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| Charles Schwab Investment Management, Inc. (CSIM), |
Because investing plays a fundamental role in building financial security, low and ensure that investment and banking products. 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. To help The Companyandas well as other corporate brokerage services.services, to businesses and their employees. The Advisor Services segment provides custodial, trading, banking, and support services, as well as retirement business services.services, to independent registered investment advisors (RIAs), independent retirement advisors, and recordkeepers. These services are further described in the segment discussion below. For financial information by segment for the three years ended December 31, 2015, see “Item 8 – Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – 24.Segment Information.”2015, the Company2017, Schwab had full-time, part-time, and temporary employees, and persons employed on a contract basis that represented the equivalent of about 15,300approximately 17,600 full-time employees.Business AcquisitionsIn December 2012, the Company acquired ThomasPartners®, Inc., a growth and dividend income-focused asset management firm.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 with 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.Recognizingbenefits of havingbelief that all Americans deserve access to a better investing experience. Although much has changed in the intervening years, our purpose remains clear strategy, management has developed a framework that consists of a purpose, vision, and values guided by the Company’s “Through Clients’ Eyes” strategy. The Company’s stated purpose is– 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 putsdescribed as “Through Clients’ Eyes.”The Company’s vision is to be the most trusted leader in investment services.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 the Company’scouple Schwab’s scale and resources as well aswith ongoing expense discipline to help keep costs- 1 -THE CHARLES SCHWAB CORPORATIONclientproducts and solutions are both affordable andas well as responsive to client needs. Finally, the Company works to be a good steward of stockholder capital and aimswe seek to maximize the Company’s valueour market valuation and stockholder returns over time.Theserving investorsthe Advisor Services arena, we compete with institutional custodians, traditional and competing for a growing percentagediscount brokers, banks and investment advisory firms, and trust companies.investable wealthBusiness – 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.• offersover 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 marketplace. As products and services have evolved over the years, 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.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. Management believesWe believe that the Company’sthis ability to providegive those clients seeking help, guidance, or advice with an individually tailored solution – ranging from occasional consultations to an ongoing relationship with a Schwab FC or an independent investment advisor (IA)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, telephone and branch channels provideIndividuals 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 section below.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 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.An 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.The Company���s earnings growth strategy is based upon the belief that developing trusted relationships with clients will lead to strong business performance. The Company has been and continues to be committed to offering its clients more value and a better investing experience which the Company believes will translate into more assets from both new and existing clients which ultimately drive revenue in terms of asset management and administration fees, net interest revenue and trading revenue.The Company’s major sources of net revenues are asset management and administration fees, net interest revenue, and trading revenue. The Company generates the majority of asset management and administration fees through its proprietary and third-party mutual fund and ETF offerings, as well as fee-based advisory solutions. A portion of asset management and administration fees comes from client cash balances placed in the Company’s money market mutual funds. 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 in deposit and brokerage accounts. The Company generates trading revenue through commissions earned for executing trades for clients and principal transaction revenue earned primarily from trading activity in client fixed income securities.- 2 -THE CHARLES SCHWAB CORPORATIONProducts and ServicesThe Company offers a broad range of products to address individuals’ varying investment and financial needs. Examples of these product offerings include the following:·Brokerage – an array of full-feature brokerage accounts with cash management capabilities;·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;·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, and specialized planning and full-time portfolio management;·Banking – checking and savings accounts, certificates of deposit, first lien residential real estate mortgage loans (First Mortgages), home equity loans and lines of credit (HELOCs), and Pledged Asset Lines® (PALs); and·Trust – trust custody services, personal trust reporting services, and administrative trustee services.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 “Item8 – 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 – 24. Segment Information.”Investor ServicesThrough the Investor Services segment, the Company provides retail brokerage and banking services, retirement plan services, and other corporate brokerage services. The Company offers research, analysis tools, online portfolio planning tools, performance reports, market analysis, and educational material to all clients. Schwab’s FCs can provide wealth management and financial planning assistance to clients to help them reach their financial goals. Investors looking for more guidance have access to 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.Schwab provideswe provide various online 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.needseek specific investment recommendations, either from time to time or on an ongoing basis. The CompanySchwab provides clients seeking advice with personalized 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.Client™Client 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 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 Portfolios™Portfolios and Windhaven Investment Management, Inc. (Windhaven®), or equity securities and ETFs through ThomasPartners® programs. The- 3 -THE CHARLES SCHWAB CORPORATIONCompanyWe 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.actively, Schwab and optionsXpress, Inc. both offeroffers integrated 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.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 Mandarin-, Cantonese-, Spanish-, and Vietnamese-speaking clients through a combination of its branch offices, and Web-basedweb-based and telephonic services.The Investor Services segmentincludes the Retirement Plan Services, Stock Plan Services, Compliance Solutions, Mutual Fund Clearing Services and Off-Platform Sales 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. The Company offers Schwab Index Advantage®, a unique 401(k) plan utilizing low cost index mutual funds and ETFs, combined with a managed investing service to help participants reach their retirement goals. Services also include support for Roth 401(k) accounts, 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.Stock Plan Services offersoffer equity compensation plan sponsors full-service recordkeeping for stock 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.mutual fund clearingcustody, recordkeeping, and trading services and recordkeeping to banks, brokerage firms, and trust companies.Company provideslargest provider of custodial, trading, banking, and support services as well asto RIAs and their clients. We also provide retirement business services.To attractservices to independent retirement advisors and serve IAs,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.IAsRIAs to conduct daily business activities online with Schwab, including viewing and managing client account information and accessing news and market information. The website provides account servicing capabilities for IAs,RIAs, including account opening, money movement, transfer of assets, trading, checking status, and communicating with the Schwabour service team. The site provides multi-year archiving of statements, trade confirms, and tax reports, along with document search capabilities.- 4 -THE CHARLES SCHWAB CORPORATIONIAsRIAs grow and manage their practices, the Company offerswe offer a variety of services, including business management and technology and operations consulting on a variety of topics critical to an IA’sRIA’s success including strategic business planning, client segmentation, growth strategies, technological strategies, and succession planning. The Advisor Services website provides interactive tools, educational content, and research reports to assist advisors thinking about establishing and managing their own independent practices.The Company offers
IAs
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 financial services industry has been subject to enhanced levels of regulatory oversight in recent years, and the Company expects this trend to continue for the foreseeable future.
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THE CHARLES SCHWAB CORPORATION
the Consumer Financial Protection Bureau (CFPB), and the Federal Deposit Insurance Corporation (FDIC).FDIC. CSC and Schwab Bank are also subject to regulation and various requirements and restrictions under state and other federal laws.
As a result of
In July 2013,
The Final Regulatory Capital Rules provided for a one-time election which CSC and Schwab Bank made to exclude accumulated other comprehensive income (AOCI) from the calculation of CET1 Capital. The Final Regulatory Capital Rules also introducedas a capital conservation buffer, thatto avoid being subject to limits a banking organization’s ability to makeon capital distributions and discretionary bonus payments to executive officers if a banking organization fails to maintain aofficers.
The Final Regulatory Capital Rulesrules provide for a “standardized approach” framework for the calculation 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 exposuresexposure of $10 billion or more, are also required to calculate their regulatory capital requirementsand risk-weighted assets using an “advanced approaches” framework to determine their risk-weighted assets.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.provisions, including additional reporting requirements. CSC and Schwab Bankits banking subsidiaries are currently only subject to the “standardized approach” framework.
The new capital requirements under the Final Regulatory Capital Rules became effective on January 1, 2015, for CSC, which had not previously beenframework but will become subject to any consolidated capital requirements, and Schwab Bank. the “advanced approaches” framework upon exceeding either of the thresholds.
In September 2014, U.S. Federal banking agencies issued an inter-agency final rule that imposes a quantitative liquidity coverage ratio (LCR) requirement on large banking organizations. The purpose of the LCR is to requirerule requires banking organizations to hold minimum amountswith consolidated total assets of high-quality liquid assets (HQLA) based on a percentage$250 billion or more, or total on-balance-sheet foreign exposure of $10 billion or more and their projected net cash outflows over a 30-day period. Banking organizationsdepository institution subsidiaries with $250$10 billion or more in total consolidated assets or foreign exposures of $10 billion or more mustto hold HQLAhigh quality liquid assets (HQLA) in an amount equal to at least 100% of their projected net cash outflows over athe 30-day period.period, calculated on each business day. Other bank and savings and loan holding companies with total consolidated assets of $50 billion or more such as CSC, 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 athe 30-day period. The modified LCR rule went into effect on January 1, 2016, with holding companies subject to the rule required to hold at least 90%period, calculated as of the necessary amountlast business day of HQLA in 2016 and at least 100% starting on January 1, 2017.
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THE CHARLES SCHWAB CORPORATION
Capital Stress Testing
assets. Community Reinvestment Act offices. broker. Financial Service Regulation Capital Management in Part II, Item 7. reduction in short-term interest rates, and decreases in securities valuations negatively impact penalties requirements on us. increased sophistication and activities of organized crime and other external parties, including foreign state-sponsored parties. Losses reimbursed to clients under our guarantee against unauthorized account activity could have a negative impact on our business, financial condition and results of operations. made websites, mobile applications and email unavailable for periods of time. It could take an extended period of time to restore full functionality to Schwab. Schwab. lending, we sponsor. quality. Loss of value of securities Actions brought against employees. December 31, 2015 Square Footage (amounts in thousands) Leased Owned Location Corporate office space: San Francisco, CA (1) - Service and other office space: Denver, CO Phoenix, AZ Austin, TX Indianapolis, IN - Orlando, FL - Richfield, OH - El Paso, TX - Chicago, IL - Substantially all of $53.34. Note 24. December 31, 2010 2011 2012 2013 2014 2015 The Charles Schwab Corporation $ $ $ $ $ $ Standard & Poor’s 500 Index $ $ $ $ $ $ Dow Jones U.S. Investment Services Index $ $ $ $ $ $ Total Number of Average Shares Purchased Price Paid Month (in thousands) per Share October: Employee transactions (1) $ November: Employee transactions (1) $ December: Employee transactions (1) $ Total: Employee transactions (1) $ (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. Selected Financial and Operating Data (In Millions, Except Per Share Amounts, Ratios, or as Noted) Growth Rates Compounded Annual 4-Year (1) 1-Year 2011-2015 2014-2015 2015 2014 2013 2012 2011 Results of Operations Net revenues % % $ $ $ $ $ Expenses excluding interest % % $ $ $ $ $ Net income % % $ $ $ $ $ Net income available to common stockholders % % $ $ $ $ $ Earnings per common share: Basic % % $ $ .96 $ .78 $ .69 $ .70 Diluted % % $ $ .95 $ .78 $ .69 $ .70 Dividends declared per common share - - $ .24 $ .24 $ .24 $ .24 $ .24 Weighted average common shares outstanding: Basic % % Diluted % % Asset management and administration fees as a percentage of net revenues % % % % % Net interest revenue as a percentage of net revenues % % % % % Trading revenue as a percentage of net revenues % % % % % Effective income tax rate % % % % % Performance Measures Net revenue growth % % % % % Pre-tax profit margin % % % % % Return on average common stockholders’ equity % % % % % Financial Condition (at year end) Total assets % % $ $ $ $ $ Long-term debt % % $ $ $ $ $ Stockholders’ equity (2) % % $ $ $ $ $ Assets to stockholders’ equity ratio Debt to total capital ratio % % % % % Employee Information Full-time equivalent employees (in thousands, at year end) % % Item 7. Regulatory guidance; Certain of these factors, as well as general risk factors affecting the Company, are discussed in greater detail in THE CHARLES SCHWAB CORPORATION Delinquency roll rates: The rates at which loans transition through delinquency stages, ultimately resulting in a loss. Order flow revenue: Net compensation received from markets and firms to which THE CHARLES SCHWAB CORPORATION Growth Rate 1-Year Year Ended December 31, 2014-2015 2015 2014 2013 Client Metrics: Net new client assets (in billions) % $ $ $ Core net new client assets (in billions) (1,2) % $ $ $ Client assets (in billions, at year end) % $ $ $ Average client assets (in billions) % $ $ $ New brokerage accounts (in thousands) % Active brokerage accounts (in thousands, at year end) % Assets receiving ongoing advisory services (in billions, at year end) % $ $ $ Client cash as a percentage of client assets (at year end) % % % Company Financial Metrics: Net revenues % $ $ $ Expenses excluding interest % Income before taxes on income % Taxes on income % Net income % $ $ $ Preferred stock dividends and other % Net income available to common stockholders % $ $ $ Earnings per common share – diluted % $ $ .95 $ .78 Net revenue growth from prior year % % % Pre-tax profit margin % % % Return on average common stockholders’ equity % % % Expenses excluding interest as a percentage of average client assets % % % THE CHARLES SCHWAB CORPORATION prior year. Earnings before income taxes rose 22% to $3.7 billion in 2017 compared to $3.0 billion in the prior year. released. THE CHARLES SCHWAB CORPORATION Year Ended December 31, 2015 2014 2013 % of % of % of Growth Rate Total Net Total Net Total Net 2014-2015 Amount Revenues Amount Revenues Amount Revenues Asset management and administration fees Mutual fund and ETF service fees (1) % $ % $ % $ % Advice solutions % % % % Other (1) % % % % Asset management and administration fees % % % % Net interest revenue Interest revenue % % % % Interest expense % % % % Net interest revenue % % % % Trading revenue Commissions % % % % Principal transactions % % % % Trading revenue % % % % Other % % % % Provision for loan losses % - - - Net impairment losses on securities % - - - - Total net revenues % $ % $ % $ % Asset Management and Administration Fees The following table presents a roll forward of client assets for the Schwab money market funds, Schwab equity and bond funds and ETFs, and Mutual Fund OneSource® Schwab Money Schwab Equity and Mutual Fund Market Funds Bond Funds and ETFs OneSource® Year Ended December 31, 2015 2014 2013 2015 2014 2013 2015 2014 2013 Balance at beginning of period $ $ $ $ $ $ $ $ $ Net inflows (outflows) Net market gains (losses) and other Balance at end of period $ $ $ $ $ $ $ $ $ Year Ended December 31, 2015 2014 2013 Average Revenue Average Average Revenue Average Average Revenue Average Schwab money market funds before fee waivers $ $ $ $ $ $ Fee waivers Schwab money market funds Schwab equity and bond funds and ETFs Mutual Fund OneSource® (1) Other third-party mutual funds and ETFs (1,2) Total mutual funds and ETFs (3) $ $ $ Advice solutions (3) : Fee-based $ $ $ Intelligent Portfolios - - N/A N/A N/A N/A N/A N/A Legacy Non-Fee N/A N/A N/A N/A N/A N/A Total advice solutions $ $ $ Other balance-based fees (2,4) Other (2,5) Total asset management and administration fees $ $ $ Year Ended December 31, 2015 2014 2013 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 $ $ % $ $ % $ $ % Cash and investments segregated % % % Broker-related receivables (1) - % - % - % Receivables from brokerage clients % % % Securities available for sale (2) % % % Securities held to maturity % % % Bank loans % % % Total interest-earning assets % % % Other interest revenue Total interest-earning assets $ $ % $ $ % $ $ % Funding sources: Bank deposits $ $ % $ $ % $ $ % Payables to brokerage clients % % % Long-term debt % % % Total interest-bearing liabilities % % % Non-interest-bearing funding sources Other interest expense (3) Total funding sources $ $ % $ $ % $ $ % Net interest revenue $ % $ % $ % Mutual Fund OneSource. Growth Rate Year Ended December 31, 2014-2015 2015 2014 2013 Daily average revenue trades (in thousands) % Clients’ daily average trades (in thousands) % Number of trading days - Average revenue per revenue trade % $ $ $ 2015. Growth Rate Year Ended December 31, 2014-2015 2015 2014 2013 Compensation and benefits % $ $ $ Professional services - Occupancy and equipment % Advertising and market development % Communications % Depreciation and amortization % Other % Total expenses excluding interest % $ $ $ Expenses as a percentage of total net revenues: Compensation and benefits % % % Advertising and market development % % % THE CHARLES SCHWAB CORPORATION Growth Rate Year Ended December 31, 2014-2015 2015 2014 2013 Salaries and wages % $ $ $ Incentive compensation % Employee benefits and other % Total compensation and benefits expense % $ $ $ Full-time equivalent employees (in thousands) At year end % Average % administration related expenses resulting from growth in the Schwab Funds result of the Tax Act. Investor Services (1) Advisor Services (1) Growth Rate Growth Rate Year Ended December 31, 2014-2015 2015 2014 2013 2014-2015 2015 2014 2013 Net Revenues Asset management and administration fees % $ $ $ % $ $ $ Net interest revenue % % Trading revenue % % Other % % Provision for loan losses % N/M - - - Net impairment losses on securities % - N/M - - Total net revenues % % Expenses Excluding Interest % % Income before taxes on income % $ $ $ % $ $ $ Unallocated Total Growth Rate Growth Rate Year Ended December 31, 2014-2015 2015 2014 2013 2014-2015 2015 2014 2013 Net Revenues Asset management and administration fees N/M $ - $ - $ % $ $ $ Net interest revenue N/M - - - % Trading revenue N/M - - - % Other N/M - % Provision for loan losses N/M - - - % Net impairment losses on securities N/M - - - % - Total net revenues N/M - - % Expenses Excluding Interest N/M - - % Income before taxes on income N/M $ - $ $ - % $ $ $ THE CHARLES SCHWAB CORPORATION of Directors. We clearly Noted) Compliance Risk rating given the guarantee of principal and interest by the U.S. government-sponsored enterprises. For more information on December 31, Loan delinquencies (1) % % Nonaccrual loans % % Allowance for loan losses % % Schwab. The Company is subject to and was in compliance with the modified LCR rule at December 31, 2017. purchase investment securities and extend loans to clients. notes, is also maintained. CSC had no there were none at December 31, 2016. Par Standard December 31, 2015 Outstanding Maturity Interest Rate Moody’s & Poor’s Fitch Senior Notes $ 2018 – 2026 1.50% to 4.45% fixed A2 A A Medium-Term Notes $ 2017 6.375% fixed A2 A A Results of Operations Less than 1-3 3-5 More than December 31, 2015 1 Year Years Years 5 Years Total Credit-related financial instruments (1) $ $ $ $ $ Long-term debt (2) Leases (3) Purchase obligations (4) Total $ $ $ $ $ THE CHARLES SCHWAB CORPORATION Regulation in Part I, Item 1. December 31, 2015 CSC Schwab Bank Total stockholders’ equity $ $ Less: Preferred Stock - Common Equity Tier 1 Capital before regulatory adjustments $ $ Less: Goodwill, net of associated deferred tax liabilities $ $ Other intangible assets, net of associated deferred tax liabilities - AOCI adjustment (1) Common Equity Tier 1 Capital $ $ Tier 1 Capital $ $ Total Capital Risk-Weighted Assets Common Equity Tier 1 Capital/Risk-Weighted Assets % % Tier 1 Capital/Risk-Weighted Assets % % Total Capital/Risk-Weighted Assets % % Tier 1 Leverage Ratio % % AOCI in CET1 Capital.In October 2012, the OCC issued final rules implementing provisions of Dodd-Frank that require national banksbanksbank 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 (D-FAST)(DFAST) rules, CSC (for the first time in 2017) and Schwab Bank must conduct annual stress tests using certain scenarios and prescribed stress-testing methodologies, report the results to the OCC and the Federal Reserve and, for Schwab Bank, the OCC, and publish a summarysummaries of the results of itstheir stress tests. In March 2015, Schwab Bank submitted its company-run stress test results to the OCC. In June 2015 Schwab Bank publicly disclosedsummary of its stress test results under the severely adverse scenario prescribed by the OCC based upon a nine-quarter timeframe beginning on October 1, 2014savings and ending on December 31, 2016. In its summary, Schwab Bank reported that its 7.2% Tier 1 leverage ratio at the beginning of the forecast period declined to a low of 6.5% during the nine-quarter forecast horizon and was 7.0% at the end.Under the final Federal Reserve D-FAST regulations, CSC will be required to conduct its first stress test using financial statement data as of December 31, 2016, report the results of that stress test to the Federal Reserve by April 5, 2017, and publicly disclose a summary of its stress test results between June 15 and June 30, 2017.loan holding company, CSC is not subject to the annual Comprehensive Capital Analysis and Review (CCAR) process, which requires certain financial institutions to submit annual capital plans to the Federal Reserve. However, CSC is taking stepscontinues to implementenhance its stress testing policies, procedures, systems, and governance structures that are designed to be consistent with regulatory expectations for a firm of its size and complexity.In September 2011 and January 2012, theissued interim final and final rules requiringrequires insured depository institutions with total consolidated assets of $50 billion or more to submit to the FDIC periodic plans providing for their resolution by the FDIC in the event of failure (resolution plans or so-called “living wills”) under the receivership and liquidation provisions of the Federal Deposit Insurance Act. Under these rules, 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: toable to: ensure that the bank’s depositors receive access to their deposits within one business day; to maximize the net present value of the bank’s assets when disposed of; and to minimize losses incurred by the bank’s creditors. Schwab Bank submitted its most recent resolution plan to the FDIC on December 31, 2015.In July 2011, pursuant to Dodd-Frank, thebegan operationshas broad rulemaking, supervisory and was given rulemakingenforcement authority for a wide range of federal consumer protection laws as well as broad powersrelating to supervise compliance withfinancial products. The CFPB has examination and enforce those laws. As a federal savings bankprimary enforcement authority over depository institutions with $10 billion or more in consolidated total assets, Schwab Bank is subject to examination, supervision and regulation by the CFPB. The CFPB has proposed and finalized many consumer protection rules since its creation and has authority to promulgate regulations, issue orders, draft policy statements, conduct examinations and bring enforcement actions. The creation of the CFPB has led to enhanced enforcement of consumer protection laws. Although the ultimate impact of this heightened scrutiny is uncertain, it could result in changes to pricing, practices, products and procedures.In February 2011, theThe FDIC establisheduses a risk-based deposit premium assessment system that, for large insured depository institutions with at least $10 billion in total consolidated assets, such as Schwab Bank, 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.October 2015,July 2016, the FDIC issued a proposed rule that would imposeimposed a flat-rate quarterly surcharge on the quarterly assessments of insured depository institutions with total assets of $10 billion or more and certain of their bank affiliates to pay for the increase. See “Item 7 – Management’s DiscussionThe 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 a 3 basis point regular assessment on their respective assessment bases (down from 5 basis points) and Analysisa new 4.5 basis point surcharge on the amount of Financial Condition and Resultstheir aggregate assessment base in excess of Operations – Current Regulatory Environment and Other Developments.”