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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 June 30, 2020
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.
1,288,641,882 shares of $.01 par value Common Stock outstanding on July 31, 2020


THE CHARLES SCHWAB CORPORATION

Quarterly Report on Form 10-Q
For the Quarter Ended June 30, 2020



 Index

 
 
 
 
 
 
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
24
 
 
 
25
 
 
 
26
 
 
 
27
 
 
 
28-29
 
 
 
30-62
 
 
 
 
 
 
Item 2.
 
1-22
 
 
 
 
 
 
Item 3.
 
23
 
 
 
 
 
 
Item 4.
 
63
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 1.
 
64
 
 
 
 
 
 
Item 1A.
 
64
 
 
 
 
 
 
Item 2.
 
65
 
 
 
 
 
 
Item 3.
 
65
 
 
 
 
 
 
Item 4.
 
65
 
 
 
 
 
 
Item 5.
 
65
 
 
 
 
 
 
Item 6.
 
66-67
 
 
 
 
 
 
68
 
 
 





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.

Principal business subsidiaries of CSC include the following:

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

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 $4.11 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, 2019 (2019 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, 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,” “aim,” “maintain,” 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);
•
Impacts related to the coronavirus (COVID-19) pandemic (see Overview);
•
Pending TD Ameritrade acquisition, including status and anticipated closing; expected benefits from recently completed transactions (see Overview, Capital Management, and Commitments and Contingencies in Part I, Item 1, Financial Information – Notes to Condensed Consolidated Financial Statements (Item 1) – Note 10);
•
Objective for amount of deposits held in excess reserves at the Federal Reserve (see Results of Operations);
•
Net interest margin compression and net interest revenue; money market fund fee waivers (see Results of Operations);
•
2020 capital expenditures (see Results of Operations);
•
The phase-out of the use of LIBOR (see Risk Management);
•
Sources of capital; Tier 1 Leverage Ratio operating objective (see Risk Management – Capital Management);
•
The expected impact of new accounting standards not yet adopted (see Summary of Significant Accounting Policies in Item 1 – Note 2);
•
Credit quality metrics and performance of the bank loans portfolios (see Bank Loans and Related Allowance for Credit Losses in Item 1 – Note 6);
•
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 equity valuations, trading activity, the level of interest rates – which can impact money market fund fee waivers, and credit spreads;
•
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 enhance our infrastructure, in a timely and successful manner;
•
Our ability to monetize client assets;
•
The scope and duration of the COVID-19 pandemic and actions taken by governmental authorities to contain the spread of the virus and the economic impact;
•
The company’s ability to support client activity levels;
•
Failure of the parties to satisfy the closing conditions in the agreement for the pending acquisition of TD Ameritrade in a timely manner or at all, including regulatory approvals, and the implementation of integration plans;

- 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)


•
Disruptions to the parties’ businesses as a result of the announcement and pendency of the TD Ameritrade acquisition;
•
The risk that expected revenue, expense and other synergies and benefits from acquisitions may not be fully realized or may take longer to realize than expected;
•
Timing and ability to invest amounts held in excess reserves at the Federal Reserve into higher yielding investments in the company’s bank securities portfolio;
•
Client cash allocations;
•
LIBOR trends;
•
The availability and terms of external financing;
•
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 2019 Form 10-K.

- 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)


OVERVIEW
Management focuses on several client activity and financial metrics in evaluating Schwab’s financial position and operating performance. Results for the second quarter and first six months of 2020 and 2019 are:
 
Three Months Ended
June 30,
 
Percent
Change
 
Six Months Ended
June 30,
Percent
Change
 
2020
 
2019
 
 
2020
 
2019
Client Metrics
 
 
 
 
 
 
 
 
 
 
Net new client assets (in billions) (1)
$
137.4

 
$
37.2

 
N/M

 
$
210.6

 
$
88.9

137
%
Core net new client assets (in billions)
$
46.6

 
$
37.2

 
25
%
 
$
119.8

 
$
88.9

35
%
Client assets (in billions, at quarter end)
$
4,110.1

 
$
3,702.4

 
11
%
 
 
 
 
 
Average client assets (in billions)
$
3,849.7

 
$
3,631.1

 
6
%
 
$
3,884.2

 
$
3,548.4

9
%
New brokerage accounts (in thousands) (2)
1,652

 
386

 
N/M

 
2,261

 
772

193
%
Active brokerage accounts (in thousands, at quarter end)
14,107

 
11,967

 
18
%
 
 
 
 
 
Assets receiving ongoing advisory services (in billions,
at quarter end)
$
2,092.7

 
$
1,938.2

 
8
%
 
 
 
 
 
Client cash as a percentage of client assets (at quarter end)
13.6
%
 
10.9
%
 
 

 
 
 
 
 
Company Financial Information and Metrics
 

 
 

 
 

 
 
 
 
 
Total net revenues
$
2,450

 
$
2,681

 
(9
)%
 
$
5,067

 
$
5,404

(6
)%
Total expenses excluding interest
1,562

 
1,445

 
8
%
 
3,132

 
2,904

8
%
Income before taxes on income
888

 
1,236

 
(28
)%
 
1,935

 
2,500

(23
)%
Taxes on income
217

 
299

 
(27
)%
 
469

 
599

(22
)%
Net income
671

 
937

 
(28
)%
 
1,466

 
1,901

(23
)%
Preferred stock dividends and other
50

 
50

 
—

 
88

 
89

(1
)%
Net income available to common stockholders
$
621

 
$
887

 
(30
)%
 
$
1,378

 
$
1,812

(24
)%
Earnings per common share — diluted
$
.48

 
$
.66

 
(27
)%
 
$
1.07

 
$
1.35

(21
)%
Net revenue growth from prior year
(9
)%
 
8
%
 
 

 
(6
)%
 
11
%
 
Pre-tax profit margin
36.2
%
 
46.1
%
 
 

 
38.2
%
 
46.3
%
 
Return on average common stockholders’ equity (annualized)
10
%
 
19
%
 
 

 
12
%
 
20
%
 
Expenses excluding interest as a percentage of average client
assets (annualized)
0.16
%
 
0.16
%
 
 
 
0.16
%
 
0.17
%
 
Consolidated Tier 1 Leverage Ratio (at quarter end)
5.9
%
 
7.3
%
 
 
 
 
 
 
 
Non-GAAP Financial Measures (3)
 
 
 
 
 
 
 
 
 
 
Adjusted total expenses (4)
$
1,469

 
$
1,435

 
 
 
$
2,996

 
$
2,886

 
Adjusted diluted EPS
$
.54

 
$
.67

 
 
 
$
1.14

 
$
1.36

 
Return on tangible common equity
12
%
 
21
%
 
 
 
15
%
 
22
%
 
(1) The second quarter and first six months of 2020 include inflows of $79.9 billion related to the acquisition of the assets of USAA’s Investment Management Company (USAA-IMCO) and $10.9 billion from a mutual fund clearing services client.
(2) The second quarter and first six months of 2020 include 1.1 million new brokerage accounts related to the acquisition of assets from USAA-IMCO.
(3) See Non-GAAP Financial Measures for further details and a reconciliation of such measures to GAAP reported results.
(4) Adjusted total expenses is a non-GAAP financial measure adjusting total expenses excluding interest. See Non-GAAP Financial Measures.
N/M Not meaningful.

During the second quarter and first half of 2020, the ongoing health crisis of the COVID-19 pandemic and its effects continued to dominate the macroeconomic environment, resulting in a contracting U.S. economy, and sustained pressures on interest rates. Throughout this challenging time, the Company continued to operate without significant client disruption, and we continued to move forward on important operating initiatives, including multiple acquisitions. Schwab’s focus on clients remains, even as almost 95% of our employees continued to work remotely throughout the second quarter.

During the second quarter of 2020, we gathered $137.4 billion in net new assets, with core net new assets totaling $46.6 billion before including the effects of the USAA-IMCO acquisition and a large mutual fund clearing inflow. Aided by ongoing client engagement and an extended tax-filing season, our year-to-date core net new assets reached $119.8 billion, representing a 6%

- 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)


annualized organic growth rate. Strong client trading activity continued during the second quarter, as daily average trades were 1.6 million in both the second quarter and first half of 2020, up 126% and 112%, respectively, from the same periods in 2019. Active brokerage accounts grew 18% from June 30, 2019 and totaled 14.1 million at June 30, 2020, inclusive of 1.1 million USAA accounts added to our platform upon closing in May of 2020. Growth in equity market valuations during the second quarter, along with our ongoing asset-gathering and approximately $80 billion in client assets transferred from USAA, helped push total client assets to $4.11 trillion at June 30, 2020, up 11% from June 30, 2019.

Schwab’s net income totaled $671 million and $1.5 billion in the second quarter and first half of 2020, respectively, representing decreases of 28% and 23% from the comparable periods in the prior year. Diluted earnings per common share (EPS) in the second quarter and first half of 2020 were $.48 and $1.07, respectively, declining 27% and 21% from the same periods in 2019. Adjusted diluted EPS(1), which excludes acquisition and integration-related costs, amortization of acquired intangible assets, and related income tax effects, were $.54 and $1.14 for the second quarter and first six months of 2020, respectively, down from $.67 and $1.36 from the same periods in the prior year.

Total net revenues were $2.5 billion and $5.1 billion in the second quarter and first half of 2020, declining 9% and 6%, respectively, from the comparable periods in 2019, due primarily to lower net interest revenue. Lower net investment yields driven by the Federal Reserve’s dramatic monetary easing in 2020 outweighed growth in client cash balances held at our bank and broker-dealer subsidiaries, which led to declines in net interest revenue of 14% and 10% in the second quarter and first half of 2020, respectively, compared with the same periods in 2019. Asset management and administration fees grew to $801 million and $1.6 billion for the second quarter and first half of 2020, respectively, representing growth of 2% and 6% relative to the same periods in 2019. These increases were due primarily to clients’ higher balances of money market funds and advice solutions, partially offset by the effect of money market fund fee waivers due to declining portfolio yields, lower Mutual Fund OneSource® balances, and lower equity market valuations in the first quarter and beginning of the second quarter of 2020. Trading revenue declined 7% and 10% during the second quarter and first half of 2020, respectively, compared with the same periods in the prior year, as our October 2019 pricing actions more than offset a significant increase in trading volume in 2020.

Total expenses excluding interest were $1.6 billion and $3.1 billion during the second quarter and first half of 2020, representing increases of 8% for both periods relative to the comparable periods in 2019. Our expenses included acquisition and integration-related costs related to our completed and pending acquisitions discussed below of $81 million and $118 million during the second quarter and first six months of 2020, respectively. Adjusted total expenses(1), which exclude acquisition and integration-related costs as well as amortization of acquired intangible assets, were $1.5 billion and $3.0 billion during the second quarter and first six months of 2020, respectively, representing increases of 2% and 4%, respectively, from the comparable periods in 2019.

During the first six months of 2020, we remained intent on maintaining a balance sheet with healthy liquidity and capital levels. The sharp pandemic-driven increase in client cash during the first quarter of 2020 was followed by more modest balance sheet expansion during the second quarter, and after adding approximately $10 billion of client cash held at our bank and broker-dealer subsidiaries from our acquisition of USAA-IMCO, we ended the second quarter with total assets of $400 billion, up 8% from March 31 and up 36% from December 31, 2019. During the second quarter, we issued $2.5 billion of preferred stock, Series G, at an initial fixed rate of 5.375%, bringing total preferred stock to $5.3 billion, or approximately 24% of Tier 1 Capital at June 30, 2020, and the Company ended the second quarter with a Tier 1 Leverage Ratio of 5.9%.

Return on average common stockholders’ equity was 10% and 12% for the second quarter and first six months of 2020, down from 19% and 20% for the comparable periods in 2019. Return on tangible common equity(1) was 12% and 15% for the second quarter and first six months of 2020, down from 21% and 22% for the comparable periods in 2019. The decreases in both return on average common stockholders’ equity and return on tangible common equity were due primarily to lower net income and an increase in average accumulated other comprehensive income (AOCI) due to unrealized gains in our available for sale (AFS) investment securities portfolio. Return on tangible common equity represents annualized adjusted net income available to common stockholders(1) as a percentage of average tangible common equity(1). Adjusted net income available to common stockholders excludes acquisition and integration-related costs, amortization of acquired intangible assets, and related income tax effects. Tangible common equity excludes goodwill, acquired intangible assets, and related deferred tax liabilities.

(1) Adjusted diluted EPS, adjusted total expenses, adjusted net income available to common stockholders, and return on tangible common equity are non-GAAP financial measures. Please see Non-GAAP Financial Measures for further details and a reconciliation of such measures to GAAP reported results.

- 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)



Business and Asset Acquisitions

During the second quarter of 2020 we made significant progress towards closing our pending acquisition of TD Ameritrade, with the completion of the Department of Justice antitrust review and affirmative votes by both Schwab and TD Ameritrade stockholders. Integration planning efforts are continuing and we remain on track for closing our acquisition of TD Ameritrade during the second half of 2020.

On May 26, 2020, the Company completed its acquisition of the assets of USAA-IMCO for $1.6 billion in cash, subject to post-closing adjustments. Along with the asset purchase agreement, the companies entered into a long-term referral agreement that makes Schwab the exclusive provider of wealth management and investment brokerage services for USAA members. The USAA-IMCO acquisition adds scale to the Company’s operations through the addition of 1.1 million brokerage and managed portfolio accounts with approximately $80 billion in client assets at the acquisition date. The transaction also provides Schwab the opportunity to further expand our client base by serving USAA’s members through the long-term referral agreement. See Item 1 – Note 3 for more information on the USAA-IMCO acquisition.

Additionally, during the second quarter of 2020 the Company completed its acquisition of technology and intellectual property of Motif, a financial technology company. The Motif assets will help us build on our existing capabilities and help accelerate our development of thematic and direct index investing for Schwab’s retail investors and RIA clients. On July 1, 2020, the Company completed its acquisition of Wasmer, Schroeder & Company, LLC, which will add established strategies and new separately managed account offerings to our existing fixed income lineup.

Current Regulatory Environment and Other Developments

Effective March 20, 2020, CSB and Charles Schwab Premier Bank, SSB (CSPB) converted to Texas-chartered state savings banks. CSB and CSPB became members of the Federal Reserve and are subject to regulation, supervision and examination by the Federal Reserve and the Texas Department of Savings and Mortgage Lending.



- 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)


RESULTS OF OPERATIONS

Total Net Revenues

The following tables present a comparison of revenue by category:
 
 
 
2020
 
2019
Three Months Ended June 30,
Percent
Change
 
Amount
 
% of
Total Net
Revenues
 
Amount
 
% of
Total Net
Revenues
Net interest revenue
 
 
 
 
 
 
 
 
 
Interest revenue
(23
)%
 
$
1,486

 
61
%
 
$
1,927

 
72
%
Interest expense
(69
)%
 
(97
)
 
(4
)%
 
(318
)
 
(12
)%
Net interest revenue
(14
)%
 
1,389

 
57
%
 
1,609

 
60
%
Asset management and administration fees
 
 
 
 
 
 
 
 
 
Mutual funds, ETFs, and collective trust funds (CTFs)
(1
)%
 
425

 
17
%
 
428

 
16
%
Advice solutions
6
%
 
314

 
13
%
 
295

 
11
%
Other
(2
)%
 
62

 
3
%
 
63

 
2
%
Asset management and administration fees
2
%
 
801

 
33
%
 
786

 
29
%
Trading revenue
 
 
 
 
 
 
 
 
 
Commissions
(28
)%
 
111

 
5
%
 
155

 
5
%
Principal transactions
(47
)%
 
10

 
—

 
19

 
1
%
Order flow revenue (1)
118
%
 
72

 
3
%
 
33

 
2
%
Trading revenue (1)
(7
)%
 
193

 
8
%
 
207

 
8
%
Other (1)
(15
)%
 
67

 
2
%
 
79

 
3
%
Total net revenues
(9
)%
 
$
2,450

 
100
%
 
$
2,681

 
100
%

 
 
 
2020
 
2019
Six Months Ended June 30,
Percent
Change
 
Amount
 
% of
Total Net
Revenues
 
Amount
 
% of
Total Net
Revenues
Net interest revenue
 
 
 
 
 
 
 
 
 
Interest revenue
(19
)%
 
$
3,194

 
63
%
 
$
3,925

 
73
%
Interest expense
(63
)%
 
(233
)
 
(5
)%
 
(635
)
 
(12
)%
Net interest revenue
(10
)%
 
2,961

 
58
%
 
3,290

 
61
%
Asset management and administration fees
 
 
 
 
 
 
 
 
 
Mutual funds, ETFs, and collective trust funds (CTFs)
4
%
 
877

 
17
%
 
842

 
16
%
Advice solutions
9
%
 
626

 
12
%
 
573

 
11
%
Other
(1
)%
 
125

 
3
%
 
126

 
2
%
Asset management and administration fees
6
%
 
1,628

 
32
%
 
1,541

 
29
%
Trading revenue
 
 
 
 
 
 
 
 
 
Commissions
(30
)%
 
224

 
4
%
 
318

 
6
%
Principal transactions
(27
)%
 
30

 
1
%
 
41

 
1
%
Order flow revenue (1)
95
%
 
127

 
3
%
 
65

 
1
%
Trading revenue (1)
(10
)%
 
381

 
8
%
 
424

 
8
%
Other (1)
(35
)%
 
97

 
2
%
 
149

 
2
%
Total net revenues
(6
)%
 
$
5,067

 
100
%
 
$
5,404

 
100
%
(1) Beginning in the first quarter of 2020, order flow revenue was reclassified from other revenue to trading revenue. Prior period amounts have been reclassified to reflect this change.


- 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)


Net Interest Revenue

Revenue on interest-earning assets is affected by various factors, such as the composition of assets, prevailing interest rates and spreads at the time of origination or purchase, changes in interest rates on floating rate securities and loans, and changes in prepayment levels for mortgage-backed and other asset-backed securities and loans.

Late in the first quarter of 2020, the Federal Reserve cut the federal funds target overnight rate twice, for a total of 150 basis points to near zero; on the longer-end of the curve, the 10-year Treasury rate declined by over 120 basis points. Lower interest rates across maturities persisted throughout the second quarter, while credit spreads also compressed. Moreover, changes in the economic environment throughout the first half of 2020 resulting from the COVID-19 pandemic drove significantly higher levels of client cash sweep balances. Given the rapid accumulation of these balances in the first quarter of 2020, the Company initially placed a substantial amount in excess reserves held at the Federal Reserve. The Company deployed a significant amount of this cash build-up during the second quarter, as part of AFS securities purchases totaling $73.9 billion. These purchases were made at rates below the average yield on the existing AFS portfolio due to the current low interest rate environment. The Company held $27.5 billion, or 9% of total deposits, in excess reserves at June 30, 2020, versus our longer-term objective of 5-7%.

The following tables present net interest revenue information corresponding to interest-earning assets and funding sources on the condensed consolidated balance sheets:
 
2020
 
2019
Three Months Ended June 30,
Average Balance
 
Interest Revenue/ Expense
 
Average Yield/Rate
 
Average Balance
 
Interest Revenue/ Expense
 
Average Yield/Rate
Interest-earning assets
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
56,553

 
$
19

 
0.13
%
 
$
26,146

 
$
158

 
2.39
%
Cash and investments segregated
33,521

 
27

 
0.32
%
 
14,588

 
89

 
2.41
%
Broker-related receivables (1)
429

 
—

 
0.30
%
 
199

 
—

 
1.38
%
Receivables from brokerage clients
17,915

 
111

 
2.44
%
 
19,423

 
217

 
4.42
%
Available for sale securities (2, 3)
234,346

 
1,146

 
1.95
%
 
56,020

 
386

 
2.74
%
Held to maturity securities (3)
—

 
—

 
—

 
132,738

 
899

 
2.70
%
Bank loans
20,163

 
133

 
2.63
%
 
16,560

 
148

 
3.58
%
Total interest-earning assets
362,927

 
1,436

 
1.58
%
 
265,674

 
1,897

 
2.84
%
Other interest revenue
 
 
50

 
 
 
 
 
30

 
 
Total interest-earning assets
$
362,927

 
$
1,486

 
1.63
%
 
$
265,674

 
$
1,927

 
2.88
%
Funding sources
 
 
 
 
 
 
 
 
 
 
 
Bank deposits
$
288,990

 
$
12

 
0.02
%
 
$
210,811

 
$
224

 
0.43
%
Payables to brokerage clients
37,500

 
1

 
0.01
%
 
23,034

 
24

 
0.42
%
Short-term borrowings (1)
39

 
—

 
0.24
%
 
3

 
—

 
2.68
%
Long-term debt
8,524

 
77

 
3.60
%
 
7,090

 
63

 
3.58
%
Total interest-bearing liabilities
335,053

 
90

 
0.11
%
 
240,938

 
311

 
0.52
%
Non-interest-bearing funding sources
27,874

 
 
 
 
 
24,736

 
 
 
 
Other interest expense
 
 
7

 
 
 
 
 
7

 
 
Total funding sources
$
362,927

 
$
97

 
0.10
%
 
$
265,674

 
$
318

 
0.48
%
Net interest revenue
 
 
$
1,389

 
1.53
%
 
 
 
$
1,609

 
2.40
%

- 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)


 
2020
 
2019
Six Months Ended June 30,
Average Balance
 
Interest Revenue/ Expense
 
Average Yield/Rate
 
Average Balance
 
Interest Revenue/ Expense
 
Average Yield/Rate
Interest-earning assets
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
44,343

 
$
104

 
0.46
%
 
$
25,568

 
$
309

 
2.41
%
Cash and investments segregated
28,619

 
114

 
0.79
%
 
14,075

 
172

 
2.43
%
Broker-related receivables
580

 
2

 
0.96
%
 
228

 
2

 
2.15
%
Receivables from brokerage clients
18,533

 
279

 
2.97
%
 
19,199

 
431

 
4.46
%
Available for sale securities (2,3)
216,045

 
2,331

 
2.15
%
 
61,407

 
837

 
2.72
%
Held to maturity securities (3)
—

 
—

 
—

 
132,583

 
1,815

 
2.73
%
Bank loans
19,530

 
277

 
2.84
%
 
16,569

 
297

 
3.59
%
Total interest-earning assets
$
327,650

 
$
3,107

 
1.89
%
 
$
269,629

 
$
3,863

 
2.86
%
Other interest revenue
 
 
87

 
 
 
 
 
62

 
 
Total interest-earning assets
$
327,650

 
$
3,194

 
1.94
%
 
$
269,629

 
$
3,925

 
2.90
%
Funding sources
 
 
 
 
 
 
 
 
 
 
 
Bank deposits
$
258,256

 
$
69

 
0.05
%
 
$
215,374

 
$
450

 
0.42
%
Payables to brokerage clients
33,894

 
9

 
0.05
%
 
22,611

 
47

 
0.42
%
Short-term borrowings (1)
21

 
—

 
0.31
%
 
17

 
—

 
2.50
%
Long-term debt
8,025

 
143

 
3.57
%
 
6,968

 
125

 
3.60
%
Total interest-bearing liabilities
$
300,196

 
$
221

 
0.15
%
 
$
244,970

 
$
622

 
0.51
%
Non-interest-bearing funding sources
27,454

 
 
 
 
 
24,659

 
 
 
 
Other interest expense
 
 
12

 
 
 
 
 
13

 
 
Total funding sources
$
327,650

 
$
233

 
0.14
%
 
$
269,629

 
$
635

 
0.47
%
Net interest revenue
 
 
$
2,961

 
1.80
%
 
 
 
$
3,290

 
2.43
%
(1) Interest revenue or expense was less than $500,000 in the period or periods presented.
(2) Amounts have been calculated based on amortized cost.
(3) On January 1, 2020, the Company transferred all of its investment securities designated as held to maturity (HTM) to the AFS category, as described in Note 5.

Net interest revenue decreased $220 million, or 14%, and $329 million, or 10% in the second quarter and first six months of 2020 compared to the same periods in 2019, due primarily to lower average investment yields partially offset by growth in interest-earning assets. Accelerated premium amortization on debt securities in the second quarter and first six months of 2020 also contributed to the reduction in net interest revenue, as the decline in long-term interest rates in the first half of 2020 resulted in higher prepayments of mortgage-related debt securities.

Average interest-earning assets for the second quarter and first six months of 2020 were higher by 37% and 22%, respectively, compared to the same periods in 2019. These increases in average interest-earning assets were primarily driven by higher client cash balances in bank deposits and payables to brokerage clients.

Our net interest margin was 1.53% and 1.80% during the second quarter and first six months of 2020, respectively, down from 2.40% and 2.43%, during the same periods in 2019. This decrease was driven primarily by lower yields received on interest-earning assets due largely to the Federal Reserve’s 2019 and 2020 interest rate decreases. The amount of any further net interest margin compression and resulting net interest revenue is dependent on a number of factors, including the timing of investing cash into higher yielding assets, changes to LIBOR, and the level of client cash balances.


- 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

The following tables present asset management and administration fees, average client assets, and average fee yields:
Three Months Ended June 30,
2020
 
2019
Average
Client
Assets
 
Revenue
 
Average
Fee
 
Average
Client
Assets
 
Revenue
 
Average
Fee
Schwab money market funds before fee waivers
$
213,037

 
$
164

 
0.31
%
 
$
161,998

 
$
123

 
0.30
%
Fee waivers
 
 
(15
)
 
 
 
 
 
—

 
 
Schwab money market funds
$
213,037

 
149

 
0.28
%
 
$
161,998

 
123

 
0.30
%
Schwab equity and bond funds, ETFs, and CTFs
274,570

 
68

 
0.10
%
 
261,773

 
74

 
0.11
%
Mutual Fund OneSource® and other non-transaction fee funds
175,067

 
135

 
0.31
%
 
192,227

 
152

 
0.32
%
Other third-party mutual funds and ETFs (1)
416,242

 
73

 
0.07
%
 
471,638

 
79

 
0.07
%
Total mutual funds, ETFs, and CTFs (2)
$
1,078,916

 
425

 
0.16
%
 
$
1,087,636

 
428

 
0.16
%
Advice solutions (2) 
 
 
 
 
 
 
 
 
 
 
 
Fee-based
$
260,653

 
314

 
0.48
%
 
$
243,050

 
295

 
0.49
%
Non-fee-based
69,234

 
—

 
—

 
69,274

 
—

 
—

Total advice solutions
$
329,887

 
314

 
0.38
%
 
$
312,324

 
295

 
0.38
%
Other balance-based fees (3)
407,796

 
45

 
0.04
%
 
408,929

 
54

 
0.05
%
Other (4)
 
 
17

 
 
 
 
 
9

 
 
Total asset management and administration fees
 
 
$
801

 
 
 
 
 
$
786

 
 

 
2020
 
2019
Six Months Ended June 30,
Average
Client
Assets
 
Revenue
 
Average
Fee
 
Average
Client
Assets
 
Revenue
 
Average
Fee
Schwab money market funds before fee waivers
$
208,405

 
$
316

 
0.30
%
 
$
160,133

 
$
245

 
0.31
%
Fee waivers
 
 
(15
)
 
 
 
 
 
—

 
 
Schwab money market funds
$
208,405

 
$
301

 
0.29
%
 
$
160,133

 
$
245

 
0.31
%
Schwab equity and bond funds, ETFs, and CTFs
282,689

 
144

 
0.10
%
 
253,048

 
144

 
0.11
%
Mutual Fund OneSource ® and other non-transaction fee funds
181,825

 
282

 
0.31
%
 
189,725

 
299

 
0.32
%
Other third-party mutual funds and ETFs (1)
434,100

 
150

 
0.07
%
 
462,050

 
154

 
0.07
%
Total mutual funds, ETFs, and CTFs (2)
$
1,107,019

 
877

 
0.16
%
 
$
1,064,956

 
842

 
0.16
%
Advice solutions (2)
 
 
 
 
 
 
 
 
 
 
 
Fee-based
$
261,954

 
626

 
0.48
%
 
$
236,722

 
573

 
0.49
%
Non-fee-based
70,232

 
—

 
—

 
68,015

 
—

 
—

Total advice solutions
$
332,186

 
626

 
0.38
%
 
$
304,737

 
573

 
0.38
%
Other balance-based fees (3)
420,321

 
99

 
0.05
%
 
400,560

 
106

 
0.05
%
Other (4)
 
 
26

 
 
 
 
 
20

 
 
Total asset management and administration fees
 
 
$
1,628

 
 
 
 
 
$
1,541

 
 
(1) Beginning in the fourth quarter of 2019, Schwab ETF OneSource™ was discontinued as a result of the elimination of online trading commissions for U.S. and Canadian-listed ETFs.
(2) Average client assets for advice solutions may also include the asset balances contained in the mutual fund and/or ETF categories listed above.
(3) Includes various asset-related fees, such as trust fees, 401(k) recordkeeping fees, and mutual fund clearing fees and other service fees.
(4) Includes miscellaneous service and transaction fees relating to mutual funds and ETFs that are not balance-based.

Asset management and administration fees increased by $15 million, or 2%, and $87 million, or 6% in the second quarter and first six months of 2020, respectively, compared to the same periods in 2019. These increases were primarily driven by higher balances in purchased money market funds and advice solutions, including managed account assets from USAA, in the second quarter and first six months of 2020 relative to the same periods in 2019. These increases were partially offset by the effect of money market fund fee waivers due to declining portfolio yields, lower Mutual Fund OneSource® balances, and lower equity market valuations in the first quarter and the beginning of the second quarter of 2020. The amount of fee waivers in coming

- 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)


quarters is dependent on a variety of factors, including the level of short-term interest rates and client preferences across our money market fund line-up.

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% and 45% of the asset management and administration fees earned during the second quarter and first six months, respectively, of both 2020 and 2019:

Schwab Money
Market Funds
 
Schwab Equity and
Bond Funds, ETFs, and CTFs
 
Mutual Fund OneSource® 
and Other NTF funds
Three Months Ended June 30,
2020
 
2019
 
2020
 
2019
 
2020
 
2019
Balance at beginning of period
$
203,728

 
$
159,669

 
$
235,623

 
$
240,887

 
$
161,639

 
$
195,116

Net inflows (outflows)
7,625

 
7,539

 
(1,416
)
 
6,133

 
(4,488
)
 
(4,937
)
Net market gains (losses) and other
205

 
856

 
39,139

 
7,440

 
35,848

 
7,598

Balance at end of period
$
211,558

 
$
168,064

 
$
273,346

 
$
254,460

 
$
192,999

 
$
197,777


 
Schwab Money
Market Funds
 
Schwab Equity and
Bond Funds, ETFs, and CTFs
 
Mutual Fund OneSource® 
and Other NTF funds
Six Months Ended June 30,
2020
 
2019
 
2020
 
2019
 
2020
 
2019
Balance at beginning of period
$
200,826

 
$
153,472

 
$
286,275

 
$
209,471

 
$
202,068

 
$
180,532

Net inflows (outflows)
9,614

 
12,691

 
5,115

 
13,381

 
(15,053
)
 
(11,143
)
Net market gains (losses) and other
1,118

 
1,901

 
(18,044
)
 
31,608

 
5,984

 
28,388

Balance at end of period
$
211,558

 
$
168,064

 
$
273,346

 
$
254,460

 
$
192,999

 
$
197,777


Trading Revenue
The following table presents trading revenue and related information:

Three Months Ended June 30,
 
Percent
Change
 
Six Months Ended
June 30,
 
Percent
Change

2020
 
2019
 
 
2020
 
2019
 
Trading revenue (1)
$
193

 
$
207

 
(7
)%
 
$
381

 
$
424

 
(10
)%
Clients’ daily average trades (DATs) (in thousands)
1,619

 
716

 
126
%
 
1,580

 
746

 
112
%
Number of trading days
63.0

 
63.0

 
—

 
125.0

 
124.0

 
1
%
Revenue per trade (2)
$
1.89

 
$
4.59

 
(59
)%
 
$
1.93

 
$
4.58

 
(58
)%
Note:
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.
(1)
Beginning in the first quarter of 2020, order flow revenue was reclassified from other revenue to trading revenue. Prior period amounts have been reclassified to reflect this change.
(2)
Revenue per trade is calculated as trading revenue divided by DATs multiplied by the number of trading days.

Trading revenue decreased $14 million, or 7%, and $43 million, or 10%, in the second quarter and first six months of 2020 compared to the same periods in 2019, due primarily to our 2019 pricing actions, which more than offset a significant increase in clients’ daily average trades and higher order flow revenue. Order flow revenue was $72 million and $33 million during the second quarters of 2020 and 2019, and $127 million and $65 million during the first six months of 2020 and 2019, respectively. The increases in order flow revenue during the second quarter and first six months of 2020 compared to the same periods in 2019 were due to a higher volume of trades.

Other Revenue

Other revenue includes certain service fees, software fees, exchange processing fees, and non-recurring gains. Other revenue decreased $12 million, or 15%, and $52 million, or 35% in the second quarter and first six months of 2020, respectively,

- 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)


compared to the same periods in 2019. These decreases were primarily driven by a gain from the sale of a portfolio management and reporting software solution for advisors to Tamarac Inc. recognized in the second quarter of 2019, a gain from the assignment of leased office space recognized in the first quarter of 2019, and an increase in the allowance for credit losses on bank loans in the first quarter of 2020.

Total Expenses Excluding Interest
The following table shows a comparison of expenses excluding interest:
 
Three Months Ended
June 30,
 
Percent
Change
 
Six Months Ended
June 30,
 
Percent
Change
 
2020
 
2019
 
 
2020
 
2019
 
Compensation and benefits
 
 
 
 
 
 
 
 
 
 
 
Salaries and wages
$
523

 
$
476

 
10
%
 
$
1,025

 
$
952

 
8
%
Incentive compensation
181

 
198

 
(9
)%
 
408

 
414

 
(1
)%
Employee benefits and other
115

 
133

 
(14
)%
 
283

 
291

 
(3
)%
Total compensation and benefits
$
819

 
$
807

 
1
%
 
$
1,716

 
$
1,657

 
4
%
Professional services
198

 
178

 
11
%
 
380

 
348

 
9
%
Occupancy and equipment
152

 
133

 
14
%
 
294

 
264

 
11
%
Advertising and market development
70

 
77

 
(9
)%
 
137

 
146

 
(6
)%
Communications
78

 
62

 
26
%
 
153

 
124

 
23
%
Depreciation and amortization
109

 
84

 
30
%
 
205

 
167

 
23
%
Regulatory fees and assessments
36

 
30

 
20
%
 
70

 
62

 
13
%
Other
100

 
74

 
35
%
 
177

 
136

 
30
%
Total expenses excluding interest
$
1,562

 
$
1,445

 
8
%
 
$
3,132

 
$
2,904

 
8
%
Expenses as a percentage of total net revenues
 
 
 
 
 
 
 
 
 
 
 
Compensation and benefits
33
%
 
30
%
 
 
 
34
%
 
31
%
 
 
Advertising and market development
3
%
 
3
%
 
 
 
3
%
 
3
%
 
 
Full-time equivalent employees (in thousands)
 
 
 
 
 
 
 
 
 
 
 
At quarter end
21.8

 
20.5

 
6
%
 
 
 
 
 
 
Average
21.3

 
20.2

 
5
%
 
20.6

 
20.0

 
3
%

Expenses excluding interest increased by 8% in the second quarter and first six months of 2020 compared to the same periods in 2019. Adjusted total expenses, excluding acquisition and integration-related costs, and amortization of acquired intangible assets, increased 2% and 4% in the second quarter and first six months of 2020, respectively. See Non-GAAP Financial Measures for further details and a reconciliation of such measures to GAAP reported results.
Total compensation and benefits increased in the second quarter and first six months of 2020 compared to the same periods in 2019, primarily due to an increase in employee headcount to support our expanding client base, including approximately 400 former USAA employees hired in connection with the USAA-IMCO acquisition, partially offset by a lower corporate bonus accrual. The year-to-date increase also reflected the Company’s payment of $1,000 to all non-officer employees in March 2020 to help them cover costs incurred due to the COVID-19 pandemic.
Professional services expense increased in the second quarter and first six months of 2020 compared to the same periods in 2019, primarily due to expenses relating to our completed and pending acquisitions.
Occupancy and equipment expense increased in the second quarter and first six months of 2020 compared to the same periods in 2019, primarily due to an increase in technology equipment costs associated with higher customer trade volumes.
Communications expense increased in the second quarter and first six months of 2020 compared to the same periods in 2019, primarily due to higher customer trade volumes as well as overall growth in our business and client base.
Depreciation and amortization expenses grew in the second quarter and first six months of 2020 compared to the same periods in 2019, primarily due to higher amortization of purchased and internally developed software, higher depreciation of buildings

- 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)


and equipment related to expansion of our campuses in the U.S. in 2019 and 2020, as well as higher amortization of acquired intangible assets due to acquisitions completed in the second quarter of 2020.
Other expenses increased in the second quarter and first six months of 2020 compared to the same periods in 2019, primarily resulting from acquisition and integration-related costs and increases in processing fees and related expenses due to higher customer trade volumes and market volatility. These increases were partially offset by lower travel and entertainment expense.

Capital expenditures were $169 million and $419 million in the second quarter and first six months of 2020, respectively compared with $173 million and $354 million in the second quarter of 2019, respectively. The year to date increase in capital expenditures from the prior year was primarily due to higher capitalized software costs, partially offset by lower building expansion in 2020 relative to the first six months of 2019. Excluding any potential impact of the pending acquisition of TD Ameritrade, we anticipate capital expenditures for full-year 2020 to be approximately 5-6% of total net revenues.

Taxes on Income

Taxes on income were $217 million and $299 million for the second quarters of 2020 and 2019, respectively, resulting in effective income tax rates on income before taxes of 24.4% and 24.2%, respectively. Taxes on income were $469 million and $599 million for the first six months of 2020 and 2019, respectively, resulting in effective income tax rates on income before taxes of 24.2% and 24.0%, respectively. The increase in the effective tax rate in the second quarter and first six months of 2020 compared to the same periods in 2019 was due to an increase in nondeductible acquisition costs and FDIC insurance premium disallowance, as well as a decrease in equity compensation tax deduction benefits. Partially offsetting the increase in the effective tax rate from these items was a lower effective state income tax rate and an increase in Low-Income Housing Tax Credit (LIHTC) benefits in the second quarter and first six months of 2020.


- 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)


Segment Information

Financial information for our segments is presented in the following tables:
 
Investor Services
 
Advisor Services
 
Total
Three Months Ended June 30,
Percent Change
 
2020
 
2019
 
Percent Change
 
2020
 
2019
 
Percent Change
 
2020
 
2019
Net Revenues
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net interest revenue
(18
)%
 
$
952

 
$
1,154

 
(4
)%
 
$
437

 
$
455

 
(14
)%
 
$
1,389

 
$
1,609

Asset management and administration fees
4
%
 
583

 
560

 
(4
)%
 
218

 
226

 
2
%
 
801

 
786

Trading revenue (1)
(1
)%
 
138

 
140

 
(18
)%
 
55

 
67

 
(7
)%
 
193

 
207

Other (1)
38
%
 
51

 
37

 
(62
)%
 
16

 
42

 
(15
)%
 
67

 
79

Total net revenues
(9
)%
 
1,724

 
1,891

 
(8
)%
 
726

 
790

 
(9
)%
 
2,450

 
2,681

Expenses Excluding Interest
11
%
 
1,168

 
1,057

 
2
%
 
394

 
388

 
8
%
 
1,562

 
1,445

Income before taxes on income
(33
)%
 
$
556

 
$
834

 
(17
)%
 
$
332

 
$
402

 
(28
)%
 
$
888

 
$
1,236

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net New Client Assets (in billions) (2)
N/M

 
$
113.0

 
$
17.9

 
26
%
 
$
24.4

 
$
19.3

 
N/M

 
$
137.4

 
$
37.2

 
Investor Services
 
Advisor Services
 
Total
Six Months Ended June 30,
Percent Change
 
2020
 
2019
 
Percent Change
 
2020
 
2019
 
Percent Change
 
2020
 
2019
Net Revenues
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net interest revenue
(11
)%
 
$
2,080

 
$
2,349

 
(6
)%
 
$
881

 
$
941

 
(10
)%
 
$
2,961

 
$
3,290

Asset management and administration fees
8
%
 
1,183

 
1,093

 
(1
)%
 
445

 
448

 
6
%
 
1,628

 
1,541

Trading revenue (1)
(9
)%
 
257

 
281

 
(13
)%
 
124

 
143

 
(10
)%
 
381

 
424

Other (1)
(10
)%
 
71

 
79

 
(63
)%
 
26

 
70

 
(35
)%
 
97

 
149

Total net revenues
(6
)%
 
3,591

 
3,802

 
(8
)%
 
1,476

 
1,602

 
(6
)%
 
5,067

 
5,404

Expenses Excluding Interest
10
%
 
2,322

 
2,119

 
3
%
 
810

 
785

 
8
%
 
3,132

 
2,904

Income before taxes on income
(25
)%
 
$
1,269

 
$
1,683

 
(18
)%
 
$
666

 
$
817

 
(23
)%
 
$
1,935

 
$
2,500

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net New Client Assets (in billions) (2)
N/M

 
$
148.3

 
$
47.1

 
49
%
 
$
62.3

 
$
41.8

 
137
%
 
$
210.6

 
$
88.9

(1) Beginning in the first quarter of 2020, order flow revenue was reclassified from other revenue to trading revenue. Prior period amounts have been reclassified to reflect this change.
(2) For the second quarter and first six months of 2020, Investor Services includes inflows of $79.9 billion related to the acquisition of the assets of USAA-IMCO and $10.9 billion from a mutual fund clearing services client.
N/M Not meaningful.

Investor Services

Total net revenues decreased by 9% and 6% in the second quarter and first six months of 2020, respectively, compared to the same periods in 2019, primarily due to decreases in net interest revenue and trading revenue, partially offset by an increase in asset management and administration fees. Net interest revenue decreased primarily due to lower average investment yields, partially offset by growth in interest-earning assets. Trading revenue decreased primarily as a result of the Company’s 2019 pricing actions, which more than offset higher trading volume seen in the first six months of 2020. Asset management and administration fees increased primarily due to increased balances in purchased money market funds and advice solutions, partially offset by money market fund fee waivers due to declining portfolio yields, lower Mutual Fund OneSource® balances, and lower equity market valuations in the first quarter and beginning of the second quarter of 2020.


- 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)


Expenses excluding interest increased by 11% and 10% in the second quarter and first six months of 2020, respectively, compared to the same periods in 2019, primarily due to higher compensation and benefits, professional services, occupancy and equipment, depreciation and amortization, and other expenses. Compensation and benefits increased primarily due to increased headcount to support our expanding client base, including approximately 400 former USAA employees hired in connection with the USAA-IMCO acquisition, as well as the Company’s payment of $1,000 to all non-officer employees in March 2020 to help them cover costs incurred due to the COVID-19 pandemic, partially offset by a lower corporate bonus accrual. The professional services increase was driven primarily by expenses related to our completed and pending acquisitions and overall growth in the business. Occupancy and equipment expenses increased primarily due to technology equipment costs associated with higher customer trade volumes. Depreciation and amortization increased primarily due to higher amortization of purchased and internally developed software, higher depreciation of buildings and equipment related to our campus expansion, as well as higher amortization of acquired intangible assets due to acquisitions completed in the second quarter of 2020. Other expenses increased primarily due to increases in processing fees and related expenses due to higher customer trade volumes and market volatility, as well as acquisition and integration-related costs, partially offset by lower travel and entertainment expenses.

