SCHWAB CHARLES CORP
10-Qs and 10-Ks
PROXIES
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
10-Q
|
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
||||
For the quarterly period ended
March 31, 2022
or
|
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
||||
For the transition period from ________ to ________
Commission File Number:
1-9700
THE CHARLES SCHWAB CORPORATION
(Exact name of registrant as specified in its charter)
|
|
|
||||||||||
|
(State or other jurisdiction of incorporation or organization)
|
(I.R.S. Employer Identification No.)
|
||||||||||
(Address of principal executive offices and zip code)
Registrant’s telephone number, including area code: (
817
)
859-5000
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||
|
|
|
|
||||||
|
|
|
|
||||||
|
|
|
|
||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes
☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Non-accelerated filer ☐ Smaller reporting company
☐
Emerging growth company
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
☐
No ☒
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
THE CHARLES SCHWAB CORPORATION
Quarterly Report on Form 10-Q
For the Quarter Ended
March 31, 2022
Index
| Item 1. | ||||||||||||||
| 25-26 | ||||||||||||||
| 27-57 | ||||||||||||||
| Item 2. | 1-19 | |||||||||||||
| Item 3. | ||||||||||||||
| Item 4. | ||||||||||||||
| Item 1. | ||||||||||||||
| Item 1A. | ||||||||||||||
| Item 2. | ||||||||||||||
| Item 3. | ||||||||||||||
| Item 4. | ||||||||||||||
| Item 5. | ||||||||||||||
| Item 6. | ||||||||||||||
Part I – FINANCIAL INFORMATION
THE CHARLES SCHWAB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
INTRODUCTION
The Charles Schwab Corporation (CSC) is a savings and loan holding company. CSC engages, through its subsidiaries (collectively referred to as Schwab or the Company), in wealth management, securities brokerage, banking, asset management, custody, and financial advisory services.
Principal business subsidiaries of CSC include the following:
•
Charles Schwab & Co., Inc. (CS&Co), incorporated in 1971, a securities broker-dealer;
•
TD Ameritrade, Inc., an introducing securities broker-dealer;
•
TD Ameritrade Clearing, Inc. (TDAC), a securities broker-dealer that provides trade execution and clearing services to TD Ameritrade, Inc.;
•
Charles Schwab Bank, SSB (CSB), our principal banking entity; and
•
Charles Schwab Investment Management, Inc. (CSIM), the investment advisor for Schwab’s proprietary mutual funds (Schwab Funds
®
) and for Schwab’s exchange-traded funds (Schwab ETFs
™
).
Unless otherwise indicated, the terms “Schwab,” “the Company,” “we,” “us,” or “our” mean CSC together with its consolidated subsidiaries.
Schwab provides financial services to individuals and institutional clients through two segments – Investor Services and Advisor Services. The Investor Services segment provides retail brokerage, investment advisory, and banking and trust services to individual investors, and retirement plan services, as well as other corporate brokerage services, to businesses and their employees. The Advisor Services segment provides custodial, trading, banking and trust, and support services, as well as retirement business services, to independent registered investment advisors (RIAs), independent retirement advisors, and recordkeepers.
Schwab was founded on the belief that all Americans deserve access to a better investing experience. Although much has changed in the intervening years, our purpose remains clear – to champion every client’s goals with passion and integrity. Guided by this purpose and our vision of creating the most trusted leader in investment services, management has adopted a strategy described as “Through Clients’ Eyes.”
This strategy emphasizes placing clients’ perspectives, needs, and desires at the forefront. Because investing plays a fundamental role in building financial security, we strive to deliver a better investing experience for our clients – individual investors and the people and institutions who serve them – by disrupting longstanding industry practices on their behalf and providing superior service. We also aim to offer a broad range of products and solutions to meet client needs with a focus on transparency, value, and trust. In addition, management works to couple Schwab’s scale and resources with ongoing expense discipline to keep costs low and ensure that products and solutions are affordable as well as responsive to client needs. In combination, these are the key elements of our “no trade-offs” approach to serving investors. We believe that following this strategy is the best way to maximize our market valuation and stockholder returns over time.
Management estimates that investable wealth in the United States (U.S.) (consisting of assets in defined contribution, retail wealth management and brokerage, and registered investment advisor channels, along with bank deposits) currently exceeds $70 trillion, which means the Company’s $7.86 trillion in client assets leaves substantial opportunity for growth. Our strategy is based on the principle that developing trusted relationships will translate into more assets from both new and existing clients, ultimately driving more revenue, and along with expense discipline and thoughtful capital management, will generate earnings growth and build long-term stockholder value.
This Management’s Discussion and Analysis should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended December 31, 2021 (2021 Form 10-K).
On our website,
https://www.aboutschwab.com
, we post the following filings after they are electronically filed with or furnished to the Securities and Exchange Commission (SEC or Commission): annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports filed or furnished pursuant to Section 13(a)
- 1 -
THE CHARLES SCHWAB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)
or 15(d) of the Securities Exchange Act of 1934. In addition, the website also includes the Dodd-Frank stress test results, our regulatory capital disclosures based on Basel III, and our average liquidity coverage ratio (LCR). The SEC maintains a website at
https://www.sec.gov
that contains reports, proxy statements, and other information that we file electronically with them.
FORWARD-LOOKING STATEMENTS
In addition to historical information, this Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act, and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements are identified by words such as “believe,” “anticipate,” “expect,” “intend,” “plan,” “will,” “may,” “estimate,” “appear,” “could,” “would,” “expand,” “aim,” “maintain,” “continue,” “seek,” and other similar expressions. In addition, any statements that refer to expectations, projections, or other characterizations of future events or circumstances are forward-looking statements.
These forward-looking statements, which reflect management’s beliefs, objectives, and expectations as of the date hereof, are estimates based on the best judgment of Schwab’s senior management. These statements relate to, among other things:
•
Maximizing our market valuation and stockholder returns over time; our belief that developing trusted relationships will translate into more client assets which drives revenue and, along with expense discipline and thoughtful capital management, generates earnings growth and builds stockholder value (see Introduction in Part I – Item 2);
•
Capital management; sources of liquidity and capital; Tier 1 Leverage Ratio operating objective (see Overview, Liquidity Risk, and Capital Management);
•
Expected timing for the TD Ameritrade client conversions; cost estimates and timing related to the TD Ameritrade integration, including acquisition and integration-related costs and capital expenditures, cost synergies, and exit and other related costs (see Overview, Exit and Other Related Liabilities in Part I – Item 1 – Financial Information – Notes to Condensed Consolidated Financial Statements (Item 1) – Note 10);
•
Net interest revenue; money market fund fee waivers (see Results of Operations);
•
Capital expenditures (see Results of Operations);
•
The phase-out of the use of LIBOR (see Risk Management);
•
The migration of Insured Deposit Account (IDA) agreement balances to our balance sheet (see Capital Management and Commitments and Contingencies in Item 1 – Note 9);
•
The expected impact of new accounting standards not yet adopted (see New Accounting Standards in Item 1 – Note 2);
•
The likelihood of indemnification and guarantee payment obligations and clients failing to fulfill contractual obligations (see Commitments and Contingencies in Item 1 – Note 9); and
•
The impact of legal proceedings and regulatory matters (see Commitments and Contingencies in Item 1 – Note 9 and Legal Proceedings in Part II – Item 1).
Achievement of the expressed beliefs, objectives, and expectations described in these statements is subject to certain risks and uncertainties that could cause actual results to differ materially from the expressed beliefs, objectives, and expectations. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this Quarterly Report on Form 10-Q or, in the case of documents incorporated by reference, as of the date of those documents.
Important factors that may cause actual results to differ include, but are not limited to:
•
General market conditions, including equity valuations, trading activity, and the level of interest rates;
•
Our ability to attract and retain clients, develop trusted relationships, and grow client assets;
•
Client use of our advisory and lending solutions and other products and services;
•
The level of client assets, including cash balances;
•
Competitive pressure on
pricing, including deposit rates;
•
Client sensitivity to rates;
•
Regulatory guidance;
•
Capital and liquidity needs and management;
•
Our ability to manage expenses;
•
Our ability to attract and retain talent;
•
Our ability to develop and launch new and enhanced products, services, and capabilities, as well as enhance our infrastructure, in a timely and successful manner;
•
Our ability to monetize client assets;
- 2 -
THE CHARLES SCHWAB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)
•
The scope and duration of the COVID-19 pandemic and actions taken by governmental authorities to contain the spread of the virus and the economic impact;
•
Our ability to support client activity levels;
•
The risk that expected cost synergies and other benefits from the TD Ameritrade acquisition may not be fully realized or may take longer to realize than expected and that integration-related expenses may be higher than expected;
•
The timing and scope of integration-related and other technology projects;
•
Re
al estate and workforce decisions;
•
Migrations of bank deposit account balances (BDA balances);
•
Balance sheet positioning relative to changes in interest rates;
•
Prepayment levels for mortgage-backed securities;
•
Client cash allocations;
•
LIBOR trends;
•
Adverse developments in litigation or regulatory matters and any related charges; and
•
Potential breaches of contractual terms for which we have indemnification and guarantee obligations.
Certain of these factors, as well as general risk factors affecting the Company, are discussed in greater detail in Part I – Item 1A – Risk Factors in the 2021 Form 10-K.
- 3 -
THE CHARLES SCHWAB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)
OVERVIEW
Management focuses on several client activity and financial metrics in evaluating Schwab’s financial position and operating performance. Results for the first quarter of 2022 and 2021 are as follows:
|
Three Months Ended
March 31, |
Percent
Change |
||||||||||||||||
| 2022 | 2021 | ||||||||||||||||
| Client Metrics | |||||||||||||||||
|
Net new client assets (in billions)
(1)
|
$ | 120.5 | $ | 133.8 | (10) | % | |||||||||||
| Core net new client assets (in billions) | $ | 120.5 | $ | 148.2 | (19) | % | |||||||||||
| Client assets (in billions, at quarter end) | $ | 7,862.1 | $ | 7,069.1 | 11 | % | |||||||||||
| Average client assets (in billions) | $ | 7,766.4 | $ | 6,952.2 | 12 | % | |||||||||||
| New brokerage accounts (in thousands) | 1,202 | 3,153 | (62) | % | |||||||||||||
| Active brokerage accounts (in thousands, at quarter end) | 33,577 | 31,902 | 5 | % | |||||||||||||
|
Assets receiving ongoing advisory services (in billions,
at quarter end) |
$ | 3,943.5 | $ | 3,493.1 | 13 | % | |||||||||||
| Client cash as a percentage of client assets (at quarter end) | 11.4 | % | 11.5 | % | |||||||||||||
| Company Financial Information and Metrics | |||||||||||||||||
| Total net revenues | $ | 4,672 | $ | 4,715 | (1) | % | |||||||||||
| Total expenses excluding interest | 2,833 | 2,755 | 3 | % | |||||||||||||
| Income before taxes on income | 1,839 | 1,960 | (6) | % | |||||||||||||
| Taxes on income | 437 | 476 | (8) | % | |||||||||||||
| Net income | 1,402 | 1,484 | (6) | % | |||||||||||||
| Preferred stock dividends and other | 124 | 96 | 29 | % | |||||||||||||
| Net income available to common stockholders | $ | 1,278 | $ | 1,388 | (8) | % | |||||||||||
| Earnings per common share — diluted | $ | .67 | $ | .73 | (8) | % | |||||||||||
| Net revenue growth from prior year | (1) | % | 80 | % | |||||||||||||
| Pre-tax profit margin | 39.4 | % | 41.6 | % | |||||||||||||
| Return on average common stockholders’ equity (annualized) | 12 | % | 12 | % | |||||||||||||
|
Expenses excluding interest as a percentage of average client
assets (annualized) |
0.15 | % | 0.16 | % | |||||||||||||
| Consolidated Tier 1 Leverage Ratio (at quarter end) | 6.1 | % | 6.4 | % | |||||||||||||
|
Non-GAAP Financial Measures
(2)
|
|||||||||||||||||
|
Adjusted total expenses
(3)
|
$ | 2,583 | $ | 2,482 | |||||||||||||
| Adjusted diluted EPS | $ | .77 | $ | .84 | |||||||||||||
| Return on tangible common equity | 26 | % | 24 | % | |||||||||||||
(1)
The first quarter of 2021 includes an outflow of $14.4 billion from a mutual fund clearing services client.
