UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

~~QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)~~



☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period endedSeptember 30, ~~2018~~2019



☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________ to ________

Commission File Number: 1-9700

THE CHARLES SCHWAB CORPORATION

(Exact name of registrant as specified in its charter)



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

211 Main Street, San Francisco, CA94105

(Address of principal executive offices and zip code)

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

Securities registered pursuant to Section 12(b) of the Act:



Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock – $.01 par value per share	SCHW	New York Stock Exchange
Depositary Shares, each representing a 1/40th ownership interest in a share of 6.00% Non-Cumulative Preferred Stock, Series C	SCHW PrC	New York Stock Exchange
Depositary Shares, each representing a 1/40th ownership interest in a share of 5.95% Non-Cumulative Preferred Stock, Series D	SCHW PrD	New York Stock Exchange

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 every Interactive Data File required to be submitted 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 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. (Check one):



~~Large accelerated filer ☒~~	~~Accelerated filer ☐~~
~~Non-accelerated filer ☐~~	~~Smaller reporting company ☐~~
~~Emerging growth company ☐~~

Large accelerated filer ☒ Accelerated filer ☐

Non-accelerated filer☐ 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.

~~1,350,452,801~~1,282,287,840 shares of $.01 par value Common Stock ~~Outstanding~~outstanding on October 31, ~~2018~~2019

THE CHARLES SCHWAB CORPORATION

Quarterly Report on Form 10-Q

For the Quarter EndedSeptember 30, ~~2018~~2019

Index



Part I - Financial Information


	Item 1.	Condensed Consolidated Financial Statements (Unaudited):

		Statements of Income	17
		~~Statements of Comprehensive Income~~	18
		~~Balance Sheets~~	19
		~~Statements of Stockholders’ Equity~~	20
		Statements of ~~Cash Flows~~Comprehensive Income	~~21-22~~ 21
		~~Notes~~Balance Sheets	~~23-54~~ 22
		Statements of Stockholders’ Equity	23
		Statements of Cash Flows	24-25
		Notes	26-56

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	~~1-15~~1-18

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	1619

	Item 4.	Controls and Procedures	5557

Part II - Other Information

	Item 1.	Legal Proceedings	5658

	Item 1A.	Risk Factors	5658

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	5658

	Item 3.	Defaults Upon Senior Securities	5658

	Item 4.	Mine Safety Disclosures	5659

	Item 5.	Other Information	5659

	Item 6.	Exhibits	57 60-61

Signature			5862

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,~~and engages, 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 & Co., Inc. (CS&Co), a securities broker-dealer;~~

~~Charles Schwab Bank (CSB), a federal savings bank; and~~


•	Charles Schwab & Co., Inc. (CS&Co), a securities broker-dealer;


•	Charles Schwab Bank (CSB), a federal savings bank; and


•	Charles Schwab Investment Management, Inc. (CSIM), the investment advisor for Schwab’s proprietary mutual funds (Schwab Funds^®) and for Schwab’s exchange-traded funds (Schwab ETFs™).

Unless otherwise indicated, the 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, as well as other corporate brokerage services, to businesses and their employees. The Advisor Services segment provides custodial, trading, banking, and support services, as well as retirement business services, to independent registered investment advisors (RIAs), independent retirement advisors, and recordkeepers.

Schwab was founded on the belief that all Americans deserve access to a better investing experience. Although much has changed in the intervening years, our purpose remains clear – to champion every client’s goals with passion and integrity. Guided by this purpose and ~~the aspiration~~our vision of creating the most trusted leader in investment services, management has adopted a strategy described as “Through Clients’ Eyes.”

This strategy emphasizes placing clients’ perspectives, needs, and desires at the forefront. Because investing plays a fundamental role in building financial security, we strive to deliver a better investing experience for our clients – individual investors and the people and institutions who serve them – by disrupting longstanding industry practices on their behalf and providing superior service. We also aim to offer a broad range of products and solutions to meet client needs with a focus on transparency, value, and trust. In addition, management works to couple Schwab’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. In combination, these are the key elements of our “no trade-offs” approach to serving investors. We believe that following this strategy is the best way to maximize our market valuation and stockholder returns over time.

Management estimates that investable wealth in the United States (U.S.) (consisting of assets in defined contribution, retail wealth management and brokerage, and registered investment advisor channels, along with bank deposits) currently exceeds $45 trillion, which means the Company’s ~~$3.56~~$3.77 trillion in client assets leaves substantial opportunity for growth. Our strategy is based on the principle that developing trusted relationships will translate into more assets from both new and existing clients, ultimately driving more revenue, and along with expense discipline and thoughtful capital management, will generate earnings growth and build long-term stockholder value.

This Management’s Discussion and Analysis should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended December 31, ~~2017 (2017~~2018 (2018 Form 10-K).

On our website, https://www.aboutschwab.com, we post the following filings after they are electronically filed with or furnished to the Securities and Exchange Commission (SEC): annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements, and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934. In addition, the website also includes the Dodd-Frank stress test results, our regulatory capital disclosures based on Basel III, and our quarterly average liquidity coverage ratio (LCR). The SEC maintains a website at https://www.sec.gov that contains reports, proxy statements, and other information that we file electronically with ~~the SEC.~~them.

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,” “could,” “would,” “expand,” and other similar expressions. In addition, any statements that refer to expectations, projections, or other characterizations of future events or circumstances are forward-looking statements.

These forward-looking statements, which reflect management’s beliefs, objectives, and expectations as of the date hereof, are estimates based on the best judgment of Schwab’s senior management. These statements relate to, among other things:

Maximizing our market valuation and stockholder returns over time; our belief that developing trusted relationships will translate into more client assets which drives revenue and, along with expense discipline and thoughtful capital management, generates earnings growth and builds stockholder value (see Introduction in Part I, Item 2);

~~Ongoing investments~~Investments to drive ~~growth~~efficiency and ~~efficiency~~scale to support our expanding client base (see Overview);

Delivery of business growth and meaningful capital returns (see Overview);

The acquisition of assets of USAA’s Investment Management Company (USAA-IMCO) and entering into a referral agreement (see Overview, Risk Management – Liquidity Risk, Capital ~~expenditures~~Management, and Commitments and Contingencies in ~~2018~~Part I, Item 1, Financial Information – Notes to Condensed Consolidated Financial Statements (Item 1) – Note 10);

The impact of the recent pricing reductions on the Company’s value proposition, competitive positioning, long-term growth in total client assets and client accounts, trading revenue, and total net revenues (see Overview);

2019 capital expenditures (see Results of Operations);

~~Consolidated balance sheet assets remaining above $250 billion~~The phase-out of the use of LIBOR (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 9)10); and

The impact of legal proceedings and regulatory matters (see Commitments and Contingencies in Item 1 – Note 910 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;

Our ability to attract and retain clients, develop trusted relationships, and grow client assets;

Client use of our ~~advice~~advisory solutions and other products and services;

The level of client assets, including cash balances;

Competitive pressure on pricing, including deposit rates;

Client sensitivity to interest rates;

Regulatory guidance;

~~Timing and amount of transfers of certain balances from sweep money market funds into bank sweep deposits;~~

Capital and liquidity needs and management;

Our ability to manage expenses;

Our ability to develop and launch new and enhanced products, services, and capabilities, as well as implement infrastructure, in a timely and successful manner;

The effect of ~~adverse~~pricing reductions on client acquisition, retention and asset levels, including cash balances;

The Company’s ability to monetize client assets;

The timing and the ability of us and USAA-IMCO to satisfy the closing conditions in the purchase agreement, including regulatory approvals and the implementation of conversion plans;

The timing of campus expansion work and technology projects;

Adverse developments in litigation or regulatory matters and ~~the extent of~~ any related charges; and

Potential breaches of contractual terms for which we have indemnification and guarantee obligations.

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 ~~2017~~2018 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 Schwab’s financial position and operating performance. Results for the third quarters and first nine months of 2019 and 2018 ~~and 2017~~ are:


	Three Months Ended September 30,						Percent Change		Nine Months Ended September 30,						Percent Change		Three Months Ended September 30,						Percent Change			Nine Months Ended September 30,							Percent Change
	2018			2017			Percent Change		2018			2017			Percent Change		2019			2018					2019				2018				Percent Change
Client Metrics																							Percent Change
Net new client assets (in billions) ⁽¹⁾	$	53.5		$	51.6		4	%	$	78.6		$	155.0		(49	)%	$	56.6		$	53.5		6	%		$	145.5			$	78.6		85	%
Core net new client assets (in billions)	$	53.5		$	51.6		4	%	$	172.5		$	136.7		26	%	$	56.6		$	53.5		6	%		$	145.5			$	172.5		(16	)%
Client assets (in billions, at quarter end)	$	3,563.7		$	3,181.2		12	%									$	3,768.4		$	3,563.7		6	%
Average client assets (in billions)	$	3,508.1		$	3,107.8		13	%	$	3,420.2		$	2,986.3		15	%	$	3,736.1		$	3,508.1		6	%		$	3,611.0			$	3,420.2		6	%
New brokerage accounts (in thousands)	369			336			10	%	1,196			1,055			13	%	363			369			(2	)%		1,135				1,196			(5	)%
Active brokerage accounts (in thousands, at quarter end)	11,423			10,565			8	%									12,118			11,423			6	%
Assets receiving ongoing advisory services (in billions, at quarter end)	$	1,851.9		$	1,613.6		15	%									$	1,977.9		$	1,851.9		7	%
Client cash as a percentage of client assets (at quarter end)	10.3		%	11.1		%											11.4		%	10.3		%
Company Financial Metrics
Total net revenues	$	2,579		$	2,165		19	%	$	7,463		$	6,376		17	%	$	2,711		$	2,579		5	%		$	8,115			$	7,463		9	%
Total expenses excluding interest	1,360			1,220			11	%	4,111			3,679			12	%	1,475			1,360			8	%		4,379				4,111			7	%
Income before taxes on income	1,219			945			29	%	3,352			2,697			24	%	1,236			1,219			1	%		3,736				3,352			11	%
Taxes on income	296			327			(9	)%	780			940			(17	)%	285			296			(4	)%		884				780			13	%
Net income	923			618			49	%	2,572			1,757			46	%	951			923			3	%		2,852				2,572			11	%
Preferred stock dividends and other	38			43			(12	)%	128			127			1	%	38			38			—			127				128			(1	)%
Net income available to common stockholders	$	885		$	575		54	%	$	2,444		$	1,630		50	%	$	913		$	885		3	%		$	2,725			$	2,444		11	%
Earnings per common share — diluted	$	.65		$	.42		55	%	$	1.79		$	1.21		48	%	$	.70		$	.65		8	%		$	2.05			$	1.79		15	%
Net revenue growth from prior year	19		%	13		%			17		%	16		%			5		%	19		%				9		%		17		%
Pre-tax profit margin	47.3		%	43.6		%			44.9		%	42.3		%			45.6		%	47.3		%				46.0		%		44.9		%
Return on average common stockholders’ equity	20		%	15		%			19		%	15		%			20		%	20		%				20		%		19		%
Expenses excluding interest as a percentage of average client assets (annualized)	0.15		%	0.16		%			0.16		%	0.16		%			0.16		%	0.15		%				0.16		%		0.16		%
Consolidated Tier 1 Leverage Ratio (at quarter end)	7.5		%	7.7		%											7.3		%	7.5		%

⁽¹⁾The first nine months of 2018 includes outflows of $93.9 billion from certain mutual fund clearing services clients. ~~The~~

During the first nine months of ~~2017 includes inflows of $18.3 billion from certain mutual fund clearing services clients.~~

~~Net~~2019, the equity markets showed noteworthy durability, as the S&P 500 remained up nearly 20% for the year through September 30^th. Concerns persisted, however, regarding global trade and a generally softening economic outlook. The Federal Reserve moved forward with mid-cycle easing, cutting short-term interest rates 25 bps in both July and September, and long-term rates also declined significantly. Through this environment, Schwab’s net income grew ~~49%~~to $951 million 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%$2.9 billion in the third quarter and first nine months of ~~2018,~~2019, respectively, ~~compared to the same periods in 2017, primarily due to higher net interest revenue as a result of higher interest rates~~while diluted earnings per share reached $.70 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%$2.05 in the third quarter and first nine months of ~~2018, respectively, compared to~~2019, representing increases of 8% and 15% from the ~~same~~comparable periods in ~~2017, delivering~~2018. Our continued success with clients and our full-service model enabled us to deliver total net revenues of $2.7 billion in the third quarter and $8.1 billion in the first nine months of 2019, up 5% and 9%, respectively, from the comparable periods in 2018.

Largely as a ~~44.9% pre-tax profit margin~~result of generally higher investment yields and higher client cash balances, net interest revenue rose 7% in the third quarter of 2019 to $1.6 billion, which brought our 2019 year-to-date net interest revenue to $4.9 billion, a 17% increase from the first nine months of 2018. Growing client balances in purchased money market funds, advice solutions, and other third-party mutual funds and ETFs helped push asset management and administration fees to $825 million in the third quarter of 2019, up 2% from the third quarter of 2018. Asset management and administration fees totaled $2.4 billion 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~~ ~~369,000~~ new brokerage accounts, helping to bring active brokerage accounts to 11.4 million at September 30, 2018. Core net new assets gathered during the third quarter of 2018 were $53.5 billion, compared to $51.6 billion for the same period a year ago. Client engagement remained strong during the third quarter of 2018, with daily average revenue trades rising 22%2019, down 4% from the same period in ~~2017.~~2018, primarily as a result of lower sweep money market fund revenue due to the transfer of sweep money market funds to bank and broker-dealer sweep, as well as declines in Mutual Fund OneSource^®

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~~balances. Trading revenue decreased 2% and solid financial performance. The consolidated balance sheet reached $272 billion of assets at September 30, 2018, a $10 billion quarterly increase, largely driven by bank sweep transfers and client activity. We transferred balances totaling $23 billion from sweep money market funds to bank sweep in the quarter, 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 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 equity to 20% and 19% for5% during the third quarter and first nine months of ~~2018,~~2019, respectively, compared ~~to 15% for~~with the same periods in ~~2017.~~2018, due primarily to lower average revenue per revenue trade.

~~Subsequent Events~~Total expenses excluding interest increased 8% and 7% during the third quarter and first nine months of 2019, respectively. Year-to-date 2019 expenses reflect growth in headcount relative to 2018 and our investments to drive efficiency and scale as we support our expanding client base. The third quarter also included $62 million of severance charges associated with our decision to eliminate positions spanning approximately 3% of our workforce, as we work to ensure we remain properly positioned to serve clients through what has become a more challenging environment. These charges contributed roughly half of our 8% expense growth in the third quarter.

Clients opened 363,000 new brokerage accounts during the third quarter, bringing our 2019 year-to-date total to 1.1 million, and helping raise active brokerage accounts to 12.1 million at quarter-end, up 6% from September 30, 2018. Core net new assets of $56.6 billion during the third quarter brought our total to $145.5 billion for the first nine months of 2019, representing an annualized organic growth rate of 6%. Client demand for help and guidance continued to grow, as client assets receiving ongoing advisory services reached $1.98 trillion at quarter-end, up 7% from September 30, 2018. Total client assets rose to $3.77 trillion as of September 30, 2019, representing an increase of $204.7 billion, or 6% from September 30, 2018.

Consistent with our approach to deliver both business growth and meaningful capital returns, we completed $771 million and $2.0 billion of share repurchases during the third quarter and first nine months of 2019, respectively, under our current $4.0 billion authorization. Our expanding client base and related increases in their cash balances drove modest organic growth in our balance sheet during the third quarter, as consolidated total assets increased $2.7 billion during the third quarter to $279.0 billion. We ended the third quarter of 2019 with a Tier 1 Leverage Ratio of 7.3%, and produced a return on equity of 20% for both the third quarter and first nine months of 2019.

On July 25, 2019, the Company announced a definitive agreement to acquire assets of USAA-IMCO, including over one million brokerage and managed portfolio accounts with approximately $90 billion in client assets, for $1.8 billion in cash. The companies have also agreed to enter into a long-term referral agreement, effective at closing of the acquisition, that would make Schwab the exclusive wealth management and brokerage provider for USAA members. The transaction is expected to close in mid-2020, subject to satisfaction of closing conditions, including regulatory approvals and the implementation of conversion plans.

Effective October ~~25, 2018, CSC’s Board~~7, 2019, CS&Co eliminated online trading commissions for U.S. and Canadian-listed stocks and ETFs, as well as the base charge on options. These pricing reductions are consistent with Founder and Chairman Charles Schwab’s vision of ~~Directors terminated~~making investing accessible to all. Management believes they enhance both our value proposition and our competitive positioning, and will contribute to long-term growth in total client assets and client accounts at Schwab. Based on trading volumes in the ~~existing two share repurchase authorizations~~third quarter of 2019, we estimate that these pricing reductions were equivalent to approximately $90-100 million of third quarter trading revenue and ~~replaced them with a new authorization to repurchase up to a~~3-4% of total ~~of $1.0 billion of common stock.~~net revenues.

On October 31, 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 SEC. The Senior Notes due 2024 have a fixed interest rate of 3.550% with interest payable semi-annually. The Senior Notes due 2029 have a fixed interest rate of 4.000% with interest payable semi-annually.

~~Current Regulatory Environment andOther Developments~~

On October 31, 2018, the Board of Governors of the Federal Reserve System (Federal Reserve) issued a notice of proposed rulemaking and the 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 two 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 in 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 impact of the 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~~Current Regulatory Environment andOther Developments

~~Total Net Revenues~~In October 2019, the Board of Governors of the Federal Reserve System (Federal Reserve) issued a final enhanced prudential standards rule, and the Federal Reserve, the Office of the Comptroller of the Currency (OCC), and the Federal Deposit Insurance Corporation (FDIC) jointly issued a final capital and liquidity rule. Together, the two rules establish a revised framework for applying enhanced prudential standards and capital and liquidity requirements to large U.S. banking organizations with more than $100 billion in total assets, with four categories of standards that reflect the risks of banking organizations in each group. CSC will be in Category III based on having $250-700 billion in total assets and less than $75 billion in cross-jurisdictional activity.

The ~~following tables present~~Federal Reserve final rule, largely unchanged from its October 2018 proposal, for the first time makes large savings and loan holding companies such as CSC subject to enhanced prudential standards, tailoring those regulatory requirements relating to capital stress testing, risk management, liquidity risk management, and single-counterparty credit limits based on an institution’s asset size and four other risk factors. The rule provides that Category III banking organizations will be subject to annual supervisory stress testing and biennial company-run stress testing. The interagency rule similarly tailors requirements under the agencies’ regulatory capital, LCR, and proposed net stable funding ratio rules for banking organizations in each of the four categories. Under the rule, banking organizations in Category III are no longer required to calculate their risk-weighted assets using the “advanced approaches” framework or to include accumulated other comprehensive income (AOCI) in calculating their regulatory capital; however, they will continue to be subject to the supplementary leverage ratio and any future countercyclical capital buffer imposed by the banking agencies. As a ~~comparison~~Category III banking organization which has less than $75 billion in weighted short-term wholesale funding, as defined in the rule, Schwab will be subject to a reduced LCR requirement calibrated at 85% of ~~revenue~~the full LCR requirement.

Although the Federal Reserve announced in its final rule that additional capital planning proposals would be issued at a later date, the agency did indicate that all Category III firms, including savings and loan holding companies, will be required to submit annual capital plans that will be subject to qualitative and quantitative assessments evaluated as part of the Comprehensive Capital Analysis and Review (CCAR) process.

In a separate rulemaking, the Federal Reserve and the FDIC excluded savings and loan holding companies such as CSC from any resolution planning requirement.

Schwab is currently assessing the overall impact of the final rules on its capital and liquidity requirements, as well as the stress testing, risk management, and other operational areas that will be affected by ~~category:~~

the rules.

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 %

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)

RESULTS OF OPERATIONS

Total Net ~~Interest Revenue~~Revenues

The following tables present ~~net interest~~a comparison of revenue ~~information corresponding~~by category:



			2019					2018
Three Months Ended September 30,	Percent Change		Amount			% of Total Net Revenues		Amount			% of Total Net Revenues
Net interest revenue
Interest revenue	8	%	$	1,892		70	%	$	1,755		68	%
Interest expense	14	%	(261		)	(10	)%	(228		)	(9	)%
Net interest revenue	7	%	1,631			60	%	1,527			59	%
Asset management and administration fees
Mutual funds, ETFs, and collective trust funds (CTFs) ⁽¹⁾	—		445			16	%	446			17	%
Advice solutions	4	%	305			11	%	294			11	%
Other ⁽¹⁾	9	%	75			3	%	69			3	%
Asset management and administration fees	2	%	825			30	%	809			31	%
Trading revenue
Commissions	3	%	159			6	%	155			6	%
Principal transactions	(38	)%	13			—		21			1	%
Trading revenue	(2	)%	172			6	%	176			7	%
Other	24	%	83			4	%	67			3	%
Total net revenues	5	%	$	2,711		100	%	$	2,579		100	%



			2019					2018
Nine Months Ended September 30,	Percent Change		Amount			% of Total Net Revenues		Amount			% of Total Net Revenues
Net interest revenue
Interest revenue	22	%	$	5,817		72	%	$	4,766		64	%
Interest expense	57	%	(896		)	(11	)%	(569		)	(8	)%
Net interest revenue	17	%	4,921			61	%	4,197			56	%
Asset management and administration fees
Mutual funds, ETFs, and collective trust funds (CTFs) ⁽¹⁾	(9	)%	1,287			16	%	1,419			19	%
Advice solutions	2	%	878			11	%	859			11	%
Other ⁽¹⁾	3	%	201			2	%	196			3	%
Asset management and administration fees	(4	)%	2,366			29	%	2,474			33	%
Trading revenue
Commissions	(5	)%	477			6	%	501			7	%
Principal transactions	(4	)%	54			1	%	56			1	%
Trading revenue	(5	)%	531			7	%	557			8	%
Other	26	%	297			3	%	235			3	%
Total net revenues	9	%	$	8,115		100	%	$	7,463		100	%

⁽¹⁾ Beginning in the first quarter of 2019, a change was made to ~~interest-earning assets~~move CTFs from other asset management and ~~funding sources on the condensed consolidated balance sheets:~~

2018 2017
Three Months Ended September 30, Average Balance Interest Revenue/ Expense Average Yield/ Rate Average Balance Interest Revenue/ Expense Average Yield/ Rate
Interest-earning assets
Cash and cash equivalents $ 18,623
$ 94
1.98 % $ 10,498
$ 33
1.25 %
Cash and investments segregated 10,253
51
1.94 % 17,355
44
1.01 %
Broker-related receivables 307
1
1.94 % 459
1
0.96 %
Receivables from brokerage clients 20,224
217
4.19 % 16,498
151
3.63 %
Available for sale securities⁽¹⁾
55,283
328
2.34 % 45,906
187
1.62 %
Held to maturity securities 137,065
887
2.57 % 107,557
606
2.24 %
Bank loans 16,579
142
3.43 % 16,058
122
3.01 %
Total interest-earning assets 258,334
1,720
2.63 % 214,331
1,144
2.12 %
Other interest revenue 35
32

Total interest-earning assets $ 258,334
$ 1,755
2.69 % $ 214,331
$ 1,176
2.18 %
Funding sources
Bank deposits $ 208,666
$ 158
0.30 % $ 163,039
$ 49
0.12 %
Payables to brokerage clients 20,595
16
0.31 % 24,833
6
0.10 %
Short-term borrowings —
—
—
1,695
6
1.40 %
Long-term debt 5,790
51
3.52 % 3,436
30
3.46 %
Total interest-bearing liabilities 235,051
225
0.38 % 193,003
91
0.19 %
Non-interest-bearing funding sources 23,283
21,328

Other interest expense 3
3

Total funding sources $ 258,334
$ 228
0.36 % $ 214,331
$ 94
0.18 %
Net interest revenue $ 1,527
2.33 % $ 1,082
2.00 %

2018 2017
Nine Months Ended September 30, Average Balance Interest Revenue/ Expense Average Yield/ Rate Average Balance Interest Revenue/ Expense Average Yield/ Rate
Interest-earning assets
Cash and cash equivalents $ 16,164
$ 217
1.78 % $ 9,375
$ 72
1.03 %
Cash and investments segregated 12,002
149
1.64 % 19,609
120
0.82 %
Broker-related receivables 324
4
1.62 % 428
2
0.74 %
Receivables from brokerage clients 19,629
600
4.03 % 15,861
415
3.50 %
Available for sale securities⁽¹⁾
52,797
859
2.16 % 55,070
615
1.49 %
Held to maturity securities 129,490
2,420
2.48 % 99,523
1,691
2.27 %
Bank loans 16,522
410
3.31 % 15,764
347
2.94 %
Total interest-earning assets 246,928
4,659
2.50 % 215,630
3,262
2.02 %
Other interest revenue 107
96

Total interest-earning assets $ 246,928
$ 4,766
2.56 % $ 215,630
$ 3,358
2.08 %
Funding sources
Bank deposits $ 193,010
$ 339
0.23 % $ 163,475
$ 98
0.08 %
Payables to brokerage clients 21,591
37
0.23 % 26,198
11
0.06 %
Short-term borrowings 4,488
54
1.59 % 1,475
11
1.00 %
Long-term debt 5,053
131
3.46 % 3,349
89
3.55 %
Total interest-bearing liabilities 224,142
561
0.33 % 194,497
209
0.14 %
Non-interest-bearing funding sources 22,786
21,133

Other interest expense 8
14

Total funding sources $ 246,928
$ 569
0.31 % $ 215,630
$ 223
0.14 %
Net interest revenue $ 4,197
2.25 % $ 3,135
1.94 %

⁽¹⁾~~Amounts~~administration fees. Prior periods have been ~~calculated based on amortized cost.~~recast to reflect this change.

