TABLE OF CONTENTS
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Note 1. | | |
Note 2. | | |
Note 3. | | |
Note 4. | | |
Note 5. | | |
Note 6. | | |
Note 7. | | |
Note 8. | | |
Note 9. | | |
Note 10. | | |
Note 11. | | |
Note 12. | | |
Note 13. | | |
Note 14. | | |
Note 15. | | |
Note 16. | | |
Note 17. | | |
Note 18. | | |
Note 19. | | |
Note 20. | | |
Note 21. | | |
Note 22. | | |
Note 23. | | |
Note 24. | | |
Note 25. | | |
Note 26. | | |
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THE CHARLES SCHWAB CORPORATION
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Consolidated Statements of Income | | | | | |
(In Millions, Except Per Share Amounts) | | | | | |
| | | | | |
Year Ended December 31, | 2021 | | 2020 | | 2019 |
Net Revenues | | | | | |
Interest revenue | $ | 8,506 | | | $ | 6,531 | | | $ | 7,580 | |
Interest expense | (476) | | | (418) | | | (1,064) | |
Net interest revenue | 8,030 | | | 6,113 | | | 6,516 | |
Asset management and administration fees (1) | 4,274 | | | 3,475 | | | 3,211 | |
Trading revenue | 4,152 | | | 1,416 | | | 752 | |
Bank deposit account fees | 1,315 | | | 355 | | | — | |
Other | 749 | | | 332 | | | 242 | |
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| | | | | |
Total net revenues | 18,520 | | | 11,691 | | | 10,721 | |
Expenses Excluding Interest | | | | | |
Compensation and benefits | 5,450 | | | 3,954 | | | 3,320 | |
Professional services | 994 | | | 843 | | | 702 | |
Occupancy and equipment | 976 | | | 703 | | | 559 | |
Advertising and market development | 485 | | | 326 | | | 307 | |
Communications | 587 | | | 353 | | | 253 | |
Depreciation and amortization | 549 | | | 414 | | | 322 | |
Amortization of acquired intangible assets | 615 | | | 190 | | | 27 | |
Regulatory fees and assessments | 275 | | | 163 | | | 122 | |
Other | 876 | | | 445 | | | 261 | |
Total expenses excluding interest | 10,807 | | | 7,391 | | | 5,873 | |
Income before taxes on income | 7,713 | | | 4,300 | | | 4,848 | |
Taxes on income | 1,858 | | | 1,001 | | | 1,144 | |
Net Income | 5,855 | | | 3,299 | | | 3,704 | |
Preferred stock dividends and other | 495 | | | 256 | | | 178 | |
Net Income Available to Common Stockholders | $ | 5,360 | | | $ | 3,043 | | | $ | 3,526 | |
Weighted-Average Common Shares Outstanding: | | | | | |
Basic | 1,887 | | | 1,429 | | | 1,311 | |
Diluted | 1,897 | | | 1,435 | | | 1,320 | |
Earnings Per Common Shares Outstanding (2): | | | | | |
Basic | $ | 2.84 | | | $ | 2.13 | | | $ | 2.69 | |
Diluted | $ | 2.83 | | | $ | 2.12 | | | $ | 2.67 | |
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(1) Includes fee waivers of $326 million and $127 million for the years ended December 31, 2021 and 2020, respectively.
(2) For the years ended December 31, 2021 and 2020, the Company had voting and nonvoting common stock outstanding. As the participation rights, including dividend and liquidation rights, are identical between the voting and nonvoting stock classes, basic and diluted earnings per share are the same for each class. See Notes 19 and 25 for additional information.
See Notes to Consolidated Financial Statements.
THE CHARLES SCHWAB CORPORATION
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Consolidated Statements of Comprehensive Income | | | | | |
(In Millions) | | | | | |
| | | | | |
Year Ended December 31, | 2021 | | 2020 | | 2019 |
Net income | $ | 5,855 | | | $ | 3,299 | | | $ | 3,704 | |
Other comprehensive income (loss), before tax: | | | | | |
Change in net unrealized gain (loss) on available for sale securities: | | | | | |
Net unrealized gain (loss) | (8,521) | | | 6,961 | | | 430 | |
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Other reclassifications included in other revenue | (4) | | | (4) | | | (6) | |
Change in net unrealized gain (loss) on held to maturity securities: | | | | | |
| | | | | |
Amortization of amounts previously recorded upon transfer to held to maturity from available for sale | — | | | — | | | 36 | |
Other | (11) | | | 8 | | | (14) | |
Other comprehensive income (loss), before tax | (8,536) | | | 6,965 | | | 446 | |
Income tax effect | 2,033 | | | (1,659) | | | (106) | |
Other comprehensive income (loss), net of tax | (6,503) | | | 5,306 | | | 340 | |
Comprehensive Income (Loss) | $ | (648) | | | $ | 8,605 | | | $ | 4,044 | |
See Notes to Consolidated Financial Statements.
THE CHARLES SCHWAB CORPORATION
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Consolidated Balance Sheets | | | |
(In Millions, Except Per Share and Share Amounts) | | | |
| | | |
December 31, | 2021 | | 2020 |
Assets | | | |
Cash and cash equivalents | $ | 62,975 | | | $ | 40,348 | |
Cash and investments segregated and on deposit for regulatory purposes (including resale agreements of $13,096 and $14,904 at December 31, 2021 and 2020, respectively) | 53,949 | | | 50,399 | |
Receivables from brokerage clients — net | 90,565 | | | 64,440 | |
Available for sale securities (amortized cost of $391,482 and $330,248 at December 31, 2021 and 2020, respectively) | 390,054 | | | 337,400 | |
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Bank loans — net | 34,636 | | | 23,813 | |
Equipment, office facilities, and property — net | 3,442 | | | 2,883 | |
Goodwill | 11,952 | | | 11,952 | |
Acquired intangible assets — net | 9,379 | | | 9,991 | |
Other assets | 10,318 | | | 7,783 | |
Total assets | $ | 667,270 | | | $ | 549,009 | |
Liabilities and Stockholders’ Equity | | | |
Bank deposits | $ | 443,778 | | | $ | 358,022 | |
Payables to brokerage clients | 125,671 | | | 104,201 | |
Accrued expenses and other liabilities | 17,791 | | | 17,094 | |
Short-term borrowings | 4,855 | | | — | |
Long-term debt | 18,914 | | | 13,632 | |
Total liabilities | 611,009 | | | 492,949 | |
Stockholders’ equity: | | | |
Preferred stock — $.01 par value per share; aggregate liquidation preference of $10,100 and $7,850 at December 31, 2021 and 2020, respectively | 9,954 | | | 7,733 | |
Common stock — 3 billion shares authorized; $.01 par value per share; 1,994,895,180 shares issued at December 31, 2021 and 2020 | 20 | | | 20 | |
Nonvoting common stock — 300 million shares authorized; $.01 par value per share; 79,293,695 shares issued at December 31, 2021 and 2020 | 1 | | | 1 | |
Additional paid-in capital | 26,741 | | | 26,515 | |
Retained earnings | 25,992 | | | 21,975 | |
Treasury stock, at cost — 180,959,274 and 193,577,648 shares at December 31, 2021 and 2020, respectively | (5,338) | | | (5,578) | |
Accumulated other comprehensive income (loss) | (1,109) | | | 5,394 | |
Total stockholders’ equity | 56,261 | | | 56,060 | |
Total liabilities and stockholders’ equity | $ | 667,270 | | | $ | 549,009 | |
See Notes to Consolidated Financial Statements.
THE CHARLES SCHWAB CORPORATION
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Consolidated Statements of Stockholders’ Equity |
(In Millions) | | | | | | | | | | |
| | | Nonvoting Common Stock | Additional Paid-In Capital | | | Accumulated Other Comprehensive Income (Loss) | | |
| Preferred Stock | Common Stock | Retained Earnings | Treasury Stock, at cost | | |
| Shares | Amount | Shares | Amount | | Total |
Balance at December 31, 2018 | $ | 2,793 | | 1,488 | | $ | 15 | | — | | $ | — | | $ | 4,499 | | $ | 17,329 | | $ | (3,714) | | $ | (252) | | | $ | 20,670 | |
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Net income | — | | — | | — | | — | | — | | — | | 3,704 | | — | | — | | | 3,704 | |
Other comprehensive income (loss), net of tax | — | | — | | — | | — | | — | | — | | — | | — | | 340 | | | 340 | |
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Dividends declared on preferred stock | — | | — | | — | | — | | — | | — | | (161) | | — | | — | | | (161) | |
Dividends declared on common stock — $.68 per share | — | | — | | — | | — | | — | | — | | (899) | | — | | — | | | (899) | |
Repurchase of common stock | — | | — | | — | | — | | — | | — | | — | | (2,220) | | — | | | (2,220) | |
Stock option exercises and other | — | | — | | — | | — | | — | | (56) | | — | | 174 | | — | | | 118 | |
Share-based compensation | — | | — | | — | | — | | — | | 171 | | — | | — | | — | | | 171 | |
Other | — | | — | | — | | — | | — | | 42 | | (13) | | (7) | | — | | | 22 | |
Balance at December 31, 2019 | 2,793 | | 1,488 | | 15 | | — | | — | | 4,656 | | 19,960 | | (5,767) | | 88 | | | 21,745 | |
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Net income | — | | — | | — | | — | | — | | — | | 3,299 | | — | | — | | | 3,299 | |
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Other comprehensive income (loss), net of tax | — | | — | | — | | — | | — | | — | | — | | — | | 5,306 | | | 5,306 | |
Acquisition of TD Ameritrade | — | | 509 | | 5 | | 77 | | 1 | | 21,757 | | — | | (5) | | — | | | 21,758 | |
Issuance of preferred stock, net | 4,940 | | — | | — | | — | | — | | — | | — | | — | | — | | | 4,940 | |
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Dividends declared on preferred stock | — | | — | | — | | — | | — | | — | | (240) | | — | | — | | | (240) | |
Dividends declared on common stock — $.72 per share | — | | — | | — | | — | | — | | — | | (1,040) | | — | | — | | | (1,040) | |
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Stock option exercises and other | — | | — | | — | | — | | — | | (121) | | — | | 200 | | — | | | 79 | |
Share-based compensation | — | | — | | — | | — | | — | | 192 | | — | | — | | — | | | 192 | |
Other | — | | (2) | | — | | 2 | | — | | 31 | | (4) | | (6) | | — | | | 21 | |
Balance at December 31, 2020 | 7,733 | | 1,995 | | 20 | | 79 | | 1 | | 26,515 | | 21,975 | | (5,578) | | 5,394 | | | 56,060 | |
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Net income | — | | — | | — | | — | | — | | — | | 5,855 | | — | | — | | | 5,855 | |
Other comprehensive income (loss), net of tax | — | | — | | — | | — | | — | | — | | — | | — | | (6,503) | | | (6,503) | |
Issuance of preferred stock, net | 2,806 | | — | | — | | — | | — | | — | | — | | — | | — | | | 2,806 | |
Redemption of preferred stock | (585) | | — | | — | | — | | — | | — | | (15) | | — | | — | | | (600) | |
Dividends declared on preferred stock | — | | — | | — | | — | | — | | — | | (456) | | — | | — | | | (456) | |
Dividends declared on common stock — $.72 per share | — | | — | | — | | — | | — | | — | | (1,367) | | — | | — | | | (1,367) | |
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Stock option exercises and other | — | | — | | — | | — | | — | | (84) | | — | | 305 | | — | | | 221 | |
Share-based compensation | — | | — | | — | | — | | — | | 229 | | — | | — | | — | | | 229 | |
Other | — | | — | | — | | — | | — | | 81 | | — | | (65) | | — | | | 16 | |
Balance at December 31, 2021 | $ | 9,954 | | 1,995 | | $ | 20 | | 79 | | $ | 1 | | $ | 26,741 | | $ | 25,992 | | $ | (5,338) | | $ | (1,109) | | | $ | 56,261 | |
See Notes to Consolidated Financial Statements.
THE CHARLES SCHWAB CORPORATION
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Consolidated Statements of Cash Flows | | | |
(In Millions) | | | |
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Year Ended December 31, | 2021 | 2020 | 2019 |
Cash Flows from Operating Activities | | | |
Net income | $ | 5,855 | | $ | 3,299 | | $ | 3,704 | |
Adjustments to reconcile net income to net cash provided by (used for) operating activities: | | | |
Share-based compensation | 254 | | 204 | | 183 | |
Depreciation and amortization | 549 | | 414 | | 322 | |
Amortization of acquired intangible assets | 615 | | 190 | | 27 | |
Provision (benefit) for deferred income taxes | 53 | | (138) | | 2 | |
Premium amortization, net, on available for sale securities | 2,346 | | 1,586 | | 446 | |
Other | 372 | | 349 | | 199 | |
Net change in: | | | |
Investments segregated and on deposit for regulatory purposes | (3,398) | | (10,208) | | (977) | |
Receivables from brokerage clients | (26,168) | | (14,609) | | (125) | |
Other assets | (1,152) | | 4 | | (709) | |
Payables to brokerage clients | 21,470 | | 22,909 | | 6,494 | |
Accrued expenses and other liabilities | 1,322 | | 2,852 | | (241) | |
Net cash provided by (used for) operating activities | 2,118 | | 6,852 | | 9,325 | |
Cash Flows from Investing Activities | | | |
Purchases of available for sale securities | (171,732) | | (202,171) | | (31,815) | |
Proceeds from sales of available for sale securities | 13,306 | | 4,801 | | 24,495 | |
Principal payments on available for sale securities | 94,912 | | 63,247 | | 21,616 | |
Purchases of held to maturity securities | — | | — | | (19,441) | |
Principal payments on held to maturity securities | — | | — | | 19,606 | |
Net change in bank loans | (10,845) | | (5,675) | | (1,730) | |
Cash acquired in acquisitions, net of cash paid | — | | 14,748 | | — | |
Purchases of equipment, office facilities, and property | (916) | | (631) | | (708) | |
Purchases of Federal Home Loan Bank stock | — | | (26) | | (27) | |
Proceeds from sales of Federal Home Loan Bank stock | — | | 32 | | 24 | |
Purchases of Federal Reserve stock | (245) | | (191) | | — | |
Other investing activities | (143) | | 15 | | (56) | |
Net cash provided by (used for) investing activities | (75,663) | | (125,851) | | 11,964 | |
Cash Flows from Financing Activities | | | |
Net change in bank deposits | 85,756 | | 137,928 | | (11,329) | |
Proceeds from commercial paper and secured lines of credit | 11,107 | | 1,234 | | 1,400 | |
Repayment of commercial paper and secured lines of credit | (6,255) | | (1,234) | | (1,400) | |
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Issuance of long-term debt | 7,036 | | 3,070 | | 593 | |
Repayment of long-term debt | (1,822) | | (700) | | — | |
Repurchases of common stock | — | | — | | (2,220) | |
Net proceeds from preferred stock offerings | 2,806 | | 4,940 | | — | |
Redemption of preferred stock | (600) | | — | | — | |
Dividends paid | (1,822) | | (1,280) | | (1,060) | |
Proceeds from stock options exercised | 221 | | 79 | | 118 | |
Other financing activities | (104) | | (55) | | (41) | |
Net cash provided by (used for) financing activities | 96,323 | | 143,982 | | (13,939) | |
Increase (Decrease) in Cash and Cash Equivalents, including Amounts Restricted | 22,778 | | 24,983 | | 7,350 | |
Cash and Cash Equivalents, including Amounts Restricted at Beginning of Year | 70,560 | | 45,577 | | 38,227 | |
Cash and Cash Equivalents, including Amounts Restricted at End of Year | $ | 93,338 | | $ | 70,560 | | $ | 45,577 | |
Continued on following page.
THE CHARLES SCHWAB CORPORATION
Continued from previous page.
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Year Ended December 31, | 2021 | 2020 | 2019 |
Supplemental Cash Flow Information | | | |
Non-cash investing activity: | | | |
Securities transferred from held to maturity to available for sale, at fair value | $ | — | | $ | 136,099 | | $ | 8,771 | |
| | | |
Additions of equipment, office facilities, and property | $ | 125 | | $ | 110 | | $ | 45 | |
Acquisition of TD Ameritrade | $ | — | | $ | 21,758 | | $ | — | |
Non-cash financing activity: | | | |
Extinguishment of finance lease obligation through an assignment agreement | $ | — | | $ | — | | $ | 52 | |
| | | |
Other Supplemental Cash Flow Information | | | |
Cash paid during the period for: | | | |
Interest | $ | 501 | | $ | 434 | | $ | 1,075 | |
Income taxes | $ | 2,053 | | $ | 803 | | $ | 1,199 | |
Amounts included in the measurement of lease liabilities | $ | 212 | | $ | 163 | | $ | 133 | |
Leased assets obtained in exchange for new operating lease liabilities | $ | 89 | | $ | 160 | | $ | 97 | |
Leased assets obtained in exchange for new finance lease liabilities | $ | 109 | | $ | — | | $ | — | |
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December 31, | 2021 | 2020 | 2019 |
Reconciliation of cash, cash equivalents and amounts reported within the balance sheet (1) | | | |
Cash and cash equivalents | $ | 62,975 | | $ | 40,348 | | $ | 29,345 | |
Restricted cash and cash equivalents amounts included in cash and investments segregated and on deposit for regulatory purposes | 30,363 | | 30,212 | | 16,232 | |
Total cash and cash equivalents, including amounts restricted shown in the statement of cash flows | $ | 93,338 | | $ | 70,560 | | $ | 45,577 | |
(1) For more information on the nature of restrictions on restricted cash and cash equivalents, see Note 23.
See Notes to Consolidated Financial Statements.
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
1. Introduction and Basis of Presentation
The Charles Schwab Corporation (CSC) is a savings and loan holding company. CSC engages, through its subsidiaries (collectively referred to as Schwab or the Company), in wealth management, securities brokerage, banking, asset management, custody, and financial advisory services.
Principal business subsidiaries of CSC include the following:
•Charles Schwab & Co., Inc. (CS&Co), incorporated in 1971, a securities broker-dealer;
•TD Ameritrade, Inc., an introducing securities broker-dealer;
•TD Ameritrade Clearing, Inc. (TDAC), a securities broker-dealer that provides trade execution and clearing services to TD Ameritrade, Inc.;
•Charles Schwab Bank, SSB (CSB), our principal banking entity; and
•Charles Schwab Investment Management, Inc. (CSIM), the investment advisor for Schwab’s proprietary mutual funds (Schwab Funds®) and for Schwab’s exchange-traded funds (Schwab ETFs™).
Schwab’s securities broker-dealers have approximately 400 domestic branch offices in 48 states and the District of Columbia, as well as locations in Puerto Rico, the United Kingdom, Hong Kong, and Singapore.
Unless otherwise indicated, the terms “Schwab,” “the Company,” “we,” “us,” or “our” mean CSC together with its consolidated subsidiaries.
The accompanying consolidated financial statements include CSC and its subsidiaries. Intercompany balances and transactions have been eliminated. These consolidated financial statements have been prepared in conformity with GAAP, which require management to make certain estimates and assumptions that affect the reported amounts in the accompanying financial statements and in the related disclosures. These estimates are based on information available as of the date of the consolidated financial statements. While management makes its best judgment, actual amounts or results could differ from those estimates. Certain estimates relate to taxes on income, legal and regulatory reserves, and fair values of assets acquired and liabilities assumed, as well as goodwill recognized, in business combinations.
Effective October 6, 2020, the Company completed its acquisition of TDA Holding and its consolidated subsidiaries (collectively referred to as “TD Ameritrade” or “TDA”). Our consolidated financial statements include the results of operations and financial condition of TD Ameritrade beginning on October 6, 2020. See Note 3 for additional information on our acquisition of TD Ameritrade.
Principles of Consolidation
Schwab evaluates all entities in which it has financial interests for consolidation, except for money market funds, which are specifically excluded from consolidation guidance. When an entity is evaluated for consolidation, Schwab determines whether its interest in the entity constitutes a controlling financial interest under either the variable interest entity (VIE) model or the voting interest entity (VOE) model. In evaluating whether Schwab’s interest in a VIE is a controlling financial interest, we consider whether our involvement in the context of the design, purpose, and risks of the VIE, as well as any involvement of related parties, provides us with (i) the power to direct the most significant activities of the VIE, and (ii) the obligation to absorb losses or receive benefits that are significant to the VIE. If both of these conditions exist, then Schwab would be the primary beneficiary of that VIE and consolidate it. Based upon the assessments for all of our interests in VIEs, there are no cases where the Company is the primary beneficiary; therefore, we are not required to consolidate any VIEs. See Note 11 for further information about VIEs. Schwab consolidates all VOEs in which it has majority-voting interests.
Investments in entities in which Schwab does not have a controlling financial interest are accounted for under the equity method of accounting when we have the ability to exercise significant influence over operating and financing decisions of the entity or by accounting policy for investments in certain types of limited liability entities. Investments in entities for which Schwab does not apply the equity method are generally carried at cost and adjusted for impairment and observable price changes of the identical or similar investments of the same issuer (adjusted cost method), except for certain investments in qualified affordable housing projects which are accounted for under the proportional amortization method. All equity method,
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
adjusted cost method, and proportional amortization method investments are included in other assets on the consolidated balance sheets.
2. Summary of Significant Accounting Policies
Revenue recognition
Net interest revenue
Net interest revenue is not within the scope of Accounting Standards Codification (ASC) 606 Revenue From Contracts With Customers (ASC 606), because it is generated from financial instruments covered by various other areas of GAAP. Net interest revenue is the difference between interest generated on interest earning assets and interest paid on funding sources. Our primary interest earning assets include cash and cash equivalents; segregated cash and investments; margin loans; investment securities; and bank loans. Fees earned and incurred on securities borrowing and lending activities, which are conducted by the Company’s broker-dealer subsidiaries on assets held in client brokerage accounts, are also included in interest revenue and expense.
Asset management and administration fees
The majority of asset management and administration fees are generated through our proprietary and third-party mutual fund and ETF offerings, as well as fee-based advisory solutions. Mutual fund and ETF service fees are charged for investment management, shareholder, and administration services provided to Schwab Funds® and Schwab ETFs™, as well as recordkeeping, shareholder, and administration services provided to third-party funds. Advice solutions fees are charged for brokerage and asset management services provided to advice solutions clients. Both mutual fund and ETF service fees and advice solutions fees are earned and recognized over time. Fees are generally based on a percentage of the daily value of assets under management and are collected on a monthly or quarterly basis.
Trading revenue
Trading revenue is primarily generated through commissions earned for executing trades for clients in individual equities, options, fixed income securities, and certain third-party mutual funds and ETFs, as well as order flow revenue. Commissions revenue is earned when the trades are executed and collected when the trades are settled. Order flow revenue is comprised of rebate payments received from execution venues to which our broker-dealer subsidiaries send equity and option orders. Order flow revenue is recognized when the trades are executed and is collected on a monthly or quarterly basis.
Bank deposit account fees
Bank deposit account fees consist of revenues resulting from sweep programs offered to certain clients whereby uninvested client cash is swept off-balance sheet to FDIC-insured (up to specified limits) accounts at the TD Depository Institutions and other third-party depository institutions. The Company provides marketing, recordkeeping, and support services related to these sweep programs to the TD Depository Institutions and other third-party depository institutions in exchange for bank deposit account fees. These revenues are based on floating and fixed yields as elected by the Company subject to certain requirements, less interest paid to clients and other applicable fees. Bank deposit account fees are earned and recognized over time and collected on a monthly basis.
