | 608.8 |
| | 561.8 |
| | 536.9 |
|
| Number of trading days | (1 | )% | | 250.0 |
| | 251.5 |
| | 251.0 |
|
| Daily average revenue per revenue trade | (27 | )% | | $ | 8.20 |
| | $ | 11.23 |
| | $ | 11.83 |
|
| Trading revenue | (21 | )% | | $ | 654 |
| | $ | 825 |
| | $ | 866 |
|
Trading revenue decreased by $171 million and
Securities Held to Maturity.”Expenses Excluding Interest
As shown$41 million in the table below, expenses excluding interest were higher in 20142017 and 2016, respectively, when compared to 2013the prior years primarily due to increaseslower commissions rates on DARTs.
During the first quarter of 2017, we announced two trading price reductions which lowered standard equity, ETF, and option trade commissions from $8.95 to $4.95 and lowered the per contract option fee from $.75 to $.65. These reductions in
compensationcommission rates reflect our continuing belief that pricing should never be an obstacle for choosing Schwab and
our commitment to share the benefits
and professional services expense. Expenses excluding interest were higher in 2013 compared to 2012 primarily due to increases in compensation and benefits, professional services, advertising and market development, and other expense. | | | | | | | | | | | | | | | | |
| | Growth Rate | | | | | | | | | | | | |
Year Ended December 31, | | 2013-2014 | | | 2014 | | | 2013 | | | 2012 |
Compensation and benefits | | 8 | % | | | $ | 2,184 | | | $ | 2,027 | | | $ | 1,803 | |
Professional services | | 10 | % | | | | 457 | | | | 415 | | | | 388 | |
Occupancy and equipment | | 5 | % | | | | 324 | | | | 309 | | | | 311 | |
Advertising and market development | | (5) | % | | | | 245 | | | | 257 | | | | 241 | |
Communications | | 1 | % | | | | 223 | | | | 220 | | | | 220 | |
Depreciation and amortization | | (1) | % | | | | 199 | | | | 202 | | | | 196 | |
Other | | 4 | % | | | | 311 | | | | 300 | | | | 274 | |
Total expenses excluding interest | | 6 | % | | | $ | 3,943 | | | $ | 3,730 | | | $ | 3,433 | |
Expenses as a percentage of total net revenues: | | | | | | | | | | | | | | | | |
Compensation and benefits | | | | | | | 36 | % | | | 37 | % | | | 37 | % |
Advertising and market development | | | | | | | 4 | % | | | 5 | % | | | 5 | % |
Compensation and Benefits
Compensation and benefits expense includes salaries and wages, incentive compensation, and related employee benefits and taxes. Incentive compensation includes variable compensation, discretionary bonuses, and stock-based compensation. Variable compensation includes payments to certain individuals based on their sales performance. Discretionary bonuses are based on the Company’s overall performance as measured by earnings per common share, and therefore will fluctuateof scale with this measure. Stock-based compensation primarily includes employee and boardclients.
With these changes, trading revenue has declined from a peak of
director stock options and restricted stock.The following table shows a comparison50%-60% of certain compensation and benefits components and employee data:
| | | | | | | | | | | | | | | | |
| | Growth Rate | | | | | | | | | | | | |
Year Ended December 31, | | 2013-2014 | | | 2014 | | | 2013 | | | 2012 |
Salaries and wages | | 12 | % | | | $ | 1,245 | | | $ | 1,110 | | | $ | 1,043 | |
Incentive compensation | | 1 | % | | | | 605 | | | | 599 | | | | 466 | |
Employee benefits and other | | 5 | % | | | | 334 | | | | 318 | | | | 294 | |
Total compensation and benefits expense | | 8 | % | | | $ | 2,184 | | | $ | 2,027 | | | $ | 1,803 | |
Full-time equivalent employees (in thousands) (1) | | | | | | | | | | | | | | | | |
At year end | | 6 | % | | | | 14.6 | | | | 13.8 | | | | 13.8 | |
Average | | 2 | % | | | | 14.2 | | | | 13.9 | | | | 13.8 | |
(1)
| Includes full-time, part-time and temporary employees, and persons employed on a contract basis, and excludes employees of outsourced service providers.
|
Salaries and wages increased in 2014 from 2013 primarily due to a $68 million charge in 2014 for estimated future severance benefits resulting from changestotal revenue in the Company’s geographic footprintearly 1990’s to the current low of 8% in 2017, 11% in 2016 and due14% in 2015.
Other Revenue
Other revenue includes order flow revenue, other service fees, software fees from our portfolio management solutions, exchange processing fees, and nonrecurring gains.
Order flow revenue was $114 million during 2017, and $103 million for both 2016 and 2015. In 2016 and 2015, other revenue also included net litigation proceeds of $16 and $75 million, respectively, relating to
annual salary increases. Incentive compensation was relatively flat in 2014 from 2013 primarily due to an increase in discretionary bonus costs, offset by higher 2013 expense related to a new payout schedule for field incentive plans.our non-agency residential mortgage-backed securities portfolios.
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)
Total Expenses Excluding Interest
The following table shows a comparison of total expenses excluding interest:
|
| | | | | | | | | | | | | | |
| | Growth Rate 2016-2017 | | 2017 | | 2016 | | 2015 |
| Compensation and benefits | | | | | | | |
| Salaries and wages | 9 | % | | $ | 1,496 |
| | $ | 1,368 |
| | $ | 1,258 |
|
| Incentive compensation | 16 | % | | 797 |
| | 689 |
| | 618 |
|
| Employee benefits and other | 9 | % | | 444 |
| | 409 |
| | 365 |
|
| Total compensation and benefits | 11 | % | | $ | 2,737 |
| | $ | 2,466 |
| | $ | 2,241 |
|
| Professional services | 15 | % | | 580 |
| | 506 |
| | 459 |
|
| Occupancy and equipment | 10 | % | | 436 |
| | 398 |
| | 353 |
|
| Advertising and market development | 1 | % | | 268 |
| | 265 |
| | 249 |
|
| Communications | (3 | )% | | 231 |
| | 237 |
| | 233 |
|
| Depreciation and amortization | 15 | % | | 269 |
| | 234 |
| | 224 |
|
| Regulatory fees and assessments | 24 | % | | 179 |
| | 144 |
| | 107 |
|
| Other | 14 | % | | 268 |
| | 235 |
| | 235 |
|
| Total expenses excluding interest | 11 | % | | $ | 4,968 |
| | $ | 4,485 |
| | $ | 4,101 |
|
| Expenses as a percentage of total net revenues: | | | | | | | |
| Compensation and benefits | | | 32 | % | | 33 | % | | 35 | % |
| Advertising and market development | | | 3 | % | | 4 | % | | 4 | % |
| Full-time equivalent employees (in thousands): | | | | | | | |
| At year end | 9 | % | | 17.6 |
| | 16.2 |
| | 15.3 |
|
| Average | 6 | % | | 16.9 |
| | 15.9 |
| | 15.1 |
|
Expenses excluding interest increased in 2017 and 2016 from the prior years by 11% and 9%, respectively. The largest drivers of the increase in both years were compensation and benefits and professional services.
Salaries and wages increased in 20132017 and 2016 from 2012the prior years, primarily due to increases in employee headcount to support the growth in the business and annual salary increases.
Incentive compensation increased in 20132017 and 2016 from 2012the prior years, primarily due to increased net client asset flows and increased employee headcount.
Employee benefits and other expenses increased in 2017 and 2016 from the
transition to a new payout schedule for field incentive plans, increased individual sales performance compensationprior years as a result of
higher field sales volume,the increases in employee headcount, salaries, wages and
increased funding for the corporate bonus plan commensurate with achieving higher earnings per common share. Employee benefits and other expense increased in 2013 from 2012 primarily due to payroll taxes related to the increase in incentive
compensation, and increased contributions to new employee HSAs. The Company was converting to HSA-based healthcare and employee enrollment in these plans rose significantly in 2013.Expenses Excluding Compensation and Benefits
compensation.
Professional services expense increased in 20142017 and 2016 from 2013the prior years, primarily due to higher spending on technology servicesprojects and an increase in fees paid to outsourced service providersasset management and consultants. Professional servicesadministration related expenses resulting from growth in the Schwab Funds® and Schwab ETFs™.
Occupancy and equipment expense increased in 20132017 and 2016 from 2012the prior years, primarily due to increased software maintenance expense relating to information technology systems and increases in facility operational expenses attributable to growth in Schwab’s geographic footprint.
Depreciation and amortization expenses were higher in 2017 and 2016 from the prior years, due to higher amortization of internally developed software associated with our investment in software and technology enhancements.
THE CHARLES SCHWAB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)
Regulatory fees assessments increased in 2017 and 2016 from the prior years, primarily due to an increase in
fees paid to outsourced service providers and consultants and higher spending on printing and fulfillment services.Occupancy and equipment expense increased in 2014 from 2013 primarily due to an increase in software maintenance expense relating to the Company’s information technology systems. Occupancy and equipment expense was relatively flat in 2013 compared to 2012.
Advertising and market development expense decreased in 2014 from 2013 primarily due to production costs incurred in 2013 relating to the development of the Company’s advertising and branding initiative, Own your tomorrowTM, partially offset by higher 2014 spending on customer promotions. Advertising and market development expense increased in 2013 from 2012 primarily due to higher spending on media relating to the launch of the Company’s new advertising and branding initiative, Own your tomorrowTM.
Other expense increased in 2014 from 2013 primarily due to an increase in travel costsFDIC insurance assessments which rose as a result of increased employee headcounthigher bank deposits and travel. the effect of a new surcharge that commenced in the third quarter of 2016.
Other expenseexpenses have increased in 20132017 from 2012 primarilythe prior year due to antravel and entertainment, asset volume-related increases, and some miscellaneous items.
Capital expenditures were $412 million, $353 million, and $285 million in 2017, 2016, and 2015, respectively. The increase in
regulatory assessments.capital expenditures in both 2017 and 2016 from the prior years was due to our growing geographical expansion in the U.S. and investments in technology projects. The largest component of capital expenditures was capitalized costs for developing internal-use software of $157 million, $130 million, and $107 million in 2017, 2016, and 2015, respectively.
Taxes on Income
The Company’s
Effective January 1, 2017, Schwab adopted Accounting Standards Update (ASU) 2016-09, which prospectively changes the accounting treatment of a portion of the tax deductions relating to equity compensation. These deductions were previously reflected directly in additional paid-in capital, a component of stockholders’ equity, and are now included in taxes on income, a component of net income. As a result of this change, our tax expense was reduced by approximately $87 million in 2017. Future effects will depend on our share price, restricted stock vesting, and the volume of equity incentive options exercised.
As previously discussed under Current Regulatory Environment and Other Developments, the Tax Act was signed into law during 2017. Among other things, the Tax Act lowers the federal corporate income tax rate from 35% to 21%, effective for tax years including or commencing January 1, 2018.
In connection with our initial analysis of the impact of the Tax Act, Schwab recognized a $46 million one-time non-cash charge to taxes on income in the fourth quarter of 2017 associated with the remeasurement of net deferred tax assets and other tax adjustments related to the Tax Act.
Schwab’s effective income tax rate on income before taxes was 37.5%35.5% in 2014, 37.2%2017 compared to 36.9% in 2013, and 36.0%2016. The decrease in 2012. The increase in 2014 from 2013 was primarily due torates between the two years reflects the net impact of the above two items. The effective rate in 2015 was 36.5%.
We estimate our effective income tax rate to be between 23% and 24% in 2018 as a
non-recurring state tax benefit of $4 million from 2013. The increase in 2013 from 2012 was primarily due to the impact of a non-recurring state tax benefit of $20 million in 2012, partially offset by the recognitionresult of the
additional state tax benefit of $4 million in 2013. Tax Act.
Segment Information
The Company
Schwab provides financial services to individuals and institutional clients through two segments – Investor Services and Advisor Services. The Investor Services segment provides retail brokerage and banking services,
to individual investors, retirement plan services, and
other corporate brokerage
services.services to individual investors. The Advisor Services segment provides custodial, trading,
banking, and support services
to independent investment advisors, andas well as retirement business services to independent
RIAs, independent retirement
plan advisors and
recordkeepers whose plan assets are held at Schwab Bank. Banking revenuesrecordkeepers. Revenues and expenses are
allocatedattributed to the
Company’s two segments based on which segment services the client.
The CompanyManagement evaluates the performance of
itsthe segments on a pre-tax
basis, excluding items such as significant nonrecurring gains, impairment charges on non-financial assets, discontinued operations, extraordinary items, and significant restructuring and other charges.basis. Segment assets and liabilities are not used for evaluating segment performance or in deciding how to allocate resources to segments.
Net revenues in both segments are generated from the underlying client assets and trading activity; differences in the composition of net revenues between the segments are based on the composition of client assets, client trading frequency, and pricing unique to each. While both segments leverage the scale and efficiency of our platforms, segment expenses reflect the dynamics of serving millions of clients in Investor Services versus the thousands of RIAs on the advisor platform.
THE CHARLES SCHWAB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)
Financial information for
the Company’s reportableour segments is presented in the following
tables:table: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Investor Services | | | Advisor Services | | |
| Growth Rate | | | | | | | | | | | | | Growth Rate | | | | | | | | | | | | |
Year Ended December 31, | 2013-2014 | | 2014 | | | 2013 | | | 2012 | | 2013-2014 | | 2014 | | | 2013 | | | 2012 | |
Net Revenues | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Asset management and | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
administration fees | 9 | % | | $ | 1,775 | | | $ | 1,627 | | | $ | 1,436 | | | 10 | % | | $ | 758 | | | $ | 689 | | | $ | 607 | | |
Net interest revenue | 16 | % | | | 2,030 | | | | 1,756 | | | | 1,559 | | | 8 | % | | | 242 | | | | 224 | | | | 205 | | |
Trading revenue | - | | | | 618 | | | | 621 | | | | 612 | | | (1) | % | | | 289 | | | | 292 | | | | 255 | | |
Other – net | 24 | % | | | 221 | | | | 178 | | | | 123 | | | 25 | % | | | 71 | | | | 57 | | | | 62 | | |
Provision for loan losses | N/M | | | | 4 | | | | 1 | | | | (15) | | | - | | | | - | | | | - | | | | (1) | | |
Net impairment losses | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
on securities | (89) | % | | | (1) | | | | (9) | | | | (29) | | | (100) | % | | | - | | | | (1) | | | | (3) | | |
Total net revenues | 11 | % | | | 4,647 | | | | 4,174 | | | | 3,686 | | | 8 | % | | | 1,360 | | | | 1,261 | | | | 1,125 | | |
Expenses Excluding | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Interest | 3 | % | | | 2,974 | | | | 2,899 | | | | 2,693 | | | 8 | % | | | 901 | | | | 831 | | | | 739 | | |
Income before taxes | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
on income | 31 | % | | $ | 1,673 | | | $ | 1,275 | | | $ | 993 | | | 7 | % | | $ | 459 | | | $ | 430 | | | $ | 386 | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Unallocated | | | Total | | |
| Growth Rate | | | | | | | | | | | | | Growth Rate | | | | | | | | | | | | |
Year Ended December 31, | 2013-2014 | | 2014 | | | 2013 | | | 2012 | | 2013-2014 | | 2014 | | | 2013 | | | 2012 | |
Net Revenues | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Asset management and | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
administration fees | N/M | | | $ | - | | | $ | (1) | | | $ | - | | | 9 | % | | $ | 2,533 | | | $ | 2,315 | | | $ | 2,043 | | |
Net interest revenue | N/M | | | | - | | | | - | | | | - | | | 15 | % | | | 2,272 | | | | 1,980 | | | | 1,764 | | |
Trading revenue | N/M | | | | - | | | | - | | | | 1 | | | (1) | % | | | 907 | | | | 913 | | | | 868 | | |
Other – net | N/M | | | | 51 | | | | 1 | | | | 71 | | | 45 | % | | | 343 | | | | 236 | | | | 256 | | |
Provision for loan losses | N/M | | | | - | | | | - | | | | - | | | N/M | | | | 4 | | | | 1 | | | | (16) | | |
Net impairment losses | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
on securities | N/M | | | | - | | | | - | | | | - | | | (90) | % | | | (1) | | | | (10) | | | | (32) | | |
Total net revenues | N/M | | | | 51 | | | | - | | | | 72 | | | 11 | % | | | 6,058 | | | | 5,435 | | | | 4,883 | | |
Expenses Excluding | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Interest | N/M | | | | 68 | | | | - | | | | 1 | | | 6 | % | | | 3,943 | | | | 3,730 | | | | 3,433 | | |
Income before taxes | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
on income | N/M | | | $ | (17) | | | $ | - | | | $ | 71 | | | 24 | % | | $ | 2,115 | | | $ | 1,705 | | | $ | 1,450 | | |
N/M Not meaningful.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Investor Services | | Advisor Services | | Total |
| | | Growth Rate
2016-2017 | | 2017 | | 2016 | | 2015 | | Growth Rate
2016-2017 | | 2017 | | 2016 | | 2015 | | Growth Rate
2016-2017 | | 2017 | | 2016 | | 2015 |
| Year Ended December 31, | | | | | | | | | | |
| Net Revenues | | | | | | | | | | | | | | | | | | | | | | | | |
| Net interest revenue | | 25 | % | | $ | 3,231 |
| | $ | 2,591 |
| | $ | 2,133 |
| | 44 | % | | $ | 1,051 |
| | $ | 731 |
| | $ | 392 |
| | 29 | % | | $ | 4,282 |
| | $ | 3,322 |
| | $ | 2,525 |
|
| Asset management and | | | | | | | | | | | | | | | | | | | | | | | | |
| administration fees | | 12 | % | | 2,344 |
| | 2,093 |
| | 1,837 |
| | 9 | % | | 1,048 |
| | 962 |
| | 813 |
| | 11 | % | | 3,392 |
| | 3,055 |
| | 2,650 |
|
| Trading revenue | | (22 | )% | | 408 |
| | 524 |
| | 556 |
| | (18 | )% | | 246 |
| | 301 |
| | 310 |
| | (21 | )% | | 654 |
| | 825 |
| | 866 |
|
| Other | | 9 | % | | 217 |
| | 199 |
| | 234 |
| | 1 | % | | 73 |
| | 72 |
| | 94 |
| | 7 | % | | 290 |
| | 271 |
| | 328 |
|
| Provision for loan losses | | (100 | )% | | — |
| | 4 |
| | 11 |
| | (100 | )% | | — |
| | 1 |
| | — |
| | (100 | )% | | — |
| | 5 |
| | 11 |
|
| Total net revenues | | 15 | % | | 6,200 |
| | 5,411 |
| | 4,771 |
| | 17 | % | | 2,418 |
| | 2,067 |
| | 1,609 |
| | 15 | % | | 8,618 |
| | 7,478 |
| | 6,380 |
|
| Expenses Excluding | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest | | 10 | % | | 3,725 |
| | 3,380 |
| | 3,090 |
| | 12 | % | | 1,243 |
| | 1,105 |
| | 1,011 |
| | 11 | % | | 4,968 |
| | 4,485 |
| | 4,101 |
|
| Income before taxes | | | | | | | | | | | | | | | | | | | | | | | | |
| on income | | 22 | % | | $ | 2,475 |
| | $ | 2,031 |
| | $ | 1,681 |
| | 22 | % | | $ | 1,175 |
| | $ | 962 |
| | $ | 598 |
| | 22 | % | | $ | 3,650 |
| | $ | 2,993 |
| | $ | 2,279 |
|
Total net revenues increased by $473$789 million, or 11%15%, in 20142017 from 20132016 primarily due to increases in net interest revenue and asset management and administration fees, partially offset by a decrease in trading revenue. Net interest revenue increased primarily due to higher net interest margins and otherhigher balances of interest-earning assets. Asset management and administration fees increased primarily due to higher client assets enrolled in advisory solutions and higher net fees on money market fund assets. Trading revenue – net.decreased primarily due to lower commission rates. Expenses excluding interest increased by $345 million, or 10%, in 2017 from 2016 primarily due to higher compensation and benefits, technology project spend, asset management and administration related expenses and regulatory fee assessments.
Total net revenues increased by $640 million, or 13%, in 2016 from 2015 primarily due to increases in net interest revenue and asset management and administration fees. Net interest revenue increased primarily due to higher balances of interest-earning assets including margin loans and the Company’s investment portfolio, and the effect higher average interest rates on securities held to maturity had on the Company’s average net interest margin.those assets. Asset management and administration fees increased due to fees from mutual fund services, advice solutions, and other asset management and administration services. Mutual fund service fees increased due to growth in client assets invested in the Company’s Mutual Fund OneSource funds and equity and bond funds, partially offset by a decrease in net money market mutual fund fees as a result of continued low yields on fund assets. Advice solution fees increased due to growth in client assets enrolled in advisory offers. Other asset management and administration fees increased primarily due to third-party mutualhigher net yields on money market fund service fees on higherassets, partially offset by a reduction in client asset balances investedassets in other third-party mutual funds. Other revenue – net increased primarily due to litigation proceeds related to the Company’s non-agency residential mortgage-backed securities portfolio and increases in
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)
order flow revenue.Mutual Fund OneSource
®. Expenses excluding interest increased by $75$290 million, or 3%9%, in 20142016 from 20132015 primarily due to growth in the business resulting in increases in compensation and benefits, depreciation and professional services expense, partially offset by a decrease in advertisingamortization, and market development expense.Netoccupancy and equipment expenses.
Advisor Services
Total net revenues increased by $488$351 million, or 13%17%, in 20132017 from 20122016 primarily due to increases in net interest revenue and asset management and administration fees, and otherpartially offset by a decrease in trading revenue. Net interest revenue increased primarily due to higher balances of interest-earning assets partially offset by the effect lower average short-term interest rates had on the Company’s averageand higher net interest margin.margins. Asset management and administration fees increased primarily due to increases in advice solutionshigher fees and mutual fund service fees. Advice solutions fees increased due to growth in client assets enrolled in advisory offers, including Windhaven and Schwab Private Client. Mutual fund service fees increased due to market appreciation andfrom growth in client assets invested in the Company’s Mutual Fund OneSource funds,ETFs and equity and bond funds, partially offset by a decrease inand higher net fees on money market mutual fund fees as a result of lower yields on fund assets. OtherTrading revenue – net increaseddecreased primarily due to an increase in order flow revenue that Schwab began receiving in November 2012.lower commission rates. Expenses excluding interest increased by $206$138 million, or 8%12%, in 20132017 from 20122016 primarily due to higher compensation and benefits, technology project spend, asset management and administration related expenses, and regulatory fee assessments.
Total net revenues increased by $458 million, or 28%, in 2016 from 2015 primarily due to increases in
compensationnet interest revenue and
benefits, professional services, advertising and market development, and other expenses.Advisor Services
Net revenues increased by $99 million, or 8%, in 2014 from 2013 primarily due to an increase in asset management and administration fees, net interest revenue, and other revenue – net. Asset management and administration fees increased due to fees from mutual fund services, advice solutions, and other asset management and administration services. Mutual fund service fees increased due to growth in client assets invested in the Company’s Mutual Fund OneSource funds and equity and bond funds, partially offset by a decrease in net money market mutual fund fees as a result of continued low yields on fund assets. Advice solutions fees increased due to growth in client assets enrolled in advisory offers. Other asset management and administration fees increased primarily due to third-party mutual fund service fees on higher client asset balances invested in other third-party mutual funds.fees. Net interest revenue increased primarily due to higher balances of interest-earning assets including margin loans and the Company’s investment portfolio, and the effect higher average interest rates on securities heldthose assets. This growth in assets was bolstered by the migration of more uninvested client cash balances in the segment to maturity had on the Company’s average net interest margin. Other revenue – net increased primarily due to increases in order flow revenue. Expenses excluding interest increased by $70 million, or 8%, in 2014 from 2013 primarily due to increases in compensation and benefits and professional services expense.
Net revenues increased by $136 million, or 12%, in 2013 from 2012 primarily due to increases in asset management and administration fees, trading revenue, and net interest revenue.Schwab Bank. Asset management and administration fees increased primarily due to increases in mutualhigher net yields on money market fund service fees and advice solutions fees. Mutual fund service fees increased due to market appreciation and growth in client assets invested in the Company’s Mutual Fund OneSource funds, and equity and bond funds. Advice solutions fees increased due to growth in client assets enrolled in advisory offers. Trading revenue increased primarily due to higher daily average revenue trades and two additional trading days in 2013. Net interest revenue increased primarily due to higher balances of interest-earning assets, partially offset by the effect lower average short-term interest rates had on the Company’s average net interest margin.assets. Expenses excluding interest increased by $92$94 million, or 12%9%, in 20132016 from 20122015 primarily due to increases in growth in the business resulting in increases in compensation and benefits, professional services, advertisingoccupancy and market development expenses,equipment, and other expenses.
Unallocated
Other revenue – net in 2014 includes a net insurance settlement of $45 million.
Other revenue – net in 2012 includes a non-recurring gain of $70 million relating to a confidential resolution of a vendor dispute.
Expenses excluding interest increased in 2014 from 2013 as a result of a charge of $68 million in the third quarter of 2014 for estimated future severance benefits resulting from changes in the Company’s geographic footprint.
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)
LIQUIDITY AND CAPITAL RESOURCES
CSC conducts substantially all of its business through its wholly-owned subsidiaries. The Company’s capital structure is designed to provide each subsidiary with capital and liquidity to meet its operational needs and regulatory requirements.
CSC is a savings and loan holding company and Schwab Bank, CSC’s depository institution, is a federal savings bank. CSC is subject to supervision and regulation by the Federal Reserve and Schwab Bank is subject to supervision and regulation by the OCC.
Liquidity
CSC
CSC’s liquidity needs arise from funding its subsidiaries’ operations, including margin and mortgage lending, and transaction settlement, in addition to funding cash dividends, acquisitions, investments, short- and long-term debt, and managing statutory capital requirements.
CSC’s liquidity needs are generally met through cash generated by its subsidiaries, as well as cash provided by external financing. CSC has a universal automatic shelf registration statement (Shelf Registration Statement) on file with the SEC which enables CSC to issue debt, equity, and other securities. CSC maintains excess liquidity in the form of overnight cash deposits and short-term investments to cover daily funding needs and to support growth in the Company’s business. Generally, CSC does not hold liquidity at its subsidiaries in excess of amounts deemed sufficient to support the subsidiaries’ operations, including any regulatory capital requirements. Schwab, Schwab Bank, and optionsXpress, Inc. are subject to regulatory requirements that may restrict them from certain transactions with CSC, as further discussed below. Management believes that funds generated by the operations of CSC’s subsidiaries will continue to be the primary funding source in meeting CSC’s liquidity needs, providing adequate liquidity to meet Schwab Bank’s capital guidelines, and maintaining Schwab and optionsXpress, Inc.’s net capital.
On July 25, 2013, CSC issued $275 million of Senior Notes that mature in 2018 under its Shelf Registration Statement. The Senior Notes have a fixed interest rate of 2.20% with interest payable semi-annually.
CSC is required to serve as a source of strength for Schwab Bank and must have the ability to provide financial assistance if Schwab Bank experiences financial distress. To manage capital adequacy, the Company currently utilizes a target Tier 1 Leverage Ratio for CSC, as currently defined by the Federal Reserve, of at least 6%. At December 31, 2014, CSC’s Tier 1 Leverage Ratio was 6.9%, Tier 1 Capital Ratio was 18.0%, and Total Capital Ratio was 18.1%. Prior to January 1, 2015, CSC, as a savings and loan holding company, was not subject to specific statutory capital requirements. Beginning on January 1, 2015, CSC is subject to new capital requirements set by the Federal Reserve.
The following are details of CSC’s long-term debt:
| | | | | | | | | | | | | | | |
| | Par | | | | | | | | | Standard | | | |
December 31, 2014 | Outstanding | | Maturity | | Interest Rate | | Moody’s | | & Poor’s | | Fitch | |
Senior Notes | | $ | 1,581 | | | 2015 – 2022 | | 0.850% to 4.45% fixed | | A2 | | A | | A | |
Medium-Term Notes | | $ | 250 | | | 2017 | | 6.375% fixed | | A2 | | A | | A | |
CSC has authorization from its Board of Directors to issue unsecured commercial paper notes (Commercial Paper Notes) not to exceed $1.5 billion. Management has set a current limit for the commercial paper program of $800 million. The maturities of the Commercial Paper Notes may vary, but are not to exceed 270 days from the date of issue. The commercial paper is not redeemable prior to maturity and cannot be voluntarily prepaid. The proceeds of the commercial paper program are to be used for general corporate purposes. There were no borrowings of Commercial Paper Notes outstanding at December 31, 2014. CSC’s ratings for these short-term borrowings are P1 by Moody’s, A1 by Standard & Poor’s, and F1 by Fitch.
THE CHARLES SCHWAB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)
RISK MANAGEMENTCSC maintains an $800 million committed, unsecured credit facility with a group of 12 banks, which is scheduled to expire in June 2015. This facility replaced a similar facility that expired in June 2014 and both facilities were unused during 2014. The funds under this facility are available for general corporate purposes. The financial covenants under this facility require Schwab to maintain a minimum net capital ratio, as defined, Schwab Bank to be well capitalized, as defined, and CSC to maintain a minimum level of stockholders’ equity, excluding accumulated other comprehensive income. At December 31, 2014, the minimum level of stockholders’ equity required under this facility was $7.8 billion (CSC’s stockholders’ equity, excluding accumulated other comprehensive income, at December 31, 2014, was $11.6 billion). Management believes that these restrictions will not have a material effect on CSC’s ability to meet foreseeable dividend or funding requirements.
CSC also has direct access to certain of the uncommitted, unsecured bank credit lines discussed below, that are primarily utilized by Schwab to manage short-term liquidity. These lines were not used by CSC during 2014.
In addition, Schwab provided CSC with a $1.0 billion credit facility, which was scheduled to expire in December 2014. Schwab terminated this credit facility in July 2014.
Schwab
Schwab’s
liquidity needs relating to client trading and margin borrowing activities are met primarily through cash balances in brokerage client accounts, which were $32.0 billion and $33.2 billion at December 31, 2014 and 2013, respectively. Management believes that brokerage client cash balances and operating earnings will continue to be the primary sources of liquidity for Schwab.Schwab is subject to regulatory requirements of Rule 15c3-1 under the Securities Exchange Act of 1934 (the Uniform Net Capital Rule) that are intended to ensure the general financial soundness and liquidity of broker-dealers. These regulations prohibit Schwab from repaying subordinated borrowings from CSC, paying cash dividends, or making unsecured advances or loans to its parent company or employees if such payment would result in a net capital amount of less than 5% of aggregate debit balances or less than 120% of its minimum dollar requirement of $250,000. At December 31, 2014, Schwab’s net capital was $1.6 billion (10% of aggregate debit balances), which was $1.2 billion in excess of its minimum required net capital and $739 million in excess of 5% of aggregate debit balances.
Schwab is also subject to Rule 15c3-3 under the Securities Exchange Act of 1934 and other applicable regulations that require it to maintain cash or qualified securities in a segregated reserve account for the exclusive benefit of clients. These funds are included in cash and investments segregated and on deposit for regulatory purposes in the Company’s consolidated balance sheets and are not available as a general source of liquidity.
Most of Schwab’s assets are readily convertible to cash, consisting primarily of short-term investment-grade, interest-earning investments (the majority of which are segregated for the exclusive benefit of clients pursuant to regulatory requirements), receivables from brokerage clients, and receivables from brokers, dealers, and clearing organizations. Client margin loans are demand loan obligations secured by readily marketable securities. Receivables from and payables to brokers, dealers, and clearing organizations primarily represent current open transactions, which usually settle, or can be closed out, within a few business days.
Schwab has a finance lease obligation related to an office building and land under a 20-year lease. The remaining finance lease obligation of $83 million at December 31, 2014, is being reduced by a portion of the lease payments over the remaining lease term of ten years.
To manage short-term liquidity, Schwab maintains uncommitted, unsecured bank credit lines with a group of banks. The need for short-term borrowings arises primarily from timing differences between cash flow requirements, scheduled liquidation of interest-earnings investments, and movements of cash to meet regulatory brokerage client cash segregation requirements. Schwab used such borrowings for three days in 2014, with average daily amounts borrowed of $25 million. There were no borrowings outstanding under these lines at December 31, 2014.
THE CHARLES SCHWAB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)
To partially satisfy the margin requirement of client option transactions with the Options Clearing Corporation, Schwab has unsecured standby letter of credit agreements (LOCs) with five banks in favor of the Options Clearing Corporation aggregating $225 million at December 31, 2014. There were no funds drawn under any of these LOCs during 2014. In connection with its securities lending activities, Schwab is required to provide collateral to certain brokerage clients. Schwab satisfies the collateral requirements by providing cash as collateral.
To manage Schwab’s regulatory capital requirement, CSC provides Schwab with a $1.4 billion subordinated revolving credit facility, which is scheduled to expire in March 2016. The amount outstanding under this facility at December 31, 2014, was $315 million. Borrowings under this subordinated lending arrangement qualify as regulatory capital for Schwab.
In addition, CSC provides Schwab with a $2.5 billion credit facility. In December 2014, CSC and Schwab agreed to extend the expiration date of this facility from December 2014 to December 2017. Borrowings under this facility do not qualify as regulatory capital for Schwab. There were no funds drawn under this facility at December 31, 2014.
Schwab Bank
Schwab Bank’s liquidity needs are met through deposits from banking clients and equity capital.
Deposits from banking clients at December 31, 2014 were $102.8 billion, which includes the excess cash held in certain Schwab and optionsXpress, Inc. brokerage accounts that is swept into deposit accounts at Schwab Bank. At December 31, 2014, these balances totaled $82.1 billion.
Schwab Bank is subject to regulatory requirements that restrict and govern the terms of affiliate transactions, such as extensions of credit and repayment of loans between Schwab Bank and CSC or CSC’s other subsidiaries. In addition, Schwab Bank is required to provide notice to and may be required to obtain approval of the OCC and the Federal Reserve to declare dividends to CSC.
Schwab Bank is required to maintain capital levels as specified in federal banking laws and regulations. Failure to meet the minimum levels could result in certain mandatory and possibly additional discretionary actions by the regulators that, if undertaken, could have a direct material effect on Schwab Bank. The Company currently utilizes a target Tier 1 Leverage Ratio for Schwab Bank of at least 6.25%. Beginning on January 1, 2015, Schwab Bank is subject to new capital requirements set by the OCC. Based on its regulatory capital ratios at December 31, 2014, Schwab Bank is considered well capitalized. Schwab Bank’s regulatory capital and ratios are as follows:
| | | | | | | | | | | | | | | | | | |
| | | | | | | | Minimum to be | | Minimum Capital |
| | Actual | | Well Capitalized | | Requirement |
December 31, 2014 | | Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio |
Tier 1 Risk-Based Capital | | $ | 7,700 | | 22.1 | % | | $ | 2,095 | | 6.0 | % | | $ | 1,397 | | 4.0 | % |
Total Risk-Based Capital | | $ | 7,744 | | 22.2 | % | | $ | 3,492 | | 10.0 | % | | $ | 2,793 | | 8.0 | % |
Tier 1 Leverage | | $ | 7,700 | | 6.9 | % | | $ | 5,548 | | 5.0 | % | | $ | 4,438 | | 4.0 | % |
Tangible Equity | | $ | 7,700 | | 6.9 | % | | | N/A | | | | | $ | 2,219 | | 2.0 | % |
N/A Not applicable.
Schwab Bank has access to traditional funding sources such as deposits, federal funds purchased, and repurchase agreements. Additionally, Schwab Bank has access to short-term funding through the Federal Reserve Bank (FRB) discount window. Amounts available under the FRB discount window are dependent on the fair value of certain of Schwab Bank’s securities available for sale and/or securities held to maturity that are pledged as collateral to the FRB. Schwab Bank maintains policies and procedures necessary to access this funding and tests discount window borrowing procedures annually. At December 31, 2014, $2.3 billion was available under this arrangement. There were no funds drawn under this arrangement during 2014.
Schwab Bank maintains a credit facility with the Federal Home Loan Bank System. Amounts available under this facility are dependent on the amount of Schwab Bank’s residential real estate mortgages and HELOCs that are pledged as collateral.
THE CHARLES SCHWAB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)
Schwab Bank maintains policies and procedures necessary to access this funding and tests borrowing procedures annually. At December 31, 2014, $9.0 billion was available under this facility. There were no funds drawn under this facility during 2014.
optionsXpress, Inc.
optionsXpress, Inc.’s liquidity needs relating to client trading and margin borrowing activities are met primarily through cash balances in brokerage client accounts, which were $942 million at December 31, 2014. Management believes that brokerage client cash balances and operating earnings will continue to be the primary sources of liquidity for optionsXpress, Inc.
optionsXpress, Inc., is subject to regulatory requirements of the Uniform Net Capital Rule that are intended to ensure the general financial soundness and liquidity of broker-dealers. These regulations prohibit optionsXpress, Inc. from paying cash dividends or making unsecured advances or loans to its parent company or employees if such payment would result in a net capital amount of less than 5% of aggregate debit balances or less than 120% of its minimum dollar requirement of $250,000. At December 31, 2014, optionsXpress Inc.’s net capital was $123 million (38% of aggregate debit balances), which was $117 million in excess of its minimum required net capital and $107 million in excess of 5% of aggregate debit balances.
optionsXpress, Inc. is also subject to Commodity Futures Trading Commission Regulation 1.17 (Reg. 1.17) under the Commodity Exchange Act, which also requires the maintenance of minimum net capital. optionsXpress, Inc. as a futures commission merchant, is required to maintain minimum net capital equal to the greater of its net capital requirement under Reg. 1.17 ($1 million), or the sum of 8% of the total risk margin requirements for all positions carried in customer accounts and 8% of the total risk margin requirements for all positions carried in non-customer accounts (as defined in Reg. 1.17). At December 31, 2014, optionsXpress, Inc. met the requirements of Reg. 1.17.
Additionally, optionsXpress, Inc. is subject to Rule 15c3-3 under the Securities Exchange Act of 1934 and other applicable regulations that require it to maintain cash or qualified securities in a segregated reserve account for the exclusive benefit of clients. These funds are included in cash and investments segregated and on deposit for regulatory purposes in the Company’s consolidated balance sheets and are not available as a general source of liquidity.
To partially satisfy the margin requirement of client option transactions with the Options Clearing Corporation, optionsXpress, Inc. has an unsecured standby LOC with one bank in favor of the Options Clearing Corporation in the amount of $15 million at December 31, 2014. There were no funds drawn under this LOC during 2014.
CSC provides optionsXpress, Inc. with a $200 million credit facility. In December 2014, CSC and optionsXpress, Inc. agreed to extend the expiration date of this facility from December 2014 to December 2016. Borrowings under this facility do not qualify as regulatory capital for optionsXpress, Inc. There were no borrowings outstanding under this facility at December 31, 2014.
optionsXpress has a term loan with CSC, of which $12 million was outstanding at December 31, 2014, and it matures in December 2017.
Capital Resources
The Company’s cash position (reported as cash and cash equivalents on its consolidated balance sheets) and cash flows are affected by changes in brokerage client cash balances and the associated amounts required to be segregated under regulatory guidelines. Timing differences between cash and investments actually segregated on a given date and the amount required to be segregated for that date may arise in the ordinary course of business, and are addressed by the Company in accordance with applicable regulations. Other factors which affect the Company’s cash position and cash flows include investment activity in security portfolios, levels of capital expenditures, acquisition and divestiture activity, banking client deposit activity, brokerage and banking client loan activity, financing activity in long-term debt, payments of dividends, and repurchases and issuances of CSC’s preferred and common stock. The combination of these factors can cause significant fluctuations in the cash position during specific time periods.
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 monitors both the relative composition and absolute level of its capital structure. Management is focused on optimizing the Company’s use of capital and currently targets a long-term debt to total financial capital ratio not to exceed 30%. The Company’s total financial capital (long-term debt plus stockholders’ equity) at December 31, 2014 was $13.7 billion, up $1.4 billion, or 12%, from December 31, 2013.
Long-term Debt
At December 31, 2014, the Company had long-term debt of $1.9 billion, or 14% of total financial capital, that bears interest at a weighted-average rate of 3.60%. At December 31, 2013, the Company had long-term debt of $1.9 billion, or 15% of total financial capital. On July 25, 2013, CSC issued $275 million of Senior Notes that mature in 2018 under its Shelf Registration Statement. The Senior Notes have a fixed interest rate of 2.20% with interest payable semi-annually. The Company repaid $6 million of other long-term debt in 2014. For further discussion of the Company’s long-term debt, see “Liquidity and Capital Resources – Liquidity” and “Item 8 – Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – 13. Borrowings.”
Capital Expenditures
The Company’s capital expenditures were $405 million (7% of net revenues) and $270 million (5% of net revenues) in 2014 and 2013, respectively. Capital expenditures in 2014 were primarily for buildings and land relating to changes in the Company’s geographic footprint, developing internal-use software, and software and equipment relating to the Company’s information technology systems. Capital expenditures in 2013 were primarily for buildings and land, capitalized costs for developing internal-use software, and software and equipment relating to the Company’s information technology systems. Capitalized costs for developing internal-use software were $81 million and $74 million in 2014 and 2013, respectively.
Management currently anticipates that 2015 capital expenditures will be approximately 15% lower than 2014 primarily due to decreased spending on buildings and furniture and equipment. A majority of this decrease is due to the construction of the Company’s new office campus in Denver, Colorado in 2014. As in recent years, the Company adjusts its capital expenditures periodically as business conditions change. Management believes that funds generated by its operations will continue to be the primary funding source of its capital expenditures.
Dividends
CSC paid common stock cash dividends of $316 million ($0.24 per share) and $311 million ($0.24 per share) in 2014 and 2013, respectively. Since the initial dividend in 1989, CSC has paid 103 consecutive quarterly dividends and has increased the quarterly dividend rate 19 times, resulting in a 21% compounded annual growth rate, excluding the special cash dividend of $1.00 per common share in 2007. While the payment and amount of dividends are at the discretion of the Board of Directors, subject to certain regulatory and other restrictions, the Company currently targets its common stock cash dividend at approximately 20% to 30% of net income.
CSC paid Series A Preferred Stock cash dividends of $28 million ($70.00 per share) in 2014 and 2013, respectively. CSC paid Series B Preferred Stock cash dividends of $29 million ($60.00 per share) in 2014 and 2013, respectively.
Share Repurchases
There were no repurchases of CSC’s common stock in 2014 or 2013. As of December 31, 2014, CSC had remaining authority from the Board of Directors to repurchase up to $596 million of its common stock, which is not subject to expiration.
Business Acquisition
On December 14, 2012, the Company acquired ThomasPartners, Inc., a growth and dividend income-focused asset management firm, for $85 million in cash.
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)
For more information on this acquisition, see “Item 8 – Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – 24. Business Acquisition.”
Off-Balance Sheet Arrangements
The Company enters into various off-balance sheet arrangements in the ordinary course of business, primarily to meet the needs of its clients. These arrangements include firm commitments to extend credit. Additionally, the Company enters into guarantees and other similar arrangements as part of transactions in the ordinary course of business. For information on each of these arrangements, see “Item 8 – Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – 14. Commitments and Contingencies and 15. Financial Instruments Subject to Off-Balance Sheet Credit Risk or Concentration Risk.”
Contractual Obligations
The Company’s principal contractual obligations as of December 31, 2014, are shown in the following table. Management believes that funds generated by its continuing operations, as well as cash provided by external financing, will continue to be the primary funding sources in meeting these obligations. Excluded from this table are liabilities recorded on the consolidated balance sheet that are generally short-term in nature (e.g., payables to brokers, dealers, and clearing organizations) or without contractual payment terms (e.g., deposits from banking clients, payables to brokerage clients, and deferred compensation).
| | | | | | | | | | | | | | | | |
| | Less than | | 1-3 | | 3-5 | | More than | | | | |
| | 1 Year | | Years | | Years | | 5 Years | | Total | |
Credit-related financial instruments (1) | | $ | 868 | | $ | 915 | | $ | 3,119 | | $ | 2,063 | | $ | 6,965 | |
Long-term debt (2) | | | 414 | | | 373 | | | 360 | | | 1,013 | | | 2,160 | |
Leases (3) | | | 95 | | | 162 | | | 107 | | | 162 | | | 526 | |
Purchase obligations (4) | | | 165 | | | 210 | | | 37 | | | 230 | | | 642 | |
Total | | $ | 1,542 | | $ | 1,660 | | $ | 3,623 | | $ | 3,468 | | $ | 10,293 | |
(1)
| Represents Schwab Bank’s commitments to extend credit to banking clients and purchase mortgage loans.
|
(2)
| Includes estimated future interest payments through 2017 for Medium-Term Notes and through 2022 for Senior Notes. Amounts exclude maturities under a finance lease obligation and unamortized discounts and premiums.
|
(3)
| Represents minimum rental commitments, net of sublease commitments, and includes facilities under the Company’s past restructuring initiatives and rental commitments under a finance lease obligation.
|
(4)
| Consists of purchase obligations for services such as advertising and marketing, telecommunications, professional services, and hardware- and software-related agreements. Includes purchase obligations that can be canceled by the Company without penalty.
|
Risk MANAGEMENT
The Company’s business activities expose it to a variety of risks, including operational, credit, market, liquidity, compliance and legalcompliance risk. The Company has a comprehensive risk management program to identify and manage these risks and their associated potential for financial and reputational impact. Despite the Company’sour efforts to identify areas of risk and implement risk management policies and procedures, there can be no assurance that the CompanySchwab will not suffer unexpected losses due to these risks.
The Company’s
Our risk management process is comprised of risk identification and assessment, risk measurement, risk monitoring and reporting, and risk mitigation. The activities and
organizationsgovernance that comprise the risk management process are described below.
Risk
The Company’s Board of Directors sets the tone for effective risk management and has approved an Enterprise Risk Management (ERM) framework that incorporates our purpose, vision, and values that form the bedrock of our corporate culture and set the tone for the organization.
We designed the ERM Framework
to enable a comprehensive approach to managing risks encountered by Schwab in its business activities. The framework incorporates key concepts commensurate with the size, risk profile, complexity, and continuing growth of the
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)
Company. The ERM Framework and governance structure constitute a comprehensive approach to managing risks encountered by the Company in its business activities. Risk appetite, which is defined as the amount of risk the Company is willing to accept in pursuit of its corporate strategy, is setdeveloped by executive management and approved by the Board of Directors.
The Company has established risk metrics and reporting that enable the measurement of the impact of strategy execution against risk appetite. The risk metrics, with risk limits and tolerance levels, are established for key risk categories by the Global Risk Committee and its functional risk sub-committees.
Senior management takes an active role in the risk management process and has developed policies and procedures under which specific business and control units are responsible for identifying, measuring, and controlling risks.
The Global Risk Committee, which is comprised of senior executives from each major business and control function, is responsible for the oversight of risk management. This includes identifying emerging risks, assessing risk management practices and the control environment, reinforcing business accountability for risk management, supervisory controls and regulatory compliance, supporting resource prioritization across the
Company,organization, and escalating significant issues to the Board of Directors.
We have established risk metrics and reporting that enable measurement of the impact of strategy execution against risk appetite. The risk metrics, with risk limits and tolerance levels, are established for key risk categories by the Global Risk Committee and its functional risk sub-committees.
The Global Risk Committee reports,
through the Chief Risk Officer, regularly to the Risk Committee of the Board of Directors. The Risk Committee
in turn assists the Board of Directors in fulfilling its oversight responsibilities with respect to
the Company’sour risk management program, including approving risk appetite statements
and related key risk appetite metrics and reviewing reports relating to risk issues from functional areas of risk management, legal, compliance, and internal audit.
Functional risk sub-committees focusing on specific areas of risk report
intoto the Global Risk Committee. These sub-committees include the:
| ·
| | Asset-Liability Management and Pricing Committee, which establishes strategies and policies for the management of corporate capital, liquidity, interest rate risk, and investments;
|
| ·
| | Credit and Market Risk Oversight Committee, which provides oversight of and approves credit and market risk policies, limits, and exposures in loan, investment, and positioning portfolios;
|
| ·
| | New Products and Services Risk Oversight Committee, which provides oversight of, and approves corporate policy and procedures relating to the risk governance of new products and services; and the
|
Compliance Risk Committee – provides oversight of compliance risk management programs and policies providing an aggregate view of compliance risk exposure; | ·
| | Operational Risk Oversight Committee, which provides oversight of and approves operational risk management policies, risk tolerance levels, and operational risk governance processes, and includes the following sub-committees:
|
Financial Risk Oversight Committee – provides oversight of and approves credit, liquidity, capital and market risk policies, limits, and exposures; | o
| | Client Fiduciary Risk Sub-Committee, which provides oversight of fiduciary risk throughout the Company;
|
New Products and Services Risk Oversight Committee – provides oversight of, and approves corporate policy and procedures relating to the risk governance of new products and services; and | o
| | Information Security and Privacy Sub-Committee, which provides oversight of the information security and privacy programs and policies;
|
Operational Risk Oversight Committee – provides oversight of and approves operational risk management policies, risk tolerance levels, and operational risk governance processes, and includes sub-committees covering Fiduciary, Data, Information Security, Model Governance, and Third-Party risk. | o
| | Model Governance Sub-Committee, which provides oversight of model risk throughout the Company; and the
|
| o
| | Vendor Management Sub-Committee, which provides oversight of the Company’s vendor management and outsourcing program and policies.
|
THE CHARLES SCHWAB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)
Senior management has also created an Incentive Compensation Risk Oversight Committee, which establishes policy and
provides oversight of incentive compensation risk. The committee reviews and approves the Annual Risk Assessment of incentive compensation plans, and reports directly to the
Compensation Committee of the Board
Compensation Committee.of Directors.
The Company’s compliance, finance, internal audit, legal, and corporate risk management departments assist management and the various risk committees in evaluating, testing, and monitoring
the Company’s risk management.
In addition, the
Company’s Disclosure Committee is responsible for monitoring and evaluating the effectiveness of
the Company’s (a)our disclosure controls and procedures and
(b) internal control over financial reporting as of the end of each fiscal
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)
quarter. The Disclosure Committee reports on this evaluation to the CEO and CFO prior to their certification required by Sections 302 and 906 of the Sarbanes Oxley Act of 2002.
Operational risks arise due to
potentially inadequatepotential inadequacies or
failedfailures related to people, internal processes,
people, and systems, or from external events
andor relationships impacting the Company and/or any of its key business partners and
vendors. Operationalthird parties. While operational risk
includes modelis inherent in all business activities, we rely on a system of internal controls and
fiduciaryrisk management practices designed to keep operational risk and
eachoperational losses within the Company’s risk appetite. We have specific policies and procedures to identify and manage operational risk, and use periodic risk and control self-assessments, control testing programs, and internal audit reviews to evaluate the effectiveness of these internal controls. Where appropriate, we manage the impact of operational loss and litigation expense through the purchase of insurance. The insurance program is
also described in detail below.The Company’sspecifically designed to address our key operational risks and to maintain compliance with local laws and regulation.
Schwab’s operations are highly dependent on the integrity
and resiliency of
itsour critical business functions and technology
systems and the Company’s success depends, in part, on its ability to make timely enhancements and additions to its technology in anticipation of evolving client needs.systems. To the extent
the CompanySchwab experiences
business or system interruptions, errors or downtime (which could result from a variety of causes, including
changes in client use patterns,natural disasters, terrorist attacks, technological failure,
cyber attacks, changes to
its systems, linkages with third-party systems, and power failures),
the Company’sour business and operations could be
significantly negatively impacted. To minimize business interruptions, Schwab
has two data centers intended, in part, to further improve the recovery of business processing in the event of an emergency. The Company is committed to an ongoing process of upgrading, enhancing, and testing its technology systems. This effort is focused on meeting client needs, meeting market and regulatory changes, and deploying standardized technology platforms.Operational risk also includes the risk of human error, employee misconduct, external fraud, computer viruses, cyber attacks, terrorist attacks, and natural disaster. Employee misconduct could include fraud and misappropriation of client or Company assets, improper use or disclosure of confidential client or Company information, and unauthorized activities, such as transactions exceeding acceptable risks or authorized limits. External fraud includes misappropriation of client or Company assets by third parties, including through unauthorized access to Company systems and data and client accounts. The frequency and sophistication of such fraud attempts continue to increase.
Operational risk is mitigated throughmaintains a system of internal controls and risk management practices that are designed to keep operational risk and operational losses at levels appropriate to the inherent risk of the business in which the Company operates. The Company has specific policies and procedures to identify and manage operational risk, and uses periodic risk self-assessments and internal audit reviews to evaluate the effectiveness of these internal controls. The Company maintains backup and recovery functions, includinginfrastructure which includes facilities for backup and communications, a geographically dispersed workforce, and conducts periodicroutine testing of business continuity and disaster recovery plans. The Company also maintains policies
Information Security risk is the risk of unauthorized access, use, disclosure, disruption, modification, recording or destruction of the firm’s information or systems. We have designed and
proceduresimplemented an information security program that knits together complementary tools, controls and
technologytechnologies to protect systems, client accounts and data. We continuously monitor the systems and work collaboratively with government agencies, law enforcement and other financial institutions to address potential threats. We use advanced monitoring systems to identify suspicious activity and deter unauthorized access by internal or external actors. We limit the number of employees who have access to clients’ personal information and internal authentication measures are enforced to protect against
the potential for social engineering. All employees who handle sensitive information are trained in privacy and security. Schwab’s fraud and
unauthorized accesscyber security teams monitor activity looking for suspicious behavior. These capabilities allow us to
systemsidentify and
data.Despite the Company’s risk management efforts, it is not always possible to deter or prevent technological or operational failure, or fraud or other misconduct, and the precautions taken by the Company may not be effective in all cases. The Company may be subject to litigation, losses, and regulatory actions in such cases, and may be required to expend significant additional resources to remediate vulnerabilities or other exposures.
The Companyquickly act on any attempted intrusions.
Schwab also faces operational risk when
it employswe employ the services of various
external vendors,third parties, including domestic and international outsourcing of certain technology, processing, servicing, and support functions.
The Company manages itsWe manage the exposure to
external vendorthird party risk through contractual provisions, control standards,
and ongoing monitoring of
vendor performance. The Company maintainsthird party performance, and appropriate testing. We maintain policies and procedures regarding the standard of care expected with
Companyall data, whether the data is internal company information, employee information, or non-public client information.
The CompanyWe clearly
definesdefine for employees, contractors, and
vendorsthird parties the
Company’s expected standards of care for confidential data.
RegularWe also provide regular training
is provided by the Company in regard toon data security.
The Company
Fiduciary risk is
actively engagedthe potential for financial or reputational loss through breach of fiduciary duties to a client. Fiduciary activities include, but are not limited to, individual and institutional trust, investment management, custody, and cash and securities processing. We manage this risk by establishing policy and procedures to ensure that obligations to clients are discharged faithfully and in
compliance with applicable legal and regulatory requirements. Business units have the
researchprimary responsibility for adherence to the policy and
development of new technologies, services,procedures applicable to their business. Guidance and
products. The Company endeavors to protect its research and development efforts, and its brands,control are provided through the
usecreation, approval, and ongoing review of
copyrights, patents, trade secrets,applicable policies by business units and
contracts.various risk committees.
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)
Model Risk
Model risk is the potential for adverse consequences from decisions based on incorrect or misused model outputs and reports. Models are owned by several business units throughout the
Company,organization, and are used for a variety of purposes. Model use includes, but is not limited to, calculating capital requirements for hypothetical stressful environments, estimating interest and credit risk for loans and other balance sheet assets, and providing guidance in the management of client portfolios.
The Company hasWe have established a policy to describe the roles and responsibilities of all key stakeholders in model development, management, and use. All models
at the Company are registered in a centralized database and classified into different risk ratings depending on their potential financial, reputational, or regulatory impact to the Company. The model risk rating
informsdetermines the scope of
all model governance activities.
Fiduciary
Schwab faces compliance risk which is the potential exposure to legal or regulatory sanctions, fines or penalties, financial loss, or damage to reputation resulting from the failure to comply with laws, regulations, rules, or other regulatory requirements. Among other things, compliance risks relate to the suitability of client investments, conflicts of interest, disclosure obligations and performance expectations for financial or reputational loss through breachproducts and services, supervision of fiduciary duties to a client. Fiduciary activities include, but are not limited to, individualemployees, and institutional trust, investment management, custody, and cash and securities processing.the adequacy of our controls. The Company attemptsand its affiliates are subject to extensive regulation by federal, state and foreign regulatory authorities, including SROs.
We manage
thiscompliance risk
by establishingthrough policies, procedures
and controls reasonably designed to
ensure that obligations to clients are discharged faithfully and inachieve and/or monitor compliance with applicable legal and regulatory requirements.