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 $445 million, or 41%, and $1.1 billion, or 34%, in~~Interest Revenue

Revenue on interest-earning assets is affected by various factors, such as the ~~third quarter and first nine months~~composition of ~~2018, respectively, compared to the same periods in 2017, primarily due to higher~~assets, prevailing interest rates ~~and growth~~at the time of origination or purchase, changes in ~~interest-earning assets.~~

Our net interest margin improved to 2.33% and 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~~floating rate securities and ~~other interest-bearing liabilities.~~

~~During the third quarter~~loans, and changes in prepayment levels for mortgage-related securities and loans. Interest rates across maturities declined during the first nine months of ~~2018, average interest earning assets grew 21% and 15%, respectively, compared~~2019 relative to the same periods in 2017. These increases reflect higher bank deposits due to transfers from sweep money market funds to bank sweep balances, as well as other client-related deposit inflows and higher borrowings, partially offset by client purchasesend of ~~other assets.~~2018. During the ~~first six months~~second and third quarters, to maintain our overall targeted interest rate risk profile, we began positioning the securities in our banking entities’ investment portfolios to include a higher percentage of ~~2018, Schwab issued senior notes~~fixed-rate, longer duration investments to lower our interest rate sensitivities to further declines in market interest rates.

The following tables present net interest revenue information corresponding to interest-earning assets and ~~utilized Federal Home Loan Bank (FHLB) advances to provide temporary~~ funding ~~for additional investments ahead of deposit growth. There were no FHLB borrowings~~sources on the condensed consolidated balance sheets:



	2019						2018
Three Months Ended September 30,	Average Balance		Interest Revenue/ Expense		Average Yield/Rate		Average Balance		Interest Revenue/ Expense		Average Yield/Rate
Interest-earning assets
Cash and cash equivalents	$	22,288	$	123	2.16	%	$	18,623	$	94	1.98	%
Cash and investments segregated	16,140		92		2.25	%	10,253		51		1.94	%
Broker-related receivables	216		2		2.34	%	307		1		1.94	%
Receivables from brokerage clients	19,438		205		4.13	%	20,224		217		4.19	%
Available for sale securities⁽¹⁾	53,487		366		2.71	%	55,283		328		2.34	%
Held to maturity securities	136,880		906		2.63	%	137,065		887		2.57	%
Bank loans	16,724		146		3.49	%	16,579		142		3.43	%
Total interest-earning assets	265,173		1,840		2.75	%	258,334		1,720		2.63	%
Other interest revenue			52						35
Total interest-earning assets	$	265,173	$	1,892	2.82	%	$	258,334	$	1,755	2.69	%
Funding sources
Bank deposits	$	208,592	$	166	0.32	%	$	208,666	$	158	0.30	%
Payables to brokerage clients	25,080		21		0.33	%	20,595		16		0.31	%
Short-term borrowings ⁽²⁾	21		—		2.48	%	—		—		—
Long-term debt	7,425		67		3.58	%	5,790		51		3.52	%
Total interest-bearing liabilities	241,118		254		0.42	%	235,051		225		0.38	%
Non-interest-bearing funding sources	24,055						23,283
Other interest expense			7						3
Total funding sources	$	265,173	$	261	0.39	%	$	258,334	$	228	0.36	%
Net interest revenue			$	1,631	2.43	%			$	1,527	2.33	%

⁽¹⁾Amounts have been calculated based on amortized cost.

⁽²⁾Interest revenue or expense was less than $500,000 in the ~~third quarter of 2018.~~period or periods presented.

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 asset management and administration fees, average client assets, and average fee yields:~~

Three Months Ended September 30, 2018 2017
Average
Client
Assets Revenue Average
Fee Average
Client
Assets Revenue Average
Fee
Schwab money market funds before fee waivers $ 130,202
$ 122
0.37 % $ 158,927
$ 220
0.55 %
Fee waivers —
(1 )
Schwab money market funds 130,202
122
0.37 % 158,927
219
0.55 %
Schwab equity and bond funds and ETFs 219,137
67
0.12 % 164,011
56
0.14 %
Mutual Fund OneSource^® and other non-transaction
fee funds
209,560
171
0.32 % 219,076
179
0.32 %
Other third-party mutual funds and ETFs ⁽¹⁾
342,316
75
0.09 % 291,307
65
0.09 %
Total mutual funds and ETFs ⁽²⁾
$ 901,215
435
0.19 % $ 833,321
519
0.25 %
Advice solutions ⁽²⁾

Fee-based $ 234,338
294
0.50 % $ 206,854
265
0.51 %
Non-fee-based 65,146
—
—
50,758
—
—
Total advice solutions $ 299,484
294
0.39 % $ 257,612
265
0.41 %
Other balance-based fees⁽³⁾
400,048
63
0.06 % 424,280
67
0.06 %
Other ⁽⁴⁾
17
10

Total asset management and administration fees $ 809
$ 861



	2019						2018
Nine Months Ended September 30,	Average Balance		Interest Revenue/ Expense		Average Yield/Rate		Average Balance		Interest Revenue/ Expense		Average Yield/Rate
Interest-earning assets
Cash and cash equivalents	$	24,506	$	432	2.33	%	$	16,164	$	217	1.78	%
Cash and investments segregated	14,771		264		2.36	%	12,002		149		1.64	%
Broker-related receivables	225		4		2.21	%	324		4		1.62	%
Receivables from brokerage clients	19,279		636		4.35	%	19,629		600		4.03	%
Available for sale securities⁽¹⁾	58,738		1,203		2.72	%	52,797		859		2.16	%
Held to maturity securities	134,031		2,721		2.70	%	129,490		2,420		2.48	%
Bank loans	16,621		443		3.56	%	16,522		410		3.31	%
Total interest-earning assets	268,171		5,703		2.82	%	246,928		4,659		2.50	%
Other interest revenue			114						107
Total interest-earning assets	$	268,171	$	5,817	2.88	%	$	246,928	$	4,766	2.56	%
Funding sources
Bank deposits	$	213,089	$	616	0.39	%	$	193,010	$	339	0.23	%
Payables to brokerage clients	23,443		68		0.39	%	21,591		37		0.23	%
Short-term borrowings ⁽²⁾	18		—		2.49	%	4,488		54		1.59	%
Long-term debt	7,122		192		3.59	%	5,053		131		3.46	%
Total interest-bearing liabilities	243,672		876		0.48	%	224,142		561		0.33	%
Non-interest-bearing funding sources	24,499						22,786
Other interest expense			20						8
Total funding sources	$	268,171	$	896	0.45	%	$	246,928	$	569	0.31	%
Net interest revenue			$	4,921	2.43	%			$	4,197	2.25	%

⁽¹⁾Amounts have been calculated based on amortized cost.

Nine Months Ended September 30, 2018 2017
Average
Client
Assets Revenue Average Fee Average Client Assets Revenue Average Fee
Schwab money market funds before fee waivers $ 142,177
$ 451
0.42 % $ 160,230
$ 675
0.56 %
Fee waivers —
(10 )
Schwab money market funds 142,177
451
0.42 % 160,230
665
0.55 %
Schwab equity and bond funds and ETFs 206,058
195
0.13 % 151,579
163
0.14 %
Mutual Fund OneSource^® and other non-transaction
fee funds
216,699
524
0.32 % 214,058
528
0.33 %
Other third-party mutual funds and ETFs ⁽¹⁾
329,033
216
0.09 % 278,479
182
0.09 %
Total mutual funds and ETFs ⁽²⁾
$ 893,967
1,386
0.21 % $ 804,346
1,538
0.26 %
Advice solutions ⁽²⁾

Fee-based $ 228,326
859
0.50 % $ 199,500
765
0.51 %
Non-fee-based 62,377
—
—
46,785
—
—
Total advice solutions $ 290,703
859
0.40 % $ 246,285
765
0.42 %
Other balance-based fees ⁽³⁾
404,596
191
0.06 % 406,442
192
0.06 %
Other ⁽⁴⁾
38
34

Total asset management and administration fees $ 2,474
$ 2,529

⁽¹⁾ ~~Includes Schwab ETF OneSource™.~~

⁽²⁾ ~~Beginning~~Interest revenue or expense was less than $500,000 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/period or ~~ETF categories listed above. Prior~~ periods ~~have been adjusted to accommodate this change.~~presented.

⁽³⁾ ~~Includes various asset-related fees, such as trust fees, 401(k) recordkeeping fees, and mutual fund clearing fees and other service fees.~~

⁽⁴⁾ ~~Includes miscellaneous service and transaction fees relating to mutual funds and ETFs that are not balance-based.~~

~~Asset management and administration fees decreased by $52~~Net interest revenue increased $104 million, or 6%7%, and ~~$55~~$724 million, or ~~2%,~~17% in the third quarter and first nine months of ~~2018,~~2019, respectively, compared to the same periods in ~~2017. The decreases were~~2018, due to ~~lower~~generally higher investment yields and growth in interest-earning assets.

Our net interest margin was 2.43% during both the third quarter and first nine months of 2019, up from 2.33% and 2.25% during the third quarter and first nine months of 2018. These increases were driven primarily by higher yields received on interest-earning assets due in part to the Federal Reserve’s 2018 interest rate increases, partially offset by higher interest rates paid on bank deposits and other interest-bearing liabilities.

Average interest-earning assets for the third quarter and first nine months of 2019 were higher by 3% and 9%, respectively, compared to the same periods in 2018. The increase in average interest-earning assets for the third quarter of 2019 primarily reflects higher client cash balances; the increase for the first nine months of 2019 primarily reflects higher bank deposits due to transfers from sweep money market funds to bank sweep, as well as higher client cash balances. Short-term borrowings in 2018 were primarily the result of Federal Home Loan Bank (FHLB) advances, which were used to provide temporary funding for investments ahead of deposit growth during the first half of 2018. There were no FHLB borrowings in the first nine months of 2019.

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 asset management and administration fees, average client assets, and average fee yields:



Three Months Ended September 30,	2019						2018
Three Months Ended September 30,	Average Client Assets		Revenue		Average Fee		Average Client Assets		Revenue		Average Fee
Schwab money market funds	$	177,892	$	133	0.30	%	$	130,202	$	122	0.37	%
Schwab equity and bond funds, ETFs, and CTFs ⁽¹⁾	274,005		75		0.11	%	235,148		78		0.13	%
Mutual Fund OneSource^® and other non-transaction fee funds	192,409		153		0.32	%	209,560		171		0.32	%
Other third-party mutual funds and ETFs ⁽²⁾	486,285		84		0.07	%	342,316		75		0.09	%
Total mutual funds, ETFs and CTFs ^(1,3)	$	1,130,591	445		0.16	%	$	917,226	446		0.19	%
Advice solutions ⁽³⁾
Fee-based	$	251,591	305		0.48	%	$	234,338	294		0.50	%
Non-fee-based	71,195		—		—		65,146		—		—
Total advice solutions	$	322,786	305		0.37	%	$	299,484	294		0.39	%
Other balance-based fees ^(1,4)	421,241		56		0.05	%	384,038		52		0.05	%
Other ⁽⁵⁾			19						17
Total asset management and administration fees			$	825					$	809



	2019						2018
Nine Months Ended September 30,	Average Client Assets		Revenue		Average Fee		Average Client Assets		Revenue		Average Fee
Schwab money market funds	$	166,053	$	378	0.30	%	$	142,177	$	451	0.42	%
Schwab equity and bond funds, ETFs, and CTFs ⁽¹⁾	260,034		219		0.11	%	221,818		228		0.14	%
Mutual Fund OneSource^® and other non-transaction fee funds	190,847		452		0.32	%	216,699		524		0.32	%
Other third-party mutual funds and ETFs ⁽²⁾	469,901		238		0.07	%	329,033		216		0.09	%
Total mutual funds, ETFs and CTFs ^(1,3)	$	1,086,835	1,287		0.16	%	$	909,727	1,419		0.21	%
Advice solutions ⁽³⁾
Fee-based	$	241,678	878		0.49	%	$	228,326	859		0.50	%
Non-fee-based	69,136		—		—		62,377		—		—
Total advice solutions	$	310,814	878		0.38	%	$	290,703	859		0.40	%
Other balance-based fees ^(1,4)	407,762		162		0.05	%	388,836		158		0.05	%
Other ⁽⁵⁾			39						38
Total asset management and administration fees			$	2,366					$	2,474

⁽¹⁾ Beginning in the first quarter of 2019, a change was made to move CTFs from other balance-based fees. Prior periods have been recast to reflect this change.

⁽²⁾ Includes Schwab ETF OneSource™.

⁽³⁾Average client assets for advice solutions may also include the asset balances contained in the mutual fund and/or ETF categories listed above.

⁽⁴⁾ Includes various asset-related fees, such as trust fees, 401(k) recordkeeping fees, and mutual fund clearing fees and other service fees.

⁽⁵⁾ Includes miscellaneous service and transaction fees relating to mutual funds and ETFs that are not balance-based.

Asset management and administration fees increased by $16 million, or 2%, in the third quarter of 2019 and decreased by

$108 million, or 4%, in the first nine months of 2019, compared to the same periods in 2018. The increase in asset management and administration fees for the third quarter of 2019 was due to higher revenue from growing asset balances in purchased money market funds, other third-party mutual funds and ETFs, and increased enrollment in advice solutions, compared to the same period in 2018. The decrease in asset management and administration fees for the first nine months of 2019 was due to lower sweep money market fund revenue as a result of transfers to bank and broker-dealer sweep, as well as client asset allocation choices ~~and our 2017 fee reductions.~~including continued reduced usage of Mutual Fund OneSource^®. Part of the ~~declines were~~year-to-date decline was offset by revenue from growing asset balances in ~~advice solutions, equity and bond~~purchased money market funds, other third-party mutual funds and ~~ETFs.~~ETFs, and increased enrollment in advice solutions.

The following tables present a roll forward of client assets for the Schwab money market funds, Schwab equity and bond funds, ETFs, and ~~exchange-traded funds (ETFs),~~CTFs, and Mutual Fund OneSource^®and other non-transaction fee (NTF) funds. These funds generated 44% ~~and 47%~~ of the ~~asset management and administration fees earned during the third quarter and first nine months of 2018, respectively, compared to 53% and 54% for the same periods in 2017:~~

Schwab Money
Market Funds Schwab Equity and
Bond Funds and ETFs
Mutual Fund OneSource^®
and Other NTF funds
Three Months Ended September 30, 2018 2017 2018 2017 2018 2017
Balance at beginning of period $ 134,166
$ 156,186
$ 201,361
$ 151,336
$ 212,513
$ 224,749
Net inflows (outflows) (6,204 ) 2,753
6,596
7,086
(7,126 ) (13,255 )
Net market gains (losses) and other 522
235
8,899
6,676
7,228
9,684
Balance at end of period $ 128,484
$ 159,174
$ 216,856
$ 165,098
$ 212,615
$ 221,178

Schwab Money
Market Funds Schwab Equity and
Bond Funds and ETFs
Mutual Fund OneSource^®
and Other NTF funds
Nine Months Ended September 30, 2018 2017 2018 2017 2018 2017
Balance at beginning of period $ 163,650
$ 163,495
$ 181,608
$ 125,813
$ 225,202
$ 198,924
Net inflows (outflows) (36,645 ) (4,832 ) 24,867
22,347
(25,403 ) (23,494 )
Net market gains (losses) and other ⁽¹⁾
1,479
511
10,381
16,938
12,816
45,748
Balance at end of period $ 128,484
$ 159,174
$ 216,856
$ 165,098
$ 212,615
$ 221,178

⁽¹⁾ ~~Includes net inflows from other third-party mutual funds to Mutual Fund OneSource~~^®~~in the second quarter of 2017.~~

~~Trading Revenue~~

~~The following table presents trading revenue and the related drivers:~~

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

2018 2017 2018 2017
Daily average revenue trades (DARTs) (in thousands) 382
312
22 % 406
313
30 %
Clients’ daily average trades (in thousands) 683
633
8 % 732
602
22 %
Number of trading days 62.5
62.5
—
187.5
187.5
—
Daily average revenue per revenue trade $ 7.27
$ 7.74
(6 )% $ 7.27
$ 8.52
(15 )%
Trading revenue $ 176
$ 151
17 % $ 557
$ 500
11 %

DART volumes increased 22% and 30% in the third quarter and first nine months of 2018, respectively, compared to the prior year. This led to an increase in trading revenue of $25 million, or 17%, and $57 million, or 11%, in the third quarter and first nine months of 2018, respectively, compared to the same periods in 2017, as the volume growth more than offset Schwab’s commission pricing reductions implemented in the first quarter of 2017. During that time, we announced two trading price reductions which lowered standard equity, ETF, and option trade commissions from $8.95 to $4.95 and lowered the per contract option fee from $.75 to $.65.

~~Other Revenue~~

Other revenue includes order flow revenue, other service fees, software fees from our portfolio management solutions, exchange processing fees, and non-recurring gains. Order flow revenue was $33 million and $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)

asset management and administration fees earned during both the third quarter and first nine months of 2019, compared to 46% and 49% for the same periods in 2018:



	Schwab Money Market Funds					Schwab Equity and Bond Funds, ETFs, and CTFs ⁽¹⁾				Mutual Fund OneSource^® and Other NTF funds
Three Months Ended September 30,	2019		2018			2019		2018		2019			2018
Balance at beginning of period	$	168,064	$	134,166		$	254,460	$	216,883	$	197,777		$	212,513
Net inflows (outflows)	18,044		(6,204		)	7,408		6,290		(5,586		)	(7,126		)
Net market gains (losses) and other	843		522			1,296		9,349		2,482			7,228
Balance at end of period	$	186,951	$	128,484		$	263,164	$	232,522	$	194,673		$	212,615



	Schwab Money Market Funds					Schwab Equity and Bond Funds, ETFs, and CTFs ⁽¹⁾				Mutual Fund OneSource^® and Other NTF funds
Nine Months Ended September 30,	2019		2018			2019		2018		2019			2018
Balance at beginning of period	$	153,472	$	163,650		$	209,471	$	196,784	$	180,532		$	225,202
Net inflows (outflows)	30,735		(36,645		)	20,789		24,746		(16,729		)	(25,403		)
Net market gains (losses) and other	2,744		1,479			32,904		10,992		30,870			12,816
Balance at end of period	$	186,951	$	128,484		$	263,164	$	232,522	$	194,673		$	212,615

⁽¹⁾ Beginning in the first quarter of 2019, CTFs are included in these balances. Prior periods have been recast to reflect this change.

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
	2019		2018		Percent Change		2019		2018		Percent Change
Daily average revenue trades (DARTs) (in thousands)	395		382		3	%	401		406		(1	)%
Clients’ daily average trades (in thousands)	718		683		5	%	737		732		1	%
Number of trading days	63.5		62.5		2	%	187.5		187.5		—
Daily average revenue per revenue trade	$	6.94	$	7.27	(5	)%	$	7.03	$	7.27	(3	)%
Trading revenue	$	172	$	176	(2	)%	$	531	$	557	(5	)%

During the third quarter and first nine months of 2019, trading revenue decreased $4 million, or 2%, and $26 million, or 5%, compared to the same periods in 2018. These declines were due primarily to decreases in daily average revenue per revenue trade, which decreased 5% and 3% in the third quarter and first nine months of 2019, respectively, compared to the same periods in 2018.

Effective October 7, 2019, CS&Co eliminated online trade commissions for U.S. and Canadian-listed stocks and ETFs, as well as the base charge on options. For additional information on the pricing reduction, see Overview.

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. Other revenue increased $16 million, or 24%, and $62 million, or 26%, in the third quarter and first nine months of 2019, respectively, compared to the same periods in 2018. The increase in other revenue for the first nine months of 2019 was primarily due to a gain from the sale of a portfolio management and reporting software solution for advisors to Tamarac Inc. in the second quarter of 2019, and a gain from the assignment of leased office space in the first quarter of 2019. Order flow revenue was $34 million and $33 million during the third quarters of 2019 and 2018, respectively, and $99 million and $104 million during the first nine months of 2019 and 2018, respectively. The decrease in order flow revenue for the first nine months of 2019 was primarily due to lower volume of trades during the first quarter of 2019 compared to the same period in 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)

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		Three Months Ended September 30,						Percent Change			Nine Months Ended September 30,						Percent Change
	2018			2017					2018				2017				2019				2018				2019				2018						Percent Change
Compensation and benefits							Percent Change											Percent Change
Salaries and wages	$	423		$	372		14	%		$	1,253			$	1,110			13	%	$	546		$	423		Percent Change	29	%		$	1,498		$	1,253		20	%
Incentive compensation	193			187			3	%		615				580				6	%	183			193			(5	)%		597			615			(3	)%
Employee benefits and other	121			103			17	%		384				336				14	%	128			121			6	%		419			384			9	%
Total compensation and benefits	$	737		$	662		11	%		$	2,252			$	2,026			11	%	$	857		$	737		16	%		$	2,514		$	2,252		12	%
Professional services	164			152			8	%		476				429				11	%	168			164			2	%		516			476			8	%
Occupancy and equipment	124			111			12	%		368				323				14	%	144			124			16	%		408			368			11	%
Advertising and market development	70			63			11	%		220				205				7	%	71			70			1	%		217			220			(1	)%
Communications	59			56			5	%		179				171				5	%	63			59			7	%		187			179			4	%
Depreciation and amortization	78			69			13	%		226				200				13	%	88			78			13	%		255			226			13	%
Regulatory fees and assessments	57			43			33	%		158				133				19	%	30			57			(47	)%		92			158			(42	)%
Other	71			64			11	%		232				192				21	%	54			71			(24	)%		190			232			(18	)%
Total expenses excluding interest	$	1,360		$	1,220		11	%		$	4,111			$	3,679			12	%	$	1,475		$	1,360		8	%		$	4,379		$	4,111		7	%
Expenses as a percentage of total net revenues
Compensation and benefits	29		%	31		%				30		%		32		%				32		%	29		%				31		%	30		%
Advertising and market development	3		%	3		%				3		%		3		%				3		%	3		%				3		%	3		%
Full-time equivalent employees (in thousands)
At quarter end	19.1			17.3			10	%												19.8			19.1			4	%
Average	19.0			17.1			11	%		18.4				16.7				10	%	20.2			19.0			6	%		20.1			18.4			9	%

Total compensation and benefits increased in the third quarter and first nine months of ~~2018~~2019 compared to the same periods in ~~2017,~~2018, primarily due to an increase in employee headcount in 2019 to support our expanding client ~~base.~~base as well as $62 million of severance charges in the third quarter of 2019.

Professional services expense increased in the third quarter and first nine months of ~~2018~~2019 compared to the same periods in ~~2017,~~2018, primarily due to ~~higher spending on technology projects, as well as an increase in asset management and administration-related expenses resulting from~~overall growth in the ~~Schwab Funds~~^®business and ~~Schwab ETFs™.~~investments in projects to further drive efficiency and scale.