$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.- 7 -THE CHARLES SCHWAB CORPORATIONSchwab Bank’sthe primary federal bank regulatory agency the OCC,for each of Schwab’s depository institution subsidiaries to assess the bank’ssubsidiary’s record in meeting the credit needs of the communities served by the bank, including low- and moderate-income neighborhoods and persons. Institutions are assigned one of four ratings: “Outstanding,ratings (“outstanding,” “Satisfactory,“satisfactory,” “Needs“needs to Improve”improve,” or “Substantial Noncompliance.” This assessment is reviewed in connection with any acquisition, merger“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 office application. It is anticipated that in 2016 the Federal Reserve will issue guidance as to how it will implement and apply the doctrine in situations where a holding company’s depository institution subsidiaries are in a troubled condition.CSC’sbroker-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, 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 futures and commodities trading activities they conductit conducts as an introducing broker and futures commission merchant, respectively.SchwabCS&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. optionsXpress, Inc. is also a member of FINRA and the MSRB.Exchange (CBOE). In addition to the SEC, 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 securities markets. The regulations 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 boththat are intended to ensure the general financial soundness and liquidity of broker-dealers. 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 of certain debt covenants under its credit agreement.a broker-dealer subsidiaryCS&Co from paying cash dividends, or making unsecured advances or loans to its parent company or repaying subordinated loans to its parent company 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.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 and Options Clearing Corporation, which may fluctuate significantly from time to time based upon the nature and size of clients’ trading activity and market volatility.- 8 -THE CHARLES SCHWAB CORPORATIONrecord-keepingrecordkeeping 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. In addition, CSC and various subsidiaries of the Company are subject to U.S. sanctions programs administered by the Office of Foreign Assets Control.For additional information on Regulation, please see “Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity” and “Capital Management,” and “Item 8 – Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – 23. Regulatory Requirements.”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 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 atthe Company’sSchwab’s website, http:https://www.aboutschwab.com, the Company posts the following filings are 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. Company’s website also includes the Dodd-Frank stress test results for Schwab Bank and the Company’sour regulatory capital disclosures based on Basel III.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).Item 1A. The Company facesitsour 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.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.”the Company’sour business.The Company’sthe Company’sour control. Deterioration in the housing and credit markets, reductions- 9 -THE CHARLES SCHWAB CORPORATIONthe Company’sour results of operations and capital resources.the Company’sour businesses affects the Company’s activities and may subject itus to significant penalties.the Company iswe are subject to extensive regulation under both federal, state, and stateforeign laws by governmental agencies, supervisory authorities and SROs. Such regulation continues to grow more extensive and complex, theThe costs and uncertainty related to complying with such regulations continue to increase, and regulatory proceedings 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 affect the Company’sour business operations and impose capital, client protection, and market conduct requirements.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, could limit Schwab Bank’sour banking subsidiaries’ ability to accept deposits swept from the client brokerage accounts and brokered deposits and could prevent the Companyus from pursuing itsour business strategy.the Company’sour efforts to comply with applicable legal requirements, there are a number of risks, particularly in areas where applicable laws or regulations may be unclear or where regulators could revise their previous guidance. Any enforcement actions or other proceedings brought by 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, 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.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 itsour relationships with itsour regulators and could restrict the ability of institutional investment managers to invest in the Company’sour securities.the Company’sour business and financial results.the CompanySchwab or its specific business lines. TheOur profitability of the Company could also be affected by rules and regulations that impact the business and financial communities generally, including changes to the laws governing taxation, electronic commerce, client privacy and security of client data. In addition, the rules and regulations could result in limitations on the lines of business the Company conducts,we conduct, modifications to the Company’sour business practices, increasedmore stringent 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 Dodd-Frank and the adoption by the federal banking agencies of regulations implementing Dodd-Frank and other reforms such as Basel III. Among the changes that are most likely to impact the Company’s business and financial results are: increased capital, liquidity and reporting requirements;requirements, increased deposit insurance assessments; the establishment of the CFPB, which has broad rulemaking, supervisory and enforcement authority over consumer financial products; the requirement for Schwab Bank (and CSC starting in 2017) to conduct annual capital adequacy stress tests; and discretion given to the SEC to adopt- 10 -THE CHARLES SCHWAB CORPORATIONrules regarding standards of conduct for broker-dealers providing investment advice to retail clients. The Company has incurred and will continue to incur significantassessments or additional costs and expend a significant amount of time as it develops and integrates appropriate systems and procedures, and then monitors, supports and refines those systems and procedures.While U.S. banking regulators have finalized many regulations to implement various provisions of Dodd-Frank and Basel III, 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 ratio,which will require financial institutions to have a stable funding structure over a one-year horizon, have not yet been proposed.Future regulatory changes or revised guidance and interpretations 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, liquidity and leverage ratio requirements or otherwise adversely affect the Company’s ability to pursue its business strategies.costs. These changes may also require the Companyus to invest significant management attention and resources to evaluate and make necessary changes to itsour compliance, risk management, treasury and operations functions.the Company’sour financial condition.Schwab Bankits banking and its broker-dealer subsidiaries, must meet certain capital and liquidity standards, subject to qualitative judgments by regulators about components, risk weightingsthe adequacy of Schwab’s capital and other factors.Schwab’s internal assessment of its capital needs. The Uniform Net Capital Rule limits Schwab’sCS&Co’s ability to transfer capital to CSC and other affiliates. New regulatory capital, liquidity, and stress testing requirements may limit or otherwise restrict how the Company utilizes itswe utilize our capital, including paying dividends, and stock repurchases, and redemptions, and may require the Companyus to increase itsour capital and/or liquidity or to limit itsour growth. Any requirement that the Company increase its regulatory capital, replace certain capital instruments which presently qualify as Tier 1 capital, or increase regulatory capital ratios or liquidity, could require the Company to liquidate assets, deleverage or otherwise change its business and/or investment plans, which may adversely affect its financial results. Issuing additional common stock would dilute the ownership of existing stockholders.If the Company’s consolidated total assets equal or exceed $250 billion, the Company would become subject to the advanced approaches framework of the Basel III capital and liquidity requirements, including being subject to a supplementary leverage ratio, the inclusion of AOCI in regulatory capital, and the unmodified LCR and enhanced Basel III disclosures. In addition, federal banking agencies have broad discretion and could require CSC or Schwab Bank to hold higher levels of capital or increase liquidity above the applicable regulatory requirements.In July 2013, the Federal Reserve and OCC issued Final Regulatory Capital Rules, which established more restrictive capital definitions, higher risk-weightings for certain asset classes, higher minimum capital ratios and capital buffers. Failure by either CSC or Schwab Bankits banking subsidiaries to meet its minimum capital requirements could result in certain mandatory and additional discretionary actions by regulators that, if undertaken, could have a negative impact on the Company.us. In addition, failure by CSC or Schwab Bankour banking subsidiaries to maintain a sufficient amount of capital to satisfy itstheir capital conservation buffer requirements (as phased in) would result in restrictions on the Company’sour ability to make capital distributions and discretionary cash bonus payments to executive officers. Further,Any requirement that we increase our regulatory capital, replace certain capital instruments which presently qualify as Tier 1 capital, or increase regulatory capital ratios or liquidity, could require us to liquidate assets, deleverage or otherwise change our business and/or investment plans, which may adversely affect our financial results. Issuing additional common stock would dilute the ownership of existing stockholders.September 2014,consolidated total assets at December 31, 2017, we are currently only subject to the Federal Reserve issued“standardized approach” capital framework of Basel III and modified liquidity requirements. When our consolidated total assets equal or exceed $250 billion, we will become subject to the “advanced approaches” framework, including being subject to a modifiedsupplementary 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 requiresincludes an assessment of the impact of operational risk. In addition, federal banking agencies have broad discretion and could require CSC or its banking subsidiaries to maintainhold higher levels of capital or increase liquidity above the applicable regulatory requirements.sufficientnegative impact on our net interest revenue. A low interest rate environment may also have a negative impact on our asset management and administration fee revenues if we have to waive a portion of our management fees for certain Schwab-sponsored money market mutual funds in order to continue providing a positive return to clients.HQLA in relation to total projected net cash outflows over a 30-day stress period. For a discussiontime 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 Company’s Liquidityharm or how best to remediate it, and Capital Management, see “Item 7 – Management’s Discussioncertain errors or actions could be repeated or compounded before they are discovered and Analysisremediated, all or any of Financial Conditionwhich would further increase the costs and Resultsconsequences of Operations – Liquidity”a cyber attack.“Capital Management,”other laws and “Item 8 – Financial Statementscould subject us to significant liability or loss that may not be covered by insurance, actions by our regulators, damage to Schwab’s reputation, or a loss of confidence in our security measures which could harm our business. We may be required to expend significant additional resources to modify our protective measures or to investigate and Supplementary Data – Notesremediate vulnerabilities or other exposures.Consolidated Financial Statements – 23. Regulatory Requirements.”the Companyus to losses, litigation, regulatory actions, and regulatory actions.The Company faces operational risk, which isreputational damage.potential for loss due to inadequate or failed internal processes,integrity of our technology systems and firmsour ability to make timely enhancements and additions to our systems. System interruptions, errors or exchanges handlingdowntime can result from a variety of causes, including changes in client orders, oruse 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 external events and relationships impacting the Company and/or any 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 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, the CompanySchwab and other financial institutions have been the- 11 -THE CHARLES SCHWAB CORPORATIONthe Company’sour technology or other operating systems in the event of an unforeseen eventoccurrence, which could affect the Company’sour ability to process and settle client transactions. Moreover, instances of fraud or other misconduct might also negatively impact the Company’sSchwab’s reputation and client confidence in the Company, in addition to any direct losses that might result from such instances. Despite the Company’sour 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 Companywe will not suffer unexpected losses, reputational damage or regulatory action due to technology or other operational failures or errors, including those of itsour vendors or other third parties.the Company devoteswe devote substantial attention and resources to the reliability, capacity and scalability of itsour systems, extraordinary trading volumes could cause the Company’sour computer systems to operate at unacceptably slow speeds or even fail, affecting the Company’sour 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. The Company isWe 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. SystemsSystem failures and constraints and transaction errors at such intermediaries could result in delays and erroneous or unanticipated execution prices, cause substantial losses for the Companyus and for itsour clients, and subject the Companyus to claims from itsour clients for damages.the Company’sour liquidity could negatively affect the Company’sour business and financial management as well as reduce client confidence in the Company.theour business operations, of the Company, including margin lending, mortgage lending, and transaction settlement, among other liquidity needs. The Company meets itsWe 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 the Company’sour ability to meet itsour liquidity needs. A reduction in the Company’sour liquidity position could reduce client confidence in the Company,Schwab, which could result in the loss of client accounts, or could cause the Companyus to fail to satisfy itsour liquidity requirements.requirements, including the modified LCR. In addition, if the Company’sour 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.the Company’sour 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 the Company’sour client lending activities (including margin, mortgage-related, and personal lending), unanticipated outflows of company cash, increased capital requirements, changes in regulatory guidance or interpretations, other regulatory changes, or a loss of market or client confidence in the Company. Schwab may also experience temporary liquidity demands due to timing differences between brokerage transaction settlements and the availability of segregated cash balances.the Company’sour liquidity needs, the Company mustwe 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 SchwabCS&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.The Companyitsour credit exposures.The Company’sthe Company haswe have policies and procedures designed to manage this risk, the policies and procedures may not be fully effective. The Company’sOur exposure mainly results from margin lending, clients’ options trading, futures activities, securities lending, mortgage lending, pledged asset- 12 -THE CHARLES SCHWAB CORPORATIONitsour role as a counterparty in financial contracts and investing activities, and indirectly from the investing activities of certain of the proprietary funds the Company sponsors.the Company iswe are subject to the risk that clients may default on their obligations when the value of the securities and cash in theirThe Company hasits 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 otherour investments. These instrumentsThose investments 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. 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 (OTTI) exists is a matter of judgment, which includes the assessment of several factors. If management determines that a security is other-than-temporarily impaired,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 securities available for sale (AFS) and securities held to maturity (HTM) securities could result in the recognition of future impairment charges. See “Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Estimates.”The Company’sEven 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.(concentration risk) can increase the Company’sour risk of loss. Examples include:Company’s credit concentration risk include:
same geographic region; and·large positions in financial instruments collateralized by assets with similar economic characteristics or in securities of a single issuer or industry;
Client margins, options or futures, pledged assets, and securities lending activities collateralized by or linked to securities of a single issuer, index, or industry.·mortgage loans and HELOCs to banking clients which are secured by properties in the same geographic region; and·margin, pledged asset, 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 sponsorsthe Company haswe have no obligation to do so, the Companywe may decide for competitive or other reasons to provide credit, liquidity or other support to itsour 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 Companyus to take significant charges, could reduce the Company’sour liquidity and, in certain situations, could, with respect to proprietary funds other than money market mutual funds, result in the Companyus having to consolidate a supported fund in itsour financial statements. If the Companywe chose not to provide credit, liquidity or other support in such a situation, the CompanySchwab could suffer reputational damage and its business could be adversely affected.Significant interest rate changes could affect the Company’s profitability and financial condition.The Company is exposed to interest rate risk primarily from changes in the interest rates on its interest-earning assets (such as cash equivalents, short- and long-term investments, and mortgage and margin loans) relative to changes in the costs of its funding sources (including bank deposits and cash in brokerage accounts, short-term borrowings, and long-term debt). Changes in interest rates can affect the interest earned on interest-earning assets differently than the interest the Company pays on its interest-bearing liabilities. In addition, certain funding sources do not bear interest and their cost therefore does not vary. Overall, the Company is positioned to benefit from a rising interest rate environment; the Company could be adversely affected by a decline in interest rates if the rates the Company earns on interest-earning assets decline more than- 13 -THE CHARLES SCHWAB CORPORATIONthe rates that the Company pays on its funding sources, or if prepayment rates increase on the mortgages and mortgage-backed securities 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 remains 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 fee revenues.Security breaches of the Company’s systems, or those of its clients or third parties, may subject the Company to significant liability and damage the Company’s reputation.The Company’s business involves the secure processing, storage and transmission of confidential information about the Company and its clients. Information security risks for financial institutionsWe 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 crime, activists, hackers and other external parties. The Company’s 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 client information), account takeovers, unavailability of service or other events. Despite the Company’s efforts to ensure the integrity of its systems, the Company 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.Security breaches, including breaches of the Company’s security measures or those of the Company’s third-party service providers or clients, could result in a violation of applicable privacy and other laws and could subject the Company to significant liability or loss that may not be covered by insurance, actions by the Company’s regulators, damage to the Company’s reputation, or a loss of confidence in the Company’s security measures which could harm the Company’s business. The Company may be required to expend significant additional resources to modify its protective measures or to investigate and remediate vulnerabilities or other exposures.The Company also faces risk related to external fraud involving the compromise of clients’ personal electronic devices that can facilitate the unauthorized access to login and password information for their various online financial accounts, including those at the Company. 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’s guarantee against unauthorized account activity could have a negative impact on the Company’s business, financial condition and results of operations.The Company is subject to litigation and regulatory investigations and proceedings and may not be successful in defending itself against claims or proceedings.substantialsignificant litigation and regulatory risks. The Company isWe 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. The Company isWe are also the subject of inquiries, investigations, and proceedings by regulatory and other governmental agencies.the Company’sour clients and the clients of third party advisors whose assets are custodied at the Company.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 Companycompany resources. If the Companywe were found to have infringed on a third-party patent, or other intellectual property rights, itwe could incur substantial damages, and in some circumstances could be enjoined from using certain technology, or providing certain products or services.- 14 -THE CHARLES SCHWAB CORPORATIONthe Companyus may result in settlements, awards, injunctions, fines, penalties or other results adverse to the Companyus, including reputational harm. Even if the Company iswe are successful in defending against these actions, the defense of such matters may result in the Companyus 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’sour operating results or cash flows for a particular future period, depending on the Company’sour 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 – 15. Commitments and Contingencies.”The Company reliesThe Company reliesthe 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.the Company’sour financial position.The Company evaluatesthe 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).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 Company’sThe Companymonitors 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 the Company’s 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 facesemployees, especially for employees who are key to the Company’s ability to build and enhance client relationships.quality professionals and otherqualified personnel in the Company’sour business is highly competitive. Competition is strong for FCs who buildAt various times, different functions and sustainroles are in especially high demand in the Company’s client relationships and for certain risk and capital managementmarket, compelling us to pay more to attract talent.- 15 -THE CHARLES SCHWAB CORPORATIONThe Company’s 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’sThe Company’sthe Company’sour stock price are the following:·the Company’s exposure to changes in interest rates;·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;
Our exposure to changes in interest rates;·the announcement of new products, services, acquisitions, or dispositions by the Company or its competitors; and
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;·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 Company’sour industry, as well as geopolitical, corporate, regulatory, business, and economic factors may also affect the Company’sour stock price.to, among other things, to issue additional shares of common or preferred stock or securities convertible or exchangeable into equity securities, without stockholder approval.the Company’sSchwab’s significant locations 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.772 137 726 28 721 299 185 275 148 117 105 83 (1)Includes the Company’s headquarters.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 — - 16 -THE CHARLES SCHWAB CORPORATIONthe 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.Item 3. “ItemItem 8 – Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – 15. Commitments and Contingencies.”Note 13.Item 4. - 17 -Item 5.Market for Registrant’s Common Equity, Related Stockholder Matters and IssuerPurchases of Equity Securities29, 2016,31, 2018, was 6,609.6,055. The closing market price per share on that date was $25.53. “ItemItem 8 – Financial StatementsNote 18 and Supplementary Data – Notes to Consolidated Financial Statements – 20. Employee Incentive, Retirement, and Deferred Compensation Plans and 26. Quarterly Financial Information (Unaudited).”
