UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2017March 31, 2018
Commission File Number: 1-9700
THE CHARLES SCHWAB CORPORATION
(Exact name of registrant as specified in its charter)
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Delaware (State or other jurisdiction of incorporation or organization) | 94-3025021 (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
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 Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) 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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “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 ☒
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
1,339,119,4761,349,185,040 shares of $.01 par value Common Stock Outstanding on July 31, 2017April 30, 2018
THE CHARLES SCHWAB CORPORATION
Quarterly Report on Form 10-Q
For the Quarter Ended June 30, 2017March 31, 2018
Index
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| Item 1. | | | |
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| | | | 18 |
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| | | | 2219-20 |
| | | | 23-4821-51 |
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| Item 2. | | | 1-171-14 |
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| Item 3. | | | 17 |
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| Item 4. | | | 4852 |
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| Item 1. | | | 49 |
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| Item 1A. | | | 49 |
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| Item 2. | | | 49 |
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| Item 3. | | | 5053 |
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| Item 4. | | | 50 |
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| Item 5. | | | 50 |
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| Item 6. | | | 51 |
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| | 52 |
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Part I – FINANCIAL INFORMATION
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 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
INTRODUCTION
The Charles Schwab Corporation (CSC) is a savings and loan holding company engaged, through its subsidiaries (collectively referred to as “Schwab” or the Company)“Company”), in wealth management, securities brokerage, banking, asset management, custody, and financial advisory services.
Significant business subsidiaries of CSC include the following:
Charles Schwab & Co., Inc. (Schwab)(CS&Co), a securities broker-dealer;
Charles Schwab Bank (Schwab Bank)(CSB), a federal savings bank; and
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• | Charles Schwab Investment Management, Inc. (CSIM), the investment advisor for Schwab’s proprietary mutual funds which are referred to as the Schwab(Schwab Funds®,) and for Schwab’s exchange-traded funds (ETFs), which are referred to as the Schwab(Schwab ETFs™). |
TheUnless otherwise indicated, the terms “Schwab,” “the Company,” “we,” “us,” or “our” mean CSC together with its consolidated subsidiaries.
Schwab provides financial services to individuals and institutional clients through two segments – Investor Services and Advisor Services. The Investor Services segment provides retail brokerage and banking services to individual investors, and retirement plan services, andas well as other corporate brokerage services.services, to businesses and their employees. The Advisor Services segment provides custodial, trading, banking, and support services, as well as retirement business services.services, to independent registered investment advisors (RIAs), independent retirement advisors, and recordkeepers.
Schwab was founded on the belief that averageall Americans deserve access to a better investing experience. Although much has changed in the intervening years, the Company’sour purpose remains clear – to champion every client’s goals with passion and integrity. Guided by this purpose and the aspiration of creating the most trusted leader in investment services, management has adopted a strategy described as “Through Clients’ Eyes.”
Under this approach, the Company’sour strategic goals are focused on putting clients’ perspectives, needs, and desires at the forefront. Because investing plays a fundamental role in building financial security, the Company striveswe strive to deliver a better investing experience for itsour clients – individual investors and the people and institutions who serve them – by disrupting longstanding industry practices on their behalf and providing superior service. The Company aimsWe aim to offer a broad range of products and solutions to meet client needs with a focus on transparency and value. In addition, management works to couple the Company’sSchwab’s scale and resources with ongoing expense discipline to keep costs low and ensure that products and solutions are affordable as well as responsive to client needs. Finally, the Company aimswe seek to maximize itsour market valuation and stockholder returns over time.
Management estimates that investable wealth in the United States (U.S.) is currently well in excess ofexceeds $30 trillion, which means the Company’s $3.04$3.31 trillion in client assets represents a market share of less than ten percent, leavingleaves substantial opportunity for growth. The Company’sOur strategy is based on the principle that developing trusted relationships will translate into more assets from both new and existing clients, ultimately driving more revenue, and along with expense discipline, generatingwill generate earnings growth and buildingbuild long-term stockholder value.
This Form 10-Q is intended to provide an update on the activityManagement’s Discussion and results of operations for the three and six months ended June 30, 2017 andAnalysis should be read in conjunction with our Annual Report on Form 10-K for the 2016fiscal year ended December 31, 2017 (2017 Form 10-K. More information on10-K).
On our website, www.aboutschwab.com, we post the Company’s business operations, descriptions of revenuefollowing filings after they are electronically filed with or furnished to the Securities and expense categories, policies and procedures including the Company’s governance and monitoring programs is available in the 2016 Form 10-K. The Company’s recentExchange Commission (SEC): annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934. The SEC maintains a website at www.sec.gov that contains reports, proxy, statements, as well asand other filingsinformation that we file electronically with the Securities and Exchange Commission (SEC), are available free of charge on the Company’s website, https://www.aboutschwab.com or by request via email (investor.relations@schwab.com), telephone (415-667-7000) or mail (Charles Schwab Investor Relations at 211 Main Street, San Francisco, CA 94105).SEC.
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)
FORWARD-LOOKING STATEMENTS
In addition to historical information, this Quarterly Report on Form 10-Q 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 necessarily estimates based on the best judgment of the Company’sSchwab’s senior management. These statements relate to, among other things, the following sections of this Form 10-Q:things:
The Company’s aimSchwab seeking to maximize its market valuation and stockholder returns over time; and the Company’sour belief that developing trusted relationships will translate into more client assets which drives revenue and, along with expense discipline, generates earnings growth and builds stockholder value (see Introduction in Part I, Item 2);
Capital expenditures in 2018 (see Results of Operations);
The expected impact of new accounting standards not yet adopted (see New Accounting Standards in Part I, Item 1, Financial Information -– Notes to Condensed Consolidated Financial Statements (Item 1) – Note 2);
The likelihood of indemnification and guarantee payment obligations (see Commitments and Contingencies in Item 1 – Note 8)9); and
The impact of legal proceedings and regulatory matters (see Commitments and Contingencies in Item 1 – Note 89 and Legal Proceedings in Part II, Item 1).
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 Quarterly Report on Form 10-Q 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:
General market conditions, including the level of interest rates, equity valuations, and trading activity;
The Company’sOur ability to attract and retain clients, develop trusted relationships, and grow client assets;
Client use of the Company’sour investment advisory services and other products and services;
The level of client assets including cash balances;
Competitive pressure on pricing;pricing, including deposit rates;
Client sensitivity to interest rates;
Regulatory guidance;
Timing, amount, and impact of migration of certain balances from brokerage accounts and sweep money market funds into Schwab Bank;bank sweep deposits;
Capital and liquidity needs and management;
The Company’sOur ability to manage expenses;
The Company’sOur ability to develop and launch new products, services, and capabilities in a timely and successful manner;
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 the Company haswe have indemnification and guarantee obligations.
Certain of these factors, as well as general risk factors affecting the Company, are discussed in greater detail in Part I – Item 1A – Risk Factors in the 20162017 Form 10-K.
THE CHARLES SCHWAB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)
OVERVIEW
Management focuses on several client activity and financial metrics in evaluating the Company’sSchwab’s financial position and operating performance. For a discussion of the key metrics and a glossary of terms, refer to the Company’s 2016 Form 10-K. Results for the secondfirst quarters of 2018 and first halves of 2017 and 2016 are:
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| Three Months Ended June 30, | | | | Six Months Ended June 30, | | | Three Months Ended March 31, | | Percent Change |
| 2017 | | 2016 | | Percent Change | | 2017 | | 2016 | | Percent Change | 2018 | | 2017 | |
Client Metrics: | | | | | | | | | | | | | | | | |
Net new client assets (in billions)(1) | $ | 64.5 |
| | $ | 26.6 |
| | 142 | % | | $ | 103.4 |
| | $ | 58.6 |
| | 76 | % | $ | (18.8 | ) | | $ | 38.9 |
| | (148 | )% |
Core net new client assets (in billions) | $ | 46.2 |
| | $ | 26.6 |
| | 74 | % | | $ | 85.1 |
| | $ | 58.6 |
| | 45 | % | $ | 65.6 |
| | $ | 38.9 |
| | 69 | % |
Client assets (in billions, at quarter end) | $ | 3,040.6 |
| | $ | 2,622.0 |
| | 16 | % | | | | | | | $ | 3,305.4 |
| | $ | 2,922.5 |
| | 13 | % |
Average client assets (in billions) | $ | 2,979.2 |
| | $ | 2,585.4 |
| | 15 | % | | $ | 2,925.5 |
| | $ | 2,515.4 |
| | 16 | % | $ | 3,382.1 |
| | $ | 2,871.9 |
| | 18 | % |
New brokerage accounts (in thousands) | 357 |
| | 271 |
| | 32 | % | | 719 |
| | 536 |
| | 34 | % | 443 |
| | 362 |
| | 22 | % |
Active brokerage accounts (in thousands, at quarter end) | 10,487 |
| | 9,977 |
| | 5 | % | | | | | | | 11,005 |
| | 10,320 |
| | 7 | % |
Assets receiving ongoing advisory services | | | | | | | | | | | | |
(in billions, at quarter end) | $ | 1,539.8 |
| | $ | 1,315.5 |
| | 17 | % | | | | | | | |
Assets receiving ongoing advisory services (in billions, at quarter end) | | $ | 1,717.6 |
| | $ | 1,481.8 |
| | 16 | % |
Client cash as a percentage of client assets (at quarter end) | 11.5 | % | | 12.6 | % | | |
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| 11.0 | % | | 12.4 | % | | |
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Company Financial Metrics: | |
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Net revenues | $ | 2,130 |
| | $ | 1,828 |
| | 17 | % | | $ | 4,211 |
| | $ | 3,592 |
| | 17 | % | |
Expenses excluding interest | 1,221 |
| | 1,108 |
| | 10 | % | | 2,459 |
| | 2,217 |
| | 11 | % | |
Total net revenues | | $ | 2,398 |
| | $ | 2,081 |
| | 15 | % |
Total expenses excluding interest | | 1,396 |
| | 1,238 |
| | 13 | % |
Income before taxes on income | 909 |
| | 720 |
| | 26 | % | | 1,752 |
| | 1,375 |
| | 27 | % | 1,002 |
| | 843 |
| | 19 | % |
Taxes on income | 334 |
| | 268 |
| | 25 | % | | 613 |
| | 511 |
| | 20 | % | 219 |
| | 279 |
| | (22 | )% |
Net income | 575 |
| | 452 |
| | 27 | % | | 1,139 |
| | 864 |
| | 32 | % | $ | 783 |
| | $ | 564 |
| | 39 | % |
Preferred stock dividends and other | 45 |
| | 46 |
| | (2 | )% | | 84 |
| | 66 |
| | 27 | % | 37 |
| | 39 |
| | (5 | )% |
Net income available to common stockholders | $ | 530 |
| | $ | 406 |
| | 31 | % | | $ | 1,055 |
| | $ | 798 |
| | 32 | % | $ | 746 |
| | $ | 525 |
| | 42 | % |
Earnings per common share – diluted | $ | .39 |
| | $ | .30 |
| | 30 | % | | $ | .78 |
| | $ | .60 |
| | 30 | % | |
Earnings per common share — diluted | | $ | .55 |
| | $ | .39 |
| | 41 | % |
Net revenue growth from prior year | 17 | % | | 17 | % | | |
| | 17 | % | | 16 | % | | | 15 | % | | 18 | % | | |
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Pre-tax profit margin | 42.7 | % | | 39.4 | % | | |
| | 41.6 | % | | 38.3 | % | | | 41.8 | % | | 40.5 | % | | |
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Return on average common stockholders’ equity | 15 | % | | 13 | % | | |
| | 15 | % | | 13 | % | | | 18 | % | | 15 | % | | |
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Expenses excluding interest as a percentage of average client | | | | | | | | | | | | |
assets (annualized) | 0.16 | % | | 0.17 | % | | | | 0.17 | % | | 0.18 | % | | | |
Expenses excluding interest as a percentage of average client assets (annualized) | | 0.17 | % | | 0.18 | % | | |
Consolidated Tier 1 Leverage Ratio (at quarter end) | 7.4 | % | | 7.2 | % | | | | | | | | | 7.5 | % | | 7.1 | % | | |
(1) The Company experiencedthree months ended March 31, 2018 includes outflows of $84.4 billion from certain mutual fund clearing services clients.
Net income for the first quarter of 2018 grew 39% from the same period in 2017 driven primarily by sustained business momentum, higher interest rates, and lower corporate income taxes. Total revenues rose 15% due to increases in all major sources of revenue as a result of strong organic growth, client engagement, and demandthe economic environment. Total expenses grew 13%, reflecting higher spending to support the expanding investor base and higher client assets, as well as a $15 million charge associated with unsecured client margin losses in volatility-related products during early February. Altogether, we achieved a 240 basis point gap between revenue and expense growth, which resulted in a 41.8% pre-tax profit margin; combined with a lower tax rate of 21.9%, we delivered net income of $783 million for its contemporary approach to wealth management during the secondfirst quarter of 2017. Equity markets rose and volatility remained largely contained. While short-term interest rates increased, reflecting the Federal Reserve’s March and June 2017 interest rate hikes, the longer end of the yield curve softened. Against this backdrop, clients opened more than 350,000 new brokerage accounts during the second quarter, bringing year-to-date new accounts to 719,000 –2018, up 34% from a year ago. Heightened client engagement resulted in core net new asset growth of $46.2 billion in the second quarter of 2017, up 74% year-over-year, bringing total client assets to $3.04 trillion at June 30, 2017. Assets enrolled in some form of ongoing advisory service totaled $1.54 trillion at quarter-end, up 17%$219 million from a year ago.
The Company’s financial model, with multiple revenue streams, operating leverage, and balance sheet strength resulted in a 27% increase in net income to $575 million inDuring the secondfirst quarter of 2017,2018, clients opened 443,000 new brokerage accounts, helping to bring active brokerage accounts to 11.0 million at March 31, 2018. Excluding planned mutual funding clearing outflows of $84.4 billion, core net new assets gathered during the first quarter of 2018 were $65.6 billion, compared to $38.9 billion for the same period a year ago. Client engagement remained strong during the first quarter of 2018, with daily average revenue trades rising 46% from the same period in 2016. Net income for the six months ended June 30, 2017 was $1.12017.
We also transferred approximately $25 billion – an increase of 32%from sweep money market funds to bank sweep deposits and paid off $15 billion in borrowings from the prior year.Federal Home Loan Bank. The pre-tax profit margins fornet effect of these moves and client activity lifted our consolidated balance sheet assets to $248 billion at March 31, 2018. Our financial results, combined with the secondbenefits of the Tax Cuts and Jobs Act (Tax Act), lifted our first quarter and first half of 2017 were over 40%, leading to a return on average common stockholders’ equity ofto 18% compared to 15% for the second quarter and first half of 2017 compared to 13% for the same periodsperiod in 2016.
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)
RESULTS OF OPERATIONS
Total Net Revenues
NetTotal net revenues of $2.1 billion and $4.2 billion for the second quarter and first half of 2017, respectively, grew 17% from the prior year periods, reflecting significant improvements in both net interest revenue and asset management and administration fees. The following tables and sections present a comparison of the Company’s major sources of net revenues:
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Three Months Ended June 30, | | | | 2017 | | 2016 |
| | Percent Change | | Amount | | % of Total Net Revenues | | Amount | | % of Total Net Revenues |
Asset management and administration fees | | | | | | | | | | |
Mutual funds and ETF service fees | | 11 | % | | $ | 513 |
| | 24 | % | | $ | 461 |
| | 25 | % |
Advice Solutions | | 13 | % | | 256 |
| | 12 | % | | 226 |
| | 12 | % |
Other | | 9 | % | | 76 |
| | 4 | % | | 70 |
| | 4 | % |
Asset management and administration fees | | 12 | % | | 845 |
| | 40 | % | | 757 |
| | 41 | % |
Net interest revenue | | | | | | | | | | |
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Interest revenue | | 34 | % | | 1,127 |
| | 52 | % | | 840 |
| | 46 | % |
Interest expense | | 76 | % | | (74 | ) | | (3 | )% | | (42 | ) | | (2 | )% |
Net interest revenue | | 32 | % | | 1,053 |
| | 49 | % | | 798 |
| | 44 | % |
Trading revenue | | | | | | | | | | |
Commissions | | (25 | )% | | 142 |
| | 6 | % | | 190 |
| | 10 | % |
Principal transactions | | 36 | % | | 15 |
| | 1 | % | | 11 |
| | 1 | % |
Trading revenue | | (22 | )% | | 157 |
| | 7 | % | | 201 |
| | 11 | % |
Other | | 7 | % | | 75 |
| | 4 | % | | 70 |
| | 4 | % |
Provision for loan losses | | (100 | )% | | — |
| | — |
| | 2 |
| | — |
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Total net revenues | | 17 | % | | $ | 2,130 |
| | 100 | % | | $ | 1,828 |
| | 100 | % |
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Six Months Ended June 30, | | | | 2017 | | 2016 |
| | Percent Change | | Amount | | % of Total Net Revenues | | Amount | | % of Total Net Revenues |
Asset management and administration fees | | | | | | | | | | |
Mutual funds and ETF service fees | | 16 | % | | $ | 1,019 |
| | 24 | % | | $ | 876 |
| | 24 | % |
Advice solutions | | 13 | % | | 500 |
| | 12 | % | | 441 |
| | 12 | % |
Other | | 7 | % | | 149 |
| | 4 | % | | 139 |
| | 4 | % |
Asset management and administration fees | | 15 | % | | 1,668 |
| | 40 | % | | 1,456 |
| | 40 | % |
Net interest revenue | | | | | | | | | | |
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Interest revenue | | 32 | % | | 2,182 |
| | 52 | % | | 1,650 |
| | 46 | % |
Interest expense | | 61 | % | | (129 | ) | | (3 | )% | | (80 | ) | | (2 | )% |
Net interest revenue | | 31 | % | | 2,053 |
| | 49 | % | | 1,570 |
| | 44 | % |
Trading revenue | | | | | | | | | | |
Commissions | | (21 | )% | | 320 |
| | 7 | % | | 405 |
| | 11 | % |
Principal transactions | | 4 | % | | 29 |
| | 1 | % | | 28 |
| | 1 | % |
Trading revenue | | (19 | )% | | 349 |
| | 8 | % | | 433 |
| | 12 | % |
Other | | 6 | % | | 141 |
| | 3 | % | | 133 |
| | 4 | % |
Provision for loan losses | | — |
| | — |
| | — |
| | — |
| | — |
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Total net revenues | | 17 | % | | $ | 4,211 |
| | 100 | % | | $ | 3,592 |
| | 100 | % |
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
The following tables present a roll forward of client assets for the Schwab money market funds, Schwab equity and bond funds and ETFs, and Mutual Fund OneSource®. The following funds generated 54% of the asset management and administration fees earned15% during the second quarter and first half of 2017, compared to 54% and 53% in the same periods in 2016: |
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| | Schwab Money Market Funds | | Schwab Equity and Bond Funds and ETFs | | Mutual Fund OneSource® |
Three Months Ended June 30, | | 2017 | | 2016 | | 2017 | | 2016 | | 2017 | | 2016 |
Balance at beginning of period | | $ | 162,887 |
| | $ | 167,427 |
| | $ | 139,412 |
| | $ | 104,953 |
| | $ | 204,887 |
| | $ | 203,759 |
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Net inflows (outflows) | | (6,861 | ) | | (6,495 | ) | | 8,086 |
| | 3,572 |
| | (5,648 | ) | | (4,437 | ) |
Net market gains (losses) and other (1) | | 160 |
| | 19 |
| | 3,838 |
| | 2,197 |
| | 25,510 |
| | 4,030 |
|
Balance at end of period | | $ | 156,186 |
| | $ | 160,951 |
| | $ | 151,336 |
| | $ | 110,722 |
| | $ | 224,749 |
| | $ | 203,352 |
|
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| | | | | | | | | | | | | | | | | | | | | | | | |
| | Schwab Money Market Funds | | Schwab Equity and Bond Funds and ETFs | | Mutual Fund OneSource® |
Six Months Ended June 30, | | 2017 | | 2016 | | 2017 | | 2016 | | 2017 | | 2016 |
Balance at beginning of period | | $ | 163,495 |
| | $ | 166,148 |
| | $ | 125,813 |
| | $ | 102,112 |
| | $ | 198,924 |
| | $ | 207,654 |
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Net inflows (outflows) | | (7,585 | ) | | (5,243 | ) | | 15,261 |
| | 5,654 |
| | (10,239 | ) | | (9,179 | ) |
Net market gains (losses) and other (1) | | 276 |
| | 46 |
| | 10,262 |
| | 2,956 |
| | 36,064 |
| | 4,877 |
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Balance at end of period | | $ | 156,186 |
| | $ | 160,951 |
| | $ | 151,336 |
| | $ | 110,722 |
| | $ | 224,749 |
| | $ | 203,352 |
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(1) Includes transfers from other third-party mutual funds to Mutual Fund OneSource® in the second quarter of 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 tables categorize asset management and administration fees, average client assets, and average fee yields by funds or revenue source:
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Three Months Ended June 30, | 2017 | | 2016 |
| Average Client Assets | | Revenue | | Average Fee | | Average Client Assets | | Revenue | | Average Fee |
Schwab money market funds before fee waivers | $ | 158,974 |
| | $ | 224 |
| | 0.57 | % | | $ | 163,929 |
| | $ | 239 |
| | 0.59 | % |
Fee waivers | | | (1 | ) | | | | | | (55 | ) | | |
Schwab money market funds | 158,974 |
| | 223 |
| | 0.56 | % | | 163,929 |
| | 184 |
| | 0.45 | % |
Schwab equity and bond funds and ETFs | 151,825 |
| | 52 |
| | 0.14 | % | | 112,814 |
| | 52 |
| | 0.19 | % |
Mutual Fund OneSource® | 220,680 |
| | 179 |
| | 0.33 | % | | 201,034 |
| | 169 |
| | 0.34 | % |
Other third-party mutual funds and ETFs (1) | 271,503 |
| | 59 |
| | 0.09 | % | | 252,405 |
| | 56 |
| | 0.09 | % |
Total mutual funds and ETFs (2) | $ | 802,982 |
| | 513 |
| | 0.26 | % | | $ | 730,182 |
| | 461 |
| | 0.25 | % |
Advice solutions (2): | | | | | | | | | | | |
Fee-based | $ | 199,823 |
| | 256 |
| | 0.51 | % | | $ | 175,973 |
| | 226 |
| | 0.52 | % |
Intelligent Portfolios | 17,796 |
| | — |
| | — |
| | 6,620 |
| | — |
| | — |
|
Legacy Non-Fee | 18,340 |
| | — |
| | — |
| | 17,015 |
| | — |
| | — |
|
Total advice solutions | $ | 235,959 |
| | 256 |
| | 0.44 | % | | $ | 199,608 |
| | 226 |
| | 0.46 | % |
Other balance-based fees (3) | 406,307 |
| | 64 |
| | 0.06 | % | | 338,529 |
| | 58 |
| | 0.07 | % |
Other (4) | | | 12 |
| | | | | | 12 |
| | |
Total asset management and administration fees | | | $ | 845 |
| | | | | | $ | 757 |
| | |
|
| | | | | | | | | | | | | | | | | | | | | |
Six Months Ended June 30, | 2017 | | 2016 |
| Average Client Assets | | Revenue | | Average Fee | | Average Client Assets | | Revenue | | Average Fee |
Schwab money market funds before fee waivers | $ | 160,881 |
| | $ | 455 |
| | 0.57 | % | | $ | 166,184 |
| | $ | 485 |
| | 0.59 | % |
Fee waivers |
| | (9 | ) | |
| |
| | (152 | ) | |
|
Schwab money market funds | 160,881 |
| | 446 |
| | 0.56 | % | | 166,184 |
| | 333 |
| | 0.40 | % |
Schwab equity and bond funds and ETFs | 145,363 |
| | 107 |
| | 0.15 | % | | 108,103 |
| | 103 |
| | 0.19 | % |
Mutual Fund OneSource ® | 211,548 |
| | 349 |
| | 0.33 | % | | 197,839 |
| | 333 |
| | 0.34 | % |
Other third-party mutual funds and ETFs (1) | 272,065 |
| | 117 |
| | 0.09 | % | | 244,820 |
| | 107 |
| | 0.09 | % |
Total mutual funds and ETFs (2) | $ | 789,857 |
| | 1,019 |
| | 0.26 | % | | $ | 716,946 |
| | 876 |
| | 0.25 | % |
Advice solutions (2) : |
| |
| |
| |
| |
| |
|
Fee-based | $ | 195,791 |
| | 500 |
| | 0.51 | % | | $ | 171,146 |
| | 441 |
| | 0.52 | % |
Intelligent Portfolios | 16,020 |
| | — |
| | — |
| | 5,868 |
| | — |
| | — |
|
Legacy Non-Fee | 17,890 |
| | — |
| | — |
| | 16,712 |
| | — |
| | — |
|
Total advice solutions | $ | 229,701 |
| | 500 |
| | 0.44 | % | | $ | 193,726 |
| | 441 |
| | 0.46 | % |
Other balance-based fees (3) | 397,523 |
| | 125 |
| | 0.06 | % | | 328,278 |
| | 114 |
| | 0.07 | % |
Other (4) |
| | 24 |
| |
|
| |
| | 25 |
| |
|
|
Total asset management and administration fees |
| | $ | 1,668 |
| |
| |
| | $ | 1,456 |
| |
|
(1) Includes Schwab ETF OneSource™.
(2) Average client assets for advice solutions may also include the asset balances contained in the mutual fund and/or ETF categories listed above.
(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.
