Document


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 March 31, 2018

Commission File Number: 1-9700

THE  CHARLES  SCHWAB  CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction
of incorporation or organization)
94-3025021
(I.R.S. Employer Identification No.)

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

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

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

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

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

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
1,349,185,040 shares of $.01 par value Common Stock Outstanding on April 30, 2018



THE CHARLES SCHWAB CORPORATION

Quarterly Report on Form 10-Q
For the Quarter Ended March 31, 2018



 Index

 
 
 
 
 
 
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
19-20
 
 
 
21-51
 
 
 
 
 
 
Item 2.
 
1-14
 
 
 
 
 
 
Item 3.
 
 
 
 
 
 
 
Item 4.
 
52
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
Item 1A.
 
 
 
 
 
 
 
Item 2.
 
 
 
 
 
 
 
Item 3.
 
53
 
 
 
 
 
 
Item 4.
 
 
 
 
 
 
 
Item 5.
 
 
 
 
 
 
 
Item 6.
 
 
 
 
 
 
 
 
 
 







Part I – FINANCIAL INFORMATION

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



Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

INTRODUCTION

The Charles Schwab Corporation (CSC) is a savings and loan holding company engaged, through its subsidiaries (collectively referred to as “Schwab” or the “Company”), in wealth management, securities brokerage, banking, asset management, custody, and financial advisory services.

Significant business subsidiaries of CSC include the following:

Charles Schwab & Co., Inc. (CS&Co), a securities broker-dealer;
Charles Schwab Bank (CSB), a federal savings bank; and
Charles Schwab Investment Management, Inc. (CSIM), the investment advisor for Schwab’s proprietary mutual funds (Schwab Funds®) and Schwab’s exchange-traded funds (Schwab ETFs™).

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

Schwab provides financial services to individuals and institutional clients through two segments – Investor Services and Advisor Services. The Investor Services segment provides retail brokerage and banking services to individual investors, and retirement plan services, as well as other corporate brokerage services, to businesses and their employees. The Advisor Services segment provides custodial, trading, banking, and support services, as well as retirement business services, to independent registered investment advisors (RIAs), independent retirement advisors, and recordkeepers.
Schwab was founded on the belief that all Americans deserve access to a better investing experience. Although much has changed in the intervening years, our purpose remains clear – to champion every client’s goals with passion and integrity. Guided by this purpose and the aspiration of creating the most trusted leader in investment services, management has adopted a strategy described as “Through Clients’ Eyes.”

Under this approach, our strategic goals are focused on putting clients’ perspectives, needs, and desires at the forefront. Because investing plays a fundamental role in building financial security, we strive to deliver a better investing experience for our clients – individual investors and the people and institutions who serve them – by disrupting longstanding industry practices on their behalf and providing superior service. We aim to offer a broad range of products and solutions to meet client needs with a focus on transparency and value. In addition, management works to couple Schwab’s scale and resources with ongoing expense discipline to keep costs low and ensure that products and solutions are affordable as well as responsive to client needs. Finally, we seek to maximize our market valuation and stockholder returns over time.

Management estimates that investable wealth in the United States (U.S.) currently exceeds $30 trillion, which means the Company’s $3.31 trillion in client assets leaves substantial opportunity for growth. Our strategy is based on the principle that developing trusted relationships will translate into more assets from both new and existing clients, ultimately driving more revenue, and along with expense discipline, will generate earnings growth and build long-term stockholder value.

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

On our website, www.aboutschwab.com, we post the following filings after they are electronically filed with or furnished to the Securities and Exchange Commission (SEC): annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934. The SEC maintains a website at www.sec.gov that contains reports, proxy, and other information that we file electronically with the SEC.


- 1 -



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


FORWARD-LOOKING STATEMENTS
In addition to historical information, this Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act, and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements are identified by words such as “believe,” “anticipate,” “expect,” “intend,” “plan,” “will,” “may,” “estimate,” “appear,” “could,” “would,” and other similar expressions. In addition, any statements that refer to expectations, projections, or other characterizations of future events or circumstances are forward-looking statements.
These forward-looking statements, which reflect management’s beliefs, objectives, and expectations as of the date hereof, are estimates based on the best judgment of Schwab’s senior management. These statements relate to, among other things:
Schwab seeking to maximize its market valuation and stockholder returns over time; our belief that developing trusted relationships will translate into more client assets which drives revenue and, along with expense discipline, generates earnings growth and builds stockholder value (see Introduction in Part I, Item 2);
Capital expenditures in 2018 (see Results of Operations);
The expected impact of new accounting standards not yet adopted (see New Accounting Standards in Part I, Item 1, Financial Information – Notes to Condensed Consolidated Financial Statements (Item 1) – Note 2);
The likelihood of indemnification and guarantee payment obligations (see Commitments and Contingencies in Item 1 – Note 9); and
The impact of legal proceedings and regulatory matters (see Commitments and Contingencies in Item 1 – Note 9 and Legal Proceedings in Part II, Item 1).

Achievement of the expressed beliefs, objectives, and expectations described in these statements is subject to certain risks and uncertainties that could cause actual results to differ materially from the expressed beliefs, objectives, and expectations. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this Quarterly Report on Form 10-Q or, in the case of documents incorporated by reference, as of the date of those documents.

Important factors that may cause actual results to differ include, but are not limited to:
General market conditions, including the level of interest rates, equity valuations, and trading activity;
Our ability to attract and retain clients, develop trusted relationships, and grow client assets;
Client use of our investment advisory services and other products and services;
The level of client assets including cash balances;
Competitive pressure on pricing, including deposit rates;
Client sensitivity to interest rates;
Regulatory guidance;
Timing, amount, and impact of migration of certain balances from sweep money market funds into bank sweep deposits;
Capital and liquidity needs and management;
Our ability to manage expenses;
Our ability to develop and launch new products, services, and capabilities in a timely and successful manner;
The effect of adverse developments in litigation or regulatory matters and the extent of any related charges; and
Potential breaches of contractual terms for which we have indemnification and guarantee obligations.

