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

FORM 10-Q

☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2019
or
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________

Commission File Number: 1-9700

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

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

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

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock – $.01 par value per share
SCHW
New York Stock Exchange
Depositary Shares, each representing a 1/40th ownership interest in a share of 6.00% Non-Cumulative Preferred Stock, Series C
SCHW PrC
New York Stock Exchange
Depositary Shares, each representing a 1/40th ownership interest in a share of 5.95% Non-Cumulative Preferred Stock, Series D
SCHW PrD
New York Stock Exchange

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).
Yes ☒   No ☐

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

Large accelerated filer ☒                        Accelerated filer ☐
Non-accelerated filer☐                        Smaller reporting company ☐         
Emerging growth company ☐

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
1,282,287,840 shares of $.01 par value Common Stock outstanding on October 31, 2019


THE CHARLES SCHWAB CORPORATION

Quarterly Report on Form 10-Q
For the Quarter Ended September 30, 2019



 Index

 
 
 
 
 
 
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
20
 
 
 
21
 
 
 
22
 
 
 
23
 
 
 
24-25
 
 
 
26-56
 
 
 
 
 
 
Item 2.
 
1-18
 
 
 
 
 
 
Item 3.
 
19
 
 
 
 
 
 
Item 4.
 
57
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 1.
 
58
 
 
 
 
 
 
Item 1A.
 
58
 
 
 
 
 
 
Item 2.
 
58
 
 
 
 
 
 
Item 3.
 
58
 
 
 
 
 
 
Item 4.
 
59
 
 
 
 
 
 
Item 5.
 
59
 
 
 
 
 
 
Item 6.
 
60-61
 
 
 
 
 
 
62
 
 
 





Part I – FINANCIAL INFORMATION

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



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

INTRODUCTION

The Charles Schwab Corporation (CSC) is a savings and loan holding company and engages, through its subsidiaries, in wealth management, securities brokerage, banking, asset management, custody, and financial advisory services.

Significant business subsidiaries of CSC include the following:

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

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

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

This strategy emphasizes placing clients’ perspectives, needs, and desires at the forefront. Because investing plays a fundamental role in building financial security, we strive to deliver a better investing experience for our clients – individual investors and the people and institutions who serve them – by disrupting longstanding industry practices on their behalf and providing superior service. We also aim to offer a broad range of products and solutions to meet client needs with a focus on transparency, value, and trust. In addition, management works to couple Schwab’s scale and resources with ongoing expense discipline to keep costs low and ensure that products and solutions are affordable as well as responsive to client needs. In combination, these are the key elements of our “no trade-offs” approach to serving investors. We believe that following this strategy is the best way to maximize our market valuation and stockholder returns over time.

Management estimates that investable wealth in the United States (U.S.) (consisting of assets in defined contribution, retail wealth management and brokerage, and registered investment advisor channels, along with bank deposits) currently exceeds $45 trillion, which means the Company’s $3.77 trillion in client assets leaves substantial opportunity for growth. Our strategy is based on the principle that developing trusted relationships will translate into more assets from both new and existing clients, ultimately driving more revenue, and along with expense discipline and thoughtful capital management, will generate earnings growth and build long-term stockholder value.

This Management’s Discussion and Analysis should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended December 31, 2018 (2018 Form 10-K).

On our website, https://www.aboutschwab.com, we post the following filings after they are electronically filed with or furnished to the Securities and Exchange Commission (SEC): annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements, and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934. In addition, the website also includes the Dodd-Frank stress test results, our regulatory capital disclosures based on Basel III, and our quarterly average liquidity coverage ratio (LCR). The SEC maintains a website at https://www.sec.gov that contains reports, proxy statements, and other information that we file electronically with them.

- 1 -

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


FORWARD-LOOKING STATEMENTS
In addition to historical information, this Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act, and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements are identified by words such as “believe,” “anticipate,” “expect,” “intend,” “plan,” “will,” “may,” “estimate,” “appear,” “could,” “would,” “expand,” and other similar expressions. In addition, any statements that refer to expectations, projections, or other characterizations of future events or circumstances are forward-looking statements.
These forward-looking statements, which reflect management’s beliefs, objectives, and expectations as of the date hereof, are estimates based on the best judgment of Schwab’s senior management. These statements relate to, among other things:
•
Maximizing our market valuation and stockholder returns over time; our belief that developing trusted relationships will translate into more client assets which drives revenue and, along with expense discipline and thoughtful capital management, generates earnings growth and builds stockholder value (see Introduction in Part I, Item 2);
•
Investments to drive efficiency and scale to support our expanding client base (see Overview);
•
Delivery of business growth and meaningful capital returns (see Overview);
•
The acquisition of assets of USAA’s Investment Management Company (USAA-IMCO) and entering into a referral agreement (see Overview, Risk Management – Liquidity Risk, Capital Management, and Commitments and Contingencies in Part I, Item 1, Financial Information – Notes to Condensed Consolidated Financial Statements (Item 1) – Note 10);
•
The impact of the recent pricing reductions on the Company’s value proposition, competitive positioning, long-term growth in total client assets and client accounts, trading revenue, and total net revenues (see Overview);
•
2019 capital expenditures (see Results of Operations);
•
The phase-out of the use of LIBOR (see Risk Management);
•
The expected impact of new accounting standards not yet adopted (see New Accounting Standards in Item 1 – Note 2);
•
The likelihood of indemnification and guarantee payment obligations (see Commitments and Contingencies in Item 1 – Note 10); and
•
The impact of legal proceedings and regulatory matters (see Commitments and Contingencies in Item 1 – Note 10 and Legal Proceedings in Part II, Item 1).

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

Important factors that may cause actual results to differ include, but are not limited to:
•
General market conditions, including the level of interest rates, equity valuations, and trading activity;
•
Our ability to attract and retain clients, develop trusted relationships, and grow client assets;
•
Client use of our advisory solutions and other products and services;
•
The level of client assets, including cash balances;
•
Competitive pressure on pricing, including deposit rates;
•
Client sensitivity to interest rates;
•
Regulatory guidance;
•
Capital and liquidity needs and management;
•
Our ability to manage expenses;
•
Our ability to develop and launch new and enhanced products, services, and capabilities, as well as implement infrastructure, in a timely and successful manner;
•
The effect of pricing reductions on client acquisition, retention and asset levels, including cash balances;
•
The Company’s ability to monetize client assets;
•
The timing and the ability of us and USAA-IMCO to satisfy the closing conditions in the purchase agreement, including regulatory approvals and the implementation of conversion plans;
•
The timing of campus expansion work and technology projects;
•
Adverse developments in litigation or regulatory matters and any related charges; and
•
Potential breaches of contractual terms for which we have indemnification and guarantee obligations.

Certain of these factors, as well as general risk factors affecting the Company, are discussed in greater detail in Part I – Item 1A – Risk Factors in the 2018 Form 10-K.

- 2 -

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


OVERVIEW
Management focuses on several client activity and financial metrics in evaluating Schwab’s financial position and operating performance. Results for the third quarters and first nine months of 2019 and 2018 are:
 
Three Months Ended
September 30,
 
Percent
Change
 
Nine Months Ended
September 30,
Percent
Change
 
2019
 
2018
 
 
2019
 
2018
Client Metrics
 
 
 
 
 
 
 
 
 
 
Net new client assets (in billions) (1)
$
56.6

 
$
53.5

 
6
%
 
$
145.5

 
$
78.6

85
%
Core net new client assets (in billions)
$
56.6

 
$
53.5

 
6
%
 
$
145.5

 
$
172.5

(16
)%
Client assets (in billions, at quarter end)
$
3,768.4

 
$
3,563.7

 
6
%
 
 
 
 
 
Average client assets (in billions)
$
3,736.1

 
$
3,508.1

 
6
%
 
$
3,611.0

 
$
3,420.2

6
%
New brokerage accounts (in thousands)
363

 
369

 
(2
)%
 
1,135

 
1,196

(5
)%
Active brokerage accounts (in thousands, at quarter end)
12,118

 
11,423

 
6
%
 
 
 
 
 
Assets receiving ongoing advisory services (in billions,
at quarter end)
$
1,977.9

 
$
1,851.9

 
7
%
 
 
 
 
 
Client cash as a percentage of client assets (at quarter end)
11.4
%
 
10.3
%
 
 

 
 
 
 
 
Company Financial Metrics
 

 
 

 
 

 
 
 
 
 
Total net revenues
$
2,711

 
$
2,579

 
5
%
 
$
8,115

 
$
7,463

9
%
Total expenses excluding interest
1,475

 
1,360

 
8
%
 
4,379

 
4,111

7
%
Income before taxes on income
1,236

 
1,219

 
1
%
 
3,736

 
3,352

11
%
Taxes on income
285

 
296

 
(4
)%
 
884

 
780

13
%
Net income
951

 
923

 
3
%
 
2,852

 
2,572

11
%
Preferred stock dividends and other
38

 
38

 
—

 
127

 
128

(1
)%
Net income available to common stockholders
$
913

 
$
885

 
3
%
 
$
2,725

 
$
2,444

11
%
Earnings per common share — diluted
$
.70

 
$
.65

 
8
%
 
$
2.05

 
$
1.79

15
%
Net revenue growth from prior year
5
%
 
19
%
 
 

 
9
%
 
17
%
 
Pre-tax profit margin
45.6
%
 
47.3
%
 
 

 
46.0
%
 
44.9
%
 
Return on average common stockholders’ equity
20
%
 
20
%
 
 

 
20
%
 
19
%
 
Expenses excluding interest as a percentage of average client
assets (annualized)
0.16
%
 
0.15
%
 
 
 
0.16
%
 
0.16
%
 
Consolidated Tier 1 Leverage Ratio (at quarter end)
7.3
%
 
7.5
%
 
 
 
 
 
 
 
(1) The first nine months of 2018 includes outflows of $93.9 billion from certain mutual fund clearing services clients.

During the first nine months of 2019, the equity markets showed noteworthy durability, as the S&P 500 remained up nearly 20% for the year through September 30th. Concerns persisted, however, regarding global trade and a generally softening economic outlook. The Federal Reserve moved forward with mid-cycle easing, cutting short-term interest rates 25 bps in both July and September, and long-term rates also declined significantly. Through this environment, Schwab’s net income grew to $951 million and $2.9 billion in the third quarter and first nine months of 2019, respectively, while diluted earnings per share reached $.70 and $2.05 in the third quarter and first nine months of 2019, representing increases of 8% and 15% from the comparable periods in 2018. Our continued success with clients and our full-service model enabled us to deliver total net revenues of $2.7 billion in the third quarter and $8.1 billion in the first nine months of 2019, up 5% and 9%, respectively, from the comparable periods in 2018.

Largely as a result of generally higher investment yields and higher client cash balances, net interest revenue rose 7% in the third quarter of 2019 to $1.6 billion, which brought our 2019 year-to-date net interest revenue to $4.9 billion, a 17% increase from the first nine months of 2018. Growing client balances in purchased money market funds, advice solutions, and other third-party mutual funds and ETFs helped push asset management and administration fees to $825 million in the third quarter of 2019, up 2% from the third quarter of 2018. Asset management and administration fees totaled $2.4 billion for the first nine months of 2019, down 4% from the same period in 2018, primarily as a result of lower sweep money market fund revenue due to the transfer of sweep money market funds to bank and broker-dealer sweep, as well as declines in Mutual Fund OneSource®

- 3 -

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


balances. Trading revenue decreased 2% and 5% during the third quarter and first nine months of 2019, respectively, compared with the same periods in 2018, due primarily to lower average revenue per revenue trade.

Total expenses excluding interest increased 8% and 7% during the third quarter and first nine months of 2019, respectively. Year-to-date 2019 expenses reflect growth in headcount relative to 2018 and our investments to drive efficiency and scale as we support our expanding client base. The third quarter also included $62 million of severance charges associated with our decision to eliminate positions spanning approximately 3% of our workforce, as we work to ensure we remain properly positioned to serve clients through what has become a more challenging environment. These charges contributed roughly half of our 8% expense growth in the third quarter.

Clients opened 363,000 new brokerage accounts during the third quarter, bringing our 2019 year-to-date total to 1.1 million, and helping raise active brokerage accounts to 12.1 million at quarter-end, up 6% from September 30, 2018. Core net new assets of $56.6 billion during the third quarter brought our total to $145.5 billion for the first nine months of 2019, representing an annualized organic growth rate of 6%. Client demand for help and guidance continued to grow, as client assets receiving ongoing advisory services reached $1.98 trillion at quarter-end, up 7% from September 30, 2018. Total client assets rose to $3.77 trillion as of September 30, 2019, representing an increase of $204.7 billion, or 6% from September 30, 2018.

Consistent with our approach to deliver both business growth and meaningful capital returns, we completed $771 million and $2.0 billion of share repurchases during the third quarter and first nine months of 2019, respectively, under our current $4.0 billion authorization. Our expanding client base and related increases in their cash balances drove modest organic growth in our balance sheet during the third quarter, as consolidated total assets increased $2.7 billion during the third quarter to $279.0 billion. We ended the third quarter of 2019 with a Tier 1 Leverage Ratio of 7.3%, and produced a return on equity of 20% for both the third quarter and first nine months of 2019.

On July 25, 2019, the Company announced a definitive agreement to acquire assets of USAA-IMCO, including over one million brokerage and managed portfolio accounts with approximately $90 billion in client assets, for $1.8 billion in cash. The companies have also agreed to enter into a long-term referral agreement, effective at closing of the acquisition, that would make Schwab the exclusive wealth management and brokerage provider for USAA members. The transaction is expected to close in mid-2020, subject to satisfaction of closing conditions, including regulatory approvals and the implementation of conversion plans.

Effective October 7, 2019, CS&Co eliminated online trading commissions for U.S. and Canadian-listed stocks and ETFs, as well as the base charge on options. These pricing reductions are consistent with Founder and Chairman Charles Schwab’s vision of making investing accessible to all. Management believes they enhance both our value proposition and our competitive positioning, and will contribute to long-term growth in total client assets and client accounts at Schwab. Based on trading volumes in the third quarter of 2019, we estimate that these pricing reductions were equivalent to approximately $90-100 million of third quarter trading revenue and 3-4% of total net revenues.



- 4 -

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


Current Regulatory Environment and Other Developments

In October 2019, the Board of Governors of the Federal Reserve System (Federal Reserve) issued a final enhanced prudential standards rule, and the Federal Reserve, the Office of the Comptroller of the Currency (OCC), and the Federal Deposit Insurance Corporation (FDIC) jointly issued a final capital and liquidity rule. Together, the two rules establish a revised framework for applying enhanced prudential standards and capital and liquidity requirements to large U.S. banking organizations with more than $100 billion in total assets, with four categories of standards that reflect the risks of banking organizations in each group. CSC will be in Category III based on having $250-700 billion in total assets and less than $75 billion in cross-jurisdictional activity.

The Federal Reserve final rule, largely unchanged from its October 2018 proposal, for the first time makes large savings and loan holding companies such as CSC subject to enhanced prudential standards, tailoring those regulatory requirements relating to capital stress testing, risk management, liquidity risk management, and single-counterparty credit limits based on an institution’s asset size and four other risk factors. The rule provides that Category III banking organizations will be subject to annual supervisory stress testing and biennial company-run stress testing. The interagency rule similarly tailors requirements under the agencies’ regulatory capital, LCR, and proposed net stable funding ratio rules for banking organizations in each of the four categories. Under the rule, banking organizations in Category III are no longer required to calculate their risk-weighted assets using the “advanced approaches” framework or to include accumulated other comprehensive income (AOCI) in calculating their regulatory capital; however, they will continue to be subject to the supplementary leverage ratio and any future countercyclical capital buffer imposed by the banking agencies. As a Category III banking organization which has less than $75 billion in weighted short-term wholesale funding, as defined in the rule, Schwab will be subject to a reduced LCR requirement calibrated at 85% of the full LCR requirement.

Although the Federal Reserve announced in its final rule that additional capital planning proposals would be issued at a later date, the agency did indicate that all Category III firms, including savings and loan holding companies, will be required to submit annual capital plans that will be subject to qualitative and quantitative assessments evaluated as part of the Comprehensive Capital Analysis and Review (CCAR) process.

In a separate rulemaking, the Federal Reserve and the FDIC excluded savings and loan holding companies such as CSC from any resolution planning requirement.

Schwab is currently assessing the overall impact of the final rules on its capital and liquidity requirements, as well as the stress testing, risk management, and other operational areas that will be affected by the rules.




- 5 -

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


RESULTS OF OPERATIONS

Total Net Revenues

The following tables present a comparison of revenue by category:
 
 
 
2019
 
2018
Three Months Ended September 30,
Percent
Change
 
Amount
 
% of
Total Net
Revenues
 
Amount
 
% of
Total Net
Revenues
Net interest revenue
 
 
 
 
 
 
 
 
 
Interest revenue
8
%
 
$
1,892

 
70
%
 
$
1,755

 
68
%
Interest expense
14
%
 
(261
)
 
(10
)%
 
(228
)
 
(9
)%
Net interest revenue
7
%
 
1,631

 
60
%
 
1,527

 
59
%
Asset management and administration fees
 
 
 
 
 
 
 
 
 
Mutual funds, ETFs, and collective trust funds (CTFs) (1)
—

 
445

 
16
%
 
446

 
17
%
Advice solutions
4
%
 
305

 
11
%
 
294

 
11
%
Other (1)
9
%
 
75

 
3
%
 
69

 
3
%
Asset management and administration fees
2
%
 
825

 
30
%
 
809

 
31
%
Trading revenue
 
 
 
 
 
 
 
 
 
Commissions
3
%
 
159

 
6
%
 
155

 
6
%
Principal transactions
(38
)%
 
13

 
—

 
21

 
1
%
Trading revenue
(2
)%
 
172

 
6
%
 
176

 
7
%
Other
24
%
 
83

 
4
%
 
67

 
3
%
Total net revenues
5
%
 
$
2,711

 
100
%
 
$
2,579

 
100
%
 
 
 
2019
 
2018
Nine Months Ended September 30,
Percent
Change
 
Amount
 
% of
Total Net
Revenues
 
Amount
 
% of
Total Net
Revenues
Net interest revenue
 
 
 
 
 
 
 
 
 
Interest revenue
22
%
 
$
5,817

 
72
%
 
$
4,766

 
64
%
Interest expense
57
%
 
(896
)
 
(11
)%
 
(569
)
 
(8
)%
Net interest revenue
17
%
 
4,921

 
61
%
 
4,197

 
56
%
Asset management and administration fees
 
 
 
 
 
 
 
 
 
Mutual funds, ETFs, and collective trust funds (CTFs) (1)
(9
)%
 
1,287

 
16
%
 
1,419

 
19
%
Advice solutions
2
%
 
878

 
11
%
 
859

 
11
%
Other (1)
3
%
 
201

 
2
%
 
196

 
3
%
Asset management and administration fees
(4
)%
 
2,366

 
29
%
 
2,474

 
33
%
Trading revenue
 
 
 
 
 
 
 
 
 
Commissions
(5
)%
 
477

 
6
%
 
501

 
7
%
Principal transactions
(4
)%
 
54

 
1
%
 
56

 
1
%
Trading revenue
(5
)%
 
531

 
7
%
 
557

 
8
%
Other
26
%
 
297

 
3
%
 
235

 
3
%
Total net revenues
9
%
 
$
8,115

 
100
%
 
$
7,463

 
100
%
(1) Beginning in the first quarter of 2019, a change was made to move CTFs from other asset management and administration fees. Prior periods have been recast to reflect this change.



- 6 -

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


Net Interest Revenue

Revenue on interest-earning assets is affected by various factors, such as the composition of assets, prevailing interest rates at the time of origination or purchase, changes in interest rates on floating rate securities and loans, and changes in prepayment levels for mortgage-related securities and loans. Interest rates across maturities declined during the first nine months of 2019 relative to the end of 2018. During the second and third quarters, to maintain our overall targeted interest rate risk profile, we began positioning the securities in our banking entities’ investment portfolios to include a higher percentage of fixed-rate, longer duration investments to lower our interest rate sensitivities to further declines in market interest rates.

The following tables present net interest revenue information corresponding to interest-earning assets and funding sources on the condensed consolidated balance sheets:
 
2019
 
2018
Three Months Ended September 30,
Average Balance
 
Interest Revenue/ Expense
 
Average Yield/Rate
 
Average Balance
 
Interest Revenue/ Expense
 
Average Yield/Rate
Interest-earning assets
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
22,288

 
$
123

 
2.16
%
 
$
18,623

 
$
94

 
1.98
%
Cash and investments segregated
16,140

 
92

 
2.25
%
 
10,253

 
51

 
1.94
%
Broker-related receivables
216

 
2

 
2.34
%
 
307

 
1

 
1.94
%
Receivables from brokerage clients
19,438

 
205

 
4.13
%
 
20,224

 
217

 
4.19
%
Available for sale securities (1)
53,487

 
366

 
2.71
%
 
55,283

 
328

 
2.34
%
Held to maturity securities
136,880

 
906

 
2.63
%
 
137,065

 
887

 
2.57
%
Bank loans
16,724

 
146

 
3.49
%
 
16,579

 
142

 
3.43
%
Total interest-earning assets
265,173

 
1,840

 
2.75
%
 
258,334

 
1,720

 
2.63
%
Other interest revenue
 
 
52

 
 
 
 
 
35

 
 
Total interest-earning assets
$
265,173

 
$
1,892

 
2.82
%
 
$
258,334

 
$
1,755

 
2.69
%
Funding sources
 
 
 
 
 
 
 
 
 
 
 
Bank deposits
$
208,592

 
$
166

 
0.32
%
 
$
208,666

 
$
158

 
0.30
%
Payables to brokerage clients
25,080

 
21

 
0.33
%
 
20,595

 
16

 
0.31
%
Short-term borrowings (2)
21

 
—

 
2.48
%
 
—

 
—

 
—

Long-term debt
7,425

 
67

 
3.58
%
 
5,790

 
51

 
3.52
%
Total interest-bearing liabilities
241,118

 
254

 
0.42
%
 
235,051

 
225

 
0.38
%
Non-interest-bearing funding sources
24,055

 
 
 
 
 
23,283

 
 
 
 
Other interest expense
 
 
7

 
 
 
 
 
3

 
 
Total funding sources
$
265,173

 
$
261

 
0.39
%
 
$
258,334

 
$
228

 
0.36
%
Net interest revenue
 
 
$
1,631

 
2.43
%
 
 
 
$
1,527

 
2.33
%
(1) Amounts have been calculated based on amortized cost.
(2) Interest revenue or expense was less than $500,000 in the period or periods presented.


- 7 -

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


 
2019
 
2018
Nine Months Ended September 30,
Average Balance
 
Interest Revenue/ Expense
 
Average Yield/Rate
 
Average Balance
 
Interest Revenue/ Expense
 
Average Yield/Rate
Interest-earning assets
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
24,506

 
$
432

 
2.33
%
 
$
16,164

 
$
217

 
1.78
%
Cash and investments segregated
14,771

 
264

 
2.36
%
 
12,002

 
149

 
1.64
%
Broker-related receivables
225

 
4

 
2.21
%
 
324

 
4

 
1.62
%
Receivables from brokerage clients
19,279

 
636

 
4.35
%
 
19,629

 
600

 
4.03
%
Available for sale securities (1)
58,738

 
1,203

 
2.72
%
 
52,797

 
859

 
2.16
%
Held to maturity securities
134,031

 
2,721

 
2.70
%
 
129,490

 
2,420

 
2.48
%
Bank loans
16,621

 
443

 
3.56
%
 
16,522

 
410

 
3.31
%
Total interest-earning assets
268,171

 
5,703

 
2.82
%
 
246,928

 
4,659

 
2.50
%
Other interest revenue
 
 
114

 
 
 
 
 
107

 
 
Total interest-earning assets
$
268,171

 
$
5,817

 
2.88
%
 
$
246,928

 
$
4,766

 
2.56
%
Funding sources
 
 
 
 
 
 
 
 
 
 
 
Bank deposits
$
213,089

 
$
616

 
0.39
%
 
$
193,010

 
$
339

 
0.23
%
Payables to brokerage clients
23,443

 
68

 
0.39
%
 
21,591

 
37

 
0.23
%
Short-term borrowings (2)
18

 
—

 
2.49
%
 
4,488

 
54

 
1.59
%
Long-term debt
7,122

 
192

 
3.59
%
 
5,053

 
131

 
3.46
%
Total interest-bearing liabilities
243,672

 
876

 
0.48
%
 
224,142

 
561

 
0.33
%
Non-interest-bearing funding sources
24,499

 
 
 
 
 
22,786

 
 
 
 
Other interest expense
 
 
20

 
 
 
 
 
8

 
 
Total funding sources
$
268,171

 
$
896

 
0.45
%
 
$
246,928

 
$
569

 
0.31
%
Net interest revenue
 
 
$
4,921

 
2.43
%
 
 
 
$
4,197

 
2.25
%
(1) Amounts have been calculated based on amortized cost.
(2) Interest revenue or expense was less than $500,000 in the period or periods presented.

Net interest revenue increased $104 million, or 7%, and $724 million, or 17% in the third quarter and first nine months of 2019, respectively, compared to the same periods in 2018, due to generally higher investment yields and growth in interest-earning assets.
Our net interest margin was 2.43% during both the third quarter and first nine months of 2019, up from 2.33% and 2.25% during the third quarter and first nine months of 2018. These increases were driven primarily by higher yields received on interest-earning assets due in part to the Federal Reserve’s 2018 interest rate increases, partially offset by higher interest rates paid on bank deposits and other interest-bearing liabilities.
Average interest-earning assets for the third quarter and first nine months of 2019 were higher by 3% and 9%, respectively, compared to the same periods in 2018. The increase in average interest-earning assets for the third quarter of 2019 primarily reflects higher client cash balances; the increase for the first nine months of 2019 primarily reflects higher bank deposits due to transfers from sweep money market funds to bank sweep, as well as higher client cash balances. Short-term borrowings in 2018 were primarily the result of Federal Home Loan Bank (FHLB) advances, which were used to provide temporary funding for investments ahead of deposit growth during the first half of 2018. There were no FHLB borrowings in the first nine months of 2019.




- 8 -

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


Asset Management and Administration Fees

The following tables present asset management and administration fees, average client assets, and average fee yields:
Three Months Ended September 30,
2019
 
2018
Average
Client
Assets
 
Revenue
 
Average
Fee
 
Average
Client
Assets
 
Revenue
 
Average
Fee
Schwab money market funds
$
177,892

 
$
133

 
0.30
%
 
$
130,202

 
$
122

 
0.37
%
Schwab equity and bond funds, ETFs, and CTFs (1)
274,005

 
75

 
0.11
%
 
235,148

 
78

 
0.13
%
Mutual Fund OneSource® and other non-transaction fee funds
192,409

 
153

 
0.32
%
 
209,560

 
171

 
0.32
%
Other third-party mutual funds and ETFs (2)
486,285

 
84

 
0.07
%
 
342,316

 
75

 
0.09
%
Total mutual funds, ETFs and CTFs (1,3)
$
1,130,591

 
445

 
0.16
%
 
$
917,226

 
446

 
0.19
%
Advice solutions (3) 
 
 
 
 
 
 
 
 
 
 
 
Fee-based
$
251,591

 
305

 
0.48
%
 
$
234,338

 
294

 
0.50
%
Non-fee-based
71,195

 
—

 
—

 
65,146

 
—

 
—

Total advice solutions
$
322,786

 
305

 
0.37
%
 
$
299,484

 
294

 
0.39
%
Other balance-based fees (1,4)
421,241

 
56

 
0.05
%
 
384,038

 
52

 
0.05
%
Other (5)
 
 
19

 
 
 
 
 
17

 
 
Total asset management and administration fees
 
 
$
825

 
 
 
 
 
$
809

 
 
 
2019
 
2018
Nine Months Ended September 30,
Average
Client
Assets
 
Revenue
 
Average
Fee
 
Average
Client
Assets
 
Revenue
 
Average
Fee
Schwab money market funds
$
166,053

 
$
378

 
0.30
%
 
$
142,177

 
$
451

 
0.42
%
Schwab equity and bond funds, ETFs, and CTFs (1)
260,034

 
219

 
0.11
%
 
221,818

 
228

 
0.14
%
Mutual Fund OneSource® and other non-transaction fee funds
190,847

 
452

 
0.32
%
 
216,699

 
524

 
0.32
%
Other third-party mutual funds and ETFs (2)
469,901

 
238

 
0.07
%
 
329,033

 
216

 
0.09
%
Total mutual funds, ETFs and CTFs (1,3)
$
1,086,835

 
1,287

 
0.16
%
 
$
909,727

 
1,419

 
0.21
%
Advice solutions (3) 
 
 
 
 
 
 
 
 
 
 
 
Fee-based
$
241,678

 
878

 
0.49
%
 
$
228,326

 
859

 
0.50
%
Non-fee-based
69,136

 
—

 
—

 
62,377

 
—

 
—

Total advice solutions
$
310,814

 
878

 
0.38
%
 
$
290,703

 
859

 
0.40
%
Other balance-based fees (1,4)
407,762

 
162

 
0.05
%
 
388,836

 
158

 
0.05
%
Other (5)
 
 
39

 
 
 
 
 
38

 
 
Total asset management and administration fees
 
 
$
2,366

 
 
 
 
 
$
2,474

 
 
(1) Beginning in the first quarter of 2019, a change was made to move CTFs from other balance-based fees. Prior periods have been recast to reflect this change.
(2) Includes Schwab ETF OneSource™.
(3) Average client assets for advice solutions may also include the asset balances contained in the mutual fund and/or ETF categories listed above.
(4) Includes various asset-related fees, such as trust fees, 401(k) recordkeeping fees, and mutual fund clearing fees and other service fees.
(5) Includes miscellaneous service and transaction fees relating to mutual funds and ETFs that are not balance-based.

Asset management and administration fees increased by $16 million, or 2%, in the third quarter of 2019 and decreased by
$108 million, or 4%, in the first nine months of 2019, compared to the same periods in 2018. The increase in asset management and administration fees for the third quarter of 2019 was due to higher revenue from growing asset balances in purchased money market funds, other third-party mutual funds and ETFs, and increased enrollment in advice solutions, compared to the same period in 2018. The decrease in asset management and administration fees for the first nine months of 2019 was due to lower sweep money market fund revenue as a result of transfers to bank and broker-dealer sweep, as well as client asset allocation choices including continued reduced usage of Mutual Fund OneSource®. Part of the year-to-date decline was offset by revenue from growing asset balances in purchased money market funds, other third-party mutual funds and ETFs, and increased enrollment in advice solutions.

The following tables present a roll forward of client assets for the Schwab money market funds, Schwab equity and bond funds, ETFs, and CTFs, and Mutual Fund OneSource® and other non-transaction fee (NTF) funds. These funds generated 44% of the

- 9 -

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


asset management and administration fees earned during both the third quarter and first nine months of 2019, compared to 46% and 49% for the same periods in 2018:

Schwab Money
Market Funds
 
Schwab Equity and
Bond Funds, ETFs, and CTFs (1)
 
Mutual Fund OneSource® 
and Other NTF funds
Three Months Ended September 30,
2019
 
2018
 
2019
 
2018
 
2019
 
2018
Balance at beginning of period
$
168,064

 
$
134,166

 
$
254,460

 
$
216,883

 
$
197,777

 
$
212,513

Net inflows (outflows)
18,044

 
(6,204
)
 
7,408

 
6,290

 
(5,586
)
 
(7,126
)
Net market gains (losses) and other
843

 
522

 
1,296

 
9,349

 
2,482

 
7,228

Balance at end of period
$
186,951

 
$
128,484

 
$
263,164

 
$
232,522

 
$
194,673

 
$
212,615

 
Schwab Money
Market Funds
 
Schwab Equity and
Bond Funds, ETFs, and CTFs (1)
 
Mutual Fund OneSource® 
and Other NTF funds
Nine Months Ended September 30,
2019
 
2018
 
2019
 
2018
 
2019
 
2018
Balance at beginning of period
$
153,472

 
$
163,650

 
$
209,471

 
$
196,784

 
$
180,532

 
$
225,202

Net inflows (outflows)
30,735

 
(36,645
)
 
20,789

 
24,746

 
(16,729
)
 
(25,403
)
Net market gains (losses) and other
2,744

 
1,479

 
32,904

 
10,992

 
30,870

 
12,816

Balance at end of period
$
186,951

 
$
128,484

 
$
263,164

 
$
232,522

 
$
194,673

 
$
212,615

(1) Beginning in the first quarter of 2019, CTFs are included in these balances. Prior periods have been recast to reflect this change.

Trading Revenue
The following table presents trading revenue and the related drivers:

Three Months Ended September 30,
 
Percent
Change
 
Nine Months Ended
September 30,
 
Percent
Change

2019
 
2018
 
 
2019
 
2018
 
Daily average revenue trades (DARTs) (in thousands)
395

 
382

 
3
%
 
401

 
406

 
(1
)%
Clients’ daily average trades (in thousands)
718

 
683

 
5
%
 
737

 
732

 
1
%
Number of trading days
63.5

 
62.5

 
2
%
 
187.5

 
187.5

 
—

Daily average revenue per revenue trade
$
6.94

 
$
7.27

 
(5
)%
 
$
7.03

 
$
7.27

 
(3
)%
Trading revenue
$
172

 
$
176

 
(2
)%
 
$
531

 
$
557

 
(5
)%
During the third quarter and first nine months of 2019, trading revenue decreased $4 million, or 2%, and $26 million, or 5%, compared to the same periods in 2018. These declines were due primarily to decreases in daily average revenue per revenue trade, which decreased 5% and 3% in the third quarter and first nine months of 2019, respectively, compared to the same periods in 2018.

Effective October 7, 2019, CS&Co eliminated online trade commissions for U.S. and Canadian-listed stocks and ETFs, as well as the base charge on options. For additional information on the pricing reduction, see Overview.

Other Revenue

Other revenue includes order flow revenue, other service fees, software fees from our portfolio management solutions, exchange processing fees, and non-recurring gains. Other revenue increased $16 million, or 24%, and $62 million, or 26%, in the third quarter and first nine months of 2019, respectively, compared to the same periods in 2018. The increase in other revenue for the first nine months of 2019 was primarily due to a gain from the sale of a portfolio management and reporting software solution for advisors to Tamarac Inc. in the second quarter of 2019, and a gain from the assignment of leased office space in the first quarter of 2019. Order flow revenue was $34 million and $33 million during the third quarters of 2019 and 2018, respectively, and $99 million and $104 million during the first nine months of 2019 and 2018, respectively. The decrease in order flow revenue for the first nine months of 2019 was primarily due to lower volume of trades during the first quarter of 2019 compared to the same period in 2018.