Occupancy and equipment expense increased in the third quarter and first nine months of ~~2018~~2019 compared to the same periods in ~~2017,~~2018, 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~~2019 compared to the same periods in ~~2017,~~2018, primarily due to higher amortization of internally developed software associated with continued investments in software and technology enhancements.

Regulatory fees and assessments ~~increased~~decreased in the third quarter and first nine months of ~~2018~~2019 compared to the same periods in ~~2017,~~2018, primarily due to ~~an increase~~a decrease in FDIC insurance assessments ~~which rose as a result~~resulting from the elimination of ~~higher average assets.~~the FDIC surcharge in the fourth quarter of 2018.

Other expenses ~~increased~~decreased in the third quarter and the first nine months of ~~2018~~2019 compared to the same ~~period~~periods in ~~2017,~~2018, primarily due to ~~a $15~~lower bad debt expense and travel and entertainment expense.

Capital expenditures were $190 million ~~charge~~and $544 million in the third quarter and first ~~quarter~~nine months of ~~2018 associated~~2019, respectively, compared 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. The ~~increases~~increase in ~~the third quarter and year-to-date~~ capital expenditures from the ~~same periods in 2017 were~~prior year was primarily due ~~primarily~~ to the expansion of our ~~office campus expansion~~campuses in the U.S. ~~and investments in technology projects.~~ We currently anticipate capital expenditures for full-year ~~2018~~2019 will reach approximately ~~6-7%~~7-8% of total net revenues.

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)

Taxes on Income

Taxes on income were ~~$296~~$285 million and ~~$327~~$296 million for the third quarters of ~~2018~~2019 and ~~2017,~~2018, respectively, resulting in effective income tax rates on income before taxes of ~~24.3%~~23.1% and ~~34.6%~~24.3%, respectively. Taxes on income were ~~$780~~$884 million and ~~$940~~

$780 million for the first nine months of ~~2018~~2019 and ~~2017,~~2018, respectively, resulting in effective income tax rates on income before taxes of ~~23.3%~~23.7% and ~~34.9%~~23.3%, respectively. The decrease in the effective tax rate in the third quarter of 2019 compared to the same period in the prior year was primarily due to federal tax benefits recognized during the ~~Tax Act which was signed into law on December 22, 2017. Among other things,~~current period. The increase in the ~~Tax Act lowered the federal corporate income~~effective tax rate ~~from 35%~~in the first nine months of 2019 compared to ~~21%, effective for~~the same period in the prior year was primarily due to a decrease in equity compensation tax ~~years including or commencing January 1, 2018.~~deduction benefits.

Segment Information

Financial information for our segments is presented in the following tables:


	Investor Services						Advisor Services						Total						Investor Services						Advisor Services						Total
Three Months Ended September 30,	Percent Change		2018		2017		Percent Change		2018		2017		Percent Change		2018		2017		Percent Change		2019		2018		Percent Change		2019		2018		Percent Change		2019		2018
Net Revenues
Net interest revenue	39	%	$	1,138	$	818	47	%	$	389	$	264	41	%	$	1,527	$	1,082	4	%	$	1,182	$	1,138	15	%	$	449	$	389	7	%	$	1,631	$	1,527
Asset management and administration fees	(5	)%	565		595		(8	)%	244		266		(6	)%	809		861		4	%	586		565		(2	)%	239		244		2	%	825		809
Trading revenue	19	%	112		94		12	%	64		57		17	%	176		151		(4	)%	108		112		—		64		64		(2	)%	172		176
Other	(2	)%	53		54		(18	)%	14		17		(6	)%	67		71		28	%	68		53		7	%	15		14		24	%	83		67
Total net revenues	20	%	1,868		1,561		18	%	711		604		19	%	2,579		2,165		4	%	1,944		1,868		8	%	767		711		5	%	2,711		2,579
Expenses Excluding Interest	11	%	1,015		918		14	%	345		302		11	%	1,360		1,220		5	%	1,070		1,015		17	%	405		345		8	%	1,475		1,360
Income before taxes on income	33	%	$	853	$	643	21	%	$	366	$	302	29	%	$	1,219	$	945	2	%	$	874	$	853	(1	)%	$	362	$	366	1	%	$	1,236	$	1,219


	Investor Services						Advisor Services						Total						Investor Services						Advisor Services						Total
Nine Months Ended September 30,	Percent Change		2018		2017		Percent Change		2018		2017		Percent Change		2018		2017		Percent Change		2019		2018		Percent Change		2019		2018		Percent Change		2019		2018
Net Revenues
Net interest revenue	33	%	$	3,158	$	2,366	35	%	$	1,039	$	769	34	%	$	4,197	$	3,135	12	%	$	3,531	$	3,158	34	%	$	1,390	$	1,039	17	%	$	4,921	$	4,197
Asset management and administration fees	(1	)%	1,727		1,743		(5	)%	747		786		(2	)%	2,474		2,529		(3	)%	1,679		1,727		(8	)%	687		747		(4	)%	2,366		2,474
Trading revenue	14	%	354		311		7	%	203		189		11	%	557		500		(7	)%	329		354		—		202		203		(5	)%	531		557
Other	14	%	182		159		—		53		53		11	%	235		212		14	%	207		182		70	%	90		53		26	%	297		235
Total net revenues	18	%	5,421		4,579		14	%	2,042		1,797		17	%	7,463		6,376		6	%	5,746		5,421		16	%	2,369		2,042		9	%	8,115		7,463
Expenses Excluding Interest	11	%	3,069		2,762		14	%	1,042		917		12	%	4,111		3,679		4	%	3,189		3,069		14	%	1,190		1,042		7	%	4,379		4,111
Income before taxes on income	29	%	$	2,352	$	1,817	14	%	$	1,000	$	880	24	%	$	3,352	$	2,697	9	%	$	2,557	$	2,352	18	%	$	1,179	$	1,000	11	%	$	3,736	$	3,352

Investor Services

Total net revenues ~~rose~~grew by ~~20% and 18%~~4% in the third quarter of 2019 compared to the same period in 2018, primarily due to an increase in net interest revenue and asset management and administration fees. During the first nine months of ~~2018, respectively,~~2019, total net revenues grew by 6% compared to ~~the same periods in 2017,~~2018, primarily due to an increase in net interest revenue, partially offset by lower asset management and administration fees. Net interest revenue increased due to higher net interest margins and higher interest-earning assets. Asset management and administration fees decreased primarily due to lower money market fund revenue as a result of transfers to bank sweep, client asset allocation choices, and our 2017 fee reductions.

~~Expenses excluding interest increased by 11% in~~for both the third quarter and first nine months of ~~2018 compared to the same periods in 2017,~~2019, primarily due to higher ~~compensation~~net interest margin and ~~benefits, technology project spend, and~~higher interest-earning assets. During the third quarter of 2019, asset management and ~~administration-related expenses~~administration fees increased primarily due to ~~support our expanding~~growing asset balances in purchased money market funds, other third-party mutual funds and ETFs, and advice solutions. Asset management and administration fees decreased during the first nine months of 2019 as a result of lower sweep money market fund revenue due to transfers to bank and broker-dealer sweep, as well as client ~~base.~~asset allocation choices including reduced usage of Mutual Fund OneSource^®. Part of the year-to-date decline was offset by growing asset balances in purchased money market funds, other third-party mutual funds and ETFs, and increased enrollment in advice solutions.

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~~

~~Total net revenues rose~~Expenses excluding interest increased by ~~18%~~5% and ~~14%~~4% in the third quarter and first nine months of ~~2018,~~2019, respectively, compared to the same periods in ~~2017,~~2018, primarily as a result of higher compensation and benefits due to increased headcount in 2019 and severance charges in the third quarter of 2019, higher professional services due to overall growth in the business and investments in projects to further drive efficiency and scale, higher occupancy and equipment expenses due to an increase in software maintenance expenses and additional licenses to support growth in the business, and higher amortization of internally developed software associated with continued investments in software and technology enhancements. These increases were partially offset by a decrease in FDIC insurance assessments due to the elimination of the FDIC surcharge in the fourth quarter of 2018 and lower travel and entertainment expenses.

Advisor Services

Total net revenues grew by 8% and 16% in the third quarter and first nine months of 2019, respectively, compared to the same periods in 2018, primarily due to increases in net interest revenue and other revenue, partially offset by lower asset management and administration fees. Net interest revenue increased primarily due to higher net interest ~~margins~~margin and higher interest-earning assets. Other revenue increased primarily due to a gain from the sale of a portfolio management and reporting software solution for advisors to Tamarac Inc. in the second quarter of 2019. Asset management and administration fees decreased primarily due to lower money market fund revenue as a result of transfers to bank and broker-dealer sweep, as well as client asset allocation choices ~~and our 2017 fee reductions.~~including reduced usage of Mutual Fund OneSource^®.

Expenses excluding interest increased by 17% and 14% in ~~both~~ the third quarter and first nine months of ~~2018~~2019, respectively, compared to the same periods in ~~2017,~~2018, primarily due to higher compensation and benefits ~~technology project spend,~~due to increased headcount in 2019 and ~~asset management~~severance charges in the third quarter of 2019, higher professional services expense due to overall growth in the business and ~~administration-related~~investments in projects to further drive efficiency and scale, and higher occupancy and equipment expense due to an increase in software maintenance expenses and additional licenses to support ~~our expanding client base.~~growth in the business. These increases were partially offset by a decrease in FDIC insurance assessments due to the elimination of the FDIC surcharge in the fourth quarter of 2018, lower bad debt expenses, and lower travel and entertainment expenses.

RISK MANAGEMENT

Schwab’s business activities expose us to a variety of risks, including operational, credit, market, liquidity, and compliance ~~risk.~~risks. The Company has a comprehensive risk management program to identify and manage these risks and their associated potential for financial and reputational impact. For a discussion of our risk management programs, see Item 7 – Risk Management in the ~~2017~~2018 Form 10-K.

Expected Phase-out of LIBOR

The Company has established a firm-wide team to address the likely discontinuation of LIBOR. As part of our efforts, we have inventoried our LIBOR exposures, the largest of which are certain investment securities and loans. In purchasing new investment securities, we ensure that appropriate fall-back language is in the security’s prospectus in the event that LIBOR is unavailable or deemed unreliable. We have also started to update loan agreements to ensure new LIBOR-based loans adequately provide for an alternative to LIBOR. Furthermore, we plan to phase-out the use of LIBOR as a reference rate in our new lending products before December 2021. Consistent with our “Through Clients’ Eyes” strategy, our focus throughout the LIBOR transition process is to ensure clients are treated fairly and consistently as this major change is occurring in the financial markets. The market transition process has not yet progressed to a point at which the impact to the Company’s consolidated financial statements of LIBOR’s discontinuation can be estimated.

Net Interest Revenue Simulation

Schwab’s 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. For ~~Schwab’s~~our net interest revenue sensitivity analysis, we 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 simulations involve assumptions that are inherently uncertain and, as a result, cannot precisely estimate the impact of changes in interest rates on net interest revenue.

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)

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 our guidelines for net interest revenue sensitivity are breached, management must report the breach to the Financial Risk Oversight Committee and establish a plan to address the interest rate risk. There were no breaches of Schwab’s net interest revenue sensitivity risk limits during the nine months ended September 30, 2018, or year ended December 31, 2017.

As represented by the simulations presented below, our 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 sheets would not be changed as a result of the simulated changes in interest rates. As we actively manage the consolidated balance sheets and interest rate exposure, in all likelihood we would take steps to manage additional interest rate exposure that could result from changes in the interest rate environment. The following table shows the simulated net interest revenue change over the next 12 months beginning September 30, ~~2018~~2019 and December 31, ~~2017~~2018 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, 2018		December 31, 2017		September 30, 2019		December 31, 2018
Increase of 100 basis points	4.1	%	3.3	%	3.8	%	4.4	%
Decrease of 100 basis points	(4.7	)%	(6.2	)%	(6.0	)%	(4.9	)%

~~The change in net interest revenue sensitivities as of September 30, 2018 reflects the increase in interest rates across all maturities.~~

~~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:~~activity which includes bank deposits and cash balances in client brokerage accounts. These funds are used to purchase investment securities and extend loans to clients.

Other sources of funds may include cash flows from operations, maturities and sales of investment securities, repayments on loans, securities lending of assets held in client brokerage accounts, repurchase agreements, and cash provided by external ~~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~~including U.S. Treasury notes, is also maintained.

In addition to internal sources of liquidity, Schwab has access to external funding. The following table describes external debt facilities available at September 30, ~~2018:~~2019:


Description	Borrower	Outstanding		Available		Borrower	Outstanding		Available
Federal Home Loan Bank secured credit facility ⁽¹⁾						Banking subsidiaries	$	—	$	35,200
Uncommitted, unsecured lines of credit with various external banks						CSC, CS&Co	—		1,472
Unsecured commercial paper ⁽²⁾						CSC	—		750
Committed, unsecured credit facility with various external banks	CSC	$	—	$	750	CSC	—		750
Uncommitted, unsecured lines of credit with various external banks	CSC, CS&Co	—		1,432
Federal Reserve Bank discount window ⁽¹⁾	CSB	—		2,422
Federal Home Loan Bank secured credit facility ⁽²⁾	Banking subsidiaries	—		30,002
Unsecured commercial paper ⁽³⁾	CSC	—		750
Federal Reserve Bank discount window ⁽³⁾						Banking subsidiaries	—		8,254

⁽¹⁾~~Amounts available are dependent on the fair value of certain investment securities that are pledged as collateral.~~

⁽²⁾Amounts available are dependent on the amount of ~~first lien residential real estate mortgage loans (First Mortgages), home equity lines of credit (HELOCs),~~First Mortgages, HELOCs, and the fair value of certain investment securities that are pledged as collateral.

^{(3) (2)}CSC has authorization from its Board of Directors to issue Commercial Paper Notes to not exceed $1.5 billion. Management has set a current limit not to exceed the amount of the committed, unsecured credit facility.

⁽³⁾Amounts available are dependent on the fair value of certain investment securities that are pledged as collateral.

CSC’s ratings for Commercial 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 Ratings, Ltd (Fitch).

~~Borrowings~~

~~The following are details of the Senior Notes and short-term borrowings:~~

September 30, 2018 Par
Outstanding Maturity Weighted Average
Interest Rate Moody’s Standard
& Poor’s Fitch
Senior Notes $ 5,781
2020 - 2028 3.31% A2 A A
Short-term borrowings $ —
N/A N/A N/A N/A N/A

~~N/A Not applicable.~~

~~New Debt Issuances~~

~~All debt issuances in 2018 were senior unsecured obligations with interest payable quarterly or semi-annually. Additional details are as follows:~~

Issuance Date
Issuance
Amount
Maturity
Date
Interest
Rate
Interest
Payable
May 22, 2018 $ 600
5/21/2021 Three-month LIBOR + 0.32% Quarterly
May 22, 2018 $ 600
5/21/2021 3.25% Semi-annually
May 22, 2018 $ 750
5/21/2025 3.85% Semi-annually

Schwab is subject to, and was in compliance with, the modified liquidity coverage ratio (LCR) rule at September 30, 2018. Schwab expects consolidated balance sheet assets to remain above $250 billion in 2018, and as a result, would become subject to the full LCR rule in 2019.

THE CHARLES SCHWAB CORPORATION

Management’s Discussion and Analysis of Financial Condition and Results of Operations

(Tabular Amounts in Millions, Except Ratios, or as Noted)

As Schwab’s consolidated balance sheet assets were above $250 billion at December 31, 2018, Schwab became subject to the non-modified LCR rule on April 1, 2019. The Company was in compliance with the LCR rule at September 30, 2019. See Current Regulatory Environment and Other Developments for information on recently issued rules that will impact Schwab’s LCR requirements. The table below presents information about our average LCR:



	Average for the Three Months Ended September 30, 2019
	Average for the Three Months Ended September 30, 2019
Total eligible high quality liquid assets	$	53,865
Net cash outflows	$	48,109
LCR	112		%

Borrowings

The following are details of the Senior Notes:



September 30, 2019	Par Outstanding		Maturity	Weighted Average Interest Rate	Moody’s	Standard & Poor’s	Fitch
Senior Notes	$	7,481	2020 - 2029	3.36%	A2	A	A

New Debt Issuance

The new debt issuance in 2019 is a senior unsecured obligation with interest payable semi-annually. Additional details are as follows:



Issuance Date	Issuance Amount		Maturity Date	Interest Rate
May 22, 2019	$	600	5/22/2029	3.250	%

Acquisition of USAA-IMCO

We expect to utilize cash generated from operations to fund the $1.8 billion purchase of assets from USAA-IMCO. The transaction is expected to close in mid-2020, subject to satisfaction of closing conditions, including regulatory approvals and the implementation of conversion plans.

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. Our capital management in coming quarters will incorporate preparations for closing the USAA-IMCO transaction, including the allocation of capital to support client cash that will be added to our balance sheet.

Regulatory Capital Requirements

CSC and CSB are subject to various capital requirements set by regulatory agencies as discussed in further detail in the ~~2017~~2018 Form 10-K and in Item 1 – Note ~~16.~~15. As of September 30, ~~2018,~~2019, CSC and CSB are considered well capitalized.

The following table details CSC’s consolidated and CSB’s capital ratios as of September 30, ~~2018~~2019 and December 31, ~~2017:~~2018:


	September 30, 2018						December 31, 2017						September 30, 2019 ⁽¹⁾						December 31, 2018
	CSC			CSB			CSC			CSB			CSC			CSB			CSC			CSB
Total stockholders’ equity	$	20,834		$	14,899		$	18,525		$	13,224		$	21,354		$	15,591		$	20,670		$	15,615
Less:
Preferred stock	2,793			—			2,793			—			2,793			—			2,793			—
Common Equity Tier 1 Capital before regulatory adjustments	$	18,041		$	14,899		$	15,732		$	13,224		$	18,561		$	15,591		$	17,877		$	15,615
Less:
Goodwill, net of associated deferred tax liabilities	$	1,191		$	13		$	1,191		$	13		$	1,188		$	13		$	1,188		$	13
Other intangible assets, net of associated deferred tax liabilities	127			—			61			—			106			—			125			—
Deferred tax assets, net of valuation allowances and deferred tax liabilities	2			—			2			—			3			1			3			1
AOCI adjustment ⁽¹⁾	(304		)	(278		)	(152		)	(144		)	—			—			(252		)	(231		)
Common Equity Tier 1 Capital	$	17,025		$	15,164		$	14,630		$	13,355		$	17,264		$	15,577		$	16,813		$	15,832
Tier 1 Capital	$	19,818		$	15,164		$	17,423		$	13,355		$	20,057		$	15,577		$	19,606		$	15,832
Total Capital	19,846			15,191			17,452			13,382			20,075			15,594			19,628			15,853
Risk-Weighted Assets	86,830			75,224			75,866			66,519			86,161			68,154			95,441			80,513
Total Leverage Exposure ⁽¹⁾													280,591			217,468			N/A			N/A
Common Equity Tier 1 Capital/Risk-Weighted Assets	19.6		%	20.2		%	19.3		%	20.1		%	20.0		%	22.9		%	17.6		%	19.7		%
Tier 1 Capital/Risk-Weighted Assets	22.8		%	20.2		%	23.0		%	20.1		%	23.3		%	22.9		%	20.5		%	19.7		%
Total Capital/Risk-Weighted Assets	22.9		%	20.2		%	23.0		%	20.1		%	23.3		%	22.9		%	20.6		%	19.7		%
Tier 1 Leverage Ratio	7.5		%	7.1		%	7.6		%	7.1		%	7.3		%	7.4		%	7.1		%	7.2		%
Supplementary Leverage Ratio ⁽¹⁾													7.1		%	7.2		%	N/A			N/A

⁽¹⁾Beginning in 2019, CSC and CSB ~~have~~are subject to the “advanced approaches” framework under the Basel III capital rule. As a result, we are now required to include all components of AOCI in regulatory capital and report our supplementary leverage ratio, which is calculated as Tier 1 capital divided by total leverage exposure. Total leverage exposure includes all on-balance sheet assets and certain off-balance sheet exposures, including unused commitments. Prior to 2019, CSC and CSB elected to ~~opt out~~opt-out of the requirement to include most components of ~~accumulated other comprehensive income (AOCI)~~AOCI in Common Equity Tier 1 ~~Capital. Schwab expects consolidated balance sheet assets to remain above $250 billion in~~Capital; the amounts and ratios for December 31, 2018 are presented on this basis. See Current Regulatory Environment and ~~as a result, would no longer exclude AOCI from~~Other Developments for information on recently issued rules that will impact Schwab’s regulatory capital ~~beginning in 2019.~~requirements.

N/A Not applicable.

CSB is also subject to regulatory requirements that restrict and govern the terms of affiliate transactions. In addition, CSB is required to provide notice to, and may be required to obtain approval from, the ~~Office of the Comptroller of the Currency~~OCC and the Federal Reserve to declare dividends to CSC.

Schwab’s primary broker-dealer subsidiary, CS&Co, is subject to regulatory requirements of the Uniform Net Capital Rule. At September 30, ~~2018,~~2019, CS&Co ~~exceeded~~was in compliance with its net capital requirements.

THE CHARLES SCHWAB CORPORATION

Management’s Discussion and Analysis of Financial Condition and Results of Operations

(Tabular Amounts in Millions, Except Ratios, or as Noted)

In addition to the capital requirements above, Schwab’s subsidiaries are subject to other regulatory requirements intended to ensure financial soundness and liquidity. See Item 1 – Note 1615 for additional information on the components of stockholders’ equity and information on the capital requirements of significant subsidiaries.

Dividends

On January 30, 2019, the Board of Directors of the Company declared a four cent, or 31%, increase in the quarterly cash dividend to $.17 per common share.

Cash dividends paid and per share amounts for the first nine months of 2019 and 2018 are as follows:



	2019				2018
Nine Months Ended September 30,	Cash Paid		Per Share Amount		Cash Paid		Per Share Amount
Common Stock	$	679	$	.51	$	448	$	.33
Series A Preferred Stock ⁽¹⁾	28		70.00		28		70.00
Series C Preferred Stock ⁽²⁾	27		45.00		27		45.00
Series D Preferred Stock ⁽²⁾	33		44.64		33		44.64
Series E Preferred Stock ⁽³⁾	28		4,625.00		28		4,625.00
Series F Preferred Stock ⁽⁴⁾	13		2,500.00		15		2,930.56

⁽¹⁾Dividends paid semi-annually until February 1, 2022 and quarterly thereafter.

⁽²⁾Dividends paid quarterly.

⁽³⁾Dividends paid semi-annually until March 1, 2022 and quarterly thereafter.

⁽⁴⁾ Dividends paid semi-annually beginning on June 1, 2018 until December 1, 2027, and quarterly thereafter.

Share Repurchases

On January 30, 2019, CSC publicly announced that its Board of Directors authorized the repurchase of up to $4.0 billion of common stock. The authorization does not have an expiration date. During the third quarter and first nine months of 2019, CSC repurchased 20 million and 49 million shares of its common stock for $771 million and $2.0 billion, respectively, leaving $2.0 billion remaining on our existing authorization as of September 30, 2019.

OTHER

Foreign Exposure

At September 30, 2019, Schwab had exposure to non-sovereign financial and non-financial institutions in foreign countries, as well as agencies of foreign governments. At September 30, 2019, the fair value of these holdings totaled $5.4 billion, with the top three exposures being to issuers and counterparties domiciled in France at $2.7 billion, Japan at $603 million, and Canada at $572 million.

In addition to the direct holdings in foreign companies and securities issued by foreign government agencies, Schwab generates indirect exposure to foreign countries through its investments in CSIM money market funds (collectively, the Funds) resulting from brokerage clearing activities. Certain of the Funds’ positions include certificates of deposit, time deposits, commercial paper, and corporate debt securities issued by counterparties in foreign countries. Schwab had outstanding margin loans to foreign residents of $667 million at September 30, 2019.

