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UNITED STATES
SECURITIES  AND  EXCHANGE  COMMISSION
Washington, D.C.  20549

FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2020
or
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)
(I.R.S. Employer Identification No.)

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

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

Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock – $.01 par value per shareSCHWNew York Stock Exchange
Depositary Shares, each representing a 1/40th ownership interest in a share of 6.00% Non-Cumulative Preferred Stock, Series CSCHW PrCNew York Stock Exchange
Depositary Shares, each representing a 1/40th ownership interest in a share of 5.95% Non-Cumulative Preferred Stock, Series DSCHW PrDNew 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

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.
1,797,212,229 shares of $.01 par value Common Stock and 79,293,695 shares of $.01 par value Nonvoting Common Stock outstanding on October 31, 2020



THE CHARLES SCHWAB CORPORATION

Quarterly Report on Form 10-Q
For the Quarter Ended September 30, 2020



 Index
 
 
    
Item 1. 
    
  
  
  
  32-33
  34-70
    
Item 2. 1-26
    
Item 3. 27
    
Item 4. 
    
  
    
Item 1. 
    
Item 1A. 
    
Item 2. 
   
Item 3. 
    
Item 4. 
    
Item 5. 
    
Item 6. 74-75
    
 
  





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 and engages, through its subsidiaries, in wealth management, securities brokerage, banking, asset management, custody, and financial advisory services.

Unless otherwise indicated, the terms “Schwab,” “the Company,” “we,” “us,” or “our” mean CSC together with its consolidated subsidiaries as of September 30, 2020.

Principal business subsidiaries of CSC include the following:

Charles Schwab & Co., Inc. (CS&Co), a securities broker-dealer;
Charles Schwab Bank, SSB (CSB), our principal banking entity; 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™).

Subsequent to September 30, 2020, the Company completed its previously announced acquisition of TD Ameritrade Holding Corporation and its consolidated subsidiaries (collectively referred to as “TD Ameritrade” or “TDA”), effective October 6, 2020. Upon completion of the acquisition, TD Ameritrade Holding Corporation (TDA Holding) became a wholly-owned subsidiary of CSC and the below became principal business subsidiaries of CSC:

TD Ameritrade, Inc., an introducing securities broker-dealer; and
TD Ameritrade Clearing, Inc. (TDAC), a securities broker-dealer that provides trade execution and clearing services on a fully-disclosed basis to TD Ameritrade, Inc.

Unless otherwise noted, this Management’s Discussion and Analysis excludes the results of operations and financial condition of TD Ameritrade. See Overview and Item 1 – Notes 3 and 17 for additional information on our acquisition of TD Ameritrade.

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 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 Schwab’s and TD Ameritrade’s combined total client assets of approximately $6 trillion leaves substantial opportunity for growth. Our strategy is based on the principle that developing trusted relationships will translate into
- 1 -


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)

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, 2019 (2019 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, 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 them.


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,” “aim,” “maintain,” 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);
Impacts related to the coronavirus (COVID-19) pandemic; advancing strategic goals to drive scale, monetization and segmentation (see Overview);
Expected benefits from recently completed transactions; expected timing for the TD Ameritrade integration; bank deposit account fee revenue; (see Overview, Risk Management, Business Acquisitions in Part I, Item 1, Financial Information – Notes to Condensed Consolidated Financial Statements (Item 1) – Note 3, and Subsequent Events in Item 1 – Note 17);
The expected impact of the final net stable funding ratio rule (see Current Regulatory Environment and Other Developments);
Objective for amount of deposits held in excess reserves at the Federal Reserve (see Results of Operations);
Net interest margin compression and net interest revenue; money market fund fee waivers (see Results of Operations);
2020 capital expenditures (see Results of Operations);
The phase-out of the use of LIBOR (see Risk Management);
Sources of capital; Tier 1 Leverage Ratio operating objective (see Capital Management);
The expected impact of new accounting standards not yet adopted (see Summary of Significant Accounting Policies in Item 1 – Note 2);
The likelihood of indemnification and guarantee payment obligations (see Commitments and Contingencies in Item 1 – Note 10); and
The impact of legal proceedings and regulatory matters (see Commitments and Contingencies in Item 1 – Note 10 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.

- 2 -


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)

Important factors that may cause actual results to differ include, but are not limited to:
General market conditions, including equity valuations, trading activity, the level of interest rates – which can impact money market fund fee waivers, and credit spreads;
Our ability to attract and retain clients, develop trusted relationships, and grow client assets;
Client use of our 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;
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 enhance our infrastructure, in a timely and successful manner;
Our ability to monetize client assets;
The scope and duration of the COVID-19 pandemic and actions taken by governmental authorities to contain the spread of the virus and the economic impact;
The company’s ability to support client activity levels;
The risk that expected revenue and expense synergies and other benefits from recent acquisitions may not be fully realized or may take longer to realize than expected;
Timing and ability to invest amounts held in excess reserves at the Federal Reserve into higher yielding investments in the company’s bank securities portfolio;
Changes in prepayment levels for mortgage-backed and other asset-backed securities and loans;
Client cash allocations;
LIBOR trends;
The availability and terms of external financing;
The timing of campus expansion work and technology projects;
Adverse developments in litigation or regulatory matters and 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 2019 Form 10-K.



