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

 

FORM 10-Q

 

QUARTERLY  REPORT  PURSUANT  TO  SECTION  13  OR  15(d)
OF  THE  SECURITIES  EXCHANGE  ACT  OF  1934

 

For the quarterly period ended June   30 , 2013

 

Commission File Number: 1-9700

 

THE  CHARLES  SCHWAB  CORPORATION

(Exact name of registrant as specified in its charter)

 

 

211 Main Street, San Francisco, CA  94105

(Address of principal executive offices and zip code)

 

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

 

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

Yes  T   No  £

 

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

Yes   T     No   £

 

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

 

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

Accelerated filer   £ Smaller reporting company   £

 

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

Yes   £ No   T

 

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

 

1,284,909,433 shares of $.01 par value Common Stock
Outstanding on July   24 , 2013

 

 

 

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Part I – FINANCIAL INFORMATION

Item 1.  Condensed Consolidated Financial Statements

 

THE CHARLES SCHWAB CORPORATION

Condensed Consolidated Statements of Income

(In millions, except per share amounts)

(Unaudited)

 

 

 

 

		Three Months Ended						Six Months Ended
		June 30,						June 30,
		2013			2012			2013			2012
Net Revenues
Asset management and administration fees		$	572		$	496		$	1,124		$	980
Interest revenue			499			497			996			969
Interest expense			(26)			(39)			(54)			(77)
Net interest revenue			473			458			942			892
Trading revenue			235			219			458			462
Other			59			121			115			167
Provision for loan losses			1			(4)			(5)			(4)
Net impairment losses on securities (1)			(3)			(7)			(7)			(25)
Total net revenues			1,337			1,283			2,627			2,472
Expenses Excluding Interest
Compensation and benefits			494			446			1,030			911
Professional services			106			93			205			189
Occupancy and equipment			77			80			154			156
Advertising and market development			67			57			141			124
Communications			56			55			110			113
Depreciation and amortization			51			48			102			96
Other			74			72			142			138
Total expenses excluding interest			925			851			1,884			1,727
Income before taxes on income			412			432			743			745
Taxes on income			156			157			281			275
Net Income			256			275			462			470
Preferred stock dividends			23			14			31			14
Net Income Available to Common Stockholders		$	233		$	261		$	431		$	456
Weighted-Average Common Shares Outstanding — Diluted			1,288			1,274			1,285			1,273
Earnings Per Common Share — Basic		$	.18		$	.20		$	.33		$	.36
Earnings Per Common Share — Diluted		$	.18		$	.20		$	.33		$	.36

 

(1)

Net impairment losses on securities include total other-than-temporary impairment losses of $2 million and $12 million, net of $(1) million and $5 million reclassified from or recognized in other comprehensive income, for the three months ended June 30, 2013 and 2012, respectively. Net impairment losses on securities include total other-than-temporary impairment losses of $2 million and $14 million, net of $(5) million and $(11) million reclassified from other comprehensive income, for the six months ended June 30, 2013 and 2012, respectively.

 

See Notes to Condensed Consolidated Financial Statements.

 

 

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		Three Months Ended						Six Months Ended
		June 30,						June 30,
		2013			2012			2013			2012
Net Income		$	256		$	275		$	462		$	470
Other comprehensive (loss) income, before tax:
Change in net unrealized gain on securities available for sale:
Net unrealized (loss) gain			(477)			119			(480)			208
Reclassification of impairment charges included in net
impairment losses on securities			3			7			7			25
Other reclassifications included in other revenue			(3)			(1)			(3)			(1)
Other			-			-			1			-
Other comprehensive (loss) income, before tax			(477)			125			(475)			232
Income tax effect			180			(47)			180			(86)
Other comprehensive (loss) income, net of tax			(297)			78			(295)			146
Comprehensive (Loss) Income		$	(41)		$	353		$	167		$	616

 

See Notes to Condensed Consolidated Financial Statements.

 

 

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		June 30,			December 31,
		2013			2012
Assets
Cash and cash equivalents		$	6,234		$	12,663
Cash and investments segregated and on deposit for regulatory purposes
(including resale agreements of $18,214 at June 30, 2013 and $19,325
at December 31, 2012)			27,011			28,469
Receivables from brokers, dealers, and clearing organizations			395			333
Receivables from brokerage clients — net			12,825			13,458
Other securities owned — at fair value			488			636
Securities available for sale			48,414			46,123
Securities held to maturity (fair value — $25,288 at June 30, 2013 and
$18,732 at December 31, 2012)			25,818			18,194
Loans to banking clients — net			11,732			10,726
Equipment, office facilities, and property — net			711			675
Goodwill			1,231			1,228
Intangible assets — net			290			319
Other assets			758			813
Total assets		$	135,907		$	133,637
Liabilities and Stockholders’ Equity
Deposits from banking clients		$	84,345		$	79,377
Payables to brokers, dealers, and clearing organizations			2,150			1,068
Payables to brokerage clients			36,852			40,330
Accrued expenses and other liabilities			1,210			1,641
Long-term debt			1,630			1,632
Total liabilities			126,187			124,048
Stockholders’ equity:
Preferred stock — $.01 par value per share; aggregated liquidation
preference of $885 at both June 30, 2013 and December 31, 2012			867			865
Common stock — 3 billion shares authorized; $.01 par value per share;
1,487,543,446 shares issued			15			15
Additional paid-in capital			3,932			3,881
Retained earnings			8,830			8,554
Treasury stock, at cost — 203,545,769 shares at June 30, 2013 and
210,014,305 shares at December 31, 2012			(3,927)			(4,024)
Accumulated other comprehensive income			3			298
Total stockholders’ equity			9,720			9,589
Total liabilities and stockholders’ equity		$	135,907		$	133,637

 

See Notes to Condensed Consolidated Financial Statements.

