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)
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.
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

Part I - Financial Information
 Page
   
     
 Item 1.
Condensed Consolidated Financial Statements (Unaudited):
  
     
  
Statements of Income
 18
15
  
Statements of Comprehensive Income
 19
16
  
Balance Sheets
 20
17
  
Statements of Stockholders’ Equity
 21
18
  
Statements of Cash Flows
 2219-20
  
Notes
 23-4821-51
     
 Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 1-171-14
     
 Item 3.
Quantitative and Qualitative Disclosures About Market Risk
 17
14
     
 Item 4.
Controls and Procedures
 4852
     
Part II - Other Information
  
     
 Item 1.
Legal Proceedings
 49
52
     
 Item 1A.
Risk Factors
 49
52
     
 Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
 49
52
     
 Item 3.
Defaults Upon Senior Securities
 5053
     
 Item 4.
Mine Safety Disclosures
 50
53
     
 Item 5.
Other Information
 50
53
     
 Item 6.
Exhibits
 51
54
     
Signature
 52
55
   






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
•
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:

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%  
      
11.0% 12.4%  
Company Financial Metrics: 
  
  
       
  
  
Net revenues$2,130
 $1,828
 17 % $4,211
 $3,592
 17%
Expenses excluding interest1,221
 1,108
 10 % 2,459
 2,217
 11%
Total net revenues$2,398
 $2,081
 15 %
Total expenses excluding interest1,396
 1,238
 13 %
Income before taxes on income909
 720
 26 % 1,752
 1,375
 27%1,002
 843
 19 %
Taxes on income334
 268
 25 % 613
 511
 20%219
 279
 (22)%
Net income575
 452
 27 % 1,139
 864
 32%$783
 $564
 39 %
Preferred stock dividends and other45
 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 year17% 17%  
 17% 16%  15% 18%  
Pre-tax profit margin42.7% 39.4%  
 41.6% 38.3%  41.8% 40.5%  
Return on average common stockholders’ equity15% 13%  
 15% 13%  18% 15%  
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:
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          
     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
 —
Total net revenues 17 % $2,130
 100 % $1,828
 100 %
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          
     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 —
 —
 —
 —
 —
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:
  
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
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


 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
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
Balance at end of period $156,186
 $160,951
 $151,336
 $110,722
 $224,749
 $203,352
(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:
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 funds158,974
 223
 0.56% 163,929
 184
 0.45%
Schwab equity and bond funds and ETFs151,825
 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 Portfolios17,796
 —
 —
 6,620
 —
 —
Legacy Non-Fee18,340
 —
 —
 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 funds160,881
 446
 0.56% 166,184
 333
 0.40%
Schwab equity and bond funds and ETFs145,363
 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 Portfolios16,020
 —
 —
 5,868
 —
 —
Legacy Non-Fee17,890
 —
 —
 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 funds156,362
 182
 0.47% 162,789
 223
 0.56%
Schwab equity and bond funds and ETFs196,950
 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-based59,762
 —
 —
 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; and
Establishing 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
DescriptionBorrower
June 30, 2017 (1)
Committed, unsecured credit facility with various external banks (2)
CSC$750
Uncommitted, unsecured lines of credit with various external banksCSC, Schwab829
Federal Reserve Bank discount windowSchwab Bank3,488
Federal Home Loan Bank secured credit facilitySchwab Bank17,507
Unsecured commercial paperCSC750
DescriptionBorrower Outstanding Available
Committed, unsecured credit facility with various external banksCSC $—
 $750
Uncommitted, unsecured lines of credit with various external banksCSC, 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, 2018Par
Outstanding		 MaturityWeighted Average
Interest Rate		Moody’sStandard
& Poor’s		Fitch
Senior Notes$4,106
 2018 - 20283.24% fixedA2AA
Short-term borrowings$—
 N/AN/AN/AN/AN/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 Stock2,783
 —
 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 liabilities53
 —
 52
 —
 69
 —
 61
 —
Deferred tax assets, net of valuation allowances and deferred tax liabilities1
 —
 —
 —
 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 Assets69,622
 61,762
 68,179
 59,915
 78,610
 68,226
 75,866
 66,519
Common Equity Tier 1 Capital/Risk-Weighted Assets19.5% 21.0% 18.4% 19.8% 19.8% 20.7% 19.3% 20.1%
Tier 1 Capital/Risk-Weighted Assets23.5% 21.0% 22.5% 19.8% 23.3% 20.7% 23.0% 20.1%
Total Capital/Risk-Weighted Assets23.6% 21.1% 22.6% 19.9% 23.4% 20.7% 23.0% 20.1%
Tier 1 Leverage Ratio7.4% 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, 2016March 31, 2018December 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 organizations910
 728
894
649
Receivables from brokerage clients — net17,993
 17,155
21,153
20,576
Other securities owned — at fair value460
 449
500
539
Available for sale securities45,634
 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 — net15,817
 15,403
16,389
16,478
Equipment, office facilities, and property — net1,335
 1,299
1,540
1,471
Goodwill1,227
 1,227
1,227
1,227
Intangible assets — net125
 144
101
108
Other assets1,432
 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 organizations1,934
 2,407
1,122
1,287
Payables to brokerage clients33,039
 35,894
31,088
31,243
Accrued expenses and other liabilities2,021
 2,331
2,468
2,810
Short-term borrowings300
 —
—
15,000
Long-term debt3,518
 2,876
4,128
4,753
Total liabilities203,112
 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 issued15
 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 capital4,336
 4,267
4,397
4,353
Retained earnings13,495
 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’ equity17,489
 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
 TotalAccumulated 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.