100 67 87 159 187 205 100 102 118 157 178 181 100 66 83 135 154 154 
- 18 -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 2015,2017, 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 the CompanyCSC on April 25, 2007, and March 13, 2008. The remaining authorizations do not have an expiration date.2015:2017:17 28.17 1,101 31.07 5 33.67 1,123 31.04 (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. 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 ShareOctober: 4 $ 44.12 November: 779 $ 44.70 December: 2 $ 48.97 Total: 785 $ 44.71 - 19 -Item 6. 8 5 6,380 6,058 5,435 4,883 4,691 6 4 4,101 3,943 3,730 3,433 3,299 14 10 1,447 1,321 1,071 928 864 12 8 1,364 1,261 1,010 883 864 10 8 1.04 10 8 1.03 2 1 1,315 1,303 1,285 1,274 1,227 2 1 1,327 1,315 1,293 1,275 1,229 42 42 43 42 41 40 38 36 36 37 14 15 17 18 20 36.5 37.5 37.2 36.0 37.9 5 11 11 4 10 35.7 34.9 31.4 29.7 29.7 12 12 11 11 12 14 19 183,718 154,642 143,642 133,617 108,553 10 52 2,890 1,899 1,903 1,632 2,001 15 14 13,402 11,803 10,381 9,589 7,714 14 13 14 14 14 18 14 15 15 21 2 5 15.3 14.6 13.8 13.8 14.1 (1)The compounded 4-year growth rate is computed using the following formula: Compound annual growth rate = (Ending Value / Beginning Value) .25 - 1.(2)In 2012, the Company issued non-cumulative perpetual preferred stock, Series A, with a total liquidation preference of $400 million and non-cumulative perpetual preferred stock, Series B, for a total liquidation preference of $485million. In 2015, the Company issued non-cumulative perpetual preferred stock, Series C, with a total liquidation preference of $600 million.- 20 -Selected Financial and Operating Data (In Millions, Except Per Share Amounts, Ratios, or as Noted) Growth Rates
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 % 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 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 Operationsthe Company’sSchwab’s senior management. These statements relate to, among other things:·the Company’s aim to maximize the Company’s value and returns over time; the Company’s ability to pursue its business strategy and maintain its market leadership position; and the Company’s belief that offering more value and a better investing experience will translate into more client assets which drives revenue (see “Item 1. – Business – Business Strategy and Competitive Environment”);·the impact of legal proceedings and regulatory matters (see “Item 3. – Legal Proceedings” and “Item 8. – Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements –15. Commitments and Contingencies – Legal contingencies”);·the impact of current market conditions and interest rates on the Company’s results of operations (see “Item 7. – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Overview” and “– Results of Operations – Net Interest Revenue”)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);·2016 capital expenditures (see “Item 7. – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Results of Operations – Expenses Excluding Compensation and Benefits”)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 “Item 7. – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity – Additional Funding Sources,” “– Contractual Obligations,” and “– Capital Management – Dividends”)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 ratios (see “Item 7. – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Capital Management – Regulatory Capital Requirements”)The estimated net reduction in Schwab’s effective income tax rate for 2018; (see Taxes on Income in Part II, Item 7);·the impact of changes in management’s estimates on the Company’s results of operations (see “Item 7. – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Estimates”)Sources of liquidity, capital, and level of dividends (see Liquidity Risk in Part II, Item 7);·the expected impact of new accounting standards not yet adopted (see “Item 8. – Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – 2. Summary of Significant Accounting Policies – New Accounting Standards – New Accounting Standards Not Yet Adopted”)Capital ratios (see Regulatory Capital Requirements in Part II, Item 7); and
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 – 15. Commitments and Contingencies – Guarantees and indemnifications”).·changes in general economic and financial market conditions;
General market conditions, including the level of interest rates, equity valuations and trading activity;·changes in revenues and profit margin due to changes in interest rates;
Our ability to attract and retain clients, develop trusted relationships, and grow client assets;·adverse developments in litigation or regulatory matters;
Client use of our investment advisory services and other products and services;·the extent of any charges associated with litigation and regulatory matters;
The level of client assets, including cash balances;·amounts recovered on insurance policies;
Competitive pressure on pricing, including deposit rates;·the Company’s ability to attract and retain clients and grow client assets and relationships;- 21 -·the Company’s ability to develop and launch new products, services and capabilities in a timely and successful manner;·fluctuations in client asset values due to changes in equity valuations;·the performance or valuation of securities available for salePotential breaches of contractual terms for which we have indemnification and guarantee obligations; and securities held to maturity;
Our ability to develop and launch new products, services and capabilities in a timely and successful manner. ·trading activity;·the level of interest rates, including yields available on money market mutual fund eligible instruments;·the timing and impact of changes in the Company’s level of investments in land, leasehold improvements, information technology equipment and software;·the adverse impact of financial reform legislation and related regulations;·the amount of loans to the Company’s brokerage and banking clients;·the level of the Company’s stock repurchase activity;·the availability and terms of external financing;·capital needs and management;·client sensitivity to interest rates;·timing, amount and impact of the migration of certain balances from brokerage accounts and sweep money market funds into Schwab Bank;·the Company’s ability to manage expenses;·regulatory guidance;·the level of client assets, including cash balances;·competitive pressures on rates and fees;·acquisition integration costs;·potential breaches of contractual terms for which the Company has indemnification and guarantee obligations;·client use of the Company’s investment advisory services and other products and services;·the volume of prepayments in the Company’s mortgage-backed securities portfolio; and·the impact of changes in market conditions on money market fund fee waivers, revenues and pre-tax profit margin.this Annual Report on Form 10-K, including “Item 1A – Risk Factors.”- 22 -balances or activity within the preceding eight months.the Company’sSchwab’s retail or other advisory solutions.Average client assets: The daily average client asset balance for the period.100th100th of 1%, or 0.01%.Cash and investments segregated and on deposit for regulatory purposes: Client cash or qualified securities balances not used for margin lending are generally segregated and maintained for the exclusive benefit of clients, pursuant to Rule 15c3-3 of the Securities Exchange Act of 1934 (commonly referred to as the Customer Protection Rule), by the Company’s broker-dealer subsidiaries.custodied at the Company,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.trades, including the Company’s Mutual Fund OneSourcetrades.® funds and exchange-traded funds, and other proprietary products.Commitments to extend credit: Legally binding agreements to extend credit for unused HELOCs, pledged asset lines and other lines of credit. Capital:: The sum of common stock and related surplus net of treasury stock, retained earnings, accumulated other comprehensive incomeAOCI and qualifying minority interests, less applicable regulatory adjustments and deductions. Schwab made a one-time election to opt-out of the requirement to include most components of AOCI in CET1 Capital under the “standardized approach” framework. (CET1) Risk-Based Capital Ratio: The ratio of CET1 Capital to total risk-weighted assets.Concentration risk: The Company’s risk exposure resulting from holding large positions in financial instruments collateralized by assets with similar economic characteristics or in securities of a single issuer or particular industry or geographical area.mutual fund clearing transfers.Credit risk: The potential for loss duerelating to a borrower, counterparty, or issuer failingspecific client. perform its contractual obligations.Rule 15c3-3 of the Securities Exchange Act of 1934.trades: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).long-termtotal debt divided by stockholders’ equity and long-termtotal debt.- 23 -THE CHARLES SCHWAB CORPORATIONManagement’s Discussion and Analysis of Financial Condition and Results of Operations(Tabular Amounts in Millions, Except Ratios, or as Noted)The CompanySchwab considers a loan to be delinquent if it is 30 days or more past due.signed into federal law in 2010 containing numerous provisions aimed at promoting financial stability in the U.S. financial system through enhancedwhich expanded prudential regulation of large financial services companies.in July 2013 thatwhich implemented Basel III and relevant provisions of Dodd-Frank, which apply to savings and loan holding companies, as well as federal savings banks. Implementation began on January 1, 2015.Mortgages:mortgages: Refers to first lien residential real estate mortgage loans, which include two loan classes: first mortgages and purchased first mortgages.loans.IncludesRepresents 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,basis.excludes employees of outsourced service providers.quickly into cash.Interest rate risk: The risk to earnings or capital arising from changes in interest rates.the CompanySchwab pays interest. available for sale, securities held to maturity, and bank loans.loans on which Schwab earns interest.risk:Coverage Ratio (LCR): Risk that the Company will be unableThe ratio of HQLA to meet obligations when they come due without incurring unacceptable losses.projected net cash outflows during a 30-day stress scenario.Ratio shown as a percentage and calculatedCalculated as the principal amount of a loan divided by the appraised value of the collateral securing the loan.LoansAdvances made to brokerage clients on a secured basis to purchase securities reflected in receivables from brokerage clients on the Company’sconsolidated balance sheet.sheets.Market risk: 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.the CompanySchwab less client outflows. Management believes that this metric depicts how well the Company’s productsInflows include dividends and services appealinterest; outflows include commissions and fees. Capital gains distributions are excluded.new and existing clients.its “required” amount of stable funding over a one-year time horizon.- 24 -THE CHARLES SCHWAB CORPORATIONManagement’s Discussion and Analysis of Financial Condition and Results of Operations(Tabular Amounts in Millions, Except Ratios, or as Noted)Operational risk: Potential for loss due to inadequate or failed internal processes, systems, and firms or exchanges handling client orders, or loss from external events and relationships impacting the Company and/or any of its key business partners and vendors.Schwab and optionsXpress, Inc.the broker-dealer subsidiaries send equity and options orders. Reflects rebates received for certain types of orders, minus fees paid for executiontypes of orders for which exchange fees or other charges apply.assetbrokerage account maintained at Schwab.the broker-dealer subsidiaries.Return on average total assets: Calculated as net income divided by average total assets for the period.Primarily computedComputed by assigning specific risk-weightings as determined by the regulators to assets and off-balance sheet instruments for capital adequacy calculations.at the end offor the quarter.Board of Governors of the Federal Reserve, System, the Office ofOCC, the Comptroller of the Currency, the Federal Deposit Insurance Corporation,FDIC, and the Consumer Financial Protection Bureau.CFPB.- 25 - of the Company 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),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. ExpensesTotal expenses, excluding interest, as a percentage of average client assets, are considered by management to beis 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, 2017, 2016, and 2015 2014, and 2013 are:12 139.4 124.8 41.6 8 134.7 124.8 140.8 2 2,513.8 2,463.6 2,249.4 6 2,531.8 2,384.0 2,116.7 10 1,070 972 960 4 9,769 9,386 9,093 2 1,253.7 1,228.1 1,101.4 13.0 12.3 13.1 5 6,380 6,058 5,435 4 4,101 3,943 3,730 8 2,279 2,115 1,705 5 832 794 634 10 1,447 1,321 1,071 38 83 60 61 8 1,364 1,261 1,010 8 1.03 5 11 11 35.7 34.9 31.4 12 12 11 0.16 0.17 0.18 (1) Growth Rate
1-Year
2016-2017 2017 2016 2015 Client Metrics: Net new client assets (in billions) 86% $ 233.1 $ 125.5 $ 139.4 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 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 % to reflect the final impact of the consolidation of its retirement plan recordkeeping platforms, an inflow of $10.2 million 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.(2)2013 excludes an outflow of $74.5 billion relating to the planned transfer of a mutual fund clearing client and $24.7 billion to reflect the estimated impact of the consolidation of its retirement plan recordkeeping technology platforms and subsequent resignation from certain retirement plan clients for a total adjustment of $99.2 billion.The Company’s financial results are highly correlated to the general overall strength of economic conditions and, more specifically, to the direction of the U.S. equity and fixed income markets, the mortgage lending markets and residential credit trends. Overall market conditions, interest rates, economic, political and regulatory trends, and industry competition are among the factors that could affect results and which are unpredictable. Interest rates have a direct correlation to the Company’s abilityplanned resignation from an Advisor Services cash management relationship netting to generatean adjustment of ($4.7) billion.interest revenue, as interest-earningnew assets and funding sources are sensitivein 2017, up 58% from 2016. Total assets receiving ongoing advisory services grew 21% in 2017 to changes$1.70 trillion. Our success with clients was bolstered by strength in the rate environment. equity markets – the Standard & Poor’s 500To® Index (S&P 500) finished 2017 up 19% from the extent short-term interest rates remain at current low levels,prior year end. Also in 2017, the Company’s net interest revenue will continue to be constrained, even as growth in average balances helps toFederal Reserve increased- 26 -such revenue.since the end of 2016.is also impacted by the amount and mix of interest-earning assets and interest-bearing funding sources, as well as the Company’s ability to attract assets from new and existing clients.The interest rate environment also affectsrose 29% while asset management and administration fees through the fees earned on the Company’s lineup of proprietary money market funds. In 2015, 2014 and 2013, the low interest rate environment caused the Company to waive a portion of its money fund fees. To the extent that short-term rates remain low, asset management and administration fees may continue to be negatively affected. Other drivers of asset management and administration fees include securities valuations and the Company’s ability to attract assets from new and existing clients.The Company generates trading revenue through commissions earned for executing trades for clients and principal transaction revenue primarily from trading activitygrew 11% 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. Volatility in the markets can influence client behavior in terms of investment decisions and volume of trading activity.2015 Compared to 2014In 2015, the Company’s revenue and net income grew despite an environment that included significant equity market volatility and continued low interest rates. The Standard & Poor’s 500 Index declined as much as 9% during the year and ultimately ended the year down 1%2017 when compared to the prior year. The federal funds short-term target rate increased 25 basis pointsTrading revenue declined in December 2015, however, the increase had limited effect on 2015 results. The average 3-month London Interbank Offered Rate (LIBOR) yield improved 8 basis points2017 by 21% due to .32% compared to 2014. Long-term interest rates decreasedprice reductions announced early in 20152017.same periodprior 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 2014. The average 10-year U.S. Treasury yield during 2015 was 2.13%, 40our asset management business.lower thanover the average yield during 2014.the Company’sour innovative, full-service model continued to resonateresonated with clients and drivedrove growth during the year. Core net new assets totaled $134.7 billion in 2015 compared to $124.8 billion in 2014. Total client assets ended 2015 at $2.51 trillion, up 2% from the year ended 2014, despite the $89.2 billion impact of reduced market valuation on client assets during the year.The CompanyWe added 1.1 million new brokerage accounts to itsour client base during 2015, up 10% compared2016, which contributed to 2014. Activebringing the total active brokerage accounts ended 2015 at 9.8to 10.2 million up 4% on a year-over-year basis. Faced with economic uncertaintyby year-end. Core net new assets from new and the resulting market volatility,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 throughout the year. Over 155,000 accountsresulting in a 12% increase in client assets enrolled in one of the Company’sour retail advisory solutions and those guided by independent advisors, to $1.40 trillion at the end of the year.2015, 60% morean environment that had periods of marked volatility, but ultimately included improving economic conditions. The S&P 500 ended 2016 10% higher than the year-earlier period, and total accounts using these solutions reached 560,000, up 14% year-over-year.Duringprior 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 Company’s net revenues increased 5%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 2014 primarily due to increases inDecember 31, 2015.partiallywhich more than offset by a decrease inlower revenue from trading revenue. ·Net interest revenue increased primarily due to higher client cash balances generating increased interest-earning assets, partially offset by lower average interest rate margins.·Asset management and administration fees increased due to higher client asset balances and higher net yields earned on money market funds.·Trading revenue decreased for 2015 primarily due to lower commissions per revenue trade and lower daily average revenue trades.Growth in expenses, excluding interest, was limited to a 4% increase in 2015 primarily reflecting business growth related increases in compensation, benefits and other expenses.The combined effect of market conditions, strong businessrevenue. Net interest revenue improved $797 million, or 32%, in 2016 compared to 2015, and asset management and administration fees improved $405 million, or 15%.the Company’s overall spending discipline resultedtechnology, resulting in a 9% expense growth for 2016. This increase allowed for a 780 basis point gap between net revenue and expense growth and a pre-tax profit margin of 40.0% in 2016, compared to 35.7% in 2015.2014 Compared to 2013The 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- 27 -ending the year up 13%, 11%, and 8%, respectively.federal funds target rate remained unchanged at a range of zero to .25% during 2014. The average 10-year U.S. 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 U.S. Treasury Bill yield decreased by 3 basis points to .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 resultaggregate principal amount of the Company’s strong key client activity metrics, the Company achieved a pre-tax profit margin of 34.9% in 2014. Overall, net income increased by 23% in 2014 from 2013 and the return on average common stockholders’ equitynotes 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.
