Charles Schwab Corporation — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024; unaudited. Schwab provides wealth management, brokerage, banking, custody, asset management, and advisory services through Investor Services and Advisor Services. Comparisons below are to Q1 2023 unless stated otherwise.
Key financial and operating metrics
| Metric | Q1 2024 | Comparison |
|---|---|---|
| Total net revenue | $4.740 billion | Down 7% |
| Net interest revenue / margin | $2.233 billion / 2.02% | Down 19% / from 2.19% |
| Asset management and administration fees | $1.348 billion | Up 21% |
| Trading revenue | $817 million | Down 8% |
| Expenses excluding interest | $2.942 billion | Down 2%; adjusted expenses were $2.802 billion, up 1% |
| Income before taxes / effective tax rate | $1.798 billion / 24.2% | Pre-tax income down 15%; tax rate was 24.0% in Q1 2023 |
| Net income / diluted EPS | $1.362 billion / $0.68 | Down 15% / 18% |
| Adjusted diluted EPS | $0.74 | Down 20% |
| Pre-tax margin / return on average common equity | 37.9% / 15% | 41.2% / 23% in Q1 2023 |
| Client assets at quarter-end | $9.118 trillion | Up 20% year over year |
| Core net new client assets | $95.6 billion | Down 27%; total net new assets were $88.2 billion, down 41% |
Balance sheet, liquidity, and capital
- Total assets were $468.8 billion at March 31, down 5% from year-end 2023. Cash and cash equivalents were $31.8 billion, versus $43.3 billion at year-end.
- Bank deposits were $269.5 billion, down $20.5 billion during the quarter. Long-term debt was $22.9 billion, down from $26.1 billion; FHLB borrowings were $24.0 billion. Supplemental funding outstanding declined $8.8 billion during the quarter.
- Average daily liquidity coverage ratio was 130%, above the 100% minimum; Schwab reported compliance with the net stable funding ratio rule. More than 80% of bank deposits qualified for FDIC insurance.
- Consolidated Tier 1 leverage ratio was 8.8%, up from 8.5% at year-end. The company’s non-GAAP adjusted ratio including AOCI was 5.3%. Schwab and its banking subsidiaries reported meeting applicable capital requirements.
- Operating cash flow was negative $1.349 billion, compared with positive $9.777 billion in Q1 2023. Investing cash flow was positive $9.475 billion; financing cash flow was negative $24.926 billion. Cash and restricted cash fell $16.8 billion to $57.7 billion.
Material changes and management commentary
- Net interest revenue remained the principal pressure: higher-cost supplemental funding and lower average interest-earning assets more than offset improved asset yields. Average interest-earning assets fell 13% year over year, and net interest margin declined 17 basis points. Management said client cash realignment continued to slow and expects supplemental funding balances to decrease over time, subject to rates and client behavior.
- Fee growth partly offset that pressure. Asset management fees benefited from higher money market fund balances, market gains, and advice-solution growth. Trading revenue was affected by narrower options spreads, lower equity order-flow revenue, and fewer trading days; daily average trades increased slightly to 5.958 million.
- Cost reductions lowered compensation and occupancy costs, while depreciation and amortization rose 29% due to technology investment and regulatory fees and assessments rose 51%, including a $25 million incremental FDIC special-assessment charge. Headcount was 32,600, down 9% year over year.
- Net income increased 30% and diluted EPS 33% sequentially versus Q4 2023, according to management, reflecting lower interest expense from reduced supplemental funding, stronger markets and client engagement, and cost actions.
- Ameritrade integration: approximately $1.6 trillion in assets across more than 15 million accounts had been transitioned. The final transition group was expected in May 2024; transition-related asset attrition was below the company’s original expectations.
Outlook, risks, contingencies, and unusual items
- Integration and savings: Schwab expects total Ameritrade acquisition and integration costs and capital expenditures of $2.4–$2.5 billion. It expects annualized integration cost synergies of $1.8–$2.0 billion; more than 80% had been achieved on an annualized run-rate basis by March 31, with the remainder expected by year-end 2024 and full-year realization beginning in 2025. Estimates remain subject to change.
- Restructuring and investment: Management expects 2024 capital expenditures of approximately 3%–5% of total net revenue. It reported approximately $500 million of incremental run-rate savings from 2023 streamlining actions and expects approximately $500 million of related exit costs in total; substantially all had been recognized by quarter-end, with remaining costs primarily related to real estate expected during 2024.
- Regulatory developments: The Department of Labor adopted a broadened fiduciary rule in April 2024, generally effective September 23, 2024, with a transition period for certain provisions; Schwab was evaluating its impact. The SEC’s amended Rule 605 order-execution disclosures were not expected to have a material impact. The FDIC may further adjust its special assessment; the $25 million Q1 estimate was subject to revision.
- Rate, funding, and balance-sheet risks: Results remain sensitive to interest rates, client cash allocations, deposit pricing, asset yields, and the availability and cost of supplemental funding. The filing reports $39.1 billion of brokered CDs outstanding, generally maturing from April 2024 through April 2025, and $7.7 billion of repurchase agreements maturing April through December 2024.
- Securities and capital sensitivity: Available-for-sale securities had $8.541 billion of gross unrealized losses at quarter-end; securities transferred to held-to-maturity included $11.0 billion of remaining after-tax unamortized losses in AOCI. A proposed banking capital rule could require AOCI inclusion in regulatory capital; its final form and impact were uncertain.
- Legal matters: The company disclosed the Corrente antitrust litigation relating to the Ameritrade acquisition and the Ford order-routing litigation. Schwab is contesting the claims and generally could not estimate potential liability at this stage.
- Other unusual items: Q1 2024 bank deposit account fee comparisons were affected by $97 million of breakage fees recorded in Q1 2023. Q1 2024 adjusted results exclude acquisition and integration costs, acquired-intangible amortization, and restructuring costs; adjusted measures are non-GAAP.
- No material changes to the risk factors from the 2023 Form 10-K were reported. Management stated disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether client cash movements and deposit balances continue to stabilize, allowing repayment of higher-cost supplemental funding and recovery in net interest margin.
- Completion and client impact of the May 2024 Ameritrade transition, actual integration costs, and delivery of remaining synergies.
- Subsequent changes to FDIC special-assessment estimates and the operational and financial impact of the new fiduciary rule.
- Trends in net new client assets, client cash as a share of assets, brokerage activity, and fee-bearing asset growth.
- Liquidity and capital effects of securities valuation losses, upcoming funding maturities, and any final regulatory capital requirements addressing AOCI.
- Developments in the disclosed litigation and any changes in the company’s ability to estimate or reserve for potential losses.