Business units have the primary responsibility for adherence to theThese procedures
applicable to their business. Guidanceaddress issues such as business conduct and
control are provided through the creation, approval,ethics, sales and
ongoing reviewtrading practices, marketing and communications, extension of
applicable policies by business unitscredit, client funds and
various risk committees.securities, books and records, anti-money laundering, client privacy, and employment policies.
Credit risk is the potential for loss due to a borrower, counterparty, or issuer failing to perform on its contractual obligations. The Company’s directOur exposure to credit risk mainly results from investing activities in our liquidity and investment portfolios, mortgage lending, margin lending and client option and futures activities, pledged asset lending, securities lending activities, mortgage lending activities, itsand our role as a counterparty in other financial contracts and other investing activities.contracts. To manage the risks of such losses, the Company haswe have established policies and procedures, which include:include establishing and reviewing credit limits, monitoring of credit limits and quality of counterparties, and adjusting margin, PAL, option, and futures requirements for certain securities. Collateral arrangements relatingsecurities and instruments.
Liquidity and Investment Portfolios
Schwab has exposure to margin loans, option positions,credit risk associated with its investment portfolios, which include U.S. agency, and non-agency mortgage-backed securities, lending agreements,asset-backed securities, corporate debt securities, U.S. agency notes, U.S. Treasury securities, certificates of deposit, U.S. state and resale agreements include provisions that require additional collateralmunicipal securities, and commercial paper.
At December 31, 2017, substantially all securities in the event that market fluctuations result in declines ininvestment portfolios were rated investment grade. U.S. agency mortgage-backed securities do not have explicit credit ratings; however, management considers these to be of the valuehighest credit quality and rating given the guarantee of collateral received.Additionally, for marginprincipal and interest by the U.S. government-sponsored enterprises.
Mortgage Lending Portfolio
The bank loan
portfolio includes First Mortgages, HELOCs, and
securities lending agreements, collateral arrangements require that the fair value of such collateral exceeds the amounts loaned.other loans. The Company’s credit risk exposure related to loans to banking clients is actively managed through individual loan and portfolio reviews performed by management.reviews. Management regularly reviews asset quality, including concentrations, delinquencies, nonaccrual loans, charge-offs, and recoveries. All are factors in the determination of an appropriate allowance for loan losses. The Company’s mortgage
Our residential loan
portfolios primarily include First Mortgages of $8.1 billion and HELOCs of $3.0 billion at December 31, 2014.The Company’s underwriting guidelines include maximum loan-to-value (LTV)LTV ratios, cash out limits, and minimum Fair Isaac Corporation (FICO) credit scores. The specific guidelines are dependent on the individual characteristics of a loan (for example, whether the property is a primary or secondary residence, whether the loan is for investment property, whether the loan is for an initial purchase of a home or refinance of an existing home, and whether the loan size is conforming or jumbo). These credit underwriting standards have limited the exposure to the types
THE CHARLES SCHWAB CORPORATION
Management’s Discussion and Analysis of loans that experienced high foreclosuresFinancial Condition and loss rates elsewhereResults of Operations
(Tabular Amounts in the industry in recent years. In January 2014, the Company revised its First Mortgage underwriting criteria in conformance with the CFPB’s new guidance on Qualified Mortgage lending and a borrower’s ability to repay. Revisions were made to requirements affecting debt to income ratio, loan to value ratio, and liquid asset holdings. These revised underwriting criteria are not expected to have a material impact on the credit quality of the Company’s First MortgageMillions, Except Ratios, or HELOC portfolios. The Companyas Noted)
Schwab does not
originate or purchase
residential loans that allow for negative amortization and does not
originate or purchase subprime loans (generally defined as extensions of credit to borrowers with a FICO score of less than 620 at origination), unless the borrower has compensating credit factors.
At December 31, 2014, approximately 1% of both the First Mortgage and HELOC portfolios consisted of loans to borrowers with updated FICO scores of less than 620.
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)
At December 31, 2014, the weighted-average originated LTV ratio was 59% for both the First Mortgage and HELOC portfolios. The computation of the origination LTV ratio for a HELOC includes any first lien mortgage outstanding on the same property at the time of origination. At December 31, 2014, 21% of HELOCs ($635 million of the HELOC portfolio) were in a first lien position. The weighted-average originated FICO score was 770 and 769 for the First Mortgage and HELOC portfolios, respectively.
The Company monitors the estimated current LTV ratios of its First Mortgage and HELOC portfolios on an ongoing basis. At December 31, 2014, the weighted-average estimated current LTV ratios were 50% and 55% for the First Mortgage and HELOC portfolios, respectively. The computation of the estimated current LTV ratio for a HELOC includes any first lien mortgage outstanding on the same property at the time of the HELOC’s origination. The Company estimates the current LTV ratio for each loan by reference to a home price appreciation index. The Company also monitors updated borrower FICO scores, delinquency trends, and verified liquid assets held by individual borrowers. At December 31, 2014, the weighted-average updated FICO scores were 773 and 769 for the First Mortgage and HELOC portfolios, respectively.
A portion of the Company’s HELOC portfolio is secured by second liens on the associated properties. Second lien mortgage loans possess a higher degree of credit risk given the subordination to the first lien holder in the event of default. At December 31, 2014, $2.3 billion, or 79%, of the HELOC portfolio was in a second lien position. In addition to the credit monitoring activities described above, the Company also monitors credit risk on second lien HELOC loans by reviewing the delinquency status of the first lien loan on the associated property. Additionally, at December 31, 2014, approximately 30% of the HELOC borrowers that had a balance only paid the minimum amount due.
For more information on the Company’s credit quality indicators relating to its First Mortgage and HELOC portfolios, including delinquency characteristics, borrower FICO scores at origination, updated borrower FICO scores, LTV ratios at origination, and estimated current LTV ratios,Schwab’s bank loans, see “ItemItem 8 – Financial StatementsNote 6.
Securities and Supplementary Data – NotesInstrument-Based Lending Portfolios
Collateral arrangements relating to
Consolidated Financial Statements – 6. Loans to Banking Clientsmargin loans, PALs, option and
Related Allowancefutures positions, securities lending agreements, and resale agreements include provisions that require additional collateral in the event of market fluctuations. Additionally, for
Loan Losses.”The following table presents certain of the Company’s loan quality metrics as a percentage of total outstanding loans:
| | | | | | | |
December 31, | | 2014 | | | 2013 | | |
Loan delinquencies (1) | | 0.27 | % | | 0.48 | % | |
Nonaccrual loans | | 0.26 | % | | 0.39 | % | |
Allowance for loan losses | | 0.31 | % | | 0.39 | % | |
(1)
| Loan delinquencies include loans that are 30 days or more past due and other nonaccrual loans.
|
The Company has exposure to credit risk associated with its securities available for salemargin loans, PALs, options and futures positions, and securities heldlending agreements, collateral arrangements require that the fair value of such collateral sufficiently exceeds the credit exposure in order to maturity portfolios, whose fair values totaled $54.8 billion and $34.7 billion at December 31, 2014, respectively. These portfolios include U.S. agency and non-agency mortgage-backed securities, asset-backed securities, corporate debt securities, U.S. agency notes, certificates of deposit, and treasury securities. U.S. agency mortgage-backed securities do not have explicit credit ratings; however, management considers these to be of the highest credit quality and rating given the guarantee of principal and interest by the U.S. government-sponsored enterprises.
At December 31, 2014, with the exception of certain non-agency residential mortgage-backed securities, all securities in the available for sale and held to maturity portfolios were rated investment grade (defined asmaintain a rating equivalent to a Moody’s rating of “Baa” or higher, or a Standard & Poor’s rating of “BBB-” or higher). In the fourth quarter of 2014, the Company sold $504 million of its non-agency residential mortgage-backed securities, resulting in a net realized loss of $8 million. The Company marked the remaining $15 million of these securities to market and recorded a $0.6 million other-than-temporary impairment charge in the fourth quarter. The decision was made to sell the securities in the fourth quarter as market valuations on these non-agency residential mortgage-backed securities became more consistent with actual performance. In addition, the Company has reached an initial settlement in legal claims it is pursuing to recover losses relating to certain of these securities.
fully secured position.
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)
Other Counterparty Exposures
Schwab performs clearing services for all securities transactions in its client accounts. Schwab has exposure to credit risk due to its obligation to settle transactions with clearing corporations, mutual funds, and other financial institutions even if Schwab’s
clientclients or a counterparty
failsfail to meet
itstheir obligations to Schwab.
Concentration
Market Risk
The Company has exposure to concentration
Market risk
when holding large positionsis the potential for changes in
earnings or the value of financial instruments
collateralizedheld by
assets with similar economic characteristics orSchwab as a result of fluctuations in
securities of a single issuer or within a particular industry.The fair value of the Company’s investments in mortgage-backed securities totaled $53.8 billion at December 31, 2014. Of these, $52.5 billion were issued by U.S. agencies and $1.3 billion were issued by private entities (non-agency securities). These U.S. agency and non-agency securities are included in securities available for sale and securities held to maturity.
The fair value of the Company’s investments in asset-backed securities totaled $19.4 billion at December 31, 2014. Of these, $11.7 billion were securities backed by student loans, the majority of which are guaranteed by the U.S. federal government. These asset-backed securities are included in securities available for sale.
The fair value of the Company’s investments in corporate debt securities and commercial paper totaled $8.1 billion at December 31, 2014, with the majority issued by institutions in the financial services industry. These securities are included in securities available for sale, cash and cash equivalents, and other securities owned in the Company’s consolidated balance sheets. Issuer, geographic, and sector concentrations are controlled by established credit policy limits to each concentration type.
The Company’s loans to banking clients include $7.4 billion of adjustable rate First Mortgage loans at December 31, 2014. The Company’s adjustable rate mortgages have initial fixed interest rates, for threeequity prices, or market conditions. We are exposed to ten years and interest rates that adjust annually thereafter. Approximately 40% of these mortgages consisted of loans with interest-only payment terms. Therate risk primarily from changes in market interest rates on approximately 65%our interest-earning assets relative to changes in the costs of its funding sources that finance these interest-only loans are not scheduled to reset for threeassets.
Net interest revenue is affected by various factors, such as the distribution and composition of interest-earning assets and interest-bearing liabilities, the spread between yields earned on interest-earning assets and rates paid on interest-bearing liabilities, which may reprice at different times or
more years. The Company’s mortgage loans do not include interest terms described as temporary introductory rates below current market rates.The Company’s 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 periodby different amounts, and the 20-year amortizing period isspread between short and long-term interest rates. Interest-earning assets primarily include investment securities, margin loans and bank loans. These assets are sensitive to changes in interest rates and changes in prepayment levels that tend to increase in a floatingdeclining rate basedenvironment and decrease in a rising rate environment. Because we establish the rates paid on certain brokerage client cash balances and bank deposits and the rates charged on certain margin and bank loans, and control the composition of our investment securities, we have some ability to manage our net interest spread, depending on competitive factors and market conditions.
To mitigate the risk of declining interest revenue, we have established policies and procedures, which include setting guidelines on the
prime rate plus a margin. HELOCs that convert to an amortizing loan may experience higher delinquenciesamount of net interest revenue at risk, and
higher loss rates than those inmonitoring the
initial draw period. The Company’s allowance for loan loss methodology takes this increased inherent risk into consideration. The following table presents when current outstanding HELOCs will convert to amortizing loans: | | | |
December 31, 2014
| Balance
|
Converted to amortizing loan by period end
| $
| 307 | |
Within 1 year
| | 274 | |
> 1 year – 3 years
| | 356 | |
> 3 years – 5 years
| | 1,139 | |
> 5 years
| | 879 | |
Total
| $
| 2,955 | |
The Company also has exposure to concentration risk from itsnet interest margin and securities lendingaverage maturity of our interest-earning assets and funding sources. To remain within these guidelines, we manage the maturity, repricing, and cash flow characteristics of the investment portfolios.
Financial instruments are also subject to the risk that valuations will be negatively affected by changes in demand and the underlying market for a financial instrument. We are indirectly exposed to option, futures, and equity market fluctuations in connection with client option and futures
activities collateralized by or referencingaccounts, securities
of a single issuer, an index, or within a single industry. This concentration risk is mitigated by collateral arrangements that require the fair value of such collateral exceeds the amounts loaned.The Company has indirect exposurecollateralizing margin loans to U.S. Governmentbrokerage customers, and agencyclient securities heldloaned out as collateral to secure its resale agreements. The Company’s primary credit exposure on these resale transactions is with its counterparty. The Company would have exposure to the U.S. Government and agency securities only in the eventpart of the counterparty’s default onbrokerage securities lending activities. Equity market valuations may also affect the resale agreements. The fair valuelevel of U.S. Governmentbrokerage client trading activity, margin borrowing, and agency securitiesoverall client engagement with Schwab. Additionally, we earn mutual fund and ETF service fees and asset management fees based upon daily balances of certain client assets. Fluctuations in these client asset balances caused by changes in equity valuations directly impact the amount of fee revenue we earn.
Our market risk related to financial instruments held
as collateral for
resale agreements totaled $10.4 billion at December 31, 2014.trading is not material.
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)
European Holdings
Net Interest Revenue Simulation
For Schwab’s net interest revenue sensitivity analysis, we use net interest revenue simulation modeling techniques to evaluate and manage the effect of changing interest rates. The simulation includes all interest-sensitive assets and liabilities. Key variables in the simulation include the repricing of financial instruments, prepayment, reinvestment, and product pricing assumptions. The simulations involve assumptions that are inherently uncertain and, as a result, cannot precisely estimate net interest revenue or predict the impact of changes in interest rates on net interest revenue. Actual results may differ from simulated results due to balance growth or decline and the timing, magnitude, and frequency of interest rate changes, as well as changes in market conditions and management strategies, including changes in asset and liability mix.
If our guidelines for net interest revenue sensitivity are breached, management must report the breach to the Financial Risk Oversight Committee and establish a plan to address the interest rate risk. There were no breaches of our net interest revenue sensitivity risk limits during the years ended December 31, 2017 or 2016.
As represented by the simulations presented below, our investment strategy is structured to produce an increase in net interest revenue when interest rates rise and, conversely, a decrease in net interest revenue when interest rates fall.
The simulations in the following table assume that the asset and liability structure of the consolidated balance sheets would not be changed as a result of the simulated changes in interest rates. As we actively manage the consolidated balance sheets and interest rate exposure, in all likelihood we would take steps to manage additional interest rate exposure that could result from changes in the interest rate environment. The following table shows the simulated net interest revenue change over the next 12 months beginning December 31, 2017 and 2016 of a gradual 100 basis point increase or decrease in market interest rates relative to prevailing market rates at the end of each reporting period.
|
| | | | |
| December 31, | 2017 |
| 2016 |
|
| Increase of 100 basis points | 3.3 | % | 6.5 | % |
| Decrease of 100 basis points | (6.2 | )% | (9.8 | )% |
The change in net interest revenue sensitivities as of December 31, 2017 reflects the increase in short-term interest rates. An increase in short-term interest rates positively impacts net interest revenue as yields on interest-earning assets rise faster than the cost of funding sources. A decline in interest rates could negatively impact the yield on the investment and loan portfolio to a greater degree than any offsetting reduction in interest expense from funding sources, compressing net interest margin.
Liquidity Risk
Liquidity risk is the potential that Schwab will be unable to meet cash flow obligations when they come due without incurring unacceptable losses.
Due to its role as a source of financial strength, CSC’s liquidity needs are primarily driven by the liquidity and capital needs of CS&Co, the capital needs of the bank subsidiaries, the amount of dividend payments on CSC’s common and preferred stock and principal and interest due on corporate debt. The liquidity needs of CS&Co are primarily driven by client activity including trading and margin borrowing activities and capital expenditures, and the capital needs of the bank subsidiaries are primarily driven by client deposits. We have established liquidity policies to support the successful execution of business strategies, while ensuring ongoing and sufficient liquidity to meet operational needs and satisfy applicable regulatory requirements under both normal and stressed conditions. We seek to maintain client confidence in the balance sheet and the safety of client assets by maintaining liquidity and diversity of funding sources to allow the Company to meet its obligations. To this end, we have established limits and contingency funding scenarios to support liquidity levels during both business as usual and stressed conditions.
We employ a variety of methodologies to monitor and manage liquidity. We conduct regular liquidity stress testing to develop a consolidated view of liquidity risk exposures and to ensure our ability to maintain sufficient liquidity during market-related or company-specific liquidity stress events. Liquidity is also tested at key subsidiaries and results are reported to the Financial Risk Oversight Committee. A number of early warning indicators are monitored to help identify emerging liquidity stresses in the market or within the organization and are reviewed with management as appropriate.
The Company is subject to and was in compliance with the modified LCR rule at December 31, 2017.
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)
Primary Funding Sources
Schwab’s primary source of funds is cash generated by client activity: bank deposits and cash balances in client brokerage accounts. These funds are used to purchase investment securities and extend loans to clients.
Other sources of funds may include cash flows from operations, maturities and sales of investment securities, repayments on loans, securities lending of assets held in client brokerage accounts, and cash provided by external financing or equity offerings.
To meet daily funding needs, we maintain liquidity in the form of overnight cash deposits and short-term investments. For unanticipated liquidity needs, a buffer of highly liquid investments, currently comprised of U.S. Treasury notes, is also maintained.
Additional Funding Sources
In addition to internal sources of liquidity, Schwab has access to external funding. The need for short-term borrowings from these facilities arises primarily from timing differences between cash flow requirements, scheduled liquidation of interest-earning investments, movements of cash to meet regulatory brokerage client cash segregation requirements and general corporate purposes. We maintain policies and procedures necessary to access funding and test discount window borrowing procedures on a periodic basis.
The following table describes external debt facilities are available at December 31, 2017:
|
| | | | | | | |
| Description | Borrower | Outstanding | Available |
Committed, unsecured credit facility with various external banks (1) | CSC | $ | — |
| $ | 750 |
|
| Uncommitted, unsecured lines of credit with various external banks | CSC, CS&Co | — |
| 1,199 |
|
Federal Reserve Bank discount window (2) | Schwab Bank | — |
| 2,458 |
|
Federal Home Loan Bank secured credit facility (3) | Schwab Bank | 15,000 |
| 17,301 |
|
Unsecured commercial paper (4) | CSC | — |
| 750 |
|
(1) Other than an overnight borrowing to test availability, this facility was unused during 2017.
(2) Amounts available are dependent on the fair value of certain investment securities that are pledged as collateral.
(3) Amounts available are dependent on the amount of First Mortgages, HELOCs, and the fair value of certain investment securities that are pledged as collateral.
(4) CSC has authorization from its Board of Directors to issue Commercial Paper Notes to not exceed $1.5 billion. Management has set a current limit not to exceed the amount of the committed, unsecured credit facility.
The financial covenants for the $750 million committed credit facility require CS&Co to maintain a minimum net capital ratio, Schwab Bank to be well capitalized, and CSC to maintain a minimum level of stockholders’ equity, adjusted to exclude AOCI. At December 31, 2017, the minimum level of stockholders’ equity required under this facility was $12.5 billion (CSC’s stockholders’ equity, excluding AOCI, at December 31, 2017 was $18.7 billion). Management believes these restrictions will not have a material effect on CSC’s ability to meet foreseeable dividend or funding requirements.
Schwab Bank has access to short-term secured funding through the Federal Reserve’s discount window. Amounts available under the Federal Reserve discount window are dependent on the fair value of certain of Schwab Bank’s investment securities that are pledged as collateral.
Schwab Bank also maintains a secured credit facility with the Federal Home Loan Bank of San Francisco (FHLB). Amounts available under this facility are dependent on the amount of Schwab Bank’s First Mortgages, HELOCs, and the fair value of certain of Schwab Bank’s investment securities that are pledged as collateral. During 2017, Schwab Bank used borrowings under this agreement to purchase investment securities prior to bulk transfers. This credit facility is also available as backup financing in the event of the outflow of client cash from Schwab Bank’s balance sheet.
CSC has a commercial paper program of which proceeds are used for general corporate purposes. The maturities of the Commercial Paper Notes may vary, but are not to exceed 270 days from the date of issue. CSC’s ratings for these short-term borrowings are P1 by Moody’s, A1 by Standard & Poor’s, and F1 by Fitch. CSC had no Commercial Paper Notes outstanding at December 31, 2017 or 2016.
THE CHARLES SCHWAB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)
To partially satisfy the margin requirement of client option transactions with the Options Clearing Corporation, CS&Co has unsecured standby letter of credit agreements (LOCs) with several banks in favor of the Options Clearing Corporation aggregating $225 million at December 31, 2017. There were no funds drawn under any of these LOCs during 2017 or 2016. In connection with its securities lending activities, the Company is required to provide collateral to certain brokerage clients. The collateral requirements were satisfied by providing cash as collateral.
CSC has a universal automatic shelf registration statement (Shelf Registration Statement) on file with the SEC, which enables it to issue debt, equity, and other securities.
Borrowings
Long-term debt outstanding was $4.8 billion and $2.9 billion at December 31, 2017 and 2016, respectively. Short-term borrowings outstanding from FHLB were $15.0 billion at December 31, 2017 and there were none at December 31, 2016.
The following are details of the Senior Notes and short-term borrowings:
|
| | | | | | | | | | |
| December 31, 2017 | Par Outstanding | Maturity | Weighted Average
Interest Rate | Moody’s | Standard
& Poor’s | Fitch |
| Senior Notes | $ | 4,731 |
| 2018 - 2028 | 3.01% fixed | A2 | A | A |
| Short-term borrowings | $ | 15,000 |
| 2018 | 1.53% fixed | N/A | N/A | N/A |
N/A Not Applicable.
New Debt Issuances
All debt issuances in 2017 were senior unsecured obligations with interest payable semi-annually. Additional details are as follows:
|
| | | | | |
| Issuance Date | Issuance Amount | Maturity Date | Interest Rate |
| March 2, 2017 | $ | 650 |
| 2027 | 3.200% |
| December 7, 2017 | $ | 700 |
| 2028 | 3.200% |
| December 7, 2017 | $ | 800 |
| 2023 | 2.650% |
Equity Issuances and Redemptions
CSC’s preferred stock issued and net proceeds for the years ending December 31, 2017 and 2016 are as follows:
|
| | | | |
| | Date Issued and Sold | Net Proceeds |
| Series D | March 7, 2016 | $ | 725 |
|
| Series E | October 31, 2016 | $ | 591 |
|
| Series F | October 31, 2017 | $ | 492 |
|
On December 1, 2017, CSC redeemed all of the 485,000 outstanding shares of its 6.00% Non-Cumulative Perpetual Preferred Stock, Series B (“Series B Preferred Stock”), and the corresponding 19,400,000 depositary shares, each representing a 1/40th interest in a share of the Series B Preferred Stock.
For further discussion of CSC’s long-term debt and information on the equity offerings, see Item 8 – Note 12 and Note 16.
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)
Off-Balance Sheet Arrangements
Schwab enters into various off-balance sheet arrangements in the ordinary course of business, primarily to meet the needs of our clients. These arrangements include firm commitments to extend credit. Additionally, Schwab enters into guarantees and other similar arrangements in the ordinary course of business. For information on each of these arrangements, see Item 8 – Note 6, Note 10, Note 12, Note 13, and Note 14.
Contractual Obligations
Schwab’s principal contractual obligations as of December 31, 2017 are shown in the following table. We believe that funds generated by continuing operations, as well as cash provided by external financing, will continue to be the primary funding sources in meeting these obligations. Excluded from this table are liabilities recorded on the consolidated balance sheets that are generally short-term in nature (e.g., payables to brokers, dealers, and clearing organizations and short-term borrowings) or without contractual payment terms (e.g., bank deposits, payables to brokerage clients, and deferred compensation).
|
| | | | | | | | | | | | | | | | | | | |
| December 31, 2017 | Less than
1 Year | | 1-3
Years | | 3-5
Years | | More than
5 Years | | Total |
Credit-related financial instruments (1) | $ | 1,622 |
| | $ | 2,842 |
| | $ | 4,254 |
| | $ | 1,945 |
| | $ | 10,663 |
|
Long-term debt (2) | 1,022 |
| | 954 |
| | 192 |
| | 3,429 |
| | 5,597 |
|
Purchase obligations (3) | 305 |
| | 219 |
| | 48 |
| | 181 |
| | 753 |
|
Leases (4) | 127 |
| | 194 |
| | 120 |
| | 289 |
| | 730 |
|
| Total | $ | 3,076 |
| | $ | 4,209 |
| | $ | 4,614 |
| | $ | 5,844 |
| | $ | 17,743 |
|
(1) Represents Schwab Bank’s commitments to extend credit to banking clients, purchase mortgage loans, and commitments to fund CRA investments.
(2) Includes estimated future interest payments through 2028 for Senior Notes. Amounts exclude maturities under a finance lease obligation and unamortized discounts and premiums.
(3) Consists of purchase obligations for services such as advertising and marketing, telecommunications, professional services, and hardware- and software-related agreements. Includes purchase obligations that can be canceled by the Company without penalty.
(4) Represents minimum rental commitments, net of sublease commitments, and includes facilities under past restructuring initiatives and rental commitments under a finance lease obligation.
CAPITAL MANAGEMENT
Schwab seeks to manage capital to a level and composition sufficient to support execution of our business strategy, including anticipated balance sheet growth, providing financial support to the subsidiaries, and sustained access to the capital markets, while at the same time meeting our regulatory capital requirements and serving as a source of financial strength to Schwab Bank. Schwab’s primary sources of capital are funds generated by the operations of subsidiaries and securities issuances by CSC in the capital markets. To ensure that Schwab has sufficient capital to absorb unanticipated losses or declines in asset values, we have adopted a policy to remain well capitalized even in stressed scenarios.
Internal guidelines are set, for both CSC and its regulated subsidiaries, to ensure capital levels are in line with our strategy and regulatory requirements. Capital forecasts are reviewed monthly at Asset-Liability Management and Pricing Committee and Financial Risk Oversight Committee meetings. A number of early warning indicators are monitored to help identify potential problems that could impact capital. In addition, we monitor the subsidiaries’ capital levels and requirements. Subject to regulatory capital requirements and any required approvals, any excess capital held by subsidiaries is transferred to CSC in the form of dividends and returns of capital. When subsidiaries have need of additional capital, funds are provided by CSC as equity investments and also as subordinated loans (in a form approved as regulatory capital by regulators) for CS&Co. The details and method used for each cash infusion are based on an analysis of the particular entity’s needs and financing alternatives. The amounts and structure of infusions must take into consideration maintenance of regulatory capital requirements, debt/equity ratios, and equity double leverage ratios.
Schwab conducts regular capital stress testing to assess the potential financial impacts of various adverse macroeconomic and company-specific events to which the Company could be subjected. The objective of the capital stress testing is (1) to explore various potential outcomes – including rare and extreme events and (2) to assess impacts of potential stressful outcomes on both capital and liquidity. Additionally, we have a comprehensive Capital Contingency Plan to provide action plans for certain low probability/high impact capital events that the Company might face. The Capital Contingency Plan is issued under the authority of the Financial Risk Oversight Committee and provides guidelines for sustained capital events. It
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)
does not specifically address every contingency, but is designed to provide a framework for responding to any capital stress. The results of the stress testing indicate there are two scenarios which could stress the Company’s capital: (1) inflows of balance sheet cash during a period of very low interest rates and (2) outflows of balance sheet cash when other sources of financing are not available and the Company is required to sell assets to fund the flows at a loss. The Capital Contingency Plan is reviewed annually and updated as appropriate.
For additional information, see Business – Regulation in Part I, Item 1.
Regulatory Capital Requirements
CSC is subject to capital requirements set by the Federal Reserve and is required to serve as a source of strength for Schwab Bank and to provide financial assistance if Schwab Bank experiences financial distress. Schwab is required to maintain a Tier 1 Leverage Ratio for CSC of at least 4%; however, management seeks to maintain the ratio of at least 6%. Due to the relatively low risk of our balance sheet assets and risk-based capital ratios at CSC and Schwab Bank that are well in excess of regulatory requirements, the Tier 1 Leverage Ratio is the most restrictive capital constraint on CSC’s asset growth.
Banking subsidiaries are subject to capital requirements set by their regulators that are substantially similar to those imposed on CSC by the Federal Reserve. Banking subsidiaries’ failure to remain well capitalized could result in certain mandatory and possibly additional discretionary actions by the regulators that could have a direct material effect on the bank. Schwab’s principal banking subsidiary, Schwab Bank, is required to maintain a Tier 1 Leverage Ratio of at least 5% to be well capitalized, but seeks to maintain the ratio of at least 6.25%. Based on its regulatory capital ratios at December 31, 2017, Schwab Bank is considered well capitalized.
The following table details CSC’s consolidated and Schwab Bank’s capital ratios:
|
| | | | | | | | | | | | | | | |
| December 31, | 2017 | | 2016 |
| | CSC | | Schwab Bank | | CSC | | Schwab Bank |
| Total stockholders’ equity | $ | 18,525 |
| | $ | 13,224 |
| | $ | 16,421 |
| | $ | 11,726 |
|
| Less: | | | | | | | |
| Preferred Stock | 2,793 |
| | — |
| | 2,783 |
| | — |
|
| Common Equity Tier 1 Capital before regulatory adjustments | $ | 15,732 |
| | $ | 13,224 |
| | $ | 13,638 |
| | $ | 11,726 |
|
| Less: | | | | | | | |
| Goodwill, net of associated deferred tax liabilities | $ | 1,191 |
| | $ | 13 |
| | $ | 1,175 |
| | $ | 11 |
|
| Other intangible assets, net of associated deferred tax liabilities | 61 |
| | — |
| | 52 |
| | — |
|
| Deferred tax assets, net of valuation allowances and deferred tax liabilities | 2 |
| | — |
| | — |
| | — |
|
AOCI adjustment (1) | (152 | ) | | (144 | ) | | (163 | ) | | (163 | ) |
| Common Equity Tier 1 Capital | $ | 14,630 |
| | $ | 13,355 |
| | $ | 12,574 |
| | $ | 11,878 |
|
| Tier 1 Capital | $ | 17,423 |
| | $ | 13,355 |
| | $ | 15,357 |
| | $ | 11,878 |
|
| Total Capital | 17,452 |
| | 13,382 |
| | 15,384 |
| | 11,904 |
|
| Risk-Weighted Assets | 75,866 |
| | 66,519 |
| | 68,179 |
| | 59,915 |
|
| Common Equity Tier 1 Capital/Risk-Weighted Assets | 19.3 | % | | 20.1 | % | | 18.4 | % | | 19.8 | % |
| Tier 1 Capital/Risk-Weighted Assets | 23.0 | % | | 20.1 | % | | 22.5 | % | | 19.8 | % |
| Total Capital/Risk-Weighted Assets | 23.0 | % | | 20.1 | % | | 22.6 | % | | 19.9 | % |
| Tier 1 Leverage Ratio | 7.6 | % | | 7.1 | % | | 7.2 | % | | 7.0 | % |
(1) CSC and Schwab Bank have elected to opt-out of the requirement to include most components of AOCI in CET1 Capital.
Schwab Bank is also subject to regulatory requirements that restrict and govern the terms of affiliate transactions. In addition, Schwab Bank is required to provide notice to, and may be required to obtain approval from, the OCC and the Federal Reserve to declare dividends to the parent company.
As a broker-dealer, CS&Co is subject to regulatory requirements of the Uniform Net Capital Rule. The rule is intended to ensure the general financial soundness and liquidity of broker-dealers. These regulations prohibit CS&Co from paying cash dividends, making unsecured advances and loans to the parent company and employees, and repaying subordinated borrowings from CSC if such payment would result in a net capital amount of less than 5% of aggregate debit balances or
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)
less than 120% of its minimum dollar requirement of $250,000. As such, CS&Co is required to maintain, at all times, at least the minimum level of net capital required under Rule 15c3-1. At December 31, 2017, CS&Co exceeded the net capital requirements.
In addition to the capital requirements above, the Company’s subsidiaries are subject to various regulatory requirements that are intended to ensure financial soundness and liquidity. See Item 8 – Note 21 for additional information on the components of stockholders’ equity and information on the capital requirements of each of the subsidiaries.
Dividends
Since the initial dividend in 1989, CSC has paid 115 consecutive quarterly dividends and has increased the quarterly dividend rate 21 times, resulting in a 20% compounded annual growth rate, excluding the special cash dividend of $1.00 per common share in 2007. While the payment and amount of dividends are at the discretion of the Board of Directors, subject to certain regulatory and other restrictions, CSC currently targets its common stock cash dividend at approximately 20% to 30% of net income.
On April 21, 2016 the Board of Directors of the Company declared a one cent, or 17%, increase in the quarterly cash dividend to $0.07 per common share. On January 26, 2017, the Board of Directors of the Company declared a one cent, or 14%, increase in the quarterly cash dividend to $0.08 per common share.
On January 25, 2018, the Board of Directors of the Company declared a two cent, or 25% increase in the quarterly cash dividend to $0.10 per common share.
The following table details the CSC cash dividends paid and per share amounts:
|
| | | | | | | | | | | | | |
| Year Ended December 31, | 2017 | | 2016 |
| | Cash Paid | Per Share
Amount | | Cash Paid | Per Share
Amount |
| Common Stock | $ | 431 |
| $ | 0.32 |
| | $ | 360 |
| $ | 0.27 |
|
Series A Preferred Stock (1) | 28 |
| 70.00 |
| | 28 |
| 70.00 |
|
Series B Preferred Stock (2,6) | 29 |
| 60.00 |
| | 29 |
| 60.00 |
|
Series C Preferred Stock (2) | 36 |
| 60.00 |
| | 36 |
| 60.00 |
|
Series D Preferred Stock (2,3) | 45 |
| 59.52 |
| | 33 |
| 43.65 |
|
Series E Preferred Stock (4) | 23 |
| 3,867.01 |
| | N/A |
| N/A |
|
Series F Preferred Stock (5) | N/A |
| N/A |
| | N/A |
| N/A |
|
(1) Dividends paid semi-annually until February 1, 2022 and quarterly thereafter.
(2) Dividends paid quarterly.
(3) Series D Preferred Stock was issued on March 7, 2016.
(4) Series E Preferred Stock was issued on October 31, 2016. Dividends paid semi-annually until March 1, 2022 and quarterly thereafter.
(5) Series F Preferred Stock was issued on October 31, 2017. Dividends paid semi-annually beginning on June 1, 2018 until December 1, 2027, and quarterly thereafter.
(6) Series B Preferred Stock was redeemed on December 1, 2017.
N/A Not applicable.
Share Repurchases
There were no repurchases of CSC’s common stock in 2017 or 2016. As of December 31, 2017, CSC had remaining authority from the Board of Directors to repurchase up to $596 million of its common stock, which is not subject to expiration.
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)
FOREIGN HOLDINGS
At December 31, 2017, Schwab had exposure to non-sovereign financial and non-financial institutions in Europe. The following table showsforeign countries of $5.7 billion, with the balancesfair value of this exposure by each countrythe top three exposures being to issuers and counterparties domiciled in Europe in which the issuer or counterparty is domiciled. The Company has no direct exposure to sovereign governments in Europe. The Company does not have unfunded commitments to counterparties in Europe, nor does it have exposure as a result of credit default protection purchased or sold separately as ofSweden at $1.6 billion, France at $1.3 billion and Canada at $0.8 billion.
At December 31,
2014.The determination2017, Schwab held AFS and HTM securities with a total fair value of the domicile$99 million issued by agencies of exposure variesforeign governments. These securities are explicitly guaranteed by the typegovernments of investment. For time deposits and certificates of deposit, the exposure is grouped in the country in which the financial institution is chartered under the regulatory framework of the European country. For asset-backed commercial paper, the exposure is grouped by the country of the sponsoring bank that provides the credit and liquidity support for such instruments. For corporate debt securities, the exposure is grouped by the country in which the issuer is domiciled. In situations in which the Company invests in a corporate debt security of a U.S. subsidiary of a European parent company, such holdings will be attributable to the European country only if significant reliance is placed on the European parent company for credit support underlying the security. For substantially all of the holdings listed below, the issuers or counterparties were financial institutions. All of the Company’s resale agreements, which are included in investments segregated and on deposit for regulatory purposes, are collateralized by U.S. government securities. Additionally, the Company’s securities lending activities are collateralized by cash. Therefore, the Company’s resale agreements and securities lending activities are not included in the table below even if the counterparty is a European institution.
issuing agencies. | | | | | | | | | | | | | | | | | | | | | |
| | Fair Value as of December 31, 2014 |
| | | | | | | | | | | | | | | | | United | | |
| | France | Netherlands | Norway | Sweden | Switzerland | Kingdom | Total |
Cash equivalents | | $ | 200 | | $ | - | | $ | - | | $ | - | | $ | - | | $ | - | | $ | 200 |
Securities available for sale | | | 86 | | | 35 | | | 75 | | | 521 | | | 509 | | | 500 | | | 1,726 |
Total fair value | | $ | 286 | | $ | 35 | | $ | 75 | | $ | 521 | | $ | 509 | | $ | 500 | | $ | 1,926 |
Total amortized cost | | $ | 285 | | $ | 35 | | $ | 75 | | $ | 520 | | $ | 509 | | $ | 500 | | $ | 1,924 |
Maturities: | | | | | | | | | | | | | | | | | | | | | |
Overnight | | $ | 200 | | $ | - | | $ | - | | $ | - | | $ | - | | $ | - | | $ | 200 |
1 day – < 6 months | | | - | | | - | | | - | | | - | | | 184 | | | - | | | 184 |
6 months – < 1 year | | | - | | | - | | | - | | | - | | | 275 | | | 150 | | | 425 |
1 year – 2 years | | | - | | | - | | | - | | | 371 | | | 50 | | | 200 | | | 621 |
> 2 years | | | 86 | | | 35 | | | 75 | | | 150 | | | - | | | 150 | | | 496 |
Total fair value | | $ | 286 | | $ | 35 | | $ | 75 | | $ | 521 | | $ | 509 | | $ | 500 | | $ | 1,926 |
In addition to the direct holdings
of Europeanin foreign companies
listed above, the Company alsoand securities issued by foreign government agencies, Schwab has indirect exposure to
Europeforeign countries through its investments in
Schwab sponsoredCSIM money market funds (collectively, the Funds) resulting from
brokerage clearing activities. At December 31,
2014,2017, the Company had
$224$135 million in investments in these Funds. Certain of the Funds’ positions include certificates of deposits, time deposits, commercial paper and corporate debt securities issued by counterparties in
Europe.Management mitigates exposureforeign countries. Schwab had outstanding margin loans to European holdings by employing a separate teamforeign residents of credit analysts that evaluate each issuer, counterparty, and country. Management monitors its exposure to European issuers by 1) performing risk assessments of the foreign countries, which include evaluating the size of the country and economy, currency trends, political landscape and the countries’ regulatory environment and developments; 2) performing ad hoc stress tests that evaluate the impact of sovereign governments’ debt write-downs on financial issuers and counterparties the Company has exposure to through its investments; 3) reviewing publicly available stress tests that are published by various regulators in the European market; 4) establishing credit and maturity limits by issuer; and 5) establishing and monitoring aggregate credit limits by geography and sector.
Market Risk
Market risk is the potential for changes in earnings or the value of financial instruments held by the Company as a result of fluctuations in interest rates, equity prices or market conditions. Included in market risk is interest rate risk, which is the risk
THE CHARLES SCHWAB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)
to earnings or capital arising from movement of interest rates. For discussion of the Company’s market risk, see “Item 7A – Quantitative and Qualitative Disclosures About Market Risk.”
Liquidity Risk
Liquidity risk arises from the inability to meet obligations when they come due without incurring unacceptable losses. It is the risk that valuations will be negatively affected by changes in demand and the underlying market for a financial instrument. Limits and contingency funding scenarios have been established for the Company to support liquidity levels and quality during both expected and stressed scenarios. The Company seeks to maintain client confidence in its balance sheet and the safety of client assets by maintaining liquidity and diversity of funding sources to allow the firm to meet its obligations under both expected and stressed scenarios. See “Liquidity and Capital Resources” for additional detail on the Company’s liquidity requirements.
Compliance Risk
The Company faces significant compliance risk in its business, that is, the risk of legal or regulatory sanctions, fines or penalties, financial loss, or damage to reputation resulting from the failure to comply with laws, regulations, rules, or other regulatory requirements. Among other things, compliance risks relate to the suitability of client investments, conflicts of interest, disclosure obligations and performance expectations for Company products and services, supervision of employees, and the adequacy of the Company’s controls. The Company and its affiliates are subject to extensive regulation by federal, state and foreign regulatory authorities, including SROs. Such regulation is becoming increasingly extensive and complex, and regulatory proceedings and sanctions against financial services firms continue to increase.
The Company attempts to manage compliance risk through policies, procedures and controls reasonably designed to achieve and/or monitor compliance with applicable legal and regulatory requirements. These procedures address issues such as business conduct and ethics, sales and trading practices, marketing and communications, extension of credit, client funds and securities, books and records, anti-money laundering, client privacy, and employment policies. Despite the Company’s efforts to maintain an effective compliance program and internal controls, legal breaches and rule violations could result in reputational harm, significant losses and disciplinary sanctions, including limitations on the Company’s business activities.
Legal Risk
Legal risk is a consequence of operational failure – the risk of a claim for damages brought by clients, employees or other third parties, alleging error that amounts to a breach of legal requirements or other duties under law. The financial services industry is subject to substantial litigation risk, and the firm incurs legal claims in the ordinary course of business. Increased litigation costs or substantial legal liability relating to an extraordinary claim or incidence of claims could have a material adverse effect on the Company’s business and financial condition. For information about the Company’s legal risk, see “Item 1A – Risk Factors,” and “Item 8 – Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – 14. Commitments and Contingencies.”
Capital Planning
The capital plan considers significant risks to meeting the Company’s capital goals over time and through evolving economic, financial, and business environments. Internal guidelines are set, for both the Company and regulated subsidiaries, to ensure continued regulatory compliance as well as to meet expectations of investors and rating agencies.
The capital plan also considers the potential effects of a sudden and sustained systemic economic downturn, idiosyncratic events which are uniquely impactful to the Company, and sensitivity analyses applied to significant assumptions that are either quantitative or qualitative in nature. The comprehensive Capital Contingency Plan was developed by the Company to address the action plans for certain capital events with low probability, but high severity, that the Company might face. The Capital Contingency Plan is issued under the authority of the Asset-Liability Management and Pricing Committee and provides guidelines for sustained capital events. It does not specifically address every contingency, but is designed to provide a framework for responding to any capital stress.
THE CHARLES SCHWAB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)
Capital forecasts are reviewed monthly$660 million at Capital Planning and Asset-Liability Management and Pricing Committee meetings and semi-annually at the Company’s Board of Directors meetings. Exceptions to internal guidelines are also reviewed at quarterly Global Risk Committee meetings.
December 31, 2017.
FAIR
VALUE OF FINANCIAL INSTRUMENTSThe Company
Schwab uses the market
and income approachesapproach to determine the fair value of certain financial assets and liabilities recorded at fair value, and to determine fair value disclosures. See
“ItemItem 8 –
Financial StatementsNote 2 and
Supplementary Data – Notes to Consolidated Financial Statements – 2. Summary of Significant Accounting Policies and 16. Fair Values of Assets and Liabilities”Note 15 for more information on
the Company’sour assets and liabilities recorded at fair value.
When available,
the CompanySchwab uses quoted prices in active markets to measure the fair value of assets and liabilities. When utilizing market data
with aand bid-ask spread,
the Company useswe use the price within the bid-ask spread that best represents fair value. When quoted prices do not exist,
the Company uses prices
are obtained from independent third-party pricing services to measure the fair value of investment assets.
The CompanyWe generally
obtainsobtain prices from at least three independent pricing sources for assets recorded at fair
value and may obtain up to five prices on assets with higher risk of limited observable information, such as non-agency residential mortgage-backed securities. The Company’svalue. Our primary independent pricing service provides prices based on observable trades and discounted cash flows that incorporate observable information such as yields for similar types of securities (a benchmark interest rate plus observable spreads) and weighted-average maturity for the same or similar “to-be-issued” securities. The
Company compares the prices obtained from its primary independent pricing service
are compared to the prices obtained from the additional independent pricing services to determine if the price obtained from the primary independent pricing service is reasonable.
The Company doesWe do 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 a material difference in the recorded amounts. At December 31,
20142017 and
2013, the Company2016, we did not adjust prices received from the primary independent third-party pricing service.
CRITICAL
ACCOUNTING ESTIMATES
The consolidated financial statements of the CompanySchwab have been prepared in accordance with GAAP. Item 8 – Note 2 contains more information on our significant accounting principles generally acceptedpolicies made in the U.S. connection with its application of these accounting principles.
While the majority of the
Company’s revenues, expenses, assets and liabilities are not based on estimates, there are certain accounting principles that require management to make estimates regarding matters that are uncertain and susceptible to change where such change may result in a material adverse impact on
the Company’sSchwab’s financial position and reported financial results. These critical accounting estimates are described below. Management regularly reviews the estimates and assumptions used in the preparation of the
Company’s financial statements for reasonableness and adequacy.
Other-than-Temporary Impairment
Management has discussed the development and selection of
Securities Available for Sale and Securities Held to MaturityManagement evaluates whether securities available for sale and securities held to maturity are other-than-temporarily impaired (OTTI) on a quarterly basis. Debt securitiesthese critical accounting estimates with unrealized losses are considered OTTI if the Company intends to sell the security or if it is more likely than not that the Company will be required to sell such security before any anticipated recovery. If management determines that a security is OTTI under these circumstances, the impairment recognized in earnings is measured as the entire difference between the amortized cost and the then-current fair value.
A security is also OTTI if management does not expect to recover the amortized costAudit Committee of the security. InBoard of Directors. Additionally, management has reviewed with the Audit Committee the Company’s significant estimates discussed in this circumstance, the impairment recognized in earnings represents estimated credit loss,Management’s Discussion and is measured by the difference between the present valueAnalysis of expected cash flowsFinancial Condition and the amortized costResults of the security. Management utilizes cash flow models to estimate the expected future cash flow from the securities and to estimate the credit loss. Expected cash flows are discounted using the security’s effective interest rate.
Operations.
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)
Income Taxes
Schwab estimates income tax expense based on amounts expected to be owed to the various tax jurisdictions in which we operate, including federal, state and local domestic jurisdictions, and immaterial amounts owed to several foreign jurisdictions. The evaluationestimated income tax expense is reported in the consolidated statements of whether the Company expects to recover the amortized cost of a security is inherently judgmental. The evaluation includes the assessment of several bond performance indicators including: the portion of the underlying loans thatincome in Taxes on income. Accrued taxes are delinquent (30 days, 60 days, 90+ days),reported in bankruptcy, in foreclosureOther assets or converted to real estate owned; the actual amount of loss incurredAccrued expenses and other liabilities on the underlying loansconsolidated balance sheets and represent the net estimated amount due to or to be received from taxing jurisdictions either currently or deferred to future periods. Deferred taxes arise from differences between assets and liabilities measured for financial reporting purposes versus income tax reporting purposes. Deferred tax assets are recognized if, in whichmanagement’s judgment, their realizability is determined to be more likely than not. Uncertain tax positions that meet the property has been foreclosed and sold;more likely than not recognition threshold are measured to determine the amount of credit support provided bybenefit to recognize. An uncertain tax position is measured at the structurelargest amount of benefit management believes is more likely than not to be realized upon settlement. In estimating accrued taxes, we assess the relative merits and risks of the security available to absorb credit losses onappropriate tax treatment considering statutory, judicial and regulatory guidance in the underlying loans; the current price and magnitudecontext of the unrealized loss;tax position. Because of the complexity of tax laws and whetherregulations, interpretation can be difficult and subject to legal judgment given specific facts and circumstances.
Changes in the
Company has received all scheduled principal and interest payments. Management uses cash flow modelsestimate of accrued taxes occur periodically due to
further assess the likelihood of other-than-temporary impairment for the Company’s non-agency residential mortgage-backed securities. To develop the cash flow models, the Company uses forecasted loss severity, prepayment speeds (i.e. the rate at which the principal on underlying loans are paid down), and default rates over the securities’ expected remaining maturities.Valuation of Goodwill
The Company tests goodwill for impairment at least annually, or whenever indications of impairment exist. Impairment exists when the carrying amount of goodwill exceeds its implied fair value, resulting in an impairment charge for this excess. Adverse changes in tax rates, interpretations of tax laws, the Company’s planned business operations such as unanticipated competition, a lossstatus of key personnel,examinations being conducted by various taxing authorities, and newly enacted statutory, judicial and regulatory guidance that impacts the salerelative merits and risks of a reporting unit or atax positions. These changes, when they occur, affect accrued taxes and can be significant portion of a reporting unit, or other unforeseen developments could result in an impairmentto the operating results of the Company’s recorded goodwill.
The Company’s annual goodwill impairment testing date is April 1st. In testingCompany. See Item 8 – Note 19 for a potential impairment of goodwill on April 1, 2014, management performed an assessment of each of the Company’s reporting units (generally defined as the Company’s businesses for which financialmore information is available and reviewed regularly by management) and concluded that goodwill was not impaired.
Allowance for Loan Losses
The appropriateness of the allowance is reviewed quarterly by management, taking into consideration current economic conditions, the existing loan portfolio composition, past loss experience, and risks inherent in the portfolio.
The methodology to establish an allowance for loan losses related to the First Mortgage and HELOC portfolio utilizes statistical models that estimate prepayments, defaults, and probable losses for the loan segments based on predicted behavior of individual loans within the segments. The methodology considers the effects of borrower behavior and a variety of factors including, but not limited to, interest rates, housing price movements as measured by a housing price index, economic conditions, estimated defaults and foreclosures measured by historical and expected delinquencies, changes in prepayment speeds, LTV ratios, past loss experience, estimates of future loss severities, borrower credit risk measured by FICO scores, and the adequacy of collateral. The methodology also evaluates concentrations in the loan segments including loan products, year of origination, and geographical distribution of collateral.
Probable losses are forecast using a loan-level simulation of the delinquency status of the loans over the term of the loans. The simulation starts with the current relevant risk indicators, including the current delinquent status of each loan, the estimated current LTV ratio of each loan, the term and structure of each loan, current key interest rates including U.S. Treasury and London Interbank Offered Rate (LIBOR) rates, and borrower FICO scores. The more significant variables in the simulation include delinquency roll rates, loss severity, housing prices, and interest rates. Delinquency roll rates (i.e., the rates at which loans transition through delinquency stages and ultimately result in a loss) are estimated from the Company’s historical loss experience adjusted for current trends and market information. Further, the delinquency roll rates within the loan-level simulation discussed above are calibrated to match a moving average of the delinquency roll rates actually experienced in the respective First Mortgage and HELOC portfolios. Loss severity estimates are based on the Company’s historical loss experience and market trends. The estimated loss severity (i.e. loss given default) used in the allowance for loan loss methodology for HELOCs is higher than that used in the methodology for First Mortgages. Housing price trends are derived from historical home price indices and econometric forecasts of future home values. Factors affecting the home price index include: housing inventory, unemployment, interest rates, and inflation expectations. Interest rate projections are based on the current term structure of interest rates and historical volatilities to project various possible future interest rate paths. As a result, the current state of house prices and the current state of delinquencies unique to the Company’s First Mortgage and
income taxes.
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)
HELOC portfolios are considered in the allowance for loan loss methodology. This methodology results in loss factors that are applied to the outstanding balances to determine the allowance for loan loss for each loan segment.
The allowance for personal loans secured by securities is established on a loan by loan basis. The market value of collateral pledged by borrowers is regularly reviewed to ensure the Company’s commitment to extend credit is over-collateralized. If collateral is in danger of falling below specified levels, the Company may reduce a borrower’s committed line or may liquidate collateral. At December 31, 2014 and 2013, the allowance for loan losses related to personal loans secured by securities was immaterial.
Legal and Regulatory Reserves
Reserves for legal and regulatory claims and proceedings reflect an estimate of probable losses for each matter, after considering, among other factors, the progress of the case, prior experience and the experience of others in similar cases, available defenses, insurance coverage and indemnification, and the opinions and views of legal counsel. In many cases, including most class action lawsuits, it is not possible to determine whether a loss will be incurred, or to estimate the range of that loss, until the matter is close to resolution, in which case no accrual is made until that time. Reserves are adjusted as more information becomes
available or when an event occurs requiring a change.available. Significant judgment is required in making these estimates, and the actual cost of resolving a matter may ultimately differ materially from the amount reserved.
The Company’s management has discussed the development and selection of these critical accounting estimates with the Audit Committee. Additionally, management has reviewed with the Audit Committee See Item 8 – Note 13 for more information on the Company’s significant estimates discussed in this Management’s Discussioncontingencies related to legal and Analysis of Financial Condition and Results of Operations.
regulatory reserves.
THE CHARLES SCHWAB CORPORATION
Item 7A.
|
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
|
Market risk is the potential for changes in earnings or the value of financial instruments held by the Company asRisk
For a
result of fluctuations in interest rates, equity prices or market conditions.The Company is exposed to interest rate risk primarily from changes in market interest rates on its interest-earning assets relative to changes in the costs of its funding sources that finance these assets. The majority of the Company’s interest-earning assets and interest-bearing liabilities are sensitive to changes in short-term interest rates. To a lesser degree, the Company is sensitive to changes in long-term interest rates through some of its investment portfolios. To manage the Company’s market risk related to interest rates, management utilizes simulation models, which include the net interest revenue sensitivity analysis described below.
Net interest revenue is affected by various factors, such as the distribution and composition of interest-earning assets and interest-bearing liabilities, the spread between yields earned on interest-earning assets and rates paid on interest-bearing liabilities, which may reprice at different times or by different amounts, and the spread between short and long-term interest rates. Interest-earning assets include residential real estate loans and mortgage-backed securities. These assets are sensitive to changes in interest rates and to changes to prepayment levels that tend to increase in a declining rate environment and decrease in a rising rate environment. Because the Company establishes the rates paid on certain brokerage client cash balances and deposits from banking clients and the rates charged on margin loans and loans to banking clients, and controls the composition of its investment securities, it has some ability to manage its net interest spread, depending on competitive factors and market conditions.
To mitigate the risk of loss, the Company has established policies and procedures which include setting guidelines on the amount of net interest revenue at risk, and monitoring the net interest margin and average maturity of its interest-earning assets and funding sources. To remain within these guidelines, the Company manages the maturity, repricing, and cash flow characteristics of the investment portfolios.
The Company is also subject to market risk as a result of fluctuations in option and equity prices. The Company’s direct holdings of option and equity securities and its associated exposure to option and equity prices are not material. The Company is indirectly exposed to option, futures, and equity market fluctuations in connection with client option and futures accounts, securities collateralizing margin loans to brokerage customers, and customer securities loaned out as part of the Company’s securities lending activities. Equity market valuations may also affect the level of brokerage client trading activity, margin borrowing, and overall client engagement with the Company. Additionally, the Company earns mutual fund service fees and asset management fees based upon daily balances of certain client assets. Fluctuations in these client asset balances caused by changes in equity valuations directly impact the amount of fee revenue earned by the Company.
Financial instruments held by the Company are also subject to liquidity risk – that is, the risk that valuations will be negatively affected by changes in demand and the underlying market for a financial instrument. Current conditions in the credit markets have significantly reduced market liquidity in a wide range of financial instruments, including the types of instruments held by the Company, and fair value can differ significantly from the value implied by the credit quality and actual performance of the instrument’s underlying cash flows.
For discussion of the impact of current market conditions on asset managementquantitative and administration fees and net interest revenue, see “Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Current Market and Regulatory Environment and Other Developments.”
The Company’squalitative disclosures about market risk, related to financial instruments held for trading is not material.
Net Interest Revenue Simulation
For the Company’s net interest revenue sensitivity analysis, the Company uses net interest revenue simulation modeling techniques to evaluate and manage the effect of changing interest rates. The simulation includes all interest-sensitive assets and liabilities. Key variablessee Risk Management in the simulation include the repricing of financial instruments, prepayment, reinvestment, and
Part II, Item 7.
THE CHARLES SCHWAB CORPORATION
product pricing assumptions. The Company uses constant balances and market rates in the simulation assumptions in order to minimize the number of variables and to better isolate risks. The simulations involve assumptions that are inherently uncertain and, as a result, cannot precisely estimate net interest revenue or predict the impact of changes in interest rates on net interest revenue. Actual results may differ from simulated results due to balance growth or decline and the timing, magnitude, and frequency of interest rate changes, as well as changes in market conditions and management strategies, including changes in asset and liability mix.
If the Company’s guidelines for its net interest revenue sensitivity are breached, management must report the breach to the Company’s Corporate Asset-Liability Management and Pricing Committee (Corporate ALCO) and establish a plan to address the interest rate risk. This plan could include, but is not limited to, rebalancing certain investment portfolios or using derivative instruments to mitigate the interest rate risk. Depending on the severity and expected duration of the breach, as well as the then current interest rate environment, the plan could also be to take no action. Any plan that recommends taking action is required to be approved by the Company’s Corporate ALCO. There were no breaches of the Company’s net interest revenue sensitivity guidelines during the years ended December 31, 2014 or 2013.