Other revenue
Other revenue includes exchange processing fees, certain service fees, software fees, and non-recurring gains. Generally, the most significant portion of other revenue is exchange processing fees, which are comprised of fees the Company’s broker-dealer subsidiaries charge clients to offset the exchange processing fees imposed on us by third-parties. Exchange processing fees are earned and collected when the trade is executed and are recognized gross of amounts remitted to the third-parties, which are included in other expenses.
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
Unsatisfied performance obligations
We do not have any unsatisfied performance obligations other than those that are subject to an elective practical expedient under ASC 606. The practical expedient applies to and is elected for contracts where we recognize revenue at the amount to which we have the right to invoice for services performed.
Cash and cash equivalents
Schwab considers all highly liquid investments that mature in three months or less from the time of acquisition and that are not segregated and on deposit for regulatory purposes to be cash and cash equivalents. Cash and cash equivalents include money market funds, deposits with banks, certificates of deposit, commercial paper, and U.S. Treasury securities. Cash and cash equivalents also include balances that our banking subsidiaries maintain at the Federal Reserve.
Cash and investments segregated and on deposit for regulatory purposes
Pursuant to Rule 15c3-3 of the Securities Exchange Act of 1934 and other applicable regulations, Schwab maintains cash or qualified securities in segregated reserve accounts for the exclusive benefit of clients. Cash and investments segregated and on deposit for regulatory purposes include resale agreements, which are collateralized by U.S. Government and agency securities. Resale agreements are accounted for as collateralized financing transactions that are recorded at their contractual amounts plus accrued interest. Under these resale agreements, the Company obtains collateral with a market value equal to or in excess of the principal amount loaned and the interest accrued. Collateral is valued daily by the Company, with additional collateral obtained to ensure full collateralization. Cash and investments segregated also include certificates of deposit and U.S. Government securities. Certificates of deposit and U.S. Government securities are recorded at fair value and unrealized gains and losses are included in earnings.
Schwab applies the practical expedient based on collateral maintenance provisions under ASC 326 Financial Instruments – Credit Losses (ASC 326), in estimating an allowance for credit losses for resale agreements. This practical expedient can be applied for financial assets with collateral maintenance provisions requiring the borrower to continually adjust the amount of the collateral securing the financial assets as a result of fair value changes in the collateral. In accordance with the practical expedient, when the Company reasonably expects that borrowers (or counterparties, as applicable) will replenish the collateral as required, there is no expectation of credit losses when the collateral’s fair value is greater than the amortized cost of the financial asset. If the amortized cost exceeds the fair value of collateral, then credit losses are estimated only on the unsecured portion.
Receivables from brokerage clients
Receivables from brokerage clients include margin loans to securities brokerage clients and other trading receivables from clients. Margin loans are collateralized by client securities and are carried at the amount receivable, net of an allowance for credit losses. Collateral is required to be maintained at specified minimum levels at all times. The Company monitors margin levels and requires clients to provide additional collateral, or reduce margin positions, to meet minimum collateral requirements if the fair value of the collateral changes. Schwab applies the practical expedient based on collateral maintenance provisions in estimating an allowance for credit losses for margin loans. An allowance for credit losses on unsecured or partially secured receivables from brokerage clients is estimated based on the aging of those receivables. Unsecured balances due to confirmed fraud are reserved immediately. The Company’s policy is to charge off any delinquent margin loans, including the accrued interest on such loans, no later than at 90 days past due. Accrued interest charged off is recognized as credit loss expense and is included in other expenses in the consolidated statements of income. Clients with margin loans have agreed to allow Schwab to pledge collateralized securities in accordance with federal regulations. The collateral is not reflected in the consolidated financial statements.
Other securities owned at fair value
Other securities owned are included in other assets on the consolidated balance sheets and recorded at fair value based on quoted market prices or other observable market data. Unrealized gains and losses are included in earnings. Client-held fractional shares are included in other securities owned for client positions for which off-balance sheet treatment pursuant to ASC 940 Financial Services – Brokers and Dealers is not applicable and the derecognition criteria in ASC 860 Transfers and Servicing, are not met. These client-held fractional shares have related repurchase liabilities that are accounted for at fair value
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
with unrealized gains and losses included in earnings. See Fair values of assets and liabilities below in this Note 2 for further information on these repurchase liabilities.
AFS investment securities
AFS investment securities are recorded at fair value and unrealized gains and losses, other than losses related to credit factors, are reported, net of taxes, in AOCI included in stockholders’ equity. Realized gains and losses from sales of AFS investment securities are determined using the specific-identification method and are included in other revenue. Interest income is recognized using the effective interest method based on the contractual terms of the security. Where applicable, prepayments are accounted for as they occur (i.e., prepayments are not estimated).
An AFS investment security is impaired if the fair value of the security is less than its amortized cost basis. Management evaluates AFS investment securities with unrealized losses to determine whether the security impairment has resulted from a credit loss or other factors. This evaluation is performed quarterly on an individual security basis.
The evaluation of whether credit loss exists is inherently judgmental. This evaluation considers multiple factors including: the financial condition of the issuer; the payment structure of the security; external credit ratings; our internal credit ratings; the security’s market implied credit spread; for asset-backed securities, the amount of credit support provided by the structure of the security to absorb credit losses on the underlying collateral; recent events specific to the issuer and the issuer’s industry; and whether all scheduled principal and interest payments have been received.
If management determines that the impairment of an AFS investment security (or a portion of the impairment) is related to credit losses, an allowance for credit losses is recorded for that security through a charge to earnings. The allowance for credit losses is measured as the difference between the amortized cost and the present value of expected cash flows and is limited to the difference between amortized cost and the fair value of the security. The Company estimates credit losses on a discounted cash flow basis using the security’s effective interest rate. Changes in the allowance for credit losses are recorded through earnings in the period of the change.
If it is determined that the Company intends to sell the impaired security or if it is more likely than not that the Company will be required to sell the security before any anticipated recovery of the amortized cost basis, any allowance for credit losses of that security will be written off and the amortized cost basis of the security will be written down to fair value with any incremental impairment recorded through earnings.
The Company excludes accrued interest from the fair value and the amortized cost basis of the AFS investment securities for the purposes of identifying and measuring impairment of the securities. AFS investment securities are placed on nonaccrual status on a timely basis and any accrued interest receivable is reversed through interest income.
Securities borrowed and securities loaned
Securities borrowed transactions require Schwab to deliver cash to the lender in exchange for securities; the receivables from these transactions are included in other assets on the consolidated balance sheets. For securities loaned, Schwab receives collateral in the form of cash in an amount equal to or greater than the market value of securities loaned; the payables from these transactions are included in accrued expenses and other liabilities on the consolidated balance sheets. The market value of securities borrowed and loaned is monitored and collateral is adjusted to ensure full collateralization. Fees received or paid are recorded in interest revenue or interest expense. Schwab applies the practical expedient based on collateral maintenance provisions in estimating an allowance for credit losses for securities borrowed receivables.
Bank loans and related allowance for loan losses
Bank loans held for investments are recorded at amortized cost, which is comprised of the contractual principal amounts adjusted for unamortized direct origination costs or net purchase discounts or premiums. Direct origination costs and premiums and discounts are recognized in interest revenue using the effective interest method over the contractual life of the loan and are adjusted for actual prepayments. Additionally, management estimates an allowance for credit losses, which is deducted from the amortized cost basis of loans to arrive at the amount expected to be collected. The bank loan portfolio includes three portfolio segments: residential real estate, PALs, and other loans. We use these segments when developing and documenting our methodology for determining the allowance for credit losses. The residential real estate portfolio segment is
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
divided into two classes of financing receivables for purposes of monitoring and assessing credit risk: First Mortgages and HELOCs.
Schwab records an allowance for credit losses through a charge to earnings based on our estimate of current expected credit losses for the existing portfolio. We review the allowance for credit losses quarterly, taking into consideration current economic conditions, reasonable and supportable forecasts, the composition of the existing loan portfolio, past loss experience, and any other risks inherent in the portfolio to ensure that the allowance for credit losses is maintained at an appropriate level.
PALs are collateralized by marketable securities with liquid markets. Credit lines are over-collateralized and borrowers are required to maintain collateral at specified levels at all times. The required collateral levels are determined based on the type of security pledged. Additionally, collateral market value is monitored on a daily basis and a borrower’s credit line may be reduced or collateral may be liquidated if the collateral is in danger of falling below specified levels. As such, the credit loss inherent within this portfolio is limited. Schwab applies the practical expedient based on collateral maintenance provisions in estimating an allowance for credit losses for PALs.
The methodology to establish an allowance for credit losses for the residential real estate portfolio segment utilizes statistical models that estimate prepayments, defaults, and expected losses for this portfolio segment based on predicted behavior of individual loans within the segment. The methodology also evaluates concentrations in the classes of financing receivables, including loan products within those classes, year of origination, and geographical distribution of collateral.
Expected credit losses are forecast using a loan-level simulation of the delinquency status of the loans over the term of the loans. The simulation starts with the current relevant risk indicators, including the current delinquent status of each loan, the estimated current LTV ratio of each loan, the term and structure of each loan, borrower FICO scores, and current key interest rates including U.S. Treasury, SOFR, and LIBOR rates. The more significant variables in the simulation include delinquency roll rates, loss severity, housing prices, interest rates, and the unemployment rate. Delinquency roll rates (i.e., the rates at which loans transition through delinquency stages and ultimately result in a loss) are estimated from our historical loss experience adjusted for current trends and market information, which includes current and forecasted conditions. Loss severity (i.e., loss given default) estimates are based on our historical loss experience and market trends, both current and forecasted. The loss severity estimate used in the allowance for credit loss methodology for HELOCs is higher than that used in the methodology for First Mortgages. Housing price trends are derived from historical home price indices and econometric forecasts of future home values. Factors affecting the home price index include housing inventory, unemployment, interest rates, and inflation expectations. Interest rate projections are based on the current term structure of interest rates and historical volatilities to project various possible future interest rate paths. The unemployment rate forecast is typically based on the recent consensus of regularly published economic surveys. Linear interpolation is applied to revert to long-term trends after the reasonable and supportable forecast period.
The methodology described above results in loss factors that are applied to the amortized cost basis of loans, exclusive of accrued interest receivable, to determine the allowance for credit losses for First Mortgages and HELOCs.
Management also estimates a liability for expected credit losses on the Company’s commitments to extend credit related to unused HELOCs and commitments to purchase first mortgages. See Note 15 for additional information on these commitments. The liability is calculated by applying the loss factors described above to the commitments expected to be funded and is included in accrued expenses and other liabilities on the consolidated balance sheets. The liability for expected credit losses on these commitments and related activity were immaterial for all periods presented.
Schwab considers loan modifications in which it makes an economic concession to a borrower experiencing financial difficulty to be troubled debt restructurings (TDRs).
Nonaccrual, nonperforming and impaired loans
First Mortgages, HELOCs, PALs, and other loans are placed on nonaccrual status upon becoming 90 days past due as to interest or principal (unless the loans are well-secured and in the process of collection), or when the full timely collection of interest or principal becomes uncertain, including loans to borrowers who have filed for bankruptcy. HELOC loans secured by a second lien are placed on non-accrual status if the associated first lien is 90 days or more delinquent, regardless of the payment status of the HELOC. When a loan is placed on nonaccrual status, the accrued and unpaid interest receivable is reversed and the loan is accounted for on the cash or cost recovery method until qualifying for return to accrual status.
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
Generally, a nonaccrual loan may be returned to accrual status when all delinquent interest and principal is repaid and the borrower demonstrates a sustained period of performance, or when the loan is both well-secured and in the process of collection and collectability is no longer doubtful. Loans on nonaccrual status and other real estate owned are considered nonperforming assets.
Loan charge-offs
The Company charges off a loan in the period that it is deemed uncollectible and records a reduction in the allowance for credit losses and the loan balance. Our charge-off policy for First Mortgage and HELOC loans is to assess the value of the property when the loan has been delinquent for 180 days or has been discharged in bankruptcy proceedings, regardless of whether the property is in foreclosure, and charge-off the amount of the loan balance in excess of the estimated current value of the underlying property less estimated costs to sell. The Company’s policy for PALs is to charge off any delinquent loans no later than at 90 days past due.
Equipment, office facilities, and property
Equipment, office facilities, and property are recorded at cost net of accumulated depreciation and amortization, except for land, which is recorded at cost. Equipment, office facilities, and property include certain capitalized costs of acquired or internally developed software. Costs for internally developed software are capitalized when the costs relate to development of approved projects for our internal needs that result in additional functionality. Costs related to preliminary project and post-project activities are expensed as incurred. Equipment, office facilities, and property (other than land) are depreciated on a straight-line basis over their estimated useful lives. Estimated useful lives are as follows:
| | | | | |
All equipment types and furniture | 3 to 10 years |
Buildings | 40 years |
Building and land improvements | 20 years |
Software | 3 to 10 years (1) |
Leasehold improvements | Lesser of useful life or lease term |
(1) Amortized over contractual term if less than three years.
Equipment, office facilities, and property are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable.
Equipment, office facilities, and property acquired in a business combination are recognized at their estimated fair values as of the date of acquisition. The fair values of real property, personal property, construction in progress, and land acquired are estimated using a sales comparison and cost approach, including consideration of functional and economic obsolescence. The Company determined the weighted-average useful lives of the assets based on the current condition and expected future use of the assets as of the date of acquisition.
Goodwill
Goodwill is not amortized but is tested for impairment annually or whenever indications of impairment exist. Impairment exists when the carrying amount of a reporting unit exceeds its estimated fair value, resulting in an impairment charge for this excess, with the maximum charge limited to the carrying value of goodwill allocated to that reporting unit. Our annual impairment testing date is April 1st. Schwab can elect to qualitatively assess goodwill for impairment if it is more likely than not that the fair value of a reporting unit exceeds its carrying value. A qualitative assessment considers macroeconomic and other industry-specific factors, such as trends in short-term and long-term interest rates and the ability to access capital, and Company specific factors such as market capitalization in excess of net assets, trends in revenue generating activities, and merger or acquisition activity.
If the Company elects to bypass qualitatively assessing goodwill, or it is not more likely than not that the fair value of a reporting unit exceeds its carrying value, management estimates the fair values of each of the Company’s reporting units (defined as the Company’s businesses for which financial information is available and reviewed regularly by management) and compares it to their carrying values. The estimated fair values of the reporting units are established using an income approach based on a discounted cash flow model that includes significant assumptions about the future operating results and
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
cash flows of each reporting unit, a market approach which compares each reporting unit to comparable companies in their respective industries, as well as a market capitalization analysis.
Intangible assets
Finite-lived intangible assets are amortized over their useful lives in a manner that best reflects their economic benefit. All intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable.
Intangible assets acquired in a business combination are recognized at their estimated fair values as of the date of acquisition. The fair values of the intangible assets acquired in the TD Ameritrade and USAA-IMCO acquisitions were determined using the following valuation methods:
| | | | | | | | | | | | | | |
Acquired intangible asset | | Acquisition | | Method |
Client relationships | | TD Ameritrade, USAA-IMCO | | Multi-period excess earnings |
Trade names | | TD Ameritrade | | Relief from royalty |
Royalty-free license | | USAA-IMCO | | Relief from royalty |
Brokerage referral agreement | | USAA-IMCO | | With-and-without |
Existing technology | | TD Ameritrade | | Cost |
The multi-period excess earnings method starts with a forecast of all of the expected future net cash flows associated with the asset and the relief from royalty method starts with a forecast of the royalties saved by the Company because it owns the asset. The with-and-without method quantifies the difference between forecasted cash flows with the asset and without the asset. The forecasts are then adjusted to present value by applying an appropriate discount rate that reflects the risks associated with the cash flow streams. The cost approach uses replacement cost as an indicator of fair value.
Low-income housing tax credit (LIHTC) investments
We account for investments in qualified affordable housing projects using the proportional amortization method if the applicable requirements are met. The proportional amortization method amortizes the cost of the investment over the period in which the investor expects to receive tax credits and other tax benefits, and the resulting amortization is recognized as a component of taxes on income. The carrying value of LIHTC investments is included in other assets on the consolidated balance sheets. Unfunded commitments related to LIHTC investments are included in accrued expenses and other liabilities on the consolidated balance sheets.
Leases
The Company primarily has operating leases for corporate offices, branch locations, and server equipment and determines if an arrangement is a lease at inception. Leases with an initial term of 12 months or less are not recorded on the balance sheet; we recognize lease expense for these leases on a straight-line basis over the lease term. The Company has also elected to not record leases acquired in a business combination on the balance sheet if the remaining term as of the acquisition date is 12 months or less. Right-of-use (ROU) assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. ROU assets and lease liabilities are recognized at commencement date based on the present value of lease payments over the lease term. The lease liability may include payments that depend on a rate or index (such as the Consumer Price Index), measured using the rate or index at the commencement date. Payments that vary because of changes in facts or circumstances occurring after the commencement date are considered variable. These payments are not recognized as part of the lease liability and are expensed in the period incurred. Lease expense for operating lease payments is recognized on a straight-line basis over the lease term. The amortization of finance lease ROU assets and the interest expense on finance lease liabilities are recognized over the lease term. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.
We have lease agreements with lease and non-lease components. For the majority of our leases (real estate leases), the Company has elected the practical expedient to account for the lease and non-lease components as a single lease component. We have not elected the practical expedient for equipment leases and account for lease and non-lease components separately for those classes of leases.
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
As the rates implicit in our leases are not readily determinable, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. Our lease terms may include periods covered by options to extend when it is reasonably certain that we will exercise those options. The lease terms may also include periods covered by options to terminate when it is reasonably certain that we will not exercise that option.
Advertising and market development
Advertising and market development activities include the cost to produce and distribute marketing campaigns as well as client incentives and discounts. Where it applies to these costs, the Company’s accounting policy is to expense when incurred.
Income taxes
Schwab provides for income taxes on all transactions that have been recognized in the consolidated financial statements. Accordingly, deferred tax assets are adjusted to reflect the tax rates at which future taxable amounts will likely be settled or realized. The effects of tax rate changes on future deferred tax assets and deferred tax liabilities, as well as other changes in income tax laws, are recorded in earnings in the period such changes are enacted. Uncertain tax positions are evaluated to determine whether they are more likely than not to be sustained upon examination. When tax positions are more likely than not to be sustained upon examination the difference between positions taken on tax return filings and estimated potential tax settlement outcomes are recognized in accrued expenses and other liabilities. If a position is not more likely than not to be sustained, then none of the tax benefit is recognized in Schwab’s financial statements. Accrued interest and penalties relating to unrecognized tax benefits are recorded in taxes on income. Schwab records amounts within AOCI net of taxes. Income tax effects are released from AOCI using the specific-identification method.
Share-based compensation
Share-based compensation includes employee and board of director stock options and restricted stock units. Schwab measures compensation expense for these share-based payment arrangements based on their estimated fair values as of the grant date. The fair value of the share-based award is recognized over the service period as share-based compensation. Share-based compensation expense is based on options or units expected to vest and therefore is reduced for estimated forfeitures. Per the Company’s accounting policy election, forfeitures are estimated at the time of grant and reviewed annually based on the Company’s historical forfeiture experience. Share-based compensation expense is adjusted in subsequent periods if actual forfeitures differ from estimated forfeitures. The excess tax benefits or deficiencies from the exercise of stock options and the vesting of restricted stock units are recorded in taxes on income.
Fair values of assets and liabilities
Fair value is defined as the price that would be received to sell an asset or the price paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurement accounting guidance describes the fair value hierarchy for disclosing assets and liabilities measured at fair value based on the inputs used to value them. The fair value hierarchy maximizes the use of observable inputs and minimizes the use of unobservable inputs. Observable inputs are based on market pricing data obtained from third-party sources independent of the Company. A quoted price in an active market provides the most reliable evidence of fair value and is generally used to measure fair value whenever available.
Unobservable inputs reflect management’s judgment about the assumptions market participants would use in pricing the asset or liability. Where inputs used to measure fair value of an asset or liability are from different levels of the hierarchy, the asset or liability is categorized based on the lowest level input that is significant to the fair value measurement in its entirety. Assessing the significance of a particular input requires judgment. The fair value hierarchy includes three levels based on the objectivity of the inputs as follows:
•Level 1 inputs are quoted prices in active markets as of the measurement date for identical assets or liabilities that the Company has the ability to access.
•Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active markets,
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
and inputs other than quoted prices that are observable for the asset or liability, such as interest rates, benchmark yields, issuer spreads, new issue data, and collateral performance.
•Level 3 inputs are unobservable inputs for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability.
Assets and liabilities measured at fair value on a recurring basis
Schwab’s assets and liabilities measured at fair value on a recurring basis include: certain cash equivalents, certain investments segregated and on deposit for regulatory purposes, AFS securities, and certain other assets and accrued expenses and other liabilities. The Company uses the market approach to determine the fair value of assets and liabilities. When available, the Company uses quoted prices in active markets to measure the fair value of assets and liabilities. Quoted prices for investments in exchange-traded securities represent end-of-day close prices published by exchanges. Quoted prices for money market funds and other mutual funds represent reported net asset values. 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 in active markets do not exist, the Company uses prices obtained from independent third-party pricing services to measure the fair value of investment assets, and we generally obtain prices from three independent third-party pricing sources for such assets recorded at fair value.
Our primary independent pricing service provides prices for our fixed income investments such as commercial paper; certificates of deposits; U.S. government and agency securities; state and municipal securities; corporate debt securities; asset-backed securities; foreign government agency securities; and non-agency commercial mortgage-backed securities. Such prices are based on observable trades, broker/dealer quotes, and discounted cash flows that incorporate observable information such as yields for similar types of securities (a benchmark interest rate plus observable spreads) and weighted-average maturity for the same or similar “to-be-issued” securities. We compare the prices obtained from the primary independent pricing service to the prices obtained from the additional independent pricing services to determine if the price obtained from the primary independent pricing service is reasonable. Schwab does not adjust the prices received from independent third-party pricing services unless such prices are inconsistent with the definition of fair value and result in material differences in the amounts recorded.
Liabilities measured at fair value on a recurring basis include repurchase liabilities related to client-held fractional shares of equities, ETFs, and other securities. See Other securities owned at fair value above in this Note 2 for the treatment of client-held fractional shares. The Company has elected the fair value option pursuant to ASC 825 Financial Instruments for the repurchase liabilities to match the measurement and accounting of the related client-held fractional shares. The fair values of the repurchase liabilities are based on quoted market prices or other observable market data consistent with the related client-held fractional shares. Unrealized gains and losses on client-held fractional shares offset the unrealized gains and losses on the corresponding repurchase liabilities, resulting in no impact to the consolidated statements of income. The Company’s liabilities to repurchase client-held fractional shares do not have credit risk, and, as a result, the Company has not recognized any gains or losses in the consolidated statements of income or comprehensive income attributable to instrument-specific credit risk for these repurchase liabilities. The repurchase liabilities are included in accrued expenses and other liabilities on the consolidated balance sheet.
New Accounting Standards
No new accounting standards that are material to the Company were adopted during the year ended December 31, 2021. There are currently no new accounting standards not yet adopted that are material to the Company.