- 10 -

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



Total Expenses Excluding Interest
The following table shows a comparison of expenses excluding interest:
 
Three Months Ended
September 30,
 
Percent
Change
 
Nine Months Ended
September 30,
 
Percent
Change
 
2019
 
2018
 
 
2019
 
2018
 
Compensation and benefits
 
 
 
 
 
 
 
 
 
 
 
Salaries and wages
$
546

 
$
423

 
29
%
 
$
1,498

 
$
1,253

 
20
%
Incentive compensation
183

 
193

 
(5
)%
 
597

 
615

 
(3
)%
Employee benefits and other
128

 
121

 
6
%
 
419

 
384

 
9
%
Total compensation and benefits
$
857

 
$
737

 
16
%
 
$
2,514

 
$
2,252

 
12
%
Professional services
168

 
164

 
2
%
 
516

 
476

 
8
%
Occupancy and equipment
144

 
124

 
16
%
 
408

 
368

 
11
%
Advertising and market development
71

 
70

 
1
%
 
217

 
220

 
(1
)%
Communications
63

 
59

 
7
%
 
187

 
179

 
4
%
Depreciation and amortization
88

 
78

 
13
%
 
255

 
226

 
13
%
Regulatory fees and assessments
30

 
57

 
(47
)%
 
92

 
158

 
(42
)%
Other
54

 
71

 
(24
)%
 
190

 
232

 
(18
)%
Total expenses excluding interest
$
1,475

 
$
1,360

 
8
%
 
$
4,379

 
$
4,111

 
7
%
Expenses as a percentage of total net revenues
 
 
 
 
 
 
 
 
 
 
 
Compensation and benefits
32
%
 
29
%
 
 
 
31
%
 
30
%
 
 
Advertising and market development
3
%
 
3
%
 
 
 
3
%
 
3
%
 
 
Full-time equivalent employees (in thousands)
 
 
 
 
 
 
 
 
 
 
 
At quarter end
19.8

 
19.1

 
4
%
 
 
 
 
 
 
Average
20.2

 
19.0

 
6
%
 
20.1

 
18.4

 
9
%
Total compensation and benefits increased in the third quarter and first nine months of 2019 compared to the same periods in 2018, primarily due to an increase in employee headcount in 2019 to support our expanding client base as well as $62 million of severance charges in the third quarter of 2019.
Professional services expense increased in the third quarter and first nine months of 2019 compared to the same periods in 2018, primarily due to overall growth in the business and investments in projects to further drive efficiency and scale.
Occupancy and equipment expense increased in the third quarter and first nine months of 2019 compared to the same periods in 2018, primarily due to an increase in software maintenance expenses and additional licenses to support growth in the business.
Depreciation and amortization expenses grew in the third quarter and first nine months of 2019 compared to the same periods in 2018, primarily due to higher amortization of internally developed software associated with continued investments in software and technology enhancements.
Regulatory fees and assessments decreased in the third quarter and first nine months of 2019 compared to the same periods in 2018, primarily due to a decrease in FDIC insurance assessments resulting from the elimination of the FDIC surcharge in the fourth quarter of 2018.

Other expenses decreased in the third quarter and the first nine months of 2019 compared to the same periods in 2018, primarily due to lower bad debt expense and travel and entertainment expense.

Capital expenditures were $190 million and $544 million in the third quarter and first nine months of 2019, respectively, compared with $156 million and $417 million in the third quarter and first nine months of 2018, respectively. The increase in capital expenditures from the prior year was primarily due to the expansion of our campuses in the U.S. We currently anticipate capital expenditures for full-year 2019 will reach approximately 7-8% of total net revenues.


- 11 -

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


Taxes on Income

Taxes on income were $285 million and $296 million for the third quarters of 2019 and 2018, respectively, resulting in effective income tax rates on income before taxes of 23.1% and 24.3%, respectively. Taxes on income were $884 million and
$780 million for the first nine months of 2019 and 2018, respectively, resulting in effective income tax rates on income before taxes of 23.7% and 23.3%, respectively. The decrease in the effective tax rate in the third quarter of 2019 compared to the same period in the prior year was primarily due to federal tax benefits recognized during the current period. The increase in the effective tax rate in the first nine months of 2019 compared to the same period in the prior year was primarily due to a decrease in equity compensation tax deduction benefits.

Segment Information

Financial information for our segments is presented in the following tables:
 
Investor Services
 
Advisor Services
 
Total
Three Months Ended September 30,
Percent Change
 
2019
 
2018
 
Percent Change
 
2019
 
2018
 
Percent Change
 
2019
 
2018
Net Revenues
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net interest revenue
4
%
 
$
1,182

 
$
1,138

 
15
%
 
$
449

 
$
389

 
7
%
 
$
1,631

 
$
1,527

Asset management and administration fees
4
%
 
586

 
565

 
(2
)%
 
239

 
244

 
2
%
 
825

 
809

Trading revenue
(4
)%
 
108

 
112

 
—

 
64

 
64

 
(2
)%
 
172

 
176

Other
28
%
 
68

 
53

 
7
%
 
15

 
14

 
24
%
 
83

 
67

Total net revenues
4
%
 
1,944

 
1,868

 
8
%
 
767

 
711

 
5
%
 
2,711

 
2,579

Expenses Excluding Interest
5
%
 
1,070

 
1,015

 
17
%
 
405

 
345

 
8
%
 
1,475

 
1,360

Income before taxes on income
2
%
 
$
874

 
$
853

 
(1
)%
 
$
362

 
$
366

 
1
%
 
$
1,236

 
$
1,219

 
Investor Services
 
Advisor Services
 
Total
Nine Months Ended September 30,
Percent Change
 
2019
 
2018
 
Percent Change
 
2019
 
2018
 
Percent Change
 
2019
 
2018
Net Revenues
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net interest revenue
12
%
 
$
3,531

 
$
3,158

 
34
%
 
$
1,390

 
$
1,039

 
17
%
 
$
4,921

 
$
4,197

Asset management and administration fees
(3
)%
 
1,679

 
1,727

 
(8
)%
 
687

 
747

 
(4
)%
 
2,366

 
2,474

Trading revenue
(7
)%
 
329

 
354

 
—

 
202

 
203

 
(5
)%
 
531

 
557

Other
14
%
 
207

 
182

 
70
%
 
90

 
53

 
26
%
 
297

 
235

Total net revenues
6
%
 
5,746

 
5,421

 
16
%
 
2,369

 
2,042

 
9
%
 
8,115

 
7,463

Expenses Excluding Interest
4
%
 
3,189

 
3,069

 
14
%
 
1,190

 
1,042

 
7
%
 
4,379

 
4,111

Income before taxes on income
9
%
 
$
2,557

 
$
2,352

 
18
%
 
$
1,179

 
$
1,000

 
11
%
 
$
3,736

 
$
3,352


Investor Services

Total net revenues grew by 4% in the third quarter of 2019 compared to the same period in 2018, primarily due to an increase in net interest revenue and asset management and administration fees. During the first nine months of 2019, total net revenues grew by 6% compared to 2018, primarily due to an increase in net interest revenue, partially offset by lower asset management and administration fees. Net interest revenue increased for both the third quarter and first nine months of 2019, primarily due to higher net interest margin and higher interest-earning assets. During the third quarter of 2019, asset management and administration fees increased primarily due to growing asset balances in purchased money market funds, other third-party mutual funds and ETFs, and advice solutions. Asset management and administration fees decreased during the first nine months of 2019 as a result of lower sweep money market fund revenue due to transfers to bank and broker-dealer sweep, as well as client asset allocation choices including reduced usage of Mutual Fund OneSource®. Part of the year-to-date decline was offset by growing asset balances in purchased money market funds, other third-party mutual funds and ETFs, and increased enrollment in advice solutions.


- 12 -

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


Expenses excluding interest increased by 5% and 4% in the third quarter and first nine months of 2019, respectively, compared to the same periods in 2018, primarily as a result of higher compensation and benefits due to increased headcount in 2019 and severance charges in the third quarter of 2019, higher professional services due to overall growth in the business and investments in projects to further drive efficiency and scale, higher occupancy and equipment expenses due to an increase in software maintenance expenses and additional licenses to support growth in the business, and higher amortization of internally developed software associated with continued investments in software and technology enhancements. These increases were partially offset by a decrease in FDIC insurance assessments due to the elimination of the FDIC surcharge in the fourth quarter of 2018 and lower travel and entertainment expenses.

Advisor Services

Total net revenues grew by 8% and 16% in the third quarter and first nine months of 2019, respectively, compared to the same periods in 2018, primarily due to increases in net interest revenue and other revenue, partially offset by lower asset management and administration fees. Net interest revenue increased primarily due to higher net interest margin and higher interest-earning assets. Other revenue increased primarily due to a gain from the sale of a portfolio management and reporting software solution for advisors to Tamarac Inc. in the second quarter of 2019. Asset management and administration fees decreased primarily due to lower money market fund revenue as a result of transfers to bank and broker-dealer sweep, as well as client asset allocation choices including reduced usage of Mutual Fund OneSource®.

Expenses excluding interest increased by 17% and 14% in the third quarter and first nine months of 2019, respectively, compared to the same periods in 2018, primarily due to higher compensation and benefits due to increased headcount in 2019 and severance charges in the third quarter of 2019, higher professional services expense due to overall growth in the business and investments in projects to further drive efficiency and scale, and higher occupancy and equipment expense due to an increase in software maintenance expenses and additional licenses to support growth in the business. These increases were partially offset by a decrease in FDIC insurance assessments due to the elimination of the FDIC surcharge in the fourth quarter of 2018, lower bad debt expenses, and lower travel and entertainment expenses.


RISK MANAGEMENT

Schwab’s business activities expose us to a variety of risks, including operational, credit, market, liquidity, and compliance risks. The Company has a comprehensive risk management program to identify and manage these risks and their associated potential for financial and reputational impact. For a discussion of our risk management programs, see Item 7 – Risk Management in the 2018 Form 10-K.

Expected Phase-out of LIBOR

The Company has established a firm-wide team to address the likely discontinuation of LIBOR. As part of our efforts, we have inventoried our LIBOR exposures, the largest of which are certain investment securities and loans. In purchasing new investment securities, we ensure that appropriate fall-back language is in the security’s prospectus in the event that LIBOR is unavailable or deemed unreliable. We have also started to update loan agreements to ensure new LIBOR-based loans adequately provide for an alternative to LIBOR. Furthermore, we plan to phase-out the use of LIBOR as a reference rate in our new lending products before December 2021. Consistent with our “Through Clients’ Eyes” strategy, our focus throughout the LIBOR transition process is to ensure clients are treated fairly and consistently as this major change is occurring in the financial markets. The market transition process has not yet progressed to a point at which the impact to the Company’s consolidated financial statements of LIBOR’s discontinuation can be estimated.

Net Interest Revenue Simulation

Schwab’s investment strategy is structured to produce an increase in net interest revenue when interest rates rise and, conversely, a decrease in net interest revenue when interest rates fall. For our net interest revenue sensitivity analysis, we use net interest revenue simulation modeling techniques to evaluate and manage the effect of changing interest rates. The simulation includes all interest-sensitive assets and liabilities. Key variables in the simulation include the repricing of financial instruments, prepayment, reinvestment, and product pricing assumptions. The simulations involve assumptions that are inherently uncertain and, as a result, cannot precisely estimate the impact of changes in interest rates on net interest revenue.

- 13 -

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


Actual results may differ from simulated results due to balance growth or decline and the timing, magnitude, and frequency of interest rate changes, as well as changes in market conditions and management strategies, including changes in asset and liability mix.

The simulations in the following table assume that the asset and liability structure of the consolidated balance sheets would not be changed as a result of the simulated changes in interest rates. As we actively manage the consolidated balance sheets and interest rate exposure, in all likelihood we would take steps to manage additional interest rate exposure that could result from changes in the interest rate environment. The following table shows the simulated net interest revenue change over the next 12 months beginning September 30, 2019 and December 31, 2018 of a gradual 100 basis point increase or decrease in market interest rates relative to prevailing market rates at the end of each reporting period:
 
September 30, 2019
 
December 31, 2018
Increase of 100 basis points
3.8
%
 
4.4
%
Decrease of 100 basis points
(6.0
)%
 
(4.9
)%
Liquidity Risk

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

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

In addition to internal sources of liquidity, Schwab has access to external funding. The following table describes external debt facilities available at September 30, 2019:
Description
Borrower
 
Outstanding
 
Available
Federal Home Loan Bank secured credit facility (1)
Banking subsidiaries
 
$
—

 
$
35,200

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

 
1,472

Unsecured commercial paper (2)
CSC
 
—

 
750

Committed, unsecured credit facility with various external banks
CSC
 
—

 
750

Federal Reserve Bank discount window (3)
Banking subsidiaries
 
—

 
8,254

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

CSC’s ratings for Commercial Paper Notes are P1 by Moody’s Investor Service (Moody’s), A1 by Standard & Poor’s Rating Group (Standard & Poor’s), and F1 by Fitch Ratings, Ltd (Fitch).

- 14 -

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


As Schwab’s consolidated balance sheet assets were above $250 billion at December 31, 2018, Schwab became subject to the non-modified LCR rule on April 1, 2019. The Company was in compliance with the LCR rule at September 30, 2019. See Current Regulatory Environment and Other Developments for information on recently issued rules that will impact Schwab’s LCR requirements. The table below presents information about our average LCR:

 
Average for the
Three Months Ended
September 30, 2019
 
Total eligible high quality liquid assets
$
53,865

Net cash outflows
$
48,109

LCR
112
%

Borrowings

The following are details of the Senior Notes:
September 30, 2019
Par
Outstanding
 
Maturity
Weighted Average
Interest Rate
Moody’s
Standard
& Poor’s
Fitch
Senior Notes
$
7,481

 
2020 - 2029
3.36%
A2
A
A

New Debt Issuance

The new debt issuance in 2019 is a senior unsecured obligation with interest payable semi-annually. Additional details are as follows:
Issuance Date
Issuance Amount
Maturity Date
Interest Rate
May 22, 2019
$
600

5/22/2029
3.250
%

Acquisition of USAA-IMCO

We expect to utilize cash generated from operations to fund the $1.8 billion purchase of assets from USAA-IMCO. The transaction is expected to close in mid-2020, subject to satisfaction of closing conditions, including regulatory approvals and the implementation of conversion plans.

- 15 -

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


CAPITAL MANAGEMENT

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

Regulatory Capital Requirements

CSC and CSB are subject to various capital requirements set by regulatory agencies as discussed in further detail in the 2018 Form 10-K and in Item 1 – Note 15. As of September 30, 2019, CSC and CSB are considered well capitalized.

The following table details CSC’s consolidated and CSB’s capital ratios as of September 30, 2019 and December 31, 2018:
 
September 30, 2019 (1)
December 31, 2018
 
CSC
 
CSB
 
CSC
 
CSB
Total stockholders’ equity
$
21,354

 
$
15,591

 
$
20,670

 
$
15,615

Less:
 
 
 
 
 
 
 
Preferred stock
2,793

 
—

 
2,793

 
—

Common Equity Tier 1 Capital before regulatory adjustments
$
18,561

 
$
15,591

 
$
17,877

 
$
15,615

Less:
 
 
 
 
 
 
 
Goodwill, net of associated deferred tax liabilities
$
1,188

 
$
13

 
$
1,188

 
$
13

Other intangible assets, net of associated deferred tax liabilities
106

 
—

 
125

 
—

Deferred tax assets, net of valuation allowances and deferred tax liabilities
3

 
1

 
3

 
1

AOCI adjustment (1)
—

 
—

 
(252
)
 
(231
)
Common Equity Tier 1 Capital
$
17,264

 
$
15,577

 
$
16,813

 
$
15,832

Tier 1 Capital
$
20,057

 
$
15,577

 
$
19,606

 
$
15,832

Total Capital
20,075

 
15,594

 
19,628

 
15,853

Risk-Weighted Assets
86,161

 
68,154

 
95,441

 
80,513

Total Leverage Exposure (1)
280,591

 
217,468

 
N/A

 
N/A

Common Equity Tier 1 Capital/Risk-Weighted Assets
20.0
%
 
22.9
%
 
17.6
%
 
19.7
%
Tier 1 Capital/Risk-Weighted Assets
23.3
%
 
22.9
%
 
20.5
%
 
19.7
%
Total Capital/Risk-Weighted Assets
23.3
%
 
22.9
%
 
20.6
%
 
19.7
%
Tier 1 Leverage Ratio
7.3
%
 
7.4
%
 
7.1
%
 
7.2
%
Supplementary Leverage Ratio (1)
7.1
%
 
7.2
%
 
N/A

 
N/A

(1) Beginning in 2019, CSC and CSB are subject to the “advanced approaches” framework under the Basel III capital rule. As a result, we are now required to include all components of AOCI in regulatory capital and report our supplementary leverage ratio, which is calculated as Tier 1 capital divided by total leverage exposure. Total leverage exposure includes all on-balance sheet assets and certain off-balance sheet exposures, including unused commitments. Prior to 2019, CSC and CSB elected to opt-out of the requirement to include most components of AOCI in Common Equity Tier 1 Capital; the amounts and ratios for December 31, 2018 are presented on this basis. See Current Regulatory Environment and Other Developments for information on recently issued rules that will impact Schwab’s regulatory capital requirements.
N/A Not applicable.

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

Schwab’s primary broker-dealer subsidiary, CS&Co, is subject to regulatory requirements of the Uniform Net Capital Rule. At September 30, 2019, CS&Co was in compliance with its net capital requirements.

- 16 -

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


In addition to the capital requirements above, Schwab’s subsidiaries are subject to other regulatory requirements intended to ensure financial soundness and liquidity. See Item 1 – Note 15 for additional information on the components of stockholders’ equity and information on the capital requirements of significant subsidiaries.

Dividends

On January 30, 2019, the Board of Directors of the Company declared a four cent, or 31%, increase in the quarterly cash dividend to $.17 per common share.

Cash dividends paid and per share amounts for the first nine months of 2019 and 2018 are as follows:
 
 
2019
 
2018
Nine Months Ended September 30,
 
Cash Paid
 
Per Share
Amount
 
Cash Paid
 
Per Share
Amount
Common Stock
 
$
679

 
$
.51

 
$
448

 
$
.33

Series A Preferred Stock (1)
 
28

 
70.00

 
28

 
70.00

Series C Preferred Stock (2)
 
27

 
45.00

 
27

 
45.00

Series D Preferred Stock (2)
 
33

 
44.64

 
33

 
44.64

Series E Preferred Stock (3)
 
28

 
4,625.00

 
28

 
4,625.00

Series F Preferred Stock (4)
 
13

 
2,500.00

 
15

 
2,930.56

(1) Dividends paid semi-annually until February 1, 2022 and quarterly thereafter.
(2) Dividends paid quarterly.
(3) Dividends paid semi-annually until March 1, 2022 and quarterly thereafter.
(4) Dividends paid semi-annually beginning on June 1, 2018 until December 1, 2027, and quarterly thereafter.

Share Repurchases

On January 30, 2019, CSC publicly announced that its Board of Directors authorized the repurchase of up to $4.0 billion of common stock. The authorization does not have an expiration date. During the third quarter and first nine months of 2019, CSC repurchased 20 million and 49 million shares of its common stock for $771 million and $2.0 billion, respectively, leaving $2.0 billion remaining on our existing authorization as of September 30, 2019.


OTHER

Foreign Exposure
At September 30, 2019, Schwab had exposure to non-sovereign financial and non-financial institutions in foreign countries, as well as agencies of foreign governments. At September 30, 2019, the fair value of these holdings totaled $5.4 billion, with the top three exposures being to issuers and counterparties domiciled in France at $2.7 billion, Japan at $603 million, and Canada at $572 million.
In addition to the direct holdings in foreign companies and securities issued by foreign government agencies, Schwab generates indirect exposure to foreign countries through its investments in CSIM money market funds (collectively, the Funds) resulting from brokerage clearing activities. Certain of the Funds’ positions include certificates of deposit, time deposits, commercial paper, and corporate debt securities issued by counterparties in foreign countries. Schwab had outstanding margin loans to foreign residents of $667 million at September 30, 2019.


- 17 -

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


Off-Balance Sheet Arrangements
Schwab enters into various off-balance sheet arrangements in the ordinary course of business, primarily to meet the needs of our clients. These arrangements include firm commitments to extend credit. Additionally, Schwab enters into guarantees and other similar arrangements in the ordinary course of business. For information on each of these arrangements, see Item 1 – Note 5, Note 6, Note 8, Note 10, and Note 11, and Item 8 – Note 14 in the 2018 Form 10-K.


CRITICAL ACCOUNTING ESTIMATES

Certain of our accounting policies that involve a higher degree of judgment and complexity are discussed in Part II – Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Estimates in the 2018 Form 10-K. There have been no changes to critical accounting estimates during the nine months of 2019.



- 18 -


THE CHARLES SCHWAB CORPORATION



Item 3. Quantitative and Qualitative Disclosures About Market Risk

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


- 19 -

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 September 30,
 
Nine Months Ended
September 30,
 
2019
 
2018
 
2019
 
2018
Net Revenues
 
 
 
 
 
 
 
Interest revenue
$
1,892

 
$
1,755

  
$
5,817

 
$
4,766

Interest expense
(261
)
 
(228
)
 
(896
)
 
(569
)
Net interest revenue
1,631

 
1,527

 
4,921

 
4,197

Asset management and administration fees
825

 
809

  
2,366

 
2,474

Trading revenue
172

 
176

 
531

 
557

Other
83

 
67

 
297

 
235

Total net revenues
2,711

 
2,579

 
8,115

 
7,463

Expenses Excluding Interest
 
 
 
 
 
 
 
Compensation and benefits
857

 
737

  
2,514

 
2,252

Professional services
168

 
164

  
516

 
476

Occupancy and equipment
144

 
124

  
408

 
368

Advertising and market development
71

 
70

  
217

 
220

Communications
63

 
59

  
187

 
179

Depreciation and amortization
88

 
78

  
255

 
226

Regulatory fees and assessments
30

 
57

 
92

 
158

Other
54

 
71

  
190

 
232

Total expenses excluding interest
1,475

 
1,360

  
4,379

 
4,111

Income before taxes on income
1,236

 
1,219

  
3,736

 
3,352

Taxes on income
285

 
296

  
884

 
780

Net Income
951

 
923

  
2,852

 
2,572

Preferred stock dividends and other (1)
38

 
38

  
127

 
128

Net Income Available to Common Stockholders
$
913

 
$
885

  
$
2,725

 
$
2,444

Weighted-Average Common Shares Outstanding:
 
 
 
 
 
 
 
Basic
1,300

 
1,351

  
1,320

 
1,349

Diluted (2)
1,308

 
1,364

 
1,329

 
1,363

Earnings Per Common Shares Outstanding:
 
 
 
 
 
 
 
Basic
$
.70

 
$
.66

  
$
2.06

 
$
1.81

Diluted (2)
$
.70

 
$
.65

  
$
2.05

 
$
1.79

(1) Includes preferred stock dividends and undistributed earnings and dividends allocated to non-vested restricted stock units.
(2) Antidilutive stock options and restricted stock units excluded from the calculation of diluted EPS totaled 17 million and 11 million shares for the third quarters of 2019 and 2018, respectively, and 18 million and 12 million shares for the first nine months of 2019 and 2018, respectively.

See Notes to Condensed Consolidated Financial Statements.


- 20 -


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


 
Three Months Ended
September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
Net income
$
951

 
$
923

 
$
2,852

 
$
2,572

Other comprehensive income (loss), before tax:
 

 
 

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

 
 

 
 
 
 
Net unrealized gain (loss)
51

 
(43
)
 
496

 
(184
)
Other reclassifications included in other revenue
(1
)
 
—

 
(5
)
 
—

Amortization of amounts previously recorded upon transfer to held to maturity from
available for sale
10

 
8

 
30

 
26

Other comprehensive income (loss), before tax
60

 
(35
)
 
521

 
(158
)
Income tax effect
(15
)
 
9

 
(125
)
 
39

Other comprehensive income (loss), net of tax
45

 
(26
)
 
396

 
(119
)
Comprehensive Income
$
996

 
$
897

 
$
3,248

 
$
2,453


See Notes to Condensed Consolidated Financial Statements.


- 21 -


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


 
September 30, 2019
 
December 31, 2018
Assets
 
 
 
Cash and cash equivalents
$
20,252

 
$
27,938

Cash and investments segregated and on deposit for regulatory purposes (including resale
agreements of $9,707 at September 30, 2019 and $7,195 at December 31, 2018)
16,164

 
13,563

Receivables from brokers, dealers, and clearing organizations
1,317

 
553

Receivables from brokerage clients — net
21,069

 
21,651

Other securities owned — at fair value
497

 
539

Available for sale securities
56,483

 
66,578

Held to maturity securities
140,194

 
144,009

Bank loans — net
16,895

 
16,609

Equipment, office facilities, and property — net
2,017

 
1,769

Goodwill
1,227

 
1,227

Other assets
2,872

 
2,046

Total assets
$
278,987

 
$
296,482

Liabilities and Stockholders’ Equity
 
 
 

Bank deposits
$
209,327

 
$
231,423

Payables to brokers, dealers, and clearing organizations
1,736

 
1,831

Payables to brokerage clients
35,622

 
32,726

Accrued expenses and other liabilities
3,521

 
2,954

Long-term debt
7,427

 
6,878

Total liabilities
257,633

 
275,812

Stockholders’ equity:
 
 
 

Preferred stock — $.01 par value per share; aggregate liquidation preference of $2,850
2,793

 
2,793

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

 
15

Additional paid-in capital
4,640

 
4,499

Retained earnings
19,374

 
17,329

Treasury stock, at cost — 198,611,926 shares at September 30, 2019 and 155,116,695
shares at December 31, 2018
(5,612
)
 
(3,714
)
Accumulated other comprehensive income (loss)
144

 
(252
)
Total stockholders’ equity
21,354

 
20,670

Total liabilities and stockholders’ equity
$
278,987

 
$
296,482


See Notes to Condensed Consolidated Financial Statements.


- 22 -


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


 
 
 
 
 
 
 
 
 
 
 
 
 
Accumulated Other Comprehensive Income (Loss)
 
 
 
Preferred Stock
 
Common stock
 
Additional Paid-in Capital
 
Retained Earnings
 
Treasury Stock,
at cost
 
Total
 
 
Shares
 
Amount
Balance at June 30, 2018
$
2,793

 
1,488

 
$
15

 
$
4,447

 
$
15,903

 
$
(2,783
)
 
$
(278
)
 
$
20,097

Net income
—

 
—

 
—

 
—

 
923

 
—

 
—

 
923

Other comprehensive income (loss), net of tax
—

 
—

 
—

 
—

 
—

 
—

 
(26
)
 
(26
)
Dividends declared on preferred stock
—

 
—

 
—

 
—

 
(34
)
 
—

 
—

 
(34
)
Dividends declared on common stock — $.13 per share
—

 
—

 
—

 
—

 
(177
)
 
—

 
—

 
(177
)
Stock option exercises and other
—

 
—

 
—

 
—

 
—

 
9

 
—

 
9

Share-based compensation
—

 
—

 
—

 
28

 
—

 
—

 
—

 
28

Other
—

 
—

 
—

 
9

 
—

 
5

 
—

 
14

Balance at September 30, 2018
$
2,793

 
1,488

 
$
15

 
$
4,484

 
$
16,615

 
$
(2,769
)
 
$
(304
)
 
$
20,834

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at June 30, 2019
$
2,793

 
1,488

 
$
15

 
$
4,599

 
$
18,680

 
$
(4,866
)
 
$
99

 
$
21,320

Net income
—

 
—

 
—

 
—

 
951

 
—

 
—

 
951

Other comprehensive income (loss), net of tax
—

 
—

 
—

 
—

 
—

 
—

 
45

 
45

Dividends declared on preferred stock
—

 
—

 
—

 
—

 
(34
)
 
—

 
—

 
(34
)
Dividends declared on common stock — $.17 per share
—

 
—

 
—

 
—

 
(223
)
 
—

 
—

 
(223
)
Repurchase of common stock
—

 
—

 
—

 
—

 
—

 
(771
)
 
—

 
(771
)
Stock option exercises and other
—

 
—

 
—

 
(2
)
 
—

 
19

 
—

 
17

Share-based compensation
—

 
—

 
—

 
33

 
—

 
—

 
—

 
33

Other
—

 
—

 
—

 
10

 
—

 
6

 
—

 
16

Balance at September 30, 2019
$
2,793

 
1,488

 
$
15

 
$
4,640

 
$
19,374

 
$
(5,612
)
 
$
144

 
$
21,354

 
 
 
 
 
 
 
 
 
 
 
 
 
Accumulated Other Comprehensive Income (Loss)
 
 
 
Preferred Stock
 
Common stock
 
Additional Paid-in Capital
 
Retained Earnings
 
Treasury Stock,
at cost
 
 
Total
 
 
Shares
 
Amount
 
 
 
 
 
Balance at December 31, 2017
$
2,793

 
1,488

 
$
15

 
$
4,353

 
$
14,408

 
$
(2,892
)
 
$
(152
)
 
$
18,525

Adoption of accounting standards
—

 
—

 
—

 
—

 
200

 
—

 
(33
)
 
167

Net income
—

 
—

 
—

 
—

 
2,572

 
—

 
—

 
2,572

Other comprehensive income (loss), net of tax
—

 
—

 
—

 
—

 
—

 
—

 
(119
)
 
(119
)
Dividends declared on preferred stock
—

 
—

 
—

 
—

 
(117
)
 
—

 
—

 
(117
)
Dividends declared on common stock — $.33 per share
—

 
—

 
—

 
—

 
(448
)
 
—

 
—

 
(448
)
Stock option exercises and other
—

 
—

 
—

 
(8
)
 
—

 
116

 
—

 
108

Share-based compensation
—

 
—

 
—

 
106

 
—

 
—

 
—

 
106

Other
—

 
—

 
—

 
33

 
—

 
7

 
—

 
40

Balance at September 30, 2018
$
2,793

 
1,488

 
$
15

 
$
4,484

 
$
16,615

 
$
(2,769
)
 
$
(304
)
 
$
20,834

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2018
$
2,793

 
1,488

 
$
15

 
$
4,499

 
$
17,329

 
$
(3,714
)
 
$
(252
)
 
$
20,670

Net income
—

 
—

 
—

 
—

 
2,852

 
—

 
—

 
2,852

Other comprehensive income (loss), net of tax
—

 
—

 
—

 
—

 
—

 
—

 
396

 
396

Dividends declared on preferred stock
—

 
—

 
—

 
—

 
(115
)
 
—

 
—

 
(115
)
Dividends declared on common stock — $.51 per share
—

 
—

 
—

 
—

 
(679
)
 
—

 
—

 
(679
)
Repurchase of common stock
—

 
—

 
—

 
—

 
—

 
(1,991
)
 
—

 
(1,991
)
Stock option exercises and other
—

 
—

 
—

 
(15
)
 
—

 
80

 
—

 
65

Share-based compensation
—

 
—

 
—

 
121

 
—

 
—

 
—

 
121

Other
—

 
—

 
—

 
35

 
(13
)
 
13

 
—

 
35

Balance at September 30, 2019
$
2,793

 
1,488

 
$
15

 
$
4,640

 
$
19,374

 
$
(5,612
)
 
$
144

 
$
21,354


See Notes to Condensed Consolidated Financial Statements.

- 23 -


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


 
Nine Months Ended
September 30,
 
2019
 
2018
Cash Flows from Operating Activities
 

 
 
Net income
$
2,852

 
$
2,572

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

 
 
Share-based compensation
131

 
113

Depreciation and amortization
255

 
226

Premium amortization, net, on available for sale and held to maturity securities
282

 
276

Other
127

 
108

Net change in:
 

 
 

Investments segregated and on deposit for regulatory purposes
(858
)
 
6,973

Receivables from brokers, dealers, and clearing organizations
(756
)
 
(147
)
Receivables from brokerage clients
576

 
(1,858
)
Other securities owned
42

 
39

Other assets
(28
)
 
(143
)
Payables to brokers, dealers, and clearing organizations
(95
)
 
43

Payables to brokerage clients
2,896

 
(3,392
)
Accrued expenses and other liabilities
(403
)
 
(155
)
Net cash provided by (used for) operating activities
5,021

 
4,655

Cash Flows from Investing Activities
 
 
 
Purchases of available for sale securities
(20,744
)
 
(19,781
)
Proceeds from sales of available for sale securities
21,710

 
115

Principal payments on available for sale securities
18,374

 
12,091

Purchases of held to maturity securities
(18,861
)
 
(30,639
)
Principal payments on held to maturity securities
13,653

 
12,382

Net change in bank loans
(338
)
 
(86
)
Purchases of equipment, office facilities, and property
(515
)
 
(400
)
Purchases of Federal Home Loan Bank stock
(2
)
 
(156
)
Proceeds from sales of Federal Home Loan Bank stock
—

 
528

Other investing activities
(18
)
 
(74
)
Net cash provided by (used for) investing activities
13,259

 
(26,020
)
Cash Flows from Financing Activities
 
 
 
Net change in bank deposits (1)
(22,096
)
 
43,752

Net change in short-term borrowings
—

 
(15,000
)
Issuance of long-term debt
593

 
1,936

Repayment of long-term debt
—

 
(906
)
Dividends paid
(808
)
 
(579
)
Proceeds from stock options exercised
65

 
108

Repurchases of common stock
(1,964
)
 
—

Other financing activities
(13
)
 
(12
)
Net cash provided by (used for) financing activities
(24,223
)
 
29,299

Increase (Decrease) in Cash and Cash Equivalents, including Amounts Restricted
(5,943
)
 
7,934

Cash and Cash Equivalents, including Amounts Restricted at Beginning of Year
38,227

 
19,160

Cash and Cash Equivalents, including Amounts Restricted at End of Period
$
32,284

 
$
27,094



Continued on following page.



- 24 -


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


Continued from previous page.
 