Certain of these factors, as well as general risk factors affecting the Company, are discussed in greater detail in Part I – Item 1A – Risk Factors in the 2017 Form 10-K.



- 2 -



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


OVERVIEW
Management focuses on several client activity and financial metrics in evaluating Schwab’s financial position and operating performance. Results for the first quarters of 2018 and 2017 are:
 
Three Months Ended
March 31,
 
Percent
Change
 
2018
 
2017
 
Client Metrics:
 
 
 
 
 
Net new client assets (in billions) (1)
$
(18.8
)
 
$
38.9

 
(148
)%
Core net new client assets (in billions)
$
65.6

 
$
38.9

 
69
 %
Client assets (in billions, at quarter end)
$
3,305.4

 
$
2,922.5

 
13
 %
Average client assets (in billions)
$
3,382.1

 
$
2,871.9

 
18
 %
New brokerage accounts (in thousands)
443

 
362

 
22
 %
Active brokerage accounts (in thousands, at quarter end)
11,005

 
10,320

 
7
 %
Assets receiving ongoing advisory services (in billions, at quarter end)
$
1,717.6

 
$
1,481.8

 
16
 %
Client cash as a percentage of client assets (at quarter end)
11.0
%
 
12.4
%
 
 

Company Financial Metrics:
 

 
 

 
 

Total net revenues
$
2,398

 
$
2,081

 
15
 %
Total expenses excluding interest
1,396

 
1,238

 
13
 %
Income before taxes on income
1,002

 
843

 
19
 %
Taxes on income
219

 
279

 
(22
)%
Net income
$
783

 
$
564

 
39
 %
Preferred stock dividends and other
37

 
39

 
(5
)%
Net income available to common stockholders
$
746

 
$
525

 
42
 %
Earnings per common share  diluted
$
.55

 
$
.39

 
41
 %
Net revenue growth from prior year
15
%
 
18
%
 
 

Pre-tax profit margin
41.8
%
 
40.5
%
 
 

Return on average common stockholders’ equity
18
%
 
15
%
 
 

Expenses excluding interest as a percentage of average client assets (annualized)
0.17
%
 
0.18
%
 
 
Consolidated Tier 1 Leverage Ratio (at quarter end)
7.5
%
 
7.1
%
 
 
(1) The three months ended March 31, 2018 includes outflows of $84.4 billion from certain mutual fund clearing services clients.

Net income for the first quarter of 2018 grew 39% from the same period in 2017 driven primarily by sustained business momentum, higher interest rates, and lower corporate income taxes. Total revenues rose 15% due to increases in all major sources of revenue as a result of strong organic growth, client engagement, and the economic environment. Total expenses grew 13%, reflecting higher spending to support the expanding investor base and higher client assets, as well as a $15 million charge associated with unsecured client margin losses in volatility-related products during early February. Altogether, we achieved a 240 basis point gap between revenue and expense growth, which resulted in a 41.8% pre-tax profit margin; combined with a lower tax rate of 21.9%, we delivered net income of $783 million for the first quarter of 2018, up $219 million from a year ago.

During the first quarter of 2018, clients opened 443,000 new brokerage accounts, helping to bring active brokerage accounts to 11.0 million at March 31, 2018. Excluding planned mutual funding clearing outflows of $84.4 billion, core net new assets gathered during the first quarter of 2018 were $65.6 billion, compared to $38.9 billion for the same period a year ago. Client engagement remained strong during the first quarter of 2018, with daily average revenue trades rising 46% from the same period in 2017.

We also transferred approximately $25 billion from sweep money market funds to bank sweep deposits and paid off $15 billion in borrowings from the Federal Home Loan Bank. The net effect of these moves and client activity lifted our consolidated balance sheet assets to $248 billion at March 31, 2018. Our financial results, combined with the benefits of the Tax Cuts and Jobs Act (Tax Act), lifted our first quarter return on equity to 18% compared to 15% for the same period in 2017.

- 3 -



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


RESULTS OF OPERATIONS

Total Net Revenues

Total net revenues grew 15% during the first quarter of 2018 compared to the same period in 2017, reflecting increases in all major sources of revenue.
Three Months Ended March 31,
 
 
 
2018
 
2017
 
 
Percent
Change
 
Amount
 
% of
Total Net
Revenues
 
Amount
 
% of
Total Net
Revenues
Net interest revenue
 
 
 
 
 
 
 
 
 
 
     Interest revenue
 
35
 %
 
$
1,421

 
59
 %
 
$
1,055

 
51
 %
     Interest expense
 
187
 %
 
(158
)
 
(6
)%
 
(55
)
 
(3
)%
Net interest revenue
 
26
 %
 
1,263

 
53
 %
 
1,000

 
48
 %
Asset management and administration fees
 
 
 
 
 
 
 
 
 
 
     Mutual funds and ETF service fees
 
(3
)%
 
493

 
21
 %
 
506

 
24
 %
     Advice Solutions
 
16
 %
 
282

 
12
 %
 
244

 
12
 %
     Other
 
4
 %
 
76

 
3
 %
 
73

 
4
 %
Asset management and administration fees
 
3
 %
 
851

 
36
 %
 
823

 
40
 %
Trading revenue
 
 
 
 
 
 
 
 
 
 
     Commissions
 
6
 %
 
189

 
7
 %
 
178

 
8
 %
     Principal transactions
 
(14
)%
 
12

 
1
 %
 
14

 
1
 %
Trading revenue
 
5
 %
 
201

 
8
 %
 
192

 
9
 %
Other
 
26
 %
 
83

 
3
 %
 
66

 
3
 %
Total net revenues
 
15
 %
 
$
2,398

 
100
 %
 
$
2,081

 
100
 %
 
 
 
 
 
 
 
 
 
 
 

- 4 -



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


Net Interest Revenue

The following table presents net interest revenue information corresponding to interest-earning assets and funding sources on the condensed consolidated balance sheets:
Three Months Ended March 31,
 