3. Business Acquisitions
TD Ameritrade
On October 6, 2020 Schwab completed its previously announced acquisition of TD Ameritrade for $21.8 billion in stock. As a result of the acquisition, TDA Holding became a wholly-owned subsidiary of CSC. TD Ameritrade provides securities brokerage services, including trade execution, clearing services, and margin lending, through its broker-dealer subsidiaries,
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
and futures and foreign exchange trade execution services through its FCM and FDM subsidiary.
In exchange for each share of TD Ameritrade common stock, TD Ameritrade stockholders received 1.0837 shares of CSC common stock, except for TD Bank and its affiliates which received a portion in nonvoting common stock. In connection with the transaction, Schwab issued approximately 586 million common shares to TD Ameritrade stockholders consisting of approximately 509 million shares of common stock and approximately 77 million shares of nonvoting common stock, as described below. Subsequently, TD Bank and its affiliates exchanged common stock for nonvoting common stock and held approximately 79 million shares of nonvoting common stock as of December 31, 2021. For further details on the new class of nonvoting common stock, see Note 19.
The fair value of the purchase price transferred upon completion of the acquisition includes the fair value of CSC common stock and nonvoting common stock that was issued to TD Ameritrade stockholders, as well as the fair value of assumed TD Ameritrade equity awards attributable to pre-combination services.
The purchase price was calculated as follows:
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| | |
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Fair value of consideration for TD Ameritrade outstanding common stock | | $ | 21,664 | |
Fair value of replaced TD Ameritrade equity awards attributable to pre-combination services (1) | | 94 | |
| | |
Purchase price | | $ | 21,758 | |
(1) Share-based awards held by TD Ameritrade employees prior to the acquisition date were assumed by Schwab and converted into share-based awards with respect to CSC common stock, after giving effect to the exchange ratio of 1.0837. Such share-based awards are otherwise subject to the same terms and conditions as were applicable immediately before the merger, except for performance-based restricted stock units which were converted into time-based restricted stock units. The portion of the fair value of the share-based awards that relates to services performed by the employees prior to the acquisition date is included in the purchase price.
The Company accounted for the TD Ameritrade acquisition as a business combination under GAAP and accordingly, the purchase price was allocated to the assets acquired and liabilities assumed based on their fair values, except for certain exceptions to the recognition principle of acquisition accounting, such as leases, share-based payments, and income taxes, as of the date of acquisition. Information regarding the acquisition is final and there were no adjustments to the provisional purchase price and fair value estimates presented in the 2020 Form 10-K.
The following table summarizes the purchase price, fair values of the assets acquired and liabilities assumed, and resulting goodwill as of the October 6, 2020 acquisition date.
| | | | | |
Purchase price | $ | 21,758 | |
Fair value of assets acquired: | |
Cash and cash equivalents | 3,484 | |
Cash and investments segregated and on deposit for regulatory purposes | 14,236 | |
| |
Receivables from brokerage clients | 28,009 | |
| |
Available for sale securities | 1,779 | |
Acquired intangible assets | 8,880 | |
Equipment, office facilities, and property | 470 | |
Other assets | 3,088 | |
Total assets acquired | 59,946 | |
Fair value of liabilities assumed: | |
| |
Payables to brokerage clients | 37,599 | |
Accrued expenses and other liabilities | 6,975 | |
| |
Long-term debt | 3,829 | |
Total liabilities assumed | 48,403 | |
Fair value of net identifiable assets acquired | 11,543 | |
Goodwill | 10,215 | |
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
The identifiable tangible and intangible assets of $470 million and $8.9 billion, respectively, are subject to depreciation and amortization. The following table summarizes the major classes of tangible and intangible assets and their respective fair values and weighted-average useful lives:
| | | | | | | | | | | | | | | | |
| | Fair Value | | Weighted-Average Useful Life (Years) | | |
Equipment, office facilities, and property | | | | | | |
Real property (1) | | $ | 226 | | | 37 | | |
Personal property (2) | | 162 | | | 2 | | |
Construction in progress | | 49 | | | N/A | | |
Land | | 33 | | | N/A | | |
Total equipment, office facilities, and property | | $ | 470 | | | | | |
| | | | | | |
Acquired intangible assets | | | | | | |
Client relationships | | $ | 8,700 | | | 20 | | |
Existing technology | | 165 | | | 2 | | |
Trade names | | 15 | | | 2 | | |
Total acquired intangible assets | | $ | 8,880 | | | | | |
(1) Consists primarily of buildings.
(2) Consists primarily of equipment and leasehold improvements.
N/A Not applicable.
Goodwill of $10.2 billion is primarily attributable to the scale, skill sets, operations, and synergies that can be leveraged to enable the combined company to build a stronger enterprise and will not be deductible for tax purposes. The goodwill assigned to the Investor Services and Advisor Services segments were $6.4 billion and $3.8 billion, respectively.
The Company’s consolidated statements of income include total net revenues and net income attributable to the TD Ameritrade acquisition of $1.7 billion and $583 million, respectively, for the period October 6, 2020 through December 31, 2020.
In connection with the TD Ameritrade acquisition, the Company incurred various professional fees and other costs such as advisory, legal, and accounting fees. In total, the Company incurred acquisition costs of $56 million and $11 million for the years ended December 31, 2020 and 2019, respectively, which are primarily included in professional services on the consolidated statements of income.
USAA-IMCO
On May 26, 2020, the Company completed its acquisition of the assets of USAA-IMCO for $1.6 billion in cash. Along with the asset purchase agreement, the companies entered into a long-term referral agreement that makes Schwab the exclusive provider of wealth management and investment brokerage services for USAA members. The USAA-IMCO acquisition has added scale to the Company’s operations through the addition of over one million brokerage and managed portfolio accounts with approximately $80 billion in client assets at the acquisition date. The transaction also provides Schwab the opportunity to further expand our client base by serving USAA’s members through the long-term referral agreement.
The Company accounted for the USAA-IMCO acquisition as a business combination under GAAP and accordingly, the purchase price was allocated to the assets acquired and liabilities assumed based on their fair values as of the date of acquisition. During the three months ended September 30, 2020, we made a $43 million post-closing adjustment to the purchase price resulting in reductions of $9 million and $34 million to our initial estimates of the fair value of the intangible assets acquired and goodwill, respectively. The Company finalized the valuation of assets and liabilities during the three months ended December 31, 2020, resulting in no additional adjustments to the estimated fair values as of the date of acquisition.
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
The following table summarizes the purchase price, fair values of the assets acquired and liabilities assumed, and resulting goodwill as of the May 26, 2020 acquisition date, adjusted for the post-closing adjustments described above.
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Purchase price | $ | 1,581 | |
Fair value of assets acquired: | |
Cash segregated and on deposit for regulatory purposes | 4,392 | |
Receivables from brokerage clients | 80 | |
Acquired intangible assets | 1,109 | |
Total assets acquired | 5,581 | |
Fair value of liabilities assumed: | |
Payables to brokerage clients | 4,472 | |
Total liabilities assumed | 4,472 | |
Fair value of net identifiable assets acquired | $ | 1,109 | |
Goodwill | $ | 472 | |
The identifiable intangible assets of $1.1 billion are subject to amortization. The following table summarizes the major classes of intangible assets acquired and their respective fair values and weighted-average useful lives:
| | | | | | | | | | | |
| Fair Value | | Weighted-Average Useful Life (Years) |
Customer relationships | $ | 962 | | | 18 |
Brokerage referral agreement (1) | 142 | | | 20 |
Royalty-free license | 5 | | | 7 |
Total acquired intangible assets | $ | 1,109 | | | |
(1) The brokerage referral agreement has an initial term of 5 years and is automatically renewable for one-year increments thereafter.
Goodwill recorded of $472 million, primarily attributable to the additional scale and anticipated synergies from the USAA-IMCO acquisition, was assigned to the Investor Services segment and is deductible for tax purposes.
The Company’s consolidated statements of income include total net revenues and net loss attributable to the USAA-IMCO acquisition of $235 million and $51 million, respectively, for the period May 26, 2020 through December 31, 2020.
In connection with the acquisition, the Company agreed to reimburse USAA for certain contract termination and other fees and severance costs incurred by USAA. These costs totaled $21 million for the year ended December 31, 2020 and are included in other expense on the consolidated statements of income. Additionally, the Company incurred various professional fees and other costs related to the USAA-IMCO acquisition, such as advisory, legal, and accounting fees. In total, the Company incurred acquisition costs of $54 million and $14 million for the years ended December 31, 2020 and 2019, respectively, which are primarily included in professional services, other expense, and compensation and benefits on the consolidated statements of income.
Pro Forma Financial Information (Unaudited)
The following table presents unaudited pro forma financial information as if the TD Ameritrade and USAA-IMCO acquisitions had occurred on January 1, 2019. The unaudited pro forma results reflect after-tax adjustments for acquisition costs, amortization and depreciation of acquired intangible and tangible assets, the impact of the amended IDA agreement which reduced the service fee on client cash deposits held at the TD Depository Institutions to 15 basis points from the 25 basis points paid by TD Ameritrade under its previous IDA agreement, and other immaterial adjustments for the effects of purchase accounting, and do not reflect potential revenue growth or cost savings that may be realized as a result of the acquisitions. Pro forma net income for the year ended December 31, 2020 excludes after-tax acquisition costs for both Schwab and the acquirees of $156 million. These costs and after-tax acquisition costs of $40 million incurred in 2019 by Schwab and the acquirees are included in pro forma net income for the year ended December 31, 2019.
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
The unaudited pro forma financial information is presented for informational purposes only, and is not necessarily indicative of future operations or results had the TD Ameritrade and USAA-IMCO acquisitions been completed as of January 1, 2019.
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| | Year Ended December 31, |
| |
| | 2020 | | 2019 |
Total net revenues | | $ | 16,617 | | | $ | 16,897 | |
Net income available to common stockholders | | 4,617 | | | 5,121 | |
4. Revenue Recognition
Disaggregated Revenue
Disaggregation of Schwab’s revenue by major source is as follows:
| | | | | | | | | | | | | | | | | |
Year Ended December 31, | 2021 | | 2020 | | 2019 |
Net interest revenue | | | | | |
Cash and cash equivalents | $ | 40 | | | $ | 120 | | | $ | 518 | |
Cash and investments segregated | 24 | | | 141 | | | 345 | |
Receivables from brokerage clients | 2,455 | | | 848 | | | 821 | |
Available for sale securities | 4,641 | | | 4,537 | | | 1,560 | |
Held to maturity securities | — | | | — | | | 3,591 | |
Bank loans | 620 | | | 545 | | | 584 | |
Securities lending revenue | 720 | | | 334 | | | 147 | |
Other interest revenue | 6 | | | 6 | | | 14 | |
Interest revenue | 8,506 | | | 6,531 | | | 7,580 | |
Bank deposits | (54) | | | (93) | | | (700) | |
Payables to brokerage clients | (9) | | | (12) | | | (79) | |
Short-term borrowings | (9) | | | — | | | — | |
Long-term debt | (384) | | | (289) | | | (258) | |
Securities lending expense | (24) | | | (33) | | | (38) | |
Other interest expense | 4 | | | 9 | | | 11 | |
Interest expense | (476) | | | (418) | | | (1,064) | |
Net interest revenue | 8,030 | | | 6,113 | | | 6,516 | |
Asset management and administration fees | | | | | |
Mutual funds, ETFs, and CTFs | 1,961 | | | 1,770 | | | 1,747 | |
Advice solutions | 1,993 | | | 1,443 | | | 1,198 | |
Other | 320 | | | 262 | | | 266 | |
Asset management and administration fees | 4,274 | | | 3,475 | | | 3,211 | |
Trading revenue | | | | | |
Commissions | 2,050 | | | 739 | | | 549 | |
Order flow revenue | 2,053 | | | 621 | | | 135 | |
Principal transactions | 49 | | | 56 | | | 68 | |
Trading revenue | 4,152 | | | 1,416 | | | 752 | |
Bank deposit account fees | 1,315 | | | 355 | | | — | |
Other | 749 | | | 332 | | | 242 | |
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Total net revenues | $ | 18,520 | | | $ | 11,691 | | | $ | 10,721 | |
For a summary of revenue provided by our reportable segments, see Note 24. The recognition of revenue is not impacted by the operating segment in which revenue is generated.
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
5. Receivables from and Payables to Brokerage Clients
Receivables from and payables to brokerage clients are detailed below: | | | | | | | | | | | |
December 31, | 2021 | | 2020 |
Receivables | | | |
Margin loans | $ | 87,365 | | | $ | 60,865 | |
Other brokerage receivables | 3,200 | | | 3,575 | |
Receivables from brokerage clients — net (1) | $ | 90,565 | | | $ | 64,440 | |
Payables | | | |
Interest-bearing payables | $ | 107,551 | | | $ | 84,642 | |
Non-interest-bearing payables | 18,120 | | | 19,559 | |
Payables to brokerage clients | $ | 125,671 | | | $ | 104,201 | |
(1) The allowance for credit losses for receivables from brokerage clients and related activity were immaterial for all periods presented.
At December 31, 2021 and 2020, approximately 17% of total CS&Co and TD Ameritrade, Inc. client accounts were located in California.
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
6. Investment Securities
The amortized cost, gross unrealized gains and losses, and fair value of the Company’s AFS investment securities are as follows:
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December 31, 2021 | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
Available for sale securities | | | | | | | |
U.S. agency mortgage-backed securities | $ | 335,803 | | | $ | 3,141 | | | $ | 4,589 | | | $ | 334,355 | |
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U.S. Treasury securities | 21,394 | | | 13 | | | 125 | | | 21,282 | |
Asset-backed securities (1) | 17,547 | | | 79 | | | 80 | | | 17,546 | |
Corporate debt securities (2) | 12,310 | | | 143 | | | 109 | | | 12,344 | |
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U.S. state and municipal securities | 1,611 | | | 81 | | | 5 | | | 1,687 | |
Non-agency commercial mortgage-backed securities | 1,170 | | | 20 | | | — | | | 1,190 | |
Certificates of deposit | 1,000 | | | — | | | 1 | | | 999 | |
Foreign government agency securities | 425 | | | — | | | — | | | 425 | |
Commercial paper | 200 | | | — | | | — | | | 200 | |
Other | 22 | | | 4 | | | — | | | 26 | |
Total available for sale securities | $ | 391,482 | | | $ | 3,481 | | | $ | 4,909 | | | $ | 390,054 | |
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December 31, 2020 | | | | | | | |
Available for sale securities | | | | | | | |
U.S. agency mortgage-backed securities | $ | 283,911 | | | $ | 7,005 | | | $ | 563 | | | $ | 290,353 | |
Asset-backed securities (1) | 18,808 | | | 174 | | | 84 | | | 18,898 | |
Corporate debt securities (2) | 12,408 | | | 388 | | | — | | | 12,796 | |
U.S. Treasury securities | 10,631 | | | 25 | | | — | | | 10,656 | |
U.S. state and municipal securities | 1,544 | | | 153 | | | — | | | 1,697 | |
Foreign government agency securities | 1,411 | | | 2 | | | — | | | 1,413 | |
Non-agency commercial mortgage-backed securities | 1,213 | | | 52 | | | — | | | 1,265 | |
Certificates of deposit | 300 | | | — | | | — | | | 300 | |
Other | 22 | | | — | | | — | | | 22 | |
Total available for sale securities | $ | 330,248 | | | $ | 7,799 | | | $ | 647 | | | $ | 337,400 | |
(1) Approximately 58% and 51% of asset-backed securities held as of December 31, 2021 and 2020, respectively, were Federal Family Education Loan Program Asset-Backed Securities. Asset-backed securities collateralized by credit card receivables represented approximately 30% and 36% of the asset-backed securities held as of December 31, 2021 and 2020, respectively.
(2) As of December 31, 2021 and 2020 approximately 31% and 46%, respectively of the total AFS in corporate debt securities were issued by institutions in the financial services industry.
On January 1, 2019 the Company transferred certain U.S. agency mortgage-backed securities with a fair value of $8.8 billion from the HTM category to the AFS category as permitted by ASU 2017-12, “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities” (ASU 2017-12). This transfer resulted in a net of tax increase to AOCI of $19 million.
In October 2019, the Federal Reserve issued a final enhanced prudential standards rule, and the Federal Reserve, the Office of the Comptroller of the Currency, and the FDIC jointly issued a final regulatory capital and liquidity rule. With total consolidated assets of $294.0 billion at December 31, 2019, CSC was designated as a Category III firm pursuant to the framework established by the final rules. Accordingly, the Company opted to exclude AOCI from its regulatory capital as permitted by the regulatory capital and liquidity rule beginning January 1, 2020. In accordance with ASC 320 Investment – Debt Securities and as of January 1, 2020, the Company transferred all of its investment securities designated as HTM to the AFS category without tainting our intent to hold other debt securities to maturity. At the date of transfer, these securities had a total amortized cost of $134.7 billion and a total net unrealized gain of $1.4 billion.
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
In January 2022, the Company transferred $108.8 billion of U.S. agency mortgage-backed securities with a total net unrealized loss at the time of transfer of $2.4 billion from the AFS category to the HTM category.
At December 31, 2021, our banking subsidiaries had pledged securities with a fair value of $49.6 billion as collateral to secure borrowing capacity on secured credit facilities with the FHLB (see Note 13). Our banking subsidiaries also pledge investment securities as collateral to secure borrowing capacity at the Federal Reserve discount window, and had pledged securities with a fair value of $12.0 billion as collateral for this facility at December 31, 2021. The Company also pledges securities issued by federal agencies to secure certain trust deposits. The fair value of these pledged securities was $1.3 billion at December 31, 2021.
Securities with unrealized losses, aggregated by category and period of continuous unrealized loss, of AFS investment securities are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Less than 12 months | | 12 months or longer | | Total |
December 31, 2021 | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses |
Available for sale securities | | | | | | | | | | | |
U.S. agency mortgage-backed securities | $ | 186,955 | | | $ | 3,216 | | | $ | 38,007 | | | $ | 1,373 | | | $ | 224,962 | | | $ | 4,589 | |
U.S. Treasury securities | 16,658 | | | 125 | | | 21 | | | — | | | 16,679 | | | 125 | |
Asset-backed securities | 6,093 | | | 58 | | | 2,708 | | | 22 | | | 8,801 | | | 80 | |
Corporate debt securities | 4,713 | | | 99 | | | 197 | | | 10 | | | 4,910 | | | 109 | |
Certificates of deposit | 799 | | | 1 | | | — | | | — | | | 799 | | | 1 | |
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U.S. state and municipal securities | 191 | | | 4 | | | 5 | | | 1 | | | 196 | | | 5 | |
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Total | $ | 215,409 | | | $ | 3,503 | | | $ | 40,938 | | | $ | 1,406 | | | $ | 256,347 | | | $ | 4,909 | |
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December 31, 2020 | | | | | | | | | | | |
Available for sale securities | | | | | | | | | | | |
U.S. agency mortgage-backed securities | $ | 61,706 | | | $ | 551 | | | $ | 4,774 | | | $ | 12 | | | $ | 66,480 | | | $ | 563 | |
Asset-backed securities | 1,398 | | | 13 | | | 5,822 | | | 71 | | | 7,220 | | | 84 | |
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Total | $ | 63,104 | | | $ | 564 | | | $ | 10,596 | | | $ | 83 | | | $ | 73,700 | | | $ | 647 | |
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At December 31, 2021, substantially all rated securities in the investment portfolios were investment grade. U.S. agency mortgage-backed securities do not have explicit credit ratings; however, management considers these to be of the highest credit quality and rating given the guarantee of principal and interest by the U.S. government or U.S. government-sponsored enterprises.
For a description of management’s quarterly evaluation of AFS securities in unrealized loss positions see Note 2. No amounts were recognized as credit loss expense and no securities were written down to fair value through earnings for the years ended December 31, 2021 and 2020. None of the Company’s AFS securities held as of December 31, 2021 and 2020 had an allowance for credit losses. Prior to the Company’s adoption of ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (ASU 2016-13) on January 1, 2020, no amount was recognized as other-than-temporary impairment in earnings or other comprehensive income during the year ended December 31, 2019.
The Company had $683 million and $634 million of accrued interest receivable as of December 31, 2021 and 2020, respectively, for AFS securities. These amounts are excluded from the amortized cost basis of AFS securities and included in other assets on the consolidated balance sheets. There were no write-offs of accrued interest receivable on AFS securities during the years ended December 31, 2021 and 2020.
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
In the table below, mortgage-backed securities and other asset-backed securities have been allocated to maturity groupings based on final contractual maturities. As borrowers may have the right to call or prepay certain obligations underlying our investment securities, actual maturities may differ from the scheduled contractual maturities presented below.
The maturities of AFS investment securities are as follows:
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December 31, 2021 | Within 1 year | | After 1 year through 5 years | | After 5 years through 10 years | | After 10 years | | Total |
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U.S. agency mortgage-backed securities | $ | 3,483 | | | $ | 20,916 | | | $ | 71,705 | | | $ | 238,251 | | | $ | 334,355 | |
U.S. Treasury securities | 4,049 | | | 14,569 | | | 2,664 | | | — | | | 21,282 | |
Asset-backed securities | — | | | 4,922 | | | 3,003 | | | 9,621 | | | 17,546 | |
Corporate debt securities | 1,634 | | | 6,443 | | | 4,267 | | | — | | | 12,344 | |
U.S. state and municipal securities | 23 | | | 150 | | | 1,010 | | | 504 | | | 1,687 | |
Non-agency commercial mortgage-backed securities | — | | | — | | | — | | | 1,190 | | | 1,190 | |
Certificates of deposit | 300 | | | 699 | | | — | | | — | | | 999 | |
Foreign government agency securities | 101 | | | 324 | | | — | | | — | | | 425 | |
Commercial paper | 200 | | | — | | | — | | | — | | | 200 | |
Other | — | | | — | | | — | | | 26 | | | 26 | |
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Total fair value | $ | 9,790 | | | $ | 48,023 | | | $ | 82,649 | | | $ | 249,592 | | | $ | 390,054 | |
Total amortized cost | $ | 9,761 | | | $ | 47,336 | | | $ | 82,556 | | | $ | 251,829 | | | $ | 391,482 | |
Weighted-average yield (1) | 1.28 | % | | 1.89 | % | | 1.78 | % | | 1.11 | % | | 1.35 | % |
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(1) The weighted-average yield is computed using the amortized cost at December 31, 2021.
