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EX-31.2 - EX-31.2 - SCHWAB CHARLES CORPschw-20150630xex312.htm
EX-12.1 - EX-12.1 - SCHWAB CHARLES CORPschw-20150630xex121.htm
EX-32.1 - EX-32.1 - SCHWAB CHARLES CORPschw-20150630xex321.htm
EX-32.2 - EX-32.2 - SCHWAB CHARLES CORPschw-20150630xex322.htm
EX-31.1 - EX-31.1 - SCHWAB CHARLES CORPschw-20150630xex311.htm
EX-10.366 - EX-10.366 - SCHWAB CHARLES CORPschw-20150630ex1036601eb.htm
EX-10.365 - EX-10.365 - SCHWAB CHARLES CORPschw-20150630ex103654dae.htm

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 June 30, 2015

 

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, 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 

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 

 

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

 

1,315,623,956 shares of $.01 par value Common Stock

Outstanding on July 27, 2015

 

 

 


 

THE CHARLES SCHWAB CORPORATION

 

Quarterly Report on Form 10-Q

For the Quarter Ended June 30, 2015

 

Index

 

 

 

 

 

 

 

 

 

 

 

 

Page

Part I - Financial Information 

 

 

 

 

 

 

 

 

Item 1.

Condensed Consolidated Financial Statements (Unaudited):

 

 

 

 

 

 

 

 

 

Statements of Income

 

29

 

 

Statements of Comprehensive Income

 

30

 

 

Balance Sheets

 

31

 

 

Statements of Cash Flows

 

32

 

 

Notes

 

33-53

 

 

 

 

 

 

Item 2.

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

 

1-26

 

 

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

27-28

 

 

 

 

 

 

Item 4.

Controls and Procedures

 

54

 

 

 

 

 

Part II - Other Information 

 

 

 

 

 

 

 

 

Item 1.

Legal Proceedings

 

55

 

 

 

 

 

 

Item 1A.

Risk Factors

 

55

 

 

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

55

 

 

 

 

 

 

Item 3.

Defaults Upon Senior Securities

 

56

 

 

 

 

 

 

Item 4.

Mine Safety Disclosures

 

56

 

 

 

 

 

 

Item 5.

Other Information

 

56

 

 

 

 

 

 

Item 6.

Exhibits

 

57

 

 

 

 

 

Signature 

 

58

 

 

 

 

 

 

 


 

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, in wealth management, securities brokerage, banking, money management, and financial advisory services. Charles Schwab & Co., Inc. (Schwab) is a securities broker-dealer with over 325 domestic branch offices in 45 states, as well as a branch in each of the Commonwealth of Puerto Rico and London, England. 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™.

 

CSC and its subsidiaries (collectively referred to as the Company) operate through two reportable segments – Investor Services and Advisor Services. 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.

 

 

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.

 

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 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations - Current Market and Regulatory Environment and Other Developments” and “- Results of Operations – Net Interest Revenue”);

·

the expected impact of the new liquidity coverage ratio (LCR) rules (see “Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations - Current Market and Regulatory Environment and Other Developments”);

·

sources of liquidity, capital, and level of dividends (see “Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources” and “Item 1 – Condensed Consolidated Financial Statements (Unaudited) – Notes – 11. Regulatory Requirements”);

·

target capital and debt ratios (see “Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources” and “Item 1 – Condensed Consolidated Financial Statements (Unaudited) – Notes – 11. Regulatory Requirements”;);

·

capital expenditures (see “Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources - Capital Resources – Capital Expenditures”);

·

the impact of the revised underwriting criteria on the credit quality of the Company’s mortgage portfolio (see “Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations - Risk Management – Credit Risk Exposures”);

·

the impact of changes in the likelihood of indemnification and guarantee payment obligations on the Company’s results of operations (see “Item 1 – Condensed Consolidated Financial Statements (Unaudited) – Notes – 6. Commitments and Contingencies”); and

·

the impact of legal proceedings and regulatory matters (see “Item 1 – Condensed Consolidated Financial Statements (Unaudited) – Notes – 6. Commitments and Contingencies  Legal contingencies” and “Part II – Other Information – Item 1 – Legal Proceedings”).

 

-  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)

 

 

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;

·

trading activity;

·

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

·

the adverse impact of financial reform legislation and related regulations;

·

investment, structural and capital adjustments made by the Company in connection with the new LCR rule;

·

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

·

the level of the Company’s stock repurchase activity;

·

the level of brokerage client cash balances and bank deposits;

·

the availability and terms of external financing;

·

capital needs and management;

·

the timing and impact of changes in the Company’s level of investments in software and equipment;

·

the extent to which past performance of the Company’s mortgage portfolio is indicative of future performance;

·

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

·

adverse developments in litigation or regulatory matters;

·

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

·

amounts recovered on insurance policies;

·

timing and amount of severance and other costs related to reducing the Company’s San Francisco footprint;

·

the Company’s ability to manage expenses;

·

regulatory guidance;

·

the level of client assets, including cash balances;

·

competitive pressures on rates and fees;

·

acquisition integration costs; and

·

client use of the Company’s investment advisory services and other products and services.

 

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, 2014, and “Part II – Other Information – Item 1A – Risk Factors.

 

 

 

-  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 of the Company focuses on several key client activity and financial metrics in evaluating the Company’s financial position and operating performance. Management believes that net revenue growth, pre-tax profit margin, earnings per common share (EPS), and return on average common stockholders’ equity provide broad indicators of the Company’s overall financial health, operating efficiency, and ability to generate acceptable returns. Expenses excluding interest as a percentage of average client assets is considered by management to be a measure of operating efficiency. Results for the second quarters and first halves of 2015 and 2014 are:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

Six Months Ended

 

 

 

 

 

June 30,

 

Percent

 

June 30,

 

Percent

 

 

2015

 

 

2014

 

Change

 

2015

 

 

2014

 

Change

Client Metrics:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net new client assets (1) (in billions)

 

$

37.0 

  

 

$

22.7 

 

63 

%

 

$

65.7 

  

 

$

56.9 

  

15 

%

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

 

$

2,543.3 

  

 

$

2,401.9 

 

%

 

 

 

 

 

 

 

 

 

 

Average client assets (3) (in billions)

 

$

2,576.2 

 

 

$

2,365.1 

 

%

 

$

2,542.3 

 

 

$

2,326.0 

 

%

New brokerage accounts (4) (in thousands)

 

 

280 

 

 

 

242 

 

16 

%

 

 

554 

 

 

 

500 

 

11 

%

Active brokerage accounts (5) (in thousands,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

at quarter end)

 

 

9,605 

 

 

 

9,252 

 

%

 

 

 

 

 

 

 

 

 

 

Assets receiving ongoing advisory services (6)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in billions, at quarter end)

 

$

1,258.1 

 

 

$

1,191.4 

 

%

 

 

 

 

 

 

 

 

 

 

Client cash as a percentage of client assets (7)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(at quarter end)

 

 

11.7 

%

 

 

11.9 

%

 

 

 

 

 

 

 

 

 

 

 

 

Company Financial Metrics:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net revenues

 

$

1,566 

  

 

$

1,478 

 

%

 

$

3,092 

  

 

$

2,956 

  

%

Expenses excluding interest

 

 

999 

  

 

 

957 

 

%

 

 

2,041 

  

 

 

1,913 

  

%

Income before taxes on income

 

 

567 

  

 

 

521 

 

%

 

 

1,051 

  

 

 

1,043 

  

%

Taxes on income

 

 

214 

  

 

 

197 

 

%

 

 

396 

  

 

 

393 

  

%

Net income

 

$

353 

  

 

$

324 

 

%

 

$

655 

  

 

$

650 

  

%

Preferred stock dividends and other

 

$

23 

 

 

$

22 

 

%

 

$

34 

 

 

$

30 

 

13 

%

Net income available to common stockholders

 

$

330 

 

 

$

302 

 

%

 

$

621 

 

 

$

620 

 

 -

 

Earnings per common share – diluted

 

$

.25

  

 

$

.23

 

%

 

$

.47

  

 

$

.47

  

 -

 

Net revenue growth from prior year

 

 

 

 

11 

%

 

 

 

 

 

 

13 

 

 

Pre-tax profit margin

 

 

36.2 

 

 

35.3 

%

 

 

 

 

34.0 

 

 

35.3 

 

 

Return on average common stockholders’

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

equity (annualized) (8)

 

 

12 

 

 

12 

%

 

 

 

 

11 

%

 

 

13 

 

 

Expenses excluding interest as a percentage

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

of average client assets (annualized)

 

 

0.16 

 

 

0.16 

%

 

 

 

 

0.16 

%

 

 

0.16 

%

 

 

 

(1)

Net new client assets is defined as the total inflows of client cash and securities to the firm less client outflows. Management believes that this metric, along with core net new assets, depicts how well the Company’s products and services appeal to new and existing clients. Core net new assets were $37.0 billion and $71.2 billion during the second quarter and first half of 2015, respectively. See below for items excluded from core net new assets in 2015. There were no significant one-time flows during the second quarter and first half of 2014.

(2)

Client assets represent the market value of all client assets custodied at the Company. Management considers client assets to be indicative of the Company’s appeal in the marketplace. Additionally, fluctuations in certain components of client assets (e.g., Mutual Fund OneSource® funds) directly impact asset management and administration fees.

(3)

Average client assets is defined as the daily average client asset balance for the period.

(4)

New brokerage accounts include all brokerage accounts opened during the period, as well as any accounts added via acquisition. This metric measures the Company’s effectiveness in attracting new clients and building stronger relationships with existing clients.

(5)

Active brokerage accounts include accounts with balances or activity within the preceding eight months. This metric is an indicator of the Company’s success in both attracting and retaining clients.

-  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)

 

 

(6)

Assets receiving ongoing advisory services include relationships under the guidance of independent advisors and assets enrolled in one of the Company’s retail or other advisory solutions. This metric depicts how well the Company’s advisory products and services appeal to new and existing clients.

(7)

Client cash as a percentage of client assets includes Schwab One®, certain cash equivalents, bank deposits and money market fund balances, as a percentage of client assets. This measure is an indicator of clients’ engagement in the fixed income and equity markets.

(8)

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

 

Core net new client assets is defined as net new client assets before significant one-time flows. Management considers this to be a useful metric when comparing period-to-period client asset flows. The following one-time flows were excluded from core net new assets.

·

An outflow of $11.6 billion relating to the Company’s planned resignation from an Advisor Services cash management relationship.

·

An inflow of $6.1 billion in the first half of 2015 to reflect the final impact of the consolidation of its retirement plan recordkeeping platforms as previously announced in the third quarter of 2013.

 

The Company’s operating environment included variable equity market performance during the second quarter of 2015; however, the markets ended the quarter largely unchanged from March 31, 2015.  Compared to the second quarter of 2014, the Nasdaq Composite Index, Standard & Poor’s 500 Index, and Dow Jones Industrial Average improved 13%,  5%, and 5%, respectively, at the end of the second quarter of 2015. Meanwhile, 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 3-month Treasury Bill yield decreased by 1 basis point to 0.01% compared to the second quarter of 2014. In addition, long-term interest rates decreased in the second quarter of 2015 compared to the same period in 2014. The average 10-year yield during the second quarter of 2015 was 2.16% which was 45 basis points lower than the average yield during the second quarter of 2014.

 

Strong client momentum continued as the Company’s innovative, full-service model continued to resonate with clients and drive growth during the second quarter of 2015. Core net new assets totaled $37.0 billion in the second quarter of 2015, which were up $14.3 billion compared to core net new client assets in the second quarter of 2014. Total client assets ended the second quarter of 2015 at $2.54 trillion, up 6% from the second quarter of 2014. The Company added 280,000 new brokerage accounts to its client base during the second quarter of 2015, up 16% compared to the second quarter of 2014. Active brokerage accounts ended the second quarter at 9.6 million, also up 4% on a year-over-year basis.

 

For the second quarter and first half of 2015, the Company’s net revenues increased 6% and 5% compared to the second quarter and first half of 2014, respectively, primarily due to increases in net interest revenue and asset management and administration fees, partially offset by a decrease in trading revenue. Net interest revenue increased primarily due to higher balances of interest-earning assets, including margin loans and the Company’s investment portfolio (securities available for sale and securities held to maturity), partially offset by the effect lower average interest rates had on the Company’s average net interest margin. Asset management and administration fees increased due to higher client asset balances in mutual fund services, advice solutions, and other asset management and administration services and improved rates earned on money market funds. Trading revenue decreased primarily due to a decrease in commission revenue as a result of lower daily average revenue trades. Other revenue increased primarily due to litigation proceeds of $17 million in the second quarter of 2015 relating to the Company’s non-agency residential mortgage-backed securities portfolio, offset by decreases in order flow revenue.

 

Expenses excluding interest increased 4% and 7% in the second quarter and first half of 2015 compared to the same periods in 2014, respectively, primarily due to increases in compensation and benefits, professional services, and other expense.

 

The combined effect of the environment, strong business growth, and the Company’s overall spending resulted in a pre-tax profit margin of 36.2% and 34.0% in the second quarter and first half of 2015, respectively. Overall, net income increased by 9%  and 1% in the second quarter and first half of 2015, compared to the same periods in 2014, respectively. The return on average common stockholders’ equity was 12% and 11% in the second quarter and first half of 2015, respectively.

 

-  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)

 

 

Subsequent Event

 

On August 3, 2015, the Company issued and sold 24 million depositary shares, each representing a 1/40th ownership interest in a share of 6.00% non-cumulative perpetual preferred stock, Series C, $0.01 par value, with a liquidation preference of $1,000 per share (equivalent to $25 per depositary share) (Series C Preferred Stock). The Series C Preferred Stock has a fixed dividend rate of 6.00%. Net proceeds received from the sale were $581 million and are being used to support balance sheet growth, including the migration of certain client balances from sweep money market funds into Schwab Bank.

 

 

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 certain other Schwab-sponsored 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 at 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 continue to be negatively affected.

 

In July 2013, the United States (U.S.) banking agencies issued regulatory capital rules that implemented BASEL III and relevant provisions of the “Dodd-Frank Wall Street Reform and Consumer Protection Act” (the Dodd-Frank Act) (Final Regulatory Capital Rules), which are applicable to savings and loan holding companies, such as CSC, and federal savings banks, such as Schwab Bank. The implementation of the rules began on January 1, 2015.

 

The Final Regulatory Capital Rules, among other things:

·

subject savings and loan holding companies to consolidated capital requirements;

·

revise the required minimum risk-based and leverage capital requirements by (1) establishing a new minimum Common Equity Tier 1 Risk-Based Capital Ratio (common equity Tier 1 capital to total risk-weighted assets) of 4.5%; (2) raising the minimum Tier 1 Risk-Based Capital Ratio from 4.0% to 6.0%; (3) maintaining the minimum Total Risk-Based Capital Ratio of 8.0%; and (4) maintaining a minimum Tier 1 Leverage Ratio (Tier 1 capital to adjusted average consolidated assets) of 4.0%;

·

add a requirement to maintain a minimum capital conservation buffer, composed of common equity Tier 1 capital, of 2.5% of risk-weighted assets, which means that banking organizations, on a fully phased-in basis no later than January 1, 2019, must maintain a Common Equity Tier 1 Risk-Based Capital Ratio greater than 7.0%; a Tier 1 Risk-Based Capital Ratio greater than 8.5% and a Total Risk-Based Capital Ratio greater than 10.5%;

·

change the definition of capital categories for insured depository: to be considered “well-capitalized”, Schwab Bank must have a Common Equity Tier 1 Risk-Based Capital Ratio of at least 6.5%, a Tier 1 Risk-Based Capital Ratio of at least 8%, a Total Risk-Based Capital Ratio of at least 10% and a Tier 1 Leverage Ratio of at least 5%; and

·

change the calculation of risk-weighted assets, including investment securities and unused commitments.

 

The application of the revised risk-weighting of assets resulted in a decrease in the Company’s Common Equity Tier 1 Risk-Based Capital, Tier 1 Risk-Based Capital, and Total Risk-Based Capital ratios of approximately 3.5% in 2015. The required minimum capital conservation buffer will be phased in incrementally, starting at 0.625% on January 1, 2016 and increasing to 1.25% on January 1, 2017, 1.875% on January 1, 2018 and 2.5% on January 1, 2019.

 

The Final Regulatory Capital Rules provide that the failure to maintain the minimum capital conservation buffer will result in restrictions on capital distributions and discretionary cash bonus payments to executive officers.

 

In September 2014, the Board of Governors of the Federal Reserve System (Federal Reserve), in collaboration with the Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation, issued a rule implementing a quantitative liquidity requirement generally consistent with the LCR standard established by Basel III. The LCR applies to all internationally active banking organizations. The Federal Reserve also issued a modified LCR that applies to the Company. Under the modified LCR, a depository institution holding company is required to maintain high-quality liquid assets in an amount related to its total estimated net cash outflows over a prospective period. The modified LCR will be phased in beginning on January 1, 2016, with a minimum requirement of 90%, increasing to 100% at January 1, 2017. The Company expects to be compliant with the modified LCR by January 1, 2016 and does not expect a material impact to the Company’s business, financial condition, and results of operations.

-  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)

 

 

 

In April 2015, the Department of Labor published notice of a rule proposal to significantly broaden the definition of “fiduciary” under the Employee Retirement Income Security Act of 1974. If adopted, among other things, the new rule would subject broker-dealers who provide non-discretionary investment advice to retirement plans and accounts to a “best interest” standard, as well as other conditions and requirements. The comment period for the rule proposal ended on July 21, 2015 and the rule proposal is subject to further modification. The Company will continue to evaluate the impact of the proposed rule.

 

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 experienced 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 and discovery is proceeding. As of June 30, 2015, the Company has realized $45 million in net settlement proceeds on such claims, and an initial trial relating to certain of the defendants who remain in the case is set for February 2016.

