Charles Schwab Corporation — 2015 Form 10-K Summary
Business context and reporting period. The filing covers the fiscal year ended December 31, 2015; it is an annual report, not a standalone fourth-quarter filing. Schwab provides brokerage, banking, asset management, custody and advisory services through Investor Services and Advisor Services. At year-end, it reported $2.51 trillion in client assets, 9.8 million active brokerage accounts and 1.0 million banking accounts.
Key financial metrics
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Net revenues | $6.380 billion | $6.058 billion | +5% |
| Expenses excluding interest | $4.101 billion | $3.943 billion | +4% |
| Income before taxes | $2.279 billion | $2.115 billion | +8% |
| Net income | $1.447 billion | $1.321 billion | +10% |
| Net income available to common stockholders | $1.364 billion | $1.261 billion | +8% |
| Diluted EPS | $1.03 | $0.95 | +8% |
| Pre-tax profit margin | 35.7% | 34.9% | +0.8 percentage points |
| Net interest revenue | $2.525 billion | $2.272 billion | +11% |
| Asset management and administration fees | $2.650 billion | $2.533 billion | +5% |
| Trading revenue | $866 million | $907 million | -5% |
| Operating cash flow | $1.246 billion | $2.348 billion | Down $1.102 billion |
Fourth-quarter 2015 net revenue was $1.691 billion, compared with $1.551 billion in fourth-quarter 2014; net income was $416 million versus $350 million, and diluted EPS was $0.28 versus $0.25.
Year-end total assets were $183.718 billion, up 19%; total liabilities were $170.316 billion and stockholders’ equity was $13.402 billion. Long-term debt was $2.890 billion, compared with $1.899 billion. The debt-to-total-capital ratio rose to 18% from 14%. Cash and cash equivalents were $11.978 billion. Bank deposits increased to $129.502 billion from $102.815 billion, including a $26.0 billion increase in brokerage-swept deposits.
Net cash from financing activities was $27.992 billion, principally reflecting the increase in bank deposits, $1.346 billion of debt issuance and $581 million of preferred-stock proceeds. Investing activities used $28.623 billion, largely for securities purchases; the filing’s consolidated cash-flow statement reports a $615 million increase in cash and cash equivalents.
Changes versus the prior comparable period
- Revenue and earnings grew despite volatile equity markets and persistently low interest rates. Client assets ended the year at $2.514 trillion, up 2%, including an estimated $89.2 billion reduction from market valuation effects. Core net new client assets increased to $134.7 billion from $124.8 billion.
- Net interest revenue growth reflected higher average interest-earning balances, partly offset by lower net interest margins. Asset-management fees benefited from client-asset growth and higher money-market fund yields.
- Trading revenue declined as daily average revenue trades fell 2% and average revenue per revenue trade declined 2%. Advice demand strengthened: more than 155,000 accounts enrolled in retail advisory solutions during 2015, up 60% year over year.
- Expenses grew more slowly than revenue, supporting margin expansion. The allowance for bank loan losses declined to $31 million from $42 million; loan delinquencies were 0.25% of outstanding loans versus 0.27%.
- Available-for-sale securities had $432 million of gross unrealized losses at year-end, versus $83 million a year earlier; the filing reported no 2015 net impairment loss on securities. Accumulated other comprehensive income moved from $165 million to a $134 million loss, largely reflecting unrealized securities losses.
Outlook, commentary, risks and unusual items
- Management said low short-term rates constrain net interest revenue and can require fee waivers on Schwab money-market funds. The company’s sensitivity model estimated that a gradual 100-basis-point rate increase would raise next-12-month net interest revenue by 8.2%; a 100-basis-point decrease would lower it by 9.5%. These are model estimates, not guidance.
- Management anticipated 2016 capital expenditures approximately 46% above 2015, mainly for property, leasehold improvements and technology. No specific revenue or earnings guidance was provided.
- Capital ratios at December 31, 2015 included a 7.1% Tier 1 leverage ratio at both CSC and Schwab Bank; both met their applicable regulatory capital requirements. Schwab Bank reported compliance with the fully phased-in modified liquidity coverage ratio. A $750 million committed credit facility was scheduled to expire in June 2016; it was unused at year-end. The company also reported $2.0 billion available at the Federal Reserve discount window and $9.3 billion under its Federal Home Loan Bank facility, with no material borrowings under either facility.
- CSC issued $1.0 billion of senior notes in March and $350 million in November 2015, and issued Series C preferred shares with $581 million net proceeds. Common dividends remained $0.24 per share for the year; management stated a target payout of approximately 20%–30% of net income, subject to board and regulatory constraints. No common-stock repurchases were made in 2015; $596 million remained authorized.
- Unusual revenue items included $75 million of net litigation proceeds in 2015 related to the company’s non-agency residential mortgage-backed securities portfolio. In 2014, other revenue included a $45 million net insurance settlement and $28 million of related litigation proceeds. The 2015 loan-loss provision was $11 million, versus $4 million in 2014.
- Risks include interest-rate and market sensitivity, intense pricing competition, regulatory and capital requirements, cybersecurity and operational disruption, credit and liquidity exposures, and litigation. The investment portfolio included $11.4 billion of floating-rate FFELP asset-backed securities; rating agencies had placed a portion under review for possible downgrade, although management said it expected full principal and interest payments.
- Legal matters included Total Bond Market Fund litigation; after year-end, on February 23, 2016, the court dismissed the remaining claims with prejudice, with an appeal still possible. optionsXpress continued to contest and appeal an SEC administrative decision concerning Regulation SHO; the ordered disgorgement and penalties were described as not material.
Important facts for investors to verify
- Whether deposit and client-asset growth continues to support net interest revenue as rates, client cash balances and funding costs change.
- How the 2015 decline in trading revenue and market-related reduction in client assets affect subsequent results.
- The sustainability of reported earnings given litigation proceeds, money-market fee waivers and other nonrecurring items.
- Execution and cost of the forecast increase in 2016 capital expenditures, and compliance with evolving capital, liquidity and consumer-protection rules.
- Performance and credit quality of the securities and loan portfolios, including FFELP ABS, California-concentrated mortgage and HELOC exposures, and securities with unrealized losses.
- Developments in legal and regulatory proceedings, including any appeal in the Total Bond Market Fund matter and the optionsXpress proceeding.