SECURITIES AND EXCHANGE COMMISSION
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended December 31, 20152018 | Commission file number 1-9700 |
THE CHARLES SCHWAB CORPORATION
(Exact name of registrant as specified in its charter)
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(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
211 Main Street, San Francisco, CA 94105
(Address of principal executive offices and zip code)
Registrant’s telephone number, including area code: (415) 667-7000
Securities registered pursuant to Section 12(b) of the Act:
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| Title of each class | Name of each exchange on which registered |
Common Stock -– $.01 par value per share | New York Stock Exchange |
Depositary Shares, each representing a 1/40th ownership interest in a | |
share of 6.0%6.00% Non-Cumulative Preferred Stock, Series BC |
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Depositary Shares, each representing a 1/40th ownership interest in a | |
share of 6.0%5.95% Non-Cumulative Preferred Stock, Series CD | New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
⌧☒ No ☐Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes
☐ No ⌧☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes
⌧ ☒ No☐
Indicate by check mark whether the registrant has submitted electronically
and posted on its corporate Website, if any, every Interactive Data File required to be submitted
and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit
and post such files). Yes
⌧ ☒ No☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10‑K. ☒
10-K.⌧Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”filer,” “smaller reporting company,” and “smaller reporting“emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer ⌧☒ | Accelerated filer ☐ |
Non-accelerated filer ☐ (Do not check if a smaller reporting company) | Smaller reporting company ☐ |
| Emerging growth company ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
☐ No ⌧☒
As of June 30,
2015,2018, the aggregate market value of the voting stock held by non-affiliates of the registrant was
$38.0$62.1 billion. For purposes of this information, the outstanding shares of Common Stock owned by directors and executive officers of the registrant
and certain investment companies managed by Charles Schwab Investment Management, Inc. were deemed to be shares of the voting stock held by affiliates.
The number of shares of Common Stock outstanding as of January
29, 2016,31, 2019, was
1,320,522,900.1,332,893,531.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this Form 10-K incorporates certain information contained in the registrant’s definitive proxy statement for its annual meeting of stockholders, to be held May
17, 2016,15, 2019, by reference to that document.
THE CHARLES SCHWAB CORPORATION
Annual Report On Form 10-K
For Fiscal Year Ended December 31, 20152018
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Item 1. | | |
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Item 1B. | | 16 |
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Item 7A. | | 52 |
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Item 9. | | 103 |
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Item 15. | | 106 |
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THE CHARLES SCHWAB CORPORATION
PART I
I
General Corporate Overview
The Charles Schwab Corporation (CSC) is a savings and loan holding company, headquartered in San Francisco, California. CSC was incorporated in 1986 and engages, through its subsidiaries (collectively referred to as
Schwab or the Company), in wealth management, securities brokerage, banking,
moneyasset management, custody, and financial advisory services. At December 31,
2015, the Company2018, Schwab had
$2.51$3.25 trillion in client assets,
9.811.6 million active brokerage accounts,
1.51.7 million corporate retirement plan participants, and
1.01.3 million banking accounts.
Significant business subsidiaries of CSC include the following:
Charles Schwab & Co., Inc. (CS&Co), incorporated in 1971, a securities broker-dealer with over 355 domestic branch offices in 47 states, as well as a branch in the Commonwealth of Puerto Rico. In addition, Schwab serves clients through branch offices in the United Kingdom (U.K.), Hong Kong, Singapore, and Australia through various subsidiaries;
Charles Schwab Bank (CSB), a federal savings bank; and
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| • | | Charles Schwab & Co., Inc. (Schwab), which was incorporated in 1971, is a securities broker-dealer with over 325 domestic branch offices in 45 states, as well as a branch in each of the Commonwealth of Puerto Rico and London, England, and serves clients in Hong Kong through one of CSC’s subsidiaries;
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| | Charles Schwab Bank (Schwab Bank), which commenced operations in 2003, is a federal savings bank located in Reno, Nevada; and
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| | Charles Schwab Investment Management, Inc. (CSIM), which is the investment advisor for Schwab’s proprietary mutual funds referred to as the Schwab(Schwab Funds®,) and Schwab’s exchange-traded funds (ETFs), referred to as the Schwab(Schwab ETFs™). |
The CompanySchwab provides financial services to individuals and institutional clients through two segments – Investor Services and Advisor Services. The Investor Services segment provides retail brokerage and banking services
to individual investors, and retirement plan services,
andas well as other corporate brokerage
services.services, to businesses and their employees. The Advisor Services segment provides custodial, trading,
banking, and support services, 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.”
As of December 31,
2015, the Company2018, Schwab had full-time, part-time,
and temporary employees, and persons employed on a contract basis that represented the equivalent of
about 15,300approximately 19,500 full-time employees.
Unless otherwise indicated, the terms “Schwab,” “the Company,” “we,” “us,” or “our” mean CSC together with its consolidated subsidiaries.
Business AcquisitionsIn December 2012, the Company acquired ThomasPartners®, Inc., a growth and dividend income-focused asset management firm.
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.
Business Strategy and Competitive Environment
Recognizing
Schwab was founded on the benefits 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 our vision of creating the best long-termmost trusted leader in investment services, management has adopted a strategy is one that putsdescribed as “Through Clients’ Eyes.”
This strategy emphasizes placing clients’ perspectives, needs, and desires at the forefront.
The Company’s vision is to be the most trusted leader in investment services.Because investing plays a fundamental role in building financial security, the Company striveswe strive to deliver a better investing experience for itsour clients – individual investors and the people and institutions who serve them – by disrupting longstanding industry practices on their behalf and providing superior service. The Company aimsWe also 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, value, and convenience.trust. In addition, management works to leverage the Company’scouple Schwab’s scale and resources as well aswith ongoing expense discipline to help keep costs
THE CHARLES SCHWAB CORPORATION
low and ensure that clientproducts and solutions are both affordable andas well as responsive to client needs. Finally,In combination, these are the Company workskey elements of our “no trade-offs” approach to be a good steward of stockholder capital and aimsserving investors. We believe that following this strategy is the best way to maximize the Company’s valueour market valuation and stockholder returns over time.
The
Management estimates that investable wealth in the United States (U.S.) (consisting of assets in defined contribution, retail wealth management and brokerage, and registered investment advisor channels, along with bank deposits) currently exceeds $45 trillion, which means the Company’s $3.25 trillion in client assets leaves substantial opportunity for growth. Our strategy is based on the principle that developing trusted relationships will translate into more assets from both new and
THE CHARLES SCHWAB CORPORATION
existing clients, ultimately driving more revenue, and along with expense discipline and thoughtful capital management, will generate earnings growth and build long-term stockholder value.
Within Investor Services, our competition in serving individual investors includes a wide range ofspans brokerage, wealth management, and asset management firms, as well as banks and trust companies. In serving investorsthe Advisor Services arena, we compete with institutional custodians, traditional and competing for a growing percentagediscount brokers, banks, and trust companies.
Across both segments, our key competitive advantages are:
Scale and Size of the investable wealthBusiness – As one of the largest investment services firms in the United States (U.S.)U.S., we are able to spread operating costs and amortize new investments over a large base of clients, and harness the resources to evolve capabilities to meet client needs.
Operating Efficiency – Coupled with scale, our operating efficiency and sharing of infrastructure across different businesses creates a cost advantage that enables us to competitively price products and services while profitably serving many different client channels.
Operating Structure – Providing bank and asset management services to broker-dealer clients helps serve a wider array of needs, thereby deepening relationships, enhancing the stability of client assets, and enabling diversified revenue streams.
Brand and Corporate Reputation – In an industry dependent on trust, Schwab’s reputation and brand across multiple constituents enables us to attract clients and employees while credibly introducing new products to the market.
Service Culture – Delivering a great client experience earns the trust and loyalty of clients and increases the likelihood that those clients will refer others.
Willingness to Disrupt – Management’s willingness to challenge the status quo, including our own business practices, to benefit clients fosters innovation and continuous improvement, which helps to attract more clients and assets.
Sources of Net Revenues
Our major sources of net revenues are net interest revenue, asset management and administration fees, and trading revenue. These revenue streams are supported by the combination of bank, broker-dealer, and asset management operating subsidiaries, each of which brings specific capabilities that enable us to provide clients with the products and services they are looking for.
Net interest revenue is the difference between interest generated on interest-earning assets and interest paid on funding sources, the majority of which is derived from client cash balances awaiting investment, held by Schwab as part of clients’ overall relationship with the Company. While certain of these client cash balances are held on CS&Co’s balance sheet or swept to our money market funds, a substantial amount of existing balances – and most new inflows of cash awaiting investment – are swept to a banking subsidiary. Interest-earning assets are primarily comprised of high-quality fixed income securities, margin loans, and bank loans.
The majority of asset management and administration fees are earned from proprietary money market mutual funds, proprietary and third-party mutual funds and exchange-traded funds (ETFs), and fee-based advisory solutions.
Trading revenue includes commissions earned for executing trades for clients in individual equities, options, futures, fixed income securities, and certain third-party mutual funds and ETFs, as well as principal transaction revenue earned primarily from actions to support client trading in fixed income securities.
Products and Services
We offer a broad range of products through intuitive end-to-end solutions, including robust digital capabilities, to address our clients’ varying investment and financial needs. Examples of these product offerings include the following:
Brokerage – an array of full-feature brokerage accounts with equity and fixed income trading, margin lending, options trading, and cash management capabilities including third-party certificates of deposit;
THE CHARLES SCHWAB CORPORATION
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| • | Mutual funds – third-party mutual funds through the Mutual Fund Marketplace®, including non-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, specialized planning, and full-time portfolio management;
Banking – checking and savings accounts, first lien residential real estate mortgage loans (First Mortgages), home equity lines of credit (HELOCs), and pledged asset lines (PALs); and
Trust – trust custody services, personal trust reporting services, and administrative trustee services.
These investing services are made available through two business segments – Investor Services and Advisor Services. Schwab’s major sources of revenues are generated by both of the reportable segments, based on their respective levels of client assets and activity. Revenue is attributable to a reportable segment based on which segment has the primary responsibility for serving the client. The accounting policies of the reportable segments are the same as those described in “Item 8 – Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements” (Item 8) – Note 2.
Investor Services
Charles Schwab initially founded the Company 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.
Through the Retail Investor business unit, we offer individual investors a multi-channel service delivery model, which includes online, mobile, telephone, and branch capabilities. Under this model, the Company can offerWe provide personalized service at competitive prices while giving clients the choice of where, when, and how they do business with the Company.us. Financial Consultants (FCs) in Schwab’s branches and regional telephone service centers are staffed with trained and experienced financial consultants (FCs) focusedfocus on building and sustaining client relationships. The Company offersWe have the ability to meet client investing needs through a single ongoing point of contact, even as those needs change over time. 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 provide
Our service delivery model provides quick and efficient access to
an extensive arraya broad lineup of information, research, tools, trade execution, and administrative services, which clients can access according to their needs. For example, clients that trade more actively can use these channels to access highly competitive pricing, expert tools, and extensive service capabilities – including experienced, knowledgeable teams of trading specialists, and integrated product offerings.
Individuals investing for retirement through 401(k) plans can take advantage of the Company’s bundled offering of multiple investment choices, education, and third-party advice. Management also believes the Company is able to compete with the wide variety of financial services firms striving to attract individual client relationships by complementing these capabilities with
the extensive array of investment, banking, and lending products and services described in the 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.
Sources of Net Revenues
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.
THE CHARLES SCHWAB CORPORATION
Products and Services
The Company offers a broad range of products to address individuals’ varying investment and financial needs. Examples of these product offerings include the following:
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| | Brokerage – an array of full-feature brokerage accounts with cash management capabilities;
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| | 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;
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| | Exchange-traded funds – an extensive offering of ETFs, including many proprietary and third-party ETFs available without a commission through Schwab ETF OneSource™;
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| | 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;
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| | 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
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| | Trust – trust custody services, personal trust reporting services, and administrative trustee services.
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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 Services
Through 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.
investment and banking products.
Schwab strives to educate and assist clients in reaching their financial goals. Educational tools include workshops, webcasts, interactive courses, and online information about investing, from which Schwab does not earn revenue. Additionally, Schwab provideswe provide various 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.
Clients may
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.
THE CHARLES SCHWAB CORPORATION
Schwab Private 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.
For clients seeking a relationship in which investment decisions are fully delegated to a financial professional, the CompanySchwab offers several alternatives. The Company providesWe provide investors access to professional investment management in a diversified account that is invested exclusively in either mutual funds or ETFs through the Schwab Managed Portfolios™Portfolios and the Windhaven Investment Management Inc. (Windhaven®), Strategies, or equity securities and ETFs through the ThomasPartners Investment Management® programs. The
THE CHARLES SCHWAB CORPORATION
CompanyStrategies. We 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.
To meet the specific needs of clients who
actively trade,
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.
For U.S. clients wishing to invest in foreign equities,
the Company offerswe offer a suite of global investing capabilities, including online access to certain foreign equity markets with the ability to trade in their local currencies. In addition,
the CompanySchwab serves both foreign investors and non-English-speaking U.S. clients who wish to trade or invest in U.S. dollar-based securities. In the U.S.,
the CompanySchwab serves Mandarin-, Cantonese-, Spanish-, and Vietnamese-speaking clients through a combination of its branch offices,
and Web-basedweb-based and telephonic services.
The Investor Services segment
We also
includes the Retirement Plan Services, 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.
Our Retirement Plan Services business unit offers a bundled 401(k) retirement plan product that provides retirement plan sponsors with extensive investment options, trustee or custodial services, and participant-level recordkeeping. Retirement plan design features, which increase plan efficiency and achieve employer goals, are also offered, such as automatic enrollment, automatic fund mapping at conversion, and automatic contribution increases. In addition to an open architecture investment platform, we offer access to low cost index mutual funds and ETFs. Individuals investing for retirement through 401(k) plans can take advantage of bundled offerings of multiple investment choices, education, and third-party advice. This third-party advice service is delivered online, by phone, or in person, including recommendations based on the core investment fund choices in their retirement plan and specific recommended savings rates. Services also include support for Roth 401(k) accounts, profit sharing, and defined benefit plans.
Lastly, the Mutual Fund Clearing Services
business unit provides
mutual fund clearingcustody, recordkeeping, and trading services
and recordkeeping to banks, brokerage firms, and trust
companies.companies, and the Off-Platform Sales business unit offers proprietary mutual funds, ETFs, and collective trust funds outside the Company.
They are included within the Investor Services segment given their leveraging of the products and services offered to individual investors.
More than thirty years ago, Schwab supported a small group of entrepreneurial advisors who challenged the industry by creating independent firms. Through the Advisor Services segment,
Schwab has become the
Company provideslargest provider of custodial, trading,
banking, and support services
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
THE CHARLES SCHWAB CORPORATION
through the Company has a dedicatedefforts of our sales, forcesupport, technology, 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 and hosts a variety of national, regional, and local events designed to help RIAs identify and implement better ways to expand and efficiently manage their practices.
RIAs who custody client accounts at Schwab may use proprietary software that provides them with up-to-date client account information as well as trading capabilities. The Advisor Services website is the core platform for
IAsRIAs to conduct daily business activities online with Schwab, including 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.
We also provide access to integrations with select third-party platforms, which support a variety of advisor needs including client relationship management, portfolio management systems, trade order management, and financial planning.
THE CHARLES SCHWAB CORPORATION
ToThe Advisor Services website also provides interactive tools, educational content, and thought leadership for advisors turning independent. We offer a variety of services to help IAsRIAs grow and manage their practices, the Company offers 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 strategicas well as an annual RIA benchmarking study to help firms understand key business planning, client segmentation, growth strategies, technological strategies and succession planning. The Advisor Services website provides interactive tools, educational content, and research reportsmetrics relative to assist advisors thinking about establishing and managing their own independent practices.
The Company offerspeers. We also offer an array of services to help advisors establish their own independent practices through the Business Start-up Solutions package. These services includea robust prospect consulting offer. To support them throughout their transition, we offer access to business start-up and transition consultants, technology engineers, and dedicated service teams and outsourcing of back-office operations, as well as third-party firms who provide assistance with real estate, errors and omissions insurance, and company benefits.
teams.
The Company offersSchwab provides a variety of educational materials, programs, and events to IAsRIAs seeking to expand their knowledge of industry issues and trends, as well as sharpen their individual expertise and practice management skills. The Company updatesWe update and sharesshare market research on an ongoing basis, and it holdshold a series of events and conferences every year to discuss topics of interest to IAs,RIAs, including business strategies and best practices. The CompanySchwab sponsors and hosts the annual IMPACT® conference, which provides a national forum for the Company, IAs,RIAs, and other industry participants to gather and share information and insights, as well as a multitude of smaller events across the country each year.IAs
RIAs and their clients have access to
aour broad range of
the Company’s products and services, including individual securities, mutual funds, ETFs,
fixed income products, managed accounts,
cash products, bank lending, and
cash products.trust services. By functioning as the custodian, Schwab earns revenue associated with the underlying client assets invested in our products and utilization of the services we provide. In this capacity, we do not charge an explicit custodial fee.
The Advisor Services segment also includes the Retirement Business Services and Corporate Brokerage Retirement Services business units. Retirement Business Services provides trust, custody, and retirement business services to independent retirement plan advisors and independent recordkeepers. PlanRetirement plan assets are held at the Business Trust division of Schwab Bank.CSB. The Company and independent retirement plan providers work together to serve plan sponsors, combining the consulting and administrative expertise of the administrator with the Company’sour investment, technology, trust, and custodial services. Retirement Business Services also offers the Schwab Personal Choice Retirement Account®, a self-directed brokerage offering for retirement plans.
Corporate Brokerage Retirement Services serves plan sponsors, advisors, and independent recordkeepers seeking a brokerage-based account to hold retirement plan assets. PlansRetirement plans held at Schwab are either self-trusteed or trusteed by a separate, independent trustee. Corporate Brokerage Retirement Services also offers the Schwab Personal Choice Retirement Account®, and the Company Retirement Account, both of which are self-directed brokerage-based solutions designed to hold the assets of company-sponsored retirement plans.
As a participant in the securities, banking and financial services industries,
the CompanySchwab is subject to extensive regulation under both federal and state laws by governmental agencies, supervisory authorities, and self-regulatory organizations (SROs).
The Company isWe are also subject to oversight by regulatory bodies in other countries in which
the Company operates.we operate. These regulations affect
the Company’sour business operations and impose capital, client protection, and market conduct requirements.
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. As a result of the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010 (Dodd-Frank), the adoption of implementing regulations by the federal regulatory agencies, and other recent regulatory reforms, the Company has experienced significant changes in the laws and regulations that apply to it, how it is regulated, and regulatory expectations in the areas of compliance, risk management, corporate governance, operations, capital and liquidity.
THE CHARLES SCHWAB CORPORATION
Holding Company and Bank Regulation
CSC is a savings and loan holding company and
Schwab Bank, CSC’s depository institution subsidiary, is a federal savings bank. CSC is regulated,
examinedsupervised, and
supervisedexamined by the Board of Governors of the Federal Reserve System (Federal Reserve)
,. CSC’s principal depository institution subsidiary, CSB, is a federal savings bank and
Schwab Bank is regulated,
examinedsupervised, and
supervisedexamined by the Office of the Comptroller of the Currency (OCC),
THE CHARLES SCHWAB CORPORATION
the Consumer Financial Protection Bureau (CFPB), and the Federal Deposit Insurance Corporation (FDIC). CSC and Schwab BankCSB are also subject to regulation and various requirements and restrictions under state and other federal laws.
This regulatory
structure establishes a comprehensive framework
is designed to protect depositors and consumers, the safety and soundness of depository institutions and their holding companies, and the stability of the banking system as a whole. This framework affects the activities and investments of CSC
Schwab Bank and
CSC’s non-bankits subsidiaries and gives the regulatory authorities broad discretion in connection with their supervisory, examination and enforcement activities and policies.
Financial Regulatory Reform
As Below is a resultdiscussion of the enactment of Dodd-Frank, the adoption by the federal banking agencies of implementing regulations and other regulatory reforms, the financial services industry is currently experiencing a period of unprecedented change in financial regulation. The changes that have been enacted under Dodd-Frank and other regulatory reforms that are significant for CSC and Schwab Bank are highlighted below.
Basel III Capital and Liquidity Framework
In July 2013, the U.S. Federal banking agencies finalized a rule to implement strengthened regulatory capital requirements for U.S. banking organizations consistent with Basel III (Final Regulatory Capital Rules). The Final Regulatory Capital Rules established Common Equity Tier 1 (CET1) Capital as a new capital standard, increased minimum required risk-based capital ratios, narrowed the eligibility criteria for regulatory capital instruments, provided for new regulatory capital deductions and adjustments, and modified methods for calculating risk-weighted assets (the denominator of risk-based capital ratios). See “Itemregulations. Also see “Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity”Current Regulatory Environment and “Capital Management,”Other Developments” for information regarding significant proposed rulemaking related to our regulation.
Basel III Capital and “Item 8 – Financial StatementsLiquidity Framework
Banking organizations are subject to the regulatory capital rules issued by the Federal Reserve and
Supplementary Data – Notesother U.S. banking regulators, including the OCC and the FDIC. In addition to
Consolidated Financial Statements – 23. Regulatory Requirements” for the newminimum risk-based capital ratio requirements.The Final Regulatory Capital Rules provided for a one-time election which CSC and Schwab Bank maderequirements, banking organizations must hold additional capital, referred 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 a capital conservation buffer of more than 2.5%, on a fully phased-in basis, in excess of all of its minimum risk-based capital ratio requirements.
The Final Regulatory Capital Rules provide for a “standardized approach” framework forofficers.
For the calculation of a banking organization’s regulatory capital and risk-weighted
assets.assets, the regulatory capital rules provide for a “standardized approach” framework and an “advanced approaches” framework. 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, are subject to an incremental capital buffer of up to 2.5% of common equity Tier 1 capital if imposed by the banking agencies, referred to as the countercyclical capital buffer, and are subject to certain other enhanced
provisions. CSC and Schwab Bank are currently onlyprovisions, including additional reporting requirements. Once a banking organization becomes subject to the
“advanced approaches” framework, the banking organization and its subsidiary depository institutions must adopt written implementation plans and complete satisfactory parallel runs of at least four consecutive quarters during which they must calculate their risk-weighted assets under both the “advanced approaches” and “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 been subject to any consolidated capital requirements, and Schwab Bank. The required minimum capital conservation buffer is being phased in incrementally; it started at .625% on January 1, 2016 and will increase to 1.25% on January 1, 2017, 1.875% on January 1, 2018 and 2.5% on January 1, 2019.
In September 2014, U.S. Federal banking agencies issued an inter-agency final rulewill notify the banking organization and its subsidiaries when they determine that imposesthe banking organization and its subsidiaries have completed satisfactory parallel runs, which may take several years. The Federal Reserve, OCC, and FDIC have recently granted extensions and exemptions to CSC and its banking subsidiaries such that they will not be required to submit implementation plans until June 30, 2020. As a quantitativeresult of crossing the $250 billion threshold in 2018, CSC and its banking subsidiaries are subject to all other advanced approaches requirements – the supplementary leverage ratio, the inclusion of AOCI in the calculation of capital ratios, and the countercyclical capital buffer, which is currently 0%.
The 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 a
30-day period.prospective 30-calendar-day period of acute liquidity stress, 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. Theperiod, calculated as of the last business day of the month. While we are currently subject to the modified LCR rule,
went into effect on January 1, 2016, with holding companieswe will become subject to the
full LCR rule
required to hold at
least 90%the beginning of the
necessary amountsecond quarter of
HQLA in 2016 and at least 100% starting on January 1, 2017.2019.
THE CHARLES SCHWAB CORPORATION
Capital Stress Testing
In October 2012, the OCC issued final rules implementing provisions of Dodd-Frank that require national banks
Savings and loan holding companies and federal savings banks 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) rules, Schwab Bank must conduct annual stress tests using certain scenarios and prescribed stress-testing methodologies reportunder the Dodd-Frank Act Stress Test (DFAST) rules. CSC reports the results to the OCC and the Federal Reserve and publish a summary of the results of its stress tests. In March 2015, Schwab Bank submitted its company-run stress test resultsCSB reports to the OCC. In June 2015 Schwab Bank publicly disclosed a summaryBoth publish summaries of itstheir stress test results under the severely adverse scenario prescribed by the OCC based uponresults.
As 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 steps to implement policies, procedures, systems and governance structures that are designed to be consistent with regulatory expectations for a firm of its size and complexity.
Insured Depository Institution Resolution Plans
In September 2011 and January 2012, the
The FDIC
issued 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 BankCSB is required to file with the FDIC
an annuala periodic 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.
Consumer Financial Protection
In July 2011, pursuant to Dodd-Frank, the
The CFPB
began 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.assets.
Deposit Insurance Assessments
The FDIC’s Deposit Insurance Fund (DIF) provides insurance coverage for certain deposits, generally up to $250,000 per depositor per account ownership type, and is funded by quarterly assessments on insured depository institutions.
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.
The Dodd-Frank Act (i) raised the minimum reserve ratio for the DIF to 1.35% (from the former minimum of 1.15%) and (ii) required that the DIF’s reserve ratio reach 1.35% by September 30, 2020.
In
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
an increase to the
increase. See “Item 7 – Management’s DiscussionDIF from 1.15% to 1.35% of the assessment base. As a result, Schwab’s banking subsidiaries became subject to an additional 4.5 basis point surcharge on the amount of their aggregate assessment base in excess of $10 billion. In the third quarter of 2018, the DIF ratio exceeded 1.35%, and
Analysis of Financial Condition and Results of Operations – Current Regulatory Environment and Other Developments.”the FDIC eliminated the surcharge beginning in the fourth quarter.
THE CHARLES SCHWAB CORPORATION
Community Reinvestment Act
The Community Reinvestment Act of 1977 (CRA) requires
Schwab 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.offices.
The Dodd-Frank Act codified the Federal Reserve’s long-held position that a depository institution holding company must serve as a source of financial strength for its subsidiary depository institutions, the so-called “source of strength doctrine.” In effect, the holding company may be compelled to commit resources to support the subsidiary in the event the subsidiary is in financial distress.
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.
THE CHARLES SCHWAB CORPORATION
Broker-Dealer and Investment Advisor Regulation
CSC’s
Schwab’s principal
broker-dealers are Schwab and optionsXpress, Inc. Schwabbroker-dealer is CS&Co. CS&Co is registered as a broker-dealer with the
United StatesU.S. Securities and Exchange Commission (SEC), the fifty states, the District of Columbia and
Commonwealth of 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.broker.
Much of the regulation of broker-dealers has been delegated to SROs.
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 principal purpose of regulating broker-dealers and investment advisors is the protection of clients and
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 both
CS&Co is subject to Rule 15c3-1 under the Securities Exchange Act of 1934 (the Uniform Net Capital Rule) and related SRO requirements. The CFTC and NFA also impose net capital requirements. The Uniform Net Capital Rule specifies minimum capital requirements
that are intended to ensure the general financial soundness and liquidity of broker-dealers. 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.
The Uniform Net Capital Rule prohibits
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.
In addition to net capital requirements, as
a self-clearing
broker-dealers, Schwab and optionsXpress, Inc. arebroker-dealer, CS&Co is subject to cash deposit and collateral requirements with clearing houses, such as the Depository Trust & Clearing Corporation 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.
THE CHARLES SCHWAB CORPORATION
As a result of our operations in countries outside the U.S., we are also subject to rules and regulations issued by certain foreign authorities, including the Financial ServiceConduct Authority (FCA) in the U.K., the Securities and Futures Commission (SFC) in Hong Kong, the Monetary Authority of Singapore (MAS) in Singapore, and the Australian Securities and Investments Commission (ASIC) in Australia.
Financial Services Regulation
Bank Secrecy Act of 1970 and USA PATRIOT Act of 2001
CSC and its subsidiaries that conduct financial services activities are subject to the Bank Secrecy Act of 1970 (BSA), as amended by the USA PATRIOT Act of 2001, which requires financial institutions to develop and implement programs reasonably designed to achieve compliance with these regulations. The BSA and USA PATRIOT Act include a variety of monitoring,
record-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 Internetinternet 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 at
1-800-SEC-0330.
THE CHARLES SCHWAB CORPORATION
On the Company’sour website, http:https://www.aboutschwab.com, the Company postswe post the following filings 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.In addition, the 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.
III, and our quarterly average LCR.
All such filings are available free of charge either on the Company’sour website or by request via email (investor.relations@schwab.com), telephone (415-667-1959)(415-667-7000), or mail (Charles Schwab Investor Relations at 211 Main Street, San Francisco, CA 94105).
The Company faces
We face a variety of risks that may affect
itsour operations,
or financial results,
or stock price and many of those risks are driven by factors that
the Companywe cannot control or predict. The following discussion addresses those risks that management believes are the most significant, although there may be other risks that could arise, or may prove to be more significant than expected, that may affect
the Company’sour operations or financial results.
For a discussion of
the Company’sour risk management, including operational risk,
compliance risk, credit risk, market risk,
and liquidity risk,
compliance risk,see Risk Management and
legal risk, see “Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Risk Management.”Capital Management in Part II, Item 7.
Developments in the business, economic, and geopolitical environment could negatively impact
the Company’sour business.
The Company’s
Our business can be adversely affected by the general environment – economic, corporate, securities market, regulatory, and geopolitical developments all play a role in client asset valuations, trading activity, interest rates, and overall investor engagement, and are outside of
the Company’sour control. Deterioration in the housing and credit markets,
reductions
THE CHARLES SCHWAB CORPORATION
reduction in short-term interest rates, and decreases in securities valuations negatively impact the Company’sour results of operations and capital resources.
Extensive regulation of the Company’sour businesses affects the Company’s activities and may subject itus to significant penalties.penalties
or limitations on business activities.
As a participant in the securities, banking, and financial services industries,
the Company iswe are subject to extensive regulation under
both federal,
state, and
stateforeign laws by governmental agencies, supervisory authorities and SROs.
Such regulation 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.requirements on us.
In addition to specific banking laws and regulations,
the Company’sour banking regulators have broad discretion in connection with their supervisory and enforcement activities and examination policies and could require CSC and/or
Schwab Bankour banking subsidiaries to hold more capital, increase liquidity, or limit their ability to pay dividends or CSC’s ability to repurchase
or redeem shares. The banking regulators could also limit
the Company’sour ability to grow, including adding assets, launching new products,
making acquisitions, and undertaking strategic
investments, could limit Schwab Bank’sinvestments. Other potential regulatory actions include limiting our banking subsidiaries’ ability to accept deposits swept from
the client brokerage accounts and
could prevent the Companybrokered deposits and preventing us from pursuing
itsour business strategy.
Despite
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.
While
the Company maintainswe maintain systems and procedures designed to ensure that
it complieswe comply with applicable laws and regulations, violations could occur. In addition, some legal/regulatory frameworks provide for the imposition of fines or penalties for noncompliance even though the noncompliance was inadvertent or unintentional and even though systems and procedures reasonably designed to prevent violations were in place at the time. There may be other negative consequences resulting from a finding of noncompliance, including restrictions on certain activities. Such a finding may also damage
the Company’sour reputation and
itsour relationships with
itsour regulators and could restrict the ability of institutional investment managers to invest in
the Company’sour securities.
THE CHARLES SCHWAB CORPORATION
Legislation or changes in rules and regulations could negatively affect
the Company’sour business and financial results.
New legislation, rules, regulations and guidance, or changes in the interpretation or enforcement of existing federal, state,
foreign and SRO rules, regulations and guidance, including changes relating to mutual funds, broker-dealer fiduciary duties and regulatory treatment of deposit accounts, may directly affect the operation and profitability of
the CompanySchwab or its specific business lines.
TheOur profitability
of the Company could also be affected by rules and regulations 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
THE CHARLES SCHWAB CORPORATION
rules 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’scould limit our ability to pursue its business strategies.return capital to stockholders. 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.
Failure to meet capital adequacy and liquidity guidelines could affect
the Company’sour financial condition.
CSC, together with
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 and countercyclical capital 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.
In 2018, we crossed the threshold for becoming subject to the “advanced approaches” framework. We are currently subject to a supplementary leverage ratio and related disclosure requirements, the inclusion of AOCI in September 2014,regulatory capital, and the Federal Reserve issuedcountercyclical capital buffer, and will become subject to the full LCR in the second quarter of 2019. In addition, federal banking agencies have broad discretion and could require CSC or its banking subsidiaries to hold higher levels of capital or increase liquidity above the applicable regulatory requirements.
Significant interest rate changes could affect our profitability.
The direction and level of interest rates are important factors in our earnings. A decline in interest rates may have a modified LCRnegative 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.
Although we believe we are positioned to benefit from a rising interest rate environment, a rise in interest rates may cause our funding costs to increase if market conditions or the competitive environment induces us to raise our interest rates to avoid losing deposits, or replace deposits with higher cost funding sources without offsetting increases in yields on interest-earning assets can reduce our net interest revenue.
The expected phase-out of LIBOR could negatively impact our net interest revenue and require significant operational work.
Certain securities in our investment portfolio and the floating rate loans we offer reference LIBOR as the benchmark rate to determine the applicable interest rate or payment amount. We also use LIBOR in many of our financial models, such as those used for capital stress testing, and to determine the dividend rates for certain of our series of preferred stock which begin to float in 2022 and later. If LIBOR is discontinued after 2021 as expected, there will be uncertainty or differences in the calculation of the applicable interest rate or payment amount depending on the terms of the governing instruments and
THE CHARLES SCHWAB CORPORATION
there will be significant work required to transition to using the new benchmark rates and implement necessary changes to our systems and financial models. This could result in different financial performance for previously booked transactions and may impact our existing transaction data, products, systems, operations, and pricing processes. The calculation of interest rates under the replacement benchmarks could also impact our net interest revenue. In addition, LIBOR may perform differently during the phase-out period than in the past which could result in lower interest payments and a reduction in the value of certain securities in our investment portfolio.
A significant change in client cash allocations could negatively impact our net interest revenue.
We rely heavily on bank deposits as a low cost source of funding to extend loans to clients and purchase investment securities. Our bank deposits are primarily driven by our bank sweep feature when cash awaiting investment in our client brokerage accounts is swept to our banking subsidiaries. A significant reduction in our clients’ allocation to cash, a change in the allocation of that requires CSCcash, or a transfer of cash away from the Company, could reduce net interest revenue.
Security breaches of our systems, or those of our clients or third parties, may subject us to maintainsignificant liability and damage Schwab’s reputation.
Our business involves the secure processing, storage, and transmission of confidential information about our clients and us. Information security risks for financial institutions are increasing, in part because of the use of the internet and mobile technologies to conduct financial transactions, and the increased sophistication and activities of organized crime, activists, hackers and other external parties, including foreign state actors. Our systems and those of other financial institutions have been and are likely to continue to be the target of cyber attacks, malicious code, computer virusesand 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 our efforts to ensure the integrity of our systems, we 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 sufficientwide variety of sources. Data security breaches may also result from non-technical means, for example, employee misconduct.
Given the high volume of transactions that we process, the large number of clients, counterparties and third-party service providers with which we do business and the increasing sophistication of cyber attacks, a cyber attack could occur and persist for an extended period of time before being detected. The extent of a particular cyber attack and the steps we may need to take to investigate the attack may not be immediately clear, and it may take a significant amount of
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.
Security breaches, including breaches of our security measures or those of our third-party service providers or clients, could result in a violation of applicable privacy and “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.
We also face risk related to external fraud involving the misappropriation and use of clients’ user names, passwords or other personal information to gain access to clients’ financial accounts at Schwab. This could occur from the compromise of clients’ personal electronic devices or as a result of a data security breach at an unrelated company where clients’ personal information is taken and then made available to fraudsters. Such risk has grown in recent years due to the
Consolidated Financial Statements – 23. Regulatory Requirements.”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.
Technology and operational failures or errors could subject
the Companyus to losses, litigation,
regulatory actions, and
regulatory actions.The Company faces operational risk, which isreputational damage.
We must process, record and monitor a large number of transactions and our operations are highly dependent on the 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,
THE CHARLES SCHWAB CORPORATION
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 target of various denial of service attacks that have, in certain circumstances,
THE CHARLES SCHWAB CORPORATION
made websites, mobile applications and email unavailable for periods of time. It could take an extended period of time to restore full functionality to the 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.
While
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.
Our investment management operations may subject us to fiduciary or other legal liability for client losses.
Fund and trust management and administration are complex activities and include functions such as recordkeeping and accounting, security pricing, corporate actions, compliance with investment restrictions, daily net asset value computations, account reconciliations, and required distributions to fund shareholders. Failure to properly perform operational tasks, or the misrepresentation of our services and products could subject us to regulatory sanctions, penalties or litigation and result in reputational damage, liability to clients, and the termination of investment management or administration agreements and the withdrawal of assets under our management.
In the management and administration of funds and client accounts, we use quantitative models and other tools and resources to support investment decisions and processes, including those related to risk assessment, portfolio management, trading and hedging activities and product valuations. Errors in the design, function, or underlying assumptions used in these models and tools, particularly if we fail to detect the errors over an extended period, could subject us to claims of a breach of fiduciary duty and potentially large liabilities for make-whole payments, litigation, and/or regulatory fines.
A significant decrease in
the Company’sour liquidity could negatively affect
the Company’sour business
and financial management as well as reduce client confidence in
the Company.Schwab.
Maintaining adequate liquidity is crucial to
theour business operations,
of the Company, including
margin lending, mortgage lending, and transaction settlement,
custody requirements, and lending commitments, among other liquidity needs.
The Company meets itsWe meet our liquidity needs primarily
throughfrom working capital and 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
market conditions or 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
losstransfer of client
assets and accounts, or could cause
the Companyus to fail to satisfy
itsour liquidity
requirements.requirements, including the 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.dividends on CSC’s preferred stock, or return capital to common stockholders. In addition, CSC may need to provide additional funding to such subsidiaries.
Factors which may adversely affect 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, fluctuations in cash
THE CHARLES SCHWAB CORPORATION
held in banking or brokerage client accounts, a dramatic increase in the Company’s clientour 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 availabilityresulting in unanticipated withdrawals of segregatedclient funds.
When available cash
balances.When cash generated by client activity and operating earnings is not sufficient for 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 Company
We may suffer significant losses from
itsour credit exposures.
The Company’s
Our businesses are subject to the risk that a client, counterparty or issuer will fail to perform its contractual obligations, or that the value of collateral held to secure obligations will prove to be inadequate. While
the 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
and futures trading, securities lending, mortgage lending, pledged asset
THE CHARLES SCHWAB CORPORATION
lending, itsour 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.
we sponsor.
When clients purchase securities on margin, borrow on lines of credit collateralized by securities, or trade options or futures,
the Company iswe are subject to the risk that clients may default on their obligations when the value of the securities and cash in their accounts falls below the amount of clients’ indebtedness. Abrupt changes in securities valuations and the failure of clients to meet margin calls could result in substantial losses.
The Company has
We have exposure to credit risk associated with
its securities available for sale and securities held to maturity portfolios, which include U.S. agency and non-agency mortgage-backed securities, asset-backed securities, corporate debt securities, U.S. agency notes, certificates of deposit, and commercial paper among 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.quality. Loss of value of securities available for sale and securities held to maturity can negatively affect earnings if management determines that such securities are other than temporarily impaired. The evaluation of whether other-than-temporary impairment (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.
Our bank loans primarily consist of First Mortgages, HELOCs, and PALs. Increases in delinquency and default rates, housing and stock price declines, increases in the unemployment rate, and other economic factors can result in charges for loan loss reserves and write downs on such loans.
Heightened credit exposures to specific counterparties or instruments (concentration risk) can increase the Company’sour risk of loss. Examples include:
Large positions in financial instruments collateralized by assets with similar economic characteristics or in securities of a single issuer or industry;
Mortgage loans and HELOCs to banking clients which are secured by properties in the
Company’s credit concentration risk include: | ·
| | large positions in financial instruments collateralized by assets with similar economic characteristics or in securities of a single issuer or industry;
|
same geographic region; and | ·
| | mortgage loans and HELOCs to banking clients which are secured by properties in the same geographic region; and
|
Client margins, options or futures, pledged assets, and securities lending activities collateralized by or linked to securities of a single issuer, index, or industry. | ·
| | 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 sponsors
We sponsor a number of proprietary money market mutual funds and other proprietary funds. Although the 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 fundone or more
THE CHARLES SCHWAB CORPORATION
funds in
itsour financial statements. If
the Company chosewe choose 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
THE CHARLES SCHWAB CORPORATION
the 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.
The financial services industry faces
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.
Litigation and arbitration claims include those brought by
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.
THE CHARLES SCHWAB CORPORATION
Actions brought against the 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 and periods of heightened volatility, 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 relies
We rely on outsourced service providers to perform key functions.
The Company relies
We rely on external service providers to perform certain key technology, processing, servicing, and support functions. These service providers face technology, operating, business, and economic risks, and any significant failures by them, including the improper use or disclosure of
the Company’sour confidential client, employee, or company information, could cause
the Companyus to incur losses and could harm
the Company’sSchwab’s reputation. An interruption in or the cessation of service by any external service provider as a result of systems failures, capacity constraints, financial difficulties or for any other reason, and
the Company’sour inability to make alternative arrangements in a timely manner could disrupt
the Company’sour operations, impact
the Company’sour ability to offer certain products and services, and result in financial losses to
the Company.us. Switching to an alternative service provider may require a transition period and result in less efficient operations.
Potential strategic transactions could have a negative impact on
the Company’sour financial position.
The Company evaluates
We evaluate potential strategic transactions, including business combinations, acquisitions, and dispositions. Any such transaction could have a material impact on
the Company’sour financial position, results of operations, or cash flows. The process of evaluating, negotiating, and effecting any such strategic transaction may divert management’s attention from other business concerns, and might cause the loss of key clients, employees, and business partners. Moreover, integrating businesses and systems may result in unforeseen expenditures as well as numerous risks and uncertainties, including the need to integrate operational, financial, and management information systems and management controls, integrate relationships with clients and business partners, and manage facilities and employees in different geographic areas. In addition, an acquisition may cause
the Companyus to assume liabilities or become subject to litigation or regulatory proceedings. Further,
the Companywe may not realize the anticipated benefits from an acquisition, and any future acquisition could be dilutive to
the Company’sour current stockholders’ percentage ownership or to earnings per common
share.The Company’sshare (EPS).
Our acquisitions and dispositions are typically subject to closing conditions, including regulatory approvals and the absence of material adverse changes in the business, operations or financial condition of the entity being acquired or sold. To the extent
the Company enterswe enter into an agreement to buy or sell an entity, there can be no guarantee that the transaction will close when expected, or at all. If a material transaction does not close,
the Company’sour stock price could decline.
The Company’s
THE CHARLES SCHWAB CORPORATION
Our industry is characterized by aggressive price competition.
The Company
We continually
monitors itsmonitor our pricing in relation to competitors and periodically
adjustsadjust trade commission rates, interest rates on deposits and loans, fees for advisory services,
expense ratios on mutual funds and ETFs, and other
fee structurespricing to enhance
itsour competitive position. Increased price competition from other financial services firms
to attract clients, such as reduced commissions,
to attract trading volume or higher deposit rates,
to attract client cash balances,or reduced mutual fund or ETF expense ratios, 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 faces
We face competition in hiring and retaining qualified
employees, especially for employees who are key to the Company’s ability to build and enhance client relationships.employees.
The market for
quality professionals and otherqualified personnel in
the Company’sour business is highly competitive.
Competition is 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.
THE CHARLES SCHWAB CORPORATION
The 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’s
Our stock price has fluctuated historically, and may continue to fluctuate.
The Company’s
Our stock price can be volatile. Among the factors that may affect the volatility of
the Company’sour stock price are the following:
| ·
| | 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;
|
| ·
| | the announcement of new products, services, acquisitions, or dispositions by the Company or its competitors; and
|
Our exposure to changes in interest rates; | ·
| | 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.
|
Speculation in the investment community or the press about, or actual changes in, our competitive position, organizational structure, executive team, operations, financial condition, financial reporting and results, expense discipline, or strategic transactions;The announcement of new products, services, acquisitions, or dispositions by us or our competitors; and
Increases or decreases in revenue or earnings, changes in earnings estimates by the investment community, and variations between estimated financial results and actual financial results.
Changes in the stock market generally, or as it concerns
the Company’sour industry, as well as geopolitical, corporate, regulatory, business, and economic factors may also affect
the Company’sour stock price.
Future sales of CSC’s equity securities may adversely affect the market price of CSC’s common stock and result in dilution.
CSC’s certificate of incorporation authorizes CSC’s Board of Directors, to, among other things, to issue additional shares of common or preferred stock or securities convertible or exchangeable into equity securities, without stockholder approval.
CSC may issue additional equity or convertible securities to raise additional capital or for other purposes. The issuance of any additional equity or convertible securities could be substantially dilutive to holders of CSC’s common stock and may adversely affect the market price of CSC’s common stock.
| |
Item 1B.
| Unresolved Securities and Exchange Commission Staff Comments
|
Item 1B. Unresolved Staff Comments
THE CHARLES SCHWAB CORPORATION
Item 2. Properties
A summary of
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.
| | | | |
December 31, 2015 | Square Footage |
(amounts in thousands) | Leased | | Owned | |
Location | | | | |
Corporate office space: | | | | |
San Francisco, CA (1) | 772 | | - | |
Service and other office space: | | | | |
Denver, CO | 137 | | 726 | |
Phoenix, AZ | 28 | | 721 | |
Austin, TX | 299 | | 185 | |
Indianapolis, IN | - | | 275 | |
Orlando, FL | 148 | | - | |
Richfield, OH | - | | 117 | |
El Paso, TX | - | | 105 | |
Chicago, IL | 83 | | - | |
(1)
| Includes the Company’s headquarters.
|
|
| | | | |
| December 31, 2018 | Square Footage |
| (amounts in thousands) | Leased | Owned |
| Location | | |
| Corporate headquarters: | | |
| San Francisco, CA | 662 |
| — |
|
| Service and other office space: | | |
| Phoenix, AZ | 28 |
| 728 |
|
| Denver, CO | — |
| 731 |
|
| Austin, TX | 83 |
| 452 |
|
| Dallas, TX | 318 |
| — |
|
| Indianapolis, IN | — |
| 161 |
|
| Orlando, FL | 159 |
| — |
|
| Chicago, IL | 145 |
| — |
|
| Richfield, OH | — |
| 117 |
|
| El Paso, TX | — |
| 105 |
|
THE CHARLES SCHWAB CORPORATION
Substantially all of the Company’sour branch offices are located in leased premises. The corporate headquarters, data centers, offices, and service centers support both of the Company’sour segments.
For a discussion of legal proceedings, see
“ItemItem 8 –
Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – 15. Commitments and Contingencies.”Note 14.
| |
| Item 4. | Mine Safety Disclosures |
THE CHARLES SCHWAB CORPORATION
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters,and Issuer Purchases of Equity Securities Item 5.
| Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
|
| Purchases of Equity Securities
|
CSC’s common stock is listed on The New York Stock Exchange under the ticker symbol SCHW. The number of common stockholders of record as of January
29, 2016,31, 2019, was
6,609.5,803. The closing market price per share on that date was
$25.53. The quarterly high and low sales prices for CSC’s common stock and the other information required to be furnished pursuant to this item are included in “Item 8 – Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – 20. Employee Incentive, Retirement, and Deferred Compensation Plans and 26. Quarterly Financial Information (Unaudited).”
$46.77.
The following graph shows a five-year comparison of cumulative total returns for CSC’s common stock, the
Standard & Poor’s 500 Index, and the Dow Jones U.S. Investment Services
Index, and the Standard & Poor’s 500 Index, each of which assumes an initial investment of $100 and reinvestment of dividends.
| | | | | | | | | | | | | | | | | | | | | | | | |
December 31, | | | 2010 | | | 2011 | | | 2012 | | | 2013 | | | 2014 | | | 2015 |
The Charles Schwab Corporation | | $ | 100 | | | $ | 67 | | | $ | 87 | | | $ | 159 | | | $ | 187 | | | $ | 205 | |
Standard & Poor’s 500 Index | | $ | 100 | | | $ | 102 | | | $ | 118 | | | $ | 157 | | | $ | 178 | | | $ | 181 | |
Dow Jones U.S. Investment Services Index | | $ | 100 | | | $ | 66 | | | $ | 83 | | | $ | 135 | | | $ | 154 | | | $ | 154 | |
- 18 -
|
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, | 2013 |
| | 2014 |
| | 2015 |
| | 2016 |
| | 2017 |
| | 2018 |
|
| The Charles Schwab Corporation | $ | 100 |
| | $ | 117 |
| | $ | 129 |
| | $ | 156 |
| | $ | 204 |
| | $ | 167 |
|
| Standard & Poor’s 500 Index | $ | 100 |
| | $ | 114 |
| | $ | 115 |
| | $ | 129 |
| | $ | 157 |
| | $ | 150 |
|
| Dow Jones U.S. Investment Services Index | $ | 100 |
| | $ | 115 |
| | $ | 114 |
| | $ | 144 |
| | $ | 180 |
| | $ | 159 |
|
THE CHARLES SCHWAB CORPORATION
Issuer Purchases of Equity Securities
At December 31, 2015, 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
On October 25, 2018, CSC publicly announced that its Board of Directors each coveringauthorized the repurchase of up to $500 million$1.0 billion of common stock, that werewhich was completed as of December 31, 2018 (see Item 8 – Note 17).
On January 30, 2019, CSC publicly announced
bythat its Board of Directors authorized the
Company on April 25, 2007, and March 13, 2008.repurchase of up to $4.0 billion of common stock. The
remaining authorizations doauthorization does not have an expiration date.
The following table summarizes purchases made by or on behalf of CSC of its common stock for each calendar month in the fourth quarter of
2015:2018 (in millions, except number of shares, which are in thousands, and per share amounts): | | | | | | | | |
| | Total Number of | | Average | |
| | Shares Purchased | | Price Paid | |
Month | | (in thousands) | | per Share | |
October: | | | | | | | | |
Employee transactions (1) | | | 17 | | | $ | 28.17 | |
November: | | | | | | | | |
Employee transactions (1) | | | 1,101 | | | $ | 31.07 | |
December: | | | | | | | | |
Employee transactions (1) | | | 5 | | | $ | 33.67 | |
Total: | | | | | | | | |
Employee transactions (1) | | | 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 | | Average
Price Paid
per Share | | Total Number of Shares Purchased as Part of Publicly Announced Program | | Approximate Dollar Value of Shares That May Yet Be Purchased Under the Publicly Announced Program (2) |
| October: | | | | | | | |
| Share repurchase program | 3,831 |
| | $ | 45.02 |
| | 3,831 |
| | $ | 827 |
|
Employee transactions (1) | 5 |
| | $ | 49.67 |
| | N/A |
| | N/A |
|
| November: | | | | | | | |
| Share repurchase program | 11,862 |
| | $ | 47.03 |
| | 11,862 |
| | $ | 269 |
|
Employee transactions (1) | 651 |
| | $ | 46.59 |
| | N/A |
| | N/A |
|
| December: | | | | | | | |
| Share repurchase program | 6,643 |
| | $ | 40.52 |
| | 6,643 |
| | $ | — |
|
Employee transactions (1) | 269 |
| | $ | 45.86 |
| | N/A |
| | N/A |
|
| Total: | | | | | | | |
| Share repurchase program | 22,336 |
| | $ | 44.75 |
| | 22,336 |
| | $ | — |
|
Employee transactions (1) | 925 |
| | $ | 46.40 |
| | N/A |
| | N/A |
|
(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.
(2) All repurchases under the 2018 share repurchase program authorization were completed by the end of 2018.
THE CHARLES SCHWAB CORPORATION
| |
| Item 6. | Selected Financial Data |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Selected Financial and Operating Data | | | | | | | | | | | | | | | | | | | | | | | | | |
(In Millions, Except Per Share Amounts, Ratios, or as Noted) | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Growth Rates | | | | | | | | | | | | | | | | | | | | |
| Compounded | | Annual | | | | | | | | | | | | | | | | | | | | |
| 4-Year (1) | | 1-Year | | | | | | | | | | | | | | | | | | | | |
| 2011-2015 | | 2014-2015 | | | 2015 | | | 2014 | | | 2013 | | | 2012 | | | 2011 |
Results of Operations | | | | | | | | | | | | | | | | | | | | | | | | | |
Net revenues | 8 | % | | 5 | % | | $ | 6,380 | | | $ | 6,058 | | | $ | 5,435 | | | $ | 4,883 | | | $ | 4,691 | |
Expenses excluding interest | 6 | % | | 4 | % | | $ | 4,101 | | | $ | 3,943 | | | $ | 3,730 | | | $ | 3,433 | | | $ | 3,299 | |
Net income | 14 | % | | 10 | % | | $ | 1,447 | | | $ | 1,321 | | | $ | 1,071 | | | $ | 928 | | | $ | 864 | |
Net income available to common stockholders | 12 | % | | 8 | % | | $ | 1,364 | | | $ | 1,261 | | | $ | 1,010 | | | $ | 883 | | | $ | 864 | |
Earnings per common share: | | | | | | | | | | | | | | | | | | | | | | | | | |
Basic | 10 | % | | 8 | % | | $ | 1.04 | | | $ | .96 | | | $ | .78 | | | $ | .69 | | | $ | .70 | |
Diluted | 10 | % | | 8 | % | | $ | 1.03 | | | $ | .95 | | | $ | .78 | | | $ | .69 | | | $ | .70 | |
Dividends declared per common share | - | | | - | | | $ | .24 | | | $ | .24 | | | $ | .24 | | | $ | .24 | | | $ | .24 | |
Weighted average common shares outstanding: | | | | | | | | | | | | | | | | | | | | | | | | | |
Basic | 2 | % | | 1 | % | | | 1,315 | | | | 1,303 | | | | 1,285 | | | | 1,274 | | | | 1,227 | |
Diluted | 2 | % | | 1 | % | | | 1,327 | | | | 1,315 | | | | 1,293 | | | | 1,275 | | | | 1,229 | |
Asset management and administration fees as a | | | | | | | | | | | | | | | | | | | | | | | | | |
percentage of net revenues | | | | | | | | 42 | % | | | 42 | % | | | 43 | % | | | 42 | % | | | 41 | % |
Net interest revenue as a percentage of net revenues | | | | | | | | 40 | % | | | 38 | % | | | 36 | % | | | 36 | % | | | 37 | % |
Trading revenue as a percentage of net revenues | | | | | | | | 14 | % | | | 15 | % | | | 17 | % | | | 18 | % | | | 20 | % |
Effective income tax rate | | | | | | | | 36.5 | % | | | 37.5 | % | | | 37.2 | % | | | 36.0 | % | | | 37.9 | % |
Performance Measures | | | | | | | | | | | | | | | | | | | | | | | | | |
Net revenue growth | | | | | | | | 5 | % | | | 11 | % | | | 11 | % | | | 4 | % | | | 10 | % |
Pre-tax profit margin | | | | | | | | 35.7 | % | | | 34.9 | % | | | 31.4 | % | | | 29.7 | % | | | 29.7 | % |
Return on average common stockholders’ equity | | | | | | | | 12 | % | | | 12 | % | | | 11 | % | | | 11 | % | | | 12 | % |
Financial Condition (at year end) | | | | | | | | | | | | | | | | | | | | | | | | | |
Total assets | 14 | % | | 19 | % | | $ | 183,718 | | | $ | 154,642 | | | $ | 143,642 | | | $ | 133,617 | | | $ | 108,553 | |
Long-term debt | 10 | % | | 52 | % | | $ | 2,890 | | | $ | 1,899 | | | $ | 1,903 | | | $ | 1,632 | | | $ | 2,001 | |
Stockholders’ equity (2) | 15 | % | | 14 | % | | $ | 13,402 | | | $ | 11,803 | | | $ | 10,381 | | | $ | 9,589 | | | $ | 7,714 | |
Assets to stockholders’ equity ratio | | | | | | | | 14 | | | | 13 | | | | 14 | | | | 14 | | | | 14 | |
Debt to total capital ratio | | | | | | | | 18 | % | | | 14 | % | | | 15 | % | | | 15 | % | | | 21 | % |
Employee Information | | | | | | | | | | | | | | | | | | | | | | | | | |
Full-time equivalent employees (in thousands, | | | | | | | | | | | | | | | | | | | | | | | | | |
at year end) | 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.
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Selected Financial and Operating Data | | | | | | | | | | | | | |
| (In Millions, Except Per Share Amounts, Ratios, or as Noted) | | | | | | | | | | | | |
| | Growth Rates | | | | | | | | | | |
| | Compounded 4-Year 2014-2018 (1) | | Annual
1-Year
2017-2018 | | 2018 | | 2017 | | 2016 | | 2015 | | 2014 |
| Results of Operations | | | | | | | | | | | | | |
| Net revenues | 14% | | 18% | | $ | 10,132 |
| | $ | 8,618 |
| | $ | 7,478 |
| | $ | 6,380 |
| | $ | 6,058 |
|
| Expenses excluding interest | 9% | | 12% | | $ | 5,570 |
| | $ | 4,968 |
| | $ | 4,485 |
| | $ | 4,101 |
| | $ | 3,943 |
|
| Net income | 28% | | 49% | | $ | 3,507 |
| | $ | 2,354 |
| | $ | 1,889 |
| | $ | 1,447 |
| | $ | 1,321 |
|
| Net income available to common stockholders | 27% | | 53% | | $ | 3,329 |
| | $ | 2,180 |
| | $ | 1,746 |
| | $ | 1,364 |
| | $ | 1,261 |
|
| Earnings per common share: | | | | | | | | | | | | | |
| Basic | 27% | | 52% | | $ | 2.47 |
| | $ | 1.63 |
| | $ | 1.32 |
| | $ | 1.04 |
| | $ | .96 |
|
| Diluted | 27% | | 52% | | $ | 2.45 |
| | $ | 1.61 |
| | $ | 1.31 |
| | $ | 1.03 |
| | $ | .95 |
|
| Dividends declared per common share | 18% | | 44% | | $ | .46 |
| | $ | .32 |
| | $ | .27 |
| | $ | .24 |
| | $ | .24 |
|
| Weighted average common shares outstanding: | | | | | | | | | | | | | |
| Basic | 1% | | 1% | | 1,348 |
| | 1,339 |
| | 1,324 |
| | 1,315 |
| | 1,303 |
|
| Diluted | 1% | | 1% | | 1,361 |
| | 1,353 |
| | 1,334 |
| | 1,327 |
| | 1,315 |
|
| Net interest revenue as a percentage of net revenues | | | | | 57 | % | | 50 | % | | 44 | % | | 40 | % | | 38 | % |
Asset management and administration fees as a
percentage of net revenues | | | | | 32 | % | | 39 | % | | 41 | % | | 41 | % | | 42 | % |
| Trading revenue as a percentage of net revenues | | | | | 8 | % | | 8 | % | | 11 | % | | 14 | % | | 15 | % |
| Effective income tax rate | | | | | 23.1 | % | | 35.5 | % | | 36.9 | % | | 36.5 | % | | 37.5 | % |
| Performance Measures | | | | | | | | | | | | | |
| Net revenue growth | | | | | 18 | % | | 15 | % | | 17 | % | | 5 | % | | 11 | % |
| Pre-tax profit margin | | | | | 45.0 | % | | 42.4 | % | | 40.0 | % | | 35.7 | % | | 34.9 | % |
| Return on average common stockholders’ equity | | | | | 19 | % | | 15 | % | | 14 | % | | 12 | % | | 12 | % |
Financial Condition (at year end) | | | | | | | | | | | | | |
| Total assets | 18% | | 22% | | $ | 296,482 |
| | $ | 243,274 |
| | $ | 223,383 |
| | $ | 183,705 |
| | $ | 154,635 |
|
| Short-term borrowings | N/M | | (100)% | | — |
| | $ | 15,000 |
| | — |
| | — |
| | — |
|
| Long-term debt | 38% | | 45% | | $ | 6,878 |
| | $ | 4,753 |
| | $ | 2,876 |
| | $ | 2,877 |
| | $ | 1,892 |
|
| Preferred stock | 34% | | — | | $ | 2,793 |
| | $ | 2,793 |
| | $ | 2,783 |
| | $ | 1,459 |
| | $ | 872 |
|
| Total stockholders’ equity | 15% | | 12% | | $ | 20,670 |
| | $ | 18,525 |
| | $ | 16,421 |
| | $ | 13,402 |
| | $ | 11,803 |
|
| Assets to stockholders’ equity ratio | | | | | 14 |
| | 13 |
| | 14 |
| | 14 |
| | 13 |
|
Debt to total capital ratio (2) | | | | | 25 | % | | 52 | % | | 15 | % | | 18 | % | | 14 | % |
| Employee Information | | | | | | | | | | | | | |
Full-time equivalent employees (in thousands,
at year end) | 8% | | 11% | | 19.5 |
| | 17.6 |
| | 16.2 |
| | 15.3 |
| | 14.6 |
|
(1) The Compounded 4-year growth rate is computed using the formula: Compound annual growth rate = (Ending Value / Beginning Value) .25– 1.
(2) The Debt to total capital ratio is computed using the formula: Total Debt (short and long-term) / (Total Debt + Stockholders’ Equity).
N/M Not meaningful.
THE CHARLES SCHWAB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)
| |
Item 7. |
Management’s Discussion and Analysisof Financial Condition and Results of Operations |
| Operations
|
FORWARD-LOOKING STATEMENTS
In addition to historical information, this Annual Report on Form 10-K contains “forward-looking statements” within the meaning of Section 27A of the Securities Act, and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements are identified by words such as “believe,” “anticipate,” “expect,” “intend,” “plan,” “will,” “may,” “estimate,” “appear,”
“aim,” “target,” “could,” “would,
” “continue,” and other similar expressions. In addition, any statements that refer to expectations, projections, or other characterizations of future events or circumstances are forward-looking statements.
These forward-looking statements, which reflect management’s beliefs, objectives, and expectations as of the date hereof, are estimates based on the best judgment of
the 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”)Maximizing our market valuation and stockholder returns over time; our belief that developing trusted relationships will translate into more client assets which drives revenue and, along with expense discipline and thoughtful capital management, generates earnings growth and builds stockholder value; 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 Item 8 – Note 14);
|
| ·
| | 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”)Effective capital management supporting business growth and capital returns to stockholders (see Overview 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 adjustment of rates paid on client-related liabilities; the stability, rate sensitivity, and duration of client-related liabilities; managing 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);
|
| ·
| | 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”)2019 capital expenditures (see Total Expenses Excluding Interest 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”)Sources of liquidity, capital, and level of dividends (see Liquidity Risk in Part II, Item 7); and
|
| ·
| | 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”).
|
Capital ratios (see Regulatory Capital Requirements in Part II, Item 7);The impact of changes in management’s estimates on Schwab’s results of operations (see Critical Accounting Estimates in Part II, Item 7);
The expected impact of new accounting standards not yet adopted (see Item 8 – Note 2); and
The impact of changes in the likelihood of indemnification and guarantee payment obligations on Schwab’s results of operations (see Item 8 – Note 14).
Achievement of the expressed beliefs, objectives and expectations described in these statements is subject to certain risks and uncertainties that could cause actual results to differ materially from the expressed beliefs, objectives, and expectations. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this Annual Report on Form 10-K or, in the case of documents incorporated by reference, as of the date of those documents.
Important factors that may cause actual results to differ include, but are not limited to:
| ·
| | changes in general economic and financial market conditions;
|
| ·
| | changes in revenues and profit margin due to changes in interest rates;
|
General market conditions, including the level of interest rates, equity valuations and trading activity; | ·
| | adverse developments in litigation or regulatory matters;
|
Our ability to attract and retain clients, develop trusted relationships, and grow client assets; | ·
| | the extent of any charges associated with litigation and regulatory matters;
|
Client use of our advisory solutions and other products and services; | ·
| | amounts recovered on insurance policies;
|
The level of client assets, including cash balances; | ·
| | the Company’s ability to attract and retain clients and grow client assets and relationships;
|
Competitive pressure on pricing, including deposit rates;- 21 -
Client sensitivity to interest rates;
Timing and amount of transfers to bank sweep deposits;
Capital and liquidity needs and management;
Our ability to manage expenses;
Our ability to develop and launch new products, services, and capabilities, as well as implement infrastructure, in a timely and successful manner;
The timing of campus expansion work and technology projects;
The effect of adverse developments in litigation or regulatory matters and the extent of any related charges; and
Potential breaches of contractual terms for which we have indemnification and guarantee obligations.
THE CHARLES SCHWAB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)
| ·
| | the Company’s 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 sale and securities held to maturity;
|
| ·
| | 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;
|
| ·
| | 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.
|
Certain of these factors, as well as general risk factors affecting the Company, are discussed in greater detail in this Annual Report on Form 10-K, including “Item 1A – Risk Factors.”
Factors in Part I, Item 1A.
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)
Active brokerage accounts: Brokerage accounts with balances or activity within the preceding eight months.270 days.
Accumulated Other Comprehensive Income (AOCI): A component of stockholders’ equity which includes unrealized gains and losses on AFS securities and net gains or losses associated with pension obligations.
Asset-backed securities: Debt securities backed by financial assets such as loans or receivables.
Assets receiving ongoing advisory services: Client relationshipsMarket value of all client assets custodied at the Company under the guidance of an independent advisors and assetsadvisor or enrolled in one of the Company’sSchwab’s retail or other advisory solutions.Average client assets: The daily average client asset balance for the period.
Basel III: Global regulatory standards on bank capital adequacy and liquidity issued by the Basel Committee on Banking Supervision.
Basis point: One basis point equals 1/100th100th 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.
Client assets: The market value, as of the end of the reporting period, of all client assets 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.
