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)
Delaware
(State or other jurisdiction
of incorporation or organization)
94-3025021
(I.R.S. Employer Identification No.)

211 Main Street, San Francisco, CA  94105
(Address of principal executive offices and zip code)

Registrant’s telephone number, including area code:  (415) 667-7000

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ☒  No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes ☒   No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☒Accelerated filer ☐
Non-accelerated filer ☐ (Do not check if a smaller reporting company)
Smaller reporting company ☐
Emerging growth company ☐ 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the
Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☒

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

1,340,576,3761,350,452,801 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

Part I - Financial Information
 Page
   
     
 Item 1.
Condensed Consolidated Financial Statements (Unaudited):
  
     
  
Statements of Income
 
1917
  
Statements of Comprehensive Income
 
2018
  
Balance Sheets
 
2119
  
Statements of Stockholders’ Equity
 
2220
  
Statements of Cash Flows
 
23
21-22
  
Notes
 24-4923-54
     
 Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 1-181-15
     
 Item 3.
Quantitative and Qualitative Disclosures About Market Risk
 
1816
     
 Item 4.
Controls and Procedures
 50
55
     
Part II - Other Information
  
     
 Item 1.
Legal Proceedings
 
5056
     
 Item 1A.
Risk Factors
 
5056
     
 Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
 
5056
     
 Item 3.
Defaults Upon Senior Securities
 
5156
     
 Item 4.
Mine Safety Disclosures
 
5156
     
 Item 5.
Other Information
 
5156
     
 Item 6.
Exhibits
 52-53
57
     
Signature
 
5458
   






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
•
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:

Three Months Ended September 30, Nine Months Ended September 30, Three Months Ended September 30, Percent
Change		 Nine Months Ended September 30,Percent
Change

20172016Percent
Change		20172016Percent
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%    
 
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% 
  
10.3% 11.1%  
     
Company Financial Metrics: 
 
 
   
Net revenues$2,165
$1,914
13%$6,376
$5,506
16%
Expenses excluding interest1,220
1,120
9%3,679
3,337
10%
Company Financial Metrics 
  
  
     
Total net revenues$2,579
 $2,165
 19% $7,463
 $6,376
17%
Total expenses excluding interest1,360
 1,220
 11% 4,111
 3,679
12%
Income before taxes on income945
794
19%2,697
2,169
24%1,219
 945
 29% 3,352
 2,697
24%
Taxes on income327
291
12%940
802
17%296
 327
 (9)% 780
 940
(17)%
Net income618
503
23%1,757
1,367
29%923
 618
 49% 2,572
 1,757
46%
Preferred stock dividends and other43
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 year13%20% 
16%17% 19% 13%  
 17% 16% 
Pre-tax profit margin43.6%41.5% 
42.3%39.4% 47.3% 43.6%  
 44.9% 42.3% 
Return on average common stockholders’ equity15%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:
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 %
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          
     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:
  
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 funds158,927
 219
 0.55% 161,904
 198
 0.49%
Schwab equity and bond funds and ETFs164,011
 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 Portfolios21,184
 —
 —
 8,249
 —
 —
Legacy Non-Fee19,022
 —
 —
 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 funds160,230
 665
 0.55% 164,758
 531
 0.43%
Schwab equity and bond funds and ETFs151,579
 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 Portfolios17,740
 —
 —
 6,662
 —
 —
Legacy Non-Fee18,267
 —
 —
 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 funds130,202
 122
 0.37% 158,927
 219
 0.55%
Schwab equity and bond funds and ETFs219,137
 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-based65,146
 —
 —
 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
  
