Charles Schwab Corporation — 2014 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2014. The filing also reports fourth-quarter results. Unless noted, dollar amounts are in millions.
Business context
Schwab provides wealth management, brokerage, banking, money management, and advisory services through Investor Services and Advisor Services. At year-end, it reported $2.46 trillion in client assets, 9.386 million active brokerage accounts, 1.4 million corporate retirement plan participants, and 985,000 banking accounts.
Financial and operating performance
| Metric | 2014 | 2013 | Change |
|---|---|---|---|
| Net revenues | $6,058 | $5,435 | +11% |
| Expenses excluding interest | $3,943 | $3,730 | +6% |
| Income before taxes | $2,115 | $1,705 | +24% |
| Net income | $1,321 | $1,071 | +23% |
| Net income available to common stockholders | $1,261 | $1,010 | +25% |
| Diluted EPS | $0.95 | $0.78 | +22% |
| Pre-tax profit margin | 34.9% | 31.4% | +3.5 percentage points |
Revenue mix in 2014: asset management and administration fees were $2,533 (42% of revenue), net interest revenue was $2,272 (38%), trading revenue was $907 (15%), and other revenue was $343 (5%). Asset-management fees rose 9% and net interest revenue rose 15%; trading revenue was nearly flat, down 1%.
Fourth-quarter 2014 revenue was $1,551, net income was $350, income available to common stockholders was $329, and diluted EPS was $0.25. Fourth-quarter 2013 figures were $1,435, $319, $297, and $0.23, respectively.
Operating cash flow was $2,348, compared with $1,656 in 2013. Cash and cash equivalents ended the year at $11,363, up from $7,728. Investing cash outflow was $8,395 and financing cash inflow was $9,682, including a $9,843 net increase in banking deposits. Capital expenditures were approximately $405, versus $270 in 2013.
Total assets were $154,642, up 8%; stockholders’ equity was $11,803, up 14%. Long-term debt was $1,899, broadly unchanged, and represented 14% of total financial capital. The company reported a 3.60% weighted-average debt interest rate. Banking-client deposits were $102,815, up from $92,972.
Liquidity and regulatory capital indicators included CSC’s 6.9% Tier 1 leverage ratio and 18.1% total capital ratio at year-end. Schwab Bank was categorized as well capitalized, with a 6.9% Tier 1 leverage ratio and 22.2% total risk-based capital ratio. Schwab broker-dealer net capital was $1.6 billion, $1.2 billion above its minimum requirement. These figures are subject to regulatory and subsidiary-level restrictions; segregated client funds are not generally available for corporate liquidity.
Material changes versus prior period
- Client assets increased 10% to $2.46 trillion, supported by $124.8 billion of net new client assets and rising equity markets. Active brokerage accounts grew 3%; the company opened 972,000 new brokerage accounts.
- Assets receiving ongoing advisory services grew 12% to $1.228 trillion. Advice-solutions fees increased 17% to $840.
- Net interest revenue benefited from higher average balances of interest-earning assets, including margin loans and securities portfolios, and improved yields on held-to-maturity securities. Average interest-earning assets rose to $138.9 billion from $130.3 billion.
- Fee waivers on Schwab money market funds rose to $751 from $674, reducing net money-market fund fees to $206 from $262 amid persistently low yields.
- Expenses rose more slowly than revenue, but included a $68 charge for estimated future severance associated with changes to the company’s geographic footprint. Professional-services expense also increased.
- Other revenue included a $45 net insurance settlement, $28 in net litigation proceeds related to non-agency mortgage-backed securities, and higher order-flow revenue. These items contributed to the 45% rise in other revenue.
- Loan credit indicators improved: delinquencies were 0.27% of loans versus 0.48%, nonaccrual loans were 0.26% versus 0.39%, and the allowance was 0.31% versus 0.39%.
Outlook, commentary, risks, and unusual items
- Management expected 2015 capital expenditures to be approximately 15% below 2014, mainly due to lower spending on buildings, furniture, and equipment following the Denver campus construction.
- Management said the new regulatory capital rules effective from January 1, 2015, and the modified liquidity coverage ratio requirements being phased in from 2016 were not expected to have a material impact, while noting that the impact was still being evaluated.
- Low short-term rates continued to constrain net interest revenue and require money-market fee waivers. The company’s simulations estimated that a gradual 100-basis-point rate increase would raise next-12-month net interest revenue 11.8%; a 100-basis-point decrease would reduce it 4.9%. Actual results may differ as balances, rates, and management actions change.
- Key risks include interest-rate and market sensitivity, competition on commissions and fees, regulatory and capital requirements, cybersecurity and operational failures, liquidity and client cash movements, credit and securities exposures, and litigation. The securities portfolio included $53.8 billion of mortgage-backed securities; most holdings were investment grade, but mortgage and issuer concentrations remain relevant.
- The company sold $504 million of non-agency residential mortgage-backed securities in the fourth quarter, recording an $8 net realized loss; it recorded a further $0.6 impairment charge on the remaining $15 million. Annual net impairment losses on securities were $1, down from $10 in 2013.
- Legal matters included an optionsXpress SEC administrative decision that the company was appealing; the ordered disgorgement and penalties were described as not material. The New York Attorney General auction-rate securities matter was settled in February 2015 with non-material company liability. For other significant pending matters, the company generally could not estimate potential losses at the stated stage.
- Common dividends were $0.24 per share for the year, with management targeting a dividend of approximately 20%–30% of net income. No common shares were repurchased under the public program in 2014; $596 remained authorized.
Important facts for investors to verify
- Whether client-asset inflows, advisory asset growth, and the 2014 revenue and earnings growth continue without reliance on favorable markets or one-time revenue items.
- The ongoing impact of low rates and money-market fee waivers on net interest revenue and fee income, and the company’s sensitivity to rate changes.
- Capital and liquidity consequences of new regulatory rules, including restrictions on subsidiary distributions and access to client-related cash.
- Credit quality, concentrations, and potential impairment exposure in mortgage-backed securities and residential lending, including HELOC second-lien exposure.
- Potential outcomes and financial effects of litigation and regulatory proceedings, cybersecurity incidents, and the $68 severance charge and related footprint changes.
- Auditor and control status: Deloitte & Touche issued an unqualified opinion, and management and the auditor concluded internal control over financial reporting was effective at December 31, 2014.