SCHWAB CHARLES CORP

Previous wording

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 $70 trillion, which means the Company’s $9.41 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.

Current wording

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 $70 trillion, which means the Company’s $9.92 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.

Previous wording

•Net interest revenue; the adjustment of rates paid on client-related liabilities (see Results of Operations in Part I – Item 2);

Current wording

•Net interest revenue, the adjustment of rates paid on client-related liabilities, and client cash realignment activity (see Results of Operations in Part I – Item 2);

Previous wording

•Supplemental funding and expectations for repayment of outstanding balances (see Results of Operations in Part I – Item 2, and Liquidity Risk in Part I – Item 2);

Current wording

•Utilization of bank supplemental funding and expectations for repayment of outstanding balances (see Results of Operations in Part I – Item 2, and Liquidity Risk in Part I – Item 2);

Previous wording

•Management of interest rate risk; the impact of changes in interest rates on net interest margin and revenue, bank deposit account fee revenue, economic value of equity, and liability and asset duration (see Risk Management in Part I – Item 2);

Current wording

•Management of interest rate risk; modeling and assumptions, the impact of changes in interest rates on net interest margin and revenue, bank deposit account fee revenue, economic value of equity, and liability and asset duration (see Risk Management in Part I – Item 2);

Previous wording

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 2024 and 2023 are as follows:

Current wording

Management focuses on several client activity and financial metrics in evaluating Schwab’s financial position and operating performance. Results for the third quarter and first nine months of 2024 and 2023 are as follows:

Previous wording

(1) The second quarter and first six months of 2024 include net inflows of $2.7 billion and net outflows of $4.7 billion, respectively, from off-platform brokered certificates of deposit (CDs) issued by CSB. Also in the second quarter and first six months of 2024, this includes an inflow of $10.3 billion from a mutual fund clearing services client. The second quarter and first six months of 2023 includes inflows of $7.8 billion and $26.8 billion, respectively, from off-platform brokered CDs issued by CSB. Also in the second quarter and first six months of 2023, this includes an inflow of $12.0 billion from a mutual fund clearing services client.

Current wording

(1) The third quarter and first nine months of 2024 include net outflows of $4.4 billion and $9.1 billion, respectively, from off-platform brokered certificates of deposit (CDs) issued by CSB. Also, the first nine months of 2024 include an inflow of $10.3 billion from a mutual fund clearing services client. The third quarter and first nine months of 2024 also include an outflow of $0.1 billion from an international relationship. The third quarter and first nine months of 2023 includes inflows of $3.3 billion and $30.1 billion, respectively, from off-platform brokered CDs issued by CSB. Also, the first nine months of 2023 include an inflow of $12.0 billion from a mutual fund clearing services client. The third quarter and first nine months of 2023 also include an outflow of $0.8 billion from an international relationship.

Previous wording

Total net revenues increased 1% year-over-year to $4.7 billion in the second quarter, bringing the year-to-date total to $9.4 billion, down 3% from the first half of 2023. Net interest revenue was $2.2 billion and $4.4 billion in the second quarter and first six months of 2024, respectively, down 6% and 13% from the comparable periods in 2023, due primarily to lower balances of interest-earning assets and higher interest rates paid on funding sources, partially offset by higher yields on interest-earning assets and increased margin and bank lending. Asset management and administration fees totaled $1.4 billion and $2.7 billion in the second quarter and first six months of 2024, respectively, rising 18% and 19% from the comparable 2023 periods primarily as a result of growth in money market funds, equity market gains, and growth in advice solutions. Trading revenue was $777 million and $1.6 billion in the second quarter and first six months of 2024, respectively, down 3% and 6% from the same periods in 2023, due to lower commissions and order flow revenue as a result of changes in mix. Bank deposit account fee revenue was $153 million in the second quarter of 2024, down 13% year-over-year primarily due to lower average BDA balances. For the first six months of 2024, bank deposit account fee revenue was up 3% from the prior-year period due primarily to $97 million of one-time breakage fees incurred in 2023. BDA balances totaled $84.5 billion at June 30, 2024, down 13% from year-end 2023, reflecting client cash allocation decisions.

Current wording

Total net revenues rose 5% year-over-year to $4.8 billion in the third quarter, bringing the year-to-date total to $14.3 billion, down 1% from the same period in 2023. Net interest revenue was $2.2 billion and $6.6 billion in the third quarter and first nine months of 2024, respectively, down 1% and 9% from the comparable periods in 2023 due primarily to lower average interest-earning assets and higher rates paid on funding sources. Asset management and administration fees were $1.5 billion and $4.2 billion in the third quarter and first nine months of 2024, respectively, increasing 21% and 20% from the same prior-year periods as a result of growth in money market funds, equity market gains, and growth in advice solutions. Trading revenue was $797 million in the third quarter of 2024, increasing 4% from the prior-year third quarter primarily due to higher volume and changes in mix; year-to-date trading revenue of $2.4 billion was lower by 3% from the prior year due to changes in mix. Bank deposit account fee revenue was $152 million and $488 million in the third quarter and first nine months of 2024, respectively, down 26% and 8% from the same prior-year periods primarily due to lower average BDA balances. BDA balances totaled $84.0 billion at September 30, 2024, down 14% from year-end 2023 primarily resulting from lower client cash allocations.