Salaries
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 funds142,177
 451
 0.42% 160,230
 665
 0.55%
Schwab equity and bond funds and ETFs206,058
 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-based62,377
 —
 —
 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 days62.5
 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
DescriptionBorrower
September 30, 2017 (1)
Committed, unsecured credit facility with various external banks (2)
CSC$750
Uncommitted, unsecured lines of credit with various external banksCSC, Schwab1,129
Federal Reserve Bank discount windowSchwab Bank3,402
Federal Home Loan Bank secured credit facilitySchwab Bank14,875
Unsecured commercial paperCSC750
DescriptionBorrower Outstanding Available
Committed, unsecured credit facility with various external banksCSC $—
 $750
Uncommitted, unsecured lines of credit with various external banksCSC, CS&Co —
 1,432
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, 2018Par
Outstanding		 MaturityWeighted Average
Interest Rate		Moody’sStandard
& Poor’s		Fitch
Senior Notes$5,781
 2020 - 20283.31%A2AA
Short-term borrowings$—
 N/AN/AN/AN/AN/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
5/21/2021Three-month LIBOR + 0.32%Quarterly
May 22, 2018$600
5/21/20213.25%Semi-annually
May 22, 2018$750
5/21/20253.85%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, 2016September 30, 2018December 31, 2017
CSC Schwab Bank CSC Schwab BankCSC CSB CSC CSB
Total stockholders’ equity$18,027
 $12,769
 $16,421
 $11,726
$20,834
 $14,899
 $18,525
 $13,224
Less:              
Preferred Stock2,783
 —
 2,783
 —
Preferred stock2,793
 —
 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 liabilities46
 —
 52
 —
127
 —
 61
 —
Deferred tax assets, net of valuation allowances and deferred tax liabilities1
 —
 —
 —
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 Assets72,037
 64,173
 68,179
 59,915
86,830
 75,224
 75,866
 66,519
Common Equity Tier 1 Capital/Risk-Weighted Assets19.6% 20.0% 18.4% 19.8%19.6% 20.2% 19.3% 20.1%
Tier 1 Capital/Risk-Weighted Assets23.5% 20.0% 22.5% 19.8%22.8% 20.2% 23.0% 20.1%
Total Capital/Risk-Weighted Assets23.5% 20.1% 22.6% 19.9%22.9% 20.2% 23.0% 20.1%
Tier 1 Leverage Ratio7.7% 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, 2016September 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 organizations665
 728
798
 649
Receivables from brokerage clients — net18,461
 17,155
22,411
 20,576
Other securities owned — at fair value427
 449
500
 539
Available for sale securities48,062
 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 securities138,952
 120,926
Bank loans — net16,232
 15,403
16,564
 16,478
Equipment, office facilities, and property — net1,392
 1,299
1,683
 1,471
Goodwill1,227
 1,227
1,227
 1,227
Intangible assets — net115
 144
Other assets1,571
 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 organizations5,427
 2,407
1,522
 1,287
Payables to brokerage clients31,480
 35,894
27,851
 31,243
Accrued expenses and other liabilities2,249
 2,331
2,697
 2,810
Short-term borrowings5,000
 —
—
 15,000
Long-term debt3,268
 2,876
5,790
 4,753
Total liabilities212,687
 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 issued15
 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 capital4,365
 4,267
4,484
 4,353
Retained earnings13,963
 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’ equity18,027
 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
 TotalAccumulated 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.
StandardDescriptionDate of AdoptionEffects on the Financial Statements or Other Significant Matters
Accounting Standards Update (ASU) 2014-09, “Revenue from Contracts with Customers (Topic 606)” and related ASUsClarifies that revenue from contracts with clients should be recognized in a manner that depicts the timing of the related transfer of goods or performance of services at an amount that reflects the expected consideration.

Adoption allows either full or modified retrospective transition. Full retrospective transition required a cumulative effect adjustment to retained earnings as of the earliest comparative period presented. Modified retrospective transition required a cumulative effect adjustment to retained earnings as of the beginning of the reporting period in which the entity first applies the new guidance.		January 1, 2018The guidance does not apply to revenue earned from the Company’s loans and securities. Accordingly, net interest revenue was not impacted. The primary impact for the Company was the capitalization on the consolidated balance sheets of sales commissions paid to employees for obtaining new contracts with clients. These capitalized costs resulted in an asset of $219 million and a related deferred tax liability of $52 million upon adoption. The asset is being amortized to expense over time as the related revenues are recognized.