(2)
See Non-GAAP Financial Measures for further details and a reconciliation of such measures to GAAP reported results.
(3)
Adjusted total expenses is a non-GAAP financial measure adjusting total expenses excluding interest. See Non-GAAP Financial Measures.
Schwab’s business momentum remained strong during the first quarter of 2022, as we supported clients through a challenging macroeconomic environment that included continued progress against the COVID-19 pandemic, rising inflation, geopolitical turmoil driven by the Russian invasion of Ukraine, the Federal Reserve initiating its first tightening cycle since late 2015, and volatile equity markets that remained below year-end 2021 levels for much of the quarter.
Against this backdrop, client engagement remained strong during the first quarter of 2022, though client trading activity and new brokerage account openings were substantially lower than the extraordinary levels seen in the first quarter of 2021. Clients’ daily average trades (DATs) totaled 6.6 million in the first quarter of 2022, decreasing 22% from 8.4 million seen in the first quarter of the prior year. Clients opened 1.2 million new brokerage accounts in the first quarter of 2022, and core net new assets totaled $120.5 billion, which represents a 6% annualized organic growth rate. We ended the first quarter of 2022 with 33.6 million active brokerage accounts and $7.86 trillion in total client assets, up 5% and 11%, respectively, over year-earlier levels.
- 4 -
THE CHARLES SCHWAB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)
Schwab’s first quarter 2022 financial results reflected the Company’s ongoing success with clients while contending with the effects of a challenging environment. First quarter 2022 net income totaled $1.4 billion, down 6% from the first quarter of 2021, and the Company produced diluted earnings per common share (EPS) of $.67, down 8% from the first quarter of 2021. Adjusted diluted EPS
(1)
, which excludes acquisition and integration-related costs, amortization of acquired intangible assets, and related income tax effects, was $.77, a decrease of 8% from the first quarter of 2021.
Total net revenues were $4.7 billion in the first quarter of 2022, down 1% from the first quarter of 2021, with growth in net interest revenue and asset management and administration fees largely offsetting the effects of decreases in other revenue streams. Net interest revenue totaled $2.2 billion in the first quarter of 2022, increasing 14% over the first quarter of 2021 primarily due to growth in interest-earning assets and some improvement in short-term interest rates. Asset management and administration fees totaled $1.1 billion, increasing 5% from the first quarter of 2021 as a result of growth in advice solutions balances and proprietary mutual funds and ETFs, as well as lower money market fund fee waivers. Growth in net interest revenue and asset management and administration fees was somewhat muted by equity market weakness and volatility, which affected margin loan balances and securities lending activity as well as client asset valuations.
Trading revenue was $963 million in the first quarter of 2022, down 21% from the first quarter of 2021. Client trading activity remained strong as DATs increased 8% from the fourth quarter of 2021, though volume was down significantly from the extraordinary levels seen in the first quarter of 2021. Bank deposit account fee revenues totaled $294 million in the first quarter of 2022, down 16% from the first quarter of 2021. Bank deposit account balances (BDA balances) totaled $154.8 billion at March 31, 2022, down 6% from March 31, 2021 and down 2% from year-end 2021, reflecting migrations to Schwab’s balance sheet in 2021 and the first quarter of 2022 partially offset by growth in client cash balances.
Total expenses excluding interest increased 3% from the first quarter of 2021 to $2.8 billion in the first quarter of 2022, which included $96 million of acquisition and integration-related costs and $154 million of amortization of acquired intangible assets. Exclusive of these items, adjusted total expenses
(1)
were $2.6 billion in the first quarter of 2022, increasing 4% from the first quarter of 2021. These increases in expenses reflect higher compensation and benefits expense as we invest in our people and our ability to support current and ongoing growth in our client base. Return on average common stockholders’ equity remained consistent year-over-year at 12%, while return on tangible common equity
(1)
increased to 26% in the first quarter of 2022 from 24% in the year-earlier period due to lower stockholders’ equity. The decrease in stockholders’ equity was due to a decrease in AOCI as higher market interest rates resulted in larger unrealized losses on our available for sale (AFS) portfolio.
The Company’s priority for capital management remains centered on maintaining flexibility for supporting ongoing growth. Total balance sheet assets increased 2% from year-end 2021, primarily as a result of the migration of $12.7 billion of Insured Deposit Account (IDA) balances onto our balance sheet during the first quarter of the year. To support our capital position for this growth in assets in the first quarter of 2022, we issued $750 million in preferred stock. During the first quarter we also issued $3.0 billion in senior notes primarily for ongoing liquidity purposes. At the end of the first quarter of 2022, Schwab’s Tier 1 Leverage Ratio was 6.1%, down slightly from year-end 2021.
(1)
Adjusted diluted EPS, adjusted total expenses, and return on tangible common equity are non-GAAP financial measures. Please see Non-GAAP Financial Measures for further details and a reconciliation of such measures to GAAP reported results.
Integration of TD Ameritrade
Effective October 6, 2020, the Company completed its acquisition of TD Ameritrade Holding Corporation (TDA Holding) and its consolidated subsidiaries (collectively referred to as “TD Ameritrade” or “TDA”). Integration work continued during the first quarter of 2022. Based on our current integration plans and expanded scope of technology work, the Company continues to expect to complete client conversions across multiple groups within approximately 30 to 36 months from the October 6, 2020 acquisition date, ending in the fourth quarter of 2023. We continue to expect to incur total acquisition and integration-related costs and capital expenditures of between $2.0 billion and $2.2 billion.
The Company’s estimates of the nature, amounts, and timing of recognition of acquisition and integration-related costs remain subject to change based on a number of factors, including the expected duration and complexity of the integration process and the continued uncertainty of the current economic environment. More specifically, factors that could cause variability in our expected acquisition and integration-related costs include the level of employee attrition, workforce redeployment from eliminated positions into open roles, changes in the levels of client activity, as well as increased real estate-related exit cost variability due to effects of the COVID-19 pandemic including changes in remote working trends.
- 5 -
THE CHARLES SCHWAB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)
Acquisition and integration-related costs, which are inclusive of related exit costs, totaled $96 million and $119 million for the first quarters of 2022 and 2021, respectively. Over the course of the integration, we continue to expect to realize annualized cost synergies of between $1.8 billion and $2.0 billion, and, through March 31, 2022, we have achieved over half of this amount on an annualized run-rate basis. Estimated timing and amounts of synergy realization are subject to change as we progress in the integration. Refer to Part II – Item 7 – Overview in our 2021 Form 10-K and Item 1 – Note 10 for additional information regarding our integration of TD Ameritrade.
RESULTS OF OPERATIONS
Total Net Revenues
The following tables present a comparison of revenue by category:
| 2022 | 2021 | ||||||||||||||||||||||||||||
| Three Months Ended March 31, |
Percent
Change |
Amount |
% of
Total Net Revenues |
Amount |
% of
Total Net Revenues |
||||||||||||||||||||||||
| Net interest revenue | |||||||||||||||||||||||||||||
| Interest revenue | 15 | % | $ | 2,319 | 50 | % | $ | 2,015 | 43 | % | |||||||||||||||||||
| Interest expense | 31 | % | (136) | (3) | % | (104) | (2) | % | |||||||||||||||||||||
| Net interest revenue | 14 | % | 2,183 | 47 | % | 1,911 | 41 | % | |||||||||||||||||||||
| Asset management and administration fees | |||||||||||||||||||||||||||||
|
Mutual funds, exchange-traded funds (ETFs), and collective trust
funds (CTFs) |
4 | % | 489 | 10 | % | 470 | 10 | % | |||||||||||||||||||||
| Advice solutions | 6 | % | 496 | 11 | % | 468 | 10 | % | |||||||||||||||||||||
| Other | 6 | % | 83 | 2 | % | 78 | 2 | % | |||||||||||||||||||||
| Asset management and administration fees | 5 | % | 1,068 | 23 | % | 1,016 | 22 | % | |||||||||||||||||||||
| Trading revenue | |||||||||||||||||||||||||||||
| Commissions | (21) | % | 484 | 10 | % | 614 | 13 | % | |||||||||||||||||||||
| Order flow revenue | (20) | % | 470 | 10 | % | 591 | 13 | % | |||||||||||||||||||||
| Principal transactions | (18) | % | 9 | — | 11 | — | |||||||||||||||||||||||
| Trading revenue | (21) | % | 963 | 20 | % | 1,216 | 26 | % | |||||||||||||||||||||
| Bank deposit account fees | (16) | % | 294 | 6 | % | 351 | 7 | % | |||||||||||||||||||||
| Other | (26) | % | 164 | 4 | % | 221 | 4 | % | |||||||||||||||||||||
| Total net revenues | (1) | % | $ | 4,672 | 100 | % | $ | 4,715 | 100 | % | |||||||||||||||||||
Net Interest Revenue
Revenue on interest-earning assets is affected by various factors, such as the composition of assets, prevailing interest rates and spreads at the time of origination or purchase, changes in interest rates on floating-rate securities and loans, and changes in prepayment levels for mortgage-backed and other asset-backed securities and loans.
Interest rates largely remained historically low for much of the first quarter of 2022. Short-term rates remained near zero until the Federal Reserve increased the federal funds target overnight rate by 25 basis points near the end of the quarter, while long-term interest rates steadily increased during the quarter. Schwab continued to see strength in net new client assets and consistent client cash allocation levels throughout the first three months of 2022, which, along with transfers of BDA balances to the Company’s balance sheet (see Bank Deposit Account Fees), drove growth in Schwab’s interest-earning assets. Partially offsetting this growth, equity market volatility and softening investor sentiment during the first quarter of 2022 reduced demand for margin loans, which declined 7% from year-end 2021. In addition, over recent quarters, the Company has increased its cash holdings and reduced the duration of incremental investment securities purchases to provide flexibility to support potential changes in client cash allocations associated with expected higher short-term interest rates. These steps also help keep Schwab positioned to benefit if rates increase further.