Nine Months Ended
September 30,
 
2019
 
2018
Supplemental Cash Flow Information
 
 
 
Non-cash investing activity:
 
 
 
Securities purchased during the period but settled after period end
$
—

 
$
221

Non-cash financing activity:
 
 
 
Extinguishment of finance lease obligation through an assignment agreement
$
52

 
$
—

Common stock repurchased during the period but settled after period end
$
27

 
$
—

Other Supplemental Cash Flow Information
 
 
 
Cash paid during the period for:
 
 
 
Interest
$
922

 
$
550

Income taxes
$
907

 
$
649

Amounts included in the measurement of lease liabilities (2)
$
99

 
N/A

Leased assets obtained in exchange for new operating lease liabilities (2)
$
87

 
N/A

 
 
 
 
 
September 30, 2019
 
September 30, 2018
Reconciliation of cash, cash equivalents and amounts reported within the balance sheet (3)
 
 
 
Cash and cash equivalents
$
20,252

 
$
21,830

Restricted cash and cash equivalents amounts included in cash and investments segregated
and on deposit for regulatory purposes
12,032

 
5,264

Total cash and cash equivalents, including amounts restricted shown in the
statement of cash flows
$
32,284

 
$
27,094

(1) Includes transfers from other sweep features to bank sweep of $10.3 billion and $67.8 billion for the nine months ended September 30, 2019 and 2018, respectively.
(2) These amounts are presented beginning in 2019 as part of the adoption of ASU 2016-02. See Notes 2 and 9 for additional information related to this adoption.
(3) For more information on the nature of restrictions on restricted cash and cash equivalents, see Note 15.
N/A Not applicable.

See Notes to Condensed Consolidated Financial Statements.


- 25 -

THE CHARLES SCHWAB CORPORATION
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted)
(Unaudited)


1.    Introduction and Basis of Presentation
The Charles Schwab Corporation (CSC) is a savings and loan holding company and engages, through its subsidiaries, in wealth management, securities brokerage, banking, asset management, custody, and financial advisory services.

Significant business subsidiaries of CSC include the following:

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

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

These unaudited condensed consolidated financial statements have been prepared in conformity with generally accepted accounting principles in the U.S. (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 condensed consolidated financial statements. While management makes its best judgment, actual amounts or results could differ from these estimates. In the opinion of management, all normal, recurring adjustments have been included for a fair statement of this interim financial information.
These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto, included in Schwab’s 2018 Form 10-K.
The significant accounting policies are included in Note 2 in the 2018 Form 10-K. There have been no significant changes to these accounting policies during the first nine months of 2019, except as described in Note 2 below.



- 26 -

THE CHARLES SCHWAB CORPORATION
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted)
(Unaudited)

2.    New Accounting Standards

Adoption of New Accounting Standards
Standard
Description
Date of Adoption
Effects on the Financial Statements or Other Significant Matters
Accounting Standards Update (ASU) 2016-02, “Leases (Topic 842)”
Amends the accounting for leases by lessees and lessors. The primary change from the new guidance is the recognition of right-of-use (ROU) assets and lease liabilities by lessees for those leases classified as operating leases. Additional changes include accounting for lease origination and executory costs, required lessee reassessments during the lease term due to changes in circumstances, and expanded lease disclosures.
Adoption provides for modified retrospective transition as of the beginning of the earliest comparative period presented in the financial statements in which the entity first applies the new standard or, optionally, through another transition method by which a cumulative-effect adjustment is recorded to retained earnings as of the beginning of the period of adoption. Certain transition relief is permitted if elected by the entity.
January 1, 2019
The Company adopted the new lease accounting guidance as of January 1, 2019 under the optional transition method provided electing not to recast its comparative periods. In addition, the Company elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allowed the Company to carry forward the historical lease classification. The adoption resulted in a gross up of the consolidated balance sheet due to recognition of ROU assets and lease liabilities primarily related to the CS&Co leases of office space and branches. The amounts were based on the present value of our remaining operating lease payments. The Company’s ROU assets and related lease liabilities upon adoption were $596 million and $662 million, respectively. Further details on the impact of adoption are included below in this Note as well as in Note 9.
ASU 2017-08, “Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities”
Shortens the amortization period for the premium on certain callable debt securities to the earliest call date. The amendments are applicable to any purchased individual debt security with an explicit and noncontingent call feature with a fixed price on a preset date. ASU 2017-08 does not impact the accounting for callable debt securities held at a discount.

Adoption requires modified retrospective transition as of the beginning of the period of adoption through a cumulative-effect adjustment to retained earnings.
January 1, 2019
The Company adopted this guidance as of January 1, 2019 using the modified retrospective method. Adoption resulted in an immaterial cumulative-effect adjustment to retained earnings as of the date of adoption.
ASU 2017-12, “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities”
This ASU amends hedge accounting guidance to better align hedge accounting with risk management activities, while reducing the complexity of applying and reporting on hedge accounting. In addition, for a closed pool of prepayable financial assets, entities will be able to hedge an amount that is not expected to be affected by prepayments, defaults and other events under the “last-of-layer” method. The guidance also permits a one-time reclassification of debt securities eligible to be hedged under the “last-of-layer” method from held to maturity (HTM) to available for sale (AFS) upon adoption.
January 1, 2019
The Company adopted this ASU on January 1, 2019. As part of its adoption, the Company made a one-time election to reclassify a portion of its HTM securities eligible to be hedged under the “last-of-layer” method to AFS. As of January 1, 2019, the securities reclassified had a fair value of $8.8 billion and resulted in a net of tax increase to AOCI of $19 million. The adoption of this standard had no other impact on the Company’s financial statements.

- 27 -

THE CHARLES SCHWAB CORPORATION
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted)
(Unaudited)

New Accounting Standards Not Yet Adopted
Standard
Description
Required Date of Adoption
Effects on the Financial Statements or Other Significant Matters
ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”
Provides guidance for recognizing impairment of most debt instruments measured at amortized cost, including loans and HTM debt securities. Requires estimating current expected credit losses (CECL) over the remaining life of an instrument or a portfolio of instruments with similar risk characteristics based on relevant information about past events, current conditions, and reasonable forecasts. The initial estimate of, and the subsequent changes in, CECL will be recognized as credit loss expense through current earnings and will be reflected as an allowance for credit losses offsetting the carrying value of the financial instrument(s) on the balance sheet. Amends the other-than-temporary impairment (OTTI) model for AFS debt securities by requiring the use of an allowance, rather than directly reducing the carrying value of the security, and eliminating consideration of the length of time such security has been in an unrealized loss position as a factor in concluding whether a credit loss exists.

Adoption requires a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the entity applies the new guidance except that a prospective transition is required for AFS debt securities for which an OTTI has been recognized prior to the effective date.
January 1, 2020 (early adoption permitted)
The Company expects that its allowance for credit losses will increase when CECL is adopted, primarily due to an incremental allowance that will be recorded on its HTM corporate debt securities. The incremental allowance at adoption is expected to be immaterial, but the impact of adoption will depend on, among other things, the economic environment, the proportion of securities classified as AFS versus HTM, and the size and type of loan and securities portfolios held by the Company on the date of adoption.
A large portion of the securities in the Company’s portfolio will have zero expectation of credit losses based on industry views and regulatory guidance for U.S. Treasury and U.S. agency mortgage-backed securities. Further, we expect to apply the practical expedient based on continuous collateral replenishment to the Company’s pledged asset lines (PALs) and margin loans.
The Company has completed the development of credit loss estimation methods for loans and the securities in its portfolio that do not have zero expectation of credit losses, including corporate debt securities and structured products. We are continuing the development of CECL policies and processes and testing and validation of credit loss estimation methods. We have also completed the first of the two planned quarterly CECL parallel runs.

 
 
 
 
 
 
 
 

- 28 -

THE CHARLES SCHWAB CORPORATION
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted)
(Unaudited)

 
 
 
 
Standard
Description
Required Date of Adoption
Effects on the Financial Statements or Other Significant Matters
ASU 2018-15, “Intangibles–Goodwill and Other–Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (a consensus of the FASB Emerging Issues Task Force)”

Aligns the criteria for capitalizing implementation costs for cloud computing arrangements (CCA) that are service contracts with internal-use software that is developed or purchased and CCAs that include an internal-use software license. This guidance requires that the capitalized implementation costs be recognized over the period of the CCA service contract, subject to impairment evaluation on an ongoing basis.

The guidance prescribes the balance sheet, income statement, and statement of cash flow classification of the capitalized implementation costs and related amortization expense, and requires additional quantitative and qualitative disclosures.

Adoption provides for retrospective or prospective application to all implementation costs incurred after the date of adoption.

January 1, 2020 (early adoption permitted)
Historically, Schwab has expensed implementation costs as they are incurred for CCAs that are service contracts. Therefore, adopting this guidance will change the Company’s accounting treatment for these types of implementation costs. The Company plans to adopt this guidance on a prospective basis and continues to evaluate the impacts of this guidance on its financial statements, including EPS.


The cumulative effect of the changes made to our consolidated January 1, 2019 balance sheet for the adoption of ASU 2016-02, Leases (Topic 842) were as follows:
 
Balance at
December 31, 2018
 
Adjustments Due to ASU 2016-02
 
Balance at
January 1, 2019
Assets
 
 
 
 
 
Other assets (1)
$
2,046

 
$
588

 
$
2,634

Liabilities
 
 
 
 
 
Accrued expenses and other liabilities (2)
$
2,954

 
$
588

 
$
3,542

(1) The adoption adjustment is comprised of two parts: 1) an increase of $596 million for the recognition of the January 1, 2019 ROU asset and 2) an $8 million decrease related to prepaid rent and initial direct costs, which were reclassified to the ROU asset upon adoption of ASU 2016-02.
(2) The adoption adjustment is comprised of two parts: 1) an increase of $662 million for the recognition of the January 1, 2019 lease liability and 2) a
$74 million decrease related to deferred rent and lease incentives, which were reclassified to the ROU asset upon adoption of ASU 2016-02.



- 29 -

THE CHARLES SCHWAB CORPORATION
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted)
(Unaudited)

3.    Revenue Recognition
Disaggregated Revenue
Disaggregation of Schwab’s revenue by major source is as follows:
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2019
2018
 
2019
2018
Net interest revenue
 
 
 
 
 
 
Interest revenue
$
1,892

 
$
1,755

 
$
5,817

$
4,766

Interest expense
(261
)
 
(228
)
 
(896
)
(569
)
Net interest revenue
1,631

 
1,527

 
4,921

4,197

Asset management and administration fees
 
 
 
 
 
 
Mutual funds, ETFs, and CTFs (1)
445

 
446

 
1,287

1,419

Advice solutions
305

 
294

 
878

859

Other (1)
75

 
69

 
201

196

Asset management and administration fees
825

 
809

 
2,366

2,474

Trading revenue
 
 
 
 
 
 
Commissions
159

 
155

 
477

501

Principal transactions
13

 
21

 
54

56

Trading revenue
172

 
176

 
531

557

Other
83

 
67

 
297

235

Total net revenues
$
2,711

 
$
2,579

 
$
8,115

$
7,463


(1) Beginning in the first quarter of 2019, a change was made to move CTFs from other asset management and administration fees. Prior periods have been recast to reflect this change.

For a summary of revenue provided by our reportable segments, see Note 16. The recognition of revenue is not impacted by the operating segment in which revenue is generated.
Contract balances
Receivables from contracts with customers within the scope of Accounting Standards Codification (ASC) 606, Revenue From Contracts With Customers (ASC 606) were $338 million at September 30, 2019 and $307 million at December 31, 2018 and were recorded in other assets on the condensed consolidated balance sheets. Schwab does not have any other significant contract assets or contract liability balances as of September 30, 2019.

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.

- 30 -

THE CHARLES SCHWAB CORPORATION
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted)
(Unaudited)

4.    Investment Securities

The amortized cost, gross unrealized gains and losses, and fair value of AFS and HTM securities are as follows:
September 30, 2019
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
Available for sale securities
 
 
 
 
 
 
 
 
U.S. agency mortgage-backed securities
 
$
40,179

 
$
299

 
$
47

 
$
40,431

U.S. Treasury securities
 
5,034

 
3

 
10

 
5,027

Asset-backed securities (1)
 
4,773

 
35

 
7

 
4,801

Corporate debt securities (2)
 
4,630

 
57

 
1

 
4,686

Certificates of deposit
 
1,000

 
4

 
—

 
1,004

Commercial paper (2,3)
 
520

 
1

 
—

 
521

Non-agency commercial mortgage-backed securities
 
13

 
—

 
—

 
13

Total available for sale securities
 
$
56,149

 
$
399

 
$
65

 
$
56,483

Held to maturity securities
 
 
 
 
 
 
 
 
U.S. agency mortgage-backed securities
 
$
114,276

 
$
1,974

 
$
238

 
$
116,012

Asset-backed securities (1)
 
18,323

 
74

 
38

 
18,359

Corporate debt securities (2)
 
4,659

 
58

 
2

 
4,715

U.S. state and municipal securities
 
1,306

 
107

 
—

 
1,413

Non-agency commercial mortgage-backed securities
 
1,136

 
28

 
—

 
1,164

U.S. Treasury securities
 
224

 
6

 
—

 
230

Certificates of deposit
 
200

 
—

 
—

 
200

Foreign government agency securities
 
50

 
—

 
—

 
50

Other
 
20

 
—

 
—

 
20

Total held to maturity securities
 
$
140,194

 
$
2,247

 
$
278

 
$
142,163

December 31, 2018
 
 
 
 
 
 
 
 
Available for sale securities
 
 
 
 
 
 
 
 
U.S. agency mortgage-backed securities
 
$
25,594

 
$
44

 
$
82

 
$
25,556

U.S. Treasury securities
 
18,410

 
—

 
108

 
18,302

Asset-backed securities (1)
 
10,086

 
14

 
15

 
10,085

Corporate debt securities (2)
 
7,477

 
10

 
20

 
7,467

Certificates of deposit
 
3,682

 
4

 
1

 
3,685

U.S. agency notes
 
900

 
—

 
2

 
898

Commercial paper (2,3)
 
522

 
—

 
—

 
522

Foreign government agency securities
 
50

 
—

 
1

 
49

Non-agency commercial mortgage-backed securities
 
14

 
—

 
—

 
14

Total available for sale securities
 
$
66,735

 
$
72

 
$
229

 
$
66,578

Held to maturity securities
 
 
 
 
 
 
 
 
U.S. agency mortgage-backed securities
 
$
118,064

 
$
217

 
$
2,188

 
$
116,093

Asset-backed securities (1)
 
18,502

 
83

 
39

 
18,546

Corporate debt securities (2)
 
4,477

 
2

 
47

 
4,432

U.S. state and municipal securities
 
1,327

 
24

 
3

 
1,348

Non-agency commercial mortgage-backed securities
 
1,156

 
3

 
17

 
1,142

U.S. Treasury securities
 
223

 
—

 
6

 
217

Certificates of deposit
 
200

 
1

 
—

 
201

Foreign government agency securities
 
50

 
—

 
1

 
49

Other
 
10

 
—

 
—

 
10

Total held to maturity securities
 
$
144,009

 
$
330

 
$
2,301

 
$
142,038


(1) Approximately 43% and 36% of asset-backed securities held as of September 30, 2019 and December 31, 2018, respectively, were Federal Family Education Loan Program Asset-Backed Securities. Asset-backed securities collateralized by credit card receivables represented approximately 42% of the asset-backed securities held as of September 30, 2019 and December 31, 2018.
(2) As of September 30, 2019 and December 31, 2018, approximately 35% and 26%, respectively, of the total AFS and HTM investments in corporate debt securities and commercial paper were issued by institutions in the financial services industry. Approximately 18% of the holdings of these securities were issued by institutions in the information technology industry as of September 30, 2019 and December 31, 2018.
(3) Included in cash and cash equivalents on the condensed consolidated balance sheets, but excluded from this table is $0.9 billion and $4.9 billion of AFS commercial paper as of September 30, 2019 and December 31, 2018, respectively. These holdings have maturities of three months or less at the time of acquisition and an aggregate market value equal to amortized cost.

- 31 -

THE CHARLES SCHWAB CORPORATION
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted)
(Unaudited)

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. For additional information on the transfer, see Notes 2 and 14.

At September 30, 2019, our banking subsidiaries had pledged securities with a fair value of $26.8 billion as collateral to secure borrowing capacity on secured credit facilities with the FHLB (see Note 8). Certain banking subsidiaries also pledge investment securities as collateral to secure borrowing capacity at the Federal Reserve Bank discount window, and had pledged securities with a fair value of $8.3 billion as collateral for this facility at September 30, 2019. CSB also pledges securities issued by federal agencies to secure certain trust deposits. The fair value of these pledged securities was $918 million at September 30, 2019.


- 32 -

THE CHARLES SCHWAB CORPORATION
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted)
(Unaudited)

Securities with unrealized losses, aggregated by category and period of continuous unrealized loss, are as follows:
 
Less than 12 months
 
12 months or longer
 
Total
 
 
 
September 30, 2019
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
Available for sale securities
 
 
 
 
 
 
 
 
 
 
 
U.S. agency mortgage-backed securities
$
12,063

 
$
24

 
$
6,317

 
$
23

 
$
18,380

 
$
47

U.S. Treasury securities
377

 
—

 
3,161

 
10

 
3,538

 
10

Asset-backed securities
763

 
1

 
398

 
6

 
1,161

 
7

Corporate debt securities
149

 
1

 
499

 
—

 
648

 
1

Total
$
13,352

 
$
26

 
$
10,375

 
$
39

 
$
23,727

 
$
65

Held to maturity securities
 

 
 

 
 

 
 

 
 

 
 

U.S. agency mortgage-backed securities
$
11,838

 
$
37

 
$
20,897

 
$
201

 
$
32,735

 
$
238

Asset-backed securities
7,638

 
34

 
556

 
4

 
8,194

 
38

Corporate debt securities
416

 
1

 
354

 
1

 
770

 
2

Total
$
19,892

 
$
72

 
$
21,807

 
$
206

 
$
41,699

 
$
278

Total securities with unrealized losses (1)
$
33,244

 
$
98

 
$
32,182

 
$
245

 
$
65,426

 
$
343

December 31, 2018
 
 
 
 
 
 
 
 
 
 
 
Available for sale securities
 
 
 
 
  
 
 
 
 
 
 
U.S. agency mortgage-backed securities
$
9,529

 
$
32

 
$
4,257

 
$
50

 
$
13,786

 
$
82

U.S. Treasury securities
4,951

 
6

 
7,037

 
102

 
11,988

 
108

Asset-backed securities
4,050

 
9

 
837

 
6

 
4,887

 
15

Corporate debt securities
3,561

 
19

 
254

 
1

 
3,815

 
20

Certificates of deposit
1,217

 
1

 
150

 
—

 
1,367

 
1

U.S. agency notes
195

 
—

 
304

 
2

 
499

 
2

Foreign government agency securities
—

 
—

 
49

 
1

 
49

 
1

Total
$
23,503

 
$
67

 
$
12,888

 
$
162

 
$
36,391

 
$
229

Held to maturity securities
 

 
 

 
 

 
 

 
 

 
 

U.S. agency mortgage-backed securities
$
29,263

 
$
222

 
$
56,435

 
$
1,966

 
$
85,698

 
$
2,188

Asset-backed securities
6,795

 
35

 
376

 
4

 
7,171

 
39

Corporate debt securities
2,909

 
29

 
1,066

 
18

 
3,975

 
47

U.S. state and municipal securities
77

 
2

 
18

 
1

 
95

 
3

Non-agency commercial mortgage-backed securities
283

 
2

 
632

 
15

 
915

 
17

U.S. Treasury securities
—

 
—

 
218

 
6

 
218

 
6

Foreign government agency securities
—

 
—

 
49

 
1

 
49

 
1

Total
$
39,327

 
$
290

 
$
58,794

 
$
2,011

 
$
98,121

 
$
2,301

Total securities with unrealized losses (2)
$
62,830

 
$
357

 
$
71,682

 
$
2,173

 
$
134,512

 
$
2,530

(1) The number of investment positions with unrealized losses totaled 343 for AFS securities and 625 for HTM securities.
(2) The number of investment positions with unrealized losses totaled 441 for AFS securities and 1,524 for HTM securities.

At September 30, 2019, 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.

- 33 -

THE CHARLES SCHWAB CORPORATION
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted)
(Unaudited)

Management evaluates whether investment securities are other-than-temporarily impaired on a quarterly basis as described in Note 2 in the 2018 Form 10-K. No amounts were recognized as OTTI in earnings or other comprehensive income during the nine months ended September 30, 2019 or the year ended December 31, 2018. As of September 30, 2019 and December 31, 2018, Schwab did not hold any securities on which OTTI was previously recognized.

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 and HTM securities are as follows:
September 30, 2019
Within
1 year
 
After 1 year
through
5 years
 
After 5 years
through
10 years
 
After
10 years
 
Total
Available for sale securities
 
 
 
 
 
 
 
 
 
U.S. agency mortgage-backed securities
$
51

 
$
1,909

 
$
11,061

 
$
27,410

 
$
40,431

U.S. Treasury securities
3,541

 
1,486

 
—

 
—

 
5,027

Asset-backed securities
35

 
3,752

 
794

 
220

 
4,801

Corporate debt securities
1,100

 
3,415

 
171

 
—

 
4,686

Certificates of deposit
501

 
503

 
—

 
—

 
1,004

Commercial paper
521

 
—

 
—

 
—

 
521

Non-agency commercial mortgage-backed securities
—

 
—

 
—

 
13

 
13

Total fair value
$
5,749

 
$
11,065

 
$
12,026

 
$
27,643

 
$
56,483

Total amortized cost
$
5,743

 
$
10,994

 
$
11,996

 
$
27,416

 
$
56,149

Held to maturity securities
 
 
 
 
 
 
 
 
 
U.S. agency mortgage-backed securities
$
663

 
$
15,472

 
$
35,048

 
$
64,829

 
$
116,012

Asset-backed securities
—

 
3,227

 
7,940

 
7,192

 
18,359

Corporate debt securities
778

 
3,079

 
858

 
—

 
4,715

U.S. state and municipal securities
—

 
99

 
452

 
862

 
1,413

Non-agency commercial mortgage-backed securities
—

 
367

 
—

 
797

 
1,164

U.S. Treasury securities
—

 
—

 
230

 
—

 
230

Certificates of deposit
200

 
—

 
—

 
—

 
200

Foreign government agency securities
—

 
50

 
—

 
—

 
50

Other
—

 
—

 
—

 
20

 
20

Total fair value
$
1,641

 
$
22,294

 
$
44,528

 
$
73,700

 
$
142,163

Total amortized cost
$
1,637

 
$
21,989

 
$
43,368

 
$
73,200

 
$
140,194



Proceeds and gross realized gains and losses from sales of AFS securities are as follows:
 
Three Months Ended
September 30,
 
Nine Months Ended September 30,
 
 
 
2019
 
2018
 
2019
 
2018
Proceeds
$
5,436

 
$
—

 
$
21,710

 
$
115

Gross realized gains
5

 
—

 
15

 
—

Gross realized losses
4

 
—

 
10

 
—





- 34 -

THE CHARLES SCHWAB CORPORATION
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted)
(Unaudited)

5.    Bank Loans and Related Allowance for Loan Losses
The composition of bank loans and delinquency analysis by loan type is as follows:
September 30, 2019
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 loan
losses
Total
bank
loans – net
First Mortgages (1,2)
$
10,607

$
20

$
2

$
11

$
33

$
10,640

$
10

$
10,630

HELOCs (1,2)
1,208

3

1

8

12

1,220

4

1,216

Pledged asset lines
4,876

2

—

—

2

4,878

—

4,878

Other
172

—

—

2

2

174

3

171

Total bank loans
$
16,863

$
25

$
3

$
21

$
49

$
16,912

$
17

$
16,895

 
 
 
 
 
 
 
 
 
December 31, 2018
 
 
 
 
 
 
 
 
First Mortgages (1,2)
$
10,349

$
21

$
2

$
12

$
35

$
10,384

$
14

$
10,370

HELOCs (1,2)
1,493

3

1

8

12

1,505

5

1,500

Pledged asset lines
4,558

3

—

—

3

4,561

—

4,561

Other
180

—

—

—

—

180

2

178

Total bank loans
$
16,580

$
27

$
3

$
20

$
50

$
16,630

$
21

$
16,609


(1) First Mortgages and HELOCs include unamortized premiums and discounts and direct origination costs of $71 million and $73 million at September 30, 2019 and December 31, 2018, respectively.
(2) At September 30, 2019 and December 31, 2018, 46% and 47%, 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 September 30, 2019 or December 31, 2018.

At September 30, 2019, CSB had pledged $10.8 billion of First Mortgages and HELOCs as collateral to secure borrowing capacity on a secured credit facility with the FHLB (see Note 8).

Substantially all of the bank loans were collectively evaluated for impairment at both September 30, 2019 and December 31, 2018.

Changes in the allowance for loan losses were as follows:
 
September 30, 2019
 
September 30, 2018
Three Months Ended
First Mortgages
 
HELOCs
 
Other
 
Total (1)
 
First Mortgages
 
HELOCs
 
Other
 
Total (1)
Balance at beginning of period
$
12

 
$
5

 
$
2

 
$
19

 
$
17

 
$
7

 
$
2

 
$
26

Charge-offs
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Recoveries
—

 
—

 
—

 
—

 
—

 
1

 
—

 
1

Provision for loan losses
(2
)
 
(1
)
 
1

 
(2
)
 
—

 
(1
)
 
—

 
(1
)
Balance at end of period
$
10

 
$
4

 
$
3

 
$
17

 
$
17

 
$
7

 
$
2

 
$
26

 
September 30, 2019
 
September 30, 2018
Nine Months Ended
First Mortgages
 
HELOCs
 
Other
 
Total (1)
 
First Mortgages
 
HELOCs
 
Other
 
Total (1)
Balance at beginning of period
$
14

 
$
5

 
$
2

 
$
21

 
$
16

 
$
8

 
$
2

 
$
26

Charge-offs
—

 
—

 
—

 
—

 
—

 
—

 
(1
)
 
(1
)
Recoveries
1

 
1

 
—

 
2

 
—

 
2

 
—

 
2

Provision for loan losses
(5
)
 
(2
)
 
1

 
(6
)
 
1

 
(3
)
 
1

 
(1
)
Balance at end of period
$
10

 
$
4

 
$
3

 
$
17

 
$
17

 
$
7

 
$
2

 
$
26

(1) All PALs were fully collateralized by securities with fair values in excess of borrowings as of each period presented.

- 35 -

THE CHARLES SCHWAB CORPORATION
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted)
(Unaudited)

A summary of impaired bank loan-related assets is as follows:
 
September 30, 2019
 
December 31, 2018
Nonaccrual loans (1)
$
21

 
$
21

Other real estate owned (2)
2

 
3

Total nonperforming assets
23

 
24

Troubled debt restructurings
2

 
4

Total impaired assets
$
25

 
$
28

(1) Nonaccrual loans include nonaccrual troubled debt restructurings.
(2) Included in other assets on the condensed 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 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.


- 36 -

THE CHARLES SCHWAB CORPORATION
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted)
(Unaudited)

The credit quality indicators of the Company’s bank loan portfolio are detailed below:
September 30, 2019
 
Balance
 
Weighted Average
Updated FICO
 
Percent of
Loans that are on
Nonaccrual Status
First Mortgages
 
 
 
 
 
 
Estimated Current LTV
 
 
 
 
 
 
<70%
 
$
9,574

 
776

 
0.03
%
>70% – <90%
 
1,061

 
770

 
0.28
%
>90% – <100%
 
4

 
756

 
—

>100%
 
1

 
768

 
—

Total
 
$
10,640

 
776

 
0.05
%
HELOCs
 
 
 
 
 
 
Estimated Current LTV (1)
 
 
 
 
 
 
<70%
 
$
1,157

 
769

 
0.25
%
>70% – <90%
 
58

 
751

 
0.83
%
>90% – <100%
 
3

 
716

 
5.06
%
>100%
 
2

 
659

 
—

Total
 
$
1,220

 
768

 
0.29
%
Pledged asset lines
 
 
 
 
 
 

Weighted-Average LTV (1)
 
 
 
 
 
 

=70%
 
$
4,878

 
767

 
—


December 31, 2018
 
Balance
 
Weighted Average
Updated FICO
 
Percent of
Loans that are on
Nonaccrual Status
First Mortgages
 
 
 
 
 
 
Estimated Current LTV
 
 
 
 
 
 
<70%
 
$
9,396

 
776

 
0.04
%
>70% – <90%
 
985

 
769

 
0.41
%
>90% – <100%
 
2

 
717

 
—

>100%
 
1

 
753

 
—

Total
 
$
10,384

 
775

 
0.07
%
HELOCs
 
 
 
 
 
 
Estimated Current LTV (1)
 
 
 
 
 
 
<70%
 
$
1,416

 
770

 
0.13
%
>70% – <90%
 
80

 
752

 
0.60
%
>90% – <100%
 
6

 
729

 
3.36
%
>100%
 
3

 
702

 
—

Total
 
$
1,505

 
769

 
0.17
%
Pledged asset lines
 
 
 
 
 
 
Weighted-Average LTV (1)
 
 
 
 
 
 
=70%
 
$
4,561

 
766

 
—


(1) Represents the LTV for the full line of credit (drawn and undrawn).


- 37 -

THE CHARLES SCHWAB CORPORATION
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted)
(Unaudited)

September 30, 2019
 
First Mortgages
 
HELOCs
Year of origination
 
 
 
 

Pre-2015
 
$
1,815

 
$
872

2015
 
889

 
85

2016
 
2,382

 
82

2017
 
2,137

 
90

2018
 
1,611

 
67

2019
 
1,806

 
24

Total
 
$
10,640

 
$
1,220

Origination FICO
 
 

 
 

<620
 
$
4

 
$
—

620 – 679
 
76

 
6

680 – 739
 
1,624

 
236

>740
 
8,936

 
978

Total
 
$
10,640

 
$
1,220

Origination LTV
 
 
 
 
<70%
 
$
7,980

 
$
869

>70% – <90%
 
2,656

 
346

>90% – <100%
 
4

 
5

Total
 
$
10,640

 
$
1,220


December 31, 2018
 
First Mortgages
 
HELOCs
Year of origination
 
 
 
 

Pre-2015
 
$
2,387

 
$
1,140

2015
 
1,050

 
106

2016
 
2,606

 
95

2017
 
2,366

 
99

2018
 
1,975

 
65

Total
 
$
10,384

 
$
1,505

Origination FICO
 
 

 
 

<620
 
$
5

 
$
—

620 – 679
 
83

 
8

680 – 739
 
1,626

 
282

>740
 
8,670

 
1,215

Total
 
$
10,384

 
$
1,505

Origination LTV
 
 

 
 

<70%
 
$
7,815

 
$
1,064

>70% – <90%
 
2,564

 
434

>90% – <100%
 
5

 
7

Total
 
$
10,384

 
$
1,505


At September 30, 2019, First Mortgage loans of $9.6 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 29% of the balance of these mortgages consisted of loans with interest-only payment terms. The interest rates on approximately 65% 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.

- 38 -

THE CHARLES SCHWAB CORPORATION
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted)
(Unaudited)

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 when current outstanding HELOCs will convert to amortizing loans:
September 30, 2019
 
Balance
Converted to an amortizing loan by period end
 
$
551

Within 1 year
 
52

> 1 year – 3 years
 
84

> 3 years – 5 years
 
170

> 5 years
 
363

Total
 
$
1,220


At September 30, 2019, $1.0 billion 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 September 30, 2019, the borrowers on approximately 54% of HELOC loan balances outstanding only paid the minimum amount due.


6.    Variable Interest Entities
As of September 30, 2019 and December 31, 2018, all of Schwab’s involvement with variable interest entities (VIEs) is through CSB’s Community Reinvestment Act (CRA)-related investments and most of those are related to Low-Income Housing Tax Credit (LIHTC) investments. As part of CSB’s community reinvestment initiatives, CSB invests in funds that make equity investments in multifamily affordable housing properties. CSB receives tax credits and other tax benefits for these investments.
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:
 
 
September 30, 2019
 
December 31, 2018
 
 
Aggregate
assets
 
Aggregate
liabilities
 
Maximum
exposure
to loss
 
Aggregate
assets
 
Aggregate
liabilities
 
Maximum
exposure
to loss
LIHTC investments (1)
 
$
498

 
$
298

 
$
498

 
$
338

 
$
188

 
$
338

Other CRA investments (2)
 
91

 
—

 
125

 
70

 
—

 
124

Total
 
$
589

 
$
298

 
$
623

 
$
408

 
$
188

 
$
462

(1) Aggregate assets and aggregate liabilities are included in other assets and accrued expenses and other liabilities, respectively, on the condensed consolidated balance sheets.
(2) Other CRA investments are recorded using either the adjusted cost method, equity method, or as HTM securities. Aggregate assets are included in HTM securities, bank loans – net, or other assets on the condensed 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 2019 and 2022. During the nine months ended September 30, 2019 and year ended December 31, 2018, Schwab did not provide or intend to provide financial or other support to the VIEs that it was not contractually required to provide.


- 39 -

THE CHARLES SCHWAB CORPORATION
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted)
(Unaudited)

7.    Bank Deposits

Bank deposits consist of interest-bearing and non-interest-bearing deposits as follows:

 
September 30, 2019
 
December 31, 2018
Interest-bearing deposits:
 
 
 
 
Deposits swept from brokerage accounts
 
$
191,456

 
$
212,311

Checking
 
12,020

 
12,523

Savings and other
 
5,146

 
5,827

Total interest-bearing deposits
 
208,622

 
230,661

Non-interest-bearing deposits
 
705

 
762

Total bank deposits
 
$
209,327

 
$
231,423




8.    Borrowings

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. The following table lists long-term debt by instrument outstanding as of September 30, 2019 and December 31, 2018:
 
Date of
Principal Amount Outstanding
 
Issuance
September 30, 2019
December 31, 2018
Fixed-rate Senior Notes:
 
 
 
4.450% due July 22, 2020
07/22/10
$
700

$
700

3.250% due May 21, 2021
05/22/18
600

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

3.000% due March 10, 2025
03/10/15
375

375

3.850% due May 21, 2025
05/22/18
750

750

3.450% due February 13, 2026
11/13/15
350

350

3.200% due March 2, 2027
03/02/17
650

650

3.200% due January 25, 2028
12/07/17
700

700

4.000% due February 1, 2029
10/31/18
600

600

3.250% due May 22, 2029
05/22/19
600

—

Floating-rate Senior Notes:
 
 
 
Three-month LIBOR + 0.32% due May 21, 2021
05/22/18
600

600

Total Senior Notes
 
7,481

6,881

5.450% Finance lease obligation (1)
06/04/04
—

52

Unamortized discount — net
 
(14
)
(15
)
Debt issuance costs
 
(40
)
(40
)
Total long-term debt
 
$
7,427

$
6,878


(1) The finance lease obligation was extinguished through an assignment agreement during the first quarter of 2019.


