Business context and reporting period
The Charles Schwab Corporation provides brokerage, banking, wealth management, asset management, custody and advisory services through Investor Services and Advisor Services. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2020; comparisons are with the corresponding 2019 periods unless noted. Results unfolded amid the COVID-19 pandemic, near-zero U.S. interest rates and elevated client activity.
Financial and operating performance
| Metric | Second quarter 2020 | First half 2020 |
|---|---|---|
| Total net revenue | $2.450 billion, down 9% | $5.067 billion, down 6% |
| Net income | $671 million, down 28% | $1.466 billion, down 23% |
| Diluted EPS | $0.48, down 27% | $1.07, down 21% |
| Pre-tax margin | 36.2%, versus 46.1% | 38.2%, versus 46.3% |
| Net interest revenue | $1.389 billion, down 14% | $2.961 billion, down 10% |
| Expenses excluding interest | $1.562 billion, up 8% | $3.132 billion, up 8% |
| Adjusted expenses (non-GAAP) | $1.469 billion | $2.996 billion |
| Adjusted diluted EPS (non-GAAP) | $0.54 | $1.14 |
- Lower investment yields following Federal Reserve rate cuts drove revenue pressure. Net interest margin was 1.53% in Q2 and 1.80% in the first half, versus 2.40% and 2.43%, respectively, a year earlier.
- Asset management and administration fees rose 2% in Q2 to $801 million and 6% in the first half to $1.628 billion. Trading revenue fell 7% and 10%, respectively, as the 2019 commission cuts outweighed sharply higher trading volumes. Daily average trades rose 126% in Q2 and 112% in the first half.
- Client assets were $4.11 trillion at quarter-end, up 11% year over year. Q2 net new client assets were $137.4 billion, including $79.9 billion from USAA-IMCO and $10.9 billion from a mutual-fund clearing client; core net new assets were $46.6 billion. First-half core net new assets were $119.8 billion, a 6% annualized organic growth rate.
- Cash flow for the six months: operating activities used $6.325 billion, investing activities used $77.445 billion and financing activities provided $84.506 billion. Cash and cash equivalents, including restricted amounts, increased $736 million. Major drivers included $101.667 billion of AFS securities purchases and an $81.472 billion increase in bank deposits.
- At June 30, total assets were $400.484 billion, versus $294.005 billion at year-end 2019; total liabilities were $369.669 billion and stockholders’ equity was $30.815 billion. Bank deposits were $301.566 billion. Long-term debt carrying value was $8.526 billion; senior notes had $8.581 billion par outstanding.
- Liquidity and capital: the average Q2 liquidity coverage ratio was 112%, above the 85% requirement. The consolidated Tier 1 Leverage Ratio was 5.9%, down from 7.3% at year-end and below management’s 6.75%–7.00% operating objective, but above the 4.00% regulatory minimum. The company reported that it and its banking subsidiaries met applicable capital requirements.
Material changes, outlook and risks
- Schwab completed the $1.6 billion cash acquisition of USAA-IMCO on May 26, adding approximately 1.1 million accounts and $80 billion in client assets, plus an exclusive long-term referral agreement. It also completed the Motif technology and intellectual-property acquisition. Wasmer, Schroeder & Company was acquired on July 1, after quarter-end.
- The TD Ameritrade transaction remained pending. The Department of Justice completed its antitrust review and both companies’ shareholders approved the deal; management said it remained on track to close in the second half of 2020, subject to closing conditions. The all-stock transaction was valued at approximately $26 billion at the reference price cited in the filing.
- Management expected 2020 capital expenditures, excluding potential TD Ameritrade acquisition impacts, to be approximately 5%–6% of total net revenue. The filing gives no specific revenue or earnings guidance.
- Management cited ongoing rate-driven net interest margin compression, potential money-market fund fee waivers, the timing of investing excess Federal Reserve reserves, client cash allocation and LIBOR transition as factors affecting future results. Excess reserves were $27.5 billion, or 9% of deposits, above the company’s 5%–7% longer-term objective.
- COVID-19 risks include prolonged low rates, market and credit volatility, possible higher mortgage and HELOC delinquencies, operational pressures from remote work and high client engagement, and impacts on fee revenue. The filing says client service response and processing times had increased in some areas.
- Acquisition and integration costs were $81 million in Q2 and $118 million in the first half; adjusted expense and EPS measures exclude specified acquisition costs and acquired-intangible amortization and are non-GAAP. AFS securities were $281.216 billion at fair value; unrealized gains contributed to AOCI of $5.611 billion. Management reported no AFS credit-loss expense in the first half.
- Legal matters include a pending Delaware fiduciary-duty lawsuit related to the TD Ameritrade deal and an order-routing class action. The company contests the claims and said it could not reasonably estimate potential liability for the described matters.
Important facts for investors to verify
- Whether the expected TD Ameritrade closing occurred on schedule, and the final transaction terms, regulatory conditions and integration costs.
- How net interest margin, revenue and excess reserves respond to sustained low rates and changes in client cash balances.
- Whether core asset growth, client retention and trading activity remain strong after separating acquisition-related inflows from organic growth.
- Progress toward the Tier 1 Leverage Ratio operating objective, and any implications for capital distributions or share repurchases; no program repurchases occurred in Q2.
- Credit performance of residential mortgages and HELOCs, exposure to pandemic-related stress, and the status or potential costs of significant litigation and regulatory matters.