The Quarterly
SCHW 2016 10-K

Schwab Charles Corp (SCHW) SEC Quarterly Report (10-Q) for Q1 2017

SCHW Q2 2017 10-Q
SCHW 2016 10-K SCHW Q2 2017 10-Q



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

March 31, 2017


Commission File Number: 1-9700


THE  CHARLES  SCHWAB  CORPORATION

(Exact name of registrant as specified in its charter)

Delaware

(State or other jurisdiction

of incorporation or organization)

94-3025021

(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


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

Yes ☒   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.

Large accelerated filer ☒

Accelerated filer ☐

Non-accelerated filer ☐  (Do not check if a smaller reporting company)

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.

1,337,132,864 shares of $.01 par value Common Stock Outstanding on April 30, 2017





THE CHARLES SCHWAB CORPORATION


Quarterly Report on Form 10-Q

For the Quarter Ended March 31, 2017




Index


Part I - Financial Information

Page







Item 1.

Condensed Consolidated Financial Statements (Unaudited):





Statements of Income

16



Statements of Comprehensive Income

17



Balance Sheets

18

Statements of Stockholders' Equity

19



Statements of Cash Flows

20



Notes

21-45





Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations

1-15





Item 3.

Quantitative and Qualitative Disclosures About Market Risk

15





Item 4.

Controls and Procedures

45



Part II - Other Information





Item 1.

Legal Proceedings

46





Item 1A.

Risk Factors

46





Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

46





Item 3.

Defaults Upon Senior Securities

47





Item 4.

Mine Safety Disclosures

47





Item 5.

Other Information

47





Item 6.

Exhibits

48



Signature

49









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 engaged, through its subsidiaries (collectively referred to as the Company), in wealth management, securities brokerage, banking, asset management, custody, and financial advisory services.


Significant business subsidiaries of CSC include the following:


Charles Schwab & Co., Inc. (Schwab), a securities broker-dealer;

Charles Schwab Bank (Schwab Bank), a federal savings bank; and

Charles Schwab Investment Management, Inc. (CSIM), the investment advisor for Schwab's proprietary mutual funds, which are referred to as the Schwab Funds ® , and for Schwab's exchange-traded funds (ETFs), which are referred to as the Schwab ETFs™.


The Company 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, retirement plan services, and other corporate brokerage services. The Advisor Services segment provides custodial, trading, banking, and support services as well as retirement business services.

Schwab was founded on the belief that average Americans deserve access to a better investing experience. Although much has changed in the intervening years, the Company's purpose remains clear – to champion every client's goals with passion and integrity. Guided by this purpose and the aspiration of creating the most trusted leader in investment services, management has adopted a strategy described as "Through Clients' Eyes."


Under this approach, the Company's strategic goals are focused on putting clients' perspectives, needs, and desires at the forefront. Because investing plays a fundamental role in building financial security, the Company strives to deliver a better investing experience for its clients – individual investors and the people and institutions who serve them – by disrupting longstanding industry practices on their behalf and providing superior service. The Company aims to offer a broad range of products and solutions to meet client needs with a focus on transparency and value. In addition, management works to couple the Company'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. Finally, the Company aims to maximize its market valuation and stockholder returns over time.


Management estimates that investable wealth in the United States (U.S.) currently exceeds $30 trillion, which means the Company's $2.92 trillion in client assets represent a market share of less than ten percent, leaving substantial opportunity for growth. The Company's 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, generating earnings growth and building long-term stockholder value.


Starting with this Quarterly Report on Form 10-Q for the period ended March 31, 2017 (Form 10-Q), management has minimized the repetition of any information already reflected in the Company's Annual Report on Form 10-K for the year-ended December 31, 2016 (2016 Form 10-K). This Form 10-Q is intended to provide an update on the activity and results of operations for the three months ended March 31, 2017 and should be read in conjunction with the 2016 Form 10-K. More information on the Company's business operations, descriptions of revenue and expense categories, policies and procedures including the Company's governance and monitoring programs is available in the 2016 Form 10-K. The Company's recent annual reports on Form 10-K, quarterly reports on Form 10-Q, proxy statements, as well as other filings with the Securities and Exchange Commission (SEC), are available free of charge on the Company's website, https://www.aboutschwab.com or by request via email ([email protected]), telephone (415-667-7000) or mail (Charles Schwab Investor Relations at 211 Main Street, San Francisco, CA 94105).



- 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," "aim," "target," "could," "would," "continue," 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 necessarily estimates based on the best judgment of the Company's senior management. These statements relate to, among other things the following sections of this Form 10-Q:

The Company's aim to maximize its market valuation and stockholder returns over time; and the Company's belief that developing trusted relationships will translate into more client assets which drives revenue and, along with expense discipline, earnings growth and builds stockholder value (see Introduction in Part I, Item 2);

The Company continuing to grow bigger, stronger, and more capable through a steadfast focus on its "Through Clients' Eyes" strategy (see Overview in Part I, Item 2);

The likelihood of indemnification and guarantee payment obligations (see Commitments and Contingencies in Part I, Item 1, Financial Information – Notes to Condensed Consolidated Financial Statements (Item 1) – Note 8); and

The impact of legal proceedings and regulatory matters (see Commitments and Contingencies in Item 1 – Note 8 and Legal Proceedings in Part II, Item 1).

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

Important factors that may cause actual results to differ include, but are not limited to:

General market conditions, including the level of interest rates, equity valuations and trading activity;

The Company's ability to attract and retain clients, develop trusted relationships, and grow client assets;

Client use of the Company's investment advisory services and other products and services;

The level of client assets including cash balances;

Competitive pressure on pricing;

Client sensitivity to rates;

Regulatory guidance;

Timing, amount, and impact of migration of certain balances from brokerage accounts and sweep money market funds into Schwab Bank;

Capital and liquidity needs and management;

The Company's ability to manage expenses;

The effect of adverse developments in litigation or regulatory matters and the extent of any related charges;

Potential breaches of contractual terms for which the Company has indemnification and guarantee obligations; and

The Company's ability to develop and launch new products, services and capabilities in a timely and successful manner.

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 2016 Form 10-K.


- 2 -



THE CHARLES SCHWAB CORPORATION

Management's Discussion and Analysis of Financial Condition and Results of Operations

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




OVERVIEW

Management focuses on several client activity and financial metrics in evaluating the Company's financial position and operating performance. For a discussion of the key metrics and a glossary of terms, refer to the Company's 2016 Form 10-K. Results for the first quarters of 2017 and 2016 are:



Three Months Ended March 31,




2017

2016

Percent
Change

Client Metrics:

Net new client assets (in billions)

$

38.9


$

32.0


22

%

Core net new client assets (in billions)

$

38.9


$

32.0


22

%

Client assets (in billions, at quarter end)

$

2,922.5


$

2,556.7


14

%

Average client assets (in billions)

$

2,871.9


$

2,445.4


17

%

New brokerage accounts (in thousands)

362


265


37

%

Active brokerage accounts (in thousands, at quarter end)

10,320


9,869


5

%

Assets receiving ongoing advisory services (in billions, at quarter end)

$

1,481.8


$

1,281.9


16

%

Client cash as a percentage of client assets (at quarter end)

12.4

%

13.1

%


Company Financial Metrics:




Net revenues

$

2,081


$

1,764


18

%

Expenses excluding interest

1,238


1,109


12

%

Income before taxes on income

843


655


29

%

Taxes on income

279


243


15

%

Net income

564


412


37

%

Preferred stock dividends and other

39


20


95

%

Net income available to common stockholders

$

525


$

392


34

%

Earnings per common share – diluted

$

.39


$

.29


34

%

Net revenue growth from prior year

18

%

16

%


Pre-tax profit margin

40.5

%

37.1

%


Return on average common stockholders' equity

15

%

13

%


Expenses excluding interest as a percentage of average client assets (annualized)

0.18

%

0.18

%



Consolidated Tier 1 Leverage Ratio

7.1

%

7.3

%


The Company continues to grow bigger, stronger, and more capable through a steadfast focus on its "Through Clients' Eyes" strategy. The equity markets began the quarter in positive territory and remained solidly positive throughout. Investors were engaged, and the Company was there to provide guidance and support along the way. Core net new assets totaled $38.9 billion for the first quarter ended March 31, 2017 , up 22% year-over-year. The Company ended the quarter serving 10.3 million active brokerage accounts, 1.1 million  banking accounts, and 1.5 million  retirement plan participants, up 5%, 7%, and 1%, respectively, from the same period in 2016 . Total client assets reached $2.92 trillion at March 31, 2017 , up 14% year-over-year. During the first quarter of 2017 , the Company's financial consultants held planning conversations with 38,000 clients, up 12% from the same quarter in 2016 . Assets enrolled in some form of ongoing advisory service totaled $1.48 trillion at quarter-end, up 16% from a year ago.


The Company's strong first quarter financial performance was driven by ongoing success in building the client base, sustained improvement in the economic environment, and the Federal Reserve System's (Federal Reserve) actions to lift interest rates, along with focused expense management. Net revenues increased 18% in the first quarter of 2017 compared to the same period in 2016 primarily due to growth in client assets and higher short-term interest rates.



- 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)




Expenses excluding interest increased 12% in the first three months of 2017 compared to the same period in 2016 largely due to higher compensation and benefits and deposit insurance assessments and surcharges. These increases were consistent with management's expectations for spending to support current and future growth in the business.


The pre-tax profit margin for the first quarter of 2017 was 40.5% compared to 37.1% for the same period in 2016 . Net income grew by 37% for the first quarter 2017 compared to the same period in 2016 . Lastly, the return on average common stockholders' equity improved to 15% for the first quarter of 2017 compared to 13% for the same period in 2016.



RESULTS OF OPERATIONS


Net Revenues

Three Months Ended March 31,

2017

2016



Percent
Change

Amount

% of
Total Net
Revenues

Amount

% of
Total Net
Revenues

Asset management and administration fees

     Mutual funds and ETF service fees

22

 %

$

506


24

 %

$

415


24

 %

     Advice Solutions

13

 %

244


12

 %

215


12

 %

     Other

6

 %

73


4

 %

69


4

 %

Asset management and administration fees

18

 %

823


40

 %

699


40

 %

Net interest revenue


     Interest revenue

30

 %

1,055


51

 %

810


46

 %

     Interest expense

45

 %

(55

)

(3

)%

(38

)

(2

)%

Net interest revenue

30

 %

1,000


48

 %

772


44

 %

Trading revenue

     Commissions

(17

)%

178


8

 %

215


12

 %

     Principal transactions

(18

)%

14


1

 %

17


1

 %

Trading revenue

(17

)%

192


9

 %

232


13

 %

Other

5

 %

66


3

 %

63


3

 %

Provision for loan losses

(100

)%

-


-


(2

)

-


Total net revenues

18

 %

$

2,081


100

 %

$

1,764


100

 %


Net revenues of $2.1 billion for the first quarter of 2017 grew 18% from the prior year reflecting significant improvements in both net interest revenue and asset management and administration fees. Net interest revenue represented 48% of the total revenue earned during the first quarter of 2017 compared to 44% for the same period in the prior year. Asset management and administration fees were 40% of total net revenues in both years. Trading revenue declined to 9% in the first quarter of 2017 , down from 13% for the prior year.


- 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)




Asset Management and Administration Fees


The following table presents a roll forward of client assets for the Schwab money market funds, Schwab equity and bond funds and ETFs, and Mutual Fund OneSource ® . The following funds generated 54% of the asset management and administration fees earned during the first quarter of 2017 compared to 52% in the same period in 2016:



Schwab Money

Market Funds

Schwab Equity and

Bond Funds and ETFs

Mutual Fund

OneSource ®

Three Months Ended March 31,

2017

2016

2017

2016

2017

2016

Balance at beginning of period

$

163,495


$

166,148


$

125,813


$

102,112


$

198,924


$

207,654


Net inflows (outflows)

(724

)

1,252


7,175


2,082


(4,590

)

(4,742

)

Net market gains (losses) and other

116


27


6,424


759


10,553


847


Balance at end of period

$

162,887


$

167,427


$

139,412


$

104,953


$

204,887


$

203,759


The following table categorizes asset management and administration fees, average client assets, and average fee yields by funds or revenue source:

Three Months Ended March 31,

2017

2016



Average

Client

Assets

Revenue

Average

Fee

Average
Client
Assets

Revenue

Average
Fee

Schwab money market funds before fee waivers

$

162,789


$

231


0.58

%

$

168,440


$

246


0.59

%

Fee waivers

(8

)

(97

)

Schwab money market funds

162,789


223


0.56

%

168,440


149


0.36

%

Schwab equity and bond funds and ETFs

140,054


55


0.16

%

103,392


51


0.20

%

Mutual Fund OneSource ®

202,416


170


0.34

%

194,644


164


0.34

%

Other third-party mutual funds and ETFs (1)

272,626


58


0.09

%

235,317


51


0.09

%

Total mutual funds and ETFs  (2)

$

777,885


506


0.26

%

$

701,793


415


0.24

%

Advice solutions  (2) :

Fee-based

$

191,727


244


0.52

%

$

166,419


215


0.52

%

Intelligent Portfolios

14,245


-


-


5,116


-


-


Legacy Non-Fee

17,441


-


-


16,469


-


-


Total advice solutions

$

223,413


244


0.44

%

$

188,004


215


0.46

%

Other balance-based fees  (3)

388,739


61


0.06

%

318,027


56


0.07

%

Other  (4)

12


13


Total asset management and administration fees

$

823


$

699


(1)

Includes Schwab ETF OneSource ™ .