- 3 -


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 quarter and first nine months of 2020 and 2019 are:
Three Months Ended
September 30,
Percent
Change
Nine Months Ended
September 30,
Percent
Change
2020201920202019
Client Metrics   
Net new client assets (in billions) (1)
$51.2 $56.6 (10)%$261.8 $145.5 80 %
Core net new client assets (in billions)$42.7 $56.6 (25)%$162.5 $145.5 12 %
Client assets (in billions, at quarter end)$4,395.3 $3,768.4 17 %
Average client assets (in billions)$4,331.5 $3,736.1 16 %$4,033.3 $3,611.0 12 %
New brokerage accounts (in thousands) (2)
592 363 63 %2,853 1,135 151 %
Active brokerage accounts (in thousands, at quarter end)14,393 12,118 19 %
Assets receiving ongoing advisory services (in billions,
at quarter end)
$2,231.3 $1,977.9 13 %
Client cash as a percentage of client assets (at quarter end)12.8 %11.4 % 
Company Financial Information and Metrics   
Total net revenues$2,448 $2,711 (10)%$7,515 $8,115 (7)%
Total expenses excluding interest1,559 1,475 %4,691 4,379 %
Income before taxes on income889 1,236 (28)%2,824 3,736 (24)%
Taxes on income191 285 (33)%660 884 (25)%
Net income698 951 (27)%2,164 2,852 (24)%
Preferred stock dividends and other83 38 118 %171 127 35 %
Net income available to common stockholders$615 $913 (33)%$1,993 $2,725 (27)%
Earnings per common share — diluted$.48 $.70 (31)%$1.54 $2.05 (25)%
Net revenue growth from prior year(10)%% (7)%%
Pre-tax profit margin36.3 %45.6 % 37.6 %46.0 %
Return on average common stockholders’ equity (annualized)10 %20 % 12 %20 %
Expenses excluding interest as a percentage of average client
assets (annualized)
0.14 %0.16 %0.16 %0.16 %
Consolidated Tier 1 Leverage Ratio (at quarter end)5.7 %7.3 %
Non-GAAP Financial Measures (3)
Adjusted total expenses (4)
$1,492 $1,465 $4,488 $4,351 
Adjusted diluted EPS$.51 $.70 $1.66 $2.07 
Return on tangible common equity12 %21 %14 %22 %
(1) The third quarter and first nine months of 2020 include inflows of $8.5 billion related to the acquisition of Wasmer, Schroeder & Company, LLC. The first nine months of 2020 also includes $79.9 billion related to the acquisition of the assets of USAA’s Investment Management Company (USAA-IMCO) and an inflow of $10.9 billion from a mutual fund clearing services client.
(2) The first nine months of 2020 include 1.1 million new brokerage accounts related to the acquisition of assets from USAA-IMCO.
(3) See Non-GAAP Financial Measures for further details and a reconciliation of such measures to GAAP reported results.
(4) Adjusted total expenses is a non-GAAP financial measure adjusting total expenses excluding interest. See Non-GAAP Financial Measures.

While the COVID-19 pandemic and challenging macroeconomic conditions persisted throughout the third quarter and first nine months of 2020, the Company’s business model and our continued focus on clients’ needs helped drive sustained business momentum. Schwab continued to operate without significant client disruption, advancing the Company’s strategic goals to drive scale, monetization, and segmentation in ways that benefit our clients. Most notably, subsequent to September 30, 2020, Schwab completed its acquisition of TD Ameritrade, which closed on October 6, 2020, as discussed further below.

Throughout the third quarter of 2020, the equity markets generally increased while both short- and long-term interest rates remained under pressure. Net new assets totaled $51.2 billion in the third quarter, despite seasonal tax outflows in July from a delayed tax filing deadline. In addition to an $8.5 billion inflow to our Advisor Services business related to closing our acquisition of Wasmer, Schroeder & Company, LLC, core net new assets totaled $42.7 billion in the third quarter of 2020, bringing year-to-date core net new assets to $162.5 billion, which represents a 5% annualized growth rate. New brokerage accounts totaled 592 thousand in the third quarter of 2020, and we ended the period at 14.4 million accounts, up 19% from September 30, 2019. Our clients continued to be highly engaged with their investments, as daily average trades were 1.5 million
- 4 -


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 both the third quarter and first nine months of 2020, up 103% and 109%, respectively, from the same periods in 2019. Against this backdrop, total client assets ended the third quarter at $4.40 trillion, up 17% from September 30, 2019.