Previous wording

Total expenses excluding interest were $2.9 billion and $5.9 billion in the second quarter and first six months of 2024, respectively, lower by 1% from both comparable periods in the prior year, reflecting lower acquisition and integration-related costs, as well as the benefits of our cost reduction restructuring efforts undertaken in late 2023, which helped drive year-over-year decreases in compensation and benefits and occupancy and equipment. Partially offsetting these reductions were growth in depreciation and amortization driven by capital expenditures to support the Ameritrade integration and growth of the business, higher other expenses inclusive of $43 million in regulatory accruals (see Results of Operations – Expenses Excluding Interest and Item 1 – Note 9) and higher exchange processing fees due primarily to the SEC’s May 2024 fee rate increase, and higher regulatory fees and assessments, reflecting incremental Federal Deposit Insurance Corporation (FDIC) special assessments of $5 million and $30 million in the second quarter and first six months of 2024, respectively (see Current Regulatory and Other Developments). Adjusted total expenses(1) were $2.8 billion and $5.6 billion in the second quarter and first six months of 2024, respectively, up 2% from both comparable prior-year periods. Acquisition and integration-related costs, amortization of acquired intangible assets, and restructuring costs totaled $175 million and $315 million in the second quarter and first six months of 2024, respectively, down 34% and 37% from the comparable periods in 2023.

Current wording

Total expenses excluding interest were $3.0 billion and $8.9 billion in the third quarter and first nine months of 2024, respectively, lower by 7% and 3% from the same periods in the prior year. These decreases reflected lower restructuring costs and lower acquisition and integration-related costs, partially offset by higher incentive compensation and other expense. Other expense reflected higher exchange processing fees primarily due to the SEC’s May 2024 fee rate increase. Adjusted total expenses(1) were $2.9 billion and $8.4 billion in the third quarter and first nine months of 2024, respectively, up 6% and 3% from the comparable prior-year periods. Acquisition and integration-related costs, amortization of acquired intangible assets, and restructuring costs totaled $153 million and $468 million in the third quarter and first nine months of 2024, respectively, down 71% and 54% from the comparable periods in 2023.

Previous wording

Return on average common stockholders’ equity was 14% and 15% for the second quarter and first six months of 2024, respectively, down from 17% and 20% from the same prior-year periods. Return on tangible common equity(1) (ROTCE) was 34% and 36% in the second quarter and first six months of 2024, respectively, down from 62% and 71% in the same periods in 2023. These decreases were due primarily to higher average stockholders’ equity for both the second quarter and year-to-date periods, and for the year-to-date period, lower net income. Average stockholders’ equity was higher in the second quarter and first six months of 2024 due to higher average retained earnings driven by net income for full-year 2023 and the second quarter and first half of 2024, as well as higher average AOCI. The increase in average AOCI was driven by lower unrealized losses on our available for sale (AFS) investment securities portfolio and securities transferred in 2022 from AFS to held to maturity (HTM) (see Item 1 – Note 15).

Current wording

Return on average common stockholders’ equity was 14% for both the third quarter and first nine months of 2024, which was flat with the third quarter of 2023 and down from 18% in the first nine months of 2023. The decrease in the year-to-date measure was due primarily to higher average stockholders’ equity. For the quarter-to-date period, year-over-year growth in net income largely offset year-over-year growth in average stockholders’ equity. Return on tangible common equity(1) (ROTCE) was 31% and 33% in the third quarter and first nine months of 2024, respectively, down from 58% and 66% in the same periods in 2023. The decreases in ROTCE were primarily due to higher average stockholders’ equity, and, for the year-to-date period, lower adjusted net income available to common stockholders(1). Average common stockholders’ equity was higher year-over-year for both the quarter-to-date and year-to-date periods due to net income for full-year 2023 and the first nine months of 2024, as well as higher average AOCI. The increase in average AOCI was driven by lower unrealized losses on our available for sale (AFS) investment securities portfolio and securities transferred in 2022 from AFS to held to maturity (HTM) (see Item 1 – Note 15).

Previous wording

(1) Adjusted diluted EPS, adjusted total expenses, return on tangible common equity, and adjusted Tier 1 Leverage Ratio are non-GAAP financial measures. See Non-GAAP Financial Measures for further details and a reconciliation of such measures to GAAP reported results.

