Through Clients Eyes. Principles that will guide our actions for growth

Transcription

1 2017 Annual Report

2 Through Clients Eyes Principles that will guide our actions for growth 1. Trust is everything. Earned over time. Lost in an instant. We will focus on anything we do or don t do that builds or undermines trust and our relationship with clients. 2. Price matters. More than ever. And in our industry more than most. We will leverage our scale to deliver industry-leading pricing without prospects or clients having to ask or negotiate. 3. Clients deserve efficient experiences. Every time. We will respect our clients time by ensuring that every interaction a client has with us is simple and easy. 4. Every prospective or existing client is critical to our future growth. No matter how large or small. We will value and delight them at each possible opportunity. 5. Actions matter more than words. Clients, press, influencers, and employees will give credit to what we do vs. what we say. We will challenge everything we do to ensure it is consistent with what we believe and say about ourselves. The Charles Schwab Corporation (NYSE: SCHW) is an investing services firm with a history of innovating and advocating for individual investors and the advisors and institutions who serve them. In addition to historical information, this Annual Report to Stockholders contains forward-looking statements, which are identified by words such as believe, expect, will, may, would, should, growth, build, deliver, continue, remain, can, improve, drive, potential, scenario, lead, plan, future, position, optimize, target, record, investment, opportunity, intend, objective, and other similar expressions. In addition, any statements that refer to expectations, projections, or other characterizations of future events or circumstances are forward-looking statements. These forward-looking statements, which reflect management s beliefs, objectives, and expectations as of the date hereof, are estimates based on the best judgment of the company s senior management. These statements relate to, among other things: growth in the company s client base, accounts, assets, market share, revenues, earnings and profits; and investments to fuel and support growth, serve clients, and drive scale and efficiency (See Letter from the Chief Executive Officer and Letter from the Chief Financial Officer ); disruptive actions; stockholder value; operating efficiency; and optimizing earnings power (See Letter from the Chief Executive Officer ); expenses; Tier 1 Leverage Ratio objective; FHLB borrowing; bulk transfers; target dividend payout ratio; optimizing the spread earned on sweep balances; deposit pricing; balance sheet growth; timing for crossing the $250 billion assets threshold; the impact of fluctuations in the S&P 500 index, interest rates, and trading activity on revenue growth, the gap between revenue and expense growth, and pre-tax profit margin; balancing near-term profitability with investments for long-term growth; increasing revenues faster than expenses; and 2018 effective tax rate (See Letter from the Chief Financial Officer ). Achievement of the expressed beliefs, objectives, and expectations described in these statements is subject to 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 March 2, 2018 (or such earlier date as may be specified herein). See Forward-Looking Statements in Management s Discussion and Analysis of Financial Condition and Results of Operations on page 19 in the Form 10-K for a discussion of important factors that may cause such differences.

3 Letter From the CEO Employer of Choice & Industry Recognition Letter From the CFO Financial Highlights Growth in Client Assets and Accounts Executive Management Form 10-K Board of Directors Corporate Information i ii

4 No trade-offs Walt Bettinger President and Chief Executive Officer To my fellow stockholders, Thank you. Yes, thank you to our valued clients, and thank you to our long-term stockholders. Why begin my annual opportunity to speak directly with stockholders with a thank you? It s simple. Every success we achieved in 2017 is just a reflection of the trust millions of clients and stockholders have in us. And their trust led to records in virtually every key area of measurement in 2017: Active brokerage accounts Revenue Net new assets Net income Client assets Stock price Are we proud? Yes, of course. But far more, we are grateful and humbled. We are grateful for the trust our clients and stockholders place in us. We are humbled by your response to our Through Clients Eyes strategy and the execution of our Virtuous Cycle approach to building the business. Again, thank you! We are committed to continuing to build the type of company that treats all constituencies our clients, our stockholders, our employees, our vendors and partners, our regulators, and our communities with honor and respect. This is my tenth opportunity to have the honor of writing to you. As in the past, my goal is to keep this letter clear, direct, and free of jargon, corporate speak, and trendy buzzwords. The litmus test for my letter is whether it reads as if I were corresponding with a business partner who has been out of touch for the past year. And as always, please let me know if I ve achieved this goal. A changing world The world we operate in is changing faster than ever before. The traditional expectations for price versus quality tradeoffs are breaking down all across our economy. On a recent Saturday, in fact, I ordered a jacket online for a lower price than it was offered for at a local mall. The 2 LETTER FROM THE CHIEF EXECUTIVE OFFICER

