4d4680191421434

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, 2013

 

Commission File Number: 1-9700

 

THE  CHARLES  SCHWAB  CORPORATION

(Exact name of registrant as specified in its charter)

 

 

 

Delaware

(State or other jurisdiction

of incorporation or organization)

94-3025021

(I.R.S. Employer Identification No.)

 

211 Main Street, San Francisco, CA  94105

(Address of principal executive offices and zip code)

 

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

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes T  No £

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes T   No £

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer T

Non-accelerated filer £ (Do not check if a smaller reporting company)

Accelerated filer £

Smaller reporting company £

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes £ No T

 

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

 

1,289,217,199 shares of $.01 par value Common Stock

Outstanding on October 23, 2013

 

 

 


 

THE CHARLES SCHWAB CORPORATION

 

Quarterly Report on Form 10-Q

For the Quarter Ended September 30, 2013

 

Index

 

 

 

 

 

 

 

 

 

 

 

 

Page

Part I - Financial Information 

 

 

 

 

 

 

 

 

Item 1.

Condensed Consolidated Financial Statements (Unaudited):

 

 

 

 

 

 

 

 

 

Statements of Income

 

1

 

 

Statements of Comprehensive Income

 

2

 

 

Balance Sheets

 

3

 

 

Statements of Cash Flows

 

4

 

 

Notes

 

522

 

 

 

 

 

 

Item 2.

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

 

23  46

 

 

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

47  48

 

 

 

 

 

 

Item 4.

Controls and Procedures

 

48

 

 

 

 

 

Part II - Other Information 

 

 

 

 

 

 

 

 

Item 1.

Legal Proceedings

 

49

 

 

 

 

 

 

Item 1A.

Risk Factors

 

49

 

 

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

49

 

 

 

 

 

 

Item 3.

Defaults Upon Senior Securities

 

50

 

 

 

 

 

 

Item 4.

Mine Safety Disclosures

 

50

 

 

 

 

 

 

Item 5.

Other Information

 

50

 

 

 

 

 

 

Item 6.

Exhibits

 

51

 

 

 

 

 

Signature 

 

52

 

 

 

 

 

 

 


 

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

 

Nine Months Ended

 

 

September 30,

 

September 30,

 

  

2013

 

2012

 

2013

 

2012

Net Revenues

  

 

 

 

 

 

 

 

 

 

 

 

Asset management and administration fees

  

$

583 

 

$

524 

  

$

1,707 

 

$

1,504 

Interest revenue

  

 

531 

 

 

478 

  

 

1,527 

 

 

1,447 

Interest expense

  

 

(25)

 

 

(39)

 

 

(79)

 

 

(116)

Net interest revenue

  

 

506 

 

 

439 

 

 

1,448 

 

 

1,331 

Trading revenue

  

 

224 

 

 

204 

 

 

682 

 

 

666 

Other

  

 

57 

 

 

42 

 

 

172 

 

 

209 

Provision for loan losses

  

 

 

 

(10)

 

 

(1)

 

 

(14)

Net impairment losses on securities (1)

  

 

(1)

 

 

(3)

 

 

(8)

 

 

(28)

Total net revenues

  

 

1,373 

 

 

1,196 

 

 

4,000 

 

 

3,668 

Expenses Excluding Interest

  

 

 

 

 

 

 

 

 

 

 

 

Compensation and benefits

  

 

482 

 

 

442 

  

 

1,512 

 

 

1,353 

Professional services

  

 

103 

 

 

98 

  

 

308 

 

 

287 

Occupancy and equipment

  

 

77 

 

 

77 

  

 

231 

 

 

233 

Advertising and market development

  

 

57 

 

 

49 

  

 

198 

 

 

173 

Communications

  

 

55 

 

 

53 

  

 

165 

 

 

166 

Depreciation and amortization

  

 

51 

 

 

50 

  

 

153 

 

 

146 

Other

  

 

84 

 

 

66 

  

 

226 

 

 

204 

Total expenses excluding interest

  

 

909 

 

 

835 

  

 

2,793 

 

 

2,562 

Income before taxes on income

  

 

464 

 

 

361 

  

 

1,207 

 

 

1,106 

Taxes on income

  

 

174 

 

 

114 

  

 

455 

 

 

389 

Net Income

  

 

290 

 

 

247 

  

 

752 

 

 

717 

Preferred stock dividends

  

 

 

 

  

 

39 

 

 

23 

Net Income Available to Common Stockholders

  

$

282 

 

$

238 

  

$

713 

 

$

694 

Weighted-Average Common Shares Outstanding — Diluted

  

 

1,296 

 

 

1,275 

  

 

1,288 

 

 

1,274 

Earnings Per Common Share — Basic

  

$

.22

 

$

.19

  

$

.55

 

$

.54

Earnings Per Common Share — Diluted

  

$

.22

 

$

.19

  

$

.55

 

$

.54

 

(1)

Net impairment losses on securities include total other-than-temporary impairment losses of $0 million and $1 million recognized in other comprehensive income, net of $(1) million and $(2) million reclassified from other comprehensive income, for the three months ended September 30, 2013 and 2012, respectively. Net impairment losses on securities include total other-than-temporary impairment losses of $2 million and $15 million recognized in other comprehensive income, net of $(6) million and $(13) million reclassified from other comprehensive income, for the nine months ended September 30, 2013 and 2012, respectively.

 

 

 

See Notes to Condensed Consolidated Financial Statements.

 

 

1 


 

THE CHARLES SCHWAB CORPORATION

Condensed Consolidated Statements of Comprehensive Income

(In millions)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

  

September 30,

 

September 30,

 

  

2013

 

2012

 

2013

 

2012

Net Income

  

$

290 

 

$

247 

  

$

752 

 

$

717 

Other comprehensive income (loss), before tax:

  

 

 

 

 

 

 

 

 

 

 

 

Change in net unrealized gain on securities available for sale:

  

 

 

 

 

 

 

 

 

 

 

 

Net unrealized gain (loss)

  

 

72 

 

 

250 

  

 

(408)

 

 

458 

Reclassification of impairment charges included in net

  

 

 

 

 

 

 

 

 

 

 

 

impairment losses on securities

 

 

 

 

 

 

 

 

28 

Other reclassifications included in other revenue

 

 

(2)

 

 

 -

 

 

(5)

 

 

(1)

Other

 

 

 -

 

 

 -

 

 

 

 

 -

Other comprehensive income (loss), before tax

  

 

71 

 

 

253 

 

 

(404)

 

 

485 

Income tax effect

 

 

(28)

 

 

(95)

 

 

152 

 

 

(181)

Other comprehensive income (loss), net of tax

  

 

43 

 

 

158 

  

 

(252)

 

 

304 

Comprehensive Income

  

$

333 

 

$

405 

  

$

500 

 

$

1,021 

 

See Notes to Condensed Consolidated Financial Statements.

 

 

2 


 

THE CHARLES SCHWAB CORPORATION

Condensed Consolidated Balance Sheets

(In millions, except per share and share amounts)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

December 31,

 

  

2013

 

2012

Assets

  

 

 

 

 

 

Cash and cash equivalents

  

$

7,362 

 

$

12,663 

Cash and investments segregated and on deposit for regulatory purposes

  

 

 

 

 

 

(including resale agreements of $13,461 at September 30, 2013 and $19,325

 

 

 

 

 

 

at December 31, 2012)

 

 

23,520 

 

 

28,469 

Receivables from brokers, dealers, and clearing organizations

  

 

511 

 

 

333 

Receivables from brokerage clients — net

  

 

13,124 

 

 

13,458 

Other securities owned — at fair value

  

 

482 

 

 

636 

Securities available for sale

  

 

51,865 

 

 

46,123 

Securities held to maturity (fair value — $27,717 at September 30, 2013 and

  

 

 

 

 

 

$18,732 at December 31, 2012)

 

 

28,219 

 

 

18,194 

Loans to banking clients — net

  

 

12,115 

 

 

10,726 

Equipment, office facilities, and property — net

  

 

738 

 

 

675 

Goodwill

  

 

1,227 

 

 

1,228 

Intangible assets — net

  

 

278 

 

 

319 

Other assets

  

 

770 

 

 

813 

Total assets

  

$

140,211 

 

$

133,637 

Liabilities and Stockholders’ Equity

  

 

 

 

 

 

Deposits from banking clients

  

$

91,187 

 

$

79,377 

Payables to brokers, dealers, and clearing organizations

  

 

1,207 

 

 

1,068 

Payables to brokerage clients

  

 

34,532 

 

 

40,330 

Accrued expenses and other liabilities

  

 

1,328 

 

 

1,641 

Long-term debt

  

 

1,904 

 

 

1,632 

Total liabilities

  

 

130,158 

 

 

124,048 

Stockholders’ equity:

  

 

 

 

 

 

Preferred stock — $.01 par value per share; aggregated liquidation

  

 

 

 

 

 

preference of $885 at both September 30, 2013 and December 31, 2012

 

 

868 

 

 

865 

Common stock — 3 billion shares authorized; $.01 par value per share;

  

 

 

 

 

 

1,487,543,446 shares issued

 

 

15 

 

 

15 

Additional paid-in capital

  

 

3,964 

 

 

3,881 

Retained earnings

  

 

9,034 

 

 

8,554 

Treasury stock, at cost — 199,823,743 shares at September 30, 2013 and

  

 

 

 

 

 

210,014,305 shares at December 31, 2012

 

 

(3,874)

 

 

(4,024)

Accumulated other comprehensive income

  

 

46 

 

 

298 

Total stockholders’ equity

  

 

10,053 

 

 

9,589 

Total liabilities and stockholders’ equity

  

$

140,211 

 

$

133,637 

 

See Notes to Condensed Consolidated Financial Statements.

 

 

3 


 

THE CHARLES SCHWAB CORPORATION

Condensed Consolidated Statements of Cash Flows

(In millions)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

September 30,

 

 

2013

 

2012

Cash Flows from Operating Activities

 

 

 

 

 

 

Net income

 

$

752 

 

$

717 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

Provision for loan losses

 

 

 

 

14 

Net impairment losses on securities

 

 

 

 

28 

Stock-based compensation

 

 

83 

 

 

79 

Depreciation and amortization

 

 

153 

 

 

146 

Premium amortization, net, on securities available for sale and securities held to maturity

 

 

129 

 

 

163 

Other

 

 

23 

 

 

Originations of loans held for sale

 

 

 -

 

 

(441)

Proceeds from sales of loans held for sale

 

 

 -

 

 

513 

Net change in:

 

 

 

 

 

 

Cash and investments segregated and on deposit for regulatory purposes

 

 

4,949 

 

 

880 

Receivables from brokers, dealers, and clearing organizations

 

 

(177)

 

 

(376)

Receivables from brokerage clients

 

 

332 

 

 

(844)

Other securities owned

 

 

154 

 

 

80 

Other assets

 

 

(48)

 

 

19 

Payables to brokers, dealers, and clearing organizations

 

 

101 

 

 

84 

Payables to brokerage clients

 

 

(5,798)

 

 

(619)

Accrued expenses and other liabilities

 

 

163 

 

 

(74)

Net cash provided by operating activities

 

 

825 

 

 

373 

Cash Flows from Investing Activities

 

 

 

 

 

 

Purchases of securities available for sale

 

 

(19,910)

 

 

(19,889)

Proceeds from sales of securities available for sale

 

 

4,665 

 

 

1,524 

Principal payments on securities available for sale

 

 

9,087 

 

 

10,546 

Purchases of securities held to maturity

 

 

(13,442)

 

 

(4,620)

Principal payments on securities held to maturity

 

 

3,332 

 

 

4,012 

Net increase in loans to banking clients

 

 

(1,315)

 

 

(318)

Purchase of equipment, office facilities, and property

 

 

(176)

 

 

(107)

Other investing activities

 

 

 

 

10 

Net cash used for investing activities

 

 

(17,757)

 

 

(8,842)

Cash Flows from Financing Activities

 

 

 

 

 

 

Net change in deposits from banking clients

 

 

11,810 

 

 

7,902 

Repayment of commercial paper

 

 

(300)

 

 

 -

Issuance of long-term debt

 

 

275 

 

 

 -

Repayment of long-term debt

 

 

(4)

 

 

(207)

Premium paid on debt exchange

 

 

 -

 

 

(19)

Net proceeds from preferred stock offerings

 

 

 -

 

 

863 

Dividends paid

 

 

(283)

 

 

(252)

Proceeds from stock options exercised and other

 

 

140 

 

 

26 

Other financing activities

 

 

(7)

 

 

 -

Net cash provided by financing activities

 

 

11,631 

 

 

8,313 

Decrease in Cash and Cash Equivalents

 

 

(5,301)

 

 

(156)

Cash and Cash Equivalents at Beginning of Period

 

 

12,663 

 

 

8,679 

Cash and Cash Equivalents at End of Period

 

$

7,362 

 

$

8,523 

Supplemental Cash Flow Information

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

 

Interest

 

$

89 

 

$

118 

Income taxes

 

$

448 

 

$

379 

Non-cash investing activity:

 

 

 

 

 

 

Securities purchased during the period but settled after period end

 

$

38 

 

$

263 

Non-cash financing activity:

 

 

 

 

 

 

Exchange of Senior Notes

 

$

 -

 

$

256 

 

See Notes to Condensed Consolidated Financial Statements.

 

4 


 

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

 

The Charles Schwab Corporation (CSC) is a savings and loan holding company engaged, through its subsidiaries, in securities brokerage, banking, money management, and financial advisory services. Charles Schwab & Co., Inc. (Schwab) is a securities broker-dealer with over 300 domestic branch offices in 45 states, as well as a branch in each of the Commonwealth of Puerto Rico and London, U.K. In addition, Schwab serves clients in Hong Kong through one of CSC’s subsidiaries. Other subsidiaries include Charles Schwab Bank (Schwab Bank), a federal savings bank, and Charles Schwab Investment Management, Inc. (CSIM), the investment advisor for Schwab’s proprietary mutual funds, which are referred to as the Schwab Funds®, and for Schwab’s exchange-traded funds, which are referred to as the Schwab ETFs™.

 

The accompanying unaudited condensed consolidated financial statements include CSC and its majority-owned subsidiaries (collectively referred to as the Company). Intercompany balances and transactions have been eliminated. These condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States (U.S.), which require management to make certain estimates and assumptions that affect the reported amounts in the accompanying financial statements. Certain estimates relate to other-than-temporary impairment of securities available for sale and securities held to maturity, valuation of goodwill, allowance for loan losses, and legal and regulatory reserves. Actual results may differ from those estimates. These condensed consolidated financial statements reflect all adjustments that are, in the opinion of management, necessary for a fair presentation of the results for the periods presented. These adjustments are of a normal recurring nature. Certain prior period amounts have been reclassified to conform to the 2013 presentation. The Company’s results for any interim period are not necessarily indicative of results for a full year or any other interim period. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012, as updated by the Company’s Current Report on Form 8-K filed on June 24, 2013, relating to the realignment of the Company’s reportable segments.

 

The Company’s significant accounting policies are included in note “2 – Summary of Significant Accounting Policies” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012, as updated by its Current Report on Form 8-K filed on June 24, 2013. There have been no significant changes to these accounting policies during the first nine months of 2013.

 

 

2.Securities Available for Sale and Securities Held to Maturity

 

The amortized cost, gross unrealized gains and losses, and fair value of securities available for sale and securities held to maturity are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

 

 

  

Gross

  

Gross

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

September 30, 2013

 

Cost

 

Gains

 

Losses

 

Value

Securities available for sale:

  

 

 

  

 

 

  

 

 

 

 

 

U.S. agency mortgage-backed securities

  

$

18,498 

  

$

175 

  

$

25 

  

$

18,648 

Asset-backed securities

  

 

14,519 

  

 

37 

  

 

42 

  

 

14,514 

Corporate debt securities

  

 

9,335 

  

 

52 

  

 

15 

  

 

9,372 

Certificates of deposit

  

 

4,275 

  

 

  

 

  

 

4,280 

U.S. agency notes

  

 

4,240 

  

 

  

 

89 

  

 

4,152 

Non-agency residential mortgage-backed securities

  

 

653 

  

 

  

 

44 

  

 

618 

Other securities

  

 

272 

  

 

  

 

 -

  

 

281 

Total securities available for sale

  

$

51,792 

  

$

289 

  

$

216 

  

$

51,865 

Securities held to maturity:

  

 

 

  

 

 

  

 

 

 

 

 

U.S. agency mortgage-backed securities

  

$

27,288 

 

$

249 

 

$

691 

 

$

26,846 

Other securities

  

 

931 

 

 

 -

 

 

60 

 

 

871 

Total securities held to maturity

  

$

28,219 

 

$

249 

 

$

751 

 

$

27,717 

 

5 


 

THE CHARLES SCHWAB CORPORATION

Notes to Condensed Consolidated Financial Statements

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

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

 

 

 

Gross

 

Gross

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

December 31, 2012

 

Cost

 

Gains

 

Losses

 

Value

Securities available for sale:

  

 

 

 

  

 

 

 

  

 

 

 

U.S. agency mortgage-backed securities

  

$

20,080 

  

$

396 

 

$

 -

 

$

20,476 

Asset-backed securities

  

 

8,104 

  

 

62 

 

 

 

 

8,164 

Corporate debt securities

  

 

6,197 

  

 

61 

 

 

 

 

6,256 

Certificates of deposit

  

 

6,150 

  

 

12 

 

 

 

 

6,161 

U.S. agency notes

  

 

3,465 

  

 

 

 

 

 

3,464 

Non-agency residential mortgage-backed securities

  

 

796 

  

 

 

 

65 

 

 

733 

Commercial paper

 

 

574 

 

 

 -

 

 

 -

 

 

574 

Other securities

  

 

278 

  

 

17 

 

 

 -

 

 

295 

Total securities available for sale

  

$

45,644 

  

$

552 

 

$

73 

 

$

46,123 

Securities held to maturity:

  

 

 

 

 

 

 

 

 

 

 

 

U.S. agency mortgage-backed securities

  

$

17,750 

  

$

558 

 

$

19 

 

$

18,289 

Other securities

  

 

444 

  

 

 -

 

 

 

 

443 

Total securities held to maturity

  

$

18,194 

  

$

558 

 

$

20 

 

$

18,732 

 

A summary of securities with unrealized losses, aggregated by category and period of continuous unrealized loss, is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

Less than

 

12 months

  

 

 

 

 

 

 

 

12 months

 

or longer

 

Total

 

  

Fair

  

Unrealized

 

Fair

  

Unrealized

  

Fair

  

Unrealized

September 30, 2013

 

Value

 

Losses

 

Value

 

Losses

 

Value

 

Losses

Securities available for sale:

  

 

 

  

 

 

 

 

 

  

 

 

  

 

 

  

 

 

U.S agency mortgage-backed securities

  

$

5,105 

  

$

25 

  

$

 -

  

$

 -

  

$

5,105 

  

$

25 

Asset-backed securities

 

 

7,328 

 

 

40 

 

 

469 

 

 

 

 

7,797 

 

 

42 

Corporate debt securities

  

 

1,685 

  

 

14 

  

 

400 

  

 

  

 

2,085 

  

 

15 

Certificates of deposit

  

 

 -

  

 

 -

  

 

299 

  

 

  

 

299 

  

 

U.S. agency notes

  

 

3,651 

  

 

89 

  

 

 -

  

 

 -

  

 

3,651 

  

 

89 

Non-agency residential mortgage-backed

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

securities

  

 

112 

  

 

  

 

393 

  

 

41 

  

 

505 

  

 

44 

Total

  

$

17,881 

  

$

171 

  

$

1,561 

  

$

45 

  

$

19,442 

  

$

216 

Securities held to maturity:

  

 

 

  

 

 

 

 

 

  

 

 

  

 

 

  

 

 

U.S. agency mortgage-backed securities

  

$

16,051 

  

$

690 

  

$

85 

  

$

  

$

16,136 

  

$

691 

Other securities

 

 

771 

 

 

60 

 

 

 -

 

 

 -

 

 

771 

 

 

60 

Total

  

$

16,822 

  

$

750 

  

$

85 

  

$

  

$

16,907 

  

$

751 

Total securities with unrealized losses (1)

  

$

34,703 

  

$

921 

  

$

1,646 

  

$

46 

  

$

36,349 

  

$

967 

 

(1)

The number of investment positions with unrealized losses totaled 260 for securities available for sale and 135 for securities held to maturity.

 

6 


 

THE CHARLES SCHWAB CORPORATION

Notes to Condensed Consolidated Financial Statements

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

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

Less than

 

12 months

 

 

 

 

  

 

 

 

12 months

 

or longer

 

Total

 

  

Fair

 

Unrealized

 

Fair

 

Unrealized

 

Fair

 

Unrealized

December 31, 2012

 

Value

 

Losses

 

Value

 

Losses

 

Value

 

Losses

Securities available for sale:

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

Asset-backed securities

  

$

 -

  

$

 -

 

$

801 

 

$

  

$

801 

  

$

Corporate debt securities

  

 

878 

  

 

 

 

 -

 

 

 -

  

 

878 

  

 

Certificates of deposit

  

 

599 

  

 

 

 

 -

 

 

 -

  

 

599 

  

 

U.S. agency notes

  

 

2,102 

  

 

 

 

 -

 

 

 -

  

 

2,102 

  

 

Non-agency residential mortgage-backed

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

securities

  

 

46 

  

 

 

 

549 

 

 

64 

  

 

595 

  

 

65 

Total

  

$

3,625 

  

$

 

$

1,350 

 

$

66 

  

$

4,975 

  

$

73 

Securities held to maturity:

  

 

 

 

 

 

 

 

 

 

 

 

  

 

 

 

 

 

U.S. agency mortgage-backed

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

securities

 

$

2,680 

 

$

19 

 

$

 -

 

$

 -

 

$

2,680 

 

$

19 

Other securities

  

 

240 

  

 

 

 

 -

 

 

 -

  

 

240 

  

 

Total

  

$

2,920 

  

$

20 

 

$

 -

 

$

 -

  

$

2,920 

  

$

20 

Total securities with unrealized losses (1)

  

$

6,545 

  

$

27 

 

$

1,350 

 

$

66 

  

$

7,895 

  

$

93 

 

(1)

The number of investment positions with unrealized losses totaled 139 for securities available for sale and 24 for securities held to maturity.

