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 September 30, 20172018
Commission File Number: 1-9700
THE CHARLES SCHWAB CORPORATION
(Exact name of registrant as specified in its charter)
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Delaware (State or other jurisdiction of incorporation or organization) | 94-3025021 (I.R.S. Employer Identification No.) |
211 Main Street, San Francisco, CA 94105
(Address of principal executive offices and zip code)
Registrant’s telephone number, including area code: (415) 667-7000
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer ☒ | Accelerated filer ☐ |
Non-accelerated filer ☐ (Do not check if a smaller reporting company) | Smaller reporting company ☐ |
Emerging growth company ☐ | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the
Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☒
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
1,340,576,3761,350,452,801 shares of $.01 par value Common Stock Outstanding on October 31, 20172018
THE CHARLES SCHWAB CORPORATION
Quarterly Report on Form 10-Q
For the Quarter Ended September 30, 20172018
Index
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| Item 2. | | | 1-181-15 |
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| Item 4. | | | 50 |
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| Item 1. | | | |
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| Item 1A. | | | |
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| Item 2. | | | |
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| Item 3. | | | |
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| Item 4. | | | |
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| Item 5. | | | |
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| Item 6. | | | 52-53 |
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Part I – FINANCIAL INFORMATION
THE CHARLES SCHWAB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
INTRODUCTION
The Charles Schwab Corporation (CSC) is a savings and loan holding company engaged, through its subsidiaries, (collectively referred to as the Company), in wealth management, securities brokerage, banking, asset management, custody, and financial advisory services.
Significant business subsidiaries of CSC include the following:
Charles Schwab & Co., Inc. (Schwab)(CS&Co), a securities broker-dealer;
Charles Schwab Bank (Schwab Bank)(CSB), a federal savings bank; and
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• | Charles Schwab Investment Management, Inc. (CSIM), the investment advisor for Schwab’s proprietary mutual funds which are referred to as the Schwab(Schwab Funds®,) and for Schwab’s exchange-traded funds (ETFs), which are referred to as the Schwab(Schwab ETFs™). |
TheUnless otherwise indicated, the terms “Schwab,” “the Company,” “we,” “us,” or “our” mean CSC together with its consolidated subsidiaries.
Schwab provides financial services to individuals and institutional clients through two segments – Investor Services and Advisor Services. The Investor Services segment provides retail brokerage and banking services to individual investors, and retirement plan services, andas well as other corporate brokerage services.services, to businesses and their employees. The Advisor Services segment provides custodial, trading, banking, and support services, as well as retirement business services.services, to independent registered investment advisors (RIAs), independent retirement advisors, and recordkeepers.
Schwab was founded on the belief that averageall Americans deserve access to a better investing experience. Although much has changed in the intervening years, the Company’sour purpose remains clear – to champion every client’s goals with passion and integrity. Guided by this purpose and the aspiration of creating the most trusted leader in investment services, management has adopted a strategy described as “Through Clients’ Eyes.”
Under this approach, the Company’s strategic goals are focused on puttingThis strategy emphasizes placing 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 also aim to offer a broad range of products and solutions to meet client needs with a focus on transparency, value, and value.trust. 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,In combination, these are the Company aimskey elements of our “no trade-offs” approach to serving investors. We believe that following this strategy is the best way to maximize itsour market valuation and stockholder returns over time.
Management estimates that investable wealth in the United States (U.S.) is(consisting of assets in defined contribution, retail wealth management and brokerage, and registered investment advisor channels, along with bank deposits) currently well in excess of $30exceeds $45 trillion, which means the Company’s $3.18$3.56 trillion in client assets leaves 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 third quarter and first nine months ended September 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 aim to maximize itsMaximizing our 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);
Ongoing investments to drive growth and efficiency (see Overview);
Capital expenditures in 2018 (see Results of Operations);
Consolidated balance sheet assets remaining above $250 billion (see Risk Management and Capital Management);
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’s investment advisory servicesour advice solutions 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 and amount and impact of migrationtransfers 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, as well as implement infrastructure, 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 third quarters and first nine months of 2018 and 2017 and 2016 are:
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| Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended September 30, | | Percent Change | | Nine Months Ended September 30, | Percent Change |
| 2017 | 2016 | Percent Change | 2017 | 2016 | Percent Change | 2018 | | 2017 | | | 2018 | | 2017 |
Client Metrics: | | | | | |
Client Metrics | | | | | | | | | | | |
Net new client assets (in billions)(1) | $ | 51.6 |
| $ | 30.0 |
| 72 | % | $ | 155.0 |
| $ | 88.6 |
| 75 | % | $ | 53.5 |
| | $ | 51.6 |
| | 4 | % | | $ | 78.6 |
| | $ | 155.0 |
| (49 | )% |
Core net new client assets (in billions) | $ | 51.6 |
| $ | 30.0 |
| 72 | % | $ | 136.7 |
| $ | 88.6 |
| 54 | % | $ | 53.5 |
| | $ | 51.6 |
| | 4 | % | | $ | 172.5 |
| | $ | 136.7 |
| 26 | % |
Client assets (in billions, at quarter end) | $ | 3,181.2 |
| $ | 2,725.3 |
| 17 | % | | | | $ | 3,563.7 |
| | $ | 3,181.2 |
| | 12 | % | | | | |
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Average client assets (in billions) | $ | 3,107.8 |
| $ | 2,699.5 |
| 15 | % | $ | 2,986.3 |
| $ | 2,576.8 |
| 16 | % | $ | 3,508.1 |
| | $ | 3,107.8 |
| | 13 | % | | $ | 3,420.2 |
| | $ | 2,986.3 |
| 15 | % |
New brokerage accounts (in thousands) | 336 |
| 264 |
| 27 | % | 1,055 |
| 800 |
| 32 | % | 369 |
| | 336 |
| | 10 | % | | 1,196 |
| | 1,055 |
| 13 | % |
Active brokerage accounts (in thousands, at quarter end) | 10,565 |
| 10,046 |
| 5 | % | | | 11,423 |
| | 10,565 |
| | 8 | % | | | | | |
Assets receiving ongoing advisory services | | | | | |
(in billions, at quarter end) | $ | 1,613.6 |
| $ | 1,368.8 |
| 18 | % | | | |
Assets receiving ongoing advisory services (in billions, at quarter end) | | $ | 1,851.9 |
| | $ | 1,613.6 |
| | 15 | % | | | | | |
Client cash as a percentage of client assets (at quarter end) | 11.1 | % | 12.5 | % | |
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| 10.3 | % | | 11.1 | % | | |
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Company Financial Metrics: | |
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Net revenues | $ | 2,165 |
| $ | 1,914 |
| 13 | % | $ | 6,376 |
| $ | 5,506 |
| 16 | % | |
Expenses excluding interest | 1,220 |
| 1,120 |
| 9 | % | 3,679 |
| 3,337 |
| 10 | % | |
Company Financial Metrics | | |
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Total net revenues | | $ | 2,579 |
| | $ | 2,165 |
| | 19 | % | | $ | 7,463 |
| | $ | 6,376 |
| 17 | % |
Total expenses excluding interest | | 1,360 |
| | 1,220 |
| | 11 | % | | 4,111 |
| | 3,679 |
| 12 | % |
Income before taxes on income | 945 |
| 794 |
| 19 | % | 2,697 |
| 2,169 |
| 24 | % | 1,219 |
| | 945 |
| | 29 | % | | 3,352 |
| | 2,697 |
| 24 | % |
Taxes on income | 327 |
| 291 |
| 12 | % | 940 |
| 802 |
| 17 | % | 296 |
| | 327 |
| | (9 | )% | | 780 |
| | 940 |
| (17 | )% |
Net income | 618 |
| 503 |
| 23 | % | 1,757 |
| 1,367 |
| 29 | % | 923 |
| | 618 |
| | 49 | % | | 2,572 |
| | 1,757 |
| 46 | % |
Preferred stock dividends and other | 43 |
| 33 |
| 30 | % | 127 |
| 99 |
| 28 | % | 38 |
| | 43 |
| | (12 | )% | | 128 |
| | 127 |
| 1 | % |
Net income available to common stockholders | $ | 575 |
| $ | 470 |
| 22 | % | $ | 1,630 |
| $ | 1,268 |
| 29 | % | $ | 885 |
| | $ | 575 |
| | 54 | % | | $ | 2,444 |
| | $ | 1,630 |
| 50 | % |
Earnings per common share – diluted | $ | .42 |
| $ | .35 |
| 20 | % | $ | 1.21 |
| $ | .95 |
| 27 | % | |
Earnings per common share — diluted | | $ | .65 |
| | $ | .42 |
| | 55 | % | | $ | 1.79 |
| | $ | 1.21 |
| 48 | % |
Net revenue growth from prior year | 13 | % | 20 | % | |
| 16 | % | 17 | % | | 19 | % | | 13 | % | | |
| | 17 | % | | 16 | % | |
Pre-tax profit margin | 43.6 | % | 41.5 | % | |
| 42.3 | % | 39.4 | % | | 47.3 | % | | 43.6 | % | | |
| | 44.9 | % | | 42.3 | % | |
Return on average common stockholders’ equity | 15 | % | 14 | % | |
| 15 | % | 13 | % | | 20 | % | | 15 | % | | |
| | 19 | % | | 15 | % | |
Expenses excluding interest as a percentage of average | | | | | |
client assets (annualized) | 0.16 | % | 0.17 | % | | 0.16 | % | 0.17 | % | | |
Expenses excluding interest as a percentage of average client assets (annualized) | | 0.15 | % | | 0.16 | % | | | | 0.16 | % | | 0.16 | % | |
Consolidated Tier 1 Leverage Ratio (at quarter end) | 7.7 | % | 7.1 | % | | | | 7.5 | % | | 7.7 | % | | | | | | | |
Management believes that the Company’s third quarter results demonstrate its financial model working as intended: driving robust business growth by winning with clients, generating strong revenue growth through multiple sources, and delivering outstanding financial results through sustained expense discipline.(1) The first nine months of 2018 includes outflows of $93.9 billion from certain mutual fund clearing services clients. The first nine months of 2017 includes inflows of $18.3 billion from certain mutual fund clearing services clients.
ClientsNet income grew 49% and 46% for the third quarter and first nine months of 2018, respectively, compared to the same periods in 2017, driven primarily by business momentum, a generally favorable economic environment, and lower corporate income taxes. Total net revenues rose 19% and 17% in the third quarter and first nine months of 2018, respectively, compared to the same periods in 2017, primarily due to higher net interest revenue as a result of higher interest rates and larger client cash sweep balances. Total expenses excluding interest grew 11% and 12% during the third quarter and first nine months of 2018, respectively, compared to the same periods in 2017, reflecting hiring to support the Company’s expanding client base and ongoing investments for driving growth and efficiency. Pre-tax income increased 29% and 24% in the third quarter and first nine months of 2018, respectively, compared to the same periods in 2017, delivering a 44.9% pre-tax profit margin for the first nine months of 2018.
Taxes on income decreased 9% and 17% for the third quarter and first nine months of 2018, compared to the same periods in 2017, resulting in effective tax rates of 24.3% and 23.3% for the third quarter and first nine months of 2018, respectively. The reduction in taxes on income was due to the Tax Act of 2017, which lowered the federal corporate income tax rate from 35% to 21% effective January 1, 2018.
During the third quarter of 2018, clients opened 336,000369,000 new brokerage accounts, during the quarter, bringing totalhelping to bring active brokerage accounts to 10.611.4 million at September 30, 2017. At the same time, core2018. Core net new assets gathered during the third quarter of 20172018 were $51.6$53.5 billion, compared to $30.0$51.6 billion for the same period a year ago. Total core net new assets for the nine months ended September 30, 2017 were $136.7 billion, contributing to total client assets reaching $3.18 trillion at quarter-end.
Strong client growth and an improved economic environment helped lift net interest revenue and asset management and administration fees. These increases supported overall net revenue growth of 13% and 16%, respectively, forClient engagement remained strong during the third quarter and first nine months of 2017 when compared to2018, with daily average revenue trades rising 22% from the same periodsperiod in the prior year.
By managing overall expense growth to 9% and 10%, respectively, for the third quarter and first nine months of 2017 when compared to the prior year, the Company was able to achieve pre-tax profit margins of 43.6% and 42.3% for the third quarter2017.
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)
During the third quarter of 2018, we effectively managed our balance sheet to support both growth and first nine monthssolid financial performance. The consolidated balance sheet reached $272 billion of 2017 – increases of 210assets at September 30, 2018, a $10 billion quarterly increase, largely driven by bank sweep transfers and 290 basis points, respectively, when comparedclient activity. We transferred balances totaling $23 billion from sweep money market funds to the same periodsbank sweep in the prior year. The Company deliveredquarter, bringing our 2018 transfers to $68 billion and leaving $33 billion remaining in sweep money market funds at September 30, 2018. In July 2018, the Board of Directors declared a 15%30% increase in the quarterly cash dividend to $.13 per common share. We finished the quarter with a Tier 1 Leverage Ratio of 7.5%, and we lifted our return on average common stockholders’ equity in bothto 20% and 19% for the third quarter and first nine months of 2018, respectively, compared to 15% for the same periods in 2017.
Subsequent EventEvents
On October 25, 2018, CSC’s Board of Directors terminated the existing two share repurchase authorizations and replaced them with a new authorization to repurchase up to a total of $1.0 billion of common stock.
On October 31, 2017,2018, CSC issued $500 million aggregate principal amount of Senior Notes that mature in 2024 and $600 million aggregate principal amount of Senior Notes that mature in 2029 under its universal shelf registration statement on file with the Company issued and sold 500,000 depositary shares, each representing a 1/100th ownership interest in a share of fixed-to-floating rate non-cumulative perpetual preferred stock, Series F, $0.01 par value, with a liquidation preference of $100,000 per share (equivalent to $1,000 per depositary share).SEC. The Series F Preferred Stock hasSenior Notes due 2024 have a fixed dividendinterest rate of 5.00% through November 30, 2027,3.550% with interest payable semi-annually, and thereaftersemi-annually. The Senior Notes due 2029 have a floatingfixed interest rate of three-month LIBOR plus a fixed spread of 2.575%,4.000% with interest payable quarterly. The net proceeds received from the sale were $492 million after deducting related expensessemi-annually.
Current Regulatory Environment and fees.Other Developments
Also onOn October 31, 2017,2018, the Company announced that it will redeem on December 1, 2017, allBoard of Governors of the outstanding sharesFederal Reserve System (Federal Reserve) issued a notice of its 6.00% non-cumulative perpetual preferred stock, Series B,proposed rulemaking and the corresponding depositary shares.Federal Reserve, the Office of the Comptroller of Currency (OCC), and the Federal Deposit Insurance Corporation (FDIC) jointly issued another notice of proposed rulemaking. The redemption willtwo proposals would establish a revised framework for applying enhanced prudential standards to large U.S. banking organizations, including savings and loan holding companies such as CSC, with four categories of standards that reflect the risks of banking organizations in each group. CSC would be funded within Category III based on having $250 billion – $700 billion in total assets. The comment period for both proposed rules ends on January 22, 2019 and we are currently evaluating the net proceeds fromimpact of the Series F offering.proposed rules.
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
Net revenues of $2.2 billion and $6.4 billion for the third quarter and first nine months of 2017, respectively, grew 13% and 16% from the prior year periods, reflecting significant improvements in both net interest revenue and asset management and administration fees. The following tables and sections present a comparison of the Company’s major sources of net revenues:
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Three Months Ended September 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 | | 7 | % | | $ | 519 |
| | 24 | % | | $ | 486 |
| | 25 | % |
Advice Solutions | | 12 | % | | 265 |
| | 12 | % | | 237 |
| | 12 | % |
Other | | 3 | % | | 77 |
| | 4 | % | | 75 |
| | 5 | % |
Asset management and administration fees | | 8 | % | | 861 |
| | 40 | % | | 798 |
| | 42 | % |
Net interest revenue | | | | | | | | | | |
|
Interest revenue | | 32 | % | | 1,176 |
| | 54 | % | | 891 |
| | 46 | % |
Interest expense | | 104 | % | | (94 | ) | | (4 | )% | | (46 | ) | | (2 | )% |
Net interest revenue | | 28 | % | | 1,082 |
| | 50 | % | | 845 |
| | 44 | % |
Trading revenue | | | | | | | | | | |
Commissions | | (25 | )% | | 136 |
| | 6 | % | | 181 |
| | 10 | % |
Principal transactions | | 67 | % | | 15 |
| | 1 | % | | 9 |
| | — |
|
Trading revenue | | (21 | )% | | 151 |
| | 7 | % | | 190 |
| | 10 | % |
Other | | (7 | )% | | 71 |
| | 3 | % | | 76 |
| | 4 | % |
Provision for loan losses | | (100 | )% | | — |
| | — |
| | 5 |
| | — |
|
Total net revenues | | 13 | % | | $ | 2,165 |
| | 100 | % | | $ | 1,914 |
| | 100 | % |
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Nine Months Ended September 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 | | 13 | % | | $ | 1,538 |
| | 24 | % | | $ | 1,362 |
| | 25 | % |
Advice solutions | | 13 | % | | 765 |
| | 12 | % | | 678 |
| | 12 | % |
Other | | 6 | % | | 226 |
| | 4 | % | | 214 |
| | 4 | % |
Asset management and administration fees | | 12 | % | | 2,529 |
| | 40 | % | | 2,254 |
| | 41 | % |
Net interest revenue | | | | | | | | | | |
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Interest revenue | | 32 | % | | 3,358 |
| | 52 | % | | 2,541 |
| | 46 | % |
Interest expense | | 77 | % | | (223 | ) | | (3 | )% | | (126 | ) | | (2 | )% |
Net interest revenue | | 30 | % | | 3,135 |
| | 49 | % | | 2,415 |
| | 44 | % |
Trading revenue | | | | | | | | | | |
Commissions | | (22 | )% | | 456 |
| | 7 | % | | 586 |
| | 10 | % |
Principal transactions | | 19 | % | | 44 |
| | 1 | % | | 37 |
| | 1 | % |
Trading revenue | | (20 | )% | | 500 |
| | 8 | % | | 623 |
| | 11 | % |
Other | | 1 | % | | 212 |
| | 3 | % | | 209 |
| | 4 | % |
Provision for loan losses | | (100 | )% | | — |
| | — |
| | 5 |
| | — |
|
Total net revenues | | 16 | % | | $ | 6,376 |
| | 100 | % | | $ | 5,506 |
| | 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 forwardcomparison of client assets for the Schwab money market funds, Schwab equity and bond funds and ETFs, and Mutual Fund OneSource®. The following funds generated 53% of the asset management and administration fees earned during the third quarter and 54% during the first nine months of 2017, compared to 54% and 53% in the same periods in 2016:revenue by category: |
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| | Schwab Money Market Funds | | Schwab Equity and Bond Funds and ETFs | | Mutual Fund OneSource® |
Three Months Ended September 30, | | 2017 | | 2016 | | 2017 | | 2016 | | 2017 | | 2016 |
Balance at beginning of period | | $ | 156,186 |
| | $ | 160,951 |
| | $ | 151,336 |
| | $ | 110,722 |
| | $ | 224,749 |
| | $ | 203,352 |
|
Net inflows (outflows) | | 2,753 |
| | (725 | ) | | 7,086 |
| | 3,297 |
| | (13,255 | ) | | (5,453 | ) |
Net market gains (losses) and other | | 235 |
| | 26 |
| | 6,676 |
| | 4,435 |
| | 9,684 |
| | 8,184 |
|
Balance at end of period | | $ | 159,174 |
| | $ | 160,252 |
| | $ | 165,098 |
| | $ | 118,454 |
| | $ | 221,178 |
| | $ | 206,083 |
|
|
| | | | | | | | | | | | | | | | | |
| | | | 2018 | | 2017 |
Three Months Ended September 30, | | Percent Change | | Amount | | % of Total Net Revenues | | Amount | | % of Total Net Revenues |
Net interest revenue | | | | | | | | | | |
Interest revenue | | 49 | % | | $ | 1,755 |
| | 68 | % | | $ | 1,176 |
| | 54 | % |
Interest expense | | 143 | % | | (228 | ) | | (9 | )% | | (94 | ) | | (4 | )% |
Net interest revenue | | 41 | % | | 1,527 |
| | 59 | % | | 1,082 |
| | 50 | % |
Asset management and administration fees | | | | | | | | | | |
Mutual funds and ETF service fees | | (16 | )% | | 435 |
| | 17 | % | | 519 |
| | 24 | % |
Advice solutions | | 11 | % | | 294 |
| | 11 | % | | 265 |
| | 12 | % |
Other | | 4 | % | | 80 |
| | 3 | % | | 77 |
| | 4 | % |
Asset management and administration fees | | (6 | )% | | 809 |
| | 31 | % | | 861 |
| | 40 | % |
Trading revenue | | | | | | | | | | |
Commissions | | 14 | % | | 155 |
| | 6 | % | | 136 |
| | 6 | % |
Principal transactions | | 40 | % | | 21 |
| | 1 | % | | 15 |
| | 1 | % |
Trading revenue | | 17 | % | | 176 |
| | 7 | % | | 151 |
| | 7 | % |
Other | | (6 | )% | | 67 |
| | 3 | % | | 71 |
| | 3 | % |
Total net revenues | | 19 | % | | $ | 2,579 |
| | 100 | % | | $ | 2,165 |
| | 100 | % |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Schwab Money Market Funds | | Schwab Equity and Bond Funds and ETFs | | Mutual Fund OneSource® |
Nine Months Ended September 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) | | (4,832 | ) | | (5,968 | ) | | 22,347 |
| | 8,951 |
| | (23,494 | ) | | (14,632 | ) |
Net market gains (losses) and other (1) | | 511 |
| | 72 |
| | 16,938 |
| | 7,391 |
| | 45,748 |
| | 13,061 |
|
Balance at end of period | | $ | 159,174 |
| | $ | 160,252 |
| | $ | 165,098 |
| | $ | 118,454 |
| | $ | 221,178 |
| | $ | 206,083 |
|
(1) Includes transfers from other third-party mutual funds to Mutual Fund OneSource® in the second quarter of 2017. |
| | | | | | | | | | | | | | | | | |
| | | | 2018 | | 2017 |
Nine Months Ended September 30, | | Percent Change | | Amount | | % of Total Net Revenues | | Amount | | % of Total Net Revenues |
Net interest revenue | | | | | | | | | | |
Interest revenue | | 42 | % | | $ | 4,766 |
| | 64 | % | | $ | 3,358 |
| | 52 | % |
Interest expense | | 155 | % | | (569 | ) | | (8 | )% | | (223 | ) | | (3 | )% |
Net interest revenue | | 34 | % | | 4,197 |
| | 56 | % | | 3,135 |
| | 49 | % |
Asset management and administration fees | | |
| | |
| | |
| | |
| | |
|
Mutual funds and ETF service fees | | (10 | )% | | 1,386 |
| | 19 | % | | 1,538 |
| | 24 | % |
Advice solutions | | 12 | % | | 859 |
| | 11 | % | | 765 |
| | 12 | % |
Other | | 1 | % | | 229 |
| | 3 | % | | 226 |
| | 4 | % |
Asset management and administration fees | | (2 | )% | | 2,474 |
| | 33 | % | | 2,529 |
| | 40 | % |
Trading revenue | | | | | | | | | | |
Commissions | | 10 | % | | 501 |
| | 7 | % | | 456 |
| | 7 | % |
Principal transactions | | 27 | % | | 56 |
| | 1 | % | | 44 |
| | 1 | % |
Trading revenue | | 11 | % | | 557 |
| | 8 | % | | 500 |
| | 8 | % |
Other | | 11 | % | | 235 |
| | 3 | % | | 212 |
| | 3 | % |
Total net revenues | | 17 | % | | $ | 7,463 |
| | 100 | % | | $ | 6,376 |
| | 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)
The following tables categorize asset management and administration fees, average client assets, and average fee yields by funds or revenue source:
|
| | | | | | | | | | | | | | | | | | | | | |
Three Months Ended September 30, | 2017 | | 2016 |
| Average Client Assets | | Revenue | | Average Fee | | Average Client Assets | | Revenue | | Average Fee |
Schwab money market funds before fee waivers | $ | 158,927 |
| | $ | 220 |
| | 0.55 | % | | $ | 161,904 |
| | $ | 239 |
| | 0.59 | % |
Fee waivers | | | (1 | ) | | | | | | (41 | ) | | |
Schwab money market funds | 158,927 |
| | 219 |
| | 0.55 | % | | 161,904 |
| | 198 |
| | 0.49 | % |
Schwab equity and bond funds and ETFs | 164,011 |
| | 56 |
| | 0.14 | % | | 121,378 |
| | 57 |
| | 0.19 | % |
Mutual Fund OneSource® | 219,076 |
| | 179 |
| | 0.32 | % | | 203,589 |
| | 175 |
| | 0.34 | % |
Other third-party mutual funds and ETFs (1) | 291,307 |
| | 65 |
| | 0.09 | % | | 263,995 |
| | 56 |
| | 0.08 | % |
Total mutual funds and ETFs (2) | $ | 833,321 |
| | 519 |
| | 0.25 | % | | $ | 750,866 |
| | 486 |
| | 0.26 | % |
Advice solutions (2) : | | | | | | | | | | | |
Fee-based | $ | 206,781 |
| | 265 |
| | 0.51 | % | | $ | 183,191 |
| | 237 |
| | 0.51 | % |
Intelligent Portfolios | 21,184 |
| | — |
| | — |
| | 8,249 |
| | — |
| | — |
|
Legacy Non-Fee | 19,022 |
| | — |
| | — |
| | 17,232 |
| | — |
| | — |
|
Total advice solutions | $ | 246,987 |
| | 265 |
| | 0.43 | % | | $ | 208,672 |
| | 237 |
| | 0.45 | % |
Other balance-based fees (3) | 424,280 |
| | 67 |
| | 0.06 | % | | 350,117 |
| | 62 |
| | 0.07 | % |
Other (4) | | | 10 |
| | | | | | 13 |
| | |
Total asset management and administration fees | | | $ | 861 |
| | | | | | $ | 798 |
| | |
|
| | | | | | | | | | | | | | | | | | | | | |
Nine Months Ended September 30, | 2017 | | 2016 |
| Average Client Assets | | Revenue | | Average Fee | | Average Client Assets | | Revenue | | Average Fee |
Schwab money market funds before fee waivers | $ | 160,230 |
| | $ | 675 |
| | 0.56 | % | | $ | 164,758 |
| | $ | 724 |
| | 0.59 | % |
Fee waivers | | | (10 | ) | | | | | | (193 | ) | | |
Schwab money market funds | 160,230 |
| | 665 |
| | 0.55 | % | | 164,758 |
| | 531 |
| | 0.43 | % |
Schwab equity and bond funds and ETFs | 151,579 |
| | 163 |
| | 0.14 | % | | 112,528 |
| | 160 |
| | 0.19 | % |
Mutual Fund OneSource ® | 214,058 |
| | 528 |
| | 0.33 | % | | 199,758 |
| | 508 |
| | 0.34 | % |
Other third-party mutual funds and ETFs (1) | 278,479 |
| | 182 |
| | 0.09 | % | | 251,211 |
| | 163 |
| | 0.09 | % |
Total mutual funds and ETFs (2) | $ | 804,346 |
| | 1,538 |
| | 0.26 | % | | $ | 728,255 |
| | 1,362 |
| | 0.25 | % |
Advice solutions (2) : | | | | | | | | | | | |
Fee-based | $ | 199,468 |
| | 765 |
| | 0.51 | % | | $ | 175,210 |
| | 678 |
| | 0.52 | % |
Intelligent Portfolios | 17,740 |
| | — |
| | — |
| | 6,662 |
| | — |
| | — |
|
Legacy Non-Fee | 18,267 |
| | — |
| | — |
| | 16,901 |
| | — |
| | — |
|
Total advice solutions | $ | 235,475 |
| | 765 |
| | 0.43 | % | | $ | 198,773 |
| | 678 |
| | 0.46 | % |
Other balance-based fees (3) | 406,442 |
| | 192 |
| | 0.06 | % | | 335,555 |
| | 176 |
| | 0.07 | % |
Other (4) | | | 34 |
| | | | | | 38 |
| | |
Total asset management and administration fees | | | $ | 2,529 |
| | | | | | $ | 2,254 |
| | |
(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 $63 million, or 8%, and $275 million, or 12% in the third quarter and first nine months of 2017 compared to the same periods in 2016, as a result of further improvement in net money fund revenue from rising rates and growing balances in advised solutions, mutual funds, and ETFs.