Advisor Services

Total net revenues decreased by 8% in both the second quarter and first six months of 2020, compared to the same periods in 2019, due to decreases in net interest revenue, asset management and administration fees, trading revenue, and other revenue. Net interest revenue decreased primarily due to lower average investment yields, partially offset by growth in interest-earning assets. Asset management and administration fees decreased primarily due to lower Mutual Fund OneSource® balances and lower equity market valuations in the first quarter and beginning of the second quarter of 2020, partially offset by increased balances in purchased money market funds. Trading revenue decreased primarily as a result of the Company’s 2019 pricing actions, partially offset by higher trading volume. The decrease in other revenue was primarily driven by a gain from the sale of a portfolio management and reporting software solution for advisors to Tamarac Inc. recognized in the second quarter of 2019, and a gain from the assignment of leased office space recognized in the first quarter of 2019.

Expenses excluding interest increased by 2% and 3% in the second quarter and first six months of 2020, respectively, compared to the same periods in 2019, primarily due to higher professional services, occupancy and equipment expenses, and depreciation and amortization. The increase in professional services was driven by expenses related to our acquisitions and overall growth in the business. Occupancy and equipment expenses increased primarily due to technology equipment costs associated with higher customer trade volumes. Depreciation and amortization expense increased primarily due to higher amortization of purchased and internally developed software, and higher depreciation of buildings and equipment related to expansion of our campuses in the U.S. in 2019 and 2020.


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 2019 Form 10-K.

Net Interest Revenue Simulation

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 simulations include all interest rate-sensitive assets and liabilities. Key assumptions include the projection of interest rate scenarios with rate floors, prepayment speeds of mortgage-related investments, repricing of financial instruments, and reinvestment of matured or paid-down securities and loans.

Net interest revenue is affected by various factors, such as the distribution and composition of interest-earning assets and interest-bearing liabilities, the spread between yields earned on interest-earning assets and rates paid on interest-bearing liabilities, which may reprice at different times or by different amounts, and the spread between short and long-term interest rates. Interest-earning assets primarily include investment securities, margin loans and bank loans. These assets are sensitive to changes in interest rates and changes in prepayment levels that tend to increase in a declining rate environment and decrease in a rising rate environment. Because we establish the rates paid on certain brokerage client cash balances and bank deposits and

- 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)


the rates charged on certain margin and bank loans, and control the composition of our investment securities, we have some ability to manage our net interest spread, depending on competitive factors and market conditions.

Net interest revenue sensitivity analysis assumes that the asset and liability structure of the consolidated balance sheet would not be changed as a result of the simulated changes in interest rates. As we actively manage the consolidated balance sheet 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 June 30, 2020 and December 31, 2019 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:
 
June 30, 2020
 
December 31, 2019
Increase of 100 basis points
14.2
%
 
4.8
%
Decrease of 100 basis points
(5.0
)%
 
(7.4
)%
The change in net interest revenue sensitivities as of June 30, 2020 reflects a significantly lower interest rate curve from the fourth quarter of 2019 due to the global economic impact from the COVID-19 pandemic. Higher short-term interest rates would positively impact net interest revenue as yields on interest earning assets are expected to rise faster than the cost of funding sources. A decline in interest rates could negatively impact the yield on the Company’s investment and loan portfolio to a greater degree than any offsetting reduction in interest expense from funding sources, compressing net interest margin.

In addition to measuring the effect of a gradual 100 basis point parallel increase or decrease in current interest rates, we regularly simulate the effects of larger parallel- and non-parallel shifts in interest rates on net interest revenue.

Economic Value of Equity Simulation

Management also uses economic value of equity (EVE) simulations to measure interest rate risk. EVE sensitivity measures the long-term impact of interest rate changes on the net present value of assets and liabilities. EVE is calculated by subjecting the balance sheet to hypothetical instantaneous shifts in the level of interest rates. This analysis is highly dependent upon asset and liability assumptions based on historical behaviors as well as our expectations of the economic environment. Key assumptions in our EVE calculation include projection of interest rate scenarios with rate floors, prepayment speeds of mortgage-related investments, term structure models of interest rates, non-maturity deposit behavior, and pricing assumptions.

As a result of the low interest rate environment in the second quarter and first six months of 2020, the downward assessments of our net interest revenue and EVE simulations as of June 30, 2020 reflected the assumption of non-negative investment yields.

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 assessed 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, and we have sold certain securities lacking appropriate fall-back language. We are updating 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.


- 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)


Liquidity Risk

Funding Sources

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, we also maintain a buffer of highly liquid investments, including U.S. Treasury securities.

In addition to internal sources of liquidity, Schwab has access to external funding. The following table describes external debt facilities available at June 30, 2020:
Description
Borrower
 
Outstanding
 
Available
Federal Home Loan Bank secured credit facility (1)
Banking subsidiaries
 
$
—

 
$
44,377

Federal Reserve discount window (2)
Banking subsidiaries
 
—

 
8,814

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

 
1,592

Unsecured commercial paper
CSC
 
—

 
750

Committed, unsecured credit facility with various external banks
CSC
 
—

 
700

(1) Amounts available are dependent on the amount of first lien residential real estate mortgage loans (First Mortgages), home equity lines of credit (HELOCs), and the fair value of certain investment securities that are pledged as collateral.
(2) 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) at June 30, 2020 and December 31, 2019.
CSC also has a universal automatic shelf registration statement on file with the SEC, which enables it to issue debt, equity, and other securities.

Liquidity Coverage Ratio

Pursuant to the 2019 interagency regulatory capital and liquidity rules, beginning in the first quarter of 2020, Schwab became subject to a reduced LCR rule requiring the Company to hold high quality liquid assets (HQLA) in an amount equal to at least 85% of the Company’s projected net cash outflows over a prospective 30-calendar-day period of acute liquidity stress, calculated on each business day. See Part I – Item 1 – Regulation in the 2019 Form 10-K for additional information. The Company was in compliance with the reduced LCR rule at June 30, 2020. The table below presents information about our average daily LCR:
 
Average for the
Three Months Ended
June 30, 2020
 
Total eligible high quality liquid assets
$
65,038

Net cash outflows
$
58,351

LCR
112
%


- 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)


Borrowings

The following are details of the Senior Notes:
June 30, 2020
Par
Outstanding
 
Maturity
Weighted Average
Interest Rate
Moody’s
Standard
& Poor’s
Fitch
Senior Notes
$
8,581

 
2020 - 2030
3.37%
A2
A
A

2020 Debt Issuances

The debt issuances in 2020 were senior unsecured obligations with interest payable semi-annually. Additional details are as follows:
Issuance Date
Issuance Amount
Maturity Date
Interest Rate
3/24/2020
$
600

3/24/2025
4.200
%
3/24/2020
$
500

3/22/2030
4.625
%

2020 Equity Issuances

CSC’s preferred stock issued and net proceeds for 2020 are as follows:
 
Date Issued and Sold
Net Proceeds
Series G
April 30, 2020
$
2,470


For further discussion of CSC’s debt and equity, see Item 1 – Notes 9 and 13.


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.

As a result of the significant inflow of client cash in the first six months of 2020, our consolidated Tier 1 Leverage Ratio declined from 7.3% at year-end 2019 to 5.9% at June 30, 2020, below our long-term operating objective of 6.75%-7.00% but well above the regulatory minimum of 4.00%. The pace of our return to the long-term operating objective over time depends on a number of factors including the overall size of the Company’s balance sheet, earnings, and capital issuance and deployment. We continue to manage our capital position in accordance with our policy and strategy described above and in further detail in the 2019 Form 10-K.

Regulatory Capital Requirements

CSC and CSB are subject to various capital requirements set by regulatory agencies as discussed in further detail in the 2019 Form 10-K and in Item 1 – Note 15. As of June 30, 2020, CSC and CSB are considered well capitalized.


- 18 -

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


The following table details CSC’s consolidated and CSB’s capital ratios as of June 30, 2020 and December 31, 2019:
 
June 30, 2020 (1)
December 31, 2019 (1)
 
CSC
 
CSB
 
CSC
 
CSB
Total stockholders’ equity
$
30,815

 
$
20,960

 
$
21,745

 
$
14,832

Less:
 
 
 
 
 
 
 
Preferred stock
5,263

 
—

 
2,793

 
—

Common Equity Tier 1 Capital before regulatory adjustments
$
25,552

 
$
20,960

 
$
18,952

 
$
14,832

Less:
 
 
 
 
 
 
 
Goodwill, net of associated deferred tax liabilities
$
1,691

 
$
13

 
$
1,184

 
$
13

Other intangible assets, net of associated deferred tax liabilities
1,254

 
—

 
104

 
—

Deferred tax assets, net of valuation allowances and deferred tax liabilities
4

 
—

 
4

 
—

AOCI adjustment (1)
5,611

 
4,892

 
—

 
—

Common Equity Tier 1 Capital
$
16,992

 
$
16,055

 
$
17,660

 
$
14,819

Tier 1 Capital
$
22,255

 
$
16,055

 
$
20,453

 
$
14,819

Total Capital
22,288

 
16,087

 
20,472

 
14,837

Risk-Weighted Assets
107,253

 
85,051

 
90,512

 
71,521

Total Leverage Exposure
382,963

 
283,511

 
286,813

 
216,582

Common Equity Tier 1 Capital/Risk-Weighted Assets
15.8
%
 
18.9
%
 
19.5
%
 
20.7
%
Tier 1 Capital/Risk-Weighted Assets
20.8
%
 
18.9
%
 
22.6
%
 
20.7
%
Total Capital/Risk-Weighted Assets
20.8
%
 
18.9
%
 
22.6
%
 
20.7
%
Tier 1 Leverage Ratio
5.9
%
 
5.8
%
 
7.3
%
 
7.1
%
Supplementary Leverage Ratio
5.8
%
 
5.7
%
 
7.1
%
 
6.8
%
(1) In the interagency regulatory capital and liquidity rules adopted in October 2019, Category III banking organizations such as CSC were given the ability to opt-out of the inclusion of AOCI in regulatory capital, and CSC made this opt-out election as of January 1, 2020. Therefore, AOCI is excluded from the amounts and ratios presented as of June 30, 2020. In 2019, CSC and CSB were required to include all components of AOCI in regulatory capital; the amounts and ratios for December 31, 2019 are presented on this basis.

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 Federal Reserve to declare dividends to CSC.
As a broker-dealer, CS&Co is subject to regulatory requirements of the Uniform Net Capital Rule. At June 30, 2020, CS&Co was in compliance with its net capital requirements.

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


- 19 -

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


Dividends

On January 30, 2020, the Board of Directors of the Company declared a one cent, or 6%, increase in the quarterly cash dividend to $.18 per common share.

Cash dividends paid and per share amounts for the first six months of 2020 and 2019 are as follows:
 
 
2020
 
2019
Six Months Ended June 30,
 
Cash Paid
 
Per Share
Amount
 
Cash Paid
 
Per Share
Amount
Common Stock
 
$
466

 
$
.36

 
$
456

 
$
.34

Series A Preferred Stock (1)
 
14

 
35.00

 
14

 
35.00

Series C Preferred Stock (2)
 
18

 
30.00

 
18

 
30.00

Series D Preferred Stock (2)
 
22

 
29.76

 
22

 
29.76

Series E Preferred Stock (3)
 
14

 
2,312.50

 
14

 
2,312.50

Series F Preferred Stock (4)
 
13

 
2,500.00

 
13

 
2,500.00

Series G Preferred Stock (5)
 
N/A

 
N/A

 
N/A

 
N/A

(1) Dividends paid semi-annually until February 1, 2022 and quarterly thereafter.
(2) Dividends paid quarterly.
(3) Dividends paid semi-annually until March 1, 2022 and quarterly thereafter.
(4) Dividends paid semi-annually beginning on June 1, 2018 until December 1, 2027, and quarterly thereafter.
(5) Series G Preferred Stock was issued on April 30, 2020. Dividends paid quarterly beginning on September 1, 2020.
N/A Not applicable.

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. There were no repurchases of CSC’s common stock under this authorization during the second quarter and first six months of 2020. As of June 30, 2020, $1.8 billion remained on our existing authorization.
 

OTHER

Foreign Exposure
At June 30, 2020, Schwab had exposure to non-sovereign financial and non-financial institutions in foreign countries, as well as agencies of foreign governments. At June 30, 2020, the fair value of these holdings totaled $8.2 billion, with the top three exposures being to issuers and counterparties domiciled in France at $5.5 billion, Sweden at $688 million, and Canada at $607 million. In addition, Schwab had outstanding margin loans to foreign residents of $531 million at June 30, 2020.

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 6, Note 7, Note 9, Note 10, and Note 11, and Item 8 – Note 14 in the 2019 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 2019 Form 10-K. There have been no changes to critical accounting estimates during the first six months of 2020.



- 20 -

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


NON-GAAP FINANCIAL MEASURES

In addition to disclosing financial results in accordance with generally accepted accounting principles in the U.S. (GAAP), Management’s Discussion and Analysis of Financial Condition and Results of Operations contain references to the non-GAAP financial measures described below. We believe these non-GAAP financial measures provide useful supplemental information about the financial performance of the Company, and facilitate meaningful comparison of Schwab’s results in the current period to both historic and future results. These non-GAAP measures should not be considered a substitute for, or superior to, financial measures calculated in accordance with GAAP, and may not be comparable to non-GAAP financial measures presented by other companies.

Schwab’s use of non-GAAP measures is reflective of certain adjustments made to GAAP financial measures as described below.
Non-GAAP Adjustment or Measure
Definition
Usefulness to Management and Investors
Acquisition and integration-related costs and amortization of acquired intangible assets
Schwab adjusts certain GAAP financial measures to exclude the impact of acquisition and integration-related costs incurred as a result of the Company’s completed and pending acquisitions, amortization of acquired intangible assets, and, where applicable, the income tax effect of these expenses.

Adjustments made to exclude amortization of acquired intangible assets are reflective of all acquired intangible assets, which were recorded as part of purchase accounting. These acquired intangible assets contribute to the Company’s revenue generation. Amortization of acquired intangible assets will continue in future periods over their remaining useful lives.
We exclude acquisition and integration-related costs and amortization of acquired intangible assets for the purpose of calculating certain non-GAAP measures because we believe doing so provides additional transparency of Schwab’s ongoing operations, and may be useful in both evaluating the operating performance of the business and facilitating comparison of results with prior and future periods.

Acquisition and integration-related costs fluctuate based on the timing of acquisitions and integration activities, thereby limiting comparability of results among periods, and are not representative of the costs of running the Company’s ongoing business. Amortization of acquired intangible assets is excluded because management does not believe it is indicative of the Company’s underlying operating performance.
Return on tangible common equity
Return on tangible common equity represents annualized adjusted net income available to common stockholders as a percentage of average tangible common equity. Tangible common equity represents common equity less goodwill, acquired intangible assets – net, and related deferred tax liabilities.
Acquisitions typically result in the recognition of significant amounts of goodwill and acquired intangible assets. We believe return on tangible common equity may be useful to investors as a supplemental measure to facilitate assessing capital efficiency and returns relative to the composition of Schwab’s balance sheet.

The following tables present reconciliations of GAAP measures to non-GAAP measures:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2020
2019
 
2020
2019
Total expenses excluding interest (GAAP)
$
1,562

$
1,445

 
$
3,132

$
2,904

Acquisition and integration-related costs (1)
(81
)
(3
)
 
(118
)
(4
)
Amortization of acquired intangible assets
(12
)
(7
)
 
(18
)
(14
)
Adjusted total expenses (Non-GAAP)
$
1,469

$
1,435

 
$
2,996

$
2,886

(1) Acquisition and integration-related expenses are primarily included in Professional services and Other.


- 21 -

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


 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2020
2019
 
2020
2019
 
Amount
Diluted EPS
Amount
Diluted EPS
 
Amount
Diluted EPS
Amount
Diluted EPS
Net income available to common stockholders (GAAP),
Earnings per common share — diluted (GAAP)
$
621

$
.48

$
887

$
.66

 
$
1,378

$
1.07

$
1,812

$
1.35

Acquisition and integration-related costs
81

.07

3

—

 
118

.09

4

—

Amortization of acquired intangible assets
12

.01

7

.01

 
18

.01

14

.01

Income tax effects (1)
(22
)
(.02
)
(2
)
—

 
(33
)
(.03
)
(4
)
—

Adjusted net income available to common stockholders
(Non-GAAP), Adjusted diluted EPS (Non-GAAP)
$
692

$
.54

$
895

$
.67

 
$
1,481

$
1.14

$
1,826

$
1.36

(1) The income tax effects of the non-GAAP adjustments are determined using an effective tax rate reflecting the exclusion of non-deductible acquisition costs and are used to present the acquisition and integration-related costs and amortization of acquired intangible assets on an after-tax basis.

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2020
2019
 
2020
2019
Return on average common stockholders' equity (GAAP)
10
%
19
%
 
12
%
20
%
Average common stockholders' equity
$
24,515

$
18,679

 
$
22,253

$
18,202

Less: Average goodwill
(1,480
)
(1,227
)
 
(1,480
)
(1,227
)
Less: Average acquired intangible assets — net
(700
)
(143
)
 
(703
)
(146
)
Plus: Average deferred tax liabilities related to goodwill and acquired intangible assets — net
67

67

 
67

67

Average tangible common equity
$
22,402

$
17,376

 
$
20,137

$
16,896

Adjusted net income available to common stockholders (1)
$
692

$
895

 
$
1,481

$
1,826

Return on tangible common equity (Non-GAAP)
12
%
21
%
 
15
%
22
%
(1) See table above for the reconciliation of net income available to common stockholders to adjusted net income available to common stockholders (non-GAAP).



- 22 -


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.


- 23 -

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
June 30,
 
Six Months Ended
June 30,
 
2020
 
2019
 
2020
 
2019
Net Revenues
 
 
 
 
 
 
 
Interest revenue
$
1,486

 
$
1,927

  
$
3,194

 
$
3,925

Interest expense
(97
)
 
(318
)
 
(233
)
 
(635
)
Net interest revenue
1,389

 
1,609

 
2,961

 
3,290

Asset management and administration fees
801

 
786

  
1,628

 
1,541

Trading revenue (1)
193

 
207

 
381

 
424

Other (1)
67

 
79

 
97

 
149

Total net revenues
2,450

 
2,681

 
5,067

 
5,404

Expenses Excluding Interest
 
 
 
 
 
 
 
Compensation and benefits
819

 
807

  
1,716

 
1,657

Professional services
198

 
178

  
380

 
348

Occupancy and equipment
152

 
133

  
294

 
264

Advertising and market development
70

 
77

  
137

 
146

Communications
78

 
62

  
153

 
124

Depreciation and amortization
109

 
84

  
205

 
167

Regulatory fees and assessments
36

 
30

 
70

 
62

Other
100

 
74

  
177

 
136

Total expenses excluding interest
1,562

 
1,445

  
3,132

 
2,904

Income before taxes on income
888

 
1,236

  
1,935

 
2,500

Taxes on income
217

 
299

  
469

 
599

Net Income
671

 
937

  
1,466

 
1,901

Preferred stock dividends and other (2)
50

 
50

  
88

 
89

Net Income Available to Common Stockholders
$
621

 
$
887

  
$
1,378

 
$
1,812

Weighted-Average Common Shares Outstanding:
 
 
 
 
 
 
 
Basic
1,288

 
1,328

  
1,287

 
1,331

Diluted (3)
1,294

 
1,337

 
1,294

 
1,340

Earnings Per Common Shares Outstanding:
 
 
 
 
 
 
 
Basic
$
.48

 
$
.67

  
$
1.07

 
$
1.36

Diluted (3)
$
.48

 
$
.66

  
$
1.07

 
$
1.35


(1) Beginning in the first quarter of 2020, order flow revenue was reclassified from other revenue to trading revenue. Prior period amounts have been reclassified to reflect this change.
(2) Includes preferred stock dividends and undistributed earnings and dividends allocated to non-vested restricted stock units.
(3) Antidilutive stock options and restricted stock units excluded from the calculation of diluted EPS totaled 19 million and 16 million shares for the second quarters of 2020 and 2019, respectively, and 19 million and 17 million shares for the first six months of 2020 and 2019, respectively.

See Notes to Condensed Consolidated Financial Statements.


- 24 -


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


 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2020
 
2019
 
2020
 
2019
Net income
$
671

 
$
937

 
$
1,466

 
$
1,901

Other comprehensive income (loss), before tax:
 

 
 

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

 
 

 
 
 
 
Net unrealized gain (loss)
2,113

 
218

 
7,264

 
445

Other reclassifications included in other revenue
—

 
(3
)
 
—

 
(4
)
Amortization of amounts previously recorded upon transfer to held to maturity
from available for sale
—

 
8

 
—

 
20

Other
1

 
—

 
1

 
—

Other comprehensive income (loss), before tax
2,114

 
223

 
7,265

 
461

Income tax effect
(498
)
 
(53
)
 
(1,742
)
 
(110
)
Other comprehensive income (loss), net of tax
1,616

 
170

 
5,523

 
351

Comprehensive Income
$
2,287

 
$
1,107

 
$
6,989

 
$
2,252


See Notes to Condensed Consolidated Financial Statements.


- 25 -


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


 
June 30, 2020
 
December 31, 2019
Assets
 
 
 
Cash and cash equivalents
$
33,574

 
$
29,345

Cash and investments segregated and on deposit for regulatory purposes (including resale
agreements of $9,407 at June 30, 2020 and $9,028 at December 31, 2019)
33,188

 
20,483

Receivables from brokerage clients — net
21,421

 
21,767

Available for sale securities (amortized cost of $273,747 at June 30, 2020 and $61,155 at
December 31, 2019)
281,216

 
61,422

Held to maturity securities
—

 
134,706

Bank loans — net
20,871

 
18,212

Equipment, office facilities, and property — net
2,314

 
2,128

Goodwill
1,733

 
1,227

Acquired intangible assets — net
1,278

 
128

Other assets
4,889

 
4,587

Total assets
$
400,484

 
$
294,005

Liabilities and Stockholders’ Equity
 
 
 

Bank deposits
$
301,566

 
$
220,094

Payables to brokerage clients
50,135

 
39,220

Accrued expenses and other liabilities
9,442

 
5,516

Long-term debt
8,526

 
7,430

Total liabilities
369,669

 
272,260

Stockholders’ equity:
 
 
 

Preferred stock — $.01 par value per share; aggregate liquidation preference of $5,350 and $2,850 at June 30, 2020 and December 31, 2019, respectively
5,263

 
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
4,760

 
4,656

Retained earnings
20,876

 
19,960

Treasury stock, at cost — 199,058,357 shares at June 30, 2020 and 201,818,100
shares at December 31, 2019
(5,710
)
 
(5,767
)
Accumulated other comprehensive income (loss)
5,611

 
88

Total stockholders’ equity
30,815

 
21,745

Total liabilities and stockholders’ equity
$
400,484

 
$
294,005


See Notes to Condensed Consolidated Financial Statements.


- 26 -


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 March 31, 2019
$
2,793

 
1,488

 
$
15

 
$
4,548

 
$
18,017

 
$
(3,677
)
 
$
(71
)
 
$
21,625

Net income
—

 
—

 
—

 
—

 
937

 
—

 
—

 
937

Other comprehensive income (loss), net of tax
—

 
—

 
—

 
—

 
—

 
—

 
170

 
170

Dividends declared on preferred stock
—

 
—

 
—

 
—

 
(47
)
 
—

 
—

 
(47
)
Dividends declared on common stock — $.17 per share
—

 
—

 
—

 
—

 
(228
)
 
—

 
—

 
(228
)
Repurchase of common stock
—

 
—

 
—

 
—

 
—

 
(1,220
)
 
—

 
(1,220
)
Stock option exercises and other
—

 
—

 
—

 
1

 
—

 
21

 
—

 
22

Share-based compensation
—

 
—

 
—

 
35

 
—

 
—

 
—

 
35

Other
—

 
—

 
—

 
15

 
1

 
10

 
—

 
26

Balance at June 30, 2019
$
2,793

 
1,488

 
$
15

 
$
4,599

 
$
18,680

 
$
(4,866
)
 
$
99

 
$
21,320

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at March 31, 2020
$
2,793

 
1,488

 
$
15

 
$
4,714

 
$
20,487

 
$
(5,734
)
 
$
3,995

 
$
26,270

Net income
—

 
—

 
—

 
—

 
671

 
—

 
—

 
671

Other comprehensive income (loss), net of tax
—

 
—

 
—

 
—

 
—

 
—

 
1,616

 
1,616

Issuance of preferred stock, net
2,470

 
—

 
—

 
—

 
—

 
—

 
—

 
2,470

Dividends declared on preferred stock
—

 
—

 
—

 
—

 
(47
)
 
—

 
—

 
(47
)
Dividends declared on common stock — $.18 per share
—

 
—

 
—

 
—

 
(233
)
 
—

 
—

 
(233
)
Stock option exercises and other
—

 
—

 
—

 
(2
)
 
—

 
8

 
—

 
6

Share-based compensation
—

 
—

 
—

 
35

 
—

 
—

 
—

 
35

Other
—

 
—

 
—

 
13

 
(2
)
 
16

 
—

 
27

Balance at June 30, 2020
$
5,263

 
1,488

 
$
15

 
$
4,760

 
$
20,876

 
$
(5,710
)
 
$
5,611

 
$
30,815

 
 
 
 
 
 
 
 
 
 
 
 
 
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, 2018
$
2,793

 
1,488

 
$
15

 
$
4,499

 
$
17,329

 
$
(3,714
)
 
$
(252
)
 
$
20,670

Net income
—

 
—

 
—

 
—

 
1,901

 
—

 
—

 
1,901

Other comprehensive income (loss), net of tax
—

 
—

 
—

 
—

 
—

 
—

 
351

 
351

Dividends declared on preferred stock
—

 
—

 
—

 
—

 
(81
)
 
—

 
—

 
(81
)
Dividends declared on common stock — $.34 per share
—

 
—

 
—

 
—

 
(456
)
 
—

 
—

 
(456
)
Repurchase of common stock
—

 
—

 
—

 
—

 
—

 
(1,220
)
 
—

 
(1,220
)
Stock option exercises and other
—

 
—

 
—

 
(13
)
 
—

 
61

 
—

 
48

Share-based compensation
—

 
—

 
—

 
88

 
—

 
—

 
—

 
88

Other
—

 
—

 
—

 
25

 
(13
)
 
7

 
—

 
19

Balance at June 30, 2019
$
2,793

 
1,488

 
$
15

 
$
4,599

 
$
18,680

 
$
(4,866
)
 
$
99

 
$
21,320

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2019
$
2,793

 
1,488

 
$
15

 
$
4,656

 
$
19,960

 
$
(5,767
)
 
$
88

 
$
21,745

Net income
—

 
—

 
—

 
—

 
1,466

 
—

 
—

 
1,466

Other comprehensive income (loss), net of tax
—

 
—

 
—

 
—

 
—

 
—

 
5,523

 
5,523

Issuance of preferred stock, net
2,470

 
—

 
—

 
—

 
—

 
—

 
—

 
2,470

Dividends declared on preferred stock
—

 
—

 
—

 
—

 
(81
)
 
—

 
—

 
(81
)
Dividends declared on common stock — $.36 per share
—

 
—

 
—

 
—

 
(466
)
 
—

 
—

 
(466
)
Stock option exercises and other
—

 
—

 
—

 
(10
)
 
—

 
39

 
—

 
29

Share-based compensation
—

 
—

 
—

 
91

 
—

 
—

 
—

 
91

Other
—

 
—

 
—

 
23

 
(3
)
 
18

 
—

 
38

Balance at June 30, 2020
$
5,263

 
1,488

 
$
15

 
$
4,760

 
$
20,876

 
$
(5,710
)
 
$
5,611

 
$
30,815


See Notes to Condensed Consolidated Financial Statements.

- 27 -


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


 
Six Months Ended
June 30,
 
2020
 
2019
Cash Flows from Operating Activities
 

 
 
Net income
$
1,466

 
$
1,901

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

 
 
Share-based compensation
91

 
95

Depreciation and amortization
205

 
167

Premium amortization, net, on available for sale and held to maturity securities
511

 
159

Other
166

 
65

Net change in:
 

 
 

Investments segregated and on deposit for regulatory purposes
(16,198
)
 
(889
)
Receivables from brokerage clients
418

 
219

Other assets
(109
)
 
15

Payables to brokerage clients
6,443

 
(1,713
)
Accrued expenses and other liabilities
682

 
(400
)
Net cash provided by (used for) operating activities
(6,325
)
 
(381
)
Cash Flows from Investing Activities
 
 
 
Purchases of available for sale securities
(101,667
)
 
(5,767
)
Proceeds from sales of available for sale securities
70

 
16,274

Principal payments on available for sale securities
24,677

 
12,306

Purchases of held to maturity securities
—

 
(10,469
)
Principal payments on held to maturity securities
—

 
8,466

Net change in bank loans
(2,663
)
 
(59
)
Cash acquired in acquisition, net of cash paid
2,768

 
—

Purchases of equipment, office facilities, and property
(335
)
 
(310
)
Purchases of Federal Home Loan Bank stock
(12
)
 
(2
)
Purchases of Federal Reserve stock
(182
)
 
—

Other investing activities
(101
)
 
9

Net cash provided by (used for) investing activities
(77,445
)
 
20,448

Cash Flows from Financing Activities
 
 
 
Net change in bank deposits
81,472

 
(23,048
)
Issuance of long-term debt
1,089

 
593

Net proceeds from preferred stock offerings
2,470

 
—

Dividends paid
(547
)
 
(537
)
Proceeds from stock options exercised
29

 
48

Repurchases of common stock
—

 
(1,155
)
Other financing activities
(7
)
 
(13
)
Net cash provided by (used for) financing activities
84,506

 
(24,112
)
Increase (Decrease) in Cash and Cash Equivalents, including Amounts Restricted
736

 
(4,045
)
Cash and Cash Equivalents, including Amounts Restricted at Beginning of Period
45,577

 
38,227

Cash and Cash Equivalents, including Amounts Restricted at End of Period
$
46,313

 
$
34,182



Continued on following page.



- 28 -


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


Continued from previous page.
 
Six Months Ended
June 30,
 
2020
 
2019
Supplemental Cash Flow Information
 
 
 
Non-cash investing activity:
 
 
 
Securities transferred from held to maturity to available for sale, at fair value
$
136,099

 
$
8,771

Securities purchased during the period but settled after period end
$
1,417

 
$
2,910

Additions of equipment, office facilities, and property
$
84

 
$
44

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
$
—

 
$
65

Other Supplemental Cash Flow Information
 
 
 
Cash paid during the period for:
 
 
 
Interest
$
227

 
$
625

Income taxes
$
41

 
$
641

Amounts included in the measurement of lease liabilities
$
75

 
$
65

Leased assets obtained in exchange for new operating lease liabilities
$
58

 
$
65

 
 
 
 
 
June 30, 2020
 
June 30, 2019
Reconciliation of cash, cash equivalents and amounts reported within the balance sheet (1)
 
 
 
Cash and cash equivalents
$
33,574

 
$
24,199

Restricted cash and cash equivalents amounts included in cash and investments segregated
and on deposit for regulatory purposes
12,739

 
9,983

Total cash and cash equivalents, including amounts restricted shown in the
statement of cash flows
$
46,313

 
$
34,182

(1) For more information on the nature of restrictions on restricted cash and cash equivalents, see Note 15.

See Notes to Condensed Consolidated Financial Statements.


- 29 -

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.

Principal business subsidiaries of CSC include the following:

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

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 2019 Form 10-K.
Reclassifications: Certain prior period amounts have been reclassified to conform to the current period presentation. Beginning in the first quarter of 2020, order flow revenue was reclassified from other revenue to trading revenue in the condensed consolidated statements of income. Beginning in the second quarter of 2020, acquired intangible assets — net was reclassified from other assets and presented separately in the condensed consolidated balance sheets. Prior period amounts have been reclassified to reflect these changes.
The significant accounting policies are included in Note 2 in the 2019 Form 10-K. There have been no significant changes to these accounting policies during the first six months of 2020, except as described in Note 2 below.


2.    Summary of Significant Accounting Policies

Cash and investments segregated and on deposit for regulatory purposes

Pursuant to Rule 15c3-3 of the Securities Exchange Act of 1934 and other applicable regulations, Schwab maintains cash or qualified securities in segregated reserve accounts for the exclusive benefit of clients. Cash and investments segregated and on deposit for regulatory purposes include resale agreements, which are collateralized by U.S. Government and agency securities. Resale agreements are accounted for as collateralized financing transactions that are recorded at their contractual amounts plus accrued interest. The Company obtains collateral with a market value equal to or in excess of the principal amount loaned and accrued interest under resale agreements. Collateral is valued daily by the Company, with additional collateral obtained to ensure full collateralization. Cash and investments segregated also include certificates of deposit and U.S. Government securities. Certificates of deposit and U.S. Government securities are recorded at fair value.

Schwab applies the practical expedient based on collateral maintenance provisions under Accounting Standards Codification (ASC) 326, Financial Instruments – Credit Losses, in estimating an allowance for credit losses for resale agreements. This practical expedient can be applied for financial assets with collateral maintenance provisions requiring the borrower to continually adjust the amount of the collateral securing the financial assets as a result of fair value changes in the collateral. In accordance with the practical expedient, when the Company reasonably expects that borrowers (or counterparties, as applicable) will replenish the collateral as required, there is no expectation of credit losses when the collateral’s fair value is

- 30 -

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

greater than the amortized cost of the financial asset. If the amortized cost exceeds the fair value of collateral, then credit losses are estimated only on the unsecured portion.

Receivables from brokerage clients

Receivables from brokerage clients include margin loans to securities brokerage clients and other trading receivables from clients. Margin loans are collateralized by client securities and are carried at the amount receivable, net of an allowance for credit losses. Collateral is required to be maintained at specified minimum levels at all times. The Company monitors margin levels and requires clients to provide additional collateral, or reduce margin positions, to meet minimum collateral requirements if the fair value of the collateral changes. Schwab applies the practical expedient based on collateral maintenance provisions in estimating an allowance for credit losses for margin loans. An allowance for credit losses on unsecured or partially secured receivables from brokerage clients is estimated based on the aging of those receivables. Unsecured balances due to confirmed fraud are reserved immediately. The Company’s policy is to charge off any delinquent margin loans, including the accrued interest on such loans, no later than at 90 days past due. Accrued interest charged off is recognized as credit loss expense and is included in other expenses in the condensed consolidated statements of income. Clients with margin loans have agreed to allow Schwab to pledge collateralized securities in accordance with federal regulations. The collateral is not reflected in the consolidated financial statements. The allowance for credit losses for receivables from brokerage clients and related activity were immaterial for all periods presented.

AFS investment securities

AFS investment securities are recorded at fair value and unrealized gains and losses, other than losses related to credit factors, are reported, net of taxes, in AOCI included in stockholders’ equity. Realized gains and losses from sales of AFS investment securities are determined on a specific identification basis and are included in other revenue.

An AFS investment security is impaired if the fair value of the security is less than its amortized cost basis. Management evaluates AFS debt investment securities with unrealized losses to determine whether the security impairment has resulted from a credit loss or other factors. This evaluation is performed quarterly on an individual security basis.

The evaluation of whether credit loss exists is inherently judgmental. This evaluation considers multiple factors including: the financial condition of the issuer; the payment structure of the security; external credit ratings; our internal credit ratings; the security’s market implied credit spread; for asset-backed securities, the amount of credit support provided by the structure of the security to absorb credit losses on the underlying collateral; recent events specific to the issuer and the issuer’s industry; and whether all scheduled principal and interest payments have been received.

If management determines that the impairment of an AFS debt investment security (or a portion of the impairment) is related to credit losses, an allowance for credit losses will be recorded for that security through a charge to earnings. The allowance for credit losses is measured as the difference between the amortized cost and the present value of expected cash flows and is limited to the difference between amortized cost and the fair value of the security. The Company estimates credit losses on a discounted cash flow basis using the security’s effective interest rate. Changes in the allowance for credit losses will be recorded through earnings in the period of the change.

If it is determined that the Company intends to sell the impaired security or if it is more likely than not that the Company will be required to sell such security before any anticipated recovery of the amortized cost basis, any allowance for credit losses of that security will be written off and the amortized cost basis of the security will be written down to fair value with any incremental impairment recorded through earnings.

The Company excludes accrued interest from the fair value and the amortized cost basis of the AFS debt investment securities for the purposes of identifying and measuring impairment of the securities. AFS debt investment securities are placed on nonaccrual status on a timely basis and any accrued interest receivable is reversed through interest income.

Securities borrowed and securities loaned

Securities borrowed transactions require Schwab to deliver cash to the lender in exchange for securities; the receivables from these transactions are included in other assets on the condensed consolidated balance sheets. For securities loaned, Schwab

- 31 -

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

receives collateral in the form of cash in an amount equal to or greater than the market value of securities loaned; the payables from these transactions are included in accrued expenses and other liabilities on the condensed consolidated balance sheets. The market value of securities borrowed and loaned are monitored, with additional collateral obtained or refunded to ensure full collateralization. Fees received or paid are recorded in interest revenue or interest expense. Schwab applies the practical expedient based on collateral maintenance provisions in estimating an allowance for credit losses for securities borrowed receivables.

Bank loans and related allowance for credit losses

Bank loans are recorded at their contractual principal amounts and include unamortized direct origination costs or net purchase discounts or premiums. Direct origination costs and premiums and discounts are recognized in interest revenue using the effective interest method over the contractual life of the loan and are adjusted for actual prepayments. Additionally, management estimates an allowance for credit losses, which is deducted from the amortized cost basis of loans to arrive at the amount expected to be collected. The bank loan portfolio includes three portfolio segments: residential real estate, pledged asset lines (PALs), and other loans. We use these segments when developing and documenting our methodology for determining the allowance for credit losses. Residential real estate portfolio segment is divided into two classes of financing receivables for purposes of monitoring and assessing credit risk: First Mortgages and HELOCs.

Schwab records an allowance for credit losses through a charge to earnings based on our estimate of current expected credit losses for the existing portfolio. We review the allowance for credit losses quarterly, taking into consideration current economic conditions, reasonable and supportable forecasts, the composition of the existing loan portfolio, past loss experience, and any other risks inherent in the portfolio to ensure that the allowance for credit losses is maintained at an appropriate level.

PALs are collateralized by marketable securities with liquid markets. Credit lines are over-collateralized and borrowers are required to maintain collateral at specified levels at all times. The required collateral levels are determined based on the type of security pledged. Additionally, collateral market value is monitored on a daily basis and a borrower’s credit line may be reduced or collateral may be liquidated if the collateral is in danger of falling below specified levels. As such, the credit loss inherent within this portfolio is limited. Schwab applies the practical expedient based on collateral maintenance provisions in estimating an allowance for credit losses for PALs.

The methodology to establish an allowance for credit losses for residential real estate portfolio segment utilizes statistical models that estimate prepayments, defaults, and expected losses for this portfolio segment based on predicted behavior of individual loans within the segment. The methodology also evaluates concentrations in the classes of financing receivables, including loan products within those classes, year of origination, and geographical distribution of collateral.

Expected credit losses are forecast using a loan-level simulation of the delinquency status of the loans over the term of the loans. The simulation starts with the current relevant risk indicators, including the current delinquent status of each loan, the estimated current LTV ratio (Estimated Current LTV) of each loan, the term and structure of each loan, current key interest rates including U.S. Treasury and LIBOR rates, and borrower FICO scores. The more significant variables in the simulation include delinquency roll rates, loss severity, housing prices, interest rates, and unemployment rate. Delinquency roll rates (i.e., the rates at which loans transition through delinquency stages and ultimately result in a loss) are estimated from our historical loss experience adjusted for current trends and market information, which includes current and forecast conditions. Loss severity (i.e., loss given default) estimates are based on our historical loss experience and market trends, both current and forecast. The loss severity estimate used in the allowance for credit loss methodology for HELOCs is higher than that used in the methodology for First Mortgages. Housing price trends are derived from historical home price indices and econometric forecasts of future home values. Factors affecting the home price index include housing inventory, unemployment, interest rates, and inflation expectations. Interest rate projections are based on the current term structure of interest rates and historical volatilities to project various possible future interest rate paths. The unemployment rate forecast is typically based on the recent consensus of regularly published economic surveys. Linear interpolation is applied to revert to long-term trends after the reasonable and supportable forecast period.

The methodology described above results in loss factors that are applied to the amortized cost basis of loans, exclusive of accrued interest receivable, to determine the allowance for credit losses for First Mortgages and HELOCs.

Management also estimates a liability for expected credit losses on the Company’s commitments to extend credit related to unused HELOCs and commitments to purchase first mortgages. See Note 10 for additional information on these commitments. The liability is calculated by applying the loss factors described above to the commitments expected to be funded and is included

- 32 -

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

in accrued expenses and other liabilities on the condensed consolidated balance sheets. The liability for expected credit losses on these commitments and related activity were immaterial for all periods presented.

Schwab considers loan modifications in which it makes an economic concession to a borrower experiencing financial difficulty to be troubled debt restructurings (TDRs).

Nonaccrual and Nonperforming loans

First Mortgages, HELOCs, PALs, and other loans are considered past due when a payment is due and unpaid for 30 days. Loans are placed on nonaccrual status upon becoming 90 days past due as to interest or principal (unless the loans are well-secured and in the process of collection), or when the full timely collection of interest or principal becomes uncertain, including loans to borrowers who have filed for bankruptcy. HELOC loans secured by a second lien are placed on non-accrual status if the associated first lien is 90 days or more delinquent, regardless of the payment status of the HELOC. When a loan is placed on nonaccrual status, the accrued interest receivable is written off by reversing interest income and the loan is accounted for on the cash or cost recovery method until qualifying for return to accrual status. Generally, a nonaccrual loan may be returned to accrual status when all delinquent interest and principal is repaid and the borrower demonstrates a sustained period of performance, or when the loan is both well-secured and in the process of collection and collectability is no longer doubtful. Loans on nonaccrual status and other real estate owned are considered nonperforming assets.

Loan Charge-Offs

The Company charges off a loan in the period that it is deemed uncollectible and records a reduction in the allowance for credit losses and the loan balance. Our charge-off policy for First Mortgage and HELOC loans is to assess the value of the property when the loan has been delinquent for 180 days or has been discharged in bankruptcy proceedings, regardless of whether the property is in foreclosure, and charge-off the amount of the loan balance in excess of the estimated current value of the underlying property less estimated costs to sell. The Company’s policy for PALs is to charge off any delinquent loans no later than at 90 days past due.