 

 

 

Results of Operations

 

The following discussion presents an analysis of the Company’s results of operations for the second quarter and first half of 2015 compared to the same periods in 2014.

 

Net Revenues

 

The Company’s major sources of net revenues are asset management and administration fees, net interest revenue, and trading revenue. Asset management and administration fees and net interest revenue increased, while trading revenue decreased in the second quarter and first half of 2015 compared to the same periods in 2014. Other revenue in the second quarter and first six months of 2015 includes litigation proceeds of $17 million relating to the Company’s non-agency residential mortgage-backed securities.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30,

 

 

 

 

2015

 

2014

 

 

 

 

 

 

 

 

% of

 

 

 

 

% of

 

 

Percent

 

 

 

 

Total Net

 

 

 

 

Total Net

 

 

Change

 

Amount

 

Revenues

 

Amount

 

Revenues

Asset management and administration fees

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mutual funds service fees (1)

 

 

$

318 

 

20 

 

$

303 

  

21 

Advice solutions

 

 

 

228 

 

15 

 

 

209 

  

14 

Other (1)

 

 

 

124 

 

 

 

120 

  

Asset management and administration fees

 

 

 

670 

 

43 

 

 

632 

  

43 

Net interest revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest revenue

 

10 

%

 

 

645 

 

41 

 

 

588 

  

40 

Interest expense

 

27 

%

 

 

(33)

 

(2)

%

 

 

(26)

 

(2)

%

Net interest revenue

 

%

 

 

612 

 

39 

 

 

562 

  

38 

Trading revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commissions

 

(4)

%

 

 

191 

 

12 

 

 

199 

  

13 

Principal transactions

 

(8)

%

 

 

12 

 

 

 

13 

  

Trading revenue

 

(4)

%

 

 

203 

 

13 

 

 

212 

  

14 

Other

 

22 

%

 

 

79 

 

 

 

65 

  

Provision for loan losses

 

(71)

%

 

 

 

 -

 

 

 

 

Total net revenues

 

 

$

1,566 

 

100 

 

$

1,478 

  

100 

 

 

 

(1)

Beginning in the second quarter of 2015, certain Mutual Fund OneSource balances were reclassified to Other third-party mutual funds. Related revenues have been reclassified to Other asset management and administration fees. Prior period information has been recast to reflect this change.

 

-  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)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30,

 

 

 

 

2015

 

 

2014

 

 

 

 

 

 

 

 

 

% of

 

 

 

 

% of

 

 

Percent

 

 

 

 

Total Net

 

 

 

 

Total Net

 

 

Change

 

Amount

 

Revenues

 

Amount

 

Revenues

Asset management and administration fees

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mutual funds service fees (1)

 

%

 

$

621 

 

20 

 

$

599 

  

21 

Advice solutions

 

10 

 

 

448 

 

14 

 

 

408 

  

14 

Other (1)

 

 

 

245 

 

 

 

236 

  

Asset management and administration fees

 

 

 

1,314 

 

42 

 

 

1,243 

  

42 

Net interest revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest revenue

 

 

 

1,262 

 

41 

 

 

1,167 

  

40 

Interest expense

 

19 

 

 

(62)

 

(2)

%

 

 

(52)

 

(2)

%

Net interest revenue

 

%

 

 

1,200 

 

39 

 

 

1,115 

  

38 

Trading revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commissions

 

(6)

 

 

409 

 

13 

 

 

433 

  

15 

Principal transactions

 

(19)

%

 

 

21 

 

 

 

26 

  

Trading revenue

 

(6)

%

 

 

430 

 

14 

 

 

459 

  

16 

Other

 

 

 

142 

 

 

 

133 

  

Provision for loan losses

 

 -

 

 

 

 

 -

 

 

 

 

 -

 

Total net revenues

 

 

$

3,092 

 

100 

 

$

2,956 

  

100 

 

 

 

(1)

Beginning in the second quarter of 2015, certain Mutual Fund OneSource balances were reclassified to Other third-party mutual funds. Related revenues have been reclassified to Other asset management and administration fees. Prior period information has been recast to reflect this change.

 

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, 401(k) recordkeeping 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.”

 

The following tables present a roll forward of client assets for the Schwab money market funds, Schwab equity and bond funds and Mutual Fund OneSource:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Schwab Money

 

 

Schwab Equity and

 

 

Mutual Fund

 

 

Market Funds

 

 

Bond Funds (1)

 

 

OneSource®

Three Months Ended June 30,

 

2015

 

 

2014

 

 

2015

 

 

2014

 

 

2015

 

 

2014

Balance at beginning of period

$

162,473 

 

$

166,311 

 

$

95,161 

 

$

75,665 

 

$

239,140 

 

$

240,613 

Net inflows/(outflows)

 

(6,906)

 

 

(6,366)

 

 

3,498 

 

 

1,583 

 

 

(6,282)

 

 

(3,476)

Net market gains and other

 

10 

 

 

 

 

(260)

 

 

3,334 

 

 

323 

 

 

10,320 

Balance at end of period

$

155,577 

 

$

159,954 

 

$

98,399 

 

$

80,582 

 

$

233,181 

 

$

247,457 

 

(1)

Includes Schwab exchange-traded funds.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

-  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)

 

 

 

 

Schwab Money

 

 

Schwab Equity and

 

 

Mutual Fund

 

 

Market Funds

 

 

Bond Funds (1)

 

 

OneSource®

Six Months Ended June 30,

 

2015

 

 

2014

 

 

2015

 

 

2014

 

 

2015

 

 

2014

Balance at beginning of period

$

167,909 

 

$

167,738 

 

$

88,450 

 

$

71,249 

 

$

236,183 

 

$

236,596 

Net inflows/(outflows)

 

(12,506)

 

 

(7,806)

 

 

8,296 

 

 

4,940 

 

 

(8,875)

 

 

(4,557)

Net market gains and other

 

174 

 

 

22 

 

 

1,653 

 

 

4,393 

 

 

5,873 

 

 

15,418 

Balance at end of period

$

155,577 

 

$

159,954 

 

$

98,399 

 

$

80,582 

 

$

233,181 

 

$

247,457 

 

(1)

Includes Schwab exchange-traded funds.

 

The following tables present asset management and administration fees, average client assets, and average fee rate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30,

 

2015

 

 

 

2014

 

Average
Client
Assets

 

Revenue

 

Average
Fee

 

 

Average
Client
Assets

 

Revenue

 

Average
Fee

Schwab money market funds

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

before fee waivers

$

157,418 

 

$

230 

 

0.59% 

 

 

$

162,683 

 

$

235 

 

0.58% 

Fee waivers

 

 

 

 

(168)

 

 

 

 

 

 

 

 

(183)

 

 

Schwab money market funds

 

157,418 

 

 

62 

 

0.16% 

 

 

 

162,683 

 

 

52 

 

0.13% 

Schwab equity and bond funds (1)

 

103,986 

 

 

56 

 

0.22% 

 

 

 

80,527 

 

 

47 

 

0.23% 

Mutual Fund OneSource ® (2)

 

245,694 

 

 

200 

 

0.33% 

 

 

 

247,107 

 

 

204 

 

0.33% 

Total mutual funds (3)

$

507,098 

 

 

318 

 

0.25% 

 

 

$

490,317 

 

 

303 

 

0.25% 

Advice solutions (3) :

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fee-based

$

174,657 

 

 

228 

 

0.52% 

 

 

$

156,197 

 

 

209 

 

0.54% 

Intelligent Portfolios

 

2,159 

 

 

 -

 

 -

 

 

 

N/A

 

 

N/A

 

N/A

Legacy Non-Fee

 

16,783 

 

 

N/A

 

N/A

 

 

 

15,595 

 

 

N/A

 

N/A

Total advice solutions

$

193,599 

 

 

228 

 

0.47% 

 

 

$

171,792 

 

 

209 

 

0.49% 

Other (2,4)

 

 

 

 

124 

 

 

 

 

 

 

 

 

120 

 

 

Total asset management

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

and administration fees

 

 

 

$

670 

 

 

 

 

 

 

 

$

632 

 

 

 

 

 

(1)

Includes Schwab exchange-traded funds.

(2)

Beginning in the second quarter of 2015, certain Mutual Fund OneSource balances were reclassified to Other third-party mutual funds. Related revenues have been reclassified to Other asset management and administration fees. Prior period information has been recast to reflect this change.

(3)

Advice solutions include managed portfolios, specialized strategies and customized investment advice. Fee-based advice solutions include Schwab Private Client, Schwab Managed Portfolios, Managed Account Select®, Schwab Advisor Network®, Windhaven® Strategies, ThomasPartners® Dividend Growth Strategy, and Schwab Index Advantage® advised retirement plan balances. Intelligent Portfolios include Schwab Intelligent Portfolios, launched in March 2015, and Institutional Intelligent Portfolios, launched in June 2015. Legacy Non-Fee advice solutions include superseded programs such as, Schwab Advisor Source and certain retirement plan balances. Average client assets for advice solutions may also include the asset balances contained in the three categories of mutual funds listed above.

(4)

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

N/A Not applicable.

 

-  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)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30,

 

2015

 

 

 

2014

 

Average
Client
Assets

 

Revenue

 

Average
Fee

 

 

Average
Client
Assets

 

Revenue

 

Average
Fee

Schwab money market funds

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

before fee waivers

$

161,411 

 

$

469 

 

0.59% 

 

 

$

164,868 

 

$

474 

 

0.58% 

Fee waivers

 

 

 

 

(353)

 

 

 

 

 

 

 

 

(368)

 

 

Schwab money market funds

 

161,411 

 

 

116 

 

0.14% 

 

 

 

164,868 

 

 

106 

 

0.13% 

Schwab equity and bond funds (1)

 

100,556 

 

 

108 

 

0.22% 

 

 

 

78,058 

 

 

92 

 

0.24% 

Mutual Fund OneSource ® (2)

 

244,333 

 

 

397 

 

0.33% 

 

 

 

244,601 

 

 

401 

 

0.33% 

Total mutual funds (3)

$

506,300 

 

 

621 

 

0.25% 

 

 

$

487,527 

 

 

599 

 

0.25% 

Advice solutions (3) :

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fee-based

$

172,405 

 

 

448 

 

0.52% 

 

 

$

153,065 

 

 

408 

 

0.54% 

Intelligent Portfolios

 

1,725 

 

 

 -

 

 -

 

 

 

N/A

 

 

N/A

 

N/A

Legacy Non-Fee

 

16,815 

 

 

N/A

 

N/A

 

 

 

15,564 

 

 

N/A

 

N/A

Total advice solutions

$

190,945 

 

 

448 

 

0.47% 

 

 

$

168,629 

 

 

408 

 

0.49% 

Other (2,4)

 

 

 

 

245 

 

 

 

 

 

 

 

 

236 

 

 

Total asset management

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

and administration fees

 

 

 

$

1,314 

 

 

 

 

 

 

 

$

1,243 

 

 

 

 

 

(1)

Includes Schwab exchange-traded funds.

(2)

Beginning in the second quarter of 2015, certain Mutual Fund OneSource balances were reclassified to Other third-party mutual funds. Related revenues have been reclassified to Other asset management and administration fees. Prior period information has been recast to reflect this change.

(3)

Advice solutions include managed portfolios, specialized strategies and customized investment advice. Fee-based advice solutions include Schwab Private Client, Schwab Managed Portfolios, Managed Account Select®, Schwab Advisor Network®, Windhaven® Strategies, ThomasPartners® Dividend Growth Strategy, and Schwab Index Advantage® advised retirement plan balances. Intelligent Portfolios include Schwab Intelligent Portfolios, launched in March 2015, and Institutional Intelligent Portfolios, launched in June 2015. Legacy Non-Fee advice solutions include superseded programs such as, Schwab Advisor Source and certain retirement plan balances. Average client assets for advice solutions may also include the asset balances contained in the three categories of mutual funds listed above.

(4)

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

N/A Not applicable.

 

Asset management and administration fees increased by $38 million, or 6%, and $71 million, or 6% in the second quarter and first half of 2015 compared to the same periods in 2014, due to the following items.

 

·

Mutual fund service fees increased by $15 million, or 5%, and $22 million, or 4%, in the second quarter and first half of 2015 compared to the same periods in 2014, primarily due to growth in client assets invested in equity and bond funds and higher net yields on money market fund assets.

·

Advice solutions fees increased by $19 million, or 9%, and $40 million, or 10%, in the second quarter and first half of 2015 compared to the same periods in 2014, primarily due to growth in client assets enrolled in advisory offers, including Schwab Private Client,  ThomasPartners®, and Schwab Managed Portfolios, partially offset by a decrease in Windhaven® assets.

·

Other asset management and administration service fees increased by $4 million, or 3%, and $9 million, or 4%, in the second quarter and first half of 2015 compared to the same periods in 2014, primarily due to third-party mutual fund service fees on higher client asset balances invested in other third-party mutual funds.

 

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.

 

-  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)

 

 

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

 

In clearing their clients’ trades, Schwab and optionsXpress, Inc., a securities broker-dealer and wholly-owned subsidiary of optionsXpress Holdings, Inc. (optionsXpress), 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.

 

The Company’s interest-earning assets are primarily funded through brokerage client cash balances and bank deposits. These interest-bearing liabilities are primarily sensitive to short-term rates, and the Company establishes the rates paid on most of these liabilities. The Company expects that the rate paid on these liabilities will generally adjust at some fraction of the movement in short-term market rates. The rates on the majority of the firm’s investment securities and loans re-price or reset based on short-term market rates. A smaller portion is invested in fixed-rate loans and securities. As such, the Company expects that net interest revenue will increase as short-term market rates increase, and decline as rates fall from current levels. When interest rates fall, the Company may attempt to mitigate some of this negative impact by lowering rates paid to clients on interest-bearing liabilities. The current low interest rate environment limits the extent to which the Company can reduce interest expense on funding sources. The Company may also alter the amount and type of fixed-rate loans and securities that are added to the portfolio. Generally, increases in the percentage of fixed-rate assets relative to total interest-bearing liabilities will reduce the rate at which net interest revenue changes if rates move.

 

Non-interest-bearing funding sources include non-interest-bearing brokerage client cash balances, stockholders’ equity, and proceeds from stock-lending activities. Revenue from stock-lending activities is included in other interest revenue.

 

-  10  -


 

THE CHARLES SCHWAB CORPORATION

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

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

 

 

The following tables present net interest revenue information corresponding to interest-earning assets and funding sources on the condensed consolidated balance sheet:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30,

 

2015

 

2014

 

 

 

 

 

Interest

 

Average

 

 

 

 

Interest

 

Average

 

 

Average

 

Revenue/

 

Yield/

 

Average

 

Revenue/

 

Yield/

 

 

Balance

 

Expense

 

Rate

 

Balance

 

Expense

 

Rate

Interest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

8,540 

  

$

  

0.28 

 

$

6,001 

  

$

  

0.20 

Cash and investments segregated

 

 

18,265 

  

 

  

0.15 

 

 

19,614 

  

 

  

0.12 

Broker-related receivables (1)

 

 

261 

  

 

 -

  

0.02 

 

 

312 

  

 

 -

  

 -

 

Receivables from brokerage clients

 

 

15,105 

  

 

125 

  

3.32 

 

 

13,634 

  

 

120 

  

3.53 

Securities available for sale (2)

 

 

61,194 

  

 

153 

  

1.00 

 

 

52,564 

  

 

138 

  

1.05 

Securities held to maturity

 

 

36,458 

  

 

227 

  

2.50 

 

 

32,043 

  

 

206 

  

2.58 

Bank loans

 

 

13,866 

  

 

91 

  

2.63 

 

 

12,775 

  

 

88 

  

2.76 

Total interest-earning assets

 

 

153,689 

  

 

609 

  

1.59 

 

 

136,943 

  

 

561 

  

1.64 

Other interest revenue

 

 

 

 

 

36 

  

 

 

 

 

 

 

 

27 

  

 

 

Total interest-earning assets

 

$

153,689 

  

$

645 

  

1.68 

 

$

136,943 

  

$

588 

  

1.72 

Funding sources:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bank deposits

 

$

110,159 

  

$

  

0.02 

 

$

94,938 

  

$

  

0.03 

Payables to brokerage clients(1)

 

 

25,138 

  

 

 -

  

0.01 

 

 

26,352 

  

 

 -

  

0.01 

Long-term debt

 

 

2,901 

  

 

24 

  

3.32 

 

 

1,901 

  

 

18 

  

3.80 

Total interest-bearing liabilities

 

 

138,198 

  

 

30 

  

0.09 

 

 

123,191 

  

 

26 

  

0.08 

Non-interest-bearing funding sources

 

 

15,491 

  

 

 

 

 

 

 

 

13,752 

  

 

 

 

 

 

Other interest expense (1,3)

 

 

 

 

 

 

 

 

 

 

 

 

 

 -

 

 

 

Total funding sources

 

$

153,689 

  

$

33 

  

0.08 

 

$

136,943 

  

$

26 

  

0.07 

Net interest revenue

 

 

 

 

$

612 

  

1.60 

 

 

 

 

$

562 

  

1.65 

 

 

 

(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.

(3)

Includes the impact of capitalizing interest on building construction and software development.

