Charles Schwab : Latest Commentary

October 6, 2020

Today we announced that we've completed the acquisition of TD Ameritrade ('TDA') in an all-stock transaction with an estimated value of approximately $22 billion. Per the merger agreement, TD Ameritrade stockholders are entitled to receive 1.0837 Schwab shares for each TD Ameritrade share owned, which represents a 17% premium over the 30-day volume weighted average price exchange ratio as of November 20, 2019.

Although the world around us has changed markedly since we announced this transaction back in late November, our enthusiasm remains undiminished and we are more confident than ever that both clients and stockholders will benefit from the combined firm. Over the past 10 months, the Schwab and TDA teams have worked tirelessly to get us to this point in the midst of a uniquely challenging macroeconomic environment. Now the 'serious work' begins, as we leverage the firms' shared focus on clients to deliver a highly-scaled organization that is positioned to meet the needs of investors across every phase of their financial journey as well as support the independent advisors who serve them. Our combined reach is a valuable strength:

Note: Total client assets based on combined data for Schwab and TD Ameritrade as of August 31, 2020, using company reports; all other combined data as of June 30, 2020, calculated using Schwab's methodology.

We shared a lot of detail back in November 2019 during our announcement as well as during the 2020 Winter Business Update, and key items such as deal rationale and structure, potential sources of synergies, and our expected approach to the integration process and related costs and timing remain unchanged. However, we thought it was worth taking time today to cover a couple of transaction-related items, including post-closing reporting expectations and certain mechanics of the Insured Deposit Account agreement ('IDA') with Toronto-Dominion Bank's two U.S. bank subsidiaries, TD Bank, National Association and TD Bank USA, National Association (together 'TD Bank').

Reporting Expectations

Upon closing, TDA's go-forward operating results will be incorporated into our consolidated results. Therefore, our 4Q20 reporting will include 87 days, or nearly a full quarter, of combined financial and client activity. We are planning to include the appropriate retail and institutional elements of TDA's business within our current Investor Services and Advisor Services reported segments.

From a broader financial statement perspective, the pro forma financials within Exhibit 99.3 to the Form 8-K filed back on March 20th serve as a good illustration of our planned approach to the combined presentation of the two firms. As you might have noticed from that filing, we will create a new revenue line item for 'Bank deposit account fees'. Given the expected size of that fee stream, as well as the Bank Deposit Accounts' ('BDA') contribution to the revenue synergy opportunity, we thought it was important to report this separately. Keep in mind that the BDA includes both the IDA arrangement with TD Bank ('IDA balances') - which accounts for the vast majority of balances - as well as other amounts routed to certain unaffiliated, third-party banks. Additionally, we also plan to continue sharing key dynamics underpinning this BDA structure, including balances, net yields, and the scheduled maturity ladder for fixed investments, similar to those previously provided by TDA.

As part of our 2Q20 earnings release, we introduced certain non-GAAP measures intended to supplement GAAP results and provide additional context to help investors evaluate Schwab's operating performance as well as facilitate a meaningful comparison of our current results to both historic and future results. These same adjusted measures of expenses, pre-tax profit margin, net income, diluted earnings per common share, and return on tangible common equity will continue as part of our regularly scheduled reporting for the foreseeable future. The adjustments from GAAP to non-GAAP will remain consistent, concentrated on acquisition and integration-related costs as well as the amortization of acquired intangibles. For the latter, our purchase price accounting analysis is well underway and we plan to share provisional estimates for allocations to intangibles, along with the corresponding amortization schedule, as soon as the information is available.

Finally, we also expect to make some minor modifications to other recurring reporting mechanisms, including our monthly SMART release. Starting with data for October, the combined firm's metrics will be delivered on a consolidated basis utilizing Schwab's calculation methodologies and presentation template. As mentioned above, we are committed to providing appropriate transparency regarding the BDA, including tweaking the SMART slightly to include both average interest-earning assets and BDA balances. In addition, we plan to also layer in a new metric regarding the percentage of total trading activity within derivatives.