(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. Beginning in the first quarter of 2017, a prospective methodology change was made to average client assets relating to 401(k) recordkeeping fees to provide improved insight into the associated fee driver, which resulted in an increase of approximately $25 billion. There was no impact to revenue or the average fee.

(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 $124 million , or 18% , in the first quarter of 2017 compared to the same period in 2016 . The increase is largely due to continued improvement in net money fund revenue from rising rates and growing balances in advisory solutions, mutual funds, and ETFs.


- 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)





Net Interest Revenue


The following table presents net interest revenue information corresponding to interest-earning assets and funding sources on the condensed consolidated balance sheets:

Three Months Ended March 31,

2017

2016



Average

Balance

Interest

Revenue/

Expense

Average

Yield/

Rate

Average
Balance

Interest
Revenue/
Expense

Average
Yield/
Rate

Interest-earning assets:

Cash and cash equivalents

$

9,047


$

17


0.76

%

$

10,752


$

13


0.49

%

Cash and investments segregated

21,820


35


0.65

%

20,265


19


0.38

%

Broker-related receivables (1)

388


-


0.55

%

384


-


0.04

%

Receivables from brokerage clients

15,245


126


3.35

%

14,890


125


3.38

%

Available for sale securities  (2)

71,430


251


1.43

%

68,163


198


1.17

%

Held to maturity securities

83,368


485


2.36

%

50,257


322


2.58

%

Bank loans

15,527


110


2.87

%

14,405


99


2.76

%

  Total interest-earning assets

216,825


1,024


1.92

%

179,116


776


1.74

%

Other interest revenue

31


34


Total interest-earning assets

$

216,825


$

1,055


1.97

%

$

179,116


$

810


1.82

%

Funding sources:

Bank deposits

$

163,682


$

19


0.05

%

$

131,620


$

8


0.02

%

Payables to brokerage clients (1)

27,666


2


0.03

%

26,728


-


0.01

%

Short-term borrowings (1)

1,332


2


0.61

%

20


-


0.20

%

Long-term debt

3,090


28


3.67

%

2,877


26


3.63

%

  Total interest-bearing liabilities

195,770


51


0.11

%

161,245


34


0.08

%

Non-interest-bearing funding sources

21,055


17,871


Other interest expense

4


4


Total funding sources

$

216,825


$

55


0.10

%

$

179,116


$

38


0.09

%

Net interest revenue

$

1,000


1.87

%

$

772


1.73

%

(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.

Net interest revenue increased $ 228 million , or 30% , in the first quarter of 2017 compared to the same period in 2016 due to higher interest-earning assets driven by growth in bank deposits. The Company has grown bank deposits through a combination of:

Gathering additional assets from new and current clients; 

Transferring uninvested cash balances in certain client brokerage accounts to Schwab Bank; and

Establishing the Schwab Bank sweep feature as the default investment option for uninvested cash balances within all new brokerage accounts as of June 2016.

The Company has invested the cash from the growth in bank deposits and short-term borrowings in investment securities. These incremental investments, coupled with an increase in short-term interest rates, have resulted in a 14 basis point improvement in the net interest margin to 1.87% during the first quarter of 2017 .

In March 2017, the Company transferred $24.7 billion of debt securities from the available for sale (AFS) category to the held to maturity (HTM) category. For additional information on the transfer, see Item 1 – Note 3.



- 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)




Trading Revenue

The following table presents trading revenue and the related drivers:



Three Months Ended
March 31,



2017

2016

Percent

Change

Daily average revenue trades (in thousands)

317


328


(3

)%

Clients' daily average trades (in thousands)

585


616


(5

)%

Number of trading days

62.0


61.0


2

 %

Average revenue per revenue trade

$

9.84


$

11.44


(14

)%

Trading revenue

$

192


$

232


(17

)%

During the first quarter of 2017 , the Company announced two trading price reductions which lowered standard equity, ETF, and option trade commissions from $8.95 to $4.95 and lowered the per contract option fee from $.75 to $.65. Trading revenue decreased by $ 40 million , or 17% , in the first quarter of 2017 compared to the same period in 2016 , primarily due to these pricing reductions along with lower trading volumes from the prior year. These reductions in commission rates reflect both the Company's belief that trade pricing should never be an obstacle for investors as well as the Company's commitment to share the benefits of its scale with clients.


Other Revenue


Other revenue increased by $3 million , or 5% , in the first quarter of 2017 compared to the first quarter of 2016 , primarily due to the sublease of office space in San Francisco along with a gain on the sale of a building in Indianapolis.


Order flow revenue was $27 million during the first quarters of both 2017 and 2016 .


- 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)



Expenses Excluding Interest

The following table shows a comparison of expenses excluding interest:



Three Months Ended March 31,



2017

2016

Percent
Change

Compensation and benefits







Salaries and wages

$

367


$

336


9

 %

Incentive compensation

202


173


17

 %

Employee benefits and other

132


117


13

 %

Total compensation and benefits

701


626


12

 %

Professional services

133


116


15

 %

Occupancy and equipment

105


98


7

 %

Advertising and market development

71


70


1

 %

Communications

57


60


(5

)%

Depreciation and amortization

65


56


16

 %

Other

106


83


28

 %

Total expenses excluding interest

$

1,238


$

1,109


12

 %

Expenses as a percentage of total net revenues:




Compensation and benefits

34

%

35

%

Advertising and market development

3

%

4

%

Full-time equivalent employees (in thousands):






At quarter end

16.5


15.6



Average

16.5


15.6




Salaries and wages increased in the first quarter of 2017 compared to the same period in 2016 primarily due to a 6% increase in employee headcount to support the growth in the business and annual salary increases.

Incentive compensation increased in the first quarter of 2017 compared to the same period in 2016 primarily due to higher field incentive plan costs relating to increased net client asset flows and increased employee headcount.

Employee benefits and other expenses increased in the first quarter of 2017 compared to the same period in 2016 due to increases in healthcare costs and higher employee headcount.

Professional services expense increased in the first quarter of 2017 compared to the same period in 2016 primarily due to higher spending on technology services and an increase in fees paid to outsourced service providers and consultants as the Company continued to invest in the business.

Depreciation and amortization expenses grew in the first quarter of 2017 compared to the same period in 2016 as a result of higher amortization of internally developed software as projects were completed and placed into production.

Other expense increased in the first quarter of 2017 compared to the same period in 2016 primarily due to an increase in the Company's Federal Deposit Insurance Corporation (FDIC) assessments. The FDIC assessments rose as a result of higher bank deposits and the effect of a new surcharge that commenced in the third quarter of 2016.


- 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)



Taxes on Income


Effective January 1, 2017, the Company adopted Accounting Standards Update (ASU) 2016-09, which prospectively changes the accounting treatment of a portion of the tax deductions relating to equity compensation. These deductions were previously reflected directly in additional paid-in capital, a component of stockholders' equity, and are now included in tax expense, a component of net income. The Company's first quarter 2017 tax expense was reduced by approximately $31 million as a result of this change. Future effects will depend on the Company's share price, restricted stock vesting, and the volume of equity incentive options exercised.


The Company's effective income tax rate on income before taxes was 33.1% and 37.1% for the first quarters of 2017 and 2016 , respectively, which reflects the benefit in the first quarter of 2017 discussed above.


Segment Information


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



Investor Services

Advisor Services

Total

Three Months Ended March 31,

Percent

Change

2017

2016

Percent
Change

2017

2016

Percent
Change

2017

2016

Net Revenues:

Asset management and

  administration fees

20

 %

$

566


$

472


13

 %

$

257


$

227


18

 %

$

823


$

699


Net interest revenue

23

 %

753


613


55

 %

247


159


30

 %

1,000


772


Trading revenue

(17

)%

119


143


(18

)%

73


89


(17

)%

192


232


Other

9

 %

50


46


(6

)%

16


17


5

 %

66


63


Provision for loan losses

(100

)%

-


(2

)

-


-


-


(100

)%

-


(2

)

Total net revenues

17

 %

1,488


1,272


21

 %

593


492


18

 %

2,081


1,764


Expenses Excluding Interest

11

 %

930


836


13

 %

308


273


12

 %

1,238


1,109


Income before taxes on income

28

 %

$

558


$

436


30

 %

$

285


$

219


29

 %

$

843


$

655



Investor Services

Net revenues rose by $216 million , or 17% , in the first quarter of 2017 compared to the same period in 2016 primarily due to increases in net interest revenue and asset management and administration fees, partially offset by a decrease in trading revenue. Net interest revenue increased primarily due to higher balances of interest-earning assets and higher yields on invested assets. Asset management and administration fees increased primarily due to higher net yields on money market fund assets and growth in client assets invested in mutual funds and ETFs and advisory solutions. Trading revenue decreased primarily due to lower commissions per revenue trade.


Expenses excluding interest increased by $94 million , or 11% , in the first quarter of 2017 compared to the same period in 2016 primarily due to higher compensation and benefits and other expenses. Incentive compensation increased as a result of growth in net client asset flows while salaries and benefits grew reflecting higher employee headcount. Other expenses rose due to higher FDIC fees.

Advisor Services

Net revenues rose by $101 million , or 21% , in the first quarter of 2017 compared to the same period in 2016 primarily due to increases in net interest revenue and asset management and administration fees, partially offset by a decrease in trading revenue. Net interest revenue increased primarily due to higher balances of interest-earning assets and higher yields. This growth in interest-earning assets was bolstered by the migration of more uninvested client cash balances in the segment to Schwab Bank. Asset management and administration fees increased primarily due to higher net yields on money market fund assets and growth in client assets invested in mutual funds and ETFs. Trading revenue decreased primarily due to lower commissions per revenue trade.


Expenses excluding interest increased by $35 million , or 13% , in the first quarter of 2017 compared to the same period in 2016 primarily due to salaries and incentive compensation resulting from growth in client assets and higher headcount.


- 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)




RISK MANAGEMENT


The Company's business activities expose it to a variety of risks, including operational, credit, market, liquidity, and compliance risk. 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 the Company's risk management programs, see Item 7 – Risk Management in the 2016 Form 10-K.


Credit Risk

Credit risk is the potential for loss due to a borrower, counterparty, or issuer failing to perform on its contractual obligations. The Company's exposure to credit risk mainly results from margin lending and client option and futures activities, securities lending, mortgage lending, pledged asset lending, its role as a counterparty in financial contracts, and other investing activities. Client investing activities often include the use of leverage through margin, options, and futures positions. The Company manages collateral concentrations at the account level and across client portfolios.

The credit risk exposure related to the Company's bank loans is actively managed through individual loan and portfolio reviews. Management regularly reviews asset quality, including concentrations, delinquencies, nonaccrual loans, charge-offs, and recoveries. All are factors in the determination of an appropriate allowance for loan losses. For more information on the Company's credit quality indicators relating to its bank loans, see Item 1 – Note 4.

The Company also has exposure to concentration risk when holding large positions in financial instruments collateralized by assets with similar economic characteristics or in securities of a single issuer or within a particular industry or geographical area. The fair value of the Company's investments in corporate debt securities and commercial paper totaled $11.3 billion at March 31, 2017 , with 43% issued by institutions in the financial services industry. For more information on the Company's investment portfolios, see Item 1 – Note 3.

Market Risk

Market risk is the potential for changes in earnings or the value of financial instruments held by the Company as a result of fluctuations in interest rates, equity prices, or market conditions.


The Company is exposed to interest rate risk primarily from changes in market interest rates on its interest-earning assets relative to changes in the costs of its funding sources that finance these assets. The majority of the Company's interest-earning assets and interest-bearing liabilities are sensitive to changes in short-term interest rates. A portion of the Company's investment portfolio is sensitive to changes in long-term interest rates.


Net Interest Revenue Simulation


For the Company's net interest revenue sensitivity analysis, the Company uses net interest revenue simulation modeling techniques to evaluate and manage the effect of changing interest rates. The simulation includes all interest-sensitive assets and liabilities. Key variables in the simulation include the repricing of financial instruments, prepayment, reinvestment, and product pricing assumptions. The Company uses constant balances and market rates in the simulation assumptions in order to minimize the number of variables and to better isolate risks. The simulations involve assumptions that are inherently uncertain and, as a result, cannot precisely estimate net interest revenue or predict the impact of changes in interest rates on net interest revenue. Actual results may differ from simulated results due to balance growth or decline and the timing, magnitude, and frequency of interest rate changes, as well as changes in market conditions and management strategies, including changes in asset and liability mix.


If the Company's guidelines for its net interest revenue sensitivity are breached, management must report the breach to the Company's Corporate Asset-Liability Management and Pricing Committee and establish a plan to address the interest rate risk. There were no breaches of the Company's net interest revenue sensitivity risk limits during the first quarter of 2017 or year ended December 31, 2016 .