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 2018 and 2017 are as follows:~~

2018 2017
Nine Months Ended September 30, Cash Paid Per Share
Amount Cash Paid Per Share
Amount
Common Stock $ 448
$ .33
$ 323
$ .24
Series A Preferred Stock ⁽¹⁾
28
70.00
28
70.00
Series B Preferred Stock ^(2,5)
N/A
N/A
22
45.00
Series C Preferred Stock ⁽²⁾
27
45.00
27
45.00
Series D Preferred Stock ⁽²⁾
33
44.64
33
44.64
Series E Preferred Stock ⁽³⁾
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⁾~~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, 2018, Schwab had exposure to non-sovereign financial and non-financial institutions in foreign countries, as well as agencies of foreign 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 France at $2.3 billion, Sweden at $1.8 billion, and Canada at $0.8 billion.

In addition to the direct holdings in foreign companies and securities issued by foreign government agencies, Schwab has indirect exposure to foreign countries through its investments in CSIM money market funds (collectively, the Funds) resulting from brokerage clearing activities. At September 30, 2018, Schwab had $21 million in investments in these Funds. Certain of the Funds’ positions include certificates of deposit, time deposits, commercial paper, and corporate debt securities issued by counterparties in foreign countries. Additionally, at September 30, 2018, Schwab had outstanding margin loans to foreign residents of $816 million.

Off-Balance Sheet Arrangements

Schwab enters into various off-balance sheet arrangements in the ordinary course of business, primarily to meet the needs of ~~its~~our clients. These arrangements include firm commitments to extend credit. Additionally, Schwab enters into guarantees and other similar arrangements in the ordinary course of business. For information on each of these arrangements, see Item 1 – Note 5, Note 6, Note 8, Note 9,10, and Note ~~10,~~11, and Item 8 – Note 1314 in the ~~2017~~2018 Form 10-K.

CRITICAL ACCOUNTING ESTIMATES

Certain of our 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 ~~2017~~2018 Form 10-K. There have been no changes to critical accounting estimates during the ~~first~~ nine months of ~~2018.~~2019.

THE CHARLES SCHWAB CORPORATION

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,
	2019			2018			2019			2018
Net Revenues
Interest revenue	$	1,892		$	1,755		$	5,817		$	4,766
Interest expense	(261		)	(228		)	(896		)	(569		)
Net interest revenue	1,631			1,527			4,921			4,197
Asset management and administration fees	825			809			2,366			2,474
Trading revenue	172			176			531			557
Other	83			67			297			235
Total net revenues	2,711			2,579			8,115			7,463
Expenses Excluding Interest
Compensation and benefits	857			737			2,514			2,252
Professional services	168			164			516			476
Occupancy and equipment	144			124			408			368
Advertising and market development	71			70			217			220
Communications	63			59			187			179
Depreciation and amortization	88			78			255			226
Regulatory fees and assessments	30			57			92			158
Other	54			71			190			232
Total expenses excluding interest	1,475			1,360			4,379			4,111
Income before taxes on income	1,236			1,219			3,736			3,352
Taxes on income	285			296			884			780
Net Income	951			923			2,852			2,572
Preferred stock dividends and other ⁽¹⁾	38			38			127			128
Net Income Available to Common Stockholders	$	913		$	885		$	2,725		$	2,444
Weighted-Average Common Shares Outstanding:
Basic	1,300			1,351			1,320			1,349
Diluted ⁽²⁾	1,308			1,364			1,329			1,363
Earnings Per Common Shares Outstanding:
Basic	$	.70		$	.66		$	2.06		$	1.81
Diluted ⁽²⁾	$	.70		$	.65		$	2.05		$	1.79

⁽¹⁾ 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
⁽²⁾Antidilutive stock options and restricted stock units excluded from the calculation of diluted EPS totaled 17 million and 11 million shares for the third quarters of 2019 and 2018, respectively, and 18 million and 12 million shares for the first nine months of 2019 and 2018, respectively.

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,
	2018			2017			2018			2017			2019			2018			2019			2018
Net income	$	923		$	618		$	2,572		$	1,757		$	951		$	923		$	2,852		$	2,572
Other comprehensive income (loss), before tax:
Change in net unrealized gain (loss) on available for sale securities:
Net unrealized gain (loss)	(43		)	—			(184		)	81			51			(43		)	496			(184		)
Reclassification of net unrealized loss transferred to held to maturity	—			—			—			227
Other reclassifications included in other revenue	—			—			—			(7		)	(1		)	—			(5		)	—
Change in net unrealized gain (loss) on held to maturity securities:
Reclassification of net unrealized loss transferred from available for sale	—			—			—			(227		)
Amortization of amounts previously recorded upon transfer from available for sale	8			10			26			21
Other	—			—			—			(3		)
Amortization of amounts previously recorded upon transfer to held to maturity from available for sale													10			8			30			26
Other comprehensive income (loss), before tax	(35		)	10			(158		)	92			60			(35		)	521			(158		)
Income tax effect	9			(4		)	39			(35		)	(15		)	9			(125		)	39
Other comprehensive income (loss), net of tax	(26		)	6			(119		)	57			45			(26		)	396			(119		)
Comprehensive Income	$	897		$	624		$	2,453		$	1,814		$	996		$	897		$	3,248		$	2,453

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, 2018			December 31, 2017			September 30, 2019			December 31, 2018
Assets
Cash and cash equivalents	$	21,830		$	14,217		$	20,252		$	27,938
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
Cash and investments segregated and on deposit for regulatory purposes (including resale agreements of $9,707 at September 30, 2019 and $7,195 at December 31, 2018)							16,164			13,563
Receivables from brokers, dealers, and clearing organizations	798			649			1,317			553
Receivables from brokerage clients — net	22,411			20,576			21,069			21,651
Other securities owned — at fair value	500			539			497			539
Available for sale securities	57,558			49,995			56,483			66,578
Held to maturity securities	138,952			120,926			140,194			144,009
Bank loans — net	16,564			16,478			16,895			16,609
Equipment, office facilities, and property — net	1,683			1,471			2,017			1,769
Goodwill	1,227			1,227			1,227			1,227
Other assets	2,092			2,057			2,872			2,046
Total assets	$	272,102		$	243,274		$	278,987		$	296,482
Liabilities and Stockholders’ Equity
Bank deposits	$	213,408		$	169,656		$	209,327		$	231,423
Payables to brokers, dealers, and clearing organizations	1,522			1,287			1,736			1,831
Payables to brokerage clients	27,851			31,243			35,622			32,726
Accrued expenses and other liabilities	2,697			2,810			3,521			2,954
Short-term borrowings	—			15,000
Long-term debt	5,790			4,753			7,427			6,878
Total liabilities	251,268			224,749			257,633			275,812
Stockholders’ equity:
Preferred stock — $.01 par value per share; aggregate liquidation preference of $2,850	2,793			2,793			2,793			2,793
Common stock — 3 billion shares authorized; $.01 par value per share; 1,487,543,446 shares issued	15			15			15			15
Additional paid-in capital	4,484			4,353			4,640			4,499
Retained earnings	16,615			14,408			19,374			17,329
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		)
Treasury stock, at cost — 198,611,926 shares at September 30, 2019 and 155,116,695 shares at December 31, 2018							(5,612		)	(3,714		)
Accumulated other comprehensive income (loss)	(304		)	(152		)	144			(252		)
Total stockholders’ equity	20,834			18,525			21,354			20,670
Total liabilities and stockholders’ equity	$	272,102		$	243,274		$	278,987		$	296,482

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				Retained Earnings			Treasury Stock, at cost							Total			Preferred Stock				Common stock						Additional Paid-in Capital				Retained Earnings				Treasury Stock, at cost								Total
				Shares			Amount							Accumulated Other Comprehensive Income (Loss)	Retained Earnings			Treasury Stock, at cost			Shares				Total			Preferred Stock				Amount						Additional Paid-in Capital				Retained Earnings				Treasury Stock, at cost								Total
Balance at December 31, 2016	Preferred Stock	$	2,783			1,488			$	15	Additional Paid-in Capital				$	4,267		$	12,649				$	(3,130	)		$	(163	)	$	16,421
Balance at June 30, 2018																												$	2,793			1,488		$	15			$	4,447			$	15,903			$	(2,783	)		$	(278	)		$	20,097
Net income	—				—			—			—					1,757			—					—				1,757			—			—			—				—				923				—				—				923
Other comprehensive income (loss), net of tax	—				—			—			—				—			—				57				57			—				—		—				—				—				—				(26		)		(26		)
Dividends declared on preferred stock	—				—			—			—				(120		)	—				—				(120		)	—				—		—				—				(34		)		—				—				(34		)
Dividends declared on common stock	—				—			—			—				(323		)	—				—				(323		)
Dividends declared on common stock — $.13 per share																													—				—		—				—				(177		)		—				—				(177		)
Stock option exercises and other	—				—			—			(30		)		—			128				—				98			—				—		—				—				—				9				—				9
Share-based compensation and related tax effects	—				—			—			105				—			—				—				105
Share-based compensation																													—				—		—				28				—				—				—				28
Other	—				—			—			23				—			9				—				32			—				—		—				9				—				5				—				14
Balance at September 30, 2017	$	2,783			1,488			$	15		$	4,365			$	13,963		$	(2,993	)		$	(106	)		$	18,027
Balance at September 30, 2018																													$	2,793			1,488		$	15			$	4,484			$	16,615			$	(2,769	)		$	(304	)		$	20,834

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
Balance at June 30, 2019																													$	2,793			1,488		$	15			$	4,599			$	18,680			$	(4,866	)		$	99			$	21,320
Net income	—				—			—			—				2,572			—				—				2,572			—				—		—				—				951				—				—				951
Other comprehensive income (loss), net of tax	—				—			—			—				—			—				(119		)		(119		)	—				—		—				—				—				—				45				45
Dividends declared on preferred stock	—				—			—			—				(117		)	—				—				(117		)	—				—		—				—				(34		)		—				—				(34		)
Dividends declared on common stock	—				—			—			—				(448		)	—				—				(448		)
Dividends declared on common stock — $.17 per share																													—				—		—				—				(223		)		—				—				(223		)
Repurchase of common stock																													—				—		—				—				—				(771		)		—				(771		)
Stock option exercises and other	—				—			—			(8		)		—			116				—				108			—				—		—				(2		)		—				19				—				17
Share-based compensation and related tax effects	—				—			—			106				—			—				—				106
Share-based compensation																													—				—		—				33				—				—				—				33
Other	—				—			—			33				—			7				—				40			—				—		—				10				—				6				—				16
Balance at September 30, 2018	$	2,793			1,488			$	15		$	4,484			$	16,615		$	(2,769	)		$	(304	)		$	20,834
Balance at September 30, 2019																													$	2,793			1,488		$	15			$	4,640			$	19,374			$	(5,612	)		$	144			$	21,354



															Accumulated Other Comprehensive Income (Loss)
	Preferred Stock		Common stock			Additional Paid-in Capital			Retained Earnings			Treasury Stock, at cost						Total
	Preferred Stock		Shares	Amount		Additional Paid-in Capital			Retained Earnings			Treasury Stock, at cost						Total
Balance at December 31, 2017	$	2,793	1,488	$	15	$	4,353		$	14,408		$	(2,892	)	$	(152	)	$	18,525
Adoption of accounting standards	—		—	—		—			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 — $.33 per share	—		—	—		—			(448		)	—			—			(448		)
Stock option exercises and other	—		—	—		(8		)	—			116			—			108
Share-based compensation	—		—	—		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

Balance at December 31, 2018	$	2,793	1,488	$	15	$	4,499		$	17,329		$	(3,714	)	$	(252	)	$	20,670
Net income	—		—	—		—			2,852			—			—			2,852
Other comprehensive income (loss), net of tax	—		—	—		—			—			—			396			396
Dividends declared on preferred stock	—		—	—		—			(115		)	—			—			(115		)
Dividends declared on common stock — $.51 per share	—		—	—		—			(679		)	—			—			(679		)
Repurchase of common stock	—		—	—		—			—			(1,991		)	—			(1,991		)
Stock option exercises and other	—		—	—		(15		)	—			80			—			65
Share-based compensation	—		—	—		121			—			—			—			121
Other	—		—	—		35			(13		)	13			—			35
Balance at September 30, 2019	$	2,793	1,488	$	15	$	4,640		$	19,374		$	(5,612	)	$	144		$	21,354

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,
	2019			2018
Cash Flows from Operating Activities
Net income	$	2,852		$	2,572
Adjustments to reconcile net income to net cash provided by (used for) operating activities:
Share-based compensation	131			113
Depreciation and amortization	255			226
Premium amortization, net, on available for sale and held to maturity securities	282			276
Other	127			108
Net change in:
Investments segregated and on deposit for regulatory purposes	(858		)	6,973
Receivables from brokers, dealers, and clearing organizations	(756		)	(147		)
Receivables from brokerage clients	576			(1,858		)
Other securities owned	42			39
Other assets	(28		)	(143		)
Payables to brokers, dealers, and clearing organizations	(95		)	43
Payables to brokerage clients	2,896			(3,392		)
Accrued expenses and other liabilities	(403		)	(155		)
Net cash provided by (used for) operating activities	5,021			4,655
Cash Flows from Investing Activities
Purchases of available for sale securities	(20,744		)	(19,781		)
Proceeds from sales of available for sale securities	21,710			115
Principal payments on available for sale securities	18,374			12,091
Purchases of held to maturity securities	(18,861		)	(30,639		)
Principal payments on held to maturity securities	13,653			12,382
Net change in bank loans	(338		)	(86		)
Purchases of equipment, office facilities, and property	(515		)	(400		)
Purchases of Federal Home Loan Bank stock	(2		)	(156		)
Proceeds from sales of Federal Home Loan Bank stock	—			528
Other investing activities	(18		)	(74		)
Net cash provided by (used for) investing activities	13,259			(26,020		)
Cash Flows from Financing Activities
Net change in bank deposits ⁽¹⁾	(22,096		)	43,752
Net change in short-term borrowings	—			(15,000		)
Issuance of long-term debt	593			1,936
Repayment of long-term debt	—			(906		)
Dividends paid	(808		)	(579		)
Proceeds from stock options exercised	65			108
Repurchases of common stock	(1,964		)	—
Other financing activities	(13		)	(12		)
Net cash provided by (used for) financing activities	(24,223		)	29,299
Increase (Decrease) in Cash and Cash Equivalents, including Amounts Restricted	(5,943		)	7,934
Cash and Cash Equivalents, including Amounts Restricted at Beginning of Year	38,227			19,160
Cash and Cash Equivalents, including Amounts Restricted at End of Period	$	32,284		$	27,094

Nine Months Ended
September 30,
2018
2017 ⁽¹⁾
Cash Flows from Operating Activities

Net income $ 2,572
$ 1,757
Adjustments to reconcile net income to net cash (used for) provided by operating activities:

Share-based compensation 113
111
Depreciation and amortization 226
200
Premium amortization, net, on available for sale and held to maturity securities 276
240
Other 108
35
Net change in:

Investments segregated and on deposit for regulatory purposes 6,973
6,864
Receivables from brokers, dealers, and clearing organizations (147 ) 61
Receivables from brokerage clients (1,858 ) (1,310 )
Other securities owned 39
22
Other assets (143 ) (76 )
Payables to brokers, dealers, and clearing organizations 43
(957 )
Payables to brokerage clients (3,392 ) (4,414 )
Accrued expenses and other liabilities (155 ) (82 )
Net cash provided by operating activities 4,655
2,451
Cash Flows from Investing Activities
Purchases of available for sale securities (19,781 ) (6,375 )
Proceeds from sales of available for sale securities 115
5,773
Principal payments on available for sale securities 12,091
6,532
Purchases of held to maturity securities (30,639 ) (19,886 )
Principal payments on held to maturity securities 12,382
7,927
Net increase in bank loans (86 ) (829 )
Purchases of equipment, office facilities, and property (400 ) (267 )
Purchases of Federal Home Loan Bank stock (156 ) (160 )
Proceeds from sales of Federal Home Loan Bank stock 528
106
Other investing activities (74 ) (52 )
Net cash provided by (used for) investing activities (26,020 ) (7,231 )
Cash Flows from Financing Activities
Net change in bank deposits 43,752
1,809
Net change in short-term borrowings (15,000 ) 5,000
Issuance of long-term debt 1,936
643
Repayment of long-term debt (906 ) (256 )
Dividends paid (579 ) (456 )
Proceeds from stock options exercised and other 108
98
Other financing activities (12 ) (10 )
Net cash provided by (used for) financing activities 29,299
6,828
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~~page.

THE CHARLES SCHWAB CORPORATION

Condensed Consolidated Statements of Cash Flows

(in Millions)

(Unaudited)

Continued from previous ~~page~~page.


	Nine Months Ended September 30,				Nine Months Ended September 30,
	2018		2017 ⁽¹⁾		2019		2018
Supplemental Cash Flow Information
Non-cash investing activity:
Securities purchased during the period but settled after period end					$	—	$	221
Non-cash financing activity:
Extinguishment of finance lease obligation through an assignment agreement					$	52	$	—
Common stock repurchased during the period but settled after period end					$	27	$	—
Other Supplemental Cash Flow Information
Cash paid during the period for:
Interest	$	550	$	233	$	922	$	550
Income taxes	$	649	$	890	$	907	$	649
Non-cash investing activity:
Securities purchased during the period but settled after period end	$	221	$	3,977
Amounts included in the measurement of lease liabilities ⁽²⁾					$	99	N/A
Leased assets obtained in exchange for new operating lease liabilities ⁽²⁾					$	87	N/A

	September 30, 2018		September 30, 2017		September 30, 2019		September 30, 2018
Reconciliation of cash, cash equivalents and amounts reported within the balance sheet ⁽²⁾
Reconciliation of cash, cash equivalents and amounts reported within the balance sheet ⁽³⁾
Cash and cash equivalents	$	21,830	$	12,253	$	20,252	$	21,830
Restricted cash and cash equivalents amounts included in cash and investments segregated and on deposit for regulatory purposes	5,264		7,668		12,032		5,264
Total cash and cash equivalents, including amounts restricted shown in the statement of cash flows	$	27,094	$	19,921	$	32,284	$	27,094

⁽¹⁾~~Adjusted~~ Includes transfers from other sweep features to bank sweep of $10.3 billion and $67.8 billion for the ~~retrospective~~nine months ended September 30, 2019 and 2018, respectively.

⁽²⁾ These amounts are presented beginning in 2019 as part of the adoption of ASU ~~2016-18.~~2016-02. See ~~Note 2.~~Notes 2 and 9 for additional information related to this adoption.

⁽²⁾⁽³⁾ For more information on the nature of restrictions on restricted cash and cash equivalents, see Note ~~16.~~15.

N/A Not applicable.

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

Significant business subsidiaries of CSC include the following:

~~Charles Schwab & Co., Inc. (CS&Co), a securities broker-dealer;~~

~~Charles Schwab Bank (CSB), a federal savings bank; and~~


•	Charles Schwab & Co., Inc. (CS&Co), a securities broker-dealer;


•	Charles Schwab Bank (CSB), a federal savings bank; and


•	Charles Schwab Investment Management, Inc. (CSIM), the investment advisor for Schwab’s proprietary mutual funds (Schwab Funds^®) and for Schwab’s exchange-traded funds (Schwab ETFs™).

Unless otherwise indicated, the terms “Schwab,” “the Company,” “we,” “us,” or “our” mean CSC together with its consolidated subsidiaries.

These unaudited 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, and in the related disclosures. These estimates are based on information available as of the date of the condensed consolidated financial statements. While management makes its best judgment, actual amounts or results could differ from these estimates. In the opinion of management, all normal, recurring adjustments have been included for a fair statement of this interim financial information.

These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto, included in Schwab’s ~~2017~~2018 Form 10-K.

The significant accounting policies are included in Note 2 in the ~~2017~~2018 Form 10-K. There have been no significant changes to these accounting policies during the first nine months of ~~2018,~~2019, except as described in Note 2 below.

~~Principles of Consolidation~~

Schwab evaluates all entities in which it has financial interests for consolidation, except for money market funds, which are specifically excluded from consolidation guidance. When an entity is evaluated for consolidation, Schwab determines whether its interest in the entity constitutes a controlling financial interest under either the variable interest entity (VIE) model or a voting interest entity (VOE) model. In evaluating whether Schwab’s interest in a VIE is a controlling financial interest, we consider whether our involvement, in the context of the design, purpose, and risks of the VIE, as well as any involvement of related parties, provides us with (i) the power to direct the most significant activities of the VIE, and (ii) the obligation to absorb losses or receive benefits that are significant to the VIE. If both of these conditions exist, then Schwab would be the primary beneficiary of that VIE, and consolidate it. Based upon the assessments for all of our interests in VIEs, there are no cases where Schwab is the primary beneficiary; therefore, we are not required to consolidate any VIEs. Schwab consolidates all VOEs in which it has majority-voting interests.

Investments in entities in which Schwab does not have a controlling financial interest are accounted for under the equity method of accounting when we have the ability to exercise significant influence over operating and financing decisions of the entity. Investments in entities for which Schwab does not have the ability to exercise significant influence are generally carried at cost 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 proportional amortization method investments are included in other assets on the condensed consolidated balance sheets.

THE CHARLES SCHWAB CORPORATION

Notes to Condensed Consolidated Financial Statements

(Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted)

(Unaudited)

2. New Accounting Standards

Adoption of New Accounting Standards



Standard	Description	Date of Adoption	Effects on the Financial Statements or Other Significant Matters
Accounting Standards Update (ASU) ~~2014-09, “Revenue from Contracts with Customers (Topic 606)” and related ASUs~~	Clarifies that revenue from contracts with clients should be recognized in a manner that depicts the timing of the related transfer of goods or performance of services at an amount that reflects the expected consideration. Adoption allows either full or modified retrospective transition. Full retrospective transition required a cumulative effect adjustment to retained earnings as of the earliest comparative period presented. Modified retrospective transition required a cumulative effect adjustment to retained earnings as of the beginning of the reporting period in which the entity first applies the new guidance.	~~January 1, 2018~~	The guidance does not apply to revenue earned from the Company’s loans and securities. Accordingly, net interest revenue was not impacted. The primary impact for the Company was the capitalization on the consolidated balance sheets of sales commissions paid to employees for obtaining new contracts with clients. These capitalized costs resulted in an asset of $219 million and a related deferred tax liability of $52 million upon adoption. The asset is being amortized to expense over time as the related revenues are recognized. The Company adopted the revenue recognition guidance using the modified retrospective method for all contracts that were not completed as of January 1, 2018. Further details of the impact of adoption are included below in this Note as well as in Note 3.
~~ASU 2016-01, “Financial Instruments – Overall (Subtopic 825-10)” and ASU 2018-03, “Technical Corrections and Improvements to Financial Instruments – Overall (Subtopic 825-10)”~~	Requires: (i) equity investments to be measured at fair value, with changes in fair value recognized in net income, unless the equity method is applied or the equity investments do not have readily determinable fair values in which case a practical alternative may be elected; (ii) use of an exit price when measuring the fair value of financial instruments for disclosures; (iii) separate presentation of financial assets and liabilities by measurement category and form of instrument on the balance sheet or in the accompanying notes. ~~Adoption requires a cumulative effect adjustment to the balance sheet as of the beginning of the year of initial application, except for certain changes that require prospective adoption.~~	~~January 1, 2018~~	The Company adopted this guidance on a prospective basis for its equity securities that do not have readily determinable fair values. No other significant changes resulted from adoption. Therefore, there was no material impact on the Company’s financial statements. The Company elected to use the alternative to fair value measurement for its equity securities that do not have readily determinable fair values. These equity securities will be adjusted for impairment and observable price changes of the identical or similar investments of the same issuer, as applicable. Schwab refers to this approach as the adjusted cost method. This method was applied to an immaterial amount of Community Reinvestment Act (CRA) investments included in other assets on the consolidated balance sheets.
~~ASU 2016-18, “Statement of Cash Flows (Topic 230) – Restricted Cash a Consensus of the Emerging Issues Task Force”~~	~~Requires that the statement of cash flows explain the change during the period in the total cash and cash equivalents, including restricted cash and cash equivalents.~~ ~~Adoption requires retrospective presentation of the statement of cash flows to include restricted cash and cash equivalents in the beginning and ending amounts.~~	~~January 1, 2018~~	~~The Company adopted this guidance on a retrospective basis. The Company has significant amounts of restricted cash and cash equivalents due to its business as a broker-dealer.~~ As a result of the adoption, changes in restricted cash and cash equivalents included within cash and investments segregated and on deposit for regulatory purposes in the consolidated balance sheets are now presented with changes in cash and cash equivalents throughout the consolidated statements of cash flows. The amount of restricted cash and cash equivalents is included in a separate table in the consolidated statements of cash flows.