The Company adopted the revenue recognition guidance using the modified retrospective method for all contracts that were not completed as of January 1, 2018. Further details of the impact of adoption are included below in this Note as well as in Note 3.
ASU 2016-01, “Financial Instruments – Overall (Subtopic 825-10)” and ASU 2018-03, “Technical Corrections and Improvements to Financial Instruments – Overall (Subtopic 825-10)”Requires: (i) equity investments to be measured at fair value, with changes in fair value recognized in net income, unless the equity method is applied or the equity investments do not have readily determinable fair values in which case a practical alternative may be elected; (ii) use of an exit price when measuring the fair value of financial instruments for disclosures; (iii) separate presentation of financial assets and liabilities by measurement category and form of instrument on the balance sheet or in the accompanying notes.

Adoption requires a cumulative effect adjustment to the balance sheet as of the beginning of the year of initial application, except for certain changes that require prospective adoption.		January 1, 2018The Company adopted this guidance on a prospective basis for its equity securities that do not have readily determinable fair values. No other significant changes resulted from adoption. Therefore, there was no material impact on the Company’s financial statements.

The Company elected to use the alternative to fair value measurement for its equity securities that do not have readily determinable fair values. These equity securities will be adjusted for impairment and observable price changes of the identical or similar investments of the same issuer, as applicable. Schwab refers to this approach as the adjusted cost method. This method was applied to an immaterial amount of Community Reinvestment Act (CRA) investments included in other assets on the consolidated balance sheets.
ASU 2016-18, “Statement of Cash Flows (Topic 230) – Restricted Cash a Consensus of the Emerging Issues Task Force”Requires that the statement of cash flows explain the change during the period in the total cash and cash equivalents, including restricted cash and cash equivalents.

Adoption requires retrospective presentation of the statement of cash flows to include restricted cash and cash equivalents in the beginning and ending amounts.		January 1, 2018The Company adopted this guidance on a retrospective basis. The Company has significant amounts of restricted cash and cash equivalents due to its business as a broker-dealer.

As a result of the adoption, changes in restricted cash and cash equivalents included within cash and investments segregated and on deposit for regulatory purposes in the consolidated balance sheets are now presented with changes in cash and cash equivalents throughout the consolidated statements of cash flows. The amount of restricted cash and cash equivalents is included in a separate table in the consolidated statements of cash flows.


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.
StandardDescriptionDate of AdoptionEffects 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, 2018The 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

StandardDescriptionRequired Date of AdoptionEffects on the Financial Statements or Other Significant Matters
ASU 2016-02, “Leases (Topic 842)”Amends the accounting for leases by lessees and lessors. The primary change from the new guidance is the recognition of right-of-use assets and lease liabilities by lessees for those leases classified as operating leases. Additional changes include accounting for lease origination and executory costs, required lessee reassessments during the lease term due to changes in circumstances, and expanded lease disclosures.

Adoption 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
StandardDescriptionRequired Date of AdoptionEffects on the Financial Statements or Other Significant Matters
ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”Provides guidance for recognizing impairment of most debt instruments measured at amortized cost, including loans and held to maturity (HTM) debt securities. Requires estimating current expected credit losses (CECL) over the remaining life of an instrument or a 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)

StandardDescriptionRequired Date of AdoptionEffects 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)

A
  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 20182017
Net interest revenue      
Interest revenue$1,755
 $1,176
 $4,766
$3,358
Interest expense(228) (94) (569)(223)
Net interest revenue1,527
 1,082
 4,197
3,135
Asset management and administration fees 
  
   
Mutual funds and ETF service fees435
 519
 1,386
1,538
Advice solutions294
 265
 859
765
Other80
 77
 229
226
Asset management and administration fees809
 861
 2,474
2,529
Trading revenue   
   