Current wording

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

Previous wording

During the second quarter of 2024, the Company completed the conversion of the final client transition group from Ameritrade to the Schwab platform. Over the course of five client transition groups, we converted approximately $1.9 trillion in client assets across more than 17 million client accounts, including 7,000 RIAs, from Ameritrade to Schwab, and conversion of this final client group is a significant milestone in our integration. In connection with these transitions, we have experienced some related attrition of client assets from retail accounts and RIAs that continues to be below our initial estimates when we announced the acquisition. We continue to expect total acquisition and integration-related costs and capital expenditures will be between $2.4 billion and $2.5 billion.

Current wording

In May 2024, the Company completed the conversion of the final client transition group from Ameritrade to the Schwab platform. Over the course of five client transition groups throughout the integration, we converted approximately $1.9 trillion in client assets across more than 17 million client accounts, including 7,000 RIAs, from Ameritrade to Schwab, and conversion of this final client group is a significant milestone in our integration. In connection with these transitions, we have experienced some expected attrition of client assets from retail accounts and RIAs that continues to be below our initial estimates when we announced the acquisition. We continue to expect total acquisition and integration-related costs and capital expenditures will be between $2.4 billion and $2.5 billion.

Previous wording

Acquisition and integration-related costs, which are inclusive of related exit costs, totaled $36 million and $74 million for the second quarter and first six months of 2024, respectively, and $130 million and $228 million for the second quarter and first six months of 2023, respectively. Over the course of the integration, we expect to realize annualized cost synergies of between $1.8 billion and $2.0 billion, and, through June 30, 2024, we have achieved approximately 90% of this amount on an annualized run-rate basis. The Company expects to realize the remaining estimated cost synergies by the end of 2024, with anticipated full year synergy realization beginning in 2025. Estimated timing and amounts of costs incurred and synergy realization are subject to change as we work to complete the integration. Refer to Part II – Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations (Item 7) – Overview in our 2023 Form 10-K, Results of Operations – Total Expenses Excluding Interest, Non-GAAP Financial Measures, and Item 1 – Note 10 for additional information regarding our integration of Ameritrade.

Current wording

Acquisition and integration-related costs, which are inclusive of related exit costs, totaled $23 million and $97 million for the third quarter and first nine months of 2024, respectively, and $106 million and $334 million for the third quarter and first nine months of 2023, respectively. Over the course of the integration, we expect to realize annualized cost synergies of between $1.8 billion and $2.0 billion, and, through September 30, 2024, we have achieved approximately 95% of this amount on an annualized run-rate basis. The Company expects to realize the remaining estimated cost synergies by the end of 2024, with anticipated full year synergy realization beginning in 2025. Estimated timing and amounts of costs incurred and synergies to be realized are subject to change as we work to complete the integration. Refer to Part II – Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations (Item 7) – Overview in our 2023 Form 10-K, Results of Operations – Total Expenses Excluding Interest, Non-GAAP Financial Measures, and Item 1 – Note 10 for additional information regarding our integration of Ameritrade.

Previous wording

In March 2024, the SEC adopted amendments to Rule 605 of Regulation National Market System (NMS) requiring enhanced disclosures of order execution quality for large broker-dealers that handle retail orders. We do not expect the new rule to have a material impact on the Company’s business, financial condition, or results of operations. Three related equity market structure rule proposals released in December 2022 by the SEC remain pending.

Current wording

In September 2024, the SEC adopted amendments to Rules 610 and 612 of Regulation National Market System (NMS) to (i) establish an additional minimum price increment, or “tick size,” for the quoting and trading of certain NMS stocks, (ii) reduce the exchange access fee caps, and (iii) require transparency of odd-lots. In March 2024, the SEC adopted amendments to Rule 605 of Regulation NMS requiring enhanced disclosures of order execution quality for large broker-dealers that handle retail orders. We do not expect the new rules to have a material impact on the Company’s business, financial condition, or results of operations. The two related equity market structure rule proposals released in December 2022 by the SEC remain pending.

Previous wording

In April 2024, the U.S. Department of Labor adopted a final rule to significantly broaden the definition of “fiduciary” under the Employee Retirement Income Security Act of 1974. Among other requirements, the rule, in conjunction with associated prohibited transaction exemptions (PTEs), subjects broker-dealers who provide non-discretionary investment advice to retirement plans and accounts to a “best interest” standard. The rule was scheduled to take effect September 23, 2024, with a one-year transition period for certain PTE provisions. On July 25 and 26, 2024, federal district court judges in two separate industry lawsuits seeking to vacate the rule stayed effectiveness of the rule pending resolution of litigation.

Current wording

6 - prohibited transaction exemptions (PTEs), subjects broker-dealers who provide non-discretionary investment advice to retirement plans and accounts to a “best interest” standard. The rule was scheduled to take effect September 23, 2024, with a one-year transition period for certain PTE provisions. On July 25 and 26, 2024, federal district court judges in two separate industry lawsuits seeking to vacate the rule stayed effectiveness of the rule pending resolution of litigation.