Client cash as a percentage of client assets: Calculated as money market fund balances, bank deposits, Schwab One® balances, and certain cash equivalents as a percentage of client assets.
Clients’ daily average trades: Includes daily average revenue trades by clients, trades by clients in asset-based pricing relationships, and all commission-free trades, 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.
Common Equity Tier 1(CET1) 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. Beginning in 2019, Schwab must include AOCI in CET1 Capital.
Common Equity Tier 1 (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 securitiesas of a single issuer or particular industry or geographical area.the end of the period.
Core net new client assets: Net new client assets before significant one-time inflows or outflows, such as acquisitions/divestitures or extraordinary flows (generally greater than $10 billion) mutual fund clearing transfers.Credit risk: The potential for loss duerelating to a borrower, counterparty, or issuer failingspecific client. These flows may span multiple reporting periods.
Customer Protection Rule: Refers to perform its contractual obligations.Rule 15c3-3 of the Securities Exchange Act of 1934.
Daily average revenue trades:Average Revenue Trades (DARTs): Total revenue trades during a certain period, divided by the number of trading days in that period. Revenue trades include all client trades that generate trading revenue (i.e., commission revenue or principal transaction revenue).
Debt to total capital ratio: Calculated as long-termtotal debt divided by stockholders’ equity and long-termtotal debt.
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)
Delinquency roll rates: The rates at which loans transition through delinquency stages, ultimately resulting in a loss. The CompanySchwab considers a loan to be delinquent if it is 30 days or more past due.
Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank):Regulatory reform legislation 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.
Duration: Duration is typically used to measure the expected change in value of a financial instrument for a 1% change in interest rates, expressed in years.
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)
Final Regulatory Capital Rules: Refers to the regulatory capital rules issued by U.S. banking agencies 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.
First Mortgages:mortgages: Refers to first lien residential real estate mortgage loans, which include two loan classes: first mortgages and purchased first mortgages.loans.
Full-time equivalent employees: 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.
High Quality Liquid Assets (HQLA): Assets with a high potential to be converted easily and excludes employees of outsourced service providers.quickly into cash.Interest rate risk: The risk to earnings or capital arising from changes in interest rates.
Interest-bearing liabilities: Includes bank deposits, payables to brokerage clients, short-term borrowings, and long-term debt on which the CompanySchwab pays interest.
Interest-earning assets: Includes cash and cash equivalents, cash and investments segregated, broker-related receivables, receivables from brokerage clients, investment securities, available for sale, securities held to maturity, and bank loans.loans on which Schwab earns interest.
Investment grade: Defined as a rating equivalent to a Moody’s Investors Service (Moody’s) rating of “Baa” or higher, or a Standard & Poor’s Rating Group (Standard & Poor’s) or Fitch Ratings, Ltd (Fitch) rating of “BBB-” or higher.
Liquidity 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.
Loan-to-value Loan-To-Value(LTV)ratio: 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.
Margin loans: 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.
Master netting arrangement: An agreement between two counterparties that have multiple contracts with each other that provides for net settlement of all contracts through a single cash payment in the event of default or termination of any one contract.
Mortgage-backed securities: A type of asset-backed security that is secured by a mortgage or group of mortgages.
Net interest margin: Net interest revenue (annualized for interim periods) divided by average interest-earning assets.
Net new client assets: Total inflows of client cash and securities to 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.
Net Stable Funding Ratio (NSFR): Measures an organization’s “available” amount of stable funding relative to new and existing clients.its “required” amount of stable funding over a one-year time horizon.
New brokerage accounts: All brokerage accounts opened during the period, as well as any accounts added via acquisition.
Nonperforming assets: The total of nonaccrual loans and other real estate owned.
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)
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.
Order flow revenue: Net compensation received from markets and firms to which Schwab and optionsXpress, Inc. sendCS&Co sends equity and options orders. ReflectsThe amount reflects rebates received for certain types of orders, minusless fees paid for execution of orders for whichwhere exchange fees or other charges apply.
Pledged Asset Line® (PAL): A non-purpose revolving line of credit from Schwab BankCSB secured by eligible assets held in a separate pledged assetbrokerage account maintained at Schwab.CS&Co.
Return on average common stockholders’ equity: Calculated as net income available to common stockholders (annualized for interim periods) divided by average common stockholders’ equity.Return on average total assets: Calculated
THE CHARLES SCHWAB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Millions, Except Ratios, or as
net income divided by average total assets for the period.Noted)
Risk-weighted assets: Primarily computedComputed by assigning specific risk-weightings as determined by the regulators to assets and off-balance sheet instruments for capital adequacy calculations.
Tier 1 Capital: The sum of CET1 Capital and additional Tier 1 Capital instruments and related surplus, less applicable adjustments and deductions.
Tier 1 Leverage Ratio: End-of-period Tier 1 capitalCapital divided by adjusted average total consolidated assets at the end offor the quarter.
Trading days: Days in which the markets/exchanges are open for the buying and selling of securities. Early market closures are counted as half-days.
U.S. federal banking agencies: Refers to the 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.
Uniform Net Capital Rule: Refers to Rule 15c3-1 under the Securities Exchange Act of 1934, which specifies minimum capital requirements that are intended to ensure the general financial soundness and liquidity of broker-dealers.broker-dealers at all times.
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)
Management
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), andEPS, return on average common stockholders’ equity,
and the Consolidated Tier 1 Leverage Ratio 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. Results for the years ended December 31,
2015, 2014,2018, 2017, and
2013 are:2016 are as follows: | | | | | | | | | | | | | | | |
| Growth Rate | | | | | | | | | | | | |
| 1-Year | | | | | | | | | | | | |
Year Ended December 31, | 2014-2015 | | | 2015 | | | 2014 | | | 2013 |
Client Metrics: | | | | | | | | | | | | | | | |
Net new client assets (in billions) | | 12 | % | | $ | 139.4 | | | $ | 124.8 | | | $ | 41.6 | |
Core net new client assets (in billions) (1,2) | | 8 | % | | $ | 134.7 | | | $ | 124.8 | | | $ | 140.8 | |
Client assets (in billions, at year end) | | 2 | % | | $ | 2,513.8 | | | $ | 2,463.6 | | | $ | 2,249.4 | |
Average client assets (in billions) | | 6 | % | | $ | 2,531.8 | | | $ | 2,384.0 | | | $ | 2,116.7 | |
New brokerage accounts (in thousands) | | 10 | % | | | 1,070 | | | | 972 | | | | 960 | |
Active brokerage accounts (in thousands, at year end) | | 4 | % | | | 9,769 | | | | 9,386 | | | | 9,093 | |
Assets receiving ongoing advisory services | | | | | | | | | | | | | | | |
(in billions, at year end) | | 2 | % | | $ | 1,253.7 | | | $ | 1,228.1 | | | $ | 1,101.4 | |
Client cash as a percentage of client assets | | | | | | | | | | | | | | | |
(at year end) | | | | | | 13.0 | % | | | 12.3 | % | | | 13.1 | % |
Company Financial Metrics: | | | | | | | | | | | | | | | |
Net revenues | | 5 | % | | $ | 6,380 | | | $ | 6,058 | | | $ | 5,435 | |
Expenses excluding interest | | 4 | % | | | 4,101 | | | | 3,943 | | | | 3,730 | |
Income before taxes on income | | 8 | % | | | 2,279 | | | | 2,115 | | | | 1,705 | |
Taxes on income | | 5 | % | | | 832 | | | | 794 | | | | 634 | |
Net income | | 10 | % | | $ | 1,447 | | | $ | 1,321 | | | $ | 1,071 | |
Preferred stock dividends and other | | 38 | % | | | 83 | | | | 60 | | | | 61 | |
Net income available to common stockholders | | 8 | % | | $ | 1,364 | | | $ | 1,261 | | | $ | 1,010 | |
Earnings per common share – diluted | | 8 | % | | $ | 1.03 | | | $ | .95 | | | $ | .78 | |
Net revenue growth from prior year | | | | | | 5 | % | | | 11 | % | | | 11 | % |
Pre-tax profit margin | | | | | | 35.7 | % | | | 34.9 | % | | | 31.4 | % |
Return on average common stockholders’ equity | | | | | | 12 | % | | | 12 | % | | | 11 | % |
Expenses excluding interest as a percentage of | | | | | | | | | | | | | | | |
average client assets | | | | | | 0.16 | % | | | 0.17 | % | | | 0.18 | % |
| |
(1)
| 2015 excludes an inflow of $6.1 billion to reflect the final impact of the consolidation of its retirement plan recordkeeping platforms, an inflow of $10.2 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.
|
|
| | | | | | | | | | | | | |
| | Growth Rate 1-Year 2017-2018 | | 2018 | | 2017 | | 2016 |
| Client Metrics | | | | | | | |
Net new client assets (in billions) (1) | (43)% | | $ | 133.9 |
| | $ | 233.1 |
| | $ | 125.5 |
|
| Core net new client assets (in billions) | 15% | | $ | 227.8 |
| | $ | 198.6 |
| | $ | 125.5 |
|
| Client assets (in billions, at year end) | (3)% | | $ | 3,252.2 |
| | $ | 3,361.8 |
| | $ | 2,779.5 |
|
| Average client assets (in billions) | 11% | | $ | 3,409.6 |
| | $ | 3,060.2 |
| | $ | 2,614.7 |
|
| New brokerage accounts (in thousands) | 9% | | 1,576 |
| | 1,441 |
| | 1,093 |
|
| Active brokerage accounts (in thousands, at year end) | 8% | | 11,593 |
| | 10,755 |
| | 10,155 |
|
| Assets receiving ongoing advisory services (in billions, at year end) | 1% | | $ | 1,708.5 |
| | $ | 1,699.8 |
| | $ | 1,401.4 |
|
| Client cash as a percentage of client assets (at year end) | | | 12.8 | % | | 10.8 | % | | 13.0 | % |
| Company Financial Metrics | | | | | | | |
| Total net revenues | 18% | | $ | 10,132 |
| | $ | 8,618 |
| | $ | 7,478 |
|
| Total expenses excluding interest | 12% | | 5,570 |
| | 4,968 |
| | 4,485 |
|
| Income before taxes on income | 25% | | 4,562 |
| | 3,650 |
| | 2,993 |
|
| Taxes on income | (19)% | | 1,055 |
| | 1,296 |
| | 1,104 |
|
| Net income | 49% | | $ | 3,507 |
| | $ | 2,354 |
| | $ | 1,889 |
|
| Preferred stock dividends and other | 2% | | 178 |
| | 174 |
| | 143 |
|
| Net income available to common stockholders | 53% | | $ | 3,329 |
| | $ | 2,180 |
| | $ | 1,746 |
|
| Earnings per common share — diluted | 52% | �� | $ | 2.45 |
| | $ | 1.61 |
| | $ | 1.31 |
|
| Net revenue growth from prior year | | | 18 | % | | 15 | % | | 17 | % |
| Pre-tax profit margin | | | 45.0 | % | | 42.4 | % | | 40.0 | % |
| Return on average common stockholders’ equity | | | 19 | % | | 15 | % | | 14 | % |
| Expenses excluding interest as a percentage of average client assets | | | 0.16 | % | | 0.16 | % | | 0.17 | % |
| Consolidated Tier 1 Leverage Ratio (at year end) | | | 7.1 | % | | 7.6 | % | | 7.2 | % |
(1) 2018 includes outflows of $93.9 billion from certain mutual fund clearing services clients. 2017 includes inflows of $34.5 billion from certain mutual fund clearing services clients.
2018 Compared to 2017
Net income increased by $1.2 billion, or 49%, in 2018, driven primarily by business momentum, a supportive economic environment for much of the year, and lower corporate tax rates. Continued execution of our ‘Through Clients’ Eyes’ strategy helped us succeed with clients. In 2018, clients opened 1.6 million new brokerage accounts, helping bring active brokerage accounts to 11.6 million at the end of the year, and core net new assets totaled $227.8 billion, up 15% from the 2017 total. Our strong net new assets largely offset lower market valuations, and we ended 2018 at $3.25 trillion in total client assets.
Total net revenue grew by $1.5 billion, or 18%, in 2018 primarily due to an increase of $1.5 billion, or 36%, in net interest revenue. The
Company’s financial results are highly correlatedFed raised the overnight federal funds target interest rate four times in 2018 for a total of 100 basis points. The growth of total net revenue resulted from higher interest rates due to the
general overall strength of economic conditionsFed’s rate normalization, 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 ability to generate net interest revenue, as interest-earning assets and funding sources are sensitive to changes in the rate environment. To the extent short-term interest rates remain at current low levels, the Company’s net interest revenue will continue to be constrained, even as growth in average balances helps to
also from higher - 26 -
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)
interest-earning assets, which reflect both client cash allocations and the transfer of sweep money market funds to bank and broker-dealer sweep. As we progressed with these transfers, the corresponding money market fund asset management and administration fee revenue naturally declined, yet positive inflows in advice solutions, Schwab equity and bond funds and ETFs, and other third-party mutual funds and ETFs kept asset management fees at $3.2 billion, limiting the decrease to 5% from 2017. Record trading activity from our clients resulted in trading revenue reaching $763 million, an increase such revenue.of 17% from the prior year.
Our increase in total expenses excluding interest of $602 million, or 12%, reflected our 2018 investments to support and fuel our business growth, including hiring additional client-facing and other employees and technology project spending, as well as an increase in marketing and a special stock award of $36 million to our employees. Even with these increases, expenses as a percentage of client assets remained consistent at 16 basis points, and pre-tax income increased 25% to $4.6 billion in 2018, resulting in a pre-tax profit margin of 45.0%. As a result of the Tax Cuts and Jobs Act of 2017 (the Tax Act), taxes on income decreased 19% in 2018, resulting in an effective tax rate of 23.1%. Overall, we generated a 19% return on equity and diluted EPS of $2.45 for the year.
During 2018, the Board of Directors raised the quarterly cash dividend 63% to $0.13 per share and authorized a $1.0 billion Share Repurchase Program, which we completed during the fourth quarter. These actions reflected the Company’s strong financial performance and our confidence in its long-term success; they also demonstrated that effective capital management at Schwab can support both healthy business growth and more meaningful capital returns to stockholders.
2017 Compared to 2016
Net income available to common stockholders rose in 2017 by $434 million, or 25%, from the prior year, resulting in diluted EPS of $1.61 in 2017 – an increase of 23% compared to $1.31 in 2016. Net revenues improved by $1.1 billion, or 15%, while expenses excluding interest increased $483 million, or 11%, compared to 2016.
Our steady focus on operating ‘through clients’ eyes’ and our goal to continually challenge the status quo helped Schwab achieve another strong growth year in 2017. Clients opened 1.4 million new brokerage accounts in 2017 and trusted Schwab with $198.6 billion of core net new assets in 2017, up 58% from 2016. Total assets receiving ongoing advisory services grew 21% in 2017 to $1.70 trillion. Our success with clients was bolstered by strength in the equity markets – the Standard & Poor’s 500® Index (S&P 500) finished 2017 up 19% from the prior year end. Also in 2017, the Federal Reserve increased the overnight federal funds target interest rate three times for a total of 75 basis points. Strong client activity and the positive economic environment resulted in total client assets rising to $3.36 trillion as of December 31, 2017 – a 21% increase since the end of 2016.
Schwab’s 2017 financial results demonstrate the power of our financial formula working as designed: our robust business growth supported strong revenue growth through multiple sources in 2017, which we combined with continued expense discipline to drive significantly improved profitability.
Net revenues grew by 15% in 2017 compared to 2016 through contributions from our two largest revenue sources. Net interest revenue
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 2014
In 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.
Consistent with our expectations, expenses grew 11% in 2017 compared to the
same period in 2014. The average 10-year U.S. Treasury yield during 2015prior year. This increase was
2.13%, 40 basis points lower than the average yield during 2014.Strong client momentum continued as the Company’s innovative, full-service model continued to resonate with clients and drive 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 Company added 1.1 million new brokerage accounts to its client base during 2015, up 10% compared to 2014. Active brokerage accounts ended 2015 at 9.8 million, up 4% on a year-over-year basis. Faced with economic uncertainty and the resulting market volatility, investors increasingly turned to advice offerings throughout the year. Over 155,000 accounts enrolled in one of the Company’s retail advisory solutions during 2015, 60% more than the year-earlier period, and total accounts using these solutions reached 560,000, up 14% year-over-year.
During 2015, the Company’s net revenues increased 5% compared to 2014 primarily due to increaseshigher 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 net interest revenue andour asset management business.
This combination of revenue growth and administration fees,expense discipline drove the pre-tax profit margin to 42.4% – an increase of 240 basis points over the prior year. Earnings before income taxes rose 22% to $3.7 billion in 2017 compared to $3.0 billion in the prior year.
The effective tax rate in 2017 was 35.5% compared to 36.9% in 2016 reflecting the benefit from the adoption of new accounting standards requiring the recognition of a portion of tax deductions related to equity compensation partially offset by
a decrease in trading revenue. | ·
| | Net interest revenue increased primarily due to higher client cash balances generating increased interest-earningthe remeasurement of deferred tax 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 effecttax adjustments associated with the 2017 enactment of market conditions, strong business growth, and the Company’s overall spending discipline resulted in a pre-tax profit margin of 35.7% in 2015.
2014 Compared to 2013
The Company operated in an environment of mixed market conditions during 2014 compared to 2013, as the Nasdaq Composite Index, Standard & Poor’s 500 Index, and Dow Jones Industrial Average showed periods of volatility before
Tax Act.
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)
ending the year
Subsequent Event
On January 30, 2019, CSC publicly announced that its Board of Directors authorized a new Share Repurchase Program to repurchase up 13%, 11%,to $4.0 billion of common stock, and 8%, respectively. The federal funds target rate remained unchanged atdeclared 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 result 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’ equity was 12% in 2014.
Overall, net revenues increased by 11% in 2014 from 2013, primarily due to increases in net interest revenue, asset management and administration fees, and other revenue.
| ·
| | Net 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)four cent, or 31%, 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 andquarterly cash dividend to $0.17 per common share. The share repurchase authorization does not have an increase in professional services expense.
expiration date.
Current Regulatory Environment and Other Developments
In December 2015, the OCC issued 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 guidelines would require each bank to develop and maintain 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. The comment period for the proposed guidelines ended on February 16, 2016 and the guidelines are subject to further modification. The Company is currently evaluating the impact of the proposed guidelines.
In
On October 2015,31, 2018, the Federal Reserve issued a notice of proposed rulemaking and the Federal Reserve, the OCC and the FDIC jointly issued another notice of proposed rulemaking. The two proposals would establish a revised framework for applying enhanced prudential standards to large U.S. banking organizations, with four categories of standards that reflect the risks of banking organizations in each group. CSC would require certain financial institutionsbe in Category III based on having $250 billion – $700 billion in total assets.
The Federal Reserve proposal, which would make large savings and loan holding companies such as CSC subject to enhanced prudential standards, would tailor those regulatory requirements relating to capital stress testing, risk management, liquidity risk management, and single-counterparty credit limits based on the category of the banking organization. The proposal provides that areCategory III banking organizations would be subject to annual supervisory stress testing and biennial company-run stress testing. The interagency proposal would similarly tailor requirements under the agencies’ capital rule, LCR rule, and the proposed net stable funding ratio rule for banking organizations in each category. Under the proposal, banking organizations in Category III would not be required to calculate their risk-weighted assets using the “advanced approaches” framework or to include AOCI in calculating their regulatory capital; however, they would continue to be subject to the supplementary leverage ratio and any future countercyclical capital buffer imposed by the banking agencies.
Although the Federal Reserve’sReserve announced in its proposal that additional capital rules to applyplanning and resolution planning proposals would be issued at a regulatory capital deduction treatment to their investments in unsecured debt issued by U.S. banklater date, the agency did indicate that all Category III firms, including savings and loan holding companies, identifiedwould be required to submit annual capital plans that would be subject to qualitative and quantitative assessments evaluated as global systemically important banking organizations. part of the CCAR process.
The comment period for the rule proposalboth proposed rules ended on February 19,January 22, 2019 andthe impact to Schwab cannot be assessed until the final rule is released.
On December 22, 2017, P.L.115-97, the Tax Act, was signed into law, and became effective on January 1, 2018. Among other things, the Tax Act lowered the federal corporate income tax rate from 35% to 21%.
As a result of the reduction of the federal corporate income tax rate, generally accepted accounting principles in the U.S. (GAAP) require companies to remeasure their deferred tax assets and deferred tax liabilities as of the date of enactment, with the resulting tax effects accounted for in the reporting period of enactment. Schwab recorded a one-time non-cash charge to taxes on income associated with the remeasurement of net deferred tax assets and other tax adjustments related to the tax reform legislation in the fourth quarter of 2017. Our 2018 effective income tax rate was reduced as a result of these changes.
In May 2016,
the Federal Reserve, the OCC and the
rule proposal is subject to further modification. The Company is currently evaluating the impact of the proposed rule.In October 2015, the FDIC jointly issued a notice of proposed rulemaking that would impose a surchargeminimum NSFR on the quarterly assessments of insured depository institutions with total assets of $10 billion or more.certain banking organizations, including CSC. 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 proposed rule proposal ended on JanuaryAugust 5, 2016 and the impact to the Company cannot be assessed until the final rule proposal is subject to further modification. The Company will continue to evaluate the impact of the proposed rule.
released.
THE CHARLES SCHWAB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)
RESULTS OF OPERATIONS
Total Net Revenues
Total net revenues of $10.1 billion and $8.6 billion for the years ended December 31, 2018 and 2017, respectively, represented growth of 18% and 15% from the prior periods, primarily due to increases in net interest revenue.
|
| | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | | 2018 | | 2017 | | 2016 |
| | Growth Rate
2017-2018 | | Amount | % of
Total Net
Revenues | | Amount | % of
Total Net
Revenues | | Amount | % of
Total Net
Revenues |
| Net interest revenue | | | | | | | | | | |
| Interest revenue | 44 | % | | $ | 6,680 |
| 66 | % | | $ | 4,624 |
| 54 | % | | $ | 3,493 |
| 46 | % |
| Interest expense | 151 | % | | (857 | ) | (9 | )% | | (342 | ) | (4 | )% | | (171 | ) | (2 | )% |
| Net interest revenue | 36 | % | | 5,823 |
| 57 | % | | 4,282 |
| 50 | % | | 3,322 |
| 44 | % |
| Asset management and administration fees | | | | | | | | | | |
| Mutual fund and ETF service fees | (12 | )% | | 1,793 |
| 18 | % | | 2,045 |
| 24 | % | | 1,853 |
| 25 | % |
| Advice solutions | 9 | % | | 1,139 |
| 11 | % | | 1,043 |
| 12 | % | | 915 |
| 12 | % |
| Other | (2 | )% | | 297 |
| 3 | % | | 304 |
| 3 | % | | 287 |
| 4 | % |
| Asset management and administration fees | (5 | )% | | 3,229 |
| 32 | % | | 3,392 |
| 39 | % | | 3,055 |
| 41 | % |
| Trading revenue | | | | | | | | | | |
| Commissions | 14 | % | | 685 |
| 7 | % | | 600 |
| 7 | % | | 779 |
| 10 | % |
| Principal transactions | 44 | % | | 78 |
| 1 | % | | 54 |
| 1 | % | | 46 |
| 1 | % |
| Trading revenue | 17 | % | | 763 |
| 8 | % | | 654 |
| 8 | % | | 825 |
| 11 | % |
| Other | 9 | % | | 317 |
| 3 | % | | 290 |
| 3 | % | | 276 |
| 4 | % |
| Total net revenues | 18 | % | | $ | 10,132 |
| 100 | % | | $ | 8,618 |
| 100 | % | | $ | 7,478 |
| 100 | % |
Net Interest Revenue
Schwab’s primary interest-earning assets include cash and cash equivalents; cash and investments segregated; margin loans, which constitute the majority of receivables from brokerage clients; investment securities; and bank loans. Revenue on interest-earning assets is affected by various factors, such as the composition of assets, prevailing interest rates at the time of origination or purchase, changes in interest rates on floating rate securities and loans, and changes in prepayment levels for mortgage-related securities and loans. Fees earned on securities borrowing and lending activities, which are conducted by CS&Co using assets held in client brokerage accounts, are included in other interest revenue and expense.
Schwab’s interest-bearing liabilities include bank deposits, payables to brokerage clients, short-term borrowings, and long-term debt. We establish the rates paid on client-related liabilities, and management expects that it will generally adjust the rates paid on these liabilities at some fraction of any movement in short-term rates. During 2018, these liabilities rose by a total of $63.3 billion, largely reflecting the effect of: our transferring a total of $72 billion sweep money market funds to bank and broker-dealer sweep; clients choosing to reallocate assets between cash, equities, fixed income and other investments; and the Company gathering additional flows from new and current clients.
Overall, management believes that the extended period of extraordinarily low interest rates running from the financial crisis until recently has likely resulted in certain sweep cash balances retaining some level of latent rate sensitivity. With the Federal Funds Target Rate having increased to 2.25 – 2.50%, management expects some sweep cash balances could migrate to alternatives, including purchased money market funds, that offer higher yields to clients but lower revenue to Schwab.
Given the general stability and relatively low rate sensitivity of client-related liabilities, management believes their duration is at least several years. We have positioned Schwab to benefit from an increase in interest rates, especially short-term interest rates, by managing the duration of interest-earning assets to be shorter than that of interest-bearing liabilities, so that asset yields are expected to move faster than liability costs.
THE CHARLES SCHWAB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)
In April 2015,order to keep interest-rate sensitivity within established limits, management monitors and responds to changes in the Departmentbalance sheet. As Schwab builds its client base, we attract new client sweep cash, which, along with the transfers of Labor published noticeexisting sweep cash balances from money market funds, is a primary driver of balance sheet growth. By managing the duration of interest-earning assets as necessary, we are positioned to continue to gain from increasing rates while limiting exposure to falling rates to an acceptable level. Approximately half of our interest earning assets re-price or reset based on short-term interest rates such as one-month LIBOR.
Non-interest-bearing funding sources include certain cash balances, stockholders’ equity and other miscellaneous assets and liabilities.
The following table presents net interest revenue information corresponding to interest-earning assets and funding sources on the consolidated balance sheets:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | 2018 | | 2017 | | 2016 |
| | Average
Balance | | Interest
Revenue/
Expense | | Average
Yield/
Rate | | Average
Balance | | Interest Revenue/
Expense | | Average
Yield/
Rate | | Average
Balance | | Interest Revenue/
Expense | | Average
Yield/
Rate |
| Interest-earning assets | | | | | | | | | | | | | | | | | |
| Cash and cash equivalents | $ | 17,783 |
| | $ | 348 |
| | 1.93 | % | | $ | 9,931 |
| | $ | 109 |
| | 1.10 | % | | $ | 11,143 |
| | $ | 57 |
| | 0.51 | % |
| Cash and investments segregated | 11,461 |
| | 206 |
| | 1.78 | % | | 18,525 |
| | 166 |
| | 0.90 | % | | 20,104 |
| | 93 |
| | 0.46 | % |
| Broker-related receivables | 303 |
| | 6 |
| | 2.09 | % | | 430 |
| | 3 |
| | 0.70 | % | | 558 |
| | 1 |
| | 0.22 | % |
| Receivables from brokerage clients | 19,870 |
| | 830 |
| | 4.12 | % | | 16,269 |
| | 575 |
| | 3.53 | % | | 15,001 |
| | 497 |
| | 3.31 | % |
Available for sale securities (1) | 54,542 |
| | 1,241 |
| | 2.26 | % | | 53,040 |
| | 815 |
| | 1.54 | % | | 72,586 |
| | 883 |
| | 1.22 | % |
| Held to maturity securities | 131,794 |
| | 3,348 |
| | 2.53 | % | | 103,599 |
| | 2,354 |
| | 2.27 | % | | 57,451 |
| | 1,402 |
| | 2.44 | % |
| Bank loans | 16,554 |
| | 559 |
| | 3.37 | % | | 15,919 |
| | 472 |
| | 2.97 | % | | 14,715 |
| | 400 |
| | 2.72 | % |
| Total interest-earning assets | 252,307 |
| | 6,538 |
| | 2.57 | % | | 217,713 |
| | 4,494 |
| | 2.06 | % | | 191,558 |
| | 3,333 |
| | 1.74 | % |
| Other interest revenue | | | 142 |
| | | | | | 130 |
| | | | | | 160 |
| | |
| Total interest-earning assets | $ | 252,307 |
| | $ | 6,680 |
| | 2.63 | % | | $ | 217,713 |
| | $ | 4,624 |
| | 2.12 | % | | $ | 191,558 |
| | $ | 3,493 |
| | 1.82 | % |
| Funding sources | | | | | | | | | | | | | | | | | |
| Bank deposits | $ | 199,139 |
| | $ | 545 |
| | 0.27 | % | | $ | 163,998 |
| | $ | 148 |
| | 0.09 | % | | $ | 141,432 |
| | $ | 37 |
| | 0.03 | % |
| Payables to brokerage clients | 21,178 |
| | 56 |
| | 0.27 | % | | 25,403 |
| | 16 |
| | 0.06 | % | | 26,311 |
| | 3 |
| | 0.01 | % |
| Short-term borrowings | 3,359 |
| | 54 |
| | 1.59 | % | | 3,503 |
| | 41 |
| | 1.17 | % | | 1,864 |
| | 9 |
| | 0.48 | % |
| Long-term debt | 5,423 |
| | 190 |
| | 3.50 | % | | 3,431 |
| | 119 |
| | 3.47 | % | | 2,876 |
| | 104 |
| | 3.62 | % |
| Total interest-bearing liabilities | 229,099 |
| | 845 |
| | 0.37 | % | | 196,335 |
| | 324 |
| | 0.17 | % | | 172,483 |
| | 153 |
| | 0.09 | % |
| Non-interest-bearing funding sources | 23,208 |
| | | | | | 21,378 |
| | | | | | 19,075 |
| | | | |
| Other interest expense | | | 12 |
| | | | | | 18 |
| | | | | | 18 |
| | |
| Total funding sources | $ | 252,307 |
| | $ | 857 |
| | 0.34 | % | | $ | 217,713 |
| | $ | 342 |
| | 0.15 | % | | $ | 191,558 |
| | $ | 171 |
| | 0.09 | % |
| Net interest revenue | | | $ | 5,823 |
| | 2.29 | % | | | | $ | 4,282 |
| | 1.97 | % | | | | $ | 3,322 |
| | 1.73 | % |
(1) Amounts have been calculated based on amortized cost.
Net interest revenue increased $1.5 billion or 36%, in 2018 from 2017, and $960 million, or 29%, in 2017 from 2016, primarily due to higher interest rates and growth in interest-earning assets.
Our net interest margin improved 32 basis points to 2.29% in 2018, primarily as a rule proposalresult of the Federal Reserve’s 2017 and 2018 interest rate increases, partially offset by higher interest rates paid on bank deposits and other interest-bearing liabilities. Our net interest margin was 1.97% in 2017, representing an improvement of 24 basis points compared to significantly broaden2016, primarily due to the definition of “fiduciary” underFederal Reserve’s interest rate increases in 2016 and 2017.
Average interest earning assets grew 16% and 14% during 2018 and 2017, respectively, compared with the Employee Retirement Income Security Act of 1974. If adopted, among other things, the new rule would subject broker-dealers who provide non-discretionary investment advicesequential prior years. These increases primarily reflect higher bank deposits due to retirement plans and accountstransfers from sweep money market funds to a “best interest” standard,bank sweep balances, as well as changes in client cash allocations, partially offset by client purchases of other conditionsassets.
In March 2017, $24.7 billion of debt securities were transferred from the AFS category to the HTM category. The transfer had no effect on the overall net interest margin. For additional information on the transfer, see Item 8 – Note 6.
THE CHARLES SCHWAB CORPORATION
Management’s Discussion and
requirements. The second comment period for the rule proposal ended on September 24, 2015Analysis of Financial Condition and
the rule proposal is subject to further modification. The Company will continue to evaluate the impactResults of
the proposed rule.RESULTS Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)
OF OPERATIONSNet Revenues
| | | | | | | | | | | | | | | | | | | | |
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) | 5 | % | | $ | 1,479 | | 23 | % | | $ | 1,413 | | 23 | % | | $ | 1,339 | | 25 | % |
Advice solutions | 7 | % | | | 898 | | 14 | % | | | 840 | | 14 | % | | | 718 | | 13 | % |
Other (1) | (3) | % | | | 273 | | 4 | % | | | 280 | | 5 | % | | | 258 | | 5 | % |
Asset management and administration fees | 5 | % | | | 2,650 | | 41 | % | | | 2,533 | | 42 | % | | | 2,315 | | 43 | % |
Net interest revenue | | | | | | | | | | | | | | | | | | | | |
Interest revenue | 12 | % | | | 2,657 | | 42 | % | | | 2,374 | | 39 | % | | | 2,085 | | 38 | % |
Interest expense | 29 | % | | | (132) | | (2) | % | | | (102) | | (1) | % | | | (105) | | (2) | % |
Net interest revenue | 11 | % | | | 2,525 | | 40 | % | | | 2,272 | | 38 | % | | | 1,980 | | 36 | % |
Trading revenue | | | | | | | | | | | | | | | | | | | | |
Commissions | (4) | % | | | 822 | | 13 | % | | | 857 | | 14 | % | | | 864 | | 16 | % |
Principal transactions | (12) | % | | | 44 | | 1 | % | | | 50 | | 1 | % | | | 49 | | 1 | % |
Trading revenue | (5) | % | | | 866 | | 14 | % | | | 907 | | 15 | % | | | 913 | | 17 | % |
Other | (4) | % | | | 328 | | 5 | % | | | 343 | | 5 | % | | | 236 | | 4 | % |
Provision for loan losses | 175 | % | | | 11 | | - | | | | 4 | | - | | | | 1 | | - | |
Net impairment losses on securities | (100) | % | | | - | | - | | | | (1) | | - | | | | (10) | | - | |
Total net revenues | 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.
|
Asset Management and Administration Fees
Asset management and administration fees include mutual fund and ETF service fees and fees for other asset-based financial services provided to individual and institutional clients. The CompanySchwab earns mutual fund and ETF service fees for shareholder services, administration, and investment management provided to its proprietary funds, and recordkeeping and shareholder services provided to third-party funds. TheseAsset management and administration fees are based upon the daily balances of client assets invested in these funds. The Company also earns asset managementfunds and do not include securities lending revenues earned by proprietary mutual funds and ETFs, as those amounts, net of program fees, for advice solutions, which include advisory and managed account services that are based on the daily balances of client assets subjectcredited to the specific fee for service.fund shareholders. The fair values of client assets included in proprietary and third-party mutual funds and ETFs are based on quoted market prices and other observable market data.
We also earn asset management fees for advice solutions, which include managed portfolios, specialized strategies, and customized investment advice. Other asset management and administration fees include various asset basedasset-based fees such as 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.
Asset management and administration fees vary with changes in the balances of client assets due to market fluctuations and client activity. For a discussion of the impact of current market conditions on
The following table presents asset management and administration fees,
see “Item 7A – Quantitativeaverage client assets, and
Qualitative Disclosures About Market Risk.”average fee yields: |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | 2018 | | 2017 | | 2016 |
| | Average
Client
Assets | | Revenue | | Average
Fee | | Average
Client
Assets | | Revenue | | Average
Fee | | Average
Client
Assets | | Revenue | | Average
Fee |
Schwab money market funds before fee
waivers | $ | 141,018 |
| | $ | 568 |
| | 0.40 | % | | $ | 160,735 |
| | $ | 875 |
| | 0.54 | % | | $ | 164,120 |
| | $ | 962 |
| | 0.59 | % |
| Fee waivers | | | — |
| | | | | | (10 | ) | | | | | | (224 | ) | | |
| Schwab money market funds | 141,018 |
| | 568 |
| | 0.40 | % | | 160,735 |
| | 865 |
| | 0.54 | % | | 164,120 |
| | 738 |
| | 0.45 | % |
| Schwab equity and bond funds and ETFs | 207,385 |
| | 258 |
| | 0.12 | % | | 158,625 |
| | 223 |
| | 0.14 | % | | 115,849 |
| | 217 |
| | 0.19 | % |
Mutual Fund OneSource® and other non- transaction fee funds | 210,429 |
| | 680 |
| | 0.32 | % | | 215,333 |
| | 706 |
| | 0.33 | % | | 199,389 |
| | 676 |
| | 0.34 | % |
Other third-party mutual funds and ETFs (1) | 328,150 |
| | 287 |
| | 0.09 | % | | 286,111 |
| | 251 |
| | 0.09 | % | | 254,584 |
| | 222 |
| | 0.09 | % |
Total mutual funds and ETFs (2) | $ | 886,982 |
| | 1,793 |
| | 0.20 | % | | $ | 820,804 |
| | 2,045 |
| | 0.25 | % | | $ | 733,942 |
| | 1,853 |
| | 0.25 | % |
Advice solutions (2) | | | | | | | | | | | | | | | | | |
| Fee-based | $ | 227,790 |
| | 1,139 |
| | 0.50 | % | | $ | 203,794 |
| | 1,043 |
| | 0.51 | % | | $ | 177,409 |
| | 915 |
| | 0.52 | % |
| Non-fee-based | 62,813 |
| | — |
| | — |
| | 48,936 |
| | — |
| | — |
| | 35,262 |
| | — |
| | — |
|
| Total advice solutions | $ | 290,603 |
| | 1,139 |
| | 0.39 | % | | $ | 252,730 |
| | 1,043 |
| | 0.41 | % | | $ | 212,671 |
| | 915 |
| | 0.43 | % |
Other balance-based fees (3) | 398,495 |
| | 250 |
| | 0.06 | % | | 417,659 |
| | 258 |
| | 0.06 | % | | 339,071 |
| | 235 |
| | 0.07 | % |
Other (4) | | | 47 |
| | | | | | 46 |
| | | | | | 52 |
| | |
Total asset management and administration
fees | | | $ | 3,229 |
| | | | | | $ | 3,392 |
| | | | | | $ | 3,055 |
| | |
(1) Includes Schwab ETF OneSource™.
(2) Beginning in the fourth quarter of 2017, a change was made to add non-fee based average assets from managed portfolios. Average client assets for advice solutions may also include the asset balances contained in the mutual fund and/or ETF categories listed above. Prior periods have been adjusted to accommodate this change.
(3) Includes various asset-related fees, such as trust fees, 401(k) recordkeeping fees, and mutual fund clearing fees and other service fees. Beginning in the first quarter of 2017, a prospective methodology change was made to average client assets relating to 401(k) recordkeeping fees to provide improved insight into the associated fee driver, which resulted in an increase of approximately $25 billion. There was no impact to revenue or the average fee.
(4) Includes miscellaneous service and transaction fees relating to mutual funds and ETFs that are not balance-based.
Asset management and administration fees decreased by $163 million, or 5%, in 2018 from 2017, primarily due to lower money market fund revenue as a result of transfers to bank sweep, client asset allocation choices, and our 2017 fee reductions. Part of the decline was offset by revenue from growing asset balances in advice solutions, Schwab equity and bond funds and ETFs, and other third-party mutual funds and ETFs.
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)
Asset management and administration fees increased by $337 million, or 11%, in 2017 from 2016 due to higher average client 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 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 | $ | 167,909 | | $ | 167,738 | | $ | 167,896 | | $ | 88,450 | | $ | 71,249 | | $ | 49,587 | | $ | 234,381 | | $ | 234,777 | | $ | 204,465 |
Net inflows (outflows) | | (1,947) | | | 287 | | | (195) | | | 15,542 | | | 11,398 | | | 8,311 | | | (23,014) | | | (8,925) | | | (2,813) |
Net market gains (losses) and other | | 186 | | | (116) | | | 37 | | | (1,880) | | | 5,803 | | | 13,351 | | | (3,713) | | | 8,529 | | | 33,125 |
Balance at end of period | $ | 166,148 | | $ | 167,909 | | $ | 167,738 | | $ | 102,112 | | $ | 88,450 | | $ | 71,249 | | $ | 207,654 | | $ | 234,381 | | $ | 234,777 |
and other non-transaction fee (NTF) funds. The following table presentsfunds generated 47%, 53%, and 53% of the asset management and administration fees average client assets,earned during 2018, 2017, and average fee rate:
2016, respectively: | | | | | | | | | | | | | | | | | | | | | | | | | |
Year Ended December 31, | | 2015 | | | | 2014 | | | 2013 |
| Average
Client
Assets | | Revenue | | Average
Fee | | | Average
Client
Assets | | Revenue | | Average
Fee | | | Average
Client
Assets | | Revenue | | Average
Fee |
Schwab money market funds | | | | | | | | | | | | | | | | | | | | | | | | | |
before fee waivers | $ | 161,381 | | $ | 947 | | 0.59% | | | $ | 164,564 | | $ | 957 | | 0.58% | | | $ | 162,484 | | $ | 936 | | 0.58% |
Fee waivers | | | | | (672) | | | | | | | | | (751) | | | | | | | | | (674) | | |
Schwab money market funds | | 161,381 | | | 275 | | 0.17% | | | | 164,564 | | | 206 | | 0.13% | | | | 162,484 | | | 262 | | 0.16% |
Schwab equity and bond funds and ETFs | | 102,486 | | | 217 | | 0.21% | | | | 83,916 | | | 192 | | 0.23% | | | | 63,012 | | | 157 | | 0.25% |
Mutual Fund OneSource® (1) | | 225,347 | | | 764 | | 0.34% | | | | 236,003 | | | 805 | | 0.34% | | | | 219,188 | | | 744 | | 0.34% |
Other third-party mutual funds and ETFs (1,2) | | 251,491 | | | 223 | | 0.09% | | | | 241,314 | | | 210 | | 0.09% | | | | 223,095 | | | 176 | | 0.08% |
Total mutual funds and ETFs (3) | $ | 740,705 | | | 1,479 | | 0.20% | | | $ | 725,797 | | | 1,413 | | 0.19% | | | $ | 667,779 | | | 1,339 | | 0.20% |
Advice solutions (3) : | | | | | | | | | | | | | | | | | | | | | | | | | |
Fee-based | $ | 172,302 | | | 898 | | 0.52% | | | $ | 160,721 | | | 840 | | 0.52% | | | $ | 136,353 | | | 718 | | 0.53% |
Intelligent Portfolios | | 3,274 | | | - | | - | | | | N/A | | | N/A | | N/A | | | | N/A | | | N/A | | N/A |
Legacy Non-Fee | | 16,463 | | | N/A | | N/A | | | | 15,794 | | | N/A | | N/A | | | | 13,890 | | | N/A | | N/A |
Total advice solutions | $ | 192,039 | | | 898 | | 0.47% | | | $ | 176,515 | | | 840 | | 0.48% | | | $ | 150,243 | | | 718 | | 0.48% |
Other balance-based fees (2,4) | | 324,701 | | | 226 | | 0.07% | | | | 297,499 | | | 234 | | 0.08% | | | | 249,619 | | | 216 | | 0.09% |
Other (2,5) | | | | | 47 | | | | | | | | | 46 | | | | | | | | | 42 | | |
Total asset management | | | | | | | | | | | | | | | | | | | | | | | | | |
and administration fees | | | | $ | 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.
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Schwab Money | | Schwab Equity and | | Mutual Fund OneSource® |
| | | Market Funds | | Bond Funds and ETFs | | and Other NTF Funds |
| Year Ended December 31, | | 2018 | | 2017 | | 2016 | | 2018 | | 2017 | | 2016 | | 2018 | | 2017 | | 2016 |
| Balance at beginning of period | | $ | 163,650 |
| | $ | 163,495 |
| | $ | 166,148 |
| | $ | 181,608 |
| | $ | 125,813 |
| | $ | 102,112 |
| | $ | 225,202 |
| | $ | 198,924 |
| | $ | 207,654 |
|
| Net inflows (outflows) | | (11,641 | ) | | (486 | ) | | (2,765 | ) | | 31,091 |
| | 30,771 |
| | 13,858 |
| | (37,513 | ) | | (27,485 | ) | | (22,469 | ) |
Net market gains (losses) and other (1) | | 1,463 |
| | 641 |
| | 112 |
| | (17,589 | ) | | 25,024 |
| | 9,843 |
| | (7,157 | ) | | 53,763 |
| | 13,739 |
|
| Balance at end of period | | $ | 153,472 |
| | $ | 163,650 |
| | $ | 163,495 |
| | $ | 195,110 |
| | $ | 181,608 |
| | $ | 125,813 |
| | $ | 180,532 |
| | $ | 225,202 |
| | $ | 198,924 |
|
N/A Not applicable.
Asset management and administration fees increased by $117 million, or 5%, in 2015
(1) Includes net inflows from 2014, and by $218 million, or 9%, in 2014 from 2013, dueother third-party mutual funds 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
|
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)
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 Revenue
Net 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 percentagesecond quarter 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.
2017.
THE CHARLES SCHWAB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)
The following table presents net interest revenue information corresponding to interest-earning assets and funding sources on the consolidated balance sheets:
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Year Ended December 31, | | 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 | | $ | 9,358 | | $ | 24 | | 0.26 | % | | $ | 7,179 | | $ | 16 | | 0.22 | % | | $ | 6,943 | | $ | 16 | | 0.23 | % |
Cash and investments segregated | | | 18,606 | | | 31 | | 0.17 | % | | | 20,268 | | | 24 | | 0.12 | % | | | 25,419 | | | 35 | | 0.14 | % |
Broker-related receivables (1) | | | 274 | | | - | | 0.07 | % | | | 325 | | | - | | 0.09 | % | | | 377 | | | - | | 0.04 | % |
Receivables from brokerage clients | | | 15,212 | | | 502 | | 3.30 | % | | | 13,778 | | | 482 | | 3.50 | % | | | 11,800 | | | 434 | | 3.68 | % |
Securities available for sale (2) | | | 62,249 | | | 629 | | 1.01 | % | | | 52,057 | | | 546 | | 1.05 | % | | | 49,114 | | | 557 | | 1.13 | % |
Securities held to maturity | | | 38,280 | | | 957 | | 2.50 | % | | | 32,361 | | | 828 | | 2.56 | % | | | 24,915 | | | 610 | | 2.45 | % |
Bank loans | | | 13,973 | | | 369 | | 2.64 | % | | | 12,906 | | | 355 | | 2.75 | % | | | 11,758 | | | 329 | | 2.80 | % |
Total interest-earning assets | | | 157,952 | | | 2,512 | | 1.59 | % | | | 138,874 | | | 2,251 | | 1.62 | % | | | 130,326 | | | 1,981 | | 1.52 | % |
Other interest revenue | | | | | | 145 | | | | | | | | | 123 | | | | | | | | | 104 | | | |
Total interest-earning assets | | $ | 157,952 | | $ | 2,657 | | 1.68 | % | | $ | 138,874 | | $ | 2,374 | | 1.71 | % | | $ | 130,326 | | $ | 2,085 | | 1.60 | % |
Funding sources: | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Bank deposits | | $ | 113,464 | | $ | 29 | | 0.03 | % | | $ | 95,842 | | $ | 30 | | 0.03 | % | | $ | 85,465 | | $ | 31 | | 0.04 | % |
Payables to brokerage clients | | | 25,651 | | | 2 | | 0.01 | % | | | 26,731 | | | 2 | | 0.01 | % | | | 30,258 | | | 3 | | 0.01 | % |
Long-term debt | | | 2,727 | | | 92 | | 3.37 | % | | | 1,901 | | | 73 | | 3.84 | % | | | 1,751 | | | 69 | | 3.94 | % |
Total interest-bearing liabilities | | | 141,842 | | | 123 | | 0.09 | % | | | 124,474 | | | 105 | | 0.08 | % | | | 117,474 | | | 103 | | 0.09 | % |
Non-interest-bearing funding sources | | | 16,110 | | | | | | | | | 14,400 | | | | | | | | | 12,852 | | | | | | |
Other interest expense (3) | | | | | | 9 | | | | | | | | | (3) | | | | | | | | | 2 | | | |
Total funding sources | | $ | 157,952 | | $ | 132 | | 0.08 | % | | $ | 138,874 | | $ | 102 | | 0.07 | % | | $ | 130,326 | | $ | 105 | | 0.08 | % |
Net interest revenue | | | | | $ | 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 2014 primarily due to higher average balances of interest-earning assets, partially offset by the effect of lower net interest margins. The growth in the average balances 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.
Trading Revenue
Trading revenue includes commission and principal transaction revenues. Commission revenue is affected by the number of revenue trades executed and the average revenue earned per revenue trade. Principal transaction revenue is primarily comprised of revenue from trading activity in
client fixed income
securities. 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.
The following table presents trading revenue and the related drivers:
|
| | | | | | | | | | | | | | |
| Year Ended December 31, | Growth Rate
2017-2018 |
| | 2018 |
| | 2017 |
| | 2016 |
|
| DARTs (in thousands) | 31 | % | | 420.9 |
| | 321.3 |
| | 291.6 |
|
| Clients’ daily average trades (in thousands) | 26 | % | | 765.4 |
| | 608.8 |
| | 561.8 |
|
| Number of trading days | — |
| | 249.5 |
| | 250.0 |
| | 251.5 |
|
| Daily average revenue per revenue trade | (12 | )% | | $ | 7.23 |
| | $ | 8.20 |
| | $ | 11.23 |
|
| Trading revenue | 17 | % | | $ | 763 |
| | $ | 654 |
| | $ | 825 |
|
Trading revenue increased by $109 million, or 17%, in 2018 compared to 2017. DART volumes increased 31% in 2018, which more than offset Schwab’s commission pricing reductions implemented in the first quarter of 2017. Trading revenue decreased by $171 million in 2017 from 2016, primarily due to lower commissions rates on DARTs.
During the first quarter of 2017, we announced two trading price reductions which lowered standard equity, ETF, and option trade commissions from $8.95 to $4.95 and lowered the per contract option fee from $.75 to $.65. These reductions in commission rates reflect our continuing belief that pricing should never be an obstacle for choosing Schwab and our commitment to share the benefits of scale with clients.
With these changes, trading revenue has declined from a peak of 50%-60% of total revenue in the early 1990’s to the current low of 8% in 2018, 8% in 2017, and 11% in 2016.
Other Revenue
Other revenue includes order flow revenue, other service fees, software fees from our portfolio management solutions, exchange processing fees, and non-recurring gains. Order flow revenue was $139 million during 2018, $114 million for 2017, and $103 million in 2016. These increases were primarily due to higher rebate rates received on certain types of
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)
| | | | | | | | | | | | | | | | |
| | Growth Rate | | | | | | | | | | | | |
Year Ended December 31, | | 2014-2015 | | | 2015 | | | 2014 | | | 2013 |
Daily average revenue trades (in thousands) | | (2) | % | | | | 292.0 | | | | 298.2 | | | | 295.0 | |
Clients’ daily average trades (in thousands) | | 4 | % | | | | 536.9 | | | | 516.8 | | | | 490.5 | |
Number of trading days | | - | | | | | 251.0 | | | | 250.5 | | | | 250.5 | |
Average revenue per revenue trade | | (2) | % | | | $ | 11.83 | | | $ | 12.13 | | | $ | 12.31 | |
Trading revenue decreased by $41 million, or 5%, in 2015 from 2014 primarily due to a decrease in commission revenue as a result of lower commissions per revenue trade
orders and
lower daily average revenue trades. Trading revenue remained relatively flat 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. AverageIn 2016, other revenue per revenue trade decreased 2% in 2015 compared to 2014 but remained relatively flat from 2014 to 2013.
Other Revenue
Other revenue includes order flow revenue, nonrecurring gains, software fees from the Company’s portfolio management services, 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 includesincluded net litigation proceeds of $75$16 million related to the Company’sour 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. Order flow revenue was $114 million during 2014 compared to $99 million during 2013. The increase was due to higher rebates received and higher volumes for certain types of orders.
residential mortgage-backed securities portfolios.
Total Expenses Excluding Interest
The following table shows a comparison of
total expenses excluding interest:
| | | | | | | | | | | | | | | | |
| | Growth Rate | | | | | | | | | | | | |
Year Ended December 31, | | 2014-2015 | | | 2015 | | | 2014 | | | 2013 |
Compensation and benefits | | 3 | % | | | $ | 2,241 | | | $ | 2,184 | | | $ | 2,027 | |
Professional services | | - | | | | | 459 | | | | 457 | | | | 415 | |
Occupancy and equipment | | 9 | % | | | | 353 | | | | 324 | | | | 309 | |
Advertising and market development | | 2 | % | | | | 249 | | | | 245 | | | | 257 | |
Communications | | 4 | % | | | | 233 | | | | 223 | | | | 220 | |
Depreciation and amortization | | 13 | % | | | | 224 | | | | 199 | | | | 202 | |
Other | | 10 | % | | | | 342 | | | | 311 | | | | 300 | |
Total expenses excluding interest | | 4 | % | | | $ | 4,101 | | | $ | 3,943 | | | $ | 3,730 | |
Expenses as a percentage of total net revenues: | | | | | | | | | | | | | | | | |
Compensation and benefits | | | | | | | 35 | % | | | 36 | % | | | 37 | % |
Advertising and market development | | | | | | | 4 | % | | | 4 | % | | | 5 | % |
- 33 -
|
| | | | | | | | | | | | | | |
| | Growth Rate 2017-2018 | | 2018 | | 2017 | | 2016 |
| Compensation and benefits | | | | | | | |
| Salaries and wages | 13 | % | | $ | 1,692 |
| | $ | 1,496 |
| | $ | 1,368 |
|
| Incentive compensation | 7 | % | | 855 |
| | 797 |
| | 689 |
|
| Employee benefits and other | 15 | % | | 510 |
| | 444 |
| | 409 |
|
| Total compensation and benefits | 12 | % | | $ | 3,057 |
| | $ | 2,737 |
| | $ | 2,466 |
|
| Professional services | 13 | % | | 654 |
| | 580 |
| | 506 |
|
| Occupancy and equipment | 14 | % | | 496 |
| | 436 |
| | 398 |
|
| Advertising and market development | 17 | % | | 313 |
| | 268 |
| | 265 |
|
| Communications | 5 | % | | 242 |
| | 231 |
| | 237 |
|
| Depreciation and amortization | 14 | % | | 306 |
| | 269 |
| | 234 |
|
| Regulatory fees and assessments | 6 | % | | 189 |
| | 179 |
| | 144 |
|
| Other | 17 | % | | 313 |
| | 268 |
| | 235 |
|
| Total expenses excluding interest | 12 | % | | $ | 5,570 |
| | $ | 4,968 |
| | $ | 4,485 |
|
| Expenses as a percentage of total net revenues | | | | | | | |
| Compensation and benefits | | | 30 | % | | 32 | % | | 33 | % |
| Advertising and market development | | | 3 | % | | 3 | % | | 4 | % |
| Full-time equivalent employees (in thousands) | | | | | | | |
| At year end | 11 | % | | 19.5 |
| | 17.6 |
| | 16.2 |
|
| Average | 11 | % | | 18.7 |
| | 16.9 |
| | 15.9 |
|
Expenses excluding interest increased in 2018 and 2017 from the prior years by 12% and 11%, respectively. The largest drivers of the increase in both years were compensation and benefits and professional services.
Total compensation and benefits increased in 2018 and 2017 from prior years, primarily due to increases in employee headcount to support our expanding client base. Additionally, in 2018 non-officer employees were issued special stock awards totaling $36 million.
Professional services expense increased in 2018 and 2017 from the prior years, primarily due to higher spending on technology projects as well as an increase in asset management and administration related expenses resulting from growth in the Schwab Funds® and Schwab ETFs™.
Occupancy and equipment expense increased in 2018 and 2017 from the prior years, primarily due to an increase in software maintenance expenses and additional licenses to support growth in the business.
Advertising and market development expense rose in 2018, primarily reflecting management’s decision to increase television advertising and digital media spending in the fourth quarter.
Depreciation and amortization expenses grew in 2018 and 2017 from the prior years, primarily due to higher amortization of internally developed software associated with our investments in software and technology enhancements.
THE CHARLES SCHWAB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)
Compensation and Benefits
Compensation 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.
The following table shows a comparison of certain compensation and benefits components and employee data:
| | | | | | | | | | | | | | | | |
| | Growth Rate | | | | | | | | | | | | |
Year Ended December 31, | | 2014-2015 | | | 2015 | | | 2014 | | | 2013 |
Salaries and wages | | 1 | % | | | $ | 1,258 | | | $ | 1,245 | | | $ | 1,110 | |
Incentive compensation | | 2 | % | | | | 618 | | | | 605 | | | | 599 | |
Employee benefits and other | | 9 | % | | | | 365 | | | | 334 | | | | 318 | |
Total compensation and benefits expense | | 3 | % | | | $ | 2,241 | | | $ | 2,184 | | | $ | 2,027 | |
Full-time equivalent employees (in thousands) | | | | | | | | | | | | | | | | |
At year end | | 5 | % | | | | 15.3 | | | | 14.6 | | | | 13.8 | |
Average | | 6 | % | | | | 15.1 | | | | 14.2 | | | | 13.9 | |
Salaries and wages
Regulatory fees assessments increased in
20152018 and 2017 from
2014 primarily due to higher employee headcount 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. Incentive compensation increased in 2015 from 2014 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. Employee benefits and other expense increased in 2015 from 2014 due to increases in healthcare costs 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 primarilyprior years, due to an increase in discretionary bonus costs, offset byFDIC insurance assessments which rose as a result of higher 2013 expense related to a new payout schedule for field incentive plans.
Expenses Excluding Compensation and Benefits
Professional services remained relatively flataverage assets in 2015 compared to 2014. Professional services expense increased in 2014 from 2013 primarily due to higher spending on technology services and andeposit balances. This increase in fees paid to outsourced service providers and consultants.
Occupancy and equipment expense increased in 2015 from 2014 primarily due to increased software maintenance expense relating to the Company’s information technology systems and an increase in property taxes and other expenses attributable to the changes in the Company’s geographic footprint. Occupancy and equipment expense increased in 2014 from 2013 primarily due to increased software maintenance expenses relating to the Company’s information 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,2018 was partially offset by a decreasethe elimination of the FDIC surcharge in corporate sponsorships and print ad media expenses. Advertising and market development expense decreasedthe fourth quarter of 2018.
Other expenses increased in
20142018 from
2013 primarily2017 due to
production costs incurredtravel and entertainment and miscellaneous items due to overall growth 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 expenseour business. Other expenses increased in 2015 compared to 20142017 from 2016 due to travel and entertainment, asset volume-related increases, in news and informational communications, partially offset by a decrease in postage expenses. Communication expense remained relatively flat in 2014 compared to 2013.
some miscellaneous items.
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)
Depreciation and amortization expense increased in 2015 compared to 2014 primarily due to increased amortization of internally-developed software associated with the Company’s investment in software and technology enhancements 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 capitalCapital expenditures were $285$576 million, (5% of net revenues), $405$412 million, (7% of net revenues), and $270$353 million (5% of net revenues) in 2015, 20142018, 2017, and 2013,2016, respectively. The decreaseincrease in capital expenditures in 2015both 2018 and 2017 from 2014the prior years was primarily due to lowerthe expansion of our campuses in the U.S. and investments in technology projects. The largest component of capital expenditures in 2018 was investment in buildings and land relating to the change in the Company’s geographic footprint.of $253 million. Capitalized costs for developing internal-use software were $107totaled $167 million, $81$157 million, and $74$130 million in 2015, 20142018, 2017, and 2013.
Management currently anticipates that 2016, respectively. Our capital expenditures will be approximately 46% higher than 2015 primarilyfor 2018 came in at the lower end of our estimated range of 6-7% of total net revenues, largely due to spendingthe timing of our campus expansion work. As we carry this work forward in 2019 and invest further in technology projects, we anticipate capital expenditures for the year will reach approximately 7-9% of total net revenues. Our longer term expectation for capital expenditures remains in the range of 3-5% of total net revenues.
Taxes on land, leasehold improvements, information technology equipmentIncome
As previously discussed under Current Regulatory Environment and
capitalized costs for internal use software.Other expense increasedDevelopments, the Tax Act was signed into law during 2017. Among other things, the Tax Act lowered the federal corporate income tax rate from 35% to 21%, beginning 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 costs2018.
Also as a result of
increased employee headcountthe Tax Act, Schwab recognized a $46 million one-time non-cash charge to taxes on income in the fourth quarter of 2017 associated with the remeasurement of net deferred tax assets and
travel.Taxesother tax adjustments related to the Tax Act.
Effective January 1, 2017, Schwab adopted Accounting Standards Update (ASU) 2016-09, which prospectively changed the accounting treatment of a portion of the tax deductions relating to equity compensation. These deductions were previously reflected directly in additional paid-in capital, a component of stockholders’ equity, and are now included in taxes on
IncomeThe Company’sincome, a component of net income. As a result of this change, our tax expense was reduced by approximately $46 million and $87 million in 2018 and 2017, respectively. Future effects will depend on our share price, restricted stock vesting, and the volume of equity incentive options exercised.
Schwab’s effective income tax rate on income before taxes was
36.5%23.1% in
2015, 37.5%2018, 35.5% in
2014,2017, and
37.2%36.9% in
2013.2016. The decrease in
2015 from 2014rates over this three-year time period was primarily due to the
recognition of net
tax benefits relating to certain current and prior-year matters. The increase in 2014 from 2013 was primarily due to the impact of
a non-recurring state tax benefit in 2013.the above items.
Segment Information
The Company
Schwab provides financial services to individuals and institutional clients through two segments – Investor Services and Advisor Services. The Investor Services segment provides retail brokerage and banking services, retirement plan services, and other corporate brokerage
services.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.”
expenses reflect the dynamics of serving millions of clients in Investor Services versus the thousands of RIAs on the advisor platform.
THE CHARLES SCHWAB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)
Financial information for
the Company’s reportableour segments is presented in the following
tables:table: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Investor Services (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 | 5 | % | | $ | 1,837 | | | $ | 1,742 | | | $ | 1,593 | | | 3 | % | | $ | 813 | | | $ | 791 | | | $ | 723 | | |
Net interest revenue | 5 | % | | | 2,133 | | | | 2,028 | | | | 1,755 | | | 61 | % | | | 392 | | | | 244 | | | | 225 | | |
Trading revenue | (8) | % | | | 556 | | | | 606 | | | | 609 | | | 3 | % | | | 310 | | | | 301 | | | | 304 | | |
Other | 7 | % | | | 234 | | | | 218 | | | | 176 | | | 27 | % | | | 94 | | | | 74 | | | | 59 | | |
Provision for loan losses | 175 | % | | | 11 | | | | 4 | | | | 1 | | | N/M | | | | - | | | | - | | | | - | | |
Net impairment losses | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
on securities | (100) | % | | | - | | | | (1) | | | | (9) | | | N/M | | | | - | | | | - | | | | (1) | | |
Total net revenues | 4 | % | | | 4,771 | | | | 4,597 | | | | 4,125 | | | 14 | % | | | 1,609 | | | | 1,410 | | | | 1,310 | | |
Expenses Excluding | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Interest | 5 | % | | | 3,090 | | | | 2,937 | | | | 2,858 | | | 8 | % | | | 1,011 | | | | 938 | | | | 872 | | |
Income before taxes | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
on income | 1 | % | | $ | 1,681 | | | $ | 1,660 | | | $ | 1,267 | | | 27 | % | | $ | 598 | | | $ | 472 | | | $ | 438 | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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 | | | $ | - | | | $ | - | | | $ | (1) | | | 5 | % | | $ | 2,650 | | | $ | 2,533 | | | $ | 2,315 | | |
Net interest revenue | N/M | | | | - | | | | - | | | | - | | | 11 | % | | | 2,525 | | | | 2,272 | | | | 1,980 | | |
Trading revenue | N/M | | | | - | | | | - | | | | - | | | (5) | % | | | 866 | | | | 907 | | | | 913 | | |
Other | N/M | | | | - | | | | 51 | | | | 1 | | | (4) | % | | | 328 | | | | 343 | | | | 236 | | |
Provision for loan losses | N/M | | | | - | | | | - | | | | - | | | 175 | % | | | 11 | | | | 4 | | | | 1 | | |
Net impairment losses | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
on securities | N/M | | | | - | | | | - | | | | - | | | (100) | % | | | - | | | | (1) | | | | (10) | | |
Total net revenues | N/M | | | | - | | | | 51 | | | | - | | | 5 | % | | | 6,380 | | | | 6,058 | | | | 5,435 | | |
Expenses Excluding | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Interest | N/M | | | | - | | | | 68 | | | | - | | | 4 | % | | | 4,101 | | | | 3,943 | | | | 3,730 | | |
Income before taxes | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
on income | N/M | | | $ | - | | | $ | (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
2017-2018 | | 2018 | | 2017 | | 2016 | | Growth Rate
2017-2018 | | 2018 | | 2017 | | 2016 | | Growth Rate
2017-2018 | | 2018 | | 2017 | | 2016 |
| Year Ended December 31, | | | | | | | | | | |
| Net Revenues | | | | | | | | | | | | | | | | | | | | | | | | |
| Net interest revenue | | 34 | % | | $ | 4,341 |
| | $ | 3,231 |
| | $ | 2,591 |
| | 41 | % | | $ | 1,482 |
| | $ | 1,051 |
| | $ | 731 |
| | 36 | % | | $ | 5,823 |
| | $ | 4,282 |
| | $ | 3,322 |
|
Asset management and
administration fees | | (4 | )% | | 2,260 |
| | 2,344 |
| | 2,093 |
| | (8 | )% | | 969 |
| | 1,048 |
| | 962 |
| | (5 | )% | | 3,229 |
| | 3,392 |
| | 3,055 |
|
| Trading revenue | | 16 | % | | 475 |
| | 408 |
| | 524 |
| | 17 | % | | 288 |
| | 246 |
| | 301 |
| | 17 | % | | 763 |
| | 654 |
| | 825 |
|
| Other | | 13 | % | | 245 |
| | 217 |
| | 203 |
| | (1 | )% | | 72 |
| | 73 |
| | 73 |
| | 9 | % | | 317 |
| | 290 |
| | 276 |
|
| Total net revenues | | 18 | % | | 7,321 |
| | 6,200 |
| | 5,411 |
| | 16 | % | | 2,811 |
| | 2,418 |
| | 2,067 |
| | 18 | % | | 10,132 |
| | 8,618 |
| | 7,478 |
|
Expenses Excluding
Interest | | 11 | % | | 4,145 |
| | 3,725 |
| | 3,380 |
| | 15 | % | | 1,425 |
| | 1,243 |
| | 1,105 |
| | 12 | % | | 5,570 |
| | 4,968 |
| | 4,485 |
|
Income before taxes
on income | | 28 | % | | $ | 3,176 |
| | $ | 2,475 |
| | $ | 2,031 |
| | 18 | % | | $ | 1,386 |
| | $ | 1,175 |
| | $ | 962 |
| | 25 | % | | $ | 4,562 |
| | $ | 3,650 |
| | $ | 2,993 |
|
N/M Not meaningful.