THE CHARLES SCHWAB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)
Net Interest Revenue
The following tables present net interest revenue information corresponding to interest-earning assets and funding sources on the condensed consolidated balance sheets: | | | | | | | | | | | | | | | | 2018 | | 2017 |
Three Months Ended September 30, | | 2017 | | 2016 | | Average Balance | | Interest Revenue/ Expense | | Average Yield/ Rate | | Average Balance | | Interest Revenue/ Expense | | Average Yield/ Rate |
| | Average Balance | | Interest Revenue/ Expense | | Average Yield/ Rate | | Average Balance | | Interest Revenue/ Expense | | Average Yield/ Rate | |
Interest-earning assets: | | | | | | | | | | | | | |
Interest-earning assets | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 10,498 |
| | $ | 33 |
| | 1.25 | % | | $ | 12,875 |
| | $ | 17 |
| | 0.53 | % | | $ | 18,623 |
| | $ | 94 |
| | 1.98 | % | | $ | 10,498 |
| | $ | 33 |
| | 1.25 | % |
Cash and investments segregated | | 17,355 |
| | 44 |
| | 1.01 | % | | 19,941 |
| | 24 |
| | 0.48 | % | | 10,253 |
| | 51 |
| | 1.94 | % | | 17,355 |
| | 44 |
| | 1.01 | % |
Broker-related receivables (1) | | 459 |
| | 1 |
| | 0.96 | % | | 667 |
| | — |
| | 0.31 | % | | 307 |
| | 1 |
| | 1.94 | % | | 459 |
| | 1 |
| | 0.96 | % |
Receivables from brokerage clients | | 16,498 |
| | 151 |
| | 3.63 | % | | 14,940 |
| | 123 |
| | 3.28 | % | | 20,224 |
| | 217 |
| | 4.19 | % | | 16,498 |
| | 151 |
| | 3.63 | % |
Available for sale securities (2)(1) | | 45,906 |
| | 187 |
| | 1.62 | % | | 74,064 |
| | 227 |
| | 1.22 | % | | 55,283 |
| | 328 |
| | 2.34 | % | | 45,906 |
| | 187 |
| | 1.62 | % |
Held to maturity securities | | 107,557 |
| | 606 |
| | 2.24 | % | | 57,669 |
| | 349 |
| | 2.41 | % | | 137,065 |
| | 887 |
| | 2.57 | % | | 107,557 |
| | 606 |
| | 2.24 | % |
Bank loans | | 16,058 |
| | 122 |
| | 3.01 | % | | 14,739 |
| | 100 |
| | 2.70 | % | | 16,579 |
| | 142 |
| | 3.43 | % | | 16,058 |
| | 122 |
| | 3.01 | % |
Total interest-earning assets | | 214,331 |
| | 1,144 |
| | 2.12 | % | | 194,895 |
| | 840 |
| | 1.71 | % | | 258,334 |
| | 1,720 |
| | 2.63 | % | | 214,331 |
| | 1,144 |
| | 2.12 | % |
Other interest revenue | | | | 32 |
| | | | | | 51 |
| | | | | | 35 |
| | | | | | 32 |
| | |
Total interest-earning assets | | $ | 214,331 |
| | $ | 1,176 |
| | 2.18 | % | | $ | 194,895 |
| | $ | 891 |
| | 1.82 | % | | $ | 258,334 |
| | $ | 1,755 |
| | 2.69 | % | | $ | 214,331 |
| | $ | 1,176 |
| | 2.18 | % |
Funding sources: | | | | | | | | | | | | | |
Funding sources | | | | | | | | | | | | | |
Bank deposits | | $ | 163,039 |
| | $ | 49 |
| | 0.12 | % | | $ | 143,578 |
| | $ | 10 |
| | 0.03 | % | | $ | 208,666 |
| | $ | 158 |
| | 0.30 | % | | $ | 163,039 |
| | $ | 49 |
| | 0.12 | % |
Payables to brokerage clients | | 24,833 |
| | 6 |
| | 0.10 | % | | 26,204 |
| | 1 |
| | 0.01 | % | | 20,595 |
| | 16 |
| | 0.31 | % | | 24,833 |
| | 6 |
| | 0.10 | % |
Short-term borrowings | | 1,695 |
| | 6 |
| | 1.40 | % | | 2,952 |
| | 4 |
| | 0.54 | % | | — |
| | — |
| | — |
| | 1,695 |
| | 6 |
| | 1.40 | % |
Long-term debt | | 3,436 |
| | 30 |
| | 3.46 | % | | 2,876 |
| | 26 |
| | 3.60 | % | | 5,790 |
| | 51 |
| | 3.52 | % | | 3,436 |
| | 30 |
| | 3.46 | % |
Total interest-bearing liabilities | | 193,003 |
| | 91 |
| | 0.19 | % | | 175,610 |
| | 41 |
| | 0.09 | % | | 235,051 |
| | 225 |
| | 0.38 | % | | 193,003 |
| | 91 |
| | 0.19 | % |
Non-interest-bearing funding sources | | 21,328 |
| | | | | | 19,285 |
| | | | | | 23,283 |
| | | | | | 21,328 |
| | | | |
Other interest expense | | | | 3 |
| | | | | | 5 |
| | | | | | 3 |
| | | | | | 3 |
| | |
Total funding sources | | $ | 214,331 |
| | $ | 94 |
| | 0.18 | % | | $ | 194,895 |
| | $ | 46 |
| | 0.10 | % | | $ | 258,334 |
| | $ | 228 |
| | 0.36 | % | | $ | 214,331 |
| | $ | 94 |
| | 0.18 | % |
Net interest revenue | | | | $ | 1,082 |
| | 2.00 | % | | | | $ | 845 |
| | 1.72 | % | | | | $ | 1,527 |
| | 2.33 | % | | | | $ | 1,082 |
| | 2.00 | % |
| | | | | | | | | | | | | | | | 2018 | | 2017 |
Nine Months Ended September 30, | | 2017 | | 2016 | | Average Balance | | Interest Revenue/ Expense | | Average Yield/ Rate | | Average Balance | | Interest Revenue/ Expense | | Average Yield/ Rate |
| | Average Balance | | Interest Revenue/ Expense | | Average Yield/ Rate | | Average Balance | | Interest Revenue/ Expense | | Average Yield/ Rate | |
Interest-earning assets: | | | | | | | | | | | | | |
Interest-earning assets | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 9,375 |
| | $ | 72 |
| | 1.03 | % | | $ | 11,510 |
| | $ | 44 |
| | 0.51 | % | | $ | 16,164 |
| | $ | 217 |
| | 1.78 | % | | $ | 9,375 |
| | $ | 72 |
| | 1.03 | % |
Cash and investments segregated | | 19,609 |
| | 120 |
| | 0.82 | % | | 19,788 |
| | 65 |
| | 0.44 | % | | 12,002 |
| | 149 |
| | 1.64 | % | | 19,609 |
| | 120 |
| | 0.82 | % |
Broker-related receivables (1) | | 428 |
| | 2 |
| | 0.74 | % | | 579 |
| | — |
| | 0.21 | % | | 324 |
| | 4 |
| | 1.62 | % | | 428 |
| | 2 |
| | 0.74 | % |
Receivables from brokerage clients | | 15,861 |
| | 415 |
| | 3.50 | % | | 14,952 |
| | 372 |
| | 3.32 | % | | 19,629 |
| | 600 |
| | 4.03 | % | | 15,861 |
| | 415 |
| | 3.50 | % |
Available for sale securities (2)(1) | | 55,070 |
| | 615 |
| | 1.49 | % | | 71,230 |
| | 636 |
| | 1.19 | % | | 52,797 |
| | 859 |
| | 2.16 | % | | 55,070 |
| | 615 |
| | 1.49 | % |
Held to maturity securities | | 99,523 |
| | 1,691 |
| | 2.27 | % | | 53,791 |
| | 1,006 |
| | 2.50 | % | | 129,490 |
| | 2,420 |
| | 2.48 | % | | 99,523 |
| | 1,691 |
| | 2.27 | % |
Bank loans | | 15,764 |
| | 347 |
| | 2.94 | % | | 14,570 |
| | 297 |
| | 2.72 | % | | 16,522 |
| | 410 |
| | 3.31 | % | | 15,764 |
| | 347 |
| | 2.94 | % |
Total interest-earning assets | | 215,630 |
| | 3,262 |
| | 2.02 | % | | 186,420 |
| | 2,420 |
| | 1.73 | % | | 246,928 |
| | 4,659 |
| | 2.50 | % | | 215,630 |
| | 3,262 |
| | 2.02 | % |
Other interest revenue | | | | 96 |
| | | | | | 121 |
| | | | | | 107 |
| | | | | | 96 |
| | |
Total interest-earning assets | | $ | 215,630 |
| | $ | 3,358 |
| | 2.08 | % | | $ | 186,420 |
| | $ | 2,541 |
| | 1.82 | % | | $ | 246,928 |
| | $ | 4,766 |
| | 2.56 | % | | $ | 215,630 |
| | $ | 3,358 |
| | 2.08 | % |
Funding sources: | | | | | | | | | | | | | |
Funding sources | | | | | | | | | | | | | |
Bank deposits | | $ | 163,475 |
| | $ | 98 |
| | 0.08 | % | | $ | 137,093 |
| | $ | 26 |
| | 0.03 | % | | $ | 193,010 |
| | $ | 339 |
| | 0.23 | % | | $ | 163,475 |
| | $ | 98 |
| | 0.08 | % |
Payables to brokerage clients | | 26,198 |
| | 11 |
| | 0.06 | % | | 26,079 |
| | 2 |
| | 0.01 | % | | 21,591 |
| | 37 |
| | 0.23 | % | | 26,198 |
| | 11 |
| | 0.06 | % |
Short-term borrowings | | 1,475 |
| | 11 |
| | 1.00 | % | | 1,674 |
| | 6 |
| | 0.48 | % | | 4,488 |
| | 54 |
| | 1.59 | % | | 1,475 |
| | 11 |
| | 1.00 | % |
Long-term debt | | 3,349 |
| | 89 |
| | 3.55 | % | | 2,876 |
| | 78 |
| | 3.62 | % | | 5,053 |
| | 131 |
| | 3.46 | % | | 3,349 |
| | 89 |
| | 3.55 | % |
Total interest-bearing liabilities | | 194,497 |
| | 209 |
| | 0.14 | % | | 167,722 |
| | 112 |
| | 0.09 | % | | 224,142 |
| | 561 |
| | 0.33 | % | | 194,497 |
| | 209 |
| | 0.14 | % |
Non-interest-bearing funding sources | | 21,133 |
| | | | | | 18,698 |
| | | | | | 22,786 |
| | | | | | 21,133 |
| | | | |
Other interest expense | | | | 14 |
| | | | | | 14 |
| | | | | | 8 |
| | | | | | 14 |
| | |
Total funding sources | | $ | 215,630 |
| | $ | 223 |
| | 0.14 | % | | $ | 186,420 |
| | $ | 126 |
| | 0.09 | % | | $ | 246,928 |
| | $ | 569 |
| | 0.31 | % | | $ | 215,630 |
| | $ | 223 |
| | 0.14 | % |
Net interest revenue | | | | $ | 3,135 |
| | 1.94 | % | | | | $ | 2,415 |
| | 1.73 | % | | | | $ | 4,197 |
| | 2.25 | % | | | | $ | 3,135 |
| | 1.94 | % |
(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.
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 increased $237$445 million, or 28%41%, and $720 million,$1.1 billion, or 30%34%, in the third quarter and first nine months of 20172018, respectively, compared to the same periods in 20162017, primarily due to higher interest rates and growth in interest-earning assets driven by bank deposits.assets.
Higher short-term interest rates reflecting the Federal Reserve’s March and June 2017 and December 2016 interest rate hikes, coupled with growth in interest-earning assets, have resulted in a 28 and 21 basis point improvement inOur net interest marginsmargin improved to 2.00%2.33% and 1.94%2.25% during the third quarter and first nine months of 2018, respectively, up from 2.00% and 1.94% during the same periods in 2017, primarily as a result of the Federal Reserve’s 2017 and March, June, and September 2018 interest rate increases, partially offset by higher interest rates paid on bank deposits and other interest-bearing liabilities.
During the third quarter and the first nine months of 2018, average interest earning assets grew 21% and 15%, respectively, compared to the same periods in 2016.
Compared to the prior year, the Company has grown2017. These increases reflect higher bank deposits through a combination of:
Gathering additional assetsdue to transfers from newsweep money market funds to bank sweep balances, as well as other client-related deposit inflows and current clients;
Transferring uninvested cash balances in certainhigher borrowings, partially offset by 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 aspurchases of June 2016.
For the nine months ended September 30, 2017, net interest revenue represented 49% of total net revenues, growing from 44% in the same period in the prior year.
In March 2017, the Company transferred $24.7 billion 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.
Trading Revenue
The following table presents trading revenue and the related drivers: |
| | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2017 | | 2016 | | Percent Change | | 2017 | | 2016 | | Percent Change |
Daily average revenue trades (in thousands) | | 312 |
| | 268 |
| | 16 | % | | 313 |
| | 291 |
| | 8 | % |
Clients’ daily average trades (in thousands) | | 633 |
| | 543 |
| | 17 | % | | 602 |
| | 558 |
| | 8 | % |
Number of trading days | | 62.5 |
| | 64.0 |
| | (2 | )% | | 187.5 |
| | 189.0 |
| | (1 | )% |
Average revenue per revenue trade | | $ | 7.74 |
| | $ | 11.17 |
| | (31 | )% | | $ | 8.52 |
| | $ | 11.30 |
| | (25 | )% |
Trading revenue | | $ | 151 |
| | $ | 190 |
| | (21 | )% | | $ | 500 |
| | $ | 623 |
| | (20 | )% |
other assets. During the first quarter of 2017, the Company 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 $39 million, or 21%, and $123 million, or 20%, in the third quarter and first ninesix months of 2017, respectively, compared2018, Schwab issued senior notes and utilized Federal Home Loan Bank (FHLB) advances to the same periods in 2016, primarily due to these pricing reductions. These reductions in commission rates reflect both the Company’s belief that pricing should never be an obstacleprovide temporary funding for choosing Schwab and the Company’s commitment to share the benefitsadditional investments ahead of its scale with clients. With these changes, trading revenue represented 8% of total net revenues through the first nine months of 2017 compared to 11% for the same period in 2016.
Other Revenue
Other revenue decreased by $5 million, or 7%,deposit growth. There were no FHLB borrowings in the third quarter of 2017 compared to the third quarter of 2016 largely due to litigation proceeds of $14 million relating to non-agency mortgage backed securities recorded in the third quarter of 2016 which did not reoccur in 2017.2018.
Other revenue increased $3 million, or 1%, in the first nine months of 2017 compared to the same period in 2016, primarily due to sublease income from office space in San Francisco, an increase in order flow revenue, and an increase in realized gains on sales of AFS securities, largely offset by the absence of litigation proceeds in 2017.
Order flow revenue was $29 million and $26 million during the third quarters of 2017 and 2016 and $82 million and $78 million during the first nine months of 2017 and 2016, 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)
Expenses Excluding InterestAsset Management and Administration Fees
The following table shows a comparison of expenses excluding interest:tables present asset management and administration fees, average client assets, and average fee yields:
|
| | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | | | Nine Months Ended September 30, | | |
| | 2017 | | 2016 | | Percent Change | | 2017 | | 2016 | | Percent Change |
Compensation and benefits | | | | | | | | | | | | |
Salaries and wages | | $ | 372 |
| | $ | 343 |
| | 8 | % | | $ | 1,110 |
| | $ | 1,018 |
| | 9 | % |
Incentive compensation | | 187 |
| | 170 |
| | 10 | % | | 580 |
| | 509 |
| | 14 | % |
Employee benefits and other | | 103 |
| | 96 |
| | 7 | % | | 336 |
| | 310 |
| | 8 | % |
Total compensation and benefits | | $ | 662 |
| | $ | 609 |
| | 9 | % | | $ | 2,026 |
| | $ | 1,837 |
| | 10 | % |
Professional services | | 152 |
| | 131 |
| | 16 | % | | 429 |
| | 372 |
| | 15 | % |
Occupancy and equipment | | 111 |
| | 100 |
| | 11 | % | | 323 |
| | 299 |
| | 8 | % |
Advertising and market development | | 63 |
| | 64 |
| | (2 | )% | | 205 |
| | 204 |
| | — |
|
Communications | | 56 |
| | 57 |
| | (2 | )% | | 171 |
| | 179 |
| | (4 | )% |
Depreciation and amortization | | 69 |
| | 60 |
| | 15 | % | | 200 |
| | 173 |
| | 16 | % |
Other | | 107 |
| | 99 |
| | 8 | % | | 325 |
| | 273 |
| | 19 | % |
Total expenses excluding interest | | $ | 1,220 |
| | $ | 1,120 |
| | 9 | % | | $ | 3,679 |
| | $ | 3,337 |
| | 10 | % |
Expenses as a percentage of total net revenues: | | | | | | | | | | | | |
Compensation and benefits | | 31 | % | | 32 | % | |
| | 32 | % | | 33 | % | |
|
Advertising and market development | | 3 | % | | 3 | % | |
| | 3 | % | | 4 | % | |
|
Full-time equivalent employees (in thousands): | | | | | | | | | | | | |
At quarter end | | 17.3 |
| | 16.1 |
| | 7 | % | |
|
| |
|
| |
|
Average | | 17.1 |
| | 16.2 |
| | 6 | % | | 16.7 |
| | 15.9 |
| | 5 | % |
|
| | | | | | | | | | | | | | | | | | | | | |
Three Months Ended September 30, | 2018 | | 2017 |
Average Client Assets | | Revenue | | Average Fee | | Average Client Assets | | Revenue | | Average Fee |
Schwab money market funds before fee waivers | $ | 130,202 |
| | $ | 122 |
| | 0.37 | % | | $ | 158,927 |
| | $ | 220 |
| | 0.55 | % |
Fee waivers | | | — |
| | | | | | (1 | ) | | |
Schwab money market funds | 130,202 |
| | 122 |
| | 0.37 | % | | 158,927 |
| | 219 |
| | 0.55 | % |
Schwab equity and bond funds and ETFs | 219,137 |
| | 67 |
| | 0.12 | % | | 164,011 |
| | 56 |
| | 0.14 | % |
Mutual Fund OneSource® and other non-transaction fee funds | 209,560 |
| | 171 |
| | 0.32 | % | | 219,076 |
| | 179 |
| | 0.32 | % |
Other third-party mutual funds and ETFs (1) | 342,316 |
| | 75 |
| | 0.09 | % | | 291,307 |
| | 65 |
| | 0.09 | % |
Total mutual funds and ETFs (2) | $ | 901,215 |
| | 435 |
| | 0.19 | % | | $ | 833,321 |
| | 519 |
| | 0.25 | % |
Advice solutions (2) | | | | | | | | | | | |
Fee-based | $ | 234,338 |
| | 294 |
| | 0.50 | % | | $ | 206,854 |
| | 265 |
| | 0.51 | % |
Non-fee-based | 65,146 |
| | — |
| | — |
| | 50,758 |
| | — |
| | — |
|
Total advice solutions | $ | 299,484 |
| | 294 |
| | 0.39 | % | | $ | 257,612 |
| | 265 |
| | 0.41 | % |
Other balance-based fees (3) | 400,048 |
| | 63 |
| | 0.06 | % | | 424,280 |
| | 67 |
| | 0.06 | % |
Other (4) | | | 17 |
| | | | | | 10 |
| | |
Total asset management and administration fees | | | $ | 809 |
| | | | | | $ | 861 |
| | |
|
| | | | | | | | | | | | | | | | | | | | | |
Nine Months Ended September 30, | 2018 | | 2017 |
Average Client Assets | | Revenue | | Average Fee | | Average Client Assets | | Revenue | | Average Fee |
Schwab money market funds before fee waivers | $ | 142,177 |
| | $ | 451 |
| | 0.42 | % | | $ | 160,230 |
| | $ | 675 |
| | 0.56 | % |
Fee waivers | | | — |
| | | | | | (10 | ) | | |
Schwab money market funds | 142,177 |
| | 451 |
| | 0.42 | % | | 160,230 |
| | 665 |
| | 0.55 | % |
Schwab equity and bond funds and ETFs | 206,058 |
| | 195 |
| | 0.13 | % | | 151,579 |
| | 163 |
| | 0.14 | % |
Mutual Fund OneSource® and other non-transaction fee funds | 216,699 |
| | 524 |
| | 0.32 | % | | 214,058 |
| | 528 |
| | 0.33 | % |
Other third-party mutual funds and ETFs (1) | 329,033 |
| | 216 |
| | 0.09 | % | | 278,479 |
| | 182 |
| | 0.09 | % |
Total mutual funds and ETFs (2) | $ | 893,967 |
| | 1,386 |
| | 0.21 | % | | $ | 804,346 |
| | 1,538 |
| | 0.26 | % |
Advice solutions (2) | | | | | | | | | | | |
Fee-based | $ | 228,326 |
| | 859 |
| | 0.50 | % | | $ | 199,500 |
| | 765 |
| | 0.51 | % |
Non-fee-based | 62,377 |
| | — |
| | — |
| | 46,785 |
| | — |
| | — |
|
Total advice solutions | $ | 290,703 |
| | 859 |
| | 0.40 | % | | $ | 246,285 |
| | 765 |
| | 0.42 | % |
Other balance-based fees (3) | 404,596 |
| | 191 |
| | 0.06 | % | | 406,442 |
| | 192 |
| | 0.06 | % |
Other (4) | | | 38 |
| | | | | | 34 |
| | |
Total asset management and administration fees | | | $ | 2,474 |
| | | | | | $ | 2,529 |
| | |
(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 wages increasedmutual 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 decreased by $52 million, or 6%, and $55 million, or 2%, in the third quarter and first nine months of 20172018, respectively, compared to the same periods in 2016 primarily2017. The decreases were due to an increase in employee headcount to support the growth in the business and annual salary increases.
Incentive compensation increased in the third quarter and first nine months of 2017 compared to the same periods in 2016 primarily due to higher incentive plan costs related to increased net client asset flows and increased employee headcount.
Employee benefits and other expenses increased in the third quarter and first nine months 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 third quarter and first nine months of 2017 compared to the same periods in 2016 primarily due to higher spending on technology projects and an increase in asset management and administration related expenses resulting from growth in the Schwab Funds® and Schwab ETFs™.
Depreciation and amortization expenses grew in the third quarter and first nine months of 2017 compared to the same periods in 2016 primarily due to higher amortization of internally developed software as projects were completed and placed into production.
Other expenses increased in the third quarter and first nine months of 2017 compared to the same periods in 2016 primarily due to an increase in the Company’s Federal Deposit Insurance Corporation (FDIC) assessments. The FDIC assessments rose as a result of higher bank deposits and the effect of the 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, alower money market
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)
component of net income. Asfund revenue as a result of this change,transfers to bank sweep, client asset allocation choices, and our 2017 fee reductions. Part of the Company’s tax expensedeclines were offset by revenue from growing asset balances in advice solutions, equity and bond funds, and ETFs.
The following tables present a roll forward of client assets for 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 44% and 47% of the asset management and administration fees earned during the third quarter and first nine months of 2018, respectively, compared to 53% and 54% for the same periods in 2017:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Schwab Money Market Funds | | Schwab Equity and Bond Funds and ETFs | | Mutual Fund OneSource® and Other NTF funds |
Three Months Ended September 30, | | 2018 | | 2017 | | 2018 | | 2017 | | 2018 | | 2017 |
Balance at beginning of period | | $ | 134,166 |
| | $ | 156,186 |
| | $ | 201,361 |
| | $ | 151,336 |
| | $ | 212,513 |
| | $ | 224,749 |
|
Net inflows (outflows) | | (6,204 | ) | | 2,753 |
| | 6,596 |
| | 7,086 |
| | (7,126 | ) | | (13,255 | ) |
Net market gains (losses) and other | | 522 |
| | 235 |
| | 8,899 |
| | 6,676 |
| | 7,228 |
| | 9,684 |
|
Balance at end of period | | $ | 128,484 |
| | $ | 159,174 |
| | $ | 216,856 |
| | $ | 165,098 |
| | $ | 212,615 |
| | $ | 221,178 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Schwab Money Market Funds | | Schwab Equity and Bond Funds and ETFs | | Mutual Fund OneSource® and Other NTF funds |
Nine Months Ended September 30, | | 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) | | (36,645 | ) | | (4,832 | ) | | 24,867 |
| | 22,347 |
| | (25,403 | ) | | (23,494 | ) |
Net market gains (losses) and other (1) | | 1,479 |
| | 511 |
| | 10,381 |
| | 16,938 |
| | 12,816 |
| | 45,748 |
|
Balance at end of period | | $ | 128,484 |
| | $ | 159,174 |
| | $ | 216,856 |
| | $ | 165,098 |
| | $ | 212,615 |
| | $ | 221,178 |
|
(1) Includes net inflows from other third-party mutual funds to Mutual Fund OneSource® in the second quarter of 2017.
Trading Revenue
The following table presents trading revenue and the related drivers: |
| | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Percent Change | | Nine Months Ended September 30, | | Percent Change |
| 2018 | | 2017 | | | 2018 | | 2017 | |
Daily average revenue trades (DARTs) (in thousands) | 382 |
| | 312 |
| | 22 | % | | 406 |
| | 313 |
| | 30 | % |
Clients’ daily average trades (in thousands) | 683 |
| | 633 |
| | 8 | % | | 732 |
| | 602 |
| | 22 | % |
Number of trading days | 62.5 |
| | 62.5 |
| | — |
| | 187.5 |
| | 187.5 |
| | — |
|
Daily average revenue per revenue trade | $ | 7.27 |
| | $ | 7.74 |
| | (6 | )% | | $ | 7.27 |
| | $ | 8.52 |
| | (15 | )% |
Trading revenue | $ | 176 |
| | $ | 151 |
| | 17 | % | | $ | 557 |
| | $ | 500 |
| | 11 | % |
DART volumes increased 22% and 30% in the third quarter and first nine months of 2018, respectively, compared to the prior year. This led to an increase in trading revenue of $25 million, or 17%, and $57 million, or 11%, in the third quarter and first nine months of 2018, respectively, compared to the same periods in 2017, as the volume growth more than offset Schwab’s commission pricing reductions implemented in the first quarter of 2017. During that time, we announced two trading price reductions which lowered standard equity, ETF, and option trade commissions from $8.95 to $4.95 and lowered the per contract option fee from $.75 to $.65.
Other Revenue
Other revenue includes order flow revenue, other service fees, software fees from our portfolio management solutions, exchange processing fees, and non-recurring gains. Order flow revenue was reduced by approximately $11$33 million and $47$29 million during the third quarters of 2018 and 2017, respectively, and $104 million and $82 million during the first nine months of 2018 and 2017, respectively. These increases were primarily due to higher rates on certain types of orders and higher volume of trades.
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 September 30, | | Percent Change | | Nine Months Ended September 30, | | Percent Change |
| | 2018 | | 2017 | | | 2018 | | 2017 | |
Compensation and benefits | | | | | | | | | | | | |
Salaries and wages | | $ | 423 |
| | $ | 372 |
| | 14 | % | | $ | 1,253 |
| | $ | 1,110 |
| | 13 | % |
Incentive compensation | | 193 |
| | 187 |
| | 3 | % | | 615 |
| | 580 |
| | 6 | % |
Employee benefits and other | | 121 |
| | 103 |
| | 17 | % | | 384 |
| | 336 |
| | 14 | % |
Total compensation and benefits | | $ | 737 |
| | $ | 662 |
| | 11 | % | | $ | 2,252 |
| | $ | 2,026 |
| | 11 | % |
Professional services | | 164 |
| | 152 |
| | 8 | % | | 476 |
| | 429 |
| | 11 | % |
Occupancy and equipment | | 124 |
| | 111 |
| | 12 | % | | 368 |
| | 323 |
| | 14 | % |
Advertising and market development | | 70 |
| | 63 |
| | 11 | % | | 220 |
| | 205 |
| | 7 | % |
Communications | | 59 |
| | 56 |
| | 5 | % | | 179 |
| | 171 |
| | 5 | % |
Depreciation and amortization | | 78 |
| | 69 |
| | 13 | % | | 226 |
| | 200 |
| | 13 | % |
Regulatory fees and assessments | | 57 |
| | 43 |
| | 33 | % | | 158 |
| | 133 |
| | 19 | % |
Other | | 71 |
| | 64 |
| | 11 | % | | 232 |
| | 192 |
| | 21 | % |
Total expenses excluding interest | | $ | 1,360 |
| | $ | 1,220 |
| | 11 | % | | $ | 4,111 |
| | $ | 3,679 |
| | 12 | % |
Expenses as a percentage of total net revenues | | | | | | | | | | | | |
Compensation and benefits | | 29 | % | | 31 | % | | | | 30 | % | | 32 | % | | |
Advertising and market development | | 3 | % | | 3 | % | | | | 3 | % | | 3 | % | | |
Full-time equivalent employees (in thousands) | | | | | | | | | | | | |
At quarter end | | 19.1 |
| | 17.3 |
| | 10 | % | | | | | | |
Average | | 19.0 |
| | 17.1 |
| | 11 | % | | 18.4 |
| | 16.7 |
| | 10 | % |
Total compensation and benefits increased in the third quarter and first nine months of 2018 compared to the same periods in 2017, primarily due to an increase in employee headcount to support our expanding client base.