2018
 
2017
 
 
Average
Balance
 
Interest
Revenue/
Expense
 
Average
Yield/
Rate
 
Average
Balance
 
Interest
Revenue/
Expense
 
Average
Yield/
Rate
Interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
17,084

 
$
66

 
1.53
%
 
$
9,047

 
$
17

 
0.76
%
Cash and investments segregated
 
13,969

 
48

 
1.37
%
 
21,820

 
35

 
0.65
%
Broker-related receivables (1)
 
287

 
1

 
1.32
%
 
388

 

 
0.55
%
Receivables from brokerage clients
 
18,872

 
179

 
3.79
%
 
15,245

 
126

 
3.35
%
Available for sale securities (2)
 
50,371

 
240

 
1.91
%
 
71,430

 
251

 
1.43
%
Held to maturity securities
 
121,412

 
721

 
2.38
%
 
83,368

 
485

 
2.36
%
Bank loans
 
16,456

 
130

 
3.19
%
 
15,527

 
110

 
2.87
%
  Total interest-earning assets
 
238,451

 
1,385

 
2.33
%
 
216,825

 
1,024

 
1.92
%
Other interest revenue
 
 
 
36

 
 
 
 
 
31

 
 
Total interest-earning assets
 
$
238,451

 
$
1,421

 
2.39
%
 
$
216,825

 
$
1,055

 
1.97
%
Funding sources:
 
 
 
 
 
 
 
 
 
 
 
 
Bank deposits
 
$
176,988

 
$
64

 
0.15
%
 
$
163,682

 
$
19

 
0.05
%
Payables to brokerage clients
 
22,469

 
7

 
0.14
%
 
27,666

 
2

 
0.03
%
Short-term borrowings
 
12,170

 
47

 
1.55
%
 
1,332

 
2

 
0.61
%
Long-term debt
 
4,392

 
37

 
3.37
%
 
3,090

 
28

 
3.67
%
  Total interest-bearing liabilities
 
216,019

 
155

 
0.29
%
 
195,770

 
51

 
0.11
%
Non-interest-bearing funding sources
 
22,432

 
 
 
 
 
21,055

 
 
 
 
Other interest expense
 
 
 
3

 
 
 
 
 
4

 
 
Total funding sources
 
$
238,451

 
$
158

 
0.27
%
 
$
216,825

 
$
55

 
0.10
%
Net interest revenue
 
 
 
$
1,263

 
2.12
%
 
 
 
$
1,000

 
1.87
%
(1) Interest revenue or expense was less than $500,000 in the period or periods presented.
(2) Amounts have been calculated based on amortized cost.
 
 
 
 
 
 
 
 
 
 
 
 
 
Net interest revenue increased $263 million, or 26%, in the first quarter of 2018 compared to the same period in 2017 primarily due to higher interest rates and growth in interest-earning assets. 
Our net interest margin improved to 2.12% during the first quarter of 2018, up from 1.87% a year earlier as a result of the Federal Reserve’s 2017 and March 2018 interest rate hikes, partially offset by higher interest rates paid on bank deposits and short-term borrowings.
In the first quarter of 2018, average interest earning assets grew 10% compared to the same period in 2017. This increase was driven by higher bank deposits from net client flows and bulk transfers, as well as higher short-term borrowings.


- 5 -



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


Asset Management and Administration Fees

The following table presents asset management and administration fees, average client assets, and average fee yields:
Three Months Ended March 31,
2018
 
2017
Average
Client
Assets
 
Revenue
 
Average
Fee
 
Average
Client
Assets
 
Revenue
 
Average
Fee
Schwab money market funds before fee waivers
$
156,362

 
$
182

 
0.47
%
 
$
162,789

 
$
231

 
0.58
%
Fee waivers
 
 

 
 
 
 
 
(8
)
 
 
Schwab money market funds
156,362

 
182

 
0.47
%
 
162,789

 
223

 
0.56
%
Schwab equity and bond funds and ETFs
196,950

 
63

 
0.13
%
 
140,054

 
55

 
0.16
%
Mutual Fund OneSource® and other NTF funds
222,669

 
178

 
0.32
%
 
202,416

 
170

 
0.34
%
Other third-party mutual funds and ETFs (1)
319,722

 
70

 
0.09
%
 
272,626

 
58

 
0.09
%
Total mutual funds and ETFs 
$
895,703

 
493

 
0.22
%
 
$
777,885

 
506

 
0.26
%
Advice solutions (2) :
 
 
 
 
 
 
 
 
 
 
 
Fee-based
$
224,760

 
282

 
0.51
%
 
$
191,775

 
244

 
0.52
%
Non-fee-based
59,762

 

 

 
42,722

 

 

      Total advice solutions
$
284,522

 
282

 
0.40
%
 
$
234,497

 
244

 
0.42
%
Other balance-based fees (3)
426,012

 
66

 
0.06
%
 
388,739

 
61

 
0.06
%
Other (4)
 
 
10

 
 
 
 
 
12

 
 
Total asset management and administration fees
 
 
$
851

 
 
 
 
 
$
823

 
 
(1) Includes Schwab ETF OneSource™.
(2) Beginning in the fourth quarter of 2017, a change was made to add non-fee based average assets from managed portfolios. Average client assets for advice solutions may also include the asset balances contained in the mutual fund and/or ETF categories listed above. Prior periods have been adjusted to accommodate this change.
(3) Includes various asset-related fees, such as trust fees, 401(k) recordkeeping fees, and mutual fund clearing fees and other service fees.
(4) Includes miscellaneous service and transaction fees relating to mutual funds and ETFs that are not balance-based.
 
 
 
 
 
 
 
 
 
 
 
 
Asset management and administration fees increased by $28 million, or 3%, in the first quarter of 2018 compared to the same period in 2017, due to growing balances in advised solutions, equity and bond funds, and ETFs, partially offset by lower money market fund revenue as a result of bulk transfers to bank sweep deposits and fee reductions in the fourth quarter of 2017.

