Edgar Filing: SCHWAB CHARLES CORP

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Form 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 June 30, 2012

Commission File Number: 1-9700

THE CHARLES SCHWAB CORPORATION

(Exact name of registrant as specified in its charter)

Delaware

94-3025021

(State or other jurisdiction

of incorporation or organization)

(I.R.S. Employer Identification No.)

211 Main Street, San Francisco, CA 94105

(Address of principal executive offices and zip code)

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

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 x 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 x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 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 x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

1,274,106,165 shares of $.01 par value Common Stock

Outstanding on July 24, 2012

THE CHARLES SCHWAB CORPORATION

Quarterly Report on Form 10-Q

For the Quarter Ended June 30, 2012

Index


		Page
Part I - Financial Information

Item 1.	Condensed Consolidated Financial Statements (Unaudited):

	Statements of Income		1

	Statements of Comprehensive Income		2

	Balance Sheets		3

	Statements of Cash Flows		4

	Notes		5 – 23

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		24 – 47

Item 3.	Quantitative and Qualitative Disclosures About Market Risk		48 – 49

Item 4.	Controls and Procedures		49

Part II - Other Information

Item 1.	Legal Proceedings		50

Item 1A.	Risk Factors		50

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		50

Item 3.	Defaults Upon Senior Securities		50

Item 4.	Mine Safety Disclosures		51

Item 5.	Other Information		51

Item 6.	Exhibits		52

Signature			53

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						Six Months Ended
	June 30,						June 30,
	2012			2011			2012			2011
Net Revenues
Asset management and administration fees	$	496		$	502		$	980		$	1,004

Interest revenue		497			496			969			977
Interest expense		(39	)		(45	)		(77	)		(90	)

Net interest revenue		458			451			892			887

Trading revenue		219			205			462			446
Other		121			35			167			74
Provision for loan losses		(4	)		(1	)		(4	)		(5	)
Net impairment losses on securities⁽¹⁾		(7	)		(2	)		(25	)		(9	)


Total net revenues		1,283			1,190			2,472			2,397

Expenses Excluding Interest
Compensation and benefits		446			430			911			867
Professional services		93			92			189			184
Occupancy and equipment		80			73			156			144
Advertising and market development		57			51			124			111
Communications		55			54			113			110
Depreciation and amortization		48			33			96			68
Class action litigation and regulatory reserve		—			7			—			7
Other		72			64			138			126

Total expenses excluding interest		851			804			1,727			1,617

Income before taxes on income		432			386			745			780
Taxes on income		157			148			275			299

Net Income		275			238			470			481

Preferred stock dividends		14			—			14			—

Net Income Available to Common Stockholders	$	261		$	238		$	456		$	481


Weighted-Average Common Shares Outstanding — Diluted		1,274			1,210			1,273			1,208


Earnings Per Common Share — Basic	$	.20		$	.20		$	.36		$	.40
Earnings Per Common Share — Diluted	$	.20		$	.20		$	.36		$	.40

⁽¹⁾

Net impairment losses on securities include total other-than-temporary impairment losses of $12 million and $11 million, net of $5 million and $9 million recognized in other comprehensive income, for the three months ended June 30, 2012 and 2011, respectively. Net impairment losses on securities include total other-than-temporary impairment losses of $14 million and $11 million, net of $(11) million and $2 million recognized in other comprehensive income, for the six months ended June 30, 2012 and 2011, respectively.

See Notes to Condensed Consolidated Financial Statements.

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THE CHARLES SCHWAB CORPORATION

Condensed Consolidated Statements of Comprehensive Income

(In millions)

(Unaudited)


	Three Months Ended June 30,						Six Months Ended June 30,
	2012			2011			2012			2011
Net Income	$	275		$	238		$	470		$	481
Other comprehensive income:
Change in net unrealized gain on securities available for sale:
Net unrealized gain		119			16			208			37
Reclassification of impairment charges included in earnings		7			2			25			9
Other reclassifications included in earnings		(1	)		1			(1	)		1
Income tax effect		(47	)		(8	)		(86	)		(18	)

Total other comprehensive income		78			11			146			29

Comprehensive Income	$	353		$	249		$	616		$	510

See Notes to Condensed Consolidated Financial Statements.

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THE CHARLES SCHWAB CORPORATION

Condensed Consolidated Balance Sheets

(In millions, except per share and share amounts)

(Unaudited)


	June 30, 2012			December 31, 2011
Assets
Cash and cash equivalents	$	8,089		$	8,679
Cash and investments segregated and on deposit for regulatory purposes (including resale agreements of $15,300 at June 30, 2012 and $17,899 at December 31, 2011)		22,723			26,034
Receivables from brokers, dealers, and clearing organizations		317			230
Receivables from brokerage clients — net		11,955			11,072
Other securities owned — at fair value		425			593
Securities available for sale		40,049			33,965
Securities held to maturity (fair value — $16,009 at June 30, 2012 and $15,539 at December 31, 2011)		15,506			15,108
Loans to banking clients — net		9,837			9,812
Loans held for sale		2			70
Equipment, office facilities, and property — net		677			685
Goodwill		1,165			1,161
Intangible assets — net		304			326
Other assets		767			818

Total assets	$	111,816		$	108,553

Liabilities and Stockholders’ Equity
Deposits from banking clients	$	66,257		$	60,854
Payables to brokers, dealers, and clearing organizations		1,332			1,098
Payables to brokerage clients		31,833			35,489
Accrued expenses and other liabilities		1,285			1,397
Long-term debt		1,999			2,001

Total liabilities		102,706			100,839

Stockholders’ equity:
Preferred stock — $.01 par value per share; aggregate liquidation preference of $885 at June 30, 2012 and $0 at December 31, 2011		863			—
Common stock — 3 billion shares authorized; $.01 par value per share; 1,487,543,446 shares issued		15			15
Additional paid-in capital		3,870			3,826
Retained earnings		8,280			7,978
Treasury stock, at cost — 213,494,172 shares at June 30, 2012 and 216,378,623 shares at December 31, 2011		(4,072	)		(4,113	)
Accumulated other comprehensive income		154			8

Total stockholders’ equity		9,110			7,714

Total liabilities and stockholders’ equity	$	111,816		$	108,553

See Notes to Condensed Consolidated Financial Statements.

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THE CHARLES SCHWAB CORPORATION

Condensed Consolidated Statements of Cash Flows

(In millions)

(Unaudited)


	Six Months Ended June 30,
	2012			2011
Cash Flows from Operating Activities
Net income	$	470		$	481
Adjustments to reconcile net income to net cash (used for) provided by operating activities:
Provision for loan losses		4			5
Net impairment losses on securities		25			9
Stock-based compensation		54			47
Depreciation and amortization		96			68
Premium amortization, net, on securities available for sale and securities held to maturity		98			37
Other		1			(9	)
Originations of loans held for sale		(435	)		(809	)
Proceeds from sales of loans held for sale		505			954
Net change in:
Cash and investments segregated and on deposit for regulatory purposes		3,311			(1,093	)
Receivables from brokers, dealers, and clearing organizations		(86	)		(47	)
Receivables from brokerage clients		(885	)		(413	)
Other securities owned		168			(80	)
Other assets		49			(1	)
Payables to brokers, dealers, and clearing organizations		212			(33	)
Payables to brokerage clients		(3,656	)		3,056
Accrued expenses and other liabilities		(163	)		(254	)

Net cash (used for) provided by operating activities		(232	)		1,918

Cash Flows from Investing Activities
Purchases of securities available for sale		(14,114	)		(7,167	)
Proceeds from sales of securities available for sale		1,323			450
Principal payments on securities available for sale		6,904			3,548
Purchases of securities held to maturity		(3,029	)		—
Principal payments on securities held to maturity		2,566			1,926
Net increase in loans to banking clients		(62	)		(753	)
Purchase of equipment, office facilities, and property		(76	)		(77	)
Other investing activities		—			6

Net cash used for investing activities		(6,488	)		(2,067	)

Cash Flows from Financing Activities
Net change in deposits from banking clients		5,403			1,749
Repayment of long-term debt		(3	)		(3	)
Net proceeds from preferred stock offerings		864			—
Dividends paid		(154	)		(145	)
Proceeds from stock options exercised and other		20			73
Other financing activities		—			10

Net cash provided by financing activities		6,130			1,684

(Decrease) Increase in Cash and Cash Equivalents		(590	)		1,535
Cash and Cash Equivalents at Beginning of Period		8,679			4,931

Cash and Cash Equivalents at End of Period	$	8,089		$	6,466


Supplemental Cash Flow Information
Cash paid during the period for:
Interest	$	74		$	86
Income taxes	$	221		$	325

See Notes to Condensed Consolidated Financial Statements.