Our results of operations for the third quarter and first nine months of 2020 reflect the strength of our business model as well as our financial management, even as the current macroeconomic environment remained challenging. Schwab’s net income was $698 million and $2.2 billion for the third quarter and first nine months of 2020, decreasing 27% and 24%, respectively, from the same periods in 2019. Diluted earnings per common share (EPS) amounted to $.48 and $1.54 during the third quarter and first nine months of 2020, respectively, down 31% and 25% from the same periods in the prior year. Adjusted diluted EPS (1), which excludes acquisition and integration-related costs, amortization of acquired intangible assets, and related income tax effects, were $.51 and $1.66 during the third quarter and first nine months of 2020, respectively, down 27% and 20% from the same periods in the prior year.

Total net revenues were $2.4 billion and $7.5 billion in the third quarter and first nine months of 2020, declining 10% and 7%, respectively, from the same periods in the prior year, primarily as a result of lower net interest revenue. Net interest revenue was helped by rising interest-earning asset levels throughout the third quarter and first nine months of 2020, though still decreased $288 million and $617 million, respectively, from the comparable periods in 2019. These declines in net interest revenue primarily resulted from the overall decline in both short- and long-term interest rates driven by the Federal Reserve’s monetary easing, as well as the related acceleration of mortgage-backed security prepayment speeds within our investment securities portfolio. Asset management and administration fees totaled $860 million and $2.5 billion during the third quarter and first nine months of 2020, increasing 4% and 5%, respectively, from the comparable periods in the prior year. The growth in asset management and administration fees was due primarily to rising balances in advisory solutions, which more than offset higher money market fund fee waivers. Trading revenue declined 12% and 11% during the third quarter and first nine months of 2020, respectively, compared with the same periods in the prior year, as our October 2019 pricing actions more than offset increased trading volumes throughout the first nine months of 2020.

Total expenses excluding interest were $1.6 billion and $4.7 billion in the third quarter and first nine months of 2020, representing increases of 6% and 7%, respectively, relative to the comparable periods in 2019. In the third quarter and first nine months of 2020, total expenses excluding interest reflected acquisition and integration-related expenses of $42 million and $160 million, respectively, as well as amortization of acquired intangible assets of $25 million and $43 million, respectively. Exclusive of these items (1), adjusted total expenses were up 2% and 3% during the third quarter and first nine months of 2020, respectively, from the comparable periods in 2019.

Throughout the first nine months of 2020, the Company maintained its disciplined approach to capital management, helping sustain ongoing balance sheet growth. Total balance sheet assets increased to $419.4 billion at September 30, 2020, representing growth of 5% from the end of the second quarter and 43% from December 31, 2019. This growth in total balance sheet assets was driven by growth in our client base and continued higher client cash allocations due to the reduced attractiveness of fixed income and other cash alternatives in the low rate environment. During the second quarter, we issued $2.5 billion of preferred stock, Series G, at an initial fixed rate of 5.375%, bringing total preferred stock to $5.3 billion, which represented approximately 23% of Tier 1 Capital at September 30, 2020. The Company’s Tier 1 leverage ratio was 5.7% at September 30, 2020.

Return on average common stockholders’ equity was 10% and 12% during the third quarter and first nine months of 2020, respectively, down from 20% in both the third quarter and first nine months of 2019. Return on tangible common equity (1) (ROTCE) was 12% and 14% for the third quarter and first nine months of 2020, down from 21% and 22% in the comparable periods of 2019. The decreases in both return on average common stockholders’ equity and ROTCE reflect lower net income as well as significantly higher balances of average accumulated other comprehensive income (AOCI) due to unrealized gains in our available for sale (AFS) investment securities portfolio.

(1) Adjusted diluted EPS, adjusted total expenses, and return on tangible common equity are non-GAAP financial measures. Please see Non-GAAP Financial Measures for further details and a reconciliation of such measures to GAAP reported results.

- 5 -


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)

Business and Asset Acquisitions

In addition to the October 6, 2020 acquisition of TD Ameritrade described below, the Company completed several acquisitions during the nine months ended September 30, 2020. On May 26, 2020, the Company completed its acquisition of the assets of USAA-IMCO for $1.6 billion in cash. Along with the asset purchase agreement, the companies entered into a long-term referral agreement that makes Schwab the exclusive provider of wealth management and investment brokerage services for USAA members. The USAA-IMCO acquisition adds scale to the Company’s operations through the addition of 1.1 million brokerage and managed portfolio accounts with approximately $80 billion in client assets at the acquisition date. The transaction also provides Schwab the opportunity to further expand our client base by serving USAA’s members through the long-term referral agreement. See Item 1 – Note 3 for more information on the USAA-IMCO acquisition.