 

The Company’s non-agency residential mortgage-backed securities portfolio includes securities collateralized by loans that are considered to be “Prime” (defined as loans to borrowers with a Fair Isaac Corporation (FICO) credit score of 620 or higher at origination), and “Alt-A” (defined as Prime loans with reduced documentation at origination). The Company does not intend to sell these securities and it is not “more likely than not” that the Company will be required to sell these securities. Management determined that it does not expect to recover all of the amortized cost of certain of its Alt-A and Prime residential mortgage-backed securities and therefore determined that these securities were other-than-temporarily impaired (OTTI).  The Company recognized an impairment charge equal to the securities’ expected credit losses of $1 million and $8 million during the third quarter and first nine months of 2013, respectively, based on the Company’s cash flow projections for these securities. The expected credit losses were measured as the difference between the present value of expected cash flows and the amortized cost of the securities. Further deterioration in the performance of the underlying loans in the Company’s non-agency residential mortgage-backed securities portfolio could result in the recognition of additional impairment losses.

 

The following table is a rollforward of the amount of credit losses recognized in earnings for OTTI securities held by the Company during the period for which a portion of the impairment was recognized in or reclassified from other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

  

Nine Months Ended

 

 

September 30,

 

September 30,

 

 

2013

  

2012

  

2013

  

2012

Balance at beginning of period

 

$

166 

  

$

152 

  

$

159 

  

$

127 

Credit losses recognized into current period earnings on debt securities for

 

 

 

 

 

 

  

 

 

  

 

 

which an other-than-temporary impairment was not previously recognized

 

 

 -

  

 

 

 

 

 

Credit losses recognized into current period earnings on debt securities for

 

 

 

 

 

 

 

 

 

 

 

 

which an other-than-temporary impairment was previously recognized

 

 

  

 

  

 

  

 

22 

Balance at end of period

 

$

167 

  

$

155 

  

$

167 

  

$

155 

 

7 


 

THE CHARLES SCHWAB CORPORATION

Notes to Condensed Consolidated Financial Statements

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

(Unaudited)

 

The maturities of securities available for sale and securities held to maturity at September 30, 2013 are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

After 1 year

  

After 5 years

  

 

 

  

 

 

 

 

Within

 

through

 

through

 

After

 

 

 

 

 

1 year

 

5 years

 

10 years

 

10 years

 

Total

Securities available for sale:

 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

U.S. agency mortgage-backed securities (1)

 

$

 -

  

$

325 

  

$

4,271 

  

$

14,052 

  

$

18,648 

Asset-backed securities

 

 

 -

  

 

1,255 

  

 

2,598 

  

 

10,661 

  

 

14,514 

Corporate debt securities

 

 

1,902 

  

 

7,364 

  

 

106 

  

 

 -

  

 

9,372 

Certificates of deposit

 

 

2,378 

  

 

1,902 

  

 

 -

  

 

 -

  

 

4,280 

U.S. agency notes

 

 

 -

  

 

2,291 

  

 

1,861 

  

 

 -

  

 

4,152 

Non-agency residential mortgage-backed

 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

securities (1)

 

 

 -

 

 

 

 

 

 

613 

 

 

618 

Other securities

 

 

 -

  

 

 -

  

 

 -

  

 

281 

  

 

281 

Total fair value

 

$

4,280 

  

$

13,140 

  

$

8,838 

  

$

25,607 

  

$

51,865 

Total amortized cost

 

$

4,272 

  

$

13,136 

  

$

8,835 

  

$

25,549 

  

$

51,792 

Securities held to maturity:

 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

U.S. agency mortgage-backed securities (1)

 

$

 -

  

$

371 

  

$

11,555 

  

$

14,920 

  

$

26,846 

Other securities

 

 

100 

  

 

 -

  

 

340 

  

 

431 

  

 

871 

Total fair value

 

$

100 

  

$

371 

  

$

11,895 

  

$

15,351 

  

$

27,717 

Total amortized cost

 

$

100 

  

$

364 

  

$

12,349 

  

$

15,406 

  

$

28,219 

 

(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 from sales of securities available for sale are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30,

 

September 30,

 

 

2013

 

2012

 

2013

 

2012

Proceeds

 

$

1,661 

  

$

201 

  

$

4,665 

  

$

1,524 

Gross realized gains

 

$

 

$

 -

 

$

 

$

 

 

 

3.Loans to Banking Clients and Related Allowance for Loan Losses

 

The composition of loans to banking clients by loan segment is as follows:

 

 

 

 

 

 

 

 

 

 

September 30,

 

December 31,

 

 

2013

 

2012

Residential real estate mortgages

 

$

7,835 

  

$

6,507 

Home equity lines of credit

 

 

3,054 

  

 

3,287 

Personal loans secured by securities

 

 

1,247 

  

 

963 

Other

 

 

31 

  

 

25 

Total loans to banking clients (1)

 

 

12,167 

  

 

10,782 

Allowance for loan losses

 

 

(52)

 

 

(56)

Total loans to banking clients – net

 

$

12,115 

  

$

10,726 

 

(1)

All loans are evaluated for impairment by loan segment.

 

The Company has commitments to extend credit related to unused home equity lines of credit (HELOCs), personal loans secured by securities, and other lines of credit, which totaled $5.6 billion and $5.4 billion at September 30, 2013 and December 31, 2012, respectively.

 

8 


 

THE CHARLES SCHWAB CORPORATION

Notes to Condensed Consolidated Financial Statements

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

(Unaudited)

 

Changes in the allowance for loan losses were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

September 30, 2013

 

 

September 30, 2012

 

 

 

Residential

 

 

 

 

 

 

 

 

 

Residential

 

 

 

 

 

 

 

 

 

 

real estate

 

 

Home equity

 

 

 

 

 

real estate

 

 

Home equity

 

 

 

 

 

 

mortgages

 

 

lines of credit

 

 

Total

 

 

mortgages

 

 

lines of credit

 

 

Total

Balance at beginning of period

 

 

$

40 

 

  

$

17 

  

$

57 

  

 

$

34 

  

 

$

17 

  

$

51 

Charge-offs

 

 

 

(1)

 

 

 

(1)

 

 

(2)

 

 

 

(2)

 

 

 

(3)

 

 

(5)

Recoveries

 

 

 

 

  

 

 -

  

 

  

 

 

  

 

 

 -

  

 

Provision for loan losses

 

 

 

(6)

 

  

 

  

 

(4)

  

 

 

  

 

 

  

 

10 

Balance at end of period

 

 

$

34 

 

  

$

18 

  

$

52 

  

 

$

35 

  

 

$

22 

  

$

57 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

September 30, 2013

 

 

September 30, 2012

 

 

 

Residential

 

 

 

 

 

 

 

 

 

Residential

 

 

 

 

 

 

 

 

 

 

real estate

 

 

Home equity

 

 

 

 

 

real estate

 

 

Home equity

 

 

 

 

 

 

mortgages

 

 

lines of credit

 

 

Total

 

 

mortgages

 

 

lines of credit

 

 

Total

Balance at beginning of period

 

 

$

36 

 

  

$

20 

  

$

56 

  

 

$

40 

  

 

$

14 

  

$

54 

Charge-offs

 

 

 

(4)

 

 

 

(4)

 

 

(8)

 

 

 

(6)

 

 

 

(7)

 

 

(13)

Recoveries

 

 

 

 

  

 

  

 

  

 

 

  

 

 

 -

  

 

Provision for loan losses

 

 

 

 -

 

  

 

  

 

  

 

 

(1)

  

 

 

15 

  

 

14 

Balance at end of period

 

 

$

34 

 

  

$

18 

  

$

52 

  

 

$

35 

  

 

$

22 

  

$

57 

 

Included in the loan portfolio are nonaccrual loans totaling $46 million and $48 million at September 30, 2013 and December 31, 2012, respectively. There were no loans accruing interest that were contractually 90 days or more past due at September 30, 2013 or December 31, 2012. Nonperforming assets, which include nonaccrual loans and other real estate owned, totaled $49 million and $54 million at September 30, 2013 and December 31, 2012, respectively. Troubled debt restructurings were not material at September 30, 2013 or December 31, 2012.

 

In 2012, Schwab Bank launched a co-branded loan origination program for Schwab Bank clients (the Program) with Quicken Loans, Inc. (Quicken® Loans®). Pursuant to the Program, Quicken Loans originates and services first lien residential real estate mortgage loans (First Mortgages) and HELOCs for Schwab Bank clients. Under the Program, Schwab Bank purchases certain First Mortgages and HELOCs that are originated by Quicken Loans. Schwab Bank sets the underwriting guidelines and pricing for all loans it intends to purchase for its portfolio. Schwab Bank purchased First Mortgages of $862 million and $923 million during the third quarters of 2013 and 2012, respectively, and $3.1 billion and $1.5 billion during the first nine months of 2013 and 2012, respectively. The First Mortgages purchased under the Program are included in the First mortgages loan class in the tables below.

 

The delinquency analysis by loan class is as follows: 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

 

 

  

 

 

  

>90 days past

  

 

 

  

 

 

 

 

 

 

 

30-59 days

 

60-89 days

 

due and other

 

Total

 

Total

September 30, 2013

 

Current

 

past due

 

past due

 

nonaccrual loans

 

past due

 

loans

Residential real estate mortgages:

 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

First mortgages

 

$

7,632 

  

$

  

$

  

$

30 

  

$

39 

  

$

7,671 

Purchased first mortgages

 

 

158 

  

 

  

 

  

 

  

 

  

 

164 

Home equity lines of credit

 

 

3,037 

  

 

  

 

  

 

12 

  

 

17 

  

 

3,054 

Personal loans secured by securities

 

 

1,247 

  

 

 -

  

 

 -

  

 

 -

  

 

 -

  

 

1,247 

Other

 

 

31 

  

 

 -

  

 

 -

  

 

 -

  

 

 -

  

 

31 

Total loans to banking clients

 

$

12,105 

  

$

11 

  

$

  

$

46 

  

$

62 

  

$

12,167 

 

 

9 


 

THE CHARLES SCHWAB CORPORATION

Notes to Condensed Consolidated Financial Statements

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

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

 

 

 

 

 

  

>90 days past

  

 

 

  

 

 

 

 

 

 

 

30-59 days

  

60-89 days

 

due and other

 

Total

 

Total

December 31, 2012

 

Current

 

past due

 

past due

 

nonaccrual loans

 

past due

 

loans

Residential real estate mortgages:

 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

First mortgages

 

$

6,291 

  

$

22 

  

$

  

$

33 

  

$

57 

  

$

6,348 

Purchased first mortgages

 

 

154 

  

 

  

 

 -

  

 

  

 

  

 

159 

Home equity lines of credit

 

 

3,269 

  

 

  

 

  

 

11 

  

 

18 

  

 

3,287 

Personal loans secured by securities

 

 

963 

  

 

 -

  

 

 -

  

 

 -

  

 

 -

  

 

963 

Other

 

 

22 

  

 

  

 

 -

  

 

 -

  

 

  

 

25 

Total loans to banking clients

 

$

10,699 

  

$

31 

  

$

  

$

48 

  

$

83 

  

$

10,782 

 

In addition to monitoring delinquency, the Company monitors the credit quality of residential real estate mortgages and HELOCs by stratifying the portfolios by the 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), as presented in the following tables. Borrowers’ FICO scores are provided by an independent third party credit reporting service and were last updated in September 2013. The Origination LTV and Estimated Current LTV ratios for a HELOC include any first lien mortgage outstanding on the same property at the time of the HELOC’s origination. The Estimated Current LTV for each loan is estimated by reference to a home price appreciation index.

 

10 


 

THE CHARLES SCHWAB CORPORATION

Notes to Condensed Consolidated Financial Statements

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

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential real estate mortgages

 

 

 

 

 

 

 

 

First

 

Purchased

 

 

 

 

 

Home equity

September 30, 2013

 

mortgages

 

first mortgages

 

Total

 

 

lines of credit

Year of origination

 

 

 

 

 

 

  

 

 

 

 

 

 

 

 

Pre-2009

 

$

712 

 

$

54 

  

$

766 

 

  

$

2,098 

 

 

2009

 

 

207 

 

 

  

 

211 

 

  

 

270 

 

 

2010

 

 

545 

 

 

  

 

553 

 

  

 

198 

 

 

2011

 

 

790 

 

 

39 

  

 

829 

 

  

 

162 

 

 

2012

 

 

2,477 

 

 

27 

  

 

2,504 

 

  

 

165 

 

 

2013

 

 

2,940 

 

 

32 

 

 

2,972 

 

 

 

161 

 

 

Total

 

$

7,671 

 

$

164 

  

$

7,835 

 

  

$

3,054 

 

 

Origination FICO

 

 

 

 

 

 

  

 

 

 

 

 

 

 

 

<620

 

$

10 

 

$

  

$

12 

 

  

$

 

 

620 – 679

 

 

98 

 

 

14 

  

 

112 

 

  

 

20 

 

 

680 – 739

 

 

1,339 

 

 

33 

  

 

1,372 

 

  

 

584 

 

 

>740

 

 

6,224 

 

 

115 

  

 

6,339 

 

  

 

2,449 

 

 

Total

 

$

7,671 

 

$

164 

  

$

7,835 

 

  

$

3,054 

 

 

Updated FICO

 

 

 

 

 

 

  

 

 

 

 

 

 

 

 

<620

 

$

47 

 

$

  

$

52 

 

  

$

45 

 

 

620 – 679

 

 

209 

 

 

12 

  

 

221 

 

  

 

106 

 

 

680 – 739

 

 

1,061 

 

 

26 

  

 

1,087 

 

  

 

471 

 

 

>740

 

 

6,354 

 

 

121 

  

 

6,475 

 

  

 

2,432 

 

 

Total

 

$

7,671 

 

$

164 

  

$

7,835 

 

  

$

3,054 

 

 

Origination LTV

 

 

 

 

 

 

  

 

 

 

 

 

 

 

 

<70%

 

$

5,174 

 

$

112 

  

$

5,286 

 

  

$

2,052 

 

 

>70% – <90%

 

 

2,480 

 

 

47 

  

 

2,527 

 

  

 

978 

 

 

>90% – <100%

 

 

17 

 

 

  

 

22 

 

  

 

24 

 

 

Total

 

$

7,671 

 

$

164 

  

$

7,835 

 

  

$

3,054 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Percent of Loans

 

 

 

 

 

 

 

 

 

 

 

 

 

that are 90+ Days

 

 

 

 

 

 

 

 

 

 

 

 

 

Past Due and

 

 

 

 

 

 

Weighted

 

 

 

 

Less than 90 Days

 

 

 

 

 

 

Average

 

Utilization

 

Past Due but on

 

September 30, 2013

 

Balance

 

Updated FICO

 

Rate (1)  

 

Nonaccrual Status

 

Residential real estate mortgages:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Estimated Current LTV

 

 

 

 

 

 

 

 

 

 

 

 

 

 

<70%

 

$

6,509 

  

 

774 

 

  

N/A

  

 

0.04 

 

>70% – <90%

 

 

1,118 

  

 

762 

 

  

N/A

  

 

0.29 

 

>90% – <100%

 

 

95 

  

 

741 

 

  

N/A

  

 

3.21 

 

>100%

 

 

113 

  

 

727 

 

  

N/A

  

 

9.12 

 

Total

 

$

7,835 

  

 

771 

 

  

N/A

  

 

0.24 

 

Home equity lines of credit:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Estimated Current LTV

 

 

 

 

 

 

 

 

 

 

 

 

 

 

<70%

 

$

2,110 

  

 

772 

 

  

36 

 

0.12 

 

>70% – <90%

 

 

670 

  

 

762 

 

  

48 

 

0.26 

 

>90% – <100%

 

 

131 

  

 

756 

 

  

58 

 

0.70 

 

>100%

 

 

143 

  

 

740 

 

  

61 

 

1.64 

 

Total

 

$

3,054 

  

 

768 

 

  

39 

 

0.25 

 

 

(1)

The Utilization Rate is calculated using the outstanding HELOC balance divided by the associated total line of credit.

N/A Not applicable.

11 


 

THE CHARLES SCHWAB CORPORATION

Notes to Condensed Consolidated Financial Statements

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

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential real estate mortgages

 

 

 

 

 

 

 

 

First

 

Purchased

 

 

 

 

 

Home equity

December 31, 2012

 

mortgages

 

first mortgages

 

Total

 

 

lines of credit

Year of origination

 

 

 

 

 

 

  

 

 

 

 

 

 

 

 

Pre-2009

 

$

867 

 

$

62 

 

$

929 

 

  

$

2,338 

 

 

2009

 

 

305 

 

 

 

 

311 

 

  

 

338 

 

 

2010

 

 

909 

 

 

12 

 

 

921 

 

  

 

249 

 

 

2011

 

 

1,270 

 

 

53 

 

 

1,323 

 

  

 

198 

 

 

2012

 

 

2,997 

 

 

26 

 

 

3,023 

 

 

 

164 

 

 

Total

 

$

6,348 

 

$

159 

 

$

6,507 

 

  

$

3,287 

 

 

Origination FICO

 

 

 

 

 

 

 

 

 

 

  

 

 

 

 

<620

 

$

10 

 

$

 

$

11 

 

  

$

 -

 

 

620 – 679

 

 

98 

 

 

16 

 

 

114 

 

  

 

23 

 

 

680 – 739

 

 

1,141 

 

 

40 

 

 

1,181 

 

  

 

633 

 

 

>740

 

 

5,099 

 

 

102 

 

 

5,201 

 

  

 

2,631 

 

 

Total

 

$

6,348 

 

$

159 

 

$

6,507 

 

  

$

3,287 

 

 

Updated FICO

 

 

 

 

 

 

 

 

 

 

  

 

 

 

 

<620

 

$

54 

 

$

 

$

60 

 

  

$

49 

 

 

620 – 679

 

 

191 

 

 

13 

 

 

204 

 

  

 

117 

 

 

680 – 739

 

 

940 

 

 

34 

 

 

974 

 

  

 

510 

 

 

>740

 

 

5,163 

 

 

106 

 

 

5,269 

 

  

 

2,611 

 

 

Total

 

$

6,348 

 

$

159 

 

$

6,507 

 

  

$

3,287 

 

 

Origination LTV

 

 

 

 

 

 

 

 

 

 

  

 

 

 

 

<70%

 

$

4,189 

 

$

97 

 

$

4,286 

 

  

$

2,225 

 

 

>70% – <90%

 

 

2,142 

 

 

54 

 

 

2,196 

 

  

 

1,036 

 

 

>90% – <100%

 

 

17 

 

 

 

 

25 

 

  

 

26 

 

 

Total

 

$

6,348 

 

$

159 

 

$

6,507 

 

  

$

3,287 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Percent of Loans

 

 

 

 

 

 

 

 

 

 

 

 

 

that are 90+ Days

 

 

 

 

 

 

 

 

 

 

 

 

 

Past Due and

 

 

 

 

 

 

Weighted

 

 

 

 

Less than 90 Days

 

 

 

 

 

 

Average

 

Utilization

 

Past Due but on

 

December 31, 2012

 

Balance

 

Updated FICO

 

Rate (1)  

 

Nonaccrual Status

 

Residential real estate mortgages:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Estimated Current LTV

 

 

 

 

 

 

 

 

 

 

 

 

 

 

<70%

 

$

4,162 

 

 

772 

 

 

N/A

 

 

0.05 

 

>70% – <90%

 

 

1,841 

 

 

764 

 

 

N/A

 

 

0.22 

 

>90% – <100%

 

 

168 

 

 

750 

 

 

N/A

 

 

0.51 

 

>100%

 

 

336 

 

 

741 

 

 

N/A

 

 

5.34 

 

Total

 

$

6,507 

 

 

768 

 

 

N/A

 

 

0.38 

 

Home equity lines of credit:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Estimated Current LTV

 

 

 

 

 

 

 

 

 

 

 

 

 

 

<70%

 

$

1,559 

 

 

773 

 

 

36 

 

0.14 

 

>70% – <90%

 

 

1,020 

 

 

766 

 

 

46 

 

0.18 

 

>90% – <100%

 

 

267 

 

 

759 

 

 

54 

 

0.44 

 

>100%

 

 

441 

 

 

753 

 

 

59 

 

1.06 

 

Total

 

$

3,287 

 

 

767 

 

 

42 

 

0.31 

 

 

(1)

The Utilization Rate is calculated using the outstanding HELOC balance divided by the associated total line of credit.

N/A Not applicable.

 

12 


 

THE CHARLES SCHWAB CORPORATION

Notes to Condensed Consolidated Financial Statements

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

(Unaudited)

 

The Company monitors the credit quality of personal loans secured by securities by reviewing the fair value of collateral to ensure adequate collateralization of at least 100% of the outstanding principal amount of the loans. All of these personal loans were fully collateralized by securities with fair values in excess of borrowings at September 30, 2013 and December 31, 2012.