 

 

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		Six Months Ended
		June 30,
		2013			2012
Cash Flows from Operating Activities
Net income		$	462		$	470
Adjustments to reconcile net income to net cash provided by (used for) operating activities:
Provision for loan losses			5			4
Net impairment losses on securities			7			25
Stock-based compensation			59			54
Depreciation and amortization			102			96
Premium amortization, net, on securities available for sale and securities held to maturity			92			98
Other			20			1
Originations of loans held for sale			-			(435)
Proceeds from sales of loans held for sale			-			505
Net change in:
Cash and investments segregated and on deposit for regulatory purposes			1,458			3,311
Receivables from brokers, dealers, and clearing organizations			(62)			(86)
Receivables from brokerage clients			631			(885)
Other securities owned			148			168
Other assets			16			49
Payables to brokers, dealers, and clearing organizations			662			212
Payables to brokerage clients			(3,478)			(3,656)
Accrued expenses and other liabilities			42			(163)
Net cash provided by (used for) operating activities			164			(232)
Cash Flows from Investing Activities
Purchases of securities available for sale			(12,587)			(14,114)
Proceeds from sales of securities available for sale			3,004			1,323
Principal payments on securities available for sale			7,017			6,904
Purchases of securities held to maturity			(9,914)			(3,029)
Principal payments on securities held to maturity			2,413			2,566
Net increase in loans to banking clients			(976)			(62)
Purchase of equipment, office facilities, and property			(111)			(76)
Other investing activities			2			-
Net cash used for investing activities			(11,152)			(6,488)
Cash Flows from Financing Activities
Net change in deposits from banking clients			4,968			5,403
Repayment of commercial paper			(300)			-
Repayment of long-term debt			(3)			(3)
Net proceeds from preferred stock offerings			-			864
Dividends paid			(184)			(154)
Proceeds from stock options exercised and other			81			20
Other financing activities			(3)			-
Net cash provided by financing activities			4,559			6,130
Decrease in Cash and Cash Equivalents			(6,429)			(590)
Cash and Cash Equivalents at Beginning of Period			12,663			8,679
Cash and Cash Equivalents at End of Period		$	6,234		$	8,089
Supplemental Cash Flow Information
Cash paid during the period for:
Interest		$	51		$	74
Income taxes		$	277		$	221
Non-cash investing activities:
Securities purchased during the period but settled after period end		$	420		$	22

 

See Notes to Condensed Consolidated Financial Statements.

 

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1.          Introduction and Basis of Presentation

 

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

 

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

 

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

 

 

2 .          Securities Available for Sale and Securities Held to Maturity

 

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

 

					Gross			Gross
		Amortized			Unrealized			Unrealized			Fair
June 30, 2013		Cost			Gains			Losses			Value
Securities available for sale:
U.S. agency mortgage-backed securities		$	18,422		$	202		$	16		$	18,608
Asset-backed securities			11,895			21			77			11,839
Corporate debt securities			8,306			39			26			8,319
Certificates of deposit			4,915			7			1			4,921
U.S. agency notes			3,740			-			105			3,635
Non-agency residential mortgage-backed securities			700			5			54			651
Commercial paper			160			-			-			160
Other securities			272			9			-			281
Total securities available for sale		$	48,410		$	283		$	279		$	48,414
Securities held to maturity:
U.S. agency mortgage-backed securities		$	24,887		$	184		$	643		$	24,428
Other securities			931			-			71			860
Total securities held to maturity		$	25,818		$	184		$	714		$	25,288

 

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THE CHARLES SCHWAB CORPORATION

Notes to Condensed Consolidated Financial Statements

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

(Unaudited)

 

					Gross			Gross
		Amortized			Unrealized			Unrealized			Fair
December 31, 2012		Cost			Gains			Losses			Value
Securities available for sale:
U.S. agency mortgage-backed securities		$	20,080		$	396		$	-		$	20,476
Asset-backed securities			8,104			62			2			8,164
Corporate debt securities			6,197			61			2			6,256
Certificates of deposit			6,150			12			1			6,161
U.S. agency notes			3,465			2			3			3,464
Non-agency residential mortgage-backed securities			796			2			65			733
Commercial paper			574			-			-			574
Other securities			278			17			-			295
Total securities available for sale		$	45,644		$	552		$	73		$	46,123
Securities held to maturity:
U.S. agency mortgage-backed securities		$	17,750		$	558		$	19		$	18,289
Other securities			444			-			1			443
Total securities held to maturity		$	18,194		$	558		$	20		$	18,732

 

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

 