Professional services expense increased in the third quarter and first nine months of 2018 compared to the same periods in 2017, primarily due to higher spending on technology projects, as well as an increase in asset management and administration-related expenses resulting from growth in the Schwab Funds® and Schwab ETFs™.
Occupancy and equipment expense increased in the third quarter and first nine months of 2018 compared to the same periods in 2017, primarily due to an increase in software maintenance expenses and additional licenses to support growth in the business.
Depreciation and amortization expenses grew in the third quarter and first nine months of 2018 compared to the same periods in 2017, primarily due to higher amortization of internally developed software associated with continued investments in software and technology enhancements.
Regulatory fees and assessments increased in the third quarter and first nine months of 2018 compared to the same periods in 2017, primarily due to an increase in FDIC insurance assessments, which rose as a result of higher average assets.
Other expenses increased in the first nine months of 2018 compared to the same period in 2017, primarily due to a $15 million charge in the first quarter of 2018 associated with unsecured client margin losses in volatility-related products and other miscellaneous expense growth related to the expanding client base.
Capital expenditures were $156 million and $417 million in the third quarter and first nine months of 2018, respectively, compared with $118 million and $271 million in the third quarter and first nine months of 2017, respectively. Future effectsThe increases in the third quarter and year-to-date capital expenditures from the same periods in 2017 were due primarily to our office campus expansion in the U.S. and investments in technology projects. We anticipate capital expenditures for full-year 2018 will depend on the Company’s share price, restricted stock vesting, and the volumereach approximately 6-7% of equity incentive options exercised.total net revenues.
The Company’s effective income tax rateTHE CHARLES SCHWAB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)
Taxes on Income
Taxes on income before taxes was 34.6%were $296 million and 36.6%$327 million for the third quarters of 2018 and 2017, respectively, resulting in effective income tax rates on income before taxes of 24.3% and 2016, respectively,34.6%, respectively. Taxes on income were $780 million and 34.9% and 37.0%$940 million for the first nine months of 2018 and 2017, respectively, resulting in effective income tax rates on income before taxes of 23.3% and 2016, respectively, which reflects the equity compensation benefit34.9%, respectively. The decrease in the first nine months of 2017 as discussed above and state-relatedeffective tax benefits recognized duringrate was primarily due to the third quarter ofTax 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 the Company’s reportableour segments is presented in the following tables: | | | | Investor Services | | Advisor Services | | Total | | Investor Services | | Advisor Services | | Total |
Three Months Ended September 30, | | Percent Change | | 2017 | | 2016 | | Percent Change | | 2017 | | 2016 | | Percent Change | | 2017 | | 2016 | | Percent Change | | 2018 | | 2017 | | Percent Change | | 2018 | | 2017 | | Percent Change | | 2018 | | 2017 |
Net Revenues: | | | | | | | | | | | | | | | | | | | |
Net Revenues | | | | | | | | | | | | | | | | | | | |
Net interest revenue | | | 39 | % | | $ | 1,138 |
| | $ | 818 |
| | 47 | % | | $ | 389 |
| | $ | 264 |
| | 41 | % | | $ | 1,527 |
| | $ | 1,082 |
|
Asset management and administration fees | | 8 | % | | $ | 595 |
| | $ | 550 |
| | 7 | % | | $ | 266 |
| | $ | 248 |
| | 8 | % | | $ | 861 |
| | $ | 798 |
| | (5 | )% | | 565 |
| | 595 |
| | (8 | )% | | 244 |
| | 266 |
| | (6 | )% | | 809 |
| | 861 |
|
Net interest revenue | | 25 | % | | 818 |
| | 654 |
| | 38 | % | | 264 |
| | 191 |
| | 28 | % | | 1,082 |
| | 845 |
| |
Trading revenue | | (24 | )% | | 94 |
| | 123 |
| | (15 | )% | | 57 |
| | 67 |
| | (21 | )% | | 151 |
| | 190 |
| | 19 | % | | 112 |
| | 94 |
| | 12 | % | | 64 |
| | 57 |
| | 17 | % | | 176 |
| | 151 |
|
Other | | (4 | )% | | 54 |
| | 56 |
| | (15 | )% | | 17 |
| | 20 |
| | (7 | )% | | 71 |
| | 76 |
| | (2 | )% | | 53 |
| | 54 |
| | (18 | )% | | 14 |
| | 17 |
| | (6 | )% | | 67 |
| | 71 |
|
Provision for loan losses | | (100 | )% | | — |
| | 4 |
| | — |
| | — |
| | 1 |
| | (100 | )% | | — |
| | 5 |
| |
Total net revenues | | 13 | % | | 1,561 |
| | 1,387 |
| | 15 | % | | 604 |
| | 527 |
| | 13 | % | | 2,165 |
| | 1,914 |
| | 20 | % | | 1,868 |
| | 1,561 |
| | 18 | % | | 711 |
| | 604 |
| | 19 | % | | 2,579 |
| | 2,165 |
|
Expenses Excluding Interest | | 8 | % | | 918 |
| | 847 |
| | 11 | % | | 302 |
| | 273 |
| | 9 | % | | 1,220 |
| | 1,120 |
| | 11 | % | | 1,015 |
| | 918 |
| | 14 | % | | 345 |
| | 302 |
| | 11 | % | | 1,360 |
| | 1,220 |
|
Income before taxes on income | | 19 | % | | $ | 643 |
| | $ | 540 |
| | 19 | % | | $ | 302 |
| | $ | 254 |
| | 19 | % | | $ | 945 |
| | $ | 794 |
| | 33 | % | | $ | 853 |
| | $ | 643 |
| | 21 | % | | $ | 366 |
| | $ | 302 |
| | 29 | % | | $ | 1,219 |
| | $ | 945 |
|
| |
| | Investor Services | | Advisor Services | | Total | | Investor Services | | Advisor Services | | Total |
Nine Months Ended September 30, | | Percent Change | | 2017 | | 2016 | | Percent Change | | 2017 | | 2016 | | Percent Change | | 2017 | | 2016 | | Percent Change | | 2018 | | 2017 | | Percent Change | | 2018 | | 2017 | | Percent Change | | 2018 | | 2017 |
Net Revenues: | | | | | | | | | | | | | | | | | | | |
Net Revenues | | | | | | | | | | | | | | | | | | | |
Net interest revenue | | | 33 | % | | $ | 3,158 |
| | $ | 2,366 |
| | 35 | % | | $ | 1,039 |
| | $ | 769 |
| | 34 | % | | $ | 4,197 |
| | $ | 3,135 |
|
Asset management and administration fees | | 13 | % | | $ | 1,743 |
| | $ | 1,536 |
| | 9 | % | | $ | 786 |
| | $ | 718 |
| | 12 | % | | $ | 2,529 |
| | $ | 2,254 |
| | (1 | )% | | 1,727 |
| | 1,743 |
| | (5 | )% | | 747 |
| | 786 |
| | (2 | )% | | 2,474 |
| | 2,529 |
|
Net interest revenue | | 25 | % | | 2,366 |
| | 1,895 |
| | 48 | % | | 769 |
| | 520 |
| | 30 | % | | 3,135 |
| | 2,415 |
| |
Trading revenue | | (21 | )% | | 311 |
| | 395 |
| | (17 | )% | | 189 |
| | 228 |
| | (20 | )% | | 500 |
| | 623 |
| | 14 | % | | 354 |
| | 311 |
| | 7 | % | | 203 |
| | 189 |
| | 11 | % | | 557 |
| | 500 |
|
Other | | 4 | % | | 159 |
| | 153 |
| | (5 | )% | | 53 |
| | 56 |
| | 1 | % | | 212 |
| | 209 |
| | 14 | % | | 182 |
| | 159 |
| | — |
| | 53 |
| | 53 |
| | 11 | % | | 235 |
| | 212 |
|
Provision for loan losses | | — |
| | — |
| | 4 |
| | — |
| | — |
| | 1 |
| | — |
| | — |
| | 5 |
| |
Total net revenues | | 15 | % | | 4,579 |
| | 3,983 |
| | 18 | % | | 1,797 |
| | 1,523 |
| | 16 | % | | 6,376 |
| | 5,506 |
| | 18 | % | | 5,421 |
| | 4,579 |
| | 14 | % | | 2,042 |
| | 1,797 |
| | 17 | % | | 7,463 |
| | 6,376 |
|
Expenses Excluding Interest | | 10 | % | | 2,762 |
| | 2,518 |
| | 12 | % | | 917 |
| | 819 |
| | 10 | % | | 3,679 |
| | 3,337 |
| | 11 | % | | 3,069 |
| | 2,762 |
| | 14 | % | | 1,042 |
| | 917 |
| | 12 | % | | 4,111 |
| | 3,679 |
|
Income before taxes on income | | 24 | % | | $ | 1,817 |
| | $ | 1,465 |
| | 25 | % | | $ | 880 |
| | $ | 704 |
| | 24 | % | | $ | 2,697 |
| | $ | 2,169 |
| | 29 | % | | $ | 2,352 |
| | $ | 1,817 |
| | 14 | % | | $ | 1,000 |
| | $ | 880 |
| | 24 | % | | $ | 3,352 |
| | $ | 2,697 |
|
Investor Services
NetTotal net revenues rose by 13%20% and 18% in the third quarter and 15% for the first nine months of 20172018, respectively, compared to the same periods in 2016,2017, primarily due to increasesan increase in net interest revenue, andpartially offset by lower asset management and administration fees, partially offset by a decrease in trading revenue.fees. Net interest revenue increased primarily due to higher net interest margins and higher balances of interest-earning assets. Asset management and administration fees increased primarily due to higher client assets enrolled in advisory solutions and mutual funds, and higher net fees on money market fund assets. Trading revenue decreased primarily due to the reductions in commissions rates announced earlier in the year.lower money market fund revenue as a result of transfers to bank sweep, client asset allocation choices, and our 2017 fee reductions.
Expenses excluding interest increased by 8%11% in both the third quarter and 10% for the first nine months of 20172018 compared to the same periods in 2016,2017, primarily due to higher compensation and benefits, technology project spend, and asset management and administration related expenses.administration-related expenses to support our expanding client 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)
Advisor Services
NetTotal net revenues rose by 15%18% and 18%,14% in the third quarter and first nine months of 20172018, respectively, compared to the same periods in 2016,2017, primarily due to increasesan increase in net interest revenue, andpartially offset by lower 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 fees on 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.lower money market fund revenue as a result of transfers to bank sweep, client asset allocation choices, and our 2017 fee reductions.
Expenses excluding interest increased by 11% and 12%,14% in both the third quarter and first nine months of 20172018 compared to the same periods in 2016,2017, primarily due to higher compensation and benefits, technology project spend, and asset management and administration relatedadministration-related expenses and FDIC regulatory assessments.
to support our expanding client base.
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 based on established underwriting principles and guidelines and is monitored 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 $10.3 billion at September 30, 2017, with 44% 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.
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 Simulation
For the Company’sSchwab’s net interest revenue sensitivity analysis, the Company useswe use net interest revenue simulation modeling techniques to evaluate and manage the effect of changing interest rates. The simulation includes all interest-sensitive assets and liabilities. Key variables in the simulation include the repricing of financial instruments, prepayment, reinvestment, and product pricing assumptions. The Company uses constant balances and 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 nine months ended September 30, 2017,2018, 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 September 30, 20172018 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:
| |
| | September 30, 2017 | | December 31, 2016 | | September 30, 2018 | | December 31, 2017 |
Increase of 100 basis points | | 5.2 | % | | 6.5 | % | | 4.1 | % | | 3.3 | % |
Decrease of 100 basis points | | (8.3 | )% | | (9.8 | )% | | (4.7 | )% | | (6.2 | )% |
The change in net interest revenue sensitivities as of September 30, 20172018 reflects the increase in short-term interest rates. An increase in short-term interest rates positively impacts net interest revenue as yields on interest-earning assets rise faster than the cost of funding sources. A decline in interest rates could negatively impact the yield on the Company’s investment and loan portfolio to a greater degree than an 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 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 September 30, 2018: |
| | | | |
| | Available at |
Description | Borrower | September 30, 2017 (1) |
Committed, unsecured credit facility with various external banks (2) | CSC | $ | 750 |
|
Uncommitted, unsecured lines of credit with various external banks | CSC, Schwab | 1,129 |
|
Federal Reserve Bank discount window | Schwab Bank | 3,402 |
|
Federal Home Loan Bank secured credit facility | Schwab Bank | 14,875 |
|
Unsecured commercial paper | CSC | 750 |
|
|
| | | | | | | | | |
Description | Borrower | | Outstanding | | Available |
Committed, unsecured credit facility with various external banks | CSC | | $ | — |
| | $ | 750 |
|
Uncommitted, unsecured lines of credit with various external banks | CSC, CS&Co | | — |
| | 1,432 |
|
Federal Reserve Bank discount window (1) | CSB | | — |
| | 2,422 |
|
Federal Home Loan Bank secured credit facility (2) | Banking subsidiaries | | — |
| | 30,002 |
|
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 used the net proceeds from the sale of the Senior Notes for general corporate purposes.committed, unsecured credit facility.
In September 2017, CSC’s $250 million, 6.375% Medium-Term Notes, Series A (Medium-Term Notes), matured.
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 short-term borrowings:
|
| | | | | | | | | | |
September 30, 2018 | Par Outstanding | | Maturity | Weighted Average Interest Rate | Moody’s | Standard & Poor’s | Fitch |
Senior Notes | $ | 5,781 |
| | 2020 - 2028 | 3.31% | A2 | A | A |
Short-term borrowings | $ | — |
| | N/A | N/A | N/A | N/A | N/A |
N/A Not applicable.
New Debt Issuances
All debt issuances in 2018 were senior unsecured obligations with interest payable quarterly or semi-annually. Additional details are rated A2 by Moody’s, A by Standard & Poor’s, and A by Fitch. CSC’s preferred stockas follows:
|
| | | | | | |
Issuance Date | Issuance Amount | Maturity Date | Interest Rate | Interest Payable |
May 22, 2018 | $ | 600 |
| 5/21/2021 | Three-month LIBOR + 0.32% | Quarterly |
May 22, 2018 | $ | 600 |
| 5/21/2021 | 3.25% | Semi-annually |
May 22, 2018 | $ | 750 |
| 5/21/2025 | 3.85% | Semi-annually |
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 September 30, 2017,2018. Schwab expects consolidated balance sheet assets to remain above $250 billion in 2018, and as a result, would become subject to the Company was in compliance with the fully phased-in modified LCR rule. For additional information on thefull LCR rule see Item 1 – Business – Regulation in the 2016 Form 10‑K.2019.
CAPITAL MANAGEMENT
The Company seeks to manage capital to a level and composition sufficient to support execution of its business strategy, including anticipated balance sheet growth, providing financial support to its subsidiaries, and sustained access to the capital markets, while at the same time meeting its regulatory capital requirements and serving as a source of financial strength to Schwab Bank.
The Company’s primary sources of capital are funds generated by the operations of its subsidiaries and securities issuances by CSC in the capital markets. To ensure that it has a sufficient amount of capital to absorb unanticipated losses or declines in asset values, the Company has adopted a policy to remain well capitalized even in stressed scenarios. 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)
CAPITAL MANAGEMENT
Schwab seeks to manage capital to a level and composition sufficient to support execution of our business strategy, including anticipated balance sheet growth, providing financial support to our subsidiaries, and sustained access to the capital markets, while at the same time meeting our regulatory capital requirements, and serving as a source of financial strength to our banking subsidiaries. Schwab’s primary sources of capital are funds generated by the operations of subsidiaries and securities issuances by CSC in the capital markets. To ensure that Schwab has sufficient capital to absorb unanticipated losses or declines in asset values, we have adopted a policy to remain well capitalized even in stressed scenarios.
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 September 30, 2017,2018, CSC and Schwab BankCSB are considered well capitalized.
The following table details CSC’s consolidated and Schwab Bank’sCSB’s capital ratios as of September 30, 20172018 and December 31, 2016:2017:
| | | September 30, 2017 | | December 31, 2016 | September 30, 2018 | December 31, 2017 |
| CSC | | Schwab Bank | | CSC | | Schwab Bank | CSC | | CSB | | CSC | | CSB |
Total stockholders’ equity | $ | 18,027 |
| | $ | 12,769 |
| | $ | 16,421 |
| | $ | 11,726 |
| $ | 20,834 |
| | $ | 14,899 |
| | $ | 18,525 |
| | $ | 13,224 |
|
Less: | | | | | | | | | | | | | | |
Preferred Stock | 2,783 |
| | — |
| | 2,783 |
| | — |
| |
Preferred stock | | 2,793 |
| | — |
| | 2,793 |
| | — |
|
Common Equity Tier 1 Capital before regulatory adjustments | $ | 15,244 |
| | $ | 12,769 |
| | $ | 13,638 |
| | $ | 11,726 |
| $ | 18,041 |
| | $ | 14,899 |
| | $ | 15,732 |
| | $ | 13,224 |
|
Less: | | | | | | | | | | | | | | |
Goodwill, net of associated deferred tax liabilities | $ | 1,175 |
| | $ | 11 |
| | $ | 1,175 |
| | $ | 11 |
| $ | 1,191 |
| | $ | 13 |
| | $ | 1,191 |
| | $ | 13 |
|
Other intangible assets, net of associated deferred tax liabilities | 46 |
| | — |
| | 52 |
| | — |
| 127 |
| | — |
| | 61 |
| | — |
|
Deferred tax assets, net of valuation allowances and deferred tax liabilities | 1 |
| | — |
| | — |
| | — |
| 2 |
| | — |
| | 2 |
| | — |
|
AOCI adjustment (1) | (106 | ) | | (104 | ) | | (163 | ) | | (163 | ) | (304 | ) | | (278 | ) | | (152 | ) | | (144 | ) |
Common Equity Tier 1 Capital | $ | 14,128 |
| | $ | 12,862 |
| | $ | 12,574 |
| | $ | 11,878 |
| $ | 17,025 |
| | $ | 15,164 |
| | $ | 14,630 |
| | $ | 13,355 |
|
Tier 1 Capital | $ | 16,911 |
| | $ | 12,862 |
| | $ | 15,357 |
| | $ | 11,878 |
| $ | 19,818 |
| | $ | 15,164 |
| | $ | 17,423 |
| | $ | 13,355 |
|
Total Capital | $ | 16,939 |
| | $ | 12,889 |
| | $ | 15,384 |
| | $ | 11,904 |
| 19,846 |
| | 15,191 |
| | 17,452 |
| | 13,382 |
|
Risk-Weighted Assets | 72,037 |
| | 64,173 |
| | 68,179 |
| | 59,915 |
| 86,830 |
| | 75,224 |
| | 75,866 |
| | 66,519 |
|
Common Equity Tier 1 Capital/Risk-Weighted Assets | 19.6 | % | | 20.0 | % | | 18.4 | % | | 19.8 | % | 19.6 | % | | 20.2 | % | | 19.3 | % | | 20.1 | % |
Tier 1 Capital/Risk-Weighted Assets | 23.5 | % | | 20.0 | % | | 22.5 | % | | 19.8 | % | 22.8 | % | | 20.2 | % | | 23.0 | % | | 20.1 | % |
Total Capital/Risk-Weighted Assets | 23.5 | % | | 20.1 | % | | 22.6 | % | | 19.9 | % | 22.9 | % | | 20.2 | % | | 23.0 | % | | 20.1 | % |
Tier 1 Leverage Ratio | 7.7 | % | | 7.2 | % | | 7.2 | % | | 7.0 | % | 7.5 | % | | 7.1 | % | | 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 surpassesSchwab expects consolidated balance sheet assets to remain above $250 billion in consolidated assets, it can2018, and as a result, would no longer exclude AOCI from regulatory capital.capital beginning in 2019.
Schwab BankCSB 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 September 30, 2017, Schwab and optionsXpress2018, 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 July 25, 2018, the Board of Directors of the Company declared a three cent, or 30%, increase in the quarterly cash dividend to $.13 per common share.
Cash dividends paid and per share amounts for the first nine months of 20172018 and 20162017 are as follows:
| | | | | | | | | | | | 2018 | | 2017 |
Nine Months Ended September 30, | | 2017 | | 2016 | | Cash Paid | | Per Share Amount | | Cash Paid | | Per Share Amount |
| | Cash Paid | | Per Share Amount | | Cash Paid | | Per Share Amount | |
Common Stock | | $ | 323 |
| | $ | 0.24 |
| | $ | 266 |
| | $ | 0.20 |
| | $ | 448 |
| | $ | .33 |
| | $ | 323 |
| | $ | .24 |
|
Series A Preferred Stock (1) | | 28 |
| | 70.00 |
| | 28 |
| | 70.00 |
| | 28 |
| | 70.00 |
| | 28 |
| | 70.00 |
|
Series B Preferred Stock (2) | | 22 |
| | 45.00 |
| | 22 |
| | 45.00 |
| |
Series B Preferred Stock (2,5) | | | N/A |
| | N/A |
| | 22 |
| | 45.00 |
|
Series C Preferred Stock (2) | | 27 |
| | 45.00 |
| | 27 |
| | 45.00 |
| | 27 |
| | 45.00 |
| | 27 |
| | 45.00 |
|
Series D Preferred Stock (2,3) | | 33 |
| | 44.64 |
| | 22 |
| | 28.77 |
| |
Series D Preferred Stock (2) | | | 33 |
| | 44.64 |
| | 33 |
| | 44.64 |
|
Series E Preferred Stock (4)(3) | | 23 |
| | 3,867.01 |
| | N/A |
| | N/A |
| | 28 |
| | 4,625.00 |
| | 23 |
| | 3,867.01 |
|
Series F Preferred Stock (4) | | | 15 |
| | 2,930.56 |
| | 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 September 30, 2017, the Company2018, Schwab had exposure to non-sovereign financial and non-financial institutions in foreign countries, as well as agencies of $6.8 billion, withforeign governments. At September 30, 2018, the fair value of these holdings totaled $7.4 billion, with the top three exposures being to issuers and counterparties domiciled in SwedenFrance at $1.9$2.3 billion, FranceSweden at $1.8 billion, and Canada at $0.8 billion.
Additionally, at September 30, 2017, the Company held AFS and HTM securities with a total fair value of $100 million issued by agencies of foreign governments. These securities are explicitly guaranteed by governments of the issuing agencies.
The Company does not have unfunded commitments to counterparties in foreign countries, nor does it have exposure as a result of credit default protection purchased or sold separately as of September 30, 2017.
In addition to the direct holdings in foreign companies and securities issued by foreign government agencies, the CompanySchwab has indirect exposure to foreign countries through its investments in CSIM money market funds (collectively, the Funds) resulting from brokerage clearing activities. At September 30, 2017, the Company2018, Schwab had $67$21 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 September 30, 2017, the Company2018, Schwab had outstanding margin loans to foreign residents of $546$816 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.
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 nine months of 2017.2018.
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)
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 immaterial 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 condensed consolidated balance sheets and represent the net estimated amount due to or to be received from taxing jurisdictions either currently or deferred to future periods. Deferred taxes arise from differences between assets and liabilities measured for financial reporting purposes versus income tax reporting purposes. Deferred tax assets are recognized if, in management’s judgment, their realizability is determined to be more likely than not. Uncertain tax positions that meet the more likely than not recognition threshold are measured to determine the amount of benefit to recognize. An uncertain tax position is measured at the largest amount of benefit management believes is more likely than not to be realized upon settlement. In estimating accrued taxes, 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 September 30, | | Nine Months Ended September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
Net Revenues | | |
| | |
| | |
| | |
|
Asset management and administration fees (1) | | $ | 861 |
| | $ | 798 |
| | $ | 2,529 |
| | $ | 2,254 |
|
Interest revenue | | 1,176 |
| | 891 |
| | 3,358 |
| | 2,541 |
|
Interest expense | | (94 | ) | | (46 | ) | | (223 | ) | | (126 | ) |
Net interest revenue | | 1,082 |
| | 845 |
| | 3,135 |
| | 2,415 |
|
Trading revenue | | 151 |
| | 190 |
| | 500 |
| | 623 |
|
Other | | 71 |
| | 76 |
| | 212 |
| | 209 |
|
Provision for loan losses | | — |
| | 5 |
| | — |
| | 5 |
|
Total net revenues | | 2,165 |
| | 1,914 |
| | 6,376 |
| | 5,506 |
|
Expenses Excluding Interest | | | | | | | | |
Compensation and benefits | | 662 |
| | 609 |
| | 2,026 |
| | 1,837 |
|
Professional services | | 152 |
| | 131 |
| | 429 |
| | 372 |
|
Occupancy and equipment | | 111 |
| | 100 |
| | 323 |
| | 299 |
|
Advertising and market development | | 63 |
| | 64 |
| | 205 |
| | 204 |
|
Communications | | 56 |
| | 57 |
| | 171 |
| | 179 |
|
Depreciation and amortization | | 69 |
| | 60 |
| | 200 |
| | 173 |
|
Other | | 107 |
| | 99 |
| | 325 |
| | 273 |
|
Total expenses excluding interest | | 1,220 |
| | 1,120 |
| | 3,679 |
| | 3,337 |
|
Income before taxes on income | | 945 |
| | 794 |
| | 2,697 |
| | 2,169 |
|
Taxes on income (2) | | 327 |
| | 291 |
| | 940 |
| | 802 |
|
Net Income | | 618 |
| | 503 |
| | 1,757 |
| | 1,367 |
|
Preferred stock dividends and other (3) | | 43 |
| | 33 |
| | 127 |
| | 99 |
|
Net Income Available to Common Stockholders | | $ | 575 |
| | $ | 470 |
| | $ | 1,630 |
| | $ | 1,268 |
|
Weighted-Average Common Shares Outstanding: | | | | | | | | |
Basic | | 1,339 |
| | 1,324 |
| | 1,338 |
| | 1,322 |
|
Diluted | | 1,353 |
| | 1,334 |
| | 1,352 |
| | 1,332 |
|
Earnings Per Common Share: | | | | | | | | |
Basic | | $ | .43 |
| | $ | .36 |
| | $ | 1.22 |
| | $ | .96 |
|
Diluted | | $ | .42 |
| | $ | .35 |
| | $ | 1.21 |
| | $ | .95 |
|
Dividends Declared Per Common Share | | $ | .08 |
| | $ | .07 |
| | $ | .24 |
| | $ | .20 |
|
(1) Includes the effect of fee waivers of $1 million and $41 million during the third quarters of 2017 and 2016, respectively, and $10 million and $193 million during the first nine months 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. |
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2018 | | 2017 | | 2018 | | 2017 |
Net Revenues | | | | | | | | |
Interest revenue | | $ | 1,755 |
| | $ | 1,176 |
| | $ | 4,766 |
| | $ | 3,358 |
|
Interest expense | | (228 | ) | | (94 | ) | | (569 | ) | | (223 | ) |
Net interest revenue | | 1,527 |
| | 1,082 |
| | 4,197 |
| | 3,135 |
|
Asset management and administration fees | | 809 |
| | 861 |
| | 2,474 |
| | 2,529 |
|
Trading revenue | | 176 |
| | 151 |
| | 557 |
| | 500 |
|
Other | | 67 |
| | 71 |
| | 235 |
| | 212 |
|
Total net revenues | | 2,579 |
| | 2,165 |
| | 7,463 |
| | 6,376 |
|
Expenses Excluding Interest | | | | | | | | |
Compensation and benefits | | 737 |
| | 662 |
| | 2,252 |
| | 2,026 |
|
Professional services | | 164 |
| | 152 |
| | 476 |
| | 429 |
|
Occupancy and equipment | | 124 |
| | 111 |
| | 368 |
| | 323 |
|
Advertising and market development | | 70 |
| | 63 |
| | 220 |
| | 205 |
|
Communications | | 59 |
| | 56 |
| | 179 |
| | 171 |
|
Depreciation and amortization | | 78 |
| | 69 |
| | 226 |
| | 200 |
|
Regulatory fees and assessments | | 57 |
| | 43 |
| | 158 |
| | 133 |
|
Other | | 71 |
| | 64 |
| | 232 |
| | 192 |
|
Total expenses excluding interest | | 1,360 |
| | 1,220 |
| | 4,111 |
| | 3,679 |
|
Income before taxes on income | | 1,219 |
| | 945 |
| | 3,352 |
| | 2,697 |
|
Taxes on income | | 296 |
| | 327 |
| | 780 |
| | 940 |
|
Net Income | | 923 |
| | 618 |
| | 2,572 |
| | 1,757 |
|
Preferred stock dividends and other | | 38 |
| | 43 |
| | 128 |
| | 127 |
|
Net Income Available to Common Stockholders | | $ | 885 |
| | $ | 575 |
| | $ | 2,444 |
| | $ | 1,630 |
|
Weighted-Average Common Shares Outstanding: | | | | | | | | |
Basic | | 1,351 |
| | 1,339 |
| | 1,349 |
| | 1,338 |
|
Diluted | | 1,364 |
| | 1,353 |
| | 1,363 |
| | 1,352 |
|
Earnings Per Common Shares Outstanding: | | | | | | | | |
Basic | | $ | .66 |
| | $ | .43 |
| | $ | 1.81 |
| | $ | 1.22 |
|
Diluted | | $ | .65 |
| | $ | .42 |
| | $ | 1.79 |
| | $ | 1.21 |
|
Dividends Declared Per Common Share | | $ | .13 |
| | $ | .08 |
| | $ | .33 |
| | $ | .24 |
|
See Notes to Condensed Consolidated Financial Statements.