 

 

4.Borrowings

 

See note “14 – Borrowings” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012, as updated by its Current Report on Form 8-K filed on June 24, 2013, relating to the realignment of the Company’s reportable segments. There have been no significant changes to the Company’s borrowings with the exception of the issuance disclosed below.

 

Long-term debt, including unamortized debt discounts and premiums, where applicable, consists of the following:

 

 

 

 

 

 

 

 

 

 

September 30,

 

December 31,

 

 

2013

 

2012

Senior Notes

 

$

1,565 

 

$

1,288 

Senior Medium-Term Notes, Series A

 

 

249 

 

 

249 

Finance lease obligation

 

 

90 

 

 

95 

Total long-term debt

 

$

1,904 

 

$

1,632 

 

On July 25, 2013, CSC issued $275 million of Senior Notes that mature in 2018 under its universal shelf registration statement on file with the SEC. The Senior Notes have a fixed interest rate of 2.20% with interest payable semi-annually.

 

Annual maturities on long-term debt outstanding at September 30, 2013 are as follows:

 

 

 

 

 

 

 

 

2013

 

 

 

 

$

2014

 

 

 

 

 

2015

 

 

 

 

 

357 

2016

 

 

 

 

 

2017

 

 

 

 

 

258 

Thereafter

 

 

 

 

 

1,292 

Total maturities

 

 

 

 

 

1,921 

Unamortized discount, net

 

 

 

 

 

(17)

Total long-term debt

 

 

 

 

$

1,904 

 

 

 

5.Commitments and Contingencies

 

The Company has clients that sell (i.e., write) listed option contracts that are cleared by the Options Clearing Corporation – a clearing house that establishes margin requirements on these transactions. The Company partially satisfies the margin requirements by arranging unsecured standby letter of credit agreements (LOCs), in favor of the Options Clearing Corporation, which are issued by multiple banks. At September 30, 2013, the aggregate face amount of these LOCs totaled $240 million. There were no funds drawn under any of these LOCs at September 30, 2013. In connection with its securities lending activities, the Company is required to provide collateral to certain brokerage clients. The Company satisfies the collateral requirements by providing cash as collateral. 

 

The Company also provides guarantees to securities clearing houses and exchanges under standard membership agreements, which require members to guarantee the performance of other members. Under the agreements, if another member becomes unable to satisfy its obligations to the clearing houses and exchanges, other members would be required to meet shortfalls. The Company’s liability under these arrangements is not quantifiable and may exceed the cash and securities it has posted as collateral. However, the potential requirement for the Company to make payments under these arrangements is remote. Accordingly, no liability has been recognized for these guarantees.

13 


 

THE CHARLES SCHWAB CORPORATION

Notes to Condensed Consolidated Financial Statements

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

(Unaudited)

 

 

Legal contingencies: The Company is subject to claims and lawsuits in the ordinary course of business, including arbitrations, class actions and other litigation, some of which include claims for substantial or unspecified damages. The Company is also the subject of inquiries, investigations, and proceedings by regulatory and other governmental agencies.

 

The Company believes it has strong defenses in all significant matters currently pending and is contesting liability and any damages claimed. Nevertheless, some of these matters may result in adverse judgments or awards, including penalties, injunctions or other relief, and the Company may also determine to settle a matter because of the uncertainty and risks of litigation. Described below are certain matters in which there is a reasonable possibility that a material loss could be incurred or where the matter may otherwise be of significant interest to stockholders. With respect to all other pending matters, based on current information and consultation with counsel, it does not appear that the outcome of any such matter could be material to the financial condition, operating results or cash flows of the Company. However, predicting the outcome of a litigation or regulatory matter is inherently difficult, requiring significant judgment and evaluation of various factors, including the procedural status of the matter and any recent developments; prior experience and the experience of others in similar cases; available defenses, including potential opportunities to dispose of a case on the merits or procedural grounds before trial (e.g., motions to dismiss or for summary judgment); the progress of fact discovery; the opinions of counsel and experts regarding potential damages; potential opportunities for settlement and the status of any settlement discussions; and potential insurance coverage and indemnification. Often, as in the case of the Auction Rate Securities Regulatory Inquiries and Total Bond Market Fund Litigation matters described below, it is not possible to reasonably estimate potential liability, if any, or a range of potential liability until the matter is closer to resolution – pending, for example, further proceedings, the outcome of key motions or appeals, or discussions among the parties. Numerous issues may have to be developed, such as discovery of important factual matters and determination of threshold legal issues, which may include novel or unsettled questions of law. Reserves are established or adjusted or further disclosure and estimates of potential loss are provided as the matter progresses and more information becomes available.

 

Auction Rate Securities Regulatory Inquiries: Schwab has been responding to industry wide inquiries from federal and state regulators regarding sales of auction rate securities to clients who were unable to sell their holdings when the normal auction process for those securities froze unexpectedly in February 2008. On August 17, 2009, a civil complaint was filed against Schwab in New York state court by the Attorney General of the State of New York (NYAG) alleging material misrepresentations and omissions by Schwab regarding the risks of auction rate securities, and seeking restitution, disgorgement, penalties and other relief, including repurchase of securities held in client accounts. As reflected in a statement issued August 17, 2009, Schwab has responded that the allegations are without merit, and has been contesting all charges. By order dated October 24, 2011, the court granted Schwab’s motion to dismiss the complaint with prejudice. The NYAG appealed, and in a decision issued August 29, 2013, the Appellate Division reinstated two of the NYAG’s four causes of action. On September 26, 2013, the NYAG petitioned the Appellate Division for reconsideration of one of the other two causes of action that the Appellate Division previously declined to reinstate. The NYAG’s petition for reconsideration remains pending.

 

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™ (Northstar lawsuit). The lawsuit, which alleges violations of state law and federal securities law in connection with the fund’s investment policy, names Schwab Investments (registrant and issuer of the fund’s shares) and CSIM 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 shareholder vote. Plaintiffs seek unspecified compensatory and rescission damages, unspecified equitable and injunctive relief, costs and attorneys’ fees. Plaintiffs’ federal securities law claim and certain of plaintiffs’ state law claims were dismissed in proceedings before the court and following a successful petition by defendants to the Ninth Circuit Court of Appeals. On August 8, 2011, the court dismissed plaintiffs’ remaining claims with prejudice. Plaintiffs have again appealed to the Ninth Circuit, where the case is currently pending.

 

optionsXpress Regulatory Matters: optionsXpress entities and individual employees are respondents in certain pending regulatory matters which predate the Company’s acquisition of optionsXpress. On April 16, 2012, optionsXpress, Inc. was charged by the SEC in an administrative proceeding alleging violations of the firm’s close-out obligations under Regulation SHO (short sale delivery rules) in connection with certain customer trading activity. Trial in the proceeding commenced September 5, 2012. In a decision issued June 7, 2013, the judge held that optionsXpress violated Regulation SHO and aided and abetted fraudulent trading activity by its customer, and ordered the firm to pay disgorgement and penalties. The

14 


 

THE CHARLES SCHWAB CORPORATION

Notes to Condensed Consolidated Financial Statements

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

(Unaudited)

 

Company continues to dispute the allegations and is appealing the decision.  The Company has a contingent liability associated with this matter, which was not material at September 30, 2013. Separately, on April 19, 2012, the SEC instituted an administrative proceeding alleging violations of the broker-dealer registration requirements by an unregistered optionsXpress entity. A settlement consenting to a penalty and cease and desist order was reached with the SEC in that proceeding on October 22, 2013. The settlement agreement and the Company’s contingent liability associated with this matter were not material at September 30, 2013.

 

 

6.Fair Values of Assets and Liabilities

 

For a description of the fair value hierarchy and the Company’s fair value methodologies, including the use of independent third-party pricing services, see note “2 – Summary of Significant Accounting Policies” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012, as updated by the Company’s Current Report on Form 8-K filed on June 24, 2013, relating to the realignment of the Company’s reportable segments. There were no significant changes in these methodologies during the quarter ended September 30, 2013. The Company did not transfer any assets or liabilities between Level 1 and Level 2 during the quarter ended September 30, 2013, or the year ended December 31, 2012. In addition, the Company did not adjust prices received from the primary independent third-party pricing service at September 30, 2013 or December 31, 2012.

 

Financial Instruments Recorded at Fair Value

 

The following tables present the fair value hierarchy for assets measured at fair value. Liabilities recorded at fair value were not material, and therefore are not included in the following tables:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quoted Prices

 

 

 

 

 

 

  

 

 

 

 

 

 

 

 

in Active Markets

 

Significant

 

Significant

 

 

 

 

 

for Identical

 

Other Observable

 

    Unobservable    

 

 

 

 

 

Assets

 

Inputs

 

Inputs

 

 

Balance at

September 30, 2013

(Level 1)

 

(Level 2)

 

(Level 3)

 

 

Fair Value

Cash equivalents:

 

 

 

  

 

 

 

 

 

 

  

 

 

 

 

 

 

 

Money market funds

 

$

675 

  

 

 

$

 -

 

 

  

$

 -

 

 

  

$

675 

Commercial paper

 

 

 -

  

 

 

 

10 

 

 

  

 

 -

 

 

  

 

10 

Total cash equivalents

 

 

675 

  

 

 

 

10 

 

 

  

 

 -

 

 

  

 

685 

Investments segregated and on deposit for regulatory purposes:

 

 

 

  

 

 

 

 

 

 

  

 

 

 

 

 

 

 

Certificates of deposit

 

 

 -

  

 

 

 

2,901 

 

 

  

 

 -

 

 

  

 

2,901 

U.S. Government securities

 

 

 -

  

 

 

 

2,601 

 

 

  

 

 -

 

 

  

 

2,601 

Total investments segregated and on deposit for regulatory

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

purposes

 

 

 -

  

 

 

 

5,502 

 

 

  

 

 -

 

 

  

 

5,502 

Other securities owned:

 

 

 

  

 

 

 

 

 

 

  

 

 

 

 

 

 

 

Schwab Funds® money market funds

 

 

225 

  

 

 

 

 -

 

 

  

 

 -

 

 

  

 

225 

Equity and bond mutual funds

 

 

198 

  

 

 

 

 -

 

 

  

 

 -

 

 

  

 

198 

State and municipal debt obligations

 

 

 -

  

 

 

 

43 

 

 

  

 

 -

 

 

  

 

43 

Equity, U.S. Government and corporate debt, and other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

securities

 

 

  

 

 

 

15 

 

 

  

 

 -

 

 

  

 

16 

Total other securities owned

 

 

424 

  

 

 

 

58 

 

 

  

 

 -

 

 

  

 

482 

Securities available for sale:

 

 

 

  

 

 

 

 

 

 

  

 

 

 

 

 

 

 

U.S. agency mortgage-backed securities

 

 

 -

  

 

 

 

18,648 

 

 

  

 

 -

 

 

  

 

18,648 

Asset-backed securities

 

 

 -

  

 

 

 

14,514 

 

 

  

 

 -

 

 

  

 

14,514 

Corporate debt securities

 

 

 -

  

 

 

 

9,372 

 

 

  

 

 -

 

 

  

 

9,372 

Certificates of deposit

 

 

 -

  

 

 

 

4,280 

 

 

  

 

 -

 

 

  

 

4,280 

U.S. agency notes

 

 

 -

  

 

 

 

4,152 

 

 

  

 

 -

 

 

  

 

4,152 

Non-agency residential mortgage-backed securities

 

 

 -

  

 

 

 

618 

 

 

  

 

 -

 

 

  

 

618 

Other securities

 

 

 -

  

 

 

 

281 

 

 

  

 

 -

 

 

  

 

281 

Total securities available for sale

 

 

 -

  

 

 

 

51,865 

 

 

  

 

 -

 

 

  

 

51,865 

Total

 

$

1,099 

  

 

 

$

57,435 

 

 

  

$

 -

 

 

  

$

58,534 

 

15 


 

THE CHARLES SCHWAB CORPORATION

Notes to Condensed Consolidated Financial Statements

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

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quoted Prices

 

 

 

 

 

 

  

 

 

 

 

 

 

 

 

in Active Markets

 

Significant

 

Significant

 

 

 

 

 

for Identical

 

Other Observable

 

    Unobservable    

 

 

 

 

 

Assets

 

Inputs

 

Inputs

 

Balance at

December 31, 2012

(Level 1)

 

(Level 2)

 

(Level 3)

 

Fair Value

Cash equivalents:

 

 

 

  

 

 

 

 

 

 

  

 

 

 

 

 

 

 

Money market funds

 

$

413 

  

 

 

$

 -

 

 

  

$

 -

 

 

  

$

413 

Commercial paper

 

 

 -

  

 

 

 

1,076 

 

 

  

 

 -

 

 

  

 

1,076 

Total cash equivalents

 

 

413 

  

 

 

 

1,076 

 

 

  

 

 -

 

 

  

 

1,489 

Investments segregated and on deposit for regulatory purposes:

 

 

 

  

 

 

 

 

 

 

  

 

 

 

 

 

 

 

Certificates of deposit

 

 

 -

  

 

 

 

2,976 

 

 

  

 

 -

 

 

  

 

2,976 

U.S. Government securities

 

 

 -

  

 

 

 

1,767 

 

 

  

 

 -

 

 

  

 

1,767 

Total investments segregated and on deposit for regulatory

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

purposes

 

 

 -

  

 

 

 

4,743 

 

 

  

 

 -

 

 

  

 

4,743 

Other securities owned:

 

 

 

  

 

 

 

 

 

 

  

 

 

 

 

 

 

 

Schwab Funds® money market funds

 

 

329 

  

 

 

 

 -

 

 

  

 

 -

 

 

  

 

329 

Equity and bond mutual funds

 

 

217 

  

 

 

 

 -

 

 

  

 

 -

 

 

  

 

217 

State and municipal debt obligations

 

 

 -

  

 

 

 

48 

 

 

  

 

 -

 

 

  

 

48 

Equity, U.S. Government and corporate debt, and other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

securities

 

 

  

 

 

 

40 

 

 

  

 

 -

 

 

  

 

42 

Total other securities owned

 

 

548 

  

 

 

 

88 

 

 

  

 

 -

 

 

  

 

636 

Securities available for sale:

 

 

 

  

 

 

 

 

 

 

  

 

 

 

 

 

 

 

U.S. agency mortgage-backed securities

 

 

 -

  

 

 

 

20,476 

 

 

  

 

 -

 

 

  

 

20,476 

Asset-backed securities

 

 

 -

  

 

 

 

8,164 

 

 

  

 

 -

 

 

  

 

8,164 

Corporate debt securities

 

 

 -

  

 

 

 

6,256 

 

 

  

 

 -

 

 

  

 

6,256 

Certificates of deposit

 

 

 -

  

 

 

 

6,161 

 

 

  

 

 -

 

 

  

 

6,161 

U.S. agency notes

 

 

 -

  

 

 

 

3,464 

 

 

  

 

 -

 

 

  

 

3,464 

Non-agency residential mortgage-backed securities

 

 

 -

  

 

 

 

733 

 

 

  

 

 -

 

 

  

 

733 

Commercial paper

 

 

 -

 

 

 

 

574 

 

 

 

 

 -

 

 

 

 

574 

Other securities

 

 

 -

  

 

 

 

295 

 

 

  

 

 -

 

 

  

 

295 

Total securities available for sale

 

 

 -

  

 

 

 

46,123 

 

 

  

 

 -

 

 

  

 

46,123 

Total

 

$

961 

  

 

 

$

52,030 

 

 

  

$

 -

 

 

  

$

52,991 

 

16 


 

THE CHARLES SCHWAB CORPORATION

Notes to Condensed Consolidated Financial Statements

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

(Unaudited)

 

Financial Instruments Not Recorded at Fair Value

 

Descriptions of the valuation methodologies and assumptions used to estimate the fair value of financial instruments not recorded at fair value are also described in note “2 – Summary of Significant Accounting Policies” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012, as updated by the Company’s Current Report on Form 8-K filed on June 24, 2013, relating to the realignment of the Company’s reportable segments. There were no significant changes in these methodologies or assumptions during the quarter ended September 30, 2013. The following tables present the fair value hierarchy for financial instruments not recorded at fair value:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

 

 

 

 

 

Quoted Prices

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 in Active Markets 

 

Significant

 

Significant

 

 

 

 

 

 

 

for Identical

 

Other Observable

 

Unobservable

 

 

 

Carrying

 

Assets

 

Inputs

 

Inputs

 

Balance at

September 30, 2013

Amount

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Fair Value

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

6,677 

 

 

  

$

 -

 

 

  

$

6,677 

 

 

  

$

 -

 

 

  

$

6,677 

Cash and investments segregated and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

on deposit for regulatory purposes

 

 

18,013 

 

 

  

 

 -

 

 

  

 

18,013 

 

 

  

 

 -

 

 

  

 

18,013 

Receivables from brokers, dealers, and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

clearing organizations

 

 

511 

 

 

  

 

 -

 

 

  

 

511 

 

 

  

 

 -

 

 

  

 

511 

Receivables from brokerage clients – net

 

 

13,119 

 

 

  

 

 -

 

 

  

 

13,119 

 

 

  

 

 -

 

 

  

 

13,119 

Securities held to maturity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. agency mortgage-backed securities

 

 

27,288 

 

 

  

 

 -

 

 

  

 

26,846 

 

 

  

 

 -

 

 

  

 

26,846 

Other securities

 

 

931 

 

 

  

 

 -

 

 

  

 

871 

 

 

  

 

 -

 

 

  

 

871 

Total securities held to maturity

 

 

28,219 

 

 

  

 

 -

 

 

  

 

27,717 

 

 

  

 

 -

 

 

  

 

27,717 

Loans to banking clients – net:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential real estate mortgages

 

 

7,801 

 

 

  

 

 -

 

 

  

 

7,803 

 

 

  

 

 -

 

 

  

 

7,803 

Home equity lines of credit

 

 

3,036 

 

 

  

 

 -

 

 

  

 

3,043 

 

 

  

 

 -

 

 

  

 

3,043 

Personal loans secured by securities

 

 

1,247 

 

 

  

 

 -

 

 

  

 

1,247 

 

 

  

 

 -

 

 

  

 

1,247 

Other

 

 

31 

 

 

  

 

 -

 

 

  

 

31 

 

 

  

 

 -

 

 

  

 

31 

Total loans to banking clients – net

 

 

12,115 

 

 

  

 

 -

 

 

  

 

12,124 

 

 

  

 

 -

 

 

  

 

12,124 

Other assets

 

 

64 

 

 

  

 

 -

 

 

  

 

64 

 

 

  

 

 -

 

 

  

 

64 

Total

 

$

78,718 

 

 

  

$

 -

 

 

  

$

78,225 

 

 

  

$

 -

 

 

  

$

78,225 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits from banking clients

 

$

91,187 

 

 

  

$

 -

 

 

  

$

91,187 

 

 

  

$

 -

 

 

  

$

91,187 

Payables to brokers, dealers, and clearing

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

organizations

 

 

1,207 

 

 

  

 

 -

 

 

  

 

1,207 

 

 

  

 

 -

 

 

  

 

1,207 

Payables to brokerage clients

 

 

34,532 

 

 

  

 

 -

 

 

  

 

34,532 

 

 

  

 

 -

 

 

  

 

34,532 

Accrued expenses and other liabilities

 

 

536 

 

 

  

 

 -

 

 

  

 

536 

 

 

  

 

 -

 

 

  

 

536 

Long-term debt

 

 

1,904 

 

 

  

 

 -

 

 

  

 

1,999 

 

 

  

 

 -

 

 

  

 

1,999 

Total

 

$

129,366 

 

 

  

$

 -

 

 

  

$

129,461 

 

 

  

$

 -

 

 

  

$

129,461 

 

17 


 

THE CHARLES SCHWAB CORPORATION

Notes to Condensed Consolidated Financial Statements

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

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

 

 

 

 

 

Quoted Prices

 

 

 

 

 

 

 

 

 

 

 

 

 

 

in Active Markets 

 

Significant

 

Significant

 

 

 

 

 

 

 

for Identical

 

Other Observable

 

Unobservable

 

 

 

Carrying

 

Assets

 

Inputs

 

Inputs

 

Balance at

December 31, 2012

Amount

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Fair Value

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

11,174 

 

 

  

$

 -

 

 

  

$

11,174 

 

 

  

$

 -

 

 

  

$

11,174 

Cash and investments segregated and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

on deposit for regulatory purposes

 

 

23,723 

 

 

  

 

 -

 

 

  

 

23,723 

 

 

  

 

 -

 

 

  

 

23,723 

Receivables from brokers, dealers, and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

clearing organizations

 

 

333 

 

 

  

 

 -

 

 

  

 

333 

 

 

  

 

 -

 

 

  

 

333 

Receivables from brokerage clients – net

 

 

13,453 

 

 

  

 

 -

 

 

  

 

13,453 

 

 

  

 

 -

 

 

  

 

13,453 

Securities held to maturity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. agency mortgage-backed securities

 

 

17,750 

 

 

  

 

 -

 

 

  

 

18,289 

 

 

  

 

 -

 

 

  

 

18,289 

Other securities

 

 

444 

 

 

  

 

 -

 

 

  

 

443 

 

 

  

 

 -

 

 

  

 

443 

Total securities held to maturity

 

 

18,194 

 

 

  

 

 -

 

 

  

 

18,732 

 

 

  

 

 -

 

 

  

 

18,732 

Loans to banking clients – net:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential real estate mortgages

 

 

6,471 

 

 

  

 

 -

 

 

  

 

6,687 

 

 

  

 

 -

 

 

  

 

6,687 

Home equity lines of credit

 

 

3,267 

 

 

  

 

 -

 

 

  

 

3,295 

 

 

  

 

 -

 

 

  

 

3,295 

Personal loans secured by securities

 

 

963 

 

 

  

 

 -

 

 

  

 

963 

 

 

  

 

 -

 

 

  

 

963 

Other

 

 

25 

 

 

  

 

 -

 

 

  

 

24 

 

 

  

 

 -

 

 

  

 

24 

Total loans to banking clients – net

 

 

10,726 

 

 

  

 

 -

 

 

  

 

10,969 

 

 

  

 

 -

 

 

  

 

10,969 

Other assets

 

 

64 

 

 

  

 

 -

 

 

  

 

64 

 

 

  

 

 -

 

 

  

 

64 

Total

 

$

77,667 

 

 

 

$

 -

 

 

 

$

78,448 

 

 

 

$

 -

 

 

 

$

78,448 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits from banking clients

 

$

79,377 

 

 

  

$

 -

 

 

  

$

79,377 

 

 

  

$

 -

 

 

  

$

79,377 

Payables to brokers, dealers, and clearing

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

organizations

 

 

1,068 

 

 

  

 

 -

 

 

  

 

1,068 

 

 

  

 

 -

 

 

  

 

1,068 

Payables to brokerage clients

 

 

40,330 

 

 

  

 

 -

 

 

  

 

40,330 

 

 

  

 

 -

 

 

  

 

40,330 

Accrued expenses and other liabilities

 

 

353 

 

 

  

 

 -

 

 

  

 

353 

 

 

  

 

 -

 

 

  

 

353 

Long-term debt

 

 

1,632 

 

 

  

 

 -

 

 

  

 

1,782 

 

 

  

 

 -

 

 

  

 

1,782 

Total

 

$

122,760 

 

 

  

$

 -

 

 

  

$

122,910 

 

 

  

$

 -

 

 

  

$

122,910 

 

Securities lending: Payables from brokers, dealers, and clearing organizations include securities loaned. The Company loans client securities temporarily to other brokers in connection with its securities lending activities and receives cash as collateral for the securities loaned. The fair value of client securities pledged in securities lending transactions to other broker-dealers was $939 million at September 30, 2013 and $852 million at December 31, 2012. Additionally, the Company borrows securities from other broker-dealers to fulfill short sales by clients, which are included in receivables from brokers, dealers, and clearing organizations. The fair value of these borrowed securities was $246 million at September 30, 2013 and $121 million at December 31, 2012. All of the Company’s securities lending transactions are subject to enforceable master netting arrangements with other broker-dealers. However, the Company does not net securities lending transactions and therefore, the Company’s securities loaned and securities borrowed are presented gross in the condensed consolidated balance sheets.