Total net revenues increased by $174$1.1 billion, or 18%, in 2018 from 2017 primarily due to an increase in net interest revenue, partially offset by lower asset management and administration fees. Net interest revenue increased primarily due to higher net interest margins and higher balances of interest-earning assets. Asset management and administration fees decreased primarily due to lower money market fund revenue as a result of transfers to bank sweep, client asset allocation choices, and our 2017 fee reductions. Expenses excluding interest increased by $420 million, or 4%11%, in 20152018 from 20142017 primarily due to higher compensation and benefits, technology project spend, and asset management and administration related expenses to support our expanding client base.
Total net revenues increased by $789 million, or 15%, in 2017 from 2016 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.
Advisor Services
Total net revenues increased by $393 million or 16%, in 2018 from 2017 primarily due to an increase in net interest revenue, partially offset by lower asset management and administration fees. Net interest revenue increased primarily due to
litigation proceeds relating to the Company’s non-agency RMBS portfolio. Trading revenuehigher net interest margins and higher balances of interest-earning assets. Asset management and administration fees decreased
in 2015 from 2014 largelyprimarily due to lower
commissions permoney market fund revenue
tradeas a result of transfers to bank sweep, client asset allocation choices, and
lower daily average revenue trades.our 2017 fee reductions. Expenses excluding interest increased by
$153$182 million, or
5%15%, in
20152018 from
20142017 primarily due to
growth in the business resulting in increases inhigher compensation and benefits,
technology project spend, and
other expenses.
THE CHARLES SCHWAB CORPORATION
Management’s Discussionasset management and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)
administration related expenses to support our expanding client base.Net
Total net revenues increased by
$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. Asset management and administration fees increased due to 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 funds and equity and bond funds, partially offset by a decrease in net money market mutual fund fees as a result of continued low yields on fund assets. Advice solution fees increased due to growth in client assets enrolled in advisory offers. Other revenue increased primarily due to litigation proceeds related to the Company’s non-agency RMBS portfolio and increases in order flow revenue. Expenses excluding interest increased by $79 million, or 3%, in 2014 from 2013 primarily due to increases in compensation and benefits and professional services expense, partially offset by a decrease in advertising and market development expense.Advisor Services
Net revenues increased by $199 million, or 14%, in 2015 from 2014 primarily due to increases in net interest revenue, asset management and administration fees, and other revenue. Net interest revenue increased primarily due to higher balances of interest-earning assets, partially offset by the effect of lower net interest margins. Interest-earning assets have grown due to growth in brokerage client cash swept 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. Expenses excluding interest increased by $73 million, or 8%, in 2015 from 2014 primarily due to increases in growth in the business resulting in increases in compensation and benefits, advertising 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, and other revenue. Asset management and administration fees increased due to 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 solutions fees increased due to growth in client assets enrolled in advisory offers. Net interestTrading revenue increaseddecreased 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.lower commission rates. Expenses excluding interest increased by $66$138 million, or 8%12%, in 20142017 from 20132016 primarily due to increases inhigher compensation and benefits, technology project spend, asset management and professional services expense.
Unallocated
Other revenue decreasedadministration related expenses, and regulatory fee assessments.
THE CHARLES SCHWAB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in
2015 from 2014 due to a net insurance settlement of $45 million in 2014.Expenses excluding interest decreased in 2015 from 2014Millions, Except Ratios, or as a result of a $68 million charge in 2014 for estimated future severance benefits resulting from changes in the Company’s geographic footprint.
Risk Noted)
RISK MANAGEMENT
The Company’s
Schwab’s business activities expose it to a variety of risks, including operational, credit, market, liquidity,
and compliance
and legal risk.risks. The Company has a comprehensive risk management program to identify and manage these risks and their associated potential for financial and reputational impact. Despite
the Company’sour efforts to identify areas of risk and implement risk management policies and procedures, there can be no assurance that
the CompanySchwab will not suffer unexpected losses due to these risks.
The Company’s
Our risk management process is comprised of risk identification and assessment, risk measurement, risk monitoring and reporting, and risk mitigation. The activities and
organizationsgovernance that comprise the risk management process are described below.
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)
CultureRisk Culture
The Board of Directors has approved an Enterprise Risk Management (ERM) framework that incorporates
the Company’sour purpose, vision, and values,
towhich form the bedrock of
its riskour corporate culture and set the tone for the organization.
The
We designed the ERM Framework
and 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.
Senior management takes an active role in the risk management process and has developed policies and procedures under which specific business and control units are responsible for identifying, measuring, and controlling risks.
The Global Risk Committee, which is comprised of senior executives from each major business and control function, is responsible for the oversight of risk management. This includes identifying emerging risks, assessing risk management practices and the control environment, reinforcing business accountability for risk management, supervisory controls and regulatory compliance, supporting resource prioritization across the
Company,organization, and escalating significant issues to the Board of Directors.
The Company has
We have established risk metrics and reporting that enable measurement of the impact of strategy execution against risk appetite. The risk metrics, with risk limits and tolerance levels, are established for key risk categories by the Global Risk Committee and its functional risk sub-committees.
The
Chief Risk Officer regularly reports activities of the Global Risk Committee
reports regularly to the Risk Committee of the Board of Directors. The
Board Risk Committee in turn assists the Board of Directors in fulfilling its oversight responsibilities with respect to
the Company’sour risk management program, including approving risk appetite statements
and related key risk appetite metrics and reviewing reports relating to risk issues from functional areas of risk management, legal, compliance, and internal audit.
Functional risk sub-committees focusing on specific areas of risk report to the Global Risk Committee. These sub-committees include the:
| ·
| | Asset-Liability Management and Pricing Committee, which establishes strategies and policies for the management of corporate capital, liquidity, interest rate risk, and investments;
|
| ·
| | Compliance Risk Committee, which 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;
|
Compliance Risk Committee – provides oversight of compliance risk management programs and policies providing an aggregate view of compliance risk exposure, and includes a subcommittee covering Fiduciary Risk; | ·
| | 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
|
Financial Risk Oversight Committee – provides oversight of and approves capital, credit, liquidity, and market risk policies, limits, and exposures; | ·
| | 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:
|
| o
| | Client Fiduciary Risk Sub-Committee, which provides oversight of fiduciary risk throughout the Company;
|
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 Fraud, Data, Information Security, Model Governance, and Third-Party risk. | o
| | Global Data Subcommittee, which oversees and approves corporate policies and standards related to enterprise data governance;
|
| o
| | Information Security and Privacy Sub-Committee, which provides oversight of the information and cyber security and privacy programs and policies;
|
| o
| | Model Governance Sub-Committee, which provides oversight of model risk throughout the Company; and the
|
| o
| | Vendor Management Sub-Committee, which provides oversight of the Company’s vendor management and outsourcing program and policies.
|
THE CHARLES SCHWAB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)
Senior management has also created an Incentive Compensation Risk Oversight Committee, which establishes policy and reviews and approves the Annual Risk Assessment of incentive compensation plans, and reports directly to the
Compensation Committee of the Board
Compensation Committee.of Directors.
The Company’s compliance, finance, internal audit, legal, and corporate risk management departments assist management and the various risk committees in evaluating, testing, and monitoring
the Company’s risk management.
In addition, the
Company’s Disclosure Committee is responsible for monitoring and evaluating the effectiveness of
the Company’s (a)our disclosure controls and procedures and
(b) internal control over financial reporting as of the end of each fiscal quarter. The Disclosure Committee reports on this evaluation to the CEO and CFO prior to their certification required by Sections 302 and 906 of the Sarbanes Oxley Act of 2002.
Operational risks arise due to
potentially inadequatepotential inadequacies or
failedfailures related to people, internal processes,
people, and systems, or from external events
andor relationships impacting the Company and/or any of its key business partners and
vendors. Operationalthird parties. While operational risk
includes 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.
Schwab’s operations are highly dependent on the integrity
and resilience of
itsour critical business functions and technology
systems and the Company’s success depends, in part, on its ability to make timely enhancements and additions to its technology in anticipation of evolving client needs.systems. To the extent
the CompanySchwab experiences
business or system interruptions, errors or downtime (which could result from a variety of causes, including
changes in client use patterns,natural disasters, terrorist attacks, technological failure,
cyber attacks, changes to
its systems, linkages with third-party systems, and power failures),
the Company’sour business and operations could be
significantly negatively impacted. To minimize business interruptions
and ensure the capacity to continue operations during an incident regardless of duration, 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 policiesplans and procedures and technology to protect against fraud and unauthorized access to systems and data.
Despite the Company’s riska well-established incident 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 Company also faces operational risk when it employs the services of various external vendors, including domestic and international outsourcing of certain technology, processing, servicing, and support functions. The Company manages its exposure to external vendor risk through contractual provisions, control standards, and ongoing monitoring of vendor performance. The Company maintains policies and procedures regarding the standard of care expected with Company data, whether the data is internal company information, employee information, or non-public client information. The Company
program.
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)
clearly defines for employees, contractors, and vendors the Company’s expected standards of care for confidential data. Regular training is provided by the Company in regard to 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 Risk
Fiduciary risk is the potential for financial or reputational loss through breach of fiduciary duties to a client. Fiduciary activities include, but are not limited to, individual and institutional trust, investment management, custody, and cash and securities processing. The Company attempts to manage this risk by establishing 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 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 Risk
Information Security risk is the potential forrisk of unauthorized access, use, disclosure, disruption, modification, perusal, inspection, recording or destruction of the firm’s information or systems. The Company hasWe have designed and implemented aan information security program that knits together complementary tools, controls and technologies to protect systems, client accounts and data. The CompanyWe continuously monitorsmonitor the systems and workswork collaboratively with government agencies, law enforcement and other financial institutions to address potential threats. The Company usesWe use advanced monitoring systems to identify suspicious activity and deter unauthorized access by internal or external actors. The Company limitsWe limit the number of employees who have access to clients’ personal information and enforces 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 Cybercyber security teams monitor activity looking for suspicious behavior. These capabilities allow the Companyus to identify and quickly act on any attempted intrusions.
Legal Risk
Legal
Schwab also faces operational risk
iswhen we employ the
riskservices of
a claim for damages or other relief brought by clients, employees orvarious third parties,
alleging a breachincluding domestic and international outsourcing 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 subjectcertain technology, processing, servicing, and support functions. We manage the exposure to
substantial litigationthird party risk and
promote a culture of resiliency through contractual provisions, control standards, ongoing monitoring of third party performance, and appropriate testing. We maintain policies and procedures regarding the
firm incurs legal claims instandard of care expected with all data, whether the
ordinary coursedata is internal company information, employee information, or non-public client information. We clearly define for employees, contractors, and third parties the expected standards of
business. Increased litigation costs or substantial legal liability relating to an extraordinary claim or incidence of claims could have a material adverse effectcare for confidential data. We also provide regular training 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 Risk
data security.
Model risk is the potential for adverse consequences from decisions based on incorrect or misused model outputs and reports. Models are owned by several business units throughout the Company,organization, and are used for a variety of purposes. Model use includes, but is not limited to, calculating capital requirements for hypothetical stressful environments, estimating interest and credit risk for loans and other balance sheet assets, and providing guidance in the management of client portfolios. The Company hasWe have established a policy to describe the roles and responsibilities of all key stakeholders in model development, management, and use. All models at the Company are registered in a centralized database and classified into different risk
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)
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.
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)
Compliance Risk
The Company
Schwab faces
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
We manage compliance risk through policies, procedures and controls reasonably designed to achieve and/or monitor compliance with applicable legal and regulatory requirements. These procedures address issues such as business conduct and ethics, sales and trading practices, marketing and communications, extension of credit, client funds and securities, books and records, anti-money laundering, client privacy, and employment policies. Despite
Fiduciary risk is the
Company’s effortspotential for financial or reputational loss through breach of fiduciary duties to
maintain an effectivea client. Fiduciary activities include, but are not limited to, individual and institutional trust, investment management, custody, and cash and securities processing. We manage this risk by establishing policy and procedures to ensure that obligations to clients are discharged faithfully and in compliance
programwith applicable legal and
internal controls, legal breachesregulatory requirements. Business units have the primary responsibility for adherence to the policy and
rule violations could result in reputational harm, significant lossesprocedures applicable to their business. Guidance and
disciplinary sanctions, including limitations oncontrol are provided through the
Company’screation, approval, and ongoing review of applicable policies by business
activities.units and various risk committees.
Credit risk is the potential for loss due to a borrower, counterparty, or issuer failing to perform
on its contractual obligations.
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.
Liquidity and
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 Portfolios
Schwab has exposure to credit risk dueassociated 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, commercial paper, and foreign government agency securities.
At December 31, 2018, substantially all securities in the investment portfolios were rated investment grade. U.S. agency mortgage-backed securities do not have explicit credit ratings; however, management considers these to
its obligation to settle transactions with clearing corporations, mutual funds,be of the highest credit quality and
other financial institutions even if Schwab’s clientrating given the guarantee of principal and interest by the U.S. government or
a counterparty fails to meet its obligations to Schwab.U.S. government-sponsored enterprises.
Mortgage Lending Portfolio
The
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’s
Our residential loan underwriting guidelines include maximum
loan-to-value (LTV)LTV ratios, cash out limits, and minimum Fair Isaac Corporation (FICO) credit scores. The specific guidelines are dependent on the individual characteristics of a loan (for example, whether the property is a primary or secondary residence, whether the loan is for investment property, whether the loan is for an initial purchase of a home or refinance of an existing home, and whether the loan size is conforming or jumbo).
The Company
THE CHARLES SCHWAB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)
Schwab does not originate or purchase residential loans that allow for negative amortization and does not
originate or purchase subprime loans (generally defined as extensions of credit to borrowers with a FICO score of less than 620 at origination), unless the borrower has compensating credit factors.
At December 31, 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.
THE CHARLES SCHWAB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)
At December 31, 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.
For more information on the Company’s credit quality indicators relating to its First Mortgage and HELOC portfolios, including delinquency characteristics, borrower FICO scores at origination, updated borrower FICO scores, LTV ratios at origination, and estimated current LTV ratios,Schwab’s bank loans, see “ItemItem 8 – Financial StatementsNote 7.
Securities and Supplementary Data – NotesInstrument-Based Lending Portfolios
Collateral arrangements relating to
Consolidated 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:
| | | | | | | |
December 31, | | 2015 | | | 2014 | | |
Loan delinquencies (1) | | 0.25 | % | | 0.27 | % | |
Nonaccrual loans | | 0.19 | % | | 0.26 | % | |
Allowance for loan losses | | 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 Risk
The 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.
THE CHARLES SCHWAB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)
The 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, 2015
| Balance
|
Converted to amortizing loan by period end
| $
| 461 | |
Within 1 year
| | 166 | |
> 1 year – 3 years
| | 973 | |
> 3 years – 5 years
| | 334 | |
> 5 years
| | 801 | |
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.
Other Counterparty Exposures
Schwab performs clearing services for all securities transactions
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.
THE CHARLES SCHWAB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)
Foreign Holdings
The 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.
Schwab.
Market risk is the potential for changes in earnings or the value of financial instruments held by
the CompanySchwab as a result of fluctuations in interest rates, equity prices, or market conditions.
Included in market risk is interest rate risk, which is the risk to earnings or capital arising from movement of interest rates. For discussion of the Company’s market risk, see “Item 7A – Quantitative and Qualitative Disclosures About Market Risk.”Liquidity Risk
Liquidity risk arises from the inability to meet obligations when they come due without incurring unacceptable losses. It is the risk that valuations will be negatively affected by changes in demand and the underlying market for a financial instrument. Limits and contingency funding scenarios have been established for the Company to support liquidity levels and quality during both expected and stressed scenarios. The Company seeks to maintain client confidence in its balance sheet and the safety of client assets by maintaining liquidity and diversity of funding sources to allow the Company to meet its obligations under both expected and stressed scenarios. See “Liquidity” for additional detail on the Company’s liquidity requirements.
LIQUIDITY
CSC’s liquidity needsWe 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 employs a variety of methodologies to monitor and manage liquidity. The Company conducts regular liquidity stress testing to develop a consolidated view of liquidity risk exposures and to ensure the Company’s 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 Pricing Committee. A number of early warning indicators are monitored to help identify emerging liquidity stresses in the market or within the Company and are reviewed with management as appropriate.
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)
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.
Primary Funding Sources
The Company’s primary source of funds is cash generated by client activity: bank deposits and cash balances in brokerage client accounts. In 2015 bank deposits swept from brokerage accounts increased $26.0 billion. These funds were used to invest in interest earning assets, thereby funding a significant portion of the 19% growth in the Company’s balance sheet.
Other sources of funds may include cash flows from operations, maturities and sales of investment securities, repayments on loans, securities lending, and cash provided by external financing or equity offerings.
To meet daily funding needs, the Company maintains liquidity in the form of overnight cash deposits and short-term investments. For unanticipated liquidity needs, the Company maintains high-quality liquid assets, currently comprised of U.S. Treasury notes.
Additional Funding Sources
In addition to internal sources of liquidity, the Company has sources of external funding. CSC maintains a $750 million committed, unsecured credit facility with a group of banks that is scheduled to expire in June 2016. Other than an overnight borrowing to test the availability of this facility, it was unused during 2015. The funds under this facility are available for general corporate purposes. The financial covenants require Schwab 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, the minimum level of stockholders’ equity required under this facility was $8.9 billion (CSC’s stockholders’ equity, excluding accumulated other comprehensive income, at December 31, 2015 was $13.5 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.
Schwab Bank has access to short-term secured funding through the Federal Reserve’s discount window. Amounts available under the Federal Reserve discount window are dependent on the fair value of certain of Schwab Bank’s securities 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.Schwab Bank also maintains a secured credit facility with the Federal Home Loan Bank of San Francisco. Amounts available under this facility are dependent on the amount of Schwab Bank’s residential real estate mortgages and HELOCs that are pledged as collateral. Schwab Bank maintains policies and procedures necessary to access this funding and tests borrowing
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)
procedures on a periodic basis. At December 31, 2015, $9.3 billion was available under this facility. There were no funds drawn under this facility during 2015, except for testing purposes.CSC has authorization from its Board of Directors to issue unsecured commercial paper notes (Commercial Paper Notes) not to exceed $1.5 billion. Management has set a current limit for the commercial paper program not to exceed the amount of the committed, unsecured credit facility, which was $750 million at December 31, 2015. 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 wereno borrowings of Commercial Paper Notes outstanding at December 31, 2015 or 2014.
At December 31, 2015 and 2014, CSC had long-term debt of $2.9 billion and $1.9 billion, respectively, which bears interest at a weighted-average rate of 3.38%. CSC has a universal automatic shelf registration statement (Shelf Registration Statement) on file with the SEC which enables it to issue debt, equity, and other securities.
On March 10, 2015, CSC issued $625 million aggregate principal amount of Senior Notes that mature in 2018 and $375 million aggregate principal amount of Senior Notes that mature in 2025. The Senior Notes due 2018 and 2025 have a fixed interest rate of 1.50% 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.
The following are details of CSC’s long-term debt:
| | | | | | | | | | | | | | | |
| | Par | | | | | | | | | Standard | | | |
December 31, 2015 | Outstanding | | Maturity | | Interest Rate | | Moody’s | | & Poor’s | | Fitch | |
Senior Notes | | $ | 2,581 | | | 2018 – 2026 | | 1.50% to 4.45% fixed | | A2 | | A | | A | |
Medium-Term Notes | | $ | 250 | | | 2017 | | 6.375% fixed | | A2 | | A | | A | |
On August 3, 2015, CSC completed an equity offering of 24 million depositary shares, each representing a 1/40th ownership interest in a share of 6.00% non-cumulative perpetual preferred stock (Series C). The Series C preferred stock has a fixed dividend rate of 6.00%. The net proceeds from the sale were $581 million.
For further discussion of CSC’s long-term debt and information on the equity offering, see “Item 8 – Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – 14. Borrowings and 18. Stockholders’ Equity.”
Off-Balance Sheet Arrangements
The Company enters into various off-balance sheet arrangements in the ordinary course of business, primarily to meet the needs of its clients. These arrangements include firm commitments to extend credit. Additionally, the Company enters into guarantees and other similar arrangements in the ordinary course of business. For information on each of these arrangements, see “Item 8 – Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – 6. Bank Loans and Related Allowance for Loan Losses, 14. Borrowings, 15. Commitments and Contingencies, and 16. Financial Instruments Subject to Off-Balance Sheet Credit Risk or Concentration Risk.”
THE CHARLES SCHWAB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)
Contractual Obligations
The Company’s principal contractual obligations as of December 31, 2015 are shown in the following table. Management believes that funds generated by its continuing operations, as well as cash provided by external financing, will continue to be the primary funding sources in meeting these obligations. Excluded from this table are liabilities recorded on the consolidated balance sheet that are generally short-term in nature (e.g., payables to brokers, dealers, and clearing organizations) or without contractual payment terms (e.g., bank deposits, payables to brokerage clients, and deferred compensation).
| | | | | | | | | | | | | | | | |
| | Less than | | 1-3 | | 3-5 | | More than | | | | |
December 31, 2015 | | 1 Year | | Years | | Years | | 5 Years | | Total | |
Credit-related financial instruments (1) | | $ | 955 | | $ | 1,635 | | $ | 3,273 | | $ | 1,975 | | $ | 7,838 | |
Long-term debt (2) | | | 94 | | | 1,312 | | | 813 | | | 1,120 | | | 3,339 | |
Leases (3) | | | 111 | | | 191 | | | 114 | | | 172 | | | 588 | |
Purchase obligations (4) | | | 230 | | | 152 | | | 36 | | | 213 | | | 631 | |
Total | | $ | 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.
|
CAPITAL MANAGEMENT
The Company seeks to manage capital to a level and composition sufficient to support execution of its business strategy, including anticipated balance sheet growth, providing financial support to its subsidiaries, and sustained access to the capital markets, while at the same time meeting its regulatory capital requirements and serving as a source of financial strength to Schwab Bank. The Company’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 it has a sufficient amount of capital to absorb unanticipated losses or declines in asset values, the Company has 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.
Internal guidelines are set, for both the Company and its regulated subsidiaries, to ensure capital levels are in line with the Company’s strategy and regulatory requirements, and capital forecasts are reviewed monthly at Capital Planning and Asset-Liability Management and Pricing 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. In addition, 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. 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. 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 Company conducts regular capital stress testing to assess the potential financial impacts of various plausible adverse macroeconomic and company-specific events to which CSC and its subsidiaries 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 has 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 Management and Pricing
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)
Committee and provides guidelines for sustained capital events. It does not specifically address every contingency, but is designed to provide a framework for responding to any capital stress. The Capital Contingency Plan is reviewed annually and updated as appropriate. See “Part I – Item 1. – Business – Regulation” for additional information.
Regulatory Capital Requirements
Beginning on January 1, 2015, CSC became subject to capital requirements set by the Federal Reserve. In addition, CSC 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 utilizes a target Tier 1 Leverage Ratio for CSC of at least 6%. Due to the relatively low risk of the Company’s 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 required to maintain capital levels specified by the OCC. These capital requirements are substantially similar to those imposed on CSC by the Federal Reserve. Schwab Bank’s 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 utilizes a target Tier 1 Leverage Ratio for Schwab Bank 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, Schwab Bank is considered well capitalized.
The following table details CSC’s and Schwab Bank’s capital ratios under the new Final Regulatory Capital Rules:
| | | | | | | | | |
December 31, 2015 | | CSC | | | | Schwab Bank | |
Total stockholders’ equity | $ | 13,402 | | | | $ | 9,191 | | |
Less: | | | | | | | | | |
Preferred Stock | | 1,459 | | | | | - | | |
Common Equity Tier 1 Capital before regulatory adjustments | $ | 11,943 | | | | $ | 9,191 | | |
Less: | | | | | | | | | |
Goodwill, net of associated deferred tax liabilities | $ | 1,185 | | | | $ | 11 | | |
Other intangible assets, net of associated deferred tax liabilities | | 41 | | | | | - | | |
AOCI adjustment (1) | | (134) | | | | | (134) | | |
Common Equity Tier 1 Capital | $ | 10,851 | | | | $ | 9,314 | | |
Tier 1 Capital | $ | 12,310 | | | | $ | 9,314 | | |
Total Capital | | 12,342 | | | | | 9,345 | | |
Risk-Weighted Assets | | 59,578 | | | | | 51,516 | | |
Common Equity Tier 1 Capital/Risk-Weighted Assets | | 18.2 | % | | | | 18.1 | % | |
Tier 1 Capital/Risk-Weighted Assets | | 20.7 | % | | | | 18.1 | % | |
Total Capital/Risk-Weighted Assets | | 20.7 | % | | | | 18.1 | % | |
Tier 1 Leverage Ratio | | 7.1 | % | | | | 7.1 | % | |
| |
(1)
| CSC and Schwab Bank have elected to opt-out 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 intended 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.
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)
See “Item 8 – Financial Statements and Supplementary Data – Consolidated Balance Sheets and Notes to Consolidated Financial Statements – 23. Regulatory Requirements” for additional information on the 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.
Schwab Bank is subject to regulatory requirements that restrict and govern the terms of affiliate transactions. In addition, Schwab Bank is required to provide notice to, and may be required to obtain approval from, the OCC and the Federal Reserve to declare dividends to CSC.
Dividends
CSC paid common stock cash dividends of $318 million ($0.24 per share) and $316 million ($0.24 per share) in 2015 and 2014, respectively. Since the initial dividend in 1989, CSC has paid 107 consecutive quarterly dividends and has increased the quarterly dividend rate 19 times, resulting in a 20% compounded annual growth rate, excluding the special cash dividend of $1.00 per common share in 2007. While the payment and amount of dividends are at the discretion of the Board of Directors, subject to certain regulatory and other restrictions, CSC currently targets its common stock cash dividend at approximately 20% to 30% of net income.
CSC paid Series A Preferred Stock cash dividends of $28 million ($70.00 per share) in 2015 and 2014, respectively. CSC paid Series B Preferred Stock cash dividends of $29 million ($60.00 per share) in 2015 and 2014, respectively. CSC paid Series C cash dividends of $12 million ($19.67 per share) in 2015.
Share Repurchases
There were no repurchases of CSC’s common stock in 2015 or 2014. As of December 31, 2015, CSC had remaining authority from the Board of Directors to repurchase up to $596 million of its common stock, which is not subject to expiration.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company uses the market and income approaches to determine the fair value of certain financial assets and liabilities recorded at fair value, and to determine fair value disclosures. See “Item 8 – Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – 2. Summary of Significant Accounting Policies and 17. Fair Values of Assets and Liabilities” for more information on the Company’s assets and liabilities recorded at fair value.
When available, the Company uses quoted prices in active markets to measure the fair value of assets and liabilities. When utilizing market data with a 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 Company generally obtains prices from at least three independent pricing sources for assets recorded at fair value. The Company’s primary independent pricing service provides prices based on observable trades and discounted cash flows that incorporate observable information such as yields for similar types of securities (a benchmark interest rate plus observable spreads) and weighted-average maturity for the same or similar “to-be-issued” securities. The Company compares the prices obtained from its primary independent pricing service to the prices obtained from the additional independent pricing services to determine if the price obtained from the primary independent pricing service is reasonable. The Company 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. At December 31, 2015 and 2014, the Company did not adjust prices received from the primary independent third-party pricing service.
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)
CRITICAL ACCOUNTING ESTIMATES
The consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the U.S. While the majority of the Company’s revenues, expenses, assets and liabilities are not based on estimates, there are certain accounting principles that require management to make estimates regarding matters that are uncertain and susceptible to change where such change may result in a material adverse impact on the Company’s financial position and reported financial results. These critical accounting estimates are described below. Management regularly reviews the estimates and assumptions used in the preparation of the Company’s financial statements for reasonableness and adequacy.
Other-than-Temporary Impairment of Securities Available for Sale and Securities Held to Maturity
Management evaluates whether securities available for sale and securities held to maturity are other-than-temporarily impaired on a quarterly basis. Debt securities with unrealized losses are considered OTTI if the Company intends to sell the security or if it is more likely than not that the Company will be required to sell such security before any anticipated recovery. If management determines that a security is OTTI under these circumstances, the impairment recognized in earnings is measured as the entire difference between the amortized cost and the then-current fair value.
A security is also OTTI if management does not expect to recover the amortized cost of the security. In this circumstance, the impairment recognized in earnings represents the estimated credit loss, and is measured by the difference between the present value of expected cash flows and the amortized cost of the security. Management utilizes cash flow 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 Goodwill
The Company tests goodwill for impairment at least annually, or whenever indications of impairment exist. Impairment exists when the carrying amount of goodwill exceeds its implied fair value, resulting in an impairment charge for this excess. Adverse changes in the Company’s planned business operations such as unanticipated competition, a loss of key personnel, the sale 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 Losses
The appropriateness of the allowance is reviewed quarterly by management, taking into consideration current economic conditions, the existing loan portfolio composition, past loss experience, and risks inherent in the 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
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)
conditions, estimated defaults and foreclosures measured by historical and expected delinquencies, changes in prepayment speeds, LTV ratios, past loss experience, estimates of future loss severities, borrower credit risk measured by FICO scores, and the adequacy of collateral. The methodology also evaluates concentrations in the loan segments including loan products, year of origination, and geographical distribution of collateral.
Probable losses are forecast using a loan-level simulation of the delinquency status of the loans over the term of the loans. The simulation starts with the current relevant risk indicators, including the current delinquent status of each loan, the estimated current LTV ratio of each loan, the term and structure of each loan, current key interest rates including U.S. Treasury and LIBOR rates, and borrower FICO scores. The more significant variables in the simulation include delinquency roll rates, loss severity, housing prices, and interest rates. Delinquency roll rates are estimated from the Company’s historical loss experience adjusted for current trends and market information. Further, the delinquency roll rates within the loan-level simulation discussed above are calibrated to match a moving average of the delinquency roll rates actually experienced in the respective First Mortgage and HELOC portfolios. Loss severity estimates are based on the Company’s historical loss experience and market trends. The estimated loss severity (i.e., loss given default) used in the allowance for loan loss 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.
Legal and Regulatory Reserves
Reserves for legal and regulatory claims and proceedings reflect an estimate of probable losses for each matter, after considering, among other factors, the progress of the case, prior experience and the experience of others in similar cases, available defenses, insurance coverage and indemnification, and the opinions and views of legal counsel. In many cases, including most class action lawsuits, it is not possible to determine whether a loss will be incurred, or to estimate the range of that loss, until the matter is close to resolution, in which case no accrual is made until that time. Reserves are adjusted as more information becomes available or when an event occurs requiring a change. 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 the Company’s significant estimates discussed in this Management’s Discussion and Analysis of Financial Condition and Results of Operations.
THE CHARLES SCHWAB CORPORATION
Item 7A.
| Quantitative and Qualitative Disclosures About Market Risk
|
Market risk is the potential for changes in earnings or the value of financial instruments held by the Company as a result of fluctuations in interest rates, equity prices or market conditions.
The Company is exposed to interest rate risk primarily from changes in market interest rates on itsour interest-earning assets relative to changes in the costs of its funding sources that finance these assets. The majority of the Company’s interest-earning assets and interest-bearing liabilities are sensitive to changes in short-term interest rates. To a lesser degree, the Company is sensitive to changes in long-term interest rates through some of its investment portfolios. To manage the Company’s market risk related to interest rates, management utilizes simulation models, which include the net interest revenue sensitivity analysis described below.
Net interest revenue is affected by various factors, such as the distribution and composition of interest-earning assets and interest-bearing liabilities, the spread between yields earned on interest-earning assets and rates paid on interest-bearing liabilities, which may reprice at different times or by different amounts, and the spread between short and long-term interest rates. Interest-earning assets 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
the Company establisheswe establish the rates paid on certain brokerage client cash balances and bank deposits and the rates charged on
certain margin
loans and bank loans, and
controlscontrol the composition of
itsour investment securities,
it haswe have some ability to manage
itsour net interest spread, depending on competitive factors and market conditions.
To mitigate the risk of
loss, the Company hasdeclining interest revenue, 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
itsour interest-earning assets and funding sources. To remain within these guidelines,
the Company manageswe manage the maturity, repricing, and cash flow characteristics of the investment portfolios.
The Company is
Financial instruments are also subject to
the risk that valuations will be negatively affected by changes in demand and the underlying market
risk asfor 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 pricesfinancial instrument. We 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,customers, and client securities loaned out as part of the
Company’sbrokerage 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.Schwab. Additionally,
the Company earnswe 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
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’swe earn.
Our market risk related to financial instruments held for trading is not material.
Net Interest Revenue Simulation
For the Company’sSchwab’s net interest revenue sensitivity analysis, the Company useswe use net interest revenue simulation modeling techniques to evaluate and manage the effect of changing interest rates. The simulation includes all interest-sensitive assets and liabilities. Key variables in the simulation include the repricing of financial instruments, prepayment, reinvestment, and product pricing assumptions. The 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
THE CHARLES SCHWAB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)
to balance growth or decline and the timing,
THE CHARLES SCHWAB CORPORATION
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’sour guidelines for
its net interest revenue sensitivity are breached, management must report the breach to the
Company’s Corporate Asset-Liability Management and PricingFinancial Risk Oversight 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’sSchwab’s net interest revenue sensitivity
guidelinesrisk limits during the years ended December 31,
20152018 or
2014. 2017.
As represented by the simulations presented below,
the Company’sour 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
sheetsheets would not be changed as a result of the simulated changes in interest rates. As
the Companywe actively
manages itsmanage the consolidated balance
sheetsheets and interest rate exposure, in all likelihood
the Companywe 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,
20152018 and
20142017 of a gradual 100 basis point increase or decrease in market interest rates relative to prevailing market rates at the end of each reporting period.
| | | | | | | |
December 31, | | 2015 | | | 2014 | | |
Increase of 100 basis points | | 8.2 | % | | 11.8 | % | |
Decrease of 100 basis points | | (9.5) | % | | (4.9) | % | |
|
| | | | |
| December 31, | 2018 |
| 2017 |
|
| Increase of 100 basis points | 4.4 | % | 3.3 | % |
| Decrease of 100 basis points | (4.9 | )% | (6.2 | )% |
The year-over-year change in net interest revenue sensitivities reflects higher interest rates across the yield curve, and particularly, higher short-term interest rates.
Liquidity Risk
Liquidity risk is the potential that Schwab will be unable to meet cash flow obligations when they come due without incurring unacceptable losses.
Due to its role as a source of financial strength, CSC’s liquidity needs are primarily driven by the liquidity and capital needs of CS&Co, the capital needs of the banking subsidiaries, principal and interest due on corporate debt, dividend payments on CSC’s preferred stock, and returns of capital to common stockholders. The liquidity needs of CS&Co are primarily driven by client activity including trading and margin borrowing activities and capital expenditures. The capital needs of the banking subsidiaries are primarily driven by client deposits. We have established liquidity policies to support the successful execution of business strategies, while ensuring ongoing and sufficient liquidity to meet operational needs and satisfy applicable regulatory requirements under both normal and stressed conditions. We seek to maintain client confidence in the balance sheet and the safety of client assets by maintaining liquidity and diversity of funding sources to allow the Company to meet its obligations. To this end, we have established limits and contingency funding scenarios to support liquidity levels during both business as usual and stressed conditions.
We employ a variety of methodologies to monitor and manage liquidity. We conduct regular liquidity stress testing to develop a consolidated view of liquidity risk exposures and to ensure our ability to maintain sufficient liquidity during market-related or company-specific liquidity stress events. Liquidity is also tested at key subsidiaries and results are reported to the Financial Risk Oversight Committee. A number of early warning indicators are monitored to help identify emerging liquidity stresses in the market or within the organization and are reviewed with management as appropriate.
THE CHARLES SCHWAB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)
The Company was subject to, and was in compliance with, the modified LCR rule at December 31, 2018. As Schwab’s consolidated balance sheet assets were above $250 billion at December 31, 2018, Schwab will become subject to the full LCR rule in the second quarter of 2019. The table below presents information about our average LCR:
|
| | | |
| | Average for the |
| | Three Months Ended December 31, 2018 |
| Total eligible HQLA | $ | 38,881 |
|
Net cash outflows (1) | $ | 35,191 |
|
| LCR | 111 | % |
(1) This amount represents modified net cash outflows as defined by the LCR rule, which requires that HQLA cover 70% of total stressed net cash outflows.
Primary Funding Sources
Schwab’s primary source of funds is cash generated by client activity which includes bank deposits and cash balances in client brokerage accounts. These funds are used to purchase investment securities and extend loans to clients.
Other sources of funds may include cash flows from operations, maturities and sales of investment securities, repayments on loans, securities lending of assets held in client brokerage accounts, repurchase agreements, and cash provided by external financing.
To meet daily funding needs, we maintain liquidity in the form of overnight cash deposits and short-term investments. For unanticipated liquidity needs, a buffer of highly liquid investments, currently comprised of U.S. Treasury notes, is also maintained.
Additional Funding Sources
In addition to internal sources of liquidity, Schwab has access to external funding. The need for short-term borrowings from these facilities arises primarily from timing differences between cash flow requirements, scheduled liquidation of interest-earning investments, movements of cash to meet regulatory brokerage client cash segregation requirements and general corporate purposes. We maintain policies and procedures necessary to access funding and test discount window borrowing procedures on a periodic basis.
The following table describes external debt facilities available at December 31, 2018:
|
| | | | | | | |
| Description | Borrower | Outstanding | Available |
Federal Home Loan Bank secured credit facility (1) | Banking subsidiaries | $ | — |
| $ | 35,528 |
|
| Uncommitted, unsecured lines of credit with various external banks | CSC, CS&Co | — |
| 1,432 |
|
Unsecured commercial paper (2) | CSC | — |
| 750 |
|
Committed, unsecured credit facility with various external banks (3) | CSC | — |
| 750 |
|
Federal Reserve Bank discount window (4) | CSB | — |
| 7,865 |
|
(1) Amounts available are dependent on the amount of First Mortgages, HELOCs, and the fair value of certain investment securities that are pledged as collateral.
(2) CSC has authorization from its Board of Directors to issue Commercial Paper Notes to not exceed $1.5 billion. Management has set a current limit not to exceed the amount of the committed, unsecured credit facility.
(3) Other than an overnight borrowing to test availability, this facility was unused during 2018.
(4) Amounts available are dependent on the fair value of certain investment securities that are pledged as collateral.
Certain banking subsidiaries maintain secured credit facilities with the Federal Home Loan Bank of San Francisco (FHLB). Amounts available under these facilities are dependent on the value of our First Mortgages, HELOCs, and the fair value of certain of our investment securities that are pledged as collateral. During 2018, CSB used borrowings under this agreement to purchase investment securities in advance of bank sweep transfers. This credit facility is also available as backup financing in the event the outflow of client cash from the banking subsidiaries’ respective balance sheets is greater than maturities and paydowns on investment securities and bank loans.
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)
CSB also has access to short-term secured funding through the Federal Reserve’s discount window. Amounts available under the Federal Reserve discount window are dependent on the fair value of certain investment securities that are pledged as collateral.
CSC has a commercial paper program of which proceeds are used for general corporate purposes. The maturities of the Commercial Paper Notes may vary, but are not to exceed 270 days from the date of issue. CSC’s ratings for these short-term borrowings are P1 by Moody’s, A1 by Standard & Poor’s, and F1 by Fitch. CSC had no Commercial Paper Notes outstanding at December 31, 2018 or 2017.
The financial covenants for the $750 million committed credit facility require CS&Co to maintain a minimum net capital ratio, CSB to be well capitalized, and CSC to maintain a minimum level of stockholders’ equity, adjusted to exclude AOCI. At December 31, 2018, the minimum level of stockholders’ equity required under this facility was $14.5 billion (CSC’s stockholders’ equity, excluding AOCI, at December 31, 2018 was $20.9 billion). Management believes these restrictions will not have a material effect on CSC’s ability to meet foreseeable dividend or funding requirements.
To partially satisfy the margin requirement of client option transactions with the Options Clearing Corporation, CS&Co has unsecured standby letter of credit agreements (LOCs) with several banks in favor of the Options Clearing Corporation aggregating $225 million at December 31, 2018. There were no funds drawn under any of these LOCs during 2018 or 2017. In connection with its securities lending activities, the Company is required to provide collateral to certain brokerage clients. The collateral requirements were satisfied by providing cash as collateral.
CSC has a universal automatic shelf registration statement (Shelf Registration Statement) on file with the SEC, which enables it to issue debt, equity, and other securities.
Borrowings
Long-term debt outstanding was $6.9 billion and $4.8 billion at December 31, 2018 and 2017, respectively. No short-term borrowings were outstanding as of December 31, 2018. Short-term borrowings outstanding from the FHLB were $15.0 billion at December 31, 2017.
The following are details of the Senior Notes:
|
| | | | | | | | | | |
| December 31, 2018 | Par Outstanding | Maturity | Weighted Average
Interest Rate | Moody’s | Standard
& Poor’s | Fitch |
| Senior Notes | $ | 6,881 |
| 2020 - 2029 | 3.42% | A2 | A | A |
New Debt Issuances
All debt issuances in 2018 and 2017 were senior unsecured obligations with interest payable quarterly or semi-annually. Additional details are as follows:
|
| | | | | | |
| Issuance Date | Issuance Amount | Maturity Date | Interest Rate | Interest Payable |
| March 2, 2017 | $ | 650 |
| 3/2/2027 | 3.200% | Semi-annually |
| December 7, 2017 | $ | 700 |
| 1/25/2028 | 3.200% | Semi-annually |
| December 7, 2017 | $ | 800 |
| 1/25/2023 | 2.650% | Semi-annually |
| May 22, 2018 | $ | 600 |
| 5/21/2021 | Three-month LIBOR
+ 0.32% | Quarterly |
| May 22, 2018 | $ | 600 |
| 5/21/2021 | 3.250% | Semi-annually |
| May 22, 2018 | $ | 750 |
| 5/21/2025 | 3.850% | Semi-annually |
| October 31, 2018 | $ | 500 |
| 2/1/2024 | 3.550% | Semi-annually |
| October 31, 2018 | $ | 600 |
| 2/1/2029 | 4.000% | Semi-annually |
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)
Equity Issuances and Redemptions
CSC did not issue any equity through external offerings during the year ended December 31, 2018. CSC’s preferred stock issued and net proceeds for the year ended December 31, 2017 are as follows:
|
| | | | |
| | Date Issued and Sold | Net Proceeds |
| Series F | October 31, 2017 | $ | 492 |
|
On December 1, 2017, CSC redeemed all of the 485,000 outstanding shares of its 6.00% Non-Cumulative Perpetual Preferred Stock, Series B (“Series B Preferred Stock”), and the corresponding 19,400,000 depositary shares, each representing a 1/40th interest in a share of the Series B Preferred Stock.
For further discussion of CSC’s long-term debt and information on the equity offerings, see Item 8 – Note 13 and Note 17.
Off-Balance Sheet Arrangements
Schwab enters into various off-balance sheet arrangements in the ordinary course of business, primarily to meet the needs of our clients. These arrangements include firm commitments to extend credit. Additionally, Schwab enters into guarantees and other similar arrangements in the ordinary course of business. For information on each of these arrangements, see Item 8 – Note 7, Note 11, Note 13, Note 14, and Note 15.
Contractual Obligations
Schwab’s principal contractual obligations as of December 31, 2018 are shown in the simulation reflectfollowing table. Excluded from this table are liabilities recorded on the factconsolidated balance sheets that are generally short-term in nature (e.g., payables to brokers, dealers, and clearing organizations and short-term borrowings) or without contractual payment terms (e.g., bank deposits, payables to brokerage clients, and deferred compensation).
|
| | | | | | | | | | | | | | | | | | | |
| December 31, 2018 | Less than
1 Year | | 1-3
Years | | 3-5
Years | | More than
5 Years | | Total |
Credit-related financial instruments (1) | $ | 1,592 |
| | $ | 3,162 |
| | $ | 5,093 |
| | $ | 1,698 |
| | $ | 11,545 |
|
Long-term debt (2) | 237 |
| | 2,325 |
| | 1,370 |
| | 4,330 |
| | 8,262 |
|
Purchase obligations (3) | 475 |
| | 303 |
| | 54 |
| | 170 |
| | 1,002 |
|
Leases (4) | 128 |
| | 219 |
| | 150 |
| | 282 |
| | 779 |
|
| Total | $ | 2,432 |
| | $ | 6,009 |
| | $ | 6,667 |
| | $ | 6,480 |
| | $ | 21,588 |
|
(1) Represents CSB’s commitments to extend credit to banking clients, purchase mortgage loans, and commitments to fund CRA investments.
(2) Includes estimated future interest rates in 2015 remainedpayments through 2029 for Senior Notes. Amounts exclude maturities under a finance lease obligation and unamortized discounts and premiums.
(3) Consists of purchase obligations for services such as advertising and marketing, telecommunications, professional services, and hardware- and software-related agreements.
(4) Represents minimum rental commitments, net of sublease commitments, and includes facilities under past restructuring initiatives and rental commitments under a finance lease obligation.
CAPITAL MANAGEMENT
Schwab seeks to manage capital to a level and composition sufficient to support execution of our business strategy, including anticipated balance sheet growth, providing financial support to the subsidiaries, and sustained access to the capital markets, while at low levels despite the increase in federalsame time meeting our regulatory capital requirements and serving as a source of financial strength to our banking subsidiaries. Schwab’s primary sources of capital are funds target range to .25% to .50% as directedgenerated by the Federal Open Marketsoperations of subsidiaries and securities issuances by CSC in the capital markets. To ensure that Schwab has sufficient capital to absorb unanticipated losses or declines in asset values, we have adopted a policy to remain well capitalized even in stressed scenarios.
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)
Internal guidelines are set, for both CSC and its regulated subsidiaries, to ensure capital levels are in line with our strategy and regulatory requirements. Capital forecasts are reviewed monthly at Asset-Liability Management and Pricing Committee and Financial Risk Oversight Committee meetings. A number of early warning indicators are monitored to help identify potential problems that could impact capital. In addition, we monitor the subsidiaries’ capital levels and requirements. Subject to regulatory capital requirements and any required approvals, any excess capital held by subsidiaries is transferred to CSC in December 2015.the form of dividends and returns of capital. When subsidiaries have need of additional capital, funds are provided by CSC as equity investments and also as subordinated loans (in a form approved as regulatory capital by regulators) for CS&Co. The current low interest rate environment limitsdetails and method used for each cash infusion are based on an analysis of the extentparticular entity’s needs and financing alternatives. The amounts and structure of infusions must take into consideration maintenance of regulatory capital requirements, debt/equity ratios, and equity double leverage ratios.
Schwab conducts regular capital stress testing to assess the potential financial impacts of various adverse macroeconomic and company-specific events to which the Company can reduce interest expense paidcould be subjected. The objective of the capital stress testing is (1) to explore various potential outcomes – including rare and extreme events and (2) to assess impacts of potential stressful outcomes on funding sources. A decline inboth capital and liquidity. Additionally, we have a comprehensive Capital Contingency Plan to provide action plans for certain low probability/high impact capital events that the Company might face. The Capital Contingency Plan is issued under the authority of the Financial Risk Oversight Committee and provides guidelines for sustained capital events. It does not specifically address every contingency, but is designed to provide a framework for responding to any capital stress. The results of the stress testing indicate there are two scenarios which could stress the Company’s capital: (1) inflows of balance sheet cash during a period of very low interest rates and (2) outflows of balance sheet cash when other sources of financing are not available and the Company is required to sell assets to fund the flows at a loss. The Capital Contingency Plan is reviewed annually and updated as appropriate.
For additional information, see Business – Regulation in Part I, Item 1.
Regulatory Capital Requirements
CSC is subject to capital requirements set by the Federal Reserve and is required to serve as a source of strength for our banking subsidiaries and to provide financial assistance if our banking subsidiaries experience financial distress. Schwab is required to maintain a Tier 1 Leverage Ratio for CSC of at least 4%; however, management seeks to maintain the ratio of at least 6%. Due to the relatively low risk of our balance sheet assets and risk-based capital ratios at CSC and CSB that are well in excess of regulatory requirements, the Tier 1 Leverage Ratio is the most restrictive capital constraint on CSC’s asset growth.
Our banking subsidiaries are subject to capital requirements set by their regulators that are substantially similar to those imposed on CSC by the Federal Reserve. Our banking subsidiaries’ failure to remain well capitalized could negativelyresult in certain mandatory and possibly additional discretionary actions by the regulators that could have a direct material effect on the banks. Schwab’s principal banking subsidiary, CSB, is required to maintain a Tier 1 Leverage Ratio of at least 5% to be well capitalized, but seeks to maintain the ratio of at least 6.25%. Based on its regulatory capital ratios at December 31, 2018, CSB is considered well capitalized.
THE CHARLES SCHWAB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)
The following table details CSC’s consolidated and CSB’s capital ratios:
|
| | | | | | | | | | | | | | | |
| December 31, | 2018 | | 2017 |
| | CSC | | CSB | | CSC | | CSB |
| Total stockholders’ equity | $ | 20,670 |
| | $ | 15,615 |
| | $ | 18,525 |
| | $ | 13,224 |
|
| Less: | | | | | | | |
| Preferred Stock | 2,793 |
| | — |
| | 2,793 |
| | — |
|
| Common Equity Tier 1 Capital before regulatory adjustments | $ | 17,877 |
| | $ | 15,615 |
| | $ | 15,732 |
| | $ | 13,224 |
|
| Less: | | | | | | | |
| Goodwill, net of associated deferred tax liabilities | $ | 1,188 |
| | $ | 13 |
| | $ | 1,191 |
| | $ | 13 |
|
| Other intangible assets, net of associated deferred tax liabilities | 125 |
| | — |
| | 61 |
| | — |
|
| Deferred tax assets, net of valuation allowances and deferred tax liabilities | 3 |
| | 1 |
| | 2 |
| | — |
|
AOCI adjustment (1) | (252 | ) | | (231 | ) | | (152 | ) | | (144 | ) |
| Common Equity Tier 1 Capital | $ | 16,813 |
| | $ | 15,832 |
| | $ | 14,630 |
| | $ | 13,355 |
|
| Tier 1 Capital | $ | 19,606 |
| | $ | 15,832 |
| | $ | 17,423 |
| | $ | 13,355 |
|
| Total Capital | 19,628 |
| | 15,853 |
| | 17,452 |
| | 13,382 |
|
| Risk-Weighted Assets | 95,441 |
| | 80,513 |
| | 75,866 |
| | 66,519 |
|
| Common Equity Tier 1 Capital/Risk-Weighted Assets | 17.6 | % | | 19.7 | % | | 19.3 | % | | 20.1 | % |
| Tier 1 Capital/Risk-Weighted Assets | 20.5 | % | | 19.7 | % | | 23.0 | % | | 20.1 | % |
| Total Capital/Risk-Weighted Assets | 20.6 | % | | 19.7 | % | | 23.0 | % | | 20.1 | % |
| Tier 1 Leverage Ratio | 7.1 | % | | 7.2 | % | | 7.6 | % | | 7.1 | % |
(1) CSC and CSB elected to opt-out of the requirement to include most components of AOCI in CET1 Capital. Beginning in 2019, CSC is required to include all components of AOCI in regulatory capital.
CSB is also subject to regulatory requirements that restrict and govern the terms of affiliate transactions. In addition, CSB is required to provide notice to, and may be required to obtain approval from, the OCC and the Federal Reserve to declare dividends to CSC.
As a broker-dealer, CS&Co is subject to regulatory requirements of the Uniform Net Capital Rule, which is intended to ensure the general financial soundness and liquidity of broker-dealers. These regulations prohibit CS&Co from paying cash dividends, making unsecured advances and loans to the parent company and employees, and repaying subordinated borrowings from CSC if such payment would result in a net capital amount below prescribed thresholds. At December 31, 2018, CS&Co was in compliance with its net capital requirements.
In addition to the capital requirements above, Schwab’s subsidiaries are subject to other regulatory requirements intended to ensure financial soundness and liquidity. See Item 8 – Note 21 for additional information on the components of stockholders’ equity and information on the capital requirements of significant subsidiaries.
Dividends
Since the initial dividend in 1989, CSC has paid 119 consecutive quarterly dividends and has increased the quarterly dividend rate 23 times, resulting in a 21% compounded annual growth rate, excluding the special cash dividend of $1.00 per common share in 2007. While the payment and amount of dividends are at the discretion of the Board of Directors, subject to certain regulatory and other restrictions, CSC currently targets its common stock cash dividend at approximately 20% to 30% of net income.
THE CHARLES SCHWAB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)
The Board of Directors of the Company declared quarterly cash dividend increases per common share during 2017 and 2018 as shown below:
|
| | | | | | | | |
| | Quarterly Cash Increase | | New Quarterly Dividend |
| Date of Declaration | Per Common Share | % Increase | Per Common Share |
| January 26, 2017 | $ | 0.01 |
| 14 | % | $ | 0.08 |
|
| January 25, 2018 | 0.02 |
| 25 | % | 0.10 |
|
| July 25, 2018 | 0.03 |
| 30 | % | 0.13 |
|
In addition, on January 30, 2019, the Board of Directors of the Company declared a four cent, or 31%, increase in the quarterly cash dividend to $0.17 per common share.
The following table details the CSC cash dividends paid and per share amounts:
|
| | | | | | | | | | | | | |
| Year Ended December 31, | 2018 | | 2017 |
| | Cash Paid | Per Share
Amount | | Cash Paid | Per Share
Amount |
| Common Stock | $ | 623 |
| $ | 0.46 |
| | $ | 431 |
| $ | 0.32 |
|
Series A Preferred Stock (1) | 28 |
| 70.00 |
| | 28 |
| 70.00 |
|
Series B Preferred Stock (2,5) | N/A |
| N/A |
| | 29 |
| 60.00 |
|
Series C Preferred Stock (2) | 36 |
| 60.00 |
| | 36 |
| 60.00 |
|
Series D Preferred Stock (2) | 45 |
| 59.52 |
| | 45 |
| 59.52 |
|
Series E Preferred Stock (3) | 28 |
| 4,625.00 |
| | 23 |
| 3,867.01 |
|
Series F Preferred Stock (4) | 27 |
| 5,430.56 |
| | N/A |
| N/A |
|
(1) Dividends paid semi-annually until February 1, 2022 and quarterly thereafter.
(2) Dividends paid quarterly.
(3) Dividends paid semi-annually until March 1, 2022 and quarterly thereafter.
(4) Series F Preferred Stock was issued on October 31, 2017. Dividends paid semi-annually beginning on June 1, 2018 until December 1, 2027, and quarterly thereafter.
(5) Series B Preferred Stock was redeemed on December 1, 2017.
N/A Not applicable.
Share Repurchases
On October 25, 2018, CSC publicly announced that its Board of Directors terminated the existing two share repurchase authorizations and replaced them with a new authorization to repurchase up to $1.0 billion of common stock. CSC repurchased 22 million shares of its common stock for $1.0 billion in 2018, completing all repurchases under this authorization. There were no repurchases of CSC’s common stock in 2018 prior to the fourth quarter, or in 2017.
On January 30, 2019, CSC publicly announced that its Board of Directors authorized the repurchase of up to $4.0 billion of common stock. The authorization does not have an expiration date.
FOREIGN HOLDINGS
At December 31, 2018, Schwab had exposure to non-sovereign financial and non-financial institutions in foreign countries, as well as agencies of foreign governments. At December 31, 2018, the fair value of these holdings totaled $7.6 billion, with the top three exposures being to issuers and counterparties domiciled in France at $2.8 billion, Sweden at $1.3 billion, and Canada at $0.8 billion.
In addition to the direct holdings in foreign companies and securities issued by foreign government agencies, Schwab has indirect exposure to foreign countries through its investments in CSIM money market funds (collectively, the Funds) resulting from brokerage clearing activities. At December 31, 2018, the Company had $21 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. Schwab had outstanding margin loans to foreign residents of $746 million at December 31, 2018.
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)
FAIR VALUE OF FINANCIAL INSTRUMENTS
Schwab uses the market approach to determine the fair value of certain financial assets and liabilities recorded at fair value, and to determine fair value disclosures. See Item 8 – Note 2 and Note 16 for more information on our assets and liabilities recorded at fair value.
When available, Schwab uses quoted prices in active markets to measure the fair value of assets and liabilities. When utilizing market data and bid-ask spread, we use the price within the bid-ask spread that best represents fair value. When quoted prices do not exist, prices are obtained from independent third-party pricing services to measure the fair value of investment assets. We generally obtain prices from three independent pricing sources for assets recorded at fair value. Our primary third-party pricing service provides prices based on observable trades and discounted cash flows that incorporate observable information such as yields for similar types of securities (a benchmark interest rate plus observable spreads) and weighted-average maturity for the same or similar “to-be-issued” securities. We compare the prices obtained from the primary independent pricing service to the prices obtained from the additional independent pricing services to determine if the price obtained from the primary independent pricing service is reasonable. Schwab does not adjust the prices received from independent third-party pricing services unless such prices are inconsistent with the definition of fair value and result in material differences in the amounts recorded. At December 31, 2018 and 2017, we did not adjust prices received from the primary independent third-party pricing service.
CRITICAL ACCOUNTING ESTIMATES
The consolidated financial statements of Schwab have been prepared in accordance with GAAP. Item 8 – Note 2 contains more information on our significant accounting policies made in connection with its application of these accounting principles.
While the majority of the 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 Schwab’s financial position and reported financial results. These critical accounting estimates are described below. Management regularly reviews the yieldestimates and assumptions used in the preparation of the financial statements for reasonableness and adequacy.
Management has discussed the development and selection of these critical accounting estimates with the Audit Committee of the Board of Directors. Additionally, management has reviewed with the Audit Committee the Company’s significant estimates discussed in this Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Income Taxes
Schwab estimates income tax expense based on amounts expected to be owed to the various tax jurisdictions in which we operate, including federal, state and local domestic jurisdictions, and immaterial amounts owed to several foreign jurisdictions. The estimated income 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 other 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 for 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 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.
Changes in the estimate of accrued taxes occur periodically due to changes in tax rates, interpretations of tax laws, the status of examinations being conducted by various taxing authorities, and newly enacted statutory, judicial and regulatory guidance that impacts the relative merits and risks of tax positions. These changes, when they occur, affect accrued taxes and can be
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)
significant to the operating results of the Company. See Item 8 – Note 20 for more information on the Company’s investment portfolioincome taxes.
Legal and Regulatory Reserves
Reserves for legal and regulatory claims and proceedings reflect an estimate of probable losses for each matter, after considering, among other factors, the progress of the case, prior experience and the experience of others in similar cases, available defenses, and the opinions and views of legal counsel. In many cases, including most class action lawsuits, it is not possible to
determine whether a
greater degree than any offsetting reductionloss will be incurred, or to estimate the range of that loss, until the matter is close to resolution, in
interest expense, further compressing net interest margin. Any increaseswhich case no accrual is made until that time. Reserves are adjusted as more information becomes available. Significant judgment is required in
short-term interest rates result in a greater impact as yields on interest-earning assets are expected to rise faster thanmaking these estimates, and the
actual cost of
funding sources.resolving a matter may ultimately differ materially from the amount reserved. See Item 8 – Note 14 for more information on the Company’s contingencies related to legal and regulatory reserves.
THE CHARLES SCHWAB CORPORATION
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
For a discussion of the quantitative and qualitative disclosures about market risk, see Risk Management in Part II, Item 7.
THE CHARLES SCHWAB CORPORATION
| |
| Item 8. | Financial Statements and Supplementary Data |
|
| | | |
| 55 |
|
| 56 |
|
| 57 |
|
| 58 |
|
| 59 |
|
| 60 |
|
Note 1. | | 60 |
|
Note 2. | | 60 57 |
|
Note 3. | | |
|
| Note 4. | | 68 |
|
Note 4. 5. | | 68 69 |
|
Note 5. 6. | | 69 70 |
|
Note 6. 7. | | 72 74 |
|
Note 7. 8. | | 75 |
|
Note 8. 9. | | 76 79 |
|
Note 9. 10. | | 77 79 |
|
Note 10. 11. | | 77 79 |
|
Note 11. 12. | | 78 80 |
|
Note 12. 13. | | 78 |
|
Note 13.
| Payables to Brokerage Clients
| 78 |
Note 14. | Borrowings
| 79 |
Note 15.
| | 80 |
|
Note 16. 15. | | 82 |
|
Note 17. 16. | | 84 |
|
Note 18. 17. | | 88 91 |
|
Note 19. 18. | | 89 92 |
|
Note 20. 19. | | 90 93 |
|
Note 21. 20. | | 92 |
|
Note 22. 21. | Earnings Per Common Share
| 94 |
Note 23.
| | 94 |
|
Note 24. 22. | | 96 |
|
Note 25. 23. | | 97 100 |
|
Note 26. 24. | | 100 102 |
|
Note 25. | | |
|
| 101 |
|
| 102 |
|
THE CHARLES SCHWAB CORPORATION
| | | | | | | | | |
Consolidated Statements of Income | | | | | | | | | |
(In Millions, Except Per Share Amounts) | | | | | | | | | |
| | | | | | | | | |
Year Ended December 31, | | | 2015 | | | 2014 | | | 2013 |
Net Revenues | | | | | | | | | |
Asset management and administration fees | | $ | 2,650 | | $ | 2,533 | | $ | 2,315 |
Interest revenue | | | 2,657 | | | 2,374 | | | 2,085 |
Interest expense | | | (132) | | | (102) | | | (105) |
Net interest revenue | | | 2,525 | | | 2,272 | | | 1,980 |
Trading revenue | | | 866 | | | 907 | | | 913 |
Other | | | 328 | | | 343 | | | 236 |
Provision for loan losses | | | 11 | | | 4 | | | 1 |
Net impairment losses on securities | | | - | | | (1) | | | (10) |
Total net revenues | | | 6,380 | | | 6,058 | | | 5,435 |
Expenses Excluding Interest | | | | | | | | | |
Compensation and benefits | | | 2,241 | | | 2,184 | | | 2,027 |
Professional services | | | 459 | | | 457 | | | 415 |
Occupancy and equipment | | | 353 | | | 324 | | | 309 |
Advertising and market development | | | 249 | | | 245 | | | 257 |
Communications | | | 233 | | | 223 | | | 220 |
Depreciation and amortization | | | 224 | | | 199 | | | 202 |
Other | | | 342 | | | 311 | | | 300 |
Total expenses excluding interest | | | 4,101 | | | 3,943 | | | 3,730 |
Income before taxes on income | | | 2,279 | | | 2,115 | | | 1,705 |
Taxes on income | | | 832 | | | 794 | | | 634 |
Net Income | | | 1,447 | | | 1,321 | | | 1,071 |
Preferred stock dividends and other (1) | | | 83 | | | 60 | | | 61 |
Net Income Available to Common Stockholders | | $ | 1,364 | | $ | 1,261 | | $ | 1,010 |
Weighted-Average Common Shares Outstanding: | | | | | | | | | |
Basic | | | 1,315 | | | 1,303 | | | 1,285 |
Diluted | | | 1,327 | | | 1,315 | | | 1,293 |
Earnings Per Common Share: | | | | | | | | | |
Basic | | $ | 1.04 | | $ | .96 | | $ | .78 |
Diluted | | $ | 1.03 | | $ | .95 | | $ | .78 |
Dividends Declared Per Common Share | | $ | .24 | | $ | .24 | | $ | .24 |
| |
(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, | 2018 | | 2017 | | 2016 |
| Net Revenues | | | | | |
| Interest revenue | $ | 6,680 |
| | $ | 4,624 |
| | $ | 3,493 |
|
| Interest expense | (857 | ) | | (342 | ) | | (171 | ) |
| Net interest revenue | 5,823 |
| | 4,282 |
| | 3,322 |
|
Asset management and administration fees (1) | 3,229 |
| | 3,392 |
| | 3,055 |
|
| Trading revenue | 763 |
| | 654 |
| | 825 |
|
| Other | 317 |
| | 290 |
| | 276 |
|
| Total net revenues | 10,132 |
| | 8,618 |
| | 7,478 |
|
| Expenses Excluding Interest | | | | | |
|
| Compensation and benefits | 3,057 |
| | 2,737 |
| | 2,466 |
|
| Professional services | 654 |
| | 580 |
| | 506 |
|
| Occupancy and equipment | 496 |
| | 436 |
| | 398 |
|
| Advertising and market development | 313 |
| | 268 |
| | 265 |
|
| Communications | 242 |
| | 231 |
| | 237 |
|
| Depreciation and amortization | 306 |
| | 269 |
| | 234 |
|
| Regulatory fees and assessments | 189 |
| | 179 |
| | 144 |
|
| Other | 313 |
| | 268 |
| | 235 |
|
| Total expenses excluding interest | 5,570 |
| | 4,968 |
| | 4,485 |
|
| Income before taxes on income | 4,562 |
| | 3,650 |
| | 2,993 |
|
| Taxes on income | 1,055 |
| | 1,296 |
| | 1,104 |
|
| Net Income | 3,507 |
| | 2,354 |
| | 1,889 |
|
Preferred stock dividends and other (2) | 178 |
| | 174 |
| | 143 |
|
| Net Income Available to Common Stockholders | $ | 3,329 |
| | $ | 2,180 |
| | $ | 1,746 |
|
| Weighted-Average Common Shares Outstanding: | | | | | |
|
| Basic | 1,348 |
| | 1,339 |
| | 1,324 |
|
Diluted (3) | 1,361 |
| | 1,353 |
| | 1,334 |
|
| Earnings Per Common Shares Outstanding: | | | | | |
|
| Basic | $ | 2.47 |
| | $ | 1.63 |
| | $ | 1.32 |
|
Diluted (3) | $ | 2.45 |
| | $ | 1.61 |
| | $ | 1.31 |
|
(1) Includes fee waivers of $0, $10 million, and $224 million during the years ended December 31, 2018, 2017, and 2016, respectively, relating to Schwab-sponsored money market funds.