- 33 -

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

New Accounting Standards

Adoption of New Accounting Standards
Standard
Description
Date of Adoption
Effects on the Financial Statements or Other Significant Matters
Accounting Standards Update (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 modified retrospective transition through 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
The Company adopted CECL as of January 1, 2020 using the modified retrospective method. The adoption of CECL resulted in an immaterial increase in the Company’s allowance for credit losses and an increase in the liability for expected credit losses on commitments to extend credit, both primarily related to First Mortgages and HELOCs. The adoption impact was recorded as an adjustment to retained earnings as of the date of adoption.
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
The Company adopted this guidance prospectively on January 1, 2020. As such, adoption had no impact on the Company’s financial statements. 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 going forward.

- 34 -

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 2020-4, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting”



Provides optional expedients and exceptions for applying existing accounting guidance to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met, including simplifying accounting analyses for contract modifications.

This guidance only applies to the items listed above if they reference LIBOR or another reference rate expected to be discontinued because of reference rate reform and only for a limited period of time. When elected, the optional expedients for contract modifications must be applied consistently for all eligible contracts or eligible transactions subject to the same accounting guidance that would have otherwise been applied.

Once elected, the amendments must be applied prospectively.
N/A. Effective March 12, 2020 through December 31, 2022
The Company is evaluating the expedients and exceptions provided by this guidance. The elected amendments will be applied prospectively and the Company is currently evaluating the potential impacts on its consolidated financial statements.




- 35 -

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

3.    Business Acquisitions

USAA-IMCO
On May 26, 2020, the Company completed its acquisition of the assets of USAA-IMCO for $1.6 billion in cash, subject to post-closing adjustments. Along with the asset purchase agreement, the companies entered into a long-term referral agreement that makes Schwab the exclusive provider of wealth management and investment brokerage services for USAA members. The USAA-IMCO acquisition adds scale to the Company’s operations through the addition of over one million brokerage and managed portfolio accounts with approximately $80 billion in client assets at the acquisition date. The transaction also provides Schwab the opportunity to further expand our client base by serving USAA’s members through the long-term referral agreement.

The Company accounted for the USAA-IMCO acquisition as a business combination under GAAP and accordingly, the purchase price was allocated to the assets acquired and liabilities assumed based on their estimated fair values as of the date of acquisition. The determination of fair values requires management to make significant estimates and assumptions. The estimated fair values of the assets acquired and liabilities assumed are considered provisional and are based on currently available information. The Company believes that the information available provides a reasonable basis for estimating the fair values of assets acquired and liabilities assumed; however, these provisional estimates may be adjusted upon the availability of new information regarding facts and circumstances which existed at the acquisition date. The Company expects to finalize the valuation of assets and liabilities as soon as practicable, but not later than one year from the acquisition date.

The following table summarizes the purchase price, provisional fair values of the assets acquired and liabilities assumed, and resulting goodwill as of the acquisition date.
Purchase price
$
1,624

 
 
Fair value of assets acquired:
 
Cash segregated and on deposit for regulatory purposes
4,392

Receivables from brokerage clients — net
80

Intangible assets
1,118

Total assets acquired
5,590

Fair value of liabilities assumed:
 
Payables to brokerage clients
4,472

Total liabilities assumed
4,472

Fair value of net identifiable assets acquired
1,118

Goodwill
$
506


The provisional identifiable intangible assets of $1.1 billion are subject to amortization. The following table summarizes the major classes of intangible assets acquired and their respective weighted-average estimated useful lives.
 
Estimated Fair Value
 
Weighted-Average Estimated Useful Life (years)
Customer relationships
$
962

 
18
Brokerage referral agreement (1)
151

 
20
Royalty-free license
5

 
7
Total intangible assets
$
1,118

 
 
(1) The brokerage referral agreement has an initial term of 5 years and is automatically renewable for one-year increments thereafter.

The estimated fair values of customer relationships, the brokerage referral agreement, and the royalty-free license were estimated using the multi-period excess earnings, with-and-without, and relief from royalty methods, respectively. The multi-period excess earnings method starts with a forecast of all of the expected future net cash flows associated with the asset, and the relief from royalty method starts with a forecast of the royalties saved by the Company because it owns the asset. The with-

- 36 -

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

and-without method quantifies the difference between forecasted cash flows with the asset and without the asset. The forecasts are then adjusted to present value by applying an appropriate discount rate that reflects the risks associated with the cash flow streams.

Goodwill recorded of $506 million, primarily attributable to the additional scale and anticipated synergies from the USAA-IMCO acquisition, was assigned to the Investor Services segment and will be deductible for tax purposes.

The Company’s condensed consolidated statements of income include total net revenues and net loss attributable to the USAA-IMCO acquisition of $39 million and $37 million, respectively, for the period May 26, 2020 through June 30, 2020.

In connection with the acquisition, the Company agreed to reimburse USAA for certain contract termination fees and severance costs incurred by USAA. These costs totaled $19 million and $23 million for the three and six months ended June 30, 2020, respectively, and are included in other expense on the condensed consolidated statements of income. Additionally, the Company incurred various professional fees and other costs related to the USAA-IMCO acquisition, such as advisory, legal, and accounting fees. In total, the Company incurred acquisition and integration-related costs of $39 million and $3 million for the three months ended June 30, 2020 and 2019, respectively, and $54 million and $3 million for the six months ended June 30, 2020 and 2019, respectively, which are primarily included in professional services and other expense on the condensed consolidated statements of income.

Pro Forma Financial Information (Unaudited)

The following table presents unaudited pro forma financial information as if the USAA-IMCO acquisition had occurred on January 1, 2019. The unaudited pro forma results reflect adjustments for acquisition and integration-related costs, amortization of acquired intangible assets, and their related income tax effects, and do not reflect potential revenue growth or cost savings that may be realized as a result of the acquisition. Pro forma net income for the three and six months ended June 30, 2020 excludes after-tax acquisition and integration-related costs of $30 million and $41 million, respectively. These costs and after-tax acquisition and integration-related costs of $10 million incurred in 2019 are included in pro forma net income for the six months ended June 30, 2019. The unaudited pro forma financial information is presented for informational purposes only, and is not necessarily indicative of future operations or results had the USAA-IMCO acquisition been completed as of January 1, 2019.
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2020
 
2019
 
2020
 
2019
Total net revenues
$
2,474

 
$
2,767

 
$
5,170

 
$
5,573

Net income
$
606

 
$
870

 
$
1,336

 
$
1,723





- 37 -

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

4.    Revenue Recognition
Disaggregated Revenue
Disaggregation of Schwab’s revenue by major source is as follows:
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2020
2019
 
2020
2019
Net interest revenue
 
 
 
 
 
 
Interest revenue
$
1,486

 
$
1,927

 
$
3,194

$
3,925

Interest expense
(97
)
 
(318
)
 
(233
)
(635
)
Net interest revenue
1,389

 
1,609

 
2,961

3,290

Asset management and administration fees
 
 
 
 
 
 
Mutual funds, ETFs, and CTFs
425

 
428

 
877

842

Advice solutions
314

 
295

 
626

573

Other
62

 
63

 
125

126

Asset management and administration fees
801

 
786

 
1,628

1,541

Trading revenue
 
 
 
 
 
 
Commissions
111

 
155

 
224

318

Principal transactions
10

 
19

 
30

41

Order flow revenue (1)
72

 
33

 
127

65

Trading revenue (1)
193

 
207

 
381

424

Other (1)
67

 
79

 
97

149

Total net revenues
$
2,450

 
$
2,681

 
$
5,067

$
5,404


(1) Beginning in the first quarter of 2020, order flow revenue was reclassified from other revenue to trading revenue. Prior period amounts have been reclassified 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 ASC 606, Revenue From Contracts With Customers (ASC 606) were $346 million at June 30, 2020 and $356 million at December 31, 2019 and were recorded in other assets on the condensed consolidated balance sheets. Schwab did not have any other significant contract assets or contract liability balances as of June 30, 2020 or December 31, 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.



- 38 -

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

5.    Investment Securities

The amortized cost, gross unrealized gains and losses, and fair value of the Company’s investment securities are as follows:
June 30, 2020
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
Available for sale securities
 
 
 
 
 
 
 
 
U.S. agency mortgage-backed securities
 
$
230,102

 
$
7,162

 
$
177

 
$
237,087

Asset-backed securities (1)
 
22,234

 
167

 
282

 
22,119

Corporate debt securities (2)
 
12,653

 
390

 
4

 
13,039

U.S. Treasury securities
 
4,733

 
38

 
—

 
4,771

U.S. state and municipal securities
 
1,489

 
131

 
—

 
1,620

Non-agency commercial mortgage-backed securities
 
1,214

 
40

 
—

 
1,254

Certificates of deposit
 
800

 
3

 
—

 
803

Commercial paper (2,3)
 
200

 
—

 
—

 
200

Foreign government agency securities
 
300

 
1

 
—

 
301

Other
 
22

 
—

 
—

 
22

Total available for sale securities
 
$
273,747

 
$
7,932

 
$
463

 
$
281,216

December 31, 2019
 
 
 
 
 
 
 
 
Available for sale securities
 
 
 
 
 
 
 
 
U.S. agency mortgage-backed securities
 
$
45,964

 
$
312

 
$
121

 
$
46,155

Corporate debt securities (2)
 
5,427

 
57

 
—

 
5,484

Asset-backed securities (1)
 
4,970

 
30

 
13

 
4,987

U.S. Treasury securities
 
3,387

 
3

 
6

 
3,384

Certificates of deposit
 
1,000

 
4

 
—

 
1,004

Commercial paper (2,3)
 
394

 
1

 
—

 
395

Non-agency commercial mortgage-backed securities
 
13

 
—

 
—

 
13

Total available for sale securities
 
$
61,155

 
$
407

 
$
140

 
$
61,422

Held to maturity securities
 
 
 
 
 
 
 
 
U.S. agency mortgage-backed securities
 
$
109,325

 
$
1,521

 
$
280

 
$
110,566

Asset-backed securities (1)
 
17,806

 
50

 
85

 
17,771

Corporate debt securities (2)
 
4,661

 
57

 
—

 
4,718

U.S. state and municipal securities
 
1,301

 
103

 
—

 
1,404

Non-agency commercial mortgage-backed securities
 
1,119

 
22

 
—

 
1,141

U.S. Treasury securities
 
223

 
5

 
—

 
228

Certificates of deposit
 
200

 
—

 
—

 
200

Foreign government agency securities
 
50

 
—

 
—

 
50

Other
 
21

 
—

 
—

 
21

Total held to maturity securities
 
$
134,706

 
$
1,758

 
$
365

 
$
136,099


(1) Approximately 41% and 43% of asset-backed securities held as of June 30, 2020 and December 31, 2019, respectively, were Federal Family Education Loan Program Asset-Backed Securities. Asset-backed securities collateralized by credit card receivables represented approximately 45% and 42% of the asset-backed securities held as of June 30, 2020 and December 31, 2019, respectively.
(2) As of June 30, 2020 approximately 49% of the total AFS, and as of December 31, 2019 approximately 32%, of the total AFS and HTM investments in corporate debt securities and commercial paper were issued by institutions in the financial services industry.
(3) Included in cash and cash equivalents on the condensed consolidated balance sheets, but excluded from this table is $2.5 billion of AFS commercial paper as of December 31, 2019 (none as of June 30, 2020). These holdings have maturities of three months or less and an aggregate market value equal to amortized cost.

In October 2019, the Federal Reserve issued a final enhanced prudential standards rule, and the Federal Reserve, the Office of the Comptroller of the Currency, and the FDIC jointly issued a final regulatory capital and liquidity rule. With total consolidated assets of $294.0 billion at December 31, 2019, CSC is designated as a Category III firm pursuant to the framework established by the final rules. Accordingly, the Company opted to exclude AOCI from its regulatory capital as permitted by the regulatory capital and liquidity rule beginning January 1, 2020. In accordance with ASC 320 and as of January 1, 2020, the Company transferred all of its investment securities designated as HTM to the AFS category without tainting our intent to hold other debt securities to maturity. At the date of transfer, these securities had a total amortized cost of $134.7 billion and a total net unrealized gain of $1.4 billion.

At June 30, 2020, our banking subsidiaries had pledged securities with a fair value of $36.7 billion as collateral to secure borrowing capacity on secured credit facilities with the Federal Home Loan Bank (FHLB) (see Note 9). Our banking

- 39 -

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

subsidiaries also pledge investment securities as collateral to secure borrowing capacity at the Federal Reserve discount window, and had pledged securities with a fair value of $8.8 billion as collateral for this facility at June 30, 2020. The Company also pledges securities issued by federal agencies to secure certain trust deposits. The fair value of these pledged securities was $1.1 billion at June 30, 2020.

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
 
 
 
June 30, 2020
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
Available for sale securities
 
 
 
 
 
 
 
 
 
 
 
Asset-backed securities
$
5,888

 
$
162

 
$
3,604

 
$
120

 
$
9,492

 
$
282

U.S. agency mortgage-backed securities
24,528

 
138

 
9,687

 
39

 
34,215

 
177

Corporate debt securities
928

 
4

 
—

 
—

 
928

 
4

Total
$
31,344

 
$
304

 
$
13,291

 
$
159

 
$
44,635

 
$
463

December 31, 2019
 
 
 
 
 
 
 
 
 
 
 
Available for sale securities
 
 
 
 
  
 
 
 
 
 
 
U.S. agency mortgage-backed securities
$
16,023

 
$
94

 
$
6,592

 
$
27

 
$
22,615

 
$
121

Asset-backed securities
960

 
6

 
298

 
7

 
1,258

 
13

U.S. Treasury securities
510

 
—

 
1,243

 
6

 
1,753

 
6

Total
$
17,493

 
$
100

 
$
8,133

 
$
40

 
$
25,626

 
$
140

Held to maturity securities
 

 
 

 
 

 
 

 
 

 
 

U.S. agency mortgage-backed securities
$
16,183

 
$
100

 
$
18,910

 
$
180

 
$
35,093

 
$
280

Asset-backed securities
7,507

 
63

 
2,898

 
22

 
10,405

 
85

Total
$
23,690

 
$
163

 
$
21,808

 
$
202

 
$
45,498

 
$
365

Total securities with unrealized losses
$
41,183

 
$
263

 
$
29,941

 
$
242

 
$
71,124

 
$
505


At June 30, 2020, 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.

Please refer to Note 2 for a description of management’s quarterly evaluation of AFS securities in unrealized loss positions. No amounts were recognized as credit loss expense and no securities were written down to fair value through earnings for the six months ended June 30, 2020. None of the Company’s AFS securities held as of June 30, 2020 had an allowance for credit losses. No amounts were recognized as OTTI in earnings or other comprehensive income during the year ended December 31, 2019, and as of December 31, 2019, Schwab did not hold any securities on which OTTI was previously recognized.

The Company had $594 million of accrued interest receivable as of June 30, 2020 for AFS securities, and $471 million of accrued interest receivable for AFS and HTM securities as of December 31, 2019. These amounts are excluded from the amortized cost basis of AFS and HTM securities and included in other assets on the condensed consolidated balance sheets. There were no write-offs of accrued interest receivable on AFS securities during the six months ended June 30, 2020, or write-offs of accrued interest receivable on AFS securities or HTM securities during the year ended December 31, 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)

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 securities are as follows:
June 30, 2020
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
$
1,090

 
$
22,122

 
$
55,851

 
$
158,024

 
$
237,087

Asset-backed securities
60

 
8,183

 
5,700

 
8,176

 
22,119

Corporate debt securities
2,750

 
8,628

 
1,661

 
—

 
13,039

U.S. Treasury securities
3,943

 
828

 
—

 
—

 
4,771

U.S. state and municipal securities
—

 
103

 
631

 
886

 
1,620

Non-agency commercial mortgage-backed securities
—

 
—

 
—

 
1,254

 
1,254

Certificates of deposit
803

 
—

 
—

 
—

 
803

Commercial paper
200

 
—

 
—

 
—

 
200

Foreign government agency securities
—

 
301

 
—

 
—

 
301

Other
—

 
—

 
—

 
22

 
22

Total fair value
$
8,846

 
$
40,165

 
$
63,843

 
$
168,362

 
$
281,216

Total amortized cost
$
25,912

 
$
36,951

 
$
57,237

 
$
153,647

 
$
273,747



Proceeds and gross realized gains and losses from sales of AFS securities are as follows:
 
Three Months Ended
June 30,
 
Six Months Ended June 30,
 
 
 
2020
 
2019
 
2020
 
2019
Proceeds
$
1

 
$
5,622

 
$
70

 
$
16,274

Gross realized gains
—

 
7

 
—

 
10

Gross realized losses
—

 
4

 
—

 
6





- 41 -

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

6.    Bank Loans and Related Allowance for Credit Losses
The composition of bank loans and delinquency analysis by portfolio segment and class of financing receivable is as follows:
June 30, 2020
Current
30-59 days
past due
60-89 days
past due
>90 days past
due and other
nonaccrual loans (3)
Total past due
and other
nonaccrual loans
Total
loans
Allowance
for credit
losses
Total
bank
loans – net
Residential real estate:
 
 
 
 
 
 
 
 
First Mortgages (1,2)
$
13,952

$
25

$
3

$
13

$
41

$
13,993

$
22

$
13,971

HELOCs (1,2)
972

1

1

7

9

981

4

977

Total residential real estate
14,924

26

4

20

50

14,974

26

14,948

Pledged asset lines
5,727

3

4

—

7

5,734

—

5,734

Other
190

—

—

3

3

193

4

189

Total bank loans
$
20,841

$
29

$
8

$
23

$
60

$
20,901

$
30

$
20,871

 
 
 
 
 
 
 
 
 
December 31, 2019
 
 
 
 
 
 
 
 
Residential real estate:
 
 
 
 
 
 
 
 
First Mortgages (1,2)
$
11,665

$
24

$
4

$
11

$
39

$
11,704

$
11

$
11,693

HELOCs (1,2)
1,105

2

1

9

12

1,117

4

1,113

Total residential real estate
12,770

26

5

20

51

12,821

15

12,806

Pledged asset lines
5,202

4

—

—

4

5,206

—

5,206

Other
201

—

—

2

2

203

3

200

Total bank loans
$
18,173

$
30

$
5

$
22

$
57

$
18,230

$
18

$
18,212


(1) First Mortgages and HELOCs include unamortized premiums and discounts and direct origination costs of $78 million and $74 million at June 30, 2020 and December 31, 2019, respectively.
(2) At June 30, 2020 and December 31, 2019, 45% 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 June 30, 2020 or December 31, 2019.

At June 30, 2020, CSB had pledged $12.4 billion of First Mortgages and HELOCs as collateral to secure borrowing capacity on a secured credit facility with the FHLB (see Note 9).

Changes in the allowance for credit losses on bank loans were as follows:
 
June 30, 2020
 
June 30, 2019
Three Months Ended
First Mortgages
 
HELOCs
 
Total residential real estate
 
Other
 
Total (1)
 
First Mortgages
 
HELOCs
 
Total residential real estate
 
Other
 
Total (1)
Balance at beginning of period
$
21

 
$
4

 
$
25

 
$
4

 
$
29

 
$
14

 
$
5

 
$
19

 
$
2

 
$
21

Charge-offs
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Recoveries
1

 
—

 
1

 
—

 
1

 
1

 
—

 
1

 
—

 
1

Provision for credit losses
—

 
—

 
—

 
—

 
—

 
(3
)
 
—

 
(3
)
 
—

 
(3
)
Balance at end of period
$
22

 
$
4

 
$
26

 
$
4

 
$
30

 
$
12

 
$
5

 
$
17

 
$
2

 
$
19



- 42 -

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

 
June 30, 2020
 
June 30, 2019
Six Months Ended
First Mortgages
 
HELOCs
 
Total residential real estate
 
Other
 
Total (1)
 
First Mortgages
 
HELOCs
 
Total residential real estate
 
Other
 
Total (1)
Balance at beginning of period
$
11

 
$
4

 
$
15

 
$
3

 
$
18

 
$
14

 
$
5

 
$
19

 
$
2

 
$
21

Adoption of ASU 2016-13
1

 
—

 
1

 
—

 
1

 
—

 
—

 
—

 
—

 
—

Charge-offs
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Recoveries
1

 
—

 
1

 
—

 
1

 
1

 
1

 
2

 
—

 
2

Provision for credit losses
9

 
—

 
9

 
1

 
10

 
(3
)
 
(1
)
 
(4
)
 
—

 
(4
)
Balance at end of period
$
22

 
$
4

 
$
26

 
$
4

 
$
30

 
$
12

 
$
5

 
$
17

 
$
2

 
$
19

Note:    Substantially all of the bank loans were collectively evaluated for impairment at December 31, 2019.
(1) All PALs were fully collateralized by securities with fair values in excess of borrowings as of each period presented.

Although continued economic uncertainty remains due to the ongoing COVID-19 pandemic, credit quality metrics and overall performance of the bank loans portfolios remain strong. Management’s reasonable and supportable forecast period extends through 2021, with unemployment peaking in the second quarter of 2020 accompanied by lackluster growth in home prices that do not revert to long-term trends until after 2021. Continued strong credit quality metrics and a modestly improving macroeconomic outlook produced a relatively stable projection of credit losses compared to the prior quarter.

A summary of bank loan-related nonperforming assets and troubled debt restructurings is as follows:
 
June 30, 2020
 
December 31, 2019
Nonaccrual loans (1)
$
23

 
$
22

Other real estate owned (2)
1

 
1

Total nonperforming assets
24

 
23

Troubled debt restructurings
2

 
2

Total nonperforming assets and troubled debt restructurings
$
26

 
$
25

(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.


- 43 -

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

The credit quality indicators of the Company’s bank loan portfolio are detailed below:
 
First Mortgages Amortized Cost Basis by Origination Year
 
 
 
 
June 30, 2020
2020
2019
2018
2017
2016
pre-2016
Total First Mortgages
Revolving HELOCs amortized cost basis
HELOCs converted to term loans
Total HELOCs
Origination FICO
 
 
 
 
 
 
 
 
 
 
<620
$
—

$
—

$
—

$
—

$
—

$
2

$
2

$
—

$
—

$
—

620 – 679
12

14

4

11

17

18

76

1

4

5

680 – 739
491

436

153

247

235

324

1,886

100

94

194

≥740
4,116

3,130

712

1,218

1,434

1,419

12,029

434

348

782

Total
$
4,619

$
3,580

$
869

$
1,476

$
1,686

$
1,763

$
13,993

$
535

$
446

$
981

Origination LTV
 
 
 
 
 
 
 
 
 
 
≤70%
$
3,866

$
2,797

$
612

$
1,106

$
1,429

$
1,240

$
11,050

$
393

$
314

$
707

>70% – ≤90%
753

783

257

370

257

520

2,940

142

128

270

>90% – ≤100%
—

—

—

—

—

3

3

—

4

4

Total
$
4,619

$
3,580

$
869

$
1,476

$
1,686

$
1,763

$
13,993

$
535

$
446

$
981

Weighted Average
Updated FICO
 
 
 
 
 
 
 
 
 
 
<620
$
4

$
4

$
2

$
2

$
4

$
22

$
38

$
5

$
13

$
18

620 – 679
31

54

17

33

19

54

208

14

20

34

680 – 739
430

322

104

162

142

215

1,375

71

66

137

≥740
4,154

3,200

746

1,279

1,521

1,472

12,372

445

347

792

Total
$
4,619

$
3,580

$
869

$
1,476

$
1,686

$
1,763

$
13,993

$
535

$
446

$
981

Estimated Current LTV (1)
 
 
 
 
 
 
 
 
 
 
≤70%
$
3,912

$
2,975

$
744

$
1,430

$
1,671

$
1,744

$
12,476

$
510

$
427

$
937

>70% – ≤90%
707

605

125

46

15

17

1,515

25

16

41

>90% – ≤100%
—

—

—

—

—

1

1

—

2

2

>100%
—

—

—

—

—

1

1

—

1

1

Total
$
4,619

$
3,580

$
869

$
1,476

$
1,686

$
1,763

$
13,993

$
535

$
446

$
981

Percent of Loans on
Nonaccrual Status
0.07
%
—

0.03
%
0.03
%
0.08
%
0.45
%
0.09
%
0.21
%
1.58
%
0.71
%
(1) Represents the LTV for the full line of credit (drawn and undrawn) for revolving HELOCs.
June 30, 2020
 
Balance
 
Weighted Average Updated FICO
 
Percent of Loans on Nonaccrual Status
Pledged Asset Lines
 
 
 
 
 
 
Weighted-Average LTV (1)
 
 
 
 
 
 
=70%
 
$
5,734

 
770

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


- 44 -

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

 
First Mortgages Amortized Cost Basis by Origination Year
 
 
 
 
December 31, 2019
2019
2018
2017
2016
pre-2016
Total First Mortgages
Revolving HELOCs amortized cost basis
HELOCs converted to term loans
Total HELOCs
Origination FICO
 
 
 
 
 
 
 
 
 
<620
$
—

$
—

$
—

$
—

$
3

$
3

$
—

$
—

$
—

620 – 679
12

6

14

20

25

77

1

4

5

680 – 739
478

220

304

290

421

1,713

114

105

219

≥740
3,512

1,058

1,593

1,839

1,909

9,911

496

397

893

Total
$
4,002

$
1,284

$
1,911

$
2,149

$
2,358

$
11,704

$
611

$
506

$
1,117

Origination LTV
 
 
 
 
 
 
 
 
 
≤70%
$
3,104

$
906

$
1,427

$
1,812

$
1,679

$
8,928

$
444

$
354

$
798

>70% – ≤90%
898

378

484

337

676

2,773

167

147

314

>90% – ≤100%
—

—

—

—

3

3

—

5

5

Total
$
4,002

$
1,284

$
1,911

$
2,149

$
2,358

$
11,704

$
611

$
506

$
1,117

Weighted Average
Updated FICO
 
 
 
 
 
 
 
 
 
<620
$
5

$
4

$
5

$
3

$
25

$
42

$
6

$
15

$
21

620 – 679
45

36

32

26

68

207

18

22

40

680 – 739
474

153

213

199

307

1,346

92

80

172

≥740
3,478

1,091

1,661

1,921

1,958

10,109

495

389

884

Total
$
4,002

$
1,284

$
1,911

$
2,149

$
2,358

$
11,704

$
611

$
506

$
1,117

Estimated Current LTV (1)
 
 
 
 
 
 
 
 
 
≤70%
$
3,125

$
1,018

$
1,790

$
2,119

$
2,330

$
10,382

$
578

$
478

$
1,056

>70% – ≤90%
877

265

121

30

27

1,320

33

23

56

>90% – ≤100%
—

1

—

—

1

2

—

3

3

>100%
—

—

—

—

—

—

—

2

2

Total
$
4,002

$
1,284

$
1,911

$
2,149

$
2,358

$
11,704

$
611

$
506

$
1,117

Percent of Loans on
Nonaccrual Status
0.04
%
0.04
%
0.04
%
0.08
%
0.25
%
0.09
%
0.19
%
1.57
%
0.83
%
(1) Represents the LTV for the full line of credit (drawn and undrawn) for revolving HELOCs.
December 31, 2019
 
Balance
 
Weighted Average Updated FICO
 
Percent of Loans on Nonaccrual Status
Pledged Asset Lines
 
 
 
 
 
 
Weighted-Average LTV (1)
 
 
 
 
 
 
=70%
 
$
5,206

 
766

 
—

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

At June 30, 2020, First Mortgage loans of $12.4 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 25% of the balance of these mortgages consisted of loans with interest-only payment terms. The interest rates on approximately 75% of the balance of these interest-only loans are not scheduled to reset for three or more years. Schwab’s mortgage loans do not include interest terms described as temporary introductory rates below current market rates.
At June 30, 2020 and December 31, 2019, Schwab had $43 million and $46 million, respectively, of accrued interest on bank loans, which is excluded from the amortized cost basis of bank loans and included in other assets on the condensed consolidated balance sheets.


- 45 -

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 HELOCs converted to amortizing loans during each period presented:
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2020
 
2019
 
2020
 
2019
HELOCs converted to amortizing loans
 
$
8

 
$
11

 
$
18

 
$
33


The following table presents when current outstanding HELOCs will convert to amortizing loans:
June 30, 2020
 
Balance
Converted to an amortizing loan by period end
 
$
446

Within 1 year
 
41

> 1 year – 3 years
 
86

> 3 years – 5 years
 
124

> 5 years
 
284

Total
 
$
981



At June 30, 2020, $789 million of the HELOC portfolio was secured by second liens on the associated properties. Second lien mortgage loans typically possess a higher degree of credit risk given the subordination to the first lien holder in the event of default. In addition to the credit monitoring activities described previously, Schwab also monitors credit risk by reviewing the delinquency status of the first lien loan on the associated property. At June 30, 2020, the borrowers on approximately 52% of HELOC loan balances outstanding only paid the minimum amount due.


7.    Variable Interest Entities
As of June 30, 2020 and December 31, 2019, 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 and 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:
 
 
June 30, 2020
 
December 31, 2019
 
 
Aggregate
assets
 
Aggregate
liabilities
 
Maximum
exposure
to loss
 
Aggregate
assets
 
Aggregate
liabilities
 
Maximum
exposure
to loss
LIHTC investments (1)
 
$
533

 
$
269

 
$
533

 
$
516

 
$
275

 
$
516

Other CRA investments (2)
 
116

 
—

 
152

 
120

 
—

 
154

Total
 
$
649

 
$
269

 
$
685

 
$
636

 
$
275

 
$
670

(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, held for investment loans at amortized cost, or as AFS securities. Aggregate assets are included in AFS 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 2020 and 2023. During the six months ended June 30, 2020 and year ended

- 46 -

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, 2019, Schwab did not provide or intend to provide financial or other support to the VIEs that it was not contractually required to provide.


8.    Bank Deposits

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

 
June 30, 2020
 
December 31, 2019
Interest-bearing deposits:
 
 
 
 
Deposits swept from brokerage accounts
 
$
279,599

 
$
201,531

Checking
 
15,245

 
12,650

Savings and other
 
5,974

 
5,168

Total interest-bearing deposits
 
300,818

 
219,349

Non-interest-bearing deposits
 
748

 
745

Total bank deposits
 
$
301,566

 
$
220,094





- 47 -

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

9.    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 June 30, 2020 and December 31, 2019.
 
Date of
Principal Amount Outstanding
 
Issuance
June 30, 2020
December 31, 2019
Fixed-rate Senior Notes:
 
 
 
4.450% due July 22, 2020 (1)
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

4.200% due March 24, 2025
03/24/20
600

—

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

600

4.625% due March 22, 2030
03/24/20
500

—

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

600

Total Senior Notes
 
8,581

7,481

Unamortized discount — net
 
(13
)
(14
)
Debt issuance costs
 
(42
)
(37
)
Total long-term debt
 
$
8,526

$
7,430


(1) Matured on July 22, 2020.

Annual maturities on long-term debt outstanding at June 30, 2020 are as follows:
 
Maturities
2020
$
700

2021
1,200

2022
256

2023
800

2024
500

Thereafter
5,125

Total maturities
8,581

Unamortized discount — net
(13
)
Debt issuance costs
(42
)
Total long-term debt
$
8,526



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 June 30, 2020 and December 31, 2019, the collateral pledged provided a total

- 48 -

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

borrowing capacity of $44.4 billion and $34.2 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 $47 million and $35 million at June 30, 2020 and December 31, 2019, respectively.

Additionally, our banking subsidiaries have access to funding through the Federal Reserve discount window. Amounts available are dependent upon the fair value of certain investment securities that are pledged as collateral. As of June 30, 2020 and December 31, 2019, the collateral pledged provided total borrowing capacity of $8.8 billion and $8.5 billion, respectively, of which no amounts were outstanding at the end of either period.

During the first quarter of 2020, CSB and CSPB became members of the Federal Reserve. As a condition of our Federal Reserve membership, we are required to hold Federal Reserve stock, which totaled $182 million at June 30, 2020.


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 $2.7 billion and $702 million during the second quarters of 2020 and 2019, respectively, and $4.9 billion and $1.1 billion during the first six months of 2020 and 2019, respectively. CSB purchased HELOCs with commitments of $133 million and $66 million during the second quarters of 2020 and 2019, respectively, and $240 million and $128 million during the first six months of 2020 and 2019, respectively.

The Company’s commitments to extend credit on bank lines of credit and to purchase First Mortgages are as follows:
 
June 30, 2020
 
December 31, 2019

Commitments to extend credit related to unused HELOCs, PALs, and other lines of credit
$
9,341

 
$
10,753

Commitments to purchase First Mortgage loans
1,992

 
1,521

Total
$
11,333

 
$
12,274



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 June 30, 2020, the aggregate face amount of these LOCs totaled $20 million. There were no funds drawn under any of these LOCs at June 30, 2020. 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. At June 30, 2020, amounts posted as collateral with such clearing houses and exchanges included $242 million of U.S. Treasury securities, which are included in other assets on the condensed consolidated balance sheet. 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 TD Ameritrade: On November 25, 2019, CSC announced a definitive agreement to acquire TD Ameritrade in an all-stock transaction. At the time of announcement, TD Ameritrade had approximately twelve million brokerage accounts and $1.3 trillion in total client assets. Under the agreement, TD Ameritrade stockholders will receive 1.0837 CSC shares for each TD Ameritrade share. Based on the closing price of CSC common stock on November 20, 2019, the merger consideration represented approximately $26 billion. The transaction is expected to close in the second half of 2020, subject to satisfaction of

- 49 -

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

closing conditions. During the second quarter of 2020 the Department of Justice completed its antitrust review of our proposed acquisition of TD Ameritrade, and both Schwab and TD Ameritrade stockholders voted to approve the acquisition.

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

Predicting the outcome of a litigation or regulatory matter is inherently difficult, requiring significant judgment and evaluation of various factors, including the procedural status of the matter and any recent developments; prior experience and the experience of others in similar cases; available defenses, including potential opportunities to dispose of a case on the merits or procedural grounds before trial (e.g., motions to dismiss or for summary judgment); the progress of fact discovery; the opinions of counsel and experts regarding potential damages; and potential opportunities for settlement and the status of any settlement discussions. It may not be reasonably possible to estimate a range of potential liability until the matter is closer to resolution – pending, for example, further proceedings, the outcome of key motions or appeals, or discussions among the parties. Numerous issues may have to be developed, such as discovery of important factual matters and determination of threshold legal issues, which may include novel or unsettled questions of law. Reserves are established or adjusted or further disclosure and estimates of potential loss are provided as the matter progresses and more information becomes available.

Schwab believes it has strong defenses in all significant matters currently pending and is contesting liability and any damages claimed. Nevertheless, some of these matters may result in adverse judgments or awards, including penalties, injunctions or other relief, and the Company may also determine to settle a matter because of the uncertainty and risks of litigation. Described below are matters in which there is a reasonable possibility of a material loss, or where the matter may otherwise be of significant interest to stockholders. Unless 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.

TD Ameritrade Acquisition Litigation: As disclosed previously, Schwab and TD Ameritrade have been responding to federal securities lawsuits and a Delaware fiduciary lawsuit relating to the proposed acquisition.

Eight lawsuits challenging the sufficiency of disclosures in the Form S-4 Registration Statement (“Registration Statement”) concerning the acquisition were filed as follows: Kent v. TD Ameritrade Holding Corporation et al., a putative class action filed March 18, 2020 in U.S. District Court for the District of Delaware (Schwab entities named); Stein v. TD Ameritrade Holding Corporation et al., filed March 23, 2020 in U.S. District Court for the District of Delaware; Roth v. TD Ameritrade Holding Corporation et al., filed March 30, 2020 in United States District Court for the District of New Jersey; Litwin v. TD Ameritrade Holding Corporation et al., filed April 2, 2020 in U.S. District Court for the District of New Jersey; Bernstein v. TD Ameritrade Holding Corporation et al., a putative class action filed April 6, 2020 in U.S. District Court for the District of New Jersey (CSC named); Garrison v. TD Ameritrade Holding Corporation et al., filed April 6, 2020 in U.S District Court for the Southern District of New York; Paine-Mantha v. TD Ameritrade Holding Corporation et al., filed May 12, 2020 in U.S. District Court for the District of Delaware; and Kong v. TD Ameritrade Holding Corporation et al., filed May 15, 2020 in U.S. District Court for the District of New Jersey. Although TD Ameritrade and Schwab disputed the allegations, to avoid any unnecessary delays and the expense and distraction of litigation, TD Ameritrade voluntarily provided supplemental disclosures to the Registration Statement. As a result, plaintiffs in all eight cases have voluntarily dismissed their claims.

On May 12, 2020, a lawsuit challenging the acquisition was filed in the Delaware Court of Chancery (Hawkes v. Bettino et al.) on behalf of a proposed class of TD Ameritrade’s stockholders, excluding, among others, the Toronto-Dominion Bank (TD Bank). The complaint names as defendants each member of the TD Ameritrade board of directors at the time the acquisition

- 50 -

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

was approved, as well as TD Bank and Schwab. As an initial matter, the lawsuit sought to enjoin voting on or consummation of the acquisition, specifically alleging that prior to the TD Ameritrade board’s approval of the acquisition, agreements were reached between Schwab and TD Bank on an amendment of the Insured Deposit Account Agreement and voting of TD Bank’s shares of TD Ameritrade common stock in favor of the acquisition; which agreements allegedly caused Schwab to become an “interested stockholder” of TD Ameritrade under Section 203 of the Delaware General Corporation Law; and which would thereby require the affirmative vote of at least 66 2/3% of the outstanding TD Ameritrade common stock not allegedly owned by Schwab under Section 203. Subsequent to filing of the lawsuit and as previously disclosed, defendants reached an agreement with plaintiff under which plaintiff agreed to withdraw his Section 203 claim if the acquisition were to receive the 66 2/3% stockholder support allegedly required. With 76.9% of the applicable outstanding TD Ameritrade common stock (excluding stock not deemed to be owned by Schwab) having voted in favor of the acquisition at the TD Ameritrade special stockholders meeting on June 4, 2020, plaintiff has now agreed to dismiss his Section 203 claim as moot and has withdrawn his application for a preliminary injunction. Still pending are separate claims asserted in the complaint for breach of fiduciary duty by certain members of the TD Ameritrade board and TD Bank, and against Schwab for aiding and abetting such breaches, the allegation being that the amendment of the Insured Deposit Account Agreement TD Bank negotiated directly with Schwab allowed TD Bank to divert merger consideration from TD Ameritrade’s minority public stockholders. Plaintiff seeks to recover monetary damages, costs and attorneys’ fees. Schwab and the other defendants consider the allegations to be entirely without merit and are contesting the remaining claims in 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 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 $556 million and $719 million at June 30, 2020 and December 31, 2019, respectively. Most of our securities lending transactions are through a program with a clearing organization, which guarantees the return of cash to us. Our securities lending transactions are subject to enforceable master netting arrangements with other broker-dealers; however, we do not net securities lending transactions. Therefore, the securities loaned and securities borrowed are presented gross in the condensed consolidated balance sheets.

- 51 -

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

The following table presents information about our resale agreements and securities lending activity depicting the potential effect of rights of setoff between these recognized assets and recognized liabilities.
 
 
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
 
June 30, 2020
 
 
 
 
 
 
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
Resale agreements (1)
 
$
9,407

 
$
—

 
$
9,407

 
$
—

 
$
(9,407
)
(2) 
 
$
—

Securities borrowed (3)
 
563

 
—

 
563

 
(563
)
 
—

 
 
—

Total
 
$
9,970

 
$
—

 
$
9,970

 
$
(563
)
 
$
(9,407
)
 
 
$
—

Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
Securities loaned (4,5)
 
$
1,653

 
$
—

 
$
1,653

 
$
(563
)
 
$
(940
)
 
 
$
150

Total
 
$
1,653

 
$
—

 
$
1,653

 
$
(563
)
 
$
(940
)
 
 
$
150

 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2019
 
 
 
 
 
 
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
Resale agreements (1)
 
$
9,028

 
$
—

 
$
9,028

 
$
—

 
$
(9,028
)
(2) 
 
$
—

Securities borrowed (3)
 
735

 
—

 
735

 
(730
)
 
(5
)
 
 
—

Total
 
$
9,763

 
$
—

 
$
9,763

 
$
(730
)
 
$
(9,033
)
 
 
$
—

Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
Securities loaned (4,5)
 
$
1,251

 
$
—

 
$
1,251

 
$
(730
)
 
$
(445
)
 
 
$
76

Total
 
$
1,251

 
$
—

 
$
1,251

 
$
(730
)
 
$
(445
)
 
 
$
76

(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 the value of the related assets. At June 30, 2020 and December 31, 2019, the fair value of collateral received in connection with resale agreements that are available to be repledged or sold was $9.6 billion and $9.2 billion, respectively.
(3) Included in other assets in the condensed consolidated balance sheets.
(4) Included in accrued expenses and other liabilities 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 June 30, 2020 and December 31, 2019.
(5) Securities loaned are predominantly comprised of equity securities held in client brokerage accounts with overnight and continuous remaining contractual maturities.

Margin lending: Clients with margin loans have agreed to allow Schwab to pledge collateralized securities in their brokerage accounts in accordance with federal regulations. The following table summarizes the fair value of client securities that were available, under such regulations, that could have been used as collateral, as well as the fair value of securities that we had pledged under such regulations and from securities borrowed transactions:
 
 
June 30, 2020
 
December 31, 2019
Fair value of client securities available to be pledged
 
$
26,170

 
$
26,685

Fair value of securities pledged for:
 
 
 
 
Fulfillment of requirements with the Options Clearing Corporation (1)
 
$
4,056

 
$
2,171

Fulfillment of client short sales
 
3,279

 
2,293

Securities lending to other broker-dealers
 
1,277

 
1,017

Total collateral pledged
 
$
8,612

 
$
5,481

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 $218 million as of June 30, 2020 and $142 million as of December 31, 2019.
(1)  
Securities pledged to fulfill client margin requirements for open option contracts established with the Options Clearing Corporation.



- 52 -

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

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, AFS securities, and certain other assets. The Company uses the market approach to determine the fair value of assets and liabilities. When available, the Company uses quoted prices in active markets to measure the fair value of assets and liabilities. Quoted prices for investments in exchange-traded securities represent end-of-day close prices published by exchanges. Quoted prices for money market funds and other mutual funds represent reported net asset values. When utilizing market data and bid-ask spread, the Company uses the price within the bid-ask spread that best represents fair value. When quoted prices in active markets do not exist, the Company uses prices obtained from independent third-party pricing services to measure the fair value of investment assets. We generally obtain prices from three independent third-party pricing sources for assets recorded at fair value.