Commissions155
 136
 501
456
Principal transactions21
 15
 56
44
Trading revenue176
 151
 557
500
Other67
 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 Total12 months or longer Total
September 30, 2017Fair
Value		 
Unrealized
Losses
 Fair
Value		 Unrealized
Losses		 Fair
Value		 Unrealized
Losses
Available for sale securities:           
September 30, 2018Fair
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 securities7,770
 72
 4,374
 97
 12,144
 169
Asset-backed securities1,841
 4
 601
 6
 2,442
 10
Corporate debt securities3,030
 8
 229
 1
 3,259
 9
U.S. agency notes566
 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 securities638
 —
 578
 4
 1,216
 4
2,115
 12
 39
 —
 2,154
 12
Corporate debt securities990
 1
 153
 —
 1,143
 1
2,862
 52
 77
 3
 2,939
 55
U.S. state and municipal securities471
 5
 14
 2
 485
 7
Non-agency commercial mortgage-backed securities651
 15
 279
 10
 930
 25
U.S. Treasury securities6,421
 49
 —
 —
 6,421
 49
—
 —
 212
 11
 212
 11
U.S. agency notes1,409
 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 securities409
 —
 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 securities4,625
 11
 4,875
 72
 9,500
 83
Asset-backed securities904
 3
 424
 3
 1,328
 6
Corporate debt securities736
 1
 120
 —
 856
 1
Certificates of deposit799
 1
 —
 —
 799
 1
U.S. agency notes99
 —
 1,807
 8
 1,906
 8
Foreign government agency securities50
 1
 —
 —
 50
 1
Total$12,909
 $38
 $9,774
 $101
 $22,683
 $139
Held to maturity securities 
  
  
  
  
  
U.S. agency mortgage-backed securities$14,816
 $69
 $2,931
 $23
 $17,747
 $92
$42,102
 $310
 $24,753
 $724
 $66,855
 $1,034
Asset-backed securities1,670
 13
 9,237
 201
 10,907
 214
1,124
 2
 72
 —
 1,196
 2
Corporate debt securities2,407
 17
 653
 1
 3,060
 18
1,078
 5
 —
 —
 1,078
 5
U.S. Treasury securities6,926
 59
 —
 —
 6,926
 59
Certificates of deposit474
 —
 100
 1
 574
 1
U.S. agency notes1,907
 8
 —
 —
 1,907
 8
U.S. state and municipal securities956
 46
 —
 —
 956
 46
Total$29,156
 $212
 $12,921
 $226
 $42,077
 $438
Held to maturity securities: 
  
  
  
  
  
U.S. agency mortgage-backed securities$51,361
 $1,086
 $—
 $—
 $51,361
 $1,086
Non-agency commercial mortgage-backed securities591
 4
 —
 —
 591
 4
607
 5
 —
 —
 607
 5
U.S. Treasury securities219
 4
 —
 —
 219
 4
220
 3
 —
 —
 220
 3
U.S. state and municipal securities14
 1
 —
 —
 14
 1
Foreign government agency securities49
 1
 —
 —
 49
 1
Total$52,185
 $1,095
 $—
 $—
 $52,185
 $1,095
$45,180
 $326
 $24,825
 $724
 $70,005
 $1,050
Total securities with unrealized losses (2)
$81,341
 $1,307
 $12,921
 $226
 $94,262
 $1,533
$58,089
 $364
 $34,599
 $825
 $92,688
 $1,189
(1) The number of investment positions with unrealized losses totaled 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 20162017 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, 2017Current
30-59 days
past due
60-89 days
past due
>90 days past
due and other
nonaccrual loans
Total past due
and other
nonaccrual loans
Total
loans
Allowance
for loan
losses
Total
bank
loans - net
Residential real estate mortgages$9,773
$11
$2
$16
$29
$9,802
$16
$9,786
Home equity loans and lines of credit2,027
4
1
10
15
2,042
8
2,034
September 30, 2018Current30-59 days
past due		60-89 days
past due
>90 days past
due and other
nonaccrual loans (3)
Total past due
and other
nonaccrual loans		Total
loans		Allowance
for loan
losses		Total
bank
loans – net
First Mortgages (1,2)
$10,217
$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 lines4,278
1
—
—
1
4,279
—
4,279
4,552
3
1
—
4
4,556
—
4,556
Other135
—
—
—
—
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 credit2,336
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 lines3,846
4
1
—
5
3,851
—
3,851
4,361
4
4
—
8
4,369
—
4,369
Other94
—
—
—
—
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 ofPrincipal Amount Outstanding