Proceeds and gross realized gains and losses from sales of AFS investment securities are as follows:
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Year Ended December 31, | 2021 | | 2020 | | 2019 |
Proceeds | $ | 13,306 | | | $ | 4,801 | | | $ | 24,495 | |
Gross realized gains | 40 | | | 5 | | | 16 | |
Gross realized losses | 36 | | | 1 | | | 10 | |
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
7. Bank Loans and Related Allowance for Credit Losses
The composition of bank loans and delinquency analysis by portfolio segment and class of financing receivable is as follows:
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December 31, 2021 | Current | | 30-59 days past due | | 60-89 days past due | | >90 days past due and other nonaccrual loans (3) | | Total past due and other nonaccrual loans | | Total loans | | Allowance for credit losses | | Total bank loans – net |
Residential real estate: | | | | | | | | | | | | | | | |
First Mortgages (1,2) | $ | 21,022 | | | $ | 41 | | | $ | 1 | | | $ | 26 | | | $ | 68 | | | $ | 21,090 | | | $ | 13 | | | $ | 21,077 | |
HELOCs (1,2) | 637 | | | 2 | | | — | | | 9 | | | 11 | | | 648 | | | 2 | | | 646 | |
Total residential real estate | 21,659 | | | 43 | | | 1 | | | 35 | | | 79 | | | 21,738 | | | 15 | | | 21,723 | |
Pledged asset lines | 12,698 | | | 3 | | | 8 | | | — | | | 11 | | | 12,709 | | | — | | | 12,709 | |
Other | 207 | | | — | | | — | | | — | | | — | | | 207 | | | 3 | | | 204 | |
Total bank loans | $ | 34,564 | | | $ | 46 | | | $ | 9 | | | $ | 35 | | | $ | 90 | | | $ | 34,654 | | | $ | 18 | | | $ | 34,636 | |
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December 31, 2020 | | | | | | | | | | | | | | | |
Residential real estate: | | | | | | | | | | | | | | | |
First Mortgages (1,2) | $ | 14,804 | | | $ | 27 | | | $ | 1 | | | $ | 72 | | | $ | 100 | | | $ | 14,904 | | | $ | 22 | | | $ | 14,882 | |
HELOCs (1,2) | 823 | | | 1 | | | 1 | | | 17 | | | 19 | | | 842 | | | 5 | | | 837 | |
Total residential real estate | 15,627 | | | 28 | | | 2 | | | 89 | | | 119 | | | 15,746 | | | 27 | | | 15,719 | |
Pledged asset lines | 7,901 | | | 10 | | | 5 | | | — | | | 15 | | | 7,916 | | | — | | | 7,916 | |
Other | 181 | | | — | | | — | | | — | | | — | | | 181 | | | 3 | | | 178 | |
Total bank loans | $ | 23,709 | | | $ | 38 | | | $ | 7 | | | $ | 89 | | | $ | 134 | | | $ | 23,843 | | | $ | 30 | | | $ | 23,813 | |
(1) First Mortgages and HELOCs include unamortized premiums and discounts and direct origination costs of $91 million and $72 million at December 31, 2021 and 2020, respectively.
(2) At December 31, 2021 and 2020, 46% and 45%, respectively, of the First Mortgage and HELOC portfolios were concentrated in California. These loans have performed in a manner consistent with the portfolio as a whole.
(3) There were no loans accruing interest that were contractually 90 days or more past due at December 31, 2021 or 2020.
At December 31, 2021, CSB had pledged the full balance of First Mortgages and HELOCs pursuant to a blanket lien status collateral arrangement to secure borrowing capacity on a secured credit facility with the FHLB (see Note 13).
Changes in the allowance for credit losses on bank loans were as follows:
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| December 31, 2021 | December 31, 2020 | December 31, 2019 |
| First Mortgages | HELOCs | Total residential real estate | Other | Total | First Mortgages | HELOCs | Total residential real estate | Other | Total | First Mortgages | HELOCs | Total residential real estate | Other | Total |
Balance at beginning of year | $ | 22 | | $ | 5 | | $ | 27 | | $ | 3 | | $ | 30 | | $ | 11 | | $ | 4 | | $ | 15 | | $ | 3 | | $ | 18 | | $ | 14 | | $ | 5 | | $ | 19 | | 2 | | $ | 21 | |
Adoption of ASU 2016-13 | — | | — | | — | | — | | — | | 1 | | — | | 1 | | — | | 1 | | — | | — | | — | | — | | — | |
Charge-offs | — | | — | | — | | (1) | | (1) | | — | | — | | — | | — | | — | | — | | — | | — | | — | | — | |
Recoveries | — | | 1 | | 1 | | — | | 1 | | 1 | | — | | 1 | | — | | 1 | | 1 | | 1 | | 2 | | — | | 2 | |
Provision for credit losses | (9) | | (4) | | (13) | | 1 | | (12) | | 9 | | 1 | | 10 | | — | | 10 | | (4) | | (2) | | (6) | | 1 | | (5) | |
Balance at end of year | $ | 13 | | $ | 2 | | $ | 15 | | $ | 3 | | $ | 18 | | $ | 22 | | $ | 5 | | $ | 27 | | $ | 3 | | $ | 30 | | $ | 11 | | $ | 4 | | $ | 15 | | $ | 3 | | $ | 18 | |
As discussed in Note 2, PALs are subject to the collateral maintenance practical expedient under ASC 326. All PALs were fully collateralized by securities with fair values in excess of borrowings as of December 31, 2021 and 2020, respectively. Therefore, no allowance for credit losses for PALs as of those dates was required.
The economy continued to strengthen overall in 2021, however, COVID-19 has continued to affect the pace of recovery. Management’s macroeconomic outlook reflects continued moderate growth in home prices and lower unemployment anticipated over the near term. This macroeconomic outlook, along with the continued strong credit quality metrics in the bank loans portfolio, result in a lower modeled projection of loss rates compared to December 31, 2020.
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
A summary of bank loan-related nonperforming assets and troubled debt restructurings is as follows:
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December 31, | 2021 | | 2020 |
Nonaccrual loans (1) | $ | 35 | | | $ | 89 | |
Other real estate owned (2) | 1 | | | 1 | |
Total nonperforming assets | 36 | | | 90 | |
Troubled debt restructurings | — | | | 1 | |
Total nonperforming assets and troubled debt restructurings | $ | 36 | | | $ | 91 | |
(1) Nonaccrual loans include nonaccrual troubled debt restructurings.
(2) Included in other assets on the consolidated balance sheets.
Credit Quality
In addition to monitoring delinquency, Schwab monitors the credit quality of First Mortgages and HELOCs by stratifying the portfolios by the following:
•Year of origination;
•Borrower FICO scores at origination (Origination FICO);
•Updated borrower FICO scores (Updated FICO);
•Loan-to-value (LTV) ratios at origination (Origination LTV); and
•Estimated Current LTV ratios (Estimated Current LTV).
Borrowers’ FICO scores are provided by an independent third-party credit reporting service and generally updated quarterly. The Origination LTV and Estimated Current LTV for a HELOC include any first lien mortgage outstanding on the same property at the time of the HELOC’s origination. The Estimated Current LTV for each loan is updated on a monthly basis by reference to a home price appreciation index.
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
The credit quality indicators of the Company’s First Mortgages and HELOCs are detailed below:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| First Mortgages Amortized Cost Basis by Origination Year | | | | |
December 31, 2021 | 2021 | 2020 | 2019 | 2018 | 2017 | pre-2017 | Total First Mortgages | Revolving HELOCs amortized cost basis | HELOCs converted to term loans | Total HELOCs |
Origination FICO | | | | | | | | | | |
<620 | $ | 1 | | $ | 1 | | $ | — | | $ | — | | $ | — | | $ | 1 | | $ | 3 | | $ | — | | $ | — | | $ | — | |
620 – 679 | 34 | | 25 | | 5 | | 1 | | 6 | | 19 | | 90 | | — | | 2 | | 2 | |
680 – 739 | 1,306 | | 524 | | 146 | | 41 | | 98 | | 215 | | 2,330 | | 61 | | 60 | | 121 | |
≥740 | 11,649 | | 4,454 | | 1,049 | | 165 | | 354 | | 996 | | 18,667 | | 308 | | 217 | | 525 | |
Total | $ | 12,990 | | $ | 5,004 | | $ | 1,200 | | $ | 207 | | $ | 458 | | $ | 1,231 | | $ | 21,090 | | $ | 369 | | $ | 279 | | $ | 648 | |
Origination LTV | | | | | | | | | | |
≤70% | $ | 11,234 | | $ | 4,159 | | $ | 948 | | $ | 160 | | $ | 351 | | $ | 909 | | $ | 17,761 | | $ | 305 | | $ | 199 | | $ | 504 | |
>70% – ≤90% | 1,756 | | 845 | | 252 | | 47 | | 107 | | 319 | | 3,326 | | 64 | | 78 | | 142 | |
>90% – ≤100% | — | | — | | — | | — | | — | | 3 | | 3 | | — | | 2 | | 2 | |
Total | $ | 12,990 | | $ | 5,004 | | $ | 1,200 | | $ | 207 | | $ | 458 | | $ | 1,231 | | $ | 21,090 | | $ | 369 | | $ | 279 | | $ | 648 | |
Weighted Average Updated FICO | | | | | | | | | | |
<620 | $ | 5 | | $ | 2 | | $ | 1 | | $ | — | | $ | 2 | | $ | 12 | | $ | 22 | | $ | 2 | | $ | 6 | | $ | 8 | |
620 – 679 | 96 | | 69 | | 19 | | 7 | | 8 | | 30 | | 229 | | 6 | | 14 | | 20 | |
680 – 739 | 1,265 | | 421 | | 115 | | 24 | | 53 | | 149 | | 2,027 | | 51 | | 39 | | 90 | |
≥740 | 11,624 | | 4,512 | | 1,065 | | 176 | | 395 | | 1,040 | | 18,812 | | 310 | | 220 | | 530 | |
Total | $ | 12,990 | | $ | 5,004 | | $ | 1,200 | | $ | 207 | | $ | 458 | | $ | 1,231 | | $ | 21,090 | | $ | 369 | | $ | 279 | | $ | 648 | |
Estimated Current LTV (1) | | | | | | | | | | |
≤70% | $ | 11,707 | | $ | 4,961 | | $ | 1,196 | | $ | 206 | | $ | 455 | | $ | 1,229 | | $ | 19,754 | | $ | 368 | | $ | 277 | | $ | 645 | |
>70% – ≤90% | 1,283 | | 43 | | 4 | | 1 | | 3 | | 2 | | 1,336 | | 1 | | 2 | | 3 | |
>90% – ≤100% | — | | — | | — | | — | | — | | — | | — | | — | | — | | — | |
>100% | — | | — | | — | | — | | — | | — | | — | | — | | — | | — | |
Total | $ | 12,990 | | $ | 5,004 | | $ | 1,200 | | $ | 207 | | $ | 458 | | $ | 1,231 | | $ | 21,090 | | $ | 369 | | $ | 279 | | $ | 648 | |
Percent of Loans on Nonaccrual Status | 0.03 | % | 0.10 | % | 0.03 | % | 0.03 | % | 0.03 | % | 1.40 | % | 0.12 | % | 0.64 | % | 2.33 | % | 1.39 | % |
(1) Represents the LTV for the full line of credit (drawn and undrawn) for revolving HELOCs.
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| First Mortgages Amortized Cost Basis by Origination Year | | | | |
December 31, 2020 | 2020 | 2019 | 2018 | 2017 | pre-2017 | Total First Mortgages | Revolving HELOCs amortized cost basis | HELOCs converted to term loans | Total HELOCs |
Origination FICO | | | | | | | | | |
<620 | $ | 1 | | $ | — | | $ | — | | $ | — | | $ | 2 | | $ | 3 | | $ | — | | $ | — | | $ | — | |
620 – 679 | 29 | | 13 | | 3 | | 8 | | 31 | | 84 | | 1 | | 3 | | 4 | |
680 – 739 | 794 | | 355 | | 105 | | 181 | | 419 | | 1,854 | | 82 | | 80 | | 162 | |
≥740 | 7,150 | | 2,452 | | 449 | | 858 | | 2,054 | | 12,963 | | 380 | | 296 | | 676 | |
Total | $ | 7,974 | | $ | 2,820 | | $ | 557 | | $ | 1,047 | | $ | 2,506 | | $ | 14,904 | | $ | 463 | | $ | 379 | | $ | 842 | |
Origination LTV | | | | | | | | | |
≤70% | $ | 6,653 | | $ | 2,211 | | $ | 396 | | $ | 793 | | $ | 1,935 | | $ | 11,988 | | $ | 351 | | $ | 269 | | $ | 620 | |
>70% – ≤90% | 1,321 | | 609 | | 161 | | 254 | | 568 | | 2,913 | | 112 | | 107 | | 219 | |
>90% – ≤100% | — | | — | | — | | — | | 3 | | 3 | | — | | 3 | | 3 | |
Total | $ | 7,974 | | $ | 2,820 | | $ | 557 | | $ | 1,047 | | $ | 2,506 | | $ | 14,904 | | $ | 463 | | $ | 379 | | $ | 842 | |
Weighted Average Updated FICO | | | | | | | | | |
<620 | $ | 5 | | $ | 2 | | $ | 1 | | $ | 4 | | $ | 19 | | $ | 31 | | $ | 3 | | $ | 9 | | $ | 12 | |
620 – 679 | 67 | | 34 | | 16 | | 21 | | 60 | | 198 | | 12 | | 20 | | 32 | |
680 – 739 | 784 | | 252 | | 66 | | 121 | | 281 | | 1,504 | | 58 | | 55 | | 113 | |
≥740 | 7,118 | | 2,532 | | 474 | | 901 | | 2,146 | | 13,171 | | 390 | | 295 | | 685 | |
Total | $ | 7,974 | | $ | 2,820 | | $ | 557 | | $ | 1,047 | | $ | 2,506 | | $ | 14,904 | | $ | 463 | | $ | 379 | | $ | 842 | |
Estimated Current LTV (1) | | | | | | | | | |
≤70% | $ | 6,999 | | $ | 2,582 | | $ | 533 | | $ | 1,034 | | $ | 2,490 | | $ | 13,638 | | $ | 452 | | $ | 368 | | $ | 820 | |
>70% – ≤90% | 975 | | 238 | | 24 | | 13 | | 16 | | 1,266 | | 11 | | 9 | | 20 | |
>90% – ≤100% | — | | — | | — | | — | | — | | — | | — | | 1 | | 1 | |
>100% | — | | — | | — | | — | | — | | — | | — | | 1 | | 1 | |
Total | $ | 7,974 | | $ | 2,820 | | $ | 557 | | $ | 1,047 | | $ | 2,506 | | $ | 14,904 | | $ | 463 | | $ | 379 | | $ | 842 | |
Percent of Loans on Nonaccrual Status | 0.09 | % | 0.38 | % | 1.02 | % | 0.87 | % | 1.57 | % | 0.48 | % | 1.37 | % | 2.80 | % | 2.02 | % |
(1) Represents the LTV for the full line of credit (drawn and undrawn) for revolving HELOCs.
At December 31, 2021, First Mortgage loans of $17.0 billion had adjustable interest rates. Substantially all of these mortgages have initial fixed interest rates for three to ten years and interest rates that adjust annually thereafter. Approximately 28% of the balance of these mortgages consisted of loans with interest-only payment terms. The interest rates on approximately 89% of the balance of these interest-only loans are not scheduled to reset for three or more years. Schwab’s mortgage loans do not include interest terms described as temporary introductory rates below current market rates.
At December 31, 2021 and 2020, Schwab had $57 million and $43 million, respectively, of accrued interest on bank loans, which is excluded from the amortized cost basis of bank loans and included in other assets on the consolidated balance sheets.
The HELOC product has a 30-year loan term with an initial draw period of ten years from the date of origination. After the initial draw period, the balance outstanding at such time is converted to a 20-year amortizing loan. The interest rate during the initial draw period and the 20-year amortizing period is a floating rate based on the prime rate plus a margin.
The following table presents HELOCs converted to amortizing loans during each period presented:
| | | | | | | | | | | |
December 31, | 2021 | | 2020 |
HELOCs converted to amortizing loans | $ | 19 | | | $ | 26 | |
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
The following table presents when current outstanding HELOCs will convert to amortizing loans:
| | | | | |
December 31, 2021 | Balance |
Converted to an amortizing loan by period end | $ | 279 | |
Within 1 year | 16 | |
> 1 year – 3 years | 72 | |
> 3 years – 5 years | 65 | |
> 5 years | 216 | |
Total | $ | 648 | |
At December 31, 2021, $495 million of the HELOC portfolio was secured by second liens on the associated properties. Second lien mortgage loans typically possess a higher degree of credit risk given the subordination to the first lien holder in the event of default. In addition to the credit monitoring activities described previously, Schwab also monitors credit risk by reviewing the delinquency status of the first lien loan on the associated property. At December 31, 2021, the borrowers on approximately 53% of HELOC loan balances outstanding only paid the minimum amount due.
8. Equipment, Office Facilities, and Property
Equipment, office facilities, and property are detailed below:
| | | | | | | | | | | |
December 31, | 2021 | | 2020 |
Software | $ | 2,524 | | | $ | 2,314 | |
Buildings | 1,640 | | | 1,444 | |
Information technology and telecommunications equipment | 679 | | | 509 | |
Leasehold improvements | 462 | | | 455 | |
Construction in progress | 429 | | | 325 | |
Land | 208 | | | 208 | |
Other | 388 | | | 295 | |
Total equipment, office facilities, and property | 6,330 | | | 5,550 | |
Accumulated depreciation and amortization | (2,888) | | | (2,667) | |
Total equipment, office facilities, and property — net | $ | 3,442 | | | $ | 2,883 | |
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
9. Goodwill and Acquired Intangible Assets
Acquired intangible assets and goodwill are detailed below:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 | | December 31, 2020 |
| Gross Carrying Value | | Accumulated Amortization | | Net Carrying Value | | Gross Carrying Value | | Accumulated Amortization | | Net Carrying Value |
Client relationships | $ | 10,089 | | | $ | (908) | | | $ | 9,181 | | | $ | 10,089 | | | $ | (386) | | | $ | 9,703 | |
Technology | 305 | | | (197) | | | 108 | | | 305 | | | (112) | | | 193 | |
Trade names | 116 | | | (26) | | | 90 | | | 113 | | | (18) | | | 95 | |
Total acquired intangible assets | $ | 10,510 | | | $ | (1,131) | | | $ | 9,379 | | | $ | 10,507 | | | $ | (516) | | | $ | 9,991 | |
Estimated future annual amortization expense for acquired intangible assets as of December 31, 2021 is as follows:
| | | | | |
2022 | $ | 596 | |
2023 | 534 | |
2024 | 518 | |
2025 | 512 | |
2026 | 508 | |
Thereafter | 6,630 | |
Total | $ | 9,298 | |
Note: The above schedule excludes indefinite-lived intangible assets of $81 million.
The changes in the carrying amount of goodwill, as allocated to our reportable segments, are presented in the following table:
| | | | | | | | | | | | | | | | | |
| Investor Services | | Advisor Services | | Total |
Balance at December 31, 2019 | $ | 1,096 | | | $ | 131 | | | $ | 1,227 | |
Goodwill acquired in TD Ameritrade acquisition | 6,380 | | | 3,835 | | | 10,215 | |
Goodwill acquired in other acquisitions | 494 | | | 16 | | | 510 | |
| | | | | |
December 31, 2020 | 7,970 | | | 3,982 | | | 11,952 | |
Goodwill acquired and other changes during the period | — | | | — | | | — | |
| | | | | |
Balance at December 31, 2021 | $ | 7,970 | | | $ | 3,982 | | | $ | 11,952 | |
See Note 3 for additional information on the Company’s acquisitions.
As of our annual testing date, we performed an assessment of each of the Company’s reporting units. Based on this analysis, we concluded that goodwill was not impaired. There were no indicators that goodwill was impaired after our annual testing date. Schwab did not recognize any goodwill impairment in any of the years presented.
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
10. Other Assets
The components of other assets are as follows:
| | | | | | | | | | | |
December 31, | 2021 | | 2020 |
Other receivables from brokers, dealers, and clearing organizations | $ | 2,475 | | | $ | 1,748 | |
Receivables — interest, dividends, and other | 1,615 | | | 1,180 | |
Other securities owned at fair value (1) | 1,584 | | | 687 | |
Other investments (2) | 1,526 | | | 1,019 | |
Operating lease ROU assets | 842 | | | 937 | |
Customer contract receivables (3) | 637 | | | 579 | |
Securities borrowed | 582 | | | 873 | |
Capitalized contract costs | 344 | | | 303 | |
Other | 713 | | | 457 | |
Total other assets | $ | 10,318 | | | $ | 7,783 | |
(1) Includes fractional shares held in client brokerage accounts. Corresponding repurchase liabilities in an equal amount for these client-held fractional shares are included in accrued expenses and other liabilities on the consolidated balance sheet. See also Notes 2 and 18.
(2) Includes LIHTC investments and certain other CRA-related investments (see Note 11). This item also includes investments in FHLB stock of $29 million at December 31, 2021 and 2020, which are required to be held as a condition of borrowing with the FHLB (see Note 13) and can only be sold to the issuer at its par value. Any cash dividends received from investments in FHLB stock are recognized as interest revenue in the consolidated statements of income. CSB and CSPB are members of the Federal Reserve and as a condition of membership, are required to hold Federal Reserve stock. Other investments also includes investments in FRB stock of $436 million and $191 million at December 31, 2021 and 2020, respectively.
(3) Represents substantially all receivables from contracts with customers within the scope of ASC 606. Schwab does not have any other significant contract assets or contract liability balances as of December 31, 2021 or 2020.
Capitalized contract costs
Capitalized contract costs relate to incremental costs of obtaining a contract with a customer, including sales commissions paid to employees for obtaining contracts with clients, and are presented in the table above. These costs are amortized to expense on a straight-line basis over a period that is consistent with how the related revenue is recognized. Amortization expense related to capitalized contract costs was $69 million, $63 million, and $55 million during the years ended December 31, 2021, 2020, and 2019, respectively, which was recorded in compensation and benefits expense on the consolidated statements of income.
11. Variable Interest Entities
As of December 31, 2021 and 2020, all of Schwab’s involvement with variable interest entities (VIEs) is through CSB’s CRA-related investments and most of these are related to LIHTC investments. As part of CSB’s community reinvestment initiatives, CSB invests in funds that make equity investments in multifamily affordable housing properties and receives tax credits and other tax benefits for these investments. During 2021, 2020, and 2019, CSB recorded amortization of $71 million, $56 million, and $39 million, respectively, and recognized tax credits and other tax benefits of $90 million, $69 million, and $47 million, respectively, associated with these investments. The amortization, as well as the tax credits and other tax benefits, are included in taxes on income.
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
Aggregate assets, liabilities, and maximum exposure to loss
The aggregate assets, liabilities, and maximum exposure to loss from those VIEs in which Schwab holds a variable interest, but is not the primary beneficiary, are summarized in the table below:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 | | December 31, 2020 |
| Aggregate assets | | Aggregate liabilities | | Maximum exposure to loss | | Aggregate assets | | Aggregate liabilities | | Maximum exposure to loss |
LIHTC investments (1) | $ | 915 | | | $ | 530 | | | $ | 915 | | | $ | 649 | | | $ | 344 | | | $ | 649 | |
Other CRA investments (2) | 161 | | | — | | | 211 | | | 118 | | | — | | | 152 | |
Total | $ | 1,076 | | | $ | 530 | | | $ | 1,126 | | | $ | 767 | | | $ | 344 | | | $ | 801 | |
(1) Aggregate assets and aggregate liabilities are included in other assets and accrued expenses and other liabilities, respectively, on the consolidated balance sheets.
(2) Other CRA investments are accounted for as loans at amortized cost, equity method investments, AFS securities, or using the adjusted cost method. Aggregate assets are included in AFS securities, bank loans – net, or other assets on the consolidated balance sheets.
Schwab’s maximum exposure to loss would result from the loss of the investments, including any committed amounts. CSB’s funding of these remaining commitments is dependent upon the occurrence of certain conditions, and CSB expects to pay substantially all of these commitments between 2022 and 2025. During the years ended December 31, 2021, 2020, and 2019, Schwab did not provide or intend to provide financial or other support to the VIEs that it was not contractually required to provide.