THE CHARLES SCHWAB CORPORATION
Condensed Consolidated Statements of Comprehensive Income
(In Millions)
(Unaudited)
| |
| | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 | | 2018 | | 2017 | | 2018 | | 2017 |
Net Income | | $ | 618 |
| | $ | 503 |
| | $ | 1,757 |
| | $ | 1,367 |
| |
Net income | | | $ | 923 |
| | $ | 618 |
| | $ | 2,572 |
| | $ | 1,757 |
|
Other comprehensive income (loss), before tax: | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Change in net unrealized gain (loss) on available for sale securities: | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Net unrealized gain (loss) | | — |
| | 77 |
| | 81 |
| | 266 |
| | (43 | ) | | — |
| | (184 | ) | | 81 |
|
Reclassification of net unrealized loss transferred to held to maturity | | — |
| | — |
| | 227 |
| | — |
| | — |
| | — |
| | — |
| | 227 |
|
Other reclassifications included in other revenue | | — |
| | — |
| | (7 | ) | | (3 | ) | | — |
| | — |
| | — |
| | (7 | ) |
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 | | 10 |
| | — |
| | 21 |
| | — |
| | 8 |
| | 10 |
| | 26 |
| | 21 |
|
Other | | — |
| | — |
| | (3 | ) | | 1 |
| | — |
| | — |
| | — |
| | (3 | ) |
Other comprehensive income (loss), before tax | | 10 |
| | 77 |
| | 92 |
| | 264 |
| | (35 | ) | | 10 |
| | (158 | ) | | 92 |
|
Income tax effect | | (4 | ) | | (29 | ) | | (35 | ) | | (99 | ) | | 9 |
| | (4 | ) | | 39 |
| | (35 | ) |
Other comprehensive income (loss), net of tax | | 6 |
| | 48 |
| | 57 |
| | 165 |
| | (26 | ) | | 6 |
| | (119 | ) | | 57 |
|
Comprehensive Income | | $ | 624 |
| | $ | 551 |
| | $ | 1,814 |
| | $ | 1,532 |
| | $ | 897 |
| | $ | 624 |
| | $ | 2,453 |
| | $ | 1,814 |
|
See Notes to Condensed Consolidated Financial Statements.
THE CHARLES SCHWAB CORPORATION
Condensed Consolidated Balance Sheets
(In Millions, Except Per Share and Share Amounts)
(Unaudited)
| | | September 30, 2017 | | December 31, 2016 | September 30, 2018 | | December 31, 2017 |
Assets | | | | | | |
Cash and cash equivalents | $ | 12,253 |
| | $ | 10,828 |
| $ | 21,830 |
| | $ | 14,217 |
|
Cash and investments segregated and on deposit for regulatory purposes | | | | |
(including resale agreements of $7,247 at September 30, 2017 and $9,547 | | | | |
at December 31, 2016) | 15,933 |
| | 22,174 |
| |
Cash and investments segregated and on deposit for regulatory purposes (including resale agreements of $4,424 at September 30, 2018 and $6,596 at December 31, 2017) | | 8,487 |
| | 15,139 |
|
Receivables from brokers, dealers, and clearing organizations | 665 |
| | 728 |
| 798 |
| | 649 |
|
Receivables from brokerage clients — net | 18,461 |
| | 17,155 |
| 22,411 |
| | 20,576 |
|
Other securities owned — at fair value | 427 |
| | 449 |
| 500 |
| | 539 |
|
Available for sale securities | 48,062 |
| | 77,365 |
| 57,558 |
| | 49,995 |
|
Held to maturity securities (fair value — $114,332 at September 30, 2017 and | | | | |
$74,444 at December 31, 2016) | 114,376 |
| | 75,203 |
| |
Held to maturity securities | | 138,952 |
| | 120,926 |
|
Bank loans — net | 16,232 |
| | 15,403 |
| 16,564 |
| | 16,478 |
|
Equipment, office facilities, and property — net | 1,392 |
| | 1,299 |
| 1,683 |
| | 1,471 |
|
Goodwill | 1,227 |
| | 1,227 |
| 1,227 |
| | 1,227 |
|
Intangible assets — net | 115 |
| | 144 |
| |
Other assets | 1,571 |
| | 1,408 |
| 2,092 |
| | 2,057 |
|
Total assets | $ | 230,714 |
| | $ | 223,383 |
| $ | 272,102 |
| | $ | 243,274 |
|
Liabilities and Stockholders’ Equity | | | |
| | | |
|
Bank deposits | $ | 165,263 |
| | $ | 163,454 |
| $ | 213,408 |
| | $ | 169,656 |
|
Payables to brokers, dealers, and clearing organizations | 5,427 |
| | 2,407 |
| 1,522 |
| | 1,287 |
|
Payables to brokerage clients | 31,480 |
| | 35,894 |
| 27,851 |
| | 31,243 |
|
Accrued expenses and other liabilities | 2,249 |
| | 2,331 |
| 2,697 |
| | 2,810 |
|
Short-term borrowings | 5,000 |
| | — |
| — |
| | 15,000 |
|
Long-term debt | 3,268 |
| | 2,876 |
| 5,790 |
| | 4,753 |
|
Total liabilities | 212,687 |
| | 206,962 |
| 251,268 |
| | 224,749 |
|
Stockholders’ equity: | | | |
| | | |
|
Preferred stock — $.01 par value per share; aggregate liquidation preference | | | | |
of $2,835 at September 30, 2017 and December 31, 2016 | 2,783 |
| | 2,783 |
| |
Common stock — 3 billion shares authorized; $.01 par value per share; 1,487,543,446 | | | | |
shares issued | 15 |
| | 15 |
| |
Preferred stock — $.01 par value per share; aggregate liquidation preference of $2,850 | | 2,793 |
| | 2,793 |
|
Common stock — 3 billion shares authorized; $.01 par value per share; 1,487,543,446 shares issued | | 15 |
| | 15 |
|
Additional paid-in capital | 4,365 |
| | 4,267 |
| 4,484 |
| | 4,353 |
|
Retained earnings | 13,963 |
| | 12,649 |
| 16,615 |
| | 14,408 |
|
Treasury stock, at cost — 147,513,629 shares at September 30, 2017 and | | | | |
154,793,560 shares at December 31, 2016 | (2,993 | ) | | (3,130 | ) | |
Treasury stock, at cost — 135,806,047 shares at September 30, 2018 and 142,210,890 shares at December 31, 2017 | | (2,769 | ) | | (2,892 | ) |
Accumulated other comprehensive income (loss) | (106 | ) | | (163 | ) | (304 | ) | | (152 | ) |
Total stockholders’ equity | 18,027 |
| | 16,421 |
| 20,834 |
| | 18,525 |
|
Total liabilities and stockholders’ equity | $ | 230,714 |
| | $ | 223,383 |
| $ | 272,102 |
| | $ | 243,274 |
|
See Notes to Condensed Consolidated Financial Statements.
THE CHARLES SCHWAB CORPORATION
Condensed Consolidated Statements of Stockholders’ Equity
(In Millions)
(Unaudited)
| | | | | | | | | | | | | | | | Accumulated Other Comprehensive Income (Loss) | | | | | | | | | | | | | | | | Accumulated Other Comprehensive Income (Loss) | | |
| | Preferred Stock | | Common stock | | Additional Paid-in Capital | | | | Treasury Stock, at cost | | | | Preferred Stock | | Common stock | | Additional Paid-in Capital | | Retained Earnings | | Treasury Stock, at cost | | Total |
| | Shares | | Amount | | Retained Earnings |
| | Total | Accumulated Other Comprehensive Income (Loss) | |
Balance at December 31, 2015 | | $ | 1,459 |
| | 1,488 |
| | $ | 15 |
| | $ | 4,152 |
| | $ | 11,253 |
| | $ | (3,343 | ) | | $ | (134 | ) | | |
Net income | | — |
| | — |
| | — |
| | — |
| | 1,367 |
| | — |
| | — |
| | |
Other comprehensive income (loss), net of tax | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 165 |
| | 165 |
| |
Issuance of preferred stock, net | | 733 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 733 |
| |
Dividends declared on preferred stock | | — |
| | — |
| | — |
| | — |
| | (84 | ) | | — |
| | — |
| | (84 | ) | |
Dividends declared on common stock | | — |
| | — |
| | — |
| | — |
| | (266 | ) | | — |
| | — |
| | (266 | ) | |
Stock option exercises and other | | — |
| | — |
| | — |
| | (16 | ) | | — |
| | 48 |
| | — |
| | 32 |
| |
Share-based compensation and | | | | | | | | | | | | | | | | | |
related tax effects | | — |
| | — |
| | — |
| | 104 |
| | — |
| | — |
| | — |
| | 104 |
| |
Other | | — |
| | — |
| | — |
| | 14 |
| | (9 | ) | | 12 |
| | — |
| | 17 |
| |
Balance at September 30, 2016 | | $ | 2,192 |
| | 1,488 |
| | $ | 15 |
| | $ | 4,254 |
| | $ | 12,261 |
| | $ | (3,283 | ) | | $ | 31 |
| | $ | 15,470 |
| |
| | | | | | | | | | | | | | | | | | 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 | | — |
| | — |
| | — |
| | — |
| | 1,757 |
| | — |
| | — |
| | 1,757 |
| | — |
| | — |
| | — |
| | — |
| | 1,757 |
| | — |
| | — | 1,757 |
|
Other comprehensive income (loss), net of tax | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 57 |
| | 57 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 57 |
| | 57 |
|
Dividends declared on preferred stock | | — |
| | — |
| | — |
| | — |
| | (120 | ) | | — |
| | — |
| | (120 | ) | | — |
| | — |
| | — |
| | — |
| | (120 | ) | | — |
| | — |
| | (120 | ) |
Dividends declared on common stock | | — |
| | — |
| | — |
| | — |
| | (323 | ) | | — |
| | — |
| | (323 | ) | | — |
| | — |
| | — |
| | — |
| | (323 | ) | | — |
| | — |
| | (323 | ) |
Stock option exercises and other | | — |
| | — |
| | — |
| | (30 | ) | | — |
| | 128 |
| | — |
| | 98 |
| | — |
| | — |
| | — |
| | (30 | ) | | — |
| | 128 |
| | — |
| | 98 |
|
Share-based compensation and | | | | | | | | | | | | | | | | | |
related tax effects | | — |
| | — |
| | — |
| | 105 |
| | — |
| | — |
| | — |
| | 105 |
| |
Share-based compensation and related tax effects | | | — |
| | — |
| | — |
| | 105 |
| | — |
| | — |
| | — |
| | 105 |
|
Other | | — |
| | — |
| | — |
| | 23 |
| | — |
| | 9 |
| | — |
| | 32 |
| | — |
| | — |
| | — |
| | 23 |
| | — |
| | 9 |
| | — |
| | 32 |
|
Balance at September 30, 2017 | | $ | 2,783 |
| | 1,488 |
| | $ | 15 |
| | $ | 4,365 |
| | $ | 13,963 |
| | $ | (2,993 | ) | | $ | (106 | ) | | $ | 18,027 |
| | $ | 2,783 |
| | 1,488 |
| | $ | 15 |
| | $ | 4,365 |
| | $ | 13,963 |
| | $ | (2,993 | ) | | $ | (106 | ) | | $ | 18,027 |
|
| | | | | | | | | | | | | | | | | |
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 | | | — |
| | — |
| | — |
| | — |
| | 2,572 |
| | — |
| | — |
| | 2,572 |
|
Other comprehensive income (loss), net of tax | | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (119 | ) | | (119 | ) |
Dividends declared on preferred stock | | | — |
| | — |
| | — |
| | — |
| | (117 | ) | | — |
| | — |
| | (117 | ) |
Dividends declared on common stock | | | — |
| | — |
| | — |
| | — |
| | (448 | ) | | — |
| | — |
| | (448 | ) |
Stock option exercises and other | | | — |
| | — |
| | — |
| | (8 | ) | | — |
| | 116 |
| | — |
| | 108 |
|
Share-based compensation and related tax effects | | | — |
| | — |
| | — |
| | 106 |
| | — |
| | — |
| | — |
| | 106 |
|
Other | | | — |
| | — |
| | — |
| | 33 |
| | — |
| | 7 |
| | — |
| | 40 |
|
Balance at September 30, 2018 | | | $ | 2,793 |
| | 1,488 |
| | $ | 15 |
| | $ | 4,484 |
| | $ | 16,615 |
| | $ | (2,769 | ) | | $ | (304 | ) | | $ | 20,834 |
|
See Notes to Condensed Consolidated Financial Statements.
THE CHARLES SCHWAB CORPORATION
Condensed Consolidated Statements of Cash Flows
(in Millions)
(Unaudited)
| | | | Nine Months Ended September 30, | | Nine Months Ended September 30, |
| | 2017 | | 2016 | | 2018 | | 2017 (1) |
Cash Flows from Operating Activities | | |
| | | | |
| | |
Net income | | $ | 1,757 |
| | $ | 1,367 |
| | $ | 2,572 |
| | $ | 1,757 |
|
Adjustments to reconcile net income to net cash provided by (used for) operating activities: | | |
| | | |
Provision for loan losses | | — |
| | (5 | ) | |
Adjustments to reconcile net income to net cash (used for) provided by operating activities: | | | |
| | |
Share-based compensation | | 111 |
| | 101 |
| | 113 |
| | 111 |
|
Depreciation and amortization | | 200 |
| | 173 |
| | 226 |
| | 200 |
|
Premium amortization, net, on available for sale securities and held to maturity securities | | 240 |
| | 181 |
| |
Premium amortization, net, on available for sale and held to maturity securities | | | 276 |
| | 240 |
|
Other | | 35 |
| | 25 |
| | 108 |
| | 35 |
|
Net change in: | | |
| | |
| | |
| | |
|
Cash and investments segregated and on deposit for regulatory purposes | | 6,241 |
| | (479 | ) | |
Investments segregated and on deposit for regulatory purposes | | | 6,973 |
| | 6,864 |
|
Receivables from brokers, dealers, and clearing organizations | | 61 |
| | (370 | ) | | (147 | ) | | 61 |
|
Receivables from brokerage clients | | (1,310 | ) | | 928 |
| | (1,858 | ) | | (1,310 | ) |
Other securities owned | | 22 |
| | (325 | ) | | 39 |
| | 22 |
|
Other assets | | (76 | ) | | (61 | ) | | (143 | ) | | (76 | ) |
Payables to brokers, dealers, and clearing organizations | | (957 | ) | | (111 | ) | | 43 |
| | (957 | ) |
Payables to brokerage clients | | (4,414 | ) | | (224 | ) | | (3,392 | ) | | (4,414 | ) |
Accrued expenses and other liabilities | | (82 | ) | | (226 | ) | | (155 | ) | | (82 | ) |
Net cash provided by (used for) operating activities | | 1,828 |
| | 974 |
| |
Net cash provided by operating activities | | | 4,655 |
| | 2,451 |
|
Cash Flows from Investing Activities | | | | | | | | |
Purchases of available for sale securities | | (6,375 | ) | | (22,782 | ) | | (19,781 | ) | | (6,375 | ) |
Proceeds from sales of available for sale securities | | 5,773 |
| | 4,645 |
| | 115 |
| | 5,773 |
|
Principal payments on available for sale securities | | 6,532 |
| | 8,652 |
| | 12,091 |
| | 6,532 |
|
Purchases of held to maturity securities | | (19,886 | ) | | (19,439 | ) | | (30,639 | ) | | (19,886 | ) |
Principal payments on held to maturity securities | | 7,927 |
| | 3,841 |
| | 12,382 |
| | 7,927 |
|
Net increase in bank loans | | (829 | ) | | (600 | ) | | (86 | ) | | (829 | ) |
Purchases of equipment, office facilities, and property | | (267 | ) | | (272 | ) | | (400 | ) | | (267 | ) |
Purchases of Federal Home Loan Bank stock | | (160 | ) | | (152 | ) | | (156 | ) | | (160 | ) |
Proceeds from sales of Federal Home Loan Bank stock | | 106 |
| | 88 |
| | 528 |
| | 106 |
|
Other investing activities | | (52 | ) | | (25 | ) | | (74 | ) | | (52 | ) |
Net cash provided by (used for) investing activities | | (7,231 | ) | | (26,044 | ) | | (26,020 | ) | | (7,231 | ) |
Cash Flows from Financing Activities | | | | | | | | |
Net change in bank deposits | | 1,809 |
| | 20,128 |
| | 43,752 |
| | 1,809 |
|
Net proceeds from short-term borrowings | | 5,000 |
| | 3,001 |
| |
Net change in short-term borrowings | | | (15,000 | ) | | 5,000 |
|
Issuance of long-term debt | | 643 |
| | — |
| | 1,936 |
| | 643 |
|
Repayment of long-term debt | | (256 | ) | | (5 | ) | | (906 | ) | | (256 | ) |
Net proceeds from preferred stock offering | | — |
| | 725 |
| |
Dividends paid | | (456 | ) | | (365 | ) | | (579 | ) | | (456 | ) |
Proceeds from stock options exercised and other | | 98 |
| | 31 |
| | 108 |
| | 98 |
|
Other financing activities | | (10 | ) | | 8 |
| | (12 | ) | | (10 | ) |
Net cash provided by (used for) financing activities | | 6,828 |
| | 23,523 |
| | 29,299 |
| | 6,828 |
|
Increase (Decrease) in Cash and Cash Equivalents | | 1,425 |
| | (1,547 | ) | |
Cash and Cash Equivalents at Beginning of Period | | 10,828 |
| | 11,978 |
| |
Cash and Cash Equivalents at End of Period | | $ | 12,253 |
| | $ | 10,431 |
| |
Supplemental Cash Flow Information | | | | | |
Cash paid during the period for: | | | | | |
Interest | | $ | 233 |
| | $ | 141 |
| |
Income taxes | | $ | 890 |
| | $ | 757 |
| |
Non-cash investing activity: | | |
| | | |
Securities purchased during the period but settled after period end | | $ | 3,977 |
| | $ | 1,021 |
| |
Increase (Decrease) in Cash and Cash Equivalents, including Amounts Restricted | | | 7,934 |
| | 2,048 |
|
Cash and Cash Equivalents including Amounts Restricted at Beginning of Year | | | 19,160 |
| | 17,873 |
|
Cash and Cash Equivalents, including Amounts Restricted at End of Period | | | $ | 27,094 |
| | $ | 19,921 |
|
(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
|
| | | | | | | | |
| | Nine Months Ended September 30, |
| | 2018 | | 2017 (1) |
Supplemental Cash Flow Information | | | | |
Cash paid during the period for: | | | | |
Interest | | $ | 550 |
| | $ | 233 |
|
Income taxes | | $ | 649 |
| | $ | 890 |
|
Non-cash investing activity: | | | | |
Securities purchased during the period but settled after period end | | $ | 221 |
| | $ | 3,977 |
|
| | | | |
| | September 30, 2018 | | September 30, 2017 |
Reconciliation of cash, cash equivalents and amounts reported within the balance sheet (2) | | | | |
Cash and cash equivalents | | $ | 21,830 |
| | $ | 12,253 |
|
Restricted cash and cash equivalents amounts included in cash and investments segregated and on deposit for regulatory purposes | | 5,264 |
| | 7,668 |
|
Total cash and cash equivalents, including amounts restricted shown in the statement of cash flows | | $ | 27,094 |
| | $ | 19,921 |
|
(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 345 domestic branch offices in 46 states, as well as a branch in the Commonwealth of Puerto Rico. In addition,broker-dealer;
Charles Schwab serves clients in London, England and 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 Funds® and 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 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 nine 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
The Company adopted ASU 2016-09, “Stock Compensation – Improvements to Employee Share-Based Payment Accounting (Topic 718),” on a prospective basis as of January 1, 2017. This guidance requires entities to recognize the income tax effects for the difference between 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 $11 million and $47 million in the third quarter and first nine months of 2017, respectively. Future effects will depend on the Company’s share price, restricted stock vesting, and the volume of equity incentive options exercised. ASU 2016-09 also provides entities with an accounting policy election to account for the impact of forfeitures of awards on compensation expense as they occur or continue with the current practice of estimating forfeitures at the grant date to determine the number of awards expected to vest and adjusting that estimate as necessary. The Company has elected to continue to follow the current practice of estimating forfeitures.
THE CHARLES SCHWAB CORPORATION
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted)
(Unaudited)
2. New Accounting Standards Not Yet Adopted
ASU 2014-09, “Revenue from Contracts with Customers (Topic 606),” 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 Financial Accounting Standards Board (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 quarterAdoption of 2018 using the modified retrospective method. The guidance does not apply to the Company’s loans and securities. Accordingly, the Company does not expect an impact to net interest revenue. The Company believes the primary areas of potential impact for the Company are (i) the capitalization of costs to obtain a contract and (ii) gross versus net presentation of certain revenue streams in the income statement. The Company believes adoption of this guidance will likely alter the timing of recognition for costs to obtain a contract in the income statement. The next phase of the Company’s implementation work is to evaluate the disclosure provisions. The Company does not expect this guidance will have a material impact on its financial statements and EPS.New Accounting Standards
ASU 2016-01, “Financial Instruments – Overall (Subtopic 825-10),” will be effective January 1, 2018 and 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. The main provisions of the guidance require: (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; and (iii) 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 this guidance will have a material impact on its financial statements and EPS.
ASU 2016-02, “Leases (Topic 842),” amends the accounting for leases by lessees and lessors. The primary change from the new guidance is the recognition of right-of-use assets and lease liabilities by lessees for those leases classified as operating leases. Additional changes include accounting for lease origination and executory costs, required lessee reassessments during the lease term due to changes in circumstances, and expanded lease disclosures. 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 relief is 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 this guidance will have a material impact on its EPS.
ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” provides new guidance for recognizing impairment of most debt instruments measured at amortized cost, including loans and held to maturity (HTM) debt securities. The new guidance will require 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. 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. The Company is currently evaluating the impact of this guidance on its financial statements and EPS. |
| | | |
Standard | Description | Date of Adoption | Effects on the Financial Statements or Other Significant Matters |
Accounting Standards Update (ASU) 2014-09, “Revenue from Contracts with Customers (Topic 606)” and related ASUs | Clarifies that revenue from contracts with clients should be recognized in a manner that depicts the timing of the related transfer of goods or performance of services at an amount that reflects the expected consideration.
Adoption allows either full or modified retrospective transition. Full retrospective transition required a cumulative effect adjustment to retained earnings as of the earliest comparative period presented. Modified retrospective transition required a cumulative effect adjustment to retained earnings as of the beginning of the reporting period in which the entity first applies the new guidance. | January 1, 2018 | The guidance does not apply to revenue earned from the Company’s loans and securities. Accordingly, net interest revenue was not impacted. The primary impact for the Company was the capitalization on the consolidated balance sheets of sales commissions paid to employees for obtaining new contracts with clients. These capitalized costs resulted in an asset of $219 million and a related deferred tax liability of $52 million upon adoption. The asset is being amortized to expense over time as the related revenues are recognized.
The Company adopted the revenue recognition guidance using the modified retrospective method for all contracts that were not completed as of January 1, 2018. Further details of the impact of adoption are included below in this Note as well as in Note 3. |
ASU 2016-01, “Financial Instruments – Overall (Subtopic 825-10)” and ASU 2018-03, “Technical Corrections and Improvements to Financial Instruments – Overall (Subtopic 825-10)” | Requires: (i) equity investments to be measured at fair value, with changes in fair value recognized in net income, unless the equity method is applied or the equity investments do not have readily determinable fair values in which case a practical alternative may be elected; (ii) use of an exit price when measuring the fair value of financial instruments for disclosures; (iii) separate presentation of financial assets and liabilities by measurement category and form of instrument on the balance sheet or in the accompanying notes.
Adoption requires a cumulative effect adjustment to the balance sheet as of the beginning of the year of initial application, except for certain changes that require prospective adoption. | January 1, 2018 | The Company adopted this guidance on a prospective basis for its equity securities that do not have readily determinable fair values. No other significant changes resulted from adoption. Therefore, there was no material impact on the Company’s financial statements.
The Company elected to use the alternative to fair value measurement for its equity securities that do not have readily determinable fair values. These equity securities will be adjusted for impairment and observable price changes of the identical or similar investments of the same issuer, as applicable. Schwab refers to this approach as the adjusted cost method. This method was applied to an immaterial amount of Community Reinvestment Act (CRA) investments included in other assets on the consolidated balance sheets. |
ASU 2016-18, “Statement of Cash Flows (Topic 230) – Restricted Cash a Consensus of the Emerging Issues Task Force” | Requires that the statement of cash flows explain the change during the period in the total cash and cash equivalents, including restricted cash and cash equivalents.
Adoption requires retrospective presentation of the statement of cash flows to include restricted cash and cash equivalents in the beginning and ending amounts. | January 1, 2018 | The Company adopted this guidance on a retrospective basis. The Company has significant amounts of restricted cash and cash equivalents due to its business as a broker-dealer.
As a result of the adoption, changes in restricted cash and cash equivalents included within cash and investments segregated and on deposit for regulatory purposes in the consolidated balance sheets are now presented with changes in cash and cash equivalents throughout the consolidated statements of cash flows. The amount of restricted cash and cash equivalents is included in a separate table in the consolidated statements of cash flows. |
| | | |
THE CHARLES SCHWAB CORPORATION
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted)
(Unaudited)
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 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. ASU 2017-08 will become effective on January 1, 2019, with early adoption permitted including in an interim period. The amendments will be applied on a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption. The Company is currently evaluating the impact of adopting this guidance on its financial statements and EPS. |
| | | |
| | | |
Standard | Description | Date of Adoption | Effects on the Financial Statements or Other Significant Matters |
ASU 2018-02, “Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income” | Permits reclassification of the impacts on certain tax affected items included in AOCI that were adjusted through income from continuing operations rather than AOCI upon the effective date of the Tax Act.
Adoption provides for retrospective adoption to all periods presented and impacted by the Tax Act or as of the beginning of the period of adoption. | January 1, 2018 | The Company adopted this guidance as of January 1, 2018. The Company elected to reclassify the income tax effects of the Tax Act from items in AOCI into retained earnings as of the beginning of the period of adoption.
Adoption resulted in a reduction in AOCI and a corresponding increase in retained earnings of $33 million. |
New Accounting Standards Not Yet Adopted
|
| | | |
Standard | Description | Required Date of Adoption | Effects on the Financial Statements or Other Significant Matters |
ASU 2016-02, “Leases (Topic 842)” | Amends the accounting for leases by lessees and lessors. The primary change from the new guidance is the recognition of right-of-use assets and lease liabilities by lessees for those leases classified as operating leases. Additional changes include accounting for lease origination and executory costs, required lessee reassessments during the lease term due to changes in circumstances, and expanded lease disclosures.