5 Schwab s Virtuous Cycle continues to deliver strong business momentum 11% Expense Growth $380M* in Annualized Cost Savings for Clients Greater investments, which fund actions to Challenge the status quo to benefit investors with more of their assets Investors reward us $198.6B Core Net New Assets $3.4T Client Assets 15% Return on Equity 23% Earnings Per Share Growth Outstanding stockholder value, and Leading to record financial results, $8.6B Revenue 42.4% Pre-Tax Profit Margin Note: All growth metrics are 2017 vs *Estimated annualized cost savings for clients from strategic pricing moves announced in February 2017 and October package containing my new jacket was sitting in my driveway by dinner that evening a dinner from an outstanding local steakhouse that was also delivered as fresh and warm as if my family had been sitting in the actual restaurant. This is the business environment that Schwab operates in and is succeeding in. At Schwab, we have embraced and even championed the concept of no trade-offs for investors an approach that contributed to our recordbreaking results. Let s discuss three of the factors changing the world of investing today and how our strategy positions Schwab to lead the change and win in the market as a result The concept of beating the market has given way to a client focus on financial planning, asset allocation, tax efficiency, and low-cost investing. Fiduciary-standard advice, fee transparency, and low fees are a fundamental expectation for most clients. Scale is playing an increasingly large role in determining the winners, as costs related to cybersecurity, compliance, and regulatory oversight challenge sub-scale firms ability to compete effectively. Beating the market For many years, experienced investors have understood just how difficult it is to beat or outperform the market on a consistent basis. Most industry studies show that very few professionals can generate market-beating returns over time, and it s almost impossible for any investor to identify who those professionals might be in advance. Today, many wise investors put their emphasis on proper planning, asset allocation, tax efficiency, and keeping costs as low as possible all factors that have driven success over time and all within every investor s control. In my opinion, no firm in the industry is doing more to support these essential ingredients of smart investing than Schwab. In 2017, we completed 142,000 financial planning conversations with clients. Along with the independent investment advisors we serve, we provided asset allocation and advisory services to clients with $1.7 trillion in assets, and we did so at a value and cost that left more money in the pockets of those clients. After all, it is the investors LETTER FROM THE CHIEF EXECUTIVE OFFICER 3

6 money to begin with, and the less we take in fees, the more remains to grow and compound. Who would have thought over 40 years ago that one day Schwab would be recognized by J.D. Power as Highest in Investor Satisfaction With Full Service Brokerage Firms in both 2016 and 2017? 1 And who would have thought that our comparable advisory services and index funds would often have lower fees than a firm like Vanguard? Net Income (IN MILLIONS AT YEAR-END) That is no trade-offs! Advice, transparency, and low fees $1, $1, $1, $1, $2, The word fiduciary sounds complex but it really isn t. A fiduciary assesses what s best for another and puts that person s interests ahead of its own. Total Client Assets (IN BILLIONS AT YEAR-END) This is no different from when you visit a physician, and you expect advice tailored to your health needs and not influenced by the last medical equipment salesperson who spoke to your doctor. Similarly, when you speak with an attorney, you expect advice offered exclusively in your best interest. And when you retain Schwab for fee-based investment advice, or one of the thousands of independent registered investment advisors who custody their client assets at Schwab, you should be able to count on the same level of objectivity, transparency, and professionalism. A simple fact is: when you pay Schwab a fee for our advisory services, we provide that advice in a fiduciary capacity, placing your interests ahead of ours. $2, $2, $2, S&P 500 Index Fund Net Expense Ratios $2, $3, Schwab Fidelity Vanguard Why does this matter so much? Because investors have realized that: $5,000 Investment 0.030% 0.090% 0.140% Receiving advice in their interest is very different from being sold a product, and Understanding the exact fees and expenses being paid is not only critical to minimizing those fees and expenses, but the easiest way to keep more of their money invested. $100,000 Investment $1,000,000 Investment 0.030% 0.035% 0.040% 0.030% 0.035% 0.040% Source: 4 LETTER FROM THE CHIEF EXECUTIVE OFFICER

7 It is no surprise that two of the fastest growing parts of Schwab are the advisory services we provide directly to investors, and the custody and related services we provide to support the growth of independent investment advisors. Quality advice from a professional putting your interests ahead of their own transparency as to exactly what you are paying for this advice...and a goal of keeping those costs as low as possible. And our unique Satisfaction Guarantee, which ensures that if for any reason, any client, no matter how large or small, is dissatisfied with the service they receive from Schwab, we will return any eligible commissions, fees, or advisory program fees. 2 That is no trade-offs! The power of scale The world we operate in is not only changing rapidly, it is increasingly complex. It is fraught with the threat of cyberattack, and it demands risk management and oversight as never before. And yet, at the same time, investors expect and deserve outstanding service and world-class value. How can investment services firms deliver on these seemingly conflicting objectives? One critical factor is scale. With client assets approaching $3.5 trillion, Schwab has enormous economies of scale advantages that we leverage for the benefit of investors. Spreading these important costs over almost $3.5 trillion in assets allows us to deliver on our commitments, and to do so while operating with more efficiency than any of our publicly traded competitors by a wide margin. Operating with greater efficiency means that we can deliver on our commitments, charge our clients less, and yet still achieve outstanding results for our stockholders. Assets Receiving Ongoing Advisory Services (IN BILLIONS AT YEAR-END) Investor Services $ Advisor Services $1, $ $1, % YEAR-OVER- YEAR GROWTH +21% YEAR-OVER- YEAR GROWTH In 2017, we chose to share further scale benefits with our clients by aggressively reducing pricing in a variety of areas ranging from online equity commissions to index mutual funds to purchased money market funds. The annual value of fees we reduced put nearly $400 million back in the pockets of our clients that s between 4% and 5% of our total revenue. In the Virtuous Cycle, we share the benefits of our growth with our valued clients! That is no trade-offs! LETTER FROM THE CHIEF EXECUTIVE OFFICER 5