- 40 -

THE CHARLES SCHWAB CORPORATION
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted)
(Unaudited)

Annual maturities on long-term debt outstanding at September 30, 2019 are as follows:
 
Maturities
2019
$
—

2020
700

2021
1,200

2022
256

2023
800

Thereafter
4,525

Total maturities
7,481

Unamortized discount — net
(14
)
Debt issuance costs
(40
)
Total long-term debt
$
7,427


Short-term borrowings: 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 September 30, 2019 and December 31, 2018, the collateral pledged provided a total borrowing capacity of $35.2 billion and $35.5 billion, respectively, of which no amounts were outstanding at the end of either period.
As a condition of the FHLB borrowings, we are required to hold FHLB stock, which was recorded in other assets on the condensed consolidated balance sheets. The investment in FHLB was $34 million at September 30, 2019 and $32 million at December 31, 2018.


9.    Leases

The Company 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. 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. Operating 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. 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.
As our leases do not provide an implicit rate, 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.
Lease expense for operating lease payments is recognized on a straight-line basis over the lease term. The Company does not have any finance leases and had an immaterial amount of sublease income for all periods presented.


- 41 -

THE CHARLES SCHWAB CORPORATION
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted)
(Unaudited)

The following table details the amounts and locations of lease assets and liabilities on the condensed consolidated balance sheet:
Leases
Balance Sheet Classification
September 30, 2019
Assets
 
 
Operating lease assets
Other assets
$
596

Liabilities
 


Operating lease liabilities
Accrued expenses and other liabilities
$
665


The components of lease expense are as follows:
Lease Cost
Three Months Ended
September 30, 2019
 
Nine Months Ended
September 30, 2019
Operating lease cost (1)
$
34

 
$
100

Variable lease cost (2)
8

 
25

(1) Includes short-term leases, which are immaterial.
(2) Includes payments that are entirely variable and amounts that represent the difference between payments based on an index or rate that would be reflected in the lease liability and what is actually incurred.

The following tables present supplemental lease information as of September 30, 2019:
Lease Term and Discount Rate

Weighted-average remaining lease term (years)
7.18

Weighted-average discount rate
3.47
%


Maturity of Lease Liabilities
Operating Leases (1)
2019
$
26

2020
136

2021
113

2022
92

2023
84

Thereafter
309

Total lease payments
760

Less: Interest
95

Present value of lease liabilities
$
665

(1) Operating lease payments exclude $41 million of legally binding minimum lease payments for leases signed but not yet commenced. These leases will commence between 2019 and 2020 with lease terms of five years to 20 years.


- 42 -

THE CHARLES SCHWAB CORPORATION
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted)
(Unaudited)

In accordance with the disclosure requirements for our adoption of ASU 2016-02, the Company is presenting the operating leases commitment table as of December 31, 2018. The following table is unchanged from the disclosure in Note 14 in the 2018 Form 10-K:
 
Operating
Leases
Subleases
Net
2019
$
131

$
4

$
127

2020
125

4

121

2021
101

4

97

2022
79

2

77

2023
72

1

71

Thereafter
282

—

282

Total
$
790

$
15

$
775




10.    Commitments and Contingencies

Loan Portfolio: CSB provides a co-branded loan origination program for CSB clients (the Program) with Quicken Loans, Inc. (Quicken Loans®). Pursuant to the Program, Quicken Loans originates and services First Mortgages and HELOCs for CSB clients. Under the Program, CSB purchases certain First Mortgages and HELOCs that are originated by Quicken Loans. CSB purchased First Mortgages of $842 million and $491 million during the third quarters of 2019 and 2018, respectively, and
$2.0 billion and $1.6 billion during the first nine months of 2019 and 2018, respectively. CSB purchased HELOCs with commitments of $52 million and $104 million during the third quarters of 2019 and 2018, respectively, and $180 million and $311 million during the first nine months of 2019 and 2018, respectively.

The Company’s commitments to extend credit on bank lines of credit and to purchase First Mortgages are as follows:
 
September 30, 2019
 
December 31, 2018

Commitments to extend credit related to unused HELOCs, PALs, and other lines of credit
$
11,234

 
$
11,046

Commitments to purchase First Mortgage loans
1,976

 
268

Total
$
13,210

 
$
11,314



In the third quarter of 2019, volume in new and refinanced First Mortgages increased as a result of lower interest rates and enhancements to customer incentives, leading to additional purchases during the third quarter and an increase in commitments to purchase First Mortgages as of September 30, 2019.

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 letter of credit agreements (LOCs), in favor of the Options Clearing Corporation, which are issued by several banks. At September 30, 2019, the aggregate face amount of these LOCs totaled $225 million. There were no funds drawn under any of these LOCs at September 30, 2019. 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.

Schwab 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. Schwab’s liability under these arrangements is not quantifiable and may exceed the cash and securities it has posted as collateral. The potential requirement for the Company to make payments under these arrangements is remote. Accordingly, no liability has been recognized for these guarantees.

Acquisition of USAA-IMCO: On July 25, 2019, the Company announced a definitive agreement to acquire assets of USAA-IMCO, including over one million brokerage and managed portfolio accounts with approximately $90 billion in client assets,

- 43 -

THE CHARLES SCHWAB CORPORATION
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted)
(Unaudited)

for $1.8 billion in cash. The companies have also agreed to enter into a long-term referral agreement, effective at closing of the acquisition, that would make Schwab the exclusive wealth management and brokerage provider for USAA members. The transaction is expected to close in mid-2020, subject to satisfaction of closing conditions, including regulatory approvals and the implementation of conversion plans.

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 is a certain matter 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.

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. 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. Defendants have answered the complaint to deny all allegations, and are vigorously contesting the lawsuit.


11.     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 are 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

- 44 -

THE CHARLES SCHWAB CORPORATION
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted)
(Unaudited)

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. 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 $860 million and $99 million at September 30, 2019 and December 31, 2018, respectively. Substantially all of our securities lending transactions are through a program with a clearing organization, which guarantees the return of cash to us and is 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 condensed consolidated balance sheets.
The following table presents information about our resale agreements and securities lending activity depicting the potential effect of rights of setoff between these recognized assets and recognized liabilities at September 30, 2019 and December 31, 2018:
 
 
Gross
Assets/
Liabilities
 
Gross Amounts
Offset in the
Condensed
Consolidated
Balance Sheets
 
Net Amounts
Presented in the
Condensed
Consolidated
Balance Sheets
 
Gross Amounts Not Offset in the
Condensed Consolidated
Balance Sheets
 
Net
Amount
 
 
 
 
Counterparty
Offsetting
 
Collateral
 
September 30, 2019
 
 
 
 
 
 
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
Resale agreements (1)
 
$
9,707

 
$
—

 
$
9,707

 
$
—

 
$
(9,707
)
(2) 
 
$
—

Securities borrowed (3)
 
877

 
—

 
877

 
(871
)
 
(6
)
 
 
—

Total
 
$
10,584

 
$
—

 
$
10,584

 
$
(871
)
 
$
(9,713
)
 
 
$
—

Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
Securities loaned (4,5)
 
$
1,471

 
$
—

 
$
1,471

 
$
(871
)
 
$
(489
)
 
 
$
111

Total
 
$
1,471

 
$
—

 
$
1,471

 
$
(871
)
 
$
(489
)
 
 
$
111

 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
Resale agreements (1)
 
$
7,195

 
$
—

 
$
7,195

 
$
—

 
$
(7,195
)
(2) 
 
$
—

Securities borrowed (3)
 
101

 
—

 
101

 
(98
)
 
(3
)
 
 
—

Total
 
$
7,296

 
$
—

 
$
7,296

 
$
(98
)
 
$
(7,198
)
 
 
$
—

Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
Securities loaned (4,5)
 
$
1,184

 
$
—

 
$
1,184

 
$
(98
)
 
$
(975
)
 
 
$
111

Total
 
$
1,184

 
$
—

 
$
1,184

 
$
(98
)
 
$
(975
)
 
 
$
111

(1) Included in cash and investments segregated and on deposit for regulatory purposes in the condensed consolidated balance sheets.
(2) Actual collateral was greater than or equal to 102% of the related assets. At September 30, 2019 and December 31, 2018, the fair value of collateral received in connection with resale agreements that are available to be repledged or sold was $9.9 billion and $7.4 billion, respectively.
(3) Included in receivables from brokers, dealers, and clearing organizations in the condensed consolidated balance sheets.
(4) Included in payables to brokers, dealers, and clearing organizations in the condensed 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 September 30, 2019 and December 31, 2018.
(5) Securities loaned are predominantly comprised of equity securities held in client brokerage accounts with overnight and continuous remaining contractual maturities.


- 45 -

THE CHARLES SCHWAB CORPORATION
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted)
(Unaudited)

Margin lending: Clients with margin loans have agreed to allow Schwab to pledge 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, and the amounts that we had pledged:
 
 
 
 
 
 
September 30, 2019
 
December 31, 2018
Fair value of client securities available to be pledged
 
$
26,614

 
$
26,628

Fair value of client securities pledged for:
 
 
 
 
Fulfillment of requirements with the Options Clearing Corporation (1)
 
1,778

 
2,315

Fulfillment of client short sales
 
2,023

 
1,292

Securities lending to other broker-dealers
 
1,204

 
974

Total collateral pledged
 
$
5,005

 
$
4,581

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 $139 million as of September 30, 2019 and $97 million as of December 31, 2018.
(1)  
Client securities pledged to fulfill client margin requirements for open option contracts established with the Options Clearing Corporation.


12.    Fair Values of Assets and Liabilities

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, other securities owned, and AFS securities. 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. When utilizing market data and bid-ask spread, the Company uses the price within the bid-ask spread that best represents fair value. When quoted prices do not exist, the Company uses prices obtained from independent third-party pricing services to measure the fair value of investment assets. We generally obtain prices from three independent third-party pricing sources for assets recorded at fair value.

Our primary independent pricing service provides prices based on observable trades and discounted cash flows that incorporate observable information such as yields for similar types of securities (a benchmark interest rate plus observable spreads) and weighted-average maturity for the same or similar “to-be-issued” securities. 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.

For a description of the fair value hierarchy and Schwab’s fair value methodologies, see Note 2 in the 2018 Form 10-K. We did not transfer any assets or liabilities between Level 1, Level 2, or Level 3 during the nine months ended September 30, 2019, or the year ended December 31, 2018. In addition, the Company did not adjust prices received from the primary independent third-party pricing service at September 30, 2019 or December 31, 2018.




- 46 -

THE CHARLES SCHWAB CORPORATION
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted)
(Unaudited)

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The following tables present the fair value hierarchy for assets measured at fair value on a recurring basis. Liabilities recorded at fair value were not material, and therefore are not included in the following tables:
September 30, 2019
Level 1
 
Level 2
 
Level 3
 
Balance at
Fair Value
Cash equivalents:
 
 
 
 
 
 
 
Money market funds
$
4,193

 
$
—

 
$
—

 
$
4,193

Commercial paper
—

 
923

 
—

 
923

Total cash equivalents
4,193

 
923

 
—

 
5,116

Investments segregated and on deposit for regulatory purposes:
 
 
 
 
 
 
 
Certificates of deposit
—

 
1,951

 
—

 
1,951

U.S. Government securities
—

 
1,605

 
—

 
1,605

Total investments segregated and on deposit for regulatory purposes
—

 
3,556

 
—

 
3,556

Other securities owned:
 
 
 
 
 
 
 
Equity and bond mutual funds
378

 
—

 
—

 
378

State and municipal debt obligations
—

 
32

 
—

 
32

Equity, U.S. Government and corporate debt, and other securities
3

 
74

 
—

 
77

Schwab Funds® money market funds
10

 
—

 
—

 
10

Total other securities owned
391

 
106

 
—

 
497

Available for sale securities:
 
 
 
 
 
 
 
U.S. agency mortgage-backed securities
—

 
40,431

 
—

 
40,431

U.S. Treasury securities
—

 
5,027

 
—

 
5,027

Asset-backed securities
—

 
4,801

 
—

 
4,801

Corporate debt securities
—

 
4,686

 
—

 
4,686

Certificates of deposit
—

 
1,004

 
—

 
1,004

Commercial paper
—

 
521

 
—

 
521

Non-agency commercial mortgage-backed securities
—

 
13

 
—

 
13

Total available for sale securities
—

 
56,483

 
—

 
56,483

Total
$
4,584

 
$
61,068

 
$
—

 
$
65,652


- 47 -

THE CHARLES SCHWAB CORPORATION
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted)
(Unaudited)

December 31, 2018
Level 1
 
Level 2
 
Level 3
 
Balance at
Fair Value
Cash equivalents:
 
 
 
 
 
 
 
Money market funds
$
3,429

 
$
—

 
$
—

 
$
3,429

Commercial paper
—

 
4,863

 
—

 
4,863

Total cash equivalents
3,429

 
4,863

 
—

 
8,292

Investments segregated and on deposit for regulatory purposes:
 
 
 
 
 
 
 
Certificates of deposit
—

 
1,396

 
—

 
1,396

U.S. Government securities
—

 
3,275

 
—

 
3,275

Total investments segregated and on deposit for regulatory purposes
—

 
4,671

 
—

 
4,671

Other securities owned:
 
 
 
 
 
 
 
Equity and bond mutual funds
441

 
—

 
—

 
441

State and municipal debt obligations
—

 
39

 
—

 
39

Equity, U.S. Government and corporate debt, and other securities
3

 
30

 
—

 
33

Schwab Funds® money market funds
26

 
—

 
—

 
26

Total other securities owned
470

 
69

 
—

 
539

Available for sale securities:
 
 
 
 
 
 
 
U.S. agency mortgage-backed securities
—

 
25,556

 
—

 
25,556

U.S. Treasury securities
—

 
18,302

 
—

 
18,302

Asset-backed securities
—

 
10,085

 
—

 
10,085

Corporate debt securities
—

 
7,467

 
—

 
7,467

Certificates of deposit
—

 
3,685

 
—

 
3,685

U.S. agency notes
—

 
898

 
—

 
898

Commercial paper
—

 
522

 
—

 
522

Foreign government agency securities
—

 
49

 
—

 
49

Non-agency commercial mortgage-backed securities
—

 
14

 
—

 
14

Total available for sale securities
—

 
66,578

 
—

 
66,578

Total
$
3,899

 
$
76,181

 
$
—

 
$
80,080

 

- 48 -

THE CHARLES SCHWAB CORPORATION
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted)
(Unaudited)

Fair Value of Other Financial Instruments
The following tables present the fair value hierarchy for other financial instruments:
September 30, 2019
Carrying
Amount
 
Level 1
 
Level 2
 
Level 3
 
Balance at
Fair Value
Assets
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
15,136

 
$
—

 
$
15,136

 
$
—

 
$
15,136

Cash and investments segregated and on deposit for
regulatory purposes
12,595

 
—

 
12,595

 
—

 
12,595

Receivables from brokers, dealers, and clearing
organizations
1,317

 
—

 
1,317

 
—

 
1,317

Receivables from brokerage clients — net
21,061

 
—

 
21,061

 
—

 
21,061

Held to maturity securities:
 
 
 
 
 
 
 
 
 
U.S. agency mortgage-backed securities
114,276

 
—

 
116,012

 
—

 
116,012

Asset-backed securities
18,323

 
—

 
18,359

 
—

 
18,359

Corporate debt securities
4,659

 
—

 
4,715

 
—

 
4,715

U.S. state and municipal securities
1,306

 
—

 
1,413

 
—

 
1,413

Non-agency commercial mortgage-backed securities
1,136

 
—

 
1,164

 
—

 
1,164

U.S. Treasury securities
224

 
—

 
230

 
—

 
230

Certificates of deposit
200

 
—

 
200

 
—

 
200

Foreign government agency securities
50

 
—

 
50

 
—

 
50

Other
20

 
—

 
20

 
—

 
20

Total held to maturity securities
140,194

 
—

 
142,163

 
—

 
142,163

Bank loans — net:
 
 
 
 
 
 
 
 
 
First Mortgages
10,630

 
—

 
10,682

 
—

 
10,682

HELOCs
1,216

 
—

 
1,255

 
—

 
1,255

Pledged asset lines
4,878

 
—

 
4,878

 
—

 
4,878

Other
171

 
—

 
171

 
—

 
171

Total bank loans — net
16,895

 
—

 
16,986

 
—

 
16,986

Other assets
617

 
—

 
617

 
—

 
617

Total
$
207,815

 
$
—

 
$
209,875

 
$
—

 
$
209,875

Liabilities
 
 
 
 
 
 
 
 
 
Bank deposits
$
209,327

 
$
—

 
$
209,327

 
$
—

 
$
209,327

Payables to brokers, dealers, and clearing organizations
1,736

 
—

 
1,736

 
—

 
1,736

Payables to brokerage clients
35,622

 
—

 
35,622

 
—

 
35,622

Accrued expenses and other liabilities
1,252

 
—

 
1,252

 
—

 
1,252

Long-term debt
7,427

 
—

 
7,771

 
—

 
7,771

Total
$
255,364

 
$
—

 
$
255,708

 
$
—

 
$
255,708



- 49 -

THE CHARLES SCHWAB CORPORATION
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted)
(Unaudited)

December 31, 2018
Carrying
Amount
 
Level 1
 
Level 2
 
Level 3
 
Balance at
Fair Value
Assets
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
19,646

 
$
—

 
$
19,646

 
$
—

 
$
19,646

Cash and investments segregated and on deposit for
regulatory purposes
8,886

 
—

 
8,886

 
—

 
8,886

Receivables from brokers, dealers, and clearing
organizations
553

 
—

 
553

 
—

 
553

Receivables from brokerage clients — net
21,641

 
—

 
21,641

 
—

 
21,641

Held to maturity securities:
 
 
 
 
 
 
 
 
 
U.S. agency mortgage-backed securities
118,064

 
—

 
116,093

 
—

 
116,093

Asset-backed securities
18,502

 
—

 
18,546

 
—

 
18,546

Corporate debt securities
4,477

 
—

 
4,432

 
—

 
4,432

U.S. state and municipal securities
1,327

 
—

 
1,348

 
—

 
1,348

Non-agency commercial mortgage-backed securities
1,156

 
—

 
1,142

 
—

 
1,142

U.S. Treasury securities
223

 
—

 
217

 
—

 
217

Certificates of deposit
200

 
—

 
201

 
—

 
201

Foreign government agency securities
50

 
—

 
49

 
—

 
49

Other
10

 
—

 
10

 
—

 
10

Total held to maturity securities
144,009

 
—

 
142,038

 
—

 
142,038

Bank loans — net:
 
 
 
 
 
 
 
 
 
First Mortgages
10,370

 
—

 
10,193

 
—

 
10,193

HELOCs
1,500

 
—

 
1,583

 
—

 
1,583

Pledged asset lines
4,561

 
—

 
4,561

 
—

 
4,561

Other
178

 
—

 
178

 
—

 
178

Total bank loans — net
16,609

 
—

 
16,515

 
—

 
16,515

Other assets
460

 
—

 
460

 
—

 
460

Total
$
211,804

 
$
—

 
$
209,739

 
$
—

 
$
209,739

Liabilities
 
 
 
 
 
 
 
 
 
Bank deposits
$
231,423

 
$
—

 
$
231,423

 
$
—

 
$
231,423

Payables to brokers, dealers, and clearing organizations
1,831

 
—

 
1,831

 
—

 
1,831

Payables to brokerage clients
32,726

 
—

 
32,726

 
—

 
32,726

Accrued expenses and other liabilities
1,370

 
—

 
1,370

 
—

 
1,370

Long-term debt
6,878

 
—

 
6,827

 
—

 
6,827

Total
$
274,228

 
$
—

 
$
274,177

 
$
—

 
$
274,177





- 50 -

THE CHARLES SCHWAB CORPORATION
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted)
(Unaudited)

13.    Stockholders’ Equity
On January 30, 2019, CSC publicly announced that its Board of Directors authorized a new Share Repurchase Program to repurchase up to $4.0 billion of common stock. The share repurchase authorization does not have an expiration date. During the third quarter and first nine months of 2019, CSC repurchased 20 million and 49 million shares of its common stock under this authorization for $771 million and $2.0 billion, respectively.

The Company’s preferred stock issued and outstanding is as follows:

 
 
Liquidation Preference Per Share
 
 
 
Dividend Rate in Effect at September 30, 2019
Earliest Redemption Date
Date at Which Dividend Rate Becomes Floating
Floating Annual Rate of Three-Month LIBOR plus:
 
Shares Issued and Outstanding (in thousands) at
Carrying Value at
 
 
September 30,
2019 (1)
December 31, 2018 (1)
September 30, 2019
December 31, 2018
Issue Date
Fixed-rate:
 
 
 
 
 
 
 
 
 
 
Series C
600

600

$
1,000

$
585

$
585

08/03/15
6.000
%
12/01/20
N/A
N/A

Series D
750

750

1,000

728

728

03/07/16
5.950
%
06/01/21
N/A
N/A

Fixed-to-floating-rate:
 
 
 
 
 
 
 
 
 
 
Series A
400

400

1,000

397

397

01/26/12
7.000
%
02/01/22
02/01/22
4.820
%
Series E
6

6

100,000

591

591

10/31/16
4.625
%
03/01/22
03/01/22
3.315
%
Series F
5

5

100,000

492

492

10/31/17
5.000
%
12/01/27
12/01/27
2.575
%
Total preferred stock
1,761

1,761



$
2,793

$
2,793

 
 
 
 
 
(1) Represented by depositary shares, except for Series A.
N/A Not applicable.

Dividends declared on the Company’s preferred stock are as follows:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2019
 
2018
 
2019
 
2018
 
 
Total
Declared
 
Per Share
Amount
 
Total
Declared
 
Per Share
Amount
 
Total
Declared
 
Per Share
Amount
 
Total
Declared
 
Per Share
Amount
Series A
 
$
—

 
$
—

 
$
—

 
$
—

 
$
14

 
$
35.00

 
$
14

 
$
35.00

Series C
 
9

 
15.00

 
9

 
15.00

 
27

 
45.00

 
27

 
45.00

Series D
 
11

 
14.88

 
11

 
14.88

 
33

 
44.64

 
33

 
44.64

Series E
 
14

 
2,312.50

 
14

 
2,312.50

 
28

 
4,625.00

 
28

 
4,625.00

Series F
 
—

 
—

 
—

 
—

 
13

 
2,500.00

 
15

 
2,930.56

Total
 
$
34

 
 
 
$
34

 
 
 
$
115

 
 
 
$
117

 
 


- 51 -

THE CHARLES SCHWAB CORPORATION
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted)
(Unaudited)

14.    Accumulated Other Comprehensive Income
The components of other comprehensive income (loss) are as follows:
 
2019
 
2018
Three Months Ended September 30,
Before
Tax
 
Tax
Effect
 
Net of
Tax
 
Before
Tax
 
Tax
Effect
 
Net of
Tax
Change in net unrealized gain (loss) on available for sale securities:
 
 
 
 
 
 
 
 
 
 
 
Net unrealized gain (loss)
$
51

 
$
(12
)
 
$
39

 
$
(43
)
 
$
11

 
$
(32
)
Other reclassifications included in other revenue
(1
)
 
—

 
(1
)
 
—

 
—

 
—

Amortization of amounts previously recorded upon transfer to held to maturity
from available for sale
10

 
(3
)
 
7

 
8

 
(2
)
 
6

Other comprehensive income (loss)
$
60

 
$
(15
)
 
$
45

 
$
(35
)
 
$
9

 
$
(26
)
 
2019
 
2018
Nine Months Ended September 30,
Before
Tax
 
Tax
Effect
 
Net of
Tax
 
Before
Tax
 
Tax
Effect
 
Net of
Tax
Change in net unrealized gain (loss) on available for sale securities:
 
 
 
 
 
 
 
 
 
 
 
Net unrealized gain (loss)
$
496

 
$
(119
)
 
$
377

 
$
(184
)
 
$
45

 
$
(139
)
Other reclassifications included in other revenue
(5
)
 
1

 
(4
)
 
—

 
—

 
—

Amortization of amounts previously recorded upon transfer to held to maturity
from available for sale
30

 
(7
)
 
23

 
26

 
(6
)
 
20

Other comprehensive income (loss)
$
521

 
$
(125
)
 
$
396

 
$
(158
)
 
$
39

 
$
(119
)
AOCI balances are as follows:
 
Total AOCI
Balance at June 30, 2018
$
(278
)
Available for sale securities:
 
Net unrealized gain (loss)
(32
)
Held to maturity securities:
 
Amortization of amounts previously recorded upon transfer to held to maturity from available for sale
6

Balance at September 30, 2018
$
(304
)
 
 
Balance at June 30, 2019
$
99

Available for sale securities:
 
Net unrealized gain (loss), excluding transfers to available for sale from held to maturity
39

Other reclassifications included in other revenue
(1
)
Held to maturity securities:
 
Amortization of amounts previously recorded upon transfer to held to maturity from available for sale
7

Balance at September 30, 2019
$
144



- 52 -

THE CHARLES SCHWAB CORPORATION
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted)
(Unaudited)

 
Total AOCI
Balance at December 31, 2017
$
(152
)
Adoption of accounting standards
(33
)
Available for sale securities:
 
Net unrealized gain (loss)
(139
)
Held to maturity securities:
 
Amortization of amounts previously recorded upon transfer to held to maturity from available for sale
20

Balance at September 30, 2018
$
(304
)
 
 
Balance at December 31, 2018
$
(252
)
Available for sale securities:
 
Net unrealized gain (loss), excluding transfers to available for sale from held to maturity
358

Net unrealized gain on securities transferred to available for sale from held to maturity (1)
19

Other reclassifications included in other revenue
(4
)
Held to maturity securities:
 
Amortization of amounts previously recorded upon transfer to held to maturity from available for sale
23

Balance at September 30, 2019
$
144


(1) As part of the adoption of ASU 2017-12, in the first quarter of 2019, the Company made a one-time election to transfer a portion of its HTM securities to AFS. The transfer resulted in a net of tax increase to AOCI of $19 million. See Notes 2 and 4 for additional discussion on the transfer of HTM securities to AFS.


- 53 -

THE CHARLES SCHWAB CORPORATION
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted)
(Unaudited)

15.    Regulatory Requirements

At September 30, 2019, CSC and CSB met all of their respective capital requirements. The regulatory capital and ratios for CSC (consolidated) and CSB are as follows:

 
Actual (1)
 
Minimum to be
Well Capitalized
 
Minimum Capital Requirement
September 30, 2019
 
Amount
 
Ratio
 
Amount
 
Ratio
 
Amount
 
Ratio (2)
CSC
 
 
 
 
 
 
 
 
 
 
 
 
Common Equity Tier 1 Risk-Based Capital
 
$
17,264

 
20.0
%
 
N/A

 
 
 
$
3,877

 
4.5
%
Tier 1 Risk-Based Capital
 
20,057

 
23.3
%
 
N/A

 
 
 
5,170

 
6.0
%
Total Risk-Based Capital
 
20,075

 
23.3
%
 
N/A

 
 
 
6,893

 
8.0
%
Tier 1 Leverage
 
20,057

 
7.3
%
 
N/A

 
 
 
10,945

 
4.0
%
Supplementary Leverage Ratio (1)
 
20,057

 
7.1
%
 
N/A

 
 
 
8,418

 
3.0
%
CSB
 
 
 
 
 
 
 
 
 
 
 
 
Common Equity Tier 1 Risk-Based Capital
 
$
15,577

 
22.9
%
 
$
4,430

 
6.5
%
 
$
3,067

 
4.5
%
Tier 1 Risk-Based Capital
 
15,577

 
22.9
%
 
5,452

 
8.0
%
 
4,089

 
6.0
%
Total Risk-Based Capital
 
15,594

 
22.9
%
 
6,815

 
10.0
%
 
5,452

 
8.0
%
Tier 1 Leverage
 
15,577

 
7.4
%
 
10,537

 
5.0
%
 
8,429

 
4.0
%
Supplementary Leverage Ratio (1)
 
15,577

 
7.2
%
 
N/A

 
N/A

 
6,524

 
3.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2018
 
 
 
 
 
 
 
 
 
 
 
 
CSC
 
 
 
 
 
 
 
 
 
 
 
 
Common Equity Tier 1 Risk-Based Capital
 
$
16,813

 
17.6
%
 
N/A

 
 
 
$
4,295

 
4.5
%
Tier 1 Risk-Based Capital
 
19,606

 
20.5
%
 
N/A

 
 
 
5,726

 
6.0
%
Total Risk-Based Capital
 
19,628

 
20.6
%
 
N/A

 
 
 
7,635

 
8.0
%
Tier 1 Leverage
 
19,606

 
7.1
%
 
N/A

 
 
 
11,058

 
4.0
%
CSB
 
 
 
 
 
 
 
 
 
 
 
 
Common Equity Tier 1 Risk-Based Capital
 
$
15,832

 
19.7
%
 
$
5,233

 
6.5
%
 
$
3,623

 
4.5
%
Tier 1 Risk-Based Capital
 
15,832

 
19.7
%
 
6,441

 
8.0
%
 
4,831

 
6.0
%
Total Risk-Based Capital
 
15,853

 
19.7
%
 
8,051

 
10.0
%
 
6,441

 
8.0
%
Tier 1 Leverage
 
15,832

 
7.2
%
 
11,044

 
5.0
%
 
8,836

 
4.0
%
(1) Beginning in 2019, CSC and CSB are subject to the “advanced approaches” framework under the Basel III capital rule. As a result, we are now required to include all components of AOCI in regulatory capital and report our supplementary leverage ratio, which is calculated as Tier 1 capital divided by total leverage exposure. Total leverage exposure includes all on-balance sheet assets and certain off-balance sheet exposures, including unused commitments. Prior to 2019, CSC and CSB elected to opt-out of the requirement to include most components of AOCI in Common Equity Tier 1 Capital; the amounts and ratios for December 31, 2018 are presented on this basis.
(2) Under the Basel III capital rule, CSC and CSB are also required to maintain a capital conservation buffer and, beginning in 2019, a countercyclical capital buffer above the regulatory minimum risk-based capital ratios. The capital conservation buffer became 2.5% on January 1, 2019 (1.875% at December 31, 2018). At September 30, 2019, the countercyclical capital buffer was zero percent. 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 September 30, 2019 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 September 30, 2019, CSB is considered well capitalized (the highest category) under its respective regulatory capital rules. There are no conditions or events since September 30, 2019 that management believes have changed CSB’s capital category.

In late 2017, Schwab acquired a federal savings bank charter which is now called Charles Schwab Premier Bank. At September 30, 2019, the balance sheet of Charles Schwab Premier Bank consisted primarily of investment securities, and held total assets of $13.5 billion. Charles Schwab Premier Bank is subject to similar regulatory guidelines and requirements, and seeks to maintain a Tier 1 Leverage Ratio similar to CSB.

- 54 -

THE CHARLES SCHWAB CORPORATION
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted)
(Unaudited)

Net capital and net capital requirements for CS&Co are as follows:
 
 
September 30, 2019
 
December 31, 2018
Net Capital
 
$
2,235

 
$
2,304

Minimum net capital required
 
0.250

 
0.250

2% of aggregate debit balances
 
440

 
436

Net Capital in excess of required net capital
 
$
1,795

 
$
1,868


In accordance with the SEC Customer Protection Rule, CS&Co had portions of its cash and investments segregated for the exclusive benefit of clients at September 30, 2019. The SEC 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. 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.


16.    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 and banking services to individual investors, and retirement plan services, as well as other corporate brokerage services, to businesses and their employees. The Advisor Services segment provides custodial, trading, banking, and support services, as well as retirement business services, to independent RIAs, independent retirement advisors, and recordkeepers. Revenues and expenses are allocated to the two segments based on which segment services the client.
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.

- 55 -

THE CHARLES SCHWAB CORPORATION
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted)
(Unaudited)

Financial information for the segments is presented in the following tables:
 
Investor Services
 
Advisor Services
 
Total
Three Months Ended September 30,
2019
 
2018
 
2019
 
2018
 
2019
 
2018
Net Revenues
 
 
 
 
 
 
 
 
 
 
 
Net interest revenue
$
1,182

 
$
1,138

 
$
449

 
$
389

 
$
1,631

 
$
1,527

Asset management and administration fees
586

 
565

 
239

 
244

 
825

 
809

Trading revenue
108

 
112

 
64

 
64

 
172

 
176

Other
68

 
53

 
15

 
14

 
83

 
67

Total net revenues
1,944

 
1,868

 
767

 
711

 
2,711

 
2,579

Expenses Excluding Interest
1,070

 
1,015

 
405

 
345

 
1,475

 
1,360

Income before taxes on income
$
874

 
$
853

 
$
362

 
$
366

 
$
1,236

 
$
1,219

 
Investor Services
 
Advisor Services
 
Total
Nine Months Ended September 30,
2019
 
2018
 
2019
 
2018
 
2019
 
2018
Net Revenues
 
 
 
 
 
 
 
 
 
 
 
Net interest revenue
$
3,531

 
$
3,158

 
$
1,390

 
$
1,039

 
$
4,921

 
$
4,197

Asset management and administration fees
1,679

 
1,727

 
687

 
747

 
2,366

 
2,474

Trading revenue
329

 
354

 
202

 
203

 
531

 
557

Other
207

 
182

 
90

 
53

 
297

 
235

Total net revenues
5,746

 
5,421

 
2,369

 
2,042

 
8,115

 
7,463

Expenses Excluding Interest
3,189

 
3,069

 
1,190

 
1,042

 
4,379

 
4,111

Income before taxes on income
$
2,557

 
$
2,352

 
$
1,179

 
$
1,000

 
$
3,736

 
$
3,352





- 56 -


THE CHARLES SCHWAB CORPORATION



Item 4.     Controls and Procedures
Evaluation of disclosure controls and procedures: The management of the Company, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of September 30, 2019. Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were effective as of September 30, 2019.
Changes in internal control over financial reporting: No change in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) was identified during the quarter ended September 30, 2019, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.



- 57 -


THE CHARLES SCHWAB CORPORATION



PART  II  -  OTHER  INFORMATION


Item 1.     Legal Proceedings
For a discussion of legal proceedings, see Item 1 – Note 10.


Item 1A.     Risk Factors

During the first nine months of 2019, there have been no material changes to the risk factors in Part I – Item 1A – Risk Factors in the 2018 Form 10-K.