 

-  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)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30,

 

2015

 

2014

 

 

 

 

 

Interest

 

Average

 

 

 

 

Interest

 

Average

 

 

Average

 

Revenue/

 

Yield/

 

Average

 

Revenue/

 

Yield/

 

 

Balance

 

Expense

 

Rate

 

Balance

 

Expense

 

Rate

Interest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

8,959 

  

$

11 

  

0.25 

 

$

6,349 

  

$

  

0.22 

Cash and investments segregated

 

 

18,884 

  

 

13 

  

0.14 

 

 

20,611 

  

 

12 

  

0.12 

Broker-related receivables (1)

 

 

271 

  

 

 -

  

0.06 

 

 

303 

  

 

 -

  

0.15 

Receivables from brokerage clients

 

 

14,763 

  

 

244 

  

3.33 

 

 

13,397 

  

 

236 

  

3.55 

Securities available for sale (2)

 

 

59,315 

  

 

295 

  

1.00 

 

 

52,269 

  

 

278 

  

1.07 

Securities held to maturity

 

 

35,673 

  

 

445 

  

2.52 

 

 

31,448 

  

 

405 

  

2.60 

Bank loans

 

 

13,701 

  

 

181 

  

2.66 

 

 

12,661 

  

 

175 

  

2.79 

Total interest-earning assets

 

 

151,566 

  

 

1,189 

  

1.58 

 

 

137,038 

  

 

1,113 

  

1.64 

Other interest revenue

 

 

 

 

 

73 

  

 

 

 

 

 

 

 

54 

  

 

 

Total interest-earning assets

 

$

151,566 

  

$

1,262 

  

1.68 

 

$

137,038 

  

$

1,167 

  

1.72 

Funding sources:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bank deposits

 

$

108,008 

  

$

14 

  

0.03 

 

$

94,360 

  

$

15 

  

0.03 

Payables to brokerage clients(1)

 

 

25,602 

  

 

  

0.01 

 

 

26,779 

  

 

  

0.01 

Long-term debt

 

 

2,527 

  

 

43 

  

3.43 

 

 

1,902 

  

 

36 

  

3.82 

Total interest-bearing liabilities

 

 

136,137 

  

 

58 

  

0.09 

 

 

123,041 

  

 

52 

  

0.09 

Non-interest-bearing funding sources

 

 

15,429 

  

 

 

 

 

 

 

 

13,997 

  

 

 

 

 

 

Other interest expense (1,3)

 

 

 

 

 

  

 

 

 

 

 

 

 

 -

  

 

 

Total funding sources

 

$

151,566 

  

$

62 

  

0.08 

 

$

137,038 

  

$

52 

  

0.08 

Net interest revenue

 

 

 

 

$

1,200 

 

1.60 

 

 

 

 

$

1,115 

 

1.64 

 

 

 

(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.

(3)

Includes the impact of capitalizing interest on building construction and software development.

 

Net interest revenue increased in the second quarter and first half of 2015 compared to the same periods in 2014, primarily due to higher balances of interest-earning assets, including the Company’s investment portfolio, partially offset by the effect lower average interest rates had on the Company’s average net interest margin. The growth in the average balances in bank deposits resulted from an increase in the excess cash held in certain brokerage client accounts swept to Schwab Bank. The growth in bank deposits contributed to the increase in interest-earning assets.

 

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 adjustments to the fair value of these securities positions. Factors that influence principal transaction revenue include the volume of client trades and market price volatility.

 

-  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)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

Six Months Ended

 

 

 

 

 

June 30,

 

Percent

 

June 30,

 

Percent

 

 

2015

 

 

2014

 

Change

 

2015

 

 

2014

 

Change

Daily average revenue trades (1) (in thousands)

 

 

267 

  

 

 

274 

  

(3)

%

 

 

290 

 

  

 

305 

 

(5)

%

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

 

 

494 

 

 

 

483 

 

%

 

 

537 

 

 

 

518 

 

%

Number of trading days

 

 

63.0 

  

 

 

63.0 

  

 -

 

 

 

124.0 

 

  

 

124.0 

 

 -

 

Average revenue per revenue trade

 

$

11.97 

    

 

$

12.26 

    

(2)

%

 

$

11.97 

 

    

$

12.13 

 

(1)

%

 

(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 exchange-traded funds (ETFs), and other proprietary products. Clients’ daily average trades is an indicator of client engagement with securities markets.

 

 

Trading revenue decreased by $9 million, or 4%, in the second quarter of 2015 compared to the second quarter of 2014, primarily due to a decrease in commission revenue as a result of lower commissions per revenue trade and lower daily average revenue trades. Trading revenue decreased by $29 million or 6% in the first half of 2015 compared to the first half of 2014 primarily due to a decrease in commission revenue as a result of lower daily average revenue trades and commissions per revenue trades. Daily average revenue trades decreased in the second quarter and first half of 2015 compared to the same periods in 2014, primarily due to a lower volume of equity and option trades, offset by a higher volume of mutual fund trades. Average revenue per revenue trade decreased 2% and 1%, respectively, in the second quarter and first half of 2015 compared to the same periods in 2014.

 

Other Revenue

 

Other revenue includes order flow revenue, nonrecurring gains, software fees from the Company’s portfolio management services, exchange processing fees, and other service fees.

 

Other revenue increased by $14 million, or 22%, and $9 million, or 7%, in the second quarter and first half of 2015 compared to the same periods in 2014, respectively, primarily due to litigation proceeds of $17 million in the second quarter of 2015 relating to the Company’s non-agency residential mortgage-backed securities portfolio, partially offset by a decrease in order flow revenue.

 

Order flow revenue was $25 million and $52 million during the second quarter and first half of 2015, respectively, compared to $27 million and $59 million during the second quarter and first half of 2014, respectively. The decrease in order flow revenue in both periods was primarily due to changes in the composition and volume of different types of orders and the fees and rebates for such orders.

 

-  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)

 

 

Expenses Excluding Interest

 

As shown in the table below, expenses excluding interest increased in the second quarter and first half of 2015 compared to the same periods in 2014, primarily due to increases in compensation and benefits, depreciation and amortization, and other expense.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

Three Months Ended

 

 

 

Six Months Ended

 

 

 

 

June 30,

Percent

 

June 30,

Percent

 

  

2015

 

 

2014

 

Change

 

2015

 

 

2014

 

Change

Compensation and benefits

  

$

540 

  

 

$

520 

  

 

$

1,121 

  

 

$

1,048 

  

Professional services

  

 

112 

  

 

 

112 

  

 -

 

 

 

226 

  

 

 

218 

  

%

Occupancy and equipment

  

 

85 

  

 

 

80 

  

%

 

 

168 

  

 

 

160 

  

Advertising and market development

  

 

62 

  

 

 

65 

  

(5)

 

 

131 

  

 

 

128 

  

Communications

  

 

59 

  

 

 

57 

  

 

 

117 

  

 

 

113 

  

%

Depreciation and amortization

  

 

55 

  

 

 

48 

  

15 

 

 

109 

  

 

 

96 

  

14 

Other

  

 

86 

  

 

 

75 

  

15 

%

 

 

169 

  

 

 

150 

  

13 

Total expenses excluding interest

  

$

999 

  

 

$

957 

  

 

$

2,041 

  

 

$

1,913 

  

Expenses as a percentage of total net revenues:

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Compensation and benefits

  

 

34 

 

 

35 

 

 

 

 

36 

 

 

35 

 

 

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 EPS, and therefore will fluctuate with this measure. Stock-based compensation primarily includes employee and board of director stock options and restricted stock.

 

The following table shows a comparison of certain compensation and benefits components and employee data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

Six Months Ended

 

 

 

 

 

June 30,

Percent

 

June 30,

 

Percent

 

 

2015

 

 

2014

 

Change

 

2015

 

 

2014

 

Change

Salaries and wages

 

$

313 

  

 

$

293 

  

 

$

630 

  

 

$

588 

  

Incentive compensation

 

 

144 

  

 

 

147 

  

(2)

 

 

301 

  

 

 

294 

  

Employee benefits and other

 

 

83 

  

 

 

80 

  

 

 

190 

  

 

 

166 

  

14 

Total compensation and benefits expense

 

$

540 

  

 

$

520 

  

 

$

1,121 

  

 

$

1,048 

  

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At quarter end

 

 

15.0 

  

 

 

14.1 

  

 

 

 

 

 

 

 

 

 

 

Average

 

 

15.0 

  

 

 

14.0 

  

 

 

14.9 

  

 

 

14.0 

  

 

 

 

(1)

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

 

Salaries and wages increased in the second quarter and first half of 2015 compared to the same periods in 2014, primarily due to higher employee headcount and annual salary increases.

 

Incentive compensation decreased in the second quarter of 2015 compared to the second quarter of 2014, due to lower discretionary bonuses, partially offset by increases in equity-based incentives. Incentive compensation increased in the first half of 2015 compared to the first half of 2014, primarily due to the earlier recognition of certain equity-based incentives due to plan changes and higher field incentive plan costs relating to increased net client asset flows.

 

-  14  -


 

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)

 

 

Employee benefits and other expense increased in the second quarter and first half of 2015 compared to the same periods in 2014, due to increases in payroll taxes as a result of higher employee headcount. The increase in employee benefits in the first half of 2015 was also due to the Company matching 401(k) contributions by pay period in 2015 instead of annually and more employees choosing to fund their 401(k) contributions from annual bonuses.

 

Expenses Excluding Compensation and Benefits

 

Professional services expense was flat in the second quarter of 2015 compared to the second quarter of 2014. Professional services increased in the first half of 2015 compared to the first half of 2014, primarily due to an increase in fees paid to outsourced service providers and consultants.

 

Occupancy and equipment expense increased in the second quarter and first half of 2015 compared to the same periods in 2014, primarily due to an increase in software maintenance expense relating to the Company’s information technology systems.

 

Depreciation and amortization expense increased in the second quarter and first half of 2015 compared to the same periods in 2014, primarily due to increased amortization of internally-developed software.

 

Other expense increased in the second quarter of 2015 compared to the second quarter of 2014, primarily due to increases in regulatory assessments, reserves for margin loss estimates, and travel costs.

 

Taxes on Income

 

The Company’s effective income tax rate on income before taxes was 37.7% and 37.8% for the second quarters of 2015 and 2014, respectively. The Company’s effective income tax rate on income before taxes was 37.7% for both first halves of 2015 and 2014, respectively.

 

Segment Information

 

The Company 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, 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. Banking 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.

 

-  15  -


 

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 June 30,

 

Change

 

2015 

 

2014 

 

Change

 

2015 

 

2014 

Net Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Asset management and administration fees

 

%

 

$

474 

 

$

441 

  

%

 

$

196 

  

$

191 

Net interest revenue

 

%

 

 

524 

 

 

504 

  

52 

%

 

 

88 

  

 

58 

Trading revenue

 

(7)

%

 

 

135 

 

 

145 

  

%

 

 

68 

  

 

67 

Other

 

23 

%

 

 

58 

 

 

47 

  

17 

%

 

 

21 

  

 

18 

Provision for loan losses

 

(67)

%

 

 

 

 

 

(100)

%

 

 

 -

 

 

Total net revenues

 

%

 

 

1,193 

 

 

1,143 

  

11 

%

 

 

373 

  

 

335 

Expenses Excluding Interest

 

%

 

 

770 

 

 

734 

  

%

 

 

229 

  

 

223 

Income before taxes on income

 

%

 

$

423 

 

$

409 

  

29 

%

 

$

144 

  

$

112 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unallocated

 

Total

 

 

Percent

 

 

 

 

 

 

 

Percent

 

 

 

 

 

 

Three Months Ended June 30,

 

Change

 

2015 

 

2014 

 

Change

 

2015 

 

2014 

Net Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Asset management and administration fees

 

 -

 

 

$

 -

 

$

 -

  

%

 

$

670 

  

$

632 

Net interest revenue

 

 -

 

 

 

 -

 

 

 -

  

%

 

 

612 

  

 

562 

Trading revenue

 

 -

 

 

 

 -

 

 

 -

  

(4)

%

 

 

203 

  

 

212 

Other

 

 -

 

 

 

 -

 

 

 -

  

22 

%

 

 

79 

  

 

65 

Provision for loan losses

 

 -

 

 

 

 -

 

 

 -

  

(71)

%

 

 

 

 

Total net revenues

 

 -

 

 

 

 -

 

 

 -

  

 

 

1,566 

  

 

1,478 

Expenses Excluding Interest

 

 -

 

 

 

 -

 

 

 -

  

 

 

999 

  

 

957 

Income before taxes on income

 

 -

 

 

$

 -

 

$

 -

  

 

$

567 

  

$

521 

Net Income

 

 

 

 

 

 

 

 

 

 

 

$

353 

  

$

324 

 

 

 

-  16  -


 

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

 

 

 

 

 

 

Six Months Ended June 30,

 

Change

 

2015

 

2014

 

Change

 

2015

 

2014

Net Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Asset management and administration fees

 

 

$

928 

 

$

869 

  

 

$

386 

  

$

374 

Net interest revenue

 

 

 

1,034 

 

 

999 

  

43 

 

 

166 

  

 

116 

Trading revenue

 

(9)

 

 

286 

 

 

316 

  

 

 

144 

  

 

143 

Other

 

 

 

103 

 

 

98 

  

11 

 

 

39 

  

 

35 

Provision for loan losses

 

20 

 

 

 

 

 

(100)

 

 

 -

 

 

Total net revenues

 

 

 

2,357 

 

 

2,287 

  

10 

 

 

735 

  

 

669 

Expenses Excluding Interest

 

 

 

1,564 

 

 

1,472 

  

 

 

477 

  

 

441 

Income before taxes on income

 

(3)

%

 

$

793 

 

$

815 

  

13 

 

$

258 

  

$

228 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unallocated

 

Total

 

 

Percent

 

 

 

 

 

 

 

Percent

 

 

 

 

 

 

Six Months Ended June 30,

 

Change

 

2015

 

2014

 

Change

 

2015

 

2014

Net Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Asset management and administration fees

 

 -

      

 

$

 -

 

$

 -

  

 

$

1,314 

  

$

1,243 

Net interest revenue

 

 -

  

 

 

 -

 

 

 -

  

 

 

1,200 

  

 

1,115 

Trading revenue

 

 -

  

 

 

 -

 

 

 -

  

(6)

 

 

430 

  

 

459 

Other

 

 -

  

 

 

 -

 

 

 -

  

 

 

142 

  

 

133 

Provision for loan losses

 

 -

  

 

 

 -

 

 

 -

  

 -

 

 

 

 

 

Total net revenues

 

 -

  

 

 

 -

 

 

 -

  

 

 

3,092 

  

 

2,956 

Expenses Excluding Interest

 

 -

  

 

 

 -

 

 

 -

 

 

 

2,041 

  

 

1,913 

Income before taxes on income

 

 -

  

 

$

 -

 

$

 -

  

 

$

1,051 

  

$

1,043 

Net Income

 

 

 

 

 

 

 

 

 

 

 

$

655 

  

$

650 

 

Investor Services

Net revenues increased by $50 million, or 4%, and $70 million, or 3%, in the second quarter and first half of 2015 compared to the same periods in 2014 primarily due to increases in asset management and administration fees, net interest revenue, and other revenue, partially offset by a decrease in trading revenue. Asset management and administration fees increased primarily due to fees from advice solutions. Advice solutions fees increased primarily due to growth in client assets enrolled in advisory offers. Net interest revenue increased primarily due to higher balances of interest-earning assets, including the Company’s investment portfolio, partially offset by the effect lower average interest rates had on the Company’s average net interest margin. Other revenue increased primarily due to litigation proceeds relating to the Company’s non-agency residential mortgage-backed securities portfolio, partially offset by a decrease in order flow revenue. Trading revenue decreased primarily due to a decrease in commission revenue as a result of lower commissions per revenue trades and lower daily average revenue trades.

 

Expenses excluding interest increased by $36 million, or 5%, and $92 million, or 6%, in the second quarter and first half of 2015 compared to the same periods in 2014, primarily due to increases in compensation and benefits, occupancy and equipment, and depreciation and amortization expense.

 

Advisor Services

Net revenues increased by $38 million, or 11%, and $66 million, or 10%, in the second quarter and first half of 2015 compared to the same periods in 2014 primarily due to increases in net interest revenue and asset management and administration fees. Net interest revenue increased primarily due to higher balances of interest-earning assets, including the Company’s investment portfolio, partially offset by the effect lower average interest rates had on the Company’s average net interest margin. Asset management and administration fees increased due to fees from mutual fund services and other asset management and administration services. Mutual fund service fees increased primarily due to growth in client assets invested in equity and bond funds. Other asset management and administration service fees increased primarily due to third-party mutual fund service fees on higher client asset balances invested in other third-party mutual funds.

-  17  -


 

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 increased by $6 million, or 3%, and $36 million, or 8%, in the second quarter and first half of 2015 compared to the same periods in 2014, primarily due to increases in compensation and benefits and other expense.

 

 

Liquidity and Capital Resources

 

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.

 

The Company monitors both the relative composition and absolute level of its capital structure. Management is focused on optimizing the Company’s use of capital and currently targets a long-term debt to total financial capital ratio not to exceed 30%. The Company’s total financial capital (long-term debt plus stockholders’ equity) at June 30, 2015 was $15.3 billion, up $1.6 billion, or 12%, from December 31, 2014.

 

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.

 

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 universal shelf registration statement on file with the Securities and Exchange Commission (SEC) which enables CSC to issue debt, equity and other securities. CSC maintains excess liquidity in the form of overnight cash deposits, short-term investments to cover daily funding needs and to support growth in the Company’s business, and long-term investments to support contingent funding needs. 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.

 

On March 10, 2015, CSC issued $625 million aggregate principal amount of Senior Notes that mature in 2018 and $375 million aggregate principal amount of Senior Notes that mature in 2025 under its universal shelf registration statement on file with the SEC. The Senior Notes due 2018 have a fixed interest rate of 1.50% with interest payable semi-annually. The Senior Notes due 2025 have a fixed interest rate of 3.00% with interest payable semi-annually.

 

In connection with the above Senior Note issuances, CSC purchased $575 million of 3-year Treasury securities and $225 million of 10-year Treasury securities that are held at CSC to augment its liquidity position.

 

-  18  -


 

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

  

 

June 30, 2015

Outstanding

 

Maturity

 

Interest Rate

 

Moody’s

 

& Poor’s

 

Fitch

Senior Notes

 

$

2,581 

 

 

2015 – 2025

 

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 June 30, 2015. CSC’s ratings for these short-term borrowings are P1 by Moody’s, A1 by Standard & Poor’s, and F1 by Fitch.