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 $88 million, or 12%, and $212 million, or 15% in the second quarter and first half of 20172018 compared to the same
periodsperiod in
2016, as a result2017, reflecting increases in all major sources of
further improvement in net money fund revenue from rising rates and growing balances in advised solutions, equity and bond funds, and ETFs. By quarter-end, the yields on all proprietary money fund portfolios were at or above their respective operating expense ratios fully eliminating yield-related fee waivers for the first time since 2008.revenue. |
| | | | | | | | | | | | | | | | | |
Three Months Ended March 31, | | | | 2018 | | 2017 |
| | Percent Change | | Amount | | % of Total Net Revenues | | Amount | | % of Total Net Revenues |
Net interest revenue | | | | | | | | | | |
Interest revenue | | 35 | % | | $ | 1,421 |
| | 59 | % | | $ | 1,055 |
| | 51 | % |
Interest expense | | 187 | % | | (158 | ) | | (6 | )% | | (55 | ) | | (3 | )% |
Net interest revenue | | 26 | % | | 1,263 |
| | 53 | % | | 1,000 |
| | 48 | % |
Asset management and administration fees | | | | | | | | | | |
Mutual funds and ETF service fees | | (3 | )% | | 493 |
| | 21 | % | | 506 |
| | 24 | % |
Advice Solutions | | 16 | % | | 282 |
| | 12 | % | | 244 |
| | 12 | % |
Other | | 4 | % | | 76 |
| | 3 | % | | 73 |
| | 4 | % |
Asset management and administration fees | | 3 | % | | 851 |
| | 36 | % | | 823 |
| | 40 | % |
Trading revenue | | | | | | | | | | |
Commissions | | 6 | % | | 189 |
| | 7 | % | | 178 |
| | 8 | % |
Principal transactions | | (14 | )% | | 12 |
| | 1 | % | | 14 |
| | 1 | % |
Trading revenue | | 5 | % | | 201 |
| | 8 | % | | 192 |
| | 9 | % |
Other | | 26 | % | | 83 |
| | 3 | % | | 66 |
| | 3 | % |
Total net revenues | | 15 | % | | $ | 2,398 |
| | 100 | % | | $ | 2,081 |
| | 100 | % |
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)
Net Interest Revenue
The following tables presenttable presents net interest revenue information corresponding to interest-earning assets and funding sources on the condensed consolidated balance sheets:
|
| | | | | | | | | | | | | | | | | | | | | | |
Three Months Ended June 30, | | 2017 | | 2016 |
| | Average Balance | | Interest Revenue/ Expense | | Average Yield/ Rate | | Average Balance | | Interest Revenue/ Expense | | Average Yield/ Rate |
Interest-earning assets: | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 8,562 |
| | $ | 22 |
| | 1.03 | % | | $ | 10,888 |
| | $ | 14 |
| | 0.52 | % |
Cash and investments segregated | | 19,703 |
| | 41 |
| | 0.83 | % | | 19,155 |
| | 22 |
| | 0.46 | % |
Broker-related receivables (1) | | 435 |
| | 1 |
| | 0.68 | % | | 685 |
| | — |
| | 0.20 | % |
Receivables from brokerage clients | | 15,827 |
| | 138 |
| | 3.50 | % | | 15,027 |
| | 124 |
| | 3.32 | % |
Available for sale securities (2) | | 48,154 |
| | 177 |
| | 1.47 | % | | 71,431 |
| | 211 |
| | 1.19 | % |
Held to maturity securities | | 107,378 |
| | 600 |
| | 2.24 | % | | 53,404 |
| | 335 |
| | 2.52 | % |
Bank loans | | 15,701 |
| | 115 |
| | 2.94 | % | | 14,569 |
| | 98 |
| | 2.71 | % |
Total interest-earning assets | | 215,760 |
| | 1,094 |
| | 2.03 | % | | 185,159 |
| | 804 |
| | 1.75 | % |
Other interest revenue | | | | 33 |
| | | | | | 36 |
| | |
Total interest-earning assets | | $ | 215,760 |
| | $ | 1,127 |
| | 2.10 | % | | $ | 185,159 |
| | $ | 840 |
| | 1.82 | % |
Funding sources: | | | | | | | | | | | | |
Bank deposits | | $ | 163,711 |
| | $ | 30 |
| | 0.07 | % | | $ | 136,009 |
| | $ | 8 |
| | 0.02 | % |
Payables to brokerage clients | | 26,125 |
| | 3 |
| | 0.05 | % | | 25,302 |
| | 1 |
| | 0.01 | % |
Short-term borrowings | | 1,393 |
| | 3 |
| | 0.86 | % | | 2,038 |
| | 2 |
| | 0.39 | % |
Long-term debt | | 3,518 |
| | 31 |
| | 3.53 | % | | 2,876 |
| | 26 |
| | 3.64 | % |
Total interest-bearing liabilities | | 194,747 |
| | 67 |
| | 0.14 | % | | 166,225 |
| | 37 |
| | 0.09 | % |
Non-interest-bearing funding sources | | 21,013 |
| | | | | | 18,934 |
| | | | |
Other interest expense | | | | 7 |
| | | | | | 5 |
| | |
Total funding sources | | $ | 215,760 |
| | $ | 74 |
| | 0.14 | % | | $ | 185,159 |
| | $ | 42 |
| | 0.09 | % |
Net interest revenue | | | | $ | 1,053 |
| | 1.96 | % | | | | $ | 798 |
| | 1.73 | % |
| | Six Months Ended June 30, | | 2017 | | 2016 | |
Three Months Ended March 31, | | | 2018 | | 2017 |
| | Average Balance | | Interest Revenue/ Expense | | Average Yield/ Rate | | 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 | | $ | 8,803 |
| | $ | 39 |
| | 0.89 | % | | $ | 10,820 |
| | $ | 27 |
| | 0.50 | % | | $ | 17,084 |
| | $ | 66 |
| | 1.53 | % | | $ | 9,047 |
| | $ | 17 |
| | 0.76 | % |
Cash and investments segregated | | 20,755 |
| | 76 |
| | 0.74 | % | | 19,710 |
| | 41 |
| | 0.42 | % | | 13,969 |
| | 48 |
| | 1.37 | % | | 21,820 |
| | 35 |
| | 0.65 | % |
Broker-related receivables (1) | | 412 |
| | 1 |
| | 0.62 | % | | 535 |
| | — |
| | 0.15 | % | | 287 |
| | 1 |
| | 1.32 | % | | 388 |
| | — |
| | 0.55 | % |
Receivables from brokerage clients | | 15,537 |
| | 264 |
| | 3.43 | % | | 14,959 |
| | 249 |
| | 3.35 | % | | 18,872 |
| | 179 |
| | 3.79 | % | | 15,245 |
| | 126 |
| | 3.35 | % |
Available for sale securities (2) | | 59,728 |
| | 428 |
| | 1.45 | % | | 69,797 |
| | 409 |
| | 1.18 | % | | 50,371 |
| | 240 |
| | 1.91 | % | | 71,430 |
| | 251 |
| | 1.43 | % |
Held to maturity securities | | 95,439 |
| | 1,085 |
| | 2.29 | % | | 51,830 |
| | 657 |
| | 2.55 | % | | 121,412 |
| | 721 |
| | 2.38 | % | | 83,368 |
| | 485 |
| | 2.36 | % |
Bank loans | | 15,615 |
| | 225 |
| | 2.91 | % | | 14,487 |
| | 197 |
| | 2.73 | % | | 16,456 |
| | 130 |
| | 3.19 | % | | 15,527 |
| | 110 |
| | 2.87 | % |
Total interest-earning assets | | 216,289 |
| | 2,118 |
| | 1.97 | % | | 182,138 |
| | 1,580 |
| | 1.74 | % | | 238,451 |
| | 1,385 |
| | 2.33 | % | | 216,825 |
| | 1,024 |
| | 1.92 | % |
Other interest revenue | | | | 64 |
| | | | | | 70 |
| | | | | | 36 |
| | | | | | 31 |
| | |
Total interest-earning assets | | $ | 216,289 |
| | $ | 2,182 |
| | 2.03 | % | | $ | 182,138 |
| | $ | 1,650 |
| | 1.82 | % | | $ | 238,451 |
| | $ | 1,421 |
| | 2.39 | % | | $ | 216,825 |
| | $ | 1,055 |
| | 1.97 | % |
Funding sources: | | | | | | | | | | | | | | | | | | | | | | | | |
Bank deposits | | $ | 163,696 |
| | $ | 49 |
| | 0.06 | % | | $ | 133,814 |
| | $ | 16 |
| | 0.02 | % | | $ | 176,988 |
| | $ | 64 |
| | 0.15 | % | | $ | 163,682 |
| | $ | 19 |
| | 0.05 | % |
Payables to brokerage clients | | 26,892 |
| | 5 |
| | 0.04 | % | | 26,015 |
| | 1 |
| | 0.01 | % | | 22,469 |
| | 7 |
| | 0.14 | % | | 27,666 |
| | 2 |
| | 0.03 | % |
Short-term borrowings | | 1,363 |
| | 5 |
| | 0.74 | % | | 1,029 |
| | 2 |
| | 0.39 | % | | 12,170 |
| | 47 |
| | 1.55 | % | | 1,332 |
| | 2 |
| | 0.61 | % |
Long-term debt | | 3,305 |
| | 59 |
| | 3.60 | % | | 2,877 |
| | 52 |
| | 3.63 | % | | 4,392 |
| | 37 |
| | 3.37 | % | | 3,090 |
| | 28 |
| | 3.67 | % |
Total interest-bearing liabilities | | 195,256 |
| | 118 |
| | 0.12 | % | | 163,735 |
| | 71 |
| | 0.09 | % | | 216,019 |
| | 155 |
| | 0.29 | % | | 195,770 |
| | 51 |
| | 0.11 | % |
Non-interest-bearing funding sources | | 21,033 |
| | | | | | 18,403 |
| | | | | | 22,432 |
| | | | | | 21,055 |
| | | | |
Other interest expense | | | | 11 |
| | | | | | 9 |
| | | | | | 3 |
| | | | | | 4 |
| | |
Total funding sources | | $ | 216,289 |
| | $ | 129 |
| | 0.12 | % | | $ | 182,138 |
| | $ | 80 |
| | 0.09 | % | | $ | 238,451 |
| | $ | 158 |
| | 0.27 | % | | $ | 216,825 |
| | $ | 55 |
| | 0.10 | % |
Net interest revenue | | | | $ | 2,053 |
| | 1.91 | % | | | | $ | 1,570 |
| | 1.73 | % | | | | $ | 1,263 |
| | 2.12 | % | | | | $ | 1,000 |
| | 1.87 | % |
(1) Interest revenue or expense was less than $500,000 in the period or periods presented.
(2) Amounts have been calculated based on amortized cost.
Net interest revenue increased $263 million, or 26%, in the first quarter of 2018 compared to the same period in 2017 primarily due to higher interest rates and growth in interest-earning assets.
Our net interest margin improved to 2.12% during the first quarter of 2018, up from 1.87% a year earlier as a result of the Federal Reserve’s 2017 and March 2018 interest rate hikes, partially offset by higher interest rates paid on bank deposits and short-term borrowings.
In the first quarter of 2018, average interest earning assets grew 10% compared to the same period in 2017. This increase was driven by higher bank deposits from net client flows and bulk transfers, as well as higher short-term borrowings.
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
Net interest revenue
The following table presents asset management and administration fees, average client assets, and average fee yields:
|
| | | | | | | | | | | | | | | | | | | | | |
Three Months Ended March 31, | 2018 | | 2017 |
Average Client Assets | | Revenue | | Average Fee | | Average Client Assets | | Revenue | | Average Fee |
Schwab money market funds before fee waivers | $ | 156,362 |
| | $ | 182 |
| | 0.47 | % | | $ | 162,789 |
| | $ | 231 |
| | 0.58 | % |
Fee waivers | | | — |
| | | | | | (8 | ) | | |
Schwab money market funds | 156,362 |
| | 182 |
| | 0.47 | % | | 162,789 |
| | 223 |
| | 0.56 | % |
Schwab equity and bond funds and ETFs | 196,950 |
| | 63 |
| | 0.13 | % | | 140,054 |
| | 55 |
| | 0.16 | % |
Mutual Fund OneSource® and other NTF funds | 222,669 |
| | 178 |
| | 0.32 | % | | 202,416 |
| | 170 |
| | 0.34 | % |
Other third-party mutual funds and ETFs (1) | 319,722 |
| | 70 |
| | 0.09 | % | | 272,626 |
| | 58 |
| | 0.09 | % |
Total mutual funds and ETFs | $ | 895,703 |
| | 493 |
| | 0.22 | % | | $ | 777,885 |
| | 506 |
| | 0.26 | % |
Advice solutions (2) : | | | | | | | | | | | |
Fee-based | $ | 224,760 |
| | 282 |
| | 0.51 | % | | $ | 191,775 |
| | 244 |
| | 0.52 | % |
Non-fee-based | 59,762 |
| | — |
| | — |
| | 42,722 |
| | — |
| | — |
|
Total advice solutions | $ | 284,522 |
| | 282 |
| | 0.40 | % | | $ | 234,497 |
| | 244 |
| | 0.42 | % |
Other balance-based fees (3) | 426,012 |
| | 66 |
| | 0.06 | % | | 388,739 |
| | 61 |
| | 0.06 | % |
Other (4) | | | 10 |
| | | | | | 12 |
| | |
Total asset management and administration fees | | | $ | 851 |
| | | | | | $ | 823 |
| | |
(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.
(4) Includes miscellaneous service and transaction fees relating to mutual funds and ETFs that are not balance-based.
Asset management and administration fees increased $255by $28 million, or 32%, and $483 million, or 31%3%, in the secondfirst quarter and first half of 20172018 compared to the same periodsperiod in 20162017, due to higher interest marginsgrowing balances in advised solutions, equity and interest-earningbond funds, and ETFs, partially offset by lower money market fund revenue as a result of bulk transfers to bank sweep deposits and fee reductions in the fourth quarter of 2017.
The following table presents a roll forward of client assets driven by growth in bank deposits. Asfor the Schwab money market funds, Schwab equity and bond funds and exchange-traded funds (ETFs), and Mutual Fund OneSource® and other non-transaction fee (NTF) funds. These funds generated 50% of June 30, 2017 net interest revenue represented 49%the asset management and administration fees earned during the first quarter of total net revenues, growing from 44% in2018, compared to 54% for the same period in the prior year.2017:
Higher short-term interest rates reflecting the Federal Reserve’s March and June 2017 interest rate hikes, coupled with growth in interest-earning assets, have resulted in a 23 and 18 basis point improvement in net interest margins to 1.96% and 1.91% during the second quarter and first half of 2017, respectively, compared to the same periods in 2016.Compared to the prior year, the Company has grown bank deposits through a combination of: |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Schwab Money Market Funds | | Schwab Equity and Bond Funds and ETFs | | Mutual Fund OneSource® and Other NTF Funds |
Three Months Ended March 31, | | 2018 | | 2017 | | 2018 | | 2017 | | 2018 | | 2017 |
Balance at beginning of period | | $ | 163,650 |
| | $ | 163,495 |
| | $ | 181,608 |
| | $ | 125,813 |
| | $ | 225,202 |
| | $ | 198,924 |
|
Net inflows (outflows) | | (19,122 | ) | | (724 | ) | | 8,646 |
| | 7,175 |
| | (4,929 | ) | | (4,590 | ) |
Net market gains (losses) and other | | 467 |
| | 116 |
| | (2,324 | ) | | 6,424 |
| | 1,341 |
| | 10,553 |
|
Balance at end of period | | $ | 144,995 |
| | $ | 162,887 |
| | $ | 187,930 |
| | $ | 139,412 |
| | $ | 221,614 |
| | $ | 204,887 |
|
Gathering additional assets from new and current clients; Transferring uninvested cash balances in certain client brokerage accounts to Schwab Bank; andEstablishing the Schwab Bank sweep feature as the default investment option for uninvested cash balances within all new brokerage accounts as of June 2016.
While there has been significant growth in bank deposits and average interest-earning assets compared to the prior year periods, balances declined from the first quarter due to clients investing more of their cash into the markets.
In March 2017, the Company transferred $24.7 billionTHE CHARLES SCHWAB CORPORATION
Management’s Discussion and Analysis of debt securities from the available for sale (AFS) category to the held to maturity (HTM) category. The transfer had no effect on the overall net interest margin. For additional information on the transfer, see Item 1 – Note 3.Financial Condition and Results of Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)
Trading Revenue
The following table presents trading revenue and the related drivers: | | | | Three Months Ended June 30, | | Six Months Ended June 30, | Three Months Ended March 31, | | Percent Change |
| | 2017 | | 2016 | | Percent Change | | 2017 | | 2016 | | Percent Change | 2018 | | 2017 | |
Daily average revenue trades (in thousands) | | 311 |
| | 279 |
| | 11 | % | | 314 |
| | 303 |
| | 4 | % | |
Daily average revenue trades (DARTs) (in thousands) | | 462 |
| | 317 |
| | 46 | % |
Clients’ daily average trades (in thousands) | | 589 |
| | 518 |
| | 14 | % | | 587 |
| | 566 |
| | 4 | % | 812 |
| | 585 |
| | 39 | % |
Number of trading days | | 63.0 |
| | 64.0 |
| | (2 | )% | | 125.0 |
| | 125.0 |
| | — |
| 61.0 |
| | 62.0 |
| | (2 | )% |
Average revenue per revenue trade | | $ | 7.96 |
| | $ | 11.27 |
| | (29 | )% | | $ | 8.91 |
| | $ | 11.36 |
| | (22 | )% | |
Daily average revenue per revenue trade | | $ | 7.24 |
| | $ | 9.84 |
| | (26 | )% |
Trading revenue | | $ | 157 |
| | $ | 201 |
| | (22 | )% | | $ | 349 |
| | $ | 433 |
| | (19 | )% | $ | 201 |
| | $ | 192 |
| | 5 | % |
DuringDART volumes increased 46% in the first quarter of 2017,2018 compared to the Companyprior year. This led to an increase in trading revenue of 5%, as the volume growth more than offset Schwab’s commission pricing reductions implemented in the first quarter of 2017. At that time, Schwab 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. Trading revenue decreased by $44 million, or 22%, and $84 million, or 19%, in the second quarter and first half of 2017, respectively, compared to the same periods in 2016, primarily due to these pricing reductions. These reductions in commission rates reflect both the Company’s belief that trade pricing should never be an obstacle for choosing Schwab and the Company’s commitment to share the benefits of its scale with clients. With these changes, trading revenue represented 8% of total net revenues through the first half of 2017 compared to 12% for the same period in 2016.
Other Revenue
Other revenue increased by $5 million, or 7%, in the second quarter of 2017 compared to the second quarter of 2016 largely due to an increase in realized gains on available for sale securities. Otherincludes order flow revenue, increased $8 million, or 6%, in the first half of 2017 compared to the same period in 2016, primarily due to the sublease of office space in San Francisco, a gain on the sale of a building in Indianapolis,other service fees, software fees from our portfolio management solutions, exchange processing fees, and an increase in realized gains on available for sale securities.
non-recurring gains. Order flow revenue was $26$38 million and $25 million during the second quarters of 2017 and 2016 and $53 million and $52$27 million during the first halvesquarters of 20172018 and 2016,2017, respectively.
THE CHARLES SCHWAB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)
Total Expenses Excluding Interest
The following table shows a comparison of expenses excluding interest: | |
| | Three Months Ended June 30, | | | | Six Months Ended June 30, | | | | Three Months Ended March 31, | | Percent Change |
| | 2017 | | 2016 | | Percent Change | | 2017 | | 2016 | | Percent Change | | 2018 | | 2017 | |
Compensation and benefits | | | | | | | | | | | | | | | | | | |
Salaries and wages | | $ | 371 |
| | $ | 339 |
| | 9 | % | | $ | 738 |
| | $ | 675 |
| | 9 | % | | $ | 411 |
| | $ | 367 |
| | 12 | % |
Incentive compensation | | 191 |
| | 166 |
| | 15 | % | | 393 |
| | 339 |
| | 16 | % | | 212 |
| | 202 |
| | 5 | % |
Employee benefits and other | | 101 |
| | 97 |
| | 4 | % | | 233 |
| | 214 |
| | 9 | % | | 147 |
| | 132 |
| | 11 | % |
Total compensation and benefits | | $ | 663 |
| | $ | 602 |
| | 10 | % | | $ | 1,364 |
| | $ | 1,228 |
| | 11 | % | | $ | 770 |
| | $ | 701 |
| | 10 | % |
Professional services | | 144 |
| | 125 |
| | 15 | % | | 277 |
| | 241 |
| | 15 | % | | 156 |
| | 133 |
| | 17 | % |
Occupancy and equipment | | 107 |
| | 101 |
| | 6 | % | | 212 |
| | 199 |
| | 7 | % | | 122 |
| | 105 |
| | 16 | % |
Advertising and market development | | 71 |
| | 70 |
| | 1 | % | | 142 |
| | 140 |
| | 1 | % | | 73 |
| | 71 |
| | 3 | % |
Communications | | 58 |
| | 62 |
| | (6 | )% | | 115 |
| | 122 |
| | (6 | )% | | 62 |
| | 57 |
| | 9 | % |
Depreciation and amortization | | 66 |
| | 57 |
| | 16 | % | | 131 |
| | 113 |
| | 16 | % | | 73 |
| | 65 |
| | 12 | % |
Regulatory fees and assessments | | | 51 |
| | 44 |
| | 16 | % |
Other | | 112 |
| | 91 |
| | 23 | % | | 218 |
| | 174 |
| | 25 | % | | 89 |
| | 62 |
| | 44 | % |
Total expenses excluding interest | | $ | 1,221 |
| | $ | 1,108 |
| | 10 | % | | $ | 2,459 |
| | $ | 2,217 |
| | 11 | % | | $ | 1,396 |
| | $ | 1,238 |
| | 13 | % |
Expenses as a percentage of total net revenues: | | | | | | | | | | | | | | | | | | |
Compensation and benefits | | 31 | % | | 33 | % | |
| | 32 | % | | 34 | % | |
| | 32 | % | | 34 | % | |
|
Advertising and market development | | 3 | % | | 4 | % | |
| | 3 | % | | 4 | % | |
| | 3 | % | | 3 | % | |
|
Full-time equivalent employees (in thousands): | | | | | | | | | | | | | | | | | | |
At quarter end | | 16.9 |
| | 16.1 |
| | 5 | % | |
|
| |
|
| |
| | 18.2 |
| | 16.5 |
| | 10 | % |
Average | | 16.7 |
| | 15.9 |
| | 5 | % | | 16.6 |
| | 15.7 |
| | 6 | % | | 18.0 |
| | 16.5 |
| | 9 | % |
SalariesTotal compensation and wagesbenefits increased in the secondfirst quarter and first half of 20172018 compared to the same periodsperiod in 20162017, primarily due to an increase in employee headcount to support the growth in the business andour expanding customer base as well as annual salary increases.
Incentive compensation increased in the second quarter and first half of 2017 compared to the same periods in 2016 primarily due to higher field incentive plan costs relating to increased net client asset flows and increased employee headcount.
Employee benefits and other expenses increased in the second quarter and first half of 2017 compared to the same periods in 2016 primarily due to higher payroll taxes and employer 401(k) matching contributions, which resulted from increased salaries and wages and incentive compensation.
Professional services expense increased in the secondfirst quarter and first half of 20172018 compared to the same periodsperiod in 20162017, primarily due to an increase in asset management and administration related expenses resulting from growth in the Schwab Funds® and Schwab ETFs™ and higher spending on technology servicesprojects.
Occupancy and equipment expense increased in the first quarter of 2018 compared to the same period in 2017, primarily due to an increase in fees paidsoftware maintenance expenses and additional licenses to outsourced service providers and consultants as the Company continued to investsupport growth in the ongoing growth of the business.
Depreciation and amortization expenses grew in the secondfirst quarter and first half of 20172018 compared to the same periodsperiod in 2016 as a result of2017, primarily due to higher amortization of internally developed software as projects were completedassociated with our investment in software and placed into production.technology enhancements.
Other expensesRegulatory fees and assessments increased in the secondfirst quarter and first half of 20172018 compared to the same periodsperiod in 20162017, primarily due to an increase in the Company’s Federal Deposit Insurance Corporation (FDIC) assessments. The FDICinsurance assessments, which rose as a result of higher bank deposits and the effect of a new surcharge that commenced in the third quarter of 2016.
Taxes on Income
Effective January 1, 2017, the Company adopted Accounting Standards Update (ASU) 2016-09, which prospectively changes the accounting treatment of a portion of the tax deductions relating to equity compensation. These deductions were previously reflected directly in additional paid-in capital, a component of stockholders’ equity, and are now included in tax expense, a component of net income. As a result of this change, the Company’s tax expense was reduced by approximately $5 million and
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)
$36 million in the second quarter and first half of 2017. Future effects will depend on the Company’s share price, restricted stock vesting, and the volume of equity incentive options exercised.
The Company’s effective income tax rate on income before taxes was 36.7% and 37.2% for the second quarters of 2017 and 2016, respectively, and 35.0% and 37.2% for the first halves of 2017 and 2016, respectively, which reflects the benefit in the first half of 2017 as discussed above.
Segment Information
Financial information for the Company’s reportable segments is presented in the following tables: |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Investor Services | | Advisor Services | | Total |
Three Months Ended June 30, | | Percent Change | | 2017 | | 2016 | | Percent Change | | 2017 | | 2016 | | Percent Change | | 2017 | | 2016 |
Net Revenues: | | | | | | | | | | | | | | | | | | |
Asset management and administration fees | | 13 | % | | $ | 582 |
| | $ | 514 |
| | 8 | % | | $ | 263 |
| | $ | 243 |
| | 12 | % | | $ | 845 |
| | $ | 757 |
|
Net interest revenue | | 27 | % | | 795 |
| | 628 |
| | 52 | % | | 258 |
| | 170 |
| | 32 | % | | 1,053 |
| | 798 |
|
Trading revenue | | (24 | )% | | 98 |
| | 129 |
| | (18 | )% | | 59 |
| | 72 |
| | (22 | )% | | 157 |
| | 201 |
|
Other | | 8 | % | | 55 |
| | 51 |
| | 5 | % | | 20 |
| | 19 |
| | 7 | % | | 75 |
| | 70 |
|
Provision for loan losses | | (100 | )% | | — |
| | 2 |
| | — |
| | — |
| | — |
| | (100 | )% | | — |
| | 2 |
|
Total net revenues | | 16 | % | | 1,530 |
| | 1,324 |
| | 19 | % | | 600 |
| | 504 |
| | 17 | % | | 2,130 |
| | 1,828 |
|
Expenses Excluding Interest | | 10 | % | | 914 |
| | 834 |
| | 12 | % | | 307 |
| | 274 |
| | 10 | % | | 1,221 |
| | 1,108 |
|
Income before taxes on income | | 26 | % | | $ | 616 |
| | $ | 490 |
| | 27 | % | | $ | 293 |
| | $ | 230 |
| | 26 | % | | $ | 909 |
| | $ | 720 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Investor Services | | Advisor Services | | Total |
Six Months Ended June 30, | | Percent Change | | 2017 | | 2016 | | Percent Change | | 2017 | | 2016 | | Percent Change | | 2017 | | 2016 |
Net Revenues: | | | | | | | | | | | | | | | | | | |
Asset management and administration fees | | 16 | % | | $ | 1,148 |
| | $ | 986 |
| | 11 | % | | $ | 520 |
| | $ | 470 |
| | 15 | % | | $ | 1,668 |
| | $ | 1,456 |
|
Net interest revenue | | 25 | % | | 1,548 |
| | 1,241 |
| | 53 | % | | 505 |
| | 329 |
| | 31 | % | | 2,053 |
| | 1,570 |
|
Trading revenue | | (20 | )% | | 217 |
| | 272 |
| | (18 | )% | | 132 |
| | 161 |
| | (19 | )% | | 349 |
| | 433 |
|
Other | | 8 | % | | 105 |
| | 97 |
| | — |
| | 36 |
| | 36 |
| | 6 | % | | 141 |
| | 133 |
|
Provision for loan losses | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Total net revenues | | 16 | % | | 3,018 |
| | 2,596 |
| | 20 | % | | 1,193 |
| | 996 |
| | 17 | % | | 4,211 |
| | 3,592 |
|
Expenses Excluding Interest | | 10 | % | | 1,844 |
| | 1,671 |
| | 13 | % | | 615 |
| | 546 |
| | 11 | % | | 2,459 |
| | 2,217 |
|
Income before taxes on income | | 27 | % | | $ | 1,174 |
| | $ | 925 |
| | 28 | % | | $ | 578 |
| | $ | 450 |
| | 27 | % | | $ | 1,752 |
| | $ | 1,375 |
|
Investor Services
Net revenues rose by 16% in the second quarter and first half of 2017 compared to the same periods in 2016 primarily due to increases in net interest revenue and asset management and administration fees, partially offset by a decrease in trading revenue. Net interest revenue increased primarily due to higher net interest margins and higher balances of interest-earningaverage assets. Asset management and administration fees increased primarily due to higher net yields on money market fund assets and growth in client assets invested in equity and bond funds, ETFs and advisory solutions. Trading revenue decreased primarily due to the reductions in commissions rates announced earlier in the year.
Expenses excluding interest increased by 10% in the second quarter and first half of 2017 compared to the same periods in 2016 primarily due to higher compensation and benefits and other expenses. Incentive compensation increased as a result of growth in net client asset flows, while salaries and benefits grew, reflecting higher staffing levels to support growth in the business. Other expenses rose due to higher FDIC regulatory assessments and occupancy and equipment 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)
Advisor Services
Net revenues rose by 19% and 20%,Other expenses increased in the secondfirst quarter and first half of 20172018 compared to the same periodsperiod in 20162017, primarily due to a $15 million charge associated with unsecured client margin losses in volatility-related products and other miscellaneous expense growth related to the growing client asset base.
Capital expenditures were $135 million and $67 million in the first quarters of 2018 and 2017, respectively. The increase in capital expenditures from the prior year was due to our office campus expansion in the U.S. and investments in technology projects. As we continue to pursue our geographic strategy, we anticipate increasing capital expenditures for full-year 2018 from our typical range of 3-5% of total net revenues to approximately 6-7%.
Taxes on Income
Taxes on income were $219 million and $279 million for the first quarters of 2018 and 2017, respectively, resulting in effective income tax rates on income before taxes of 21.9% and 33.1%, respectively. The decrease in the effective tax rate was primarily due to the Tax Act which was signed into law on December 22, 2017. Among other things, the Tax Act lowered the federal corporate income tax rate from 35% to 21%, effective for tax years including or commencing January 1, 2018.
Segment Information
Financial information for our segments is presented in the following table: |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Investor Services | | Advisor Services | | Total |
Three Months Ended March 31, | | Percent Change | | 2018 | | 2017 | | Percent Change | | 2018 | | 2017 | | Percent Change | | 2018 | | 2017 |
Net Revenues | | | | | | | | | | | | | | | | | | |
Net interest revenue | | 27 | % | | $ | 957 |
| | $ | 753 |
| | 24 | % | | $ | 306 |
| | $ | 247 |
| | 26 | % | | $ | 1,263 |
| | $ | 1,000 |
|
Asset management and administration fees | | 5 | % | | 593 |
| | 566 |
| | — |
| | 258 |
| | 257 |
| | 3 | % | | 851 |
| | 823 |
|
Trading revenue | | 7 | % | | 127 |
| | 119 |
| | 1 | % | | 74 |
| | 73 |
| | 5 | % | | 201 |
| | 192 |
|
Other | | 28 | % | | 64 |
| | 50 |
| | 19 | % | | 19 |
| | 16 |
| | 26 | % | | 83 |
| | 66 |
|
Total net revenues | | 17 | % | | 1,741 |
| | 1,488 |
| | 11 | % | | 657 |
| | 593 |
| | 15 | % | | 2,398 |
| | 2,081 |
|
Expenses Excluding Interest | | 12 | % | | 1,042 |
| | 930 |
| | 15 | % | | 354 |
| | 308 |
| | 13 | % | | 1,396 |
| | 1,238 |
|
Income before taxes on income | | 25 | % | | $ | 699 |
| | $ | 558 |
| | 6 | % | | $ | 303 |
| | $ | 285 |
| | 19 | % | | $ | 1,002 |
| | $ | 843 |
|
Investor Services
Total net revenues rose by 17% in the first quarter of 2018 compared to the same period in 2017, primarily due to increases in net interest revenue and asset management and administration fees, partially offset by a decrease in trading revenue.fees. Net interest revenue increased primarily due to higher balances of interest-earning assetsnet interest margins and higher net interest margins. This growth in interest-earning assets was aided by the migration of more uninvested client cash balances in the segment to Schwab Bank.assets. Asset management and administration fees increased primarily due to higher net yields onclient assets enrolled in advisory solutions partially offset by lower money market fund assets and growth in client assets invested in equity and bond funds and ETFs. Trading revenue decreased primarily due to the reductions in commissions rates announced earlier in the year.revenue.
Expenses excluding interest increased by 12% and 13%, in the secondfirst quarter and first half of 20172018 compared to the same periodsperiod in 20162017, due to higher compensation and benefits, technology project spend, and asset management and administration related expenses to support our expanding client and asset base.
Advisor Services
Total net revenues rose by 11% in the first quarter of 2018 compared to the same period in 2017, primarily due to an increase in net interest revenue. Net interest revenue increased primarily due to higher net interest margins and higher interest-earning assets.
Expenses excluding interest increased by 15% in the first quarter of 2018 compared to the same period in 2017, primarily due to higher compensation and benefits, technology project spend, and other expenses. Incentive compensation increased as a result of growth in net client asset flows, while salariesmanagement and benefits grew, reflecting higher staffing levelsadministration related expenses to support growth in the business. Other expenses rose due to higher FDIC regulatory assessmentsour expanding client and occupancy and equipment costs.asset base.