The following table presents a roll forward of client assets for the Schwab money market funds, Schwab equity and bond funds and exchange-traded funds (ETFs), and Mutual Fund OneSource® and other non-transaction fee (NTF) funds. These funds generated 50% of the asset management and administration fees earned during the first quarter of 2018, compared to 54% for the same period in 2017:
 
 
Schwab Money
Market Funds
 
Schwab Equity and
Bond Funds and ETFs
 
Mutual Fund OneSource®
and Other NTF Funds
Three Months Ended March 31,
 
2018
 
2017
 
2018
 
2017
 
2018
 
2017
Balance at beginning of period
 
$
163,650

 
$
163,495

 
$
181,608

 
$
125,813

 
$
225,202

 
$
198,924

Net inflows (outflows)
 
(19,122
)
 
(724
)
 
8,646

 
7,175

 
(4,929
)
 
(4,590
)
Net market gains (losses) and other
 
467

 
116

 
(2,324
)
 
6,424

 
1,341

 
10,553

Balance at end of period
 
$
144,995

 
$
162,887

 
$
187,930

 
$
139,412

 
$
221,614

 
$
204,887

 
 
 
 
 
 
 
 
 
 
 
 
 


- 6 -



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


Trading Revenue
The following table presents trading revenue and the related drivers:
 
Three Months Ended
March 31,
 
Percent
Change
 
2018
 
2017
 
Daily average revenue trades (DARTs) (in thousands)
462

 
317

 
46
 %
Clients’ daily average trades (in thousands)
812

 
585

 
39
 %
Number of trading days
61.0

 
62.0

 
(2
)%
Daily average revenue per revenue trade
$
7.24

 
$
9.84

 
(26
)%
Trading revenue
$
201

 
$
192

 
5
 %
DART volumes increased 46% in the first quarter of 2018 compared to the prior year. This led to an increase in trading revenue of 5%, as the volume growth more than offset Schwab’s commission pricing reductions implemented in the first quarter of 2017. At that time, Schwab announced two trading price reductions which lowered standard equity, ETF, and option trade commissions from $8.95 to $4.95 and lowered the per contract option fee from $.75 to $.65.

Other Revenue

Other revenue includes order flow revenue, other service fees, software fees from our portfolio management solutions, exchange processing fees, and non-recurring gains. Order flow revenue was $38 million and $27 million during the first quarters of 2018 and 2017, respectively.


- 7 -



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


Total Expenses Excluding Interest
The following table shows a comparison of expenses excluding interest:

 
Three Months Ended March 31,
 
Percent
Change

 
2018
 
2017
 
Compensation and benefits
 
 
 
 
 
 
Salaries and wages
 
$
411

 
$
367

 
12
%
Incentive compensation
 
212

 
202

 
5
%
Employee benefits and other
 
147

 
132

 
11
%
Total compensation and benefits
 
$
770

 
$
701

 
10
%
Professional services
 
156

 
133

 
17
%
Occupancy and equipment
 
122

 
105

 
16
%
Advertising and market development
 
73

 
71

 
3
%
Communications
 
62

 
57

 
9
%
Depreciation and amortization
 
73

 
65

 
12
%
Regulatory fees and assessments
 
51

 
44

 
16
%
Other
 
89

 
62

 
44
%
Total expenses excluding interest
 
$
1,396

 
$
1,238

 
13
%
Expenses as a percentage of total net revenues:
 
 
 
 
 
 
Compensation and benefits
 
32
%
 
34
%
 

Advertising and market development
 
3
%
 
3
%
 

Full-time equivalent employees (in thousands):
 
 
 
 
 
 
At quarter end
 
18.2

 
16.5

 
10
%
Average
 
18.0

 
16.5

 
9
%
Total compensation and benefits increased in the first quarter of 2018 compared to the same period in 2017, primarily due to an increase in employee headcount to support our expanding customer base as well as annual salary increases.

Professional services expense increased in the first quarter of 2018 compared to the same period in 2017, primarily due to an increase in asset management and administration related expenses resulting from growth in the Schwab Funds® and Schwab ETFs™ and higher spending on technology projects.
Occupancy and equipment expense increased in the first quarter of 2018 compared to the same period in 2017, primarily due to an increase in software maintenance expenses and additional licenses to support growth in the business.
Depreciation and amortization expenses grew in the first quarter of 2018 compared to the same period in 2017, primarily due to higher amortization of internally developed software associated with our investment in software and technology enhancements.
Regulatory fees and assessments increased in the first quarter of 2018 compared to the same period in 2017, primarily due to an increase in Federal Deposit Insurance Corporation (FDIC) insurance assessments, which rose as a result of higher average assets.


- 8 -



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


Other expenses increased in the first quarter of 2018 compared to the same period in 2017, primarily due to a $15 million charge associated with unsecured client margin losses in volatility-related products and other miscellaneous expense growth related to the growing client asset base.

Capital expenditures were $135 million and $67 million in the first quarters of 2018 and 2017, respectively. The increase in capital expenditures from the prior year was due to our office campus expansion in the U.S. and investments in technology projects. As we continue to pursue our geographic strategy, we anticipate increasing capital expenditures for full-year 2018 from our typical range of 3-5% of total net revenues to approximately 6-7%.

Taxes on Income

Taxes on income were $219 million and $279 million for the first quarters of 2018 and 2017, respectively, resulting in effective income tax rates on income before taxes of 21.9% and 33.1%, respectively. The decrease in the effective tax rate was primarily due to the Tax Act which was signed into law on December 22, 2017. Among other things, the Tax Act lowered the federal corporate income tax rate from 35% to 21%, effective for tax years including or commencing January 1, 2018.