8 Expenses as a Percentage of Average Client Assets 0.56% Morgan Stanley WM 0.52% Bank of America GWIM 0.42% E*TRADE 0.27% TD Ameritrade 0.16% Schwab Source: Company earnings releases. Core Net New Assets (IN BILLIONS AT YEAR-END) $ $ $ $ $ The future for Schwab We believe investable wealth in the United States exceeds $30 trillion. So even though we are now serving almost $3.5 trillion in client assets, we are far from maximizing our growth potential. The opportunities to serve millions more investors and gain their trust to invest with Schwab are enormous. Today, we are better positioned than ever to capture a growing share of the market by continuing to build on our no trade-offs approach delivering quality service and advice, offering transparent and low prices, and leveraging our scale to operate efficiently and profitably. And as we transition into 2018 and strive to pursue this growth, we will operate with several clear priorities: Ensuring we continue to build client trust by making every decision Through Clients Eyes, Optimizing our earnings power while continuing to invest in our clients and our people, and Investing in the business for the long haul, with a focus on growth, infrastructure, and risk management. We believe your company has reached a point where we should be investing not only to support the growth we are achieving now, but also to clear the path for the growth we re going to achieve over the next decade and beyond. You ll see us working on both those fronts in LETTER FROM THE CHIEF EXECUTIVE OFFICER

9 Today, we are better positioned than ever to capture a growing share of the market by continuing to build on our no trade-offs approach delivering quality service and advice, offering transparent and low prices, and leveraging our scale to operate efficiently and profitably. Conclusion As I mentioned in the opening of this letter, this is my tenth opportunity to share with you my thoughts, dreams, challenges, and ambitions for your company. The past decade has been a remarkable one. From the depths of the financial crisis and the resulting zero interest rate policies enacted by the Federal Reserve, to the highs of record stock market levels and consumer confidence one thing has remained unchanged: our Through Clients Eyes strategy. Every day we ask ourselves how we can use our intimate knowledge of investing, saving, and the markets to better serve our clients, to offer them better value to serve them the way we would want to be served. This simple approach consistent with the Golden Rule comes to life in our Virtuous Cycle. Treating clients as we would want to be treated has fueled our tremendous growth in recent years. That growth has helped us build scale and grow profits, and, importantly, it has also allowed us to share the benefits of that increasing scale with our clients in the form of great service, expanded investing solutions, and lower pricing. So I will close where I started with a sincere thank you. Thank you to our valued clients, and thank you to our longterm stockholders. Your trust and confidence in Schwab have helped us build a remarkable company, one whose future has never been brighter! Warmly, Walt Bettinger March 2, 2018 linkedin.com/in/waltbettinger twitter.com/waltbettinger 1 Charles Schwab received the highest numerical score in the J.D. Power Full Service Investor Satisfaction Study study based on 6,579 total responses from 20 firms measuring opinions of investors who used full service investment institutions, surveyed January Your experiences may vary. Visit jdpower.com 2 If you are not completely satisfied for any reason, at your request Charles Schwab & Co., Inc. or Charles Schwab Bank will refund any eligible fee. See schwab.com/satisfaction. LETTER FROM THE CHIEF EXECUTIVE OFFICER 7

10 SAN FRANCISCO Admired as an employer of choice Schwab ranked as a top place to work in many of the places we call home STATE OF STATE OF AUSTIN CENTRAL CHARLOTTE CHICAGO A R I Z O N A T E X A S T E X A S F L O R I D A N. C A R O LI N A I L L I N O I S CLEVELAND DENVER INDIANAPOLIS O H I O DALLAS/FORT WORTH T E X A S C O L O R A D O I N D I A N A C A L I A I F O R N As a firm, we have an unshakable belief in our purpose and in our culture of service. As an employer, we are committed to helping individuals unleash their potential and achieve their dreams challenging themselves as we seek to challenge the status quo on behalf of our clients. We place great value on the recognition we receive as an employer of choice, particularly those awards that are based on feedback from our employees. Since 2013, Schwab has consistently been recognized as a top place to work, based on employee feedback in major markets where Schwab has significant concentrations of employees, including Austin, Central Florida, Charlotte, Chicago, Cleveland, Denver, Indianapolis, the San Francisco Bay Area, and the state of Arizona. In 2017, Schwab s annual recognition expanded to the entire state of Texas and, separately, the Dallas/ Fort Worth area. Corporate Equality Since 2004, Charles Schwab has received a 100% rating on the Human Rights Campaign s Corporate Equality Index. The index rates American workplaces on lesbian, gay, bisexual, and transgender equality. Military-Friendly Workplace Schwab has been recognized annually as a military-friendly workplace and for its commitment to hiring veterans by G.I. Jobs, Military Spouse, and Military Benefits magazines since In 2017, we received even higher honors from G.I. Jobs, being named a Military Friendly GOLD Top 10 Employer. Schwab also received the 2017 Patriot Award as a member of the Employer Support of the Guard and Reserve, a program of the Department of Defense. And for a sixth consecutive year, Schwab was recognized as one of the Best of the Best Top Veteran-Friendly Companies by U.S. Veterans magazine. 8 EMPLOYER OF CHOICE & INDUSTRY RECOGNITION