As represented by the simulations presented below, the Company's investment strategy is structured to produce an increase in net interest revenue when interest rates rise and, conversely, a decrease in net interest revenue when interest rates fall.


- 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)




The simulations in the following table assume 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 the Company actively manages its consolidated balance sheet and interest rate exposure, in all likelihood the Company would take steps to manage additional interest rate exposure that could result from changes in the interest rate environment. The following table displays the simulated net interest revenue change over the next 12 months beginning March 31, 2017 and December 31, 2016 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:



March 31, 2017

December 31, 2016

Increase of 100 basis points

4.7

 %

6.5

 %

Decrease of 100 basis points

(9.6

)%

(9.8

)%

The change in net interest revenue sensitivities as of March 31, 2017 reflects the increase in interest rates across all terms. The increase of short-term interest rates positively impacts net interest revenue as yields on interest-earning assets 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.


Liquidity Risk


Liquidity risk is the potential that the Company will be unable to sell assets or meet cash flow obligations when they come due without incurring unacceptable losses. The Company's primary source of funds is cash generated by client activity: bank deposits and cash balances in client brokerage accounts. Other sources of funds may include cash flows from operations, maturities and sales of investment securities, repayments on loans, lending securities held in client brokerage accounts, and cash provided by external financing or equity offerings.

To meet daily funding needs, the Company maintains liquidity in the form of overnight cash deposits and short-term investments. For unanticipated liquidity needs, the Company maintains a buffer of highly liquid investments, currently comprised of U.S. Treasury notes.


- 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)





In addition to internal sources of liquidity, the Company has sources of external funding. The following table describes debt facilities available to the Company:

Available at

Description

Borrower

March 31, 2017 (1)

Committed, unsecured credit facility with various external banks

CSC

$

750


Uncommitted, unsecured lines of credit with various external banks

CSC, Schwab

1,102


Federal Reserve Bank discount window

Schwab Bank

3,839


Federal Home Loan Bank secured credit facility

Schwab Bank

18,166


Unsecured commercial paper

CSC

150


(1) See Item 1 – Note 7 for information on amounts outstanding. For additional information on the Company's borrowing facilities, including financial covenants and other conditions of borrowing, see Item 7 – Liquidity Risk in the 2016 Form 10-K.

CSC has a universal automatic shelf registration statement on file with the SEC, which enables it to issue debt, equity, and other securities.

On March 2, 2017, CSC issued $650 million aggregate principal amount of Senior Notes that mature in 2027 . The Senior Notes have a fixed interest rate of 3.200% with interest payable semi-annually. CSC intends to use the net proceeds from the sale of the Senior Notes for general corporate purposes, including, but not limited to, the repayment of $250 million aggregate principal amount of its 6.375% Senior Notes due September 1, 2017.

CSC's ratings for commercial paper notes are P1 by Moody's, A1 by Standard & Poor's, and F1 by Fitch. CSC's Senior Notes and Medium-Term Notes are rated A2 by Moody's, A by Standard & Poor's, and A by Fitch. CSC's preferred stock is rated Baa2 by Moody's, BBB by Standard & Poor's, and BB+ by Fitch. For further discussion of CSC's debt and equity, see Item 1 – Note 7 and Note 11.

Beginning on January 1, 2016, the Company became subject to the modified liquidity coverage ratio (LCR) rule which was fully phased in on January 1, 2017 and requires CSC to hold High Quality Liquid Assets equal to at least 70% of projected net cash outflows over a 30-day period, as defined by the rule. At March 31, 2017 , the Company was in compliance with the fully phased-in modified LCR rule. For additional information on the LCR rule, see Item 1 – Business – Regulation in the 2016 Form 10‑K.



CAPITAL MANAGEMENT


The Company seeks to manage capital to a level and composition sufficient to support execution of its business strategy, including anticipated balance sheet growth, providing financial support to its subsidiaries, and sustained access to the capital markets, while at the same time meeting its regulatory capital requirements and serving as a source of financial strength to Schwab Bank.


The Company's primary sources of capital are funds generated by the operations of its subsidiaries and securities issuances by CSC in the capital markets. To ensure that it has a sufficient amount of capital to absorb unanticipated losses or declines in asset values, the Company has adopted a policy to remain well capitalized even in stressed scenarios. For a description of the Company's internal guidelines, monitoring and governance processes, see Item 7 – Capital Management in the 2016 Form 10‑K.



- 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)




Regulatory Capital Requirements

CSC and Schwab Bank are subject to various capital requirements set by regulatory agencies as discussed in further detail in the 2016 Form 10-K and in Item 1 – Note 14. As of March 31, 2017, CSC and Schwab Bank are considered well capitalized.

The following table details CSC's and Schwab Bank's capital ratios as of March 31, 2017 and December 31, 2016 :

March 31, 2017

December 31, 2016

CSC

Schwab Bank

CSC

Schwab Bank

Total stockholders' equity

$

16,982


$

12,376


$

16,421


$

11,726


Less:

Preferred Stock

2,783


-


2,783


-


Common Equity Tier 1 Capital before regulatory adjustments

$

14,199


$

12,376


$

13,638


$

11,726


Less:

Goodwill, net of associated deferred tax liabilities

$

1,175


$

11


$

1,175


$

11


Other intangible assets, net of associated deferred tax liabilities

61


-


52


-


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

1


-


-


-


AOCI adjustment  (1)

(132

)

(131

)

(163

)

(163

)

Common Equity Tier 1 Capital 

$

13,094


$

12,496


$

12,574


$

11,878


Tier 1 Capital

$

15,877


$

12,496


$

15,357


$

11,878


Total Capital

$

15,905


$

12,522


$

15,384


$

11,904


Risk-Weighted Assets

71,380


63,573


68,179


59,915


Common Equity Tier 1 Capital/Risk-Weighted Assets

18.3

%

19.7

%

18.4

%

19.8

%

Tier 1 Capital/Risk-Weighted Assets

22.2

%

19.7

%

22.5

%

19.8

%

Total Capital/Risk-Weighted Assets

22.3

%

19.7

%

22.6

%

19.9

%

Tier 1 Leverage Ratio

7.1

%

7.0

%

7.2

%

7.0

%

(1) CSC and Schwab Bank have elected to opt-out of the requirement to include most components of accumulated other comprehensive income (AOCI) in Common Equity Tier 1 (CET1) Capital. The year after the Company surpasses $250 billion in consolidated assets, it can no longer exclude AOCI from regulatory capital.

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

The Company's broker-dealer subsidiaries (Schwab and optionsXpress, Inc. (optionsXpress)) are subject to regulatory requirements of the Uniform Net Capital Rule. At March 31, 2017 , Schwab and optionsXpress met and exceeded their net capital requirements.

In addition to the capital requirements above, the Company's subsidiaries are subject to various regulatory requirements that are intended to ensure financial soundness and liquidity. See Item 1 – Note 14 for additional information on the components of stockholders' equity and information on the capital requirements of each of the subsidiaries.


- 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)




Dividends


Cash dividends paid and per share amounts for the first quarters of 2017 and 2016 are as follows:

Three Months Ended March 31,

2017

2016



Cash Paid

Per Share Amount

Cash Paid

Per Share Amount

Common Stock

$

108


$

0.08


$

80


$

0.06


Series A Preferred Stock (1)

14


35.00


14


35.00


Series B Preferred Stock (2)

7


15.00


7


15.00


Series C Preferred Stock (2)

9


15.00


9


15.00


Series D Preferred Stock (2,3)

11


14.88


-


-


Series E Preferred Stock (4)

9


1,554.51


-


-


(1) Dividends paid semi-annually until February 1, 2022 and quarterly thereafter.

(2) Dividends paid quarterly.

(3) Series D Preferred Stock was issued on March 7, 2016.

(4) Series E Preferred Stock was issued on October 31, 2016. Dividends paid semi-annually until March 1, 2022 and quarterly thereafter.



OTHER


Foreign Holdings

At March 31, 2017 , the Company had exposure to non-sovereign financial and non-financial institutions in foreign countries of $6.8 billion , with the fair value of the top three exposures being to issuers and counterparties domiciled in France at $1.8 billion , Sweden at $1.2 billion , and Australia at $0.9 billion . The Company has no direct exposure to sovereign foreign governments. The Company does not have unfunded commitments to counterparties in foreign countries, nor does it have exposure as a result of credit default protection purchased or sold separately as of March 31, 2017 . 

In addition to the direct holdings in foreign companies, the Company has indirect exposure to foreign countries through its investments in CSIM money market funds (collectively, the Funds) resulting from brokerage clearing activities. At March 31, 2017 , the Company had $113 million in investments in these Funds. Certain of the Funds' positions include certificates of deposits, time deposits, commercial paper, and corporate debt securities issued by counterparties in foreign countries. Additionally, at March 31, 2017 , the Company had outstanding margin loans to foreign residents of $405 million .


Off-Balance Sheet Arrangements

The Company enters into various off-balance sheet arrangements in the ordinary course of business, primarily to meet the needs of its clients. These arrangements include firm commitments to extend credit. Additionally, the Company enters into guarantees and other similar arrangements in the ordinary course of business. For information on each of these arrangements, see Item 1 – Note 4, Note 5, Note 7, and Note 8 , and Item 8 – Note 15 in the 2016 Form 10-K.



- 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)




CRITICAL ACCOUNTING ESTIMATES

Certain of the Company's 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  2016  Form 10-K. With the exception of adding Income Taxes, there have been no other changes to critical accounting estimates during the first  three months of 2017 .

Income Taxes

The Company estimates income tax expense based on amounts expected to be owed to the various tax jurisdictions in which it operates, including federal, state and local domestic jurisdictions, and insignificant amounts owed to several foreign jurisdictions. The estimated income tax expense is reported in the Consolidated Statements of Income. Accrued taxes are reported in other assets or other liabilities on the Consolidated Balance Sheets and represent the net estimated amount due to or to be received from taxing jurisdictions either currently or deferred to future periods. Deferred taxes arise from differences between assets and liabilities measured for financial reporting purposes versus income tax reporting purposes. Deferred tax assets are recognized if, in management's judgment, their realizability is determined to be more likely than not. Uncertain tax positions that meet the more likely than not recognition threshold are measured to determine the amount of benefit to recognize. An uncertain tax position is measured at the largest amount of benefit management believes is more likely than not to be realized upon settlement. In estimating accrued taxes, the Company assesses the relative merits and risks of the appropriate tax treatment considering statutory, judicial and regulatory guidance in the context of the tax position. Because of the complexity of tax laws and regulations, interpretation can be difficult and subject to legal judgment given specific facts and circumstances.  


Changes in the estimate of accrued taxes occur periodically due to changes in tax rates, interpretations of tax laws, the status of examinations being conducted by various taxing authorities, and newly enacted statutory, judicial and regulatory guidance that impacts the relative merits and risks of tax positions. These changes, when they occur, affect accrued taxes and can be significant to the operating results of the Company.



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.


- 15 -


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
March 31,



2017

2016

Net Revenues



Asset management and administration fees (1)

$

823


$

699


Interest revenue

1,055


810


Interest expense

(55

)

(38

)

Net interest revenue

1,000


772


Trading revenue

192


232


Other

66


63


Provision for loan losses

-


(2

)

Total net revenues

2,081


1,764


Expenses Excluding Interest

Compensation and benefits

701


626


Professional services

133


116


Occupancy and equipment

105


98


Advertising and market development

71


70


Communications

57


60


Depreciation and amortization

65


56


Other

106


83


Total expenses excluding interest

1,238


1,109


Income before taxes on income

843


655


Taxes on income (2)

279


243


Net Income

564


412


Preferred stock dividends and other (3)

39


20


Net Income Available to Common Stockholders

$

525


$

392


Weighted-Average Common Shares Outstanding:

Basic

1,336


1,321


Diluted

1,351


1,330


Earnings Per Common Share:

Basic

$

.39


$

.30


Diluted

$

.39


$

.29


Dividends Declared Per Common Share

$

.08


$

.06


(1) Includes fee waivers of $ 8 million and $ 97 million during the first quarters of 2017 and 2016 , respectively, relating to Schwab-sponsored money market funds.

(2) Includes the prospective adoption of ASU 2016-09 in 2017. See New Accounting Standards in Note 2 for additional information.

(3) Includes preferred stock dividends and undistributed earnings and dividends allocated to non-vested restricted stock units.


See Notes to Condensed Consolidated Financial Statements.



- 16 -



THE CHARLES SCHWAB CORPORATION

Condensed Consolidated Statements of Comprehensive Income

(In Millions)

(Unaudited)





Three Months Ended
March 31,



2017

2016

Net Income

$

564


$

412


Other comprehensive income (loss), before tax:



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



Net unrealized gain (loss)

52


21


Reclassification of net unrealized loss transferred to held to maturity

227


-


Other reclassifications included in other revenue

(1

)

-


Change in net unrealized gain (loss) on held to maturity securities:

Reclassification of net unrealized loss transferred from available for sale

(227

)

-


Amortization of amounts previously recorded upon transfer from available for sale

2


-


Other

(3

)

1


Other comprehensive income (loss), before tax

50


22


Income tax effect

(19

)

(8

)

Other comprehensive income (loss), net of tax

31


14


Comprehensive Income

$

595


$

426


See Notes to Condensed Consolidated Financial Statements.