Segment Information

Financial information for our segments is presented in the following table:
 
 
Investor Services
 
Advisor Services
 
Total
Three Months Ended March 31,
 
Percent
Change
 
2018
 
2017
 
Percent
Change
 
2018
 
2017
 
Percent
Change
 
2018
 
2017
Net Revenues
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net interest revenue
 
27
%
 
$
957

 
$
753

 
24
%
 
$
306

 
$
247

 
26
%
 
$
1,263

 
$
1,000

Asset management and administration fees
 
5
%
 
593

 
566

 

 
258

 
257

 
3
%
 
851

 
823

Trading revenue
 
7
%
 
127

 
119

 
1
%
 
74

 
73

 
5
%
 
201

 
192

Other
 
28
%
 
64

 
50

 
19
%
 
19

 
16

 
26
%
 
83

 
66

Total net revenues
 
17
%
 
1,741

 
1,488

 
11
%
 
657

 
593

 
15
%
 
2,398

 
2,081

Expenses Excluding Interest
 
12
%
 
1,042

 
930

 
15
%
 
354

 
308

 
13
%
 
1,396

 
1,238

Income before taxes on income
 
25
%
 
$
699

 
$
558

 
6
%
 
$
303

 
$
285

 
19
%
 
$
1,002

 
$
843

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Investor Services

Total net revenues rose by 17% in the first quarter of 2018 compared to the same period in 2017, primarily due to increases in net interest revenue and asset management and administration fees. Net interest revenue increased primarily due to higher net interest margins and higher interest-earning assets. Asset management and administration fees increased primarily due to higher client assets enrolled in advisory solutions partially offset by lower money market fund revenue.

Expenses excluding interest increased by 12% in the first quarter of 2018 compared to the same period in 2017, due to higher compensation and benefits, technology project spend, and asset management and administration related expenses to support our expanding client and asset base.
Advisor Services
Total net revenues rose by 11% in the first quarter of 2018 compared to the same period in 2017, primarily due to an increase in net interest revenue. Net interest revenue increased primarily due to higher net interest margins and higher interest-earning assets.

Expenses excluding interest increased by 15% in the first quarter of 2018 compared to the same period in 2017, primarily due to higher compensation and benefits, technology project spend, and asset management and administration related expenses to support our expanding client and asset base.



- 9 -



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


RISK MANAGEMENT

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

Net Interest Revenue Simulation

For Schwab’s net interest revenue sensitivity analysis, we use net interest revenue simulation modeling techniques to evaluate and manage the effect of changing interest rates. The simulation includes all interest-sensitive assets and liabilities. Key variables in the simulation include the repricing of financial instruments, prepayment, reinvestment, and product pricing assumptions. The simulations involve assumptions that are inherently uncertain and, as a result, cannot precisely estimate 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 our guidelines for net interest revenue sensitivity are breached, management must report the breach to the Financial Risk Oversight Committee and establish a plan to address the interest rate risk. There were no breaches of Schwab’s net interest revenue sensitivity risk limits during the three months ended March 31, 2018, or year ended December 31, 2017.

As represented by the simulations presented below, our investment strategy is structured to produce an increase in net interest revenue when interest rates rise and, conversely, a decrease in net interest revenue when interest rates fall.

The simulations in the following table assume that the asset and liability structure of the consolidated balance sheets would not be changed as a result of the simulated changes in interest rates. As we actively manage the consolidated balance sheets and interest rate exposure, in all likelihood we would take steps to manage additional interest rate exposure that could result from changes in the interest rate environment. The following table shows the simulated net interest revenue change over the next 12 months beginning March 31, 2018 and December 31, 2017 of a gradual 100 basis point increase or decrease in market interest rates relative to prevailing market rates at the end of each reporting period:

 
March 31, 2018
 
December 31, 2017
Increase of 100 basis points
 
3.5
 %
 
3.3
 %
Decrease of 100 basis points
 
(5.2
)%
 
(6.2
)%
The change in net interest revenue sensitivities as of March 31, 2018 reflects the increase in interest rates across all maturities.


- 10 -



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


Liquidity Risk

Schwab’s primary source of funds is cash generated by client activity: bank deposits and cash balances in client brokerage accounts. These funds are used to purchase investment securities and extend loans to clients.

Other sources of funds may include cash flows from operations, maturities and sales of investment securities, repayments on loans, securities lending of assets held in client brokerage accounts, and cash provided by external debt or equity financing.
 
To meet daily funding needs, we maintain liquidity in the form of overnight cash deposits and short-term investments. For unanticipated liquidity needs, a buffer of highly liquid investments, currently comprised of U.S. Treasury notes, is also maintained.

In addition to internal sources of liquidity, Schwab has access to external funding. The following table describes external debt facilities available at March 31, 2018:
Description
Borrower
 
Outstanding
 
Available
Committed, unsecured credit facility with various external banks
CSC
 
$

 
$
750

Uncommitted, unsecured lines of credit with various external banks
CSC, CS&Co
 

 
1,199

Federal Reserve Bank discount window (1)
CSB
 

 
2,456

Federal Home Loan Bank secured credit facility (2)
CSB
 

 
31,369

Unsecured commercial paper (3)
CSC
 

 
750

(1) Amounts available are dependent on the fair value of certain investment securities that are pledged as collateral.
(2) Amounts available are dependent on the amount of first lien residential real estate mortgage loans (First Mortgages), home equity lines of credit (HELOCs), and the fair value of certain investment securities that are pledged as collateral.
(3) CSC has authorization from its Board of Directors to issue Commercial Paper Notes to not exceed $1.5 billion. Management has set a current limit not to exceed the amount of the committed, unsecured credit facility.

CSC’s ratings for Commercial Paper Notes are P1 by Moody’s Investor Service (Moody’s), A1 by Standard & Poor’s Rating Group (Standard & Poor’s), and F1 by Fitch Ratings, Ltd (Fitch).
Borrowings
The following are details of the Senior Notes and short-term borrowings:
March 31, 2018
Par
Outstanding
 
Maturity
Weighted Average
Interest Rate
Moody’s
Standard
& Poor’s
Fitch
Senior Notes
$
4,106

 
2018 - 2028
3.24% fixed
A2
A
A
Short-term borrowings
$

 
N/A
N/A
N/A
N/A
N/A
N/A Not applicable.

