Business context and reporting period
The Charles Schwab Corporation is a wealth management, brokerage, banking, asset management, custody, and advisory company operating through Investor Services and Advisor Services. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2023; comparisons are with the corresponding 2022 periods unless noted.
Financial and operating performance
| Metric | Q3 2023 | Q3 2022 | First nine months 2023 | First nine months 2022 |
|---|---|---|---|---|
| Total net revenue | $4.606 billion | $5.500 billion | $14.378 billion | $15.265 billion |
| Net interest revenue | $2.237 billion | $2.926 billion | $7.297 billion | $7.653 billion |
| Net income | $1.125 billion | $2.020 billion | $4.022 billion | $5.215 billion |
| Diluted EPS | $0.56 | $0.99 | $2.03 | $2.53 |
| Pre-tax profit margin | 30.0% | 48.7% | 36.1% | 44.5% |
- Adjusted diluted EPS, a non-GAAP measure, was $0.77 for Q3 and $2.45 for the first nine months, versus $1.10 and $2.83 in 2022. Adjusted expenses were $2.703 billion and $8.177 billion, up 5% and 6%, respectively.
- Revenue mix: Q3 asset management and administration fees rose 17% to $1.224 billion; trading revenue fell 17% to $768 million; bank deposit account fees fell 50% to $205 million. The comparable nine-month changes were +11%, -11%, and -50%.
- Net interest margin was 1.94% in Q3 versus 1.97%; it was 2.00% for the nine-month period versus 1.65%. Higher yields on assets were offset in Q3 by lower average interest-earning assets and more expensive funding.
- Q3 expenses excluding interest increased 14% to $3.223 billion, including $279 million in restructuring costs. Nine-month expenses rose 8% to $9.194 billion. Q3 effective tax rate was 18.7%, compared with 24.5%.
- Client assets were $7.824 trillion at quarter-end, up 18% year over year and 11% from year-end 2022. Core net new assets were $45.7 billion in Q3 and $229.6 billion year to date. Daily average trades declined 6% in Q3 and 11% year to date.
Balance sheet, cash flow, debt, and liquidity
- Total assets were $475.2 billion at September 30, down 14% from December 31, 2022. Cash and cash equivalents were $33.3 billion; stockholders’ equity was $37.8 billion.
- Bank deposits were $284.4 billion, down $82.3 billion year to date; brokerage-client payables were $72.8 billion. The company cited client movement from sweep cash into higher-yielding alternatives as a principal driver.
- Long-term debt was $24.8 billion, versus $20.8 billion at year-end 2022. FHLB borrowings were $31.8 billion and other short-term borrowings were $7.6 billion. Brokered CDs outstanding were $45.4 billion.
- For the first nine months, operating cash flow was negative $450 million, investing cash flow was positive $47.7 billion, and financing cash flow was negative $61.1 billion. Cash and cash equivalents excluding restricted amounts decreased $6.9 billion to $33.3 billion.
- The consolidated Tier 1 leverage ratio was 8.2%, up from 7.2% at year-end 2022; CSB’s ratio was 9.6%. Average Q3 liquidity coverage ratio was 119%, and the company reported compliance with LCR and NSFR requirements.
- Available-for-sale securities had $11.8 billion of gross unrealized losses at quarter-end. AOCI was negative $20.8 billion; Schwab said unrealized securities losses were a key factor affecting equity. Regulatory capital ratios exclude AOCI under current rules; the non-GAAP adjusted Tier 1 leverage ratios including AOCI were 4.1% for CSC and 4.4% for CSB.
Material changes and management outlook
- Management attributed lower earnings principally to reduced net interest revenue, lower bank deposit fees and trading revenue, alongside higher operating costs. Higher asset-management fees partly offset these pressures.
- Management said client cash realignment slowed substantially in Q2 and Q3, notwithstanding an August increase after the July Federal Reserve rate hike. Supplemental funding outstanding decreased by a net $5.4 billion during Q3. The company expects supplemental funding balances to decline through the end of 2024, with some balances potentially remaining into 2025.
- TD Ameritrade integration: the third client conversion was completed in September, moving $1.3 trillion in assets; a fourth conversion was completed in November, after quarter-end. Nearly 90% of TD Ameritrade client accounts had transitioned by then. The final transition group is expected in the first half of 2024.
- Expected total TD Ameritrade acquisition and integration costs and capital expenditures remain $2.4–$2.5 billion. Management expects $1.8–$2.0 billion in annualized cost synergies; about 75% had been achieved on an annualized run-rate basis by September 30. The vast majority of remaining synergies is expected by end-2024, with full-year realization beginning in 2025.
- Separately, the company expects at least $500 million in incremental annualized cost savings from streamlining, with estimated exit and related costs of $400–$500 million. It recognized $279 million of restructuring costs in Q3 and expects further position-elimination costs in Q4 2023 and real-estate costs in Q4 2023 and 2024. Full-year 2023 capital expenditures are expected to be approximately 3–4% of net revenue.
- The filing does not provide a specific earnings or revenue forecast. Outlook remains sensitive to interest rates, client cash allocation, asset gathering and markets, integration execution, expenses, and funding access.
Risks, contingencies, and unusual items
- Proposed U.S. regulatory capital changes could require AOCI inclusion and revised risk-weighted asset calculations, with proposed phase-in beginning July 2025. A separate proposed long-term debt rule could require additional eligible debt. The company was evaluating the impact of both proposals.
- A proposed FDIC special assessment was estimated by the company at approximately $160 million, payable over eight quarters beginning Q1 2024 if finalized; it would be recognized in earnings upon enactment. The proposed rule was not final in the filing.
- The revised IDA agreement extends the deposit sweep arrangement through July 1, 2034 and specifies balance limits and conditions for moving balances onto Schwab’s balance sheet. No IDA balances were migrated during the first nine months of 2023. The company paid $227 million in market-based fees to buy down fixed-rate obligations in May and August.
- Material litigation includes an antitrust case alleging the TD Ameritrade acquisition reduced competition in retail order execution, plus order-routing cases. Schwab contests the claims; for the matters described, the filing generally says potential liability cannot be reasonably estimated.
- Other sensitivities include sustained high rates, funding costs, unrealized securities losses, deposit and client cash outflows, and execution of the remaining TD Ameritrade transitions and cost-saving plans. The company reported no material change to its 2022 Form 10-K risk factors.
Important facts for investors to verify
- Whether client cash outflows and deposit trends stabilize, and how much supplemental funding remains outstanding and at what cost.
- Progress and attrition in the final TD Ameritrade transition, total integration spending, and delivery of projected synergies and incremental savings.
- Net interest revenue and margin sensitivity to rates, client allocation behavior, and funding repricing.
- Potential effects of regulatory capital and long-term debt rules, and the final amount and timing of any FDIC special assessment.
- Developments in the disclosed litigation and any material change to potential loss estimates or contingencies.