Previous wording

6 - and a potential one-time final special assessment for any shortfall in the DIF. The pre-tax impact of the final rule’s initial assessment to the Company was $172 million, which was tax deductible and was recognized in earnings in the fourth quarter of 2023. In late February 2024, the FDIC notified banks, including the Company’s banking subsidiaries, that the estimated assessed losses to the DIF increased. Accordingly, during the first quarter of 2024, Schwab recognized a pre-tax charge of $25 million for its estimate of this incremental special assessment, which is tax deductible. During the second quarter of 2024, the Company recognized an additional pre-tax charge of $5 million based on the FDIC’s June 2024 invoices, resulting in a year-to-date total of $30 million. The Company paid its first amount on the special assessment in the second quarter of 2024 and expects the remaining collection period to be the next two years. The FDIC has indicated that its special assessments and related collection period remain subject to further refinement.

Current wording

In November 2023, the FDIC approved a final special assessment to recover losses incurred by the Deposit Insurance Fund (DIF) to protect uninsured depositors due to the March 2023 closures of two banks, which was subject to potential extension and a potential one-time final special assessment for any shortfall in the DIF. The pre-tax impact of the final rule’s initial assessment to the Company was $172 million, which was tax deductible and was recognized in earnings in the fourth quarter of 2023. In late February 2024, the FDIC notified banks, including the Company’s banking subsidiaries, that the estimated assessed losses to the DIF increased. Accordingly, during the first quarter of 2024, Schwab recognized a pre-tax charge of $25 million for its estimate of this incremental special assessment, which is tax deductible. During the second quarter of 2024, the Company recognized an additional pre-tax charge of $5 million based on the FDIC’s June 2024 invoices, resulting in a year-to-date total of $30 million. The Company paid its first amount on the special assessment in the second quarter of 2024 and expects the remaining collection period to be the next two years. The FDIC has indicated that its special assessments and related collection period remain subject to further refinement.

Previous wording

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 cash and cash equivalents, floating-rate securities and loans, and changes in prepayment levels for mortgage-backed and other asset-backed securities and loans. Schwab establishes the rates paid on client-related liabilities, and management expects that it will generally adjust the rates paid on these liabilities at some fraction of any movement in short-term rates. Interest expense on long-term debt, FHLB borrowings, other short-term borrowings, and other funding sources is impacted by market interest rates at the time of borrowing and changes in interest rates on floating-rate liabilities. See also Risk Management – Interest Rate Risk Simulations.

Current wording

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 cash and cash equivalents, floating-rate securities and loans, and changes in prepayment levels for mortgage-backed and other asset-backed securities and loans. Schwab establishes the rates paid on client-related liabilities, and management expects that it will generally adjust the rates paid on these liabilities at some fraction of any movement in short-term rates. Interest expense on long-term debt, FHLB borrowings, other short-term borrowings, and other funding sources is impacted by market interest rates at the time of borrowing and changes in interest rates on floating-rate liabilities. See also Risk Management – Market Risk.

Previous wording

In response to inflation, the Federal Reserve raised the federal funds target overnight rate four times in the first three quarters of 2023 for a total of 100 basis points before holding rates unchanged since July 2023. Short-term rates remained consistent through the first six months of 2024, as the Federal Reserve maintained the upper bound of the target overnight rate at 5.50%.

Current wording

In response to inflation, the Federal Reserve raised the federal funds target overnight rate four times in the first three quarters of 2023 for a total of 100 basis points. The Federal Reserve maintained the upper bound of the target overnight rate at 5.50% from July 2023 through much of the first nine months of 2024 before reducing the rate by 50 basis points towards the end of September 2024.

Previous wording

Schwab’s average interest-earning assets in the second quarter and first six months of 2024 were lower compared with the same periods in 2023, reflecting clients’ reallocation of cash from sweep products to higher-yielding investment solutions particularly throughout 2023, which resulted from the higher interest rate environment. In the first six months of 2024, the Company saw additional reduction of sweep cash, which also reflected strong client engagement in the equity markets and seasonal tax payments in the second quarter. These changes in client cash reduced average balances of bank deposits during the second quarter and first six months of 2024, and payables to brokerage clients during the first six months of 2024. To support client cash allocation activity that resulted from the higher interest rate environment, the Company has been utilizing supplemental funding, including drawing upon FHLB secured lending facilities, engaging with external financial institutions in repurchase agreements, and issuing brokered CDs. The average pace of client cash allocation out of sweep products into higher-yielding investment solutions decreased significantly beginning in the second half of 2023, and continued to decrease in the first half of 2024 from peak levels seen in mid-2023.