As represented by the simulations presented below, the Company’s investment strategy is structured to produce an increase in net interest revenue when interest rates rise and, conversely, a decrease in net interest revenue when interest rates fall.
The simulations in the following table assume that the asset and liability structure of the consolidated balance sheet would not be changed as a result of the simulated changes in interest rates. As the Company actively manages its consolidated balance sheet and interest rate exposure, in all likelihood the Company would take steps to manage any additional interest rate exposure that could result from changes in the interest rate environment. The following table shows the results of a gradual 100 basis point increase or decrease in market interest rates relative to the Company’s current market rates forecast on simulated net interest revenue over the next 12 months beginning December 31, 2014 and 2013.
| | | | | | | |
December 31, | | 2014 | | | 2013 | | |
Increase of 100 basis points | | 11.8 | % | | 11.0 | % | |
Decrease of 100 basis points | | (4.9) | % | | (4.5) | % | |
The sensitivities shown in the simulation reflect the fact that short-term interest rates in 2014 remained at historically low levels, including the federal funds target rate, which was unchanged at a range of zero to 0.25%. The current low interest rate environment limits the extent to which the Company can reduce interest expense paid on funding sources. A decline in interest rates could negatively impact the yield on the Company’s investment portfolio to a greater degree than any offsetting reduction in interest expense, further compressing net interest margin. Any increases in short-term interest rates result in a greater impact as yields on interest-earning assets are expected to rise faster than the cost of funding sources.
THE CHARLES SCHWAB CORPORATION
| |
| Item 8. | Financial Statements and Supplementary Data |
THE CHARLES SCHWAB CORPORATION
| | | | | | | | | |
Consolidated Statements of Income | | | | | | | | | |
(In Millions, Except Per Share Amounts) | | | | | | | | | |
| | | | | | | | | |
Year Ended December 31, | | | 2014 | | | 2013 | | | 2012 |
Net Revenues | | | | | | | | | |
Asset management and administration fees | | $ | 2,533 | | $ | 2,315 | | $ | 2,043 |
Interest revenue | | | 2,374 | | | 2,085 | | | 1,914 |
Interest expense | | | (102) | | | (105) | | | (150) |
Net interest revenue | | | 2,272 | | | 1,980 | | | 1,764 |
Trading revenue | | | 907 | | | 913 | | | 868 |
Other — net | | | 343 | | | 236 | | | 256 |
Provision for loan losses | | | 4 | | | 1 | | | (16) |
Net impairment losses on securities (1) | | | (1) | | | (10) | | | (32) |
Total net revenues | | | 6,058 | | | 5,435 | | | 4,883 |
Expenses Excluding Interest | | | | | | | | | |
Compensation and benefits | | | 2,184 | | | 2,027 | | | 1,803 |
Professional services | | | 457 | | | 415 | | | 388 |
Occupancy and equipment | | | 324 | | | 309 | | | 311 |
Advertising and market development | | | 245 | | | 257 | | | 241 |
Communications | | | 223 | | | 220 | | | 220 |
Depreciation and amortization | | | 199 | | | 202 | | | 196 |
Other | | | 311 | | | 300 | | | 274 |
Total expenses excluding interest | | | 3,943 | | | 3,730 | | | 3,433 |
Income before taxes on income | | | 2,115 | | | 1,705 | | | 1,450 |
Taxes on income | | | 794 | | | 634 | | | 522 |
Net Income | | | 1,321 | | | 1,071 | | | 928 |
Preferred stock dividends | | | 60 | | | 61 | | | 45 |
Net Income Available to Common Stockholders | | $ | 1,261 | | $ | 1,010 | | $ | 883 |
Weighted-Average Common Shares Outstanding — Diluted | | | 1,315 | | | 1,293 | | | 1,275 |
Earnings Per Common Share — Basic | | $ | .96 | | $ | .78 | | $ | .69 |
Earnings Per Common Share — Diluted | | $ | .95 | | $ | .78 | | $ | .69 |
Dividends Declared Per Common Share | | $ | .24 | | $ | .24 | | $ | .24 |
(1)
| Net impairment losses on securities include total other-than-temporary impairment losses of $1 million, $2 million, and $15 million recognized in other comprehensive income, net of less than $1 million, $(8) million, and $(17) million reclassified from other comprehensive income in 2014, 2013, and 2012, respectively.
|
|
| | | | | | | | | | | |
| Consolidated Statements of Income | | | | | |
| (In Millions, Except Per Share Amounts) | | | | | |
| | | | | | |
| Year Ended December 31, | 2017 | | 2016 | | 2015 |
| Net Revenues | | | | | |
| Interest revenue | $ | 4,624 |
| | $ | 3,493 |
| | $ | 2,657 |
|
| Interest expense | (342 | ) | | (171 | ) | | (132 | ) |
| Net interest revenue | 4,282 |
| | 3,322 |
| | 2,525 |
|
Asset management and administration fees (1) | 3,392 |
| | 3,055 |
| | 2,650 |
|
| Trading revenue | 654 |
| | 825 |
| | 866 |
|
| Other | 290 |
| | 271 |
| | 328 |
|
| Provision for loan losses | — |
| | 5 |
| | 11 |
|
| Total net revenues | 8,618 |
| | 7,478 |
| | 6,380 |
|
| Expenses Excluding Interest | | | | | |
|
| Compensation and benefits | 2,737 |
| | 2,466 |
| | 2,241 |
|
| Professional services | 580 |
| | 506 |
| | 459 |
|
| Occupancy and equipment | 436 |
| | 398 |
| | 353 |
|
| Advertising and market development | 268 |
| | 265 |
| | 249 |
|
| Communications | 231 |
| | 237 |
| | 233 |
|
| Depreciation and amortization | 269 |
| | 234 |
| | 224 |
|
| Regulatory fees and assessments | 179 |
| | 144 |
| | 107 |
|
| Other | 268 |
| | 235 |
| | 235 |
|
| Total expenses excluding interest | 4,968 |
| | 4,485 |
| | 4,101 |
|
| Income before taxes on income | 3,650 |
| | 2,993 |
| | 2,279 |
|
Taxes on income (2) | 1,296 |
| | 1,104 |
| | 832 |
|
| Net Income | 2,354 |
| | 1,889 |
| | 1,447 |
|
Preferred stock dividends and other (3) | 174 |
| | 143 |
| | 83 |
|
| Net Income Available to Common Stockholders | $ | 2,180 |
| | $ | 1,746 |
| | $ | 1,364 |
|
| Weighted-Average Common Shares Outstanding: | | | | | |
|
| Basic | 1,339 |
| | 1,324 |
| | 1,315 |
|
| Diluted | 1,353 |
| | 1,334 |
| | 1,327 |
|
| Earnings Per Common Share: | | | | | |
|
| Basic | $ | 1.63 |
| | $ | 1.32 |
| | $ | 1.04 |
|
| Diluted | $ | 1.61 |
| | $ | 1.31 |
| | $ | 1.03 |
|
| Dividends Declared Per Common Share | $ | .32 |
| | $ | .27 |
| | $ | .24 |
|
(1) Includes fee waivers of $10 million, $224 million, and $672 million during the years ended December 31, 2017, 2016, and 2015, respectively, relating to Schwab-sponsored money market funds.
(2) Includes the prospective adoption of ASU 2016-09 in 2017. See New Accounting Standards in Note 2 for additional information. Taxes on income were increased by approximately $46 million in December 2017 due to the enactment of the Tax Cuts and Jobs Act legislation resulting in the remeasurement of deferred tax assets and other tax adjustments.
(3) Includes preferred stock dividends and undistributed earnings and dividends allocated to non-vested restricted stock units.
See Notes to Consolidated Financial Statements.
- 51 -
THE CHARLES SCHWAB CORPORATION
| | | | | | | | | |
Consolidated Statements of Comprehensive Income | | | | | | | | | |
(In Millions) | | | | | | | | | |
| | | | | | | | | |
Year Ended December 31, | | | 2014 | | | 2013 | | | 2012 |
Net income | | $ | 1,321 | | $ | 1,071 | | $ | 928 |
Other comprehensive income (loss), before tax: | | | | | | | | | |
Change in net unrealized gain on securities available for sale: | | | | | | | | | |
Net unrealized gain (loss) | | | 255 | | | (468) | | | 470 |
Reclassification of impairment charges included in net | | | | | | | | | |
impairment losses on securities | | | 1 | | | 10 | | | 32 |
Other reclassifications included in other revenue | | | (7) | | | (7) | | | (38) |
Other | | | - | | | 1 | | | 1 |
Other comprehensive income (loss), before tax | | | 249 | | | (464) | | | 465 |
Income tax effect | | | (93) | | | 175 | | | (175) |
Other comprehensive income (loss), net of tax | | | 156 | | | (289) | | | 290 |
Comprehensive Income | | $ | 1,477 | | $ | 782 | | $ | 1,218 |
|
| | | | | | | | | | | | |
| Consolidated Statements of Comprehensive Income | | | | | |
| (In Millions) | | | | | |
| | | | | | |
| Year Ended December 31, | 2017 | | 2016 | | 2015 |
| Net income | $ | 2,354 |
| | $ | 1,889 |
| | $ | 1,447 |
|
| Other comprehensive income (loss), before tax: | | | | | |
| Change in net unrealized gain (loss) on available for sale securities: | | | | | |
| Net unrealized gain (loss) | 13 |
| | (44 | ) | | (477 | ) |
| Reclassification of net unrealized loss transferred to held to maturity | 227 |
| | — |
| | — |
|
| Other reclassifications included in other revenue | (12 | ) | | (4 | ) | — |
| — |
|
| Change in net unrealized gain (loss) on held to maturity securities: | | | | | |
| Reclassification of net unrealized loss transferred from available for sale | (227 | ) | | — |
| | — |
|
| Amortization of amounts previously recorded upon transfer from available for sale | 31 |
| | — |
| | — |
|
| Other | (11 | ) | | 1 |
| | — |
|
| Other comprehensive income (loss), before tax | 21 |
| | (47 | ) | | (477 | ) |
| Income tax effect | (10 | ) | | 18 |
| | 178 |
|
| Other comprehensive income (loss), net of tax | 11 |
| | (29 | ) | | (299 | ) |
| Comprehensive Income | $ | 2,365 |
| | $ | 1,860 |
| | $ | 1,148 |
|
See Notes to Consolidated Financial Statements.
THE CHARLES SCHWAB CORPORATION
| | | | | | |
Consolidated Balance Sheets | | | | | | |
(In Millions, Except Per Share and Share Amounts) | | | | | | |
| | | | |
December 31, | | 2014 | | 2013 |
Assets | | | | | | |
Cash and cash equivalents | | $ | 11,363 | | $ | 7,728 |
Cash and investments segregated and on deposit for regulatory purposes | | | | | | |
(including resale agreements of $10,186 and $14,016 at December 31, 2014 | | | | | | |
and 2013, respectively) | | | 20,781 | | | 23,553 |
Receivables from brokers, dealers, and clearing organizations | | | 469 | | | 509 |
Receivables from brokerage clients — net | | | 15,669 | | | 13,951 |
Other securities owned — at fair value | | | 516 | | | 517 |
Securities available for sale | | | 54,783 | | | 51,618 |
Securities held to maturity (fair value — $34,743 and $29,490 at December 31, | | | | | | |
2014 and 2013, respectively) | | | 34,389 | | | 30,318 |
Loans to banking clients — net | | | 13,399 | | | 12,419 |
Equipment, office facilities, and property — net | | | 1,039 | | | 790 |
Goodwill | | | 1,227 | | | 1,227 |
Intangible assets — net | | | 227 | | | 266 |
Other assets | | | 780 | | | 746 |
Total assets | | $ | 154,642 | | $ | 143,642 |
Liabilities and Stockholders’ Equity | | | | | | |
Deposits from banking clients | | $ | 102,815 | | $ | 92,972 |
Payables to brokers, dealers, and clearing organizations | | | 2,004 | | | 1,467 |
Payables to brokerage clients | | | 34,305 | | | 35,333 |
Accrued expenses and other liabilities | | | 1,816 | | | 1,586 |
Long-term debt | | | 1,899 | | | 1,903 |
Total liabilities | | | 142,839 | | | 133,261 |
Stockholders’ equity: | | | | | | |
Preferred stock — $.01 par value per share; aggregate liquidation | | | | | | |
preference of $885 | | | 872 | | | 869 |
Common stock — 3 billion shares authorized; $.01 par value per share; | | | | | | |
1,487,543,446 shares issued | | | 15 | | | 15 |
Additional paid-in capital | | | 4,050 | | | 3,951 |
Retained earnings | | | 10,198 | | | 9,253 |
Treasury stock, at cost — 176,821,202 shares and 190,657,263 shares | | | | | | |
at December 31, 2014 and 2013, respectively | | | (3,497) | | | (3,716) |
Accumulated other comprehensive income | | | 165 | | | 9 |
Total stockholders’ equity | | | 11,803 | | | 10,381 |
Total liabilities and stockholders’ equity | | $ | 154,642 | | $ | 143,642 |
|
| | | | | | | |
| Consolidated Balance Sheets | | | |
| (In Millions, Except Per Share and Share Amounts) | | | |
| | | | |
| December 31, | 2017 | | 2016 |
| Assets | | | |
| Cash and cash equivalents | $ | 14,217 |
| | $ | 10,828 |
|
| Cash and investments segregated and on deposit for regulatory purposes | | | |
| (including resale agreements of $6,596 and $9,547 at December 31, 2017 | | | |
| and 2016, respectively) | 15,139 |
| | 22,174 |
|
| Receivables from brokers, dealers, and clearing organizations | 649 |
| | 728 |
|
| Receivables from brokerage clients — net | 20,576 |
| | 17,155 |
|
| Other securities owned — at fair value | 539 |
| | 449 |
|
| Available for sale securities | 49,995 |
| | 77,365 |
|
Held to maturity securities (fair value — $120,373 and $74,444 at December 31, | | | |
| 2017 and 2016, respectively) | 120,926 |
| | 75,203 |
|
| Bank loans — net | 16,478 |
| | 15,403 |
|
| Equipment, office facilities, and property — net | 1,471 |
| | 1,299 |
|
| Goodwill | 1,227 |
| | 1,227 |
|
| Intangible assets — net | 108 |
| | 144 |
|
| Other assets | 1,949 |
| | 1,408 |
|
| Total assets | $ | 243,274 |
| | $ | 223,383 |
|
| Liabilities and Stockholders’ Equity | |
| | |
|
| Bank deposits | $ | 169,656 |
| | $ | 163,454 |
|
| Payables to brokers, dealers, and clearing organizations | 1,287 |
| | 2,407 |
|
| Payables to brokerage clients | 31,243 |
| | 35,894 |
|
| Accrued expenses and other liabilities | 2,810 |
| | 2,331 |
|
| Short-term borrowings | 15,000 |
| | — |
|
| Long-term debt | 4,753 |
| | 2,876 |
|
| Total liabilities | 224,749 |
| | 206,962 |
|
| Stockholders’ equity: | |
| | |
|
| Preferred stock — $.01 par value per share; aggregate liquidation preference | | | |
of $2,850 and $2,835 at December 31, 2017 and 2016, respectively | 2,793 |
| | 2,783 |
|
| Common stock — 3 billion shares authorized; $.01 par value per share; | | | |
| 1,487,543,446 shares issued | 15 |
| | 15 |
|
| Additional paid-in capital | 4,353 |
| | 4,267 |
|
| Retained earnings | 14,408 |
| | 12,649 |
|
| Treasury stock, at cost — 142,210,890 and 154,793,560 shares | | | |
| at December 31, 2017 and 2016, respectively | (2,892 | ) | | (3,130 | ) |
| Accumulated other comprehensive income | (152 | ) | | (163 | ) |
| Total stockholders’ equity | 18,525 |
| | 16,421 |
|
| Total liabilities and stockholders’ equity | $ | 243,274 |
| | $ | 223,383 |
|
See Notes to Consolidated Financial Statements.
- 53 -
THE CHARLES SCHWAB CORPORATION
| | | | | | | | | |
Consolidated Statements of Cash Flows | | | | | | | | | |
(In Millions) | | | | | | | | | |
| | | | | | | | | |
Year Ended December 31, | | | 2014 | | | 2013 | | | 2012 |
Cash Flows from Operating Activities | | | | | | | | | |
Net income | | $ | 1,321 | | $ | 1,071 | | $ | 928 |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | | |
Provision for loan losses | | | (4) | | | (1) | | | 16 |
Net impairment losses on securities | | | 1 | | | 10 | | | 32 |
Stock-based compensation | | | 115 | | | 116 | | | 105 |
Depreciation and amortization | | | 199 | | | 202 | | | 196 |
(Benefit) Provision for deferred income taxes | | | (25) | | | (21) | | | 5 |
Premium amortization, net, on securities available for sale and securities held to maturity | | | 125 | | | 162 | | | 222 |
Other | | | (7) | | | 15 | | | 26 |
Originations of loans held for sale | | | - | | | - | | | (441) |
Proceeds from sales of loans held for sale | | | - | | | - | | | 513 |
Net change in: | | | | | | | | | |
Cash and investments segregated and on deposit for regulatory purposes | | | 2,772 | | | 4,916 | | | (2,549) |
Receivables from brokers, dealers, and clearing organizations | | | 44 | | | (175) | | | (104) |
Receivables from brokerage clients | | | (1,725) | | | (496) | | | (2,391) |
Other securities owned | | | 1 | | | 119 | | | (43) |
Other assets | | | (30) | | | 17 | | | 10 |
Payables to brokers, dealers, and clearing organizations | | | 393 | | | 318 | | | 28 |
Payables to brokerage clients | | | (1,028) | | | (4,997) | | | 4,950 |
Accrued expenses and other liabilities | | | 196 | | | 400 | | | (237) |
Net cash provided by operating activities | | | 2,348 | | | 1,656 | | | 1,266 |
Cash Flows from Investing Activities | | | | | | | | | |
Purchases of securities available for sale | | | (15,134) | | | (22,942) | | | (29,035) |
Proceeds from sales of securities available for sale | | | 6,556 | | | 6,167 | | | 3,336 |
Principal payments on securities available for sale | | | 5,843 | | | 10,772 | | | 13,867 |
Purchases of securities held to maturity | | | (6,920) | | | (16,061) | | | (8,678) |
Principal payments on securities held to maturity | | | 2,687 | | | 3,895 | | | 5,453 |
Net increase in loans to banking clients | | | (1,016) | | | (1,634) | | | (978) |
Purchase of equipment, office facilities, and property | | | (400) | | | (249) | | | (148) |
Cash paid in business acquisitions | | | - | | | - | | | (80) |
Other investing activities | | | (11) | | | 2 | | | 3 |
Net cash used for investing activities | | | (8,395) | | | (20,050) | | | (16,260) |
Cash Flows from Financing Activities | | | | | | | | | |
Net change in deposits from banking clients | | | 9,843 | | | 13,595 | | | 18,523 |
Issuance of commercial paper | | | - | | | - | | | 300 |
Repayment of commercial paper | | | - | | | (300) | | | - |
Issuance of long-term debt | | | - | | | 275 | | | 350 |
Repayment of long-term debt | | | (6) | | | (6) | | | (732) |
Premium paid on debt exchange | | | - | | | - | | | (19) |
Net proceeds from preferred stock offerings | | | - | | | - | | | 863 |
Dividends paid | | | (373) | | | (368) | | | (337) |
Proceeds from stock options exercised and other | | | 189 | | | 258 | | | 35 |
Other financing activities | | | 29 | | | 5 | | | (5) |
Net cash provided by financing activities | | | 9,682 | | | 13,459 | | | 18,978 |
Increase (Decrease) in Cash and Cash Equivalents | | | 3,635 | | | (4,935) | | | 3,984 |
Cash and Cash Equivalents at Beginning of Year | | | 7,728 | | | 12,663 | | | 8,679 |
Cash and Cash Equivalents at End of Year | | $ | 11,363 | | $ | 7,728 | | $ | 12,663 |
| | | | | | | | | |
Supplemental Cash Flow Information | | | | | | | | | |
Cash paid during the year for: | | | | | | | | | |
Interest | | $ | 103 | | $ | 99 | | $ | 143 |
Income taxes | | $ | 778 | | $ | 624 | | $ | 508 |
Non-cash investing activity: | | | | | | | | | |
Securities purchased during the year but settled after year end | | $ | 143 | | $ | 81 | | $ | - |
Non-cash financing activity: | | | | | | | | | |
Exchange of Senior Notes | | $ | - | | $ | - | | $ | 256 |
|
| | | | | | | | | | | |
| Consolidated Statements of Cash Flows | | | | | |
| (In Millions) | | | | | |
| | | | | | |
| Year Ended December 31, | 2017 | | 2016 | | 2015 |
| Cash Flows from Operating Activities | | | | | |
| Net income | $ | 2,354 |
| | $ | 1,889 |
| | $ | 1,447 |
|
| Adjustments to reconcile net income to net cash (used for) provided by operating activities: | | | | | |
| Provision for loan losses | — |
| | (5 | ) | | (11 | ) |
| Share-based compensation | 153 |
| | 141 |
| | 135 |
|
| Depreciation and amortization | 269 |
| | 234 |
| | 224 |
|
| Provision (Benefit) for deferred income taxes | 58 |
| | 15 |
| | (7 | ) |
| Premium amortization, net, on available for sale and held to maturity securities | 342 |
| | 266 |
| | 162 |
|
| Other | 51 |
| | 9 |
| | (4 | ) |
| Net change in: | | | | | |
| Cash and investments segregated and on deposit for regulatory purposes | 7,035 |
| | (2,576 | ) | | 1,183 |
|
| Receivables from brokers, dealers, and clearing organizations | 74 |
| | (147 | ) | | (108 | ) |
| Receivables from brokerage clients | (3,428 | ) | | 150 |
| | (1,652 | ) |
| Other securities owned | (90 | ) | | 84 |
| | (17 | ) |
| Other assets | (177 | ) | | (93 | ) | | (98 | ) |
| Payables to brokers, dealers, and clearing organizations | (1,148 | ) | | (181 | ) | | 808 |
|
| Payables to brokerage clients | (4,651 | ) | | 2,709 |
| | (1,120 | ) |
| Accrued expenses and other liabilities | 421 |
| | 167 |
| | 304 |
|
| Net cash provided by operating activities | 1,263 |
| | 2,662 |
| | 1,246 |
|
| Cash Flows from Investing Activities | | | | | |
| Purchases of available for sale securities | (15,033 | ) | | (29,248 | ) | | (21,351 | ) |
| Proceeds from sales of available for sale securities | 8,617 |
| | 5,537 |
| | 2,424 |
|
| Principal payments on available for sale securities | 9,095 |
| | 11,903 |
| | 7,340 |
|
| Purchases of held to maturity securities | (32,925 | ) | | (31,162 | ) | | (19,303 | ) |
| Principal payments on held to maturity securities | 11,627 |
| | 5,747 |
| | 3,540 |
|
| Net increase in bank loans | (1,071 | ) | | (1,103 | ) | | (980 | ) |
| Purchase of equipment, office facilities, and property | (400 | ) | | (346 | ) | | (266 | ) |
| Purchases of Federal Home Loan Bank stock | (430 | ) | | (152 | ) | | — |
|
| Proceeds from sales of Federal Home Loan Bank stock | 106 |
| | 88 |
| | 8 |
|
| Other investing activities | (59 | ) | | (39 | ) | | (35 | ) |
| Net cash used for investing activities | (20,473 | ) | | (38,775 | ) | | (28,623 | ) |
| Cash Flows from Financing Activities | | | | | |
| Net change in bank deposits | 6,186 |
| | 33,952 |
| | 26,687 |
|
| Net proceeds from short-term borrowings | 15,000 |
| | — |
| | — |
|
| Issuance of long-term debt | 2,129 |
| | — |
| | 1,346 |
|
| Repayment of long-term debt | (257 | ) | | (7 | ) | | (357 | ) |
| Net proceeds from preferred stock offerings | 492 |
| | 1,316 |
| | 581 |
|
| Redemption of preferred stock | (485 | ) | | — |
| | — |
|
| Dividends paid | (592 | ) | | (486 | ) | | (387 | ) |
| Proceeds from stock options exercised and other | 171 |
| | 144 |
| | 90 |
|
| Other financing activities | (45 | ) | | 44 |
| | 32 |
|
| Net cash provided by financing activities | 22,599 |
| | 34,963 |
| | 27,992 |
|
| Increase (Decrease) in Cash and Cash Equivalents | 3,389 |
| | (1,150 | ) | | 615 |
|
| Cash and Cash Equivalents at Beginning of Year | 10,828 |
| | 11,978 |
| | 11,363 |
|
| Cash and Cash Equivalents at End of Year | $ | 14,217 |
| | $ | 10,828 |
| | $ | 11,978 |
|
| | | | | | |
| Supplemental Cash Flow Information | | | | | |
| Cash paid during the year for: | | | | | |
| Interest | $ | 327 |
| | $ | 160 |
| | $ | 121 |
|
| Income taxes | $ | 1,212 |
| | $ | 991 |
| | $ | 810 |
|
| Non-cash investing activity: | | | | | |
| Securities purchased during the year but settled after year end | $ | 29 |
| | $ | — |
| | $ | — |
|
See Notes to Consolidated Financial Statements.
- 54 -
THE CHARLES SCHWAB CORPORATION
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Consolidated Statements of Stockholders’ Equity | |
(In Millions) | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | Accumulated | | | | | |
| | | | | | | | | Additional | | | | | | | | | | Other | | | | | |
| Preferred | | Common Stock | | Paid-In | | Retained | | Treasury Stock, | | Comprehensive | | | | | |
| Stock | | Shares | | Amount | | Capital | | Earnings | | at cost | | Income (Loss) | | | Total | |
Balance at December 31, 2011 | $ | - | | 1,488 | | $ | 15 | | $ | 3,826 | | $ | 7,978 | | | $ | (4,113) | | | | $ | 8 | | | | $ | 7,714 | |
Net income | | - | | - | | | - | | | - | | | 928 | | | | - | | | | | - | | | | | 928 | |
Other comprehensive income, net of tax | | - | | - | | | - | | | - | | | - | | | | - | | | | | 290 | | | | | 290 | |
Issuance of preferred stock | | 863 | | - | | | - | | | - | | | - | | | | - | | | | | - | | | | | 863 | |
Dividends declared on preferred stock | | - | | - | | | - | | | - | | | (43) | | | | - | | | | | - | | | | | (43) | |
Dividends declared on common stock | | - | | - | | | - | | | - | | | (308) | | | | - | | | | | - | | | | | (308) | |
Stock option exercises and other | | - | | - | | | - | | | (40) | | | - | | | | 76 | | | | | - | | | | | 36 | |
Stock-based compensation and | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
related tax effects | | - | | - | | | - | | | 98 | | | - | | | | - | | | | | - | | | | | 98 | |
Other | | 2 | | - | | | - | | | (3) | | | (1) | | | | 13 | | | | | - | | | | | 11 | |
Balance at December 31, 2012 | | 865 | | 1,488 | | | 15 | | | 3,881 | | | 8,554 | | | | (4,024) | | | | | 298 | | | | | 9,589 | |
Net income | | - | | - | | | - | | | - | | | 1,071 | | | | - | | | | | - | | | | | 1,071 | |
Other comprehensive loss, net of tax | | - | | - | | | - | | | - | | | - | | | | - | | | | | (289) | | | | | (289) | |
Dividends declared on preferred stock | | - | | - | | | - | | | - | | | (57) | | | | - | | | | | - | | | | | (57) | |
Dividends declared on common stock | | - | | - | | | - | | | - | | | (311) | | | | - | | | | | - | | | | | (311) | |
Stock option exercises and other | | - | | - | | | - | | | (54) | | | - | | | | 314 | | | | | - | | | | | 260 | |
Stock-based compensation and | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
related tax effects | | - | | - | | | - | | | 119 | | | - | | | | - | | | | | - | | | | | 119 | |
Other | | 4 | | - | | | - | | | 5 | | | (4) | | | | (6) | | | | | - | | | | | (1) | |
Balance at December 31, 2013 | | 869 | | 1,488 | | | 15 | | | 3,951 | | | 9,253 | | | | (3,716) | | | | | 9 | | | | | 10,381 | |
Net income | | - | | - | | | - | | | - | | | 1,321 | | | | - | | | | | - | | | | | 1,321 | |
Other comprehensive income, net of tax | | - | | - | | | - | | | - | | | - | | | | - | | | | | 156 | | | | | 156 | |
Dividends declared on preferred stock | | - | | - | | | - | | | - | | | (57) | | | | - | | | | | - | | | | | (57) | |
Dividends declared on common stock | | - | | - | | | - | | | - | | | (316) | | | | - | | | | | - | | | | | (316) | |
Stock option exercises and other | | - | | - | | | - | | | (53) | | | - | | | | 240 | | | | | - | | | | | 187 | |
Stock-based compensation and | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
related tax effects | | - | | - | | | - | | | 139 | | | - | | | | - | | | | | - | | | | | 139 | |
Other | | 3 | | - | | | - | | | 13 | | | (3) | | | | (21) | | | | | - | | | | | (8) | |
Balance at December 31, 2014 | $ | 872 | | 1,488 | | $ | 15 | | $ | 4,050 | | $ | 10,198 | | | $ | (3,497) | | | | $ | 165 | | | | $ | 11,803 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Consolidated Statements of Stockholders’ Equity |
| (In Millions) | | | | | | | | | | | | | |
| | | | | | Additional
Paid-In
Capital | | | | | | Accumulated Other Comprehensive
Income (Loss) | | |
| | Preferred
Stock | | Common Stock | | | Retained
Earnings | | Treasury Stock,
at cost | | | |
| | | Shares | | Amount | | | | | | Total |
| Balance at December 31, 2014 | $ | 872 |
| | 1,488 |
| | $ | 15 |
| | $ | 4,050 |
| | $ | 10,198 |
| | $ | (3,497 | ) | | $ | 165 |
| | $ | 11,803 |
|
| Net income | — |
| | — |
| | — |
| | — |
| | 1,447 |
| | — |
| | — |
| | 1,447 |
|
| Other comprehensive income (loss), net of tax | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (299 | ) | | (299 | ) |
| Issuance of preferred stock, net | 587 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 587 |
|
| Dividends declared on preferred stock | — |
| | — |
| | — |
| | — |
| | (69 | ) | | — |
| | — |
| | (69 | ) |
| Dividends declared on common stock | — |
| | — |
| | — |
| | — |
| | (318 | ) | | — |
| | — |
| | (318 | ) |
| Stock option exercises and other | — |
| | — |
| | — |
| | (87 | ) | | — |
| | 177 |
| | — |
| | 90 |
|
| Share-based compensation and | | | | | | | | | | | | | | | |
| related tax effects | — |
| | — |
| | — |
| | 172 |
| | — |
| | — |
| | — |
| | 172 |
|
| Other | — |
| | — |
| | — |
| | 17 |
| | (5 | ) | | (23 | ) | | — |
| | (11 | ) |
| Balance at December 31, 2015 | 1,459 |
| | 1,488 |
| | 15 |
| | 4,152 |
| | 11,253 |
| | (3,343 | ) | | (134 | ) | | 13,402 |
|
| Net income | — |
| | — |
| | — |
| | — |
| | 1,889 |
| | — |
| | — |
| | 1,889 |
|
| Other comprehensive income (loss), net of tax | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (29 | ) | | (29 | ) |
| Issuance of preferred stock, net | 1,324 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 1,324 |
|
| Dividends declared on preferred stock | — |
| | — |
| | — |
| | — |
| | (126 | ) | | — |
| | — |
| | (126 | ) |
| Dividends declared on common stock | — |
| | — |
| | — |
| | — |
| | (360 | ) | | — |
| | — |
| | (360 | ) |
| Stock option exercises and other | — |
| | — |
| | — |
| | (80 | ) | | — |
| | 224 |
| | — |
| | 144 |
|
| Share-based compensation and | | | | | | | | | | | | | | | |
| related tax effects | — |
| | — |
| | — |
| | 177 |
| | — |
| | — |
| | — |
| | 177 |
|
| Other | — |
| | — |
| | — |
| | 18 |
| | (7 | ) | | (11 | ) | | — |
| | — |
|
| Balance at December 31, 2016 | 2,783 |
| | 1,488 |
| | 15 |
| | 4,267 |
| | 12,649 |
| | (3,130 | ) | | (163 | ) | | 16,421 |
|
| Net income | — |
| | — |
| | — |
| | — |
| | 2,354 |
| | — |
| | — |
| | 2,354 |
|
| Other comprehensive income (loss), net of tax | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 11 |
| | 11 |
|
| Issuance of preferred stock, net | 492 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 492 |
|
| Redemption of preferred stock | (482 | ) |
| — |
|
| — |
|
| — |
|
| (3 | ) |
| — |
|
| — |
|
| (485 | ) |
| Dividends declared on preferred stock | — |
| | — |
| | — |
| | — |
| | (161 | ) | | — |
| | — |
| | (161 | ) |
| Dividends declared on common stock | — |
| | — |
| | — |
| | — |
| | (431 | ) | | — |
| | — |
| | (431 | ) |
| Stock option exercises and other | — |
| | — |
| | — |
| | (88 | ) | | — |
| | 259 |
| | — |
| | 171 |
|
Share-based compensation and
| | | | | | | | | | | | | | | |
| related tax effects | — |
| | — |
| | — |
| | 144 |
| | — |
| | — |
| | — |
| | 144 |
|
| Other | — |
| | — |
| | — |
| | 30 |
| | — |
| | (21 | ) | | — |
| | 9 |
|
| Balance at December 31, 2017 | $ | 2,793 |
| | 1,488 |
| | $ | 15 |
| | $ | 4,353 |
| | $ | 14,408 |
| | $ | (2,892 | ) | | $ | (152 | ) | | $ | 18,525 |
|
See Notes to Consolidated Financial Statements.
- 55 -
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
1.
Introduction and Basis of Presentation | |
| 1. | Introduction and Basis of Presentation |
The Charles Schwab Corporation (CSC) is a savings and loan holding company, engaged,headquartered in San Francisco, California. CSC was incorporated in 1986 and engages, through its subsidiaries, in wealth management, securities brokerage, banking, moneyasset management, custody, and financial advisory services. Charles Schwab & Co., Inc. (Schwab)(CS&Co) is a securities broker-dealer with over 325345 domestic branch offices in 4546 states, as well as a branch in each of the Commonwealth of Puerto Rico and London, England.Rico. In addition, Schwab serves clients in England, Hong Kong, Singapore, and Australia through one of CSC’svarious subsidiaries. Other significant subsidiaries include Charles Schwab Bank, (Schwab Bank), a federal savings bank, and Charles Schwab Investment Management, Inc. (CSIM), the investment advisor for Schwab’s proprietary mutual funds which are referred to as the Schwab(Schwab Funds®), and for Schwab’s exchange-traded funds which are referred to as the Schwab ETFsTM(Schwab ETFs™).
The accompanying consolidated financial statements include CSC and its
majority-owned subsidiaries (collectively referred to as the Company).subsidiaries. Intercompany balances and transactions have been eliminated. These consolidated financial statements have been prepared in conformity with
accounting principles generally accepted in the United States (U.S.),GAAP, which require management to make certain estimates and assumptions that affect the reported amounts in the accompanying financial statements. Certain estimates relate to
other-than-temporary impairment of securities available for sale and securities held to maturity, valuation of goodwill, allowance for loan losses,taxes on income and legal and regulatory reserves. Actual results may differ from those estimates.
2.
Unless otherwise indicated, the terms “Schwab,” “the Company,” “we,” “us,” or “our” mean CSC together with its consolidated subsidiaries.
Principles of Consolidation
Schwab evaluates all entities in which it has financial interests for consolidation, except for money market funds, which are specifically excluded from consolidation guidance. When an entity is evaluated for consolidation, Schwab determines whether its interest in the entity constitutes a controlling financial interest under either the variable interest entity (VIE) model or the voting interest entity (VOE) model. In evaluating whether Schwab’s interest in a VIE is a controlling financial interest, we consider whether our involvement, in the context of the design, purpose, and risks of the VIE, as well as any involvement of related parties, provides us with (i) the power to direct the most significant activities of the VIE and (ii) the obligation to absorb losses or receive benefits that are significant to the VIE. If both of these conditions exist, then Schwab would be the primary beneficiary of that VIE and consolidate it. Based upon the assessments for all of our interests in VIEs, there are no cases where the Company is the primary beneficiary; therefore, we are not required to consolidate any VIEs. See Note 10 for further information about VIEs. The Company consolidates all VOEs in which it has majority voting interests.
Investments in entities in which Schwab does not have a controlling financial interest are accounted for under the equity method of accounting when we have the ability to exercise significant influence over operating and financing decisions of the entity. Investments in entities for which the Company does not have the ability to exercise significant influence are generally carried at cost, except for certain investments in qualified affordable housing projects which are accounted for under the proportional amortization method. All equity method, cost method, and proportional amortization method investments are included in other assets on the consolidated balance sheets.
Summary of Significant Accounting Policies | |
| 2. | Summary of Significant Accounting Policies |
Interest revenue
Interest revenue is recognized as earned on interest-earning assets such as cash and cash equivalents, cash and investments segregated, receivables from brokerage clients, investment securities, and bank loans. Interest revenue from these assets is based upon average or daily balances and the applicable interest rates. Interest revenue is also recognized from securities lending activities when earned based upon the securities and amounts lent and the applicable rates.
Asset management and administration fees
Asset management and administration fees include mutual fund service fees and fees for other asset-based financial services provided to individual and institutional clients, and are recognized as revenue overservices are performed. Such fees are generally based on a percentage of the period that the related service is provided, based upondaily average asset balances. balances, which are based on quoted market prices and other observable market data.
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
The Company’s policy is to recognize revenue subject to refunds because management can estimate refunds based on Company specificCompany-specific experience. Actual refunds were not material as of December 31, 2014. The Company earns mutual fund service feesimmaterial for shareholder services, administration, and investment management provided to its proprietary funds, and recordkeeping and shareholder services provided to third-party funds. These fees are based uponall periods presented.
Trading revenue
Schwab generates the
daily balances of client assets invested in these funds. The Company also earns asset management fees from advisory offers that are based on the daily balances of client assets subject to the specific fee for service. The fair values of client assets included in proprietary and third-party mutual funds are based on quoted market prices and other observable market data. Other asset management and administration fees include various asset based fees, such as third-party mutual fund service fees, trust fees, 401(k) record keeping fees, and mutual fund clearing and other service fees.In 2014, 2013, and 2012, the Company waived a portionmajority of its asset management feestrading revenue through commissions earned from certain Schwab-sponsored money market mutual funds in order to provide a positive return tofor executing trades for clients. Under agreements with these funds, the Company may recover such fee waivers depending on the future performance of the funds and approval by the boards of the respective funds until the third anniversary of the end of the fiscal year in which such fee waiver occurs, subject to certain limitations. Recoveries of previously-waived asset management feesCommission revenues are recognized as revenue when substantially all uncertainties about timing and amountservices are performed at the time of realization are resolved.
Interest revenue
Interest revenue represents interest earned on cash and cash equivalents, cash and investments segregated, receivables from brokers, dealers, and clearing organizations, receivables from brokerage clients, other securities owned, securities available for sale, securities held to maturity, and loans to banking clients. Interest revenue is recognized in the period earned based upon average or daily asset balances and respective interest rates.
Trading revenue
Trading revenue includes commission and principal transaction revenues. Clients’ securities transactions are recordedexecution (i.e., on the date that they settle, while the related commission revenues and expenses are recorded on the date that the trade occurs.
date).
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
Principal transaction revenue is primarily comprised of revenue from trading activity in client fixed income securities, which is recorded on a trade date basis. To accommodate clients’ fixed income trading activity, the Company maintains positions in fixed income securities, including state and municipal debt obligations, U.S. Government, corporate debt and other securities. The difference between the price at which the Company buys and sells securities to and from its clients and other broker-dealers is recognized as principal transaction revenue. Principal transaction revenue also includes adjustments to the fair value of these securities positions.
Cash and cash equivalents
The Company
Schwab considers all highly liquid investments
with original maturities ofthat mature in three months or less
from the time of acquisition and that are not segregated and on deposit for regulatory purposes to be cash equivalents. Cash and cash equivalents include money market funds, deposits with banks, certificates of deposit, commercial paper, and
treasuryU.S. Treasury securities. Cash and cash equivalents also include balances that Schwab Bank maintains at the Federal Reserve
Bank.Bank (FRB).
Cash and investments segregated and on deposit for regulatory purposes
Cash and investments segregated and on deposit for regulatory purposes include securities purchased under agreements to resell (resale agreements), which are collateralized by U.S. Government and agency securities. Resale agreements are accounted for as collateralized investingfinancing transactions that are recorded at their contractual amounts plus accrued interest. The Company obtains control of collateral with a market value equal to or in excess of the principal amount loaned and accrued interest under resale agreements. Collateral is valued daily by the Company, with additional collateral obtained to ensure full collateralization. Cash and investments segregated also include certificates of deposit and U.S. Government securities. Certificates of deposit and U.S. Government securities are recorded at fair value. Pursuant to applicable regulations, clientthe SEC’s Customer Protection Rule, cash balances thatnot collateralizing margin positions and not swept to money market funds or bank deposit accounts, are not used for margin lending are generally segregated into investment accounts that are maintainedby Schwab for the exclusive benefit of clients.
Receivables from brokerage clients
Receivables from brokerage clients include margin loans to
securities brokerage clients and
other trading receivables from clients. Margin loans are
recordedcollateralized by client securities and are carried at the amount receivable, net of an allowance for doubtful accounts.
The Company monitors margin levels and requires clients to deposit additional collateral, or reduce margin positions to meet minimum collateral requirements if the fair value of the collateral changes. Receivables from brokerage clients that remain unsecured or partially secured for more than 30 days are fully
reserved.reserved for in the allowance for doubtful accounts, except in the case of confirmed fraud, which is reserved immediately. Clients with margin loans have agreed to allow Schwab to pledge collateralized securities in accordance with federal regulations. The collateral is not reflected in the consolidated financial statements. The allowance for doubtful accounts for brokerage clients and related activity was immaterial for all periods presented.
Other securities owned are recorded at fair value based on quoted market prices or other observable market data. Unrealized gains and losses are included in trading revenue.
Securities available for sale and
Investment securities
held to maturitySecurities available for sale
AFS securities are recorded at fair value and unrealized gains and losses are reported, net of taxes, in
accumulated other comprehensive income (loss)AOCI included in stockholders’ equity.
Securities held to maturityHTM securities are recorded at amortized cost based on the Company’s positive intent and ability to hold these securities to maturity. Realized gains and losses from sales of
AFS securities
available for sale are determined on a specific identification basis and are included in other
revenue – net.revenue.
Management evaluates whether
investment securities
available for sale and securities held to maturity are
other-than-temporarily impaired (OTTI)OTTI on a quarterly basis. Debt securities with unrealized losses are considered OTTI if the Company intends to sell the security or if it is more likely than not that the Company will be required to sell such security before any anticipated recovery. If management determines that a security is OTTI under these circumstances, the impairment recognized in earnings is measured as the entire difference between
the amortized cost and
the then-current fair value.
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
A security is also OTTI if management does not expect to recover all of the amortized cost of the security. In this circumstance, the impairment recognized in earnings represents
the estimated credit loss, and is measured by the difference between the present value of expected cash flows and the amortized cost of the security.
Management utilizes cash flow
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
Where appropriate, models to estimate the expected future cash flow from the securitiesare utilized to estimate the credit loss. Expectedloss on a discounted cash flows are discountedflow basis using the security’s effective interest rate.
The evaluation of whether
the Company expectswe expect to recover the amortized cost of a security is inherently judgmental. The evaluation
includes the assessment of several bond performance indicatorsconsiders multiple factors including: the
portionmagnitude and duration of the
underlying loans that are delinquent (30 days, 60 days, 90+ days), in bankruptcy, in foreclosure or converted to real estate owned;unrealized loss; the
actual amountfinancial condition of
loss incurred on the
underlying loans in whichissuer; the
property has been foreclosed and sold;payment structure of the security; external credit ratings; our internal credit ratings; for asset-backed securities, the amount of credit support provided by the structure of the security
available to absorb credit losses on the underlying
loans;collateral; recent events specific to the
current priceissuer and
magnitude of the
unrealized loss;issuer’s industry; and whether
the Company has received all scheduled principal and interest
payments. Management uses cash flow models to further assess the likelihood of other-than-temporary impairment for the Company’s non-agency residential mortgage-backed securities. To develop the cash flow models, the Company uses forecasted loss severity, prepayment speeds (i.e. the rate at which the principal on underlying loans are paid down), and default rates over the securities’ expected remaining maturities.payments have been received.
Securities borrowed and securities loaned
Securities borrowed require
the CompanySchwab to deliver cash to the lender in exchange for securities and are included in receivables from brokers, dealers, and clearing organizations. For securities loaned,
the CompanySchwab receives collateral in the form of cash in an amount equal to or greater than the market value of securities loaned. Securities loaned are included in payables to brokers, dealers, and clearing organizations. The
Company monitors the market value of securities borrowed and loaned
are monitored, with additional collateral obtained or refunded to ensure full collateralization. Fees received or paid are recorded in interest revenue or interest expense.
Loans to banking clients
Bank loans and related allowance for loan losses
Loans to banking clients
Bank loans are recorded at their contractual principal amounts and include unamortized direct origination costs or net purchase discounts or premiums. Direct origination costs and premiums and discounts are recognized in interest revenue using the effective interest method over the contractual life of the loan and are adjusted for actual prepayments. Additionally, loans are recorded net of an allowance for loan losses. The Company’s loan portfolio includes four loan segments: residential real estate mortgages, home equity loans and lines of credit (HELOC), personal loans secured by securitiestypes: First Mortgages, HELOCs, PALs and other loans. Residential real estate mortgages include two loan classes: first mortgages and purchased first mortgages. LoanWe use these segments are defined as the level to which the Company disaggregates its loan portfolio when developing and documenting aour methodology for determining the allowance for loan losses. A loan class
PALs are collateralized by marketable securities with liquid markets. Credit lines are over-collateralized dependent on the type of security pledged. Collateral market value is
defined asmonitored on a
groupdaily basis and a borrower’s committed line may be reduced or collateral may be liquidated if the collateral is in danger of
loansfalling below specified levels. As such, the loss inherent within
a loan segment that has homogeneous risk characteristics.The Companythis portfolio is limited.
Schwab records an allowance for loan losses through a charge to earnings based on
management’sour estimate of probable losses in the existing portfolio.
Management reviewsWe review the allowance for loan losses quarterly, taking into consideration current economic conditions, the composition of the existing loan portfolio, past loss experience, and risks inherent in the portfolio to ensure that the allowance for loan losses is maintained at an appropriate level.
The methodology to establish an allowance for loan losses utilizes statistical models that estimate prepayments, defaults, and probable losses for the loan segments based on predicted behavior of individual loans within the segments. The methodology considers the effects of borrower behavior and a variety of factors including, but not limited to, interest rates, housing price movements as measured by a housing price index, economic conditions, estimated defaults and foreclosures measured by historical and expected delinquencies, changes in prepayment speeds,
loan-to-value (LTV)LTV ratios, past loss experience, estimates of future loss severities, borrower credit risk,
measured by Fair Isaac Corporation (FICO) scores, and the adequacy of collateral. The methodology also evaluates concentrations in the loan
segments,types, including loan products
within those types, year of origination, and geographical distribution of collateral.
Probable losses are forecast using a loan-level simulation of the delinquency status of the loans over the term of the loans. The simulation starts with the current relevant risk indicators, including the current delinquent status of each loan, the estimated current LTV ratio
(Estimated Current LTV) of each loan, the term and structure of each loan, current key interest rates including U.S. Treasury and
London Interbank Offered Rate (LIBOR)LIBOR rates, and borrower FICO scores. The more significant variables in the simulation include delinquency roll rates, loss severity, housing prices, and interest rates. Delinquency roll rates (i.e., the rates at which loans transition through delinquency stages and ultimately result in a loss) are estimated from
the Company’sour historical loss experience adjusted for current trends and market information.
Further, the delinquency roll rates within theLoss severity estimates are based on our historical loss experience and- 58 -
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
loan-level simulation discussed above are calibrated to match a moving average of the delinquency roll rates actually experienced in the respective first lien residential real estate mortgage loan (First Mortgage) and HELOC portfolios. Loss severity estimates are based on the Company’s historical loss experience and
market trends. The estimated loss severity (i.e.
, loss given default) used in the allowance for loan loss methodology for HELOC loans is higher than that used in the methodology for First Mortgages. Housing price trends are derived from historical home price indices and econometric forecasts of future home values. Factors affecting the home price index
include:include housing inventory, unemployment, interest rates, and inflation expectations. Interest rate projections are based on the current term structure of interest rates and historical volatilities to project various possible future interest rate paths.
As a result, the current state of house prices, including the decrease in general house prices experienced over the last several years, as well as the current state of delinquencies unique to the Company’s First Mortgage and HELOC portfolios, are considered in the allowance for loan loss methodology.This methodology results in loss factors that are applied to the outstanding balances to determine the allowance for loan loss for each loan segment.
The Companytype.
Schwab considers loan modifications in which it makes an economic concession to a borrower experiencing financial difficulty to be
a troubled debt
restructuring.restructurings (TDRs).
Nonaccrual,
Nonperforming and Impaired loans
Residential real estate mortgages, HELOC, personal,
First Mortgages, HELOCs, PALs, and other loans are placed on nonaccrual status upon becoming 90 days past due as to interest or principal (unless the loans are well-secured and in the process of collection), or when the full timely collection of interest or principal becomes uncertain, including loans to borrowers who have filed for bankruptcy.
For the portion of the HELOC
portfolio for which the Company is able to track the delinquency status on the associated firstloans secured by a second lien
loan, the Company places a HELOCare placed on non-accrual status if the associated first
mortgagelien is 90 days or more delinquent, regardless of the payment status of the HELOC. When a loan is placed on nonaccrual status, the accrued and unpaid interest receivable is reversed and the loan is accounted for on the cash or cost recovery method
thereafter, until qualifying for return to accrual status. Generally, a nonaccrual loan may be returned to accrual status when all delinquent interest and principal is repaid and the borrower demonstrates a sustained period of performance, or when the loan is both well-secured and in the process of collection and collectability is no longer doubtful.
Loans on nonaccrual status and other real estate owned are considered nonperforming assets. Nonaccrual loans, other real estate owned, and TDRs are considered impaired assets, as it is probable we will not collect all amounts due.
The Company charges off a loan in the period that it is deemed uncollectible and records a reduction in the allowance for loan losses and the loan balance.
The Company’sOur charge-off policy for
residential real estate first mortgagesFirst Mortgage and HELOC loans is to assess the value of the property when the loan has been delinquent for 180 days or has been discharged in bankruptcy proceedings, regardless of whether or not the property is in foreclosure, and charge-off the amount of the loan balance in excess of the estimated current value of the underlying property less estimated costs to sell.
Equipment, office facilities, and property
Equipment, office facilities, and property are recorded at cost net of accumulated depreciation and amortization, except for land, which is recorded at cost. Equipment, and office facilities, and property include certain capitalized costs of acquired or internally developed software. Costs for internally developed software are capitalized when the costs relate to development of approved projects for our internal needs that result in additional functionality. Costs related to preliminary project and post-project activities are expensed as incurred. Equipment, office facilities, and property (other than land) are depreciated on a straight-line basis over antheir estimated useful life of five to tenlives. Estimated useful lives are as follows:
|
| |
| Equipment and office facilities | 5 to 10 years |
| Buildings | 20 to 40 years |
| Software | 3 or 5 years (1) |
| Leasehold improvements | Lesser of useful life or lease term |
(1) Amortized over contractual term if less than three years. Buildings are depreciated on a straight-line basis over 20 to 40 years. Leasehold improvements are amortized on a straight-line basis over the shorter of the estimated useful life of the asset or the term of the lease. Software and certain costs incurred for purchasing or developing software for internal use are amortized on a straight-line basis over an estimated useful life of three or five years.
Equipment, office facilities, and property are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable.
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
Goodwill represents the fair value of acquired businesses in excess of the fair value of the individually identified net assets acquired. Goodwill is not amortized but is tested for impairment annually or whenever indications of impairment exist. The Company’sImpairment exists when the carrying amount of goodwill exceeds its implied fair value, resulting in an impairment charge for this excess. Our annual impairment testing date is April 1st. The CompanySchwab can elect to qualitatively assess goodwill for
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
impairment if it is more likely than not that the fair value of a reporting unit exceeds its carrying value. A qualitative assessment may considerconsiders macroeconomic and other industry-specific factors, such as trends in short-term and long-term interest rates and the ability to access capital, orand Company specific factors such as market capitalization in excess of net assets, trends in revenue generating activities, and merger or acquisition activity.
If the Company elects to bypass qualitatively assessing goodwill, or it is not more likely than not that the fair value of a reporting unit exceeds its carrying value, management estimates the fair values of each of the Company’s reporting units (defined as the Company’s businesses for which financial information is available and reviewed regularly by management) and compares it to their carrying values. The estimated fair values of the reporting units are established using an income approach based on a discounted cash flow model that includes significant assumptions about the future operating results and cash flows of each reporting unit, a market approach which compares each reporting unit to comparable companies in their respective industries,
andas well as a market capitalization analysis.
Based on the Company’s analysis, fair value significantly exceeded the carrying value for all reporting units as of its annual testing date.
Intangible assets
Intangible
Finite-lived intangible assets are amortized over their useful lives in a manner that best reflects their economic benefit. IntangibleAll intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable.
Low-Income Housing Tax Credit (LIHTC) Investments
As part of our community reinvestment initiatives, Schwab invests with other institutional investors in funds that make equity investments in multifamily affordable housing properties. The Company
does not have any indefinite-lived intangible assets.receives tax credits and other tax benefits for these investments. We account for investments in qualified affordable housing projects using the proportional amortization method if the applicable requirements are met. The proportional amortization method amortizes the cost of the investment over the period in which the investor expects to receive tax credits and other tax benefits, and the resulting amortization is recognized as a component of taxes on income. The carrying value of LIHTC investments is included in other assets on the consolidated balance sheets. Unfunded commitments related to LIHTC investments are included in accrued expenses and other liabilities on the consolidated balance sheets.
Guarantees and indemnifications
The Company
Schwab recognizes, at the inception of a guarantee, a liability equal to the estimated fair value of the obligation undertaken in issuing the guarantee. The fair values of
the obligations relating to
standby letter of credit agreements (LOCs) are estimated based on fees charged to enter into similar agreements, considering the creditworthiness of the counterparties. The fair values of the obligations relating to other guarantees are estimated based on transactions for similar guarantees or expected present value measures.
Advertising and market development
Advertising and market development activities include the cost to produce and distribute marketing campaigns as well as client incentives and discounts. Such costs are generally expensed when incurred.
Schwab provides for income taxes on all transactions that have been recognized in the consolidated financial statements. Accordingly, deferred tax assets are adjusted to reflect the tax rates at which future taxable amounts will likely be settled or realized. The effects of tax rate changes on future deferred tax assets and deferred tax liabilities, as well as other changes in income tax laws, are recorded in earnings in the period during which such changes are enacted.
The Company’s unrecognizedUnrecognized tax benefits, which are included in accrued expenses and other liabilities, represent the difference between positions taken on tax return filings and estimated potential tax settlement outcomes.
Interest and penaltiesAccrued interest relating to unrecognized tax benefits
is recorded in taxes on income and penalties are recorded in
income taxother expense.
Stock-based
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
Share-based compensation
Stock-based
Share-based compensation includes employee and board of director stock options
restricted stock units, and restricted stock
awards. The Companyunits. Schwab measures compensation expense for these share-based payment arrangements based on their estimated fair values as of the
awards’ grant date. The fair value of the share-based award is recognized over the vesting period as
stock-basedshare-based compensation.
Stock-basedShare-based compensation expense is based on
awardsunits expected to vest and therefore is reduced for estimated forfeitures.
ForfeituresPer the Company’s accounting policy election, forfeitures are estimated at the time of grant
and reviewed annually based on the Company’s historical forfeiture
experience and revisedexperience. Share-based compensation expense is adjusted in subsequent periods if actual forfeitures differ from
those estimates. Theestimated forfeitures. Beginning January 1, 2017, the excess tax benefits
or deficiencies from the exercise of stock options and the vesting of restricted stock
awardsunits are recorded in
additional paid-in capital.taxes on income.
