Business context and reporting period
The Charles Schwab Corporation’s Form 10-K covers the fiscal year ended December 31, 2020. Schwab provides brokerage, banking, wealth management, asset management, custody, and advisory services through its Investor Services and Advisor Services segments. The filing also reports fourth-quarter results; figures below are in U.S. dollars.
TD Ameritrade was acquired on October 6, 2020, so its results are consolidated only from that date. Schwab ended the year with $6.69 trillion in client assets, 29.6 million active brokerage accounts, and approximately 32,000 full-time-equivalent employees.
Financial and operating highlights
| Metric | FY 2020 | FY 2019 |
|---|---|---|
| Total net revenue | $11.691 billion | $10.721 billion |
| Net interest revenue | $6.113 billion | $6.516 billion |
| Asset management and administration fees | $3.475 billion | $3.211 billion |
| Trading revenue | $1.416 billion | $752 million |
| Bank deposit account fees | $355 million | None reported |
| Expenses excluding interest | $7.391 billion | $5.873 billion |
| Net income | $3.299 billion | $3.704 billion |
| Net income available to common stockholders | $3.043 billion | $3.526 billion |
| Diluted EPS | $2.12 | $2.67 |
| Pre-tax profit margin | 36.8% | 45.2% |
| Net interest margin | 1.62% | 2.41% |
| Operating cash flow | $6.852 billion | $9.325 billion |
Revenue rose 9%, while net income fell 11% and diluted EPS fell 21%. Adjusted diluted EPS, a non-GAAP measure excluding acquisition and integration costs, acquired-intangible amortization, and related tax effects, was $2.45 versus $2.70 in 2019. Management reported adjusted expenses of $6.759 billion, up 16%.
Fourth-quarter 2020 revenue was $4.176 billion and net income was $1.135 billion, compared with $2.606 billion and $852 million, respectively, in fourth-quarter 2019. Q4 diluted EPS was $0.57 versus $0.62. Fourth-quarter 2020 includes TD Ameritrade from October 6 onward.
Balance sheet, liquidity, and capital
- Total assets were $549.0 billion at year-end, up 87% from $294.0 billion, reflecting acquisitions and balance-sheet growth. Bank deposits were $358.0 billion; brokerage-client payables were $104.2 billion.
- Long-term debt was $13.6 billion, compared with $7.4 billion in 2019; there were no short-term borrowings outstanding. The reported debt-to-total-capital ratio was 20%, down from 25%.
- Total stockholders’ equity was $56.1 billion, including $7.7 billion of preferred stock. Schwab raised approximately $4.94 billion net through Series G and H preferred offerings during 2020.
- The year-end Tier 1 Leverage Ratio was 6.3% for CSC and 5.5% for principal bank subsidiary CSB, versus 7.3% and 7.1% in 2019. Both were above stated regulatory minimums; the decline reflected substantial client cash inflows and balance-sheet expansion.
- Average daily Liquidity Coverage Ratio for Q4 was 109%, with $78.1 billion of eligible high-quality liquid assets and $72.0 billion of net cash outflows. Schwab reported compliance with the reduced LCR requirement.
- Cash and cash equivalents were $40.3 billion on the balance sheet. Cash flow from investing was negative $125.9 billion, largely reflecting $202.2 billion of purchases of available-for-sale securities; financing cash flow was positive $144.0 billion, primarily reflecting deposit growth and capital issuance.
Material changes versus 2019
- TD Ameritrade added approximately $1.7 billion of revenue and $943 million of expenses from October 6 through year-end. Schwab issued approximately 586 million shares in the acquisition. TD Ameritrade contributed $583 million of net income for the post-acquisition period, according to the acquisition note.
- Trading revenue increased 88%, driven principally by TD Ameritrade and record client activity, despite the prior-year elimination of online stock and ETF commissions and options base charges. Daily average trades were 2.603 million versus 749,000.
- Net interest revenue declined 6% and net interest margin fell from 2.41% to 1.62%, as lower rates and mortgage-security prepayments reduced yields; growth in interest-earning assets partly offset the pressure.
- Expenses excluding interest increased 26%. Acquisition and integration-related costs were $442 million, compared with $26 million in 2019, and amortization of acquired intangibles was $190 million versus $27 million.
- Client assets increased 66% to $6.692 trillion; core net new client assets were $281.9 billion versus $211.7 billion. Reported total net new assets of $1.953 trillion include acquisition-related inflows and are not directly comparable with organic flows.
- Schwab transferred all investment securities previously classified as held-to-maturity to available-for-sale on January 1, 2020. Year-end accumulated other comprehensive income was $5.394 billion, following $5.306 billion of net-of-tax other comprehensive income in 2020, primarily from unrealized securities gains.
Outlook, commentary, risks, and unusual items
- Management expects TD Ameritrade integration to take 18–36 months. It estimates approximately $1.6 billion in total integration-related costs and capital expenditures and expects annualized cost synergies of $1.8–$2.0 billion over the course of integration. The company expected roughly one-quarter to one-third of those synergies, on an annualized run-rate basis, by the end of the first year after closing. These are estimates, not assured outcomes.
- Schwab expected acquisition and integration-related costs in 2021 to be roughly consistent with 2020’s $442 million. It forecast 2021 capital expenditures at approximately 6–7% of net revenue, compared with a longer-term range of 3–5%, and anticipated additional spending and hiring to improve client service.
- The TD Ameritrade insured deposit account agreement requires migration of all uninsured IDA balances out of the sweep program on June 30, 2021. From July 1, 2021, Schwab may migrate up to $10 billion every 12 months subject to contractual limits; it must maintain a minimum $50 billion IDA balance through June 2031. IDA balance movements, capital availability, and fee economics could affect results.
- COVID-19, near-zero rates, market volatility, high trading volumes, remote work, and disruptions at outsourced providers affected operations and may continue to pressure revenue, credit quality, client service, and integration execution. Schwab reported longer client wait times and occasional website and mobile access delays.
- Other risks include interest-rate and client-cash sensitivity, mortgage and HELOC delinquencies, cybersecurity and operational failures, regulatory capital and liquidity requirements, litigation, and competition. Schwab anticipated exceeding the $75 billion short-term wholesale funding threshold in 2021, which would bring more stringent liquidity requirements and reporting.
- Legal proceedings include order-routing cases and litigation challenging the TD Ameritrade acquisition. The filing says potential losses for certain matters cannot be reasonably estimated at the current stage. Management stated it was contesting the claims.
- The independent auditor gave an unqualified opinion on the financial statements and concluded internal control over financial reporting was effective. However, management and the auditor excluded TD Ameritrade from the 2020 internal-control assessment because of the timing and complexity of the acquisition; integration of its controls was ongoing.
Most important facts for investors to verify
- Whether Schwab realizes the stated $1.8–$2.0 billion annualized TD Ameritrade cost synergies on schedule, and whether integration costs remain near estimates.
- How lower rates, deposit pricing, client cash allocation, and the IDA agreement affect net interest revenue and bank deposit account fees.
- The timing, amount, and capital impact of required and optional IDA balance migrations, including the $50 billion minimum balance and contractual restrictions.
- Whether client service capacity, technology reliability, and TD Ameritrade systems integration improve amid sustained high activity.
- Trends in bank loan delinquencies, credit-loss allowances, regulatory capital ratios, and the transition to stricter liquidity requirements.
- How much of reported asset and account growth represents organic net new assets rather than acquired balances, and how acquisition-related costs affect GAAP earnings versus non-GAAP measures.
- Progress in bringing TD Ameritrade within Schwab’s internal-control assessment, and developments in material litigation and regulatory matters.