IDA Overview and Opportunity

Schwab has entered into an amended IDA with TD Bank, which became effective at closing. While the construct of the agreement is generally in-line with the historical arrangements between TDA and TD Bank, there are several key areas to call out:

• Service Fee Reduction
• Balance Migration Option
• Multi-stage Structure

Under the IDA, the service fee paid on client cash deposits held at TD Bank will be reduced by 40%, from 25 basis points to 15 basis points ('bps'), for the life of the agreement. One other change relative to the previous IDA arrangement is the removal of any rate-related floors. Under the prior agreement, TDA had floors in place which enabled them to carve-out up to $20 billion of floating-rate investments from the applicable service fee during specified low-rate environments (such as we are in now). Going forward, the renegotiated 15 bps rate will be applied across all fixed and floating IDA balances.

Starting on July 1, 2021, Schwab maintains an option to begin migrating up to $10 billion from the IDA balances to Schwab's balance sheet as long as certain binding limitations are accounted for, including Schwab's obligation to move all of the uninsured IDA balances on that date, and the net change in IDA balances between today and June 30 of next year. Following these adjustments to the migration amount, our option enables us to move up to $10 billion in a given 12-month period - subject to the stated restrictions such as the $50 billion IDA floor and maintaining at least 80% of the IDA balances in fixed-rate investments through June 2026.

The IDA between Schwab and TD Bank was developed using a multi-stage approach. Starting with closing, or Legal Day 1 ('LD1'), the different stages of the agreement can be characterized as follows:

As you may recall, the cash migrations over the next 10+ years are the largest source of estimated net revenue synergies related to this transaction. In simple terms, Schwab anticipates picking up incremental economics on the migrated balances equal to the eliminated service fee plus a credit spread on a typical Schwab Bank portfolio investment. For additional details on the IDA, we'd encourage you to review the amended agreement between Schwab and TD Bank which was filed as Exhibit 10.407 to our most recent Form 10-K. Finally, we're also excited about digging in on the other revenue synergy opportunities we've identified, such as introducing TDA's clients to Schwab's breadth and depth of capabilities, including advisory and investment management solutions and mortgage lending.

We are so proud of all the work both companies have put in to get us to this day. We know there will be tough decisions and challenges to overcome as these two great firms come together, but we believe the potential of the combined firm is undeniably compelling. We remain confident that we have the right people, resources, and plan to take full advantage of the opportunity in front of us: to provide an enhanced experience for our combined client base as well as deliver long-term value for stockholders.

Forward-looking statements

This commentary contains forward-looking statements relating to Schwab's acquisition of TD Ameritrade and the combined company, including client and stockholder benefits; scale; revenue and expense synergies; the integration process, costs and timing; and post-closing reporting expectations that reflect management's expectations as of the date hereof. Achievement of these expectations is subject to risks and uncertainties that could cause actual results to differ materially from the expressed expectations.

Important factors that may cause such differences include, but are not limited to, the risk that expected revenue, expense, operational and other synergies from the transaction may not be fully realized or may take longer to realize than expected; the companies are unable to successfully implement their integration strategies and plans; general market conditions, including equity valuations, trading activity, the level of interest rates - which can impact money market fund fee waivers - and credit spreads; the companies' ability to attract and retain clients and registered investment advisors and grow those relationships and client assets; competitive pressures on pricing, including deposit rates; the companies' ability to develop and launch new and enhanced products, services, and capabilities, as well as enhance their infrastructure, in a timely and successful manner; client use of the companies' advisory solutions and other products and services; client cash allocations; client sensitivity to rates; the level of client assets, including cash balances; the companies' ability to monetize client assets; capital and liquidity needs and management; the scope and duration of the COVID-19 pandemic and actions taken by governmental authorities to contain the spread of the virus and the economic impact; regulatory guidance; litigation or regulatory matters; and any adverse impact of financial reform legislation and related regulations. Other important factors are set forth in Schwab's and TD Ameritrade's definitive joint proxy statement/prospectus dated May 4, 2020, as supplemented, and Schwab's and TD Ameritrade's most recent reports on Form 10-K and Form 10-Q.