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THE CHARLES SCHWAB CORPORATION

Notes to Condensed Consolidated Financial Statements

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

(Unaudited)

Introduction and Basis of Presentation

The Charles Schwab Corporation (CSC) is a savings and loan holding company engaged, through its subsidiaries, in securities brokerage, banking, and related financial services. Charles Schwab & Co., Inc. (Schwab) is a securities broker-dealer with over 300 domestic branch offices in 45 states, as well as a branch in each of the Commonwealth of Puerto Rico and London, U.K. In addition, Schwab serves clients in Hong Kong through one of CSC’s subsidiaries. Other subsidiaries include 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, 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 United States, 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 of securities available for sale and securities held to maturity, valuation of goodwill, allowance for loan losses, and legal reserves. 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. Certain prior period amounts have been reclassified to conform to the 2012 presentation. 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 Company’s Annual Report on Form 10-K for the year ended December 31, 2011.

New Accounting Standard

Adoption of New Accounting Standard

Testing Goodwill for Impairment: In September 2011, the Financial Accounting Standards Board issued new guidance allowing companies to consider qualitative factors before performing a quantitative assessment when determining whether goodwill is impaired, which was effective for goodwill impairment tests performed after January 1, 2012. Specifically, there is no longer a requirement to perform the two-step goodwill impairment test unless the entity determines that based on qualitative factors, it is more likely than not that the fair value of a reporting unit is less than its carrying amount. The adoption of this new guidance did not have a material impact on the Company’s financial position, results of operations, earnings per common share (EPS), or cash flows.

Business Acquisition

On September 1, 2011, the Company completed its acquisition of all of the outstanding common shares of optionsXpress Holdings, Inc. (optionsXpress) for total consideration of $714 million. optionsXpress is an online brokerage firm primarily focused on equity option securities and futures. The optionsXpress^® brokerage platform provides active investors and traders trading tools, analytics and education to execute a variety of investment strategies. The combination of optionsXpress and Schwab offers active investors an additional level of service and platform capabilities.

Under the terms of the merger agreement, optionsXpress stockholders received 1.02 shares of the Company’s common stock for each share of optionsXpress stock. As a result, the Company issued 59 million shares of the Company’s common stock valued at $710 million, based on the closing price of the Company’s common stock on September 1, 2011. The Company also assumed optionsXpress’ stock-based compensation awards valued at $4 million. In allocating the purchase price based on estimated fair values of assets and liabilities assumed as of the acquisition date, the Company preliminarily recorded $511 million of goodwill and $285 million of intangible assets. The allocation of the purchase price is preliminary and subject to further adjustment as information relative to closing date fair values and related tax balances are finalized. The results of optionsXpress’ operations have been included in the Company’s condensed consolidated statements of income

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THE CHARLES SCHWAB CORPORATION

Notes to Condensed Consolidated Financial Statements

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

(Unaudited)

from the date of acquisition. The amounts of optionsXpress’ net revenues and net income for the second quarter of 2012 were $49 million and $6 million, respectively. The amounts of optionsXpress’ net revenues and net income for the first half of 2012 were $101 million and $8 million, respectively.

The following table presents pro forma financial information as if optionsXpress had been acquired prior to January 1, 2011. Pro forma net income reflects the impact of amortizing purchase accounting adjustments relating to intangible assets, net of tax, of $5 million and $10 million in the second quarter and first half of 2011, respectively.


	Three Months Ended June 30, 2011		Six Months Ended June 30, 2011
Net revenues	$	1,249	$	2,522
Net income	$	242	$	494
Basic EPS	$	.19	$	.39
Diluted EPS	$	.19	$	.39

The pro forma financial information above is presented for illustrative purposes only and is not necessarily indicative of the results that actually would have occurred had the acquisition been completed prior to January 1, 2011, nor is it indicative of the results of operations for future periods.

Securities Available for Sale and Securities Held to Maturity

The amortized cost, gross unrealized gains and losses, and fair value of securities available for sale and securities held to maturity are as follows:


June 30, 2012	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Securities available for sale:
U.S. agency residential mortgage-backed securities	$	24,041	$	354	$	8	$	24,387
Non-agency residential mortgage-backed securities		923		1		148		776
Certificates of deposit		5,348		11		3		5,356
Corporate debt securities		4,825		23		3		4,845
U.S. agency notes		100		1		—		101
Asset-backed and other securities		4,565		21		2		4,584

Total securities available for sale	$	39,802	$	411	$	164	$	40,049

Securities held to maturity:
U.S. agency residential mortgage-backed securities	$	15,227	$	504	$	1	$	15,730
Other securities		279		1		1		279

Total securities held to maturity	$	15,506	$	505	$	2	$	16,009

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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, 2011	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Securities available for sale:
U.S. agency residential mortgage-backed securities	$	20,666	$	269	$	14	$	20,921
Non-agency residential mortgage-backed securities		1,130		—		223		907
Certificates of deposit		3,623		2		3		3,622
Corporate debt securities		3,592		5		26		3,571
U.S. agency notes		1,795		5		—		1,800
Asset-backed and other securities		3,144		7		7		3,144

Total securities available for sale	$	33,950	$	288	$	273	$	33,965

Securities held to maturity:
U.S. agency residential mortgage-backed securities	$	14,770	$	430	$	2	$	15,198
Other securities		338		3		—		341

Total securities held to maturity	$	15,108	$	433	$	2	$	15,539

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
June 30, 2012	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Securities available for sale:
U.S. agency residential mortgage-backed securities	$	860	$	4	$	243	$	4	$	1,103	$	8
Non-agency residential mortgage-backed securities		—		—		702		148		702		148
Certificates of deposit		321		2		399		1		720		3
Corporate debt securities		894		3		—		—		894		3
Asset-backed and other securities		1,555		2		—		—		1,555		2

Total	$	3,630	$	11	$	1,344	$	153	$	4,974	$	164

Securities held to maturity:
U.S. agency residential mortgage-backed securities	$	116	$	1	$	—	$	—	$	116	$	1
Other securities		99		1		—		—		99		1

Total	$	215	$	2	$	—	$	—	$	215	$	2

Total securities with unrealized losses ⁽¹⁾	$	3,845	$	13	$	1,344	$	153	$	5,189	$	166

⁽¹⁾	The number of investment positions with unrealized losses totaled 170 for securities available for sale and 3 for securities held to maturity.

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THE CHARLES SCHWAB CORPORATION

Notes to Condensed Consolidated Financial Statements

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

(Unaudited)


	Less than 12 months				12 months or longer				Total
December 31, 2011	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Securities available for sale:
U.S. agency residential mortgage-backed securities	$	5,551	$	14	$	—	$	—	$	5,551	$	14
Non-agency residential mortgage-backed securities		121		8		746		215		867		223
Certificates of deposit		2,158		3		—		—		2,158		3
Corporate debt securities		1,888		26		—		—		1,888		26
Asset-backed and other securities		1,376		6		152		1		1,528		7

Total	$	11,094	$	57	$	898	$	216	$	11,992	$	273

Securities held to maturity:
U.S. agency residential mortgage-backed securities	$	384	$	2	$	—	$	—	$	384	$	2

Total	$	384	$	2	$	—	$	—	$	384	$	2

Total securities with unrealized losses ⁽¹⁾	$	11,478	$	59	$	898	$	216	$	12,376	$	275

⁽¹⁾	The number of investment positions with unrealized losses totaled 296 for securities available for sale and 3 for securities held to maturity.

Unrealized losses in securities available for sale of $164 million as of June 30, 2012, were concentrated in non-agency residential mortgage-backed securities. Included in non-agency residential mortgage-backed securities are securities collateralized by loans that are considered to be “Prime” (defined as loans to borrowers with a Fair Isaac & Company credit score of 620 or higher at origination), and “Alt-A” (defined as Prime loans with reduced documentation at origination). At June 30, 2012, the amortized cost and fair value of Alt-A residential mortgage-backed securities were $343 million and $265 million, respectively.