11 2017 Customer Satisfaction Recognition J.D. Power Ranked by J.D. Power Highest in Investor Satisfaction with Full Service Brokerage Firms, Two Years in a Row. Charles Schwab received the highest numerical score in the J.D. Power Full Service Investor Satisfaction Study S Ṃ 2017 study based on 6,579 total responses from 20 firms measuring opinions of investors who used full-service investment institutions, surveyed January Your experiences may vary. Visit Jdpower.com Best Online Brokers Barron s Schwab rated a Top Online Broker in Barron s survey of the Best Online Brokers, scoring an overall 4 out of 5 stars. From Barron s 2017 Online Broker Survey published March 18, Barron s is a trademark of Dow Jones & Co., L.P. All rights reserved. Reprinted with permission of Barron s. Schwab received 4 out of 5 stars for the year Barron s evaluated 16 firms in the following categories of service: Trading Experience and Technology, Usability, Mobile, Range of Offerings, Research Amenities, Portfolio Analysis and Reports, Customer Service and Education and Security, and Costs #1 Customer Service and Trade Reliability Investor s Business Daily Schwab was named #1 in Customer Service and Trade Reliability in the 2017 Investor s Business Daily Best Online Brokers survey for the fifth year in a row. Schwab also received the highest rating for website performance for the second consecutive year. From Investors Business Daily, January 30, In order to develop one of the most respected and thorough reports on online brokers, IBD and its polling partner, TechnoMetrica, surveyed thousands of investors regarding their opinions on 24 potential attributes of online brokers, such as Trade Reliability, Low Commissions & Fees, and Site Performance. IBD then narrowed and weighted the attributes to calculate an Overall Customer Experience Index for each broker. Its research team analyzed investor-submitted data acquired through a two-phase process to determine the leaders in each sub-category Most Admired Companies Recognition FORTUNE Selected as one of the FORTUNE World s Most Admired Companies. From FORTUNE Magazine: February Time Inc. FORTUNE and The World s Most Admired Companies are registered trademarks of Time Inc. and are used under license. FORTUNE and Time Inc. are not affiliated with, and do not endorse products or services of Charles Schwab and Co, Inc. Based on a survey by the Korn Ferry Hay Group of 4,000 respondents comprised of corporate executives, directors, and analysts. The respondents were asked to select the 10 companies they admired most from a list compiled according to selection criteria established by FORTUNE and Korn Ferry Hay Group. Some of the ways in which we served our communities in % of employees volunteered on company time 2,500 grants, matching gifts, and sponsorships made to nonprofit organizations 641 schools in 50 states received financial education through our partnership with DonorsChoose.org EMPLOYER OF CHOICE & INDUSTRY RECOGNITION 9

12 Raising our sights Peter Crawford Chief Financial Officer After 16 years at Schwab, I was fortunate enough to assume the role of CFO in May with the company better positioned than ever. Through a consistent focus on clients, proven strategy, competitive strength, and some help from the broader economic environment, we ve now leveraged that positioning into the best results in company history. In the 2016 Annual Report, my predecessor and colleague, Joe Martinetto, remarked how there was room to run in 2017, and we certainly ran fast, with total client assets up 21% to $3.4 trillion, revenue growth of 15%, expense growth of 11%, a 240-basis-point rise in our pre-tax profit margin to a record 42.4%, and diluted earnings per share up 23%. In my first letter to you as CFO, I d like to share how we capitalized on the more favorable environments in 2016 and 2017, executed on our strategy, and positioned ourselves for further success in 2018 and beyond. But first, I thought I would briefly mention what I am hearing in my meetings with clients, investors, and employees as the new CFO. One question I am often asked is, What are you going to change? The short answer is, not much. I don t see a reason to dramatically alter our course, as our longstanding financial formula continues to ring true driving solid business growth through a relentless client focus, generating strong revenue growth from diversified sources, and building improved profitability through continued expense discipline which enables us to continue making investments in both our clients and long-term profitable growth. Schwab is, and will remain, a growth company, and my colleagues and I intend to do everything we can to continue making sound investments to grow in the future while delivering on our near-term financial commitments performance Last January, we set our 2017 plan. We had two rate hikes behind us and the hope of a few more on the horizon. The election was over and the markets were rallying ahead of the inauguration. Our financial scenario for the year assumed one rate hike in June, equity market appreciation of 6.5%, the 10-year Treasury averaging just north of 2.45%, 10 LETTER FROM THE CHIEF FINANCIAL OFFICER