- 17 -


THE CHARLES SCHWAB CORPORATION

Condensed Consolidated Balance Sheets

(In Millions, Except Per Share and Share Amounts)

(Unaudited)





March 31, 2017

December 31, 2016

Assets

Cash and cash equivalents

$

9,475


$

10,828


Cash and investments segregated and on deposit for regulatory purposes

(including resale agreements of $8,465 at March 31, 2017 and $9,547

at December 31, 2016)

21,481


22,174


Receivables from brokers, dealers, and clearing organizations

721


728


Receivables from brokerage clients - net

16,729


17,155


Other securities owned - at fair value

564


449


Available for sale securities

50,588


77,365


Held to maturity securities (fair value - $107,382 at March 31, 2017 and

$74,444 at December 31, 2016)

107,971


75,203


Bank loans - net

15,548


15,403


Equipment, office facilities, and property - net

1,305


1,299


Goodwill

1,227


1,227


Intangible assets - net

135


144


Other assets

1,317


1,408


Total assets

$

227,061


$

223,383


Liabilities and Stockholders' Equity


Bank deposits

$

166,889


$

163,454


Payables to brokers, dealers, and clearing organizations

2,643


2,407


Payables to brokerage clients

34,267


35,894


Accrued expenses and other liabilities

2,162


2,331


Short-term borrowings

600


-


Long-term debt

3,518


2,876


Total liabilities

210,079


206,962


Stockholders' equity:


Preferred stock - $.01 par value per share; aggregate liquidation preference

             of $2,835 at March 31, 2017 and December 31, 2016

2,783


2,783


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

  shares issued

15


15


Additional paid-in capital

4,300


4,267


Retained earnings

13,069


12,649


Treasury stock, at cost - 150,686,613 shares at March 31, 2017 and

154,793,560 shares at December 31, 2016

(3,053

)

(3,130

)

Accumulated other comprehensive income (loss)

(132

)

(163

)

Total stockholders' equity

16,982


16,421


Total liabilities and stockholders' equity

$

227,061


$

223,383



See Notes to Condensed Consolidated Financial Statements.



- 18 -


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

Treasury Stock, at cost

Shares

Amount

Retained Earnings


Total

Balance at December 31, 2015

$

1,459


1,488


$

15


$

4,152


$

11,253


$

(3,343

)

$

(134

)

$

13,402


Net income

-


-


-


-


412


-


-


412


Other comprehensive income (loss), net of tax

-


-


-


-


-


-


14


14


Issuance of preferred stock

727


-


-


-


-


-


-


727


Dividends declared on preferred stock

-


-


-


-


(16

)

-


-


(16

)

Dividends declared on common stock

-


-


-


-


(80

)

-


-


(80

)

Stock option exercises and other

-


-


-


(12

)

-


19


-


7


Share-based compensation and

   related tax effects

-


-


-


47


-


-


-


47


Other

-


-


-


2


(2

)

-


-


-


Balance at March 31, 2016

$

2,186


1,488


$

15


$

4,189


$

11,567


$

(3,324

)

$

(120

)

$

14,513


Balance at December 31, 2016

$

2,783


1,488


$

15


$

4,267


$

12,649


$

(3,130

)

$

(163

)

$

16,421


Net income

-


-


-


-


564


-


-


564


Other comprehensive income (loss), net of tax

-


-


-


-


-


-


31


31


Dividends declared on preferred stock

-


-


-


-


(37

)

-


-


(37

)

Dividends declared on common stock

-


-


-


-


(107

)

-


-


(107

)

Stock option exercises and other

-


-


-


(23

)

-


81


-


58


Share-based compensation

-


-


-


49


-


-


-


49


Other

-


-


-


7


-


(4

)

-


3


Balance at March 31, 2017

$

2,783


1,488


$

15


$

4,300


$

13,069


$

(3,053

)

$

(132

)

$

16,982



See Notes to Condensed Consolidated Financial Statements.



- 19 -


THE CHARLES SCHWAB CORPORATION

Condensed Consolidated Statements of Cash Flows

(in Millions)

(Unaudited)



Three Months Ended
March 31,



2017

2016

Cash Flows from Operating Activities


Net income

$

564


$

412


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


Provision for loan losses

-


2


Share-based compensation

52


47


Depreciation and amortization

65


56


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

72


46


Other

12


10


Net change in:



Cash and investments segregated and on deposit for regulatory purposes

693


(662

)

Receivables from brokers, dealers, and clearing organizations

11


(524

)

Receivables from brokerage clients

424


1,350


Other securities owned

(115

)

48


Other assets

4


21


Payables to brokers, dealers, and clearing organizations

(346

)

(120

)

Payables to brokerage clients

(1,627

)

(903

)

Accrued expenses and other liabilities

(143

)

(152

)

Net cash used for operating activities

(334

)

(369

)

Cash Flows from Investing Activities

Purchases of available for sale securities

(1,992

)

(7,967

)

Proceeds from sales of available for sale securities

1,064


300


Principal payments on available for sale securities

3,067


2,086


Purchases of held to maturity securities

(9,301

)

(3,878

)

Principal payments on held to maturity securities

1,731


897


Net increase in bank loans

(134

)

(139

)

Purchases of equipment, office facilities, and property

(80

)

(56

)

Proceeds from sales of Federal Home Loan Bank stock

64


-


Other investing activities

(6

)

(5

)

Net cash used for investing activities

(5,587

)

(8,762

)

Cash Flows from Financing Activities

Net change in bank deposits

3,435


6,187


Net proceeds from short-term borrowings

600


800


Issuance of long-term debt

643


-


Repayment of long-term debt

(2

)

(1

)

Net proceeds from preferred stock offering

-


725


Dividends paid

(158

)

(110

)

Proceeds from stock options exercised and other

58


7


Other financing activities

(8

)

2


Net cash provided by financing activities

4,568


7,610


Decrease in Cash and Cash Equivalents

(1,353

)

(1,521

)

Cash and Cash Equivalents at Beginning of Period

10,828


11,978


Cash and Cash Equivalents at End of Period

$

9,475


$

10,457


Supplemental Cash Flow Information

Cash paid during the period for:

Interest

$

75


$

56


Income taxes

$

8


$

19


Non-cash investing activity:


Securities purchased during the period but settled after period end

$

581


$

380


See Notes to Condensed Consolidated Financial Statements.


- 20 -


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

CSC is a savings and loan holding company engaged, through its subsidiaries, in wealth management, securities brokerage, banking, asset management, custody, and financial advisory services. Schwab is a securities broker-dealer with over 335 domestic branch offices in 46 states, as well as a branch in each of the Commonwealth of Puerto Rico and London, England. In addition, Schwab serves clients in Hong Kong through one of CSC's subsidiaries. Other subsidiaries include Schwab Bank, a federal savings bank, and CSIM, the investment advisor for Schwab's proprietary mutual funds, which are referred to as the Schwab Funds ® , and for Schwab's exchange-traded funds, which are referred to as the Schwab ETFs™.

The accompanying unaudited condensed consolidated financial statements include CSC and its majority-owned subsidiaries (collectively, referred to as the Company). Intercompany balances and transactions have been eliminated. These condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the U.S., which require management to make certain estimates and assumptions that affect the reported amounts in the accompanying financial statements. Certain estimates relate to other-than-temporary impairment (OTTI) of investment securities, valuation of goodwill, allowance for loan losses, legal and regulatory reserves, and income taxes. Actual results may differ from those estimates.

These condensed consolidated financial statements reflect all adjustments that are, in the opinion of management, necessary for a fair presentation of the results for the periods presented. These adjustments are of a normal recurring nature. The Company's results for any interim period are not necessarily indicative of results for a full year or any other interim period. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the 2016 Form 10-K.

The Company's significant accounting policies are included in Note 2 in the 2016 Form 10-K. There have been no significant changes to these accounting policies during the first three months of 2017 except as described in Note 2 below.

Principles of Consolidation

The Company evaluates for consolidation all entities in which it has financial interests, except for money market funds which are specifically excluded from consolidation guidance. For an entity subject to consolidation, the Company evaluates whether the Company's interest in the entity constitutes a controlling financial interest under either the variable interest entity (VIE) model or a voting interest entity (VOE) model. Based upon the Company's assessments, the Company is not deemed to have a controlling financial interest in and, therefore, is not required to consolidate any VIEs. See Note 5 for further information about VIEs. The Company consolidates all VOEs in which it has majority-voting interests.

For investments in entities in which the Company does not have a controlling financial interest, the Company accounts for those investments under the equity method of accounting when the Company has the ability to exercise significant influence over operating and financing decisions of the entity. Investments in entities for which the Company does not have the ability to exercise significant influence are generally carried at cost. Both equity method and cost method investments are included in other assets on the condensed consolidated balance sheets.



2.    New Accounting Standards


Adoption of New Accounting Standards


On January 1, 2017, the Company adopted, on a prospective basis, ASU 2016-09, "Stock Compensation – Improvements to Employee Share-Based Payment Accounting (Topic 718)", which requires entities to recognize the income tax effects for the difference between generally accepted accounting principles (GAAP) and federal income tax treatment (i.e., excess tax benefit or deficiency) of share-based awards in the income statement when the awards vest or are settled, rather than recording such effects in additional paid-in capital. As a result, the Company's tax expense was reduced by approximately $31 million in the first quarter of 2017 . Future effects will depend on the Company's share price, restricted stock vesting, and the volume of equity incentive options exercised. For the purpose of recognizing compensation cost associated with share-based awards, ASU 2016-09 also provides entities with an accounting policy election to account for forfeitures of awards as they occur or continue


- 21 -


THE CHARLES SCHWAB CORPORATION

Notes to Condensed Consolidated Financial Statements

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

(Unaudited)


with current practice of estimating forfeitures at the grant date to determine the number of awards expected to vest and adjusting that estimate as necessary. The Company has elected to continue to follow the current practice.


New Accounting Standards Not Yet Adopted

In May 2014, the Financial Accounting Standards Board (FASB) issued ASU 2014-09, "Revenue from Contracts with Customers (Topic 606)," which provides new guidance on revenue recognition. The guidance clarifies that revenue from contracts with customers should be recognized in a manner that depicts the timing of the related transfer of goods or performance of services at an amount that reflects the expected consideration. The FASB has subsequently issued several amendments to the standard, including deferral of the effective date until January 1, 2018, clarification of principal versus agent considerations, narrow scope improvements and other technical corrections. Entities may elect either full or modified retrospective transition. Full retrospective transition will require a cumulative effect adjustment to retained earnings as of the earliest comparative period presented. Modified retrospective transition will require a cumulative effect adjustment to retained earnings as of the beginning of the reporting period in which the entity first applies the new guidance.


The Company plans to adopt the revenue recognition guidance in the first quarter of 2018. The guidance does not apply to revenue associated with financial instruments, including loans and securities that are accounted for under other U.S. GAAP. Accordingly, the Company does not expect an impact to net interest revenue. While the Company has not yet identified any changes in the timing of revenue recognition, the Company's review is ongoing. The Company is evaluating the impact the new standard will have on the presentation of certain revenue streams (gross versus net reporting) and the capitalization of contract costs. The Company has not yet selected a transition method and continues to evaluate the impact the new guidance will have on its financial statements and earnings per common share (EPS).


In January 2016, the FASB issued ASU 2016-01, "Financial Instruments – Overall (Subtopic 825-10)," which will become effective January 1, 2018. This new guidance addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. The main provisions of the guidance include (i) most equity investments are to be measured at fair value with changes in fair value recognized in net income, except for those accounted for under the equity method or those that do not have readily determinable fair values for which a practical expedient can be elected, (ii) requires the use of an exit price notion when measuring the fair value of financial instruments for disclosure purposes, and (iii) requires separate presentation of financial assets and financial liabilities by measurement category and form of financial instrument on the balance sheet or in the accompanying notes. The Company does not expect the adoption of ASU 2016-01 will have a material impact on its financial statements and EPS.


In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)" which amends the accounting for leases by lessees and lessors. The primary change as a result of the new standard is the recognition of right-of-use assets and lease liabilities by lessees for those leases classified as operating leases. Additional changes include accounting for lease origination and executory costs, required lessee reassessments during the lease term due to changes in circumstances and expanded lease disclosures. ASU 2016-02 will become effective January 1, 2019, with early adoption permitted, and requires entities to apply the new guidance using a modified retrospective transition. Modified retrospective transition requires entities to apply the new guidance as of the beginning of the earliest comparative period presented in the financial statements in which the entity first applies the new standard. Certain transition reliefs are permitted if elected by the entity. The adoption of ASU 2016-02 will result in the Company recognizing a right-of-use asset and lease liability on the consolidated balance sheet based on the present value of remaining operating lease payments (see Note 14 of the Company's 2016 Form 10-K for the undiscounted future annual minimum rental commitments for operating leases). The Company does not expect the adoption of ASU 2016-02 will have a material impact on its EPS.


