Charles Schwab Corporation — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Schwab provides brokerage, banking, wealth management, asset management, custody, and advisory services through Investor Services and Advisor Services. Figures are in U.S. dollars; financial amounts are in billions unless noted.
Business context and operating performance
- Client assets reached $8.02 trillion, up 17% year over year and 14% from year-end 2022. Second-quarter net new client assets were $72.0 billion; core net new assets were $52.2 billion. First-half core net new assets were $183.9 billion, an annualized organic growth rate above 5%.
- Active brokerage accounts were 34.4 million, up 1% year over year. Daily average trades were 5.3 million in Q2, down 15%; new brokerage accounts were 960,000, down 5%.
- Management attributed results to elevated interest rates, client movement from sweep cash into higher-yielding alternatives, lower trading activity, and improved market valuations. Clients were net buyers of equities in June.
Financial results and year-over-year comparisons
| Metric | Q2 2023 | Q2 2022 | H1 2023 | H1 2022 |
|---|---|---|---|---|
| Total net revenues | $4.656B (-9%) | $5.093B | $9.772B (approximately flat) | $9.765B |
| Net interest revenue | $2.290B (-10%) | $2.544B | $5.060B (+7%) | $4.727B |
| Asset management and administration fees | $1.173B (+12%) | $1.052B | $2.291B (+8%) | $2.120B |
| Trading revenue | $803M (-9%) | $885M | $1.695B (-8%) | $1.848B |
| Bank deposit account fees | $175M (-50%) | $352M | $326M (-50%) | $646M |
| Expenses excluding interest | $2.965B (+5%) | $2.819B | $5.971B (+6%) | $5.652B |
| Income before taxes | $1.691B (-26%) | $2.274B | $3.801B (-8%) | $4.113B |
| Net income | $1.294B (-28%) | $1.793B | $2.897B (-9%) | $3.195B |
| Diluted EPS | $0.64 (-26%) | $0.87 | $1.48 (-4%) | $1.54 |
| Pre-tax profit margin | 36.3% | 44.6% | 38.9% | 42.1% |
Adjusted diluted EPS, a non-GAAP measure excluding specified acquisition and integration costs and acquired-intangible amortization, was $0.75 in Q2 and $1.68 in H1, down 23% and 3%, respectively. Adjusted expenses were $2.701 billion in Q2 and $5.474 billion in H1. These measures are supplemental, not substitutes for GAAP results.
Q2 net interest revenue fell as higher-cost supplemental funding and lower average interest-earning assets outweighed higher asset yields. H1 net interest revenue grew on higher yields. Net interest margin rose to 1.87% in Q2 and 2.03% in H1, versus 1.62% and 1.50%, respectively, in 2022. Fee growth reflected higher money market fund balances and the end of fee waivers; weaker trading reflected lower volume and a shift in trade mix. Bank deposit account fees were also affected by lower balances, higher client rates, and $97 million of one-time breakage fees in Q1 from ending certain third-party bank arrangements.
Balance sheet, cash flow, debt, and capital
- At June 30, total assets were $511.5 billion, down 7% from year-end 2022. Cash and cash equivalents were $47.7 billion, compared with $40.2 billion at year-end.
- Bank deposits were $304.4 billion, down $62.3 billion from year-end; brokerage-client payables were $84.8 billion, down from $97.4 billion. Management linked these movements primarily to clients reallocating cash toward higher-yielding investments.
- To support liquidity, Schwab increased FHLB borrowings to $41.0 billion from $12.4 billion at year-end, had $7.8 billion of other short-term borrowings, and had $41.4 billion of brokered CDs outstanding. Long-term debt was $22.5 billion, including $2.5 billion issued in May at fixed rates of 5.643% and 5.853%.
- For H1, operating cash flow was $4.6 billion and investing cash flow was $29.2 billion; financing cash outflow was $33.4 billion. Cash and cash equivalents, excluding restricted amounts, increased $7.5 billion.
- Average daily LCR was 129% and average NSFR was 120%; Schwab reported compliance with both requirements. The consolidated Tier 1 leverage ratio was 7.5%, up from 7.2% at year-end. Schwab and its banking subsidiaries were reported well capitalized; the non-GAAP ratio including AOCI was 3.7% consolidated and 4.0% for CSB.
- Stockholders’ equity was $37.1 billion. AOCI was a loss of $20.7 billion, including $12.3 billion after tax of remaining unrealized losses on securities transferred from available-for-sale to held-to-maturity in 2022. The securities portfolio remained exposed to interest-rate-related valuation changes.
Outlook, significant changes, and risks
- TD Ameritrade integration: Schwab had transitioned approximately one-third of TDA accounts by June 30 and expected most remaining transitions in two groups during the rest of 2023, with a small group in H1 2024. Estimated total acquisition and integration costs and capital expenditures were $2.4–$2.5 billion. Expected annualized synergies were $1.8–$2.0 billion; about 75% had been achieved on a run-rate basis, with most of the remainder expected by end-2024 and full-year realization beginning in 2025.
- Further cost actions: Schwab planned office consolidations and operational streamlining, including workforce reductions, targeting at least $500 million in additional annual run-rate savings. Associated exit costs could be significant but were not yet estimable. Most position-elimination costs were expected in H2 2023; real-estate costs in 2023–2024.
- Funding outlook: Management expected supplemental funding balances to decline through end-2024, with a limited amount remaining in early 2025. Further high-cost funding may be needed if client cash reallocations increase, potentially reducing net interest revenue.
- Capital and regulation: A proposed banking capital rule would include AOCI in regulatory capital and revise risk-weighted-asset calculations, with a proposed phase-in from July 2025 to July 2028. Management said it expected to meet proposed requirements organically ahead of the transition period. A proposed FDIC special assessment was estimated to cost Schwab approximately $160 million over eight quarters from Q1 2024; recognition depends on final enactment.
- Other regulatory uncertainty: Proposed SEC equity-market-structure, mutual-fund liquidity, and banking Community Reinvestment Act rules could affect Schwab; their impact was not yet assessable pending final rules. LIBOR publication ceased June 30, 2023; work remained to monitor certain legacy instruments and systems.
- Legal and operational contingencies: The filing discusses, among other matters, the Corrente antitrust litigation and order-routing cases; Schwab contests the claims. For the described matters, the filing generally says potential loss cannot be reasonably estimated at this stage. Guarantees to clearing houses can be unquantifiable, though payment was characterized as remote.
- Other notable items: The Board increased the quarterly common dividend to $0.25 per share. Schwab repurchased $2.8 billion of common stock in H1 and none under its public program in Q2; approximately $8.7 billion remained authorized. Standard & Poor’s downgraded certain Schwab ratings during Q2, and Moody’s moved its outlook from positive to stable.
Important facts for investors to verify
- Whether client cash movements stabilize and supplemental borrowing, brokered-CD balances, and related funding expense decline as management expects.
- Progress on remaining TDA client transitions, integration spending, synergy realization, and the separate $500 million cost-savings plan and its unestimated exit costs.
- Changes in AOCI-related securities losses and the potential capital impact of final regulatory capital rules.
- Final FDIC special-assessment terms and the timing and accounting for the estimated $160 million cost.
- Whether asset gathering and fee growth offset lower trading activity, reduced sweep balances, and pressure on bank deposit account fees.
- Developments in the cited litigation and proposed SEC rules, including any material change in exposure or business economics.