(2) Includes preferred stock dividends and undistributed earnings and dividends allocated to non-vested restricted stock units.
(3) Antidilutive stock options and restricted stock units excluded from the calculation of diluted EPS totaled 18 million, 15 million, and 26 million shares in 2018, 2017, and 2016, respectively.
See Notes to Consolidated Financial Statements.
- 55 -
THE CHARLES SCHWAB CORPORATION
| | | | | | | | | |
Consolidated Statements of Comprehensive Income | | | | | | | | | |
(In Millions) | | | | | | | | | |
| | | | | | | | | |
Year Ended December 31, | | | 2015 | | | 2014 | | | 2013 |
Net income | | $ | 1,447 | | $ | 1,321 | | $ | 1,071 |
Other comprehensive income (loss), before tax: | | | | | | | | | |
Change in net unrealized gain on securities available for sale: | | | | | | | | | |
Net unrealized gain (loss) | | | (477) | | | 255 | | | (468) |
Reclassification of impairment charges included in net | | | | | | | | | |
impairment losses on securities | | | - | | | 1 | | | 10 |
Other reclassifications included in other revenue | | | - | | | (7) | | | (7) |
Other | | | - | | | - | | | 1 |
Other comprehensive income (loss), before tax | | | (477) | | | 249 | | | (464) |
Income tax effect | | | 178 | | | (93) | | | 175 |
Other comprehensive income (loss), net of tax | | | (299) | | | 156 | | | (289) |
Comprehensive Income | | $ | 1,148 | | $ | 1,477 | | $ | 782 |
|
| | | | | | | | | | | |
| Consolidated Statements of Comprehensive Income | | | | | |
| (In Millions) | | | | | |
| | | | | | |
| Year Ended December 31, | 2018 | | 2017 | | 2016 |
| Net income | $ | 3,507 |
| | $ | 2,354 |
| | $ | 1,889 |
|
| Other comprehensive income (loss), before tax: | | | | | |
| Change in net unrealized gain (loss) on available for sale securities: | | | | | |
| Net unrealized gain (loss) | (123 | ) | | 13 |
| | (44 | ) |
| 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 | 35 |
| | 31 |
| | — |
|
| Other | (1 | ) | | (11 | ) | | 1 |
|
| Other comprehensive income (loss), before tax | (89 | ) | | 21 |
| | (47 | ) |
| Income tax effect | 22 |
| | (10 | ) | | 18 |
|
| Other comprehensive income (loss), net of tax | (67 | ) | | 11 |
| | (29 | ) |
| Comprehensive Income | $ | 3,440 |
| | $ | 2,365 |
| | $ | 1,860 |
|
See Notes to Consolidated Financial Statements.
THE CHARLES SCHWAB CORPORATION
| | | | | | |
Consolidated Balance Sheets | | | | | | |
(In Millions, Except Per Share and Share Amounts) | | | | | | |
| | | | |
December 31, | | 2015 | | 2014 |
Assets | | | | | | |
Cash and cash equivalents | | $ | 11,978 | | $ | 11,363 |
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) | | | 19,598 | | | 20,781 |
Receivables from brokers, dealers, and clearing organizations | | | 582 | | | 469 |
Receivables from brokerage clients — net | | | 17,313 | | | 15,669 |
Other securities owned — at fair value | | | 533 | | | 516 |
Securities available for sale | | | 65,646 | | | 54,783 |
Securities held to maturity (fair value — $50,088 and $34,743 at December 31, | | | | | | |
2015 and 2014, respectively) | | | 50,007 | | | 34,389 |
Bank loans — net | | | 14,334 | | | 13,399 |
Equipment, office facilities, and property — net | | | 1,145 | | | 1,039 |
Goodwill | | | 1,227 | | | 1,227 |
Intangible assets — net | | | 181 | | | 227 |
Other assets | | | 1,174 | | | 780 |
Total assets | | $ | 183,718 | | $ | 154,642 |
Liabilities and Stockholders’ Equity | | | | | | |
Bank deposits | | $ | 129,502 | | $ | 102,815 |
Payables to brokers, dealers, and clearing organizations | | | 2,588 | | | 2,004 |
Payables to brokerage clients | | | 33,185 | | | 34,305 |
Accrued expenses and other liabilities | | | 2,151 | | | 1,816 |
Long-term debt | | | 2,890 | | | 1,899 |
Total liabilities | | | 170,316 | | | 142,839 |
Stockholders’ equity: | | | | | | |
Preferred stock — $.01 par value per share; aggregate liquidation preference | | | | | | |
of $1,485 and $885 at December 31, 2015 and 2014, respectively | | | 1,459 | | | 872 |
Common stock — 3 billion shares authorized; $.01 par value per share; | | | | | | |
1,487,543,446 shares issued | | | 15 | | | 15 |
Additional paid-in capital | | | 4,152 | | | 4,050 |
Retained earnings | | | 11,253 | | | 10,198 |
Treasury stock, at cost — 167,205,881 shares and 176,821,202 shares | | | | | | |
at December 31, 2015 and 2014, respectively | | | (3,343) | | | (3,497) |
Accumulated other comprehensive income | | | (134) | | | 165 |
Total stockholders’ equity | | | 13,402 | | | 11,803 |
Total liabilities and stockholders’ equity | | $ | 183,718 | | $ | 154,642 |
|
| | | | | | | |
| Consolidated Balance Sheets | | | |
| (In Millions, Except Per Share and Share Amounts) | | | |
| | | | |
| December 31, | 2018 | | 2017 |
| Assets | | | |
| Cash and cash equivalents | $ | 27,938 |
| | $ | 14,217 |
|
Cash and investments segregated and on deposit for regulatory purposes (including resale
agreements of $7,195 and $6,596 at December 31, 2018 and 2017, respectively) | 13,563 |
| | 15,139 |
|
| Receivables from brokers, dealers, and clearing organizations | 553 |
| | 649 |
|
| Receivables from brokerage clients — net | 21,651 |
| | 20,576 |
|
| Other securities owned — at fair value | 539 |
| | 539 |
|
| Available for sale securities | 66,578 |
| | 49,995 |
|
| Held to maturity securities | 144,009 |
| | 120,926 |
|
| Bank loans — net | 16,609 |
| | 16,478 |
|
| Equipment, office facilities, and property — net | 1,769 |
| | 1,471 |
|
| Goodwill | 1,227 |
| | 1,227 |
|
| Other assets | 2,046 |
| | 2,057 |
|
| Total assets | $ | 296,482 |
| | $ | 243,274 |
|
| Liabilities and Stockholders’ Equity | |
| | |
|
| Bank deposits | $ | 231,423 |
| | $ | 169,656 |
|
| Payables to brokers, dealers, and clearing organizations | 1,831 |
| | 1,287 |
|
| Payables to brokerage clients | 32,726 |
| | 31,243 |
|
| Accrued expenses and other liabilities | 2,954 |
| | 2,810 |
|
| Short-term borrowings | — |
| | 15,000 |
|
| Long-term debt | 6,878 |
| | 4,753 |
|
| Total liabilities | 275,812 |
| | 224,749 |
|
| Stockholders’ equity: | |
| | |
|
| Preferred stock — $.01 par value per share; aggregate liquidation preference of $2,850 | 2,793 |
| | 2,793 |
|
Common stock — 3 billion shares authorized; $.01 par value per share; 1,487,543,446
shares issued | 15 |
| | 15 |
|
| Additional paid-in capital | 4,499 |
| | 4,353 |
|
| Retained earnings | 17,329 |
| | 14,408 |
|
Treasury stock, at cost — 155,116,695 and 142,210,890 shares at December 31, 2018 and 2017,
respectively | (3,714 | ) | | (2,892 | ) |
| Accumulated other comprehensive income (loss) | (252 | ) | | (152 | ) |
| Total stockholders’ equity | 20,670 |
| | 18,525 |
|
| Total liabilities and stockholders’ equity | $ | 296,482 |
| | $ | 243,274 |
|
See Notes to Consolidated Financial Statements.
- 57 -
THE CHARLES SCHWAB CORPORATION
| | | | | | | | | |
Consolidated Statements of Cash Flows | | | | | | | | | |
(In Millions) | | | | | | | | | |
| | | | | | | | | |
Year Ended December 31, | | | 2015 | | | 2014 | | | 2013 |
Cash Flows from Operating Activities | | | | | | | | | |
Net income | | $ | 1,447 | | $ | 1,321 | | $ | 1,071 |
Adjustments to reconcile net income to net cash (used for) provided by operating activities: | | | | | | | | | |
Provision for loan losses | | | (11) | | | (4) | | | (1) |
Net impairment losses on securities | | | - | | | 1 | | | 10 |
Stock-based compensation | | | 135 | | | 115 | | | 116 |
Depreciation and amortization | | | 224 | | | 199 | | | 202 |
(Benefit) provision for deferred income taxes | | | (7) | | | (25) | | | (21) |
Premium amortization, net, on securities available for sale and securities held to maturity | | | 162 | | | 125 | | | 162 |
Other | | | (4) | | | (7) | | | 15 |
Net change in: | | | | | | | | | |
Cash and investments segregated and on deposit for regulatory purposes | | | 1,183 | | | 2,772 | | | 4,916 |
Receivables from brokers, dealers, and clearing organizations | | | (108) | | | 44 | | | (175) |
Receivables from brokerage clients | | | (1,652) | | | (1,725) | | | (496) |
Other securities owned | | | (17) | | | 1 | | | 119 |
Other assets | | | (98) | | | (30) | | | 17 |
Payables to brokers, dealers, and clearing organizations | | | 808 | | | 393 | | | 318 |
Payables to brokerage clients | | | (1,120) | | | (1,028) | | | (4,997) |
Accrued expenses and other liabilities | | | 304 | | | 196 | | | 400 |
Net cash provided by operating activities | | | 1,246 | | | 2,348 | | | 1,656 |
Cash Flows from Investing Activities | | | | | | | | | |
Purchases of securities available for sale | | | (21,351) | | | (15,134) | | | (22,942) |
Proceeds from sales of securities available for sale | | | 2,424 | | | 6,556 | | | 6,167 |
Principal payments on securities available for sale | | | 7,340 | | | 5,843 | | | 10,772 |
Purchases of securities held to maturity | | | (19,303) | | | (6,920) | | | (16,061) |
Principal payments on securities held to maturity | | | 3,540 | | | 2,687 | | | 3,895 |
Net increase in bank loans | | | (980) | | | (1,016) | | | (1,634) |
Purchase of equipment, office facilities, and property | | | (266) | | | (400) | | | (249) |
Other investing activities | | | (27) | | | (11) | | | 2 |
Net cash used for investing activities | | | (28,623) | | | (8,395) | | | (20,050) |
Cash Flows from Financing Activities | | | | | | | | | |
Net change in bank deposits | | | 26,687 | | | 9,843 | | | 13,595 |
Repayment of commercial paper | | | - | | | - | | | (300) |
Issuance of long-term debt | | | 1,346 | | | - | | | 275 |
Repayment of long-term debt | | | (357) | | | (6) | | | (6) |
Net proceeds from preferred stock offering | | | 581 | | | - | | | - |
Dividends paid | | | (387) | | | (373) | | | (368) |
Proceeds from stock options exercised and other | | | 90 | | | 189 | | | 258 |
Other financing activities | | | 32 | | | 29 | | | 5 |
Net cash provided by financing activities | | | 27,992 | | | 9,682 | | | 13,459 |
Increase (Decrease) in Cash and Cash Equivalents | | | 615 | | | 3,635 | | | (4,935) |
Cash and Cash Equivalents at Beginning of Year | | | 11,363 | | | 7,728 | | | 12,663 |
Cash and Cash Equivalents at End of Year | | $ | 11,978 | | $ | 11,363 | | $ | 7,728 |
| | | | | | | | | |
Supplemental Cash Flow Information | | | | | | | | | |
Cash paid during the year for: | | | | | | | | | |
Interest | | $ | 121 | | $ | 103 | | $ | 99 |
Income taxes | | $ | 810 | | $ | 778 | | $ | 624 |
Non-cash investing activity: | | | | | | | | | |
Securities purchased during the year but settled after year end | | $ | - | | $ | 143 | | $ | 81 |
|
| | | | | | | | | |
| Consolidated Statements of Cash Flows | | | |
| (In Millions) | | | |
| | | | |
| Year Ended December 31, | 2018 | 2017 (1) | 2016 (1) |
| Cash Flows from Operating Activities | | | |
| Net income | $ | 3,507 |
| $ | 2,354 |
| $ | 1,889 |
|
| Adjustments to reconcile net income to net cash provided by (used for) operating activities: | | | |
| Share-based compensation | 197 |
| 153 |
| 141 |
|
| Depreciation and amortization | 306 |
| 269 |
| 234 |
|
| Provision (benefit) for deferred income taxes | 49 |
| 58 |
| 15 |
|
| Premium amortization, net, on available for sale and held to maturity securities | 350 |
| 342 |
| 266 |
|
| Other | 137 |
| 51 |
| 4 |
|
| Net change in: | | | |
| Investments segregated and on deposit for regulatory purposes | 6,922 |
| 4,933 |
| (1,635 | ) |
| Receivables from brokers, dealers, and clearing organizations | 96 |
| 74 |
| (147 | ) |
| Receivables from brokerage clients | (1,100 | ) | (3,428 | ) | 150 |
|
| Other securities owned | — |
| (90 | ) | 84 |
|
| Other assets | (104 | ) | (177 | ) | (93 | ) |
| Payables to brokers, dealers, and clearing organizations | 573 |
| (1,148 | ) | (181 | ) |
| Payables to brokerage clients | 1,483 |
| (4,651 | ) | 2,709 |
|
| Accrued expenses and other liabilities | 40 |
| 421 |
| 167 |
|
| Net cash provided by (used for) operating activities | 12,456 |
| (839 | ) | 3,603 |
|
| Cash Flows from Investing Activities | | | |
| Purchases of available for sale securities | (32,801 | ) | (15,033 | ) | (29,248 | ) |
| Proceeds from sales of available for sale securities | 115 |
| 8,617 |
| 5,537 |
|
| Principal payments on available for sale securities | 16,016 |
| 9,095 |
| 11,903 |
|
| Purchases of held to maturity securities | (40,873 | ) | (32,925 | ) | (31,162 | ) |
| Principal payments on held to maturity securities | 17,410 |
| 11,627 |
| 5,747 |
|
| Net increase in bank loans | (129 | ) | (1,071 | ) | (1,103 | ) |
| Purchases of equipment, office facilities, and property | (570 | ) | (400 | ) | (346 | ) |
| Purchases of Federal Home Loan Bank stock | (156 | ) | (430 | ) | (152 | ) |
| Proceeds from sales of Federal Home Loan Bank stock | 529 |
| 106 |
| 88 |
|
| Other investing activities | (96 | ) | (59 | ) | (39 | ) |
| Net cash provided by (used for) investing activities | (40,555 | ) | (20,473 | ) | (38,775 | ) |
| Cash Flows from Financing Activities | | | |
Net change in bank deposits (2) | 61,767 |
| 6,186 |
| 33,952 |
|
| Net change in short-term borrowings | (15,000 | ) | 15,000 |
| — |
|
| Issuance of long-term debt | 3,024 |
| 2,129 |
| — |
|
| Repayment of long-term debt | (909 | ) | (257 | ) | (7 | ) |
| Repurchases of common stock | (1,000 | ) | — |
| — |
|
| Net proceeds from preferred stock offerings | — |
| 492 |
| 1,316 |
|
| Redemption of preferred stock | — |
| (485 | ) | — |
|
| Dividends paid | (787 | ) | (592 | ) | (486 | ) |
| Proceeds from stock options exercised | 125 |
| 171 |
| 144 |
|
| Other financing activities | (54 | ) | (45 | ) | 44 |
|
| Net cash provided by (used for) financing activities | 47,166 |
| 22,599 |
| 34,963 |
|
| Increase (Decrease) in Cash and Cash Equivalents, including Amounts Restricted | 19,067 |
| 1,287 |
| (209 | ) |
| Cash and Cash Equivalents including Amounts Restricted at Beginning of Year | 19,160 |
| 17,873 |
| 18,082 |
|
| Cash and Cash Equivalents, including Amounts Restricted at End of Year | $ | 38,227 |
| $ | 19,160 |
| $ | 17,873 |
|
Continued on following page
THE CHARLES SCHWAB CORPORATION
Continued from previous page
|
| | | | | | | | | |
| Year Ended December 31, | 2018 | 2017 (1) | 2016 (1) |
| Supplemental Cash Flow Information | | | |
| Cash paid during the year for: | | | |
| Interest | $ | 798 |
| $ | 327 |
| $ | 160 |
|
| Income taxes | $ | 927 |
| $ | 1,212 |
| $ | 991 |
|
| Non-cash investing activity: | | | |
| Securities purchased during the period but settled after period end | $ | — |
| $ | 29 |
| $ | — |
|
|
| | | | | | | | | |
| December 31, | 2018 | 2017 | 2016 |
Reconciliation of cash, cash equivalents and amounts reported within the balance sheet (3) | | | |
| Cash and cash equivalents | $ | 27,938 |
| $ | 14,217 |
| $ | 10,828 |
|
Restricted cash and cash equivalents amounts included in cash and investments segregated
and on deposit for regulatory purposes | 10,289 |
| 4,943 |
| 7,045 |
|
Total cash and cash equivalents, including amounts restricted shown in the
statement of cash flows | $ | 38,227 |
| $ | 19,160 |
| $ | 17,873 |
|
(1) Adjusted for the retrospective adoption of ASU 2016-18. See Note 2.
(2) Includes transfers from other sweep features to bank sweep of $72 billion, $5 billion and $8 billion for the years ended December 31, 2018, 2017 and 2016, respectively.
(3) For more information on the nature of restrictions on restricted cash and cash equivalents see Note 21.
See Notes to Consolidated Financial Statements.
- 58 -
THE CHARLES SCHWAB CORPORATION
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Consolidated Statements of Stockholders’ Equity | |
(In Millions) | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | Accumulated | | | | | |
| | | | | | | | | Additional | | | | | | | | | | Other | | | | | |
| Preferred | | Common Stock | | Paid-In | | Retained | | Treasury Stock, | | Comprehensive | | | | | |
| Stock | | Shares | | Amount | | Capital | | Earnings | | at cost | | Income (Loss) | | | Total | |
Balance at December 31, 2012 | $ | 865 | | 1,488 | | $ | 15 | | $ | 3,881 | | $ | 8,554 | | | $ | (4,024) | | | | $ | 298 | | | | $ | 9,589 | |
Net income | | - | | - | | | - | | | - | | | 1,071 | | | | - | | | | | - | | | | | 1,071 | |
Other comprehensive income (loss), net of tax | | - | | - | | | - | | | - | | | - | | | | - | | | | | (289) | | | | | (289) | |
Dividends declared on preferred stock | | - | | - | | | - | | | - | | | (57) | | | | - | | | | | - | | | | | (57) | |
Dividends declared on common stock | | - | | - | | | - | | | - | | | (311) | | | | - | | | | | - | | | | | (311) | |
Stock option exercises and other | | - | | - | | | - | | | (54) | | | - | | | | 314 | | | | | - | | | | | 260 | |
Stock-based compensation and | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
related tax effects | | - | | - | | | - | | | 119 | | | - | | | | - | | | | | - | | | | | 119 | |
Other | | 4 | | - | | | - | | | 5 | | | (4) | | | | (6) | | | | | - | | | | | (1) | |
Balance at December 31, 2013 | | 869 | | 1,488 | | | 15 | | | 3,951 | | | 9,253 | | | | (3,716) | | | | | 9 | | | | | 10,381 | |
Net income | | - | | - | | | - | | | - | | | 1,321 | | | | - | | | | | - | | | | | 1,321 | |
Other comprehensive income (loss), net of tax | | - | | - | | | - | | | - | | | - | | | | - | | | | | 156 | | | | | 156 | |
Dividends declared on preferred stock | | - | | - | | | - | | | - | | | (57) | | | | - | | | | | - | | | | | (57) | |
Dividends declared on common stock | | - | | - | | | - | | | - | | | (316) | | | | - | | | | | - | | | | | (316) | |
Stock option exercises and other | | - | | - | | | - | | | (53) | | | - | | | | 240 | | | | | - | | | | | 187 | |
Stock-based compensation and | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
related tax effects | | - | | - | | | - | | | 139 | | | - | | | | - | | | | | - | | | | | 139 | |
Other | | 3 | | - | | | - | | | 13 | | | (3) | | | | (21) | | | | | - | | | | | (8) | |
Balance at December 31, 2014 | | 872 | | 1,488 | | | 15 | | | 4,050 | | | 10,198 | | | | (3,497) | | | | | 165 | | | | | 11,803 | |
Net income | | - | | - | | | - | | | - | | | 1,447 | | | | - | | | | | - | | | | | 1,447 | |
Other comprehensive income (loss), net of tax | | - | | - | | | - | | | - | | | - | | | | - | | | | | (299) | | | | | (299) | |
Issuance of preferred stock | | 581 | | - | | | - | | | - | | | - | | | | - | | | | | - | | | | | 581 | |
Dividends declared on preferred stock | | - | | - | | | - | | | - | | | (69) | | | | - | | | | | - | | | | | (69) | |
Dividends declared on common stock | | - | | - | | | - | | | - | | | (318) | | | | - | | | | | - | | | | | (318) | |
Stock option exercises and other | | - | | - | | | - | | | (87) | | | - | | | | 177 | | | | | - | | | | | 90 | |
Stock-based compensation and | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
related tax effects | | - | | - | | | - | | | 172 | | | - | | | | - | | | | | - | | | | | 172 | |
Other | | 6 | | - | | | - | | | 17 | | | (5) | | | | (23) | | | | | - | | | | | (5) | |
Balance at December 31, 2015 | $ | 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, 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 — $.27
per share | — |
| | — |
| | — |
| | — |
| | (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 — $.32
per share | — |
| | — |
| | — |
| | — |
| | (431 | ) | | — |
| | — |
| | (431 | ) |
| Stock option exercises and other | — |
| | — |
| | — |
| | (88 | ) | | — |
| | 259 |
| | — |
| | 171 |
|
| Share-based compensation | — |
| | — |
| | — |
| | 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 |
|
| Adoption of accounting standards (Note 2) | — |
| | — |
| | — |
| | — |
| | 200 |
| | — |
| | (33 | ) | | 167 |
|
| Net income | — |
| | — |
| | — |
| | — |
| | 3,507 |
| | — |
| | — |
| | 3,507 |
|
| Other comprehensive income (loss), net of tax | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (67 | ) | | (67 | ) |
| Dividends declared on preferred stock | — |
| | — |
| | — |
| | — |
| | (164 | ) | | — |
| | — |
| | (164 | ) |
Dividends declared on common stock — $.46
per share | — |
| | — |
| | — |
| | — |
| | (624 | ) | | — |
| | — |
| | (624 | ) |
| Repurchase of common stock | — |
| | — |
| | — |
| | — |
| | — |
| | (1,000 | ) | | — |
| | (1,000 | ) |
| Stock option exercises and other | — |
| | — |
| | — |
| | (84 | ) | | — |
| | 209 |
| | — |
| | 125 |
|
| Share-based compensation | — |
| | — |
| | — |
| | 188 |
| | — |
| | — |
| | — |
| | 188 |
|
| Other | — |
| | — |
| | — |
| | 42 |
| | 2 |
| | (31 | ) | | — |
| | 13 |
|
| Balance at December 31, 2018 | $ | 2,793 |
| | 1,488 |
| | $ | 15 |
| | $ | 4,499 |
| | $ | 17,329 |
| | $ | (3,714 | ) | | $ | (252 | ) | | $ | 20,670 |
|
See Notes to Consolidated Financial Statements.
- 59 -
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
1.
Introduction and Basis of PresentationCSC
| |
| 1. | Introduction and Basis of Presentation |
The Charles Schwab Corporation (CSC) is a savings and loan holding company, engaged,headquartered in San Francisco, California. CSC was incorporated in 1986 and engages, through its subsidiaries, in wealth management, securities brokerage, banking, moneyasset management, custody, and financial advisory services.
Significant business subsidiaries of CSC include the following:
Charles Schwab & Co., Inc. (CS&Co) is a securities broker-dealer with over 325355 domestic branch offices in 4547 states, as well as a branch in each of the Commonwealth of Puerto Rico and London, England.Rico. In addition, Schwab serves clients through branch offices in the U.K., Hong Kong, Singapore, and Australia through one of CSC’s subsidiaries. Other subsidiaries includevarious subsidiaries;
Charles Schwab Bank (CSB), a federal savings bank,bank; and CSIM,
| |
| • | Charles Schwab Investment Management, Inc. (CSIM), the investment advisor for Schwab’s proprietary mutual funds (Schwab Funds®), and for Schwab’s exchange-traded funds (Schwab ETFs™). |
Unless otherwise indicated, the
investment advisor for Schwab’s proprietary mutual funds, which are referred to as the Schwab Funds®, and for Schwab’s exchange-traded funds, which are referred to as the Schwab ETFs™.terms “Schwab,” “the Company,” “we,” “us,” or “our” mean CSC together with its consolidated subsidiaries.
The accompanying consolidated financial statements include CSC and its
majority-owned subsidiaries (collectively referred to as the Company).subsidiaries. Intercompany balances and transactions have been eliminated. These consolidated financial statements have been prepared in conformity with
accounting principles generally accepted in the U.S.,GAAP, which require management to make certain estimates and assumptions that affect the reported amounts in the accompanying financial
statements and in the related disclosures. These estimates are based on information available as of the date of the consolidated financial statements.
While management makes its best judgment, actual amounts or results could differ from those estimates. 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.
Principles of Consolidation
The
Schwab evaluates all entities in which it has financial interests for consolidation, except for money market funds, which are specifically excluded from consolidation guidance. When an entity is evaluated for consolidation, Schwab determines whether its interest in the entity constitutes a controlling financial interest under either the variable interest entity (VIE) model or the voting interest entity (VOE) model. In evaluating whether Schwab’s interest in a VIE is a controlling financial interest, we consider whether our involvement in the context of the design, purpose, and risks of the VIE, as well as any involvement of related parties, provides us with (i) the power to direct the most significant activities of the VIE, and (ii) the obligation to absorb losses or receive benefits that are significant to the VIE. If both of these conditions exist, then Schwab would be the primary beneficiary of that VIE, and consolidate it. Based upon the assessments for all of our interests in VIEs, there are no cases where the Company accountsis the primary beneficiary; therefore, we are not required to consolidate any VIEs. See Note 11 for investmentsfurther information about VIEs. Schwab consolidates all VOEs in which it has majority-voting interests.
Investments in entities
in which Schwab does not have a controlling financial interest are accounted for
which it owns a voting interest and for which it hasunder the equity method of accounting when we have the ability to exercise significant influence over operating and financing decisions
usingof the
equity method of accounting.entity. Investments in entities for which
the CompanySchwab does not have the ability to exercise significant influence are generally carried at
cost. Bothcost and adjusted for impairment and observable price changes of the identical or similar investments of the same issuer (adjusted cost method), except for certain investments in qualified affordable housing projects which are accounted for under the proportional amortization method. All equity method,
adjusted cost method, and
costproportional amortization method investments are included in other
assets.The Company evaluates its initial and 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 evaluation 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 the
VIE’s economic performance and the obligation to absorb losses of the VIE that potentially could be significant to the VIE or the right to receive benefits from the VIE that potentially could be significant to the VIE.
The primary beneficiary determination for the Company’s sponsored funds is 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, 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 Policies
Asset management and administration fees
Asset management and administration fees include mutual fund service fees and fees for other asset-based financial services provided to individual and institutional clients, and are recognized as revenue over the period that the related service is provided, based upon average asset balances. The Company’s policy is to recognize revenue subject to refunds because management can estimate refunds based on Company specific experience. Actual refunds were not material as of 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 based on the daily balances of client assets subject to the specific fee for service. The fair values of client assets included in proprietary and third-party mutual funds 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
consolidated balance sheets.
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
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
| |
| 2. | Summary of Significant Accounting Policies |
Revenue recognition
Schwab’s accounting policies for revenue recognition are discussed 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 revenue
Interest revenue represents interest earned on cash and cash equivalents, cash and investments segregated, receivables from brokers, dealers, and clearing organizations, receivables from brokerage clients, other securities owned, securities available for sale, securities held to maturity, and bank loans. Interest revenue is recognized in the period earned based upon average or daily asset balances and respective interest rates.
Trading revenue
Trading revenue includes commission and principal transaction revenues. 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.
Note 3.
Cash and cash equivalentsThe Company
Schwab considers all highly liquid investments
with original maturities ofthat mature in three months or less
from the time of acquisition and that are not segregated and on deposit for regulatory purposes to be
cash and 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 maintainsour banking subsidiaries maintain at the Federal
Reserve Bank.Reserve.
Cash and investments segregated and on deposit for regulatory purposes
Cash and investments segregated and on deposit for regulatory purposes include securities purchased under agreements to resell (resale agreements), which are collateralized by U.S. Government and agency securities. Resale agreements are accounted for as collateralized financing transactions that are recorded at their contractual amounts plus accrued interest. The Company obtains control of collateral with a market value equal to or in excess of the principal amount loaned and accrued interest under resale agreements. Collateral is valued daily by the Company, with additional collateral obtained to ensure full collateralization. Cash and investments segregated also include certificates of deposit and U.S. Government securities. Certificates of deposit and U.S. Government securities are recorded at fair value. Pursuant to applicable regulations, clientthe SEC’s Customer Protection Rule, cash balances 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.
Receivables from brokerage clients
Receivables from brokerage clients include margin loans to securities brokerage clients and other trading receivables from clients. Margin loans are recordedcollateralized by client securities and are carried at the amount receivable, net of an allowance for doubtful accounts. The Company monitors margin levels and requires clients to deposit additional collateral, or reduce margin positions, to meet minimum collateral requirements if the fair value of the collateral changes. Receivables from brokerage clients that remain unsecured or partially secured for more than 30 days are fully reserved.reserved for in the allowance for doubtful accounts, except in the case of confirmed fraud, which is reserved immediately. Clients with margin loans have agreed to allow Schwab to pledge collateralized securities in accordance with federal regulations. The collateral is not reflected in the consolidated financial statements. The allowance for doubtful accounts for brokerage clients and related activity was immaterial for all periods presented.
Other securities owned are recorded at fair value based on quoted market prices or other observable market data. Unrealized gains and losses are included in trading revenue.earnings.
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
Investment securitiesSecurities available for sale and
AFS securities
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.
Management evaluates whether
investment securities
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.
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
A security is also OTTI if management does not expect to recover all of the amortized cost of the security. In this circumstance, the impairment recognized in earnings represents the estimated credit loss, and is measured by the difference between the present value of expected cash flows and the amortized cost of the security. Where appropriate,
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 evaluation of whether
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.payments have been received.
Securities borrowed and securities loaned
Securities borrowed transactions require the CompanySchwab to deliver cash to the lender in exchange for securities andsecurities; the receivables from these transactions 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 loanedloaned; the payables from these transactions 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.
Bank loans and related allowance for loan losses
Bank loans are recorded at their contractual principal amounts and include unamortized direct origination costs or net purchase discounts or premiums. Direct origination costs and premiums and discounts are recognized in interest revenue using the effective interest method over the contractual life of the loan and are adjusted for actual prepayments. Additionally, loans are recorded net of an allowance for loan losses. The
Company’s loan portfolio includes four loan
segments: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.
PALs are collateralized by marketable securities with liquid markets. Credit lines are over-collateralized dependent on the type of security pledged. Collateral market value is monitored on a daily basis and a borrower’s committed line may be reduced or collateral may be liquidated if the collateral is in danger of falling below specified levels. As such, the loss inherent within this portfolio is limited.
The Company
Schwab records an allowance for loan losses through a charge to earnings based on
management’sour estimate of probable losses in the existing portfolio.
Management reviewsWe review the allowance for loan losses quarterly, taking into consideration current
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
economic conditions, the composition of the existing loan portfolio, past loss experience, and risks inherent in the portfolio to ensure that the allowance for loan losses is maintained at an appropriate level.
The methodology to establish an allowance for loan losses utilizes statistical models that estimate prepayments, defaults, and probable losses for the loan segments based on predicted behavior of individual loans within the segments. The methodology considers the effects of borrower behavior and a variety of factors including, but not limited to, interest rates, housing price movements as measured by a housing price index, economic conditions, estimated defaults and foreclosures measured by historical and expected delinquencies, changes in prepayment speeds, LTV ratios, past loss experience, estimates of future loss severities, borrower credit risk,
measured by FICO scores, and the adequacy of collateral. The methodology also evaluates concentrations in the loan
segments,types, including loan products
within those types, year of origination, and geographical distribution of collateral.
Probable losses are forecast using a loan-level simulation of the delinquency status of the loans over the term of the loans. The simulation starts with the current relevant risk indicators, including the current delinquent status of each loan, the estimated current LTV ratio (Estimated Current LTV) of each loan, the term and structure of each loan, current key interest rates including U.S. Treasury and LIBOR rates, and borrower FICO scores. The more significant variables in the simulation include delinquency roll rates, loss severity, housing prices, and interest rates. Delinquency roll rates (i.e., the rates at which loans transition through delinquency stages and ultimately result in a loss) are estimated from the Company’sour historical loss experience adjusted for current trends and market information. Further, the delinquency roll rates within 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 and
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
market trends. The estimated loss severity (i.e., loss given default) used in the allowance for loan loss methodology for HELOC loans is higher than that used in the methodology for First Mortgages. Housing price trends are derived from historical home price indices and econometric forecasts of future home values. Factors affecting the home price index
include:include housing inventory, unemployment, interest rates, and inflation expectations. Interest rate projections are based on the current term structure of interest rates and historical volatilities to project various possible future interest rate paths.
This methodology results in loss factors that are applied to the outstanding balances to determine the allowance for loan loss for each loan segment.
The Companytype.
Schwab considers loan modifications in which it makes an economic concession to a borrower experiencing financial difficulty to be
a troubled debt
restructuring (TDR)restructurings (TDRs).
Nonaccrual, Nonperforming and Impaired loans
First Mortgages, HELOCs, PALs, and other loans are placed on nonaccrual status upon becoming 90 days past due as to interest or principal (unless the loans are well-secured and in the process of collection), or when the full timely collection of interest or principal becomes uncertain, including loans to borrowers who have filed for bankruptcy.
For the portion of the HELOC
portfolio for which the Company is able to track the delinquency status on the associated firstloans secured by a second lien
loan, the Company places a HELOCare placed on non-accrual status if the associated first
mortgagelien is 90 days or more delinquent, regardless of the payment status of the HELOC. When a loan is placed on nonaccrual status, the accrued and unpaid interest receivable is reversed and the loan is accounted for on the cash or cost recovery method 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 charges off a loan in the period that it is deemed uncollectible and records a reduction in the allowance for loan losses and the loan balance.
The Company’sOur charge-off policy for 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,
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
regardless of whether or not the property is in foreclosure, and charge-off the amount of the loan balance in excess of the estimated current value of the underlying property less estimated costs to sell.
Equipment, office facilities, and property
Equipment, office facilities, and property are recorded at cost net of accumulated depreciation and amortization, except for land, which is recorded at cost. Equipment, and office facilities, and property include certain capitalized costs of acquired or internally developed software. Costs for internally developed software are capitalized when the costs relate to development of approved projects for our internal needs that result in additional functionality. Costs related to preliminary project and post-project activities are expensed as incurred. Equipment, office facilities, and property (other than land) are depreciated on a straight-line basis over antheir estimated useful life of five to tenlives. Estimated useful lives are as follows:
|
| |
| Equipment and office facilities | 5 to 10 years |
| Buildings | 20 to 40 years |
| Software | 3 to 10 years (1) |
| Leasehold improvements | Lesser of useful life or lease term |
(1) Amortized over contractual term if less than three years. Buildings are depreciated on a straight-line basis over 20 to 40 years. Leasehold improvements are amortized on a straight-line basis over the shorter of the estimated useful life of the asset or the term of the lease. Software and certain costs incurred for purchasing or developing software for internal use are amortized on a straight-line basis over an estimated useful life of three or five years.
Equipment, office facilities, and property are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable.
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
Goodwill represents the fair value of acquired businesses in excess of the fair value of the individually identified net assets acquired. Goodwill is not amortized but is tested for impairment annually or whenever indications of impairment exist. The Company’sImpairment exists when the carrying amount of goodwill exceeds its implied fair value, resulting in an impairment charge for this excess. Our annual impairment testing date is April 1st. The CompanySchwab can elect to qualitatively assess goodwill for 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.
If the Company elects to bypass qualitatively assessing goodwill, or it is not more likely than not that the fair value of a reporting unit exceeds its carrying value, management estimates the fair values of each of the Company’s reporting units (defined as the Company’s businesses for which financial information is available and reviewed regularly by management) and compares it to their carrying values. The estimated fair values of the reporting units are established using an income approach based on a discounted cash flow model that includes significant assumptions about the future operating results and cash flows of each reporting unit, a market approach which compares each reporting unit to comparable companies in their respective industries, as well as a market capitalization analysis. Based on the Company’s analysis, fair value significantly exceeded the carrying value for all reporting units as of its annual testing date.
Intangible assetsIntangible
Finite-lived intangible assets are amortized over their useful lives in a manner that best reflects their economic benefit. IntangibleAll intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. The Company does not have any indefinite-lived intangible assets.
Low-Income Housing Tax Credit (LIHTC) Investments
As part of the Company’s community reinvestment initiatives, the Company 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 accounts
We 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.
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
Guarantees and indemnifications
The Company
Schwab recognizes, at the inception of a guarantee, a liability equal to the estimated fair value of the obligation undertaken in issuing the guarantee. The fair values of obligations relating to guarantees are estimated based on transactions for similar guarantees or expected present value measures.
Advertising and market development
Advertising and market development activities include the cost to produce and distribute marketing campaigns as well as client incentives and discounts. Such costs are generally expensed when incurred.
Schwab provides for income taxes on all transactions that have been recognized in the consolidated financial statements. Accordingly, deferred tax assets are adjusted to reflect the tax rates at which future taxable amounts will likely be settled or realized. The effects of tax rate changes on future deferred tax assets and deferred tax liabilities, as well as other changes in income tax laws, are recorded in earnings in the period during which such changes are enacted. The Company’s unrecognizedUncertain tax benefits, whichpositions are included in accrued expenses and other liabilities, representevaluated to determine whether they are more likely than not to be sustained upon examination. When tax positions are more likely than not to be sustained upon examination the difference between positions taken on tax return filings and estimated potential tax settlement outcomes.outcomes are recognized in accrued expenses and other liabilities. If a position is not more likely than not to be sustained, then none of the tax benefit is recognized in Schwab’s financial statements. Accrued interest
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
and penalties relating to unrecognized tax benefits is recorded in
incometaxes on income. Schwab records amounts within AOCI net of taxes. Income tax
expense and penaltieseffects are
recorded in other expense.Stock-basedreleased from AOCI using the specific-identification approach.
Share-based compensationStock-based
Share-based compensation includes employee and board of director stock options restricted stock units, and restricted stock awards. The Companyunits. Schwab measures compensation expense for these share-based payment arrangements based on their estimated fair values as of the awards’ grant date. The fair value of the share-based award is recognized over the vesting period as stock-basedshare-based compensation. Stock-basedShare-based compensation expense is based on awardsoptions or units 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 taxes on income.
Earnings per common share
EPS is computed using the two-class method. Preferred stock dividends and undistributed earnings and dividends allocated to participating securities are subtracted from net income in determining net income available to common stockholders. Basic EPS is computed by dividing net income available to common stockholders by the weighted-average number of common shares outstanding during the period. The computation of diluted EPS is similar to the computation of basic EPS except that the denominator is increased to include the number of additional
paid-in capital.common shares that would have been outstanding if dilutive potential common shares had been issued. Dilutive potential common shares include, if dilutive, the effect of outstanding stock options and non-vested restricted stock units.
Fair values of assets and liabilities
Fair value is defined as the price that would be received to sell an asset or the price paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurement accounting guidance describes the fair value hierarchy for disclosing assets and liabilities measured at fair value based on the inputs used to value them. The fair value hierarchy maximizes the use of observable inputs and minimizes the use of unobservable inputs. Observable inputs are based on market pricing data obtained from third-party sources independent of the Company. A quoted price in an active market provides the most reliable evidence of fair value and is generally used to measure fair value whenever available.
Unobservable inputs reflect management’s judgment about the assumptions market participants would use in pricing the asset or liability. Where inputs used to measure fair value of an asset or liability are from different levels of the hierarchy, the asset or liability is categorized based on the lowest level input that is significant to the fair value measurement in its entirety. Assessing the significance of a particular input requires judgment. The fair value hierarchy includes three levels based on the objectivity of the inputs as follows: | ·
| | Level 1 inputs are quoted prices in active markets as of the measurement date for identical assets or liabilities that the Company has the ability to access. |
| ·
| | Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates, benchmark yields, issuer spreads, new issue data, and collateral performance.
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THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
| ·
| | 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.
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The Company’s policy is to recognize transfers of financial instruments between levels as of the beginning ofmeasurement date for identical assets or liabilities that the reporting periodCompany has the ability to access.
Level 2 inputs are inputs other than quoted prices included in which a transfer occurs.Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates, benchmark yields, issuer spreads, new issue data, and collateral performance.
Level 3 inputs are unobservable inputs for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability.
Assets and liabilities measured at fair value on a recurring basisThe Company’s
Schwab’s assets and liabilities measured at fair value on a recurring basis includeinclude: certain cash equivalents, certain investments segregated and on deposit for regulatory purposes, other securities owned, and securities 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
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
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
third-party pricing sources for assets recorded at fair value.
The Company’s
Our primary independent pricing service provides prices based on observable trades and discounted cash flows that incorporate observable information such as yields for similar types of securities (a benchmark interest rate plus observable spreads) and weighted-average maturity for the same or similar “to-be-issued” securities. The Company comparesWe compare the prices obtained from itsthe primary independent pricing service to the prices obtained from the additional independent pricing services to determine if the price obtained from the primary independent pricing service is reasonable. The CompanySchwab does not adjust the prices received from independent third-party pricing services unless such prices are inconsistent with the definition of fair value and result in a material differencedifferences in the recorded amounts.Fair value of other financial instruments
Descriptions of the valuation methodologies and assumptions used to estimate the fair value of other financial instruments are described below. The Company’s financial instruments not recorded at fair value but for which fair value can be approximated and disclosed include:
amounts recorded. | ·
| | 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 the carrying values of these financial instruments approximate their fair values.
|
| ·
| | 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 approximate their fair values.
|
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
| ·
| |
Financial instruments 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.
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| ·
| | 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.
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New Accounting Standards
Adoption of New Accounting StandardsIn 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.
New Accounting Standards Not Yet Adopted
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
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| | | |
| Standard | Description | Date of Adoption | Effects on the Financial Statements or Other Significant Matters |
| Accounting Standards Update (ASU) 2014-09, “Revenue from Contracts with Customers (Topic 606)” and related ASUs | Clarifies that revenue from contracts with clients should be recognized in a manner that depicts the timing of the related transfer of goods or performance of services at an amount that reflects the expected consideration.
Adoption allows either full or modified retrospective transition. Full retrospective transition required a cumulative effect adjustment to retained earnings as of the earliest comparative period presented. Modified retrospective transition required a cumulative effect adjustment to retained earnings as of the beginning of the reporting period in which the entity first applies the new guidance. | January 1, 2018 | The guidance does not apply to revenue earned from the Company’s loans and securities. Accordingly, net interest revenue was not impacted. The primary impact for the Company was the capitalization on the consolidated balance sheets of sales commissions paid to employees for obtaining new contracts with clients. These capitalized costs resulted in an asset of $219 million and a related deferred tax liability of $52 million upon adoption. The asset is being amortized to expense over time as the related revenues are recognized.
The Company adopted the revenue recognition guidance using the modified retrospective method for all contracts that were not completed as of January 1, 2018. Further details of the impact of adoption are included below in this Note as well as in Note 3. |
| ASU 2016-01, “Financial Instruments – Overall (Subtopic 825-10)” and ASU 2018-03, “Technical Corrections and Improvements to 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 adopted this guidance on a prospective basis for its equity securities that do not have readily determinable fair values. No other significant changes resulted from adoption. Therefore, there was no material impact on the Company’s financial statements.
The Company elected to use the alternative to fair value measurement for its equity securities that do not have readily determinable fair values. These equity securities will be adjusted for impairment and observable price changes of the identical or similar investments of the same issuer, as applicable. Schwab refers to this approach as the adjusted cost method. This method was applied to an immaterial amount of Community Reinvestment Act (CRA) investments included in other assets on the consolidated balance sheets. |
| ASU 2016-18, “Statement of Cash Flows (Topic 230) – Restricted Cash a Consensus of the Emerging Issues Task Force” | Requires that the statement of cash flows explain the change during the period in the total cash and cash equivalents, including restricted cash and cash equivalents.
Adoption requires retrospective presentation of the statement of cash flows to include restricted cash and cash equivalents in the beginning and ending amounts. | January 1, 2018 | The Company adopted this guidance on a retrospective basis. The Company has significant amounts of restricted cash and cash equivalents due to its business as a broker-dealer.
As a result of the adoption, changes in restricted cash and cash equivalents included within cash and investments segregated and on deposit for regulatory purposes in the consolidated balance sheets are now presented with changes in cash and cash equivalents throughout the consolidated statements of cash flows. The amount of restricted cash and cash equivalents is included in a separate table in the consolidated statement of cash flows. |
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
|
| | | |
| Standard | Description | Date of Adoption | Effects on the Financial Statements or Other Significant Matters |
| ASU 2018-02, “Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income” | Permits reclassification of the impacts on certain tax affected items included in AOCI that were adjusted through income from continuing operations rather than AOCI upon the effective date of the Tax Act.
Adoption provides for retrospective adoption to all periods presented and impacted by the Tax Act or as of the beginning of the period of adoption. | January 1, 2018 | The Company adopted this guidance as of January 1, 2018. The Company elected to reclassify the income tax effects of the Tax Act from items in AOCI into retained earnings as of the beginning of the period of adoption.
Adoption resulted in a reduction in AOCI and a corresponding increase in retained earnings of $33 million. |
New Accounting Standards Not Yet Adopted
|
| | | |
| Standard | Description | Required Date of Adoption | Effects on the Financial Statements or Other Significant Matters |
| 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 provides for 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 or prospectively with an adjustment as of the beginning of the period of adoption. Certain transition relief is permitted if elected by the entity. | January 1, 2019 | The Company adopted the new lease accounting guidance prospectively as of January 1, 2019, which will result in a gross up of the consolidated balance sheet due to recognition of right-of-use assets and lease liabilities primarily related to CS&Co leases of office space and branches. These amounts will be based on the present value of our remaining operating lease payments. The Company's right of use assets and related lease liabilities upon adoption will be $596 million and $662 million, respectively. |
| | | |
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
|
| | | |
| | | |
| 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 continues to evaluate the impact of this guidance on its financial statements. The Company has finished the majority of its scoping work and assessment of the current state of data and systems. Work is transitioning to designing and building out approaches to address certain asset classes with a focus primarily on a subset of our securities, including corporate debt securities. The Company expects that a large portion of its securities will have zero expectation of credit losses based on industry and regulator views for U.S. treasury and certain government agency-backed securities. We are currently working on in-depth analysis for the other asset types that do not have zero expectation of credit losses to determine our methods and any needed 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 adopted this guidance as of January 1, 2019 using the modified retrospective method. Adoption resulted in an immaterial cumulative-effect adjustment to the opening balance of retained earnings as of the beginning of the period of adoption. |
| | | |
| | | |
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
|
| | | |
| | | |
| Standard | Description | Required Date of Adoption | Effects on the Financial Statements or Other Significant Matters |
| ASU 2018-15, “Intangibles–Goodwill and Other–Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (a consensus of the FASB Emerging Issues Task Force)” | Aligns the criteria for capitalizing implementation costs for cloud computing arrangements (CCA) that are service contracts with internal-use software that is developed or purchased and CCAs that include an internal-use software license. This guidance requires that the capitalized implementation costs be recognized over the period of the CCA service contract, subject to impairment evaluation on an ongoing basis.
The guidance prescribes the balance sheet, income statement, and statement of cash flow classification of the capitalized implementation costs and related amortization expense, and requires additional quantitative and qualitative disclosures.
Adoption provides for retrospective or prospective application to all implementation costs incurred after the date of adoption. | January 1, 2020 (early adoption permitted) | Historically, Schwab has expensed implementation costs as they are incurred for CCAs that are service contracts. Therefore, adopting this guidance will change the Company’s accounting treatment for these types of implementation costs. The Company is evaluating the impacts of this guidance on its financial statements. |
The cumulative effect of the changes made to our consolidated January 1, 2016,2018 balance sheet for the adoption of ASU 2014-09, “Revenue – Revenue from Contracts with Customers” and ASU 2018-02, “Other Comprehensive Income – Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income” were as follows: |
| | | | | | | | | | | | | | | | |
| | | Balance at
December 31, 2017 | | Adjustments Due to ASU 2014-09 | | Adjustments Due to ASU 2018-02 | | Balance at
January 1, 2018 |
| Assets | | | | | | | | |
Other assets (1) | | $ | 2,057 |
| | $ | 167 |
| | $ | — |
| | $ | 2,224 |
|
| Stockholders’ Equity | | | | | | | | |
| Retained earnings | | 14,408 |
| | 167 |
| | 33 |
| | 14,608 |
|
| Accumulated other comprehensive income | | (152 | ) | | — |
| | (33 | ) | | (185 | ) |
$52 million.
In accordance with the new revenue standard requirements, the disclosure of the impact of adoption on our consolidated statement of income and consolidated balance sheet were as follows:
|
| | | | | | | | | | | | |
| | | Year Ended December 31, 2018 |
| Statement of Income | | As Reported | | Balances Without Adoption of ASU 2014-09 | | Effect of Change
Higher/(Lower) |
| Expenses Excluding Interest | | | | | | |
| Compensation and benefits | | $ | 3,057 |
| | $ | 3,088 |
| | $ | (31 | ) |
| Taxes on income | | 1,055 |
| | 1,047 |
| | 8 |
|
| Net Income | | 3,507 |
| | 3,484 |
| | 23 |
|
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
|
| | | | | | | | | | | | |
| | | As of December 31, 2018 |
| Balance Sheet | | As Reported | | Balances Without Adoption of ASU 2014-09 | | Effect of Change
Higher/(Lower) |
| Assets | | | | | | |
Other assets (1) | | $ | 2,046 |
| | $ | 1,851 |
| | $ | 195 |
|
| Liabilities | | | | | | |
Accrued expenses and other liabilities (1) | | 2,954 |
| | 2,949 |
| | 5 |
|
| Stockholders’ Equity | | | | | | |
| Retained earnings | | 17,329 |
| | 17,139 |
| | 190 |
|
(1) Adjustment is comprised of an increase in capitalized contract costs of $250 million, partially offset by an increase in deferred tax liabilities of
$60 million.
3.Revenue Recognition
Disaggregated Revenue
Disaggregation of Schwab’s revenue by major source is as follows: |
| | | | | | | | | | | |
| Year Ended December 31, | 2018 | | 2017 | | 2016 |
| Net interest revenue | | | | | |
| Interest revenue | $ | 6,680 |
| | $ | 4,624 |
| | $ | 3,493 |
|
| Interest expense | (857 | ) | | (342 | ) | | (171 | ) |
| Net interest revenue | 5,823 |
| | 4,282 |
| | 3,322 |
|
| Asset management and administration fees | | | | | |
| Mutual funds and ETF service fees | 1,793 |
| | 2,045 |
| | 1,853 |
|
| Advice solutions | 1,139 |
| | 1,043 |
| | 915 |
|
| Other | 297 |
| | 304 |
| | 287 |
|
| Asset management and administration fees | 3,229 |
| | 3,392 |
| | 3,055 |
|
| Trading revenue | | | | | |
| Commissions | 685 |
| | 600 |
| | 779 |
|
| Principal transactions | 78 |
| | 54 |
| | 46 |
|
| Trading revenue | 763 |
| | 654 |
| | 825 |
|
| Other | 317 |
| | 290 |
| | 276 |
|
| Total net revenues | $ | 10,132 |
| | $ | 8,618 |
| | $ | 7,478 |
|
For a summary of revenue provided by our reportable segments, see Note 22. The recognition of revenue is not impacted by the operating segment in which revenue is generated.
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
Net interest revenue
Net interest revenue, which is generated from financial instruments covered by various other areas of GAAP, is not within the scope of Accounting Standards Codification (ASC) 606, Revenue From Contracts With Customers (ASC 606), and is applicableincluded in the table above in order to all entities but provides an exceptionreconcile to total net revenues per the consolidated statements of income. Net interest revenue is the difference between interest generated on interest earning assets and interest paid on funding sources. Our primary interest earning assets include cash and cash equivalents; segregated cash and investments; margin loans, which constitute the majority of receivables from brokerage clients; investment securities; and bank loans. Revenue on interest earning assets is affected by various factors, such as the composition of assets, prevailing interest rates at the time of origination or purchase, changes in interest rates on floating rate securities and loans, and changes in prepayment levels for reporting entities with interestsmortgage related securities and loans. Fees earned and incurred on securities borrowing and lending activities, which are conducted by CS&Co on assets held in legal entities thatclient brokerage accounts, are requiredalso included in interest revenue and expense.
Asset management and administration fees
The majority of asset management and administration fees are generated through our proprietary and third-party mutual fund and ETF offerings, as well as fee-based advisory solutions. Mutual fund and ETF service fees are charged for investment management, shareholder, and administration services provided to comply with or operate in accordance with requirements thatSchwab Funds® and Schwab ETFs™, as well as recordkeeping, shareholder, and administration services provided to third-party funds. Advice solutions fees are similarcharged for brokerage and asset management services provided to those in Rule 2a-7advice solutions clients. Both mutual fund and ETF service fees and advice solutions fees are earned and recognized over time. Fees are generally based on a percentage of the Investment Company Actdaily value of 1940assets under management and are collected on a monthly or quarterly basis.
Trading revenue
Substantially all trading revenue is generated through commissions earned for registered money market funds. executing trades for clients in individual equities, options, fixed income securities, and certain third-party mutual funds and ETFs. This revenue is earned and collected when the trades are executed.
The adoptionOther revenue
Other revenue includes order flow revenue, other service fees, software fees from our portfolio management solutions, exchange processing fees, and nonrecurring gains. Generally, the most significant portion of ASU 2015-02 willother revenue is order flow revenue, which is comprised of rebate payments received from execution venues to which CS&Co sends equity and option orders. Order flow revenue is recognized when the trades are executed.
Capitalized contract costs
Capitalized contract costs relate to sales commissions paid to employees for obtaining contracts with clients and are included in other assets on the consolidated balance sheets. These costs are amortized to expense on a straight-line basis over a period that is consistent with how the related revenue is recognized. At December 31, 2018 and January 1, 2018, we had $250 million and $219 million of capitalized contract costs, respectively. Amortization expense related to capitalized contract costs was $47 million in 2018, which was recorded in compensation and benefits expense on the consolidated statements of income.
Contract balances
Receivables from contracts with customers within the scope of ASC 606 were $307 million at December 31, 2018 and $353 million at January 1, 2018 and were recorded in other assets on the consolidated balance sheets. Schwab does not have an impact on the Company’s consolidated financial statementsany other significant contract assets or EPScontract liability balances 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 effective2018 and January 1, 2016, will2018.
Unsatisfied performance obligations
We do 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 guidancehave any unsatisfied performance obligations other than those 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.are subject to an elective practical expedient under ASC 606. The guidance became effective January 1, 2016, andpractical expedient applies to any new arrangements entered into after that date. The Company does not expectand is elected for contracts where we recognize revenue at the new guidance willamount to which we have a significant impact on its financial statementsthe right to invoice for services performed.
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, 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.as Noted)
| |
| 4. | Receivables from and Payables to Brokerage Clients |
Receivables from
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, | 2018 | | 2017 |
| Receivables | | | |
| Margin loans, net of allowance for doubtful accounts | $ | 19,273 |
| | $ | 18,331 |
|
| Other brokerage receivables | 2,378 |
| | 2,245 |
|
| Receivables from brokerage clients — net | $ | 21,651 |
| | $ | 20,576 |
|
| Payables | | | |
| Interest-bearing payables | $ | 21,990 |
| | $ | 22,840 |
|
| Non-interest-bearing payables | 10,736 |
| | 8,403 |
|
| Payables to brokerage clients | $ | 32,726 |
| | $ | 31,243 |
|
At December 31, 20152018 and 2014, respectively. Securities owned by brokerage clients are held as collateral for margin loans. Such collateral is not reflected2017, approximately 22% 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.
Other Securities OwnedA summary of other securities owned is as follows:
| | | | | | | | |
December 31, | | | 2015 | | | 2014 |
Schwab Funds® money market funds | | $ | 261 | | | $ | 224 | |
Equity and bond mutual funds | | | 205 | | | | 215 | |
State and municipal debt obligations | | | 50 | | | | 51 | |
Equity, U.S. Government and corporate debt, and other securities | | | 17 | | | | 26 | |
Total other securities owned | | $ | 533 | | | $ | 516 | |
|
| | | | | | | |
| December 31, | 2018 | | 2017 |
| Equity and bond mutual funds | $ | 441 |
| | $ | 318 |
|
| State and municipal debt obligations | 39 |
| | 52 |
|
| Equity, U.S. Government and corporate debt, and other securities | 33 |
| | 34 |
|
Schwab Funds® money market funds | 26 |
| | 135 |
|
| Total other securities owned | $ | 539 |
| | $ | 539 |
|
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 clients’ transactions in certain Schwab Funds and third-party mutual fund clients’ transactions,funds, and investments made by the Company relating to itsour deferred compensation plan. State and municipal debt obligations, equity, U.S. Government and corporate debt, and other securities include securities held to meet clients’ trading activities. The positions in Schwab Funds® money market funds arise from certain overnight funding of clients’ redemption, check-writing, and debit card activities.
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
6. Investment Securities
5.Securities Available for Sale and Securities Held to MaturityThe amortized cost, gross unrealized gains and losses, and fair value of AFS and HTM securities available for saleare as follows:
|
| | | | | | | | | | | | | | | |
| December 31, 2018 | Amortized
Cost | | Gross Unrealized
Gains | | Gross Unrealized
Losses | | Fair
Value |
| Available for sale securities | | | | | | | |
| U.S. agency mortgage-backed securities | $ | 25,594 |
| | $ | 44 |
| | $ | 82 |
| | $ | 25,556 |
|
| U.S. Treasury securities | 18,410 |
| | — |
| | 108 |
| | 18,302 |
|
Asset-backed securities (1) | 10,086 |
| | 14 |
| | 15 |
| | 10,085 |
|
Corporate debt securities (2) | 7,477 |
| | 10 |
| | 20 |
| | 7,467 |
|
| Certificates of deposit | 3,682 |
| | 4 |
| | 1 |
| | 3,685 |
|
| U.S. agency notes | 900 |
| | — |
| | 2 |
| | 898 |
|
Commercial paper (2,3) | 522 |
| | — |
| | — |
| | 522 |
|
| Foreign government agency securities | 50 |
| | — |
| | 1 |
| | 49 |
|
| Non-agency commercial mortgage-backed securities | 14 |
| | — |
| | — |
| | 14 |
|
| Total available for sale securities | $ | 66,735 |
| | $ | 72 |
| | $ | 229 |
| | $ | 66,578 |
|
| Held to maturity securities | | | | | | | |
| U.S. agency mortgage-backed securities | $ | 118,064 |
| | $ | 217 |
| | $ | 2,188 |
| | $ | 116,093 |
|
Asset-backed securities (1) | 18,502 |
| | 83 |
| | 39 |
| | 18,546 |
|
Corporate debt securities (2) | 4,477 |
| | 2 |
| | 47 |
| | 4,432 |
|
| U.S. state and municipal securities | 1,327 |
| | 24 |
| | 3 |
| | 1,348 |
|
| Non-agency commercial mortgage-backed securities | 1,156 |
| | 3 |
| | 17 |
| | 1,142 |
|
| U.S. Treasury securities | 223 |
| | — |
| | 6 |
| | 217 |
|
| Certificates of deposit | 200 |
| | 1 |
| | — |
| | 201 |
|
| Foreign government agency securities | 50 |
| | — |
| | 1 |
| | 49 |
|
| Other | 10 |
| | — |
| | — |
| | 10 |
|
| Total held to maturity securities | $ | 144,009 |
| | $ | 330 |
| | $ | 2,301 |
| | $ | 142,038 |
|
| | |
| | |
| | |
| | |
|
| December 31, 2017 | | | | | | | |
| Available for sale securities | | | | | | | |
| U.S. agency mortgage-backed securities | $ | 20,915 |
| | $ | 53 |
| | $ | 39 |
| | $ | 20,929 |
|
| U.S. Treasury securities | 9,583 |
| | — |
| | 83 |
| | 9,500 |
|
Asset-backed securities (1) | 9,019 |
| | 34 |
| | 6 |
| | 9,047 |
|
Corporate debt securities (2) | 6,154 |
| | 16 |
| | 1 |
| | 6,169 |
|
| Certificates of deposit | 2,040 |
| | 2 |
| | 1 |
| | 2,041 |
|
| U.S. agency notes | 1,914 |
| | — |
| | 8 |
| | 1,906 |
|
Commercial paper (2) | 313 |
| | — |
| | — |
| | 313 |
|
| Foreign government agency securities | 51 |
| | — |
| | 1 |
| | 50 |
|
| Non-agency commercial mortgage-backed securities | 40 |
| | — |
| | — |
| | 40 |
|
| Total available for sale securities | $ | 50,029 |
| | $ | 105 |
| | $ | 139 |
| | $ | 49,995 |
|
| Held to maturity securities | | | | | | | |
| U.S. agency mortgage-backed securities | $ | 101,197 |
| | $ | 290 |
| | $ | 1,034 |
| | $ | 100,453 |
|
Asset-backed securities (1) | 12,937 |
| | 127 |
| | 2 |
| | 13,062 |
|
Corporate debt securities (2) | 4,078 |
| | 13 |
| | 5 |
| | 4,086 |
|
| U.S. state and municipal securities | 1,247 |
| | 57 |
| | — |
| | 1,304 |
|
| Non-agency commercial mortgage-backed securities | 994 |
| | 10 |
| | 5 |
| | 999 |
|
| U.S. Treasury securities | 223 |
| | — |
| | 3 |
| | 220 |
|
| Certificates of deposit | 200 |
| | — |
| | — |
| | 200 |
|
| Foreign government agency securities | 50 |
| | — |
| | 1 |
| | 49 |
|
| Total held to maturity securities | $ | 120,926 |
| | $ | 497 |
| | $ | 1,050 |
| | $ | 120,373 |
|
(1) Approximately 36% and 42% of asset-backed securities held as of December 31, 2018 and 2017, respectively, were Federal Family Education Loan Program Asset-Backed Securities. Asset-backed securities collateralized by credit card receivables represented approximately 42% and 40% of the asset-backed securities held as of December 31, 2018 and 2017, respectively.
(2) As of December 31, 2018 and 2017, approximately 26% and 41%, respectively, of the total AFS and HTM investments in corporate debt securities and commercial paper were issued by institutions in the financial services industry. Approximately 18% and 22% of the holdings of these securities were issued by institutions in the information technology industry as of December 31, 2018 and 2017, respectively.