Our primary independent pricing service provides prices for our fixed income investments such as commercial paper; certificates of deposit; U.S. government and agency securities; state and municipal securities; corporate debt securities; asset-backed securities; foreign government agency securities; and non-agency commercial mortgage-backed securities. Such prices are based on observable trades, broker/dealer quotes, and discounted cash flows that incorporate observable information such as yields for similar types of securities (a benchmark interest rate plus observable spreads) and weighted-average maturity for the same or similar “to-be-issued” securities. We compare the prices obtained from the primary independent pricing service to the prices obtained from the additional independent pricing services to determine if the price obtained from the primary independent pricing service is reasonable. Schwab does not adjust the prices received from independent third-party pricing services unless such prices are inconsistent with the definition of fair value and result in material differences in the amounts recorded.

For a description of the fair value hierarchy and Schwab’s fair value methodologies, see Note 2 in the 2019 Form 10-K. The Company did not adjust prices received from the primary independent third-party pricing service at June 30, 2020 or December 31, 2019.




- 53 -

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:
June 30, 2020
Level 1
 
Level 2
 
Level 3
 
Balance at
Fair Value
Cash equivalents:
 
 
 
 
 
 
 
Money market funds
$
5,516

 
$
—

 
$
—

 
$
5,516

Total cash equivalents
5,516

 
—

 
—

 
5,516

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

 
1,378

 
—

 
1,378

U.S. Government securities
—

 
20,157

 
—

 
20,157

Total investments segregated and on deposit for regulatory purposes
—

 
21,535

 
—

 
21,535

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

 
237,087

 
—

 
237,087

Asset-backed securities
—

 
22,119

 
—

 
22,119

Corporate debt securities
—

 
13,039

 
—

 
13,039

U.S. Treasury securities
—

 
4,771

 
—

 
4,771

U.S. state and municipal securities
—

 
1,620

 
—

 
1,620

Non-agency commercial mortgage-backed securities
—

 
1,254

 
—

 
1,254

Certificates of deposit
—

 
803

 
—

 
803

Commercial paper
—

 
200

 
—

 
200

Foreign government agency securities
—

 
301

 
—

 
301

Other
—

 
22

 
—

 
22

Total available for sale securities
—

 
281,216

 
—

 
281,216

Other assets:
 
 
 
 
 
 
 
Equity and bond mutual funds
375

 
—

 
—

 
375

U.S. Government securities
—

 
278

 
—

 
278

State and municipal debt obligations
—

 
30

 
—

 
30

Equity, corporate debt, and other securities
7

 
28

 
—

 
35

Total other assets
382

 
336

 
—

 
718

Total
$
5,898

 
$
303,087

 
$
—

 
$
308,985


- 54 -

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, 2019
Level 1
 
Level 2
 
Level 3
 
Balance at
Fair Value
Cash equivalents:
 
 
 
 
 
 
 
Money market funds
$
5,179

 
$
—

 
$
—

 
$
5,179

Commercial paper
—

 
2,498

 
—

 
2,498

Total cash equivalents
5,179

 
2,498

 
—

 
7,677

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

 
1,351

 
—

 
1,351

U.S. Government securities
—

 
7,276

 
—

 
7,276

Total investments segregated and on deposit for regulatory purposes
—

 
8,627

 
—

 
8,627

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

 
46,155

 
—

 
46,155

Corporate debt securities
—

 
5,484

 
—

 
5,484

Asset-backed securities
—

 
4,987

 
—

 
4,987

U.S. Treasury securities
—

 
3,384

 
—

 
3,384

Certificates of deposit
—

 
1,004

 
—

 
1,004

Commercial paper
—

 
395

 
—

 
395

Non-agency commercial mortgage-backed securities
—

 
13

 
—

 
13

Total available for sale securities
—

 
61,422

 
—

 
61,422

Other assets:
 
 
 
 
 
 
 
Equity and bond mutual funds
442

 
—

 
—

 
442

U.S. Government securities
—

 
202

 
—

 
202

State and municipal debt obligations
—

 
47

 
—

 
47

Equity, corporate debt, and other securities
5

 
22

 
—

 
27

Total other assets
447

 
271

 
—

 
718

Total
$
5,626

 
$
72,818

 
$
—

 
$
78,444

 
Fair Value of Other Financial Instruments
The following tables present the fair value hierarchy for other financial instruments:
June 30, 2020
Carrying
Amount
 
Level 1
 
Level 2
 
Level 3
 
Balance at
Fair Value
Assets
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
28,058

 
$
28,058

 
$
—

 
$
—

 
$
28,058

Cash and investments segregated and on deposit for
regulatory purposes
11,643

 
2,230

 
9,413

 
—

 
11,643

Receivables from brokerage clients — net
21,418

 
—

 
21,418

 
—

 
21,418

Bank loans — net:
 
 
 
 
 
 
 
 
 
First Mortgages
13,971

 
—

 
14,344

 
—

 
14,344

HELOCs
977

 
—

 
973

 
—

 
973

Pledged asset lines
5,734

 
—

 
5,734

 
—

 
5,734

Other
189

 
—

 
189

 
—

 
189

Total bank loans — net
20,871

 
—

 
21,240

 
—

 
21,240

Other assets
1,272

 
—

 
1,272

 
—

 
1,272

Liabilities
 
 
 
 
 
 
 
 
 
Bank deposits
$
301,566

 
$
—

 
$
301,566

 
$
—

 
$
301,566

Payables to brokerage clients
50,135

 
—

 
50,135

 
—

 
50,135

Accrued expenses and other liabilities
3,827

 
—

 
3,827

 
—

 
3,827

Long-term debt
8,526

 
—

 
9,381

 
—

 
9,381


- 55 -

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, 2019
Carrying
Amount
 
Level 1
 
Level 2
 
Level 3
 
Balance at
Fair Value
Assets
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
21,668

 
$
21,668

 
$
—

 
$
—

 
$
21,668

Cash and investments segregated and on deposit for
regulatory purposes
11,807

 
2,792

 
9,015

 
—

 
11,807

Receivables from brokerage clients — net
21,763

 
—

 
21,763

 
—

 
21,763

Held to maturity securities:
 
 
 
 
 
 
 
 
 
U.S. agency mortgage-backed securities
109,325

 
—

 
110,566

 
—

 
110,566

Asset-backed securities
17,806

 
—

 
17,771

 
—

 
17,771

Corporate debt securities
4,661

 
—

 
4,718

 
—

 
4,718

U.S. state and municipal securities
1,301

 
—

 
1,404

 
—

 
1,404

Non-agency commercial mortgage-backed securities
1,119

 
—

 
1,141

 
—

 
1,141

U.S. Treasury securities
223

 
—

 
228

 
—

 
228

Certificates of deposit
200

 
—

 
200

 
—

 
200

Foreign government agency securities
50

 
—

 
50

 
—

 
50

Other
21

 
—

 
21

 
—

 
21

Total held to maturity securities
134,706

 
—

 
136,099

 
—

 
136,099

Bank loans — net:
 
 
 
 
 
 
 
 
 
First Mortgages
11,693

 
—

 
11,639

 
—

 
11,639

HELOCs
1,113

 
—

 
1,153

 
—

 
1,153

Pledged asset lines
5,206

 
—

 
5,206

 
—

 
5,206

Other
200

 
—

 
200

 
—

 
200

Total bank loans — net
18,212

 
—

 
18,198

 
—

 
18,198

Other assets
1,014

 
—

 
1,014

 
—

 
1,014

Liabilities
 
 
 
 
 
 
 
 
 
Bank deposits
$
220,094

 
$
—

 
$
220,094

 
$
—

 
$
220,094

Payables to brokerage clients
39,220

 
—

 
39,220

 
—

 
39,220

Accrued expenses and other liabilities
1,882

 
—

 
1,882

 
—

 
1,882

Long-term debt
7,430

 
—

 
7,775

 
—

 
7,775





- 56 -

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 April 30, 2020, the Company issued and sold 2,500,000 depositary shares, each representing a 1/100th ownership interest in a share of 5.375% fixed-rate reset non-cumulative perpetual preferred stock, Series G, $0.01 par value per share, with a liquidation preference of $100,000 per share (equivalent to $1,000 per Depositary Share). The net proceeds of the offering were approximately $2.47 billion, after deducting the underwriting discount and estimated offering expenses.

On January 30, 2019, CSC publicly announced that its Board of Directors authorized a share repurchase program to repurchase up to $4.0 billion of common stock. The share repurchase authorization does not have an expiration date. There were no repurchases of CSC’s common stock under this authorization during the six months ended June 30, 2020. During the second quarter of 2019, CSC repurchased 29 million shares of its common stock under this authorization for $1.2 billion. There were no repurchases of CSC’s common stock under this authorization during the first quarter of 2019.

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

 
 
Liquidation Preference Per Share
 
 
 
Dividend Rate in Effect at June 30, 2020
Earliest Redemption Date
Date at Which Dividend Rate Becomes Floating or Resets
Floating Annual Rate of Three-Month LIBOR/ Term Five-Year Treasury plus (2):
 
Shares Issued and Outstanding (in thousands) at
Carrying Value at
 
 
June 30,
2020 (1)
December 31, 2019 (1)
June 30, 2020
December 31, 2019
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/Fixed-rate reset:
 
 
 
 
 
 
 
 
 
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
%
Series G
25

—

100,000

2,470

—

04/30/20
5.375
%
06/01/25
06/01/25
4.971
%
Total preferred stock
1,786

1,761



$
5,263

$
2,793

 
 
 
 
 
(1) Represented by depositary shares, except for Series A.
(2) The Series G dividend rate resets on each five-year anniversary beginning on June 1, 2025 based on the five-year Treasury rate; Series G is only redeemable on reset dates. The dividend rates for all other series of preferred stock will float based on LIBOR.
N/A Not applicable.

Dividends declared on the Company’s preferred stock are as follows:
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2020
 
2019
 
2020
 
2019
 
 
Total
Declared
 
Per Share
Amount
 
Total
Declared
 
Per Share
Amount
 
Total
Declared
 
Per Share
Amount
 
Total
Declared
 
Per Share
Amount
Series A
 
$
14.0

 
$
35.00

 
$
14.0

 
$
35.00

 
$
14.0

 
$
35.00

 
$
14.0

 
$
35.00

Series C
 
9.0

 
15.00

 
9.0

 
15.00

 
18.0

 
30.00

 
18.0

 
30.00

Series D
 
11.1

 
14.88

 
11.1

 
14.88

 
22.3

 
29.76

 
22.3

 
29.76

Series E
 
—

 
—

 
—

 
—

 
13.9

 
2,312.50

 
13.9

 
2,312.50

Series F
 
12.5

 
2,500.00

 
12.5

 
2,500.00

 
12.5

 
2,500.00

 
12.5

 
2,500.00

Series G (1)
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Total
 
$
46.6

 
 
 
$
46.6

 
 
 
$
80.7

 
 
 
$
80.7

 
 
(1) Series G preferred stock was issued on April 30, 2020. Dividends are paid quarterly beginning on September 1, 2020.

- 57 -

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:
 
2020
 
2019
Three Months Ended June 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)
$
2,113

 
$
(498
)
 
$
1,615

 
$
218

 
$
(53
)
 
$
165

Other reclassifications included in other revenue
—

 
—

 
—

 
(3
)
 
1

 
(2
)
Amortization of amounts previously recorded upon transfer to held to
maturity from available for sale
—

 
—

 
—

 
8

 
(1
)
 
7

Other
1

 
—

 
1

 
—

 
—

 
—

Other comprehensive income (loss)
$
2,114

 
$
(498
)
 
$
1,616

 
$
223

 
$
(53
)
 
$
170

 
2020
 
2019
Six Months Ended June 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)
$
7,264

 
$
(1,742
)
 
$
5,522

 
$
445

 
$
(107
)
 
$
338

Other reclassifications included in other revenue
—

 
—

 
—

 
(4
)
 
1

 
(3
)
Amortization of amounts previously recorded upon transfer to held to
maturity from available for sale
—

 
—

 
—

 
20

 
(4
)
 
16

Other
1

 
—

 
1

 
—

 
—

 
—

Other comprehensive income (loss)
$
7,265

 
$
(1,742
)
 
$
5,523

 
$
461

 
$
(110
)
 
$
351


AOCI balances are as follows:
 
Total AOCI
Balance at March 31, 2019
$
(71
)
Available for sale securities:
 
Net unrealized gain (loss), excluding transfers to available for sale from held to maturity
165

Other reclassifications included in other revenue
(2
)
Held to maturity securities:
 
Amortization of amounts previously recorded upon transfer to held to maturity from available for sale
7

Balance at June 30, 2019
$
99

 
 
Balance at March 31, 2020
$
3,995

Available for sale securities:
 
Net unrealized gain (loss), excluding transfers to available for sale from held to maturity
1,615

Other
1

Balance at June 30, 2020
$
5,611



- 58 -

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, 2018
(252
)
Available for sale securities:
 
Net unrealized gain (loss), excluding transfers to available for sale from held to maturity
319

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

Other reclassifications included in other revenue
(3
)
Held to maturity securities:
 
Amortization of amounts previously recorded upon transfer to held to maturity from available for sale
16

Balance at June 30, 2019
99

 
 
Balance at December 31, 2019
88

Available for sale securities:
 
Net unrealized gain (loss), excluding transfers to available for sale from held to maturity
4,465

Net unrealized gain on securities transferred to available for sale from held to maturity (2)
1,057

Other
1

Balance at June 30, 2020
5,611

(1) In the first quarter of 2019, the Company made an election to transfer a portion of its HTM securities to AFS as part of its adoption of ASU 2017-12, “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities”. The transfer resulted in a net of tax increase to AOCI of $19 million.
(2) On January 1, 2020, the Company transferred all of its investment securities designated as HTM to the AFS category. The transfer resulted in a net of tax increase to AOCI of $1.1 billion. See Note 5 for additional discussion on the 2020 transfer of HTM securities to AFS.





- 59 -

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 June 30, 2020, 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
June 30, 2020
 
Amount
 
Ratio
 
Amount
 
Ratio
 
Amount
 
Ratio (2)
CSC
 
 
 
 
 
 
 
 
 
 
 
 
Common Equity Tier 1 Risk-Based Capital
 
$
16,992

 
15.8
%
 
N/A

 
 
 
$
4,826

 
4.5
%
Tier 1 Risk-Based Capital
 
22,255

 
20.8
%
 
N/A

 
 
 
6,435

 
6.0
%
Total Risk-Based Capital
 
22,288

 
20.8
%
 
N/A

 
 
 
8,580

 
8.0
%
Tier 1 Leverage
 
22,255

 
5.9
%
 
N/A

 
 
 
15,046

 
4.0
%
Supplementary Leverage Ratio
 
22,255

 
5.8
%
 
N/A

 
 
 
11,489

 
3.0
%
CSB
 
 
 
 
 
 
 
 
 
 
 
 
Common Equity Tier 1 Risk-Based Capital
 
$
16,055

 
18.9
%
 
$
5,528

 
6.5
%
 
$
3,827

 
4.5
%
Tier 1 Risk-Based Capital
 
16,055

 
18.9
%
 
6,804

 
8.0
%
 
5,103

 
6.0
%
Total Risk-Based Capital
 
16,087

 
18.9
%
 
8,505

 
10.0
%
 
6,804

 
8.0
%
Tier 1 Leverage
 
16,055

 
5.8
%
 
13,848

 
5.0
%
 
11,078

 
4.0
%
Supplementary Leverage Ratio
 
16,055

 
5.7
%
 
N/A

 
N/A

 
8,505

 
3.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2019
 
 
 
 
 
 
 
 
 
 
 
 
CSC
 
 
 
 
 
 
 
 
 
 
 
 
Common Equity Tier 1 Risk-Based Capital
 
$
17,660

 
19.5
%
 
N/A

 
 
 
$
4,073

 
4.5
%
Tier 1 Risk-Based Capital
 
20,453

 
22.6
%
 
N/A

 
 
 
5,431

 
6.0
%
Total Risk-Based Capital
 
20,472

 
22.6
%
 
N/A

 
 
 
7,241

 
8.0
%
Tier 1 Leverage
 
20,453

 
7.3
%
 
N/A

 
 
 
11,189

 
4.0
%
Supplementary Leverage Ratio
 
20,453

 
7.1
%
 
N/A

 
 
 
8,604

 
3.0
%
CSB
 
 
 
 
 
 
 
 
 
 
 
 
Common Equity Tier 1 Risk-Based Capital
 
$
14,819

 
20.7
%
 
$
4,649

 
6.5
%
 
$
3,218

 
4.5
%
Tier 1 Risk-Based Capital
 
14,819

 
20.7
%
 
5,722

 
8.0
%
 
4,291

 
6.0
%
Total Risk-Based Capital
 
14,837

 
20.7
%
 
7,152

 
10.0
%
 
5,722

 
8.0
%
Tier 1 Leverage
 
14,819

 
7.1
%
 
10,486

 
5.0
%
 
8,389

 
4.0
%
Supplementary Leverage Ratio
 
14,819

 
6.8
%
 
N/A

 
N/A

 
6,497

 
3.0
%
(1) In the interagency regulatory capital and liquidity rules adopted in October 2019, Category III banking organizations such as CSC were given the ability to opt-out of the inclusion of AOCI in regulatory capital, and CSC made this opt-out election as of January 1, 2020. Therefore, AOCI is excluded from the amounts and ratios presented as of March 31, 2020. In 2019, CSC and CSB were required to include all components of AOCI in regulatory capital; the amounts and ratios for December 31, 2019 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 a countercyclical capital buffer above the regulatory minimum risk-based capital ratios. The capital conservation buffer and countercyclical capital buffer were 2.5% and zero percent, respectively, for both periods presented. If either buffer falls below the minimum requirement, the Company would be subject to limits on capital distributions and discretionary bonus payments to executive officers. At June 30, 2020, 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 June 30, 2020, CSB is considered well capitalized (the highest category) under its respective regulatory capital rules. There are no conditions or events since June 30, 2020 that management believes have changed CSB’s capital category.

At June 30, 2020, the balance sheets of CSPB and Charles Schwab Trust Bank (Trust Bank) consisted primarily of investment securities, and the entities held total assets of $26.0 billion and $11.2 billion, respectively. Based on their regulatory capital ratios, at June 30, 2020, CSPB and Trust Bank are considered well capitalized under their respective regulatory capital rules.

- 60 -

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:
 
 
June 30, 2020
 
December 31, 2019
Net Capital
 
$
2,041

 
$
3,700

Minimum net capital required
 
0.250

 
0.250

2% of aggregate debit balances
 
471

 
446

Net Capital in excess of required net capital
 
$
1,570

 
$
3,254


Pursuant to Rule 15c3-3 of the Securities Exchange Act of 1934 and other applicable regulations, Schwab had cash and investments segregated for the exclusive benefit of clients at June 30, 2020. 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 condensed 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 attributed 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.

- 61 -

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 table:
 
Investor Services
 
Advisor Services
 
Total
Three Months Ended June 30,
2020
 
2019
 
2020
 
2019
 
2020
 
2019
Net Revenues
 
 
 
 
 
 
 
 
 
 
 
Net interest revenue
$
952

 
$
1,154

 
$
437

 
$
455

 
$
1,389

 
$
1,609

Asset management and administration fees
583

 
560

 
218

 
226

 
801

 
786

Trading revenue (1)
138

 
140

 
55

 
67

 
193

 
207

Other (1)
51

 
37

 
16

 
42

 
67

 
79

Total net revenues
1,724

 
1,891

 
726

 
790

 
2,450

 
2,681

Expenses Excluding Interest
1,168

 
1,057

 
394

 
388

 
1,562

 
1,445

Income before taxes on income
$
556

 
$
834

 
$
332

 
$
402

 
$
888

 
$
1,236


 
Investor Services
 
Advisor Services
 
Total
Six Months Ended June 30,
2020
 
2019
 
2020
 
2019
 
2020
 
2019
Net Revenues
 
 
 
 
 
 
 
 
 
 
 
Net interest revenue
$
2,080

 
$
2,349

 
$
881

 
$
941

 
$
2,961

 
$
3,290

Asset management and administration fees
1,183

 
1,093

 
445

 
448

 
1,628

 
1,541

Trading revenue (1)
257

 
281

 
124

 
143

 
381

 
424

Other (1)
71

 
79

 
26

 
70

 
97

 
149

Total net revenues
3,591

 
3,802

 
1,476

 
1,602

 
5,067

 
5,404

Expenses Excluding Interest
2,322

 
2,119

 
810

 
785

 
3,132

 
2,904

Income before taxes on income
$
1,269

 
$
1,683

 
$
666

 
$
817

 
$
1,935

 
$
2,500

(1) Beginning in the first quarter of 2020, order flow revenue was reclassified from other revenue to trading revenue. Prior period amounts have been reclassified to reflect this change.



- 62 -


THE CHARLES SCHWAB CORPORATION



Item 4.     Controls and Procedures
Evaluation of disclosure controls and procedures: The management of the Company, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of June 30, 2020. Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were effective as of June 30, 2020.
Changes in internal control over financial reporting: No change in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) was identified during the quarter ended June 30, 2020, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.



- 63 -


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 six months of 2020, there have been no material changes to the risk factors in Part I – Item 1A – Risk Factors in the 2019 Form 10-K except as described below. The risk factor described below updates, and should be read together with, the risk factors disclosed in Part I – Item 1A – Risk Factors, in our 2019 Annual Report on Form 10-K.

The challenging economic environment triggered by the COVID-19 pandemic has impacted and will continue to impact our business, results of operations and financial condition.
The COVID‑19 pandemic has adversely impacted the economic environment, leading to lower interest rates across the curve and heightened volatility in the financial markets. These developments have had, and may continue to have, a negative impact on our net interest revenue and asset management and administration fees. Additionally, in March 2020, we experienced a significant increase in client cash balances held at our bank and broker-dealer subsidiaries, which caused our Tier 1 Leverage Ratio to decline into the buffer we maintain between our long-term operating objective and our regulatory requirement. This will limit our ability to return excess capital to stockholders, including through share repurchases, until the ratio returns to higher levels. Furthermore, many of our employees and those of our outsourced service providers are working remotely. Certain of our client service response and processing times have increased as a result of very high levels of client engagement, our employees working remotely, and the temporary loss of services from some of our outsourced service providers. Credit markets have been adversely impacted due to both uncertainty regarding the pandemic’s economic impact and the anticipation that high levels of unemployment will have a significant impact on retail credit and commercial real estate forbearances and delinquencies. We may experience higher levels of delinquencies on our portfolios of first mortgages and home equity lines of credit. We may also experience higher credit spreads in certain sectors within our portfolio of investment securities, especially those asset-backed securities and commercial mortgage-backed securities with exposure to retail loans and commercial real estate. These and other impacts of the COVID‑19 pandemic could have the effects of heightening many of the other risks described in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2019 incorporated by reference herein. The extent to which the COVID‑19 pandemic impacts our business, results of operations and financial condition will depend on future developments, which are highly uncertain, including the scope and duration of the pandemic, actions taken by governmental authorities to contain the financial and economic impact of the pandemic and the spread of COVID‑19, further changes in credit quality and spreads, and reactions in the financial markets.



- 64 -


THE CHARLES SCHWAB CORPORATION



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. There were no share repurchases under this authorization during the second quarter of 2020.

The following table summarizes purchases made by or on behalf of CSC of its common stock for each calendar month in the second quarter of 2020 (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
April:
 
 
 
 
 
 
 
 
Share repurchase program
 
—

 
$
—

 
—

 
$
1,780

Employee transactions (1)
 
2

 
$
33.07

 
N/A

 
N/A

May:
 
 
 
 
 
 
 
 
Share repurchase program
 
—

 
$
—

 
—

 
$
1,780

Employee transactions (1)
 
6

 
$
36.24

 
N/A

 
N/A

June:
 
 
 
 
 
 
 
 
Share repurchase program
 
—

 
$
—

 
—

 
$
1,780

Employee transactions (1)
 
7

 
$
37.87

 
N/A

 
N/A

Total:
 
 
 
 
 
 
 
 
Share repurchase program
 
—

 
$
—

 
—

 
$
1,780

Employee transactions (1)
 
15

 
$
36.49

 
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. CSC 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.


Item 4.     Mine Safety Disclosures

Not applicable.


Item 5.     Other Information
None.

- 65 -


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
 
2.1
 
 
 
 
2.2
 
 
 
 
3.21
 
 
 
 
10.410
(2)
 
 
 
10.411
(1)
 
 
 
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)
 
 
 
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)
 
 
 
 
 
 
 

- 66 -


THE CHARLES SCHWAB CORPORATION



Exhibit
Number
Exhibit
 
(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 June 30, 2020 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.
 


* The schedules and exhibits have been omitted pursuant to Item 601(b)(2) of Regulation S-K. Schwab agrees to furnish supplementally a copy of such schedules and exhibits, or any section thereof, to the SEC upon request.

- 67 -


THE CHARLES SCHWAB CORPORATION




SIGNATURE


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


 
 
 
THE CHARLES SCHWAB CORPORATION
 
 
 
(Registrant)
 
 
 
 
 
 
 
 
 
 
 
 
Date:
August 7, 2020
 
/s/ Peter Crawford
 
 
 
Peter Crawford
 
 
 
Executive Vice President and Chief Financial Officer


- 68 -


EXHIBIT 10.411

EXECUTION COPY

$700,000,000
CREDIT AGREEMENT
(364-DAY COMMITMENT)
dated as of May 29, 2020

Among

THE CHARLES SCHWAB CORPORATION

and

CITIBANK, N.A.
as Administrative Agent
and
THE OTHER FINANCIAL INSTITUTIONS PARTY HERETO
and

BANK OF AMERICA, N.A.
CREDIT SUISSE AG, CAYMAN ISLANDS BRANCH
THE BANK OF NEW YORK MELLON
and
WELLS FARGO BANK, NATIONAL ASSOCIATION
as Co-Documentation Agents

and
JPMORGAN CHASE BANK, N.A.
as Syndication Agent

and
CITIBANK, N.A.
and
JPMORGAN CHASE BANK, N.A.
as Joint Lead Arrangers and Bookrunners






1.
DEFINITIONS.   
1
 
 
 
 
2.
THE CREDIT FACILITY.   
13
 
 
 
 
 
2.1 The Revolving Credit Facility   
13
 
 
2.2 Term Loan Facility   
14
 
 
2.3 Evidence of Borrowing/Promissory Notes   
14
 
 
2.4 Making of Revolving Loans and Term Loans, Borrowings; Interest Periods;
 
 
            Notice   
15
 
 
2.5 Conversion and Continuation Elections.   
16
 
 
2.6 Interest Periods   
17
 
 
2.7 Interest Rates   
18
 
 
2.8 Substitute Rates   
18
 
 
2.9 Fees   
19
 
 
2.10 Reduction of Credit   
20
 
 
2.11 Termination Date; Extensions   
20
 
 
2.12 Payments by the Lenders to the Agent   
21
 
 
2.13 Sharing of Payments, Etc.   
21
 
 
2.14 Computation of Fees and Interest   
22
 
 
2.15 Defaulting Lenders   
22
 
 
2.16 LIBOR Replacement   
24
 
 
2.17 Increases in Commitments   
25
 
 
 
 
3.
PAYMENT.   
26
 
 
 
 
 
3.1 Repayment   
26
 
 
3.2 Method of Payment   
27
 
 
3.3 Optional Prepayment   
27
 
 
3.4 Taxes/Net Payments   
27
 
 
3.5 Illegality   
28
 
 
3.6 Increased Costs and Reduction of Return   
29
 
 
3.7 Funding Losses   
29
 
 
3.8 Certificates of Lenders   
30
 
 
3.9 Substitution of Lenders   
30
 
 
3.10 Survival   
30
 
 
 
 
4.
CONDITIONS.   
30
 
 
 
 
 
4.1 Conditions Precedent to the Effectiveness of this Agreement   
30
 
 
4.2 Conditions Precedent to Revolving Loans and Term Loans   
31
 
 
 
 
5.
REPRESENTATIONS AND WARRANTIES.   
32
 
 
 
 
 
5.1 Organization and Good Standing   
32
 
 
5.2 Corporate Power and Authority   
32
 
 
5.3 Enforceability   
33
 
 
 
 
 
 
 
 
 
 
 

i

 
5.4 No Violation of Laws or Agreements   
33
 
 
5.5 No Consents   
33
 
 
5.6 Financial Statements   
33
 
 
5.7 Broker Subsidiary Licenses, Etc   
33
 
 
5.8 Broker Subsidiary/Broker Registration   
33
 
 
5.9 Broker Subsidiary/SIPC   
33
 
 
5.10 Taxes   
34
 
 
5.11 ERISA   
34
 
 
5.12 No Extension of Credit for Default Remedy/Hostile Acquisition   
34
 
 
5.13 Use of Proceeds/Margin Regulations   
34
 
 
5.14 Authorized Persons   
34
 
 
5.15 Material Contracts   
34
 
 
5.16 Litigation   
34
 
 
5.17 Investment Company   
35
 
 
5.18 Designated Persons   
35
 
 
 
 
6.
AFFIRMATIVE COVENANTS.   
35
 
 
 
 
 
6.1 Notice of Events of Default   
35
 
 
6.2 Financial Statements   
35
 
 
6.3 Insurance   
35
 
 
6.4 Books and Records   
36
 
 
6.5 Change in Business   
36
 
 
6.6 Capital Requirements   
36
 
 
6.7 Anti-Corruption Laws and Sanctions   
36
 
 
 
 
7.
NEGATIVE COVENANTS.   
36
 
 
 
 
 
7.1 Net Capital   
36
 
 
7.2 Minimum Stockholders’ Equity   
36
 
 
7.3 Merger/Disposition of Assets   
36
 
 
7.4 Broker Subsidiary Indebtedness   
36
 
 
7.5 Indebtedness Secured by Subsidiary Stock   
37
 
 
7.6 Liens and Encumbrances   
37
 
 
7.7 Use of Proceeds   
38
 
 
 
 
8.
EVENTS OF DEFAULT.   
38
 
 
 
 
 
8.1 Defaults   
38
 
 
8.2 Remedies   
39
 
 
 
 
9.
THE AGENT.   
40
 
 
 
 
 
9.1 Appointment and Authorization   
40
 
 
9.2 Delegation of Duties   
40
 
 
9.3 Liability of Agent   
40
 
 
9.4 Reliance by Agent   
40
 
 
 
 
 
 
 
 
 

ii

 
9.5 Notice of Default   
41
 
 
9.6 Credit Decision   
41
 
 
9.7 Indemnification of Agent   
42
 
 
9.8 Agent in Individual Capacity   
42
 
 
9.9 Successor Agent   
42
 
 
9.10 Withholding Tax   
43
 
 
9.11 Co-Agents   
44
 
 
9.12 Certain ERISA Matters
44
 
 
 
 
10.
MISCELLANEOUS.   
46
 
 
 
 
 
10.1 Amendments and Waivers   
46
 
 
10.2 Notices   
46
 
 
10.3 No Waiver-Cumulative Remedies   
48
 
 
10.4 Costs and Expenses   
48
 
 
10.5 Borrower Indemnification   
49
 
 
10.6 Payments Set Aside   
50
 
 
10.7 Successors and Assigns   
50
 
 
10.8  Assignments, Participations Etc   
50
 
 
10.9 Confidentiality   
53
 
 
10.10 Notification of Addresses, Lending Offices, Etc   
54
 
 
10.11 Counterparts   
54
 
 
10.12 Severability   
54
 
 
10.13 No Third Parties Benefited   
55
 
 
10.14 Governing Law and Jurisdiction   
55
 
 
10.15 Waiver of Jury Trial   
55
 
 
10.16 Entire Agreement   
57
 
 
10.17 Headings   
57
 
 
10.18 USA Patriot Act   
57
 
 
10.19 Acknowledgment and Consent to Bail-In of Affected Financial Institutions   
57
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

iii

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
SCHEDULES:
 
 
 
 
 
Schedule 1 - Lenders’ Commitments
 
 
Schedule 2 - List of Borrowing Agreements
 
 
Schedule 6.2 – Compliance Certificate
 
 
Schedule 10.2 - Notices
 
 
 
 
 
EXHIBITS:
 
 
 
 
 
Exhibit A-1 - Revolving Note
 
 
Exhibit A-2 - Term Note
 
 
Exhibit B - Borrowing Advice
 
 
Exhibit C - Notice of Conversion/Continuation
 
 
Exhibit D - Commitment and Termination Date Extension Request
 
 
Exhibit E - Borrower’s Opinion of Counsel
 
 
Exhibit F - Form of Assignment and Acceptance
 


iv



CREDIT AGREEMENT (364-DAY COMMITMENT)


THIS CREDIT AGREEMENT (364-DAY COMMITMENT) (“this Agreement”) is entered into as of May 29, 2020, among The Charles Schwab Corporation, a Delaware corporation (the “Borrower”), the several financial institutions from time to time party to this Agreement (collectively the “Lenders”; individually each a “Lender”), and Citibank, N.A., as administrative agent for the Lenders (the “Agent”).

WHEREAS, the Lenders are willing to make from time to time Revolving Loans to the Borrower through May 28, 2021, and to make Term Loans to the Borrower on or before May 28, 2021 and maturing no later than May 27, 2022, upon the terms and subject to the conditions set forth in this Agreement.

NOW, THEREFORE, in consideration of the premises and of the mutual agreements and covenants herein contained, the parties hereto agree as follows:

1.
DEFINITIONS. The following terms have the following meanings:

Affiliate:
As to any Person, any other Person which, directly or indirectly, is in control of, is controlled by, or is under common control with, such Person. A Person shall be deemed to control another Person if the controlling Person possesses, directly or indirectly, the power to direct or cause the direction of the management and policies of the other Person, whether through the ownership of voting securities, membership interests, by contract, or otherwise.

Agent:
Citibank in its capacity as administrative agent for the Lenders hereunder and any successor agent appointed under Section 9.9.

Agent-Related
Persons:
Citibank and any successor agent appointed under Section 9.9, together with Citibank’s Affiliates, and the officers, directors, employees, agents and attorney-in-fact of such Persons and Affiliates.

Agreement:
This Credit Agreement.
    
Agent’s
Payment Office:
The address for payments set forth on the signature page hereto in relation to the Agent, or such other address as the Agent may from time to time specify.

Anti-Corruption
Laws
The U.S. Foreign Corrupt Practices Act and the U.K. Bribery Act, each as may be amended, and any rules or regulations thereunder.




Applicable Margin:     (i) with respect to Eurodollar Rate Loans, 1.25% per annum;
and
    
(ii) with respect to Base Rate Loans, 0.25% per annum.

Arrangers:
Citibank, N.A. and JPMorgan Chase Bank, N.A.

Assignee:
The meaning specified in Section 10.8.

Attorney Costs:
Without duplication, (1) all fees and disbursements of any law firm or other external counsel, and (2) the allocated cost of internal legal services and all disbursements of internal counsel.

Bail-In Action:
The meaning specified in Section 10.19.

Bank Subsidiary:
Any Federal savings association (as defined in 12 U.S.C. §1813(b)(2), any national member bank (as defined in 12 U.S.C. §1813(d)(1)) or state member bank (as defined in 12 U.S.C.§1813(d)(2)) that is a subsidiary (as defined in 12 U.S.C §1841(d)) of the Borrower.

Bankruptcy Code:
The Federal Bankruptcy Reform Act of 1978 (11 U.S.C. §101, et seq.), as amended.

Base Rate:
For any day, the highest of: (a) 0.500% per annum above the Federal Funds Rate; (b) the rate of interest in effect for such day as publicly announced from time to time by Citibank, N.A. as its “Base Rate” and (c) the ICE Benchmark Administration Interest Settlement Rate (or the successor thereto if the ICE Benchmark Administration is no longer making such a rate available) applicable to Dollars for a period of one month (“One Month LIBOR”) plus 1.00% (for the avoidance of doubt, the One Month LIBOR for any day shall be based on the rate appearing on Reuters LIBOR01 Page (or other commercially available source providing such quotations as designated by the Agent from time to time) at approximately 11:00 a.m. London time on such day); provided that, if One Month LIBOR shall be less than zero, such rate shall be deemed zero for purposes of this Agreement. The “Base Rate” described in clause (b) is a rate set by Citibank, N.A. based upon various factors including Citibank, N.A.’s costs and desired return, general economic conditions and other factors, and is used as a reference point for pricing some loans, which may be priced at, above, or below such announced rate. Any change in such rate announced by Citibank, N.A. shall take effect at the opening of business on the day specified in the public announcement of such change. If the Base Rate is being used as an alternate rate of interest pursuant to Section 2.16(b) hereof, then the Base Rate shall


2



be the greater of clauses (a) and (b) above and shall be determined without reference to clause (c) above

Base Rate Loan:
A Revolving Loan or Term Loan that bears interest based on the Base Rate.

Borrowing:
A borrowing hereunder consisting of Revolving Loans or Term Loans of the same Type made to the Borrower on the same day by the Lenders under Section 2 and, other than in the case of a Base Rate Loan, having the same Interest Period.

Borrowing Advice:
A written request made by the Borrower with respect to any Loan substantially in the form of Exhibit B specifying the information required in Section 2.4 hereof and executed by the Borrower from time to time.

Borrowing
Agreements:
The credit agreement(s) between the Borrower and the lenders listed in Schedule 2.

Borrowing Date:
Any date on which a Borrowing occurs under Section 2.4.

Broker Subsidiary:
Charles Schwab & Co., Inc., a California corporation, and its successors and assigns.

Business Day:
A day other than a Saturday, Sunday or any other day on which commercial banks are authorized or required to close in California or New York and, if the applicable Business Day relates to a Eurodollar Rate Loan, such a day on which dealings are carried on in the applicable offshore dollar interbank market.

Capital Adequacy
Regulation:
Any guideline, directive or requirement of any central bank or other Governmental Authority, or any other law, rule or regulation, whether or not having the force of law, in each case, regarding capital adequacy of any bank or of any corporation controlling a bank. For the avoidance of doubt, Capital Adequacy Regulation shall include all rules, guidelines or directives concerning capital adequacy (x) issued in connection with the Dodd-Frank Wall Street Reform and Consumer Protection Act or (y) promulgated by the Bank for International Settlements, the Basel Committee on Banking Supervision (or any successor or similar authority) or the United States or foreign regulatory authorities, in each case pursuant to Basel III, regardless of the date enacted, adopted or issued.

Change in

3



Control:
The consummation of a reorganization, merger or consolidation by the Borrower or the sale or other disposition of all or substantially all of the assets of the Borrower (a “Business Combination”), unless, following such Business Combination, (i) no person or entity (excluding any corporation resulting from such Business Combination or any employee benefit plan (or related trust) of the Borrower or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 35% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such corporation (except to the extent that such ownership existed prior to the Business Combination); and (ii) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the board of directors of the Borrower as of the time of the action of the board of directors of the Borrower providing for such Business Combination.

Citibank:
Citibank, N.A., a national banking association.

Closing Date:
The date (not before May 29, 2020) on which all conditions precedent set forth in Section 4 are satisfied or waived by all Lenders or, in the case of subsection 4.1(g), waived by the person entitled to receive such payment.

Code:
The Internal Revenue Code of 1986, as amended, and Regulations promulgated thereunder.

Commitment:
The meaning specified in Section 2.1.

Commitment Fee:
The meaning specified in subsection 2.9(b).

Consolidated
Stockholders’ Equity:
With respect to any Person, as of any date of determination, all amounts that would, in accordance with GAAP, be included under shareholders’ equity on a consolidated balance sheet of such Person as at such date, including any preferred stock, but excluding accumulated other comprehensive income (or loss).
Controlled
Subsidiary:
Any corporation 80% of whose voting stock (except for any qualifying shares) is owned directly or indirectly by the Borrower.

Conversion/
Continuation Date:
Any date on which under Section 2.5, the Borrower (a) converts Loans of one Type to another Type, or (b) continues as Loans of

4



the same Type, but with a new Interest Period, Loans having Interest Periods expiring on such date.

Credit:
The aggregate amount of the Commitments of all Lenders to make Revolving Loans under the Revolving Credit Facility and Term Loans under the Term Loan Facility in an amount not to exceed Seven Hundred Million and no/100 Dollars ($700,000,000.00), as the same may be reduced under Section 2.10 or increased under Section 2.17

Debtor Relief Laws:
The Bankruptcy Code of the United States of America, and all other liquidation, conservatorship, bankruptcy, assignment for the benefit of creditors, moratorium, rearrangement, receivership, insolvency, reorganization, or similar debtor relief Laws of the United States or other applicable jurisdictions from time to time in effect.

Default:
Any event or circumstance which, with the giving of notice, the lapse of time, or both, would (if not cured or otherwise remedied during such time) constitute an Event of Default.

Defaulting Lender:
Subject to Section 2.15(b), any Lender that (a) has failed to (i) fund all or any portion of its Loans within two Business Days of the date such Loans were required to be funded hereunder unless such Lender notifies the Agent and the Borrower in writing that such failure is the result of such Lender’s determination that one or more conditions precedent to funding (each of which conditions precedent, together with any applicable default, shall be specifically identified in such writing) has not been satisfied, or (ii) pay to the Agent or any other Lender any other amount required to be paid by it hereunder within two Business Days of the date when due, (b) has notified the Borrower or the Agent in writing that it does not intend to comply with its funding obligations hereunder, or has made a public statement to that effect (unless such writing or public statement relates to such Lender’s obligation to fund a Loan hereunder and states that such position is based on such Lender’s determination that a condition precedent to funding (which condition precedent, together with any applicable default, shall be specifically identified in such writing or public statement) cannot be satisfied), (c) has failed, within three Business Days after written request by the Agent or the Borrower, to confirm in writing to the Agent and the Borrower that it will comply with its prospective funding obligations hereunder (provided that such Lender shall cease to be a Defaulting Lender pursuant to this clause (c) upon receipt of such written confirmation by the Agent and the Borrower), or (d) has, or has a direct or indirect parent company that has, (i) become the subject of a proceeding under

5



any Debtor Relief Law or a Bail-In Action, or (ii) had appointed for it a receiver, custodian, conservator, trustee, administrator, assignee for the benefit of creditors or similar Person charged with reorganization or liquidation of its business or assets, including the Federal Deposit Insurance Corporation or any other state or federal regulatory authority acting in such a capacity; provided that a Lender shall not be a Defaulting Lender solely by virtue of the ownership or acquisition of any equity interest in that Lender or any direct or indirect parent company thereof by a Governmental Authority so long as such ownership interest does not result in or provide such Lender with immunity from the jurisdiction of courts within the United States or from the enforcement of judgments or writs of attachment on its assets or permit such Lender (or such Governmental Authority) to reject, repudiate, disavow or disaffirm any contracts or agreements made with such Lender. Any determination by the Agent that a Lender is a Defaulting Lender under any one or more of clauses (a) through (d) above shall be conclusive and binding absent manifest error, and such Lender shall be deemed to be a Defaulting Lender (subject to Section 2.15(b)) upon delivery of written notice of such determination to the Borrower and each Lender.