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
Fair values of assets and liabilities
Fair value is defined as the price that would be received to sell an asset or the price paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurement accounting guidance describes the fair value hierarchy for disclosing assets and liabilities measured at fair value based on the inputs used to value them. The fair value hierarchy maximizes the use of observable inputs and minimizes the use of unobservable inputs. Observable inputs are based on market pricing data obtained from sources independent of the Company. A quoted price in an active market provides the most reliable evidence of fair value and is generally used to measure fair value whenever available.
Unobservable inputs reflect management’s judgment about the assumptions market participants would use in pricing the asset or liability. Where inputs used to measure fair value of an asset or liability are from different levels of the hierarchy, the asset or liability is categorized based on the lowest level input that is significant to the fair value measurement in its entirety. Assessing the significance of a particular input requires judgment. The fair value hierarchy includes three levels based on the objectivity of the inputs as follows:
| ·
| | Level 1 inputs are quoted prices in active markets as of the measurement date for identical assets or liabilities that the Company has the ability to access. |
| ·
| | Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates, benchmark yields, issuer spreads, new issue data, and collateral performance. |
| ·
| | Level 3 inputs are unobservable inputs for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability. |
The Company’s policy is to recognize transfers of financial instruments between levels as of the beginning of the reporting period in which a transfer occurs.
Assets and liabilities
recordedmeasured at fair value
on a recurring basis
Schwab’s assets and liabilities measured at fair value on a recurring basis include certain cash equivalents, certain investments segregated and on deposit for regulatory purposes, other securities owned, and AFS securities. The Company uses the market and income approachesapproach 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. When utilizing market data and bid-ask spread, the Company uses the price within the bid-ask spread that best represents fair value. When quoted prices do not exist, the Company uses prices obtained from independent third-party pricing services to measure the fair value of investment assets. The CompanyWe generally obtainsobtain prices from at least three independent pricing sources for assets recorded at fair value and may obtain up to five prices on assets with higher risk of limited observable information, such as non-agency residential mortgage-backed securities. The Company’svalue.
Our primary independent pricing service provides prices based on observable trades and discounted cash flows that incorporate observable information such as yields for similar types of securities (a benchmark interest rate plus observable spreads) and weighted-average maturity for the same or similar “to-be-issued” securities.
The Company comparesWe compare the prices obtained from
itsthe 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.
The CompanySchwab 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 a material difference in the recorded amounts.
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
Fair value of other financial instruments
not recorded at fair value
Descriptions of the valuation methodologies and assumptions used to estimate the fair value of
other financial instruments
not recorded at fair value are described below.
The Company’sOur financial instruments not recorded at fair value but for which fair value can be approximated and disclosed include:
| ·
| | Cash and cash equivalents are short-term in nature and accordingly are recorded at amounts that approximate fair value.
|
| ·
| | Cash and investments segregated and on deposit for regulatory purposes include cash and securities purchased under resale agreements. Securities purchased under resale agreements are short-term in nature and are backed by collateral that both exceeds the carrying value of the resale agreement and is highly liquid in nature. Accordingly, the carrying value approximatesCash and cash equivalents are short-term in nature and accordingly are recorded at amounts that approximate fair value.
|
Cash and investments segregated and on deposit for regulatory purposes include cash and securities purchased under resale agreements. Securities purchased under resale agreements are short-term in nature and are backed by collateral that both exceeds the carrying value of the resale agreement and is highly liquid in nature. Accordingly, the carrying values of these financial instruments approximate their fair values.
Receivables from/payables to brokers, dealers, and clearing organizations are short-term in nature, recorded at contractual amounts and historically have been settled at those values. Accordingly, the carrying values of these financial instruments approximate their fair values.
Receivables from/payables to brokerage clients — net are short-term in nature, recorded at contractual amounts and historically have been settled at those values. Accordingly, the carrying values of these financial instruments approximate their fair values.
HTM securities – The fair values of HTM securities are obtained using an independent third-party pricing service similar to investment assets recorded at fair value as discussed above.
Bank loans – The fair values of First Mortgages and HELOCs are estimated based on prices of mortgage-backed securities collateralized by similar types of loans. PALs are non-purpose revolving lines of credit secured by eligible assets; accordingly, the carrying values of these loans approximate their fair values.
Financial instruments included in other assets primarily consist of LIHTC investments, cost method investments and FHLB stock, whose carrying values approximate their fair values. FHLB stock is recorded at par, which approximates its fair value.
Bank deposits – Substantially all bank deposits have no stated maturity and are recorded at the amount payable on demand as of the balance sheet date. The carrying values of these deposits approximate their fair values.
Financial instruments included in accrued expenses and other liabilities consist of drafts payable and certain amounts due under contractual obligations, including unfunded LIHTC commitments. The carrying values of these instruments approximate their fair values.
Short-term borrowings consist of commercial paper, borrowings on Schwab’s uncommitted, unsecured bank credit lines, and funds drawn on Schwab Bank’s secured credit facility with the Federal Home Loan Bank of San Francisco. Due to the short-term nature of these borrowings, carrying value approximates fair value.
Long-term debt – Except for the finance lease obligation, the fair values of long-term debt are estimated using indicative, non-binding quotes from independent brokers. The Company validates indicative prices for its debt through comparison to other independent non-binding quotes. The finance lease obligation is recorded at carrying value, which approximates fair value.
Firm commitments to extend credit – Schwab extends credit to banking clients through HELOCs and PALs. The Company considers the fair value of these unused commitments to not be material because the interest rates earned on these balances are based on floating interest rates that reset monthly.
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
New Accounting Standards
Adoption of New Accounting Standards
|
| ·
| | Receivables from/payables
|
| Standard | Description | Required Date of Adoption | Effects on the Financial Statements or Other Significant Matters |
ASU 2016-09, “Stock Compensation - Improvements to brokers, dealers,Employee Share-Based Payment Accounting (Topic 718)” | Requires entities to recognize the income tax effects for the difference between GAAP and clearing organizationsfederal income tax treatment (i.e., excess tax benefit or deficiency) of share-based awards in the income statement when the awards vest or are recordedsettled, rather than recording such effects in additional paid-in capital.
Provides entities with an accounting policy election to account for the impact of forfeitures of awards on compensation expense as they occur or continue with the current practice of estimating forfeitures at contractual amountsthe grant date to determine the number of awards expected to vest and historically have been settled at those valuesadjusting that estimate as necessary.
| January 1, 2017 | The Company’s taxes on income were reduced by approximately $87 million in 2017. Future effects will depend on the Company’s share price, restricted stock vesting, and are short-term in nature, and therefore approximate fair value.the volume of equity incentive options exercised.
The Company made an accounting policy election to continue its current practice of estimating forfeitures. |
| ·
| | Receivables from/payables to brokerage clients — net are recorded at contractual amounts and historically have been settled at those values and are short-term in nature, and therefore approximate fair value.
|
| ·
| | Securities held to maturity – The fair values of securities held to maturity are obtained using an independent third-party pricing service similar to investment assets recorded at fair value as discussed above.
|
| ·
| | Loans to banking clients – The fair values of the Company’s loans to banking clients are estimated based on prices of mortgage-backed securities collateralized by similar types of loans.
|
| ·
| | Financial instruments included in other assets primarily consist of cost method investments and Federal Home Loan Bank (FHLB) stock, whose carrying values approximate their fair values. FHLB stock is recorded at par, which approximates fair value.
|
| ·
| | Deposits from banking clients have no stated maturity and are recorded at the amount payable on demand as of the balance sheet date. The Company considers the carrying value of these deposits to approximate their fair values.
|
| ·
| | Financial instruments included in accrued expenses and other liabilities consist of commercial paper, drafts payable and certain amounts due under contractual obligations which are short-term in nature and accordingly are recorded at amounts that approximate fair value.
|
| ·
| | Long-term debt – Except for the finance lease obligation, the fair values of long-term debt are estimated using indicative, non-binding quotes from independent brokers. The Company validates indicative prices for its debt through comparison to other independent non-binding quotes. The finance lease obligation is recorded at carrying value, which approximates fair value.
|
| ·
| | Firm commitments to extend credit – The Company extends credit to banking clients through HELOC and personal loans secured by securities. The Company considers the fair value of these unused commitments to be not material because the interest rates earned on these balances are based on floating interest rates that reset monthly. The Company does not charge a fee to maintain a HELOC or personal loan.
|
New Accounting Standards Not Yet Adopted
In January 2014, the Financial Accounting Standards Board (FASB) issued new guidance for creditors of consumer mortgage loans, which is effective January 1, 2015. The guidance clarifies when physical possession of a property underlying a consumer mortgage loan transfers to the creditor, and therefore when a loan receivable should be derecognized and the real estate property underlying the loan should be recognized. The adoption of this new guidance is not expected to have a material impact on the Company’s financial statements or earnings per common share (EPS).
In May 2014, the FASB issued new guidance on revenue recognition, which is effective January 1, 2017. The guidance clarifies that revenue from contracts with customers should be recognized in a manner that depicts the timing of the transfer of goods or performance of services at an amount that reflects the expected consideration. The Company is currently evaluating the impact of this new guidance on its financial statements and EPS.
3.Receivables from Brokerage Clients
Receivables from brokerage clients consist primarily of margin loans to brokerage clients of $14.3 billion and $12.8 billion at December 31, 2014 and 2013, respectively. Securities owned by brokerage clients are held as collateral for margin loans. Such collateral is not reflected in the consolidated financial statements. The average yield earned on margin loans was 3.50% and 3.68% in 2014 and 2013, respectively.
|
| | | |
| Standard | Description | Required Date of Adoption | Effects on the Financial Statements or Other Significant Matters |
| ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)” and related ASUs | Clarifies that revenue from contracts with clients should be recognized in a manner that depicts the timing of the related transfer of goods or performance of services at an amount that reflects the expected consideration.
Adoption allows either full or modified retrospective transition. Full retrospective transition will require a cumulative effect adjustment to retained earnings as of the earliest comparative period presented. Modified retrospective transition will require a cumulative effect adjustment to retained earnings as of the beginning of the reporting period in which the entity first applies the new guidance. | January 1, 2018 | The guidance does not apply to revenue earned from the Company’s loans and securities. Accordingly, net interest revenue will not be impacted. The primary impact for the Company will be the capitalization of sales commissions paid to employees for obtaining new contracts with clients on the consolidated balance sheets. These capitalized costs will result in an asset of $219 million and a related deferred tax liability of $51 million upon adoption. The asset will subsequently be amortized to expense over time as the related revenues are recognized. The Company does not expect this guidance will have a material impact on its EPS.
The Company adopted the revenue recognition guidance as of January 1, 2018 using the modified retrospective method. The Company’s implementation work is now substantially complete. |
| | | |
| | | |
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
4.
|
| | | |
| �� | | | |
| Standard | Description | Required Date of Adoption | Effects on the Financial Statements or Other Significant Matters |
| ASU 2016-01, “Financial Instruments - Overall (Subtopic 825-10)” | Requires: (i) equity investments to be measured at fair value, with changes in fair value recognized in net income, unless the equity method is applied or the equity investments do not have readily determinable fair values in which case a practical alternative may be elected; (ii) use of an exit price when measuring the fair value of financial instruments for disclosures; (iii) separate presentation of financial assets and liabilities by measurement category and form of instrument on the balance sheet or in the accompanying notes.
Adoption requires a cumulative effect adjustment to the balance sheet as of the beginning of the year of initial application, except for certain changes that require prospective adoption. | January 1, 2018 | The Company does not expect this guidance will have a material impact on its financial statements, including EPS. |
| ASU 2016-02, “Leases (Topic 842)” | Amends the accounting for leases by lessees and lessors. The primary change from the new guidance is the recognition of right-of-use assets and lease liabilities by lessees for those leases classified as operating leases. Additional changes include accounting for lease origination and executory costs, required lessee reassessments during the lease term due to changes in circumstances, and expanded lease disclosures.
Adoption requires modified retrospective transition as of the beginning of the earliest comparative period presented in the financial statements in which the entity first applies the new standard. Certain transition relief is permitted if elected by the entity. | January 1, 2019 | The Company does not expect this guidance will have a material impact on its EPS, but it will result in a gross up of the consolidated balance sheets due to recognition of right-of-use assets and lease liabilities based on the present value of remaining operating lease payments (see Note 13 for the undiscounted rental commitments for operating leases).
The Company is evaluating its adoption method due to a recently proposed ASU that provides an alternative adoption method. The Company is refining its methodology to estimate the right of use assets and lease liabilities and working on system updates to apply the lease accounting changes. The full population of contracts that may be subject to balance sheet recognition is still being evaluated, but is nearly complete. The Company has further work to perform related to disclosures. |
| | | |
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
|
| | | |
| | | |
| Standard | Description | Required Date of Adoption | Effects on the Financial Statements or Other Significant Matters |
| ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” | Provides guidance for recognizing impairment of most debt instruments measured at amortized cost, including loans and HTM debt securities. Requires estimating current expected credit losses (CECL) over the remaining life of an instrument or a portfolio of instruments with similar risk characteristics based on relevant information about past events, current conditions, and reasonable forecasts. The initial estimate of, and the subsequent changes in, CECL will be recognized as credit loss expense through current earnings and will be reflected as an allowance for credit losses offsetting the carrying value of the financial instrument(s) on the balance sheet. Amends the OTTI model for AFS debt securities by requiring the use of an allowance, rather than directly reducing the carrying value of the security, and eliminating consideration of the length of time such security has been in an unrealized loss position as a factor in concluding whether a credit loss exists.
Adoption requires a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the entity applies the new guidance except that a prospective transition is required for AFS debt securities for which an OTTI has been recognized prior to the effective date. | January 1, 2020 (early adoption permitted) | The Company is currently evaluating the impact of this guidance on its financial statements, including EPS. Initial implementation work performed to date has focused on evaluating the Company’s impacted assets, including loans and investment securities. The Company has also been evaluating its current data and system capabilities and considering additional data sources and system enhancements. Additional work to be completed includes an in-depth analysis for each impacted asset type, selection of methods, and changes to policies and procedures. |
| ASU 2017-08, “Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities” | Shortens the amortization period for the premium on certain callable debt securities to the earliest call date. The amendments are applicable to any purchased individual debt security with an explicit and noncontingent call feature with a fixed price on a preset date. ASU 2017-08 does not impact the accounting for callable debt securities held at a discount.
Adoption requires modified retrospective transition as of the beginning of the period of adoption through a cumulative-effect adjustment to retained earnings. | January 1, 2019 (early adoption permitted)
| The Company is currently evaluating the impact of adopting this guidance on its financial statements, including EPS. |
Other Securities Owned
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
| |
| 3. | Receivables from and Payables to Brokerage Clients |
Receivables from and payables to brokerage clients are detailed below:
|
| | | | | | | |
| December 31, | 2017 | | 2016 |
| Receivables | | | |
| Margin loans, net of allowance for doubtful accounts | $ | 18,331 |
| | $ | 15,257 |
|
| Other brokerage receivables | 2,245 |
| | 1,898 |
|
Receivables from brokerage clients — net | $ | 20,576 |
| | $ | 17,155 |
|
| | | | |
| Payables | | | |
| Interest-bearing payables | $ | 22,840 |
| | $ | 28,336 |
|
| Non-interest-bearing payables | 8,403 |
| | 7,558 |
|
| Payables to brokerage clients | $ | 31,243 |
| | $ | 35,894 |
|
At December 31, 2017 and 2016, approximately 22% and 23%, respectively, of CS&Co’s total client accounts were located in California.
A summary of other securities owned is as follows:
| | | | | | | | |
December 31, | | | 2014 | | | 2013 |
Schwab Funds® money market funds | | $ | 224 | | | $ | 261 | |
Equity and bond mutual funds | | | 215 | | | | 208 | |
State and municipal debt obligations | | | 51 | | | | 32 | |
Equity, U.S. Government and corporate debt, and other securities | | | 26 | | | | 16 | |
Total other securities owned | | $ | 516 | | | $ | 517 | |
|
| | | | | | | |
| December 31, | 2017 | | 2016 |
| Equity and bond mutual funds | $ | 318 |
| | $ | 272 |
|
Schwab Funds® money market funds | 135 |
| | 108 |
|
| State and municipal debt obligations | 52 |
| | 41 |
|
| Equity, U.S. Government and corporate debt, and other securities | 34 |
| | 28 |
|
| Total other securities owned | $ | 539 |
| | $ | 449 |
|
Equity and bond mutual funds include inventory maintained to facilitate certain Schwab Funds and third-party mutual fund clients’ transactions, and investments made relating to our deferred compensation plan. The Company’s positions in Schwab Funds® money market funds arise from certain overnight funding of clients’ redemption, check-writing, and debit card activities. Equity and bond mutual funds include mutual fund investments held at CSC, investments made by the Company relating to its deferred compensation plan, and inventory maintained to facilitate certain Schwab Funds and third-party mutual fund clients’ transactions. State and municipal debt obligations, equity, U.S. Government and corporate debt, and other securities include securities held to meet clients’ trading activities.5.
Securities Available for Sale and Securities Held to MaturityThe amortized cost, gross unrealized gains and losses, and fair value of securities available for sale and securities held to maturity are as follows:
| | | | | | | | | | | | |
| | | | | Gross | | Gross | | | |
| | Amortized | | Unrealized | | Unrealized | | Fair |
December 31, 2014 | | Cost | | Gains | | Losses | | Value |
Securities available for sale: | | | | | | | | | | | | |
Asset-backed securities | | $ | 19,320 | | $ | 64 | | $ | 18 | | $ | 19,366 |
U.S. agency mortgage-backed securities | | | 18,487 | | | 242 | | | 12 | | | 18,717 |
Corporate debt securities | | | 8,023 | | | 30 | | | 8 | | | 8,045 |
U.S. agency notes | | | 3,839 | | | - | | | 44 | | | 3,795 |
Treasury securities | | | 2,993 | | | 2 | | | 1 | | | 2,994 |
Certificates of deposit | | | 1,533 | | | 1 | | | - | | | 1,534 |
Non-agency commercial mortgage-backed securities | | | 310 | | | 7 | | | - | | | 317 |
Other securities | | | 15 | | | - | | | - | | | 15 |
Total securities available for sale | | $ | 54,520 | | $ | 346 | | $ | 83 | | $ | 54,783 |
Securities held to maturity: | | | | | | | | | | | | |
U.S. agency mortgage-backed securities | | $ | 33,388 | | $ | 531 | | $ | 174 | | $ | 33,745 |
Non-agency commercial mortgage-backed securities | | | 1,001 | | | 11 | | | 14 | | | 998 |
Total securities held to maturity | | $ | 34,389 | | $ | 542 | | $ | 188 | | $ | 34,743 |
- 63 -
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
| | | | | | | | | | | | |
| | | | | Gross | | Gross | | | |
| | Amortized | | Unrealized | | Unrealized | | Fair |
December 31, 2013 | | Cost | | Gains | | Losses | | Value |
Securities available for sale: | | | | | | | | | | | | |
U.S. agency mortgage-backed securities | | $ | 18,554 | | $ | 140 | | $ | 49 | | $ | 18,645 |
Asset-backed securities | | | 15,201 | | | 42 | | | 37 | | | 15,206 |
Corporate debt securities | | | 8,973 | | | 49 | | | 15 | | | 9,007 |
U.S. agency notes | | | 4,239 | | | 1 | | | 104 | | | 4,136 |
Certificates of deposit | | | 3,650 | | | 4 | | | 2 | | | 3,652 |
Non-agency residential mortgage-backed securities | | | 616 | | | 11 | | | 34 | | | 593 |
Non-agency commercial mortgage-backed securities | | | 271 | | | 8 | | | - | | | 279 |
Other securities | | | 100 | | | - | | | - | | | 100 |
Total securities available for sale | | $ | 51,604 | | $ | 255 | | $ | 241 | | $ | 51,618 |
Securities held to maturity: | | | | | | | | | | | | |
U.S. agency mortgage-backed securities | | $ | 29,260 | | $ | 161 | | $ | 921 | | $ | 28,500 |
Non-agency commercial mortgage-backed securities | | | 958 | | | - | | | 68 | | | 890 |
Other securities | | | 100 | | | - | | | - | | | 100 |
Total securities held to maturity | | $ | 30,318 | | $ | 161 | | $ | 989 | | $ | 29,490 |
5. Investment Securities
The amortized cost, gross unrealized gains and losses, and fair value of AFS and HTM securities are as follows: |
| | | | | | | | | | | | | | | |
| December 31, 2017 | Amortized
Cost | | Gross Unrealized
Gains | | Gross Unrealized
Losses | | Fair
Value |
| Available for sale securities: | | | | | | | |
| U.S. agency mortgage-backed securities | $ | 20,915 |
| | $ | 53 |
| | $ | 39 |
| | $ | 20,929 |
|
| U.S. Treasury securities | 9,583 |
| | — |
| | 83 |
| | 9,500 |
|
Asset-backed securities (1) | 9,019 |
| | 34 |
| | 6 |
| | 9,047 |
|
Corporate debt securities (2) | 6,154 |
| | 16 |
| | 1 |
| | 6,169 |
|
| Certificates of deposit | 2,040 |
| | 2 |
| | 1 |
| | 2,041 |
|
| U.S. agency notes | 1,914 |
| | — |
| | 8 |
| | 1,906 |
|
Commercial paper (2) | 313 |
| | — |
| | — |
| | 313 |
|
| Foreign government agency securities | 51 |
| | — |
| | 1 |
| | 50 |
|
| Non-agency commercial mortgage-backed securities | 40 |
| | — |
| | — |
| | 40 |
|
| Total available for sale securities | $ | 50,029 |
| | $ | 105 |
| | $ | 139 |
| | $ | 49,995 |
|
| Held to maturity securities: | | | | | | | |
| U.S. agency mortgage-backed securities | $ | 101,197 |
| | $ | 290 |
| | $ | 1,034 |
| | $ | 100,453 |
|
Asset-backed securities (1) | 12,937 |
| | 127 |
| | 2 |
| | 13,062 |
|
Corporate debt securities (2) | 4,078 |
| | 13 |
| | 5 |
| | 4,086 |
|
| U.S. state and municipal securities | 1,247 |
| | 57 |
| | — |
| | 1,304 |
|
| Non-agency commercial mortgage-backed securities | 994 |
| | 10 |
| | 5 |
| | 999 |
|
| U.S. Treasury securities | 223 |
| | — |
| | 3 |
| | 220 |
|
| Certificates of deposit | 200 |
| | — |
| | — |
| | 200 |
|
| Foreign government agency securities | 50 |
| | — |
| | 1 |
| | 49 |
|
| Total held to maturity securities | $ | 120,926 |
| | $ | 497 |
| | $ | 1,050 |
| | $ | 120,373 |
|
| | |
| | |
| | |
| | |
|
| December 31, 2016 | |
| | |
| | |
| | |
|
| Available for sale securities: | |
| | |
| | |
| | |
|
| U.S. agency mortgage-backed securities | $ | 33,167 |
| | $ | 120 |
| | $ | 92 |
| | $ | 33,195 |
|
| U.S. Treasury securities | 8,679 |
| | 3 |
| | 59 |
| | 8,623 |
|
Asset-backed securities (1) | 20,520 |
| | 29 |
| | 214 |
| | 20,335 |
|
Corporate debt securities (2) | 9,850 |
| | 20 |
| | 18 |
| | 9,852 |
|
| Certificates of deposit | 2,070 |
| | 2 |
| | 1 |
| | 2,071 |
|
| U.S. agency notes | 1,915 |
| | — |
| | 8 |
| | 1,907 |
|
Commercial paper (2) | 214 |
| | — |
| | — |
| | 214 |
|
| Non-agency commercial mortgage-backed securities | 45 |
| | — |
| | — |
| | 45 |
|
| U.S. state and municipal securities | 1,167 |
| | 2 |
| | 46 |
| | 1,123 |
|
| Total available for sale securities | $ | 77,627 |
| | $ | 176 |
| | $ | 438 |
| | $ | 77,365 |
|
| Held to maturity securities: | |
| | |
| | |
| | |
|
| U.S. agency mortgage-backed securities | $ | 72,439 |
| | $ | 324 |
| | $ | 1,086 |
| | $ | 71,677 |
|
Asset-backed securities (1) | 941 |
| | — |
| | — |
| | 941 |
|
Corporate debt securities (2) | 436 |
| | — |
| | — |
| | 436 |
|
| U.S. state and municipal securities | 68 |
| | 1 |
| | 1 |
| | 68 |
|
| Non-agency commercial mortgage-backed securities | 997 |
| | 11 |
| | 4 |
| | 1,004 |
|
| U.S. Treasury securities | 223 |
| | — |
| | 4 |
| | 219 |
|
Commercial paper (2) | 99 |
| | — |
| | — |
| | 99 |
|
| Total held to maturity securities | $ | 75,203 |
| | $ | 336 |
| | $ | 1,095 |
| | $ | 74,444 |
|
(1) Approximately 42% and 47% of Asset-backed securities held as of December 31, 2017 and 2016, respectively, were Federal Family Education Loan Program Asset-Backed Securities. Asset-backed securities collateralized by credit cards represented approximately 40% and 36% of the asset-backed securities held as of December 31, 2017 and 2016, respectively.
(2) As of December 31, 2017 and 2016, approximately 41% and 49%, respectively, of the total AFS and HTM investments in Corporate debt securities and Commercial paper were issued by institutions in the financial services industry. As of December 31, 2017 and 2016, approximately 22% and 19% of the holdings of these securities were issued by institutions in the information technology industry.
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
The increase in the HTM portfolio at December 31, 2017 compared to December 31, 2016 was primarily attributable to the transfer of $24.7 billion of investment securities from the AFS category to the HTM category during the first quarter of 2017. These securities had a total net unrealized loss of $227 million before income tax in AOCI on the date of transfer. The transfer was made to mitigate the potential volatility in regulatory capital from changes in market values in the AFS securities portfolio and the related impact to AOCI once Schwab crosses $250 billion in consolidated assets. The year after Schwab surpasses $250 billion in consolidated assets, it can no longer exclude AOCI from regulatory capital. The transfer included U.S. agency mortgage-backed securities, asset-backed securities, corporate debt securities, and U.S. state and municipal securities. The unrealized holding gains and losses on the date of transfer, are reported as a separate component of AOCI and as an adjustment to the purchase premium and discount on the securities transferred. The separate component of AOCI will be amortized or accreted into interest income over the remaining life of the securities transferred, offsetting the revised premium or discount amortization or accretion on the transferred assets.
Schwab Bank maintains a secured credit facility with the FHLB, and certain investment securities are pledged as collateral in order to secure borrowing capacity. At December 31, 2017, the Company had pledged securities with a fair value of $24.2 billion with the FHLB. Schwab Bank also pledges certain investment securities as collateral to secure borrowing capacity at the FRB discount window, and had pledged securities with a fair value of $2.5 billion as collateral for this facility at December 31, 2017. In addition, Schwab Bank pledges securities issued by federal agencies to secure certain trust deposits. The fair value of these pledged securities was
$132$923 million at December 31,
2014.A summary of securities with unrealized losses, aggregated by category and period of continuous unrealized loss, is as follows:
2017. | | | | | | | | | | | | | | | | | | |
| | Less than | | 12 months | | | | | | |
| | 12 months | | or longer | | Total |
| | Fair | | Unrealized | | Fair | | Unrealized | | Fair | | Unrealized |
December 31, 2014 | | Value | | Losses | | Value | | Losses | | Value | | Losses |
Securities available for sale: | | | | | | | | | | | | | | | | | | |
Asset-backed securities | | $ | 5,754 | | $ | 15 | | $ | 792 | | $ | 3 | | $ | 6,546 | | $ | 18 |
U.S agency mortgage-backed securities | | | 2,247 | | | 5 | | | 1,767 | | | 7 | | | 4,014 | | | 12 |
Corporate debt securities | | | 1,781 | | | 4 | | | 552 | | | 4 | | | 2,333 | | | 8 |
U.S. agency notes | | | - | | | - | | | 3,696 | | | 44 | | | 3,696 | | | 44 |
Treasury securities | | | 1,246 | | | 1 | | | - | | | - | | | 1,246 | | | 1 |
Total | | $ | 11,028 | | $ | 25 | | $ | 6,807 | | $ | 58 | | $ | 17,835 | | $ | 83 |
Securities held to maturity: | | | | | | | | | | | | | | | | | | |
U.S. agency mortgage-backed securities | | $ | 264 | | $ | 1 | | $ | 10,415 | | $ | 173 | | $ | 10,679 | | $ | 174 |
Non-agency commercial mortgage-backed | | | | | | | | | | | | | | | | | | |
securities | | | - | | | - | | | 660 | | | 14 | | | 660 | | | 14 |
Total | | $ | 264 | | $ | 1 | | $ | 11,075 | | $ | 187 | | $ | 11,339 | | $ | 188 |
Total securities with unrealized losses (1) | | $ | 11,292 | | $ | 26 | | $ | 17,882 | | $ | 245 | | $ | 29,174 | | $ | 271 |
(1)
| The number of investment positions with unrealized losses totaled 173 for securities available for sale and 111 for securities held to maturity.
|
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
| | | | | | | | | | | | | | | | | | |
| | Less than | | 12 months | | | | | | |
| | 12 months | | or longer | | Total |
| | Fair | | Unrealized | | Fair | | Unrealized | | Fair | | Unrealized |
December 31, 2013 | | Value | | Losses | | Value | | Losses | | Value | | Losses |
Securities available for sale: | | | | | | | | | | | | | | | | | | |
U.S agency mortgage-backed securities | | $ | 5,044 | | $ | 47 | | $ | 93 | | $ | 2 | | $ | 5,137 | | $ | 49 |
Asset-backed securities | | | 6,391 | | | 33 | | | 591 | | | 4 | | | 6,982 | | | 37 |
Corporate debt securities | | | 1,802 | | | 14 | | | 499 | | | 1 | | | 2,301 | | | 15 |
U.S. agency notes | | | 3,636 | | | 104 | | | - | | | - | | | 3,636 | | | 104 |
Certificates of deposit | | | - | | | - | | | 299 | | | 2 | | | 299 | | | 2 |
Non-agency residential mortgage-backed | | | | | | | | | | | | | | | | | | |
securities | | | 89 | | | 2 | | | 374 | | | 32 | | | 463 | | | 34 |
Total | | $ | 16,962 | | $ | 200 | | $ | 1,856 | | $ | 41 | | $ | 18,818 | | $ | 241 |
Securities held to maturity: | | | | | | | | | | | | | | | | | | |
U.S. agency mortgage-backed securities | | $ | 19,175 | | $ | 698 | | $ | 2,345 | | $ | 223 | | $ | 21,520 | | $ | 921 |
Non-agency commercial mortgage-backed | | | | | | | | | | | | | | | | | | |
securities | | | 630 | | | 43 | | | 260 | | | 25 | | | 890 | | | 68 |
Total | | $ | 19,805 | | $ | 741 | | $ | 2,605 | | $ | 248 | | $ | 22,410 | | $ | 989 |
Total securities with unrealized losses (1) | | $ | 36,767 | | $ | 941 | | $ | 4,461 | | $ | 289 | | $ | 41,228 | | $ | 1,230 |
(1)
| The number of investment positions with unrealized losses totaled 273 for securities available for sale and 193 for securities held to maturity.
|
Management evaluates whether securities available
Securities with unrealized losses, aggregated by category and period of continuous unrealized loss, are as follows:
|
| | | | | | | | | | | | | | | | | | | | | | |
| | Less than
12 months | | 12 months
or longer | | Total |
| December 31, 2017 | Fair
Value | | Unrealized
Losses | | Fair
Value | | Unrealized
Losses | | Fair
Value | Unrealized
Losses |
| Available for sale securities: | | | | | | | | | | |
| U.S. agency mortgage-backed securities | $ | 5,696 |
| | $ | 21 |
| | $ | 2,548 |
| | $ | 18 |
| | $ | 8,244 |
| $ | 39 |
|
| U.S. Treasury securities | 4,625 |
| | 11 |
| | 4,875 |
| | 72 |
| | 9,500 |
| 83 |
|
| Asset-backed securities | 904 |
| | 3 |
| | 424 |
| | 3 |
| | 1,328 |
| 6 |
|
| Corporate debt securities | 736 |
| | 1 |
| | 120 |
| | — |
| | 856 |
| 1 |
|
| Certificates of deposit | 799 |
| | 1 |
| | — |
| | — |
| | 799 |
| 1 |
|
| U.S. agency notes | 99 |
| | — |
| | 1,807 |
| | 8 |
| | 1,906 |
| 8 |
|
| Foreign government agency securities | 50 |
| | 1 |
| | — |
| | — |
| | 50 |
| 1 |
|
| Total | $ | 12,909 |
| | $ | 38 |
| | $ | 9,774 |
| | $ | 101 |
| | $ | 22,683 |
| $ | 139 |
|
| Held to maturity securities: | |
| | |
| | |
| | |
| | |
| |
|
| U.S. agency mortgage-backed securities | $ | 42,102 |
| | $ | 310 |
| | $ | 24,753 |
| | $ | 724 |
| | $ | 66,855 |
| $ | 1,034 |
|
| Asset-backed securities | 1,124 |
| | 2 |
| | 72 |
| | — |
| | 1,196 |
| 2 |
|
| Corporate debt securities | 1,078 |
| | 5 |
| | — |
| | — |
| | 1,078 |
| 5 |
|
| Non-agency commercial mortgage-backed securities | 607 |
| | 5 |
| | — |
| | — |
| | 607 |
| 5 |
|
| U.S. Treasury securities | 220 |
| | 3 |
| | — |
| | — |
| | 220 |
| 3 |
|
| Foreign government agency securities | 49 |
| | 1 |
| | — |
| | — |
| | 49 |
| 1 |
|
| Total | $ | 45,180 |
| | $ | 326 |
| | $ | 24,825 |
| | $ | 724 |
| | $ | 70,005 |
| $ | 1,050 |
|
Total securities with unrealized losses (1) | $ | 58,089 |
| | $ | 364 |
| | $ | 34,599 |
| | $ | 825 |
| | $ | 92,688 |
| $ | 1,189 |
|
| | |
| | |
| | |
| | |
| | |
| |
| December 31, 2016 | |
| | |
| | |
| | |
| | |
| |
| Available for sale securities: | |
| | |
| | |
| | |
| | |
| |
| U.S. agency mortgage-backed securities | $ | 14,816 |
| | $ | 69 |
| | $ | 2,931 |
| | $ | 23 |
| | $ | 17,747 |
| $ | 92 |
|
| U.S. Treasury securities | 6,926 |
| | 59 |
| | — |
| | — |
| | 6,926 |
| 59 |
|
| Asset-backed securities | 1,670 |
| | 13 |
| | 9,237 |
| | 201 |
| | 10,907 |
| 214 |
|
| Corporate debt securities | 2,407 |
| | 17 |
| | 653 |
| | 1 |
| | 3,060 |
| 18 |
|
| Certificates of deposit | 474 |
| | — |
| | 100 |
| | 1 |
| | 574 |
| 1 |
|
| U.S. agency notes | 1,907 |
| | 8 |
| | — |
| | — |
| | 1,907 |
| 8 |
|
| U.S. state and municipal securities | 956 |
| | 46 |
| | — |
| | — |
| | 956 |
| 46 |
|
| Total | $ | 29,156 |
| | $ | 212 |
| | $ | 12,921 |
| | $ | 226 |
| | $ | 42,077 |
| $ | 438 |
|
| Held to maturity securities: | |
| | |
| | |
| | |
| | |
| |
| U.S. agency mortgage-backed securities | $ | 51,361 |
| | $ | 1,086 |
| | $ | — |
| | $ | — |
| | $ | 51,361 |
| $ | 1,086 |
|
| Non-agency commercial mortgage-backed securities | 591 |
| | 4 |
| | — |
| | — |
| | 591 |
| 4 |
|
| U.S. Treasury securities | 219 |
| | 4 |
| | — |
| | — |
| | 219 |
| 4 |
|
| U.S. state and municipal securities | 14 |
| | 1 |
| | — |
| | — |
| | 14 |
| 1 |
|
| Total | $ | 52,185 |
| | $ | 1,095 |
| | $ | — |
| | $ | — |
| | $ | 52,185 |
| $ | 1,095 |
|
Total securities with unrealized losses (2) | $ | 81,341 |
| | $ | 1,307 |
| | $ | 12,921 |
| | $ | 226 |
| | $ | 94,262 |
| $ | 1,533 |
|
(1) The number of investment positions with unrealized losses totaled 251 for sale and securities held to maturity are OTTI on a quarterly basis as described in note “2 – Summary of Significant Accounting Policies.”Non-agency residential mortgage-backed securities include securities collateralized by loans that are considered to be “Prime” (defined as loans to borrowers with a Fair Isaac Corporation (FICO) credit score of 620 or higher at origination), and “Alt-A” (defined as Prime loans with reduced documentation at origination). Management determined that it does not expect to recover all of the amortized cost of certain of its Alt-A and Prime residential mortgage-backedAFS securities and therefore determined that these938 for HTM securities.
(2) The number of investment positions with unrealized losses totaled 627 for AFS securities were OTTI. The Company recognized an impairment charge equal to the securities’ expected credit losses of $1 million in 2014, based on the Company’s cash flow projectionsand 612 for theseHTM securities. The expected credit losses are measured as the difference between the present value of expected cash flows and the amortized cost of the securities. In the fourth quarter of 2014, the Company sold $504 million of its non-agency residential mortgage-backed securities portfolio, resulting in a net realized loss of $8 million. The Company marked the remaining $15 million of these securities to market and recorded a $0.6 million OTTI charge in the fourth quarter.The following table is a rollforward of the amount of credit losses recognized in earnings for OTTI securities held by the Company during the period for which a portion of the impairment was reclassified from or recognized in other comprehensive income (loss):
| | | | | | | | | | | | |
Year Ended December 31, | | | 2014 | | | 2013 | | | 2012 |
Balance at beginning of year | | $ | 169 | | | $ | 159 | | | $ | 127 | |
Credit losses recognized into current year earnings on debt securities for | | | | | | | | | | | | |
which an other-than-temporary impairment was not previously recognized | | | 1 | | | | 1 | | | | 6 | |
Credit losses recognized into current year earnings on debt securities for | | | | | | | | | | | | |
which an other-than-temporary impairment was previously recognized | | | - | | | | 9 | | | | 26 | |
Reductions due to sale of debt securities for which an other-than-temporary | | | | | | | | | | | | |
impairment was previously recognized | | | (168) | | | | - | | | | - | |
Balance at end of year | | $ | 2 | | | $ | 169 | | | $ | 159 | |
- 65 -
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
At December 31, 2017, substantially all securities in the investment portfolios were rated investment grade. U.S. agency mortgage-backed securities do not have explicit credit ratings; however, management considers these to be of the highest credit quality and rating given the guarantee of principal and interest by the U.S. government or U.S. government-sponsored enterprises.
Management evaluates whether investment securities are OTTI on a quarterly basis as described in Note 2. Amounts recognized as OTTI in earnings or other comprehensive income were immaterial in 2017, 2016, and 2015. As of December 31, 2017 and 2016, the Company did not hold any securities on which OTTI was previously recognized.
The maturities of AFS and HTM securities available for sale andare as follows:
|
| | | | | | | | | | | | | | | | | | | |
| December 31, 2017 | Within
1 year | | After 1 year through
5 years | | After 5 years through
10 years | | After
10 years | | Total |
| Available for sale securities: | | | | | | | | | |
U.S. agency mortgage-backed securities (1) | $ | 61 |
| | $ | 2,253 |
| | $ | 8,282 |
| | $ | 10,333 |
| | $ | 20,929 |
|
| U.S. Treasury securities | 2,515 |
| | 6,985 |
| | — |
| | — |
| | 9,500 |
|
| Asset-backed securities | 251 |
| | 6,924 |
| | 1,261 |
| | 611 |
| | 9,047 |
|
| Corporate debt securities | 3,135 |
| | 3,034 |
| | — |
| | — |
| | 6,169 |
|
| Certificates of deposit | 575 |
| | 1,466 |
| | — |
| | — |
| | 2,041 |
|
| U.S. agency notes | 1,658 |
| | 248 |
| | — |
| | — |
| | 1,906 |
|
| Commercial paper | 313 |
| | — |
| | — |
| | — |
| | 313 |
|
| Foreign government agency securities | — |
| | 50 |
| | — |
| | — |
| | 50 |
|
Non-agency commercial mortgage-backed securities (1) | — |
| | — |
| | — |
| | 40 |
| | 40 |
|
| Total fair value | $ | 8,508 |
| | $ | 20,960 |
| | $ | 9,543 |
| | $ | 10,984 |
| | $ | 49,995 |
|
| Total amortized cost | $ | 8,517 |
| | $ | 20,999 |
| | $ | 9,546 |
| | $ | 10,967 |
| | $ | 50,029 |
|
Weighted-average yield (2) | 1.53 | % | | 1.63 | % | | 1.72 | % | | 1.79 | % | | 1.66 | % |
| Held to maturity securities: | | | | | | | | | |
U.S. agency mortgage-backed securities (1) | $ | 441 |
| | $ | 12,680 |
| | $ | 29,511 |
| | $ | 57,821 |
| | $ | 100,453 |
|
| Asset-backed securities | — |
| | 1,003 |
| | 6,245 |
| | 5,814 |
| | 13,062 |
|
| Corporate debt securities | 351 |
| | 3,206 |
| | 454 |
| | 75 |
| | 4,086 |
|
| U.S. state and municipal securities | — |
| | — |
| | 121 |
| | 1,183 |
| | 1,304 |
|
Non-agency commercial mortgage-backed securities (1) | — |
| | 362 |
| | — |
| | 637 |
| | 999 |
|
| U.S. Treasury securities | — |
| | — |
| | 220 |
| | — |
| | 220 |
|
| Certificates of deposit | — |
| | 200 |
| | — |
| | — |
| | 200 |
|
| Foreign government agency securities | — |
| | 49 |
| | — |
| | — |
| | 49 |
|
| Total fair value | $ | 792 |
| | $ | 17,500 |
| | $ | 36,551 |
| | $ | 65,530 |
| | $ | 120,373 |
|
| Total amortized cost | $ | 792 |
| | $ | 17,486 |
| | $ | 36,544 |
| | $ | 66,104 |
| | $ | 120,926 |
|
Weighted-average yield (2) | 1.97 | % | | 2.45 | % | | 2.35 | % | | 2.16 | % | | 2.26 | % |
(1) Mortgage-backed securities heldhave been allocated to maturity groupings based on final contractual maturities. Actual maturities will differ from final contractual maturities because borrowers on a certain portion of loans underlying these securities have the right to prepay their obligations.
(2) The weighted-average yield is computed using the amortized cost at December 31, 2014, are as follows:2017. | | | | | | | | | | | | | | | |
| | | | | After 1 year | | After 5 years | | | | | | |
| | Within | | through | | through | | After | | | |
| | 1 year | | 5 years | | 10 years | | 10 years | | Total |
Securities available for sale: | | | | | | | | | | | | | | | |
Asset-backed securities | | $ | - | | $ | 2,946 | | $ | 5,062 | | $ | 11,358 | | $ | 19,366 |
U.S. agency mortgage-backed securities (1) | | | - | | | 1,281 | | | 5,196 | | | 12,240 | | | 18,717 |
Corporate debt securities | | | 999 | | | 7,046 | | | - | | | - | | | 8,045 |
U.S. agency notes | | | - | | | 3,795 | | | - | | | - | | | 3,795 |
Treasury securities | | | - | | | 2,994 | | | - | | | - | | | 2,994 |
Certificates of deposit | | | 624 | | | 910 | | | - | | | - | | | 1,534 |
Non-agency commercial mortgage-backed | | | | | | | | | | | | | | | |
securities (1) | | | - | | | - | | | - | | | 317 | | | 317 |
Other securities | | | - | | | - | | | - | | | 15 | | | 15 |
Total fair value | | $ | 1,623 | | $ | 18,972 | | $ | 10,258 | | $ | 23,930 | | $ | 54,783 |
Total amortized cost | | $ | 1,621 | | $ | 18,981 | | $ | 10,168 | | $ | 23,750 | | $ | 54,520 |
Securities held to maturity: | | | | | | | | | | | | | | | |
U.S. agency mortgage-backed securities (1) | | $ | - | | $ | 857 | | $ | 15,618 | | $ | 17,270 | | $ | 33,745 |
Non-agency commercial mortgage-backed | | | | | | | | | | | | | | | |
securities (1) | | | - | | | - | | | 359 | | | 639 | | | 998 |
Total fair value | | $ | - | | $ | 857 | | $ | 15,977 | | $ | 17,909 | | $ | 34,743 |
Total amortized cost | | $ | - | | $ | 853 | | $ | 15,789 | | $ | 17,747 | | $ | 34,389 |
(1)
| Mortgage-backed securities have been allocated to maturity groupings based on final contractual maturities. Actual maturities will differ from final contractual maturities because borrowers on a certain portion of loans underlying these securities have the right to prepay their obligations.
|
Proceeds and gross realized gains and losses from sales of AFS securities available for sale are as follows:
| | | | | | | | | | | | |
Year Ended December 31, | | | 2014 | | | 2013 | | | 2012 |
Proceeds | | $ | 6,556 | | | $ | 6,167 | | | $ | 3,336 | |
Gross realized gains | | $ | 30 | | | $ | 7 | | | $ | 35 | |
Gross realized losses | | $ | 23 | | | $ | - | | | $ | - | |
6.
|
| | | | | | | | | | | |
| Year Ended December 31, | 2017 | | 2016 | | 2015 |
| Proceeds | $ | 8,617 |
| | $ | 5,537 |
| | $ | 2,424 |
|
| Gross realized gains | 12 |
| | 4 |
| | 1 |
|
| Gross realized losses | — |
| | — |
| | 1 |
|
Loans
THE CHARLES SCHWAB CORPORATION
Notes to
Banking Clients and Related Allowance for Loan LossesConsolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
| |
| 6. | Bank Loans and Related Allowance for Loan Losses |
The composition of
bank loans
to banking clientsand delinquency analysis by loan
segmenttype is as follows:
| | | | | | | | | | | | |
December 31, | | | | | | | 2014 | | | 2013 |
Residential real estate mortgages | | | | | | $ | 8,127 | | | $ | 8,006 | |
Home equity loans and lines of credit | | | | | | | 2,955 | | | | 3,041 | |
Personal loans secured by securities | | | | | | | 2,320 | | | | 1,384 | |
Other | | | | | | | 39 | | | | 36 | |
Total loans to banking clients (1) | | | | | | | 13,441 | | | | 12,467 | |
Allowance for loan losses | | | | | | | (42) | | | | (48) | |
Total loans to banking clients – net | | | | | | $ | 13,399 | | | $ | 12,419 | |
(1)
| Loans are evaluated for impairment by loan segment.
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2017 | Current | | 30-59 days
past due | | 60-89 days
past due | | >90 days past
due and other
nonaccrual loans (3) | | Total past due and other
nonaccrual loans | | Total
loans | | Allowance for loan
losses | | Total
bank
loans - net |
First Mortgages (1,2) | $ | 9,983 |
| | $ | 14 |
| | $ | 2 |
| | $ | 17 |
| | $ | 33 |
| | $ | 10,016 |
| | $ | 16 |
| | $ | 10,000 |
|
HELOCs (1,2) | 1,928 |
| | — |
| | 3 |
| | 12 |
| | 15 |
| | 1,943 |
| | 8 |
| | 1,935 |
|
| Pledged asset lines | 4,361 |
| | 4 |
| | 4 |
| | — |
| | 8 |
| | 4,369 |
| | — |
| | 4,369 |
|
| Other | 176 |
| | — |
| | — |
| | — |
| | — |
| | 176 |
| | 2 |
| | 174 |
|
| Total bank loans | $ | 16,448 |
| | $ | 18 |
| | $ | 9 |
| | $ | 29 |
| | $ | 56 |
| | $ | 16,504 |
| | $ | 26 |
| | $ | 16,478 |
|
| | | | | | | | | | | | | | | | |
| December 31, 2016 | | | | | | | | | | | | | | | |
First Mortgages (1,2) | $ | 9,100 |
| | $ | 15 |
| | $ | 3 |
| | $ | 16 |
| | $ | 34 |
| | $ | 9,134 |
| | $ | 17 |
| | $ | 9,117 |
|
HELOCs (1,2) | 2,336 |
| | 2 |
| | 2 |
| | 10 |
| | 14 |
| | 2,350 |
| | 8 |
| | 2,342 |
|
| Pledged asset lines | 3,846 |
| | 4 |
| | 1 |
| | — |
| | 5 |
| | 3,851 |
| | — |
| | 3,851 |
|
| Other | 94 |
| | — |
| | — |
| | — |
| | — |
| | 94 |
| | 1 |
| | 93 |
|
| Total bank loans | $ | 15,376 |
| | $ | 21 |
| | $ | 6 |
| | $ | 26 |
| | $ | 53 |
| | $ | 15,429 |
| | $ | 26 |
| | $ | 15,403 |
|
(1) First Mortgages and HELOCs include unamortized premiums and discounts and direct origination costs of $77 million and $78 million at December 31, 2017 and 2016, respectively.
(2) At December 31, 2017 and 2016, 48% of the First Mortgage and HELOC portfolios were concentrated in California. These loans have performed in a manner consistent with the portfolio as a whole.
(3) There were no loans accruing interest that were contractually 90 days or more past due at December 31, 2017 or 2016.
Schwab Bank maintains a secured credit facility with the FHLB and loan collateral, including First Mortgages and HELOCs, is pledged at the FHLB in order to secure borrowing capacity. The Company has commitments to extend credit related to unused HELOCs, personal loans secured by securities, and other linesamount of credit, which totaled $6.7 billion and $5.7loan collateral pledged was $11.1 billion at December 31, 20142017.
Substantially all of the bank loans were collectively evaluated for impairment at both December 31, 2017 and 2013, respectively.2016.
Changes in the allowance for loan losses were as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2017 | | December 31, 2016 | | December 31, 2015 |
| | First Mortgages | | HELOCs | | Other | | Total (1) | | First Mortgages | | HELOCs | | Other | | Total (1) | | First Mortgages | | HELOCs | | Total (1) |
| Balance at beginning of year | $ | 17 |
| | $ | 8 |
| | $ | 1 |
| | $ | 26 |
| | $ | 20 |
| | $ | 11 |
| | $ | — |
| | $ | 31 |
| | $ | 29 |
| | $ | 13 |
| | $ | 42 |
|
| Charge-offs | (2 | ) | | (1 | ) | | — |
| | (3 | ) | | (1 | ) | | (1 | ) | | — |
| | (2 | ) | | (1 | ) | | (2 | ) | | (3 | ) |
| Recoveries | 1 |
| | 1 |
| | 1 |
| | 3 |
| | 1 |
| | 1 |
| | — |
| | 2 |
| | 1 |
| | 2 |
| | 3 |
|
| Provision for loan losses | — |
| | — |
| | — |
| | — |
| | (3 | ) | | (3 | ) | | 1 |
| | (5 | ) | | (9 | ) | | (2 | ) | | (11 | ) |
| Balance at end of year | $ | 16 |
| | $ | 8 |
| | $ | 2 |
| | $ | 26 |
| | $ | 17 |
| | $ | 8 |
| | $ | 1 |
| | $ | 26 |
| | $ | 20 |
| | $ | 11 |
| | $ | 31 |
|
(1) All personal loansPALs were fully collateralized by securities with fair values in excess of borrowings at December 31, 20142017, 2016, and 2013.2015.
A summary of impaired bank loan related assets is as follows:
|
| | | | | | | |
| December 31, | 2017 | | 2016 |
Nonaccrual loans (1) | $ | 28 |
| | $ | 26 |
|
Other real estate owned (2) | 3 |
| | 5 |
|
| Total nonperforming assets | 31 |
| | 31 |
|
| Troubled debt restructurings | 11 |
| | 14 |
|
| Total impaired assets | $ | 42 |
| | $ | 45 |
|
(1) Nonaccrual loans include nonaccrual troubled debt restructurings.
(2) Included in Other assets on the consolidated balance sheets.
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
Credit Quality
In addition to monitoring delinquency, Schwab monitors the credit quality of First Mortgages and HELOCs by stratifying the portfolios by the following:
Year of origination;
Borrower FICO scores at origination (Origination FICO);
Updated borrower FICO scores (Updated FICO);
Loan-to-value ratios at origination (Origination LTV); and
Estimated current LTV.
Borrowers’ FICO scores are provided by an independent third-party credit reporting service and were last updated in December 2017. The Origination LTV and Estimated Current LTV for a HELOC include any first lien mortgage outstanding on the same property at the time of the HELOC’s origination. The Estimated Current LTV for each loan is estimated by reference to a home price appreciation index.
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
The credit quality indicators of the bank loan portfolio are detailed below:
|
| | | | | | | | | | | | |
| December 31, 2017 | Balance | | Weighted Average
Updated FICO | | Utilization
Rate (1) | | Percent of Loans that are on
Nonaccrual Status |
| First Mortgages: | | | | | | | |
| Estimated Current LTV | | | | | | | |
<70% | $ | 9,046 |
| | 775 |
| | N/A |
| | 0.09 | % |
>70% – <90% | 961 |
| | 769 |
| | N/A |
| | 0.46 | % |
>90% – <100% | 5 |
| | 714 |
| | N/A |
| | 10.49 | % |
| >100% | 4 |
| | 713 |
| | N/A |
| | 6.23 | % |
| Total | $ | 10,016 |
| | 775 |
| | N/A |
| | 0.14 | % |
| HELOCs: | | | | | | | |
Estimated Current LTV (2) | | | | | | | |
<70% | $ | 1,773 |
| | 772 |
| | 32 | % | | 0.18 | % |
>70% – <90% | 148 |
| | 755 |
| | 47 | % | | 0.84 | % |
>90% – <100% | 14 |
| | 742 |
| | 64 | % | | 2.85 | % |
| >100% | 8 |
| | 718 |
| | 72 | % | | 4.91 | % |
| Total | $ | 1,943 |
| | 770 |
| | 33 | % | | 0.27 | % |
| Pledged asset lines: | | | | | | | |
Weighted Average LTV (2) | | | | | |
| | |
|
| = 70% | $ | 4,369 |
| | 765 |
| | 41 | % | | — |
|
| December 31, 2016 | Balance | | Weighted Average
Updated FICO | | Utilization
Rate (1) | | Percent of Loans that are on
Nonaccrual Status |
| First Mortgages: | | | | | | | |
| Estimated Current LTV | | | | | | | |
<70% | $ | 8,350 |
| | 774 |
| | N/A |
| | 0.04 | % |
>70% – <90% | 743 |
| | 768 |
| | N/A |
| | 0.35 | % |
>90% – <100% | 21 |
| | 747 |
| | N/A |
| | 2.08 | % |
| >100% | 20 |
| | 709 |
| | N/A |
| | 14.50 | % |
| Total | $ | 9,134 |
| | 773 |
| | N/A |
| | 0.10 | % |
| HELOCs: | | | | | | | |
Estimated Current LTV (2) | | | | | | | |
<70% | $ | 2,070 |
| | 771 |
| | 35 | % | | 0.12 | % |
>70% – <90% | 234 |
| | 757 |
| | 50 | % | | 0.40 | % |
>90% – <100% | 29 |
| | 747 |
| | 66 | % | | 1.74 | % |
| >100% | 17 |
| | 728 |
| | 70 | % | | 3.73 | % |
| Total | $ | 2,350 |
| | 769 |
| | 36 | % | | 0.20 | % |
| Pledged asset lines: | | | | | | | |
Weighted Average LTV (2) | | | | | |
| | |
|
| = 70% | $ | 3,851 |
| | 763 |
| | 46 | % | | — |
|
(1) The Utilization Rate is calculated using the outstanding balance divided by the associated total line of credit.
(2) Represents the LTV for the full line of credit (drawn and undrawn).
N/A Not applicable.
