Charles Schwab Corporation (SCHW) — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. Amounts are in U.S. dollars; financial statement amounts are generally in millions unless stated otherwise. Schwab provides brokerage, banking, wealth management, asset management, custody, and advisory services through Investor Services and Advisor Services. TD Ameritrade, acquired October 6, 2020, is included in 2021 results but not in the comparable 2020 results, limiting year-over-year comparability.
Financial and operating highlights
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Total net revenue | $4.527 billion | $2.450 billion | $9.242 billion | $5.067 billion |
| Net income | $1.265 billion | $671 million | $2.749 billion | $1.466 billion |
| Net income available to common stockholders | $1.117 billion | $621 million | $2.505 billion | $1.378 billion |
| Diluted EPS | $0.59 | $0.48 | $1.32 | $1.07 |
| Pre-tax profit margin | 38.0% | 36.2% | 39.8% | 38.2% |
| Net interest margin | 1.46% | 1.53% | 1.47% | 1.80% |
- Revenue mix, Q2: Net interest revenue was $1.947 billion, asset management and administration fees $1.047 billion, trading revenue $955 million, bank deposit account fees $337 million, and other revenue $241 million. Money market fund fee waivers were $85 million in the quarter.
- Expenses: Expenses excluding interest were $2.808 billion in Q2 and $5.563 billion for the first half, up 80% and 78% year over year, respectively. Adjusted expenses, a non-GAAP measure excluding acquisition/integration costs and acquired-intangible amortization, were $2.510 billion and $4.992 billion.
- Non-GAAP earnings: Adjusted diluted EPS was $0.70 in Q2 and $1.55 for the first half, compared with $0.54 and $1.14 in 2020. GAAP diluted EPS reflects the larger share count following the issuance of approximately 586 million shares for the TD Ameritrade acquisition.
- Client activity: Client assets were $7.575 trillion at quarter-end, up 84% year over year. Core net new client assets were $108.8 billion in Q2 and $257.0 billion in the first half; first-half organic growth rate was 8%. Daily average trades were 6.0 million in Q2, down 28% from Q1 but 4% above Q4 2020. Active brokerage accounts totaled 32.3 million.
- Cash flow: First-half operating cash flow was negative $5.336 billion and investing cash flow was negative $31.019 billion; financing cash flow was positive $20.525 billion. Cash and cash equivalents, including restricted amounts, fell $15.830 billion to $54.730 billion. Operating cash flow was affected by balance-sheet movements, including a $17.830 billion increase in brokerage-client receivables.
- Balance sheet and funding: Total assets were $574.532 billion at June 30, up from $549.009 billion at year-end 2020. Bank deposits were $368.638 billion; brokerage-client payables were $105.012 billion. Long-term debt was $18.708 billion and short-term borrowings $3.500 billion. The company issued $6.197 billion of long-term debt and repaid $1.208 billion during the first half.
- Capital and liquidity: Consolidated Tier 1 Leverage Ratio was 6.4%, below management’s 6.75%–7.00% long-term operating objective but above regulatory minimums. The average Q2 LCR was 109%; Schwab was compliant with the then-applicable 85% requirement and was scheduled to become subject to the full 100% LCR on October 1, 2021. Banking subsidiaries had $54.984 billion of available FHLB capacity and $9.528 billion of discount-window capacity, subject to collateral requirements.
Material changes versus comparable periods
- Q2 revenue rose 85% and first-half revenue rose 82%; net income increased 89% and 88%, respectively. TD Ameritrade’s inclusion was a major contributor, particularly to trading revenue, margin lending, securities lending, and bank deposit account fees. These reported comparisons are not like-for-like.
- Trading revenue was $955 million in Q2 versus $193 million a year earlier, but declined 21% from Q1 2021 as activity moderated from the first-quarter surge. Net interest revenue increased year over year, while net interest margin fell due primarily to lower yields on interest-earning assets and securities purchases at lower rates.
- Expenses rose substantially with the acquired business, added staffing and integration work, and a $200 million regulatory-matter charge recorded in Q2. Q2 GAAP diluted EPS increased less than net income, in part reflecting acquisition-related share issuance and higher preferred dividends.
- Available-for-sale securities were $359.622 billion at quarter-end versus $337.400 billion at year-end. First-half other comprehensive income was negative $2.986 billion, largely reflecting changes in unrealized securities gains and losses.
Outlook, management commentary, and risks
- TD Ameritrade integration: Client conversion is expected within 30–36 months of the October 2020 acquisition. Estimated total acquisition and integration-related costs and capital expenditures are $2.0–$2.2 billion. Management targets annualized cost synergies of $1.8–$2.0 billion; about one-third had been achieved on an annualized run-rate basis by Q2, with approximately 40% expected by the end of the first year after acquisition. Estimates may change with integration scope, client volumes, staffing, and real estate decisions.
- Spending: Full-year 2021 capital expenditures were expected to be approximately 6%–7% of total net revenue. Estimated total TD Ameritrade exit and other related costs were $650 million–$1.0 billion; $276 million had been incurred through June 30, 2021.
- Deposits and regulation: Schwab began moving IDA balances to its balance sheet in July. Approximately $9.9 billion had moved through July 31, including uninsured balances and certain international-account transfers. Future migration is subject to contractual limits and adequate capital. Daily LCR and NSFR reporting began July 1, 2021; full LCR and NSFR requirements were scheduled for October 1, 2021.
- Interest-rate sensitivity: Management estimated that a gradual 100-basis-point rate increase would raise next-12-month net interest revenue by 13%, while a 100-basis-point decrease would reduce it by 4%. Outcomes depend on market rates, asset and liability repricing, prepayments, and client cash behavior. Money market fee waivers also depend on short-term rates and client choices.
- Regulatory and legal matters: Q2 included a $200 million liability and non-deductible charge tied to a tentative resolution of an SEC investigation into historic disclosures about Schwab Intelligent Portfolios. Any settlement remained subject to Commission approval. Other disclosed litigation includes TD Ameritrade acquisition litigation and order-routing cases; potential losses were generally not estimable. Schwab stated that no material changes had occurred to the risk factors in its 2020 Form 10-K.
- Other exposures: Risks include persistently low rates, mortgage-backed-security prepayments, client cash outflows, market and trading activity changes, integration execution and synergy realization, capital and liquidity needs, and litigation or regulatory outcomes. The company was also preparing for the phase-out of LIBOR in new lending products before the end of 2021.
Most important facts for investors to verify
- How much of reported revenue, earnings, and expense growth reflects TD Ameritrade consolidation versus organic growth; compare with the filing’s pro forma information where relevant.
- Whether integration spending, client conversion timing, and the $1.8–$2.0 billion annualized synergy target remain on track, including the evolving technology scope.
- Whether net interest margin and fee-waiver pressures improve or worsen as rates, prepayments, client cash allocations, and IDA balances change.
- The final resolution and total cost of the SEC investigation, and developments in the other disclosed lawsuits and regulatory matters.
- Capital and liquidity capacity as IDA balances migrate and the full LCR/NSFR requirements take effect; confirm the applicable ratios and available collateral-backed funding.
- Cash-flow interpretation: the first-half operating and investing cash outflows were heavily influenced by balance-sheet growth and securities activity, not solely operating earnings.