13 and our trading levels relatively flat to 2016 levels. With these assumptions, we expected revenue growth in the low double digits, a gap between revenue and expense growth of basis points, and a pre-tax profit margin of at least 41%. Confident that we had turned a corner and were unprecedented event. In addition, clients brought $198.6 billion in core net new assets to Schwab the most in our history and marking a 7% organic growth rate resulting in record total assets of $3.4 trillion. Our transfer of account ratio, which measures the dollars flowing into Schwab Schwab is, and will remain, a growth company, and my colleagues and I intend to do everything we can to continue making sound investments to grow in the future while delivering on our near-term financial commitments. accelerating into 2017, we embedded within our baseline scenario a series of bold and strategic pricing investments to drive growth. These moves included reductions in our equity and options commissions and index fund expense ratios in the first half of the year, and lower pricing on our money funds in October. Altogether, our 2017 pricing actions added up to nearly $400 million in annualized savings for our clients. Where did we land? The equity markets were consistently strong, with the S&P 500 Index finishing 2017 up 19.4%. Instead of the one rate hike in our baseline scenario, the Fed hiked rates three times, in March, June, and December (although these didn t move the long end of the curve higher, with the 10-year Treasury yield averaging only 2.33% for the year). Client sentiment reached highs not seen since the 2000s, and investors engaged more actively with the markets. from our competitors divided by the dollars going out to our competitors, went from 1.6 in 2016 to 2.1 in And our Client Promoter Score, which measures how likely a client is to refer a friend or colleague to Schwab, rose in both our Retail and Advisor Services businesses to 63 and 57, respectively levels only seen at world-class service organizations. Our strong asset gathering and the improved interest rate environment helped produce record 2017 revenues of $8.6 billion, up 15% over Net interest revenue rose 29% to $4.3 billion, and Asset management and administration fees increased 11% to $3.4 billion, both records. These increases New Accounts (IN THOUSANDS AT YEAR-END) The environment definitely helped us, but we also drove organic growth by consistently investing on behalf of our clients over the years in areas such as pricing, service, products, and technology. As Walt discussed in his letter, we strive to provide a no trade-offs combination of value, service, transparency, and trust to our clients and are convinced that the moves we made have not only improved the lives of our clients, but also our long-term competitive position. Our 2017 results bear this out. Clients opened , , , more than 100,000 accounts in each month of the year, an LETTER FROM THE CHIEF FINANCIAL OFFICER 11

14 in our two largest revenue sources were more than enough to offset a reduction in trading revenues resulting from our pricing actions. On the expense front, our spending rose 11% year-overyear, consistent with our expectations, including higher compensation due to increased staffing levels and incentive costs relating to our strong asset gathering, as well as increased project spending and other investments to lay the foundation for growth in 2018 and beyond. With the help of the environment, the gap between revenue and expense growth widened to 440 basis points, and we reached both a record pre-tax profit margin of 42.4% and an eight-year high for ROE, at 15%. Schwab s 2017 results demonstrate what can happen when our disciplined financial management meets a favorable external environment. We believe we are heading into 2018 with even stronger momentum! Effective balance sheet management remains core to sustaining our success. We support balance sheet growth primarily with capital generated through earnings, as well as with external sources (like preferred stock) if necessary while maintaining a consolidated Tier 1 Leverage Ratio above our objective of 6.75% 7.00%. In the last several years, we have chosen to utilize our capital to support balance sheet growth from both new client cash balances and bulk transfers of sweep money market funds to Schwab Bank as part of our long-term cash migration strategy. In 2017, as clients engaged with the markets, they pushed their cash levels to historic lows as a percentage of total client assets 10.8% at December 31. Given that we were mindful of approaching the $250 billion consolidated asset threshold, which brings somewhat heightened regulatory requirements, we intentionally limited the amount of bulk transfers of sweep money market funds to just $2 billion. Another part of managing our approach to $250 billion involved the utilization of Federal Home Loan Bank (FHLB) advances to provide temporary funding for Schwab Bank portfolio investments; these advances will eventually be paid down as bulk transfers occur. The FHLB borrowings, which totaled $15 billion at year-end, enabled us to strengthen net interest revenue by getting a head start on anticipated 2018 bulk transfers while controlling our approach to the threshold. By month-end December, our consolidated balance sheet totaled $243 billion, and our year-end Tier 1 Leverage Ratio was 7.6%, well above our operating objective. Net Revenues (IN MILLIONS AT YEAR-END) $5, $6, $6, Pre-Tax Profit Margin 31.4% % % 2015 $7, % 2016 $8, % 2017 We maintained our target 20%-30% dividend payout ratio by raising our quarterly cash dividend from $0.07 to $0.08 in January 2017 and then to $0.10 in January We also worked to optimize our capital mix by redeeming our Series B 6.00% preferred shares and replacing them with a lower rate preferred offering, and by issuing $1.5 billion of senior notes in advance of 2018 debt maturities and to support continued business growth outlook Moving into 2018, we intend to deploy excess capital by actively transferring more sweep money market fund balances to bank sweep. We continue to see a total net bulk transfer opportunity of approximately $60-$80 billion moving to our balance sheet, where we can optimize the 12 LETTER FROM THE CHIEF FINANCIAL OFFICER