 

CSC maintains a $750 million committed, unsecured credit facility with a group of 11 banks, which is scheduled to expire in June 2016. This facility replaced a similar facility that expired in June 2015 and both facilities were unused during the first half of 2015. 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, excluding accumulated other comprehensive income. At June 30, 2015, the minimum level of stockholders’ equity required under this facility was $8.5 billion (CSC’s stockholders’ equity, excluding accumulated other comprehensive income, at June 30, 2015 was $12.2 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 certain of the 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 half of 2015.

 

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%. Beginning on January 1, 2015, CSC became subject to new capital requirements set by the Federal Reserve. Based on its regulatory capital ratios at June 30, 2015, CSC exceeded minimum capital requirements. See “Item 1 Condensed Consolidated Financial Statements (Unaudited) Notes 11. Regulatory Requirements” for CSC’s regulatory capital and ratios.

 

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 $29.2 billion and $32.0 billion at June 30, 2015 and December 31, 2014, respectively. Management believes that brokerage client cash balances and operating earnings will continue to be the primary sources of liquidity for Schwab.

 

Most of Schwab’s assets are readily convertible to cash, consisting primarily of short-term 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 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 $79 million at June 30, 2015 is being reduced by a portion of the lease payments over the remaining lease term of nine years.

 

To manage short-term liquidity, Schwab maintains uncommitted, unsecured bank credit lines with a group of banks. 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

-  19  -


 

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)

 

 

requirements. Schwab used such borrowings for six days during the first half of 2015, with average daily amounts borrowed of $137 million. There were no borrowings outstanding under these lines at June 30, 2015.

 

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 June 30, 2015. There were no funds drawn under any of these LOCs during the first half of 2015. 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.

 

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 June 30, 2015, Schwab’s net capital was $1.7 billion (9% of aggregate debit balances), which was $1.3 billion in excess of its minimum required net capital and $767 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.

 

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 2016. The amount outstanding under this facility at June 30, 2015 was $465 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 2017. Borrowings under this facility do not qualify as regulatory capital for Schwab. There were no funds drawn under this facility at June 30, 2015.

 

Schwab Bank

 

Schwab Bank’s liquidity needs are met through bank deposits and equity capital.

 

Bank deposits at June 30, 2015 were $112.9 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 June 30, 2015, these balances totaled $92.2 billion.

 

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 certain 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 June 30, 2015, $2.2 billion was available under this arrangement. There were no funds drawn under this arrangement during the first half of 2015.

 

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 June 30, 2015, $9.2 billion was available under this facility. There were no funds drawn under this facility during the first half of 2015.

 

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

-  20  -


 

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)

 

 

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%. Beginning on January 1, 2015, Schwab Bank is subject to new capital requirements set by the OCC. Based on its regulatory capital ratios at June 30, 2015, Schwab Bank is considered well capitalized. See “Item 1 Condensed Consolidated Financial Statements (Unaudited) Notes 11. Regulatory Requirements” for Schwab Bank’s regulatory capital and ratios.

 

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 $1.1 billion and $942 million at June 30, 2015 and December 31, 2014, respectively. 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 June 30, 2015, optionsXpress, Inc.’s net capital was $131 million (31% of aggregate debit balances), which was $123 million in excess of its minimum required net capital and $110 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 June 30, 2015, 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 June 30, 2015. There were no funds drawn under this LOC during the first half of 2015.

 

CSC provides optionsXpress, Inc. with a $200 million credit facility, which is scheduled to expire in December 2016. Borrowings under this facility do not qualify as regulatory capital for optionsXpress, Inc. There was $20 million of borrowings outstanding under this facility at June 30, 2015.

 

optionsXpress has a term loan with CSC, of which $3 million was outstanding at June 30, 2015, and it matures in December 2017.

 

Long-term Debt

 

At June 30, 2015, the Company had long-term debt of $2.9 billion, or 19% of total financial capital, that bears interest at a weighted-average rate of 3.07%. At December 31, 2014, the Company had long term debt of $1.9 billion, or 14% of total financial capital. The Company repaid $4 million of long-term debt in the first half of 2015.

 

-  21  -


 

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)

 

 

On March 10, 2015, CSC issued $625 million aggregate principal amount of Senior Notes that mature in 2018 and $375 million aggregate principal amount of Senior Notes that mature in 2025 under its universal shelf registration statement on file with the SEC. The Senior Notes due 2018 have a fixed interest rate of 1.50% with interest payable semi-annually. The Senior Notes due 2025 have a fixed interest rate of 3.00% with interest payable semi-annually.

 

Capital Expenditures

 

The Company’s capital expenditures were $139 million and $168 million in the first halves of 2015 and 2014, respectively. The Company’s capital expenditures include $14 million and $3 million of accrued but unpaid capital expenditures at June 30, 2015 and 2014, respectively. Capital expenditures in the first half of 2015 were primarily for developing internal-use software, buildings, and software and equipment relating to the Company’s information technology systems. Capital expenditures for the first half of 2014 were primarily for buildings, developing internal-use software, and software and equipment relating to the Company’s information technology systems. Capitalized costs for developing internal-use software were $49 million and $36 million in the first halves of 2015 and 2014, respectively.

 

As discussed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014, management anticipated that the 2015 capital expenditures would be approximately 15% lower than 2014. However, management has revised the Company’s estimated full year 2015 capital expenditures to be approximately 5% less than 2014 levels primarily due to capitalized costs for developing internal-use software, and equipment relating to the Company’s information technology systems.

 

Dividends

 

CSC paid common stock cash dividends of $159 million ($0.12 per share) and $157 million ($0.12 per share) in the first halves of 2015 and 2014, respectively.

 

CSC paid Series A Preferred Stock cash dividends of $14 million ($35.00 per share) in both the first halves of 2015 and 2014. CSC paid Series B Preferred Stock cash dividends of $15 million ($30.00 per share) in both the first halves of 2015 and 2014, respectively.

 

Share Repurchases

 

There were no repurchases of CSC’s common stock in the first halves of 2015 and 2014. As of June 30, 2015, CSC had remaining authority from the Board of Directors to repurchase up to $596 million of its common stock, which is not subject to expiration.

 

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  Off-Balance Sheet Arrangements” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014, and “Item 1 – Condensed Consolidated Financial Statements (Unaudited) – Notes – 6. Commitments and Contingencies.”

 

 

Risk Management

 

The Company’s business activities expose it to a variety of risks, including operational, credit, market, liquidity, compliance and legal risk. The Company has a comprehensive risk management program to identify and manage these risks and their associated potential for financial and reputational impact. 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 these risks.  

 

-  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)

 

 

For a discussion on risks that the Company faces and the Company’s process of risk identification and assessment, risk measurement, risk monitoring and reporting and risk mitigation, 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, 2014. 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.

 

Credit Risk Exposures

 

The Company’s credit risk exposure related to bank loans 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. The Company’s mortgage loan portfolios primarily include first lien residential real estate mortgage loans (First Mortgages) of $8.2 billion and HELOCs of $2.8 billion at June 30, 2015.

 

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. In January 2014, the Company revised its First Mortgage underwriting criteria in conformance with the Consumer Financial Protection Bureau’s new guidance on Qualified Mortgage lending and a borrower’s ability to repay. Revisions were made to requirements affecting debt to income ratio, LTV ratio, and liquid asset holdings. These revised underwriting criteria have not and are not expected to have a material impact on the credit quality of the Company’s First Mortgage or HELOC portfolios. 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 June 30, 2015, approximately 1% of both the First Mortgage and HELOC portfolios consisted of loans to borrowers with updated FICO scores of less than 620.

 

At June 30, 2015, 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 June 30, 2015,  21% of HELOCs ($609 million of the HELOC portfolio) were in a first lien position. The weighted-average originated FICO score was 770 and 769 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 June 30, 2015, the weighted-average estimated current LTV ratios were 48% and 52% 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 June 30, 2015, the weighted-average updated FICO scores were 773 and 770 for the First Mortgage and HELOC portfolios, respectively.

 

The majority 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 June 30, 2015, $2.2 billion, or 79%, 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 June 30, 2015, approximately 30% 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 – 4. Bank Loans and Related Allowance for Loan Losses.”

 

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

 

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

December 31,

 

2015

 

2014

Loan delinquencies (1)

 

0.20 

%

 

 

 

0.27 

%

 

Nonaccrual loans

 

0.22 

%

 

 

 

0.26 

%

 

Allowance for loan losses

 

0.26 

%

 

 

 

0.31 

%

 

 

 

 

(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 $63.4 billion and $38.0 billion at June 30, 2015, respectively. These portfolios include U.S. agency and non-agency mortgage-backed securities, asset-backed securities, corporate debt securities, U.S. agency notes, treasury securities, and certificates of deposit. 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.

 

At June 30, 2015,  with the exception of certain non-agency residential mortgage-backed securities, all securities in the available for sale and held to maturity portfolios 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).

 

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 within a particular industry.

 

The fair value of the Company’s investments in mortgage-backed securities totaled $58.9 billion at June 30, 2015. Of these, $57.6 billion were issued by U.S. agencies and $1.3 billion were issued by private entities (non-agency securities). These U.S. agency and non-agency securities are included in securities available for sale and securities held to maturity.

 

The fair value of the Company’s investments in asset-backed securities totaled $21.7 billion at June 30, 2015. Of these, $12.5 billion were securities backed by student loans, the majority of which are guaranteed by the U.S. federal government. These asset-backed securities are included in securities available for sale.

 

The fair value of the Company’s investments in corporate debt securities and commercial paper totaled $10.0 billion at June 30, 2015, with the majority issued by institutions in the financial services industry. These securities are included in securities available for sale, cash and cash equivalents, and other securities owned in the Company’s condensed consolidated balance sheets. Issuer, geographic, and sector concentrations are controlled by established credit policy limits to each concentration type.

 

The Company’s bank loans include $7.4 billion of adjustable rate First Mortgage loans at June 30, 2015. 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 55% 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.

 

As of June 30, 2015, 48% of the Company’s HELOC and First Mortgage portfolio was concentrated in California. These loans have performed in a manner consistent with the portfolio as a whole.

 

-  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)

 

 

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

 

 

 

 

 

 

June 30, 2015

  

Balance

 

Converted to amortizing loan by period end

 

$

393 

 

Within 1 year

  

 

229 

 

> 1 year – 3 years

  

 

592 

 

> 3 years – 5 years

  

 

797 

 

> 5 years

  

 

832 

 

Total

  

$

2,843 

 

 

The Company also has exposure to concentration risk from its margin and securities lending and client option and futures activities collateralized by or referencing securities of a single issuer, an index, or within a single industry. This concentration risk is mitigated by collateral arrangements that require the fair value of such collateral exceed 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 $8.6 billion at June 30, 2015.

 

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 June 30, 2015.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value as of June 30, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

United

 

 

 

 

France

Netherlands

Norway

Sweden

Switzerland

Kingdom

Total

Cash equivalents

 

$

250 

 

$

 -

 

$

200 

 

$

 -

 

$

 -

 

$

 -

 

$

450 

Securities available for sale

 

 

85 

 

 

35 

 

 

75 

 

 

521 

 

 

650 

 

 

750 

 

 

2,116 

Total fair value

 

$

335 

  

$

35 

  

$

275 

  

$

521 

  

$

650 

 

$

750 

 

$

2,566 

Total amortized cost

 

$

335 

  

$

35 

  

$

275 

  

$

520 

  

$

650 

 

$

750 

 

$

2,565 

Maturities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Overnight

 

$

250 

  

$

 -

  

$

200 

  

$

 -

  

$

 -

 

$

 -

 

$

450 

1 day – < 6 months

 

 

 -

  

 

 -

  

 

 -

  

 

 -

  

 

275 

 

 

150 

 

 

425 

6 months – < 1 year

 

 

 -

  

 

 -

  

 

 -

  

 

151 

  

 

50 

 

 

200 

 

 

401 

1 year – 2 years

 

 

 -

  

 

 -

  

 

 -

  

 

370 

  

 

125 

 

 

300 

 

 

795 

> 2 years

 

 

85 

  

 

35 

  

 

75 

  

 

 -

  

 

200 

 

 

100 

 

 

495 

Total fair value

 

$

335 

  

$

35 

  

$

275 

  

$

521 

  

$

650 

 

$

750 

 

$

2,566 

 

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 June 30, 2015, the Company had $248 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.

 

-  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)

 

 

 

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, 2014. There have been no changes to these critical accounting estimates during the first half of 2015.

 

 

-  26  -


 

THE CHARLES SCHWAB CORPORATION

 

 

 

 

Item 3.Quantitative and Qualitative Disclosures About Market Risk

 

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

 

The Company is exposed to interest rate risk primarily from changes in market interest rates on its interest-earning assets relative to changes in the costs of its funding sources that finance these assets. The majority of the Company’s interest-earning assets and interest-bearing liabilities are sensitive to changes in short-term interest rates. To a lesser degree, the Company is sensitive to changes in long-term interest rates through some of its investment portfolios. 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 that tend to increase in a declining rate environment and decrease in a rising rate environment. Because the Company establishes the rates paid on certain brokerage client cash balances and bank deposits and the rates charged on margin loans and bank loans, 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, futures, and equity market fluctuations in connection with client option and futures 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. Current 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.

 

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 uncertain and, as a result, cannot precisely estimate net interest revenue or predict the impact of changes in interest rates on

-  27  -


 

THE CHARLES SCHWAB CORPORATION

 

 

 

 

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 half of 2015 or year ended December 31, 2014.

 

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.

 

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 June 30, 2015 and December 31, 2014.

 

 

 

 

 

 

 

 

 

 

June 30,

 

December 31,

 

 

2015

 

2014

Increase of 100 basis points

 

10.6 

 

11.8 

Decrease of 100 basis points

 

(5.9)

 

(4.9)

%

 

The sensitivities shown in the simulation reflect the fact that short-term interest rates in the first half of 2015 remained at 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. A decline in interest rates could 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. 

 

 

-  28  -


 

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

 

Six Months Ended

 

 

June 30,

 

June 30,

 

  

2015

 

2014

 

2015

 

2014

Net Revenues

  

 

 

 

 

 

 

 

 

 

 

 

Asset management and administration fees

  

$

670 

 

$

632 

  

$

1,314 

 

$

1,243 

Interest revenue

  

 

645 

 

 

588 

  

 

1,262 

 

 

1,167 

Interest expense

  

 

(33)

 

 

(26)

 

 

(62)

 

 

(52)

Net interest revenue

  

 

612 

 

 

562 

 

 

1,200 

 

 

1,115 

Trading revenue

  

 

203 

 

 

212 

 

 

430 

 

 

459 

Other

  

 

79 

 

 

65 

 

 

142 

 

 

133 

Provision for loan losses

  

 

 

 

 

 

 

 

Total net revenues

  

 

1,566 

 

 

1,478 

 

 

3,092 

 

 

2,956 

Expenses Excluding Interest

  

 

 

 

 

 

 

 

 

 

 

 

Compensation and benefits

  

 

540 

 

 

520 

  

 

1,121 

 

 

1,048 

Professional services

  

 

112 

 

 

112 

  

 

226 

 

 

218 

Occupancy and equipment

  

 

85 

 

 

80 

  

 

168 

 

 

160 

Advertising and market development

  

 

62 

 

 

65 

  

 

131 

 

 

128 

Communications

  

 

59 

 

 

57 

  

 

117 

 

 

113 

Depreciation and amortization

  

 

55 

 

 

48 

  

 

109 

 

 

96 

Other

  

 

86 

 

 

75 

  

 

169 

 

 

150 

Total expenses excluding interest

  

 

999 

 

 

957 

  

 

2,041 

 

 

1,913 

Income before taxes on income

  

 

567 

 

 

521 

  

 

1,051 

 

 

1,043 

Taxes on income

  

 

214 

 

 

197 

  

 

396 

 

 

393 

Net Income

  

 

353 

 

 

324 

  

 

655 

 

 

650 

Preferred stock dividends and other (1)

  

 

23 

 

 

22 

  

 

34 

 

 

30 

Net Income Available to Common Stockholders

  

$

330 

 

$

302 

  

$

621 

 

$

620 

Weighted-Average Common Shares Outstanding — Diluted

  

 

1,326 

 

 

1,313 

  

 

1,325 

 

 

1,312 

Earnings Per Common Share — Basic

  

$

.25

 

$

.23

  

$

.47

 

$

.47

Earnings Per Common Share — Diluted

  

$

.25

 

$

.23

  

$

.47

 

$

.47

 

 

 

(1)

Includes preferred stock dividends and undistributed earnings and dividends allocated to non-vested restricted stock units.

 

See Notes to Condensed Consolidated Financial Statements.

 

 

-  29  -


 

THE CHARLES SCHWAB CORPORATION

Condensed Consolidated Statements of Comprehensive Income

(In Millions)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

  

June 30,

 

June 30,

 

  

2015

 

2014

 

2015

 

2014

Net Income

  

$

353 

 

$

324 

  

$

655 

 

$

650 

Other comprehensive income (loss), before tax:

  

 

 

 

 

 

 

 

 

 

 

 

Change in net unrealized gain on securities available for sale:

  

 

 

 

 

 

 

 

 

 

 

 

Net unrealized gain (loss)

  

 

(91)

 

 

126 

  

 

16 

 

 

285 

Other reclassifications included in other revenue

 

 

 -

 

 

(1)

 

 

 -

 

 

(2)

Other comprehensive income (loss), before tax

  

 

(91)

 

 

125 

 

 

16 

 

 

283 

Income tax effect

 

 

34 

 

 

(47)

 

 

(7)

 

 

(106)

Other comprehensive income (loss), net of tax

  

 

(57)

 

 

78 

  

 

 

 

177 

Comprehensive Income

  

$

296 

 

$

402 

  

$

664 

 

$

827 

 

See Notes to Condensed Consolidated Financial Statements.