~~CHARLES SCHWAB CORPORATION~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted)~~

~~(Unaudited)~~




~~Standard~~	~~Description~~	~~Date of Adoption~~	~~Effects on the Financial Statements or Other Significant Matters~~
~~ASU 2018-02, “Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income”~~	Permits reclassification of the impacts on certain tax affected items included in AOCI that were adjusted through income from continuing operations rather than AOCI upon the effective date of the Tax Act. ~~Adoption provides for retrospective adoption to all periods presented and impacted by the Tax Act or as of the beginning of the period of adoption.~~	~~January 1, 2018~~	The Company adopted this guidance as of January 1, 2018. The Company elected to reclassify the income tax effects of the Tax Act from items in AOCI into retained earnings as of the beginning of the period of adoption. ~~Adoption resulted in a reduction in AOCI and a corresponding increase in retained earnings of $33 million.~~

~~New Accounting Standards Not Yet Adopted~~



~~Standard~~	~~Description~~	~~Required Date of Adoption~~	~~Effects on the Financial Statements or Other Significant Matters~~
~~ASU~~ 2016-02, “Leases (Topic 842)”	Amends the accounting for leases by lessees and lessors. The primary change from the new guidance is the recognition of right-of-use (ROU) 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~~optionally, through another transition method by which a cumulative-effect adjustment is recorded to retained earnings 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~~adopted the new lease accounting guidance ~~prospectively~~ as of January 1, 2019 ~~with a cumulative-effect adjustment~~under the optional transition method provided electing not to recast its comparative periods. In addition, the ~~opening balance~~Company elected the package of ~~retained earnings (i.e., prior periods will not be adjusted).~~practical expedients permitted under the transition guidance within the new standard, which among other things, allowed the Company to carry forward the historical lease classification. The ~~Company does not expect this guidance will have a material impact on its earnings per common share (EPS). However, it will result~~adoption resulted in a gross up of the consolidated balance sheet due to recognition of ~~right-of-use~~ROU assets and lease liabilities primarily related to the CS&Co leases of office space and branches. ~~These~~The amounts ~~will be~~were based on the present value of our remaining operating lease ~~payments (see~~payments. The Company’s ROU assets and related lease liabilities upon adoption were $596 million and $662 million, respectively. Further details on the impact of adoption are included below in this Note 13as well as in Note 9.
ASU 2017-08, “Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities”	Shortens the ~~2017 10-K~~amortization period for the ~~undiscounted rental commitments~~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 ~~operating leases).~~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	The Company adopted this guidance as of January 1, 2019 using the modified retrospective method. Adoption resulted in an immaterial cumulative-effect adjustment to retained earnings as of the date of adoption.
ASU 2017-12, “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities”	This ASU amends hedge accounting guidance to better align hedge accounting with risk management activities, while reducing the complexity of applying and reporting on hedge accounting. In addition, for a closed pool of prepayable financial assets, entities will be able to hedge an amount that 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 liabilitynot expected to be ~~less than 0.5%~~affected by prepayments, defaults and other events under the “last-of-layer” method. The guidance also permits a one-time reclassification of ~~our total assets.~~
debt securities eligible to be hedged under the “last-of-layer” method from held to maturity (HTM) to available for sale (AFS) upon adoption.	January 1, 2019		The Company adopted this ASU on January 1, 2019. As part of its adoption, the Company made a one-time election to reclassify a portion of its HTM securities eligible to be hedged under the “last-of-layer” method to AFS. As of January 1, 2019, the securities reclassified had a fair value of $8.8 billion and resulted in a net of tax increase to AOCI of $19 million. The adoption of this standard had no other impact on the Company’s 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)

New Accounting Standards Not Yet Adopted




Standard	Description	Required Date of Adoption	Effects on the Financial Statements or Other Significant Matters
ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”	Provides guidance for recognizing impairment of most debt instruments measured at amortized cost, including loans and ~~held to maturity (HTM)~~HTM debt securities. Requires estimating current expected credit losses (CECL) over the remaining life of an instrument or a portfolio of instruments with similar risk characteristics based on relevant information about past events, current conditions, and reasonable forecasts. The initial estimate of, and the subsequent changes in, CECL will be recognized as credit loss expense through current earnings and will be reflected as an allowance for credit losses offsetting the carrying value of the financial instrument(s) on the balance sheet. Amends the ~~OTTI~~other-than-temporary impairment (OTTI) model for ~~available for sale (AFS)~~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~~expects that its allowance for credit losses will increase when CECL is adopted, primarily due to ~~evaluate the impact of this guidance~~an incremental allowance that will be recorded 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, includingHTM corporate debt securities. The incremental allowance at adoption is expected to be immaterial, but the impact of adoption will depend on, among other things, the economic environment, the proportion of securities classified as AFS versus HTM, and the size and type of loan and securities portfolios held by the Company ~~expects that a~~on the date of adoption. A large portion of ~~its~~the securities in the Company’s portfolio will have zero expectation of credit losses based on industry views and ~~regulator views~~regulatory guidance for U.S. ~~treasury~~Treasury and ~~certain government agency-backed~~U.S. agency mortgage-backed securities. ~~We are currently working~~Further, we expect to apply the practical expedient based on ~~in-depth analysis~~continuous collateral replenishment to the Company’s pledged asset lines (PALs) and margin loans. The Company has completed the development of credit loss estimation methods for loans and the ~~other asset types~~securities in its portfolio that do not have zero expectation of credit losses, ~~to determine our methods~~including corporate debt securities and ~~any needed changes to~~structured products. We are continuing the development of CECL policies and ~~procedures.~~processes and testing and validation of credit loss estimation methods. We have also completed the first of the two planned quarterly CECL parallel runs.
~~ASU 2017-08, “Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities”~~	Shortens the amortization period for the premium on certain callable debt securities to the earliest call date. The amendments are applicable to any purchased individual debt security with an explicit and noncontingent call feature with a fixed price on a preset date. ASU 2017-08 does not impact the accounting for callable debt securities held at a discount. ~~Adoption requires modified retrospective transition as of the beginning of the period of adoption through a cumulative-effect adjustment to retained earnings.~~	~~January 1, 2019 (early adoption permitted)~~	~~While still under evaluation, the Company does not expect this guidance will have a material impact on its financial statements, including EPS.~~

THE CHARLES SCHWAB CORPORATION

Notes to Condensed Consolidated Financial Statements

(Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted)

(Unaudited)




Standard	Description	Required Date of Adoption	Effects on the Financial Statements or Other Significant Matters
ASU 2018-15, “Intangibles–Goodwill and Other–Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (a consensus of the FASB Emerging Issues Task Force)”	Aligns the criteria for capitalizing implementation costs for cloud computing arrangements (CCA) that are service contracts with internal-use software that is developed or purchased and CCAs that include an internal-use software license. This guidance requires that the capitalized implementation costs be recognized over the period of the CCA service contract, subject to impairment evaluation on an ongoing basis. The guidance prescribes the balance sheet, income statement, and statement of cash flow classification of the capitalized implementation costs and related amortization expense, and requires additional quantitative and qualitative disclosures. Adoption provides for retrospective or prospective application to all implementation costs incurred after the date of adoption.	January 1, 2020 (early adoption permitted)	Historically, Schwab has expensed implementation costs as they are incurred for CCAs that are service contracts. Therefore, adopting this guidance will change the Company’s accounting treatment for these types of implementation costs. The Company ~~is evaluating~~plans to adopt this guidance on a prospective basis and continues to evaluate the impacts of this guidance on its financial statements, including EPS.

The cumulative effect of the changes made to our consolidated January 1, ~~2018~~2019 balance sheet for the adoption of ASU ~~2014-09, “Revenue – Revenue from Contracts with Customers”~~ ~~and~~ ~~ASU 2018-02, “Other Comprehensive Income – Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income”~~2016-02, Leases (Topic 842) 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 )



	Balance at December 31, 2018		Adjustments Due to ASU 2016-02		Balance at January 1, 2019
Assets
Other assets ⁽¹⁾	$	2,046	$	588	$	2,634
Liabilities
Accrued expenses and other liabilities ⁽²⁾	$	2,954	$	588	$	3,542

⁽¹⁾~~Adjustment~~The adoption adjustment is comprised of two parts: 1) an increase ~~in capitalized contract~~of $596 million for the recognition of the January 1, 2019 ROU asset and 2) an $8 million decrease related to prepaid rent and initial direct costs, which were reclassified to the ROU asset upon adoption of ~~$219 million, partially offset by~~ASU 2016-02.

⁽²⁾The adoption adjustment is comprised of two parts: 1) an increase ~~in deferred tax liabilities~~ of ~~$52 million.~~

~~In accordance with~~$662 million for the ~~new revenue standard requirements, the disclosure~~recognition of the ~~impact~~January 1, 2019 lease liability and 2) a

$74 million decrease related to deferred rent and lease incentives, which were reclassified to the ROU asset upon adoption of ~~adoption on our condensed consolidated statement of income and condensed consolidated balance sheet were as follows:~~ASU 2016-02.

Three Months Ended September 30, 2018
Statement of Income As Reported Balances Without Adoption of ASU 2014-09 Effect of Change
Higher/(Lower)
Expenses Excluding Interest
Compensation and benefits $ 737
$ 744
$ (7 )
Taxes on income 296
294
2
Net Income 923
918
5

THE CHARLES SCHWAB CORPORATION

Notes to Condensed Consolidated Financial Statements

(Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted)

(Unaudited)

Nine Months Ended September 30, 2018
Statement of Income As Reported Balances Without Adoption of ASU 2014-09 Effect of Change
Higher/(Lower)
Expenses Excluding Interest
Compensation and benefits $ 2,252
$ 2,279
$ (27 )
Taxes on income 780
773
7
Net Income 2,572
2,552
20

As of September 30, 2018
Balance Sheet As Reported Balances Without Adoption of ASU 2014-09 Effect of Change
Higher/(Lower)
Assets
Other assets ⁽¹⁾
$ 2,092
$ 1,905
$ 187
Stockholders’ Equity
Retained earnings 16,615
16,428
187

⁽¹⁾~~Adjustment is comprised of an increase in capitalized contract costs of $246 million, partially offset by an increase in deferred tax liabilities of $59 million.~~

3. Revenue Recognition

Disaggregated Revenue

Disaggregation of Schwab’s revenue by major source is as follows:



	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
Net interest revenue
Interest revenue	$	1,892		$	1,755		$	5,817		$	4,766
Interest expense	(261		)	(228		)	(896		)	(569		)
Net interest revenue	1,631			1,527			4,921			4,197
Asset management and administration fees
Mutual funds, ETFs, and CTFs ⁽¹⁾	445			446			1,287			1,419
Advice solutions	305			294			878			859
Other ⁽¹⁾	75			69			201			196
Asset management and administration fees	825			809			2,366			2,474
Trading revenue
Commissions	159			155			477			501
Principal transactions	13			21			54			56
Trading revenue	172			176			531			557
Other	83			67			297			235
Total net revenues	$	2,711		$	2,579		$	8,115		$	7,463

Three Months Ended September 30, Nine Months Ended September 30,
2018 2017 2018 2017
Net interest revenue
Interest revenue $ 1,755
$ 1,176
$ 4,766
$ 3,358
Interest expense (228 ) (94 ) (569 ) (223 )
Net interest revenue 1,527
1,082
4,197
3,135
Asset management and administration fees

Mutual funds and ETF service fees 435
519
1,386
1,538
Advice solutions 294
265
859
765
Other 80
77
229
226
Asset management and administration fees 809
861
2,474
2,529
Trading revenue

Commissions 155
136
501
456
Principal transactions 21
15
56
44
Trading revenue 176
151
557
500
Other 67
71
235
212
Total net revenues $ 2,579
$ 2,165
$ 7,463
$ 6,376
⁽¹⁾ Beginning in the first quarter of 2019, a change was made to move CTFs from other asset management and administration fees. Prior periods have been recast to reflect this change.

For a summary of revenue provided by our reportable segments, see Note ~~17.~~16. The recognition of revenue is not impacted by the operating segment in which revenue is generated.

Contract balances

~~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~~Receivables from ~~financial instruments covered by various other areas of GAAP, is not~~contracts with customers 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~~$338 million at September 30, 2019 and $307 million at December 31, 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.~~2019.

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.

THE 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
September 30, 2019									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	$	40,179	$	299	$	47	$	40,431
U.S. Treasury securities	12,412		—		169		12,243		5,034		3		10		5,027
Asset-backed securities ⁽¹⁾	9,378		19		10		9,387		4,773		35		7		4,801
Corporate debt securities ⁽²⁾	6,921		10		9		6,922		4,630		57		1		4,686
Certificates of deposit	2,765		4		—		2,769		1,000		4		—		1,004
U.S. agency notes	1,688		—		6		1,682
Commercial paper ^(2,3)	518		—		—		518		520		1		—		521
Foreign government agency securities	50		—		2		48
Non-agency commercial mortgage-backed securities	34		—		—		34		13		—		—		13
Total available for sale securities	$	57,776	$	80	$	298	$	57,558	$	56,149	$	399	$	65	$	56,483
Held to maturity securities
U.S. agency mortgage-backed securities	$	113,453	$	26	$	3,483	$	109,996	$	114,276	$	1,974	$	238	$	116,012
Asset-backed securities ⁽¹⁾	17,964		122		12		18,074		18,323		74		38		18,359
Corporate debt securities ⁽²⁾	4,578		8		55		4,531		4,659		58		2		4,715
U.S. state and municipal securities	1,330		6		7		1,329		1,306		107		—		1,413
Non-agency commercial mortgage-backed securities	1,149		1		25		1,125		1,136		28		—		1,164
U.S. Treasury securities	223		—		11		212		224		6		—		230
Certificates of deposit	200		1		—		201		200		—		—		200
Foreign government agency securities	50		—		2		48		50		—		—		50
Other	5		—		—		5		20		—		—		20
Total held to maturity securities	$	138,952	$	164	$	3,595	$	135,521	$	140,194	$	2,247	$	278	$	142,163


December 31, 2017
December 31, 2018
Available for sale securities
U.S. agency mortgage-backed securities	$	20,915	$	53	$	39	$	20,929	$	25,594	$	44	$	82	$	25,556
U.S. Treasury securities	9,583		—		83		9,500		18,410		—		108		18,302
Asset-backed securities ⁽¹⁾	9,019		34		6		9,047		10,086		14		15		10,085
Corporate debt securities ⁽²⁾	6,154		16		1		6,169		7,477		10		20		7,467
Certificates of deposit	2,040		2		1		2,041		3,682		4		1		3,685
U.S. agency notes	1,914		—		8		1,906		900		—		2		898
Commercial paper ⁽²⁾	313		—		—		313
Commercial paper ^(2,3)									522		—		—		522
Foreign government agency securities	51		—		1		50		50		—		1		49
Non-agency commercial mortgage-backed securities	40		—		—		40		14		—		—		14
Total available for sale securities	$	50,029	$	105	$	139	$	49,995	$	66,735	$	72	$	229	$	66,578
Held to maturity securities
U.S. agency mortgage-backed securities	$	101,197	$	290	$	1,034	$	100,453	$	118,064	$	217	$	2,188	$	116,093
Asset-backed securities ⁽¹⁾	12,937		127		2		13,062		18,502		83		39		18,546
Corporate debt securities ⁽²⁾	4,078		13		5		4,086		4,477		2		47		4,432
U.S. state and municipal securities	1,247		57		—		1,304		1,327		24		3		1,348
Non-agency commercial mortgage-backed securities	994		10		5		999		1,156		3		17		1,142
U.S. Treasury securities	223		—		3		220		223		—		6		217
Certificates of deposit	200		—		—		200		200		1		—		201
Foreign government agency securities	50		—		1		49		50		—		1		49
Other									10		—		—		10
Total held to maturity securities	$	120,926	$	497	$	1,050	$	120,373	$	144,009	$	330	$	2,301	$	142,038

⁽¹⁾Approximately ~~37%~~43% and ~~42%~~36% of asset-backed securities held as of September 30, ~~2018~~2019 and December 31, ~~2017,~~2018, respectively, were Federal Family Education Loan Program Asset-Backed Securities. Asset-backed securities collateralized by credit card receivables represented approximately ~~43% and 40%~~42% of the asset-backed securities held as of September 30, ~~2018~~2019 and December 31, ~~2017, respectively.~~2018.

⁽²⁾As of September 30, ~~2018~~2019 and December 31, ~~2017,~~2018, approximately ~~31%~~35% and ~~41%~~26%, 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~~2019 and December 31, ~~2017, respectively.~~2018.

⁽³⁾ Included in cash and cash equivalents on the condensed consolidated balance ~~sheet,~~sheets, but excluded from this table is ~~$2.0~~$0.9 billion and $4.9 billion of AFS commercial ~~paper.~~paper as of September 30, 2019 and December 31, 2018, respectively. These holdings have maturities of three months or less at the time of acquisition and an aggregate market value equal to amortized cost.

THE CHARLES SCHWAB CORPORATION

Notes to Condensed Consolidated Financial Statements

(Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted)

(Unaudited)

On January 1, 2019 the Company transferred certain U.S. agency mortgage-backed securities with a fair value of $8.8 billion from the HTM category to the AFS category as permitted by ASU 2017-12. For additional information on the transfer, see Notes 2 and 14.

At September 30, ~~2018, certain~~2019, our banking subsidiaries had pledged securities with a fair value of ~~$21.5~~$26.8 billion as collateral to secure borrowing capacity on secured credit facilities with the FHLB (see Note 8). WeCertain banking subsidiaries 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~~$8.3 billion as collateral for this facility at September 30, ~~2018.~~2019. CSB also pledges securities issued by federal agencies to secure certain trust deposits. The fair value of these pledged securities was ~~$898~~$918 million at September 30, ~~2018.~~2019.

THE 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, are as follows:


	Less than				12 months								Less than 12 months				12 months or longer				Total
	12 months				or longer				Total				Less than 12 months								Total
September 30, 2018	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
September 30, 2019													Fair Value		Unrealized Losses		12 months or longer	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	$	12,063	$	24	$	6,317	$	23	$	18,380	$	47
U.S. Treasury securities	7,770		72		4,374		97		12,144		169		377		—		3,161		10		3,538		10
Asset-backed securities	1,841		4		601		6		2,442		10		763		1		398		6		1,161		7
Corporate debt securities	3,030		8		229		1		3,259		9		149		1		499		—		648		1
U.S. agency notes	566		2		1,116		4		1,682		6
Foreign government agency securities	—		—		48		2		48		2
Total	$	23,326	$	154	$	8,356	$	144	$	31,682	$	298	$	13,352	$	26	$	10,375	$	39	$	23,727	$	65
Held to maturity securities
U.S. agency mortgage-backed securities	$	59,643	$	1,247	$	40,279	$	2,236	$	99,922	$	3,483	$	11,838	$	37	$	20,897	$	201	$	32,735	$	238
Asset-backed securities	2,115		12		39		—		2,154		12		7,638		34		556		4		8,194		38
Corporate debt securities	2,862		52		77		3		2,939		55		416		1		354		1		770		2
U.S. state and municipal securities	471		5		14		2		485		7
Non-agency commercial mortgage-backed securities	651		15		279		10		930		25
U.S. Treasury securities	—		—		212		11		212		11
Foreign government agency securities	—		—		48		2		48		2
Total	$	65,742	$	1,331	$	40,948	$	2,264	$	106,690	$	3,595	$	19,892	$	72	$	21,807	$	206	$	41,699	$	278
Total securities with unrealized losses ⁽¹⁾	$	89,068	$	1,485	$	49,304	$	2,408	$	138,372	$	3,893	$	33,244	$	98	$	32,182	$	245	$	65,426	$	343



December 31, 2018
Available for sale securities
U.S. agency mortgage-backed securities	$	9,529	$	32	$	4,257	$	50	$	13,786	$	82
U.S. Treasury securities	4,951		6		7,037		102		11,988		108
Asset-backed securities	4,050		9		837		6		4,887		15
Corporate debt securities	3,561		19		254		1		3,815		20
Certificates of deposit	1,217		1		150		—		1,367		1
U.S. agency notes	195		—		304		2		499		2
Foreign government agency securities	—		—		49		1		49		1
Total	$	23,503	$	67	$	12,888	$	162	$	36,391	$	229
Held to maturity securities
U.S. agency mortgage-backed securities	$	29,263	$	222	$	56,435	$	1,966	$	85,698	$	2,188
Asset-backed securities	6,795		35		376		4		7,171		39
Corporate debt securities	2,909		29		1,066		18		3,975		47
U.S. state and municipal securities	77		2		18		1		95		3
Non-agency commercial mortgage-backed securities	283		2		632		15		915		17
U.S. Treasury securities	—		—		218		6		218		6
Foreign government agency securities	—		—		49		1		49		1
Total	$	39,327	$	290	$	58,794	$	2,011	$	98,121	$	2,301
Total securities with unrealized losses ⁽²⁾	$	62,830	$	357	$	71,682	$	2,173	$	134,512	$	2,530

December 31, 2017
Available for sale securities
U.S. agency mortgage-backed securities $ 5,696
$ 21
$ 2,548
$ 18
$ 8,244
$ 39
U.S. Treasury securities 4,625
11
4,875
72
9,500
83
Asset-backed securities 904
3
424
3
1,328
6
Corporate debt securities 736
1
120
—
856
1
Certificates of deposit 799
1
—
—
799
1
U.S. agency notes 99
—
1,807
8
1,906
8
Foreign government agency securities 50
1
—
—
50
1
Total $ 12,909
$ 38
$ 9,774
$ 101
$ 22,683
$ 139
Held to maturity securities

U.S. agency mortgage-backed securities $ 42,102
$ 310
$ 24,753
$ 724
$ 66,855
$ 1,034
Asset-backed securities 1,124
2
72
—
1,196
2
Corporate debt securities 1,078
5
—
—
1,078
5
Non-agency commercial mortgage-backed securities 607
5
—
—
607
5
U.S. Treasury securities 220
3
—
—
220
3
Foreign government agency securities 49
1
—
—
49
1
Total $ 45,180
$ 326
$ 24,825
$ 724
$ 70,005
$ 1,050
Total securities with unrealized losses ⁽²⁾
$ 58,089
$ 364
$ 34,599
$ 825
$ 92,688
$ 1,189

⁽¹⁾The number of investment positions with unrealized losses totaled ~~413~~343 for AFS securities and ~~1,800~~625 for HTM securities.

⁽²⁾The number of investment positions with unrealized losses totaled ~~251~~441 for AFS securities and ~~938~~1,524 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, ~~2018,~~2019, substantially all rated securities in the investment portfolios were ~~rated~~ investment grade. U.S. agency mortgage-backed securities do not have explicit credit ratings; however, management considers these to be of the highest credit quality and rating given the guarantee of principal and interest by the U.S. government or U.S. government-sponsored enterprises.

Management evaluates whether investment securities are other-than-temporarily impaired (OTTI) on a quarterly basis as described in Note 2 in the 2017 Form 10-K. No amounts were recognized as OTTI in earnings or other comprehensive income in 2018 or 2017. As of 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, 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⁾
$ 383
$ 14,370
$ 31,785
$ 63,458
$ 109,996
Asset-backed securities 5
1,611
9,373
7,085
18,074
Corporate debt securities 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 —
—
212
—
212
Certificates of deposit —
201
—
—
201
Foreign government agency securities —
48
—
—
48
Other —
—
—
5
5
Total fair value $ 626
$ 20,192
$ 42,367
$ 72,336
$ 135,521
Total amortized cost $ 628
$ 20,540
$ 43,339
$ 74,445
$ 138,952

⁽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,

2018 2017 2018 2017
Proceeds $ —
$ 288
$ 115
$ 5,773
Gross realized gains —
—
—
7

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 other-than-temporarily impaired on a quarterly basis as described in Note 2 in the 2018 Form 10-K. NaN amounts were recognized as OTTI in earnings or other comprehensive income during the nine months ended September 30, 2019 or the year ended December 31, 2018. As of September 30, 2019 and December 31, 2018, Schwab did not hold any securities on which OTTI was previously recognized.