Designated Person:
A Person named on (a) the list of Specially Designated Nationals and Blocked Persons issued by OFAC or any successor office or agency within the U.S. Department of the Treasury, or similar issuance by the U.S. Department of State, or (b) any similar list issued by the United Nations Security Council, the European Union or Her Majesty’s Treasury of the United Kingdom.
Dollars,
dollars, and $:
Each mean lawful money of the United States.

Effective Amount:
With respect to any Revolving Loans and Term Loans on any date, the aggregate outstanding principal amount thereof after giving effect to any Borrowings and prepayments or repayments of Revolving Loans and Term Loans occurring on such date.

Eligible Assignee:
(i) A commercial bank organized under the laws of the United States, or any state thereof, and having total equity capital of at least $1,000,000,000 and a senior debt rating of a least “A” by S&P Global Ratings or at least “A-2” by Moody’s Investors Service, Inc. or, if not rated by either of the foregoing organizations, an equivalent rating from a nationally recognized statistical rating organization; or (ii) a commercial bank organized under the laws of any other country which is a member of the Organization for Economic Cooperation and Development (the OECD), or a political subdivision of any such country, and having total equity capital of at least $1,000,000,000 and a senior debt

6



rating of at least “A” by S&P Global Ratings or at least “A-2” by Moody’s Investors Service, Inc., or, if not rated by either of the foregoing organizations, an equivalent rating from a nationally recognized statistical rating organization; provided that such bank is acting through a branch or agency located in the United States.

Eurodollar
Base Rate:
For any Interest Period:

(a)    the rate per annum equal to the rate determined by the Agent to be the offered rate that appears on the page of the Reuters screen (or any successor thereto) that displays an average ICE Benchmark Administration Interest Settlement Rate (or the successor thereto if the ICE Benchmark Administration is no longer making such a rate available) for deposits in Dollars (“LIBOR”)(for delivery on the first day of such Interest Period) with a term equivalent to such Interest Period, determined as of approximately 11:00 a.m. (London time) two Business Days prior to the first day of such Interest Period, or

(b)    in the event the rate referenced in the preceding subsection(a) does not appear on such page or service or such page or service shall cease to be available, the rate per annum equal to the rate determined by the Agent to be the offered rate on such other page or other service that displays an average ICE Benchmark Administration Interest Settlement Rate (or the successor thereto if the ICE Benchmark Administration is no longer making such a rate available) for deposits in Dollars (for delivery on the first day of such Interest Period) with a term equivalent to such Interest Period, determined as of approximately 11:00 a.m. (London time) two Business Days prior to the first day of such Interest Period;

provided that, if the Eurodollar Base shall be less than zero, such rate shall be deemed zero for purposes of this Agreement.

Eurodollar Rate:
The rate obtained by dividing (i) Eurodollar Base Rate by (ii) a percentage (expressed as a decimal) equal to 1.00 minus the Eurodollar Rate Reserve Percentage.

Eurodollar Rate
Loan:
A Revolving Loan or Term Loan that bears interest based on the Eurodollar Rate.

Eurodollar Rate
Reserve Percentage:
For any Interest Period for any Loan for which the Eurodollar Rate has been selected or is applicable, the percentage (expressed as a decimal) as calculated by the Agent that is in effect on the first day

7



of such Interest Period, as prescribed by the Board of Governors of the U.S. Federal Reserve System (or any successor), for determining reserve requirements to be maintained by the Agent under Regulation D (or any successor regulation thereof) as amended to the date hereof (including such reserve requirements as become applicable to the Agent pursuant to phase-in or other similar requirements of Regulation D at any time subsequent to the date hereof) in respect of “Eurocurrency liabilities” (as defined in Regulation D). The Eurodollar Rate shall be adjusted automatically on and as of the effective date of any change in the Eurodollar Rate Reserve Percentage.

Event of Default:
Any of the events or circumstances specified in Section 8.1.

Exchange Act:
The Securities and Exchange Act of 1934, as amended, and regulations promulgated thereunder.

FATCA:
Sections 1471 through 1474 of the Code, as of the date of this Agreement (or any amended or successor version that is substantively comparable and not materially more onerous to comply with), any current or future regulations or official interpretations thereof and any agreements entered into pursuant to Section 1471(b)(1) of the Code, any intergovernmental agreement entered into in connection with the implementation of such Sections of the Code and any fiscal or regulatory legislation, rules or practices adopted pursuant to such intergovernmental agreement.

Federal Funds Rate:
For any day, the interest rate per annum equal to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System, as published for such day (or, if such day is not a Business Day, for the next preceding Business Day) by the Federal Reserve Bank of New York; provided that, if the Federal Funds Rate shall be less than zero, such rate shall be deemed zero for purposes of this Agreement.

Fee Letters:
The meaning specified in subsection 2.9(a).

FRB:
The Board of Governors of the Federal Reserve System, and any Governmental Authority succeeding to any of its principal functions.

GAAP:
Generally accepted accounting principles set forth from time to time in the opinions and pronouncements of the Accounting Principles Board and the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board (or agencies with similar functions of

8



comparable stature and authority within the U.S. accounting profession), which are applicable to the circumstances as of the date of determination.

Governmental
Authority:
Any nation or government, any state or other political subdivision thereof, any central bank (or similar monetary or regulatory authority) thereof, any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government, and any corporation or other entity owned or controlled, through stock or capital ownership or otherwise, by any of the foregoing.

Hedge Agreements:
Interest rate swap, interest rate cap or interest rate collar agreements.

Indebtedness:
As to any corporation, any obligation of, or guaranteed or assumed by, such corporation for (i) borrowed money evidenced by bonds, debentures, notes or other similar instruments, (ii) the deferred purchase price of property or services (excluding trade and other accounts payable), (iii) the leasing of tangible personal property under leases which, under any applicable Financial Accounting Standards Board Statement, have been or should be recorded as capitalized leases, (iv) direct or contingent obligations under letters of credit issued for the account of such corporation or (v) net obligations in respect of Hedge Agreements entered into with any counterparty.

Indemnified
Liabilities:
The meaning specified in Section 10.5.

Indemnified Person:    The meaning specified in Section 10.5.

Insolvency
Proceeding:
As to a debtor, (a) any case, action or proceeding before any court or other Governmental Authority relating to bankruptcy, reorganization, insolvency, liquidation, receivership, dissolution, winding-up or relief of debtors, or (b) any general assignment for the benefit of creditors, composition, marshaling of assets for creditors, or other similar arrangement in respect of its creditors generally or any substantial portion of its creditors, undertaken under U.S. Federal, state or foreign law, including the Bankruptcy Code.

Interest
Payment Date:
As to any Loan other than a Base Rate Loan, the last day of each Interest Period applicable to such Loan and, as to any Base Rate

9



Loan, the last Business Day of each calendar quarter, provided, however, that if any Interest Period for a Eurodollar Rate Loan exceeds three months, the date that falls three months after the beginning of such Interest Period and after each Interest Payment Date thereafter is also an Interest Payment Date.

Interest Period:
Any period specified in accordance with Section 2.6 hereof.

Intermediate
Parent:
Schwab Holdings, Inc., a Delaware corporation and its successors and assigns.

Lender:
The meaning specified in the introductory clause hereto.

Lending Office:
As to any Lender, the office or offices of such Lender specified as its “Lending Office” or “Domestic Lending Office” or “Offshore Lending Office”, as the case may be, on Schedule 10.2, or such other office or offices as such Lender may from time to time notify the Borrower and the Agent.

Loan:
An extension of credit by a Lender to the Borrower under Section 2 in the form of a Revolving Loan or Term Loan.

Loan Document:
This Agreement, any Notes, the Fee Letters, and all other documents delivered to the Agent or any Lender in connection herewith.

Minimum
Stockholders’ Equity: As of the Closing Date, and the last day of each fiscal quarter thereafter, the greater of:

(a)    $15,200,000,000, or

(b)
the sum of –

(i)    $15,200,000,000, plus

(ii)    50% of the sum of cumulative Net Earnings for each fiscal quarter commencing with the fiscal quarter ended June 30, 2020.

Net Capital Ratio:
As of the date of determination, that percentage of net capital to aggregate debit items of any entity subject to the Net Capital Rule 15c3-1 promulgated by the Securities Exchange Commission pursuant to the Securities Exchange Act of 1934 and any successor or replacement rule or regulation therefor.


10



Net Earnings:
With respect to any fiscal period, the consolidated net income of the Borrower and its Subsidiaries, after taking into account all extraordinary items, taxes and other proper charges and reserves for the applicable period, determined in accordance with GAAP, consistently applied.

Non-Defaulting
Lender:
At any time, each Lender that is not a Defaulting Lender at such time.

Note:
A promissory note executed by the Borrower in favor of a Lender pursuant to Section 2.3 in substantially the form of Exhibits A-1 and A-2.

Notice of Conversion/
Continuation:
A notice in substantially the form of Exhibit C.

Obligations:
All borrowings, debts, liabilities, obligations, covenants and duties arising under any Loan Document owing by the Borrower to any Lender, the Agent, or any Indemnified Person, whether direct or indirect (including those acquired by assignment), absolute or contingent, due or to become due, now existing or hereafter arising.

OFAC:
The U.S. Department of the Treasury’s Office of Foreign Assets Control.

Person:
An individual, partnership, corporation, limited liability company, business trust, unincorporated association, trust, joint venture or other entity or Governmental Authority.

Pro Rata Share:
As to any Lender at any time, the percentage equivalent (expressed as a decimal, rounded to the ninth decimal place) at such time of such Lender’s Commitment divided by the combined Commitments of all Lenders.

Reference Banks:
Citibank, N.A. and JPMorgan Chase Bank, N.A.

Replacement Lender:
The meaning specified in Section 3.9.

Required Lenders:
At any time at least two Lenders then holding in excess of 50% of the then aggregate unpaid principal amount of the Loans, or, if no such principal amount is then outstanding, at least two Lenders then having in excess of 50% of the Commitments. The Loans owing to, and Commitments of, any Defaulting Lender shall be disregarded in determining Required Lenders at any time.


11



Requirement of Law:
As to any Person, any law (statutory or common), treaty, rule or regulation or determination of an arbitrator or of a Governmental Authority, in each case applicable to or binding upon the Person or any of its property or to which the Person or any of its property is subject.

Responsible Officer:
Any senior vice president or more senior officer of the Borrower, or any other officer having substantially the same authority and responsibility; or, with respect to compliance with financial covenants, the chief financial officer, executive vice president- finance, controller or the treasurer of the Borrower, or any other officer having substantially the same authority and responsibility.

Revolving Credit
Facility:
The revolving credit facility available to the Borrower pursuant to Section 2.1 hereof.

Revolving Loan:
The meaning specified in Section 2.1, and may be a Base Rate Loan or a Eurodollar Rate Loan (each a “Type” of Revolving Loan).

Revolving Note:
The meaning specified in Section 2.3.

Revolving
Termination Date:
The earlier to occur of:

(a)
May 28, 2021; and

(b)
the    date    on    which    the    Commitments    terminate    in accordance with the provisions of this Agreement.

Sanctions:
Economic or financial sanctions or trade embargoes imposed, administered or enforced from time to time by (a) OFAC or any successor office or agency within the U.S. Department of the Treasury or the U.S. Department of State, or (b) the United Nations Security Council, the European Union or Her Majesty’s Treasury of the United Kingdom.

SEC:
The Securities and Exchange Commission, or any Governmental Authority succeeding to any of its principal functions.

Senior Medium-
Term Notes,
Series A:
Senior debt securities or senior subordinated debt securities issued by The Charles Schwab Corporation with a maturity between 9 months and 30 years in accordance with the Senior Indenture, as amended, and the Senior Subordinated Indenture, as amended, both dated as of July 15, 1993 by and between The Charles

12



Schwab Corporation and The Bank of New York Mellon Trust Company, N.A. as successor trustee to The Chase Manhattan Bank.

Subsidiary:
Any corporation or other entity of which a sufficient number of voting securities or other interests having power to elect a majority of the board of directors or other persons performing similar functions are at the time directly or indirectly owned by the Borrower.

Term Commitment:
Seven Hundred Million and no/100 Dollars ($700,000,000.00), as the same may be reduced under Section 2.10 or increased under Section 2.17.

Term Loan:
The meaning specified in Section 2.2 and may be a Base Rate Loan or Eurodollar Rate Loan (each a “Type” of Term Loan).

Term Loan Facility:
The term loan facility available to the Borrower pursuant to Section 2.2 hereof.

Term Loan Maturity
Date:
The meaning specified in Section 2.2.

Term Note:
The meaning specified in Section 2.3.

Term Out Fee:
The meaning specified in subsection 2.9(c).

Type:
The meaning specified in the definition of “Revolving Loan”.

2.
THE CREDIT FACILITY.

2.1    The Revolving Credit Facility Each Lender severally agrees, on the terms and conditions set forth herein, to make loans in Dollars to the Borrower (each such loan, a “Revolving Loan”) from time to time on any Business Day during the period from the Closing Date to the Revolving Termination Date, in an aggregate amount not to exceed at any time outstanding, together with the principal amount of Term Loans outstanding in favor of such Lender at such time, the amount set forth next to such Lender’s name on Schedule 1 (such amount together with the Lender’s Pro Rata Share of the Term Commitment, as the same may be reduced under Section 2.10 or as a result of one or more assignments under Section 10.8, the Lender’s “Commitment”); provided, however, that, after giving effect to any Borrowing of Revolving Loans, the Effective Amount of all outstanding Revolving Loans shall not at any time exceed the combined Commitments; and provided further that the Effective Amount of the Revolving Loans, together with all Term Loans outstanding at such time, of any Lender shall not at any time exceed such Lender’s Commitment. Within the limits of each Lender’s Commitment, and subject to the other terms and conditions hereof, the Borrower may borrow under this Section 2.1, prepay under Section 3.3 and reborrow under this Section 2.1.


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2.2    Term Loan Facility. Each Lender severally agrees, on the terms and conditions set forth herein, to make Loans to the Borrower during the period from the Closing Date to May 28, 2021, in an aggregate amount not to exceed such Lender’s Pro Rata Share of the Term Commitment. The Borrower from time to time may borrow under the Term Loan Facility (and may reborrow any amount theretofore prepaid) until close of business on May 28, 2021, for a term not to exceed 364 days from the date of the Borrowing. Each such loan under the Term Loan Facility (a “Term Loan”) shall be in the minimum amount of $10,000,000 and shall become due and payable on the last day of the term selected by the Borrower for such Term Loan (the “Term Loan Maturity Date”), which shall in no event be later than 364 days from the date of such Term Loan. The maximum availability under the Term Loan Facility shall be the amount of the Credit minus the aggregate outstanding principal amount of Revolving Loans and Term Loans made by the Lenders; provided, however, that to the extent the proceeds of a Term Loan are used to repay an outstanding Revolving Loan (or a portion thereof), such Revolving Loan (or portion thereof) shall not be considered part of the aggregate principal amount of outstanding Revolving Loans made by the Lenders for purposes of this sentence (such maximum availability hereafter being referred to as the “Term Loan Availability”). Under no circumstances shall the aggregate outstanding principal amount of Term Loans and Revolving Loans made by the Lenders exceed the Credit, and under no circumstances shall any Lender be obligated (i) to make any Term Loan (nor may the Borrower reborrow any amount heretofore prepaid) after May 28, 2021, or (ii) to make any Term Loan in excess of the Term Loan Availability. Each Term Loan made hereunder shall fully and finally mature and be due and payable in full on the Term Loan Maturity Date specified in the Borrowing Advice for such Term Loan; provided, however, that to the extent the Borrowing Advice for any Term Loan selects an Interest Period that expires before the Term Loan Maturity Date specified in such Borrowing Advice, the Borrower may from time to time select additional interest rate options and Interest Periods (none of which shall extend beyond the Term Loan Maturity Date for such Term Loan) by delivering a Borrowing Advice or Notice of Conversion/Continuation, as applicable.

2.3    Evidence of Borrowing/Promissory Notes. The Loans made by each Lender shall be evidenced by one or more accounts or records maintained by such Lender and by the Agent in the ordinary course of business. The accounts or records maintained by the Agent and each Lender shall be conclusive absent manifest error of the amount of the Loans made by the Lenders to the Borrower and the interest and payments thereon. Any failure to so record or any error in doing so shall not, however, limit or otherwise affect the obligation of the Borrower hereunder to pay any amount owing with respect to the Loans. In the event of any conflict between the accounts and records maintained by any Lender and the accounts and records of the Agent in respect of such matters, the accounts and records of the Agent shall control in the absence of manifest error. Upon the request of any Lender, within ten Business Days after such Lender becomes a party to this Agreement, made through the Agent, the Borrower shall execute and deliver to such Lender (through the Agent) promissory notes of the Borrower (the “Revolving Note and the Term Note”) in substantially the form attached hereto as Exhibits A-1 and A-2, with the blanks appropriately completed, payable to the order of such Lender in the principal amount of its Commitment, bearing interest as hereinafter specified, which shall evidence such Lender’s Revolving Loans and Term Loans, respectively, in addition to such accounts or records. Each Revolving Note and Term Note requested at least five Business Days

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prior to the date hereof shall be dated the date hereof and shall be delivered in accordance with Section 4.1(a). Each other Revolving Note and Term Note shall be dated, and shall be delivered to each requesting Lender, not later than ten Business Days after the request therefor is delivered to the Borrower; provided that any failure to timely deliver any Note shall not constitute a Default hereunder and shall not excuse any Lender from the performance of its funding obligations hereunder. Each Lender shall, and is hereby authorized by the Borrower to, endorse on the schedule contained on the Revolving Note and Term Note, or on a continuation of such schedule attached thereto and made a part thereof, appropriate notations regarding the Revolving Loans and Term Loans evidenced by such Note as specifically provided therein and such Lender’s record shall be conclusive absent manifest error; provided, however, that the failure to make, or error in making, any such notation shall not limit or otherwise affect the obligations of the Borrower hereunder or under the Revolving Note and Term Note. The Agent, by notice to the Borrower (to be given not later than two Business Days prior to the initial Borrowing or Term Loan hereunder) may request that Revolving Loans or Term Loans made hereunder for which the interest calculation is to be based on the Eurodollar Rate be evidenced by separate Revolving Notes (in the case of Revolving Loans) and Term Notes (in the case of Term Loans), substantially in the form of Exhibit A-1 hereto (in the case of Revolving Loans) and Exhibit A-2 hereto (in the case of Term Loans), payable to the order of each Lender for the account of its office, branch or affiliate it may designate as its Lending Office.

2.4    Making of Revolving Loans and Term Loans, Borrowings; Interest Periods; Notice.

(a)    Each Borrowing of Revolving Loans or Term Loans shall be made upon Borrower’s irrevocable written notice delivered to the Agent in the form of a Borrowing Advice (which notice must be received by the Agent prior to 10:00 a.m. San Francisco time for a Eurodollar Rate Loan, and prior to 11:00 a.m. San Francisco time for a Base Rate Loan) (i) the same Business Day as the requested Borrowing Date in the case of Base Rate Loans to be made on such Business Day, or (ii) three Business Days prior to the requested Borrowing Date in the case of Eurodollar Rate Loans, with each Borrowing Advice setting forth the following information:

(A)    the requested Borrowing Date, which shall be a Business Day, on which such Revolving Loan or Term Loan is to be made;

(B)    for a Eurodollar Rate Loan, the duration of the Interest Period selected in accordance with Section 2.6 hereof (if the Borrowing Advice fails to specify the duration of the Interest Period for any Borrowing comprised of a Eurodollar Rate Loan, such Interest Period shall be three months);
(C)     the Type of Loans comprising the Borrowing and the interest rate option selected in accordance with Section 2.7 hereof; and

(D)    the aggregate principal amount of the Revolving Loan or Term Loan (which shall be in an aggregate minimum amount of $10,000,000) to which such Interest Period and interest rate shall apply.


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(b)    The Agent will promptly notify each Lender of its receipt of any Borrowing Advice and of the amount of such Lender’s Pro Rata Share of that Borrowing.

(c)    Each Lender will make the amount of its Pro Rata Share of each Borrowing available to the Agent for the account of the Borrower at the Agent’s Payment Office by 1:00 p.m. San Francisco time on the Borrowing Date requested by the Borrower in funds immediately available to the Agent. Each Loan to the Borrower under this Agreement shall be made by 1:30 p.m. (San Francisco time) on the date of the Requested Borrowing Date, and shall be in immediately available funds (in the aggregate amount made available to the Agent by the Lenders) wired to the Borrower’s account at Citibank, N.A. or such other account as may be designated by the Borrower in writing.

(d)    After giving effect to any Borrowing, there may not be more than ten (10) different Interest Periods in effect.


With respect to any Borrowing having an Interest Period ending on or before May 28, 2021, if prior to the last day of the Interest Period for such Borrowing the Borrower fails timely to provide a Notice of Conversion/Continuation in accordance with Section 2.5, such Borrowing shall, on the last day of the then-existing Interest Period for such Borrowing, automatically convert into a Base Rate Loan. In the event of any such automatic conversion, the Borrower on the date of such conversion shall be deemed to make a representation and warranty to the Lenders that, to the best of the Borrower’s knowledge, (i) neither the Borrower nor any Bank Subsidiary is in violation of the capital requirements as described in Section 6.6, (ii) the Broker Subsidiary is not in violation of minimum net capital requirements as described in Section 7.1, (iii) the Borrower’s Consolidated Stockholders’ Equity is not below the Minimum Stockholders’ Equity as described in Section 7.2, and (iv) no amount owing with respect to any Commitment Fee, any outstanding Borrowing, or any interest thereon, or any other amount hereunder, is due and unpaid. If prior to the last day of the Interest Period applicable to any Term Loan the Borrower fails timely to provide a Notice of Conversion/Continuation in accordance with Section 2.5, such Term Loan shall, on the last day of the then-existing Interest Period for such Term Loan, automatically convert into a Base Rate Loan.

2.5
Conversion and Continuation Elections.

(a)    The Borrower may, upon irrevocable written notice to the Agent in accordance with this Section 2.5:
(i)     elect, as of any Business Day, in the case of Base Rate Loans, or as of the last day of the applicable Interest Period, in the case of any other Type of Loan, to convert any such Loan (or any part thereof in an amount not less than $10,000,000), into Loans of any other Type; or
(ii)    elect as of the last day of the applicable Interest Period, to continue any Loans having Interest Periods expiring on such day (or any part thereof in an amount not less than $10,000,000);


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provided, that if at any time the aggregate amount of Eurodollar Rate Loans in respect of any Borrowing is reduced, by payment, prepayment, or conversion of part thereof to be less than $10,000,000, such Eurodollar Rate Loans shall automatically convert into Base Rate Loans.

(b)    The Borrower shall deliver a Notice of Conversion/Continuation to be received by the Agent not later than 10:00 a.m. San Francisco time for a Eurodollar Rate Loan, and not later than 11:00 a.m. San Francisco time for a Base Rate Loan, at least (i) three Business Days in advance of the Conversion/Continuation Date, as to any Loan that is to be converted into or continued as a Eurodollar Rate Loan; and (ii) the same Business Day as the Conversion/Continuation Date, as to any Loan that is to be converted into a Base Rate Loan, specifying:

(A)    the proposed Conversion/Continuation Date;

(B)
the aggregate amount of the Loan or Loans to be converted
or renewed;

(C)    the Type of Loan or Loans resulting from the proposed conversion or continuation; and

(D)    other than in the case of conversions into Base Rate Loans, the duration of the requested Interest Period.

(c)    If upon the expiration of any Interest Period applicable to Eurodollar Rate Loans, the Borrower has failed to select timely a new Interest Period to be applicable to such Eurodollar Rate Loans, or if any Default or Event of Default then exists, the Borrower shall be deemed to have elected to convert such Eurodollar Rate Loans into Base Rate Loans effective as of the expiration date of such Interest Period.

(d)    The Agent will promptly notify each Lender of its receipt of a Notice of Conversion/Continuation, or, if no timely notice is provided by the Borrower, the Agent will promptly notify each Lender of the details of any automatic conversion. All conversions and continuations shall be made ratably according to the respective outstanding principal amounts of the Loans with respect to which the notice was given as held by each Lender.

(e)    Unless the Required Lenders otherwise agree, during the existence of a Default or Event of Default, the Borrower may not elect to have a Loan converted into or continued as a Eurodollar Rate Loan.

(f)    After giving effect to any conversion or continuation of Loans, there may not be more than ten (10) different Interest Periods in effect.

2.6    Interest Periods. The Borrower may select for any Eurodollar Rate Loan the Interest Period (as defined in the next sentence) for each Borrowing, it being understood that the

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Borrower may request multiple Borrowings on the same day and may select a different Interest Period for each such Borrowing. An Interest Period shall be each period, as selected by the Borrower in accordance with the terms of this Agreement, beginning on the Borrowing Date of any Eurodollar Rate Loan, or on the Conversion/Continuation Date on which any Loan is converted into or continued as a Eurodollar Rate Loan, and ending on the date specified by the Borrower that is one, two, three or six months thereafter; provided that whenever the first day of any Interest Period occurs on a day of an initial calendar month for which there is no numerically corresponding day in the calendar month that succeeds such initial calendar month by the number of months equal to the number of months in such Interest Period, such Interest Period shall end on the last Business Day of such succeeding calendar month; and provided further that if the last day of an Interest Period would be a day that is not a Business Day, such Interest Period shall be extended to the next succeeding Business Day, unless such next succeeding Business Day is in a different calendar month, in which case such interest period shall end on the next preceding Business Day; but provided, however, that (i) no Interest Period applicable to any Revolving Loan shall extend beyond the Revolving Termination Date; and (ii) no Interest Period applicable to any Term Loan shall extend beyond the Term Loan Maturity Date specified in the Borrowing Advice for such Term Loan, which in no event shall be later than May 27, 2022.

2.7
Interest Rates.

(a)    (i) Each Revolving Loan, while outstanding, shall bear interest from the applicable Borrowing Date at a rate per annum equal to the Eurodollar Rate or the Base Rate, as the case may be, (and subject to the Borrower’s right to convert to other Types of Loans under Section 2.5) plus the Applicable Margin.

(ii) Each Term Loan, while outstanding, shall bear interest from the applicable Borrowing Date at a rate per annum equal to the Eurodollar Rate or the Base Rate, as the case may be, (and subject to the Borrower’s right to convert to other Types of Loans under Section 2.5) plus the Applicable Margin.

(b)    Interest on each Revolving Loan and Term Loan shall be paid in arrears on each Interest Payment Date. Interest shall also be paid on the date of any prepayment of Loans under Section 3.3 for the portion of the Loan so prepaid and upon payment (including prepayment) in full thereof, and, during the existence of any Event of Default interest shall be paid on demand of the Agent at the request or with the consent of the Required Lenders.

(c)    After the principal amount of any Revolving Loan or Term Loan, accrued interest upon such Loan, the commitment fee, or any other amount hereunder shall have
become due and payable by acceleration, or otherwise, it shall thereafter (until paid) bear interest, payable on demand, (i) until the end of the Interest Period with respect to such Loan at a rate per annum equal to 2% per annum in excess of the rate or rates in effect with respect to such Loan, and (ii) thereafter, at a rate per annum equal to 2% per annum in excess of the Base Rate.

2.8    Substitute Rates. If upon receipt by the Agent of a Borrowing Advice relating to any Borrowing or of a Notice of Conversion/Continuation:


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(a)    the Agent shall determine that by reason of changes affecting the London interbank market, adequate and reasonable means do not exist for ascertaining the applicable Eurodollar Rate with respect to any Interest Period; or

(b)    the Agent shall determine that by reason of any change since the date hereof in any applicable law or governmental regulation (other than any such change in the regulations described in the definition of Eurodollar Rate Reserve Percentage in Section 1 hereof), guideline or order (or any interpretation thereof), the adoption or enactment of any new law or governmental regulation or order or any other circumstance affecting the Lenders or the London interbank market, the Eurodollar Rate shall no longer represent the effective cost to the Lenders of U.S. dollar deposits in the relevant amount and for the relevant period; or

(c)    Agent shall determine that, as a result of any change since the date hereof in any applicable law or governmental regulation or as a result of the adoption of any new applicable law or governmental regulation, the applicable Eurodollar Rate would be unlawful; or

(d)    the applicable Reuters screen (or any successor page of such service, or any successor or substitute for such service, as provided in the definition herein for Eurodollar Base Rate) is unavailable and fewer than two Reference Banks furnish timely information to the Agent for determining the Eurodollar Base Rate for any Eurodollar Rate Loans, after the Agent has requested such information;

then, the Agent will promptly so notify the Borrower and each Lender, whereupon, the obligation of the Lenders to make or maintain Eurodollar Rate Loans hereunder shall be suspended until the Agent upon the instruction of the Required Lenders revokes such notice in writing. Upon receipt of such notice, the Borrower may revoke any Notice of Borrowing or Notice of Conversion/Continuation then submitted by it and, at its election, submit a Borrowing Advice or Notice of Conversion/Continuation selecting another Type of Loan. If the Borrower does not revoke such Notice or give a Notice as provided herein, the Lenders shall make, convert or continue the Loans, as proposed by the Borrower in the amount specified in the applicable notice submitted by the Borrower, but such Loans shall be made, converted or continued as Base Rate Loans instead of Eurodollar Rate Loans.

2.9
Fees.

(a)    Arrangement, Agency Fees. The Borrower shall pay an arrangement fee to the Arrangers for their respective accounts, and shall pay an agency fee to the Agent for the Agent’s account, as required by the separate letter agreements (“Fee Letters”) between the Borrower and each of the Arrangers and between the Borrower and the Agent, each dated May 3, 2020.

(b)    Commitment Fee. The Borrower shall pay to the Agent for the account of each Lender a commitment fee (the “Commitment Fee”) on the actual daily unused portion of such Lender’s Commitment computed on a quarterly basis in arrears on the last Business Day of each quarter based upon the daily utilization for that quarter as calculated by the Agent, equal to one tenth of one percent (0.10%) per annum. For purposes of calculating

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utilization under this subsection, the Commitments shall be deemed used to the extent of the Effective Amount of Revolving Loans and Term Loans then outstanding. Such Commitment Fee shall accrue from the Closing Date to the Revolving Termination Date and shall be due and payable quarterly in arrears on the last Business Day of each quarter commencing on the quarter ending June 30, 2020 through the Revolving Termination Date, with the final payment to be made on the Revolving Termination Date; provided that, in connection with any reduction or termination of Commitments under Section 2.10, the accrued commitment fee calculated for the period ending on such date shall also be paid on the date of such reduction or termination, with the following quarterly payment being calculated on the basis of the period from such reduction or termination date to such quarterly payment date.

(c)    Term Loan Fee. The Borrower shall pay to the Agent for the account of each Lender a term loan fee (the “Term Out Fee”) equal to one percent (1.00%) of the aggregate principal amount of all Term Loans outstanding on May 28, 2021, payable on such date.

2.10    Reduction of Credit. The Borrower, from time to time, upon at least three (3) Business Days’ written notice to the Agent, may terminate the commitments, or permanently reduce the Commitments by an aggregate minimum amount of $10,000,000, without penalty or premium; unless after giving effect thereto and to any prepayments of Loans made on the effective date thereof, the Effective Amount of all Revolving Loans and Term Loans together would exceed the amount of the combined Commitments then in effect. Once reduced in accordance with this Section, the Commitments may not be increased. Any reduction of the Commitments shall be applied to each Lender’s Commitment according to its Pro Rata Share. All accrued Commitment Fees to, but not including, the effective date of any reduction or termination of Commitments, shall be paid on the effective date of such reduction or termination. During the continuation of the Credit, the computation of the Commitment Fee and the Lenders’ obligations to make Revolving Loans or Term Loans shall be based upon such reduced Commitments. In the event the Credit shall be reduced to zero pursuant to this Section, the Credit shall be deemed terminated, and any Commitment Fee or any other amount payable hereunder then accrued shall become immediately payable. Such termination of the Credit shall terminate the Borrower’s obligations with respect to the Commitment Fee to the extent not theretofore accrued and shall terminate the Lenders’ obligations to make any further Revolving Loans or Term Loans under this Agreement.

2.11    Termination Date; Extensions. The termination date of each Lender’s Commitment with respect to the Credit (the “Termination Date”), including both the Revolving Credit Facility under Section 2.1 hereof and the Term Loan Facility under Section 2.2 hereof, is initially May 28, 2021. At any time no earlier than forty-five (45) days and no later than thirty (30) days prior to the Termination Date then in effect (whether the initial Termination Date of May 28, 2021 or any later Termination Date as extended under this Section 2.11), the Borrower may, by written notice to the Agent in the form attached as Exhibit D hereto, request that the Termination Date be extended for a period of 364 calendar days. Such request shall be irrevocable and binding upon the Borrower. In no event will any Lender agree to approve any extension more than thirty (30) days before the Termination Date then in effect. Failure of any Lender to respond shall mean that such Lender has not approved such extension. If each Lender

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(in its sole discretion) agrees to so extend its Commitment and the Termination Date (which agreement may be given or withheld in such Lender’s sole and absolute discretion), the Agent shall evidence such agreement by executing and returning to the Borrower a copy of the Borrower’s written request no later than fifteen (15) days after the Agent’s receipt of the Borrower’s written request. If the Agent fails to so respond to and accept the Borrower’s request for extension of the Termination Date then in effect, the Lenders’ Commitments shall be terminated on the Termination Date then in effect. If, on the other hand, the Agent so responds to and accepts the Borrower’s request for extension of the Termination Date, then upon receipt by the Borrower of a copy of the Borrower’s written request countersigned by the Agent, (i) the Lenders’ Commitments then in effect and the Termination Date then in effect shall automatically be extended for the 364-day period specified in such written request, and (ii) each reference in this Agreement to “May 28, 2021”, and “May 27, 2022” (and any prior extension thereof pursuant to this Section 2.11) also shall automatically be correspondingly extended for 364 days.

2.12
Payments by the Lenders to the Agent.

(a)    Unless the Agent receives notice from a Lender on or prior to the Closing Date or, with respect to any Borrowing after the Closing Date, at least one Business Day before the date of such Borrowing in the case of a Eurodollar Rate Loan, or, in the case of a Base Rate Loan, prior to noon (12:00) San Francisco time on the date of such Borrowing, that such Lender will not make available as and when required hereunder to the Agent for the account of the Borrower the amount of that Lender’s Pro Rata Share of the Borrowing, the Agent may assume that each Lender has made such amount available to the Agent in immediately available funds on the Borrowing Date and the Agent may (but shall not be so required), in reliance upon such assumption, make available to the Borrower on such date a corresponding amount. If and to the extent any Lender shall not have made its full amount available to the Agent in immediately available funds and the Agent in such circumstances has made a corresponding amount available to the Borrower such Lender shall on the Business Day following such Borrowing Date make such amount available to the Agent, together with interest at the Federal Funds Rate for each day during such period. A notice of the Agent submitted to any Lender with respect to amounts owing under this subsection (a) shall be conclusive, absent manifest error. If such amount is so made available, such payment to the Agent shall constitute such Lender’s Loan on the date of Borrowing for all purposes of this Agreement. If such amount is not made available to the Agent on the Business Day following the Borrowing Date, the Agent will notify the Borrower of such failure to fund and, upon demand by the Agent, the Borrower shall pay such amount to the Agent for the Agent’s account, together with interest thereon for each day elapsed since the date of such Borrowing, at a rate per annum equal to the interest rate applicable at the time to the Loans comprising such Borrowing.
(b)    The failure of any Lender to make any Loan on any Borrowing Date shall not relieve any other Lender of any obligation hereunder to make a Loan on such Borrowing Date, but no Lender shall be responsible for the failure of any other Lender to make the Loan to be made by such other Lender on any Borrowing Date.

2.13    Sharing of Payments, Etc.. If, other than as expressly provided elsewhere herein, any Lender shall obtain on account of the Loans made by it any payment (whether voluntary,

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involuntary, through the exercise of any right of set-off, or otherwise) in excess of its Pro Rata Share, such Lender shall immediately (a) notify the Agent of such fact, and (b) purchase from the other Lenders such participation in the Loans made by them as shall be necessary to cause such purchasing Lender to share the excess payment pro rata with each of them; provided, however, (a) that if all or any portion of such excess payment is thereafter recovered from the purchasing Lender, such purchase shall to that extent be rescinded and each other Lender shall repay to the purchasing Lender the purchase price paid therefor, together with an amount equal to such paying Lender’s ratable share (according to the proportion of (i) the amount of such paying Lender’s required repayment to (ii) the total amount so recovered from the purchasing Lender) of any interest or other amount paid or payable by the purchasing Lender in respect of the total amount so recovered and (b) the provisions of this paragraph shall not be construed to apply to (x) any payment made by the Borrower pursuant to and in accordance with the express terms of this Agreement (including the application of funds arising from the existence of a Defaulting Lender), or (y) any payment obtained by a Lender as consideration for the assignment of or sale of a participation in any of its Loans to any assignee or participant, other than to the Borrower or any Subsidiary thereof (as to which the provisions of this paragraph shall apply). The Borrower agrees that any Lender so purchasing a participation from another Lender may, to the fullest extent permitted by law, exercise all its rights of payment (including the right of set-off, but subject to Section 10.5) with respect to such participation as fully as if such Lender were the direct creditor of the Borrower in the amount of such participation. The Agent will keep records (which shall be conclusive and binding in the absence of manifest error) of participation purchased under this Section and will in each case notify the Lenders following any such purchase or repayment.

2.14
Computation of Fees and Interest.

(a)    All computations of interest for Base Rate Loans when the Base Rate is determined by Citibank N.A.’s “Base Rate” shall be made on the basis of a year of 365 or 366 days, as the case may be, and actual days elapsed. All other computations of interest, and all computation of fees under subsection 2.9(b) and (c) shall be made on the basis of a 360-day year and actual days elapsed. Interest and such fees shall accrue during each period during which interest or such fees are computed from and including the first day thereof to and excluding the last day thereof.
(b)    Each Reference Bank may, if requested by the Agent, furnish to the Agent timely information for the purpose of determining each Eurodollar Base Rate. If any one or more of the Reference Banks shall not furnish such timely information to the Agent for the purpose of determining any such interest rate, the Agent shall determine such interest rate on the basis of timely information furnished by the remaining Reference Banks, subject to the provisions of Section 2.8. The Agent shall give prompt notice to the Borrower and the Lenders of the applicable interest rate determined by the Agent for purposes of Section 2.7(a) (it being understood that the Agent shall not be required to disclose to any party hereto (other than the Borrower) any information regarding any Reference Bank or any rate provided by such Reference Bank in accordance with this subsection, including, without limitation, whether a Reference Bank has provided a rate or the rate provided by any individual Reference Bank).

2.15
Defaulting Lenders.


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(a)    Defaulting Lender Adjustments. Notwithstanding anything to the contrary contained in this Agreement, if any Lender becomes a Defaulting Lender, then, until such time as such Lender is no longer a Defaulting Lender, to the extent permitted by applicable law:

(i)    Waivers and Amendments. Such Defaulting Lender’s right to approve or disapprove any amendment, waiver or consent with respect to this Agreement shall be restricted as set forth in the definition of Required Lenders.

(ii)    Defaulting Lender Waterfall. Any payment of principal, interest, fees or other amounts received by the Agent for the account of such Defaulting Lender (whether voluntary or mandatory, at maturity, pursuant to Section 8 or otherwise) shall be applied at such time or times as may be determined by the Agent as follows: first, to the payment of any amounts owing by such Defaulting Lender to the Agent hereunder; second, as the Borrower may request (so long as no Event of Default exists), to the funding of any Loan in respect of which such Defaulting Lender has failed to fund its portion thereof as required by this Agreement, as determined by the Agent; third, if so determined by the Agent and the Borrower, to be held in a deposit account and released pro rata in order to satisfy such Defaulting Lender’s potential future funding obligations with respect to Loans under this Agreement; fourth, to the payment of any amounts owing to the Lenders as a result of any judgment of a court of competent jurisdiction obtained by any Lender against such Defaulting Lender as a result of such Defaulting Lender’s breach of its obligations under this Agreement; fifth, so long as no Event of Default exists, to the payment of any amounts owing to the Borrower as a result of any judgment of a court of competent jurisdiction obtained by the Borrower against such Defaulting Lender as a result of such Defaulting Lender’s breach of its obligations under this Agreement; and sixth, to such Defaulting Lender or as otherwise directed by a court of competent jurisdiction; provided that if (x) such payment is a payment of the principal amount of any Loans in respect of which such Defaulting Lender has not fully funded its appropriate share, and (y) such Loans were made at a time when the conditions set forth in Section 4.2 were satisfied or waived, such payment shall be applied solely to pay the Loans of all Non-Defaulting Lenders on a pro rata basis prior to being applied to the payment of any Loans of such Defaulting Lender until such time as all Loans are held by the Lenders pro rata in accordance with the Commitments. Any payments, prepayments or other amounts paid or payable to a Defaulting Lender that are applied (or held) to pay amounts owed by a Defaulting Lender shall be deemed paid to and redirected by such Defaulting Lender, and each Lender irrevocably consents hereto.

(iii)     Certain Fees. No Defaulting Lender shall be entitled to receive any Commitment Fee for any period during which that Lender is a Defaulting Lender (and the Borrower shall not be required to pay any such fee that otherwise would have been required to have been paid to that Defaulting Lender).

(b)    Defaulting Lender Cure. If the Borrower and the Agent agree in writing that a Lender is no longer a Defaulting Lender, the Agent will so notify the parties hereto, whereupon as of the effective date specified in such notice and subject to any conditions set forth therein, that Lender will, to the extent applicable, purchase at par that portion of

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outstanding Loans of the other Lenders or take such other actions as the Agent may determine to be necessary to cause the Loans to be held pro rata by the Lenders in accordance with the Commitments, whereupon such Lender will cease to be a Defaulting Lender; provided that no adjustments will be made retroactively with respect to fees accrued or payments made by or on behalf of the Borrower while that Lender was a Defaulting Lender; and provided, further, that except to the extent otherwise expressly agreed by the affected parties, no change hereunder from Defaulting Lender to Lender will constitute a waiver or release of any claim of any party hereunder arising from that Lender’s having been a Defaulting Lender.