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
|
| | | | | | | |
| December 31, 2017 | First Mortgages | | HELOCs |
| Year of origination | | | |
|
| Pre-2013 | $ | 1,478 |
| | $ | 1,349 |
|
| 2013 | 1,326 |
| | 147 |
|
| 2014 | 530 |
| | 116 |
|
| 2015 | 1,218 |
| | 128 |
|
| 2016 | 2,886 |
| | 111 |
|
| 2017 | 2,578 |
| | 92 |
|
| Total | $ | 10,016 |
| | $ | 1,943 |
|
| Origination FICO | |
| | |
|
| <620 | $ | 6 |
| | $ | 1 |
|
| 620 – 679 | 89 |
| | 10 |
|
| 680 – 739 | 1,569 |
| | 365 |
|
>740 | 8,352 |
| | 1,567 |
|
| Total | $ | 10,016 |
| | $ | 1,943 |
|
| Origination LTV | | | |
<70% | $ | 7,569 |
| | $ | 1,360 |
|
>70% – <90% | 2,441 |
| | 574 |
|
>90% – <100% | 6 |
| | 9 |
|
| Total | $ | 10,016 |
| | $ | 1,943 |
|
| December 31, 2016 | First Mortgages | | HELOCs |
| Year of origination | | | |
|
| Pre-2013 | $ | 2,136 |
| | $ | 1,765 |
|
| 2013 | 1,746 |
| | 193 |
|
| 2014 | 685 |
| | 152 |
|
| 2015 | 1,458 |
| | 146 |
|
| 2016 | 3,109 |
| | 94 |
|
| Total | $ | 9,134 |
| | $ | 2,350 |
|
| Origination FICO | |
| | |
|
| <620 | $ | 8 |
| | $ | — |
|
| 620 – 679 | 92 |
| | 13 |
|
| 680 – 739 | 1,427 |
| | 432 |
|
>740 | 7,607 |
| | 1,905 |
|
| Total | $ | 9,134 |
| | $ | 2,350 |
|
| Origination LTV | |
| | |
|
<70% | $ | 6,865 |
| | $ | 1,628 |
|
>70% – <90% | 2,260 |
| | 709 |
|
>90% – <100% | 9 |
| | 13 |
|
| Total | $ | 9,134 |
| | $ | 2,350 |
|
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
At December 31, 2017, First Mortgage loans of $9.0 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 33% of the balance of these mortgages consisted of loans with interest-only payment terms. The interest rates on approximately 58% 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.
The HELOC product has a 30-year loan term with an initial draw period of ten years from the date of origination. After the initial draw period, the balance outstanding at such time is converted to a 20-year amortizing loan. The interest rate during the initial draw period and the 20-year amortizing period is a floating rate based on the prime rate plus a margin. HELOCs that convert to an amortizing loan may experience higher delinquencies and higher loss rates than those in the initial draw period. The allowance for loan loss methodology takes this increased inherent risk into consideration.
The following table presents when current outstanding HELOCs will convert to amortizing loans:
|
| | | |
| December 31, 2017 | Balance |
| Converted to amortizing loan by period end | $ | 437 |
|
| Within 1 year | 559 |
|
| > 1 year – 3 years | 204 |
|
| > 3 years – 5 years | 149 |
|
| > 5 years | 594 |
|
| Total | $ | 1,943 |
|
At December 31, 2017, $1.5 billion of the HELOC portfolio was secured by second liens on the associated properties. Second lien mortgage loans typically possess a higher degree of credit risk given the subordination to the first lien holder in the event of default. In addition to the credit monitoring activities described previously, Schwab also monitors credit risk by reviewing the delinquency status of the first lien loan on the associated property. At December 31, 2017, the borrowers on approximately 38% of HELOC loan balances outstanding only paid the minimum amount of interest due.
| |
| 7. | Equipment, Office Facilities, and Property |
Equipment, office facilities, and property are detailed below:
|
| | | | | | | |
| December 31, | 2017 |
| | 2016 |
|
| Software | $ | 1,490 |
| | $ | 1,335 |
|
| Buildings | 810 |
| | 807 |
|
| Leasehold improvements | 357 |
| | 342 |
|
| Information technology equipment | 326 |
| | 299 |
|
| Furniture and equipment | 193 |
| | 190 |
|
| Land | 167 |
| | 168 |
|
| Construction in progress | 142 |
| | 26 |
|
| Telecommunications equipment | 66 |
| | 67 |
|
| Total equipment, office facilities, and property | 3,551 |
| | 3,234 |
|
| Accumulated depreciation and amortization | (2,080 | ) | | (1,935 | ) |
| Total equipment, office facilities, and property — net | $ | 1,471 |
| | $ | 1,299 |
|
Depreciation and amortization expense for equipment, office facilities, and property was $232 million, $197 million, and $179 million in 2017, 2016, and 2015, respectively.
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
| |
| 8. | Intangible Assets and Goodwill |
Intangible assets and goodwill are detailed below:
|
| | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2017 | December 31, 2016 |
| | Gross Carrying
Value | | Accumulated
Amortization | | Net Carrying
Value | Gross Carrying
Value | | Accumulated
Amortization | | Net Carrying
Value |
| Client relationships | $ | 274 |
| | $ | 189 |
| | $ | 85 |
| $ | 274 |
| | $ | 169 |
| | $ | 105 |
|
| Technology | 89 |
| | 66 |
| | 23 |
| 89 |
| | 56 |
| | 33 |
|
| Trade name | 15 |
| | 15 |
| | — |
| 16 |
| | 10 |
| | 6 |
|
| Total intangible assets | $ | 378 |
| | $ | 270 |
| | $ | 108 |
| $ | 379 |
| | $ | 235 |
| | $ | 144 |
|
Amortization expense for intangible assets was $37 million in both 2017 and 2016, and $45 million in 2015.
Estimated future annual amortization expense for intangible assets as of December 31, 2017, is as follows:
|
| | | |
| 2018 | $ | 30 |
|
| 2019 | 27 |
|
| 2020 | 22 |
|
| 2021 | 15 |
|
| 2022 | 11 |
|
| Thereafter | 2 |
|
| Total | $ | 107 |
|
The changes in the carrying amount of goodwill, as allocated to our reportable segments for purposes of testing goodwill for impairment are presented in the following table:
|
| | | | | | | | | | | |
| | Investor
Services | | Advisor
Services | | Total |
| Balance at December 31, 2015 | $ | 1,096 |
| | $ | 131 |
| | $ | 1,227 |
|
| Goodwill acquired and other changes during the period | — |
| | — |
| | — |
|
| Balance at December 31, 2016 | 1,096 |
| | 131 |
| | 1,227 |
|
| Goodwill acquired and other changes during the period | — |
| | — |
| | — |
|
| Balance at December 31, 2017 | $ | 1,096 |
| | $ | 131 |
| | $ | 1,227 |
|
In 2017, Schwab elected to bypass the qualitative goodwill impairment assessment. As of April 1, 2017, we have determined through quantitative testing that the fair value significantly exceeded the carrying value of each of the reporting units, and concluded that goodwill was not impaired. Schwab did not recognize any goodwill impairment in any of the years presented.
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
9. Other Assets
The components of other assets are as follows:
|
| | | | | | | |
| December 31, | 2017 | | 2016 |
Accounts receivable (1) | $ | 461 |
| | $ | 451 |
|
| Interest and dividends receivable | 413 |
| | 325 |
|
FHLB stock (2) | 405 |
| | 81 |
|
Other investments (3) | 376 |
| | 243 |
|
| Prepaid expenses | 126 |
| | 90 |
|
| Deferred tax asset — net | 76 |
| | 143 |
|
| Other | 92 |
| | 75 |
|
| Total other assets | $ | 1,949 |
| | $ | 1,408 |
|
(1) Accounts receivable includes accrued service fee income and a receivable from our loan servicer.
(2) Investments in stock of the FHLB can only be sold to the issuer at its par value. Any cash dividends received from these investments are recognized as interest income in the consolidated statements of income.
(3) Predominantly CRA-related, including LIHTC investments.
| |
| 10. | Variable Interest Entities |
As of December 31, 2017 and 2016, all of Schwab’s involvement with VIEs is through Schwab Bank’s CRA-related investments and most of those related to LIHTC investments. As part of Schwab Bank’s community reinvestment initiatives, Schwab Bank invests with other institutional investors in funds that make equity investments in multifamily affordable housing properties. Schwab Bank receives tax credits and other tax benefits for these investments. Schwab Bank’s LIHTC investments are accounted for using the proportional amortization method which amortizes the cost of the investment over the period in which the investor expects to receive tax credits and other tax benefits, and the resulting amortization is included in taxes on income on the consolidated statements of income.
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 as to which we have concluded it is not the primary beneficiary, are summarized in the table below:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2017 | | December 31, 2016 |
| | Aggregate
assets | | Aggregate
liabilities | | Maximum exposure
to loss | | Aggregate
assets | | Aggregate
liabilities | | Maximum exposure to loss |
LIHTC Investments (1) | $ | 304 |
| | $ | 203 |
| | $ | 304 |
| | $ | 189 |
| | $ | 135 |
| | $ | 189 |
|
Other CRA Investments (2) | 69 |
| | — |
| | 125 |
| | 60 |
| | — |
| | 80 |
|
| Total | $ | 373 |
| | $ | 203 |
| | $ | 429 |
| | $ | 249 |
| | $ | 135 |
| | $ | 269 |
|
(1) Aggregate assets and aggregate liabilities are included in other assets and accrued expenses and other liabilities, respectively, on the consolidated balance sheets.
(2) Other CRA investments are recorded using either the cost method, equity method, or as HTM securities. Aggregate assets are included in other assets, HTM securities, or bank loans – net on the consolidated balance sheets.
Schwab’s maximum exposure to loss would result from the loss of the investments, including any committed amounts. During the years ended December 31, 2017 and 2016, Schwab did not provide or intend to provide financial or other support to the VIEs that it was not contractually required to provide. Schwab Bank’s funding of these remaining commitments is dependent upon the occurrence of certain conditions, and Schwab Bank expects to pay substantially all of these commitments between 2018 and 2021.
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
Bank deposits consist of interest-bearing and non-interest-bearing deposits as follows:
|
| | | | | | | |
| December 31, | 2017 | | 2016 |
| Interest-bearing deposits: | | | |
| Deposits swept from brokerage accounts | $ | 148,212 |
| | $ | 141,146 |
|
| Checking | 13,388 |
| | 13,842 |
|
| Savings and other | 7,264 |
| | 7,792 |
|
| Total interest-bearing deposits | 168,864 |
| | 162,780 |
|
| Non-interest-bearing deposits | 792 |
| | 674 |
|
| Total bank deposits | $ | 169,656 |
| | $ | 163,454 |
|
12. Borrowings
CSC’s senior notes are unsecured obligations and rank equally with the other unsecured senior debt. CSC may redeem some or all of the senior notes of each series prior to their maturity, subject to certain restrictions, and the payment of an applicable make-whole premium in certain instances. Interest is payable semi-annually for the senior notes. The following table lists long-term debt by instrument outstanding as of December 31, 2017 and 2016.
|
| | | | | | | | | |
| | Date of | | Principal Amount Outstanding |
| | Issuance | | 2017 | | 2016 |
| Fixed-Rate Senior Notes: | | | | | |
1.500% due March 10, 2018 (1) | 03/10/15 | | $ | 625 |
| | $ | 625 |
|
| 2.200% due July 25, 2018 | 07/25/13 | | 275 |
| | 275 |
|
| 4.450% due July 22, 2020 | 07/22/10 | | 700 |
| | 700 |
|
| 3.225% due September 1, 2022 | 08/29/12 | | 256 |
| | 256 |
|
| 2.650% due January 25, 2023 | 12/07/17 | | 800 |
| | — |
|
| 3.000% due March 10, 2025 | 03/10/15 | | 375 |
| | 375 |
|
| 3.450% due February 13, 2026 | 11/13/15 | | 350 |
| | 350 |
|
| 3.200% due March 2, 2027 | 03/02/17 | | 650 |
| | — |
|
| 3.200% due January 25, 2028 | 12/07/17 | | 700 |
| | — |
|
| Total fixed-rate senior notes | | | 4,731 |
| | 2,581 |
|
| 6.375% Medium-Term Notes |
| | — |
| | 250 |
|
5.450% Finance lease obligation (2) | 06/04/04 | | 61 |
| | 68 |
|
| Unamortized discount, net | | | (14 | ) | | (13 | ) |
| Debt issuance costs |
| | (25 | ) | | (10 | ) |
| Total long-term debt | | | $ | 4,753 |
| | $ | 2,876 |
|
(1) Redeemed on February 8, 2018. See Note 25.
(2) Schwab has a finance lease obligation related to an office building and land under a 20-year lease. The remaining finance lease obligation is being reduced by a portion of the lease payments over the remaining lease term through June 30, 2024.
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
Annual maturities on long-term debt outstanding at December 31, 2017, are as follows:
|
| | | |
| 2018 | $ | 908 |
|
| 2019 | 8 |
|
| 2020 | 709 |
|
| 2021 | 9 |
|
| 2022 | 266 |
|
| Thereafter | 2,892 |
|
| Total maturities | 4,792 |
|
| Unamortized discount, net | (14 | ) |
| Debt issuance costs | (25 | ) |
| Total long-term debt | $ | 4,753 |
|
Short-term borrowings: Schwab Bank maintains a secured credit facility with the FHLB. Amounts available under this facility are dependent on the amount of Schwab Bank’s First Mortgages, HELOCs, and the fair value of certain of Schwab Bank’s investment securities that are pledged as collateral. As of December 31, 2017, the collateral pledged by Schwab Bank provided a total borrowing capacity of $32.3 billion of which $15.0 billion was outstanding. No amounts were outstanding under this facility as of December 31, 2016. The Company could increase its borrowing capacity by pledging additional securities.
As a condition of the FHLB borrowings, Schwab Bank is required to hold FHLB stock, with the investment recorded in other assets on the consolidated balance sheets. The investment in FHLB was $405 million and $81 million at December 31, 2017 and 2016, respectively.
| |
| 13. | Commitments and Contingencies |
Loan Portfolio:Schwab Bank provides a co-branded loan origination program for Schwab Bank clients (the Program) with Quicken Loans, Inc. (Quicken Loans®). Pursuant to the Program, Quicken Loans originates and services First Mortgages and HELOCs for Schwab Bank clients. Under the Program, Schwab Bank purchases certain First Mortgages and HELOCs that are originated by Quicken Loans. Schwab Bank purchased First Mortgages of $1.4$2.8 billion and $3.5$3.3 billion during 20142017 and 2013,2016, respectively. Schwab Bank purchased HELOCs with commitments of $664$461 million and $917$440 million during 20142017 and 2013,2016, respectively.Credit Quality
Changes in the allowance for loan losses were
The Company’s commitments to extend credit on bank lines of credit and to purchase First Mortgages are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Year Ended | December 31, 2014 | | December 31, 2013 | | December 31, 2012 |
| Residential | | Home equity | | | | | | Residential | | Home equity | | | | | | Residential | | Home equity | | | | |
| real estate | | loans and | | | | | | real estate | | loans and | | | | | | real estate | | loans and | | | | |
| mortgages | | lines of credit | | Total | | mortgages | | lines of credit | | Total | | mortgages | | lines of credit | | Total |
Balance at beginning of year | | $ | 34 | | | | $ | 14 | | | $ | 48 | | | | $ | 36 | | | | $ | 20 | | | $ | 56 | | | | $ | 40 | | | | $ | 14 | | | $ | 54 | |
Charge-offs | | | (3) | | | | | (2) | | | | (5) | | | | | (5) | | | | | (6) | | | | (11) | | | | | (7) | | | | | (9) | | | | (16) | |
Recoveries | | | 2 | | | | | 1 | | | | 3 | | | | | 2 | | | | | 2 | | | | 4 | | | | | 2 | | | | | - | | | | 2 | |
Provision for loan losses | | | (4) | | | | | - | | | | (4) | | | | | 1 | | | | | (2) | | | | (1) | | | | | 1 | | | | | 15 | | | | 16 | |
Balance at end of year | | $ | 29 | | | | $ | 13 | | | $ | 42 | | | | $ | 34 | | | | $ | 14 | | | $ | 48 | | | | $ | 36 | | | | $ | 20 | | | $ | 56 | |
The delinquency analysis by loan class is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | >90 days past | | Total past due | | |
| | | | 30-59 days | | 60-89 days | | due and other | | and other | | Total |
December 31, 2014 | Current | | past due | | past due | | nonaccrual loans | | nonaccrual loans | | loans |
Residential real estate mortgages | $ | 8,092 | | | $ | 9 | | | | $ | 2 | | | | $ | 24 | | | | $ | 35 | | | $ | 8,127 |
Home equity loans and lines of credit | | 2,942 | | | | 1 | | | | | 1 | | | | | 11 | | | | | 13 | | | | 2,955 |
Personal loans secured by securities | | 2,320 | | | | - | | | | | - | | | | | - | | | | | - | | | | 2,320 |
Other | | 38 | | | | 1 | | | | | - | | | | | - | | | | | 1 | | | | 39 |
Total loans to banking clients | $ | 13,392 | | | $ | 11 | | | | $ | 3 | | | | $ | 35 | | | | $ | 49 | | | $ | 13,441 |
| | | | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2013 | | | | | | | | | | | | | | | | | |
Residential real estate mortgages | $ | 7,962 | | | $ | 4 | | | | $ | 4 | | | | $ | 36 | | | | $ | 44 | | | $ | 8,006 |
Home equity loans and lines of credit | | 3,025 | | | | 2 | | | | | 2 | | | | | 12 | | | | | 16 | | | | 3,041 |
Personal loans secured by securities | | 1,384 | | | | - | | | | | - | | | | | - | | | | | - | | | | 1,384 |
Other | | 36 | | | | - | | | | | - | | | | | - | | | | | - | | | | 36 |
Total loans to banking clients | $ | 12,407 | | | $ | 6 | | | | $ | 6 | | | | $ | 48 | | | | $ | 60 | | | $ | 12,467 |
|
| | | | | | |
| December 31, | 2017 | 2016 |
| Commitments to extend credit related to unused HELOCs, PALs, and other lines of credit | $ | 10,060 |
| $ | 8,445 |
|
| Commitments to purchase First Mortgage loans | 308 |
| 466 |
|
| Total | $ | 10,368 |
| $ | 8,911 |
|
There were no loans accruing interest that were contractually 90 days or more past due at December 31, 2014 or 2013. Nonperforming assets, which include nonaccrual loans and other real estate owned, totaled $44 million and $53 million at December 31, 2014 and 2013, respectively. Troubled debt restructurings were not material at December 31, 2014 or 2013, respectively.
In addition to monitoring delinquency, the Company monitors the credit quality of residential real estate mortgages and HELOCs by stratifying the portfolios by the year of origination, borrower FICO scores at origination (Origination FICO), updated borrower FICO scores (Updated FICO), LTV ratios at origination (Origination LTV), and estimated current LTV ratios (Estimated Current LTV), as presented in the following tables. Borrowers’ FICO scores are provided by an independent third party credit reporting service and were last updated in December 2014. The Origination LTV and Estimated Current LTV ratios for a HELOC include any first lien mortgage outstanding on the same property at the time of the HELOC’s origination. The Estimated Current LTV for each loan is estimated by reference to a home price appreciation index.
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
| | | | | | | | | | | | | | |
| | | | | Weighted | | | | | Percent of Loans | |
| | | | | Average | | Utilization | | that are on | |
December 31, 2014 | | Balance | | Updated FICO | | Rate (1) | | Nonaccrual Status | |
Residential real estate mortgages: | | | | | | | | | | | | | | |
Estimated Current LTV | | | | | | | | | | | | | | |
<70% | | $ | 7,131 | | | 774 | | | N/A | | | 0.04 | % | |
>70% – <90% | | | 882 | | | 765 | | | N/A | | | 0.50 | % | |
>90% – <100% | | | 61 | | | 740 | | | N/A | | | 2.95 | % | |
>100% | | | 53 | | | 726 | | | N/A | | | 10.95 | % | |
Total | | $ | 8,127 | | | 773 | | | N/A | | | 0.18 | % | |
Home equity loans and lines of credit: | | | | | | | | | | | | | | |
Estimated Current Combined LTV | | | | | | | | | | | | | | |
<70% | | $ | 2,282 | | | 773 | | | 36 | % | | 0.08 | % | |
>70% – <90% | | | 526 | | | 762 | | | 48 | % | | 0.34 | % | |
>90% – <100% | | | 81 | | | 749 | | | 61 | % | | 1.67 | % | |
>100% | | | 66 | | | 742 | | | 63 | % | | 1.54 | % | |
Total | | $ | 2,955 | | | 769 | | | 39 | % | | 0.20 | % | |
(1)
| The Utilization Rate is calculated using the outstanding HELOC balance divided by the associated total line of credit.
|
N/A Not applicable.
| | | | | | | | | |
| | Residential | | Home equity |
| | real estate | | loans and |
December 31, 2014 | | mortgages | | lines of credit |
Year of origination | | | | | | | | | |
Pre-2010 | | $ | 749 | | | $ | 2,076 | | |
2010 | | | 370 | | | | 168 | | |
2011 | | | 588 | | | | 137 | | |
2012 | | | 2,107 | | | | 147 | | |
2013 | | | 3,047 | | | | 250 | | |
2014 | | | 1,266 | | | | 177 | | |
Total | | $ | 8,127 | | | $ | 2,955 | | |
Origination FICO | | | | | | | | | |
<620 | | $ | 10 | | | $ | - | | |
620 – 679 | | | 97 | | | | 18 | | |
680 – 739 | | | 1,366 | | | | 549 | | |
>740 | | | 6,654 | | | | 2,388 | | |
Total | | $ | 8,127 | | | $ | 2,955 | | |
Origination LTV | | | | | | | | | |
<70% | | $ | 5,572 | | | $ | 1,979 | | |
>70% – <90% | | | 2,538 | | | | 955 | | |
>90% – <100% | | | 17 | | | | 21 | | |
Total | | $ | 8,127 | | | $ | 2,955 | | |
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
| | | | | | | | | | | | | | |
| | | | | Weighted | | | | | Percent of Loans | |
| | | | | Average | | Utilization | | that are on | |
December 31, 2013 | | Balance | | Updated FICO | | Rate (1) | | Nonaccrual Status | |
Residential real estate mortgages: | | | | | | | | | | | | | | |
Estimated Current LTV | | | | | | | | | | | | | | |
<70% | | $ | 6,649 | | | 775 | | | N/A | | | 0.05 | % | |
>70% – <90% | | | 1,181 | | | 763 | | | N/A | | | 0.34 | % | |
>90% – <100% | | | 86 | | | 732 | | | N/A | | | 4.77 | % | |
>100% | | | 90 | | | 730 | | | N/A | | | 10.50 | % | |
Total | | $ | 8,006 | | | 772 | | | N/A | | | 0.26 | % | |
Home equity loans and lines of credit: | | | | | | | | | | | | | | |
Estimated Current Combined LTV | | | | | | | | | | | | | | |
<70% | | $ | 2,127 | | | 773 | | | 36 | % | | 0.13 | % | |
>70% – <90% | | | 664 | | | 762 | | | 48 | % | | 0.22 | % | |
>90% – <100% | | | 127 | | | 752 | | | 59 | % | | 1.22 | % | |
>100% | | | 123 | | | 743 | | | 63 | % | | 1.34 | % | |
Total | | $ | 3,041 | | | 769 | | | 39 | % | | 0.24 | % | |
(1)
| The Utilization Rate is calculated using the outstanding HELOC balance divided by the associated total line of credit.
|
N/A Not applicable.
| | | | | | | | | |
| | Residential | | Home equity |
| | real estate | | loans and |
December 31, 2013 | | mortgages | | lines of credit |
Year of origination | | | | | | | | | |
Pre-2010 | | $ | 914 | | | $ | 2,304 | | |
2010 | | | 510 | | | | 191 | | |
2011 | | | 771 | | | | 155 | | |
2012 | | | 2,429 | | | | 162 | | |
2013 | | | 3,382 | | | | 229 | | |
Total | | $ | 8,006 | | | $ | 3,041 | | |
Origination FICO | | | | | | | | | |
<620 | | $ | 11 | | | $ | - | | |
620 – 679 | | | 110 | | | | 20 | | |
680 – 739 | | | 1,384 | | | | 576 | | |
>740 | | | 6,501 | | | | 2,445 | | |
Total | | $ | 8,006 | | | $ | 3,041 | | |
Origination LTV | | | | | | | | | |
<70% | | $ | 5,416 | | | $ | 2,040 | | |
>70% – <90% | | | 2,568 | | | | 977 | | |
>90% – <100% | | | 22 | | | | 24 | | |
Total | | $ | 8,006 | | | $ | 3,041 | | |
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
7.Equipment, Office Facilities, and Property
Equipment, office facilities, and property are detailed below:
| | | | | | | | | | | | |
December 31, | | | | | | | 2014 | | | 2013 |
Software | | | | | | $ | 1,281 | | | $ | 1,177 | |
Buildings | | | | | | | 673 | | | | 460 | |
Leasehold improvements | | | | | | | 310 | | | | 300 | |
Information technology equipment | | | | | | | 257 | | | | 245 | |
Furniture and equipment | | | | | | | 154 | | | | 131 | |
Telecommunications equipment | | | | | | | 83 | | | | 102 | |
Construction in progress | | | | | | | 64 | | | | 95 | |
Land | | | | | | | 107 | | | | 70 | |
Total equipment, office facilities, and property | | | | | | | 2,929 | | | | 2,580 | |
Accumulated depreciation and amortization | | | | | | | (1,890) | | | | (1,790) | |
Total equipment, office facilities, and property – net | | | | | | $ | 1,039 | | | $ | 790 | |
Depreciation and amortization expense for equipment, office facilities, and property was $155 million, $154 million, $149 million in 2014, 2013, and 2012, respectively.
8.Intangible Assets and Goodwill
The gross carrying value of intangible assets and accumulated amortization was:
| | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2014 | | December 31, 2013 |
| | Gross | | | | | Net | | Gross | | | | | Net |
| | Carrying | | Accumulated | | Carrying | | Carrying | | Accumulated | | Carrying |
| | Value | | Amortization | | Value | | Value | | Amortization | | Value |
Customer relationships | | $ | 274 | | | $ | 116 | | | $ | 158 | | $ | 274 | | | $ | 84 | | | $ | 190 |
Technology | | | 89 | | | | 37 | | | | 52 | | | 89 | | | | 27 | | | | 62 |
Trade name | | | 17 | | | | 6 | | | | 11 | | | 17 | | | | 4 | | | | 13 |
Other | | | 7 | | | | 1 | | | | 6 | | | 2 | | | | 1 | | | | 1 |
Total intangible assets | | $ | 387 | | | $ | 160 | | | $ | 227 | | $ | 382 | | | $ | 116 | | | $ | 266 |
Amortization expense for intangible assets was $44 million, $48 million, and $47 million in 2014, 2013, and 2012, respectively.
Estimated future annual amortization expense for intangible assets as of December 31, 2014, is as follows:
| | | | | | | | | | | | |
2015 | | | | | | | | | | $ | 45 | |
2016 | | | | | | | | | | | 37 | |
2017 | | | | | | | | | | | 34 | |
2018 | | | | | | | | | | | 31 | |
2019 | | | | | | | | | | | 29 | |
Thereafter | | | | | | | | | | | 51 | |
Total intangible assets | | | | | | | | | | $ | 227 | |
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
Goodwill impairment charges since January 1, 2002 are immaterial. The changes in the carrying amount of goodwill, as allocated to the Company’s reportable segments for purposes of testing goodwill for impairment going forward, are presented in the following table:
| | | | | | | | | | |
| | Investor | | Advisor | | | | |
| | Services | | Services | | Total | |
Balance at December 31, 2012 | | $ | 1,128 | | $ | 100 | | $ | 1,228 | |
Goodwill acquired and other changes during the period | | | (1) | | | - | | | (1) | |
Balance at December 31, 2013 | | | 1,127 | | | 100 | | | 1,227 | |
Goodwill acquired and other changes during the period | | | - | | | - | | | - | |
Balance at December 31, 2014 | | $ | 1,127 | | $ | 100 | | $ | 1,227 | |
In testing for potential impairment of goodwill on April 1, 2014, management performed an assessment of each of the Company’s reporting units. As a result of this assessment, management concluded that goodwill was not impaired. The Company did not recognize any goodwill impairment in 2013 or 2012.
9.Other Assets
The components of other assets are as follows:
| | | | | | | | | | | | |
December 31, | | | | | | | 2014 | | | 2013 |
Accounts receivable (1) | | | | | | $ | 359 | | | $ | 328 | |
Interest and dividends receivable | | | | | | | 180 | | | | 171 | |
Prepaid expenses | | | | | | | 110 | | | | 85 | |
Other investments | | | | | | | 72 | | | | 59 | |
Deferred tax asset – net | | | | | | | - | | | | 28 | |
Other | | | | | | | 59 | | | | 75 | |
Total other assets | | | | | | $ | 780 | | | $ | 746 | |
(1)
| Accounts receivable includes accrued service fee income and a receivable from the Company’s loan servicer.
|
10.Deposits from Banking Clients
Deposits from banking clients consist of interest-bearing and non-interest-bearing deposits as follows:
| | | | | | | | | | | | |
December 31, | | | | | | | 2014 | | | 2013 |
Interest-bearing deposits: | | | | | | | | | | | | |
Deposits swept from brokerage accounts | | | | | | $ | 82,101 | | | $ | 72,166 | |
Checking | | | | | | | 12,318 | | | | 12,053 | |
Savings and other | | | | | | | 7,832 | | | | 8,232 | |
Total interest-bearing deposits | | | | | | | 102,251 | | | | 92,451 | |
Non-interest-bearing deposits | | | | | | | 564 | | | | 521 | |
Total deposits from banking clients | | | | | | $ | 102,815 | | | $ | 92,972 | |
11.Payables to Brokers, Dealers, and Clearing Organizations
Payables to brokers, dealers, and clearing organizations include securities loaned of $1.5 billion and $1.2 billion at December 31, 2014 and 2013, respectively. The cash collateral received from counterparties under securities lending transactions was equal to or greater than the market value of the securities loaned at December 31, 2014 and 2013.
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
12.Payables to Brokerage Clients
The principal source of funding for Schwab’s margin lending is cash balances in brokerage client accounts, which are included in payables to brokerage clients. Cash balances in interest-bearing brokerage client accounts were $27.6 billion and $28.8 billion at December 31, 2014 and 2013, respectively. The average rate paid on cash balances in interest-bearing brokerage client accounts was 0.01% in 2014 and 2013.
13.Borrowings
Long-term debt including unamortized debt discounts and premiums, where applicable, consists of the following:
| | | | | | | | | | | | |
December 31, | | | | | | | 2014 | | | 2013 |
Senior Notes | | | | | | $ | 1,567 | | | $ | 1,565 | |
Senior Medium-Term Notes, Series A | | | | | | | 249 | | | | 249 | |
Finance lease obligation | | | | | | | 83 | | | | 89 | |
Total long-term debt | | | | | | $ | 1,899 | | | $ | 1,903 | |
CSC has a universal automatic shelf registration statement (Shelf Registration Statement) on file with the Securities and Exchange Commission (the SEC), which enables CSC to issue debt, equity, and other securities.
The Senior Notes outstanding at December 31, 2014, have maturities ranging from 2015 to 2022 and fixed interest rates ranging from 0.850% to 4.45% with interest payable semi-annually.
On July 25, 2013, CSC issued $275 million of Senior Notes that mature in 2018 under its Shelf Registration Statement. The Senior Notes have a fixed interest rate of 2.20% with interest payable semi-annually.
The Senior Medium-Term Notes, Series A (Medium-Term Notes) outstanding at December 31, 2014, mature in 2017 and have a fixed interest rate of 6.375% with interest payable semi-annually.
Schwab has a finance lease obligation related to an office building and land under a 20-year lease. The remaining finance lease obligation of $83 million at December 31, 2014, is being reduced by a portion of the lease payments over the remaining lease term of 10 years.
Annual maturities on long-term debt outstanding at December 31, 2014, are as follows:
| | | | | | | | | | |
2015 | | | | | | | | $ | 357 | |
2016 | | | | | | | | | 7 | |
2017 | | | | | | | | | 258 | |
2018 | | | | | | | | | 283 | |
2019 | | | | | | | | | 8 | |
Thereafter | | | | | | | | | 1,001 | |
Total maturities | | | | | | | | | 1,914 | |
Unamortized discount, net | | | | | | | | | (15) | |
Total long-term debt | | | | | | | | $ | 1,899 | |
CSC has authorization from its Board of Directors to issue unsecured commercial paper notes (Commercial Paper Notes) not to exceed $1.5 billion. Management has set a current limit for the commercial paper program of $800 million. The maturities of the Commercial Paper Notes may vary, but are not to exceed 270 days from the date of issue. The commercial paper is not redeemable prior to maturity and cannot be voluntarily prepaid. The proceeds of the commercial paper program are to be used for general corporate purposes. There were no borrowings of Commercial Paper Notes outstanding at December 31, 2014 or 2013.
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
CSC maintains an $800 million committed, unsecured credit facility with a group of 12 banks, which is scheduled to expire in June 2015. This facility replaced a similar facility that expired in June 2014. The funds under this facility are available for general corporate purposes. The financial covenants under this facility require Schwab to maintain a minimum net capital ratio, as defined, Schwab Bank to be well capitalized, as defined, and CSC to maintain a minimum level of stockholders’ equity, excluding accumulated other comprehensive income. At December 31, 2014, the minimum level of stockholders’ equity required under this facility was $7.8 billion (CSC’s stockholders’ equity, excluding accumulated other comprehensive income, at December 31, 2014, was $11.6 billion). There were no borrowings outstanding under these facilities at December 31, 2014 or 2013.
To manage short-term liquidity, Schwab maintains uncommitted, unsecured bank credit lines with a group of banks. There were no borrowings outstanding under these lines at December 31, 2014 or 2013.
To partially satisfy the margin requirement of client option transactions with the Options Clearing Corporation, Schwab has unsecured standby LOCs with five banks in favor of the Options Clearing Corporation aggregating $225 million at December 31, 2014. There were no funds drawn under any of these LOCs at December 31, 2014 or 2013. In connection with its securities lending activities, Schwab is required to provide collateral to certain brokerage clients. Schwab satisfies the collateral requirements by providing cash as collateral.
To partially satisfy the margin requirement of client option transactions with the Options Clearing Corporation, optionsXpress, Inc. has an unsecured standby LOC with one bank in favor of the Options Clearing Corporation in the amount of $15 million at December 31, 2014. There were no funds drawn under this LOC during 2014.
14.Commitments and Contingencies
Operating leases: The CompanySchwab has non-cancelable operating leases for office space and equipment. Future annual minimum rental commitments under these leases, net of contractual subleases at December 31, 2014, are as follows:
| | | | | | | | | | |
| | Operating | | | | | | | |
| | Leases | | Subleases | | Net | |
2015 | | $ | 120 | | $ | 35 | | $ | 85 | |
2016 | | | 109 | | | 34 | | | 75 | |
2017 | | | 93 | | | 28 | | | 65 | |
2018 | | | 55 | | | 6 | | | 49 | |
2019 | | | 39 | | | 2 | | | 37 | |
Thereafter | | | 120 | | | 6 | | | 114 | |
Total | | $ | 536 | | $ | 111 | | $ | 425 | |
|
| | | | | | | | | |
| December 31, 2017 | Operating
Leases | Subleases | Net |
| 2018 | $ | 137 |
| $ | 6 |
| $ | 131 |
|
| 2019 | 119 |
| 4 |
| 115 |
|
| 2020 | 109 |
| 4 |
| 105 |
|
| 2021 | 86 |
| 4 |
| 82 |
|
| 2022 | 68 |
| 2 |
| 66 |
|
| Thereafter | 310 |
| 1 |
| 309 |
|
| Total | $ | 829 |
| $ | 21 |
| $ | 808 |
|
Certain leases contain provisions for renewal options, purchase options, and rent escalations based on increases in certain costs incurred by the lessor. Rent expense
relating to operating leases was
$214$136 million,
$208$123 million, and
$203$116 million in
2014, 2013,2017, 2016, and
2012,2015, respectively.
Purchase obligations:The Company Schwab has purchase obligations for services such as advertising and marketing, telecommunications, professional services, and hardware- and software-related agreements. At December 31, 2014, theThe Company has purchase obligations as follows: | | | | | | | | | | |
2015 | | | | | | | | $ | 165 | |
2016 | | | | | | | | | 143 | |
2017 | | | | | | | | | 67 | |
2018 | | | | | | | | | 19 | |
2019 | | | | | | | | | 18 | |
Thereafter | | | | | | | | | 230 | |
Total | | | | | | | | $ | 642 | |
- 73 -
|
| | | |
| December 31, 2017 | |
| 2018 | $ | 305 |
|
| 2019 | 148 |
|
| 2020 | 71 |
|
| 2021 | 26 |
|
| 2022 | 22 |
|
| Thereafter | 181 |
|
| Total | $ | 753 |
|
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
Guarantees and indemnifications: In the normal course of business, the Company provides certain indemnifications (i.e., protection against damage or loss) to counterparties in connection with the disposition of certain of its assets. Such indemnifications are generally standard contractual terms with various expiration dates and typically relate to title to the assets transferred, ownership of intellectual property rights (e.g., patents), accuracy of financial statements, compliance with laws and regulations, failure to pay, satisfy or discharge any liability, or to defend claims, as well as errors, omissions, and misrepresentations. The maximum potential future liability under these indemnifications cannot be estimated. The Company has not recorded a liability for these indemnifications and believes that the occurrence of events that would trigger payments under these agreements is remote.The CompanySchwab 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. The CompanyWe partially satisfiessatisfy the margin requirements by arranging unsecured standby LOCs, in favor of the Options Clearing Corporation, which are issued by multipleseveral banks. At December 31, 2014,2017, the aggregate face amount of these LOCs totaled $240$225 million. There were no funds drawn under any of these LOCs at December 31, 2014.2017. In connection with its securities lending activities, the CompanySchwab is required to provide collateral to certain brokerage clients. The Company satisfies the collateral requirements by providing cash as collateral.
The Company
Schwab also provides guarantees to securities clearing houses and exchanges under standard membership agreements, which require members to guarantee the performance of other members. Under the agreements, if another member becomes unable to satisfy its obligations to the clearing houses and exchanges, other members would be required to meet shortfalls. The Company’s liability under these arrangements is not quantifiable and may exceed the cash and securities it has posted as collateral.
However, theThe potential requirement for the Company to make payments under these arrangements is remote. Accordingly, no liability has been recognized for these guarantees.
Legal contingencies: The CompanySchwab 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.The Company
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; potential opportunities for settlement and the status of any
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
settlement discussions; and potential insurance coverage and indemnification. It may not be reasonably possible to estimate a range of potential liability until the matter is closer to resolution – pending, for example, further proceedings, the outcome of key motions or appeals, or discussions among the parties. Numerous issues may have to be developed, such as discovery of important factual matters and determination of threshold legal issues, which may include novel or unsettled questions of law. Reserves are established or adjusted or further disclosure and estimates of potential loss are provided as the matter progresses and more information becomes available.
Schwab believes it has strong defenses in all significant matters currently pending and is contesting liability and any damages claimed. Nevertheless, some of these matters may result in adverse judgments or awards, including penalties, injunctions or other relief, and the Company may also determine to settle a matter because of the uncertainty and risks of litigation. Described below are certain matters in which there is a reasonable possibility that a material loss could be incurred or where the matter may otherwise be of significant interest to stockholders. Unless otherwise noted, the Company is unable to provide a reasonable estimate of any potential liability given the stage of proceedings in the matter.
With respect to all other pending matters, based on current information and consultation with counsel, it does not appear reasonably possible that the outcome of any such matter would be material to the financial condition, operating results, or cash flows of the Company. However, 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; potential opportunities for settlement and the status of any settlement discussions; and potential insurance coverage and indemnification. It may not be possible to reasonably estimate potential liability, if any, or 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.
Auction Rate Securities: As disclosed previously, Schwab has been responding to a civil complaint filed on August 17, 2009, in New York state court by the Attorney General of the State of New York (NYAG) alleging misrepresentations in sales of auction rate securities to clients. In 2011, the court granted Schwab’s motion to dismiss the complaint with prejudice. After part of the case was reinstated on appeal in 2013, Schwab filed a motion for summary judgment of the NYAG’s remaining
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
causes of action. On February 3, 2015, the parties entered into a settlement agreement under which the NYAG’s complaint will be voluntarily dismissed and discontinued with prejudice. The Company’s liability with respect to resolution of the matter is not material.
Total Bond Market Fund Litigation: On August 28, 2008, a class action lawsuit was filed in the U.S. District Court for the Northern District of California on behalf of investors in the Schwab Total Bond Market Fund™. The lawsuit, which allegesalleged violations of state law and federal securities law in connection with the fund’s investment policy, names named CSIM, Schwab Investments (registrant and issuer of the fund’s shares), and CSIMcertain current and former fund trustees as defendants. Allegations include that the fund improperly deviated from its stated investment objectives by investing in collateralized mortgage obligations (CMOs) and investing more than 25% of fund assets in CMOs and mortgage-backed securities without obtaining a shareholderfundholder vote. Plaintiffs seekPlaintiff seeks unspecified compensatory and rescission damages, unspecified equitable and injunctive relief, costs, and attorneys’ fees. Plaintiffs’fees on behalf of a putative class of investors who held shares as of August 31, 2007, and a putative class of investors who purchased the shares between September 1, 2017 and February 27, 2009. Plaintiff’s federal securities law claim and certain of plaintiffs’plaintiff’s state law claims were dismissed in proceedings before the court and following a successful petition by defendants to the Ninth Circuit Court of Appeals.dismissed. On August 8, 2011, the court dismissed plaintiffs’plaintiff’s remaining claims with prejudice. Plaintiffs have againPlaintiff appealed to the Ninth Circuit, which issued a ruling on March 9, 2015 reversing the district court’s dismissal of the case and remanding the case for further proceedings. Plaintiff filed a fourth amended complaint on June 25, 2015, and in decisions issued October 6, 2015 and February 23, 2016, the court dismissed all claims with prejudice. Plaintiff has appealed to the Ninth Circuit, where the case is currentlyagain pending.
Other Regulatory MattersCrago Order Routing Litigation: On April16, 2012, optionsXpress, Inc.July 13, 2016, a securities class action lawsuit was charged byfiled in the SEC inU.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 administrative proceeding alleging violations of the firm’s close-out obligationsagreement under Regulation SHO (short sale delivery rules) in connectionwhich CS&Co routed orders to UBS Securities LLC between July 13, 2011 and December 31, 2014 violated CS&Co’s duty to seek best execution. Plaintiffs seek unspecified damages, interest, injunctive and equitable relief, and attorneys’ fees and costs. After a first amended complaint was dismissed with certain customer trading activity. Following trial,leave to amend, plaintiffs filed a second amended complaint on August 14, 2017. Defendants again moved to dismiss, and in a decision issued June 7, 2013,December 5, 2017, the judge held thatcourt denied the firm had violated Regulation SHO and aided and abetted fraudulent trading activity by its customer, and orderedmotion. Defendants have answered the firm and the customercomplaint to pay disgorgement and penalties in an amount which would not be material. The Company continues to dispute thedeny all allegations, and is appealingintend to vigorously contest the decision.lawsuit.15.
| |
| 14. | Financial Instruments Subject to Off-Balance Sheet Credit Risk |
Off-Balance Sheet Credit Risk
or Concentration RiskOff-Balance Sheet Credit Risk
Resale and repurchase 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. SchwabWe also setsset standards for the credit quality of the counterparty, monitorsmonitor the fair value of the underlying securities as compared to the related receivable, including accrued interest, and requiresrequire additional collateral where deemed appropriate. At December 31, 2014 and 2013, the fair value of collateral received in connection with resale agreements that are available to be repledged or sold was $10.4 billion and $14.3 billion, respectively. Schwab utilizes the collateral provided under these resale agreements to meet obligations under broker-dealer client protection rules, which place limitations on its ability to access such segregated securities. For Schwab to repledge or sell this collateral, it would be required to deposit cash and/or securities of an equal amount into its segregated reserve bank accounts in order to meet its segregated cash and investment requirement. The Company’sSchwab’s resale agreements are not subject to master netting arrangements.
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
Securities lending: The CompanySchwab 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, the Companywe may be exposed to the risk of acquiring the securities at prevailing market prices in order to satisfy itsour client obligations. The CompanySchwab mitigates this risk by requiring credit approvals for counterparties, monitoring the fair value of securities loaned, and requiring additional cash as collateral when necessary. The fair value of client securities pledged in securities lending transactions to other broker-dealers was $1.3 billion and $1.1 billion at December 31, 2014 and 2013, respectively. The Company hasWe also pledged a portion of its securities owned in connection with securities lending transactions to other broker-dealers. Additionally, the Company borrowsborrow securities from other broker-dealers to fulfill short sales by brokerage clients and deliversdeliver cash to the lender in exchange for the securities. The fair value of these borrowed securities was $88$215 million and $276$213 million at December 31, 20142017 and 2013,2016, respectively. All of the Company’sour securities lending transactions are through a program with a clearing organization, which guarantees the return of cash to us and is subject to enforceable master netting arrangements
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
with other broker-dealers. However, the Company doesbroker-dealers; however, we do not net securities lending transactions and therefore,transactions. Therefore, the Company’s securities loaned and securities borrowed are presented gross in the consolidated balance sheets.
The following table presents information about
the Company’sour resale agreements and securities lending activity
to enable the users of the Company’s financial statements to evaluatedepicting the potential effect of rights of setoff between these recognized assets and recognized liabilities at December 31,
20142017 and
2013.2016. | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | Gross Amounts Not Offset in the | | | |
| | | | | | Gross Amounts | | Net Amounts | | Consolidated Balance Sheet | | | |
| | | Gross | | | Offset in the | | Presented in the | | | | | | | | | |
| | | Assets / | | | Consolidated | | Consolidated | | Counterparty | | | | | Net |
| | | Liabilities | | | Balance Sheet | | Balance Sheet | | Offsetting | | Collateral | | | Amount |
December 31, 2014 | | | | | | | | | | | | | | | | | | | | | | | |
Assets: | | | | | | | | | | | | | | | | | | | | | | | |
Resale agreements (1) | | $ | 10,186 | | | $ | - | | | $ | 10,186 | | | $ | - | | | $ | (10,186) | (2) | | $ | - |
Securities borrowed (3) | | | 187 | | | | - | | | | 187 | | | | (69) | | | | (117) | | | | 1 |
Total | | $ | 10,373 | | | $ | - | | | $ | 10,373 | | | $ | (69) | | | $ | (10,303) | | | $ | 1 |
Liabilities: | | | | | | | | | | | | | | | | | | | | | | | |
Securities loaned (4) | | $ | 1,477 | | | $ | - | | | $ | 1,477 | | | $ | (69) | | | $ | (1,293) | | | $ | 115 |
Total | | $ | 1,477 | | | $ | - | | | $ | 1,477 | | | $ | (69) | | | $ | (1,293) | | | $ | 115 |
| | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2013 | | | | | | | | | | | | | | | | | | | | | | | |
Assets: | | | | | | | | | | | | | | | | | | | | | | | |
Resale agreements (1) | | $ | 14,016 | | | $ | - | | | $ | 14,016 | | | $ | - | | | $ | (14,016) | (2) | | $ | - |
Securities borrowed (3) | | | 349 | | | | - | | | | 349 | | | | (88) | | | | (257) | | | | 4 |
Total | | $ | 14,365 | | | $ | - | | | $ | 14,365 | | | $ | (88) | | | $ | (14,273) | | | $ | 4 |
Liabilities: | | | | | | | | | | | | | | | | | | | | | | | |
Securities loaned (4) | | $ | 1,187 | | | $ | - | | | $ | 1,187 | | | $ | (88) | | | $ | (1,019) | | | $ | 80 |
Total | | $ | 1,187 | | | $ | - | | | $ | 1,187 | | | $ | (88) | | | $ | (1,019) | | | $ | 80 |
(1)
| Included in cash and investments segregated and on deposit for regulatory purposes in the Company’s consolidated balance sheets.
|
(2)
| Actual collateral was greater than 102% of the related assets.
|
(3)
| Included in receivables from brokers, dealers, and clearing organizations in the Company’s consolidated balance sheets.
|
(4)
| Included in payables to brokers, dealers, and clearing organizations in the Company’s consolidated balance sheets.
|
|
| | | | | | | | | | | | | | | | | | | |
| | | | | Gross Amounts Not Offset in the
Consolidated Balance Sheets | |
| | Gross
Assets/
Liabilities | Gross Amounts Offset in the Consolidated
Balance Sheets | Net Amounts Presented in the Consolidated
Balance Sheets | Counterparty
Offsetting | Collateral | Net
Amount |
| December 31, 2017 | | | | | | | |
| Assets: | | | | | | | |
Resale agreements (1) | $ | 6,596 |
| $ | — |
| $ | 6,596 |
| $ | — |
| $ | (6,596 | ) | (2) | $ | — |
|
Securities borrowed (3) | 222 |
| — |
| 222 |
| (199 | ) | (22 | ) | | 1 |
|
| Total | $ | 6,818 |
| $ | — |
| $ | 6,818 |
| $ | (199 | ) | $ | (6,618 | ) | | $ | 1 |
|
| Liabilities: | | | | | | | |
Securities loaned (4,5) | $ | 966 |
| $ | — |
| $ | 966 |
| $ | (199 | ) | $ | (670 | ) | | $ | 97 |
|
| Total | $ | 966 |
| $ | — |
| $ | 966 |
| $ | (199 | ) | $ | (670 | ) | | $ | 97 |
|
| | | | | | | | |
| December 31, 2016 | | | | | | | |
| Assets: | | | | | | | |
Resale agreements (1) | $ | 9,547 |
| $ | — |
| $ | 9,547 |
| $ | — |
| $ | (9,547 | ) | (2) | $ | — |
|
Securities borrowed (3) | 393 |
| — |
| 393 |
| (200 | ) | (189 | ) | | 4 |
|
| Total | $ | 9,940 |
| $ | — |
| $ | 9,940 |
| $ | (200 | ) | $ | (9,736 | ) | | $ | 4 |
|
| Liabilities: | | | | | | | |
Securities loaned (4,5) | $ | 1,996 |
| $ | — |
| $ | 1,996 |
| $ | (200 | ) | $ | (1,660 | ) | | $ | 136 |
|
| Total | $ | 1,996 |
| $ | — |
| $ | 1,996 |
| $ | (200 | ) | $ | (1,660 | ) | | $ | 136 |
|
(1) Included in cash and investments segregated and on deposit for regulatory purposes in the consolidated balance sheets.
(2) Actual collateral was greater than or equal to 102% of the related assets. At December 31, 2017 and 2016, the fair value of collateral received in connection with resale agreements that are available to be repledged or sold was $6.7 billion and $9.8 billion, respectively.
(3) Included in receivables from brokers, dealers, and clearing organizations in the consolidated balance sheets.
(4) Included in payables to brokers, dealers, and clearing organizations in the consolidated balance sheets. The cash collateral received from counterparties under securities lending transactions was equal to or greater than the market value of the securities loaned at December 31, 2017 and 2016.
(5) Securities loaned are predominantly comprised of equity securities held in client brokerage accounts with overnight and continuous remaining contractual maturities.
Client trade settlement:The Company Schwab is obligated to settle transactions with brokers and other financial institutions even if the Company’sour clients fail to meet their obligations to the Company.us. Clients are required to complete their transactions on settlement date, generally threetwo business days after the trade date. If clients do not fulfill their contractual obligations, the Companywe may incur losses. The Company hasWe have established procedures to reduce this risk by requiring deposits from clients in excess of amounts prescribed by regulatory requirements for certain types of trades, and therefore the potential to make payments under these client transactions is remote. Accordingly, no liability has been recognized for these transactions.Margin lending: The Company provides margin loans to its clients which are collateralized by securities in their brokerage accounts and may be liable for the margin requirement of its client margin securities transactions. As clients write options or sell securities short, the Company may incur losses if the clients do not fulfill their obligations and the collateral in client accounts is insufficient to fully cover losses which clients may incur from these strategies. To mitigate this risk, the Company monitors required margin levels and requires clients to deposit additional collateral, or reduce positions to meet minimum collateral requirements. The contractual value of margin loans to clients was $14.3 billion and $12.8 billion at December 31, 2014 and 2013, respectively.
Clients with margin loans have agreed to allow the Company to pledge collateralized securities in their brokerage accounts in accordance with federal regulations. Under such regulations, the Company was allowed to pledge securities with a fair value of $20.4 billion and $18.2 billion at December 31, 2014 and 2013, respectively. The fair value of client securities pledged to fulfill the short sales of its clients was $1.5 billion and $1.6 billion at December 31, 2014 and 2013, respectively. The fair
- 76 -
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
Margin lending: Clients with margin loans have agreed to allow Schwab to pledge collateralized securities in their brokerage accounts in accordance with federal regulations. The following table summarizes the fair value of client securities that were available, under such regulations, that could have been used as collateral, and the amounts that we had pledged:
|
| | | | | | |
| December 31, | 2017 | 2016 |
| Fair value of client securities available to be pledged | $ | 25,905 |
| $ | 21,516 |
|
| Fair value of client securities pledged for: | | |
Fulfillment of requirements with the Options Clearing Corporation (1)
| 2,280 |
| 1,519 |
|
| Fulfillment of client short sales | 2,011 |
| 2,048 |
|
Securities lending to other broker-dealers
| 784 |
| 1,626 |
|
| Total collateral pledged | $ | 5,075 |
| $ | 5,193 |
|
Note: Excludes amounts available and pledged
to fulfill the Company’s proprietary short sales, which resultedfor securities lending from
facilitating clients’ dividend reinvestment elections, was $216 million and $130 million at December 31, 2014 and 2013, respectively. The Company may also pledgefully-paid client
securities to fulfill client margin requirements for open option contracts established with the OCC.securities. The fair value of
thesefully-paid client securities available and pledged
securities to the OCC was
$1.3 billion and $1.3 billion at$78 million as of December 31,
20142017 and
2013, respectively.Commitments to extend credit: Schwab Bank enters into commitments to extend credit to banking clients. Schwab Bank also has commitments to purchase certain First Mortgage loans and HELOCs under the Program with Quicken Loans, which began in 2012. The credit risk associated with these commitments varies depending on the creditworthiness$58 million as of the client and the value of any collateral expected to be held. Collateral requirements vary by type of loan. At December 31, 2014 and 2013, the Company had commitments to purchase First Mortgage loans of $226 million and $208 million, respectively. Schwab Bank also has commitments to extend credit related to its clients’ unused HELOCs, personal loans secured by securities, and other lines of credit, which totaled $6.7 billion and $5.7 billion at December 31, 2014 and 2013, respectively. See also note “6 – Loans to Banking Clients and Related Allowance for Loan Losses.”
Financial Guarantees: See note “14 – Commitments and Contingencies.”
Concentration Risk
The Company has exposure to concentration risk when holding large positions of financial instruments collateralized by assets with similar economic characteristics or in securities of a single issuer or industry.
The fair value of the Company’s investments in mortgage-backed securities totaled $53.8 billion at December 31, 2014. Of these, $52.5 billion were issued by U.S. agencies and $1.3 billion were issued by private entities (non-agency securities). The fair value of the Company’s investments in mortgage-backed securities totaled $48.9 billion at December 31, 2013. Of these, $47.1 billion were issued by U.S. agencies and $1.8 billion were non-agency securities. These U.S. agency and non-agency securities are included in securities available for sale and securities held to maturity.
The fair value of the Company’s investments in corporate debt securities and commercial paper totaled $8.1 billion and $9.2 billion at December 31, 2014 and 2013, respectively, with the majority issued by institutions in the financial services industry. These securities are included in securities available for sale, cash and cash equivalents, and other securities owned.
The fair value of the Company’s investments in asset-backed securities totaled $19.4 billion and $15.2 billion at December 31, 2014 and 2013, respectively, with the majority serviced by a single servicer.
The Company’s loans to banking clients include $7.4 billion and $7.3 billion of adjustable rate First Mortgages at December 31, 2014 and 2013, respectively. At December 31, 2014, approximately 40% of these mortgages consisted of loans with interest-only payment terms. At December 31, 2014, the interest rates on approximately 65% of these interest-only loans are not scheduled to reset for three or more years. For additional detail on concentrations in loans to banking clients, see note “6 – Loans to Banking Clients and Related Allowance for Loan Losses.”
The Company also has exposure to concentration risk from its margin and securities lending activities collateralized by securities of a single issuer or industry. This concentration risk is mitigated by collateral arrangements that require the fair value of such collateral exceeds the amounts loaned, as described above.
16.2016.
| |
(1) | Client securities pledged to fulfill client margin requirements for open option contracts established with the Options Clearing Corporation. |
15. Fair Values of Assets and Liabilities
For a description of the fair value hierarchy and
the Company’sSchwab’s fair value methodologies, including the use of independent third-party pricing services, see
note “2 – Summary of Significant Accounting Policies.” The CompanyNote 2. We did not transfer any assets or liabilities between Level 1, Level 2, or Level 3 during
20142017 or
2013.2016. In addition, the Company did not adjust prices received from the primary independent third-party pricing service at December 31,
20142017 or
2013.2016.