- 6 -
THE CHARLES SCHWAB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)
The following table presents net interest revenue information corresponding to interest-earning assets and funding sources on the condensed consolidated balance sheets:
| 2022 | 2021 | ||||||||||||||||||||||||||||||||||
| Three Months Ended March 31, | Average Balance | Interest Revenue/ Expense | Average Yield/Rate | Average Balance | Interest Revenue/ Expense | Average Yield/Rate | |||||||||||||||||||||||||||||
| Interest-earning assets | |||||||||||||||||||||||||||||||||||
| Cash and cash equivalents | $ | 72,465 | $ | 34 | 0.19 | % | $ | 38,898 | $ | 7 | 0.08 | % | |||||||||||||||||||||||
| Cash and investments segregated | 51,913 | 15 | 0.11 | % | 48,149 | 10 | 0.08 | % | |||||||||||||||||||||||||||
| Receivables from brokerage clients | 84,204 | 626 | 2.97 | % | 67,738 | 563 | 3.32 | % | |||||||||||||||||||||||||||
|
Available for sale securities
(1,2)
|
284,526 | 947 | 1.33 | % | 338,245 | 1,091 | 1.29 | % | |||||||||||||||||||||||||||
|
Held to maturity securities
(1,2)
|
103,416 | 378 | 1.46 | % | — | — | — | ||||||||||||||||||||||||||||
| Bank loans | 35,852 | 187 | 2.10 | % | 24,476 | 139 | 2.27 | % | |||||||||||||||||||||||||||
| Total interest-earning assets | 632,376 | 2,187 | 1.38 | % | 517,506 | 1,810 | 1.40 | % | |||||||||||||||||||||||||||
| Securities lending revenue | 129 | 204 | |||||||||||||||||||||||||||||||||
| Other interest revenue | 3 | 1 | |||||||||||||||||||||||||||||||||
| Total interest-earning assets | $ | 632,376 | $ | 2,319 | 1.47 | % | $ | 517,506 | $ | 2,015 | 1.56 | % | |||||||||||||||||||||||
| Funding sources | |||||||||||||||||||||||||||||||||||
| Bank deposits | $ | 452,692 | $ | 16 | 0.01 | % | $ | 363,099 | $ | 13 | 0.01 | % | |||||||||||||||||||||||
| Payables to brokerage clients | 105,929 | 2 | 0.01 | % | 87,339 | 2 | 0.01 | % | |||||||||||||||||||||||||||
|
Short-term borrowings
(3)
|
4,717 | 4 | 0.33 | % | 1,093 | — | 0.22 | % | |||||||||||||||||||||||||||
| Long-term debt | 19,864 | 108 | 2.18 | % | 14,245 | 85 | 2.37 | % | |||||||||||||||||||||||||||
| Total interest-bearing liabilities | 583,202 | 130 | 0.09 | % | 465,776 | 100 | 0.09 | % | |||||||||||||||||||||||||||
|
Non-interest-bearing funding sources
|
49,174 | 51,730 | |||||||||||||||||||||||||||||||||
|
Securities lending expense
|
7 | 5 | |||||||||||||||||||||||||||||||||
|
Other interest expense
|
(1) | (1) | |||||||||||||||||||||||||||||||||
| Total funding sources | $ | 632,376 | $ | 136 | 0.09 | % | $ | 517,506 | $ | 104 | 0.08 | % | |||||||||||||||||||||||
| Net interest revenue | $ | 2,183 | 1.38 | % | $ | 1,911 | 1.48 | % | |||||||||||||||||||||||||||
(2)
In January 2022, the Company transferred a portion of its investment securities designated as available for sale to the held to maturity category, as described in Item 1 – Note 4.
(3)
Interest revenue or expense was less than $500 thousand in the period or periods presented.
Net interest revenue increased $272 million, or 14%, in the first quarter 2022 compared to the same period in 2021. This increase was due to overall growth in interest-earning assets, as well as higher average yields on investment securities as a result of some improvement in market interest rates and lower premium amortization. Net premium amortization of investment securities decreased to $486 million in the first quarter of 2022 from $624 million in the first quarter of 2021. These positive effects were partially offset by lower securities lending revenue and lower average yields in margin and bank lending.
Average interest-earning assets for the first quarter of 2022 were higher by 22% compared to the same period in 2021. This increase was primarily due to growth in bank deposits and payables to brokerage clients, which resulted from strong net new client asset inflows and transfers of BDA balances to our balance sheet in the second half of 2021 and the first quarter of 2022.
Net interest margin decreased to 1.38% during the first quarter of 2022 from 1.48% during the same period in 2021. This decrease was primarily driven by lower securities lending revenue resulting from lower market demand, as well as lower yields received on margin and bank lending which were consistent with yields seen in the fourth quarter of 2021. Partially offsetting these decreases, yields on investment securities improved as a result of higher market interest rates. New issuances of long-term debt since the first quarter of 2021 have been at lower interest rates, thereby increasing interest expense but lowering the average rate, and helping the average yield on funding sources during the first quarter of 2022 to remain relatively consistent with the first quarter of 2021.
- 7 -
THE CHARLES SCHWAB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)
Asset Management and Administration Fees
The following table presents asset management and administration fees, average client assets, and average fee yields:
| Three Months Ended March 31, | 2022 | 2021 | |||||||||||||||||||||||||||||||||
|
Average
Client Assets |
Revenue |
Average
Fee |
Average
Client Assets |
Revenue |
Average
Fee |
||||||||||||||||||||||||||||||
| Schwab money market funds before fee waivers | $ | 144,732 | $ | 102 | 0.29 | % | $ | 169,683 | $ | 122 | 0.29 | % | |||||||||||||||||||||||
| Fee waivers | (54) | (78) | |||||||||||||||||||||||||||||||||
| Schwab money market funds | $ | 144,732 | 48 | 0.13 | % | $ | 169,683 | 44 | 0.11 | % | |||||||||||||||||||||||||
| Schwab equity and bond funds, ETFs, and CTFs | 456,326 | 97 | 0.09 | % | 377,282 | 86 | 0.09 | % | |||||||||||||||||||||||||||
|
Mutual Fund OneSource
®
and other non-transaction fee funds
|
212,641 | 165 | 0.31 | % | 222,455 | 172 | 0.31 | % | |||||||||||||||||||||||||||
| Other third-party mutual funds and ETFs | 872,212 | 179 | 0.08 | % | 849,409 | 168 | 0.08 | % | |||||||||||||||||||||||||||
|
Total mutual funds, ETFs, and CTFs
(1)
|
$ | 1,685,911 | 489 | 0.12 | % | $ | 1,618,829 | 470 | 0.12 | % | |||||||||||||||||||||||||
|
Advice solutions
(1)
|
|||||||||||||||||||||||||||||||||||
| Fee-based | $ | 469,325 | 496 | 0.43 | % | $ | 424,629 | 468 | 0.45 | % | |||||||||||||||||||||||||
| Non-fee-based | 90,335 | — | — | 84,767 | — | — | |||||||||||||||||||||||||||||
| Total advice solutions | $ | 559,660 | 496 | 0.36 | % | $ | 509,396 | 468 | 0.37 | % | |||||||||||||||||||||||||
|
Other balance-based fees
(2)
|
616,679 | 67 | 0.04 | % | 576,562 | 64 | 0.05 | % | |||||||||||||||||||||||||||
|
Other
(3)
|
16 | 14 | |||||||||||||||||||||||||||||||||
| Total asset management and administration fees | $ | 1,068 | $ | 1,016 | |||||||||||||||||||||||||||||||
(1)
Average client assets for advice solutions may also include the asset balances contained in the mutual fund and/or ETF categories listed above.
(2)
Includes various asset-related fees, such as trust fees, 401(k) recordkeeping fees, and mutual fund clearing fees and other service fees.
(3)
Includes miscellaneous service and transaction fees relating to mutual funds and ETFs that are not balance-based.
Asset management and administration fees increased by $52 million, or 5%, in the first quarter of 2022 compared to the same period in 2021.
This increase was due to
growth in advice solutions and proprietary mutual funds and ETFs, as well as lower money market fund fee waivers due to improved portfolio yields during the first three months of 2022. These increases were partially offset by lower balances in money market funds and Mutual Fund OneSource
®
, as well as equity market weakness and volatility during the first quarter of 2022, which negatively impacted client asset valuations. The Company anticipates that money market fund fee waivers will be substantially eliminated following an additional increase to the federal funds target rate of 25 basis points beyond the increase in March.
The following table presents a roll forward of client assets for the Schwab money market funds, Schwab equity and bond funds, exchange-traded funds (ETFs), and collective trust funds (CTFs), and Mutual Fund OneSource
®
and other non-transaction fee (NTF) funds. These funds generated 29% and 30% of the asset management and administration fees earned in the first quarter of 2022 and 2021, respectively:
|
Schwab Money
Market Funds |
Schwab Equity and
Bond Funds, ETFs, and CTFs |
Mutual Fund OneSource
®
and Other NTF funds |
|||||||||||||||||||||||||||||||||
| Three Months Ended March 31, | 2022 | 2021 | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||||||||
| Balance at beginning of period | $ | 146,509 | $ | 176,089 | $ | 454,864 | $ | 341,689 | $ | 234,940 | $ | 223,857 | |||||||||||||||||||||||
| Net inflows (outflows) | (3,420) | (12,522) | 9,461 | 12,805 | (8,556) | (4,688) | |||||||||||||||||||||||||||||
| Net market gains (losses) and other | 16 | 14 | (20,048) | 19,323 | 9,081 | 8,120 | |||||||||||||||||||||||||||||
| Balance at end of period | $ | 143,105 | $ | 163,581 | $ | 444,277 | $ | 373,817 | $ | 235,465 | $ | 227,289 | |||||||||||||||||||||||
Trading Revenue
Trading revenue includes commissions, order flow revenue, and principal transaction revenues. Commissions and order flow revenue are primarily affected by volume and mix of client trades executed. Principal transaction revenue is recognized primarily as a result of accommodating clients’ fixed income trading activity, and includes adjustments to the fair value of securities positions held to facilitate such client trading activity.
- 8 -
THE CHARLES SCHWAB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)
The following table presents trading revenue and related information:
| Three Months Ended March 31, |
Percent
Change |
||||||||||||||||
| 2022 | 2021 | ||||||||||||||||
| Trading revenue | $ | 963 | $ | 1,216 | (21) | % | |||||||||||
| Clients’ daily average trades (DATs) (in thousands) | 6,578 | 8,414 | (22) | % | |||||||||||||
| Number of trading days | 62.0 | 61.0 | 2 | % | |||||||||||||
|
Revenue per trade
(1)
|
$ | 2.36 | $ | 2.37 | — | ||||||||||||
(1)
Revenue per trade is calculated as trading revenue divided by DATs multiplied by the number of trading days.
Trading revenue decreased $253 million in the first quarter of 2022 compared to the same period in 2021, primarily due to lower client trading activity during the first quarter of 2022 relative to the extraordinary trading volume experienced during the first quarter of 2021. This decreased trading activity in the first quarter of 2022 resulted in lower commissions and order flow revenue, which declined 21% and 20%, respectively, relative to the first quarter of 2021.
Bank Deposit Account Fees
The Company earns bank deposit account fee revenue pursuant to the Insured Deposit Account agreement (IDA agreement) with TD Bank USA, National Association and TD Bank, National Association (together, the TD Depository Institutions) and arrangements with other third-party banks.