Item 2.     Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
On January 30, 2019, CSC publicly announced that its Board of Directors authorized the repurchase of up to $4.0 billion of common stock. The authorization does not have an expiration date.

The following table summarizes purchases made by or on behalf of CSC of its common stock for each calendar month in the third quarter of 2019 (in millions, except number of shares, which are in thousands, and per share amounts):
Month
 
Total Number of Shares Purchased
 
Average Price Paid per Share
 
Total Number of Shares Purchased as Part of Publicly Announced Program
 
Approximate Dollar Value of Shares That May Yet Be Purchased Under the Publicly Announced Program
July:
 
 
 
 
 
 
 
 
Share repurchase program
 
—

 
$
—

 
—

 
$
2,780

Employee transactions (1)
 
20

 
$
40.95

 
N/A

 
N/A

August:
 
 
 
 
 
 
 
 
Share repurchase program
 
12,793

 
$
37.39

 
12,793

 
$
2,301

Employee transactions (1)
 
3

 
$
40.05

 
N/A

 
N/A

September:
 
 
 
 
 
 
 
 
Share repurchase program
 
7,141

 
$
40.94

 
7,141

 
$
2,009

Employee transactions (1)
 
6

 
$
38.33

 
N/A

 
N/A

Total:
 
 
 
 
 
 
 
 
Share repurchase program
 
19,934

 
$
38.69

 
19,934

 
$
2,009

Employee transactions (1)
 
29

 
$
40.35

 
N/A

 
N/A

(1) Includes restricted shares withheld (under the terms of grants under employee stock incentive plans) to offset tax withholding obligations that occur upon vesting and release of restricted shares. The Company may receive shares delivered or attested to pay the exercise price and/or to satisfy tax withholding obligations by employees who exercise stock options granted under employee stock incentive plans, which are commonly referred to as stock swap exercises.
N/A Not applicable.


Item 3.     Defaults Upon Senior Securities

None.



- 58 -


THE CHARLES SCHWAB CORPORATION



Item 4.     Mine Safety Disclosures

Not applicable.


Item 5.     Other Information
None.

- 59 -


THE CHARLES SCHWAB CORPORATION



Item 6.     Exhibits
The following exhibits are filed as part of this Quarterly Report on Form 10-Q:
Exhibit
Number
Exhibit
 
 
 
 
10.397
(1),(2)
 
 
 
10.398
(1),(2)
 
 
 
10.399
(1),(2)
 
 
 
10.401
(1),(2)
 
 
 
10.402
(1),(2)
 
 
 
10.403
(1),(2)
 
 
 
10.404
(1),(2)
 
 
 
31.1
 
 
 
 
31.2
 
 
 
 
32.1
(1)
 
 
 
32.2
(1)
 
 
 
101.INS
Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
(3)
 
 
 
101.SCH
Inline XBRL Taxonomy Extension Schema
(3)
 
 
 
101.CAL
Inline XBRL Taxonomy Extension Calculation
(3)
 
 
 
101.DEF
Inline XBRL Extension Definition
(3)
 
 
 

- 60 -


THE CHARLES SCHWAB CORPORATION



Exhibit
Number
Exhibit
 
 
 
 
101.LAB
Inline XBRL Taxonomy Extension Label
(3)
 
 
 
101.PRE
Inline XBRL Taxonomy Extension Presentation
(3)
 
 
 
104
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
 
 
 
 
(1)
Furnished as an exhibit to this Quarterly Report on Form 10-Q.
 
 
 
 
(2)
Management contract or compensatory plan.
 
 
 
 
(3)
Attached as Exhibit 101 to this Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 2019 are the following materials formatted in Inline XBRL (Extensible Business Reporting Language) (i) the Condensed Consolidated Statements of Income, (ii) the Condensed Consolidated Statements of Comprehensive Income, (iii) the Condensed Consolidated Balance Sheets, (iv) the Condensed Consolidated Statements of Stockholders’ Equity, (v) the Condensed Consolidated Statements of Cash Flows, and (vi) Notes to Condensed Consolidated Financial Statements.
 



- 61 -


THE CHARLES SCHWAB CORPORATION




SIGNATURE


Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


 
 
 
THE CHARLES SCHWAB CORPORATION
 
 
 
(Registrant)
 
 
 
 
 
 
 
 
 
 
 
 
Date:
November 7, 2019
 
/s/ Peter Crawford
 
 
 
Peter Crawford
 
 
 
Executive Vice President and Chief Financial Officer


- 62 -

EXHIBIT 10.397

THE CHARLES SCHWAB CORPORATION
[2013 STOCK INCENTIVE PLAN]
NOTICE OF NON-EMPLOYEE DIRECTOR
RETAINER STOCK OPTION GRANT

You have been granted the following option to purchase common stock (a “Share”) of The Charles Schwab Corporation (“Schwab”) under [The Charles Schwab Corporation 2013 Stock Incentive Plan] (the “Plan”):

Name of Recipient:
<first_name> <last_name>
 
 
Total Number of
Shares Granted:
<shares_awarded>
 
 
Exercise Price per
Share:
<award_price>
 
 
Grant Date:
<award_date>
 
 
Expiration Date:
<expire_date>
 
 
Vesting Schedule:
So long as you continue as a non‑employee director on the Board of Directors of Schwab (“Board”) or the board of a subsidiary of Schwab or an employee of Schwab or its subsidiaries and subject to the terms of the Stock Option Agreement, you will acquire the right to exercise this option (become "vested" in this option) on the following dates and in the following amounts:
 
Number of Options on Vesting Date:
 
                        <vesting_schedule>



You and Schwab agree that this option is granted under and governed by the terms and conditions of the Plan and the Stock Option Agreement, both of which are made a part of this notice. Please review the Plan and the Stock Option Agreement carefully, as they explain the terms and conditions of this option. You agree that Schwab may deliver electronically all documents relating to the Plan or this option (including, without limitation, prospectuses required by the Securities and Exchange Commission) and all other documents that Schwab is required to deliver to its stockholders. By accepting this grant, you agree to all of the terms and conditions described above, in the Retainer Stock Option Agreement and in the Plan.


1

THE CHARLES SCHWAB CORPORATION
[2013 STOCK INCENTIVE PLAN]
NON-EMPLOYEE DIRECTOR RETAINER STOCK OPTION AGREEMENT

Tax Treatment
This option is a non-qualified stock option and is not intended to qualify as an incentive stock option under federal tax laws.
Vesting
This option becomes vested in installments as described in the Notice of Non-Employee Director Retainer Stock Option Grant. If you become a common-law employee of The Charles Schwab Corporation (“Schwab”) Schwab or its subsidiaries, then this option will continue to vest as described in the Notice of Non-Employee Director Retainer Stock Option Grant so long as you continue as either a non-employee director or an employee of Schwab or its subsidiaries.
Accelerated
Vesting
This option will become fully exercisable if your service as a non‑employee director terminates on account of your death, disability or retirement. If, prior to the date your service terminates, Schwab is subject to a “change in control” (as defined in [The Charles Schwab Corporation 2013 Stock Incentive Plan] (the “Plan”) document), this option will become fully exercisable immediately preceding the change in control. If the Compensation Committee (the “Compensation Committee”) of the Board of Directors (the “Board”) of Schwab determines that a change in control is likely to occur, Schwab will advise you and this option will become fully exercisable as of the date 10 days prior to the anticipated date of the change in control.
Definition of
Disability
For all purposes of this Agreement, "disability" means that you are unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which has lasted, or can be expected to last, for a continuous period of not less than 12 months or which can be expected to result in death as determined by Schwab in its sole discretion.
Definition of
Retirement
For all purposes of this Agreement, "retirement" means your resignation or removal from the Board or the board of a subsidiary of Schwab at any time after you have attained age 70 or completed 5 continuous years of service as a non‑employee director on the Board and/or the board of a subsidiary of Schwab. Serving simultaneously for a year on the Board and the board of a subsidiary of Schwab is counted as one year total for purposes of determining years of service. If you serve on the Board and the board of a subsidiary of Schwab, you must leave both boards to qualify for retirement.
 
 

1

Exercise
Procedures
You or your representative may exercise this option by following the procedures prescribed by Schwab. If this option is being exercised by your representative, your representative must furnish proof satisfactory to Schwab of your representative's right to exercise this option. After completing the prescribed procedures, Schwab will cause to be issued the shares of common stock of Schwab (“Shares”) purchased, which will be registered in the name of the person exercising this option.
Forms of
Payment
When you submit your notice of exercise, you must pay the option exercise price for the Shares you are purchasing. Payment may be made in one of the following forms:
 
•    Cash in your Schwab brokerage account in an amount sufficient to cover the option exercise price of the Shares and the required tax withholding (this exercise method is sometimes referred to as “Exercise and Hold”).
•    Shares surrendered to Schwab. These Shares will be valued at their fair market value on the date when the new Shares are purchased. (This exercise method is sometimes referred to as a “Stock Swap.”)
•    By delivery (in a manner prescribed by Schwab) of an irrevocable direction to Charles Schwab & Co., Inc. to sell Shares (including Shares to be issued upon exercise of this option) and to deliver all or part of the sale proceeds to Schwab in payment of all or part of the exercise price. (This exercise method is sometimes referred to as “Exercise and Sell” or “Sell to Cover.”)
Term
This option expires no later than the 10th anniversary of the Grant Date but may expire earlier upon your termination of service, as described below.
Termination of
Service as a
Non‑Employee
Director
This option will expire on the date three months following the date of your termination of service as a non-employee director if such service terminates for any reason other than on account of becoming a common‑law employee of Schwab or its subsidiaries, death, disability or retirement. The terms “disability” and “retirement” are defined above.
If you become an employee of Schwab or its subsidiaries, this option will expire on the date three months following the date you cease to be an employee of Schwab and its subsidiaries (other than by reason of disability, death or retirement). If you cease to be a non-employee director or an employee of Schwab and its subsidiaries by reason of your disability or death, then this option will expire on the first anniversary of the date of your death or disability.
If you cease to be a non‑employee director by reason of your retirement, then this option will expire on the 10th anniversary of the Grant Date.
 
 

2

Restrictions on
Exercise and
Issuance or
Transfer of
Shares
You cannot exercise this option and no Shares may be issued under this option if the issuance of Shares at that time would violate any applicable law, regulation, or rule. Schwab may impose restrictions upon the sale, pledge, or other transfer of Shares (including the placement of appropriate legends on stock certificates) if, in the judgment of Schwab and its counsel, such restrictions are necessary or desirable to comply with applicable law, regulations, or rules.
No Stockholder
Rights
You, or your estate or heirs, have no rights as a stockholder of Schwab until you have exercised this option by giving the required notice to the Company and paying the exercise price. No adjustments are made for dividends or other rights if the applicable record date occurs before you exercise this option, except as described in the Plan.
No Right to
Remain
Director or
Employee

Nothing in this Agreement will be construed as giving you the right to be retained as a director or an employee of Schwab and its subsidiaries.
Transfer of
Option
In general, only you may exercise this option prior to your death. You may not assign, sell, transfer, pledge, encumber, or otherwise dispose of this option, except as provided below. For instance, you may not sell this option or use it as security for a loan. If you attempt to do any of these things, this option will immediately become invalid.
You may dispose of this option in your will or in a beneficiary designation. You may designate one or more beneficiaries by filing a beneficiary designation form with Schwab. You may change your beneficiary designation by filing a new form with Schwab at any time prior to your death. If you do not designate a beneficiary or if your designated beneficiary predeceases you, then your options will be exercisable by your estate.
This option may not be assigned, transferred, pledged, encumbered, or otherwise disposed of in any settlement, judgment, decree or order (including approval of a property settlement agreement) that relates to the provision of child support, alimony payments, or marital property rights or domestic property rights.

3

Limitation on
Payments
If a payment from the Plan would constitute an excess parachute payment or if there have been certain securities law violations, then your grant may be reduced or forfeited and you may be required to disgorge any profit that you have realized from your grant.
If a disqualified individual receives a payment or transfer under the Plan that would constitute an excess parachute payment under section 280G of the Internal Revenue Code of 1986, as amended (the “Code”), such payment will be reduced, as described below. Generally, someone is a “disqualified individual” under section 280G if he or she is (a) an officer of Schwab, (b) a member of the group consisting of the highest paid 1% of the employees of Schwab or, if less, the highest paid 250 employees of Schwab, or (c) a 1% stockholder of Schwab. For purposes of this section on “Limitation on Payments,” the term “Schwab" will include affiliated corporations to the extent determined by the Auditors (as defined below) in accordance with section 280G(d)(5) of the Code.
 
In the event that the independent auditors most recently selected by the Board (the “Auditors”) determine that any payment or transfer in the nature of compensation to or for your benefit, whether paid or payable (or transferred or transferable) pursuant to the terms of the Plan or otherwise (a “Payment”), would be nondeductible for federal income tax purposes because of the provisions concerning “excess parachute payments” in section 280G of the Code, then the aggregate present value of all Payments will be reduced (but not below zero) to the Reduced Amount (as defined below); provided, however, that the Compensation Committee may specify in writing that the grant will not be so reduced and will not be subject to reduction under this section.
 
For this purpose, the “Reduced Amount” will be the amount, expressed as a present value, which maximizes the aggregate present value of the Payments without causing any Payment to be nondeductible by Schwab because of section 280G of the Code.

4

 
If the Auditors determine that any Payment would be nondeductible because of section 280G of the Code, then Schwab will promptly give you notice to that effect and a copy of the detailed calculation of the Reduced Amount. You may then elect, in your discretion, which and how much of the Payments will be eliminated or reduced (as long as after such election, the aggregate present value of the Payments equals the Reduced Amount). You will advise Schwab in writing of your election within 10 days of receipt of the notice. If you do not make such an election within the 10-day period, then Schwab may elect which and how much of the Payments will be eliminated or reduced (as long as after such election the aggregate present value of the Payments equals the Reduced Amount, and your election is consistent with any mandatory eliminations or reductions that apply under other agreements or the Plan). Schwab will notify you promptly of its election. Present value will be determined in accordance with section 280G(d)(4) of the Code. The Auditors’ determinations will be binding upon you and Schwab and will be made within 60 days of the date when a Payment becomes payable or transferable.
As promptly as practicable following these determinations and elections, Schwab will pay or transfer to or for your benefit such amounts as are then due to you under the Plan and will promptly pay or transfer to or for your benefit in the future such amounts as become due to you under the Plan.
 
As a result of uncertainty in the application of section 280G of the Code at the time of an initial determination by the Auditors, it is possible that Payments will have been made by Schwab that should not have been made (an “Overpayment”) or that additional Payments that will not have been made by Schwab could have been made (an “Underpayment”) consistent in each case with the calculation of the Reduced Amount. In the event the Auditors, based upon the assertion of a deficiency by the Internal Revenue Service against you or Schwab that the Auditors believe has a high probability of success, determine that an Overpayment has been made, such Overpayment will be treated for all purposes as a loan to you that you will repay to Schwab on demand, together with interest at the applicable federal rate provided in section 7872(f)(2) of the Code. However, no amount will be payable by you to Schwab if and to the extent that such payment would not reduce the amount that is subject to taxation under section 4999 of the Code. In the event the Auditors determine that an Underpayment has occurred, such Underpayment will promptly be paid or transferred by Schwab to or for your benefit, together with interest at the applicable federal rate provided in section 7872(f)(2) of the Code.
Plan
Administration
The Plan administrator has discretionary authority to make all determinations related to this grant and to construe the terms of the Plan and this Agreement. The Plan administrator’s determinations are conclusive and binding on all persons, and they are entitled to deference upon any review.

5

Adjustments
In the event of a stock split, a stock dividend or a similar change in Shares, the Compensation Committee shall adjust the number of Shares covered by this option and the exercise price per Share.
Severability
In the event that any provision of this Agreement is held invalid or unenforceable, the provision will be severable from, and such invalidity or unenforceability will not be construed to have any effect on, the remaining provisions of this Agreement.
Applicable Law
This Agreement will be interpreted and enforced under the laws of the State of Delaware (without regard to their choice-of-law provisions), as such laws are applied to contracts entered into and performed in Delaware.
The Plan and
Other
Agreements
The text of the Plan is incorporated in this Agreement by reference. This Agreement and the Plan constitute the entire understanding between you and Schwab regarding this option. Any prior agreements, commitments or negotiations concerning this option are superseded. This Agreement may be amended only by another written agreement, signed by both parties. If there is any inconsistency or conflict between any provision of this Agreement and the Plan, the terms of the Plan will control.

BY ACCEPTING THIS OPTION GRANT,
YOU AGREE TO ALL OF THE TERMS AND CONDITIONS
DESCRIBED ABOVE AND IN THE PLAN.

6

EXHIBIT 10.398

THE CHARLES SCHWAB CORPORATION
[2013 STOCK INCENTIVE PLAN]
NOTICE OF NON-EMPLOYEE DIRECTOR
RETAINER RESTRICTED STOCK UNIT GRANT

You have been granted Restricted Stock Units. A Restricted Stock Unit represents the right to receive, subject to certain conditions, a share of common stock (a “Share”) of The Charles Schwab Corporation (“Schwab”), under [The Charles Schwab Corporation 2013 Stock Incentive Plan] (the “Plan”). Your Restricted Stock Units are granted subject to the following terms:

Name of Recipient:
<first_name> <last_name>
 
 
Total Number of
Restricted Stock
Units Granted:
<shares_awarded>
 
 
Grant Date:
<award_date>
 
 
Vesting Schedule:
So long as you continue as a non‑employee director on the Board of Directors of Schwab (“Board”) or the board of a subsidiary of Schwab or an employee of Schwab or its subsidiaries and subject to the terms of the Restricted Stock Unit Agreement, the Restricted Stock Units subject to this grant will become vested and distributable on the following dates and in the following amounts, subject to the restrictions below:
 
 
 
Number of Restricted Stock Units on Vesting Date:
 
                          <vesting_schedule>

Restricted Stock Units are an unfunded and unsecured obligation of Schwab. Any vested Restricted Stock Units will be paid in Shares as provided in the Restricted Stock Unit Agreement.

You and Schwab agree that this grant is issued under and governed by the terms and conditions of the Plan and the Restricted Stock Unit Agreement, both of which are made a part of this notice. Please review the Restricted Stock Unit Agreement and the Plan carefully, as they explain the terms and conditions of this grant. You agree that Schwab may deliver electronically all documents relating to the Plan or this grant (including, without limitation, prospectuses required by the Securities and Exchange Commission) and all other documents that Schwab is required to deliver to its stockholders. By accepting this grant, you agree to all of the terms and conditions described above, in the Restricted Stock Unit Agreement and in the Plan.



1

THE CHARLES SCHWAB CORPORATION
[2013 STOCK INCENTIVE PLAN]
NON-EMPLOYEE DIRECTOR
RETAINER RESTRICTED STOCK UNIT AGREEMENT

Payment for Units
No payment is required for the Restricted Stock Units that you are receiving. Restricted Stock Units are an unfunded and unsecured obligation of The Charles Schwab Corporation (“Schwab”).
Vesting
Subject to the provisions of this Restricted Stock Unit Agreement (“Agreement”), a Restricted Stock Unit becomes vested and distributable as of the earliest of the following:
(1) The applicable Vesting Date for the Restricted Stock Unit indicated in the Notice of Non-Employee Director Retainer Restricted Stock Unit Grant.
(2) Your death.
(3) Your disability.
(4) Your separation from service, if the separation qualifies as a retirement.
(5) A change in control.
If you become a common-law employee of Schwab or a subsidiary of Schwab (“subsidiary” means a subsidiary corporation as defined in section 424(f) of the Internal Revenue Code of 1986, as amended (the “Code”)), then the Restricted Stock Units will continue to vest as described in the Notice of Non-Employee Director Retainer Restricted Stock Unit Grant so long as you continue as either a non‑employee director or an employee of Schwab or its subsidiaries.
Unvested units will be considered “Restricted Stock Units.” If your service terminates for any reason, then your Restricted Stock Units will be forfeited to the extent that they have not vested before the termination date and do not vest as a result of the termination. This means that the Restricted Stock Units will immediately revert to Schwab. You will receive no payment for Restricted Stock Units that are forfeited. Schwab determines when your service terminates for this purpose.
Definition of Fair
Market Value

“Fair market value” means the average of the high and low price of a Share (as defined below) as reported on the New York Stock Exchange on the applicable determination date.
Definition of
Disability
For all purposes of this Agreement, "disability" means that you have a disability that qualifies as such under section 409A of the Code.

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Definition of
Retirement
For all purposes of this Agreement, "retirement" means your resignation or removal from the Board of Directors of Schwab (the “Board”) or a subsidiary of Schwab at any time after you have attained age 70 or completed 5 continuous years of service as a non‑employee director on the Board and/or a subsidiary of Schwab. Serving simultaneously for a year on the Board and the board of a subsidiary of Schwab is counted as one year total for purposes of determining years of service. If you serve on the Board and the board of a subsidiary of Schwab, you must leave both boards to qualify for retirement.
Definition of
Change in Control
For all purposes of this Agreement, "change in control" means an event that qualifies as a change in control event under section 409A of the Code and as a change in control as defined in [The Charles Schwab Corporation 2013 Stock Incentive Plan] (the “Plan”).
Definition of
Separation From
Service
For all purposes of this Agreement, "separation from service" means a separation from service as defined under section 409A of the Code.
Payment of Shares
Any vested Restricted Stock Units will be paid in shares of common stock of Schwab (“Shares”) as provided herein. Shares that have become vested and distributable under this Agreement shall be distributed as follows:
(1) Shares that vest and become distributable on a Vesting Date shall be distributed within 30 days of the Vesting Date.
(2) Shares that vest and become distributable on death, disability or a change in control shall be distributable within 90 days of such event.
(3) Shares that vest and become distributable on a separation from service that qualifies as a retirement shall be distributed within 90 days of the separation from service. Notwithstanding the foregoing, if at the time of your separation from service, you are a “specified employee”, you will receive your Shares six months after your separation from service. "Specified Employee" means a "specified employee" within the meaning of section 409A of the Code and any regulatory guidance promulgated thereunder, provided that in determining the compensation of individuals for this purpose, the definition of compensation in Treas. Reg. § 1.415(c)-2(d)(2) shall be used.

2

Restrictions on
Restricted Stock
Units
You may not assign, sell, transfer, pledge, encumber, or otherwise dispose of any Restricted Stock Units without Schwab’s written consent. Schwab will deliver Shares to you only after the Restricted Stock Units vest and after all other terms and conditions in this Agreement have been satisfied.
Restricted Stock Units may not be assigned, transferred, pledged, encumbered, or otherwise disposed of in any settlement, judgment, decree or order (including approval of a property settlement agreement) that relates to the provision of child support, alimony payments, or marital property rights or domestic property rights.
Delivery of Shares
After Death
In the event that Shares are distributable upon your death, the Shares will be delivered to your beneficiary or beneficiaries. You may designate one or more beneficiaries by filing a beneficiary designation form with Schwab. You may change your beneficiary designation by filing a new form with Schwab at any time prior to your death. If you do not designate a beneficiary or if your designated beneficiary predeceases you, then your Shares will be delivered to your estate.
Restrictions on
Resale
You agree not to sell any Shares at a time when applicable laws, Schwab’s policies, or an agreement between Schwab and its underwriters prohibit a sale. This restriction will apply as long as your service continues and for such period of time after the termination of your service as Schwab may specify.
No Stockholder
Rights
Your Restricted Stock Units carry no voting or other stockholder rights. You have no rights as a Schwab stockholder until your Restricted Stock Units are settled by issuing Shares.
Contribution of
Par Value
On your behalf, Schwab will contribute to its capital an amount equal to the par value of the Shares issued to you.
Dividend
Equivalent Rights
If Schwab pays cash dividends on Shares, you will receive cash equal to the dividend per Share multiplied by the number of unvested Restricted Stock Units. Each such payment shall be made as soon as practicable following the payment of the actual dividend, but in no event beyond March 15 of the year following the year the actual dividend is paid.
No Right to
Remain Employee
or Director
Nothing in this Agreement will be construed as giving you the right to be retained as an employee, contingent worker or director of Schwab and its subsidiaries for any specific duration or at all.
Limitation on
Payments
If a payment from the Plan would constitute an excess parachute payment under section 280G of the Code or if there have been
 
 

3

 
certain securities law violations, then your grant may be reduced or forfeited and you may be required to disgorge any profit that you have realized from your grant.

If a disqualified individual receives a payment or transfer under the Plan that would constitute an excess parachute payment under section 280G of the Code, such payment will be reduced, as described below. Generally, someone is a “disqualified individual” under section 280G if he or she is (a) an officer of Schwab, (b) a member of the group consisting of the highest paid 1% of the employees of Schwab or, if less, the highest paid 250 employees of Schwab, or (c) a 1% stockholder of Schwab. For purposes of this section on “Limitation on Payments,” the term “Schwab " will include affiliated corporations to the extent determined by the independent auditors most recently selected by the Schwab Board of Directors (the “Auditors”) in accordance with section 280G(d)(5) of the Code.

In the event that the Auditors determine that any payment or transfer in the nature of compensation to or for your benefit, whether paid or payable (or transferred or transferable) pursuant to the terms of the Plan or otherwise (a “Payment”), would be nondeductible for federal income tax purposes because of the provisions concerning “excess parachute payments” in section 280G of the Code, then the aggregate present value of all Payments will be reduced (but not below zero) to the Reduced Amount (as defined below); provided, however, that the Compensation Committee (the “Compensation Committee”) of the Board of Schwab may specify in writing that the grant will not be so reduced and will not be subject to reduction under this section.

For this purpose, the “Reduced Amount” will be the amount, expressed as a present value, which maximizes the aggregate present value of the Payments without causing any Payment to be nondeductible by Schwab because of section 280G of the Code.

If the Auditors determine that any Payment would be nondeductible because of section 280G of the Code, then Schwab will promptly give you notice to that effect and a copy of the detailed calculation of the Reduced Amount. The Auditors will determine which and how much of the Payments will be eliminated or reduced (such that the aggregate present value of the Payments equals the Reduced Amount). Schwab will notify you promptly of the Auditor's determination. Present value will be determined in accordance with section 280G(d)(4) of the

4

 
Code. The Auditors’ determinations will be binding upon you and Schwab and will be made within 60 days of the date when a Payment becomes payable or transferable.

As a result of uncertainty in the application of section 280G of the Code at the time of an initial determination by the Auditors, it is possible that Payments will have been made by Schwab that should not have been made (an “Overpayment”) or that additional Payments that will not have been made by Schwab could have been made (an “Underpayment”) consistent in each case with the calculation of the Reduced Amount. In the event the Auditors, based upon the assertion of a deficiency by the Internal Revenue Service against you or Schwab that the Auditors believe has a high probability of success, determine that an Overpayment has been made, the amount of such Overpayment will be paid by you to Schwab on demand, together with interest at the applicable federal rate provided in section 7872(f)(2) of the Code. However, no amount will be payable by you to Schwab if and to the extent that such payment would not reduce the amount that is subject to taxation under section 4999 of the Code. In the event the Auditors determine that an Underpayment has occurred, such Underpayment will promptly be paid or transferred by Schwab to or for your benefit, together with interest at the applicable federal rate provided in section 7872(f)(2) of the Code, provided that no such Underpayment related to Shares distributable under this Agreement shall be paid beyond the deadline for making such payments under section 409A of the Code.
Plan
Administration
The Plan administrator has discretionary authority to make all determinations related to this grant and to construe the terms of the Plan, the Notice of Non-Employee Director Retainer Restricted Stock Unit Grant, and this Agreement. The Plan administrator’s determinations are conclusive and binding on all persons, and they are entitled to deference upon any review.
Adjustments
In the event of a stock split, a stock dividend or a similar change in the Shares, the number of Restricted Stock Units that remain subject to forfeiture will be adjusted accordingly.
Severability
In the event that any provision of this Agreement is held invalid or unenforceable, the provision will be severable from, and such invalidity or unenforceability will not be construed to have any effect on, the remaining provisions of this Agreement.
Applicable Law
This Agreement will be interpreted and enforced under the laws of the State of Delaware (without regard to their choice-of-law provisions), as such laws are applied to contracts entered into and performed in Delaware.

5

The Plan and
Other Agreements
The text of the Plan is incorporated in this Agreement by reference. This Agreement, the Notice of Non-Employee Director Retainer Restricted Stock Unit Grant and the Plan constitute the entire understanding between you and Schwab regarding this grant. Any prior agreements, commitments or negotiations concerning this grant are superseded. This Agreement may be amended only by another written agreement, signed by both parties and approved by the Compensation Committee. If there is any inconsistency or conflict between any provision of this Agreement and the Plan, the terms of the Plan will control.

BY ACCEPTING THIS GRANT, YOU AGREE TO ALL OF THE TERMS AND
CONDITIONS DESCRIBED ABOVE AND IN THE PLAN.


6

EXHIBIT 10.399


THE CHARLES SCHWAB CORPORATION
2013 STOCK INCENTIVE PLAN
NOTICE OF NON-EMPLOYEE DIRECTOR
DEFERRED COMPENSATION STOCK OPTION GRANT

You have been granted the following option to purchase common stock (“Shares”) of The Charles Schwab Corporation (“Schwab”) under The Charles Schwab Corporation 2013 Stock Incentive Plan (the “Plan”):


Name of Recipient:

<first_name> <last_name>
Total Number of
Shares Granted:

<shares_awarded>
Exercise Price per
Share:

<award_price>
Grant Date:

<award_date>
Expiration Date:

<expire_date>
Vesting Schedule:
This option is fully vested and non-forfeitable at all times.


You and Schwab agree that this option is granted under and governed by the terms and conditions of the Plan, The Charles Schwab Corporation Directors' Deferred Compensation Plan II and the Stock Option Agreement, which are made a part of this notice. Please review the Plan and the Stock Option Agreement carefully, as they explain the terms and conditions of this option. You agree that Schwab may deliver electronically all documents relating to the Plan or this option (including, without limitation, prospectuses required by the Securities and Exchange Commission) and all other documents that Schwab is required to deliver to its stockholders. By accepting this grant, you agree to all of the terms and conditions described above, in the Deferred Compensation Stock Option Agreement and in the Plan.
 


1


THE CHARLES SCHWAB CORPORATION
2013 STOCK INCENTIVE PLAN
NON-EMPLOYEE DIRECTOR
DEFERRED COMPENSATION STOCK OPTION AGREEMENT

Tax Treatment
This option is a non-qualified stock option and is not intended to qualify as an incentive stock option under federal tax laws.
Vesting
This option has been issued under The Charles Schwab Corporation 2013 Stock Incentive Plan (the “Plan”) pursuant to your deferral election under The Charles Schwab Corporation Directors’ Deferred Compensation Plan II (the "Deferred Compensation Plan") and is fully vested and non-forfeitable at all times.
Exercise
Procedures
You or your representative may exercise this option by following the procedures prescribed by The Charles Schwab Corporation (“Schwab”). If this option is being exercised by your representative, your representative must furnish proof satisfactory to Schwab of your representative's right to exercise this option. After completing the prescribed procedures, Schwab will cause to be issued the shares of common stock of Schwab (“Shares”) purchased, which will be registered in the name of the person exercising this option.
Forms of
Payment
When you submit your notice of exercise, you must pay the option exercise price for the Shares you are purchasing. Payment may be made in one of the following forms:
 
 
 
•    Cash in your Schwab brokerage account in an amount sufficient to cover the option exercise price of the Shares and the required tax withholding (this exercise method is sometimes referred to as “Exercise and Hold”).
 
 
 
•    Shares surrendered to Schwab. These Shares will be valued at their fair market value on the date when the new Shares are purchased. (This exercise method is sometimes referred to as a “Stock Swap.”)
 
 
 
•    By delivery (in a manner prescribed by Schwab) of an irrevocable direction to Charles Schwab & Co., Inc. to sell Shares (including Shares to be issued upon exercise of this option) and to deliver all or part of the sale proceeds to Schwab in payment of all or part of the exercise price. (This exercise method is sometimes referred to as “Exercise and Sell” or “Sell to Cover.”)
 
 
Term
This option expires no later than the 10th anniversary of the Grant Date but may expire earlier upon your termination of service, as described below.

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Termination of
Service as
Non‑Employee
Director
This option will expire on the date three months following the date of your termination of service as a non-employee director if such service terminates for any reason other than on account of becoming a common‑law employee of Schwab or its subsidiaries, death, disability or retirement. The terms “disability” and “retirement” are defined below.
If you become an employee of Schwab or its subsidiaries, this option will expire on the date three months following the date you cease to be an employee of Schwab and its subsidiaries (other than by reason of disability, death or retirement). If you cease to be a non-employee director or an employee of Schwab and its subsidiaries by reason of your disability or death, then this option will expire on the first anniversary of the date of your death or disability.
If you cease to be a non‑employee director by reason of your retirement, then this option will expire on the 10th anniversary of the Grant Date.
Definition of
Disability
For all purposes of this Agreement, "disability" means that you are unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which has lasted, or can be expected to last, for a continuous period of not less than 12 months or which can be expected to result in death as determined by Schwab in its sole discretion.
Definition of
Retirement
For all purposes of this Agreement, "retirement" means your resignation or removal from the Board of Directors of Schwab (“Board”) or the board of a subsidiary of Schwab at any time after you have attained age 70 or completed 5 continuous years of service as a non‑employee director on the Board and/or the board of a subsidiary of Schwab. Serving simultaneously for a year on the Board and the board of a subsidiary of Schwab is counted as one year total for purposes of determining years of service. If you serve on the Board and the board of a subsidiary of Schwab, you must leave both boards to qualify for retirement.
Restrictions on
Exercise and
Issuance or
Transfer of
Shares
You cannot exercise this option and no Shares may be issued under this option if the issuance of Shares at that time would violate any applicable law, regulation or rule. Schwab may impose restrictions upon the sale, pledge, or other transfer of Shares (including the placement of appropriate legends on stock certificates) if, in the judgment of Schwab and its counsel, such restrictions are necessary or desirable to comply with applicable law, regulations, or rules.
 
 

2


No Stockholder
Rights
You, or your estate or heirs, have no rights as a stockholder of Schwab until you have exercised this option by giving the required notice to the Company and paying the exercise price. No adjustments are made for dividends or other rights if the applicable record date occurs before you exercise this option, except as described in the Plan.
No Right to
Remain
Director or
Employee

Nothing in this Agreement will be construed as giving you the right to be retained as a director or an employee of Schwab and its subsidiaries.
Transfer of
Option
In general, only you may exercise this option prior to your death. You may not assign, sell, transfer, pledge, encumber, or otherwise dispose of this option, except as provided below. For instance, you may not sell this option or use it as security for a loan. If you attempt to do any of these things, this option will immediately become invalid.