$625 million. ·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 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 (RMBS) 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.December 2015,May 2016, the Federal Reserve, the OCC and the FDIC jointly issued a notice of proposed guidelines to establish standards for recovery planning by national banks and federal savings banks with total consolidated assets of $50 billion or more. The proposed guidelinesrulemaking that would require each bank to develop and maintainimpose a recovery plan that sets forth the bank’s plan for how it will remain a going concern when it is experiencing considerable financial or operational stress.minimum NSFR on certain banking organizations, including CSC. The comment period for the proposed guidelinesrule ended on February 16,August 5, 2016 and the guidelines are subjectimpact to further modification. Thethe Company cannot be assessed until the final rule is currently evaluating the impact of the proposed guidelines.requirehave required certain financial institutions that are subject to the Federal Reserve’s capital rules to apply adeduct from their regulatory capital deduction treatment to theirthe amount of any investments in or exposure to unsecured debt issued by U.S. bank holding companies identified as global systemically important banking organizations. The comment period fororganizations (GSIBs). In December 2016, the rule proposal ended on February 19, 2016 and the rule proposal is subject to further modification. The Company is currently evaluating the impact of the proposed rule.In October 2015, the FDICFederal Reserve issued a noticefinal rule that did not include this regulatory capital deduction proposal. At the same time, the Federal Reserve did indicate its intent to work with the OCC and FDIC to develop a proposed interagency approach towards the regulatory capital treatment of proposed rulemaking that would impose a surcharge on the quarterly assessments of insured depository institutions with total assets of $10 billion or more. The surcharge would equal an annual rate of 4.5 basis points applied to the institution’s assessment base, with certain adjustments. The FDIC expects the proposed surcharge to commence in the third quarter of 2016 and continue through the quarter that the reserve ratio of the DIF reaches 1.35%. Under the proposed rule, if by year-end 2018, the reserve ratio has not reached 1.35%, the FDIC would impose a shortfall assessment on the institutions subject to the surcharge. The comment period for the rule proposal ended on January 5, 2016 and the rule proposal is subject to further modification. GSIB unsecured debt. The Company will continue to evaluate the impact of the proposed rule.- 28 -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
RevenuesNet 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 % Aprilorder to keep interest-rate sensitivity within established limits, management monitors and responds to changes in the balance sheet. As Schwab builds its client base, we attract new client sweep cash, which, along with the bulk transfer ofYear 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/
RateInterest-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 % 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 % 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 % 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 % DepartmentFederal 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 Labor published notice13 basis points compared to 2015.rule proposal to significantly broaden the definition of “fiduciary” under the Employee Retirement Income Security Act of 1974. If adopted, among other things, thecombination of: rule would subject broker-dealers who provide non-discretionary investment advice to retirement plans and current clients;a “best interest” standard,the bank sweep feature; andwell asthe default investment option for uninvested cash balances within all new Investor and Advisor Services brokerage accounts during 2016.conditions and requirements.investments which affected growth in bank sweep deposits.second comment period fortransfer had no effect on the rule proposal endedoverall net interest margin. For additional information on September 24, 2015 and the rule proposal is subject to further modification. The Company will continue to evaluate the impact of the proposed rule.RESULTS transfer, see Item 8 – Note 5.5 1,479 23 1,413 23 1,339 25 7 898 14 840 14 718 13 (3) 273 4 280 5 258 5 5 2,650 41 2,533 42 2,315 43 12 2,657 42 2,374 39 2,085 38 29 (132) (2) (102) (1) (105) (2) 11 2,525 40 2,272 38 1,980 36 (4) 822 13 857 14 864 16 (12) 44 1 50 1 49 1 (5) 866 14 907 15 913 17 (4) 328 5 343 5 236 4 175 11 4 1 (100) (1) (10) 5 6,380 100 6,058 100 5,435 100 (1)In 2015, Other third-party mutual funds were reclassified to Mutual funds and ETFs. Related revenues have been reclassified from Other asset management and administration fees. Prior-period information has been recast to reflect this change.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.asset basedasset-based fees such as trust fees, 401(k) recordkeeping fees, mutual fund clearing fees, trust fees, collective trust fund fees, 401(k) record keeping fees, and non-balance based service and transaction fees. For a discussion of the impact of current market conditions on asset management and administration fees, see “Item 7A – Quantitative and Qualitative Disclosures About Market Risk.”- 29 -THE CHARLES SCHWAB CORPORATIONManagement’s Discussion and Analysis of Financial Condition and Results of Operations(Tabular Amounts in Millions, Except Ratios, or as Noted): and other non-transaction fee (NTF) funds. The following funds generated 53% of the asset management and administration fees earned during 2017 and 2016 and 47% during 2015:167,909 167,738 167,896 88,450 71,249 49,587 234,381 234,777 204,465 (1,947) 287 (195) 15,542 11,398 8,311 (23,014) (8,925) (2,813) 186 (116) 37 (1,880) 5,803 13,351 (3,713) 8,529 33,125 166,148 167,909 167,738 102,112 88,450 71,249 207,654 234,381 234,777 Schwab Money Schwab Equity and Market Funds Bond Funds and ETFs 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 ) 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 rate:yields:
Client
Assets
Fee
Client
Assets
Fee
Client
Assets
Fee161,381 947 0.59% 164,564 957 0.58% 162,484 936 0.58% (672) (751) (674) 161,381 275 0.17% 164,564 206 0.13% 162,484 262 0.16% 102,486 217 0.21% 83,916 192 0.23% 63,012 157 0.25% 225,347 764 0.34% 236,003 805 0.34% 219,188 744 0.34% 251,491 223 0.09% 241,314 210 0.09% 223,095 176 0.08% 740,705 1,479 0.20% 725,797 1,413 0.19% 667,779 1,339 0.20% 172,302 898 0.52% 160,721 840 0.52% 136,353 718 0.53% 3,274 16,463 15,794 13,890 192,039 898 0.47% 176,515 840 0.48% 150,243 718 0.48% 324,701 226 0.07% 297,499 234 0.08% 249,619 216 0.09% 47 46 42 2,650 2,533 2,315 (1)In 2015, certain Mutual Fund OneSource balances and revenues were reclassified to Other third-party mutual funds and ETFs. Prior-period information has been recast to reflect this change.(2)Beginning in 2015, Other third-party mutual funds and ETFs and Other balance-based fees are presented separately. Related revenues were previously presented in Other. Prior-period information has been recast to reflect this change. Other third-party mutual funds and ETFs include ETF OneSource.(3)Beginning in 2015, Fee-based, Intelligent Portfolios and Legacy Non-Fee advice solutions are presented separately. Prior-period information has been recast to reflect this change. Advice solutions include managed portfolios, specialized strategies and customized investment advice. Fee-based advice solutions include Schwab Private Client, Schwab Managed Portfolios, Managed Account Select, Schwab Advisor Network, Windhaven Strategies, Thomas Partners Dividend Growth Strategy, and Schwab Index Advantage advised retirement plan balances. Intelligent Portfolios include Schwab Intelligent Portfolios™, launched in March 2015, and Institutional Intelligent Portfolios, launched in June 2015. Legacy Non-Fee advice solutions include superseded programs such as Schwab Advisor Source and certain retirement plan balances. Average client assets for advice solutions may also include the asset balances contained in the three categories of mutual funds listed above.(4)Includes various asset-based fees, such as trust fees, mutual fund clearing fees, 401(k) recordkeeping fees, and other service fees.(5)Includes miscellaneous service and transaction fees relating to mutual funds and ETFs that are not balance-based.Year Ended December 31, 2017 2016 2015 Average
Client
Assets Revenue Average
Fee Average
Client
Assets Revenue Average
Fee Average
Client
Assets Revenue Average
FeeSchwab 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 % NTF funds 215,333 706 0.33 % 199,389 676 0.34 % 225,347 764 0.34 % 286,111 251 0.09 % 254,584 222 0.09 % 251,491 223 0.09 % $ 820,804 2,045 0.25 % $ 733,942 1,853 0.25 % $ 740,705 1,479 0.20 % 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 % 417,659 258 0.06 % 339,071 235 0.07 % 324,701 226 0.07 % 46 52 47 Total asset management and administration fees $ 3,392 $ 3,055 $ 2,650 N/A Not applicable.$117$337 million, or 5%11%, in 20152017 from 2014, and by $218 million, or 9%, in 2014 from 2013, due to the following items.·Mutual fund and ETF service fees increased by $66 million, or 5%, in 2015 from 2014, due to higher net yields on money market fund assets, growth in client assets in equity and bond funds and ETFs and other third party mutual funds and ETFs, partially offset by a reduction in client assets in Mutual Fund OneSource. Mutual fund and ETF service fees increased by $74 million, or 6%, in 2014 from 2013 due to growth in client assets in Mutual Fund- 30 -THE CHARLES SCHWAB CORPORATIONManagement’s Discussion and Analysis of Financial Condition and Results of Operations(Tabular Amounts in Millions, Except Ratios, or as Noted)OneSource® funds and equity and bond funds and ETFs, and higher service fees in other third party mutual funds and ETFs, partially offset by lower net yields on money market fund assets.·Advice solutions fees increased by $58 million, or 7%, in 2015 from 2014 primarily due to growth in client assets enrolled in advisory offers, including Schwab Private Client™, ThomasPartners®, and Managed Account Select®, partially offset by a decrease in Windhaven®. Advice solutions fees increased by $122 million, or 17%, in 2014 from 2013 due to growth in client assets enrolled in advisory offers, including Schwab Private Client, ThomasPartners, and Schwab Managed Portfolios™.·Other balance-based asset management and administration service fees decreased by 3% in 2015 from 2014. Other balance-based asset management and administration fees increased by $18 million, or 8%, in 2014 from 2013 primarily due to growth in client assets in transaction fee fund clearing, collective trust funds, and Advisor Services – asset based fees.Net Interest RevenueNet interest revenue is the difference between interest earned on interest-earning assets and interest paid on funding sources. The Company’s interest-earning assets are primarily funded through bank deposits and brokerage client account balances.Interest-earning assets include cash and cash equivalents, segregated cash and investments, margin loans included in receivables from brokerage clients, investment securities and bank loans. Revenue on interest-earning assets is affected by various factors such as distribution and composition of assets, prevailing interest rates when purchased, and changes in prepayment levels. Fees earned on securities borrowed and loaned are included in other interest revenue and expense. The rates on the majority of the Company’s investment securities and loans re-price or reset based on short-term market rates and the remainder is invested in fixed-rate loans and securities.The Company’s interest-bearing liabilities include bank deposits, payables to brokerage clients and long-term debt. Interest-bearing liabilities are primarily sensitive to short-term interest rates and the Company establishes the rates paid on most of these liabilities. The Company expects that the rate paid on these liabilities will generally adjust at some fraction of the movement in short-term market rates.The Company expects that net interest revenue will increase as short-term market rates increase and decline should rates fall below current levels. When interest rates fall, the Company may attempt to mitigate some of this negative impact by lowering rates paid to clients on interest-bearing liabilities. The current low interest rate environment limits the extent to which the Company can reduce interest expense on funding sources. The Company may also alter the amount and type of fixed rate loans and securities that are added to the portfolio. Generally, increases in the percentage of fixed-rate assets relative to non-interest-bearing liabilities will reduce the rate at which net interest revenue changes if rates move.Non-interest bearing funding sources include non-interest bearing cash balances, stockholders’ equity and other miscellaneous assets and liabilities.- 31 -THE CHARLES SCHWAB CORPORATIONManagement’s Discussion and Analysis of Financial Condition and Results of Operations(Tabular Amounts in Millions, Except Ratios, or as Noted)The following table presents net interest revenue information corresponding to interest-earning assets and funding sources on the consolidated balance sheets:9,358 24 0.26 7,179 16 0.22 6,943 16 0.23 18,606 31 0.17 20,268 24 0.12 25,419 35 0.14 274 0.07 325 0.09 377 0.04 15,212 502 3.30 13,778 482 3.50 11,800 434 3.68 62,249 629 1.01 52,057 546 1.05 49,114 557 1.13 38,280 957 2.50 32,361 828 2.56 24,915 610 2.45 13,973 369 2.64 12,906 355 2.75 11,758 329 2.80 157,952 2,512 1.59 138,874 2,251 1.62 130,326 1,981 1.52 145 123 104 157,952 2,657 1.68 138,874 2,374 1.71 130,326 2,085 1.60 113,464 29 0.03 95,842 30 0.03 85,465 31 0.04 25,651 2 0.01 26,731 2 0.01 30,258 3 0.01 2,727 92 3.37 1,901 73 3.84 1,751 69 3.94 141,842 123 0.09 124,474 105 0.08 117,474 103 0.09 16,110 14,400 12,852 9 (3) 2 157,952 132 0.08 138,874 102 0.07 130,326 105 0.08 2,525 1.60 2,272 1.64 1,980 1.52 (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 $253 million or 11% in 2015 from 20142016, primarily due to higher average balances of interest-earningclient assets invested in advice solutions, mutual funds, and ETFs, and lower fee waivers on money market funds. Partially offsetting these increases were lower fee rates on proprietary money funds and other indexed mutual funds and ETFs due to fee reductions implemented by Schwab in 2017.the effect of lower net interest margins. The growtha reduction in the average balancesclient assets in bank deposits resulted from an increase in the uninvested cash balances in certain brokerage client accounts swept to Schwab Bank.Net interest revenue increased $292 million or 15% in 2014 from 2013 primarily due to higher average 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 bank deposits funded the increase in the balances of securities held to maturity and securities available for sale.client fixed income securities. Factors that influence principal transaction revenue include the volume of client trades and market price volatility.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 revenue also includes adjustments to the fair value of these securities positions.- 32 -(2) 292.0 298.2 295.0 4 536.9 516.8 490.5 251.0 250.5 250.5 (2) 11.83 12.13 12.31 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 or 5%, in 2015 from 20142017 and 2016, respectively, when compared to the prior years primarily due to a decreaselower commissions rates on DARTs.ashas declined from a resultpeak of lower commissions per50%-60% of total revenue tradein the early 1990’s to the current low of 8% in 2017, 11% in 2016 and lower daily average revenue trades. Trading revenue remained relatively flat14% in 2014 from 2013.Daily average revenue trades decreased in 2015 from 2014 primarily due to a lower volume of equity trades. Daily average revenue trades increased in 2014 from 2013 primarily due to a higher volume of equity trades, offset by a lower volume of mutual fund trades. Average revenue per revenue trade decreased 2% in 2015 compared to 2014 but remained relatively flat from 2014 to 2013.nonrecurring gains,other service fees, software fees from the Company’sour portfolio management services,solutions, exchange processing fees, and other service fees.Other revenue decreased by $15 million, or 4%, in 2015 compared to 2014 primarily due to lower order flow revenue. Order flow revenue was $103 million during 2015 compared to $114 million during 2014. The decrease was primarily due to changes in the composition and volume of different types of orders and the fees and rebates for such orders. Other revenue in 2015 also includes net litigation proceeds of $75 million related to the Company’s non-agency RMBS portfolio. Other revenue in 2014 includes a net insurance settlement of $45 million and net litigation proceeds of $28 million related to the Company’s non-agency RMBS portfolio.Other revenue 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 RMBS portfolio, and increases in order flow revenue. nonrecurring gains.2014 compared2017, 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 $99 million during 2013. The increase was due to higher rebates received and higher volumes for certain types of orders.Expenses Excluding InterestThe following table shows a comparison of expenses excluding interest:3 2,241 2,184 2,027 459 457 415 9 353 324 309 2 249 245 257 4 233 223 220 13 224 199 202 10 342 311 300 4 4,101 3,943 3,730 35 36 37 4 4 5 - 33 -Compensation and BenefitsCompensation and benefits expense includes salaries and wages, incentive compensation, and related employee benefits and other. 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 EPS, and therefore fluctuate with this measure. Stock-based compensation primarily includes employee and board of director stock options and restricted stock.certaintotal 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 components and employee data:professional services.1 1,258 1,245 1,110 2 618 605 599 9 365 334 318 3 2,241 2,184 2,027 5 15.3 14.6 13.8 6 15.1 14.2 13.9 20152017 and 2016 from 2014the prior years, primarily due to higherincreases in employee headcount to support the growth in the business and annual salary increases, partially offset by a $68 million charge in 2014 for estimated future severance benefits resulting from changes in the Company’s geographic footprint. increases.20152017 and 2016 from 2014the prior years, primarily due to the earlier recognition of certain equity-based incentives due to plan changes offset by a reduction in long-term incentive plan expenses. increased net client asset flows and increased employee headcount.expenseexpenses increased in 20152017 and 2016 from 2014 due tothe prior years as a result of the increases in healthcare costsemployee headcount, salaries, wages and higher employee headcount.Salaries and wages increased in 2014 from 2013 primarily due to a $68 million charge in 2014 for estimated future severance benefits resulting from changes in the Company’s geographic footprint and due to annual salary increases. Incentive compensation was relatively flat in 2014 from 2013 primarily due to an increase in discretionary bonus costs, offset by a higher 2013 expense related to a new payout schedule for field incentive plans.Expenses Excluding Compensation and BenefitsProfessional services remained relatively flat in 2015 compared to 2014. compensation.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.20152017 and 2016 from 2014the prior years, primarily due to increased software maintenance expense relating to the Company’s information technology systems and an increaseincreases in property taxes and otherfacility operational expenses attributable to the changesgrowth in the Company’sSchwab’s geographic footprint. Occupancyequipment expense increasedamortization expenses were higher in 20142017 and 2016 from 2013 primarilythe prior years, due to increasedhigher amortization of internally developed software maintenance expenses relating to the Company’s informationassociated with our investment in software and technology systems.Advertising and market development increased in 2015 compared to 2014 due to increased electronic and other media expenses and spending on client promotions, partially offset by a decrease in corporate sponsorships and print ad media expenses. 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 tomorrow®, partially offset by higher 2014 spending on client promotions.Communication expense increased in 2015 compared to 2014 due to increases in news and informational communications, partially offset by a decrease in postage expenses. Communication expense remained relatively flat in 2014 compared to 2013.- 34 -Depreciation and amortization expense2015 compared to 20142017 and 2016 from the prior years, primarily due to an increase in FDIC insurance assessments which rose as a result of higher bank deposits and the effect of a new surcharge that commenced in the third quarter of 2016.amortization of internally-developed software associated within 2017 from the Company’s investment in softwareprior year due to travel and technology enhancementsentertainment, asset volume-related increases, and increased depreciation related to new buildings and equipment associated with the Company’s expanded geographic footprint. Depreciation and amortization expense remained relatively flat in 2014 compared to 2013.The Company’s capitalsome miscellaneous items.