		Less than						12 months
		12 months						or longer						Total
		Fair			Unrealized			Fair			Unrealized			Fair			Unrealized
June 30, 2013		Value			Losses			Value			Losses			Value			Losses
Securities available for sale:
U.S agency mortgage-backed securities		$	2,416		$	16		$	-		$	-		$	2,416		$	16
Asset-backed securities			8,704			70			481			7			9,185			77
Corporate debt securities			2,555			25			250			1			2,805			26
Certificates of deposit			774			1			-			-			774			1
U.S. agency notes			3,635			105			-			-			3,635			105
Non-agency residential mortgage-backed
securities			181			5			401			49			582			54
Total		$	18,265		$	222		$	1,132		$	57		$	19,397		$	279
Securities held to maturity:
U.S. agency mortgage-backed securities		$	16,315		$	643		$	-		$	-		$	16,315		$	643
Other securities			760			71			-			-			760			71
Total		$	17,075		$	714		$	-		$	-		$	17,075		$	714
Total securities with unrealized losses  (1)		$	35,340		$	936		$	1,132		$	57		$	36,472		$	993

 

 

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THE CHARLES SCHWAB CORPORATION

Notes to Condensed Consolidated Financial Statements

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

(Unaudited)

 

		Less than						12 months
		12 months						or longer						Total
		Fair			Unrealized			Fair			Unrealized			Fair			Unrealized
December 31, 2012		Value			Losses			Value			Losses			Value			Losses
Securities available for sale:
Asset-backed securities		$	-		$	-		$	801		$	2		$	801		$	2
Corporate debt securities			878			2			-			-			878			2
Certificates of deposit			599			1			-			-			599			1
U.S. agency notes			2,102			3			-			-			2,102			3
Non-agency residential mortgage-backed
securities			46			1			549			64			595			65
Total		$	3,625		$	7		$	1,350		$	66		$	4,975		$	73
Securities held to maturity:
U.S. agency mortgage-backed
securities		$	2,680		$	19		$	-		$	-		$	2,680		$	19
Other securities			240			1			-			-			240			1
Total		$	2,920		$	20		$	-		$	-		$	2,920		$	20
Total securities with unrealized losses  (1)		$	6,545		$	27		$	1,350		$	66		$	7,895		$	93

 

 

Non -agency residential mortgage-backed securities include securities collateralized by loans that are considered to be   “Prime” (defined as loans to borrowers with a Fair Isaac Corporation (FICO) credit score of 620 or higher at origination), and “Alt - A” (defined as Prime loans with reduced documentation at origination).   Based on the Company’s cash flow projections,   management determined that it does not expect to recover all of the amortized cost of certain of its Alt-A and Prime residential mortgage-backed securities and therefore determined that these securities were other-than-temporarily impaired (OTTI). Because the Company does not intend to sell these securities and it is not “more likely than not” that the Company will be required to sell these securities, the Company recognized an impairment charge equal to the securities’ expected credit losses of $ 3  million and $ 7  million during the second quarter and first half of 2013 , respectively . The expected credit losses were measured as the difference between the present value of expected cash flows and the amortized cost of the securities. Further deterioration in the performance of the underlying loans in the Company’s non-agency residential mortgage-backed securities portfolio could result in the recognition of additional impairment losses.

 

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

 

		Three Months Ended						Six Months Ended
		June 30,						June 30,
		2013			2012			2013			2012
Balance at beginning of period		$	163		$	145		$	159		$	127
Credit losses recognized into current period earnings on debt securities for
which an other-than-temporary impairment was not previously recognized			1			4			1			5
Credit losses recognized into current period earnings on debt securities for
which an other-than-temporary impairment was previously recognized			2			3			6			20
Balance at end of period		$	166		$	152		$	166		$	152

 

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

 

					After 1 year			After 5 years
		Within			through			through			After
		1 year			5 years			10 years			10 years			Total
Securities available for sale:
U.S. agency mortgage-backed securities  (1)		$	-		$	122		$	3,974		$	14,512		$	18,608
Asset-backed securities			-			856			1,060			9,923			11,839
Corporate debt securities			2,234			6,085			-			-			8,319
Certificates of deposit			3,028			1,893			-			-			4,921
U.S. agency notes			-			1,781			1,854			-			3,635
Non-agency residential mortgage-backed
securities  (1)			-			2			3			646			651
Commercial paper			160			-			-			-			160
Other securities			-			-			-			281			281
Total fair value		$	5,422		$	10,739		$	6,891		$	25,362		$	48,414
Total amortized cost		$	5,412		$	10,773		$	6,888		$	25,337		$	48,410
Securities held to maturity:
U.S. agency mortgage-backed securities  (1)		$	-		$	-		$	11,458		$	12,970		$	24,428
Other securities			-			100			334			426			860
Total fair value		$	-		$	100		$	11,792		$	13,396		$	25,288
Total amortized cost		$	-		$	100		$	12,219		$	13,499		$	25,818

 

 

Proceeds and gross realized gains (losses) from sales of securities available for sale are as follows:

 

 

		Three Months Ended						Six Months Ended
		June 30,						June 30,
		2013			2012			2013			2012
Proceeds		$	3,004		$	1,073		$	3,004		$	1,323
Gross realized gains		$	3		$	2		$	3		$	2
Gross realized losses		$	-		$	-		$	-		$	-

 

 

 

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

 

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

 

		June 30,			December 31,
		2013			2012
Residential real estate mortgages		$	7,470		$	6,507
Home equity lines of credit			3,125			3,287
Personal loans secured by securities			1,166			963
Other			28			25
Total loans to banking clients  (1)			11,789			10,782
Allowance for loan losses			(57)			(56)
Total loans to banking clients – net		$	11,732		$	10,726

 

 

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The Company has commitments to extend credit related to unused home equity lines of credit (HELOCs), personal loans secured by securities, and other lines of credit, which totaled $ 5.5  billion and $5.4  billion at June 30, 2013, and December 31, 2012, respectively.