Additionally, during the second quarter of 2020 the Company completed its acquisition of technology and intellectual property of Motif, a financial technology company. The Motif assets help us build on our existing capabilities and help accelerate our development of thematic and direct index investing for Schwab’s retail investors and RIA clients. On July 1, 2020, the Company completed its acquisition of Wasmer, Schroeder & Company, LLC, which adds established strategies and new separately managed account offerings to our existing fixed income lineup.

Subsequent Events

Acquisition of TD Ameritrade Holding Corporation

Effective October 6, 2020, the Company completed its previously announced acquisition of TD Ameritrade. TD Ameritrade provides securities brokerage services, including trade execution, clearing services, and margin lending, through its broker-dealer subsidiaries; and futures and foreign exchange trade execution services through its futures commission merchant (FCM) and forex dealer member (FDM) subsidiary. TDA also provides cash sweep and deposit account products through third-party relationships.

TDA’s principal securities broker-dealers, TD Ameritrade, Inc. and TDAC, are registered broker-dealers with the SEC and members of the Financial Industry Regulatory Authority, Inc. (FINRA). TD Ameritrade, Inc. is also a registered investment advisor with the SEC. TD Ameritrade Futures & Forex LLC (TDAFF) is registered as an FCM and FDM with the Commodity Futures Trading Commission (CFTC), and is a member of the National Futures Association (NFA).

TDA provides services to individual retail investors and traders and to RIAs predominantly through the Internet, a national branch network, and relationships with RIAs. At the time of acquisition, TD Ameritrade had approximately 10,000 employees. TD Ameritrade’s sources of net revenues consist primarily of commissions and transaction fees, bank deposit account fees, net interest revenue, and investment product fees.

TDA’s commissions and transaction fees have included commissions earned on trades of certain securities and derivatives, as well as order flow revenue.

TDA’s bank deposit account fees have been generated through TD Ameritrade’s insured deposit account agreement with TD Bank USA, National Association and TD Bank, National Association (together, the TD Depository Institutions), as well as bank deposit account agreements with other third-party depository institutions, whereby uninvested cash held by certain of TDA’s brokerage clients is swept into Federal Deposit Insurance Corporation (FDIC)-insured (up to specified limits) money market deposit accounts at the TD Depository Institutions and other third-party depository institutions. TDA has earned revenue on client cash at these depository institutions based on the return of floating-rate and fixed-rate notional investments, less the interest paid to clients and certain other fees.

TDA’s net interest revenue has been generated primarily through margin lending, securities lending activity, as well as segregated and operating cash and investments. Interest-bearing liabilities have primarily consisted of interest-bearing payables to brokerage clients.

TDA’s investment product fee revenue has consisted of revenues earned on client assets invested in money market funds, other mutual funds, and certain investment programs. Investment product fees also includes referral and asset-based program fees on its client assets managed by independent RIAs utilizing TDA’s trading and investing platforms.
- 6 -


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)

Concurrently with the execution of the Agreement and Plan of Merger, dated as of November 24, 2019, as amended (the merger agreement), CSC entered into a stockholder agreement with The Toronto-Dominion Bank (TD Bank), a registration rights agreement with TD Bank and Charles R. Schwab, and an amended and restated insured deposit account agreement (IDA agreement) with the TD Depository Institutions. These agreements were effective upon the merger and are further detailed in Part I – Item 1 of our 2019 Form 10-K.

Effective upon the merger, Todd M. Ricketts, Brian M. Levitt, and Bharat B. Masrani were elected to CSC’s Board of Directors. Mr. Ricketts was designated by TD Ameritrade pursuant to the terms of the merger agreement and Messrs. Levitt and Masrani were designated by TD Bank pursuant to the terms of the merger agreement and the stockholder agreement between Schwab and TD Bank.

Integration Overview

We anticipate the acquisition of TD Ameritrade will significantly increase our scale to help support the Company’s ongoing efforts to enhance the client experience, provide deeper resources for individual investors as well as RIAs, and continue to improve our operating efficiency. With a combined total for Schwab and TD Ameritrade of approximately $6 trillion in client assets and 29 million brokerage accounts at the time of closing, we expect our enhanced scale will lower total expenses as a percentage of client assets. Combining the respective strengths of Schwab and TD Ameritrade will enable the Company to invest in enhanced client experience capabilities and further our financial success to the benefit of clients, employees, and stockholders.

The integration of Schwab’s and TD Ameritrade’s operations is expected to occur over 18 to 36 months from the date of acquisition, though planning for integration has been underway since the acquisition was announced on November 25, 2019. In October, the Company began efforts to reduce overlapping or redundant roles across the two firms and to rationalize branch locations of Schwab and TDA. These and other integration activities are expected to continue throughout the integration process. Until the integration is complete, Schwab and TD Ameritrade will continue to operate separate broker-dealers to serve their respective clients. Starting in the fourth quarter of 2020, TD Ameritrade will be incorporated into our two existing reportable segments.