Adoption provides for modified retrospective transition as of the beginning of the earliest comparative period presented in the financial statements in which the entity first applies the new standard or prospectively with an adjustment as of the beginning of the period of adoption. Certain transition relief is permitted if elected by the entity. | January 1, 2019 | The Company plans to adopt the new lease accounting guidance prospectively as of January 1, 2019 with a cumulative-effect adjustment to the opening balance of retained earnings (i.e., prior periods will not be adjusted). The Company does not expect this guidance will have a material impact on its earnings per common share (EPS). However, it will result in a gross up of the consolidated balance sheet due to recognition of right-of-use assets and lease liabilities primarily related to leases of office space and branches. These amounts will be based on the present value of our remaining operating lease payments (see Note 13 in the 2017 10-K for the undiscounted rental commitments for operating leases).
The Company is refining its methodology to estimate the right-of-use assets and lease liabilities. We are also testing system updates and refining internal controls for applying the lease accounting changes. Based upon our current population of leases, we expect the right-of-use asset and corresponding lease liability to be less than 0.5% of our total assets. |
| | | |
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 Securities
The amortized cost, gross unrealized gains and losses, and fair value of AFS and HTM securities are as follows:
|
| | | | | | | | | | | | | | | | |
September 30, 2017 | | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
Available for sale securities: | | | | | | | | |
U.S. agency mortgage-backed securities | | $ | 19,717 |
| | $ | 54 |
| | $ | 25 |
| | $ | 19,746 |
|
Asset-backed securities | | 9,960 |
| | 40 |
| | 4 |
| | 9,996 |
|
Corporate debt securities | | 6,449 |
| | 20 |
| | 1 |
| | 6,468 |
|
U.S. Treasury securities | | 7,741 |
| | 7 |
| | 49 |
| | 7,699 |
|
Certificates of deposit | | 1,840 |
| | 3 |
| | — |
| | 1,843 |
|
U.S. agency notes | | 1,913 |
| | — |
| | 6 |
| | 1,907 |
|
Commercial paper | | 312 |
| | — |
| | — |
| | 312 |
|
Non-agency commercial mortgage-backed securities | | 41 |
| | — |
| | — |
| | 41 |
|
Foreign government agency securities | | 50 |
| | — |
| | — |
| | 50 |
|
Total available for sale securities | | $ | 48,023 |
| | $ | 124 |
| | $ | 85 |
| | $ | 48,062 |
|
Held to maturity securities: | | | | | | | | |
U.S. agency mortgage-backed securities | | $ | 96,045 |
| | $ | 492 |
| | $ | 721 |
| | $ | 95,816 |
|
Non-agency commercial mortgage-backed securities | | 995 |
| | 13 |
| | 2 |
| | 1,006 |
|
Asset-backed securities | | 12,237 |
| | 100 |
| | 1 |
| | 12,336 |
|
Corporate debt securities | | 3,377 |
| | 26 |
| | — |
| | 3,403 |
|
U.S. Treasury securities | | 223 |
| | — |
| | 1 |
| | 222 |
|
U.S. state and municipal securities | | 1,249 |
| | 50 |
| | — |
| | 1,299 |
|
Certificates of deposit | | 200 |
| | — |
| | — |
| | 200 |
|
Foreign government agency securities
| | 50 |
| | — |
| | — |
| | 50 |
|
Total held to maturity securities | | $ | 114,376 |
| | $ | 681 |
| | $ | 725 |
| | $ | 114,332 |
|
|
| | | | | | | | | | | | | | | | |
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 September 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 |
| | | |
| | | |
Standard | Description | Required Date of Adoption | Effects on the Financial Statements or Other Significant Matters |
ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” | Provides guidance for recognizing impairment of most debt instruments measured at amortized cost, including loans and held to maturity (HTM) debt securities. Requires estimating current expected credit losses (CECL) over the remaining life of an instrument or a 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 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 continues to evaluate the impact of this guidance on its financial statements, including EPS. The Company has finished the majority of its scoping work and assessment of the current state of data and systems. Work is transitioning to designing and building out approaches to address certain asset classes with a focus primarily on a subset of our securities, including corporate debt securities. The Company expects that a large portion of its securities will have zero expectation of credit losses based on industry and regulator views for U.S. treasury and certain government agency-backed securities. We are currently working on in-depth analysis for the other asset types that do not have zero expectation of credit losses to determine our methods and any needed changes to policies and procedures. |
ASU 2017-08, “Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities” | Shortens the amortization period for the premium on certain callable debt securities to the earliest call date. The amendments are applicable to any purchased individual debt security with an explicit and noncontingent call feature with a fixed price on a preset date. ASU 2017-08 does not impact the accounting for callable debt securities held at a discount.
Adoption requires modified retrospective transition as of the beginning of the period of adoption through a cumulative-effect adjustment to retained earnings. | January 1, 2019 (early adoption permitted)
| While still under evaluation, the Company does not expect this guidance will have a material impact on its financial statements, including EPS. |
| | | |
THE CHARLES SCHWAB CORPORATION
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted)
(Unaudited)
|
| | | |
| | | |
Standard | Description | Required Date of Adoption | Effects on the Financial Statements or Other Significant Matters |
ASU 2018-15, “Intangibles–Goodwill and Other–Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (a consensus of the FASB Emerging Issues Task Force)”
| Aligns the criteria for capitalizing implementation costs for cloud computing arrangements (CCA) that are service contracts with internal-use software that is developed or purchased and CCAs that include an internal-use software license. This guidance requires that the capitalized implementation costs be recognized over the period of the CCA service contract, subject to impairment evaluation on an ongoing basis.
The guidance prescribes the balance sheet, income statement, and statement of cash flow classification of the capitalized implementation costs and related amortization expense, and requires additional quantitative and qualitative disclosures.
Adoption provides for retrospective or prospective application to all implementation costs incurred after the date of adoption.
| January 1, 2020 (early adoption permitted) | Historically, Schwab has expensed implementation costs as they are incurred for CCAs that are service contracts. Therefore, adopting this guidance will change the Company’s accounting treatment for these types of implementation costs. The Company is evaluating the impacts of this guidance on its financial statements, including EPS.
|
and the related impact to AOCI once the Company crosses $250 billion in consolidated assets. The year after the Company surpasses $250 billion in consolidated assets, it can no longer exclude AOCI from regulatory capital. The transfer included U.S. agency mortgage-backed securities, asset-backed securities, corporate debt securities, and U.S. state and municipal securities. The unrealized holding gains and losses on the date of transfer are reported as a separate component of AOCI and as an adjustment to the purchase premium and discount on the securities transferred. The separate component of AOCI will be amortized or accreted into interest income over the remaining lifecumulative effect of the securities transferred, offsettingchanges made to our consolidated January 1, 2018 balance sheet for the revised premium or discount amortization or accretion on the transferred assetsadoption of .ASU 2014-09, “Revenue – Revenue from Contracts with Customers” and ASU 2018-02, “Other Comprehensive Income – Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income” were as follows: |
| | | | | | | | | | | | | | | | |
| | Balance at December 31, 2017 | | Adjustments Due to ASU 2014-09 | | Adjustments Due to ASU 2018-02 | | Balance at January 1, 2018 |
Assets | | | | | | | | |
Other assets (1) | | $ | 2,057 |
| | $ | 167 |
| | $ | — |
| | $ | 2,224 |
|
Stockholders’ Equity | | | | | | | | |
Retained earnings | | 14,408 |
| | 167 |
| | 33 |
| | 14,608 |
|
Accumulated other comprehensive income | | (152 | ) | | — |
| | (33 | ) | | (185 | ) |
(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.
Schwab Bank pledges securities issued by federal agencies to secure certain trust deposits. The fair valueIn accordance with the new revenue standard requirements, the disclosure of these pledged securities was $936 million at September 30, 2017.the impact of adoption on our condensed consolidated statement of income and condensed consolidated balance sheet were as follows:
|
| | | | | | | | | | | | |
| | Three Months Ended September 30, 2018 |
Statement of Income | | As Reported | | Balances Without Adoption of ASU 2014-09 | | Effect of Change Higher/(Lower) |
Expenses Excluding Interest | | | | | | |
Compensation and benefits | | $ | 737 |
| | $ | 744 |
| | $ | (7 | ) |
Taxes on income | | 296 |
| | 294 |
| | 2 |
|
Net Income | | 923 |
| | 918 |
| | 5 |
|
THE CHARLES SCHWAB CORPORATION
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted)
(Unaudited)
|
| | | | | | | | | | | | |
| | Nine Months Ended September 30, 2018 |
Statement of Income | | As Reported | | Balances Without Adoption of ASU 2014-09 | | Effect of Change Higher/(Lower) |
Expenses Excluding Interest | | | | | | |
Compensation and benefits | | $ | 2,252 |
| | $ | 2,279 |
| | $ | (27 | ) |
Taxes on income | | 780 |
| | 773 |
| | 7 |
|
Net Income | | 2,572 |
| | 2,552 |
| | 20 |
|
|
| | | | | | | | | | | | |
| | As of September 30, 2018 |
Balance Sheet | | As Reported | | Balances Without Adoption of ASU 2014-09 | | Effect of Change Higher/(Lower) |
Assets | | | | | | |
Other assets (1) | | $ | 2,092 |
| | $ | 1,905 |
| | $ | 187 |
|
Stockholders’ Equity | | | | | | |
Retained earnings | | 16,615 |
| | 16,428 |
| | 187 |
|
(1) Adjustment is comprised of an increase in capitalized contract costs of $246 million, partially offset by an increase in deferred tax liabilities of $59 million.
3. Revenue Recognition
Disaggregated Revenue
Disaggregation of Schwab’s revenue by major source is as follows: |
| | | | | | | | | | | | | | |
| Three Months Ended September 30, | Nine Months Ended September 30, |
| 2018 | | 2017 | | 2018 | 2017 |
Net interest revenue | | | | | | |
Interest revenue | $ | 1,755 |
| | $ | 1,176 |
| | $ | 4,766 |
| $ | 3,358 |
|
Interest expense | (228 | ) | | (94 | ) | | (569 | ) | (223 | ) |
Net interest revenue | 1,527 |
| | 1,082 |
| | 4,197 |
| 3,135 |
|
Asset management and administration fees | |
| | |
| | | |
Mutual funds and ETF service fees | 435 |
| | 519 |
| | 1,386 |
| 1,538 |
|
Advice solutions | 294 |
| | 265 |
| | 859 |
| 765 |
|
Other | 80 |
| | 77 |
| | 229 |
| 226 |
|
Asset management and administration fees | 809 |
| | 861 |
| | 2,474 |
| 2,529 |
|
Trading revenue | | | |
| | | |
Commissions | 155 |
| | 136 |
| | 501 |
| 456 |
|
Principal transactions | 21 |
| | 15 |
| | 56 |
| 44 |
|
Trading revenue | 176 |
| | 151 |
| | 557 |
| 500 |
|
Other | 67 |
| | 71 |
| | 235 |
| 212 |
|
Total net revenues | $ | 2,579 |
| | $ | 2,165 |
| | $ | 7,463 |
| $ | 6,376 |
|
For a summary of revenue provided by our reportable segments, see Note 17. The recognition of revenue is not impacted by the operating segment in which revenue is generated.
CHARLES SCHWAB CORPORATION
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted)
(Unaudited)
Net interest revenue
Net interest revenue, which is generated from financial instruments covered by various other areas of GAAP, is not within the scope of Accounting Standards Codification (ASC) 606, Revenue From Contracts With Customers (ASC 606), and is 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 interest paid on funding sources. Our primary interest earning assets include cash and cash equivalents; segregated cash and investments; margin loans, which constitute the majority of receivables from brokerage clients; investment securities; and bank loans. Revenue on interest earning assets is affected by various factors, such as the composition of assets, prevailing interest rates at the time of origination or purchase, changes in interest rates on floating rate securities, and 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 solutions fees are earned and recognized over time. Fees are generally based on a percentage of the daily value of assets under management and are collected on a monthly or quarterly basis.
Trading revenue
Substantially all trading revenue is generated through commissions earned for executing trades for clients in individual equities, options, fixed income securities, and certain third-party mutual funds and ETFs. This revenue is earned and collected when the trades are executed.
Other 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 which CS&Co sends equity and option orders. Order flow revenue is recognized when 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 on 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 September 30, 2018 and January 1, 2018, we had $246 million and $219 million of deferred contract costs, respectively. Amortization expense related to deferred contract costs was $12 million and $34 million for the third quarter and first nine months of 2018, respectively, which was recorded in compensation and benefits expense on the condensed consolidated statements of income.
Contract balances
Receivables from contracts with customers within the scope of ASC 606 were $353 million at January 1, 2018 and $359 million at September 30, 2018 and were recorded in other assets on the condensed consolidated balance sheets. Schwab does not have any other significant contract assets or contract liability balances as of September 30, 2018 and January 1, 2018.
Unsatisfied performance obligations
We do not have any unsatisfied performance obligations other than those that are subject to an elective practical expedient under ASC 606. The practical expedient applies to and is elected for contracts where we recognize revenue at the amount to which we have the right to invoice for services performed.
CHARLES SCHWAB CORPORATION
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted)
(Unaudited)
4. Investment Securities
The amortized cost, gross unrealized gains and losses, and fair value of AFS and HTM securities are as follows: |
| | | | | | | | | | | | | | | | |
September 30, 2018 | | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
Available for sale securities | | | | | | | | |
U.S. agency mortgage-backed securities | | $ | 24,010 |
| | $ | 47 |
| | $ | 102 |
| | $ | 23,955 |
|
U.S. Treasury securities | | 12,412 |
| | — |
| | 169 |
| | 12,243 |
|
Asset-backed securities (1) | | 9,378 |
| | 19 |
| | 10 |
| | 9,387 |
|
Corporate debt securities (2) | | 6,921 |
| | 10 |
| | 9 |
| | 6,922 |
|
Certificates of deposit | | 2,765 |
| | 4 |
| | — |
| | 2,769 |
|
U.S. agency notes | | 1,688 |
| | — |
| | 6 |
| | 1,682 |
|
Commercial paper (2,3) | | 518 |
| | — |
| | — |
| | 518 |
|
Foreign government agency securities | | 50 |
| | — |
| | 2 |
| | 48 |
|
Non-agency commercial mortgage-backed securities | | 34 |
| | — |
| | — |
| | 34 |
|
Total available for sale securities | | $ | 57,776 |
| | $ | 80 |
| | $ | 298 |
| | $ | 57,558 |
|
Held to maturity securities | | | | | | | | |
U.S. agency mortgage-backed securities | | $ | 113,453 |
| | $ | 26 |
| | $ | 3,483 |
| | $ | 109,996 |
|
Asset-backed securities (1) | | 17,964 |
| | 122 |
| | 12 |
| | 18,074 |
|
Corporate debt securities (2) | | 4,578 |
| | 8 |
| | 55 |
| | 4,531 |
|
U.S. state and municipal securities | | 1,330 |
| | 6 |
| | 7 |
| | 1,329 |
|
Non-agency commercial mortgage-backed securities | | 1,149 |
| | 1 |
| | 25 |
| | 1,125 |
|
U.S. Treasury securities | | 223 |
| | — |
| | 11 |
| | 212 |
|
Certificates of deposit | | 200 |
| | 1 |
| | — |
| | 201 |
|
Foreign government agency securities | | 50 |
| | — |
| | 2 |
| | 48 |
|
Other | | 5 |
| | — |
| | — |
| | 5 |
|
Total held to maturity securities | | $ | 138,952 |
| | $ | 164 |
| | $ | 3,595 |
| | $ | 135,521 |
|
|
| | | | | | | | | | | | | | | | |
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 37% and 42% of asset-backed securities held as of September 30, 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 43% and 40% of the asset-backed securities held as of September 30, 2018 and December 31, 2017, respectively.
(2) As of September 30, 2018 and December 31, 2017, approximately 31% and 41%, respectively, of the total AFS and HTM investments in corporate debt securities and commercial paper were issued by institutions in the financial services industry. Approximately 18% and 22% of the holdings of these securities were issued by institutions in the information technology industry as of September 30, 2018 and December 31, 2017, respectively.
(3) Included in cash and cash equivalents on the condensed consolidated balance sheet, but excluded from this table is $2.0 billion of AFS commercial paper. These holdings have maturities of three months or less and an aggregate market value equal to amortized cost.
CHARLES SCHWAB CORPORATION
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted)
(Unaudited)
At September 30, 2018, certain banking subsidiaries had pledged securities with a fair value of $21.5 billion as collateral to secure borrowing capacity on secured credit facilities with the FHLB (see Note 8). We also pledge 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 $2.4 billion as collateral for this facility at September 30, 2018. CSB also pledges securities issued by federal agencies to secure certain trust deposits. The fair value of these pledged securities was $898 million at September 30, 2018.
CHARLES SCHWAB CORPORATION
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted)
(Unaudited)
Securities with unrealized losses, aggregated by category and period of continuous unrealized loss, isare as follows:
| | | Less than | | 12 months | | | | | Less than | | 12 months | | | | |
| 12 months | | or longer | | Total | 12 months | | or longer | | Total |
September 30, 2017 | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | |
Available for sale securities: | | | | | | | | | | | | |
September 30, 2018 | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses |
Available for sale securities | | | | | | | | | | | | |
U.S. agency mortgage-backed securities | | $ | 10,119 |
| | $ | 68 |
| | $ | 1,988 |
| | $ | 34 |
| | $ | 12,107 |
| | $ | 102 |
|
U.S. Treasury securities | | 7,770 |
| | 72 |
| | 4,374 |
| | 97 |
| | 12,144 |
| | 169 |
|
Asset-backed securities | | 1,841 |
| | 4 |
| | 601 |
| | 6 |
| | 2,442 |
| | 10 |
|
Corporate debt securities | | 3,030 |
| | 8 |
| | 229 |
| | 1 |
| | 3,259 |
| | 9 |
|
U.S. agency notes | | 566 |
| | 2 |
| | 1,116 |
| | 4 |
| | 1,682 |
| | 6 |
|
Foreign government agency securities | | — |
| | — |
| | 48 |
| | 2 |
| | 48 |
| | 2 |
|
Total | | $ | 23,326 |
| | $ | 154 |
| | $ | 8,356 |
| | $ | 144 |
| | $ | 31,682 |
| | $ | 298 |
|
Held to maturity securities | | |
| | |
| | |
| | |
| | |
| | |
|
U.S. agency mortgage-backed securities | $ | 3,254 |
| | $ | 6 |
| | $ | 2,805 |
| | $ | 19 |
| | $ | 6,059 |
| | $ | 25 |
| $ | 59,643 |
| | $ | 1,247 |
| | $ | 40,279 |
| | $ | 2,236 |
| | $ | 99,922 |
| | $ | 3,483 |
|
Asset-backed securities | 638 |
| | — |
| | 578 |
| | 4 |
| | 1,216 |
| | 4 |
| 2,115 |
| | 12 |
| | 39 |
| | — |
| | 2,154 |
| | 12 |
|
Corporate debt securities | 990 |
| | 1 |
| | 153 |
| | — |
| | 1,143 |
| | 1 |
| 2,862 |
| | 52 |
| | 77 |
| | 3 |
| | 2,939 |
| | 55 |
|
U.S. state and municipal securities | | 471 |
| | 5 |
| | 14 |
| | 2 |
| | 485 |
| | 7 |
|
Non-agency commercial mortgage-backed securities | | 651 |
| | 15 |
| | 279 |
| | 10 |
| | 930 |
| | 25 |
|
U.S. Treasury securities | 6,421 |
| | 49 |
| | — |
| | — |
| | 6,421 |
| | 49 |
| — |
| | — |
| | 212 |
| | 11 |
| | 212 |
| | 11 |
|
U.S. agency notes | 1,409 |
| | 5 |
| | 498 |
| | 1 |
| | 1,907 |
| | 6 |
| |
Total | $ | 12,712 |
| | $ | 61 |
| | $ | 4,034 |
| | $ | 24 |
| | $ | 16,746 |
| | $ | 85 |
| |
Held to maturity securities: | |
| | |
| | |
| | |
| | |
| | |
| |
U.S. agency mortgage-backed securities | $ | 2,386 |
| | $ | 90 |
| | $ | 47,136 |
| | $ | 631 |
| | $ | 49,522 |
| | $ | 721 |
| |
Non-agency commercial mortgage-backed securities | — |
| | — |
| | 491 |
| | 2 |
| | 491 |
| | 2 |
| |
Asset-backed securities | 409 |
| | — |
| | 672 |
| | 1 |
| | 1,081 |
| | 1 |
| |
U.S. Treasury securities | — |
| | — |
| | 222 |
| | 1 |
| | 222 |
| | 1 |
| |
Foreign government agency securities | | — |
| | — |
| | 48 |
| | 2 |
| | 48 |
| | 2 |
|
Total | $ | 2,795 |
| | $ | 90 |
| | $ | 48,521 |
| | $ | 635 |
| | $ | 51,316 |
| | $ | 725 |
| $ | 65,742 |
| | $ | 1,331 |
| | $ | 40,948 |
| | $ | 2,264 |
| | $ | 106,690 |
| | $ | 3,595 |
|
Total securities with unrealized losses (1) | $ | 15,507 |
| | $ | 151 |
| | $ | 52,555 |
| | $ | 659 |
| | $ | 68,062 |
| | $ | 810 |
| $ | 89,068 |
| | $ | 1,485 |
| | $ | 49,304 |
| | $ | 2,408 |
| | $ | 138,372 |
| | $ | 3,893 |
|
| | December 31, 2016 | | | | | | | | | | | | |
Available for sale securities: | | | | | | | | | | | | |
December 31, 2017 | | | | | | | | | | | | |
Available for sale securities | | | | | | | | | | | | |
U.S. agency mortgage-backed securities | | $ | 5,696 |
| | $ | 21 |
| | $ | 2,548 |
| | $ | 18 |
| | $ | 8,244 |
| | $ | 39 |
|
U.S. Treasury securities | | 4,625 |
| | 11 |
| | 4,875 |
| | 72 |
| | 9,500 |
| | 83 |
|
Asset-backed securities | | 904 |
| | 3 |
| | 424 |
| | 3 |
| | 1,328 |
| | 6 |
|
Corporate debt securities | | 736 |
| | 1 |
| | 120 |
| | — |
| | 856 |
| | 1 |
|
Certificates of deposit | | 799 |
| | 1 |
| | — |
| | — |
| | 799 |
| | 1 |
|
U.S. agency notes | | 99 |
| | — |
| | 1,807 |
| | 8 |
| | 1,906 |
| | 8 |
|
Foreign government agency securities | | 50 |
| | 1 |
| | — |
| | — |
| | 50 |
| | 1 |
|
Total | | $ | 12,909 |
| | $ | 38 |
| | $ | 9,774 |
| | $ | 101 |
| | $ | 22,683 |
| | $ | 139 |
|
Held to maturity securities | | |
| | |
| | |
| | |
| | |
| | |
|
U.S. agency mortgage-backed securities | $ | 14,816 |
| | $ | 69 |
| | $ | 2,931 |
| | $ | 23 |
| | $ | 17,747 |
| | $ | 92 |
| $ | 42,102 |
| | $ | 310 |
| | $ | 24,753 |
| | $ | 724 |
| | $ | 66,855 |
| | $ | 1,034 |
|
Asset-backed securities | 1,670 |
| | 13 |
| | 9,237 |
| | 201 |
| | 10,907 |
| | 214 |
| 1,124 |
| | 2 |
| | 72 |
| | — |
| | 1,196 |
| | 2 |
|
Corporate debt securities | 2,407 |
| | 17 |
| | 653 |
| | 1 |
| | 3,060 |
| | 18 |
| 1,078 |
| | 5 |
| | — |
| | — |
| | 1,078 |
| | 5 |
|
U.S. Treasury securities | 6,926 |
| | 59 |
| | — |
| | — |
| | 6,926 |
| | 59 |
| |
Certificates of deposit | 474 |
| | — |
| | 100 |
| | 1 |
| | 574 |
| | 1 |
| |
U.S. agency notes | 1,907 |
| | 8 |
| | — |
| | — |
| | 1,907 |
| | 8 |
| |
U.S. state and municipal securities | 956 |
| | 46 |
| | — |
| | — |
| | 956 |
| | 46 |
| |
Total | $ | 29,156 |
| | $ | 212 |
| | $ | 12,921 |
| | $ | 226 |
| | $ | 42,077 |
| | $ | 438 |
| |
Held to maturity securities: | |
| | |
| | |
| | |
| | |
| | |
| |
U.S. agency mortgage-backed securities | $ | 51,361 |
| | $ | 1,086 |
| | $ | — |
| | $ | — |
| | $ | 51,361 |
| | $ | 1,086 |
| |
Non-agency commercial mortgage-backed securities | 591 |
| | 4 |
| | — |
| | — |
| | 591 |
| | 4 |
| 607 |
| | 5 |
| | — |
| | — |
| | 607 |
| | 5 |
|
U.S. Treasury securities | 219 |
| | 4 |
| | — |
| | — |
| | 219 |
| | 4 |
| 220 |
| | 3 |
| | — |
| | — |
| | 220 |
| | 3 |
|
U.S. state and municipal securities | 14 |
| | 1 |
| | — |
| | — |
| | 14 |
| | 1 |
| |
Foreign government agency securities | | 49 |
| | 1 |
| | — |
| | — |
| | 49 |
| | 1 |
|
Total | $ | 52,185 |
| | $ | 1,095 |
| | $ | — |
| | $ | — |
| | $ | 52,185 |
| | $ | 1,095 |
| $ | 45,180 |
| | $ | 326 |
| | $ | 24,825 |
| | $ | 724 |
| | $ | 70,005 |
| | $ | 1,050 |
|
Total securities with unrealized losses (2) | $ | 81,341 |
| | $ | 1,307 |
| | $ | 12,921 |
| | $ | 226 |
| | $ | 94,262 |
| | $ | 1,533 |
| $ | 58,089 |
| | $ | 364 |
| | $ | 34,599 |
| | $ | 825 |
| | $ | 92,688 |
| | $ | 1,189 |
|
(1) The number of investment positions with unrealized losses totaled 212413 for AFS securities and 6981,800 for HTM securities.
(2) The number of investment positions with unrealized losses totaled 627251 for AFS securities and 612938 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)
At September 30, 2017,2018, 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.
THE 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 OTTIother-than-temporarily impaired (OTTI) on a quarterly basis as described in Note 2 in the 2016
2017 Form 10-K. No amounts were recognized as OTTI in earnings or other comprehensive income in 2018 or 2017. As of September 30, 2018 and December 31, 2017, Schwab did not hold any securities on which OTTI was previously recognized.