The following table presents bank deposit account fee revenue, average BDA balances, average net yield, and average balances earning floating- and fixed-rate yields:
| Three Months Ended March 31, | Percent Change | ||||||||||||||||
| 2022 | 2021 | ||||||||||||||||
| Bank deposit account fees | $ | 294 | $ | 351 | (16) | % | |||||||||||
| Average BDA balances | $ | 155,809 | $ | 166,750 | (7) | % | |||||||||||
| Average net yield | 0.75 | % | 0.84 | % | |||||||||||||
| Percentage of average BDA balances designated as: | |||||||||||||||||
| Fixed-rate balances | 77 | % | 79 | % | |||||||||||||
| Floating-rate balances | 23 | % | 21 | % | |||||||||||||
Bank deposit account fees decreased $57 million, or 16%, in the first quarter of 2022 compared with the first quarter of 2021. This decrease was primarily due to lower average BDA balances and lower average net yield. The Company transferred $10.6 billion and $12.7 billion of BDA balances to its balance sheet during the second half of 2021 and first quarter of 2022, respectively. The transfer of these balances to our balance sheet was the primary driver of the decrease in average BDA balances in the first quarter of 2022 compared with the first quarter of 2021.
Transfers of BDA balances to Schwab’s balance sheet result in lower balances upon which bank deposit account fee revenue is earned but provide a source of funding to invest in interest-earning assets to increase net interest revenue. See also Capital Management and Item 1 – Note 9 for discussion of the IDA agreement and the potential to move IDA balances to Schwab’s balance sheet.
Other Revenue
Other revenue includes exchange processing fees, certain service fees, software fees, non-recurring gains, and the provision for credit losses on bank loans. Other revenue decreased $57 million in the first quarter of 2022 compared to the same period in 2021 primarily due to an increase in the provision for credit losses on bank loans and lower exchange processing fees. The provision for credit losses on bank loans increased as a result of higher loan loss factors driven primarily by higher forecasted interest rates during the first quarter of 2022 and growth of the loan portfolio. Exchange processing fees decreased as a result of lower average SEC fee rates and lower trading volume.
- 9 -
THE CHARLES SCHWAB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)
Total Expenses Excluding Interest
The following table shows a comparison of expenses excluding interest:
|
Three Months Ended
March 31, |
Percent
Change |
||||||||||||||||
| 2022 | 2021 | ||||||||||||||||
| Compensation and benefits | |||||||||||||||||
| Salaries and wages | $ | 853 | $ | 776 | 10 | % | |||||||||||
| Incentive compensation | 417 | 409 | 2 | % | |||||||||||||
| Employee benefits and other | 276 | 245 | 13 | % | |||||||||||||
| Total compensation and benefits | $ | 1,546 | $ | 1,430 | 8 | % | |||||||||||
| Professional services | 244 | 226 | 8 | % | |||||||||||||
| Occupancy and equipment | 269 | 237 | 14 | % | |||||||||||||
| Advertising and market development | 102 | 116 | (12) | % | |||||||||||||
| Communications | 144 | 147 | (2) | % | |||||||||||||
| Depreciation and amortization | 150 | 129 | 16 | % | |||||||||||||
| Amortization of acquired intangible assets | 154 | 154 | — | ||||||||||||||
| Regulatory fees and assessments | 68 | 78 | (13) | % | |||||||||||||
| Other | 156 | 238 | (34) | % | |||||||||||||
| Total expenses excluding interest | $ | 2,833 | $ | 2,755 | 3 | % | |||||||||||
| Expenses as a percentage of total net revenues | |||||||||||||||||
| Compensation and benefits | 33 | % | 30 | % | |||||||||||||
| Advertising and market development | 2 | % | 2 | % | |||||||||||||
| Full-time equivalent employees (in thousands) | |||||||||||||||||
| At quarter end | 34.2 | 32.0 | 7 | % | |||||||||||||
| Average | 33.9 | 32.1 | 6 | % | |||||||||||||
Expenses excluding interest
increased by $78 million, or 3%, in the first quarter of 2022 compared to the same period in 2021. Adjusted total expenses, which excludes acquisition and integration-related costs and amortization of acquired intangible assets, increased 4% in the first quarter of 2022 compared to the same period in 2021. See Non-GAAP Financial Measures for further details and a reconciliation of such measures to GAAP reported results.
Total compensation and benefits increased in the first quarter of 2022 compared to the same period in 2021, primarily due to growth in employee headcount to support our expanding client base, annual merit increases, as well as a 5% employee salary increase and other targeted compensation adjustments that went into effect in late 2021. Compensation and benefits in the first quarter of 2022 included $56 million of acquisition and integration-related costs, down from $72 million in the first quarter of 2021.
Professional services expense increased in the first quarter of 2022 compared to the same period in 2021, primarily due to increased utilization of technology-related and other professional services to support overall growth of the business and enhancement to technological infrastructure to support our expanding client base, as well as the integration of TD Ameritrade. Professional services included acquisition and integration-related costs of $31 million and $27 million in the first quarter of 2022 and 2021, respectively.
Occupancy and equipment expense increased in the first quarter of 2022 compared to the same period in 2021, primarily due to an increase in software maintenance and licensing as well as other technology equipment costs to support growth of the business and the integration of TD Ameritrade. Occupancy and equipment included $4 million and $16 million of acquisition and integration-related costs in the first quarter of 2022 and 2021, respectively.
Advertising and market development expense decreased in the first quarter of 2022 compared to the same period in 2021, primarily due to decreases in spending for marketing communications for TD Ameritrade.
Communications expense decreased slightly in the first quarter of 2022 compared to the same period in 2021, primarily due to lower news and quotation services expenses, driven by lower trade volumes, as well as lower telecommunications spending.
- 10 -
THE CHARLES SCHWAB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)
Depreciation and amortization expense increased in the first quarter of 2022 compared to the same period in 2021, primarily as a result of higher amortization of purchased and internally developed software and higher depreciation of hardware, driven by capital expenditures in 2021 and the first quarter of 2022 to support the TDA integration and enhance our technological infrastructure to support growth of the business.
Regulatory fees and assessments decreased in the first quarter of 2022 compared to the same period in 2021, primarily as a result of lower client trading activity, partially offset by higher FDIC assessments and other regulatory assessments due to asset growth and overall growth of the business.
Other expense decreased in the first quarter of 2022 compared to the same period in 2021, primarily due to lower exchange processing fees, brokerage clearing fees, and lower charges for trade errors and bad debt expense. These decreases were due to lower client trading volume and, for exchange processing fees, lower average SEC fee rates.
Capital expenditures were $209 million in both the first quarter of 2022 and 2021, with spending in both periods primarily related to TDA integration and to enhance our technological infrastructure to support greater capacity for our expanding client base. We continue to anticipate capital expenditures for full-year 2022 will be approximately 4-5% of total net revenues.
Taxes on Income
Taxes on income were $437 million and $476 million for the first quarters of 2022 and 2021, respectively, resulting in effective income tax rates on income before taxes of 23.8% and 24.3%, respectively. The decrease in the effective tax rate in the first quarter of 2022 compared to the same period in 2021 was primarily due to the impact of blended state tax rate changes on the Company’s deferred taxes and a decrease in state tax expense due to uncertain tax position accruals during the first quarter of 2022.
Segment Information
Financial information for our segments is presented in the following tables:
| Investor Services | Advisor Services | Total | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Three Months Ended March 31, | Percent Change | 2022 | 2021 | Percent Change | 2022 | 2021 | Percent Change | 2022 | 2021 | ||||||||||||||||||||||||||||||||||||||||||||
| Net Revenues | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net interest revenue | 8 | % | $ | 1,574 | $ | 1,454 | 33 | % | $ | 609 | $ | 457 | 14 | % | $ | 2,183 | $ | 1,911 | |||||||||||||||||||||||||||||||||||
| Asset management and administration fees | 5 | % | 781 | 742 | 5 | % | 287 | 274 | 5 | % | 1,068 | 1,016 | |||||||||||||||||||||||||||||||||||||||||
| Trading revenue | (23) | % | 844 | 1,097 | — | 119 | 119 | (21) | % | 963 | 1,216 | ||||||||||||||||||||||||||||||||||||||||||
| Bank deposit account fees | (21) | % | 200 | 254 | (3) | % | 94 | 97 | (16) | % | 294 | 351 | |||||||||||||||||||||||||||||||||||||||||
| Other | (29) | % | 127 | 178 | (14) | % | 37 | 43 | (26) | % | 164 | 221 | |||||||||||||||||||||||||||||||||||||||||
| Total net revenues | (5) | % | 3,526 | 3,725 | 16 | % | 1,146 | 990 | (1) | % | 4,672 | 4,715 | |||||||||||||||||||||||||||||||||||||||||
| Expenses Excluding Interest | 1 | % | 2,131 | 2,109 | 9 | % | 702 | 646 | 3 | % | 2,833 | 2,755 | |||||||||||||||||||||||||||||||||||||||||
| Income before taxes on income | (14) | % | $ | 1,395 | $ | 1,616 | 29 | % | $ | 444 | $ | 344 | (6) | % | $ | 1,839 | $ | 1,960 | |||||||||||||||||||||||||||||||||||
|
Net New Client Assets (in billions)
(1)
|
(16) | % | $ | 54.6 | $ | 65.1 | (4) | % | $ | 65.9 | $ | 68.7 | (10) | % | $ | 120.5 | $ | 133.8 | |||||||||||||||||||||||||||||||||||
(1)
In the first quarter of 2021, Investor Services includes an outflow of $14.4 billion from a mutual fund clearing services client.
Segment Net Revenues
Investor Services total net revenues decreased by 5% in the first quarter of 2022 compared to the same quarter in 2021, while Advisor Services total net revenues increased by 16% in the first quarter of 2022 compared to the same quarter in 2021. Net interest revenue increased for both segments due to overall growth in interest-earning assets and higher average yields on investment securities, partially offset by lower securities lending revenue in Investor Services and lower average yields on margin and bank lending in both segments. Asset management and administration fees increased in Investor Services primarily due to growth in advice solutions, while both segments benefited from growth in proprietary mutual funds and ETFs, and lower money market fund fee waivers. Trading revenue decreased for Investor Services primarily as a result of reduced client trading activity, while Advisor Services trading revenue remained consistent in the first quarter of 2022 compared to the same quarter in 2021. Bank deposit account fee revenue decreased for Investor Services, and to a lesser degree Advisor Services, primarily as a result of migrating BDA balances to Schwab’s balance sheet during the second half of 2021 and the first quarter of 2022, and
- 11 -
THE CHARLES SCHWAB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)
lower average net yield. Declines in other revenue for both segments were primarily due to an increase in the provision for credit losses on bank loans and lower exchange processing fees in the first quarter of 2022 compared to the same quarter in 2021.