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
Financial Instruments Recorded
Assets and Liabilities Measured at Fair Value
on a Recurring Basis
The following tables present the fair value hierarchy for assets measured at fair
value.value on a recurring basis. Liabilities recorded at fair value were not material, and therefore are not included in the following tables:
| | | | | | | | | | | | | | | | | | | |
| Quoted Prices | | | | | | | | | | | | | | | |
| in Active Markets | | Significant | | | Significant | | | | | | |
| for Identical | | Other Observable | | | Unobservable | | | | | | |
| Assets | | Inputs | | | Inputs | | | | Balance at | |
December 31, 2014 | (Level 1) | | (Level 2) | | | (Level 3) | | | | Fair Value | |
Cash equivalents: | | | | | | | | | | | | | | | | | | | |
Money market funds | | $ | 2,142 | | | | $ | - | | | | $ | - | | | | $ | 2,142 | |
Commercial paper | | | - | | | | | 32 | | | | | - | | | | | 32 | |
Total cash equivalents | | | 2,142 | | | | | 32 | | | | | - | | | | | 2,174 | |
Investments segregated and on deposit for | | | | | | | | | | | | | | | | | | | |
regulatory purposes: | | | | | | | | | | | | | | | | | | | |
Certificates of deposit | | | - | | | | | 4,125 | | | | | - | | | | | 4,125 | |
U.S. Government securities | | | - | | | | | 2,186 | | | | | - | | | | | 2,186 | |
Total investments segregated and on deposit for | | | | | | | | | | | | | | | | | | | |
regulatory purposes | | | - | | | | | 6,311 | | | | | - | | | | | 6,311 | |
Other securities owned: | | | | | | | | | | | | | | | | | | | |
Schwab Funds® money market funds | | | 224 | | | | | - | | | | | - | | | | | 224 | |
Equity and bond mutual funds | | | 215 | | | | | - | | | | | - | | | | | 215 | |
State and municipal debt obligations | | | - | | | | | 51 | | | | | - | | | | | 51 | |
Equity, U.S. Government and corporate debt, and | | | | | | | | | | | | | | | | | | | |
other securities | | | 2 | | | | | 24 | | | | | - | | | | | 26 | |
Total other securities owned | | | 441 | | | | | 75 | | | | | - | | | | | 516 | |
Securities available for sale: | | | | | | | | | | | | | | | | | | | |
Asset-backed securities | | | - | | | | | 19,366 | | | | | - | | | | | 19,366 | |
U.S. agency mortgage-backed securities | | | - | | | | | 18,717 | | | | | - | | | | | 18,717 | |
Corporate debt securities | | | - | | | | | 8,045 | | | | | - | | | | | 8,045 | |
U.S. agency notes | | | - | | | | | 3,795 | | | | | - | | | | | 3,795 | |
Treasury securities | | | - | | | | | 2,994 | | | | | - | | | | | 2,994 | |
Certificates of deposit | | | - | | | | | 1,534 | | | | | - | | | | | 1,534 | |
Non-agency commercial mortgage-backed securities | | | - | | | | | 317 | | | | | - | | | | | 317 | |
Other securities | | | - | | | | | 15 | | | | | - | | | | | 15 | |
Total securities available for sale | | | - | | | | | 54,783 | | | | | - | | | | | 54,783 | |
Total | | $ | 2,583 | | | | $ | 61,201 | | | | $ | - | | | | $ | 63,784 | |
- 78 -
|
| | | | | | | | | | | | |
| December 31, 2017 | Quoted Prices
in Active Markets
for Identical
Assets
(Level 1) | Significant
Other Observable Inputs
(Level 2) | Significant Unobservable Inputs
(Level 3) | Balance at
Fair Value |
| Cash equivalents: | | | | |
| Money market funds | $ | 2,727 |
| $ | — |
| $ | — |
| $ | 2,727 |
|
| Total cash equivalents | 2,727 |
| — |
| — |
| 2,727 |
|
| Investments segregated and on deposit for regulatory purposes: | |
| |
| |
| |
| Certificates of deposit | — |
| 2,198 |
| — |
| 2,198 |
|
| U.S. Government securities | — |
| 3,658 |
| — |
| 3,658 |
|
| Total investments segregated and on deposit for regulatory purposes | — |
| 5,856 |
| — |
| 5,856 |
|
| Other securities owned: | |
| |
| |
| |
| Equity and bond mutual funds | 318 |
| — |
| — |
| 318 |
|
Schwab Funds® money market funds | 135 |
| — |
| — |
| 135 |
|
| State and municipal debt obligations | — |
| 52 |
| — |
| 52 |
|
| Equity, U.S. Government and corporate debt, and other securities | 2 |
| 32 |
| — |
| 34 |
|
| Total other securities owned | 455 |
| 84 |
| — |
| 539 |
|
| Available for sale securities: | |
| |
| |
| |
| U.S. agency mortgage-backed securities | — |
| 20,929 |
| — |
| 20,929 |
|
| U.S. Treasury securities | — |
| 9,500 |
| — |
| 9,500 |
|
| Asset-backed securities | — |
| 9,047 |
| — |
| 9,047 |
|
| Corporate debt securities | — |
| 6,169 |
| — |
| 6,169 |
|
| Certificates of deposit | — |
| 2,041 |
| — |
| 2,041 |
|
| U.S. agency notes | — |
| 1,906 |
| — |
| 1,906 |
|
| Commercial paper | — |
| 313 |
| — |
| 313 |
|
| Foreign government agency securities | — |
| 50 |
| — |
| 50 |
|
| Non-agency commercial mortgage-backed securities | — |
| 40 |
| — |
| 40 |
|
| Total available for sale securities | — |
| 49,995 |
| — |
| 49,995 |
|
| Total | $ | 3,182 |
| $ | 55,935 |
| $ | — |
| $ | 59,117 |
|
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
| | | | | | | | | | | | | | | | | | | |
| Quoted Prices | | | | | | | | | | | | | | | |
| in Active Markets | | Significant | | | | Significant | | | | | |
| for Identical | | Other Observable | | | | Unobservable | | | | | |
| Assets | | Inputs | | | | Inputs | | | Balance at | |
December 31, 2013 | (Level 1) | | (Level 2) | | | | (Level 3) | | | Fair Value | |
Cash equivalents: | | | | | | | | | | | | | | | | | | | |
Money market funds | | $ | 1,141 | | | | $ | - | | | | $ | - | | | | $ | 1,141 | |
Commercial paper | | | - | | | | | 22 | | | | | - | | | | | 22 | |
Total cash equivalents | | | 1,141 | | | | | 22 | | | | | - | | | | | 1,163 | |
Investments segregated and on deposit for | | | | | | | | | | | | | | | | | | | |
regulatory purposes: | | | | | | | | | | | | | | | | | | | |
Certificates of deposit | | | - | | | | | 2,737 | | | | | - | | | | | 2,737 | |
U.S. Government securities | | | - | | | | | 2,539 | | | | | - | | | | | 2,539 | |
Total investments segregated and on deposit for | | | | | | | | | | | | | | | | | | | |
regulatory purposes | | | - | | | | | 5,276 | | | | | - | | | | | 5,276 | |
Other securities owned: | | | | | | | | | | | | | | | | | | | |
Schwab Funds® money market funds | | | 261 | | | | | - | | | | | - | | | | | 261 | |
Equity and bond mutual funds | | | 208 | | | | | - | | | | | - | | | | | 208 | |
State and municipal debt obligations | | | - | | | | | 32 | | | | | - | | | | | 32 | |
Equity, U.S. Government and corporate debt, and | | | | | | | | | | | | | | | | | | | |
other securities | | | 1 | | | | | 15 | | | | | - | | | | | 16 | |
Total other securities owned | | | 470 | | | | | 47 | | | | | - | | | | | 517 | |
Securities available for sale: | | | | | | | | | | | | | | | | | | | |
U.S. agency mortgage-backed securities | | | - | | | | | 18,645 | | | | | - | | | | | 18,645 | |
Asset-backed securities | | | - | | | | | 15,206 | | | | | - | | | | | 15,206 | |
Corporate debt securities | | | - | | | | | 9,007 | | | | | - | | | | | 9,007 | |
U.S. agency notes | | | - | | | | | 4,136 | | | | | - | | | | | 4,136 | |
Certificates of deposit | | | - | | | | | 3,652 | | | | | - | | | | | 3,652 | |
Non-agency residential mortgage-backed securities | | | - | | | | | 593 | | | | | - | | | | | 593 | |
Non-agency commercial mortgage-backed securities | | | - | | | | | 279 | | | | | - | | | | | 279 | |
Other securities | | | - | | | | | 100 | | | | | - | | | | | 100 | |
Total securities available for sale | | | - | | | | | 51,618 | | | | | - | | | | | 51,618 | |
Total | | $ | 1,611 | | | | $ | 56,963 | | | | $ | - | | | | $ | 58,574 | |
|
| | | | | | | | | | | | |
| December 31, 2016 | Quoted Prices
in Active Markets
for Identical
Assets
(Level 1) | Significant
Other Observable Inputs
(Level 2) | Significant Unobservable Inputs
(Level 3) | Balance at
Fair Value |
| Cash equivalents: | | | | |
| Money market funds | $ | 1,514 |
| $ | — |
| $ | — |
| $ | 1,514 |
|
| Total cash equivalents | 1,514 |
| — |
| — |
| 1,514 |
|
| Investments segregated and on deposit for regulatory purposes: | | | | |
| Certificates of deposit | — |
| 2,525 |
| — |
| 2,525 |
|
| U.S. Government securities | — |
| 6,111 |
| — |
| 6,111 |
|
| Total investments segregated and on deposit for regulatory purposes | — |
| 8,636 |
| — |
| 8,636 |
|
| Other securities owned: | |
| | | |
| Equity and bond mutual funds | 272 |
| — |
| — |
| 272 |
|
Schwab Funds® money market funds | 108 |
| — |
| — |
| 108 |
|
| State and municipal debt obligations | — |
| 41 |
| — |
| 41 |
|
| Equity, U.S. Government and corporate debt, and other securities | 2 |
| 26 |
| — |
| 28 |
|
| Total other securities owned | 382 |
| 67 |
| — |
| 449 |
|
| Available for sale securities: | | | | |
| U.S. agency mortgage-backed securities | — |
| 33,195 |
| — |
| 33,195 |
|
| U.S. Treasury securities | — |
| 8,623 |
| — |
| 8,623 |
|
| Asset-backed securities | — |
| 20,335 |
| — |
| 20,335 |
|
| Corporate debt securities | — |
| 9,852 |
| — |
| 9,852 |
|
| Certificates of deposit | — |
| 2,071 |
| — |
| 2,071 |
|
| U.S. agency notes | — |
| 1,907 |
| — |
| 1,907 |
|
| Commercial paper | — |
| 214 |
| — |
| 214 |
|
| U.S. state and municipal securities | — |
| 1,123 |
| — |
| 1,123 |
|
| Non-agency commercial mortgage-backed securities | — |
| 45 |
| — |
| 45 |
|
| Total available for sale securities | — |
| 77,365 |
| — |
| 77,365 |
|
| Total | $ | 1,896 |
| $ | 86,068 |
| $ | — |
| $ | 87,964 |
|
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
Fair Value of Other Financial Instruments
Not Recorded at Fair Value
Descriptions of the valuation methodologies and assumptions used to estimate the fair value of
other financial instruments
not recorded at fair value are also described in
note “2 – Summary of Significant Accounting Policies.”Note 2. There were no significant changes in these methodologies or assumptions during
2014.2017. The following tables present the fair value hierarchy for
other financial
instruments not recorded at fair value:instruments: | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Quoted Prices | | | | | | | | |
| | | | | in Active Markets | | Significant | | Significant | | | | |
| | | for Identical | | Other Observable | | Unobservable | | | |
| | Carrying | | Assets | | Inputs | | Inputs | | Balance at | |
December 31, 2014 | | Amount | | (Level 1) | | (Level 2) | | (Level 3) | | Fair Value | |
Assets: | | | | | | | | | | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 9,189 | | | $ | - | | | | $ | 9,189 | | | | $ | - | | | $ | 9,189 | |
Cash and investments segregated and | | | | | | | | | | | | | | | | | | | | | | |
on deposit for regulatory purposes | | | 14,466 | | | | - | | | | | 14,466 | | | | | - | | | | 14,466 | |
Receivables from brokers, dealers, and | | | | | | | | | | | | | | | | | | | | | | |
clearing organizations | | | 469 | | | | - | | | | | 469 | | | | | - | | | | 469 | |
Receivables from brokerage clients – net | | | 15,666 | | | | - | | | | | 15,666 | | | | | - | | | | 15,666 | |
Securities held to maturity: | | | | | | | | | | | | | | | | | | | | | | |
U.S. agency mortgage-backed securities | | | 33,388 | | | | - | | | | | 33,745 | | | | | - | | | | 33,745 | |
Non-agency commercial mortgage-backed | | | | | | | | | | | | | | | | | | | | | | |
securities | | | 1,001 | | | | - | | | | | 998 | | | | | - | | | | 998 | |
Total securities held to maturity | | | 34,389 | | | | - | | | | | 34,743 | | | | | - | | | | 34,743 | |
Loans to banking clients: (1) | | | | | | | | | | | | | | | | | | | | | | |
Residential real estate mortgages | | | 8,127 | | | | - | | | | | 8,158 | | | | | - | | | | 8,158 | |
Home equity loans and lines of credit | | | 2,955 | | | | - | | | | | 3,026 | | | | | - | | | | 3,026 | |
Personal loans secured by securities | | | 2,320 | | | | - | | | | | 2,320 | | | | | - | | | | 2,320 | |
Other | | | 39 | | | | - | | | | | 38 | | | | | - | | | | 38 | |
Total loans to banking clients | | | 13,441 | | | | - | | | | | 13,542 | | | | | - | | | | 13,542 | |
Other assets | | | 76 | | | | - | | | | | 76 | | | | | - | | | | 76 | |
Total | | $ | 87,696 | | | $ | - | | | | $ | 88,151 | | | | $ | - | | | $ | 88,151 | |
Liabilities: | | | | | | | | | | | | | | | | | | | | | | |
Deposits from banking clients | | $ | 102,815 | | | $ | - | | | | $ | 102,815 | | | | $ | - | | | $ | 102,815 | |
Payables to brokers, dealers, and clearing | | | | | | | | | | | | | | | | | | | | | | |
organizations | | | 2,004 | | | | - | | | | | 2,004 | | | | | - | | | | 2,004 | |
Payables to brokerage clients | | | 34,305 | | | | - | | | | | 34,305 | | | | | - | | | | 34,305 | |
Accrued expenses and other liabilities | | | 687 | | | | - | | | | | 687 | | | | | - | | | | 687 | |
Long-term debt | | | 1,899 | | | | - | | | | | 2,010 | | | | | - | | | | 2,010 | |
Total | | $ | 141,710 | | | $ | - | | | | $ | 141,821 | | | | $ | - | | | $ | 141,821 | |
(1)
| The carrying value of loans to banking clients excludes the allowance for loan losses of $42 million at December 31, 2014.
|
|
| | | | | | | | | | | | | | | |
| December 31, 2017 | Carrying
Amount | Quoted Prices in Active Markets
for Identical
Assets
(Level 1) | Significant
Other Observable Inputs
(Level 2) | Significant Unobservable Inputs
(Level 3) | Balance at
Fair Value |
| Assets: | | | | | |
| Cash and cash equivalents | $ | 11,490 |
| $ | — |
| $ | 11,490 |
| $ | — |
| $ | 11,490 |
|
| Cash and investments segregated and on deposit for regulatory purposes | 9,277 |
| — |
| 9,277 |
| — |
| 9,277 |
|
| Receivables from brokers, dealers, and clearing organizations | 649 |
| — |
| 649 |
| — |
| 649 |
|
| Receivables from brokerage clients — net | 20,568 |
| — |
| 20,568 |
| — |
| 20,568 |
|
| Held to maturity securities: | | | | | |
| U.S. agency mortgage-backed securities | 101,197 |
| — |
| 100,453 |
| — |
| 100,453 |
|
| Asset-backed securities | 12,937 |
| — |
| 13,062 |
| — |
| 13,062 |
|
| Corporate debt securities | 4,078 |
| — |
| 4,086 |
| — |
| 4,086 |
|
| U.S. state and municipal securities | 1,247 |
| — |
| 1,304 |
| — |
| 1,304 |
|
| Non-agency commercial mortgage-backed securities | 994 |
| — |
| 999 |
| — |
| 999 |
|
| U.S. Treasury securities | 223 |
| — |
| 220 |
| — |
| 220 |
|
| Certificates of deposit | 200 |
| — |
| 200 |
| — |
| 200 |
|
| Foreign government agency securities | 50 |
| — |
| 49 |
| — |
| 49 |
|
| Total held to maturity securities | 120,926 |
| — |
| 120,373 |
| — |
| 120,373 |
|
Bank loans — net: | | | | | |
| First Mortgages | 10,000 |
| — |
| 9,917 |
| — |
| 9,917 |
|
| HELOCs | 1,935 |
| — |
| 2,025 |
| — |
| 2,025 |
|
| Pledged asset lines | 4,369 |
| — |
| 4,369 |
| — |
| 4,369 |
|
| Other | 174 |
| — |
| 174 |
| — |
| 174 |
|
Total bank loans — net | 16,478 |
| — |
| 16,485 |
| — |
| 16,485 |
|
| Other assets | 781 |
| — |
| 781 |
| — |
| 781 |
|
| Total | $ | 180,169 |
| $ | — |
| $ | 179,623 |
| $ | — |
| $ | 179,623 |
|
| Liabilities: | | | | | |
| Bank deposits | $ | 169,656 |
| $ | — |
| $ | 169,656 |
| $ | — |
| $ | 169,656 |
|
| Payables to brokers, dealers, and clearing organizations | 1,287 |
| — |
| 1,287 |
| — |
| 1,287 |
|
| Payables to brokerage clients | 31,243 |
| — |
| 31,243 |
| — |
| 31,243 |
|
| Accrued expenses and other liabilities | 1,463 |
| — |
| 1,463 |
| — |
| 1,463 |
|
| Short-term borrowings | 15,000 |
| — |
| 15,000 |
| — |
| 15,000 |
|
| Long-term debt | 4,753 |
| — |
| 4,811 |
| — |
| 4,811 |
|
| Total | $ | 223,402 |
| $ | — |
| $ | 223,460 |
| $ | — |
| $ | 223,460 |
|
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
| | | | | | | | | | | | | | | | | | | | | |
| | | | | Quoted Prices | | | | | | | |
| | | | | in Active Markets | | Significant | | Significant | | | |
| | | for Identical | | Other Observable | | Unobservable | | |
| | Carrying | | Assets | | Inputs | | Inputs | | Balance at |
December 31, 2013 | | Amount | | (Level 1) | | (Level 2) | | (Level 3) | | Fair Value |
Assets: | | | | | | | | | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 6,565 | | | $ | - | | | | $ | 6,565 | | | | $ | - | | | $ | 6,565 |
Cash and investments segregated and | | | | | | | | | | | | | | | | | | | | | |
on deposit for regulatory purposes | | | 18,273 | | | | - | | | | | 18,273 | | | | | - | | | | 18,273 |
Receivables from brokers, dealers, and | | | | | | | | | | | | | | | | | | | | | |
clearing organizations | | | 509 | | | | - | | | | | 509 | | | | | - | | | | 509 |
Receivables from brokerage clients – net | | | 13,949 | | | | - | | | | | 13,949 | | | | | - | | | | 13,949 |
Securities held to maturity: | | | | | | | | | | | | | | | | | | | | | |
U.S. agency mortgage-backed securities | | | 29,260 | | | | - | | | | | 28,500 | | | | | - | | | | 28,500 |
Non-agency commercial mortgage-backed | | | | | | | | | | | | | | | | | | | | | |
securities | | | 958 | | | | - | | | | | 890 | | | | | - | | | | 890 |
Other securities | | | 100 | | | | - | | | | | 100 | | | | | - | | | | 100 |
Total securities held to maturity | | | 30,318 | | | | - | | | | | 29,490 | | | | | - | | | | 29,490 |
Loans to banking clients: (1) | | | | | | | | | | | | | | | | | | | | | |
Residential real estate mortgages | | | 8,006 | | | | - | | | | | 7,930 | | | | | - | | | | 7,930 |
Home equity loans and lines of credit | | | 3,041 | | | | - | | | | | 3,043 | | | | | - | | | | 3,043 |
Personal loans secured by securities | | | 1,384 | | | | - | | | | | 1,384 | | | | | - | | | | 1,384 |
Other | | | 36 | | | | - | | | | | 35 | | | | | - | | | | 35 |
Total loans to banking clients | | | 12,467 | | | | - | | | | | 12,392 | | | | | - | | | | 12,392 |
Other assets | | | 64 | | | | - | | | | | 64 | | | | | - | | | | 64 |
Total | | $ | 82,145 | | | $ | - | | | | $ | 81,242 | | | | $ | - | | | $ | 81,242 |
Liabilities: | | | | | | | | | | | | | | | | | | | | | |
Deposits from banking clients | | $ | 92,972 | | | $ | - | | | | $ | 92,972 | | | | $ | - | | | $ | 92,972 |
Payables to brokers, dealers, and clearing | | | | | | | | | | | | | | | | | | | | | |
organizations | | | 1,467 | | | | - | | | | | 1,467 | | | | | - | | | | 1,467 |
Payables to brokerage clients | | | 35,333 | | | | - | | | | | 35,333 | | | | | - | | | | 35,333 |
Accrued expenses and other liabilities | | | 680 | | | | - | | | | | 680 | | | | | - | | | | 680 |
Long-term debt | | | 1,903 | | | | - | | | | | 1,989 | | | | | - | | | | 1,989 |
Total | | $ | 132,355 | | | $ | - | | | | $ | 132,441 | | | | $ | - | | | $ | 132,441 |
(1)
| The carrying value of loans to banking clients excludes the allowance for loan losses of $48 million at December 31, 2013.
|
17.
|
| | | | | | | | | | | | | | | |
| December 31, 2016 | Carrying
Amount | Quoted Prices in Active Markets
for Identical
Assets
(Level 1) | Significant
Other Observable Inputs
(Level 2) | Significant Unobservable Inputs
(Level 3) | Balance at
Fair Value |
| Assets: | | | | | |
| Cash and cash equivalents | $ | 9,314 |
| $ | — |
| $ | 9,314 |
| $ | — |
| $ | 9,314 |
|
| Cash and investments segregated and on deposit for regulatory purposes | 13,533 |
| — |
| 13,533 |
| — |
| 13,533 |
|
| Receivables from brokers, dealers, and clearing organizations | 728 |
| — |
| 728 |
| — |
| 728 |
|
| Receivables from brokerage clients — net | 17,151 |
| — |
| 17,151 |
| — |
| 17,151 |
|
| Held to maturity securities: | | | | | |
| U.S. agency mortgage-backed securities | 72,439 |
| — |
| 71,677 |
| — |
| 71,677 |
|
| Asset-backed securities | 941 |
| — |
| 941 |
| — |
| 941 |
|
| Corporate debt securities | 436 |
| — |
| 436 |
| — |
| 436 |
|
| U.S. state and municipal securities | 68 |
| — |
| 68 |
| — |
| 68 |
|
| Non-agency commercial mortgage-backed securities | 997 |
| — |
| 1,004 |
| — |
| 1,004 |
|
| U.S. Treasury securities | 223 |
| — |
| 219 |
| — |
| 219 |
|
| Commercial paper | 99 |
| — |
| 99 |
| — |
| 99 |
|
| Total held to maturity securities | 75,203 |
| — |
| 74,444 |
| — |
| 74,444 |
|
Bank loans — net: | | | | | |
| First Mortgages | 9,117 |
| — |
| 9,064 |
| — |
| 9,064 |
|
| HELOCs | 2,342 |
| — |
| 2,458 |
| — |
| 2,458 |
|
| Pledged asset lines | 3,851 |
| — |
| 3,851 |
| — |
| 3,851 |
|
| Other | 93 |
| — |
| 94 |
| — |
| 94 |
|
Total bank loans — net | 15,403 |
| — |
| 15,467 |
| — |
| 15,467 |
|
| Other assets | 328 |
| — |
| 328 |
| — |
| 328 |
|
| Total | $ | 131,660 |
| $ | — |
| $ | 130,965 |
| $ | — |
| $ | 130,965 |
|
| Liabilities: | | | | | |
| Bank deposits | $ | 163,454 |
| $ | — |
| $ | 163,454 |
| $ | — |
| $ | 163,454 |
|
| Payables to brokers, dealers, and clearing organizations | 2,407 |
| — |
| 2,407 |
| — |
| 2,407 |
|
| Payables to brokerage clients | 35,894 |
| — |
| 35,894 |
| — |
| 35,894 |
|
| Accrued expenses and other liabilities | 1,169 |
| — |
| 1,169 |
| — |
| 1,169 |
|
| Long-term debt | 2,876 |
| — |
| 2,941 |
| — |
| 2,941 |
|
| Total | $ | 205,800 |
| $ | — |
| $ | 205,865 |
| $ | — |
| $ | 205,865 |
|
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
16. Stockholders’ Equity
The Company
CSC did not issue any shares of common stock during
2014, 2013,2017, 2016, or
2012, respectively.The Company2015.
CSC was authorized to issue 9,940,000 shares of preferred stock, $0.01 par value, at December 31,
20142017 and
2013.2016. The
Company’sfollowing is a summary of CSC’s non-cumulative perpetual preferred stock
issued and outstanding
is as
follows:of such dates: | | | | | | | | | | | | | | | | | | | | | | | | | | |
December 31, | 2014 | | | 2013 |
| Shares | | | | | | | | | | | Shares | | | | | | | | |
| Issued and | | Liquidation | | | | | | | | | Issued and | | Liquidation | | | | | | |
| Outstanding | | Preference | | Liquidation | | Carrying | | | Outstanding | | Preference | | Liquidation | | Carrying |
| (In thousands) | | Per Share | | Preference | | Value | | | (In thousands) | | Per Share | | Preference | | Value |
Series A | 400 | | | | $ | 1,000 | | $ | 400 | | $ | 395 | | | 400 | | | | $ | 1,000 | | $ | 400 | | $ | 395 |
Series B | 485 | | | | $ | 1,000 | | | 485 | | | 477 | | | 485 | | | | $ | 1,000 | | | 485 | | | 474 |
Total Preferred Stock | 885 | | | | | | | $ | 885 | | $ | 872 | | | 885 | | | | | | | $ | 885 | | $ | 869 |
- 81 -
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Dividend Rate in Effect at December 31, 2017 | | | Date at Which Dividend Rate Becomes Floating | | Floating Annual Rate of Three-month LIBOR plus: |
| | Shares Issued and Outstanding (In thousands) at December 31,(1) | Liquidation Preference Per Share | Carrying Value at December 31, | | | Earliest Redemption Date |
| | 2017 | | 2016 | | 2017 | | 2016 | Issue Date | |
| Fixed-rate: | | | | | | | | | | | | | | | |
Series B (2) | — |
| | 485 |
| | 1,000 |
| $ | — |
| | $ | 482 |
| 06/06/12 | — |
| | — |
| N/A | | N/A |
|
| Series C | 600 |
| | 600 |
| | 1,000 |
| 585 |
| | 585 |
| 08/03/15 | 6.000 | % | | 12/01/20 |
| N/A | | N/A |
|
| Series D | 750 |
| | 750 |
| | 1,000 |
| 728 |
| | 728 |
| 03/07/16 | 5.950 | % | | 06/01/21 |
| N/A | | N/A |
|
| Fixed-to-floating-rate: | | | | | | | | | | | | | | | |
| Series A | 400 |
| | 400 |
| | 1,000 |
| 397 |
| | 397 |
| 01/26/12 | 7.000 | % | | 02/01/22 |
| 02/01/22 | | 4.820 | % |
| Series E | 6 |
| | 6 |
| | 100,000 |
| 591 |
| | 591 |
| 10/31/16 | 4.625 | % | | 03/01/22 |
| 03/01/22 | | 3.315 | % |
| Series F | 5 |
| | — |
| | 100,000 |
| 492 |
| | — |
| 10/31/17 | 5.000 | % | | 12/01/27 |
| 12/01/27 | | 2.575 | % |
| Total Preferred Stock | 1,761 |
| | 2,241 |
| |
|
| $ | 2,793 |
| | $ | 2,783 |
| | | | | | | |
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
The(1) Represented by depositary shares, except for Series A
(2) On December 1, 2017, CSC redeemed all of the outstanding shares of its 6.00% Non-Cumulative Preferred Stock, has noSeries B at their stated maturityredemption value.
Dividends on CSC’s preferred stock are not cumulative and haswill only be paid on a fixedseries of preferred stock for a dividend rate of 7.000% until February 2022 and a floating rate equal to three-month LIBOR plus 4.820% thereafter. During the fixed rate period dividends, if declared will be payable semi-annually in arrears. During the floating rate period, dividends, if declared, will be payable quarterly in arrears. Dividends are not cumulative.by CSC’s Board of Directors. Under the terms of the Series A Preferred Stock, the Company’seach series of preferred stock, CSC’s ability to pay dividends on, make distributions with respect to, or to repurchase, redeem or acquire its common stock or any preferred stock ranking on parity with or junior to the Series A Preferred Stock,series of preferred stock, is subject to restrictions in the event that the CompanyCSC does not declare and either pay or set aside a sum sufficient for payment of dividends on the Series A Preferred Stockseries of preferred stock for the immediately preceding dividend period. The Series A Preferred Stock is redeemable
Dividends on fixed-rate preferred stock are payable quarterly. Dividends on fixed-to-floating-rate preferred stock are payable semiannually while at the Company’sa fixed rate, and will become payable quarterly after converting to a floating rate.
Redemption Rights
Each series of CSC’s stock may be redeemed at CSC’s option
in whole or in part, on any dividend payment date on or after
February 1, 2022 or, in whole but not in part, within 90 daysthe earliest redemption date for that series. All outstanding preferred stock series may also be redeemed following a
regulatory capital“capital treatment event,
” as
defineddescribed in
its Certificate of Designations.The Series B Preferred Stock has no stated maturity and has a fixed dividend rate of 6.00%. Dividends, if declared, will be payable quarterly in arrears. Dividends are not cumulative. Under the terms of the Series B Preferred Stock, the Company’s ability to pay dividends on, make distributions with respect to, or to repurchase, redeem or acquire its common stock or anyeach series. Any redemption of CSC’s preferred stock ranking on parity with or junior to the Series B Preferred Stock, is subject to restrictionsapproval from the Federal Reserve.
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in
the event that the Company does not declare and either payMillions, Except Per Share Data, Option Price Amounts, Ratios, or
set aside a sum sufficient for payment of dividends on the Series B Preferred Stock for the immediately preceding dividend period. The Series B Preferred Stock is redeemable at the Company’s option, in whole or in part, on any dividend payment date on or after September 1, 2017 or, in whole but not in part, within 90 days following a regulatory capital treatment event as
defined in its Certificate of Designations.18.Accumulated Other Comprehensive Income
Accumulated other comprehensive incomeNoted)
| |
| 17. | Accumulated Other Comprehensive Income |
AOCI represents cumulative gains and losses that are not reflected in earnings. The components of other comprehensive income (loss) are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Year Ended December 31, | 2014 | | 2013 | | 2012 |
| Before | | Tax | | Net of | | Before | | Tax | | Net of | | Before | | Tax | | Net of |
| tax | | effect | | tax | | tax | | effect | | tax | | tax | | effect | | tax |
Change in net unrealized gain on | | | | | | | | | | | | | | | | | | | | | | | | | | |
securities available for sale: | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net unrealized gain (loss) | $ | 255 | | $ | (95) | | $ | 160 | | $ | (468) | | $ | 176 | | $ | (292) | | $ | 470 | | $ | (177) | | $ | 293 |
Reclassification of impairment charges | | | | | | | | | | | | | | | | | | | | | | | | | | |
included in net impairment losses on | | | | | | | | | | | | | | | | | | | | | | | | | | |
securities | | 1 | | | (1) | | | - | | | 10 | | | (4) | | | 6 | | | 32 | | | (12) | | | 20 |
Other reclassifications included in | | | | | | | | | | | | | | | | | | | | | | | | | | |
other revenue | | (7) | | | 3 | | | (4) | | | (7) | | | 3 | | | (4) | | | (38) | | | 14 | | | (24) |
Change in net unrealized gain on | | | | | | | | | | | | | | | | �� | | | | | | | | | | |
securities available for sale | | 249 | | | (93) | | | 156 | | | (465) | | | 175 | | | (290) | | | 464 | | | (175) | | | 289 |
Other | | - | | | - | | | - | | | 1 | | | - | | | 1 | | | 1 | | | - | | | 1 |
Other comprehensive income (loss) | $ | 249 | | $ | (93) | | $ | 156 | | $ | (464) | | $ | 175 | | $ | (289) | | $ | 465 | | $ | (175) | | $ | 290 |
- 82 -
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | 2017 | | 2016 | | 2015 |
| | Before
tax | | Tax
effect | | Net of
tax | | Before
tax | | Tax
effect | | Net of
tax | | Before
tax | | Tax
effect | | Net of
tax |
| Change in net unrealized gain (loss) on available for sale securities: | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
| Net unrealized gain (loss) | $ | 13 |
| | $ | (7 | ) | | $ | 6 |
| | $ | (44 | ) | | $ | 16 |
| | $ | (28 | ) | | $ | (477 | ) | | $ | 178 |
| | $ | (299 | ) |
Reclassification of net unrealized loss on securities transferred to held to maturity (1) | 227 |
| | (85 | ) | | 142 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Other reclassifications included in other revenue | (12 | ) | | 4 |
| | (8 | ) | | (4 | ) | | 2 |
| | (2 | ) | | — |
| | — |
| | — |
|
| Change in net unrealized gain (loss) on held to maturity securities: |
|
| |
|
| | | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
Reclassification of net unrealized loss on securities transferred from available for sale (1) | (227 | ) | | 85 |
| | (142 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Amortization of amounts previously recorded upon transfer from available for sale | 31 |
| | (11 | ) | | 20 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Other | (11 | ) | | 4 |
| | (7 | ) | | 1 |
| | — |
| | 1 |
| | — |
| | — |
| | — |
|
| Other comprehensive income (loss) | $ | 21 |
| | $ | (10 | ) | | $ | 11 |
| | $ | (47 | ) | | $ | 18 |
| | $ | (29 | ) | | $ | (477 | ) | | $ | 178 |
| | $ | (299 | ) |
(1) See Note 5 for discussion of the transfer of securities from the AFS category to the HTM category during the first quarter of 2017.
AOCI balances are as follows:
|
| | | |
| | Total
Accumulated Other
Comprehensive Income |
| Balance at December 31, 2014 | $ | 165 |
|
| Net unrealized gain (loss) on available for sale securities | (299 | ) |
| Balance at December 31, 2015 | $ | (134 | ) |
| Net unrealized gain (loss) on available for sale securities | (30 | ) |
| Other | $ | 1 |
|
| Balance at December 31, 2016 | $ | (163 | ) |
| Available for sale securities: | |
| Net unrealized gain (loss) | 6 |
|
| Reclassification of net unrealized loss on securities transferred to held to maturity | 142 |
|
| Other reclassifications included in other revenue | (8 | ) |
| Held to maturity securities: | |
| Reclassification of net unrealized loss on securities transferred from available for sale | (142 | ) |
| Amortization of amounts previously recorded upon transfer to held to maturity from available for sale | 20 |
|
| Other | (7 | ) |
| Balance at December 31, 2017 | $ | (152 | ) |
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
Accumulated other comprehensive income balances are as follows:
| | | | | | | | | | | | | | | | | | |
| Net unrealized | | | | | | | | | Total |
| gain on securities | | | | | | | | | accumulated other |
| available for sale | | | | Other | | | | comprehensive income |
Balance at December 31, 2011 | | $ | 10 | | | | | $ | (2) | | | | | | $ | 8 | | |
Other net changes | | | 289 | | | | | | 1 | | | | | | | 290 | | |
Balance at December 31, 2012 | | $ | 299 | | | | | $ | (1) | | | | | | $ | 298 | | |
Other net changes | | | (290) | | | | | | 1 | | | | | | | (289) | | |
Balance at December 31, 2013 | | $ | 9 | | | | | $ | - | | | | | | $ | 9 | | |
Other net changes | | | 156 | | | | | | - | | | | | | | 156 | | |
Balance at December 31, 2014 | | $ | 165 | | | | | $ | - | | | | | | $ | 165 | | |
19.Employee Incentive, Retirement, and Deferred Compensation Plans
The Company’s stock
| |
| 18. | Employee Incentive, Retirement, Deferred Compensation, and Career Achievement Plans |
Schwab’s share-based incentive plans provide for granting options
restricted stock units, and restricted stock
awardsunits to employees, officers, and directors. In addition,
the Company offerswe offer retirement and employee stock purchase plans to eligible employees and
sponsorssponsor deferred compensation plans for eligible officers and non-employee directors.
A summary of
the Company’s stock-basedshare-based compensation
expense and related income tax benefit is as follows:
| | | | | | | | | | | | |
Year Ended December 31, | | | 2014 | | | 2013 | | | 2012 |
Stock option expense | | $ | 44 | | | $ | 52 | | | $ | 57 | |
Restricted stock unit expense | | | 66 | | | | 60 | | | | 40 | |
Restricted stock award expense | | | - | | | | - | | | | 5 | |
Employee stock purchase plan expense | | | 5 | | | | 4 | | | | 3 | |
Total stock-based compensation expense | | $ | 115 | | | $ | 116 | | | $ | 105 | |
Income tax benefit on stock-based compensation | | $ | (43) | | | $ | (43) | | | $ | (39) | |
|
| | | | | | | | | | | |
| Year Ended December 31, | 2017 | | 2016 | | 2015 |
| Stock option expense | $ | 50 |
| | $ | 45 |
| | $ | 46 |
|
| Restricted stock unit expense | 94 |
| | 89 |
| | 83 |
|
| Employee stock purchase plan expense | 9 |
| | 7 |
| | 6 |
|
| Total share-based compensation expense | $ | 153 |
| | $ | 141 |
| | $ | 135 |
|
Income tax benefit on share-based compensation expense (1) | $ | (57 | ) | | $ | (53 | ) | | $ | (51 | ) |
(1) Excludes the 2017 income tax benefit of $87 million due to the adoption of ASU 2016-09, as disclosed in Note 2.
The Company issues shares for stock options and restricted stock
awardsunits from treasury stock. At December 31,
2014,2017, the Company was authorized to grant up to
5944 million common shares under its existing stock incentive plans. Additionally, at December 31,
2014,2017, the Company had
4137 million shares reserved for future issuance under its employee stock purchase plan.
As of December 31,
2014,2017, there was
$206$268 million of total unrecognized compensation cost
net of forfeitures, related to outstanding stock options
restricted stock awards, and restricted stock units, which is expected to be recognized through
20182021 with a remaining weighted-average service period of
2.8 years.1.9 years for stock options, 2.4 years for restricted stock units, and 0.3 years for performance stock units.
Options are granted for the purchase of shares of common stock at an exercise price not less than market value on the date of grant, and expire
within seven or ten years from the date of grant. Options generally vest annually over a
three-one- to
five-yearfour-year period from the date of grant.
Certain options were granted at an exercise price above the market value of common stock on the date of grant (i.e., premium-priced options).
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
The Company’s stockStock option activity is summarized below:
| | | | | | | | | | | | | | | | |
| | | | | | | | | | Weighted- | | | | |
| | | | | Weighted- | | Average | | | | |
| | | | | Average | | Remaining | | Aggregate | |
| Number | | Exercise Price | | Contractual | | Intrinsic | |
| of Options | | per Share | | Life (in years) | | Value | |
Outstanding at December 31, 2013 | | 46 | | | | $ | 16.74 | | | | | | | | | |
Granted | | 6 | | | | $ | 27.96 | | | | | | | | | |
Exercised | | (10) | | | | $ | 19.04 | | | | | | | | | |
Forfeited | | (1) | | | | $ | 16.66 | | | | | | | | | |
Expired | | - | | | | $ | 20.19 | | | | | | | | | |
Outstanding at December 31, 2014 | | 41 | | | | $ | 17.74 | | | | 7.02 | | | $ | 513 | |
Vested and expected to vest at December 31, 2014 | | 40 | | | | $ | 17.62 | | | | 6.96 | | | $ | 497 | |
Vested and exercisable at December 31, 2014 | | 24 | | | | $ | 15.76 | | | | 5.92 | | | $ | 342 | |
|
| | | | | | | | | | | | |
| | Number
of Options
(In millions) | | Weighted- Average Exercise Price
per Share | | Weighted- Average Remaining Contractual
Life (in years) | | Aggregate Intrinsic
Value |
| Outstanding at December 31, 2016 | 37 |
| | $ | 22.12 |
| | 6.50 | | $ | 649 |
|
| Granted | 4 |
| | 43.71 |
| | | | |
| Exercised | (9 | ) | | 18.20 |
| | | | |
| Forfeited | — |
| | 31.02 |
| | | | |
| Expired | — |
| | 24.82 |
| | | | |
| Outstanding at December 31, 2017 | 32 |
| | $ | 26.16 |
| | 6.38 | | $ | 814 |
|
| Vested and expected to vest at December 31, 2017 | 31 |
| | $ | 26.02 |
| | 6.35 | | $ | 811 |
|
| Vested and exercisable at December 31, 2017 | 20 |
| | $ | 20.82 |
| | 5.02 | | $ | 612 |
|
The aggregate intrinsic value in the table above represents the difference between CSC’s closing stock price and the exercise price of each in-the-money option on the last trading day of the period presented.
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
Information on stock options granted and exercised is presented below:
| | | | | | | | | | | | |
Year Ended December 31, | | | 2014 | | | 2013 | | | 2012 |
Weighted-average fair value of options granted per share | | $ | 7.82 | | | $ | 6.33 | | | $ | 4.07 | |
Cash received from options exercised | | $ | 189 | | | $ | 258 | | | $ | 35 | |
Tax benefit realized on options exercised | | $ | 8 | | | $ | - | | | $ | 1 | |
Aggregate intrinsic value of options exercised | | $ | 86 | | | $ | 82 | | | $ | 9 | |
Management uses a binomial
|
| | | | | | | | | | | |
| Year Ended December 31, | 2017 | | 2016 | | 2015 |
| Weighted-average fair value of options granted per share | $ | 13.04 |
| | $ | 8.73 |
| | $ | 8.56 |
|
| Cash received from options exercised | 171 |
| | 144 |
| | 90 |
|
| Tax benefit realized on options exercised | 70 |
| | 38 |
| | 22 |
|
| Aggregate intrinsic value of options exercised | 241 |
| | 149 |
| | 90 |
|
We use an option pricing model to estimate the fair value of options granted. The
binomial model takes into account the contractual term of the stock option, expected volatility, dividend yield, and risk-free interest rate. Expected volatility is based on the implied volatility of publicly-traded options on CSC’s stock. Dividend yield is based on the average historical CSC dividend yield. The risk-free interest rate is based on the yield of a U.S. Treasury zero-coupon issue with a remaining term similar to the contractual term of the option.
Management usesWe use historical option exercise data, which includes employee termination data, to estimate the probability of future option exercises.
Management uses theThe Black-Scholes model
is used to solve for the expected life of
options valued with the binomial model presented below.options. The assumptions used to value the
Company’s options granted during the years presented and their expected lives were as follows:
| | | | | | | | | | | | |
Year Ended December 31, | | | 2014 | | | 2013 | | | 2012 |
Weighted-average expected dividend yield | | | 1.20 | % | | | 1.13 | % | | | .99 | % |
Weighted-average expected volatility | | | 28 | % | | | 28 | % | | | 31 | % |
Weighted-average risk-free interest rate | | | 2.4 | % | | | 2.5 | % | | | 1.8 | % |
Expected life (in years) | | | 4.4 – 7.2 | | | | 4.6 – 7.9 | | | | 3.0 – 6.7 | |
|
| | | | | | | | |
| Year Ended December 31, | 2017 | | 2016 | | 2015 |
| Weighted-average expected dividend yield | 1.06 | % | | 1.22 | % | | 1.22 | % |
| Weighted-average expected volatility | 34 | % | | 30 | % | | 28 | % |
| Weighted-average risk-free interest rate | 2.1 | % | | 1.8 | % | | 2.2 | % |
| Expected life (in years) | 4.1 - 5.3 |
| | 4.7 - 7.3 |
| | 4.7 - 7.5 |
|
Restricted stock units are awards that entitle the holder to receive shares of CSC’s common stock following a vesting period. Restricted stock units are restricted from transfer or sale and generally vest annually over a three- to five-year period, while
some vest based uponperformance-based restricted stock units also require the Company
achievingachieve certain financial or other
measures.measures prior to vesting. The fair value of restricted stock units is based on the market price of the Company’s stock on the date of grant. The grant date fair value is amortized to compensation expense on a straight-line basis over the requisite service period. The fair value of the restricted stock units that vested during each of the years
2014, 2013,2017, 2016, and
20122015 was
$116$127 million,
$78$105 million, and
$30$126 million, respectively.
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
The Company’s restricted stock units activity is summarized below:
| | | | | | | | |
| | | | | Weighted- | |
| | | | | Average Grant | |
| | Number | | Date Fair Value | |
| | of Units | | per Unit | |
Outstanding at December 31, 2013 | | 11 | | | $ | 16.11 | | |
Granted | | 3 | | | $ | 28.09 | | |
Vested | | (4) | | | $ | 15.63 | | |
Forfeited | | - | | | $ | 16.50 | | |
Outstanding at December 31, 2014 | | 10 | | | $ | 20.66 | | |
|
| | | | | | |
| | Number
of Units
(In millions) | | Weighted- Average Grant Date Fair Value
per Unit |
| Outstanding at December 31, 2016 | 8 |
| | $ | 29.41 |
|
| Granted | 2 |
| | 44.23 |
|
| Vested | (3 | ) | | 28.15 |
|
| Forfeited | — |
| | 30.86 |
|
| Outstanding at December 31, 2017 | 7 |
| | $ | 35.16 |
|
Upon completing three months of consecutive service, employees of the CompanyEmployees can participate in the Company’sSchwab’s qualified retirement plan, the SchwabPlan® Retirement Savings and Investment Plan. The Company may match certain employee contributions or make additional contributions to this plan at its discretion. The Company’s total expense was $68$92 million, $63$83 million, and $59$78 million in 2014, 2013,2017, 2016, and 2012,2015, respectively.
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
Deferred Compensation Plans
The Company’s
Schwab’s deferred compensation plan for officers permits participants to defer the receipt of certain cash compensation. The Company’s deferred compensation plan for non-employee directors permits participants to defer receipt of all or a portion of their director fees and to receive either a grant of stock options, or upon ceasing to serve as a director, the number of shares of CSC’s common stock that would have resulted from investing the deferred fee amount into CSC’s common stock. The deferred compensation liability was $132$160 million and $135 million at December 31, 2017 and 2016, respectively.
FC Career Achievement Plan
The FC career achievement plan was implemented in January 2014 and
2013, respectively.20.Taxesis a noncontributory, unfunded, nonqualified plan for eligible FCs. An FC is eligible for earned cash payments after retirement contingent upon meeting certain performance levels, tenure, age and client transitioning requirements. Allocations to the plan are completed annually by the Company and are subject to general creditors of the Company. Based on Incomethe performance level achieved, an FC will receive an award calculated as a percentage of eligible compensation. Full vesting occurs when an FC reaches 60 years of age and has at least ten years of service with the Company. The Company is using the Society of Actuaries MP-2017 mortality improvement scale for its mortality assumptions.
The following table presents the changes in projected benefit obligation:
|
| | | | | | | |
| December 31, | 2017 | | 2016 |
| Projected benefit obligation at beginning of year | $ | 26 |
| | $ | 17 |
|
| Benefit cost | 9 |
| | 7 |
|
| Actuarial (gain)/loss | 9 |
| | 2 |
|
Projected benefit obligation at end of year (1) | $ | 44 |
| | $ | 26 |
|
(1) This amount is recognized as a liability on the consolidated balance sheets and also depicts the accumulated benefit obligation.
The following table presents the net benefit cost and assumptions used to determine the net benefit cost:
|
| | | | | | | | | | | |
| December 31, | 2017 | | 2016 | | 2015 |
| Service cost | $ | 8 |
| | $ | 6 |
| | $ | 8 |
|
| Interest cost | 1 |
| | 1 |
| | — |
|
| Net benefit cost | $ | 9 |
| | $ | 7 |
| | $ | 8 |
|
| | | | | | |
| Assumptions used to determine net benefit cost: | | | | | |
| Discount rate | 3.71 | % | | 4.62 | % | | 4.19 | % |
| Rate of compensation increase | 3.00 | % | | 3.00 | % | | 3.00 | % |
| Investment crediting rate for notional account balances | 6.50 | % | | 6.50 | % | | 6.50 | % |
The following tables present the change in AOCI attributable to the components of
income tax expense are as follows:the net cost and the change in benefit obligation and the amounts recognized in AOCI: | | | | | | | | | | | | |
Year Ended December 31, | | | 2014 | | | 2013 | | | 2012 |
Current: | | | | | | | | | | | | |
Federal | | $ | 747 | | | $ | 598 | | | $ | 489 | |
State | | | 72 | | | | 57 | | | | 28 | |
Total current | | | 819 | | | | 655 | | | | 517 | |
Deferred: | | | | | | | | | | | | |
Federal | | | (23) | | | | (20) | | | | 5 | |
State | | | (2) | | | | (1) | | | | - | |
Total deferred | | | (25) | | | | (21) | | | | 5 | |
Taxes on income | | $ | 794 | | | $ | 634 | | | $ | 522 | |
- 85 -
|
| | | | | | | |
| December 31, | 2017 | | 2016 |
| Change in AOCI: | | | |
| Beginning balance | $ | 1 |
| | $ | — |
|
| Actuarial gain/(loss) | (11 | ) | | 1 |
|
| Ending balance | $ | (10 | ) | | $ | 1 |
|
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
|
| | | | | | | |
| December 31, | 2017 | | 2016 |
| Components in AOCI: | | | |
| Net gain/(loss) | $ | (10 | ) | | $ | 1 |
|
| Amount recognized in AOCI | $ | (10 | ) | | $ | 1 |
|
| Tax effect | $ | 4 |
| | $ | — |
|
| Net amount recognized in AOCI | $ | (6 | ) | | $ | 1 |
|
On December 22, 2017, P.L. 115-97, known as the Tax Cuts and Jobs Act (the Tax Act), was signed into law. Among other things, the Tax Act lowers the federal corporate income tax rate from 35% to 21%, effective for tax years including or commencing January 1, 2018. The SEC staff issued Staff Accounting Bulletin (SAB) 118, which provides guidance on accounting for the effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the enactment date for companies to complete the accounting under ASC 740 Income Taxes. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Tax Act for which the accounting under ASC 740 is complete. To the extent a company’s accounting for certain income tax effects of the Tax Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the Tax Act.
In connection with our initial analysis of the impact of the Tax Act, Schwab recognized a $46 million one-time non-cash charge to taxes on income in the fourth quarter of 2017 associated with the remeasurement of net deferred tax assets and other tax adjustments related to the Tax Act. While we were able to make a reasonable estimate of the impact of the reduction in the corporate tax rate, our accounting for various elements of the Tax Act may be affected by other related analysis including, but not limited to, bonus depreciation that will allow for immediate expensing of qualified property and the state tax effect of adjustments made to federal temporary differences. As such, the impact of the Tax Act is an estimate pending further information and the analysis noted.
The components of taxes on income are as follows:
|
| | | | | | | | | | | |
| Year Ended December 31, | 2017 | | 2016 | | 2015 |
| Current: | | | | | |
| Federal | $ | 1,132 |
| | $ | 980 |
| | $ | 740 |
|
| State | 106 |
| | 109 |
| | 99 |
|
| Total current | 1,238 |
| | 1,089 |
| | 839 |
|
| Deferred: | | | | | |
| Federal | 58 |
| | 13 |
| | (6 | ) |
| State | — |
| | 2 |
| | (1 | ) |
| Total deferred | 58 |
| | 15 |
| | (7 | ) |
| Taxes on income | $ | 1,296 |
| | $ | 1,104 |
| | $ | 832 |
|
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
The temporary differences that created deferred tax assets and liabilities are detailed below:
| | | | | | | | | | | | |
December 31, | | | | | | | 2014 | | | 2013 |
Deferred tax assets: | | | | | | | | | | | | |
Employee compensation, severance, and benefits | | | | | | $ | 213 | | | $ | 190 | |
Facilities lease commitments | | | | | | | 30 | | | | 33 | |
Reserves and allowances | | | | | | | 25 | | | | 30 | |
State and local taxes | | | | | | | 12 | | | | 12 | |
Net operating loss carryforwards | | | | | | | 6 | | | | 6 | |
Total deferred tax assets | | | | | | | 286 | | | | 271 | |
Valuation allowance | | | | | | | (4) | | | | (4) | |
Deferred tax assets – net of valuation allowance | | | | | | | 282 | | | | 267 | |
Deferred tax liabilities: | | | | | | | | | | | | |
Depreciation and amortization | | | | | | | (125) | | | | (142) | |
Net unrealized gain on securities available for sale | | | | | | | (98) | | | | (5) | |
Capitalized internal-use software development costs | | | | | | | (76) | | | | (62) | |
Deferred cancellation of debt income | | | | | | | (9) | | | | (11) | |
Deferred loan costs | | | | | | | (7) | | | | (10) | |
Deferred Senior Note exchange | | | | | | | (6) | | | | (7) | |
Other | | | | | | | - | | | | (2) | |
Total deferred tax liabilities | | | | | | | (321) | | | | (239) | |
Deferred tax (liability) asset – net (1) | | | | | | $ | (39) | | | $ | 28 | |
(1)
| Amounts are included in other assets and in accrued expenses and other liabilities at December 31, 2014 and 2013, respectively.
|
|
| | | | | | | |
| December 31, | 2017 | | 2016 |
| Deferred tax assets: | | | |
| Employee compensation, severance, and benefits | $ | 133 |
| | $ | 216 |
|
| Net unrealized loss on available for sale securities | 57 |
| | 97 |
|
Reserves and allowances
| 15 |
| | 25 |
|
Facilities lease commitments
| 14 |
| | 25 |
|
| State and local taxes | 12 |
| | 17 |
|
| Net operating loss carryforwards | 5 |
| | 5 |
|
| Other | 3 |
| | — |
|
| Total deferred tax assets | 239 |
| | 385 |
|
| Valuation allowance | (2 | ) | | (3 | ) |
Deferred tax assets — net of valuation allowance | 237 |
| | 382 |
|
| Deferred tax liabilities: | | | |
Capitalized internal-use software development costs
| (89 | ) | | (118 | ) |
Depreciation and amortization
| (72 | ) | | (114 | ) |
| Other | — |
| | (7 | ) |
| Total deferred tax liabilities | (161 | ) | | (239 | ) |
Deferred tax asset — net (1) | $ | 76 |
| | $ | 143 |
|
(1) Amounts are included in other assets on the consolidated balance sheets at both December 31, 2017 and 2016.
A reconciliation of the federal statutory income tax rate to the effective income tax rate is as follows:
| | | | | | | | | | | | |
Year Ended December 31, | | | 2014 | | | 2013 | | | 2012 |
Federal statutory income tax rate | | | 35.0 | % | | | 35.0 | % | | | 35.0 | % |
State income taxes, net of federal tax benefit (1) | | | 2.3 | | | | 2.3 | | | | 1.2 | |
Other | | | 0.2 | | | | (0.1) | | | | (0.2) | |
Effective income tax rate | | | 37.5 | % | | | 37.2 | % | | | 36.0 | % |
(1)
| Includes the impact of a non-recurring state tax benefit of which $4 million and $20 million were recorded in 2013 and 2012, respectively.
|
|
| | | | | | | | |
| Year Ended December 31, | 2017 | | 2016 | | 2015 |
| Federal statutory income tax rate | 35.0 | % | | 35.0 | % | | 35.0 | % |
| State income taxes, net of federal tax benefit | 2.2 |
| | 2.4 |
| | 2.6 |
|
| Equity compensation benefit | (2.4 | ) | | — |
| | — |
|
Other (1) | 0.7 |
| | (0.5 | ) | | (1.1 | ) |
| Effective income tax rate | 35.5 | % | | 36.9 | % | | 36.5 | % |
(1) Includes the impact of one-time charge to taxes on income associated with the Tax Act.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
| | | | | | | | | | | | |
December 31, | | | | | | | 2014 | | | 2013 |
Balance at beginning of year | | | | | | $ | 10 | | | $ | 12 | |
Additions for tax positions related to the current year | | | | | | | 1 | | | | 1 | |
Additions for tax positions related to prior years | | | | | | | 1 | | | | - | |
Reductions due to lapse of statute of limitations | | | | | | | (1) | | | | (2) | |
Reductions for settlements with tax authorities | | | | | | | - | | | | (1) | |
Balance at end of year | | | | | | $ | 11 | | | $ | 10 | |
|
| | | | | | | |
| December 31, | 2017 | | 2016 |
| Balance at beginning of year | $ | 93 |
| | $ | 48 |
|
| Additions for tax positions related to the current year | 22 |
| | 16 |
|
| Additions for tax positions related to prior years | 15 |
| | 32 |
|
| Reductions for tax positions related to prior years | (2 | ) | | (2 | ) |
| Reductions due to lapse of statute of limitations | — |
| | — |
|
| Reductions for settlements with tax authorities | (17 | ) | | (1 | ) |
| Balance at end of year | $ | 111 |
| | $ | 93 |
|
Unrecognized tax benefits totaled $111 million and $93 million as of December 31, 2017 and 2016, respectively, $104 million and $85 million of which if recognized would affect the annual effective tax rate.