In June 2016, the FASB issued ASU 2016-13, "Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments" which provides new guidance for recognizing impairment of most debt instruments measured at amortized cost, including loans and HTM debt securities. The new guidance will require estimating 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. The new guidance also amends the 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. ASU 2016-13 will become effective January 1, 2020, with early adoption permitted as


- 22 -


THE CHARLES SCHWAB CORPORATION

Notes to Condensed Consolidated Financial Statements

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

(Unaudited)


of January 1, 2019. The new guidance will be applied 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 had been recognized before the effective date. The Company is currently evaluating the impact of this new guidance on its financial statements and EPS.


In March 2017, the FASB issued ASU 2017-08, "Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities" which shortens the amortization period for the premium on certain callable debt securities to the earliest call date. The amendments are applicable to any purchased individual debt security with an explicit and noncontingent call feature that is callable at a fixed price on a preset date. The amendments do not impact the accounting for callable debt securities held at a discount, which will continue to be accreted to maturity. ASU 2017-08 will become effective on January 1, 2019, with early adoption permitted including adoption in an interim period. The amendments will be applied on a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption. The Company is currently evaluating the impact of adopting ASU 2017-08 on its financial statements and EPS.




- 23 -


THE CHARLES SCHWAB CORPORATION

Notes to Condensed Consolidated Financial Statements

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

(Unaudited)


3.    Investment Securities

The amortized cost, gross unrealized gains and losses, and fair value of AFS and HTM securities are as follows:

March 31, 2017

Amortized

Cost

Gross

Unrealized

Gains

Gross
Unrealized
Losses

Fair

Value

Available for sale securities:

U.S. agency mortgage-backed securities

$

19,301


$

50


$

30


$

19,321


Asset-backed securities

11,418


39


10


11,447


Corporate debt securities

7,482


24


1


7,505


U.S. Treasury securities

8,480


5


55


8,430


Certificates of deposit

1,720


2


-


1,722


U.S. agency notes

1,915


-


8


1,907


Commercial paper

213


-


-


213


Non-agency commercial mortgage-backed securities

43


-


-


43


     Total available for sale securities

$

50,572


$

120


$

104


$

50,588


Held to maturity securities:

U.S. agency mortgage-backed securities

$

90,154


$

397


$

1,040


$

89,511


Non-agency commercial mortgage-backed securities

996


10


5


1,001


Asset-backed securities

11,950


18


2


11,966


Corporate debt securities

3,179


16


-


3,195


U.S. Treasury securities

223


-


3


220


Commercial paper

99


-


-


99


U.S. state and municipal securities

1,170


20


-


1,190


Certificates of deposit

200


-


-


200


     Total held to maturity securities

$

107,971


$

461


$

1,050


$

107,382


December 31, 2016

Available for sale securities:

U.S. agency mortgage-backed securities

$

33,167


$

120


$

92


$

33,195


Asset-backed securities

20,520


29


214


20,335


Corporate debt securities

9,850


20


18


9,852


U.S. Treasury securities

8,679


3


59


8,623


Certificates of deposit

2,070


2


1


2,071


U.S. agency notes

1,915


-


8


1,907


U.S. state and municipal securities

1,167


2


46


1,123


Commercial paper

214


-


-


214


Non-agency commercial mortgage-backed securities

45


-


-


45


     Total available for sale securities

$

77,627


$

176


$

438


$

77,365


Held to maturity securities:

U.S. agency mortgage-backed securities

$

72,439


$

324


$

1,086


$

71,677


Non-agency commercial mortgage-backed securities

997


11


4


1,004


Asset-backed securities

941


-


-


941


Corporate debt securities

436


-


-


436


U.S. Treasury securities

223


-


4


219


Commercial paper

99


-


-


99


U.S. state and municipal securities

68


1


1


68


     Total held to maturity securities

$

75,203


$

336


$

1,095


$

74,444


The increase in the HTM portfolio at March 31, 2017 compared to December 31, 2016 was primarily attributable to the transfer of $24.7 billion of investment securities from the AFS category to the HTM category during the first quarter of 2017 . These securities had a total net unrealized loss of $227 million before income tax in AOCI on the date of transfer. The transfer was made to mitigate the potential volatility on regulatory capital from changes in market values in the AFS securities portfolio and the related impact to AOCI once the Company crosses $250 billion in consolidated assets. The year after the Company surpasses $250 billion in consolidated assets, it can no longer exclude AOCI from regulatory capital. The transfer included U.S. agency mortgage-backed securities, asset-backed securities, corporate debt securities, and U.S. state and municipal securities. The unrealized holding gains and losses on the date of transfer are reported as a separate component of AOCI and as an adjustment to the purchase premium and discount on the securities transferred. The separate component of AOCI will be


- 24 -


THE CHARLES SCHWAB CORPORATION

Notes to Condensed Consolidated Financial Statements

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

(Unaudited)


amortized or accreted into interest income over the remaining life of the securities transferred, offsetting the revised premium or discount amortization or accretion on the transferred assets .


Schwab Bank pledges securities issued by federal agencies to secure certain trust deposits. The fair value of these pledged securities was $844 million at  March 31, 2017 .


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



Less than

12 months



12 months

or longer

Total

March 31, 2017

Fair
Value

Unrealized

Losses

Fair
Value

Unrealized
Losses

Fair
Value

Unrealized
Losses

Available for sale securities:

U.S. agency mortgage-backed securities

$

6,663


$

20


$

1,939


$

10


$

8,602


$

30


Asset-backed securities

975


1


959


9


1,934


10


Corporate debt securities

1,157


1


403


-


1,560


1


U.S. Treasury Notes

6,587


55


-


-


6,587


55


U.S. agency notes

1,907


8


-


-


1,907


8


Total

$

17,289


$

85


$

3,301


$

19


$

20,590


$

104


Held to maturity securities:







U.S. agency mortgage-backed securities

$

52,259


$

1,040


$

149


$

-


$

52,408


$

1,040


Non-agency commercial mortgage-backed securities

609


5


-


-


609


5


Asset-backed securities

723


-


3,524


2


4,247


2


U.S. Treasury securities

220


3


-


-


220


3


Total

$

53,811


$

1,048


$

3,673


$

2


$

57,484


$

1,050


Total securities with unrealized losses  (1)

$

71,100


$

1,133


$

6,974


$

21


$

78,074


$

1,154


December 31, 2016

Available for sale securities:

U.S. agency mortgage-backed securities

$

14,816


$

69


$

2,931


$

23


$

17,747


$

92


Asset-backed securities

1,670


13


9,237


201


10,907


214


Corporate debt securities

2,407


17


653


1


3,060


18


U.S. Treasury securities

6,926


59


-


-


6,926


59


Certificates of deposit

474


-


100


1


574


1


U.S. agency notes

1,907


8


-


-


1,907


8


U.S. state and municipal securities

956


46


-


-


956


46


Total

$

29,156


$

212


$

12,921


$

226


$

42,077


$

438


Held to maturity securities:







U.S. agency mortgage-backed securities

$

51,361


$

1,086


$

-


$

-


$

51,361


$

1,086


Non-agency commercial mortgage-backed securities

591


4


-


-


591


4


U.S. Treasury securities

219


4


-


-


219


4


U.S. state and municipal securities

14


1


-


-


14


1


Total

$

52,185


$

1,095


$

-


$

-


$

52,185


$

1,095


Total securities with unrealized losses  (2)

$

81,341


$

1,307


$

12,921


$

226


$

94,262


$

1,533


(1)

The number of investment positions with unrealized losses totaled  266 for AFS securities and 698 for HTM securities.

(2)

The number of investment positions with unrealized losses totaled 627 for AFS securities and 612 for HTM securities.


At March 31, 2017 , substantially all securities in the investment portfolios were rated 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-sponsored enterprises.


- 25 -


THE CHARLES SCHWAB CORPORATION

Notes to Condensed Consolidated Financial Statements

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

(Unaudited)


Management evaluates whether investment securities are OTTI on a quarterly basis as described in Note 2 in the 2016

Form 10-K.


The maturities of AFS and HTM securities are as follows:

March 31, 2017

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)

$

114


$

2,614


$

6,629


$

9,964


$

19,321


Asset-backed securities

4


8,939


1,743


761


11,447


Corporate debt securities

2,299


5,206


-


-


7,505


U.S. Treasury securities

872


7,114


444


-


8,430


Certificates of deposit

851


871


-


-


1,722


U.S. agency notes

349


1,558


-


-


1,907


Commercial paper

213


-


-


-


213


Non-agency commercial mortgage-backed securities (1)

-


-


-


43


43


Total fair value

$

4,702


$

26,302


$

8,816


$

10,768


$

50,588


Total amortized cost

$

4,701


$

26,298


$

8,802


$

10,771


$

50,572


Held to maturity securities:

U.S. agency mortgage-backed securities  (1)

$

-


$

8,012


$

31,625


$

49,874


$

89,511


Non-agency commercial mortgage-backed securities  (1)

-


-


363


638


1,001


Asset-backed securities

-


949


4,166


6,851


11,966


Corporate debt securities

-


3,195


-


-


3,195


U.S. Treasury securities

-


-


220


-


220


Commercial paper

99


-


-


-


99


U.S. state and municipal securities

-


-


83


1,107


1,190


Certificates of deposit

-


200


-


-


200


Total fair value

$

99


$

12,356


$

36,457


$

58,470


$

107,382


Total amortized cost

$

99


$

12,224


$

36,557


$

59,091


$

107,971


(1)

Mortgage-backed securities have been allocated to maturity groupings based on final contractual maturities. Actual maturities will differ from final contractual maturities because borrowers on a certain portion of loans underlying these securities have the right to prepay their obligations.

Proceeds and gross realized gains and losses from sales of AFS securities are as follows:



Three Months Ended March 31,





2017

2016

Proceeds

$

1,064


$

300


Gross realized gains

1


-






- 26 -


THE CHARLES SCHWAB CORPORATION

Notes to Condensed Consolidated Financial Statements

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

(Unaudited)


4.    Bank Loans and Related Allowance for Loan Losses

The composition of bank loans and delinquency analysis by loan type is as follows:

March 31, 2017

Current

30-59 days

past due

60-89 days

past due

>90 days past

due and other

nonaccrual loans

Total past due

and other

nonaccrual loans

Total

loans

Allowance

for loan

losses

Total

bank

loans - net

Residential real estate mortgages

$

9,371


$

8


$

2


$

17


$

27


$

9,398


$

17


$

9,381


Home equity loans and lines of credit

2,216


2


-


12


14


2,230


8


2,222


Pledged asset lines

3,844


-


1


-


1


3,845


-


3,845


Other

101


-


-


-


-


101


1


100


Total bank loans

$

15,532


$

10


$

3


$

29


$

42


$

15,574


$

26


$

15,548


December 31, 2016

Residential real estate mortgages

$

9,100


$

15


$

3


$

16


$

34


$

9,134


$

17


$

9,117


Home equity loans and lines of credit

2,336


2


2


10


14


2,350


8


2,342


Pledged asset lines

3,846


4


1


-


5


3,851


-


3,851


Other

94


-


-


-


-


94


1


93


Total bank loans

$

15,376


$

21


$

6


$

26


$

53


$

15,429


$

26


$

15,403


Residential real estate mortgages (First Mortgages) and home equity loans and lines of credit (HELOCs) include unamortized premiums and discounts and direct origination costs of $78 million at both March 31, 2017 and December 31, 2016 . The Company had commitments to extend credit related to unused HELOCs, pledged asset lines (PALs), and other lines of credit, which totaled $8.8 billion and $8.4 billion at March 31, 2017 and December 31, 2016 , respectively. The Company had commitments to purchase First Mortgage loans of $453 million and $466 million at March 31, 2017 and December 31, 2016 , respectively. All PALs were fully collateralized by securities with fair values in excess of borrowings at March 31, 2017 and December 31, 2016 .

Schwab Bank provides a co-branded loan origination program for Schwab Bank clients (the Program) with Quicken Loans, Inc. (Quicken Loans ® ). Pursuant to the Program, Quicken Loans originates and services First Mortgages and HELOCs for Schwab Bank clients. Under the Program, Schwab Bank purchases certain First Mortgages and HELOCs that are originated by Quicken Loans. Schwab Bank purchased First Mortgages of $665 million and $557 million during the first quarters of 2017 and 2016 , respectively. Schwab Bank purchased HELOCs with commitments of $118 million and $110 million during the first quarters of 2017 and 2016 , respectively.

Credit Quality

Changes in the allowance for loan losses were as follows:

Three Months Ended

March 31, 2017

March 31, 2016



Residential
real estate
mortgages

Home equity
loans and
lines of credit

Other

Total

Residential
real estate
mortgages

Home equity
loans and
lines of credit

Other

Total

Balance at beginning of period

$

17


$

8


$

1


$

26


$

20


$

11


$

-


$

31


Charge-offs

-


-


-


-


(1

)

-


-


(1

)

Recoveries

-


-


-


-


1


-


-


1


Provision for loan losses

-


-


-


-


1


-


1


2


Balance at end of period

$

17


$

8


$

1


$

26


$

21


$

11


$

1


$

33


Substantially all of the bank loans were collectively evaluated for impairment at March 31, 2017 and December 31, 2016 . There were no loans accruing interest that were contractually 90 days or more past due at March 31, 2017 or December 31, 2016 .