THE CHARLES SCHWAB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)
RISK MANAGEMENT
The Company’sSchwab’s business activities expose itus to a variety of risks, including operational, credit, market, liquidity, and compliance risk. The Company has a comprehensive risk management program to identify and manage these risks and their associated potential for financial and reputational impact. For a discussion of the Company’sour risk management programs, see Item 7 – Risk Management in the 20162017 Form 10-K.
Credit Risk
Credit risk is the potential for loss due to a borrower, counterparty, or issuer failing to perform on its contractual obligations. The Company’s exposure to credit risk mainly results from margin lending and client option and futures activities, securities lending, mortgage lending, pledged asset lending, its role as a counterparty in financial contracts, and other investing activities. Client investing activities often include the use of leverage through margin, options, and futures positions. The Company manages collateral concentrations at the account level and across client portfolios.
The credit risk exposure related to the Company’s bank loans is actively managed through individual loan and portfolio 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. For more information on the Company’s credit quality indicators relating to its bank loans, see Item 1 – Note 4.
The Company also has exposure to concentration risk when holding large 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 fair value of the Company’s investments in corporate debt securities and commercial paper totaled $10.1 billion at June 30, 2017, with 46% issued by institutions in the financial services industry. For more information on the Company’s investment portfolios, see Item 1 – Note 3.
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 its interest-earning assets relative to changes in the costs of its funding sources that finance these assets. The majority of the Company’s interest-earning assets and interest-bearing liabilities are sensitive to changes in short-term interest rates. A portion of the Company’s investment portfolio is sensitive to changes in long-term interest rates.
Net Interest Revenue Simulation
THE CHARLES SCHWAB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)
For 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 prevailing market rates in the simulation assumptions in order to minimize the number of variables and to better isolate risks. The simulations involve assumptions that are inherently uncertain and, as a result, cannot precisely estimate net interest revenue or predict the impact of changes in interest rates on net interest revenue. Actual results may differ from simulated results due to balance growth or decline and the timing, magnitude, and frequency of interest rate changes, as well as changes in market conditions and management strategies, including changes in asset and liability mix.
If the Company’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. There were no breaches of the Company’sSchwab’s net interest revenue sensitivity risk limits during the second quarter of 2017three months ended March 31, 2018, or year ended December 31, 2016.2017.
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 additional interest rate exposure that could result from changes in the interest rate environment. The following table displaysshows the simulated net interest revenue change over the next 12 months beginning June 30, 2017March 31, 2018 and December 31, 20162017 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:
| |
| | June 30, 2017 | | December 31, 2016 | | March 31, 2018 | | December 31, 2017 |
Increase of 100 basis points | | 5.3 | % | | 6.5 | % | | 3.5 | % | | 3.3 | % |
Decrease of 100 basis points | | (8.1 | )% | | (9.8 | )% | | (5.2 | )% | | (6.2 | )% |
The change in net interest revenue sensitivities as of June 30, 2017March 31, 2018 reflects the increase in short-term interest rates. The increase of short-term interest rates positively impacts net interest revenue as yields on interest-earning assets rise faster than the cost of funding sources. A decline in interest rates could negatively impact the yield on the Company’s investment and loan portfolio to a greater degree than any offsetting reduction in interest expense from funding sources, compressing net interest margin.across all maturities.
Liquidity Risk
Liquidity risk is the potential that the Company will be unable to sell assets or meet cash flow obligations when they come due without incurring unacceptable losses. The Company’s primary source of funds is cash generated by client activity: bank deposits and cash balances in client brokerage accounts. Other sources of funds may include cash flows from operations, maturities and sales of investment securities, repayments on loans, lending securities held in client brokerage accounts, and cash provided by external financing.
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 a buffer of highly liquid investments, currently comprised of U.S. Treasury notes.
THE CHARLES SCHWAB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)
Liquidity Risk
Schwab’s primary source of funds is cash generated by client activity: bank deposits and cash balances in client brokerage accounts. These funds are used to purchase investment securities and extend loans to clients.
Other sources of funds may include cash flows from operations, maturities and sales of investment securities, repayments on loans, securities lending of assets held in client brokerage accounts, and cash provided by external debt or equity 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.
In addition to internal sources of liquidity, the CompanySchwab has sources ofaccess to external funding. The following table describes external debt facilities available to the Company:at March 31, 2018: |
| | | | |
| | Available at |
Description | Borrower | June 30, 2017 (1) |
Committed, unsecured credit facility with various external banks (2) | CSC | $ | 750 |
|
Uncommitted, unsecured lines of credit with various external banks | CSC, Schwab | 829 |
|
Federal Reserve Bank discount window | Schwab Bank | 3,488 |
|
Federal Home Loan Bank secured credit facility | Schwab Bank | 17,507 |
|
Unsecured commercial paper | CSC | 750 |
|
|
| | | | | | | | | |
Description | Borrower | | Outstanding | | Available |
Committed, unsecured credit facility with various external banks | CSC | | $ | — |
| | $ | 750 |
|
Uncommitted, unsecured lines of credit with various external banks | CSC, CS&Co | | — |
| | 1,199 |
|
Federal Reserve Bank discount window (1) | CSB | | — |
| | 2,456 |
|
Federal Home Loan Bank secured credit facility (2) | CSB | | — |
| | 31,369 |
|
Unsecured commercial paper (3) | CSC | | — |
| | 750 |
|
(1) See Item 1 – Note 7 for information on amounts outstanding. For additional informationAmounts available are dependent on the Company’s borrowing facilities, including financial covenants and other conditionsfair value of borrowing, see Item 7 – Liquidity Risk in the 2016 Form 10-K.certain investment securities that are pledged as collateral.
(2)In June 2017, CSC entered into this facility, which is set to expire in June 2018. This facility replaced a similar facility Amounts available are dependent on the amount of first lien residential real estate mortgage loans (First Mortgages), home equity lines of credit (HELOCs), and the fair value of certain investment securities that expired in June 2017. The funds under this facility are available for general corporate purposes.pledged as collateral.
(3) CSC has a universal automatic shelf registration statement on file with the SEC, which enables itauthorization from its Board of Directors to issue debt, equity, and other securities.
On March 2, 2017, CSC issued $650 million aggregate principalCommercial Paper Notes to not exceed $1.5 billion. Management has set a current limit not to exceed the amount of Senior Notes that mature in 2027. The Senior Notes have a fixed interest rate of 3.200% with interest payable semi-annually. CSC intends to use the net proceeds from the sale of the Senior Notes for general corporate purposes, including, but not limited to, the repayment of $250 million aggregate principal amount of its 6.375% Senior Notes due September 1, 2017.committed, unsecured credit facility.
CSC’s ratings for commercial paper notesCommercial Paper Notes are P1 by Moody’s Investor Service (Moody’s), A1 by Standard & Poor’s Rating Group (Standard & Poor’s), and F1 by Fitch. CSC’sFitch Ratings, Ltd (Fitch).
Borrowings
The following are details of the Senior Notes and Medium-Term Notes are rated A2 by Moody’s, short-term borrowings:
|
| | | | | | | | | | |
March 31, 2018 | Par Outstanding | | Maturity | Weighted Average Interest Rate | Moody’s | Standard & Poor’s | Fitch |
Senior Notes | $ | 4,106 |
| | 2018 - 2028 | 3.24% fixed | A2 | A | A |
Short-term borrowings | $ | — |
| | N/A | N/A | N/A | N/A | N/A |
N/A by Standard & Poor’s, and A by Fitch. CSC’s preferred stockNot applicable.
Schwab is rated Baa2 by Moody’s, BBB by Standard & Poor’s, and BB+ by Fitch. For further discussion of CSC’s debt and equity, see Item 1 – Note 7 and Note 11.
Beginning on January 1, 2016, the Company became subject to, and was in compliance with, the modified liquidity coverage ratio (LCR) rule which was fully phased in on January 1, 2017 and requires CSC to hold High Quality Liquid Assets equal to at least 70% of projected net cash outflows over a 30-day period, as defined by the rule. At June 30, 2017, the Company was in compliance with the fully phased-in modified LCR rule. For additional information on the LCR rule, see Item 1 – Business – Regulation in the 2016 Form 10‑K.March 31, 2018.
CAPITAL MANAGEMENT
The CompanySchwab seeks to manage capital to a level and composition sufficient to support execution of itsour business strategy, including anticipated balance sheet growth, providing financial support to itsour subsidiaries, and sustained access to the capital markets, while at the same time meeting itsour regulatory capital requirements, and serving as a source of financial strength to Schwab Bank.
The Company’sour banking subsidiaries. Schwab’s primary sources of capital are funds generated by the operations of its subsidiaries and securities issuances by CSC in the capital markets. To ensure that itSchwab has a sufficient amount of capital to absorb unanticipated losses or declines in asset values, the Company haswe have adopted a policy to remain well capitalized even in stressed scenarios. For a description of the Company’s internal guidelines, monitoring and governance processes, see Item 7 – Capital Management in the 2016 Form 10‑K.
THE CHARLES SCHWAB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)
Regulatory Capital Requirements
CSC and Schwab BankCSB are subject to various capital requirements set by regulatory agencies as discussed in further detail in the 20162017 Form 10-K and in Item 1 – Note 14.16. As of June 30, 2017,March 31, 2018, CSC and Schwab BankCSB are considered well capitalized.
The following table details CSC’s consolidated and Schwab Bank’sCSB’s capital ratios as of June 30, 2017March 31, 2018 and December 31, 2016:2017:
| | | June 30, 2017 | | December 31, 2016 | | March 31, 2018 | | December 31, 2017 |
| CSC | | Schwab Bank | | CSC | | Schwab Bank | | CSC | | CSB | | CSC | | CSB |
Total stockholders’ equity | $ | 17,489 |
| | $ | 12,888 |
| | $ | 16,421 |
| | $ | 11,726 |
| | $ | 19,330 |
| | $ | 13,859 |
| | $ | 18,525 |
| | $ | 13,224 |
|
Less: | | | | | | | | | | | | | | | |
Preferred Stock | 2,783 |
| | — |
| | 2,783 |
| | — |
| |
Preferred stock | | | 2,793 |
| | — |
| | 2,793 |
| | — |
|
Common Equity Tier 1 Capital before regulatory adjustments | $ | 14,706 |
| | $ | 12,888 |
| | $ | 13,638 |
| | $ | 11,726 |
| | $ | 16,537 |
| | $ | 13,859 |
| | $ | 15,732 |
| | $ | 13,224 |
|
Less: | | | | | | | | | | | | | | | |
Goodwill, net of associated deferred tax liabilities | $ | 1,175 |
| | $ | 11 |
| | $ | 1,175 |
| | $ | 11 |
| | $ | 1,191 |
| | $ | 13 |
| | $ | 1,191 |
| | $ | 13 |
|
Other intangible assets, net of associated deferred tax liabilities | 53 |
| | — |
| | 52 |
| | — |
| | 69 |
| | — |
| | 61 |
| | — |
|
Deferred tax assets, net of valuation allowances and deferred tax liabilities | 1 |
| | — |
| | — |
| | — |
| | 2 |
| | — |
| | 2 |
| | — |
|
AOCI adjustment (1) | (112 | ) | | (110 | ) | | (163 | ) | | (163 | ) | | (260 | ) | | (247 | ) | | (152 | ) | | (144 | ) |
Common Equity Tier 1 Capital | $ | 13,589 |
| | $ | 12,987 |
| | $ | 12,574 |
| | $ | 11,878 |
| | $ | 15,535 |
| | $ | 14,093 |
| | $ | 14,630 |
| | $ | 13,355 |
|
Tier 1 Capital | $ | 16,372 |
| | $ | 12,987 |
| | $ | 15,357 |
| | $ | 11,878 |
| | $ | 18,328 |
| | $ | 14,093 |
| | $ | 17,423 |
| | $ | 13,355 |
|
Total Capital | $ | 16,400 |
| | $ | 13,014 |
| | $ | 15,384 |
| | $ | 11,904 |
| | 18,372 |
| | 14,121 |
| | 17,452 |
| | 13,382 |
|
Risk-Weighted Assets | 69,622 |
| | 61,762 |
| | 68,179 |
| | 59,915 |
| | 78,610 |
| | 68,226 |
| | 75,866 |
| | 66,519 |
|
Common Equity Tier 1 Capital/Risk-Weighted Assets | 19.5 | % | | 21.0 | % | | 18.4 | % | | 19.8 | % | | 19.8 | % | | 20.7 | % | | 19.3 | % | | 20.1 | % |
Tier 1 Capital/Risk-Weighted Assets | 23.5 | % | | 21.0 | % | | 22.5 | % | | 19.8 | % | | 23.3 | % | | 20.7 | % | | 23.0 | % | | 20.1 | % |
Total Capital/Risk-Weighted Assets | 23.6 | % | | 21.1 | % | | 22.6 | % | | 19.9 | % | | 23.4 | % | | 20.7 | % | | 23.0 | % | | 20.1 | % |
Tier 1 Leverage Ratio | 7.4 | % | | 7.3 | % | | 7.2 | % | | 7.0 | % | | 7.5 | % | | 7.0 | % | | 7.6 | % | | 7.1 | % |
(1) CSC and Schwab BankCSB have elected to opt-outopt out of the requirement to include most components of accumulated other comprehensive income (AOCI) in regulatory capital, including Common Equity Tier 1 (CET1) Capital. The year after the Company surpasses $250 billion in consolidated assets, it can no longer exclude AOCI from regulatory capital.
Schwab Bank
CSB is also subject to regulatory requirements that restrict and govern the terms of affiliate transactions. In addition, Schwab BankCSB is required to provide notice to, and may be required to obtain approval from, the Office of the Comptroller of the Currency and the Federal Reserve to declare dividends to CSC.
The Company’s
Schwab’s primary broker-dealer subsidiaries (Schwab and optionsXpress, Inc. (optionsXpress)) aresubsidiary, CS&Co, is subject to regulatory requirements of the Uniform Net Capital Rule. At June 30, 2017, Schwab and optionsXpressMarch 31, 2018, CS&Co exceeded theirits net capital requirements.
In addition to the capital requirements above, the Company’sSchwab’s subsidiaries are subject to variousother regulatory requirements that are intended to ensure financial soundness and liquidity. See Item 1 – Note 1416 for additional information on the components of stockholders’ equity and information on the capital requirements of each of thesignificant subsidiaries.
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)
Dividends
On January 25, 2018, the Board of Directors of the Company declared a two cent, or 25%, increase in the quarterly cash dividend to $.10 per common share.
Cash dividends paid and per share amounts for the first halvesthree months of 20172018 and 20162017 are as follows:
| | Six Months Ended June 30, | | 2017 | | 2016 | |
Three Months Ended March 31, | | | 2018 | | 2017 |
| | Cash Paid | | Per Share Amount | | Cash Paid | | Per Share Amount | | Cash Paid | | Per Share Amount | | Cash Paid | | Per Share Amount |
Common Stock | | $ | 215 |
| | $ | 0.16 |
| | $ | 173 |
| | $ | 0.13 |
| | $ | 136 |
| | $ | .10 |
| | $ | 108 |
| | $ | .08 |
|
Series A Preferred Stock (1) | | 14 |
| | 35.00 |
| | 14 |
| | 35.00 |
| | 14 |
| | 35.00 |
| | 14 |
| | 35.00 |
|
Series B Preferred Stock (2) | | 15 |
| | 30.00 |
| | 15 |
| | 30.00 |
| |
Series B Preferred Stock (2,5) | | | N/A |
| | N/A |
| | 7 |
| | 15.00 |
|
Series C Preferred Stock (2) | | 18 |
| | 30.00 |
| | 18 |
| | 30.00 |
| | 9 |
| | 15.00 |
| | 9 |
| | 15.00 |
|
Series D Preferred Stock (2,3) | | 22 |
| | 29.76 |
| | 10 |
| | 13.89 |
| |
Series D Preferred Stock (2) | | | 11 |
| | 14.88 |
| | 11 |
| | 14.88 |
|
Series E Preferred Stock (4)(3) | | 9 |
| | 1,554.51 |
| | N/A |
| | N/A |
| | 14 |
| | 2,312.50 |
| | 9 |
| | 1,554.51 |
|
Series F Preferred Stock (4) | | | N/A |
| | N/A |
| | N/A |
| | N/A |
|
(1) Dividends paid semi-annually until February 1, 2022 and quarterly thereafter.
(2) Dividends paid quarterly.
(3) Series D Preferred Stock was issued on March 7, 2016.
(4) Series E Preferred Stock was issued on October 31, 2016. Dividends paid semi-annually until March 1, 2022 and quarterly thereafter.
(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.
OTHER
Foreign Holdings
At June 30, 2017, the CompanyMarch 31, 2018, Schwab had exposure to non-sovereign financial and non-financial institutions in foreign countries, as well as agencies of $6.1 billion, withforeign governments. At March 31, 2018, the fair value of these holdings totaled $6.8 billion, with the top three exposures being to issuers and counterparties domiciled in France at $1.7$2.4 billion, Sweden at $1.1$1.9 billion, and Canada at $0.8$0.6 billion. The Company has no direct exposure to sovereignOur holdings of securities issued by agencies of foreign governments. The Company does not have unfunded commitments to counterparties in foreign countries, nor does it have exposure as a resultgovernments are explicitly guaranteed by the governments of credit default protection purchased or sold separately as of June 30, 2017. the issuing agencies.
In addition to the direct holdings in foreign companies the Companyand 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 June 30, 2017, the CompanyMarch 31, 2018, Schwab had $78$59 million in investments in these Funds. Certain of the Funds’ positions include certificates of deposits,deposit, time deposits, commercial paper, and corporate debt securities issued by counterparties in foreign countries. Additionally, at June 30, 2017, the CompanyMarch 31, 2018, Schwab had outstanding margin loans to foreign residents of $418$880 million.
Off-Balance Sheet Arrangements
The CompanySchwab 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 CompanySchwab enters into guarantees and other similar arrangements in the ordinary course of business. For information on each of these arrangements, see Item 1 – Note 4, Note 5, Note 7,6, Note 8, Note 9, and Note 8 ,10, and Item 8 – Note 1513 in the 20162017 Form 10-K.
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
Certain of the Company’sour accounting policies that involve a higher degree of judgment and complexity are discussed in Part II – Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Estimates in the 20162017 Form 10-K. With the exception of adding Income Taxes, thereThere have been no other changes to critical accounting estimates during the first sixthree months of 2017.
Income Taxes
The Company estimates income tax expense based on amounts expected to be owed to the various tax jurisdictions in which it operates, including federal, state and local domestic jurisdictions, and insignificant amounts owed to several foreign jurisdictions. The estimated income tax expense is reported in the Consolidated Statements of Income. Accrued taxes are reported in other assets or other liabilities on the Consolidated Balance Sheets and represent the net estimated amount due to or
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)
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, the Company assesses 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 significant to the operating results of the Company.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
For discussion of the quantitative and qualitative disclosures about market risk, see Risk Management in Item 2.
Part I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
THE CHARLES SCHWAB CORPORATION
Condensed Consolidated Statements of Income
(In Millions, Except Per Share Amounts)
(Unaudited)
| |
| | Three Months Ended June 30, | | Six Months Ended June 30, | | Three Months Ended March 31, |
| | 2017 | | 2016 | | 2017 | | 2016 | | 2018 | | 2017 |
Net Revenues | | |
| | |
| | |
| | |
| | |
| | |
|
Asset management and administration fees (1) | | $ | 845 |
| | $ | 757 |
| | $ | 1,668 |
| | $ | 1,456 |
| |
Interest revenue | | 1,127 |
| | 840 |
| | 2,182 |
| | 1,650 |
| | $ | 1,421 |
| | $ | 1,055 |
|
Interest expense | | (74 | ) | | (42 | ) | | (129 | ) | | (80 | ) | | (158 | ) | | (55 | ) |
Net interest revenue | | 1,053 |
| | 798 |
| | 2,053 |
| | 1,570 |
| | 1,263 |
| | 1,000 |
|
Asset management and administration fees | | | 851 |
| | 823 |
|
Trading revenue | | 157 |
| | 201 |
| | 349 |
| | 433 |
| | 201 |
| | 192 |
|
Other | | 75 |
| | 70 |
| | 141 |
| | 133 |
| | 83 |
| | 66 |
|
Provision for loan losses | | — |
| | 2 |
| | — |
| | — |
| |
Total net revenues | | 2,130 |
| | 1,828 |
| | 4,211 |
| | 3,592 |
| | 2,398 |
| | 2,081 |
|
Expenses Excluding Interest | | | | | | | | | | | | |
Compensation and benefits | | 663 |
| | 602 |
| | 1,364 |
| | 1,228 |
| | 770 |
| | 701 |
|
Professional services | | 144 |
| | 125 |
| | 277 |
| | 241 |
| | 156 |
| | 133 |
|
Occupancy and equipment | | 107 |
| | 101 |
| | 212 |
| | 199 |
| | 122 |
| | 105 |
|
Advertising and market development | | 71 |
| | 70 |
| | 142 |
| | 140 |
| | 73 |
| | 71 |
|
Communications | | 58 |
| | 62 |
| | 115 |
| | 122 |
| | 62 |
| | 57 |
|
Depreciation and amortization | | 66 |
| | 57 |
| | 131 |
| | 113 |
| | 73 |
| | 65 |
|
Regulatory fees and assessments | | | 51 |
| | 44 |
|
Other | | 112 |
| | 91 |
| | 218 |
| | 174 |
| | 89 |
| | 62 |
|
Total expenses excluding interest | | 1,221 |
| | 1,108 |
| | 2,459 |
| | 2,217 |
| | 1,396 |
| | 1,238 |
|
Income before taxes on income | | 909 |
| | 720 |
| | 1,752 |
| | 1,375 |
| | 1,002 |
| | 843 |
|
Taxes on income (2) | | 334 |
| | 268 |
| | 613 |
| | 511 |
| | 219 |
| | 279 |
|
Net Income | | 575 |
| | 452 |
| | 1,139 |
| | 864 |
| | 783 |
| | 564 |
|
Preferred stock dividends and other (3) | | 45 |
| | 46 |
| | 84 |
| | 66 |
| | 37 |
| | 39 |
|
Net Income Available to Common Stockholders | | $ | 530 |
| | $ | 406 |
| | $ | 1,055 |
| | $ | 798 |
| | $ | 746 |
| | $ | 525 |
|
Weighted-Average Common Shares Outstanding: | | | | | | | | | | | | |
Basic | | 1,338 |
| | 1,322 |
| | 1,337 |
| | 1,322 |
| | 1,347 |
| | 1,336 |
|
Diluted | | 1,351 |
| | 1,333 |
| | 1,351 |
| | 1,331 |
| | 1,362 |
| | 1,351 |
|
Earnings Per Common Share: | | | | | | | | | | | | |
Basic | | $ | .40 |
| | $ | .31 |
| | $ | .79 |
| | $ | .60 |
| | $ | .55 |
| | $ | .39 |
|
Diluted | | $ | .39 |
| | $ | .30 |
| | $ | .78 |
| | $ | .60 |
| | $ | .55 |
| | $ | .39 |
|
Dividends Declared Per Common Share | | $ | .08 |
| | $ | .07 |
| | $ | .16 |
| | $ | .13 |
| | $ | .10 |
| | $ | .08 |
|
(1) Includes the effect of fee waivers of $1 million and $55 million during the second quarters of 2017 and 2016, respectively, and $9 million and $152 million during the first halves of 2017 and 2016, respectively, relating to Schwab-sponsored money market funds.
(2) Includes the prospective adoption of ASU 2016-09 in 2017. See New Accounting Standards in Note 2 for additional information.
(3) Includes preferred stock dividends and undistributed earnings and dividends allocated to non-vested restricted stock units.
See Notes to Condensed Consolidated Financial Statements.
THE CHARLES SCHWAB CORPORATION
Condensed Consolidated Statements of Comprehensive Income
(In Millions)
(Unaudited)
| |
| | Three Months Ended June 30, | | Six Months Ended June 30, | | Three Months Ended March 31, |
| | 2017 | | 2016 | | 2017 | | 2016 | | 2018 | | 2017 |
Net Income | | $ | 575 |
| | $ | 452 |
| | $ | 1,139 |
| | $ | 864 |
| | $ | 783 |
| | $ | 564 |
|
Other comprehensive income (loss), before tax: | | |
| | |
| | |
| | |
| | |
| | |
|
Change in net unrealized gain (loss) on available for sale securities: | | |
| | |
| | |
| | |
| | |
| | |
|
Net unrealized gain (loss) | | 29 |
| | 168 |
| | 81 |
| | 189 |
| | (108 | ) | | 52 |
|
Reclassification of net unrealized loss transferred to held to maturity | | — |
| | — |
| | 227 |
| | — |
| | — |
| | 227 |
|
Other reclassifications included in other revenue | | (6 | ) | | (3 | ) | | (7 | ) | | (3 | ) | | — |
| | (1 | ) |
Change in net unrealized gain (loss) on held to maturity securities: | | | | | | | | | | | | |
Reclassification of net unrealized loss transferred from available for sale | | — |
| | — |
| | (227 | ) | | — |
| | — |
| | (227 | ) |
Amortization of amounts previously recorded upon transfer from available for sale | | 9 |
| | — |
| | 11 |
| | — |
| | 9 |
| | 2 |
|
Other | | — |
| | — |
| | (3 | ) | | 1 |
| | — |
| | (3 | ) |
Other comprehensive income (loss), before tax | | 32 |
| | 165 |
| | 82 |
| | 187 |
| | (99 | ) | | 50 |
|
Income tax effect | | (12 | ) | | (62 | ) | | (31 | ) | | (70 | ) | | 24 |
| | (19 | ) |
Other comprehensive income (loss), net of tax | | 20 |
| | 103 |
| | 51 |
| | 117 |
| | (75 | ) | | 31 |
|
Comprehensive Income | | $ | 595 |
| | $ | 555 |
| | $ | 1,190 |
| | $ | 981 |
| | $ | 708 |
| | $ | 595 |
|
See Notes to Condensed Consolidated Financial Statements.
THE CHARLES SCHWAB CORPORATION
Condensed Consolidated Balance Sheets
(In Millions, Except Per Share and Share Amounts)
(Unaudited)
| | | June 30, 2017 | | December 31, 2016 | March 31, 2018 | December 31, 2017 |
Assets | | | | |
Cash and cash equivalents | $ | 9,575 |
| | $ | 10,828 |
| $ | 14,145 |
| $ | 14,217 |
|
Cash and investments segregated and on deposit for regulatory purposes | | | | |
(including resale agreements of $7,588 at June 30, 2017 and $9,547 | | | | |
at December 31, 2016) | 18,483 |
| | 22,174 |
| |
Cash and investments segregated and on deposit for regulatory purposes (including resale agreements of $4,434 at March 31, 2018 and $6,596 at December 31, 2017) | | 12,823 |
| 15,139 |
|
Receivables from brokers, dealers, and clearing organizations | 910 |
| | 728 |
| 894 |
| 649 |
|
Receivables from brokerage clients — net | 17,993 |
| | 17,155 |
| 21,153 |
| 20,576 |
|
Other securities owned — at fair value | 460 |
| | 449 |
| 500 |
| 539 |
|
Available for sale securities | 45,634 |
| | 77,365 |
| 51,827 |
| 49,995 |
|
Held to maturity securities (fair value — $107,446 at June 30, 2017 and | | | | |
$74,444 at December 31, 2016) | 107,610 |
| | 75,203 |
| |
Held to maturity securities (fair value — $123,463 at March 31, 2018 and $120,373 at December 31, 2017)
| | 125,683 |
| 120,926 |
|
Bank loans — net | 15,817 |
| | 15,403 |
| 16,389 |
| 16,478 |
|
Equipment, office facilities, and property — net | 1,335 |
| | 1,299 |
| 1,540 |
| 1,471 |
|
Goodwill | 1,227 |
| | 1,227 |
| 1,227 |
| 1,227 |
|
Intangible assets — net | 125 |
| | 144 |
| 101 |
| 108 |
|
Other assets | 1,432 |
| | 1,408 |
| 2,038 |
| 1,949 |
|
Total assets | $ | 220,601 |
| | $ | 223,383 |
| $ | 248,320 |
| $ | 243,274 |
|
Liabilities and Stockholders’ Equity | | | |
| | |
|
Bank deposits | $ | 162,300 |
| | $ | 163,454 |
| $ | 190,184 |
| $ | 169,656 |
|
Payables to brokers, dealers, and clearing organizations | 1,934 |
| | 2,407 |
| 1,122 |
| 1,287 |
|
Payables to brokerage clients | 33,039 |
| | 35,894 |
| 31,088 |
| 31,243 |
|
Accrued expenses and other liabilities | 2,021 |
| | 2,331 |
| 2,468 |
| 2,810 |
|
Short-term borrowings | 300 |
| | — |
| — |
| 15,000 |
|
Long-term debt | 3,518 |
| | 2,876 |
| 4,128 |
| 4,753 |
|
Total liabilities | 203,112 |
| | 206,962 |
| 228,990 |
| 224,749 |
|
Stockholders’ equity: | | | |
| | |
|
Preferred stock — $.01 par value per share; aggregate liquidation preference | | | | |
of $2,835 at June 30, 2017 and December 31, 2016 | 2,783 |
| | 2,783 |
| |
Common stock — 3 billion shares authorized; $.01 par value per share; 1,487,543,446 | | | | |
shares issued | 15 |
| | 15 |
| |
Preferred stock — $.01 par value per share; aggregate liquidation preference of $2,850 at March 31, 2018 and December 31, 2017 | | 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 | 4,336 |
| | 4,267 |
| 4,397 |
| 4,353 |
|
Retained earnings | 13,495 |
| | 12,649 |
| 15,222 |
| 14,408 |
|
Treasury stock, at cost — 149,339,521 shares at June 30, 2017 and | | | | |
154,793,560 shares at December 31, 2016 | (3,028 | ) | | (3,130 | ) | |
Treasury stock, at cost — 139,326,005 shares at March 31, 2018 and 142,210,890 shares at December 31, 2017 | | (2,837 | ) | (2,892 | ) |
Accumulated other comprehensive income (loss) | (112 | ) | | (163 | ) | (260 | ) | (152 | ) |
Total stockholders’ equity | 17,489 |
| | 16,421 |
| 19,330 |
| 18,525 |
|
Total liabilities and stockholders’ equity | $ | 220,601 |
| | $ | 223,383 |
| $ | 248,320 |
| $ | 243,274 |
|
See Notes to Condensed Consolidated Financial Statements.