 

Resale agreements: Cash and investments segregated and on deposit for regulatory purposes include securities purchased under agreements to resell (resale agreements), which are collateralized by U.S. Government and agency securities. 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. Schwab utilizes the collateral provided under these resale agreements to meet obligations under broker-dealer client protection rules, which place limitations on its ability to access such segregated securities. The Company’s resale agreements are not subject to master netting arrangements.

 

 

18 


 

THE CHARLES SCHWAB CORPORATION

Notes to Condensed Consolidated Financial Statements

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

(Unaudited)

 

7.Accumulated Other Comprehensive Income

 

Accumulated other comprehensive income represents cumulative gains and losses that are not reflected in earnings. The components of other comprehensive income (loss) are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

 

 

 

2013

 

 

 

 

 

 

 

 

2012

 

 

 

 

 

 

Before

 

Tax

 

 

Net of

 

Before

 

Tax

 

 

Net of

 

 

tax

 

effect

 

 

tax

 

tax

 

effect

 

 

tax

Change in net unrealized gain on

 

 

 

  

 

 

 

  

 

 

 

 

 

  

 

 

 

  

 

 

securities available for sale:

 

 

 

  

 

 

 

  

 

 

 

 

 

  

 

 

 

  

 

 

Net unrealized gain

 

$

72 

  

$

(28)

 

$

44 

 

 

$

250 

  

$

(94)

 

$

156 

 

Reclassification of impairment charges

 

 

 

  

 

 

 

  

 

 

 

 

 

  

 

 

 

  

 

 

included in net impairment losses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

on securities

 

 

  

 

 -

 

  

 

 

 

  

 

(1)

 

  

 

Other reclassifications included in

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

other revenue

 

 

(2)

 

 

 -

 

 

(2)

 

 

 

 -

 

 

 -

 

 

 -

 

Change in net unrealized gain on

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

 

 

securities available for sale

 

 

71 

 

 

(28)

 

 

43 

 

 

 

253 

 

 

(95)

 

 

158 

 

Other comprehensive income

 

$

71 

 

$

(28)

 

$

43 

 

 

$

253 

 

$

(95)

 

$

158 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30,

 

 

 

 

2013

 

 

 

 

 

 

 

 

2012

 

 

 

 

 

 

Before

 

Tax

 

 

Net of

 

Before

 

Tax

 

 

Net of

 

 

tax

 

effect

 

 

tax

 

tax

 

effect

 

 

tax

Change in net unrealized gain on

 

 

 

  

 

 

 

  

 

 

 

 

 

  

 

 

 

  

 

 

securities available for sale:

 

 

 

  

 

 

 

  

 

 

 

 

 

  

 

 

 

  

 

 

Net unrealized (loss) gain

 

$

(408)

  

$

153 

 

$

(255)

 

 

$

458 

  

$

(171)

 

$

287 

 

Reclassification of impairment charges

 

 

 

  

 

 

 

  

 

 

 

 

 

  

 

 

 

  

 

 

included in net impairment losses

 

 

 

  

 

 

 

  

 

 

 

 

 

  

 

 

 

  

 

 

on securities

 

 

  

 

(2)

 

  

 

 

 

28 

  

 

(10)

 

  

18 

 

Other reclassifications included in

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

other revenue

 

 

(5)

 

 

 

 

(4)

 

 

 

(1)

 

 

 -

 

 

(1)

 

Change in net unrealized gain on

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

 

 

securities available for sale

 

 

(405)

 

 

152 

 

 

(253)

 

 

 

485 

 

 

(181)

 

 

304 

 

Other

 

 

  

 

 -

 

  

 

 

 

 -

  

 

 -

 

  

 -

 

Other comprehensive (loss) income

 

$

(404)

 

$

152 

 

$

(252)

 

 

$

485 

 

$

(181)

 

$

304 

 

 

Accumulated other comprehensive income balances are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

Net unrealized

 

 

 

 

 

 

Total

 

gain on securities

 

 

 

 

 

 

accumulated other

 

available for sale

 

Other

 

comprehensive income

Balance at December 31, 2011

 

$

10 

 

 

  

$

(2)

 

 

 

$

 

Other net changes

 

 

304 

 

 

  

 

 -

 

 

 

 

304 

 

Balance at September 30, 2012

 

$

314 

 

 

  

$

(2)

 

 

 

$

312 

 

Balance at December 31, 2012

 

$

299 

 

 

  

$

(1)

 

 

 

$

298 

 

Other net changes

 

 

(253)

 

 

 

 

 

 

 

 

(252)

 

Balance at September 30, 2013

 

$

46 

 

 

 

$

 -

 

 

 

$

46 

 

 

 

 

19 


 

THE CHARLES SCHWAB CORPORATION

Notes to Condensed Consolidated Financial Statements

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

(Unaudited)

 

8.Earnings Per Common Share

 

Basic earnings per common share (EPS) is computed by dividing net income available to common stockholders by the weighted-average number of common shares outstanding during the period. The computation of diluted EPS is similar to the computation of basic EPS except that the denominator is increased to include the number of additional common shares that would have been outstanding if dilutive potential common shares had been issued. Dilutive potential common shares include, if dilutive, the effect of outstanding stock options and unvested restricted stock awards and units. EPS under the basic and diluted computations is as follows: 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30,

 

September 30,

 

 

2013

 

2012

 

2013

 

2012

Net income

 

$

290 

  

$

247 

  

$

752 

 

$

717 

Preferred stock dividends

 

 

(8)

 

 

(9)

  

 

(39)

 

 

(23)

Net income available to common stockholders

 

$

282 

  

$

238 

  

$

713 

 

$

694 

Weighted-average common shares outstanding — basic

 

 

1,287 

  

 

1,274 

  

 

1,282 

 

 

1,273 

Common stock equivalent shares related to stock incentive plans

 

 

  

 

  

 

 

 

Weighted-average common shares outstanding — diluted (1)

 

 

1,296 

  

 

1,275 

  

 

1,288 

 

 

1,274 

Basic EPS

 

$

  .22

  

$

  .19

  

$

  .55

 

$

  .54

Diluted EPS

 

$

  .22

  

$

  .19

  

$

  .55

 

$

  .54

 

(1)

Antidilutive stock options and restricted stock awards excluded from the calculation of diluted EPS totaled 19 million and 59 million shares for the third quarters of 2013 and 2012, respectively, and 31 million and 61 million shares for the first nine months of 2013 and 2012, respectively.

 

 

 

9.Regulatory Requirements

 

CSC is a savings and loan holding company and Schwab Bank, CSC’s depository institution subsidiary, is a federal savings bank. CSC is subject to supervision and regulation by the Board of Governors of the Federal Reserve System (the Federal Reserve) and Schwab Bank is subject to supervision and regulation by the Office of the Comptroller of the Currency (the OCC). CSC is currently not subject to specific statutory capital requirements, however, CSC is required to serve as a source of strength for Schwab Bank. Under the new regulatory capital rules, which implemented Basel III and relevant provisions of the “Dodd-Frank Wall Street Reform and Consumer Protection Act,” CSC will be subject to minimum leverage and minimum risk-based capital ratio requirements beginning on January 1, 2015. 

 

Schwab Bank is subject to regulation and supervision and to various requirements and restrictions under federal and state laws, including regulatory capital guidelines. Among other things, these requirements also restrict and govern the terms of affiliate transactions, such as extensions of credit and repayment of loans between Schwab Bank and CSC or CSC’s other subsidiaries. In addition, Schwab Bank is required to provide notice to and may be required to obtain approval of the OCC and the Federal Reserve to declare dividends to CSC. The federal banking agencies have broad powers to enforce these regulations, including the power to terminate deposit insurance, impose substantial fines and other civil and criminal penalties, and appoint a conservator or receiver. Under the Federal Deposit Insurance Act, Schwab Bank could be subject to restrictive actions if it were to fall within one of the lowest three of five capital categories. Schwab Bank is required to maintain minimum capital levels as specified in federal banking laws and regulations. Failure to meet the minimum levels could result in certain mandatory, and possibly additional discretionary, actions by the regulators that, if undertaken, could have a direct material effect on Schwab Bank. At September 30, 2013, CSC and Schwab Bank met the capital level requirements.

 

20 


 

THE CHARLES SCHWAB CORPORATION

Notes to Condensed Consolidated Financial Statements

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

(Unaudited)

 

The regulatory capital and ratios for Schwab Bank at September 30, 2013 are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Minimum Capital

 

Minimum to be

 

 

Actual

 

Requirement

 

Well Capitalized

 

 

Amount

 

Ratio

 

Amount

 

Ratio

 

Amount

  

Ratio

Tier 1 Risk-Based Capital

 

$

6,345 

 

18.5 

 

$

1,369 

 

4.0 

 

$

2,053 

  

6.0 

Total Risk-Based Capital

 

$

6,398 

 

18.7 

 

$

2,737 

 

8.0 

 

$

3,422 

  

10.0 

Tier 1 Leverage

 

$

6,345 

 

6.5 

 

$

3,911 

 

4.0 

 

$

4,889 

  

5.0 

Tangible Equity

 

$

6,345 

 

6.5 

 

$

1,955 

 

2.0 

 

 

N/A 

  

 

 

 

N/A Not applicable.

 

Based on its regulatory capital ratios at September 30, 2013, Schwab Bank is considered well capitalized (the highest category) pursuant to banking regulatory guidelines. There are no conditions or events since September 30, 2013, that management believes have changed Schwab Bank’s capital category.

 

CSC’s principal U.S. broker-dealers are Schwab and optionsXpress, Inc. Schwab and optionsXpress, Inc. are both subject to Rule 15c3-1 under the Securities Exchange Act of 1934 (the Uniform Net Capital Rule). Schwab and optionsXpress, Inc. compute net capital under the alternative method permitted by the Uniform Net Capital Rule. This method requires the maintenance of minimum net capital, as defined, of the greater of 2% of aggregate debit balances arising from client transactions or a minimum dollar requirement ($250,000 for Schwab), which is based on the type of business conducted by the broker-dealer. Under the alternative method, a broker-dealer may not repay subordinated borrowings, pay cash dividends, or make any unsecured advances or loans to its parent company or employees if such payment would result in a net capital amount of less than 5% of aggregate debit balances or less than 120% of its minimum dollar requirement.

 

optionsXpress, Inc. is also subject to Commodity Futures Trading Commission Regulation 1.17 (Reg. 1.17) under the Commodity Exchange Act, which also requires the maintenance of minimum net capital. optionsXpress, Inc., as a futures commission merchant, is required to maintain minimum net capital equal to the greater of its net capital requirement under Reg. 1.17 ($1 million), or the sum of 8% of the total risk margin requirements for all positions carried in client accounts and 8% of the total risk margin requirements for all positions carried in non-client accounts (as defined in Reg. 1.17).

 

Net capital and net capital requirements for Schwab and optionsXpress, Inc. at September 30, 2013 are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Capital

 

Net Capital

 

 

 

 

 

% of

 

Minimum

 

2% of

 

in Excess of

 

in Excess of 5%

 

 

 

 

 

Aggregate

 

Net Capital

 

Aggregate

 

Required

 

of Aggregate

 

 

Net Capital

 

Debit Balances

 

Required

 

Debit Balances

 

Net Capital

 

Debit Balances

Schwab

 

$

1,361 

  

 

$

0.250 

  

$

288 

  

$

1,073 

  

$

642 

optionsXpress, Inc.

 

$

100 

  

29 

 

$

  

$

  

$

93 

  

$

83 

 

 

 

10.Segment Information

 

The Company structures its operating segments according to its clients and the services provided to those clients. The Company’s two reportable segments are Investor Services and Advisor Services. In the first quarter of 2013, the Company realigned its reportable segments as a result of organizational changes. The segment formerly reported as Institutional Services was renamed to Advisor Services. Additionally, the Retirement Plan Services and Corporate Brokerage Services business units are now part of the Investor Services segment. Prior period segment information has been recast to reflect these organizational changes. The Investor Services segment provides retail brokerage and banking services to individual investors, retirement plan services, and corporate brokerage services. The Advisor Services segment provides custodial, trading, and support services to independent investment advisors, and retirement business services to independent retirement plan advisors and recordkeepers whose plan assets are held at Schwab Bank. Revenues and expenses are allocated to the Company’s two segments based on which segment services the client.

 

The Company evaluates the performance of its segments on a pre-tax basis, excluding items such as significant nonrecurring gains, impairment charges on non-financial assets, discontinued operations, extraordinary items, and significant restructuring

21 


 

THE CHARLES SCHWAB CORPORATION

Notes to Condensed Consolidated Financial Statements

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

(Unaudited)

 

and other charges. Segment assets and liabilities are not used for evaluating segment performance or in deciding how to allocate resources to segments. There are no revenues from transactions between the segments.

 

Financial information for the Company’s reportable segments is presented in the following table:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

Investor Services

 

Advisor Services

 

Unallocated

 

Total

Three Months Ended September 30,

2013

 

2012

 

2013

 

2012

 

2013

 

2012

 

2013

 

2012

Net Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Asset management and administration fees

$

410 

  

$

366 

  

$

173 

  

$

157 

  

$

 -

  

$

  

$

583 

  

$

524 

Net interest revenue

 

450 

  

 

387 

  

 

56 

  

 

52 

  

 

 -

  

 

 -

  

 

506 

  

 

439 

Trading revenue

 

153 

  

 

145 

  

 

71 

  

 

60 

  

 

 -

 

 

(1)

  

 

224 

  

 

204 

Other

 

44 

  

 

26 

  

 

13 

  

 

16 

  

 

 -

  

 

 -

  

 

57 

  

 

42 

Provision for loan losses

 

 

 

(10)

 

 

 

 

 -

 

 

 -

  

 

 -

  

 

 

 

(10)

Net impairment losses on securities

 

 -

 

 

(2)

 

 

(1)

 

 

(1)

 

 

 -

  

 

 -

  

 

(1)

 

 

(3)

Total net revenues

 

1,060 

  

 

912 

  

 

313 

  

 

284 

  

 

 -

  

 

 -

  

 

1,373 

  

 

1,196 

Expenses Excluding Interest

 

705 

  

 

657 

  

 

204 

  

 

178 

  

 

 -

  

 

 -

  

 

909 

  

 

835 

Income before taxes on income

$

355 

  

$

255 

  

$

109 

  

$

106 

  

$

 -

  

$

 -

  

$

464 

  

$

361 

Taxes on income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

174 

  

 

114 

Net Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

290 

  

$

247 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

Investor Services

 

Advisor Services

 

Unallocated

 

Total

Nine Months Ended September 30,

2013

 

2012

 

2013

 

2012

 

2013

 

2012

 

2013

 

2012

Net Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Asset management and administration fees

$

1,199 

  

$

1,057 

  

$

508 

  

$

447 

  

$

 -

  

$

 -

  

$

1,707 

  

$

1,504 

Net interest revenue

 

1,281 

  

 

1,178 

  

 

167 

  

 

153 

  

 

 -

  

 

 -

  

 

1,448 

  

 

1,331 

Trading revenue

 

462 

  

 

475 

  

 

220 

  

 

192 

  

 

 -

 

 

(1)

  

 

682 

  

 

666 

Other (1)

 

129 

  

 

87 

  

 

43 

  

 

50 

  

 

 -

  

 

72 

  

 

172 

  

 

209 

Provision for loan losses

 

(1)

 

 

(13)

 

 

 -

 

 

(1)

 

 

 -

  

 

 -

  

 

(1)

 

 

(14)

Net impairment losses on securities

 

(7)

 

 

(25)

 

 

(1)

 

 

(3)

 

 

 -

  

 

 -

  

 

(8)

 

 

(28)

Total net revenues

 

3,063 

  

 

2,759 

  

 

937 

  

 

838 

  

 

 -

  

 

71 

  

 

4,000 

  

 

3,668 

Expenses Excluding Interest

 

2,178 

  

 

2,014 

  

 

615 

  

 

548 

  

 

 -

  

 

 -

 

 

2,793 

  

 

2,562 

Income before taxes on income

$

885 

  

$

745 

  

$

322 

  

$

290 

  

$

 -

  

$

71 

  

$

1,207 

  

$

1,106 

Taxes on income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

455 

  

 

389 

Net Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

752 

 

$

717 

 

 

 

(1)

Unallocated amount includes a pre-tax gain of $70 million relating to a confidential resolution of a vendor dispute in the second quarter of 2012.

 

 

 

 

11.Subsequent Events

 

The Company has evaluated the impact of events that have occurred subsequent to September 30, 2013, through the date the condensed consolidated financial statements were filed with the SEC. Based on this evaluation, other than as recorded or disclosed within these condensed consolidated financial statements and related notes, the Company has determined none of these events were required to be recognized or disclosed. 

 

 

 

22 


 

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

 

OVERVIEW

 

Management of The Charles Schwab Corporation (CSC) and its subsidiaries (collectively referred to as the Company) focuses on several key client activity and financial metrics in evaluating the Company’s financial position and operating performance. Results for the third quarters and first nine months of 2013 and 2012 are:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

Nine Months Ended

 

 

 

 

 

September 30,

Percent

 

September 30,

 

Percent

 

 

2013

 

 

2012

 

Change

 

2013

 

 

2012

 

Change

Client Activity Metrics:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net new client assets (1) (2) (in billions)

 

$

18.1 

  

 

$

20.4 

 

(11)

%

 

$

39.8 

  

 

$

75.3 

  

(47)

%

Client assets (2) (in billions, at quarter end)

 

$

2,145.0 

  

 

$

1,890.4 

 

13 

%

 

 

 

 

 

 

 

 

 

 

New brokerage accounts (in thousands)

 

 

223 

 

 

 

198 

 

13 

%

 

 

710 

 

 

 

659 

 

%

Active brokerage accounts (in thousands,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

at quarter end)

 

 

9,013 

  

 

 

8,736 

 

%

 

 

 

  

 

 

 

  

 

 

Company Financial Metrics:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net revenues (3)

 

$

1,373 

  

 

$

1,196 

 

15 

%

 

$

4,000 

  

 

$

3,668 

  

%

Expenses excluding interest

 

 

909 

  

 

 

835 

 

%

 

 

2,793 

  

 

 

2,562 

  

%

Income before taxes on income

 

 

464 

  

 

 

361 

 

29 

%

 

 

1,207 

  

 

 

1,106 

  

%

Taxes on income (4)

 

 

174 

  

 

 

114 

 

53 

%

 

 

455 

  

 

 

389 

  

17 

%

Net income

 

$

290 

  

 

$

247 

 

17 

%

 

$

752 

  

 

$

717 

  

%

Preferred stock dividends

 

$

 

 

$

 

(11)

%

 

$

39 

 

 

$

23 

 

70 

%

Net income available to common stockholders

 

$

282 

 

 

$

238 

 

18 

%

 

$

713 

 

 

$

694 

 

%

Earnings per common share – diluted

 

$

.22

  

 

$

.19

 

16 

%

 

$

.55

  

 

$

.54

  

%

Net revenue growth from prior year

 

 

15 

 

 

%

 

 

 

 

 

 

 

 

Pre-tax profit margin

 

 

33.8 

 

 

30.2 

%

 

 

 

 

30.2 

 

 

30.2 

 

 

Return on average common stockholders’

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

equity (annualized) (5)

 

 

13 

 

 

11 

%

 

 

 

 

11 

 

 

11 

 

 

Annualized net revenue per average full-time

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

equivalent employee (in thousands)

 

$

398 

 

 

$

352 

 

13 

%

 

$

384 

 

 

$

354 

 

%

 

(1)

Includes outflows of $44.3 billion in the second quarter of 2013 relating to the planned transfer of a mutual fund clearing services client. Includes outflows of $1.3 billion as a result of the closure and/or sale of certain subsidiaries of optionsXpress Holdings, Inc. in the third quarter of 2012. Includes inflows of $12.0 billion in the first quarter of 2012 from a mutual fund clearing services client.