You may dispose of this option in your will or in a beneficiary designation. You may designate one or more beneficiaries by filing a beneficiary designation form with Schwab. You may change your beneficiary designation by filing a new form with Schwab at any time prior to your death. If you do not designate a beneficiary or if your designated beneficiary predeceases you, then your options will be exercisable by your estate.

This option may not be assigned, transferred, pledged, encumbered, or otherwise disposed of in any settlement, judgment, decree or order (including approval of a property settlement agreement) that relates to the provision of child support, alimony payments, or marital property rights or domestic property rights.

Plan
Administration
The Plan administrator has discretionary authority to make all determinations related to this grant and to construe the terms of the Plan and this Agreement. The Plan administrator’s determinations are conclusive and binding on all persons, and they are entitled to deference upon any review.

Adjustments
In the event of a stock split, a stock dividend or a similar change in the Shares, the Compensation Committee of the Board shall adjust the number of Shares covered by this option and the exercise price per Share.

Severability
In the event that any provision of this Agreement is held invalid or unenforceable, the provision will be severable from, and such invalidity or unenforceability will not be construed to have any effect on, the remaining provisions of this Agreement.

 
 
 
 
 
 

3


Applicable Law
This Agreement will be interpreted and enforced under the laws of the State of Delaware (without regard to their choice-of-law provisions), as such laws are applied to contracts entered into and performed in Delaware.

The Plan and
Other
Agreements
The text of the Plan is incorporated in this Agreement by reference. This Agreement and the Plan constitute the entire understanding between you and Schwab regarding this option. Any prior agreements, commitments or negotiations concerning this option are superseded. This Agreement may be amended only by another written agreement, signed by both parties. If there is any inconsistency or conflict between any provision of this Agreement and the Plan, the terms of the Plan will control.


BY ACCEPTING THIS OPTION GRANT,
YOU AGREE TO ALL OF THE TERMS AND CONDITIONS
DESCRIBED ABOVE AND IN THE PLANS.


4


EXHIBIT 10.401

THE CHARLES SCHWAB CORPORATION
2013 STOCK INCENTIVE PLAN
NOTICE OF NON-EMPLOYEE DIRECTOR
DEFERRED COMPENSATION RESTRICTED STOCK UNIT GRANT

You have been granted Restricted Stock Units. A Restricted Stock Unit represents the right to receive, subject to certain conditions, a share of common stock (“Shares”) of The Charles Schwab Corporation (“Schwab”), under The Charles Schwab Corporation 2013 Stock Incentive Plan (the “Plan”). Your Restricted Stock Units are granted subject to the following terms:

Name of Recipient:
 
Total Number of
Restricted Stock
Units Granted:

 
Grant Date:

 
Vesting Schedule:
These Restricted Stock Units are fully vested and non-forfeitable at all times.

Restricted Stock Units are an unfunded and unsecured obligation of Schwab. Restricted Stock Units will be paid in Shares as provided in the Restricted Stock Unit Agreement.

You and Schwab agree that these units are granted under and governed by the terms and conditions of the Plan, The Charles Schwab Corporation Directors' Deferred Compensation Plan II and the Restricted Stock Unit Agreement, which are made a part of this notice. Please review the Plan and Restricted Stock Unit Agreement carefully, as they explain the terms and conditions of these units. You agree that Schwab may deliver electronically all documents relating to the Plan or these units (including, without limitation, prospectuses required by the Securities and Exchange Commission) and all other documents that Schwab is required to deliver to its stockholders. By accepting this grant, you agree to all of the terms and conditions described above, in the Deferred Compensation Restricted Stock Unit Agreement and in the Plan.

1


THE CHARLES SCHWAB CORPORATION
2013 STOCK INCENTIVE PLAN
NON-EMPLOYEE DIRECTOR
DEFERRED COMPENSATION RESTRICTED STOCK UNIT AGREEMENT

Vesting
These restricted stock units have been issued under The Charles Schwab Corporation 2013 Stock Incentive Plan (the “Plan”) pursuant to your deferral election under The Charles Schwab Corporation Directors’ Deferred Compensation Plan II (the "Deferred Compensation Plan") and are fully vested and non-forfeitable at all times.
Nature of Units
Your units are mere bookkeeping entries. They represent only The Charles Schwab Corporation’s (“Schwab’s”) unfunded and unsecured promise to issue shares of Schwab common stock (“Shares”) on a future date. As a holder of units, you have no rights other than the rights of a general creditor of Schwab.
Voting Rights and
Dividend Equivalent
Rights
Your units carry no voting or dividend rights. If Schwab pays cash dividends on Shares, any dividend equivalents paid on Restricted Stock Units shall be credited to you as additional Restricted Stock Units. Otherwise, you have no rights as a Schwab stockholder until your units are settled by issuing Shares.
Settlement of
Units
Your units will be settled in accordance with the terms of the Deferred Compensation Plan. At the time of settlement, you will receive one Share for each unit.
Other Terms and
Conditions
Your units will be governed by all of the applicable terms and conditions of the Deferred Compensation Plan, which are made part of this Restricted Stock Unit Agreement (“Agreement”).
Restrictions on
Restricted Stock
Units
You may not assign, sell, transfer, pledge, encumber, or otherwise dispose of any Restricted Stock Units. Schwab will deliver Shares to you in accordance with the terms of the Deferred Compensation Plan.
Restricted Stock Units may not be assigned, transferred, pledged, encumbered, or otherwise disposed of in any settlement, judgment, decree or order (including approval of a property settlement agreement) that relates to the provision of child support, alimony payments, or marital property rights or domestic property rights.
Delivery of
Shares After
Death
In the event that Shares are distributable upon your death, the Shares will be delivered to your beneficiary or beneficiaries. You may designate one or more

1


 
beneficiaries by filing a beneficiary designation form with Schwab. You may change your beneficiary designation by filing a new form with Schwab at any time prior to your death. If you do not designate a beneficiary or if your designated beneficiary predeceases you, then your Shares will be delivered to your estate.
Restrictions on
Resale
You agree not to sell any shares at a time when applicable laws, Schwab policies, or an agreement between Schwab and its underwriters prohibit a sale. This restriction will apply as long as your service continues and for such period of time after the termination of your service as Schwab may specify.
Plan Administration
The Plan administrator has discretionary authority to make all determinations related to this grant and to construe the terms of the Plan, the Notice of Non-Employee Director Deferred Compensation Restricted Stock Unit Grant and this Agreement. The Plan administrator’s determinations are conclusive and binding on all persons, and they are entitled to deference upon any review.
Adjustments
In the event of a stock split, a stock dividend or a similar change in Shares, the number of your units will be adjusted accordingly, as Schwab may determine pursuant to the Plan.
The Plan and Other
Agreements
The text of the Plan and the Deferred Compensation Plan (the "Plans") are incorporated in this Agreement by reference. This Agreement and the Plans constitute the entire understanding between you and Schwab regarding these units. Any prior agreements, commitments or negotiations concerning these units are superseded. This Agreement may be amended only by another written agreement, signed by both parties. If there is any inconsistency or conflict between any provision of this Agreement and the Plans, the terms of the Plans will control.

BY ACCEPTING THIS GRANT,
YOU AGREE TO ALL OF THE TERMS AND CONDITIONS
DESCRIBED ABOVE AND IN THE PLANS.

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EXHIBIT 10.402


THE CHARLES SCHWAB CORPORATION
[2013 STOCK INCENTIVE PLAN]
NOTICE OF NONQUALIFIED STOCK OPTION GRANT
    
You have been granted the following option to purchase common stock (“Shares”) of The Charles Schwab Corporation (“Schwab”) under [The Charles Schwab Corporation 2013 Stock Incentive Plan] (the “Plan”). A stock option represents the right to purchase Shares at a fixed price, called the exercise price, within a certain period of time. Your option is granted subject to the following terms:

Name of Recipient:

<first_name> <last_name>
Total Number of
Shares Granted:

<shares_awarded>
Exercise Price Per
Share:

<award_price>
Grant Date:

<award_date>
Expiration Date:

<expire_date>
Vesting Schedule
So long as you remain employed in good standing by Schwab or its subsidiaries and subject to the terms of the Nonqualified Stock Option Agreement, you will acquire the right to exercise this option (become "vested" in this option) on the following dates and in the following amounts:

Number of Shares on Vesting Date:
<vesting_schedule>




You and Schwab agree that this option is granted under and governed by the terms and conditions of the Plan and the Nonqualified Stock Option Agreement, both of which are made a part of this notice. Please review the Plan and the Nonqualified Stock Option Agreement carefully, as they explain the terms and conditions of this option. You agree that Schwab may deliver electronically all documents relating to the Plan or this option (including, without limitation, prospectuses required by the Securities and Exchange Commission) and all other documents that Schwab is required to deliver to its stockholders.
  




THE CHARLES SCHWAB CORPORATION
[2013 STOCK INCENTIVE PLAN]
NONQUALIFIED STOCK OPTION AGREEMENT


Tax Treatment
This option is a nonqualified stock option and is not intended to qualify as an incentive stock option under federal tax laws.
Vesting
Subject to the provisions of this Nonqualified Stock Option Agreement (“Agreement”), this option becomes vested in installments as described in the Notice of Nonqualified Stock Option Grant.
Accelerated
Vesting
This option will become fully exercisable if your service with The Charles Schwab Corporation (“Schwab”) and its subsidiaries terminates on account of your death or disability.
This option will become fully exercisable if your service with Schwab and its subsidiaries terminates on account of your retirement as defined below.
If, prior to the date your service terminates, Schwab is subject to a “change in control” (as defined in [The Charles Schwab Corporation 2013 Stock Incentive Plan] (the “Plan”)), this option will become fully exercisable immediately preceding the change in control. If the Compensation Committee (or its delegate) (the “Compensation Committee”) of the Board of Directors of Schwab (the “Board”) determines that a change in control is likely to occur, Schwab will advise you and this option will become fully exercisable as of the date 10 days prior to the anticipated date of the change in control.
Definition of
Disability
For all purposes of this Agreement, "disability" means that you have a disability such that you have been determined to be eligible for benefits under Schwab’s long-term disability plan or if you are not covered by Schwab’s long-term disability plan, you are unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which has lasted, or can be expected to last, for a continuous period of not less than 12 months or which can be expected to result in death as determined by Schwab in its sole discretion.
Definition of
Retirement
For all purposes of this Agreement, “retirement” will mean any termination of employment with Schwab and its subsidiaries for any reason other than death at any time after the earlier of when you attain age 55, but only if, at the time of your termination, you have been credited with at least 10 years of service or when you attain age 65, but only if, at the time of your termination, you have been credited with at least 5 years of service.



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The phrase "years of service" above has the same meaning given to it under the SchwabPlan Retirement Savings and Investment Plan (or any successor plan).
Exercise
Procedures
You or your representative may exercise this option by following the procedures prescribed by Schwab. If this option is being exercised by your representative, your representative must furnish proof satisfactory to Schwab of your representative’s right to exercise this option. After completing the prescribed procedures, Schwab will cause to be issued the shares of common stock of Schwab (“Shares”) purchased, which will be registered in the name of the person exercising this option.
Forms of
Payment
When you submit your notice of exercise, you must pay the option exercise price for the Shares you are purchasing. Payment may be made in one of the following forms:
 
 
 
• Cash in your Schwab brokerage account in an amount sufficient to cover the option exercise price of the Shares and the required tax withholding (this exercise method is sometimes referred to as “Exercise and Hold”).
 
 
 
• Shares are surrendered to Schwab. These shares will be valued at their fair market value on the date when the new Shares are purchased. (This exercise method is sometimes referred to as a “Stock Swap.”)
 
 
 
• By delivery (in a manner prescribed by Schwab) of an irrevocable direction to Charles Schwab & Co., Inc. to sell Shares (including Shares to be issued upon exercise of this option) and to deliver all or part of the sale proceeds to Schwab in payment of all or part of the exercise price. (This exercise method is sometimes referred to as “Exercise and Sell” or “Sell to Cover.”)
 
 
Term
This option expires no later than the Expiration Date specified in the Notice of Nonqualified Stock Option Grant but may expire earlier upon your termination of service, as described below.
Termination of
Service
This option will expire on the date three months following the date of your termination of employment with Schwab and its subsidiaries for any reason other than on account of death, disability or retirement. The terms “disability” and “retirement” are defined above.
If you cease to be an employee of Schwab and its subsidiaries by reason of your disability or death, then this option will expire on the first anniversary of the date of your death or disability.


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If you cease to be an employee of Schwab and its subsidiaries by reason of your retirement and have been credited with at least 5 years of service, then this option will expire on the earlier of the fifth anniversary of the date of your termination or the Expiration Date specified in the Notice of Nonqualified Stock Option Grant. If you cease to be an employee of Schwab and its subsidiaries by reason of your retirement and have been credited with at least 15 years of service, then this option will expire on the Expiration Date specified in the Notice of Nonqualified Stock Option Grant.
Effect of
Entitlement to
Severance
If you are entitled to severance benefits under The Charles Schwab Severance Pay Plan (or any successor plan) and have signed your Severance Agreement, then vesting of this option shall be determined under the terms of that plan.
Cancellation of
Options
To the fullest extent permitted by applicable laws, this option will immediately be cancelled and will expire in the event that Schwab terminates your employment on account of conduct contrary to the best interests of Schwab, including, without limitation, conduct constituting a violation of law or Schwab policy, fraud, theft, conflict of interest, dishonesty or harassment. The determination whether your employment has been terminated on account of conduct inimical to the best interests of Schwab shall be made by Schwab in its sole discretion.
Withholding
Taxes and
Stock
Withholding
You will not be allowed to exercise this option unless you make arrangements acceptable to Schwab to pay any applicable withholding of income and employment taxes that may be due as a result of the option exercise. These arrangements may include without limitation withholding Shares that otherwise would be issued to you when you exercise this option. In the event you do not elect to pay applicable withholding taxes in cash, Schwab shall withhold Shares. Schwab may withhold the number of whole Shares, valued at the fair market value on the applicable date, required to satisfy such applicable withholding taxes. Schwab will round up to the next whole Share to cover the applicable withholding taxes, and any amounts in excess of the applicable withholding taxes resulting from rounding up to the next whole Share will be added to your federal income tax withholdings. While Schwab will withhold to satisfy applicable withholding taxes, you acknowledge that, regardless of any action taken by Schwab, the ultimate liability for all income tax, social insurance, payroll tax, fringe benefits tax, payment on account or other tax-related items related to your participation in the Plan and legally applicable to you, is and remains your responsibility and may exceed the amount, if any, actually withheld by Schwab.
Restrictions on
Exercise and
You cannot exercise this option and no Shares may be issued under this option if the issuance of Shares at that time would violate any
 
 

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Issuance or
Transfer of
Shares
applicable law, regulation, or rule. Schwab may impose restrictions upon the sale, pledge, or other transfer of Shares (including the placement of appropriate legends on stock certificates) if, in the judgment of Schwab and its counsel, such restrictions are necessary or desirable to comply with applicable law, regulations or rules.
No
Stockholder
Rights
You, or your estate or heirs, have no rights as a stockholder of Schwab until you have exercised this option by giving the required notice to Schwab and paying the exercise price. No adjustments are made for dividends or other rights if the applicable record date occurs before you exercise this option, except as described in the Plan.
No Right to
Employment
Nothing in this Agreement will be construed as giving you the right to be retained as an employee, consultant, or director of Schwab and its subsidiaries for any specific duration or at all.
Transfer of
Option
In general, only you may exercise this option prior to your death. You may not transfer or assign this option, except as provided below. For instance, you may not sell this option or use it as security for a loan. If you attempt to do any of these things, this option will immediately become invalid.
 
You may dispose of this option in your will or in a beneficiary designation. You may designate one or more beneficiaries by filing a beneficiary designation form with Schwab. You may change your beneficiary designation by filing a new form with Schwab at any time prior to your death. If you do not designate a beneficiary or if your designated beneficiary predeceases you, then your options will be exercisable by your estate.
This option may not be assigned, transferred, pledged, encumbered, or otherwise disposed of in any settlement, judgment, decree or order (including approval of a property settlement agreement) that relates to the provision of child support, alimony payments, or marital property rights or domestic property rights.
Limitation on
Payments
If a payment from the Plan would constitute an excess parachute payment or if there have been certain securities law violations, then your grant may be reduced or cancelled and you may be required to disgorge any profit that you have realized from your grant.

If a disqualified individual receives a payment or transfer under the Plan that would constitute an excess parachute payment under the Internal Revenue Code of 1986, as amended (the “Code”), such payment will be reduced, as described below. Generally, someone is a “disqualified individual” under section 280G if he or she is (a) an officer of Schwab, (b) a member of the group consisting of the highest paid 1% of the employees of Schwab or, if less, the highest paid 250
 
 

4



 
employees of Schwab, or (c) a 1% stockholder of Schwab.
For purposes of this section on “Limitation on Payments,” the term “Schwab " will include affiliated corporations to the extent determined by the Auditors (as defined below) in accordance with section 280G(d)(5) of the Code.
In the event that the independent auditors most recently selected by the Board (the “Auditors”) determine that any payment or transfer in the nature of compensation to or for your benefit, whether paid or payable (or transferred or transferable) pursuant to the terms of the Plan or otherwise (a “Payment”), would be nondeductible for federal income tax purposes because of the provisions concerning “excess parachute payments” in section 280G of the Code, then the aggregate present value of all Payments will be reduced (but not below zero) to the Reduced Amount (as defined below); provided, however, that the Compensation Committee may specify in writing that the grant will not be so reduced and will not be subject to reduction under this section.
For this purpose, the “Reduced Amount” will be the amount, expressed as a present value, which maximizes the aggregate present value of the Payments without causing any Payment to be nondeductible by Schwab because of section 280G of the Code.
If the Auditors determine that any Payment would be nondeductible because of section 280G of the Code, then Schwab will promptly give you notice to that effect and a copy of the detailed calculation and of the Reduced Amount. You may then elect, in your discretion, which and how much of the Payments will be eliminated or reduced (as long as after such election, the aggregate present value of the Payments equals the Reduced Amount, and your election is consistent with any mandatory eliminations or reductions that apply under other agreements or the Plan). You will advise Schwab in writing of your election within 10 days of receipt of the notice. If you do not make such an election within the 10-day period, then Schwab may elect which and how much of the Payments will be eliminated or reduced (as long as after such election the aggregate present value of the Payments equals the Reduced Amount). Schwab will notify you promptly of its election. Present value will be determined in accordance with section 280G(d)(4) of the Code. The Auditors’ determinations will be binding upon you and Schwab and will be made within 60 days of the date when a Payment becomes payable or transferable.
As promptly as practicable following these determinations and elections, Schwab will pay or transfer to or for your benefit such amounts as are then due to you under the Plan, and will promptly pay

5



 
or transfer to or for your benefit in the future such amounts as become due to you under the Plan.
As a result of uncertainty in the application of section 280G of the Code at the time of an initial determination by the Auditors, it is possible that Payments will have been made by Schwab that should not have been made (an “Overpayment”) or that additional Payments that will not have been made by Schwab could have been made (an “Underpayment”) consistent in each case with the calculation of the Reduced Amount. In the event the Auditors, based upon the assertion of a deficiency by the Internal Revenue Service against you or Schwab that the Auditors believe has a high probability of success determine that an Overpayment has been made, such Overpayment will be treated for all purposes as a loan to you that you will repay to Schwab on demand, together with interest at the applicable federal rate provided in section 7872(f)(2) of the Code. However, no amount will be payable by you to Schwab if and to the extent that such payment would not reduce the amount that is subject to taxation under section 4999 of the Code. In the event the Auditors determine that an Underpayment has occurred, such Underpayment will promptly be paid or transferred by Schwab to or for your benefit, together with interest at the applicable federal rate provided in section 7872(f)(2) of the Code.
Plan
Administration
The Plan administrator has discretionary authority to make all determinations related to this option and to construe the terms of the Plan, the Notice of Nonqualified Stock Option Grant, and this Agreement. The Plan administrator’s determinations are conclusive and binding on all persons, and they are entitled to deference upon any review.
Adjustments
In the event of a stock split, a stock dividend or a similar change in Shares, the Compensation Committee, in its discretion, may adjust the number of Shares covered by this option and the exercise price per Share.
Severability
In the event that any provision of this Agreement is held invalid or unenforceable, the provision will be severable from, and such invalidity or unenforceability will not be construed to have any effect on, the remaining provisions of this Agreement.
Applicable
Law
This Agreement will be interpreted and enforced under the laws of the State of Delaware (without regard to their choice-of-law provisions), as such laws are applied to contracts entered into and performed in Delaware.
The Plan and Other
Agreements
The text of the Plan is incorporated in this Agreement by reference. This Agreement (including the Additional Terms and Conditions for Non-U.S. Recipients and the Country-Specific Provisions), the Notice

6



 
of Nonqualified Stock Option Grant, and the Plan constitute the entire understanding between you and Schwab regarding this option. Any prior agreements, commitments or negotiations concerning this option are superseded. This Agreement may be amended only by another written agreement approved by the Compensation Committee and signed by both parties. If there is any inconsistency or conflict between any provision of this Agreement and the Plan, the terms of the Plan will control. Nothing in this Agreement gives you the ability to negotiate or change the key terms and conditions described above, in the Notice of Nonqualified Stock Option Grant and in the Plan.

7




ADDITIONAL TERMS AND CONDITIONS FOR NON-U.S. RECIPIENTS

The additional (or, if so indicated, different) terms and conditions set forth below are specifically incorporated into the Nonqualified Stock Option Agreement (the “Agreement”) for awards granted outside the United States (“U.S.”). These terms and conditions govern this option granted under the Plan if you reside or work outside of the U.S. Due to the complexities of legal, regulatory and tax issues, you should seek appropriate professional advice as to how the relevant laws in the applicable country may apply to your individual situation.

Capitalized terms used but not defined herein shall have the meanings ascribed to them in the Plan and/or the Agreement.

Withholding Taxes and Stock Withholding: The following provisions supplement the Withholding Taxes and Stock Withholding section of the Agreement:

You acknowledge that, regardless of any action taken by Schwab or, if different, your employer (“Employer”), the ultimate liability for all income tax, social insurance, payroll tax, fringe benefits tax, payment on account or other tax-related items related to your participation in the Plan and legally applicable to you (“withholding taxes”), is and remains your responsibility and may exceed the amount, if any, actually withheld by Schwab or your Employer. You further acknowledge that Schwab and/or your Employer (1) make no representations or undertakings regarding the treatment of any withholding taxes in connection with any aspect of this option, including, but not limited to, the grant, vesting or exercise of this option, the subsequent sale of Shares acquired pursuant to such exercise and the receipt of any dividends; and (2) do not commit to and are under no obligation to structure the terms of the grant or any aspect of this option to reduce or eliminate your liability for withholding taxes or achieve any particular tax result. Further, if you are subject to withholding taxes in more than one jurisdiction, you acknowledge that Schwab and/or your Employer (or former employer, as applicable) may be required to withhold or account for withholding taxes in more than one jurisdiction.

Prior to any relevant taxable or tax withholding event, as applicable, you agree to make adequate arrangements satisfactory to Schwab and/or the Employer to satisfy all withholding taxes.

In this regard, you authorize Schwab and/or the Employer, or their respective agents, at their discretion, to satisfy any applicable withholding obligations with regard to all withholding taxes by one or a combination of the following: (a) withholding from your wages or other cash compensation paid to you by Schwab and/or the Employer; (b) withholding from funds in your Schwab brokerage account; (c) requiring you to make a cash payment in an amount equal to the withholding obligations for withholding taxes; (d) withholding from proceeds of the sale of Shares acquired upon exercise of this option either through a voluntary sale or through a mandatory sale arranged by Schwab (on your behalf pursuant to this authorization without further consent); (e) withholding in Shares to be issued upon exercise of this option; or (f) any other method of withholding determined by Schwab and permitted by applicable law.

8



Depending on the withholding method, Schwab may withhold or account for withholding taxes by considering applicable minimum statutory withholding amounts or other applicable withholding rates, including maximum applicable rates in your jurisdiction(s), in which case you may receive a refund of any over-withheld amount in cash and will have no entitlement to the equivalent in Shares. If the obligation for withholding taxes is satisfied by withholding in Shares, for tax purposes, you are deemed to have been issued the full number of Shares subject to the exercised option, notwithstanding that a number of the Shares are held back solely for the purpose of paying the withholding taxes.

Nature of Grant: In accepting this option, you acknowledge, understand and agree that:

(1)
the Plan is established voluntarily by Schwab, it is discretionary in nature and it may be modified, amended, suspended or terminated by Schwab at any time, to the extent permitted by the Plan;

(2)
the grant of this option is exceptional, voluntary and occasional and does not create any contractual or other right to receive future grants of options, or benefits in lieu of options, even if options have been granted in the past;

(3)
all decisions with respect to future options or other grants, if any, will be at the sole discretion of Schwab;

(4)
you are voluntarily participating in the Plan;

(5)
this option, any Shares acquired under this option, and the income and value of same, are not intended to replace any pension rights or compensation;

(6)
this option and any Shares acquired under this option, and the income and value of same, are not part of normal or expected compensation for any purpose, including calculating any severance, resignation, termination, redundancy, dismissal, end-of-service payments, bonuses, holiday pay, long-service awards, pension or retirement or welfare benefits or similar mandatory payments;

(7)
unless otherwise agreed with Schwab, this option and the Shares acquired under this option, and the income and value of same, are not granted as consideration for, or in connection with, the service you may provide as a director of a subsidiary of Schwab;

(8)
the future value of the underlying Shares is unknown, indeterminable and cannot be predicted with certainty;

(9)
if the underlying Shares do not increase in value, this option will have no value;

(10)
if you exercise this option and acquire Shares, the value of such Shares may increase or decrease in value, even below the exercise price;

(11)
for purposes of this option, your employment or service relationship will be considered terminated as of the date you are no longer actively providing

9



services to Schwab and its subsidiaries (regardless of the reason for such termination and whether or not later found to be invalid or in breach of employment laws in the jurisdiction where you are employed or the terms of your employment agreement, if any), and unless otherwise expressly provided in this Agreement or determined by Schwab, (i) your right to vest in this option under the Plan, if any, will terminate as of such date and will not be extended by any notice period (e.g., your period of service would not include any contractual notice period or any period of “garden leave” or similar period mandated under employment laws in the jurisdiction where you are employed or the terms of your employment agreement, if any); and (ii) the period (if any) during which you may exercise this option after such termination of your employment or service relationship will commence on the date you cease to actively provide services and will not be extended by any notice period mandated under employment laws in the jurisdiction where you are employed or terms of your employment agreement, if any; the Plan administrator shall have the exclusive discretion to determine when you are no longer actively providing services for purposes of this option grant (including whether you may still be considered to be providing services while on a leave of absence);

(12)
unless otherwise provided in the Plan or by Schwab in its discretion, this option and the benefits evidenced by this Agreement do not create any entitlement to have this option or any such benefits transferred to, or assumed by, another company nor to be exchanged, cashed out or substituted for, in connection with any corporate transaction affecting the Shares; and

(13)
neither Schwab, its subsidiaries nor your Employer shall be liable for any foreign exchange rate fluctuation between your local currency and the United States Dollar that may affect the value of this option or of any amounts due to you pursuant to the exercise of this option or the subsequent sale of any Shares acquired upon exercise.

No Advice Regarding Grant: Schwab is not providing any tax, legal or financial advice, nor is Schwab making any recommendations regarding your participation in the Plan, or your acquisition or sale of the underlying Shares. You should consult with your own personal tax, legal and financial advisors regarding your participation in the Plan before taking any action related to the Plan.

Compliance with Law: Notwithstanding any other provision of the Plan or this Agreement, unless there is an available exemption from any registration, qualification or other legal requirement applicable to the Shares, Schwab shall not be required to deliver any Shares issuable upon exercise of this option prior to the completion of any registration or qualification of the Shares under any local, state, federal or foreign securities or exchange control law or under rulings or regulations of the U.S. Securities and Exchange Commission (“SEC”) or of any other governmental regulatory body, or prior to obtaining any approval or other clearance from any local, state, federal or foreign governmental agency, which registration, qualification or approval Schwab shall, in its absolute discretion, deem necessary or advisable. You understand that Schwab is under no obligation to register or qualify the Shares with the SEC or any state or foreign

10



securities commission or to seek approval or clearance from any governmental authority for the issuance or sale of the Shares. Further, you agree that Schwab shall have unilateral authority to amend the Agreement without your consent to the extent necessary to comply with securities or other laws applicable to issuance of Shares.

Insider Trading/Market Abuse Laws: You acknowledge that you may be subject to insider trading restrictions and/or market abuse laws based on the exchange on which the Shares are listed and in applicable jurisdictions including the United States and your country or your broker’s country, if different, which may affect your ability to accept, acquire, sell, attempt to sell or otherwise dispose of Shares, rights to Shares (e.g., this option) or rights linked to the value of Shares during such times you are considered to have “inside information” regarding Schwab (as defined in the laws or regulations in applicable jurisdictions). Local insider trading laws and regulations may prohibit the cancellation or amendment of orders you placed before you possessed inside information. Furthermore, you could be prohibited from (i) disclosing the inside information to any third party, including fellow employees and (ii) “tipping” third parties or causing them otherwise to buy or sell securities. Any restrictions under these laws or regulations are separate from and in addition to any restrictions that may be imposed under any applicable Schwab insider trading policy. You acknowledge that it is your responsibility to comply with any applicable restrictions and are advised to speak to your personal advisor on this matter.

Foreign Asset/Account Reporting: Please be aware that your country may have certain foreign asset and/or account reporting requirements which may affect your ability to acquire or hold Shares under the Plan or cash received from participating in the Plan (including from any dividends received or sale proceeds arising from the sale of Shares) in a brokerage or bank account outside your country. You may be required to report such accounts, assets or transactions to the tax or other authorities in your country. You acknowledge that it is your responsibility to be compliant with such regulations, and you should speak to your personal advisor on this matter.

Data Privacy:

(1)
Declaration of Consent. You hereby agree with the data processing practices described in this Agreement and consent to the collection, processing and use, in electronic or other form, of your personal data as described herein and the transfer of such personal data to the recipients mentioned below, including recipients located in countries which may not have a similar level of protection from the perspective of your country’s data protection laws.

(2)
Data Collection and Usage. Schwab and your Employer will collect, process and use certain personal information about you, including, but not limited to, your name, home address and telephone number, email address, date of birth, social insurance, passport or other identification number, salary, nationality, job title, any Shares or directorships held in Schwab, details of all options or any other entitlement to Shares awarded, canceled, exercised, vested, unvested or outstanding in your favor (“Data”), for the purposes of implementing, administering and managing the Plan. The legal basis, where required, for

11



the processing of Data is your consent. Where required under applicable law, Data may also be disclosed to certain securities or other regulatory authorities where Schwab’s securities are listed or traded or regulatory filings are made and the legal basis, where required, for such disclosure are the applicable laws.

(3)
Stock Plan Administration Service Providers. Schwab transfers Data to certain of its subsidiaries providing stock plan and broker services, or such other third party stock plan service provider as may be selected by Schwab in the future, which is assisting Schwab with the implementation, administration and management of the Plan. You may be asked to agree on separate terms and data processing practices, with such agreement being a condition of the ability to participate in the Plan.

(4)
Other Service Provider Data Recipients. Schwab also may transfer Data to other third party service providers, if necessary to ensure compliance with applicable tax, exchange control, securities and labor law. Such third party service providers may include Schwab’s legal counsel as well as Schwab’s auditor, accountant, or other third party vendor (currently Deloitte & Touche LLP). Wherever possible, Schwab will anonymize Data, but you understand that your Data may need to be transferred to such providers to ensure compliance with applicable law and/or tax requirements.

(5)
International Data Transfers. Schwab and its other service providers described above under (4) are located in the United States. The United States may have different data privacy laws and protections than your country. For example, the European Commission has issued a limited adequacy finding with respect to the United States that applies only to the extent companies register for the EU-U.S. Privacy Shield program, which is open to companies subject to Federal Trade Commission jurisdiction. Schwab’s legal basis, where required, for the transfer of Data is your consent.

(6)
Data Retention. Schwab will hold and use the Data only as long as is necessary to implement, administer and manage your participation in the Plan, or as required to comply with legal or regulatory obligations, including under tax and securities laws. When Schwab no longer needs the Data, Schwab will remove it from its systems. If Schwab keeps Data longer, it would be to satisfy legal or regulatory obligations and Schwab’s legal basis would be relevant laws or regulations.

(7)
Data Subject Rights. You understand that data subject rights vary depending on applicable law and that, depending on where you are based and subject to the conditions set out under applicable law, you may have, without limitation, the rights to (i) request access to or copies of Data that Schwab processes, (ii) rectify or supplement Data that is incorrect, incomplete or out-of-date in light of the purposes underlying the processing, (iii) delete Data, (iv) restrict processing of Data, (v) restrict portability of Data, (vi) lodge complaints with competent authorities in your jurisdiction and/or (vii) receive a list with the

12



names and addresses of any potential recipients of Data. To receive clarification regarding these rights or to exercise these rights, you understand that you can contact your local human resources representative.

(8)
Voluntariness and Consequences of Consent Denial or Withdrawal. Participation in the Plan is voluntary and you are providing the consents herein on a purely voluntary basis. If you do not consent, or if you later seek to revoke your consent, your employment status or service with your Employer will not be affected; the only consequence of refusing or withdrawing your consent is that Schwab would not be able to grant you options or other equity awards or administer or maintain such awards.

(9)
Declaration of Consent. By accepting the options and indicating consent via Schwab’s online acceptance procedure, you are declaring that you agree with the data processing practices described herein and consent to the collection, processing and use of Data by Schwab and the transfer of Data to the recipients mentioned above, including recipients located in countries which do not adduce an adequate level of protection from a European (or other non-U.S.) data protection law perspective, for the purposes described above.


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COUNTRY-SPECIFIC PROVISIONS

Terms and Conditions

These additional terms and conditions govern this option granted to you under the Plan if you are an employee and reside and/or work in one of the countries listed below.

Notifications

These provisions may also include information regarding exchange controls and certain other issues of which you should be aware with respect to your participation in the Plan. The information is based on the securities, exchange control and other laws in effect in the respective countries as of September 2019. These laws are often complex and change frequently. As a result, you should not rely on the information in these additional terms and conditions as the only source of information relating to your participation in the Plan.