 

 

-  30  -


 

THE CHARLES SCHWAB CORPORATION

Condensed Consolidated Balance Sheets

(In Millions, Except Per Share and Share Amounts)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

December 31,

 

  

2015

 

2014

Assets

  

 

 

 

 

 

Cash and cash equivalents

  

$

9,017 

 

$

11,363 

Cash and investments segregated and on deposit for regulatory purposes

  

 

 

 

 

 

(including resale agreements of $8,422 at June 30, 2015 and $10,186

 

 

 

 

 

 

at December 31, 2014)

 

 

17,884 

 

 

20,781 

Receivables from brokers, dealers, and clearing organizations

  

 

917 

 

 

469 

Receivables from brokerage clients — net

  

 

16,618 

 

 

15,669 

Other securities owned — at fair value

  

 

611 

 

 

516 

Securities available for sale

  

 

63,415 

 

 

54,783 

Securities held to maturity (fair value — $37,979 at June 30, 2015 and

  

 

 

 

 

 

$34,743 at December 31, 2014)

 

 

37,747 

 

 

34,389 

Bank loans — net

  

 

14,014 

 

 

13,399 

Equipment, office facilities, and property — net

  

 

1,091 

 

 

1,039 

Goodwill

  

 

1,227 

 

 

1,227 

Intangible assets — net

  

 

204 

 

 

227 

Other assets

  

 

882 

 

 

780 

Total assets

  

$

163,627 

 

$

154,642 

Liabilities and Stockholders’ Equity

  

 

 

 

 

 

Bank deposits

  

$

112,911 

 

$

102,815 

Payables to brokers, dealers, and clearing organizations

  

 

2,518 

 

 

2,004 

Payables to brokerage clients

  

 

31,480 

 

 

34,305 

Accrued expenses and other liabilities

  

 

1,401 

 

 

1,816 

Long-term debt

  

 

2,894 

 

 

1,899 

Total liabilities

  

 

151,204 

 

 

142,839 

Stockholders’ equity:

  

 

 

 

 

 

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

  

 

 

 

 

 

preference of $885

 

 

874 

 

 

872 

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

  

 

 

 

 

 

1,487,543,446 shares issued

 

 

15 

 

 

15 

Additional paid-in capital

  

 

4,124 

 

 

4,050 

Retained earnings

  

 

10,664 

 

 

10,198 

Treasury stock, at cost — 172,482,892 shares at June 30, 2015 and

  

 

 

 

 

 

176,821,202 shares at December 31, 2014

 

 

(3,428)

 

 

(3,497)

Accumulated other comprehensive income

  

 

174 

 

 

165 

Total stockholders’ equity

  

 

12,423 

 

 

11,803 

Total liabilities and stockholders’ equity

  

$

163,627 

 

$

154,642 

 

See Notes to Condensed Consolidated Financial Statements.

 

 

-  31  -


 

THE CHARLES SCHWAB CORPORATION

Condensed Consolidated Statements of Cash Flows

(In Millions)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

June 30,

 

 

2015

 

2014

Cash Flows from Operating Activities

 

 

 

 

 

 

Net income

 

$

655 

 

$

650 

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

 

 

 

 

 

 

Provision for loan losses

 

 

(6)

 

 

(6)

Stock-based compensation

 

 

69 

 

 

54 

Depreciation and amortization

 

 

109 

 

 

96 

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

 

 

77 

 

 

58 

Other

 

 

 

 

Net change in:

 

 

 

 

 

 

Cash and investments segregated and on deposit for regulatory purposes

 

 

2,897 

 

 

4,460 

Receivables from brokers, dealers, and clearing organizations

 

 

(445)

 

 

(9)

Receivables from brokerage clients

 

 

(954)

 

 

(722)

Other securities owned

 

 

(95)

 

 

(66)

Other assets

 

 

(33)

 

 

(47)

Payables to brokers, dealers, and clearing organizations

 

 

269 

 

 

95 

Payables to brokerage clients

 

 

(2,825)

 

 

(3,849)

Accrued expenses and other liabilities

 

 

(458)

 

 

(220)

Net cash (used for) provided by operating activities

 

 

(737)

 

 

501 

Cash Flows from Investing Activities

 

 

 

 

 

 

Purchases of securities available for sale

 

 

(12,423)

 

 

(6,493)

Proceeds from sales of securities available for sale

 

 

594 

 

 

2,045 

Principal payments on securities available for sale

 

 

3,404 

 

 

3,194 

Purchases of securities held to maturity

 

 

(5,070)

 

 

(3,255)

Principal payments on securities held to maturity

 

 

1,688 

 

 

1,132 

Net increase in bank loans

 

 

(632)

 

 

(460)

Purchase of equipment, office facilities, and property

 

 

(125)

 

 

(165)

Other investing activities

 

 

(4)

 

 

(8)

Net cash used for investing activities

 

 

(12,568)

 

 

(4,010)

Cash Flows from Financing Activities

 

 

 

 

 

 

Net change in bank deposits

 

 

10,096 

 

 

2,716 

Issuance of long-term debt

 

 

998 

 

 

 -

Repayment of long-term debt

 

 

(4)

 

 

(4)

Dividends paid

 

 

(188)

 

 

(186)

Proceeds from stock options exercised and other

 

 

50 

 

 

81 

Other financing activities

 

 

 

 

Net cash provided by financing activities

 

 

10,959 

 

 

2,613 

Decrease in Cash and Cash Equivalents

 

 

(2,346)

 

 

(896)

Cash and Cash Equivalents at Beginning of Period

 

 

11,363 

 

 

7,728 

Cash and Cash Equivalents at End of Period

 

$

9,017 

 

$

6,832 

Supplemental Cash Flow Information

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

 

Interest

 

$

53 

 

$

51 

Income taxes

 

$

386 

 

$

403 

Non-cash investing activity:

 

 

 

 

 

 

Securities purchased during the period but settled after period end

 

$

245 

 

$

163 

 

See Notes to Condensed Consolidated Financial Statements.

 

-  32  -


 

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 wealth management, securities brokerage, banking, money management, and financial advisory services. Charles Schwab & Co., Inc. (Schwab) is a securities broker-dealer with over 325 domestic branch offices in 45 states, as well as a branch in each of the Commonwealth of Puerto Rico and London, England. 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 valuation of goodwill, allowance for loan losses, legal and regulatory reserves, and other-than-temporary impairment (OTTI) of securities available for sale and securities held to maturity. 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. 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, 2014.

 

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, 2014. There have been no significant changes to these accounting policies during the first half of 2015.

 

Principles of Consolidation

 

The Company accounts for investments in entities for which it owns a voting interest and for which it has the ability to exercise significant influence over operating and financing decisions using the equity method of accounting. Investments in entities for which the Company does not have the ability to exercise significant influence are generally carried at cost. Both equity method and cost method investments are included in other assets.

 

The Company evaluates its initial and continuing involvement with certain entities to determine if the Company is required to consolidate the entities under the variable interest entity (VIE) model. For interests in entities other than the Company’s sponsored funds, the evaluation is based on a qualitative assessment of whether the Company is the primary beneficiary of the VIE. The primary beneficiary of a VIE has the power to direct the activities of a VIE that most significantly impact the VIE’s economic performance and the obligation to absorb losses of the VIE that potentially could be significant to the VIE or the right to receive benefits from the VIE that potentially could be significant to the VIE.

 

The primary beneficiary determination for the Company’s sponsored funds is based on a quantitative assessment of whether the Company would absorb a majority of the VIE’s expected losses, receive a majority of the VIE’s expected residual returns, or both. Based upon the Company’s assessments, we have determined we are not the primary beneficiary of and, therefore, are not required to consolidate any VIEs.

 

 

2.New Accounting Standards

 

Adoption of New Accounting Standard

 

In January 2014, the Financial Accounting Standards Board (FASB) issued new guidance for creditors of consumer mortgage loans, which was effective January 1, 2015. The guidance clarifies when physical possession of a property underlying a consumer mortgage loan transfers to the creditor, and therefore when a loan receivable should be derecognized and the real estate property underlying the loan should be recognized. The adoption of this new guidance in the first quarter of 2015 did not have an impact on the Company’s financial statements or earnings per common share (EPS) as the Company’s practice for recognizing foreclosed real estate was already consistent with the guidance.

-  33  -


 

THE CHARLES SCHWAB CORPORATION

Notes to Condensed Consolidated Financial Statements

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

(Unaudited)

 

 

New Accounting Standards Not Yet Adopted

 

In May 2014, the FASB issued new guidance on revenue recognition, which will become effective January 1, 2018. The guidance clarifies that revenue from contracts with customers should be recognized in a manner that depicts the timing of the related transfer of goods or performance of services at an amount that reflects the expected consideration. The Company is currently evaluating the impact of this new guidance on its financial statements and EPS.

 

In February 2015, the FASB issued new guidance that amends the analysis a reporting entity must perform to determine whether it should consolidate certain types of legal entities. The new guidance will become effective January 1, 2016, and is applicable to all entities but provides an exception for reporting entities with interests in legal entities that are required to comply with or operate in accordance with requirements that are similar to those in Rule 2a-7 of the Investment Company Act of 1940 for registered money market funds. The Company is currently evaluating the impact of this new guidance on its financial statements and EPS.

 

In April 2015, the FASB issued new guidance that changes the presentation of debt issuance costs. The new guidance will require debt issuance costs related to a recognized debt liability to be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. Currently, debt issuance costs are presented as a separate asset. The new guidance, which will become effective January 1, 2016, will not impact the Company’s financial results or EPS as the change only affects the balance sheet presentation of debt issuance costs; recognition and measurement of debt issuance costs will not be affected.

 

In April 2015, the FASB issued new guidance that clarifies customer’s accounting for fees paid in a cloud computing arrangement. Under the new guidance, if a cloud computing arrangement includes a software license, the customer shall account for the software license element of the arrangement consistent with the acquisition of other software licenses. If the cloud computing arrangement does not include a software license, the customer shall account for the arrangement as a service contract. The guidance will become effective January 1, 2016. The Company is currently evaluating the impact of this new guidance on its financial statements and EPS.

 

 

3.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

June 30, 2015

 

Cost

 

Gains

 

Losses

 

Value

Securities available for sale:

  

 

 

  

 

 

  

 

 

 

 

 

U.S. agency mortgage-backed securities

  

$

20,623 

  

$

221 

  

$

19 

  

$

20,825 

Asset-backed securities

  

 

21,615 

  

 

73 

  

 

18 

  

 

21,670 

Corporate debt securities

  

 

9,534 

  

 

30 

  

 

10 

  

 

9,554 

U.S. agency notes

  

 

5,307 

  

 

  

 

18 

  

 

5,291 

Treasury securities

  

 

3,818 

  

 

13 

  

 

 -

  

 

3,831 

Certificates of deposit

  

 

1,924 

  

 

  

 

  

 

1,924 

Non-agency commercial mortgage-backed securities

 

 

302 

 

 

 

 

 -

 

 

307 

Other securities

  

 

13 

  

 

 -

  

 

 -

  

 

13 

Total securities available for sale

  

$

63,136 

  

$

345 

  

$

66 

  

$

63,415 

Securities held to maturity:

  

 

 

  

 

 

  

 

 

 

 

 

U.S. agency mortgage-backed securities

  

$

36,524 

 

$

467 

 

$

223 

 

$

36,768 

Non-agency commercial mortgage-backed securities

 

 

1,000 

 

 

 

 

17 

 

 

992 

Treasury securities

  

 

223 

 

 

 -

 

 

 

 

219 

Total securities held to maturity

  

$

37,747 

 

$

476 

 

$

244 

 

$

37,979 

 

-  34  -


 

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, 2014

 

Cost

 

Gains

 

Losses

 

Value

Securities available for sale:

  

 

 

 

  

 

 

 

  

 

 

 

Asset-backed securities

  

$

19,320 

  

$

64 

 

$

18 

 

$

19,366 

U.S. agency mortgage-backed securities

  

 

18,487 

  

 

242 

 

 

12 

 

 

18,717 

Corporate debt securities

  

 

8,023 

  

 

30 

 

 

 

 

8,045 

U.S. agency notes

  

 

3,839 

  

 

 -

 

 

44 

 

 

3,795 

Treasury securities

 

 

2,993 

 

 

 

 

 

 

2,994 

Certificates of deposit

  

 

1,533 

  

 

 

 

 -

 

 

1,534 

Non-agency commercial mortgage-backed securities

 

 

310 

 

 

 

 

 -

 

 

317 

Other securities

  

 

15 

  

 

 -

 

 

 -

 

 

15 

Total securities available for sale

  

$

54,520 

  

$

346 

 

$

83 

 

$

54,783 

Securities held to maturity:

  

 

 

 

 

 

 

 

 

 

 

 

U.S. agency mortgage-backed securities

  

$

33,388 

  

$

531 

 

$

174 

 

$

33,745 

Non-agency commercial mortgage-backed securities

 

 

1,001 

 

 

11 

 

 

14 

 

 

998 

Total securities held to maturity

  

$

34,389 

  

$

542 

 

$

188 

 

$

34,743 

 

Schwab Bank pledges securities issued by federal agencies to secure certain trust deposits. The fair value of these pledged securities was $170 million at June 30, 2015.

 

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

June 30, 2015

 

Value

 

Losses

 

Value

 

Losses

 

Value

 

Losses

Securities available for sale:

  

 

 

  

 

 

 

 

 

  

 

 

  

 

 

  

 

 

U.S. agency mortgage-backed securities

 

$

3,759 

 

$

14 

 

$

1,135 

 

$

 

$

4,894 

 

$

19 

Asset-backed securities

  

 

6,466 

  

 

16 

  

 

712 

  

 

  

 

7,178 

  

 

18 

Corporate debt securities

  

 

2,739 

  

 

  

 

654 

  

 

  

 

3,393 

  

 

10 

U.S. agency notes

  

 

1,120 

  

 

  

 

2,253 

  

 

13 

  

 

3,373 

  

 

18 

Certificates of deposit

 

 

898 

 

 

 

 

 -

 

 

 -

 

 

898 

 

 

Total

  

$

14,982 

  

$

44 

  

$

4,754 

  

$

22 

  

$

19,736 

  

$

66 

Securities held to maturity:

  

 

 

  

 

 

 

 

 

  

 

 

  

 

 

  

 

 

U.S. agency mortgage-backed securities

  

$

13,093 

  

$

188 

  

$

1,968 

  

$

35 

  

$

15,061 

  

$

223 

Non-agency commercial mortgage-backed

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

securities

 

 

657 

 

 

17 

 

 

 -

 

 

 -

 

 

657 

 

 

17 

Treasury securities

 

 

219 

 

 

 

 

 -

 

 

 -

 

 

219 

 

 

Total

  

$

13,969 

  

$

209 

  

$

1,968 

  

$

35 

  

$

15,937 

  

$

244 

Total securities with unrealized losses (1)

  

$

28,951 

  

$

253 

  

$

6,722 

  

$

57 

  

$

35,673 

  

$

310 

 

 

 

(1)

The number of investment positions with unrealized losses totaled 244 for securities available for sale and 171 for securities held to maturity.

 

-  35  -


 

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, 2014

 

Value

 

Losses

 

Value

 

Losses

 

Value

 

Losses

Securities available for sale:

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

Asset-backed securities

  

$

5,754 

  

$

15 

 

$

792 

 

$

  

$

6,546 

  

$

18 

U.S. agency mortgage-backed securities

 

 

2,247 

 

 

 

 

1,767 

 

 

 

 

4,014 

 

 

12 

Corporate debt securities

  

 

1,781 

  

 

 

 

552 

 

 

  

 

2,333 

  

 

U.S. agency notes

  

 

 -

  

 

 -

 

 

3,696 

 

 

44 

  

 

3,696 

  

 

44 

Treasury securities

 

 

1,246 

 

 

 

 

 -

 

 

 -

 

 

1,246 

 

 

Total

  

$

11,028 

  

$

25 

 

$

6,807 

 

$

58 

  

$

17,835 

  

$

83 

Securities held to maturity:

  

 

 

 

 

 

 

 

 

 

 

 

  

 

 

 

 

 

U.S. agency mortgage-backed securities

 

$

264 

 

$

 

$

10,415 

 

$

173 

 

$

10,679 

 

$

174 

Non-agency commercial mortgage-backed

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

securities

  

 

 -

  

 

 -

 

 

660 

 

 

14 

  

 

660 

  

 

14 

Total

  

$

264 

  

$

 

$

11,075 

 

$

187 

  

$

11,339 

  

$

188 

Total securities with unrealized losses (1)

  

$

11,292 

  

$

26 

 

$

17,882 

 

$

245 

  

$

29,174 

  

$

271 

 

(1)

The number of investment positions with unrealized losses totaled 173 for securities available for sale and 111 for securities held to maturity.

 

Management evaluates whether securities available for sale and securities held to maturity are OTTI on a quarterly basis as 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, 2014. There were no impairment charges recognized during the second quarters or first halves of 2015 and 2014.