THE CHARLES SCHWAB CORPORATION
Condensed Consolidated Statements of Stockholders'Stockholders’ Equity
(In Millions)
(Unaudited)
| | | | | | | | | | | | | | | | Accumulated Other Comprehensive Income (Loss) | | | | | | | | | | | | | | | | Accumulated Other Comprehensive Income (Loss) | | |
| | Preferred Stock | | Common stock | | Additional Paid-in Capital | | | | Treasury Stock, at cost | | | | Preferred Stock | | Common stock | | Additional Paid-in Capital | | Retained Earnings | | Treasury Stock, at cost | | Total |
| | Shares | | Amount | | Retained Earnings |
| | Total | Accumulated Other Comprehensive Income (Loss) | |
Balance at December 31, 2015 | | $ | 1,459 |
| | 1,488 |
| | $ | 15 |
| | $ | 4,152 |
| | $ | 11,253 |
| | $ | (3,343 | ) | | $ | (134 | ) | | |
Net income | | — |
| | — |
| | — |
| | — |
| | 864 |
| | — |
| | — |
| | |
Other comprehensive income (loss), net of tax | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 117 |
| | 117 |
| |
Issuance of preferred stock | | 730 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 730 |
| |
Dividends declared on preferred stock | | — |
| | — |
| | — |
| | — |
| | (57 | ) | | — |
| | — |
| | (57 | ) | |
Dividends declared on common stock | | — |
| | — |
| | — |
| | — |
| | (173 | ) | | — |
| | — |
| | (173 | ) | |
Stock option exercises and other | | — |
| | — |
| | — |
| | (14 | ) | | — |
| | 33 |
| | — |
| | 19 |
| |
Share-based compensation and | | | | | | | | | | | | | | | | | |
related tax effects | | — |
| | — |
| | — |
| | 76 |
| | — |
| | — |
| | — |
| | 76 |
| |
Other | | — |
| | — |
| | — |
| | 9 |
| | (5 | ) | | 8 |
| | — |
| | 12 |
| |
Balance at June 30, 2016 | | $ | 2,189 |
| | 1,488 |
| | $ | 15 |
| | $ | 4,223 |
| | $ | 11,882 |
| | $ | (3,302 | ) | | $ | (17 | ) | | $ | 14,990 |
| |
| | | | | | | | | | | | | | | | | | Preferred Stock | | Shares | | Amount | | Additional Paid-in Capital | | Retained Earnings | | Treasury Stock, at cost | | Accumulated Other Comprehensive Income (Loss) | Total |
Balance at December 31, 2016 | | $ | 2,783 |
| | 1,488 |
| | $ | 15 |
| | $ | 4,267 |
| | $ | 12,649 |
| | $ | (3,130 | ) | | $ | (163 | ) | | $ | 16,421 |
| | 1,488 |
| | $ | 15 |
| | $ |
Net income | | — |
| | — |
| | — |
| | — |
| | 1,139 |
| | — |
| | — |
| | 1,139 |
| | — |
| | — |
| | — |
| | — |
| | 564 |
| | — |
| | — | 564 |
|
Other comprehensive income (loss), net of tax | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 51 |
| | 51 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 31 |
| | 31 |
|
Dividends declared on preferred stock | | — |
| | — |
| | — |
| | — |
| | (78 | ) | | — |
| | — |
| | (78 | ) | | — |
| | — |
| | — |
| | — |
| | (37 | ) | | — |
| | — |
| | (37 | ) |
Dividends declared on common stock | | — |
| | — |
| | — |
| | — |
| | (215 | ) | | — |
| | — |
| | (215 | ) | | — |
| | — |
| | — |
| | — |
| | (107 | ) | | — |
| | — |
| | (107 | ) |
Stock option exercises and other | | — |
| | — |
| | — |
| | (26 | ) | | — |
| | 98 |
| | — |
| | 72 |
| | — |
| | — |
| | — |
| | (23 | ) | | — |
| | 81 |
| | — |
| | 58 |
|
Share-based compensation and | | | | | | | | | | | | | | | | | |
related tax effects | | — |
| | — |
| | — |
| | 79 |
| | — |
| | — |
| | — |
| | 79 |
| |
Share-based compensation and related tax effects | | | — |
| | — |
| | — |
| | 49 |
| | — |
| | — |
| | — |
| | 49 |
|
Other | | — |
| | — |
| | — |
| | 16 |
| | — |
| | 4 |
| | — |
| | 20 |
| | — |
| | — |
| | — |
| | 7 |
| | — |
| | (4 | ) | | — |
| | 3 |
|
Balance at June 30, 2017 | | $ | 2,783 |
| | 1,488 |
| | $ | 15 |
| | $ | 4,336 |
| | $ | 13,495 |
| | $ | (3,028 | ) | | $ | (112 | ) | | $ | 17,489 |
| |
Balance at March 31, 2017 | | | $ | 2,783 |
| | 1,488 |
| | $ | 15 |
| | $ | 4,300 |
| | $ | 13,069 |
| | $ | (3,053 | ) | | $ | (132 | ) | | $ | 16,982 |
|
| | | | | | | | | | | | | | | | | |
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 | | | — |
| | — |
| | — |
| | — |
| | 783 |
| | — |
| | — |
| | 783 |
|
Other comprehensive income (loss), net of tax | | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (75 | ) | | (75 | ) |
Dividends declared on preferred stock | | | — |
| | — |
| | — |
| | — |
| | (34 | ) | | — |
| | — |
| | (34 | ) |
Dividends declared on common stock | | | — |
| | — |
| | — |
| | — |
| | (135 | ) | | — |
| | — |
| | (135 | ) |
Stock option exercises and other | | | — |
| | — |
| | — |
| | (12 | ) | | — |
| | 61 |
| | — |
| | 49 |
|
Share-based compensation and related tax effects | | | — |
| | — |
| | — |
| | 47 |
| | — |
| | — |
| | — |
| | 47 |
|
Other | | | — |
| | — |
| | — |
| | 9 |
| | — |
| | (6 | ) | | — |
| | 3 |
|
Balance at March 31, 2018 | | | $ | 2,793 |
| | 1,488 |
| | $ | 15 |
| | $ | 4,397 |
| | $ | 15,222 |
| | $ | (2,837 | ) | | $ | (260 | ) | | $ | 19,330 |
|
See Notes to Condensed Consolidated Financial Statements.
THE CHARLES SCHWAB CORPORATION
Condensed Consolidated Statements of Cash Flows
(in Millions)
(Unaudited)
| | | | Six Months Ended June 30, | | Three Months Ended March 31, |
| | 2017 | | 2016 | | 2018 | | 2017 (1) |
Cash Flows from Operating Activities | | |
| | | | |
| | |
Net income | | $ | 1,139 |
| | $ | 864 |
| | $ | 783 |
| | $ | 564 |
|
Adjustments to reconcile net income to net cash provided by (used for) operating activities: | | |
| | | | |
| | |
Provision for loan losses | | — |
| | — |
| |
Share-based compensation | | 84 |
| | 75 |
| | 50 |
| | 52 |
|
Depreciation and amortization | | 131 |
| | 113 |
| | 73 |
| | 65 |
|
Premium amortization, net, on available for sale securities and held to maturity securities | | 148 |
| | 107 |
| | 96 |
| | 72 |
|
Other | | 19 |
| | 17 |
| | 36 |
| | 12 |
|
Net change in: | | |
| | |
| | |
| | |
|
Cash and investments segregated and on deposit for regulatory purposes | | 3,691 |
| | 1,005 |
| |
Investments segregated and on deposit for regulatory purposes | | | 853 |
| | (550 | ) |
Receivables from brokers, dealers, and clearing organizations | | (180 | ) | | (431 | ) | | (245 | ) | | 11 |
|
Receivables from brokerage clients | | (841 | ) | | 486 |
| | (595 | ) | | 424 |
|
Other securities owned | | (11 | ) | | 8 |
| | 39 |
| | (115 | ) |
Other assets | | (50 | ) | | (37 | ) | | (16 | ) | | 4 |
|
Payables to brokers, dealers, and clearing organizations | | (473 | ) | | 153 |
| | (325 | ) | | (346 | ) |
Payables to brokerage clients | | (2,855 | ) | | (506 | ) | | (155 | ) | | (1,627 | ) |
Accrued expenses and other liabilities | | (293 | ) | | (331 | ) | | (346 | ) | | (143 | ) |
Net cash provided by (used for) operating activities | | 509 |
| | 1,523 |
| | 248 |
| | (1,577 | ) |
Cash Flows from Investing Activities | | | | | | | | |
Purchases of available for sale securities | | (3,077 | ) | | (16,598 | ) | | (4,631 | ) | | (1,992 | ) |
Proceeds from sales of available for sale securities | | 5,485 |
| | 4,074 |
| | — |
| | 1,064 |
|
Principal payments on available for sale securities | | 4,698 |
| | 4,763 |
| | 2,695 |
| | 3,067 |
|
Purchases of held to maturity securities | | (12,309 | ) | | (7,582 | ) | | (8,235 | ) | | (9,301 | ) |
Principal payments on held to maturity securities | | 4,469 |
| | 2,198 |
| | 3,548 |
| | 1,731 |
|
Net increase in bank loans | | (418 | ) | | (362 | ) | |
Net change in bank loans | | | 74 |
| | (134 | ) |
Purchases of equipment, office facilities, and property | | (164 | ) | | (195 | ) | | (122 | ) | | (80 | ) |
Purchases of Federal Home Loan Bank stock | | (87 | ) | | (118 | ) | |
Proceeds from sales of Federal Home Loan Bank stock | | 100 |
| | — |
| | 172 |
| | 64 |
|
Other investing activities | | (14 | ) | | (14 | ) | | (40 | ) | | (6 | ) |
Net cash provided by (used for) investing activities | | (1,317 | ) | | (13,834 | ) | | (6,539 | ) | | (5,587 | ) |
Cash Flows from Financing Activities | | | | | | | | |
Net change in bank deposits | | (1,154 | ) | | 7,793 |
| | 20,528 |
| | 3,435 |
|
Net proceeds from short-term borrowings | | 300 |
| | 5,000 |
| |
Net change in short-term borrowings | | | (15,000 | ) | | 600 |
|
Issuance of long-term debt | | 643 |
| | — |
| | — |
| | 643 |
|
Repayment of long-term debt | | (4 | ) | | (3 | ) | | (627 | ) | | (2 | ) |
Net proceeds from preferred stock offering | | — |
| | 725 |
| |
Dividends paid | | (293 | ) | | (230 | ) | | (184 | ) | | (158 | ) |
Proceeds from stock options exercised and other | | 71 |
| | 19 |
| | 49 |
| | 58 |
|
Other financing activities | | (8 | ) | | 5 |
| | (10 | ) | | (8 | ) |
Net cash provided by (used for) financing activities | | (445 | ) | | 13,309 |
| | 4,756 |
| | 4,568 |
|
Increase (Decrease) in Cash and Cash Equivalents | | (1,253 | ) | | 998 |
| |
Cash and Cash Equivalents at Beginning of Period | | 10,828 |
| | 11,978 |
| |
Cash and Cash Equivalents at End of Period | | $ | 9,575 |
| | $ | 12,976 |
| |
Supplemental Cash Flow Information | | | | | |
Cash paid during the period for: | | | | | |
Interest | | $ | 117 |
| | $ | 74 |
| |
Income taxes | | $ | 597 |
| | $ | 505 |
| |
Non-cash investing activity: | | |
| | | |
Securities purchased during the period but settled after period end | | $ | — |
| | $ | 651 |
| |
Increase (Decrease) in Cash and Cash Equivalents, including Amounts Restricted | | | (1,535 | ) | | (2,596 | ) |
Cash and Cash Equivalents, including Amounts Restricted at Beginning of Period | | | 19,160 |
| | 17,873 |
|
Cash and Cash Equivalents, including Amounts Restricted at End of Period | | | $ | 17,625 |
| | $ | 15,277 |
|
(1)Adjusted for the retrospective adoption of ASU 2016-18. See Note 2.
Continued on following page
THE CHARLES SCHWAB CORPORATION
Condensed Consolidated Statements of Cash Flows
(in Millions)
(Unaudited)
Continued from previous page
|
| | | | | | | | |
| | Three Months Ended March 31, |
| | 2018 | | 2017 (1) |
Supplemental Cash Flow Information | | | | |
Cash paid during the period for: | | | | |
Interest | | $ | 169 |
| | $ | 75 |
|
Income taxes | | $ | 3 |
| | $ | 8 |
|
Non-cash investing activity: | | | | |
Securities purchased during the period but settled after period end | | $ | 160 |
| | $ | 581 |
|
| | | | |
| | March 31, 2018 | | March 31, 2017 |
Reconciliation of cash, cash equivalents and amounts reported within the balance sheet (2) | | | | |
Cash and cash equivalents | | $ | 14,145 |
| | $ | 9,475 |
|
Restricted cash and cash equivalents amounts included in Cash and investments segregated and on deposit for regulatory purposes | | 3,480 |
| | 5,802 |
|
Total cash and cash equivalents, including amounts restricted shown in the statement of cash flows | | $ | 17,625 |
| | $ | 15,277 |
|
(1) Adjusted for the retrospective adoption of ASU 2016-18. See Note 2.
(2) For more information on the nature of restrictions on restricted cash and cash equivalents see Note 16.
See Notes to Condensed Consolidated Financial Statements.
THE CHARLES SCHWAB CORPORATION
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted)
(Unaudited)
1. Introduction and Basis of Presentation
CSCThe Charles Schwab Corporation (CSC) is a savings and loan holding company engaged, through its subsidiaries, in wealth management, securities brokerage, banking, asset management, custody, and financial advisory services.
Significant business subsidiaries of CSC include the following:
Charles Schwab is& Co., Inc. (CS&Co), a securities broker-dealer with over 340 domestic branch offices in 46 states, as well as a branch in each of the Commonwealth of Puerto Rico and London, England. In addition,broker-dealer;
Charles Schwab serves clients in Hong Kong through one of CSC’s subsidiaries. Other subsidiaries include 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 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
These unaudited condensed consolidated financial statements include CSC and its majority-owned subsidiaries (collectively, referred to as the Company). Intercompany balances and transactions have been eliminated. These condensed consolidated financial statements have been prepared in conformity with generally accepted 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. Certainstatements, and in the related disclosures. These estimates relate to other-than-temporary impairment (OTTI)are based on information available as of investment securities, valuationthe date of goodwill, allowance for loan losses, legal and regulatory reserves, and income taxes. Actual results may differ from those estimates.
Thesethe condensed consolidated financial statements reflect all adjustments that are, instatements. While management makes its best judgment, actual amounts or results could differ from these estimates. In the opinion of management, necessaryall normal, recurring adjustments have been included for a fair presentationstatement of the results for the periods presented. These adjustments are of a normal recurring nature. The Company’s results for anythis interim period are not necessarily indicative of results for a full year or any other interim period. financial information.
These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto, included in the 2016Schwab’s 2017 Form 10-K.
The Company’s significant accounting policies are included in Note 2 in the 20162017 Form 10-K. There have been no significant changes to these accounting policies during the first sixthree months of 20172018, except as described in Note 2 below.
Principles of Consolidation
The CompanySchwab evaluates for consolidation all entities in which it has financial interests for consolidation, except for money market funds, which are specifically excluded from consolidation guidance. ForWhen an entity subject tois evaluated for consolidation, the Company evaluatesSchwab determines whether the Company’sits interest in the entity constitutes a controlling financial interest under either the variable interest entity (VIE) model or a voting interest entity (VOE) model. Based upon the Company’s assessments, the CompanyIn evaluating whether Schwab’s interest in a VIE is not deemed to have 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 Schwab is the primary beneficiary; therefore, iswe are not required to consolidate any VIEs. See Note 5 for further information about VIEs. The CompanySchwab consolidates all VOEs in which it has majority-voting interests.
For investmentsInvestments in entities in which the CompanySchwab does not have a controlling financial interest the Company accountsare accounted for those investments under the equity method of accounting when the Company haswe have the ability to exercise significant influence over operating and financing decisions of the 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 on the condensed consolidated balance sheets.
2. New Accounting Standards
Adoption of New Accounting Standards
On January 1, 2017, the Company adopted, on a prospective basis, ASU 2016-09, “Stock Compensation – Improvements to Employee Share-Based Payment Accounting (Topic 718)”, which requires entities to recognize the income tax effects for the difference between generally accepted accounting principles (GAAP) and federal income tax treatment (i.e., excess tax benefit or deficiency) of share-based awards in the income statement when the awards vest or are settled, rather than recording such effects in additional paid-in capital. As a result, the Company’s tax expense was reduced by approximately $5 million and $36 million in the second quarter and first half of 2017, respectively. Future effects will depend on the Company’s share price, restricted stock vesting, and the volume of equity incentive options exercised. For the purpose of recognizing compensation cost associated with share-based awards, ASU 2016-09 also provides entities with an accounting policy election to account for forfeitures of awards as they occur or continue with current practice of estimating forfeitures at the grant date to determine the
THE CHARLES SCHWAB CORPORATION
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted)
(Unaudited)
number of awards expected to vest and adjusting that estimate as necessary. The Company has elected to continue to follow the current practice.2. New Accounting Standards
Adoption of New Accounting Standards Not Yet Adopted
In May 2014, the Financial Accounting Standards Board (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 FASB has subsequently issued several amendments to the standard, including deferral of the effective date until January 1, 2018, clarification of principal versus agent considerations, narrow scope improvements and other technical corrections. Entities may 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 plans to adopt the revenue recognition guidance in the first quarter of 2018 using the modified retrospective method with a cumulative effect adjustment to opening retained earnings. The guidance does not apply to revenue associated with financial instruments, including loans and securities that are accounted for under other U.S. GAAP. Accordingly, the Company does not expect an impact to net interest revenue. The Company believes that the primary areas of potential impact of the guidance for the Company are (1) the impact on the income statement of the capitalization of costs to obtain a contract and (2) the presentation of certain revenue streams in the income statement (i.e., gross versus net reporting). With respect to the capitalization of costs to obtain a contract, the Company believes adoption of the standard will likely alter the timing, measurement and recognition of those costs in the income statement; however, the Company does not expect the impact to be material.
The American Institute of Certified Public Accountants has formed sixteen industry task forces to help assess industry specific implementation issues. Preliminary conclusions reached by the Company may be impacted by the finalized task-force papers, which have yet to be released. The next phase of the Company’s implementation work will be to evaluate any changes that may be required to the Company’s applicable disclosures. While the total revenue may be impacted by the adoption of the guidance, net income will not be affected.
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 main provisions of the guidance include: (i) most equity investments are to be measured at fair value, with changes in fair value recognized in net income, except for those accounted for under the equity method or those that do not have readily determinable fair values for which a practical alternative can be elected; (ii) requires the use of an exit price notion when measuring the fair value of financial instruments for disclosure purposes; and (iii) requires separate presentation of financial assets and liabilities by measurement category and form of instrument on the balance sheet or in the accompanying notes. The Company does not expect the adoption of ASU 2016-01 will have a material impact on its financial statements and EPS.
In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)”, which amends the accounting for leases by lessees and lessors. The primary change as a result of the new standard 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. ASU 2016-02 will become effective January 1, 2019, with early adoption permitted, and requires entities to apply the new guidance using a modified retrospective transition. Modified retrospective transition requires entities to apply the new guidance as of the beginning of the earliest comparative period presented in the financial statements in which the entity first applies the new standard. Certain transition reliefs are permitted if elected by the entity. The adoption of ASU 2016-02 will result in the Company recognizing a right-of-use asset and lease liability on the consolidated balance sheet based on the present value of remaining operating lease payments (see Note 14 of the Company’s 2016 Form 10-K for the undiscounted future annual minimum rental commitments for operating leases). The Company does not expect the adoption of ASU 2016-02 will have a material impact on its EPS.
|
| | | |
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. |
| | | |
THE CHARLES SCHWAB CORPORATION
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted)
(Unaudited)
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses |
| | | |
| | | |
Standard | Description | Date of Adoption | Effects on the Financial Statements or Other Significant Matters |
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 statements of cash flows. |
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 early adopted this guidance as of the beginning of the quarter. The Company elected to reclassify the income tax effects of the Tax Act from items in AOCI into retained earnings.
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 requires modified retrospective transition as of the beginning of the earliest comparative period presented in the financial statements in which the entity first applies the new standard. Certain transition relief is permitted if elected by the entity. | January 1, 2019 | The Company does not expect this guidance will have a material impact on its earnings per common share (EPS), but it will result in a gross up of the consolidated balance sheets due to recognition of right-of-use assets and lease liabilities based on the present value of remaining operating lease payments (see Note 13 in the 2017 10-K for the undiscounted rental commitments for operating leases).
The Company is evaluating its adoption method due to a recently proposed ASU that provides an alternative adoption method. The Company is refining its methodology to estimate the right of use assets and lease liabilities and working on system updates to apply the lease accounting changes. The full population of contracts that may be subject to balance sheet recognition is still being evaluated, and is nearly complete. The Company has further work to perform related to disclosures. |
| | | |
CHARLES SCHWAB CORPORATION
Notes to Condensed Consolidated Financial Instruments” which provides new guidance for recognizing impairment of most debt instruments measured at amortized cost, including loans and HTM debt securities. The new guidance will require estimating expected credit losses (CECL) over the remaining life of an instrumentStatements
(Tabular Amounts in Millions, Except Per Share Data, Ratios, 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. The new guidance also 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. ASU 2016-13 will become effective January 1, 2020, with early adoption permitted as of January 1, 2019. The new guidance will be applied through 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 had been recognized before the effective date. Noted)
(Unaudited)
|
| | | |
| | | |
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 held to maturity (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 available for sale (AFS) debt securities by requiring the use of an allowance, rather than directly reducing the carrying value of the security, and eliminating consideration of the length of time such security has been in an unrealized loss position as a factor in concluding whether a credit loss exists.
Adoption requires a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the entity applies the new guidance except that a prospective transition is required for AFS debt securities for which an OTTI has been recognized prior to the effective date. | January 1, 2020 (early adoption permitted) | The Company is currently evaluating the impact of this guidance on its financial statements, including EPS. Initial implementation work performed to date has focused on evaluating the Company’s impacted assets, including loans and investment securities. The Company has also been evaluating its current data and system capabilities and considering additional data sources and system enhancements. Additional work to be completed includes an in-depth analysis for each impacted asset type, selection of methods, and changes to policies and procedures. |
ASU 2017-08, “Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities” | Shortens the amortization period for the premium on certain callable debt securities to the earliest call date. The amendments are applicable to any purchased individual debt security with an explicit and noncontingent call feature with a fixed price on a preset date. ASU 2017-08 does not impact the accounting for callable debt securities held at a discount.
Adoption requires modified retrospective transition as of the beginning of the period of adoption through a cumulative-effect adjustment to retained earnings. | January 1, 2019 (early adoption permitted)
| The Company is currently evaluating the impact of adopting this guidance on its financial statements, including EPS. |
CHARLES SCHWAB CORPORATION
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted)
(Unaudited)
The cumulative effect of the changes made to our consolidated January 1, 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) | | $ | 1,949 |
| | $ | 167 |
| | $ | — |
| | $ | 2,116 |
|
Stockholders’ Equity | | | | | | | | |
Retained earnings | | 14,408 |
| | 167 |
| | 33 |
| | 14,608 |
|
Accumulated other comprehensive income | | (152 | ) | | — |
| | (33 | ) | | (185 | ) |
(1) Adjustment is comprised of an increase in capitalized contract costs of $219 million, partially offset by an increase in deferred tax liabilities of $52 million.
In accordance with the new revenue standard requirements, the disclosure of the impact of this new guidanceadoption on its financial statementsour condensed consolidated statement of income and EPS.condensed consolidated balance sheet were as follows: |
| | | | | | | | | | | | |
| | Three Months Ended March 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 | | $ | 770 |
| | $ | 781 |
| | $ | (11 | ) |
Taxes on income | | 219 |
| | 216 |
| | 3 |
|
Net Income | | 783 |
| | 775 |
| | 8 |
|
In March 2017, the FASB issued ASU 2017-08, “Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities”, which 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 |
| | | | | | | | | | | | |
| | As of March 31, 2018 |
Balance Sheet | | As Reported | | Balances Without Adoption of ASU 2014-09 | | Effect of Change Higher/(Lower) |
Assets | | | | | | |
Other assets (1) | | $ | 2,038 |
| | $ | 1,863 |
| | $ | 175 |
|
Stockholders’ Equity | | | | | | |
Retained earnings | | 15,222 |
| | 15,047 |
| | 175 |
|
(1) Adjustment is comprised of an explicit and noncontingent call feature that is callable at a fixed price on a preset date. The amendments do not impact the accounting for callable debt securities held at a discount, which will continue to be accreted to maturity. ASU 2017-08 will become effective on January 1, 2019, with early adoption permitted including adoptionincrease in capitalized contract costs of $230 million, partially offset by an interim period. The amendments will be applied on a modified retrospective basis through a cumulative-effect adjustment to retained earnings asincrease in deferred tax liabilities of the beginning of the period of adoption. The Company is currently evaluating the impact of adopting ASU 2017-08 on its financial statements and EPS.$55 million.
THE CHARLES SCHWAB CORPORATION
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted)
(Unaudited)
3. Investment SecuritiesRevenue Recognition
Disaggregated Revenue
Disaggregation of Schwab’s revenue by major source is as follows: |
| | | | | | | | |
| | Three Months Ended March 31, |
| | 2018 | | 2017 |
Net interest revenue | | | | |
Interest revenue | | $ | 1,421 |
| | $ | 1,055 |
|
Interest expense | | (158 | ) | | (55 | ) |
Net interest revenue | | 1,263 |
| | 1,000 |
|
Asset management and administration fees | | | | |
Mutual funds and ETF service fees | | 493 |
| | 506 |
|
Advice Solutions | | 282 |
| | 244 |
|
Other | | 76 |
| | 73 |
|
Asset management and administration fees | | 851 |
| | 823 |
|
Trading revenue | | | | |
Commissions | | 189 |
| | 178 |
|
Principal transactions | | 12 |
| | 14 |
|
Trading revenue | | 201 |
| | 192 |
|
Other | | 83 |
| | 66 |
|
Total net revenues | | $ | 2,398 |
| | $ | 2,081 |
|
For a summary of revenue provided by our reportable segments, see Note 17. The amortized cost, gross unrealized gainsrecognition of revenue is not impacted by the operating segment in which revenue is generated. Schwab does not have any significant contract balances as of March 31, 2018.
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 ASU 2014-09, and losses,is included in the table above in order to reconcile to total net revenues per the condensed consolidated statement of income. Net interest revenue is the difference between interest generated on interest earning assets and fairinterest 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 changes in prepayment levels for mortgage related securities and loans. Fees earned on securities borrowing and lending activities, which are conducted by CS&Co on assets held in client brokerage accounts, are included in other interest revenue and expense.