Amended IDA Agreement and Bank Deposit Account Fee Revenue

In accordance with the amended IDA agreement with the TD Depository Institutions, cash held in TD Ameritrade’s eligible customer accounts will continue to be swept to money market deposit accounts at the TD Depository Institutions. Schwab will provide marketing, recordkeeping and support services to the TD Depository Institutions with respect to the money market deposit accounts for which Schwab receives an aggregate monthly fee, determined by reference to certain yields, less a service fee on client cash deposits held at the TD Depository Institutions, FDIC deposit assessments, and interest on deposits paid to customers. Under the amended IDA, the service fee on client cash deposits held at the TD Depository Institutions was reduced by 40%, from 25 basis points to 15 basis points for the life of the agreement. Under TDA’s prior IDA agreement, TDA had floors in place which enabled them to carve-out up to $20 billion of floating-rate investments from the applicable service fee during specified low-rate environments. Pursuant to the amended IDA agreement, the 15 basis point service fee will be applied across all designated fixed and floating IDA balances.

Beginning in the fourth quarter of 2020, we expect to begin recognizing significant bank deposit account fee revenue pursuant to the amended IDA agreement with the TD Depository Institutions and TDA’s existing agreements with other third-party depository institutions. The net fees earned by Schwab under these arrangements will be included in a new revenue line item in our consolidated statement of income titled bank deposit account fees. In addition, as part of our management of interest rate risk, Schwab will begin performing interest rate sensitivity analysis on our bank deposit account fee revenue.

Beginning July 1, 2021, Schwab will have the option to begin reducing deposit balances swept to the TD Depository Institutions by up to $10 billion over each 12-month period, subject to certain limitations and adjustments, migrating them instead to Schwab’s balance sheet. Our ability to migrate these balances to our balance sheet is dependent on certain binding limitations, including Schwab’s obligation to move all of the uninsured IDA sweep balances on that date, and the requirement that Schwab can only move floating IDA balances. Schwab’s initial reduction will also be affected by the net change in IDA sweep balances between the effective date of the IDA agreement and June 30, 2021. In addition, Schwab also must maintain a minimum $50 billion IDA sweep balance through June 2031, and at least 80% of the IDA sweep balances must be designated as fixed-rate obligations through June 2026.
- 7 -


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)

See Item 1 – Notes 3 and 17 as well as Risk Management, Off-Balance Sheet Arrangements, and Contractual Obligations for additional information on the acquisition of TD Ameritrade and related matters.

Planned Change of CSC Headquarters

Subsequent to September 30, 2020 and in conjunction with the close of the acquisition of TD Ameritrade, CSC’s Board of Directors approved an amendment to Section 1.02 of the Company’s Fourth Restated Bylaws to change our corporate headquarters from San Francisco to Westlake, Texas, effective January 1, 2021. Opened in late 2019, the Westlake location provides a more centrally located hub for the Company given our nationwide presence across our network of branches and operations centers.

Current Regulatory Environment and Other Developments

Effective March 20, 2020, CSB and Charles Schwab Premier Bank, SSB (CSPB) converted to Texas-chartered state savings banks. CSB and CSPB became members of the Federal Reserve and are subject to regulation, supervision and examination by the Federal Reserve and the Texas Department of Savings and Mortgage Lending.

In September 2020, the Federal Reserve issued a notice of proposed rulemaking that, among other things, would amend the stress testing rules for covered savings and loan holding companies to provide that their capital distribution assumptions would match those of comparable bank holding companies. The rule proposal also solicits feedback on whether large savings and loan holding companies (SLHCs) should be subject to the capital planning and stress capital buffer requirements that apply to large bank holding companies. The comment period for the proposed rule and SLHC questions ends on November 20, 2020.

In October 2020, the Federal Reserve, the Office of the Comptroller of the Currency, and the FDIC issued a final net stable funding ratio (NSFR) rule that will require certain banking organizations with $100 billion or more in consolidated assets to maintain a minimum level of stable funding based on the liquidity characteristics of the banking organization’s assets, commitments, and derivative exposures over a one-year time horizon. The NSFR will be expressed as a ratio of a banking organization’s available stable funding to its required stable funding. Banking organizations subject to the full requirement must maintain an NSFR equal to at least 1.0 on an ongoing basis. As a banking organization subject to Category III standards with less than $75 billion in average weighted short-term wholesale funding, CSC will be subject to a reduced NSFR requirement equal to 85% of the full requirement. The rule will take effect on July 1, 2021 and beginning in 2023, holding companies regulated by the Federal Reserve will be required to publicly disclose their NSFR levels semiannually. The Company does not expect the NSFR rule to have a material impact on the Company’s business, financial condition, or results of operations.