Segment Expenses Excluding Interest
Investor Services and Advisor Services total expenses excluding interest increased by 1% and 9%, respectively, in the first quarter of 2022 compared to the same period in 2021. These increases were primarily a result of higher compensation and benefits expenses in both segments due to additional increases in headcount to support our expanding client base, annual merit increases, as well as a 5% employee salary increase and other targeted compensation adjustments that went into effect in late 2021. In addition, both segments saw higher occupancy and equipment expenses in the first quarter of 2022 compared to the same period in 2021, primarily due to an increase in software maintenance and licensing as well as other technology equipment costs to support growth of the business and the integration of TD Ameritrade. These increases were partially offset by decreases of other expenses in both segments, primarily due to lower exchange processing fees, brokerage clearing fees, and lower charges for trade errors and bad debt expense. These decreases were due to lower client trading volume and, for exchange processing fees, lower average SEC fee rates.
RISK MANAGEMENT
Schwab’s business activities expose it to a variety of risks, including operational, compliance, credit, market, and liquidity risks. The Company has a comprehensive risk management program to identify and manage these risks and their associated potential for financial and reputational impact.
As part of our on-going integration of TD Ameritrade, the Company has aligned TD Ameritrade’s risk management practices with Schwab’s risk appetite. Our integration work included evaluating new or changed risks impacting the combined company, and taking action through various means. Though integration work continues, the Company’s operations, inclusive of TD Ameritrade, remain consistent with our Enterprise Risk Management (ERM) framework.
For a discussion of our risk management programs, see Part II – Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Risk Management in the 2021 Form 10-K.
Interest Rate Risk Simulations
Net Interest Revenue Simulation
For our net interest revenue sensitivity analysis, we use net interest revenue simulation modeling techniques to evaluate and manage the effect of changing interest rates. The simulations include all balance sheet interest rate-sensitive assets and liabilities. Key assumptions include the projection of interest rate scenarios with rate floors, prepayment speeds of mortgage-related investments, repricing of financial instruments, and reinvestment of matured or paid-down securities and loans.
Net interest revenue is affected by various factors, such as the distribution and composition of interest-earning assets and interest-bearing liabilities, the spread between yields earned on interest-earning assets and rates paid on interest-bearing liabilities, which may reprice at different times or by different amounts, and the spread between short- and long-term interest rates. Interest-earning assets include investment securities, margin loans, and bank loans. These assets are sensitive to changes in interest rates and changes in prepayment levels that tend to increase in a declining rate environment and decrease in a rising rate environment. Because we establish the rates paid on certain brokerage client cash balances and bank deposits and the rates charged on certain margin and bank loans, and control the composition of our investment securities, we have some ability to manage our net interest spread, depending on competitive factors and market conditions.
Net interest revenue sensitivity analysis assumes the asset and liability structure of the consolidated balance sheet would not be changed as a result of the simulated changes in interest rates. As we actively manage the consolidated balance sheet and interest rate exposure, in all likelihood we would take steps to manage additional interest rate exposure that could result from changes in the interest rate environment.
- 12 -
THE CHARLES SCHWAB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)
The following table shows the simulated change to net interest revenue over the next 12 months beginning March 31, 2022 and December 31, 2021 of a gradual 100 basis point increase or decrease in market interest rates relative to prevailing market rates at the end of each reporting period:
| March 31, 2022 | December 31, 2021 | ||||||||||
| Increase of 100 basis points | 12.0 | % | 14.1 | % | |||||||
| Decrease of 100 basis points | (8.0) | % | (4.5) | % | |||||||
The Company’s simulated increase of 100 basis points in market interest rates had a lower impact on net interest revenue as of March 31, 2022 compared to December 31, 2021 primarily due to an increase in the Company’s projected repricing of client deposit rates across higher market interest rate scenarios and decreased sensitivity to prepayments on the Company’s mortgage-backed investment securities. This was partially offset as a result of higher cash and segregated cash and investments balances at March 31, 2022 relative to year-end. A simulated decrease of 100 basis points in market interest rates had a larger impact on net interest revenue as of March 31, 2022 compared to December 31, 2021 primarily as a result of holding a higher allocation of floating-rate assets.
Higher short-term interest rates would positively impact net interest revenue as yields on interest-earning assets are expected to rise faster than the cost of funding sources. A decline in interest rates could negatively impact the yield on the Company’s investment and loan portfolio to a greater degree than any offsetting reduction in interest expense from funding sources, compressing net interest margin.
In addition to measuring the effect of a gradual 100 basis point parallel increase or decrease in current interest rates, we regularly simulate the effects of larger parallel- and non-parallel shifts in interest rates on net interest revenue.
Bank Deposit Account Fees Simulation
Consistent with the presentation on the consolidated statement of income, the sensitivity of bank deposit account fee revenue to interest rate changes is assessed separately from the net interest revenue simulation described above. As of March 31, 2022 and December 31, 2021, simulated changes in bank deposit account fee revenue from gradual 100 basis point changes in market interest rates relative to prevailing market rates did not have a significant impact on the Company’s total net revenues.
Economic Value of Equity Simulation
Management also uses economic value of equity (EVE) simulations to measure interest rate risk. EVE sensitivity measures the long-term impact of interest rate changes on the net present value of assets and liabilities. EVE is calculated by subjecting the balance sheet to hypothetical instantaneous shifts in the level of interest rates. This analysis is highly dependent upon asset and liability assumptions based on historical behaviors as well as our expectations of the economic environment. Key assumptions in our EVE calculation include projection of interest rate scenarios with rate floors, prepayment speeds of mortgage-related investments, term structure models of interest rates, non-maturity deposit behavior, and pricing assumptions. Our net interest revenue, bank deposit account fee revenue, and EVE simulations reflect the assumption of non-negative investment yields.
Phase-out of LIBOR
The Company has made significant progress to prepare for the phasing-out of LIBOR, as described in Part II – Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Risk Management in the 2021 Form 10-K, and additional transition efforts to prepare for the phasing-out of LIBOR are ongoing.
On March 15, 2022, President Biden signed the Consolidated Appropriations Act of 2022 into law, which includes the Adjustable Interest Rate (LIBOR) Act, containing legislation related to the transition away from LIBOR. This legislation is intended to establish a uniform process for replacing LIBOR in existing contracts and securities that continue after the cessation of LIBOR and do not contain clearly defined or practicable fallback provisions. The Company believes this legislation helps provide clarity for the transition of our legacy LIBOR contracts, including investment securities, loans, and preferred stock, to alternative reference rates in an orderly manner.
- 13 -
THE CHARLES SCHWAB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)
Liquidity Risk
Liquidity risk is the potential that Schwab will be unable to sell assets or meet cash flow obligations when they come due without incurring unacceptable losses. We have established liquidity policies to support the successful execution of business strategies, while ensuring ongoing and sufficient liquidity to meet operational needs and satisfy applicable regulatory requirements under both normal and stressed conditions. We employ a variety of methodologies to monitor and manage liquidity, which are described below and in greater detail in Part II – Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Risk Management – Liquidity Risk in our 2021 10-K.
Funding Sources
Schwab’s primary source of funds is cash generated by client activity which includes bank deposits and cash balances in client brokerage accounts. These funds are used to purchase investment securities and extend loans to clients.
Other sources of funds may include cash flows from operations, maturities and sales of investment securities, repayments on loans, securities lending of assets held in client brokerage accounts, repurchase agreements, and cash provided by external financing.
To meet daily funding needs, we maintain liquidity in the form of overnight cash deposits and short-term investments. For unanticipated liquidity needs, we also maintain a buffer of highly liquid investments, including U.S. Treasury securities.
In addition to internal sources of liquidity, Schwab has access to external funding. The following table describes external debt facilities available at March 31, 2022:
| Description | Borrower | Outstanding | Available | ||||||||
| Federal Home Loan Bank secured credit facilities | Banking subsidiaries | $ | — | $ | 68,208 | ||||||
| Federal Reserve discount window | Banking subsidiaries | — | 10,309 | ||||||||
| Uncommitted, unsecured lines of credit with various external banks | CSC, CS&Co | — | 1,522 | ||||||||
| Unsecured commercial paper | CSC | 2,386 | 2,614 | ||||||||
|
Committed, unsecured credit facility with various external banks
(1)
|
TDAC | — | 600 | ||||||||
|
Secured uncommitted lines of credit with various external banks
(2)
|
TDAC | 1,850 | — | ||||||||
(1)
This facility matured on April 21, 2022 and was not renewed.
(2)
Secured borrowing capacity is made available based on TDAC’s ability to provide acceptable collateral to the lenders as determined by the credit agreements.
Our banking subsidiaries may also engage with external banks in repurchase agreements collateralized by investments securities as another source of short-term liquidity. CSC’s ratings for Commercial Paper Notes are P1 by Moody’s Investor Service (Moody’s), A1 by Standard & Poor’s Rating Group (Standard & Poor’s), and F1 by Fitch Ratings, Ltd (Fitch) at March 31, 2022 and December 31, 2021. CSC also has a universal automatic shelf registration statement on file with the SEC, which enables it to issue debt, equity, and other securities.
See Part II – Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Risk Management – Liquidity Risk in the 2021 Form 10-K for additional information on these and other borrowing facilities.
To support growth in margin loan balances at our broker-dealer subsidiaries while meeting our LCR requirements, the Company may issue commercial paper or draw on secured lines of credit, in addition to capital markets issuances.
- 14 -
THE CHARLES SCHWAB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)
Liquidity Coverage Ratio
Schwab is subject to the full LCR rule, which requires the Company to hold high quality liquid assets (HQLA) in an amount equal to at least 100% of the Company’s projected net cash outflows over a prospective 30-calendar-day period of acute liquidity stress, calculated on each business day. See Part I – Item 1 – Business – Regulation in the 2021 Form 10-K for additional information. The Company was in compliance with the LCR rule at March 31, 2022, and the table below presents information about our average daily LCR:
|
Average for the
Three Months Ended March 31, 2022 |
|||||
| Total eligible HQLA | $ | 129,040 | |||
| Net cash outflows | $ | 115,861 | |||
| LCR | 111 | % | |||
Borrowings
The Company had short-term borrowings outstanding of $4.2 billion and $4.9 billion as of March 31, 2022 and December 31, 2021, respectively. Long-term debt is primarily comprised of Senior Notes and totaled $21.9 billion and $18.9 billion at March 31, 2022 and December 31, 2021, respectively.
The following table provides information about our Senior Notes outstanding at March 31, 2022:
| March 31, 2022 |
Par
Outstanding |
Maturity |
Weighted Average
Interest Rate |
Moody’s |
Standard
& Poor’s |
Fitch | ||||||||||||||
| CSC Senior Notes | $ | 20,768 | 2022 - 2032 | 2.46% | A2 | A | A | |||||||||||||
| TDA Holding Senior Notes | $ | 963 | 2022 - 2029 | 3.06% | A2 | A | — | |||||||||||||
New Debt Issuances
The below debt issuances in the first quarter of 2022 were senior unsecured obligations. Interest is payable semi-annually for the fixed-rate Senior Notes and quarterly for the floating-rate Senior Notes. Additional details are as follows:
| Issuance Date | Issuance Amount | Maturity Date | Interest Rate | ||||||||
| March 3, 2022 | $ | 500 | 03/03/2027 |
SOFR
(1)
+ 1.050%
|
|||||||
| March 3, 2022 | $ | 1,500 | 03/03/2027 | 2.450% | |||||||
| March 3, 2022 | $ | 1,000 | 03/03/2032 | 2.900% | |||||||
(1)
Secured Overnight Financing Rate
Equity Issuances
CSC’s preferred stock issued and net proceeds for the first quarter of 2022 are as follows:
| Date Issued and Sold | Net Proceeds | |||||||
| Series K | March 4, 2022 | $ | 740 | |||||
For further discussion, see Item 1 – Note 8 for the Company’s outstanding debt and borrowing facilities and Item 1 – Note 13 for equity outstanding balances, issuances, and redemptions.