- 27 -


THE CHARLES SCHWAB CORPORATION

Notes to Condensed Consolidated Financial Statements

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

(Unaudited)


Nonperforming assets, which include nonaccrual loans and other real estate owned, totaled $33 million and $31 million at March 31, 2017 and December 31, 2016 , respectively. Impaired assets, which include nonaccrual loans, other real estate owned and troubled debt restructurings, totaled $46 million and $45 million at March 31, 2017 and December 31, 2016 , respectively. Troubled debt restructurings were not material at March 31, 2017 or December 31, 2016 .

In addition to monitoring delinquency, the Company 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 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 were last updated in March 2017. 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 estimated by reference to a home price appreciation index.

As of March 31, 2017 and December 31, 2016 , 48% of the Company's HELOC and First Mortgage portfolio was concentrated in California. These loans have performed in a manner consistent with the portfolio as a whole. 

The credit quality indicators of the Company's bank loan portfolio are detailed below:

March 31, 2017

Balance

Weighted Average
Updated FICO

Utilization
Rate (1)

Percent of
Loans on
Nonaccrual Status

Residential real estate mortgages:

Estimated Current LTV

< 70%

$

8,496


776


N/A


0.02

%

>70% –  < 90%

863


770


N/A


0.31

%

>90% –  < 100%

19


774


N/A


5.24

%

>100%

20


693


N/A


18.80

%

Total

$

9,398


776


N/A


0.10

%

Home equity loans and lines of credit:

Estimated Current LTV (2)

< 70%

$

1,956


773


34

%

0.15

%

>70% –  < 90%

230


759


49

%

0.34

%

>90% –  < 100%

26


748


67

%

1.30

%

>100%

18


732


72

%

7.86

%

Total

$

2,230


771


35

%

0.24

%

Pledged asset lines:



Weighted-Average LTV (2)



=70%

$

3,845


771


44

%

-


(1)

The Utilization Rate is calculated using the outstanding balance divided by the associated total line of credit.

(2)

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

N/A Not applicable.



- 28 -


THE CHARLES SCHWAB CORPORATION

Notes to Condensed Consolidated Financial Statements

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

(Unaudited)


March 31, 2017

Residential
real estate
mortgages

Home equity
loans and
lines of credit

Year of origination


Pre-2013

$

1,991


$

1,649


2013

1,642


179


2014

642


146


2015

1,413


140


2016

3,113


98


2017

597


18


Total

$

9,398


$

2,230


Origination FICO



<620

$

8


$

-


620 – 679

90


12


680 – 739

1,462


410


> 740

7,838


1,808


Total

$

9,398


$

2,230


Origination LTV

< 70%

$

7,098


$

1,542


>70% –  < 90%

2,292


675


>90% –  < 100%

8


13


Total

$

9,398


$

2,230


December 31, 2016

Balance

Weighted Average
Updated FICO

Utilization
Rate (1)

Percent of
Loans on
Nonaccrual Status

Residential real estate mortgages:

Estimated Current LTV

< 70%

$

8,350


774


N/A 


0.04

%

>70% –  < 90%

743


768


N/A 


0.35

%

>90% –  < 100%

21


747


N/A 


2.08

%

>100%

20


709


N/A 


14.50

%

Total

$

9,134


773


N/A 


0.10

%

Home equity loans and lines of credit:

Estimated Current LTV (2)

< 70%

$

2,070


771


35

%

0.12

%

>70% –  < 90%

234


757


50

%

0.40

%

>90% –  < 100%

29


747


66

%

1.74

%

>100%

17


728


70

%

3.73

%

Total

$

2,350


769


36

%

0.20

%

Pledged asset lines:

Weighted-Average LTV (2)

=70%

$

3,851


763


46

%

-


(1)

The Utilization Rate is calculated using the outstanding balance divided by the associated total line of credit.

(2)

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

N/A Not applicable.



- 29 -


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, 2016

Residential
real estate
mortgages

Home equity
loans and
lines of credit

Year of origination


Pre-2013

$

2,136


$

1,765


2013

1,746


193


2014

685


152


2015

1,458


146


2016

3,109


94


Total

$

9,134


$

2,350


Origination FICO



<620

$

8


$

-


620 – 679

92


13


680 – 739

1,427


432


> 740

7,607


1,905


Total

$

9,134


$

2,350


Origination LTV



< 70%

$

6,865


$

1,628


>70% –  < 90%

2,260


709


>90% –  < 100%

9


13


Total

$

9,134


$

2,350


The Company's bank loans include $8.5 billion of adjustable rate First Mortgage loans at March 31, 2017 . The Company's adjustable rate mortgages have initial fixed interest rates for three to ten years and interest rates that adjust annually thereafter. Approximately 35% of these mortgages consisted of loans with interest-only payment terms. The interest rates on approximately 56% of these interest-only loans are not scheduled to reset for three or more years. The Company's mortgage loans do not include interest terms described as temporary introductory rates below current market rates.

The Company's 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. HELOCs that convert to an amortizing loan may experience higher delinquencies and higher loss rates than those in the initial draw period. The Company's allowance for loan loss methodology takes this increased inherent risk into consideration. 

The following table presents when current outstanding HELOCs will convert to amortizing loans:

March 31, 2017

Balance

Converted to an amortizing loan by period end

$

465


Within 1 year

171


> 1 year – 3 years

760


> 3 years – 5 years

175


> 5 years

659


Total

$

2,230




- 30 -


THE CHARLES SCHWAB CORPORATION

Notes to Condensed Consolidated Financial Statements

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

(Unaudited)


At March 31, 2017 , $1.8 billion of the HELOC portfolio was secured by second liens on the associated properties. Second lien mortgage loans typically possess a higher degree of credit risk given the subordination to the first lien holder in the event of default. In addition to the credit monitoring activities described previously, the Company also monitors credit risk by reviewing the delinquency status of the first lien loan on the associated property. At  March 31, 2017 , approximately 36% of the HELOC borrowers that had a balance only paid the minimum amount of interest due.


5.    Variable Interest Entities

A VIE requires consolidation by the entity's primary beneficiary. The Company evaluates all entities in which it has a financial interest to determine if the entity is a VIE and if so, whether the Company is the primary beneficiary. See Principles of Consolidation in Note 1 for discussion of the Company's evaluations of VIEs and whether it is deemed to be the primary beneficiary of any VIEs in which it holds an interest. The Company was not the primary beneficiary of, and therefore, not required to consolidate any VIEs at March 31, 2017 and December 31, 2016 .

As of March 31, 2017 and December 31, 2016 , the majority of the Company's VIEs related to Schwab Bank's Low-Income Housing Tax Credit (LIHTC) investments. Schwab Bank's LIHTC investments are accounted for using the proportional amortization method. Amortization, tax credits, and other tax benefits recognized in relation to LIHTC investments are included in taxes on income in the condensed consolidated statements of income. For further information on the Community Reinvestment Act (CRA) and Schwab Bank's LIHTC investments, see Note 2 and Note 10 in the 2016 Form 10-K.

The carrying value of the LIHTC investments was $201 million and $189 million as of March 31, 2017 and December 31, 2016 , respectively, which is included in other assets on the condensed consolidated balance sheets. Schwab Bank recorded liabilities of $139 million and $135 million for unfunded commitments related to LIHTC investments at March 31, 2017 and December 31, 2016 , respectively, which are included in accrued expenses and other liabilities on the condensed consolidated balance sheets. Schwab Bank's funding of these remaining commitments is dependent upon the occurrence of certain conditions and Schwab Bank expects to pay substantially all of these commitments between 2017 and 2020 .

Aggregate assets, liabilities and maximum exposure to loss

The aggregate assets, liabilities, and maximum exposure to loss from those VIEs in which the Company holds a variable interest, but as to which the Company has concluded it is not the primary beneficiary, are summarized in the table below:



March 31, 2017

December 31, 2016



Aggregate
assets

Aggregate
liabilities

Maximum
exposure
to loss

Aggregate
assets

Aggregate
liabilities

Maximum
exposure
to loss

LIHTC investments

$

201


$

139


$

201


$

189


$

135


$

189


Other CRA investments  (1)

63


-


84


60


-


80


Total

$

264


$

139


$

285


$

249


$

135


$

269


(1)

Other CRA investments are recorded using either the cost method or the equity method. Aggregate assets are included in either other assets or bank loans – net on the condensed consolidated balance sheets.


The Company's maximum exposure to loss would result from the loss of the investments, including any committed amounts. During the three months ended March 31, 2017 and 2016 , the Company did not provide or intend to provide financial or other support to the VIEs that it was not contractually required to provide.



- 31 -


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 Deposits


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




March 31, 2017

December 31, 2016

Interest-bearing deposits:

Deposits swept from brokerage accounts

$

144,371


$

141,146


Checking

14,151


13,842


Savings and other

7,665


7,792


Total interest-bearing deposits

166,187


162,780


Non-interest-bearing deposits

702


674


Total bank deposits

$

166,889


$

163,454




7.    Borrowings


Long-term debt was net of unamortized debt discounts/premiums and debt issuance costs of $29 million and $24 million at March 31, 2017 and December 31, 2016 , respectively.



March 31,
2017

December 31,
2016

Senior Notes

$

3,202


$

2,558


Medium-Term Notes

250


250


Finance lease obligation

66


68


Total long-term debt

$

3,518


$

2,876



On March 2, 2017 , CSC issued $650 million aggregate principal amount of Senior Notes that mature in 2027 . The Senior Notes have a fixed interest rate of 3.200% with interest payable semi-annually.

The Company's long-term debt at March 31, 2017 had a weighted-average interest rate of 3.34% .

Annual maturities on long-term debt outstanding at March 31, 2017 are as follows:

2017

$

256


2018

908


2019

8


2020

709


2021

9


Thereafter

1,657


Total maturities

3,547


Unamortized discount, net

(14

)

Debt issuance costs

(15

)

Total long-term debt

$

3,518


Short-term borrowings: Schwab Bank maintains a secured credit facility with the Federal Home Loan Bank of San Francisco (FHLB). Amounts available under this facility are dependent on the amount of Schwab Bank's First Mortgages, HELOCs, and the fair value of certain of Schwab Bank's investment securities that are pledged as collateral. As a condition of the borrowings, Schwab Bank is required to hold FHLB stock, with the investment recorded in other assets on the condensed consolidated balance sheets. Schwab Bank sold $64 million of FHLB stock in the first quarter of 2017 . Schwab Bank did no t purchase or sell


- 32 -


THE CHARLES SCHWAB CORPORATION

Notes to Condensed Consolidated Financial Statements

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

(Unaudited)


FHLB stock during the first quarter of 2016 . No funds were drawn under this facility as of March 31, 2017 and December 31, 2016 .

CSC has authorization from its Board of Directors to issue Commercial Paper Notes not to exceed $1.5 billion . Management has set a current limit for the commercial paper program not to exceed the amount of the committed, unsecured credit facility, which was $750 million at March 31, 2017 . CSC had $600 million of Commercial Paper Notes outstanding at March 31, 2017 and no borrowings outstanding at December 31, 2016 .



8.    Commitments and Contingencies


Guarantees and indemnifications: The Company has clients that sell (i.e., write) listed option contracts that are cleared by the Options Clearing Corporation – a clearing house that establishes margin requirements on these transactions. The Company partially satisfies the margin requirements by arranging unsecured standby letter of credit agreements (LOCs), in favor of the Options Clearing Corporation, which are issued by several banks. At March 31, 2017 , the aggregate face amount of these LOCs totaled $295 million . There were no funds drawn under any of these LOCs at March 31, 2017 . In connection with its securities lending activities, the Company is required to provide collateral to certain brokerage clients. The Company satisfies the collateral requirements by providing cash as collateral.

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

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


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


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


Total Bond Market Fund Litigation : On August 28, 2008, a class action lawsuit was filed in the U.S. District Court for the Northern District of California on behalf of investors in the Schwab Total Bond Market Fund ™ . The lawsuit, which alleged violations of state law and federal securities law in connection with the fund's investment policy, named CSIM, Schwab Investments (registrant and issuer of the fund's shares) and certain current and former fund trustees as defendants. Allegations


- 33 -


THE CHARLES SCHWAB CORPORATION

Notes to Condensed Consolidated Financial Statements

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

(Unaudited)


include that the fund improperly deviated from its stated investment objectives by investing in collateralized mortgage obligations (CMOs) and investing more than 25% of fund assets in CMOs and mortgage-backed securities without obtaining a fundholder vote. Plaintiff seeks unspecified compensatory and rescission damages, unspecified equitable and injunctive relief, costs and attorneys' fees. Plaintiff's federal securities law claim and certain of plaintiff's state law claims were dismissed. On August 8, 2011, the court dismissed plaintiff's remaining claims with prejudice. Plaintiff appealed to the Ninth Circuit, which issued a ruling on March 9, 2015 reversing the district court's dismissal of the case and remanding the case for further proceedings. Plaintiff filed a fourth amended complaint on June 25, 2015, and in decisions issued October 6, 2015 and February 23, 2016, the court dismissed all claims with prejudice. Plaintiff has appealed to the Ninth Circuit, where the case is again pending.