Certain Alt-A and Prime residential mortgage-backed securities experienced continued credit deterioration in the first half of 2012, including increased payment delinquency rates and losses on foreclosures of underlying mortgages. In addition, the Company increased the projected default rates for modified loans in the first quarter of 2012. Based on the Company’s cash flow projections, management determined that it does not expect to recover all of the amortized cost of these securities and therefore determined that these securities were other-than-temporarily impaired (OTTI). The Company employs a buy and hold strategy relative to its mortgage-related securities, and does not intend to sell these securities and it will not be required to sell these securities before anticipated recovery of the unrealized losses on these securities. Further, the Company has adequate liquidity at June 30, 2012, with cash and cash equivalents totaling $8.1 billion, a loan-to-deposit ratio of 15%, adequate access to short-term borrowing facilities and regulatory capital ratios in excess of “well capitalized” levels. Because the Company does not intend to sell these securities and it is not “more likely than not” that the Company will be required to sell these securities, the Company recognized an impairment charge equal to the securities’ expected credit losses of $7 million and $25 million during the second quarter and first half of 2012, respectively. The expected credit losses were measured as the difference between the present value of expected cash flows and the amortized cost of the securities. Further deterioration in the performance of the underlying loans in the Company’s residential mortgage-backed securities portfolio could result in the recognition of additional impairment charges.

Actual credit losses on the Company’s residential mortgage-backed securities were not material during the second quarters or first halves of 2012 or 2011.

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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 is a rollforward of the amount of credit losses recognized in earnings for OTTI securities held by the Company during the period for which a portion of the impairment was recognized in other comprehensive income:


	Three Months Ended June 30,				Six Months Ended June 30,
	2012		2011		2012		2011
Balance at beginning of period	$	145	$	103	$	127	$	96
Credit losses recognized into current period earnings on debt securities for which an other-than-temporary impairment was not previously recognized		4		2		5		2
Credit losses recognized into current period earnings on debt securities for which an other-than-temporary impairment was previously recognized		3		—		20		7

Balance at end of period	$	152	$	105	$	152	$	105

The maturities of securities available for sale and securities held to maturity at June 30, 2012, are as follows:


	Within 1 year		After 1 year through 5 years		After 5 years through 10 years		After 10 years		Total
Securities available for sale:
U.S. agency residential mortgage-backed securities ⁽¹⁾	$	—	$	—	$	3,422	$	20,965	$	24,387
Non-agency residential mortgage-backed securities ⁽¹⁾		—		—		9		767		776
Certificates of deposit		3,575		1,781		—		—		5,356
Corporate debt securities		734		4,111		—		—		4,845
U.S. agency notes		—		101		—		—		101
Asset-backed and other securities		300		372		669		3,243		4,584

Total fair value	$	4,609	$	6,365	$	4,100	$	24,975	$	40,049
Total amortized cost	$	4,605	$	6,338	$	3,986	$	24,873	$	39,802

Securities held to maturity:
U.S. agency residential mortgage-backed securities ⁽¹⁾	$	—	$	—	$	5,725	$	10,005	$	15,730
Other securities		117		162		—		—		279

Total fair value	$	117	$	162	$	5,725	$	10,005	$	16,009
Total amortized cost	$	117	$	162	$	5,521	$	9,706	$	15,506

⁽¹⁾

Residential mortgage-backed securities have been allocated over 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 (losses) from sales of securities available for sale are as follows:


	Three Months Ended June 30,				Six Months Ended June 30,
	2012		2011		2012		2011
Proceeds	$	1,073	$	250	$	1,323	$	450
Gross realized gains	$	2	$	1	$	2	$	1
Gross realized losses	$	—	$	—	$	—	$	—

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THE CHARLES SCHWAB CORPORATION

Notes to Condensed Consolidated Financial Statements

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

(Unaudited)

Loans to Banking Clients and Related Allowance for Loan Losses

The composition of loans to banking clients by loan segment is as follows:


	June 30, 2012			December 31, 2011
Residential real estate mortgages	$	5,674		$	5,596
Home equity lines of credit		3,408			3,509
Personal loans secured by securities		787			742
Other		19			19

Total loans to banking clients ⁽¹⁾		9,888			9,866
Allowance for loan losses		(51	)		(54	)

Total loans to banking clients – net	$	9,837		$	9,812

⁽¹⁾	All loans are evaluated for impairment by loan segment.

Changes in the allowance for loan losses were as follows:


Three Months Ended	June 30, 2012									June 30, 2011
Three Months Ended	Residential real estate mortgages			Home equity lines of credit			Total			Residential real estate mortgages			Home equity lines of credit			Total
Balance at beginning of period	$	37		$	13		$	50		$	37		$	16		$	53
Charge-offs		(1	)		(2	)		(3	)		(3	)		(2	)		(5	)
Recoveries		—			—			—			—			1			1
Provision for loan losses		(2	)		6			4			—			1			1

Balance at end of period	$	34		$	17		$	51		$	34		$	16		$	50


Six Months Ended	June 30, 2012									June 30, 2011
Six Months Ended	Residential real estate mortgages			Home equity lines of credit			Total			Residential real estate mortgages			Home equity lines of credit			Total
Balance at beginning of period	$	40		$	14		$	54		$	38		$	15		$	53
Charge-offs		(4	)		(4	)		(8	)		(6	)		(3	)		(9	)
Recoveries		1			—			1			—			1			1
Provision for loan losses		(3	)		7			4			2			3			5

Balance at end of period	$	34		$	17		$	51		$	34		$	16		$	50

Included in the loan portfolio are nonaccrual loans totaling $47 million and $52 million at June 30, 2012 and December 31, 2011, respectively. There were no loans accruing interest that were contractually 90 days or more past due at June 30, 2012 or December 31, 2011. The amount of interest revenue that would have been earned on nonaccrual loans, versus actual interest revenue recognized on these loans, was not material to the Company’s results of operations in the first halves of 2012 or 2011. Nonperforming assets, which include nonaccrual loans and other real estate owned, totaled $52 million and $56 million at June 30, 2012 and December 31, 2011, respectively. The Company considers loan modifications in which it makes an economic concession to a borrower experiencing financial difficulty to be a troubled debt restructuring. Troubled debt restructurings were not material at June 30, 2012 or December 31, 2011.

In the first quarter of 2012, Schwab Bank launched 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 loans for Schwab Bank clients and Schwab Bank sets the underwriting standards and pricing for those loans it intends to purchase for its portfolio. The first mortgage portion of the Program launched in March 2012 and these loans are included in the originated and purchased first mortgages loan class as of June 30, 2012, in the tables below. The home equity line of

- 10 -

THE CHARLES SCHWAB CORPORATION

Notes to Condensed Consolidated Financial Statements

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

(Unaudited)

credit (HELOC) portion of the Program was launched in May 2012. Under the Program, Schwab Bank purchases all HELOC loans to Schwab Bank clients that are originated by Quicken Loans.

The delinquency aging analysis by loan class is as follows:


June 30, 2012	Current		30-59 days past due		60-89 days past due		Greater than 90 days		Total past due		Total loans
Residential real estate mortgages:
Originated and purchased first mortgages	$	5,458	$	19	$	3	$	34	$	56	$	5,514
Other purchased first mortgages		153		2		1		4		7		160
Home equity lines of credit		3,392		5		2		9		16		3,408
Personal loans secured by securities		787		—		—		—		—		787
Other		19		—		—		—		—		19

Total loans to banking clients	$	9,809	$	26	$	6	$	47	$	79	$	9,888


December 31, 2011
Residential real estate mortgages:
Originated first mortgages	$	5,380	$	16	$	2	$	39	$	57	$	5,437
Purchased first mortgages		152		2		—		5		7		159
Home equity lines of credit		3,494		5		2		8		15		3,509
Personal loans secured by securities		741		1		—		—		1		742
Other		19		—		—		—		—		19

Total loans to banking clients	$	9,786	$	24	$	4	$	52	$	80	$	9,866

- 11 -

THE CHARLES SCHWAB CORPORATION

Notes to Condensed Consolidated Financial Statements

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

(Unaudited)

In addition to monitoring the delinquency characteristics as presented in the aging analysis in the previous table, the Company monitors the credit quality of residential real estate mortgages and HELOCs by stratifying the portfolios by the year of origination, borrower Fair Issac & Company (FICO) scores at origination, updated FICO scores, and loan-to-value ratios at origination (Origination LTV), as presented in the following tables. Borrowers’ FICO scores are provided by an independent third party credit reporting service and were last updated in June 2012.