 

-  36  -


 

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 June 30, 2015 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)

 

$

 -

  

$

1,220 

  

$

7,876 

  

$

11,729 

  

$

20,825 

Asset-backed securities

 

 

  

 

4,287 

  

 

5,309 

  

 

12,073 

  

 

21,670 

Corporate debt securities

 

 

1,209 

  

 

8,345 

  

 

 -

  

 

 -

  

 

9,554 

U.S. agency notes

 

 

 -

  

 

5,291 

  

 

 -

  

 

 -

  

 

5,291 

Treasury securities

 

 

 -

  

 

3,831 

  

 

 -

  

 

 -

  

 

3,831 

Certificates of deposit

 

 

840 

  

 

1,084 

  

 

 -

  

 

 -

  

 

1,924 

Non-agency commercial mortgage-backed

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

securities (1)

 

 

 -

 

 

 -

 

 

 -

 

 

307 

 

 

307 

Other securities

 

 

 -

 

 

 -

 

 

 -

 

 

13 

 

 

13 

Total fair value

 

$

2,050 

  

$

24,058 

  

$

13,185 

  

$

24,122 

  

$

63,415 

Total amortized cost

 

$

2,048 

  

$

24,021 

  

$

13,106 

  

$

23,961 

  

$

63,136 

Securities held to maturity:

 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

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

 

$

 -

  

$

938 

  

$

18,184 

  

$

17,646 

  

$

36,768 

Non-agency commercial mortgage-backed

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

securities (1)

 

 

 -

 

 

 -

 

 

359 

 

 

633 

 

 

992 

Treasury securities

 

 

 -

  

 

 -

  

 

219 

  

 

 -

  

 

219 

Total fair value

 

$

 -

  

$

938 

  

$

18,762 

  

$

18,279 

  

$

37,979 

Total amortized cost

 

$

 -

  

$

923 

  

$

18,609 

  

$

18,215 

  

$

37,747 

 

(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

 

Six Months Ended

 

 

June 30,

 

June 30,

 

 

2015

 

2014

 

2015

 

2014

Proceeds

 

$

444 

  

$

760 

  

$

594 

  

$

2,045 

Gross realized gains

 

$

 

$

 

$

 

$

Gross realized losses

 

$

  

$

 -

  

$

  

$

 -

 

 

 

4.Bank Loans and Related Allowance for Loan Losses

 

The composition of bank loans by loan segment is as follows:

 

 

 

 

 

 

 

 

 

 

June 30,

 

December 31,

 

 

2015

 

2014

Residential real estate mortgages

 

$

8,236 

  

$

8,127 

Home equity loans and lines of credit

 

 

2,843 

  

 

2,955 

Personal loans secured by securities

 

 

2,919 

  

 

2,320 

Other

 

 

52 

  

 

39 

Total bank loans (1)

 

 

14,050 

  

 

13,441 

Allowance for loan losses

 

 

(36)

 

 

(42)

Total bank loans – net

 

$

14,014 

  

$

13,399 

 

(1)

All loans are evaluated for impairment by loan segment.

-  37  -


 

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 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 $7.1 billion and $6.7 billion at June 30, 2015 and December 31, 2014, respectively. All of the personal loans were fully collateralized by securities with fair values in excess of borrowings at June 30, 2015 and December 31, 2014.

 

Schwab Bank provides 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 purchased First Mortgages of $542 million and $332 million during the second quarters of 2015 and 2014, respectively and $982 million and $618 million during the first halves of 2015 and 2014, respectively. Schwab Bank purchased HELOCs with commitments of $165 million and $175 million during the second quarters of 2015 and 2014, respectively, and $282 million and  $347 million during the first halves of 2015 and 2014, respectively.

 

Credit Quality

 

Changes in the allowance for loan losses were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

June 30, 2015

 

 

June 30, 2014

 

Residential

 

Home Equity

 

 

 

 

 

Residential

 

Home Equity

 

 

 

 

Real Estate

 

Loans and

 

 

 

 

 

Real Estate

 

Loans and

 

 

 

 

Mortgages

 

Lines of Credit

 

Total

 

 

Mortgages

 

Lines of Credit

 

Total

Balance at beginning of period

$

26 

  

 

$

12 

 

  

$

38 

  

 

$

33 

  

 

$

15 

 

  

$

48 

Charge-offs

 

 -

 

 

 

(1)

 

 

 

(1)

 

 

 

 -

 

 

 

(1)

 

 

 

(1)

Recoveries

 

 -

  

 

 

 

  

 

  

 

 

  

 

 

 -

 

  

 

Provision for loan losses

 

(3)

  

 

 

 

  

 

(2)

  

 

 

(6)

  

 

 

(1)

 

  

 

(7)

Balance at end of period

$

23 

  

 

$

13 

 

  

$

36 

  

 

$

28 

  

 

$

13 

 

  

$

41 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended

June 30, 2015

 

 

June 30, 2014

 

Residential

 

Home Equity

 

 

 

 

 

Residential

 

Home Equity

 

 

 

 

Real Estate

 

Loans and

 

 

 

 

 

Real Estate

 

Loans and

 

 

 

 

Mortgages

 

Lines of Credit

 

Total

 

 

Mortgages

 

Lines of Credit

 

 

Total

Balance at beginning of period

$

29 

  

 

$

13 

 

  

$

42 

  

 

$

34 

  

 

$

14 

 

  

$

48 

Charge-offs

 

 -

 

 

 

(2)

 

 

 

(2)

 

 

 

(1)

 

 

 

(2)

 

 

 

(3)

Recoveries

 

 -

  

 

 

 

  

 

  

 

 

  

 

 

 

  

 

Provision for loan losses

 

(6)

  

 

 

 -

 

  

 

(6)

  

 

 

(6)

  

 

 

 -

 

  

 

(6)

Balance at end of period

$

23 

  

 

$

13 

 

  

$

36 

  

 

$

28 

  

 

$

13 

 

  

$

41 

 

The delinquency and nonaccrual analysis by loan class is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

 

 

 

 

 

 

 

 

>90 days past

 

Total past due

 

 

 

 

 

30-59 days

 

60-89 days

 

due and other

 

and other

 

Total

June 30, 2015

Current

 

past due

 

past due

 

nonaccrual loans

 

nonaccrual loans

 

loans

Residential real estate mortgages

$

8,206 

  

 

$

 

 

 

$

 

 

 

$

21 

  

 

 

$

30 

  

 

$

8,236 

Home equity loans and lines of credit

 

2,830 

  

 

 

 

 

 

 

 

 

 

 

10 

  

 

 

 

13 

  

 

 

2,843 

Personal loans secured by securities

 

2,919 

  

 

 

 -

 

 

 

 

 -

 

 

 

 

 -

  

 

 

 

 -

  

 

 

2,919 

Other

 

52 

  

 

 

 -

 

 

 

 

 -

 

 

 

 

 -

  

 

 

 

 -

  

 

 

52 

Total bank loans

$

14,007 

  

 

$

10 

 

 

 

$

 

 

 

$

31 

  

 

 

$

43 

  

 

$

14,050 

 

 

-  38  -


 

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

 

Total past due

 

 

 

 

 

30-59 days

 

60-89 days

 

due and other

 

and other

 

Total

December 31, 2014

Current

 

past due

 

past due

 

nonaccrual loans

 

nonaccrual loans

 

loans

Residential real estate mortgages

$

8,092 

  

 

$

 

 

 

$

 

 

 

$

24 

  

 

 

$

35 

  

 

$

8,127 

Home equity loans and lines of credit

 

2,942 

  

 

 

 

 

 

 

 

 

 

 

11 

  

 

 

 

13 

  

 

 

2,955 

Personal loans secured by securities

 

2,320 

  

 

 

 -

 

 

 

 

 -

 

 

 

 

 -

  

 

 

 

 -

  

 

 

2,320 

Other

 

38 

  

 

 

 

 

 

 

 -

 

 

 

 

 -

  

 

 

 

  

 

 

39 

Total bank loans

$

13,392 

  

 

$

11 

 

 

 

$

 

 

 

$

35 

  

 

 

$

49 

  

 

$

13,441 

 

There were no loans accruing interest that were contractually 90 days or more past due at June 30, 2015 or December 31, 2014. Nonperforming assets, which include nonaccrual loans and other real estate owned, totaled $39 million and $44 million at June 30, 2015 and December 31, 2014, respectively. Troubled debt restructurings were not material at June 30, 2015 or December 31, 2014.

 

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 June 2015. 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.

 

As of June 30, 2015, 48% of the Company’s HELOC and First Mortgage portfolio were concentrated in California. These loans have performed in a manner consistent with the portfolio as a whole.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted

 

 

 

 

Percent of Loans

 

 

 

 

 

 

Average

 

Utilization

 

that are on

June 30, 2015

 

Balance

 

 

Updated FICO

 

Rate(1)  

 

Nonaccrual Status

Residential real estate mortgages:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Estimated Current LTV

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

<70%

 

$

7,385 

  

 

 

775 

 

 

  

N/A

  

 

 

0.03 

 

>70% – <90%

 

 

763 

  

 

 

764 

 

 

  

N/A

  

 

 

0.48 

 

>90% – <100%

 

 

47 

  

 

 

741 

 

 

  

N/A

  

 

 

3.67 

 

>100%

 

 

41 

  

 

 

721 

 

 

  

N/A

  

 

 

10.57 

 

Total

 

$

8,236 

  

 

 

773 

 

 

  

N/A

  

 

 

0.14 

 

Home equity loans and lines of credit:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Estimated Current LTV

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

<70%

 

$

2,287 

  

 

 

772 

 

 

  

36 

 

 

0.05 

 

>70% – <90%

 

 

436 

  

 

 

762 

 

 

  

49 

 

 

0.36 

 

>90% – <100%

 

 

63 

  

 

 

752 

 

 

  

58 

 

 

0.66 

 

>100%

 

 

57 

  

 

 

744 

 

 

  

65 

 

 

1.23 

 

Total

 

$

2,843 

  

 

 

770 

 

 

  

39 

 

 

0.14 

 

 

(1)

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

N/A Not applicable.

 

 

-  39  -


 

THE CHARLES SCHWAB CORPORATION

Notes to Condensed Consolidated Financial Statements

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

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential

 

Home Equity

 

 

Real Estate

 

Loans and

June 30, 2015

 

Mortgages

 

Lines of Credit

Year of origination

 

 

 

 

 

 

 

 

 

Pre-2011

 

$

999 

 

 

$

2,085 

 

 

2011

 

 

501 

 

 

 

126 

 

 

2012

 

 

1,886 

 

 

 

134 

 

 

2013

 

 

2,742 

 

 

 

247 

 

 

2014

 

 

1,140 

 

 

 

188 

 

 

2015

 

 

968 

 

 

 

63 

 

 

Total

 

$

8,236 

 

 

$

2,843 

 

 

Origination FICO

 

 

 

 

 

 

 

 

 

<620

 

$

 

 

$

 -

 

 

620 – 679

 

 

90 

 

 

 

16 

 

 

680 – 739

 

 

1,364 

 

 

 

521 

 

 

>740

 

 

6,773 

 

 

 

2,306 

 

 

Total

 

$

8,236 

 

 

$

2,843 

 

 

Origination LTV

 

 

 

 

 

 

 

 

 

<70%

 

$

5,728 

 

 

$

1,919 

 

 

>70% – <90%

 

 

2,493 

 

 

 

905 

 

 

>90% – <100%

 

 

15 

 

 

 

19 

 

 

Total

 

$

8,236 

 

 

$

2,843 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted

 

 

 

 

Percent of Loans

 

 

 

 

 

 

Average

 

Utilization

 

that are on

December 31, 2014

 

Balance

 

 

Updated FICO

 

Rate(1)  

 

Nonaccrual Status

Residential real estate mortgages:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Estimated Current LTV

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

<70%

 

$

7,131 

 

 

 

774 

 

 

 

N/A 

 

 

 

0.04 

 

>70% – <90%

 

 

882 

 

 

 

765 

 

 

 

N/A 

 

 

 

0.50 

 

>90% – <100%

 

 

61 

 

 

 

740 

 

 

 

N/A 

 

 

 

2.95 

 

>100%

 

 

53 

 

 

 

726 

 

 

 

N/A 

 

 

 

10.95 

 

Total

 

$

8,127 

 

 

 

773 

 

 

 

N/A 

 

 

 

0.18 

 

Home equity loans and lines of credit:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Estimated Current LTV

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

<70%

 

$

2,282 

 

 

 

773 

 

 

 

36 

 

 

0.08 

 

>70% – <90%

 

 

526 

 

 

 

762 

 

 

 

48 

 

 

0.34 

 

>90% – <100%

 

 

81 

 

 

 

749 

 

 

 

61 

 

 

1.67 

 

>100%

 

 

66 

 

 

 

742 

 

 

 

63 

 

 

1.54 

 

Total

 

$

2,955 

 

 

 

769 

 

 

 

39 

 

 

0.20 

 

 

(1)

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

N/A Not applicable.

 

 

-  40  -


 

THE CHARLES SCHWAB CORPORATION

Notes to Condensed Consolidated Financial Statements

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

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential

 

Home Equity

 

 

Real Estate

 

Loans and

December 31, 2014

 

Mortgages

 

Lines of Credit

Year of origination

 

 

 

 

 

 

 

 

 

Pre-2011

 

$

1,119 

 

 

$

2,244 

 

 

2011

 

 

588 

 

 

 

137 

 

 

2012

 

 

2,107 

 

 

 

147 

 

 

2013

 

 

3,047 

 

 

 

250 

 

 

2014

 

 

1,266 

 

 

 

177 

 

 

Total

 

$

8,127 

 

 

$

2,955 

 

 

Origination FICO

 

 

 

 

 

 

 

 

 

<620

 

$

10 

 

 

$

 -

 

 

620 – 679

 

 

97 

 

 

 

18 

 

 

680 – 739

 

 

1,366 

 

 

 

549 

 

 

>740

 

 

6,654 

 

 

 

2,388 

 

 

Total

 

$

8,127 

 

 

$

2,955 

 

 

Origination LTV

 

 

 

 

 

 

 

 

 

<70%

 

$

5,572 

 

 

$

1,979 

 

 

>70% – <90%

 

 

2,538 

 

 

 

955 

 

 

>90% – <100%

 

 

17 

 

 

 

21 

 

 

Total

 

$

8,127 

 

 

$

2,955 

 

 

 

 

 

5.Borrowings

 

See note “13 – Borrowings” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014. 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:

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

December 31,

 

 

2015

 

2014

Senior Notes

 

$

2,566 

 

$

1,567 

Senior Medium-Term Notes, Series A

 

 

249 

 

 

249 

Finance lease obligation

 

 

79 

 

 

83 

Total long-term debt

 

$

2,894 

 

$

1,899 

 

On March 10, 2015, CSC issued $625 million aggregate principal amount of Senior Notes that mature in 2018 and $375 million aggregate principal amount of Senior Notes that mature in 2025 under its universal shelf registration statement on file with the Securities and Exchange Commission (SEC). The Senior Notes due 2018 have a fixed interest rate of 1.50% with interest payable semi-annually. The Senior Notes due 2025 have a fixed interest rate of 3.00% with interest payable semi-annually.

 

-  41  -


 

THE CHARLES SCHWAB CORPORATION

Notes to Condensed Consolidated Financial Statements

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

(Unaudited)

 

Annual maturities on long-term debt outstanding at June 30, 2015 are as follows:

 

 

 

 

 

 

 

 

 

2015

 

 

 

 

$

353 

2016

 

 

 

 

 

2017

 

 

 

 

 

258 

2018

 

 

 

 

 

908 

2019

 

 

 

 

 

Thereafter

 

 

 

 

 

1,376 

Total maturities

 

 

 

 

 

2,910 

Unamortized discount, net

 

 

 

 

 

(16)

Total long-term debt

 

 

 

 

$

2,894 

 

 

 

6.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 June 30, 2015, the aggregate face amount of these LOCs totaled $240 million. There were no funds drawn under any of these LOCs at June 30, 2015. 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.

 

The Company has recorded a liability of $46 million for unfunded commitments related to investments in qualified affordable housing projects at June 30, 2015, which is included in accrued expenses and other liabilities on the balance sheet. These commitments are expected to be paid during the years from 2015 to 2020. The Company also recorded a corresponding asset for the funded and unfunded investments in qualified affordable housing projects of $56 million at June 30, 2015, which is included in other assets on the balance sheet.

 

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. Unless otherwise noted, the Company is unable to provide a reasonable estimate of any potential liability given the stage of proceedings in the matter.

 

With respect to all other pending matters, based on current information and consultation with counsel, it does not appear reasonably possible that the outcome of any such matter would be material to the financial condition, operating results or cash flows of the Company. 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. It may not be possible to reasonably estimate potential liability, if any, or a range of potential liability until the matter is closer to resolution – pending, for example, further proceedings, the outcome of key motions or appeals, or

-  42  -


 

THE CHARLES SCHWAB CORPORATION

Notes to Condensed Consolidated Financial Statements

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

(Unaudited)

 

discussions among the parties. Numerous issues may have to be developed, such as discovery of important factual matters and determination of threshold legal issues, which may include novel or unsettled questions of law. Reserves are established or adjusted or further disclosure and estimates of potential loss are provided as the matter progresses and more information becomes available.

 

Total Bond Market Fund Litigation: On August 28, 2008, a class action lawsuit was filed in the U.S. District Court for the Northern District of California on behalf of investors in the Schwab Total Bond Market Fund™. The lawsuit, which 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. On August 8, 2011, the court dismissed plaintiffs’ remaining claims with prejudice. Plaintiffs appealed to the Ninth Circuit, which issued a ruling on March 9, 2015 reversing the district court’s dismissal of the case and remanding the case for further proceedings. Defendants petitioned for Supreme Court review of the Ninth Circuit decision on July 27, 2015. Concurrently, the case is proceeding in trial court, with plaintiff having filed a fourth amended complaint on June 25, 2015, and defendants filing a motion to dismiss on July 24, 2015.

 

Other Regulatory Matters: 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. Following trial, in a decision issued June 7, 2013, the judge held that the firm had violated Regulation SHO and aided and abetted fraudulent trading activity by its customer, and ordered the firm and the customer to pay disgorgement and penalties in an amount which would not be material. The Company continues to dispute the allegations and is appealing the decision.

 

 

7.Offsetting Assets and Liabilities

 

Resale and repurchase agreements: Schwab enters into collateralized resale agreements principally with other broker-dealers, which could result in losses in the event the counterparty fails to purchase the securities held as collateral for the cash advanced and the fair value of the securities declines. To mitigate this risk, Schwab requires that the counterparty deliver securities to a custodian, to be held as collateral, with a fair value in excess of the resale price. Schwab also sets standards for the credit quality of the counterparty, monitors the fair value of the underlying securities as compared to the related receivable, including accrued interest, and requires additional collateral where deemed appropriate. The fair value of collateral received in connection with resale agreements that are available to be repledged or sold was $8.6 billion at June 30, 2015 and $10.4 billion at December 31, 2014. 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. For Schwab to repledge or sell this collateral, it would be required to deposit cash and/or securities of an equal amount into its segregated reserve bank accounts in order to meet its segregated cash and investment requirement. The Company’s resale agreements are not subject to master netting arrangements.