Interest was accrued related to unrecognized tax benefits in tax expense and penalties in other expense. Approximately $5 million and $8 million for the payment of interest and penalties was accrued at December 31, 2017 and 2016, respectively.
The
Company and its subsidiaries are subject to routine examinations by the respective federal,
state and applicable local jurisdictions’ taxing authorities. Federal returns for 2011 through
20132016 remain
opensubject to
Federal tax examinations.examination. The years open to examination by state and local governments vary by jurisdiction.
- 86 -
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
21.
Earnings Per Common Share | |
| 20. | Earnings Per Common Share |
EPS is computed using the two-class method. Preferred stock dividends, and undistributed earnings and dividends allocated to participating securities are subtracted from net income in determining net income available to common stockholders. Basic EPS is computed by dividing net income available to common stockholders by the weighted-average number of common shares outstanding during the period. The computation of diluted EPS is similar to the computation of basic EPS except that the denominator is increased to include the number of additional common shares that would have been outstanding if dilutive potential common shares had been issued. Dilutive potential common shares include, if dilutive, the effect of outstanding stock options and
unvestednon-vested restricted stock
awards and units. EPS under the basic and diluted computations is as follows:
| | | | | | | | | | | | |
Year Ended December 31, | | | 2014 | | | 2013 | | | 2012 |
Net income | | $ | 1,321 | | | $ | 1,071 | | | $ | 928 | |
Preferred stock dividends | | | (60) | | | | (61) | | | | (45) | |
Net income available to common stockholders | | $ | 1,261 | | | $ | 1,010 | | | $ | 883 | |
Weighted-average common shares outstanding — basic | | | 1,303 | | | | 1,285 | | | | 1,274 | |
Common stock equivalent shares related to stock incentive plans | | | 12 | | | | 8 | | | | 1 | |
Weighted-average common shares outstanding — diluted (1) | | | 1,315 | | | | 1,293 | | | | 1,275 | |
Basic EPS | | $ | .96 | | | $ | .78 | | | $ | .69 | |
Diluted EPS | | $ | .95 | | | $ | .78 | | | $ | .69 | |
(1)
| Antidilutive stock options and restricted stock awards excluded from the calculation of diluted EPS totaled 24 million, 34 million, and 74 million shares in 2014, 2013, and 2012, respectively.
|
|
| | | | | | | | | | | |
| Year Ended December 31, | 2017 | | 2016 | | 2015 |
| Net income | $ | 2,354 |
| | $ | 1,889 |
| | $ | 1,447 |
|
Preferred stock dividends and other (1) | (174 | ) | | (143 | ) | | (83 | ) |
| Net income available to common stockholders | $ | 2,180 |
| | $ | 1,746 |
| | $ | 1,364 |
|
| Weighted-average common shares outstanding — basic | 1,339 |
| | 1,324 |
| | 1,315 |
|
| Common stock equivalent shares related to stock incentive plans | 14 |
| | 10 |
| | 12 |
|
Weighted-average common shares outstanding — diluted (2) | 1,353 |
| | 1,334 |
| | 1,327 |
|
| Basic EPS | $ | 1.63 |
| | $ | 1.32 |
| | $ | 1.04 |
|
| Diluted EPS | $ | 1.61 |
| | $ | 1.31 |
| | $ | 1.03 |
|
22.(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 15 million, 26 million, and 23 million shares in 2017, 2016, and 2015, respectively.
21. Regulatory Requirements
CSC is a savings and loan holding company and Schwab Bank, CSC’s
primary depository institution subsidiary, is a federal savings bank. CSC is subject to
examination, supervision, and regulation by the
Board of Governors of the Federal
Reserve System (the Federal Reserve).Reserve. Schwab Bank is subject to
examination, supervision, and regulation by the
Office of the Comptroller of the Currency (the OCC),OCC, as its primary regulator, the
Federal Deposit Insurance Corporation,FDIC as its deposit insurer, and the
Consumer Financial Protection Bureau.CFPB. CSC is required to serve as a source of strength for Schwab Bank.
Prior to January 1, 2015, CSC, as a savings and loan holding company, was not subject to specific statutory capital requirements. Beginning on January 1, 2015, CSC is subject to new capital requirements set by the Federal Reserve.
Schwab Bank is subject
to regulation and supervision and to various requirements and restrictions under federal and state laws, including regulatory capital
guidelines. Among other things, these requirements
alsoand requirements that restrict and govern the terms of affiliate transactions, such as extensions of credit
and repayment of loans between Schwab Bank andto, or asset purchases from CSC or
CSC’sits other
subsidiaries.subsidiaries by Schwab Bank. In addition, Schwab Bank is required to provide notice to and may be required to obtain approval of the OCC and the Federal Reserve to declare dividends to CSC. The federal banking agencies have broad powers to enforce these regulations, including the power to terminate deposit insurance, impose substantial fines and other civil and criminal penalties, and appoint a conservator or receiver. Under the Federal Deposit Insurance Act, Schwab Bank could be subject to restrictive actions if it were to fall within one of the lowest three of five capital categories. CSC and Schwab Bank are required to maintain minimum capital levels as specified in federal banking
laws and regulations. Failure to meet the minimum levels could result in certain mandatory, and possibly additional discretionary actions by the regulators that, if undertaken, could have a direct material effect on CSC and Schwab Bank. At December 31,
2014,2017, both CSC and Schwab Bank met
theall of their respective capital
level requirements.
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
The regulatory capital and ratios for
CSC (consolidated) and Schwab Bank are as follows:
| | | | | | | | | | | | | | | | | | |
| | | | | | | | Minimum to be | | Minimum Capital |
| | Actual | | Well Capitalized | | Requirement |
| | Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio |
December 31, 2014 | | | | | | | | | | | | | | | | | | |
Tier 1 Risk-Based Capital | | $ | 7,700 | | 22.1 | % | | $ | 2,095 | | 6.0 | % | | $ | 1,397 | | 4.0 | % |
Total Risk-Based Capital | | $ | 7,744 | | 22.2 | % | | $ | 3,492 | | 10.0 | % | | $ | 2,793 | | 8.0 | % |
Tier 1 Leverage | | $ | 7,700 | | 6.9 | % | | $ | 5,548 | | 5.0 | % | | $ | 4,438 | | 4.0 | % |
Tangible Equity | | $ | 7,700 | | 6.9 | % | | | N/A | | | | | $ | 2,219 | | 2.0 | % |
December 31, 2013 | | | | | | | | | | | | | | | | | | |
Tier 1 Risk-Based Capital | | $ | 6,550 | | 19.0 | % | | $ | 2,074 | | 6.0 | % | | $ | 1,383 | | 4.0 | % |
Total Risk-Based Capital | | $ | 6,599 | | 19.1 | % | | $ | 3,457 | | 10.0 | % | | $ | 2,766 | | 8.0 | % |
Tier 1 Leverage | | $ | 6,550 | | 6.6 | % | | $ | 4,993 | | 5.0 | % | | $ | 3,994 | | 4.0 | % |
Tangible Equity | | $ | 6,550 | | 6.6 | % | | | N/A | | | | | $ | 1,997 | | 2.0 | % |
|
| | | | | | | | | | | | | | | | | | | | |
| | Actual | | Minimum to be
Well Capitalized | | Minimum Capital
Requirement |
| December 31, 2017 | Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio |
| CSC | | | | | | | | | | | |
| Common Equity Tier 1 Risk-Based Capital | $ | 14,630 |
| | 19.3 | % | | N/A | | | | $ | 3,414 |
| | 4.5 | % |
| Tier 1 Risk-Based Capital | 17,423 |
| | 23.0 | % | | N/A | | | | 4,552 |
| | 6.0 | % |
| Total Risk-Based Capital | 17,452 |
| | 23.0 | % | | N/A | | | | 6,069 |
| | 8.0 | % |
| Tier 1 Leverage | 17,423 |
| | 7.6 | % | | N/A | | | | 9,218 |
| | 4.0 | % |
| Schwab Bank | | | | | | | | | | | |
| Common Equity Tier 1 Risk-Based Capital | $ | 13,355 |
| | 20.1 | % | | $ | 4,324 |
| | 6.5 | % | | $ | 2,993 |
| | 4.5 | % |
| Tier 1 Risk-Based Capital | 13,355 |
| | 20.1 | % | | 5,321 |
| | 8.0 | % | | 3,991 |
| | 6.0 | % |
| Total Risk-Based Capital | 13,382 |
| | 20.1 | % | | 6,652 |
| | 10.0 | % | | 5,321 |
| | 8.0 | % |
| Tier 1 Leverage | 13,355 |
| | 7.1 | % | | 9,462 |
| | 5.0 | % | | 7,569 |
| | 4.0 | % |
| | | | | | | | | | | | |
| December 31, 2016 | | | | | | | | | | | |
| CSC | | | | | | | | | | | |
| Common Equity Tier 1 Risk-Based Capital | $ | 12,574 |
| | 18.4 | % | | N/A | | | | $ | 3,068 |
| | 4.5 | % |
| Tier 1 Risk-Based Capital | 15,357 |
| | 22.5 | % | | N/A | | | | 4,091 |
| | 6.0 | % |
| Total Risk-Based Capital | 15,384 |
| | 22.6 | % | | N/A | | | | 5,454 |
| | 8.0 | % |
| Tier 1 Leverage | 15,357 |
| | 7.2 | % | | N/A | | | | 8,516 |
| | 4.0 | % |
| Schwab Bank | | | | | | | | | | | |
| Common Equity Tier 1 Risk-Based Capital | $ | 11,878 |
| | 19.8 | % | | $ | 3,894 |
| | 6.5 | % | | $ | 2,696 |
| | 4.5 | % |
| Tier 1 Risk-Based Capital | 11,878 |
| | 19.8 | % | | 4,793 |
| | 8.0 | % | | 3,595 |
| | 6.0 | % |
| Total Risk-Based Capital | 11,904 |
| | 19.9 | % | | 5,992 |
| | 10.0 | % | | 4,793 |
| | 8.0 | % |
| Tier 1 Leverage | 11,878 |
| | 7.0 | % | | 8,456 |
| | 5.0 | % | | 6,765 |
| | 4.0 | % |
N/A Not
applicable.Applicable.
Based on its regulatory capital ratios at December 31,
2014 and 2013,2017, Schwab Bank is considered well capitalized (the highest category)
pursuant to bankingunder its respective regulatory
guidelines.capital rules. There are no conditions or events since December 31,
2014,2017 that management believes have changed Schwab Bank’s capital category.
The Federal Reserve requires Schwab Bank to maintain reserve balances at the Federal Reserve
Bank based on
certain deposit levels.its deposits that are considered to be transaction accounts. Schwab Bank’s average reserve
requirement was $1.3requirements were $1.6 billion and
$1.2$1.5 billion in
20142017 and
2013,2016, respectively.
CSC’s principal U.S. broker-dealers are
Beginning on January 1, 2016, CSC and Schwab and optionsXpress, Inc. Schwab and optionsXpress, Inc. are bothBank became subject to Rule 15c3-1 undera new capital conservation buffer requirement of 0.625% of risk-weighted assets, increasing each year by 0.625% until fully implemented at 2.5% of risk-weighted assets in January 2019. The capital conservation buffer is in addition to the Securities Exchange Act of 1934 (theminimum risk-based capital requirements described above. Failure to maintain the capital conservation buffer would limit an entity’s ability to make capital distributions and discretionary bonus payments to executive officers. At December 31, 2017, both CSC’s and Schwab Bank’s capital levels exceeded the fully implemented capital conservation buffer requirement.
CS&Co, a securities broker-dealer, is subject to the Uniform Net Capital
Rule). Schwab and optionsXpress, Inc. computeRule. CS&Co computes its net capital under the alternative method permitted by the Uniform Net Capital Rule. This method requires the maintenance of minimum net capital, as defined, of the greater of 2% of aggregate debit balances arising from client transactions or a minimum dollar requirement
($250,000),of $250,000, which is based on the type of business conducted by the broker-dealer. Under the alternative method, a broker-dealer may not repay subordinated borrowings, pay cash dividends, or make any unsecured advances or loans
to its parent company or employees if such payment would result in a net capital amount of less than 5% of aggregate debit balances or less than 120% of its minimum dollar requirement.
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
During 2017, optionsXpress, Inc.
is also subject, a wholly-owned subsidiary of the Company, was renamed as Charles Schwab Futures (CS Futures). In October 2017, CS Futures transferred all of its retail brokerage customer accounts along with the related operations to
CS&Co. CS Futures was de-registered as a securities broker-dealer with the SEC but remains a registered Futures Commission Merchant with the Commodity Futures Trading
Commission Regulation 1.17 (Reg. 1.17) under the Commodity Exchange Act, which also requires the maintenance of minimum net capital. optionsXpress, Inc., as a futures commission merchant, is required to maintain minimum net capital equal to the greater of its net capital requirement under Reg. 1.17 ($1 million), or the sum of 8% of the total risk margin requirements for all positions carried in client accounts and 8% of the total risk margin requirements for all positions carried in non-client accounts (as defined in Reg. 1.17).Commission.
Net capital and net capital requirements for
Schwab and optionsXpress, Inc. at December 31, 2014,CS&Co are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | Net Capital | | Net Capital |
| | | | | % of | | Minimum | | 2% of | | in Excess of | | in Excess of 5% |
| | | | | Aggregate | | Net Capital | | Aggregate | | Required | | of Aggregate |
| | Net Capital | | Debit Balances | | Required | | Debit Balances | | Net Capital | | Debit Balances |
Schwab | | $ | 1,550 | | 10 | % | | | | $ | 0.250 | | $ | 324 | | | | $ | 1,226 | | | | $ | 739 | |
optionsXpress, Inc. | | $ | 123 | | 38 | % | | | | $ | 1 | | $ | 6 | | | | $ | 117 | | | | $ | 107 | |
Schwab and optionsXpress, Inc. are also subject to Rule 15c3-3 under the Securities Exchange Act of 1934 and other applicable regulations, which require them to maintain cash or qualified securities in a segregated reserve account for the exclusive benefit of clients.
|
| | | | | | | |
| December 31, | 2017 | | 2016 |
| Net capital | $ | 2,118 |
| | $ | 1,846 |
|
| Minimum net capital required | 0.250 |
| | 0.250 |
|
| 2% of aggregate debit balances | 435 |
| | 355 |
|
| Net capital in excess of required net capital | 1,683 |
| | 1,491 |
|
In accordance with
the SEC Customer Protection Rule,
15c3-3, Schwab and optionsXpress, Inc.CS&Co had portions of
theirits cash and investments segregated for the exclusive benefit of clients at December 31,
2014.2017. The SEC Customer Protection Rule requires broker-dealers to segregate client fully paid securities and cash balances not collateralizing margin positions and not swept to money market funds or bank deposit accounts. Amounts included in cash and investments segregated and on deposit for regulatory purposes represent actual balances on deposit, whereas cash and investments
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
required to be segregated and on deposit for regulatory purposes at December 31, 20142017 for Schwab and optionsXpress, Inc.CS&Co totaled $21.9$15.3 billion. On January 5, 2015, Schwab and optionsXpress, Inc.3, 2018, CS&Co deposited a net amount of $1.7 billion$704 million of cash into theirits segregated reserve bank accounts. Cash and investments required to be segregated and on deposit for regulatory purposes at December 31, 20132016 for Schwab and optionsXpress, Inc.CS&Co totaled $24.0$22.5 billion. On January 3, 2014, Schwab and optionsXpress, Inc. deposited4, 2017, a net amount of $965 million$1.6 billion of cash was deposited into theirthe segregated reserve bank accounts.
23.
Segment InformationThe Company’s
Schwab’s two reportable segments are Investor Services and Advisor Services.
The CompanySchwab structures
itsthe operating segments according to its clients and the services provided to those clients. The Investor Services segment provides retail brokerage and banking services to individual investors
and retirement plan services,
andas well as other corporate brokerage
services.services, to businesses and their employees. The Advisor Services segment provides custodial, trading,
banking, and support services,
to independent investment advisors, andas well as retirement business services, to independent
RIAs, independent retirement
plan advisors, and
recordkeepers whose plan assets are held at Schwab Bank.recordkeepers. Revenues and expenses are allocated to the Company’s two segments based on which segment services the client.
The accounting policies of the segments are the same as those described in
note “2 – Summary of Significant Accounting Policies.” Financial information for the Company’s reportable segments is presented in the following table.Note 2. For the computation of its segment information, the CompanySchwab utilizes an activity-based costing model to allocate traditional income statement line item expenses (e.g., compensation and benefits, depreciation and amortization, and professional services) to the business activities driving segment expenses (e.g., client service, opening new accounts, or business development) and a funds transfer pricing methodology to allocate certain revenues.The Company
Management evaluates the performance of its segments on a pre-tax
basis, excluding extraordinary or significant non-recurring items and results of discontinued operations.basis. Segment assets and liabilities are not used for evaluating segment performance or in deciding how to allocate resources to segments.
However, capital expenditures are used in resource allocation and are therefore disclosed. There are no revenues from transactions between the segments.
Capital expenditures are reported gross, and are not net of proceeds from the sale of fixed assets.Financial information for the Company’s reportable segments is presented in the following table:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Investor Services | | Advisor Services | | Unallocated | | Total |
Year Ended December 31, | 2014 | | 2013 | | 2012 | | 2014 | | 2013 | | 2012 | | 2014 | | 2013 | | 2012 | | 2014 | | 2013 | | 2012 |
Net Revenues: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Asset management and | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
administration fees | $ | 1,775 | | $ | 1,627 | | $ | 1,436 | | $ | 758 | | $ | 689 | | $ | 607 | | $ | - | | $ | (1) | | $ | - | | $ | 2,533 | | $ | 2,315 | | $ | 2,043 |
Net interest revenue | | 2,030 | | | 1,756 | | | 1,559 | | | 242 | | | 224 | | | 205 | | | - | | | - | | | - | | | 2,272 | | | 1,980 | | | 1,764 |
Trading revenue | | 618 | | | 621 | | | 612 | | | 289 | | | 292 | | | 255 | | | - | | | - | | | 1 | | | 907 | | | 913 | | | 868 |
Other – net (1) | | 221 | | | 178 | | | 123 | | | 71 | | | 57 | | | 62 | | | 51 | | | 1 | | | 71 | | | 343 | | | 236 | | | 256 |
Provision for loan losses | | 4 | | | 1 | | | (15) | | | - | | | - | | | (1) | | | - | | | - | | | - | | | 4 | | | 1 | | | (16) |
Net impairment losses | | | | | | | �� | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
on securities | | (1) | | | (9) | | | (29) | | | - | | | (1) | | | (3) | | | - | | | - | | | - | | | (1) | | | (10) | | | (32) |
Total net revenues | | 4,647 | | | 4,174 | | | 3,686 | | | 1,360 | | | 1,261 | | | 1,125 | | | 51 | | | - | | | 72 | | | 6,058 | | | 5,435 | | | 4,883 |
Expenses Excluding Interest (2) | | 2,974 | | | 2,899 | | | 2,693 | | | 901 | | | 831 | | | 739 | | | 68 | | | - | | | 1 | | | 3,943 | | | 3,730 | | | 3,433 |
Income before taxes on income | $ | 1,673 | | $ | 1,275 | | $ | 993 | | $ | 459 | | $ | 430 | | $ | 386 | | $ | (17) | | $ | - | | $ | 71 | | $ | 2,115 | | $ | 1,705 | | $ | 1,450 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Capital expenditures | $ | 271 | | $ | 190 | | $ | 98 | | $ | 134 | | $ | 80 | | $ | 40 | | $ | - | | $ | - | | $ | - | | $ | 405 | | $ | 270 | | $ | 138 |
Depreciation and amortization | $ | 154 | | $ | 155 | | $ | 157 | | $ | 45 | | $ | 47 | | $ | 39 | | $ | - | | $ | - | | $ | - | | $ | 199 | | $ | 202 | | $ | 196 |
(1)
| Unallocated amount includes a net insurance settlement of $45 million in 2014 and a non-recurring gain of $70 million relating to a confidential resolution of a vendor dispute in 2012.
|
(2)
| Unallocated amount includes a charge of $68 million for estimated future severance benefits resulting from changes in the Company’s geographic footprint in 2014.
|
Fees received from Schwab’s proprietary mutual funds represented 7%, 9%, and 10% of the Company’s net revenues in 2014, 2013, and 2012, respectively. Except for Schwab’s proprietary mutual funds, which are considered a single client for purposes of this computation, no single client accounted for more than 10% of the Company’s net revenues in 2014, 2013, or 2012. Substantially all of the Company’s revenues and assets are generated or located in the U.S. The percentage of Schwab’s total client accounts located in California was 23% at December 31, 2014, 2013, and 2012.
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
24.Business Acquisition
On December 14, 2012,
Financial information for the
Company acquired ThomasPartners, Inc., a growth and dividend income-focused asset management firm, for $85 million in cash. The Company recorded goodwill of $68 million and intangible assets of $32 million. The intangible assets primarily relate to customer relationships and are being amortized over 11 years. The goodwill was allocated to the Investor Services and Advisor Services segments
is presented in the
amounts of $54 million and $14 million, respectively.25.following table:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Investor Services | | Advisor Services | | Total |
| Year Ended December 31, | 2017 | | 2016 | | 2015 | | 2017 | | 2016 | | 2015 | | 2017 | | 2016 | | 2015 |
| Net Revenues: | | | | | | | | | | | | | | | | | |
| Net interest revenue | $ | 3,231 |
| | $ | 2,591 |
| | $ | 2,133 |
| | $ | 1,051 |
| | $ | 731 |
| | $ | 392 |
| | $ | 4,282 |
| | $ | 3,322 |
| | $ | 2,525 |
|
| Asset management and | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
| administration fees | 2,344 |
| | 2,093 |
| | 1,837 |
| | 1,048 |
| | 962 |
| | 813 |
| | 3,392 |
| | 3,055 |
| | 2,650 |
|
| Trading revenue | 408 |
| | 524 |
| | 556 |
| | 246 |
| | 301 |
| | 310 |
| | 654 |
| | 825 |
| | 866 |
|
| Other | 217 |
| | 199 |
| | 234 |
| | 73 |
| | 72 |
| | 94 |
| | 290 |
| | 271 |
| | 328 |
|
| Provision for loan losses | — |
| | 4 |
| | 11 |
| | — |
| | 1 |
| | — |
| | — |
| | 5 |
| | 11 |
|
| Total net revenues | 6,200 |
| | 5,411 |
| | 4,771 |
| | 2,418 |
| | 2,067 |
| | 1,609 |
| | 8,618 |
| | 7,478 |
| | 6,380 |
|
Expenses Excluding Interest | 3,725 |
| | 3,380 |
| | 3,090 |
| | 1,243 |
| | 1,105 |
| | 1,011 |
| | 4,968 |
| | 4,485 |
| | 4,101 |
|
| Income before taxes on income | $ | 2,475 |
| | $ | 2,031 |
| | $ | 1,681 |
| | $ | 1,175 |
| | $ | 962 |
| | $ | 598 |
| | $ | 3,650 |
| | $ | 2,993 |
| | $ | 2,279 |
|
| Capital expenditures | $ | 265 |
| | $ | 234 |
| | $ | 195 |
| | $ | 147 |
| | $ | 119 |
| | $ | 90 |
| | $ | 412 |
| | $ | 353 |
| | $ | 285 |
|
| Depreciation and amortization | $ | 203 |
| | $ | 180 |
| | $ | 171 |
| | $ | 66 |
| | $ | 54 |
| | $ | 53 |
| | $ | 269 |
| | $ | 234 |
| | $ | 224 |
|
Subsequent EventsThe Company has evaluated the impact of events that have occurred subsequent to December 31, 2014, through the date the consolidated financial statements were filed with the SEC. Based on this evaluation, other than as recorded or disclosed within these consolidated financial statements and related notes, the Company has determined none of these events were required to be recognized or disclosed.
26.The Charles Schwab Corporation – Parent Company Only Financial Statements
Condensed Statements of Income
| | | | | | | | | | | | |
Year Ended December 31, | | | 2014 | | | | 2013 | | | | 2012 | |
Interest revenue | | $ | 2 | | | $ | 4 | | | $ | 6 | |
Interest expense | | | (64) | | | | (65) | | | | (97) | |
Net interest revenue | | | (62) | | | | (61) | | | | (91) | |
Other revenue – net | | | 1 | | | | - | | | | (30) | |
Expenses excluding interest | | | (24) | | | | (28) | | | | (23) | |
Loss before income tax benefit and equity in net income of subsidiaries | | | (85) | | | | (89) | | | | (144) | |
Income tax benefit | | | 32 | | | | 38 | | | | 58 | |
Loss before equity in net income of subsidiaries | | | (53) | | | | (51) | | | | (86) | |
Equity in net income of subsidiaries: | | | | | | | | | | | | |
Equity in undistributed net income of subsidiaries | | | 1,157 | | | | 830 | | | | 662 | |
Dividends from bank subsidiary | | | 45 | | | | 163 | | | | 50 | |
Dividends from non-bank subsidiaries | | | 172 | | | | 129 | | | | 302 | |
Net Income | | | 1,321 | | | | 1,071 | | | | 928 | |
Preferred stock dividends | | | 60 | | | | 61 | | | | 45 | |
Net Income Available to Common Stockholders | | $ | 1,261 | | | $ | 1,010 | | | $ | 883 | |
- 90 -
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
| |
| 23. | The Charles Schwab Corporation – Parent Company Only Financial Statements |
Condensed Statements of Income
|
| | | | | | | | | | | |
| Year Ended December 31, | 2017 |
| 2016 |
| 2015 |
| Interest revenue | $ | 33 |
|
| $ | 22 |
|
| $ | 12 |
|
| Interest expense | (114 | ) |
| (100 | ) |
| (86 | ) |
| Net interest expense | (81 | ) |
| (78 | ) |
| (74 | ) |
| Other | 3 |
|
| 1 |
|
| 4 |
|
| Expenses excluding interest | (32 | ) |
| (21 | ) |
| (27 | ) |
| Loss before income tax benefit and equity in net income of subsidiaries | (110 | ) |
| (98 | ) |
| (97 | ) |
| Income tax benefit | 27 |
|
| 34 |
|
| 41 |
|
| Loss before equity in net income of subsidiaries | (83 | ) |
| (64 | ) |
| (56 | ) |
| Equity in net income of subsidiaries: | | | | | |
| Equity in undistributed net income of subsidiaries | 1,479 |
|
| 1,690 |
|
| 1,287 |
|
| Dividends from bank subsidiary | 625 |
|
| — |
|
| — |
|
| Dividends from non-bank subsidiaries | 333 |
|
| 263 |
|
| 216 |
|
| Net Income | 2,354 |
|
| 1,889 |
|
| 1,447 |
|
Preferred stock dividends and other (1) | 174 |
|
| 143 |
|
| 83 |
|
| Net Income Available to Common Stockholders | $ | 2,180 |
|
| $ | 1,746 |
|
| $ | 1,364 |
|
(1) Includes preferred stock dividends and undistributed earnings and dividends allocated to non-vested restricted stock units.
| | | | | | | | | | | | |
December 31, | | | | | | | 2014 | | | 2013 |
Assets | | | | | | | | | | | | |
Cash and cash equivalents | | | | | | $ | 1,043 | | | $ | 700 | |
Receivables from subsidiaries | | | | | | | 360 | | | | 162 | |
Other securities owned – at fair value | | | | | | | 74 | | | | 80 | |
Loans to non-bank subsidiaries | | | | | | | 327 | | | | 980 | |
Investment in non-bank subsidiaries | | | | | | | 4,083 | | | | 3,828 | |
Investment in bank subsidiary | | | | | | | 7,883 | | | | 6,576 | |
Other assets | | | | | | | 68 | | | | 65 | |
Total assets | | | | | | $ | 13,838 | | | $ | 12,391 | |
Liabilities and Stockholders’ Equity | | | | | | | | | | | | |
Accrued expenses and other liabilities | | | | | | $ | 185 | | | $ | 187 | |
Payables to subsidiaries | | | | | | | 34 | | | | 9 | |
Long-term debt | | | | | | | 1,816 | | | | 1,814 | |
Total liabilities | | | | | | | 2,035 | | | | 2,010 | |
Stockholders’ equity | | | | | | | 11,803 | | | | 10,381 | |
Total liabilities and stockholders’ equity | | | | | | $ | 13,838 | | | $ | 12,391 | |
- 91 -
|
| | | | | | | |
| December 31, | 2017 | | 2016 |
| Assets | | | |
| Cash and cash equivalents | $ | 2,825 |
| | $ | 1,189 |
|
| Receivables from subsidiaries | 571 |
| | 503 |
|
| Available for sale securities | 573 |
| | 569 |
|
| Held to maturity securities | 223 |
| | 223 |
|
| Other securities owned — at fair value | 76 |
| | 75 |
|
| Loans to non-bank subsidiaries | 448 |
| | — |
|
| Investment in non-bank subsidiaries | 5,393 |
| | 5,044 |
|
| Investment in bank subsidiary | 13,224 |
| | 11,726 |
|
| Other assets | 160 |
| | 124 |
|
| Total assets | $ | 23,493 |
| | $ | 19,453 |
|
| Liabilities and Stockholders’ Equity | | | |
| Accrued expenses and other liabilities | $ | 276 |
| | $ | 219 |
|
| Payables to subsidiaries | — |
| | 6 |
|
| Long-term debt | 4,692 |
| | 2,807 |
|
| Total liabilities | 4,968 |
| | 3,032 |
|
| Stockholders’ equity | 18,525 |
| | 16,421 |
|
| Total liabilities and stockholders’ equity | $ | 23,493 |
| | $ | 19,453 |
|
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
Condensed Statements of Cash Flows | | | | | | | | | | | | |
Year Ended December 31, | | | 2014 | | | 2013 | | | 2012 |
Cash Flows from Operating Activities | | | | | | | | | | | | |
Net income | | $ | 1,321 | | | $ | 1,071 | | | $ | 928 | |
Adjustments to reconcile net income to net cash provided by | | | | | | | | | | | | |
operating activities: | | | | | | | | | | | | |
Equity in undistributed earnings of subsidiaries | | | (1,157) | | | | (830) | | | | (662) | |
Provision for deferred income taxes | | | 4 | | | | (11) | | | | 9 | |
Other | | | (23) | | | | (4) | | | | 39 | |
Net change in: | | | | | | | | | | | | |
Other securities owned | | | 5 | | | | (5) | | | | 3 | |
Other assets | | | (9) | | | | 29 | | | | (21) | |
Accrued expenses and other liabilities | | | (1) | | | | 13 | | | | (5) | |
Net cash provided by operating activities | | | 140 | | | | 263 | | | | 291 | |
Cash Flows from Investing Activities | | | | | | | | | | | | |
Due from (Due to) subsidiaries – net | | | 607 | | | | (546) | | | | 43 | |
Increase in investments in subsidiaries | | | (249) | | | | (225) | | | | (307) | |
Other investing activities | | | - | | | | (1) | | | | - | |
Net cash provided by (used for) investing activities | | | 358 | | | | (772) | | | | (264) | |
Cash Flows from Financing Activities | | | | | | | | | | | | |
Issuance of commercial paper | | | - | | | | - | | | | 300 | |
Repayment of commercial paper | | | - | | | | (300) | | | | - | |
Issuance of long-term debt | | | - | | | | 275 | | | | 350 | |
Repayment of long-term debt | | | - | | | | - | | | | (727) | |
Premium paid on debt exchange | | | - | | | | - | | | | (19) | |
Net proceeds from preferred stock offering | | | - | | | | - | | | | 863 | |
Dividends paid | | | (373) | | | | (368) | | | | (337) | |
Proceeds from stock options exercised and other | | | 189 | | | | 258 | | | | 35 | |
Other financing activities | | | 29 | | | | 5 | | | | (5) | |
Net cash (used for) provided by financing activities | | | (155) | | | | (130) | | | | 460 | |
Increase (Decrease) in Cash and Cash Equivalents | | | 343 | | | | (639) | | | | 487 | |
Cash and Cash Equivalents at Beginning of Year | | | 700 | | | | 1,339 | | | | 852 | |
Cash and Cash Equivalents at End of Year | | $ | 1,043 | | | $ | 700 | | | $ | 1,339 | |
- 92 -
|
| | | | | | | | | | | |
| Year Ended December 31, | 2017 | | 2016 | | 2015 |
| Cash Flows from Operating Activities | | | | | |
| Net income | $ | 2,354 |
| | $ | 1,889 |
| | $ | 1,447 |
|
| Adjustments to reconcile net income to net cash provided by | | | | | |
| operating activities: | | | | | |
| Equity in undistributed earnings of subsidiaries | (1,479 | ) | | (1,690 | ) | | (1,287 | ) |
| Other | 5 |
| | (37 | ) | | (31 | ) |
| Net change in: | | | | | |
| Other securities owned | (1 | ) | | (10 | ) | | 9 |
|
| Other assets | (26 | ) | | (27 | ) | | (32 | ) |
| Accrued expenses and other liabilities | 44 |
| | 30 |
| | 4 |
|
| Net cash provided by (used for) operating activities | 897 |
| | 155 |
| | 110 |
|
| Cash Flows from Investing Activities | | | | | |
| Due from (to) subsidiaries — net | (374 | ) | | 95 |
| | 93 |
|
| Increase in investments in subsidiaries | (342 | ) | | (1,547 | ) | | (611 | ) |
| Repayments (Advances) of subordinated loan to CS&Co | — |
| | 465 |
| | (150 | ) |
| Purchases of available for sale securities | (201 | ) | | (2 | ) | | (842 | ) |
| Proceeds from sales of available for sale securities | 197 |
| | 2 |
| | 200 |
|
| Principal payments on available for sale securities | — |
| | — |
| | 75 |
|
| Purchases of held to maturity securities | — |
| | — |
| | (223 | ) |
| Other investing activities | (6 | ) | | (4 | ) | | — |
|
| Net cash provided by (used for) investing activities | (726 | ) | | (991 | ) | | (1,458 | ) |
| Cash Flows from Financing Activities | | | | | |
| Issuance of long-term debt | 2,129 |
| | — |
| | 1,346 |
|
| Repayment of long-term debt | (250 | ) | | — |
| | (350 | ) |
| Net proceeds from preferred stock offerings | 492 |
| | 1,316 |
| | 581 |
|
| Redemption of preferred stock | (485 | ) | | — |
| | — |
|
| Dividends paid | (592 | ) | | (486 | ) | | (387 | ) |
| Proceeds from stock options exercised and other | 171 |
| | 144 |
| | 90 |
|
| Other financing activities | — |
| | 44 |
| | 32 |
|
| Net cash provided by (used for) financing activities | 1,465 |
| | 1,018 |
| | 1,312 |
|
| Increase (Decrease) in Cash and Cash Equivalents | 1,636 |
| | 182 |
| | (36 | ) |
| Cash and Cash Equivalents at Beginning of Year | 1,189 |
| | 1,007 |
| | 1,043 |
|
| Cash and Cash Equivalents at End of Year | $ | 2,825 |
| | $ | 1,189 |
| | $ | 1,007 |
|
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
27.
24. Quarterly Financial Information (Unaudited)
| | | | | | | | | | | | | | | | |
| | Fourth | | | Third | | | Second | | | First | |
| | Quarter | | | Quarter | | | Quarter | | | Quarter | |
Year Ended December 31, 2014: | | | | | | | | | | | | | | | | |
Net Revenues | | $ | 1,551 | | | $ | 1,551 | | | $ | 1,478 | | | $ | 1,478 | |
Expenses Excluding Interest | | $ | 997 | | | $ | 1,033 | | | $ | 957 | | | $ | 956 | |
Net Income | | $ | 350 | | | $ | 321 | | | $ | 324 | | | $ | 326 | |
Net Income Available to Common Stockholders | | $ | 329 | | | $ | 312 | | | $ | 302 | | | $ | 318 | |
Weighted-Average Common Shares Outstanding – Diluted | | | 1,320 | | | | 1,316 | | | | 1,313 | | | | 1,311 | |
Basic Earnings Per Common Share | | $ | .25 | | | $ | .24 | | | $ | .23 | | | $ | .24 | |
Diluted Earnings Per Common Share | | $ | .25 | | | $ | .24 | | | $ | .23 | | | $ | .24 | |
Dividends Declared Per Common Share | | $ | .06 | | | $ | .06 | | | $ | .06 | | | $ | .06 | |
Range of Common Stock Price Per Share: | | | | | | | | | | | | | | | | |
High | | $ | 30.89 | | | $ | 31.00 | | | $ | 28.04 | | | $ | 29.13 | |
Low | | $ | 23.35 | | | $ | 26.44 | | | $ | 24.56 | | | $ | 23.56 | |
Range of Price/Earnings Ratio (1): | | | | | | | | | | | | | | | | |
High | | | 32 | | | | 33 | | | | 30 | | | | 33 | |
Low | | | 24 | | | | 28 | | | | 27 | | | | 27 | |
Year Ended December 31, 2013: | | | | | | | | | | | | | | | | |
Net Revenues | | $ | 1,435 | | | $ | 1,373 | | | $ | 1,337 | | | $ | 1,290 | |
Expenses Excluding Interest | | $ | 937 | | | $ | 909 | | | $ | 925 | | | $ | 959 | |
Net Income | | $ | 319 | | | $ | 290 | | | $ | 256 | | | $ | 206 | |
Net Income Available to Common Stockholders | | $ | 297 | | | $ | 282 | | | $ | 233 | | | $ | 198 | |
Weighted-Average Common Shares Outstanding – Diluted | | | 1,304 | | | | 1,296 | | | | 1,288 | | | | 1,282 | |
Basic Earnings Per Common Share | | $ | .23 | | | $ | .22 | | | $ | .18 | | | $ | .15 | |
Diluted Earnings Per Common Share | | $ | .23 | | | $ | .22 | | | $ | .18 | | | $ | .15 | |
Dividends Declared Per Common Share | | $ | .06 | | | $ | .06 | | | $ | .06 | | | $ | .06 | |
Range of Common Stock Price Per Share: | | | | | | | | | | | | | | | | |
High | | $ | 26.00 | | | $ | 22.69 | | | $ | 21.23 | | | $ | 18.11 | |
Low | | $ | 20.57 | | | $ | 20.74 | | | $ | 16.21 | | | $ | 15.05 | |
Range of Price/Earnings Ratio (1): | | | | | | | | | | | | | | | | |
High | | | 33 | | | | 32 | | | | 32 | | | | 26 | |
Low | | | 26 | | | | 30 | | | | 24 | | | | 22 | |
(1)
| Price/earnings ratio is computed by dividing the high and low market prices by diluted earnings per common share for the preceding 12-month period ending on the last day of the quarter presented.
|
|
| | | | | | | | | | | | | | | |
| | Fourth
Quarter | | Third
Quarter | | Second
Quarter | | First
Quarter |
| Year Ended December 31, 2017: | | | | | | | |
| Total Net Revenues | $ | 2,242 |
| | $ | 2,165 |
| | $ | 2,130 |
| | $ | 2,081 |
|
| Total Expenses Excluding Interest | $ | 1,289 |
| | $ | 1,220 |
| | $ | 1,221 |
| | $ | 1,238 |
|
| Net Income | $ | 597 |
| | $ | 618 |
| | $ | 575 |
| | $ | 564 |
|
| Net Income Available to Common Stockholders | $ | 550 |
| | $ | 575 |
| | $ | 530 |
| | $ | 525 |
|
| Weighted-Average Common Shares Outstanding — Basic | 1,343 |
| | 1,339 |
| | 1,338 |
| | 1,336 |
|
| Weighted-Average Common Shares Outstanding — Diluted | 1,358 |
| | 1,353 |
| | 1,351 |
| | 1,351 |
|
| Earnings Per Common Share — Basic | $ | .41 |
| | $ | .43 |
| | $ | .40 |
| | $ | .39 |
|
| Earnings Per Common Share — Diluted | $ | .41 |
| | $ | .42 |
| | $ | .39 |
| | $ | .39 |
|
| Dividends Declared Per Common Share | $ | .08 |
| | $ | .08 |
| | $ | .08 |
| | $ | .08 |
|
| Range of Common Stock Price Per Share: | | | | | | | |
| High | $ | 52.52 |
| | $ | 44.35 |
| | $ | 44.10 |
| | $ | 43.65 |
|
| Low | $ | 42.20 |
| | $ | 38.06 |
| | $ | 37.16 |
| | $ | 37.62 |
|
Range of Price/Earnings Ratio (1): | | | | | | | |
| High | 33 |
| | 28 |
| | 30 |
| | 31 |
|
| Low | 26 |
| | 24 |
| | 25 |
| | 27 |
|
| Year Ended December 31, 2016: | | | | | | | |
| Total Net Revenues | $ | 1,972 |
| | $ | 1,914 |
| | $ | 1,828 |
| | $ | 1,764 |
|
| Total Expenses Excluding Interest | $ | 1,148 |
| | $ | 1,120 |
| | $ | 1,108 |
| | $ | 1,109 |
|
| Net Income | $ | 522 |
| | $ | 503 |
| | $ | 452 |
| | $ | 412 |
|
| Net Income Available to Common Stockholders | $ | 478 |
| | $ | 470 |
| | $ | 406 |
| | $ | 392 |
|
| Weighted-Average Common Shares Outstanding — Basic | 1,329 |
| | 1,324 |
| | 1,322 |
| | 1,321 |
|
| Weighted-Average Common Shares Outstanding — Diluted | 1,341 |
| | 1,334 |
| | 1,333 |
| | 1,330 |
|
| Earnings Per Common Share — Basic | $ | .36 |
| | $ | .36 |
| | $ | .31 |
| | $ | .30 |
|
| Earnings Per Common Share — Diluted | $ | .36 |
| | $ | .35 |
| | $ | .30 |
| | $ | .29 |
|
| Dividends Declared Per Common Share | $ | .07 |
| | $ | .07 |
| | $ | .07 |
| | $ | .06 |
|
| Range of Common Stock Price Per Share: | | | | | | | |
| High | $ | 40.58 |
| | $ | 31.87 |
| | $ | 31.07 |
| | $ | 32.23 |
|
| Low | $ | 30.66 |
| | $ | 23.83 |
| | $ | 24.02 |
| | $ | 21.51 |
|
Range of Price/Earnings Ratio (1): | | | | | | | |
| High | 31 |
| | 26 |
| | 27 |
| | 29 |
|
| Low | 24 |
| | 20 |
| | 21 |
| | 20 |
|
Report (1) Price/earnings ratio is computed by dividing the high and low market prices by diluted earnings per common share for the preceding 12-month period ending on the last day of the quarter presented.
25. Subsequent Event
On February 8, 2018, CSC redeemed all of Independent Registered Public Accounting Firmits outstanding 1.500% Senior Notes due March 10, 2018. The aggregate principal amount of the notes was $625 million.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the Stockholders and the Board of Directors
and Stockholders of The Charles Schwab Corporation:
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of The Charles Schwab Corporation and subsidiaries (the Company)"Company") as of December 31, 20142017 and 2013, and2016, the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows, for each of the three years in the period ended December 31, 2014. Our audits also included2017, and the financial statement schedule ofrelated notes (collectively referred to as the Company on page F-2."financial statements"). We also have audited the Company’s internal control over financial reporting as of December 31, 2014,2017, based on criteria established in Internal Control –- Integrated Framework (2013)(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Commission (COSO).
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2017, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO.
Basis for Opinions
The Company’s management is responsible for these financial statements,
and financial statement schedule, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying
Management’sManagement's Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on these financial statements and
financial statement schedule and an opinion on the Company’s internal control over financial reporting based on our audits.
We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the auditaudits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the financial statements included
performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures to respond to those risks. Such procedures included examining, on a test basis, evidence
supportingregarding the amounts and disclosures in the financial
statements, assessingstatements. Our audits also included evaluating the accounting principles used and significant estimates made by management,
andas well as evaluating the overall
presentation of the financial
statement presentation.statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed
by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of theits inherent limitations, of internal control over financial reporting including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be preventedprevent or detected on a timely basis.detect misstatements. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of The Charles Schwab Corporation and subsidiaries as of December 31, 2014 and 2013, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2014, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2014, based on the criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
|
| |
/s/ DeloitteDELOITTE & ToucheTOUCHE LLP | |
San Francisco, California
February
23, 201522, 2018 - 94 -
We have served as the Company's auditor since 1976.
THE CHARLES SCHWAB CORPORATION
Management’sReport on Internal Control Over Financial Reporting
Management of The Charles Schwab Corporation, together with its subsidiaries (the Company), is responsible for establishing and maintaining adequate internal control over financial reporting. The Company’s internal control over financial reporting is a process designed under the supervision of and effected by the Company’s chief executive officer and chief financial officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of published financial statements in accordance with accounting principles generally accepted in the United States of America.
As of December 31, 2014,2017, management conducted an assessment of the effectiveness of the Company’s internal control over financial reporting based on the framework established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management has determined that the Company’s internal control over financial reporting was effective as of December 31, 2014.2017.
The Company’s internal control over financial reporting includes policies and procedures that pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of assets; provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures are being made only in accordance with authorizations of management and the directors of the Company; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the Company’s financial statements.
The Company’s internal control over financial reporting as of December 31,
2014,2017, has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report appearing on the previous page.
- 95 -
THE CHARLES SCHWAB CORPORATION
Item 9.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Item 9A.
Controls and Procedures
Evaluation of disclosure controls and procedures:The management of the Company, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of December 31, 2014.2017. Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were effective as of December 31, 2014.2017.
Changes in internal control over financial reporting: No change in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) was identified during the quarter ended December 31, 2014,2017, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
Management’s Report on Internal Control Over Financial Reporting and the Report of Independent Registered Public Accounting Firm are included in
“Item 8 – Financial Statements and Supplementary Data.”Item 8.
Item 9B.
Other Information
Directors, Executive Officers, and Corporate Governance | |
| Item 10. | Directors, Executive Officers, and Corporate Governance |
The information relating to directors of CSC required to be furnished pursuant to this item is incorporated by reference from portions of the Company’s definitive proxy statement for its annual meeting of stockholders to be filed with the SEC pursuant to Regulation 14A by April 30, 20152018 (the Proxy Statement) under “Members of the Board of Directors,” “Corporate Governance, Information,” “Director Nominations,” “Executive Officers,” and “Section 16(a) Beneficial Ownership Reporting Compliance.” The Company’s Code of Conduct and Business Ethics, applicable to directors and all employees, including senior financial officers, is available on the Company’s website at http:https://www.aboutschwab.com/governance. If the Company makes any amendments to or grants any waivers from its Code of Conduct and Business Ethics, which are required to be disclosed pursuant to the Securities Exchange Act of 1934, the Company will make such disclosures on this website.
THE CHARLES SCHWAB CORPORATION
SchwabExecutive Officers of the Registrant
The following table provides certain information about each of the Company’s executive officers as of December 31, 2014.
| | | |
| Item 11. | | | |
Executive Officers of the Registrant |
| | | |
| Name
| Age
| Title
|
| Charles R. Schwab
| 77
| Chairman of the Board
|
| Walter W. Bettinger II
| 54
| President and Chief Executive Officer
|
| Jay L. Allen
| 58
| Executive Vice President and Chief Administrative Officer
|
| Bernard J. Clark
| 56
| Executive Vice President – Advisor Services
|
| David R. Garfield
| 58
| Executive Vice President, General Counsel and Corporate Secretary
|
| Terri R. Kallsen
| 46
| Executive Vice President – Investor Services
|
| Joseph R. Martinetto
| 52
| Executive Vice President and Chief Financial Officer
|
| James D. McCool
| 55
| Executive Vice President – Client Solutions
|
| | | Compensation |
Mr. Schwab has been Chairman of the Board and a director of CSC since its incorporation in 1986. He also served as Chief Executive Officer of CSC from 1986 to 1997, and as Co-Chief Executive Officer from 1998 until 2003. He was re-appointed Chief Executive Officer in 2004 and served in that role until 2008. Mr. Schwab is also Chairman of Charles Schwab & Co., Inc. and Charles Schwab Bank, and Chairman and trustee of The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust, Schwab Annuity Portfolios, Laudus Trust, and Laudus Institutional Trust, all registered investment companies.
Mr. Bettinger has been President and Chief Executive Officer of CSC since 2008. He also serves on the Board of Directors of CSC, Charles Schwab & Co., Inc. and Charles Schwab Bank, and as a trustee of The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust, Schwab Annuity Portfolios, Laudus Trust, Laudus Institutional Trust, and Schwab Strategic Trust, all registered investment companies. Prior to assuming his current role, Mr. Bettinger served as President and Chief Operating Officer of CSC from 2007 until 2008 and as Executive Vice President and President – Schwab Investor Services of CSC and Schwab from 2005 to 2007. He served as Executive Vice President and Chief Operating Officer – Individual Investor Enterprise of CSC and Schwab from 2004 until 2005, and Executive Vice President – Corporate Services of Schwab from 2002 until 2004. Mr. Bettinger joined Schwab in 1995.
Mr. Allen has been Executive Vice President and Chief Administrative Officer of CSC and Schwab since April 2014. He served as Executive Vice President – Human Resources and Employee Services of CSC and Schwab from 2007 until April 2014. He served as Senior Vice President – Human Resources of Schwab Investor Services from 2004 to 2007. Mr. Allen joined Schwab in 2003 as Vice President – Human Resources of Schwab Investor Services.
Mr. Clark has been Executive Vice President – Advisor Services of CSC since 2012. Mr. Clark has served as Executive Vice President – Advisor Services of Schwab since 2010. From 2006 until 2010, Mr. Clark served as Senior Vice President – Schwab Institutional Sales of Schwab. During 2005 and 2006, he served as Senior Vice President – Client Service of Schwab. Mr. Clark joined Schwab in 1998.
Mr. Garfield has been Executive Vice President, General Counsel and Corporate Secretary of CSC and Executive Vice President of Schwab since October 2014. Mr. Garfield served as Deputy General Counsel of Wells Fargo & Company from 1998 until he joined Schwab in October 2014.
Ms. Kallsen has been Executive Vice President – Investor Services of CSC and Schwab since December 2014. She served as Senior Vice President – Portfolio Consulting of Schwab from 2012 until June 2014 and as Senior Vice President – Branch Network from June 2014 until December 2014. Prior to joining Schwab, Ms. Kallsen served as Executive Vice President of First Command Financial Services from 2009 until 2012 and as Senior Vice President of USAA from 2004 until 2009.
THE CHARLES SCHWAB CORPORATION
Mr. Martinetto has been Executive Vice President and Chief Financial Officer of CSC and Schwab since 2007. He has served as Chief Executive Officer of Charles Schwab Bank since December 2012. Mr. Martinetto served as Senior Vice President and Treasurer of CSC and Schwab from 2003 to 2007 and Senior Vice President – Individual Investor Finance of Schwab from 2002 to 2003. Mr. Martinetto joined Schwab in 1997.
Mr. McCool has been Executive Vice President – Clients Solutions of CSC and Schwab since 2012. He served as Executive Vice President – Institutional Services of CSC and Schwab from 2008 until 2012. Mr. McCool served as Executive Vice President – Schwab Corporate and Retirement Services of CSC from 2007 until 2008 and of Schwab from 2006 until 2008. Mr. McCool served as Senior Vice President – Corporate Services of Schwab from 2004 until 2006. Mr. McCool also served as President and Chief Executive Officer of The Charles Schwab Trust Company (CSTC) from 2005 until 2007. Mr. McCool served as Senior Vice President – Plan Administrative Services of CSTC from 2004 until 2005, Chief Operating Officer of CSTC from 2003 until 2004, and Vice President – Development and Business Technology of CSTC from 2002 until 2003. Mr. McCool joined Schwab in 1995.
Item 11.Executive Compensation
The information required to be furnished pursuant to this item is incorporated by reference from portions of the Proxy Statement under “Compensation Discussion and Analysis,” “Executive Compensation Tables – 20142017 Summary Compensation Table,” “Executive Compensation Tables – 20142017 Grants of Plan-Based Awards Table,” “Executive Compensation Tables – Narrative to Summary Compensation and Grants of Plan-Based Awards Tables,” “Executive Compensation Tables – 20142017 Termination and Change in Control Benefits Table,” “Executive Compensation Tables – Outstanding Equity Awards as of December 31, 2014,2017,” “Executive Compensation Tables – 20142017 Option Exercises and Stock Vested Table,” “Executive Compensation Tables – 20142017 Nonqualified Deferred Compensation Table,” “Director Compensation,” and “Compensation Committee Interlocks and Insider Participation.” In addition, the information from a portion of the Proxy Statement under “Compensation Committee Report,” is incorporated by reference from the Proxy Statement and furnished on this Form 10-K, and shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933.
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
THE CHARLES SCHWAB CORPORATION
| |
| Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
The information required to be furnished pursuant to this item is incorporated by reference from portions of the Proxy Statement under “Security Ownership of Certain Beneficial Owners and Management,” and “Securities Authorized for Issuance under Equity Compensation Plans.”
Item 13.
Certain Relationships and Related Transactions, and Director Independence | |
| Item 13. | Certain Relationships and Related Transactions, and Director Independence |
The information required to be furnished pursuant to this item is incorporated by reference from portions of the Proxy Statement under “Transactions with Related Persons” and “Director Independence.”
Item 14.
Principal Accountant Fees and Services | |
| Item 14. | Principal Accountant Fees and Services |
The information required to be furnished pursuant to this item is incorporated by reference from a portion of the Proxy Statement under “Auditor Fees.”
THE CHARLES SCHWAB CORPORATION
Exhibits and Financial Statement Schedule | |
| Item 15. | Exhibits, Financial Statement Schedules |
(a) Documents filed as part of this Report
The financial statements and independent auditors’ report are included in
“ItemItem 8
– Financial Statements and Supplementary Data” and are listed below:
Consolidated Statements of Income
Consolidated Statements of Comprehensive Income
Consolidated Balance Sheets
Consolidated Statements of Cash Flows
Consolidated Statements of Stockholders’ Equity
Notes to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
2. Financial Statement
ScheduleTheSchedules
Other financial statement
scheduleschedules required
to be furnished pursuant to this
itemItem are omitted because of the absence of conditions under which they are required or because the information is
listedincluded in the
accompanying index appearing on page F-1.Company’s consolidated financial statements and notes in Item 8.
THE CHARLES SCHWAB CORPORATION
The exhibits listed below are filed as part of this annual report on Form 10-K.