 

Changes in the allowance for loan losses were as follows:

 

Three Months Ended			June 30, 2013											June 30, 2012
			Residential											Residential
			real estate				Home equity							real estate				Home equity
			mortgages				lines of credit				Total			mortgages				lines of credit				Total
Balance at beginning of period			$	40			$	19		$	59			$	37			$	13		$	50
Charge-offs				(1)				(1)			(2)				(1)				(2)			(3)
Recoveries				-				1			1				-				-			-
Provision for loan losses				1				(2)			(1)				(2)				6			4
Balance at end of period			$	40			$	17		$	57			$	34			$	17		$	51

 

 

Six Months Ended			June 30, 2013											June 30, 2012
			Residential											Residential
			real estate				Home equity							real estate				Home equity
			mortgages				lines of credit				Total			mortgages				lines of credit				Total
Balance at beginning of period			$	36			$	20		$	56			$	40			$	14		$	54
Charge-offs				(3)				(3)			(6)				(4)				(4)			(8)
Recoveries				1				1			2				1				-			1
Provision for loan losses				6				(1)			5				(3)				7			4
Balance at end of period			$	40			$	17		$	57			$	34			$	17		$	51

 

Included in the loan portfolio are nonaccrual loans totaling   $ 43  million and $ 48  million at June   30 , 2013 and December 31, 2012, respectively. There were no loans accruing interest that were contractually 90 days or more past due at June   30 , 2013 or December 31, 2012. Nonperforming assets, which include nonaccrual loans and other real estate owned, totaled   $ 46  million and $ 54  million at June   30 , 2013 and December 31, 2012, respectively.   Troubled debt restructurings were not material at June 30, 2013 or December 31, 2012.

 

In 2012, Schwab Bank launched a co-branded loan origination program for Schwab Bank clients (the Program) with Quicken Loans, Inc. (Quicken ^® Loans ^® ). Pursuant to the Program, Quicken Loans originates and services first lien residential real estate mortgage loans ( First Mortgages) and HELOCs for Schwab Bank clients. Under the Program, Schwab Bank purchases certain First Mortgages and HELOCs that are originated by Quicken Loans. Schwab Bank sets the underwriting guidelines and pricing for all loans it intends to purchase for its portfolio. Schwab Bank purchased First Mortgages of $ 928  million   and $ 515  million during the second quarters of 2013 and 2012, respectively, and $ 2.2  billion and $ 586  million during the first halves of 2013 and 2012, respectively . The First Mortgages purchased under the Program are included in the First mortgages loan class in the tables below.

 

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The delinquency   analysis by loan class is as follows:  

 

											>90 days past
					30-59 days			60-89 days			due and other			Total			Total
June 30, 2013		Current			past due			past due			nonaccrual loans			past due			loans
Residential real estate mortgages:
First mortgages		$	7,259		$	14		$	1		$	27		$	42		$	7,301
Purchased first mortgages			162			2			-			5			7			169
Home equity lines of credit			3,108			4			3			10			17			3,125
Personal loans secured by securities			1,165			-			-			1			1			1,166
Other			28			-			-			-			-			28
Total loans to banking clients		$	11,722		$	20		$	4		$	43		$	67		$	11,789

 

 

											>90 days past
					30-59 days			60-89 days			due and other			Total			Total
December 31, 2012		Current			past due			past due			nonaccrual loans			past due			loans
Residential real estate mortgages:
First mortgages		$	6,291		$	22		$	2		$	33		$	57		$	6,348
Purchased first mortgages			154			1			-			4			5			159
Home equity lines of credit			3,269			5			2			11			18			3,287
Personal loans secured by securities			963			-			-			-			-			963
Other			22			3			-			-			3			25
Total loans to banking clients		$	10,699		$	31		$	4		$	48		$	83		$	10,782

 

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

 

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THE CHARLES SCHWAB CORPORATION

Notes to Condensed Consolidated Financial Statements

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

(Unaudited)

 

		Residential real estate mortgages
		First			Purchased							Home equity
June 30, 2013		mortgages			first mortgages			Total				lines of credit
Year of origination
Pre-2009		$	756		$	56		$	812			$	2,172
2009			238			4			242				292
2010			644			9			653				215
2011			912			42			954				175
2012			2,731			27			2,758				172
2013			2,020			31			2,051				99
Total		$	7,301		$	169		$	7,470			$	3,125
Origination FICO
<620		$	10		$	2		$	12			$	-
620 – 679			99			15			114				21
680 – 739			1,285			34			1,319				599
> 740			5,907			118			6,025				2,505
Total		$	7,301		$	169		$	7,470			$	3,125
Updated FICO
<620		$	50		$	5		$	55			$	44
620 – 679			192			11			203				111
680 – 739			1,020			32			1,052				488
> 740			6,039			121			6,160				2,482
Total		$	7,301		$	169		$	7,470			$	3,125
Origination LTV
< 70%		$	4,900		$	114		$	5,014			$	2,101
>70% –  < 90%			2,385			49			2,434				999
>90% –  < 100%			16			6			22				25
Total		$	7,301		$	169		$	7,470			$	3,125

 