(2)

In the third quarter of 2013, the Company reduced its reported total for overall client assets by $24.7 billion to reflect the estimated impact of the consolidation of its retirement plan recordkeeping technology platforms and subsequent resignation from certain retirement plan clients.

(3)

Includes a pre-tax gain of $70 million relating to a confidential resolution of a vendor dispute in the second quarter of 2012.

(4)

Includes a nonrecurring state tax benefit of $20 million recognized in the third quarter of 2012.

(5)

Calculated as net income available to common stockholders divided by average common stockholders’ equity.

 

The broad equity markets improved during the third quarter of 2013 compared to the third quarter of 2012, as the Nasdaq Composite Index, Standard & Poor’s 500 Index, and Dow Jones Industrial Average increased 21%, 17%, and 13%, respectively. Short-term interest rates continued to be constrained as the federal funds target rate remained unchanged at a range of zero to 0.25% and the average three-month Treasury Bill yield decreased by 7 basis points to 0.02% during the third quarter of 2013 compared to the third quarter of 2012. Long-term interest rates increased during the third quarter of 2013 compared to the third quarter of 2012, including the average 10-year Treasury yield, which increased by 107 basis points to 2.69%.

 

23 


 

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 Company continued to experience strength in its key client activity metrics during the third quarter of 2013 core net new client assets totaled $42.8 billion, up 97% from the third quarter of 2012, and the highest in the Company’s history for a summer quarter. Total client assets ended the quarter at $2.15 trillion, up 13% from the third quarter of 2012. In addition, the Company added 223,000 new brokerage accounts to its client base during the third quarter of 2013, up 13%, and active brokerage accounts were 9.0 million, up 3% on a year-over-year basis.

 

For the third quarter of 2013, the Company’s net revenues increased by 15% from the third quarter of 2012. All of the Company’s major sources of net revenues (net interest revenue, asset management and administration fees, and trading revenue) increased. Net interest revenue increased primarily due to higher balances of interest-earning assets partially offset by the effect lower average short-term interest rates had on the Company’s average net interest margin. Asset management and administration fees increased primarily due to increases in advice solutions fees and mutual fund service fees. Trading revenue increased primarily due to higher daily average revenue trades.

 

For the first nine months of 2013, net revenues increased by 9% compared to the first nine months of 2012 primarily due to increases in asset management and administration fees and net interest revenue, partially offset by a decrease in other revenue. Asset management and administration fees increased primarily due to increases in advice solutions fees and mutual fund service fees. Net interest revenue increased primarily due to higher balances of interest-earning assets partially offset by the effect lower average short-term interest rates had on the Company’s average net interest margin. Other revenue decreased primarily due to a gain of $70 million relating to a confidential resolution of a vendor dispute in the second quarter of 2012.

 

Expenses excluding interest increased by 9% in both the third quarter and first nine months of 2013 compared to the same periods in 2012, primarily due to increases in compensation and benefits, advertising and market development, professional services, and other expense. Compensation and benefits expense increased in the third quarter and first nine months of 2013, primarily due to higher incentive compensation relating to the transition to a new payout schedule for field incentive plans and increased field sales volume. The increase in compensation and benefits in the first nine months of 2013 was also due to increased and accelerated health savings account (HSA) contributions and equity incentive plan changes to vesting for retirement-eligible employees in the first quarter of 2013. Advertising and market development expense increased in the third quarter and first nine months of 2013, primarily due to the Company’s new advertising and branding initiative, Own your tomorrow.

 

As a result of the Company’s strong key client activity metrics, the Company achieved a pre-tax profit margin of 33.8% and 30.2% in the third quarter and first nine months of 2013, respectively. Overall, net income increased by 17% and 5% in the third quarter and first nine months of 2013 compared to the same periods in 2012, respectively. The return on average common stockholders’ equity was 13% and 11% in the third quarter and first nine months of 2013, respectively.  As discussed above, net income for the first nine months of 2012 includes a pre-tax gain of $70 million (after-tax of $44 million) recognized in the second quarter of 2012, and a nonrecurring state tax benefit of $20 million that reduced taxes on income in the third quarter of 2012, which affects the comparability of the Company’s financial metrics year-over-year.

 

 

CURRENT MARKET AND REGULATORY ENVIRONMENT AND OTHER DEVELOPMENTS

 

To the extent short-term interest rates remain at current low levels, the Company’s net interest revenue will continue to be constrained, even as growth in average balances helps to increase such revenue. The low short-term interest rate environment also affects asset management and administration fees. The Company continues to waive a portion of its management fees, as the overall yields on certain Schwab-sponsored money market mutual funds have remained at levels at or below the management fees on those funds. These and other money market mutual funds may not be able to replace maturing securities with securities of equal or higher yields. As a result, the yields on such funds may remain around or decline from their current levels, and therefore below the stated management fees on those funds. To the extent this occurs, asset management and administration fees may be negatively affected.

 

On July 2, 2013, the Board of Governors of the Federal Reserve System (the Federal Reserve) issued regulatory capital rules, which implemented Basel III and relevant provisions of the “Dodd-Frank Wall Street Reform and Consumer Protection Act” (the Dodd-Frank Act), that will be phased in beginning on January 1, 2015. The final rules will subject savings and loan holding companies, such as CSC, to consolidated capital requirements. In addition, the final rules establish more restrictive capital definitions, higher risk-weightings for certain asset classes, higher minimum capital ratios and capital buffers. On

24 


 

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)

 

 

July 9, 2013, the Office of the Comptroller of the Currency (the OCC) issued similar regulatory capital rules applicable to federal savings banks, including Schwab Bank. The Company is evaluating the impact of the new rules, but does not expect them to have a material impact on the Company’s business, financial condition, or results of operations.

 

On October 24, 2013, the Federal Reserve, in collaboration with the OCC and the Federal Deposit Insurance Corporation, issued a joint notice of proposed rulemaking that would implement a quantitative liquidity requirement generally consistent with the liquidity coverage ratio (LCR) standard established by Basel III. The LCR would apply to all internationally active banking organizations. The Federal Reserve also proposed a modified LCR standard, which would apply to the Company. Under the modified LCR, a depository institution holding company would be required to maintain high-quality liquid assets in an amount related to its total net cash outflows over a prospective period. The proposed transition period for the rule would begin on January 1, 2015, and institutions would be required to be fully compliant by January 1, 2017. The Company is currently evaluating the impact of the proposed rule, which is subject to comment until January 31, 2014, and to further modification.

 

The Company is pursuing lawsuits in state court in San Francisco for rescission and damages against issuers, underwriters, and dealers of individual non-agency residential mortgage-backed securities on which the Company has experienced realized and unrealized losses. The lawsuits allege that offering documents for the securities contained material untrue and misleading statements about the securities and the underwriting standards and credit quality of the underlying loans. On January 27, 2012 and July 24, 2012, the court denied defendants’ motions to dismiss the claims with respect to all but 3 of the 51 securities, and discovery is proceeding.

 

In April 2013, the SEC published notice of a National Securities Clearing Corporation (NSCC) proposed rule change that would impose a supplemental liquidity funding obligation on certain NSCC participants. The stated purpose is to provide the NSCC with sufficient liquidity and financial resources to withstand a default by one of its members. The rule change, as currently proposed, could require the Company to provide a supplemental liquidity deposit. The Company does not have sufficient information to assess the potential impact of the proposed rule change, which is subject to comment and further modification.

 

As a result of the current U.S. budget deficit concerns, one or more of the credit rating agencies may downgrade the U.S. government’s credit rating. Any downgrade could decrease the value of the Company’s securities in both the available for sale and held to maturity portfolios.

 

25 


 

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

 

The following discussion presents an analysis of the Company’s results of operations for the third quarter and first nine months of 2013 compared to the same periods in 2012.

 

Net Revenues

 

The Company’s major sources of net revenues are asset management and administration fees, net interest revenue, and trading revenue, all of which increased in the third quarter and first nine months of 2013 compared to the same periods in 2012.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

 

 

 

2013

 

2012

 

 

 

 

 

 

 

 

% of

 

 

 

 

% of

 

 

Percent

 

 

 

 

Total Net

 

 

 

 

Total Net

 

 

Change

 

Amount

 

Revenues

 

Amount

 

Revenues

Asset management and administration fees

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Schwab money market funds before fee waivers

 

%

 

$

239 

 

 

 

 

$

221 

  

 

 

Fee waivers

 

32 

%

 

 

(180)

 

 

 

 

 

(136)

 

 

 

Schwab money market funds after fee waivers

 

(31)

 

 

59 

 

 

 

85 

  

Equity and bond funds

 

28 

 

 

41 

 

 

 

32 

  

Mutual Fund OneSource®

 

14 

 

 

195 

 

14 

 

 

171 

  

14 

Total mutual funds

 

 

 

295 

 

21 

 

 

288 

  

24 

Advice solutions

 

24 

 

 

183 

 

14 

 

 

148 

  

12 

Other

 

19 

 

 

105 

 

 

 

88 

  

Asset management and administration fees

 

11 

 

 

583 

 

43 

 

 

524 

  

44 

Net interest revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest revenue

 

11 

%

 

 

531 

 

39 

 

 

478 

  

40 

Interest expense

 

(36)

%

 

 

(25)

 

(2)

%

 

 

(39)

 

(3)

%

Net interest revenue

 

15 

%

 

 

506 

 

37 

 

 

439 

  

37 

Trading revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commissions

 

11 

%

 

 

210 

 

15 

 

 

190 

  

16 

Principal transactions

 

 -

 

 

 

14 

 

 

 

14 

  

Trading revenue

 

10 

%

 

 

224 

 

16 

 

 

204 

  

17 

Other

 

36 

%

 

 

57 

 

 

 

42 

  

Provision for loan losses

 

(140)

%

 

 

 

 -

 

 

 

(10)

 

(1)

%

Net impairment losses on securities

 

(67)

%

 

 

(1)

 

 -

 

 

 

(3)

 

 -

 

Total net revenues

 

15 

 

$

1,373 

 

100 

 

$

1,196 

  

100 

 

26 


 

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)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30,

 

 

 

 

2013

 

 

2012

 

 

 

 

 

 

 

 

 

% of

 

 

 

 

% of

 

 

Percent

 

 

 

 

Total Net

 

 

 

 

Total Net

 

 

Change

 

Amount

 

Revenues

 

Amount

 

Revenues

Asset management and administration fees

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Schwab money market funds before fee waivers

 

 

$

695 

 

 

 

 

$

663 

 

 

 

Fee waivers

 

11 

 

 

(492)

 

 

 

 

 

(445)

 

 

 

Schwab money market funds after fee waivers

 

(7)

%

 

 

203 

 

 

 

218 

 

Equity and bond funds

 

20 

 

 

114 

 

 

 

95 

 

Mutual Fund OneSource®

 

14 

%

 

 

570 

 

14 

 

 

501 

 

14 

Total mutual funds

 

%

 

 

887 

 

22 

 

 

814 

 

22 

Advice solutions

 

22 

 

 

523 

 

13 

 

 

427 

 

12 

Other

 

13 

 

 

297 

 

 

 

263 

 

Asset management and administration fees

 

13 

 

 

1,707 

 

43 

 

 

1,504 

 

41 

Net interest revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest revenue

 

 

 

1,527 

 

38 

 

 

1,447 

 

39 

Interest expense

 

(32)

%

 

 

(79)

 

(2)

%

 

 

(116)

 

(3)

%

Net interest revenue

 

%

 

 

1,448 

 

36 

 

 

1,331 

 

36 

Trading revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commissions

 

 

 

647 

 

16 

 

 

624 

 

17 

Principal transactions

 

(17)

%

 

 

35 

 

 

 

42 

 

Trading revenue

 

 

 

682 

 

17 

 

 

666 

 

18 

Other

 

(18)

 

 

172 

 

 

 

209 

 

Provision for loan losses

 

(93)

 

 

(1)

 

 -

 

 

 

(14)

 

 -

 

Net impairment losses on securities

 

(71)

 

 

(8)

 

 -

 

 

 

(28)

 

(1)

Total net revenues

 

 

$

4,000 

 

100 

 

$

3,668 

 

100 

 

 

Asset Management and Administration Fees

 

Asset management and administration fees include mutual fund service fees and fees for other asset-based financial services provided to individual and institutional clients. The Company earns mutual fund service fees for shareholder services, administration, and investment management provided to its proprietary funds, and recordkeeping and shareholder services provided to third-party funds. These fees are based upon the daily balances of client assets invested in these funds. The Company also earns asset management fees for advice solutions, which include advisory and managed account services that are based on the daily balances of client assets subject to the specific fee for service. The fair values of client assets included in proprietary and third-party mutual funds are based on quoted market prices and other observable market data. Other asset management and administration fees include various asset based fees, such as third-party mutual fund service fees, trust fees, 401k record keeping fees, and mutual fund clearing and other service fees. Asset management and administration fees vary with changes in the balances of client assets due to market fluctuations and client activity. For a discussion of the impact of current market conditions on asset management and administration fees, see “Current Market and Regulatory Environment and Other Developments.”

 

Asset management and administration fees increased by $59 million, or 11%, and $203 million, or 13%, in the third quarter and first nine months of 2013 compared to the same periods in 2012, primarily due to increases in advice solutions fees and mutual fund service fees.

 

Mutual fund service fees increased by $7 million, or 2%, and $73 million, or 9%, in the third quarter and first nine months of 2013 compared to the same periods in 2012, primarily due to market appreciation of client assets invested in the Company’s Mutual Fund OneSource funds, and due to growth in client assets invested in money market mutual funds and equity and bond funds, partially offset by a decrease in net money market mutual fund fees as a result of lower yields on fund assets.

 

27 


 

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)

 

 

Advice solutions fees increased by $35 million, or 24%, and $96 million, or 22%, in the third quarter and first nine months of 2013 compared to the same periods in 2012, primarily due to growth in client assets enrolled in advisory offers, including Windhaven®, Schwab Private Client, and ThomasPartners®.

 

Net Interest Revenue

 

Net interest revenue is the difference between interest earned on interest-earning assets and interest paid on funding sources. Net interest revenue is affected by changes in the volume and mix of these assets and liabilities, as well as by fluctuations in interest rates and portfolio management strategies. The majority of the Company’s interest-earning assets and interest-bearing liabilities are sensitive to changes in short-term interest rates. The Company’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 (i.e., interest-earning assets generally reprice more quickly than interest-bearing liabilities). When interest rates fall, the Company may attempt to mitigate some of this negative impact by extending the maturities of assets in investment portfolios to lock in asset yields, and by lowering rates paid to clients on interest-bearing liabilities. Since the Company establishes the rates paid on certain brokerage client cash balances and deposits from banking clients, as well as the rates charged on receivables from brokerage clients, and also controls the composition of its investment securities, it has some ability to manage its net interest spread. However, the spread is influenced by external factors such as the interest rate environment and competition. The current low interest rate environment limits the extent to which the Company can reduce interest expense paid on funding sources. For discussion of the impact of current market conditions on net interest revenue, see “Current Market and Regulatory Environment and Other Developments.”

 

The Company’s interest-earning assets are financed primarily by brokerage client cash balances and deposits from banking clients. Non-interest-bearing funding sources include non-interest-bearing brokerage client cash balances and proceeds from stock-lending activities, as well as stockholders’ equity.

 

Schwab Bank maintains liquidity, available for sale, and held to maturity investment portfolios for liquidity as well as to invest funds from deposits that are in excess of loans to banking clients and liquidity requirements. Schwab Bank lends funds to banking clients primarily in the form of mortgage loans and home equity lines of credit (HELOCs). These loans are largely funded by interest-bearing deposits from banking clients.

 

In clearing their clients’ trades, Charles Schwab & Co., Inc. (Schwab) and optionsXpress, Inc. hold cash balances payable to clients. In most cases, Schwab and optionsXpress, Inc. pay their clients interest on cash balances awaiting investment, and in turn invest these funds and earn interest revenue. Receivables from brokerage clients consist primarily of margin loans to brokerage clients. Margin loans are loans made to clients on a secured basis to purchase securities. Pursuant to applicable regulations, client cash balances that are not used for margin lending are generally segregated into investment accounts that are maintained for the exclusive benefit of clients, which are recorded in cash and investments segregated on the Company’s condensed consolidated balance sheets.

 

28 


 

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 table presents net interest revenue information corresponding to interest-earning assets and funding sources on the condensed consolidated balance sheet:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

2013

 

2012

 

 

 

 

 

Interest

 

Average

 

 

 

 

Interest

 

Average

 

 

Average

 

Revenue/

 

Yield/

 

Average

 

Revenue/

 

Yield/

 

 

Balance

 

Expense

 

Rate

 

Balance

 

Expense

 

Rate

Interest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

8,034 

  

$

  

0.20 

 

$

7,942 

  

$

  

0.20 

Cash and investments segregated

 

 

24,425 

  

 

  

0.13 

 

 

23,516 

  

 

12 

  

0.20 

Broker-related receivables (1)

 

 

351 

  

 

 -

  

0.01 

 

 

414 

  

 

 -

  

 -

 

Receivables from brokerage clients

 

 

11,846 

  

 

109 

  

3.65 

 

 

10,956 

  

 

112 

  

4.07 

Securities available for sale (2)

 

 

49,205 

  

 

138 

  

1.11 

 

 

40,701 

  

 

146 

  

1.43 

Securities held to maturity

 

 

26,819 

  

 

166 

  

2.46 

 

 

15,311 

  

 

95 

  

2.47 

Loans to banking clients

 

 

12,004 

  

 

84 

  

2.78 

 

 

10,014 

  

 

77 

  

3.06 

Loans held for sale (1)

 

 

 -

  

 

 -

  

 -

 

 

 

  

 

 -

  

4.06 

Total interest-earning assets

 

 

132,684 

  

 

509 

  

1.52 

 

 

108,855 

  

 

446 

  

1.63 

Other interest revenue

 

 

 

 

 

22 

  

 

 

 

 

 

 

 

32 

  

 

 

Total interest-earning assets

 

$

132,684 

  

$

531 

  

1.59 

 

$

108,855 

  

$

478 

  

1.74 

Funding sources:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits from banking clients

 

$

87,793 

  

$

  

0.03 

 

$

67,027 

  

$

11 

  

0.07 

Payables to brokerage clients

 

 

29,312 

  

 

  

0.01 

 

 

28,435 

  

 

  

0.01 

Long-term debt

 

 

1,833 

  

 

17 

  

3.68 

 

 

1,923 

  

 

27 

  

5.59 

Total interest-bearing liabilities

 

 

118,938 

  

 

25 

  

0.08 

 

 

97,385 

  

 

39 

  

0.16 

Non-interest-bearing funding sources

 

 

13,746 

  

 

 

 

 

 

 

 

11,470 

  

 

 

 

 

 

Total funding sources

 

$

132,684 

  

$

25 

  

0.08 

 

$

108,855 

  

$

39 

  

0.14 

Net interest revenue

 

 

 

 

$

506 

  

1.51 

 

 

 

 

$

439 

  

1.60 

 

(1)

Interest revenue was less than $500,000 in the periods presented.

(2)

Amounts have been calculated based on amortized cost.

 

 

29 


 

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)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30,

 

2013

 

2012

 

 

 

 

 

Interest

 

Average

 

 

 

 

Interest

 

Average

 

 

Average

 

Revenue/

 

Yield/

 

Average

 

Revenue/

 

Yield/

 

 

Balance

 

Expense

 

Rate

 

Balance

 

Expense

 

Rate

Interest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

7,094 

  

$

12 

  

0.23 

 

$

6,741 

  

$

12 

  

0.24 

Cash and investments segregated

 

 

26,148 

  

 

29 

  

0.15 

 

 

25,259 

  

 

33 

  

0.17 

Broker-related receivables (1)

 

 

370 

  

 

 -

  

0.09 

 

 

345 

  

 

 -

  

0.02 

Receivables from brokerage clients

 

 

11,588 

  

 

321 

  

3.70 

 

 

10,750 

  

 

333 

  

4.14 

Securities available for sale (2)

 

 

48,250 

  

 

413 

  

1.14 

 

 

38,443 

  

 

443 

  

1.54 

Securities held to maturity

 

 

23,601 

  

 

430 

  

2.44 

 

 

15,175 

  

 

302 

  

2.66 

Loans to banking clients

 

 

11,569 

  

 

243 

  

2.81 

 

 

9,921 

  

 

233 

  

3.14 

Loans held for sale

 

 

 -

  

 

 -

  

 -

 

 

 

24 

  

 

  

4.12 

Total interest-earning assets

 

 

128,620 

  

 

1,448 

  

1.51 

 

 

106,658 

  

 

1,357 

  

1.70 

Other interest revenue

 

 

 

 

 

79 

  

 

 

 

 

 

 

 

90 

  

 

 

Total interest-earning assets

 

$

128,620 

  

$

1,527 

  

1.59 

 

$

106,658 

  

$

1,447 

  

1.81 

Funding sources:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits from banking clients

 

$

83,492 

  

$

24 

  

0.04 

 

$

63,577 

  

$

31 

  

0.07 

Payables to brokerage clients

 

 

30,847 

  

 

  

0.01 

 

 

29,651 

  

 

  

0.01 

Long-term debt

 

 

1,699 

  

 

51 

  

4.01 

 

 

1,974 

  

 

81 

  

5.48 

Total interest-bearing liabilities

 

 

116,038 

  

 

77 

  

0.09 

 

 

95,202 

  

 

114 

  

0.16 

Non-interest-bearing funding sources

 

 

12,582 

  

 

 

 

 

 

 

 

11,456 

  

 

 

 

 

 

Other interest expense

 

 

 

 

 

  

 

 

 

 

 

 

 

  

 

 

Total funding sources

 

$

128,620 

  

$

79 

  

0.08 

 

$

106,658 

  

$

116 

  

0.14 

Net interest revenue

 

 

 

 

$

1,448 

 

1.51 

 

 

 

 

$

1,331 

 

1.67 

 

(1)

Interest revenue was less than $500,000 in the periods presented.