The maturities of AFS and HTM securities are as follows: | | September 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: | | | | | | | | | | | |
September 30, 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) | | | $ | 169 |
| | $ | 3,669 |
| | $ | 10,571 |
| | $ | 9,546 |
| | $ | 23,955 |
|
U.S. Treasury securities | | | 5,999 |
| | 6,244 |
| | — |
| | — |
| | 12,243 |
|
Asset-backed securities | | | 250 |
| | 6,968 |
| | 1,750 |
| | 419 |
| | 9,387 |
|
Corporate debt securities | | | 1,621 |
| | 5,301 |
| | — |
| | — |
| | 6,922 |
|
Certificates of deposit | | | 866 |
| | 1,903 |
| | — |
| | — |
| | 2,769 |
|
U.S. agency notes | | | 1,311 |
| | 371 |
| | — |
| | — |
| | 1,682 |
|
Commercial paper | | | 518 |
| | — |
| | — |
| | — |
| | 518 |
|
Foreign government agency securities | | | — |
| | 48 |
| | — |
| | — |
| | 48 |
|
Non-agency commercial mortgage-backed securities (1) | | | — |
| | — |
| | — |
| | 34 |
| | 34 |
|
Total fair value | | | $ | 10,734 |
| | $ | 24,504 |
| | $ | 12,321 |
| | $ | 9,999 |
| | $ | 57,558 |
|
Total amortized cost | | | $ | 10,762 |
| | $ | 24,632 |
| | $ | 12,368 |
| | $ | 10,014 |
| | $ | 57,776 |
|
Held to maturity securities | | | | | | | | | | | |
U.S. agency mortgage-backed securities (1) | | $ | 83 |
| | $ | 2,390 |
| | $ | 6,646 |
| | $ | 10,627 |
| | $ | 19,746 |
| | $ | 383 |
| | $ | 14,370 |
| | $ | 31,785 |
| | $ | 63,458 |
| | $ | 109,996 |
|
Asset-backed securities | | — |
| | 8,096 |
| | 1,243 |
| | 657 |
| | 9,996 |
| | 5 |
| | 1,611 |
| | 9,373 |
| | 7,085 |
| | 18,074 |
|
Corporate debt securities | | 3,381 |
| | 3,087 |
| | — |
| | — |
| | 6,468 |
| | 238 |
| | 3,550 |
| | 743 |
| | — |
| | 4,531 |
|
U.S. state and municipal securities | | | — |
| | 59 |
| | 254 |
| | 1,016 |
| | 1,329 |
|
Non-agency commercial mortgage-backed securities (1) | | | — |
| | 353 |
| | — |
| | 772 |
| | 1,125 |
|
U.S. Treasury securities | | 2,069 |
| | 5,630 |
| | — |
| | — |
| | 7,699 |
| | — |
| | — |
| | 212 |
| | — |
| | 212 |
|
Certificates of deposit | | 876 |
| | 967 |
| | — |
| | — |
| | 1,843 |
| | — |
| | 201 |
| | — |
| | — |
| | 201 |
|
U.S. agency notes | | 847 |
| | 1,060 |
| | — |
| | — |
| | 1,907 |
| |
Commercial paper | | 312 |
| | — |
| | — |
| | — |
| | 312 |
| |
Non-agency commercial mortgage-backed securities (1) | | — |
| | — |
| | — |
| | 41 |
| | 41 |
| |
Foreign government agency securities | | — |
| | 50 |
| | — |
| | — |
| | 50 |
| | — |
| | 48 |
| | — |
| | — |
| | 48 |
|
Other | | | — |
| | — |
| | — |
| | 5 |
| | 5 |
|
Total fair value | | $ | 7,568 |
| | $ | 21,280 |
| | $ | 7,889 |
| | $ | 11,325 |
| | $ | 48,062 |
| | $ | 626 |
| | $ | 20,192 |
| | $ | 42,367 |
| | $ | 72,336 |
| | $ | 135,521 |
|
Total amortized cost | | $ | 7,563 |
| | $ | 21,278 |
| | $ | 7,881 |
| | $ | 11,301 |
| | $ | 48,023 |
| | $ | 628 |
| | $ | 20,540 |
| | $ | 43,339 |
| | $ | 74,445 |
| | $ | 138,952 |
|
Held to maturity securities: | | | | | | | | | | | |
U.S. agency mortgage-backed securities (1) | | $ | 303 |
| | $ | 11,401 |
| | $ | 29,606 |
| | $ | 54,506 |
| | $ | 95,816 |
| |
Non-agency commercial mortgage-backed securities (1) | | — |
| | — |
| | 364 |
| | 642 |
| | 1,006 |
| |
Asset-backed securities | | — |
| | 1,016 |
| | 5,364 |
| | 5,956 |
| | 12,336 |
| |
Corporate debt securities | | 250 |
| | 3,153 |
| | — |
| | — |
| | 3,403 |
| |
U.S. Treasury securities | | — |
| | — |
| | 222 |
| | — |
| | 222 |
| |
U.S. state and municipal securities | | — |
| | — |
| | 98 |
| | 1,201 |
| | 1,299 |
| |
Certificates of deposit | | — |
| | 200 |
| | — |
| | — |
| | 200 |
| |
Foreign government agency securities | | — |
| | 50 |
| | — |
| | — |
| | 50 |
| |
Total fair value | | $ | 553 |
| | $ | 15,820 |
| | $ | 35,654 |
| | $ | 62,305 |
| | $ | 114,332 |
| |
Total amortized cost | | $ | 553 |
| | $ | 15,672 |
| | $ | 35,558 |
| | $ | 62,593 |
| | $ | 114,376 |
| |
(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 September 30, | Nine Months Ended September 30, | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | |
| | 2017 | | 2016 | 2017 | | 2016 | | 2018 | | 2017 | | 2018 | | 2017 |
Proceeds | | $ | 288 |
| | $ | 571 |
| $ | 5,773 |
| | $ | 4,645 |
| | $ | — |
| | $ | 288 |
| | $ | 115 |
| | $ | 5,773 |
|
Gross realized gains | | — |
| | — |
| 7 |
| | 3 |
| | — |
| | — |
| | — |
| | 7 |
|
Gross realized losses | | — |
| | — |
| — |
| | — |
| |
THE CHARLES SCHWAB CORPORATION
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted)
(Unaudited)
4.5. Bank Loans and Related Allowance for Loan Losses
The composition of bank loans and delinquency analysis by loan type is as follows:
| | September 30, 2017 | Current | 30-59 days past due | 60-89 days past due | >90 days past due and other nonaccrual loans | Total past due and other nonaccrual loans | Total loans | Allowance for loan losses | Total bank loans - net | |
Residential real estate mortgages | $ | 9,773 |
| $ | 11 |
| $ | 2 |
| $ | 16 |
| $ | 29 |
| $ | 9,802 |
| $ | 16 |
| $ | 9,786 |
| |
Home equity loans and lines of credit | 2,027 |
| 4 |
| 1 |
| 10 |
| 15 |
| 2,042 |
| 8 |
| 2,034 |
| |
September 30, 2018 | | Current | 30-59 days past due | 60-89 days past due | >90 days past due and other nonaccrual loans (3) | Total past due and other nonaccrual loans | Total loans | Allowance for loan losses | Total bank loans – net |
First Mortgages (1,2) | | $ | 10,217 |
| $ | 24 |
| $ | 2 |
| $ | 13 |
| $ | 39 |
| $ | 10,256 |
| $ | 17 |
| $ | 10,239 |
|
HELOCs (1,2) | | 1,589 |
| 2 |
| 1 |
| 10 |
| 13 |
| 1,602 |
| 7 |
| 1,595 |
|
Pledged asset lines | 4,278 |
| 1 |
| — |
| — |
| 1 |
| 4,279 |
| — |
| 4,279 |
| 4,552 |
| 3 |
| 1 |
| — |
| 4 |
| 4,556 |
| — |
| 4,556 |
|
Other | 135 |
| — |
| — |
| — |
| — |
| 135 |
| 2 |
| 133 |
| 176 |
| — |
| — |
| — |
| — |
| 176 |
| 2 |
| 174 |
|
Total bank loans | $ | 16,213 |
| $ | 16 |
| $ | 3 |
| $ | 26 |
| $ | 45 |
| $ | 16,258 |
| $ | 26 |
| $ | 16,232 |
| $ | 16,534 |
| $ | 29 |
| $ | 4 |
| $ | 23 |
| $ | 56 |
| $ | 16,590 |
| $ | 26 |
| $ | 16,564 |
|
| | |
December 31, 2016 | | |
Residential real estate mortgages | $ | 9,100 |
| $ | 15 |
| $ | 3 |
| $ | 16 |
| $ | 34 |
| $ | 9,134 |
| $ | 17 |
| $ | 9,117 |
| |
Home equity loans and lines of credit | 2,336 |
| 2 |
| 2 |
| 10 |
| 14 |
| 2,350 |
| 8 |
| 2,342 |
| |
December 31, 2017 | | |
First Mortgages (1,2) | | $ | 9,983 |
| $ | 14 |
| $ | 2 |
| $ | 17 |
| $ | 33 |
| $ | 10,016 |
| $ | 16 |
| $ | 10,000 |
|
HELOCs (1,2) | | 1,928 |
| — |
| 3 |
| 12 |
| 15 |
| 1,943 |
| 8 |
| 1,935 |
|
Pledged asset lines | 3,846 |
| 4 |
| 1 |
| — |
| 5 |
| 3,851 |
| — |
| 3,851 |
| 4,361 |
| 4 |
| 4 |
| — |
| 8 |
| 4,369 |
| — |
| 4,369 |
|
Other | 94 |
| — |
| — |
| — |
| — |
| 94 |
| 1 |
| 93 |
| 176 |
| — |
| — |
| — |
| — |
| 176 |
| 2 |
| 174 |
|
Total bank loans | $ | 15,376 |
| $ | 21 |
| $ | 6 |
| $ | 26 |
| $ | 53 |
| $ | 15,429 |
| $ | 26 |
| $ | 15,403 |
| $ | 16,448 |
| $ | 18 |
| $ | 9 |
| $ | 29 |
| $ | 56 |
| $ | 16,504 |
| $ | 26 |
| $ | 16,478 |
|
Residential real estate mortgages (First Mortgages)(1) First Mortgages and home equity loans and lines of credit (HELOCs)HELOCs include unamortized premiums and discounts and direct origination costs of $77$73 million and $78$77 million at September 30, 20172018 and December 31, 2016,2017, respectively. The Company
(2) At September 30, 2018 and December 31, 2017, 47% and 48%, respectively, 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 September 30, 2018 or December 31, 2017.
At September 30, 2018, CSB had commitmentspledged $11.1 billion of First Mortgages and HELOCs as collateral to extendsecure borrowing capacity on a secured credit related to unused HELOCs,facility with the FHLB (see Note 8).
Substantially all of the bank loans were collectively evaluated for impairment at September 30, 2018 and December 31, 2017.
Changes in the allowance for loan losses were as follows: |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2018 | | September 30, 2017 |
Three Months Ended | | First Mortgages | | HELOCs | | Other | | Total (1) | | First Mortgages | | HELOCs | | Other | | Total (1) |
Balance at beginning of period | | $ | 17 |
| | $ | 7 |
| | $ | 2 |
| | $ | 26 |
| | $ | 17 |
| | $ | 8 |
| | $ | 1 |
| | $ | 26 |
|
Charge-offs | | — |
| | — |
| | — |
| | — |
| | (1 | ) | | — |
| | — |
| | (1 | ) |
Recoveries | | — |
| | 1 |
| | — |
| | 1 |
| | — |
| | — |
| | 1 |
| | 1 |
|
Provision for loan losses | | — |
| | (1 | ) | | — |
| | (1 | ) | | — |
| | — |
| | — |
| | — |
|
Balance at end of period | | $ | 17 |
| | $ | 7 |
| | $ | 2 |
| | $ | 26 |
| | $ | 16 |
| | $ | 8 |
| | $ | 2 |
| | $ | 26 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Nine Months Ended | | | | | | | | | | | | | | | | |
Balance at beginning of period | | $ | 16 |
| | $ | 8 |
| | $ | 2 |
| | $ | 26 |
| | $ | 17 |
| | $ | 8 |
| | $ | 1 |
| | $ | 26 |
|
Charge-offs | | — |
| | — |
| | (1 | ) | | (1 | ) | | (2 | ) | | (1 | ) | | — |
| | (3 | ) |
Recoveries | | — |
| | 2 |
| | — |
| | 2 |
| | 1 |
| | 1 |
| | 1 |
| | 3 |
|
Provision for loan losses | | 1 |
| | (3 | ) | | 1 |
| | (1 | ) | | — |
| | — |
| | — |
| | — |
|
Balance at end of period | | $ | 17 |
| | $ | 7 |
| | $ | 2 |
| | $ | 26 |
| | $ | 16 |
| | $ | 8 |
| | $ | 2 |
| | $ | 26 |
|
(1) All pledged asset lines (PALs), and other lines of credit, which totaled $9.6 billion and $8.4 billion at September 30, 2017 and December 31, 2016, respectively. The Company had commitments to purchase First Mortgage loans of $459 million and $466 million at September 30, 2017 and December 31, 2016, respectively. All PALs were fully collateralized by securities with fair values in excess of borrowings at September 30, 20172018 and December 31, 2016.
Schwab Bank provides a co-branded loan origination program for Schwab Bank clients (the Program) with Quicken Loans, Inc. (Quicken Loans2017.®). Pursuant to the Program, Quicken Loans originates and services First Mortgages and HELOCs for Schwab Bank clients. Under the Program, Schwab Bank purchases certain First Mortgages and HELOCs that are originated by Quicken Loans. Schwab Bank purchased First Mortgages of $696 million and $858 million during the third quarters of 2017 and 2016, respectively, and $2.0 billion and $2.1 billion during the first nine months of 2017 and 2016, respectively. Schwab Bank purchased HELOCs with commitments of $115 million and $93 million during the third quarters of 2017 and 2016, respectively, and $344 million and $315 million during the first nine months of 2017 and 2016, respectively.
THE CHARLES SCHWAB CORPORATION
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted)
(Unaudited)
Credit QualityA summary of impaired bank loan-related assets is as follows: |
| | | | | | | | |
| | September 30, 2018 | | December 31, 2017 |
Nonaccrual loans (1) | | $ | 23 |
| | $ | 28 |
|
Other real estate owned (2) | | 3 |
| | 3 |
|
Total nonperforming assets | | 26 |
| | 31 |
|
Troubled debt restructurings | | 4 |
| | 11 |
|
Total impaired assets | | $ | 30 |
| | $ | 42 |
|
(1) Nonaccrual loans include nonaccrual troubled debt restructurings.
(2) Included in other assets on the condensed consolidated balance sheets.
Changes in the allowance for loan losses were as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Three Months Ended | | September 30, 2017 | | September 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 |
| | $ | 10 |
| | $ | 1 |
| | $ | 31 |
|
Charge-offs | | (1 | ) | | — |
| | — |
| | (1 | ) | | — |
| | — |
| | — |
| | — |
|
Recoveries | | — |
| | — |
| | 1 |
| | 1 |
| | — |
| | — |
| | — |
| | — |
|
Provision for loan losses | | — |
| | — |
| | — |
| | — |
| | (5 | ) | | — |
| | — |
| | (5 | ) |
Balance at end of period | | $ | 16 |
| | $ | 8 |
| | $ | 2 |
| | $ | 26 |
| | $ | 15 |
| | $ | 10 |
| | $ | 1 |
| | $ | 26 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Nine Months Ended | | September 30, 2017 | | September 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 | | (2 | ) | | (1 | ) | | — |
| | (3 | ) | | (1 | ) | | — |
| | — |
| | (1 | ) |
Recoveries | | 1 |
| | 1 |
| | 1 |
| | 3 |
| | 1 |
| | — |
| | — |
| | 1 |
|
Provision for loan losses | | — |
| | — |
| | — |
| | — |
| | (5 | ) | | (1 | ) | | 1 |
| | (5 | ) |
Balance at end of period | | $ | 16 |
| | $ | 8 |
| | $ | 2 |
| | $ | 26 |
| | $ | 15 |
| | $ | 10 |
| | $ | 1 |
| | $ | 26 |
|
Substantially all of the bank loans were collectively evaluated for impairment at September 30, 2017 and December 31, 2016. There were no loans accruing interest that were contractually 90 days or more past due at September 30, 2017 or December 31, 2016. Nonperforming assets, which include nonaccrual loans and other real estate owned, totaled $29 million and $31 million at September 30, 2017 and December 31, 2016, respectively. Impaired assets, which include nonaccrual loans, other real estate owned and troubled debt restructurings, totaled $38 million and $45 million at September 30, 2017 and December 31, 2016, respectively. Troubled debt restructurings were not material at September 30, 2017 or December 31, 2016.Credit Quality
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 September 2017.quarterly. 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 estimatedupdated on a monthly basis by reference to a home price appreciation index.
As of September 30, 2017 and December 31, 2016, 47% and 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: |
| | | | | | | | | | | | | |
September 30, 2018 | | Balance | | Weighted Average Updated FICO | | Utilization Rate (1) | | Percent of Loans that are on Nonaccrual Status |
First Mortgages | | | | | | | | |
Estimated Current LTV | | | | | | | | |
<70% | | $ | 9,383 |
| | 777 |
| | N/A |
| | 0.05 | % |
>70% – <90% | | 868 |
| | 771 |
| | N/A |
| | 0.24 | % |
>90% – <100% | | 4 |
| | 713 |
| | N/A |
| | 8.70 | % |
>100% | | 1 |
| | 742 |
| | N/A |
| | — |
|
Total | | $ | 10,256 |
| | 776 |
| | N/A |
| | 0.07 | % |
HELOCs | | | | | | | | |
Estimated Current LTV (2) | | | | | | | | |
<70% | | $ | 1,509 |
| | 771 |
| | 31 | % | | 0.18 | % |
>70% – <90% | | 84 |
| | 752 |
| | 47 | % | | 0.90 | % |
>90% – <100% | | 5 |
| | 746 |
| | 77 | % | | 0.90 | % |
>100% | | 4 |
| | 704 |
| | 81 | % | | 5.28 | % |
Total | | $ | 1,602 |
| | 770 |
| | 31 | % | | 0.24 | % |
Pledged asset lines | | | | | | |
| | |
|
Weighted-Average LTV (2) | | | | | | |
| | |
|
=70% | | $ | 4,556 |
| | 766 |
| | 36 | % | | — |
|
|
| | | | | | | | | | | | | |
September 30, 2017 | | Balance | | Weighted Average Updated FICO | | Utilization Rate (1) | | Percent of Loans on Nonaccrual Status |
Residential real estate mortgages: | | | | | | | | |
Estimated Current LTV | | | | | | | | |
<70% | | $ | 8,896 |
| | 776 |
| | N/A |
| | 0.05 | % |
>70% – <90% | | 893 |
| | 768 |
| | N/A |
| | 0.47 | % |
>90% – <100% | | 8 |
| | 720 |
| | N/A |
| | 4.60 | % |
>100% | | 5 |
| | 724 |
| | N/A |
| | — |
|
Total | | $ | 9,802 |
| | 776 |
| | N/A |
| | 0.09 | % |
Home equity loans and lines of credit: | | | | | | | | |
Estimated Current LTV (2) | | | | | | | | |
<70% | | $ | 1,855 |
| | 772 |
| | 33 | % | | 0.16 | % |
>70% – <90% | | 160 |
| | 757 |
| | 49 | % | | 0.46 | % |
>90% – <100% | | 17 |
| | 747 |
| | 74 | % | | 2.08 | % |
>100% | | 10 |
| | 718 |
| | 74 | % | | 2.12 | % |
Total | | $ | 2,042 |
| | 770 |
| | 34 | % | | 0.21 | % |
Pledged asset lines: | | | | | | |
| | |
|
Weighted-Average LTV (2) | | | | | | |
| | |
|
=70% | | $ | 4,279 |
| | 767 |
| | 42 | % | | — |
|
(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.
|
| | | | | | | | |
September 30, 2017 | | Residential real estate mortgages | | Home equity loans and lines of credit |
Year of origination | | | | |
|
Pre-2013 | | $ | 1,639 |
| | $ | 1,448 |
|
2013 | | 1,437 |
| | 158 |
|
2014 | | 569 |
| | 126 |
|
2015 | | 1,280 |
| | 134 |
|
2016 | | 2,967 |
| | 107 |
|
2017 | | 1,910 |
| | 69 |
|
Total | | $ | 9,802 |
| | $ | 2,042 |
|
Origination FICO | | |
| | |
|
<620 | | $ | 7 |
| | $ | 1 |
|
620 – 679 | | 85 |
| | 10 |
|
680 – 739 | | 1,533 |
| | 377 |
|
>740 | | 8,177 |
| | 1,654 |
|
Total | | $ | 9,802 |
| | $ | 2,042 |
|
Origination LTV | | | | |
<70% | | $ | 7,395 |
| | $ | 1,423 |
|
>70% – <90% | | 2,400 |
| | 608 |
|
>90% – <100% | | 7 |
| | 11 |
|
Total | | $ | 9,802 |
| | $ | 2,042 |
|
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: | | | | | | | | | |
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% | | $ | 8,350 |
| | 774 |
| | N/A |
| | 0.04 | % | | $ | 9,046 |
| | 775 |
| | N/A |
| | 0.09 | % |
>70% – <90% | | 743 |
| | 768 |
| | N/A |
| | 0.35 | % | | 961 |
| | 769 |
| | N/A |
| | 0.46 | % |
>90% – <100% | | 21 |
| | 747 |
| | N/A |
| | 2.08 | % | | 5 |
| | 714 |
| | N/A |
| | 10.49 | % |
>100% | | 20 |
| | 709 |
| | N/A |
| | 14.50 | % | | 4 |
| | 713 |
| | N/A |
| | 6.23 | % |
Total | | $ | 9,134 |
| | 773 |
| | N/A |
| | 0.10 | % | | $ | 10,016 |
| | 775 |
| | N/A |
| | 0.14 | % |
Home equity loans and lines of credit: | | | | | | | | | |
HELOCs | | | | | | | | | |
Estimated Current LTV (2) | | | | | | | | | | | | | | | | |
<70% | | $ | 2,070 |
| | 771 |
| | 35 | % | | 0.12 | % | | $ | 1,773 |
| | 772 |
| | 32 | % | | 0.18 | % |
>70% – <90% | | 234 |
| | 757 |
| | 50 | % | | 0.40 | % | | 148 |
| | 755 |
| | 47 | % | | 0.84 | % |
>90% – <100% | | 29 |
| | 747 |
| | 66 | % | | 1.74 | % | | 14 |
| | 742 |
| | 64 | % | | 2.85 | % |
>100% | | 17 |
| | 728 |
| | 70 | % | | 3.73 | % | | 8 |
| | 718 |
| | 72 | % | | 4.91 | % |
Total | | $ | 2,350 |
| | 769 |
| | 36 | % | | 0.20 | % | | $ | 1,943 |
| | 770 |
| | 33 | % | | 0.27 | % |
Pledged asset lines: | | | | | | | | | |
Pledged asset lines | | | | | | | | | |
Weighted-Average LTV (2) | | | | | | | | | | | | | | | | |
=70% | | $ | 3,851 |
| | 763 |
| | 46 | % | | — |
| | $ | 4,369 |
| | 765 |
| | 41 | % | | — |
|
(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 |
Year of origination | | | | |
|
Pre-2013 | | $ | 2,136 |
| | $ | 1,765 |
|
2013 | | 1,746 |
| | 193 |
|
2014 | | 685 |
| | 152 |
|
2015 | | 1,458 |
| | 146 |
|
2016 | | 3,109 |
| | 94 |
|
Total | | $ | 9,134 |
| | $ | 2,350 |
|
Origination FICO | | |
| | |
|
<620 | | $ | 8 |
| | $ | — |
|
620 – 679 | | 92 |
| | 13 |
|
680 – 739 | | 1,427 |
| | 432 |
|
>740 | | 7,607 |
| | 1,905 |
|
Total | | $ | 9,134 |
| | $ | 2,350 |
|
Origination LTV | | |
| | |
|
<70% | | $ | 6,865 |
| | $ | 1,628 |
|
>70% – <90% | | 2,260 |
| | 709 |
|
>90% – <100% | | 9 |
| | 13 |
|
Total | | $ | 9,134 |
| | $ | 2,350 |
|
The Company’s bank loans include $8.8 billion of adjustable rate First Mortgage loans at September 30, 2017. The Company’s adjustable rate mortgages have initial fixed interest rates for three to ten years and interest rates that adjust annually thereafter. Approximately 34% of these mortgages consisted of loans with interest-only payment terms. The interest rates on
THE CHARLES SCHWAB CORPORATION
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted)
(Unaudited)
|
| | | | | | | | |
September 30, 2018 | | First Mortgages | | HELOCs |
Year of origination | | | | |
|
Pre-2014 | | $ | 2,144 |
| | $ | 1,156 |
|
2014 | | 436 |
| | 93 |
|
2015 | | 1,087 |
| | 110 |
|
2016 | | 2,662 |
| | 96 |
|
2017 | | 2,420 |
| | 101 |
|
2018 | | 1,507 |
| | 46 |
|
Total | | $ | 10,256 |
| | $ | 1,602 |
|
Origination FICO | | |
| | |
|
<620 | | $ | 5 |
| | — |
|
620 – 679 | | 83 |
| | 8 |
|
680 – 739 | | 1,595 |
| | 305 |
|
>740 | | 8,573 |
| | 1,289 |
|
Total | | $ | 10,256 |
| | $ | 1,602 |
|
Origination LTV | | | | |
<70% | | $ | 7,737 |
| | $ | 1,127 |
|
>70% – <90% | | 2,514 |
| | 468 |
|
>90% – <100% | | 5 |
| | 7 |
|
Total | | $ | 10,256 |
| | $ | 1,602 |
|
|
| | | | | | | | |
December 31, 2017 | | First Mortgages | | HELOCs |
Year of origination | | | | |
|
Pre-2014 | | $ | 2,804 |
| | $ | 1,496 |
|
2014 | | 530 |
| | 116 |
|
2015 | | 1,218 |
| | 128 |
|
2016 | | 2,886 |
| | 111 |
|
2017 | | 2,578 |
| | 92 |
|
Total | | $ | 10,016 |
| | $ | 1,943 |
|
Origination FICO | | |
| | |
|
<620 | | $ | 6 |
| | $ | 1 |
|
620 – 679 | | 89 |
| | 10 |
|
680 – 739 | | 1,569 |
| | 365 |
|
>740 | | 8,352 |
| | 1,567 |
|
Total | | $ | 10,016 |
| | $ | 1,943 |
|
Origination LTV | | |
| | |
|
<70% | | $ | 7,569 |
| | $ | 1,360 |
|
>70% – <90% | | 2,441 |
| | 574 |
|
>90% – <100% | | 6 |
| | 9 |
|
Total | | $ | 10,016 |
| | $ | 1,943 |
|
At September 30, 2018, First Mortgage loans of $9.3 billion had adjustable interest rates. These mortgages have initial fixed interest rates for three to ten years and interest rates that adjust annually thereafter. Approximately 31% of the balance of these mortgages consisted of loans with interest-only payment terms. The interest rates on approximately 56%64% of the balance of these interest-only loans are not scheduled to reset for three or more years. The Company’sSchwab’s mortgage loans do not include interest terms described as temporary introductory rates below current market rates.
CHARLES SCHWAB CORPORATION
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted)
(Unaudited)
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:
| | September 30, 2017 | | Balance | |
September 30, 2018 | | | Balance |
Converted to an amortizing loan by period end | | $ | 447 |
| | $ | 640 |
|
Within 1 year | | 475 |
| | 186 |
|
> 1 year – 3 years | | 346 |
| | 133 |
|
> 3 years – 5 years | | 148 |
| | 163 |
|
> 5 years | | 626 |
| | 480 |
|
Total | | $ | 2,042 |
| | $ | 1,602 |
|
At September 30, 2017, $1.62018, $1.3 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 September 30, 2017,2018, the borrowers on approximately 39%54% 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 Principles 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 September 30, 2017 and December 31, 2016.
As of September 30, 20172018 and December 31, 2016, the majority2017, all of the Company’s VIEsSchwab’s involvement with variable interest entities (VIEs) is through CSB’s Community Reinvestment Act-related investments and most of those are related to Schwab Bank’s Low-Income Housing Tax Credit (LIHTC) investments. Schwab Bank’sAs part of CSB’s community reinvestment initiatives, CSB generally 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 the Community Reinvestment Act (CRA) and Schwab Bank’s LIHTC investments, see Note 2 and Note 10 in the 2016 Form 10-K.
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 CompanySchwab holds a variable interest, but as to which the Company has concluded it is not the primary beneficiary, are summarized in the table below:
| | | | September 30, 2017 | | December 31, 2016 | | September 30, 2018 | | December 31, 2017 |
| | Aggregate assets | | Aggregate liabilities | | Maximum exposure to loss | | Aggregate assets | | Aggregate liabilities | | Maximum exposure to loss | | Aggregate assets | | Aggregate liabilities | | Maximum exposure to loss | | Aggregate assets | | Aggregate liabilities | | Maximum exposure to loss |
LIHTC investments (1) | | $ | 253 |
| | $ | 169 |
| | $ | 253 |
| | $ | 189 |
| | $ | 135 |
| | $ | 189 |
| | $ | 347 |
| | $ | 204 |
| | $ | 347 |
| | $ | 304 |
| | $ | 203 |
| | $ | 304 |
|
Other CRA investments (2) | | 63 |
| | — |
| | 82 |
| | 60 |
| | — |
| | 80 |
| | 68 |
| | — |
| | 116 |
| | 69 |
| | — |
| | 125 |
|
Total | | $ | 316 |
| | $ | 169 |
| | $ | 335 |
| | $ | 249 |
| | $ | 135 |
| | $ | 269 |
| | $ | 415 |
| | $ | 204 |
| | $ | 463 |
| | $ | 373 |
| | $ | 203 |
| | $ | 429 |
|
(1) Aggregate assets and aggregate liabilities are included in other assets and accrued expenses and other liabilities, respectively, on the condensed consolidated balance sheets.