	Residential real estate mortgages
June 30, 2012	Originated and purchased first mortgages		Other purchased first mortgages		Total		Home equity lines of credit
Year of origination
Pre-2008	$	513	$	58	$	571	$	1,243
2008		464		7		471		1,212
2009		415		8		423		384
2010		1,374		15		1,389		289
2011		1,824		68		1,892		223
2012		924		4		928		57

Total	$	5,514	$	160	$	5,674	$	3,408

Origination FICO
< 620	$	10	$	2	$	12	$	1
620 - 679		96		18		114		24
680 - 739		1,029		42		1,071		652
³ 740		4,379		98		4,477		2,731

Total	$	5,514	$	160	$	5,674	$	3,408

Updated FICO
< 620	$	55	$	6	$	61	$	45
620 - 679		154		11		165		105
680 - 739		857		37		894		516
³ 740		4,448		106		4,554		2,742

Total	$	5,514	$	160	$	5,674	$	3,408

Origination LTV ⁽¹⁾
£ 70%	$	3,586	$	96	$	3,682	$	2,307
71% - 89%		1,903		55		1,958		1,063
³ 90%		25		9		34		38

Total	$	5,514	$	160	$	5,674	$	3,408

⁽¹⁾	The computation of the Origination LTV ratio for a HELOC includes any first lien mortgage outstanding on the same property at the time of origination. At June 30, 2012, $746 million of $3.4 billion in HELOCs were in a first lien position.

- 12 -

THE CHARLES SCHWAB CORPORATION

Notes to Condensed Consolidated Financial Statements

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

(Unaudited)


	Residential real estate mortgages
December 31, 2011	Originated first mortgages		Purchased first mortgages		Total		Home equity lines of credit
Year of origination
Pre-2008	$	569	$	60	$	629	$	1,306
2008		538		8		546		1,262
2009		553		10		563		412
2010		1,757		17		1,774		311
2011		2,020		64		2,084		218

Total	$	5,437	$	159	$	5,596	$	3,509

Origination FICO
< 620	$	9	$	2	$	11	$	—
620 - 679		108		19		127		24
680 - 739		1,030		43		1,073		667
³ 740		4,290		95		4,385		2,818

Total	$	5,437	$	159	$	5,596	$	3,509

Updated FICO
< 620	$	55	$	7	$	62	$	49
620 - 679		162		11		173		112
680 - 739		831		44		875		520
³ 740		4,389		97		4,486		2,828

Total	$	5,437	$	159	$	5,596	$	3,509

Origination LTV ⁽¹⁾
£ 70%	$	3,507	$	91	$	3,598	$	2,378
71% - 89%		1,904		60		1,964		1,091
³ 90%		26		8		34		40

Total	$	5,437	$	159	$	5,596	$	3,509

⁽¹⁾	The computation of the Origination LTV ratio for a HELOC includes any first lien mortgage outstanding on the same property at the time of origination. At December 31, 2011, $755 million of $3.5 billion in HELOCs were in a first lien position.

The Company monitors the credit quality of personal loans secured by securities by reviewing the fair value of collateral to ensure adequate collateralization of at least 100% of the principal amount of the loans. All of these personal loans were fully collateralized by securities with fair values in excess of borrowing amounts at June 30, 2012 and December 31, 2011.

Commitments and Contingencies

The Company has clients that sell (i.e., write) listed option contracts that are cleared by various clearing houses. The clearing houses establish 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 clearing houses, which are issued by multiple banks. At June 30, 2012, the aggregate face amount of these LOCs totaled $350 million. In connection with its securities lending activities, Schwab is required to provide collateral to certain brokerage clients. Schwab satisfies the collateral requirements by arranging LOCs in favor of these brokerage clients, which are issued by multiple banks. At June 30, 2012, the aggregate face amount of these LOCs totaled $110 million. There were no funds drawn under any of these LOCs at June 30, 2012.

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

- 13 -

THE CHARLES SCHWAB CORPORATION

Notes to Condensed Consolidated Financial Statements

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

(Unaudited)

collateral. However, 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. In addition, the Company is responding to certain litigation claims brought against former subsidiaries pursuant to indemnities it has provided to purchasers of those entities.

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. With respect to all other pending matters, based on current information and consultation with counsel, it does not appear that the outcome of any such matter could be material to the financial condition, operating results or cash flows of the Company. However, 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. Often, as in the case of the Auction Rate Securities Regulatory Inquiries and Total Bond Market Fund Litigation matters described below, it is not 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.

Auction Rate Securities Regulatory Inquiries: Schwab has been responding to industry wide inquiries from federal and state regulators regarding sales of auction rate securities to clients who were unable to sell their holdings when the normal auction process for those securities froze unexpectedly in February 2008. On August 17, 2009, a civil complaint was filed against Schwab in New York state court by the Attorney General of the State of New York (NYAG) alleging material misrepresentations and omissions by Schwab regarding the risks of auction rate securities, and seeking restitution, disgorgement, penalties and other relief, including repurchase of securities held in client accounts. As reflected in a statement issued August 17, 2009, Schwab has responded that the allegations are without merit, and has been contesting all charges. By order dated October 24, 2011, the court granted Schwab’s motion to dismiss the complaint. On November 30, 2011, the NYAG filed notice of its intention to appeal the ruling.

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™ (Northstar lawsuit). The lawsuit, which alleges violations of state law and federal securities law in connection with the fund’s investment policy, names Schwab Investments (registrant and issuer of the fund’s shares) and CSIM as defendants. Allegations 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 shareholder vote. Plaintiffs seek unspecified compensatory and rescission damages, unspecified equitable and injunctive relief, and costs and attorneys’ fees. Plaintiffs’ federal securities law claim and certain of plaintiffs’ state law claims were dismissed in proceedings before the court and following a successful petition by defendants to the Ninth Circuit Court of Appeals. On August 8, 2011, the court dismissed plaintiffs’ remaining claims with prejudice. Plaintiffs have appealed to the Ninth Circuit, where the case is currently pending.

optionsXpress Regulatory Matters: optionsXpress entities and individual employees have been responding to certain pending regulatory matters which predate the Company’s acquisition of optionsXpress. On April 16, 2012, optionsXpress, Inc. was

- 14 -

THE CHARLES SCHWAB CORPORATION

Notes to Condensed Consolidated Financial Statements

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

(Unaudited)

charged by the Securities and Exchange Commission (SEC) in an administrative proceeding alleging violations of the firm’s close-out obligations under SEC Regulation SHO (short sale delivery rules) in connection with certain customer trading activity. Separately, on April 19, 2012, the SEC instituted an administrative proceeding alleging violations of the broker-dealer registration requirements by an unregistered optionsXpress entity. The Company disputes the allegations and is contesting the charges in the two matters. The Company recorded a contingent liability associated with these matters, which was not material at June 30, 2012.

Fair Values of Assets and Liabilities

Fair value is defined as the price that would be received to sell an asset or the price paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurement accounting guidance describes the fair value hierarchy for disclosing assets and liabilities measured at fair value based on the inputs used to value them. The fair value hierarchy maximizes the use of observable inputs and minimizes the use of unobservable inputs. Observable inputs are based on market pricing data obtained from sources independent of the Company. A quoted price in an active market provides the most reliable evidence of fair value and is generally used to measure fair value whenever available. Unobservable inputs reflect management’s judgment about the assumptions market participants would use in pricing the asset or liability. Where inputs used to measure fair value of an asset or liability are from different levels of the hierarchy, the asset or liability is categorized based on the lowest level input that is significant to the fair value measurement in its entirety. Assessing the significance of a particular input requires judgment. The fair value hierarchy includes three levels based on the objectivity of the inputs as follows:

•

Level 1 inputs are quoted prices in active markets as of the measurement date for identical assets or liabilities that the Company has the ability to access. The Company did not transfer any assets or liabilities between Level 1 and Level 2 during the first half of 2012, or the year ended December 31, 2011.

•

Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates, benchmark yields, issuer spreads, new issue data, and collateral performance.

•

Level 3 inputs are unobservable inputs for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability. The Company did not have any financial assets or liabilities utilizing Level 3 inputs as of June 30, 2012, or December 31, 2011.

Assets and Liabilities Recorded at Fair Value

The Company’s assets recorded at fair value include certain cash equivalents, investments segregated and on deposit for regulatory purposes, other securities owned, and securities available for sale. The Company uses the market and income approaches 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. 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 validates prices received from the pricing services using various methods, including comparison to prices received from additional pricing services, comparison to quoted market prices, where available, comparison to internal valuation models, and review of other relevant market data. When comparing to relevant market data with a bid-ask spread, the Company uses the price within the bid-ask spread that best represents fair value. 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. At June 30, 2012, and December 31, 2011, the Company did not adjust prices received from independent third-party pricing services. Liabilities recorded at fair value were not material, and therefore are not included in the following tables.