(5% of net revenues), $405 million (7% of net revenues),in 2017, 2016, and $270 million (5% of net revenues) in 2015, 2014 and 2013, respectively. The decreaseincrease in capital expenditures in 2015both 2017 and 2016 from 2014the prior years was primarily due to lower investment in buildings and land relating to the changeour growing geographical expansion in the Company’s geographic footprint. CapitalizedU.S. and investments in technology projects. The largest component of capital expenditures was capitalized costs for developing internal-use software wereof $157 million, $130 million, and $107 million $81 millionin 2017, 2016, and $74 million2015, respectively.2015, 2014additional paid-in capital, a component of stockholders’ equity, and 2013.Management currently anticipates that 2016 capital expenditures will be approximately 46% higher than 2015 primarily due to spendingare now included in taxes on land, leasehold improvements, information technology equipment and capitalized costs for internal use software.Other expense increased in 2015 from 2014 primarily due to increases in FDIC insurance assessments due to higher bank deposits, legal expenses and miscellaneous items. Other expense increased in 2014 from 2013 primarily due to higher travel costs asincome, a component of net income. As a result of increased employee headcountthis change, our tax expense was reduced by approximately $87 million in 2017. Future effects will depend on our share price, restricted stock vesting, and travel.Taxesthe volume of equity incentive options exercised.IncomeThe Company’sincome in the fourth quarter of 2017 associated with the remeasurement of net deferred tax assets and other tax adjustments related to the Tax Act.36.5%35.5% in 2015, 37.5%2017 compared to 36.9% in 2014, and 37.2% in 2013.2016. The decrease in 2015 from 2014 was primarily due torates between the recognition oftwo years reflects the net tax benefits relating to certain current and prior-year matters. The increase in 2014 from 2013 was primarily due to the impact of the above two items. The effective rate in 2015 was 36.5%.non-recurring state tax benefit in 2013.The Companyservices.services to individual investors. The Advisor Services segment provides custodial, trading, banking, and support services as well as retirement business services.services to independent RIAs, independent retirement advisors and recordkeepers. 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 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.For additional information 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 productscomposition of client assets, client trading frequency, and services offered by eachpricing unique to each. While both segments leverage the scale and efficiency of our platforms, segment please see “Item 1 – Business.”- 35 -the Company’s reportableour segments is presented in the following tables:table:5 1,837 1,742 1,593 3 813 791 723 5 2,133 2,028 1,755 61 392 244 225 (8) 556 606 609 3 310 301 304 7 234 218 176 27 94 74 59 175 11 4 1 (100) (1) (9) (1) 4 4,771 4,597 4,125 14 1,609 1,410 1,310 5 3,090 2,937 2,858 8 1,011 938 872 1 1,681 1,660 1,267 27 598 472 438 (1) 5 2,650 2,533 2,315 11 2,525 2,272 1,980 (5) 866 907 913 51 1 (4) 328 343 236 175 11 4 1 (100) (1) (10) 51 5 6,380 6,058 5,435 68 4 4,101 3,943 3,730 (17) 8 2,279 2,115 1,705 (1)During 2015, the Corporate Brokerage Retirement Services business was transferred from the Investor Services segment to the Advisor Services segment. All prior-period amounts have been recast to conform with the current year presentation. 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 N/M Not meaningful.Net$174$789 million, or 4%15%, in 20152017 from 20142016 primarily due to increases in net interest revenue and asset management and administration fees, and other revenue, partially offset by a decrease in trading revenue. Net interest revenue increased mainlyprimarily due to higher net interest margins and higher balances of interest-earning assets, partially offset by the effect of lower net interest margins.assets. Asset management and administration fees increased primarily due to fees from advice solutions which increased mainly due to growth inhigher client assets enrolled in advisory offers. Othersolutions and higher net fees on money market fund assets. Trading revenue 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.litigation proceeds relating to the Company’s non-agency RMBS portfolio. Trading revenue decreased in 2015 from 2014 largelyhigher balances of interest-earning assets and higher interest rates on those assets. Asset management and administration fees increased primarily due to lower commissions per revenue trade and lower daily average revenue trades.higher net yields on money market fund assets, partially offset by a reduction in client assets in Mutual Fund OneSource®. Expenses excluding interest increased by $153$290 million, or 5%9%, in 20152016 from 20142015 primarily due to growth in the business resulting in increases in compensation and benefits, depreciation and otheramortization, and occupancy and equipment expenses.- 36 -THE CHARLES SCHWAB CORPORATIONManagement’s Discussion and Analysis of Financial Condition and Results of Operations(Tabular Amounts in Millions, Except Ratios, or as Noted)Net$472$351 million, or 11%17%, in 20142017 from 20132016 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 and the effect higher average interest rates on securities held to maturity had on the Company’s average net interest margin.margins. Asset management and administration fees increased primarily due to higher fees from mutual fund services, advice solutions, and other asset management and administration services. Mutual fund and ETF service fees increased due to growth in client assets invested in the Company’s Mutual Fund OneSource fundsETFs and equity and bond funds, partially offset by a decrease inand higher net fees on 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. OtherTrading revenue increaseddecreased primarily due to litigation proceeds related to the Company’s non-agency RMBS portfolio and increases in order flow revenue.lower commission rates. Expenses excluding interest increased by $79$138 million, or 3%12%, in 20142017 from 20132016 primarily due to increases inhigher compensation and benefits, technology project spend, asset management and professional services expense, partially offset by a decrease in advertisingadministration related expenses, and market development expense.Advisor ServicesNetregulatory fee assessments.$199$458 million, or 14%28%, in 20152016 from 20142015 primarily due to increases in net interest revenue and asset management and administration fees, and other revenue.fees. Net interest revenue increased primarily due to higher balances of interest-earning assets partially offsetand higher interest rates on those assets. This growth in assets was bolstered by the effectmigration of lower net interest margins. Interest-earning assets have grown due to growth in brokeragemore uninvested client cash sweptbalances in the segment to Schwab Bank. Asset management and administration fees increased primarily due to higher net yields on money market fund assets and growth in client assets in equity and bond funds. Other revenue increased primarily due to litigation proceeds relating to the Company’s non-agency RMBS portfolio.assets. Expenses excluding interest increased by $73$94 million, or 8%9%, in 20152016 from 20142015 primarily due to increases in growth in the business resulting in increases in compensation and benefits, advertisingoccupancy and marketing, other expenses.Net revenues increased by $100 million, or 8%, in 2014 from 2013 primarily due to an increase in asset management and administration fees, net interest revenue,equipment, and other revenue. Asset managementexpenses.administration fees increased due to fees from mutual fund services, advice solutions,Analysis of Financial Condition and other asset management and administration services. Mutual fund and ETF service fees increased due to growthResults of Operationsclient 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 feesMillions, Except Ratios, or as a result of continued low yields on fund assets. Advice solutions fees increased due to growth in client assets enrolled in advisory offers. 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. Other revenue increased primarily due to increases in order flow revenue. Expenses excluding interest increased by $66 million, or 8%, in 2014 from 2013 primarily due to increases in compensation and benefits and professional services expense.UnallocatedOther revenue decreased in 2015 from 2014 due to a net insurance settlement of $45 million in 2014.Expenses excluding interest decreased in 2015 from 2014 as a result of a $68 million charge in 2014 for estimated future severance benefits resulting from changes in the Company’s geographic footprint.The Company’scompliance 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’sorganizationsgovernance that comprise the risk management process are described below.- 37 -THE CHARLES SCHWAB CORPORATIONManagement’s Discussion and Analysis of Financial Condition and Results of Operations(Tabular Amounts in Millions, Except Ratios, or as Noted)Risk Culturethe Company’sour purpose, vision, and values tothat form the bedrock of its riskour corporate culture and set the tone for the organization.Theand governance structure constituteto enable a comprehensive approach to managing risks encountered by the CompanySchwab in its business activities. The framework incorporates key concepts commensurate with the size, risk profile, complexity, and continuing growth of the Company. 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.Company,organization, and escalating significant issues to the Board of Directors.The Company hasthe 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.·Asset-Liability Management and Pricing Committee, which establishes strategies and policies for the management of corporate capital, liquidity, interest rate risk, and investments;·Compliance Risk Committee, which provides oversight of compliance risk management programs and policies providing an aggregate view of compliance risk exposure;
Compliance Risk Committee – provides oversight of compliance risk management programs and policies providing an aggregate view of compliance risk exposure;·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;
Financial Risk Oversight Committee – provides oversight of and approves credit, liquidity, capital and market risk policies, limits, and exposures;·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·Operational Risk Oversight Committee, whichNew 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 approves operational risk management policies, risk tolerance levels, and operational risk governance processes, and includes the following sub-committees:
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.oClient Fiduciary Risk Sub-Committee, which provides oversight of fiduciary risk throughout the Company;oGlobal Data Subcommittee, which oversees and approves corporate policies and standards related to enterprise data governance;oInformation Security and Privacy Sub-Committee, which provides oversight of the information and cyber security and privacy programs and policies;oModel Governance Sub-Committee, which provides oversight of model risk throughout the Company; and theoVendor Management Sub-Committee, which provides oversight of the Company’s vendor management and outsourcing program and policies.- 38 -Compensation Committee.the Company’s risk management. 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 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.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 fiduciary, information security, legal,is inherent in all business activities, we rely on a system of internal controls and modelrisk 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.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 disasters. 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 policiesproceduresimplemented 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.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 Company- 39 -THE CHARLES SCHWAB CORPORATIONManagement’s Discussion and Analysis of Financial Condition and Results of Operations(Tabular Amounts in Millions, Except Ratios, or as Noted)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 is actively engaged in the research and development of new technologies, services, and products. The Company endeavors to protect its research and development efforts, and its brands, through the use of copyrights, patents, trade secrets, and contracts.Fiduciary RiskThe Company attempts toWe manage this risk by establishing policy and procedures to ensure that obligations to clients are discharged faithfully and in compliance with applicable legal and regulatory requirements. Business units have the primary responsibility for adherence to the policy and procedures applicable to their business. Guidance and control are provided through the creation, approval, and ongoing review of applicable policies by business units and various risk committees.Information Security RiskInformation Security risk is the potential for unauthorized access, use, disclosure, disruption, modification, perusal, inspection, recordingdestruction of the firm’s information or systems. The Company has designed and implemented a security program that knits together complementary tools, controls and technologies to protect systems, client accounts and data. The Company continuously monitors the systems and works collaboratively with government agencies, law enforcement and other financial institutions to address potential threats. The Company uses advanced monitoring systems to identify suspicious activity and deter unauthorized access by internal or external actors. The Company limits the number of employees who have access to clients’ personal information and enforces internal authentication measures to protect against the potential for social engineering. All employees who handle sensitive information are trained in privacy and security. Schwab’s fraud and Cyber security teams monitor activity looking for suspicious behavior. These capabilities allow the Company to identify and quickly act on any attempted intrusions.Legal RiskLegal risk is the risk of a claim for damages or other relief brought by clients, employees or third parties, alleging a breach of legal requirements or other duties under law. This risk may occur as a result of operational failure but may also occur as a result of other factors. 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 – 15. Commitments and Contingencies.”Model RiskCompany,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.- 40 -THE CHARLES SCHWAB CORPORATIONManagement’s Discussion and Analysis of Financial Condition and Results of Operations(Tabular Amounts in Millions, Except Ratios, or as Noted)The Company significant compliance risk in its business, thatwhich is the risk ofpotential 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 Company products and services, supervision of employees, and the adequacy of the Company’sour 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 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.The nature and amount of credit risk depends on the type of transaction, the structure and duration of that transaction, and the parties involved.The Company’sOur 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, pledged asset lending, 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 relating to margin loans, PALs, option positions, securities lending agreements, and resale agreements include provisions that require additional collateral in the event market fluctuations result in declines in the value of collateral received. Additionally, for margin loan, PALinstruments.securities lending agreements, collateral arrangements require that the fair value of such collateral exceeds the amounts loaned.Schwab performs clearing services for all securities transactions in its client accounts. Investment Portfoliosdueassociated with its investment portfolios, which include U.S. agency, and non-agency mortgage-backed securities, asset-backed securities, corporate debt securities, U.S. agency notes, U.S. Treasury securities, certificates of deposit, U.S. state and municipal securities, and commercial paper.its obligation to settle transactions with clearing corporations, mutual funds,be of the highest credit quality and other financial institutions even if Schwab’s client or a counterparty fails to meet its obligations to Schwab. Company’s bank loan portfolio includes First Mortgages, HELOCs, PALs and other loans. The credit risk exposure related to loans 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’sloan-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).The CompanyAt December 31, 2015, approximately 1% of both the First Mortgage and HELOC portfolios consisted of loans to borrowers with updated borrower FICO (updated FICO) scores of less than 620.- 41 -THE CHARLES SCHWAB CORPORATIONManagement’s Discussion and Analysis of Financial Condition and Results of Operations(Tabular Amounts in Millions, Except Ratios, or as Noted)At December 31, 2015, the weighted-average originated LTV ratio was 58% and 59% for the First Mortgage and HELOC portfolios, respectively. The computation of the LTV ratios at origination (origination LTV) for a HELOC includes any first lien mortgage outstanding on the same property at the time of origination. At December 31, 2015, 21% of HELOCs ($583 million of the HELOC portfolio) were in a first lien position. The weighted-average originated FICO score was 771 and 769 for the First Mortgage and HELOC portfolios, respectively.The Company monitors the estimated current LTV ratios (estimated current LTV) of its First Mortgage and HELOC portfolios on an ongoing basis. At December 31, 2015, the weighted-average estimated current LTV ratios were 48% and 51% 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, 2015, the weighted-average updated FICO scores were 773 and 770 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, 2015, $2.2 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. At December 31, 2015, approximately 28% of the HELOC borrowers that had a balance only paid the minimum amount of interest due or less. 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. Supplementary Data – NotesInstrument-Based Lending PortfoliosConsolidated Financial Statements – 6. Bank Loansmargin loans, PALs, option and Related Allowance for Loan Losses.”The following table presents certain of the Company’s bank loan quality metrics as a percentage of total outstanding loans:2015 2014 0.25 0.27 0.19 0.26 0.22 0.31 (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 available for salefutures positions, securities lending agreements, and held to maturity securities whichresale agreements include U.S. agency and non-agency mortgage-backed securities, asset-backed securities, corporate debt securities, U.S. agency notes, U.S. Treasury securities, certificates of deposit, and U.S. state and municipal securities.At December 31, 2015, substantially all securitiesprovisions that require additional collateral in the availableevent of market fluctuations. Additionally, for salemargin loans, PALs, options and held to maturity portfolios were rated investment grade (defined as a rating equivalent to a Moody’s rating of “Baa” or higher, or a Standard & Poor’s rating of “BBB-” or higher). 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.Concentration RiskThe Company has exposure to concentration risk when holding largefutures positions, in financial instruments collateralized by assets with similar economic characteristics or in securities of a single issuer or within a particular industry or geographical area.