 

Securities lending: 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. Increases in security prices may cause the fair value of the securities loaned to exceed the amount of cash received as collateral. In the event the counterparty to these transactions does not return the loaned securities or provide additional cash collateral, the Company may be exposed to the risk of acquiring the securities at prevailing market prices in order to satisfy its client obligations. The Company mitigates this risk by requiring credit approvals for counterparties, monitoring the fair value of securities loaned, and requiring additional cash as collateral when necessary. The fair value of client securities pledged in securities lending transactions to other broker-dealers was $1.6 billion at June 30, 2015 and  $1.3 billion at December 31, 2014. The Company has also pledged a portion of its securities owned in connection with securities lending transactions to other broker-dealers. Additionally, the Company borrows securities from other broker-dealers to fulfill short sales by clients and delivers cash to the lender in exchange for the securities. The fair value of these borrowed securities was $399 million at June 30, 2015 and  $88 million at December 31, 2014. 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 consolidated balance sheets.

-  43  -


 

THE CHARLES SCHWAB CORPORATION

Notes to Condensed Consolidated Financial Statements

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

(Unaudited)

 

 

The following table presents information about the Company’s resale agreements and securities lending activity to enable the users of the Company’s financial statements to evaluate the potential effect of rights of setoff between these recognized assets and recognized liabilities at June 30, 2015 and December 31, 2014.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross Amounts

 

Net Amounts

 

Gross Amounts Not Offset in the

 

 

 

 

 

 

Gross

 

 

Offset in the

 

Presented in the

 

Consolidated Balance Sheet

 

 

 

 

 

 

Assets/

 

 

Consolidated

 

Consolidated

 

Counterparty

 

 

 

 

Net

 

 

 

Liabilities

 

 

Balance Sheet

 

Balance Sheet

 

Offsetting

 

Collateral

 

 

Amount

June 30, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Resale agreements (1)

 

$

8,422 

 

 

$

 -

 

 

$

8,422 

 

 

$

 -

 

 

$

(8,422)

(2)

 

$

 -

Securities borrowed (3)

 

 

533 

 

 

 

 -

 

 

 

533 

 

 

 

(410)

 

 

 

(123)

 

 

 

 -

Total

 

$

8,955 

 

 

$

 -

 

 

$

8,955 

 

 

$

(410)

 

 

$

(8,545)

 

 

$

 -

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities loaned (4,5)

 

$

1,894 

 

 

$

 -

 

 

$

1,894 

 

 

$

(410)

 

 

$

(1,361)

 

 

$

123 

Total

 

$

1,894 

 

 

$

 -

 

 

$

1,894 

 

 

$

(410)

 

 

$

(1,361)

 

 

$

123 

December 31, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Resale agreements (1)

 

$

10,186 

 

 

$

 -

 

 

$

10,186 

 

 

$

 -

 

 

$

(10,186)

(2)

 

$

 -

Securities borrowed (3)

 

 

187 

 

 

 

 -

 

 

 

187 

 

 

 

(69)

 

 

 

(117)

 

 

 

Total

 

$

10,373 

 

 

$

 -

 

 

$

10,373 

 

 

$

(69)

 

 

$

(10,303)

 

 

$

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities loaned (4,5)

 

$

1,477 

 

 

$

 -

 

 

$

1,477 

 

 

$

(69)

 

 

$

(1,293)

 

 

$

115 

Total

 

$

1,477 

 

 

$

 -

 

 

$

1,477 

 

 

$

(69)

 

 

$

(1,293)

 

 

$

115 

 

 

 

(1)

Included in cash and investments segregated and on deposit for regulatory purposes in the Company’s consolidated balance sheets.

(2)

Actual collateral was greater than 102% of the related assets.

(3)

Included in receivables from brokers, dealers, and clearing organizations in the Company’s consolidated balance sheets.

(4)

Included in payables to brokers, dealers, and clearing organizations in the Company’s consolidated balance sheets.

(5)

Securities loaned are predominantly comprised of equity securities with overnight and continuous remaining contractual maturities.

 

 

 

8.Fair Values of Assets and Liabilities

 

Assets and liabilities recorded at fair value

 

The Company uses the market and income approaches to determine the fair value of assets and liabilities. When available, the Company uses quoted prices in active markets to measure the fair value of assets and liabilities. When utilizing market data and bid-ask spread, the Company uses the price within the bid-ask spread that best represents fair value. When quoted prices do not exist, the Company uses prices obtained from independent third-party pricing services to measure the fair value of investment assets. The Company generally obtains prices from at least three independent pricing sources for assets recorded at fair value and may obtain up to five prices on assets with higher risk of limited observable information, such as non-agency residential mortgage-backed securities. The Company’s primary independent pricing service provides prices based on observable trades and discounted cash flows that incorporate observable information such as yields for similar types of securities (a benchmark interest rate plus observable spreads) and weighted-average maturity for the same or similar “to-be-issued” securities. The Company compares the prices obtained from its primary independent pricing service to the prices obtained from the additional independent pricing services to determine if the price obtained from the primary independent pricing service is reasonable. The Company does not adjust the prices received from independent third-party pricing services unless such prices are inconsistent with the definition of fair value and result in a material difference in the recorded amounts.

 

-  44  -


 

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 described below. The Company’s financial instruments not recorded at fair value but for which fair value can be approximated and disclosed include:

 

·

Cash and cash equivalents are short-term in nature and accordingly are recorded at amounts that approximate fair value.

 

·

Cash and investments segregated and on deposit for regulatory purposes include cash and securities purchased under resale agreements. Securities purchased under resale agreements are short-term in nature and are backed by collateral that both exceeds the carrying value of the resale agreement and is highly liquid in nature. Accordingly, the carrying value approximates fair value.

 

·

Receivables from/payables to brokers, dealers, and clearing organizations are recorded at contractual amounts and historically have been settled at those values and are short-term in nature, and therefore approximate fair value.

 

·

Receivables from/payables to brokerage clientsnet are recorded at contractual amounts and historically have been settled at those values and are short-term in nature, and therefore approximate fair value.

 

·

Securities held to maturity – The fair values of securities held to maturity are obtained using an independent third-party pricing service similar to investment assets recorded at fair value as discussed above.

 

·

Bank loans – The fair values of the Company’s residential real estate mortgages and HELOCs are estimated based on prices of mortgage-backed securities collateralized by similar types of loans. Personal loans secured by securities are short-term, variable interest rate loans; accordingly, the carrying values of these loans approximate their fair values.

 

·

Financial instruments included in other assets primarily consist of cost method investments and Federal Home Loan Bank (FHLB) stock, whose carrying values approximate their fair values. FHLB stock is recorded at par, which approximates fair value.

 

·

Bank deposits have no stated maturity and are recorded at the amount payable on demand as of the balance sheet date. The Company considers the carrying value of these deposits to approximate their fair values.

 

·

Financial instruments included in accrued expenses and other liabilities consist of commercial paper, drafts payable and certain amounts due under contractual obligations which are short-term in nature and accordingly are recorded at amounts that approximate fair value.

 

·

Long-term debt – Except for the finance lease obligation, the fair values of long-term debt are estimated using indicative, non-binding quotes from independent brokers. The Company validates indicative prices for its debt through comparison to other independent non-binding quotes. The finance lease obligation is recorded at carrying value, which approximates fair value.

 

For a description of the fair value hierarchy, see “Note 2 – Summary of Significant Accounting Policies” in the Company’s annual report on Form 10-K for the year ended December 31, 2014. There were no significant changes in these policies and methodologies during the first half of 2015. The Company did not transfer any assets or liabilities between Level 1, Level 2, or Level 3 during the six months ended June 30, 2015, or the year ended December 31, 2014. In addition, the Company did not adjust prices received from the primary independent third-party pricing service at June 30, 2015 or December 31, 2014.

 

-  45  -


 

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 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

June 30, 2015

(Level 1)

 

(Level 2)

 

(Level 3)

 

Fair Value

Cash equivalents:

 

 

 

  

 

 

 

 

 

 

  

 

 

 

 

 

 

 

 

Money market funds

 

$

758 

 

 

 

$

 -

 

 

 

$

 -

 

 

 

$

758 

 

Commercial paper

 

 

 -

 

 

 

 

417 

 

 

 

 

 -

 

 

 

 

417 

 

Total cash equivalents

 

 

758 

 

 

 

 

417 

 

 

 

 

 -

 

 

 

 

1,175 

 

Investments segregated and on deposit for regulatory

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

purposes:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Certificates of deposit

 

 

 -

 

 

 

 

3,077 

 

 

 

 

 -

 

 

 

 

3,077 

 

U.S. Government securities

 

 

 -

 

 

 

 

1,858 

 

 

 

 

 -

 

 

 

 

1,858 

 

Total investments segregated and on deposit for

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

regulatory purposes

 

 

 -

 

 

 

 

4,935 

 

 

 

 

 -

 

 

 

 

4,935 

 

Other securities owned:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Schwab Funds® money market funds

 

 

248 

 

 

 

 

 -

 

 

 

 

 -

 

 

 

 

248 

 

Equity and bond mutual funds

 

 

292 

 

 

 

 

 -

 

 

 

 

 -

 

 

 

 

292 

 

State and municipal debt obligations

 

 

 -

 

 

 

 

43 

 

 

 

 

 -

 

 

 

 

43 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

other securities

 

 

 

 

 

 

26 

 

 

 

 

 -

 

 

 

 

28 

 

Total other securities owned

 

 

542 

 

 

 

 

69 

 

 

 

 

 -

 

 

 

 

611 

 

Securities available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. agency mortgage-backed securities

 

 

 -

 

 

 

 

20,825 

 

 

 

 

 -

 

 

 

 

20,825 

 

Asset-backed securities

 

 

 -

 

 

 

 

21,670 

 

 

 

 

 -

 

 

 

 

21,670 

 

Corporate debt securities

 

 

 -

 

 

 

 

9,554 

 

 

 

 

 -

 

 

 

 

9,554 

 

U.S. agency notes

 

 

 -

 

 

 

 

5,291 

 

 

 

 

 -

 

 

 

 

5,291 

 

Treasury securities

 

 

 -

 

 

 

 

3,831 

 

 

 

 

 -

 

 

 

 

3,831 

 

Certificates of deposit

 

 

 -

 

 

 

 

1,924 

 

 

 

 

 -

 

 

 

 

1,924 

 

Non-agency commercial mortgage-backed securities

 

 

 -

 

 

 

 

307 

 

 

 

 

 -

 

 

 

 

307 

 

Other securities

 

 

 -

 

 

 

 

13 

 

 

 

 

 -

 

 

 

 

13 

 

Total securities available for sale

 

 

 -

 

 

 

 

63,415 

 

 

 

 

 -

 

 

 

 

63,415 

 

Total

 

$

1,300 

 

 

 

$

68,836 

 

 

 

$

 -

 

 

 

$

70,136 

 

 

-  46  -


 

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, 2014

(Level 1)

 

(Level 2)

 

(Level 3)

 

Fair Value

Cash equivalents:

 

 

 

  

 

 

 

 

 

 

  

 

 

 

 

 

 

 

 

Money market funds

 

$

2,142 

 

 

 

$

 -

 

 

 

$

 -

 

 

 

$

2,142 

 

Commercial paper

 

 

 -

 

 

 

 

32 

 

 

 

 

 -

 

 

 

 

32 

 

Total cash equivalents

 

 

2,142 

 

 

 

 

32 

 

 

 

 

 -

 

 

 

 

2,174 

 

Investments segregated and on deposit for regulatory

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

purposes:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Certificates of deposit

 

 

 -

 

 

 

 

4,125 

 

 

 

 

 -

 

 

 

 

4,125 

 

U.S. Government securities

 

 

 -

 

 

 

 

2,186 

 

 

 

 

 -

 

 

 

 

2,186 

 

Total investments segregated and on deposit for

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

regulatory purposes

 

 

 -

 

 

 

 

6,311 

 

 

 

 

 -

 

 

 

 

6,311 

 

Other securities owned:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Schwab Funds® money market funds

 

 

224 

 

 

 

 

 -

 

 

 

 

 -

 

 

 

 

224 

 

Equity and bond mutual funds

 

 

215 

 

 

 

 

 -

 

 

 

 

 -

 

 

 

 

215 

 

State and municipal debt obligations

 

 

 -

 

 

 

 

51 

 

 

 

 

 -

 

 

 

 

51 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

other securities

 

 

 

 

 

 

24 

 

 

 

 

 -

 

 

 

 

26 

 

Total other securities owned

 

 

441 

 

 

 

 

75 

 

 

 

 

 -

 

 

 

 

516 

 

Securities available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Asset-backed securities

 

 

 -

 

 

 

 

19,366 

 

 

 

 

 -

 

 

 

 

19,366 

 

U.S. agency mortgage-backed securities

 

 

 -

 

 

 

 

18,717 

 

 

 

 

 -

 

 

 

 

18,717 

 

Corporate debt securities

 

 

 -

 

 

 

 

8,045 

 

 

 

 

 -

 

 

 

 

8,045 

 

U.S. agency notes

 

 

 -

 

 

 

 

3,795 

 

 

 

 

 -

 

 

 

 

3,795 

 

Treasury securities

 

 

 -

 

 

 

 

2,994 

 

 

 

 

 -

 

 

 

 

2,994 

 

Certificates of deposit

 

 

 -

 

 

 

 

1,534 

 

 

 

 

 -

 

 

 

 

1,534 

 

Non-agency commercial mortgage-backed securities

 

 

 -

 

 

 

 

317 

 

 

 

 

 -

 

 

 

 

317 

 

Other securities

 

 

 -

 

 

 

 

15 

 

 

 

 

 -

 

 

 

 

15 

 

Total securities available for sale

 

 

 -

 

 

 

 

54,783 

 

 

 

 

 -

 

 

 

 

54,783 

 

Total

 

$

2,583 

 

 

 

$

61,201 

 

 

 

$

 -

 

 

 

$

63,784 

 

 

-  47  -


 

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

 

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

 

June 30, 2015

 

Amount

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Fair Value

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

7,842 

 

 

$

 -

 

 

  

$

7,842 

 

 

  

$

 -

 

 

$

7,842 

  

Cash and investments segregated and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

on deposit for regulatory purposes

 

 

12,949 

 

 

 

 -

 

 

  

 

12,949 

 

 

  

 

 -

 

 

 

12,949 

 

Receivables from brokers, dealers, and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

clearing organizations

 

 

917 

 

 

 

 -

 

 

  

 

917 

 

 

  

 

 -

 

 

 

917 

 

Receivables from brokerage clients – net

 

 

16,618 

 

 

 

 -

 

 

  

 

16,618 

 

 

  

 

 -

 

 

 

16,618 

  

Securities held to maturity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. agency mortgage-backed securities

 

 

36,524 

 

 

 

 -

 

 

  

 

36,768 

 

 

  

 

 -

 

 

 

36,768 

  

Non-agency commercial mortgage-backed

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  securities

 

 

1,000 

 

 

 

 -

 

 

  

 

992 

 

 

  

 

 -

 

 

 

992 

  

Treasury securities

 

 

223 

 

 

 

 -

 

 

 

 

219 

 

 

 

 

 -

 

 

 

219 

 

Total securities held to maturity

 

 

37,747 

 

 

 

 -

 

 

  

 

37,979 

 

 

  

 

 -

 

 

 

37,979 

  

Bank loans: (1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential real estate mortgages

 

 

8,236 

 

 

 

 -

 

 

  

 

8,263 

 

 

  

 

 -

 

 

 

8,263 

  

Home equity loans and lines of credit

 

 

2,843 

 

 

 

 -

 

 

  

 

2,920 

 

 

  

 

 -

 

 

 

2,920 

  

Personal loans secured by securities

 

 

2,919 

 

 

 

 -

 

 

  

 

2,919 

 

 

  

 

 -

 

 

 

2,919 

  

Other

 

 

52 

 

 

 

 -

 

 

  

 

52 

 

 

  

 

 -

 

 

 

52 

  

Total bank loans

 

 

14,050 

 

 

 

 -

 

 

  

 

14,154 

 

 

  

 

 -

 

 

 

14,154 

  

Other assets

 

 

125 

 

 

 

 -

 

 

  

 

125 

 

 

  

 

 -

 

 

 

125 

  

Total

 

$

90,248 

 

 

$

 -

 

 

  

$

90,584 

 

 

  

$

 -

 

 

$

90,584 

  

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bank deposits

 

$

112,911 

 

 

$

 -

 

 

  

$

112,911 

 

 

  

$

 -

 

 

$

112,911 

  

Payables to brokers, dealers, and clearing

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

organizations

 

 

2,518 

 

 

 

 -

 

 

  

 

2,518 

 

 

  

 

 -

 

 

 

2,518 

 

Payables to brokerage clients

 

 

31,480 

 

 

 

 -

 

 

  

 

31,480 

 

 

  

 

 -

 

 

 

31,480 

  

Accrued expenses and other liabilities

 

 

468 

 

 

 

 -

 

 

  

 

468 

 

 

  

 

 -

 

 

 

468 

  

Long-term debt

 

 

2,894 

 

 

 

 -

 

 

  

 

3,010 

 

 

  

 

 -

 

 

 

3,010 

  

Total

 

$

150,271 

 

 

$

 -

 

 

  

$

150,387 

 

 

  

$

 -

 

 

$

150,387 

  

 

(1)

The carrying value of bank loans excludes the allowance for loan losses of $36 million at June 30, 2015.