9.     Offsetting Assets and Liabilities


Resale and repurchase 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. Schwab utilizes the collateral provided under these resale agreements to meet obligations under broker-dealer client protection rules, which place limitations on its ability to access such segregated securities. For Schwab to repledge or sell this collateral, it would be required to deposit cash and/or securities of an equal amount into its segregated reserve bank accounts in order to meet its segregated cash and investment requirement. The Company's resale agreements are not subject to master netting arrangements.


Securities lending: The Company 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, the Company may be exposed to the risk of acquiring the securities at prevailing market prices in order to satisfy its client obligations. The Company mitigates this risk by requiring credit approvals for counterparties, monitoring the fair value of securities loaned, and requiring additional cash as collateral when necessary. The Company borrows securities from other broker-dealers to fulfill short sales by brokerage clients and delivers cash to the lender in exchange for the securities. The fair value of these borrowed securities was $324 million at March 31, 2017 and $213 million at December 31, 2016 . All of the Company's securities lending transactions are subject to enforceable master netting arrangements with other broker-dealers; however, the Company does not net securities lending transactions. Therefore, the Company's securities loaned and securities borrowed are presented gross in the consolidated balance sheets.


- 34 -


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 the Company's resale agreements and securities lending activity to enable the users of the Company's financial statements to evaluate the potential effect of rights of setoff between these recognized assets and recognized liabilities at March 31, 2017 and December 31, 2016 .



Gross Amounts Not Offset in the
Condensed Consolidated
Balance Sheets

Gross
Assets/
Liabilities

Gross Amounts
Offset in the
Condensed
Consolidated
Balance Sheets

Net Amounts
Presented in the
Condensed
Consolidated
Balance Sheets

Counterparty
Offsetting

Collateral

Net
Amount

March 31, 2017

Assets:

Resale agreements (1)

$

8,465


$

-


$

8,465


$

-


$

(8,465

)

(2)

$

-


Securities borrowed (3)

441


-


441


(304

)

(136

)

1


Total

$

8,906


$

-


$

8,906


$

(304

)

$

(8,601

)

$

1


Liabilities:

Securities loaned (4,5)

$

1,869


$

-


$

1,869


$

(304

)

$

(1,443

)

$

122


Total

$

1,869


$

-


$

1,869


$

(304

)

$

(1,443

)

$

122


December 31, 2016

Assets:

Resale agreements (1)

$

9,547


$

-


$

9,547


$

-


$

(9,547

)

(2)

$

-


Securities borrowed  (3)

393


-


393


(200

)

(189

)

4


Total

$

9,940


$

-


$

9,940


$

(200

)

$

(9,736

)

$

4


Liabilities:

Securities loaned (4,5)

$

1,996


$

-


$

1,996


$

(200

)

$

(1,660

)

$

136


Total

$

1,996


$

-


$

1,996


$

(200

)

$

(1,660

)

$

136


(1)

Included in cash and investments segregated and on deposit for regulatory purposes in the Company's condensed consolidated balance sheets.

(2)

Actual collateral was greater than or equal to 102% of the related assets. At March 31, 2017 and December 31, 2016 , the fair value of collateral received in connection with resale agreements that are available to be repledged or sold was $8.6 billion and $9.8 billion , respectively.

(3)

Included in receivables from brokers, dealers, and clearing organizations in the Company's condensed consolidated balance sheets.

(4)

Included in payables to brokers, dealers, and clearing organizations in the Company's condensed consolidated balance sheets.

(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 the Company to pledge collateralized securities in their brokerage accounts in accordance with federal regulations. The following table summarizes the fair value of client securities available, under such regulations, for the Company to utilize as collateral, and the amounts pledged by the Company:


March 31, 2017

December 31, 2016

Fair value of client securities available to be pledged

$

21,441


$

21,516


   Fair value of client securities pledged for:

     Securities lending to other broker-dealers

1,566


1,626


     Fulfillment of client short sales

2,183


2,048


     Fulfillment of requirements with the Options Clearing Corporation (1)

1,546


1,519


   Total collateral pledged

$

5,295


$

5,193


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 $65 million as of March 31, 2017 and $58 million as of December 31, 2016 .

(1) Client securities pledged to fulfill client margin requirements for open option contracts established with the Options Clearing Corporation.



- 35 -


THE CHARLES SCHWAB CORPORATION

Notes to Condensed Consolidated Financial Statements

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

(Unaudited)


10.    Fair Values of Assets and Liabilities

Assets and liabilities measured at fair value on a recurring basis

The Company's assets and liabilities measured at fair value on a recurring basis include certain cash equivalents, certain investments segregated and on deposit for regulatory purposes, other securities owned, and AFS securities. The Company uses the market approach to determine the fair value of assets and liabilities. When available, the Company uses quoted prices in active markets to measure the fair value of assets and liabilities. When utilizing market data and bid-ask spread, the Company uses the price within the bid-ask spread that best represents fair value. When quoted prices do not exist, the Company uses prices obtained from independent third-party pricing services to measure the fair value of investment assets. The Company generally obtains prices from at least three independent pricing sources for assets recorded at fair value.

The Company's primary independent pricing service provides prices based on observable trades and discounted cash flows that incorporate observable information such as yields for similar types of securities (a benchmark interest rate plus observable spreads) and weighted-average maturity for the same or similar "to-be-issued" securities. The Company compares the prices obtained from its 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. The Company 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 a material difference in the recorded amounts.

Fair value of other financial instruments

Descriptions of the valuation methodologies and assumptions used to estimate the fair value of other financial instruments are described below. The Company's financial instruments not recorded at fair value but for which fair value can be approximated and disclosed include:

Cash and cash equivalents are short-term in nature and accordingly are recorded at amounts that approximate fair value.

Cash and investments segregated and on deposit for regulatory purposes include cash and securities purchased under resale agreements. Securities purchased under resale agreements are short-term in nature and are backed by collateral that both exceeds the carrying value of the resale agreement and is highly liquid in nature. Accordingly, the carrying values of these financial instruments approximate their fair values.

Receivables from/payables to brokers, dealers, and clearing organizations are short-term in nature, recorded at contractual amounts and historically have been settled at those values. Accordingly, the carrying values of these financial instruments approximate their fair values.

Receivables from/payables to brokerage clients - net are short-term in nature, recorded at contractual amounts and historically have been settled at those values. Accordingly, the carrying values of these financial instruments approximate their fair values.

HTM securities – The fair values of HTM securities are obtained using an independent third-party pricing service similar to investment assets recorded at fair value as discussed above.

Bank loans – The fair values of the Company's First Mortgages and HELOCs are estimated based on prices of mortgage-backed securities collateralized by similar types of loans. PALs are non-purpose revolving lines of credit secured by eligible assets; accordingly, the carrying values of these loans approximate their fair values.

Financial instruments included in other assets primarily consist of LIHTC investments, cost method investments, and FHLB stock, whose carrying values approximate their fair values. FHLB stock is recorded at par, which approximates its fair value.

Bank deposits have no stated maturity and are recorded at the amount payable on demand as of the balance sheet date. The Company considers the carrying values of these deposits to approximate their fair values.

Financial instruments included in accrued expenses and other liabilities consist of drafts payable and certain amounts due under contractual obligations, including unfunded LIHTC commitments. The carrying values of these instruments approximate their fair values.


- 36 -


THE CHARLES SCHWAB CORPORATION

Notes to Condensed Consolidated Financial Statements

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

(Unaudited)


Short-term borrowings consist of commercial paper and funds drawn on Schwab Bank's secured credit facility with the Federal Home Loan Bank of San Francisco. Due to the short-term nature of these borrowings, carrying value approximates fair value.

Long-term debt – Except for the finance lease obligation, the fair values of long-term debt are estimated using indicative, non-binding quotes from independent brokers. The Company validates indicative prices for its debt through comparison to other independent non-binding quotes. The finance lease obligation is recorded at carrying value, which approximates fair value.

Firm commitments to extend credit – The Company extends credit to banking clients through HELOCs and PALs. The Company considers the fair value of these unused commitments to not be material because the interest rates earned on these balances are based on floating interest rates that reset monthly.

For a description of the fair value hierarchy, see Note 2 in the 2016 Form 10-K. There were no significant changes in these policies and methodologies during the first three months of 2017 . The Company did not transfer any assets or liabilities between Level 1, Level 2, or Level 3 during the three months ended March 31, 2017 , or the year ended December 31, 2016 . In addition, the Company did not adjust prices received from the primary independent third-party pricing service at March 31, 2017 or December 31, 2016 .


- 37 -


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:

March 31, 2017

Quoted Prices
in Active Markets
for Identical
Assets
(Level 1)

Significant
Other Observable
Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)

Balance at
Fair Value

Cash equivalents:

Money market funds

$

1,483


$

-


$

-


$

1,483


Commercial paper

-


299


-


299


Total cash equivalents

1,483


299


-


1,782


Investments segregated and on deposit for regulatory purposes:




Certificates of deposit

-


1,868


-


1,868


U.S. Government securities

-


6,789


-


6,789


Total investments segregated and on deposit for regulatory purposes

-


8,657


-


8,657


Other securities owned:




Equity and bond mutual funds

390


-


-


390


Schwab Funds ®  money market funds

113


-


-


113


State and municipal debt obligations

-


35


-


35


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

2


24


-


26


Total other securities owned

505


59


-


564


Available for sale securities:




U.S. agency mortgage-backed securities

-


19,321


-


19,321


Asset-backed securities

-


11,447


-


11,447


Corporate debt securities

-


7,505


-


7,505


U.S. Treasury securities

-


8,430


-


8,430


Certificates of deposit

-


1,722


-


1,722


U.S. agency notes

-


1,907


-


1,907


Commercial paper

-


213


-


213


Non-agency commercial mortgage-backed securities

-


43


-


43


Total available for sale securities

-


50,588


-


50,588


Total

$

1,988


$

59,603


$

-


$

61,591



- 38 -


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, 2016

Quoted Prices
in Active Markets
for Identical
Assets
(Level 1)

Significant
Other Observable
Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)

Balance at
Fair Value

Cash equivalents:

Money market funds

$

1,514


$

-


$

-


$

1,514


Total cash equivalents

1,514


-


-


1,514


Investments segregated and on deposit for regulatory purposes:

Certificates of deposit

-


2,525


-


2,525


U.S. Government securities

-


6,111


-


6,111


Total investments segregated and on deposit for regulatory purposes

-


8,636


-


8,636


Other securities owned:


Equity and bond mutual funds

272


-


-


272


Schwab Funds ®  money market funds

108


-


-


108


State and municipal debt obligations

-


41


-


41


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

2


26


-


28


Total other securities owned

382


67


-


449


Available for sale securities:

U.S. agency mortgage-backed securities

-


33,195


-


33,195


Asset-backed securities

-


20,335


-


20,335


Corporate debt securities

-


9,852


-


9,852


U.S. Treasury securities

-


8,623


-


8,623


Certificates of deposit

-


2,071


-


2,071


U.S. agency notes

-


1,907


-


1,907


U.S. state and municipal securities

-


1,123


-


1,123


Commercial paper

-


214


-


214


Non-agency commercial mortgage-backed securities

-


45


-


45


Total available for sale securities

-


77,365


-


77,365


Total

$

1,896


$

86,068


$

-


$

87,964



- 39 -


THE CHARLES SCHWAB CORPORATION

Notes to Condensed Consolidated Financial Statements

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

(Unaudited)


Fair Value of Other Financial Instruments

The following tables present the fair value hierarchy for other financial instruments:

March 31, 2017

Carrying
Amount

Quoted Prices
in Active Markets
for Identical
Assets
(Level 1)

Significant
Other Observable
Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)

Balance at
Fair Value

Assets:

Cash and cash equivalents

$

7,693


$

-


$

7,693


$

-


$

7,693


Cash and investments segregated and on deposit for regulatory purposes

12,821


-


12,821


-


12,821


Receivables from brokers, dealers, and clearing organizations

721


-


721


-


721


Receivables from brokerage clients – net

16,726


-


16,726


-


16,726


Held to maturity securities:

U.S. agency mortgage-backed securities

90,154


-


89,511


-


89,511


Non-agency commercial mortgage-backed securities

996


-


1,001


-


1,001


Asset-backed securities

11,950


-


11,966


-


11,966


Corporate debt securities

3,179


-


3,195


-


3,195


U.S. Treasury securities

223


-


220


-


220


Commercial paper

99


-


99


-


99


U.S. state and municipal securities

1,170


-


1,190


-


1,190


Certificates of deposit

200


-


200


-


200


Total held to maturity securities

107,971


-


107,382


-


107,382


Bank loans – net:

Residential real estate mortgages

9,381


-


9,368


-


9,368


Home equity loans and lines of credit

2,222


-


2,315


-


2,315


Pledged asset lines

3,845


-


3,845


-


3,845


Other

100


-


100


-


100


Total bank loans – net

15,548


-


15,628


-


15,628


Other assets

276


-


276


-


276


Total

$

161,756


$

-


$

161,247


$

-


$

161,247


Liabilities:

