Charles Schwab Corporation — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021. The filing is unaudited. Schwab provides brokerage, banking, wealth management, custody, and advisory services through Investor Services and Advisor Services. Results include TD Ameritrade from its October 6, 2020 acquisition, so year-over-year comparisons are substantially affected by the acquisition.
Financial performance and key metrics
| Metric | Q1 2021 | Q1 2020 or comparison |
|---|---|---|
| Total net revenues | $4.715 billion | $2.617 billion; up 80% |
| Net interest revenue | $1.911 billion | $1.572 billion; up 22% |
| Asset management and administration fees | $1.016 billion | $827 million; up 23% |
| Trading revenue | $1.216 billion | $188 million |
| Expenses excluding interest | $2.755 billion | $1.570 billion; up 75% |
| Income before taxes | $1.960 billion | $1.047 billion |
| Net income | $1.484 billion | $795 million; up 87% |
| Diluted EPS | $0.73 | $0.58; up 26% |
| Adjusted diluted EPS (non-GAAP) | $0.84 | $0.61 |
| Pre-tax profit margin | 41.6% | 40.0% |
| Net interest margin | 1.48% | 2.14% |
| Average return on common equity | 12% | 14% |
TD Ameritrade contributed $2.2 billion of revenue, including $548 million of net interest revenue and $980 million of trading revenue. Adjusted total expenses were $2.482 billion, excluding acquisition and integration costs and acquired-intangible amortization; adjusted measures are non-GAAP.
- Client activity: Net new client assets were $133.8 billion, including a $14.4 billion outflow from a mutual fund clearing client; core net new assets were $148.2 billion. Quarter-end client assets were $7.069 trillion, up 102% year over year. Clients opened 3.153 million brokerage accounts, and daily average trades were 8.4 million.
- Cash flow: Operating cash flow was a net use of $4.742 billion, compared with $10.118 billion provided in Q1 2020. The filing reports a $10.290 billion increase in brokerage-client receivables and a $2.862 billion decrease in brokerage-client payables, partly offset by changes in segregated investments and noncash adjustments. Investing cash flow was a net use of $13.158 billion; financing cash flow provided $20.779 billion. Cash and cash equivalents, including restricted amounts, ended the quarter at $73.439 billion.
- Balance sheet and funding: Total assets were $563.457 billion, up from $549.009 billion at year-end 2020. Bank deposits were $369.898 billion; brokerage-client payables were $101.339 billion. Long-term debt was $17.698 billion and short-term borrowings were $2.500 billion. Stockholders’ equity was $55.594 billion.
- Capital and liquidity: The consolidated Tier 1 Leverage Ratio was 6.4%, compared with 6.3% at year-end, below management’s 6.75%–7.00% operating objective but above regulatory minimums. The average daily liquidity coverage ratio was 107%; Schwab reported compliance with the then-applicable 85% requirement.
- Comprehensive income: Comprehensive loss was $3.032 billion, despite net income of $1.484 billion, primarily reflecting a $4.516 billion after-tax decline in unrealized gains on available-for-sale securities.
Material changes versus the comparable period
- Reported revenue and expenses rose sharply, largely because Q1 2021 included TD Ameritrade, which was not consolidated in Q1 2020. The acquisition also increased weighted-average diluted shares, limiting EPS growth relative to net-income growth.
- Trading revenue rose substantially with heightened client trading and the acquired business. Management said daily average trades increased 45% from Q4 2020.
- Net interest revenue increased, but net interest margin declined to 1.48% from 2.14%, reflecting low short-term rates, lower asset yields, and accelerated mortgage-backed-security premium amortization.
- Common stockholders’ equity returns declined year over year, while non-GAAP return on tangible common equity rose to 24% from 16%, primarily due to higher net income.
- Available-for-sale securities’ unrealized gains fell during the quarter, reducing accumulated other comprehensive income to $878 million from $5.394 billion at year-end.
Outlook, management commentary, and risks
- TD Ameritrade integration: Client conversion is expected within 30–36 months of the October 2020 acquisition. Schwab expects total acquisition and integration-related costs and capital expenditures of $2.0–$2.2 billion, and annualized cost synergies of $1.8–$2.0 billion over the integration period. Management expects one-quarter to one-third of synergies, on an annualized run-rate basis, by the end of the first year after acquisition. Costs, timing, and synergies remain estimates and may change.
- Spending: Full-year 2021 capital expenditures are expected to be approximately 6%–7% of total net revenues. Estimated total TD Ameritrade integration exit and other related costs are $650 million–$1 billion.
- Client service: Schwab said extraordinary client activity affected service levels at times. It expanded self-service capabilities, adjusted call routing, and increased client service professionals by 10% since year-end 2020; management reported improvement by quarter-end.
- Interest-rate sensitivity: A modeled gradual 100-basis-point rate increase would raise next-12-month net interest revenue by 14.2%; a 100-basis-point decline would reduce it by 4.2%. These are model estimates, not forecasts, and depend on assumptions and balance-sheet conditions.
- Liquidity regulation: Daily LCR and NSFR reporting to the Federal Reserve was scheduled to begin July 1, 2021; the full 100% LCR and NSFR requirements were scheduled to apply October 1, 2021.
- IDA balances: Schwab expected to move uninsured balances out of the TD deposit sweep program on June 30, 2021. From July 1, it could elect to migrate up to $10 billion of eligible balances every 12 months, subject to restrictions and capital availability. The agreement also requires a minimum $50 billion IDA balance through June 2031.
- Contingencies and risks: The filing discusses order-routing lawsuits, acquisition-related litigation, and other regulatory and legal matters. Schwab contests the claims; it generally could not estimate potential losses for the described matters. Other risks include integration execution and costs, market and interest-rate changes, client cash levels, competition, liquidity and capital requirements, COVID-19 impacts, and LIBOR transition.
- Other developments: Schwab’s Financial Holding Company election became effective March 16, 2021, permitting certain additional financial activities, subject to ongoing eligibility requirements. The filing reported no material changes to the company’s previously disclosed risk factors.
Important facts for investors to verify
- How much reported growth reflects TD Ameritrade consolidation versus underlying organic growth, and whether planned integration synergies are achieved against expected costs and timing.
- Whether trading activity and trading revenue remain elevated, and how service capacity and client experience develop as activity changes.
- How low rates, asset yields, mortgage prepayments, and client cash allocations affect net interest margin and money market fund fee waivers.
- Whether operating cash flow normalizes after the quarter’s large client-balance movements, and how balance-sheet growth affects capital ratios and the 6.75%–7.00% leverage objective.
- The effect of IDA balance changes and any migration to Schwab’s balance sheet on funding, liquidity, and capital requirements, including the transition to full LCR and NSFR rules.
- Developments in pending litigation and regulatory matters, for which potential loss estimates are generally not available in the filing.
- The distinction between GAAP results and non-GAAP adjusted figures, and the impact of unrealized securities marks on comprehensive income and equity.