Schwab additionally enters into guarantees and other similar arrangements in the ordinary course of business. For information on these arrangements, see Item 1 – Notes 5, 6, 8, 9, and 11.
- 15 -
THE CHARLES SCHWAB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)
CAPITAL MANAGEMENT
Schwab seeks to manage capital to a level and composition sufficient to support execution of our business strategy, including anticipated balance sheet growth inclusive of migration of IDA balances (see further discussion below), providing financial support to our subsidiaries, and sustained access to the capital markets, while at the same time meeting our regulatory capital requirements and serving as a source of financial strength to our banking subsidiaries. Schwab’s primary sources of capital are funds generated by the operations of subsidiaries and securities issuances by CSC in the capital markets. To ensure that Schwab has sufficient capital to absorb unanticipated losses or declines in asset values, we have adopted a policy to remain well capitalized even in stressed scenarios.
Regulatory Capital Requirements
CSC and certain subsidiaries including our banking and broker-dealer subsidiaries are subject to various capital requirements set by regulatory agencies as discussed in further detail in Part II – Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Capital Management of the 2021 Form 10-K and in Item 1 – Note 16. As of March 31, 2022, CSC and our banking subsidiaries are considered well capitalized, and CS&Co, TDAC, and TD Ameritrade, Inc. were in compliance with their respective net capital requirements.
The following table details CSC’s consolidated and CSB’s capital ratios as of March 31, 2022 and December 31, 2021:
| March 31, 2022 | December 31, 2021 | ||||||||||||||||||||||
| CSC | CSB | CSC | CSB | ||||||||||||||||||||
| Total stockholders’ equity | $ | 48,098 | $ | 21,036 | $ | 56,261 | $ | 27,035 | |||||||||||||||
| Less: | |||||||||||||||||||||||
| Preferred stock | 10,694 | — | 9,954 | — | |||||||||||||||||||
| Common Equity Tier 1 Capital before regulatory adjustments | $ | 37,404 | $ | 21,036 | $ | 46,307 | $ | 27,035 | |||||||||||||||
| Less: | |||||||||||||||||||||||
| Goodwill, net of associated deferred tax liabilities | $ | 11,857 | $ | 13 | $ | 11,857 | $ | 13 | |||||||||||||||
| Other intangible assets, net of associated deferred tax liabilities | 7,446 | — | 7,579 | — | |||||||||||||||||||
| Deferred tax assets, net of valuation allowances and deferred tax liabilities | 27 | 25 | 13 | 12 | |||||||||||||||||||
|
AOCI adjustment
(1)
|
(11,045) | (9,674) | (1,109) | (1,004) | |||||||||||||||||||
| Common Equity Tier 1 Capital | $ | 29,119 | $ | 30,672 | $ | 27,967 | $ | 28,014 | |||||||||||||||
| Tier 1 Capital | $ | 39,813 | $ | 30,672 | $ | 37,921 | $ | 28,014 | |||||||||||||||
| Total Capital | 39,850 | 30,701 | 37,950 | 28,033 | |||||||||||||||||||
| Risk-Weighted Assets | 154,355 | 113,108 | 141,969 | 104,409 | |||||||||||||||||||
| Total Leverage Exposure | 653,783 | 435,882 | 614,466 | 400,532 | |||||||||||||||||||
| Common Equity Tier 1 Capital/Risk-Weighted Assets | 18.9 | % | 27.1 | % | 19.7 | % | 26.8 | % | |||||||||||||||
| Tier 1 Capital/Risk-Weighted Assets | 25.8 | % | 27.1 | % | 26.7 | % | 26.8 | % | |||||||||||||||
| Total Capital/Risk-Weighted Assets | 25.8 | % | 27.1 | % | 26.7 | % | 26.8 | % | |||||||||||||||
| Tier 1 Leverage Ratio | 6.1 | % | 7.1 | % | 6.2 | % | 7.1 | % | |||||||||||||||
| Supplementary Leverage Ratio | 6.1 | % | 7.0 | % | 6.2 | % | 7.0 | % | |||||||||||||||
(1)
Changes in market interest rates can result in unrealized gains or losses on AFS securities, which are included in AOCI. As a Category III banking organization, CSC has elected to exclude AOCI from regulatory capital.
The Company’s issuance of preferred stock and quarterly earnings in the first quarter of 2022 helped to largely maintain our Tier 1 Leverage Ratio, as bank deposits and payables to brokerage clients grew by a total of $21.7 billion, or 4%, during the quarter. We ended the first quarter of 2022 with a consolidated Tier 1 Leverage Ratio of 6.1%, down slightly from 6.2% at year-end 2021. CSB’s Tier 1 Leverage Ratio remained consistent with year-end 2021, ending the first quarter of 2022 at 7.1%. Though our Tier 1 Leverage Ratio is below our long-term operating objective for consolidated CSC, this ratio is well above the regulatory minimum. The pace of return to our long-term operating objective over time depends on a number of factors including the overall size of the Company’s balance sheet, earnings, and capital issuance and deployment. We continue to manage our capital position in accordance with our policy and strategy described in further detail in our 2021 Form 10-K.
- 16 -
THE CHARLES SCHWAB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)
IDA Agreement
Certain brokerage client deposits are swept off-balance sheet to the TD Depository Institutions pursuant to the IDA agreement. During the first quarter of 2022, Schwab moved $12.7 billion of IDA balances to its balance sheet. The Company’s overall capital management strategy includes supporting migration of IDA balances in future periods as available pursuant to the terms of the IDA agreement. The Company’s ability to migrate these balances to its balance sheet is dependent upon multiple factors including having sufficient capital levels to sustain these incremental deposits and the availability of IDA balances designated as floating-rate obligations. See Item 1 – Note 9 for further information on the IDA agreement.
Dividends
Cash dividends paid and per share amounts for the first three months of 2022 and 2021 are as follows:
| 2022 | 2021 | ||||||||||||||||||||||
| Three Months Ended March 31, | Cash Paid |
Per Share
Amount |
Cash Paid |
Per Share
Amount |
|||||||||||||||||||
| Common and Nonvoting Common Stock | $ | 381 | $ | .20 | $ | 341 | $ | .18 | |||||||||||||||
|
Series A Preferred Stock
(1)
|
14 | 35.00 | 14 | 35.00 | |||||||||||||||||||
|
Series C Preferred Stock
(2)
|
— | — | 9 | 15.00 | |||||||||||||||||||
|
Series D Preferred Stock
(3)
|
11 | 14.88 | 11 | 14.88 | |||||||||||||||||||
|
Series E Preferred Stock
(4)
|
14 | 2,312.50 | 14 | 2,312.50 | |||||||||||||||||||
|
Series F Preferred Stock
(5)
|
— | — | — | — | |||||||||||||||||||
|
Series G Preferred Stock
(3)
|
34 | 1,343.75 | 34 | 1,343.75 | |||||||||||||||||||
|
Series H Preferred Stock
(6)
|
25 | 1,000.00 | 22 | 888.89 | |||||||||||||||||||
|
Series I Preferred Stock
(7)
|
23 | 1,000.00 | — | — | |||||||||||||||||||
|
Series J Preferred Stock
(8)
|
7 | 11.13 | — | — | |||||||||||||||||||
|
Series K Preferred Stock
(9)
|
— | — | N/A | N/A | |||||||||||||||||||
(1)
Dividends were paid semi-annually until February 1, 2022 and are paid quarterly thereafter.
(2)
Series C Preferred Stock was redeemed on June 1, 2021. Prior to redemption, dividends were paid quarterly and the final dividend was paid on June 1, 2021.
(3)
Dividends paid quarterly.
(4)
Dividends were paid semi-annually until March 1, 2022 and are paid quarterly thereafter.
(5)
Dividends paid semi-annually until December 1, 2027 and quarterly thereafter.
(6)
Series H Preferred Stock was issued on December 11, 2020. Dividends are paid quarterly, and the first dividend was paid on March 1, 2021.
(7)
Series I Preferred Stock was issued on March 18, 2021. Dividends are paid quarterly, and the first dividend was paid on June 1, 2021.
(8)
Series J Preferred Stock was issued on March 30, 2021. Dividends are paid quarterly, and the first dividend was paid on June 1, 2021.
(9)
Series K Preferred Stock was issued on March 4, 2022. Dividends are paid quarterly, and the first dividend will be paid on June 1, 2022.
N/A Not applicable.
Share Repurchases
On January 30, 2019, CSC publicly announced that its Board of Directors authorized the repurchase of up to $4.0 billion of common stock. The authorization does not have an expiration date. There were no repurchases of CSC’s common stock under this authorization during the first three months of 2022 or 2021. As of March 31, 2022, $1.8 billion remained on the authorization.
OTHER
Foreign Exposure
At March 31, 2022, Schwab had exposure to non-sovereign financial and non-financial institutions in foreign countries, as well as agencies of foreign governments. At March 31, 2022, the fair value of these holdings totaled $18.6 billion, with the top three exposures being to issuers and counterparties domiciled in the United Kingdom at $6.4 billion, France at $5.4 billion, and Canada at $1.8 billion. At December 31, 2021, the fair value of these holdings totaled $12.5 billion, with the top three exposures being to issuers and counterparties domiciled in the United Kingdom at $5.2 billion, France at $3.9 billion, and Sweden at $754 million. In addition, Schwab had outstanding margin loans to foreign residents of $3.8 billion and $3.3 billion at March 31, 2022 and December 31, 2021, respectively.
- 17 -
THE CHARLES SCHWAB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)
CRITICAL ACCOUNTING ESTIMATES
Certain of our accounting policies that involve a higher degree of judgment and complexity are discussed in Part II – Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Estimates in the 2021 Form 10-K. There have been no changes to critical accounting estimates during the first three months of 2022.
NON-GAAP FINANCIAL MEASURES
In addition to disclosing financial results in accordance with generally accepted accounting principles in the U.S. (GAAP), Management’s Discussion and Analysis of Financial Condition and Results of Operations contain references to the non-GAAP financial measures described below. We believe these non-GAAP financial measures provide useful supplemental information about the financial performance of the Company, and facilitate meaningful comparison of Schwab’s results in the current period to both historic and future results. These non-GAAP measures should not be considered a substitute for, or superior to, financial measures calculated in accordance with GAAP, and may not be comparable to non-GAAP financial measures presented by other companies.
Schwab’s use of non-GAAP measures is reflective of certain adjustments made to GAAP financial measures as described below.
| Non-GAAP Adjustment or Measure | Definition | Usefulness to Investors and Uses by Management | ||||||
| Acquisition and integration-related costs and amortization of acquired intangible assets |
Schwab adjusts certain GAAP financial measures to exclude the impact of acquisition and integration-related costs incurred as a result of the Company’s acquisitions, amortization of acquired intangible assets, and, where applicable, the income tax effect of these expenses.