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 Schwab Funds® and Schwab ETFs™, as well as recordkeeping, shareholder, and administration services provided to third-party funds. Advice Solutions fees are charged for brokerage and asset management services provided to Advice Solutions clients. Both Mutual fund and ETF service fees and Advice Solution fees are earned and recognized over time. Fees are generally based on a percentage of the daily value of AFSassets under management and HTM securities are as follows:collected on a monthly or quarterly basis.
|
| | | | | | | | | | | | | | | | |
June 30, 2017 | | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
Available for sale securities: | | | | | | | | |
U.S. agency mortgage-backed securities | | $ | 17,604 |
| | $ | 56 |
| | $ | 27 |
| | $ | 17,633 |
|
Asset-backed securities | | 9,858 |
| | 40 |
| | 4 |
| | 9,894 |
|
Corporate debt securities | | 6,603 |
| | 23 |
| | 1 |
| | 6,625 |
|
U.S. Treasury securities | | 7,740 |
| | 8 |
| | 51 |
| | 7,697 |
|
Certificates of deposit | | 1,620 |
| | 2 |
| | — |
| | 1,622 |
|
U.S. agency notes | | 1,914 |
| | — |
| | 7 |
| | 1,907 |
|
Commercial paper | | 214 |
| | — |
| | — |
| | 214 |
|
Non-agency commercial mortgage-backed securities | | 42 |
| | — |
| | — |
| | 42 |
|
Total available for sale securities | | $ | 45,595 |
| | $ | 129 |
| | $ | 90 |
| | $ | 45,634 |
|
Held to maturity securities: | | | | | | | | |
U.S. agency mortgage-backed securities | | $ | 89,250 |
| | $ | 499 |
| | $ | 805 |
| | $ | 88,944 |
|
Non-agency commercial mortgage-backed securities | | 995 |
| | 12 |
| | 3 |
| | 1,004 |
|
Asset-backed securities | | 12,493 |
| | 70 |
| | 2 |
| | 12,561 |
|
Corporate debt securities | | 3,181 |
| | 23 |
| | — |
| | 3,204 |
|
U.S. Treasury securities | | 223 |
| | — |
| | 1 |
| | 222 |
|
Commercial paper | | 100 |
| | — |
| | — |
| | 100 |
|
U.S. state and municipal securities | | 1,168 |
| | 43 |
| | — |
| | 1,211 |
|
Certificates of deposit | | 200 |
| | — |
| | — |
| | 200 |
|
Total held to maturity securities | | $ | 107,610 |
| | $ | 647 |
| | $ | 811 |
| | $ | 107,446 |
|
|
| | | | | | | | | | | | | | | | |
December 31, 2016 | | | | | | | | |
Available for sale securities: | | | | | | | | |
U.S. agency mortgage-backed securities | | $ | 33,167 |
| | $ | 120 |
| | $ | 92 |
| | $ | 33,195 |
|
Asset-backed securities | | 20,520 |
| | 29 |
| | 214 |
| | 20,335 |
|
Corporate debt securities | | 9,850 |
| | 20 |
| | 18 |
| | 9,852 |
|
U.S. Treasury securities | | 8,679 |
| | 3 |
| | 59 |
| | 8,623 |
|
Certificates of deposit | | 2,070 |
| | 2 |
| | 1 |
| | 2,071 |
|
U.S. agency notes | | 1,915 |
| | — |
| | 8 |
| | 1,907 |
|
U.S. state and municipal securities | | 1,167 |
| | 2 |
| | 46 |
| | 1,123 |
|
Commercial paper | | 214 |
| | — |
| | — |
| | 214 |
|
Non-agency commercial mortgage-backed securities | | 45 |
| | — |
| | — |
| | 45 |
|
Total available for sale securities | | $ | 77,627 |
| | $ | 176 |
| | $ | 438 |
| | $ | 77,365 |
|
Held to maturity securities: | | | | | | | | |
U.S. agency mortgage-backed securities | | $ | 72,439 |
| | $ | 324 |
| | $ | 1,086 |
| | $ | 71,677 |
|
Non-agency commercial mortgage-backed securities | | 997 |
| | 11 |
| | 4 |
| | 1,004 |
|
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 |
|
The increase in the HTM portfolio at June 30, 2017 compared to December 31, 2016 was primarily attributable to the transfer of $24.7 billion of investment securities from the AFS category to the HTM category during the first quarter of 2017. These securities had a total net unrealized loss of $227 million before income tax in AOCI on the date of transfer. The transfer was made to mitigate the potential volatility in regulatory capital from changes in market values in the AFS securities portfolio and the related impact to AOCI once the Company crosses $250 billion in consolidated assets. The year after the Company
THE CHARLES SCHWAB CORPORATION
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted)
(Unaudited)
surpasses $250 billionTrading revenue
Substantially all trading revenue is generated through commissions earned for executing trades for clients 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 debtindividual equities, options, fixed income securities, and U.S. statecertain third-party mutual funds and municipal securities. The unrealized holding gainsETFs. This revenue is earned and losses oncollected at a point-in-time which is consistent with the date of transfertiming that the trade execution services are reported as a separate component of AOCI and as an adjustment to the purchase premium and discount on the securities transferred. The separate component of AOCI will be amortized or accreted into interest income over the remaining life of the securities transferred, offsetting the revised premium or discount amortization or accretion on the transferred assets.performed.
Schwab Bank pledges securities issued by federal agenciesOther 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 other revenue is order flow revenue, which are payments received from execution venues to secure certain trust deposits. The fair value of these pledged securities was $967 millionwhich CS&Co sends equity and option orders. Order flow revenue is recognized at June 30, 2017.the point-in-time that the trades are executed.
Capitalized contract costs
Deferred contract costs relate to sales commissions paid to employees for obtaining contracts with clients and are included in Other assets in the condensed 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 March 31, 2018 and January 1, 2018, we had $230 million and $219 million of deferred contract costs, respectively. Amortization expense related to deferred contract costs was $11 million for the first quarter of 2018, which was recorded in Compensation and benefits expense.
THE
CHARLES SCHWAB CORPORATION
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted)
(Unaudited)
A summary4. Investment Securities
The amortized cost, gross unrealized gains and losses, and fair value of AFS and HTM securities are as follows: |
| | | | | | | | | | | | | | | | |
March 31, 2018 | | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
Available for sale securities: | | | | | | | | |
U.S. agency mortgage-backed securities | | $ | 21,077 |
| | $ | 49 |
| | $ | 65 |
| | $ | 21,061 |
|
U.S. Treasury securities | | 10,964 |
| | — |
| | 137 |
| | 10,827 |
|
Asset-backed securities (1) | | 9,622 |
| | 25 |
| | 11 |
| | 9,636 |
|
Corporate debt securities (2) | | 6,546 |
| | 12 |
| | 6 |
| | 6,552 |
|
Certificates of deposit | | 1,790 |
| | 2 |
| | 1 |
| | 1,791 |
|
U.S. agency notes | | 1,565 |
| | — |
| | 8 |
| | 1,557 |
|
Commercial paper (2) | | 315 |
| | — |
| | — |
| | 315 |
|
Foreign government agency securities | | 50 |
| | — |
| | 2 |
| | 48 |
|
Non-agency commercial mortgage-backed securities | | 40 |
| | — |
| | — |
| | 40 |
|
Total available for sale securities | | $ | 51,969 |
| | $ | 88 |
| | $ | 230 |
| | $ | 51,827 |
|
Held to maturity securities: | | | | | | | | |
U.S. agency mortgage-backed securities | | $ | 103,967 |
| | $ | 82 |
| | $ | 2,377 |
| | $ | 101,672 |
|
Asset-backed securities (1) | | 14,625 |
| | 126 |
| | 7 |
| | 14,744 |
|
Corporate debt securities (2) | | 4,340 |
| | 8 |
| | 44 |
| | 4,304 |
|
U.S. state and municipal securities | | 1,245 |
| | 20 |
| | 3 |
| | 1,262 |
|
Non-agency commercial mortgage-backed securities | | 1,033 |
| | 3 |
| | 19 |
| | 1,017 |
|
U.S. Treasury securities | | 223 |
| | — |
| | 8 |
| | 215 |
|
Certificates of deposit | | 200 |
| | — |
| | — |
| | 200 |
|
Foreign government agency securities | | 50 |
| | — |
| | 1 |
| | 49 |
|
Total held to maturity securities | | $ | 125,683 |
| | $ | 239 |
| | $ | 2,459 |
| | $ | 123,463 |
|
|
| | | | | | | | | | | | | | | | |
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 40% and 42% of Asset-backed securities held as of March 31, 2018 and December 31, 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 March 31, 2018 and December 31, 2017, respectively.
(2) As of March 31, 2018 and December 31, 2017, approximately 38% 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 22% of the holdings of these securities were issued by institutions in the information technology industry as of both March 31, 2018 and December 31, 2017.
CHARLES SCHWAB CORPORATION
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted)
(Unaudited)
At March 31, 2018, CSB had pledged securities with a fair value of $23.0 billion as collateral to secure borrowing capacity on a secured credit facility with the Federal Home Loan Bank of San Francisco (FHLB) (see Note 8). 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 $2.5 billion as collateral for this facility at March 31, 2018. CSB also pledges securities issued by federal agencies to secure certain trust deposits. The fair value of these pledged securities was $906 million at March 31, 2018.
CHARLES SCHWAB CORPORATION
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted)
(Unaudited)
Securities with unrealized losses, aggregated by category and period of continuous unrealized loss, isare as follows:
| | | Less than | | 12 months | | | | | Less than | | 12 months | | | | |
| 12 months | | or longer | | Total | 12 months | | or longer | | Total |
June 30, 2017 | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | |
March 31, 2018 | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses |
Available for sale securities: | | | | | | | | | | | | | | | | | | | | | | |
U.S. agency mortgage-backed securities | | $ | 6,308 |
| | $ | 52 |
| | $ | 2,339 |
| | $ | 13 |
| | $ | 8,647 |
| | $ | 65 |
|
U.S. Treasury securities | | 5,522 |
| | 45 |
| | 5,305 |
| | 92 |
| | 10,827 |
| | 137 |
|
Asset-backed securities | | 1,594 |
| | 7 |
| | 422 |
| | 4 |
| | 2,016 |
| | 11 |
|
Corporate debt securities | | 1,503 |
| | 6 |
| | 20 |
| | — |
| | 1,523 |
| | 6 |
|
Certificates of deposit | | 1,019 |
| | 1 |
| | — |
| | — |
| | 1,019 |
| | 1 |
|
U.S. agency notes | | — |
| | — |
| | 1,557 |
| | 8 |
| | 1,557 |
| | 8 |
|
Foreign government agency securities | | 48 |
| | 2 |
| | — |
| | — |
| | 48 |
| | 2 |
|
Total | | $ | 15,994 |
| | $ | 113 |
| | $ | 9,643 |
| | $ | 117 |
| | $ | 25,637 |
| | $ | 230 |
|
Held to maturity securities: | | |
| | |
| | |
| | |
| | |
| | |
|
U.S. agency mortgage-backed securities | $ | 1,817 |
| | $ | 6 |
| | $ | 2,976 |
| | $ | 21 |
| | $ | 4,793 |
| | $ | 27 |
| $ | 60,892 |
| | $ | 1,166 |
| | $ | 24,742 |
| | $ | 1,211 |
| | $ | 85,634 |
| | $ | 2,377 |
|
Asset-backed securities | 866 |
| | — |
| | 550 |
| | 4 |
| | 1,416 |
| | 4 |
| 1,249 |
| | 7 |
| | 100 |
| | — |
| | 1,349 |
| | 7 |
|
Corporate debt securities | 867 |
| | 1 |
| | 303 |
| | — |
| | 1,170 |
| | 1 |
| 2,743 |
| | 44 |
| | — |
| | — |
| | 2,743 |
| | 44 |
|
U.S. state and municipal securities | | 96 |
| | 3 |
| | — |
| | — |
| | 96 |
| | 3 |
|
Non-agency commercial mortgage-backed securities | | 764 |
| | 19 |
| | — |
| | — |
| | 764 |
| | 19 |
|
U.S. Treasury securities | 6,418 |
| | 51 |
| | — |
| | — |
| | 6,418 |
| | 51 |
| 215 |
| | 8 |
| | — |
| | — |
| | 215 |
| | 8 |
|
U.S. agency notes | 1,907 |
| | 7 |
| | — |
| | — |
| | 1,907 |
| | 7 |
| |
Total | $ | 11,875 |
| | $ | 65 |
| | $ | 3,829 |
| | $ | 25 |
| | $ | 15,704 |
| | $ | 90 |
| |
Held to maturity securities: | |
| | |
| | |
| | |
| | |
| | |
| |
U.S. agency mortgage-backed securities | $ | 174 |
| | $ | — |
| | $ | 48,699 |
| | $ | 805 |
| | $ | 48,873 |
| | $ | 805 |
| |
Non-agency commercial mortgage-backed securities | — |
| | — |
| | 535 |
| | 3 |
| | 535 |
| | 3 |
| |
Asset-backed securities | 945 |
| | 1 |
| | 779 |
| | 1 |
| | 1,724 |
| | 2 |
| |
U.S. Treasury securities | — |
| | — |
| | 222 |
| | 1 |
| | 222 |
| | 1 |
| |
Foreign government agency securities | | 49 |
| | 1 |
| | — |
| | — |
| | 49 |
| | 1 |
|
Total | $ | 1,119 |
| | $ | 1 |
| | $ | 50,235 |
| | $ | 810 |
| | $ | 51,354 |
| | $ | 811 |
| $ | 66,008 |
| | $ | 1,248 |
| | $ | 24,842 |
| | $ | 1,211 |
| | $ | 90,850 |
| | $ | 2,459 |
|
Total securities with unrealized losses (1) | $ | 12,994 |
| | $ | 66 |
| | $ | 54,064 |
| | $ | 835 |
| | $ | 67,058 |
| | $ | 901 |
| $ | 82,002 |
| | $ | 1,361 |
| | $ | 34,485 |
| | $ | 1,328 |
| | $ | 116,487 |
| | $ | 2,689 |
|
| | December 31, 2016 | | | | | | | | | | | | |
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 | $ | 14,816 |
| | $ | 69 |
| | $ | 2,931 |
| | $ | 23 |
| | $ | 17,747 |
| | $ | 92 |
| $ | 42,102 |
| | $ | 310 |
| | $ | 24,753 |
| | $ | 724 |
| | $ | 66,855 |
| | $ | 1,034 |
|
Asset-backed securities | 1,670 |
| | 13 |
| | 9,237 |
| | 201 |
| | 10,907 |
| | 214 |
| 1,124 |
| | 2 |
| | 72 |
| | — |
| | 1,196 |
| | 2 |
|
Corporate debt securities | 2,407 |
| | 17 |
| | 653 |
| | 1 |
| | 3,060 |
| | 18 |
| 1,078 |
| | 5 |
| | — |
| | — |
| | 1,078 |
| | 5 |
|
U.S. Treasury securities | 6,926 |
| | 59 |
| | — |
| | — |
| | 6,926 |
| | 59 |
| |
Certificates of deposit | 474 |
| | — |
| | 100 |
| | 1 |
| | 574 |
| | 1 |
| |
U.S. agency notes | 1,907 |
| | 8 |
| | — |
| | — |
| | 1,907 |
| | 8 |
| |
U.S. state and municipal securities | 956 |
| | 46 |
| | — |
| | — |
| | 956 |
| | 46 |
| |
Total | $ | 29,156 |
| | $ | 212 |
| | $ | 12,921 |
| | $ | 226 |
| | $ | 42,077 |
| | $ | 438 |
| |
Held to maturity securities: | |
| | |
| | |
| | |
| | |
| | |
| |
U.S. agency mortgage-backed securities | $ | 51,361 |
| | $ | 1,086 |
| | $ | — |
| | $ | — |
| | $ | 51,361 |
| | $ | 1,086 |
| |
Non-agency commercial mortgage-backed securities | 591 |
| | 4 |
| | — |
| | — |
| | 591 |
| | 4 |
| 607 |
| | 5 |
| | — |
| | — |
| | 607 |
| | 5 |
|
U.S. Treasury securities | 219 |
| | 4 |
| | — |
| | — |
| | 219 |
| | 4 |
| 220 |
| | 3 |
| | — |
| | — |
| | 220 |
| | 3 |
|
U.S. state and municipal securities | 14 |
| | 1 |
| | — |
| | — |
| | 14 |
| | 1 |
| |
Foreign government agency securities | | 49 |
| | 1 |
| | — |
| | — |
| | 49 |
| | 1 |
|
Total | $ | 52,185 |
| | $ | 1,095 |
| | $ | — |
| | $ | — |
| | $ | 52,185 |
| | $ | 1,095 |
| $ | 45,180 |
| | $ | 326 |
| | $ | 24,825 |
| | $ | 724 |
| | $ | 70,005 |
| | $ | 1,050 |
|
Total securities with unrealized losses (2) | $ | 81,341 |
| | $ | 1,307 |
| | $ | 12,921 |
| | $ | 226 |
| | $ | 94,262 |
| | $ | 1,533 |
| $ | 58,089 |
| | $ | 364 |
| | $ | 34,599 |
| | $ | 825 |
| | $ | 92,688 |
| | $ | 1,189 |
|
| |
(1)The number of investment positions with unrealized losses totaled 314 for AFS securities and 1,353 for HTM securities. (2) The number of investment positions with unrealized losses totaled 251 for AFS securities and 938 for HTM securities.
CHARLES SCHWAB CORPORATION Notes to Condensed Consolidated Financial Statements (Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted) (Unaudited) | The number of investment positions with unrealized losses totaled 205 for AFS securities and 625 for HTM securities. |
| |
(2)
| The number of investment positions with unrealized losses totaled 627 for AFS securities and 612 for HTM securities. |
At June 30, 2017,March 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 other-than-temporarily impaired (OTTI) on a quarterly basis as described in Note 2 in the 2017 Form 10-K. No amounts were recognized as OTTI in earnings or other comprehensive income in 2018 or 2017. As of March 31, 2018 and December 31, 2017, Schwab did not hold any securities on which OTTI was previously recognized.
THE The maturities of AFS and HTM securities are as follows: |
| | | | | | | | | | | | | | | | | | | | |
March 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 (1) | | $ | 35 |
| | $ | 3,454 |
| | $ | 7,846 |
| | $ | 9,726 |
| | $ | 21,061 |
|
U.S. Treasury securities | | 2,441 |
| | 8,386 |
| | — |
| | — |
| | 10,827 |
|
Asset-backed securities | | 250 |
| | 7,844 |
| | 959 |
| | 583 |
| | 9,636 |
|
Corporate debt securities | | 3,183 |
| | 3,369 |
| | — |
| | — |
| | 6,552 |
|
Certificates of deposit | | 772 |
| | 1,019 |
| | — |
| | — |
| | 1,791 |
|
U.S. agency notes | | 1,310 |
| | 247 |
| | — |
| | — |
| | 1,557 |
|
Commercial paper | | 315 |
| | — |
| | — |
| | — |
| | 315 |
|
Foreign government agency securities | | — |
| | 48 |
| | — |
| | — |
| | 48 |
|
Non-agency commercial mortgage-backed securities (1) | | — |
| | — |
| | — |
| | 40 |
| | 40 |
|
Total fair value | | $ | 8,306 |
| | $ | 24,367 |
| | $ | 8,805 |
| | $ | 10,349 |
| | $ | 51,827 |
|
Total amortized cost | | $ | 8,315 |
| | $ | 24,480 |
| | $ | 8,819 |
| | $ | 10,355 |
| | $ | 51,969 |
|
Held to maturity securities: | | | | | | | | | | |
U.S. agency mortgage-backed securities (1) | | $ | 418 |
| | $ | 13,032 |
| | $ | 30,343 |
| | $ | 57,879 |
| | $ | 101,672 |
|
Asset-backed securities | | — |
| | 1,046 |
| | 7,356 |
| | 6,342 |
| | 14,744 |
|
Corporate debt securities | | 351 |
| | 3,368 |
| | 585 |
| | — |
| | 4,304 |
|
U.S. state and municipal securities | | — |
| | — |
| | 173 |
| | 1,089 |
| | 1,262 |
|
Non-agency commercial mortgage-backed securities (1) | | — |
| | 355 |
| | — |
| | 662 |
| | 1,017 |
|
U.S. Treasury securities | | — |
| | — |
| | 215 |
| | — |
| | 215 |
|
Certificates of deposit | | — |
| | 200 |
| | — |
| | — |
| | 200 |
|
Foreign government agency securities | | — |
| | 49 |
| | — |
| | — |
| | 49 |
|
Total fair value | | $ | 769 |
| | $ | 18,050 |
| | $ | 38,672 |
| | $ | 65,972 |
| | $ | 123,463 |
|
Total amortized cost | | $ | 771 |
| | $ | 18,270 |
| | $ | 39,171 |
| | $ | 67,471 |
| | $ | 125,683 |
|
(1) Mortgage-backed securities have been allocated to maturity groupings based on final contractual maturities. Actual maturities will differ from final contractual maturities because borrowers on a certain portion of loans underlying these securities have the right to prepay their obligations.
Proceeds and gross realized gains and losses from sales of AFS securities are as follows:
|
| | | | | | | | |
| | Three Months Ended March 31, |
| |
| | 2018 | | 2017 |
Proceeds | | $ | — |
| | $ | 1,064 |
|
Gross realized gains | | — |
| | 1 |
|
CHARLES SCHWAB CORPORATION
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted)
(Unaudited)
Management evaluates whether investment securities are OTTI on a quarterly basis as described in Note 2 in the 20165. Bank Loans and Related Allowance for Loan Losses
Form 10-K.
The maturitiescomposition of AFSbank loans and HTM securities are as follows: |
| | | | | | | | | | | | | | | | | | | | |
June 30, 2017 | | Within 1 year | | After 1 year through 5 years | | After 5 years through 10 years | | After 10 years | | Total |
Available for sale securities: | | | | | | | | | | |
U.S. agency mortgage-backed securities (1) | | $ | 108 |
| | $ | 1,884 |
| | $ | 6,306 |
| | $ | 9,335 |
| | $ | 17,633 |
|
Asset-backed securities | | 23 |
| | 8,019 |
| | 1,126 |
| | 726 |
| | 9,894 |
|
Corporate debt securities | | 2,851 |
| | 3,774 |
| | — |
| | — |
| | 6,625 |
|
U.S. Treasury securities | | 1,619 |
| | 6,078 |
| | — |
| | — |
| | 7,697 |
|
Certificates of deposit | | 951 |
| | 671 |
| | — |
| | — |
| | 1,622 |
|
U.S. agency notes | | 847 |
| | 1,060 |
| | — |
| | — |
| | 1,907 |
|
Commercial paper | | 214 |
| | — |
| | — |
| | — |
| | 214 |
|
Non-agency commercial mortgage-backed securities (1) | | — |
| | — |
| | — |
| | 42 |
| | 42 |
|
Total fair value | | $ | 6,613 |
| | $ | 21,486 |
| | $ | 7,432 |
| | $ | 10,103 |
| | $ | 45,634 |
|
Total amortized cost | | $ | 6,612 |
| | $ | 21,476 |
| | $ | 7,427 |
| | $ | 10,080 |
| | $ | 45,595 |
|
Held to maturity securities: | | | | | | | | | | |
U.S. agency mortgage-backed securities (1) | | $ | — |
| | $ | 9,695 |
| | $ | 30,224 |
| | $ | 49,025 |
| | $ | 88,944 |
|
Non-agency commercial mortgage-backed securities (1) | | — |
| | — |
| | 363 |
| | 641 |
| | 1,004 |
|
Asset-backed securities | | — |
| | 1,019 |
| | 5,395 |
| | 6,147 |
| | 12,561 |
|
Corporate debt securities | | — |
| | 3,204 |
| | — |
| | — |
| | 3,204 |
|
U.S. Treasury securities | | — |
| | — |
| | 222 |
| | — |
| | 222 |
|
Commercial paper | | 100 |
| | — |
| | — |
| | — |
| | 100 |
|
U.S. state and municipal securities | | — |
| | — |
| | 88 |
| | 1,123 |
| | 1,211 |
|
Certificates of deposit | | — |
| | 200 |
| | — |
| | — |
| | 200 |
|
Total fair value | | $ | 100 |
| | $ | 14,118 |
| | $ | 36,292 |
| | $ | 56,936 |
| | $ | 107,446 |
|
Total amortized cost | | $ | 100 |
| | $ | 13,939 |
| | $ | 36,222 |
| | $ | 57,349 |
| | $ | 107,610 |
|
| |
(1)
| Mortgage-backed securities have been allocated to maturity groupings based on final contractual maturities. Actual maturities will differ from final contractual maturities because borrowers on a certain portion of loans underlying these securities have the right to prepay their obligations. |
Proceeds and gross realized gains and losses from sales of AFS securities aredelinquency analysis by loan type is as follows:
|
| | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | Six Months Ended June 30, |
| |
| | 2017 | | 2016 | 2017 | | 2016 |
Proceeds | | $ | 4,421 |
| | $ | 3,774 |
| $ | 5,485 |
| | $ | 4,074 |
|
Gross realized gains | | 6 |
| | 3 |
| 7 |
| | 3 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | |
March 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) | $ | 10,041 |
| $ | 15 |
| $ | 3 |
| $ | 19 |
| $ | 37 |
| $ | 10,078 |
| $ | 17 |
| $ | 10,061 |
|
HELOCs (1,2) | 1,781 |
| 4 |
| 1 |
| 10 |
| 15 |
| 1,796 |
| 7 |
| 1,789 |
|
Pledged asset lines | 4,360 |
| 1 |
| 1 |
| — |
| 2 |
| 4,362 |
| — |
| 4,362 |
|
Other | 180 |
| — |
| — |
| — |
| — |
| 180 |
| 3 |
| 177 |
|
Total bank loans | $ | 16,362 |
| $ | 20 |
| $ | 5 |
| $ | 29 |
| $ | 54 |
| $ | 16,416 |
| $ | 27 |
| $ | 16,389 |
|
| | | | | | | | |
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 Mortgages and HELOCs include unamortized premiums and discounts and direct origination costs of $75 million and $77 million at March 31, 2018 and December 31, 2017, respectively.
(2) At March 31, 2018 and December 31, 2017, 48% of the First Mortgage and HELOC portfolios were concentrated in California. These loans have performed in a manner consistent with the portfolio as a whole.
(3) There were no loans accruing interest that were contractually 90 days or more past due at March 31, 2018 or December 31, 2017.
At March 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 8).
Substantially all of the bank loans were collectively evaluated for impairment at March 31, 2018 and December 31, 2017.
Changes in the allowance for loan losses were as follows: |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2018 | | March 31, 2017 |
| | First Mortgages | | HELOCs | | Other | | Total (1) | | First Mortgages | | HELOCs | | Other | | Total (1) |
Balance at beginning of period | | $ | 16 |
| | $ | 8 |
| | $ | 2 |
| | $ | 26 |
| | $ | 17 |
| | $ | 8 |
| | $ | 1 |
| | $ | 26 |
|
Provision for loan losses | | 1 |
| | (1 | ) | | 1 |
| | 1 |
| | — |
| | — |
| | — |
| | — |
|
Balance at end of period | | $ | 17 |
| | $ | 7 |
| | $ | 3 |
| | $ | 27 |
| | $ | 17 |
| | $ | 8 |
| | $ | 1 |
| | $ | 26 |
|
(1) All pledged asset lines (PALs) were fully collateralized by securities with fair values in excess of borrowings at March 31, 2018 and December 31, 2017.
THE CHARLES SCHWAB CORPORATION
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted)
(Unaudited)
4. Bank Loans and Related Allowance for Loan Losses
The compositionA summary of impaired bank loans and delinquency analysis by loan typerelated assets is as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
June 30, 2017 | Current | 30-59 days past due | 60-89 days past due | >90 days past due and other nonaccrual loans | Total past due and other nonaccrual loans | Total loans | Allowance for loan losses | Total bank loans - net |
Residential real estate mortgages | $ | 9,549 |
| $ | 14 |
| $ | 1 |
| $ | 17 |
| $ | 32 |
| $ | 9,581 |
| $ | 17 |
| $ | 9,564 |
|
Home equity loans and lines of credit | 2,137 |
| 1 |
| 1 |
| 9 |
| 11 |
| 2,148 |
| 8 |
| 2,140 |
|
Pledged asset lines | 4,000 |
| 1 |
| — |
| — |
| 1 |
| 4,001 |
| — |
| 4,001 |
|
Other | 113 |
| — |
| — |
| — |
| — |
| 113 |
| 1 |
| 112 |
|
Total bank loans | $ | 15,799 |
| $ | 16 |
| $ | 2 |
| $ | 26 |
| $ | 44 |
| $ | 15,843 |
| $ | 26 |
| $ | 15,817 |
|
| | | | | | | | |
December 31, 2016 | | | | | | | | |
Residential real estate mortgages | $ | 9,100 |
| $ | 15 |
| $ | 3 |
| $ | 16 |
| $ | 34 |
| $ | 9,134 |
| $ | 17 |
| $ | 9,117 |
|
Home equity loans and lines of credit | 2,336 |
| 2 |
| 2 |
| 10 |
| 14 |
| 2,350 |
| 8 |
| 2,342 |
|
Pledged asset lines | 3,846 |
| 4 |
| 1 |
| — |
| 5 |
| 3,851 |
| — |
| 3,851 |
|
Other | 94 |
| — |
| — |
| — |
| — |
| 94 |
| 1 |
| 93 |
|
Total bank loans | $ | 15,376 |
| $ | 21 |
| $ | 6 |
| $ | 26 |
| $ | 53 |
| $ | 15,429 |
| $ | 26 |
| $ | 15,403 |
|
Residential real estate mortgages (First Mortgages) and home equity loans and lines of credit (HELOCs) include unamortized premiums and discounts and direct origination costs of $77 million and $78 million at June 30, 2017 and December 31, 2016, respectively. The Company had commitments to extend credit related to unused HELOCs, pledged asset lines (PALs), and other lines of credit, which totaled $9.2 billion and $8.4 billion at June 30, 2017 and December 31, 2016, respectively. The Company had commitments to purchase First Mortgage loans of $457 million and $466 million at June 30, 2017 and December 31, 2016, respectively. All PALs were fully collateralized by securities with fair values in excess of borrowings at June 30, 2017 and December 31, 2016. |
| | | | | | | | |
| | March 31, 2018 | | December 31, 2017 |
Nonaccrual loans (1) | | $ | 29 |
| | $ | 28 |
|
Other real estate owned (2) | | 2 |
| | 3 |
|
Total nonperforming assets | | 31 |
| | 31 |
|
Troubled debt restructurings | | 8 |
| | 11 |
|
Total impaired assets | | $ | 39 |
| | $ | 42 |
|
Schwab Bank provides a co-branded loan origination program for Schwab Bank clients (the Program) with Quicken Loans, Inc. (Quicken Loans®(1)). Pursuant to Nonaccrual loans include nonaccrual troubled debt restructurings.
(2) Included in Other assets on 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 $683 million and $691 million during the second quarters of 2017 and 2016, respectively, and $1.3 billion and $1.2 billion during the first halves of 2017 and 2016, respectively. Schwab Bank purchased HELOCs with commitments of $111 million and $112 million during the second quarters of 2017 and 2016, respectively, and $229 million and $222 million during the first halves of 2017 and 2016, respectively.condensed consolidated balance sheets.