15 spread earned on sweep balances while paying clients a competitive market rate for such deposits. Operationally, it would be challenging to complete all of those transfers in a single year, so we currently expect to manage them Return on Equity 15% at a rate consistent with overall balance sheet growth of approximately 15% in 2018, after taking client-driven growth 14% into account, and cross the $250 billion threshold sometime in the first half of the year. There are multiple variables at play, so let me walk through each one. First, existing clients may decide to engage more 11% 12% 12% with the markets, as we saw in 2017, or take money out of the markets thereby reducing or increasing their bank sweep balances. Second, clients make decisions about how much of that cash they want to move off our balance sheet in search of higher yields in CDs, purchased money funds, etc. Third, a portion of the net new assets we attract will Total Balance Sheet Assets (IN BILLIONS AT YEAR-END) be allocated to cash. Putting it all together, we will monitor client cash allocations from both existing and new balances and then complete bulk transfers so that the net effect of all three pieces is balance sheet growth at a pace consistent with working our consolidated Tier 1 Leverage Ratio toward, but not through, our operating objective. Along with the engineered improvement in earnings power provided by bulk transfers, we are also planning for stronger revenues from continued growth in our business. Overall, assuming 6.5% S&P 500 Index appreciation, daily average revenue trades up slightly from 2017, one rate hike in June, and an average 10-year Treasury yield of 2.55%, we believe we can produce low double-digit revenue growth, a gap between revenue and expense growth of basis points, and a pre-tax profit margin of around 43%. This scenario is consistent with our goal of balancing near term profitability with investments for long-term growth, and contemplates further improvement in our pre-tax profit margin, even after a 12+ point increase since As many of you know, we typically highlight our ability to flex expense management as conditions unfold during a given year. This year may feel a little different, as we intend to make these planned investments regardless of the environment, barring some major event. Why? Part of exercising discipline is knowing when to pull back and when to push forward, and we feel the time has come for a steady hand on the throttle we have the business momentum, with 7% organic growth; the record profitability, with margins of $ $ $ $ $ %; the opportunity, with more than $30 trillion in U.S. investable wealth; and the know-how to continue growing profitably and widen our competitive advantage into the future. So we expect to make significant investments in digital, our technology infrastructure, and business process redesign through 2018 all so we can bend our cost curve while continuing to drive revenue growth, i.e., extend our ability to increase revenues faster than expenses, into the future. None of this is new we have always striven to leave as much as possible in our clients pockets as we serve them, while improving our efficiency and scale, so that the net result benefits both clients and stockholders. Even as our revenue generated on client assets, or ROCA, has declined from 39 basis points in 2004, to 29 in 2010, to 28 today, we have reduced our operating expenses on client assets, or EOCA, from 32 basis points in 2004, to 24 in 2010, to 16 LETTER FROM THE CHIEF FINANCIAL OFFICER 13

16 Revenue and Expense as a Percentage of Average Client Assets (IN BASIS POINTS) REVENUE ON CLIENT ASSETS EXPENSES ON CLIENT ASSETS in 2017 enabling our pre-tax profit margin to expand from 16% to over 42% during that time. As Walt discussed in his letter, this discipline not only helps clients and stockholders, it also puts us in a formidable position versus competitors. The net effect of all of this is that there may be more pre-tax profit margin variability than expense variability versus our baseline in 2018, as we focus on a certain level of spending if we have any help from the environment (e.g., more than one rate hike), the margin and therefore gap between revenue and expense growth should expand. Before I close, I wanted to take a brief moment and discuss taxes. With 2018 tax reform, Schwab stands to benefit from the reduction in the statutory corporate tax rate going from 35% to 21%. While there are a number of factors that will impact the actual rate, the bottom line is that we currently expect to capture the majority of this reduction and estimate that our 2018 effective tax rate will be around 23%-24%. While I haven t been Schwab s CFO for very long, I know that investors are always very focused on what s to come in the year ahead. I hope this letter has provided you with a good review of 2017 and the perspective you re seeking for 2018 but more importantly, I hope that you see all the opportunity that lies beyond. It s time to invest even more in driving growth. It s time to extend our competitive advantage. It s time that we all raise our sights. We are preparing Schwab for growth not just in 2018, but for the next 5, 10, even 20 years. This takes fortitude, but it s consistent with our purpose To champion our clients goals with passion and integrity. As we head into 2018 and beyond, I am more excited than ever about the opportunity to demonstrate that when we do right by our clients and put them first, our stockholders and our employees also win. Thank you for your ongoing support as we build the Schwab of the future. Peter Crawford March 2, 2018 It s time that we all raise our sights. We are preparing Schwab for growth not just in 2018, but for the next 5, 10, even 20 years. 14 LETTER FROM THE CHIEF FINANCIAL OFFICER

17 Fueling ongoing growth We ll continue building forward momentum by staying true to our strategy of seeing Through Clients Eyes and anticipating their needs. We are incredibly optimistic about the opportunities ahead. Active Brokerage Accounts 10.8 Million +6% Total Client Assets $3.36 Trillion +21% All Proprietary Mutual Funds and ETFs $345 Billion +19% Total Employees 17,600 +9% Capital Expenditures $412 Million +17% Total Expenses $4.97 Billion +11% As of December 31, All percentages refer to the year-over-year change from 2016 to LETTER FROM THE CHIEF FINANCIAL OFFICER 15