In addition, the information contained herein is general in nature and may not apply to your particular situation, and Schwab is not in a position to assure you of a particular result. Accordingly, you should seek appropriate professional advice as to how the relevant laws in your country may apply to your situation.

You understand that if you are a citizen or resident of a country other than the one in which you currently reside and/or work, transfer to another country after the date of grant, or are considered a resident of another country for local law purposes, Schwab shall, in its discretion, determine the extent to which the special terms and conditions contained herein shall be applicable to you. In addition, the notifications contained herein may not be applicable to you in the same manner.

HONG KONG

Terms and Conditions

Sale Restriction: Any Shares acquired pursuant to exercise of this option are accepted as a personal investment. In the event that you exercise this option and Shares are issued to you (or your heir) within 6 months of the date of grant, you (or your heir) agree that such Shares will not be offered to the public or otherwise disposed of prior to the 6-month anniversary of the date of grant.

Notifications

Securities Law: WARNING: The contents of this document have not been reviewed by any regulatory authority in Hong Kong. You are advised to exercise caution in relation to the offer. If you are in any doubt about any of the contents of this document, you should obtain independent professional advice. Neither the grant of the options nor the issuance of Shares upon exercise constitutes a public offering of securities under Hong Kong law and are available only to employees of Schwab and its subsidiaries. This Agreement, the Plan and other incidental communication materials distributed in connection with the options (i) have not been prepared in accordance with and are not intended to constitute

14



a “prospectus” for a public offering of securities under the applicable securities legislation in Hong Kong and (ii) are intended only for the personal use of each eligible employee of Schwab or its subsidiaries and may not be distributed to any other person.

Nature of Scheme. Schwab specifically intends that the Plan will not be an occupational retirement scheme for purposes of the Occupational Retirement Schemes Ordinance (“ORSO”).

UNITED KINGDOM

Terms and Conditions

Withholding Taxes and Stock Withholding: This section supplements the “Withholding Taxes and Stock Withholding” section of the Agreement:

Without limitation to the “Withholding Taxes and Stock Withholding” section of the Agreement, you agree that you are liable for all withholding taxes and hereby covenant to pay all such withholding taxes as and when requested by Schwab or your Employer or by Her Majesty’s Revenue and Customs (“HMRC”) (or any other tax authority or any other relevant authority). You also agree to indemnify and keep indemnified Schwab and your Employer against any taxes that they are required to pay or withhold or have paid or will pay to HMRC (or any other tax authority or any other relevant authority) on your behalf.

Notwithstanding the foregoing, if you are an executive officer or director (as within the meaning of Section 13(k) of the Exchange Act), you understand that you may not be able to indemnify Schwab or your Employer for the amount of any income tax not collected from or paid by you, as it may be considered a loan. In the event that you are an executive officer or director and income tax due is not collected from or paid by you within 90 days after the end of the United Kingdom tax year in which the event giving rise to the income tax occurs, the amount of any income tax due may constitute a benefit to you on which additional income tax and national insurance contributions may be payable. You will be responsible for reporting and paying any income tax due on this additional benefit directly to HMRC under the self-assessment regime and for paying Schwab or your Employer (as appropriate) for the value of any employee national insurance contributions due on this additional benefit, which Schwab or your Employer may recover from you by any means referred to in this Agreement.

Retirement: Notwithstanding the terms and conditions set forth in the Agreement, the options of employees in the United Kingdom will not vest upon retirement and any options that are vested prior to retirement will terminate on the earlier of the date three months following the date of your retirement or the Expiration Date specified in the Notice of Nonqualified Stock Option Grant.


BY ACCEPTING THIS OPTION GRANT, YOU AGREE TO ALL OF THE
TERMS AND CONDITIONS DESCRIBED ABOVE AND IN THE PLAN.



15


EXHIBIT 10.403


THE CHARLES SCHWAB CORPORATION
[2013 STOCK INCENTIVE PLAN]
NOTICE OF RESTRICTED STOCK UNIT GRANT

You have been granted Restricted Stock Units. A Restricted Stock Unit represents the right to receive, subject to certain conditions, a share of common stock (a “Share”) of The Charles Schwab Corporation (“Schwab”) under [The Charles Schwab Corporation 2013 Stock Incentive Plan] (the “Plan”). Your Restricted Stock Units are granted subject to the following terms:
 
Name of Recipient:

<first_name> <last_name>
Total Number of
Restricted Stock Units
Granted:

<shares_awarded>
Grant Date:

<award_date>
Vesting Schedule:
So long as you remain in service in good standing and subject to the terms of the Restricted Stock Unit Agreement, the Restricted Stock Units subject to this grant will become vested and distributable on the following dates and in the following amounts, subject to the restrictions below:

Number of Restricted Stock Units on Vesting Date:
<vesting_schedule>



Restricted Stock Units are an unfunded and unsecured obligation of Schwab. Any vested Restricted Stock Units will be paid in Shares as provided in the Restricted Stock Unit Agreement.

You and Schwab agree that this grant is issued under and governed by the terms and conditions of the Plan and the Restricted Stock Unit Agreement, both of which are made a part of this notice. Please review the Plan and the Restricted Stock Unit Agreement carefully, as they explain the terms and conditions of this grant. You agree that Schwab may deliver electronically all documents relating to the Plan or this grant (including, without limitation, prospectuses required by the Securities and Exchange Commission) and all other documents that Schwab is required to deliver to its stockholders. By accepting this grant, you agree to all of the terms and conditions described above, in the Restricted Stock Unit Agreement and in the Plan, and you have no right whatsoever to change or negotiate such terms and conditions.




THE CHARLES SCHWAB CORPORATION
[2013 STOCK INCENTIVE PLAN]
RESTRICTED STOCK UNIT AGREEMENT


Payment for Units

No payment is required for the Restricted Stock Units that you are receiving. Restricted Stock Units are an unfunded and unsecured obligation of The Charles Schwab Corporation (“Schwab”).

Vesting

Subject to the provisions of this Restricted Stock Unit Agreement (“Agreement”), a Restricted Stock Unit becomes vested and distributable as of the earliest of the following:

(1) The applicable Vesting Date for the Restricted Stock Unit indicated in the Notice of Restricted Stock Unit Grant.

(2) Your death.

(3) Your disability.

(4) Your separation from service, if the separation qualifies as a retirement or a severance eligible termination (provided that vesting shall occur upon a severance eligible termination only to the extent provided in The Charles Schwab Severance Pay Plan (or any successor plan)).

(5) A change in control.

Unvested units will be considered “Restricted Stock Units.” If your service terminates for any reason, then your Restricted Stock Units will be forfeited to the extent that they have not vested on or before the termination date and do not vest as a result of the termination. This means that the Restricted Stock Units will immediately revert to Schwab. You will receive no payment for Restricted Stock Units that are forfeited. Schwab determines when your service terminates for this purpose. For all purposes of this Agreement, “service” means continuous employment as a common-law employee of Schwab or a parent corporation or subsidiary of Schwab, and “subsidiary” means a subsidiary corporation as defined in section 424(f) of the Internal Revenue Code of 1986, as amended (the “Code”).

Definition of Fair
Market Value

“Fair market value” means the average of the high and low price of a Share (as defined below) as reported on the New York Stock Exchange on the applicable determination date.

  Definition of Disability

For all purposes of this Agreement, “disability” means that

1




 
you have a disability that qualifies as such under section 409A of the Code and due to which you have been determined to be eligible for benefits under Schwab’s long-term disability plan or if you are not covered by Schwab’s long-term disability plan, you are unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which has lasted, or can be expected to last, for a continuous period of not less than 12 months or which can be expected to result in death as determined by Schwab in its sole discretion.

Definition of
Retirement
If you are an employee of Schwab and its subsidiaries, “retirement” means a separation from service for any reason other than death at any time after the earlier of when you attain age 55, but only if, at the time of your separation, you have been credited with at least 10 years of service or when you attain age 65, but only if, at the time of your termination, you have been credited with at least 5 years of service.

The phrase “years of service” above has the same meaning given to it under The SchwabPlan Retirement Savings and Investment Plan (or any successor plan).

Definition of Severance
Eligible Termination
For all purposes of this Agreement, "severance eligible termination" means a separation from service entitling you to severance benefits when you have signed your Severance Agreement under The Charles Schwab Severance Pay Plan (or any successor plan).

Definition of Change in
Control
For all purposes of this Agreement, "change in control" means an event that qualifies as a change in control event under section 409A of the Code and as a change in control as defined in [The Charles Schwab Corporation 2013 Stock Incentive Plan] (the “Plan”).

Definition of
Separation From
Service
For all purposes of this Agreement, "separation from service" means a separation from service as defined under section 409A of the Code. 

Payment of Shares

Any vested Restricted Stock Units will be paid in shares of common stock of Schwab (“Shares”) as provided herein. Shares that have become vested and distributable under this Agreement shall be distributed as follows:
(1) Shares that vest and become distributable on a Vesting Date shall be distributed within 30 days of the Vesting Date.

2




 
(2) Shares that vest and become distributable on death, disability or a change in control, shall be distributable within 90 days of such event.
 
 
 
(3) Shares that vest and become distributable on a separation from service (either a retirement or a severance eligible termination) shall be distributed within 90 days of the separation from service. Generally, for severance eligible terminations, the distribution date shall be the “termination date” specified in the notice under The Charles Schwab Severance Pay Plan. Notwithstanding the foregoing, if at the time of your separation from service, you are a “specified employee”, you will receive your Shares six months after your separation from service. “Specified Employee” means a “specified employee” within the meaning of section 409A of the Code and any regulatory guidance promulgated thereunder, provided that in determining the compensation of individuals for this purpose, the definition of compensation in Treas. Reg. § 1.415(c)-2(d)(2) shall be used.
 
 
Restrictions on
Restricted Stock Units
You may not assign, sell, transfer, pledge, encumber, or otherwise dispose of any Restricted Stock Units without Schwab’s written consent. Schwab will deliver Shares to you only after the Restricted Stock Units vest and after all other terms and conditions in this Agreement have been satisfied.

Restricted Stock Units may not be assigned, transferred, pledged, encumbered, or otherwise disposed of in any settlement, judgment, decree or order (including approval of a property settlement agreement) that relates to the provision of child support, alimony payments, or marital property rights or domestic property rights.

Delivery of Shares
After Death

In the event that Shares are distributable upon your death, the Shares will be delivered to your beneficiary or beneficiaries. You may designate one or more beneficiaries by filing a beneficiary designation form with Schwab. You may change your beneficiary designation by filing a new form with Schwab at any time prior to your death. If you do not designate a beneficiary or if your designated beneficiary predeceases you, then your Shares will be delivered to your estate.

Cancellation of
Restricted Stock Units
To the fullest extent permitted by applicable laws, these Restricted Stock Units will immediately be cancelled and will

3




 
expire in the event that Schwab terminates your employment on account of conduct contrary to the best interests of Schwab, including, without limitation, conduct constituting a violation of law or Schwab policy, fraud, theft, conflict of interest, dishonesty or harassment. The determination whether your employment has been terminated on account of conduct inimical to the best interests of Schwab shall be made by Schwab in its sole discretion, and will be entitled to deference upon any review.
Restrictions on Resale
You agree not to sell any Shares at a time when applicable laws, Schwab’s policies, or an agreement between Schwab and its underwriters prohibit a sale. This restriction will apply as long as your service continues and for such period of time after the termination of your service as Schwab may specify.

Withholding Taxes

Shares will not be distributed unless you have made acceptable arrangements to pay any applicable withholding taxes that may be due as a result of the vesting and or the distribution of the Shares. These arrangements may include withholding Shares. Schwab may withhold the number of whole Shares, valued at the fair market value on the applicable date, required to satisfy such applicable withholding taxes. Schwab will round up to the next whole Share to cover the applicable withholding taxes, and any amounts in excess of the applicable withholding taxes resulting from rounding up to the next whole Share will be added to your federal income tax withholdings. In the event you do not elect to pay applicable withholding taxes in cash, Schwab shall withhold Shares as noted above. While Schwab will withhold to satisfy applicable withholding taxes, you acknowledge that, regardless of any action taken by Schwab, the ultimate liability for all income tax, social insurance, payroll tax, fringe benefits tax, payment on account or other tax-related items related to your participation in the Plan and legally applicable to you, is and remains your responsibility and may exceed the amount, if any, actually withheld by Schwab.

Applicable withholding taxes due on the distribution of Shares subject to this award following termination of employment will be withheld as noted above, unless you have made acceptable arrangements to pay any applicable withholding taxes in cash. If you elect to pay applicable withholding taxes due upon the distribution of Shares in cash, you are responsible for having sufficient funds in your Schwab brokerage account to cover the applicable withholding taxes at the time they are due.

4




 
Any withholding taxes due prior to distribution of Shares (e.g., under section 3121(v)(2) of the Code upon retirement eligibility) shall be paid by accelerating the vesting of and withholding of Shares payable in connection with such Restricted Stock Units for participants other than executive officers of Schwab (i.e., individuals holding the office of Executive Vice President or above), who shall pay such withholding taxes in cash upon Schwab’s request. Prior to the distribution of Shares, the number of Shares accelerated and withheld for withholding taxes will be rounded down to the next whole Share, and any amounts of less than the fair market value of a Share will be deducted from your pay to cover the applicable withholding taxes due prior to distribution of Shares. Participants may not make any election as to the payment of withholding taxes due prior to the distribution of Shares (e.g., under section 3121(v)(2) of the Code upon retirement eligibility).


No Stockholder Rights

Your Restricted Stock Units carry no voting or other stockholder rights. You have no rights as a Schwab stockholder until your Restricted Stock Units are settled by issuing Shares.

Contribution of Par
Value
On your behalf, Schwab will contribute to its capital an amount equal to the par value of the Shares issued to you.

Dividend Equivalent
Rights

If Schwab pays cash dividends on Shares, you will receive cash equal to the dividend per Share multiplied by the number of unvested Restricted Stock Units. Each such payment shall be made as soon as practicable following the payment of the actual dividend, but in no event beyond March 15 of the year following the year the actual dividend is paid.

No Right to Remain
Employee

Nothing in this Agreement will be construed as giving you the right to be retained as an employee, contingent worker, or director of Schwab and its subsidiaries for any specific duration or at all.
Limitation on  
Payments

If a payment from the Plan would constitute an excess parachute payment under section 280G of the Code or if there have been certain securities law violations, then your grant may be reduced or forfeited and you may be required to disgorge any profit that you have realized from your grant.

If a disqualified individual receives a payment or transfer under the Plan that would constitute an excess parachute payment under section 280G of the Code, such payment will



5




 
be reduced, as described below. Generally, someone is a “disqualified individual” under section 280G if he or she is (a) an officer of Schwab, (b) a member of the group consisting of the highest paid 1% of the employees of Schwab or, if less, the highest paid 250 employees of Schwab, or (c) a 1% stockholder of Schwab. For purposes of this section on “Limitation on Payments,” the term “Schwab” will include affiliated corporations to the extent determined by the independent auditors most recently selected by the Board of Directors (the “Auditors”) in accordance with section 280G(d)(5) of the Code.

In the event that the Auditors determine that any payment or transfer in the nature of compensation to or for your benefit, whether paid or payable (or transferred or transferable) pursuant to the terms of the Plan or otherwise (a “Payment”), would be nondeductible for federal income tax purposes because of the provisions concerning “excess parachute payments” in section 280G of the Code, then the aggregate present value of all Payments will be reduced (but not below zero) to the Reduced Amount (as defined below); provided, however, that the Compensation Committee (the “Compensation Committee”) of the Board of Directors may specify in writing that the grant will not be so reduced and will not be subject to reduction under this section.

For this purpose, the “Reduced Amount” will be the amount, expressed as a present value, which maximizes the aggregate present value of the Payments without causing any Payment to be nondeductible by Schwab because of section 280G of the Code.

If the Auditors determine that any Payment would be nondeductible because of section 280G of the Code, then Schwab will promptly give you notice to that effect and a copy of the detailed calculation of the Reduced Amount. The Auditors will determine which and how much of the Payments will be eliminated or reduced (such that the aggregate present value of the Payments equals the Reduced Amount and is consistent with any mandatory eliminations or reductions that apply under other agreements or the Plan). Schwab will notify you promptly of the Auditor’s determination. Present value will be determined in accordance with section 280G(d)(4) of the Code. The Auditors’ determinations will be binding upon you and Schwab and will be made within 60 days of the date when a Payment becomes payable or transferable.

As a result of uncertainty in the application of section 280G of


6




 
the Code at the time of an initial determination by the Auditors, it is possible that Payments will have been made by Schwab that should not have been made (an “Overpayment”) or that additional Payments that will not have been made by Schwab could have been made (an “Underpayment”) consistent in each case with the calculation of the Reduced Amount. In the event the Auditors, based upon the assertion of a deficiency by the Internal Revenue Service against you or Schwab that the Auditors believe has a high probability of success, determine that an Overpayment has been made, the amount of such Overpayment will be paid by you to Schwab on demand, together with interest at the applicable federal rate provided in section 7872(f)(2) of the Code. However, no amount will be payable by you to Schwab if and to the extent that such payment would not reduce the amount that is subject to taxation under section 4999 of the Code. In the event the Auditors determine that an Underpayment has occurred, such Underpayment will promptly be paid or transferred by Schwab to or for your benefit, together with interest at the applicable federal rate provided in section 7872(f)(2) of the Code, provided that no such Underpayment related to Shares distributable under this Agreement shall be paid beyond the deadline for making such payments under section 409A of the Code.
Plan Administration

The Plan administrator has discretionary authority to make all determinations related to this grant and to construe the terms of the Plan, the Notice of Restricted Stock Unit Grant and this Agreement. The Plan administrator’s determinations are conclusive and binding on all persons, and they are entitled to deference upon any review.

Adjustments

In the event of a stock split, a stock dividend or a similar change in the Shares, the number of Restricted Stock Units that remain subject to forfeiture will be adjusted accordingly.

Severability

In the event that any provision of this Agreement is held invalid or unenforceable, the provision will be severable from, and such invalidity or unenforceability will not be construed to have any effect on, the remaining provisions of this Agreement.

Applicable Law

This Agreement will be interpreted and enforced under the laws of the State of Delaware (without regard to their choice-of-law provisions), as such laws are applied to contracts entered into and performed in Delaware.

The Plan and Other
Agreements

The text of the Plan is incorporated in this Agreement by reference. This Agreement (including the Additional Terms

7




 
and Conditions for Non-U.S. Recipients and the Country-Specific Provisions), the Notice of Restricted Stock Unit Grant, and the Plan constitute the entire understanding between you and Schwab regarding this grant. Any prior agreements, commitments or negotiations concerning this grant are superseded. This Agreement may be amended only by another written agreement, signed by both parties and approved by the Compensation Committee. If there is any inconsistency or conflict between any provision of this Agreement and the Plan, the terms of the Plan will control.

8




ADDITIONAL TERMS AND CONDITIONS FOR NON-U.S. RECIPIENTS

The additional (or, if so indicated, different) terms and conditions set forth below are specifically incorporated into the Restricted Stock Unit Agreement (the “Agreement”) for awards granted outside the United States (“U.S.”). These terms and conditions govern the Restricted Stock Units granted under the Plan if you reside or work outside of the U.S. Due to the complexities of legal, regulatory and tax issues, you should seek appropriate professional advice as to how the relevant laws in the applicable country may apply to your individual situation.

Capitalized terms used but not defined herein shall have the meanings ascribed to them in the Plan and/or the Agreement.

Withholding Taxes: the following provisions supplement the Withholding Taxes section of the Restricted Stock Unit Agreement:

You acknowledge that, regardless of any action taken by Schwab or, if different, your employer (“Employer”), the ultimate liability for all income tax, social insurance, payroll tax, fringe benefits tax, payment on account or other tax-related items related to your participation in the Plan and legally applicable to you (“withholding taxes”), is and remains your responsibility and may exceed the amount, if any, actually withheld by Schwab or your Employer. You further acknowledge that Schwab and/or your Employer (1) make no representations or undertakings regarding the treatment of any withholding taxes in connection with any aspect of the Restricted Stock Units, including, but not limited to, the grant, vesting or settlement of the Restricted Stock Units, the subsequent sale of Shares acquired pursuant to such settlement and the receipt of any dividends and/or any dividend equivalents; and (2) do not commit to and are under no obligation to structure the terms of the grant or any aspect of the Restricted Stock Units to reduce or eliminate your liability for withholding taxes or achieve any particular tax result. Further, if you are subject to withholding taxes in more than one jurisdiction, you acknowledge that Schwab and/or your Employer (or former employer, as applicable) may be required to withhold or account for withholding taxes in more than one jurisdiction.

Prior to any relevant taxable or tax withholding event, as applicable, you agree to make adequate arrangements satisfactory to Schwab and/or the Employer to satisfy all withholding taxes.

In this regard, you authorize Schwab and/or the Employer, or their respective agents, at their discretion, to satisfy any applicable withholding obligations with regard to all withholding taxes by one or a combination of the following: (a) withholding from your wages or other cash compensation paid to you by Schwab and/or the Employer; (b) withholding from funds in your Schwab brokerage account; (c) requiring you to make a cash payment in an amount equal to the withholding obligations for withholding taxes; (d) withholding from proceeds of the sale of Shares acquired upon settlement of the Restricted Stock Units either through a voluntary sale or through a mandatory sale arranged by Schwab (on your behalf pursuant to this authorization without further consent); (e) withholding in Shares to be issued upon settlement of the Restricted Stock Units; or (f) any other method of withholding determined by Schwab and permitted by applicable law.

Depending on the withholding method, Schwab may withhold or account for withholding taxes by considering applicable minimum statutory withholding rates or other applicable withholding rates, including maximum applicable rates in your jurisdiction(s), in which case you may receive

9




a refund of any over-withheld amount in cash and will have no entitlement to the equivalent in Shares. If the obligation for withholding taxes is satisfied by withholding in Shares, for tax purposes, you are deemed to have been issued the full number of Shares subject to the vested Restricted Stock Units, notwithstanding that a number of the Shares are held back solely for the purpose of paying the withholding taxes.

Nature of Grant: In accepting the grant, you acknowledge, understand and agree that:

(1)
the Plan is established voluntarily by Schwab, it is discretionary in nature and it may be modified, amended, suspended or terminated by Schwab at any time, to the extent permitted by the Plan;

(2)
the grant of the Restricted Stock Units is exceptional, voluntary and occasional and does not create any contractual or other right to receive future grants of Restricted Stock Units, or benefits in lieu of Restricted Stock Units, even if Restricted Stock Units have been granted in the past;

(3)
all decisions with respect to future Restricted Stock Units or other grants, if any, will be at the sole discretion of Schwab;

(4)
you are voluntarily participating in the Plan;

(5)
the Restricted Stock Units, the Shares subject to the Restricted Stock Units, and the income and value of same, are not intended to replace any pension rights or compensation;

(6)
the Restricted Stock Units and the Shares subject to the Restricted Stock Units, and the income and value of same, are not part of normal or expected compensation for any purpose, including calculating any severance, resignation, termination, redundancy, dismissal, end-of-service payments, bonuses, holiday pay, long-service awards, pension or retirement or welfare benefits or similar mandatory payments;

(7)
unless otherwise agreed with Schwab, the Restricted Stock Units and the Shares subject to the Restricted Stock Units, and the income and value of same, are not granted as consideration for, or in connection with, the service you may provide as a director of a subsidiary of Schwab;

(8)
the future value of the underlying Shares is unknown, indeterminable and cannot be predicted with certainty;

(9)
for purposes of the Restricted Stock Units, your service will be considered terminated as of the date you are no longer actively providing services to Schwab and its subsidiaries (regardless of the reason for such termination and whether or not later found to be invalid or in breach of employment laws in the jurisdiction where you are employed or the terms of your employment agreement, if any), and unless otherwise expressly provided in this Agreement or determined by Schwab, your right to vest in the Restricted Stock Units under the Plan, if any, will terminate as of such date and will not be extended by any notice period (e.g., your period of service would not include any contractual notice period or any period of “garden leave” or similar period mandated under employment laws in

10




the jurisdiction where you are employed or the terms of your employment agreement, if any); the Plan administrator shall have the exclusive discretion to determine when you are no longer actively providing services for purposes of your Restricted Stock Unit grant (including whether you may still be considered to be providing services while on a leave of absence);

(10)
unless otherwise provided in the Plan or by Schwab in its discretion, the Restricted Stock Units and the benefits evidenced by this Agreement do not create any entitlement to have the Restricted Stock Units or any such benefits transferred to, or assumed by, another company nor to be exchanged, cashed out or substituted for, in connection with any corporate transaction affecting the Shares; and

(11)
neither Schwab, its subsidiaries nor your Employer shall be liable for any foreign exchange rate fluctuation between your local currency and the United States Dollar that may affect the value of the Restricted Stock Units or of any amounts due to you pursuant to the settlement of the Restricted Stock Units or the subsequent sale of any Shares acquired upon settlement.

No Advice Regarding Grant: Schwab is not providing any tax, legal or financial advice, nor is Schwab making any recommendations regarding your participation in the Plan, or your acquisition or sale of the underlying Shares. You should consult with your own personal tax, legal and financial advisors regarding your participation in the Plan before taking any action related to the Plan.

Compliance with Law: Notwithstanding any other provision of the Plan or this Agreement, unless there is an available exemption from any registration, qualification or other legal requirement applicable to the Shares, Schwab shall not be required to deliver any Shares issuable upon settlement of the Restricted Stock Units prior to the completion of any registration or qualification of the Shares under any local, state, federal or foreign securities or exchange control law or under rulings or regulations of the U.S. Securities and Exchange Commission (“SEC”) or of any other governmental regulatory body, or prior to obtaining any approval or other clearance from any local, state, federal or foreign governmental agency, which registration, qualification or approval Schwab shall, in its absolute discretion, deem necessary or advisable. You understand that Schwab is under no obligation to register or qualify the Shares with the SEC or any state or foreign securities commission or to seek approval or clearance from any governmental authority for the issuance or sale of the Shares. Further, you agree that Schwab shall have unilateral authority to amend the Agreement without your consent to the extent necessary to comply with securities or other laws applicable to issuance of Shares.

Insider Trading/Market Abuse Laws: You acknowledge that you may be subject to insider trading restrictions and/or market abuse laws based on the exchange on which the Shares are listed and in applicable jurisdictions including the United States and your country or your broker’s country, if different, which may affect your ability to accept, acquire, sell, attempt to sell or otherwise dispose of Shares, rights to Shares (e.g., Restricted Stock Units) or rights linked to the value of Shares (e.g., dividend equivalents) during such times you are considered to have “inside information” regarding Schwab (as defined in the laws or regulations in applicable jurisdictions). Local insider trading laws and regulations may prohibit the cancellation or amendment of orders you placed before you possessed inside information. Furthermore, you could be prohibited from (i) disclosing the inside information to any third party, including fellow

11




employees and (ii) “tipping” third parties or causing them otherwise to buy or sell securities. Any restrictions under these laws or regulations are separate from and in addition to any restrictions that may be imposed under any applicable Schwab insider trading policy. You acknowledge that it is your responsibility to comply with any applicable restrictions and are advised to speak to your personal advisor on this matter.

Foreign Asset/Account Reporting: Please be aware that your country may have certain foreign asset and/or account reporting requirements which may affect your ability to acquire or hold Shares under the Plan or cash received from participating in the Plan (including from any dividends or dividend equivalents received or sale proceeds arising from the sale of Shares) in a brokerage or bank account outside your country. You may be required to report such accounts, assets or transactions to the tax or other authorities in your country. You acknowledge that it is your responsibility to be compliant with such regulations, and you should speak to your personal advisor on this matter.

Data Privacy:

(1)
Declaration of Consent. You hereby agree with the data processing practices described in this Agreement and consent to the collection, processing and use, in electronic or other form, of your personal data as described herein and the transfer of such personal data to the recipients mentioned below, including recipients located in countries which may not have a similar level of protection from the perspective of your country’s data protection laws.

(2)
Data Collection and Usage. Schwab and your Employer will collect, process and use certain personal information about you, including, but not limited to, your name, home address and telephone number, email address, date of birth, social insurance, passport or other identification number, salary, nationality, job title, any Shares or directorships held in Schwab, details of all Restricted Stock Units or any other entitlement to Shares awarded, canceled, exercised, vested, unvested or outstanding in your favor (“Data”), for the purposes of implementing, administering and managing the Plan. The legal basis, where required, for the processing of Data is your consent. Where required under applicable law, Data may also be disclosed to certain securities or other regulatory authorities where Schwab’s securities are listed or traded or regulatory filings are made and the legal basis, where required, for such disclosure are the applicable laws.

(3)
Stock Plan Administration Service Providers. Schwab transfers Data to certain of its subsidiaries providing stock plan and broker services, or such other third party stock plan service provider as may be selected by Schwab in the future, which is assisting Schwab with the implementation, administration and management of the Plan. You may be asked to agree on separate terms and data processing practices, with such agreement being a condition of the ability to participate in the Plan.

(4)
Other Service Provider Data Recipients. Schwab also may transfer Data to other third party service providers, if necessary to ensure compliance with applicable tax, exchange control, securities and labor law. Such third party service providers may include Schwab’s legal counsel as well as Schwab’s auditor, accountant, or other third party vendor (currently Deloitte & Touche LLP). Wherever possible, Schwab

12




will anonymize Data, but you understand that your Data may need to be transferred to such providers to ensure compliance with applicable law and/or tax requirements.

(5)
International Data Transfers. Schwab and its other service providers described above under (4) are located in the United States. The United States may have different data privacy laws and protections than your country. For example, the European Commission has issued a limited adequacy finding with respect to the United States that applies only to the extent companies register for the EU-U.S. Privacy Shield program, which is open to companies subject to Federal Trade Commission jurisdiction. Schwab’s legal basis, where required, for the transfer of Data is your consent.

(6)
Data Retention. Schwab will hold and use the Data only as long as is necessary to implement, administer and manage your participation in the Plan, or as required to comply with legal or regulatory obligations, including under tax and securities laws. When Schwab no longer needs the Data, Schwab will remove it from its systems. If Schwab keeps Data longer, it would be to satisfy legal or regulatory obligations and Schwab’s legal basis would be relevant laws or regulations.

(7)
Data Subject Rights. You understand that data subject rights vary depending on applicable law and that, depending on where you are based and subject to the conditions set out under applicable law, you may have, without limitation, the rights to (i) request access or copies of Data that Schwab processes, (ii) rectify or supplement Data that is incorrect, incomplete or out-of-date in light of the purposes underlying the processing, (iii) delete Data, (iv) restrict processing of Data, (v) portability of Data, (vi) lodge complaints with competent authorities in your jurisdiction and/or (vii) receive a list with the names and addresses of any potential recipients of Data. To receive clarification regarding these rights or to exercise these rights, you understand that you can contact your local human resources representative.

(8)
Voluntariness and Consequences of Consent Denial or Withdrawal. Participation in the Plan is voluntary and you are providing the consents herein on a purely voluntary basis. If you do not consent, or if you later seek to revoke your consent, your employment status or service with your Employer will not be affected; the only consequence of refusing or withdrawing your consent is that Schwab would not be able to grant you Restricted Stock Units or other equity awards or administer or maintain such awards.

(9)
Declaration of Consent. By accepting the Restricted Stock Units and indicating consent via Schwab’s online acceptance procedure, you are declaring that you agree with the data processing practices described herein and consent to the collection, processing and use of Data by Schwab and the transfer of Data to the recipients mentioned above, including recipients located in countries which do not adduce an adequate level of protection from a European (or other non-U.S.) data protection law perspective, for the purposes described above.

13




COUNTRY-SPECIFIC PROVISIONS

Terms and Conditions

These additional terms and conditions govern the Restricted Stock Units granted to you under the Plan if you are an employee and reside and/or work in one of the countries listed below.

Notifications

These provisions may also include information regarding exchange controls and certain other issues of which you should be aware with respect to your participation in the Plan. The information is based on the securities, exchange control and other laws in effect in the respective countries as of September 2019. These laws are often complex and change frequently. As a result, you should not rely on the information in these additional terms and conditions as the only source of information relating to your participation in the Plan.

In addition, the information contained herein is general in nature and may not apply to your particular situation, and Schwab is not in a position to assure you of a particular result. Accordingly, you should seek appropriate professional advice as to how the relevant laws in your country may apply to your situation.

You understand that if you are a citizen or resident of a country other than the one in which you currently reside and/or work, transfer to another country after the date of grant, or are considered a resident of another country for local law purposes, Schwab shall, in its discretion, determine the extent to which the special terms and conditions contained herein shall be applicable to you. In addition, the notifications contained herein may not be applicable to you in the same manner.

HONG KONG

Terms and Conditions

Form of Payment:     Notwithstanding any discretion in Section 5(d) of the Plan to the contrary, if you reside in Hong Kong, the Restricted Stock Units shall be payable in Shares only.

Sale Restriction: Any Shares received at vesting are accepted as a personal investment. In the event that the Restricted Stock Units vest and Shares are issued to you (or your heir) within 6 months of the date of grant, you (or your heir) agree that the Shares will not be offered to the public or otherwise disposed of prior to the 6-month anniversary of the date of grant.

Notifications

Securities Law: WARNING: The contents of this document have not been reviewed by any regulatory authority in Hong Kong. You are advised to exercise caution in relation to the offer. If you are in any doubt about any of the contents of this document, you should obtain independent professional advice. Neither the grant of the Restricted Stock Units nor the issuance of Shares upon vesting of the Restricted Stock Units constitutes a public offering of securities under Hong Kong law and are available only to employees of Schwab and its subsidiaries. This Agreement, the Plan and other incidental communication materials distributed in connection with the Restricted Stock Units (i) have not been prepared in accordance with and are not intended to

14




constitute a “prospectus” for a public offering of securities under the applicable securities legislation in Hong Kong, and (ii) are intended only for the personal use of each eligible employee of Schwab or its subsidiaries and may not be distributed to any other person.

Nature of Scheme. Schwab specifically intends that the Plan will not be an occupational retirement scheme for purposes of the Occupational Retirement Schemes Ordinance (“ORSO”).

UNITED KINGDOM

Terms and Conditions

Withholding Taxes: This section supplements the “Withholding Taxes” section of the Agreement:

Without limitation to the “Withholding Taxes” section of the Agreement, you agree that you are liable for all withholding taxes and hereby covenant to pay all such withholding taxes as and when requested by Schwab or your Employer or by Her Majesty’s Revenue and Customs (“HMRC”) (or any other tax authority or any other relevant authority). You also agree to indemnify and keep indemnified Schwab and your Employer against any taxes that they are required to pay or withhold or have paid or will pay to HMRC (or any other tax authority or any other relevant authority) on your behalf.