IssuanceSeptember 30, 2018December 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, 202007/22/10700
700
3.250% due May 21, 202105/22/18600
—
3.225% due September 1, 202208/29/12256
256
2.650% due January 25, 202312/07/17800
800
3.000% due March 10, 202503/10/15375
375
3.850% due May 21, 202505/22/18750
—
3.450% due February 13, 202611/13/15350
350
3.200% due March 2, 202703/02/17650
650
3.200% due January 25, 202812/07/17700
700
Floating-rate Senior Notes:   
Three-month LIBOR + 0.32% due May 21, 202105/22/18600
—
Total Senior Notes 5,781
4,731
5.450% Finance lease obligation (3)
06/04/0455
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
2018908
$2
20198
8
2020709
709
20219
1,209
2022266
Thereafter1,657
3,642
Total maturities3,294
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 loans355
 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 pledgedFair 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 salesFulfillment 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, 2017Quoted Prices
in Active Markets
for Identical
Assets
(Level 1)		 Significant
Other Observable
Inputs
(Level 2)		 Significant
Unobservable
Inputs
(Level 3)		 Balance at
Fair Value
September 30, 2018Level 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 equivalents1,720
 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 funds294
 —
 —
 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 owned366
 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, 2017Level 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, 2018Carrying
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 — net22,402
 —
 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 securities1,330
 —
 1,329
 —
 1,329
Non-agency commercial mortgage-backed securities1,149
 —
 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
Other5
 —
 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 Mortgages10,239
 —
 9,963
 —
 9,963
HELOCs1,595
 —
 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 — net16,564
 —
 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, 2017Carrying
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 — net20,568
 —
 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 securities1,247
 —
 1,304
 —
 1,304
Non-agency commercial mortgage-backed securities994
 —
 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 deposit200
 —
 200
 —
 200
Foreign government agency securities50
 —
 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 Mortgages10,000
 —
 9,917
 —
 9,917
HELOCs1,935
 —
 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 — net16,478
 —
 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 borrowings15,000
 —
 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, 2018Earliest Redemption DateDate at Which Dividend Rate Becomes FloatingFloating Annual Rate of Three-Month LIBOR plus:
 Shares
Issued and
Outstanding
(In thousands)		 Liquidation
Preference
Per Share		 Liquidation
Preference		 Carrying
Value		 Shares
Issued and
Outstanding
(In thousands)		 Liquidation
Preference
Per Share		 Liquidation
Preference		 Carrying
Value		Shares Issued and Outstanding (In thousands) atCarrying 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 ShareSeptember 30, 2018December 31, 2017Issue DateDividend Rate in Effect at September 30, 2018Earliest Redemption DateDate at Which Dividend Rate Becomes FloatingFloating 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
03/07/165.950%06/01/21N/AN/A
Fixed-to-floating-rate:      
Series A400
400
1,000
397
397
01/26/127.000%02/01/224.820%
Series E 6
 100,000
 600
 591
 6
 100,000
 600
 591
6
6
100,000
591
591
10/31/164.625%03/01/223.315%
Total Preferred Stock 2,241
   $2,835
 $2,783
 2,241
   $2,835
 $2,783
Series F5
5
100,000
492
492
10/31/175.000%12/01/2712/01/272.575%
Total preferred stock1,761
1,761


$2,793
$2,793
     
(1) Represented by depositary shares, except for Series A.
N/A Not applicable.


12.13.    Accumulated Other Comprehensive Income
Accumulated other comprehensive income (AOCI) represents cumulative gains and losses that are not reflected in earnings. The components of other comprehensive income (loss) are as follows:
2018 2017
Three Months Ended September 30,2017 2016Before
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 sale10
 (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 2016Before
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 sale21
 (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:
Exhibit
Number
Exhibit 
   
3.20
Certificate of Designations of 5.00% Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock, Series F, of The Charles Schwab Corporation filed as Exhibit 3.1 to the Registrant’s Form 8-K dated October 31, 2017, and incorporated herein by reference.