												Percent of Loans
												that are 90+ Days
												Past Due and
					Weighted							Less than 90 Days
					Average				Utilization			Past Due but on
June 30, 2013		Balance			Updated FICO				Rate (1)			Nonaccrual Status
Residential real estate mortgages:
Estimated Current LTV
< 70%		$	5,830			773			N/A			0.04	%
>70% –  < 90%			1,355			763			N/A			0.27	%
>90% –  < 100%			119			744			N/A			0.88	%
>100%			166			733			N/A			7.72	%
Total		$	7,470			770			N/A			0.27	%
Home equity lines of credit:
Estimated Current LTV
< 70%		$	1,945			772			36	%		0.10	%
>70% –  < 90%			783			764			48	%		0.24	%
>90% –  < 100%			173			754			56	%		0.45	%
>100%			224			747			59	%		0.95	%
Total		$	3,125			767			40	%		0.22	%

 

N/A Not applicable.

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THE CHARLES SCHWAB CORPORATION

Notes to Condensed Consolidated Financial Statements

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

(Unaudited)

 

		Residential real estate mortgages
		First			Purchased							Home equity
December 31, 2012		mortgages			first mortgages			Total				lines of credit
Year of origination
Pre-2009		$	867		$	62		$	929			$	2,338
2009			305			6			311				338
2010			909			12			921				249
2011			1,270			53			1,323				198
2012			2,997			26			3,023				164
Total		$	6,348		$	159		$	6,507			$	3,287
Origination FICO
<620		$	10		$	1		$	11			$	-
620 – 679			98			16			114				23
680 – 739			1,141			40			1,181				633
> 740			5,099			102			5,201				2,631
Total		$	6,348		$	159		$	6,507			$	3,287
Updated FICO
<620		$	54		$	6		$	60			$	49
620 – 679			191			13			204				117
680 – 739			940			34			974				510
> 740			5,163			106			5,269				2,611
Total		$	6,348		$	159		$	6,507			$	3,287
Origination LTV
< 70%		$	4,189		$	97		$	4,286			$	2,225
>70% –  < 90%			2,142			54			2,196				1,036
>90% –  < 100%			17			8			25				26
Total		$	6,348		$	159		$	6,507			$	3,287

 

 

												Percent of Loans
												that are 90+ Days
												Past Due and
					Weighted							Less than 90 Days
					Average				Utilization			Past Due but on
December 31, 2012		Balance			Updated FICO				Rate (1)			Nonaccrual Status
Residential real estate mortgages:
Estimated Current LTV
< 70%		$	4,162			772			N/A			0.05	%
>70% –  < 90%			1,841			764			N/A			0.22	%
>90% –  < 100%			168			750			N/A			0.51	%
>100%			336			741			N/A			5.34	%
Total		$	6,507			768			N/A			0.38	%
Home equity lines of credit:
Estimated Current LTV
< 70%		$	1,559			773			36	%		0.14	%
>70% –  < 90%			1,020			766			46	%		0.18	%
>90% –  < 100%			267			759			54	%		0.44	%
>100%			441			753			59	%		1.06	%
Total		$	3,287			767			42	%		0.31	%

 

N/A Not applicable.

 

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

 

 

4 .         Commitments and Contingencies

 

The Company has clients that sell (i.e., write) listed option contracts that are cleared by the Options Clearing Corporation – a clearing house that establishes margin requirements on these transactions. The Company partially satisfies the margin requirements by arranging unsecured standby letter of credit agreements (LOCs), in favor of the Options Clearing Corporation, which are issued by multiple banks. At June   30 , 2013, the aggregate face amount of these LOCs totaled $ 240  million. In connection with its securities lending activities, the Company is required to provide collateral to certain brokerage clients. The Company satisfies the collateral requirements by arranging LOCs in favor of these brokerage clients, which are issued by multiple banks , or by providing cash as collateral . At June   30 , 2013, the aggregate face amount of these LOCs totaled $ 32  million. There were no funds drawn under any of these LOCs at June   30 , 2013.

 

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

 

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

 

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

 

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

---

 

 

Total Bond Market Fund Litigation : On August 28, 2008, a class action lawsuit was filed in the U.S. District Court for the Northern District of California on behalf of investors in the Schwab Total Bond Market Fund™ (Northstar lawsuit). The lawsuit, which alleges violations of state law and federal securities law in connection with the fund’s investment policy, names Schwab Investments (registrant and issuer of the fund’s shares) and CSIM as defendants. Allegations include that the fund improperly deviated from its stated investment objectives by investing in collateralized mortgage obligations (CMOs) and investing more than 25 % of fund assets in CMOs and mortgage-backed securities without obtaining a shareholder vote. Plaintiffs seek unspecified compensatory and rescission damages, unspecified equitable and injunctive relief, costs and attorneys’ fees. Plaintiffs’ federal securities law claim and certain of plaintiffs’ state law claims were dismissed in proceedings before the court and following a successful petition by defendants to the Ninth Circuit Court of Appeals. On August 8, 2011, the court dismissed plaintiffs’ remaining claims with prejudice. Plaintiffs have again appealed to the Ninth Circuit, where the case is currently pending.