THE CHARLES SCHWAB CORPORATION
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted)
(Unaudited)
Credit Quality
Changes in the allowance for loan losses were as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Three Months Ended | | June 30, 2017 | | June 30, 2016 |
| | Residential real estate mortgages | | Home equity loans and lines of credit | | Other | | Total | | Residential real estate mortgages | | Home equity loans and lines of credit | | Other | | Total |
Balance at beginning of period | | $ | 17 |
| | $ | 8 |
| | $ | 1 |
| | $ | 26 |
| | $ | 21 |
| | $ | 11 |
| | $ | 1 |
| | $ | 33 |
|
Charge-offs | | (1 | ) | | (1 | ) | | — |
| | (2 | ) | | — |
| | — |
| | — |
| | — |
|
Recoveries | | 1 |
| | 1 |
| | — |
| | 2 |
| | — |
| | — |
| | — |
| | — |
|
Provision for loan losses | | — |
| | — |
| | — |
| | — |
| | (1 | ) | | (1 | ) | | — |
| | (2 | ) |
Balance at end of period | | $ | 17 |
| | $ | 8 |
| | $ | 1 |
| | $ | 26 |
| | $ | 20 |
| | $ | 10 |
| | $ | 1 |
| | $ | 31 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Six Months Ended | | June 30, 2017 | | June 30, 2016 |
| | Residential real estate mortgages | | Home equity loans and lines of credit | | Other | | Total | | Residential real estate mortgages | | Home equity loans and lines of credit | | Other | | Total |
Balance at beginning of period | | $ | 17 |
| | $ | 8 |
| | $ | 1 |
| | $ | 26 |
| | $ | 20 |
| | $ | 11 |
| | $ | — |
| | $ | 31 |
|
Charge-offs | | (1 | ) | | (1 | ) | | — |
| | (2 | ) | | (1 | ) | | — |
| | — |
| | (1 | ) |
Recoveries | | 1 |
| | 1 |
| | — |
| | 2 |
| | 1 |
| | — |
| | — |
| | 1 |
|
Provision for loan losses | | — |
| | — |
| | — |
| | — |
| | — |
| | (1 | ) | | 1 |
| | — |
|
Balance at end of period | | $ | 17 |
| | $ | 8 |
| | $ | 1 |
| | $ | 26 |
| | $ | 20 |
| | $ | 10 |
| | $ | 1 |
| | $ | 31 |
|
Substantially all of the bank loans were collectively evaluated for impairment at June 30, 2017 and December 31, 2016. There were no loans accruing interest that were contractually 90 days or more past due at June 30, 2017 or December 31, 2016. Nonperforming assets, which include nonaccrual loans and other real estate owned, totaled $30 million and $31 million at June 30, 2017 and December 31, 2016, respectively. Impaired assets, which include nonaccrual loans, other real estate owned and troubled debt restructurings, totaled $41 million and $45 million at June 30, 2017 and December 31, 2016, respectively. Troubled debt restructurings were not material at June 30, 2017 or December 31, 2016.
In addition to monitoring delinquency, the CompanySchwab monitors the credit quality of First Mortgages and HELOCs by stratifying the portfolios by the following:
Year of origination;
Borrower FICO scores at origination (Origination FICO);
Updated borrower FICO scores (Updated FICO);
Loan-to-value (LTV) ratios at origination (Origination LTV); and
Estimated current LTV ratios (Estimated Current LTV).
Borrowers’ FICO scores are provided by an independent third-party credit reporting service and were last updated in June 2017.March 2018. The Origination LTV and Estimated Current LTV for a HELOC include any first lien mortgage outstanding on the same property at the time of the HELOC’s origination. The Estimated Current LTV for each loan is estimated by reference to a home price appreciation index.
As of June 30, 2017 and December 31, 2016, 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.
THE CHARLES SCHWAB CORPORATION
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted)
(Unaudited)
The credit quality indicators of the Company’s bank loan portfolio are detailed below: |
| | | | | | | | | | | | | |
March 31, 2018 | | Balance | | Weighted Average Updated FICO | | Utilization Rate (1) | | Percent of Loans that are on Nonaccrual Status |
First Mortgages: | | | | | | | | |
Estimated Current LTV | | | | | | | | |
<70% | | $ | 9,114 |
| | 778 |
| | N/A |
| | 0.08 | % |
>70% – <90% | | 955 |
| | 770 |
| | N/A |
| | 0.58 | % |
>90% – <100% | | 6 |
| | 713 |
| | N/A |
| | 6.11 | % |
>100% | | 3 |
| | 738 |
| | N/A |
| | 7.67 | % |
Total | | $ | 10,078 |
| | 777 |
| | N/A |
| | 0.13 | % |
HELOCs: | | | | | | | | |
Estimated Current LTV (2) | | | | | | | | |
<70% | | $ | 1,639 |
| | 773 |
| | 31 | % | | 0.17 | % |
>70% – <90% | | 139 |
| | 757 |
| | 45 | % | | 0.86 | % |
>90% – <100% | | 11 |
| | 746 |
| | 68 | % | | 1.47 | % |
>100% | | 7 |
| | 714 |
| | 72 | % | | 8.46 | % |
Total | | $ | 1,796 |
| | 771 |
| | 32 | % | | 0.26 | % |
Pledged asset lines: | | | | | | |
| | |
|
Weighted-Average LTV (2) | | | | | | |
| | |
|
=70% | | $ | 4,362 |
| | 767 |
| | 39 | % | | — |
|
| | June 30, 2017 | | Balance | | Weighted Average Updated FICO | | Utilization Rate (1) | | Percent of Loans on Nonaccrual Status | |
Residential real estate mortgages: | | | | | | | | | |
December 31, 2017 | | | Balance | | Weighted Average Updated FICO | | Utilization Rate (1) | | Percent of Loans that are on Nonaccrual Status |
First Mortgages: | | | | | | | | | |
Estimated Current LTV | | | | | | | | | | | | | | | | |
<70% | | $ | 8,648 |
| | 775 |
| | N/A |
| | 0.03 | % | | $ | 9,046 |
| | 775 |
| | N/A |
| | 0.09 | % |
>70% – <90% | | 898 |
| | 768 |
| | N/A |
| | 0.30 | % | | 961 |
| | 769 |
| | N/A |
| | 0.46 | % |
>90% – <100% | | 16 |
| | 740 |
| | N/A |
| | 2.93 | % | | 5 |
| | 714 |
| | N/A |
| | 10.49 | % |
>100% | | 19 |
| | 698 |
| | N/A |
| | 17.07 | % | | 4 |
| | 713 |
| | N/A |
| | 6.23 | % |
Total | | $ | 9,581 |
| | 774 |
| | N/A |
| | 0.09 | % | | $ | 10,016 |
| | 775 |
| | N/A |
| | 0.14 | % |
Home equity loans and lines of credit: | | | | | | | | | |
HELOCs: | | | | | | | | | |
Estimated Current LTV (2) | | | | | | | | | | | | | | | | |
<70% | | $ | 1,893 |
| | 772 |
| | 33 | % | | 0.10 | % | | $ | 1,773 |
| | 772 |
| | 32 | % | | 0.18 | % |
>70% – <90% | | 216 |
| | 759 |
| | 49 | % | | 0.19 | % | | 148 |
| | 755 |
| | 47 | % | | 0.84 | % |
>90% – <100% | | 23 |
| | 743 |
| | 65 | % | | 0.98 | % | | 14 |
| | 742 |
| | 64 | % | | 2.85 | % |
>100% | | 16 |
| | 730 |
| | 73 | % | | 8.87 | % | | 8 |
| | 718 |
| | 72 | % | | 4.91 | % |
Total | | $ | 2,148 |
| | 770 |
| | 35 | % | | 0.19 | % | | $ | 1,943 |
| | 770 |
| | 33 | % | | 0.27 | % |
Pledged asset lines: | | | | | | |
| | |
| | | | | | | | |
Weighted-Average LTV (2) | | | | | | |
| | |
| | | | | | | | |
=70% | | $ | 4,001 |
| | 767 |
| | 43 | % | | — |
| | $ | 4,369 |
| | 765 |
| | 41 | % | | — |
|
| |
(1)(1) The Utilization Rate is calculated using the outstanding balance divided by the associated total line of credit. (2) Represents the LTV for the full line of credit (drawn and undrawn). | The Utilization Rate is calculated using the outstanding balance divided by the associated total line of credit. |
| |
(2)
| Represents the LTV for the full line of credit (drawn and undrawn). |
N/A Not applicable.
|
| | | | | | | | |
June 30, 2017 | | Residential real estate mortgages | | Home equity loans and lines of credit |
Year of origination | | | | |
|
Pre-2013 | | $ | 1,808 |
| | $ | 1,553 |
|
2013 | | 1,534 |
| | 169 |
|
2014 | | 599 |
| | 137 |
|
2015 | | 1,351 |
| | 140 |
|
2016 | | 3,037 |
| | 104 |
|
2017 | | 1,252 |
| | 45 |
|
Total | | $ | 9,581 |
| | $ | 2,148 |
|
Origination FICO | | |
| | |
|
<620 | | $ | 7 |
| | $ | — |
|
620 – 679 | | 85 |
| | 11 |
|
680 – 739 | | 1,491 |
| | 396 |
|
>740 | | 7,998 |
| | 1,741 |
|
Total | | $ | 9,581 |
| | $ | 2,148 |
|
Origination LTV | | | | |
<70% | | $ | 7,237 |
| | $ | 1,491 |
|
>70% – <90% | | 2,336 |
| | 646 |
|
>90% – <100% | | 8 |
| | 11 |
|
Total | | $ | 9,581 |
| | $ | 2,148 |
|
THE CHARLES SCHWAB CORPORATION
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted)
(Unaudited)
|
| | | | | | | | | | | | | |
December 31, 2016 | | Balance | | Weighted Average Updated FICO | | Utilization Rate (1) | | Percent of Loans on Nonaccrual Status |
Residential real estate mortgages: | | | | | | | | |
Estimated Current LTV | | | | | | | | |
<70% | | $ | 8,350 |
| | 774 |
| | N/A |
| | 0.04 | % |
>70% – <90% | | 743 |
| | 768 |
| | N/A |
| | 0.35 | % |
>90% – <100% | | 21 |
| | 747 |
| | N/A |
| | 2.08 | % |
>100% | | 20 |
| | 709 |
| | N/A |
| | 14.50 | % |
Total | | $ | 9,134 |
| | 773 |
| | N/A |
| | 0.10 | % |
Home equity loans and lines of credit: | | | | | | | | |
Estimated Current LTV (2) | | | | | | | | |
<70% | | $ | 2,070 |
| | 771 |
| | 35 | % | | 0.12 | % |
>70% – <90% | | 234 |
| | 757 |
| | 50 | % | | 0.40 | % |
>90% – <100% | | 29 |
| | 747 |
| | 66 | % | | 1.74 | % |
>100% | | 17 |
| | 728 |
| | 70 | % | | 3.73 | % |
Total | | $ | 2,350 |
| | 769 |
| | 36 | % | | 0.20 | % |
Pledged asset lines: | | | | | | | | |
Weighted-Average LTV (2) | | | | | | | | |
=70% | | $ | 3,851 |
| | 763 |
| | 46 | % | | — |
|
|
| | | | | | | | |
March 31, 2018 | | First Mortgages | | HELOCs |
Year of origination | | | | |
|
Pre-2014 | | $ | 2,570 |
| | $ | 1,364 |
|
2014 | | 499 |
| | 105 |
|
2015 | | 1,167 |
| | 115 |
|
2016 | | 2,813 |
| | 101 |
|
2017 | | 2,556 |
| | 97 |
|
2018 | | 473 |
| | 14 |
|
Total | | $ | 10,078 |
| | $ | 1,796 |
|
Origination FICO | | |
| | |
|
<620 | | $ | 6 |
| | $ | 1 |
|
620 – 679 | | 90 |
| | 9 |
|
680 – 739 | | 1,564 |
| | 339 |
|
>740 | | 8,418 |
| | 1,447 |
|
Total | | $ | 10,078 |
| | $ | 1,796 |
|
Origination LTV | | | | |
<70% | | $ | 7,627 |
| | $ | 1,257 |
|
>70% – <90% | | 2,445 |
| | 530 |
|
>90% – <100% | | 6 |
| | 9 |
|
Total | | $ | 10,078 |
| | $ | 1,796 |
|
| |
(1)
| The Utilization Rate is calculated using the outstanding balance divided by the associated total line of credit. |
| |
(2)
| Represents the LTV for the full line of credit (drawn and undrawn). |
N/A Not applicable.
| | December 31, 2016 | | Residential real estate mortgages | | Home equity loans and lines of credit | |
December 31, 2017 | | | First Mortgages | | HELOCs |
Year of origination | | | | |
| | | | |
|
Pre-2013 | | $ | 2,136 |
| | $ | 1,765 |
| |
2013 | | 1,746 |
| | 193 |
| |
Pre-2014 | | | $ | 2,804 |
| | $ | 1,496 |
|
2014 | | 685 |
| | 152 |
| | 530 |
| | 116 |
|
2015 | | 1,458 |
| | 146 |
| | 1,218 |
| | 128 |
|
2016 | | 3,109 |
| | 94 |
| | 2,886 |
| | 111 |
|
2017 | | | 2,578 |
| | 92 |
|
Total | | $ | 9,134 |
| | $ | 2,350 |
| | $ | 10,016 |
| | $ | 1,943 |
|
Origination FICO | | |
| | |
| | |
| | |
|
<620 | | $ | 8 |
| | $ | — |
| | $ | 6 |
| | $ | 1 |
|
620 – 679 | | 92 |
| | 13 |
| | 89 |
| | 10 |
|
680 – 739 | | 1,427 |
| | 432 |
| | 1,569 |
| | 365 |
|
>740 | | 7,607 |
| | 1,905 |
| | 8,352 |
| | 1,567 |
|
Total | | $ | 9,134 |
| | $ | 2,350 |
| | $ | 10,016 |
| | $ | 1,943 |
|
Origination LTV | | |
| | |
| | |
| | |
|
<70% | | $ | 6,865 |
| | $ | 1,628 |
| | $ | 7,569 |
| | $ | 1,360 |
|
>70% – <90% | | 2,260 |
| | 709 |
| | 2,441 |
| | 574 |
|
>90% – <100% | | 9 |
| | 13 |
| | 6 |
| | 9 |
|
Total | | $ | 9,134 |
| | $ | 2,350 |
| | $ | 10,016 |
| | $ | 1,943 |
|
The Company’s bank loans include $8.6 billion of adjustable rateAt March 31, 2018, First Mortgage loans at June 30, 2017. The Company’sof $9.1 billion had adjustable rateinterest rates. These mortgages have initial fixed interest rates for three to ten years and interest rates that adjust annually thereafter. Approximately 34%33% of the balance of these mortgages consisted of loans with interest-only payment terms. The interest rates on approximately 60% of the balance of these interest-only loans are not scheduled to reset for three or more years. Schwab’s mortgage loans do not include interest terms described as temporary introductory rates below current market rates.
THE CHARLES SCHWAB CORPORATION
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted)
(Unaudited)
approximately 56% 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:
| | June 30, 2017 | | Balance | |
March 31, 2018 | | | Balance |
Converted to an amortizing loan by period end | | $ | 454 |
| | $ | 451 |
|
Within 1 year | | 316 |
| | 495 |
|
> 1 year – 3 years | | 566 |
| | 168 |
|
> 3 years – 5 years | | 158 |
| | 145 |
|
> 5 years | | 654 |
| | 537 |
|
Total | | $ | 2,148 |
| | $ | 1,796 |
|
At June 30, 2017, $1.7March 31, 2018, $1.4 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, the CompanySchwab also monitors credit risk by reviewing the delinquency status of the first lien loan on the associated property. At June 30, 2017,March 31, 2018, the borrowers on approximately 38%36% of the HELOC borrowers that had a balanceloan balances outstanding only paid the minimum amount of interest due.
5.6. Variable Interest Entities
A VIE requires consolidation by the entity’s primary beneficiary. The Company evaluates all entities in which it has a financial interest to determine if the entity is a VIE and if so, whether the Company is the primary beneficiary. See PrinciplesAs of Consolidation in Note 1 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 at June 30, 2017March 31, 2018 and December 31, 2016.
As2017, all of June 30, 2017Schwab’s involvement with variable interest entities (VIEs) is through CSB’s Community Reinvestment Act-related investments and December 31, 2016, the majoritymost of the Company’s VIEsthose related to Schwab Bank’s Low-Income Housing Tax Credit (LIHTC)LIHTC investments. Schwab Bank’sAs part of CSB’s community reinvestment initiatives, CSB invests with other institutional investors in funds that make equity investments in multifamily affordable housing properties. CSB receives tax credits and other tax benefits for these investments. CSB’s LIHTC investments are accounted for using the proportional amortization method. Amortization,method, which amortizes the cost of the investment over the period in which the investor expects to receive tax credits and other tax benefits, recognized in relation to LIHTC investments areand the resulting amortization is included in taxes on income inon the condensed consolidated statements of income. For further information on
Aggregate assets, liabilities, and maximum exposure to loss
The aggregate assets, liabilities, and maximum exposure to loss from those VIEs in which Schwab holds a variable interest, but as to which we have concluded it is not the Community Reinvestment Act (CRA) and Schwab Bank’s LIHTC investments, see Note 2 and Note 10primary beneficiary, are summarized in the 2016 Form 10-K.table below: The carrying value of the LIHTC investments was $213 million |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2018 | | December 31, 2017 |
| | Aggregate assets | | Aggregate liabilities | | Maximum exposure to loss | | Aggregate assets | | Aggregate liabilities | | Maximum exposure to loss |
LIHTC investments (1) | | $ | 340 |
| | $ | 217 |
| | $ | 340 |
| | $ | 304 |
| | $ | 203 |
| | $ | 304 |
|
Other CRA investments (2) | | 67 |
| | — |
| | 122 |
| | 69 |
| | — |
| | 125 |
|
Total | | $ | 407 |
| | $ | 217 |
| | $ | 462 |
| | $ | 373 |
| | $ | 203 |
| | $ | 429 |
|
(1) Aggregate assets and $189 million as of June 30, 2017 and December 31, 2016, respectively, which isaggregate liabilities are included in other assets and accrued expenses and other liabilities, respectively, on the condensed consolidated balance sheets. Schwab Bank
(2) Other CRA investments are recorded liabilities of $145 million and $135 million for unfunded commitments related to LIHTC investments at June 30, 2017 and December 31, 2016, respectively, whichusing either the adjusted cost method, equity method, or as HTM securities. Aggregate assets are included in accrued expenses and other liabilitiesassets, HTM securities, or bank loans – net on the condensed 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 2017 and 2020.
THE CHARLES SCHWAB CORPORATION
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted)
(Unaudited)
Aggregate assets, liabilities and maximum exposure to loss
The aggregate assets, liabilities, and maximum exposure to loss from those VIEs in which the Company holds a variable interest, but as to which the Company has concluded it is not the primary beneficiary, are summarized in the table below:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | June 30, 2017 | | December 31, 2016 |
| | Aggregate assets | | Aggregate liabilities | | Maximum exposure to loss | | Aggregate assets | | Aggregate liabilities | | Maximum exposure to loss |
LIHTC investments | | $ | 213 |
| | $ | 145 |
| | $ | 213 |
| | $ | 189 |
| | $ | 135 |
| | $ | 189 |
|
Other CRA investments (1) | | 63 |
| | — |
| | 83 |
| | 60 |
| | — |
| | 80 |
|
Total | | $ | 276 |
| | $ | 145 |
| | $ | 296 |
| | $ | 249 |
| | $ | 135 |
| | $ | 269 |
|
| |
(1)
| 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 condensed consolidated balance sheets. |
The Company’sSchwab’s maximum exposure to loss would result from the loss of the investments, including any committed amounts. During the sixthree months ended June 30,March 31, 2018 and 2017, and 2016, the CompanySchwab did not provide or intend to provide financial or other support to the VIEs that it was not contractually required to provide. 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 2018 and 2021.
6.7. Bank Deposits
Bank deposits consist of interest-bearing and non-interest-bearing deposits as follows:
| |
| | June 30, 2017 | | December 31, 2016 | | March 31, 2018 | | December 31, 2017 |
Interest-bearing deposits: | | | | | | | | |
Deposits swept from brokerage accounts | | $ | 140,725 |
| | $ | 141,146 |
| | $ | 168,854 |
| | $ | 148,212 |
|
Checking | | 13,504 |
| | 13,842 |
| | 13,530 |
| | 13,388 |
|
Savings and other | | 7,495 |
| | 7,792 |
| | 6,925 |
| | 7,264 |
|
Total interest-bearing deposits | | 161,724 |
| | 162,780 |
| | 189,309 |
| | 168,864 |
|
Non-interest-bearing deposits | | 576 |
| | 674 |
| | 875 |
| | 792 |
|
Total bank deposits | | $ | 162,300 |
| | $ | 163,454 |
| | $ | 190,184 |
| | $ | 169,656 |
|
7.8. Borrowings
Long-termCSC’s Senior Notes are unsecured obligations and rank equally with the other unsecured senior debt. CSC may redeem some or all of the Senior Notes of each series prior to their maturity, subject to certain restrictions, and the payment of an applicable make-whole premium in certain instances. Interest is payable semi-annually for the Senior Notes. The following table lists long-term debt was netby instrument outstanding as of unamortized debt discounts/premiums and debt issuance costs of $27 million and $24 million at June 30, 2017March 31, 2018 and December 31, 2016, respectively.2017.
|
| | | | | | | | |
| | June 30, 2017 | | December 31, 2016 |
Senior Notes | | $ | 3,204 |
| | $ | 2,558 |
|
Medium-Term Notes | | 250 |
| | 250 |
|
Finance lease obligation | | 64 |
| | 68 |
|
Total long-term debt | | $ | 3,518 |
| | $ | 2,876 |
|
|
| | | | | | | | | |
| | Date of Issuance | | Principal Amount Outstanding |
| | | March 31, 2018 | December 31, 2017 |
Fixed-rate Senior Notes: | | | | | |
1.500% due March 10, 2018 (1) | | 03/10/15 | | $ | — |
| $ | 625 |
|
2.200% due July 25, 2018 | | 07/25/13 | | 275 |
| 275 |
|
4.450% due July 22, 2020 | | 07/22/10 | | 700 |
| 700 |
|
3.225% due September 1, 2022 | | 08/29/12 | | 256 |
| 256 |
|
2.650% due January 25, 2023 | | 12/07/17 | | 800 |
| 800 |
|
3.000% due March 10, 2025 | | 03/10/15 | | 375 |
| 375 |
|
3.450% due February 13, 2026 | | 11/13/15 | | 350 |
| 350 |
|
3.200% due March 2, 2027 | | 03/02/17 | | 650 |
| 650 |
|
3.200% due January 25, 2028 | | 12/07/17 | | 700 |
| 700 |
|
Total fixed-rate Senior Notes | | | | 4,106 |
| 4,731 |
|
5.450% Finance lease obligation (2) | | 06/04/04 | | 59 |
| 61 |
|
Unamortized discount — net | | | | (14 | ) | (14 | ) |
Debt issuance costs | | | | (23 | ) | (25 | ) |
Total long-term debt | | | | $ | 4,128 |
| $ | 4,753 |
|
(1) Redeemed on February 8, 2018.
(2) Schwab has a finance lease obligation related to an office building and land under a 20-year lease. The remaining finance lease obligation is being reduced by a portion of the lease payments over the remaining lease term through June 30, 2024.
THE CHARLES SCHWAB CORPORATION
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted)
(Unaudited)
On March 2, 2017, CSC issued $650 million aggregate principal amount of Senior Notes that mature in 2027. The Senior Notes have a fixed interest rate of 3.200% with interest payable semi-annually.
The Company’s long-term debt at June 30, 2017 had a weighted-average interest rate of 3.34%.
Annual maturities on long-term debt outstanding at June 30, 2017March 31, 2018 are as follows:
| | 2017 | $ | 254 |
| |
2018 | 908 |
| $ | 281 |
|
2019 | 8 |
| 8 |
|
2020 | 709 |
| 709 |
|
2021 | 9 |
| 9 |
|
2022 | | 266 |
|
Thereafter | 1,657 |
| 2,892 |
|
Total maturities | 3,545 |
| 4,165 |
|
Unamortized discount, net | (13 | ) | |
Unamortized discount — net | | (14 | ) |
Debt issuance costs | (14 | ) | (23 | ) |
Total long-term debt | $ | 3,518 |
| $ | 4,128 |
|
Short-term borrowings: Schwab BankCSB maintains a secured credit facility with the Federal Home Loan Bank of San Francisco (FHLB).FHLB. Amounts available under this facility are dependent on the amountvalue of Schwab Bank’sCSB’s First Mortgages, HELOCs, and the fair value of certain of Schwab Bank’sCSB’s investment securities that are pledged as collateral. As of March 31, 2018, the collateral pledged by CSB provided a total borrowing capacity of $31.4 billion of which no amounts were outstanding. As of December 31, 2017, the collateral pledged by CSB provided a total borrowing capacity $32.3 billion, of which $15.0 billion, was outstanding.
As a condition of the FHLB borrowings, Schwab BankCSB is required to hold FHLB stock, with the investment recorded in other assets on the condensed consolidated balance sheets. The investment in FHLB was $68$233 million at June 30, 2017March 31, 2018 and $81$405 million at December 31, 2016. No funds were drawn under this facility as of June 30, 2017 and December 31, 2016.
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 June 30, 2017. CSC had no Commercial Paper Notes outstanding at June 30, 2017 and December 31, 2016.
CSC and Schwab also have access to uncommitted, unsecured bank credit lines with several banks. Schwab had $300 million outstanding under these lines at June 30, 2017 and there were no borrowings outstanding under these lines at December 31, 2016.
8.9. 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 $513 million and $665 million during the first quarters of 2018 and 2017, respectively. Schwab purchased HELOCs with commitments of $107 million and $118 million during the first quarters of 2018 and 2017, respectively.
The Company’s commitments to extend credit on bank lines of credit and to purchase First Mortgages are as follows:
|
| | | | | | | |
| March 31, 2018 | | December 31, 2017 |
|
Commitments to extend credit related to unused HELOCs, PALs, and other lines of credit | $ | 10,555 |
| | $ | 10,060 |
|
Commitments to purchase First Mortgage loans | 377 |
| | 308 |
|
Total | $ | 10,932 |
| | $ | 10,368 |
|
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 letter of credit agreements (LOCs), in favor of the Options Clearing Corporation, which are issued by several banks. At June 30, 2017,March 31, 2018, the aggregate face amount of these LOCs totaled $295$225 million. There were no funds drawn under any of these LOCs at June 30, 2017.March 31, 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 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. The
CHARLES SCHWAB CORPORATION
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted)
(Unaudited)
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 CHARLES SCHWAB CORPORATION
NotesPredicting 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 Condensed Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Ratios,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 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 Noted)
(Unaudited)
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.
The CompanySchwab 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. 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 Fund Litigation: On August 28, 2008, a class action lawsuit was filed in the U.S. District Court for the Northern District of California on behalf of investors in the Schwab Total Bond Market Fund™. The lawsuit, which alleged violations of state law 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 fundholder vote. Plaintiff seeks unspecified compensatory and rescission damages, unspecified equitable and injunctive relief, costs, and attorneys’ fees.fees on behalf of a putative class of investors who held shares as of August 31, 2007, and a putative class of investors who purchased the shares between September 1, 2017 and February 27, 2009. Plaintiff’s federal securities law claim and certain of plaintiff’s state law claims were dismissed. On August 8, 2011, the court dismissed plaintiff’s remaining claims with prejudice. Plaintiff appealed to the Ninth Circuit, which issued a ruling on March 9, 2015 reversing the district court’s dismissal of the case and remanding the case for further proceedings. Plaintiff filed a fourth amended complaint on June 25, 2015, and in decisions issued October 6, 2015 and February 23, 2016, the court dismissed all claims with prejudice. Plaintiff has appealed to the Ninth Circuit, where the case isremains pending.
Crago Order Routing Litigation: On July 13, 2016, a securities class action lawsuit was filed in the U.S. District Court for the Northern District of California on behalf of a putative class of customers executing equity orders through CS&Co. The lawsuit names CS&Co and CSC as defendants and alleges that an agreement under which CS&Co routed orders to UBS Securities LLC between July 13, 2011 and December 31, 2014 violated CS&Co’s duty to seek best execution. Plaintiffs seek unspecified damages, interest, injunctive and equitable relief, and attorneys’ fees and costs. After a first amended complaint was dismissed with leave to amend, plaintiffs filed a second amended complaint on August 14, 2017. Defendants again pending.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.
9. Offsetting Assets and Liabilities
CHARLES SCHWAB CORPORATION
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted)
(Unaudited)
10. Financial Instruments Subject to Off-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. 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. We also borrow securities from other broker-dealers to fulfill short sales by brokerage clients and deliver cash to the lender in exchange for the securities. The fair value of these borrowed securities was $237 million and $215 million at March 31, 2018 and December 31, 2017, respectively. All of our securities lending transactions are through a program with a clearing organization, which guarantees the return of cash to us and is subject to enforceable master netting arrangements with other broker-dealers; however, we do not net securities lending transactions. Therefore, the securities loaned and securities borrowed are presented gross in the condensed consolidated balance sheets.
THE CHARLES SCHWAB CORPORATION
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted)
(Unaudited)
requiring additional cash as collateral when necessary. The Company borrows securities from other broker-dealers to fulfill short sales by brokerage clients and delivers cash to the lender in exchange for the securities. The fair value of these borrowed securities was $426 million at June 30, 2017 and $213 million at December 31, 2016. All of the Company’s securities lending transactions are subject to enforceable master netting arrangements with other broker-dealers; however, the Company does not net securities lending transactions. Therefore, the Company’s securities loaned and securities borrowed are presented gross in the condensed consolidated balance sheets.