12. Bank Deposits
Bank deposits consist of interest-bearing and non-interest-bearing deposits as follows:
| | | | | | | | | | | |
December 31, | 2021 | | 2020 |
Interest-bearing deposits: | | | |
Deposits swept from brokerage accounts | $ | 412,287 | | | $ | 332,513 | |
Checking | 22,786 | | | 17,785 | |
Savings and other | 7,234 | | | 6,739 | |
Total interest-bearing deposits | 442,307 | | | 357,037 | |
Non-interest-bearing deposits | 1,471 | | | 985 | |
Total bank deposits | $ | 443,778 | | | $ | 358,022 | |
13. Borrowings
CSC Senior Notes
CSC’s Senior Notes are unsecured obligations. CSC may redeem some or all of the Senior Notes of each series prior to their maturity, subject to certain restrictions, and the payment of an applicable make-whole premium in certain instances. Interest is payable semi-annually for the fixed-rate Senior Notes and quarterly for the floating-rate Senior Notes.
TDA Holding Senior Notes
TDA Holding’s Senior Notes are unsecured obligations. TDA Holding may redeem some or all of the Senior Notes of each series prior to their maturity, subject to certain restrictions, and the payment of an applicable make-whole premium in certain instances. Interest is payable semi-annually for the fixed-rate Senior Notes.
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
The following table lists long-term debt by instrument outstanding as of December 31, 2021 and 2020.
| | | | | | | | | | | |
| Date of | Principal Amount Outstanding |
| Issuance | 2021 | 2020 |
CSC Fixed-rate Senior Notes: | | | |
3.250% due May 21, 2021 | 05/22/18 | $ | — | | $ | 600 | |
3.225% due September 1, 2022 | 08/29/12 | 256 | | 256 | |
2.650% due January 25, 2023 | 12/07/17 | 800 | | 800 | |
3.550% due February 1, 2024 | 10/31/18 | 500 | | 500 | |
0.750% due March 18, 2024 | 03/18/21 | 1,500 | | — | |
3.750% due April 1, 2024 (1) | 09/24/21 | 350 | | — | |
3.000% due March 10, 2025 | 03/10/15 | 375 | | 375 | |
4.200% due March 24, 2025 | 03/24/20 | 600 | | 600 | |
3.625% due April 1, 2025 (1) | 09/24/21 | 418 | | — | |
3.850% due May 21, 2025 | 05/22/18 | 750 | | 750 | |
3.450% due February 13, 2026 | 11/13/15 | 350 | | 350 | |
0.900% due March 11, 2026 | 12/11/20 | 1,250 | | 1,250 | |
1.150% due May 13, 2026 | 05/13/21 | 1,000 | | — | |
3.200% due March 2, 2027 | 03/02/17 | 650 | | 650 | |
3.300% due April 1, 2027 (1) | 09/24/21 | 744 | | — | |
3.200% due January 25, 2028 | 12/07/17 | 700 | | 700 | |
2.000% due March 20, 2028 | 03/18/21 | 1,250 | | — | |
4.000% due February 1, 2029 | 10/31/18 | 600 | | 600 | |
3.250% due May 22, 2029 | 05/22/19 | 600 | | 600 | |
2.750% due October 1, 2029 (1) | 09/24/21 | 475 | | — | |
4.625% due March 22, 2030 | 03/24/20 | 500 | | 500 | |
1.650% due March 11, 2031 | 12/11/20 | 750 | | 750 | |
2.300% due May 13, 2031 | 05/13/21 | 750 | | — | |
1.950% due December 1, 2031 | 08/26/21 | 850 | | — | |
CSC Floating-rate Senior Notes: | | | |
Three-month LIBOR + 0.32% due May 21, 2021 | 05/22/18 | — | | 600 | |
SOFR + 0.500% due March 18, 2024 | 03/18/21 | 1,250 | | — | |
SOFR + 0.520% due May 13, 2026 | 05/13/21 | 500 | | — | |
Total CSC Senior Notes | | 17,768 | | 9,881 | |
TDA Holding Fixed-rate Senior Notes: | | | |
2.950% due April 1, 2022 | 03/09/15 | 750 | | 750 | |
3.750% due April 1, 2024 (1) | 11/01/18 | 50 | | 400 | |
3.625% due April 1, 2025 (1) | 10/22/14 | 82 | | 500 | |
3.300% due April 1, 2027 (1) | 04/27/17 | 56 | | 800 | |
2.750% due October 1, 2029 (1) | 08/16/19 | 25 | | 500 | |
TDA Holding Floating-rate Senior Notes: | | | |
Three-month LIBOR + 0.43% due November 1, 2021 | 11/01/18 | — | | 600 | |
Total TDA Holding Senior Notes | | 963 | | 3,550 | |
Finance lease liabilities | | 94 | | 6 | |
Unamortized premium — net | | 180 | | 249 | |
Debt issuance costs | | (91) | | (54) | |
Total long-term debt | | $ | 18,914 | | $ | 13,632 | |
(1) During 2021, we completed an offer to exchange certain senior notes issued by TDA Holding for senior notes issued by CSC. Of the approximately $2.2 billion in aggregate principal amount of TDA Holding’s senior notes offered in the exchange, 90%, or approximately $2.0 billion, were tendered and accepted. The new senior notes issued by CSC have the same interest rates and maturity dates as the TDA Holding senior notes. The $213 million not exchanged remained outstanding across four series of senior notes issued by TDA Holding. The debt exchange was treated as a debt modification for accounting purposes.
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
Annual maturities on all long-term debt outstanding at December 31, 2021, are as follows:
| | | | | |
| Maturities |
2022 | $ | 1,036 | |
2023 | 829 | |
2024 | 3,673 | |
2025 | 2,237 | |
2026 | 3,100 | |
Thereafter | 7,950 | |
Total maturities | 18,825 | |
Unamortized premium — net | 180 | |
Debt issuance costs | (91) | |
Total long-term debt | $ | 18,914 | |
Short-term borrowings: CSC has the ability to issue up to $5.0 billion of commercial paper notes ($1.5 billion at December 31, 2020) with maturities of up to 270 days. CSC had $3.0 billion of commercial paper notes outstanding at December 31, 2021 and none outstanding at December 31, 2020. CSC and CS&Co also have access to uncommitted lines of credit with external banks with total borrowing capacity of $1.5 billion; no amounts were outstanding as of December 31, 2021 or 2020.
Our banking subsidiaries maintain secured credit facilities with the FHLB. Amounts available under these facilities are dependent on the amount of our First Mortgages, HELOCs, and the fair value of certain of their investment securities that are pledged as collateral. As of December 31, 2021 and 2020, the collateral pledged provided a total borrowing capacity of $63.5 billion and $55.1 billion, respectively, of which no amounts were outstanding at the end of either year.
Our banking subsidiaries have access to funding through the Federal Reserve discount window. Amounts available are dependent upon the fair value of certain investment securities that are pledged as collateral. As of December 31, 2021 and 2020, our collateral pledged provided total borrowing capacity of $12.0 billion and $7.9 billion, respectively, of which no amounts were outstanding at the end of either year.
Our banking subsidiaries may engage with external banks in repurchase agreements collateralized by investment securities as another source of short-term liquidity. The Company had no borrowings outstanding pursuant to such repurchase agreements at December 31, 2021 or 2020.
TDAC maintains secured uncommitted lines of credit, under which TDAC borrows on either a demand or short-term basis and pledges client margin securities as collateral. There was $1.9 billion outstanding under the secured uncommitted lines of credit as of December 31, 2021. There were no borrowings outstanding under these secured uncommitted lines of credit as of December 31, 2020. See Note 17 for additional information.
TDAC maintains a senior unsecured committed revolving credit facility with an aggregate borrowing capacity of $600 million, which matures in April 2022. Additionally, at December 31, 2020, TDAC maintained an $850 million unsecured committed revolving credit facility which matured in April 2021 and was not renewed. There were no borrowings outstanding under the TDAC senior revolving facilities as of December 31, 2021 or December 31, 2020.
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
14. Leases
The following table details the amounts and locations of operating lease assets and liabilities on the consolidated balance sheet:
| | | | | | | | | | | | | | |
December 31, | | 2021 | | 2020 |
Lease assets: | Balance Sheet Classification | | | |
Operating lease ROU assets | Other assets | $ | 842 | | | $ | 937 | |
Lease liabilities: | | | | |
Operating lease liabilities | Accrued expenses and other liabilities | $ | 932 | | | $ | 1,033 | |
The Company had immaterial sublease income for the years ended December 31, 2021 and 2020.
The components of lease expense are as follows:
| | | | | | | | | | | | | | | | | |
Year Ended December 31, | 2021 | | 2020 | | 2019 |
Lease Cost | | | | | |
Operating lease cost (1) | $ | 220 | | | $ | 166 | | | $ | 137 | |
Variable lease cost (2) | 48 | | | 34 | | | 34 | |
(1) Includes an immaterial amount attributable to short-term leases.
(2) Includes payments that are entirely variable and amounts that represent the difference between payments based on an index or rate that is reflected in the lease liability and what is actually incurred.
The following tables present supplemental operating lease information:
| | | | | | | | | | | |
December 31, | 2021 | | 2020 |
Lease Term and Discount Rate | | | |
Weighted-average remaining lease term (years) | 6.63 | | 7.02 |
Weighted-average discount rate | 2.48 | % | | 2.86 | % |
| | | | | |
Maturity of Lease Liabilities | Operating Leases (1) |
2022 | $ | 191 | |
2023 | 185 | |
2024 | 149 | |
2025 | 128 | |
2026 | 103 | |
Thereafter | 257 | |
Total lease payments | 1,013 | |
Less: Interest | 81 | |
Present value of lease liabilities | $ | 932 | |
(1) Operating lease payments exclude $40 million of legally binding minimum lease payments for leases signed, but not yet commenced. These leases will commence between 2022 and 2023 with lease terms of five years to 15 years.
The Company had finance lease ROU assets included in equipment, office facilities, and property – net of $93 million and finance lease liabilities of $94 million included in long-term debt on the consolidated balance sheet as of December 31, 2021. Finance leases were immaterial as of December 31, 2020.
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
15. Commitments and Contingencies
Loan Portfolio: CSB provides a co-branded loan origination program for CSB clients (the Program) with Rocket Mortgage, LLC (Rocket Mortgage®), formerly known as Quicken Loans, LLC. Pursuant to the Program, Rocket Mortgage originates and services First Mortgages and HELOCs for CSB clients. Under the Program, CSB purchases certain First Mortgages and HELOCs that are originated by Rocket Mortgage. CSB purchased First Mortgages of $14.0 billion and $8.7 billion during 2021 and 2020, respectively. CSB purchased HELOCs with commitments of $418 million and $458 million during 2021 and 2020, respectively.
The Company’s commitments to extend credit on bank lines of credit and to purchase First Mortgages are as follows:
| | | | | | | | |
December 31, | 2021 | 2020 |
Commitments to extend credit related to unused HELOCs, PALs, and other lines of credit | $ | 6,193 | | $ | 8,141 | |
Commitments to purchase First Mortgage loans | 1,824 | | 1,917 | |
Total | $ | 8,017 | | $ | 10,058 | |
Guarantees and indemnifications: Schwab has clients that sell (i.e., write) listed option contracts that are cleared by the Options Clearing Corporation – a clearing house that establishes margin requirements on these transactions. We partially satisfy the margin requirements by arranging unsecured standby LOCs, in favor of the Options Clearing Corporation, which are issued by several banks. At December 31, 2021, the aggregate face amount of these LOCs totaled $15 million. There were no funds drawn under any of these LOCs at December 31, 2021. In connection with its securities lending activities, Schwab is required to provide collateral to certain brokerage clients. The Company satisfies the collateral requirements by providing cash as collateral.
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 amounts it has posted as collateral. The Company also engages third-party firms to clear clients’ futures and options on futures transactions and to facilitate clients’ foreign exchange trading, and has agreed to indemnify these firms for losses that they may incur from the client transactions introduced to them by the Company. The potential requirement for the Company to make payments under these arrangements is remote. Accordingly, no liability has been recognized for these guarantees.
IDA agreement: The Company’s IDA agreement with the TD Depository Institutions became effective on October 6, 2020. The IDA agreement creates responsibilities of the Company and certain contingent obligations. Pursuant to the IDA agreement, uninvested cash within eligible brokerage client accounts is swept off-balance sheet to deposit accounts at the TD Depository Institutions. Schwab provides recordkeeping and support services to the TD Depository Institutions with respect to the deposit accounts for which Schwab receives an aggregate monthly fee. Though unlikely, in the event the sweep arrangement fee computation were to result in a negative amount in any given month, Schwab would be required to pay the TD Depository Institutions.
The IDA agreement also provides that, as of July 1, 2021, Schwab has the option to migrate up to $10 billion of IDA balances every 12 months to Schwab’s balance sheet, subject to certain limitations and adjustments. The Company’s ability to migrate these balances to its balance sheet is dependent upon multiple factors including having sufficient capital levels to sustain these incremental deposits and certain binding limitations specified in the IDA agreement, including the requirement that Schwab can only move IDA balances designated as floating-rate obligations. In addition, Schwab also must maintain a minimum $50 billion IDA balance through June 2031, and at least 80% of the IDA balances must be designated as fixed-rate obligations through June 2026.
The total ending IDA balance was $147.2 billion as of December 31, 2021, and $154.1 billion as of December 31, 2020. Were IDA balances to decline below the required IDA balance minimum, Schwab could be required to direct additional sweep cash from its balance sheet to the IDA program. Through December 31, 2021, Schwab had moved $10.1 billion of IDA balances to its balance sheet, which included uninsured balances and certain international account balances. Subsequent to December 31, 2021, the Company moved approximately $10 billion of additional IDA balances to its balance sheet.
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
Legal contingencies: Schwab is subject to claims and lawsuits in the ordinary course of business, including arbitrations, class actions and other litigation, some of which include claims for substantial or unspecified damages. The Company is also the subject of inquiries, investigations, and proceedings by regulatory and other governmental agencies.
Predicting the outcome of a litigation or regulatory matter is inherently difficult, requiring significant judgment and evaluation of various factors, including the procedural status of the matter and any recent developments; prior experience and the experience of others in similar cases; available defenses, including potential opportunities to dispose of a case on the merits or procedural grounds before trial (e.g., motions to dismiss or for summary judgment); the progress of fact discovery; the opinions of counsel and experts regarding potential damages; and potential opportunities for settlement and the status of any settlement discussions. It may not be reasonably possible to estimate a range of potential liability until the matter is closer to resolution – pending, for example, further proceedings, the outcome of key motions or appeals, or discussions among the parties. Numerous issues may have to be developed, such as discovery of important factual matters and determination of threshold legal issues, which may include novel or unsettled questions of law. Reserves are established or adjusted or further disclosure and estimates of potential loss are provided as the matter progresses and more information becomes available.
Schwab believes it has strong defenses in all significant matters currently pending and is contesting liability and any damages claimed. Nevertheless, some of these matters may result in adverse judgments or awards, including penalties, injunctions or other relief, and the Company may also determine to settle a matter because of the uncertainty and risks of litigation. Described below are 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.
Schwab Intelligent Portfolios® SEC Investigation: As disclosed on July 1, 2021, the Company has been responding to an enforcement investigation by the SEC arising from a compliance examination and concerning historic disclosures related to the Schwab Intelligent Portfolios digital advisory solution. In connection with a tentative agreement reached with SEC staff to resolve the matter, financial results for 2021 included a liability and related non-deductible charge of approximately $200 million. Completion of any settlement is always contingent on a vote of the Commission. The Company continues to cooperate with SEC staff with the goal of fully resolving the matter.
TD Ameritrade Acquisition Litigation: As disclosed previously, Schwab and TD Ameritrade have been responding to a lawsuit challenging the acquisition which was filed on May 12, 2020 in the Delaware Court of Chancery (Hawkes v. Bettino et al.) on behalf of a proposed class of TD Ameritrade’s stockholders, excluding, among others, TD Bank. The initial complaint named as defendants each member of the TD Ameritrade board of directors at the time the acquisition was approved, as well as TD Bank and Schwab. On June 11, 2020, plaintiff dismissed a claim that had sought to enjoin voting on or consummation of the acquisition. On February 5, 2021, plaintiff filed an amended complaint naming an officer and certain directors of TD Ameritrade at the time the acquisition was approved, as well as TD Bank, certain TD Bank related entities, and Schwab. The amended complaint asserts separate claims for breach of fiduciary duty by the TD Ameritrade officer, certain members of the TD Ameritrade board and TD Bank, and against Schwab for aiding and abetting such breaches, the allegation being that the amendment of the Insured Deposit Account Agreement TD Bank negotiated directly with Schwab allowed TD Bank to divert merger consideration from TD Ameritrade’s minority public stockholders. Plaintiff seeks to recover monetary damages, costs and attorneys’ fees. Schwab and the other defendants consider the allegations to be entirely without merit and on April 29, 2021, filed motions to dismiss the remaining claims in the lawsuit.
Crago Order Routing Litigation: On July 13, 2016, a securities class action lawsuit was filed in the U.S. District Court for the Northern District of California on behalf of a putative class of customers executing equity orders through CS&Co. The lawsuit names CS&Co and CSC as defendants and alleges that an agreement under which CS&Co routed orders to UBS Securities LLC between July 13, 2011 and December 31, 2014 violated CS&Co’s duty to seek best execution. Plaintiffs seek unspecified damages, interest, injunctive and equitable relief, and attorneys’ fees and costs. Defendants consider the allegations to be entirely without merit and have been vigorously contesting the lawsuit. After a first amended complaint was dismissed with leave to amend, plaintiffs filed a second amended complaint on August 14, 2017. Defendants again moved to dismiss, and in a decision issued December 5, 2017, the court denied the motion. Plaintiffs filed a motion for class certification on April 30, 2021, and in a decision on October 27, 2021, the court denied the motion and held that certification of a class action is inappropriate. Plantiffs sought review of the order denying class certification by the Ninth Circuit Court of Appeals, which was denied, and on February 3, 2022, plantiffs filed a motion for reconsideration of that denial, which is pending.
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
Ford Order Routing Litigation: On September 15, 2014, TDA Holding, TD Ameritrade, Inc. and its former CEO, Frederick J. Tomczyk, were sued in the U.S. District Court for the District of Nebraska on behalf of a putative class of TD Ameritrade, Inc. clients alleging that defendants failed to seek best execution and made misrepresentations and omissions regarding its order routing practices. Plaintiffs seek unspecified damages and injunctive and other relief. Defendants consider the allegations to be entirely without merit and have been vigorously contesting the lawsuit. On September 14, 2018, the District Court granted plaintiff’s motion for class certification, and defendants petitioned for an immediate appeal of the District Court’s class certification decision. On April 23, 2021, the U.S. Court of Appeals, 8th Circuit, issued a decision reversing the District Court’s certification of a class and remanding the case back to the District Court for further proceedings. Plaintiffs have renewed their motion for class certification with the District Court, and a motion by defendants to compel the case to arbitration was denied by the District Court as premature.
16. Exit and Other Related Liabilities
As a result of the significant growth seen beginning in late 2020 and early 2021 across key client volume metrics, including the number of active brokerage accounts, clients’ daily average trades, and peak daily trades, the Company determined in 2021 to increase the scope of technology work related to the integration of TD Ameritrade. In 2021, we commenced greater technology build-out to support the expanded volumes of our combined client base. Based on our current integration plans and expanded scope of technology work, the Company continues to expect to complete client conversion within 30 to 36 months from the October 6, 2020 acquisition date.
To achieve our integration objectives, the Company expects to recognize significant additional acquisition and integration-related costs and capital expenditures throughout the integration process. Such acquisition and integration-related costs have included, and are expected to continue to include, professional fees, such as legal, advisory, and accounting fees, compensation and benefits expenses for employees and contractors involved in the integration work, and costs for technology enhancements.
The Company’s acquisition and integration-related spending also includes exit and other related costs, which are primarily comprised of employee compensation and benefits such as severance pay, other termination benefits, and retention costs, as well as costs related to facility closures such as accelerated amortization and depreciation or impairments of assets in those locations. Exit and other related costs are a component of the Company’s overall acquisition and integration-related spending, and support the Company’s ability to achieve integration objectives including expected synergies.
Our estimates of the nature, amounts, and timing of recognition of acquisition and integration-related costs remain subject to change based on a number of factors, including the expected duration and complexity of the integration process and the continued uncertainty of the current economic environment. More specifically, factors that could cause variability in our expected acquisition and integration-related costs include the level of employee attrition, workforce redeployment from eliminated positions into open roles, changes in the levels of client activity, as well as increased real estate-related exit cost variability due to the effects of the COVID-19 pandemic including changes in remote working trends.
Inclusive of costs recognized through December 31, 2021, Schwab currently expects to incur total exit and other related costs for the integration of TD Ameritrade ranging from $650 million to $1 billion, consisting of employee compensation and benefits, facility exit costs, and certain other costs. During the years ended December 31, 2021 and 2020, the Company recognized $108 million and $186 million for acquisition-related exit costs, respectively. The Company expects the remaining exit and other related costs will be incurred and charged to expense over the next 21 to 33 months; some costs are expected to be incurred after client conversion. In addition to ASC 420 Exit or Disposal Cost Obligations, certain of the costs associated with these activities are accounted for in accordance with ASC 360 Property, Plant and Equipment, ASC 712 Compensation – Nonretirement Post Employment Benefits, ASC 718 Compensation – Stock Compensation, and ASC 842 Leases.
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
The following is a summary of the activity in the Company’s exit and other related liabilities for the years ended December 31, 2021 and 2020:
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | |
| Investor Services Employee Compensation and Benefits | | | | | | Advisor Services Employee Compensation and Benefits | | | | | | Total |
Balance at December 31, 2019 | $ | — | | | | | | | $ | — | | | | | | | $ | — | |
Exit and other related liabilities assumed in business acquisition | 18 | | | | | | | 5 | | | | | | | 23 | |
Amounts recognized in expense (1) | 138 | | | | | | | 38 | | | | | | | 176 | |
Costs paid or otherwise settled | (70) | | | | | | | (19) | | | | | | | (89) | |
Balance at December 31, 2020 (2) | $ | 86 | | | | | | | $ | 24 | | | | | | | $ | 110 | |
| | | | | | | | | | | | | |
Amounts recognized in expense (1) | 66 | | | | | | | 17 | | | | | | | 83 | |
Costs paid or otherwise settled | (124) | | | | | | | (34) | | | | | | | (158) | |
| | | | | | | | | | | | | |
Balance at December 31, 2021 (2) | $ | 28 | | | | | | | $ | 7 | | | | | | | $ | 35 | |
(1) Amounts recognized in expense for severance pay and other termination benefits, as well as retention costs, are primarily included in compensation and benefits on the consolidated statements of income. The year ended December 31, 2021 includes a reduction of the liability resulting from changes in estimates of $9 million and $2 million in Investor Services and Advisor Services, respectively.
(2) Included in accrued and expenses and other liabilities on the consolidated balance sheets.