- 15 -

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 tables present the fair value hierarchy for assets measured at fair value:


June 30, 2012	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	$	162	$	—	$	—	$	162
Commercial paper		—		682		—		682

Total cash equivalents		162		682		—		844
Investments segregated and on deposit for regulatory purposes:
Certificates of deposit		—		2,624		—		2,624
Corporate debt securities		—		678		—		678

Total investments segregated and on deposit for regulatory purposes		—		3,302		—		3,302
Other securities owned:
Schwab Funds^® money market funds		135		—		—		135
Equity and bond mutual funds		186		—		—		186
State and municipal debt obligations		—		71		—		71
Equity, U.S. Government and corporate debt, and other securities		3		30		—		33

Total other securities owned		324		101		—		425
Securities available for sale:
U.S. agency residential mortgage-backed securities		—		24,387		—		24,387
Non-agency residential mortgage-backed securities		—		776		—		776
Certificates of deposit		—		5,356		—		5,356
Corporate debt securities		—		4,845		—		4,845
U.S. agency notes		—		101		—		101
Asset-backed and other securities		—		4,584		—		4,584

Total securities available for sale		—		40,049		—		40,049

Total	$	486	$	44,134	$	—	$	44,620

- 16 -

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, 2011	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	$	8	$	—	$	—	$	8
Commercial paper		—		814		—		814

Total cash equivalents		8		814		—		822
Investments segregated and on deposit for regulatory purposes:
Certificates of deposit		—		2,374		—		2,374
Corporate debt securities		—		767		—		767
U.S. Government securities		—		650		—		650

Total investments segregated and on deposit for regulatory purposes		—		3,791		—		3,791
Other securities owned:
Schwab Funds^® money market funds		332		—		—		332
Equity and bond mutual funds		183		—		—		183
State and municipal debt obligations		—		46		—		46
Equity, U.S. Government and corporate debt, and other securities		12		20		—		32

Total other securities owned		527		66		—		593
Securities available for sale:
U.S. agency residential mortgage-backed securities		—		20,921		—		20,921
Non-agency residential mortgage-backed securities		—		907		—		907
Certificates of deposit		—		3,622		—		3,622
Corporate debt securities		—		3,571		—		3,571
U.S. agency notes		—		1,800		—		1,800
Asset-backed and other securities		—		3,144		—		3,144

Total securities available for sale		—		33,965		—		33,965

Total	$	535	$	38,636	$	—	$	39,171

Financial Instruments Not Recorded at Fair Value

Descriptions of the valuation methodologies and assumptions used to estimate the fair value of financial instruments not recorded at fair value are described below. There were no significant changes in these methodologies or assumptions during the first half of 2012.

Cash and cash equivalents, receivables from/payables to brokers, dealers, and clearing organizations, and receivables from/payables to brokerage clients are short-term in nature and accordingly are recorded at amounts that approximate fair value. Cash and cash equivalents include cash and highly liquid investments with original maturities of three months or less. Receivables from/payables to brokers, dealers, and clearing organizations, and receivables from/payables to brokerage clients are recorded at or near transaction price and historically have been settled or converted to cash at approximately that value.

Cash and investments segregated and on deposit for regulatory purposes include securities purchased under resale agreements. Securities purchased under resale agreements are recorded at par value plus accrued interest. 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 value approximates fair value.

Securities held to maturity include U.S. agency residential mortgage-backed securities, asset-backed securities collateralized by credit card and auto loans, and corporate debt securities. Securities held to maturity are recorded at amortized cost. The fair value of these securities is obtained using an independent third-party pricing service similar to investment assets recorded at fair value as discussed above.

- 17 -

THE CHARLES SCHWAB CORPORATION

Notes to Condensed Consolidated Financial Statements

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

(Unaudited)

Loans to banking clients primarily include adjustable rate residential first-mortgage and HELOC loans. Loans to banking clients are recorded at carrying value net of an allowance for loan losses. The fair value of the Company’s loans to banking clients is estimated based on prices obtained from independent third-party pricing services for mortgage-backed securities collateralized by similar types of loans similar to investment assets recorded at fair value as discussed above. The Company may adjust the independent third-party prices to account for differences between the weighted average lives and coupon rates of comparable mortgage-backed securities and loans to banking clients.

Loans held for sale include fixed-rate and adjustable-rate residential first-mortgage loans intended for sale. Loans held for sale are recorded at the lower of cost or fair value. The fair value of the Company’s loans held for sale is estimated using quoted market prices for securities backed by similar types of loans.

Other assets – Financial instruments included in other assets primarily consist of cost method investments and Federal Home Loan Bank (FHLB) stock, whose carrying values approximate their fair values. FHLB stock is recorded at par, which approximates fair value as there is a quoted market price for this stock based on the requirements of the FHLB.

Deposits from banking clients – The Company considers the fair value of deposits with no stated maturity, such as deposits from banking clients, to be equal to the amount payable on demand as of the balance sheet date.

Accrued expenses and other liabilities – Financial instruments included in accrued expenses and other liabilities consist of drafts payable and certain amounts due under contractual obligations which are short-term in nature and accordingly are recorded at amounts that approximate fair value.

Long-term debt includes Senior Notes, Senior Medium-Term Notes, Series A, Junior Subordinated Notes, and a finance lease obligation. The fair values of the Senior Notes, Senior Medium-Term Notes, Series A, and Junior Subordinated Notes 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 HELOC and personal loans secured by securities. The Company considers the fair value of these unused commitments to be not material because the interest rates earned on these balances are based on market interest rate indices and reset monthly. Future utilization of HELOC and personal loan commitments will earn a then-current market interest rate. The Company does not charge a fee to maintain a HELOC or personal loan.

- 18 -

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 the fair value hierarchy for financial instruments not recorded at fair value at June 30, 2012:


	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	$	7,245	$	—	$	7,245	$	—	$	7,245
Cash and investments segregated and on deposit for regulatory purposes		19,417		—		19,417		—		19,417
Receivables from brokers, dealers, and clearing organizations		317		—		317		—		317
Receivables from brokerage clients – net		11,952		—		11,952		—		11,952
Securities held to maturity:
U.S. agency residential mortgage-backed securities		15,227		—		15,730		—		15,730
Other securities		279		—		279		—		279

Total securities held to maturity		15,506		—		16,009		—		16,009
Loans to banking clients – net:
Residential real estate mortgages		5,640		—		5,742		—		5,742
Home equity lines of credit		3,391		—		3,368		—		3,368
Personal loans secured by securities		787		—		787		—		787
Other		19		—		19		—		19

Total loans to banking clients – net		9,837		—		9,916		—		9,916
Loans held for sale		2		—		3		—		3
Other assets		62		—		62		—		62

Total	$	64,338	$	—	$	64,921	$	—	$	64,921

Liabilities:
Deposits from banking clients	$	66,257	$	—	$	66,257	$	—	$	66,257
Payables to brokers, dealers, and clearing organizations		1,332		—		1,332		—		1,332
Payables to brokerage clients		31,833		—		31,833		—		31,833
Accrued expenses and other liabilities		501		—		501		—		501
Long-term debt		1,999		—		2,189		—		2,189

Total	$	101,922	$	—	$	102,112	$	—	$	102,112

The following table presents the Company’s fair value estimates for financial instruments not recorded at fair value at December 31, 2011. The table excludes short-term financial assets and liabilities, for which carrying amounts approximate fair value, and financial instruments recorded at fair value.