(2)

Amounts have been calculated based on amortized cost.

 

Net interest revenue increased in the third quarter and first nine months of 2013 compared to the same periods in 2012, primarily due to higher balances of interest-earning assets, including securities available for sale and securities held to maturity, partially offset by the effect lower average short-term interest rates had on the Company’s average net interest margin. The current low interest rate environment limited the extent to which the Company could reduce interest expense paid on funding sources. The growth in the average balance of deposits from banking clients funded the increase in the balances of securities available for sale and securities held to maturity. Net interest revenue also increased due to the redemption of higher rate trust preferred securities and the exchange of higher rate Senior Notes in the third quarter of 2012.

 

Trading Revenue

 

Trading revenue includes commission and principal transaction revenues. Commission revenue is affected by the number of revenue trades executed and the average revenue earned per revenue trade. Principal transaction revenue is primarily comprised of revenue from trading activity in client fixed income securities. To accommodate clients’ fixed income trading activity, the Company maintains positions in fixed income securities, including state and municipal debt obligations, U.S. Government, corporate debt, and other securities. The difference between the price at which the Company buys and sells securities to and from its clients and other broker-dealers is recognized as principal transaction revenue. Principal transaction revenue also includes gains and losses on these securities positions. Factors that influence principal transaction revenue include the volume of client trades and market price volatility.

 

30 


 

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 increased by $20 million, or 10%, in the third quarter of 2013 compared to the third quarter of 2012, primarily due to higher daily average revenue trades and one additional trading day during the quarter. Trading revenue remained relatively flat in the first nine months of 2013 compared to the first nine months of 2012 as trading activity remained relatively muted. Daily average revenue trades increased in the third quarter of 2013, primarily due to a higher volume of equity and mutual fund trades, partially offset by a lower volume of future and option trades. Daily average revenue trades were relatively flat in the first nine months of 2013, primarily due to a higher volume of equity and mutual fund trades, offset by a lower volume of future and option trades. Average revenue per revenue trade also remained relatively flat in the third quarter and first nine months of 2013 compared to the same periods in 2012.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

Nine Months Ended

 

 

 

 

 

September 30,

 

Percent

 

September 30,

 

Percent

 

 

2013

 

2012

 

Change

 

2013

 

2012

 

Change

Daily average revenue trades (1) (in thousands)

 

 

283.2 

  

 

261.5 

  

%

 

 

294.4 

  

 

288.3 

 

%

Clients’ daily average trades (2) (in thousands)

 

 

478.6 

 

 

402.4 

 

19 

%

 

 

491.4 

 

 

438.0 

 

12 

%

Number of trading days

 

 

63.5 

  

 

62.5 

  

%

 

 

187.5 

  

 

187.5 

 

 -

 

Average revenue per revenue trade

 

$

12.39 

    

$

12.44 

    

 -

 

 

$

12.30 

    

$

12.31 

 

 -

 

 

(1)

Includes all client trades that generate trading revenue (i.e., commission revenue or principal transaction revenue).

(2)

Includes daily average revenue trades, trades by clients in asset-based pricing relationships, and all commission-free trades, including the Company’s Mutual Fund OneSource funds and ETFs, and other proprietary products. Clients’ daily average trades is an indicator of client engagement with securities markets.

 

 

Other Revenue

 

Other revenue includes nonrecurring gains, order flow revenue, software fees from the Company’s portfolio management services, exchange processing fees, realized gains or losses on sales of securities available for sale, and other service fees. Other revenue increased by $15 million, or 36%, in the third quarter of 2013 compared to the third quarter of 2012, primarily due to an increase in order flow revenue that Schwab began receiving in November 2012. Other revenue decreased by $37 million, or 18%, in the first nine months of 2013 compared to the first nine months of 2012, primarily due to a gain of $70 million relating to a confidential resolution of a vendor dispute in the second quarter of 2012, partially offset by the increase in order flow revenue mentioned above.

 

Net Impairment Losses on Securities

 

Net impairment losses on securities were $1 million and $8  million in the third quarter and first nine months of 2013, respectively, and  $3 million and $28 million in the third quarter and first nine months of 2012, respectively. These charges were lower in the third quarter and first nine months of 2013, reflecting a stabilization of the credit characteristics of the securities’ underlying loans. For further discussion, see “Item 1 – Condensed Consolidated Financial Statements (Unaudited) – Notes – 2. Securities Available for Sale and Securities Held to Maturity.” 

 

31 


 

THE CHARLES SCHWAB CORPORATION

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

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

 

 

Expenses Excluding Interest

 

As shown in the table below, expenses excluding interest increased in the third quarter and first nine months of 2013 compared to the same periods in 2012, primarily due to increases in compensation and benefits, advertising and market development, professional services, and other expense.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

Three Months Ended

 

 

 

Nine Months Ended

 

 

 

 

September 30,

Percent

 

September 30,

Percent

 

  

2013

 

 

2012

 

Change

 

2013

 

 

2012

 

Change

Compensation and benefits

  

$

482 

  

 

$

442 

  

 

$

1,512 

  

 

$

1,353 

  

12 

Professional services

  

 

103 

  

 

 

98 

  

%

 

 

308 

  

 

 

287 

  

%

Occupancy and equipment

  

 

77 

  

 

 

77 

  

 -

 

 

 

231 

  

 

 

233 

  

(1)

Advertising and market development

  

 

57 

  

 

 

49 

  

16 

 

 

198 

  

 

 

173 

  

14 

Communications

  

 

55 

  

 

 

53 

  

%

 

 

165 

  

 

 

166 

  

(1)

%

Depreciation and amortization

  

 

51 

  

 

 

50 

  

 

 

153 

  

 

 

146 

  

Other

  

 

84 

  

 

 

66 

  

27 

%

 

 

226 

  

 

 

204 

  

11 

Total expenses excluding interest

  

$

909 

  

 

$

835 

  

 

$

2,793 

  

 

$

2,562 

  

Expenses as a percentage of total net revenues:

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total expenses excluding interest

  

 

66 

 

 

70 

 

 

 

 

70 

 

 

70 

 

 

Advertising and market development

  

 

 

 

 

 

 

 

 

 

 

 

 

 

Compensation and Benefits

 

Compensation and benefits expense includes salaries and wages, incentive compensation, and related employee benefits and taxes. Incentive compensation includes variable compensation, discretionary bonuses, and stock-based compensation. Variable compensation includes payments to certain individuals based on their sales performance. Discretionary bonuses are based on the Company’s overall performance as measured by earnings per common share, and therefore will fluctuate with this measure. Stock-based compensation primarily includes employee and board of director stock options, restricted stock units, and restricted stock awards. 

 

Compensation and benefits expense increased by $40 million, or 9%, and $159 million, or 12%, in the third quarter and first nine months of 2013 compared to the same periods in 2012, respectively, primarily due to increases in salaries and wages and incentive compensation. The following table shows a comparison of certain compensation and benefits components and employee data: 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

Nine Months Ended

 

 

 

 

 

September 30,

Percent

 

September 30,

 

Percent

 

 

2013

 

 

2012

 

Change

 

2013

 

 

2012

 

Change

Salaries and wages

 

$

272 

  

 

$

255 

  

 

$

836 

  

 

$

785 

  

Incentive compensation

 

 

137 

  

 

 

119 

  

15 

 

 

440 

  

 

 

350 

  

26 

Employee benefits and other

 

 

73 

  

 

 

68 

  

 

 

236 

  

 

 

218 

  

Total compensation and benefits expense

 

$

482 

  

 

$

442 

  

 

$

1,512 

  

 

$

1,353 

  

12 

Compensation and benefits expense as a

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

percentage of total net revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and wages

 

 

20 

 

 

21 

 

 

 

 

21 

 

 

21 

 

 

Incentive compensation

 

 

10 

 

 

10 

 

 

 

 

11 

 

 

10 

 

 

Employee benefits and other

 

 

 

 

 

 

 

 

 

 

 

 

Total compensation and benefits expense

 

 

35 

 

 

37 

 

 

 

 

38 

 

 

37 

 

 

Full-time equivalent employees (1) (in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At quarter end

 

 

13.8 

  

 

 

13.6 

  

%

 

 

 

 

 

 

 

 

 

 

Average

 

 

13.8 

  

 

 

13.6 

  

%

 

 

13.9 

  

 

 

13.8 

  

 

(1)

Includes full-time, part-time and temporary employees, and persons employed on a contract basis, and excludes employees of outsourced service providers.

32 


 

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)

 

 

 

Salaries and wages increased in the third quarter and first nine months of 2013 compared to the same periods in 2012, primarily due to annual salary increases.

 

Incentive compensation increased in the third quarter and first nine months of 2013 compared to the same periods in 2012, primarily due to the transition to a new payout schedule for field incentive plans, increased individual sales performance compensation as a result of higher field sales volume, and higher discretionary bonuses.

 

Employee benefits and other expense increased in the first nine months of 2013 compared to the first nine months of 2012, primarily due to payroll taxes related to the increase in incentive compensation, and increased and accelerated contributions to new employee HSAs. The Company funded its entire annual contribution to employee HSAs in the first quarter of 2013. The Company is converting to HSA-based healthcare and employee enrollment in these plans rose significantly in 2013.

 

Expenses Excluding Compensation and Benefits

 

Professional services expense increased in the third quarter and first nine months of 2013 compared to the same periods in 2012, primarily due to an increase in fees paid to outsourced service providers and consultants and higher spending on printing and fulfillment services.

 

Advertising and market development expense increased in the third quarter and first nine months of 2013 compared to the same periods in 2012, primarily due to higher spending on media relating to the launch of the Company’s new advertising and branding initiative, Own your tomorrow™. The increase in advertising and market development expense in the first nine months of 2013 was also due to higher spending on customer promotions.

 

Other expense increased in the third quarter and first nine months of 2013 compared to the same periods in 2012, primarily due to increases in regulatory assessments and the Company’s reserve for legal contingencies.

 

Taxes on Income

 

The Company’s effective income tax rate on income before taxes was 37.5% and 31.6% for the third quarters of 2013 and 2012, respectively. The Company’s effective income tax rate on income before taxes was 37.7% and 35.2% for the first nine months of 2013 and 2012, respectively. The increase in the third quarter and first nine months of 2013 was primarily due to the recognition of a nonrecurring state tax benefit of $20 million in the third quarter of 2012.

 

Segment Information

 

The Company provides financial services to individuals and institutional clients through two segments – Investor Services and Advisor Services. In the first quarter of 2013, the Company realigned its reportable segments as a result of organizational changes. The segment formerly reported as Institutional Services was renamed to Advisor Services. Additionally, the Retirement Plan Services and Corporate Brokerage Services business units are now part of the Investor Services segment. Prior period segment information has been recast to reflect these organizational changes. The Investor Services segment provides retail brokerage and banking services to individual investors, retirement plan services, and corporate brokerage services. The Advisor Services segment provides custodial, trading, and support services to independent investment advisors, and retirement business services to independent retirement plan advisors and recordkeepers whose plan assets are held at Schwab Bank. Revenues and expenses are allocated to the Company’s two segments based on which segment services the client. The Company evaluates the performance of its segments on a pre-tax basis, excluding items such as significant nonrecurring gains, impairment charges on non-financial assets, discontinued operations, extraordinary items, and significant restructuring and other charges. Segment assets and liabilities are not used for evaluating segment performance or in deciding how to allocate resources to segments.

 

33 


 

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)

 

 

Financial information for the Company’s reportable segments is presented in the following tables:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investor Services

 

Advisor Services

 

 

Percent

 

 

 

 

 

 

 

Percent

 

 

 

 

 

 

Three Months Ended September 30,

 

Change

 

2013 

 

2012 

 

Change

 

2013 

 

2012 

Net Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Asset management and administration fees

 

12 

 

$

410 

 

$

366 

  

10 

 

$

173 

  

$

157 

Net interest revenue

 

16 

%

 

 

450 

 

 

387 

  

 

 

56 

  

 

52 

Trading revenue

 

%

 

 

153 

 

 

145 

  

18 

%

 

 

71 

  

 

60 

Other

 

69 

%

 

 

44 

 

 

26 

  

(19)

 

 

13 

  

 

16 

Provision for loan losses

 

(130)

%

 

 

 

 

(10)

 

 -

 

 

 

 

 

 -

Net impairment losses on securities

 

(100)

%

 

 

 -

 

 

(2)

 

 -

 

 

 

(1)

 

 

(1)

Total net revenues

 

16 

%

 

 

1,060 

 

 

912 

  

10 

 

 

313 

  

 

284 

Expenses Excluding Interest

 

 

 

705 

 

 

657 

  

15 

 

 

204 

  

 

178 

Income before taxes on income

 

39 

%

 

$

355 

 

$

255 

  

 

$

109 

  

$

106 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unallocated

 

Total

 

 

Percent

 

 

 

 

 

 

 

Percent

 

 

 

 

 

 

Three Months Ended September 30,

 

Change

 

2013 

 

2012 

 

Change

 

2013 

 

2012 

Net Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Asset management and administration fees

 

N/M

 

 

$

 -

 

$

  

11 

 

$

583 

  

$

524 

Net interest revenue

 

N/M

 

 

 

 -

 

 

 -

  

15 

%

 

 

506 

  

 

439 

Trading revenue

 

N/M

 

 

 

 -

 

 

(1)

  

10 

%

 

 

224 

  

 

204 

Other

 

N/M

 

 

 

 -

 

 

 -

  

36 

%

 

 

57 

  

 

42 

Provision for loan losses

 

N/M

 

 

 

 -

 

 

 -

  

(140)

%

 

 

 

 

(10)

Net impairment losses on securities

 

N/M

 

 

 

 -

 

 

 -

  

(67)

%

 

 

(1)

 

 

(3)

Total net revenues

 

N/M

 

 

 

 -

 

 

 -

  

15 

 

 

1,373 

  

 

1,196 

Expenses Excluding Interest

 

N/M

 

 

 

 -

 

 

 -

  

 

 

909 

  

 

835 

Income before taxes on income

 

N/M

 

 

$

 -

 

$

 -

  

29 

%

 

$

464 

  

$

361 

Taxes on income

 

 

 

 

 

 

 

 

 

 

53 

%

 

 

174 

  

 

114 

Net Income

 

 

 

 

 

 

 

 

 

 

17 

 

$

290 

  

$

247 

 

N/M Not meaningful.

 

34 


 

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)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investor Services

 

Advisor Services

 

 

Percent

 

 

 

 

 

 

 

Percent

 

 

 

 

 

 

Nine Months Ended September 30,

 

Change

 

2013

 

2012

 

Change

 

2013

 

2012

Net Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Asset management and administration fees

 

13 

 

$

1,199 

 

$

1,057 

  

14 

 

$

508 

  

$

447 

Net interest revenue

 

%

 

 

1,281 

 

 

1,178 

  

 

 

167 

  

 

153 

Trading revenue

 

(3)

%

 

 

462 

 

 

475 

  

15 

 

 

220 

  

 

192 

Other

 

48 

 

 

129 

 

 

87 

  

(14)

 

 

43 

  

 

50 

Provision for loan losses

 

(92)

 

 

(1)

 

 

(13)

 

(100)

 

 

 -

 

 

(1)

Net impairment losses on securities

 

(72)

 

 

(7)

 

 

(25)

 

(67)

 

 

(1)

 

 

(3)

Total net revenues

 

11 

%

 

 

3,063 

 

 

2,759 

  

12 

 

 

937 

  

 

838 

Expenses Excluding Interest

 

 

 

2,178 

 

 

2,014 

  

12 

 

 

615 

  

 

548 

Income before taxes on income

 

19 

%

 

$

885 

 

$

745 

  

11 

 

$

322 

  

$

290 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unallocated

 

Total

 

 

Percent

 

 

 

 

 

 

 

Percent

 

 

 

 

 

 

Nine Months Ended September 30,

 

Change

 

2013

 

2012

 

Change

 

2013

 

2012

Net Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Asset management and administration fees

 

N/M

      

 

$

 -

 

$

 -

  

13 

 

$

1,707 

  

$

1,504 

Net interest revenue

 

N/M

  

 

 

 -

 

 

 -

  

 

 

1,448 

  

 

1,331 

Trading revenue

 

N/M

  

 

 

 -

 

 

(1)

  

 

 

682 

  

 

666 

Other

 

N/M

  

 

 

 -

 

 

72 

  

(18)

 

 

172 

  

 

209 

Provision for loan losses

 

N/M

  

 

 

 -

 

 

 -

  

(93)

 

 

(1)

 

 

(14)

Net impairment losses on securities

 

N/M

  

 

 

 -

 

 

 -

  

(71)

 

 

(8)

 

 

(28)

Total net revenues

 

N/M

  

 

 

 -

 

 

71 

  

 

 

4,000 

  

 

3,668 

Expenses Excluding Interest

 

N/M

  

 

 

 -

 

 

 -

 

 

 

2,793 

  

 

2,562 

Income before taxes on income

 

N/M

  

 

$

 -

 

$

71 

  

 

$

1,207 

  

$

1,106 

Taxes on income

 

 

 

 

 

 

 

 

 

 

17 

 

 

455 

  

 

389 

Net Income

 

 

 

 

 

 

 

 

 

 

 

$

752 

  

$

717 

 

N/M Not meaningful.

 

Investor Services

Net revenues increased by $148 million, or 16%, and $304 million, or 11%, in the third quarter and first nine months of 2013 compared to the same periods in 2012, respectively, primarily due to increases in asset management and administration fees, net interest revenue, and other revenue. Asset management and administration fees increased primarily due to increases in advice solutions fees and mutual fund service fees. Advice solutions fees increased due to growth in client assets enrolled in advisory offers, including Windhaven and Schwab Private Client. Mutual fund service fees increased primarily due to market appreciation of client assets invested in the Company’s Mutual Fund OneSource funds, and due to growth in client assets invested in money market mutual funds and equity and bond funds, partially offset by a decrease in net money market mutual fund fees as a result of lower yields on fund assets. Net interest revenue increased primarily due to higher balances of interest-earning assets, partially offset by the effect lower average short-term interest rates had on the Company’s average net interest margin. Other revenue increased primarily due to an increase in order flow revenue that Schwab began receiving in November 2012. The increase in net revenues in the first nine months of 2013 was partially offset by a decrease in trading revenue, primarily due to lower daily average revenue trades.

 

Expenses excluding interest increased by $48 million, or 7%, and $164 million, or 8%, in the third quarter and first nine months of 2013 compared to the same periods in 2012, respectively, primarily due to increases in compensation and benefits, advertising and market development, and professional services expenses.

 

Advisor Services

Net revenues increased by $29 million, or 10%, and $99 million, or 12%, in the third quarter and first nine months of 2013 compared to the same periods in 2012, respectively, primarily due to increases in asset management and administration fees,

35 


 

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, and net interest revenue. Asset management and administration fees increased primarily due to increases in advice solutions fees and mutual fund service fees. Advice solutions fees increased due to growth in client assets enrolled in advisory offers, including ThomasPartners. Mutual fund service fees increased primarily due to market appreciation of client assets invested in the Company’s Mutual Fund OneSource funds, and due to growth in client assets invested in money market mutual funds and equity and bond funds, partially offset by a decrease in net money market mutual fund fees as a result of lower yields on fund assets. Trading revenue increased primarily due to higher daily average revenue trades. Net interest revenue increased primarily due to higher balances of interest-earning assets, partially offset by the effect lower average short-term interest rates had on the Company’s average net interest margin.

 

Expenses excluding interest increased by $26 million, or 15%, and $67 million, or 12%, in the third quarter and first nine months of 2013 compared to the same periods in 2012, respectively, primarily due to increases in compensation and benefits, professional services, and advertising and market development expenses.

 

Unallocated

Other revenue in the first nine months of 2012 includes a gain of $70 million relating to a confidential resolution of a vendor dispute in the second quarter of 2012.

 

 

Liquidity and Capital Resources

 

CSC conducts substantially all of its business through its wholly-owned subsidiaries. The Company’s capital structure is designed to provide each subsidiary with capital and liquidity to meet its operational needs and regulatory requirements.

 

CSC is a savings and loan holding company and Schwab Bank, CSC’s depository institution, is a federal savings bank. CSC is subject to supervision and regulation by the Federal Reserve and Schwab Bank is subject to supervision and regulation by the OCC.

 

Liquidity

 

CSC

 

CSC’s liquidity needs arise from funding its subsidiaries’ operations, including margin and mortgage lending, and transaction settlement, in addition to funding cash dividends, acquisitions, investments, short- and long-term debt, and managing statutory capital requirements.