The following table summarizes the exit and other related costs recognized in expense for the year ended December 31, 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Investor Services | Advisor Services | |
| Employee Compensation and Benefits | Facility Exit Costs (1) | | Investor Services Total | Employee Compensation and Benefits | Facility Exit Costs (1) | | Advisor Services Total | Total |
Compensation and benefits | $ | 66 | | $ | — | | | $ | 66 | | $ | 17 | | $ | — | | | $ | 17 | | $ | 83 | |
Occupancy and equipment | — | | 18 | | | 18 | | — | | 4 | | | 4 | | 22 | |
Professional services | — | | 1 | | | 1 | | — | | — | | | — | | 1 | |
| | | | | | | | | |
| | | | | | | | | |
Other | — | | 2 | | | 2 | | — | | — | | | — | | 2 | |
Total | $ | 66 | | $ | 21 | | | $ | 87 | | $ | 17 | | $ | 4 | | | $ | 21 | | $ | 108 | |
(1) Costs related to facility closures. These costs, which are primarily comprised of accelerated amortization of ROU assets, relate to the impact of abandoning leased and other properties.
The following table summarizes the exit and other related costs recognized in expense for the year ended December 31, 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Investor Services | Advisor Services | |
| Employee Compensation and Benefits | Facility Exit Costs (1) | | Investor Services Total | Employee Compensation and Benefits | Facility Exit Costs (1) | | Advisor Services Total | Total |
Compensation and benefits | $ | 138 | | $ | — | | | $ | 138 | | $ | 38 | | $ | — | | | $ | 38 | | $ | 176 | |
Occupancy and equipment | — | | 6 | | | 6 | | — | | 1 | | | 1 | | 7 | |
| | | | | | | | | |
| | | | | | | | | |
Depreciation and amortization | — | | 2 | | | 2 | | — | | 1 | | | 1 | | 3 | |
| | | | | | | | | |
Total | $ | 138 | | $ | 8 | | | $ | 146 | | $ | 38 | | $ | 2 | | | $ | 40 | | $ | 186 | |
(1) Costs related to facility closures. These costs, which are comprised of accelerated amortization of ROU assets and accelerated depreciation of fixed assets, relate to the impact of abandoning leased and other properties.
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
The following table summarizes the exit and other related costs incurred from October 6, 2020 through December 31, 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Investor Services | Advisor Services | |
| Employee Compensation and Benefits | Facility Exit Costs (1) | | Investor Services Total | Employee Compensation and Benefits | Facility Exit Costs (1) | | Advisor Services Total | Total |
Compensation and benefits | $ | 204 | | $ | — | | | $ | 204 | | $ | 55 | | $ | — | | | $ | 55 | | $ | 259 | |
Occupancy and equipment | — | | 24 | | | 24 | | — | | 5 | | | 5 | | 29 | |
Depreciation and amortization | — | | 2 | | | 2 | | — | | 1 | | | 1 | | 3 | |
Professional services | — | | 1 | | | 1 | | — | | — | | | — | | 1 | |
| | | | | | | | | |
Other | — | | 2 | | | 2 | | — | | — | | | — | | 2 | |
Total | $ | 204 | | $ | 29 | | | $ | 233 | | $ | 55 | | $ | 6 | | | $ | 61 | | $ | 294 | |
(1) Costs related to facility closures. These costs, which are primarily comprised of accelerated amortization of ROU assets and accelerated depreciation of fixed assets, relate to the impact of abandoning leased and other properties.
17. Financial Instruments Subject to Off-Balance Sheet Credit Risk
Resale agreements: Schwab enters into collateralized resale agreements principally with other broker-dealers, which could result in losses in the event the counterparty fails to purchase the securities held as collateral for the cash advanced and the fair value of the securities declines. To mitigate this risk, Schwab requires that the counterparty deliver securities to a custodian, to be held as collateral, with a fair value at or in excess of the resale price. Schwab also sets standards for the credit quality of the counterparty, monitors the fair value of the underlying securities as compared to the related receivable, including accrued interest, and requires additional collateral where deemed appropriate. The collateral provided under these resale agreements is utilized to meet obligations under broker-dealer client protection rules, which place limitations on our ability to access such segregated securities. For Schwab to repledge or sell this collateral, we would be required to deposit cash and/or securities of an equal amount into our segregated reserve bank accounts in order to meet our segregated cash and investment requirement. Schwab’s resale agreements as of December 31, 2021 and 2020 were not subject to master netting arrangements.
Securities lending: Schwab loans brokerage client securities temporarily to other brokers and clearing houses in connection with its securities lending activities and receives cash as collateral for the securities loaned. Increases in security prices may cause the fair value of the securities loaned to exceed the amount of cash received as collateral. In the event the counterparty to these transactions does not return the loaned securities or provide additional cash collateral, we may be exposed to the risk of acquiring the securities at prevailing market prices in order to satisfy our client obligations. Schwab mitigates this risk by requiring credit approvals for counterparties, monitoring the fair value of securities loaned, and requiring additional cash as collateral when necessary. In addition, most of our securities lending transactions are through a program with a clearing organization, which guarantees the return of cash to us. We also borrow securities from other broker-dealers to fulfill short sales by brokerage clients and deliver cash to the lender in exchange for the securities. The fair value of these borrowed securities was $566 million and $852 million at December 31, 2021 and 2020, respectively. Our securities lending transactions are subject to enforceable master netting arrangements with other broker-dealers; however, we do not net securities lending transactions. Therefore, the securities loaned and securities borrowed are presented gross in the consolidated balance sheets.
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
The following table presents information about our resale agreements, securities lending, and other activity depicting the potential effect of rights of setoff between these recognized assets and recognized liabilities.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Gross Assets/ Liabilities | | Gross Amounts Offset in the Consolidated Balance Sheets | | Net Amounts Presented in the Consolidated Balance Sheets | | Gross Amounts Not Offset in the Consolidated Balance Sheets | | Net Amount |
| | | | Counterparty Offsetting | | Collateral | |
December 31, 2021 | | | | | | | | | | | | | |
Assets | | | | | | | | | | | | | |
Resale agreements (1) | | $ | 13,096 | | | $ | — | | | $ | 13,096 | | | $ | — | | | $ | (13,096) | | (2) | | $ | — | |
Securities borrowed (3) | | 582 | | | — | | | 582 | | | (383) | | | (195) | | | | 4 | |
Total | | $ | 13,678 | | | $ | — | | | $ | 13,678 | | | $ | (383) | | | $ | (13,291) | | | | $ | 4 | |
Liabilities | | | | | | | | | | | | | |
Securities loaned (4,5) | | $ | 7,158 | | | $ | — | | | $ | 7,158 | | | $ | (383) | | | $ | (6,015) | | | | $ | 760 | |
Secured short-term borrowings (6) | | 1,850 | | | — | | | 1,850 | | | — | | | (1,850) | | | | — | |
Total | | $ | 9,008 | | | $ | — | | | $ | 9,008 | | | $ | (383) | | | $ | (7,865) | | | | $ | 760 | |
| | | | | | | | | | | | | |
December 31, 2020 | | | | | | | | | | | | | |
Assets | | | | | | | | | | | | | |
Resale agreements (1) | | $ | 14,904 | | | $ | — | | | $ | 14,904 | | | $ | — | | | $ | (14,904) | | (2) | | $ | — | |
Securities borrowed (3) | | 873 | | | — | | | 873 | | | (673) | | | (195) | | | | 5 | |
Total | | $ | 15,777 | | | $ | — | | | $ | 15,777 | | | $ | (673) | | | $ | (15,099) | | | | $ | 5 | |
Liabilities | | | | | | | | | | | | | |
Securities loaned (4,5) | | $ | 7,549 | | | $ | — | | | $ | 7,549 | | | $ | (673) | | | $ | (6,049) | | | | $ | 827 | |
Total | | $ | 7,549 | | | $ | — | | | $ | 7,549 | | | $ | (673) | | | $ | (6,049) | | | | $ | 827 | |
(1) Included in cash and investments segregated and on deposit for regulatory purposes in the consolidated balance sheets.
(2) Actual collateral was greater than or equal to the value of the related assets. At December 31, 2021 and 2020, the fair value of collateral received in connection with resale agreements that are available to be repledged or sold was $13.4 billion and $15.2 billion, respectively.
(3) Included in other assets in the consolidated balance sheets.
(4) Included in accrued expenses and other liabilities in the consolidated balance sheets. The cash collateral received from counterparties under securities lending transactions was equal to or greater than the market value of the securities loaned at December 31, 2021 and 2020.
(5) Securities loaned are predominantly comprised of equity securities held in client brokerage accounts with overnight and continuous remaining contractual maturities.
(6) Included in short-term borrowings in the consolidated balance sheets. See below for collateral pledged and Note 13 for additional information.
Client trade settlement: Schwab is obligated to settle transactions with brokers and other financial institutions even if our clients fail to meet their obligations to us. Clients are required to complete their transactions on settlement date, generally two business days after the trade date. If clients do not fulfill their contractual obligations, we may incur losses. We have established procedures to reduce this risk by requiring deposits from clients in excess of amounts prescribed by regulatory requirements for certain types of trades, and therefore the potential to make payments under these client transactions is remote. Accordingly, no liability has been recognized for these transactions.
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
Margin lending: Clients with margin loans have agreed to allow Schwab to pledge collateralized securities in their brokerage accounts in accordance with federal regulations. The following table summarizes the fair value of client securities that were available, under such regulations, that could have been used as collateral, as well as the fair value of securities that we had pledged to third parties under such regulations and from securities borrowed transactions:
| | | | | | | | |
December 31, | 2021 | 2020 |
Fair value of client securities available to be pledged | $ | 120,306 | | $ | 84,006 | |
Fair value of securities pledged for: | | |
Fulfillment of requirements with the Options Clearing Corporation (1) | $ | 16,829 | | $ | 10,222 | |
Fulfillment of client short sales | 5,934 | | 6,274 | |
Securities lending to other broker-dealers | 6,269 | | 6,522 | |
Collateral for short-term borrowings | 2,390 | | — | |
Total collateral pledged to third parties | $ | 31,422 | | $ | 23,018 | |
Note: Excludes amounts available and pledged for securities lending from fully-paid client securities. The fair value of fully-paid client securities available and pledged was $118 million as of December 31, 2021 and $183 million as of December 31, 2020.
(1) Securities pledged to fulfill client margin requirements for open option contracts established with the Options Clearing Corporation.
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
18. Fair Values of Assets and Liabilities
For a description of the fair value hierarchy and Schwab’s fair value methodologies, including the use of independent third-party pricing services, see Note 2. The Company did not adjust prices received from the primary independent third-party pricing service at December 31, 2021 or 2020.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following tables present the fair value hierarchy for assets and liabilities measured at fair value on a recurring basis:
| | | | | | | | | | | | | | |
December 31, 2021 | Level 1 | Level 2 | Level 3 | Balance at Fair Value |
Cash equivalents: | | | | |
Money market funds | $ | 11,719 | | $ | — | | $ | — | | $ | 11,719 | |
| | | | |
Total cash equivalents | 11,719 | | — | | — | | 11,719 | |
Investments segregated and on deposit for regulatory purposes: | | | | |
Certificates of deposit | — | | 350 | | — | | 350 | |
U.S. Government securities | — | | 36,349 | | — | | 36,349 | |
Total investments segregated and on deposit for regulatory purposes | — | | 36,699 | | — | | 36,699 | |
Available for sale securities: | | | | |
U.S. agency mortgage-backed securities | — | | 334,355 | | — | | 334,355 | |
U.S. Treasury securities | — | | 21,282 | | — | | 21,282 | |
Asset-backed securities | — | | 17,546 | | — | | 17,546 | |
Corporate debt securities | — | | 12,344 | | — | | 12,344 | |
U.S. state and municipal securities | — | | 1,687 | | — | | 1,687 | |
Non-agency commercial mortgage-backed securities | — | | 1,190 | | — | | 1,190 | |
Certificates of deposit | — | | 999 | | — | | 999 | |
Foreign government agency securities | — | | 425 | | — | | 425 | |
Commercial paper | — | | 200 | | — | | 200 | |
Other | — | | 26 | | — | | 26 | |
Total available for sale securities | — | | 390,054 | | — | | 390,054 | |
Other assets: | | | | |
Equity, corporate debt, and other securities | 854 | | 59 | | — | | 913 | |
Mutual funds and ETFs | 636 | | — | | — | | 636 | |
State and municipal debt obligations | — | | 32 | | — | | 32 | |
U.S. Government securities | — | | 3 | | — | | 3 | |
Total other assets | 1,490 | | 94 | | — | | 1,584 | |
Total assets | $ | 13,209 | | $ | 426,847 | | $ | — | | $ | 440,056 | |
Accrued expenses and other liabilities | $ | 1,354 | | $ | 45 | | $ | — | | $ | 1,399 | |
Total liabilities | $ | 1,354 | | $ | 45 | | $ | — | | $ | 1,399 | |
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
| | | | | | | | | | | | | | |
December 31, 2020 | Level 1 | Level 2 | Level 3 | Balance at Fair Value |
Cash equivalents: | | | | |
Money market funds | $ | 11,159 | | $ | — | | $ | — | | $ | 11,159 | |
| | | | |
Total cash equivalents | 11,159 | | — | | — | | 11,159 | |
Investments segregated and on deposit for regulatory purposes: | | | | |
Certificates of deposit | — | | 550 | | — | | 550 | |
U.S. Government securities | — | | 30,698 | | — | | 30,698 | |
Total investments segregated and on deposit for regulatory purposes | — | | 31,248 | | — | | 31,248 | |
Available for sale securities: | | | | |
U.S. agency mortgage-backed securities | — | | 290,353 | | — | | 290,353 | |
Asset-backed securities | — | | 18,898 | | — | | 18,898 | |
Corporate debt securities | — | | 12,796 | | — | | 12,796 | |
U.S. Treasury securities | — | | 10,656 | | — | | 10,656 | |
U.S. state and municipal securities | — | | 1,697 | | — | | 1,697 | |
| | | | |
| | | | |
Foreign government agency securities | — | | 1,413 | | — | | 1,413 | |
Non-agency commercial mortgage-backed securities | — | | 1,265 | | — | | 1,265 | |
Certificates of deposit | — | | 300 | | — | | 300 | |
Other | — | | 22 | | — | | 22 | |
Total available for sale securities | — | | 337,400 | | — | | 337,400 | |
Other assets: | | | | |
Mutual funds and ETFs | 361 | | — | | — | | 361 | |
U.S. Government securities | — | | 253 | | — | | 253 | |
State and municipal debt obligations | — | | 37 | | — | | 37 | |
Equity, corporate debt, and other securities | 7 | | 29 | | — | | 36 | |
| | | | |
Total other assets | 368 | | 319 | | — | | 687 | |
Total | $ | 11,527 | | $ | 368,967 | | $ | — | | $ | 380,494 | |
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
Fair Value of Other Financial Instruments
The following tables present the fair value hierarchy for other financial instruments:
| | | | | | | | | | | | | | | | | |
December 31, 2021 | Carrying Amount | Level 1 | Level 2 | Level 3 | Balance at Fair Value |
Assets | | | | | |
Cash and cash equivalents | $ | 51,256 | | $ | 51,256 | | $ | — | | $ | — | | $ | 51,256 | |
Cash and investments segregated and on deposit for regulatory purposes | 17,246 | | 4,151 | | 13,095 | | — | | 17,246 | |
| | | | | |
Receivables from brokerage clients — net | 90,560 | | — | | 90,560 | | — | | 90,560 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
Bank loans — net: | | | | | |
First Mortgages | 21,077 | | — | | 21,027 | | — | | 21,027 | |
HELOCs | 646 | | — | | 668 | | — | | 668 | |
Pledged asset lines | 12,709 | | — | | 12,709 | | — | | 12,709 | |
Other | 204 | | — | | 204 | | — | | 204 | |
Total bank loans — net | 34,636 | | — | | 34,608 | | — | | 34,608 | |
Other assets | 3,561 | | — | | 3,561 | | — | | 3,561 | |
| | | | | |
Liabilities | | | | | |
Bank deposits | $ | 443,778 | | $ | — | | $ | 443,778 | | $ | — | | $ | 443,778 | |
| | | | | |
Payables to brokerage clients | 125,671 | | — | | 125,671 | | — | | 125,671 | |
Accrued expenses and other liabilities | 8,327 | | — | | 8,327 | | — | | 8,327 | |
Short-term borrowings | 4,855 | | — | | 4,855 | | — | | 4,855 | |
Long-term debt | 18,820 | | — | | 19,383 | | — | | 19,383 | |
| | | | | |
| | | | | | | | | | | | | | | | | |
December 31, 2020 | Carrying Amount | Level 1 | Level 2 | Level 3 | Balance at Fair Value |
Assets | | | | | |
Cash and cash equivalents | $ | 29,189 | | $ | 29,189 | | $ | — | | $ | — | | $ | 29,189 | |
Cash and investments segregated and on deposit for regulatory purposes | 19,143 | | 4,212 | | 14,931 | | — | | 19,143 | |
| | | | | |
Receivables from brokerage clients — net | 64,436 | | — | | 64,436 | | — | | 64,436 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
Bank loans — net: | | | | | |
First Mortgages | 14,882 | | — | | 15,305 | | — | | 15,305 | |
HELOCs | 837 | | — | | 838 | | — | | 838 | |
Pledged asset lines | 7,916 | | — | | 7,916 | | — | | 7,916 | |
Other | 178 | | — | | 178 | | — | | 178 | |
Total bank loans — net | 23,813 | | — | | 24,237 | | — | | 24,237 | |
Other assets | 2,883 | | — | | 2,883 | | — | | 2,883 | |
| | | | | |
Liabilities | | | | | |
Bank deposits | $ | 358,022 | | $ | — | | $ | 358,022 | | $ | — | | $ | 358,022 | |
| | | | | |
Payables to brokerage clients | 104,201 | | — | | 104,201 | | — | | 104,201 | |
Accrued expenses and other liabilities | 8,263 | | — | | 8,263 | | — | | 8,263 | |
| | | | | |
Long-term debt | 13,626 | | — | | 14,829 | | — | | 14,829 | |
| | | | | |
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
19. Stockholders’ Equity
Except in connection with the 2020 acquisition of TD Ameritrade as described below, CSC did not issue shares of common stock through external offerings during the years ended December 31, 2021, 2020 or 2019.
On October 6, 2020, the Company completed its acquisition of TD Ameritrade. In conjunction with the acquisition, the Company issued shares of CSC common stock and a new, nonvoting class of CSC common stock. Immediately prior to the acquisition, on October 6, 2020, the Company amended its certificate of incorporation to create the nonvoting class of common stock with 300 million shares authorized for issuance and to increase the number of authorized shares of capital stock by the same amount. Each share of nonvoting common stock has identical rights to common stock, including liquidation and dividend rights, except that holders of nonvoting common stock have no voting rights other than over matters that significantly and adversely affect the rights or preferences of the nonvoting common stock, or as required by applicable law. Holders of nonvoting common stock are restricted from transferring shares except for permitted inside or outside transfers, as defined in the certificate of incorporation. Shares of nonvoting stock transferred in a permitted outside transfer are automatically converted to shares of common stock.
Pursuant to the Merger Agreement, CSC issued approximately 177 million shares of common stock and approximately 77 million shares of nonvoting common stock to TD Bank and its affiliates on October 6, 2020. Those shares of common stock and nonvoting common stock were issued in reliance upon an exemption from registration afforded by Section 4(a)(2) of the Securities Act. Following this issuance, TD Bank exchanged an aggregate of approximately 2 million shares of CSC common stock for an equal number of shares of CSC nonvoting common stock and held approximately 79 million shares of nonvoting common stock as of December 31, 2021. TD Bank and its affiliates are not permitted to own more than 9.9% of CSC common stock. This limit is interpreted in accordance with the applicable rules of the Federal Reserve and includes shares of CSC common stock deemed to be beneficially owned directly or indirectly by TD Bank and its affiliates.
On June 1, 2021, the Company redeemed all of the 600,000 outstanding shares of its 6.00% non-cumulative perpetual preferred stock, Series C, and the corresponding 24,000,000 depositary shares, each representing a 1/40th interest in a share of the Series C Preferred Stock. The depositary shares were redeemed at a redemption price of $25 per depositary share for a total of $600 million.
On March 30, 2021, the Company issued and sold 24,000,000 depositary shares, each representing a 1/40th ownership interest in a share of 4.450% fixed-rate non-cumulative perpetual preferred stock, Series J, $.01 par value, with a liquidation preference of $1,000 per share (equivalent of $25 per Depositary Share). The net proceeds of the offering were $584 million, after deducting the underwriting discount and offering expenses.
On March 18, 2021, the Company issued and sold 2,250,000 depositary shares, each representing a 1/100th ownership interest in a share of 4.000% fixed-rate reset non-cumulative perpetual preferred stock, Series I, $.01 par value per share, with a liquidation preference of $100,000 per share (equivalent of $1,000 per Depositary Share). The net proceeds of the offering were $2.2 billion, after deducting the underwriting discount and offering expenses.
On December 11, 2020, the Company issued and sold 2,500,000 depositary shares, each representing a 1/100th ownership interest in a share of 4.000% fixed-rate reset non-cumulative perpetual preferred stock, Series H, $.01 par value per share, with a liquidation preference of $100,000 per share (equivalent of $1,000 per Depositary Share). The net proceeds of the offering were approximately $2.47 billion, after deducting the underwriting discount and offering expenses.
On April 30, 2020, the Company issued and sold 2,500,000 depositary shares, each representing a 1/100th ownership interest in a share of 5.375% fixed-rate reset non-cumulative perpetual preferred stock, Series G, $.01 par value per share, with a liquidation preference of $100,000 per share (equivalent of $1,000 per Depositary Share). The net proceeds of the offering were approximately $2.47 billion, after deducting the underwriting discount and offering expenses.
On January 30, 2019, CSC publicly announced that its Board of Directors authorized a share repurchase program to repurchase up to $4.0 billion of common stock. The share repurchase authorization does not have an expiration date. There were no repurchases of CSC’s common stock under this authorization during the years ended December 31, 2021 and 2020. During 2019, CSC repurchased 55 million shares of its common stock under this authorization for $2.2 billion.
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
CSC was authorized to issue 9,940,000 shares of preferred stock, $.01 par value, at December 31, 2021 and 2020. The following is a summary of CSC’s non-cumulative perpetual preferred stock outstanding as of such dates:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Dividend Rate in Effect at December 31, 2021 | | Date at Which Dividend Rate Resets or Becomes Floating | Reset / Floating Rate | Margin Over Reset / Floating Rate |
| Shares Issued and Outstanding (in thousands) at December 31, | Liquidation Preference Per Share | Carrying Value at December 31, | | Earliest Redemption Date |
| 2021 (1) | 2020 (1) | 2021 | 2020 | Issue Date |
Fixed-rate: | | | | | | | | | | | |
Series C (2) | — | | 600 | | $ | 1,000 | | $ | — | | $ | 585 | | 08/03/15 | — | | — | | N/A | N/A | N/A |
Series D | 750 | | 750 | | 1,000 | | 728 | | 728 | | 03/07/16 | 5.950 | % | 06/01/21 | N/A | N/A | N/A |
Series J | 600 | | — | | 1,000 | | 584 | | — | | 03/30/21 | 4.450 | % | 06/01/26 | N/A | N/A | N/A |
Fixed-to-floating-rate/Fixed-rate reset (3): | | | | | | | | |
Series A | 400 | | 400 | | 1,000 | | 397 | | 397 | | 01/26/12 | 7.000 | % | 02/01/22 | 02/01/22 | 3M LIBOR | 4.820 | % |
Series E | 6 | | 6 | | 100,000 | | 591 | | 591 | | 10/31/16 | 4.625 | % | 03/01/22 | 03/01/22 | 3M LIBOR | 3.315 | % |
Series F | 5 | | 5 | | 100,000 | | 492 | | 492 | | 10/31/17 | 5.000 | % | 12/01/27 | 12/01/27 | 3M LIBOR | 2.575 | % |
Series G | 25 | | 25 | | 100,000 | | 2,470 | | 2,470 | | 04/30/20 | 5.375 | % | 06/01/25 | 06/01/25 | 5-Year Treasury | 4.971 | % |
Series H | 25 | | 25 | | 100,000 | | 2,470 | | 2,470 | | 12/11/20 | 4.000 | % | 12/01/30 | 12/01/30 | 10-Year Treasury | 3.079 | % |
Series I (4) | 23 | | — | | 100,000 | | 2,222 | | — | | 03/18/21 | 4.000 | % | 06/01/26 | 06/01/26 | 5-Year Treasury | 3.168 | % |
Total preferred stock | 1,834 | | 1,811 | | | $ | 9,954 | | $ | 7,733 | | | | | | | |
(1) Represented by depositary shares, except for Series A.(2) Series C Preferred Stock was redeemed on June 1, 2021.