Exhibit
Number
|
Exhibit
| |
| | |
2.1
Exhibit Number | Agreement and Plan of Merger, dated March 18, 2011, by and among The Charles Schwab Corporation, Neon Acquisition Corp. and optionsXpress Holdings, Inc., filed as Exhibit 2.1 to the Registrant’s Form 8-K dated March 18, 2011, and incorporated herein by reference.
| |
| | |
3.11 | | |
| | |
3.14 | | |
| | |
3.15 | | |
| | |
3.16 | | |
| | |
| 3.17 | | |
| | |
4.1
3.18 | | |
| | |
| 3.19 | | |
| | |
| 3.20 | | |
| | |
| 3.21 | | |
| | |
| 4.1 | | |
| | |
| 4.2 | | |
| | |
| 4.3 | | |
| | |
| 4.4 | | |
| | |
| 4.5 | | |
| | |
- 99 -
THE CHARLES SCHWAB CORPORATION
Exhibit
Number |
Exhibit
| |
| | |
4.2 | Neither the Registrant nor its subsidiaries are parties to any instrument with respect to long-term debt for which securities authorized thereunder exceed 10% of the total assets of the Registrant and its subsidiaries on a consolidated basis. Copies of instruments with respect to long-term debt of lesser amounts will be provided to the SEC upon request. | |
| | |
10.4 | Form of Release Agreement dated as of March 31, 1987 among BAC, Registrant, Schwab Holdings, Inc., Charles Schwab & Co., Inc. and former shareholders of Schwab Holdings, Inc., filed as the identically-numbered exhibit to Registrant’s Registration Statement No. 33-16192 on Form S-1 and incorporated herein by reference. | |
| | |
10.57 | Registration Rights and Stock Restriction Agreement, dated as of March 31, 1987, between the Registrant and the holders of the Common Stock, filed as Exhibit 4.23 to Registrant’s Registration Statement No. 33-16192 on Form S-1 and incorporated herein by reference. | |
| | |
10.72 | Restatement of Assignment and License, as amended January 25, 1988, among Charles Schwab & Co., Inc., Charles R. Schwab and the Registrant. | |
| | |
10.271 | The Charles Schwab Corporation Directors’ Deferred Compensation Plan, as amended through December 8, 2004. | (2) |
| | |
10.272 | The Charles Schwab Corporation Deferred Compensation Plan, as amended through December 8, 2004. | (2) |
| | |
10.302 | The Charles Schwab Corporation 2001 Stock Incentive Plan, as amended and restated as of December 12, 2007, filed as Exhibit 10.302 to the Registrant’s Form 10-K for the year ended December 31, 2012, and incorporated herein by reference. | (2) |
| | |
10.314 | Employment Agreement dated as of March 13, 2008, between the Registrant and Charles R. Schwab, filed as Exhibit 10.314 to the Registrant’s Form 10-Q for the quarter ended March 31, 2013, and incorporated herein by reference. | (2) |
| | |
10.317 | Form of Notice and Nonqualified Stock Option Agreement for Walter W. Bettinger under The Charles Schwab Corporation 2004 Stock Incentive Plan dated October 1, 2008, filed as Exhibit 10.317 to the Registrant’s Form 10-Q for the quarter ended September 30, 2013, and incorporated herein by reference. | (2) |
| | |
10.322 | The Charles Schwab Corporation Deferred Compensation Plan II, as amended and restated as of October 23, 2008, filed as Exhibit 10.322 to the Registrant’s Form 10-K for the year ended December 31, 2013, and incorporated herein by reference. | (2) |
| | |
10.331 | The Charles Schwab Corporation Corporate Executive Bonus Plan, restated to include amendments approved at the Annual Meeting of Stockholders on May 13, 2010, filed as Exhibit 10.331 to the Registrant’s Form 10-Q for the quarter ended June 30, 2010, and incorporated herein by reference. | (2) |
| | |
10.338 | The Charles Schwab Corporation 2004 Stock Incentive Plan, as approved at the Annual Meeting of Stockholders on May 17, 2011, filed as Exhibit 10.338 to the Registrant’s Form 10-Q for the quarter ended June 30, 2011, and incorporated herein by reference. | (2) |
| | |
10.349 | The Charles Schwab Severance Pay Plan, as Amended and Restated Effective May 1, 2012, filed as Exhibit 10.349 to the Registrant’s Form 10-Q for the quarter ended June 30, 2012, and incorporated herein by reference. | (2) |
| | |
10.351 | Summary of Non-Employee Director Compensation, filed as Exhibit 10.351 to the Registrant’s
Form 10-K for the year ended December 31, 2012, and incorporated herein by reference. | (2) |
| | |
|
| | |
Exhibit Number | Exhibit | |
| 4.6 | Neither the Registrant nor its subsidiaries are parties to any instrument with respect to long-term debt for which securities authorized thereunder exceed 10% of the total assets of the Registrant and its subsidiaries on a consolidated basis. Copies of instruments with respect to long-term debt of lesser amounts will be provided to the SEC upon request. | |
| | | |
| 10.4 | Form of Release Agreement dated as of March 31, 1987 among BAC, Registrant, Schwab Holdings, Inc., Charles Schwab & Co., Inc., and former shareholders of Schwab Holdings, Inc., filed as the identically-numbered exhibit to Registrant’s Registration Statement No. 33-16192 on Form S-1 and incorporated herein by reference. | |
| | | |
| 10.57 | Registration Rights and Stock Restriction Agreement, dated as of March 31, 1987, between the Registrant and the holders of the Common Stock, filed as Exhibit 4.23 to Registrant’s Registration Statement No. 33-16192 on Form S-1 and incorporated herein by reference. | |
| | | |
| 10.72 | | |
| | | |
| 10.271 | | (2) |
| | | |
| 10.272 | | (2) |
| | | |
| 10.314 | | (2) |
| | | |
| 10.322 | | (2) |
| | | |
| 10.338 | | (2) |
| | | |
| 10.349 | | (2) |
| | | |
| 10.352 | | (2) |
| | | |
| 10.360 | | (2) |
| | | |
| 10.362 | | (2) |
| | | |
| 10.365 | | (2) |
| | | |
| 10.367 | | (2) |
| | | |
| 10.368 | | |
| | | |
THE CHARLES SCHWAB CORPORATION
Exhibit
Number |
Exhibit
| |
| | |
10.352 | Form of Performance-Based Cash Long-Term Incentive Award Agreement under The Charles Schwab Corporation 2004 Stock Incentive Plan and successor plans, filed as Exhibit 10.352 to the Registrant’s Form 8-K dated January 24, 2013, and incorporated herein by reference. | (2) |
| | |
10.353 | Form of Notice and Performance-Based Restricted Stock Unit Agreement under The Charles Schwab Corporation 2004 Stock Incentive Plan and successor plans, filed as Exhibit 10.353 to the Registrant’s Form 8-K dated January 24, 2013, and incorporated herein by reference. | (2) |
| | |
10.354 | Form of Notice and Nonqualified Stock Option Agreement under The Charles Schwab Corporation 2004 Stock Incentive Plan and successor plans, filed as Exhibit 10.354 to the Registrant’s Form 8-K dated January 24, 2013, and incorporated herein by reference. | (2) |
| | |
10.355 | Form of Notice and Restricted Stock Unit Agreement under The Charles Schwab Corporation 2004 Stock Incentive Plan and successor plans, filed as Exhibit 10.355 to the Registrant’s Form 8-K dated January 24, 2013, and incorporated herein by reference. | (2) |
| | |
10.356 | Form of Notice and Retainer Stock Option Agreement for Non-Employee Directors under The Charles Schwab Corporation 2004 Stock Incentive Plan and successor plans, filed as Exhibit 10.356 to the Registrant’s Form 8-K dated January 24, 2013, and incorporated herein by reference. | (2) |
| | |
10.357 | Form of Notice and Retainer Restricted Stock Unit Agreement for Non-Employee Directors under The Charles Schwab Corporation 2004 Stock Incentive Plan and successor plans, filed as Exhibit 10.357 to the Registrant’s Form 8-K dated January 24, 2013, and incorporated herein by reference. | (2) |
| | |
10.358 | Form of Notice and Stock Option Agreement for Non-Employee Directors under The Charles Schwab Corporation Directors’ Deferred Compensation Plan II and The Charles Schwab Corporation 2004 Stock Incentive Plan and successor plans, filed as Exhibit 10.358 to the Registrant’s Form 8-K dated January 24, 2013, and incorporated herein by reference. | (2) |
| | |
10.359 | Form of Notice and Restricted Stock Unit Agreement for Non-Employee Directors under The Charles Schwab Corporation Directors’ Deferred Compensation Plan II and The Charles Schwab Corporation 2004 Stock Incentive Plan and successor plans, filed as Exhibit 10.359 to the Registrant’s Form 8-K dated January 24, 2013, and incorporated herein by reference. | (2) |
| | |
10.360 | The Charles Schwab Corporation 2013 Stock Incentive Plan, as approved at the Annual Meeting of Stockholders on May 16, 2013, filed as Exhibit 10.360 to the Registrant’s Form 8-K dated May 16, 2013, and incorporated herein by reference. | (2) |
| | |
10.361 | Credit Agreement (364 – Day Commitment) dated as of June 7, 2013, between the Registrant and financial institutions therein, filed as Exhibit 10.361 to the Registrant’s Form 10-Q for the quarter ended June 30, 2013, and incorporated herein by reference. | |
| | |
10.362 | The Charles Schwab Corporation Directors’ Deferred Compensation Plan II, as amended and restated as of April 24, 2013, filed as Exhibit 10.362 to the Registrant’s Form 10-Q for the quarter ended June 30, 2013, and incorporated herein by reference. | (2) |
| | |
10.363 | Credit Agreement (364 – Day Commitment) dated as of June 6, 2014, between the Registrant and financial institutions therein (supersedes Exhibit 10.361), filed as Exhibit 10.363 to the Registrant’s Form 10-Q for the quarter ended June 30, 2014, and incorporated herein by reference. | |
| | |
10.364 | Separation Agreement, General Release and Waiver of Claims by and between Mr. Clendening and CSC, filed as Exhibit 10.364 to the Registrant’s Form 8-K/A dated December 10, 2014, and incorporated herein by reference. | (2) |
| | |
|
| | |
Exhibit Number | Exhibit | |
| 10.369 | | (2) |
| | | |
| 10.370 | | (2) |
| | | |
| 10.371 | | (2) |
| | | |
| 10.372 | | (2) |
| 10.373 | | (2) |
| | | |
| 10.374 | | (2) |
| | | |
| 10.375 | | (2) |
| | | |
| 10.376 | | (2) |
| | | |
| 10.377 | | (2) |
| | | |
| 10.378 | | (2) |
| | | |
| 10.379 | | (2) |
| | | |
| 10.380 | | (2) |
| | | |
| 10.381 | | (2) |
| | | |
THE CHARLES SCHWAB CORPORATION
Exhibit
Number |
Exhibit
| |
| | |
12.1 | Computation of Ratio of Earnings to Fixed Charges and Ratio of Earnings to Fixed Charges and Preferred Stock Dividends. | |
| | |
21.1 | Subsidiaries of the Registrant. | |
| | |
23.1 | Independent Registered Public Accounting Firm’s Consent. | |
| | |
31.1 | Certification Pursuant to Rule 13a-14(a)/15d-14(a), As Adopted Pursuant to Section 302 of The Sarbanes-Oxley Act of 2002. | |
| | |
31.2 | Certification Pursuant to Rule 13a-14(a)/15d-14(a), As Adopted Pursuant to Section 302 of The Sarbanes-Oxley Act of 2002. | |
| | |
32.1 | Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002. | (1) |
| | |
32.2 | Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002. | (1) |
| | |
101.INS | XBRL Instance Document | (3) |
| | |
101.SCH | XBRL Taxonomy Extension Schema | (3) |
| | |
101.CAL | XBRL Taxonomy Extension Calculation | (3) |
| | |
101.DEF | XBRL Extension Definition | (3) |
| | |
101.LAB | XBRL Taxonomy Extension Label | (3) |
| | |
101.PRE | XBRL Taxonomy Extension Presentation | (3) |
| | |
(1) | Furnished as an exhibit to this annual report on Form 10-K. | |
| | |
(2) | Management contract or compensatory plan. | |
| | |
(3) | Attached as Exhibit 101 to this Annual Report on Form 10-K for the annual period ended December 31, 2014, are the following materials formatted in XBRL (Extensible Business Reporting Language) (i) the Consolidated Statements of Income,(ii) the Consolidated Statements of Comprehensive Income, (iii) the Consolidated Balance Sheets, (iv) the Consolidated Statements of Cash Flows, (v) the Consolidated Statements of Stockholders’ Equity, and (vi) Notes to Consolidated Financial Statements. | |
| | |
|
| | |
Exhibit Number | Exhibit | |
| 10.382 | | (2) |
| | | |
| 10.383 | | (2) |
| | | |
| 10.384 | | (2) |
| | | |
| 10.385 | | (1),(2) |
| | | |
| 10.386 | | (1),(2) |
| | | |
| 10.387 | | (1),(2) |
| | | |
| 10.388 | | (1),(2) |
| | | |
| 10.389 | | (1),(2) |
| | | |
| 10.390 | | (1),(2) |
| | | |
| 12.1 | | |
| | | |
| 21.1 | | |
| | | |
| 23.1 | | |
| 31.1 | | |
| | | |
| 31.2 | | |
| | | |
| 32.1 | | (1) |
| | | |
| 32.2 | | (1) |
| 101.INS | XBRL Instance Document | (3) |
| | | |
| 101.SCH | XBRL Taxonomy Extension Schema | (3) |
| | | |
| 101.CAL | XBRL Taxonomy Extension Calculation | (3) |
| | | |
| 101.DEF | XBRL Extension Definition | (3) |
| | | |
| 101.LAB | XBRL Taxonomy Extension Label | (3) |
| | | |
| 101.PRE | XBRL Taxonomy Extension Presentation | (3) |
| | | |
THE CHARLES SCHWAB CORPORATION
S
|
| | |
Exhibit Number | Exhibit | |
| (1) | Furnished as an exhibit to this annual report on Form 10-K. | |
| | |
| (2) | Management contract or compensatory plan. | |
| | |
| (3) | Attached as Exhibit 101 to this Annual Report on Form 10-K for the annual period ended December 31, 2017, are the following materials formatted in XBRL (Extensible Business Reporting Language) (i) the Consolidated Statements of Income,(ii) the Consolidated Statements of Comprehensive Income, (iii) the Consolidated Balance Sheets, (iv) the Consolidated Statements of Cash Flows, (v) the Consolidated Statements of Stockholders’ Equity, and (vi) Notes to Consolidated Financial Statements. | |
IGNATURES
THE CHARLES SCHWAB CORPORATION
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on February
23, 2015.22, 2018.
|
| | |
| THE CHARLES SCHWAB CORPORATION |
| (Registrant) |
| | |
| BY: | /s/ Walter W. Bettinger II |
| | Walter W. Bettinger II |
| | President and Chief Executive Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated, on February
23, 2015.22, 2018. |
| | |
| Signature / Title | | Signature / Title |
| | |
| | |
/s/ Walter W. Bettinger II | | /s/ Joseph R. Martinetto Peter Crawford |
Walter W. Bettinger II, | | Joseph R. Martinetto,
Peter Crawford, |
President and Chief Executive Officer and Director | | Executive Vice President
and Chief Financial Officer
(principal (principal financial and accounting officer)
|
| | |
| | |
/s/ Charles R. Schwab | | /s/ John K. Adams, Jr. |
Charles R. Schwab, Chairman of the Board | | John K. Adams, Jr., Director |
| | |
| | |
/s/ Nancy H. Bechtle
| | /s/ C. Preston Butcher | | /s/ Joan T. Dea |
Nancy H. Bechtle, Director
| | C. Preston Butcher, Director | | Joan T. Dea, Director |
| | |
| | |
/s/ Christopher V. Dodds | | /s/ Stephen A. Ellis |
Christopher V. Dodds, Director | | Stephen A. Ellis, Director |
| | |
| | |
/s/ Mark A. Goldfarb | | /s/ William S. Haraf |
Mark A. Goldfarb, Director | | William S. Haraf, Director |
| | |
| | |
/s/ Frank C. Herringer | | /s/ Stephen T. McLin |
Frank C. Herringer, Director | | Stephen T. McLin, Director |
| | |
| | |
/s/ Arun Sarin | | /s/ Paula A. Sneed |
Arun Sarin, Director | | Paula A. Sneed, Director |
| | |
| | |
/s/ Roger O. Walther | | /s/ Robert N. Wilson |
Roger O. Walther, Director | | Robert N. Wilson, Director |
- 103 -
THE CHARLES SCHWAB CORPORATION
| | |
| | |
| | |
Index to Financial Statement Schedule
| | |
| | |
| | STATISTICAL DISCLOSURE BY BANK HOLDING COMPANIES |
| | |
| Page
| The following table outlines the information required by the SEC’s Industry Guide 3, “Statistical Disclosure by Bank Holding Companies.” Beginning in 2017, these disclosures are presented at the consolidated holding company level. Comparative prior period amounts are also presented at a consolidated level.
|
| | |
| | |
Schedule II - Valuation and Qualifying Accounts
| F-2
| |
| Required Disclosure | Page |
Supplemental Financial Data for Charles Schwab Bank (Unaudited)
| F-3Distribution of Assets, Liabilities and Stockholders’ Equity; Interest Rates and Interest Differential
| F-2 – F-9 | F-3 |
| Investment Portfolio | F-4 |
| Risk Elements – Cross-border Holdings | F-5 |
| Loan Portfolio | F-6 – F-7 |
| Summary of Loan Loss Experience | F-7 |
| Deposits | F-7 |
| Return on Equity and Assets | F-7 |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
Schedules not listed are omitted because of the absence of the conditions under which they are required or because the information is included in the Company’s consolidated financial statements and notes in “Item 8 – Financial Statements and Supplementary Data.”
| |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
THE CHARLES SCHWAB CORPORATION
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | SCHEDULE II |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Valuation and Qualifying Accounts |
(In millions) |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | Balance at | | Additions | | | | | Balance at |
| | Beginning | | Charged | | | | | | | End |
Description | | of Year | | to Expense | | Other (1) | | Written off | | of Year |
| | | | | | | | | | | | | | | |
For the year ended December 31, 2014: | | | | | | | | | | | | | | | |
Allowance for doubtful accounts of | | | | | | | | | | | | | | | |
brokerage clients (2) | | $ | - | | $ | 6 | | $ | 1 | | $ | (5) | | $ | 2 |
| | | | | | | | | | | | | | | |
For the year ended December 31, 2013: | | | | | | | | | | | | | | | |
Allowance for doubtful accounts of | | | | | | | | | | | | | | | |
brokerage clients (2) | | $ | 1 | | $ | 2 | | $ | 1 | | $ | (4) | | $ | - |
| | | | | | | | | | | | | | | |
For the year ended December 31, 2012: | | | | | | | | | | | | | | | |
Allowance for doubtful accounts of | | | | | | | | | | | | | | | |
brokerage clients (2) | | $ | 2 | | $ | 4 | | $ | - | | $ | (5) | | $ | 1 |
(1)
| Includes collections of previously written-off accounts.
|
(2)
| Excludes banking-related valuation and qualifying accounts. See “Item 8 – Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – 6. Loans to Banking Clients and Related Allowance for Loan Losses.”
|
THE CHARLES SCHWAB CORPORATION
Supplemental Financial Data for Charles Schwab Bank (Unaudited)
The following supplemental financial data is consistent with the Securities Exchange Act of 1934, Industry Guide 3 – Statistical Disclosure by Bank Holding Companies.
The accompanying unaudited financial information represents Charles Schwab Bank (Schwab Bank), which is a subsidiary of The Charles Schwab Corporation (CSC). CSC is a savings and loan holding company and Schwab Bank is a federal savings bank. The following information excludes intercompany balances and transactions with CSC and its affiliates.1.Three-year Net Interest Revenue and Average Balances
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
For the Year Ended December 31, | | 2014 | | | 2013 | | | 2012 | |
| | Average | | | | | Average | | Average | | | | | Average | | Average | | | | | Average |
| | Balance | | Interest | | Rate | | Balance | | Interest | | Rate | | Balance | | Interest | | Rate |
Assets: | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Cash and cash equivalents (1) | | $ | 5,871 | | $ | 15 | | 0.26 | % | | $ | 5,626 | | $ | 15 | | 0.27 | % | | $ | 5,575 | | $ | 15 | | 0.27 | % |
Securities available for sale (2) | | | 52,056 | | | 546 | | 1.05 | % | | | 49,112 | | | 557 | | 1.13 | % | | | 39,739 | | | 583 | | 1.47 | % |
Securities held to maturity | | | 32,361 | | | 828 | | 2.56 | % | | | 24,915 | | | 610 | | 2.45 | % | | | 15,371 | | | 397 | | 2.58 | % |
Loans to banking clients (3) | | | 12,903 | | | 354 | | 2.74 | % | | | 11,756 | | | 329 | | 2.80 | % | | | 10,050 | | | 309 | | 3.07 | % |
Loans held for sale | | | - | | | - | | - | | | | - | | | - | | - | | | | 18 | | | 1 | | 4.12 | % |
Other interest-earning assets | | | 63 | | | 6 | | 9.52 | % | | | 53 | | | 2 | | 3.77 | % | | | 54 | | | 1 | | 1.85 | % |
Total interest-earning assets | | | 103,254 | | | 1,749 | | 1.69 | % | | | 91,462 | | | 1,513 | | 1.65 | % | | | 70,807 | | | 1,306 | | 1.84 | % |
Net unrealized gain on | | | | | | | | | | | | | | | | | | | | | | | | | | | |
securities available for sale | | | 229 | | | | | | | | | 252 | | | | | | | | | 275 | | | | | | |
Noninterest-earning assets | | | 525 | | | | | | | | | 671 | | | | | | | | | 566 | | | | | | |
Total Assets | | $ | 104,008 | | | | | | | | $ | 92,385 | | | | | | | | $ | 71,648 | | | | | | |
Liabilities and Stockholder’s Equity: | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Interest-bearing banking deposits | | $ | 95,842 | | | 30 | | 0.03 | % | | $ | 85,465 | | | 31 | | 0.04 | % | | $ | 65,546 | | | 42 | | 0.06 | % |
Total sources on which interest is paid | | | 95,842 | | | 30 | | 0.03 | % | | | 85,465 | | | 31 | | 0.04 | % | | | 65,546 | | | 42 | | 0.06 | % |
Noninterest-bearing liabilities | | | 723 | | | | | | | | | 650 | | | | | | | | | 577 | | | | | | |
Stockholder’s equity | | | 7,443 | | | | | | | | | 6,270 | | | | | | | | | 5,525 | | | | | | |
Total Liabilities and Stockholder’s Equity | | $ | 104,008 | | | | | | | | $ | 92,385 | | | | | | | | $ | 71,648 | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net interest revenue | | | | | $ | 1,719 | | | | | | | | $ | 1,482 | | | | | | | | $ | 1,264 | | | |
Net yield on interest-earning assets | | | | | | | | 1.66 | % | | | | | | | | 1.62 | % | | | | | | | | 1.79 | % |
(1)
| Includes deposits with banks, short-term investments, and federal funds sold.
|
(2)
1. | Amounts have been calculated based on amortized cost.
|
(3)
| Includes average principal balances of nonaccrual loans.
Three-year Net Interest Revenue and Average Balances |
F-3
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Year Ended December 31, | 2017 | | 2016 | | 2015 |
| | Average | | | | Average | | Average | | | | Average | | Average | | | | Average |
| | Balance | | Interest | | Rate | | Balance | | Interest | | Rate | | Balance | | Interest | | Rate |
| Assets: | | | | | | | | | | | | | | | | | |
| Cash and cash equivalents | $ | 9,931 |
| | $ | 109 |
| | 1.10 | % | | $ | 11,143 |
| | $ | 57 |
| | 0.51 | % | | $ | 9,358 |
| | $ | 24 |
| | 0.26 | % |
| Cash and investments segregated | 18,525 |
| | 166 |
| | 0.90 | % | | 20,104 |
| | 93 |
| | 0.46 | % | | 18,606 |
| | 31 |
| | 0.17 | % |
Broker-related receivables (1) | 430 |
| | 3 |
| | 0.70 | % | | 558 |
| | 1 |
| | 0.22 | % | | 274 |
| | — |
| | 0.07 | % |
| Receivables from brokerage clients | 16,269 |
| | 575 |
| | 3.53 | % | | 15,001 |
| | 497 |
| | 3.31 | % | | 15,212 |
| | 502 |
| | 3.30 | % |
Available for sale securities (2) | 53,040 |
| | 815 |
| | 1.54 | % | | 72,586 |
| | 883 |
| | 1.22 | % | | 62,249 |
| | 629 |
| | 1.01 | % |
| Held to maturity securities | 103,599 |
| | 2,354 |
| | 2.27 | % | | 57,451 |
| | 1,402 |
| | 2.44 | % | | 38,280 |
| | 957 |
| | 2.50 | % |
Bank loans (6) | 15,919 |
| | 472 |
| | 2.97 | % | | 14,715 |
| | 400 |
| | 2.72 | % | | 13,973 |
| | 369 |
| | 2.64 | % |
| Total interest-earning assets | 217,713 |
| | 4,494 |
| | 2.06 | % | | 191,558 |
| | 3,333 |
| | 1.74 | % | | 157,952 |
| | 2,512 |
| | 1.59 | % |
| Other interest revenue |
|
| | 130 |
| |
|
| |
|
| | 160 |
| |
|
| |
|
| | 145 |
| |
|
|
| Total interest-earning assets | 217,713 |
| | 4,624 |
| | 2.12 | % | | 191,558 |
| | 3,493 |
| | 1.82 | % | | 157,952 |
| | 2,657 |
| | 1.68 | % |
Noninterest-earning assets (3,4) | 9,968 |
| |
|
| |
|
| | 9,354 |
| |
|
| |
|
| | 8,061 |
| |
|
| |
|
|
| Total assets | $ | 227,681 |
| |
|
| |
|
| | $ | 200,912 |
| |
|
| |
|
| | $ | 166,013 |
| |
|
| |
|
|
| | | | | | | | | | | | | | | | | | |
| Liabilities and Stockholders’ Equity: | | | | | | | | | | | | | | | | | |
| Bank deposits | $ | 163,998 |
| | $ | 148 |
| | 0.09 | % | | $ | 141,432 |
| | $ | 37 |
| | 0.03 | % | | $ | 113,464 |
| | $ | 29 |
| | 0.03 | % |
| Payables to brokerage clients | 25,403 |
| | 16 |
| | 0.06 | % | | 26,311 |
| | 3 |
| | 0.01 | % | | 25,651 |
| | 2 |
| | 0.01 | % |
Short-term borrowings (1) | 3,503 |
| | 41 |
| | 1.17 | % | | 1,864 |
| | 9 |
| | 0.48 | % | | 21 |
| | — |
| | 0.27 | % |
| Long-term debt | 3,431 |
| | 119 |
| | 3.47 | % | | 2,876 |
| | 104 |
| | 3.62 | % | | 2,717 |
| | 92 |
| | 3.39 | % |
| Total interest-bearing liabilities | 196,335 |
| | 324 |
| | 0.17 | % | | 172,483 |
| | 153 |
| | 0.09 | % | | 141,853 |
| | 123 |
| | 0.09 | % |
| Other interest expense | | | 18 |
| | | | | | 18 |
| | | | | | 9 |
| | |
Noninterest-bearing liabilities (3,5) | 13,787 |
| |
|
| |
|
| | 13,375 |
| |
|
| |
|
| | 11,529 |
| |
|
| |
|
|
Total liabilities (7) | 210,122 |
| | 342 |
| | 0.15 | % | | 185,858 |
| | 171 |
| | 0.09 | % | | 153,382 |
| | 132 |
| | 0.08 | % |
Stockholders’ equity (3) | 17,559 |
| |
|
| |
|
| | 15,054 |
| |
|
| |
|
| | 12,631 |
| |
|
| |
|
|
| Total liabilities and stockholders’ equity | $ | 227,681 |
| |
| |
|
| | $ | 200,912 |
| |
| |
|
| | $ | 166,013 |
| |
| |
|
|
| | | | | | | | | | | | | | | | | | |
| Net interest revenue | | | $ | 4,282 |
| | | | | | $ | 3,322 |
| | | | | | $ | 2,525 |
| | |
| Net yield on interest-earning assets | | | | | 1.97 | % | | | | | | 1.73 | % | | | | | | 1.60 | % |
(1) Interest revenue or expense was less than $500,000 in the period or periods presented.
(2) Amounts calculated based on amortized cost.
(3) Average balance calculation based on month end balances.
(4) Noninterest-earning assets include equipment, office facilities, and property – net, goodwill, intangible assets – net, and other assets that do not generate interest income.
(5) Noninterest-bearing liabilities consist of other liabilities that do not generate interest expense.
(6) Includes average principal balances of nonaccrual loans.
(7) Average rate calculation based on total funding sources.
THE CHARLES SCHWAB CORPORATION
Supplemental Financial Data
for Charles Schwab Bank (Unaudited)
2.Analysis of Change in Net Interest Revenue
| |
| 2. | Analysis of Change in Net Interest Revenue |
An analysis of the year-to-year changes in the categories of interest revenue and interest expense resulting from changes in volume and rate is as follows:
| | | | | | | | | | | | | | | | | | |
| | | 2014 Compared to 2013 | | | 2013 Compared to 2012 |
| | | Increase (Decrease) Due to | | | Increase (Decrease) Due to |
| | Change in: | | Change in: |
| | Average | | Average | | | | Average | | Average | | |
| | Volume | | Rate | | Total | | Volume | | Rate | | Total |
Interest-earning assets: | | | | | | | | | | | | | | | | | | |
Cash and cash equivalents (1) | | $ | - | | $ | - | | $ | - | | $ | - | | $ | - | | $ | - |
Securities available for sale (2) | | | 33 | | | (44) | | | (11) | | | 137 | | | (163) | | | (26) |
Securities held to maturity | | | 182 | | | 36 | | | 218 | | | 247 | | | (34) | | | 213 |
Loans to banking clients (3) | | | 32 | | | (7) | | | 25 | | | 52 | | | (32) | | | 20 |
Loans held for sale | | | - | | | - | | | - | | | (1) | | | - | | | (1) |
Other interest-earning assets | | | - | | | 4 | | | 4 | | | - | | | 1 | | | 1 |
Total interest-earning assets | | $ | 247 | | $ | (11) | | $ | 236 | | $ | 435 | | $ | (228) | | $ | 207 |
Interest-bearing sources of funds: | | | | | | | | | | | | | | | | | | |
Interest-bearing banking deposits | | $ | 4 | | $ | (5) | | $ | (1) | | $ | 12 | | $ | (23) | | $ | (11) |
Total sources on which interest is paid | | $ | 4 | | $ | (5) | | $ | (1) | | $ | 12 | | $ | (23) | | $ | (11) |
Change in net interest revenue | | $ | 243 | | $ | (6) | | $ | 237 | | $ | 423 | | $ | (205) | | $ | 218 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | 2017 Compared to 2016
Increase (Decrease) Due to
Change in: | | 2016 Compared to 2015
Increase (Decrease) Due to
Change in: |
| | Average
Volume | | Average
Rate | | Total | | Average
Volume | | Average
Rate | | Total |
| Interest-earning assets: | | | | | | | | | | | |
Cash and cash equivalents (1) | $ | (6 | ) | | $ | 58 |
| | $ | 52 |
| | $ | 5 |
| | $ | 28 |
| | $ | 33 |
|
| Cash and investments segregated | (7 | ) | | 80 |
| | 73 |
| | 3 |
| | 59 |
| | 62 |
|
| Broker-related receivables | — |
| | 2 |
| | 2 |
| | — |
| | 1 |
| | 1 |
|
| Receivables from brokerage clients | 42 |
| | 36 |
| | 78 |
| | (7 | ) | | 2 |
| | (5 | ) |
Available for sale securities (2) | (238 | ) | | 170 |
| | (68 | ) | | 104 |
| | 150 |
| | 254 |
|
| Held to maturity securities | 1,126 |
| | (174 | ) | | 952 |
| | 479 |
| | (34 | ) | | 445 |
|
Bank loans (3) | 33 |
| | 39 |
| | 72 |
| | 20 |
| | 11 |
| | 31 |
|
| Other interest revenue | — |
| | (30 | ) | | (30 | ) | | — |
| | 15 |
| | 15 |
|
| Total interest-earning assets | $ | 950 |
| | $ | 181 |
| | $ | 1,131 |
| | $ | 604 |
| | $ | 232 |
| | $ | 836 |
|
| Interest-bearing sources of funds: | | | | | | | | | | | |
| Bank deposits | $ | 7 |
| | $ | 104 |
| | $ | 111 |
| | $ | 8 |
| | $ | — |
| | $ | 8 |
|
| Payables to brokerage clients | — |
| | 13 |
| | 13 |
| | — |
| | 1 |
| | 1 |
|
| Short-term borrowings | 8 |
| | 24 |
| | 32 |
| | 5 |
| | 4 |
| | 9 |
|
| Long-term debt | 20 |
| | (5 | ) | | 15 |
| | 5 |
| | 7 |
| | 12 |
|
| Other interest expense | — |
| | — |
| | — |
| | — |
| | 9 |
| | 9 |
|
| Total sources on which interest is paid | 35 |
| | 136 |
| | 171 |
| | 18 |
| | 21 |
| | 39 |
|
| Change in net interest revenue | $ | 915 |
| | $ | 45 |
| | $ | 960 |
| | $ | 586 |
| | $ | 211 |
| | $ | 797 |
|
Changes that are not due solely to volume or rate have been allocated to rate.
(1)
| Includes deposits with banks and short-term investments.
|
(2)
| Amounts have been calculated based on amortized cost.
|
(3)
| Includes average principal balances of nonaccrual loans.
|
(1) Includes deposits with banks and short-term investments.F-4
(2) Amounts have been calculated based on amortized cost.
(3) Includes average principal balances of nonaccrual loans.
THE CHARLES SCHWAB CORPORATION
Supplemental Financial Data
for Charles Schwab Bank (Unaudited)
3.Securities Available for Sale and Securities Held to MaturityThe amortized cost, gross unrealized gains and losses, and fair value of AFS and HTM securities available for sale and securities held to maturity2015 are as follows:
| | | | | | | | | | | | |
| | | | | Gross | | Gross | | | |
| | Amortized | | Unrealized | | Unrealized | | Fair |
December 31, 2014 | | Cost | | Gains | | Losses | | Value |
Securities available for sale: | | | | | | | | | | | | |
Asset-backed securities | | $ | 19,320 | | $ | 64 | | $ | 18 | | $ | 19,366 |
U.S. agency mortgage-backed securities | | | 18,487 | | | 242 | | | 12 | | | 18,717 |
Corporate debt securities | | | 8,023 | | | 30 | | | 8 | | | 8,045 |
U.S. agency notes | | | 3,839 | | | - | | | 44 | | | 3,795 |
Treasury securities | | | 2,993 | | | 2 | | | 1 | | | 2,994 |
Certificates of deposit | | | 1,533 | | | 1 | | | - | | | 1,534 |
Non-agency commercial mortgage-backed securities | | | 310 | | | 7 | | | - | | | 317 |
Other securities | | | 15 | | | - | | | - | | | 15 |
Total securities available for sale | | $ | 54,520 | | $ | 346 | | $ | 83 | | $ | 54,783 |
Securities held to maturity: | | | | | | | | | | | | |
U.S. agency mortgage-backed securities | | $ | 33,388 | | $ | 531 | | $ | 174 | | $ | 33,745 |
Non-agency commercial mortgage-backed securities | | | 1,001 | | | 11 | | | 14 | | | 998 |
Total securities held to maturity | | $ | 34,389 | | $ | 542 | | $ | 188 | | $ | 34,743 |
| | | | | | | | | |
| | | | | Gross | | Gross | | | | | | | | | | | |
| | Amortized | | Unrealized | | Unrealized | | Fair | |
December 31, 2013 | | Cost | | Gains | | Losses | | Value | |
Securities available for sale: | | | | | | | | | | |
| December 31, 2015 | | Amortized
Cost | | Gross Unrealized
Gains | | Gross Unrealized
Losses | | Fair
Value |
| Available for sale securities: | | | | | | | | |
U.S. agency mortgage-backed securities | | $ | 18,554 | | $ | 140 | | $ | 49 | | $ | 18,645 | $ | 22,014 |
| | $ | 183 |
| | $ | 48 |
| | $ | 22,149 |
|
| U.S. Treasury securities | | 5,719 |
| | 2 |
| | 17 |
| | 5,704 |
|
Asset-backed securities | | | 15,201 | | | 42 | | | 37 | | | 15,206 | 21,784 |
| | 7 |
| | 306 |
| | 21,485 |
|
Corporate debt securities | | | 8,973 | | | 49 | | | 15 | | | 9,007 | 10,764 |
| | 14 |
| | 31 |
| | 10,747 |
|
| Certificates of deposit | | 1,685 |
| | 1 |
| | 3 |
| | 1,683 |
|
U.S. agency notes | | | 4,239 | | | 1 | | | 104 | | | 4,136 | 3,177 |
| | — |
| | 27 |
| | 3,150 |
|
Certificates of deposit | | | 3,650 | | | 4 | | | 2 | | | 3,652 | |
Non-agency residential mortgage-backed securities | | | 616 | | | 11 | | | 34 | | | 593 | |
| U.S. state and municipal securities | | 414 |
| | 10 |
| | — |
| | 424 |
|
Non-agency commercial mortgage-backed securities | | | 271 | | | 8 | | | - | | | 279 | 298 |
| | 1 |
| | — |
| | 299 |
|
Other securities | | | 100 | | | - | | | - | | | 100 | 5 |
| | — |
| | — |
| | 5 |
|
Total securities available for sale | | $ | 51,604 | | $ | 255 | | $ | 241 | | $ | 51,618 | |
Securities held to maturity: | | | | | | | | | | |
| Total available for sale securities | | $ | 65,860 |
| | $ | 218 |
| | $ | 432 |
| | $ | 65,646 |
|
| Held to maturity securities: | | | | | | | | |
U.S. agency mortgage-backed securities | | $ | 29,260 | | $ | 161 | | $ | 921 | | $ | 28,500 | $ | 48,785 |
| | $ | 391 |
| | $ | 293 |
| | $ | 48,883 |
|
Non-agency commercial mortgage-backed securities | | 958 | | - | | 68 | | 890 | 999 |
| | 6 |
| | 20 |
| | 985 |
|
Other securities | | | 100 | | | - | | | - | | | 100 | |
Total securities held to maturity | | $ | 30,318 | | $ | 161 | | $ | 989 | | $ | 29,490 | |
| U.S. Treasury securities | | 223 |
| | — |
| | 3 |
| | 220 |
|
| Total held to maturity securities | | $ | 50,007 |
| | $ | 397 |
| | $ | 316 |
| | $ | 50,088 |
|
For additional information on 2017 and 2016 investments, see Item 8 – Note 5.
As of December 31, 2017, in addition to holdings of securities issued by the U.S. Government and U.S. Government agencies and corporations, the Company’s holdings of investment securities from single issuers with aggregate book values in excess of ten percent of stockholders’ equity were as follows:
|
| | | | | | | |
| Issuer | Aggregate Amortized Cost | | Aggregate Fair Value |
Citibank Credit Card Issuance Trust (1) | $ | 1,850 |
| | $ | 1,863 |
|
(1) Included in AFS and HTM securities in the Company’s consolidated balance sheets.
THE CHARLES SCHWAB CORPORATION
Supplemental Financial Data
for Charles Schwab Bank (Unaudited)
| | | | | | | | | | | | |
| | | | | Gross | | Gross | | | |
| | Amortized | | Unrealized | | Unrealized | | Fair |
December 31, 2012 | | Cost | | Gains | | Losses | | Value |
Securities available for sale: | | | | | | | | | | | | |
U.S. agency mortgage-backed securities | | $ | 20,080 | | $ | 396 | | $ | - | | $ | 20,476 |
Asset-backed securities | | | 8,104 | | | 62 | | | 2 | | | 8,164 |
Corporate debt securities | | | 6,197 | | | 61 | | | 2 | | | 6,256 |
Certificates of deposit | | | 6,150 | | | 12 | | | 1 | | | 6,161 |
U.S. agency notes | | | 3,465 | | | 2 | | | 3 | | | 3,464 |
Non-agency residential mortgage-backed securities | | | 796 | | | 2 | | | 65 | | | 733 |
Commercial paper | | | 574 | | | - | | | - | | | 574 |
Other securities | | | 273 | | | 16 | | | - | | | 289 |
Total securities available for sale | | $ | 45,639 | | $ | 551 | | $ | 73 | | $ | 46,117 |
Securities held to maturity: | | | | | | | | | | | | |
U.S. agency mortgage-backed securities | | $ | 17,750 | | $ | 558 | | $ | 19 | | $ | 18,289 |
Other securities | | | 444 | | | - | | | 1 | | | 443 |
Total securities held to maturity | | $ | 18,194 | | $ | 558 | | $ | 20 | | $ | 18,732 |
The maturities and related weighted-average yields of securities available for sale and securities held to maturity at December 31, 2014, are as follows:
| | | | | | | | | | | | | | | | | | | |
| | | | | After 1 year | | After 5 years | | | | | | | |
| Within | | | through | | through | | After | | | | |
| 1 year | | | 5 years | | 10 years | | 10 years | | Total | |
Securities available for sale: | | | | | | | | | | | | | | | | | | | |
Asset-backed securities | $ | - | | | $ | 2,946 | | | $ | 5,062 | | | $ | 11,358 | | | $ | 19,366 | |
U.S. agency mortgage-backed securities (1) | | - | | | | 1,281 | | | | 5,196 | | | | 12,240 | | | | 18,717 | |
Corporate debt securities | | 999 | | | | 7,046 | | | | - | | | | - | | | | 8,045 | |
U.S. agency notes | | - | | | | 3,795 | | | | - | | | | - | | | | 3,795 | |
Treasury securities | | - | | | | 2,994 | | | | - | | | | - | | | | 2,994 | |
Certificates of deposit | | 624 | | | | 910 | | | | - | | | | - | | | | 1,534 | |
Non-agency commercial mortgage-backed | | | | | | | | | | | | | | | | | | | |
securities (1) | | - | | | | - | | | | - | | | | 317 | | | | 317 | |
Other securities | | - | | | | - | | | | - | | | | 15 | | | | 15 | |
Total fair value | $ | 1,623 | | | $ | 18,972 | | | $ | 10,258 | | | $ | 23,930 | | | $ | 54,783 | |
Total amortized cost | $ | 1,621 | | | $ | 18,981 | | | $ | 10,168 | | | $ | 23,750 | | | $ | 54,520 | |
Weighted-average yield (2) | | 1.00 | % | | | 0.88 | % | | | 0.90 | % | | | 1.08 | % | | | 0.97 | % |
Securities held to maturity: | | | | | | | | | | | | | | | | | | | |
U.S. agency mortgage-backed securities (1) | $ | - | | | $ | 857 | | | $ | 15,618 | | | $ | 17,270 | | | $ | 33,745 | |
Non-agency commercial mortgage-backed | | | | | | | | | | | | | | | | | | | |
securities (1) | | - | | | | - | | | | 359 | | | | 639 | | | | 998 | |
Total fair value | $ | - | | | $ | 857 | | | $ | 15,977 | | | $ | 17,909 | | | $ | 34,743 | |
Total amortized cost | $ | - | | | $ | 853 | | | $ | 15,789 | | | $ | 17,747 | | | $ | 34,389 | |
Weighted-average yield (2) | | - | | | | 1.98 | % | | | 2.64 | % | | | 2.46 | % | | | 2.53 | % |
(1)
| Mortgage-backed securities have been allocated to maturity groupings based on final contractual maturities. Actual maturities will differ from final contractual maturities because borrowers on a certain portion of loans underlying these securities have the right to prepay their obligations.
|
(2)
4. | The weighted-average yield is computed using the amortized cost at December 31, 2014.
Cross-border Holdings |
THE CHARLES SCHWAB CORPORATION
Supplemental Financial Data for Charles Schwab Bank (Unaudited)
(Dollars in Millions)
4.Cross-border Holdings
The tables below set forth the amount of Schwab Bank’sinformation describes Schwab’s cross-border holdings, based on carryingfair value, as of December 31, 2014, 2013,2017, 2016, and 2012.2015. Such holdings, by country, that exceed 1%0.75% of total assets are disclosed separately, and suchseparately.
There were no cross-border holdings by country, that are betweenexceeded 0.75% and 1% of total assets are listedat December 31, 2017.
|
| | | | | | | | | | | | | |
| December 31, 2016 | Banks and other
financial institutions | | Commercial and
industrial institutions | | Total | Exposure as a %
of total assets |
| Country: | | | | | | |
| France | $ | 1,784 |
| | $ | 110 |
| | $ | 1,894 |
| 0.8 | % |
| Total | $ | 1,784 |
| | $ | 110 |
| | $ | 1,894 |
| |
|
| | | | | | | | | | | | | |
| December 31, 2015 | Banks and other
financial institutions | | Commercial and
industrial institutions | | Total | Exposure as a %
of total assets |
| Country: | | | | | | |
| Canada | $ | 1,499 |
| | $ | — |
| | $ | 1,499 |
| 0.8 | % |
| Australia | 1,376 |
| | 60 |
| | 1,436 |
| 0.8 | % |
| Total | $ | 2,875 |
| | $ | 60 |
| | $ | 2,935 |
| |
THE CHARLES SCHWAB CORPORATION
Supplemental Financial Data (Unaudited)
(Dollars in
the aggregate. Cross-border holdings are comprised of cash equivalents and securities available for sale.Millions) | | | | | | | | | | | | | | | | | | |
| Banks and other | | Commercial and | | | | | | | Exposure as a % |
December 31, 2014 | financial institutions | | industrial institutions | | Total | | of total assets |
Country: | | | | | | | | | | | | | | | | | | |
Canada | | $ | 1,437 | | | | $ | - | | | | $ | 1,437 | | | | 1.3 | % |
Australia | | | 1,182 | | | | | - | | | | | 1,182 | | | | 1.1 | % |
Total | | $ | 2,619 | | | | $ | - | | | | $ | 2,619 | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| Banks and other | | Commercial and | | | | | Exposure as a % |
December 31, 2013 | financial institutions | | industrial institutions | | Total | | of total assets |
Country: | | | | | | | | | | | | | | | | | | |
Canada | | $ | 2,408 | | | | $ | - | | | | $ | 2,408 | | | | 2.4 | % |
Australia | | | 1,563 | | | | | - | | | | | 1,563 | | | | 1.6 | % |
United Kingdom | | | 1,262 | | | | | 140 | | | | | 1,402 | | | | 1.4 | % |
Sweden | | | 1,247 | | | | | - | | | | | 1,247 | | | | 1.2 | % |
Switzerland | | | 825 | | | | | - | | | | | 825 | | | | 0.8 | % |
Total | | $ | 7,305 | | | | $ | 140 | | | | $ | 7,445 | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| Banks and other | | Commercial and | | | | | Exposure as a % |
December 31, 2012 | financial institutions | | industrial institutions | | Total | | of total assets |
Country: | | | | | | | | | | | | | | | | | | |
Australia | | $ | 2,300 | | | | $ | - | | | | $ | 2,300 | | | | 2.7 | % |
United Kingdom | | | 1,556 | | | | | 351 | | | | | 1,907 | | | | 2.2 | % |
Canada | | | 1,732 | | | | | - | | | | | 1,732 | | | | 2.0 | % |
Sweden | | | 1,302 | | | | | - | | | | | 1,302 | | | | 1.5 | % |
Switzerland | | | 902 | | | | | - | | | | | 902 | | | | 1.1 | % |
Japan | | | 800 | | | | | - | | | | | 800 | | | | 0.9 | % |
Total | | $ | 8,592 | | | | $ | 351 | | | | $ | 8,943 | | | | | |
5.Loans to Banking Clients and Related Allowance for Loan Losses
| |
| 5. | Bank Loans and Related Allowance for Loan Losses |
The composition of the loan portfolio is as follows:
| | | | | | | | | | | | | | | |
December 31, | | 2014 | | 2013 | | 2012 | | 2011 | | 2010 |
Residential real estate mortgages | | $ | 8,127 | | $ | 8,006 | | $ | 6,507 | | $ | 5,596 | | $ | 4,695 |
Home equity loans and lines of credit | | | 2,955 | | | 3,041 | | | 3,287 | | | 3,509 | | | 3,500 |
Personal loans secured by securities | | | 2,320 | | | 1,384 | | | 963 | | | 742 | | | 562 |
Other | | | 36 | | | 34 | | | 22 | | | 16 | | | 16 |
Total loans to banking clients | | $ | 13,438 | | $ | 12,465 | | $ | 10,779 | | $ | 9,863 | | $ | 8,773 |
F-7
|
| | | | | | | | | | | | | | | | | | | |
| December 31, | 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
| First Mortgages | $ | 10,016 |
| | $ | 9,134 |
| | $ | 8,334 |
| | $ | 8,127 |
| | $ | 8,006 |
|
| HELOCs | 1,943 |
| | 2,350 |
| | 2,735 |
| | 2,955 |
| | 3,041 |
|
| Pledged asset lines | 4,369 |
| | 3,851 |
| | 3,232 |
| | 2,320 |
| | 1,384 |
|
| Other | 176 |
| | 94 |
| | 64 |
| | 39 |
| | 36 |
|
| Total bank loans | $ | 16,504 |
| | $ | 15,429 |
| | $ | 14,365 |
| | $ | 13,441 |
| | $ | 12,467 |
|
THE CHARLES SCHWAB CORPORATION
Supplemental Financial Data for Charles Schwab Bank (Unaudited)
(Dollars in Millions)
An analysis of nonaccrual loans is as follows:
| | | | | | | | | | | | | | | |
December 31, | | 2014 | | 2013 | | 2012 | | 2011 | | 2010 |
Nonaccrual loans | | $ | 35 | | $ | 48 | | $ | 48 | | $ | 52 | | $ | 51 |
Average nonaccrual loans | | $ | 39 | | $ | 43 | | $ | 48 | | $ | 51 | | $ | 40 |
|
| | | | | | | | | | | | | | | | | | | |
| December 31, | 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
| Nonaccrual loans | $ | 28 |
| | $ | 26 |
| | $ | 28 |
| | $ | 35 |
| | $ | 48 |
|
| Average nonaccrual loans | $ | 27 |
| | $ | 27 |
| | $ | 30 |
| | $ | 39 |
| | $ | 43 |
|
There were no loans accruing interest that were contractually 90 days or more past due as of any period presented.
Changes in the allowance for loan losses were as follows:
| | | | | | | | | | | | | | | |
December 31, | | 2014 | | 2013 | | 2012 | | 2011 | | 2010 |
Balance at beginning of year | | $ | 48 | | $ | 56 | | $ | 54 | | $ | 53 | | $ | 45 |
Charge-offs | | | (5) | | | (11) | | | (16) | | | (19) | | | (20) |
Recoveries | | | 3 | | | 4 | | | 2 | | | 2 | | | 1 |
Provision for loan losses | | | (4) | | | (1) | | | 16 | | | 18 | | | 27 |
Balance at end of year | | $ | 42 | | $ | 48 | | $ | 56 | | $ | 54 | | $ | 53 |
|
| | | | | | | | | | | | | | | | | | | |
| December 31, | 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
| Balance at beginning of year | $ | 26 |
| | $ | 31 |
| | $ | 42 |
| | $ | 48 |
| | $ | 56 |
|
| Charge-offs | (3 | ) | | (2 | ) | | (3 | ) | | (5 | ) | | (11 | ) |
| Recoveries | 3 |
| | 2 |
| | 3 |
| | 3 |
| | 4 |
|
| Provision for loan losses | — |
| | (5 | ) | | (11 | ) | | (4 | ) | | (1 | ) |
| Balance at end of year | $ | 26 |
| | $ | 26 |
| | $ | 31 |
| | $ | 42 |
| | $ | 48 |
|
The maturities of the loan portfolio
at December 31, 2014, are as follows:
| | | | | | | | | | | | | | |
| | | | | After 1 year | | | | | | | |
| | Within | | through | | After | | |
| | 1 year | | 5 years | | 5 years | | Total |
Residential real estate mortgages (1) | | $ | - | | $ | - | | | $ | 8,127 | | | $ | 8,127 |
Home equity loans and lines of credit (2) | | | 574 | | | 1,500 | | | | 881 | | | | 2,955 |
Personal loans secured by securities | | | 127 | | | 2,193 | | | | | | | | 2,320 |
Other | | | 7 | | | 26 | | | | 3 | | | | 36 |
Total | | $ | 708 | | $ | 3,719 | | | $ | 9,011 | | | $ | 13,438 |
(1)
| Maturities are based upon the contractual terms of the loans.
|
(2)
| Maturities are based on an initial draw period of 10 years.
|
|
| | | | | | | | | | | | | | | |
| December 31, 2017 | Within
1 year | | After 1 year
through
5 years | | After
5 years | | Total |
First Mortgages (1) | $ | — |
| | $ | — |
| | $ | 10,016 |
| | $ | 10,016 |
|
HELOCs (2) | 980 |
| | 365 |
| | 598 |
| | 1,943 |
|
| Pledged asset lines | 341 |
| | 4,024 |
| | 4 |
| | 4,369 |
|
| Other | 10 |
| | 162 |
| | 4 |
| | 176 |
|
| Total | $ | 1,331 |
| | $ | 4,551 |
| | $ | 10,622 |
| | $ | 16,504 |
|
(1) Maturities are based upon the contractual terms of the loans.
(2) Maturities are based on an initial draw period of ten years.
The interest sensitivity of loans with contractual maturities in excess of one year
at December 31, 2014, is as follows:
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | After
|
| | | | | | | | | | | | | 1 year
|
Loans with predetermined interest rates
| | | | | | | | | | | | | $
| | | | | | | December 31, 2017 | After
1 year | | Loans with floating or adjustable interest rates | $ | 14,086 |
| | Loans with predetermined interest rates | 1,087 |
| | Total | $ | 15,173 |
|
|
Loans with floating or adjustable interest rates
| | | | | | | | | | | | | | 756 |
Total
| | | | | | | | | | | | | $
| 12,730 |
6.Summary of Loan Loss on Banking Loans Experience
| | | | | | | | | | | | | | | | | | | | |
December 31, | | 2014 | | | 2013 | | | 2012 | | | 2011 | | | 2010 | |
Average loans | | $ | 12,904 | | | $ | 11,756 | | | $ | 10,050 | | | $ | 9,468 | | | $ | 7,983 | |
Allowance to year end loans | | | .31 | % | | | .39 | % | | | .52 | % | | | .55 | % | | | .60 | % |
Allowance to nonperforming loans | | | 120 | % | | | 100 | % | | | 117 | % | | | 104 | % | | | 104 | % |
Nonperforming assets to average loans | | �� | | | | | | | | | | | | | | | | | | |
and real estate owned | | | .31 | % | | | .45 | % | | | .54 | % | | | .59 | % | | | .68 | % |
THE CHARLES SCHWAB CORPORATION
Supplemental Financial Data
for Charles Schwab Bank (Unaudited)
7.Deposits from Banking Clients
| |
| 6. | Summary of Loan Loss on Banking Loans Experience |
|
| | | | | | | | | | | | | | | | | | | |
| December 31, | 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
| Average loans | $ | 15,919 |
| | $ | 14,715 |
| | $ | 13,973 |
| | $ | 12,906 |
| | $ | 11,758 |
|
| Allowance to year end loans | .16 | % | | .17 | % | | .21 | % | | .31 | % | | .39 | % |
| Allowance to nonperforming loans | 93 | % | | 101 | % | | 110 | % | | 120 | % | | 100 | % |
| Nonperforming assets to average loans | | | | | | | | | |
| and real estate owned | .20 | % | | .21 | % | | .26 | % | | .31 | % | | .45 | % |
The following table presents the average amount of and the average rate paid on deposit categories that are in excess of ten percent of average total deposits from banking clients:
| | | | | | | | | | | | | | | | | | |
| | 2014 | | | 2013 | | | 2012 | |
| | Amount | | Rate | | | Amount | | Rate | | | Amount | | Rate | |
Analysis of average daily deposits: | | | | | | | | | | | | | | | | | | |
Money market and other savings deposits | | $ | 82,927 | | 0.01 | % | | $ | 73,167 | | 0.03 | % | | $ | 54,318 | | 0.05 | % |
Interest-bearing demand deposits | | | 12,915 | | 0.09 | % | | | 12,298 | | 0.10 | % | | | 11,227 | | 0.13 | % |
Total | | $ | 95,842 | | | | | $ | 85,465 | | | | | $ | 65,545 | | | |
|
| | | | | | | | | | | | | | | | | |
| | 2017 | | 2016 | | 2015 |
| | Amount | Rate | | Amount | Rate | | Amount | Rate |
| Analysis of average daily deposits: | | | | | | | | |
| Money market and other savings deposits | $ | 148,679 |
| 0.09 | % | | $ | 126,719 |
| 0.02 | % | | $ | 99,881 |
| 0.02 | % |
| Interest-bearing demand deposits | 15,319 |
| 0.14 | % | | 14,713 |
| 0.07 | % | | 13,583 |
| 0.07 | % |
| Total | $ | 163,998 |
| | | $ | 141,432 |
| | | $ | 113,464 |
| |
At December 31,
2014,2017, bank deposits
from banking clients included one domestic-issued certificate of deposit of $100,000 or more, in the amount of
$524,765,$116,579, with a contractual maturity of
lessgreater than twelve months.
8.Ratios
| | | | | | | | | |
December 31, | | 2014 | | | 2013 | | | 2012 | |
Return on average stockholder’s equity | | 12.71 | % | | 12.46 | % | | 11.82 | % |
Return on average total assets | | 0.91 | % | | 0.85 | % | | 0.91 | % |
Average stockholder’s equity as a percentage of average total assets | | 7.15 | % | | 6.79 | % | | 7.71 | % |
|
| | | | | | |
| December 31, | 2017 | 2016 | 2015 |
| Return on average total stockholders’ equity | 13.41 | % | 12.55 | % | 11.45 | % |
| Return on average total assets | 1.03 | % | 0.94 | % | 0.87 | % |
| Average total stockholders’ equity as a percentage of average total assets | 7.71 | % | 7.49 | % | 7.61 | % |
Dividend payout ratio (1) | 19.88 | % | 20.61 | % | 23.30 | % |
Note: Average balance calculations based on month end balances.
| |
(1) | Dividends declared per common share divided by diluted EPS. |