Charles Schwab Corporation — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. Schwab provides brokerage, wealth management, banking, asset management, custody, and advisory services through Investor Services and Advisor Services. The results include TD Ameritrade from its October 6, 2020 acquisition date, so year-over-year comparisons are materially affected by the acquisition.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Total net revenue | $4.57B | $2.45B | $13.81B | $7.52B |
| Net income | $1.53B | $698M | $4.28B | $2.16B |
| Diluted EPS | $0.74 | $0.48 | $2.06 | $1.54 |
| Adjusted diluted EPS (non-GAAP) | $0.84 | $0.51 | $2.39 | $1.66 |
| Pre-tax profit margin | 44.0% | 36.3% | 41.2% | 37.6% |
| Net interest revenue | $2.03B | $1.34B | $5.89B | $4.30B |
| Expenses excluding interest | $2.56B | $1.56B | $8.12B | $4.69B |
- Revenue increased 87% in Q3 and 84% year to date; net income rose 119% and 98%, respectively. Growth chiefly reflects TD Ameritrade’s inclusion, alongside client-asset growth and elevated trading activity.
- Q3 revenue included $964M trading revenue, $1.10B asset management and administration fees, and $323M bank deposit account fees. Year-to-date trading revenue was $3.14B and bank deposit account fees were $1.01B.
- Expenses rose faster than revenue in absolute terms, primarily from the acquired business, increased staffing and integration costs. Non-GAAP adjusted expenses were $2.30B in Q3 and $7.29B year to date; these exclude acquisition and integration costs and acquired-intangible amortization.
- Q3 net interest margin was 1.45%, versus 1.38% a year earlier; the nine-month margin was 1.46%, versus 1.64%. Lower asset yields weighed on the year-to-date comparison.
Balance sheet, cash flow, and capital
- At September 30, total assets were $607.5B, up 11% from year-end 2020. Client assets were $7.61T; client cash was 10.8% of client assets, down from 12.8% a year earlier.
- Bank deposits were $395.3B and brokerage-client payables were $113.1B. Short-term borrowings were $3.0B and long-term debt was $19.5B, for $22.5B combined, compared with $13.6B of long-term debt and no short-term borrowings at December 31, 2020.
- Cash flow for the first nine months: operating activities used $3.52B, investing activities used $53.97B, and financing activities provided $47.03B. Cash and cash equivalents, including restricted amounts, decreased $10.46B. Investing outflows largely reflected purchases of investment securities and growth in bank loans; these cash flows should be considered in the context of the balance-sheet activities of a financial institution.
- The consolidated Tier 1 Leverage Ratio was 6.3%, unchanged from year-end and below management’s 6.75%–7.00% long-term operating objective, but above the regulatory minimum. The company and its banking subsidiaries were reported as well capitalized.
- Average daily LCR was 109% for Q3, and Schwab complied with the then-applicable 85% requirement. The full 100% LCR and NSFR requirements took effect October 1, 2021.
- Available-for-sale securities were $377.0B. Nine-month other comprehensive loss, net of tax, was $4.14B, primarily reflecting a decline in unrealized gains on these securities.
Changes, outlook, and risks
- Client assets increased 73% year over year to $7.61T; active brokerage accounts rose 127% to 32.7M. Schwab reported 1.18M new brokerage accounts in Q3 and $139B of Q3 core net new assets. Daily average trades were 5.55M, down 8% from Q2.
- Management expected TD Ameritrade client conversion within 30–36 months of the October 2020 acquisition. It estimated total acquisition and integration-related costs and capital expenditures of $2.0B–$2.2B, and annualized cost synergies of $1.8B–$2.0B; approximately 40% of the targeted synergies had been achieved on an annualized run-rate basis by Q3. Timing and estimates remain subject to change.
- Estimated TD Ameritrade integration exit and other related costs were $650M–$1.0B. Full-year 2021 capital expenditures were expected to be approximately 5%–6% of total net revenue.
- Q3 and nine-month results included $104M and $367M of acquisition and integration-related costs, respectively, plus acquired-intangible amortization of $153M and $461M. A roughly $200M non-deductible charge for a regulatory matter was recorded in the first nine months, reducing earnings and affecting the effective tax rate. Schwab said it had reached a tentative agreement with SEC staff concerning historic disclosures for Schwab Intelligent Portfolios; final resolution remained subject to Commission approval.
- Interest-rate sensitivity modeling estimated that a gradual 100-basis-point increase would raise net interest revenue over the following 12 months by 13.6%, while a 100-basis-point decrease would lower it by 4.0%, assuming the balance-sheet structure remained unchanged. Actual outcomes depend on rates, asset repricing, client cash behavior, and prepayments.
- Other disclosed exposures include ongoing TD Ameritrade integration and technology demands, money-market fee waivers, migration of insured deposit account balances under contractual limits, liquidity and capital requirements, and litigation and regulatory proceedings. Management said no material changes had occurred to the risk factors in its 2020 Form 10-K.
Important facts for investors to verify
- How much reported growth reflects TD Ameritrade versus organic client and asset growth, and whether announced integration synergies are being realized as planned.
- Progress on client conversion, total integration spending, capital expenditures, and the range and timing of expected exit costs.
- Net interest margin trends, the sensitivity of earnings to interest rates and prepayments, and the effect of money-market fee waivers.
- Capital and liquidity headroom as the full LCR and NSFR requirements apply and Schwab continues migrating eligible deposit balances onto its balance sheet.
- Final SEC resolution and potential outcomes of other legal or regulatory matters; the filing says potential liability for certain proceedings cannot be reasonably estimated.