The Charles Schwab Corporation — 2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021. This is an annual report, not a standalone fourth-quarter filing; the figures below are for the full year unless stated otherwise. Dollar amounts are in U.S. dollars.
Business context
Schwab provides brokerage, wealth management, banking, asset management, custody, and advisory services through Investor Services and Advisor Services. At year-end, it reported $8.14 trillion in client assets, 33.2 million active brokerage accounts, and 1.6 million banking accounts. The year included the first full year of TD Ameritrade results; the 2020 comparison includes TD Ameritrade only from its October 6, 2020 acquisition date.
Financial and operating performance
| Metric | 2021 | 2020 | Change |
|---|---|---|---|
| Total net revenues | $18.52 billion | $11.69 billion | +58% |
| Net interest revenue | $8.03 billion | $6.11 billion | +31% |
| Asset management and administration fees | $4.27 billion | $3.48 billion | +23% |
| Trading revenue | $4.15 billion | $1.42 billion | +193% |
| Bank deposit account fees | $1.32 billion | $355 million | 2021 included a full year |
| Expenses excluding interest | $10.81 billion | $7.39 billion | +46% |
| Income before taxes | $7.71 billion | $4.30 billion | +79% |
| Net income | $5.86 billion | $3.30 billion | +77% |
| Diluted EPS | $2.83 | $2.12 | +33% |
Adjusted diluted EPS, a non-GAAP measure excluding acquisition and integration costs, acquired-intangible amortization, and related tax effects, was $3.25 versus $2.45. Pre-tax profit margin was 41.6% versus 36.8%; return on average common equity was 11% versus 9%, and return on tangible common equity was 22% versus 15%. Net interest margin declined to 1.45% from 1.62% as lower asset yields and securities premium amortization offset balance growth.
- Client activity: Core net new client assets were $558.2 billion, an 8% annual organic growth rate. Reported net new assets were $516.2 billion, including $42.0 billion of outflows from certain mutual fund clearing clients. Year-end client assets rose 22%, and active brokerage accounts rose 12%.
- Cash flow: Net cash from operating activities was $2.12 billion, down from $6.85 billion. Investing activities used $75.66 billion, including $171.73 billion of AFS securities purchases, partly offset by principal payments and sales. Financing activities provided $96.32 billion, primarily reflecting deposit growth and borrowing. Cash and cash equivalents, including restricted amounts, increased $22.78 billion.
- Balance sheet and debt: Total assets were $667.27 billion, up from $549.01 billion. Bank deposits were $443.78 billion and brokerage-client payables were $125.67 billion. Short-term borrowings were $4.86 billion, versus none at year-end 2020; long-term debt was $18.91 billion, versus $13.63 billion.
- Capital and liquidity: The consolidated Tier 1 Leverage Ratio was 6.2%, slightly below 6.3% a year earlier and below management’s 6.75%–7.00% long-term objective, but above the 4% regulatory minimum. The average fourth-quarter LCR was 106%, above the 100% requirement. Management said capital returns, including repurchases, remain subject to capital and regulatory constraints.
Material changes, outlook, and notable items
- Revenue and earnings growth reflected the full-year inclusion of TD Ameritrade, strong client engagement and trading, growth in interest-earning assets, and higher balances in advice solutions and funds. TD Ameritrade contributed $7.6 billion of 2021 revenue. Trading revenue also benefited from a higher share of derivatives trades.
- Expenses rose with the acquired business, higher staffing and compensation, integration work, and increased technology and operating capacity. Acquisition and integration-related costs were $468 million; acquired-intangible amortization was $615 million. The company also recorded an approximately $200 million non-deductible charge related to an SEC investigation of historic Schwab Intelligent Portfolios disclosures, based on a tentative agreement with SEC staff that remained subject to Commission approval.
- TD Ameritrade integration: Schwab continued to expect client conversion within 30–36 months of the October 2020 acquisition. Estimated total acquisition and integration costs and capital expenditures were $2.0–$2.2 billion. The company expected 2022 integration costs of approximately $350–$400 million and annualized cost synergies of $1.8–$2.0 billion; about half had been achieved on a run-rate basis by year-end 2021. Management expected about 60% of synergies by year-end 2022, with much of the balance after conversion and into 2024. These estimates may change.
- Management expected 2022 capital expenditures of approximately 4%–5% of net revenue, mainly supporting integration and capacity; the longer-term expectation was 3%–5%. No broader earnings or revenue guidance is provided in the supplied filing text.
- Schwab transferred $10.6 billion of BDA balances to its balance sheet during 2021. The IDA agreement requires at least $50 billion of balances through June 2031 and restricts migration; after year-end, Schwab moved approximately another $10 billion. The agreement’s service fee is 15 basis points, and low-rate conditions could reduce the economics or result in a payment to the TD banks.
- Rising rates, client cash allocation changes, market declines, trading volumes, and the integration may affect revenue, capital, or service levels. A 100-basis-point rate increase was estimated to raise next-12-month net interest revenue 14.1%; a 100-basis-point decrease was estimated to lower it 4.5%, based on year-end balance-sheet assumptions. These are simulations, not forecasts.
- AFS securities recorded $6.50 billion of net-of-tax OCI losses in 2021, largely reflecting unrealized valuation changes as rates moved. No AFS credit-loss expense was recorded. In January 2022, Schwab transferred $108.8 billion of agency mortgage-backed securities to HTM with a $2.4 billion net unrealized loss at transfer.
- Other risks include litigation and regulatory proceedings, cyber and technology disruptions, third-party service-provider dependence, credit exposures, and heightened regulatory capital, liquidity, stress-testing, and reporting requirements. The filing reports the company was compliant with the full LCR at year-end and that CSB was well capitalized.
Important facts for investors to verify
- How much reported growth is attributable to TD Ameritrade versus organic growth, and whether client asset inflows and trading activity remain durable.
- Progress, total cost, timing, and realization of TD Ameritrade conversion and the $1.8–$2.0 billion annualized synergy target.
- Trends in net interest margin, money-market fee waivers, client cash balances, BDA migrations, and the contractual limits and economics of the IDA agreement.
- Capital headroom and liquidity under regulatory stress, including the 6.2% leverage ratio, 106% average LCR, and potential impact of further balance-sheet growth or capital rules.
- Resolution of the SEC matter and other litigation, including whether the tentative settlement is approved and whether additional loss estimates or charges emerge.
- Interest-rate exposure and AFS portfolio valuation effects, including the impact of the January 2022 HTM transfer; distinguish unrealized OCI movements from credit losses and realized earnings effects.