In the table below, mortgage-backed securities and other asset-backed securities have been allocated to maturity groupings based on final contractual maturities. As borrowers may have the right to call or prepay certain obligations underlying our investment securities, actual maturities may differ from the scheduled contractual maturities presented below.

The maturities of AFS and HTM securities are as follows:



September 30, 2019	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	$	51	$	1,909	$	11,061	$	27,410	$	40,431
U.S. Treasury securities	3,541		1,486		—		—		5,027
Asset-backed securities	35		3,752		794		220		4,801
Corporate debt securities	1,100		3,415		171		—		4,686
Certificates of deposit	501		503		—		—		1,004
Commercial paper	521		—		—		—		521
Non-agency commercial mortgage-backed securities	—		—		—		13		13
Total fair value	$	5,749	$	11,065	$	12,026	$	27,643	$	56,483
Total amortized cost	$	5,743	$	10,994	$	11,996	$	27,416	$	56,149
Held to maturity securities
U.S. agency mortgage-backed securities	$	663	$	15,472	$	35,048	$	64,829	$	116,012
Asset-backed securities	—		3,227		7,940		7,192		18,359
Corporate debt securities	778		3,079		858		—		4,715
U.S. state and municipal securities	—		99		452		862		1,413
Non-agency commercial mortgage-backed securities	—		367		—		797		1,164
U.S. Treasury securities	—		—		230		—		230
Certificates of deposit	200		—		—		—		200
Foreign government agency securities	—		50		—		—		50
Other	—		—		—		20		20
Total fair value	$	1,641	$	22,294	$	44,528	$	73,700	$	142,163
Total amortized cost	$	1,637	$	21,989	$	43,368	$	73,200	$	140,194

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,
	2019		2018		2019		2018
Proceeds	$	5,436	$	—	$	21,710	$	115
Gross realized gains	5		—		15		—
Gross realized losses	4		—		10		—

THE CHARLES SCHWAB CORPORATION

Notes to Condensed Consolidated Financial Statements

(Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted)

(Unaudited)

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, 2019	Current		30-59 days past due		60-89 days past due		>90 days past due and other nonaccrual loans ⁽³⁾		Total past due and other nonaccrual loans		Total loans		Allowance for loan losses		Total bank loans – net
First Mortgages ^(1,2)	$	10,607	$	20	$	2	$	11	$	33	$	10,640	$	10	$	10,630
HELOCs ^(1,2)	1,208		3		1		8		12		1,220		4		1,216
Pledged asset lines	4,876		2		—		—		2		4,878		—		4,878
Other	172		—		—		2		2		174		3		171
Total bank loans	$	16,863	$	25	$	3	$	21	$	49	$	16,912	$	17	$	16,895

December 31, 2018
First Mortgages ^(1,2)	$	10,349	$	21	$	2	$	12	$	35	$	10,384	$	14	$	10,370
HELOCs ^(1,2)	1,493		3		1		8		12		1,505		5		1,500
Pledged asset lines	4,558		3		—		—		3		4,561		—		4,561
Other	180		—		—		—		—		180		2		178
Total bank loans	$	16,580	$	27	$	3	$	20	$	50	$	16,630	$	21	$	16,609

September 30, 2018 Current 30-59 days
past due 60-89 days
past due
>90 days past
due and other
nonaccrual loans ⁽³⁾
Total past due
and other
nonaccrual loans Total
loans Allowance
for loan
losses Total
bank
loans – net
First Mortgages ^(1,2)
$ 10,217
$ 24
$ 2
$ 13
$ 39
$ 10,256
$ 17
$ 10,239
HELOCs ^(1,2)
1,589
2
1
10
13
1,602
7
1,595
Pledged asset lines 4,552
3
1
—
4
4,556
—
4,556
Other 176
—
—
—
—
176
2
174
Total bank loans $ 16,534
$ 29
$ 4
$ 23
$ 56
$ 16,590
$ 26
$ 16,564

December 31, 2017
First Mortgages ^(1,2)
$ 9,983
$ 14
$ 2
$ 17
$ 33
$ 10,016
$ 16
$ 10,000
HELOCs ^(1,2)
1,928
—
3
12
15
1,943
8
1,935
Pledged asset lines 4,361
4
4
—
8
4,369
—
4,369
Other 176
—
—
—
—
176
2
174
Total bank loans $ 16,448
$ 18
$ 9
$ 29
$ 56
$ 16,504
$ 26
$ 16,478

⁽¹⁾First Mortgages and HELOCs include unamortized premiums and discounts and direct origination costs of ~~$73~~$71 million and ~~$77~~$73 million at September 30, ~~2018~~2019 and December 31, ~~2017,~~2018, respectively.

⁽²⁾At September 30, ~~2018~~2019 and December 31, ~~2017,~~2018, 46% and 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 no0 loans accruing interest that were contractually 90 days or more past due at September 30, ~~2018~~2019 or December 31, ~~2017.~~2018.

At September 30, ~~2018,~~2019, CSB had pledged ~~$11.1~~$10.8 billion of First Mortgages and HELOCs as collateral to secure borrowing capacity on a secured credit facility with the FHLB (see Note 8).

Substantially all of the bank loans were collectively evaluated for impairment at both September 30, ~~2018~~2019 and December 31, ~~2017.~~2018.

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



	September 30, 2019											September 30, 2018
Three Months Ended	First Mortgages			HELOCs			Other		Total ⁽¹⁾			First Mortgages		HELOCs			Other		Total ⁽¹⁾
Balance at beginning of period	$	12		$	5		$	2	$	19		$	17	$	7		$	2	$	26
Charge-offs	—			—			—		—			—		—			—		—
Recoveries	—			—			—		—			—		1			—		1
Provision for loan losses	(2		)	(1		)	1		(2		)	—		(1		)	—		(1		)
Balance at end of period	$	10		$	4		$	3	$	17		$	17	$	7		$	2	$	26



	September 30, 2019											September 30, 2018
Nine Months Ended	First Mortgages			HELOCs			Other		Total ⁽¹⁾			First Mortgages		HELOCs			Other			Total ⁽¹⁾
Balance at beginning of period	$	14		$	5		$	2	$	21		$	16	$	8		$	2		$	26
Charge-offs	—			—			—		—			—		—			(1		)	(1		)
Recoveries	1			1			—		2			—		2			—			2
Provision for loan losses	(5		)	(2		)	1		(6		)	1		(3		)	1			(1		)
Balance at end of period	$	10		$	4		$	3	$	17		$	17	$	7		$	2		$	26

⁽¹⁾All ~~pledged asset lines (PALs)~~PALs were fully collateralized by securities with fair values in excess of borrowings ~~at September 30, 2018 and December 31, 2017.~~as of each period presented.

THE CHARLES SCHWAB CORPORATION

Notes to Condensed Consolidated Financial Statements

(Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted)

(Unaudited)

A summary of impaired bank loan-related assets is as follows:


	September 30, 2018		December 31, 2017		September 30, 2019		December 31, 2018
Nonaccrual loans ⁽¹⁾	$	23	$	28	$	21	$	21
Other real estate owned ⁽²⁾	3		3		2		3
Total nonperforming assets	26		31		23		24
Troubled debt restructurings	4		11		2		4
Total impaired assets	$	30	$	42	$	25	$	28

⁽¹⁾ Nonaccrual loans include nonaccrual troubled debt restructurings.

⁽²⁾ Included in other assets on the condensed consolidated balance sheets.

Credit Quality

In addition to monitoring delinquency, Schwab 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 updated 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 updated on a monthly basis by reference to a home price appreciation index.

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, 2019	Balance		Weighted Average Updated FICO	Percent of Loans that are on Nonaccrual Status
First Mortgages
Estimated Current LTV
<70%	$	9,574	776	0.03	%
>70% – <90%	1,061		770	0.28	%
>90% – <100%	4		756	—
>100%	1		768	—
Total	$	10,640	776	0.05	%
HELOCs
Estimated Current LTV ⁽¹⁾
<70%	$	1,157	769	0.25	%
>70% – <90%	58		751	0.83	%
>90% – <100%	3		716	5.06	%
>100%	2		659	—
Total	$	1,220	768	0.29	%
Pledged asset lines
Weighted-Average LTV ⁽¹⁾
=70%	$	4,878	767	—

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 % —



December 31, 2018	Balance		Weighted Average Updated FICO	Percent of Loans that are on Nonaccrual Status
First Mortgages
Estimated Current LTV
<70%	$	9,396	776	0.04	%
>70% – <90%	985		769	0.41	%
>90% – <100%	2		717	—
>100%	1		753	—
Total	$	10,384	775	0.07	%
HELOCs
Estimated Current LTV ⁽¹⁾
<70%	$	1,416	770	0.13	%
>70% – <90%	80		752	0.60	%
>90% – <100%	6		729	3.36	%
>100%	3		702	—
Total	$	1,505	769	0.17	%
Pledged asset lines
Weighted-Average LTV ⁽¹⁾
=70%	$	4,561	766	—

December 31, 2017 Balance Weighted Average
Updated FICO
Utilization
Rate ⁽¹⁾
Percent of
Loans that are on
Nonaccrual Status
First Mortgages
Estimated Current LTV
<70%
$ 9,046
775
N/A
0.09 %
>70% – <90%
961
769
N/A
0.46 %
>90% – <100%
5
714
N/A
10.49 %
>100% 4
713
N/A
6.23 %
Total $ 10,016
775
N/A
0.14 %
HELOCs
Estimated Current LTV ⁽²⁾

<70%
$ 1,773
772
32 % 0.18 %
>70% – <90%
148
755
47 % 0.84 %
>90% – <100%
14
742
64 % 2.85 %
>100% 8
718
72 % 4.91 %
Total $ 1,943
770
33 % 0.27 %
Pledged asset lines
Weighted-Average LTV ⁽²⁾

=70% $ 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.~~

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
September 30, 2019					First Mortgages		HELOCs
Year of origination
Pre-2014	$	2,144	$	1,156
2014	436		93
Pre-2015					$	1,815	$	872
2015	1,087		110		889		85
2016	2,662		96		2,382		82
2017	2,420		101		2,137		90
2018	1,507		46		1,611		67
2019					1,806		24
Total	$	10,256	$	1,602	$	10,640	$	1,220
Origination FICO
<620	$	5	—		$	4	$	—
620 – 679	83		8		76		6
680 – 739	1,595		305		1,624		236
>740	8,573		1,289		8,936		978
Total	$	10,256	$	1,602	$	10,640	$	1,220
Origination LTV
<70%	$	7,737	$	1,127	$	7,980	$	869
>70% – <90%	2,514		468		2,656		346
>90% – <100%	5		7		4		5
Total	$	10,256	$	1,602	$	10,640	$	1,220



December 31, 2018	First Mortgages		HELOCs
Year of origination
Pre-2015	$	2,387	$	1,140
2015	1,050		106
2016	2,606		95
2017	2,366		99
2018	1,975		65
Total	$	10,384	$	1,505
Origination FICO
<620	$	5	$	—
620 – 679	83		8
680 – 739	1,626		282
>740	8,670		1,215
Total	$	10,384	$	1,505
Origination LTV
<70%	$	7,815	$	1,064
>70% – <90%	2,564		434
>90% – <100%	5		7
Total	$	10,384	$	1,505

December 31, 2017 First Mortgages HELOCs
Year of origination
Pre-2014 $ 2,804
$ 1,496
2014 530
116
2015 1,218
128
2016 2,886
111
2017 2,578
92
Total $ 10,016
$ 1,943
Origination FICO

<620 $ 6
$ 1
620 – 679 89
10
680 – 739 1,569
365
>740
8,352
1,567
Total $ 10,016
$ 1,943
Origination LTV

<70%
$ 7,569
$ 1,360
>70% – <90%
2,441
574
>90% – <100%
6
9
Total $ 10,016
$ 1,943

At September 30, ~~2018,~~2019, First Mortgage loans of ~~$9.3~~$9.6 billion had adjustable interest rates. ~~These~~Substantially all of these mortgages have initial fixed interest rates for three to ten years and interest rates that adjust annually thereafter. Approximately ~~31%~~29% of the balance of these mortgages consisted of loans with interest-only payment terms. The interest rates on approximately ~~64%~~65% of the balance of these interest-only loans are not scheduled to reset for three or more years. Schwab’s mortgage loans do not include interest terms described as temporary introductory rates below current market rates.

THE CHARLES SCHWAB CORPORATION

Notes to Condensed Consolidated Financial Statements

(Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted)

(Unaudited)

The HELOC product has a 30-year loan term with an initial draw period of ten years from the date of origination. After the initial draw period, the balance outstanding at such time is converted to a 20-year amortizing loan. The interest rate during the initial draw period and the 20-year amortizing period is a floating rate based on the prime rate plus a margin. HELOCs that convert to an amortizing loan may experience higher delinquencies, and higher loss rates, than those in the initial draw period. The allowance for loan loss methodology takes this increased inherent risk into consideration.

The following table presents when current outstanding HELOCs will convert to amortizing loans:



September 30, 2019	Balance
Converted to an amortizing loan by period end	$	551
Within 1 year	52
> 1 year – 3 years	84
> 3 years – 5 years	170
> 5 years	363
Total	$	1,220

September 30, 2018 Balance
Converted to an amortizing loan by period end $ 640
Within 1 year 186
> 1 year – 3 years 133
> 3 years – 5 years 163
> 5 years 480
Total $ 1,602

At September 30, ~~2018, $1.3~~2019, $1.0 billion of the HELOC portfolio was secured by second liens on the associated properties. Second lien mortgage loans typically possess a higher degree of credit risk given the subordination to the first lien holder in the event of default. In addition to the credit monitoring activities described previously, Schwab also monitors credit risk by reviewing the delinquency status of the first lien loan on the associated property. At September 30, ~~2018,~~2019, the borrowers on approximately 54% of HELOC loan balances outstanding only paid the minimum amount due.

6. Variable Interest Entities

As of September 30, ~~2018~~2019 and December 31, ~~2017,~~2018, all of Schwab’s involvement with variable interest entities (VIEs) is through CSB’s Community Reinvestment ~~Act-related~~Act (CRA)-related investments and most of those are related to Low-Income Housing Tax Credit (LIHTC) investments. As 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, which amortizes the cost of the investment over the period in which the investor expects to receive tax credits and other tax benefits, and the resulting amortization is included in taxes on income on the consolidated statements of income.

Aggregate assets, liabilities and maximum exposure to loss

The aggregate assets, liabilities, and maximum exposure to loss from those VIEs in which Schwab holds a variable interest, but is not the primary beneficiary, are summarized in the table below:


	September 30, 2018						December 31, 2017						September 30, 2019						December 31, 2018
	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⁾	$	347	$	204	$	347	$	304	$	203	$	304	$	498	$	298	$	498	$	338	$	188	$	338
Other CRA investments ⁽²⁾	68		—		116		69		—		125		91		—		125		70		—		124
Total	$	415	$	204	$	463	$	373	$	203	$	429	$	589	$	298	$	623	$	408	$	188	$	462

⁽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 as HTM securities. Aggregate assets are included in HTM securities, bank loans – net, or other assets on the condensed consolidated balance sheets.

Schwab’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, Schwab did not provide or intend to provide financial or other support to the VIEs that it was not contractually required to provide.~~ CSB’s funding of these remaining commitments is dependent upon the occurrence of certain conditions, and CSB expects to pay substantially all of these commitments between 2019 and 2022. During the nine months ended September 30, 2019 and year ended December 31, 2018, ~~and 2021.~~Schwab did not provide or intend to provide financial or other support to the VIEs that it was not contractually required to provide.

THE CHARLES SCHWAB CORPORATION

Notes to Condensed Consolidated Financial Statements

(Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted)

(Unaudited)

7. Bank Deposits

Bank deposits consist of interest-bearing and non-interest-bearing deposits as follows:



	September 30, 2019		December 31, 2018
Interest-bearing deposits:
Deposits swept from brokerage accounts	$	191,456	$	212,311
Checking	12,020		12,523
Savings and other	5,146		5,827
Total interest-bearing deposits	208,622		230,661
Non-interest-bearing deposits	705		762
Total bank deposits	$	209,327	$	231,423

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 are unsecured ~~obligations and rank equally with the other unsecured senior debt.~~obligations. CSC may redeem some or all of the Senior Notes of each series prior to their maturity, subject to certain restrictions, and the payment of an applicable make-whole premium in certain instances. Interest is payable semi-annually for the fixed-rate Senior Notes and quarterly for the floating-rate Senior Notes. The following table lists long-term debt by instrument outstanding as of September 30, ~~2018~~2019 and December 31, ~~2017.~~2018:



	Date of	Principal Amount Outstanding
	Issuance	September 30, 2019			December 31, 2018
Fixed-rate Senior Notes:
4.450% due July 22, 2020	07/22/10	$	700		$	700
3.250% due May 21, 2021	05/22/18	600			600
3.225% due September 1, 2022	08/29/12	256			256
2.650% due January 25, 2023	12/07/17	800			800
3.550% due February 1, 2024	10/31/18	500			500
3.000% due March 10, 2025	03/10/15	375			375
3.850% due May 21, 2025	05/22/18	750			750
3.450% due February 13, 2026	11/13/15	350			350
3.200% due March 2, 2027	03/02/17	650			650
3.200% due January 25, 2028	12/07/17	700			700
4.000% due February 1, 2029	10/31/18	600			600
3.250% due May 22, 2029	05/22/19	600			—
Floating-rate Senior Notes:
Three-month LIBOR + 0.32% due May 21, 2021	05/22/18	600			600
Total Senior Notes		7,481			6,881
5.450% Finance lease obligation ⁽¹⁾	06/04/04	—			52
Unamortized discount — net		(14		)	(15		)
Debt issuance costs		(40		)	(40		)
Total long-term debt		$	7,427		$	6,878

Date of Principal Amount Outstanding

Issuance September 30, 2018 December 31, 2017
Fixed-rate Senior Notes:
1.500% due March 10, 2018 ⁽¹⁾
03/10/15 $ —
$ 625
2.200% due July 25, 2018 ⁽²⁾
07/25/13 —
275
4.450% due July 22, 2020 07/22/10 700
700
3.250% due May 21, 2021 05/22/18 600
—
3.225% due September 1, 2022 08/29/12 256
256
2.650% due January 25, 2023 12/07/17 800
800
3.000% due March 10, 2025 03/10/15 375
375
3.850% due May 21, 2025 05/22/18 750
—
3.450% due February 13, 2026 11/13/15 350
350
3.200% due March 2, 2027 03/02/17 650
650
3.200% due January 25, 2028 12/07/17 700
700
Floating-rate Senior Notes:
Three-month LIBOR + 0.32% due May 21, 2021 05/22/18 600
—
Total Senior Notes 5,781
4,731
5.450% Finance lease obligation ⁽³⁾
06/04/04 55
61
Unamortized discount — net (13 ) (14 )
Debt issuance costs (33 ) (25 )
Total long-term debt $ 5,790
$ 4,753

⁽¹⁾ ~~Redeemed on February 8, 2018.~~

⁽²⁾~~Redeemed on June 25, 2018.~~

⁽³⁾~~Schwab has a~~The finance lease obligation ~~related to~~was extinguished through an ~~office building and land under a 20-year lease. The remaining finance lease obligation is being reduced by a portion~~assignment agreement during the first quarter of ~~the lease payments over the remaining lease term through June 30, 2024.~~2019.

THE 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~~2019 are as follows:



	Maturities
2019	$	—
2020	700
2021	1,200
2022	256
2023	800
Thereafter	4,525
Total maturities	7,481
Unamortized discount — net	(14		)
Debt issuance costs	(40		)
Total long-term debt	$	7,427

Maturities
2018 $ 2
2019 8
2020 709
2021 1,209
2022 266
Thereafter 3,642
Total maturities 5,836
Unamortized discount — net (13 )
Debt issuance costs (33 )
Total long-term debt $ 5,790

Short-term borrowings: ~~Certain~~ Our banking subsidiaries maintain secured credit facilities with the FHLB. Amounts available under these facilities are dependent on the ~~value~~amount of our First Mortgages, HELOCs, and the fair value of certain of their investment securities that are pledged as collateral. As of September 30, 2019 and December 31, 2018, the collateral pledged provided a total borrowing capacity of ~~$30.0~~$35.2 billion and $35.5 billion, respectively, of which no0 amounts were ~~outstanding. As~~outstanding at the end of ~~December 31, 2017, the collateral pledged by CSB provided a total borrowing capacity of $32.3 billion, of which $15.0 billion was outstanding.~~either period.

As a condition of the FHLB borrowings, we are required to hold FHLB stock, which was recorded in other assets on the condensed consolidated balance sheets. The investment in FHLB was ~~$32~~$34 million at September 30, ~~2018~~2019 and ~~$405~~$32 million at December 31, ~~2017.~~2018.

9. Leases

The Company has operating leases for corporate offices, branch locations, and server equipment and determines if an arrangement is a lease at inception. Leases with an initial term of 12 months or less are not recorded on the balance sheet; we recognize lease expense for these leases on a straight-line basis over the lease term. ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and lease liabilities are recognized at commencement date based on the present value of lease payments over the lease term. The lease liability may include payments that depend on a rate or index (such as the Consumer Price Index), measured using the rate or index at the commencement date. Payments that vary because of changes in facts or circumstances occurring after the commencement date are considered variable. These payments are not recognized as part of the lease liability and are expensed in the period incurred. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.

We have lease agreements with lease and non-lease components. For the majority of our leases (real estate leases), the Company has elected the practical expedient to account for the lease and non-lease components as a single lease component. We have not elected the practical expedient for equipment leases and account for lease and non-lease components separately for those classes of leases.

As our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. Our lease terms may include periods covered by options to extend when it is reasonably certain that we will exercise those options. The lease terms may also include periods covered by options to terminate when it is reasonably certain that we will not exercise that option.

Lease expense for operating lease payments is recognized on a straight-line basis over the lease term. The Company does not have any finance leases and had an immaterial amount of sublease income for all periods presented.

THE 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 details the amounts and locations of lease assets and liabilities on the condensed consolidated balance sheet:



Leases	Balance Sheet Classification	September 30, 2019
Assets
Operating lease assets	Other assets	$	596
Liabilities
Operating lease liabilities	Accrued expenses and other liabilities	$	665

The components of lease expense are as follows:



Lease Cost	Three Months Ended September 30, 2019		Nine Months Ended September 30, 2019
Operating lease cost ⁽¹⁾	$	34	$	100
Variable lease cost ⁽²⁾	8		25

⁽¹⁾Includes short-term leases, which are immaterial.

⁽²⁾Includes payments that are entirely variable and amounts that represent the difference between payments based on an index or rate that would be reflected in the lease liability and what is actually incurred.

The following tables present supplemental lease information as of September 30, 2019:



Lease Term and Discount Rate
Weighted-average remaining lease term (years)	7.18
Weighted-average discount rate	3.47	%



Maturity of Lease Liabilities	Operating Leases ⁽¹⁾
2019	$	26
2020	136
2021	113
2022	92
2023	84
Thereafter	309
Total lease payments	760
Less: Interest	95
Present value of lease liabilities	$	665

⁽¹⁾Operating lease payments exclude $41 million of legally binding minimum lease payments for leases signed but not yet commenced. These leases will commence between 2019 and 2020 with lease terms of five years to 20 years.