- 8 -


THE CHARLES SCHWAB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)

RESULTS OF OPERATIONS

Total Net Revenues

The following tables present a comparison of revenue by category:
 20202019
Three Months Ended September 30,Percent
Change
Amount% of
Total Net
Revenues
Amount% of
Total Net
Revenues
Net interest revenue
Interest revenue(24)%$1,432 59 %$1,892 70 %
Interest expense(66)%(89)(4)%(261)(10)%
Net interest revenue(18)%1,343 55 %1,631 60 %
Asset management and administration fees   
Mutual funds, exchange traded funds (ETFs), and collective trust
funds (CTFs)
(5)%423 17 %445 16 %
Advice solutions22 %373 15 %305 11 %
Other(15)%64 %75 %
Asset management and administration fees%860 35 %825 30 %
Trading revenue  
Commissions(32)%108 %159 %
Principal transactions(54)%— 13 — 
Order flow revenue (1)
97 %67 %34 %
Trading revenue (1)
(12)%181 %206 %
Other (1)
31 %64 %49 %
Total net revenues(10)%$2,448 100 %$2,711 100 %

20202019
Nine Months Ended September 30,Percent
Change
Amount% of
Total Net
Revenues
Amount% of
Total Net
Revenues
Net interest revenue
Interest revenue(20)%$4,626 61 %$5,817 72 %
Interest expense(64)%(322)(4)%(896)(11)%
Net interest revenue(13)%4,304 57 %4,921 61 %
Asset management and administration fees
Mutual funds, ETFs, and CTFs%1,300 17 %1,287 16 %
Advice solutions14 %999 13 %878 11 %
Other(6)%189 %201 %
Asset management and administration fees%2,488 33 %2,366 29 %
Trading revenue
Commissions(30)%332 %477 %
Principal transactions(33)%36 %54 %
Order flow revenue (1)
96 %194 %99 %
Trading revenue (1)
(11)%562 %630 %
Other (1)
(19)%161 %198 %
Total net revenues(7)%$7,515 100 %$8,115 100 %
(1) Beginning in the first quarter of 2020, order flow revenue was reclassified from other revenue to trading revenue. Prior period amounts have been reclassified to reflect this change.

- 9 -


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

Revenue on interest-earning assets is affected by various factors, such as the composition of assets, prevailing interest rates and spreads at the time of origination or purchase, changes in interest rates on floating rate securities and loans, and changes in prepayment levels for mortgage-backed and other asset-backed securities and loans.

Late in the first quarter of 2020, the Federal Reserve cut the federal funds target overnight rate twice, for a total of 150 basis points to near zero; on the longer-end of the curve, the 10-year Treasury rate declined by over 120 basis points. Lower interest rates across maturities persisted from the end of the first quarter through the third quarter of 2020, while credit spreads also compressed. Moreover, changes in the economic environment throughout the first nine months of 2020 resulting from the COVID-19 pandemic drove significantly higher levels of client cash sweep balances. As these balances rapidly accumulated in the first quarter of 2020, the Company initially placed a substantial amount in excess reserves held at the Federal Reserve, and subsequently deployed a significant amount of this cash build-up in the second and third quarters, as part of AFS securities purchases totaling $73.9 billion and $45.2 billion, respectively. These purchases were made at rates below the average yield on the existing AFS portfolio due to the current low interest rate environment. As of September 30, 2020, the Company held $21.9 billion, or 6.8% of total deposits, in excess reserves, ending the quarter within our longer-term objective of approximately 5-7%.

- 10 -


THE CHARLES SCHWAB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)