Current wording

Schwab’s average interest-earning assets in the third quarter and first nine months of 2024 were lower compared with the same periods in 2023, reflecting clients’ reallocation of cash from sweep products to higher-yielding investment cash alternatives and fixed income investments particularly throughout 2023, which resulted from the higher interest rate environment. The Company saw additional reduction of sweep cash through much of the first nine months of 2024, which also reflected strong client engagement in the equity markets. These changes in client cash reduced average balances of bank deposits in the third quarter and first nine months of 2024. To support client cash allocation activity that resulted from the higher interest rate environment during 2023 and through most of 2024, the Company has utilized bank supplemental funding, including drawing upon FHLB secured lending facilities, engaging with external financial institutions in repurchase agreements, and issuing brokered CDs. The average pace of client cash allocation out of sweep products into higher-yielding investment solutions decreased significantly beginning in the second half of 2023, and continued to decrease through the third quarter and first nine months of 2024 from peak levels seen in mid-2023.

Previous wording

Net interest revenue decreased $132 million, or 6%, and $669 million, or 13%, in the second quarter and first six months of 2024, respectively, compared to the same periods in 2023. These decreases were primarily due to lower average interest-earning assets and, for the year-to-date period, utilization of higher cost supplemental funding sources to support client cash allocations in the elevated rate environment. Average interest-earning assets for both the second quarter and first six months of 2024 were lower by 14% compared to the same periods in 2023. These decreases were due primarily to lower bank sweep deposits as a result of client cash reallocation into higher-yielding investment cash alternatives and fixed income investments. Maturities and paydowns on the AFS and HTM investment securities portfolio supported reductions in bank sweep deposits, and, for the second quarter, lower year-over-year balances of supplemental funding sources.

Current wording

Net interest revenue decreased $15 million, or 1%, and $684 million, or 9%, in the third quarter and first nine months of 2024, respectively, compared to the same periods in 2023. These decreases were primarily due to lower average interest-earning assets, higher average rates paid on funding sources, and lower net interest revenue contributed from securities lending, partially offset by lower average bank supplemental funding. Average interest-earning assets were lower by 8% and 12% for the third quarter and first nine months of 2024, respectively, compared to the same periods in 2023. These decreases were due primarily to lower average bank sweep deposits, which reflected client cash reallocation into higher-yielding investment cash alternatives and fixed income investments as well as client engagement with the equity markets. The decreases in average interest-earning assets in the third quarter and first nine months of 2024 were partially offset by growth in margin lending, which was supported by increased use of broker-dealer funding sources including securities lending, and growth in bank loans. Additionally, principal and interest on the AFS and HTM investment securities portfolio, along with deceleration of client cash reallocation activity, supported a reduction of bank supplemental funding balances.

Previous wording

Net interest margin increased to 2.03% during the second quarter of 2024 from 1.87% compared to the same period in 2023 as improved yields on interest-earning assets offset higher rates paid across interest-bearing funding sources. Net interest margin during the first six months of 2024 was 2.03%, remaining unchanged from the same period in 2023 as the benefit of improved yields on interest-earning assets was offset by higher rates paid on interest-bearing funding sources.

Current wording

Net interest margin increased to 2.08% and 2.04% during the third quarter and first nine months of 2024, respectively, compared to 1.94% and 2.00% during the same periods in 2023 as improved yields on most interest-earning assets offset higher rates paid across interest-bearing funding sources.

Previous wording

The Company’s average balances of FHLB borrowings and brokered CDs were lower in the second quarter of 2024 compared to the same period in 2023, which helped support a 16-basis-point improvement in net interest margin for the second quarter of 2024 compared with the same period in 2023. The Company continues to prioritize repayment of the outstanding balances of its supplemental funding sources. The total outstanding balance of supplemental funding sources increased by $2.9 billion during the second quarter of 2024 as client cash was retained on the Company’s broker-dealer to support higher levels of margin lending activity, though the outstanding balance of supplemental funding of $73.7 billion as of June 30, 2024 was lower by $5.9 billion, or 7%, from year-end 2023. Our use and the financial impacts of such supplemental funding is dependent on several factors, including the volume and pace of clients’ cash allocation activity, which is driven primarily by changes in market interest rates, clients’ margin lending activity, as well as asset gathering and the level of maturities and paydowns on our investment securities portfolios. While client cash realignment activity has continued to decline from peak levels, uncertainty remains, including in regard to the path of market interest rates and client behavior, which will significantly impact our utilization of supplemental funding sources. The impacts to net interest revenue of using supplemental funding sources also depend on the type of funding source used, levels of interest rates, and the use of proceeds. The Company currently expects its