The following table presents information about the Company’sour resale agreements and securities lending activity to enable the users of the Company’s financial statements to evaluatedepicting the potential effect of rights of setoff between these recognized assets and recognized liabilities at June 30, 2017March 31, 2018 and December 31, 2016.2017. |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | Gross Amounts Not Offset in the Condensed Consolidated Balance Sheets | | |
| | Gross Assets/ Liabilities | | Gross Amounts Offset in the Condensed Consolidated Balance Sheets | | Net Amounts Presented in the Condensed Consolidated Balance Sheets | | Counterparty Offsetting | | Collateral | | Net Amount |
March 31, 2018 | | | | | | | | | | | | | |
Assets: | | | | | | | | | | | | | |
Resale agreements (1) | | $ | 4,434 |
| | $ | — |
| | $ | 4,434 |
| | $ | — |
| | $ | (4,434 | ) | (2) | | $ | — |
|
Securities borrowed (3) | | 241 |
| | — |
| | 241 |
| | (172 | ) | | (68 | ) | | | 1 |
|
Total | | $ | 4,675 |
| | $ | — |
| | $ | 4,675 |
| | $ | (172 | ) | | $ | (4,502 | ) | | | $ | 1 |
|
Liabilities: | | | | | | | | | | | | | |
Securities loaned (4,5) | | $ | 800 |
| | $ | — |
| | $ | 800 |
| | $ | (172 | ) | | $ | (558 | ) | | | $ | 70 |
|
Total | | $ | 800 |
| | $ | — |
| | $ | 800 |
| | $ | (172 | ) | | $ | (558 | ) | | | $ | 70 |
|
| | | | | | | | | | | | | |
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 condensed consolidated balance sheets. (2) Actual collateral was greater than or equal to 102% of the related assets. At March 31, 2018 and December 31, 2017, the fair value of collateral received in connection with resale agreements that are available to be repledged or sold was $4.5 billion and $6.7 billion, respectively. |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | Gross Amounts Not Offset in the Condensed Consolidated Balance Sheets | | |
| | Gross Assets/ Liabilities | | Gross Amounts Offset in the Condensed Consolidated Balance Sheets | | Net Amounts Presented in the Condensed Consolidated Balance Sheets | | Counterparty Offsetting | | Collateral | | Net Amount |
June 30, 2017 | | | | | | | | | | | | | |
Assets: | | | | | | | | | | | | | |
Resale agreements (1) | | $ | 7,588 |
| | $ | — |
| | $ | 7,588 |
| | $ | — |
| | $ | (7,588 | ) | (2) | | $ | — |
|
Securities borrowed (3) | | 584 |
| | — |
| | 584 |
| | (345 | ) | | (237 | ) | | | 2 |
|
Total | | $ | 8,172 |
| | $ | — |
| | $ | 8,172 |
| | $ | (345 | ) | | $ | (7,825 | ) | | | $ | 2 |
|
Liabilities: | | | | | | | | | | | | | |
Securities loaned (4,5) | | $ | 1,684 |
| | $ | — |
| | $ | 1,684 |
| | $ | (345 | ) | | $ | (1,210 | ) | | | $ | 129 |
|
Total | | $ | 1,684 |
| | $ | — |
| | $ | 1,684 |
| | $ | (345 | ) | | $ | (1,210 | ) | | | $ | 129 |
|
December 31, 2016 | | | | | | | | | | | | | |
Assets: | | | | | | | | | | | | | |
Resale agreements (1) | | $ | 9,547 |
| | $ | — |
| | $ | 9,547 |
| | $ | — |
| | $ | (9,547 | ) | (2) | | $ | — |
|
Securities borrowed (3) | | 393 |
| | — |
| | 393 |
| | (200 | ) | | (189 | ) | | | 4 |
|
Total | | $ | 9,940 |
| | $ | — |
| | $ | 9,940 |
| | $ | (200 | ) | | $ | (9,736 | ) | | | $ | 4 |
|
Liabilities: | | | | | | | | | | | | | |
Securities loaned (4,5) | | $ | 1,996 |
| | $ | — |
| | $ | 1,996 |
| | $ | (200 | ) | | $ | (1,660 | ) | | | $ | 136 |
|
Total | | $ | 1,996 |
| | $ | — |
| | $ | 1,996 |
| | $ | (200 | ) | | $ | (1,660 | ) | | | $ | 136 |
|
(3) Included in receivables from brokers, dealers, and clearing organizations in the condensed consolidated balance sheets. | |
(1)(4) Included in payables to brokers, dealers, and clearing organizations in the condensed consolidated balance sheets. The cash collateral received from counterparties under securities lending transactions was equal to or greater than the market value of the securities loaned at March 31, 2018 and December 31, 2017. (5) Securities loaned are predominantly comprised of equity securities held in client brokerage accounts with overnight and continuous remaining contractual maturities. | Included in cash and investments segregated and on deposit for regulatory purposes in the Company’s condensed consolidated balance sheets. |
| |
(2)
| Actual collateral was greater than or equal to 102% of the related assets. At June 30, 2017 and December 31, 2016, the fair value of collateral received in connection with resale agreements that are available to be repledged or sold was $7.7 billion and $9.8 billion, respectively. |
| |
(3)
| Included in receivables from brokers, dealers, and clearing organizations in the Company’s condensed consolidated balance sheets. |
| |
(4)
| Included in payables to brokers, dealers, and clearing organizations in the Company’s condensed consolidated balance sheets. |
| |
(5)
| Securities loaned are predominantly comprised of equity securities held in client brokerage accounts with overnight and continuous remaining contractual maturities. |
THE CHARLES SCHWAB CORPORATION
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted)
(Unaudited)
Margin lending: Clients with margin loans have agreed to allow the CompanySchwab 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, for the Company to utilizethat could have been used as collateral, and the amounts pledged by the Company:that we had pledged:
| | | | June 30, 2017 | | December 31, 2016 | | March 31, 2018 | | December 31, 2017 |
Fair value of client securities available to be pledged | Fair value of client securities available to be pledged | | $ | 23,023 |
| | $ | 21,516 |
| Fair value of client securities available to be pledged | | $ | 27,296 |
| | $ | 25,905 |
|
Fair value of client securities pledged for: | Fair value of client securities pledged for: | | | | | Fair value of client securities pledged for: | | | | |
Fulfillment of requirements with the Options Clearing Corporation (1) | | Fulfillment of requirements with the Options Clearing Corporation (1) | | 3,368 |
| | 2,280 |
|
Fulfillment of client short sales | | Fulfillment of client short sales | | 1,713 |
| | 2,011 |
|
Securities lending to other broker-dealers | Securities lending to other broker-dealers | | 1,295 |
| | 1,626 |
| Securities lending to other broker-dealers | | 653 |
| | 784 |
|
Fulfillment of client short sales | | 2,225 |
| | 2,048 |
| |
Fulfillment of requirements with the Options Clearing Corporation (1) | | 1,969 |
| | 1,519 |
| |
Total collateral pledged | Total collateral pledged | | $ | 5,489 |
| | $ | 5,193 |
| Total collateral pledged | | $ | 5,734 |
| | $ | 5,075 |
|
Note: Excludes amounts available and pledged for securities lending from fully-paid client securities. The fair value of fully-paid client securities available and pledged was $104$74 million as of June 30, 2017March 31, 2018 and $58$78 million as of December 31, 2016.2017.
| |
(1) | Client securities pledged to fulfill client margin requirements for open option contracts established with the Options Clearing Corporation. |
(1) Client securities pledged to fulfill client margin requirements for open option contracts established with the Options Clearing Corporation.
10.11. Fair Values of Assets and Liabilities
Assets and liabilities measured at fair value on a recurring basis
The Company’s
Schwab’s assets and liabilities measured at fair value on a recurring basis include certain cash equivalents, certain investments segregated and on deposit for regulatory purposes, other securities owned, and AFS securities. The Company uses the market approach to determine the fair value of assets and liabilities. When available, the Company uses quoted prices in active markets to measure the fair value of assets and liabilities. When utilizing market data and bid-ask spread, the Company uses the price within the bid-ask spread that best represents fair value. When quoted prices do not exist, the Company uses prices obtained from independent third-party pricing services to measure the fair value of investment assets. The CompanyWe generally obtainsobtain prices from at least three independent pricing sources for assets recorded at fair value.
The Company’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 servicessources to determine if the price obtained from the primary independent pricing service is reasonable. The CompanySchwab does not adjust the prices received from independent third-party pricing services unless such prices are inconsistent with the definition of fair value and result in a material difference in the recorded amounts.
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:
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 their fair values.
THE CHARLES SCHWAB CORPORATION
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted)
(Unaudited)
Receivables from/payables to brokerage clients — net are short-term in nature, recorded at contractual amounts and historically have been settled at those values. Accordingly, the carrying values of these financial instruments approximate their fair values.
HTM securities – The fair values of HTM securities are obtained using an independent third-party pricing service similar to investment assets recorded at fair value as discussed above.
Bank loans – The fair values of 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.
Financial instruments included in other assets primarily consist of LIHTC investments, cost method investments, and FHLB stock, whose carrying values approximate their fair values. FHLB stock is recorded at par, which approximates its fair value.
Bank deposits have no stated maturity and are recorded at the amount payable on demand as of the balance sheet date. The Company considers the carrying values of these deposits to approximate their fair values.
Financial instruments included in accrued expenses and other liabilities consist of drafts payable and certain amounts due under contractual obligations, including unfunded LIHTC commitments. The carrying values of these instruments approximate their fair values.
Short-term borrowings consist of commercial paper, borrowings on Schwab’s uncommitted, unsecured bank credit lines, and funds drawn on Schwab Bank’s secured credit facility with the Federal Home Loan Bank of San Francisco. Due to the short-term nature of these borrowings, carrying value approximates fair value.
Long-term debt – Except for the finance lease obligation, the fair values of long-term debt are estimated using indicative, non-binding quotes from independent brokers. The Company validates indicative prices for its debt through comparison to other independent non-binding quotes. The finance lease obligation is recorded at carrying value, which approximates fair value.
Firm commitments to extend credit – 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.
For a description of the fair value hierarchy and Schwab’s fair value methodologies, including the use of independent third-party pricing services, see Note 2 in the 20162017 Form 10-K. There were no significant changes in these policies and methodologies during the first six months of 2017. The CompanyWe did not transfer any assets or liabilities between Level 1, Level 2, or Level 3 during the sixthree months ended June 30, 2017,March 31, 2018, or the year ended December 31, 2016.2017. In addition, the Company did not adjust prices received from the primary independent third-party pricing service at June 30, 2017March 31, 2018 or December 31, 2016.2017.
THE CHARLES SCHWAB CORPORATION
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted)
(Unaudited)
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following tables present the fair value hierarchy for assets 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:
| | June 30, 2017 | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Balance at Fair Value | |
March 31, 2018 | | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Balance at Fair Value |
Cash equivalents: | | | | | | | | | | | | | | | |
Money market funds | $ | 1,670 |
| | $ | — |
| | $ | — |
| | $ | 1,670 |
| | $ | 1,049 |
| | $ | — |
| | $ | — |
| | $ | 1,049 |
|
Total cash equivalents | 1,670 |
| | — |
| | — |
| | 1,670 |
| | 1,049 |
| | — |
| | — |
| | 1,049 |
|
Investments segregated and on deposit for regulatory purposes: | |
| | |
| | |
| | | | |
| | |
| | |
| | |
Certificates of deposit | — |
| | 2,026 |
| | — |
| | 2,026 |
| | — |
| | 2,147 |
| | — |
| | 2,147 |
|
U.S. Government securities | — |
| | 5,256 |
| | — |
| | 5,256 |
| | — |
| | 3,661 |
| | — |
| | 3,661 |
|
Total investments segregated and on deposit for regulatory purposes | — |
| | 7,282 |
| | — |
| | 7,282 |
| | — |
| | 5,808 |
| | — |
| | 5,808 |
|
Other securities owned: | |
| | |
| | |
| | | | |
| | |
| | |
| | |
Equity and bond mutual funds | 300 |
| | — |
| | — |
| | 300 |
| | 371 |
| | — |
| | — |
| | 371 |
|
Schwab Funds® money market funds | 78 |
| | — |
| | — |
| | 78 |
| | 59 |
| | — |
| | — |
| | 59 |
|
State and municipal debt obligations | — |
| | 41 |
| | — |
| | 41 |
| | — |
| | 36 |
| | — |
| | 36 |
|
Equity, U.S. Government and corporate debt, and other securities | 2 |
| | 39 |
| | — |
| | 41 |
| | 2 |
| | 32 |
| | — |
| | 34 |
|
Total other securities owned | 380 |
| | 80 |
| | — |
| | 460 |
| | 432 |
| | 68 |
| | — |
| | 500 |
|
Available for sale securities: | |
| | |
| | |
| | | | |
| | |
| | |
| | |
U.S. agency mortgage-backed securities | — |
| | 17,633 |
| | — |
| | 17,633 |
| | — |
| | 21,061 |
| | — |
| | 21,061 |
|
U.S. Treasury securities | | | — |
| | 10,827 |
| | — |
| | 10,827 |
|
Asset-backed securities | — |
| | 9,894 |
| | — |
| | 9,894 |
| | — |
| | 9,636 |
| | — |
| | 9,636 |
|
Corporate debt securities | — |
| | 6,625 |
| | — |
| | 6,625 |
| | — |
| | 6,552 |
| | — |
| | 6,552 |
|
U.S. Treasury securities | — |
| | 7,697 |
| | — |
| | 7,697 |
| |
Certificates of deposit | — |
| | 1,622 |
| | — |
| | 1,622 |
| | — |
| | 1,791 |
| | — |
| | 1,791 |
|
U.S. agency notes | — |
| | 1,907 |
| | — |
| | 1,907 |
| | — |
| | 1,557 |
| | — |
| | 1,557 |
|
Commercial paper | — |
| | 214 |
| | — |
| | 214 |
| | — |
| | 315 |
| | — |
| | 315 |
|
Foreign government agency securities | | | — |
| | 48 |
| | — |
| | 48 |
|
Non-agency commercial mortgage-backed securities | — |
| | 42 |
| | — |
| | 42 |
| | — |
| | 40 |
| | — |
| | 40 |
|
Total available for sale securities | — |
| | 45,634 |
| | — |
| | 45,634 |
| | — |
| | 51,827 |
| | — |
| | 51,827 |
|
Total | $ | 2,050 |
| | $ | 52,996 |
| | $ | — |
| | $ | 55,046 |
| | $ | 1,481 |
| | $ | 57,703 |
| | $ | — |
| | $ | 59,184 |
|
THE CHARLES SCHWAB CORPORATION
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted)
(Unaudited)
| | December 31, 2016 | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Balance at Fair Value | |
December 31, 2017 | | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Balance at Fair Value |
Cash equivalents: | | | | | | | | | | | | | | | | |
Money market funds | | $ | 1,514 |
| | $ | — |
| | $ | — |
| | $ | 1,514 |
| | $ | 2,727 |
| | $ | — |
| | $ | — |
| | $ | 2,727 |
|
Total cash equivalents | | 1,514 |
| | — |
| | — |
| | 1,514 |
| | 2,727 |
| | — |
| | — |
| | 2,727 |
|
Investments segregated and on deposit for regulatory purposes: | | | | | | | | | | | | | | | | |
Certificates of deposit | | — |
| | 2,525 |
| | — |
| | 2,525 |
| | — |
| | 2,198 |
| | — |
| | 2,198 |
|
U.S. Government securities | | — |
| | 6,111 |
| | — |
| | 6,111 |
| | — |
| | 3,658 |
| | — |
| | 3,658 |
|
Total investments segregated and on deposit for regulatory purposes | | — |
| | 8,636 |
| | — |
| | 8,636 |
| | — |
| | 5,856 |
| | — |
| | 5,856 |
|
Other securities owned: | | |
| | | | | | | | |
| | | | | | |
Equity and bond mutual funds | | 272 |
| | — |
| | — |
| | 272 |
| | 318 |
| | — |
| | — |
| | 318 |
|
Schwab Funds® money market funds | | 108 |
| | — |
| | — |
| | 108 |
| | 135 |
| | — |
| | — |
| | 135 |
|
State and municipal debt obligations | | — |
| | 41 |
| | — |
| | 41 |
| | — |
| | 52 |
| | — |
| | 52 |
|
Equity, U.S. Government and corporate debt, and other securities | | 2 |
| | 26 |
| | — |
| | 28 |
| | 2 |
| | 32 |
| | — |
| | 34 |
|
Total other securities owned | | 382 |
| | 67 |
| | — |
| | 449 |
| | 455 |
| | 84 |
| | — |
| | 539 |
|
Available for sale securities: | | | | | | | | | | | | | | | | |
U.S. agency mortgage-backed securities | | — |
| | 33,195 |
| | — |
| | 33,195 |
| | — |
| | 20,929 |
| | — |
| | 20,929 |
|
U.S. Treasury securities | | | — |
| | 9,500 |
| | — |
| | 9,500 |
|
Asset-backed securities | | — |
| | 20,335 |
| | — |
| | 20,335 |
| | — |
| | 9,047 |
| | — |
| | 9,047 |
|
Corporate debt securities | | — |
| | 9,852 |
| | — |
| | 9,852 |
| | — |
| | 6,169 |
| | — |
| | 6,169 |
|
U.S. Treasury securities | | — |
| | 8,623 |
| | — |
| | 8,623 |
| |
Certificates of deposit | | — |
| | 2,071 |
| | — |
| | 2,071 |
| | — |
| | 2,041 |
| | — |
| | 2,041 |
|
U.S. agency notes | | — |
| | 1,907 |
| | — |
| | 1,907 |
| | — |
| | 1,906 |
| | — |
| | 1,906 |
|
U.S. state and municipal securities | | — |
| | 1,123 |
| | — |
| | 1,123 |
| |
Commercial paper | | — |
| | 214 |
| | — |
| | 214 |
| | — |
| | 313 |
| | — |
| | 313 |
|
Foreign government agency securities | | | — |
| | 50 |
| | — |
| | 50 |
|
Non-agency commercial mortgage-backed securities | | — |
| | 45 |
| | — |
| | 45 |
| | — |
| | 40 |
| | — |
| | 40 |
|
Total available for sale securities | | — |
| | 77,365 |
| | — |
| | 77,365 |
| | — |
| | 49,995 |
| | — |
| | 49,995 |
|
Total | | $ | 1,896 |
| | $ | 86,068 |
| | $ | — |
| | $ | 87,964 |
| | $ | 3,182 |
| | $ | 55,935 |
| | $ | — |
| | $ | 59,117 |
|
THE CHARLES SCHWAB CORPORATION
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted)
(Unaudited)
Fair Value of Other Financial Instruments
The following tables present the fair value hierarchy for other financial instruments:
| | June 30, 2017 | | Carrying Amount | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Balance at Fair Value | |
March 31, 2018 | | | Carrying Amount | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Balance at Fair Value |
Assets: | | | | | | | | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 7,905 |
| | $ | — |
| | $ | 7,905 |
| | $ | — |
| | $ | 7,905 |
| | $ | 13,096 |
| | $ | — |
| | $ | 13,096 |
| | $ | — |
| | $ | 13,096 |
|
Cash and investments segregated and on deposit for regulatory purposes | | 11,196 |
| | — |
| | 11,196 |
| | — |
| | 11,196 |
| | 7,002 |
| | — |
| | 7,002 |
| | — |
| | 7,002 |
|
Receivables from brokers, dealers, and clearing organizations | | 910 |
| | — |
| | 910 |
| | — |
| | 910 |
| | 894 |
| | — |
| | 894 |
| | — |
| | 894 |
|
Receivables from brokerage clients – net | | 17,990 |
| | — |
| | 17,990 |
| | — |
| | 17,990 |
| |
Receivables from brokerage clients — net | | | 21,144 |
| | — |
| | 21,144 |
| | — |
| | 21,144 |
|
Held to maturity securities: | | | | | | | | | | | | | | | | | | | | |
U.S. agency mortgage-backed securities | | 89,250 |
| | — |
| | 88,944 |
| | — |
| | 88,944 |
| | 103,967 |
| | — |
| | 101,672 |
| | — |
| | 101,672 |
|
Non-agency commercial mortgage-backed securities | | 995 |
| | — |
| | 1,004 |
| | — |
| | 1,004 |
| |
Asset-backed securities | | 12,493 |
| | — |
| | 12,561 |
| | — |
| | 12,561 |
| | 14,625 |
| | — |
| | 14,744 |
| | — |
| | 14,744 |
|
Corporate debt securities | | 3,181 |
| | — |
| | 3,204 |
| | — |
| | 3,204 |
| | 4,340 |
| | — |
| | 4,304 |
| | — |
| | 4,304 |
|
U.S. state and municipal securities | | | 1,245 |
| | — |
| | 1,262 |
| | — |
| | 1,262 |
|
Non-agency commercial mortgage-backed securities | | | 1,033 |
| | — |
| | 1,017 |
| | — |
| | 1,017 |
|
U.S. Treasury securities | | 223 |
| | — |
| | 222 |
| | — |
| | 222 |
| | 223 |
| | — |
| | 215 |
| | — |
| | 215 |
|
Commercial paper | | 100 |
| | — |
| | 100 |
| | — |
| | 100 |
| |
U.S. state and municipal securities | | 1,168 |
| | — |
| | 1,211 |
| | — |
| | 1,211 |
| |
Certificates of deposit | | 200 |
| | — |
| | 200 |
| | — |
| | 200 |
| | 200 |
| | — |
| | 200 |
| | — |
| | 200 |
|
Foreign government agency securities | | | 50 |
| | — |
| | 49 |
| | — |
| | 49 |
|
Total held to maturity securities | | 107,610 |
| | — |
| | 107,446 |
| | — |
| | 107,446 |
| | 125,683 |
| | — |
| | 123,463 |
| | — |
| | 123,463 |
|
Bank loans – net: | | | | | | | | | | | |
Residential real estate mortgages | | 9,564 |
| | — |
| | 9,541 |
| | — |
| | 9,541 |
| |
Home equity loans and lines of credit | | 2,140 |
| | — |
| | 2,249 |
| | — |
| | 2,249 |
| |
Bank loans — net: | | | | | | | | | | | |
First Mortgages | | | 10,061 |
| | — |
| | 9,865 |
| | — |
| | 9,865 |
|
HELOCs | | | 1,789 |
| | — |
| | 1,834 |
| | — |
| | 1,834 |
|
Pledged asset lines | | 4,001 |
| | — |
| | 4,001 |
| | — |
| | 4,001 |
| | 4,362 |
| | — |
| | 4,362 |
| | — |
| | 4,362 |
|
Other | | 112 |
| | — |
| | 112 |
| | — |
| | 112 |
| | 177 |
| | — |
| | 177 |
| | — |
| | 177 |
|
Total bank loans – net | | 15,817 |
| | — |
| | 15,903 |
| | — |
| | 15,903 |
| |
Total bank loans — net | | | 16,389 |
| | — |
| | 16,238 |
| | — |
| | 16,238 |
|
Other assets | | 337 |
| | — |
| | 337 |
| | — |
| | 337 |
| | 656 |
| | — |
| | 656 |
| | — |
| | 656 |
|
Total | | $ | 161,765 |
| | $ | — |
| | $ | 161,687 |
| | $ | — |
| | $ | 161,687 |
| | $ | 184,864 |
| | $ | — |
| | $ | 182,493 |
| | $ | — |
| | $ | 182,493 |
|
Liabilities: | | | | | | | | | | | | | | | | | | | | |
Bank deposits | | $ | 162,300 |
| | $ | — |
| | $ | 162,300 |
| | $ | — |
| | $ | 162,300 |
| | $ | 190,184 |
| | $ | — |
| | $ | 190,184 |
| | $ | — |
| | $ | 190,184 |
|
Payables to brokers, dealers, and clearing organizations | | 1,934 |
| | — |
| | 1,934 |
| | — |
| | 1,934 |
| | 1,122 |
| | — |
| | 1,122 |
| | — |
| | 1,122 |
|
Payables to brokerage clients | | 33,039 |
| | — |
| | 33,039 |
| | — |
| | 33,039 |
| | 31,088 |
| | — |
| | 31,088 |
| | — |
| | 31,088 |
|
Accrued expenses and other liabilities | | 911 |
| | — |
| | 911 |
| | — |
| | 911 |
| | 1,173 |
| | — |
| | 1,173 |
| | — |
| | 1,173 |
|
Short-term borrowings | | 300 |
| | — |
| | 300 |
| | — |
| | 300 |
| |
Long-term debt | | 3,518 |
| | — |
| | 3,591 |
| | — |
| | 3,591 |
| | 4,128 |
| | — |
| | 4,077 |
| | — |
| | 4,077 |
|
Total | | $ | 202,002 |
| | $ | — |
| | $ | 202,075 |
| | $ | — |
| | $ | 202,075 |
| | $ | 227,695 |
| | $ | — |
| | $ | 227,644 |
| | $ | — |
| | $ | 227,644 |
|
THE CHARLES SCHWAB CORPORATION
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted)
(Unaudited)
| | December 31, 2016 | | Carrying Amount | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Balance at Fair Value | |
December 31, 2017 | | | Carrying Amount | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Balance at Fair Value |
Assets: | | | | | | | | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 9,314 |
| | $ | — |
| | $ | 9,314 |
| | $ | — |
| | $ | 9,314 |
| | $ | 11,490 |
| | $ | — |
| | $ | 11,490 |
| | $ | — |
| | $ | 11,490 |
|
Cash and investments segregated and on deposit for regulatory purposes | | 13,533 |
| | — |
| | 13,533 |
| | — |
| | 13,533 |
| | 9,277 |
| | — |
| | 9,277 |
| | — |
| | 9,277 |
|
Receivables from brokers, dealers, and clearing organizations | | 728 |
| | — |
| | 728 |
| | — |
| | 728 |
| | 649 |
| | — |
| | 649 |
| | — |
| | 649 |
|
Receivables from brokerage clients – net | | 17,151 |
| | — |
| | 17,151 |
| | — |
| | 17,151 |
| |
Receivables from brokerage clients — net | | | 20,568 |
| | — |
| | 20,568 |
| | — |
| | 20,568 |
|
Held to maturity securities: | | | | | | | | | | | | | | | | | | | | |
U.S. agency mortgage-backed securities | | 72,439 |
| | — |
| | 71,677 |
| | — |
| | 71,677 |
| | 101,197 |
| | — |
| | 100,453 |
| | — |
| | 100,453 |
|
Non-agency commercial mortgage-backed securities | | 997 |
| | — |
| | 1,004 |
| | — |
| | 1,004 |
| |
Asset-backed securities | | 941 |
| | — |
| | 941 |
| | — |
| | 941 |
| | 12,937 |
| | — |
| | 13,062 |
| | — |
| | 13,062 |
|
Corporate debt securities | | 436 |
| | — |
| | 436 |
| | — |
| | 436 |
| | 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 |
| | — |
| | 219 |
| | — |
| | 219 |
| | 223 |
| | — |
| | 220 |
| | — |
| | 220 |
|
Commercial paper | | 99 |
| | — |
| | 99 |
| | — |
| | 99 |
| |
U.S. state and municipal securities | | 68 |
| | — |
| | 68 |
| | — |
| | 68 |
| |
Certificates of deposit | | | 200 |
| | — |
| | 200 |
| | — |
| | 200 |
|
Foreign government agency securities | | | 50 |
| | — |
| | 49 |
| | — |
| | 49 |
|
Total held to maturity securities | | 75,203 |
| | — |
| | 74,444 |
| | — |
| | 74,444 |
| | 120,926 |
| | — |
| | 120,373 |
| | — |
| | 120,373 |
|
Bank loans – net: | | | | | | | | | | | |
Residential real estate mortgages | | 9,117 |
| | — |
| | 9,064 |
| | — |
| | 9,064 |
| |
Home equity loans and lines of credit | | 2,342 |
| | — |
| | 2,458 |
| | — |
| | 2,458 |
| |
Bank loans — net: | | | | | | | | | | | |
First Mortgages | | | 10,000 |
| | — |
| | 9,917 |
| | — |
| | 9,917 |
|
HELOCs | | | 1,935 |
| | — |
| | 2,025 |
| | — |
| | 2,025 |
|
Pledged asset lines | | 3,851 |
| | — |
| | 3,851 |
| | — |
| | 3,851 |
| | 4,369 |
| | — |
| | 4,369 |
| | — |
| | 4,369 |
|
Other | | 93 |
| | — |
| | 94 |
| | — |
| | 94 |
| | 174 |
| | — |
| | 174 |
| | — |
| | 174 |
|
Total bank loans – net | | 15,403 |
| | — |
| | 15,467 |
| | — |
| | 15,467 |
| |
Total bank loans — net | | | 16,478 |
| | — |
| | 16,485 |
| | — |
| | 16,485 |
|
Other assets | | 328 |
| | — |
| | 328 |
| | — |
| | 328 |
| | 781 |
| | — |
| | 781 |
| | — |
| | 781 |
|
Total | | $ | 131,660 |
| | $ | — |
| | $ | 130,965 |
| | $ | — |
| | $ | 130,965 |
| | $ | 180,169 |
| | $ | — |
| | $ | 179,623 |
| | $ | — |
| | $ | 179,623 |
|
Liabilities: | | | | | | | | | | | | | | | | | | | | |
Bank deposits | | $ | 163,454 |
| | $ | — |
| | $ | 163,454 |
| | $ | — |
| | $ | 163,454 |
| | $ | 169,656 |
| | $ | — |
| | $ | 169,656 |
| | $ | — |
| | $ | 169,656 |
|
Payables to brokers, dealers, and clearing organizations | | 2,407 |
| | — |
| | 2,407 |
| | — |
| | 2,407 |
| | 1,287 |
| | — |
| | 1,287 |
| | — |
| | 1,287 |
|
Payables to brokerage clients | | 35,894 |
| | — |
| | 35,894 |
| | — |
| | 35,894 |
| | 31,243 |
| | — |
| | 31,243 |
| | — |
| | 31,243 |
|
Accrued expenses and other liabilities | | 1,169 |
| | — |
| | 1,169 |
| | — |
| | 1,169 |
| | 1,463 |
| | — |
| | 1,463 |
| | — |
| | 1,463 |
|
Short-term borrowings | | | 15,000 |
| | — |
| | 15,000 |
| | — |
| | 15,000 |
|
Long-term debt | | 2,876 |
| | — |
| | 2,941 |
| | — |
| | 2,941 |
| | 4,753 |
| | — |
| | 4,811 |
| | — |
| | 4,811 |
|
Total | | $ | 205,800 |
| | $ | — |
| | $ | 205,865 |
| | $ | — |
| | $ | 205,865 |
| | $ | 223,402 |
| | $ | — |
| | $ | 223,460 |
| | $ | — |
| | $ | 223,460 |
|
THE CHARLES SCHWAB CORPORATION
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted)
(Unaudited)
11.12. Stockholders’ Equity
The Company’s preferred stock issued and outstanding is as follows:
| | | | June 30, 2017 | | December 31, 2016 | Shares Issued and Outstanding (In thousands) at | Liquidation Preference Per Share | Carrying Value at | | Dividend Rate in Effect at March 31, 2018 | Earliest Redemption Date | Date at Which Dividend Rate Becomes Floating | Floating Annual Rate of Three-Month LIBOR plus: |
| | Shares Issued and Outstanding (In thousands) | | Liquidation Preference Per Share | | Liquidation Preference | | Carrying Value | | Shares Issued and Outstanding (In thousands) | | Liquidation Preference Per Share | | Liquidation Preference | | Carrying Value | March 31, 2018 (1) | December 31, 2017 (1) | March 31, 2018 | December 31, 2017 | Issue Date |
Series A | | 400 |
| | $ | 1,000 |
| | $ | 400 |
| | $ | 397 |
| | 400 |
| | $ | 1,000 |
| | $ | 400 |
| | $ | 397 |
| |
Series B | | 485 |
| | 1,000 |
| | 485 |
| | 482 |
| | 485 |
| | 1,000 |
| | 485 |
| | 482 |
| |
Fixed-rate: | | | | | | | |
Series C | | 600 |
| | 1,000 |
| | 600 |
| | 585 |
| | 600 |
| | 1,000 |
| | 600 |
| | 585 |
| 600 |
| 600 |
| $ | 1,000 |
| $ | 585 |
| $ | 585 |
| 08/03/15 | 6.000 | % | 12/01/20 | N/A | N/A |
|
Series D | | 750 |
| | 1,000 |
| | 750 |
| | 728 |
| | 750 |
| | 1,000 |
| | 750 |
| | 728 |
| 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 | 4.820 | % |
Series E | | 6 |
| | 100,000 |
| | 600 |
| | 591 |
| | 6 |
| | 100,000 |
| | 600 |
| | 591 |
| 6 |
| 6 |
| 100,000 |
| 591 |
| 591 |
| 10/31/16 | 4.625 | % | 03/01/22 | 3.315 | % |
Total Preferred Stock | | 2,241 |
| | | | $ | 2,835 |
| | $ | 2,783 |
| | 2,241 |
| | | | $ | 2,835 |
| | $ | 2,783 |
| |
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.