StandardDescriptionDate of AdoptionEffects on the Financial Statements or Other Significant Matters
Accounting Standards Update (ASU) 2014-09, “Revenue from Contracts with Customers (Topic 606)” and related ASUsClarifies 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, 2018The 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, 2018The 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
StandardDescriptionDate of AdoptionEffects 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, 2018The 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, 2018The 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

StandardDescriptionRequired Date of AdoptionEffects 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)

StandardDescriptionRequired Date of AdoptionEffects 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 Total12 months or longer Total
June 30, 2017Fair
Value		 
Unrealized
Losses
 Fair
Value		 Unrealized
Losses		 Fair
Value		 Unrealized
Losses
March 31, 2018Fair
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 securities5,522
 45
 5,305
 92
 10,827
 137
Asset-backed securities1,594
 7
 422
 4
 2,016
 11
Corporate debt securities1,503
 6
 20
 —
 1,523
 6
Certificates of deposit1,019
 1
 —
 —
 1,019
 1
U.S. agency notes—
 —
 1,557
 8
 1,557
 8
Foreign government agency securities48
 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 securities866
 —
 550
 4
 1,416
 4
1,249
 7
 100
 —
 1,349
 7
Corporate debt securities867
 1
 303
 —
 1,170
 1
2,743
 44
 —
 —
 2,743
 44
U.S. state and municipal securities96
 3
 —
 —
 96
 3
Non-agency commercial mortgage-backed securities764
 19
 —
 —
 764
 19
U.S. Treasury securities6,418
 51
 —
 —
 6,418
 51
215
 8
 —
 —
 215
 8
U.S. agency notes1,907
 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 securities945
 1
 779
 1
 1,724
 2
U.S. Treasury securities—
 —
 222
 1
 222
 1
Foreign government agency securities49
 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 securities4,625
 11
 4,875
 72
 9,500
 83
Asset-backed securities904
 3
 424
 3
 1,328
 6
Corporate debt securities736
 1
 120
 —
 856
 1
Certificates of deposit799
 1
 —
 —
 799
 1
U.S. agency notes99
 —
 1,807
 8
 1,906
 8
Foreign government agency securities50
 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 securities1,670
 13
 9,237
 201
 10,907
 214
1,124
 2
 72
 —
 1,196
 2
Corporate debt securities2,407
 17
 653
 1
 3,060
 18
1,078
 5
 —
 —
 1,078
 5
U.S. Treasury securities6,926
 59
 —
 —
 6,926
 59
Certificates of deposit474
 —
 100
 1
 574
 1
U.S. agency notes1,907
 8
 —
 —
 1,907
 8
U.S. state and municipal securities956
 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 securities591
 4
 —
 —
 591
 4
607
 5
 —
 —
 607
 5
U.S. Treasury securities219
 4
 —
 —
 219
 4
220
 3
 —
 —
 220
 3
U.S. state and municipal securities14
 1
 —
 —
 14
 1
Foreign government agency securities49
 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 20162017 2016
Proceeds $4,421
 $3,774
$5,485
 $4,074
Gross realized gains 6
 3
7
 3
March 31, 2018Current30-59 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 lines4,360
1
1
—
2
4,362
—
4,362
Other180
—
—
—
—
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 lines4,361
4
4
—
8
4,369
—
4,369
Other176
—
—
—
—
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, 2017Current
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 credit2,137
1
1
9
11
2,148
8
2,140
Pledged asset lines4,000
1
—
—
1
4,001
—
4,001
Other113
—
—
—
—
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 credit2,336
2
2
10
14
2,350
8
2,342
Pledged asset lines3,846
4
1
—
5
3,851
—
3,851
Other94
—
—
—
—
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, 2018December 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
2018908
$281
20198
8
2020709
709
20219
9
2022266
Thereafter1,657
2,892
Total maturities3,545
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 loans377
 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 pledgedFair 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, 2017Quoted 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 equivalents1,670
 —
 —
 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 funds300
 —
 —
 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 owned380
 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, 2016Shares Issued and Outstanding (In thousands) atLiquidation Preference Per ShareCarrying Value at Dividend Rate in Effect at March 31, 2018Earliest Redemption DateDate at Which Dividend Rate Becomes FloatingFloating 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, 2018December 31, 2017Issue 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
08/03/156.000%12/01/20N/AN/A
Series D 750
 1,000
 750
 728
 750
 1,000
 750
 728
750
750
1,000
728
728
03/07/165.950%06/01/21N/AN/A
Fixed-to-floating-rate:      
Series A400
400
1,000
397
397
01/26/127.000%02/01/224.820%
Series E 6
 100,000
 600
 591
 6
 100,000
 600
 591
6
6
100,000
591
591
10/31/164.625%03/01/223.315%
Total Preferred Stock 2,241
   $2,835
 $2,783
 2,241
   $2,835
 $2,783
Series F5
5
100,000
492
492
10/31/175.000%12/01/2712/01/272.575%
Total preferred stock1,761
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) $33
  Reclassification of net unrealized loss on securities transferred to held to maturity (1)
—
 —
 —
 227
 (85) 142
  Other reclassifications included in other revenue—
 —
 —
 (1) —
 (1)
Change in net unrealized gain (loss) on held to maturity securities:           
  Reclassification of net unrealized loss on securities transferred from available for sale (1)
—
 —
 —
 (227) 85
 (142)
  Amortization of amounts previously recorded upon transfer from available for sale9
 (2) 7
 2
 (1) 1
Other—
 —
 —
 (3) 1
 (2)
Other comprehensive income (loss)$(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 sale9
 (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 sale11
 (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 
  