18 Financial highlights GROWTH RATE 1-YEAR (In Millions, Except Per Share Amounts and as Noted) Net revenues 15% $ 8,618 $ 7,478 $ 6,380 Expenses excluding interest 11% $ 4,968 $ 4,485 $ 4,101 Net income available to common stockholders 25% $ 2,180 $ 1,746 $ 1,364 Basic earnings per common share 23% $ 1.63 $ 1.32 $ 1.04 Diluted earnings per common share 23% $ 1.61 $ 1.31 $ 1.03 Dividends declared per common share 19% $.32 $.27 $.24 Weighted-average common shares outstanding diluted 1% 1,353 1,334 1,327 Closing market price per share (at year-end) 30% $ $ $ Book value per common share (at year-end) 14% $ $ $ 9.05 Net revenue growth 15% 17% 5% Pre-tax profit margin 42.4% 40.0% 35.7% Return on average common stockholders' equity 15% 14% 12% Full-time equivalent employees (at year-end, in thousands) 9% SCHW Stock Price At Year-End For The Past Ten Years $60 $ $50 $40 $30 $20 $ FINANCIAL HIGHLIGHTS

19 Growth in client assets and accounts GROWTH RATES COMPOUNDED 4-YEAR ANNUAL 1-YEAR (In Billions, at Year-End, Except as Noted) Assets in client accounts Schwab One, certain cash equivalents and bank deposits 12% 1% $ $ $ $ $ Proprietary mutual funds (Schwab Funds and Laudus Funds ): Money market funds (1%) Equity and bond funds (1, 2) 11% 25% Total proprietary mutual funds 3% 7% Mutual Fund Marketplace (3) : Mutual Fund OneSource and other non-transaction fee funds (4) (1%) 13% Mutual fund clearing services 16% 35% Other third-party mutual funds (4) 11% 22% Total Mutual Fund Marketplace 9% 23% 1, Total mutual fund assets 8% 20% 1, , , , ,050.9 Exchange-traded funds (ETFs) (1) Proprietary ETFs (2) 56% 66% ETF OneSource (3) 36% 35% Other third-party ETFs 15% 30% Total ETF assets 21% 37% Equity and other securities (1, 4) 11% 22% 1, Fixed income securities 8% 18% Margin loans outstanding 10% 20% (18.3) (15.3) (15.8) (14.3) (12.6) Total client assets 11% 21% $ 3,361.8 $ 2,779.5 $ 2,513.8 $ 2,463.6 $ 2,249.4 Client assets by business ( 5) Investor Services 10% 21% $ 1,810.9 $ 1,495.4 $ 1,358.6 $ 1,325.2 $ 1,217.0 Advisor Services 11% 21% 1, , , , ,032.4 Total client assets 11% 21% $ 3,361.8 $ 2,779.5 $ 2,513.8 $ 2,463.6 $ 2,249.4 Net growth in assets in client accounts (for the year ended) Net new assets by business ( 5) Investor Services (6,7) 59% 112% $ $ 58.4 $ 84.1 $ 57.4 $ (19.5) Advisor Services (8) 16% 63% Total net new assets 54% 86% $ $ $ $ $ 41.6 Net market gains (losses) 8% 149% (89.2) Net growth 18% 119% $ $ $ 50.2 $ $ New brokerage accounts (in thousands, for the year ended) 11% 32% 1,441 1,093 1, Clients (in thousands) Active Brokerage Accounts (9) 4% 6% 10,755 10,155 9,769 9,386 9,093 Banking Accounts 7% 8% 1,197 1,106 1, Corporate Retirement Plan Participants (6) 5% 2% 1,568 1,543 1,519 1,428 1,305 (1) Effective 2014, ETFs are presented separately; they were previously included in Equity and bond funds and Equity and other securities. Prior period information has been recast to reflect this change. (2) Includes proprietary equity and bond funds and ETFs held on and off the Schwab platform. As of December 31, 2017, off-platform equity and bond funds and ETFs were $10.1 billion and $24.0 billion, respectively. (3) Excludes all proprietary mutual funds and ETFs. (4) In 2015, certain Mutual Fund OneSource balances were reclassified to Other third-party mutual funds and Equity and other securities. Prior period information has been recast to reflect this change. (5) In 2015, the Company realigned its reportable segments as a result of organizational changes. The Corporate Brokerage Retirement Services business was transferred from the Investor Services segment to the Advisor Services segment. Prior period segment information has been recast to reflect this change. (6) In 2015, the Company increased its reported totals for overall client assets and retirement plan participants by $6.1 billion and 35,000, respectively, to reflect the final impact of the consolidation of its retirement plan recordkeeping platforms as previously announced in In 2013, the Company reduced its reported totals for overall client assets and retirement plan participants by $24.7 billion and 317,000, respectively, to reflect the estimated impact of the consolidation of its retirement plan recordkeeping platforms and subsequent resignation from certain retirement plan clients. (7) 2017 includes inflows of $34.5 billion from certain mutual fund clearing services clients and an outflow of $9.0 billion from a mutual fund clearing services client includes an inflow of $2.7 billion from a mutual fund clearing services client includes inflows of $32.5 billion from certain mutual fund clearing service clients includes inflows of $10.2 billion and an outflow of $3.4 billion from certain mutual fund clearing services clients includes outflows of $74.5 billion relating to the planned transfer of a mutual fund clearing services client and $2.1 billion from another mutual fund clearing services client also includes inflows of $35.8 billion from certain mutual fund clearing services clients. (8) 2015 includes an outflow of $11.6 billion relating to the Company s planned resignation from an Advisor Services cash management relationship. (9) Periodically, the Company reviews its active account base. In 2017, active brokerage accounts were reduced by approximately 48,000 as a result of low-balance closures. GROWTH IN CLIENT ASSETS AND ACCOUNTS 17