 

optionsXpress Regulatory Matters : optionsXpress entities and individual employees are respondents   in certain pending regulatory matters which predate the Company’s acquisition of optionsXpress. On April   16, 2012, optionsXpress, Inc. was charged by the SEC in an administrative proceeding alleging violations of the firm’s close-out obligations under Regulation SHO (short sale delivery rules) in connection with certain customer trading activity. Trial in the proceeding commenced September 5, 2012. In a decision issued June 7, 2013, the judge held that optionsXpress violated Regulation SHO and aided and abetted fraudulent trading activity by its customer, and ordered the firm to pay disgorgement and penalties. The Company continues to dispute the allegations and is appealing the decision . Separately, on April   19, 2012, the SEC instituted an administrative proceeding alleging violations of the broker-dealer registration requirements by an unregistered optionsXpress entity. On September 5, 2012, the judge hearing the case ruled on summary disposition that applicable registration requirements were violated. Certain other issues, including relief, remain to be determined at trial. The Company continues to dispute the allegations and is contesting the charges. The Company has a contingent liability associated with the two separate matters, which was not material at June   30 , 2013.

 

 

5.          Fair Values of Assets and Liabilities

 

For a description of the fair value hierarchy and the Company’s fair value methodologies, including the use of independent third-party pricing services, s ee note “2 – Summary of Significant Accounting Policies” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012 , as updated by the Company’s Current Report on Form 8-K filed on June 24, 2013, relating to the realignment of the Company’s reportable segments . The Company did not transfer any assets or liabilities between Level 1 and Level 2 during the quarter ended June   30 , 2013, or the year ended December 31, 2012. In addition, the Company did not adjust prices received from the primary independent third-party pricing service at June   30 , 2013, or December   31, 2012.

 

---

 

Financial Instruments Recorded at Fair Value

 

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

 

	Quoted Prices
	in Active Markets					Significant					Significant
	for Identical					Other Observable					Unobservable
	Assets					Inputs					Inputs						Balance at
June 30, 2013	(Level 1)					(Level 2)					(Level 3)						Fair Value
Cash equivalents:
Money market funds		$	18				$	-				$	-				$	18
Commercial paper			-					21					-					21
Total cash equivalents			18					21					-					39
Investments segregated and on deposit for regulatory purposes:
Certificates of deposit			-					2,651					-					2,651
U.S. Government securities			-					2,148					-					2,148
Total investments segregated and on deposit for regulatory
purposes			-					4,799					-					4,799
Other securities owned:
Schwab Funds ®  money market funds			218					-					-					218
Equity and bond mutual funds			214					1					-					215
State and municipal debt obligations			-					33					-					33
Equity, U.S. Government and corporate debt, and other
securities			-					22					-					22
Total other securities owned			432					56					-					488
Securities available for sale:
U.S. agency mortgage-backed securities			-					18,608					-					18,608
Asset-backed securities			-					11,839					-					11,839
Corporate debt securities			-					8,319					-					8,319
Certificates of deposit			-					4,921					-					4,921
U.S. agency notes			-					3,635					-					3,635
Non-agency residential mortgage-backed securities			-					651					-					651
Commercial paper			-					160					-					160
Other securities			-					281					-					281
Total securities available for sale			-					48,414					-					48,414
Total		$	450				$	53,290				$	-				$	53,740

 

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THE CHARLES SCHWAB CORPORATION

Notes to Condensed Consolidated Financial Statements

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

(Unaudited)

 

	Quoted Prices
	in Active Markets					Significant					Significant
	for Identical					Other Observable					Unobservable
	Assets					Inputs					Inputs					Balance at
December 31, 2012	(Level 1)					(Level 2)					(Level 3)					Fair Value
Cash equivalents:
Money market funds		$	413				$	-				$	-				$	413
Commercial paper			-					1,076					-					1,076
Total cash equivalents			413					1,076					-					1,489
Investments segregated and on deposit for regulatory purposes:
Certificates of deposit			-					2,976					-					2,976
U.S. Government securities			-					1,767					-					1,767
Total investments segregated and on deposit for regulatory
purposes			-					4,743					-					4,743
Other securities owned:
Schwab Funds ®  money market funds			329					-					-					329
Equity and bond mutual funds			217					-					-					217
State and municipal debt obligations			-					48					-					48
Equity, U.S. Government and corporate debt, and other
securities			2					40					-					42
Total other securities owned			548					88					-					636
Securities available for sale:
U.S. agency mortgage-backed securities			-					20,476					-					20,476
Asset-backed securities			-					8,164					-					8,164
Corporate debt securities			-					6,256					-					6,256
Certificates of deposit			-					6,161					-					6,161
U.S. agency notes			-					3,464					-					3,464
Non-agency residential mortgage-backed securities			-					733					-					733
Commercial paper			-					574					-					574
Other securities			-					295					-					295
Total securities available for sale			-					46,123					-					46,123
Total		$	961				$	52,030				$	-				$	52,991

 

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Financial Instruments Not Recorded at Fair Value

 

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

 