(3) The dividend rate for Series G resets on each five-year anniversary from the first reset date. The dividend rate for Series H resets on each 10-year anniversary from the first reset date.
(4) The Series I dividend rate resets on each five-year anniversary beginning on June 1, 2026 based on a five-year treasury rate, representing the average of the yields on actively traded U.S. treasury securities adjusted to constant maturity for five-year maturities. Series I is only redeemable on dividend payment dates on or after the first reset date.
N/A Not applicable.
Dividends declared on the Company’s preferred stock are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Year Ended December 31, | 2021 | | 2020 | | 2019 |
| Total Declared (in millions) | | Per Share Amount | | Total Declared (in millions) | | Per Share Amount | | Total Declared (in millions) | | Per Share Amount |
Series A | $ | 28.0 | | | $ | 70.00 | | | $ | 28.0 | | | $ | 70.00 | | | $ | 28.0 | | | $ | 70.00 | |
Series C (1) | 18.0 | | | 30.00 | | | 36.0 | | | 60.00 | | | 36.0 | | | 60.00 | |
Series D | 44.6 | | | 59.52 | | | 44.6 | | | 59.52 | | | 44.6 | | | 59.52 | |
Series E | 27.8 | | | 4,625.00 | | | 27.8 | | | 4,625.00 | | | 27.8 | | | 4,625.00 | |
Series F | 25.0 | | | 5,000.00 | | | 25.0 | | | 5,000.00 | | | 25.0 | | | 5,000.00 | |
Series G (2) | 134.4 | | | 5,375.00 | | | 78.8 | | | 3,150.35 | | | N/A | | N/A |
Series H (3) | 97.2 | | | 3,888.89 | | | N/A | | N/A | | N/A | | N/A |
Series I (4) | 63.2 | | | 2,811.11 | | | N/A | | N/A | | N/A | | N/A |
Series J (5) | 17.9 | | | 29.80 | | | N/A | | N/A | | N/A | | N/A |
Total | $ | 456.1 | | | | | $ | 240.2 | | | | | $ | 161.4 | | | |
(1) Series C Preferred Stock was redeemed on June 1, 2021. Prior to redemption, dividends were paid quarterly and the final dividend was paid on June 1, 2021.
(2) Series G Preferred Stock was issued on April 30, 2020. Dividends are paid quarterly, and the first dividend was paid on September 1, 2020.
(3) Series H Preferred Stock was issued on December 11, 2020. Dividends are paid quarterly, and the first dividend was paid on March 1, 2021.
(4) Series I Preferred Stock was issued on March 18, 2021. Dividends are paid quarterly, and the first dividend was paid on June 1, 2021.
(5) Series J Preferred Stock was issued on March 30, 2021. Dividends are paid quarterly, and the first dividend was paid on June 1, 2021.
N/A Not applicable.
Dividends on CSC’s preferred stock are not cumulative and will only be paid on a series of preferred stock for a dividend period if declared by CSC’s Board of Directors. Under the terms of each series of preferred stock, CSC’s ability to pay dividends on, make distributions with respect to, or to repurchase, redeem or acquire its common stock or any preferred stock ranking on parity with or junior to the series of preferred stock, is subject to restrictions in the event that CSC does not declare and either pay or set aside a sum sufficient for payment of dividends on the series of preferred stock for the immediately preceding dividend period.
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
Dividends on fixed-rate preferred stock, as well as Series G, H, and I, are payable quarterly. Dividends on fixed-to-floating-rate preferred stock are payable semi-annually while at a fixed rate and will become payable quarterly after converting to a floating rate. The Series A preferred stock dividend converted to a floating rate on February 1, 2022 and is now payable quarterly.
Redemption Rights
Each series of CSC’s preferred stock, except for Series G, may be redeemed at CSC’s option on any dividend payment date on or after the earliest redemption date for that series. Series G preferred stock may be redeemed at CSC’s option on any reset date on or after the earliest redemption date for the series. All outstanding preferred stock series may also be redeemed following a “capital treatment event,” as described in the terms of each series set forth in the relevant certificate of designations. Any redemption of CSC’s preferred stock is subject to approval from the Federal Reserve.
20. Accumulated Other Comprehensive Income
AOCI represents cumulative gains and losses that are not reflected in earnings. AOCI balances and the components of other comprehensive income (loss) are as follows:
| | | | | |
| Total AOCI |
Balance at December 31, 2018 | $ | (252) | |
| |
Available for sale securities: | |
| |
Net unrealized gain (loss) excluding transfers to available for sale from held to maturity, net of tax expense (benefit) of $96 | 309 | |
Net unrealized gain on securities transferred to available for sale from held to maturity, net of tax expense (benefit) of $6 (1) | 19 | |
| |
Other reclassifications included in other revenue, net of tax expense (benefit) of $(1) | (5) | |
Held to maturity securities: | |
| |
Amortization of amounts previously recorded upon transfer to held to maturity from available for sale, net of tax expense (benefit) of $9 | 27 | |
Other, net of tax expense (benefit) of $(4) | (10) | |
Balance at December 31, 2019 | $ | 88 | |
| |
Available for sale securities: | |
Net unrealized gain (loss) excluding transfers to available for sale from held to maturity, net of tax expense (benefit) of $1,322 | 4,246 | |
Net unrealized gain on securities transferred to available for sale from held to maturity, net of tax expense (benefit) of $336 (2) | 1,057 | |
| |
Other reclassifications included in other revenue, net of tax expense (benefit) of $(1) | (3) | |
| |
| |
| |
Other, net of tax expense (benefit) of $2 | 6 | |
Balance at December 31, 2020 | $ | 5,394 | |
| |
Available for sale securities: | |
Net unrealized gain (loss), net of tax expense (benefit) of $(2,029) | (6,492) | |
| |
Other reclassifications included in other revenue, net of tax expense (benefit) of $(1) | (3) | |
| |
| |
| |
Other, net of tax expense (benefit) of $(3) | (8) | |
Balance at December 31, 2021 | $ | (1,109) | |
(1) In the first quarter of 2019, the Company made an election to transfer a portion of its HTM securities to AFS as part of the adoption of ASU 2017-12. The transfer resulted in a net of tax increase to AOCI of $19 million. See Note 6 for additional discussion on the 2019 transfer of HTM securities to AFS.
(2) On January 1, 2020, the Company transferred all of its investment securities designated as HTM to the AFS category. The transfer resulted in a net of tax increase to AOCI of $1.1 billion. See Note 6 for additional discussion on the 2020 transfer of HTM securities to AFS.
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
21. Employee Incentive, Retirement, Deferred Compensation, and Career Achievement Plans
Schwab’s share-based incentive plans provide for granting options and restricted stock units to employees and directors. In addition, we offer retirement and employee stock purchase plans to eligible employees and sponsor deferred compensation plans for eligible officers and non-employee directors.
A summary of share-based compensation expense and related income tax benefit is as follows:
| | | | | | | | | | | | | | | | | |
Year Ended December 31, | 2021 | | 2020 | | 2019 |
Stock option expense | $ | 36 | | | $ | 36 | | | $ | 51 | |
Restricted stock unit expense | 200 | | | 156 | | | 120 | |
Employee stock purchase plan expense | 18 | | | 12 | | | 12 | |
Total share-based compensation expense | $ | 254 | | | $ | 204 | | | $ | 183 | |
Income tax benefit on share-based compensation expense (1) | $ | (60) | | | $ | (49) | | | $ | (44) | |
(1) Excludes income tax benefits from stock options exercised and restricted stock units vested of $93 million, $14 million, and $23 million in 2021, 2020, and 2019, respectively.
The Company issues shares for stock options and restricted stock units from treasury stock. At December 31, 2021, the Company was authorized to grant up to 58 million common shares under its existing stock incentive plans. Additionally, at December 31, 2021, the Company had 30 million shares reserved for future issuance under its employee stock purchase plan.
As of December 31, 2021, there was $297 million of total unrecognized compensation cost related to outstanding stock options and restricted stock units, which is expected to be recognized through 2025 with a remaining weighted-average service period of 0.7 years for stock options, 1.9 years for restricted stock units, and 0.5 years for performance-based stock units.
Acquisition of TD Ameritrade: Upon the completion of the TD Ameritrade acquisition on October 6, 2020, TD Ameritrade’s equity awards, whether vested or unvested, were assumed by the Company and converted into equity awards based on CSC common stock taking into account the defined exchange ratio of 1.0837. Otherwise, these share-based awards are subject to the same terms and conditions that were applicable immediately before the merger, except for performance-based restricted stock units which were converted into time-based restricted stock units. The fair value of the stock options assumed by the Company was determined using an option pricing model. The portion of the fair value of the replacement awards related to services provided prior to the acquisition was $94 million and was accounted for as consideration transferred. The remaining portion of the fair value of $73 million is associated with future services and had a remaining weighted-average service period of 1.9 years on the acquisition date. A change in the actual or estimated forfeiture rate from the amount originally or subsequently estimated will result in an adjustment to compensation expense based on the full acquisition-date fair value of awards not expected to vest, regardless of whether those awards were treated as consideration transferred or stock-based compensation for future services.
Stock Option Plan
Options are granted for the purchase of shares of common stock at an exercise price not less than market value on the date of grant, and expire ten years from the date of grant. Options generally vest annually over a one- to four-year period from the date of grant.
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
Stock option activity is summarized below:
| | | | | | | | | | | | | | | | | | | | | | | |
| Number of Options (In millions) | | Weighted- Average Exercise Price per Share | | Weighted- Average Remaining Contractual Life (in years) | | Aggregate Intrinsic Value |
Outstanding at December 31, 2020 | 24 | | | $ | 33.67 | | | 5.36 | | $ | 452 | |
| | | | | | | |
Granted | 2 | | | 64.49 | | | | | |
Exercised | (9) | | | 27.80 | | | | | |
Forfeited (1) | — | | | 45.99 | | | | | |
Expired (1) | — | | | 35.00 | | | | | |
Outstanding at December 31, 2021 | 17 | | | $ | 39.11 | | | 5.38 | | $ | 782 | |
Vested and expected to vest at December 31, 2021 | 17 | | | $ | 39.09 | | | 5.38 | | $ | 782 | |
Vested and exercisable at December 31, 2021 | 13 | | | $ | 34.93 | | | 4.54 | | $ | 650 | |
(1) Number of options was less than 500 thousand.
The aggregate intrinsic value in the table above represents the difference between CSC’s closing stock price and the exercise price of each in-the-money option on the last trading day of the period presented.
Information on stock options granted and exercised is presented below:
| | | | | | | | | | | | | | | | | |
Year Ended December 31, | 2021 | | 2020 | | 2019 |
Weighted-average fair value of options granted per share | $ | 19.51 | | | $ | 11.56 | | | $ | 11.97 | |
Cash received from options exercised | 221 | | | 79 | | | 118 | |
Tax benefit realized on options exercised | 61 | | | 11 | | | 17 | |
Aggregate intrinsic value of options exercised | 322 | | | 71 | | | 108 | |
We use an option pricing model to estimate the fair value of options granted. The model takes into account the contractual term of the stock option, expected volatility, dividend yield, and the risk-free interest rate. Expected volatility is based on the implied volatility of publicly-traded options on CSC’s stock. Dividend yield is based on the average historical CSC dividend yield. The risk-free interest rate is based on the yield of a U.S. Treasury zero-coupon issue with a remaining term similar to the contractual term of the option. We use historical option exercise data, which includes employee termination data, to estimate the probability of future option exercises. The assumptions used to value the options granted during the years presented and their expected lives were as follows:
| | | | | | | | | | | | | | | | | |
Year Ended December 31, | 2021 | | 2020 | | 2019 |
Weighted-average expected dividend yield | 1.36 | % | | 2.08 | % | | 1.85 | % |
Weighted-average expected volatility | 37 | % | | 36 | % | | 30 | % |
Weighted-average risk-free interest rate | 0.8 | % | | 1.0 | % | | 2.5 | % |
Expected life (in years) | 4.2 - 5.4 | | 4.3 - 5.9 | | 4.2 - 5.9 |
Restricted Stock Units
Restricted stock units are awards that entitle the holder to receive shares of CSC’s common stock following a vesting period. Restricted stock units are restricted from transfer or sale and generally vest annually over a one- to four-year period, while performance-based restricted stock units also require the Company to achieve certain financial or other measures prior to vesting. The fair value of restricted stock units is based on the market price of the Company’s stock on the date of grant. The grant date fair value is amortized to compensation expense on a straight-line basis over the requisite service period. The fair value of the restricted stock units that vested during each of the years 2021, 2020, and 2019 was $317 million, $175 million, and $123 million, respectively.
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
The Company’s restricted stock units activity is summarized below:
| | | | | | | | | | | |
| Number of Units (In millions) | | Weighted- Average Grant Date Fair Value per Unit |
Outstanding at December 31, 2020 | 10 | | | $ | 40.85 | |
| | | |
Granted | 4 | | | 64.18 | |
Vested | (4) | | | 41.25 | |
Forfeited | (1) | | | 45.63 | |
Outstanding at December 31, 2021 | 9 | | | $ | 49.69 | |
Retirement and Deferred Compensation Plans
Employees can participate in Schwab’s qualified retirement plan, the SchwabPlan Retirement Savings and Investment Plan. The Company may match certain employee contributions or make additional contributions to this plan at its discretion. The Company’s total expense was $187 million, $136 million, and $118 million in 2021, 2020, and 2019, respectively.
Schwab’s deferred compensation plan for officers permits participants to defer the receipt of certain cash compensation. The deferred compensation plan for non-employee directors permits participants to defer receipt of all or a portion of their director fees and to receive either a grant of stock options, or upon ceasing service as a director, the number of shares of CSC’s common stock that would have resulted from investing the deferred fee amount into CSC’s common stock. The deferred compensation liability was $194 million and $176 million at December 31, 2021 and 2020, respectively.
Effective upon the completion of the TD Ameritrade acquisition on October 6, 2020, TD Ameritrade’s 401(k) and deferred profit-sharing plan was terminated and all unvested balances in the plan became fully vested. TD Ameritrade employees employed immediately prior to the acquisition who continued as employees of TDA Holding, CSC, or any of their subsidiaries after completion of the acquisition became eligible to participate in the SchwabPlan Retirement Savings and Investment Plan and make rollover contributions from their TD Ameritrade plan balances to the SchwabPlan Retirement Savings and Investment Plan.
Financial Consultant Career Achievement Plan
The financial consultant career achievement plan is a noncontributory, unfunded, nonqualified plan for eligible financial consultants. A financial consultant is eligible for earned cash payments after retirement contingent upon meeting certain performance levels, tenure, age, and client transitioning requirements. Allocations to the plan are calculated annually based on performance levels achieved and eligible compensation and are subject to general creditors of the Company. Full vesting occurs when a financial consultant reaches 60 years of age and has at least ten years of service with the Company.
The following table presents the changes in projected benefit obligation:
| | | | | | | | | | | |
December 31, | 2021 | | 2020 |
Projected benefit obligation at beginning of year | $ | 92 | | | $ | 83 | |
Benefit cost (1) | 16 | | | 17 | |
Actuarial loss/(gain) (2) | 11 | | | (8) | |
Projected benefit obligation at end of year (3) | $ | 119 | | | $ | 92 | |
(1) Includes service cost and interest cost, which are recognized in compensation and benefits expense and other expense, respectively, in the consolidated statements of income.
(2) Actuarial loss/(gain) is reflected in the consolidated statements of comprehensive income and is included in AOCI on the consolidated balance sheets.
(3) This amount is recognized as a liability in accrued expenses and other liabilities on the consolidated balance sheets.
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
22. Taxes on Income
The components of taxes on income are as follows:
| | | | | | | | | | | | | | | | | |
Year Ended December 31, | 2021 | | 2020 | | 2019 |
Current: | | | | | |
Federal | $ | 1,507 | | | $ | 967 | | | $ | 958 | |
State | 298 | | | 172 | | | 184 | |
Total current | 1,805 | | | 1,139 | | | 1,142 | |
Deferred: | | | | | |
Federal | 38 | | | (113) | | | 3 | |
State | 15 | | | (25) | | | (1) | |
Total deferred | 53 | | | (138) | | | 2 | |
Taxes on income | $ | 1,858 | | | $ | 1,001 | | | $ | 1,144 | |
The temporary differences that created deferred tax assets and liabilities are detailed below:
| | | | | | | | |
December 31, | 2021 | 2020 |
Deferred tax assets: | | |
Net unrealized loss on available for sale securities | $ | 347 | | $ | — | |
Employee compensation, severance, and benefits | 237 | | 271 | |
Operating lease liabilities | 225 | | 249 | |
Reserves and allowances | 74 | | 70 | |
Debt fair value remeasurement | 47 | | 67 | |
State and local taxes | 40 | | 37 | |
Net operating loss carryforwards | 8 | | 8 | |
| | |
Total deferred tax assets | 978 | | 702 | |
Valuation allowance | (8) | | (8) | |
Deferred tax assets — net of valuation allowance | 970 | | 694 | |
Deferred tax liabilities: | | |
Amortization of acquired intangible assets | (1,888) | | (1,954) | |
Net unrealized gain on available for sale securities | — | | (1,686) | |
Operating lease ROU assets | (210) | | (233) | |
Capitalized internal-use software development costs | (142) | | (101) | |
| | |
| | |
Other | (212) | | (182) | |
Total deferred tax liabilities | (2,452) | | (4,156) | |
Deferred tax asset/(liability) — net (1) | $ | (1,482) | | $ | (3,462) | |
(1) Amounts are included in accrued expenses and other liabilities on the consolidated balance sheets at December 31, 2021 and 2020.
A reconciliation of the federal statutory income tax rate to the effective income tax rate is as follows:
| | | | | | | | | | | | | | | | | |
Year Ended December 31, | 2021 | | 2020 | | 2019 |
Federal statutory income tax rate | 21.0 | % | | 21.0 | % | | 21.0 | % |
State income taxes, net of federal tax benefit | 3.4 | | | 3.2 | | | 3.2 | |
Equity compensation benefit | (1.2) | | | (0.3) | | | (0.5) | |
Other | 0.9 | | | (0.6) | | | (0.1) | |
Effective income tax rate | 24.1 | % | | 23.3 | % | | 23.6 | % |
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
| | | | | | | | | | | |
December 31, | 2021 | | 2020 |
Balance at beginning of year | $ | 248 | | | $ | 101 | |
Additions for tax positions related to the current year | 34 | | | 15 | |
Additions for tax positions related to prior years | 15 | | | 3 | |
Additions for current year acquisitions | — | | | 200 | |
Reductions for tax positions related to prior years | (15) | | | (7) | |
Reductions due to lapse of statute of limitations | (8) | | | (24) | |
Reductions for settlements with tax authorities | (3) | | | (40) | |
Balance at end of year | $ | 271 | | | $ | 248 | |
Unrecognized tax benefits totaled $271 million and $248 million as of December 31, 2021 and 2020, respectively, $221 million and $202 million of which if recognized, would affect the annual effective tax rate.
Interest and penalties were accrued related to unrecognized tax benefits in tax expense. At December 31, 2021 and 2020, we had accrued approximately $68 million and $58 million, respectively, for the payment of interest and penalties.
The Company and its subsidiaries are subject to routine examinations by the respective federal, state, and applicable local jurisdictions’ taxing authorities. Federal returns for 2017 through 2020 remain subject to examination. The years open to examination by state and local governments vary by jurisdiction.
23. Regulatory Requirements
CSC is a savings and loan holding company and is subject to examination, supervision, and regulation by the Federal Reserve. CSB, CSC’s primary depository institution subsidiary, is a Texas-chartered state savings bank and is a member of the Federal Reserve system. CSB is subject to examination, supervision, and regulation by the Federal Reserve, the TDSML, the FDIC as its deposit insurer, and the CFPB. CSC is required to serve as a source of strength for CSB.
CSB is subject to various requirements and restrictions under federal and state laws, including regulatory capital requirements and requirements that restrict and govern the terms of affiliate transactions, such as extensions of credit to, or asset purchases from CSC or its other subsidiaries by CSB. In addition, CSB is required to provide notice to and may be required to obtain approval of the Federal Reserve and the TDSML 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 prompt corrective action provisions of the Federal Deposit Insurance Act, CSB could be subject to restrictive actions if it were to fall within one of the lowest three of five capital categories. CSC and CSB are required to maintain minimum capital levels as specified in federal banking 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 CSB. At December 31, 2021, both CSC and CSB met all of their respective capital requirements.