(2) Other CRA investments are recorded using either the adjusted cost method, equity method, or the equity method.as HTM securities. Aggregate assets are included in either other assets orHTM securities, bank loans – net, or other assets 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 nine months ended September 30, 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. Schwab Bank’sCSB’s funding of these remaining commitments is dependent upon the occurrence of certain conditions, and Schwab BankCSB expects to pay substantially all of these commitments between 20172018 and 2020.2021.
6. Bank Deposits
Bank deposits consist of interest-bearing and non-interest-bearing deposits as follows:
|
| | | | | | | | |
| | September 30, 2017 | | December 31, 2016 |
Interest-bearing deposits: | | | | |
Deposits swept from brokerage accounts | | $ | 144,293 |
| | $ | 141,146 |
|
Checking | | 12,943 |
| | 13,842 |
|
Savings and other | | 7,441 |
| | 7,792 |
|
Total interest-bearing deposits | | 164,677 |
| | 162,780 |
|
Non-interest-bearing deposits | | 586 |
| | 674 |
|
Total bank deposits | | $ | 165,263 |
| | $ | 163,454 |
|
7. Borrowings
Long-term debt was net of unamortized debt discounts/premiums and debt issuance costs of $26 million and $24 million at September 30, 2017 and December 31, 2016, respectively.
|
| | | | | | | | |
| | September 30, 2017 | | December 31, 2016 |
Senior Notes | | $ | 3,205 |
| | $ | 2,558 |
|
Medium-Term Notes | | — |
| | 250 |
|
Finance lease obligation | | 63 |
| | 68 |
|
Total long-term debt | | $ | 3,268 |
| | $ | 2,876 |
|
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 amount7. Bank Deposits
Bank deposits consist of interest-bearing and non-interest-bearing deposits as follows:
|
| | | | | | | | |
| | September 30, 2018 | | December 31, 2017 |
Interest-bearing deposits: | | | | |
Deposits swept from brokerage accounts | | $ | 194,337 |
| | $ | 148,212 |
|
Checking | | 12,230 |
| | 13,388 |
|
Savings and other | | 6,153 |
| | 7,264 |
|
Total interest-bearing deposits | | 212,720 |
| | 168,864 |
|
Non-interest-bearing deposits | | 688 |
| | 792 |
|
Total bank deposits | | $ | 213,408 |
| | $ | 169,656 |
|
8. Borrowings
CSC’s Senior Notes that mature in 2027. Theare unsecured obligations and rank equally with the other unsecured senior debt. CSC may redeem some or all of the Senior Notes have a fixed interest rate of 3.200% with interesteach 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.
semi-annually for the fixed-rate Senior Notes and quarterly for the floating-rate Senior Notes. The Company’sfollowing table lists long-term debt atby instrument outstanding as of September 30, 2017 had2018 and December 31, 2017.
|
| | | | | | | |
| Date of | Principal Amount Outstanding |
| Issuance | September 30, 2018 | December 31, 2017 |
Fixed-rate Senior Notes: | | | |
1.500% due March 10, 2018 (1) | 03/10/15 | $ | — |
| $ | 625 |
|
2.200% due July 25, 2018 (2) | 07/25/13 | — |
| 275 |
|
4.450% due July 22, 2020 | 07/22/10 | 700 |
| 700 |
|
3.250% due May 21, 2021 | 05/22/18 | 600 |
| — |
|
3.225% due September 1, 2022 | 08/29/12 | 256 |
| 256 |
|
2.650% due January 25, 2023 | 12/07/17 | 800 |
| 800 |
|
3.000% due March 10, 2025 | 03/10/15 | 375 |
| 375 |
|
3.850% due May 21, 2025 | 05/22/18 | 750 |
| — |
|
3.450% due February 13, 2026 | 11/13/15 | 350 |
| 350 |
|
3.200% due March 2, 2027 | 03/02/17 | 650 |
| 650 |
|
3.200% due January 25, 2028 | 12/07/17 | 700 |
| 700 |
|
Floating-rate Senior Notes: | | | |
Three-month LIBOR + 0.32% due May 21, 2021 | 05/22/18 | 600 |
| — |
|
Total Senior Notes | | 5,781 |
| 4,731 |
|
5.450% Finance lease obligation (3) | 06/04/04 | 55 |
| 61 |
|
Unamortized discount — net | | (13 | ) | (14 | ) |
Debt issuance costs | | (33 | ) | (25 | ) |
Total long-term debt | | $ | 5,790 |
| $ | 4,753 |
|
(1) Redeemed on February 8, 2018.
(2) Redeemed on June 25, 2018.
(3) Schwab has a weighted-average interest ratefinance 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 3.11%.the lease payments over the remaining lease term through June 30, 2024.
CHARLES SCHWAB CORPORATION
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted)
(Unaudited)
Annual maturities on long-term debt outstanding at September 30, 2018 are as follows: | | | September 30, 2017 |
| Maturities |
2017 | $ | 3 |
| |
2018 | 908 |
| $ | 2 |
|
2019 | 8 |
| 8 |
|
2020 | 709 |
| 709 |
|
2021 | 9 |
| 1,209 |
|
2022 | | 266 |
|
Thereafter | 1,657 |
| 3,642 |
|
Total maturities | 3,294 |
| 5,836 |
|
Unamortized discount, net | (13 | ) | |
Unamortized discount — net | | (13 | ) |
Debt issuance costs | (13 | ) | (33 | ) |
Total long-term debt | $ | 3,268 |
| $ | 5,790 |
|
Short-term borrowings: Schwab Bank maintains aCertain banking subsidiaries maintain secured credit facilityfacilities with the Federal Home Loan Bank of San Francisco (FHLB).FHLB. Amounts available under this facilitythese facilities are dependent on the value of Schwab Bank’sour First Mortgages, HELOCs, and the fair value of certain of their investment securities that are pledged as collateral. As of September 30, 2017,2018, the collateral pledged by Schwab Bank provided a total borrowing capacity of $19.9$30.0 billion includingof which no amounts were outstanding. As of December 31, 2017, the $5.0 billion outstanding. The Company could increase itscollateral pledged by CSB provided a total borrowing capacity by pledging additional securities. At December 31, 2016, there were no amounts outstanding under this facility.of $32.3 billion, of which $15.0 billion was outstanding.
As a condition of the FHLB borrowings, Schwab Bank iswe are required to hold FHLB stock, with the investmentwhich was recorded in other assets on the condensed consolidated balance sheets. The investment in FHLB was $135$32 million at September 30, 20172018 and $81$405 million at 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 September 30, 2017. CSC had no Commercial Paper Notes outstanding at September 30, 2017 and December 31, 2016.
CSC and Schwab also have access to uncommitted, unsecured bank credit lines with several banks. Schwab had no borrowings outstanding under these lines at September 30, 2017 and 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 $491 million and $696 million during the third quarters of 2018 and 2017, respectively, and $1.6 billion and $2.0 billion during the first nine months of 2018 and 2017, respectively. Schwab purchased HELOCs with commitments of $104 million and $115 million during the third quarters of 2018 and 2017, respectively, and $311 million and $344 million during the first nine months 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:
|
| | | | | | | |
| September 30, 2018 | | December 31, 2017 |
|
Commitments to extend credit related to unused HELOCs, PALs, and other lines of credit | $ | 11,028 |
| | $ | 10,060 |
|
Commitments to purchase First Mortgage loans | 355 |
| | 308 |
|
Total | $ | 11,383 |
| | $ | 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 September 30, 2017,2018, the aggregate face amount of these LOCs totaled $295$225 million. There were no funds drawn under any of these LOCs at September 30, 2017.2018. 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 potential requirement for the Company to make payments under these arrangements is remote. Accordingly, no liability has been recognized for these guarantees.
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 CompanyPredicting 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 reasonably possible to estimate a range of potential liability until the matter is closer to resolution – pending, for example, further proceedings, the outcome of key motions or appeals, or discussions among the parties. Numerous issues may have to be developed, such as discovery of important factual matters and determination of threshold legal issues, which may include novel or unsettled questions of law. Reserves are established or adjusted or further disclosure and estimates of potential loss are provided as the matter progresses and more information becomes available.
Schwab believes it has strong defenses in all significant matters currently pending and is contesting liability and any damages claimed. Nevertheless, some of these matters may result in adverse judgments or awards, including penalties, injunctions or other relief, and the Company may also determine to settle a matter because of the uncertainty and risks of litigation. Described below are certain matters in which there is a reasonable possibility that a material loss could be incurred or where the matter may otherwise be of significant interest to stockholders. Unless otherwise noted, the Company is unable to provide a reasonable estimate of any potential liability given the stage of proceedings in the matter.
With respect to all other pending matters, based on current information and consultation with counsel, it does not appear reasonably possible that the outcome of any such matter would be material to the financial condition, operating results, or cash flows of the Company. 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 ofPlaintiff’s fourth amended complaint, filed on June 25, 2015, asserts state law breach of contract and federal securities law in connection with the fund’s investment policy, namedfiduciary duty claims and names 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. Plaintiff’s federal securities law claimfees on behalf of a putative class of investors who held shares as of August 31, 2007, and certaina putative class of plaintiff’s state law claims were dismissed. On August 8, 2011,investors who purchased 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 caseshares between September 1, 2017 and remanding the case for further proceedings. Plaintiff filed a fourth amended complaint on June 25, 2015, and inFebruary 27, 2009. In decisions issued October 6, 2015 and February 23, 2016, the court dismissed all claims with prejudice.prejudice, holding that federal securities law precluded plaintiff from pursuing such claims as a class action. Plaintiff has appealed to the Ninth Circuit, whereand on September 14, 2018, a 3-judge panel upheld dismissal, with leave for plaintiff to pursue the case isclaims in its individual capacity. Action by plaintiff, including further appeal, remains 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
THE CHARLES SCHWAB CORPORATION
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted)
(Unaudited)
prices may cause the fair value of the securities loaned to exceed the amount of cash received as collateral. In the event the counterparty to these transactions does not return the loaned securities or provide additional cash collateral, the Companywe may be exposed to the risk of acquiring the securities at prevailing market prices in order to satisfy itsour client obligations. The CompanySchwab mitigates this risk by requiring credit approvals for counterparties, monitoring the fair value of securities loaned, and requiring additional cash as collateral when necessary. The Company borrowsWe also borrow securities from other broker-dealers to fulfill short sales by brokerage clients and deliversdeliver cash to the lender in exchange for the securities. The fair value of these borrowed securities was $336$338 million and $215 million at September 30, 20172018 and $213 million at December 31, 2016.2017, respectively. All of the Company’sour securities lending transactions are through a program with a clearing organization, which guarantees the return of cash to us and is subject to enforceable master netting arrangements with other broker-dealers; however, the Company doeswe do not net securities lending transactions. Therefore, the Company’s securities loaned and securities borrowed are presented gross in the condensed consolidated balance sheets.
CHARLES SCHWAB CORPORATION
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted)
(Unaudited)
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 September 30, 20172018 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 |
September 30, 2018 | | | | | | | | | | | | | |
Assets | | | | | | | | | | | | | |
Resale agreements (1) | | $ | 4,424 |
| | $ | — |
| | $ | 4,424 |
| | $ | — |
| | $ | (4,424 | ) | (2) | | $ | — |
|
Securities borrowed (3) | | 346 |
| | — |
| | 346 |
| | (316 | ) | | (30 | ) | | | — |
|
Total | | $ | 4,770 |
| | $ | — |
| | $ | 4,770 |
| | $ | (316 | ) | | $ | (4,454 | ) | | | $ | — |
|
Liabilities | | | | | | | | | | | | | |
Securities loaned (4,5) | | $ | 1,062 |
| | $ | — |
| | $ | 1,062 |
| | $ | (316 | ) | | $ | (652 | ) | | | $ | 94 |
|
Total | | $ | 1,062 |
| | $ | — |
| | $ | 1,062 |
| | $ | (316 | ) | | $ | (652 | ) | | | $ | 94 |
|
| | | | | | | | | | | | | |
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 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | 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 |
September 30, 2017 | | | | | | | | | | | | | |
Assets: | | | | | | | | | | | | | |
Resale agreements (1) | | $ | 7,247 |
| | $ | — |
| | $ | 7,247 |
| | $ | — |
| | $ | (7,247 | ) | (2) | | $ | — |
|
Securities borrowed (3) | | 344 |
| | — |
| | 344 |
| | (297 | ) | | (46 | ) | | | 1 |
|
Total | | $ | 7,591 |
| | $ | — |
| | $ | 7,591 |
| | $ | (297 | ) | | $ | (7,293 | ) | | | $ | 1 |
|
Liabilities: | | | | | | | | | | | | | |
Securities loaned (4,5) | | $ | 1,324 |
| | $ | — |
| | $ | 1,324 |
| | $ | (297 | ) | | $ | (919 | ) | | | $ | 108 |
|
Total | | $ | 1,324 |
| | $ | — |
| | $ | 1,324 |
| | $ | (297 | ) | | $ | (919 | ) | | | $ | 108 |
|
December 31, 2016 | | | | | | | | | | | | | |
Assets: | | | | | | | | | | | | | |
Resale agreements (1) | | $ | 9,547 |
| | $ | — |
| | $ | 9,547 |
| | $ | — |
| | $ | (9,547 | ) | (2) | | $ | — |
|
Securities borrowed (3) | | 393 |
| | — |
| | 393 |
| | (200 | ) | | (189 | ) | | | 4 |
|
Total | | $ | 9,940 |
| | $ | — |
| | $ | 9,940 |
| | $ | (200 | ) | | $ | (9,736 | ) | | | $ | 4 |
|
Liabilities: | | | | | | | | | | | | | |
Securities loaned (4,5) | | $ | 1,996 |
| | $ | — |
| | $ | 1,996 |
| | $ | (200 | ) | | $ | (1,660 | ) | | | $ | 136 |
|
Total | | $ | 1,996 |
| | $ | — |
| | $ | 1,996 |
| | $ | (200 | ) | | $ | (1,660 | ) | | | $ | 136 |
|
(1) Included in cash and investments segregated and on deposit for regulatory purposes in the Company’s condensed consolidated balance sheets.
(2) Actual collateral was greater than or equal to 102% of the related assets. At September 30, 20172018 and December 31, 2016,2017, the fair value of collateral received in connection with resale agreements that are available to be repledged or sold was $7.4$4.5 billion and $9.8$6.7 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. The cash collateral received from counterparties under securities lending transactions was equal to or greater than the market value of the securities loaned at September 30, 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.
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:
| | | | September 30, 2017 | | December 31, 2016 | | September 30, 2018 | | December 31, 2017 |
Fair value of client securities available to be pledged | Fair value of client securities available to be pledged | | $ | 23,520 |
| | $ | 21,516 |
| Fair value of client securities available to be pledged | | $ | 28,806 |
| | $ | 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) | | 3,036 |
| | 2,280 |
|
Fulfillment of client short sales | | Fulfillment of client short sales | | 1,923 |
| | 2,011 |
|
Securities lending to other broker-dealers | Securities lending to other broker-dealers | | 1,115 |
| | 1,626 |
| Securities lending to other broker-dealers | | 872 |
| | 784 |
|
Fulfillment of client short sales | | 2,281 |
| | 2,048 |
| |
Fulfillment of requirements with the Options Clearing Corporation (1) | | 1,949 |
| | 1,519 |
| |
Total collateral pledged | Total collateral pledged | | $ | 5,345 |
| | $ | 5,193 |
| Total collateral pledged | | $ | 5,831 |
| | $ | 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 $92$88 million as of September 30, 20172018 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 carrying values of these deposits approximate their fair values.
Financial instruments included in accrued expenses and other liabilities consist of drafts payable and certain amounts due under contractual obligations, including unfunded LIHTC commitments. The carrying values of these instruments approximate their fair values.
Short-term borrowings consist of commercial paper, borrowings on Schwab’s uncommitted, unsecured bank credit lines, and funds drawn on Schwab Bank’s secured credit facility with the Federal Home Loan Bank of San Francisco. Due to the short-term nature of these borrowings, carrying value approximates fair value.
Long-term debt – Except for the finance lease obligation, the fair values of long-term debt are estimated using indicative, non-binding quotes from independent brokers. The Company validates indicative prices for its debt through comparison to other independent non-binding quotes. The finance lease obligation is recorded at carrying value, which approximates fair value.
Firm commitments to extend credit – 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 nine months of 2017. The CompanyWe did not transfer any assets or liabilities between Level 1, Level 2, or Level 3 during the nine months ended September 30, 2017,2018, 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 September 30, 20172018 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:
| | September 30, 2017 | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Balance at Fair Value | |
September 30, 2018 | | Level 1 | | Level 2 | | Level 3 | | Balance at Fair Value |
Cash equivalents: | | | | | | | | | | | | | | |
Money market funds | $ | 1,720 |
| | $ | — |
| | $ | — |
| | $ | 1,720 |
| $ | 552 |
| | $ | — |
| | $ | — |
| | $ | 552 |
|
Commercial paper | — |
| | 115 |
| | — |
| | 115 |
| — |
| | 1,988 |
| | — |
| | 1,988 |
|
Total cash equivalents | 1,720 |
| | 115 |
| | — |
| | 1,835 |
| 552 |
| | 1,988 |
| | — |
| | 2,540 |
|
Investments segregated and on deposit for regulatory purposes: | |
| | |
| | |
| | | |
| | |
| | |
| | |
Certificates of deposit | — |
| | 1,200 |
| | — |
| | 1,200 |
| — |
| | 1,950 |
| | — |
| | 1,950 |
|
U.S. Government securities | — |
| | 3,814 |
| | — |
| | 3,814 |
| |
Total investments segregated and on deposit for regulatory purposes | — |
| | 5,014 |
| | — |
| | 5,014 |
| — |
| | 1,950 |
| | — |
| | 1,950 |
|
Other securities owned: | |
| | |
| | |
| | | |
| | |
| | |
| | |
Equity and bond mutual funds | 294 |
| | — |
| | — |
| | 294 |
| 394 |
| | — |
| | — |
| | 394 |
|
Schwab Funds® money market funds | 68 |
| | — |
| | — |
| | 68 |
| 21 |
| | — |
| | — |
| | 21 |
|
State and municipal debt obligations | — |
| | 35 |
| | — |
| | 35 |
| — |
| | 44 |
| | — |
| | 44 |
|
Equity, U.S. Government and corporate debt, and other securities | 4 |
| | 26 |
| | — |
| | 30 |
| 3 |
| | 38 |
| | — |
| | 41 |
|
Total other securities owned | 366 |
| | 61 |
| | — |
| | 427 |
| 418 |
| | 82 |
| | — |
| | 500 |
|
Available for sale securities: | |
| | |
| | |
| | | |
| | |
| | |
| | |
U.S. agency mortgage-backed securities | — |
| | 19,746 |
| | — |
| | 19,746 |
| — |
| | 23,955 |
| | — |
| | 23,955 |
|
U.S. Treasury securities | | — |
| | 12,243 |
| | — |
| | 12,243 |
|
Asset-backed securities | — |
| | 9,996 |
| | — |
| | 9,996 |
| — |
| | 9,387 |
| | — |
| | 9,387 |
|
Corporate debt securities | — |
| | 6,468 |
| | — |
| | 6,468 |
| — |
| | 6,922 |
| | — |
| | 6,922 |
|
U.S. Treasury securities | — |
| | 7,699 |
| | — |
| | 7,699 |
| |
Certificates of deposit | — |
| | 1,843 |
| | — |
| | 1,843 |
| — |
| | 2,769 |
| | — |
| | 2,769 |
|
U.S. agency notes | — |
| | 1,907 |
| | — |
| | 1,907 |
| — |
| | 1,682 |
| | — |
| | 1,682 |
|
Commercial paper | — |
| | 312 |
| | — |
| | 312 |
| — |
| | 518 |
| | — |
| | 518 |
|
Foreign government agency securities | | — |
| | 48 |
| | — |
| | 48 |
|
Non-agency commercial mortgage-backed securities | — |
| | 41 |
| | — |
| | 41 |
| — |
| | 34 |
| | — |
| | 34 |
|
Foreign government agency securities | — |
| | 50 |
| | — |
| | 50 |
| |
Total available for sale securities | — |
| | 48,062 |
| | — |
| | 48,062 |
| — |
| | 57,558 |
| | — |
| | 57,558 |
|
Total | $ | 2,086 |
| | $ | 53,252 |
| | $ | — |
| | $ | 55,338 |
| $ | 970 |
| | $ | 61,578 |
| | $ | — |
| | $ | 62,548 |
|
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 | | Level 1 | | Level 2 | | 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:
| | September 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 | |
Assets: | | | | | | | | | | | |
September 30, 2018 | | Carrying Amount | | Level 1 | | Level 2 | | Level 3 | | Balance at Fair Value |
Assets | | | | | | | | | | |
Cash and cash equivalents | | $ | 10,418 |
| | $ | — |
| | $ | 10,418 |
| | $ | — |
| | $ | 10,418 |
| $ | 19,290 |
| | $ | — |
| | $ | 19,290 |
| | $ | — |
| | $ | 19,290 |
|
Cash and investments segregated and on deposit for regulatory purposes | | 10,916 |
| | — |
| | 10,916 |
| | — |
| | 10,916 |
| 6,526 |
| | — |
| | 6,526 |
| | — |
| | 6,526 |
|
Receivables from brokers, dealers, and clearing organizations | | 665 |
| | — |
| | 665 |
| | — |
| | 665 |
| 798 |
| | — |
| | 798 |
| | — |
| | 798 |
|
Receivables from brokerage clients – net | | 18,456 |
| | — |
| | 18,456 |
| | — |
| | 18,456 |
| |
Receivables from brokerage clients — net | | 22,402 |
| | — |
| | 22,402 |
| | — |
| | 22,402 |
|
Held to maturity securities: | | | | | | | | | | | | | | | | | | | |
U.S. agency mortgage-backed securities | | 96,045 |
| | — |
| | 95,816 |
| | — |
| | 95,816 |
| 113,453 |
| | — |
| | 109,996 |
| | — |
| | 109,996 |
|
Non-agency commercial mortgage-backed securities | | 995 |
| | — |
| | 1,006 |
| | — |
| | 1,006 |
| |
Asset-backed securities | | 12,237 |
| | — |
| | 12,336 |
| | — |
| | 12,336 |
| 17,964 |
| | — |
| | 18,074 |
| | — |
| | 18,074 |
|
Corporate debt securities | | 3,377 |
| | — |
| | 3,403 |
| | — |
| | 3,403 |
| 4,578 |
| | — |
| | 4,531 |
| | — |
| | 4,531 |
|
U.S. state and municipal securities | | 1,330 |
| | — |
| | 1,329 |
| | — |
| | 1,329 |
|
Non-agency commercial mortgage-backed securities | | 1,149 |
| | — |
| | 1,125 |
| | — |
| | 1,125 |
|
U.S. Treasury securities | | 223 |
| | — |
| | 222 |
| | — |
| | 222 |
| 223 |
| | — |
| | 212 |
| | — |
| | 212 |
|
U.S. state and municipal securities | | 1,249 |
| | — |
| | 1,299 |
| | — |
| | 1,299 |
| |
Certificates of deposit | | 200 |
| | — |
| | 200 |
| | — |
| | 200 |
| 200 |
| | — |
| | 201 |
| | — |
| | 201 |
|
Foreign government agency securities | | 50 |
| | — |
| | 50 |
| | — |
| | 50 |
| 50 |
| | — |
| | 48 |
| | — |
| | 48 |
|
Other | | 5 |
| | — |
| | 5 |
| | — |
| | 5 |
|
Total held to maturity securities | | 114,376 |
| | — |
| | 114,332 |
| | — |
| | 114,332 |
| 138,952 |
| | — |
| | 135,521 |
| | — |
| | 135,521 |
|
Bank loans – net: | | | | | | | | | | | |
Residential real estate mortgages | | 9,786 |
| | — |
| | 9,771 |
| | — |
| | 9,771 |
| |
Home equity loans and lines of credit | | 2,034 |
| | — |
| | 2,127 |
| | — |
| | 2,127 |
| |
Bank loans — net: | | | | | | | | | | |
First Mortgages | | 10,239 |
| | — |
| | 9,963 |
| | — |
| | 9,963 |
|
HELOCs | | 1,595 |
| | — |
| | 1,664 |
| | — |
| | 1,664 |
|
Pledged asset lines | | 4,279 |
| | — |
| | 4,279 |
| | — |
| | 4,279 |
| 4,556 |
| | — |
| | 4,556 |
| | — |
| | 4,556 |
|
Other | | 133 |
| | — |
| | 133 |
| | — |
| | 133 |
| 174 |
| | — |
| | 174 |
| | — |
| | 174 |
|
Total bank loans – net | | 16,232 |
| | — |
| | 16,310 |
| | — |
| | 16,310 |
| |
Total bank loans — net | | 16,564 |
| | — |
| | 16,357 |
| | — |
| | 16,357 |
|
Other assets | | 465 |
| | — |
| | 465 |
| | — |
| | 465 |
| 463 |
| | — |
| | 463 |
| | — |
| | 463 |
|
Total | | $ | 171,528 |
| | $ | — |
| | $ | 171,562 |
| | $ | — |
| | $ | 171,562 |
| $ | 204,995 |
| | $ | — |
| | $ | 201,357 |
| | $ | — |
| | $ | 201,357 |
|
Liabilities: | | | | | | | | | | | |
Liabilities | | | | | | | | | | |
Bank deposits | | $ | 165,263 |
| | $ | — |
| | $ | 165,263 |
| | $ | — |
| | $ | 165,263 |
| $ | 213,408 |
| | $ | — |
| | $ | 213,408 |
| | $ | — |
| | $ | 213,408 |
|
Payables to brokers, dealers, and clearing organizations | | 5,427 |
| | — |
| | 5,427 |
| | — |
| | 5,427 |
| 1,522 |
| | — |
| | 1,522 |
| | — |
| | 1,522 |
|
Payables to brokerage clients | | 31,480 |
| | — |
| | 31,480 |
| | — |
| | 31,480 |
| 27,851 |
| | — |
| | 27,851 |
| | — |
| | 27,851 |
|
Accrued expenses and other liabilities | | 1,067 |
| | — |
| | 1,067 |
| | — |
| | 1,067 |
| 1,177 |
| | — |
| | 1,177 |
| | — |
| | 1,177 |
|
Short-term borrowings | | 5,000 |
| | — |
| | 5,000 |
| | — |
| | 5,000 |
| |
Long-term debt | | 3,268 |
| | — |
| | 3,347 |
| | — |
| | 3,347 |
| 5,790 |
| | — |
| | 5,687 |
| | — |
| | 5,687 |
|
Total | | $ | 211,505 |
| | $ | — |
| | $ | 211,584 |
| | $ | — |
| | $ | 211,584 |
| $ | 249,748 |
| | $ | — |
| | $ | 249,645 |
| | $ | — |
| | $ | 249,645 |
|
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 | |
Assets: | | | | | | | | | | | |
December 31, 2017 | | Carrying Amount | | Level 1 | | Level 2 | | 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: | | | | | | | | | | | |
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:
| | | | September 30, 2017 | | December 31, 2016 | | Liquidation Preference Per Share | | | Dividend Rate in Effect at September 30, 2018 | Earliest Redemption Date | Date at Which Dividend Rate Becomes Floating | Floating Annual Rate of Three-Month LIBOR plus: |
| | Shares Issued and Outstanding (In thousands) | | Liquidation Preference Per Share | | Liquidation Preference | | Carrying Value | | Shares Issued and Outstanding (In thousands) | | Liquidation Preference Per Share | | Liquidation Preference | | Carrying Value | Shares Issued and Outstanding (In thousands) at | Carrying Value at | |
Series A | | 400 |
| | $ | 1,000 |
| | $ | 400 |
| | $ | 397 |
| | 400 |
| | $ | 1,000 |
| | $ | 400 |
| | $ | 397 |
| |
Series B | | 485 |
| | 1,000 |
| | 485 |
| | 482 |
| | 485 |
| | 1,000 |
| | 485 |
| | 482 |
| |
| | September 30, 2018 (1) | December 31, 2017 (1) | Liquidation Preference Per Share | September 30, 2018 | December 31, 2017 | Issue Date | Dividend Rate in Effect at September 30, 2018 | Earliest Redemption Date | Date at Which Dividend Rate Becomes Floating | Floating Annual Rate of Three-Month LIBOR plus: |
Fixed-rate: | | | | |
Series C | | 600 |
| | 1,000 |
| | 600 |
| | 585 |
| | 600 |
| | 1,000 |
| | 600 |
| | 585 |
| 600 |
| 600 |
| $ | 585 |
| $ | 585 |
| 08/03/15 |
Series D | | 750 |
| | 1,000 |
| | 750 |
| | 728 |
| | 750 |
| | 1,000 |
| | 750 |
| | 728 |
| 750 |
| 750 |
| 1,000 |
| 728 |
| 728 |
| 03/07/16 | 5.950 | % | 06/01/21 | N/A | N/A |
|
Fixed-to-floating-rate: | | | | | | | |
Series A | | 400 |
| 400 |
| 1,000 |
| 397 |
| 397 |
| 01/26/12 | 7.000 | % | 02/01/22 | 4.820 | % |
Series E | | 6 |
| | 100,000 |
| | 600 |
| | 591 |
| | 6 |
| | 100,000 |
| | 600 |
| | 591 |
| 6 |
| 6 |
| 100,000 |
| 591 |
| 591 |
| 10/31/16 | 4.625 | % | 03/01/22 | 3.315 | % |
Total Preferred Stock | | 2,241 |
| | | | $ | 2,835 |
| | $ | 2,783 |
| | 2,241 |
| | | | $ | 2,835 |
| | $ | 2,783 |
| |
Series F | | 5 |
| 5 |
| 100,000 |
| 492 |
| 492 |
| 10/31/17 | 5.000 | % | 12/01/27 | 12/01/27 | 2.575 | % |
Total preferred stock | | 1,761 |
| 1,761 |
|
|
| $ | 2,793 |
| $ | 2,793 |
| | | | | |
(1) Represented by depositary shares, except for Series A.