(3) Included in cash and cash equivalents on the consolidated balance sheet, but excluded from this table is $4.9 billion of AFS commercial paper. These holdings have maturities of three months or less and an aggregate market value equal to maturity are as follows:amortized cost. | | | | | | | | | | | | |
| | | | | Gross | | Gross | | | |
| | Amortized | | Unrealized | | Unrealized | | Fair |
December 31, 2015 | | Cost | | Gains | | Losses | | Value |
Securities available for sale: | | | | | | | | | | | | |
U.S. agency mortgage-backed securities | | $ | 22,014 | | $ | 183 | | $ | 48 | | $ | 22,149 |
Asset-backed securities | | | 21,784 | | | 7 | | | 306 | | | 21,485 |
Corporate debt securities | | | 10,764 | | | 14 | | | 31 | | | 10,747 |
U.S. Treasury securities | | | 5,719 | | | 2 | | | 17 | | | 5,704 |
U.S. agency notes | | | 3,177 | | | - | | | 27 | | | 3,150 |
Certificates of deposit | | | 1,685 | | | 1 | | | 3 | | | 1,683 |
U.S. state and municipal securities | | | 414 | | | 10 | | | - | | | 424 |
Non-agency commercial mortgage-backed securities | | | 298 | | | 1 | | | - | | | 299 |
Other securities | | | 5 | | | - | | | - | | | 5 |
Total securities available for sale | | $ | 65,860 | | $ | 218 | | $ | 432 | | $ | 65,646 |
Securities held to maturity: | | | | | | | | | | | | |
U.S. agency mortgage-backed securities | | $ | 48,785 | | $ | 391 | | $ | 293 | | $ | 48,883 |
Non-agency commercial mortgage-backed securities | | | 999 | | | 6 | | | 20 | | | 985 |
U.S. Treasury securities | | | 223 | | | - | | | 3 | | | 220 |
Total securities held to maturity | | $ | 50,007 | | $ | 397 | | $ | 316 | | $ | 50,088 |
| | | | | | | | | | | | |
| | | | | Gross | | Gross | | | |
| | Amortized | | Unrealized | | Unrealized | | Fair |
December 31, 2014 | | Cost | | Gains | | Losses | | Value |
Securities available for sale: | | | | | | | | | | | | |
U.S. agency mortgage-backed securities | | $ | 18,487 | | $ | 242 | | $ | 12 | | $ | 18,717 |
Asset-backed securities | | | 19,320 | | | 64 | | | 18 | | | 19,366 |
Corporate debt securities | | | 8,023 | | | 30 | | | 8 | | | 8,045 |
U.S. Treasury securities | | | 2,993 | | | 2 | | | 1 | | | 2,994 |
U.S. agency notes | | | 3,839 | | | - | | | 44 | | | 3,795 |
Certificates of deposit | | | 1,533 | | | 1 | | | - | | | 1,534 |
Non-agency commercial mortgage-backed securities | | | 310 | | | 7 | | | - | | | 317 |
Other securities | | | 15 | | | - | | | - | | | 15 |
Total securities available for sale | | $ | 54,520 | | $ | 346 | | $ | 83 | | $ | 54,783 |
Securities held to maturity: | | | | | | | | | | | | |
U.S. agency mortgage-backed securities | | $ | 33,388 | | $ | 531 | | $ | 174 | | $ | 33,745 |
Non-agency commercial mortgage-backed securities | | | 1,001 | | | 11 | | | 14 | | | 998 |
Total securities held to maturity | | $ | 34,389 | | $ | 542 | | $ | 188 | | $ | 34,743 |
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
During 2017, the Company transferred $24.7 billion of investment securities from the AFS category to the HTM category. These securities had a total net unrealized loss of $227 million before income tax in AOCI on the date of transfer. The transfer was made to mitigate the potential volatility in regulatory capital from changes in market values in the AFS securities portfolio and the related impact to AOCI in anticipation of Schwab crossing $250 billion in consolidated assets, which occurred in the second quarter of 2018. The year after a company surpasses $250 billion in consolidated assets, it can no longer exclude AOCI from regulatory capital. The transfer included U.S. agency mortgage-backed securities, asset-backed securities, corporate debt securities, and U.S. state and municipal securities. The unrealized holding gains and losses on the date of transfer, are reported as a separate component of AOCI and as an adjustment to the purchase premium and discount on the securities transferred. The separate component of AOCI is amortized or accreted into interest income over the remaining life of the securities transferred, offsetting the revised premium or discount amortization or accretion on the transferred assets.
At December 31, 2018, certain banking subsidiaries had pledged securities with a fair value of $27.2 billion as collateral to secure borrowing capacity on secured credit facilities with the FHLB (see Note 13). CSB also pledges certain investment securities as collateral to secure borrowing capacity at the Federal Reserve Bank
discount window, and had pledged securities with a fair value of $7.9 billion as collateral for this facility at December 31, 2018. CSB also pledges securities issued by federal agencies to secure certain trust deposits. The fair value of these pledged securities was
$170$906 million at December 31,
2015.A summary of securities with unrealized losses, aggregated by category and period of continuous unrealized loss, is as follows:
2018. | | | | | | | | | | | | | | | | | | |
| | 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 | | $ | 8,541 | | $ | 47 | | $ | 813 | | $ | 1 | | $ | 9,354 | | $ | 48 |
Asset-backed securities | | | 17,127 | | | 240 | | | 2,743 | | | 66 | | | 19,870 | | | 306 |
Corporate debt securities | | | 5,433 | | | 25 | | | 942 | | | 6 | | | 6,375 | | | 31 |
U.S. Treasury securities | | | 5,010 | | | 17 | | | - | | | - | | | 5,010 | | | 17 |
U.S. agency notes | | | 1,281 | | | 10 | | | 1,547 | | | 17 | | | 2,828 | | | 27 |
Certificates of deposit | | | 773 | | | 2 | | | 599 | | | 1 | | | 1,372 | | | 3 |
Total | | $ | 38,165 | | $ | 341 | | $ | 6,644 | | $ | 91 | | $ | 44,809 | | $ | 432 |
Securities held to maturity: | | | | | | | | | | | | | | | | | | |
U.S. agency mortgage-backed securities | | $ | 24,219 | | $ | 253 | | $ | 1,842 | | $ | 40 | | $ | 26,061 | | $ | 293 |
Non-agency commercial mortgage-backed | | | | | | | | | | | | | | | | | | |
securities | | | 729 | | | 20 | | | - | | | - | | | 729 | | | 20 |
U.S. Treasury securities | | | 220 | | | 3 | | | - | | | - | | | 220 | | | 3 |
Total | | $ | 25,168 | | $ | 276 | | $ | 1,842 | | $ | 40 | | $ | 27,010 | | $ | 316 |
Total securities with unrealized losses (1) | | $ | 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.
|
| | | | | | | | | | | | | | | | | | |
| | 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 | | $ | 2,247 | | $ | 5 | | $ | 1,767 | | $ | 7 | | $ | 4,014 | | $ | 12 |
Asset-backed securities | | | 5,754 | | | 15 | | | 792 | | | 3 | | | 6,546 | | | 18 |
Corporate debt securities | | | 1,781 | | | 4 | | | 552 | | | 4 | | | 2,333 | | | 8 |
U.S. Treasury securities | | | 1,246 | | | 1 | | | - | | | - | | | 1,246 | | | 1 |
U.S. agency notes | | | - | | | - | | | 3,696 | | | 44 | | | 3,696 | | | 44 |
Total | | $ | 11,028 | | $ | 25 | | $ | 6,807 | | $ | 58 | | $ | 17,835 | | $ | 83 |
Securities held to maturity: | | | | | | | | | | | | | | | | | | |
U.S. agency mortgage-backed securities | | $ | 264 | | $ | 1 | | $ | 10,415 | | $ | 173 | | $ | 10,679 | | $ | 174 |
Non-agency commercial mortgage-backed | | | | | | | | | | | | | | | | | | |
securities | | | - | | | - | | | 660 | | | 14 | | | 660 | | | 14 |
Total | | $ | 264 | | $ | 1 | | $ | 11,075 | | $ | 187 | | $ | 11,339 | | $ | 188 |
Total securities with unrealized losses (1) | | $ | 11,292 | | $ | 26 | | $ | 17,882 | | $ | 245 | | $ | 29,174 | | $ | 271 |
(1)
| The number of investment positions with unrealized losses totaled 173 for securities available for sale and 111 for securities held to maturity.
|
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.”
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
The following table is a roll forward
Securities with unrealized losses, aggregated by category and period of
the amount of credit losses recognized in earnings for OTTI securities held by the Company during the period for which a portion of the impairment was reclassified from or recognized in other comprehensive income (loss): | | | | | | | | | | | | |
Year Ended December 31, | | | 2015 | | | 2014 | | | 2013 |
Balance at beginning of year | | $ | 2 | | | $ | 169 | | | $ | 159 | |
Credit losses recognized into current year earnings on debt securities for | | | | | | | | | | | | |
which an OTTI was not previously recognized | | | - | | | | 1 | | | | 1 | |
Credit losses recognized into current year earnings on debt securities for | | | | | | | | | | | | |
which an OTTI was previously recognized | | | - | | | | - | | | | 9 | |
Reductions due to sale of debt securities for which an OTTI was | | | | | | | | | | | | |
previously recognized | | | (1) | | | | (168) | | | | - | |
Balance at end of year | | $ | 1 | | | $ | 2 | | | $ | 169 | |
The maturities of securities available for sale and securities held to maturitycontinuous unrealized loss, are as follows:
| | | | | | | | | | | | | | | |
| | | | | 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) | | $ | - | | $ | 1,883 | | $ | 10,372 | | $ | 9,894 | | $ | 22,149 |
Asset-backed securities | | | - | | | 7,014 | | | 3,555 | | | 10,916 | | | 21,485 |
Corporate debt securities | | | 2,344 | | | 8,403 | | | - | | | - | | | 10,747 |
U.S. Treasury securities | | | 2,494 | | | 3,015 | | | 195 | | | - | | | 5,704 |
U.S. agency notes | | | - | | | 3,150 | | | - | | | - | | | 3,150 |
Certificates of deposit | | | 935 | | | 748 | | | - | | | - | | | 1,683 |
U.S. state and municipal securities | | | - | | | - | | | 19 | | | 405 | | | 424 |
Non-agency commercial mortgage-backed | | | | | | | | | | | | | | | |
securities (1) | | | - | | | - | | | - | | | 299 | | | 299 |
Other securities | | | - | | | - | | | - | | | 5 | | | 5 |
Total fair value | | $ | 5,773 | | $ | 24,213 | | $ | 14,141 | | $ | 21,519 | | $ | 65,646 |
Total amortized cost | | $ | 5,774 | | $ | 24,247 | | $ | 14,160 | | $ | 21,679 | | $ | 65,860 |
Securities held to maturity: | | | | | | | | | | | | | | | |
U.S. agency mortgage-backed securities (1) | | $ | - | | $ | 2,380 | | $ | 20,337 | | $ | 26,166 | | $ | 48,883 |
Non-agency commercial mortgage-backed | | | | | | | | | | | | | | | |
securities (1) | | | - | | | - | | | 357 | | | 628 | | | 985 |
U.S. Treasury securities | | | - | | | - | | | 220 | | | - | | | 220 |
Total fair value | | $ | - | | $ | 2,380 | | $ | 20,914 | | $ | 26,794 | | $ | 50,088 |
Total amortized cost | | $ | - | | $ | 2,311 | | $ | 20,878 | | $ | 26,818 | | $ | 50,007 |
(1)
| Mortgage-backed | | | | | | | | | | | | | | | | | | | | | | | | | | | Less than
12 months | | 12 months
or longer | | Total | | December 31, 2018 | Fair
Value | | Unrealized
Losses | | Fair
Value | | Unrealized
Losses | | Fair
Value | | Unrealized
Losses | | Available for sale securities | | | | | | | | | | | | | U.S. agency mortgage-backed securities | $ | 9,529 |
| | $ | 32 |
| | $ | 4,257 |
| | $ | 50 |
| | $ | 13,786 |
| | $ | 82 |
| | U.S. Treasury securities | 4,951 |
| | 6 |
| | 7,037 |
| | 102 |
| | 11,988 |
| | 108 |
| | Asset-backed securities | 4,050 |
| | 9 |
| | 837 |
| | 6 |
| | 4,887 |
| | 15 |
| | Corporate debt securities | 3,561 |
| | 19 |
| | 254 |
| | 1 |
| | 3,815 |
| | 20 |
| | Certificates of deposit | 1,217 |
| | 1 |
| | 150 |
| | — |
| | 1,367 |
| | 1 |
| | U.S. agency notes | 195 |
| | — |
| | 304 |
| | 2 |
| | 499 |
| | 2 |
| | Foreign government agency securities | — |
| | — |
| | 49 |
| | 1 |
| | 49 |
| | 1 |
| | Total | $ | 23,503 |
| | $ | 67 |
| | $ | 12,888 |
| | $ | 162 |
| | $ | 36,391 |
| | $ | 229 |
| | Held to maturity securities | |
| | |
| | |
| | |
| | |
| | |
| | U.S. agency mortgage-backed securities | $ | 29,263 |
| | $ | 222 |
| | $ | 56,435 |
| | $ | 1,966 |
| | $ | 85,698 |
| | $ | 2,188 |
| | Asset-backed securities | 6,795 |
| | 35 |
| | 376 |
| | 4 |
| | 7,171 |
| | 39 |
| | Corporate debt securities | 2,909 |
| | 29 |
| | 1,066 |
| | 18 |
| | 3,975 |
| | 47 |
| | U.S. state and municipal securities | 77 |
| | 2 |
| | 18 |
| | 1 |
| | 95 |
| | 3 |
| | Non-agency commercial mortgage-backed securities | 283 |
| | 2 |
| | 632 |
| | 15 |
| | 915 |
| | 17 |
| | U.S. Treasury securities | — |
| | — |
| | 218 |
| | 6 |
| | 218 |
| | 6 |
| | Foreign government agency securities | — |
| | — |
| | 49 |
| | 1 |
| | 49 |
| | 1 |
| | Total | $ | 39,327 |
| | $ | 290 |
| | $ | 58,794 |
| | $ | 2,011 |
| | $ | 98,121 |
| | $ | 2,301 |
| Total securities with unrealized losses (1) | $ | 62,830 |
| | $ | 357 |
| | $ | 71,682 |
| | $ | 2,173 |
| | $ | 134,512 |
| | $ | 2,530 |
| | | |
| | |
| | |
| | |
| | |
| | | | December 31, 2017 | |
| | |
| | |
| | |
| | |
| | | | Available for sale securities | |
| | |
| | |
| | |
| | |
| | | | U.S. agency mortgage-backed securities | $ | 5,696 |
| | $ | 21 |
| | $ | 2,548 |
| | $ | 18 |
| | $ | 8,244 |
| | $ | 39 |
| | U.S. Treasury securities | 4,625 |
| | 11 |
| | 4,875 |
| | 72 |
| | 9,500 |
| | 83 |
| | Asset-backed securities | 904 |
| | 3 |
| | 424 |
| | 3 |
| | 1,328 |
| | 6 |
| | Corporate debt securities | 736 |
| | 1 |
| | 120 |
| | — |
| | 856 |
| | 1 |
| | Certificates of deposit | 799 |
| | 1 |
| | — |
| | — |
| | 799 |
| | 1 |
| | U.S. agency notes | 99 |
| | — |
| | 1,807 |
| | 8 |
| | 1,906 |
| | 8 |
| | Foreign government agency securities | 50 |
| | 1 |
| | — |
| | — |
| | 50 |
| | 1 |
| | Total | $ | 12,909 |
| | $ | 38 |
| | $ | 9,774 |
| | $ | 101 |
| | $ | 22,683 |
| | $ | 139 |
| | Held to maturity securities | |
| | |
| | |
| | |
| | |
| | | | U.S. agency mortgage-backed securities | $ | 42,102 |
| | $ | 310 |
| | $ | 24,753 |
| | $ | 724 |
| | $ | 66,855 |
| | $ | 1,034 |
| | Asset-backed securities | 1,124 |
| | 2 |
| | 72 |
| | — |
| | 1,196 |
| | 2 |
| | Corporate debt securities | 1,078 |
| | 5 |
| | — |
| | — |
| | 1,078 |
| | 5 |
| | Non-agency commercial mortgage-backed securities | 607 |
| | 5 |
| | — |
| | — |
| | 607 |
| | 5 |
| | U.S. Treasury securities | 220 |
| | 3 |
| | — |
| | — |
| | 220 |
| | 3 |
| | Foreign government agency securities | 49 |
| | 1 |
| | — |
| | — |
| | 49 |
| | 1 |
| | Total | $ | 45,180 |
| | $ | 326 |
| | $ | 24,825 |
| | $ | 724 |
| | $ | 70,005 |
| | $ | 1,050 |
| Total securities with unrealized losses (2) | $ | 58,089 |
| | $ | 364 |
| | $ | 34,599 |
| | $ | 825 |
| | $ | 92,688 |
| | $ | 1,189 |
|
(1) The number of investment positions with unrealized losses totaled 441 for AFS securities have been allocated to maturity groupings based on final contractual maturities. Actual maturities will differ from final contractual maturities because borrowers on a certain portion of loans underlying these securities have the right to prepay their obligations. |
Proceeds and gross realized gains1,524 for HTM securities.
(2) The number of investment positions with unrealized losses totaled 251 for AFS securities and losses from sales of securities available938 for sale are as follows:HTM securities. | | | | | | | | | | | | |
Year Ended December 31, | | | 2015 | | | 2014 | | | 2013 |
Proceeds | | $ | 2,424 | | | $ | 6,556 | | | $ | 6,167 | |
Gross realized gains | | | 1 | | | | 30 | | | | 7 | |
Gross realized losses | | | 1 | | | | 23 | | | | - | |
- 71 -
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
At December 31, 2018, substantially all securities in the investment portfolios were rated investment grade. U.S. agency mortgage-backed securities do not have explicit credit ratings; however, management considers these to be of the highest credit quality and rating given the guarantee of principal and interest by the U.S. government or U.S. government-sponsored enterprises.
Management evaluates whether investment securities are OTTI on a quarterly basis as described in Note 2. Amounts recognized as OTTI in earnings or other comprehensive income were immaterial in 2018, 2017, and 2016. As of December 31, 2018 and 2017, the Company did not hold any securities on which OTTI was previously recognized.
In the below table, mortgage-backed securities have been allocated to maturity groupings based on final contractual maturities. As borrowers may have the right to call or prepay certain obligations underlying our investment securities, actual maturities may differ from the scheduled contractual maturities presented below.
The maturities of AFS and HTM securities are as follows:
|
| | | | | | | | | | | | | | | | | | | |
| December 31, 2018 | 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 | $ | 153 |
| | $ | 3,481 |
| | $ | 12,100 |
| | $ | 9,822 |
| | $ | 25,556 |
|
| U.S. Treasury securities | 14,164 |
| | 4,138 |
| | — |
| | — |
| | 18,302 |
|
| Asset-backed securities | — |
| | 8,445 |
| | 1,240 |
| | 400 |
| | 10,085 |
|
| Corporate debt securities | 1,755 |
| | 5,712 |
| | — |
| | — |
| | 7,467 |
|
| Certificates of deposit | 1,984 |
| | 1,701 |
| | — |
| | — |
| | 3,685 |
|
| U.S. agency notes | 499 |
| | 399 |
| | — |
| | — |
| | 898 |
|
| Commercial paper | 522 |
| | — |
| | — |
| | — |
| | 522 |
|
| Foreign government agency securities | — |
| | 49 |
| | — |
| | — |
| | 49 |
|
| Non-agency commercial mortgage-backed securities | — |
| | — |
| | — |
| | 14 |
| | 14 |
|
| Total fair value | $ | 19,077 |
| | $ | 23,925 |
| | $ | 13,340 |
| | $ | 10,236 |
| | $ | 66,578 |
|
| Total amortized cost | $ | 19,111 |
| | $ | 24,010 |
| | $ | 13,382 |
| | $ | 10,232 |
| | $ | 66,735 |
|
Weighted-average yield (1) | 1.80 | % | | 2.71 | % | | 2.61 | % | | 2.70 | % | | 2.43 | % |
| Held to maturity securities | | | | | | | | | |
| U.S. agency mortgage-backed securities | $ | 256 |
| | $ | 14,960 |
| | $ | 34,008 |
| | $ | 66,869 |
| | $ | 116,093 |
|
| Asset-backed securities | — |
| | 2,106 |
| | 9,144 |
| | 7,296 |
| | 18,546 |
|
| Corporate debt securities | 137 |
| | 3,550 |
| | 745 |
| | — |
| | 4,432 |
|
| U.S. state and municipal securities | — |
| | 59 |
| | 309 |
| | 980 |
| | 1,348 |
|
| Non-agency commercial mortgage-backed securities | — |
| | 356 |
| | — |
| | 786 |
| | 1,142 |
|
| U.S. Treasury securities | — |
| | — |
| | 217 |
| | — |
| | 217 |
|
| Certificates of deposit | — |
| | 201 |
| | — |
| | — |
| | 201 |
|
| Foreign government agency securities | — |
| | 49 |
| | — |
| | — |
| | 49 |
|
| Other | — |
| | — |
| | — |
| | 10 |
| | 10 |
|
| Total fair value | $ | 393 |
| | $ | 21,281 |
| | $ | 44,423 |
| | $ | 75,941 |
| | $ | 142,038 |
|
| Total amortized cost | $ | 395 |
| | $ | 21,446 |
| | $ | 44,925 |
| | $ | 77,243 |
| | $ | 144,009 |
|
Weighted-average yield (1) | 1.97 | % | | 2.56 | % | | 2.69 | % | | 2.63 | % | | 2.63 | % |
6.(1) The weighted-average yield is computed using the amortized cost at December 31, 2018.
Proceeds and gross realized gains and losses from sales of AFS securities are as follows:
|
| | | | | | | | | | | |
| Year Ended December 31, | 2018 | | 2017 | | 2016 |
| Proceeds | $ | 115 |
| | $ | 8,617 |
| | $ | 5,537 |
|
| Gross realized gains | — |
| | 12 |
| | 4 |
|
| Gross realized losses | — |
| | — |
| | — |
|
Bank Loans and Related Allowance for Loan Losses
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
| |
| 7. | Bank Loans and Related Allowance for Loan Losses |
The composition of bank loans and delinquency analysis by loan
segmenttype is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | >90 days past | | Total past due | | | | Allowance | | Total |
| | | | 30-59 days | | 60-89 days | | due and other | | and other | | Total | | for loan | | bank |
December 31, 2015 | Current | | past due | | past due | | nonaccrual loans | | nonaccrual loans | | loans | | losses | | loans - net |
Residential real estate mortgages | $ | 8,304 | | | $ | 11 | | | | $ | 1 | | | | $ | 18 | | | | $ | 30 | | | $ | 8,334 | | $ | 20 | | $ | 8,314 |
Home equity loans and lines of credit | | 2,720 | | | | 4 | | | | | 1 | | | | | 10 | | | | | 15 | | | | 2,735 | | | 11 | | | 2,724 |
Pledged asset lines | | 3,228 | | | | 3 | | | | | 1 | | | | | - | | | | | 4 | | | | 3,232 | | | - | | | 3,232 |
Other | | 64 | | | | - | | | | | - | | | | | - | | | | | - | | | | 64 | | | - | | | 64 |
Total bank loans | $ | 14,316 | | | $ | 18 | | | | $ | 3 | | | | $ | 28 | | | | $ | 49 | | | $ | 14,365 | | $ | 31 | | $ | 14,334 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2014 | | | | | | | | | | | | | | | | | | | | | | | |
Residential real estate mortgages | $ | 8,092 | | | $ | 9 | | | | $ | 2 | | | | $ | 24 | | | | $ | 35 | | | $ | 8,127 | | $ | 29 | | $ | 8,098 |
Home equity loans and lines of credit | | 2,942 | | | | 1 | | | | | 1 | | | | | 11 | | | | | 13 | | | | 2,955 | | | 13 | | | 2,942 |
Pledged asset lines | | 2,320 | | | | - | | | | | - | | | | | - | | | | | - | | | | 2,320 | | | - | | | 2,320 |
Other | | 38 | | | | 1 | | | | | - | | | | | - | | | | | 1 | | | | 39 | | | - | | | 39 |
Total bank loans | $ | 13,392 | | | $ | 11 | | | | $ | 3 | | | | $ | 35 | | | | $ | 49 | | | $ | 13,441 | | $ | 42 | | $ | 13,399 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2018 | Current | | 30-59 days
past due | | 60-89 days
past due | | >90 days past
due and other
nonaccrual loans (3) | | Total past due and other
nonaccrual loans | | Total
loans | | Allowance for loan
losses | | Total
bank
loans – net |
First Mortgages (1,2) | $ | 10,349 |
| | $ | 21 |
| | $ | 2 |
| | $ | 12 |
| | $ | 35 |
| | $ | 10,384 |
| | $ | 14 |
| | $ | 10,370 |
|
HELOCs (1,2) | 1,493 |
| | 3 |
| | 1 |
| | 8 |
| | 12 |
| | 1,505 |
| | 5 |
| | 1,500 |
|
| Pledged asset lines | 4,558 |
| | 3 |
| | — |
| | — |
| | 3 |
| | 4,561 |
| | — |
| | 4,561 |
|
| Other | 180 |
| | — |
| | — |
| | — |
| | — |
| | 180 |
| | 2 |
| | 178 |
|
| Total bank loans | $ | 16,580 |
| | $ | 27 |
| | $ | 3 |
| | $ | 20 |
| | $ | 50 |
| | $ | 16,630 |
| | $ | 21 |
| | $ | 16,609 |
|
| | | | | | | | | | | | | | | | |
| December 31, 2017 | | | | | | | | | | | | | | | |
First Mortgages (1,2) | $ | 9,983 |
| | $ | 14 |
| | $ | 2 |
| | $ | 17 |
| | $ | 33 |
| | $ | 10,016 |
| | $ | 16 |
| | $ | 10,000 |
|
HELOCs (1,2) | 1,928 |
| | — |
| | 3 |
| | 12 |
| | 15 |
| | 1,943 |
| | 8 |
| | 1,935 |
|
| Pledged asset lines | 4,361 |
| | 4 |
| | 4 |
| | — |
| | 8 |
| | 4,369 |
| | — |
| | 4,369 |
|
| Other | 176 |
| | — |
| | — |
| | — |
| | — |
| | 176 |
| | 2 |
| | 174 |
|
| Total bank loans | $ | 16,448 |
| | $ | 18 |
| | $ | 9 |
| | $ | 29 |
| | $ | 56 |
| | $ | 16,504 |
| | $ | 26 |
| | $ | 16,478 |
|
(1) First mortgagesMortgages and HELOCs include unamortized premiums and discounts and direct origination costs of $80$73 million and $77 million at December 31, 20152018 and 2014,2017, respectively. The Company had commitments to extend credit related to unused HELOCs, PALs, and other lines of credit, which totaled $7.4 billion and $6.7 billion at
(2) At December 31, 20152018 and 2014, respectively. The Company had commitments to purchase2017, 47% and 48%, respectively, of the First Mortgage and HELOC portfolios were concentrated in California. These loans of $37 million and $24 million at December 31, 2015 and 2014, respectively. Additionally,have performed in a manner consistent with the Company hadportfolio as a pipeline of First Mortgages in process of $223 million and $202 million at December 31, 2015 and 2014, respectively. All PALs were fully collateralized by securities with fair values in excess of borrowings at December 31, 2015 and 2014.whole.
Schwab Bank provides a co-branded loan origination program for Schwab Bank clients (the Program) with Quicken Loans, Inc. (Quicken Loans(3) ®). Pursuant to the Program, Quicken Loans originates and services First Mortgages and HELOCs for Schwab Bank clients. Under the Program, Schwab Bank purchases certain First Mortgages and HELOCs that are originated by Quicken Loans. Schwab Bank purchased First Mortgages of $2.0 billion and $1.4 billion during 2015 and 2014, respectively. Schwab Bank purchased HELOCs with commitments of $573 million and $664 million during 2015 and 2014, respectively.Credit Quality
Changes in the allowance for loan losses were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2015 | | December 31, 2014 | | December 31, 2013 |
| Residential | | Home equity | | | | | | Residential | | Home equity | | | | | | Residential | | Home equity | | | | |
| real estate | | loans and | | | | | | real estate | | loans and | | | | | | real estate | | loans and | | | | |
| mortgages | | lines of credit | | Total | | mortgages | | lines of credit | | Total | | mortgages | | lines of credit | | Total |
Balance at beginning of year | | $ | 29 | | | | $ | 13 | | | $ | 42 | | | | $ | 34 | | | | $ | 14 | | | $ | 48 | | | | $ | 36 | | | | $ | 20 | | | $ | 56 | |
Charge-offs | | | (1) | | | | | (2) | | | | (3) | | | | | (3) | | | | | (2) | | | | (5) | | | | | (5) | | | | | (6) | | | | (11) | |
Recoveries | | | 1 | | | | | 2 | | | | 3 | | | | | 2 | | | | | 1 | | | | 3 | | | | | 2 | | | | | 2 | | | | 4 | |
Provision for loan losses | | | (9) | | | | | (2) | | | | (11) | | | | | (4) | | | | | - | | | | (4) | | | | | 1 | | | | | (2) | | | | (1) | |
Balance at end of year | | $ | 20 | | | | $ | 11 | | | $ | 31 | | | | $ | 29 | | | | $ | 13 | | | $ | 42 | | | | $ | 34 | | | | $ | 14 | | | $ | 48 | |
The majority of the bank loans were collectively evaluated for impairment at both December 31, 2015 and 2014. There were no loans accruing interest that were contractually 90 days or more past due at December 31, 20152018 or 2014. Nonperforming assets, which include nonaccrual2017.
At December 31, 2018, CSB had pledged $11.1 billion of First Mortgages and HELOCs as collateral to secure borrowing capacity on a secured credit facility with the FHLB (see Note 13).
Substantially all of the bank loans were collectively evaluated for impairment at both December 31, 2018 and other real estate owned, totaled $36 million and $44 million2017.
Changes in the allowance for loan losses were as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2018 | | December 31, 2017 | | December 31, 2016 |
| | First Mortgages | | HELOCs | | Other | | Total (1) | | First Mortgages | | HELOCs | | Other | | Total (1) | | First Mortgages | | HELOCs | | Other | Total (1) |
| Balance at beginning of year | $ | 16 |
| | $ | 8 |
| | $ | 2 |
| | $ | 26 |
| | $ | 17 |
| | $ | 8 |
| | $ | 1 |
| | $ | 26 |
| | $ | 20 |
| | $ | 11 |
| | — |
| $ | 31 |
|
| Charge-offs | — |
| | — |
| | (1 | ) | | (1 | ) | | (2 | ) | | (1 | ) | | — |
| | (3 | ) | | (1 | ) | | (1 | ) | | — |
| (2 | ) |
| Recoveries | 1 |
| | 1 |
| | — |
| | 2 |
| | 1 |
| | 1 |
| | 1 |
| | 3 |
| | 1 |
| | 1 |
| | — |
| 2 |
|
| Provision for loan losses | (3 | ) | | (4 | ) | | 1 |
| | (6 | ) | | — |
| | — |
| | — |
| | — |
| | (3 | ) | | (3 | ) | | 1 |
| (5 | ) |
| Balance at end of year | $ | 14 |
| | $ | 5 |
| | $ | 2 |
| | $ | 21 |
| | $ | 16 |
| | $ | 8 |
| | $ | 2 |
| | $ | 26 |
| | $ | 17 |
| | $ | 8 |
| | $ | 1 |
| $ | 26 |
|
(1)All PALs were fully collateralized by securities with fair values in excess of borrowings at December 31, 20152018, 2017, and 2014, respectively. Impaired2016.
A summary of impaired bank loan-related assets whichis as follows:
|
| | | | | | | |
| December 31, | 2018 | | 2017 |
Nonaccrual loans (1) | $ | 21 |
| | $ | 28 |
|
Other real estate owned (2) | 3 |
| | 3 |
|
| Total nonperforming assets | 24 |
| | 31 |
|
| Troubled debt restructurings | 4 |
| | 11 |
|
| Total impaired assets | $ | 28 |
| | $ | 42 |
|
(1) Nonaccrual loans include non-accrual loans, other real estate owned and TDRs, totaled $50 million and $61 million at December 31, 2015 and 2014, respectively. Troublednonaccrual troubled debt restructurings were not material at December 31, 2015 or 2014, respectively.restructurings. - 72 -
(2) Included in Other assets on the consolidated balance sheets.
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
Credit Quality
In addition to monitoring delinquency, the CompanySchwab monitors the credit quality of First Mortgages and HELOCs by stratifying the portfolios by the yearfollowing:
Year of origination, borrowerorigination;
Borrower FICO scores at origination updated(Origination FICO);
Updated borrower FICO scores LTV(Updated FICO);
Loan-to-value (LTV) ratios at origination (Origination LTV); and estimated
Estimated current LTV ratios. ratios (Estimated Current LTV).
Borrowers’ FICO scores are provided by an independent
third partythird-party credit reporting service and
were last updated
in December 2015.quarterly. The Origination LTV and Estimated Current LTV
ratios for a HELOC include any first lien mortgage outstanding on the same property at the time of the HELOC’s origination. The Estimated Current LTV for each loan is
estimatedupdated on a monthly basis by reference to a home price appreciation index.
As of December 31, 2015 and 2014, 48% of the Company’s HELOC and First Mortgage portfolio was concentrated in California. These loans have performed in a manner consistent with the portfolio as a whole.
| | | | | | | | | | | | | | |
| | | | | Weighted | | | | | Percent of Loans | |
| | | | | Average | | Utilization | | that are on | |
December 31, 2015 | | Balance | | Updated FICO | | Rate (1) | | Nonaccrual Status | |
Residential real estate mortgages: | | | | | | | | | | | | | | |
Estimated Current LTV | | | | | | | | | | | | | | |
<70% | | $ | 7,508 | | | 774 | | | N/A | | | 0.03 | % | |
>70% – <90% | | | 759 | | | 764 | | | N/A | | | 0.31 | % | |
>90% – <100% | | | 37 | | | 736 | | | N/A | | | 5.54 | % | |
>100% | | | 30 | | | 713 | | | N/A | | | 7.72 | % | |
Total | | $ | 8,334 | | | 773 | | | N/A | | | 0.11 | % | |
Home equity loans and lines of credit: | | | | | | | | | | | | | | |
Estimated Current LTV | | | | | | | | | | | | | | |
<70% | | $ | 2,277 | | | 772 | | | 37 | % | | 0.09 | % | |
>70% – <90% | | | 373 | | | 760 | | | 50 | % | | 0.48 | % | |
>90% – <100% | | | 48 | | | 748 | | | 63 | % | | 1.02 | % | |
>100% | | | 37 | | | 739 | | | 67 | % | | 1.79 | % | |
Total | | $ | 2,735 | | | 770 | | | 39 | % | | 0.18 | % | |
Pledged asset lines: | | | | | | | | | | | | | | |
Weighted Average LTV | | | | | | | | | | | | | | |
=70% | | $ | 3,232 | | | 764 | | | 49 | % | | - | | |
(1)
| The Utilization Rate is calculated using the outstanding balance divided by the associated total line of credit.
|
N/A Not applicable.
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
| | | | | | | | | |
| | Residential | | Home equity |
| | real estate | | loans and |
December 31, 2015 | | mortgages | | lines of credit |
Year of origination | | | | | | | | | |
Pre-2011 | | $ | 882 | | | $ | 1,934 | | |
2011 | | | 424 | | | | 114 | | |
2012 | | | 1,644 | | | | 125 | | |
2013 | | | 2,450 | | | | 232 | | |
2014 | | | 1,021 | | | | 188 | | |
2015 | | | 1,913 | | | | 142 | | |
Total | | $ | 8,334 | | | $ | 2,735 | | |
Origination FICO | | | | | | | | | |
<620 | | $ | 10 | | | $ | - | | |
620 – 679 | | | 88 | | | | 16 | | |
680 – 739 | | | 1,381 | | | | 498 | | |
>740 | | | 6,855 | | | | 2,221 | | |
Total | | $ | 8,334 | | | $ | 2,735 | | |
Origination LTV | | | | | | | | | |
<70% | | $ | 5,913 | | | $ | 1,858 | | |
>70% – <90% | | | 2,408 | | | | 860 | | |
>90% – <100% | | | 13 | | | | 17 | | |
Total | | $ | 8,334 | | | $ | 2,735 | | |
| | | | | | | | | | | | | | |
| | | | | Weighted | | | | | Percent of Loans | |
| | | | | Average | | Utilization | | that are on | |
December 31, 2014 | | Balance | | Updated FICO | | Rate (1) | | Nonaccrual Status | |
Residential real estate mortgages: | | | | | | | | | | | | | | |
Estimated Current LTV | | | | | | | | | | | | | | |
<70% | | $ | 7,131 | | | 774 | | | N/A | | | 0.04 | % | |
>70% – <90% | | | 882 | | | 765 | | | N/A | | | 0.50 | % | |
>90% – <100% | | | 61 | | | 740 | | | N/A | | | 2.95 | % | |
>100% | | | 53 | | | 726 | | | N/A | | | 10.95 | % | |
Total | | $ | 8,127 | | | 773 | | | N/A | | | 0.18 | % | |
Home equity loans and lines of credit: | | | | | | | | | | | | | | |
Estimated Current LTV | | | | | | | | | | | | | | |
<70% | | $ | 2,282 | | | 773 | | | 36 | % | | 0.08 | % | |
>70% – <90% | | | 526 | | | 762 | | | 48 | % | | 0.34 | % | |
>90% – <100% | | | 81 | | | 749 | | | 61 | % | | 1.67 | % | |
>100% | | | 66 | | | 742 | | | 63 | % | | 1.54 | % | |
Total | | $ | 2,955 | | | 769 | | | 39 | % | | 0.20 | % | |
Pledged asset lines: | | | | | | | | | | | | | | |
Weighted Average LTV | | | | | | | | | | | | | | |
=70% | | $ | 2,320 | | | 764 | | | 50 | % | | - | | |
(1)
| The Utilization Rate is calculated using the outstanding balance divided by the associated total line of credit.
|
The credit quality indicators of the bank loan portfolio are detailed below:N/A Not applicable.
|
| | | | | | | | | |
| December 31, 2018 | Balance | | Weighted Average
Updated FICO | | Percent of Loans that are on
Nonaccrual Status |
| First Mortgages | | | | | |
| Estimated Current LTV | | | | | |
<70% | $ | 9,396 |
| | 776 |
| | 0.04 | % |
>70% – <90% | 985 |
| | 769 |
| | 0.41 | % |
>90% – <100% | 2 |
| | 717 |
| | — |
|
| >100% | 1 |
| | 753 |
| | — |
|
| Total | $ | 10,384 |
| | 775 |
| | 0.07 | % |
| HELOCs | | | | | |
Estimated Current LTV (1) | | | | | |
<70% | $ | 1,416 |
| | 770 |
| | 0.13 | % |
>70% – <90% | 80 |
| | 752 |
| | 0.60 | % |
>90% – <100% | 6 |
| | 729 |
| | 3.36 | % |
| >100% | 3 |
| | 702 |
| | — |
|
| Total | $ | 1,505 |
| | 769 |
| | 0.17 | % |
| Pledged asset lines | | | | | |
Weighted Average LTV (1) | | | | | |
|
| =70% | $ | 4,561 |
| | 766 |
| | — |
|
| December 31, 2017 | Balance | | Weighted Average
Updated FICO | | Percent of Loans that are on
Nonaccrual Status |
| First Mortgages | | | | | |
| Estimated Current LTV | | | | | |
<70% | $ | 9,046 |
| | 775 |
| | 0.09 | % |
>70% – <90% | 961 |
| | 769 |
| | 0.46 | % |
>90% – <100% | 5 |
| | 714 |
| | 10.49 | % |
| >100% | 4 |
| | 713 |
| | 6.23 | % |
| Total | $ | 10,016 |
| | 775 |
| | 0.14 | % |
| HELOCs | | | | | |
Estimated Current LTV (1) | | | | | |
<70% | $ | 1,773 |
| | 772 |
| | 0.18 | % |
>70% – <90% | 148 |
| | 755 |
| | 0.84 | % |
>90% – <100% | 14 |
| | 742 |
| | 2.85 | % |
| >100% | 8 |
| | 718 |
| | 4.91 | % |
| Total | $ | 1,943 |
| | 770 |
| | 0.27 | % |
| Pledged asset lines | | | | | |
Weighted Average LTV (1) | | | | | |
|
| =70% | $ | 4,369 |
| | 765 |
| | — |
|
(1) Represents the LTV for the full line of credit (drawn and undrawn).
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
| | | | | | | | | |
| | Residential | | Home equity |
| | real estate | | loans and |
December 31, 2014 | | mortgages | | lines of credit |
Year of origination | | | | | | | | | |
Pre-2011 | | $ | 1,119 | | | $ | 2,244 | | |
2011 | | | 588 | | | | 137 | | |
2012 | | | 2,107 | | | | 147 | | |
2013 | | | 3,047 | | | | 250 | | |
2014 | | | 1,266 | | | | 177 | | |
Total | | $ | 8,127 | | | $ | 2,955 | | |
Origination FICO | | | | | | | | | |
<620 | | $ | 10 | | | $ | - | | |
620 – 679 | | | 97 | | | | 18 | | |
680 – 739 | | | 1,366 | | | | 549 | | |
>740 | | | 6,654 | | | | 2,388 | | |
Total | | $ | 8,127 | | | $ | 2,955 | | |
Origination LTV | | | | | | | | | |
<70% | | $ | 5,572 | | | $ | 1,979 | | |
>70% – <90% | | | 2,538 | | | | 955 | | |
>90% – <100% | | | 17 | | | | 21 | | |
Total | | $ | 8,127 | | | $ | 2,955 | | |
7.Equipment, Office Facilities,
|
| | | | | | | |
| December 31, 2018 | First Mortgages | | HELOCs |
| Year of origination | | | |
|
| Pre-2014 | $ | 1,979 |
| | $ | 1,051 |
|
| 2014 | 408 |
| | 89 |
|
| 2015 | 1,050 |
| | 106 |
|
| 2016 | 2,606 |
| | 95 |
|
| 2017 | 2,366 |
| | 99 |
|
| 2018 | 1,975 |
| | 65 |
|
| Total | $ | 10,384 |
| | $ | 1,505 |
|
| Origination FICO | |
| | |
|
| <620 | $ | 5 |
| | $ | — |
|
| 620 – 679 | 83 |
| | 8 |
|
| 680 – 739 | 1,626 |
| | 282 |
|
>740 | 8,670 |
| | 1,215 |
|
| Total | $ | 10,384 |
| | $ | 1,505 |
|
| Origination LTV | | | |
<70% | $ | 7,815 |
| | $ | 1,064 |
|
>70% – <90% | 2,564 |
| | 434 |
|
>90% – <100% | 5 |
| | 7 |
|
| Total | $ | 10,384 |
| | $ | 1,505 |
|
| December 31, 2017 | First Mortgages | | HELOCs |
| Year of origination | | | |
|
| Pre-2014 | $ | 2,804 |
| | $ | 1,496 |
|
| 2014 | 530 |
| | 116 |
|
| 2015 | 1,218 |
| | 128 |
|
| 2016 | 2,886 |
| | 111 |
|
| 2017 | 2,578 |
| | 92 |
|
| Total | $ | 10,016 |
| | $ | 1,943 |
|
| Origination FICO | |
| | |
|
| <620 | $ | 6 |
| | $ | 1 |
|
| 620 – 679 | 89 |
| | 10 |
|
| 680 – 739 | 1,569 |
| | 365 |
|
>740 | 8,352 |
| | 1,567 |
|
| Total | $ | 10,016 |
| | $ | 1,943 |
|
| Origination LTV | |
| | |
|
<70% | $ | 7,569 |
| | $ | 1,360 |
|
>70% – <90% | 2,441 |
| | 574 |
|
>90% – <100% | 6 |
| | 9 |
|
| Total | $ | 10,016 |
| | $ | 1,943 |
|
At December 31, 2018, First Mortgage loans of $9.4 billion had adjustable interest rates. Substantially all of these mortgages have initial fixed interest rates for three to ten years and
PropertyEquipment, office facilities, and propertyinterest rates that adjust annually thereafter. Approximately 31% of the balance of these mortgages consisted of loans with interest-only payment terms. The interest rates on approximately 64% of the balance of these interest-only loans are detailed below:
| | | | | | | | | | | | |
December 31, | | | | | | | 2015 | | | 2014 |
Software | | | | | | $ | 1,183 | | | $ | 1,281 | |
Buildings | | | | | | | 771 | | | | 673 | |
Leasehold improvements | | | | | | | 322 | | | | 310 | |
Information technology equipment | | | | | | | 273 | | | | 257 | |
Furniture and equipment | | | | | | | 177 | | | | 154 | |
Telecommunications equipment | | | | | | | 78 | | | | 83 | |
Construction in progress | | | | | | | 18 | | | | 64 | |
Land | | | | | | | 110 | | | | 107 | |
Total equipment, office facilities, and property | | | | | | | 2,932 | | | | 2,929 | |
Accumulated depreciation and amortization | | | | | | | (1,787) | | | | (1,890) | |
Total equipment, office facilities, and property – net | | | | | | $ | 1,145 | | | $ | 1,039 | |
Depreciation and amortization expensenot scheduled to reset for equipment, office facilities, and property was $179 million, $155 million, $154 million in 2015, 2014, and 2013, respectively.
three or more years. Schwab’s mortgage loans do not include interest terms described as temporary introductory rates below current market rates.
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
8.
The HELOC product has a 30-year loan term with an initial draw period of ten years from the date of origination. After the initial draw period, the balance outstanding at such time is converted to a 20-year amortizing loan. The interest rate during the initial draw period and the 20-year amortizing period is a floating rate based on the prime rate plus a margin. HELOCs that convert to an amortizing loan may experience higher delinquencies and higher loss rates than those in the initial draw period. The allowance for loan loss methodology takes this increased inherent risk into consideration.
The following table presents when current outstanding HELOCs will convert to amortizing loans:
|
| | | |
| December 31, 2018 | Balance |
| Converted to amortizing loan by period end | $ | 677 |
|
| Within 1 year | 83 |
|
| > 1 year – 3 years | 118 |
|
| > 3 years – 5 years | 173 |
|
| > 5 years | 454 |
|
| Total | $ | 1,505 |
|
At December 31, 2018, $1.2 billion of the HELOC portfolio was secured by second liens on the associated properties. Second lien mortgage loans typically possess a higher degree of credit risk given the subordination to the first lien holder in the event of default. In addition to the credit monitoring activities described previously, Schwab also monitors credit risk by reviewing the delinquency status of the first lien loan on the associated property. At December 31, 2018, the borrowers on approximately 51% of HELOC loan balances outstanding only paid the minimum amount due.
| |
| 8. | Equipment, Office Facilities, and Property |
Equipment, office facilities, and
GoodwillIntangible assets and goodwillproperty are detailed below:
| | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2015 | | December 31, 2014 |
| | Gross | | | | | Net | | Gross | | | | | Net |
| | Carrying | | Accumulated | | Carrying | | Carrying | | Accumulated | | Carrying |
| | Value | | Amortization | | Value | | Value | | Amortization | | Value |
Client relationships | | $ | 274 | | | $ | 144 | | | $ | 130 | | $ | 274 | | | $ | 116 | | | $ | 158 |
Technology | | | 89 | | | | 47 | | | | 42 | | | 89 | | | | 37 | | | | 52 |
Trade name | | | 16 | | | | 7 | | | | 9 | | | 17 | | | | 6 | | | | 11 |
Other | | | - | | | | - | | | | - | | | 7 | | | | 1 | | | | 6 |
Total intangible assets | | $ | 379 | | | $ | 198 | | | $ | 181 | | $ | 387 | | | $ | 160 | | | $ | 227 |
Amortization expense for intangible assets was $45 million, $44 million,
|
| | | | | | | |
| December 31, | 2018 | | 2017 |
| Software | $ | 1,699 |
| | $ | 1,490 |
|
| Buildings | 945 |
| | 810 |
|
| Leasehold improvements | 367 |
| | 357 |
|
| Construction in progress | 248 |
| | 142 |
|
| Furniture and equipment | 219 |
| | 193 |
|
| Information technology equipment | 206 |
| | 326 |
|
| Land | 179 |
| | 167 |
|
| Telecommunications equipment | 69 |
| | 66 |
|
| Total equipment, office facilities, and property | 3,932 |
| | 3,551 |
|
| Accumulated depreciation and amortization | (2,163 | ) | | (2,080 | ) |
| Total equipment, office facilities, and property — net | $ | 1,769 |
| | $ | 1,471 |
|
Depreciation and
$48 million in 2015, 2014, and 2013, respectively.Estimated future annual amortization expense for intangible assets as of December 31, 2015, is as follows:
| | | | | | | | | | | | |
2016 | | | | | | | | | | $ | 37 | |
2017 | | | | | | | | | | | 33 | |
2018 | | | | | | | | | | | 31 | |
2019 | | | | | | | | | | | 29 | |
2020 | | | | | | | | | | | 23 | |
Thereafter | | | | | | | | | | | 28 | |
Total intangible assets | | | | | | | | | | $ | 181 | |
The changesequipment, office facilities, and property was $277 million, $232 million, and $197 million in the carrying amount of goodwill, as allocated to the Company’s reportable segments for purposes of testing goodwill for impairment going forward, are presented in the following table:
2018, 2017, and 2016, respectively. | | | | | | | | | | |
| | Investor | | Advisor | | | | |
| | Services | | Services | | Total | |
Balance at December 31, 2013 | | $ | 1,127 | | $ | 100 | | $ | 1,227 | |
Goodwill acquired and other changes during the period | | | - | | | - | | | - | |
Balance at December 31, 2014 | | | 1,127 | | | 100 | | | 1,227 | |
Goodwill acquired and other changes during the period (1) | | | (31) | | | 31 | | | - | |
Balance at December 31, 2015 | | $ | 1,096 | | $ | 131 | | $ | 1,227 | |
(1)
| During 2015, the Corporate Brokerage Retirement Services business was transferred from the Investor Services segment to the Advisor Services segment. Related goodwill amounts were transferred from the Investor Services segment to the Advisor Services segment.
|
In testing for potential impairment of goodwill on April 1, 2015, management performed an assessment of each of the Company’s reporting units. As a result of this assessment, management concluded that goodwill was not impaired. The Company did not recognize any goodwill impairment in 2015, 2014, or 2013.
- 76 -
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
The changes in the carrying amount of goodwill, as allocated to our reportable segments, are presented in the following table:
|
| | | | | | | | | | | |
| | Investor
Services | | Advisor
Services | | Total |
| Balance at December 31, 2016 | $ | 1,096 |
| | $ | 131 |
| | $ | 1,227 |
|
| Goodwill acquired and other changes during the period | — |
| | — |
| | — |
|
| Balance at December 31, 2017 | 1,096 |
| | 131 |
| | 1,227 |
|
| Goodwill acquired and other changes during the period | — |
| | — |
| | — |
|
| Balance at December 31, 2018 | $ | 1,096 |
| | $ | 131 |
| | $ | 1,227 |
|
9.As of our annual testing date, we performed a qualitative assessment of each of the Company’s reporting units. Based on the Company’s analysis, fair value significantly exceeded the carrying value for all reporting units and we concluded that goodwill was not impaired. Schwab did not recognize any goodwill impairment in any of the years presented.
The components of other assets are as follows:
| | | | | | | | | | | | |
December 31, | | | | | | | 2015 | | | 2014 |
Accounts receivable (1) | | | | | | $ | 388 | | | $ | 359 | |
Interest and dividends receivable | | | | | | | 241 | | | | 180 | |
Other investments (2) | | | | | | | 180 | | | | 72 | |
Deferred tax asset – net | | | | | | | 145 | | | | - | |
Other | | | | | | | 119 | | | | 59 | |
Prepaid expenses | | | | | | | 101 | | | | 110 | |
Total other assets | | | | | | $ | 1,174 | | | $ | 780 | |
|
| | | | | | | |
| December 31, | 2018 | | 2017 |
| Interest and dividends receivable | $ | 586 |
| | $ | 413 |
|
Other investments (1) | 428 |
| | 376 |
|
Accounts receivable (2) | 410 |
| | 461 |
|
| Capitalized contract costs, net | 250 |
| | — |
|
Intangible assets, net of accumulated amortization of $299 and $270 (3) | 152 |
| | 108 |
|
| Prepaid expenses | 122 |
| | 126 |
|
FHLB stock (4) | 32 |
| | 405 |
|
| Deferred tax asset — net | 3 |
| | 76 |
|
| Other | 63 |
| | 92 |
|
| Total other assets | $ | 2,046 |
| | $ | 2,057 |
|
(1) Predominantly CRA-related, including LIHTC investments.
(2) Accounts receivable predominantly includes receivables from contracts with customers and a receivable from our loan servicer.
(3) Exclusive of indefinite-lived intangible assets of $74 million and $1 million at December 31, 2018 and 2017, respectively, future amortization over the next five years and thereafter is expected to total $77 million. Amortization expense for intangible assets was $29 million in 2018, and $37 million in both 2017 and 2016.
(4) Investments in stock of the FHLB can only be sold to the issuer at its par value. Any cash dividends received from these investments are recognized as interest revenue in the consolidated statements of income.
(1)
| Accounts receivable includes accrued service fee income and a receivable from the Company’s loan servicer.
|
(2)
11. | Other investments includeVariable Interest Entities
|
As of December 31, 2018 and 2017, all of Schwab’s involvement with VIEs is through CSB’s CRA-related investments and most of those related to LIHTC investments.
10.Variable Interest Entities
A VIE requires consolidation by the entity’s primary beneficiary. The Company evaluates all of the entities in which it is involved to determine if an entity is a VIE and if so, whether the Company is the primary beneficiary. See the “Principles of Consolidation” section of “Notes – 1. Introduction and Basis of Presentation” for discussion of the Company’s evaluations of VIEs and whether it is deemed to be the primary beneficiary of any VIEs in which it holds an interest. The Company was not the primary beneficiary of, and therefore, not required to consolidate any VIEs during 2015, 2014, or 2013.
Community Reinvestment Act investments
Schwab Bank is subject to the CRA. The CRA is intended to encourage banks to help meet the credit needs of the communities in which they operate, including low and moderate income neighborhoods, consistent with safe and sound banking operations. As part of Schwab Bank’sCSB’s community reinvestment initiatives, Schwab BankCSB invests with other institutional investors in funds that make equity investments in multifamily affordable housing properties.
In 2014, Schwab Bank’s management approved a program to invest in LIHTC funds. Schwab Bank CSB receives tax credits and other tax benefits for these investments. Schwab Bank’s LIHTC investments are accounted for using the proportional amortization method if certain criteria are met. See “Notes – 2. Summary of Significant Accounting Policies” for discussion of the application of the proportional amortization method. As of December 31, 2015, the majority of the Company’s VIEs are related to Schwab Bank’s LIHTC investments made in 2014 and 2015. Schwab Bank did not have any LIHTC investments prior to 2014. Schwab Bank also has investments in other CRA-related funds, which were invested prior to 2014.
During 2015 and 2014, Schwab Bank recorded amortization of $3.3 million and $0.3 million, respectively, and recognized tax credits and other tax benefits of $4.5 million and $0.5 million, respectively, associated with these investments, both of which are included in taxes on income. The carrying value of the LIHTC investments was $104 million and $45 million as of December 31, 2015 and 2014, respectively, which is included in other assets on the consolidated balance sheets. Schwab Bank recorded liabilities of $84 million and $40 million for unfunded commitments related to LIHTC investments at December 31, 2015 and 2014, respectively, which are included in accrued expenses and other liabilities on the consolidated balance sheets. Schwab Bank’s funding of these remaining commitments is dependent upon the occurrence of certain conditions and Schwab Bank expects to pay substantially all of these commitments between 2016 and 2020.
- 77 -
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
Aggregate assets, liabilities and maximum exposure to loss
The aggregate assets, liabilities, and maximum exposure to loss from those VIEs in which
the CompanySchwab holds a variable interest, but
as to which the Company has concluded it is not the primary beneficiary, are summarized in the table below:
| | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2015 | | | | December 31, 2014 |
| | | | | | | | | | | Maximum | | | | | | | | | | | | Maximum |
| | | Aggregate | | | | Aggregate | | | | exposure | | | | Aggregate | | | | Aggregate | | | | exposure |
| | | assets | | | | liabilities | | | | to loss | | | | assets | | | | liabilities | | | | to loss |
LIHTC Investments (1) | | $ | 104 | | | $ | 84 | | | $ | 104 | | | $ | 45 | | | $ | 40 | | | $ | 45 |
Other CRA Investments (2) | | | 57 | | | | - | | | | 66 | | | | 37 | | | | - | | | | 62 |
Total | | $ | 161 | | | $ | 84 | | | $ | 170 | | | $ | 82 | | | $ | 40 | | | $ | 107 |
| |
(1)
| LIHTC investments are recorded using the proportional amortization method.
|
(2)
| Other CRA investments are recorded using either the cost method or the equity method. Aggregate assets are included in either other assets or bank loans – net on the consolidated balance sheets.
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2018 | | December 31, 2017 |
| | Aggregate
assets | | Aggregate
liabilities | | Maximum exposure
to loss | | Aggregate
assets | | Aggregate
liabilities | | Maximum exposure to loss |
LIHTC Investments (1) | $ | 338 |
| | $ | 188 |
| | $ | 338 |
| | $ | 304 |
| | $ | 203 |
| | $ | 304 |
|
Other CRA Investments (2) | 70 |
| | — |
| | 124 |
| | 69 |
| | — |
| | 125 |
|
| Total | $ | 408 |
| | $ | 188 |
| | $ | 462 |
| | $ | 373 |
| | $ | 203 |
| | $ | 429 |
|
The Company’s
(1) Aggregate assets and aggregate liabilities are included in other assets and accrued expenses and other liabilities, respectively, on the consolidated balance sheets.
(2) Other CRA investments are recorded using either the adjusted cost method, equity method, or as HTM securities. Aggregate assets are included in HTM securities, bank loans – net, or other assets on the consolidated balance sheets.
Schwab’s maximum exposure to loss would result from the loss of the investments, including any committed amounts. During the years ended December 31,
20152018 and
2014, the Company2017, Schwab did not provide or intend to provide financial or other support to the VIEs that it was not contractually required to provide.
11. CSB’s funding of these remaining commitments is dependent upon the occurrence of certain conditions, and CSB expects to pay substantially all of these commitments between 2019 and 2022.
Bank deposits consist of interest-bearing and non-interest-bearing deposits as follows:
| | | | | | | | | | | | |
December 31, | | | | | | | 2015 | | | 2014 |
Interest-bearing deposits: | | | | | | | | | | | | |
Deposits swept from brokerage accounts | | | | | | $ | 108,137 | | | $ | 82,101 | |
Checking | | | | | | | 12,822 | | | | 12,318 | |
Savings and other | | | | | | | 7,896 | | | | 7,832 | |
Total interest-bearing deposits | | | | | | | 128,855 | | | | 102,251 | |
Non-interest-bearing deposits | | | | | | | 647 | | | | 564 | |
Total bank deposits | | | | | | $ | 129,502 | | | $ | 102,815 | |
12.
|
| | | | | | | |
| December 31, | 2018 | | 2017 |
| Interest-bearing deposits: | | | |
| Deposits swept from brokerage accounts | $ | 212,311 |
| | $ | 148,212 |
|
| Checking | 12,523 |
| | 13,388 |
|
| Savings and other | 5,827 |
| | 7,264 |
|
| Total interest-bearing deposits | 230,661 |
| | 168,864 |
|
| Non-interest-bearing deposits | 762 |
| | 792 |
|
| Total bank deposits | $ | 231,423 |
| | $ | 169,656 |
|
Payables to Brokers, Dealers, and Clearing OrganizationsPayables to brokers, dealers, and clearing organizations include securities loaned of $2.2billion and $1.5billion at December 31, 2015 and 2014, respectively. The cash collateral received from counterparties under securities lending transactions was equal to or greater than the market value of the securities loaned at December 31, 2015 and 2014.
13.Payables to Brokerage Clients
The principal source of funding for Schwab’s margin lending is cash balances in brokerage client accounts, which are included in payables to brokerage clients. Cash balances in interest-bearing brokerage client accounts were $26.6 billion and $27.6 billion at December 31, 2015 and 2014, respectively. The average rate paid on cash balances in interest-bearing brokerage client accounts was 0.01% in 2015 and 2014.
- 78 -
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
14.13. BorrowingsLong-term debt including unamortized debt discounts
CSC’s Senior Notes are unsecured obligations and
premiums, where applicable, consistsrank equally with the other unsecured senior debt. CSC may redeem some or all of the
following: | | | | | | | | | | | | |
December 31, | | | | | | | 2015 | | | 2014 |
Senior Notes | | | | | | $ | 2,565 | | | $ | 1,567 | |
Medium-Term Notes, Series A | | | | | | | 250 | | | | 249 | |
Finance lease obligation | | | | | | | 75 | | | | 83 | |
Total long-term debt | | | | | | $ | 2,890 | | | $ | 1,899 | |
CSC has a universal automatic shelf registration statement (Shelf Registration Statement) on file with the SEC, which enables CSC to issue debt, equity, and other securities.
The Senior Notes of each series prior to their maturity, subject to certain restrictions, and the payment of an applicable make-whole premium in certain instances. Interest is payable semi-annually for the fixed-rate Senior Notes and quarterly for the floating-rate Senior Notes. The following table lists long-term debt by instrument outstanding atas of December 31, 2015, have maturities ranging from 2018 to 2026 and bear interest at a weighted-average rate of 3.03% with interest payable semi-annually.
On November 13, 2015, CSC issued $350 million aggregate principal amount of Senior Notes that mature in 2026. The Senior Notes have a fixed interest rate of 3.450% with interest payable semi-annually.
On March 10, 2015, CSC issued $625 million aggregate principal amount of Senior Notes that mature in 2018 and $375 million aggregate principal amount of Senior Notes that mature in 2025. The Senior Notes due 2018 and 2025 have a fixed interest rate of 1.50% and 3.00%, respectively, with interest payable semi-annually.
The Medium-Term Notes, Series A (Medium-Term Notes) outstanding at December 31, 2015, mature in 2017 and have a fixed interest rate of 6.375% with interest payable semi-annually.
2017.
|
| | | | | | | |
| | Date of | Principal Amount Outstanding |
| | Issuance | 2018 | 2017 |
| Fixed-Rate Senior Notes: | | | |
1.500% due March 10, 2018 (1) | 03/10/15 | $ | — |
| $ | 625 |
|
2.200% due July 25, 2018 (2) | 07/25/13 | — |
| 275 |
|
| 4.450% due July 22, 2020 | 07/22/10 | 700 |
| 700 |
|
| 3.250% due May 21, 2021 | 05/22/18 | 600 |
| — |
|
| 3.225% due September 1, 2022 | 08/29/12 | 256 |
| 256 |
|
| 2.650% due January 25, 2023 | 12/07/17 | 800 |
| 800 |
|
| 3.550% due February 1, 2024 | 10/31/18 | 500 |
| — |
|
| 3.000% due March 10, 2025 | 03/10/15 | 375 |
| 375 |
|
| 3.850% due May 21, 2025 | 05/22/18 | 750 |
| — |
|
| 3.450% due February 13, 2026 | 11/13/15 | 350 |
| 350 |
|
| 3.200% due March 2, 2027 | 03/02/17 | 650 |
| 650 |
|
| 3.200% due January 25, 2028 | 12/07/17 | 700 |
| 700 |
|
| 4.000% due February 1, 2029 | 10/31/18 | 600 |
| — |
|
| Floating-rate Senior Notes: | | | |
| Three-month LIBOR + 0.32% due May 21, 2021 | 05/22/18 | 600 |
| — |
|
| Total Senior Notes | | 6,881 |
| 4,731 |
|
5.450% Finance lease obligation (3) | 06/04/04 | 52 |
| 61 |
|
Unamortized discount — net | | (15 | ) | (14 | ) |
| Debt issuance costs | | (40 | ) | (25 | ) |
| Total long-term debt | | $ | 6,878 |
| $ | 4,753 |
|
(1) Redeemed on February 8, 2018.
(2) Redeemed on June 25, 2018.
(3) Schwab has a finance lease obligation related to an office building and land under a 20-year lease. The remaining finance lease obligation of $75 million at December 31, 2015, is being reduced by a portion of the lease payments over the remaining lease term of nine years.Annual maturities on long-term debt outstanding at December 31, 2015, are as follows:
| | | | | | | | | | |
2016 | | | | | | | | $ | 7 | |
2017 | | | | | | | | | 258 | |
2018 | | | | | | | | | 908 | |
2019 | | | | | | | | | 8 | |
2020 | | | | | | | | | 709 | |
Thereafter | | | | | | | | | 1,016 | |
Total maturities | | | | | | | | | 2,906 | |
Unamortized discount, net | | | | | | | | | (16) | |
Total long-term debt | | | | | | | | $ | 2,890 | |
CSC has authorization from its Board of Directors to issue 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. The maturities of the Commercial Paper Notes may vary, but are not to exceed 270 days from the date of issue. The commercial paper is not redeemable prior to maturity and cannot be voluntarily prepaid. The proceeds of the commercial paper program are to be used for general corporate purposes. There were no borrowings of Commercial Paper Notes outstanding at December 31, 2015 or 2014.
CSC maintains a $750 million committed, unsecured credit facility with a group of banks, which is scheduled to expire inthrough June 2016. This facility replaced a similar facility that expired in June 2015. The funds under this facility are available for general corporate purposes. The financial covenants require Schwab to maintain a minimum net capital ratio, as defined, Schwab Bank to be well capitalized, as defined, and CSC to maintain a minimum level of stockholders’ equity, adjusted to exclude accumulated other comprehensive income. At December 31, 2015, the minimum level of stockholders’ equity
30, 2024.