THE CHARLES SCHWAB CORPORATION

Notes to Condensed Consolidated Financial Statements

(Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted)

(Unaudited)

In accordance with the disclosure requirements for our adoption of ASU 2016-02, the Company is presenting the operating leases commitment table as of December 31, 2018. The following table is unchanged from the disclosure in Note 14 in the 2018 Form 10-K:



	Operating Leases		Subleases		Net
2019	$	131	$	4	$	127
2020	125		4		121
2021	101		4		97
2022	79		2		77
2023	72		1		71
Thereafter	282		—		282
Total	$	790	$	15	$	775

10. 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~~$842 million and ~~$696~~$491 million during the third quarters of ~~2018~~2019 and ~~2017,~~2018, respectively, and ~~$1.6~~

$2.0 billion and ~~$2.0~~$1.6 billion during the first nine months of 2019 and 2018, ~~and 2017,~~ respectively. ~~Schwab~~CSB purchased HELOCs with commitments of ~~$104~~$52 million and ~~$115~~$104 million during the third quarters of ~~2018~~2019 and ~~2017,~~2018, respectively, and ~~$311~~$180 million and ~~$344~~$311 million during the first nine months of 2019 and 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, 2019		December 31, 2018
Commitments to extend credit related to unused HELOCs, PALs, and other lines of credit	$	11,234	$	11,046
Commitments to purchase First Mortgage loans	1,976		268
Total	$	13,210	$	11,314

September 30, 2018 December 31, 2017
Commitments to extend credit related to unused HELOCs, PALs, and other lines of credit $ 11,028
$ 10,060
Commitments to purchase First Mortgage loans 355
308
Total $ 11,383
$ 10,368

In the third quarter of 2019, volume in new and refinanced First Mortgages increased as a result of lower interest rates and enhancements to customer incentives, leading to additional purchases during the third quarter and an increase in commitments to purchase First Mortgages as of September 30, 2019.

Guarantees and indemnifications: Schwab 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. We partially satisfy 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, ~~2018,~~2019, the aggregate face amount of these LOCs totaled $225 million. There were no0 funds drawn under any of these LOCs at September 30, ~~2018.~~2019. In connection with its securities lending activities, Schwab is required to provide collateral to certain brokerage clients. The Company satisfies the collateral requirements by providing cash as collateral.

Schwab 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. Schwab’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, 0 liability has been recognized for these guarantees.

Acquisition of USAA-IMCO: On July 25, 2019, the Company announced a definitive agreement to acquire assets of USAA-IMCO, including over 1000000 brokerage and managed portfolio accounts with approximately $90 billion in client assets,

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 $1.8 billion in cash. The companies have also agreed to enter into a long-term referral agreement, effective at closing of the ~~Company~~acquisition, that would make Schwab the exclusive wealth management and brokerage provider for USAA members. The transaction is expected to ~~make payments under these arrangements is remote. Accordingly, no liability has been recognized for these guarantees.~~close in mid-2020, subject to satisfaction of closing conditions, including regulatory approvals and the implementation of conversion plans.

Legal contingencies: Schwab 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.

Predicting the outcome of a litigation or regulatory matter is inherently difficult, requiring significant judgment and evaluation of various factors, including the procedural status of the matter and any recent developments; prior experience and the experience of others in similar cases; available defenses, including potential opportunities to dispose of a case on the merits or procedural grounds before trial (e.g., motions to dismiss or for summary judgment); the progress of fact discovery; the opinions of counsel and experts regarding potential damages; and potential opportunities for settlement and the status of any settlement ~~discussions; and potential insurance coverage and indemnification.~~discussions. It may not be reasonably possible to estimate a range of potential liability until the matter is closer to resolution – pending, for example, further proceedings, the outcome of key motions or appeals, or discussions among the parties. Numerous issues may have to be developed, such as discovery of important factual matters and determination of threshold legal issues, which may include novel or unsettled questions of law. Reserves are established or adjusted or further disclosure and estimates of potential loss are provided as the matter progresses and more information becomes available.

Schwab believes it has strong defenses in all significant matters currently pending and is contesting liability and any damages claimed. Nevertheless, some of these matters may result in adverse judgments or awards, including penalties, injunctions or other relief, and the Company may also determine to settle a matter because of the uncertainty and risks of litigation. Described below ~~are~~is a certain ~~matters~~matter 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.

~~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~~^™. Plaintiff’s fourth amended complaint, filed on June 25, 2015, asserts state law breach of contract and fiduciary 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 on behalf of a putative class of investors who held shares as of August 31, 2007, and a putative class of investors who purchased the shares between September 1, 2017 and February 27, 2009. In decisions issued October 6, 2015 and February 23, 2016, the court dismissed all claims with prejudice, holding that federal securities law precluded plaintiff from pursuing such claims as a class action. Plaintiff appealed to the Ninth Circuit, and on September 14, 2018, a 3-judge panel upheld dismissal, with leave for plaintiff to pursue the claims 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 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~~are vigorously ~~contest~~contesting the lawsuit.

~~CHARLES SCHWAB CORPORATION~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted)~~

~~(Unaudited)~~

~~10.~~11. Financial Instruments Subject to Off-Balance Sheet Credit Risk

Resale 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. The collateral provided under these resale agreements is utilized to meet obligations under broker-dealer client protection rules, which place limitations on our ability to access such segregated securities. For Schwab to repledge or sell this collateral, itwe would be required to deposit cash and/or securities of an equal amount into ~~its~~our segregated reserve bank accounts in order to meet ~~its~~our segregated cash and investment requirement. Schwab’s resale agreements are not subject to master netting arrangements.

Securities lending: Schwab loans brokerage client securities temporarily to other brokers and clearing houses in connection with its securities lending activities and receives cash as collateral for the securities loaned. Increases in security prices may cause the fair value of the securities loaned to exceed the amount of cash received as collateral. In the event the counterparty to

THE CHARLES SCHWAB CORPORATION

Notes to Condensed Consolidated Financial Statements

(Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted)

(Unaudited)

these transactions does not return the loaned securities or provide additional cash collateral, we may be exposed to the risk of acquiring the securities at prevailing market prices in order to satisfy our client obligations. Schwab mitigates this risk by requiring credit approvals for counterparties, monitoring the fair value of securities loaned, and requiring additional cash as collateral when necessary. We also borrow securities from other broker-dealers to fulfill short sales by brokerage clients and deliver cash to the lender in exchange for the securities. The fair value of these borrowed securities was ~~$338~~$860 million and ~~$215~~$99 million at September 30, ~~2018~~2019 and December 31, ~~2017,~~2018, respectively. ~~All~~Substantially all of our securities lending transactions are through a program with a clearing organization, which guarantees the return of cash to us and is subject to enforceable master netting arrangements with other broker-dealers; however, we do not net securities lending transactions. Therefore, the securities loaned and securities borrowed are presented gross in the condensed consolidated balance sheets.

~~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 our resale agreements and securities lending activity depicting the potential effect of rights of setoff between these recognized assets and recognized liabilities at September 30, ~~2018~~2019 and December 31, ~~2017.~~2018:


							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		Gross Amounts Not Offset in the Condensed Consolidated Balance Sheets							Net Amount
	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		Gross Assets/ Liabilities				Counterparty Offsetting			Collateral							Net Amount
September 30, 2018
September 30, 2019
Assets
Resale agreements ⁽¹⁾	$	4,424	$	—	$	4,424	$	—		$	(4,424	)	⁽²⁾	$	—	$	9,707	$	—		$	9,707	$	—		$	(9,707	)	⁽²⁾	$	—
Securities borrowed ⁽³⁾	346		—		346		(316		)	(30		)		—		877		—			877		(871		)	(6		)		—
Total	$	4,770	$	—	$	4,770	$	(316	)	$	(4,454	)		$	—	$	10,584	$	—		$	10,584	$	(871	)	$	(9,713	)		$	—
Liabilities
Securities loaned ^(4,5)	$	1,062	$	—	$	1,062	$	(316	)	$	(652	)		$	94	$	1,471	$	—		$	1,471	$	(871	)	$	(489	)		$	111
Total	$	1,062	$	—	$	1,062	$	(316	)	$	(652	)		$	94	$	1,471	$	—		$	1,471	$	(871	)	$	(489	)		$	111

December 31, 2017
December 31, 2018
Assets
Resale agreements ⁽¹⁾	$	6,596	$	—	$	6,596	$	—		$	(6,596	)	⁽²⁾	$	—	$	7,195	$	—		$	7,195	$	—		$	(7,195	)	⁽²⁾	$	—
Securities borrowed ⁽³⁾	222		—		222		(199		)	(22		)		1		101		—			101		(98		)	(3		)		—
Total	$	6,818	$	—	$	6,818	$	(199	)	$	(6,618	)		$	1	$	7,296	$	—		$	7,296	$	(98	)	$	(7,198	)		$	—
Liabilities
Securities loaned ^(4,5)	$	966	$	—	$	966	$	(199	)	$	(670	)		$	97	$	1,184	$	—		$	1,184	$	(98	)	$	(975	)		$	111
Total	$	966	$	—	$	966	$	(199	)	$	(670	)		$	97	$	1,184	$	—		$	1,184	$	(98	)	$	(975	)		$	111

⁽¹⁾ Included in cash and investments segregated and on deposit for regulatory purposes in the condensed consolidated balance sheets.

⁽²⁾ Actual collateral was greater than or equal to 102% of the related assets. At September 30, ~~2018~~2019 and December 31, ~~2017,~~2018, the fair value of collateral received in connection with resale agreements that are available to be repledged or sold was ~~$4.5~~$9.9 billion and ~~$6.7~~$7.4 billion, respectively.

⁽³⁾ Included in receivables from brokers, dealers, and clearing organizations in the condensed consolidated balance sheets.

⁽⁴⁾ Included in payables to brokers, dealers, and clearing organizations in the condensed consolidated balance sheets. The cash collateral received from counterparties under securities lending transactions was equal to or greater than the market value of the securities loaned at September 30, ~~2018~~2019 and December 31, ~~2017.~~2018.

⁽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 Schwab to pledge ~~collateralized~~ securities in their brokerage accounts in accordance with federal regulations. The following table summarizes the fair value of client securities that were available, under such regulations, that could have been used as collateral, and the amounts that we had pledged:


		September 30, 2018		December 31, 2017			September 30, 2019		December 31, 2018
Fair value of client securities available to be pledged	Fair value of client securities available to be pledged	$	28,806	$	25,905	Fair value of client securities available to be pledged	$	26,614	$	26,628
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 requirements with the Options Clearing Corporation ⁽¹⁾	1,778		2,315
Fulfillment of client short sales	Fulfillment of client short sales	1,923		2,011		Fulfillment of client short sales	2,023		1,292
Securities lending to other broker-dealers	Securities lending to other broker-dealers	872		784		Securities lending to other broker-dealers	1,204		974
Total collateral pledged	Total collateral pledged	$	5,831	$	5,075	Total collateral pledged	$	5,005	$	4,581

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 ~~$88~~$139 million as of September 30, ~~2018~~2019 and ~~$78~~$97 million as of December 31, ~~2017.~~2018.


⁽¹⁾	Client securities pledged to fulfill client margin requirements for open option contracts established with the Options Clearing Corporation.

~~11.~~12. Fair Values of Assets and Liabilities

Assets and liabilities measured at fair value on a recurring basis

Schwab’s assets and liabilities measured at fair value on a recurring basis ~~include~~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. We generally obtain prices from ~~at least~~ three independent third-party pricing sources for assets recorded at fair value.

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. We compare the prices obtained from the primary independent pricing service to the prices obtained from the additional independent pricing ~~sources~~services to determine if the price obtained from the primary independent pricing service is reasonable. Schwab does not adjust the prices received from independent third-party pricing services unless such prices are inconsistent with the definition of fair value and result in a material ~~difference~~differences in the ~~recorded amounts.~~amounts recorded.

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 ~~2017~~2018 Form 10-K. We did not transfer any assets or liabilities between Level 1, Level 2, or Level 3 during the nine months ended September 30, ~~2018,~~2019, or the year ended December 31, ~~2017.~~2018. In addition, the Company did not adjust prices received from the primary independent third-party pricing service at September 30, ~~2018~~2019 or December 31, ~~2017.~~2018.

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, 2018	Level 1		Level 2		Level 3		Balance at Fair Value
September 30, 2019									Level 1		Level 2		Level 3		Balance at Fair Value
Cash equivalents:
Money market funds	$	552	$	—	$	—	$	552	$	4,193	$	—	$	—	$	4,193
Commercial paper	—		1,988		—		1,988		—		923		—		923
Total cash equivalents	552		1,988		—		2,540		4,193		923		—		5,116
Investments segregated and on deposit for regulatory purposes:
Certificates of deposit	—		1,950		—		1,950		—		1,951		—		1,951
U.S. Government securities									—		1,605		—		1,605
Total investments segregated and on deposit for regulatory purposes	—		1,950		—		1,950		—		3,556		—		3,556
Other securities owned:
Equity and bond mutual funds	394		—		—		394		378		—		—		378
Schwab Funds^® money market funds	21		—		—		21
State and municipal debt obligations	—		44		—		44		—		32		—		32
Equity, U.S. Government and corporate debt, and other securities	3		38		—		41		3		74		—		77
Schwab Funds^® money market funds									10		—		—		10
Total other securities owned	418		82		—		500		391		106		—		497
Available for sale securities:
U.S. agency mortgage-backed securities	—		23,955		—		23,955		—		40,431		—		40,431
U.S. Treasury securities	—		12,243		—		12,243		—		5,027		—		5,027
Asset-backed securities	—		9,387		—		9,387		—		4,801		—		4,801
Corporate debt securities	—		6,922		—		6,922		—		4,686		—		4,686
Certificates of deposit	—		2,769		—		2,769		—		1,004		—		1,004
U.S. agency notes	—		1,682		—		1,682
Commercial paper	—		518		—		518		—		521		—		521
Foreign government agency securities	—		48		—		48
Non-agency commercial mortgage-backed securities	—		34		—		34		—		13		—		13
Total available for sale securities	—		57,558		—		57,558		—		56,483		—		56,483
Total	$	970	$	61,578	$	—	$	62,548	$	4,584	$	61,068	$	—	$	65,652

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, 2017	Level 1		Level 2		Level 3		Balance at Fair Value
December 31, 2018									Level 1		Level 2		Level 3		Balance at Fair Value
Cash equivalents:
Money market funds	$	2,727	$	—	$	—	$	2,727	$	3,429	$	—	$	—	$	3,429
Commercial paper									—		4,863		—		4,863
Total cash equivalents	2,727		—		—		2,727		3,429		4,863		—		8,292
Investments segregated and on deposit for regulatory purposes:
Certificates of deposit	—		2,198		—		2,198		—		1,396		—		1,396
U.S. Government securities	—		3,658		—		3,658		—		3,275		—		3,275
Total investments segregated and on deposit for regulatory purposes	—		5,856		—		5,856		—		4,671		—		4,671
Other securities owned:
Equity and bond mutual funds	318		—		—		318		441		—		—		441
Schwab Funds^® money market funds	135		—		—		135
State and municipal debt obligations	—		52		—		52		—		39		—		39
Equity, U.S. Government and corporate debt, and other securities	2		32		—		34		3		30		—		33
Schwab Funds^® money market funds									26		—		—		26
Total other securities owned	455		84		—		539		470		69		—		539
Available for sale securities:
U.S. agency mortgage-backed securities	—		20,929		—		20,929		—		25,556		—		25,556
U.S. Treasury securities	—		9,500		—		9,500		—		18,302		—		18,302
Asset-backed securities	—		9,047		—		9,047		—		10,085		—		10,085
Corporate debt securities	—		6,169		—		6,169		—		7,467		—		7,467
Certificates of deposit	—		2,041		—		2,041		—		3,685		—		3,685
U.S. agency notes	—		1,906		—		1,906		—		898		—		898
Commercial paper	—		313		—		313		—		522		—		522
Foreign government agency securities	—		50		—		50		—		49		—		49
Non-agency commercial mortgage-backed securities	—		40		—		40		—		14		—		14
Total available for sale securities	—		49,995		—		49,995		—		66,578		—		66,578
Total	$	3,182	$	55,935	$	—	$	59,117	$	3,899	$	76,181	$	—	$	80,080

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, 2018	Carrying Amount		Level 1		Level 2		Level 3		Balance at Fair Value
September 30, 2019											Carrying Amount		Level 1		Level 2		Level 3		Balance at Fair Value
Assets
Cash and cash equivalents	$	19,290	$	—	$	19,290	$	—	$	19,290	$	15,136	$	—	$	15,136	$	—	$	15,136
Cash and investments segregated and on deposit for regulatory purposes	6,526		—		6,526		—		6,526		12,595		—		12,595		—		12,595
Receivables from brokers, dealers, and clearing organizations	798		—		798		—		798		1,317		—		1,317		—		1,317
Receivables from brokerage clients — net	22,402		—		22,402		—		22,402		21,061		—		21,061		—		21,061
Held to maturity securities:
U.S. agency mortgage-backed securities	113,453		—		109,996		—		109,996		114,276		—		116,012		—		116,012
Asset-backed securities	17,964		—		18,074		—		18,074		18,323		—		18,359		—		18,359
Corporate debt securities	4,578		—		4,531		—		4,531		4,659		—		4,715		—		4,715
U.S. state and municipal securities	1,330		—		1,329		—		1,329		1,306		—		1,413		—		1,413
Non-agency commercial mortgage-backed securities	1,149		—		1,125		—		1,125		1,136		—		1,164		—		1,164
U.S. Treasury securities	223		—		212		—		212		224		—		230		—		230
Certificates of deposit	200		—		201		—		201		200		—		200		—		200
Foreign government agency securities	50		—		48		—		48		50		—		50		—		50
Other	5		—		5		—		5		20		—		20		—		20
Total held to maturity securities	138,952		—		135,521		—		135,521		140,194		—		142,163		—		142,163
Bank loans — net:
First Mortgages	10,239		—		9,963		—		9,963		10,630		—		10,682		—		10,682
HELOCs	1,595		—		1,664		—		1,664		1,216		—		1,255		—		1,255
Pledged asset lines	4,556		—		4,556		—		4,556		4,878		—		4,878		—		4,878
Other	174		—		174		—		174		171		—		171		—		171
Total bank loans — net	16,564		—		16,357		—		16,357		16,895		—		16,986		—		16,986
Other assets	463		—		463		—		463		617		—		617		—		617
Total	$	204,995	$	—	$	201,357	$	—	$	201,357	$	207,815	$	—	$	209,875	$	—	$	209,875
Liabilities
Bank deposits	$	213,408	$	—	$	213,408	$	—	$	213,408	$	209,327	$	—	$	209,327	$	—	$	209,327
Payables to brokers, dealers, and clearing organizations	1,522		—		1,522		—		1,522		1,736		—		1,736		—		1,736
Payables to brokerage clients	27,851		—		27,851		—		27,851		35,622		—		35,622		—		35,622
Accrued expenses and other liabilities	1,177		—		1,177		—		1,177		1,252		—		1,252		—		1,252
Long-term debt	5,790		—		5,687		—		5,687		7,427		—		7,771		—		7,771
Total	$	249,748	$	—	$	249,645	$	—	$	249,645	$	255,364	$	—	$	255,708	$	—	$	255,708

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, 2018	Carrying Amount		Level 1		Level 2		Level 3		Balance at Fair Value
Assets
Cash and cash equivalents	$	19,646	$	—	$	19,646	$	—	$	19,646
Cash and investments segregated and on deposit for regulatory purposes	8,886		—		8,886		—		8,886
Receivables from brokers, dealers, and clearing organizations	553		—		553		—		553
Receivables from brokerage clients — net	21,641		—		21,641		—		21,641
Held to maturity securities:
U.S. agency mortgage-backed securities	118,064		—		116,093		—		116,093
Asset-backed securities	18,502		—		18,546		—		18,546
Corporate debt securities	4,477		—		4,432		—		4,432
U.S. state and municipal securities	1,327		—		1,348		—		1,348
Non-agency commercial mortgage-backed securities	1,156		—		1,142		—		1,142
U.S. Treasury securities	223		—		217		—		217
Certificates of deposit	200		—		201		—		201
Foreign government agency securities	50		—		49		—		49
Other	10		—		10		—		10
Total held to maturity securities	144,009		—		142,038		—		142,038
Bank loans — net:
First Mortgages	10,370		—		10,193		—		10,193
HELOCs	1,500		—		1,583		—		1,583
Pledged asset lines	4,561		—		4,561		—		4,561
Other	178		—		178		—		178
Total bank loans — net	16,609		—		16,515		—		16,515
Other assets	460		—		460		—		460
Total	$	211,804	$	—	$	209,739	$	—	$	209,739
Liabilities
Bank deposits	$	231,423	$	—	$	231,423	$	—	$	231,423
Payables to brokers, dealers, and clearing organizations	1,831		—		1,831		—		1,831
Payables to brokerage clients	32,726		—		32,726		—		32,726
Accrued expenses and other liabilities	1,370		—		1,370		—		1,370
Long-term debt	6,878		—		6,827		—		6,827
Total	$	274,228	$	—	$	274,177	$	—	$	274,177

December 31, 2017 Carrying
Amount Level 1 Level 2 Level 3 Balance at
Fair Value
Assets
Cash and cash equivalents $ 11,490
$ —
$ 11,490
$ —
$ 11,490
Cash and investments segregated and on deposit for
regulatory purposes 9,277
—
9,277
—
9,277
Receivables from brokers, dealers, and clearing
organizations 649
—
649
—
649
Receivables from brokerage clients — net 20,568
—
20,568
—
20,568
Held to maturity securities:
U.S. agency mortgage-backed securities 101,197
—
100,453
—
100,453
Asset-backed securities 12,937
—
13,062
—
13,062
Corporate debt securities 4,078
—
4,086
—
4,086
U.S. state and municipal securities 1,247
—
1,304
—
1,304
Non-agency commercial mortgage-backed securities 994
—
999
—
999
U.S. Treasury securities 223
—
220
—
220
Certificates of deposit 200
—
200
—
200
Foreign government agency securities 50
—
49
—
49
Total held to maturity securities 120,926
—
120,373
—
120,373
Bank loans — net:
First Mortgages 10,000
—
9,917
—
9,917
HELOCs 1,935
—
2,025
—
2,025
Pledged asset lines 4,369
—
4,369
—
4,369
Other 174
—
174
—
174
Total bank loans — net 16,478
—
16,485
—
16,485
Other assets 781
—
781
—
781
Total $ 180,169
$ —
$ 179,623
$ —
$ 179,623
Liabilities
Bank deposits $ 169,656
$ —
$ 169,656
$ —
$ 169,656
Payables to brokers, dealers, and clearing organizations 1,287
—
1,287
—
1,287
Payables to brokerage clients 31,243
—
31,243
—
31,243
Accrued expenses and other liabilities 1,463
—
1,463
—
1,463
Short-term borrowings 15,000
—
15,000
—
15,000
Long-term debt 4,753
—
4,811
—
4,811
Total $ 223,402
$ —
$ 223,460
$ —
$ 223,460

THE CHARLES SCHWAB CORPORATION

Notes to Condensed Consolidated Financial Statements

(Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted)

(Unaudited)

~~12.~~13. Stockholders’ Equity

On January 30, 2019, CSC publicly announced that its Board of Directors authorized a new Share Repurchase Program to repurchase up to $4.0 billion of common stock. The share repurchase authorization does not have an expiration date. During the third quarter and first nine months of 2019, CSC repurchased 20 million and 49 million shares of its common stock under this authorization for $771 million and $2.0 billion, respectively.

The Company’s preferred stock issued and outstanding is as follows:


			Liquidation Preference Per Share							Dividend Rate in Effect at September 30, 2018		Earliest Redemption Date	Date at Which Dividend Rate Becomes Floating	Floating Annual Rate of Three-Month LIBOR plus:				Liquidation Preference Per Share							Dividend Rate in Effect at September 30, 2019		Earliest Redemption Date	Date at Which Dividend Rate Becomes Floating	Floating Annual Rate of Three-Month LIBOR plus:
	Shares Issued and Outstanding (In thousands) at				Carrying Value at											Shares Issued and Outstanding (in thousands) at				Carrying Value at
	September 30, 2018 ⁽¹⁾	December 31, 2017 ⁽¹⁾			September 30, 2018		December 31, 2017		Issue Date							September 30, 2019 ⁽¹⁾	December 31, 2018 ⁽¹⁾			September 30, 2019		December 31, 2018		Issue Date
Fixed-rate:
Series C	600	600	$	1,000	$	585	$	585	08/03/15	6.000	%	12/01/20	N/A	N/A		600	600	$	1,000	$	585	$	585	08/03/15	6.000	%	12/01/20	N/A	N/A
Series D	750	750	1,000		728		728		03/07/16	5.950	%	06/01/21	N/A	N/A		750	750	1,000		728		728		03/07/16	5.950	%	06/01/21	N/A	N/A
Fixed-to-floating-rate:
Series A	400	400	1,000		397		397		01/26/12	7.000	%	02/01/22		4.820	%	400	400	1,000		397		397		01/26/12	7.000	%	02/01/22	02/01/22	4.820	%
Series E	6	6	100,000		591		591		10/31/16	4.625	%	03/01/22		3.315	%	6	6	100,000		591		591		10/31/16	4.625	%	03/01/22	03/01/22	3.315	%
Series F	5	5	100,000		492		492		10/31/17	5.000	%	12/01/27	12/01/27	2.575	%	5	5	100,000		492		492		10/31/17	5.000	%	12/01/27	12/01/27	2.575	%
Total preferred stock	1,761	1,761			$	2,793	$	2,793								1,761	1,761			$	2,793	$	2,793

⁽¹⁾ Represented by depositary shares, except for Series A.