Adjustments made to exclude amortization of acquired intangible assets are reflective of all acquired intangible assets, which were recorded as part of purchase accounting. These acquired intangible assets contribute to the Company’s revenue generation. Amortization of acquired intangible assets will continue in future periods over their remaining useful lives. |
We exclude acquisition and integration-related costs and amortization of acquired intangible assets for the purpose of calculating certain non-GAAP measures because we believe doing so provides additional transparency of Schwab’s ongoing operations, and is useful in both evaluating the operating performance of the business and facilitating comparison of results with prior and future periods.
Acquisition and integration-related costs fluctuate based on the timing of acquisitions and integration activities, thereby limiting comparability of results among periods, and are not representative of the costs of running the Company’s ongoing business. Amortization of acquired intangible assets is excluded because management does not believe it is indicative of the Company’s underlying operating performance. |
||||||
| Return on tangible common equity | Return on tangible common equity represents annualized adjusted net income available to common stockholders as a percentage of average tangible common equity. Tangible common equity represents common equity less goodwill, acquired intangible assets – net, and related deferred tax liabilities. | Acquisitions typically result in the recognition of significant amounts of goodwill and acquired intangible assets. We believe return on tangible common equity may be useful to investors as a supplemental measure to facilitate assessing capital efficiency and returns relative to the composition of Schwab’s balance sheet. | ||||||
The Company also uses adjusted diluted EPS and return on tangible common equity as components of performance criteria for employee bonus and certain executive management incentive compensation arrangements. The Compensation Committee of CSC’s Board of Directors maintains discretion in evaluating performance against these criteria.
- 18 -
THE CHARLES SCHWAB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)
The following tables present reconciliations of GAAP measures to non-GAAP measures:
| Three Months Ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| Total expenses excluding interest (GAAP) | $ | 2,833 | $ | 2,755 | ||||
|
Acquisition and integration-related costs
(1)
|
(96) | (119) | ||||||
| Amortization of acquired intangible assets | (154) | (154) | ||||||
| Adjusted total expenses (non-GAAP) | $ | 2,583 | $ | 2,482 | ||||
(1)
Acquisition and integration-related costs for the three months ended March 31, 2022 primarily consist of $56 million of compensation and benefits, $31 million of professional services, and $4 million of occupancy and equipment. Acquisition and integration-related costs for the three months ended March 31, 2021 primarily consist of $72 million of compensation and benefits, $27 million of professional services, and $16 million of occupancy and equipment.
| Three Months Ended March 31, | ||||||||||||||
| 2022 | 2021 | |||||||||||||
| Amount | Diluted EPS | Amount | Diluted EPS | |||||||||||
|
Net income available to common stockholders (GAAP),
Earnings per common share — diluted (GAAP) |
$ | 1,278 | $ | .67 | $ | 1,388 | $ | .73 | ||||||
| Acquisition and integration-related costs | 96 | .05 | 119 | .06 | ||||||||||
| Amortization of acquired intangible assets | 154 | .08 | 154 | .08 | ||||||||||
|
Income tax effects
(1)
|
(61) | (.03) | (67) | (.03) | ||||||||||
|
Adjusted net income available to common stockholders
(non-GAAP), Adjusted diluted EPS (non-GAAP) |
$ | 1,467 | $ | .77 | $ | 1,594 | $ | .84 | ||||||
(1)
The income tax effects of the non-GAAP adjustments are determined using an effective tax rate reflecting the exclusion of non-deductible acquisition costs and are used to present the acquisition and integration-related costs and amortization of acquired intangible assets on an after-tax basis.
| Three Months Ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| Return on average common stockholders’ equity (GAAP) | 12 | % | 12 | % | ||||
| Average common stockholders’ equity | $ | 41,856 | $ | 46,691 | ||||
| Less: Average goodwill | (11,952) | (11,952) | ||||||
| Less: Average acquired intangible assets — net | (9,303) | (9,915) | ||||||
|
Plus: Average deferred tax liabilities related to goodwill and
acquired intangible assets — net |
1,886 | 1,935 | ||||||
| Average tangible common equity | $ | 22,487 | $ | 26,759 | ||||
|
Adjusted net income available to common stockholders
(1)
|
$ | 1,467 | $ | 1,594 | ||||
| Return on tangible common equity (non-GAAP) | 26 | % | 24 | % | ||||
(1)
See table above for the reconciliation of net income available to common stockholders to adjusted net income available to common stockholders (non-GAAP).
- 19 -
THE CHARLES SCHWAB CORPORATION
Item 3. Quantitative and Qualitative Disclosures About Market Risk
For discussion of the quantitative and qualitative disclosures about market risk, see Risk Management in Item 2.
- 20 -
Part I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
THE CHARLES SCHWAB CORPORATION
Condensed Consolidated Statements of Income
(In Millions, Except Per Share Amounts)
(Unaudited)
|
Three Months Ended
March 31, |
|||||||||||
| 2022 | 2021 | ||||||||||
| Net Revenues | |||||||||||
| Interest revenue | $ |
|
$ |
|
|||||||
| Interest expense |
(
|
(
|
|||||||||
| Net interest revenue |
|
|
|||||||||
|
Asset management and administration fees
(1)
|
|
|
|||||||||
| Trading revenue |
|
|
|||||||||
| Bank deposit account fees |
|
|
|||||||||
| Other |
|
|
|||||||||
| Total net revenues |
|
|
|||||||||
| Expenses Excluding Interest | |||||||||||
| Compensation and benefits |
|
|
|||||||||
| Professional services |
|
|
|||||||||
| Occupancy and equipment |
|
|
|||||||||
| Advertising and market development |
|
|
|||||||||
| Communications |
|
|
|||||||||
| Depreciation and amortization |
|
|
|||||||||
| Amortization of acquired intangible assets |
|
|
|||||||||
| Regulatory fees and assessments |
|
|
|||||||||
| Other |
|
|
|||||||||
| Total expenses excluding interest |
|
|
|||||||||
| Income before taxes on income |
|
|
|||||||||
| Taxes on income |
|
|
|||||||||
| Net Income |
|
|
|||||||||
| Preferred stock dividends and other |
|
|
|||||||||
| Net Income Available to Common Stockholders | $ |
|
$ |
|
|||||||
| Weighted-Average Common Shares Outstanding: | |||||||||||
| Basic |
|
|
|||||||||
| Diluted |
|
|
|||||||||
|
Earnings Per Common Shares Outstanding
(2)
:
|
|||||||||||
| Basic | $ |
|
$ |
|
|||||||
| Diluted | $ |
|
$ |
|
|||||||
(1)
Includes fee waivers of $
54
million and $
78
million for the three months ended March 31, 2022 and 2021, respectively.
(2)
The Company had voting and nonvoting common stock outstanding. As the participation rights, including dividend and liquidation rights, are identical between the voting and nonvoting stock classes, basic and diluted earnings per share are the same for each class. See Note 15 for additional information.
See Notes to Condensed Consolidated Financial Statements.
- 21 -
THE CHARLES SCHWAB CORPORATION
Condensed Consolidated Statements of Comprehensive Income
(In Millions)
(Unaudited)
|
Three Months Ended
March 31, |
|||||||||||
| 2022 | 2021 | ||||||||||
| Net income | $ |
|
$ |
|
|||||||
| Other comprehensive income (loss), before tax: | |||||||||||
| Change in net unrealized gain (loss) on available for sale securities: | |||||||||||
| Net unrealized gain (loss) excluding transfers to held to maturity |
(
|
(
|
|||||||||
| Reclassification of net unrealized loss transferred to held to maturity |
|
|
|||||||||
| Other reclassifications included in other revenue |
(
|
(
|
|||||||||
| Change in net unrealized gain (loss) on held to maturity securities: | |||||||||||
| Reclassification of net unrealized loss transferred from available for sale |
(
|
|
|||||||||
|
Amortization of amounts previously recorded upon transfer to held to maturity
from available for sale |
|
|
|||||||||
| Other comprehensive income (loss), before tax |
(
|
(
|
|||||||||
| Income tax effect |
|
|
|||||||||
| Other comprehensive income (loss), net of tax |
(
|
(
|
|||||||||
| Comprehensive Income (Loss) | $ |
(
|
$ |
(
|
|||||||
See Notes to Condensed Consolidated Financial Statements.
- 22 -
THE CHARLES SCHWAB CORPORATION
Condensed Consolidated Balance Sheets
(In Millions, Except Per Share and Share Amounts)
(Unaudited)
| March 31, 2022 | December 31, 2021 | ||||||||||
| Assets | |||||||||||
| Cash and cash equivalents | $ |
|
$ |
|
|||||||
|
Cash and investments segregated and on deposit for regulatory purposes (including resale
agreements of $
|
|
|
|||||||||
| Receivables from brokerage clients — net |
|
|
|||||||||
|
Available for sale securities (amortized cost of $
$
|
|
|
|||||||||
| Held to maturity securities |
|
|
|||||||||
| Bank loans — net |
|
|
|||||||||
| Equipment, office facilities, and property — net |
|
|
|||||||||
| Goodwill |
|
|
|||||||||
| Acquired intangible assets — net |
|
|
|||||||||
| Other assets |
|
|
|||||||||
| Total assets | $ |
|
$ |
|
|||||||
| Liabilities and Stockholders’ Equity | |||||||||||
| Bank deposits | $ |
|
$ |
|
|||||||
| Payables to brokerage clients |
|
|
|||||||||
| Accrued expenses and other liabilities |
|
|
|||||||||
| Short-term borrowings |
|
|
|||||||||
| Long-term debt |
|
|
|||||||||
| Total liabilities |
|
|
|||||||||
| Stockholders’ equity: | |||||||||||
|
Preferred stock — $
and $
|
|
|
|||||||||
|
Common stock —
|
|
|
|||||||||
|
Nonvoting common stock —
|
|
|
|||||||||
| Additional paid-in capital |
|
|
|||||||||
| Retained earnings |
|
|
|||||||||
|
Treasury stock, at cost —
shares at December 31, 2021
|
(
|
(
|
|||||||||
| Accumulated other comprehensive income (loss) |
(
|
(
|
|||||||||
| Total stockholders’ equity |
|
|
|||||||||
| Total liabilities and stockholders’ equity | $ |
|
$ |
|
|||||||
See Notes to Condensed Consolidated Financial Statements.
