Charles Schwab Corporation — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. Schwab provides wealth management, brokerage, banking, asset management, custody, and advisory services through Investor Services and Advisor Services. Figures are unaudited.
Financial and operating performance
| Metric | Q2 2022 | Six months 2022 |
|---|---|---|
| Total net revenue | $5.093 billion, up 13% year over year | $9.765 billion, up 6% |
| Net interest revenue | $2.544 billion, up 31% | $4.727 billion, up 23% |
| Net income | $1.793 billion, up 42% | $3.195 billion, up 16% |
| Diluted EPS | $0.87, up 47% | $1.54, up 17% |
| Adjusted diluted EPS (non-GAAP) | $0.97, up 39% | $1.74, up 12% |
| Pre-tax profit margin | 44.6%, versus 38.0% | 42.1%, versus 39.8% |
| Expenses excluding interest | $2.819 billion, approximately flat | $5.652 billion, up 2% |
Higher rates and growth in interest-earning assets drove net interest revenue and increased net interest margin to 1.62% for Q2 (from 1.46%) and 1.50% for the first half (from 1.47%). Trading revenue fell 7% in Q2 and 15% year to date; asset management and administration fees were essentially flat in Q2 and rose 3% year to date. Q2 daily average trades were up 3% year over year, while first-half daily average trades declined 11%.
Adjusted expenses, excluding acquisition and integration costs and acquired-intangible amortization, rose 2% in Q2 and 3% year to date. Compensation and benefits and occupancy/equipment costs increased, reflecting staffing, investment, and integration needs. GAAP results also benefited from the absence of the approximately $200 million regulatory-matter charge recorded in Q2 2021.
Balance sheet, liquidity, and cash flow
- Total assets were $637.6 billion at June 30, down 4% from year-end 2021; stockholders’ equity was $44.5 billion, down from $56.3 billion. The decline in equity primarily reflected a $14.9 billion first-half after-tax loss in other comprehensive income, mainly from unrealized losses on available-for-sale securities as rates rose.
- Cash and cash equivalents were $64.6 billion. Bank deposits were $442.0 billion and brokerage-client payables were $114.9 billion.
- Long-term debt was $21.1 billion, up from $18.9 billion at year-end; short-term borrowings were $1.4 billion, down from $4.9 billion. The company issued $3.0 billion of senior notes in March, primarily for liquidity, and $740 million net proceeds from Series K preferred stock.
- The average Q2 liquidity coverage ratio was 114%, above the 100% regulatory minimum. The consolidated Tier 1 leverage ratio was 6.4%, versus 6.2% at year-end. Schwab and its banking subsidiaries were reported as meeting applicable capital requirements.
- Operating cash flow was negative $4.9 billion for the first half, compared with negative $5.3 billion a year earlier; investing cash flow was negative $1.3 billion and financing cash flow negative $3.4 billion. These figures include substantial balance-sheet and client-fund movements and should not be read as a standalone measure of earnings.
Changes, outlook, and notable items
- Client assets ended Q2 at $6.83 trillion, down 10% year over year and 16% from year-end, largely reflecting market declines. Core net new assets were $64.2 billion in Q2 and $184.7 billion for the first half. New brokerage accounts declined from unusually high prior-year levels; active accounts rose 5% to 33.9 million.
- Management expects TD Ameritrade client conversions to continue across groups through 2023, ending in Q4. It continues to estimate total acquisition/integration costs and capital expenditures of $2.0–$2.2 billion and annualized cost synergies of $1.8–$2.0 billion; over half of the expected synergies had been achieved on an annualized run-rate basis by June 30. Full-year 2022 capital expenditures were expected to be approximately 4–5% of net revenue.
- Management cited inflation, aggressive Federal Reserve tightening, geopolitical turmoil, volatile markets, and weaker investor sentiment. Margin loans declined 16% from year-end. Its modeled 12-month net-interest-revenue sensitivity to a gradual 100-basis-point rate increase was +6.2%; a 100-basis-point decrease was modeled at -6.1%, with actual outcomes dependent on balance-sheet and client behavior.
- The FDIC proposed a 2-basis-point increase in initial deposit insurance assessment rates beginning in 2023; the proposal was subject to comment. The Federal Reserve assigned Schwab a 2.5% stress capital buffer, effective October 1, 2022.
- The SEC announced a $186.5 million settlement in June 2022 concerning past disclosures for Schwab Intelligent Portfolios. A separate TD Ameritrade acquisition-related class action had a proposed settlement pending court approval; Schwab said its potential payment would be immaterial under indemnification obligations if approved. Other litigation and regulatory matters remain, and the filing says potential losses generally cannot be estimated at this stage.
- After quarter-end, the board authorized up to $15 billion in share repurchases and raised the quarterly common dividend 10% to $0.22 per share. On August 1, Schwab repurchased 15 million shares from a TD Bank affiliate for $1.0 billion.
Key facts for investors to verify
- How sustained rate increases, deposit-rate competition, client cash allocations, and possible rate declines affect net interest margin and revenue.
- Whether client-asset inflows and account growth persist amid market weakness, and how trading and advisory fees respond.
- TD Ameritrade conversion timing, remaining integration spending, capital expenditures, and delivery of projected synergies.
- The effect of securities valuation losses and AOCI on reported equity, capital, and future balance-sheet flexibility.
- Capacity to fund the new repurchase authorization and higher dividend while maintaining capital and liquidity requirements.
- The filing reports first-half IDA balance migrations as $14.6 billion in several sections and $16.3 billion in the bank-deposit-fee discussion; verify the precise measure and reconciliation.