N/A Not applicable.

Dividends declared on the Company’s preferred stock are as follows:



	Three Months Ended September 30,								Nine Months Ended September 30,
	2019				2018				2019				2018
	Total Declared		Per Share Amount		Total Declared		Per Share Amount		Total Declared		Per Share Amount		Total Declared		Per Share Amount
Series A	$	—	$	—	$	—	$	—	$	14	$	35.00	$	14	$	35.00
Series C	9		15.00		9		15.00		27		45.00		27		45.00
Series D	11		14.88		11		14.88		33		44.64		33		44.64
Series E	14		2,312.50		14		2,312.50		28		4,625.00		28		4,625.00
Series F	—		—		—		—		13		2,500.00		15		2,930.56
Total	$	34			$	34			$	115			$	117

~~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, 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) $ (43 ) $ 11
$ (32 ) $ —
$ —
$ —
Change in net unrealized gain (loss) on held to maturity securities:
Amortization of amounts previously recorded upon transfer from available for sale 8
(2 ) 6
10
(4 ) 6
Other comprehensive income (loss) $ (35 ) $ 9
$ (26 ) $ 10
$ (4 ) $ 6

2018 2017
Nine Months Ended September 30, 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) $ (184 ) $ 45
$ (139 ) $ 81
$ (30 ) $ 51
Reclassification of net unrealized loss on securities transferred to held to maturity ⁽¹⁾
—
—
—
227
(85 ) 142
Other reclassifications included in other revenue —
—
—
(7 ) 3
(4 )
Change in net unrealized gain (loss) on held to maturity securities:
Reclassification of net unrealized loss on securities transferred from available for sale ⁽¹⁾
—
—
—
(227 ) 85
(142 )
Amortization of amounts previously recorded upon transfer from available for sale 26
(6 ) 20
21
(9 ) 12
Other —
—
—
(3 ) 1
(2 )
Other comprehensive income (loss) $ (158 ) $ 39
$ (119 ) $ 92
$ (35 ) $ 57

⁽¹⁾ ~~See Note 5 in the 2017 10-K for discussion of the transfer of securities from the AFS category to the HTM category during the first quarter of 2017.~~

THE CHARLES SCHWAB CORPORATION

Notes to Condensed Consolidated Financial Statements

(Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted)

(Unaudited)

14. Accumulated Other Comprehensive Income

The components of other comprehensive income (loss) are as follows:



	2019									2018
Three Months Ended September 30,	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)	$	51		$	(12	)	$	39		$	(43	)	$	11		$	(32	)
Other reclassifications included in other revenue	(1		)	—			(1		)	—			—			—
Amortization of amounts previously recorded upon transfer to held to maturity from available for sale	10			(3		)	7			8			(2		)	6
Other comprehensive income (loss)	$	60		$	(15	)	$	45		$	(35	)	$	9		$	(26	)



	2019									2018
Nine Months Ended September 30,	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)	$	496		$	(119	)	$	377		$	(184	)	$	45		$	(139	)
Other reclassifications included in other revenue	(5		)	1			(4		)	—			—			—
Amortization of amounts previously recorded upon transfer to held to maturity from available for sale	30			(7		)	23			26			(6		)	20
Other comprehensive income (loss)	$	521		$	(125	)	$	396		$	(158	)	$	39		$	(119	)

AOCI balances are as follows:


	Total Accumulated Other Comprehensive Income			Total AOCI
Balance at December 31, 2016	$	(163	)
Available for sale securities:
Net unrealized gain (loss)	51
Reclassification of net unrealized loss on securities transferred to held to maturity	142
Other reclassifications included in other revenue	(4		)
Held to maturity securities:
Reclassification of net unrealized loss on securities transferred from available for sale	(142		)
Amortization of amounts previously recorded upon transfer to held to maturity from available for sale	12
Other	(2		)
Balance at September 30, 2017	$	(106	)

Balance at December 31, 2017	$	(152	)
Adoption of accounting standards (Note 2)	(33		)
Balance at June 30, 2018				$	(278	)
Available for sale securities:
Net unrealized gain (loss)	(139		)	(32		)
Held to maturity securities:
Amortization of amounts previously recorded upon transfer to held to maturity from available for sale	20			6
Balance at September 30, 2018	$	(304	)	$	(304	)

Balance at June 30, 2019				$	99
Available for sale securities:
Net unrealized gain (loss), excluding transfers to available for sale from held to maturity				39
Other reclassifications included in other revenue				(1		)
Held to maturity securities:
Amortization of amounts previously recorded upon transfer to held to maturity from available for sale				7
Balance at September 30, 2019				$	144

~~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.

THE CHARLES SCHWAB CORPORATION

Notes to Condensed Consolidated Financial Statements

(Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted)

(Unaudited)

~~15. Earnings Per Common Share~~

~~EPS under the basic and diluted computations is as follows:~~



	Total AOCI
Balance at December 31, 2017	$	(152	)
Adoption of accounting standards	(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	)

Balance at December 31, 2018	$	(252	)
Available for sale securities:
Net unrealized gain (loss), excluding transfers to available for sale from held to maturity	358
Net unrealized gain on securities transferred to available for sale from held to maturity ⁽¹⁾	19
Other reclassifications included in other revenue	(4		)
Held to maturity securities:
Amortization of amounts previously recorded upon transfer to held to maturity from available for sale	23
Balance at September 30, 2019	$	144

Three Months Ended
September 30, Nine Months Ended
September 30,
2018 2017 2018 2017
Net income $ 923
$ 618
$ 2,572
$ 1,757
Preferred stock dividends and other ⁽¹⁾
(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
Common stock equivalent shares related to stock incentive plans 13
14
14
14
Weighted-average common shares outstanding — diluted ⁽²⁾
1,364
1,353
1,363
1,352
Basic EPS $ .66
$ .43
$ 1.81
$ 1.22
Diluted EPS $ .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 units excluded from~~ As part of the ~~calculation~~adoption of ~~diluted EPS totaled 11 million and 9 million shares for the third quarters of 2018 and 2017, respectively, and 12 million and 10 million shares for~~ASU 2017-12, in the first ~~nine months~~quarter of ~~2018~~2019, the Company made a one-time election to transfer a portion of its HTM securities to AFS. The transfer resulted in a net of tax increase to AOCI of $19 million. See Notes 2 and ~~2017, respectively.~~4 for additional discussion on the transfer of HTM securities to AFS.

THE CHARLES SCHWAB CORPORATION

Notes to Condensed Consolidated Financial Statements

(Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted)

(Unaudited)

~~16.~~15. Regulatory Requirements

At September 30, ~~2018, Schwab~~2019, CSC and CSB met all of their respective capital requirements. The regulatory capital and ratios for CSC (consolidated) and CSB are as follows:

Actual Minimum to be
Well Capitalized Minimum Capital Requirement
September 30, 2018 Amount Ratio Amount Ratio Amount Ratio
CSC
Common Equity Tier 1 Risk-Based Capital $ 17,025
19.6 % N/A
$ 3,907
4.5 %
Tier 1 Risk-Based Capital 19,818
22.8 % N/A
5,210
6.0 %
Total Risk-Based Capital 19,846
22.9 % N/A
6,946
8.0 %
Tier 1 Leverage 19,818
7.5 % N/A
10,622
4.0 %
CSB
Common Equity Tier 1 Risk-Based Capital $ 15,164
20.2 % $ 4,890
6.5 % $ 3,385
4.5 %
Tier 1 Risk-Based Capital 15,164
20.2 % 6,018
8.0 % 4,513
6.0 %
Total Risk-Based Capital 15,191
20.2 % 7,522
10.0 % 6,018
8.0 %
Tier 1 Leverage 15,164
7.1 % 10,668
5.0 % 8,534
4.0 %

December 31, 2017
CSC
Common Equity Tier 1 Risk-Based Capital $ 14,630
19.3 % N/A
$ 3,414
4.5 %
Tier 1 Risk-Based Capital 17,423
23.0 % N/A
4,552
6.0 %
Total Risk-Based Capital 17,452
23.0 % N/A
6,069
8.0 %
Tier 1 Leverage 17,423
7.6 % N/A
9,218
4.0 %
CSB
Common Equity Tier 1 Risk-Based Capital $ 13,355
20.1 % $ 4,324
6.5 % $ 2,993
4.5 %
Tier 1 Risk-Based Capital 13,355
20.1 % 5,321
8.0 % 3,991
6.0 %
Total Risk-Based Capital 13,382
20.1 % 6,652
10.0 % 5,321
8.0 %
Tier 1 Leverage 13,355
7.1 % 9,462
5.0 % 7,569
4.0 %



	Actual ⁽¹⁾				Minimum to be Well Capitalized				Minimum Capital Requirement
September 30, 2019	Amount		Ratio		Amount		Ratio		Amount		Ratio ⁽²⁾
CSC
Common Equity Tier 1 Risk-Based Capital	$	17,264	20.0	%	N/A				$	3,877	4.5	%
Tier 1 Risk-Based Capital	20,057		23.3	%	N/A				5,170		6.0	%
Total Risk-Based Capital	20,075		23.3	%	N/A				6,893		8.0	%
Tier 1 Leverage	20,057		7.3	%	N/A				10,945		4.0	%
Supplementary Leverage Ratio ⁽¹⁾	20,057		7.1	%	N/A				8,418		3.0	%
CSB
Common Equity Tier 1 Risk-Based Capital	$	15,577	22.9	%	$	4,430	6.5	%	$	3,067	4.5	%
Tier 1 Risk-Based Capital	15,577		22.9	%	5,452		8.0	%	4,089		6.0	%
Total Risk-Based Capital	15,594		22.9	%	6,815		10.0	%	5,452		8.0	%
Tier 1 Leverage	15,577		7.4	%	10,537		5.0	%	8,429		4.0	%
Supplementary Leverage Ratio ⁽¹⁾	15,577		7.2	%	N/A		N/A		6,524		3.0	%

December 31, 2018
CSC
Common Equity Tier 1 Risk-Based Capital	$	16,813	17.6	%	N/A				$	4,295	4.5	%
Tier 1 Risk-Based Capital	19,606		20.5	%	N/A				5,726		6.0	%
Total Risk-Based Capital	19,628		20.6	%	N/A				7,635		8.0	%
Tier 1 Leverage	19,606		7.1	%	N/A				11,058		4.0	%
CSB
Common Equity Tier 1 Risk-Based Capital	$	15,832	19.7	%	$	5,233	6.5	%	$	3,623	4.5	%
Tier 1 Risk-Based Capital	15,832		19.7	%	6,441		8.0	%	4,831		6.0	%
Total Risk-Based Capital	15,853		19.7	%	8,051		10.0	%	6,441		8.0	%
Tier 1 Leverage	15,832		7.2	%	11,044		5.0	%	8,836		4.0	%

⁽¹⁾Beginning in 2019, CSC and CSB are subject to the “advanced approaches” framework under the Basel III capital rule. As a result, we are now required to include all components of AOCI in regulatory capital and report our supplementary leverage ratio, which is calculated as Tier 1 capital divided by total leverage exposure. Total leverage exposure includes all on-balance sheet assets and certain off-balance sheet exposures, including unused commitments. Prior to 2019, CSC and CSB elected to opt-out of the requirement to include most components of AOCI in Common Equity Tier 1 Capital; the amounts and ratios for December 31, 2018 are presented on this basis.

⁽²⁾Under the Basel III capital rule, CSC and CSB are also required to maintain a capital conservation buffer and, beginning in 2019, a countercyclical capital buffer above the regulatory minimum risk-based capital ratios. The capital conservation buffer became 2.5% on January 1, 2019 (1.875% at December 31, 2018). At September 30, 2019, the countercyclical capital buffer was zero percent. If either buffer falls below the minimum requirement, the Company would be subject to limits on capital distributions and discretionary bonus payments to executive officers. At September 30, 2019 the minimum capital requirement plus capital conservation buffer and countercyclical capital buffer for Common Equity Tier 1 Risk-Based Capital, Tier 1 Risk-Based Capital, and Total Risk-Based Capital ratios were 7.0%, 8.5%, and 10.5%, respectively.

N/A Not applicable.

AtBased on its regulatory capital ratios at September 30, ~~2018,~~2019, CSB is considered well capitalized (the highest category) under its respective regulatory capital rules. AtThere are no conditions or events since September 30, ~~2018, CSC’s and~~2019 that management believes have changed CSB’s capital levels exceeded the fully implemented capital conservation buffer requirement. Certain events, such as growth in bank deposits and regulatory discretion, could adversely affect our ability to meet future capital requirements.category.

In late 2017, Schwab acquired a federal savings bank charter ~~and changed the name to~~which is now called Charles Schwab ~~Signature Bank (CSSB).~~Premier Bank. At September 30, ~~2018, CSSB’s~~2019, the balance sheet of Charles Schwab Premier Bank consisted primarily of investment securities, ~~with~~and held total assets of ~~$13.1~~$13.5 billion. ~~CSSB~~Charles Schwab Premier Bank is subject to similar regulatory guidelines and requirements, and seeks to maintain a Tier 1 Leverage Ratio similar to CSB.

~~Net capital and net capital requirements for CS&Co are as follows:~~

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)

Net capital and net capital requirements for CS&Co are as follows:



	September 30, 2019		December 31, 2018
Net Capital	$	2,235	$	2,304
Minimum net capital required	0.250		0.250
2% of aggregate debit balances	440		436
Net Capital in excess of required net capital	$	1,795	$	1,868

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.~~2019. The SEC Customer Protection Rule requires broker-dealers to segregate client ~~fully paid~~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.~~16. Segment Information

Schwab’s ~~two~~2 reportable segments are Investor Services and Advisor Services. Schwab structures the 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, as well as other corporate brokerage services, to businesses and their employees. The Advisor Services segment provides custodial, trading, banking, and support services, as well as retirement business services, to independent RIAs, independent retirement advisors, and recordkeepers. Revenues and expenses are allocated to the ~~two~~2 segments based on which segment services the client.

Management evaluates the performance of the 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 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
Nine Months Ended September 30, 2018 2017 2018 2017 2018 2017
Net Revenues
Net interest revenue $ 3,158
$ 2,366
$ 1,039
$ 769
$ 4,197
$ 3,135
Asset management and administration fees 1,727
1,743
747
786
2,474
2,529
Trading revenue 354
311
203
189
557
500
Other 182
159
53
53
235
212
Total net revenues 5,421
4,579
2,042
1,797
7,463
6,376
Expenses Excluding Interest 3,069
2,762
1,042
917
4,111
3,679
Income before taxes on income $ 2,352
$ 1,817
$ 1,000
$ 880
$ 3,352
$ 2,697

THE CHARLES SCHWAB CORPORATION

Notes to Condensed Consolidated Financial Statements

(Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted)

(Unaudited)

~~18. Subsequent Events~~Financial information for the segments is presented in the following tables:

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.



	Investor Services				Advisor Services				Total
Three Months Ended September 30,	2019		2018		2019		2018		2019		2018
Net Revenues
Net interest revenue	$	1,182	$	1,138	$	449	$	389	$	1,631	$	1,527
Asset management and administration fees	586		565		239		244		825		809
Trading revenue	108		112		64		64		172		176
Other	68		53		15		14		83		67
Total net revenues	1,944		1,868		767		711		2,711		2,579
Expenses Excluding Interest	1,070		1,015		405		345		1,475		1,360
Income before taxes on income	$	874	$	853	$	362	$	366	$	1,236	$	1,219



	Investor Services				Advisor Services				Total
Nine Months Ended September 30,	2019		2018		2019		2018		2019		2018
Net Revenues
Net interest revenue	$	3,531	$	3,158	$	1,390	$	1,039	$	4,921	$	4,197
Asset management and administration fees	1,679		1,727		687		747		2,366		2,474
Trading revenue	329		354		202		203		531		557
Other	207		182		90		53		297		235
Total net revenues	5,746		5,421		2,369		2,042		8,115		7,463
Expenses Excluding Interest	3,189		3,069		1,190		1,042		4,379		4,111
Income before taxes on income	$	2,557	$	2,352	$	1,179	$	1,000	$	3,736	$	3,352

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, ~~2018.~~2019. 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, ~~2018.~~2019.

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, ~~2018,~~2019, 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 9.10.

Item 1A. Risk Factors

During the first nine months of ~~2018,~~2019, there have been no material changes to the risk factors in Part I – Item 1A – Risk Factors in the ~~2017~~2018 Form 10-K.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Issuer Purchases of Equity Securities

~~At September~~On January 30, 2018, approximately $596 million of future share repurchases remained authorized under the Share Repurchase Program. 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 CSC on April 25, 2007 and March 13, 2008. There were no share repurchases during the third quarter of 2018. On October 25, 2018,2019, CSC publicly announced that its Board of Directors ~~terminated~~authorized the ~~existing authorizations and replaced them with a new authorization to~~ repurchase of up to ~~a total of $1.0~~$4.0 billion of common stock. The authorization 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 ~~2018:~~

2019 (in millions, except number of shares, which are in thousands, and per share amounts):


Month	Total number of shares purchased (in thousands)	Average price paid per shares		Total Number of Shares Purchased	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Program	Approximate Dollar Value of Shares That May Yet Be Purchased Under the Publicly Announced Program
July:
Share repurchase program				—	$	—	—	$	2,780
Employee transactions ⁽¹⁾	3	$	51.24	20	$	40.95	N/A	N/A
August:
Share repurchase program				12,793	$	37.39	12,793	$	2,301
Employee transactions ⁽¹⁾	5	$	50.57	3	$	40.05	N/A	N/A
September:
Share repurchase program				7,141	$	40.94	7,141	$	2,009
Employee transactions ⁽¹⁾	5	$	50.99	6	$	38.33	N/A	N/A
Total:
Employee Transactions ⁽¹⁾	13	$	50.89
Share repurchase program				19,934	$	38.69	19,934	$	2,009
Employee transactions ⁽¹⁾				29	$	40.35	N/A	N/A

⁽¹⁾ Includes restricted shares withheld (under the terms of grants under employee stock incentive plans) to offset tax withholding obligations that occur upon vesting and release of restricted shares. 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.

N/A Not applicable.

Item 3. Defaults Upon Senior Securities

None.

THE CHARLES SCHWAB CORPORATION

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

THE CHARLES SCHWAB CORPORATION

Item 6. Exhibits

The following exhibits are filed as part of this Quarterly Report on Form 10-Q:


Exhibit Number	Exhibit Number	Exhibit		Exhibit

12.1		Computation of Ratio of Earnings to Fixed Charges and Ratio of Earnings to Fixed Charges and Preferred Stock Dividends.
10.397				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 10.381).	(1),(2)

10.398				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 10.382).	(1),(2)

10.399				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 10.383).	(1),(2)

10.401				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 10.384).	(1),(2)

10.402				Form of Notice and Nonqualified Stock Option Agreement under The Charles Schwab Corporation 2013 Stock Incentive Plan and successor plans (supersedes Exhibit 10.393).	(1),(2)

10.403				Form of Notice and Restricted Stock Unit Agreement under The Charles Schwab Corporation 2013 Stock Incentive Plan and successor plans (supersedes Exhibit 10.394).	(1),(2)

10.404				Form of Notice and Restricted Stock Unit Agreement (no accelerating vesting for retirement) under The Charles Schwab Corporation 2013 Stock Incentive Plan and successor plans (supersedes Exhibit 10.396).	(1),(2)

31.1	31.1	Certification Pursuant to Rule 13a-14(a)/15d-14(a), As Adopted Pursuant to Section 302 of The Sarbanes-Oxley Act of 2002.		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	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.		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	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)	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	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)	Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002.	(1)

101.INS	101.INS	XBRL Instance Document	(2)	Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.	(3)

101.SCH	101.SCH	XBRL Taxonomy Extension Schema	(2)	Inline XBRL Taxonomy Extension Schema	(3)

101.CAL	101.CAL	XBRL Taxonomy Extension Calculation	(2)	Inline XBRL Taxonomy Extension Calculation	(3)

101.DEF	101.DEF	XBRL Extension Definition	(2)	Inline XBRL Extension Definition	(3)

101.LAB		XBRL Taxonomy Extension Label	(2)

101.PRE		XBRL Taxonomy Extension Presentation	(2)

(1	)	Furnished as an exhibit to this Quarterly Report on Form 10-Q.

(2	)	Attached as Exhibit 101 to this Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2018 are the following materials formatted in XBRL (Extensible Business Reporting Language) (i) the Condensed Consolidated Statements of Income, (ii) the Condensed Consolidated Statements of Comprehensive Income, (iii) the Condensed Consolidated Balance Sheets, (iv) the Condensed Consolidated Statements of Stockholders’ Equity, (v) the Condensed Consolidated Statements of Cash Flows, and (vi) Notes to Condensed Consolidated Financial Statements.

THE CHARLES SCHWAB CORPORATION



Exhibit Number	Exhibit

101.LAB	Inline XBRL Taxonomy Extension Label	(3)

101.PRE	Inline XBRL Taxonomy Extension Presentation	(3)

104	Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

(1)	Furnished as an exhibit to this Quarterly Report on Form 10-Q.

(2)	Management contract or compensatory plan.

(3)	Attached as Exhibit 101 to this Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2019 are the following materials formatted in Inline 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, ~~2018~~2019	/s/ Peter Crawford
		Peter Crawford
		Executive Vice President and Chief Financial Officer

- 5862 -



	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



Issuance Date	Issuance Amount		Maturity Date	Interest Rate	Interest Payable
May 22, 2018	$	600	5/21/2021	Three-month LIBOR + 0.32%	Quarterly
May 22, 2018	$	600	5/21/2021	3.25%	Semi-annually
May 22, 2018	$	750	5/21/2025	3.85%	Semi-annually



	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		)



	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



	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



	Actual				Minimum to be Well Capitalized				Minimum Capital Requirement
September 30, 2018	Amount		Ratio		Amount		Ratio		Amount		Ratio
CSC
Common Equity Tier 1 Risk-Based Capital	$	17,025	19.6	%	N/A				$	3,907	4.5	%
Tier 1 Risk-Based Capital	19,818		22.8	%	N/A				5,210		6.0	%
Total Risk-Based Capital	19,846		22.9	%	N/A				6,946		8.0	%
Tier 1 Leverage	19,818		7.5	%	N/A				10,622		4.0	%
CSB
Common Equity Tier 1 Risk-Based Capital	$	15,164	20.2	%	$	4,890	6.5	%	$	3,385	4.5	%
Tier 1 Risk-Based Capital	15,164		20.2	%	6,018		8.0	%	4,513		6.0	%
Total Risk-Based Capital	15,191		20.2	%	7,522		10.0	%	6,018		8.0	%
Tier 1 Leverage	15,164		7.1	%	10,668		5.0	%	8,534		4.0	%

December 31, 2017
CSC
Common Equity Tier 1 Risk-Based Capital	$	14,630	19.3	%	N/A				$	3,414	4.5	%
Tier 1 Risk-Based Capital	17,423		23.0	%	N/A				4,552		6.0	%
Total Risk-Based Capital	17,452		23.0	%	N/A				6,069		8.0	%
Tier 1 Leverage	17,423		7.6	%	N/A				9,218		4.0	%
CSB
Common Equity Tier 1 Risk-Based Capital	$	13,355	20.1	%	$	4,324	6.5	%	$	2,993	4.5	%
Tier 1 Risk-Based Capital	13,355		20.1	%	5,321		8.0	%	3,991		6.0	%
Total Risk-Based Capital	13,382		20.1	%	6,652		10.0	%	5,321		8.0	%
Tier 1 Leverage	13,355		7.1	%	9,462		5.0	%	7,569		4.0	%