Business Acquisitions

6 Months Ended

Jun. 30, 2020

USAA-IMCO

On May 26, 2020, the Company completed its acquisition of the assets of USAA-IMCO for $1.6 billion in cash, subject to post-closing adjustments. Along with the asset purchase agreement, the companies entered into a long-term referral agreement that makes Schwab the exclusive provider of wealth management and investment brokerage services for USAA members. The USAA-IMCO acquisition adds scale to the Company’s operations through the addition of over one million brokerage and managed portfolio accounts with approximately $80 billion in client assets at the acquisition date. The transaction also provides Schwab the opportunity to further expand our client base by serving USAA’s members through the long-term referral agreement.

The Company accounted for the USAA-IMCO acquisition as a business combination under GAAP and accordingly, the purchase price was allocated to the assets acquired and liabilities assumed based on their estimated fair values as of the date of acquisition. The determination of fair values requires management to make significant estimates and assumptions. The estimated fair values of the assets acquired and liabilities assumed are considered provisional and are based on currently available information. The Company believes that the information available provides a reasonable basis for estimating the fair values of assets acquired and liabilities assumed; however, these provisional estimates may be adjusted upon the availability of new information regarding facts and circumstances which existed at the acquisition date. The Company expects to finalize the valuation of assets and liabilities as soon as practicable, but not later than one year from the acquisition date.

The following table summarizes the purchase price, provisional fair values of the assets acquired and liabilities assumed, and resulting goodwill as of the acquisition date.



Purchase price	$	1,624

Fair value of assets acquired:
Cash segregated and on deposit for regulatory purposes	4,392
Receivables from brokerage clients — net	80
Intangible assets	1,118
Total assets acquired	5,590
Fair value of liabilities assumed:
Payables to brokerage clients	4,472
Total liabilities assumed	4,472
Fair value of net identifiable assets acquired	1,118
Goodwill	$	506

The provisional identifiable intangible assets of $1.1 billion are subject to amortization. The following table summarizes the major classes of intangible assets acquired and their respective weighted-average estimated useful lives.



	Estimated Fair Value		Weighted-Average Estimated Useful Life (years)
Customer relationships	$	962	18
Brokerage referral agreement ⁽¹⁾	151		20
Royalty-free license	5		7
Total intangible assets	$	1,118

⁽¹⁾The brokerage referral agreement has an initial term of 5 years and is automatically renewable for one-year increments thereafter.

The estimated fair values of customer relationships, the brokerage referral agreement, and the royalty-free license were estimated using the multi-period excess earnings, with-and-without, and relief from royalty methods, respectively. The multi-period excess earnings method starts with a forecast of all of the expected future net cash flows associated with the asset, and the relief from royalty method starts with a forecast of the royalties saved by the Company because it owns the asset. The with-

and-without method quantifies the difference between forecasted cash flows with the asset and without the asset. The forecasts are then adjusted to present value by applying an appropriate discount rate that reflects the risks associated with the cash flow streams.

Goodwill recorded of $506 million, primarily attributable to the additional scale and anticipated synergies from the USAA-IMCO acquisition, was assigned to the Investor Services segment and will be deductible for tax purposes.

The Company’s condensed consolidated statements of income include total net revenues and net loss attributable to the USAA-IMCO acquisition of $39 million and $37 million, respectively, for the period May 26, 2020 through June 30, 2020.

In connection with the acquisition, the Company agreed to reimburse USAA for certain contract termination fees and severance costs incurred by USAA. These costs totaled $19 million and $23 million for the three and six months ended June 30, 2020, respectively, and are included in other expense on the condensed consolidated statements of income. Additionally, the Company incurred various professional fees and other costs related to the USAA-IMCO acquisition, such as advisory, legal, and accounting fees. In total, the Company incurred acquisition and integration-related costs of $39 million and $3 million for the three months ended June 30, 2020 and 2019, respectively, and $54 million and $3 million for the six months ended June 30, 2020 and 2019, respectively, which are primarily included in professional services and other expense on the condensed consolidated statements of income.

Pro Forma Financial Information (Unaudited)

The following table presents unaudited pro forma financial information as if the USAA-IMCO acquisition had occurred on January 1, 2019. The unaudited pro forma results reflect adjustments for acquisition and integration-related costs, amortization of acquired intangible assets, and their related income tax effects, and do not reflect potential revenue growth or cost savings that may be realized as a result of the acquisition. Pro forma net income for the three and six months ended June 30, 2020 excludes after-tax acquisition and integration-related costs of $30 million and $41 million, respectively. These costs and after-tax acquisition and integration-related costs of $10 million incurred in 2019 are included in pro forma net income for the six months ended June 30, 2019. The unaudited pro forma financial information is presented for informational purposes only, and is not necessarily indicative of future operations or results had the USAA-IMCO acquisition been completed as of January 1, 2019.



	Three Months Ended June 30,				Six Months Ended June 30,
	2020		2019		2020		2019
Total net revenues	$	2,474	$	2,767	$	5,170	$	5,573
Net income	$	606	$	870	$	1,336	$	1,723