The Charles Schwab Corporation — FY2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022; filed February 24, 2023. Although the request metadata identifies 2022 Q4, this filing reports full-year results, with balance-sheet figures generally as of year-end. Schwab is a diversified brokerage, wealth-management, banking, custody, and asset-management company. It reported $7.05 trillion in client assets, 33.8 million active brokerage accounts, and 1.7 million banking accounts at year-end.
Financial performance and position
| Metric | FY2022 / Dec. 31, 2022 | Prior comparable period |
|---|---|---|
| Total net revenues | $20.762 billion | $18.520 billion in 2021; up 12% |
| Net interest revenue | $10.682 billion | $8.030 billion; up 33% |
| Asset management and administration fees | $4.216 billion | $4.274 billion; down 1% |
| Trading revenue | $3.673 billion | $4.152 billion; down 12% |
| Bank deposit account fees | $1.409 billion | $1.315 billion; up 7% |
| Expenses excluding interest | $11.374 billion | $10.807 billion; up 5% |
| Income before taxes | $9.388 billion | $7.713 billion; up 22% |
| Net income | $7.183 billion | $5.855 billion; up 23% |
| Diluted EPS | $3.50 | $2.83; up 24% |
| Pre-tax profit margin | 45.2% | 41.6% |
| Operating cash flow | $2.057 billion | $2.118 billion |
Management’s non-GAAP adjusted diluted EPS was $3.90, versus $3.25 in 2021. Adjusted total expenses were $10.386 billion, up 7%. The filing reports return on average common equity of 18% (11% in 2021) and non-GAAP return on tangible common equity of 42% (22% in 2021). These non-GAAP measures exclude acquisition and integration costs, acquired-intangible amortization, and related tax effects, as applicable.
Year-end balance sheet and liquidity: Total assets were $551.8 billion, down 17% from $667.3 billion. Bank deposits were $366.7 billion, down from $443.8 billion, and brokerage-client payables were $97.4 billion, down from $125.7 billion. Short-term borrowings rose to $17.1 billion from $4.9 billion; long-term debt was $20.8 billion, versus $18.9 billion. Stockholders’ equity declined to $36.6 billion from $56.3 billion. The average daily Liquidity Coverage Ratio for Q4 was 123%, above the 100% requirement. The consolidated Tier 1 Leverage Ratio was 7.2%, compared with 6.2% a year earlier; CSB’s ratio was 7.3%.
Material changes and drivers
- Rapid Federal Reserve rate increases lifted net interest revenue and net interest margin to 1.78% from 1.45%. Higher funding costs, cash movements, and lower margin-loan and securities-lending activity partly offset asset-yield benefits.
- Equity-market declines reduced client assets 13% to $7.05 trillion. Client asset market-value losses of about $1.5 trillion outweighed continued inflows. Core net new client assets were $427.7 billion, down from $558.2 billion, and represented 5% organic growth.
- Daily average trades fell 9% to 5.9 million as trading activity moderated from 2021’s exceptional levels. New brokerage accounts declined 45% to 4.0 million, while active accounts increased 2% to 33.8 million.
- Client cash reallocations toward higher-yielding alternatives contributed to an 18% decrease in bank deposits and brokerage payables combined. BDA balances were $126.6 billion at year-end, down 20% from 2021.
- Higher compensation, occupancy, and technology expenses were partly offset by lower other expense, including the absence of a roughly $200 million regulatory charge recorded in 2021.
- Higher rates drove substantial unrealized securities losses: AOCI was negative $22.6 billion at year-end, and stockholders’ equity fell. Schwab transferred $188.6 billion of securities from available-for-sale to held-to-maturity during 2022; management said this reduces AOCI sensitivity, with transfer-date unrealized losses amortized over time rather than recognized immediately in net income.
Outlook, management commentary, and risks
- TD Ameritrade integration: Most client transitions were expected during 2023, with a small group in the first half of 2024; the first transition occurred in February 2023. Schwab expected $2.4–$2.5 billion in total acquisition/integration costs and capital expenditures, and approximately $450–$550 million of integration-related costs in 2023. It targeted $1.8–$2.0 billion in annualized cost synergies, had achieved over 65% by year-end 2022, and expected most remaining synergies by the end of 2024, with full-year realization beginning in 2025.
- Spending: Management expected 2023 capital expenditures of approximately 3–4% of revenue, with a longer-term range of 3–5%. Additional service staffing and professional-services costs were expected to support account transitions.
- Funding and cash sensitivity: Schwab said client cash outflows had exceeded excess cash and cash generated by portfolio maturities and paydowns, leading it to use temporary supplemental funding. Subsequent to year-end, it drew an additional $13.0 billion of FHLB advances, borrowed $3.4 billion through repurchase agreements, and issued $9.4 billion of retail brokered CDs. These funding actions carried higher rates and near-term maturities.
- Other post-year-end items: Schwab incurred $97 million in January 2023 breakage fees after ending certain third-party bank sweep arrangements. The FDIC’s two-basis-point assessment increase was expected to weigh on bank deposit account fees. A January 2023 dividend announcement raised the quarterly common dividend 14% to $0.25 per share.
- Regulation and litigation: The SEC had proposed substantial equity-market-structure changes and mutual-fund liquidity rules; management said impacts could not yet be assessed. A putative class action alleges the TD Ameritrade acquisition reduced competition in retail order execution; the company is contesting it. Other disclosed order-routing litigation remains subject to proceedings, and the filing says potential losses in certain matters cannot be reasonably estimated.
- Key risks: Results depend materially on interest rates, client cash allocations and asset flows, market valuations, competitive deposit pricing, trading activity, and access to funding. Additional risks include the complexity and cost of the TD Ameritrade conversion, regulatory or capital constraints, unrealized securities losses, credit deterioration, cyber and operational incidents, and litigation.
Important facts for investors to verify
- Track the pace and cost of TD Ameritrade account transitions, client retention, and delivery of the targeted $1.8–$2.0 billion in annualized synergies.
- Monitor client cash movements, deposit pricing, supplemental funding balances and costs, and LCR performance; compare subsequent funding needs with the year-end position.
- Assess the effect of interest-rate changes on net interest revenue and margin, including management’s year-end simulation: a gradual 100-basis-point rise indicated a 3.6% increase in 12-month net interest revenue; a 100-basis-point decline indicated a 3.2% decrease.
- Review the securities portfolio’s unrealized losses, liquidity needs, and the effects of AFS-to-HTM transfers on reported equity and future flexibility.
- Evaluate whether asset gathering, client assets, trading activity, expenses, and adjusted results support reported earnings growth; distinguish GAAP from management’s non-GAAP measures.
- Follow developments in the order-execution and acquisition-related litigation, proposed SEC rules, and any changes to capital-distribution constraints.
The independent auditor issued an unqualified opinion on the financial statements and internal control over financial reporting; management also concluded that internal control was effective as of December 31, 2022.