						Quoted Prices
						in Active Markets					Significant					Significant
						for Identical					Other Observable					Unobservable
	Carrying					Assets					Inputs					Inputs					Balance at
June 30, 2013	Amount					(Level 1)					(Level 2)					(Level 3)					Fair Value
Assets:
Cash and cash equivalents		$	6,195				$	-				$	6,195				$	-				$	6,195
Cash and investments segregated and
on deposit for regulatory purposes			22,206					-					22,206					-					22,206
Receivables from brokers, dealers, and
clearing organizations			395					-					395					-					395
Receivables from brokerage clients – net			12,821					-					12,821					-					12,821
Securities held to maturity:
U.S. agency mortgage-backed securities			24,887					-					24,428					-					24,428
Other securities			931					-					860					-					860
Total securities held to maturity			25,818					-					25,288					-					25,288
Loans to banking clients – net:
Residential real estate mortgages			7,430					-					7,451					-					7,451
Home equity lines of credit			3,108					-					3,059					-					3,059
Personal loans secured by securities			1,166					-					1,166					-					1,166
Other			28					-					28					-					28
Total loans to banking clients – net			11,732					-					11,704					-					11,704
Other assets			63					-					63					-					63
Total		$	79,230				$	-				$	78,672				$	-				$	78,672
Liabilities:
Deposits from banking clients		$	84,345				$	-				$	84,345				$	-				$	84,345
Payables to brokers, dealers, and clearing
organizations			2,150					-					2,150					-					2,150
Payables to brokerage clients			36,852					-					36,852					-					36,852
Accrued expenses and other liabilities			426					-					426					-					426
Long-term debt			1,630					-					1,738					-					1,738
Total		$	125,403				$	-				$	125,511				$	-				$	125,511

 

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THE CHARLES SCHWAB CORPORATION

Notes to Condensed Consolidated Financial Statements

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

(Unaudited)

 

						Quoted Prices
						in Active Markets					Significant					Significant
						for Identical					Other Observable					Unobservable
	Carrying					Assets					Inputs					Inputs					Balance at
December 31, 2012	Amount					(Level 1)					(Level 2)					(Level 3)					Fair Value
Assets:
Cash and cash equivalents		$	11,174				$	-				$	11,174				$	-				$	11,174
Cash and investments segregated and
on deposit for regulatory purposes			23,723					-					23,723					-					23,723
Receivables from brokers, dealers, and
clearing organizations			333					-					333					-					333
Receivables from brokerage clients – net			13,453					-					13,453					-					13,453
Securities held to maturity:
U.S. agency mortgage-backed securities			17,750					-					18,289					-					18,289
Other securities			444					-					443					-					443
Total securities held to maturity			18,194					-					18,732					-					18,732
Loans to banking clients – net:
Residential real estate mortgages			6,471					-					6,687					-					6,687
Home equity lines of credit			3,267					-					3,295					-					3,295
Personal loans secured by securities			963					-					963					-					963
Other			25					-					24					-					24
Total loans to banking clients – net			10,726					-					10,969					-					10,969
Other assets			64					-					64					-					64
Total		$	77,667				$	-				$	78,448				$	-				$	78,448
Liabilities:
Deposits from banking clients		$	79,377				$	-				$	79,377				$	-				$	79,377
Payables to brokers, dealers, and clearing
organizations			1,068					-					1,068					-					1,068
Payables to brokerage clients			40,330					-					40,330					-					40,330
Accrued expenses and other liabilities			353					-					353					-					353
Long-term debt			1,632					-					1,782					-					1,782
Total		$	122,760				$	-				$	122,910				$	-				$	122,910

 

Securities lending: Payables from brokers, dealers, and clearing organizations include securities loaned. The Company loans client securities temporarily to other brokers in connection with its securities lending activities and receives cash as collateral for the securities loaned. The fair value of client securities pledged in securities lending transactions to other broker-dealers was $ 1.2  billion at June 30, 2013 and $ 852  million at December 31, 2012. Additionally, the Company borrows securities from other broker-dealers to fulfill short sales by clients, which are included in receivables from brokers, dealers, and clearing organizations. The fair value of these borrowed securities was $ 115  million at June 30, 2013 and $ 121  million at December 31, 2012. All of the Company’s securities lending transactions are subject to enforceable master netting arrangements with other broker-dealers. However, the Company does not net securities lending transactions and therefore, the Company’s securities loaned and securities borrowed are presented gross in the condensed consolidated balance sheets.

 

Resale agreements: Cash and investments segregated and on deposit for regulatory purposes include securities purchased under agreements to resell (resale agreements), which are collateralized by U.S. Government and agency securities. Schwab enters into collateralized resale agreements principally with other broker-dealers, which could result in losses in the event the counterparty fails to purchase the securities held as collateral for the cash advanced and the fair value of the securities declines. Schwab utilizes the collateral provided under these resale agreements to meet obligations under broker-dealer client protection rules, which place limitations on its ability to access such segregated securities. The Company’s resale agreements are not subject to enforceable master netting arrangements.

 

 

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6.          Accumulated Other Comprehensive Income

 

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

 

Three Months Ended June 30,					2013										2012
		Before			Tax				Net of			Before			Tax				Net of
		tax			effect				tax			tax			effect				tax
Change in net unrealized gain on
securities available for sale:
Net unrealized (loss) gain		$	(477)		$	179		$	(298)			$	119		$	(45)		$	74
Reclassification of impairment charges
included in net impairment losses
on securities			3			-			3				7			(2)			5
Other reclassifications included in
other revenue			(3)			1			(2)				(1)			-			(1)
Change in net unrealized gain on
securities available for sale			(477)			180			(297)				125			(47)			78
Other comprehensive (loss) income		$	(477)		$	180		$	(297)			$	125		$	(47)		$	78

 

