Business context and reporting period
The Charles Schwab Corporation (Schwab) filed this unaudited Form 10-Q for the quarter ended March 31, 2022. It provides wealth management, brokerage, banking, asset management, custody, and advisory services through its Investor Services and Advisor Services segments. The quarter unfolded amid rising inflation and interest rates, geopolitical uncertainty, and volatile equity markets.
Financial performance and position
| Metric | Q1 2022 | Q1 2021 / comparison |
|---|---|---|
| Total net revenue | $4.672 billion | $4.715 billion; down 1% |
| Net interest revenue | $2.183 billion | $1.911 billion; up 14% |
| Asset management and administration fees | $1.068 billion | $1.016 billion; up 5% |
| Trading revenue | $963 million | $1.216 billion; down 21% |
| Expenses excluding interest | $2.833 billion | $2.755 billion; up 3% |
| Income before taxes | $1.839 billion | $1.960 billion; down 6% |
| Net income | $1.402 billion | $1.484 billion; down 6% |
| Diluted EPS | $0.67 | $0.73; down 8% |
| Adjusted diluted EPS (non-GAAP) | $0.77 | $0.84; down 8% |
| Pre-tax profit margin | 39.4% | 41.6% |
| Net interest margin | 1.38% | 1.48% |
Net interest revenue benefited from a 22% increase in average interest-earning assets and improved investment yields, partly offset by lower securities-lending revenue and lending yields. Fee revenue grew with advice balances and lower money-market fee waivers. Trading revenue declined as daily average trades fell 22% year over year, to 6.6 million. Adjusted total expenses were $2.583 billion, up 4%; reported expenses included $96 million of acquisition and integration costs and $154 million of acquired-intangible amortization. Return on average common equity was 12%; non-GAAP return on tangible common equity was 26%, versus 24% a year earlier.
Client assets reached $7.862 trillion, up 11% year over year; core net new assets were $120.5 billion, a 6% annualized organic growth rate. New brokerage accounts totaled 1.2 million, down 62% from the unusually high prior-year quarter. Advisor Services revenue rose 16% to $1.146 billion, while Investor Services revenue fell 5% to $3.526 billion.
Cash flow, balance sheet, and capital
- Operating cash flow was $3.053 billion, compared with an outflow of $4.742 billion in Q1 2021. Investing cash flow was negative $3.642 billion and financing cash flow was positive $24.609 billion, including a $22.049 billion increase in bank deposits, $2.971 billion of long-term debt issuance, and $740 million of preferred-stock proceeds.
- Total assets were $680.950 billion at quarter-end, up from $667.270 billion at year-end 2021. Cash and cash equivalents were $91.126 billion; bank deposits were $465.827 billion.
- Short-term borrowings were $4.234 billion and long-term debt was $21.873 billion, compared with $4.855 billion and $18.914 billion, respectively, at year-end 2021. The company issued $3.0 billion of senior notes during the quarter.
- Average daily liquidity coverage ratio was 111%, with $129.040 billion of eligible high-quality liquid assets and $115.861 billion of projected net cash outflows; Schwab reported compliance with the 100% requirement.
- Consolidated Tier 1 Leverage Ratio was 6.1%, down from 6.2% at year-end. Management said it remained above regulatory minimums but below its long-term operating objective. Schwab issued Series K preferred stock for $740 million net proceeds.
- Stockholders’ equity fell to $48.098 billion from $56.261 billion at year-end, primarily as accumulated other comprehensive loss widened to $11.045 billion amid higher rates and unrealized losses on available-for-sale securities.
Material changes, outlook, and risks
- In January, Schwab transferred $108.8 billion of agency mortgage-backed securities from available-for-sale to held-to-maturity classification. At quarter-end, the available-for-sale portfolio had $12.474 billion of gross unrealized losses; the held-to-maturity portfolio had $6.137 billion. Management reported no credit-loss allowance on these securities and said substantially all rated portfolio securities were investment grade.
- Schwab moved $12.7 billion of Insured Deposit Account balances onto its balance sheet during the quarter. This reduces balances generating deposit-account fees but supplies funding for interest-earning assets. The IDA agreement includes a $50 billion minimum balance through June 2031 and other migration restrictions.
- TD Ameritrade client conversions are expected to finish in Q4 2023. Schwab continues to estimate total acquisition and integration costs and capital expenditures of $2.0–$2.2 billion, and annualized cost synergies of $1.8–$2.0 billion; more than half of the expected synergies had been achieved on an annualized run-rate basis by March 31. Estimated exit and other related costs are $650 million–$1.0 billion.
- Management expects 2022 capital expenditures of approximately 4–5% of total net revenue. It anticipated money-market fund fee waivers would be substantially eliminated after an additional 25-basis-point increase in the federal funds target rate beyond the March increase.
- Rate sensitivity modeling estimated that a gradual 100-basis-point rate increase would raise net interest revenue by 12% over the following 12 months; a 100-basis-point decrease would reduce it by 8%. Results depend on assumptions and actual balance-sheet positioning may change.
- Key exposures include market and interest-rate changes, client cash allocation and deposit migration, trading activity, competition and pricing, liquidity and capital needs, credit forecasts, and execution and cost risks in the TD Ameritrade integration. Foreign non-sovereign financial and non-financial exposure was $18.6 billion at quarter-end.
- Schwab disclosed an SEC investigation concerning historic disclosures for Schwab Intelligent Portfolios. A tentative settlement with SEC staff was reached; 2021 results included an approximately $200 million liability and charge, but final resolution remains subject to Commission approval. Other material-interest litigation includes order-routing cases and TD Ameritrade acquisition litigation; the latter had a proposed class settlement pending a July 2022 hearing.
- Management reported no material change to the risk factors in its 2021 Form 10-K, no change in critical accounting estimates, and effective disclosure controls as of March 31, 2022.
Important facts for investors to verify
- Whether net interest revenue growth from higher rates and balance-sheet expansion offsets lower net interest margin, deposit fees, and market-sensitive revenues.
- How unrealized securities losses, AOCI, and future interest-rate movements affect reported equity and capital, including the accounting treatment of the transferred held-to-maturity portfolio.
- Progress and final costs of TD Ameritrade integration, client conversions, and realization of the stated synergy targets.
- Changes in client assets, cash allocations, IDA balances and migration capacity, and the associated effects on funding, fee revenue, liquidity, and leverage.
- Resolution and potential financial impact of the SEC investigation and other litigation, as well as compliance with liquidity and regulatory capital requirements.