2.16     LIBOR Replacement.
(a)Notwithstanding anything to the contrary in this Agreement or any other Loan Documents, if the Agent determines (which determination shall be conclusive absent manifest error), or the Lenders notify the Agent (with a copy to the Borrower) that the Required Lenders have determined, that:

(i)adequate and reasonable means do not exist for ascertaining the Eurodollar Base Rate for any requested Interest Period, including, without limitation, because the Eurodollar Base Rate as determined by the method described in the definition of “Eurodollar Base Rate” is not available or published on a current basis and such circumstances are unlikely to be temporary; or

(ii)the supervisor for the administrator of LIBOR or a governmental authority having jurisdiction over the Agent has made a public statement identifying a specific date after which LIBOR or the Eurodollar Base Rate shall no longer be made available, or used for determining the interest rate of loans (such specific date, the “Scheduled Unavailability Date”),
then, after such determination by the Agent or receipt by the Agent of such notice, as applicable, the Agent and the Borrower may amend this Agreement to replace LIBOR and the Eurodollar Base Rate with an alternate benchmark rate (including any mathematical or other adjustments to the benchmark (if any) incorporated therein) that has been broadly accepted by the syndicated loan market in the United States in lieu of LIBOR (any such proposed rate, a “LIBOR Successor Rate”, which, if less than zero, shall be deemed to be zero for purposes of this Agreement), together with any proposed LIBOR Successor Rate Conforming Changes and, notwithstanding anything to the contrary in Section 10.1, any such amendment shall become effective at 5:00 p.m. (New York time) on the fifth Business Day after the Agent shall have posted such proposed amendment to all Lenders and the Borrower unless, prior to such time, Lenders comprising the Required Lenders have delivered to the Agent notice that such Required Lenders do not accept such amendment.

(b)     If no LIBOR Successor Rate has been determined and the circumstances under clause (i) above exist or the Scheduled Unavailability Date has occurred, the obligation of the Lenders to make or maintain Eurodollar Rate Advances shall be suspended (to the extent of the affected Eurodollar Rate Advances or Interest Periods). Upon receipt of such notice, the Borrower may revoke any pending request for a Eurodollar Rate Borrowing of, conversion to or continuation of Eurodollar Rate Advances (to the extent of the affected

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Eurodollar Rate Advances or Interest Periods) or, failing that, will be deemed to have converted such request into a request for a Borrowing of Base Rate Advances in the amount specified therein.

LIBOR Successor Rate
Conforming Changes: With respect to any proposed LIBOR Successor Rate, any conforming changes to the definition of Base Rate, Interest Period, timing and frequency of determining rates and making payments of interest and other administrative matters as may be appropriate, in the discretion of the Agent, to reflect the adoption of such LIBOR Successor Rate and to permit the administration thereof by the Agent in a manner substantially consistent with market practice (or, if the Agent determines that adoption of any portion of such market practice is not administratively feasible or that no market practice for the administration of such LIBOR Successor Rate exists, in such other manner of administration as the Agent determines in consultation with the Borrower).

2.17     Increases in Commitments.

(a)Request for Increase. The Borrower may, by notice to the Agent (who shall promptly notify the Lenders), request one increase in the Commitments (such increase, the “Incremental Commitment”) to an aggregate amount (including such request) not to exceed $1,000,000,000; provided that such request for an increase shall be in a minimum amount of $10,000,000 or an integral multiple of $5,000,000 in excess thereof.

(b)Incremental Lenders. The Incremental Commitment may be provided by any existing Lender or other Person that is an Eligible Assignee (each such existing Lender or other Person that agrees to provide any of the Incremental Commitment, an “Incremental Lender”); provided that each Incremental Lender shall be subject to the consent (not to be unreasonably withheld or delayed) of the Agent. Notwithstanding anything herein to the contrary, no Lender shall have any obligation to agree to increase its Commitment, or to provide a Commitment, pursuant to this Section and any election to do so shall be in the sole discretion of such Lender.

(c)Terms of Incremental Commitment. The Agent and the Borrower shall determine the effective date for such increase pursuant to this Section (the “Incremental Commitment Effective Date”) and, if applicable, the final allocation of such increase among the Persons providing such increase; provided that such date shall be a Business Day at least 30 days prior to the Revolving Termination Date.

In order to effect such increase, the Borrower, the applicable Incremental Lender(s) and the Agent (but no other Lenders or Persons) shall enter into one or more Joinder Agreements, each in form and substance satisfactory to the Borrower and the Agent, pursuant to which the applicable Incremental Lender(s) will provide the Incremental Commitment(s).

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Effective as of the Incremental Commitment Effective Date, subject to the terms and conditions set forth in this Section, such Incremental Commitment shall be a Commitment (and not a separate facility hereunder), each Incremental Lender providing any of such Incremental Commitment shall be, and have all the rights of, a Lender, and the Revolving Loans made by it on the Incremental Commitment Effective Date pursuant to paragraph (e) of this Section shall be Revolving Loans, for all purposes of this Agreement.

(d)    Conditions to Effectiveness. Notwithstanding the foregoing, the increase in the Commitments pursuant to this Section shall not be effective with respect to any Incremental Lender unless:

(i)no Default or Event of Default shall have occurred and be continuing on the Incremental Commitment Effective Date and after giving effect to such increase;

(ii)the representations and warranties contained in this Agreement are true and correct on and as of the Incremental Commitment Effective Date and after giving effect to such increase, as though made on and as of such date (or, if any such representation or warranty is expressly stated to have been made as of a specific date, as of such specific date); and

(iii)the Agent shall have received one or more Joinder Agreements contemplated above, providing for Incremental Commitments in the amount of such increase.

As of the Incremental Commitment Effective Date, upon the Agent’s receipt of the documents required by this paragraph (d), the Agent shall record the information contained in the applicable Joinder Agreement(s) in the Register and give prompt notice of the increase in the Commitments to the Borrower and the Lenders (including each Incremental Lender).

(e)    Adjustments to Revolving Outstandings. On the Incremental Commitment Effective Date, if there are Revolving Loans then outstanding, the Borrower shall prepay such Revolving Loans (and pay any additional amounts required pursuant to Section 3.7 in connection therewith), and borrow Revolving Loans from the Lenders (including the Incremental Lender(s)), as shall be necessary in order that, after giving effect to such prepayments and borrowings, all Revolving Loans will be held ratably by the Lenders (including the Incremental Lender(s)) in accordance with their respective Commitments after giving effect to the Incremental Commitment(s).


3.
PAYMENT.

3.1    Repayment.


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(a)    The Term Credit. The Borrower shall repay to the Agent for the account of the Lenders the aggregate principal amount of the Term Loans outstanding on each Term Loan Maturity Date, as applicable.

(b)    The Revolving Credit. The Borrower shall repay to the Agent, for the account of the Lenders, on the Revolving Termination Date the aggregate principal amount of Revolving Loans outstanding on such date.

3.2    Method of Payment. All payments hereunder and under any Revolving Note and Term Note shall be payable in lawful money of the United States of America and in immediately available funds not later than 12:00 noon (San Francisco time) on the date when due at the principal office of the Agent or at such other place as the Agent may, from time to time, designate in writing to the Borrower.

3.3    Optional Prepayment. Subject to Section 3.7, the Borrower shall be entitled at any time or from time to time, upon not less than one (1) Business Day irrevocable notice to the Agent, to ratably prepay Loans in whole or in part in minimum amounts of $10,000,000 without premium or penalty. Each notice of payment shall specify the date and aggregate principal amount of any such prepayment and the Type(s) of Loans to be repaid. The Agent will promptly notify each Lender of its receipt of any such Notice and of such Lender’s Pro Rata Share of such prepayment. If such Notice is given by the Borrower, the Borrower shall make such prepayment and the payment amount, specified in such Notice shall be due and payable on the date specified therein, together with all accrued interest to each such date on the amount prepaid, and any amounts required in accordance with Section 3.7 hereof as a result of such prepayment.
 
3.4    Taxes/Net Payments. All payments by Borrower hereunder and under any Revolving Note and Term Note to the Agent or any Lender shall be made without set-off or counterclaim and in such amounts as may be necessary in order that all such payments, after deduction or withholding for or on account of any present or future taxes, levies, imposts, duties or other charges of whatsoever nature imposed by any Governmental Authority or taxing authority thereof (collectively, “Taxes”), shall not be less than the amounts otherwise specified to be paid under this Agreement. The Borrower shall pay all Taxes when due and shall promptly send to the Lender original tax receipts or copies thereof certified by the relevant taxing authority together with such other documentary evidence with respect to such payments as may be required from time to time by the Agent. If the Borrower fails to pay any Taxes to the appropriate taxing authorities when due or fails to remit to the Agent or Lender any such original tax receipts or certified copies thereof as aforesaid or other required documentary evidence, the Borrower shall indemnify the Agent or Lender within thirty (30) days of demand by the Lender or Agent for any taxes, interest or penalties that may become payable by the Agent or Lender as a result of such failure.

Notwithstanding the foregoing, (i) the Borrower shall not be liable for the payment of any tax on or measured by the net income of any Lender pursuant to the laws of the jurisdiction where an office of such Lender making any loan hereunder is located or does business, and (ii) the foregoing obligation to gross up the payments to any Lender so as not to deduct or offset any withholding taxes or Taxes paid or payable by the Borrower with respect to any payments to

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such Lender shall not apply (x) to any payment to any Lender which is a “foreign corporation, partnership or trust” within the meaning of the Code if such Lender is not, on the date hereof (or on the date it becomes a Lender under this Agreement pursuant to the assignment terms of this Agreement), or on any date hereafter that it is a Lender under this Agreement, entitled to submit either a Form W-8BEN or any successor form thereto (relating to such Lender and entitling it to a complete exemption from withholding on all interest to be received by it hereunder in respect of the Loans) or Form W-8ECI or any successor form thereto (relating to all interest to be received by such Lender hereunder in respect of the Loans) of the U.S. Department of Treasury, (y) to any item referred to in the preceding sentence that would not have been imposed but for the failure by such Lender to comply with any applicable certification, information, documentation or other reporting requirements concerning the nationality, residence, identity or connections of such Lender with the United States if such compliance is required by statute or regulation of the United States as a precondition to relief or exemption from such item or (z) to any taxes imposed pursuant to FATCA.

3.5
Illegality.

(a)    If any Lender determines that the introduction of any Requirement of Law, or any change in any Requirement of Law, or in the interpretation or administration of any Requirement of Law, has made it unlawful, or that any central bank or other Governmental Authority has asserted that it is unlawful, for any Lender or its applicable Lending Office to make Eurodollar Rate Loans, then, on notice thereof by the Lender to the Borrower through the Agent, any obligation of that Lender to make Eurodollar Rate Loans shall be suspended until the Lender notifies the Agent and the Borrower that the circumstances giving rise to such determination no longer exist.

(b)    If a Lender determines that it is unlawful to maintain any Eurodollar Rate Loan, the Borrower shall, upon its receipt of notice of such fact and demand from such Lender (with a copy to the Agent), prepay in full such Eurodollar Rate Loans of that Lender then outstanding, together with interest accrued thereon and amounts required under Section 3.7, either on the last day of the Interest Period thereof, if the Lender may lawfully continue to maintain such Eurodollar Rate Loans to such day, or immediately, if the Lender may not lawfully continue to maintain such Eurodollar Rate Loan. If the Borrower is required to so prepay any Eurodollar Rate Loan, then concurrently with such prepayment, the Borrower shall borrow from the affected Lender, in the amount of such repayment, a Base Rate Loan.

(c)    If the obligation of any Lender to make or maintain Eurodollar Rate Loans has been so terminated or suspended, the Borrower may elect, by giving notice to the Lender through the Agent that all Loans which would otherwise be made by the Lender as Eurodollar Rate Loans shall be instead Base Rate Loans.

(d)    Before giving any notice to the Agent under this Section, the affected Lender shall designate a different Lending Office with respect to its Eurodollar Rate Loans if such designation will avoid the need for giving such notice or making such demand and will not, in the judgment of the Lender, be illegal or otherwise disadvantageous to the Lender.


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3.6
Increased Costs and Reduction of Return.

(a)    If any Lender determines that, due to either (i) the introduction of or any change (other than any change by way of imposition of or increase in reserve requirements included in the calculation of the Eurodollar Rate) in or in the interpretation of any law or regulation, or (ii) the compliance by that Lender with any guideline or request from any central bank or other Governmental Authority (whether or not having the force of law), there shall be any increase in the cost to such Lender of agreeing to make or making, funding or maintaining any Eurodollar Rate Loan, then the Borrower shall be liable for, and shall from time to time, upon demand (with a copy of such demand to be sent to the Agent), pay to the Agent for the account of such Lender, additional amounts as are sufficient to compensate such Lender for such increased costs.

(b)    If any Lender shall have determined that (i) the introduction of any Capital Adequacy Regulation, (ii) any change in any Capital Adequacy Regulation, (iii) any change in the interpretation or administration of any Capital Adequacy Regulation by any central bank or other Governmental Authority charged with the interpretation or administration thereof, or (iv) compliance by the Lender (or its Lending Office) or any corporation controlling the Lender with any Capital Adequacy Regulation, affects or would affect the amount of capital or liquidity required or expected to be maintained by the Lender or any corporation controlling the Lender and determines that the amount of such capital or liquidity is increased as a consequence of its Commitment, Loans, credits or obligations under this Agreement then, upon demand of such Lender to the Borrower through the Agent, the Borrower shall pay to the Lender, from time to time as specified by the Lender, additional amounts sufficient to compensate the Lender for the cost of such increase.

3.7    Funding Losses. The Borrower shall reimburse each Lender and hold each Lender harmless from any loss or expense which the Lender may sustain or incur as a consequence of:

(a)    the failure of the Borrower to make on a timely basis any payment of principal of any Eurodollar Rate Loan;

(b)    the failure of the Borrower to borrow, continue or convert a Loan after the Borrower has given (or is deemed to have given) a Notice of Borrowing or a Notice of Conversion/Continuation;

(c)    the failure of the Borrower to make any prepayment in accordance with any notice delivered under Section 3.3;

(d)    the prepayment or other payment (including after acceleration thereof) of any Eurodollar Rate Loan on a day that is not the last day of the relevant Interest Period; or

(e)    the automatic conversion under Section 2.5 of any Eurodollar Rate Loan to a Base Rate Loan on a day that is not the last day of the relevant Interest Period,


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including any such loss or expense arising from the liquidation or reemployment of funds obtained by it to maintain its Eurodollar Rate Loans or from fees payable to terminate the deposits from which such funds were obtained. For purposes of calculating amounts payable by the Borrower to the Lenders under this Section and under subsection 3.6(a), each Eurodollar Rate Loan made by a Lender and each related reserve, special deposit or similar requirement shall be conclusively deemed to have been funded at the LIBO-based rate used in determining the Eurodollar Rate for such Eurodollar Rate Loan by a matching deposit or other borrowing in the interbank eurodollar market for a comparable amount and for a comparable period, whether or not such Eurodollar Rate Loan is in fact so funded.

3.8    Certificates of Lenders.     Any Lender claiming reimbursement or compensation under this Section 3 shall deliver to the Borrower (with a copy to the Agent) a certificate setting forth in reasonable detail the amount payable to the Lender hereunder and such certificate shall be conclusive and binding on the Borrower in the absence of manifest error.

3.9    Substitution of Lenders. Upon the receipt by the Borrower from any Lender (an “Affected Lender”) of a claim for compensation under Section 3.6, or if any Lender is a Defaulting Lender (an Affected Lender or a Defaulting Lender is a “Replaceable Lender”), the Borrower may: (i) request the Replaceable Lender to use its best efforts to obtain a replacement bank or financial institution satisfactory to the Borrower to acquire and assume all or a ratable part of all of such Replaceable Lender’s Loans and Commitment (a “Replacement Lender”); (ii) request one or more of the other Lenders to acquire and assume all or part of such Replaceable Lender’s Loans and Commitment (but no other Lender shall be required to do so); or (iii) designate a Replacement Lender. Any such designation of a Replacement Lender under clause (ii) or (iii) shall be subject to the prior written consent of the Agent (which consent shall not be unreasonably withheld).

3.10    Survival. The agreements and obligations of the Borrower in this Section 3 shall survive the payment of all other Obligations.

4.
CONDITIONS.

4.1    Conditions Precedent to the Effectiveness of this Agreement. The obligation of each Lender to make its initial extension of credit hereunder is subject to the condition that the Agent has received on or before the Closing Date all of the following in form and substance satisfactory to the Agent and each Lender;

(a)    This Agreement and, to the extent requested by such Lender at least five Business Days prior to the date hereof, the Notes, in each case executed by each party thereto.

(b)    A copy of a resolution or resolutions adopted by the Board of Directors or Executive Committee of the Borrower, certified by the Secretary or an Assistant Secretary of the Borrower as being in full force and effect on the date hereof, authorizing the execution, delivery and performance of this Agreement and the consummation of the

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transactions contemplated hereby, and a copy of the Certificate of Incorporation and the By- Laws of the Borrower, similarly certified.

(c)    A certificate, signed by the Secretary or an Assistant Secretary of the Borrower and dated the date hereof, as to the incumbency of the person or persons authorized to execute and deliver this Agreement.

(d)    A certificate signed by the Chief Financial Officer, Treasurer or Corporate Controller of the Borrower that, as of the date hereof, there has been no material adverse change in its consolidated financial condition since December 31, 2019 not reflected on its Quarterly Report on Form 10-Q filed with the SEC for the period ending March 31, 2020.

(e)    A certificate, signed by the Secretary or an Assistant Secretary of the Borrower and dated the date hereof, as to the persons authorized to execute and deliver a Borrowing Advice, a Notice of Conversion/Continuation, and the Revolving Notes and the Term Notes. The Agent and each Lender may rely on such certificate with respect to the Revolving Loans and Term Loans hereunder unless and until it shall have received an updated certificate and, after receipt of such updated certificate, similarly may rely thereon.

(f)    A written opinion, dated the date hereof, of counsel for the Borrower, in the form of Exhibit E.

(g)     Evidence of payment by the Borrower of all accrued and unpaid fees, costs and expenses to the extent then due and payable on the Closing Date, together with Attorney Costs of Citibank to the extent invoiced prior to or on the Closing Date, plus such additional amounts of Attorney Costs as shall constitute Citibank’s reasonable estimate of Attorney Costs incurred or to be incurred by it through the closing proceedings (provided that such estimate shall not thereafter preclude final settling of accounts between the Borrower and Citibank); including any such costs, fees and expenses arising under or referenced in Sections 2.9 and 10.4.

(h)    Written evidence that all of the Borrowing Agreements have been or concurrently herewith are being terminated.

(i)    A certificate, signed by the Chief Financial Officer, Treasurer or an Assistant Treasurer of the Borrower and dated as of the date hereof, which confirms that after giving effect to this Agreement, the aggregate principal amount of credit available under all of the Borrower’s committed unsecured revolving credit facilities combined will not exceed the amount authorized under the resolutions of the Borrower referenced in subsection 4.1(b).

4.2    Conditions Precedent to Revolving Loans and Term Loans. The obligation of each Lender to make any Revolving Loan or Term Loan to be made by it (including its initial Revolving Loan), or to continue or convert any Loan under Section 2.5 is subject to the satisfaction of the following conditions precedent on the relevant Borrowing Date or Conversion/Continuation Date:


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The Agent shall have received a Borrowing Advice or a Notice of Conversion/Continuation, as applicable. Each Borrowing Advice or Notice of Conversion/Continuation given by the Borrower shall be deemed to be a representation and warranty by the Borrower to each Lender, effective on and as of the date of such Notice and as of such Borrowing Date for a Revolving Loan or Term Loan covered thereby, that (i) the representations and warranties set forth in Section 5 hereof (other than the representation and warranty set forth in Section 5.16) are true and correct as of such date, and (ii) no Default or Event of Default has occurred and is continuing. No Lender shall be required to make any Loan hereunder if:

(a)    the Credit, the Revolving Credit Facility (in the case of a Revolving Loan) or the Term Loan Facility (in the case of a Term Loan) has been terminated; or

(b)    any of the representations or warranties of the Borrower set forth in Section 5 hereof shall prove to have been untrue in any material respect when made, or when any Default or Event of Default as defined in Section 8, has occurred; or

(c)    the Borrower or any Bank Subsidiary is in violation of the capital requirements as described in Section 6.6; or

(d)    the Broker Subsidiary is in violation of minimum net capital requirements as described in Section 7.1; or
    
(e)     the Borrower’s Consolidated Stockholders’ Equity is below the Minimum Stockholders’ Equity as described in Section 7.2; or

(f)    any amount owing with respect to any Commitment Fee or any outstanding Revolving Loan or Term Loan or any interest thereon or any other amount payable hereunder is due and unpaid.

5.
REPRESENTATIONS AND WARRANTIES.

The Borrower represents and warrants to the Agent and each Lender, as of the date of delivery of this Agreement and as of the date of any Revolving Loan or Term Loan, as follows:

5.1    Organization and Good Standing. The Borrower is a corporation duly organized, validly existing and in good standing under the laws of the state of Delaware and has full power, authority and legal right and has all governmental licenses, authorizations, qualifications and approvals required to own its property and assets and to transact the business in which it is engaged, except where the failure to have any such license, authorization, qualification or approval, individually or in the aggregate, could not reasonably be expected to have a material adverse effect on the Borrower and its Subsidiaries taken as a whole on a consolidated basis; and all of the outstanding shares of capital stock of Borrower have been duly authorized and validly issued, are fully paid and non-assessable.

5.2    Corporate Power and Authority. The Borrower has full power, authority and legal right to execute and deliver, and to perform its obligations under, this Agreement, and to borrow

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hereunder, and has taken all necessary corporate and legal action to authorize the borrowings hereunder on the terms and conditions of this Agreement and to authorize the execution and delivery of this Agreement, and the performance of the terms thereof.

5.3    Enforceability. This Agreement has been duly authorized and executed by the Borrower, and when delivered to the Lenders will be a legal, valid and binding agreement of the Borrower, enforceable against the Borrower in accordance with its terms, except, in each case, as enforcement thereof may be limited by bankruptcy, insolvency or other laws relating to or affecting enforcement of creditors’ rights or by general equity principles.

5.4    No Violation of Laws or Agreements. The execution and delivery of this Agreement by the Borrower and the performance of the terms hereof will not violate (i) any provision of any law or regulation or any judgment, order or determination of any court or governmental authority or of the charter or by-laws of the Borrower, or (ii) any securities issued by the Borrower or any provision of any mortgage, indenture, loan or security agreement, or other instrument, to which the Borrower is a party or which purports to be binding upon it or any of its assets, in each case in this clause (ii), in any respect that reasonably could be expected to have a material adverse effect on the Borrower and its Subsidiaries taken as a whole on a consolidated basis; nor will the execution and the delivery of this Agreement by the Borrower and the performance of the terms hereof result in the creation of any lien or security interest on any assets of the Borrower pursuant to the provisions of any of the foregoing.

5.5     No Consents. Except as disclosed in writing by Borrower, no consents of others (including, without limitation, stockholders and creditors of the Borrower) nor any consents or authorizations of, exemptions by, or registrations, filings or declarations with, any Governmental Authority are required to be obtained by the Borrower in connection with the execution and delivery of this Agreement and the performance of the terms thereof.

5.6    Financial Statements. The consolidated financial statements of the Borrower contained in the documents previously delivered to each Lender have been prepared in accordance with U.S. generally accepted accounting principles and present fairly the consolidated financial position of the Borrower.

5.7    Broker Subsidiary Licenses, Etc. The Broker Subsidiary possesses all material licenses, permits and approvals necessary for the conduct of its business as now conducted and as presently proposed to be conducted as are required by law or the applicable rules of the SEC and the Financial Industry Regulatory Authority.

5.8    Broker Subsidiary/Broker Registration. The Broker Subsidiary is registered as a broker-dealer under the Securities Exchange Act of 1934, as amended.

5.9    Broker Subsidiary/SIPC. The Broker Subsidiary is not in arrears with respect to any assessment made upon it by the Securities Investor Protection Corporation, except for any assessment being contested by the Broker Subsidiary in good faith by appropriate proceedings and with respect to which adequate reserves or other provisions are being maintained to the extent required by U.S. generally accepted accounting principles.


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5.10    Taxes. The Borrower has paid and discharged or caused to be paid and discharged all taxes, assessments, and governmental charges prior to the date on which the same would have become delinquent, except to the extent that such taxes, assessments or charges are being contested in good faith and by appropriate proceedings by or on behalf of the Borrower and with respect to which adequate reserves or other provisions are being maintained to the extent required by U.S. generally accepted accounting principles.

5.11    ERISA. The Borrower is in all material respects in compliance with the provisions of and regulations under the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), and the Code applicable to any pension or other employee benefit plan established or maintained by the Borrower or to which contributions are made by the Borrower (the “Plans”). The Borrower has met all of the funding standards applicable to each of its Plans, and there exists no event or condition that would permit the institution of proceedings to terminate any of the Plans under Section 4042 of ERISA. The estimated current value of the benefits vested under each of the Plans does not, and upon termination of any of the Plans will not, exceed the estimated current value of any such Plan’s assets. The Borrower has not, with respect to any of the Plans, engaged in a prohibited transaction set forth in Section 406 of ERISA or Section 4975(c) of the Code that could be expected to have a material adverse effect on the Borrower and its Subsidiaries taken as a whole on a consolidated basis.

5.12     No Extension of Credit for Default Remedy/Hostile Acquisition. The Borrower will not use any amounts borrowed by it under this Agreement to remedy a default under any mortgage, indenture, agreement or instrument under which there may be issued any Indebtedness of the Borrower to any bank or bank holding company, or their respective assignees, for borrowed money. Further, the Borrower will not use any amounts advanced to it under this Agreement for the immediate purpose of acquiring a company where the Board of Directors or other governing body of the entity being acquired has made (and not rescinded) a public statement opposing such acquisition.

5.13    Use of Proceeds/Margin Regulations. The Borrower will use the proceeds for general corporate purposes. The Borrower will not use the proceeds of any loan provided hereby in such a manner as to result in a violation of Regulations T, U or X of the Board of Governors of the Federal Reserve System.

5.14    Authorized Persons. The persons named for such purpose in the certificates delivered pursuant to subsection 4.1(e) hereof are authorized to execute Borrowing Advices.

5.15    Material Contracts. Borrower is not in default in the performance or observance of any material obligation, agreement, covenant or condition contained in any material contract, indenture, mortgage, loan agreement, note or lease to which the Borrower is a party or by which it may be bound.

5.16    Litigation. Except for any matter disclosed in the Form 10-Q filed by the Borrower with the SEC on May 8, 2020, and the matter disclosed in the Form 8-K filed by the Borrower with the SEC on May 26, 2020, there is no action, suit or proceeding pending against,

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or to the knowledge of the Borrower, threatened against or affecting, the Borrower or any of its Subsidiaries before any court, arbitrator, governmental body, agency or official in which there is a reasonable possibility of an adverse decision which could have a material adverse effect on the business or the financial condition of the Borrower.

5.17    Investment Company. The Borrower is not an “investment company” or a company “controlled” by an “investment company” within the meaning of the Investment Company Act of 1940, as amended.

5.18    Designated Persons. None of the Borrower, the Broker Subsidiary or any Bank Subsidiary, nor, to the knowledge of the Borrower, any of their respective directors or officers, is a Designated Person. No Borrowing or the use of proceeds thereof by the Borrower or any Subsidiary will, directly or, to the knowledge of the Borrower, indirectly, violate Anti- Corruption Laws or Sanctions.

6.
AFFIRMATIVE COVENANTS.

The Borrower covenants and agrees that so long as any Lender shall have a Commitment hereunder or any Loan or other obligation hereunder shall remain outstanding, unpaid or unsatisfied and until full payment of all amounts due to the Lenders hereunder, it will, unless and to the extent the Required Lenders waive compliance in writing:

6.1     Notice of Events of Default. Give prompt notice to the Agent and each Lender, no later than three Business Days after becoming aware thereof, of any Default or Event of Default.

6.2    Financial Statements. Deliver to the Agent, in form and detail satisfactory to the Agent and the Required Lenders, within ten Business Days after the filing with the SEC of each Form 10-Q and Form 10-K filed by the Borrower with the SEC under the Exchange Act, a compliance certificate with an attached schedule of calculations (in the form attached hereto as Schedule 6.2) demonstrating compliance with the Section 7.1 and Section 7.2 financial covenants; and also deliver to the Agent a copy of (i) each registration statement filed by the Borrower under the Securities Act of 1933, (ii) each Form 10-Q and Form 10-K (in each case including exhibits) filed by the Borrower with the SEC under the Exchange Act, (iii) each Form 8-K (with exhibits) and proxy statement filed by the Borrower with the SEC under the Exchange Act, and (iv) any request filed by the Borrower with the SEC for an extension of the due date of any of the filings referred to in the foregoing clauses (i), (ii) or (iii); provided, however, that each of the filings referred to in the foregoing clauses (i) through (iv) shall automatically be deemed delivered by the Borrower to the Agent and the Lenders upon its filing by the Borrower with the SEC.

6.3    Insurance. Maintain and keep in force in adequate amounts such insurance as is usual in the business carried on by the Borrower and cause the Broker Subsidiary to maintain and keep in force in adequate amounts such insurance as is usual in the business carried on by the Broker Subsidiary.


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6.4    Books and Records. Maintain adequate books, accounts and records and prepare all financial statements required hereunder in accordance with U.S. generally accepted accounting principles and practices and in compliance with the regulations of any governmental regulatory body having jurisdiction thereof.

6.5    Change in Business. Advise the Agent and each Lender, in a timely manner, of material changes to the nature of business of the Borrower or the Broker Subsidiary as at present conducted. The Broker Subsidiary is at present engaged in the business of providing financial services, primarily to individual investors and/or their advisors.

6.6    Capital Requirements. The Borrower will maintain, and cause each Bank Subsidiary to maintain, at all times such amount of capital as may be prescribed by such entity’s prudential supervisor, from time to time, whether by regulation, agreement or order. The Borrower shall at all times ensure that all Bank Subsidiaries shall be “well capitalized” within the meaning of 12 U.S.C. §1831(o), as amended, reenacted or redesignated from time to time.

6.7    Anti-Corruption Laws and Sanctions. The Borrower has implemented and will maintain in effect policies and procedures reasonably designed to ensure compliance with Anti- Corruption Laws and Sanctions.

7.
NEGATIVE COVENANTS.

The Borrower covenants and agrees that so long as any Lender shall have any Commitment hereunder, or any Loan or other obligation, shall remain outstanding, unpaid or unsatisfied and until full payment of all amounts due to the Lenders hereunder, unless and to the extent the Required Lenders waive compliance in writing:

7.1    Net Capital. The Borrower will not permit the Broker Subsidiary to allow any month-end Net Capital Ratio to be less than 5%.

7.2    Minimum Stockholders’ Equity. The Borrower will not allow its Consolidated Stockholders’ Equity to fall below the Minimum Stockholders’ Equity.

7.3    Merger/Disposition of Assets. The Borrower will not (i) permit either Broker Subsidiary or Intermediate Parent to (a) merge or consolidate, unless the surviving company is a Controlled Subsidiary, or (b) convey or transfer its properties and assets substantially as an entirety except to one or more Controlled Subsidiaries; or (ii) except as permitted by subsection 7.3(i) sell, transfer or otherwise dispose of any voting stock of Broker Subsidiary or Intermediate Parent, or permit either Broker Subsidiary or Intermediate Parent to issue, sell or otherwise dispose of any of its voting stock, unless, after giving effect to any such transaction, Broker Subsidiary or Intermediate Parent, as the case may be, remains a Controlled Subsidiary.

7.4    Broker Subsidiary Indebtedness. The Borrower will not permit the Broker Subsidiary to create, incur or assume any Indebtedness other than:

(a)    (i)    Indebtedness to customers, other brokers or dealers, securities exchanges or securities markets, self-regulatory organizations, clearing houses and like

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institutions (including, without limitation, letters of credit or similar credit support devices issued for the account of Broker Subsidiary and for the benefit of any of the foregoing in order to comply with any margin, collateral or similar requirements imposed by or for the benefit of any of the foregoing), (ii) ”broker call” credit, (iii) indebtedness consisting of borrowings secured solely by margin loans made by Broker Subsidiary, together with any underlying collateral of Broker Subsidiary, (iv) stock loans, (v) obligations to banks for disbursement accounts, (vi) Indebtedness incurred for the purchase of tangible personal property on a non-recourse basis or for the leasing of tangible personal property under a capitalized lease, (vii) Indebtedness incurred for the purchase, installation or servicing of computer equipment and software, and (viii) Indebtedness incurred in the ordinary course of the Broker Subsidiary’s business, to the extent not already included in the foregoing clauses (i) through (vii);

(b)
intercompany Indebtedness; and

(c)
other Indebtedness in the aggregate not exceeding $100,000,000.

7.5    Indebtedness Secured by Subsidiary Stock. The Borrower will not, and will not permit any Subsidiary at any time directly or indirectly to create, assume, incur or permit to exist any Indebtedness secured by a pledge, lien or other encumbrance (hereinafter referred to as a “lien”) on the voting stock of any Subsidiary without making effective provision whereby the obligations of the Borrower hereunder and under the Notes, if any, shall be secured equally and ratably with such secured Indebtedness so long as other Indebtedness shall be so secured; provided, however, that the foregoing covenant shall not be applicable to any liens permitted pursuant to subsections (a) through (d) in Section 7.6 below.

7.6    Liens and Encumbrances. The Borrower will not create, incur, assume or suffer to exist any lien or encumbrance upon or with respect to any of its properties, whether now owned or hereafter acquired, except the following:

(a)    liens securing taxes, assessments or governmental charges or levies, or in connection with workers’ compensation, unemployment insurance or social security obligations, or the claims or demands of materialmen, mechanics, carriers, warehousemen, landlords and other like persons not yet delinquent or which are being contested in good faith by appropriate proceedings with respect to which adequate reserves or other provisions are being maintained to the extent required by U.S. generally accepted accounting principles;

(b)    liens not for borrowed money incidental to the conduct of its business or the ownership of property that do not materially detract from the value of any item of property;

(c)    attachment, judgment or other similar liens arising in the connection with court proceedings that do not, in the aggregate, materially detract from the value of its property, materially impair the use thereof in the operation of its businesses and (i) that are discharged or stayed within sixty (60) days of attachment or levy, or (ii) payment of which is covered in full (subject to customary and reasonable deductibles) by insurance or surety bonds;

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(d)    liens existing at Closing Date provided that the obligations secured thereby are not increased; and

(e)    liens in respect of Hedge Agreements securing net payment obligations in an aggregate amount not to exceed $500,000,000 at any time outstanding.

7.7    Use of Proceeds. The Borrower will not request any Borrowing, and shall not use the proceeds of any Borrowing, in any manner that, directly or, to the knowledge of the Borrower, indirectly, would result in the violation of any Anti-Corruption Laws or Sanctions.

8.
EVENTS OF DEFAULT.

8.1    Defaults.    The occurrence of any of the following events shall constitute an “Event of Default”:

(a)    The Borrower shall fail to pay any interest with respect to the Revolving Loans or the Term Loans or any Commitment Fee or Term Out Fee in accordance with the terms hereof within 10 days after such payment is due.

(b)    The Borrower shall fail to pay any principal with respect to the Revolving Loans or the Term Loans in accordance with the terms thereof on the date when due.

(c)     Any representation or warranty made by the Borrower herein or hereunder or in any certificate or other document furnished by the Borrower hereunder shall prove to have been incorrect when made (or deemed made) in any respect that is materially adverse to the interests of the Lenders or their rights and remedies hereunder.

(d)    Except as specified in (a) and (b) above, the Borrower shall default in the performance of, or breach, any covenant of the Borrower with respect to this Agreement, and such default or breach shall continue for a period of thirty days after there has been given, by registered or certified mail, to the Borrower by the Agent a written notice specifying such default or breach and requiring it to be remedied.

(e)    An event of default as defined in any mortgage, indenture, agreement or instrument under which there is issued, or by which there is secured or evidenced, any Indebtedness (other than in respect of Hedge Agreements) of the Borrower in a principal amount not less than $100,000,000 shall have occurred and shall result in such Indebtedness becoming or being declared due and payable prior to the date on which it otherwise would become due and payable, or an event of default or a termination event as defined in any Hedge Agreement shall have occurred and shall result in a net payment obligation of the Borrower thereunder of not less than $100,000,000 in aggregate for all such Hedge Agreements; provided, however, that if such event of default shall be remedied or cured by the Borrower, or waived by the holders of such Indebtedness, within twenty days after the Borrower has received written notice of such event of default and acceleration, then the Event of Default hereunder by reason thereof shall be deemed likewise to have thereupon been remedied, cured or waived without further action upon the part of either the Borrower or the Agent and Lenders.


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(f)    Any involuntary proceeding shall be commenced or an involuntary petition shall be filed in a court of competent jurisdiction seeking (i) relief against the Borrower or the Broker Subsidiary, or against all or a substantial part of the property of either of them, under Title 11 of the United States Code or any other federal, state or foreign bankruptcy, insolvency, reorganization or similar law, (ii) the appointment of a receiver, liquidator, assignee, custodian, trustee, sequestrator or similar official for the Borrower or the Broker Subsidiary or for all or a substantial part of the property of either of them, or (iii) the winding-up or liquidation of the Borrower or the Broker Subsidiary; and, in any such case, such involuntary proceeding or involuntary petition shall continue undismissed for 60 days, or, before such 60-day period has elapsed, there shall be entered an order or decree ordering the relief requested in such involuntary proceeding or involuntary petition.

(g)    The Borrower or the Broker Subsidiary shall commence a voluntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, or shall consent to the entry of an order for relief in an involuntary case under such law, or shall consent to the appointment of or taking possession by a receiver, liquidator, assignee, custodian, trustee, sequestrator (or similar official) of the Borrower or Broker Subsidiary or for any substantial part of its respective properties, or shall make any general assignment for the benefit of creditors, or shall fail generally to pay its respective debts as they become due or shall take any corporate action in furtherance of any of the foregoing.

(h)     A final judgment or judgments for the payment of money in excess of $100,000,000 in the aggregate shall be entered against the Borrower by a court or courts of competent jurisdiction, and the same shall not be discharged (or provisions shall not be made for such discharge), or a stay of execution thereof shall not be procured, within 30 days from the date of entry thereof and the Borrower shall not, within said period of 30 days, or such longer period during which execution of the same shall have been stayed, appeal therefrom and cause the execution thereof to be stayed during such appeal.

(i)    At any time after a Change in Control, the Borrower fails to maintain at least one of the following credit ratings for its Senior Medium-Term Notes, Series A: (a) BBB- (or better) by S&P Global Ratings or (b) Baa3 (or better) by Moody’s Investors Service, Inc.

8.2    Remedies. If an Event of Default occurs and is continuing, then and in every such case the Agent shall, at the request of, or may, with the consent of, the Required Lenders (i) declare the Commitment of each Lender to make Loans to be terminated whereupon such Commitments and obligation shall be terminated, and (ii) declare the unpaid principal of all outstanding Loans, any and all accrued and unpaid interest, any accrued and unpaid Commitment Fees, or any other amounts owing or payable under the Notes, if any, to be immediately due and payable, by a notice in writing to the Borrower, and upon such declaration such principal, interest, Commitment Fees, or other amounts payable hereunder and accrued thereon shall become immediately due and payable, together with any funding losses that may result as a consequence of such declaration, without presentment, demand, protest or other notice of any kind, all of which are expressly waived by the Borrower; provided, however, that in the case of

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any of the Events of Default specified in subsection (f) or (g) of Section 8.1, automatically without any notice to the Borrower or any other act by the Agent, the Credit and the obligations of each Lender to make Loans shall automatically terminate and the unpaid principal amount of all outstanding Loans, any accrued and unpaid interest, any accrued and unpaid Commitment Fees or any other amounts payable hereunder shall become immediately due and payable, together with any funding losses that may result as a consequence thereof, without further act of the Agent or any Lender and without presentment, demand, protest or other notice of any kind, all of which are expressly waived by the Borrower.

9.
THE AGENT.

9.1    Appointment and Authorization. Each Lender hereby irrevocably (subject to Section 9.9) appoints, designates and authorizes the Agent to take such action on its behalf under the provisions of this Agreement and each other Loan Document and to exercise such powers and perform such duties as are expressly delegated to it by the terms of this Agreement or any other Loan Document, together with such powers as are reasonably incidental thereto. Notwithstanding any provision to the contrary contained elsewhere in this Agreement or in any other Loan Document, the Agent shall not have any duties or responsibilities except those expressly set forth, nor shall the Agent have or be deemed to have any fiduciary relationship with any Lender, and no implied covenants, functions, responsibilities, duties, obligations or liabilities shall be read into this Agreement or any other Loan Document or otherwise exist against the Agent.

9.2    Delegation of Duties. The Agent may execute any of its duties under this Agreement or any other Loan Document by or through agents, employees or attorneys-in-fact and shall be entitled to advice of counsel concerning all matters pertaining to such duties. The Agent shall not be responsible for the negligence or misconduct of any agent or attorney-in-fact that it selects with reasonable care.

9.3    Liability of Agent. None of the Agent-Related Persons shall (i) be liable for any action taken or omitted to be taken by any of them under or in connection with this Agreement or any other Loan Document or the transactions contemplated hereby (except for its own gross negligence or willful misconduct), or (ii) be responsible in any manner to any of the Lenders for any recital, statement, representation or warranty made by the Borrower or any Subsidiary or Affiliate of the Borrower, or any officer thereof, contained in this Agreement or in any other Loan Document, or in any certificate, report, statement or other document referred to or provided for in, or received by the Agent under or in connection with, this Agreement or any other Loan Document, or the validity, effectiveness, genuineness, enforceability or sufficiency of this Agreement or any other Loan Document, or for any failure of the Borrower or any other party to any Loan Document to perform its obligations hereunder or thereunder. No Agent-Related Person shall be under any obligation to any Lender to ascertain or to inquire as to the observance or performance of any of the agreements contained in, or conditions of, this Agreement or any other Loan Document, or to inspect the properties, books or records of the Borrower or any of the Borrower’s Subsidiaries or Affiliates.

9.4
Reliance by Agent.


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(a)    The Agent shall be entitled to rely, and shall be fully protected in relying, upon any writing, resolution, notice, consent, certificate, affidavit, letter, facsimile, telex or telephone message, statement or other document or conversation believed by it to be genuine and correct and to have been signed, sent or made by the proper Person or Persons, and upon advice and statements of legal counsel (including counsel to the Borrower), independent accountants and other experts selected by the Agent. The Agent shall be fully justified in failing or refusing to take any action under this Agreement or any other Loan Document unless it shall first receive such advice or concurrence of the Required Lenders as it deems appropriate and, if it so requests, it shall first be indemnified to its satisfaction by the Lenders against any and all liability and expense which may be incurred by it by reason of taking or continuing to take any such action. The Agent shall in all cases be fully protected in acting, or in refraining from acting, under this Agreement or any other Loan Document in accordance with a request or consent of the Required Lenders and such request and any action taken or failure to act pursuant thereto shall be binding upon all of the Lenders.

(b)    For purposes of determining compliance with the conditions specified in Section 4.1, each Lender that has executed this Agreement shall be deemed to have consented to, approved or accepted or to be satisfied with, each document or other matter either sent by Agent to such Lender for consent, approval, acceptance or satisfaction, or required thereunder to be consented to or approved by or acceptable or satisfactory to the Lender.