Bank deposits

$

166,889


$

-


$

166,889


$

-


$

166,889


Payables to brokers, dealers, and clearing organizations

2,643


-


2,643


-


2,643


Payables to brokerage clients

34,267


-


34,267


-


34,267


Accrued expenses and other liabilities

996


-


996


-


996


Short-term borrowings

600


-


600


-


600


Long-term debt

3,518


-


3,576


-


3,576


Total

$

208,913


$

-


$

208,971


$

-


$

208,971




- 40 -


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, 2016

Carrying
Amount

Quoted Prices
in Active Markets
for Identical
Assets
(Level 1)

Significant
Other Observable
Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)

Balance at
Fair Value

Assets:

Cash and cash equivalents

$

9,314


$

-


$

9,314


$

-


$

9,314


Cash and investments segregated and on deposit for regulatory purposes

13,533


-


13,533


-


13,533


Receivables from brokers, dealers, and clearing organizations

728


-


728


-


728


Receivables from brokerage clients – net

17,151


-


17,151


-


17,151


Held to maturity securities:

U.S. agency mortgage-backed securities

72,439


-


71,677


-


71,677


Non-agency commercial mortgage-backed securities

997


-


1,004


-


1,004


Asset-backed securities

941


-


941


-


941


Corporate debt securities

436


-


436


-


436


U.S. Treasury securities

223


-


219


-


219


Commercial paper

99


-


99


-


99


U.S. state and municipal securities

68


-


68


-


68


Total held to maturity securities

75,203


-


74,444


-


74,444


Bank loans – net:

Residential real estate mortgages

9,117


-


9,064


-


9,064


Home equity loans and lines of credit

2,342


-


2,458


-


2,458


Pledged asset lines

3,851


-


3,851


-


3,851


Other

93


-


94


-


94


Total bank loans – net

15,403


-


15,467


-


15,467


Other assets

328


-


328


-


328


Total

$

131,660


$

-


$

130,965


$

-


$

130,965


Liabilities:

Bank deposits

$

163,454


$

-


$

163,454


$

-


$

163,454


Payables to brokers, dealers, and clearing organizations

2,407


-


2,407


-


2,407


Payables to brokerage clients

35,894


-


35,894


-


35,894


Accrued expenses and other liabilities

1,169


-


1,169


-


1,169


Long-term debt

2,876


-


2,941


-


2,941


Total

$

205,800


$

-


$

205,865


$

-


$

205,865














- 41 -


THE CHARLES SCHWAB CORPORATION

Notes to Condensed Consolidated Financial Statements

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

(Unaudited)


11.    Stockholders' Equity

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



March 31, 2017

December 31, 2016



Shares
Issued and
Outstanding
(In thousands)

Liquidation
Preference
Per Share

Liquidation
Preference

Carrying
Value

Shares
Issued and
Outstanding
(In thousands)

Liquidation
Preference
Per Share

Liquidation
Preference

Carrying
Value

Series A

400


$

1,000


$

400


$

397


400


$

1,000


$

400


$

397


Series B

485


1,000


485


482


485


1,000


485


482


Series C

600


1,000


600


585


600


1,000


600


585


Series D

750


1,000


750


728


750


1,000


750


728


Series E

6


100,000


$

600


$

591


6


100,000


600


591


Total Preferred Stock

2,241


$

2,835


$

2,783


2,241


$

2,835


$

2,783



12.    Accumulated Other Comprehensive Income

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

Three Months Ended March 31,

2017

2016



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)

$

52


$

(19

)

$

33


$

21


$

(8

)

$

13


Reclassification of net unrealized loss on securities transferred to held to maturity (1)

227


(85

)

142


-


-


-


Other reclassifications included in other revenue

(1

)

-


(1

)

-


-


-


Change in net unrealized gain (loss) on held to maturity securities:

Reclassification of net unrealized loss on securities transferred from available for sale (1)

(227

)

85


(142

)

-


-


-


Amortization of amounts previously recorded upon transfer from available for sale

2


(1

)

1


-


-


-


Other

(3

)

1


(2

)

1


-


1


Other comprehensive income (loss)

$

50


$

(19

)

$

31


$

22


$

(8

)

$

14


(1)

See Note 3 for discussion of the transfer of securities from the AFS category to the HTM category during the first quarter of 2017 .


- 42 -


THE CHARLES SCHWAB CORPORATION

Notes to Condensed Consolidated Financial Statements

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

(Unaudited)


Accumulated other comprehensive income balances are as follows:



Total
Accumulated Other
Comprehensive Income

Balance at December 31, 2015

$

(134

)

Net unrealized gain (loss) on available for sale securities

13


Other

1


Balance at March 31, 2016

$

(120

)

Balance at December 31, 2016

$

(163

)

Available for sale securities:

Net unrealized gain (loss)

33


Reclassification of net unrealized loss on securities transferred to held to maturity

142


Other reclassifications included in other revenue

(1

)

Held to maturity securities:

Reclassification of net unrealized loss on securities transferred from available for sale

(142

)

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

1


Other

(2

)

Balance at March 31, 2017

$

(132

)



13.    Earnings Per Common Share


EPS under the basic and diluted computations is as follows:

Three Months Ended
March 31,



2017

2016

Net income

$

564


$

412


Preferred stock dividends and other  (1)

(39

)

(20

)

Net income available to common stockholders

$

525


$

392


Weighted-average common shares outstanding - basic

1,336


1,321


Common stock equivalent shares related to stock incentive plans

15


9


Weighted-average common shares outstanding - diluted  (2)

1,351


1,330


Basic EPS

$

.39


$

.30


Diluted EPS

$

.39


$

.29


(1)

Includes preferred stock dividends and undistributed earnings and dividends allocated to non-vested restricted stock units.

(2)

Antidilutive stock options and restricted stock awards excluded from the calculation of diluted EPS totaled  10 million and 21 million shares for the first quarters of 2017 and 2016 , respectively.



14.    Regulatory Requirements


At March 31, 2017 , both CSC and Schwab Bank met all of their respective capital requirements. Certain events, such as growth in bank deposits and regulatory discretion, could adversely affect CSC's or Schwab Bank's ability to meet future capital requirements.


- 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 regulatory capital and ratios for CSC and Schwab Bank are as follows:



Actual

Minimum to be
Well Capitalized

Minimum Capital Requirement

March 31, 2017

Amount

Ratio

Amount

Ratio

Amount

Ratio

CSC

Common Equity Tier 1 Risk-Based Capital

$

13,094


18.3

%

N/A


$

3,212


4.5

%

Tier 1 Risk-Based Capital

15,877


22.2

%

N/A


4,283


6.0

%

Total Risk-Based Capital

15,905


22.3

%

N/A


5,710


8.0

%

Tier 1 Leverage

15,877


7.1

%

N/A


8,915


4.0

%

Schwab Bank

Common Equity Tier 1 Risk-Based Capital

$

12,496


19.7

%

$

4,132


6.5

%

$

2,861


4.5

%

Tier 1 Risk-Based Capital

12,496


19.7

%

5,086


8.0

%

3,814


6.0

%

Total Risk-Based Capital

12,522


19.7

%

6,357


10.0

%

5,086


8.0

%

Tier 1 Leverage

12,496


7.0

%

8,912


5.0

%

7,130


4.0

%

December 31, 2016

CSC

Common Equity Tier 1 Risk-Based Capital

$

12,574


18.4

%

N/A


$

3,068


4.5

%

Tier 1 Risk-Based Capital

15,357


22.5

%

N/A


4,091


6.0

%

Total Risk-Based Capital

15,384


22.6

%

N/A


5,454


8.0

%

Tier 1 Leverage

15,357


7.2

%

N/A


8,516


4.0

%

Schwab Bank

Common Equity Tier 1 Risk-Based Capital

$

11,878


19.8

%

$

3,894


6.5

%

$

2,696


4.5

%

Tier 1 Risk-Based Capital

11,878


19.8

%

4,793


8.0

%

3,595


6.0

%

Total Risk-Based Capital

11,904


19.9

%

5,992


10.0

%

4,793


8.0

%

Tier 1 Leverage

11,878


7.0

%

8,456


5.0

%

6,765


4.0

%

N/A Not applicable.

Based on its regulatory capital ratios at March 31, 2017 , Schwab Bank is considered well capitalized (the highest category) under its respective regulatory capital rules. There are no conditions or events since March 31, 2017 that management believes have changed Schwab Bank's capital category. At March 31, 2017 , both CSC's and Schwab Bank's capital levels exceeded the fully implemented capital conservation buffer requirement.

Net capital and net capital requirements for Schwab and optionsXpress are as follows:

March 31, 2017

Net Capital

Minimum Net Capital Required

2% of Aggregate Debit Balances

Net Capital in Excess of Required Capital

Schwab

$

1,896


$

0.250


$

350


$

1,546


optionsXpress

285


1


7


278


December 31, 2016

Schwab

$

1,846


$

0.250


$

355


$

1,491


optionsXpress

269


1


8


261




- 44 -


THE CHARLES SCHWAB CORPORATION

Notes to Condensed Consolidated Financial Statements

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

(Unaudited)


15.    Segment Information

The Company's two reportable segments are Investor Services and Advisor Services. The Company structures its operating segments according to its clients and the services provided to those clients. The Investor Services segment provides retail brokerage and banking services, retirement plan services, and other corporate brokerage services. The Advisor Services segment provides custodial, trading, banking, and support services as well as retirement business services. Revenues and expenses are allocated to the Company's two segments based on which segment services the client.

Management evaluates the performance of its segments on a pre-tax basis. Segment assets and liabilities are not used for evaluating segment performance or in deciding how to allocate resources to segments. There are no revenues from transactions between the segments.

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

Investor Services

Advisor Services

Total

Three Months Ended March 31,

2017

2016

2017

2016

2017

2016

Net Revenues:

Asset management and administration fees

$

566


$

472


$

257


$

227


$

823


$

699


Net interest revenue

753


613


247


159


1,000


772


Trading revenue

119


143


73


89


192


232


Other

50


46


16


17


66


63


Provision for loan losses

-


(2

)

-


-


-


(2

)

Total net revenues

1,488


1,272


593


492


2,081


1,764


Expenses Excluding Interest

930


836


308


273


1,238


1,109


Income before taxes on income

$

558


$

436


$

285


$

219


$

843


$

655



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 March 31, 2017 . 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 March 31, 2017 .

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 March 31, 2017 , that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.


- 45 -



THE CHARLES SCHWAB CORPORATION




PART  II  -  OTHER  INFORMATION


Item 1.     Legal Proceedings

For a discussion of legal proceedings, see Item 1 – Note 8.


Item 1A.     Risk Factors


During the first three months of 2017 , there have been no material changes to the risk factors in Part I – Item 1A – Risk Factors in the 2016 Form 10-K.


Item 2.     Unregistered Sales of Equity Securities and Use of Proceeds

Issuer Purchases of Equity Securities

At March 31, 2017 , approximately $596 million of future share repurchases are authorized under the Share Repurchase Program. There were no share repurchases during the first quarter of 2017 . There were two authorizations under this program by CSC's Board of Directors, each covering up to $500 million of common stock that were publicly announced by the Company on April 25, 2007, and March 13, 2008. The remaining authorizations do not have an expiration date.

The following table summarizes purchases made by or on behalf of CSC of its common stock for each calendar month in the first quarter of 2017 :

Month

Total Number of

Shares Purchased

(in thousands)

Average Price Paid per Share

January:

Employee transactions  (1)

10

$

40.32


February:

Employee transactions  (1)

12

$

41.22


March:

Employee transactions  (1)

186

$

42.42


Total:

Employee transactions  (1)

208

$

42.25


(1)

Includes restricted shares withheld (under the terms of grants under employee stock incentive plans) to offset tax withholding obligations that occur upon vesting and release of restricted shares. The Company may receive shares delivered or attested to pay the exercise price and/or to satisfy tax withholding obligations by employees who exercise stock options granted under employee stock incentive plans, which are commonly referred to as stock swap exercises.


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THE CHARLES SCHWAB CORPORATION




Item 3.     Defaults Upon Senior Securities

None.


Item 4.     Mine Safety Disclosures


Not applicable.


Item 5.     Other Information

None.


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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



12.1

Computations of Ratio of Earnings to Fixed Charges and Ratio of Earnings to Fixed Charges and Preferred Stock Dividends.



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.



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.



32.1

Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002.

(1)



32.2

Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002.

(1)



101.INS

XBRL Instance Document

(2)



101.SCH

XBRL Taxonomy Extension Schema

(2)



101.CAL

XBRL Taxonomy Extension Calculation

(2)



101.DEF

XBRL Extension Definition

(2)



101.LAB

XBRL Taxonomy Extension Label

(2)



101.PRE

XBRL Taxonomy Extension Presentation

(2)



(1

)

Furnished as an exhibit to this Quarterly Report on Form 10-Q.

(2

)

Attached as Exhibit 101 to this Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2017 are the following materials formatted in 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.




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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:

May 8, 2017

/s/ Joseph R. Martinetto



Joseph R. Martinetto



Senior Executive Vice President and



Chief Financial Officer



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