Schwab is subject to, and was in compliance with, the modified liquidity coverage ratio rule at March 31, 2018.


CAPITAL MANAGEMENT

Schwab seeks to manage capital to a level and composition sufficient to support execution of our business strategy, including anticipated balance sheet growth, providing financial support to our subsidiaries, and sustained access to the capital markets, while at the same time meeting our regulatory capital requirements, and serving as a source of financial strength to our banking subsidiaries. Schwab’s primary sources of capital are funds generated by the operations of subsidiaries and securities issuances by CSC in the capital markets. To ensure that Schwab has sufficient capital to absorb unanticipated losses or declines in asset values, we have adopted a policy to remain well capitalized even in stressed scenarios.


- 11 -



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


Regulatory Capital Requirements
CSC and CSB are subject to various capital requirements set by regulatory agencies as discussed in further detail in the 2017 Form 10-K and in Item 1 – Note 16. As of March 31, 2018, CSC and CSB are considered well capitalized.
The following table details CSC’s consolidated and CSB’s capital ratios as of March 31, 2018 and December 31, 2017:
 
 
March 31, 2018
 
December 31, 2017
 
 
CSC
 
CSB
 
CSC
 
CSB
Total stockholders’ equity
 
$
19,330

 
$
13,859

 
$
18,525

 
$
13,224

Less:
 
 
 
 
 
 
 
 
Preferred stock
 
2,793

 

 
2,793

 

Common Equity Tier 1 Capital before regulatory adjustments
 
$
16,537

 
$
13,859

 
$
15,732

 
$
13,224

Less:
 
 
 
 
 
 
 
 
Goodwill, net of associated deferred tax liabilities
 
$
1,191

 
$
13

 
$
1,191

 
$
13

Other intangible assets, net of associated deferred tax liabilities
 
69

 

 
61

 

Deferred tax assets, net of valuation allowances and deferred tax liabilities
 
2

 

 
2

 

AOCI adjustment (1)
 
(260
)
 
(247
)
 
(152
)
 
(144
)
Common Equity Tier 1 Capital 
 
$
15,535

 
$
14,093

 
$
14,630

 
$
13,355

Tier 1 Capital
 
$
18,328

 
$
14,093

 
$
17,423

 
$
13,355

Total Capital
 
18,372

 
14,121

 
17,452

 
13,382

Risk-Weighted Assets
 
78,610

 
68,226

 
75,866

 
66,519

Common Equity Tier 1 Capital/Risk-Weighted Assets
 
19.8
%
 
20.7
%
 
19.3
%
 
20.1
%
Tier 1 Capital/Risk-Weighted Assets
 
23.3
%
 
20.7
%
 
23.0
%
 
20.1
%
Total Capital/Risk-Weighted Assets
 
23.4
%
 
20.7
%
 
23.0
%
 
20.1
%
Tier 1 Leverage Ratio
 
7.5
%
 
7.0
%
 
7.6
%
 
7.1
%
(1) CSC and CSB have elected to opt out of the requirement to include most components of accumulated other comprehensive income (AOCI) in Common Equity Tier 1 Capital.

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

Schwab’s primary broker-dealer subsidiary, CS&Co, is subject to regulatory requirements of the Uniform Net Capital Rule. At March 31, 2018, CS&Co exceeded its net capital requirements.

In addition to the capital requirements above, Schwab’s subsidiaries are subject to other regulatory requirements intended to ensure financial soundness and liquidity. See Item 1 – Note 16 for additional information on the components of stockholders’ equity and information on the capital requirements of significant subsidiaries.


- 12 -



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


Dividends

On January 25, 2018, the Board of Directors of the Company declared a two cent, or 25%, increase in the quarterly cash dividend to $.10 per common share.

Cash dividends paid and per share amounts for the first three months of 2018 and 2017 are as follows:
Three Months Ended March 31,
 
2018
 
2017
 
 
Cash Paid
 
Per Share
Amount
 
Cash Paid
 
Per Share
Amount
Common Stock
 
$
136

 
$
.10

 
$
108

 
$
.08

Series A Preferred Stock (1)
 
14

 
35.00

 
14

 
35.00

Series B Preferred Stock (2,5)
 
N/A

 
N/A

 
7

 
15.00

Series C Preferred Stock (2)
 
9

 
15.00

 
9

 
15.00

Series D Preferred Stock (2)
 
11

 
14.88

 
11

 
14.88

Series E Preferred Stock (3)
 
14

 
2,312.50

 
9

 
1,554.51

Series F Preferred Stock (4)
 
N/A

 
N/A

 
N/A

 
N/A

(1) Dividends paid semi-annually until February 1, 2022 and quarterly thereafter.
(2) Dividends paid quarterly.
(3) Dividends paid semi-annually until March 1, 2022 and quarterly thereafter.
(4) Series F Preferred Stock was issued on October 31, 2017. Dividends paid semi-annually beginning on June 1, 2018 until December 1, 2027, and quarterly thereafter.
(5) Series B Preferred Stock was redeemed on December 1, 2017.
N/A Not applicable.


OTHER

Foreign Holdings
At March 31, 2018, Schwab had exposure to non-sovereign financial and non-financial institutions in foreign countries, as well as agencies of foreign governments. At March 31, 2018, the fair value of these holdings totaled $6.8 billion, with the top three exposures being to issuers and counterparties domiciled in France at $2.4 billion, Sweden at $1.9 billion, and Canada at $0.6 billion. Our holdings of securities issued by agencies of foreign governments are explicitly guaranteed by the governments of the issuing agencies.
In addition to the direct holdings in foreign companies and securities issued by foreign government agencies, Schwab has indirect exposure to foreign countries through its investments in CSIM money market funds (collectively, the Funds) resulting from brokerage clearing activities. At March 31, 2018, Schwab had $59 million in investments in these Funds. Certain of the Funds’ positions include certificates of deposit, time deposits, commercial paper, and corporate debt securities issued by counterparties in foreign countries. Additionally, at March 31, 2018, Schwab had outstanding margin loans to foreign residents of $880 million.