20 Executive Management Charles R. Schwab Chairman of the Board Walter W. Bettinger II President and Chief Executive Officer Steven H. Anderson Executive Vice President, Retirement Plan Services Catherine Casey Executive Vice President, Human Resources Marie A. Chandoha President and Chief Executive Officer, Charles Schwab Investment Management, Inc. Jason Clague Executive Vice President, Operational Services Bernard J. Clark Executive Vice President, Advisor Services Jonathan M. Craig Senior Executive Vice President Peter Crawford Executive Vice President and Chief Financial Officer David R. Garfield Executive Vice President, General Counsel and Corporate Secretary G. Andrew Gill Executive Vice President, Enterprise Marketing, Analytics and Insights Neesha Hathi Executive Vice President and Chief Digital Officer Tim Heier Executive Vice President and Chief Technology Officer Dennis Howard Executive Vice President and Chief Information Officer Lisa Kidd Hunt Executive Vice President, Business Initiatives Terri R. Kallsen Executive Vice President, Investor Services Mitch Mantua Executive Vice President, Internal Audit Joseph R. Martinetto Senior Executive Vice President and Chief Operating Officer Nigel J. Murtagh Executive Vice President, Corporate Risk Paul V. Woolway President and Chief Executive Officer, Charles Schwab Bank 18 Executive MANAGEMENT

21 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2017 Commission file number THE CHARLES SCHWAB CORPORATION (Exact name of registrant as specified in its charter) Delaware (State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.) Title of each class Common Stock $.01 par value per share Depositary Shares, each representing a 1/40 th ownership interest in a share of 6.00% Non-Cumulative Preferred Stock, Series C Depositary Shares, each representing a 1/40 th ownership interest in a share of 5.95% Non-Cumulative Preferred Stock, Series D 211 Main Street, San Francisco, CA (Address of principal executive offices and zip code) Registrant s telephone number, including area code: (415) Securities registered pursuant to Section 12(b) of the Act: Securities registered pursuant to Section 12(g) of the Act: None Name of each exchange on which registered New York Stock Exchange New York Stock Exchange New York Stock Exchange Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes No Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes No 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 Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10 K. Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or 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 Non-accelerated filer (Do not check if a smaller reporting company) Accelerated filer Smaller reporting company Emerging growth company If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No As of June 30, 2017, the aggregate market value of the voting stock held by non-affiliates of the registrant was $51.2 billion. For purposes of this information, the outstanding shares of Common Stock owned by directors and executive officers of the registrant were deemed to be shares of the voting stock held by affiliates. The number of shares of Common Stock outstanding as of January 31, 2018, was 1,346,473,499. DOCUMENTS INCORPORATED BY REFERENCE Part III of this Form 10-K incorporates certain information contained in the registrant s definitive proxy statement for its annual meeting of stockholders, to be held May 15, 2018, by reference to that document.

22 Annual Report On Form 10-K For Fiscal Year Ended December 31, 2017 TABLE OF CONTENTS Part I Item 1. Business 1 General Corporate Overview 1 Business Strategy and Competitive Environment 1 Sources of Net Revenues 2 Products and Services 2 Regulation 5 Available Information 8 Item 1A. Risk Factors 9 Item 1B. Unresolved Securities and Exchange Commission Staff Comments 15 Item 2. Properties 15 Item 3. Legal Proceedings 15 Item 4. Mine Safety Disclosures 15 Part II Item 5. Market for Registrant s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities 16 Item 6. Selected Financial Data 18 Item 7. Management s Discussion and Analysis of Financial Condition and Results of Operations 19 Forward-Looking Statements 19 Glossary of Terms 21 Overview 24 Current Regulatory Environment and Other Developments 26 Results of Operations 27 Risk Management 35 Capital Management 42 Fair Value of Financial Instruments 45 Critical Accounting Estimates 45 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 47 Item 8. Financial Statements and Supplementary Data 48 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure 102 Item 9A. Controls and Procedures 102 Item 9B. Other Information 102 Part III Item 10. Directors, Executive Officers, and Corporate Governance 102 Item 11. Executive Compensation 102 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 103 Item 13. Certain Relationships and Related Transactions, and Director Independence 103 Item 14. Principal Accountant Fees and Services 103 Part IV Item 15. Exhibits, Financial Statement Schedules 104 Exhibit Index 105 Signatures 110 Statistical Disclosure by Bank Holding Companies F-1