The following tables present net interest revenue information corresponding to interest-earning assets and funding sources on the condensed consolidated balance sheets:
20202019
Three Months Ended September 30,Average BalanceInterest Revenue/ ExpenseAverage Yield/RateAverage BalanceInterest Revenue/ ExpenseAverage Yield/Rate
Interest-earning assets      
Cash and cash equivalents$32,628 $0.10 %$22,288 $123 2.16 %
Cash and investments segregated33,214 14 0.16 %16,140 92 2.25 %
Broker-related receivables (1)
754 — 0.05 %216 2.34 %
Receivables from brokerage clients21,242 125 2.31 %19,438 205 4.13 %
Available for sale securities (2,3)
276,081 1,103 1.59 %53,487 366 2.71 %
Held to maturity securities (3)
— — — 136,880 906 2.63 %
Bank loans21,668 134 2.46 %16,724 146 3.49 %
Total interest-earning assets385,587 1,384 1.43 %265,173 1,840 2.75 %
Other interest revenue48 52 
Total interest-earning assets$385,587 $1,432 1.47 %$265,173 $1,892 2.82 %
Funding sources
Bank deposits$310,685 $12 0.02 %$208,592 $166 0.32 %
Payables to brokerage clients40,169 0.01 %25,080 21 0.33 %
Short-term borrowings (1)
— 0.12 %21 — 2.48 %
Long-term debt7,992 69 3.46 %7,425 67 3.58 %
Total interest-bearing liabilities358,851 82 0.09 %241,118 254 0.42 %
Non-interest-bearing funding sources26,736 24,055 
Other interest expense
Total funding sources$385,587 $89 0.09 %$265,173 $261 0.39 %
Net interest revenue$1,343 1.38 %$1,631 2.43 %
20202019
Nine Months Ended September 30,Average BalanceInterest Revenue/ ExpenseAverage Yield/RateAverage BalanceInterest Revenue/ ExpenseAverage Yield/Rate
Interest-earning assets
Cash and cash equivalents$40,410 $112 0.37 %$24,506 $432 2.33 %
Cash and investments segregated30,162 128 0.56 %14,771 264 2.36 %
Broker-related receivables638 0.60 %225 2.21 %
Receivables from brokerage clients19,442 404 2.73 %19,279 636 4.35 %
Available for sale securities (2,3)
236,204 3,434 1.93 %58,738 1,203 2.72 %
Held to maturity securities (3)
— — — 134,031 2,721 2.70 %
Bank loans20,248 411 2.70 %16,621 443 3.56 %
Total interest-earning assets347,104 4,491 1.72 %268,171 5,703 2.82 %
Other interest revenue135 114 
Total interest-earning assets$347,104 $4,626 1.77 %$268,171 $5,817 2.88 %
Funding sources
Bank deposits$275,860 $81 0.04 %$213,089 $616 0.39 %
Payables to brokerage clients36,001 10 0.04 %23,443 68 0.39 %
Short-term borrowings (1)
16 — 0.29 %18 — 2.49 %
Long-term debt8,014 212 3.53 %7,122 192 3.59 %
Total interest-bearing liabilities319,891 303 0.13 %243,672 876 0.48 %
Non-interest-bearing funding sources27,213 24,499 
Other interest expense19 20 
Total funding sources$347,104 $322 0.13 %$268,171 $896 0.45 %
Net interest revenue$4,304 1.64 %$4,921 2.43 %
(1) Interest revenue or expense was less than $500 thousand in the period or periods presented.
(2) Amounts have been calculated based on amortized cost.
(3) On January 1, 2020, the Company transferred all of its investment securities designated as held to maturity (HTM) to the AFS category, as described in Item 1 – Note 5.

- 11 -


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 decreased $288 million, or 18%, and $617 million, or 13% in the third quarter and first nine months of 2020 compared to the same periods in 2019, due primarily to lower average investment yields partially offset by growth in interest-earning assets. Accelerated premium amortization on debt securities in the third quarter and first nine months of 2020 also contributed to the reduction in net interest revenue, as the decline in long-term interest rates in the first nine months of 2020 resulted in higher prepayments of mortgage-related debt securities.

Average interest-earning assets for the third quarter and first nine months of 2020 were higher by 45% and 29%, respectively, compared to the same periods in 2019. These increases in average interest-earning assets were primarily driven by higher client cash balances in bank deposits and payables to brokerage clients.

Our net interest margin was 1.38% and 1.64% during the third quarter and first nine months of 2020, respectively, down from 2.43% during both the third quarter and first nine months of 2019. These decreases were driven primarily by lower yields received on interest-earning assets due largely to the Federal Reserve’s 2019 and 2020 interest rate reductions and higher premium amortization on mortgage-related debt securities. The amount of any further net interest margin compression and resulting net interest revenue is dependent on a number of factors, including changes to LIBOR, premium amortization, and growth in client cash balances.

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 30,20202019
Average
Client
Assets
RevenueAverage
Fee
Average
Client
Assets
RevenueAverage
Fee
Schwab money market funds before fee waivers$199,822 $153 0.30 %$177,892 $133 0.30 %
Fee waivers(44)— 
Schwab money market funds$199,822 109 0.22 %$177,892 133 0.30 %
Schwab equity and bond funds, ETFs, and CTFs306,899 75 0.10 %274,005 75 0.11 %
Mutual Fund OneSource® and other non-transaction fee funds
197,809 154 0.31 %192,409 153 0.32 %
Other third-party mutual funds and ETFs (1)
469,822 85 0.07 %486,285 84 0.07 %
Total mutual funds, ETFs, and CTFs (2)
$1,174,352 423 0.14 %$1,130,591 445 0.16 %
Advice solutions (2)
Fee-based$307,983 373 0.48 %$251,591 305 0.48 %
Non-fee-based73,850 — — 71,195 — — 
Total advice solutions$381,833 373 0.39 %$322,786 305 0.37 %
Other balance-based fees (3)
443,929 51 0.05 %421,241 56 0.05 %
Other (4)
13 19 
Total asset management and administration fees$860 $825 