Current wording

The Company’s average balances of FHLB borrowings and brokered CDs were lower in the third quarter of 2024 compared to the same period in 2023, which helped contribute to a 14-basis-point improvement in net interest margin for the third quarter of 2024 compared with the same period in 2023. The Company continues to prioritize repayment of bank supplemental funding balances. The total outstanding balance of bank supplemental funding decreased by $8.9 billion during the third quarter of 2024. Our use and the financial impacts of such bank supplemental funding is dependent on several factors, including the volume and pace of clients’ cash allocation activity, which is driven primarily by changes in market interest rates, as well as asset gathering and the level of maturities and paydowns on our investment securities portfolios. While client cash realignment activity has continued to decline from peak levels, uncertainty remains, including the path of market interest rates and client behavior, which could significantly impact our utilization of bank supplemental funding sources. The impacts to net interest revenue of using bank supplemental funding sources also depend on the type of funding source used, levels of interest rates, and the use of proceeds. The Company currently expects its outstanding balances of bank supplemental funding sources to decrease over time. Certain balances outstanding at September 30, 2024 will require rollover into new borrowings, the amount and costs

Previous wording

10 - outstanding balances of supplemental funding sources to decrease over time. Certain amounts outstanding at June 30, 2024 will require rollover into new borrowings, the amount and costs of which will depend on the above noted factors. See also Risk Management – Liquidity Risk, Item 1 – Note 7 Bank Deposits, and Item 1 – Note 8 Borrowings for additional information on these and other funding sources.

Current wording

10 - of which will depend on the above noted factors. See also Risk Management – Liquidity Risk, Capital Management, Item 1 – Note 7, Note 8, and Note 12 for additional information on these and other funding sources.

Previous wording

(1)Average client assets for advice solutions may also include the asset balances contained in the mutual fund and/or ETF categories listed above.

Current wording

(2)Average client assets for advice solutions may also include the asset balances contained in the mutual fund and/or ETF categories listed above.

Previous wording

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

Current wording

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

Previous wording

Asset management and administration fees increased by $210 million, or 18%, and $440 million, or 19%, in the second quarter and first six months of 2024, respectively, compared to the same periods in 2023. These increases were primarily a result of higher balances in Schwab money market funds as clients shifted their cash allocations to higher-yielding investment solutions. These increases were also due to growth in balances in Mutual Fund OneSource® and fee-based advice solutions, as a result of strong equity markets and, for advice solutions, net inflows of client assets.

Current wording

Asset management and administration fees increased by $252 million, or 21%, and $692 million, or 20%, in the third quarter and first nine months of 2024, respectively, compared to the same periods in 2023. These increases were primarily a result of higher balances in Schwab money market funds as clients shifted their cash allocations to higher-yielding investment solutions. These increases were also due to growth in balances in fee-based advice solutions and Mutual Fund OneSource, as a result of strong equity markets and, for advice solutions, net inflows of client assets.

Previous wording

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 NTF funds. These funds generated 49% of the asset management and administration fees earned in both the second quarter and first six months of 2024, compared with 42% and 41% in the second quarter and first six months of 2023, respectively:

Current wording

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 NTF funds. These funds generated 49% of the asset management and administration fees earned in both the third quarter and first nine months of 2024, compared with 44% and 42% in the third quarter and first nine months of 2023, respectively:

Previous wording

(1) Revenue per trade is calculated as trading revenue divided by DATs multiplied by the number of trading days.

Current wording

(1) Revenue per trade is calculated as trading revenue divided by the product of DATs multiplied by the number of trading days.

Previous wording

The following table presents bank deposit account fee revenue, average BDA balances, average net yield, and average balances earning fixed- and floating-rate yields:

Current wording

The following table presents bank deposit account fee revenue and related information:

Previous wording

Bank deposit account fees decreased $22 million, or 13%, and increased $10 million, or 3%, in the second quarter and first six months of 2024, respectively, compared to the same periods in 2023. The decrease in the second quarter of 2024 compared to 2023 was primarily due to lower average BDA balances. The increase in the first six months of 2024 compared to 2023 was primarily due to $97 million of breakage fees incurred that resulted in lower bank deposit account fee revenue in the first six months of 2023.

Current wording

Bank deposit account fees decreased $53 million, or 26%, and $43 million, or 8%, in the third quarter and first nine months of 2024, respectively, compared to the same periods in 2023. The decrease in the third quarter and first nine months of 2024 compared to the same periods in 2023 was primarily due to lower average BDA balances. The decrease in the first nine months of 2024 compared to the same period in 2023 was partially offset by $97 million of breakage fees incurred that resulted in lower bank deposit account fee revenue in the first nine months of 2023. The decrease in average BDA balances in the third quarter and first nine months of 2024 compared to the same periods in 2023 was primarily due to client cash allocation decisions in response to higher short-term market interest rates during 2023 and through most of 2024.

Previous wording

In addition, the average amount of floating-rate BDA balances increased in the second quarter and first six months of 2024 compared to the same periods in 2023, which contributed to an increase in average net yield. These factors were partially offset by a decrease in average BDA balances in the second quarter and first six months of 2024 compared to the same periods in 2023, primarily due to client cash allocation decisions in response to higher short-term market interest rates. The percentages of BDA balances designated as fixed-rate and floating-rate obligation amounts as of June 30, 2024 were 89% and 11%, respectively.