10.349The Charles Schwab Severance Pay Plan, as Amended and Restated Effective May 1, 2012.(1)
  
10.376Credit Agreement (364 – Day Commitment) dated as of June 2, 2017, between the Registrant and financial institutions therein (supersedes Exhibit 10.368). 
     
12.112.1Computations of Ratio of Earnings to Fixed Charges and Ratio of Earnings to Fixed Charges and Preferred Stock Dividends. 12.1
Computation of Ratio of Earnings to Fixed Charges and Ratio of Earnings to Fixed Charges and Preferred Stock Dividends.
 
     
31.131.1Certification Pursuant to Rule 13a-14(a)/15d-14(a), As Adopted Pursuant to Section 302 of The Sarbanes-Oxley Act of 2002. 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.

 
     
31.231.2Certification Pursuant to Rule 13a-14(a)/15d-14(a), As Adopted Pursuant to Section 302 of The Sarbanes-Oxley Act of 2002. 31.2
Certification Pursuant to Rule 13a-14(a)/15d-14(a), As Adopted Pursuant to Section 302 of The Sarbanes-Oxley Act of 2002.
 
     
32.132.1Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002.(2)32.1
Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002.
(1)
     
32.232.2Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002.(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.
(1)
     
101.INS101.INSXBRL Instance Document(3)101.INSXBRL Instance Document(2)
     
101.SCH101.SCHXBRL Taxonomy Extension Schema(3)101.SCHXBRL Taxonomy Extension Schema(2)
     
101.CAL101.CALXBRL Taxonomy Extension Calculation(3)101.CALXBRL Taxonomy Extension Calculation(2)
     
101.DEF101.DEFXBRL Extension Definition(3)101.DEFXBRL Extension Definition(2)
     
101.LAB101.LABXBRL Taxonomy Extension Label(3)101.LABXBRL Taxonomy Extension Label(2)
     
101.PRE101.PREXBRL Taxonomy Extension Presentation(3)101.PREXBRL 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


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