	Carrying Amount		Fair Value
Financial Assets:
Securities held to maturity	$	15,108	$	15,539
Loans to banking clients – net	$	9,812	$	9,671
Loans held for sale	$	70	$	73
Financial Liabilities:
Long-term debt	$	2,001	$	2,159

- 19 -

THE CHARLES SCHWAB CORPORATION

Notes to Condensed Consolidated Financial Statements

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

(Unaudited)

Preferred Stock

The Company was authorized to issue 9,940,000 shares of preferred stock, $0.01 par value, at both June 30, 2012, and December 31, 2011. There were no shares of preferred stock issued and outstanding at December 31, 2011. The Company’s preferred stock issued and outstanding as of June 30, 2012, are as follows:


	Shares Issued and Outstanding (In thousands)		Liquidation Preference Per Share		Liquidation Preference		Carrying Value
Series A		400	$	1,000	$	400	$	394
Series B		485	$	1,000		485		469

Total Preferred Stock		885			$	885	$	863

In June 2012, the Company issued and sold 19,400,000 depositary shares, each representing a 1/40^th ownership interest in a share of 6.00% non-cumulative perpetual preferred stock, Series B, equivalent to $25 per depositary share (Series B Preferred Stock). Net proceeds received from the sale were $469 million. The Series B Preferred Stock has no stated maturity and has a fixed dividend rate of 6.00%. Dividends, if declared, will be payable quarterly in arrears. Under the terms of the Series B Preferred Stock, the Company’s ability to pay dividends on, make distributions with respect to, or to repurchase, redeem or acquire its common stock or any preferred stock ranking on parity with or junior to the Series B Preferred Stock, is subject to restrictions in the event that the Company does not declare and either pay or set aside a sum sufficient for payment of dividends on the Series B Preferred Stock for the immediately preceding dividend period. The Series B Preferred Stock is redeemable at the Company’s option, in whole or in part, on any dividend payment date on or after September 1, 2017, or, in whole but not in part, within 90 days following a regulatory capital treatment event as defined in its Certificate of Designations.

In January 2012, the Company issued and sold 400,000 shares of fixed-to-floating rate non-cumulative perpetual preferred stock, Series A (Series A Preferred Stock). Net proceeds received from the sale were $394 million. The Series A Preferred Stock has no stated maturity and has a fixed dividend rate of 7.000% until February 2022 and a floating rate equal to three-month LIBOR plus 4.820% thereafter. During the fixed rate period, dividends, if declared, will be payable semi-annually in arrears. During the floating rate period, dividends, if declared, will be payable quarterly in arrears. Dividends will not be cumulative. Under the terms of the Series A Preferred Stock, the Company’s ability to pay dividends on, make distributions with respect to, or to repurchase, redeem or acquire its common stock or any preferred stock ranking on parity with or junior to the Series A Preferred Stock, is subject to restrictions in the event that the Company does not declare and either pay or set aside a sum sufficient for payment of dividends on the Series A Preferred Stock for the immediately preceding dividend period. The Series A Preferred Stock is redeemable at the Company’s option, in whole or in part, on any dividend payment date on or after February 1, 2022, or, in whole but not in part, within 90 days following a regulatory capital treatment event as defined in its Certificate of Designations.

- 20 -

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

Accumulated other comprehensive income (loss) represents cumulative gains and losses that are not reflected in earnings. Accumulated other comprehensive income balances were:


	Net unrealized gain on securities available for sale		Other			Total accumulated other comprehensive income
Balance at December 31, 2010	$	17	$	(1	)	$	16
Other net changes		28		1			29

Balance at June 30, 2011	$	45	$	—		$	45

Balance at December 31, 2011	$	10	$	(2	)	$	8
Other net changes		145		1			146

Balance at June 30, 2012	$	155	$	(1	)	$	154

10.

Earnings Per Common Share

Basic EPS is computed by dividing net income available to common stockholders by the weighted-average number of common shares outstanding during the period. The computation of diluted EPS is similar to the computation of basic EPS except that the denominator is increased to include the number of additional common shares that would have been outstanding if dilutive potential common shares had been issued. Dilutive potential common shares include the effect of outstanding stock options and unvested restricted stock awards and units. EPS under the basic and diluted computations is as follows:


	Three Months Ended June 30,							Six Months Ended June 30,
	2012				2011			2012				2011
Net income		$	275			$	238		$	470			$	481
Preferred stock dividends			(14	)			—			(14	)			—

Net income available to common stockholders ⁽¹⁾		$	261			$	238		$	456			$	481

Weighted-average common shares outstanding — basic			1,273				1,207			1,272				1,205
Common stock equivalent shares related to stock incentive plans			1				3			1				3

Weighted-average common shares outstanding — diluted ⁽²⁾			1,274				1,210			1,273				1,208

Basic EPS		$	.20			$	.20		$	.36			$	.40
Diluted EPS		$	.20			$	.20		$	.36			$	.40

⁽¹⁾	Net income available to participating securities (unvested restricted shares) was not material for the second quarters or first halves of 2012 or 2011.

⁽²⁾	Antidilutive stock options and restricted stock awards excluded from the calculation of diluted EPS totaled 59 million and 42 million shares for the second quarters of 2012 and 2011, respectively, and 61 million and 43 million shares for the first halves of 2012 and 2011, respectively.

11.

Regulatory Requirements

CSC is a savings and loan holding company and Schwab Bank, CSC’s depository institution subsidiary, is a federal savings bank. CSC is subject to supervision and regulation by the Board of Governors of the Federal Reserve System and Schwab Bank is subject to supervision and regulation by the Office of the Comptroller of the Currency. CSC is currently not subject to specific statutory capital requirements, however CSC is required to serve as a source of strength for Schwab Bank. Under the “Dodd-Frank Wall Street Reform and Consumer Protection Act”, CSC will be subject to new minimum leverage and

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THE CHARLES SCHWAB CORPORATION

Notes to Condensed Consolidated Financial Statements

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

(Unaudited)

minimum risk-based capital ratio requirements that will be set by the Federal Reserve that are at least as stringent as the requirements generally applicable to insured depository institutions as of July 21, 2011.

Schwab Bank is required to maintain minimum capital levels as specified in federal banking laws and regulations. Failure to meet the minimum levels could result in certain mandatory, and possibly additional discretionary actions by the regulators that, if undertaken, could have a direct material effect on Schwab Bank. At June 30, 2012, CSC and Schwab Bank met the capital level requirements.

The regulatory capital and ratios for Schwab Bank at June 30, 2012, are as follows:


	Actual					Minimum Capital Requirement					Minimum to be Well Capitalized
	Amount		Ratio			Amount		Ratio			Amount		Ratio
Tier 1 Risk-Based Capital	$	5,431		22.1	%	$	985		4.0	%	$	1,477		6.0	%
Total Risk-Based Capital	$	5,479		22.3	%	$	1,970		8.0	%	$	2,462		10.0	%
Tier 1 Leverage	$	5,431		7.6	%	$	2,876		4.0	%	$	3,595		5.0	%
Tangible Equity	$	5,431		7.6	%	$	1,438		2.0	%		N/A

N/A Not applicable.

Based on its regulatory capital ratios at June 30, 2012, Schwab Bank is considered well capitalized (the highest category) pursuant to banking regulatory guidelines. There are no conditions or events since June 30, 2012, that management believes have changed Schwab Bank’s capital category.

CSC’s principal U.S. broker-dealers are Schwab and optionsXpress, Inc. optionsXpress, Inc. is a wholly-owned subsidiary of optionsXpress. Schwab and optionsXpress, Inc. are both subject to Rule 15c3-1 under the Securities Exchange Act of 1934 (the Uniform Net Capital Rule). Schwab and optionsXpress, Inc. compute net capital under the alternative method permitted by the Uniform Net Capital Rule. This method requires the maintenance of minimum net capital, as defined, of the greater of 2% of aggregate debit balances arising from client transactions or a minimum dollar requirement ($250,000 for Schwab), which is based on the type of business conducted by the broker-dealer. Under the alternative method, a broker-dealer may not repay subordinated borrowings, pay cash dividends, or make any unsecured advances or loans to its parent company or employees if such payment would result in a net capital amount of less than 5% of aggregate debit balances or less than 120% of its minimum dollar requirement.

optionsXpress, Inc. is also subject to Commodity Futures Trading Commission Regulation 1.17 (Reg. 1.17) under the Commodity Exchange Act, which also requires the maintenance of minimum net capital. optionsXpress, Inc., as a futures commission merchant, is required to maintain minimum net capital equal to the greater of its net capital requirement under Reg. 1.17 ($1 million), or the sum of 8% of the total risk margin requirements for all positions carried in client accounts and 8% of the total risk margin requirements for all positions carried in non-client accounts (as defined in Reg. 1.17).

Net capital and net capital requirements for Schwab and optionsXpress, Inc. at June 30, 2012, are as follows:


	Net Capital		% of Aggregate Debit Balances			Minimum Net Capital Required		2% of Aggregate Debit Balances		Net Capital in Excess of Required Net Capital		Net Capital in Excess of 5% of Aggregate Debit Balances
Schwab	$	1,440		11	%	$	0.250	$	263	$	1,177	$	781
optionsXpress, Inc.	$	71		30	%	$	1	$	5	$	66	$	59

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THE CHARLES SCHWAB CORPORATION

Notes to Condensed Consolidated Financial Statements

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

(Unaudited)

12.