Current wording

Average net yield decreased in the third quarter of 2024 compared to the same period in 2023, as the increase in the average amount of floating-rate BDA balances was more than offset by a decrease in average net yield on fixed-rate BDA balances. Average net yield increased in the first nine months of 2024 compared to the same period in 2023, due to the breakage fees incurred in 2023 and the increase in the average amount of floating-rate BDA balances, which was partially offset by the decrease in average net yield on fixed-rate BDA balances. The percentages of BDA balances designated as fixed-rate and floating-rate obligation amounts as of September 30, 2024 were 84% and 16%, respectively.

Previous wording

Other revenue increased $4 million, or 2%, and decreased $22 million, or 6%, in the second quarter and first six months of 2024, respectively, compared to the same periods in 2023. The increase in the second quarter of 2024 was primarily due to higher exchange processing fees and lower provision for credit losses on bank loans, partially offset by certain lower service and other fees. The decrease in the first six months of 2024 was primarily due to certain lower service and other fees, partially offset by lower provision for credit losses on bank loans. Exchange processing fees increased in the second quarter of 2024 due to higher SEC fee rates compared to the second quarter of 2023. Effective May 22, 2024, the SEC increased its fee rates applicable to most securities transactions from the rate in effect since late February 2023. This change will result in higher exchange processing fees per security transaction in other revenue and a corresponding increase in other expense, resulting in no impact to net income. The provision for credit losses on bank loans was lower in the second quarter and the first six months of 2024 compared to the same periods in 2023, due to lower loan loss factors while the total balance of first lien residential real estate mortgage loans (First Mortgages) remained largely consistent with year-end 2023.

Current wording

Other revenue increased $28 million, or 16%, and $6 million, or 1%, in the third quarter and first nine months of 2024, respectively, compared to the same periods in 2023. The increase in the third quarter and first nine months of 2024 was primarily due to higher exchange processing fees and lower losses recognized on sales of AFS securities, partially offset by certain lower service and other fees and a smaller release from the provision for credit losses on bank loans. Exchange processing fees increased in the third quarter and first nine months of 2024 due to higher SEC fee rates compared to the same periods in 2023. Effective May 22, 2024, the SEC increased its fee rates applicable to most securities transactions from the rate in effect since late February 2023.

Previous wording

Expenses excluding interest decreased by $22 million, or 1%, and $86 million, or 1%, in the second quarter and first six months of 2024, respectively, compared to the same periods in 2023. Adjusted total expenses, which excludes acquisition and integration-related costs, amortization of acquired intangible assets, and, beginning in the third quarter of 2023, restructuring costs, increased 2% in the second quarter and first six months of 2024, compared to the same periods in 2023. See Non-GAAP Financial Measures for further details and a reconciliation of such measures to GAAP reported results. The Company began incurring restructuring costs in the third quarter of 2023 in connection with actions to streamline its operations to prepare for post-integration of Ameritrade (see below and Overview – Other for additional information).

Current wording

Expenses excluding interest decreased by $218 million, or 7%, and $304 million, or 3%, in the third quarter and first nine months of 2024, respectively, compared to the same periods in 2023. Adjusted total expenses, which excludes acquisition and integration-related costs, amortization of acquired intangible assets, and, beginning in the third quarter of 2023, restructuring costs, increased 6% and 3% in the third quarter and first nine months of 2024, respectively, compared to the same periods in 2023. See Non-GAAP Financial Measures for further details and a reconciliation of such measures to GAAP reported results.

Previous wording

Total compensation and benefits expense decreased in the second quarter and first six months of 2024 compared to the same periods in 2023, primarily due to lower headcount as a result of position eliminations completed in the second half of 2023 as part of restructuring, partially offset by higher incentive compensation and annual merit increases. Compensation and benefits included acquisition and integration-related costs of $18 million and $48 million in the second quarter of 2024 and 2023, respectively, and $35 million and $106 million in the first six months of 2024 and 2023, respectively. Compensation and benefits also included a $3 million and $34 million benefit in the second quarter and first six months of 2024, respectively, due to a change in estimated restructuring costs.

Current wording

Total compensation and benefits expense decreased in the third quarter and first nine months of 2024 compared to the same periods in 2023, primarily due to the recognition of $276 million of restructuring costs during the third quarter of 2023. The decreases were also due to lower headcount as a result of position eliminations from the restructuring and Ameritrade integration, partially offset by higher incentive compensation and annual merit increases. Compensation and benefits included acquisition and integration-related costs of $9 million and $52 million in the third quarter of 2024 and 2023, respectively, and $44 million and $158 million in the first nine months of 2024 and 2023, respectively. Compensation and benefits also included a $34 million benefit in the first nine months of 2024, due to a change in estimated restructuring costs.