- 42 -THE CHARLES SCHWAB CORPORATIONManagement’s Discussion and Analysis of Financial Condition and Results of Operations(Tabular Amounts in Millions, Except Ratios, or as Noted)The fair value of the Company’s investments in mortgage-backed securities totaled $72.3 billion at December 31, 2015. Of these, $71.0 billion were issued by U.S. agencies and $1.3billion 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 $21.5 billion at December 31, 2015. Schwab holds $11.4 billion floating rate Federal Family Education Loan Program Asset-Backed Securities (FFELP ABS). Two Nationally Recognized Statistical Rating Organizations have placed a portion of FFELP ABS on review for downgrade. Both agencies have indicated that some classes could be downgraded below investment grade due to the risk that some remainder of the securities could be outstanding after their legal final maturity date. The timing of FFELP ABS principal payments is inherently uncertain given the variety of payment options available to student loan borrowers. Loans collateralizing these securities continue to offer a guarantee from the Department of Education of at least 97%. Schwab holds only senior class notes that have additional credit enhancement of 3% or more that, together with the Department of Education guarantee, provide 100% or more credit enhancement. The Company has an independent credit assessment function and it does not rely on rating agencies. The Company does not consider these securities to be impaired because it expects full payment of principal and interest. Therefore, the Company continues to assign them the highest internal credit rating.The fair value of the Company’s investments in corporate debt securities and commercial paper totaled $11.1 billion at December 31, 2015, 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 bank loans include $7.5 billion of adjustable rate First Mortgage loans at December 31, 2015. The Company’s adjustable rate mortgages have initial fixed interest rates for three to ten years and interest rates that adjust annually thereafter. Approximately 39% of these mortgages consisted of loans with interest-only payment terms. The interest rates on approximately 53% of these interest-only loans are not scheduled to reset for three 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 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 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, 2015BalanceConverted to amortizing loan by period end$461 Within 1 year166 > 1 year – 3 years973 > 3 years – 5 years334 > 5 years801 Total$2,735 The Company also has exposure to concentration risk from its margin and securities lending PAL, and client option and futures activities collateralized by or referencing securities of a single issuer, an index, or within a single industry. This concentration risk is mitigated byagreements, collateral arrangements require that require the fair value of such collateral sufficiently exceeds the amounts loaned.The Company has indirect exposure to U.S. Government and agency securities held as collateral to secure its resale agreements. The Company’s primary credit exposure on these resalein order to maintain a fully secured position.is within its counterparty. The Company would have exposure to the U.S. Government and agency securities only in the event of the counterparty’s default on the resale agreements. The fair value of U.S. Government and agency securities held as collateral for resale agreements totaled $8.2 billion at December 31, 2015.- 43 -THE CHARLES SCHWAB CORPORATIONManagement’s Discussion and Analysis of Financial Condition and Results of Operations(Tabular Amounts in Millions, Except Ratios, or as Noted)Foreign HoldingsThe Companyclient accounts. Schwab has exposure to non-sovereigncredit risk due to its obligation to settle transactions with clearing corporations, mutual funds, and other financial and non-financial institutions in foreign countries. The majority of the Company’s foreign investments, at fair value, of $1.5 billion, $1.4 billion and $1.1 billion are in Canada, Australia and France, respectively, at December 31, 2015. These exposures are based on which country the issuereven if Schwab’s clients or a counterparty is domiciled. The Company has no direct exposurefail to sovereign foreign governments. The Company does not have unfunded commitmentsmeet their obligations to counterparties in foreign countries, nor does it have exposure as a result of credit default protection purchased or sold separately as of December 31, 2015.In addition to direct holdings in foreign companies, the Company also has indirect exposure to foreign countries through its investments in Schwab sponsored money market funds (collectively, the Funds) resulting from clearing activities. At December 31, 2015, the Company had $261 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 foreign countries.the CompanySchwab as a result of fluctuations in interest rates, equity prices, or market conditions. Included in market risk isWe are exposed to interest rate risk primarily from changes in market interest rates on our interest-earning assets relative to changes in the costs of its funding sources that finance these assets.ismay reprice at different times or by different amounts, and the spread 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 declining rate environment and decrease in a rising rate environment. Because we establish the rates paid on certain brokerage client cash balances and bank deposits and the rates charged on certain margin and bank loans, and control the composition of our investment securities, we have some ability to manage our net interest spread, depending on competitive factors and market conditions.to earnings or capital arising from movement of declining interest rates. For discussionrevenue, we have 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 our interest-earning assets and funding sources. To remain within these guidelines, we manage the maturity, repricing, and cash flow characteristics of the Company’s market risk, see “Item 7A – Quantitative and Qualitative Disclosures About Market Risk.”Liquidity RiskLiquidity risk arises from the inabilityinvestment portfolios. 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. LimitsWe are indirectly exposed to option, futures, and contingencyequity market fluctuations in connection with client option and futures accounts, securities collateralizing margin loans to brokerage customers, and client securities loaned out as part of the brokerage securities lending activities. Equity market valuations may also affect the level of brokerage client trading activity, margin borrowing, and overall client engagement with Schwab. Additionally, we earn mutual fund and ETF service fees and asset management fees based upon daily balances of certain client assets. Fluctuations in these client asset balances caused by changes in equity valuations directly impact the amount of fee revenue we earn.December 31, 2017 2016 Increase of 100 basis points 3.3 % 6.5 % Decrease of 100 basis points (6.2 )% (9.8 )% scenariossources. 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.been established for the Companyliquidity policies to support the successful execution of business strategies, while ensuring ongoing and sufficient liquidity levelsto meet operational needs and quality duringsatisfy applicable regulatory requirements under both expectednormal and stressed scenarios. The Company seeksconditions. We seek to maintain client confidence in itsthe balance sheet and the safety of client assets by maintaining liquidity and diversity of funding sources to allow the Company to meet its obligations underobligations. To this end, we have established limits and contingency funding scenarios to support liquidity levels during both expectedbusiness as usual and stressed scenarios. See “Liquidity” for additional detail on the Company’s liquidity requirements.CSC’s liquidity needs are primarily driven by the liquidity and capital needs of Schwab Bank and Schwab, the amount of dividend payments on CSC’s common and preferred stock and principal and interest due on corporate debt. The liquidity needs of its brokerage subsidiaries are primarily driven by client activity including trading and margin borrowing activities and capital expenditures; and the liquidity needs of its bank subsidiary are primarily driven by lending and investment activities and client withdrawals of deposits.The Company has established liquidity policies to support the successful execution of its business strategies, while ensuring ongoing and sufficient liquidity to meet its operational needs and satisfy applicable regulatory requirements under both normal and stress conditions.The Company employsThe Company conductsWe conduct regular liquidity stress testing to develop a consolidated view of liquidity risk exposures and to ensure the Company’sour 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 on a monthly basis to the Company’s Corporate Asset-Liability Management and PricingFinancial Risk Oversight Committee. A number of early warning indicators are monitored to help identify emerging liquidity stresses in the market or within the Companyorganization and are reviewed with management as appropriate.- 44 -As of January 1, 2016, the Company is required to comply with the modified LCR rule. This rule was adopted to help regulators ensure that large financial institutions have sufficient liquidity to withstand a short-term stress scenario, and is measured by comparing available high quality liquid assets against prescriptive cash outflows over a 30 day horizon. The Company is currently in compliance with the fully phased-in modified LCR rule.The Company’sclient accounts. In 2015 bank deposits swept from brokerage accounts increased $26.0 billion. These funds wereare used to invest in interest earning assets, thereby funding a significant portion of the 19% growth in the Company’s balance sheet.the Company maintainswe maintain liquidity in the form of overnight cash deposits and short-term investments. For unanticipated liquidity needs, the Company maintains high-qualitya buffer of highly liquid assets,investments, currently comprised of U.S. Treasury notes.the CompanySchwab has sources ofaccess to external funding. CSC maintainsThe 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 $750 million committed, unsecured credit facility with a group of banks that is scheduled to expire in June 2016. periodic basis.Description Borrower Outstanding Available CSC $ — $ 750 Uncommitted, unsecured lines of credit with various external banks CSC, CS&Co — 1,199 Schwab Bank — 2,458 Schwab Bank 15,000 17,301 CSC — 750 the availability, of this facility it was unused during 2015. The funds under this facility2017.for general corporate purposes. are dependent on the amount of First Mortgages, HELOCs, and the fair value of certain investment securities that are pledged as collateral.SchwabCS&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, 2015,2017, the minimum level of stockholders’ equity required under this facility was $8.9$12.5 billion (CSC’s stockholders’ equity, excluding accumulated other comprehensive income,AOCI, at December 31, 20152017 was $13.5$18.7 billion). Management believes that these restrictions will not have a material effect on CSC’s ability to meet foreseeable dividend or funding requirements.CSC and Schwab also have access to uncommitted, unsecured bank credit lines with several banks. The need for short-term borrowings arises primarily from timing differences between cash flow requirements, scheduled liquidation of interest-earning investments, and movements of cash to meet regulatory brokerage client cash segregation requirements. Schwab used such borrowings for six days in 2015, with average daily amounts borrowed of $137 million. These lines were not used by CSC during 2015. There were no borrowings outstanding under these lines at December 31, 2015.To partially satisfy the margin requirement of client option transactions with the Options Clearing Corporation, the broker-dealer subsidiaries have unsecured standby letter of credit agreements (LOCs) with several banks in favor of the Options Clearing Corporation aggregating $295 million at December 31, 2015. There were no funds drawn under any of these LOCs during 2015 or 2014. 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. available for sale and/or securities held to maturity that are pledged as collateral. Schwab Bank maintains policies and procedures necessary to access this funding and tests discount window borrowing procedures on a periodic basis. At December 31, 2015, $2.0 billion was available under this arrangement. There were no funds drawn under this arrangement during 2015, except for testing purposes.Francisco.Francisco (FHLB). Amounts available under this facility are dependent on the amount of Schwab Bank’s residential real estate mortgagesFirst Mortgages, HELOCs, and HELOCsthe fair value of certain of Schwab Bank’s investment securities that are pledged as collateral. During 2017, Schwab Bank maintains policies and procedures necessary to access this funding and tests borrowing- 45 -THE CHARLES SCHWAB CORPORATIONManagement’s Discussion and Analysis of Financial Condition and Results of Operations(Tabular Amounts in Millions, Except Ratios, or as Noted)procedures on a periodic basis. At December 31, 2015, $9.3 billion was availableused borrowings under this facility. There were no funds drawn under thisagreement to purchase investment securities prior to bulk transfers. This credit facility during 2015, except for testing purposes.is also available as backup financing in the event of the outflow of client cash from Schwab Bank’s balance sheet.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 not to exceed the amount of the committed, unsecured credit facility, which was $750 million at December 31, 2015.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. 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. CSC’s ratings for these short-term borrowings are P1 by Moody’s, A1 by Standard & Poor’s, and F1 by Fitch. There were borrowings of Commercial Paper Notes outstanding at December 31, 20152017 or 2014.At2016.2015 and 2014, CSC had long-term debt2017. There were no funds drawn under any of $2.9 billion and $1.9 billion, respectively, which bears interest at a weighted-average rate of 3.38%. 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.On March 10, 2015, CSC issued $625 million aggregate principal amount of Senior Notes that mature in 2018$375 million aggregate principal amount of Senior Notes that mature in 2025. The Senior Notes due 2018$2.9 billion at December 31, 2017 and 2025 have a fixed interest rate of 1.50%2016, respectively. Short-term borrowings outstanding from FHLB were $15.0 billion at December 31, 2017 and 3.00%, respectively, with interest payable semi-annually. Additionally, on November 13, 2015, CSC issued $350 million aggregate amount of 3.450% Senior Notes that mature in 2026, with interest payable semi-annually.December 31, 2017 Par Outstanding Maturity Weighted Average
Interest RateMoody’s Standard
& Poor’sFitch 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 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% long-term debt:preferred stock issued and net proceeds for the years ending December 31, 2017 and 2016 are as follows:2,581 250 Date Issued and Sold Net Proceeds Series D March 7, 2016 $ 725 Series E October 31, 2016 $ 591 Series F October 31, 2017 $ 492 August 3, 2015,December 1, 2017, CSC completed an equity offeringredeemed all of 24 millionthe 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 ownership interest in a share of 6.00% non-cumulative perpetual preferred stock (Series C). Thethe Series C preferred stock has a fixed dividend rate of 6.00%. The net proceeds from the sale were $581 million.B Preferred Stock.offering,offerings, see “ItemItem 8 – Note 12 and Note 16.StatementsCondition and Supplementary Data – Notes to Consolidated Financial Statements – 14. Borrowings and 18. Stockholders’ Equity.”The Companyitsour clients. These arrangements include firm commitments to extend credit. Additionally, the CompanySchwab enters into guarantees and other similar arrangements in the ordinary course of business. For information on each of these arrangements, see “ItemItem 8 – Financial StatementsNote 6, Note 10, Note 12, Note 13, and Supplementary Data – Notes to Consolidated Financial Statements – 6. Bank Loans and Related Allowance for Loan Losses,Note 14. Borrowings, 15. Commitments and Contingencies, and 16. Financial Instruments Subject to Off-Balance Sheet Credit Risk or Concentration Risk.”- 46 -THE CHARLES SCHWAB CORPORATIONManagement’s Discussion and Analysis of Financial Condition and Results of Operations(Tabular Amounts in Millions, Except Ratios, or as Noted)The Company’s20152017 are shown in the following table. Management believesWe believe 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 sheetsheets that are generally short-term in nature (e.g., payables to brokers, dealers, and clearing organizations)organizations and short-term borrowings) or without contractual payment terms (e.g., bank deposits, payables to brokerage clients, and deferred compensation).955 1,635 3,273 1,975 7,838 94 1,312 813 1,120 3,339 111 191 114 172 588 230 152 36 213 631 1,390 3,290 4,236 3,480 12,396 (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 2026 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.December 31, 2017 Less than
1 Year 1-3
Years 3-5
Years More than
5 Years Total $ 1,622 $ 2,842 $ 4,254 $ 1,945 $ 10,663 1,022 954 192 3,429 5,597 305 219 48 181 753 127 194 120 289 730 Total $ 3,076 $ 4,209 $ 4,614 $ 5,844 $ 17,743 The Companyitsour business strategy, including anticipated balance sheet growth, providing financial support to itsthe subsidiaries, and sustained access to the capital markets, while at the same time meeting itsour regulatory capital requirements and serving as a source of financial strength to Schwab Bank. The Company’sSchwab’s primary sources of capital are funds generated by the operations of its subsidiaries and securities issuances by CSC in the capital markets. To ensure that itSchwab has a sufficient amount of capital to absorb unanticipated losses or declines in asset values, the Company haswe have adopted a policy to remain well capitalized even in stressed scenarios. The level, composition and utilization of capital are influenced by changes in the economic environment, strategic initiatives, and legislative and regulatory developments.the CompanyCSC and its regulated subsidiaries, to ensure capital levels are in line with the Company’sour strategy and regulatory requirements, and capitalrequirements. Capital forecasts are reviewed monthly at Capital Planning and 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 and are reviewed with management as appropriate.capital. In addition, we monitor the Company monitors its 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.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 Schwab.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.The Companyplausible adverse macroeconomic and company-specific events to which CSC and its subsidiariesthe Company could be subjected. The objective of the Company’s 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, the Company haswe 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 Asset-Liability ManagementFinancial Risk Oversight Committee and Pricingprovides guidelines for sustained capital events. It- 47 -Committee and provides guidelines for sustained capital events. It See “Part I – Item 1. –Regulation” for additional information.Beginning on January 1, 2015, becameis subject to capital requirements set by the Federal Reserve. In addition, CSCReserve and is required to serve as a source of strength for Schwab Bank and to provide financial assistance if Schwab Bank experiences financial distress. To manage capital adequacy, the Company currently utilizesSchwab is required to maintain a target 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 the Company’sour 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.Schwab Bank is also requiredmaintain capital levels specified by the OCC. These capital requirements set by their regulators that are substantially similar to those imposed on CSC by the Federal Reserve. Schwab Bank’sBanking subsidiaries’ failure to remain well capitalized could result in certain mandatory and possibly additional discretionary actions by the regulators that if undertaken, could have a direct material effect on the bank. The Company currently utilizesSchwab’s principal banking subsidiary, Schwab Bank, is required to maintain a target Tier 1 Leverage Ratio for Schwab Bankof at least 5% to be well capitalized, but seeks to maintain the ratio of at least 6.25%. As of January 1, 2015, Schwab Bank became subject to the new Final Regulatory Capital Rules set by the OCC. Based on its regulatory capital ratios at December 31, 2015,2017, Schwab Bank is considered well capitalized.ratios under the new Final Regulatory Capital Rules:ratios:13,402 9,191 1,459 11,943 9,191 1,185 11 41 (134) (134) 10,851 9,314 12,310 9,314 12,342 9,345 59,578 51,516 18.2 18.1 20.7 18.1 20.7 18.1 7.1 7.1 (1)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 — — — (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 % of the requirement to include most components of AOCI in CET1 Capital.The Company’s broker-dealer subsidiaries (Schwab and optionsXpress, Inc.) are subject to regulatory requirements of the Uniform Net Capital Rule. The rule is intendedrequirement to ensure the general financial soundness and liquidity of broker-dealers. These regulations prohibit the broker-dealer subsidiaries from paying cash dividends, making unsecured advances and loans to their parent company and employees, and Schwab from repaying subordinated borrowings from CSC 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. As such, the broker-dealer subsidiaries are required to maintain, at all times, at least the minimum level of net capital required under Rule 15c3-1. At December 31, 2015, Schwab and optionsXpress met and exceeded their net capital requirements.- 48 -THE CHARLES SCHWAB CORPORATIONManagement’s Discussion and Analysis of Financial Condition and Results of Operations(Tabular Amounts in Millions, Except Ratios, or as Noted)See “Item 8 – Financial Statements and Supplementary Data – Consolidated Balance Sheets and Notes to Consolidated Financial Statements – 23. Regulatory Requirements” for additional information on theinclude most components of stockholder’s equity and information on the capital requirements of each of the subsidiaries.In addition to capital requirements, the Company’s subsidiaries are subject to various regulatory requirements that are intended to ensure financial soundness and liquidity.