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
required under this facility was $8.9billion (CSC’s stockholders’ equity, excluding accumulated other comprehensive income,
Annual maturities on long-term debt outstanding at December 31, 2015, was $13.5 billion). There were no borrowings outstanding2018, are as follows:
|
| | | |
| | Maturities |
| 2019 | $ | 8 |
|
| 2020 | 709 |
|
| 2021 | 1,209 |
|
| 2022 | 266 |
|
| 2023 | 810 |
|
| Thereafter | 3,931 |
|
| Total maturities | 6,933 |
|
| Unamortized discount — net | (15 | ) |
| Debt issuance costs | (40 | ) |
| Total long-term debt | $ | 6,878 |
|
Short-term borrowings: Certain banking subsidiaries maintain secured credit facilities with the FHLB. Amounts available under these facilities atare dependent on the amount of our First Mortgages, HELOCs, and the fair value of certain of their investment securities that are pledged as collateral. As of December 31, 2015 or 2014.To manage short-term liquidity, Schwab maintains uncommitted, unsecured bank credit lines with several banks. There2018, the collateral pledged provided a total borrowing capacity of $35.5 billion of which no amounts were no borrowings outstanding under these lines atoutstanding. As of December 31, 2015 or 2014.
To partially satisfy2017, the margin requirementcollateral pledged provided a total borrowing capacity of client option transactions$32.3 billion of which $15.0 billion was outstanding, with a 1.53% weighted average fixed interest rate. The Company could increase its borrowing capacity by pledging additional securities.
As a condition of the FHLB borrowings, we are required to hold FHLB stock, with the Options Clearing Corporation,investment recorded in other assets on the broker-dealer subsidiaries have unsecured standby LOCs with several banksconsolidated balance sheets. The investment in favor of the Options Clearing Corporation aggregating $295FHLB was $32 million and $405 million at December 31, 2015. There were no funds drawn under any2018 and 2017, respectively.
| |
| 14. | Commitments and Contingencies |
Loan Portfolio: CSB provides a co-branded loan origination program for CSB clients (the Program) with Quicken Loans, Inc. (Quicken Loans®). Pursuant to the Program, Quicken Loans originates and services First Mortgages and HELOCs for CSB clients. Under the Program, CSB purchases certain First Mortgages and HELOCs that are originated by Quicken Loans. CSB purchased First Mortgages of these LOCs at December 31, 2015$2.1 billion and $2.8 billion during 2018 and 2017, respectively. CSB purchased HELOCs with commitments of $395 million and $461 million during 2018 and 2017, respectively.
The Company’s commitments to extend credit on bank lines of credit and to purchase First Mortgages are as follows:
|
| | | | | | |
| December 31, | 2018 | 2017 |
| Commitments to extend credit related to unused HELOCs, PALs, and other lines of credit | $ | 11,046 |
| $ | 10,060 |
|
| Commitments to purchase First Mortgage loans | 268 |
| 308 |
|
| Total | $ | 11,314 |
| $ | 10,368 |
|
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, 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.15.Commitments and Contingencies
Noted)
Operating leases: The CompanySchwab has non-cancelable operating leases for office space and equipment. FutureAs of December 31, 2018, future annual minimum rental commitments under these leases, net of contractual subleases are as follows: | | | | | | | | | | |
| | Operating | | | | | | | |
December 31, 2015 | | Leases | | Subleases | | Net | |
2016 | | $ | 135 | | $ | 34 | | $ | 101 | |
2017 | | | 122 | | | 28 | | | 94 | |
2018 | | | 82 | | | 6 | | | 76 | |
2019 | | | 53 | | | 2 | | | 51 | |
2020 | | | 43 | | | 2 | | | 41 | |
Thereafter | | | 139 | | | 4 | | | 135 | |
Total | | $ | 574 | | $ | 76 | | $ | 498 | |
|
| | | | | | | | | |
| | Operating
Leases | Subleases | Net |
| 2019 | $ | 131 |
| $ | 4 |
| $ | 127 |
|
| 2020 | 125 |
| 4 |
| 121 |
|
| 2021 | 101 |
| 4 |
| 97 |
|
| 2022 | 79 |
| 2 |
| 77 |
|
| 2023 | 72 |
| 1 |
| 71 |
|
| Thereafter | 282 |
| — |
| 282 |
|
| Total | $ | 790 |
| $ | 15 |
| $ | 775 |
|
Certain leases contain provisions for renewal options, purchase options, and rent escalations based on increases in certain costs incurred by the lessor. Rent expense relating to operating leases was
$116$146 million,
$114$136 million, and
$116$123 million in
2015, 2014,2018, 2017, and
2013,2016, respectively.
Purchase obligations:The Company Schwab has purchase obligations for services such as advertising and marketing, telecommunications, professional services, and hardware- and software-related agreements. TheAs of December 31, 2018, the Company has purchase obligations as follows: | | | | | | | | | | |
December 31, 2015 | | | | | | | | | | |
2016 | | | | | | | | $ | 230 | |
2017 | | | | | | | | | 114 | |
2018 | | | | | | | | | 38 | |
2019 | | | | | | | | | 19 | |
2020 | | | | | | | | | 17 | |
Thereafter | | | | | | | | | 213 | |
Total | | | | | | | | $ | 631 | |
|
| | | |
| 2019 | $ | 475 |
|
| 2020 | 232 |
|
| 2021 | 71 |
|
| 2022 | 32 |
|
| 2023 | 22 |
|
| Thereafter | 170 |
|
| Total | $ | 1,002 |
|
Guarantees and indemnifications: The CompanySchwab has clients that sell (i.e., write) listed option contracts that are cleared by the Options Clearing Corporation – a clearing house that establishes margin requirements on these transactions. The CompanyWe partially satisfiessatisfy the margin requirements by arranging unsecured standby LOCs, in favor of the Options Clearing Corporation, and others, which are issued by multipleseveral banks. At December 31, 2015,2018, the aggregate face amount of these LOCs totaled $304$225 million. There were no funds drawn under any of these LOCs at December 31, 2015.2018. In connection with its securities lending activities, the CompanySchwab is required to provide collateral to certain brokerage clients. The Company satisfies the collateral requirements by providing cash as collateral.
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
The CompanySchwab also provides guarantees to securities clearing houses and exchanges under standard membership agreements, which require members to guarantee the performance of other members. Under the agreements, if another member becomes unable to satisfy its obligations to the clearing houses and exchanges, other members would be required to meet shortfalls. The Company’sSchwab’s liability under these arrangements is not quantifiable and may exceed the cash and securities it has posted as collateral. However, theThe potential requirement for the Company to make payments under these arrangements is remote. Accordingly, no liability has been recognized for these guarantees.
Legal contingencies: The CompanySchwab is subject to claims and lawsuits in the ordinary course of business, including arbitrations, class actions and other litigation, some of which include claims for substantial or unspecified damages. The Company is also the subject of inquiries, investigations, and proceedings by regulatory and other governmental agencies.The Company
Predicting the outcome of a litigation or regulatory matter is inherently difficult, requiring significant judgment and evaluation of various factors, including the procedural status of the matter and any recent developments; prior experience and the experience of others in similar cases; available defenses, including potential opportunities to dispose of a case on the merits or procedural grounds before trial (e.g., motions to dismiss or for summary judgment); the progress of fact discovery; the opinions of counsel and experts regarding potential damages; and potential opportunities for settlement and the status of
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
any settlement discussions. It may not be reasonably possible to estimate a range of potential liability until the matter is closer to resolution – pending, for example, further proceedings, the outcome of key motions or appeals, or discussions among the parties. Numerous issues may have to be developed, such as discovery of important factual matters and determination of threshold legal issues, which may include novel or unsettled questions of law. Reserves are established or adjusted or further disclosure and estimates of potential loss are provided as the matter progresses and more information becomes available.
Schwab believes it has strong defenses in all significant matters currently pending and is contesting liability and any damages claimed. Nevertheless, some of these matters may result in adverse judgments or awards, including penalties, injunctions or other relief, and the Company may also determine to settle a matter because of the uncertainty and risks of litigation. Described below are certain matters in which there is a reasonable possibility that a material loss could be incurred or where the matter may otherwise be of significant interest to stockholders. Unless otherwise noted, the Company is unable to provide a reasonable estimate of any potential liability given the stage of proceedings in the matter. With respect to all other pending matters, based on current information and consultation with counsel, it does not appear reasonably possible that the outcome of any such matter would be material to the financial condition, operating results, or cash flows of the Company. However, predicting the outcome of a litigation or regulatory matter is inherently difficult, requiring significant judgment and evaluation of various factors, including the procedural status of the matter and any recent developments; prior experience and the experience of others in similar cases; available defenses, including potential opportunities to dispose of a case on the merits or procedural grounds before trial (e.g., motions to dismiss or for summary judgment); the progress of fact discovery; the opinions of counsel and experts regarding potential damages; potential opportunities for settlement and the status of any settlement discussions; and potential insurance coverage and indemnification. It may not be possible to reasonably estimate potential liability, if any, or a range of potential liability until the matter is closer to resolution – pending, for example, further proceedings, the outcome of key motions or appeals, or discussions among the parties. Numerous issues may have to be developed, such as discovery of important factual matters and determination of threshold legal issues, which may include novel or unsettled questions of law. Reserves are established or adjusted or further disclosure and estimates of potential loss are provided as the matter progresses and more information becomes available.
Total Bond Market FundCrago Order Routing Litigation: On August 28, 2008,July 13, 2016, a securities class action lawsuit was filed in the U.S. District Court for the Northern District of California on behalf of a putative class of customers executing equity orders through CS&Co. The lawsuit names CS&Co and CSC as defendants and alleges that an agreement under which CS&Co routed orders to UBS Securities LLC between July 13, 2011 and December 31, 2014 violated CS&Co’s duty to seek best execution. Plaintiffs seek unspecified damages, interest, injunctive and equitable relief, and attorneys’ fees and costs. After a first amended complaint was dismissed with leave to amend, plaintiffs filed a second amended complaint on August 14, 2017. Defendants again moved to dismiss, and in a decision issued December 5, 2017, the court denied the motion. Defendants have answered the complaint to deny all allegations, and intend to vigorously contest the lawsuit.
Total Bond Market Fund™ Litigation: As disclosed previously, the Company had been responding to a class action lawsuit in the U.S. District Court for the Northern District of California on behalf of investors in the Schwab Total Bond Market Fund™. The lawsuit, which alleges violationsFund. On December 13, 2018, following dismissal of state lawits fourth amended complaint and federal securities law in connection with the fund’s investment policy, named CSIM, Schwab Investments (registrant and issuer of the fund’s shares) and certain current and former fund trustees as defendants. Allegations include that the fund improperly deviated from its stated investment objectives by investing in collateralized mortgage obligations (CMOs) and investing more than 25% of fund assets in CMOs and mortgage-backed securities without obtaining a shareholder vote. Plaintiff seeks unspecified compensatory and rescission damages, unspecified equitable and injunctive relief, costs and attorneys’ fees. Plaintiff’s federal securities law claim and certain of plaintiff’s state law claims were dismissed. On August 8, 2011, the court dismissed plaintiff’s remaining claims with prejudice. Plaintiff appealedunsuccessful appeals to the Ninth Circuit which issued a ruling on March 9, 2015 reversing the district court’sCourt of Appeals, plaintiff stipulated and agreed to dismissal of all claims, concluding the case and remanding the case for further proceedings. A petition by defendants for U.S. Supreme Court review was denied on October 6, 2015. In the interim, defendants filed a fourth amended complaint on June 25, 2015. Defendants moved to dismiss and on October 6, 2015, the court dismissed with prejudice plaintiff’s contractual claims, but declined to dismiss certain of the claims for fiduciary breach. On February 23, 2016, the court dismissed plaintiff’s remaining claims with prejudice. Plaintiff has 30 days in which to appeal.case.Other Regulatory Matters: On April16, 2012, optionsXpress, Inc. was charged by the SEC in an administrative proceeding alleging violations of the firm’s close-out obligations under Regulation SHO (short sale delivery rules) in connection with certain client trading activity. Following trial, in a decision issued June 7, 2013, the judge held that the firm had violated Regulation SHO and aided and abetted fraudulent trading activity by its client, and ordered the firm and the client to pay
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
disgorgement and penalties in an amount which would not be material. The Company continues to dispute the allegations and is appealing the decision.
16.
| |
| 15. | Financial Instruments Subject to Off-Balance Sheet Credit Risk |
Off-Balance Sheet Credit Risk or Concentration RiskOff-Balance Sheet Credit Risk
Resale and repurchase agreements: Schwab enters into collateralized resale agreements principally with other broker-dealers, which could result in losses in the event the counterparty fails to purchase the securities held as collateral for the cash advanced and the fair value of the securities declines. To mitigate this risk, Schwab requires that the counterparty deliver securities to a custodian, to be held as collateral, with a fair value at or in excess of the resale price. Schwab also sets standards for the credit quality of the counterparty, monitors the fair value of the underlying securities as compared to the related receivable, including accrued interest, and requires additional collateral where deemed appropriate. At December 31, 2015 and 2014, the fair value of collateral received in connection with resale agreements that are available to be repledged or sold was $8.2 billion and $10.4 billion, respectively. Schwab utilizes theThe collateral provided under these resale agreements is utilized to meet obligations under broker-dealer client protection rules, which place limitations on itsour ability to access such segregated securities. For Schwab to repledge or sell this collateral, it would be required to deposit cash and/or securities of an equal amount into its segregated reserve bank accounts in order to meet its segregated cash and investment requirement. The Company’sSchwab’s resale agreements are not subject to master netting arrangements.
Securities lending: The CompanySchwab loans brokerage client securities temporarily to other brokers and clearing houses in connection with its securities lending activities and receives cash as collateral for the securities loaned. Increases in security prices may cause the fair value of the securities loaned to exceed the amount of cash received as collateral. In the event the counterparty to these transactions does not return the loaned securities or provide additional cash collateral, the Companywe may be exposed to the risk of acquiring the securities at prevailing market prices in order to satisfy itsour client obligations. The CompanySchwab mitigates this risk by requiring credit approvals for counterparties, monitoring the fair value of securities loaned, and requiring additional cash as collateral when necessary. The fair value of client securities pledged in securities lending transactions to other broker-dealers was $1.9 billion and $1.3 billion at December 31, 2015 and 2014, respectively. The Company hasWe also pledged a portion of its securities owned in connection with securities lending transactions to other broker-dealers. Additionally, the Company borrowsborrow securities from other broker-dealers to fulfill short sales by brokerage clients and deliversdeliver cash to the lender in exchange for the securities. The fair value of these borrowed securities was $72$99 million and $88$215 million at December 31, 20152018 and 2014,2017, respectively. All of the Company’sour securities lending transactions are subject to enforceable master netting arrangements with other broker-dealers. However, the Company does not net securities lending transactions and therefore, the Company’s securities loaned and securities borrowed are presented gross in the consolidated balance sheets. - 82 -
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
through a program with a clearing organization, which guarantees the return of cash to us and is subject to enforceable master netting arrangements with other broker-dealers; however, we do not net securities lending transactions. Therefore, the securities loaned and securities borrowed are presented gross in the consolidated balance sheets.
The following table presents information about
the Company’sour resale agreements and securities lending activity
to enable the users of the Company’s financial statements to evaluatedepicting the potential effect of rights of setoff between these recognized assets and recognized
liabilities.liabilities at December 31, 2018 and 2017. | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | Gross Amounts Not Offset in the | | | |
| | | | | | Gross Amounts | | Net Amounts | | Consolidated Balance Sheet | | | |
| | | Gross | | | Offset in the | | Presented in the | | | | | | | | | |
| | | Assets/ | | | Consolidated | | Consolidated | | Counterparty | | | | | Net |
| | | Liabilities | | | Balance Sheet | | Balance Sheet | | Offsetting | | Collateral | | | Amount |
December 31, 2015 | | | | | | | | | | | | | | | | | | | | | | | |
Assets: | | | | | | | | | | | | | | | | | | | | | | | |
Resale agreements (1) | | $ | 8,088 | | | $ | - | | | $ | 8,088 | | | $ | - | | | $ | (8,088) | (2) | | $ | - |
Securities borrowed (3) | | | 198 | | | | - | | | | 198 | | | | (70) | | | | (127) | | | | 1 |
Total | | $ | 8,286 | | | $ | - | | | $ | 8,286 | | | $ | (70) | | | $ | (8,215) | | | $ | 1 |
Liabilities: | | | | | | | | | | | | | | | | | | | | | | | |
Securities loaned (4,5) | | $ | 2,233 | | | $ | - | | | $ | 2,233 | | | $ | (70) | | | $ | (1,990) | | | $ | 173 |
Total | | $ | 2,233 | | | $ | - | | | $ | 2,233 | | | $ | (70) | | | $ | (1,990) | | | $ | 173 |
| | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2014 | | | | | | | | | | | | | | | | | | | | | | | |
Assets: | | | | | | | | | | | | | | | | | | | | | | | |
Resale agreements (1) | | $ | 10,186 | | | $ | - | | | $ | 10,186 | | | $ | - | | | $ | (10,186) | (2) | | $ | - |
Securities borrowed (3) | | | 187 | | | | - | | | | 187 | | | | (69) | | | | (117) | | | | 1 |
Total | | $ | 10,373 | | | $ | - | | | $ | 10,373 | | | $ | (69) | | | $ | (10,303) | | | $ | 1 |
Liabilities: | | | | | | | | | | | | | | | | | | | | | | | |
Securities loaned (4,5) | | $ | 1,477 | | | $ | - | | | $ | 1,477 | | | $ | (69) | | | $ | (1,293) | | | $ | 115 |
Total | | $ | 1,477 | | | $ | - | | | $ | 1,477 | | | $ | (69) | | | $ | (1,293) | | | $ | 115 |
(1)
| Included in cash and investments segregated and on deposit for regulatory purposes in the Company’s consolidated balance sheets.
|
(2)
| Actual collateral was greater than or equal to 102% of the related assets.
|
(3)
| Included in receivables from brokers, dealers, and clearing organizations in the Company’s consolidated balance sheets.
|
(4)
| Included in payables to brokers, dealers, and clearing organizations in the Company’s consolidated balance sheets.
|
(5)
| Securities loaned are predominantly comprised of equity securities with overnight and continuous remaining contractual maturities.
|
|
| | | | | | | | | | | | | | | | | | | |
| | | | | Gross Amounts Not Offset in the
Consolidated Balance Sheets | |
| | Gross
Assets/
Liabilities | Gross Amounts Offset in the Consolidated
Balance Sheets | Net Amounts Presented in the Consolidated
Balance Sheets | Counterparty
Offsetting | Collateral | Net
Amount |
| December 31, 2018 | | | | | | | |
| Assets | | | | | | | |
Resale agreements (1) | $ | 7,195 |
| $ | — |
| $ | 7,195 |
| $ | — |
| $ | (7,195 | ) | (2) | $ | — |
|
Securities borrowed (3) | 101 |
| — |
| 101 |
| (98 | ) | (3 | ) | | — |
|
| Total | $ | 7,296 |
| $ | — |
| $ | 7,296 |
| $ | (98 | ) | $ | (7,198 | ) | | $ | — |
|
| Liabilities | | | | | | | |
Securities loaned (4,5) | $ | 1,184 |
| $ | — |
| $ | 1,184 |
| $ | (98 | ) | $ | (975 | ) | | $ | 111 |
|
| Total | $ | 1,184 |
| $ | — |
| $ | 1,184 |
| $ | (98 | ) | $ | (975 | ) | | $ | 111 |
|
| | | | | | | | |
| December 31, 2017 | | | | | | | |
| Assets | | | | | | | |
Resale agreements (1) | $ | 6,596 |
| $ | — |
| $ | 6,596 |
| $ | — |
| $ | (6,596 | ) | (2) | $ | — |
|
Securities borrowed (3) | 222 |
| — |
| 222 |
| (199 | ) | (22 | ) | | 1 |
|
| Total | $ | 6,818 |
| $ | — |
| $ | 6,818 |
| $ | (199 | ) | $ | (6,618 | ) | | $ | 1 |
|
| Liabilities | | | | | | | |
Securities loaned (4,5) | $ | 966 |
| $ | — |
| $ | 966 |
| $ | (199 | ) | $ | (670 | ) | | $ | 97 |
|
| Total | $ | 966 |
| $ | — |
| $ | 966 |
| $ | (199 | ) | $ | (670 | ) | | $ | 97 |
|
(1) Included in cash and investments segregated and on deposit for regulatory purposes in the consolidated balance sheets.
(2) Actual collateral was greater than or equal to 102% of the related assets. At December 31, 2018 and 2017, the fair value of collateral received in connection with resale agreements that are available to be repledged or sold was $7.4 billion and $6.7 billion, respectively.
(3) Included in receivables from brokers, dealers, and clearing organizations in the consolidated balance sheets.
(4) Included in payables to brokers, dealers, and clearing organizations in the consolidated balance sheets. The cash collateral received from counterparties under securities lending transactions was equal to or greater than the market value of the securities loaned at December 31, 2018 and 2017.
(5) Securities loaned are predominantly comprised of equity securities held in client brokerage accounts with overnight and continuous remaining contractual maturities.
Client trade settlement:The Company Schwab is obligated to settle transactions with brokers and other financial institutions even if the Company’sour clients fail to meet their obligations to the Company.us. Clients are required to complete their transactions on settlement date, generally threetwo business days after the trade date. If clients do not fulfill their contractual obligations, the Companywe may incur losses. The Company hasWe have established procedures to reduce this risk by requiring deposits from clients in excess of amounts prescribed by regulatory requirements for certain types of trades, and therefore the potential to make payments under these client transactions is remote. Accordingly, no liability has been recognized for these transactions.Margin lending: The Company provides margin loans to its clients which are collateralized by securities in their brokerage accounts and may be liable for the margin requirement of its client margin securities transactions. As clients write options or sell securities short, the Company may incur losses if the clients do not fulfill their obligations and the collateral in client accounts is insufficient to fully cover losses which clients may incur from these strategies. To mitigate this risk, the Company monitors required margin levels and requires clients to deposit additional collateral, or reduce positions to meet minimum collateral requirements. The contractual value of margin loans to clients was $15.8 billion and $14.3 billion at December 31, 2015 and 2014, respectively.
Clients with margin loans have agreed to allow the Company to pledge collateralized securities in their brokerage accounts in accordance with federal regulations. Under such regulations, the Company was allowed to pledge securities with a fair value of $22.4 billion and $20.4 billion at December 31, 2015 and 2014, respectively. The fair value of client securities pledged to fulfill the short sales of its clients was $1.3 billion and $1.5 billion at December 31, 2015 and 2014, respectively. The fair
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
Margin lending: Clients with margin loans have agreed to allow Schwab to pledge collateralized securities in their brokerage accounts in accordance with federal regulations. The following table summarizes the fair value of client securities that were available, under such regulations, that could have been used as collateral, and the amounts that we had pledged:
|
| | | | | | |
| December 31, | 2018 | 2017 |
| Fair value of client securities available to be pledged | $ | 26,628 |
| $ | 25,905 |
|
| Fair value of client securities pledged for: | | |
Fulfillment of requirements with the Options Clearing Corporation (1) | 2,315 |
| 2,280 |
|
| Fulfillment of client short sales | 1,292 |
| 2,011 |
|
| Securities lending to other broker-dealers | 974 |
| 784 |
|
| Total collateral pledged | $ | 4,581 |
| $ | 5,075 |
|
Note: Excludes amounts available and pledged
to fulfill the Company’s proprietary short sales, which resultedfor securities lending from
facilitating clients’ dividend reinvestment elections, was $303 million and $216 million at December 31, 2015 and 2014, respectively. The Company may also pledgefully-paid client
securities to fulfill client margin requirements for open option contracts established with the Options Clearing Corporation.securities. The fair value of
thesefully-paid client securities available and pledged
securities to the Options Clearing Corporation was
$1.5 billion and $1.3 billion at$97 million as of December 31,
20152018 and
2014, respectively.Financial Guarantees: See “Notes – 15. Commitments and Contingencies.”
Concentration Risk
The Company has exposure to concentration risk when holding large positions$78 million as of financial instruments collateralized by assets with similar economic characteristics or in securities of a single issuer or industry.
The fair value of the Company’s investments in mortgage-backed securities totaled $72.3 billion at December 31, 2015. Of these, $71.0 billion were issued by U.S. agencies and $1.3 billion were issued by private entities (non-agency securities). The fair value of the Company’s investments2017.
| |
(1) | Client securities pledged to fulfill client margin requirements for open option contracts established with the Options Clearing Corporation. |
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in
mortgage-backed securities totaled $53.8 billion at December 31, 2014. Of these, $52.5 billion were issued by U.S. agencies and $1.3 billion were non-agency securities. These U.S. agency and non-agency securities are included in securities available for sale and securities held to maturity in the consolidated balance sheets.The fair value of the Company’s investments in corporate debt securities and commercial paper totaled $11.1 billion and $8.1 billion at December 31, 2015 and 2014, respectively, with the majority issued by institutions in the financial services industry. These securities are included in securities available for sale, cash and cash equivalents, and other securities owned.
The Company’s bank loans include $7.5 billion and $7.4 billion of adjustable rate First Mortgages at December 31, 2015 and 2014, respectively. At December 31, 2015, approximately 39% of these mortgages consisted of loans with interest-only payment terms. At December 31, 2015, the interest rates on approximately 53% of these interest-only loans are not scheduled to reset for threeMillions, Except Per Share Data, Option Price Amounts, Ratios, or more years. For additional detail on concentrations in bank loans, see “Notes – 6. Bank Loans and Related Allowance for Loan Losses.”
No single client accounted for more than 10% of the Company’s net revenues in 2015, 2014, or 2013. Substantially all of the Company’s revenues and assets are generated or located in the U.S. The percentage of Schwab’s total client accounts located in California was 23% at December 31, 2015, 2014, and 2013.
The Company also has exposure to concentration risk from its margin and securities lending activities collateralized by securities of a single issuer or industry. This concentration risk is mitigated by collateral arrangements that require the fair value of such collateral exceeds the amounts loaned, as described above.
Noted)
17.16. Fair Values of Assets and Liabilities
For a description of the fair value hierarchy and
the Company’sSchwab’s fair value methodologies, including the use of independent third-party pricing services, see
“Notes –Note 2.
Summary of Significant Accounting Policies.” The
Company did not transfer any assets or liabilities between Level 1, Level 2, or Level 3 during 2015 or 2014. In addition, the Company did not adjust prices received from the primary independent third-party pricing service at December 31,
20152018 or
2014.2017.
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following tables present the fair value hierarchy for assets measured at fair value on a recurring basis. Liabilities recorded at fair value were not material, and therefore are not included in the following tables:
| | | | | | | | | | | | | | | | | | | |
| Quoted Prices | | | | | | | | | | | | | | | |
| in Active Markets | | Significant | | | Significant | | | | | | |
| for Identical | | Other Observable | | | Unobservable | | | | | | |
| Assets | | Inputs | | | Inputs | | | | Balance at | |
December 31, 2015 | (Level 1) | | (Level 2) | | | (Level 3) | | | | Fair Value | |
Cash equivalents: | | | | | | | | | | | | | | | | | | | |
Money market funds | | $ | 1,968 | | | | $ | - | | | | $ | - | | | | $ | 1,968 | |
Commercial paper | | | - | | | | | 360 | | | | | - | | | | | 360 | |
Total cash equivalents | | | 1,968 | | | | | 360 | | | | | - | | | | | 2,328 | |
Investments segregated and on deposit for | | | | | | | | | | | | | | | | | | | |
regulatory purposes: | | | | | | | | | | | | | | | | | | | |
Certificates of deposit | | | - | | | | | 3,430 | | | | | - | | | | | 3,430 | |
U.S. Government securities | | | - | | | | | 4,517 | | | | | - | | | | | 4,517 | |
Total investments segregated and on deposit for | | | | | | | | | | | | | | | | | | | |
regulatory purposes | | | - | | | | | 7,947 | | | | | - | | | | | 7,947 | |
Other securities owned: | | | | | | | | | | | | | | | | | | | |
Schwab Funds® money market funds | | | 261 | | | | | - | | | | | - | | | | | 261 | |
Equity and bond mutual funds | | | 205 | | | | | - | | | | | - | | | | | 205 | |
State and municipal debt obligations | | | - | | | | | 50 | | | | | - | | | | | 50 | |
Equity, U.S. Government and corporate debt, and | | | | | | | | | | | | | | | | | | | |
other securities | | | 1 | | | | | 16 | | | | | - | | | | | 17 | |
Total other securities owned | | | 467 | | | | | 66 | | | | | - | | | | | 533 | |
Securities available for sale: | | | | | | | | | | | | | | | | | | | |
U.S. agency mortgage-backed securities | | | - | | | | | 22,149 | | | | | - | | | | | 22,149 | |
Asset-backed securities | | | - | | | | | 21,485 | | | | | - | | | | | 21,485 | |
Corporate debt securities | | | - | | | | | 10,747 | | | | | - | | | | | 10,747 | |
U.S. Treasury securities | | | - | | | | | 5,704 | | | | | - | | | | | 5,704 | |
U.S. agency notes | | | - | | | | | 3,150 | | | | | - | | | | | 3,150 | |
Certificates of deposit | | | - | | | | | 1,683 | | | | | - | | | | | 1,683 | |
U.S. state and municipal securities | | | - | | | | | 424 | | | | | - | | | | | 424 | |
Non-agency commercial mortgage-backed securities | | | - | | | | | 299 | | | | | - | | | | | 299 | |
Other securities | | | - | | | | | 5 | | | | | - | | | | | 5 | |
Total securities available for sale | | | - | | | | | 65,646 | | | | | - | | | | | 65,646 | |
Total | | $ | 2,435 | | | | $ | 74,019 | | | | $ | - | | | | $ | 76,454 | |
- 85 -
|
| | | | | | | | | | | | |
| December 31, 2018 | Level 1 | Level 2 | Level 3 | Balance at
Fair Value |
| Cash equivalents: | | | | |
| Money market funds | $ | 3,429 |
| $ | — |
| $ | — |
| $ | 3,429 |
|
| Commercial paper | — |
| 4,863 |
| — |
| 4,863 |
|
| Total cash equivalents | 3,429 |
| 4,863 |
| — |
| 8,292 |
|
| Investments segregated and on deposit for regulatory purposes: | | | | |
| Certificates of deposit | — |
| 1,396 |
| — |
| 1,396 |
|
| U.S. Government securities | — |
| 3,275 |
| — |
| 3,275 |
|
| Total investments segregated and on deposit for regulatory purposes | — |
| 4,671 |
| — |
| 4,671 |
|
| Other securities owned: | | | | |
| Equity and bond mutual funds | 441 |
| — |
| — |
| 441 |
|
| State and municipal debt obligations | — |
| 39 |
| — |
| 39 |
|
| Equity, U.S. Government and corporate debt, and other securities | 3 |
| 30 |
| — |
| 33 |
|
Schwab Funds® money market funds | 26 |
| — |
| — |
| 26 |
|
| Total other securities owned | 470 |
| 69 |
| — |
| 539 |
|
| Available for sale securities: | | | | |
| U.S. agency mortgage-backed securities | — |
| 25,556 |
| — |
| 25,556 |
|
| U.S. Treasury securities | — |
| 18,302 |
| — |
| 18,302 |
|
| Asset-backed securities | — |
| 10,085 |
| — |
| 10,085 |
|
| Corporate debt securities | — |
| 7,467 |
| — |
| 7,467 |
|
| Certificates of deposit | — |
| 3,685 |
| — |
| 3,685 |
|
| U.S. agency notes | — |
| 898 |
| — |
| 898 |
|
| Commercial paper | — |
| 522 |
| — |
| 522 |
|
| Foreign government agency securities | — |
| 49 |
| — |
| 49 |
|
| Non-agency commercial mortgage-backed securities | — |
| 14 |
| — |
| 14 |
|
| Total available for sale securities | — |
| 66,578 |
| — |
| 66,578 |
|
| Total | $ | 3,899 |
| $ | 76,181 |
| $ | — |
| $ | 80,080 |
|
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
| | | | | | | | | | | | | | | | | | | |
| Quoted Prices | | | | | | | | | | | | | | | |
| in Active Markets | | Significant | | | | Significant | | | | | |
| for Identical | | Other Observable | | | | Unobservable | | | | | |
| Assets | | Inputs | | | | Inputs | | | Balance at | |
December 31, 2014 | (Level 1) | | (Level 2) | | | | (Level 3) | | | Fair Value | |
Cash equivalents: | | | | | | | | | | | | | | | | | | | |
Money market funds | | $ | 2,142 | | | | $ | - | | | | $ | - | | | | $ | 2,142 | |
Commercial paper | | | - | | | | | 32 | | | | | - | | | | | 32 | |
Total cash equivalents | | | 2,142 | | | | | 32 | | | | | - | | | | | 2,174 | |
Investments segregated and on deposit for | | | | | | | | | | | | | | | | | | | |
regulatory purposes: | | | | | | | | | | | | | | | | | | | |
Certificates of deposit | | | - | | | | | 4,125 | | | | | - | | | | | 4,125 | |
U.S. Government securities | | | - | | | | | 2,186 | | | | | - | | | | | 2,186 | |
Total investments segregated and on deposit for | | | | | | | | | | | | | | | | | | | |
regulatory purposes | | | - | | | | | 6,311 | | | | | - | | | | | 6,311 | |
Other securities owned: | | | | | | | | | | | | | | | | | | | |
Schwab Funds® money market funds | | | 224 | | | | | - | | | | | - | | | | | 224 | |
Equity and bond mutual funds | | | 215 | | | | | - | | | | | - | | | | | 215 | |
State and municipal debt obligations | | | - | | | | | 51 | | | | | - | | | | | 51 | |
Equity, U.S. Government and corporate debt, and | | | | | | | | | | | | | | | | | | | |
other securities | | | 2 | | | | | 24 | | | | | - | | | | | 26 | |
Total other securities owned | | | 441 | | | | | 75 | | | | | - | | | | | 516 | |
Securities available for sale: | | | | | | | | | | | | | | | | | | | |
U.S. agency mortgage-backed securities | | | - | | | | | 18,717 | | | | | - | | | | | 18,717 | |
Asset-backed securities | | | - | | | | | 19,366 | | | | | - | | | | | 19,366 | |
Corporate debt securities | | | - | | | | | 8,045 | | | | | - | | | | | 8,045 | |
U.S. Treasury securities | | | - | | | | | 2,994 | | | | | - | | | | | 2,994 | |
U.S. agency notes | | | - | | | | | 3,795 | | | | | - | | | | | 3,795 | |
Certificates of deposit | | | - | | | | | 1,534 | | | | | - | | | | | 1,534 | |
Non-agency commercial mortgage-backed securities | | | - | | | | | 317 | | | | | - | | | | | 317 | |
Other securities | | | - | | | | | 15 | | | | | - | | | | | 15 | |
Total securities available for sale | | | - | | | | | 54,783 | | | | | - | | | | | 54,783 | |
Total | | $ | 2,583 | | | | $ | 61,201 | | | | $ | - | | | | $ | 63,784 | |
|
| | | | | | | | | | | | |
| December 31, 2017 | Level 1 | Level 2 | Level 3 | Balance at
Fair Value |
| Cash equivalents: | | | | |
| Money market funds | $ | 2,727 |
| $ | — |
| $ | — |
| $ | 2,727 |
|
| Total cash equivalents | 2,727 |
| — |
| — |
| 2,727 |
|
| Investments segregated and on deposit for regulatory purposes: | | | | |
| Certificates of deposit | — |
| 2,198 |
| — |
| 2,198 |
|
| U.S. Government securities | — |
| 3,658 |
| — |
| 3,658 |
|
| Total investments segregated and on deposit for regulatory purposes | — |
| 5,856 |
| — |
| 5,856 |
|
| Other securities owned: | | | | |
| Equity and bond mutual funds | 318 |
| — |
| — |
| 318 |
|
Schwab Funds® money market funds | 135 |
| — |
| — |
| 135 |
|
| State and municipal debt obligations | — |
| 52 |
| — |
| 52 |
|
| Equity, U.S. Government and corporate debt, and other securities | 2 |
| 32 |
| — |
| 34 |
|
| Total other securities owned | 455 |
| 84 |
| — |
| 539 |
|
| Available for sale securities: | | | | |
| U.S. agency mortgage-backed securities | — |
| 20,929 |
| — |
| 20,929 |
|
| U.S. Treasury securities | — |
| 9,500 |
| — |
| 9,500 |
|
| Asset-backed securities | — |
| 9,047 |
| — |
| 9,047 |
|
| Corporate debt securities | — |
| 6,169 |
| — |
| 6,169 |
|
| Certificates of deposit | — |
| 2,041 |
| — |
| 2,041 |
|
| U.S. agency notes | — |
| 1,906 |
| — |
| 1,906 |
|
| Commercial paper | — |
| 313 |
| — |
| 313 |
|
| Foreign government mortgage-backed securities | — |
| 50 |
| — |
| 50 |
|
| Non-agency commercial mortgage-backed securities | — |
| 40 |
| — |
| 40 |
|
| Total available for sale securities | — |
| 49,995 |
| — |
| 49,995 |
|
| Total | $ | 3,182 |
| $ | 55,935 |
| $ | — |
| $ | 59,117 |
|
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
Fair Value of Other Financial InstrumentsDescriptions of the valuation methodologies and assumptions used to estimate the fair value of other financial instruments are also described in “Notes – 2. Summary of Significant Accounting Policies.” There were no significant changes in these methodologies or assumptions during 2015.
The following tables present the fair value hierarchy for other financial instruments:
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | Quoted Prices | | | | | | | | |
| | | | | in Active Markets | | Significant | | Significant | | | | |
| | | for Identical | | Other Observable | | Unobservable | | | |
| | Carrying | | Assets | | Inputs | | Inputs | | Balance at | |
December 31, 2015 | | Amount | | (Level 1) | | (Level 2) | | (Level 3) | | Fair Value | |
Assets: | | | | | | | | | | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 9,650 | | | $ | - | | | | $ | 9,650 | | | | $ | - | | | $ | 9,650 | |
Cash and investments segregated and | | | | | | | | | | | | | | | | | | | | | | |
on deposit for regulatory purposes | | | 11,647 | | | | - | | | | | 11,647 | | | | | - | | | | 11,647 | |
Receivables from brokers, dealers, and | | | | | | | | | | | | | | | | | | | | | | |
clearing organizations | | | 582 | | | | - | | | | | 582 | | | | | - | | | | 582 | |
Receivables from brokerage clients – net | | | 17,310 | | | | - | | | | | 17,310 | | | | | - | | | | 17,310 | |
Securities held to maturity: | | | | | | | | | | | | | | | | | | | | | | |
U.S. agency mortgage-backed securities | | | 48,785 | | | | - | | | | | 48,883 | | | | | - | | | | 48,883 | |
Non-agency commercial mortgage-backed | | | | | | | | | | | | | | | | | | | | | | |
securities | | | 999 | | | | - | | | | | 985 | | | | | - | | | | 985 | |
U.S. Treasury securities | | | 223 | | | | - | | | | | 220 | | | | | - | | | | 220 | |
Total securities held to maturity | | | 50,007 | | | | - | | | | | 50,088 | | | | | - | | | | 50,088 | |
Bank loans: (1) | | | | | | | | | | | | | | | | | | | | | | |
Residential real estate mortgages | | | 8,334 | | | | - | | | | | 8,347 | | | | | - | | | | 8,347 | |
Home equity loans and lines of credit | | | 2,735 | | | | - | | | | | 2,857 | | | | | - | | | | 2,857 | |
Pledged asset lines | | | 3,232 | | | | - | | | | | 3,232 | | | | | - | | | | 3,232 | |
Other | | | 64 | | | | - | | | | | 64 | | | | | - | | | | 64 | |
Total bank loans | | | 14,365 | | | | - | | | | | 14,500 | | | | | - | | | | 14,500 | |
Other assets | | | 184 | | | | - | | | | | 184 | | | | | - | | | | 184 | |
Total | | $ | 103,745 | | | $ | - | | | | $ | 103,961 | | | | $ | - | | | $ | 103,961 | |
Liabilities: | | | | | | | | | | | | | | | | | | | | | | |
Bank deposits | | $ | 129,502 | | | $ | - | | | | $ | 129,502 | | | | $ | - | | | $ | 129,502 | |
Payables to brokers, dealers, and clearing | | | | | | | | | | | | | | | | | | | | | | |
organizations | | | 2,588 | | | | - | | | | | 2,588 | | | | | - | | | | 2,588 | |
Payables to brokerage clients | | | 33,185 | | | | - | | | | | 33,185 | | | | | - | | | | 33,185 | |
Accrued expenses and other liabilities | | | 1,115 | | | | - | | | | | 1,115 | | | | | - | | | | 1,115 | |
Long-term debt | | | 2,890 | | | | - | | | | | 2,980 | | | | | - | | | | 2,980 | |
Total | | $ | 169,280 | | | $ | - | | | | $ | 169,370 | | | | $ | - | | | $ | 169,370 | |
(1)
| The carrying value of bank loans excludes the allowance for loan losses of $31 million at December 31, 2015.
|
|
| | | | | | | | | | | | | | | |
| December 31, 2018 | Carrying
Amount | Level 1 | Level 2 | Level 3 | Balance at
Fair Value |
| Assets | | | | | |
| Cash and cash equivalents | $ | 19,646 |
| $ | — |
| $ | 19,646 |
| $ | — |
| $ | 19,646 |
|
| Cash and investments segregated and on deposit for regulatory purposes | 8,886 |
| — |
| 8,886 |
| — |
| 8,886 |
|
| Receivables from brokers, dealers, and clearing organizations | 553 |
| — |
| 553 |
| — |
| 553 |
|
| Receivables from brokerage clients — net | 21,641 |
| — |
| 21,641 |
| — |
| 21,641 |
|
| Held to maturity securities: | | | | | |
| U.S. agency mortgage-backed securities | 118,064 |
| — |
| 116,093 |
| — |
| 116,093 |
|
| Asset-backed securities | 18,502 |
| — |
| 18,546 |
| — |
| 18,546 |
|
| Corporate debt securities | 4,477 |
| — |
| 4,432 |
| — |
| 4,432 |
|
| U.S. state and municipal securities | 1,327 |
| — |
| 1,348 |
| — |
| 1,348 |
|
| Non-agency commercial mortgage-backed securities | 1,156 |
| — |
| 1,142 |
| — |
| 1,142 |
|
| U.S. Treasury securities | 223 |
| — |
| 217 |
| — |
| 217 |
|
| Certificates of deposit | 200 |
| — |
| 201 |
| — |
| 201 |
|
| Foreign government agency securities | 50 |
| — |
| 49 |
| — |
| 49 |
|
| Other | 10 |
| — |
| 10 |
| — |
| 10 |
|
| Total held to maturity securities | 144,009 |
| — |
| 142,038 |
| — |
| 142,038 |
|
| Bank loans — net: | | | | | |
| First Mortgages | 10,370 |
| — |
| 10,193 |
| — |
| 10,193 |
|
| HELOCs | 1,500 |
| — |
| 1,583 |
| — |
| 1,583 |
|
| Pledged asset lines | 4,561 |
| — |
| 4,561 |
| — |
| 4,561 |
|
| Other | 178 |
| — |
| 178 |
| — |
| 178 |
|
| Total bank loans — net | 16,609 |
| — |
| 16,515 |
| — |
| 16,515 |
|
| Other assets | 460 |
| — |
| 460 |
| — |
| 460 |
|
| Total | $ | 211,804 |
| $ | — |
| $ | 209,739 |
| $ | — |
| $ | 209,739 |
|
| Liabilities | | | | | |
| Bank deposits | $ | 231,423 |
| $ | — |
| $ | 231,423 |
| $ | — |
| $ | 231,423 |
|
| Payables to brokers, dealers, and clearing organizations | 1,831 |
| — |
| 1,831 |
| — |
| 1,831 |
|
| Payables to brokerage clients | 32,726 |
| — |
| 32,726 |
| — |
| 32,726 |
|
| Accrued expenses and other liabilities | 1,370 |
| — |
| 1,370 |
| — |
| 1,370 |
|
| Long-term debt | 6,878 |
| — |
| 6,827 |
| — |
| 6,827 |
|
| Total | $ | 274,228 |
| $ | — |
| $ | 274,177 |
| $ | — |
| $ | 274,177 |
|
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
| | | | | | | | | | | | | | | | | | | | | |
| | | | | Quoted Prices | | | | | | | |
| | | | | in Active Markets | | Significant | | Significant | | | |
| | | for Identical | | Other Observable | | Unobservable | | |
| | Carrying | | Assets | | Inputs | | Inputs | | Balance at |
December 31, 2014 | | Amount | | (Level 1) | | (Level 2) | | (Level 3) | | Fair Value |
Assets: | | | | | | | | | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 9,189 | | | $ | - | | | | $ | 9,189 | | | | $ | - | | | $ | 9,189 |
Cash and investments segregated and | | | | | | | | | | | | | | | | | | | | | |
on deposit for regulatory purposes | | | 14,466 | | | | - | | | | | 14,466 | | | | | - | | | | 14,466 |
Receivables from brokers, dealers, and | | | | | | | | | | | | | | | | | | | | | |
clearing organizations | | | 469 | | | | - | | | | | 469 | | | | | - | | | | 469 |
Receivables from brokerage clients – net | | | 15,666 | | | | - | | | | | 15,666 | | | | | - | | | | 15,666 |
Securities held to maturity: | | | | | | | | | | | | | | | | | | | | | |
U.S. agency mortgage-backed securities | | | 33,388 | | | | - | | | | | 33,745 | | | | | - | | | | 33,745 |
Non-agency commercial mortgage-backed | | | | | | | | | | | | | | | | | | | | | |
securities | | | 1,001 | | | | - | | | | | 998 | | | | | - | | | | 998 |
Total securities held to maturity | | | 34,389 | | | | - | | | | | 34,743 | | | | | - | | | | 34,743 |
Bank loans: (1) | | | | | | | | | | | | | | | | | | | | | |
Residential real estate mortgages | | | 8,127 | | | | - | | | | | 8,158 | | | | | - | | | | 8,158 |
Home equity loans and lines of credit | | | 2,955 | | | | - | | | | | 3,026 | | | | | - | | | | 3,026 |
Pledged asset lines | | | 2,320 | | | | - | | | | | 2,320 | | | | | - | | | | 2,320 |
Other | | | 39 | | | | - | | | | | 38 | | | | | - | | | | 38 |
Total bank loans | | | 13,441 | | | | - | | | | | 13,542 | | | | | - | | | | 13,542 |
Other assets | | | 76 | | | | - | | | | | 76 | | | | | - | | | | 76 |
Total | | $ | 87,696 | | | $ | - | | | | $ | 88,151 | | | | $ | - | | | $ | 88,151 |
Liabilities: | | | | | | | | | | | | | | | | | | | | | |
Bank deposits | | $ | 102,815 | | | $ | - | | | | $ | 102,815 | | | | $ | - | | | $ | 102,815 |
Payables to brokers, dealers, and clearing | | | | | | | | | | | | | | | | | | | | | |
organizations | | | 2,004 | | | | - | | | | | 2,004 | | | | | - | | | | 2,004 |
Payables to brokerage clients | | | 34,305 | | | | - | | | | | 34,305 | | | | | - | | | | 34,305 |
Accrued expenses and other liabilities | | | 687 | | | | - | | | | | 687 | | | | | - | | | | 687 |
Long-term debt | | | 1,899 | | | | - | | | | | 2,010 | | | | | - | | | | 2,010 |
Total | | $ | 141,710 | | | $ | - | | | | $ | 141,821 | | | | $ | - | | | $ | 141,821 |
(1)
| The carrying value of bank loans excludes the allowance for loan losses of $42 million at December 31, 2014.
|
18.
|
| | | | | | | | | | | | | | | |
| December 31, 2017 | Carrying
Amount | Level 1 | Level 2 | Level 3 | Balance at
Fair Value |
| Assets | | | | | |
| Cash and cash equivalents | $ | 11,490 |
| $ | — |
| $ | 11,490 |
| $ | — |
| $ | 11,490 |
|
| Cash and investments segregated and on deposit for regulatory purposes | 9,277 |
| — |
| 9,277 |
| — |
| 9,277 |
|
| Receivables from brokers, dealers, and clearing organizations | 649 |
| — |
| 649 |
| — |
| 649 |
|
| Receivables from brokerage clients — net | 20,568 |
| — |
| 20,568 |
| — |
| 20,568 |
|
| Held to maturity securities: | | | | | |
| U.S. agency mortgage-backed securities | 101,197 |
| — |
| 100,453 |
| — |
| 100,453 |
|
| Asset-backed securities | 12,937 |
| — |
| 13,062 |
| — |
| 13,062 |
|
| Corporate debt securities | 4,078 |
| — |
| 4,086 |
| — |
| 4,086 |
|
| U.S. state and municipal securities | 1,247 |
| — |
| 1,304 |
| — |
| 1,304 |
|
| Non-agency commercial mortgage-backed securities | 994 |
| — |
| 999 |
| — |
| 999 |
|
| U.S. Treasury securities | 223 |
| — |
| 220 |
| — |
| 220 |
|
| Certificates of deposit | 200 |
| — |
| 200 |
| — |
| 200 |
|
| Foreign government agency securities | 50 |
| — |
| 49 |
| — |
| 49 |
|
| Total held to maturity securities | 120,926 |
| — |
| 120,373 |
| — |
| 120,373 |
|
| Bank loans — net: | | | | | |
| First Mortgages | 10,000 |
| — |
| 9,917 |
| — |
| 9,917 |
|
| HELOCs | 1,935 |
| — |
| 2,025 |
| — |
| 2,025 |
|
| Pledged asset lines | 4,369 |
| — |
| 4,369 |
| — |
| 4,369 |
|
| Other | 174 |
| — |
| 174 |
| — |
| 174 |
|
| Total bank loans — net | 16,478 |
| — |
| 16,485 |
| — |
| 16,485 |
|
| Other assets | 781 |
| — |
| 781 |
| — |
| 781 |
|
| Total | $ | 180,169 |
| $ | — |
| $ | 179,623 |
| $ | — |
| $ | 179,623 |
|
| Liabilities | | | | | |
| Bank deposits | $ | 169,656 |
| $ | — |
| $ | 169,656 |
| $ | — |
| $ | 169,656 |
|
| Payables to brokers, dealers, and clearing organizations | 1,287 |
| — |
| 1,287 |
| — |
| 1,287 |
|
| Payables to brokerage clients | 31,243 |
| — |
| 31,243 |
| — |
| 31,243 |
|
| Accrued expenses and other liabilities | 1,463 |
| — |
| 1,463 |
| — |
| 1,463 |
|
| Short-term borrowings | 15,000 |
| — |
| 15,000 |
| — |
| 15,000 |
|
| Long-term debt | 4,753 |
| — |
| 4,811 |
| — |
| 4,811 |
|
| Total | $ | 223,402 |
| $ | — |
| $ | 223,460 |
| $ | — |
| $ | 223,460 |
|
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
17. Stockholders’ Equity
The Company
CSC did not issue any shares of common stock
through external offerings during
2015, 2014,2018, 2017, or
2013, respectively.The Company2016.
On October 25, 2018, CSC publicly announced that its Board of Directors terminated the existing two share repurchase authorizations and replaced them with a new authorization to repurchase up to $1.0 billion of common stock. CSC repurchased 22 million shares for $1.0 billion in 2018, completing all repurchases under this authorization. There were no repurchases of CSC’s common stock in 2018 prior to the fourth quarter, or in 2017.
CSC was authorized to issue 9,940,000 shares of preferred stock, $0.01 par value, at December 31, 20152018 and 2014.2017. The Company’sfollowing is a summary of CSC’s non-cumulative perpetual preferred stock issuedoutstanding as of such dates:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Dividend Rate in Effect at December 31, 2018 | | Date at Which Dividend Rate Becomes Floating | | Floating Annual Rate of Three-month LIBOR plus: |
| | Shares Issued and Outstanding (In thousands) at December 31, | Liquidation Preference Per Share | Carrying Value at December 31, | | Earliest Redemption Date |
| | 2018 (1) | | 2017 (1) | | 2018 | | 2017 | Issue Date |
| Fixed-rate: | | | | | | | | | | | | | | |
| Series C | 600 |
| | 600 |
| | $ | 1,000 |
| $ | 585 |
| | $ | 585 |
| 08/03/15 | 6.000 | % | 12/01/20 | N/A | | N/A |
|
| Series D | 750 |
| | 750 |
| | 1,000 |
| 728 |
| | 728 |
| 03/07/16 | 5.950 | % | 06/01/21 | N/A | | N/A |
|
| Fixed-to-floating-rate: | | | | | | | | | | | | | | |
| Series A | 400 |
| | 400 |
| | 1,000 |
| 397 |
| | 397 |
| 01/26/12 | 7.000 | % | 02/01/22 | 02/01/22 | | 4.820 | % |
| Series E | 6 |
| | 6 |
| | 100,000 |
| 591 |
| | 591 |
| 10/31/16 | 4.625 | % | 03/01/22 | 03/01/22 | | 3.315 | % |
| Series F | 5 |
| | 5 |
| | 100,000 |
| 492 |
| | 492 |
| 10/31/17 | 5.000 | % | 12/01/27 | 12/01/27 | | 2.575 | % |
| Total Preferred Stock | 1,761 |
| | 1,761 |
| |
|
| $ | 2,793 |
| | $ | 2,793 |
| | | | | | |
(1) Represented by depositary shares, except for Series A.
N/A Not applicable.
Dividends on CSC’s preferred stock are not cumulative and
outstanding is as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | |
December 31, | 2015 | | | 2014 |
| Shares | | | | | | | | | | | Shares | | | | | | | | |
| Issued and | | Liquidation | | | | | | | | | Issued and | | Liquidation | | | | | | |
| Outstanding | | Preference | | Liquidation | | Carrying | | | Outstanding | | Preference | | Liquidation | | Carrying |
| (In thousands) | | Per Share | | Preference | | Value | | | (In thousands) | | Per Share | | Preference | | Value |
Series A | 400 | | | | $ | 1,000 | | $ | 400 | | $ | 396 | | | 400 | | | | $ | 1,000 | | $ | 400 | | $ | 395 |
Series B | 485 | | | | | 1,000 | | | 485 | | | 480 | | | 485 | | | | | 1,000 | | | 485 | | | 477 |
Series C | 600 | | | | | 1,000 | | | 600 | | | 583 | | | - | | | | | - | | | - | | | - |
Total Preferred Stock | 1,485 | | | | | | | $ | 1,485 | | $ | 1,459 | | | 885 | | | | | | | $ | 885 | | $ | 872 |
The Series A Preferred Stock has no stated maturity and haswill only be paid on a fixedseries of preferred stock for a dividend rate of 7.000% until February 2022 and a floating rate equal to three-month LIBOR plus 4.820% thereafter. During the fixed rate period dividends, if declared will be
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
payable semi-annually in arrears. During the floating rate period, dividends, if declared, will be payable quarterly in arrears. Dividends are not cumulative.by CSC’s Board of Directors. Under the terms of the Series A Preferred Stock, the Company’seach series of preferred stock, CSC’s ability to pay dividends on, make distributions with respect to, or to repurchase, redeem or acquire its common stock or any preferred stock ranking on parity with or junior to the Series A Preferred Stock,series of preferred stock, is subject to restrictions in the event that the CompanyCSC does not declare and either pay or set aside a sum sufficient for payment of dividends on the Series A Preferred Stockseries of preferred stock for the immediately preceding dividend period. The Series A Preferred Stock is redeemable
Dividends on fixed-rate preferred stock are payable quarterly. Dividends on fixed-to-floating-rate preferred stock are payable semiannually while at the Company’sa fixed rate, and will become payable quarterly after converting to a floating rate.
Redemption Rights
Each series of CSC’s stock may be redeemed at CSC’s option
in whole or in part, on any dividend payment date on or after
February 1, 2022 or, in whole but not in part, within 90 daysthe earliest redemption date for that series. All outstanding preferred stock series may also be redeemed following a
regulatory capital“capital treatment event,
” as
defineddescribed in
its Certificate of Designations.The Series B Preferred Stock has no stated maturity and has a fixed dividend rate of 6.00%. Dividends, if declared, will be payable quarterly in arrears. Dividends are not cumulative. Under the terms of each series set forth in the Series B Preferred Stock, the Company’s ability to pay dividends on, make distributions with respect to, or to repurchase, redeem or acquire its common stock or anyrelevant certificate of designations. Any redemption of CSC’s preferred stock ranking on parity with or junior to the Series B Preferred Stock, is subject to restrictionsapproval from the Federal Reserve.
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in
the event that the Company does not declare and either payMillions, Except Per Share Data, Option Price Amounts, Ratios, or
set aside a sum sufficient for payment of dividends on the Series B Preferred Stock for the immediately preceding dividend period. The Series B Preferred Stock is redeemable at the Company’s option, in whole or in part, on any dividend payment date on or after September 1, 2017 or, in whole but not in part, within 90 days following a regulatory capital treatment event as
defined in its Certificate of Designations.On August 3, 2015, the Company issued and sold 24 million depositary shares, each representing a 1/40th ownership interest in a share of 6.00% non-cumulative perpetual preferred stock, Series C, $0.01 par value, with a liquidation preference of $1,000 per share (equivalent to $25 per depositary share).
The Series C Preferred Stock has no stated maturity and a fixed dividend rate of 6.00%. Dividends, if declared, will be payable quarterly in arrears. Dividends are not cumulative. Under the terms of the Series C Preferred Stock, the Company’s ability to pay dividends on, make distributions with respect to, or to repurchase, redeem or acquire its common stock or any preferred stock ranking on parity with or junior to the Series C Preferred Stock, is subject to restrictions in the event that the Company does not declare and either pay or set aside a sum sufficient for payment of dividends on the Series C Preferred Stock for the immediately preceding dividend period. The Series C Preferred Stock is redeemable at the Company’s option, in whole or in part, on any dividend payment date on or after December 1, 2020 or, in whole but not in part, within 90 days following a regulatory capital treatment event as defined in its Certificate of Designations.
19.Accumulated Other Comprehensive Income
Accumulated other comprehensive incomeNoted)
| |
| 18. | Accumulated Other Comprehensive Income |
AOCI represents cumulative gains and losses that are not reflected in earnings. The components of other comprehensive income (loss) are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Year Ended December 31, | 2015 | | 2014 | | 2013 |
| Before | | Tax | | Net of | | Before | | Tax | | Net of | | Before | | Tax | | Net of |
| tax | | effect | | tax | | tax | | effect | | tax | | tax | | effect | | tax |
Change in net unrealized gain on | | | | | | | | | | | | | | | | | | | | | | | | | | |
securities available for sale: | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net unrealized gain (loss) | $ | (477) | | $ | 178 | | $ | (299) | | $ | 255 | | $ | (95) | | $ | 160 | | $ | (468) | | $ | 176 | | $ | (292) |
Reclassification of impairment charges | | | | | | | | | | | | | | | | | | | | | | | | | | |
included in net impairment losses on | | | | | | | | | | | | | | | | | | | | | | | | | | |
securities | | - | | | - | | | - | | | 1 | | | (1) | | | - | | | 10 | | | (4) | | | 6 |
Other reclassifications included in | | | | | | | | | | | | | | | | | | | | | | | | | | |
other revenue | | - | | | - | | | - | | | (7) | | | 3 | | | (4) | | | (7) | | | 3 | | | (4) |
Change in net unrealized gain on | | | | | | | | | | | | | | | | | | | | | | | | | | |
securities available for sale | | (477) | | | 178 | | | (299) | | | 249 | | | (93) | | | 156 | | | (465) | | | 175 | | | (290) |
Other | | - | | | - | | | - | | | - | | | - | | | - | | | 1 | | | - | | | 1 |
Other comprehensive income (loss) | $ | (477) | | $ | 178 | | $ | (299) | | $ | 249 | | $ | (93) | | $ | 156 | | $ | (464) | | $ | 175 | | $ | (289) |
- 89 -
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | 2018 | | 2017 | | 2016 |
| | Before
tax | Tax
effect | Net of
tax | | Before
tax | Tax
effect | Net of
tax | | Before
tax | Tax
effect | Net of
tax |
Change in net unrealized gain (loss) on available for
sale securities: | |
| |
| | | |
| |
| |
| | |
| |
| |
|
| Net unrealized gain (loss) | $ | (123 | ) | $ | 30 |
| $ | (93 | ) | | $ | 13 |
| $ | (7 | ) | $ | 6 |
| | $ | (44 | ) | $ | 16 |
| $ | (28 | ) |
Reclassification of net unrealized loss on securities transferred to held to maturity (1) | — |
| — |
| — |
| | 227 |
| (85 | ) | 142 |
| | — |
| — |
| — |
|
| Other reclassifications included in other revenue | — |
| — |
| — |
| | (12 | ) | 4 |
| (8 | ) | | (4 | ) | 2 |
| (2 | ) |
Change in net unrealized gain (loss) on held to maturity
securities: | | | | | | | | | | | |
Reclassification of net unrealized loss on securities transferred from available for sale (1) | — |
| — |
| — |
| | (227 | ) | 85 |
| (142 | ) | | — |
| — |
| — |
|
Amortization of amounts previously recorded upon transfer
from available for sale | 35 |
| (8 | ) | 27 |
| | 31 |
| (11 | ) | 20 |
| | — |
| — |
| — |
|
| Other | (1 | ) | — |
| (1 | ) | | (11 | ) | 4 |
| (7 | ) | | 1 |
| — |
| 1 |
|
| Other comprehensive income (loss) | $ | (89 | ) | $ | 22 |
| $ | (67 | ) | | $ | 21 |
| $ | (10 | ) | $ | 11 |
| | $ | (47 | ) | $ | 18 |
| $ | (29 | ) |
(1) See Note 6 for discussion of the transfer of securities from the AFS category to the HTM category during the first quarter of 2017.
AOCI balances are as follows:
|
| | | |
| | Total AOCI |
| Balance at December 31, 2015 | $ | (134 | ) |
| Net unrealized gain (loss) on available for sale securities | (30 | ) |
| Other changes | 1 |
|
| Balance at December 31, 2016 | $ | (163 | ) |
| Available for sale securities: | |
| Net unrealized gain (loss) | 6 |
|
| Reclassification of net unrealized loss on securities transferred to held to maturity | 142 |
|
| Other reclassifications included in other revenue | (8 | ) |
| Held to maturity securities: | |
| Reclassification of net unrealized loss on securities transferred from available for sale | (142 | ) |
| Amortization of amounts previously recorded upon transfer to held to maturity from available for sale | 20 |
|
| Other | (7 | ) |
| Balance at December 31, 2017 | $ | (152 | ) |
| Adoption of accounting standards (Note 2) | (33 | ) |
| Available for sale securities: | |
| Net unrealized gain (loss) | (93 | ) |
| Held to maturity securities: | |
| Amortization of amounts previously recorded upon transfer to held to maturity from available for sale | 27 |
|
| Other | (1 | ) |
| Balance at December 31, 2018 | $ | (252 | ) |
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
Accumulated other comprehensive income balances are as follows:
| | | | | | | | | | | | | | | | | | |
| Net unrealized | | | | | | | | | Total |
| gain/(loss) on securities | | | | | | | | | accumulated other |
| available for sale | | | | Other | | | | comprehensive income |
Balance at December 31, 2012 | | $ | 299 | | | | | $ | (1) | | | | | | $ | 298 | | |
Other net changes | | | (290) | | | | | | 1 | | | | | | | (289) | | |
Balance at December 31, 2013 | | $ | 9 | | | | | $ | - | | | | | | $ | 9 | | |
Other net changes | | | 156 | | | | | | - | | | | | | | 156 | | |
Balance at December 31, 2014 | | $ | 165 | | | | | $ | - | | | | | | $ | 165 | | |
Other net changes | | | (299) | | | | | | - | | | | | | | (299) | | |
Balance at December 31, 2015 | | $ | (134) | | | | | $ | - | | | | | | $ | (134) | | |
20.Employee Incentive, Retirement, and Deferred Compensation Plans
The Company’s stock
| |
| 19. | Employee Incentive, Retirement, Deferred Compensation, and Career Achievement Plans |
Schwab’s share-based incentive plans provide for granting options
restricted stock units, and restricted stock
awardsunits to employees, officers, and directors. In addition,
the Company offerswe offer retirement and employee stock purchase plans to eligible employees and
sponsorssponsor deferred compensation plans for eligible officers and non-employee directors.
A summary of
the Company’s stock-basedshare-based compensation
expense and related income tax benefit is as follows:
| | | | | | | | | | | | |
Year Ended December 31, | | | 2015 | | | 2014 | | | 2013 |
Stock option expense | | $ | 46 | | | $ | 44 | | | $ | 52 | |
Restricted stock unit expense | | | 83 | | | | 66 | | | | 60 | |
Employee stock purchase plan expense | | | 6 | | | | 5 | | | | 4 | |
Total stock-based compensation expense | | $ | 135 | | | $ | 115 | | | $ | 116 | |
Income tax benefit on stock-based compensation | | $ | (51) | | | $ | (43) | | | $ | (43) | |
|
| | | | | | | | | | | |
| Year Ended December 31, | 2018 | | 2017 | | 2016 |
| Stock option expense | $ | 51 |
| | $ | 50 |
| | $ | 45 |
|
Restricted stock unit expense (1) | 136 |
| | 94 |
| | 89 |
|
| Employee stock purchase plan expense | 10 |
| | 9 |
| | 7 |
|
| Total share-based compensation expense | $ | 197 |
| | $ | 153 |
| | $ | 141 |
|
Income tax benefit on share-based compensation expense (2) | $ | (47 | ) | | $ | (57 | ) | | $ | (53 | ) |
(1) Restricted stock unit expense in 2018 includes $36 million related to special stock awards issued to non-officer employees.
(2) Excludes income tax benefits due to the adoption of ASU 2016-09 of $46 million and $87 million in 2018 and 2017, respectively.
The Company issues shares for stock options and restricted stock awardsunits from treasury stock. At December 31, 2015,2018, the Company was authorized to grant up to 5768 million common shares under its existing stock incentive plans. Additionally, at December 31, 2015,2018, the Company had 4036 million shares reserved for future issuance under its employee stock purchase plan.
