Charles Schwab Corporation (SCHW) — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023. Schwab provides brokerage, wealth management, banking, asset management, custody, and advisory services through Investor Services and Advisor Services. Financial amounts below are in U.S. dollars; financial statement figures are generally in millions.
Financial and operating results
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Total net revenue | $5.116 billion | $4.672 billion | +10% |
| Net interest revenue | $2.770 billion | $2.183 billion | +27% |
| Expenses excluding interest | $3.006 billion | $2.833 billion | +6% |
| Income before taxes | $2.110 billion | $1.839 billion | +15% |
| Net income | $1.603 billion | $1.402 billion | +14% |
| Net income available to common stockholders | $1.533 billion | $1.278 billion | +20% |
| Diluted EPS | $0.83 | $0.67 | +24% |
| Pre-tax profit margin | 41.2% | 39.4% | +1.8 percentage points |
Non-GAAP adjusted diluted EPS was $0.93, versus $0.77 a year earlier; adjusted expenses were $2.773 billion. Net interest margin rose to 2.19% from 1.38%. The effective tax rate was 24.0%, compared with 23.8%.
Revenue trends were mixed: asset management and administration fees rose 5% to $1.118 billion, while trading revenue fell 7% to $892 million and bank deposit account fees fell 49% to $151 million. The latter included $97 million of one-time breakage fees after Schwab ended arrangements with certain third-party banks. Higher interest rates boosted asset yields, but increased funding costs and client cash movement partly offset the benefit.
Client metrics included $131.7 billion of core net new assets, $150.7 billion of total net new assets (including $19.0 billion of off-platform CDs), and $7.58 trillion of quarter-end client assets. Daily average trades declined 10% year over year to 5.9 million; active brokerage accounts rose 2% to 34.1 million.
Balance sheet, cash flow, and capital
Total assets were $535.6 billion at March 31, down 3% from year-end 2022. Cash and cash equivalents were $49.2 billion, up $9.0 billion during the quarter. Operating and investing activities provided $9.8 billion and $11.0 billion of cash, respectively; financing activities used $10.1 billion. Bank deposits declined $41.0 billion, including a $63.7 billion decrease in brokerage sweep deposits, partly offset by increased brokered CDs and borrowings.
At quarter-end, bank deposits were $325.7 billion and payables to brokerage clients were $87.6 billion. Federal Home Loan Bank borrowings were $45.6 billion, other short-term borrowings were $7.1 billion, and long-term debt was $20.0 billion. The company reported $30.7 billion of brokered CDs outstanding. Its average daily liquidity coverage ratio was 129%, above the 100% requirement; management reported the company was in compliance. More than 80% of bank deposits qualified for FDIC insurance.
The consolidated Tier 1 leverage ratio was 7.1%, versus 7.2% at year-end; CSB’s ratio was 7.7%. Schwab reported that CSC and its banking subsidiaries were well capitalized and broker-dealer subsidiaries met their net capital requirements. The company paid a $0.25 quarterly common dividend, up 14%, and repurchased $2.8 billion of common stock and $467 million of preferred stock during the quarter. It suspended active common-share repurchases during the quarter and said it did not plan to resume them until there was more regulatory clarity.
Accumulated other comprehensive loss was $20.7 billion at quarter-end, including substantial unrealized losses on securities. The filing reports a $12.8 billion after-tax remaining unamortized loss on securities transferred from available-for-sale to held-to-maturity in 2022. The regulatory capital treatment of AOCI was a focus of management’s capital planning.
Outlook, developments, and risks
- Management expected to continue using higher-cost supplemental funding to support client cash reallocations. Such funding was expected to peak in 2023, decline in 2024, and leave a limited amount outstanding in early 2025; management cautioned that it would reduce net interest revenue in coming quarters.
- Schwab expected 2023 capital expenditures of approximately 3%–4% of net revenue. It expected total TD Ameritrade acquisition and integration costs and capital expenditures of $2.4–$2.5 billion, and annualized cost synergies of $1.8–$2.0 billion. About 75% of the targeted synergies had been achieved on an annualized run-rate basis by March 31; most remaining synergies were expected by the end of 2024, with full-year realization beginning in 2025.
- Most remaining TD Ameritrade client transitions were expected during 2023, with a small group in the first half of 2024. The first transition group was completed in February 2023.
- A May 4, 2023 amendment to the insured deposit account agreement extended the sweep arrangement through July 1, 2034 and established minimum and maximum balance terms. At March 31, IDA balances were $106.5 billion. Schwab did not migrate IDA balances onto its balance sheet during Q1; future migration depends on capital and contractual limitations.
- Management cited market conditions, interest rates, client cash allocations, deposit pricing competition, liquidity and capital needs, regulatory changes, integration execution, expenses, and litigation as risks. Interest-rate simulations showed estimated next-12-month net interest revenue sensitivity of +5.0% for a gradual 100-basis-point increase and -4.4% for a gradual 100-basis-point decrease, subject to modeling assumptions.
- Subsequent to quarter-end, credit-rating agencies changed outlooks and S&P downgraded certain short-term and long-term ratings. The filing also describes pending order-routing and antitrust litigation; the company contests the claims and generally could not estimate potential losses.
- SEC proposals affecting equity market structure and open-end fund liquidity, as well as proposed Community Reinvestment Act revisions, remained unresolved; Schwab said their impact could not yet be assessed. Management reported no material changes to the risk factors in its 2022 Form 10-K.
Most important facts for investors to verify
- Whether client cash outflows and deposit mix continue, and how much reliance on brokered CDs, FHLB advances, and other supplemental funding is required.
- How rising funding costs and potential rate changes affect net interest revenue, margins, and liquidity.
- Progress and costs of TD Ameritrade transitions, and delivery and timing of remaining cost synergies.
- Regulatory treatment of AOCI, future capital requirements, and the timing of any resumption of share repurchases or migration of IDA balances.
- Developments in deposit-account agreements, credit ratings, proposed regulations, and material litigation.
- Interpret non-GAAP adjusted EPS, expenses, and tangible-equity returns alongside GAAP results; these measures exclude specified acquisition-related costs and acquired-intangible amortization.