Dividends
CSC paid common stockthe parent company.
| 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 | |||||||||
was redeemed on December 1, 2017.
- 49 -
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. THE CHARLES SCHWAB CORPORATION Market December 31, Increase of 100 basis points % % Decrease of 100 basis points % % Note 1. Note 2. Note 3. Note 4. Note 5. Note 6. Note 7. Note 8. Note 9. Note 10. Note 11. Note 12. Note 13. Note Note Note Note Note Note Note Note Note Note Note Note 25. Consolidated Statements of Income (In Millions, Except Per Share Amounts) Year Ended December 31, 2015 2014 2013 Net Revenues Asset management and administration fees $ $ $ Interest revenue Interest expense Net interest revenue Trading revenue Other Provision for loan losses Net impairment losses on securities - Total net revenues Expenses Excluding Interest Compensation and benefits Professional services Occupancy and equipment Advertising and market development Communications Depreciation and amortization Other Total expenses excluding interest Income before taxes on income Taxes on income Net Income Preferred stock dividends and other (1) Net Income Available to Common Stockholders $ $ $ Weighted-Average Common Shares Outstanding: Basic Diluted Earnings Per Common Share: Basic $ $ .96 $ .78 Diluted $ $ .95 $ .78 Dividends Declared Per Common Share $ .24 $ .24 $ .24 Consolidated Statements of Comprehensive Income (In Millions) Year Ended December 31, 2015 2014 2013 Net income $ $ $ Other comprehensive income (loss), before tax: Change in net unrealized gain on securities available for sale: Net unrealized gain (loss) Reclassification of impairment charges included in net impairment losses on securities - Other reclassifications included in other revenue - Other - - Other comprehensive income (loss), before tax Income tax effect Other comprehensive income (loss), net of tax Comprehensive Income $ $ $ Consolidated Balance Sheets (In Millions, Except Per Share and Share Amounts) December 31, 2015 2014 Assets Cash and cash equivalents $ $ Cash and investments segregated and on deposit for regulatory purposes (including resale agreements of $8,088 and $10,186 at December 31, 2015 and 2014, respectively) Receivables from brokers, dealers, and clearing organizations Receivables from brokerage clients — net Other securities owned — at fair value Securities available for sale Securities held to maturity (fair value — $50,088 and $34,743 at December 31, 2015 and 2014, respectively) Bank loans — net Equipment, office facilities, and property — net Goodwill Intangible assets — net Other assets Total assets $ $ Liabilities and Stockholders’ Equity Bank deposits $ $ Payables to brokers, dealers, and clearing organizations Payables to brokerage clients Accrued expenses and other liabilities Long-term debt Total liabilities Stockholders’ equity: Preferred stock — $.01 par value per share; aggregate liquidation preference of $1,485 and $885 at December 31, 2015 and 2014, respectively Common stock — 3 billion shares authorized; $.01 par value per share; 1,487,543,446 shares issued Additional paid-in capital Retained earnings Treasury stock, at cost — 167,205,881 shares and 176,821,202 shares at December 31, 2015 and 2014, respectively Accumulated other comprehensive income Total stockholders’ equity Total liabilities and stockholders’ equity $ $ Consolidated Statements of Cash Flows (In Millions) Year Ended December 31, 2015 2014 2013 Cash Flows from Operating Activities Net income $ $ $ Adjustments to reconcile net income to net cash (used for) provided by operating activities: Provision for loan losses Net impairment losses on securities - Stock-based compensation Depreciation and amortization (Benefit) provision for deferred income taxes Premium amortization, net, on securities available for sale and securities held to maturity Other Net change in: Cash and investments segregated and on deposit for regulatory purposes Receivables from brokers, dealers, and clearing organizations Receivables from brokerage clients Other securities owned Other assets Payables to brokers, dealers, and clearing organizations Payables to brokerage clients Accrued expenses and other liabilities Net cash provided by operating activities Cash Flows from Investing Activities Purchases of securities available for sale Proceeds from sales of securities available for sale Principal payments on securities available for sale Purchases of securities held to maturity Principal payments on securities held to maturity Net increase in bank loans Purchase of equipment, office facilities, and property Other investing activities Net cash used for investing activities Cash Flows from Financing Activities Net change in bank deposits Repayment of commercial paper - - Issuance of long-term debt - Repayment of long-term debt Net proceeds from preferred stock offering - - Dividends paid Proceeds from stock options exercised and other Other financing activities Net cash provided by financing activities Increase (Decrease) in Cash and Cash Equivalents Cash and Cash Equivalents at Beginning of Year Cash and Cash Equivalents at End of Year $ $ $ Supplemental Cash Flow Information Cash paid during the year for: Interest $ $ $ Income taxes $ $ $ Non-cash investing activity: Securities purchased during the year but settled after year end $ - $ $ 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, 2012 $ $ $ $ $ $ $ Net income - - - - - - Other comprehensive income (loss), net of tax - - - - - - Dividends declared on preferred stock - - - - - - Dividends declared on common stock - - - - - - Stock option exercises and other - - - - - Stock-based compensation and related tax effects - - - - - - Other - - - Balance at December 31, 2013 Net income - - - - - - Other comprehensive income (loss), net of tax - - - - - - Dividends declared on preferred stock - - - - - - Dividends declared on common stock - - - - - - Stock option exercises and other - - - - - Stock-based compensation and related tax effects - - - - - - Other - - - Balance at December 31, 2014 Net income - - - - - - Other comprehensive income (loss), net of tax - - - - - - Issuance of preferred stock - - - - - - Dividends declared on preferred stock - - - - - - Dividends declared on common stock - - - - - - Stock option exercises and other - - - - - Stock-based compensation and related tax effects - - - - - - Other - - - Balance at December 31, 2015 $ $ $ $ $ $ $ THE CHARLES SCHWAB CORPORATION applicable rates. Cash and cash equivalents Bank (FRB). 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. payments have been received. 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. This methodology results in loss factors that are applied to the outstanding balances to determine the allowance for loan loss for each loan 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. Guarantees and indemnifications taxes on income. 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 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. New Accounting Standards December 31, 2015 2014 Schwab Funds® money market funds $ $ Equity and bond mutual funds State and municipal debt obligations Equity, U.S. Government and corporate debt, and other securities Total other securities owned $ $ The amortized cost, gross unrealized gains and losses, and fair value of AFS and HTM securities Gross Gross Amortized Unrealized Unrealized Fair December 31, 2015 Cost Gains Losses Value Securities available for sale: U.S. agency mortgage-backed securities $ $ $ $ Asset-backed securities Corporate debt securities U.S. Treasury securities U.S. agency notes - Certificates of deposit U.S. state and municipal securities - Non-agency commercial mortgage-backed securities - Other securities - - Total securities available for sale $ $ $ $ Securities held to maturity: U.S. agency mortgage-backed securities $ $ $ $ Non-agency commercial mortgage-backed securities U.S. Treasury securities - Total securities held to maturity $ $ $ $ Gross Gross Amortized Unrealized Unrealized Fair December 31, 2014 Cost Gains Losses Value Securities available for sale: U.S. agency mortgage-backed securities $ $ $ $ Asset-backed securities Corporate debt securities U.S. Treasury securities U.S. agency notes - Certificates of deposit - Non-agency commercial mortgage-backed securities - Other securities - - Total securities available for sale $ $ $ $ Securities held to maturity: U.S. agency mortgage-backed securities $ $ $ $ Non-agency commercial mortgage-backed securities Total securities held to maturity $ $ $ $ THE CHARLES SCHWAB CORPORATION Less than 12 months 12 months or longer Total Fair Unrealized Fair Unrealized Fair Unrealized December 31, 2015 Value Losses Value Losses Value Losses Securities available for sale: U.S. agency mortgage-backed securities $ $ $ $ $ $ Asset-backed securities Corporate debt securities U.S. Treasury securities - - U.S. agency notes Certificates of deposit Total $ $ $ $ $ $ Securities held to maturity: U.S. agency mortgage-backed securities $ $ $ $ $ $ Non-agency commercial mortgage-backed securities - - U.S. Treasury securities - - Total $ $ $ $ $ $ Total securities with unrealized losses (1) $ $ $ $ $ $ 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: U.S. agency mortgage-backed securities $ $ $ $ $ $ Asset-backed securities Corporate debt securities U.S. Treasury securities - - U.S. agency notes - - Total $ $ $ $ $ $ Securities held to maturity: U.S. agency mortgage-backed securities $ $ $ $ $ $ Non-agency commercial mortgage-backed securities - - Total $ $ $ $ $ $ Total securities with unrealized losses (1) $ $ $ $ $ $ THE CHARLES SCHWAB CORPORATION Year Ended December 31, 2015 2014 2013 Balance at beginning of year $ $ $ Credit losses recognized into current year earnings on debt securities for which an OTTI was not previously recognized - Credit losses recognized into current year earnings on debt securities for which an OTTI was previously recognized - - Reductions due to sale of debt securities for which an OTTI was previously recognized - Balance at end of year $ $ $ After 1 year After 5 years Within through through After December 31, 2015 1 year 5 years 10 years 10 years Total Securities available for sale: U.S. agency mortgage-backed securities (1) $ - $ $ $ $ Asset-backed securities - Corporate debt securities - - U.S. Treasury securities - U.S. agency notes - - - Certificates of deposit - - U.S. state and municipal securities - - Non-agency commercial mortgage-backed securities (1) - - - Other securities - - - Total fair value $ $ $ $ $ Total amortized cost $ $ $ $ $ Securities held to maturity: U.S. agency mortgage-backed securities (1) $ - $ $ $ $ Non-agency commercial mortgage-backed securities (1) - - U.S. Treasury securities - - - Total fair value $ - $ $ $ $ Total amortized cost $ - $ $ $ $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. 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 ImpairmentSecurities Available for Sale and Securities Held to MaturityManagement evaluates whether securities available for sale and securities held to maturity are other-than-temporarily impaired 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. In this circumstance,Board of Directors. Additionally, management has reviewed with 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 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.The evaluation of whether the Company expects to recover the amortized cost of a security is inherently judgmental. The evaluation includes the consideration of multiple factors including: the magnitude and duration of the unrealized loss; the financial condition of the issuer; the payment structure of the security; external credit ratings; for asset-backed securities, the amount of credit support provided by the structure of the security to absorb credit losses on the underlying collateral; recent events specific to the issuer and the issuer’s industry; and whether the Company has received all scheduled principal and interest payments.Valuation of GoodwillThe 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 inAudit Committee the Company’s planned business operations such as unanticipated competition, a losssignificant estimates discussed in this Management’s Discussion and Analysis of key personnel, the saleFinancial Condition and Results of a reporting unit or a significant portion of a reporting unit, or other unforeseen developments could result in an impairment of the Company’s recorded goodwill.The Company’s annual goodwill impairment testing date is April 1st. In testing for a potential impairment of goodwill on April 1, 2015, management performed an assessment of each of the Company’s reporting units (generally defined as the Company’s businesses for which financial information is available and reviewed regularly by management) and concluded that goodwill was not impaired.Allowance for Loan LossesThe 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 portfolios. The methodology to establish an allowance for loan losses related to the First Mortgage and HELOC portfolios 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- 50 -conditions,defaultsincome tax expense is reported in the consolidated statements of income in Taxes on income. Accrued taxes are reported in Other assets or Accrued expenses and foreclosuresother liabilities on the consolidated balance sheets and represent the net estimated amount due to or to be received from taxing jurisdictions either currently or deferred to future periods. Deferred taxes arise from differences between assets and liabilities measured by historicalfor financial reporting purposes versus income tax reporting purposes. Deferred tax assets are recognized if, in management’s judgment, their realizability is determined to be more likely than not. Uncertain tax positions that meet the more likely than not recognition threshold are measured to determine the amount of benefit to recognize. An uncertain tax position is measured at the largest amount of benefit management believes is more likely than not to be realized upon settlement. In estimating accrued taxes, we assess the relative merits and expected delinquencies,risks of the appropriate tax treatment considering statutory, judicial and regulatory guidance in the context of the tax position. Because of the complexity of tax laws and regulations, interpretation can be difficult and subject to legal judgment given specific facts and circumstances. prepayment speeds, LTV ratios, past loss experience, estimatestax rates, interpretations of future loss severities, borrower credit risk measuredtax laws, the status of examinations being conducted by FICO scores,various taxing authorities, and newly enacted statutory, judicial and regulatory guidance that impacts the adequacyrelative merits and risks of collateral. The methodology also evaluates concentrations intax positions. These changes, when they occur, affect accrued taxes and can be significant to the loan segments including loan products, year of origination, and geographical distribution of collateral.Probable losses are forecast using a loan-level simulationoperating results 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 LIBOR rates, and borrower FICO scores. TheCompany. See Item 8 – Note 19 for more significant variables in the simulation include delinquency roll rates, loss severity, housing prices, and interest rates. Delinquency roll rates 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 basedinformation 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 for HELOCs is higher than that used 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. This methodology results in loss factors that are applied to the outstanding balances to determine the allowance for loan loss for each loan segment.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.- 51 -risk is the potential for changes in earnings or the value of financial instruments held by the Company asRiskresult 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 majoritydiscussion of the Company’s interest-earning assetsquantitative 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’squalitative disclosures about 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 primarily include investment securities, margin loans and bank loans. These assets are sensitive to changessee Risk Management in interest rates and changes in prepayment levels that tend to increase in a declining rate environment and decrease in a rising rate environment. Because the Company establishes the rates paid on certain brokerage client cash balances and bank deposits and the rates charged on margin loans and bank loans, 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 clients, and client 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 reduced market liquidity among a 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.The Company’s market risk related to financial instruments held for trading is not material.Net Interest Revenue SimulationFor 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 variables in the simulation include the repricing of financial instruments, prepayment, reinvestment, and 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,- 52 -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 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 Asset-Liability Management and Pricing Committee. There were no breaches of the Company’s net interest revenue sensitivity guidelines during the years ended December 31, 2015 or 2014. 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 simulated net interest revenue change over the next 12 months beginning December 31, 2015 and 2014 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.2015 2014 8.2 11.8 (9.5) (4.9) The sensitivities shown in the simulation reflect the fact that short-term interest rates in 2015 remained at low levels despite the increase in federal funds target range to .25% to .50% as directed by the Federal Open Markets Committee in December 2015. 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.- 53 -THE CHARLES SCHWAB CORPORATIONItem 8. 55 56 57 58 59 60 60 60 68 6468 69 6572 6975 76 7477 7577 78 7678 78 Note 14.79 Note 15.80 16.82 17.84 18.88 8619.89 8720.90 8821.92 22.94 23.94 24.96 25.97 26.100 99101 102 - 54 -2,650 2,533 2,315 2,657 2,374 2,085 (132) (102) (105) 2,525 2,272 1,980 866 907 913 328 343 236 11 4 1 (1) (10) 6,380 6,058 5,435 2,241 2,184 2,027 459 457 415 353 324 309 249 245 257 233 223 220 224 199 202 342 311 300 4,101 3,943 3,730 2,279 2,115 1,705 832 794 634 1,447 1,321 1,071 83 60 61 1,364 1,261 1,010 1,315 1,303 1,285 1,327 1,315 1,293 1.04 1.03 (1)Includes preferred stock dividends and undistributed earnings and dividends allocated to non-vested restricted stock units.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 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 1,296 1,104 832 Net Income 2,354 1,889 1,447 174 143 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 - 55 -1,447 1,321 1,071 (477) 255 (468) 1 10 (7) (7) 1 (477) 249 (464) 178 (93) 175 (299) 156 (289) 1,148 1,477 782 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 - 56 -11,978 11,363 19,598 20,781 582 469 17,313 15,669 533 516 65,646 54,783 50,007 34,389 14,334 13,399 1,145 1,039 1,227 1,227 181 227 1,174 780 183,718 154,642 129,502 102,815 2,588 2,004 33,185 34,305 2,151 1,816 2,890 1,899 170,316 142,839 1,459 872 15 15 4,152 4,050 11,253 10,198 (3,343) (3,497) (134) 165 13,402 11,803 183,718 154,642 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 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 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 - 57 -1,447 1,321 1,071 (11) (4) (1) 1 10 135 115 116 224 199 202 (7) (25) (21) 162 125 162 (4) (7) 15 1,183 2,772 4,916 (108) 44 (175) (1,652) (1,725) (496) (17) 1 119 (98) (30) 17 808 393 318 (1,120) (1,028) (4,997) 304 196 400 1,246 2,348 1,656 (21,351) (15,134) (22,942) 2,424 6,556 6,167 7,340 5,843 10,772 (19,303) (6,920) (16,061) 3,540 2,687 3,895 (980) (1,016) (1,634) (266) (400) (249) (27) (11) 2 (28,623) (8,395) (20,050) 26,687 9,843 13,595 (300) 1,346 275 (357) (6) (6) 581 (387) (373) (368) 90 189 258 32 29 5 27,992 9,682 13,459 615 3,635 (4,935) 11,363 7,728 12,663 11,978 11,363 7,728 121 103 99 810 778 624 143 81 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 $ — $ — - 58 -865 1,488 15 3,881 8,554 (4,024) 298 9,589 1,071 1,071 (289) (289) (57) (57) (311) (311) (54) 314 260 119 119 4 5 (4) (6) (1) 869 1,488 15 3,951 9,253 (3,716) 9 10,381 1,321 1,321 156 156 (57) (57) (316) (316) (53) 240 187 139 139 3 13 (3) (21) (8) 872 1,488 15 4,050 10,198 (3,497) 165 11,803 1,447 1,447 (299) (299) 581 581 (69) (69) (318) (318) (87) 177 90 172 172 6 17 (5) (23) (5) 1,459 1,488 15 4,152 11,253 (3,343) (134) 13,402 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 - 59 -1.1. Introduction and Basis of Presentation Introduction and Basis of PresentationCSCThe 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. (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 Schwab Bank, a federal savings bank, and CSIM,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(Schwab ETFs™).