As of December 31, 2015,2018, there was $201$294 million of total unrecognized compensation cost net of forfeitures, related to outstanding stock options restricted stock awards, and restricted stock units, which is expected to be recognized through 20192022 with a remaining weighted-average service period of 2.8 years.1.8 years for stock options, 2.4 years for restricted stock units, and 0.3 years for performance stock units.
Options are granted for the purchase of shares of common stock at an exercise price not less than market value on the date of grant, and expire within seven or ten years from the date of grant. Options generally vest annually over a three-one- to five-yearfour-year period from the date of grant. Certain options were granted at an exercise price above the market value of common stock on the date of grant (i.e., premium-priced options).
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
The Company’s stockStock option activity is summarized below:
| | | | | | | | | | | | | | | | |
| | | | | | | | | | Weighted- | | | | |
| | | | | Weighted- | | Average | | | | |
| | | | | Average | | Remaining | | Aggregate | |
| Number | | Exercise Price | | Contractual | | Intrinsic | |
| of Options | | per Share | | Life (in years) | | Value | |
Outstanding at December 31, 2014 | | 41 | | | | $ | 17.74 | | | | | | | | | |
Granted | | 6 | | | | | 31.04 | | | | | | | | | |
Exercised | | (6) | | | | | 15.78 | | | | | | | | | |
Forfeited | | (1) | | | | | 21.06 | | | | | | | | | |
Expired | | - | | | | | 16.16 | | | | | | | | | |
Outstanding at December 31, 2015 | | 40 | | | | $ | 19.82 | | | | 6.62 | | | $ | 528 | |
Vested and expected to vest at December 31, 2015 | | 39 | | | | $ | 19.61 | | | | 6.55 | | | $ | 519 | |
Vested and exercisable at December 31, 2015 | | 26 | | | | $ | 16.46 | | | | 5.51 | | | $ | 425 | |
|
| | | | | | | | | | | | |
| | Number
of Options
(In millions) | | Weighted- Average Exercise Price
per Share | | Weighted- Average Remaining Contractual
Life (in years) | | Aggregate Intrinsic
Value |
| Outstanding at December 31, 2017 | 32 |
| | $ | 26.16 |
| | 6.38 | | $ | 814 |
|
| Granted | 4 |
| | 47.98 |
| | | | |
| Exercised | (6 | ) | | 21.65 |
| | | | |
Forfeited (1) | — |
| | 36.05 |
| | | | |
Expired (1) | — |
| | 19.05 |
| | | | |
| Outstanding at December 31, 2018 | 30 |
| | $ | 30.19 |
| | 6.27 | | $ | 373 |
|
| Vested and expected to vest at December 31, 2018 | 30 |
| | $ | 30.05 |
| | 6.24 | | $ | 373 |
|
| Vested and exercisable at December 31, 2018 | 19 |
| | $ | 23.70 |
| | 4.86 | | $ | 331 |
|
(1) Number of options were less than 500 thousand.
The aggregate intrinsic value in the table above represents the difference between CSC’s closing stock price and the exercise price of each in-the-money option on the last trading day of the period presented.
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
Information on stock options granted and exercised is presented below:
| | | | | | | | | | | | |
Year Ended December 31, | | | 2015 | | | 2014 | | | 2013 |
Weighted-average fair value of options granted per share | | $ | 8.56 | | | $ | 7.82 | | | $ | 6.33 | |
Cash received from options exercised | | | 90 | | | | 189 | | | | 258 | |
Tax benefit realized on options exercised | | | 22 | | | | 8 | | | | - | |
Aggregate intrinsic value of options exercised | | | 90 | | | | 86 | | | | 82 | |
Management uses a binomial
|
| | | | | | | | | | | |
| Year Ended December 31, | 2018 | | 2017 | | 2016 |
| Weighted-average fair value of options granted per share | $ | 14.16 |
| | $ | 13.04 |
| | $ | 8.73 |
|
| Cash received from options exercised | 125 |
| | 171 |
| | 144 |
|
| Tax benefit realized on options exercised | 35 |
| | 70 |
| | 38 |
|
| Aggregate intrinsic value of options exercised | 189 |
| | 241 |
| | 149 |
|
We use an option pricing model to estimate the fair value of options granted. The binomial model takes into account the contractual term of the stock option, expected volatility, dividend yield, and the risk-free interest rate. Expected volatility is based on the implied volatility of publicly-traded options on CSC’s stock. Dividend yield is based on the average historical CSC dividend yield. The risk-free interest rate is based on the yield of a U.S. Treasury zero-coupon issue with a remaining term similar to the contractual term of the option. Management usesWe use historical option exercise data, which includes employee termination data, to estimate the probability of future option exercises. Management uses the Black-Scholes model to solve for the expected life of options valued with the binomial model presented below. The assumptions used to value the Company’s options granted during the years presented and their expected lives were as follows: | | | | | | | | | | | | |
Year Ended December 31, | | | 2015 | | | 2014 | | | 2013 |
Weighted-average expected dividend yield | | | 1.22 | % | | | 1.20 | % | | | 1.13 | % |
Weighted-average expected volatility | | | 28 | % | | | 28 | % | | | 28 | % |
Weighted-average risk-free interest rate | | | 2.2 | % | | | 2.4 | % | | | 2.5 | % |
Expected life (in years) | | | 4.7 – 7.5 | | | | 4.4 – 7.2 | | | | 4.6 – 7.9 | |
|
| | | | | | | | |
| Year Ended December 31, | 2018 | | 2017 | | 2016 |
| Weighted-average expected dividend yield | 1.42 | % | | 1.06 | % | | 1.22 | % |
| Weighted-average expected volatility | 33 | % | | 34 | % | | 30 | % |
| Weighted-average risk-free interest rate | 3.0 | % | | 2.1 | % | | 1.8 | % |
| Expected life (in years) | 4.0 - 5.2 |
| | 4.1 - 5.3 |
| | 4.7 - 7.3 |
|
Restricted stock units are awards that entitle the holder to receive shares of CSC’s common stock following a vesting period. Restricted stock units are restricted from transfer or sale and generally vest annually over a
three-one- to
five-yearfour-year period, while
some vest based uponperformance-based restricted stock units also require the Company
achievingachieve certain financial or other
measures.measures prior to vesting. The fair value of restricted stock units is based on the market price of the Company’s stock on the date of grant. The grant date fair value is amortized to compensation expense on a straight-line basis over the requisite service period. The fair value of the restricted stock units that vested during each of the years
2015, 2014,2018, 2017, and
20132016 was
$126$166 million,
$116$127 million, and
$78$105 million, respectively.
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
The Company’s restricted stock units activity is summarized below:
| | | | | | | | |
| | | | | Weighted- | |
| | | | | Average Grant | |
| | Number | | Date Fair Value | |
| | of Units | | per Unit | |
Outstanding at December 31, 2014 | | 10 | | | $ | 20.66 | | |
Granted | | 3 | | | | 30.84 | | |
Vested | | (4) | | | | 17.95 | | |
Forfeited | | (1) | | | | 21.25 | | |
Outstanding at December 31, 2015 | | 8 | | | $ | 25.84 | | |
|
| | | | | | |
| | Number
of Units
(In millions) | | Weighted- Average Grant Date Fair Value
per Unit |
| Outstanding at December 31, 2017 | 7 |
| | $ | 35.16 |
|
Granted (1) | 3 |
| | 47.03 |
|
Vested (1) | (3 | ) | | 35.95 |
|
Forfeited (2) | — |
| | 36.10 |
|
| Outstanding at December 31, 2018 | 7 |
| | $ | 40.64 |
|
(1) Includes 781 thousand units related to special non-officer employee stock awards, with a weighted-average grant date fair value of $45.87. All units granted vested immediately.
(2) Number of units were less than 500 thousand.
Employees of the Company can participate in the Company’sSchwab’s qualified retirement plan, the SchwabPlan® Retirement Savings and Investment Plan. The Company may match certain employee contributions or make additional contributions to this plan at its discretion. The Company’s total expense was $78$105 million, $68$92 million, and $63$83 million in 2015, 2014,2018, 2017, and 2013,2016, respectively.
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
Deferred Compensation Plans
The Company’s
Schwab’s deferred compensation plan for officers permits participants to defer the receipt of certain cash compensation. The
Company’s deferred compensation plan for non-employee directors permits participants to defer receipt of all or a portion of their director fees and to receive either a grant of stock options, or upon ceasing
to serveservice as a director, the number of shares of CSC’s common stock that would have resulted from investing the deferred fee amount into CSC’s common stock. The deferred compensation liability was
$129$144 million and
$132$160 million at December 31,
20152018 and
2014,2017, respectively.
21.FC Career Achievement Plan
The FC career achievement plan is a noncontributory, unfunded, nonqualified plan for eligible FCs. An FC is eligible for earned cash payments after retirement contingent upon meeting certain performance levels, tenure, age, and client transitioning requirements. Allocations to the plan are calculated annually based on performance levels achieved and eligible compensation and are subject to general creditors of the Company. Full vesting occurs when an FC reaches 60 years of age and has at least ten years of service with the Company.
The following table presents the changes in projected benefit obligation:
|
| | | | | | | |
| December 31, | 2018 | | 2017 |
| Projected benefit obligation at beginning of year | $ | 44 |
| | $ | 26 |
|
Benefit cost (1) | 11 |
| | 9 |
|
Actuarial (gain)/loss (2) | 1 |
| | 9 |
|
Projected benefit obligation at end of year (3) | $ | 56 |
| | $ | 44 |
|
(1) Includes service cost and interest cost, which are recognized in compensation and benefits expense and other expense, respectively, in the consolidated statements of income.
(2) Actuarial (gain)/loss is reflected in the consolidated statements of comprehensive income and is included in AOCI on the consolidated balance sheets.
(3) This amount is recognized as a liability on the consolidated balance sheets and also depicts the accumulated benefit obligation.
Taxes on IncomeThe components of
On December 22, 2017, the Tax Act was signed into law. Among other things, the Tax Act lowered the federal corporate income tax expense arerate from 35% to 21%, effective for tax years including or commencing January 1, 2018. Schwab’s effective tax rate for the years ended December 31, 2018, 2017, and 2016 was 23.1%, 35.5%, and 36.9%, respectively, resulting from the impact of the Tax Act of 2017.
Also as
follows:a result of the Tax Act, Schwab recognized a $46 million one-time non-cash charge to taxes on income in the fourth quarter of 2017 associated with the remeasurement of net deferred tax assets and other tax adjustments related to the Tax Act. During 2018, we concluded our analysis and accounting for all remaining impacts of the Tax Act, including the state tax effect of adjustments made to federal temporary differences, resulting in no additional material impacts. | | | | | | | | | | | | |
Year Ended December 31, | | | 2015 | | | 2014 | | | 2013 |
Current: | | | | | | | | | | | | |
Federal | | $ | 740 | | | $ | 747 | | | $ | 598 | |
State | | | 99 | | | | 72 | | | | 57 | |
Total current | | | 839 | | | | 819 | | | | 655 | |
Deferred: | | | | | | | | | | | | |
Federal | | | (6) | | | | (23) | | | | (20) | |
State | | | (1) | | | | (2) | | | | (1) | |
Total deferred | | | (7) | | | | (25) | | | | (21) | |
Taxes on income | | $ | 832 | | | $ | 794 | | | $ | 634 | |
- 92 -
As of January 1, 2018, Schwab adopted new accounting guidance that decreased AOCI and increased retained earnings by $33 million for the reclassification of certain impacts of the Tax Act as described in Note 2. Schwab also adopted new revenue recognition guidance as of January 1, 2018, which resulted in recording an asset for capitalized contract costs of $219 million and a related deferred tax liability of $52 million as described in Note 2. As of December 31, 2018, the deferred tax liability related to the capitalized contract costs was $60 million.
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
The components of taxes on income are as follows:
|
| | | | | | | | | | | |
| Year Ended December 31, | 2018 | | 2017 | | 2016 |
| Current: | | | | | |
| Federal | $ | 847 |
| | $ | 1,132 |
| | $ | 980 |
|
| State | 159 |
| | 106 |
| | 109 |
|
| Total current | 1,006 |
| | 1,238 |
| | 1,089 |
|
| Deferred: | | | | | |
| Federal | 42 |
| | 58 |
| | 13 |
|
| State | 7 |
| | — |
| | 2 |
|
| Total deferred | 49 |
| | 58 |
| | 15 |
|
| Taxes on income | $ | 1,055 |
| | $ | 1,296 |
| | $ | 1,104 |
|
The temporary differences that created deferred tax assets and liabilities are detailed below: | | | | | | | | | | | | |
December 31, | | | | | | | 2015 | | | 2014 |
Deferred tax assets: | | | | | | | | | | | | |
Employee compensation, severance, and benefits | | | | | | $ | 221 | | | $ | 213 | |
Net unrealized loss on securities available for sale | | | | | | | 80 | | | | - | |
Facilities lease commitments | | | | | | | 28 | | | | 30 | |
Reserves and allowances | | | | | | | 28 | | | | 25 | |
State and local taxes | | | | | | | 14 | | | | 12 | |
Net operating loss carryforwards | | | | | | | 6 | | | | 6 | |
Other | | | | | | | 1 | | | | - | |
Total deferred tax assets | | | | | | | 378 | | | | 286 | |
Valuation allowance | | | | | | | (4) | | | | (4) | |
Deferred tax assets – net of valuation allowance | | | | | | | 374 | | | | 282 | |
Deferred tax liabilities: | | | | | | | | | | | | |
Depreciation and amortization | | | | | | | (115) | | | | (125) | |
Net unrealized gain on securities available for sale | | | | | | | - | | | | (98) | |
Capitalized internal-use software development costs | | | | | | | (97) | | | | (76) | |
Deferred cancellation of debt income | | | | | | | (6) | | | | (9) | |
Deferred loan costs | | | | | | | (5) | | | | (7) | |
Deferred Senior Note exchange | | | | | | | (6) | | | | (6) | |
Total deferred tax liabilities | | | | | | | (229) | | | | (321) | |
Deferred tax asset (liability) – net (1) | | | | | | $ | 145 | | | $ | (39) | |
(1)
| Amounts are included in other assets and in accrued expenses and other liabilities at December 31, 2015 and 2014, respectively.
|
|
| | | | | | | |
| December 31, | 2018 | | 2017 |
| Deferred tax assets: | | | |
| Employee compensation, severance, and benefits | $ | 132 |
| | $ | 133 |
|
| Net unrealized loss on available for sale securities | 79 |
| | 57 |
|
| Reserves and allowances | 13 |
| | 15 |
|
| Facilities lease commitments | 12 |
| | 14 |
|
| State and local taxes | 21 |
| | 12 |
|
| Net operating loss carryforwards | 5 |
| | 5 |
|
| Other | 6 |
| | 3 |
|
| Total deferred tax assets | 268 |
| | 239 |
|
| Valuation allowance | (3 | ) | | (2 | ) |
| Deferred tax assets — net of valuation allowance | 265 |
| | 237 |
|
| Deferred tax liabilities: | | | |
| Capitalized internal-use software development costs | (98 | ) | | (89 | ) |
| Depreciation and amortization | (108 | ) | | (72 | ) |
| Capitalized contract costs | (60 | ) | | — |
|
| Total deferred tax liabilities | (266 | ) | | (161 | ) |
Deferred tax asset/(liability) — net (1) | $ | (1 | ) | | $ | 76 |
|
(1) Amounts are included in accrued expenses and other liabilities and in other assets on the consolidated balance sheets at December 31, 2018 and in other assets at December 31, 2017.
A reconciliation of the federal statutory income tax rate to the effective income tax rate is as follows:
| | | | | | | | | | | | |
Year Ended December 31, | | | 2015 | | | 2014 | | | 2013 |
Federal statutory income tax rate | | | 35.0 | % | | | 35.0 | % | | | 35.0 | % |
State income taxes, net of federal tax benefit | | | 2.6 | | | | 2.3 | | | | 2.3 | |
Other | | | (1.1) | | | | 0.2 | | | | (0.1) | |
Effective income tax rate | | | 36.5 | % | | | 37.5 | % | | | 37.2 | % |
A reconciliation
|
| | | | | | | | |
| Year Ended December 31, | 2018 | | 2017 | | 2016 |
| Federal statutory income tax rate | 21.0 | % | | 35.0 | % | | 35.0 | % |
| State income taxes, net of federal tax benefit | 3.0 |
| | 2.2 |
| | 2.4 |
|
| Equity compensation benefit | (1.0 | ) | | (2.4 | ) | | — |
|
Other (1) | 0.1 |
| | 0.7 |
| | (0.5 | ) |
| Effective income tax rate | 23.1 | % | | 35.5 | % | | 36.9 | % |
(1) 2017 includes the impact of one-time charge to taxes on income associated with the beginning and ending amount of unrecognized tax benefits is as follows:Tax Act. | | | | | | | | | | | | |
December 31, | | | | | | | 2015 | | | 2014 |
Balance at beginning of year | | | | | | $ | 11 | | | $ | 10 | |
Additions for tax positions related to the current year | | | | | | | 15 | | | | 1 | |
Additions for tax positions related to prior years | | | | | | | 26 | | | | 1 | |
Reductions due to lapse of statute of limitations | | | | | | | (4) | | | | (1) | |
Balance at end of year | | | | | | $ | 48 | | | $ | 11 | |
At December 31, 2015 and 2014, there are $41 million and $7 million, respectively, of unrecognized tax benefits that, if recognized, would affect the annual effective tax rate.
The Company recognizes interest accrued related to unrecognized tax benefits in tax expense and penalties in other expense. The Company had approximately $6 million and $1 million for the payment of interest and penalties accrued at December 31, 2015 and 2014, respectively.
The federal returns for 2011 through 2014 remain open to Federal tax examinations. The years open to examination by state and local governments vary by jurisdiction.
- 93 -
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
22.Earnings Per Common Share
EPS
A reconciliation of the beginning and ending amount of unrecognized tax benefits is computed usingas follows:
|
| | | | | | | |
| December 31, | 2018 | | 2017 |
| Balance at beginning of year | $ | 111 |
| | $ | 93 |
|
| Additions for tax positions related to the current year | 3 |
| | 22 |
|
| Additions for tax positions related to prior years | 3 |
| | 15 |
|
| Reductions for tax positions related to prior years | (4 | ) | | (2 | ) |
| Reductions due to lapse of statute of limitations | — |
| | — |
|
| Reductions for settlements with tax authorities | (1 | ) | | (17 | ) |
| Balance at end of year | $ | 112 |
| | $ | 111 |
|
Unrecognized tax benefits totaled $112 million and $111 million as of December 31, 2018 and 2017, respectively, $108 million and $104 million of which if recognized, would affect the two-class method. Preferred stock dividends,annual effective tax rate.
Interest and undistributed earningspenalties were accrued related to unrecognized tax benefits in tax expense. At December 31, 2018 and dividends allocated2017, we had accrued approximately $9 million and $5 million, respectively, for the payment of interest and penalties.
The Company and its subsidiaries are subject to participating securities are subtracted from net income in determining net income available to common stockholders. Basic EPS is calculated by dividing net income available to common stockholdersroutine examinations by the weighted-average number of common shares outstanding during the period.respective federal, state and applicable local jurisdictions’ taxing authorities. Federal returns for 2011 through 2017 remain subject to examination. The computation of diluted EPS is similaryears open to the computation of basic EPS except that the denominator is increased to include the number of additional common shares that would have been outstanding if dilutive potential common shares had been issued. Dilutive potential common shares include, if dilutive, the effect of outstanding stock optionsexamination by state and unvested restricted stock awards and units. EPS under the basic and diluted computations is as follows:local governments vary by jurisdiction. | | | | | | | | | | | | |
Year Ended December 31, | | | 2015 | | | 2014 | | | 2013 |
Net income | | $ | 1,447 | | | $ | 1,321 | | | $ | 1,071 | |
Preferred stock dividends and other (1) | | | (83) | | | | (60) | | | | (61) | |
Net income available to common stockholders | | $ | 1,364 | | | $ | 1,261 | | | $ | 1,010 | |
Weighted-average common shares outstanding — basic | | | 1,315 | | | | 1,303 | | | | 1,285 | |
Common stock equivalent shares related to stock incentive plans | | | 12 | | | | 12 | | | | 8 | |
Weighted-average common shares outstanding — diluted (2) | | | 1,327 | | | | 1,315 | | | | 1,293 | |
Basic EPS | | $ | 1.04 | | | $ | .96 | | | $ | .78 | |
Diluted EPS | | $ | 1.03 | | | $ | .95 | | | $ | .78 | |
(1)
| Includes preferred stock dividends and undistributed earnings and dividends allocated to non-vested restricted stock units.
|
(2)
| Antidilutive stock options and restricted stock awards excluded from the calculation of diluted EPS totaled 23 million, 24 million, and 34 million shares in 2015, 2014, and 2013, respectively.
|
23.
21. Regulatory Requirements
CSC is a savings and loan holding company and
Schwab Bank,CSB, CSC’s
primary depository institution subsidiary, is a federal savings bank. CSC is subject to examination, supervision, and regulation by the Federal Reserve.
Schwab BankCSB is subject to examination, supervision, and regulation by the OCC, as its primary regulator, the FDIC as its deposit insurer, and the
CFPB, as its conduct regulator.CFPB. CSC is required to serve as a source of strength for
Schwab Bank. On January 1, 2015, CSC became subject to regulatory capital requirements adopted by the Federal Reserve.Schwab BankCSB.
CSB is subject to various requirements and restrictions under federal and state laws, including regulatory capital requirements and requirements that restrict and govern the terms of affiliate transactions, such as extensions of credit to, or asset purchases from CSC or its other subsidiaries by
Schwab Bank.CSB. In addition,
Schwab BankCSB is required to provide notice to and may be required to obtain approval of the OCC and the Federal Reserve to declare dividends to CSC. The federal banking agencies have broad powers to enforce these regulations, including the power to terminate deposit insurance, impose substantial fines and other civil and criminal penalties, and appoint a conservator or receiver. Under the Federal Deposit Insurance Act,
Schwab BankCSB could be subject to restrictive actions if it were to fall within one of the lowest three of five capital categories. CSC and
Schwab BankCSB are required to maintain minimum capital levels as specified in federal banking regulations. Failure to meet the minimum levels could result in certain mandatory, and possibly additional discretionary actions by the regulators that, if undertaken, could have a direct material effect on CSC and
Schwab Bank.CSB. At December 31,
2015,2018, both CSC and
Schwab BankCSB met all of their respective capital requirements.
Certain events, such as growth in bank deposits and regulatory discretion, could adversely affect CSC’s or Schwab Bank’s ability to meet future capital requirements.
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
The regulatory capital and ratios for CSC
(consolidated) and
Schwab BankCSB are as follows:
| | | | | | | | | | | | | | | | | | |
| | | | | | | | Minimum to be | | Minimum Capital |
| | Actual | | Well Capitalized | | Requirement |
| | Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio |
December 31, 2015 | | | | | | | | | | | | | | | | | | |
CSC (1) | | | | | | | | | | | | | | | | | | |
Common Equity Tier 1 Risk-Based Capital | | $ | 10,851 | | 18.2 | % | | | N/A | | | | | $ | 2,681 | | 4.5 | % |
Tier 1 Risk-Based Capital | | | 12,310 | | 20.7 | % | | | N/A | | | | | | 3,575 | | 6.0 | % |
Total Risk-Based Capital | | | 12,342 | | 20.7 | % | | | N/A | | | | | | 4,766 | | 8.0 | % |
Tier 1 Leverage | | | 12,310 | | 7.1 | % | | | N/A | | | | | | 6,912 | | 4.0 | % |
Schwab Bank (2) | | | | | | | | | | | | | | | | | | |
Common Equity Tier 1 Risk-Based Capital | | $ | 9,314 | | 18.1 | % | | $ | 3,349 | | 6.5 | % | | $ | 2,318 | | 4.5 | % |
Tier 1 Risk-Based Capital | | | 9,314 | | 18.1 | % | | | 4,121 | | 8.0 | % | | | 3,091 | | 6.0 | % |
Total Risk-Based Capital | | | 9,345 | | 18.1 | % | | | 5,152 | | 10.0 | % | | | 4,121 | | 8.0 | % |
Tier 1 Leverage | | | 9,314 | | 7.1 | % | | | 6,594 | | 5.0 | % | | | 5,275 | | 4.0 | % |
December 31, 2014 | | | | | | | | | | | | | | | | | | |
Schwab Bank (2) | | | | | | | | | | | | | | | | | | |
Tier 1 Risk-Based Capital | | $ | 7,700 | | 22.1 | % | | $ | 2,095 | | 6.0 | % | | $ | 1,397 | | 4.0 | % |
Total Risk-Based Capital | | | 7,744 | | 22.2 | % | | | 3,492 | | 10.0 | % | | | 2,793 | | 8.0 | % |
Tier 1 Leverage | | | 7,700 | | 6.9 | % | | | 5,548 | | 5.0 | % | | | 4,438 | | 4.0 | % |
(1)
| The ratios above reflect the impact of a change in approach related to the risk-weighting of the majority of the Company’s margin loan portfolio in accordance with the new capital requirements based on Basel III rules which became effective at the beginning of 2015.
|
(2)
| Due to the change in regulatory requirements, the December 31, 2015 ratios were calculated under the new capital requirements based on Basel III requirements and the December 31, 2014 ratios were calculated under the prior capital requirements based on Basel I requirements.
|
|
| | | | | | | | | | | | | | | | | | | | |
| | Actual | | Minimum to be
Well Capitalized | | Minimum Capital
Requirement |
| December 31, 2018 | Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio (1) |
| CSC | | | | | | | | | | | |
| Common Equity Tier 1 Risk-Based Capital | $ | 16,813 |
| | 17.6 | % | | N/A |
| | | | $ | 4,295 |
| | 4.5 | % |
| Tier 1 Risk-Based Capital | 19,606 |
| | 20.5 | % | | N/A |
| | | | 5,726 |
| | 6.0 | % |
| Total Risk-Based Capital | 19,628 |
| | 20.6 | % | | N/A |
| | | | 7,635 |
| | 8.0 | % |
| Tier 1 Leverage | 19,606 |
| | 7.1 | % | | N/A |
| | | | 11,058 |
| | 4.0 | % |
| CSB | | | | | | | | | | | |
| Common Equity Tier 1 Risk-Based Capital | $ | 15,832 |
| | 19.7 | % | | $ | 5,233 |
| | 6.5 | % | | $ | 3,623 |
| | 4.5 | % |
| Tier 1 Risk-Based Capital | 15,832 |
| | 19.7 | % | | 6,441 |
| | 8.0 | % | | 4,831 |
| | 6.0 | % |
| Total Risk-Based Capital | 15,853 |
| | 19.7 | % | | 8,051 |
| | 10.0 | % | | 6,441 |
| | 8.0 | % |
| Tier 1 Leverage | 15,832 |
| | 7.2 | % | | 11,044 |
| | 5.0 | % | | 8,836 |
| | 4.0 | % |
| | | | | | | | | | | | |
| December 31, 2017 | | | | | | | | | | | |
| CSC | | | | | | | | | | | |
| Common Equity Tier 1 Risk-Based Capital | $ | 14,630 |
| | 19.3 | % | | N/A |
| | | | $ | 3,414 |
| | 4.5 | % |
| Tier 1 Risk-Based Capital | 17,423 |
| | 23.0 | % | | N/A |
| | | | 4,552 |
| | 6.0 | % |
| Total Risk-Based Capital | 17,452 |
| | 23.0 | % | | N/A |
| | | | 6,069 |
| | 8.0 | % |
| Tier 1 Leverage | 17,423 |
| | 7.6 | % | | N/A |
| | | | 9,218 |
| | 4.0 | % |
| CSB | | | | | | | | | | | |
| Common Equity Tier 1 Risk-Based Capital | $ | 13,355 |
| | 20.1 | % | | $ | 4,324 |
| | 6.5 | % | | $ | 2,993 |
| | 4.5 | % |
| Tier 1 Risk-Based Capital | 13,355 |
| | 20.1 | % | | 5,321 |
| | 8.0 | % | | 3,991 |
| | 6.0 | % |
| Total Risk-Based Capital | 13,382 |
| | 20.1 | % | | 6,652 |
| | 10.0 | % | | 5,321 |
| | 8.0 | % |
| Tier 1 Leverage | 13,355 |
| | 7.1 | % | | 9,462 |
| | 5.0 | % | | 7,569 |
| | 4.0 | % |
(1) Under the Basel III capital rule, CSC and CSB are also required to maintain a capital conservation buffer above the regulatory minimum capital ratios. The capital conservation buffer was 1.875% in 2018, and became 2.5% on January 1, 2019. If the capital conservation buffer falls below the minimum requirement, the Company would be subject to limits on capital distributions and discretionary bonus payments to executive officers. For 2018, the minimum capital requirement plus capital conservation buffer for Common Equity Tier 1 Risk-Based Capital, Tier 1 Risk-Based Capital, and Total Risk-Based Capital ratios were 6.375%, 7.875%, and 9.875%, respectively. At December 31, 2018, both CSC’s and CSB’s capital levels exceeded the fully implemented capital conservation buffer requirement.
Based on
theirits regulatory capital ratios at December 31,
2015, CSC and Schwab Bank are2018, CSB is considered well capitalized (the highest category) under
theirits respective regulatory capital rules.
Schwab Bank was also considered well capitalized at December 31, 2014 under the previous regulatory capital rules then in effect. There are no conditions or events since December 31,
2015,2018 that management believes have changed
Schwab Bank’sCSB’s capital category.
The Federal Reserve requires
Schwab BankCSB to maintain reserve balances at the Federal Reserve
Bank based on its deposits that are considered to be transaction accounts.
Schwab Bank’sCSB’s average reserve
requirements were $1.4 billion and $1.3requirement was $1.6 billion in
20152018 and
2014, respectively.CSC’s principal broker-dealers are2017. In late 2017, Schwab acquired a federal savings bank charter which is now called Charles Schwab Premier Bank (formerly known as Charles Schwab Signature Bank). At December 31, 2018, the balance sheet of Charles Schwab Premier Bank consisted primarily of investment securities, and optionsXpress, Inc.held total assets of $15.2 billion. Charles Schwab and optionsXpress, Inc. are bothPremier Bank is subject to Rule 15c3-1 undersimilar regulatory guidelines and requirements, and seeks to maintain a Tier 1 Leverage Ratio similar to CSB.
CS&Co, a securities broker-dealer, is subject to the
Securities Exchange Act of 1934 (the Uniform Net Capital
Rule). Schwab and optionsXpress, Inc. computeRule. CS&Co computes its net capital under the alternative method permitted by the Uniform Net Capital Rule. This method requires the maintenance of minimum net capital, as defined, of the greater of 2% of aggregate debit balances arising from client transactions or a minimum dollar requirement
($250,000),of $250,000, which is based on the type of business conducted by the broker-dealer. Under the alternative method, a broker-dealer may not repay subordinated borrowings, pay cash dividends, or make any unsecured advances or loans
to its parent company or employees if such payment would result in a net capital amount of less than 5% of aggregate debit balances or less than 120% of its minimum dollar requirement.
optionsXpress, Inc. is also subject to Commodity Futures Trading Commission Regulation 1.17 (Reg. 1.17) under the Commodity Exchange Act, which also requires the maintenance of minimum net capital. optionsXpress, Inc., as a futures commission merchant, is required to maintain minimum net capital equal to the greater of its net capital requirement under Reg. 1.17 ($1 million), or the sum of 8% of the total risk margin requirements for all positions carried in client accounts and 8% of the total risk margin requirements for all positions carried in non-client accounts (as defined in Reg. 1.17).
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
Net capital and net capital requirements for
Schwab and optionsXpress, Inc.CS&Co are as follows:
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | Net Capital | |
| | | | | | Minimum | | | 2% of | | | in Excess of | |
| | | | | | Net Capital | | | Aggregate | | | Required | |
December 31, 2015 | | Net Capital | | Required | Debit Balances | Net Capital | |
Schwab | | $ | 1,746 | | | $ | 0.250 | | | $ | 358 | | | $ | 1,388 | | |
optionsXpress, Inc. | | | 244 | | | | 1 | | | | 7 | | | | 237 | | |
December 31, 2014 | | | | | | | | | | |
Schwab | | $ | 1,550 | | | $ | 0.250 | | | $ | 324 | | | $ | 1,226 | | |
optionsXpress, Inc. | | | 123 | | | | 1 | | | | 6 | | | | 117 | | |
Schwab and optionsXpress, Inc. are also subject to Rule 15c3-3 under the Securities Exchange Act of 1934 and other applicable regulations, which require them to maintain cash or qualified securities in a segregated reserve account for the exclusive benefit of clients.
|
| | | | | | | |
| December 31, | 2018 | | 2017 |
| Net capital | $ | 2,304 |
| | $ | 2,118 |
|
| Minimum net capital required | 0.250 |
| | 0.250 |
|
| 2% of aggregate debit balances | 436 |
| | 435 |
|
| Net capital in excess of required net capital | $ | 1,868 |
| | $ | 1,683 |
|
In accordance with
the SEC Customer Protection Rule,
15c3-3, Schwab and optionsXpress, Inc.CS&Co had portions of
theirits cash and investments segregated for the exclusive benefit of clients at December 31,
2015.2018. The SEC Customer Protection Rule requires broker-dealers to segregate client fully-paid securities and cash balances not collateralizing margin positions and not swept to money market funds or bank deposit accounts. Amounts included in cash and investments segregated and on deposit for regulatory purposes represent actual balances on deposit, whereas cash and investments required to be segregated and on deposit for regulatory purposes at December 31,
20152018 for
Schwab and optionsXpress, Inc.CS&Co totaled
$20.5$16.7 billion.
OnAs of January
5, 2016, Schwab and optionsXpress, Inc.3, 2019, CS&Co had deposited
a net amount of $1.4$3.7 billion of cash
and qualified securities into
theirits segregated reserve
bank accounts. Cash and investments required to be segregated and on deposit for regulatory purposes at December 31,
20142017 for
Schwab and optionsXpress, Inc.CS&Co totaled
$21.9$15.3 billion. On January
5, 2015, Schwab and optionsXpress, Inc. deposited a net amount of $1.7 billion3, 2018, $704 million of cash
and qualified securities was deposited into
theirthe segregated reserve
bank accounts.
24.
Segment InformationThe Company’s
Schwab’s two reportable segments are Investor Services and Advisor Services.
The CompanySchwab structures
itsthe operating segments according to its clients and the services provided to those clients. The Investor Services segment provides retail brokerage and banking services
to individual investors and retirement plan services,
andas well as other corporate brokerage
services.services, to businesses and their employees. The Advisor Services segment provides custodial, trading,
banking, and support services, as well as retirement business
services.services, to independent RIAs, independent retirement advisors, and recordkeepers. Revenues and expenses are allocated to the
Company’s two segments based on which segment services the client.
The accounting policies of the segments are the same as those described in
“Notes –Note 2.
Summary of Significant Accounting Policies.” For the computation of its segment information,
the CompanySchwab utilizes an activity-based costing model to allocate traditional income statement line item expenses (e.g., compensation and benefits, depreciation and amortization, and professional services) to the business activities driving segment expenses (e.g., client service, opening new accounts, or business development) and a funds transfer pricing methodology to allocate certain revenues.
The Company
Management evaluates the performance of its segments on a pre-tax basis, excluding significant non-recurring items and results of discontinued operations.basis. Segment assets and liabilities are not used for evaluating segment performance or in deciding how to allocate resources to segments. However, capital expenditures are used in resource allocation and are therefore disclosed. There are no revenues from transactions between the segments. Capital expenditures are reported gross, and are not net of proceeds from
Financial information for the
sale of fixed assets.segments is presented in the following table: |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Investor Services | | Advisor Services | | Total |
| Year Ended December 31, | 2018 | | 2017 | | 2016 | | 2018 | | 2017 | | 2016 | | 2018 | | 2017 | | 2016 |
| Net Revenues | | | | | | | | | | | | | | | | | |
| Net interest revenue | $ | 4,341 |
| | $ | 3,231 |
| | $ | 2,591 |
| | $ | 1,482 |
| | $ | 1,051 |
| | $ | 731 |
| | $ | 5,823 |
| | $ | 4,282 |
| | $ | 3,322 |
|
| Asset management and administration fees | 2,260 |
| | 2,344 |
| | 2,093 |
| | 969 |
| | 1,048 |
| | 962 |
| | 3,229 |
| | 3,392 |
| | 3,055 |
|
| Trading revenue | 475 |
| | 408 |
| | 524 |
| | 288 |
| | 246 |
| | 301 |
| | 763 |
| | 654 |
| | 825 |
|
| Other | 245 |
| | 217 |
| | 203 |
| | 72 |
| | 73 |
| | 73 |
| | 317 |
| | 290 |
| | 276 |
|
| Total net revenues | 7,321 |
| | 6,200 |
| | 5,411 |
| | 2,811 |
| | 2,418 |
| | 2,067 |
| | 10,132 |
| | 8,618 |
| | 7,478 |
|
| Expenses Excluding Interest | 4,145 |
| | 3,725 |
| | 3,380 |
| | 1,425 |
| | 1,243 |
| | 1,105 |
| | 5,570 |
| | 4,968 |
| | 4,485 |
|
| Income before taxes on income | $ | 3,176 |
| | $ | 2,475 |
| | $ | 2,031 |
| | $ | 1,386 |
| | $ | 1,175 |
| | $ | 962 |
| | $ | 4,562 |
| | $ | 3,650 |
| | $ | 2,993 |
|
| Capital expenditures | $ | 390 |
| | $ | 265 |
| | $ | 234 |
| | $ | 186 |
| | $ | 147 |
| | $ | 119 |
| | $ | 576 |
| | $ | 412 |
| | $ | 353 |
|
| Depreciation and amortization | $ | 186 |
| | $ | 203 |
| | $ | 180 |
| | $ | 120 |
| | $ | 66 |
| | $ | 54 |
| | $ | 306 |
| | $ | 269 |
| | $ | 234 |
|
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
Financial information for the Company’s reportable segments is presented in the following table:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Investor Services (1) | | Advisor Services (1) | | Unallocated | | Total |
Year Ended December 31, | 2015 | | 2014 | | 2013 | | 2015 | | 2014 | | 2013 | | 2015 | | 2014 | | 2013 | | 2015 | | 2014 | | 2013 |
Net Revenues: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Asset management and | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
administration fees | $ | 1,837 | | $ | 1,742 | | $ | 1,593 | | $ | 813 | | $ | 791 | | $ | 723 | | $ | - | | $ | - | | $ | (1) | | $ | 2,650 | | $ | 2,533 | | $ | 2,315 |
Net interest revenue | | 2,133 | | | 2,028 | | | 1,755 | | | 392 | | | 244 | | | 225 | | | - | | | - | | | - | | | 2,525 | | | 2,272 | | | 1,980 |
Trading revenue | | 556 | | | 606 | | | 609 | | | 310 | | | 301 | | | 304 | | | - | | | - | | | - | | | 866 | | | 907 | | | 913 |
Other (2) | | 234 | | | 218 | | | 176 | | | 94 | | | 74 | | | 59 | | | - | | | 51 | | | 1 | | | 328 | | | 343 | | | 236 |
Provision for loan losses | | 11 | | | 4 | | | 1 | | | - | | | - | | | - | | | - | | | - | | | - | | | 11 | | | 4 | | | 1 |
Net impairment losses | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
on securities | | - | | | (1) | | | (9) | | | - | | | - | | | (1) | | | - | | | - | | | - | | | - | | | (1) | | | (10) |
Total net revenues | | 4,771 | | | 4,597 | | | 4,125 | | | 1,609 | | | 1,410 | | | 1,310 | | | - | | | 51 | | | - | | | 6,380 | | | 6,058 | | | 5,435 |
Expenses Excluding Interest (3) | | 3,090 | | | 2,937 | | | 2,858 | | | 1,011 | | | 938 | | | 872 | | | - | | | 68 | | | - | | | 4,101 | | | 3,943 | | | 3,730 |
Income before taxes on income | $ | 1,681 | | $ | 1,660 | | $ | 1,267 | | $ | 598 | | $ | 472 | | $ | 438 | | $ | - | | $ | (17) | | $ | - | | $ | 2,279 | | $ | 2,115 | | $ | 1,705 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Capital expenditures | $ | 195 | | $ | 271 | | $ | 188 | | $ | 90 | | $ | 134 | | $ | 82 | | $ | - | | $ | - | | $ | - | | $ | 285 | | $ | 405 | | $ | 270 |
Depreciation and amortization | $ | 171 | | $ | 154 | | $ | 157 | | $ | 53 | | $ | 45 | | $ | 45 | | $ | - | | $ | - | | $ | - | | $ | 224 | | $ | 199 | | $ | 202 |
(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.
|
(2)
23. | Unallocated amount includes a net insurance settlement of $45 million in 2014.
|
(3)
| Unallocated amount includes a charge of $68 million for estimated future severance benefits resulting from changes in the Company’s geographic footprint in 2014.
The Charles Schwab Corporation – Parent Company Only Financial Statements |
25.The Charles Schwab Corporation – Parent Company Only Financial Statements
Condensed Statements of Income
| | | | | | | | | | | | |
Year Ended December 31, | | | 2015 | | | | 2014 | | | | 2013 | |
Interest revenue | | $ | 12 | | | $ | 2 | | | $ | 4 | |
Interest expense | | | (86) | | | | (64) | | | | (65) | |
Net interest expense | | | (74) | | | | (62) | | | | (61) | |
Other | | | 4 | | | | 1 | | | | - | |
Expenses excluding interest | | | (27) | | | | (24) | | | | (28) | |
Loss before income tax benefit and equity in net income of subsidiaries | | | (97) | | | | (85) | | | | (89) | |
Income tax benefit | | | 41 | | | | 32 | | | | 38 | |
Loss before equity in net income of subsidiaries | | | (56) | | | | (53) | | | | (51) | |
Equity in net income of subsidiaries: | | | | | | | | | | | | |
Equity in undistributed net income of subsidiaries | | | 1,287 | | | | 1,157 | | | | 830 | |
Dividends from bank subsidiary | | | - | | | | 45 | | | | 163 | |
Dividends from non-bank subsidiaries | | | 216 | | | | 172 | | | | 129 | |
Net Income | | | 1,447 | | | | 1,321 | | | | 1,071 | |
Preferred stock dividends and other (1) | | | 83 | | | | 60 | | | | 61 | |
Net Income Available to Common Stockholders | | $ | 1,364 | | | $ | 1,261 | | | $ | 1,010 | |
(1)
| Includes preferred stock dividends and undistributed earnings and dividends allocated to non-vested restricted stock units.
|
|
| | | | | | | | | | | |
| Year Ended December 31, | 2018 |
| 2017 |
| 2016 |
| Interest revenue | $ | 88 |
|
| $ | 33 |
|
| $ | 22 |
|
| Interest expense | (184 | ) |
| (114 | ) |
| (100 | ) |
| Net interest expense | (96 | ) |
| (81 | ) |
| (78 | ) |
| Other | 1 |
|
| 3 |
|
| 1 |
|
| Expenses excluding interest | (85 | ) |
| (32 | ) |
| (21 | ) |
| Loss before income tax benefit and equity in net income of subsidiaries | (180 | ) |
| (110 | ) |
| (98 | ) |
| Income tax benefit | 20 |
|
| 27 |
|
| 34 |
|
| Loss before equity in net income of subsidiaries | (160 | ) |
| (83 | ) |
| (64 | ) |
| Equity in net income of subsidiaries: | | | | | |
| Equity in undistributed net income of subsidiaries | 2,590 |
|
| 1,479 |
|
| 1,690 |
|
| Dividends from bank subsidiaries | 750 |
|
| 625 |
|
| — |
|
| Dividends from non-bank subsidiaries | 327 |
|
| 333 |
|
| 263 |
|
| Net Income | 3,507 |
|
| 2,354 |
|
| 1,889 |
|
Preferred stock dividends and other (1) | 178 |
|
| 174 |
|
| 143 |
|
| Net Income Available to Common Stockholders | $ | 3,329 |
|
| $ | 2,180 |
|
| $ | 1,746 |
|
- 97 -
(1) Includes preferred stock dividends and undistributed earnings and dividends allocated to non-vested restricted stock units.
Condensed Balance Sheets
|
| | | | | | | |
| December 31, | 2018 | | 2017 |
| Assets | | | |
| Cash and cash equivalents | $ | 2,092 |
| | $ | 2,825 |
|
| Receivables from subsidiaries | 784 |
| | 571 |
|
| Available for sale securities | 1,754 |
| | 573 |
|
| Held to maturity securities | 223 |
| | 223 |
|
| Other securities owned — at fair value | 109 |
| | 76 |
|
| Loans to non-bank subsidiaries | 185 |
| | 448 |
|
| Investment in non-bank subsidiaries | 5,507 |
| | 5,393 |
|
| Investment in bank subsidiaries | 16,995 |
| | 13,224 |
|
| Other assets | 228 |
| | 160 |
|
| Total assets | $ | 27,877 |
| | $ | 23,493 |
|
| Liabilities and Stockholders’ Equity | | | |
| Accrued expenses and other liabilities | $ | 379 |
| | $ | 276 |
|
| Payables to subsidiaries | 2 |
| | — |
|
| Long-term debt | 6,826 |
| | 4,692 |
|
| Total liabilities | 7,207 |
| | 4,968 |
|
| Stockholders’ equity | 20,670 |
| | 18,525 |
|
| Total liabilities and stockholders’ equity | $ | 27,877 |
| | $ | 23,493 |
|
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
Condensed Balance SheetsStatements of Cash Flows | | | | | | | | | | | | |
December 31, | | | | | | | 2015 | | | 2014 |
Assets | | | | | | | | | | | | |
Cash and cash equivalents | | | | | | $ | 1,007 | | | $ | 1,043 | |
Receivables from subsidiaries | | | | | | | 419 | | | | 360 | |
Securities available for sale | | | | | | | 569 | | | | - | |
Securities held to maturity | | | | | | | 223 | | | | - | |
Other securities owned – at fair value | | | | | | | 65 | | | | 74 | |
Loans to non-bank subsidiaries | | | | | | | 468 | | | | 327 | |
Investment in non-bank subsidiaries | | | | | | | 4,374 | | | | 4,083 | |
Investment in bank subsidiary | | | | | | | 9,191 | | | | 7,883 | |
Other assets | | | | | | | 101 | | | | 68 | |
Total assets | | | | | | $ | 16,417 | | | $ | 13,838 | |
Liabilities and Stockholders’ Equity | | | | | | | | | | | | |
Accrued expenses and other liabilities | | | | | | $ | 189 | | | $ | 185 | |
Payables to subsidiaries | | | | | | | 11 | | | | 34 | |
Long-term debt | | | | | | | 2,815 | | | | 1,816 | |
Total liabilities | | | | | | | 3,015 | | | | 2,035 | |
Stockholders’ equity | | | | | | | 13,402 | | | | 11,803 | |
Total liabilities and stockholders’ equity | | | | | | $ | 16,417 | | | $ | 13,838 | |
- 98 -
|
| | | | | | | | | | | |
| Year Ended December 31, | 2018 | | 2017 | | 2016 |
| Cash Flows from Operating Activities | | | | | |
| Net income | $ | 3,507 |
| | $ | 2,354 |
| | $ | 1,889 |
|
| Adjustments to reconcile net income to net cash provided by (used for) operating activities: | | | | | |
| Equity in undistributed earnings of subsidiaries | (2,590 | ) | | (1,479 | ) | | (1,690 | ) |
| Other | 13 |
| | 5 |
| | (37 | ) |
| Net change in: | | | | | |
| Other securities owned | (33 | ) | | (1 | ) | | (10 | ) |
| Other assets | 28 |
| | (26 | ) | | (27 | ) |
| Accrued expenses and other liabilities | 28 |
| | 44 |
| | 30 |
|
| Net cash provided by (used for) operating activities | 953 |
| | 897 |
| | 155 |
|
| Cash Flows from Investing Activities | | | | | |
| Due from (to) subsidiaries — net | 408 |
| | (374 | ) | | 95 |
|
| Increase in investments in subsidiaries | (1,188 | ) | | (342 | ) | | (1,547 | ) |
| Repayments (Advances) of subordinated loan to CS&Co | (185 | ) | | — |
| | 465 |
|
| Purchases of available for sale securities | (1,751 | ) | | (201 | ) | | (2 | ) |
| Proceeds from sales of available for sale securities | — |
| | 197 |
| | 2 |
|
| Principal payments on available for sale securities | 573 |
| | — |
| | — |
|
| Other investing activities | (5 | ) | | (6 | ) | | (4 | ) |
| Net cash provided by (used for) investing activities | (2,148 | ) | | (726 | ) | | (991 | ) |
| Cash Flows from Financing Activities | | | | | |
| Issuance of long-term debt | 3,024 |
| | 2,129 |
| | — |
|
| Repayment of long-term debt | (900 | ) | | (250 | ) | | — |
|
| Repurchases of common stock | (1,000 | ) | | — |
| | — |
|
| Net proceeds from preferred stock offerings | — |
| | 492 |
| | 1,316 |
|
| Redemption of preferred stock | — |
| | (485 | ) | | — |
|
| Dividends paid | (787 | ) | | (592 | ) | | (486 | ) |
| Proceeds from stock options exercised and other | 125 |
| | 171 |
| | 144 |
|
| Other financing activities | — |
| | — |
| | 44 |
|
| Net cash provided by (used for) financing activities | 462 |
| | 1,465 |
| | 1,018 |
|
| Increase (Decrease) in Cash and Cash Equivalents | (733 | ) | | 1,636 |
| | 182 |
|
| Cash and Cash Equivalents at Beginning of Year | 2,825 |
| | 1,189 |
| | 1,007 |
|
| Cash and Cash Equivalents at End of Year | $ | 2,092 |
| | $ | 2,825 |
| | $ | 1,189 |
|
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
Condensed Statements of Cash Flows
| | | | | | | | | | | | |
Year Ended December 31, | | | 2015 | | | 2014 | | | 2013 |
Cash Flows from Operating Activities | | | | | | | | | | | | |
Net income | | $ | 1,447 | | | $ | 1,321 | | | $ | 1,071 | |
Adjustments to reconcile net income to net cash provided by | | | | | | | | | | | | |
operating activities: | | | | | | | | | | | | |
Equity in undistributed earnings of subsidiaries | | | (1,287) | | | | (1,157) | | | | (830) | |
Provision for deferred income taxes | | | 8 | | | | 4 | | | | (11) | |
Other | | | (39) | | | | (23) | | | | (4) | |
Net change in: | | | | | | | | | | | | |
Other securities owned | | | 9 | | | | 5 | | | | (5) | |
Other assets | | | (32) | | | | (9) | | | | 29 | |
Accrued expenses and other liabilities | | | 4 | | | | (1) | | | | 13 | |
Net cash provided by operating activities | | | 110 | | | | 140 | | | | 263 | |
Cash Flows from Investing Activities | | | | | | | | | | | | |
Due from (due to) subsidiaries – net | | | 93 | | | | 607 | | | | (546) | |
Increase in investments in subsidiaries | | | (611) | | | | (249) | | | | (225) | |
Increase in subordinated loan to CS & Co. | | | (150) | | | | - | | | | - | |
Purchases of securities available for sale | | | (842) | | | | - | | | | - | |
Proceeds from sales of securities available for sale | | | 200 | | | | - | | | | - | |
Principal payments on securities available for sale | | | 75 | | | | - | | | | - | |
Purchases of securities held to maturity | | | (223) | | | | - | | | | - | |
Other investing activities | | | - | | | | - | | | | (1) | |
Net cash provided by (used for) investing activities | | | (1,458) | | | | 358 | | | | (772) | |
Cash Flows from Financing Activities | | | | | | | | | | | | |
Repayment of commercial paper | | | - | | | | - | | | | (300) | |
Issuance of long-term debt | | | 1,346 | | | | - | | | | 275 | |
Repayment of long-term debt | | | (350) | | | | - | | | | - | |
Net proceeds from preferred stock offering | | | 581 | | | | - | | | | - | |
Dividends paid | | | (387) | | | | (373) | | | | (368) | |
Proceeds from stock options exercised and other | | | 90 | | | | 189 | | | | 258 | |
Other financing activities | | | 32 | | | | 29 | | | | 5 | |
Net cash provided by (used for) financing activities | | | 1,312 | | | | (155) | | | | (130) | |
Increase (Decrease) in Cash and Cash Equivalents | | | (36) | | | | 343 | | | | (639) | |
Cash and Cash Equivalents at Beginning of Year | | | 1,043 | | | | 700 | | | | 1,339 | |
Cash and Cash Equivalents at End of Year | | $ | 1,007 | | | $ | 1,043 | | | $ | 700 | |
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
26.24. Quarterly Financial Information (Unaudited)
| | | | | | | | | | | | | | | | |
| | Fourth | | | Third | | | Second | | | First | |
| | Quarter | | | Quarter | | | Quarter | | | Quarter | |
Year Ended December 31, 2015: | | | | | | | | | | | | | | | | |
Net Revenues | | $ | 1,691 | | | $ | 1,597 | | | $ | 1,566 | | | $ | 1,526 | |
Expenses Excluding Interest | | $ | 1,046 | | | $ | 1,014 | | | $ | 999 | | | $ | 1,042 | |
Net Income | | $ | 416 | | | $ | 376 | | | $ | 353 | | | $ | 302 | |
Net Income Available to Common Stockholders | | $ | 378 | | | $ | 365 | | | $ | 330 | | | $ | 291 | |
Weighted-Average Common Shares Outstanding – Basic | | | 1,319 | | | | 1,316 | | | | 1,314 | | | | 1,312 | |
Weighted-Average Common Shares Outstanding – Diluted | | | 1,330 | | | | 1,328 | | | | 1,326 | | | | 1,323 | |
Basic Earnings Per Common Share | | $ | .29 | | | $ | .28 | | | $ | .25 | | | $ | .22 | |
Diluted Earnings Per Common Share | | $ | .28 | | | $ | .28 | | | $ | .25 | | | $ | .22 | |
Dividends Declared Per Common Share | | $ | .06 | | | $ | .06 | | | $ | .06 | | | $ | .06 | |
Range of Common Stock Price Per Share: | | | | | | | | | | | | | | | | |
High | | $ | 34.52 | | | $ | 35.72 | | | $ | 33.78 | | | $ | 31.73 | |
Low | | $ | 26.40 | | | $ | 27.10 | | | $ | 29.12 | | | $ | 25.43 | |
Range of Price/Earnings Ratio (1): | | | | | | | | | | | | | | | | |
High | | | 34 | | | | 36 | | | | 35 | | | | 34 | |
Low | | | 26 | | | | 27 | | | | 30 | | | | 27 | |
Year Ended December 31, 2014: | | | | | | | | | | | | | | | | |
Net Revenues | | $ | 1,551 | | | $ | 1,551 | | | $ | 1,478 | | | $ | 1,478 | |
Expenses Excluding Interest | | $ | 997 | | | $ | 1,033 | | | $ | 957 | | | $ | 956 | |
Net Income | | $ | 350 | | | $ | 321 | | | $ | 324 | | | $ | 326 | |
Net Income Available to Common Stockholders | | $ | 329 | | | $ | 312 | | | $ | 302 | | | $ | 318 | |
Weighted-Average Common Shares Outstanding – Basic | | | 1,309 | | | | 1,304 | | | | 1,302 | | | | 1,299 | |
Weighted-Average Common Shares Outstanding – Diluted | | | 1,320 | | | | 1,316 | | | | 1,313 | | | | 1,311 | |
Basic Earnings Per Common Share | | $ | .25 | | | $ | .24 | | | $ | .23 | | | $ | .24 | |
Diluted Earnings Per Common Share | | $ | .25 | | | $ | .24 | | | $ | .23 | | | $ | .24 | |
Dividends Declared Per Common Share | | $ | .06 | | | $ | .06 | | | $ | .06 | | | $ | .06 | |
Range of Common Stock Price Per Share: | | | | | | | | | | | | | | | | |
High | | $ | 30.89 | | | $ | 31.00 | | | $ | 28.04 | | | $ | 29.13 | |
Low | | $ | 23.35 | | | $ | 26.44 | | | $ | 24.56 | | | $ | 23.56 | |
Range of Price/Earnings Ratio (1): | | | | | | | | | | | | | | | | |
High | | | 32 | | | | 33 | | | | 30 | | | | 33 | |
Low | | | 24 | | | | 28 | | | | 27 | | | | 27 | |
(1)
| Price/earnings ratio is computed by dividing the high and low market prices by diluted earnings per common share for the preceding 12-month period ending on the last day of the quarter presented.
|
|
| | | | | | | | | | | | | | | |
| | Fourth
Quarter | | Third
Quarter | | Second
Quarter | | First
Quarter |
| Year Ended December 31, 2018: | | | | | | | |
| Total Net Revenues | $ | 2,669 |
| | $ | 2,579 |
| | $ | 2,486 |
| | $ | 2,398 |
|
| Total Expenses Excluding Interest | $ | 1,459 |
| | $ | 1,360 |
| | $ | 1,355 |
| | $ | 1,396 |
|
| Net Income | $ | 935 |
| | $ | 923 |
| | $ | 866 |
| | $ | 783 |
|
| Net Income Available to Common Stockholders | $ | 885 |
| | $ | 885 |
| | $ | 813 |
| | $ | 746 |
|
| Weighted-Average Common Shares Outstanding — Basic | 1,343 |
| | 1,351 |
| | 1,350 |
| | 1,347 |
|
| Weighted-Average Common Shares Outstanding — Diluted | 1,354 |
| | 1,364 |
| | 1,364 |
| | 1,362 |
|
| Earnings Per Common Share — Basic | $ | .66 |
| | $ | .66 |
| | $ | .60 |
| | $ | .55 |
|
| Earnings Per Common Share — Diluted | $ | .65 |
| | $ | .65 |
| | $ | .60 |
| | $ | .55 |
|
| Dividends Declared Per Common Share | $ | .13 |
| | $ | .13 |
| | $ | .10 |
| | $ | .10 |
|
| Year Ended December 31, 2017: | | | | | | | |
| Total Net Revenues | $ | 2,242 |
| | $ | 2,165 |
| | $ | 2,130 |
| | $ | 2,081 |
|
| Total Expenses Excluding Interest | $ | 1,289 |
| | $ | 1,220 |
| | $ | 1,221 |
| | $ | 1,238 |
|
| Net Income | $ | 597 |
| | $ | 618 |
| | $ | 575 |
| | $ | 564 |
|
| Net Income Available to Common Stockholders | $ | 550 |
| | $ | 575 |
| | $ | 530 |
| | $ | 525 |
|
| Weighted-Average Common Shares Outstanding — Basic | 1,343 |
| | 1,339 |
| | 1,338 |
| | 1,336 |
|
| Weighted-Average Common Shares Outstanding — Diluted | 1,358 |
| | 1,353 |
| | 1,351 |
| | 1,351 |
|
| Earnings Per Common Share — Basic | $ | .41 |
| | $ | .43 |
| | $ | .40 |
| | $ | .39 |
|
| Earnings Per Common Share — Diluted | $ | .41 |
| | $ | .42 |
| | $ | .39 |
| | $ | .39 |
|
| Dividends Declared Per Common Share | $ | .08 |
| | $ | .08 |
| | $ | .08 |
| | $ | .08 |
|
25. Subsequent Event
On January 30, 2019, CSC publicly announced that its Board of Directors authorized a new Share Repurchase Program to repurchase up to $4.0 billion of common stock, and declared a four cent, or 31%, increase in the quarterly cash dividend to $0.17 per common share. The share repurchase authorization does not have an expiration date.
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNINGACCOUNTING FIRMTo
the Stockholders and the Board of Directors
and Stockholders of The Charles Schwab
CorporationSan Francisco, California
Corporation:
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of The Charles Schwab Corporation and subsidiaries (the “Company”"Company") as of December 31, 20152018 and 2014, and2017, the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows, for each of the three years in the period ended December 31, 2015. Our audits also included2018, and the financial statement schedule ofrelated notes (collectively referred to as the Company on page F-2."financial statements"). We also have audited the Company’s internal control over financial reporting as of December 31, 2015,2018, based on the criteria established in Internal Control – Control—Integrated Framework (2013)(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Commission (COSO).
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control—Integrated Framework (2013) issued by COSO.
Basis for Opinions
The Company’s management is responsible for these financial statements,
and financial statement schedule, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying
Management’sManagement's Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on
thethese financial statements
and financial statement schedule and an opinion on the Company’s internal control over financial reporting based on our audits.
We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the auditaudits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the financial statements included
performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures to respond to those risks. Such procedures included examining, on a test basis, evidence
supportingregarding the amounts and disclosures in the financial
statements, assessingstatements. Our audits also included evaluating the accounting principles used and significant estimates made by management,
andas well as evaluating the overall
presentation of the financial
statement presentation.statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed
by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of theits inherent limitations, of internal control over financial reporting including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be preventedprevent or detected on a timely basis.detect misstatements. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of The Charles Schwab Corporation and subsidiaries as of December 31, 2015 and 2014, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2015, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2015, based on the criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
|
| |
| /s/ DELOITTE & TOUCHE LLP | |
San Francisco, California
February
24, 201622, 2019 - 101 -
We have served as the Company's auditor since 1976.
THE CHARLES SCHWAB CORPORATION
Management’sReport on Internal Control Over Financial Reporting
Management of The Charles Schwab Corporation, together with its subsidiaries (the Company), is responsible for establishing and maintaining adequate internal control over financial reporting. The Company’s internal control over financial reporting is a process designed under the supervision of and effected by the Company’s chief executive officer and chief financial officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of published financial statements in accordance with accounting principles generally accepted in the United States of America.
As of December 31, 2015,2018, management conducted an assessment of the effectiveness of the Company’s internal control over financial reporting based on the framework established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management has determined that the Company’s internal control over financial reporting was effective as of December 31, 2015.2018.
The Company’s internal control over financial reporting includes policies and procedures that pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of assets; provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures are being made only in accordance with authorizations of management and the directors of the Company; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the Company’s financial statements.
The Company’s internal control over financial reporting as of December 31,
2015,2018, has been audited by Deloitte & Touche
LLP, an independent registered public accounting firm, as stated in their report appearing on the previous page.- 102 -
THE CHARLES SCHWAB CORPORATION
Item 9.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Item 9A.
Controls and Procedures
Evaluation of disclosure controls and procedures:The management of the Company, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of December 31, 2015.2018. Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were effective as of December 31, 2015.2018.
Changes in internal control over financial reporting: No change in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) was identified during the quarter ended December 31, 2015,2018, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
Management’s Report on Internal Control Over Financial Reporting and the Report of Independent Registered Public Accounting Firm are included in
“Item 8 – Financial Statements and Supplementary Data.”Item 8.
Item 9B.
Other Information
Directors, Executive Officers, and Corporate Governance | |
| Item 10. | Directors, Executive Officers, and Corporate Governance |
The information relating to directors of CSC required to be furnished pursuant to this item is incorporated by reference from portions of the Company’s definitive proxy statement for its annual meeting of stockholders to be filed with the SEC pursuant to Regulation 14A by April 30, 20162019 (the Proxy Statement) under “Members of the Board of Directors,” “Corporate Governance, Information,” “Director Nominations,” and “Section 16(a) Beneficial Ownership Reporting Compliance.” The Company’s Code of Conduct and Business Ethics, applicable to directors and all employees, including senior financial officers, is available on the Company’s website at http:https://www.aboutschwab.com/governance. If the Company makes any amendments to or grants any waivers from its Code of Conduct and Business Ethics, which are required to be disclosed pursuant to the Securities Exchange Act of 1934, the Company will make such disclosures on this website.
THE CHARLES SCHWAB CORPORATION
Schwab Executive Officers of the Registrant
The following table provides certain information about each of the Company’s executive officers as of December 31,
2015.2018. | | | |
| | | |
| | | |
| Executive Officers of the Registrant |
| | | |
| Name | Age | Title |
| Charles R. Schwab | 78
81 | Chairman of the Board |
| Walter W. Bettinger II | 55
58 | President and Chief Executive Officer |
| Marie A. Chandoha | 54
57 | President and Chief Executive Officer – Charles Schwab Investment Management, Inc.
|
| Bernard J. Clark | 57
60 | Executive Vice President – Advisor Services |
| Jonathan M. Craig | 47 | Senior Executive Vice President |
| Peter B. Crawford | 50 | Executive Vice President and Chief Financial Officer |
| David R. Garfield | 59
62 | Executive Vice President, General Counsel and Corporate Secretary |
| Terri R. Kallsen | 47
50 | Executive Vice President – Investor Services |
| Joseph R. Martinetto | 53
56 | Senior Executive Vice President and Chief FinancialOperating Officer |
| Nigel J. Murtagh | 52
55 | Executive Vice President – Corporate Risk |
| | | |
Mr. Schwab has been Chairman of the Board and a director of CSC since its incorporation in 1986. He also served as Chief Executive Officer of CSC from 1986 to 1997 and as Co-Chief Executive Officer from 1998 until 2003. He was re-appointed Chief Executive Officer in 2004 and served in that role until 2008. He served as Chairman of the Board and a director of CS&Co until 2018. Mr. Schwab is also Chairman of SchwabCSB.