Segment Information

The Company structures its operating segments according to its clients and the services provided to those clients. The Company’s two reportable segments are Investor Services and Institutional Services.

The Company evaluates the performance of its segments on a pre-tax basis, excluding items such as significant nonrecurring gains, impairment charges on non-financial assets, discontinued operations, extraordinary items, and significant restructuring and other charges. 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 with other segments within the Company.

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


	Investor Services						Institutional Services						Unallocated						Total
Three Months Ended June 30,	2012			2011			2012			2011			2012			2011			2012			2011
Net Revenues:
Asset management and administration fees	$	271		$	275		$	227		$	227		$	(2	)	$	—		$	496		$	502
Net interest revenue		385			387			73			64			—			—			458			451
Trading revenue		147			136			72			70			—			(1	)		219			205
Other ⁽¹⁾		27			16			21			19			73			—			121			35
Provision for loan losses		(3	)		(1	)		(1	)		—			—			—			(4	)		(1	)
Net impairment losses on securities		(6	)		(2	)		(1	)		—			—			—			(7	)		(2	)

Total net revenues		821			811			391			380			71			(1	)		1,283			1,190

Expenses Excluding Interest		587			547			264			258			—			(1	)		851			804

Income before taxes on income	$	234		$	264		$	127		$	122		$	71		$	—		$	432		$	386

Taxes on income																				157			148

Net Income																			$	275		$	238


	Investor Services						Institutional Services						Unallocated						Total
Six Months Ended June 30,	2012			2011			2012			2011			2012			2011			2012			2011
Net Revenues:
Asset management and administration fees	$	531		$	551		$	450		$	453		$	(1	)	$	—		$	980		$	1,004
Net interest revenue		750			760			142			127			—			—			892			887
Trading revenue		310			296			152			150			—			—			462			446
Other ⁽¹⁾		54			36			41			38			72			—			167			74
Provision for loan losses		(3	)		(4	)		(1	)		(1	)		—			—			(4	)		(5	)
Net impairment losses on securities		(22	)		(8	)		(3	)		(1	)		—			—			(25	)		(9	)

Total net revenues		1,620			1,631			781			766			71			—			2,472			2,397

Expenses Excluding Interest		1,193			1,101			534			518			—			(2	)		1,727			1,617

Income before taxes on income	$	427		$	530		$	247		$	248		$	71		$	2		$	745		$	780

Taxes on income																				275			299

Net Income																			$	470		$	481

⁽¹⁾	Unallocated amount includes a pre-tax gain of $70 million relating to a confidential resolution of a vendor dispute in the second quarter of 2012.

13.

Subsequent Event

On July 31, 2012, the Company announced its decision to redeem all of the fixed-to-floating rate trust preferred securities of $300 million issued by Schwab Capital Trust I (the Trust). The trust preferred securities are being redeemed, along with the common securities issued by the Trust and held by the Company, as a result of the concurrent redemption in whole by the Company of the Junior Subordinated Notes held by the Trust which underlie the trust preferred securities. The redemption date for the trust preferred securities will be August 31, 2012, and the redemption price will be 100% of the liquidation amount of each trust preferred security, plus accumulated and unpaid distributions up to and including the redemption date. After the redemption date, the trust preferred securities will no longer be outstanding and distributions will no longer accrue.

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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

OVERVIEW

Management of The Charles Schwab Corporation (CSC) and its subsidiaries (collectively referred to as the Company) focuses on several key client activity and financial metrics in evaluating the Company’s financial position and operating performance. Results for the second quarters and first halves of 2012 and 2011 are:


	Three Months Ended June 30,						Percent Change			Six Months Ended June 30,						Percent Change
	2012			2011			Percent Change			2012			2011			Percent Change
Client Activity Metrics:
Net new client assets ⁽¹⁾(in billions)	$	16.0		$	15.4			4	%	$	54.9		$	38.4			43	%
Client assets (in billions, at quarter end)	$	1,802.4		$	1,655.5			9	%
Clients’ daily average trades ⁽²⁾(in thousands)		435.6			397.1			10	%		455.8			434.5			5	%

Company Financial Metrics:
Net revenues ⁽³⁾	$	1,283		$	1,190			8	%	$	2,472		$	2,397			3	%
Expenses excluding interest		851			804			6	%		1,727			1,617			7	%

Income before taxes on income		432			386			12	%		745			780			(4	%)
Taxes on income		157			148			6	%		275			299			(8	%)

Net income	$	275		$	238			16	%	$	470		$	481			(2	%)

Earnings per common share – diluted	$	.20		$	.20			—		$	.36		$	.40			(10	%)
Net revenue growth from prior year		8	%		10	%					3	%		16	%
Pre-tax profit margin		33.7	%		32.4	%					30.1	%		32.5	%
Return on average common stockholders’ equity (annualized) ⁽⁴⁾		13	%		14	%					11	%		15	%
Annualized net revenue per average full-time equivalent employee (in thousands)	$	372		$	361			3	%	$	356		$	366			(3	%)

⁽¹⁾	Includes inflows of $12.0 billion in the first quarter of 2012 from a mutual fund clearing services client.

⁽²⁾	Amounts include revenue trades from commissions or principal mark-ups (i.e., fixed income), trades by clients in asset-based pricing relationships, and all commission-free trades, including the Company’s Mutual Fund OneSource^® funds and Exchange-Traded Funds, and other proprietary products.

⁽³⁾	Includes a pre-tax gain of $70 million relating to a confidential resolution of a vendor dispute in the second quarter of 2012.

⁽⁴⁾	Return on average common stockholders’ equity is calculated using net income available to common stockholders divided by average common stockholders’ equity.

The broad equity markets improved during the second quarter of 2012 compared to the second quarter of 2011, as the Nasdaq Composite Index, Dow Jones Industrial Average, and Standard & Poor’s 500 Index increased 6%, 4%, and 3%, respectively. While the federal funds target rate remained unchanged at a range of zero to 0.25%, the average three-month Treasury Bill yield increased by 4 basis points to 0.08% during the second quarter of 2012 compared to the second quarter of 2011. At the same time, the average 10-year Treasury yield decreased by 138 basis points to 1.81%.

While the economy and financial markets faced heightened challenges, including lower longer term interest rates and equity market volatility, the Company saw signs of sustained client engagement and demand for the Company’s full-service capabilities remained strong during the second quarter of 2012. Net new client assets totaled $16.0 billion and total client assets ended the quarter at $1.80 trillion, up 4% and 9%, respectively, from the second quarter of 2011. In addition, clients’ daily average trades were 435,600 in the second quarter of 2012, up 10% on a year-over-year basis.

For the second quarter of 2012, net revenues increased by 8% compared to the second quarter of 2011 primarily due to increases in trading revenue and other revenue. Trading revenue increased primarily due to higher daily average revenue trades as a result of the inclusion of optionsXpress Holdings, Inc.’s (optionsXpress) option, future, and equity trades from its acquisition in September 2011. Other revenue increased primarily due to a pre-tax gain of $70 million relating to a

- 24 -

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)

confidential resolution of a vendor dispute in the second quarter of 2012. Asset management and administration fees were relatively flat primarily due to a decrease in mutual fund service fees, offset by an increase in other asset management and administration fees. Net interest revenue was also relatively flat, reflecting higher balances of interest-earning assets offset by the effect of lower interest rate spreads during the second quarter of 2012 due to the continued low interest rate environment.

For the first half of 2012, net revenues increased by 3% compared to the first half of 2011 primarily due to increases in trading revenue and other revenue, partially offset by a decrease in asset management and administration fees and higher net impairment losses on securities. Trading revenue increased primarily due to higher daily average revenue trades as a result of the inclusion of optionsXpress’ option, future, and equity trades from its acquisition in September 2011. Other revenue increased primarily due to the pre-tax gain of $70 million relating to a confidential resolution of a vendor dispute and the inclusion of revenues relating to education services and other service fees from the optionsXpress acquisition. Asset management and administration fees decreased primarily due to a decrease in mutual fund service fees, partially offset by an increase in other asset management and administration fees. Net impairment losses in the Company’s non-agency residential mortgage-backed securities portfolio were higher due to further credit deterioration of the securities’ underlying loans and an increase in projected default rates for modified loans. Net interest revenue was relatively flat, reflecting higher balances of interest-earning assets offset by the effect of lower interest rate spreads during the first half of 2012 due to the continued low interest rate environment.