 

CSC’s liquidity needs are generally met through cash generated by its subsidiaries, as well as cash provided by external financing. CSC has a Shelf Registration Statement on file with the SEC which enables CSC to issue debt, equity and other securities. CSC maintains excess liquidity in the form of overnight cash deposits and short-term investments to cover daily funding needs and to support growth in the Company’s business. Generally, CSC does not hold liquidity at its subsidiaries in excess of amounts deemed sufficient to support the subsidiaries’ operations, including any regulatory capital requirements. Schwab, Schwab Bank, and optionsXpress, Inc. are subject to regulatory requirements that may restrict them from certain transactions with CSC, as further discussed below. Management believes that funds generated by the operations of CSC’s subsidiaries will continue to be the primary funding source in meeting CSC’s liquidity needs, providing adequate liquidity to meet Schwab Bank’s capital guidelines, and maintaining Schwab and optionsXpress, Inc.’s net capital.

 

On July 25, 2013, CSC issued $275 million of Senior Notes that mature in 2018 under its universal shelf registration statement on file with the SEC. The Senior Notes have a fixed interest rate of 2.20% with interest payable semi-annually.

 

While CSC is not currently subject to specific statutory capital requirements, CSC is required to serve as a source of strength for Schwab Bank and must have the ability to provide financial assistance if Schwab Bank experiences financial distress. To manage capital adequacy, the Company currently utilizes a target Tier 1 Leverage Ratio for CSC, as currently defined by the Federal Reserve, of at least 6%. At September 30, 2013, CSC’s Tier 1 Leverage Ratio was 6.3%, Tier 1 Capital Ratio was 16.5%, and Total Capital Ratio was 16.6%.

 

36 


 

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 are details of CSC’s long-term debt:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Par

 

 

  

 

  

 

  

Standard

  

 

September 30, 2013

Outstanding

 

Maturity

 

Interest Rate

 

Moody’s

 

& Poor’s

 

Fitch

Senior Notes

$

1,581 

  

2015 - 2022

  

0.850% to 4.45% fixed

  

A2

  

A

  

A

Medium-Term Notes

$

250 

  

2017

  

6.375% fixed

  

A2

  

A

  

A

 

CSC has authorization from its Board of Directors to issue unsecured commercial paper notes (Commercial Paper Notes) not to exceed $1.5 billion. Management has set a current limit for the commercial paper program of $800 million. The maturities of the Commercial Paper Notes may vary, but are not to exceed 270 days from the date of issue. The commercial paper is not redeemable prior to maturity and cannot be voluntarily prepaid. The proceeds of the commercial paper program are to be used for general corporate purposes. There were no borrowings of Commercial Paper Notes outstanding at September 30, 2013. CSC’s ratings for these short-term borrowings are P1 by Moody’s, A1 by Standard & Poor’s, and F1 by Fitch.

 

CSC maintains an $800 million committed, unsecured credit facility with a group of 12 banks, which is scheduled to expire in June 2014. This facility replaced a similar facility that expired in June 2013 and these facilities were unused during the first nine months of 2013. The funds under this facility are available for general corporate purposes. The financial covenants under this facility require Schwab to maintain a minimum net capital ratio, as defined, Schwab Bank to be well capitalized, as defined, and CSC to maintain a minimum level of stockholders’ equity. At September 30, 2013, the minimum level of stockholders’ equity required under this facility was $7.0 billion (CSC’s stockholders’ equity at September 30, 2013 was $10.1 billion). Management believes that these restrictions will not have a material effect on CSC’s ability to meet foreseeable dividend or funding requirements.

 

CSC also has direct access to $647 million of the $942 million uncommitted, unsecured bank credit lines discussed below, that are primarily utilized by Schwab to manage short-term liquidity. These lines were not used by CSC during the first nine months of 2013.

 

In addition, Schwab provides CSC with a $1.0 billion credit facility, which is scheduled to expire in December 2014. There were no funds drawn under this facility at September 30, 2013.

 

Schwab

 

Schwab’s liquidity needs relating to client trading and margin borrowing activities are met primarily through cash balances in brokerage client accounts, which were $32.4 billion and $37.4 billion at September 30, 2013 and December 31, 2012, respectively. Management believes that brokerage client cash balances and operating earnings will continue to be the primary sources of liquidity for Schwab.

 

Schwab is subject to regulatory requirements of Rule 15c3-1 under the Securities Exchange Act of 1934 (the Uniform Net Capital Rule) that are intended to ensure the general financial soundness and liquidity of broker-dealers. These regulations prohibit Schwab from repaying subordinated borrowings from CSC, paying cash dividends, or making unsecured advances or loans to its parent company or employees if such payment would result in a net capital amount of less than 5% of aggregate debit balances or less than 120% of its minimum dollar requirement of $250,000. At September 30, 2013, Schwab’s net capital was $1.4 billion (9% of aggregate debit balances), which was $1.1 billion in excess of its minimum required net capital and $642 million in excess of 5% of aggregate debit balances. 

 

Schwab is also subject to Rule 15c3-3 under the Securities Exchange Act of 1934 and other applicable regulations that require it to maintain cash or qualified securities in a segregated reserve account for the exclusive benefit of clients. These funds are included in cash and investments segregated and on deposit for regulatory purposes in the Company’s condensed consolidated balance sheets and are not available as a general source of liquidity.

 

Most of Schwab’s assets are readily convertible to cash, consisting primarily of short-term (i.e., less than 150 days) investment-grade, interest-earning investments (the majority of which are segregated for the exclusive benefit of clients pursuant to regulatory requirements), receivables from brokerage clients, and receivables from brokers, dealers, and clearing organizations. Client margin loans are demand loan obligations secured by readily marketable securities. Receivables from

37 


 

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)

 

 

and payables to brokers, dealers, and clearing organizations primarily represent current open transactions, which usually settle, or can be closed out, within a few business days.

 

Schwab has a finance lease obligation related to an office building and land under a 20-year lease. The remaining finance lease obligation of $90 million at September 30, 2013 is being reduced by a portion of the lease payments over the remaining lease term of 11 years.

 

To manage short-term liquidity, Schwab maintains uncommitted, unsecured bank credit lines with a group of six banks totaling $942 million at September 30, 2013. The need for short-term borrowings arises primarily from timing differences between cash flow requirements, scheduled liquidation of interest-earning investments, and movements of cash to meet regulatory brokerage client cash segregation requirements. Schwab used such borrowings for nine days during the first nine months of 2013, with average daily amounts borrowed of $60 million. There were no borrowings outstanding under these lines at September 30, 2013.

 

To partially satisfy the margin requirement of client option transactions with the Options Clearing Corporation, Schwab has unsecured standby letter of credit agreements (LOCs) with five banks in favor of the Options Clearing Corporation aggregating $225 million at September 30, 2013. There were no funds drawn under any of these LOC’s during the first nine months of 2013. In connection with its securities lending activities, Schwab is required to provide collateral to certain brokerage clients. Schwab satisfies the collateral requirements by providing cash as collateral.

 

To manage Schwab’s regulatory capital requirement, CSC provides Schwab with a $1.4 billion subordinated revolving credit facility, which is scheduled to expire in March 2014. The amount outstanding under this facility at September 30, 2013 was $315 million. Borrowings under this subordinated lending arrangement qualify as regulatory capital for Schwab.

 

In addition, CSC provides Schwab with a $2.5 billion credit facility, which is scheduled to expire in December 2014. Borrowings under this facility do not qualify as regulatory capital for Schwab. There were no funds drawn under this facility at September 30, 2013.

 

Schwab Bank

 

Schwab Bank’s liquidity needs are met through deposits from banking clients and equity capital.

 

Deposits from banking clients at September 30, 2013 were $91.2 billion, which includes the excess cash held in certain Schwab and optionsXpress, Inc. brokerage client accounts that is swept into deposit accounts at Schwab Bank. At September 30, 2013, these balances totaled $70.7 billion.

 

Schwab Bank is subject to regulatory requirements that restrict and govern the terms of affiliate transactions, such as extensions of credit and repayment of loans between Schwab Bank and CSC or CSC’s other subsidiaries. In addition, Schwab Bank is required to provide notice to and may be required to obtain approval of the OCC and the Federal Reserve to declare dividends to CSC.

 

Schwab Bank is required to maintain capital levels as specified in federal banking laws and regulations. Failure to meet the minimum levels could result in certain mandatory, and possibly additional discretionary actions by the regulators that, if undertaken, could have a direct material effect on Schwab Bank. The Company currently utilizes a target Tier 1 Leverage Ratio for Schwab Bank of at least 6.25%. Based on its regulatory capital ratios at September 30, 2013, Schwab Bank is considered well capitalized. Schwab Bank’s regulatory capital and ratios are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Minimum Capital

 

Minimum to be

 

 

Actual

 

Requirement

 

Well Capitalized

September 30, 2013

 

Amount

 

Ratio

 

Amount

 

Ratio

 

Amount

 

Ratio

Tier 1 Risk-Based Capital

 

$

6,345 

  

18.5 

 

$

1,369 

  

4.0 

 

$

2,053 

  

6.0 

Total Risk-Based Capital

 

$

6,398 

  

18.7 

 

$

2,737 

  

8.0 

 

$

3,422 

  

10.0 

Tier 1 Leverage

 

$

6,345 

  

6.5 

 

$

3,911 

  

4.0 

 

$

4,889 

  

5.0 

Tangible Equity

 

$

6,345 

  

6.5 

 

$

1,955 

  

2.0 

 

 

N/A 

  

 

 

 

N/A Not applicable.

38 


 

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)

 

 

 

Schwab Bank has access to traditional funding sources such as deposits, federal funds purchased, and repurchase agreements. Additionally, Schwab Bank has access to short-term funding through the Federal Reserve Bank (FRB) discount window. Amounts available under the FRB discount window are dependent on the fair value of Schwab Bank’s securities available for sale and/or securities held to maturity that are pledged as collateral to the FRB. Schwab Bank maintains policies and procedures necessary to access this funding and tests discount window borrowing procedures annually. At September 30, 2013, $2.6 billion was available under this arrangement. There were no funds drawn under this arrangement during the first nine months of 2013.

 

Schwab Bank maintains a credit facility with the Federal Home Loan Bank System. Amounts available under this facility are dependent on the amount of Schwab Bank’s residential real estate mortgages and HELOCs that are pledged as collateral. Schwab Bank maintains policies and procedures necessary to access this funding and tests borrowing procedures annually. At September 30, 2013, $6.7 billion was available under this facility. There were no funds drawn under this facility during the first nine months of 2013.

 

optionsXpress, Inc.

 

optionsXpress, Inc.’s liquidity needs relating to client trading and margin borrowing activities are met primarily through cash balances in brokerage client accounts, which were $1.3 billion at September 30, 2013. Management believes that brokerage client cash balances and operating earnings will continue to be the primary sources of liquidity for optionsXpress, Inc.

 

optionsXpress, Inc., is subject to regulatory requirements of the Uniform Net Capital Rule that are intended to ensure the general financial soundness and liquidity of broker-dealers. These regulations prohibit optionsXpress, Inc. from paying cash dividends or making unsecured advances or loans to its parent company or employees if such payment would result in a net capital amount of less than 5% of aggregate debit balances or less than 120% of its minimum dollar requirement of $250,000. At September 30, 2013, optionsXpress, Inc.’s net capital was $100 million (29% of aggregate debit balances), which was $93 million in excess of its minimum required net capital and $83 million in excess of 5% of aggregate debit balances.

 

optionsXpress, Inc. is also subject to Commodity Futures Trading Commission Regulation 1.17 (Reg. 1.17) under the Commodity Exchange Act, which also requires the maintenance of minimum net capital. optionsXpress, Inc. as a futures commission merchant, is required to maintain minimum net capital equal to the greater of its net capital requirement under Reg. 1.17 ($1 million), or the sum of 8% of the total risk margin requirements for all positions carried in customer accounts and 8% of the total risk margin requirements for all positions carried in non-customer accounts (as defined in Reg. 1.17). At September 30, 2013, optionsXpress, Inc. met the requirements of Reg. 1.17.

 

Additionally, optionsXpress, Inc. is subject to Rule 15c3-3 under the Securities Exchange Act of 1934 and other applicable regulations that require it to maintain cash or qualified securities in a segregated reserve account for the exclusive benefit of clients. These funds are included in cash and investments segregated and on deposit for regulatory purposes in the Company’s condensed consolidated balance sheets and are not available as a general source of liquidity.

 

To partially satisfy the margin requirement of client option transactions with the Options Clearing Corporation, optionsXpress, Inc. has an unsecured standby LOC with one bank in favor of the Options Clearing Corporation in the amount of $15 million at September 30, 2013. There were no funds drawn under this LOC during the first nine months of 2013.

 

CSC provides optionsXpress, Inc. with a $200 million credit facility, which is scheduled to expire in December 2014. Borrowings under this facility do not qualify as regulatory capital for optionsXpress, Inc. There were no borrowings outstanding under this facility at September 30, 2013.

 

optionsXpress Holdings, Inc., optionsXpress, Inc.’s parent company, has a term loan with CSC, of which $40 million was outstanding at September 30, 2013, and it matures in December 2017.  

 

Capital Resources

 

The Company monitors both the relative composition and absolute level of its capital structure. Management is focused on limiting the Company’s use of capital and currently targets a long-term debt to total financial capital ratio not to exceed 30%.

39 


 

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 Company’s total financial capital (long-term debt plus stockholders’ equity) at September 30, 2013 was $12.0 billion, up $736 million, or 7%, from December 31, 2012.

 

The Company’s cash position (reported as cash and cash equivalents on its condensed consolidated balance sheets) and cash flows are affected by changes in brokerage client cash balances and the associated amounts required to be segregated under regulatory guidelines. Timing differences between cash and investments actually segregated on a given date and the amount required to be segregated for that date may arise in the ordinary course of business, and are addressed by the Company in accordance with applicable regulations. Other factors which affect the Company’s cash position and cash flows include investment activity in security portfolios, levels of capital expenditures, acquisition and divestiture activity, banking client deposit activity, brokerage and banking client loan activity, financing activity in long-term debt, payments of dividends, and repurchases and issuances of CSC’s preferred and common stock. The combination of these factors can cause significant fluctuations in the cash position during specific time periods.

 

Long-term Debt

 

At September 30, 2013, the Company had long-term debt of $1.9 billion, or 16% of total financial capital, that bears interest at a weighted-average rate of 3.61%. At December 31, 2012, the Company had long-term debt of $1.6 billion, or 15% of total financial capital. The Company repaid $4 million of long-term debt in the first nine months of 2013.

 

On July 25, 2013, CSC issued $275 million of Senior Notes that mature in 2018 under its universal shelf registration statement on file with the SEC. The Senior Notes have a fixed interest rate of 2.20% with interest payable semi-annually.

 

Capital Expenditures

 

The Company’s capital expenditures were $180 million and $135 million in the first nine months of 2013 and 2012, respectively. Capital expenditures in the first nine months of 2013 were primarily for developing internal-use software, software and equipment relating to the Company’s information technology systems, buildings, and land. Capital expenditures for the first nine months of 2012 were primarily for developing internal-use software, software and equipment relating to the Company’s information technology systems, and leasehold improvements. Capitalized costs for developing internal-use software were $55 million and $40 million in the first nine months of 2013 and 2012, respectively.

 

As discussed in the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2013, management estimated the full-year 2013 capital expenditures to be approximately 110% higher than 2012. However, during the current quarter management revised the Company’s estimated full-year 2013 capital expenditures to approximately 90% higher than 2012 levels primarily due to the revised timing of the planned consolidation and relocation of the Company’s existing office campus in Colorado, offset by increased spending on software.

 

Dividends

 

CSC paid common stock cash dividends of $233 million ($0.18 per share) and $231 million ($0.18 per share) in the first nine months of 2013 and 2012, respectively.

 

CSC paid Series A Preferred Stock cash dividends of $28 million ($70.00 per share) and $14 million ($36.17 per share) in the first nine months of 2013 and 2012, respectively. CSC paid Series B Preferred Stock cash dividends of $22 million ($45.00 per share) and $7 million ($14.17 per share) in the first nine months of 2013 and 2012, respectively.

 

Share Repurchases

 

There were no repurchases of CSC’s common stock in the first nine months of 2013 or 2012. As of September 30, 2013, CSC had remaining authority from the Board of Directors to repurchase up to $596 million of its common stock, which does not have an expiration date.

 

40 


 

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)

 

 

Off-Balance Sheet Arrangements

 

The Company enters into various off-balance sheet arrangements in the ordinary course of business, primarily to meet the needs of its clients. These arrangements include firm commitments to extend credit. Additionally, the Company enters into guarantees and other similar arrangements as part of transactions in the ordinary course of business. For discussion on the Company’s off-balance sheet arrangements, see “Part II – Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012, as updated by the Company’s Current Report on Form 8-K filed on June 24, 2013, relating to the realignment of the Company’s reportable segments, and “Item 1 – Condensed Consolidated Financial Statements (Unaudited) – Notes – 5. Commitments and Contingencies.”

 

 

Risk Management

 

The Company’s business activities expose it to a variety of risks, including operational, credit, market, liquidity, and reputational risk. Identification and management of these risks are essential to the success and financial soundness of the Company.

 

For a discussion on risks that the Company faces and the policies and procedures for risk identification, assessment, and management, see “Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Risk Management” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012, as updated by the Company’s Current Report on Form 8-K filed on June 24, 2013, relating to the realignment of the Company’s reportable segments. For updated information on the Company’s credit risk and concentration risk exposures, see below. See “Item 3 – Quantitative and Qualitative Disclosures About Market Risk” for additional information relating to market risk.

 

Risk is inherent in the Company’s business. Consequently, despite the Company’s efforts to identify areas of risk and implement risk management policies and procedures, there can be no assurance that the Company will not suffer unexpected losses due to operational or other risks.

 

Credit Risk Exposures

 

The Company’s credit risk exposure related to loans to banking clients is actively managed through individual and portfolio reviews performed by management. Management regularly reviews asset quality, including concentrations, delinquencies, nonaccrual loans, charge-offs, and recoveries. All are factors in the determination of an appropriate allowance for loan losses, which is reviewed quarterly by management. The Company’s mortgage loan portfolios primarily include first lien residential real estate mortgage loans (First Mortgages) of $7.8 billion and HELOCs of $3.1 billion at September 30, 2013.

 

The Company’s First Mortgage portfolio underwriting requirements are generally consistent with the underwriting requirements in the secondary market for loan portfolios. The Company’s underwriting guidelines include maximum loan-to-value (LTV) ratios, cash out limits, and minimum Fair Isaac Corporation (FICO) credit scores. The specific guidelines are dependent on the individual characteristics of a loan (for example, whether the property is a primary or secondary residence, whether the loan is for investment property, whether the loan is for an initial purchase of a home or refinance of an existing home, and whether the loan is conforming or jumbo). These credit underwriting standards have limited the exposure to the types of loans that experienced high foreclosures and loss rates elsewhere in the industry in recent years. There have been no significant changes to the LTV ratio or FICO score underwriting guidelines related to the Company’s First Mortgage or HELOC portfolios during the first nine months of 2013. The Company does not purchase loans that allow for negative amortization and does not purchase subprime loans (generally defined as extensions of credit to borrowers with a FICO score of less than 620 at origination), unless the borrower has compensating credit factors. At September 30, 2013, approximately 1% of both the First Mortgage and HELOC portfolios consisted of loans to borrowers with updated FICO scores of less than 620.

 

At September 30, 2013, the weighted-average originated LTV ratio was 59% for both the First Mortgage and HELOC portfolios. The computation of the origination LTV ratio for a HELOC includes any first lien mortgage outstanding on the same property at the time of origination. At September 30, 2013, 22% of HELOCs ($681 million of the HELOC portfolio)

41 


 

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)

 

 

were in a first lien position. The weighted-average originated FICO score was 769 and 768 for the First Mortgage and HELOC portfolios, respectively.  

 

The Company monitors the estimated current LTV ratios of its First Mortgage and HELOC portfolios on an ongoing basis. At September 30, 2013, the weighted-average estimated current LTV ratios were 53% and 60% for the First Mortgage and HELOC portfolios, respectively. The computation of the estimated current LTV ratio for a HELOC includes any first lien mortgage outstanding on the same property at the time of the HELOC’s origination. The Company estimates the current LTV ratio for each loan by reference to a home price appreciation index. The Company also monitors updated borrower FICO scores, delinquency trends, and verified liquid assets held by individual borrowers. At September 30, 2013, the weighted-average updated FICO scores were 771 and 768 for the First Mortgage and HELOC portfolios, respectively.

 

A portion of the Company’s HELOC portfolio is secured by second liens on the associated properties. Second lien mortgage loans possess a higher degree of credit risk given the subordination to the first lien holder in the event of default. At September 30, 2013, $2.4 billion, or 78%, of the HELOC portfolio was in a second lien position. In addition to the credit monitoring activities described above, the Company also monitors credit risk on second lien HELOC loans by reviewing the delinquency status of the first lien loan on the associated property. Additionally, at September 30, 2013, approximately 35% of the HELOC borrowers that had a balance only paid the minimum amount due.

 

For more information on the Company’s credit quality indicators relating to its First Mortgage and HELOC portfolios, including delinquency characteristics, borrower FICO scores at origination, updated borrower FICO scores, LTV ratios at origination, and estimated current LTV ratios, see “Item 1 – Condensed Consolidated Financial Statements (Unaudited) – Notes – 3. Loans to Banking Clients and Related Allowance for Loan Losses.”