Off-Balance Sheet Arrangements
Schwab enters into various off-balance sheet arrangements in the ordinary course of business, primarily to meet the needs of its clients. These arrangements include firm commitments to extend credit. Additionally, Schwab enters into guarantees and other similar arrangements in the ordinary course of business. For information on each of these arrangements, see Item 1 – Note 5, Note 6, Note 8, Note 9, and Note 10, and Item 8 – Note 13 in the 2017 Form 10-K.



- 13 -



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)


CRITICAL ACCOUNTING ESTIMATES

Certain of our accounting policies that involve a higher degree of judgment and complexity are discussed in Part II – Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Estimates in the 2017 Form 10-K. There have been no changes to critical accounting estimates during the first three months of 2018.


Item 3. Quantitative and Qualitative Disclosures About Market Risk

For discussion of the quantitative and qualitative disclosures about market risk, see Risk Management in Item 2.



- 14 -


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
March 31,

 
2018
 
2017
Net Revenues
 
 

 
 

   Interest revenue
 
$
1,421

 
$
1,055

   Interest expense
 
(158
)
 
(55
)
Net interest revenue
 
1,263

 
1,000

Asset management and administration fees
 
851

 
823

Trading revenue
 
201

 
192

Other
 
83

 
66

   Total net revenues
 
2,398

 
2,081

Expenses Excluding Interest
 
 
 
 
Compensation and benefits
 
770

 
701

Professional services
 
156

 
133

Occupancy and equipment
 
122

 
105

Advertising and market development
 
73

 
71

Communications
 
62

 
57

Depreciation and amortization
 
73

 
65

Regulatory fees and assessments
 
51

 
44

Other
 
89

 
62

  Total expenses excluding interest
 
1,396

 
1,238

Income before taxes on income
 
1,002

 
843

Taxes on income
 
219

 
279

Net Income
 
783

 
564

Preferred stock dividends and other
 
37

 
39

Net Income Available to Common Stockholders
 
$
746

 
$
525

Weighted-Average Common Shares Outstanding:
 
 
 
 
Basic
 
1,347

 
1,336

Diluted
 
1,362

 
1,351

Earnings Per Common Share:
 
 
 
 
Basic
 
$
.55

 
$
.39

Diluted
 
$
.55

 
$
.39

Dividends Declared Per Common Share
 
$
.10

 
$
.08



See Notes to Condensed Consolidated Financial Statements.


- 15 -



THE CHARLES SCHWAB CORPORATION
Condensed Consolidated Statements of Comprehensive Income
(In Millions)
(Unaudited)


 
 
Three Months Ended
March 31,
 
 
2018
 
2017
Net Income
 
$
783

 
$
564

Other comprehensive income (loss), before tax:
 
 

 
 

Change in net unrealized gain (loss) on available for sale securities:
 
 

 
 

Net unrealized gain (loss)
 
(108
)
 
52

Reclassification of net unrealized loss transferred to held to maturity
 

 
227

Other reclassifications included in other revenue
 

 
(1
)
Change in net unrealized gain (loss) on held to maturity securities:
 
 
 
 
Reclassification of net unrealized loss transferred from available for sale
 

 
(227
)
Amortization of amounts previously recorded upon transfer from available for sale
 
9

 
2

Other
 

 
(3
)
Other comprehensive income (loss), before tax
 
(99
)
 
50

Income tax effect
 
24

 
(19
)
Other comprehensive income (loss), net of tax
 
(75
)
 
31

Comprehensive Income
 
$
708

 
$
595


See Notes to Condensed Consolidated Financial Statements.


- 16 -



THE CHARLES SCHWAB CORPORATION
Condensed Consolidated Balance Sheets
(In Millions, Except Per Share and Share Amounts)
(Unaudited)


 
March 31, 2018
December 31, 2017
Assets
 
 
Cash and cash equivalents
$
14,145

$
14,217

Cash and investments segregated and on deposit for regulatory purposes (including resale agreements of $4,434 at March 31, 2018 and $6,596 at December 31, 2017)
12,823

15,139

Receivables from brokers, dealers, and clearing organizations
894

649

Receivables from brokerage clients — net
21,153

20,576

Other securities owned — at fair value
500

539

Available for sale securities
51,827

49,995

Held to maturity securities (fair value — $123,463 at March 31, 2018 and $120,373 at
December 31, 2017)
125,683

120,926

Bank loans — net
16,389

16,478

Equipment, office facilities, and property — net
1,540

1,471

Goodwill
1,227

1,227

Intangible assets — net
101

108

Other assets
2,038

1,949

Total assets
$
248,320

$
243,274

Liabilities and Stockholders’ Equity
 
 

Bank deposits
$
190,184

$
169,656

Payables to brokers, dealers, and clearing organizations
1,122

1,287

Payables to brokerage clients
31,088

31,243

Accrued expenses and other liabilities
2,468

2,810

Short-term borrowings

15,000

Long-term debt
4,128

4,753

Total liabilities
228,990

224,749

Stockholders’ equity:
 
 

           Preferred stock — $.01 par value per share; aggregate liquidation preference
of
 $2,850 at March 31, 2018 and December 31, 2017
2,793

2,793

Common stock — 3 billion shares authorized; $.01 par value per share; 1,487,543,446
shares issued
15

15

Additional paid-in capital
4,397

4,353

Retained earnings
15,222

14,408

           Treasury stock, at cost — 139,326,005 shares at March 31, 2018 and
142,210,890 shares at December 31, 2017
(2,837
)
(2,892
)
Accumulated other comprehensive income (loss)
(260
)
(152
)
Total stockholders’ equity
19,330

18,525

Total liabilities and stockholders’ equity
$
248,320

$
243,274


See Notes to Condensed Consolidated Financial Statements.