Mr. Bettinger has been President and Schwab Bank.Chief Executive Officer of CSC since 2008. He servedserves on the Board of Directors of CSC and CSB, and is Chairman of CS&Co, as well as Chairman and trustee of The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust, Schwab Annuity Portfolios, Laudus Trust, and Laudus Institutional Trust, all registered investment companies, through December 31, 2015.Mr. Bettinger has been President and Chief Executive Officer of CSC since 2008. He also serves on the Board of Directors of CSC, Schwab and Schwab Bank, and as Chairman and trustee of The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust, Schwab Annuity Portfolios, Laudus Trust, Laudus Institutional Trust, and Schwab Strategic Trust, all registered investment companies. Prior to assuming his current role,companies and affiliates of CSC. Mr. Bettinger served as President and Chief Operating Officer of CSC from 2007 until 2008 and as Executive Vice President and President – Schwab Investor Services of CSC and SchwabCS&Co from 2005 to 2007. He served as Executive Vice President and Chief Operating Officer – Individual Investor Enterprise of CSC and Schwab from 2004 until 2005, and Executive Vice President – Corporate Services of Schwab from 2002 until 2004. Mr. Bettinger joined Schwab in 1995.
Ms. Chandohahas been President and Chief Executive Officer of CSIM since 2011 and has served as a directorPresident of CSIM since 2010. Prior to joiningfrom 2011 until October 2018. She serves as a trustee of The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust, Schwab Annuity Portfolios, Laudus Trust, and Schwab Strategic Trust. On September 25, 2018, Ms. Chandoha served as the global head of the fixed-income business at BlackRock (formerly Barclays Global Investors) from 2007 until 2010 and as co-head and senior portfolio managerannounced her decision to retire on March 29, 2019. Ms. Chandoha joined Schwab in charge of the Montgomery fixed income division at Wells Capital Management from 1999 until 2007.2010.
Mr. Clark has been Executive Vice President – Advisor Services of CSC since 2012. Mr. Clark has served as Executive Vice President – Advisor Services of SchwabCS&Co since 2010. From 2006 until 2010, Mr. Clark served as Senior Vice President – Schwab Institutional Sales of Schwab. During 2005 and 2006, he served as Senior Vice President – Client Service of Schwab.Charles Schwab & Co., Inc. Mr. Clark joined Schwab in 1998.
Mr. Craig has been Senior Executive Vice President of CSC and CS&Co since 2018. He served as Executive Vice President – Client and Marketing Solutions for CSC from 2017 until 2018 and served as Executive Vice President and Chief Marketing Officer of CS&Co from 2012 until 2018. Mr. Craig joined Schwab in 2000.
Mr. Crawford has been Executive Vice President and Chief Financial Officer of CSC and CS&Co since 2017. Prior to his appointment as Chief Financial Officer, Mr. Crawford was Executive Vice President of Finance from 2015 to 2017. He served as Senior Vice President of Schwab’s asset management and client solutions organization from 2008 to 2015. He has served on the Board of Directors of CS&Co since 2018. Mr. Crawford joined Schwab in 2001.
Mr. Garfield has been Executive Vice President, General Counsel and Corporate Secretary of CSC since 2014 and Executive Vice President and Corporate Secretary of SchwabCS&Co since 2014.2015. Mr. Garfield served as Deputy General Counsel of Wells Fargo & Company from 1998 until heto 2014. Mr. Garfield joined Schwab in 2014.
THE CHARLES SCHWAB CORPORATION
Ms. Kallsen has been Executive Vice President – Investor Services of CSC and SchwabCS&Co since 2014. She served as Senior Vice President – Portfolio Consulting of SchwabCS&Co from 2012 until 2014 and as Senior Vice President – Branch Network from
THE CHARLES SCHWAB CORPORATION
June 2014 until December 2014. Prior to joining Schwab, Ms. Kallsen served as Executive Vice President of First Command Financial Services from 2009 until 2012 and as Senior Vice President of USAA from 2004 until 2009.
joined Schwab in 2012.
Mr. Martinetto has been Senior Executive Vice President of CSC and CS&Co since 2015, and Chief Operating Officer of CSC and CS&Co since 2018. He served as Chief Financial Officer of CSC and Schwab since July 2015. He served asCS&Co from 2007 until 2017, and Executive Vice President and Chief Financial Officer of CSC and SchwabCS&Co from 2007 until July 2015. He also serves on the Board of Directors of CS&Co and CSB. Additionally, Mr. Martinetto served as Senior Vice President and Treasureris a trustee of CSCThe Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust, Schwab Annuity Portfolios, Laudus Trust, and Schwab from 2003 to 2007 and Senior Vice President – Individual Investor Finance of Schwab from 2002 to 2003.Strategic Trust. Mr. Martinetto joined Schwab in 1997.
Mr. Murtagh has been Executive Vice President – Corporate Risk of CSC and SchwabCS&Co since 2012. He has served as Executive Vice President and Chief Risk Officer of CSB since 2018. He served as Senior Vice President and Chief Credit Officer of SchwabCS&Co from 2002 until 2012 and of CSC from 2008 until 2012. Mr. Murtagh joined Schwab in 2000.Item 11.
Executive Compensation
THE CHARLES SCHWAB CORPORATION
| |
| Item 11. | Executive Compensation |
The information required to be furnished pursuant to this item is incorporated by reference from portions of the Proxy Statement under “Compensation Discussion and Analysis,” “Executive Compensation Tables –
20152018 Summary Compensation Table,” “Executive Compensation Tables –
20152018 Grants of Plan-Based Awards Table,” “Executive Compensation Tables – Narrative to Summary Compensation and Grants of Plan-Based Awards Tables,” “Executive Compensation Tables –
20152018 Termination and Change in Control Benefits Table,” “Executive Compensation Tables – Outstanding Equity Awards as of December 31,
2015,2018,” “Executive Compensation Tables –
20152018 Option Exercises and Stock Vested Table,” “Executive Compensation Tables –
20152018 Nonqualified Deferred Compensation Table,” “Director Compensation,” and “Compensation Committee Interlocks and Insider Participation.” In addition, the information from a portion of the Proxy Statement under “Compensation Committee Report,” is incorporated by reference from the Proxy Statement and furnished on this Form 10-K, and shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933.
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | |
| Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
The information required to be furnished pursuant to this item is incorporated by reference from portions of the Proxy Statement under “Security Ownership of Certain Beneficial Owners and Management,” and “Securities Authorized for Issuance under Equity Compensation Plans.”
Item 13.
Certain Relationships and Related Transactions, and Director Independence | |
| Item 13. | Certain Relationships and Related Transactions, and Director Independence |
The information required to be furnished pursuant to this item is incorporated by reference from portions of the Proxy Statement under “Transactions with Related Persons” and “Director Independence.”
Item 14.
Principal Accountant Fees and Services | |
| Item 14. | Principal Accountant Fees and Services |
The information required to be furnished pursuant to this item is incorporated by reference from a portion of the Proxy Statement under “Auditor Fees.”
THE CHARLES SCHWAB CORPORATION
Exhibits and Financial Statement Schedule | |
| Item 15. | Exhibits, Financial Statement Schedules |
(a) Documents filed as part of this Report
The financial statements and independent auditors’ report are included in
“ItemItem 8
– Financial Statements and Supplementary Data” and are listed below:
Consolidated Statements of Income
Consolidated Statements of Comprehensive Income
Consolidated Balance Sheets
Consolidated Statements of Cash Flows
Consolidated Statements of Stockholders’ Equity
Notes to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
2. Financial Statement
ScheduleTheSchedules
Other financial statement
scheduleschedules required
to be furnished pursuant to this
itemItem are omitted because of the absence of conditions under which they are required or because the information is
listedincluded in the
accompanying index appearing on page F-1.Company’s consolidated financial statements and notes in Item 8. - 106 -
THE CHARLES SCHWAB CORPORATION
The exhibits listed below are filed as part of this annual report on Form 10-K.
Exhibit
Number
|
Exhibit
| |
| | |
2.1
Exhibit Number | Agreement and Plan of Merger, dated March 18, 2011, by and among The Charles Schwab Corporation, Neon Acquisition Corp. and optionsXpress Holdings, Inc., filed as Exhibit 2.1 to the Registrant’s Form 8-K dated March 18, 2011, and incorporated herein by reference.
| |
| | |
3.11 | | |
| | |
3.14 | | |
| | |
3.15 | | |
| | |
3.16
3.17 | Certificate of Designations of 6.00% Non-Cumulative Perpetual Preferred Stock, Series B, of the Charles Schwab Corporation filed as Exhibit 3.1 to the Registrant’s Form 8-K dated May 31, 2012, and incorporated herein by reference.
| |
| | |
3.17
| | |
| | |
4.1
3.18 | | |
| | |
| 3.19 | | |
| | |
| 3.20 | | |
| | |
| 4.2 | Deposit Agreement, dated June 6, 2012,August 3, 2015, between the Company and Wells Fargo Bank, N.A., as Depositary (including the form of Depositary Share Receipt attached as Exhibit A thereto), filed as Exhibit 4.1 to the Registrant’s Form 8-K dated May 31, 2012,August 3, 2015 and incorporated herein by reference. | |
| | |
| 4.3 | | |
| | |
| 4.4 | | |
| | |
| 4.5 | | |
| | |
| 4.6 | Neither the Registrant nor its subsidiaries are parties to any instrument with respect to long-term debt for which securities authorized thereunder exceed 10% of the total assets of the Registrant and its subsidiaries on a consolidated basis. Copies of instruments with respect to long-term debt of lesser amounts will be provided to the SEC upon request. | |
| | |
| 10.4 | Form of Release Agreement dated as of March 31, 1987 among BAC, Registrant, Schwab Holdings, Inc., Charles Schwab & Co., Inc., and former shareholders of Schwab Holdings, Inc., filed as the identically-numbered exhibit to Registrant’s Registration Statement No. 33-16192 on Form S-1 and incorporated herein by reference. | |
| | |
| 10.57 | Registration Rights and Stock Restriction Agreement, dated as of March 31, 1987, between the Registrant and the holders of the Common Stock, filed as Exhibit 4.23 to Registrant’s Registration Statement No. 33-16192 on Form S-1 and incorporated herein by reference. | |
| | |
- 107 -
THE CHARLES SCHWAB CORPORATION
Exhibit
Number |
Exhibit
| |
| | |
4.2 | Deposit Agreement, dated August 3, 2015, between the Company and Wells Fargo Bank, N.A., as Depositary (including the form of Depositary Share Receipt attached as Exhibit A thereto), filed as Exhibit 4.1 to the Registrant’s Form 8-K dated August 3, 2015 and incorporated herein by reference. | |
| | |
4.3 | Neither the Registrant nor its subsidiaries are parties to any instrument with respect to long-term debt for which securities authorized thereunder exceed 10% of the total assets of the Registrant and its subsidiaries on a consolidated basis. Copies of instruments with respect to long-term debt of lesser amounts will be provided to the SEC upon request. | |
| | |
10.4 | Form of Release Agreement dated as of March 31, 1987 among BAC, Registrant, Schwab Holdings, Inc., Charles Schwab & Co., Inc. and former shareholders of Schwab Holdings, Inc., filed as the identically-numbered exhibit to Registrant’s Registration Statement No. 33-16192 on Form S-1 and incorporated herein by reference. | |
| | |
10.57 | Registration Rights and Stock Restriction Agreement, dated as of March 31, 1987, between the Registrant and the holders of the Common Stock, filed as Exhibit 4.23 to Registrant’s Registration Statement No. 33-16192 on Form S-1 and incorporated herein by reference. | |
| | |
10.72 | Restatement of Assignment and License, as amended January 25, 1988, among Charles Schwab & Co., Inc., Charles R. Schwab and the Registrant, and incorporated herein by reference. | |
| | |
10.271 | The Charles Schwab Corporation Directors’ Deferred Compensation Plan, as amended through December 8, 2004, and incorporated herein by reference. | (2) |
| | |
10.272 | The Charles Schwab Corporation Deferred Compensation Plan, as amended through December 8, 2004, and incorporated herein by reference. | (2) |
| | |
10.314 | Employment Agreement dated as of March 13, 2008, between the Registrant and Charles R. Schwab, filed as Exhibit 10.314 to the Registrant’s Form 10-Q for the quarter ended March 31, 2013, and incorporated herein by reference. | (2) |
| | |
10.322 | The Charles Schwab Corporation Deferred Compensation Plan II, as amended and restated as of October 23, 2008, filed as Exhibit 10.322 to the Registrant’s Form 10-K for the year ended December 31, 2013, and incorporated herein by reference. | (2) |
| | |
10.331 | The Charles Schwab Corporation Corporate Executive Bonus Plan, restated to include amendments approved at the Annual Meeting of Stockholders on May 13, 2010, filed as Exhibit 10.331 to the Registrant’s Form 10-Q for the quarter ended June 30 2010, and incorporated herein by reference. | (2) |
| | |
10.338 | The Charles Schwab Corporation 2004 Stock Incentive Plan, as approved at the Annual Meeting of Stockholders on May 17, 2011, filed as Exhibit 10.338 to the Registrant’s Form 10-Q for the quarter ended June 30, 2011, and incorporated herein by reference. | (2) |
| | |
10.349 | The Charles Schwab Severance Pay Plan, as Amended and Restated Effective May 1, 2012, filed as Exhibit 10.349 to the Registrant’s Form 10-Q for the quarter ended June 30, 2012, and incorporated herein by reference. | (2) |
| | |
10.351 | Summary of Non-Employee Director Compensation, filed as Exhibit 10.351 to the Registrant’s
Form 10-K for the year ended December 31, 2012, and incorporated herein by reference. | (2) |
| | |
10.352 | Form of Performance-Based Cash Long-Term Incentive Award Agreement under The Charles Schwab Corporation 2004 Stock Incentive Plan and successor plans, filed as Exhibit 10.352 to the Registrant’s Form 8-K dated January 24, 2013, and incorporated herein by reference. | (2) |
| | |
10.353 | Form of Notice and Performance-Based Restricted Stock Unit Agreement under The Charles Schwab Corporation 2004 Stock Incentive Plan and successor plans, filed as Exhibit 10.353 to the Registrant’s Form 8-K dated January 24, 2013, and incorporated herein by reference. | (2) |
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|
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Exhibit Number | Exhibit | |
| 10.72 | | |
| | | |
| 10.271 | | (2) |
| | | |
| 10.272 | | (2) |
| | | |
| 10.314 | | (1),(2) |
| | | |
| 10.338 | | (2) |
| | | |
| 10.349 | | (2) |
| | | |
| 10.362 | | (1),(2) |
| | | |
| 10.376 | | (2) |
| | | |
| 10.381 | | (2) |
| | | |
| 10.382 | | (2) |
| | | |
| 10.383 | | (2) |
| | | |
| 10.384 | | (2) |
| | | |
| 10.385 | | (2) |
| | | |
| 10.386 | | (2) |
| | | |
| 10.387 | | (2) |
| | | |
| 10.388 | | (2) |
| | | |
THE CHARLES SCHWAB CORPORATION
| | |
Exhibit
Number |
Exhibit
| |
| | |
10.354 | Form of Notice and Nonqualified Stock Option Agreement under The Charles Schwab Corporation 2004 Stock Incentive Plan and successor plans, filed as Exhibit 10.354 to the Registrant’s Form 8-K dated January 24, 2013, and incorporated herein by reference. | (2) |
| | |
10.355 | Form of Notice and Restricted Stock Unit Agreement under The Charles Schwab Corporation 2004 Stock Incentive Plan and successor plans, filed as Exhibit 10.355 to the Registrant’s Form 8-K dated January 24, 2013, and incorporated herein by reference. | (2) |
| | |
10.356 | Form of Notice and Retainer Stock Option Agreement for Non-Employee Directors under The Charles Schwab Corporation 2004 Stock Incentive Plan and successor plans, filed as Exhibit 10.356 to the Registrant’s Form 8-K dated January 24, 2013, and incorporated herein by reference. | (2) |
| | |
10.357 | Form of Notice and Retainer Restricted Stock Unit Agreement for Non-Employee Directors under The Charles Schwab Corporation 2004 Stock Incentive Plan and successor plans, filed as Exhibit 10.357 to the Registrant’s Form 8-K dated January 24, 2013, and incorporated herein by reference. | (2) |
| | |
10.358 | Form of Notice and Stock Option Agreement for Non-Employee Directors under The Charles Schwab Corporation Directors’ Deferred Compensation Plan II and The Charles Schwab Corporation 2004 Stock Incentive Plan and successor plans, filed as Exhibit 10.358 to the Registrant’s Form 8-K dated January 24, 2013, and incorporated herein by reference. | (2) |
| | |
10.359 | Form of Notice and Restricted Stock Unit Agreement for Non-Employee Directors under The Charles Schwab Corporation Directors’ Deferred Compensation Plan II and The Charles Schwab Corporation 2004 Stock Incentive Plan and successor plans, filed as Exhibit 10.359 to the Registrant’s Form 8-K dated January 24, 2013, and incorporated herein by reference. | (2) |
| | |
10.360 | The Charles Schwab Corporation 2013 Stock Incentive Plan, as approved at the Annual Meeting of Stockholders on May 16, 2013, filed as Exhibit 10.360 to the Registrant’s Form 8-K dated May 16, 2013, and incorporated herein by reference. | (2) |
| | |
10.362 | The Charles Schwab Corporation Directors’ Deferred Compensation Plan II, as amended and restated as of April 24, 2013, filed as Exhibit 10.362 to the Registrant’s Form 10-Q for the quarter ended June 30, 2013, and incorporated herein by reference. | (2) |
| | |
10.363 | Credit Agreement (364 – Day Commitment) dated as of June 6, 2014, between the Registrant and financial institutions therein, filed as Exhibit 10.363 to the Registrant’s Form 10-Q for the quarter ended June 30, 2014, and incorporated herein by reference. | |
| | |
10.364 | Separation Agreement, General Release and Waiver of Claims by and between Mr. Clendening and CSC, filed as Exhibit 10.364 to the Registrant’s Form 8-K/A dated December 10, 2014, and incorporated herein by reference. | (2) |
| | |
10.365 | The Charles Schwab Corporation Corporate Executive Bonus Plan, restated to include amendments approved at the Annual Meeting of Stockholders on May 13, 2015 (supersedes Exhibit 10.331), and incorporated herein by reference. | (2) |
| | |
10.366 | Credit Agreement (364 – Day Commitment) dated as of June 5, 2015, between the Registrant and financial institutions therein (supersedes Exhibit 10.363), filed as Exhibit 10.366 to the Registrant’s Form 10-Q for the quarter ended June 30, 2015, and incorporated herein by reference. | |
| | |
10.367 | Summary of Non-Employee Director Compensation (supersedes Exhibit 10.351). | (2) |
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|
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Exhibit Number | Exhibit | |
| 10.389 | | (2) |
| | | |
| 10.390 | | (2) |
| | | |
| 10.391 | | (2) |
| | | |
| 10.392 | | |
| | | |
| 10.393 | | (1),(2) |
| | | |
| 10.394 | | (1),(2) |
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| 21.1 | | |
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| 23.1 | | |
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| 31.1 | | |
| | | |
| 31.2 | | |
| | | |
| 32.1 | | (1) |
| | | |
| 32.2 | | (1) |
| | | |
| 101.INS | XBRL Instance Document | (3) |
| | | |
| 101.SCH | XBRL Taxonomy Extension Schema | (3) |
| | | |
| 101.CAL | XBRL Taxonomy Extension Calculation | (3) |
| | | |
| 101.DEF | XBRL Extension Definition | (3) |
| | | |
| 101.LAB | XBRL Taxonomy Extension Label | (3) |
| | | |
| 101.PRE | XBRL Taxonomy Extension Presentation | (3) |
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| | | |
THE CHARLES SCHWAB CORPORATION
Exhibit
Number |
Exhibit
| |
| | |
12.1 | Computation of Ratio of Earnings to Fixed Charges and Ratio of Earnings to Fixed Charges and Preferred Stock Dividends. | |
| | |
21.1 | Subsidiaries of the Registrant. | |
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23.1 | Independent Registered Public Accounting Firm’s Consent. | |
| | |
31.1 | Certification Pursuant to Rule 13a-14(a)/15d-14(a), As Adopted Pursuant to Section 302 of The Sarbanes-Oxley Act of 2002. | |
| | |
31.2 | Certification Pursuant to Rule 13a-14(a)/15d-14(a), As Adopted Pursuant to Section 302 of The Sarbanes-Oxley Act of 2002. | |
| | |
32.1 | Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002. | (1) |
| | |
32.2 | Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002. | (1) |
| | |
101.INS | XBRL Instance Document | (3) |
| | |
101.SCH | XBRL Taxonomy Extension Schema | (3) |
| | |
101.CAL | XBRL Taxonomy Extension Calculation | (3) |
| | |
101.DEF | XBRL Extension Definition | (3) |
| | |
101.LAB | XBRL Taxonomy Extension Label | (3) |
| | |
101.PRE | XBRL Taxonomy Extension Presentation | (3) |
| | |
(1) | Furnished as an exhibit to this annual report on Form 10-K. | |
| | |
(2) | Management contract or compensatory plan. | |
| | |
(3) | Attached as Exhibit 101 to this Annual Report on Form 10-K for the annual period ended December 31, 2015, are the following materials formatted in XBRL (Extensible Business Reporting Language) (i) the Consolidated Statements of Income,(ii) the Consolidated Statements of Comprehensive Income, (iii) the Consolidated Balance Sheets, (iv) the Consolidated Statements of Cash Flows, (v) the Consolidated Statements of Stockholders’ Equity, and (vi) Notes to Consolidated Financial Statements. | |
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|
| | |
Exhibit Number | Exhibit | |
| (1) | Furnished as an exhibit to this annual report on Form 10-K. | |
| | |
| (2) | Management contract or compensatory plan. | |
| | |
| (3) | Attached as Exhibit 101 to this Annual Report on Form 10-K for the annual period ended December 31, 2018, are the following materials formatted in XBRL (Extensible Business Reporting Language) (i) the Consolidated Statements of Income, (ii) the Consolidated Statements of Comprehensive Income, (iii) the Consolidated Balance Sheets, (iv) the Consolidated Statements of Cash Flows, (v) the Consolidated Statements of Stockholders’ Equity, and (vi) Notes to Consolidated Financial Statements. | |
THE CHARLES SCHWAB CORPORATION
SIGNATURES
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on February
24, 2016.22, 2019.
|
| | |
| THE CHARLES SCHWAB CORPORATION |
| (Registrant) |
| | |
| BY: | /s/ Walter W. Bettinger II |
| | Walter W. Bettinger II |
| | President and Chief Executive Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated, on February
24, 2016.22, 2019. |
| | |
| Signature / Title | | Signature / Title |
| | |
| | |
/s/ Walter W. Bettinger II | | /s/ Joseph R. Martinetto Peter Crawford |
Walter W. Bettinger II, | | Joseph R. Martinetto,
Peter Crawford, |
President and Chief Executive Officer and Director | | Senior Executive Vice President
and Chief Financial Officer
(principal (principal financial and accounting officer)
|
| | |
| | |
/s/ Charles R. Schwab | | /s/ John K. Adams, Jr. |
Charles R. Schwab, Chairman of the Board | | John K. Adams, Jr., Director |
| | |
| | |
/s/ Nancy H. Bechtle Joan T. Dea | | /s/ C. Preston Butcher
|
Nancy H. Bechtle, Director
| | C. Preston Butcher, Director
|
| | |
| | |
/s/ Christopher V. Dodds |
| Joan T. Dea, Director | | Christopher V. Dodds, Director |
| | |
| /s/ Stephen A. Ellis |
Christopher V. Dodds, Director
| | Stephen A. Ellis, Director
|
| | |
| | |
/s/ Mark A. Goldfarb |
| Stephen A. Ellis, Director | | Mark A. Goldfarb, Director |
| | |
| /s/ William S. Haraf |
Mark A. Goldfarb, Director
| | William S. Haraf, Director
|
| | |
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/s/ Frank C. Herringer |
| William S. Haraf, Director | | Frank C. Herringer, Director |
| | |
| /s/ Stephen T. McLin | | /s/ Charles A. Ruffel |
Frank C. Herringer, Director
| | Stephen T. McLin, Director | | Charles A. Ruffel, Director |
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/s/ Arun Sarin | | /s/ Paula A. Sneed |
Arun Sarin, Director | | Paula A. Sneed, Director |
| | |
| | |
/s/ Roger O. Walther | | /s/ Robert N. Wilson
|
Roger O. Walther, Director | | Robert N. Wilson, Director
|
- 111 -
THE CHARLES SCHWAB CORPORATION
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Index to Financial Statement Schedule
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| | STATISTICAL DISCLOSURE BY BANK HOLDING COMPANIES |
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| Page
| The following table outlines the information required by the SEC’s Industry Guide 3, “Statistical Disclosure by Bank Holding Companies,” which is presented at the consolidated holding company level. |
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Schedule II - Valuation and Qualifying Accounts
| F-2
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| Required Disclosure | Page |
Supplemental Financial Data for Charles Schwab Bank (Unaudited)
| F-3Distribution of Assets, Liabilities and Stockholders’ Equity; Interest Rates and Interest Differential
| F-2 – F-9 | F-3 |
| Investment Portfolio | F-4 |
| Risk Elements – Cross-border Holdings | F-5 |
| Loan Portfolio | F-6 – F-7 |
| Summary of Loan Loss Experience | F-7 |
| Deposits | F-7 |
| Return on Equity and Assets | F-7 |
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Schedules not listed are omitted because of the absence of the conditions under which they are required or because the information is included in the Company’s consolidated financial statements and notes in “Item 8 – Financial Statements and Supplementary Data.”
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F-1
THE CHARLES SCHWAB CORPORATION
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | SCHEDULE II |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Valuation and Qualifying Accounts |
(In millions) |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | Balance at | | Additions | | | | | Balance at |
| | Beginning | | Charged | | | | | | | End |
Description | | of Year | | to Expense | | Other (1) | | Written off | | of Year |
| | | | | | | | | | | | | | | |
For the year ended December 31, 2015: | | | | | | | | | | | | | | | |
Allowance for doubtful accounts of | | | | | | | | | | | | | | | |
brokerage clients (2) | | $ | 2 | | $ | 5 | | $ | 3 | | $ | (9) | | $ | 1 |
| | | | | | | | | | | | | | | |
For the year ended December 31, 2014: | | | | | | | | | | | | | | | |
Allowance for doubtful accounts of | | | | | | | | | | | | | | | |
brokerage clients (2) | | $ | - | | $ | 6 | | $ | 1 | | $ | (5) | | $ | 2 |
| | | | | | | | | | | | | | | |
For the year ended December 31, 2013: | | | | | | | | | | | | | | | |
Allowance for doubtful accounts of | | | | | | | | | | | | | | | |
brokerage clients (2) | | $ | 1 | | $ | 2 | | $ | 1 | | $ | (4) | | $ | - |
(1)
| Includes collections of previously written-off accounts.
|
(2)
| Excludes banking-related valuation and qualifying accounts. See “Item 8 – Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – 6. Bank Loans and Related Allowance for Loan Losses.”
|
THE CHARLES SCHWAB CORPORATION
Supplemental Financial Data for Charles Schwab Bank (Unaudited)
The following supplemental financial data is consistent with the Securities Exchange Act of 1934, Industry Guide 3 – Statistical Disclosure by Bank Holding Companies.
The accompanying unaudited financial information represents Schwab Bank, which is a subsidiary of CSC. CSC is a savings and loan holding company and Schwab Bank is a federal savings bank. The following information excludes intercompany balances and transactions with CSC and its affiliates.1.Three-year Net Interest Revenue and Average Balances
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
For the Year Ended December 31, | | 2015 | | | 2014 | | | 2013 | |
| | Average | | | | | Average | | Average | | | | | Average | | Average | | | | | Average |
| | Balance | | Interest | | Rate | | Balance | | Interest | | Rate | | Balance | | Interest | | Rate |
Assets: | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Cash and cash equivalents (1) | | $ | 8,028 | | $ | 22 | | 0.27 | % | | $ | 5,871 | | $ | 15 | | 0.26 | % | | $ | 5,626 | | $ | 15 | | 0.27 | % |
Securities available for sale (2) | | | 61,783 | | | 623 | | 1.01 | % | | | 52,056 | | | 546 | | 1.05 | % | | | 49,112 | | | 557 | | 1.13 | % |
Securities held to maturity | | | 38,099 | | | 953 | | 2.50 | % | | | 32,361 | | | 828 | | 2.56 | % | | | 24,915 | | | 610 | | 2.45 | % |
Bank loans (3) | | | 13,970 | | | 369 | | 2.64 | % | | | 12,903 | | | 354 | | 2.74 | % | | | 11,756 | | | 329 | | 2.80 | % |
Other interest-earning assets | | | 56 | | | 5 | | 8.93 | % | | | 63 | | | 6 | | 9.52 | % | | | 53 | | | 2 | | 3.77 | % |
Total interest-earning assets | | | 121,936 | | | 1,972 | | 1.62 | % | | | 103,254 | | | 1,749 | | 1.69 | % | | | 91,462 | | | 1,513 | | 1.65 | % |
Net unrealized gain on | | | | | | | | | | | | | | | | | | | | | | | | | | | |
securities available for sale | | | 187 | | | | | | | | | 229 | | | | | | | | | 252 | | | | | | |
Noninterest-earning assets | | | 601 | | | | | | | | | 525 | | | | | | | | | 671 | | | | | | |
Total Assets | | $ | 122,724 | | | | | | | | $ | 104,008 | | | | | | | | $ | 92,385 | | | | | | |
Liabilities and Stockholder’s Equity: | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Interest-bearing banking deposits | | $ | 113,464 | | | 29 | | 0.03 | % | | $ | 95,842 | | | 30 | | 0.03 | % | | $ | 85,465 | | | 31 | | 0.04 | % |
Total sources on which interest is paid | | | 113,464 | | | 29 | | 0.03 | % | | | 95,842 | | | 30 | | 0.03 | % | | | 85,465 | | | 31 | | 0.04 | % |
Noninterest-bearing liabilities | | | 719 | | | | | | | | | 723 | | | | | | | | | 650 | | | | | | |
Stockholder’s equity | | | 8,541 | | | | | | | | | 7,443 | | | | | | | | | 6,270 | | | | | | |
Total Liabilities and Stockholder’s Equity | | $ | 122,724 | | | | | | | | $ | 104,008 | | | | | | | | $ | 92,385 | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net interest revenue | | | | | $ | 1,943 | | | | | | | | $ | 1,719 | | | | | | | | $ | 1,482 | | | |
Net yield on interest-earning assets | | | | | | | | 1.59 | % | | | | | | | | 1.66 | % | | | | | | | | 1.62 | % |
(1)
| Includes deposits with banks and short-term investments.
|
(2)
1. | Amounts have been calculated based on amortized cost.
|
(3)
| Includes average principal balances of nonaccrual loans.
Three-year Net Interest Revenue and Average Balances |
F-3
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Year Ended December 31, | 2018 | | 2017 | | 2016 |
| | Average | | | | Average | | Average | | | | Average | | Average | | | | Average |
| | Balance | | Interest | | Rate | | Balance | | Interest | | Rate | | Balance | | Interest | | Rate |
| Assets: | | | | | | | | | | | | | | | | | |
| Cash and cash equivalents | $ | 17,783 |
| | $ | 348 |
| | 1.93 | % | | $ | 9,931 |
| | $ | 109 |
| | 1.10 | % | | $ | 11,143 |
| | $ | 57 |
| | 0.51 | % |
| Cash and investments segregated | 11,461 |
| | 206 |
| | 1.78 | % | | 18,525 |
| | 166 |
| | 0.90 | % | | 20,104 |
| | 93 |
| | 0.46 | % |
| Broker-related receivables | 303 |
| | 6 |
| | 2.09 | % | | 430 |
| | 3 |
| | 0.70 | % | | 558 |
| | 1 |
| | 0.22 | % |
| Receivables from brokerage clients | 19,870 |
| | 830 |
| | 4.12 | % | | 16,269 |
| | 575 |
| | 3.53 | % | | 15,001 |
| | 497 |
| | 3.31 | % |
Available for sale securities (1) | 54,542 |
| | 1,241 |
| | 2.26 | % | | 53,040 |
| | 815 |
| | 1.54 | % | | 72,586 |
| | 883 |
| | 1.22 | % |
| Held to maturity securities | 131,794 |
| | 3,348 |
| | 2.53 | % | | 103,599 |
| | 2,354 |
| | 2.27 | % | | 57,451 |
| | 1,402 |
| | 2.44 | % |
Bank loans (5) | 16,554 |
| | 559 |
| | 3.37 | % | | 15,919 |
| | 472 |
| | 2.97 | % | | 14,715 |
| | 400 |
| | 2.72 | % |
| Total interest-earning assets | 252,307 |
| | 6,538 |
| | 2.57 | % | | 217,713 |
| | 4,494 |
| | 2.06 | % | | 191,558 |
| | 3,333 |
| | 1.74 | % |
| Other interest revenue | | | 142 |
| | | | | | 130 |
| | | | | | 160 |
| | |
| Total interest-earning assets | 252,307 |
| | 6,680 |
| | 2.63 | % | | 217,713 |
| | 4,624 |
| | 2.12 | % | | 191,558 |
| | 3,493 |
| | 1.82 | % |
Noninterest-earning assets (2,3) | 11,681 |
| | | | | | 9,968 |
| | | | | | 9,354 |
| | | | |
| Total assets | $ | 263,988 |
| | | | | | $ | 227,681 |
| | | | | | $ | 200,912 |
| | | | |
| | | | | | | | | | | | | | | | | | |
| Liabilities and Stockholders’ Equity: | | | | | | | | | | | | | | | | | |
| Bank deposits | $ | 199,139 |
| | $ | 545 |
| | 0.27 | % | | $ | 163,998 |
| | $ | 148 |
| | 0.09 | % | | $ | 141,432 |
| | $ | 37 |
| | 0.03 | % |
| Payables to brokerage clients | 21,178 |
| | 56 |
| | 0.27 | % | | 25,403 |
| | 16 |
| | 0.06 | % | | 26,311 |
| | 3 |
| | 0.01 | % |
| Short-term borrowings | 3,359 |
| | 54 |
| | 1.59 | % | | 3,503 |
| | 41 |
| | 1.17 | % | | 1,864 |
| | 9 |
| | 0.48 | % |
| Long-term debt | 5,423 |
| | 190 |
| | 3.50 | % | | 3,431 |
| | 119 |
| | 3.47 | % | | 2,876 |
| | 104 |
| | 3.62 | % |
| Total interest-bearing liabilities | 229,099 |
| | 845 |
| | 0.37 | % | | 196,335 |
| | 324 |
| | 0.17 | % | | 172,483 |
| | 153 |
| | 0.09 | % |
| Other interest expense | | | 12 |
| | | | | | 18 |
| | | | | | 18 |
| | |
Noninterest-bearing liabilities (2,4) | 14,883 |
| | | | | | 13,787 |
| | | | | | 13,375 |
| | | | |
Total liabilities (6) | 243,982 |
| | 857 |
| | 0.34 | % | | 210,122 |
| | 342 |
| | 0.15 | % | | 185,858 |
| | 171 |
| | 0.09 | % |
Stockholders’ equity (2) | 20,006 |
| | | | | | 17,559 |
| | | | | | 15,054 |
| | | | |
| Total liabilities and stockholders’ equity | $ | 263,988 |
| | | | | | $ | 227,681 |
| | | | | | $ | 200,912 |
| | | | |
| | | | | | | | | | | | | | | | | | |
| Net interest revenue | | | $ | 5,823 |
| | | | | | $ | 4,282 |
| | | | | | $ | 3,322 |
| | |
| Net yield on interest-earning assets | | | | | 2.29 | % | | | | | | 1.97 | % | | | | | | 1.73 | % |
(1) Amounts calculated based on amortized cost.
(2) Average balance calculation based on month end balances.
(3) Noninterest-earning assets include equipment, office facilities, and property – net, goodwill, and other assets that do not generate interest income.
(4) Noninterest-bearing liabilities consist of other liabilities that do not generate interest expense.
(5) Includes average principal balances of nonaccrual loans.
(6) Average rate calculation based on total funding sources.
THE CHARLES SCHWAB CORPORATION
Supplemental Financial Data
for Charles Schwab Bank (Unaudited)
2.Analysis of Change in Net Interest Revenue
| |
| 2. | Analysis of Change in Net Interest Revenue |
An analysis of the year-to-year changes in the categories of interest revenue and interest expense resulting from changes in volume and rate is as follows:
| | | | | | | | | | | | | | | | | | |
| | | 2015 Compared to 2014 | | | 2014 Compared to 2013 |
| | | Increase (Decrease) Due to | | | Increase (Decrease) Due to |
| | Change in: | | Change in: |
| | Average | | Average | | | | Average | | Average | | |
| | Volume | | Rate | | Total | | Volume | | Rate | | Total |
Interest-earning assets: | | | | | | | | | | | | | | | | | | |
Cash and cash equivalents (1) | | $ | 6 | | $ | 1 | | $ | 7 | | $ | - | | $ | - | | $ | - |
Securities available for sale (2) | | | 102 | | | (25) | | | 77 | | | 33 | | | (44) | | | (11) |
Securities held to maturity | | | 147 | | | (22) | | | 125 | | | 182 | | | 36 | | | 218 |
Bank loans (3) | | | 29 | | | (14) | | | 15 | | | 32 | | | (7) | | | 25 |
Other interest-earning assets | | | (1) | | | - | | | (1) | | | - | | | 4 | | | 4 |
Total interest-earning assets | | $ | 283 | | $ | (60) | | $ | 223 | | $ | 247 | | $ | (11) | | $ | 236 |
Interest-bearing sources of funds: | | | | | | | | | | | | | | | | | | |
Interest-bearing banking deposits | | $ | 5 | | $ | (6) | | $ | (1) | | $ | 4 | | $ | (5) | | $ | (1) |
Total sources on which interest is paid | | $ | 5 | | $ | (6) | | $ | (1) | | $ | 4 | | $ | (5) | | $ | (1) |
Change in net interest revenue | | $ | 278 | | $ | (54) | | $ | 224 | | $ | 243 | | $ | (6) | | $ | 237 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | 2018 Compared to 2017
Increase (Decrease) Due to
Change in: | | 2017 Compared to 2016
Increase (Decrease) Due to
Change in: |
| | Average
Volume | | Average
Rate | | Total | | Average
Volume | | Average
Rate | | Total |
| Interest-earning assets: | | | | | | | | | | | |
Cash and cash equivalents (1) | $ | 86 |
| | $ | 153 |
| | $ | 239 |
| | $ | (6 | ) | | $ | 58 |
| | $ | 52 |
|
| Cash and investments segregated | (64 | ) | | 104 |
| | 40 |
| | (7 | ) | | 80 |
| | 73 |
|
| Broker-related receivables | (1 | ) | | 4 |
| | 3 |
| | — |
| | 2 |
| | 2 |
|
| Receivables from brokerage clients | 127 |
| | 128 |
| | 255 |
| | 42 |
| | 36 |
| | 78 |
|
Available for sale securities (2) | 23 |
| | 403 |
| | 426 |
| | (238 | ) | | 170 |
| | (68 | ) |
| Held to maturity securities | 640 |
| | 354 |
| | 994 |
| | 1,126 |
| | (174 | ) | | 952 |
|
Bank loans (3) | 19 |
| | 68 |
| | 87 |
| | 33 |
| | 39 |
| | 72 |
|
| Other interest revenue | — |
| | 12 |
| | 12 |
| | — |
| | (30 | ) | | (30 | ) |
| Total interest-earning assets | $ | 830 |
| | $ | 1,226 |
| | $ | 2,056 |
| | $ | 950 |
| | $ | 181 |
| | $ | 1,131 |
|
| Interest-bearing sources of funds: | | | | | | | | | | | |
| Bank deposits | $ | 32 |
| | $ | 365 |
| | $ | 397 |
| | $ | 7 |
| | $ | 104 |
| | $ | 111 |
|
| Payables to brokerage clients | (3 | ) | | 43 |
| | 40 |
| | — |
| | 13 |
| | 13 |
|
| Short-term borrowings | (2 | ) | | 15 |
| | 13 |
| | 8 |
| | 24 |
| | 32 |
|
| Long-term debt | 69 |
| | 2 |
| | 71 |
| | 20 |
| | (5 | ) | | 15 |
|
| Other interest expense | — |
| | (6 | ) | | (6 | ) | | — |
| | — |
| | — |
|
| Total sources on which interest is paid | 96 |
| | 419 |
| | 515 |
| | 35 |
| | 136 |
| | 171 |
|
| Change in net interest revenue | $ | 734 |
| | $ | 807 |
| | $ | 1,541 |
| | $ | 915 |
| | $ | 45 |
| | $ | 960 |
|
Changes that are not due solely to volume or rate have been allocated to rate.
(1)
| Includes deposits with banks and short-term investments.
|
(2)
| Amounts have been calculated based on amortized cost.
|
(3)
| Includes average principal balances of nonaccrual loans.
|
(1) Includes deposits with banks and short-term investments.F-4
(2) Amounts have been calculated based on amortized cost.
(3) Includes average principal balances of nonaccrual loans.
THE CHARLES SCHWAB CORPORATION
Supplemental Financial Data
for Charles Schwab Bank (Unaudited)
3.Securities Available for Sale and Securities Held to MaturityThe amortized cost, gross unrealized gains and losses, and fair value of AFS and HTM securities available for sale and securities held to maturity2016 are as follows:
| | | | | | | | | | | | |
| | | | | Gross | | Gross | | | |
| | Amortized | | Unrealized | | Unrealized | | Fair |
December 31, 2015 | | Cost | | Gains | | Losses | | Value |
Securities available for sale: | | | | | | | | | | | | |
U.S. agency mortgage-backed securities | | $ | 22,014 | | $ | 183 | | $ | 48 | | $ | 22,149 |
Asset-backed securities | | | 21,784 | | | 7 | | | 306 | | | 21,485 |
Corporate debt securities | | | 10,764 | | | 14 | | | 31 | | | 10,747 |
U.S. Treasury securities | | | 5,150 | | | 1 | | | 16 | | | 5,135 |
U.S. agency notes | | | 3,177 | | | - | | | 27 | | | 3,150 |
Certificates of deposit | | | 1,685 | | | 1 | | | 3 | | | 1,683 |
U.S. state and municipal securities | | | 414 | | | 10 | | | - | | | 424 |
Non-agency commercial mortgage-backed securities | | | 298 | | | 1 | | | - | | | 299 |
Other securities | | | 5 | | | - | | | - | | | 5 |
Total securities available for sale | | $ | 65,291 | | $ | 217 | | $ | 431 | | $ | 65,077 |
Securities held to maturity: | | | | | | | | | | | | |
U.S. agency mortgage-backed securities | | $ | 48,785 | | $ | 391 | | $ | 293 | | $ | 48,883 |
Non-agency commercial mortgage-backed securities | | | 999 | | | 6 | | | 20 | | | 985 |
Total securities held to maturity | | $ | 49,784 | | $ | 397 | | $ | 313 | | $ | 49,868 |
| | | | | | | | | |
| | | | | Gross | | Gross | | | | | | | | | | | |
| | Amortized | | Unrealized | | Unrealized | | Fair | |
December 31, 2014 | | Cost | | Gains | | Losses | | Value | |
Securities available for sale: | | | | | | | | | | |
| December 31, 2016 | | Amortized
Cost | | Gross Unrealized
Gains | | Gross Unrealized
Losses | | Fair
Value |
| Available for sale securities: | | | | | | | | |
U.S. agency mortgage-backed securities | | $ | 18,487 | | $ | 242 | | $ | 12 | | $ | 18,717 | $ | 33,167 |
| | $ | 120 |
| | $ | 92 |
| | $ | 33,195 |
|
Asset-backed securities | | | 19,320 | | | 64 | | | 18 | | | 19,366 | 20,520 |
| | 29 |
| | 214 |
| | 20,335 |
|
Corporate debt securities | | | 8,023 | | | 30 | | | 8 | | | 8,045 | 9,850 |
| | 20 |
| | 18 |
| | 9,852 |
|
U.S. Treasury securities | | | 2,993 | | | 2 | | | 1 | | | 2,994 | 8,679 |
| | 3 |
| | 59 |
| | 8,623 |
|
| Certificates of deposit | | 2,070 |
| | 2 |
| | 1 |
| | 2,071 |
|
U.S. agency notes | | | 3,839 | | | - | | | 44 | | | 3,795 | 1,915 |
| | — |
| | 8 |
| | 1,907 |
|
Certificates of deposit | | | 1,533 | | | 1 | | | - | | | 1,534 | |
| U.S. state and municipal securities | | 1,167 |
| | 2 |
| | 46 |
| | 1,123 |
|
| Commercial paper | | 214 |
| | — |
| | — |
| | 214 |
|
Non-agency commercial mortgage-backed securities | | | 310 | | | 7 | | | - | | | 317 | 45 |
| | — |
| | — |
| | 45 |
|
Other securities | | | 15 | | | - | | | - | | | 15 | |
Total securities available for sale | | $ | 54,520 | | $ | 346 | | $ | 83 | | $ | 54,783 | |
Securities held to maturity: | | | | | | | | | | |
| Total available for sale securities | | $ | 77,627 |
| | $ | 176 |
| | $ | 438 |
| | $ | 77,365 |
|
| Held to maturity securities: | | | | | | | | |
U.S. agency mortgage-backed securities | | $ | 33,388 | | $ | 531 | | $ | 174 | | $ | 33,745 | $ | 72,439 |
| | $ | 324 |
| | $ | 1,086 |
| | $ | 71,677 |
|
Non-agency commercial mortgage-backed securities | | | 1,001 | | | 11 | | | 14 | | | 998 | 997 |
| | 11 |
| | 4 |
| | 1,004 |
|
Total securities held to maturity | | $ | 34,389 | | $ | 542 | | $ | 188 | | $ | 34,743 | |
| Asset-backed securities | | 941 |
| | — |
| | — |
| | 941 |
|
| Corporate debt securities | | 436 |
| | — |
| | — |
| | 436 |
|
| U.S. Treasury securities | | 223 |
| | — |
| | 4 |
| | 219 |
|
| Commercial paper | | 99 |
| | — |
| | — |
| | 99 |
|
| U.S. state and municipal securities | | 68 |
| | 1 |
| | 1 |
| | 68 |
|
| Total held to maturity securities | | $ | 75,203 |
| | $ | 336 |
| | $ | 1,095 |
| | $ | 74,444 |
|
For additional information on 2018 and 2017 investments, see Item 8 – Note 6.
As of December 31, 2018, in addition to holdings of securities issued by the U.S. Government and U.S. Government agencies and corporations, the Company’s holdings of investment securities from single issuers with aggregate book values in excess of ten percent of stockholders’ equity are detailed in the table below. These securities have performed in a manner consistent with the investment securities portfolio as a whole.
|
| | | | | | | |
| Issuer | Aggregate Amortized Cost | | Aggregate Fair Value |
Discover Card Execution Note Trust (1) | $ | 2,300 |
| | $ | 2,295 |
|
American Express Credit Account Master Trust Class A(1) | $ | 2,251 |
| | $ | 2,241 |
|
Capital One Multi-Asset Execution Trust Class A(1) | $ | 2,140 |
| | $ | 2,140 |
|
(1) Included in AFS and HTM securities in the Company’s consolidated balance sheets.
THE CHARLES SCHWAB CORPORATION
Supplemental Financial Data
for Charles Schwab Bank (Unaudited)
| | | | | | | | | | | | |
| | | | | Gross | | Gross | | | |
| | Amortized | | Unrealized | | Unrealized | | Fair |
December 31, 2013 | | Cost | | Gains | | Losses | | Value |
Securities available for sale: | | | | | | | | | | | | |
U.S. agency mortgage-backed securities | | $ | 18,554 | | $ | 140 | | $ | 49 | | $ | 18,645 |
Asset-backed securities | | | 15,201 | | | 42 | | | 37 | | | 15,206 |
Corporate debt securities | | | 8,973 | | | 49 | | | 15 | | | 9,007 |
U.S. agency notes | | | 4,239 | | | 1 | | | 104 | | | 4,136 |
Certificates of deposit | | | 3,650 | | | 4 | | | 2 | | | 3,652 |
Non-agency commercial mortgage-backed securities | | | 271 | | | 8 | | | - | | | 279 |
Other securities | | | 716 | | | 11 | | | 34 | | | 693 |
Total securities available for sale | | $ | 51,604 | | $ | 255 | | $ | 241 | | $ | 51,618 |
Securities held to maturity: | | | | | | | | | | | | |
U.S. agency mortgage-backed securities | | $ | 29,260 | | $ | 161 | | $ | 921 | | $ | 28,500 |
Non-agency commercial mortgage-backed securities | | | 958 | | | - | | | 68 | | | 890 |
Other securities | | | 100 | | | - | | | - | | | 100 |
Total securities held to maturity | | $ | 30,318 | | $ | 161 | | $ | 989 | | $ | 29,490 |
The maturities and related weighted-average yields of securities available for sale and securities held to maturity are as follows:
| | | | | | | | | | | | | | | | | | | |
| | | | | 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) | $ | - | | | $ | 1,883 | | | $ | 10,372 | | | $ | 9,894 | | | $ | 22,149 | |
Asset-backed securities | | - | | | | 7,014 | | | | 3,555 | | | | 10,916 | | | | 21,485 | |
Corporate debt securities | | 2,344 | | | | 8,403 | | | | - | | | | - | | | | 10,747 | |
U.S. Treasury securities | | 2,494 | | | | 2,641 | | | | - | | | | - | | | | 5,135 | |
U.S. agency notes | | - | | | | 3,150 | | | | - | | | | - | | | | 3,150 | |
Certificates of deposit | | 935 | | | | 748 | | | | - | | | | - | | | | 1,683 | |
U.S. state and municipal securities | | - | | | | - | | | | 19 | | | | 405 | | | | 424 | |
Non-agency commercial mortgage-backed | | | | | | | | | | | | | | | | | | | |
securities (1) | | - | | | | - | | | | - | | | | 299 | | | | 299 | |
Other securities | | - | | | | - | | | | - | | | | 5 | | | | 5 | |
Total fair value | $ | 5,773 | | | $ | 23,839 | | | $ | 13,946 | | | $ | 21,519 | | | $ | 65,077 | |
Total amortized cost | $ | 5,774 | | | $ | 23,873 | | | $ | 13,966 | | | $ | 21,678 | | | $ | 65,291 | |
Weighted-average yield (2) | | 0.80 | % | | | 1.05 | % | | | 0.90 | % | | | 1.18 | % | | | 1.04 | % |
Securities held to maturity: | | | | | | | | | | | | | | | | | | | |
U.S. agency mortgage-backed securities (1) | $ | - | | | $ | 2,380 | | | $ | 20,337 | | | $ | 26,166 | | | $ | 48,883 | |
Non-agency commercial mortgage-backed | | | | | | | | | | | | | | | | | | | |
securities (1) | | - | | | | - | | | | 357 | | | | 628 | | | | 985 | |
Total fair value | $ | - | | | $ | 2,380 | | | $ | 20,694 | | | $ | 26,794 | | | $ | 49,868 | |
Total amortized cost | $ | - | | | $ | 2,311 | | | $ | 20,656 | | | $ | 26,817 | | | $ | 49,784 | |
Weighted-average yield (2) | | - | | | | 2.76 | % | | | 2.57 | % | | | 2.09 | % | | | 2.32 | % |
(1)
| Mortgage-backed securities have been allocated to maturity groupings based on final contractual maturities. Actual maturities will differ from final contractual maturities because borrowers on a certain portion of loans underlying these securities have the right to prepay their obligations.
|
(2)
4. | The weighted-average yield is computed using the amortized cost at December 31, 2015.
Cross-border Holdings |
THE CHARLES SCHWAB CORPORATION
Supplemental Financial Data for Charles Schwab Bank (Unaudited)
(Dollars in Millions)
4.Cross-border Holdings
The tables below set forth the amount of Schwab Bank’sinformation describes Schwab’s cross-border holdings, based on carryingfair value, as of December 31, 2015, 2014,2018, 2017, and 2013.2016. Such holdings, by country, that exceed 1%0.75% of total assets are disclosed separately, and suchseparately.
|
| | | | | | | | | | | | | |
| December 31, 2018 | Banks and other
financial institutions | | Commercial and
industrial institutions | | Total | Exposure as a %
of total assets |
| Country: | | | | | | |
| France | $ | 2,793 |
| | $ | — |
| | $ | 2,793 |
| 0.9 | % |
| Total | $ | 2,793 |
| | $ | — |
| | $ | 2,793 |
| |
There were no cross-border holdings by country, that are betweenexceeded 0.75% and 1% of total assets are listedat December 31, 2017.
|
| | | | | | | | | | | | | |
| December 31, 2016 | Banks and other
financial institutions | | Commercial and
industrial institutions | | Total | Exposure as a %
of total assets |
| Country: | | | | | | |
| France | $ | 1,784 |
| | $ | 110 |
| | $ | 1,894 |
| 0.8 | % |
| Total | $ | 1,784 |
| | $ | 110 |
| | $ | 1,894 |
| |
THE CHARLES SCHWAB CORPORATION
Supplemental Financial Data (Unaudited)
(Dollars in
the aggregate. Cross-border holdings are comprised of cash equivalents and securities available for sale.Millions) | | | | | | | | | | | | | | | | | | |
| Banks and other | | Commercial and | | | | | | | Exposure as a % |
December 31, 2015 | financial institutions | | industrial institutions | | Total | | of total assets |
Country: | | | | | | | | | | | | | | | | | | |
Canada | | $ | 1,499 | | | | $ | - | | | | $ | 1,499 | | | | 1.1 | % |
Australia | | | 1,376 | | | | | 60 | | | | | 1,436 | | | | 1.0 | % |
Total | | $ | 2,875 | | | | $ | 60 | | | | $ | 2,935 | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| Banks and other | | Commercial and | | | | | Exposure as a % |
December 31, 2014 | financial institutions | | industrial institutions | | Total | | of total assets |
Country: | | | | | | | | | | | | | | | | | | |
Canada | | $ | 1,437 | | | | $ | - | | | | $ | 1,437 | | | | 1.3 | % |
Australia | | | 1,182 | | | | | - | | | | | 1,182 | | | | 1.1 | % |
Total | | $ | 2,619 | | | | $ | - | | | | $ | 2,619 | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| Banks and other | | Commercial and | | | | | Exposure as a % |
December 31, 2013 | financial institutions | | industrial institutions | | Total | | of total assets |
Country: | | | | | | | | | | | | | | | | | | |
Canada | | $ | 2,408 | | | | $ | - | | | | $ | 2,408 | | | | 2.4 | % |
Australia | | | 1,563 | | | | | - | | | | | 1,563 | | | | 1.6 | % |
United Kingdom | | | 1,262 | | | | | 140 | | | | | 1,402 | | | | 1.4 | % |
Sweden | | | 1,247 | | | | | - | | | | | 1,247 | | | | 1.2 | % |
Switzerland | | | 825 | | | | | - | | | | | 825 | | | | 0.8 | % |
Total | | $ | 7,305 | | | | $ | 140 | | | | $ | 7,445 | | | | | |
5.Bank Loans and Related Allowance for Loan Losses
| |
| 5. | Bank Loans and Related Allowance for Loan Losses |
The composition of the loan portfolio is as follows:
| | | | | | | | | | | | | | | |
December 31, | | 2015 | | 2014 | | 2013 | | 2012 | | 2011 |
Residential real estate mortgages | | $ | 8,334 | | $ | 8,127 | | $ | 8,006 | | $ | 6,507 | | $ | 5,596 |
Home equity loans and lines of credit | | | 2,735 | | | 2,955 | | | 3,041 | | | 3,287 | | | 3,509 |
Pledged asset lines | | | 3,232 | | | 2,320 | | | 1,384 | | | 963 | | | 742 |
Other | | | 61 | | | 36 | | | 34 | | | 22 | | | 16 |
Total bank loans | | $ | 14,362 | | $ | 13,438 | | $ | 12,465 | | $ | 10,779 | | $ | 9,863 |
|
| | | | | | | | | | | | | | | | | | | |
| December 31, | 2018 | | 2017 | | 2016 | | 2015 | | 2014 |
| First Mortgages | $ | 10,384 |
| | $ | 10,016 |
| | $ | 9,134 |
| | $ | 8,334 |
| | $ | 8,127 |
|
| HELOCs | 1,505 |
| | 1,943 |
| | 2,350 |
| | 2,735 |
| | 2,955 |
|
| Pledged asset lines | 4,561 |
| | 4,369 |
| | 3,851 |
| | 3,232 |
| | 2,320 |
|
| Other | 180 |
| | 176 |
| | 94 |
| | 64 |
| | 39 |
|
| Total bank loans | $ | 16,630 |
| | $ | 16,504 |
| | $ | 15,429 |
| | $ | 14,365 |
| | $ | 13,441 |
|
An analysis of nonaccrual loans is as follows:
| | | | | | | | | | | | | | | |
December 31, | | 2015 | | 2014 | | 2013 | | 2012 | | 2011 |
Nonaccrual loans | | $ | 28 | | $ | 35 | | $ | 48 | | $ | 48 | | $ | 52 |
Average nonaccrual loans | | $ | 30 | | $ | 39 | | $ | 43 | | $ | 48 | | $ | 51 |
F-7
|
| | | | | | | | | | | | | | | | | | | |
| December 31, | 2018 | | 2017 | | 2016 | | 2015 | | 2014 |
| Nonaccrual loans | $ | 21 |
| | $ | 28 |
| | $ | 26 |
| | $ | 28 |
| | $ | 35 |
|
| Average nonaccrual loans | $ | 25 |
| | $ | 27 |
| | $ | 27 |
| | $ | 30 |
| | $ | 39 |
|
THE CHARLES SCHWAB CORPORATION
Supplemental Financial Data for Charles Schwab Bank (Unaudited)
(Dollars in Millions)
There were no loans accruing interest that were contractually 90 days or more past due as of any period presented.
Changes in the allowance for loan losses were as follows:
| | | | | | | | | | | | | | | |
December 31, | | 2015 | | 2014 | | 2013 | | 2012 | | 2011 |
Balance at beginning of year | | $ | 42 | | $ | 48 | | $ | 56 | | $ | 54 | | $ | 53 |
Charge-offs | | | (3) | | | (5) | | | (11) | | | (16) | | | (19) |
Recoveries | | | 3 | | | 3 | | | 4 | | | 2 | | | 2 |
Provision for loan losses | | | (11) | | | (4) | | | (1) | | | 16 | | | 18 |
Balance at end of year | | $ | 31 | | $ | 42 | | $ | 48 | | $ | 56 | | $ | 54 |
|
| | | | | | | | | | | | | | | | | | | |
| December 31, | 2018 | | 2017 | | 2016 | | 2015 | | 2014 |
| Balance at beginning of year | $ | 26 |
| | $ | 26 |
| | $ | 31 |
| | $ | 42 |
| | $ | 48 |
|
| Charge-offs | (1 | ) | | (3 | ) | | (2 | ) | | (3 | ) | | (5 | ) |
| Recoveries | 2 |
| | 3 |
| | 2 |
| | 3 |
| | 3 |
|
| Provision for loan losses | (6 | ) | | — |
| | (5 | ) | | (11 | ) | | (4 | ) |
| Balance at end of year | $ | 21 |
| | $ | 26 |
| | $ | 26 |
| | $ | 31 |
| | $ | 42 |
|
The maturities of the loan portfolio are as follows:
| | | | | | | | | | | | | | |
| | | | | After 1 year | | | | | | | |
| | Within | | through | | After | | |
December 31, 2015 | | 1 year | | 5 years | | 5 years | | Total |
Residential real estate mortgages (1) | | $ | - | | $ | - | | | $ | 8,334 | | | $ | 8,334 |
Home equity loans and lines of credit (2) | | | 620 | | | 1,307 | | | | 808 | | | | 2,735 |
Pledged asset lines | | | 466 | | | 2,766 | | | | - | | | | 3,232 |
Other | | | 6 | | | 52 | | | | 3 | | | | 61 |
Total | | $ | 1,092 | | $ | 4,125 | | | $ | 9,145 | | | $ | 14,362 |
(1)
| Maturities are based upon the contractual terms of the loans.
|
(2)
| Maturities are based on an initial draw period of ten years.
|
|
| | | | | | | | | | | | | | | |
| December 31, 2018 | Within
1 year | | After 1 year
through
5 years | | After
5 years | | Total |
First Mortgages (1) | $ | — |
| | $ | — |
| | $ | 10,384 |
| | $ | 10,384 |
|
HELOCs (2) | 760 |
| | 291 |
| | 454 |
| | 1,505 |
|
| Pledged asset lines | 679 |
| | 3,869 |
| | 13 |
| | 4,561 |
|
| Other | 6 |
| | 169 |
| | 5 |
| | 180 |
|
| Total | $ | 1,445 |
| | $ | 4,329 |
| | $ | 10,856 |
| | $ | 16,630 |
|
(1) Maturities are based upon the contractual terms of the loans.
(2) Maturities are based on an initial draw period of ten years.
The interest sensitivity of loans with contractual maturities in excess of one year is as follows:
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | After
|
December 31, 2015
| | | | | | | | | | | | | 1 year
|
Loans with floating or adjustable interest rates
| | | | | | | | | | | | | $
| 12,336 |
Loans with predetermined interest rates
| | | | | | | | | | | | | | 934 |
Total
| | | | | | | | | | | | | $
| 13,270 |
6.Summary of Loan Loss on Banking Loans Experience
| | | | | | | | | | | | | | | | | | | | |
December 31, | | 2015 | | | 2014 | | | 2013 | | | 2012 | | | 2011 | |
Average loans | | $ | 13,972 | | | $ | 12,904 | | | $ | 11,756 | | | $ | 10,050 | | | $ | 9,468 | |
Allowance to year end loans | | | .21 | % | | | .31 | % | | | .39 | % | | | .52 | % | | | .55 | % |
Allowance to nonperforming loans | | | 110 | % | | | 120 | % | | | 100 | % | | | 117 | % | | | 104 | % |
Nonperforming assets to average loans | | | | | | | | | | | | | | | | | | | | |
and real estate owned | | | .26 | % | | | .31 | % | | | .45 | % | | | .54 | % | | | .59 | % |
|
| | | |
| December 31, 2018 | After
1 year |
| Loans with floating or adjustable interest rates | $ | 14,175 |
|
| Loans with predetermined interest rates | 1,010 |
|
| Total | $ | 15,185 |
|
THE CHARLES SCHWAB CORPORATION
Supplemental Financial Data
for Charles Schwab Bank (Unaudited)
7.Bank Deposits
| |
| 6. | Summary of Loan Loss on Banking Loans Experience |
|
| | | | | | | | | | | | | | | | | | | |
| December 31, | 2018 | | 2017 | | 2016 | | 2015 | | 2014 |
| Average loans | $ | 16,554 |
| | $ | 15,919 |
| | $ | 14,715 |
| | $ | 13,973 |
| | $ | 12,906 |
|
| Allowance to year end loans | .13 | % | | .16 | % | | .17 | % | | .21 | % | | .31 | % |
| Allowance to nonperforming loans | 100 | % | | 93 | % | | 101 | % | | 110 | % | | 120 | % |
Nonperforming assets to average loans and
real estate owned | .14 | % | | .20 | % | | .21 | % | | .26 | % | | .31 | % |
The following table presents the average amount of and the average rate paid on deposit categories that are in excess of ten percent of average total deposits from banking clients:
| | | | | | | | | | | | | | | | | | |
| | 2015 | | | 2014 | | | 2013 | |
| | Amount | | Rate | | | Amount | | Rate | | | Amount | | Rate | |
Analysis of average daily deposits: | | | | | | | | | | | | | | | | | | |
Money market and other savings deposits | | $ | 99,881 | | 0.02 | % | | $ | 82,927 | | 0.01 | % | | $ | 73,167 | | 0.03 | % |
Interest-bearing demand deposits | | | 13,583 | | 0.07 | % | | | 12,915 | | 0.09 | % | | | 12,298 | | 0.10 | % |
Total | | $ | 113,464 | | | | | $ | 95,842 | | | | | $ | 85,465 | | | |
|
| | | | | | | | | | | | | | | | | |
| December 31, | 2018 | | 2017 | | 2016 |
| | Amount | Rate | | Amount | Rate | | Amount | Rate |
| Analysis of average daily deposits: | | | | | | | | |
| Money market and other savings deposits | $ | 184,039 |
| 0.28 | % | | $ | 148,679 |
| 0.09 | % | | $ | 126,719 |
| 0.02 | % |
| Interest-bearing demand deposits | 15,100 |
| 0.25 | % | | 15,319 |
| 0.14 | % | | 14,713 |
| 0.07 | % |
| Total | $ | 199,139 |
| | | $ | 163,998 |
| | | $ | 141,432 |
| |
At December
31, 2015, bank deposits did not include any domestic-issued2018, there were no certificates of deposit of $100,000 or more.8.Ratios
more included in bank deposits. | | | | | | | | | |
December 31, | | 2015 | | | 2014 | | | 2013 | |
Return on average stockholder’s equity | | 12.85 | % | | 12.71 | % | | 12.46 | % |
Return on average total assets | | 0.89 | % | | 0.91 | % | | 0.85 | % |
Average stockholder’s equity as a percentage of average total assets | | 6.96 | % | | 7.15 | % | | 6.79 | % |
|
| | | | | | |
| December 31, | 2018 | 2017 | 2016 |
| Return on average total stockholders’ equity | 17.53 | % | 13.41 | % | 12.55 | % |
| Return on average total assets | 1.33 | % | 1.03 | % | 0.94 | % |
| Average total stockholders’ equity as a percentage of average total assets | 7.58 | % | 7.71 | % | 7.49 | % |
Dividend payout ratio (1) | 18.78 | % | 19.88 | % | 20.61 | % |
Note: Average balance calculations based on month end balances.
| |
(1) | Dividends declared per common share divided by diluted EPS. |