Past CFO Commentary

Today, President Trump signed significant tax reform legislation into law and I wanted to spend a moment focusing on the potential impacts to Schwab's effective tax rate. As you may know, we have historically paid close to the full statutory federal corporate income tax rate, so the benefits are likely to be meaningful–though the new law does include the disallowance of some Schwab-relevant deductions. I wanted to give you a brief overview of the key elements of the law that are likely to affect our tax rate:

Net Deferred Tax Asset Repricing: I'll start with the most complex implication to explain. Certain income and expense items are sometimes recognized at different times on tax returns vs. financial statements. These items result in deferred tax assets (DTAs) and deferred tax liabilities (DTLs), based on the tax rate assumed to be in effect in the future recognition period. When a future period's tax rate changes, we are required to revalue our DTAs and DTLs to reflect the new tax value associated with the future income and expense items. The one-time repricing of these DTAs and DTLs occurs in the period that the law is enacted (upon the President's signature) and is posted in the tax expense line of the income statement. Our DTAs are currently greater than our DTLs and we estimate that Schwab will have a net DTA adjustment of approximately $40 million (i.e., a $40 million increase in GAAP tax expense), with the actual amount dependent upon the final valuation of tax-sensitive balance sheet items as of the date of enactment.

Corporate Tax Rate: Per the law, our statutory federal corporate income tax rate will be reduced from 35% to 21%, starting in 2018.

FDIC Deposit Insurance Assessment Deduction: Under the law, banks with over $50 billion in assets may no longer deduct FDIC insurance assessments, including both standard and surcharge assessments, starting in 2018. This will slightly offset the reduction in our statutory tax rate (though the impact of this lost deduction will decrease whenever the temporary FDIC surcharge ends, which we estimate to be either late 2018 or early 2019). We won't know the exact amount until each quarter, when we actually compute and pay the assessments.

Other Deductions: Certain other deductions will also no longer be available (e.g., Executive Compensation Over $1 Million, Section 199); and the value of some other deductions will be reduced by the lower tax rate (e.g., State Taxes, Municipal Interest).

So, putting it all together, in 4Q 2017, we could see an increase in our tax expense (for GAAP purposes) of $40 million due to net deferred tax asset repricing. For 2018 and beyond, we estimate a net reduction in our tax rate of 11.5%-12.0% from this law. We will continue to evaluate the impacts of tax reform and provide updates as necessary.

Forward-looking statements

This commentary contains forward-looking statements relating to the effect of the 2017 tax reform legislation on the company's effective tax rate, including estimates of the company's net deferred tax asset adjustment and related increase in tax expense and the net reduction in the company's tax rate in 2018 and beyond, and the timing of when the temporary FDIC surcharge will end.

Important factors that may cause such differences include, but are not limited to, the final valuation of tax-sensitive balance sheet items as of the date of the law's enactment, the impact of the loss of the deduction for FDIC insurance assessments and the value of other deductions that are no longer available or reduced.