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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)

20202019
Nine Months Ended September 30,Average
Client
Assets
RevenueAverage
Fee
Average
Client
Assets
RevenueAverage
Fee
Schwab money market funds before fee waivers$205,544 $469 0.30 %$166,053 $378 0.30 %
Fee waivers(59)— 
Schwab money market funds$205,544 410 0.27 %$166,053 378 0.30 %
Schwab equity and bond funds, ETFs, and CTFs 290,759 219 0.10 %260,034 219 0.11 %
Mutual Fund OneSource ® and other non-transaction fee funds
187,153 436 0.31 %190,847 452 0.32 %
Other third-party mutual funds and ETFs (1)
446,007 235 0.07 %469,901 238 0.07 %
Total mutual funds, ETFs, and CTFs (2)
$1,129,463 1,300 0.15 %$1,086,835 1,287 0.16 %
Advice solutions (2)
Fee-based$277,297 999 0.48 %$241,678 878 0.49 %
Non-fee-based71,438 — — 69,136 — — 
Total advice solutions$348,735 999 0.38 %$310,814 878 0.38 %
Other balance-based fees (3)
428,191 150 0.05 %407,762 162 0.05 %
Other (4)
39 39 
Total asset management and administration fees$2,488 $2,366 
(1) Beginning in the fourth quarter of 2019, Schwab ETF OneSource™ was discontinued as a result of the elimination of online trading commissions for U.S. and Canadian-listed ETFs.
(2) Average client assets for advice solutions may also include the asset balances contained in the mutual fund and/or ETF categories listed above.
(3) Includes various asset-related fees, such as trust fees, 401(k) recordkeeping fees, and mutual fund clearing fees and other service fees.
(4) Includes miscellaneous service and transaction fees relating to mutual funds and ETFs that are not balance-based.

Asset management and administration fees increased by $35 million, or 4%, and $122 million, or 5% in the third quarter and first nine months of 2020, respectively, compared to the same periods in 2019. These increases were primarily driven by higher balances in advice solutions, including managed account assets from USAA, as well as purchased money market funds, in the third quarter and first nine months of 2020 relative to the same periods in 2019. These increases were partially offset by the effect of money market fund fee waivers due to declining portfolio yields. The amount of fee waivers in coming quarters is dependent on a variety of factors, including the level of short-term interest rates and client preferences across our money market fund line-up.

The following tables present a roll forward of client assets for the Schwab money market funds, Schwab equity and bond funds, ETFs, and CTFs, and Mutual Fund OneSource® and other non-transaction fee (NTF) funds. These funds generated 39% and 43% of the asset management and administration fees earned during the third quarter and first nine months of 2020, respectively, compared to 44% of asset management and administration fees for both the third quarter and first nine months of 2019:
Schwab Money
Market Funds
Schwab Equity and
Bond Funds, ETFs, and CTFs
Mutual Fund OneSource®
and Other NTF funds
Three Months Ended September 30,202020192020201920202019
Balance at beginning of period$211,558 $168,064 $273,346 $254,460 $192,999 $197,777 
Net inflows (outflows)(21,280)18,044 3,564 7,408 (2,504)(5,586)
Net market gains (losses) and other 34 843 17,539 1,296 13,098 2,482 
Balance at end of period$190,312 $186,951 $294,449 $263,164 $203,593 $194,673 

Schwab Money
Market Funds
Schwab Equity and
Bond Funds, ETFs, and CTFs
Mutual Fund OneSource®
and Other NTF funds
Nine Months Ended September 30,202020192020201920202019
Balance at beginning of period$200,826 $153,472 $286,275 $209,471 $202,068 $180,532 
Net inflows (outflows)(11,665)30,735 8,679 20,789 (17,557)(16,729)
Net market gains (losses) and other 1,151 2,744 (505)32,904 19,082 30,870 
Balance at end of period$190,312 $186,951 $294,449 $263,164 $203,593 $194,673 

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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)

Trading Revenue
The following table presents trading revenue and related information:
Three Months Ended September 30,Percent
Change
Nine Months Ended
September 30,
Percent
Change
2020201920202019
Trading revenue (1)
$181 $206 (12)%$562 $630 (11)%
Clients’ daily average trades (DATs) (in thousands)1,460 718 103 %1,539 737 109 %
Number of trading days64.0 63.5 %189.0 187.5 %
Revenue per trade (2)
$1.94 $4.52 (57)%$1.93 $4.56 (58)%
Note:     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.
(1)     Beginning in the first quarter of 2020, order flow revenue was reclassified from other revenue to trading revenue. Prior period amounts have been reclassified to reflect this change.
(2)