12.13. Accumulated Other Comprehensive Income
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: |
| | | | | | | | | | | | | | | | | | | | | | | |
Three Months Ended March 31, | 2018 | | 2017 |
| 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) | $ | (108 | ) | | $ | 26 |
| | $ | (82 | ) | | $ | 52 |
| | $ | (19 | ) | | $ | 33 |
|
Reclassification of net unrealized loss on securities transferred to held to maturity (1) | — |
| | — |
| | — |
| | 227 |
| | (85 | ) | | 142 |
|
Other reclassifications included in other revenue | — |
| | — |
| | — |
| | (1 | ) | | — |
| | (1 | ) |
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 | 9 |
| | (2 | ) | | 7 |
| | 2 |
| | (1 | ) | | 1 |
|
Other | — |
| | — |
| | — |
| | (3 | ) | | 1 |
| | (2 | ) |
Other comprehensive income (loss) | $ | (99 | ) | | $ | 24 |
| | $ | (75 | ) | | $ | 50 |
| | $ | (19 | ) | | $ | 31 |
|
(1) See Note 5 in the 2017 10-K for discussion of the transfer of securities from the AFS category to the HTM category during the first quarter of 2017.
|
| | | | | | | | | | | | | | | | | | | | | | | |
Three Months Ended June 30, | 2017 | | 2016 |
| 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) | $ | 29 |
| | $ | (11 | ) | | $ | 18 |
| | $ | 168 |
| | $ | (63 | ) | | $ | 105 |
|
Other reclassifications included in other revenue | (6 | ) | | 3 |
| | (3 | ) | | (3 | ) | | 1 |
| | (2 | ) |
Change in net unrealized gain (loss) on held to maturity securities: | | | | | | | | | | | |
Amortization of amounts previously recorded upon transfer from available for sale | 9 |
| | (4 | ) | | 5 |
| | — |
| | — |
| | — |
|
Other comprehensive income (loss) | $ | 32 |
| | $ | (12 | ) | | $ | 20 |
| | $ | 165 |
| | $ | (62 | ) | | $ | 103 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
Six Months Ended June 30, | 2017 | | 2016 |
| 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) | $ | 81 |
| | $ | (30 | ) | | $ | 51 |
| | $ | 189 |
| | $ | (71 | ) | | $ | 118 |
|
Reclassification of net unrealized loss on securities transferred to held to maturity (1) | 227 |
| | (85 | ) | | 142 |
| | — |
| | — |
| | — |
|
Other reclassifications included in other revenue | (7 | ) | | 3 |
| | (4 | ) | | (3 | ) | | 1 |
| | (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 | 11 |
| | (5 | ) | | 6 |
| | — |
| | — |
| | — |
|
Other | (3 | ) | | 1 |
| | (2 | ) | | 1 |
| | — |
| | 1 |
|
Other comprehensive income (loss) | $ | 82 |
| | $ | (31 | ) | | $ | 51 |
| | $ | 187 |
| | $ | (70 | ) | | $ | 117 |
|
|
| | | | | | | | | | | |
(1)
| See Note 3 for discussion of the transfer of securities from the AFS category to the HTM category during the first quarter of 2017. | | | | | | | | | | |
THE CHARLES SCHWAB CORPORATION
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted)
(Unaudited)
Accumulated other comprehensive incomeAOCI balances are as follows:
| |
| | Total Accumulated Other Comprehensive Income | | Total Accumulated Other Comprehensive Income |
Balance at December 31, 2015 | | $ | (134 | ) | |
Net unrealized gain (loss) on available for sale securities | | 116 |
| |
Other | | 1 |
| |
Balance at June 30, 2016 | | $ | (17 | ) | |
Balance at December 31, 2016 | | $ | (163 | ) | | $ | (163 | ) |
Available for sale securities: | | | | |
Net unrealized gain (loss) | | 51 |
| | 33 |
|
Reclassification of net unrealized loss on securities transferred to held to maturity | | 142 |
| | 142 |
|
Other reclassifications included in other revenue | | (4 | ) | | (1 | ) |
Held to maturity securities: | | | | |
Reclassification of net unrealized loss on securities transferred from available for sale | | (142 | ) | | (142 | ) |
Amortization of amounts previously recorded upon transfer to held to maturity from available for sale | | 6 |
| | 1 |
|
Other | | (2 | ) | | (2 | ) |
Balance at June 30, 2017 | | $ | (112 | ) | |
Balance at March 31, 2017 | | | $ | (132 | ) |
| | | |
Balance at December 31, 2017 | | | $ | (152 | ) |
Adoption of accounting standards (Note 2) | | | (33 | ) |
Available for sale securities: | | | |
Net unrealized gain (loss) | | | (82 | ) |
Held to maturity securities: | | | |
Amortization of amounts previously recorded upon transfer to held to maturity from available for sale | | | 7 |
|
Balance at March 31, 2018 | | | $ | (260 | ) |
13. Earnings Per Common Share
EPS under the basic and diluted computations is as follows:
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
Net income | | $ | 575 |
| | $ | 452 |
| | $ | 1,139 |
| | $ | 864 |
|
Preferred stock dividends and other (1) | | (45 | ) | | (46 | ) | | (84 | ) | | (66 | ) |
Net income available to common stockholders | | $ | 530 |
| | $ | 406 |
| | $ | 1,055 |
| | $ | 798 |
|
Weighted-average common shares outstanding — basic | | 1,338 |
| | 1,322 |
| | 1,337 |
| | 1,322 |
|
Common stock equivalent shares related to stock incentive plans | | 13 |
| | 11 |
| | 14 |
| | 9 |
|
Weighted-average common shares outstanding — diluted (2) | | 1,351 |
| | 1,333 |
| | 1,351 |
| | 1,331 |
|
Basic EPS | | $ | .40 |
| | $ | .31 |
| | $ | .79 |
| | $ | .60 |
|
Diluted EPS | | $ | .39 |
| | $ | .30 |
| | $ | .78 |
| | $ | .60 |
|
| |
(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 9 million and 19 million shares for the second quarters of 2017 and 2016, respectively, and 10 million and 22 million shares for the first halves of 2017 and 2016, respectively. |
14. Regulatory RequirementsTaxes on Income
On December 22, 2017, the Tax Act was signed into law. Among other things, the Tax Act lowered the federal corporate income tax rate from 35% to 21%, effective for tax years including or commencing January 1, 2018. In connection with our initial analysis of the impact of the Tax Act, Schwab’s effective tax rate for the three months ended March 31, 2018, was 21.9% compared to 33.1% for the same period in 2017.
At June 30,Also as 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 both CSCassociated with the remeasurement of net deferred tax assets and Schwab Bank met allother tax adjustments related to the Tax Act. While we were able to make a reasonable estimate of their respective capital requirements. Certain events,the impact of the reduction in the corporate tax rate in the fourth quarter of 2017, our accounting for various elements of the Tax Act may be affected by clarifications of the Tax Act and other related analysis including, but not limited to, bonus depreciation that will allow for immediate expensing of qualified property and the state tax effect of adjustments made to federal temporary differences. As such, as growth in bank depositsthe impact of the Tax Act is an estimate pending further information and regulatory discretion, could adversely affect CSC’s or Schwab Bank’s ability to meet future capital requirements.
THE CHARLES SCHWAB CORPORATION
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted)
(Unaudited)
the analysis noted.
The regulatory capitalSchwab did not record any material measurement-period adjustments related to the Tax Act during the first quarter of 2018. We are continuing to gather additional information to complete the accounting for estimated items and ratiosexpect to complete the accounting within the prescribed measurement period. As of January 1, 2018, Schwab adopted new accounting guidance that decreased AOCI and increased retained earnings by $33 million for CSC and Schwab Bank arethe reclassification of certain impacts of the Tax Act as follows:described in Note 2.
|
| | | | | | | | | | | | | | | | | | | | | |
| | Actual | | Minimum to be Well Capitalized | | Minimum Capital Requirement |
June 30, 2017 | | Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio |
CSC | | | | | | | | | | | | |
Common Equity Tier 1 Risk-Based Capital | | $ | 13,589 |
| | 19.5 | % | | N/A |
| | | | $ | 3,133 |
| | 4.5 | % |
Tier 1 Risk-Based Capital | | 16,372 |
| | 23.5 | % | | N/A |
| | | | 4,177 |
| | 6.0 | % |
Total Risk-Based Capital | | 16,400 |
| | 23.6 | % | | N/A |
| | | | 5,570 |
| | 8.0 | % |
Tier 1 Leverage | | 16,372 |
| | 7.4 | % | | N/A |
| | | | 8,843 |
| | 4.0 | % |
Schwab Bank | | | | | | | | | | | | |
Common Equity Tier 1 Risk-Based Capital | | $ | 12,987 |
| | 21.0 | % | | $ | 4,015 |
| | 6.5 | % | | $ | 2,779 |
| | 4.5 | % |
Tier 1 Risk-Based Capital | | 12,987 |
| | 21.0 | % | | 4,941 |
| | 8.0 | % | | 3,706 |
| | 6.0 | % |
Total Risk-Based Capital | | 13,014 |
| | 21.1 | % | | 6,176 |
| | 10.0 | % | | 4,941 |
| | 8.0 | % |
Tier 1 Leverage | | 12,987 |
| | 7.3 | % | | 8,934 |
| | 5.0 | % | | 7,148 |
| | 4.0 | % |
December 31, 2016 | | | | | | | | | | | | |
CSC | | | | | | | | | | | | |
Common Equity Tier 1 Risk-Based Capital | | $ | 12,574 |
| | 18.4 | % | | N/A |
| | | | $ | 3,068 |
| | 4.5 | % |
Tier 1 Risk-Based Capital | | 15,357 |
| | 22.5 | % | | N/A |
| | | | 4,091 |
| | 6.0 | % |
Total Risk-Based Capital | | 15,384 |
| | 22.6 | % | | N/A |
| | | | 5,454 |
| | 8.0 | % |
Tier 1 Leverage | | 15,357 |
| | 7.2 | % | | N/A |
| | | | 8,516 |
| | 4.0 | % |
Schwab Bank | | | | | | | | | | | | |
Common Equity Tier 1 Risk-Based Capital | | $ | 11,878 |
| | 19.8 | % | | $ | 3,894 |
| | 6.5 | % | | $ | 2,696 |
| | 4.5 | % |
Tier 1 Risk-Based Capital | | 11,878 |
| | 19.8 | % | | 4,793 |
| | 8.0 | % | | 3,595 |
| | 6.0 | % |
Total Risk-Based Capital | | 11,904 |
| | 19.9 | % | | 5,992 |
| | 10.0 | % | | 4,793 |
| | 8.0 | % |
Tier 1 Leverage | | 11,878 |
| | 7.0 | % | | 8,456 |
| | 5.0 | % | | 6,765 |
| | 4.0 | % |
N/A Not applicable.Based on its regulatory capital ratios at June 30, 2017, Schwab Bank is considered well capitalized (the highest category) under its respective regulatory capital rules. There are no conditions or events since June 30, 2017 that management believes have changed Schwab Bank’s capital category. At June 30, 2017, both CSC’s and Schwab Bank’s capital levels exceeded the fully implemented capital conservation buffer requirement.
Net capital and net capital requirements for Schwab and optionsXpress are as follows:
|
| | | | | | | | | | | | | | | | |
June 30, 2017 | | Net Capital | | Minimum Net Capital Required | | 2% of Aggregate Debit Balances | | Net Capital in Excess of Required Capital |
Schwab | | $ | 1,951 |
| | $ | 0.250 |
| | $ | 385 |
| | $ | 1,566 |
|
optionsXpress | | 290 |
| | 1 |
| | 7 |
| | 283 |
|
December 31, 2016 | | | | | | | | |
Schwab | | $ | 1,846 |
| | $ | 0.250 |
| | $ | 355 |
| | $ | 1,491 |
|
optionsXpress | | 269 |
| | 1 |
| | 8 |
| | 261 |
|
THE CHARLES SCHWAB CORPORATION
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted)
(Unaudited)
15. Earnings Per Common Share
EPS under the basic and diluted computations is as follows:
|
| | | | | | | | |
| | Three Months Ended March 31, |
| | 2018 | | 2017 |
Net income | | $ | 783 |
| | $ | 564 |
|
Preferred stock dividends and other (1) | | (37 | ) | | (39 | ) |
Net income available to common stockholders | | $ | 746 |
| | $ | 525 |
|
Weighted-average common shares outstanding — basic | | 1,347 |
| | 1,336 |
|
Common stock equivalent shares related to stock incentive plans | | 15 |
| | 15 |
|
Weighted-average common shares outstanding — diluted (2) | | 1,362 |
| | 1,351 |
|
Basic EPS | | $ | .55 |
| | $ | .39 |
|
Diluted EPS | | $ | .55 |
| | $ | .39 |
|
(1) Includes preferred stock dividends and undistributed earnings and dividends allocated to non-vested restricted stock units.
(2) Antidilutive stock options and restricted stock units excluded from the calculation of diluted EPS totaled 11 million and 10 million shares for the first quarters of 2018 and 2017, respectively.
CHARLES SCHWAB CORPORATION
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted)
(Unaudited)
16. Regulatory Requirements
At March 31, 2018, Schwab and CSB met all of their respective capital requirements. The regulatory capital and ratios for CSC (consolidated) and CSB are as follows: |
| | | | | | | | | | | | | | | | | | | | | |
| | Actual | | Minimum to be Well Capitalized | | Minimum Capital Requirement |
March 31, 2018 | | Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio |
CSC | | | | | | | | | | | | |
Common Equity Tier 1 Risk-Based Capital | | $ | 15,535 |
| | 19.8 | % | | N/A |
| | | | $ | 3,537 |
| | 4.5 | % |
Tier 1 Risk-Based Capital | | 18,328 |
| | 23.3 | % | | N/A |
| | | | 4,717 |
| | 6.0 | % |
Total Risk-Based Capital | | 18,372 |
| | 23.4 | % | | N/A |
| | | | 6,289 |
| | 8.0 | % |
Tier 1 Leverage | | 18,328 |
| | 7.5 | % | | N/A |
| | | | 9,832 |
| | 4.0 | % |
CSB | | | | | | | | | | | | |
Common Equity Tier 1 Risk-Based Capital | | $ | 14,093 |
| | 20.7 | % | | $ | 4,435 |
| | 6.5 | % | | $ | 3,070 |
| | 4.5 | % |
Tier 1 Risk-Based Capital | | 14,093 |
| | 20.7 | % | | 5,458 |
| | 8.0 | % | | 4,094 |
| | 6.0 | % |
Total Risk-Based Capital | | 14,121 |
| | 20.7 | % | | 6,823 |
| | 10.0 | % | | 5,458 |
| | 8.0 | % |
Tier 1 Leverage | | 14,093 |
| | 7.0 | % | | 10,133 |
| | 5.0 | % | | 8,107 |
| | 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 | % |
N/A Not applicable.
At March 31, 2018, CSB is considered well capitalized (the highest category) under its regulatory capital rules. At March 31, 2018, both CSC’s and CSB’s capital levels exceeded the fully implemented capital conservation buffer requirement. Certain events, such as growth in bank deposits and regulatory discretion, could adversely affect our ability to meet future capital requirements.
In late 2017, Schwab acquired a federal savings bank charter and changed the name to Charles Schwab Signature Bank (CSSB). At March 31, 2018, CSSB’s balance sheet consisted primarily of investment securities with total assets of $6.5 billion. CSSB is subject to similar regulatory guidelines and requirements, and seeks to maintain a Tier 1 Leverage Ratio similar to CSB.
Net capital and net capital requirements for CS&Co are as follows: |
| | | | | | | | |
| | March 31, 2018 | | December 31, 2017 |
Net Capital | | $ | 2,211 |
| | $ | 2,118 |
|
Minimum net capital required | | 0.250 |
| | 0.250 |
|
2% of aggregate debit balances | | 459 |
| | 435 |
|
Net Capital in excess of required net capital | | $ | 1,752 |
| | $ | 1,683 |
|
In accordance with the SEC Customer Protection Rule, CS&Co had portions of its cash and investments segregated for the exclusive benefit of clients at March 31, 2018. The SEC Customer Protection Rule requires broker-dealers to segregate client
CHARLES SCHWAB CORPORATION
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted)
(Unaudited)
fully paid securities and cash balances not collateralizing margin positions and not swept to money market funds or bank deposit accounts. Amounts included in cash and investments segregated and on deposit for regulatory purposes represent actual balances on deposit. Cash and cash equivalents included in cash and investments segregated and on deposit for regulatory purposes are presented as part of Schwab’s cash balances in the consolidated statements of cash flows.
17. Segment Information
The Company’sSchwab’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.
Management evaluates the performance of itsthe segments on a pre-tax basis. Segment assets and liabilities are not used for evaluating segment performance or in deciding how to allocate resources to segments. There are no revenues from transactions between the segments.
Financial information for the Company’s reportable segments is presented in the following table: |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Investor Services | | Advisor Services | | Total |
Three Months Ended March 31, | | 2018 | | 2017 | | 2018 | | 2017 | | 2018 | | 2017 |
Net Revenues: | | | | | | | | | | | | |
Net interest revenue | | $ | 957 |
| | $ | 753 |
| | $ | 306 |
| | $ | 247 |
| | $ | 1,263 |
| | $ | 1,000 |
|
Asset management and administration fees | | 593 |
| | 566 |
| | 258 |
| | 257 |
| | 851 |
| | 823 |
|
Trading revenue | | 127 |
| | 119 |
| | 74 |
| | 73 |
| | 201 |
| | 192 |
|
Other | | 64 |
| | 50 |
| | 19 |
| | 16 |
| | 83 |
| | 66 |
|
Total net revenues | | 1,741 |
| | 1,488 |
| | 657 |
| | 593 |
| | 2,398 |
| | 2,081 |
|
Expenses Excluding Interest | | 1,042 |
| | 930 |
| | 354 |
| | 308 |
| | 1,396 |
| | 1,238 |
|
Income before taxes on income | | $ | 699 |
| | $ | 558 |
| | $ | 303 |
| | $ | 285 |
| | $ | 1,002 |
| | $ | 843 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Investor Services | | Advisor Services | | Total |
Three Months Ended June 30, | | 2017 | | 2016 | | 2017 | | 2016 | | 2017 | | 2016 |
Net Revenues: | | | | | | | | | | | | |
Asset management and administration fees | | $ | 582 |
| | $ | 514 |
| | $ | 263 |
| | $ | 243 |
| | $ | 845 |
| | $ | 757 |
|
Net interest revenue | | 795 |
| | 628 |
| | 258 |
| | 170 |
| | 1,053 |
| | 798 |
|
Trading revenue | | 98 |
| | 129 |
| | 59 |
| | 72 |
| | 157 |
| | 201 |
|
Other | | 55 |
| | 51 |
| | 20 |
| | 19 |
| | 75 |
| | 70 |
|
Provision for loan losses | | — |
| | 2 |
| | — |
| | — |
| | — |
| | 2 |
|
Total net revenues | | 1,530 |
| | 1,324 |
| | 600 |
| | 504 |
| | 2,130 |
| | 1,828 |
|
Expenses Excluding Interest | | 914 |
| | 834 |
| | 307 |
| | 274 |
| | 1,221 |
| | 1,108 |
|
Income before taxes on income | | $ | 616 |
| | $ | 490 |
| | $ | 293 |
| | $ | 230 |
| | $ | 909 |
| | $ | 720 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Investor Services | | Advisor Services | | Total |
Six Months Ended June 30, | | 2017 | | 2016 | | 2017 | | 2016 | | 2017 | | 2016 |
Net Revenues: | | | | | | | | | | | | |
Asset management and administration fees | | $ | 1,148 |
| | $ | 986 |
| | $ | 520 |
| | $ | 470 |
| | $ | 1,668 |
| | $ | 1,456 |
|
Net interest revenue | | 1,548 |
| | 1,241 |
| | 505 |
| | 329 |
| | 2,053 |
| | 1,570 |
|
Trading revenue | | 217 |
| | 272 |
| | 132 |
| | 161 |
| | 349 |
| | 433 |
|
Other | | 105 |
| | 97 |
| | 36 |
| | 36 |
| | 141 |
| | 133 |
|
Provision for loan losses | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Total net revenues | | 3,018 |
| | 2,596 |
| | 1,193 |
| | 996 |
| | 4,211 |
| | 3,592 |
|
Expenses Excluding Interest | | 1,844 |
| | 1,671 |
| | 615 |
| | 546 |
| | 2,459 |
| | 2,217 |
|
Income before taxes on income | | $ | 1,174 |
| | $ | 925 |
| | $ | 578 |
| | $ | 450 |
| | $ | 1,752 |
| | $ | 1,375 |
|
THE CHARLES SCHWAB CORPORATION
Item 4. Controls and Procedures
Evaluation of disclosure controls and procedures: The management of the Company, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of June 30, 2017.March 31, 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 June 30, 2017.March 31, 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 June 30, 2017,March 31, 2018, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
THE CHARLES SCHWAB CORPORATION
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
For a discussion of legal proceedings, see Item 1 – Note 8.9.
Item 1A. Risk Factors
During the first sixthree months of 2017,2018, there have been no material changes to the risk factors in Part I – Item 1A – Risk Factors in the 20162017 Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
At June 30, 2017, approximately $596 million of future share repurchases are authorized under the Share Repurchase Program. There were no share repurchases during the second quarter of 2017. There were two authorizations under this program by CSC’s Board of Directors, each covering up to $500 million of common stock that were publicly announced by the Company on April 25, 2007, and March 13, 2008. The remaining authorizations do not have an expiration date.
The following table summarizes purchases made by or on behalf of CSC of its common stock for each calendar month in the secondfirst quarter of 2017:2018:
| | Month | | Total number of shares Purchased (in thousands) | | Average Price Paid per shares | | Total number of shares Purchased (in thousands) | | Average Price Paid per shares |
April: | | | | | |
January: | | | | | |
Employee transactions (1) | | 10 |
| | $ | 39.45 |
| | 10 |
| | $ | 51.80 |
|
May: | | | | | |
February: | | | | | |
Employee transactions (1) | | 7 |
| | $ | 39.70 |
| | 5 |
| | $ | 53.61 |
|
June: | | | | | |
March: | | | | | |
Employee transactions (1) | | 18 |
| | $ | 39.92 |
| | 179 |
| | $ | 52.00 |
|
Total: | | | | | | | | |
Employee Transactions (1) | | 35 |
| | $ | 37.75 |
| | 194 |
| | $ | 52.04 |
|
(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.
There were no share repurchases under the Share Repurchase Program during the first quarter of 2018. At March 31, 2018, approximately $596 million of future share repurchases remained authorized under the Share Repurchase Program, and the remaining authorizations do not have an expiration date. Repurchases as part of this program are under two authorizations by CSC’s Board of Directors, each covering up to $500 million of common stock, which were publicly announced by the Company on April 25, 2007 and March 13, 2008.
THE CHARLES SCHWAB CORPORATION
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
THE CHARLES SCHWAB CORPORATION
Item 6. Exhibits
The following exhibits are filed as part of this Quarterly Report on Form 10-Q:
| | Exhibit Number | Exhibit Number | Exhibit | | Exhibit Number | Exhibit | |
| | | |
10.349 | The Charles Schwab Severance Pay Plan, as Amended and Restated Effective May 1, 2012. | (1) | |
| | | |
10.376 | Credit Agreement (364 – Day Commitment) dated as of June 2, 2017, between the Registrant and financial institutions therein (supersedes Exhibit 10.368). | | |
| | | | | | |
12.1 | 12.1 | Computations of Ratio of Earnings to Fixed Charges and Ratio of Earnings to Fixed Charges and Preferred Stock Dividends. | | 12.1 | | |
| | | | | | |
31.1 | 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. | | 31.1 |
| |
| | | | | | |
31.2 | 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. | | 31.2 | | |
| | | | | | |
32.1 | 32.1 | Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002. | (2) | 32.1 | | (1) |
| | | | | | |
32.2 | 32.2 | Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002. | (2) | 32.2 | | (1) |
| | | | | | |
101.INS | 101.INS | XBRL Instance Document | (3) | 101.INS | XBRL Instance Document | (2) |
| | | | | | |
101.SCH | 101.SCH | XBRL Taxonomy Extension Schema | (3) | 101.SCH | XBRL Taxonomy Extension Schema | (2) |
| | | | | | |
101.CAL | 101.CAL | XBRL Taxonomy Extension Calculation | (3) | 101.CAL | XBRL Taxonomy Extension Calculation | (2) |
| | | | | | |
101.DEF | 101.DEF | XBRL Extension Definition | (3) | 101.DEF | XBRL Extension Definition | (2) |
| | | | | | |
101.LAB | 101.LAB | XBRL Taxonomy Extension Label | (3) | 101.LAB | XBRL Taxonomy Extension Label | (2) |
| | | | | | |
101.PRE | 101.PRE | XBRL Taxonomy Extension Presentation | (3) | 101.PRE | XBRL Taxonomy Extension Presentation | (2) |
| | | | | | |
(1 | ) | Management contract or compensatory plan. | | ) | Furnished as an exhibit to this Quarterly Report on Form 10-Q. | |
| | | | | | |
(2 | ) | Furnished as an exhibit to this Quarterly Report on Form 10-Q. | | ) | Attached as Exhibit 101 to this Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2018 are the following materials formatted in XBRL (Extensible Business Reporting Language) (i) the Condensed Consolidated Statements of Income, (ii) the Condensed Consolidated Statements of Comprehensive Income, (iii) the Condensed Consolidated Balance Sheets, (iv) the Condensed Consolidated Statements of Stockholders’ Equity, (v) the Condensed Consolidated Statements of Cash Flows, and (vi) Notes to Condensed Consolidated Financial Statements. | |
| | | |
(3 | ) | Attached as Exhibit 101 to this Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2017 are the following materials formatted in XBRL (Extensible Business Reporting Language) (i) the Condensed Consolidated Statements of Income, (ii) the Condensed Consolidated Statements of Comprehensive Income, (iii) the Condensed Consolidated Balance Sheets, (iv) the Condensed Consolidated Statements of Stockholders’ Equity, (v) the Condensed Consolidated Statements of Cash Flows, and (vi) Notes to Condensed Consolidated Financial Statements. | | |
THE CHARLES SCHWAB CORPORATION
SIGNATURE
Pursuant to the requirements 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.
|
| | | |
| | | THE CHARLES SCHWAB CORPORATION |
| | | (Registrant) |
| | | |
| | | |
| | | |
Date: | August 7, 2017May 9, 2018 | | /s/ Peter Crawford |
| | | Peter Crawford |
| | | Executive Vice President and |
| | | Chief Financial Officer |