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 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 OTTI 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.The Company accounts for investments entities for which it owns a voting interest and for 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.usingof the equity method of accounting.entity. Investments in entities for which the Company does not have the ability to exercise significant influence are generally carried at cost. Bothcost, except for certain investments in qualified affordable housing projects which are accounted for under the proportional amortization method. All equity method, cost method, and costproportional amortization method investments are included in other assets.The Company evaluates its initialassets on the consolidated balance sheets.2. Summary of Significant Accounting Policies continuing involvement with certain entities to determine if the Company is required to consolidate the entities under the variable interest entity (VIE) model. For interests in entities other than the Company’s sponsored funds, the evaluationcash equivalents, cash and investments segregated, receivables from brokerage clients, investment securities, and bank loans. Interest revenue from these assets is based on a qualitative assessment of whether the Company is the primary beneficiary of the VIE. The primary beneficiary of a VIE has the power to direct the activities of a VIE that most significantly impact theVIE’s economic performanceupon average or daily balances and the obligation to absorb losses of the VIE that potentially could be significant to the VIE or the right to receive benefitsapplicable interest rates. Interest revenue is also recognized from the VIE that potentially could be significant to the VIE.The primary beneficiary determination for the Company’s sponsored funds issecurities lending activities when earned based on a quantitative assessment of whether the Company would absorb a majority of the VIE’s expected losses, receive a majority of the VIE’s expected residual returns, or both. Based upon the Company’s assessments,securities and amounts lent and the Company is not deemed to be the primary beneficiary of and, therefore, is not required to consolidate any VIEs.2.Summary of Significant Accounting Policiesinclude 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.Company specificCompany-specific experience. Actual refunds were not materialimmaterial for all periods presented.December 31, 2015. The Company 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. These fees are based upon the daily balances of client assets invested in these funds. The Company also earns asset management fees for advice solutions, which include advisory and managed account services that are basedexecution (i.e., 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 and ETFs 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) recordkeeping fees, and mutual fund clearing and other service fees.In 2015, 2014 and 2013, the Company waived a portion of its asset management fees earned from certain Schwab-sponsored money market mutual funds. Under agreements with these funds entered into when the Company began waiving fees, the- 60 -THE CHARLES SCHWAB CORPORATIONNotes to Consolidated Financial Statements(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)Company was entitled to 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. During the year ended December 31, 2015, the Company terminated the fee waiver reimbursement agreements and, therefore, no longer has the right to receive reimbursement of waived fees.Interest revenueInterest 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 bank loans. Interest revenue is recognized in the period earned based upon average or daily asset balances and respective interest rates.Trading revenueTrading revenue includes commission and principal transaction revenues. Commission revenue is affected by the number of 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. Factors that influence principal transaction revenue include the volume of client trades and market price volatility. To accommodate clients’ fixed income trading activity, the Company maintains positions in fixed income securities, including U.S. 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.The Companywith 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 U.S. Treasury securities. Cash and cash equivalents also include balances that Schwab Bank maintains at the Federal Reserve Bank.applicable regulations, clientthe SEC’s Customer Protection Rule, cash balances not used forcollateralizing margin lendingpositions and not swept to money market funds or bank deposit accounts, are segregated into investment accounts maintainedby Schwab for the exclusive benefit of clients.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.- 61 -THE CHARLES SCHWAB CORPORATIONNotes to Consolidated Financial Statements(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)Securities available for sale and held to maturitySecurities available for sale 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. available for sale and securities held to maturity are 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 amortized cost and fair value.management utilizes cash flow 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 Company expectswe expect to recover the amortized cost of a security is inherently judgmental. The evaluation includes the consideration ofconsiders multiple factors including: the magnitude and duration of the unrealized loss; the financial condition of the issuer; the 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 to absorb credit losses on the underlying collateral; recent events specific to the issuer and the issuer’s industry; and whether the Company has received all scheduled principal and interest payments.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.Company’s loan portfolio includes four loan segments:types: First Mortgages, HELOCs, PALs and other loans. First 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 is defined as a group of loans within a loan segment that has homogeneous risk characteristics.The Companymanagement’sour estimate of probable losses in the existing portfolio. Management reviewsWe review the allowance for loan losses quarterly, taking into consideration current- 62 -THE CHARLES SCHWAB CORPORATIONNotes to Consolidated Financial Statements(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)measured by 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.the Company’sour 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’sour historical loss experience andinclude: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.segment.The Companytype.a troubled debt restructuring (TDR)restructurings (TDRs).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 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 the Companywe will not collect all amounts due.The Company’sOur charge-off policy for First 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,- 63 -THE CHARLES SCHWAB CORPORATIONNotes to Consolidated Financial Statements(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)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 Leasehold improvements Lesser of useful life or lease term 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. 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 impairment if it is more likely than not that the fair value of a reporting unit exceeds its carrying value. A qualitative assessment considers macroeconomic and other industry-specific factors, such as trends in short-term and long-term interest rates and the ability to access capital, and Company specific factors such as market capitalization in excess of net assets, trends in revenue generating activities, and merger or acquisition activity. Based on the Company’s analysis, fair value significantly exceeded the carrying value for all reporting units as of its annual testing date.IntangibleIntangibleAll intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. The Company does not have any indefinite-lived intangible assets.the Company’sour community reinvestment initiatives, the CompanySchwab invests with other institutional investors in funds that make equity investments in multifamily affordable housing properties. The Company receives tax credits and other tax benefits for these investments. The Company accountsWe account for investments in qualified affordable housing projects using the proportional amortization method if certain criteriathe 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 income tax expense attributable to continuing operations.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.- 64 -THE CHARLES SCHWAB CORPORATIONNotes to Consolidated Financial Statements(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)The CompanyThe CompanyThe 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. Accrued interest relating to unrecognized tax benefits is recorded in taxes on income tax expense and penalties are recorded in other expense.Stock-basedStock-basedrestricted 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.· 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.- 65 -THE CHARLES SCHWAB CORPORATIONNotes to Consolidated Financial Statements(Tabular Amountsaccess.Millions, Except Per Share Data, Option Price Amounts, Ratios,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 Noted)interest rates, benchmark yields, issuer spreads, new issue data, and collateral performance.·The Company’ssecurities available for sale.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.The Company’sThe 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 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 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 fair values.·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·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.·Bank loans – The fair values of the Company’s 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- 66 -·Financial instruments included in other assets primarily consist of LIHTC investments, 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.·Bank deposits 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, unfunded LIHTC commitments 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 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.In January 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-04, “Receivables – Troubled Debt Restructurings by Creditors (Subtopic 310-40).” ASU 2014-04 provides new guidance for creditors of consumer mortgage loans, and was 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 in the first quarter of 2015 did not have an impact on the Company’s financial statements or EPS as the Company’s practice for recognizing foreclosed real estate was already consistent with the guidance.In August 2015, the FASB issued ASU 2015-15, “Interest – Imputation of Interest (Subtopic 835-30).” Pursuant to the Securities and Exchange Commission (SEC) Staff Announcement at the June 18, 2015 Emerging Issues Task Force meeting, ASU 2015-15 provides clarification to ASU 2015-03 (discussed below) of SEC Staff views on the presentation and subsequent measurement of debt issuance costs related to line-of-credit arrangements. The new guidance permits deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of a line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line of credit. The adoption of this new guidance in the third quarter of 2015 did not have an impact on the Company’s financial statements or EPS as the Company’s practice for recognizing debt issuance costs on line-of-credit arrangements was already consistent with the guidance.Standard Description Required Date of Adoption Effects on the Financial Statements or Other Significant Matters ASU 2016-09, “Stock Compensation - Improvements to Employee Share-Based Payment Accounting (Topic 718)” 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 the volume of equity incentive options exercised.
The Company made an accounting policy election to continue its current practice of estimating forfeitures.In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606),” which provides new guidance on revenue recognition. The guidance clarifies that revenue from contracts with customers 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. The new guidance will become effective January 1, 2018, and permits entities to elect 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. The Company is currently evaluating the impact of this new guidance on its financial statements and EPS.In February 2015, the FASB issued ASU 2015-02, “Consolidation (Topic 810),” which amends the analysis a reporting entity must perform to determine whether it should consolidate certain types of legal entities. The new guidance became effective- 67 -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 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.January 1, 2016, and is applicable�� 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 all entities but provides an exception for reporting entities with interestsConsolidated Financial Statementslegal entities that areMillions, 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. comply withConsolidated Financial Statementsoperate in accordance with requirements that are similar to those in Rule 2a-7 of the Investment Company Act of 1940 for registered money market funds. The adoption of ASU 2015-02 will not have an impact on the Company’s consolidated financial statements or EPS as of December 31, 2015.In April 2015, the FASB issued ASU 2015-03, “Interest – Imputation of Interest (Subtopic 835-30).” The new guidance will require debt issuance costs related to a recognized debt liability to be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. Currently, debt issuance costs are presented as a separate asset. The new guidance, which became effective January 1, 2016, will not impact the Company’s financial results or EPS as the change only affects the balance sheet presentation of debt issuance costs; recognition and measurement of debt issuance costs will not be affected.In April 2015, the FASB issued ASU 2015-05, “Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40),” which provides new guidance that clarifies customer’s accounting for fees paid in a cloud computing arrangement. Under the new guidance, if a cloud computing arrangement includes a software license, the customer shall account for the software license element of the arrangement consistent with the acquisition of other software licenses. If the cloud computing arrangement does not include a software license, the customer shall account for the arrangement as a service contract. The guidance became effective January 1, 2016, and applies to any new arrangements entered into after that date. The Company does not expect the new guidance will have a significant impact on its financial statements or EPS.In January 2016, the FASB issued ASU 2016-01, “Financial Instruments – Overall (Subtopic 825-10),” which will become effective January 1, 2018. This new guidance addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. The Company is currently evaluating the impact of this new guidance on its financial statements and EPS.3. Receivables from and Payables to Brokerage Clients Brokerage ClientsReceivables from brokerage clients consist primarily of margin loansand payables to brokerage clients of $15.8 billion and $14.3 billion atare 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 $ 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 20152017 and 2014, respectively. Securities owned by brokerage clients are held as collateral for margin loans. Such collateral is not reflected2016, approximately 22% and 23%, respectively, of CS&Co’s total client accounts were located in the consolidated financial statements. The average yield earned on margin loans was 3.30% and 3.50% in 2015 and 2014, respectively.4.California.4. Other Securities Owned 261 224 205 215 50 51 17 26 533 516 December 31, 2017 2016 Equity and bond mutual funds $ 318 $ 272 135 108 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 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 inventory maintained to facilitate certain Schwab Funds and third-party mutual fund clients’ transactions, and investments made by the Company relating to itsour deferred compensation plan. The positions in Schwab Funds® money market funds arise from certain overnight funding of clients’ redemption, check-writing, and debit card activities. State and municipal debt obligations, equity, U.S. Government and corporate debt, and other securities include securities held to meet clients’ trading activities.- 68 -5.Securities Available for Sale and Securities Held to Maturityavailable for saleare as follows:December 31, 2017 Amortized
Cost Gross Unrealized
Gains Gross Unrealized
Losses Fair
ValueAvailable for sale securities: U.S. agency mortgage-backed securities $ 20,915 $ 53 $ 39 $ 20,929 U.S. Treasury securities 9,583 — 83 9,500 9,019 34 6 9,047 6,154 16 1 6,169 Certificates of deposit 2,040 2 1 2,041 U.S. agency notes 1,914 — 8 1,906 313 — — 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 12,937 127 2 13,062 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 20,520 29 214 20,335 9,850 20 18 9,852 Certificates of deposit 2,070 2 1 2,071 U.S. agency notes 1,915 — 8 1,907 214 — — 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 $ 71,677 941 — — 941 436 — — 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 99 — — 99 Total held to maturity securities $ 75,203 $ 336 $ 1,095 $ 74,444 to maturity are as follows: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.22,014 183 48 22,149 21,784 7 306 21,485 10,764 14 31 10,747 5,719 2 17 5,704 3,177 27 3,150 1,685 1 3 1,683 414 10 424 298 1 299 5 5 65,860 218 432 65,646 48,785 391 293 48,883 999 6 20 985 223 3 220 50,007 397 316 50,088 18,487 242 12 18,717 19,320 64 18 19,366 8,023 30 8 8,045 2,993 2 1 2,994 3,839 44 3,795 1,533 1 1,534 310 7 317 15 15 54,520 346 83 54,783 33,388 531 174 33,745 1,001 11 14 998 34,389 542 188 34,743 - 69 -$170$923 million at December 31, 2015.A summary of securities with unrealized losses, aggregated by category and period of continuous unrealized loss, is as follows:8,541 47 813 1 9,354 48 17,127 240 2,743 66 19,870 306 5,433 25 942 6 6,375 31 5,010 17 5,010 17 1,281 10 1,547 17 2,828 27 773 2 599 1 1,372 3 38,165 341 6,644 91 44,809 432 24,219 253 1,842 40 26,061 293 729 20 729 20 220 3 220 3 25,168 276 1,842 40 27,010 316 63,333 617 8,486 131 71,819 748 (1)The number of investment positions with unrealized losses totaled 409 for securities available for sale and 286 for securities held to maturity.2,247 5 1,767 7 4,014 12 5,754 15 792 3 6,546 18 1,781 4 552 4 2,333 8 1,246 1 1,246 1 3,696 44 3,696 44 11,028 25 6,807 58 17,835 83 264 1 10,415 173 10,679 174 660 14 660 14 264 1 11,075 187 11,339 188 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.Management evaluates whether securities available for sale and securities held to maturity are OTTI on a quarterly basis as described in “Notes – 2. Summary of Significant Accounting Policies.”- 70 -The following table is a roll forwardthe 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):2 169 159 1 1 9 (1) (168) 1 2 169 The maturities of securities available for sale and securities held to maturitycontinuous unrealized loss, are as follows:1,883 10,372 9,894 22,149 7,014 3,555 10,916 21,485 2,344 8,403 10,747 2,494 3,015 195 5,704 3,150 3,150 935 748 1,683 19 405 424 299 299 5 5 5,773 24,213 14,141 21,519 65,646 5,774 24,247 14,160 21,679 65,860 2,380 20,337 26,166 48,883 357 628 985 220 220 2,380 20,914 26,794 50,088 2,311 20,878 26,818 50,007 (1)Mortgage-backed Less than
12 months 12 months
or longer Total December 31, 2017 Fair
Value Unrealized
Losses Fair
Value Unrealized
Losses Fair
ValueUnrealized
LossesAvailable 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 $ 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 $ 81,341 $ 1,307 $ 12,921 $ 226 $ 94,262 $ 1,533 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 gains938 for HTM securities.
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Year Ended December 31, |
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| 2015 |
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| 2014 |
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| 2013 | |||
Proceeds |
| $ | 2,424 |
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| $ | 6,556 |
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| $ | 6,167 |
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Gross realized gains |
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| 1 |
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| 30 |
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| 7 |
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Gross realized losses |
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| 1 |
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| 23 |
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- 71 -
THE CHARLES SCHWAB CORPORATION
| 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 | % | |||||||||
| Year Ended December 31, | 2017 | 2016 | 2015 | ||||||||
| Proceeds | $ | 8,617 | $ | 5,537 | $ | 2,424 | |||||
| Gross realized gains | 12 | 4 | 1 | ||||||||
| Gross realized losses | — | — | 1 | ||||||||