Previous wording

Professional services expense decreased in the second quarter and first six months of 2024 compared to the same periods in 2023, primarily due to lower utilization of professional services as we completed Ameritrade client account transitions in the second quarter of 2024, and approach the completion of the overall Ameritrade integration. Professional services included acquisition and integration-related costs of $12 million and $41 million in the second quarter of 2024 and 2023, respectively, and $29 million and $74 million in the first six months of 2024 and 2023, respectively.

Current wording

Professional services expense decreased in the third quarter and first nine months of 2024 compared to the same periods in 2023, primarily due to lower utilization of professional services as we completed the final Ameritrade client account transitions in the second quarter of 2024, and approach the completion of the Ameritrade integration. Professional services included acquisition and integration-related costs of $3 million and $37 million in the third quarter of 2024 and 2023, respectively, and $32 million and $111 million in the first nine months of 2024 and 2023, respectively.

Previous wording

Occupancy and equipment expense decreased in the second quarter and first six months of 2024 compared to the same periods in 2023, primarily due to lower technology equipment and software costs, lower property tax expense, and lower occupancy costs as a result of facility closures in 2023 related to restructuring and the Ameritrade integration. Occupancy and equipment included restructuring costs of $1 million and $3 million in the second quarter and first six months of 2024, respectively.

Current wording

Occupancy and equipment expense decreased in the third quarter and first nine months of 2024 compared to the same periods in 2023, primarily due to lower technology equipment and software costs, lower property tax expense, and lower occupancy costs as a result of facility closures in 2023 related to restructuring and the Ameritrade integration. Occupancy and equipment included restructuring costs of $3 million in the first nine months of 2024. Occupancy and equipment included acquisition and integration-related costs of $7 million and $21 million in the third quarter and first nine months of 2023, respectively.

Previous wording

Advertising and market development expense increased in the second quarter and first six months of 2024 compared to the same periods in 2023, primarily due to higher client promotional spending.

Current wording

Advertising and market development expense remained consistent in the third quarter and first nine months of 2024 compared to the same periods in 2023, as higher client promotional spending largely offset lower digital advertising costs.

Previous wording

Communications expense decreased in the second quarter and first six months of 2024, compared to the same periods in 2023, primarily as a result of lower exchange quotation services expenses.

Current wording

Communications expense decreased in the third quarter and first nine months of 2024, compared to the same periods in 2023, primarily as a result of lower exchange quotation services expenses.

Previous wording

Depreciation and amortization expense increased in the second quarter and first six months of 2024 compared to the same periods in 2023, primarily as a result of higher amortization of purchased and internally developed software, driven by capital expenditures in 2023 and the first six months of 2024 to support the Ameritrade integration and enhance our technological infrastructure to support growth of the business. Depreciation and amortization expense included acquisition and integration-related costs of $5 million in the second quarter and first six months of 2024.

Current wording

Depreciation and amortization expense increased in the third quarter and first nine months of 2024 compared to the same periods in 2023, primarily as a result of higher amortization of purchased and internally developed software, driven by capital expenditures in 2023 and the first nine months of 2024 primarily to enhance our technological infrastructure to support growth of the business. Depreciation and amortization expense included acquisition and integration-related costs of $8 million and $13 million in the third quarter and first nine months of 2024, respectively.

Previous wording

Amortization of acquired intangible assets decreased in the second quarter and first six months of 2024 compared to the same periods in 2023, as certain assets from the Ameritrade acquisition were fully amortized during 2023.

Current wording

Amortization of acquired intangible assets decreased in the third quarter and first nine months of 2024 compared to the same periods in 2023, as certain assets from the Ameritrade acquisition were fully amortized during 2023.

Previous wording

Regulatory fees and assessments increased in the second quarter and first six months of 2024 compared to the same periods in 2023, primarily as a result of incremental FDIC special assessments and higher FDIC deposit insurance assessments, reflecting greater use of brokered CDs, partially offset by a lower assessment base. The incremental FDIC special assessments totaled $5 million and $30 million in the second quarter and first six months of 2024, respectively. See Current Regulatory and Other Developments for further discussion of these special assessments.

Current wording

Regulatory fees and assessments decreased in the third quarter and increased in the first nine months of 2024 compared to the same periods in 2023. The decrease in the third quarter of 2024 was primarily due to lower FDIC deposit insurance assessments, reflecting a decrease in brokered CDs compared to the third quarter of 2023, and a lower assessment base. The increase in the first nine months of 2024 was primarily as a result of incremental FDIC special assessments and higher FDIC deposit insurance assessments, reflecting greater use of brokered CDs compared to the first nine months of 2023, partially offset by a lower assessment base. The incremental FDIC special assessments totaled $30 million in the first nine months of 2024. See Current Regulatory and Other Developments for further discussion of these special assessments.