9.5    Notice of Default. The Agent shall not be deemed to have knowledge or notice of the occurrence of any Default or Event of Default, except with respect to defaults in the payment of principal, interest and fees required to be paid to the Agent for the account of the Lenders, unless the Agent shall have received written notice from a Lender or the Borrower referring to this Agreement, describing such Default or Event of Default and stating that such notice is a “notice of default”. The Agent will notify the Lenders of its receipt of any such notice. The Agent shall take such action with respect to such Default or Event of Default as may be requested by the Required Lenders in accordance with Section 8; provided, however, that unless and until the Agent has received any such request, the Agent may (but shall not be obligated to) take such action, or refrain from taking such action, with respect to such Default or Event of Default as it shall deem advisable or in the best interest of the Lenders.

9.6    Credit Decision. Each Lender acknowledges that none of the Agent-Related Persons has made any representation or warranty to it and that no act by the Agent hereinafter taken, including any review of the affairs of the Borrower and its Subsidiaries, shall be deemed to constitute any representation or warranty by any Agent-Related Person to any Lender. Each Lender represents to the Agent that it has, independently and without reliance upon any Agent- Related Person and based on such documents and information as it has deemed appropriate, made its own appraisal of, and investigation into, the business, prospects, operations, property, financial and other condition and creditworthiness of the Borrower and its Subsidiaries, and all applicable bank regulatory laws relating to the transactions contemplated hereby, and made its own decision to enter into this Agreement and to extend credit to the Borrower hereunder. Each Lender also represents that it will, independently and without reliance upon any Agent-Related Person and based on such documents and information as it shall deem appropriate at the time,

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continue to make its own credit analysis, appraisals and decisions in taking or not taking action under this Agreement and the other Loan Documents, and to make such investigations as it deems necessary to inform itself as to the business, prospects, operations, property, financial and other condition and creditworthiness of the Borrower. Except for notices, reports and other documents expressly herein required to be furnished to the Lenders by the Agent, the Agent shall not have any duty or responsibility to provide any Lender with any credit or other information concerning the business, prospects, operations, property, financial and other condition or creditworthiness of the Borrower which may come into the possession of any of the Agent- Related Persons.

9.7    Indemnification of Agent. Whether or not the transactions contemplated hereby are consummated, the Lenders shall indemnify upon demand the Agent-Related Persons (to the extent not reimbursed by or on behalf of the Borrower and without limiting the obligation of the Borrower to do so), pro rata, from and against any and all Indemnified Liabilities; provided, however, that no Lender shall be liable for the payment to the Agent-Related Persons of any portion of such Indemnified Liabilities resulting solely from any such Person’s gross negligence or willful misconduct. Without limitation of the foregoing, each Lender shall reimburse the Agent upon demand for its ratable share, of any costs or out-of-pocket expenses (including Attorney Costs) incurred by the Agent in connection with the preparation, execution, delivery, administration, modification, amendment or enforcement (whether through negotiations, legal proceedings or otherwise) of, or legal advice in respect of rights or responsibilities under, this Agreement, any other Loan Document, or any document contemplated by or referred to herein to the extent that the Agent is not reimbursed for such expenses by or on behalf of the Borrower. The undertaking in this Section shall survive the payment of all Obligations hereunder and the resignation or replacement of the Agent.

9.8    Agent in Individual Capacity. Citibank and its Affiliates may make loans to, issue letters of credit for the account of, accept deposits from, acquire equity interests in and generally engage in any kind of banking, trust, financial advisory, underwriting or other business with the Borrower and its Subsidiaries and Affiliates as though Citibank were not the Agent hereunder and without notice to or consent of the Lenders. The Lenders acknowledge that, pursuant to such activities, Citibank or its Affiliates may receive information regarding the Borrower or its Affiliates (including information that may be subject to confidentiality obligations in favor of the Borrower or such Subsidiary) and acknowledge that the Agent shall be under no obligation to provide such information to them. With respect to its Loans, Citibank shall have the same rights and powers under this Agreement as any other Lender and may exercise the same as though it were not the Agent.

9.9    Successor Agent. The Agent may, and at the request of the Required Lenders shall, resign as Agent upon 30 days’ notice to the Lenders and Borrower. If the Agent resigns under this Agreement, the Required Lenders, with the consent of the Borrower, which consent shall not be unreasonably withheld, shall appoint from among the Lenders a successor agent for the Lenders which successor agent shall be approved by the Borrower. If no successor agent is appointed prior to the effective date of the resignation of the Agent, the Agent with the consent of the Borrower, which consent shall not be unreasonably withheld, may appoint, after consulting with the Lenders and the Borrower, a successor agent from among the Lenders. Upon

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the acceptance of its appointment as successor agent hereunder, such successor agent shall succeed to all the rights, powers and duties of the retiring Agent and the term “Agent” shall mean such successor agent and the retiring Agent’s appointment, powers and duties as Agent shall be terminated. After any retiring Agent’s resignation hereunder as Agent, the provisions of this Section 9 and Sections 10.4 and 10.5 shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Agent under this Agreement. If no successor agent has accepted appointment as Agent by the date which is 30 days following a retiring Agent’s notice of resignation, the retiring Agent’s resignation shall nevertheless thereupon become effective and the Lenders shall perform all of the duties of the Agent hereunder until such time, if any, as the Required Lenders appoint a successor agent as provided for above. The retiring Agent shall refund to Borrower that portion of any agency fee paid to such Agent as is not earned due to such Agent’s resignation, prorated to the date of such Agent’s resignation.

9.10
Withholding Tax.

(a)    If any Lender is a “foreign corporation, partnership or trust” within the meaning of the Code and such Lender claims exemption from, or a reduction of, U.S. withholding tax under Section 1441 or 1442 of the Code, such Lender agrees with and in favor of the Agent, to deliver to the Agent:

(i)    if such Lender claims an exemption from, or a reduction of, withholding tax under a United States tax treaty, properly completed IRS Form W-8BEN before the payment of any interest in the first calendar year and before the payment of any interest in any subsequent calendar year during which the Form W-8BEN (or any successor thereto) then in effect expires;

(ii)    if such Lender claims that interest paid under this Agreement is exempt from United States withholding tax because it is effectively connected with a United States trade or business of such Lender, two properly completed copies of IRS Form W-8ECI or any successor form thereto before the payment of any interest is due in the first taxable year of such Lender and before the payment of any interest in any subsequent calendar year during which the Form W-8ECI (or any successor thereto) then in effect expires; and

(iii)    such other form or forms as may be required under the Code or other laws of the United States as a condition to exemption from, or reduction of, United States withholding tax.

Such Lender agrees to promptly notify the Agent of any change in circumstances which would render invalid any claimed exemption or reduction.

(b)    If any Lender claims exemption from, or reduction of, withholding tax under a United States tax treaty by providing IRS Form W-8BEN and such Lender sells, assigns, grants a participation in, or otherwise transfers all or part of the Obligations of the Borrower to such Lender, such Lender agrees to notify the Agent of the percentage amount in which it is no longer the beneficial owner of Obligations of the Borrower to such Lender. To the

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extent of such percentage amount, the Agent will treat such Lender’s IRS Form W-8BEN or any successor form thereto as no longer valid.

(c)    If any Lender claiming exemption from United States withholding tax by filing IRS Form W-8ECI or any successor form thereto with the Agent sells, assigns, grants a participation in, or otherwise transfers all or part of the Obligations of the Borrower to such Lender, such Lender agrees to undertake sole responsibility for complying with the withholding tax requirements imposed by Sections 1441 and 1442 of the Code.

(d)    If any Lender is entitled to a reduction in the applicable withholding tax, the Agent may withhold from any interest payment to such Lender an amount equivalent to the applicable withholding tax after taking into account such reduction. If the forms or other documentation required by subsection (a) of this Section are not delivered to the Agent or if any Lender which is a “foreign corporation, partnership or trust” within the meaning of the Code is not entitled to claim exemption from or a reduction of U.S. withholding tax under Section 1441 or 1442 of the Code, then the Agent shall withhold from any interest payment to such Lender not providing such forms or other documentation an amount equivalent to the applicable withholding tax.

(e)    If the IRS or any other Governmental Authority of the United States or other jurisdiction asserts a claim that the Agent did not properly withhold tax from amounts paid to or for the account of any Lender (because the appropriate form was not delivered, was not properly executed, or because such Lender failed to notify the Agent of a change in circumstances which rendered the exemption from, or reduction of, withholding tax ineffective, or for any other reason other than the Agent’s gross negligence or willful misconduct) such Lender shall indemnify the Agent fully for all amounts paid, directly or indirectly, by the Agent as tax or otherwise, including penalties and interest, and including any taxes imposed by any jurisdiction on the amounts payable to the Agent under this Section, together with all costs and expenses (including Attorney Costs). The obligation of the Lenders under this subsection shall survive the payment of all Obligations and the resignation or replacement of the Agent.

9.11    Co-Agents. None of the Lenders identified on the facing page or signature pages of this Agreement as a “co-agent”, “managing agent”, “syndication agent” or “documentation agent” shall have any right, power, obligation, liability, responsibility or duty under this Agreement other than those applicable to all Lenders as such. Without limiting the foregoing, none of the Lenders so identified as a “co-agent”, “syndication agent” or “documentation agent” shall have or be deemed to have any fiduciary relationship with any Lender. Each Lender acknowledges that it has not relied, and will not rely, on any of the Lenders so identified in deciding to enter into this Agreement or in taking or not taking action hereunder.

9.12
Certain ERISA Matters.

(a)    Each Lender (x) represents and warrants, as of the date such Person became a Lender party hereto, to, and (y) covenants, from the date such Person became a Lender party hereto to the date such Person ceases being a Lender party hereto, for the benefit of,

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the Agent and each Arranger and their respective Affiliates, and not, for the avoidance of doubt, to or for the benefit of the Borrower, that at least one of the following is and will be true:

(i)    such Lender is not using “plan assets” (within the meaning of Section 3(42) of ERISA or otherwise for purposes of Title I of ERISA or Section 4975 of the Code) of one or more Benefit Plans with respect to such Lender’s entrance into, participation in, administration of and performance of the Loans, the Commitments or this Agreement;

(ii)    the prohibited transaction exemption set forth in one or more Prohibited Transaction Exemptions (“PTEs”), such as PTE 84-14 (a class exemption for certain transactions determined by independent qualified professional asset managers), PTE 95-60 (a class exemption for certain transactions involving insurance company general accounts), PTE 90-1 (a class exemption for certain transactions involving insurance company pooled separate accounts), PTE 91-38 (a class exemption for certain transactions involving bank collective investment funds) or PTE 96-23 (a class exemption for certain transactions determined by in-house asset managers), is applicable with respect to such Lender’s entrance into, participation in, administration of and performance of the Loans, the Commitments and this Agreement; or

(iii)    (A) such Lender is an investment fund managed by a “Qualified Professional Asset Manager” (within the meaning of Part VI of PTE 84-14), (B) such Qualified Professional Asset Manager made the investment decision on behalf of such Lender to enter into, participate in, administer and perform the Loans, the Commitments and this Agreement, (C) the entrance into, participation in, administration of and performance of the Loans, the Commitments and this Agreement satisfies the requirements of sub-sections (b) through (g) of Part I of PTE 84-14 and (D) to the best knowledge of such Lender, the requirements of subsection (a) of Part I of PTE 84-14 are satisfied with respect to such Lender’s entrance into, participation in, administration of and performance of the Loans, the Commitments and this Agreement.

(b)    In addition, unless sub-clause (i) in the immediately preceding clause (a) is true with respect to a Lender, such Lender further (x) represents and warrants, as of the date such Person became a Lender party hereto, to, and (y) covenants, from the date such Person became a Lender party hereto to the date such Person ceases being a Lender party hereto, for the benefit of, the Agent and each Arranger and their respective Affiliates, and not, for the avoidance of doubt, to or for the benefit of the Borrower, that none of the Agent, and Arranger or their respective Affiliates is a fiduciary with respect to the assets of such Lender involved in such Lender’s entrance into, participation in, administration of and performance of the Loans, the Commitments and this Agreement (including in connection with the reservation or exercise of any rights by the Agent under this Agreement or any documents related hereto).

As used in this Section, the following terms have the following meanings:

Benefit Plan:
Any of (a) an “employee benefit plan” (as defined in ERISA) that is subject to Title I of ERISA, (b) a “plan” as defined in Section 4975 of the Code or (c) any Person whose assets include (for purposes of ERISA Section 3(42) or otherwise for purposes of

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Title I of ERISA or Section 4975 of the Code) the assets of any such “employee benefit plan” or “plan”.


PTE:
A prohibited transaction class exemption issued by the U.S. Department of Labor, as any such exemption may be amended from time to time.

10.
MISCELLANEOUS.

10.1    Amendments and Waivers. No amendment or waiver of any provision of this Agreement or any other Loan Document, and no consent with respect to any departure by the Borrower or any applicable Subsidiary therefrom, shall be effective unless the same shall be in writing and signed by the Required Lenders (or by the Agent at the written request of the Required Lenders) and the Borrower and acknowledged by the Agent, and then any such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given; provided, however, that no such waiver, amendment, or consent shall, unless in writing and signed by all the Lenders and the Borrower and acknowledged by the Agent, do any of the following:

(a)    increase or extend the Commitment of any Lender (or reinstate any Commitment terminated pursuant to Section 8.2);

(b)    postpone or delay any date fixed by this Agreement or any other Loan Document for any payment of principal, interest, fees or other amounts due to the Lenders (or any of them) hereunder or under any other Loan Document;

(c)     reduce the principal of, or the rate of interest specified herein on any Loan, or (subject to clause (ii) below) any fees or other amounts payable hereunder or under any other Loan Document;

(d)    change the percentage of the Commitments or of the aggregate unpaid principal amount of the Loans which is required for the Lenders or any of them to take any action hereunder; or

(e)    amend this Section, or Section 2.13, or any provision herein providing for consent or other action by all Lenders;

and, provided further, that (i) no amendment, waiver or consent shall, unless in writing and signed by the Agent in addition to the Required Lenders or all the Lenders, as the case may be, affect the rights or duties of the Agent under this Agreement or any other Loan Document, and
(ii) the respective Fee Letters may be amended or rights or privileges thereunder waived, in a writing executed by the parties thereto.

10.2
Notices.

(a)    All notices, requests and other communications shall be either (i) in writing (including, unless the context expressly otherwise provides, by facsimile transmission,

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provided that any matter transmitted by the Borrower by facsimile shall be immediately confirmed by a telephone call to the recipient at the number specified on Schedule 10.2) or (ii) as and to the extent set forth in clause (d) below, by electronic mail.

(b)    All such notices, requests and communications shall, when transmitted by overnight delivery, faxed or e-mailed, be effective when delivered for overnight (next-day) delivery, transmitted in legible form by facsimile machine (provided that the sender has retained its facsimile machine-generated confirmation of the receipt of such fax by the recipient’s facsimile machine) or transmitted by e-mail (provided that the e-mail was sent to the e-mail address provided by the recipient and that the e-mail was not returned to the sender as undeliverable), respectively, or if mailed, upon the third Business Day after the date deposited into the U.S. mail, or if delivered, upon delivery; except that notices pursuant to Section 2 or 9 shall not be effective until actually received by the Agent.

(c)    The agreement of the Agent and the Lenders herein to receive certain notices by telephone, facsimile or e-mail is solely for the convenience of the Borrower, the Agent and the Lenders. The Agent and the Lenders shall be entitled to rely on the authority of any Person purporting to be a Person who is named in the then-current certificate delivered pursuant to subsection 4.1(e) hereof as authorized to execute Borrowing Advices (each an “Authorized Person”) and the Lenders shall not have any liability to the Borrower or other Person on account of any action taken or not taken by the Agent or the Lenders in reliance upon such telephonic, facsimile or e-mail notice, provided the Agent and the Lenders reasonably believe such Person to be an Authorized Person. The obligation of the Borrower to repay the Loans shall not be affected in any way to any extent by any failure by the Agent and the Lenders to receive written confirmation of any telephonic, facsimile or e-mail notice or the receipt by the Agent and the Lenders of a confirmation which is at variance with the terms understood by the Agent and the Lenders to be contained in the telephonic, facsimile or e-mail notice.

(d)    The compliance certificate described in Section 6.2 shall be delivered to the Agent by the Borrower by mail or overnight delivery. Except for the compliance certificate described in Section 6.2, materials required to be delivered pursuant to Section 6.2 shall be delivered to the Agent in an electronic medium format reasonably acceptable to the Agent by e-mail at oploanswebadmin@citi.com. The Borrower agrees that the Agent may make such materials (collectively, the “Communications”) available to the Lenders by posting such materials on Debt Domain or a substantially similar electronic transmission system (collectively, the “Platform”). In addition, to the extent the Borrower in its sole discretion so elects and confirms in writing or by e-mail to the Agent, any other written information, documents, instruments or other material relating to the Borrower, any of its Subsidiaries or any other materials or matters relating to this Agreement, the Notes, if any, or any of the transactions contemplated hereby and supplied by the Borrower to the Agent (other than any such communication that (i) relates to a request for a new, or a conversion of an existing, Borrowing (including any election of an interest rate or Interest Period relating thereto), (ii) relates to the payment of any principal or other amount due hereunder prior to the scheduled date therefor, (iii) provides notice of any Default or Event of Default or (iv) is required to be delivered to satisfy any condition precedent set forth in Section 4.1 or Section 4.2), shall, to the extent of such election and confirmation by the Borrower, constitute materials that are “Communications” for purposes of this subparagraph (d). The Borrower and each of the Lenders acknowledges that (i)

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the distribution of material through an electronic medium is not necessarily secure and that there are confidentiality and other risks associated with such distribution, (ii) the Platform is provided “as is” and “as available” and (iii) neither the Agent nor any of its Affiliates warrants the accuracy, adequacy or completeness of the Communications or the Platform and each expressly disclaims liability for errors or omissions in the Communications or the Platform (provided, as to such disclaimer, that the Agent and its Affiliates have not been grossly negligent or engaged in any willful misconduct in respect of the Platform). No warranty of any kind, express, implied or statutory, including, without limitation, any warranty of merchantability, fitness for a particular purpose, non-infringement of third party rights or freedom from viruses or other code defects, is made by the Agent or any of its Affiliates in connection with the Platform.

(e)    Each Lender agrees that notice to it (as provided in the next sentence) (a “Notice”) specifying that any Communications have been posted to the Platform shall constitute effective delivery of such information, documents or other materials to such Lender for purposes of this Agreement. Each Lender agrees (i) to notify the Agent in writing of such Lender’s e-mail address to which a Notice may be sent by electronic transmission (including by electronic communication) on or before the date such Lender becomes a party to this Agreement (and from time to time thereafter to ensure that the Agent has on record an effective e-mail address for such Lender) and (ii) that any Notice may be sent to such e-mail address.

(f)    The Agent agrees to give to each Lender prompt notice of all materials delivered by the Borrower pursuant to Section 6.2.

10.3    No Waiver-Cumulative Remedies. No failure to exercise and no delay in exercising, on the part of the Agent or any Lender, any right, remedy, power or privilege hereunder, shall operate as a waiver thereof, nor shall any single or partial exercise of any right, remedy, power or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, remedy, power or privilege.

10.4
Costs and Expenses. The Borrower shall:

(a)    whether or not the transactions contemplated hereby are consummated, pay or reimburse Citibank including in its capacity as Agent and Lender within five Business Days after demand, subject to subsection 4.1(g) for all reasonable costs and expenses incurred by Citibank including in its capacity as Agent and Lender in connection with the development, preparation, delivery, administration and execution of, and any amendment, supplement, waiver or modification to (in each case, whether or not consummated), this Agreement, any Loan Document and any other documents prepared in connection herewith or therewith, and the consummation of the transactions contemplated hereby and thereby, including reasonable Attorney Costs incurred by Citibank (including in its capacity as Agent and Lender with respect thereto); and

(b)    pay or reimburse the Agent, the Arrangers and each Lender within five Business Days after demand (subject to subsection 4.1(g)) for all reasonable costs and expenses (including reasonable Attorney Costs) incurred by them in connection with the

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enforcement, attempted enforcement, or preservation of any rights or remedies under this Agreement or any other Loan Document during the existence of an Event of Default or after acceleration of the Loans (including in connection with any “workout” or restructuring regarding the Loans, and including in any Insolvency Proceeding or appellate proceeding). In connection with any claim, demand, action or cause of action relating to the enforcement, preservation or exercise of any rights or remedies covered by this Section 10.4 against the Borrower, all Lenders shall be represented by the same legal counsel selected by such Lenders; provided, that if such legal counsel determines in good faith that representing all such Lenders would or could result in a conflict of interest under laws or ethical principles applicable to such legal counsel or that a claim is available to a Lender that is not available to all such Lenders, then to the extent reasonably necessary to avoid such a conflict of interest or to permit an unqualified assertion of such a claim, each Lender shall be entitled to separate representation by legal counsel selected by that Lender, with all such legal counsel using reasonable efforts to avoid unnecessary duplication of effort by counsel for all Lenders.

10.5    Borrower Indemnification. Whether or not the transactions contemplated hereby are consummated, the Borrower shall indemnify and hold the Agent-Related Persons, and each Lender and each of its respective officers, directors, employees, counsel, agents and attorneys-in-fact (each, an “Indemnified Person”) harmless from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, charges, expenses and disbursements (including Attorney Costs) of any kind or nature whatsoever which may at any time (including at any time following repayment of the Loans and the termination, resignation or replacement of the Agent or replacement of any Lender) be imposed on, incurred by or asserted against any such Person in any way relating to or arising out of this Agreement or any document contemplated by or referred to herein, or the transactions contemplated hereby, or any action taken or omitted by any such Person under or in connection with any of the foregoing, including with respect to any investigation, litigation or proceeding (including any Insolvency Proceeding or appellate proceeding) related to or arising out of this Agreement or the Loans or the use of the proceeds thereof, whether or not any Indemnified Person is a party thereto (all the foregoing, collectively, the “Indemnified Liabilities”); provided, that the Borrower shall have no obligation hereunder to any Indemnified Person with respect to Indemnified Liabilities resulting from the gross negligence or willful misconduct of such Indemnified Person. If any claim, demand, action or cause of action is asserted against any Indemnified Person, such Indemnified Person shall promptly notify Borrower, but the failure to so promptly notify Borrower shall not affect Borrower’s obligations under this Section unless such failure materially prejudices Borrower’s right to participate in the contest of such claim, demand, action or cause of action, as hereinafter provided. If requested by Borrower in writing, such Indemnified Person shall in good faith contest the validity, applicability and amount of such claim, demand, action or cause of action and shall permit Borrower to participate in such contest. Any Indemnified Person that proposes to settle or compromise any claim or proceeding for which Borrower may be liable for payment of indemnity hereunder shall give Borrower written notice of the terms of such proposed settlement or compromise reasonably in advance of settling or compromising such claim or proceeding and shall obtain Borrower’s prior consent. In connection with any claim, demand, action or cause of action covered by this Section 10.5 against more than one Indemnified Person, all such Indemnified Persons shall be represented by the same legal counsel selected by the Indemnified Persons and reasonably acceptable to Borrower; provided, that if such legal counsel

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determines in good faith that representing all such Indemnified Persons would or could result in a conflict of interest under laws or ethical principles applicable to such legal counsel or that a defense or counterclaim is available to an Indemnified Person that is not available to all such Indemnified Persons, then to the extent reasonably necessary to avoid such a conflict of interest or to permit unqualified assertion of such a defense or counterclaim, each Indemnified Person shall be entitled to separate representation by legal counsel selected by that Indemnified Person and reasonably acceptable to Borrower, with all such legal counsel using reasonable efforts to avoid unnecessary duplication of effort by counsel for all Indemnified Persons. The agreements in this Section shall survive payment of all other Obligations.

10.6    Payments Set Aside. To the extent that the Borrower makes a payment to the Agent or the Lenders, or the Agent or the Lenders exercise any right of set-off, and such payment or the proceeds of such set-off or any part thereof are subsequently invalidated, declared to be fraudulent or preferential, set aside or required (including pursuant to any settlement entered into by the Agent or such Lender in its discretion) to be repaid to a trustee, receiver or any other party, in connection with any Insolvency Proceeding or otherwise, then (a) to the extent of such recovery the obligation or part thereof originally intended to be satisfied shall be revived and continued in full force and effect as if such payment had not been made or such set-off had not occurred, and (b) each Lender severally agrees to pay to the Agent upon demand its pro rata share of any amount so recovered from or repaid by the Agent.

10.7    Successors and Assigns. The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, except that the Borrower may not assign or transfer any of its rights or obligations under this Agreement without the prior written consent of the Agent and each Lender.

10.8
Assignments, Participations Etc.

(a)    (i) Any Lender may, with the written consent of the Agent and the Borrower, which consent shall not be unreasonably withheld or delayed (except Borrower’s consent shall not be required if a Default or an Event of Default exists and is continuing), at any time assign and delegate to one or more Eligible Assignees (provided that no written consent of the Agent shall be required in connection with any assignment and delegation by a Lender to an Eligible Assignee that is an Affiliate of such Lender) (each an “Assignee”) all, or any ratable part of all, of the Loans, the Commitments, and the other rights and obligations of such Lender hereunder, in a minimum amount of $10,000,000; provided, however, that (x) the Borrower and, the Agent may continue to deal solely and directly with such Lender in connection with the interest so assigned to an Assignee until (A) written notice of such assignment, together with payment instructions, addresses and related information with respect to the Assignee, shall have been given to the Borrower and the Agent by such Lender and the Assignee; (B) such Lender and its Assignee shall have delivered to the Borrower and the Agent an Assignment and Acceptance in the form of Exhibit F (“Assignment and Acceptance”) together with any Note or Notes subject to such assignment; and (C) the assignor Lender or Assignee has paid to the Agent a processing fee in the amount of $3,500 and (y) no such assignment shall be made to any Defaulting Lender or any of its Subsidiaries, or any Person who, upon becoming a Lender hereunder, would constitute a Defaulting Lender.


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(ii) Certain Additional Payments. In connection with any assignment of rights and obligations of any Defaulting Lender hereunder, no such assignment shall be effective unless and until, in addition to the other conditions thereto set forth herein, the parties to the assignment shall make such additional payments to the Agent in an aggregate amount sufficient, upon distribution thereof as appropriate (which may be outright payment, purchases by the assignee of participations, or other compensating actions, including funding, with the consent of the Borrower and the Agent, the applicable pro rata share of Loans previously requested but not funded by the Defaulting Lender, to each of which the applicable assignee and assignor hereby irrevocably consent), to (x) pay and satisfy in full all payment liabilities then owed by such Defaulting Lender to the Agent, and each other Lender hereunder (and interest accrued thereon), and (y) acquire (and fund as appropriate) its full Pro Rata Share of all Loans in accordance with its Pro Rata Share. Notwithstanding the foregoing, in the event that any assignment of rights and obligations of any Defaulting Lender hereunder shall become effective under applicable law without compliance with the provisions of this paragraph, then the assignee of such interest shall be deemed to be a Defaulting Lender for all purposes of this Agreement until such compliance occurs.

(b)    From and after the date that the Agent notifies the assignor Lender and the Borrower that it has received (and the Borrower and the Agent have provided their consent with respect to) an executed Assignment and Acceptance and payment of the above- referenced processing fee, (i) the Assignee thereunder shall be a party hereto and, to the extent that rights and obligations hereunder have been assigned to it pursuant to such Assignment and Acceptance, shall have the rights and obligations of a Lender under the Loan Documents, and (ii) the assignor Lender shall, to the extent that rights and obligations hereunder and under the other Loan Documents have been assigned by it pursuant to such Assignment and Acceptance, relinquish its rights and be released from its obligations under the Loan Documents.

(c)    If requested by the Assignee and/or the Assignor, within five Business Days after its receipt of notice by the Agent that it has received an executed Assignment and Acceptance and payment of the processing fee (and provided that it consents to such assignment in accordance with subsection 10.8(a)), the Borrower shall execute and deliver to the Agent, new Notes evidencing such Assignee’s assigned Loans and Commitment and, if the assignor Lender has retained a portion of its Loans and its Commitment, replacement Notes in the principal amount of the Commitment retained by the assignor Lender (such Notes to be in exchange for, but not in payment of, any Notes held by such Lender). Immediately upon each Assignee’s making its processing fee payment under the Assignment and Acceptance, this Agreement shall be deemed to be amended to the extent, but only to the extent, necessary to reflect the addition of the Assignee and the resulting adjustment of the Commitments arising therefrom. The Commitment allocated to each Assignee shall reduce such Commitments of the assignor Lender pro tanto.

The Agent, acting solely for this purpose as a non-fiduciary agent of the Borrower, shall maintain at one of its offices in New Castle, Delaware a copy of each Assignment and Acceptance permitted by subparagraph (a) of this Section 10.8 and delivered to it and a register for the recordation of the names and addresses of the Lenders, and the

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Commitments of, and principal amounts (and stated interest) of the Loans owing to, each Lender pursuant to the terms hereof from time to time (the “Assignment Register”). The entries in the Assignment Register shall be conclusive absent manifest error, and the Borrower, the Agent and the Lenders shall treat each Person whose name is recorded in the Assignment Register pursuant to the terms hereof as a Lender hereunder for all purposes of this Agreement. The Assignment Register shall be available for inspection by the Borrower and any Lender, at any reasonable time and from time to time upon reasonable prior notice.

(d)    Any Lender may at any time sell to one or more commercial banks or other Persons not Affiliates of the Borrower (a “Participant”) participating interests in any Loans, the Commitment of that Lender and the other interests of that Lender (the “originating Lender”) hereunder and under the other Loan Documents; provided, however, that (i) the originating Lender’s obligations under this Agreement shall remain unchanged, (ii) the originating Lender shall remain solely responsible for the performance of such obligations, (iii) the Borrower, and the Agent shall continue to deal solely and directly with the originating Lender in connection with the originating Lender’s rights and obligations under this Agreement and the other Loan Documents, and (iv) no Lender shall transfer or grant any participating interest under which the Participant has rights to approve any amendment to, or any consent or waiver with respect to, this Agreement or any other Loan Document. Any Lender that sells a participation to any Person that is a “foreign corporation, partnership or trust” within the meaning of the Code shall include in its participation agreement with such Person a covenant by such Person that such Person will comply with the provisions of Section 9.10 as if such Person were a Lender and provide that the Agent and the Borrower shall be third party beneficiaries of such covenant.

(e)    Notwithstanding any other provision in this Agreement, any Lender may at any time create a security interest in, or pledge, all or any portion of its rights under and interest in this Agreement and any Note held by it in favor of any Federal Reserve Bank in accordance with Regulation A of the FRB or U.S. Treasury Regulation 31 CFR §203.14, and such Federal Reserve Bank may enforce such pledge or security interest in any manner permitted under applicable law.

(f)    Any Lender (a “Granting Lender”) may, with notice to the Agent, grant to a special purpose funding vehicle (an “SPC”) the option to fund all or any part of any Loan that such Granting Lender would otherwise be obligated to fund pursuant to this Agreement. The funding of a Loan by an SPC hereunder shall utilize the Revolving Credit Commitment of the Granting Lender to the same extent, and as if, such Loan were funded by such Granting Lender. Each party hereto hereby agrees that no SPC shall be liable for any indemnity or payment under this Agreement for which a Lender would otherwise be liable for so long as, and to the extent, the Granting Lender provides such indemnity or makes such payment. Notwithstanding anything to the contrary contained in the foregoing or anywhere else in this Agreement, (i) nothing herein shall constitute a commitment by any SPC to fund any Loan, (ii) if an SPC elects not to exercise such option or otherwise fails to fund all or any part of such Loan, the Granting Lender shall be obligated to fund such Loan pursuant to the terms hereof, and (iii) the Borrower and Agent shall continue to deal exclusively with the Granting Lender and any funding by an SPC hereunder shall not constitute an assignment, assumption or participation of

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any rights or obligations of the Granting Lender. Any SPC may disclose on a confidential basis any non-public information relating to its funding of Loans to any rating agency, commercial paper dealer or provider of any surety or guarantee to such SPC, provided, as a condition precedent to such disclosure, (A) such agency, dealer or provider has delivered to such Granting Lender for the benefit of Borrower a written confidentiality agreement substantially similar to Section 10.9, and (B) simultaneous with or prior to such disclosure, such Granting Lender has given written notice to Borrower of the agency, dealer or provider to which such disclosure is being made and the contents of such disclosure. This Section may not be amended without the prior written consent of each Granting Lender, all or any part of whose Loan is being funded by an SPC at the time of such amendment.

10.9    Confidentiality. Each Lender agrees to hold any confidential information that it may receive from Borrower or from the Agent on such Borrower’s behalf, pursuant to this Agreement in confidence, except for disclosure: (a) to legal counsel and accountants for Borrower or any Lender; (b) to other professional advisors to Borrower or any Lender, provided that the recipient has delivered to such Lender a written confidentiality agreement substantially similar to this Section 10.9; (c) to regulatory officials having jurisdiction over any Lender; (d) as required by applicable law or legal process or in connection with any legal proceeding in which any Lender and Borrower are adverse parties; (e) to Affiliates or agents of such Lender to the extent the Affiliate or agent is involved in the administration of the credit facilities extended to Borrower and its Subsidiaries hereunder, provided, however, that (i) as to any such Affiliate, such Affiliate has delivered to such Lender a written confidentiality agreement substantially similar to this Section 10.9, and (ii) as to any such agent, such agent has been informed by such Lender of the confidential nature of such confidential information and has been instructed by such Lender to maintain the confidentiality of such confidential information; and (f) to another financial institution in connection with a disposition or proposed disposition to that financial institution of all or part of any Lender’s interests hereunder or a participation interest in the Revolving Loans and/or the Term Loans, each in accordance with Section 10.8 hereof, provided that the recipient has delivered to such Lender a written confidentiality agreement substantially similar to this Section 10.9. Each Lender further agrees that it will not use such confidential information in any activity or for any purpose other than the administration of credit facilities extended to Borrower and its Subsidiaries and, without limitation, will take such steps as are reasonably appropriate to preclude access to any such confidential information to be obtained by any Person employed by any Lender, or by an affiliate of any Lender, who is not involved in the administration of credit facilities extended to Borrower and its Subsidiaries. For purposes of the foregoing, “confidential information” shall mean any information respecting Borrower or its Subsidiaries reasonably specified by Borrower as confidential, other than (i) information filed with any governmental agency and available to the public, and (ii) information disclosed by Borrower to any Person not associated with Borrower without a written confidentiality agreement substantially similar to this Section 10.9. Certain of the confidential information pursuant to this Agreement is or may be valuable proprietary information that constitutes a trade secret of Borrower or its Subsidiaries; neither the provision of such confidential information to any Lender or the limited disclosures thereof permitted by this Section 10.9 shall affect the status of any such confidential information as a trade secret of Borrower and its Subsidiaries. Each Lender, and each other Person who agrees to be bound by this Section 10.9, acknowledges that any breach of the agreements contained in this Section 10.9 would result in losses that could not

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be reasonably or adequately compensated by money damages. Accordingly, if any Lender or any other person breaches its obligations hereunder, such Lender or such other Person recognizes and consents to the right of Borrower, Intermediate Parent, and/or Broker Subsidiary to seek injunctive relief to compel such Lender or other Person to abide by the terms of this Section 10.9.

The Agent agrees to provide to the Borrower, upon the Borrower’s request, each interest rate that is furnished by any Reference Bank to the Agent pursuant to Section 2.14(b) (each, a “Reference Bank Rate”), which information is to be treated by the Borrower as confidential except (i) the Borrower may disclose any actual interest rate payable under this Agreement, and (ii) the Borrower may disclose any Reference Bank Rate (a) to legal counsel and accountants for Borrower; (b) to other professional advisors to Borrower, provided that the recipient has delivered to the Borrower a written confidentiality agreement substantially similar to this Section 10.9; (c) to regulatory officials having jurisdiction over the Borrower; (d) as required by applicable law, legal process, the New York Stock Exchange or any similar self- regulatory exchange of which Borrower is a member, or in connection with any legal proceeding in which any Lender and Borrower are adverse parties; (e) to Affiliates or agents of the Borrower to the extent the Affiliate or agent is involved in the administration of the credit facilities extended to the Borrower and its Subsidiaries hereunder, provided, however, that (i) as to any such Affiliate, such Affiliate has delivered to the Borrower a written confidentiality agreement substantially similar to this Section 10.9, and (ii) as to any such agent, such agent has been informed by the Borrower of the confidential nature of such confidential information and has been instructed by the Borrower to maintain the confidentiality of such Reference Bank Rate. The Borrower further agrees that it will not use such confidential information in any activity or for any purpose other than the administration of this Agreement and, without limitation, will take such steps as are reasonably appropriate to preclude access to any such confidential information to be obtained by any Person employed by the Borrower, or by an affiliate of the Borrower, who is not involved in the administration of this Agreement.

10.10    Notification of Addresses, Lending Offices, Etc. Each Lender shall notify the Agent in writing of any changes in the address to which notices to the Lender should be directed, of addresses of any Lending Office, of payment instructions in respect of all payments to be made to it hereunder and of such other administrative information as the Agent shall reasonably request.

10.11    Counterparts. This Agreement may be executed in any number of separate counterparts, each of which, when so executed, shall be deemed an original, and all of said counterparts taken together shall be deemed to constitute but one and the same instrument. Delivery of an executed counterpart of a signature page to this Agreement by telecopier, email or other electronic transmission shall be effective as delivery of a manually executed counterpart of this Agreement.

10.12    Severability. The illegality or unenforceability of any provision of this Agreement or any instrument or agreement required hereunder shall not in any way affect or impair the legality or enforceability of the remaining provisions of this Agreement or any instrument or agreement required hereunder.


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10.13    No Third Parties Benefited. This Agreement is made and entered into for the sole protection and legal benefit of the Borrower, the Lenders, the Agent and the Arrangers, and their permitted successors and assigns, and no other Person shall be a direct or indirect legal beneficiary of, or have any direct or indirect cause of action or claim in connection with, this Agreement or any of the other Loan Documents.

10.14
Governing Law and Jurisdiction.

(a)    THIS AGREEMENT AND THE NOTES SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAW OF THE STATE OF CALIFORNIA; PROVIDED THAT THE AGENT AND THE LENDERS SHALL RETAIN ALL RIGHTS ARISING UNDER FEDERAL LAW.

(b)    EACH PARTY HERETO IRREVOCABLY AND UNCONDITIONALLY AGREES THAT IT WILL NOT COMMENCE ANY ACTION, LITIGATION OR PROCEEDING OF ANY KIND OR DESCRIPTION, WHETHER IN LAW OR EQUITY, WHETHER IN CONTRACT OR IN TORT OR OTHERWISE, AGAINST ANY OTHER PARTY HERETO OR ANY AGENT-RELATED PARTY IN ANY WAY RELATING TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT OR THE TRANSACTIONS RELATING HERETO OR THERETO, IN ANY FORUM OTHER THAN THE COURTS OF THE STATE OF CALIFORNIA THE COURTS OF THE STATE OF NEW YORK SITTING IN NEW YORK COUNTY, AND OF THE UNITED STATES DISTRICT COURT OF THE NORTHERN DISTRICT OF CALIFORNIA OR THE SOUTHERN DISTRICT OF NEW YORK, AND ANY APPELLATE COURT FROM ANY THEREOF, AND EACH OF THE PARTIES HERETO IRREVOCABLY AND UNCONDITIONALLY SUBMITS TO THE JURISDICTION OF SUCH COURTS AND AGREES THAT ALL CLAIMS IN RESPECT OF ANY SUCH ACTION, LITIGATION OR PROCEEDING MAY BE HEARD AND DETERMINED IN SUCH CALIFORNIA OR NEW YORK STATE COURT OR, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, IN SUCH FEDERAL COURT. EACH OF THE BORROWER, THE AGENT AND THE LENDERS IRREVOCABLY WAIVES ANY OBJECTION, INCLUDING ANY OBJECTION TO THE LAYING OF VENUE OR BASED ON THE GROUNDS OF FORUM NON CONVENIENS, WHICH IT MAY NOW OR HEREAFTER HAVE TO THE BRINGING OF ANY ACTION OR PROCEEDING IN SUCH JURISDICTION IN RESPECT OF THIS AGREEMENT OR ANY DOCUMENT RELATED HERETO.

10.15
Waiver of Jury Trial.

(a)    TO THE FULL EXTENT PERMITTED BY LAW, THE BORROWER, THE LENDERS AND THE AGENT EACH WAIVE THEIR RESPECTIVE RIGHTS TO A TRIAL BY JURY OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF OR RELATED TO THIS AGREEMENT, THE OTHER LOAN DOCUMENTS, OR THE TRANSACTION CONTEMPLATED HEREBY OR THEREBY, IN ANY ACTION, PROCEEDING OR OTHER LITIGATION OF ANY TYPE BROUGHT BY ANY OF THE PARTIES AGAINST ANY OTHER PARTY OR ANY AGENT-RELATED PERSON, PARTICIPANT OR ASSIGNEE, WHETHER WITH RESPECT TO CONTRACT

55




CLAIMS, TORT CLAIMS, OR OTHERWISE. TO THE FULL EXTENT PERMITTED BY LAW, THE BORROWER, THE LENDERS AND THE AGENT EACH AGREE THAT ANY SUCH CLAIM OR CAUSE OF ACTION SHALL BE TRIED BY A COURT TRIAL WITHOUT A JURY. WITHOUT LIMITING THE FOREGOING, THE PARTIES FURTHER AGREE THAT THEIR RESPECTIVE RIGHT TO A TRIAL BY JURY IS WAIVED BY OPERATION OF THIS SECTION AS TO ANY ACTION, COUNTERCLAIM OR OTHER PROCEEDING WHICH SEEKS, IN WHOLE OR IN PART, TO CHALLENGE THE VALIDITY OR ENFORCEABILITY OF THIS AGREEMENT OR THE OTHER LOAN DOCUMENTS OR ANY PROVISION HEREOF OR THEREOF. THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS.

(b)    WITHOUT INTENDING IN ANY WAY TO LIMIT THE PARTIES’ AGREEMENT IMMEDIATELY ABOVE TO WAIVE THEIR RESPECTIVE RIGHT TO A TRIAL BY JURY, if such waiver of the right to a trial by jury is not enforceable, the parties hereto agree that any and all disputes or controversies of any nature between the Borrower, on the one hand, and any one or more of the other parties to this Agreement, on the other, arising out of this Agreement at any time shall be decided by a reference to a private judge, mutually selected by the parties to such dispute (or, if they cannot agree, by the Presiding Judge of the California Superior Court in and for the County of San Francisco) appointed in accordance with California Code of Civil Procedure Section 638 (or pursuant to comparable provisions of federal law if the dispute falls within the exclusive jurisdiction of the federal courts), sitting without a jury, in San Francisco County, California; and the parties hereby submit to the jurisdiction of such court. The reference proceedings shall be conducted pursuant to and in accordance with the provisions of California Code of Civil Procedure §§ 638 through 645.1, inclusive. The private judge shall have the power, among others, to grant provisional relief, including without limitation, entering temporary restraining orders, issuing preliminary and permanent injunctions and appointing receivers. All such proceedings shall be closed to the public and confidential, and all records relating thereto shall be permanently sealed. If during the course of any dispute, a party desires to seek provisional relief, but a judge has not been appointed at that point pursuant to the judicial reference procedures, then such party may apply to the California Superior Court in and for the County of San Francisco for such relief. The proceeding before the private judge shall be conducted in the same manner as it would be before a court under the rules of evidence applicable to judicial proceedings. The parties shall be entitled to discovery which shall be conducted in the same manner as it would be before a court under the rules of discovery applicable to judicial proceedings. The private judge shall oversee discovery and may enforce all discovery rules and orders applicable to judicial proceedings in the same manner as a trial court judge. The parties agree that the selected or appointed private judge shall have the power to decide all issues in the action or proceeding, whether of fact or of law, and shall report a statement of decision thereon pursuant to the California Code of Civil Procedure § 644(a). Nothing in this paragraph shall limit the right of any party at any time to exercise self-help remedies, foreclose against collateral (if any), or obtain provisional remedies. The private judge shall also determine all issues relating to the applicability, interpretation, and enforceability of this paragraph.