N/A Not applicable.
12.13. Accumulated Other Comprehensive Income
Accumulated other comprehensive income (AOCI) represents cumulative gains and losses that are not reflected in earnings. The components of other comprehensive income (loss) are as follows:
| | | | | | | | | | | | | | | 2018 | | 2017 |
Three Months Ended September 30, | 2017 | | 2016 | Before Tax | | Tax Effect | | Net of Tax | | Before Tax | | Tax Effect | | Net of Tax |
| Before Tax | | Tax Effect | | Net of Tax | | Before Tax | | Tax Effect | | Net of Tax | |
Change in net unrealized gain (loss) on available for sale securities: | |
| | |
| | |
| | |
| | |
| | |
| |
| | |
| | |
| | |
| | |
| | |
|
Net unrealized gain (loss) | $ | — |
| | $ | — |
| | $ | — |
| | $ | 77 |
| | $ | (29 | ) | | $ | 48 |
| $ | (43 | ) | | $ | 11 |
| | $ | (32 | ) | | $ | — |
| | $ | — |
| | $ | — |
|
Other reclassifications included in other revenue | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| |
Change in net unrealized gain (loss) on held to maturity securities: | | | | | | | | | | | | | | | | | | | | | | |
Amortization of amounts previously recorded upon transfer from available for sale | 10 |
| | (4 | ) | | 6 |
| | — |
| | — |
| | — |
| 8 |
| | (2 | ) | | 6 |
| | 10 |
| | (4 | ) | | 6 |
|
Other comprehensive income (loss) | $ | 10 |
| | $ | (4 | ) | | $ | 6 |
| | $ | 77 |
| | $ | (29 | ) | | $ | 48 |
| $ | (35 | ) | | $ | 9 |
| | $ | (26 | ) | | $ | 10 |
| | $ | (4 | ) | | $ | 6 |
|
| | | | | | | | | | | | | | | 2018 | | 2017 |
Nine Months Ended September 30, | 2017 | | 2016 | Before Tax | | Tax Effect | | Net of Tax | | Before Tax | | Tax Effect | | Net of Tax |
| Before Tax | | Tax Effect | | Net of Tax | | Before Tax | | Tax Effect | | Net of Tax | |
Change in net unrealized gain (loss) on available for sale securities: | |
| | |
| | |
| | |
| | |
| | | |
| | |
| | |
| | |
| | |
| | |
Net unrealized gain (loss) | $ | 81 |
| | $ | (30 | ) | | $ | 51 |
| | $ | 266 |
| | $ | (100 | ) | | $ | 166 |
| $ | (184 | ) | | $ | 45 |
| | $ | (139 | ) | | $ | 81 |
| | $ | (30 | ) | | $ | 51 |
|
Reclassification of net unrealized loss on securities transferred to held to maturity (1) | 227 |
| | (85 | ) | | 142 |
| | — |
| | — |
| | — |
| — |
| | — |
| | — |
| | 227 |
| | (85 | ) | | 142 |
|
Other reclassifications included in other revenue | (7 | ) | | 3 |
| | (4 | ) | | (3 | ) | | 1 |
| | (2 | ) | — |
| | — |
| | — |
| | (7 | ) | | 3 |
| | (4 | ) |
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 | ) | | — |
| | — |
| | — |
| — |
| | — |
| | — |
| | (227 | ) | | 85 |
| | (142 | ) |
Amortization of amounts previously recorded upon transfer from available for sale | 21 |
| | (9 | ) | | 12 |
| | — |
| | — |
| | — |
| 26 |
| | (6 | ) | | 20 |
| | 21 |
| | (9 | ) | | 12 |
|
Other | (3 | ) | | 1 |
| | (2 | ) | | 1 |
| | — |
| | 1 |
| — |
| | — |
| | — |
| | (3 | ) | | 1 |
| | (2 | ) |
Other comprehensive income (loss) | $ | 92 |
| | $ | (35 | ) | | $ | 57 |
| | $ | 264 |
| | $ | (99 | ) | | $ | 165 |
| $ | (158 | ) | | $ | 39 |
| | $ | (119 | ) | | $ | 92 |
| | $ | (35 | ) | | $ | 57 |
|
(1) See Note 35 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.
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 | | 164 |
| |
Other | | 1 |
| |
Balance at September 30, 2016 | | $ | 31 |
| |
Balance at December 31, 2016 | | $ | (163 | ) | | $ | (163 | ) |
Available for sale securities: | | | | |
Net unrealized gain (loss) | | 51 |
| | 51 |
|
Reclassification of net unrealized loss on securities transferred to held to maturity | | 142 |
| | 142 |
|
Other reclassifications included in other revenue | | (4 | ) | | (4 | ) |
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 | | 12 |
| | 12 |
|
Other | | (2 | ) | | (2 | ) |
Balance at September 30, 2017 | | $ | (106 | ) | | $ | (106 | ) |
| | | |
Balance at December 31, 2017 | | | $ | (152 | ) |
Adoption of accounting standards (Note 2) | | | (33 | ) |
Available for sale securities: | | | |
Net unrealized gain (loss) | | | (139 | ) |
Held to maturity securities: | | | |
Amortization of amounts previously recorded upon transfer to held to maturity from available for sale | | | 20 |
|
Balance at September 30, 2018 | | | $ | (304 | ) |
13.14. Taxes 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. Schwab’s effective tax rate for the three and nine months ended September 30, 2018 was 24.3% and 23.3%, respectively, compared to 34.6% and 34.9% for the three and nine months ended September 30, 2017, respectively, resulting from the impact of the Tax Act of 2017.
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 associated with the remeasurement of net deferred tax assets and other tax adjustments related to the Tax Act. While we were able to make a reasonable estimate of the impact of the reduction in the corporate tax rate 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.
During the second quarter of 2018, Schwab concluded its analysis of the effect of bonus depreciation that allows for immediate expensing of qualified property related to the Tax Act. The impact of the true-up adjustment from this analysis was determined to be immaterial. We are continuing to gather additional information to complete the accounting for the remaining estimated items, including the state tax effect of adjustments made to federal temporary differences, and expect to complete the accounting within the prescribed measurement period. As such, the impact of the Tax Act is an estimate pending further information and the analysis noted.
As of January 1, 2018, Schwab adopted new accounting guidance that decreased AOCI and increased retained earnings by $33 million for the reclassification of certain impacts of the Tax Act as described in Note 2.
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 September 30, | | Nine Months Ended September 30, | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 | | 2018 | | 2017 | | 2018 | | 2017 |
Net income | | $ | 618 |
| | $ | 503 |
| | $ | 1,757 |
| | $ | 1,367 |
| | $ | 923 |
| | $ | 618 |
| | $ | 2,572 |
| | $ | 1,757 |
|
Preferred stock dividends and other (1) | | (43 | ) | | (33 | ) | | (127 | ) | | (99 | ) | | (38 | ) | | (43 | ) | | (128 | ) | | (127 | ) |
Net income available to common stockholders | | $ | 575 |
| | $ | 470 |
| | $ | 1,630 |
| | $ | 1,268 |
| | $ | 885 |
| | $ | 575 |
| | $ | 2,444 |
| | $ | 1,630 |
|
Weighted-average common shares outstanding — basic | | 1,339 |
| | 1,324 |
| | 1,338 |
| | 1,322 |
| | 1,351 |
| | 1,339 |
| | 1,349 |
| | 1,338 |
|
Common stock equivalent shares related to stock incentive plans | | 14 |
| | 10 |
| | 14 |
| | 10 |
| | 13 |
| | 14 |
| | 14 |
| | 14 |
|
Weighted-average common shares outstanding — diluted (2) | | 1,353 |
| | 1,334 |
| | 1,352 |
| | 1,332 |
| | 1,364 |
| | 1,353 |
| | 1,363 |
| | 1,352 |
|
Basic EPS | | $ | .43 |
| | $ | .36 |
| | $ | 1.22 |
| | $ | .96 |
| | $ | .66 |
| | $ | .43 |
| | $ | 1.81 |
| | $ | 1.22 |
|
Diluted EPS | | $ | .42 |
| | $ | .35 |
| | $ | 1.21 |
| | $ | .95 |
| | $ | .65 |
| | $ | .42 |
| | $ | 1.79 |
| | $ | 1.21 |
|
(1) Includes preferred stock dividends and undistributed earnings and dividends allocated to non-vested restricted stock units.
(2) Antidilutive stock options and restricted stock awardsunits excluded from the calculation of diluted EPS totaled 911 million and 179 million shares for the third quarters of 20172018 and 2016,2017, respectively, and 1012 million and 2110 million shares for the first nine months of 20172018 and 2016,2017, respectively.
14. Regulatory Requirements
At September 30, 2017, both CSC and Schwab Bank met all of their respective capital requirements. Certain events, such as growth in bank deposits and regulatory discretion, could adversely affect CSC’s or Schwab Bank’s ability to meet future capital requirements.
THE CHARLES SCHWAB CORPORATION
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted)
(Unaudited)
16. Regulatory Requirements
At September 30, 2018, Schwab and CSB met all of their respective capital requirements. The regulatory capital and ratios for CSC (consolidated) and Schwab BankCSB are as follows:
| | | | Actual | | Minimum to be Well Capitalized | | Minimum Capital Requirement | | Actual | | Minimum to be Well Capitalized | | Minimum Capital Requirement |
September 30, 2017 | | Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio | |
September 30, 2018 | | | Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio |
CSC | | | | | | | | | | | | | | | | | | | | | | | | |
Common Equity Tier 1 Risk-Based Capital | | $ | 14,128 |
| | 19.6 | % | | N/A |
| | | | $ | 3,242 |
| | 4.5 | % | | $ | 17,025 |
| | 19.6 | % | | N/A |
| | | | $ | 3,907 |
| | 4.5 | % |
Tier 1 Risk-Based Capital | | 16,911 |
| | 23.5 | % | | N/A |
| | | | 4,322 |
| | 6.0 | % | | 19,818 |
| | 22.8 | % | | N/A |
| | | | 5,210 |
| | 6.0 | % |
Total Risk-Based Capital | | 16,939 |
| | 23.5 | % | | N/A |
| | | | 5,763 |
| | 8.0 | % | | 19,846 |
| | 22.9 | % | | N/A |
| | | | 6,946 |
| | 8.0 | % |
Tier 1 Leverage | | 16,911 |
| | 7.7 | % | | N/A |
| | | | 8,802 |
| | 4.0 | % | | 19,818 |
| | 7.5 | % | | N/A |
| | | | 10,622 |
| | 4.0 | % |
Schwab Bank | | | | | | | | | | | | | |
CSB | | | | | | | | | | | | | |
Common Equity Tier 1 Risk-Based Capital | | $ | 12,862 |
| | 20.0 | % | | $ | 4,171 |
| | 6.5 | % | | $ | 2,888 |
| | 4.5 | % | | $ | 15,164 |
| | 20.2 | % | | $ | 4,890 |
| | 6.5 | % | | $ | 3,385 |
| | 4.5 | % |
Tier 1 Risk-Based Capital | | 12,862 |
| | 20.0 | % | | 5,134 |
| | 8.0 | % | | 3,850 |
| | 6.0 | % | | 15,164 |
| | 20.2 | % | | 6,018 |
| | 8.0 | % | | 4,513 |
| | 6.0 | % |
Total Risk-Based Capital | | 12,889 |
| | 20.1 | % | | 6,417 |
| | 10.0 | % | | 5,134 |
| | 8.0 | % | | 15,191 |
| | 20.2 | % | | 7,522 |
| | 10.0 | % | | 6,018 |
| | 8.0 | % |
Tier 1 Leverage | | 12,862 |
| | 7.2 | % | | 8,923 |
| | 5.0 | % | | 7,138 |
| | 4.0 | % | | 15,164 |
| | 7.1 | % | | 10,668 |
| | 5.0 | % | | 8,534 |
| | 4.0 | % |
| | | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2016 | | | | | | | | | | | | | |
December 31, 2017 | | | | | | | | | | | | | |
CSC | | | | | | | | | | | | | | | | | | | | | | | | |
Common Equity Tier 1 Risk-Based Capital | | $ | 12,574 |
| | 18.4 | % | | N/A |
| | | | $ | 3,068 |
| | 4.5 | % | | $ | 14,630 |
| | 19.3 | % | | N/A |
| | | | $ | 3,414 |
| | 4.5 | % |
Tier 1 Risk-Based Capital | | 15,357 |
| | 22.5 | % | | N/A |
| | | | 4,091 |
| | 6.0 | % | | 17,423 |
| | 23.0 | % | | N/A |
| | | | 4,552 |
| | 6.0 | % |
Total Risk-Based Capital | | 15,384 |
| | 22.6 | % | | N/A |
| | | | 5,454 |
| | 8.0 | % | | 17,452 |
| | 23.0 | % | | N/A |
| | | | 6,069 |
| | 8.0 | % |
Tier 1 Leverage | | 15,357 |
| | 7.2 | % | | N/A |
| | | | 8,516 |
| | 4.0 | % | | 17,423 |
| | 7.6 | % | | N/A |
| | | | 9,218 |
| | 4.0 | % |
Schwab Bank | | | | | | | | | | | | | |
CSB | | | | | | | | | | | | | |
Common Equity Tier 1 Risk-Based Capital | | $ | 11,878 |
| | 19.8 | % | | $ | 3,894 |
| | 6.5 | % | | $ | 2,696 |
| | 4.5 | % | | $ | 13,355 |
| | 20.1 | % | | $ | 4,324 |
| | 6.5 | % | | $ | 2,993 |
| | 4.5 | % |
Tier 1 Risk-Based Capital | | 11,878 |
| | 19.8 | % | | 4,793 |
| | 8.0 | % | | 3,595 |
| | 6.0 | % | | 13,355 |
| | 20.1 | % | | 5,321 |
| | 8.0 | % | | 3,991 |
| | 6.0 | % |
Total Risk-Based Capital | | 11,904 |
| | 19.9 | % | | 5,992 |
| | 10.0 | % | | 4,793 |
| | 8.0 | % | | 13,382 |
| | 20.1 | % | | 6,652 |
| | 10.0 | % | | 5,321 |
| | 8.0 | % |
Tier 1 Leverage | | 11,878 |
| | 7.0 | % | | 8,456 |
| | 5.0 | % | | 6,765 |
| | 4.0 | % | | 13,355 |
| | 7.1 | % | | 9,462 |
| | 5.0 | % | | 7,569 |
| | 4.0 | % |
N/A Not applicable.
Based on its regulatory capital ratios atAt September 30, 2017, Schwab Bank2018, CSB is considered well capitalized (the highest category) under its respective regulatory capital rules. There are no conditions or events since September 30, 2017 that management believes have changed Schwab Bank’s capital category. At September 30, 2017, both2018, CSC’s and Schwab Bank’sCSB’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 September 30, 2018, CSSB’s balance sheet consisted primarily of investment securities with total assets of $13.1 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 Schwab and optionsXpressCS&Co are as follows:
|
| | | | | | | | | | | | | | | | |
September 30, 2017 | | Net Capital | | Minimum Net Capital Required | | 2% of Aggregate Debit Balances | | Net Capital in Excess of Required Capital |
Schwab | | $ | 1,974 |
| | $ | 0.250 |
| | $ | 394 |
| | $ | 1,580 |
|
optionsXpress | | 295 |
| | 1 |
| | 7 |
| | 288 |
|
December 31, 2016 | | | | | | | | |
Schwab | | $ | 1,846 |
| | $ | 0.250 |
| | $ | 355 |
| | $ | 1,491 |
|
optionsXpress | | 269 |
| | 1 |
| | 8 |
| | 261 |
|
|
| | | | | | | | |
| | September 30, 2018 | | December 31, 2017 |
Net Capital | | $ | 2,280 |
| | $ | 2,118 |
|
Minimum net capital required | | 0.250 |
| | 0.250 |
|
2% of aggregate debit balances | | 476 |
| | 435 |
|
Net Capital in excess of required net capital | | $ | 1,804 |
| | $ | 1,683 |
|
THE CHARLES SCHWAB CORPORATION
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted)
(Unaudited)
15.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 September 30, 2018. The SEC Customer Protection Rule requires broker-dealers to segregate client fully paid securities and cash balances not collateralizing margin positions and not swept to money market funds or bank deposit accounts. Amounts included in cash and investments segregated and on deposit for regulatory purposes represent actual balances on deposit. 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 tables: |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Investor Services | | Advisor Services | | Total |
Three Months Ended September 30, | | 2018 | | 2017 | | 2018 | | 2017 | | 2018 | | 2017 |
Net Revenues | | | | | | | | | | | | |
Net interest revenue | | $ | 1,138 |
| | $ | 818 |
| | $ | 389 |
| | $ | 264 |
| | $ | 1,527 |
| | $ | 1,082 |
|
Asset management and administration fees | | 565 |
| | 595 |
| | 244 |
| | 266 |
| | 809 |
| | 861 |
|
Trading revenue | | 112 |
| | 94 |
| | 64 |
| | 57 |
| | 176 |
| | 151 |
|
Other | | 53 |
| | 54 |
| | 14 |
| | 17 |
| | 67 |
| | 71 |
|
Total net revenues | | 1,868 |
| | 1,561 |
| | 711 |
| | 604 |
| | 2,579 |
| | 2,165 |
|
Expenses Excluding Interest | | 1,015 |
| | 918 |
| | 345 |
| | 302 |
| | 1,360 |
| | 1,220 |
|
Income before taxes on income | | $ | 853 |
| | $ | 643 |
| | $ | 366 |
| | $ | 302 |
| | $ | 1,219 |
| | $ | 945 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Investor Services | | Advisor Services | | Total |
Three Months Ended September 30, | | 2017 | | 2016 | | 2017 | | 2016 | | 2017 | | 2016 |
Net Revenues: | | | | | | | | | | | | |
Asset management and administration fees | | $ | 595 |
| | $ | 550 |
| | $ | 266 |
| | $ | 248 |
| | $ | 861 |
| | $ | 798 |
|
Net interest revenue | | 818 |
| | 654 |
| | 264 |
| | 191 |
| | 1,082 |
| | 845 |
|
Trading revenue | | 94 |
| | 123 |
| | 57 |
| | 67 |
| | 151 |
| | 190 |
|
Other | | 54 |
| | 56 |
| | 17 |
| | 20 |
| | 71 |
| | 76 |
|
Provision for loan losses | | — |
| | 4 |
| | — |
| | 1 |
| | — |
| | 5 |
|
Total net revenues | | 1,561 |
| | 1,387 |
| | 604 |
| | 527 |
| | 2,165 |
| | 1,914 |
|
Expenses Excluding Interest | | 918 |
| | 847 |
| | 302 |
| | 273 |
| | 1,220 |
| | 1,120 |
|
Income before taxes on income | | $ | 643 |
| | $ | 540 |
| | $ | 302 |
| | $ | 254 |
| | $ | 945 |
| | $ | 794 |
|
| | | | Investor Services | | Advisor Services | | Total | | Investor Services | | Advisor Services | | Total |
Nine Months Ended September 30, | | 2017 | | 2016 | | 2017 | | 2016 | | 2017 | | 2016 | | 2018 | | 2017 | | 2018 | | 2017 | | 2018 | | 2017 |
Net Revenues: | | | | | | | | | | | | | |
Net Revenues | | | | | | | | | | | | | |
Net interest revenue | | | $ | 3,158 |
| | $ | 2,366 |
| | $ | 1,039 |
| | $ | 769 |
| | $ | 4,197 |
| | $ | 3,135 |
|
Asset management and administration fees | | $ | 1,743 |
| | $ | 1,536 |
| | $ | 786 |
| | $ | 718 |
| | $ | 2,529 |
| | $ | 2,254 |
| | 1,727 |
| | 1,743 |
| | 747 |
| | 786 |
| | 2,474 |
| | 2,529 |
|
Net interest revenue | | 2,366 |
| | 1,895 |
| | 769 |
| | 520 |
| | 3,135 |
| | 2,415 |
| |
Trading revenue | | 311 |
| | 395 |
| | 189 |
| | 228 |
| | 500 |
| | 623 |
| | 354 |
| | 311 |
| | 203 |
| | 189 |
| | 557 |
| | 500 |
|
Other | | 159 |
| | 153 |
| | 53 |
| | 56 |
| | 212 |
| | 209 |
| | 182 |
| | 159 |
| | 53 |
| | 53 |
| | 235 |
| | 212 |
|
Provision for loan losses | | — |
| | 4 |
| | — |
| | 1 |
| | — |
| | 5 |
| |
Total net revenues | | 4,579 |
| | 3,983 |
| | 1,797 |
| | 1,523 |
| | 6,376 |
| | 5,506 |
| | 5,421 |
| | 4,579 |
| | 2,042 |
| | 1,797 |
| | 7,463 |
| | 6,376 |
|
Expenses Excluding Interest | | 2,762 |
| | 2,518 |
| | 917 |
| | 819 |
| | 3,679 |
| | 3,337 |
| | 3,069 |
| | 2,762 |
| | 1,042 |
| | 917 |
| | 4,111 |
| | 3,679 |
|
Income before taxes on income | | $ | 1,817 |
| | $ | 1,465 |
| | $ | 880 |
| | $ | 704 |
| | $ | 2,697 |
| | $ | 2,169 |
| | $ | 2,352 |
| | $ | 1,817 |
| | $ | 1,000 |
| | $ | 880 |
| | $ | 3,352 |
| | $ | 2,697 |
|
16.CHARLES SCHWAB CORPORATION
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted)
(Unaudited)
18. Subsequent EventEvents
On October 25, 2018, CSC’s Board of Directors terminated the existing two share repurchase authorizations and replaced them with a new authorization to repurchase up to a total of $1.0 billion of common stock.
On October 31, 2017,2018, CSC issued $500 million aggregate principal amount of Senior Notes that mature in 2024 and $600 million aggregate principal amount of Senior Notes that mature in 2029 under its universal shelf registration statement on file with the Company issued and sold 500,000 depositary shares, each representing a 1/100th ownership interest in a share of fixed-to-floating rate non-cumulative perpetual preferred stock, Series F, $0.01 par value, with a liquidation preference of $100,000 per share (equivalent to $1,000 per depositary share).SEC. The Series F Preferred Stock hasSenior Notes due 2024 have a fixed dividendinterest rate of 5.00% through November 30, 2027,3.550% with interest payable semi-annually, and thereaftersemi-annually. The Senior Notes due 2029 have a floatingfixed interest rate of three-month LIBOR plus a fixed spread of 2.575%,4.000% with interest payable quarterly. The net proceeds received from the sale were $492 million after deducting related expenses and fees.
Also on October 31, 2017, the Company announced that it will redeem on December 1, 2017, all of the outstanding shares of its 6.00% non-cumulative perpetual preferred stock, Series B, and the corresponding depositary shares. The redemption will be funded with the net proceeds from the Series F offering.semi-annually.
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 September 30, 2017.2018. 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 September 30, 2017.2018.
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 September 30, 2017,2018, 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 nine 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 September 30, 2017,2018, approximately $596 million of future share repurchases areremained authorized under the Share Repurchase Program. There were no share repurchases during the third 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 CompanyCSC on April 25, 2007 and March 13, 2008. There were no share repurchases during the third quarter of 2018. On October 25, 2018, CSC publicly announced that its Board of Directors terminated the existing authorizations and replaced them with a new authorization to repurchase up to a total of $1.0 billion of common stock. The remaining authorizations doauthorization does not have an expiration date.
The following table summarizes purchases made by or on behalf of CSC of its common stock for each calendar month in the third 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 |
July: | | | | | | | | |
Employee transactions (1) | | 7 |
| | $ | 43.43 |
| | 3 |
| | $ | 51.24 |
|
August: | | | | | | | | |
Employee transactions (1) | | 9 |
| | $ | 42.68 |
| | 5 |
| | $ | 50.57 |
|
September: | | | | | | | | |
Employee transactions (1) | | 9 |
| | $ | 39.90 |
| | 5 |
| | $ | 50.99 |
|
Total: | | | | | | | | |
Employee Transactions (1) | | 25 |
| | $ | 41.90 |
| | 13 |
| | $ | 50.89 |
|
(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.
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:
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Exhibit Number | Exhibit | |
| | |
3.20 |
| |
| | |
10.377 |
| (1) |
| | |
10.378 | | (1) (2) |
| | |
10.379 | | (1) (2) |
| | |
10.380 | | (1) (2) |
| | |
10.381 | | (1) (2) |
| | |
10.382 | | (1) (2) |
| | |
10.383 | | (1) (2) |
| | |
10.384 | | (1) (2) |
| | |
12.1 | | |
| | |
31.1 |
| |
| | |
31.2 | | |
| | |
32.1 | | (2) |
| | |
32.2 | | (2) |
| | |
| | |
THE CHARLES SCHWAB CORPORATION
|
| | | |
Exhibit
Number
| Exhibit | |
| | |
101.INS | XBRL Instance Document | (3) |
| | |
101.SCH | XBRL Taxonomy Extension Schema | (3) |
| | |
101.CAL | XBRL Taxonomy Extension Calculation | (3) |
| | |
101.DEF | XBRL Extension Definition | (3) |
| | |
101.LAB | XBRL Taxonomy Extension Label | (3) |
| | |
101.PRE | XBRL Taxonomy Extension Presentation | (3) |
| | |
(1 | ) | Management contract or compensatory plan. | |
| | |
(2 | ) | Furnished as an exhibit to this Quarterly Report on Form 10-Q. | |
| | |
(3 | ) | Attached as Exhibit 101 to this Quarterly Report on Form 10-Q for the quarterly period ended September30, 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.
| |
|
| | | |
Exhibit Number | Exhibit | |
| | |
12.1 | | |
| | |
31.1 | | |
| | |
31.2 | | |
| | |
32.1 | | (1) |
| | |
32.2 | | (1) |
| | |
101.INS | XBRL Instance Document | (2) |
| | |
101.SCH | XBRL Taxonomy Extension Schema | (2) |
| | |
101.CAL | XBRL Taxonomy Extension Calculation | (2) |
| | |
101.DEF | XBRL Extension Definition | (2) |
| | |
101.LAB | XBRL Taxonomy Extension Label | (2) |
| | |
101.PRE | XBRL Taxonomy Extension Presentation | (2) |
| | |
(1 | ) | Furnished as an exhibit to this Quarterly Report on Form 10-Q. | |
| | |
(2 | ) | Attached as Exhibit 101 to this Quarterly Report on Form 10-Q for the quarterly period ended September 30, 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. | |
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.
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| | | |
| | | THE CHARLES SCHWAB CORPORATION |
| | | (Registrant) |
| | | |
| | | |
| | | |
Date: | November 7, 20172018 | | /s/ Peter Crawford |
| | | Peter Crawford |
| | | Executive Vice President and Chief Financial Officer |