 

-  48  -


 

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, 2014

 

Amount

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Fair Value

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

9,189 

 

 

$

 -

 

 

  

$

9,189 

 

 

  

$

 -

 

 

$

9,189 

  

Cash and investments segregated and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

on deposit for regulatory purposes

 

 

14,466 

 

 

 

 -

 

 

  

 

14,466 

 

 

  

 

 -

 

 

 

14,466 

 

Receivables from brokers, dealers, and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

clearing organizations

 

 

469 

 

 

 

 -

 

 

  

 

469 

 

 

  

 

 -

 

 

 

469 

 

Receivables from brokerage clients – net

 

 

15,666 

 

 

 

 -

 

 

  

 

15,666 

 

 

  

 

 -

 

 

 

15,666 

  

Securities held to maturity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. agency mortgage-backed securities

 

 

33,388 

 

 

 

 -

 

 

  

 

33,745 

 

 

  

 

 -

 

 

 

33,745 

  

Non-agency commercial mortgage-backed

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

securities

 

 

1,001 

 

 

 

 -

 

 

 

 

998 

 

 

 

 

 -

 

 

 

998 

 

Total securities held to maturity

 

 

34,389 

 

 

 

 -

 

 

  

 

34,743 

 

 

  

 

 -

 

 

 

34,743 

  

Bank loans: (1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential real estate mortgages

 

 

8,127 

 

 

 

 -

 

 

  

 

8,158 

 

 

  

 

 -

 

 

 

8,158 

  

Home equity loans and lines of credit

 

 

2,955 

 

 

 

 -

 

 

  

 

3,026 

 

 

  

 

 -

 

 

 

3,026 

  

Personal loans secured by securities

 

 

2,320 

 

 

 

 -

 

 

  

 

2,320 

 

 

  

 

 -

 

 

 

2,320 

  

Other

 

 

39 

 

 

 

 -

 

 

  

 

38 

 

 

  

 

 -

 

 

 

38 

  

Total bank loans

 

 

13,441 

 

 

 

 -

 

 

  

 

13,542 

 

 

  

 

 -

 

 

 

13,542 

  

Other assets

 

 

76 

 

 

 

 -

 

 

  

 

76 

 

 

  

 

 -

 

 

 

76 

  

Total

 

$

87,696 

 

 

$

 -

 

 

 

$

88,151 

 

 

 

$

 -

 

 

$

88,151 

  

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bank deposits

 

$

102,815 

 

 

$

 -

 

 

  

$

102,815 

 

 

  

$

 -

 

 

$

102,815 

  

Payables to brokers, dealers, and clearing

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

organizations

 

 

2,004 

 

 

 

 -

 

 

  

 

2,004 

 

 

  

 

 -

 

 

 

2,004 

 

Payables to brokerage clients

 

 

34,305 

 

 

 

 -

 

 

  

 

34,305 

 

 

  

 

 -

 

 

 

34,305 

  

Accrued expenses and other liabilities

 

 

687 

 

 

 

 -

 

 

  

 

687 

 

 

  

 

 -

 

 

 

687 

  

Long-term debt

 

 

1,899 

 

 

 

 -

 

 

  

 

2,010 

 

 

  

 

 -

 

 

 

2,010 

  

Total

 

$

141,710 

 

 

$

 -

 

 

  

$

141,821 

 

 

  

$

 -

 

 

$

141,821 

  

 

(1)

The carrying value of bank loans excludes the allowance for loan losses of  $42 million at December 31, 2014.

 

 

 

9.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 are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30,

 

 

 

 

2015

 

 

 

 

 

 

 

 

2014

 

 

 

 

 

 

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

 

$

(91)

  

$

34 

 

$

(57)

 

 

$

126 

  

$

(47)

 

$

79 

 

Other reclassifications included in

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

other revenue

 

 

 -

 

 

 -

 

 

 -

 

 

 

(1)

 

 

 -

 

 

(1)

 

Change in net unrealized (loss) gain on

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

 

 

securities available for sale

 

 

(91)

 

 

34 

 

 

(57)

 

 

 

125 

 

 

(47)

 

 

78 

 

Other comprehensive (loss) income

 

$

(91)

 

$

34 

 

$

(57)

 

 

$

125 

 

$

(47)

 

$

78 

 

 

 

-  49  -


 

THE CHARLES SCHWAB CORPORATION

Notes to Condensed Consolidated Financial Statements

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

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30,

 

 

 

 

2015

 

 

 

 

 

 

 

 

2014

 

 

 

 

 

 

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

 

$

16 

  

$

(7)

 

$

 

 

$

285 

  

$

(106)

 

$

179 

 

Other reclassifications included in

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

other revenue

 

 

 -

 

 

 -

 

 

 -

 

 

 

(2)

 

 

 -

 

 

(2)

 

Change in net unrealized gain on

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

 

 

securities available for sale

 

 

16 

 

 

(7)

 

 

 

 

 

283 

 

 

(106)

 

 

177 

 

Other comprehensive income

 

$

16 

 

$

(7)

 

$

 

 

$

283 

 

$

(106)

 

$

177 

 

 

Accumulated other comprehensive income balances are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

 

 

 

 

Total

 

 

 

 

 

Accumulated Other

 

 

 

 

 

Comprehensive Income

Balance at December 31, 2013

 

 

 

 

 

 

 

 

$

 

Net unrealized gain on securities available for sale

 

 

 

 

 

 

 

 

 

177 

 

Balance at June 30, 2014

 

 

 

 

 

 

 

 

$

186 

 

Balance at December 31, 2014

 

 

 

 

 

 

 

 

$

165 

 

Net unrealized gain on securities available for sale

 

 

 

 

 

 

 

 

 

 

Balance at June 30, 2015

 

 

 

 

 

 

 

 

$

174 

 

 

 

 

10.Earnings Per Common Share

 

Basic 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

 

Six Months Ended

 

 

June 30,

 

June 30,

 

 

2015

 

2014

 

2015

 

2014

Net income

 

$

353 

  

$

324 

  

$

655 

 

$

650 

Preferred stock dividends and other (1)

 

 

(23)

 

 

(22)

  

 

(34)

 

 

(30)

Net income available to common stockholders

 

$

330 

  

$

302 

  

$

621 

 

$

620 

Weighted-average common shares outstanding — basic

 

 

1,314 

  

 

1,302 

  

 

1,313 

 

 

1,301 

Common stock equivalent shares related to stock incentive plans

 

 

12 

  

 

11 

  

 

12 

 

 

11 

Weighted-average common shares outstanding — diluted (2)

 

 

1,326 

  

 

1,313 

  

 

1,325 

 

 

1,312 

Basic EPS

 

$

  .25

  

$

  .23

  

$

  .47

 

$

  .47

Diluted EPS

 

$

  .25

  

$

  .23

  

$

  .47

 

$

  .47

 

 

 

(1)

Includes preferred stock dividends and undistributed earnings and dividends allocated to non-vested restricted stock units.

(2)

Antidilutive stock options and restricted stock awards excluded from the calculation of diluted EPS totaled 15 million and 16 million shares for the second quarters of 2015 and 2014, respectively, and 16 million and 17 million shares for the first halves of 2015 and 2014, respectively.

 

-  50  -


 

THE CHARLES SCHWAB CORPORATION

Notes to Condensed Consolidated Financial Statements

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

(Unaudited)

 

 

 

11.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). Schwab Bank is subject to supervision and regulation by the Office of the Comptroller of the Currency (the OCC), as its primary regulator, the Federal Deposit Insurance Corporation, as its deposit insurer, and the Consumer Financial Protection Bureau. CSC is required to serve as a source of strength for Schwab Bank. Prior to January 1, 2015, CSC, as a savings and loan holding company, was not subject to certain statutory capital requirements. Beginning on January 1, 2015, CSC became subject to new capital requirements set by the Federal Reserve.

 

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. CSC and Schwab Bank are 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 CSC and Schwab Bank. At June 30, 2015, CSC and Schwab Bank met the capital level requirements.

 

The regulatory capital and ratios for CSC and Schwab Bank at June 30, 2015 are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Minimum to be

 

Minimum Capital

 

 

Actual

 

Well Capitalized

 

Requirement

 

 

Amount

 

Ratio

 

Amount

 

Ratio

 

Amount

  

Ratio

CSC

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Equity Tier 1 Risk-Based Capital

 

$

10,140 

 

14.8 

 

 

N/A

 

 

 

 

$

3,094 

 

4.5 

Tier 1 Risk-Based Capital

 

$

11,014 

 

16.0 

 

 

N/A

 

 

 

 

$

4,125 

  

6.0 

Total Risk-Based Capital

 

$

11,051 

 

16.1 

 

 

N/A

 

 

 

 

$

5,501 

  

8.0 

Tier 1 Leverage

 

$

11,014 

 

7.0 

 

 

N/A

 

 

 

 

$

6,342 

  

4.0 

Schwab Bank

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Equity Tier 1 Risk-Based Capital

 

$

8,365 

 

17.7 

 

$

3,071 

 

6.5 

 

$

2,126 

 

4.5 

Tier 1 Risk-Based Capital

 

$

8,365 

 

17.7 

 

$

3,779 

 

8.0 

 

$

2,834 

  

6.0 

Total Risk-Based Capital

 

$

8,401 

 

17.8 

 

$

4,724 

 

10.0 

 

$

3,779 

  

8.0 

Tier 1 Leverage

 

$

8,365 

 

7.0 

 

$

5,962 

 

5.0 

 

$

4,770 

  

4.0 

 

N/A Not applicable.

 

Based on its regulatory capital ratios at June 30, 2015, Schwab Bank is considered well capitalized (the highest category) pursuant to banking regulatory guidelines. There are no conditions or events since June 30, 2015, 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), 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.

 

-  51  -


 

THE CHARLES SCHWAB CORPORATION

Notes to Condensed Consolidated Financial Statements

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

(Unaudited)

 

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 June 30, 2015 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

 

 

$

1,650 

 

  

 

 

 

 

$

0.250 

 

  

 

$

353 

 

  

 

$

1,297 

 

  

 

$

767 

  

optionsXpress, Inc.

 

 

$

131 

 

  

 

31 

 

 

 

$

 

  

 

$

 

  

 

$

123 

 

  

 

$

110 

  

 

 

 

12.Segment Information

 

The Company’s two reportable segments are Investor Services and Advisor Services. The Company structures its operating segments according to its clients and the services provided to those clients. The Investor Services segment provides retail brokerage and banking services to individual investors, 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 extraordinary or significant non-recurring items and results of discontinued operations. Segment assets and liabilities are not used for evaluating segment performance or in deciding how to allocate resources to segments. There are no revenues from transactions between the segments.

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

Investor Services

 

Advisor Services

 

Unallocated

 

Total

Three Months Ended June 30,

2015

 

2014

 

2015

 

2014

 

2015

 

2014

 

2015

 

2014

Net Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Asset management and administration fees

$

474 

  

$

441 

  

$

196 

  

$

191 

  

$

 -

  

$

 -

  

$

670 

  

$

632 

Net interest revenue

 

524 

  

 

504 

  

 

88 

  

 

58 

  

 

 -

  

 

 -

  

 

612 

  

 

562 

Trading revenue

 

135 

  

 

145 

  

 

68 

  

 

67 

  

 

 -

 

 

 -

  

 

203 

  

 

212 

Other

 

58 

  

 

47 

  

 

21 

  

 

18 

  

 

 -

  

 

 -

  

 

79 

  

 

65 

Provision for loan losses

 

 

 

 

 

 -

 

 

 

 

 -

  

 

 -

  

 

 

 

Total net revenues

 

1,193 

  

 

1,143 

  

 

373 

  

 

335 

  

 

 -

  

 

 -

  

 

1,566 

  

 

1,478 

Expenses Excluding Interest

 

770 

  

 

734 

  

 

229 

  

 

223 

  

 

 -

  

 

 -

 

 

999 

  

 

957 

Income before taxes on income

$

423 

  

$

409 

  

$

144 

  

$

112 

  

$

 -

  

$

 -

  

$

567 

  

$

521 

 

 

-  52  -


 

THE CHARLES SCHWAB CORPORATION

Notes to Condensed Consolidated Financial Statements

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

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

Investor Services

 

Advisor Services

 

Unallocated

 

Total

Six Months Ended June 30,

2015

 

2014

 

2015

 

2014

 

2015

 

2014

 

2015

 

2014

Net Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Asset management and administration fees

$

928 

  

$

869 

  

$

386 

  

$

374 

  

$

 -

  

$

 -

  

$

1,314 

  

$

1,243 

Net interest revenue

 

1,034 

  

 

999 

  

 

166 

  

 

116 

  

 

 -

  

 

 -

  

 

1,200 

  

 

1,115 

Trading revenue

 

286 

  

 

316 

  

 

144 

  

 

143 

  

 

 -

 

 

 -

  

 

430 

  

 

459 

Other

 

103 

  

 

98 

  

 

39 

  

 

35 

  

 

 -

  

 

 -

  

 

142 

  

 

133 

Provision for loan losses

 

 

 

 

 

 -

 

 

 

 

 -

  

 

 -

  

 

 

 

Total net revenues

 

2,357 

  

 

2,287 

  

 

735 

  

 

669 

  

 

 -

  

 

 -

  

 

3,092 

  

 

2,956 

Expenses Excluding Interest

 

1,564 

  

 

1,472 

  

 

477 

  

 

441 

  

 

 -

  

 

 -

  

 

2,041 

  

 

1,913 

Income before taxes on income

$

793 

  

$

815 

  

$

258 

  

$

228 

  

$

 -

  

$

 -

  

$

1,051 

  

$

1,043 

 

 

 

13.Subsequent Event

 

On August 3, 2015, the Company issued and sold 24 million depositary shares, each representing a 1/40th ownership interest in a share of 6.00% non-cumulative perpetual preferred stock, Series C, $0.01 par value, with a liquidation preference of $1,000 per share (equivalent to $25 per depositary share) (Series C Preferred Stock).  The Series C Preferred Stock has a fixed dividend rate of 6.00%. Net proceeds received from the sale were $581 million and are being used to support balance sheet growth, including the migration of certain client balances from sweep money market funds into Schwab Bank.

 

 

 

-  53  -


 

THE CHARLES SCHWAB CORPORATION

 

 

 

 

Item 4.Controls and Procedures

 

Evaluation of disclosure controls and procedures: The management of the Company, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of June 30, 2015. 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 June 30, 2015.

 

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 June 30, 2015, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

 

-  54  -


 

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 – 6. Commitments and Contingencies.”

 

 

Item 1A.Risk Factors

 

During the first half of 2015, 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, 2014.

 

 

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 second quarter of 2015:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Number of 

 

Approximate Dollar

 

 

 

 

 

 

 

 

 

Shares Purchased

 

Value of Shares that

 

 

Total Number of

 

Average

 

as Part of Publicly

 

May Yet be Purchased

 

 

Shares Purchased

 

Price Paid

 

Announced Program (1) 

 

Under the Program

Month

 

(in thousands)

 

per Share

 

(in thousands)

 

(in millions)

April:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Share repurchase program (1)

 

 

 -

 

  

$

 -

  

 

 -

 

  

 

$

596 

 

Employee transactions (2)

 

 

 

  

$

30.16 

  

 

N/A

 

  

 

 

N/A

 

May:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Share repurchase program (1)

 

 

 -

 

  

$

 -

  

 

 -

 

  

 

$

596 

 

Employee transactions (2)

 

 

 

  

$

31.05 

  

 

N/A

 

  

 

 

N/A

 

June:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Share repurchase program (1)

 

 

 -

 

  

$

 -

  

 

 -

 

  

 

$

596 

 

Employee transactions (2)

 

 

 

  

$

31.82 

  

 

N/A

 

  

 

 

N/A

 

Total:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Share repurchase program (1)

 

 

 -

 

  

$

 -

 

 

 -

 

  

 

$

596 

 

Employee transactions (2)

 

 

15 

 

  

$

30.96 

 

 

N/A

 

  

 

 

N/A

 

 

 

 

(1)

There were no share repurchases under the Share Repurchase Program during the second quarter. There were two authorizations under this program by CSC’s Board of Directors, each covering up to $500 million of common stock that were publicly announced by the 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.

 

 

-  55  -


 

THE CHARLES SCHWAB CORPORATION

 

 

 

 

Item 3.Defaults Upon Senior Securities

 

None.

 

 

Item 4.Mine Safety Disclosures

 

Not applicable.

 

 

Item 5.Other Information

 

None.

 

 

-  56  -


 

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

 

 

 

 

10.365

The Charles Schwab Corporation Corporate Executive Bonus Plan, restated to include amendments approved at the Annual Meeting of Stockholders on May 13, 2015 (supersedes Exhibit 10.331).

(1)

 

 

 

10.366

Credit Agreement (364 – Day Commitment) dated as of June 5, 2015, between the Registrant and financial institutions therein (supersedes Exhibit 10.363)

 

 

 

 

12.1

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

 

 

 

 

31.1

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

 

 

 

 

31.2

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

 

 

 

 

32.1

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

(1)

 

 

 

32.2

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

(1)

 

 

 

101.INS

XBRL Instance Document

(2)

 

 

 

101.SCH

XBRL Taxonomy Extension Schema

(2)

 

 

 

101.CAL

XBRL Taxonomy Extension Calculation

(2)

 

 

 

101.DEF

XBRL Extension Definition

(2)

 

 

 

101.LAB

XBRL Taxonomy Extension Label

(2)

 

 

 

101.PRE

XBRL Taxonomy Extension Presentation

(2)

 

 

 

(1)

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

 

 

 

(2)

Attached as Exhibit 101 to this Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2015 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.

 

 

 

 

-  57  -


 

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:

August 6, 2015

 

/s/ Joseph R. Martinetto

 

 

 

Joseph R. Martinetto

 

 

 

Senior Executive Vice President and

 

 

 

Chief Financial Officer

 

 

 

-  58  -