- 17 -



THE CHARLES SCHWAB CORPORATION
Condensed Consolidated Statements of Stockholders Equity
(In Millions)
(Unaudited)


 
 
 
 
 
 
 
 
 
 
 
 
 
 
Accumulated Other Comprehensive Income (Loss)
 
 
 
 
Preferred Stock
 
Common stock
 
Additional Paid-in Capital
 
Retained Earnings
 
Treasury Stock,
at cost
 
 
Total
 
 
 
Shares
 
Amount
 
 
 
 
 
Balance at December 31, 2016
 
$
2,783

 
1,488

 
$
15

 
$
4,267

 
$
12,649

 
$
(3,130
)
 
$
(163
)
 
$
16,421

Net income
 

 

 

 

 
564

 

 

 
564

Other comprehensive income (loss), net of tax
 

 

 

 

 

 

 
31

 
31

Dividends declared on preferred stock
 

 

 

 

 
(37
)
 

 

 
(37
)
Dividends declared on common stock
 

 

 

 

 
(107
)
 

 

 
(107
)
Stock option exercises and other
 

 

 

 
(23
)
 

 
81

 

 
58

Share-based compensation and related tax effects
 

 

 

 
49

 

 

 

 
49

Other
 

 

 

 
7

 

 
(4
)
 

 
3

Balance at March 31, 2017
 
$
2,783

 
1,488

 
$
15

 
$
4,300

 
$
13,069

 
$
(3,053
)
 
$
(132
)
 
$
16,982

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2017
 
$
2,793

 
1,488

 
$
15

 
$
4,353

 
$
14,408

 
$
(2,892
)
 
$
(152
)
 
$
18,525

Adoption of accounting standards (Note 2)
 

 

 

 

 
200

 

 
(33
)
 
167

Net income
 

 

 

 

 
783

 

 

 
783

Other comprehensive income (loss), net of tax
 

 

 

 

 

 

 
(75
)
 
(75
)
Dividends declared on preferred stock
 

 

 

 

 
(34
)
 

 

 
(34
)
Dividends declared on common stock
 

 

 

 

 
(135
)
 

 

 
(135
)
Stock option exercises and other
 

 

 

 
(12
)
 

 
61

 

 
49

Share-based compensation and related tax effects
 

 

 

 
47

 

 

 

 
47

Other
 

 

 

 
9

 

 
(6
)
 

 
3

Balance at March 31, 2018
 
$
2,793

 
1,488

 
$
15

 
$
4,397

 
$
15,222

 
$
(2,837
)
 
$
(260
)
 
$
19,330


See Notes to Condensed Consolidated Financial Statements.


- 18 -



THE CHARLES SCHWAB CORPORATION
Condensed Consolidated Statements of Cash Flows
(in Millions)
(Unaudited)


 
 
Three Months Ended
March 31,
 
 
2018
 
2017 (1)
Cash Flows from Operating Activities
 
 

 
 
Net income
 
$
783

 
$
564

Adjustments to reconcile net income to net cash provided by (used for) operating activities:
 
 

 
 
Share-based compensation
 
50

 
52

Depreciation and amortization
 
73

 
65

Premium amortization, net, on available for sale securities and held to maturity securities
 
96

 
72

Other
 
36

 
12

Net change in:
 
 

 
 

Investments segregated and on deposit for regulatory purposes
 
853

 
(550
)
Receivables from brokers, dealers, and clearing organizations
 
(245
)
 
11

Receivables from brokerage clients
 
(595
)
 
424

Other securities owned
 
39

 
(115
)
Other assets
 
(16
)
 
4

Payables to brokers, dealers, and clearing organizations
 
(325
)
 
(346
)
Payables to brokerage clients
 
(155
)
 
(1,627
)
Accrued expenses and other liabilities
 
(346
)
 
(143
)
Net cash provided by (used for) operating activities
 
248

 
(1,577
)
Cash Flows from Investing Activities
 
 
 
 
Purchases of available for sale securities
 
(4,631
)
 
(1,992
)
Proceeds from sales of available for sale securities
 

 
1,064

Principal payments on available for sale securities
 
2,695

 
3,067

Purchases of held to maturity securities
 
(8,235
)
 
(9,301
)
Principal payments on held to maturity securities
 
3,548

 
1,731

Net change in bank loans
 
74

 
(134
)
Purchases of equipment, office facilities, and property
 
(122
)
 
(80
)
Proceeds from sales of Federal Home Loan Bank stock
 
172

 
64

Other investing activities
 
(40
)
 
(6
)
Net cash provided by (used for) investing activities
 
(6,539
)
 
(5,587
)
Cash Flows from Financing Activities
 
 
 
 
Net change in bank deposits
 
20,528

 
3,435

Net change in short-term borrowings
 
(15,000
)
 
600

Issuance of long-term debt
 

 
643

Repayment of long-term debt
 
(627
)
 
(2
)
Dividends paid
 
(184
)
 
(158
)
Proceeds from stock options exercised and other
 
49

 
58

Other financing activities
 
(10
)
 
(8
)
Net cash provided by (used for) financing activities
 
4,756

 
4,568

Increase (Decrease) in Cash and Cash Equivalents, including Amounts Restricted
 
(1,535
)
 
(2,596
)
Cash and Cash Equivalents, including Amounts Restricted at Beginning of Period
 
19,160

 
17,873

Cash and Cash Equivalents, including Amounts Restricted at End of Period
 
$
17,625

 
$
15,277

(1)Adjusted for the retrospective adoption of ASU 2016-18. See Note 2.

Continued on following page









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THE CHARLES SCHWAB CORPORATION
Condensed Consolidated Statements of Cash Flows
(in Millions)
(Unaudited)


Continued from previous page
 
 
Three Months Ended
March 31,
 
 
2018
 
2017 (1)
Supplemental Cash Flow Information
 
 
 
 
    Cash paid during the period for:
 
 
 
 
  Interest
 
$
169

 
$
75

  Income taxes
 
$
3

 
$
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