Notwithstanding the foregoing, if you are an executive officer or director (as within the meaning of Section 13(k) of the Exchange Act), you understand that you may not be able to indemnify Schwab or your Employer for the amount of any income tax not collected from or paid by you, as it may be considered a loan. In the event that you are an executive officer or director and income tax due is not collected within 90 days of the end of the United Kingdom tax year in which the event giving rise to the income tax occurs, the amount of any income tax due may constitute a benefit to you on which additional income tax and national insurance contributions may be payable. You will be responsible for reporting and paying any income tax due on this additional benefit directly to HMRC under the self-assessment regime and for paying Schwab or your Employer (as appropriate) for the value of any employee national insurance contributions due on this additional benefit, which Schwab or your Employer may recover from you by any means referred to in this Agreement.

Retirement: Notwithstanding the terms and conditions set forth in the Agreement, the Restricted Stock Units of employees in the United Kingdom will not vest upon retirement.

BY ACCEPTING THIS GRANT, YOU AGREE TO ALL OF THE TERMS AND
CONDITIONS DESCRIBED ABOVE AND IN THE PLAN.

15



EXHIBIT 10.404


THE CHARLES SCHWAB CORPORATION
[2013 STOCK INCENTIVE PLAN]
NOTICE OF RESTRICTED STOCK UNIT GRANT (RETENTION)


You have been granted Restricted Stock Units. A Restricted Stock Unit represents the right to receive, subject to certain conditions, a share of common stock (a “Share”) of The Charles Schwab Corporation (“Schwab”) under [The Charles Schwab Corporation 2013 Stock Incentive Plan] (the “Plan”). Your Restricted Stock Units are granted subject to the following terms:
 
Name of Recipient:

<first_name> <last_name>
Total Number of
Restricted Stock Units
Granted:

<shares_awarded>
Grant Date:

<award_date>
Vesting Schedule:
So long as you remain in service in good standing and subject to the terms of the Restricted Stock Unit Agreement, the Restricted Stock Units subject to this grant will become vested and distributable on the following dates and in the following amounts, subject to the restrictions below:

Number of Restricted Stock Units on Vesting Date:
                           <vesting_schedule>


Restricted Stock Units subject to this grant will not vest upon retirement.

Restricted Stock Units are an unfunded and unsecured obligation of Schwab. Any vested Restricted Stock Units will be paid in Shares as provided in the Restricted Stock Unit Agreement.

You and Schwab agree that this grant is issued under and governed by the terms and conditions of the Plan and the Restricted Stock Unit Agreement, both of which are made a part of this notice. Please review the Plan and the Restricted Stock Unit Agreement carefully, as they explain the terms and conditions of this grant. You agree that Schwab may deliver electronically all documents relating to the Plan or this grant (including, without limitation, prospectuses required by the Securities and Exchange Commission) and all other documents that Schwab is required to deliver to its stockholders. By accepting this grant, you agree to all of the terms and conditions described above, in the Restricted Stock Unit Agreement and in the Plan, and you have no right whatsoever to change or negotiate such terms and conditions.



THE CHARLES SCHWAB CORPORATION
[2013 STOCK INCENTIVE PLAN]
RESTRICTED STOCK UNIT AGREEMENT (RETENTION)


Payment for Units

No payment is required for the Restricted Stock Units that you are receiving. Restricted Stock Units are an unfunded and unsecured obligation of The Charles Schwab Corporation (“Schwab”).

Vesting

Subject to the provisions of this Restricted Stock Unit Agreement (“Agreement”), a Restricted Stock Unit becomes vested and distributable as of the earliest of the following:
 
(1) The applicable Vesting Date for the Restricted Stock Unit indicated in the Notice of Restricted Stock Unit Grant.
 
 
 
(2) Your death.
 
 
 
(3) Your disability.
 
 
 
(4) Your separation from service due to a severance eligible termination under The Charles Schwab Severance Pay Plan (or any successor plan)).
 
 
 
(5) A change in control.
 
 
 
Unvested units will be considered “Restricted Stock Units.” If your service terminates for any reason, then your Restricted Stock Units will be forfeited to the extent that they have not vested on or before the termination date and do not vest as a result of the termination. This means that the Restricted Stock Units will immediately revert to Schwab. You will receive no payment for Restricted Stock Units that are forfeited. Schwab determines when your service terminates for this purpose. For all purposes of this Agreement, “service” means continuous employment as a common-law employee of Schwab or a parent corporation or subsidiary of Schwab, and “subsidiary” means a subsidiary corporation as defined in section 424(f) of the Internal Revenue Code of 1986, as amended (the “Code”).
 
 
Retirement
Restricted Stock Units subject to this grant will not vest upon retirement.
 
 
Definition of Fair
Market Value

“Fair market value” means the average of the high and low price of a Share (as defined below) as reported on the New York Stock Exchange on the applicable determination date.


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Definition of Disability

For all purposes of this Agreement, "disability" means that you have a disability that qualifies as such under section 409A of the Code and due to which you have been determined to be eligible for benefits under Schwab’s long-term disability plan or if you are not covered by Schwab’s long-term disability plan, you are unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which has lasted, or can be expected to last, for a continuous period of not less than 12 months or which can be expected to result in death as determined by Schwab in its sole discretion.
 
 
Definition of Severance
Eligible Termination
For all purposes of this Agreement, "severance eligible termination" means a separation from service entitling you to severance benefits when you have signed your Severance Agreement under The Charles Schwab Severance Pay Plan (or any successor plan).

Definition of Change in
Control
For all purposes of this Agreement, "change in control" means an event that qualifies as a change in control event under section 409A of the Code and as a change in control as defined in [The Charles Schwab Corporation 2013 Stock Incentive Plan] (the “Plan”).

Definition of
Separation From
Service
For all purposes of this Agreement, "separation from service" means a separation from service as defined under section 409A of the Code. 

Payment of Shares

Any vested Restricted Stock Units will be paid in shares of common stock of Schwab (“Shares”) as provided herein. Shares that have become vested and distributable under this Agreement shall be distributed as follows:
(1) Shares that vest and become distributable on a Vesting Date shall be distributed within 30 days of the Vesting Date.
(2) Shares that vest and become distributable on death, disability or a change in control, shall be distributable within 90 days of such event.
(3) Shares that vest and become distributable on a separation from service due to a severance eligible termination shall be distributed within 90 days of the separation from service. Generally, the distribution date shall be the "termination date" specified in the notice under The Charles Schwab Severance Pay Plan. Notwithstanding the foregoing, if at the time of your separation from service, you are a “specified employee”, you will receive your Shares six months after your separation from service. "Specified Employee" means a "specified

2




 
employee" within the meaning of section 409A of the Code and any regulatory guidance promulgated thereunder, provided that in determining the compensation of individuals for this purpose, the definition of compensation in Treas. Reg. § 1.415(c)-2(d)(2) shall be used.
Restrictions on
Restricted Stock Units
You may not assign, sell, transfer, pledge, encumber, or otherwise dispose of any Restricted Stock Units without Schwab’s written consent. Schwab will deliver Shares to you only after the Restricted Stock Units vest and after all other terms and conditions in this Agreement have been satisfied.

Restricted Stock Units may not be assigned, transferred, pledged, encumbered, or otherwise disposed of in any settlement, judgment, decree or order (including approval of a property settlement agreement) that relates to the provision of child support, alimony payments, or marital property rights or domestic property rights.

Delivery of Shares
After Death

In the event that Shares are distributable upon your death, the Shares will be delivered to your beneficiary or beneficiaries. You may designate one or more beneficiaries by filing a beneficiary designation form with Schwab. You may change your beneficiary designation by filing a new form with Schwab at any time prior to your death. If you do not designate a beneficiary or if your designated beneficiary predeceases you, then your Shares will be delivered to your estate.

Cancellation of
Restricted Stock Units
To the fullest extent permitted by applicable laws, these Restricted Stock Units will immediately be cancelled and will expire in the event that Schwab terminates your employment on account of conduct contrary to the best interests of Schwab, including, without limitation, conduct constituting a violation of law or Schwab policy, fraud, theft, conflict of interest, dishonesty or harassment. The determination whether your employment has been terminated on account of conduct inimical to the best interests of Schwab shall be made by Schwab in its sole discretion, and will be entitled to deference upon any review.

Restrictions on Resale
You agree not to sell any Shares at a time when applicable laws, Schwab’s policies, or an agreement between Schwab and its underwriters prohibit a sale. This restriction will apply as long as your service continues and for such period of time after the termination of your service as Schwab may specify.


3




Withholding Taxes

Shares will not be distributed unless you have made acceptable arrangements to pay any applicable withholding taxes that may be due as a result of the vesting and or the distribution of the Shares. These arrangements may include withholding Shares. Schwab may withhold the number of whole Shares, valued at the fair market value on the applicable date, required to satisfy such applicable withholding taxes. Schwab will round up to the next whole Share to cover the applicable withholding taxes, and any amounts in excess of the applicable withholding taxes resulting from rounding up to the next whole Share will be added to your federal income tax withholdings. In the event you do not elect to pay applicable withholding taxes in cash, Schwab shall withhold Shares as noted above. While Schwab will withhold to satisfy applicable withholding taxes, you acknowledge that, regardless of any action taken by Schwab, the ultimate liability for all income tax, social insurance, payroll tax, fringe benefits tax, payment on account or other tax-related items related to your participation in the Plan and legally applicable to you, is and remains your responsibility and may exceed the amount, if any, actually withheld by Schwab.

Applicable withholding taxes due on the distribution of Shares subject to this award following termination of employment will be withheld as noted above, unless you have made acceptable arrangements to pay any applicable withholding taxes in cash. If you elect to pay applicable withholding taxes due upon the distribution of Shares in cash, you are responsible for having sufficient funds in your Schwab brokerage account to cover the applicable withholding taxes at the time they are due.

No Stockholder Rights

Your Restricted Stock Units carry no voting or other stockholder rights. You have no rights as a Schwab stockholder until your Restricted Stock Units are settled by issuing Shares.

Contribution of Par
Value
On your behalf, Schwab will contribute to its capital an amount equal to the par value of the Shares issued to you.

Dividend Equivalent
Rights

If Schwab pays cash dividends on Shares, you will receive cash equal to the dividend per Share multiplied by the number of unvested Restricted Stock Units. Each such payment shall be made as soon as practicable following the payment of the actual dividend, but in no event beyond March 15 of the year following the year the actual dividend is paid.

 
 

4




No Right to Remain
Employee

Nothing in this Agreement will be construed as giving you the right to be retained as an employee, contingent worker, or director of Schwab and its subsidiaries for any specific duration or at all.
Limitation on  
Payments

If a payment from the Plan would constitute an excess parachute payment under section 280G of the Code or if there have been certain securities law violations, then your grant may be reduced or forfeited and you may be required to disgorge any profit that you have realized from your grant.

If a disqualified individual receives a payment or transfer under the Plan that would constitute an excess parachute payment under section 280G of the Code, such payment will be reduced, as described below. Generally, someone is a “disqualified individual” under section 280G if he or she is (a) an officer of Schwab, (b) a member of the group consisting of the highest paid 1% of the employees of Schwab or, if less, the highest paid 250 employees of Schwab, or (c) a 1% stockholder of Schwab. For purposes of this section on “Limitation on Payments,” the term “Schwab" will include affiliated corporations to the extent determined by the independent auditors most recently selected by the Board of Directors (the “Auditors”) in accordance with section 280G(d)(5) of the Code.

In the event that the Auditors determine that any payment or transfer in the nature of compensation to or for your benefit, whether paid or payable (or transferred or transferable) pursuant to the terms of the Plan or otherwise (a “Payment”), would be nondeductible for federal income tax purposes because of the provisions concerning “excess parachute payments” in section 280G of the Code, then the aggregate present value of all Payments will be reduced (but not below zero) to the Reduced Amount (as defined below); provided, however, that the Compensation Committee (the “Compensation Committee”) of the Board of Directors may specify in writing that the grant will not be so reduced and will not be subject to reduction under this section.

For this purpose, the “Reduced Amount” will be the amount, expressed as a present value, which maximizes the aggregate present value of the Payments without causing any Payment to be nondeductible by Schwab because of section 280G of the Code.

If the Auditors determine that any Payment would be nondeductible because of section 280G of the Code, then Schwab will promptly give you notice to that effect and a


5




 
copy of the detailed calculation of the Reduced Amount. The Auditors will determine which and how much of the Payments will be eliminated or reduced (such that the aggregate present value of the Payments equals the Reduced Amount and is consistent with any mandatory eliminations or reductions that apply under other agreements or the Plan). Schwab will notify you promptly of the Auditor's determination. Present value will be determined in accordance with section 280G(d)(4) of the Code. The Auditors’ determinations will be binding upon you and Schwab and will be made within 60 days of the date when a Payment becomes payable or transferable.

As a result of uncertainty in the application of section 280G of the Code at the time of an initial determination by the Auditors, it is possible that Payments will have been made by Schwab that should not have been made (an “Overpayment”) or that additional Payments that will not have been made by Schwab could have been made (an “Underpayment”) consistent in each case with the calculation of the Reduced Amount. In the event the Auditors, based upon the assertion of a deficiency by the Internal Revenue Service against you or Schwab that the Auditors believe has a high probability of success, determine that an Overpayment has been made, the amount of such Overpayment will be paid by you to Schwab on demand, together with interest at the applicable federal rate provided in section 7872(f)(2) of the Code. However, no amount will be payable by you to Schwab if and to the extent that such payment would not reduce the amount that is subject to taxation under section 4999 of the Code. In the event the Auditors determine that an Underpayment has occurred, such Underpayment will promptly be paid or transferred by Schwab to or for your benefit, together with interest at the applicable federal rate provided in section 7872(f)(2) of the Code, provided that no such Underpayment related to Shares distributable under this Agreement shall be paid beyond the deadline for making such payments under section 409A of the Code.

Plan Administration

The Plan administrator has discretionary authority to make all determinations related to this grant and to construe the terms of the Plan, the Notice of Restricted Stock Unit Grant and this Agreement. The Plan administrator’s determinations are conclusive and binding on all persons, and they are entitled to deference upon any review.

Adjustments

In the event of a stock split, a stock dividend or a similar change in the Shares, the number of Restricted Stock Units that remain subject to forfeiture will be adjusted accordingly.


6




Severability

In the event that any provision of this Agreement is held invalid or unenforceable, the provision will be severable from, and such invalidity or unenforceability will not be construed to have any effect on, the remaining provisions of this Agreement.

Applicable Law

This Agreement will be interpreted and enforced under the laws of the State of Delaware (without regard to their choice-of-law provisions), as such laws are applied to contracts entered into and performed in Delaware.

The Plan and Other
Agreements

The text of the Plan is incorporated in this Agreement by reference. This Agreement (including the Additional Terms and Conditions for Non-U.S. Recipients and the Country-Specific Provisions), the Notice of Restricted Stock Unit Grant, and the Plan constitute the entire understanding between you and Schwab regarding this grant. Any prior agreements, commitments or negotiations concerning this grant are superseded. This Agreement may be amended only by another written agreement, signed by both parties and approved by the Compensation Committee. If there is any inconsistency or conflict between any provision of this Agreement and the Plan, the terms of the Plan will control.



7




ADDITIONAL TERMS AND CONDITIONS FOR NON-U.S. RECIPIENTS

The additional (or, if so indicated, different) terms and conditions set forth below are specifically incorporated into the Restricted Stock Unit Agreement (the “Agreement”) for awards granted outside the United States (“U.S.”). These terms and conditions govern the Restricted Stock Units granted under the Plan if you reside or work outside of the U.S. Due to the complexities of legal, regulatory and tax issues, you should seek appropriate professional advice as to how the relevant laws in the applicable country may apply to your individual situation.

Capitalized terms used but not defined herein shall have the meanings ascribed to them in the Plan and/or the Agreement.

Withholding Taxes: the following provisions supplement the Withholding Taxes section of the Restricted Stock Unit Agreement:

You acknowledge that, regardless of any action taken by Schwab or, if different, your employer (“Employer”), the ultimate liability for all income tax, social insurance, payroll tax, fringe benefits tax, payment on account or other tax-related items related to your participation in the Plan and legally applicable to you (“withholding taxes”), is and remains your responsibility and may exceed the amount, if any, actually withheld by Schwab or your Employer. You further acknowledge that Schwab and/or your Employer (1) make no representations or undertakings regarding the treatment of any withholding taxes in connection with any aspect of the Restricted Stock Units, including, but not limited to, the grant, vesting or settlement of the Restricted Stock Units, the subsequent sale of Shares acquired pursuant to such settlement and the receipt of any dividends and/or any dividend equivalents; and (2) do not commit to and are under no obligation to structure the terms of the grant or any aspect of the Restricted Stock Units to reduce or eliminate your liability for withholding taxes or achieve any particular tax result. Further, if you are subject to withholding taxes in more than one jurisdiction, you acknowledge that Schwab and/or your Employer (or former employer, as applicable) may be required to withhold or account for withholding taxes in more than one jurisdiction.

Prior to any relevant taxable or tax withholding event, as applicable, you agree to make adequate arrangements satisfactory to Schwab and/or the Employer to satisfy all withholding taxes.

In this regard, you authorize Schwab and/or the Employer, or their respective agents, at their discretion, to satisfy any applicable withholding obligations with regard to all withholding taxes by one or a combination of the following: (a) withholding from your wages or other cash compensation paid to you by Schwab and/or the Employer; (b) withholding from funds in your Schwab brokerage account; (c) requiring you to make a cash payment in an amount equal to the withholding obligations for withholding taxes; (d) withholding from proceeds of the sale of Shares acquired upon settlement of the Restricted Stock Units either through a voluntary sale or through a mandatory sale arranged by Schwab (on your behalf pursuant to this authorization without further consent); (e) withholding in Shares to be issued upon settlement of the Restricted Stock Units; or (f) any other method of withholding determined by Schwab and permitted by applicable law.

Depending on the withholding method, Schwab may withhold or account for withholding taxes by considering applicable minimum statutory withholding rates or other applicable withholding rates, including maximum applicable rates in your jurisdiction(s), in which case you may receive

8




a refund of any over-withheld amount in cash and will have no entitlement to the equivalent in Shares. If the obligation for withholding taxes is satisfied by withholding in Shares, for tax purposes, you are deemed to have been issued the full number of Shares subject to the vested Restricted Stock Units, notwithstanding that a number of the Shares are held back solely for the purpose of paying the withholding taxes.

Nature of Grant: In accepting the grant, you acknowledge, understand and agree that:

(1)
the Plan is established voluntarily by Schwab, it is discretionary in nature and it may be modified, amended, suspended or terminated by Schwab at any time, to the extent permitted by the Plan;

(2)
the grant of the Restricted Stock Units is exceptional, voluntary and occasional and does not create any contractual or other right to receive future grants of Restricted Stock Units, or benefits in lieu of Restricted Stock Units, even if Restricted Stock Units have been granted in the past;

(3)
all decisions with respect to future Restricted Stock Units or other grants, if any, will be at the sole discretion of Schwab;

(4)
you are voluntarily participating in the Plan;

(5)
the Restricted Stock Units, the Shares subject to the Restricted Stock Units, and the income and value of same, are not intended to replace any pension rights or compensation;

(6)
the Restricted Stock Units and the Shares subject to the Restricted Stock Units, and the income and value of same, are not part of normal or expected compensation for any purpose, including calculating any severance, resignation, termination, redundancy, dismissal, end-of-service payments, bonuses, holiday pay, long-service awards, pension or retirement or welfare benefits or similar mandatory payments;

(7)
unless otherwise agreed with Schwab, the Restricted Stock Units and the Shares subject to the Restricted Stock Units, and the income and value of same, are not granted as consideration for, or in connection with, the service you may provide as a director of a subsidiary of Schwab;

(8)
the future value of the underlying Shares is unknown, indeterminable and cannot be predicted with certainty;

(9)
for purposes of the Restricted Stock Units, your service will be considered terminated as of the date you are no longer actively providing services to Schwab and its subsidiaries (regardless of the reason for such termination and whether or not later found to be invalid or in breach of employment laws in the jurisdiction where you are employed or the terms of your employment agreement, if any), and unless otherwise expressly provided in this Agreement or determined by Schwab, your right to vest in the Restricted Stock Units under the Plan, if any, will terminate as of such date and will not be extended by any notice period (e.g., your period of service would not include any contractual notice period or any period of “garden leave” or similar period mandated under employment laws in

9




the jurisdiction where you are employed or the terms of your employment agreement, if any); the Plan administrator shall have the exclusive discretion to determine when you are no longer actively providing services for purposes of your Restricted Stock Unit grant (including whether you may still be considered to be providing services while on a leave of absence);

(10)
unless otherwise provided in the Plan or by Schwab in its discretion, the Restricted Stock Units and the benefits evidenced by this Agreement do not create any entitlement to have the Restricted Stock Units or any such benefits transferred to, or assumed by, another company nor to be exchanged, cashed out or substituted for, in connection with any corporate transaction affecting the Shares; and

(11)
neither Schwab, its subsidiaries nor your Employer shall be liable for any foreign exchange rate fluctuation between your local currency and the United States Dollar that may affect the value of the Restricted Stock Units or of any amounts due to you pursuant to the settlement of the Restricted Stock Units or the subsequent sale of any Shares acquired upon settlement.

No Advice Regarding Grant: Schwab is not providing any tax, legal or financial advice, nor is Schwab making any recommendations regarding your participation in the Plan, or your acquisition or sale of the underlying Shares. You should consult with your own personal tax, legal and financial advisors regarding your participation in the Plan before taking any action related to the Plan.

Compliance with Law: Notwithstanding any other provision of the Plan or this Agreement, unless there is an available exemption from any registration, qualification or other legal requirement applicable to the Shares, Schwab shall not be required to deliver any Shares issuable upon settlement of the Restricted Stock Units prior to the completion of any registration or qualification of the Shares under any local, state, federal or foreign securities or exchange control law or under rulings or regulations of the U.S. Securities and Exchange Commission (“SEC”) or of any other governmental regulatory body, or prior to obtaining any approval or other clearance from any local, state, federal or foreign governmental agency, which registration, qualification or approval Schwab shall, in its absolute discretion, deem necessary or advisable. You understand that Schwab is under no obligation to register or qualify the Shares with the SEC or any state or foreign securities commission or to seek approval or clearance from any governmental authority for the issuance or sale of the Shares. Further, you agree that Schwab shall have unilateral authority to amend the Agreement without your consent to the extent necessary to comply with securities or other laws applicable to issuance of Shares.

Insider Trading/Market Abuse Laws: You acknowledge that you may be subject to insider trading restrictions and/or market abuse laws based on the exchange on which the Shares are listed and in applicable jurisdictions including the United States and your country or your broker’s country, if different, which may affect your ability to accept, acquire, sell, attempt to sell or otherwise dispose of Shares, rights to Shares (e.g., Restricted Stock Units) or rights linked to the value of Shares (e.g., dividend equivalents) during such times you are considered to have “inside information” regarding Schwab (as defined in the laws or regulations in applicable jurisdictions). Local insider trading laws and regulations may prohibit the cancellation or amendment of orders you placed before you possessed inside information. Furthermore, you could be prohibited from (i) disclosing the inside information to any third party, including fellow

10




employees and (ii) “tipping” third parties or causing them otherwise to buy or sell securities. Any restrictions under these laws or regulations are separate from and in addition to any restrictions that may be imposed under any applicable Schwab insider trading policy. You acknowledge that it is your responsibility to comply with any applicable restrictions and are advised to speak to your personal advisor on this matter.

Foreign Asset/Account Reporting: Please be aware that your country may have certain foreign asset and/or account reporting requirements which may affect your ability to acquire or hold Shares under the Plan or cash received from participating in the Plan (including from any dividends or dividend equivalents received or sale proceeds arising from the sale of Shares) in a brokerage or bank account outside your country. You may be required to report such accounts, assets or transactions to the tax or other authorities in your country. You acknowledge that it is your responsibility to be compliant with such regulations, and you should speak to your personal advisor on this matter.

Data Privacy:

(1)
Declaration of Consent. You hereby agree with the data processing practices described in this Agreement and consent to the collection, processing and use, in electronic or other form, of your personal data as described herein and the transfer of such personal data to the recipients mentioned below, including recipients located in countries which may not have a similar level of protection from the perspective of your country’s data protection laws.

(2)
Data Collection and Usage. Schwab and your Employer will collect, process and use certain personal information about you, including, but not limited to, your name, home address and telephone number, email address, date of birth, social insurance, passport or other identification number, salary, nationality, job title, any Shares or directorships held in Schwab, details of all Restricted Stock Units or any other entitlement to Shares awarded, canceled, exercised, vested, unvested or outstanding in your favor (“Data”), for the purposes of implementing, administering and managing the Plan. The legal basis, where required, for the processing of Data is your consent. Where required under applicable law, Data may also be disclosed to certain securities or other regulatory authorities where Schwab’s securities are listed or traded or regulatory filings are made and the legal basis, where required, for such disclosure are the applicable laws.

(3)
Stock Plan Administration Service Providers. Schwab transfers Data to certain of its subsidiaries providing stock plan and broker services, or such other third party stock plan service provider as may be selected by Schwab in the future, which is assisting Schwab with the implementation, administration and management of the Plan. You may be asked to agree on separate terms and data processing practices, with such agreement being a condition of the ability to participate in the Plan.

(4)
Other Service Provider Data Recipients. Schwab also may transfer Data to other third party service providers, if necessary to ensure compliance with applicable tax, exchange control, securities and labor law. Such third party service providers may include Schwab’s legal counsel as well as Schwab’s auditor, accountant, or other third party vendor (currently Deloitte & Touche LLP). Wherever possible, Schwab




11




will anonymize Data, but you understand that your Data may need to be transferred to such providers to ensure compliance with applicable law and/or tax requirements.

(5)
International Data Transfers. Schwab and its other service providers described above under (4) are located in the United States. The United States may have different data privacy laws and protections than your country. For example, the European Commission has issued a limited adequacy finding with respect to the United States that applies only to the extent companies register for the EU-U.S. Privacy Shield program, which is open to companies subject to Federal Trade Commission jurisdiction. Schwab’s legal basis, where required, for the transfer of Data is your consent.

(6)
Data Retention. Schwab will hold and use the Data only as long as is necessary to implement, administer and manage your participation in the Plan, or as required to comply with legal or regulatory obligations, including under tax and securities laws. When Schwab no longer needs the Data, Schwab will remove it from its systems. If Schwab keeps Data longer, it would be to satisfy legal or regulatory obligations and Schwab’s legal basis would be relevant laws or regulations.

(7)
Data Subject Rights. You understand that data subject rights vary depending on applicable law and that, depending on where you are based and subject to the conditions set out under applicable law, you may have, without limitation, the rights to (i) request access or copies of Data that Schwab processes, (ii) rectify or supplement Data that is incorrect, incomplete or out-of-date in light of the purposes underlying the processing, (iii) delete Data, (iv) restrict processing of Data, (v) portability of Data, (vi) lodge complaints with competent authorities in your jurisdiction and/or (vii) receive a list with the names and addresses of any potential recipients of Data. To receive clarification regarding these rights or to exercise these rights, you understand that you can contact your local human resources representative.

(8)
Voluntariness and Consequences of Consent Denial or Withdrawal. Participation in the Plan is voluntary and you are providing the consents herein on a purely voluntary basis. If you do not consent, or if you later seek to revoke your consent, your employment status or service with your Employer will not be affected; the only consequence of refusing or withdrawing your consent is that Schwab would not be able to grant you Restricted Stock Units or other equity awards or administer or maintain such awards.

(9)
Declaration of Consent. By accepting the Restricted Stock Units and indicating consent via Schwab’s online acceptance procedure, you are declaring that you agree with the data processing practices described herein and consent to the collection, processing and use of Data by Schwab and the transfer of Data to the recipients mentioned above, including recipients located in countries which do not adduce an adequate level of protection from a European (or other non-U.S.) data protection law perspective, for the purposes described above.



12




COUNTRY-SPECIFIC PROVISIONS

Terms and Conditions

These additional terms and conditions govern the Restricted Stock Units granted to you under the Plan if you are an employee and reside and/or work in one of the countries listed below.

Notifications

These provisions may also include information regarding exchange controls and certain other issues of which you should be aware with respect to your participation in the Plan. The information is based on the securities, exchange control and other laws in effect in the respective countries as of September 2019. These laws are often complex and change frequently. As a result, you should not rely on the information in these additional terms and conditions as the only source of information relating to your participation in the Plan.

In addition, the information contained herein is general in nature and may not apply to your particular situation, and Schwab is not in a position to assure you of a particular result. Accordingly, you should seek appropriate professional advice as to how the relevant laws in your country may apply to your situation.

You understand that if you are a citizen or resident of a country other than the one in which you currently reside and/or work, transfer to another country after the date of grant, or are considered a resident of another country for local law purposes, Schwab shall, in its discretion, determine the extent to which the special terms and conditions contained herein shall be applicable to you. In addition, the notifications contained herein may not be applicable to you in the same manner.


HONG KONG

Terms and Conditions

Form of Payment:     Notwithstanding any discretion in Section 5(d) of the Plan to the contrary, if you reside in Hong Kong, the Restricted Stock Units shall be payable in Shares only.

Sale Restriction: Any Shares received at vesting are accepted as a personal investment. In the event that the Restricted Stock Units vest and Shares are issued to you (or your heir) within 6 months of the date of grant, you (or your heir) agree that the Shares will not be offered to the public or otherwise disposed of prior to the 6-month anniversary of the date of grant.

Notifications

Securities Law: WARNING: The contents of this document have not been reviewed by any regulatory authority in Hong Kong. You are advised to exercise caution in relation to the offer. If you are in any doubt about any of the contents of this document, you should obtain independent professional advice. Neither the grant of the Restricted Stock Units nor the issuance of Shares upon vesting of the Restricted Stock Units constitutes a public offering of securities under Hong Kong law and are available only to employees of Schwab and its subsidiaries. This Agreement, the Plan and other incidental communication materials distributed in connection with the

1




Restricted Stock Units (i) have not been prepared in accordance with and are not intended to constitute a “prospectus” for a public offering of securities under the applicable securities legislation in Hong Kong, and (ii) are intended only for the personal use of each eligible employee of Schwab or its subsidiaries and may not be distributed to any other person.

Nature of Scheme. Schwab specifically intends that the Plan will not be an occupational retirement scheme for purposes of the Occupational Retirement Schemes Ordinance (“ORSO”).

UNITED KINGDOM

Terms and Conditions

Withholding Taxes: This section supplements the “Withholding Taxes” section of the Agreement:

Without limitation to the “Withholding Taxes” section of the Agreement, you agree that you are liable for all withholding taxes and hereby covenant to pay all such withholding taxes as and when requested by Schwab or your Employer or by Her Majesty’s Revenue and Customs (“HMRC”) (or any other tax authority or any other relevant authority). You also agree to indemnify and keep indemnified Schwab and your Employer against any taxes that they are required to pay or withhold or have paid or will pay to HMRC (or any other tax authority or any other relevant authority) on your behalf.

Notwithstanding the foregoing, if you are an executive officer or director (as within the meaning of Section 13(k) of the Exchange Act), you understand that you may not be able to indemnify Schwab or your Employer for the amount of any income tax not collected from or paid by you, as it may be considered a loan. In the event that you are an executive officer or director and income tax due is not collected within 90 days of the end of the United Kingdom tax year in which the event giving rise to the income tax occurs, the amount of any income tax due may constitute a benefit to you on which additional income tax and national insurance contributions may be payable. You will be responsible for reporting and paying any income tax due on this additional benefit directly to HMRC under the self-assessment regime and for paying Schwab or your Employer (as appropriate) for the value of any employee national insurance contributions due on this additional benefit, which Schwab or your Employer may recover from you by any means referred to in this Agreement.

BY ACCEPTING THIS GRANT, YOU AGREE TO ALL OF THE TERMS AND
CONDITIONS DESCRIBED ABOVE AND IN THE PLAN.


2



THE CHARLES SCHWAB CORPORATION 

 EXHIBIT 31.1


CERTIFICATION PURSUANT TO RULE 13a‑14(a)/15d‑14(a), AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Walter W. Bettinger II, certify that:

1.
I have reviewed this Quarterly Report on Form 10-Q of The Charles Schwab Corporation;

2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;
c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:
November 7, 2019
 
/s/ Walter W. Bettinger II
 
 
 
Walter W. Bettinger II
 
 
 
President and Chief Executive Officer




THE CHARLES SCHWAB CORPORATION

EXHIBIT 31.2


CERTIFICATION PURSUANT TO RULE 13a‑14(a)/15d‑14(a), AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Peter Crawford, certify that:

1.
I have reviewed this Quarterly Report on Form 10-Q of The Charles Schwab Corporation;

2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;
c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:
November 7, 2019
 
/s/ Peter Crawford
 
 
 
Peter Crawford
 
 
 
Executive Vice President and Chief Financial Officer




THE CHARLES SCHWAB CORPORATION 

EXHIBIT 32.1


CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of The Charles Schwab Corporation (the Company) on Form 10-Q for the quarter ended September 30, 2019 (the Report), I, Walter W. Bettinger II, President and Chief Executive Officer of the Company, hereby certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:

(1)
The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company for the periods presented therein.


/s/ Walter W. Bettinger II
 
Date:
November 7, 2019
Walter W. Bettinger II
 
 
 
President and Chief Executive Officer
 
 
 























A signed original of this written statement required by Section 906 has been provided to The Charles Schwab Corporation and will be retained by The Charles Schwab Corporation and furnished to the Securities and Exchange Commission or its staff upon request.



THE CHARLES SCHWAB CORPORATION

EXHIBIT 32.2


CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of The Charles Schwab Corporation (the Company) on Form 10-Q for the quarter ended September 30, 2019 (the Report), I, Peter Crawford, Executive Vice President and Chief Financial Officer of the Company, hereby certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:

(1)
The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company for the periods presented therein.


/s/ Peter Crawford
 
Date:
November 7, 2019
Peter Crawford
 
 
 
Executive Vice President and Chief Financial Officer
 
 
 























A signed original of this written statement required by Section 906 has been provided to The Charles Schwab Corporation and will be retained by The Charles Schwab Corporation and furnished to the Securities and Exchange Commission or its staff upon request.