Six Months Ended June 30,					2013										2012
		Before			Tax				Net of			Before			Tax				Net of
		tax			effect				tax			tax			effect				tax
Change in net unrealized gain on
securities available for sale:
Net unrealized (loss) gain		$	(480)		$	181		$	(299)			$	208		$	(77)		$	131
Reclassification of impairment charges
included in net impairment losses
on securities			7			(2)			5				25			(9)			16
Other reclassifications included in
other revenue			(3)			1			(2)				(1)			-			(1)
Change in net unrealized gain on
securities available for sale			(476)			180			(296)				232			(86)			146
Other			1			-			1				-			-			-
Other comprehensive (loss) income		$	(475)		$	180		$	(295)			$	232		$	(86)		$	146

 

Accumulated other comprehensive income balances are as follows:

 

	Net unrealized										Total
	gain on securities										accumulated other
	available for sale					Other					comprehensive income
Balance at December 31, 2011		$	10				$	(2)				$	8
Other net changes			146					-					146
Balance at June 30, 2012		$	156				$	(2)				$	154
Balance at December 31, 2012		$	299				$	(1)				$	298
Other net changes			(296)					1					(295)
Balance at June 30, 2013		$	3				$	-				$	3

 

 

 

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7.          Earnings Per Common Share

 

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

 

		Three Months Ended						Six Months Ended
		June 30,						June 30,
		2013			2012			2013			2012
Net income		$	256		$	275		$	462		$	470
Preferred stock dividends			(23)			(14)			(31)			(14)
Net income available to common stockholders		$	233		$	261		$	431		$	456
Weighted-average common shares outstanding — basic			1,282			1,273			1,280			1,272
Common stock equivalent shares related to stock incentive plans			6			1			5			1
Weighted-average common shares outstanding — diluted  (1)			1,288			1,274			1,285			1,273
Basic EPS		$	.18		$	.20		$	.33		$	.36
Diluted EPS		$	.18		$	.20		$	.33		$	.36

 

 

 

 

8 .          Regulatory Requirements

 

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

 

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

 

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

 

								Minimum Capital						Minimum to be
		Actual						Requirement						Well Capitalized
		Amount			Ratio			Amount			Ratio			Amount			Ratio
Tier 1 Risk-Based Capital		$	5,961		18.6	%		$	1,280		4.0	%		$	1,920		6.0	%
Total Risk-Based Capital		$	6,020		18.8	%		$	2,560		8.0	%		$	3,200		10.0	%
Tier 1 Leverage		$	5,961		6.6	%		$	3,637		4.0	%		$	4,546		5.0	%
Tangible Equity		$	5,961		6.6	%		$	1,818		2.0	%			N/A

 

N/A Not applicable.

 

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

 

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

 

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

 

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

 

																	Net Capital
														Net Capital			in Excess of
					% of			Minimum			2% of			in Excess of			5% of
					Aggregate			Net Capital			Aggregate			Required			Aggregate
		Net Capital			Debit Balances			Required			Debit Balances			Net Capital			Debit Balances
Schwab		$	1,334		10	%		$	0.250		$	280		$	1,054		$	634
optionsXpress, Inc.		$	92		27	%		$	1		$	7		$	85		$	75

 

 

 

9.          Segment Information

 

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

 

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The Company evaluates the performance of its segments on a pre-tax basis, excluding items such as significant nonrecurring gains, impairment charges on non-financial assets, discontinued operations, extraordinary items, and significant restructuring and other charges. Segment assets and liabilities are not used for evaluating segment performance or in deciding how to allocate resources to segments. There are no revenues from transactions between the segments.

 

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

 

	Investor Services						Advisor Services						Unallocated						Total
Three Months Ended June 30,	2013			2012			2013			2012			2013			2012			2013			2012
Net Revenues:
Asset management and administration fees	$	402		$	350		$	170		$	148		$	-		$	(2)		$	572		$	496
Net interest revenue		418			407			55			51			-			-			473			458
Trading revenue		160			156			75			63			-			-			235			219
Other (1)		43			29			16			19			-			73			59			121
Provision for loan losses		1			(3)			-			(1)			-			-			1			(4)
Net impairment losses on securities		(3)			(6)			-			(1)			-			-			(3)			(7)
Total net revenues		1,021			933			316			279			-			71			1,337			1,283
Expenses Excluding Interest		722			667			203			184			-			-			925			851
Income before taxes on income	$	299		$	266		$	113		$	95		$	-		$	71		$	412		$	432
Taxes on income																				156			157
Net Income																			$	256		$	275

 

 

	Investor Services						Advisor Services						Unallocated						Total
Six Months Ended June 30,	2013			2012			2013			2012			2013			2012			2013			2012
Net Revenues:
Asset management and administration fees	$	789		$	691		$	335		$	290		$	-		$	(1)		$	1,124		$	980
Net interest revenue		831			791			111			101			-			-			942			892
Trading revenue		309			330			149			132			-			-			458			462
Other (1)		85			61			30			34			-			72			115			167
Provision for loan losses		(4)			(3)			(1)			(1)			-			-			(5)			(4)
Net impairment losses on securities		(7)			(23)			-			(2)			-			-			(7)			(25)
Total net revenues		2,003			1,847			624			554			-			71			2,627			2,472
Expenses Excluding Interest		1,473			1,357			411			370			-			-			1,884			1,727
Income before taxes on income	$	530		$	490		$	213		$	184		$	-		$	71		$	743		$	745
Taxes on income																				281			275
Net Income																			$	462		$	470

 

 

 

 

10.        Subsequent Events

 

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

 

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