56




10.16     Entire Agreement. This Agreement, together with the other Loan Documents, embodies the entire agreement and understanding among the Borrower, the Lenders and the Agent, and supersedes all prior or contemporaneous agreements and understandings of such Persons, verbal or written, relating to the subject matter hereof and thereof.

10.17     Headings. Articles and Section headings in this Agreement are included herein for the convenience of reference only.

10.18     USA Patriot Act. Each Lender hereby notifies the Borrower that pursuant to the requirements of the USA Patriot Act (Title III of Pub. L. 107-56 (signed into law October 26, 2001)) (the “Act”), it is required to obtain, verify and record information that identifies each borrower, guarantor or grantor (the “Loan Parties”), which information includes the name and address of each Loan Party and other information that will allow such Lender to identify such Loan Party in accordance with the Act.

10.19     Acknowledgement and Consent to Bail-In of Affected Financial Institutions. Notwithstanding anything to the contrary in any Loan Document or in any other agreement, arrangement or understanding among any such parties, each party hereto acknowledges that any liability of any Affected Financial Institution arising under any Loan Document, to the extent such liability is unsecured, may be subject to the Write-Down and Conversion Powers of the applicable Resolution Authority and agrees and consents to, and acknowledges and agrees to be bound by:

(a)     the application of any Write-Down and Conversion Powers by the applicable Resolution Authority to any such liabilities arising hereunder which may be payable to it by any party hereto that is an Affected Financial Institution; and

(b)    the effects of any Bail-In Action on any such liability, including, if
applicable:

(i)    a reduction in full or in part or cancellation of any such
liability;

(ii)    a conversion of all, or a portion of, such liability into shares or other instruments of ownership in such Affected Financial Institution, its parent undertaking, or a bridge institution that may be issued to it or otherwise conferred on it, and that such shares or other instruments of ownership will be accepted by it in lieu of any rights with respect to any such liability under this Agreement or any other Loan Document; or

(iii)    the variation of the terms of such liability in connection with the exercise of the Write-Down and Conversion Powers of the applicable Resolution Authority.

The following terms have the following meanings:

Affected Financial


57




Institution:
(a) any EEA Financial Institution or (b) any UK Financial Institution.

Bail-In Action:
The exercise of any Write-Down and Conversion Powers by the applicable Resolution Authority in respect of any liability of an Affected Financial Institution.

Bail-In Legislation:
(a) With respect to any EEA Member Country implementing Article 55 of Directive 2014/59/EU of the European Parliament and of the Council of the European Union, the implementing law, regulation rule or requirement for such EEA Member Country from time to time which is described in the EU Bail-In Legislation Schedule and (b) with respect to the United Kingdom, Part I of the United Kingdom Banking Act 2009 (as amended from time to time) and any other law, regulation or rule applicable in the United Kingdom relating to the resolution of unsound or failing banks, investment firms or other financial institutions or their affiliates (other than through liquidation, administration or other insolvency proceedings).


EEA Financial
Institution:
(a) Any credit institution or investment firm established in any EEA Member Country which is subject to the supervision of an EEA Resolution Authority, (b) any entity established in an EEA Member Country which is a parent of an institution described in clause (a) of this definition, or (c) any financial institution established in an EEA Member Country which is a subsidiary of an institution described in clauses (a) or (b) of this definition and is subject to consolidated supervision with its parent.

EEA Member
Country:
Any of the member states of the European Union, Iceland, Liechtenstein, and Norway.

EEA Resolution
Authority:
Any public administrative authority or any Person entrusted with public administrative authority of any EEA Member Country (including any delegee) having responsibility for the resolution of any EEA Financial Institution.

EU Bail-In Legislation
Schedule:
The EU Bail-In Legislation Schedule published by the Loan Market Association (or any successor Person), as in effect from time to time.

Loan Market

58




Association:
The London trade association, which is the self-described authoritative voice of the syndicated loan markets in Europe, the Middle East and Africa.

Resolution
Authority:
An EEA Resolution Authority or, with respect to any UK Financial Institution, a UK Resolution Authority.

UK Financial
Institution:
Any BRRD Undertaking (as such term is defined under the PRA Rulebook (as amended form time to time) promulgated by the United Kingdom Prudential Regulation Authority) or any Person falling within IFPRU 11.6 of the FCA Handbook (as amended from time to time) promulgated by the United Kingdom Financial Conduct Authority, which includes certain credit institutions and investment firms, and certain affiliates of such credit institutions or investment firms.

UK Resolution
Authority
The Bank of England or any other public administrative authority having responsibility for the resolution of any UK Financial Institution.

Write-Down and
Conversion Powers:
(a) With respect to any EEA Resolution Authority, the write-down and conversion powers of such EEA Resolution Authority from time to time under the Bail-In Legislation for the applicable EEA Member Country, which write-down and conversion powers are described in the EU Bail-In Legislation Schedule, and (b) with respect to the United Kingdom, any powers of the applicable Resolution Authority under the Bail-In Legislation to cancel, reduce, modify or change the form of a liability of any UK Financial Institution or any contract or instrument under which that liability arises, to convert all or part of that liability into shares, securities or obligations of that Person or any other Person, to provide that any such contract or instrument is to have effect as if a right had been exercised under it or to suspend any obligation in respect of that liability or any of the powers under that Bail-In Legislation that are related to or ancillary to any of those powers.


(SIGNATURE PAGE FOLLOWS)
            






59



IN WITNESS WHEREOF, the parties hereto have executed this Agreement by their duly authorized officers as of the date first above written.

    
Borrower:
 
 
THE CHARLES SCHWAB CORPORATION
 
 
By:
/s/ William F. Quinn
Name:
William F. Quinn
Title:
Senior Vice President and Treasurer



Lenders:
 
 
CITIBANK, N.A., as Agent and
individually as Lender
 
 
By:
/s/ Maureen Maroney
Name:
Maureen Maroney
Title:
Vice President
 
 
JPMORGAN CHASE BANK, N.A.
 
 
By:
/s/ Victoria Teterceva
Name:
Victoria Teterceva
Title:
Vice President
 
 
BANK OF AMERICA, N.A.
 
 
By:
/s/ Maryanne Fitzmaurice
Name:
Maryanne Fitzmaurice
Title:
Director
 
 
CREDIT SUISSE AG, CAYMAN ISLANDS BRANCH
 
 
By:
/s/ Doreen Barr
Name:
Doreen Barr
Title:
Authorized Signatory
 
 
By:
/s/ Komal Shah
Name:
Komal Shah
Title:
Authorized Signatory
 
 
THE BANK OF NEW YORK MELLON
 
 
By:
/s/ Amanda Stone
Name:
Amanda Stone
Title:
Vice President



WELLS FARGO BANK, NATIONAL ASSOCIATION
 
 
By:
/s/ James Mastroianna
Name:
James Mastroianna
Title:
Director
 
 
GOLDMAN SACHS BANK USA
 
 
By:
/s/ Ryan Durkin
Name:
Ryan Durkin
Title:
Authorized Signatory
 
 
HSBC BANK USA, NATIONAL ASSOCIATION
 
 
By:
/s/ Johann Matthai
Name:
Johann Matthai
Title:
Director
 
 
MORGAN STANLEY BANK, N.A.
 
 
By:
/s/ Alysha Salinger
Name:
Alysha Salinger
Title:
Authorized Signatory
 
 
STATE STREET BANK AND TRUST COMPANY
 
 
By:
/s/ Pallo Blum-Tucker
Name:
Pallo Blum-Tucker
Title:
Managing Director
 
 
U.S. BANK NATIONAL ASSOCIATION
 
 
By:
/s/ Mark R. Cousineau
Name:
Mark R. Cousineau
Title:
Senior Vice President




Schedule 1
 
LENDERS’ COMMITMENTS
 
 
The Charles Schwab Corporation $700,000,000 Credit Agreement (364-Day Commitment) dated
as of May 29, 2020.
 
 
 
 
 
 
Lender Commitment Amount
1. Citibank, N.A.
1.
$77,500,000
2. JPMorgan Chase Bank, N.A.
2.
$77,500,000
3. Bank of America, N.A.
3.
$67,500,000
4. Credit Suisse AG, Cayman Islands Branch
4.
$67,500,000
5. The Bank of New York Mellon
5.
$67,500,000
6. Wells Fargo Bank, National Association
6.
$67,500,000
7. Goldman Sachs Bank USA
7.
$55,000,000
8. HSBC Bank USA, National Association
8.
$55,000,000
9. Morgan Stanley Bank, N.A.
9.
$55,000,000
10. State Street Bank and Trust Company
10.
$55,000,000
11. U.S. Bank National Association
11.
$55,000,000
 
 
 
 
 
 
Total
 
$700,000,000




Schedule 2

LIST OF BORROWING AGREEMENTS

1.     $750,000,000 Credit Agreement (364-Day Commitment) dated as of May 31, 2019 among the Borrower, the lenders party thereto, and Citibank, N.A., as administrative agent for such lenders.
 




Schedule 6.2
COMPLIANCE CERTIFICATE

I,________________, certify that I am the ____________________________ of The Charles Schwab Corporation (the “Borrower”), and that as such I am authorized to execute this Compliance Certificate on behalf of the Borrower, and do hereby further certify on behalf of the Borrower that:

1.    I have reviewed the terms of that certain Credit Agreement (364-Day Commitment) dated as of May 29, 2020 among the Borrower, the financial institutions named therein (the “Lenders”) and Citibank, N.A., as Agent for the Lenders (the “Credit Agreement”), and I have made, or have caused to be made by employees or agents under my supervision, a detailed review of the transactions and conditions of the Borrower during the accounting period covered by the financial statements dated_______________, 20___ that are deemed delivered to the Agent pursuant to Section 6.2 of the Credit Agreement.

2.    The examination described in paragraph 1 did not disclose, and I have no knowledge of the existence of any condition or event which constitutes a Default or Event of Default during or at the end of the accounting period covered by the attached financial statements or as of the date of this Compliance Certificate, except as set forth below.

3.    Schedule I attached hereto sets forth financial data and computations evidencing compliance with the covenants set forth in Sections 7.1 and 7.2 of the Credit Agreement, all of which data and computations are true, complete and correct. Capitalized terms not otherwise defined herein are defined in the Credit Agreement.

4.    Described below are the exceptions, if any, to paragraph 2 by listing, in detail, the nature of the condition or event, the period during which it has existed and the action which the Borrower has taken, is taking, or proposes to take with respect to each such condition or event.

The foregoing certifications, together with the computations set forth in Schedule I hereto are made and delivered this ____day of_____________20___.


By:
 
Name:
 
Title:
 

 




The Charles Schwab Corporation

Credit Agreement (364-Day Commitment)
Dated as of May 29, 2020

Schedule I
to
Compliance Certificate
(Dollars in Thousands)

1.    Net Capital Ratio of the Broker Subsidiary.

Requirement: Broker Subsidiary - month-end ratio not less than 5%.


Net Capital Ratio for Broker Subsidiary

Month                Month-end Ratio







2.    Minimum Stockholders’ Equity of Borrower.

Requirement: As of     , 20     , required Minimum Stockholders’ Equity is
the greater of (a) $15,200,000,000 or (b) $15,200,000,000 plus 50% of the sum of cumulative Net Earnings for each fiscal quarter commencing with the fiscal quarter ended June 30, 2020.
    




Schedule 10.2

NOTICES

If to the Borrower:
 
 
 
If by U.S. mail:
The Charles Schwab Corporation
 
Treasury Department
 
Attn: William F. Quinn or Successor
 
211 Main Street (Mail Stop SF211MN-03-309)
 
San Francisco, CA 94105
 
 
If by hand delivery
 
(including courier
 
and overnight
 
messenger service):
The Charles Schwab Corporation
 
Treasury Department
 
Attn: William F. Quinn or Successor
 
211 Main Street, 3rd Floor
 
San Francisco, CA 94105
 
 
Telephone:
(415) 667-7337
Facsimile:
(415) 667-8565

If to the Agent:

See information under Citibank, N.A. in table below pertaining to Lenders.

If to the Lenders:

Credit Contact
Operations Contact
Lending Office
Payment Instructions
Bank of America, N.A.
One Bryant Park, 18th Floor
New York, NY 10036
Attention: Maryanne Fitzmaurice
                  Director
(646) 556-0343
Fax: 704 683-9184
Bank of America, N.A.
901 S. Main St.
Dallas, TX 75202
Attention: Tammi Reddy
(415) 436-3685 ext. 65843
Fax: (312) 453-5129

Bank of America, N.A.
2001 Clayton Road
Concord, California 94520
Bank of America, N.A.
ABA #: 026009593
Charlotte, NC
Acct #: 4426457864
Attention: Bilateral Clearing Account
Ref: Charles Schwab Corporation
The Bank of New York Mellon
BNY Mellon Center
500 Grant Street
Pittsburgh, PA 15258
Attention: Amanda Rae Stone
                   Vice President
(412) 234-1105
Fax: (412) 234-6112

The Bank of New York Mellon
6023 Airport Road
Oriskany, NY 13424
Attention: Mikila Richards
(315) 765-4783
Fax: (315) 765-4783

The Bank of New York
Mellon
240 Greenwich Street
New York, NY 10286

The Bank of New York
ABA #: 021-000-018
Acct #: GLA111-231
Acct name: Broker Services
Ref: Charles Schwab Corporation



Credit Contact
Operations Contact
Lending Office
Payment Instructions
Citibank, N.A.
388 Greenwich Street
New York, NY 10013
Attention: Dane Graham
                 Director
(212) 816-8219
Fax: (212) 816-1212

Citibank, N.A.
1615 Brett Road, Bldg #3
New Castle, DE 19720
Attention: Investor Relations (302) 894-6010
Fax: (212) 994-0961
Citibank, N.A.
399 Park Avenue
New York, NY 10043

Citibank NA
ABA #: 021-000-089
New York, NY
Acct #: 36852248
Acct Name: Agency/Medium Term Finance
Ref: The Charles Schwab
Corporation
Credit Suisse AG, Cayman
Islands Branch
Eleven Madison Avenue
New York, NY 10010
Attention: Doreen Barr /
                 Michael Del Genio
Phone: (212) 325-9914 /
                  (212) 325-7688
Fax: (212) 325-8615 /

Credit Suisse AG, Cayman
Islands Branch
7033 Louis Stephens Drive
PO Box 110047
Research Triangle Park, NC 27709
Attention: Fay Rollins
                  Loan Closers /
                  Tedrick Kelly
                  Administrator
Phone: (212) 325-9041 /
                  (919) 994-6087
Fax: (866) 469-3871
Credit Suisse AG, Cayman Islands Branch
Eleven Madison Avenue
New York, NY 10010
Credit Suisse
Bank Name: The Bank of New York
ABA #: 021-000-018
New York, NY
Acct #: 890-0492-627
Acct Name: CS Agency Cayman
Ref: The Charles Schwab Corporation
Goldman Sachs Bank USA
Michelle Latzoni
c/o Goldman, Sachs & Co.
30 Hudson Street, 5th Floor
Jersey City, NJ 07302
Email: gsd.link@gs.com
Tel: (212)934-3921
Goldman Sachs Bank USA
c/o Goldman, Sachs & Co.
30 Hudson Street, 5th Floor
Jersey City, NJ 07302
gs-sbd-admin-contacts@ny.email.gs.com
Tel: (212)902-1099
Fax: (917)977-3966
Goldman Sachs Bank USA
200 West Street
New York, NY 10282
Goldman Sachs Bank USA
Swift Code: CITIUS33
Aba: 021000089
Bank Name: Citibank N.A.
City: New York
A/C #: 30627664
Entity Name: Goldman Sachs Bank USA
HSBC Bank USA, National Association
452 Fifth Avenue
New York, NY 10018
Attention: Jeffrey Roth /
                 Stephen J. Contino
Phone: (212) 525-4341 /
                 (212) 525- 7054

HSBC Bank USA, New York
452 Fifth Avenue
New York, NY 10018
Attention: CTLA Lan Admin
Phone: (212) 525-1529 /
Fax: (847) 793- 3415

HSBC Bank USA, National Association
452 fifth Avenue
New York, NY 10018
HSBC Bank USA, National Association
ABA #: 021-000-1088
Acct #: 713011777
Acct Name: NY Loan Agency
Attn: CTLA Laon Admin
Ref: The Charles Schwab Corporation
JPMorgan Chase Bank, N.A.
383 Madison Avenue, Floor 23
New York, NY 10179
Attention: Victoria Teterceva,
Vice President
Phone: (212) 270-2372

JPMorgan Chase Bank, N.A.
JPM-Bangalore Loan Operations
Prestige Tech Park, Floor 4
Sarjapur outer Ring Rd, Vathur Hobli
Bangalore, India 560 087
Phone: 91 80 67905014
ext 35014
Fax: (201) 244-3885

JPMorgan Chase Bank, N.A.
500 Stanton Christiana Road, Ops 2, Floor 3
Newark, DE 19713-2107

JPMorgan Chase Bank, N.A.
New York, NY
ABA #: 021000021
Acct #: 9008113381H2832
Acct Name: LS2 Incoming Account
Attn: Loan & Agency
Ref: Charles Schwab
Morgan Stanley Bank, N.A.
750 Seventh Avenue
New York, NY 10019
Attention: Joan Cho
(212) 762-1190
Morgan Stanley Loan Servicing
1300 Thames Street Wharf, 4th Floor
Baltimore, MD 21231
443-627-4355
Fax: 718-233-2140

Morgan Stanley Bank, N.A.
One Utah Center
201 South Main Street, 5th Floor
Salt Lake, City, UT 84111
MS BANK NA USD
Citibank, N.A.
New York, NY 10043
ABA #: 021-000-089
Acct #: 3044-0947
Acct Name: Morgan Stanley Bank, N.A.
Ref: The Charles Schwab
Corporation
Attn: Morgan Stanley Loan Servicing
 
 
 
 

2


Credit Contact
Operations Contact
Lending Office
Payment Instructions
State Street Bank and Trust Company
One Lincoln Street SFC0310
Boston, MA 02211
Attention: Timothy Cronin /
                  Kimberly Costa
 (617) 664-1530 / (617) 662-86288
State Street Bank and Trust Company
One Lincoln Street SFC0310
Boston, MA 02211
Attention: Peter Connolly
(617) 662-8588
Fax: (617) 988-6677
State Street Bank and Trust Company
One Lincoln Street SFC0310
Boston, MA 02211
State Street Bank and Trust Company, Boston, MA
ABA#: 011-000-028
Acct #: 0006-332-1
Acct. Name: IS Loan Operations / LSU Internal
Ref: The Charles Schwab Corporation
Attn: Peter Connolly, ext 617-662-8588
U.S. Bank National Association
461 Fifth Avenue, 7th Floor
New York, NY 10017-6234
Attention: Angela (Zhanglan) Cheng, Portfolio Manager
(917) 326-3101
Angela.cheng@usbank.com
U.S. Bank National Association
400 City Center
Oshkosh, WI 54901
CLS Syndication Services Team – East
(920) 237-7601
Fax: (920) 237-7993
U.S. Bank National Association
800 Nicollet Mall
Minneapolis, MN 55402

U.S. Bank National Association
ABA#: 091000022
Acct. #: 0068542160600
Account Name: CLS Syndication Services GL Acct.
Ref.: Charles Schwab Corporation (Type of pymt)
Attn: CLS Syndication Team
Wells Fargo Bank,
National Association
301 S. College Street, 11th Floor MAC D1053-115
Charlotte, NC 28202
Attention: James Mastroianna
                 Vice President
                 Portfolio Manager
                 Financial Institutions
                 Group
(612)-67-8120
james.a.mastroianna@wellsfarg
o.com
Wells Fargo Bank,
National Association
1700 Lincoln Street, 5th Floor
MAC C7300-059
Denver, CO 80203-4500
Attention: Dorothy Cardenas
                  Loan Servicing Spec.
(303) 863-5917
Fax: (303) 863-2729

Wells Fargo Bank,
National Association
90 South 7th Street, 7th Floor
MAC N9305-075
Minneapolis, MN 55402-3903

Wells Fargo Bank,
National Association
ABA #: 121000248
Acct #: 00029694050720
Account Name: WLS Denver
Attn: Dorothy Cardenas
Ref: Charles Schwab



3


EXHIBIT A-1

REVOLVING NOTE


$________(Amount of Commitment)                        Date: May 29, 2020
For Value Received, The Charles Schwab Corporation (“Schwab”) hereby promises to pay to the order of_________________(the “Lender”) to Citibank, N.A., as Agent, at Agent’s office located at 388 Greenwich Street, New York, New York 10013, for the account of the applicable Lending Office of the Lender, the principal amount of ____________________     ($___________    ) or the aggregate amount of all Revolving Loans made to Schwab by the Lender, whichever is less, on May 28, 2021. The undersigned also promises to pay interest on the unpaid principal amount of each Borrowing from the date of such Borrowing until such principal amount is paid, at the rates per annum, and payable at such times, as are specified in the Credit Agreement. This Note shall be subject to the terms of the Credit Agreement, and all principal and interest payable hereunder shall be due and payable in accordance with the terms of the Credit Agreement.

Schwab hereby authorizes the Lender to endorse on the Schedule attached to this Note the amount and Type of Revolving Loans made to Schwab by the Lender and all renewals, conversions, and payments of principal amounts in respect of such Revolving Loans, which endorsements shall, in the absence of manifest error, be conclusive as to the outstanding principal amount of all such Revolving Loans, provided, however, that the failure to make such notation with respect to any Revolving Loans or payments shall not limit or otherwise affect the obligation of Schwab under the Credit Agreement or this Note.

This Note is the Revolving Note referred to in the Credit Agreement (364-Day Commitment), dated as of May 29, 2020 among Schwab, the Lender, certain other Lenders party thereto, and Citibank, N.A., as Agent for the Lenders (the “Credit Agreement”). Terms defined in the Credit Agreement are used herein with the same meanings. The Credit Agreement, among other things, contains provisions for acceleration of the maturity of this Note, upon the happening of certain stated events and also for prepayments on account of the principal of this Note prior to the maturity of this Note upon the terms and conditions specified in the Credit Agreement.

Principal and interest payments shall be in money of the United States of America, lawful at such times for the satisfaction of public and private debts, and shall be in immediately available funds.

Schwab promises to pay the costs of collection, including reasonable attorney’s fees, if default is made in the payment of this Note.

The terms and provisions of this Note shall be governed by the applicable laws of the State of California.



IN WITNESS WHEREOF, the undersigned has caused this Note to be executed by its officers thereunto duly authorized and directed by appropriate corporate authority.

The Charles Schwab Corporation
By:
 
Name:
 
Title:
 


2


EXHIBIT A-1

SCHEDULE TO REVOLVING NOTE
Date
Made,
Continued,
Converted,
or Paid
Type of
Loan


Amount
of Loan
Amount of Principal Continued, Converted,
or Paid
Unpaid
Principal
Balance of Revolving
Note

Name of
Person
Making
Notation
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


3


EXHIBIT A-2

TERM NOTE


Date: May 29, 2020

FOR VALUE RECEIVED, the undersigned, The Charles Schwab Corporation (“Schwab”) hereby promises to pay to the order of____________________(the “Lender”) to Citibank, N.A., as Agent, at the Agent’s office located at 388 Greenwich Street, New York, New York 10013, for the account of the applicable Lending Office of the Lender, the principal amount of each Term Loan made by the Lender to Schwab pursuant to the terms of the Credit Agreement (364-Day Commitment), dated as of May 29, 2020, as amended, among Schwab, the Lender, certain other Lenders party thereto, and Citibank, N.A., as Agent for the Lenders (the “Credit Agreement”), as shown in the schedule attached hereto and any continuation thereof, in lawful money of the United States and in immediately available funds on the Term Loan Maturity Date for such Term Loan. The undersigned also promises to pay interest on the unpaid principal amount of each Term Loan from the date of such Term Loan until such principal amount is paid, in like money, at said office for the account of the Lender’s applicable Lending Office, at the rates per annum, and payable at such times as are specified in the Credit Agreement. This Term Note shall be subject to the terms of the Credit Agreement and all principal and interest payable hereunder should be due and payable in accordance with the terms of the Credit Agreement. Terms defined in the Credit Agreement are used herein with the same meanings.

This Term Note is one of the Term Notes referred to in, and is entitled to the benefits of, the Credit Agreement. The Credit Agreement, among other things, contains provisions for acceleration of the maturity of this Term Note upon the happening of certain stated events and also for prepayments on account of principal hereof prior to the maturity of the Term Note upon the terms and conditions specified in the Credit Agreement.

Schwab promises to pay costs of collection, including reasonable attorney’s fees, if default is made in the payment of this Note.

The terms and provisions of this Term Note shall be governed by the applicable laws of the State of California.

IN WITNESS WHEREOF, the undersigned has caused this Term Note to be executed by its officer thereunto duly authorized and directed by appropriate corporate authority.

The Charles Schwab Corporation
By:
 
Name:
 
Title:
 






EXHIBIT A-2

SCHEDULE TO TERM NOTE

Date
Made,
Continued, Converted,
or Paid

Type of
Loan

Amount of Loan

Term Loan Maturity Date
Amount of Principal Continued, Converted,
or Paid
Unpaid Principal Balance of Term Note

Name of
Person
Making Notation
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


2


EXHIBIT B

BORROWING ADVICE


1.    This Borrowing Advice is executed and delivered by The Charles Schwab Corporation (“Borrower”) to you pursuant to that certain Credit Agreement dated as of May 29, 2020 (the “Credit Agreement”), entered into by Borrower, Citibank, N.A. (“Citibank”) and certain other Lenders parties thereto, collectively with Citibank (the “Lenders”) and Citibank as Agent for the Lenders (herein “Agent”). Terms defined in the Credit Agreement and not otherwise defined herein are used herein as defined in the Credit Agreement.

2.    Borrower hereby requests that the Lenders make a Revolving [or Term Loan] for the account of Borrower (at_______________, Account No._________________) pursuant to Section 2.4 of the Credit Agreement as follows:

(a)
Amount of Revolving [or Term Loan]:______________________.

(b)
Borrowing Date of Revolving [or Term Loan]:_________________.

(c)
[If a Revolving Loan] Type of Revolving Loan (check one only):

________ Eurodollar Rate with________- day Interest Period
________ Base Rate

(d)
[If a Term Loan] Type of Term Loan (check one only):

________ Eurodollar Rate with initial ________- day Interest Period
________ Base Rate

(e)
[If a Term Loan] Maturity Date of Term Loan:_________________.

3.    Following this request for a Revolving Loan [or Term Loan], the aggregate outstanding amount of all Revolving Loans and Term Loans will not exceed the aggregate amount of the Commitments.



4.
This Borrowing Advice is executed on______________by the Borrower.


BORROWER:
THE CHARLES SCHWAB CORPORATION, a Delaware Corporation
By:
 
Name:
 
Title:
 


2


EXHIBIT C

NOTICE OF CONVERSION/CONTINUATION
Dated as of: _________________

Citibank, N.A., as Agent
___________________________
___________________________


Ladies and Gentlemen:

This irrevocable Notice of Conversion/Continuation (this “Notice”) is delivered to you under the Credit Agreement (364-Day Commitment) dated as of May 29, 2020 (as amended, restated or otherwise modified, the “Credit Agreement”) by and among The Charles Schwab Corporation, a Delaware corporation (the “Borrower”); and Citibank, N.A., a Delaware corporation (herein “Citibank”) and the other Lenders signatory thereto (together with Citibank, collectively “Lenders”), and Citibank as agent for the Lenders (herein “Agent”).

1.    This Notice is submitted for the purpose of:

(check one and complete applicable information in accordance with the Credit Agreement)

[__]    Converting or [__] continuing all or a portion of the following type of Loan:

(a)
(check, as applicable)
    
Base Rate Loan ____________________;
Eurodollar Rate Loan ________________.

(b)
The aggregate outstanding principal balance of the above Loan is $_________________.

(c)
As applicable, the last day of the current Interest Period for such Loan is __________________.

(d)
The principal amount of such Loan to be [converted or continued] is $_________________.

(e)
Such principal amount should be converted/continued into the following type of Loan:
    
Base Rate Loan ____________________;
Eurodollar Rate Loan ________________.

(f)
The requested effective date of the [conversion/continuation] of such Loan is _____________________.

(g)
As applicable, the requested Interest Period applicable to the new Loan is _____________________.




2.    No Default or Event of Default under the Credit Agreement has occurred and is continuing or will be caused by the advance requested hereby.

3.    The representations and warranties set forth in Section 5 of the Credit Agreement are true and correct as if made on the date hereof (except for such representations and warranties as expressly relate to a prior date).

Capitalized terms used herein which are not defined herein shall have the respective meanings set forth in the Credit Agreement.

IN WITNESS WHEREOF, the undersigned officer of the Borrower has executed this Notice of Conversion/Continuation this ___ day of __________, _____.

    
THE CHARLES SCHWAB CORPORATION
 
 
By:
 
Name:
 
Title:
 
 
[must be signed by an Authorized Officer]


2


EXHIBIT D

COMMITMENT AND TERMINATION DATE EXTENSION REQUEST

[Bank name and address]    [Date]

Reference is made to that certain Credit Agreement (364-Day Commitment) dated as of May 29, 2020 (“Credit Agreement”) entered into by The Charles Schwab Corporation (“Borrower”), Citibank, N.A., as Agent and Lenders party thereto. Terms defined in the Credit Agreement and not otherwise defined herein are used herein as defined in the Credit Agreement.

Pursuant to Section 2.11 of the Credit Agreement, Borrower hereby requests Agent to obtain each Lender’s agreement to the extension of such Lender’s Commitment presently in effect, in the amount of $[specify amount of existing Commitment], and the Termination Date presently in effect, for an additional 364 days.

Agent’s execution of a copy of this letter in the space provided below and the transmission of such executed copy to Borrower shall constitute all Lenders’ acceptance of Borrower’s request and all Lenders’ agreement to the 364-day extension sought herein. More specifically, upon the execution of a copy of this letter by Agent on behalf of Lenders and the transmission thereof to Borrower within 15 days after Agent’s receipt of this letter, (1) the Termination Date as defined in Section 2.11 of the Credit Agreement shall be extended 364 days and deemed changed to ___________________, and (2) all other dates appearing in the Credit Agreement that are referred to in Section 2.11 of the Credit Agreement shall correspondingly be extended 364 days.

This Commitment and Termination Date Extension Request is executed by Borrower on ________________.
                    
BORROWER:
 
THE CHARLES SCHWAB CORPORATION,
a Delaware Corporation
 
 
By:
 
Name:
 
Title:
 

ACCEPTED AND AGREED:
Agent, on Behalf of Lenders
By:
 
Name:
 
Title:
 



EXHIBIT E
BORROWER’S OPINION OF COUNSEL

[Arnold & Porter Kaye Scholer LLP Letterhead]


[Date]

Citibank, N.A., as Agent
___________________________
___________________________

Re:
Credit Agreement (364-Day Commitment), dated May 29, 2020, among
The Charles Schwab Corporation, Citibank, N.A., as Agent
and the Lenders party thereto


Ladies and Gentlemen:

This opinion is delivered at the request of The Charles Schwab Corporation to you in your capacity as Agent, on behalf of the Lenders, under the Credit Agreement (364-Day Commitment) dated as of May 29, 2020 (the “Credit Agreement”) among The Charles Schwab Corporation, a Delaware corporation (“Borrower”), Citibank, N.A., as the Administrative Agent and the Lenders signatories thereto (each a “Lender” and collectively, the “Lenders”). This opinion letter speaks as of close of business on May 29, 2020 (hereafter the “operative date”).

We have acted as special counsel to Borrower in connection with the Credit Agreement. In such capacity we have examined originals, or copies represented to us by Borrower to be true copies, of the Credit Agreement; and we have obtained such certificates of such responsible officials of Borrower and of public officials as we have deemed necessary for purposes of this opinion. We have assumed without investigation the genuineness of all signatures on original documents, the authenticity of all documents submitted to us as originals, the conformity to original documents of all documents submitted to us as photostatic copies of originals, and the accuracy and completeness of all corporate records certified to us by the Borrower to be accurate and complete. We have further assumed that the Credit Agreement is binding upon and enforceable against the Agent and the Lenders. As to factual matters, we have relied upon the representations and warranties contained in and made pursuant to the Credit Agreement.

Capitalized terms not otherwise defined herein have the meanings given for such terms in the Credit Agreement. For the purpose of this opinion, “Loan Documents” as used herein means the Credit Agreement and the Notes.

Based upon the foregoing and in reliance thereon, and subject to the exceptions and qualifications set forth herein, we are of the opinion that:

1.    Borrower is a corporation duly formed, validly existing, and in good standing under the laws of Delaware.



2.     Borrower has all requisite corporate power and authority to execute, deliver and perform all of its obligations under the Loan Documents.

3.    Each Loan Document has been duly authorized, executed and delivered by Borrower. Each Loan Document constitutes the legal, valid and binding obligation of Borrower, enforceable against Borrower in accordance with its terms, except as such validity, binding nature or enforceability may be limited by:

(a)    the effect of applicable federal or state bankruptcy, reorganization, insolvency, fraudulent conveyance, moratorium or other similar laws and court decisions relating to or affecting creditors’ rights generally;

(b)    the effect of legal and equitable principles upon the availability of creditors’ remedies, regardless of whether considered in a proceeding in equity or at law;

(c)    the effect of California judicial decisions involving statutes or principles of equity which have held that certain covenants or other provisions of agreements, including without limitation those providing for the acceleration of indebtedness due under debt instruments upon the occurrence of events therein described, are unenforceable under circumstances where it cannot be demonstrated that the enforcement of such provisions is reasonably necessary for the protection of the lender, has been undertaken in good faith under the circumstances then existing, and is commercially reasonable;

(d)    the effect of Section 1670.5 of the California Civil Code, which provides that a court may refuse to enforce a contract or may limit the application thereof or any clause thereof which the court finds as a matter of law to have been unconscionable at the time it was made;
(e)    the unenforceability, under certain circumstances, of provisions purporting to require the award of attorneys’ fees, expenses, or costs, where such provisions do not satisfy the requirements of California Civil Code Section 1717 et seq., or in any action where the lender is not the prevailing party;

(f)    the unenforceability, under certain circumstances, of provisions waiving stated rights or unknown future rights and waiving defenses to obligations, where such waivers are contrary to applicable law or against public policy;

(g)    the unenforceability, under certain circumstances, of provisions which provide for penalties, late charges, additional interest in the event of a default by the borrower or fees or costs related to such charges;

(h)    the unenforceability, under certain circumstances, of provisions to the effect that rights or remedies are not exclusive, that every right or remedy is cumulative and may be exercised in addition to or with any other right or remedy, or that the election of some particular remedy or remedies does not preclude recourse to one or another remedy;

(i)    the unenforceability of provisions prohibiting waivers of provisions of either of the Loan Documents otherwise than in writing to the extent that Section 1698 of the California Civil Code permits oral modifications that have been executed;

2


(j)     limitations on the enforceability of release, contribution, exculpatory, or nonliability provisions, under federal or state securities laws, Sections 1542 and 1543 of the California Civil Code, and any other applicable statute or court decisions;

(k)    limitations on the enforceability of any indemnity obligations imposed upon or undertaken by the borrower to the extent that such obligations do not satisfy the requirements of Sections 2772 et seq. of the California Civil Code and any judicial decisions thereunder; provided that the limitations and qualifications set forth in the immediately preceding sub-paragraphs (b) through (k) do not, in our opinion, render the remedies available to the Lenders under the Loan Documents inadequate for the practical realization of the primary rights and benefits reasonably expected by an institutional lender in a comparable unsecured credit facility transaction governed by California law; and

(l)    the effect of Grafton Partners L.P. v. Superior Court, 36 Cal. 4th 944, 2005 WL 1831995 (Cal. 2005), in which the California Supreme Court held that predispute contractual waivers of trial by jury are invalid, as well as the effect of Section 631(d) of the California Code of Civil Procedure, which provides that a court may, in its discretion upon just terms, allow a trial by jury although there may have been a waiver of trial by jury.

The foregoing opinions are subject to the following exceptions and qualifications:

a.    We have not been requested to verify and have not verified the validity, accuracy, or reasonableness of any of the factual representations contained in either or both of the Loan Documents, and we express no opinion with respect to any of such matters.

b.    We are members of the bar of the State of California. We are opining herein only concerning matters governed by the Federal laws of the United States of America, the substantive laws of the State of California, and the General Corporation Law of the State of Delaware, and only with respect to Borrower. We express no opinion concerning the applicability to either or both of the Loan Documents, or the effect thereon, of the laws of any other jurisdiction. Furthermore, we express no opinion with respect to choice of law or conflicts of law, and none of the opinions stated herein shall be deemed to include or refer to choice of law or conflict of law.
c.    We express no opinion on any Federal or state securities laws as they may relate to either or both of the Loan Documents.

d.
We express no opinion as to compliance with the usury laws of any jurisdiction.

The opinions set forth herein are given as of the operative date. We disclaim any obligation to notify you or any other person or entity after the operative date if any change in fact and/or law should change our opinion with respect to any matters set forth herein. This opinion letter is rendered to you in your capacity as the Agent on behalf of the Lenders under the Credit Agreement and may not be relied upon, circulated or quoted, in whole or in part, by any other person or entity (other than the Lenders and a person or entity who becomes an assignee or successor in interest of any Lender or acquires a participation from any Lender consistent with the terms of the Loan Documents) and shall not be referred to in any report or document furnished to any other person or entity without our prior written consent; provided, however, that the foregoing shall not preclude any Lender from describing or otherwise disclosing the

3


existence or contents of this letter to (i) any bank regulatory authority having jurisdiction over such Lender, as required by such authority, (ii) a person or entity who, in good-faith discussions between such Lender and such person or entity, is proposed to become an assignee or successor in interest of such Lender or to acquire a participation from the Bank consistent with the terms of the Loan Documents, and (iii) counsel to the Agent and the Lenders.

Very truly yours,
 
ARNOLD & PORTER KAYE SCHOLER LLP
 
 
By: _______________________________


4


EXHIBIT F

FORM OF ASSIGNMENT AND ACCEPTANCE


To:    CITIBANK, N.A., as Administrative Agent


Ladies and Gentlemen:


Reference is made to that certain Credit Agreement (364-Day Commitment) dated as of May 29, 2020 between THE CHARLES SCHWAB CORPORATION, a Delaware corporation (“Borrower”), Lenders from time to time party thereto, and CITIBANK, N.A., as Administrative Agent (as amended, restated, extended, supplemented or otherwise modified in writing from time to time, the “Agreement”, the terms defined therein being used herein as therein defined).

1.    We hereby give you notice of, and request your consent to, the assignment by _______________________ (the “Assignor”) to __________________ (the “Assignee”) of _________% of the right, title and interest of the Assignor in and to the Loan Documents, including, without limitation, the right, title and interest of the Assignor in and to the Commitment of the Assignor, and all outstanding Loans made by the Assignor. Before giving effect to such assignment:

(a)
the aggregate amount of the Assignor’s Commitment is $_______________.
(b)
the aggregate principal amount of its outstanding Loans is $_____________.

2.    The Assignee hereby represents and warrants that it has complied with the requirements of Section 10.8 of the Agreement in connection with this assignment and acknowledges and agrees that: (a) other than the representation and warranty that it is the legal and beneficial owner of the Pro Rata Share being assigned hereby free and clear of any adverse claim, the Assignor has made no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with the Agreement or the execution, legality, validity, enforceability, genuineness or sufficiency of the Agreement of any other Loan Document; (b) the Assignor had made no representation or warranty and assumes no responsibility with respect to the financial condition of Borrower or the performance by Borrower of the Obligations; (c) it has received a copy of the Agreement, together with copies of the most recent financial statements delivered pursuant to Section 6.2 thereof and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into this Assignment and Acceptance; (d) it will independently and without reliance upon Administrative Agent or any Lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under the Agreement; (e) it appoints and authorizes Administrative Agent to take such action and to exercise such powers under the Agreement and the other Loan Documents as are delegated to Administrative Agent by the Agreement and such other Loan Documents; and (f) it will perform in accordance with their terms all of the obligations which by the terms of the Agreement are required to be performed by it as a Lender.



3.    The Assignee agrees that, upon receiving your consent to such assignment and form and after _______________, the Assignee will be bound by the terms of the Loan Documents, with respect to the interest in the Loan Documents assigned to it as specified above, as fully and to the same extent as if the Assignee were a Lender originally holding such interest in the Loan Documents.

4.    The following administrative details apply to the Assignee:

(a)
Credit Contact:
 
 
 
 
 
Assignee name:
 
 
Address:
 
 
 
 
 
Attention:
 
 
Telephone:
 
 
Telecopier:
 
    
(b)
Operations Contact:
 
 
 
 
Assignee name:
 
 
Address:
 
 
 
 
 
Attention:
 
 
Telephone:
 
 
Telecopier:
 

(c)
Lending Office:
 
 
 
 
Assignee name:
 
 
Address:
 
 
 
 

(d)
Payment Instructions:
 
 
 
 
Assignee name:
 
 
ABA No.:
 
 
Account No.:
 
 
Attention:
 
 
Reference:
 


2


IN WITNESS WHEREOF, the Assignor and the Assignee have caused this Assignment and Acceptance to be executed by their respective duly authorized officials, officers or agents as of the date first above mentioned.

    
Very truly yours,
[ASSIGNOR]
 
 
By:
 
Name:
 
Title:
 
 
 
 
 
[ASSIGNEE]
 
 
By:
 
Name:
 
Title:
 

    

We hereby consent to the
foregoing assignment.

THE CHARLES SCHWAB CORPORATION,
as Borrower
By:
 
Name:
 
Title:
 

CITIBANK, N.A.,
as Administrative Agent
By:
 
Name:
 
Title:
 


3

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:
August 7, 2020
 
/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:
August 7, 2020
 
/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 June 30, 2020 (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:
August 7, 2020
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 June 30, 2020 (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:
August 7, 2020
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.