 

The following table presents certain of the Company’s loan quality metrics as a percentage of total outstanding loans:

 

 

 

 

 

 

 

 

 

 

September 30,

 

December 31,

 

 

2013

 

2012

Loan delinquencies (1)

 

0.51% 

 

 

0.77% 

 

Nonaccrual loans

 

0.38% 

 

 

0.45% 

 

Allowance for loan losses

 

0.43% 

 

 

0.52% 

 

 

(1)

Loan delinquencies include loans that are 30 days or more past due and other nonaccrual loans.

 

The Company has exposure to credit risk associated with its securities available for sale and securities held to maturity portfolios, whose fair values totaled $51.9 billion and $27.7 billion at September 30, 2013, respectively. These portfolios include U.S. agency and non-agency mortgage-backed securities, asset-backed securities, corporate debt securities, certificates of deposit, U.S. agency notes, and other securities. 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-sponsored enterprises.

 

Non-agency residential mortgage-backed securities include securities collateralized by loans that are considered to be “Prime” (defined by the Company as loans to borrowers with a FICO score of 620 or higher at origination), and “Alt-A” (defined by the Company as Prime loans with reduced documentation at origination). The Company has recognized net impairment losses on these securities. At September 30, 2013, the amortized cost of non-agency residential mortgage-backed securities represented 1% of the total mortgage-backed securities portfolio. These securities were originated between 2003 and 2007. At September 30, 2013, with the exception of one corporate bond (with an amortized cost of $100 million), all of the corporate debt securities and non-mortgage asset-backed securities were rated investment grade (defined as a rating equivalent to a Moody’s rating of “Baa” or higher, or a Standard & Poor’s rating of “BBB-” or higher). The one non-investment grade corporate bond, which matures in April 2014, was not considered other than temporarily impaired at September 30, 2013. 

 

Concentration Risk Exposures

 

The Company has exposure to concentration risk when holding large positions in financial instruments collateralized by assets with similar economic characteristics or in securities of a single issuer or industry.

 

42 


 

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 fair value of the Company’s investments in mortgage-backed securities totaled $46.1 billion at September 30, 2013. Of these, $45.5 billion were issued by U.S. agencies and $618 million were issued by private entities (non-agency securities). The U.S. agency securities are included in securities available for sale and securities held to maturity and the non-agency securities are included in securities available for sale.

 

The Company’s investments in corporate debt securities and commercial paper totaled $9.5 billion at September 30, 2013, with the majority issued by institutions in the financial services industry. These securities are included in securities available for sale, securities held to maturity, cash and cash equivalents, and other securities owned in the Company’s condensed consolidated balance sheets.

 

The Company’s loans to banking clients include $7.1 billion of adjustable rate first lien residential real estate mortgage loans at September 30, 2013. The Company’s adjustable rate mortgages have initial fixed interest rates for three to ten years and interest rates that adjust annually thereafter. Approximately 40% of these mortgages consisted of loans with interest-only payment terms. The interest rates on approximately 70% of these interest-only loans are not scheduled to reset for three or more years. The Company’s mortgage loans do not include interest terms described as temporary introductory rates below current market rates. At September 30, 2013, 46% of the residential real estate mortgages and 50% of the HELOC balances were secured by properties which are located in California.

 

The Company’s HELOC product has a 30-year loan term with an initial draw period of ten years from the date of origination. After the initial draw period, the balance outstanding at such time is converted to a 20-year amortizing loan. The interest rate during the initial draw period and the 20-year amortizing period is a floating rate based on the prime rate plus a margin. The following table presents when current outstanding HELOCs will convert to amortizing loans:

 

 

 

 

 

 

September 30, 2013

  

Balance

 

Converted to amortizing loan by period end

 

$

47 

 

Within 1 year

  

 

269 

  

> 1 year – 3 years

  

 

523 

  

> 3 years – 5 years

  

 

1,008 

  

> 5 years

  

 

1,207 

  

Total

  

$

3,054 

  

 

The Company also has exposure to concentration risk from its margin and securities lending activities collateralized by securities of a single issuer or industry. This concentration risk is mitigated by collateral arrangements that require the fair value of such collateral exceeds the amounts loaned.

 

The Company has indirect exposure to U.S. Government and agency securities held as collateral to secure its resale agreements. The Company’s primary credit exposure on these resale transactions is with its counterparty. The Company would have exposure to the U.S. Government and agency securities only in the event of the counterparty’s default on the resale agreements. The fair value of U.S. Government and agency securities held as collateral for resale agreements totaled $13.7 billion at September 30, 2013.

 

43 


 

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)

 

 

European Holdings

 

The Company has exposure to non-sovereign financial and non-financial institutions in Europe. The following table shows the balances of this exposure by each country in Europe in which the issuer or counterparty is domiciled. The Company has no direct exposure to sovereign governments in Europe. The Company does not have unfunded commitments to counterparties in Europe, nor does it have exposure as a result of credit default protection purchased or sold separately as of September 30, 2013.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value as of September 30, 2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

United

 

 

 

 

France

Germany

Netherlands

Norway

Sweden

Switzerland

Kingdom

Total

Cash equivalents

 

$

486 

 

$

-

 

$

-

 

$

300 

 

$

-

 

$

-

 

$

200 

 

$

986 

Cash and investments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

segregated and on deposit

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

for regulatory purposes

 

 

-

  

 

400 

 

 

-

  

 

-

  

 

-

  

 

-

 

 

-

 

 

400 

Securities available for sale

 

 

556 

 

 

150 

 

 

358 

 

 

100 

 

 

1,347 

 

 

701 

 

 

1,364 

 

 

4,576 

Securities held to maturity

 

 

-

  

 

-

 

 

-

  

 

-

  

 

-

  

 

100 

 

 

-

 

 

100 

Total fair value

 

$

1,042 

  

$

550 

 

$

358 

  

$

400 

  

$

1,347 

  

$

801 

 

$

1,564 

 

$

6,062 

Total amortized cost

 

$

1,041 

  

$

550 

 

$

357 

  

$

400 

  

$

1,345 

  

$

800 

 

$

1,561 

 

$

6,054 

Maturities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Overnight

 

$

486 

  

$

400 

 

$

-

  

$

300 

  

$

-

  

$

-

 

$

200 

 

$

1,386 

1 day – < 6 months

 

 

400 

  

 

 -

 

 

122 

  

 

-

  

 

100 

  

 

151 

 

 

901 

 

 

1,674 

6 months – < 1 year

 

 

-

  

 

150 

 

 

100 

  

 

100 

  

 

200 

  

 

75 

 

 

160 

 

 

785 

1 year – 2 years

 

 

-

  

 

-

 

 

-

  

 

-

  

 

626 

  

 

425 

 

 

303 

 

 

1,354 

> 2 years

 

 

156 

  

 

-

 

 

136 

  

 

-

  

 

421 

  

 

150 

 

 

-

 

 

863 

Total fair value

 

$

1,042 

  

$

550 

 

$

358 

  

$

400 

  

$

1,347 

  

$

801 

 

$

1,564 

 

$

6,062 

 

In addition to the direct holdings of European companies listed above, the Company also has indirect exposure to Europe through its investments in Schwab sponsored money market funds (collectively, the Funds) resulting from clearing activities. At September 30, 2013, the Company had $227 million in investments in these Funds. Certain of the Funds’ positions include certificates of deposits, time deposits, commercial paper and corporate debt securities issued by counterparties in Europe.

 

 

Critical Accounting ESTIMATES

 

Certain of the Company’s 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 Company’s Annual Report on Form 10-K for the year ended December 31, 2012, as updated by the Company’s Current Report on Form 8-K filed on June 24, 2013, relating to the realignment of the Company’s reportable segments. There have been no changes to these critical accounting estimates during the first nine months of 2013.

 

As disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012, as updated by the Company’s Current Report on Form 8-K filed on June 24, 2013, relating to the realignment of the Company’s reportable segments, the Company’s annual goodwill impairment testing date is April 1. In testing for potential impairment of goodwill on April 1, 2013, management performed a qualitative assessment of each of the Company’s reporting units (generally defined as the Company’s businesses for which financial information is available and reviewed regularly by management) and concluded that goodwill was not impaired.

 

 

Forward-Looking Statements

 

In addition to historical information, this Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act, and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements are identified by words such as “believe,” “anticipate,” “expect,” “intend,” “plan,” “will,” “may,” “estimate,” “appear,” “aim,” “target,” “could,” 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.

 

44 


 

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)

 

 

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

·

the impact of current market conditions on the Company’s results of operations (see “Item 1 – Condensed Consolidated Financial Statements (Unaudited) – Notes – 2. Securities Available for Sale and Securities Held to Maturity” and “Current Market and Regulatory Environment and Other Developments”);

·

the expected impact of the final regulatory capital rules, which implemented Basel III and relevant provisions of the Dodd-Frank Act, the Federal Reserve notice of proposed rulemaking, and the NSCC proposed rule change (see “Current Market and Regulatory Environment and Other Developments”);

·

the impact of changes in the likelihood of guarantee payment obligations on the Company’s results of operations (see “Item 1 – Condensed Consolidated Financial Statements (Unaudited) – Notes – 5. Commitments and Contingencies”);

·

the impact of legal proceedings and regulatory matters (see “Item 1 – Condensed Consolidated Financial Statements (Unaudited) – Notes – 5. Commitments and Contingencies” and “Part II – Other Information – Item 1 – Legal Proceedings”);

·

target capital ratios (see “Item 1 – Condensed Consolidated Financial Statements (Unaudited) – Notes – 9. Regulatory Requirements” and “Liquidity and Capital Resources”);

·

sources of liquidity, capital, and level of dividends (see “Liquidity and Capital Resources”); and

·

capital expenditures (see “Liquidity and Capital Resources – Capital Resources”).

 

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:

·

changes in general economic and financial market conditions;

·

changes in revenues and profit margin due to changes in interest rates;

·

the Company’s ability to attract and retain clients and grow client assets and relationships;

·

the Company’s ability to develop and launch new products, services and capabilities in a timely and successful manner;

·

fluctuations in client asset values due to changes in equity valuations;

·

the Company’s ability to monetize client assets;

·

the performance or valuation of securities available for sale and securities held to maturity;

·

trading activity;

·

the level of interest rates, including yields available on money market mutual fund eligible instruments;

·

competitive pressures on rates and fees;

·

the adverse impact of financial reform legislation and related regulations;

·

potential breaches of contractual terms for which the Company has guarantee obligations;

·

adverse developments in litigation or regulatory matters;

·

amounts recovered on insurance policies;

·

the extent of any charges associated with litigation and regulatory matters;

·

the amount of loans to the Company’s brokerage and banking clients;

·

the level of the Company’s stock repurchase activity;

·

capital needs and management;

·

the level of field sales volume and related incentive compensation;

·

level of expenses;

·

acquisition integration costs;

·

the level of brokerage client cash balances and deposits from banking clients;

·

the availability and terms of external financing; and

·

timing and impact of changes in the Company’s level of investments in buildings and software.

 

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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)

 

 

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 Company’s Annual Report on Form 10-K for the year ended December 31, 2012, and “Part II – Other Information – Item 1A – Risk Factors.

 

 

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THE CHARLES SCHWAB CORPORATION

 

 

 

 

Item 3.Quantitative and Qualitative Disclosures About Market Risk

 

Market risk is the potential for changes in revenue or the value of financial instruments held by the Company as a result of fluctuations in interest rates, equity prices or market conditions.

 

The Company is exposed to interest rate risk primarily from changes in market interest rates on its interest-earning assets relative to changes in the costs of its funding sources that finance these assets. The majority of the Company’s interest-earning assets and interest-bearing liabilities are sensitive to changes in short-term interest rates. To manage the Company’s market risk related to interest rates, management utilizes simulation models, which include the net interest revenue sensitivity analysis described below.

 

Net interest revenue is affected by various factors, such as the distribution and composition of interest-earning assets and interest-bearing liabilities, the spread between yields earned on interest-earning assets and rates paid on interest-bearing liabilities, which may reprice at different times or by different amounts, and the spread between short and long-term interest rates. Interest-earning assets include residential real estate loans and mortgage-backed securities. These assets are sensitive to changes in interest rates and to changes to prepayment levels, which tend to increase in a declining rate environment. Because the Company establishes the rates paid on certain brokerage client cash balances and deposits from banking clients and the rates charged on margin loans and loans to banking clients, and controls the composition of its investment securities, it has some ability to manage its net interest spread, depending on competitive factors and market conditions.

 

To mitigate the risk of loss, the Company has established policies and procedures which include setting guidelines on the amount of net interest revenue at risk, and monitoring the net interest margin and average maturity of its interest-earning assets and funding sources. To remain within these guidelines, the Company manages the maturity, repricing, and cash flow characteristics of the investment portfolios.

 

The Company is also subject to market risk as a result of fluctuations in option and equity prices. The Company’s direct holdings of option and equity securities and its associated exposure to option and equity prices are not material. The Company is indirectly exposed to option and equity market fluctuations in connection with client option accounts, securities collateralizing margin loans to brokerage customers, and customer securities loaned out as part of the Company’s securities lending activities. Equity market valuations may also affect the level of brokerage client trading activity, margin borrowing, and overall client engagement with the Company. Additionally, the Company earns mutual fund service fees and asset management fees based upon daily balances of certain client assets. Fluctuations in these client asset balances caused by changes in equity valuations directly impact the amount of fee revenue earned by the Company.

 

Financial instruments held by the Company are also subject to liquidity risk – that is, the risk that valuations will be negatively affected by changes in demand and the underlying market for a financial instrument. Recent conditions in the credit markets have significantly reduced market liquidity in a wide range of financial instruments, including the types of instruments held by the Company, and fair value can differ significantly from the value implied by the credit quality and actual performance of the instrument’s underlying cash flows.

 

Financial instruments held by the Company are also subject to valuation risk as a result of changes in valuations of the underlying collateral, such as housing prices in the case of residential real estate loans and mortgage-backed securities.

 

For discussion of the impact of current market conditions on asset management and administration fees and net interest revenue, see “Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Current Market and Regulatory Environment and Other Developments.”

 

The Company’s market risk related to financial instruments held for trading is not material.

 

Net Interest Revenue Simulation

 

For the Company’s net interest revenue sensitivity analysis, the Company uses net interest revenue simulation modeling techniques to evaluate and manage the effect of changing interest rates. The simulation includes all interest-sensitive assets and liabilities. Key variables in the simulation include the repricing of financial instruments, prepayment, reinvestment, and product pricing assumptions. The Company uses constant balances and market rates in the simulation assumptions in order to minimize the number of variables and to better isolate risks. The simulations involve assumptions that are inherently

47 


 

THE CHARLES SCHWAB CORPORATION

 

 

 

 

uncertain and, as a result, cannot precisely estimate net interest revenue or predict the impact of changes in interest rates on net interest revenue. Actual results may differ from simulated results due to balance growth or decline and the timing, magnitude, and frequency of interest rate changes, as well as changes in market conditions and management strategies, including changes in asset and liability mix.

 

If the Company’s guidelines for its net interest revenue sensitivity are breached, management must report the breach to the Company’s Corporate Asset-Liability Management and Pricing Committee (Corporate ALCO) and establish a plan to address the interest rate risk. This plan could include, but is not limited to, rebalancing certain investment portfolios or using derivative instruments to mitigate the interest rate risk. Depending on the severity and expected duration of the breach, as well as the then current interest rate environment, the plan could also be to take no action. Any plan that recommends taking action is required to be approved by the Company’s Corporate ALCO. There were no breaches of the Company’s net interest revenue sensitivity guidelines during the first nine months of 2013 or year-ending December 31, 2012.

 

As represented by the simulations presented below, the Company’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 (i.e., interest-earning assets generally reprice more quickly than interest-bearing liabilities).

 

The simulations in the following table assume that the asset and liability structure of the consolidated balance sheet would not be changed as a result of the simulated changes in interest rates. As the Company actively manages its consolidated balance sheet and interest rate exposure, in all likelihood the Company would take steps to manage any additional interest rate exposure that could result from changes in the interest rate environment. The following table shows the results of a gradual 100 basis point increase or decrease in market interest rates relative to the Company’s current market rates forecast on simulated net interest revenue over the next 12 months beginning September 30, 2013 and December 31, 2012.

 

 

 

 

 

 

 

 

 

 

September 30,

 

December 31,

 

 

2013

 

2012

Increase of 100 basis points

 

11.6 

 

19.2 

Decrease of 100 basis points

 

(5.3)

 

(10.0)

%

 

The sensitivities shown in the simulation reflect the fact that short-term interest rates in the first nine months of 2013 remained at historically low levels, including the federal funds target rate, which was unchanged at a range of zero to 0.25%. The current low interest rate environment limits the extent to which the Company can reduce interest expense paid on funding sources in a declining interest rate scenario. A decline in interest rates could therefore negatively impact the yield on the Company’s investment portfolio to a greater degree than any offsetting reduction in interest expense, further compressing net interest margin. Any increases in short-term interest rates result in a greater impact as yields on interest-earning assets are expected to rise faster than the cost of funding sources. 

 

 

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, 2013. 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, 2013.

 

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, 2013, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

 

48 


 

THE CHARLES SCHWAB CORPORATION

 

 

 

 

PART  II  -  OTHER  INFORMATION

 

 

Item 1.Legal Proceedings

 

For a discussion of legal proceedings, see “Part I – Financial Information – Item 1 – Condensed Consolidated Financial Statements (Unaudited) – Notes – 5. Commitments and Contingencies.”

 

 

Item 1A.Risk Factors

 

During the first nine months of 2013, there have been no material changes to the risk factors in “Part I – Item 1A – Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012.

 

 

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

 

Issuer Purchases of Equity Securities

 

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 2013:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Number

 

Approximate

 

 

 

 

 

 

 

 

of Shares Purchased

 

Dollar Value of

 

 

Total Number

 

 

 

 

as Part of Publicly

 

Shares that May

 

 

of Shares

 

 

Average

 

Announced

 

Yet be Purchased

 

 

Purchased

 

 

Price Paid

 

Program (1) 

 

Under the Program

Month

 

(in thousands)

 

 

per Share

 

(in thousands)

 

(in millions)

July:

 

 

 

 

 

 

 

 

 

 

 

 

 

Share repurchase program (1)

 

 -

 

  

$

 -

  

 -

 

  

$

596 

 

Employee transactions (2)

 

 

  

$

21.49 

  

N/A

 

  

 

N/A

 

August:

 

 

 

 

 

 

 

 

 

 

 

 

 

Share repurchase program (1)

 

 -

 

  

$

 -

  

 -

 

  

$

596 

 

Employee transactions (2)

 

 

  

$

22.59 

  

N/A

 

  

 

N/A

 

September:

 

 

 

 

 

 

 

 

 

 

 

 

 

Share repurchase program (1)

 

 -

 

  

$

 -

  

 -

 

  

$

596 

 

Employee transactions (2)

 

 

  

$

21.31 

  

N/A

 

  

 

N/A

 

Total:

 

 

 

 

 

 

 

 

 

 

 

 

 

Share repurchase program (1)

 

 -

 

  

$

 -

  

 -

 

  

$

596 

 

Employee transactions (2)

 

 

  

$

21.64 

  

N/A

 

  

 

N/A

 

 

(1)

There were no share repurchases under the Share Repurchase Program during the third quarter. Repurchases under this program would occur under two authorizations by CSC’s Board of Directors, each covering up to $500 million of common stock that were publicly announced by the Company on April 25, 2007 and March 13, 2008. The remaining authorizations do not have an expiration date.

(2)

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.

 

 

49 


 

THE CHARLES SCHWAB CORPORATION

 

 

 

 

Item 3.Defaults Upon Senior Securities

 

None.

 

 

Item 4.Mine Safety Disclosures

 

Not applicable.

 

 

Item 5.Other Information

 

None.

 

 

50 


 

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

 

 

 

 

10.317

Form of Notice and Nonqualified Stock Option Agreement for Walter W. Bettinger under The Charles Schwab Corporation 2004 Stock Incentive Plan dated October 1, 2008.

(1)

 

 

 

12.1

Computation of Ratio of Earnings to Fixed Charges and Ratio of Earnings to Fixed Charges and Preferred Stock Dividends.

 

 

 

 

31.1

Certification Pursuant to Rule 13a-14(a)/15d-14(a), As Adopted Pursuant to Section 302 of The Sarbanes-Oxley Act of 2002.

 

 

 

 

31.2

Certification Pursuant to Rule 13a-14(a)/15d-14(a), As Adopted Pursuant to Section 302 of The Sarbanes-Oxley Act of 2002.

 

 

 

 

32.1

Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002.

(2)

 

 

 

32.2

Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002.

(2)

 

 

 

101.INS

XBRL Instance Document

(3)

 

 

 

101.SCH

XBRL Taxonomy Extension Schema

(3)

 

 

 

101.CAL

XBRL Taxonomy Extension Calculation

(3)

 

 

 

101.DEF

XBRL Extension Definition

(3)

 

 

 

101.LAB

XBRL Taxonomy Extension Label

(3)

 

 

 

101.PRE

XBRL Taxonomy Extension Presentation

(3)

 

 

 

(1)

Management contract or compensatory plan.

 

 

 

 

(2)

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

 

 

 

(3)

Attached as Exhibit 101 to this Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2013 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 Cash Flows, and (v) Notes to Condensed Consolidated Financial Statements.

 

 

 

 

51 


 

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 6, 2013

 

/s/ Joseph R. Martinetto

 

 

 

Joseph R. Martinetto

 

 

 

Executive Vice President and

 

 

 

Chief Financial Officer

 

 

 

 

52