 
   
10.377
The Charles Schwab Corporation Deferred Compensation Plan II, as amended and restated as of October 19, 2017 (supersedes Exhibit 10.322). Filed as Exhibit 10.377 to the Registrant’s Form 8-K dated October 24, 2017, and incorporated herein by reference.

(1)
   
10.378
Form of Notice and Performance-Based Restricted Stock Unit Agreement under The Charles Schwab Corporation 2013 Stock Incentive Plan and successor plans (supersedes Exhibit 10.369).
(1) (2)
   
10.379
Form of Notice and Nonqualified Stock Option Agreement under The Charles Schwab Corporation 2013 Stock Incentive Plan and successor plans (supersedes Exhibit 10.370).
(1) (2)
   
10.380
Form of Notice and Restricted Stock Unit Agreement under The Charles Schwab Corporation 2013 Stock Incentive Plan and successor plans (supersedes Exhibit 10.371).
(1) (2)
   
10.381
Form of Notice and Retainer Stock Option Agreement for Non-Employee Directors under The Charles Schwab Corporation 2013 Stock Incentive Plan and successor plans (supersedes Exhibit 10.372).
(1) (2)
   
10.382
Form of Notice and Retainer Restricted Stock Unit Agreement for Non-Employee Directors under The Charles Schwab Corporation 2013 Stock Incentive Plan and successor plans (supersedes Exhibit 10.373).
(1) (2)
   
10.383
Form of Notice and Stock Option Agreement for Non-Employee Directors under The Charles Schwab Corporation Directors’ Deferred Compensation Plan II and successor plans (supersedes Exhibit 10.374).
(1) (2)
   
10.384
Form of Notice and Restricted Stock Unit Agreement for Non-Employee Directors under The Charles Schwab Corporation Directors’ Deferred Compensation Plan II and successor plans (supersedes Exhibit 10.375).
(1) (2)
   
12.1
Computations of Ratio of Earnings to Fixed Charges and Ratio of Earnings to Fixed Charges and Preferred Stock Dividends.
 
   
31.1
Certification Pursuant to Rule 13a-14(a)/15d-14(a), As Adopted Pursuant to Section 302 of The Sarbanes-Oxley Act of 2002.

 
   
31.2
Certification Pursuant to Rule 13a-14(a)/15d-14(a), As Adopted Pursuant to Section 302 of The Sarbanes-Oxley Act of 2002.
 
   
32.1
Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002.
(2)
   
32.2
Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002.
(2)
   
   


THE CHARLES SCHWAB CORPORATION



Exhibit
Number
Exhibit
101.INSXBRL Instance Document(3)
101.SCHXBRL Taxonomy Extension Schema(3)
101.CALXBRL Taxonomy Extension Calculation(3)
101.DEFXBRL Extension Definition(3)
101.LABXBRL Taxonomy Extension Label(3)
101.PREXBRL 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
Computation of Ratio of Earnings to Fixed Charges and Ratio of Earnings to Fixed Charges and Preferred Stock Dividends.
 
   
31.1
Certification Pursuant to Rule 13a-14(a)/15d-14(a), As Adopted Pursuant to Section 302 of The Sarbanes-Oxley Act of 2002.
 
   
31.2
Certification Pursuant to Rule 13a-14(a)/15d-14(a), As Adopted Pursuant to Section 302 of The Sarbanes-Oxley Act of 2002.
 
   
32.1
Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002.
(1)
   
32.2
Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002.
(1)
   
101.INSXBRL Instance Document(2)
   
101.SCHXBRL Taxonomy Extension Schema(2)
   
101.CALXBRL Taxonomy Extension Calculation(2)
   
101.DEFXBRL Extension Definition(2)
   
101.LABXBRL Taxonomy Extension Label(2)
   
101.PREXBRL 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.


   THE CHARLES SCHWAB CORPORATION
   (Registrant)
    
    
    
Date:November 7, 20172018 /s/ Peter Crawford
   Peter Crawford
   Executive Vice President and Chief Financial Officer


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