Expenses excluding interest increased by 6% and 7% in the second quarter and first half of 2012 compared to the same periods in 2011, respectively, primarily due to the inclusion of optionsXpress. Overall, net income increased by 16% in the second quarter of 2012 compared to the second quarter of 2011 and was relatively flat in the first half of 2012 compared to the first half of 2011.

In comparison to the first quarter of 2012, both the broad equity markets and longer term interest rate environment declined in the second quarter of 2012 – the Nasdaq Composite Index, Dow Jones Industrial Average, and Standard & Poor’s 500 Index decreased 5%, 3%, and 3%, respectively, and the average 10-year Treasury yield decreased by 21 basis points to 1.81%. The three-month Treasury Bill yield increased by 2 basis points to 0.08% from the first quarter of 2012. Despite the challenging environment, the Company’s strong key client activity metrics and ongoing expense discipline helped net revenues grow 8% and expenses decrease by 3%, resulting in a 41% increase in net income for the second quarter of 2012 from the first quarter of 2012. The second quarter results include the pre-tax gain of $70 million (after-tax of $44 million) discussed above.

Equity Offerings

In June 2012, the Company issued and sold 485,000 shares of 6.00% non-cumulative perpetual preferred stock, Series B, with a liquidation preference of $1,000 per share for net proceeds of $469 million. In January 2012, the Company issued and sold 400,000 shares of fixed-to-floating rate (currently fixed at 7.000%) non-cumulative perpetual preferred stock, Series A, with a liquidation preference of $1,000 per share for net proceeds of $394 million. Net proceeds received from these sales are being used for general corporate purposes, which may include, without limitation, extending credit to, or funding investments in, the Company’s subsidiaries, and the possible refinancing of outstanding indebtedness. For further discussion of these equity offerings, see “Item 1 – Condensed Consolidated Financial Statements (Unaudited) – Notes – 8. Preferred Stock.”

Subsequent Events

On August 1, 2012, the Company announced the commencement of a private offer to certain eligible holders of its outstanding 4.950% Senior Notes due 2014 to exchange those notes for new Senior Notes due 2022 and cash. The exchange is subject to certain conditions, which the Company may waive at its sole discretion.

- 25 -

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)

date for the trust preferred securities will be August 31, 2012, and the redemption price will be 100% of the liquidation amount of each trust preferred security, plus accumulated and unpaid distributions up to and including the redemption date. After the redemption date, the trust preferred securities will no longer be outstanding and distributions will no longer accrue.

CURRENT MARKET AND REGULATORY ENVIRONMENT AND OTHER DEVELOPMENTS

The broad equity markets and short-term interest rates showed improvement from 2011, however the low interest rate environment continues to constrain growth in the Company’s net revenues.

As discussed above, interest rates remained at low levels during the second quarter of 2012. To the extent rates remain at these low levels, the Company’s net interest revenue will continue to be constrained, even as growth in average balances helps to increase such revenue. The low interest rate environment also affects asset management and administration fees. While net money market mutual fund fees improved in the second quarter of 2012 from the first quarter of 2012 primarily due to improved short-term interest rates, the overall yields on certain Schwab-sponsored money market mutual funds have remained at levels at or below the management fees on those funds. The Company continues to waive a portion of its management fees so that the funds can maintain a positive return to clients. These and other money market mutual funds may not be able to replace maturing securities with securities of equal or higher yields. As a result, the yields on such funds may remain around or decline from their current levels, and therefore below the management fees on those funds. To the extent this occurs, asset management and administration fees may be negatively affected.

The Company recorded net impairment losses of $7 million and $25 million related to certain non-agency residential mortgage-backed securities in the second quarter and first half of 2012, respectively, due to further credit deterioration of the securities’ underlying loans. Net impairment losses in the first half of 2012 were also due to an increase in projected default rates for modified loans in the first quarter of 2012. Further deterioration in the performance of the underlying loans in the Company’s residential mortgage-backed securities portfolio could result in the recognition of additional impairment charges.

The “Dodd-Frank Wall Street Reform and Consumer Protection Act” (the Dodd-Frank Act) was signed into law in July 2010. Among other things, the legislation transferred the supervision and regulation of CSC from the Office of Thrift Supervision (OTS) to the Board of Governors of the Federal Reserve System (the Federal Reserve) and supervision and regulation of Schwab Bank from the OTS to the Office of the Comptroller of the Currency; both transfers were effective July 21, 2011. The Federal Reserve recently issued notices of proposed rulemaking (NPRs) to meet certain requirements of the Dodd-Frank Act and to align current capital rules with the BASEL III capital standards. The NPRs would subject all savings and loan holding companies, including CSC, to consolidated capital requirements. In addition, the NPRs would establish more restrictive capital definitions, higher risk-weightings for certain asset classes, higher minimum capital ratios and capital buffers. The NPRs would also exclude trust preferred securities from tier 1 capital. The NPRs would be phased in under an extended timeframe, beginning January 2013. The NPRs are in a comment period and are subject to further modification. CSC is currently evaluating the impact of the NPRs but does not expect them to have a material impact on the Company’s business, financial condition, and results of operations.

The Company is pursuing lawsuits in state court in San Francisco for rescission and damages against issuers, underwriters, and dealers of 51 individual non-agency residential mortgage-backed securities on which the Company has experienced realized and unrealized losses. The lawsuits allege that offering documents for the securities contained material untrue and misleading statements about the securities and the underwriting standards and credit quality of the underlying loans. On January 27, 2012, the court denied defendants’ motions to dismiss the claims with respect to all but 4 of the 51 securities, and allowed the cases to proceed to discovery.

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THE CHARLES SCHWAB CORPORATION

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

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

RESULTS OF OPERATIONS

The following discussion presents an analysis of the Company’s results of operations for the second quarter and first half of 2012 compared to the same periods in 2011.

Net Revenues

The Company’s major sources of net revenues are asset management and administration fees, net interest revenue, and trading revenue. Asset management and administration fees and net interest revenue were relatively flat, while trading revenue increased in the second quarter of 2012 compared to the second quarter of 2011. Asset management and administration fees decreased and net interest revenue was relatively flat, while trading revenue increased in the first half of 2012 compared to the first half of 2011.


Three Months Ended June 30,				2012						2011
	Percent Change			Amount			% of Total Net Revenues			Amount			% of Total Net Revenues
Asset management and administration fees
Schwab money market funds before fee waivers		6	%	$	220					$	208
Fee waivers		14	%		(146	)					(128	)

Schwab money market funds after fee waivers		(8	%)		74			6	%		80			7	%
Equity and bond funds		—			31			2	%		31			3	%
Mutual Fund OneSource^®		(10	%)		164			13	%		182			15	%

Total mutual funds		(8	%)		269			21	%		293			25	%
Advice solutions		4	%		140			11	%		134			11	%
Other		16	%		87			7	%		75			6	%

Asset management and administration fees		(1	%)		496			39	%		502			42	%


Net interest revenue
Interest revenue		—			497			39	%		496			42	%
Interest expense		(13	%)		(39	)		(3	%)		(45	)		(4	%)

Net interest revenue		2	%		458			36	%		451			38	%


Trading revenue
Commissions		8	%		205			16	%		189			16	%
Principal transactions		(13	%)		14			1	%		16			1	%

Trading revenue		7	%		219			17	%		205			17	%


Other		N/M			121			9	%		35			3	%

Provision for loan losses		N/M			(4	)		—			(1	)		—

Net impairment losses on securities		N/M			(7	)		(1	%)		(2	)		—

Total net revenues		8	%	$	1,283			100	%	$	1,190			100	%

N/M Not meaningful.

- 27 -

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)


Six Months Ended June 30,				2012						2011
	Percent Change			Amount			% of Total Net Revenues			Amount			% of Total Net Revenues
Asset management and administration fees
Schwab money market funds before fee waivers		5	%	$	442					$	419
Fee waivers		29	%		(309	)					(240	)

Schwab money market funds after fee waivers		(26	%)		133			5	%		179			7	%
Equity and bond funds		1	%		63			3	%		60			3	%
Mutual Fund OneSource^®		(7	%)		330			13	%		356			15	%

Total mutual funds		(12	%)		526			21	%		595			25	%
Advice solutions		6	%		279			12	%		263			11	%
Other		20	%		175			7	%		146			6	%

Asset management and administration fees		(2

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