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
The regulatory capital and ratios for CSC (consolidated) and CSB are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Actual | | Minimum to be Well Capitalized | | Minimum Capital Requirement |
December 31, 2021 | Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio (1) |
CSC | | | | | | | | | | | |
Common Equity Tier 1 Risk-Based Capital | $ | 27,967 | | | 19.7 | % | | N/A | | | | $ | 6,389 | | | 4.5 | % |
Tier 1 Risk-Based Capital | 37,921 | | | 26.7 | % | | N/A | | | | 8,518 | | | 6.0 | % |
Total Risk-Based Capital | 37,950 | | | 26.7 | % | | N/A | | | | 11,358 | | | 8.0 | % |
Tier 1 Leverage | 37,921 | | | 6.2 | % | | N/A | | | | 24,346 | | | 4.0 | % |
Supplementary Leverage Ratio | 37,921 | | | 6.2 | % | | N/A | | | | 18,434 | | | 3.0 | % |
CSB | | | | | | | | | | | |
Common Equity Tier 1 Risk-Based Capital | $ | 28,014 | | | 26.8 | % | | $ | 6,787 | | | 6.5 | % | | $ | 4,698 | | | 4.5 | % |
Tier 1 Risk-Based Capital | 28,014 | | | 26.8 | % | | 8,353 | | | 8.0 | % | | 6,265 | | | 6.0 | % |
Total Risk-Based Capital | 28,033 | | | 26.8 | % | | 10,441 | | | 10.0 | % | | 8,353 | | | 8.0 | % |
Tier 1 Leverage | 28,014 | | | 7.1 | % | | 19,790 | | | 5.0 | % | | 15,832 | | | 4.0 | % |
Supplementary Leverage Ratio | 28,014 | | | 7.0 | % | | N/A | | | | 12,016 | | | 3.0 | % |
| | | | | | | | | | | |
December 31, 2020 | | | | | | | | | | | |
CSC | | | | | | | | | | | |
Common Equity Tier 1 Risk-Based Capital | $ | 22,916 | | | 18.5 | % | | N/A | | | | $ | 5,575 | | | 4.5 | % |
Tier 1 Risk-Based Capital | 30,649 | | | 24.7 | % | | N/A | | | | 7,433 | | | 6.0 | % |
Total Risk-Based Capital | 30,688 | | | 24.8 | % | | N/A | | | | 9,910 | | | 8.0 | % |
Tier 1 Leverage | 30,649 | | | 6.3 | % | | N/A | | | | 19,396 | | | 4.0 | % |
Supplementary Leverage Ratio | 30,649 | | | 6.2 | % | | N/A | | | | 14,744 | | | 3.0 | % |
CSB | | | | | | | | | | | |
Common Equity Tier 1 Risk-Based Capital | $ | 17,526 | | | 19.2 | % | | $ | 5,919 | | | 6.5 | % | | $ | 4,098 | | | 4.5 | % |
Tier 1 Risk-Based Capital | 17,526 | | | 19.2 | % | | 7,285 | | | 8.0 | % | | 5,464 | | | 6.0 | % |
Total Risk-Based Capital | 17,558 | | | 19.3 | % | | 9,106 | | | 10.0 | % | | 7,285 | | | 8.0 | % |
Tier 1 Leverage | 17,526 | | | 5.5 | % | | 15,979 | | | 5.0 | % | | 12,783 | | | 4.0 | % |
Supplementary Leverage Ratio | 17,526 | | | 5.4 | % | | N/A | | | | 9,763 | | | 3.0 | % |
(1) Under the Basel III capital rule, CSC and CSB are also required to maintain a capital conservation buffer and a countercyclical capital buffer above the regulatory minimum risk-based capital ratios. The capital conservation buffer and countercyclical buffer were 2.5% and zero percent, respectively, for both periods presented. If either buffer falls below the minimum requirement, the Company would be subject to limits on capital distributions and discretionary bonus payments to executive officers. At December 31, 2021, the minimum capital requirement plus capital conservation buffer and countercyclical capital buffer for Common Equity Tier 1 Risk-Based Capital, Tier 1 Risk-Based Capital, and Total Risk-Based Capital ratios were 7.0%, 8.5%, and 10.5%, respectively.
N/A Not applicable.
Based on its regulatory capital ratios at December 31, 2021, CSB is considered well capitalized (the highest category) under its respective regulatory capital rules. There are no conditions or events since December 31, 2021 that management believes have changed CSB’s capital category.
CSC’s other banking subsidiaries are Charles Schwab Premier Bank, SSB (CSPB) and Charles Schwab Trust Bank (Trust Bank). CSPB is Texas-chartered state savings bank that provides banking and custody services, and Trust Bank is a Nevada-state chartered savings bank that provides trust and custody services. At December 31, 2021 and 2020, the balance sheets of CSPB and Trust Bank primarily consisted of investment securities. At December 31, 2021 and 2020, CSPB held total assets of $39.2 billion and $31.6 billion, respectively, and Trust Bank held total assets of $15.9 billion and $12.5 billion, respectively. Based on their regulatory capital ratios, at December 31, 2021 and 2020, CSPB and Trust Bank are considered well capitalized under their respective regulatory capital rules.
As securities broker-dealers, CS&Co, TDAC, and TD Ameritrade, Inc. are subject to the SEC’s Uniform Net Capital Rule. CS&Co and TDAC each compute net capital under the alternative method permitted by the Uniform Net Capital Rule, which 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, which is based on the type of business conducted by the broker-dealer. TD Ameritrade, Inc. is required to maintain minimum net capital of the greater of 2% of aggregate debit balances arising from client transactions or a minimum dollar requirement. Under the alternative method, a broker-dealer may not repay
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
subordinated borrowings, pay cash dividends, or make any unsecured advances or loans 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.
Net capital and net capital requirements for CS&Co, TDAC, and TD Ameritrade, Inc., are as follows:
| | | | | | | | | | | |
December 31, | 2021 | | 2020 |
CS&Co |
Net capital | $ | 5,231 | | | $ | 3,117 | |
Minimum dollar requirement(1) | 0.250 | | | 1.000 | |
2% of aggregate debit balances | 941 | | | 616 | |
Net capital in excess of required net capital | $ | 4,290 | | | $ | 2,501 | |
TDAC | | | |
Net capital | $ | 5,337 | | | $ | 4,040 | |
Minimum dollar requirement | 1.500 | | | 1.500 | |
2% of aggregate debit balances | 1,007 | | | 748 | |
Net capital in excess of required net capital | $ | 4,330 | | | $ | 3,292 | |
TD Ameritrade, Inc. | | | |
Net capital | $ | 711 | | | $ | 350 | |
Minimum dollar requirement | 0.250 | | | 0.250 | |
2% of aggregate debit balances | — | | | — | |
Net capital in excess of required net capital | $ | 711 | | | $ | 350 | |
(1) During 2021, CS&Co transferred its futures business to Charles Schwab Futures and Forex LLC, a wholly-owned subsidiary of CSC. This transfer was accounted for as a common control transaction and did not have an impact on the consolidated financial statements. CS&Co subsequently deregistered prior to December 31, 2021 as an FCM with the CFTC, and, therefore, is no longer subject to net capital requirements under CFTC Regulation 1.17 under the Commodity Exchange Act.
Pursuant to the SEC’s Customer Protection Rule and other applicable regulations, Schwab had cash and investments segregated for the exclusive benefit of clients at December 31, 2021. The SEC’s Customer Protection Rule requires broker-dealers to segregate client fully-paid securities and cash balances not collateralizing margin positions and not swept to money market funds or bank deposit accounts. Amounts included in cash and investments segregated and on deposit for regulatory purposes represent actual balances on deposit, whereas cash and investments required to be segregated and on deposit for regulatory purposes at December 31, 2021 for CS&Co totaled $38.4 billion and for TDAC totaled $15.9 billion. As of January 4, 2022, CS&Co had deposited $1.5 billion of cash and qualified securities into its segregated reserve accounts. As of January 3, 2022, TDAC had deposited $406 million of cash and qualified securities from its segregated reserve accounts. Cash and investments required to be segregated and on deposit for regulatory purposes at December 31, 2020 for CS&Co totaled $39.2 billion and for TDAC totaled $14.5 billion. Cash and cash equivalents included in cash and investments segregated and on deposit for regulatory purposes are presented as part of Schwab’s cash balances in the consolidated statements of cash flows.
24. Segment Information
Schwab’s two reportable segments are Investor Services and Advisor Services. Schwab structures the operating segments according to its clients and the services provided to those clients. The Investor Services segment provides retail brokerage, investment advisory, and banking and trust services to individual investors, and retirement plan services, as well as other corporate brokerage services, to businesses and their employees. The Advisor Services segment provides custodial, trading, banking and trust, and support services, as well as retirement business services, to independent RIAs, independent retirement advisors, and recordkeepers. Revenues and expenses are attributed to the two segments based on which segment services the client.
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
The Company integrated its business and asset acquisitions during 2020 into its two existing reportable segments. Revenues and expenses from our acquisition of USAA-IMCO are allocated to Investor Services only; revenues and expenses from TD Ameritrade and our other 2020 acquisitions are attributed to Investor Services and Advisor Services based on which segment services the client. See Note 3 for more information regarding business acquisitions.
The accounting policies of the segments are the same as those described in Note 2. For the computation of its segment information, Schwab utilizes an activity-based costing model to allocate traditional income statement line item expenses (e.g., compensation and benefits, depreciation and amortization, and professional services) to the business activities driving segment expenses (e.g., client service, opening new accounts, or business development) and a funds transfer pricing methodology to allocate certain revenues.
Management evaluates the performance of the segments on a pre-tax basis. Segment assets and liabilities are not used for evaluating segment performance or in deciding how to allocate resources to segments. There are no revenues from transactions between the segments.
Financial information for the segments is presented in the following table:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Investor Services | | Advisor Services | | Total |
Year Ended December 31, | 2021 | | 2020 | | 2019 | | 2021 | | 2020 | | 2019 | | 2021 | | 2020 | | 2019 |
Net Revenues | | | | | | | | | | | | | | | | | |
Net interest revenue | $ | 6,052 | | | $ | 4,391 | | | $ | 4,685 | | | $ | 1,978 | | | $ | 1,722 | | | $ | 1,831 | | | $ | 8,030 | | | $ | 6,113 | | | $ | 6,516 | |
Asset management and administration fees | 3,130 | | | 2,544 | | | 2,289 | | | 1,144 | | | 931 | | | 922 | | | 4,274 | | | 3,475 | | | 3,211 | |
Trading revenue | 3,753 | | | 1,156 | | | 503 | | | 399 | | | 260 | | | 249 | | | 4,152 | | | 1,416 | | | 752 | |
Bank deposit account fees | 964 | | | 255 | | | — | | | 351 | | | 100 | | | — | | | 1,315 | | | 355 | | | — | |
Other | 562 | | | 262 | | | 146 | | | 187 | | | 70 | | | 96 | | | 749 | | | 332 | | | 242 | |
Total net revenues | 14,461 | | | 8,608 | | | 7,623 | | | 4,059 | | | 3,083 | | | 3,098 | | | 18,520 | | | 11,691 | | | 10,721 | |
Expenses Excluding Interest | 8,289 | | | 5,529 | | | 4,284 | | | 2,518 | | | 1,862 | | | 1,589 | | | 10,807 | | | 7,391 | | | 5,873 | |
Income before taxes on income | $ | 6,172 | | | $ | 3,079 | | | $ | 3,339 | | | $ | 1,541 | | | $ | 1,221 | | | $ | 1,509 | | | $ | 7,713 | | | $ | 4,300 | | | $ | 4,848 | |
Capital expenditures | $ | 771 | | | $ | 535 | | | $ | 507 | | | $ | 270 | | | $ | 206 | | | $ | 246 | | | $ | 1,041 | | | $ | 741 | | | $ | 753 | |
Depreciation and amortization | $ | 399 | | | $ | 288 | | | $ | 216 | | | $ | 150 | | | $ | 126 | | | $ | 106 | | | $ | 549 | | | $ | 414 | | | $ | 322 | |
Amortization of acquired intangible assets | $ | 499 | | | $ | 149 | | | $ | 26 | | | $ | 116 | | | $ | 41 | | | $ | 1 | | | $ | 615 | | | $ | 190 | | | $ | 27 | |
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
25. Earnings Per Common Share
EPS is computed using the two-class method. Preferred stock dividends, and undistributed earnings and dividends allocated to participating securities are subtracted from net income in determining net income available to common stockholders. Basic EPS is computed by dividing net income available to common stockholders by the weighted-average number of common shares outstanding during the period. Diluted EPS is calculated similar to basic EPS except that the numerator and denominator are adjusted as necessary for any effects of dilutive potential common shares, which include, if dilutive, outstanding stock options and non-vested restricted stock units.
For the years ended December 31, 2021 and 2020, the Company had voting and nonvoting common stock outstanding. Since the rights of the voting and nonvoting common stock are identical, except with respect to voting, the net income of the Company has been allocated on a proportionate basis to the two classes. Diluted earnings per share is calculated using the treasury stock method for outstanding stock options and non-vested restricted stock units and the if-converted method for nonvoting common stock. The if-converted method assumes conversion of all nonvoting common stock to common stock.
EPS under the basic and diluted computations for both common stock and nonvoting common stock are as follows:
| | | | | | | | | | | | | | | | | | | | |
Year Ended December 31, | 2021 | 2020 | 2019 |
| Common Stock | Nonvoting Common Stock (1) | Common Stock | Nonvoting Common Stock (1) | Common Stock | Nonvoting Common Stock (1) |
Basic earnings per share: | | | | | | |
Numerator | | | | | | |
Net income | $ | 5,610 | | $ | 245 | | $ | 3,255 | | $ | 44 | | $ | 3,704 | | N/A |
Preferred stock dividends and other (2) | (474) | | (21) | | (253) | | (3) | | (178) | | N/A |
Net income available to common stockholders | $ | 5,136 | | $ | 224 | | $ | 3,002 | | $ | 41 | | $ | 3,526 | | N/A |
Denominator | | | | | | |
Weighted-average common shares outstanding — basic | 1,808 | | 79 | | 1,410 | | 19 | | 1,311 | | N/A |
Basic earnings per share | $ | 2.84 | | $ | 2.84 | | $ | 2.13 | | $ | 2.13 | | $ | 2.69 | | N/A |
Diluted earnings per share: | | | | | | |
Numerator | | | | | | |
Net income available to common stockholders | $ | 5,136 | | $ | 224 | | $ | 3,002 | | $ | 41 | | $ | 3,526 | | N/A |
Reallocation of net income available to common stockholders as a result of conversion of nonvoting to voting shares | 224 | | — | | 41 | | — | | N/A | N/A |
Allocation of net income available to common stockholders: | $ | 5,360 | | $ | 224 | | $ | 3,043 | | $ | 41 | | $ | 3,526 | | N/A |
Denominator | | | | | | |
Weighted-average common shares outstanding — basic | 1,808 | | 79 | | 1,410 | | 19 | | 1,311 | | N/A |
Conversion of nonvoting shares to voting shares | 79 | | — | | 19 | | — | | N/A | N/A |
Common stock equivalent shares related to stock incentive plans | 10 | | — | | 6 | | — | | 9 | | N/A |
Weighted-average common shares outstanding — diluted (3) | 1,897 | | 79 | | 1,435 | | 19 | | 1,320 | | N/A |
Diluted earnings per share | $ | 2.83 | | $ | 2.83 | | $ | 2.12 | | $ | 2.12 | | $ | 2.67 | | N/A |
(1) Nonvoting common stock was issued in conjunction with the October 6, 2020 acquisition of TD Ameritrade. As such, nonvoting common stock is not applicable for the basic and diluted EPS computations in 2019.
(2) Includes preferred stock dividends and undistributed earnings and dividends allocated to non-vested restricted stock units.
(3) Antidilutive stock options and restricted stock units excluded from the calculation of diluted EPS totaled 16 million, 22 million, and 21 million in 2021, 2020, and 2019 respectively.
N/A Not applicable.
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
26. The Charles Schwab Corporation – Parent Company Only Financial Statements
Condensed Statements of Income
| | | | | | | | | | | | | | | | | |
Year Ended December 31, | 2021 | | 2020 | | 2019 |
Interest revenue | $ | 11 | | | $ | 38 | | | $ | 119 | |
Interest expense | (355) | | | (273) | | | (248) | |
Net interest expense | (344) | | | (235) | | | (129) | |
Trading revenue | — | | | 1 | | | — | |
Other revenue | (2) | | | (1) | | | (1) | |
Expenses Excluding Interest: | | | | | |
Professional services | (17) | | | (68) | | | (24) | |
Other expenses excluding interest | (125) | | | (85) | | | (83) | |
Loss before income tax benefit and equity in net income of subsidiaries | (488) | | | (388) | | | (237) | |
Income tax benefit/(expense) | 32 | | | 45 | | | (9) | |
Loss before equity in net income of subsidiaries | (456) | | | (343) | | | (246) | |
Equity in net income of subsidiaries: | | | | | |
Equity in undistributed net income/(distributions in excess of net income) of subsidiaries | 3,361 | | | 2,476 | | | (1,198) | |
Dividends from bank subsidiaries | — | | | — | | | 4,915 | |
Dividends from non-bank subsidiaries | 2,950 | | | 1,166 | | | 233 | |
Net Income | 5,855 | | | 3,299 | | | 3,704 | |
Preferred stock dividends and other (1) | 495 | | | 256 | | | 178 | |
Net Income Available to Common Stockholders | $ | 5,360 | | | $ | 3,043 | | | $ | 3,526 | |
(1) Includes preferred stock dividends and undistributed earnings and dividends allocated to non-vested restricted stock units.
Condensed Balance Sheets
| | | | | | | | | | | |
December 31, | 2021 | | 2020 |
Assets | | | |
Cash and cash equivalents | $ | 6,839 | | | $ | 4,654 | |
Receivables from subsidiaries | 1,288 | | | 1,260 | |
Available for sale securities | 4,218 | | | 4,982 | |
| | | |
| | | |
| | | |
Investment in non-bank subsidiaries | 34,377 | | | 29,550 | |
Investment in bank subsidiaries | 30,720 | | | 25,548 | |
Other assets | 357 | | | 371 | |
Total assets | $ | 77,799 | | | $ | 66,365 | |
Liabilities and Stockholders’ Equity | | | |
Accrued expenses and other liabilities | $ | 618 | | | $ | 458 | |
Payables to subsidiaries | 80 | | | 34 | |
Short-term borrowings | 3,005 | | | — | |
Long-term debt | 17,835 | | | 9,813 | |
Total liabilities | 21,538 | | | 10,305 | |
Stockholders’ equity | 56,261 | | | 56,060 | |
Total liabilities and stockholders’ equity | $ | 77,799 | | | $ | 66,365 | |
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
Condensed Statements of Cash Flows
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Year Ended December 31, | 2021 | | 2020 | | 2019 |
Cash Flows from Operating Activities | | | | | |
Net income | $ | 5,855 | | | $ | 3,299 | | | $ | 3,704 | |
Adjustments to reconcile net income to net cash provided by (used for) operating activities: | | | | | |
Dividends in excess of (equity in undistributed) earnings of subsidiaries | (3,361) | | | (2,476) | | | 1,198 | |
Other | 21 | | | 41 | | | 9 | |
Net change in: | | | | | |
| | | | | |
Other assets | 76 | | | (65) | | | 57 | |
Accrued expenses and other liabilities | 112 | | | 34 | | | 34 | |
Net cash provided by (used for) operating activities | 2,703 | | | 833 | | | 5,002 | |
Cash Flows from Investing Activities | | | | | |
Due from (to) subsidiaries — net | 211 | | | 46 | | | (122) | |
Increase in investments in subsidiaries | (10,926) | | | (2,172) | | | (1,783) | |
Repayments (advances) of subordinated loan to CS&Co | — | | | — | | | 185 | |
Purchases of available for sale securities | (8,002) | | | (5,397) | | | (1,141) | |
Proceeds from sales of available for sale securities | 2 | | | 2 | | | 181 | |
Principal payments on available for sale securities | 8,754 | | | 2,395 | | | 994 | |
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Net cash provided by (used for) investing activities | (9,961) | | | (5,126) | | | (1,686) | |
Cash Flows from Financing Activities | | | | | |
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Issuance of long-term debt | 7,036 | | | 3,070 | | | 593 | |
Repayment of long-term debt | (1,200) | | | (700) | | | — | |
Issuance of commercial paper | 8,253 | | | 1,234 | | | 1,400 | |
Repayments of commercial paper | (5,250) | | | (1,234) | | | (1,400) | |
Repurchases of common stock | — | | | — | | | (2,220) | |
Net proceeds from preferred stock offerings | 2,806 | | | 4,940 | | | — | |
Redemption of preferred stock | (600) | | | — | | | — | |
Dividends paid | (1,822) | | | (1,280) | | | (1,060) | |
Proceeds from stock options exercised and other | 220 | | | 79 | | | 118 | |
Other financing activities | — | | | (1) | | | — | |
Net cash provided by (used for) financing activities | 9,443 | | | 6,108 | | | (2,569) | |
Increase (Decrease) in Cash and Cash Equivalents | 2,185 | | | 1,815 | | | 747 | |
Cash and Cash Equivalents at Beginning of Year | 4,654 | | | 2,839 | | | 2,092 | |
Cash and Cash Equivalents at End of Year | $ | 6,839 | | | $ | 4,654 | | | $ | 2,839 | |
Supplemental Cash Flow Information | | | | | |
Non-Cash Investing and Financing Activity | | | | | |
Exchange of TDA Holding-issued senior notes for CSC-issued senior notes | $ | 1,987 | | | $ | — | | | $ | — | |
THE CHARLES SCHWAB CORPORATION
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of The Charles Schwab Corporation
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of The Charles Schwab Corporation and subsidiaries (the “Company”) as of December 31, 2021 and 2020, the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows, for each of the three years in the period ended December 31, 2021, and the related notes (collectively referred to as the “financial statements”). We also have audited the Company’s internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control – Integrated Framework (2013) issued by COSO.
Basis for Opinions
The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management's Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on these financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures to respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
THE CHARLES SCHWAB CORPORATION
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Asset Management and Administration Fees (AMAF) and Trading Revenue – Refer to Note 4 to the financial statements
Critical Audit Matter Description
Net revenues from asset management and administrative fees (AMAF) are generated through proprietary, third-party mutual fund and exchange-traded funds (ETF) offerings, as well as fee-based advisory solutions. Trading revenue is generated through commissions earned for executing trades for clients in individual equities, options, and certain third-party mutual funds and ETFs. Both AMAF and trading revenues are made up of a significant volume of low-dollar transactions, and use automated systems to process and record these transactions based on underlying information sourced from multiple systems and contractual terms with individual investors and third-party mutual funds.
Given that the Company’s process to record revenue is highly automated and involves multiple systems and databases, auditing these revenue streams was complex and challenging due to the extent of audit effort required and involvement of professionals with expertise in information technology (IT) necessary for us to identify, test, and evaluate the Company’s systems, software applications, and automated controls.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the Company’s systems to process the AMAF and trading revenue transactions included the following, among others:
•With the assistance of our IT specialists, we:
◦Identified the significant systems used to process revenue transactions and, using a risk-based approach, tested the relevant general IT controls over each of these systems.
◦Performed testing of automated business controls and system interface controls (including batch processing) within the relevant revenue streams.
•We tested internal controls within the relevant revenue business processes, including those in place to reconcile the various systems to the Company’s general ledger.
•We created data visualizations to evaluate recorded revenue and evaluate trends in the revenue data.
•For a sample of revenue transactions, we performed detail transaction testing by agreeing the amounts recognized to contractual agreements and testing the mathematical accuracy of the recorded revenue.
•For a sample of accounts, we tested the accuracy and completeness of assets under management by obtaining independent pricing support and reconciling total positions to third-party statements.
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/s/ DELOITTE & TOUCHE LLP | |
Dallas, Texas
February 24, 2022
We have served as the Company's auditor since 1976.
THE CHARLES SCHWAB CORPORATION
Management’s Report on Internal Control Over Financial Reporting
Management of The Charles Schwab Corporation, together with its subsidiaries (the Company), is responsible for establishing and maintaining adequate internal control over financial reporting. The Company’s internal control over financial reporting is a process designed under the supervision of and effected by the Company’s Chief Executive Officer and Chief Financial Officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of published financial statements in accordance with accounting principles generally accepted in the United States of America.
As of December 31, 2021, management conducted an assessment of the effectiveness of the Company’s internal control over financial reporting based on the framework established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management has determined that the Company’s internal control over financial reporting was effective as of December 31, 2021.
The Company’s internal control over financial reporting includes policies and procedures that pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of assets; provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures are being made only in accordance with authorizations of management and the directors of the Company; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the Company’s financial statements.
The Company’s internal control over financial reporting as of December 31, 2021, has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report appearing on the previous pages.
THE CHARLES SCHWAB CORPORATION