- 23 -
THE CHARLES SCHWAB CORPORATION
Condensed Consolidated Statements of Stockholders
’
Equity
(In Millions)
(Unaudited)
| Accumulated Other Comprehensive Income (Loss) | ||||||||||||||||||||||||||||||||
| Preferred Stock | Common Stock |
Nonvoting
Common Stock |
Additional Paid-in Capital | Retained Earnings |
Treasury Stock,
at cost |
Total | ||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||
| Balance at December 31, 2020 | $ |
|
|
$ |
|
|
$ |
|
$ |
|
$ |
|
$ |
(
|
$ |
|
$ |
|
||||||||||||||
| Net income | — | — | — | — | — | — |
|
— | — |
|
||||||||||||||||||||||
| Other comprehensive income (loss), net of tax | — | — | — | — | — | — | — | — |
(
|
(
|
||||||||||||||||||||||
| Issuance of preferred stock, net |
|
— | — | — | — | — | — | — | — |
|
||||||||||||||||||||||
| Dividends declared on preferred stock | — | — | — | — | — | — |
(
|
— | — |
(
|
||||||||||||||||||||||
|
Dividends declared on common stock — $
per share
|
— | — | — | — | — | — |
(
|
— | — |
(
|
||||||||||||||||||||||
| Stock option exercises and other | — | — | — | — | — |
|
— |
|
— |
|
||||||||||||||||||||||
| Share-based compensation | — | — | — | — | — |
|
— | — | — |
|
||||||||||||||||||||||
| Other | — | — | — | — | — |
|
|
(
|
— |
(
|
||||||||||||||||||||||
| Balance at March 31, 2021 | $ |
|
|
$ |
|
|
$ |
|
$ |
|
$ |
|
$ |
(
|
$ |
|
$ |
|
||||||||||||||
| Balance at December 31, 2021 | $ |
|
|
$ |
|
|
$ |
|
$ |
|
$ |
|
$ |
(
|
$ |
(
|
$ |
|
||||||||||||||
| Net income | — | — | — | — | — | — |
|
— | — |
|
||||||||||||||||||||||
| Other comprehensive income (loss), net of tax | — | — | — | — | — | — | — | — |
(
|
(
|
||||||||||||||||||||||
| Issuance of preferred stock, net |
|
— | — | — | — | — | — | — | — |
|
||||||||||||||||||||||
| Dividends declared on preferred stock | — | — | — | — | — | — |
(
|
— | — |
(
|
||||||||||||||||||||||
|
Dividends declared on common stock — $
per share
|
— | — | — | — | — | — |
(
|
— | — |
(
|
||||||||||||||||||||||
| Stock option exercises and other | — | — | — | — | — |
(
|
— |
|
— |
|
||||||||||||||||||||||
| Share-based compensation | — | — | — | — | — |
|
— | — | — |
|
||||||||||||||||||||||
| Other | — | — | — | — | — |
|
— |
(
|
— |
(
|
||||||||||||||||||||||
| Balance at March 31, 2022 | $ |
|
|
$ |
|
|
$ |
|
$ |
|
$ |
|
$ |
(
|
$ |
(
|
$ |
|
||||||||||||||
See Notes to the Condensed Consolidated Financial Statements
.
- 24 -
THE CHARLES SCHWAB CORPORATION
Condensed Consolidated Statements of Cash Flows
(in Millions)
(Unaudited)
|
Three Months Ended
March 31, |
|||||||||||
| 2022 | 2021 | ||||||||||
| Cash Flows from Operating Activities | |||||||||||
| Net income | $ |
|
$ |
|
|||||||
| Adjustments to reconcile net income to net cash provided by (used for) operating activities: | |||||||||||
| Share-based compensation |
|
|
|||||||||
| Depreciation and amortization |
|
|
|||||||||
| Amortization of acquired intangible assets |
|
|
|||||||||
| Provision (benefit) for deferred income taxes |
(
|
(
|
|||||||||
| Premium amortization, net, on available for sale and held to maturity securities |
|
|
|||||||||
| Other |
|
|
|||||||||
| Net change in: | |||||||||||
| Investments segregated and on deposit for regulatory purposes |
(
|
|
|||||||||
| Receivables from brokerage clients |
|
(
|
|||||||||
| Other assets |
(
|
|
|||||||||
| Payables to brokerage clients |
(
|
(
|
|||||||||
| Accrued expenses and other liabilities |
(
|
|
|||||||||
| Net cash provided by (used for) operating activities |
|
(
|
|||||||||
| Cash Flows from Investing Activities | |||||||||||
| Purchases of available for sale securities |
(
|
(
|
|||||||||
| Proceeds from sales of available for sale securities |
|
|
|||||||||
| Principal payments on available for sale securities |
|
|
|||||||||
| Principal payments on held to maturity securities |
|
|
|||||||||
| Net change in bank loans |
(
|
(
|
|||||||||
| Purchases of equipment, office facilities, and property |
(
|
(
|
|||||||||
| Purchases of Federal Reserve stock |
(
|
(
|
|||||||||
| Other investing activities |
(
|
(
|
|||||||||
| Net cash provided by (used for) investing activities |
(
|
(
|
|||||||||
| Cash Flows from Financing Activities | |||||||||||
| Net change in bank deposits |
|
|
|||||||||
| Proceeds from commercial paper and secured lines of credit |
|
|
|||||||||
| Repayment of commercial paper and secured lines of credit |
(
|
(
|
|||||||||
| Issuance of long-term debt |
|
|
|||||||||
| Net proceeds from preferred stock offerings |
|
|
|||||||||
| Dividends paid |
(
|
(
|
|||||||||
| Proceeds from stock options exercised |
|
|
|||||||||
| Other financing activities |
(
|
(
|
|||||||||
| Net cash provided by (used for) financing activities |
|
|
|||||||||
| Increase (Decrease) in Cash and Cash Equivalents, including Amounts Restricted |
|
|
|||||||||
| Cash and Cash Equivalents, including Amounts Restricted at Beginning of Period |
|
|
|||||||||
| Cash and Cash Equivalents, including Amounts Restricted at End of Period | $ |
|
$ |
|
|||||||
Continued on following page.
- 25 -
THE CHARLES SCHWAB CORPORATION
Condensed Consolidated Statements of Cash Flows
(in Millions)
(Unaudited)
Continued from previous page.
|
Three Months Ended
March 31, |
|||||||||||
| 2022 | 2021 | ||||||||||
| Supplemental Cash Flow Information | |||||||||||
| Non-cash investing activity: | |||||||||||
| Securities transferred from available for sale to held to maturity, at fair value | $ |
|
$ |
|
|||||||
| Securities purchased during the period but settled after period end | $ |
|
$ |
|
|||||||
| Changes in accrued equipment, office facilities, and property purchases | $ |
(
|
$ |
|
|||||||
| Other Supplemental Cash Flow Information: | |||||||||||
| Cash paid during the period for: | |||||||||||
| Interest | $ |
|
$ |
|
|||||||
| Income taxes | $ |
|
$ |
|
|||||||
| Amounts included in the measurement of lease liabilities | $ |
|
$ |
|
|||||||
| Leased assets obtained in exchange for new operating lease liabilities | $ |
|
$ |
|
|||||||
| Leased assets obtained in exchange for new finance lease liabilities | $ |
|
$ |
|
|||||||
| March 31, 2022 | March 31, 2021 | ||||||||||
|
Reconciliation of cash, cash equivalents and amounts reported within the balance sheet
(1)
|
|||||||||||
| Cash and cash equivalents | $ |
|
$ |
|
|||||||
|
Restricted cash and cash equivalents amounts included in cash and investments segregated
and on deposit for regulatory purposes |
|
|
|||||||||
|
Total cash and cash equivalents, including amounts restricted shown in the
statement of cash flows |
$ |
|
$ |
|
|||||||
(1)
For more information on the nature of restrictions on restricted cash and cash equivalents, see Note 16.
See Notes to Condensed Consolidated Financial Statements.
- 26 -
THE CHARLES SCHWAB CORPORATION
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted)
(Unaudited)
1.
Introduction and Basis of Presentation
The Charles Schwab Corporation (CSC) is a savings and loan holding company. CSC engages, through its subsidiaries (collectively referred to as Schwab or the Company), in wealth management, securities brokerage, banking, asset management, custody, and financial advisory services.
Principal business subsidiaries of CSC include the following:
•
Charles Schwab & Co., Inc. (CS&Co), incorporated in 1971, a securities broker-dealer;
•
TD Ameritrade, Inc., an introducing securities broker-dealer;
•
TD Ameritrade Clearing, Inc. (TDAC), a securities broker-dealer that provides trade execution and clearing services to TD Ameritrade, Inc.;
•
Charles Schwab Bank, SSB (CSB), our principal banking entity; and
•
Charles Schwab Investment Management, Inc. (CSIM), the investment advisor for Schwab’s proprietary mutual funds (Schwab Funds
®
) and for Schwab’s exchange-traded funds (Schwab ETFs
™
).
Unless otherwise indicated, the terms “Schwab,” “the Company,” “we,” “us,” or “our” mean CSC together with its consolidated subsidiaries.
These unaudited condensed consolidated financial statements have been prepared in conformity with GAAP, which require management to make certain estimates and assumptions that affect the reported amounts in the accompanying financial statements and in the related disclosures. These estimates are based on information available as of the date of the condensed consolidated financial statements. While management makes its best judgment, actual amounts or results could differ from these estimates. In the opinion of management, all normal, recurring adjustments have been included for a fair statement of this interim financial information.
These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto, included in Schwab’s 2021 Form 10-K.
The significant accounting policies are included in Note 2 in the 2021 Form 10-K. There have been no significant changes to these accounting policies during the first three months of 2022.
- 27 -
THE CHARLES SCHWAB CORPORATION
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted)
(Unaudited)
2.
New Accounting Standards
Adoption of New Accounting Standards
The Company did not adopt any material new accounting standards during the three months ended March 31, 2022.
New Accounting Standards Not Yet Adopted
| Standard | Description | Required Date of Adoption | Effects on the Financial Statements or Other Significant Matters | ||||||||
| Accounting Standards Update (ASU) 2022-02, “Financial Instruments—Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures” |
Troubled Debt Restructurings (TDRs)
Eliminates the accounting guidance for TDRs. Rather than applying the specific guidance for TDRs, creditors will apply the recognition and measurement guidance for loan refinancings and restructurings to determine whether a modification results in a new loan or a continuation of an existing loan. The guidance requires enhanced disclosures for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty.
Vintage Disclosures
Requires that an entity disclose current-period gross writeoffs by year of origination for financing receivables and net investments in leases within the scope of Subtopic 326-20,
Financial Instruments—Credit Losses—Measured at Amortized Cost.
Adoption provides for prospective application, with an option to apply the modified retrospective transition method for the change in recognition and measurement of TDRs.
|
January 1, 2023 | The Company is evaluating the impact of this guidance on its financial statements. | ||||||||
- 28 -
THE CHARLES SCHWAB CORPORATION
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted)
(Unaudited)
3.
Revenue Recognition
Disaggregated Revenue
Disaggregation of Schwab’s revenue by major source is as follows:
|
Three Months Ended
March 31, |
|||||||||||
| 2022 | 2021 | ||||||||||
| Net interest revenue | |||||||||||
| Cash and cash equivalents | $ |
|
$ |
|
|||||||
| Cash and investments segregated |
|
|
|||||||||
| Receivables from brokerage clients |
|
|
|||||||||
| Available for sale securities |
|
|
|||||||||
| Held to maturity securities |
|
|
|||||||||
| Bank loans |
|
|
|||||||||
| Securities lending revenue |
|
|
|||||||||
| Other interest revenue |
|
|
|||||||||
| Interest revenue |
|
|
|||||||||
| Bank deposits |
(
|
(
|
|||||||||
| Payables to brokerage clients |
(
|
(
|
|||||||||
| Short-term borrowings |
(
|
|
|||||||||
| Long-term debt |
(
|
(
|
|||||||||
| Securities lending expense |
(
|
(
|
|||||||||
| Other interest expense |
|
|
|||||||||
| Interest expense |
(
|
(
|
|||||||||
| Net interest revenue |
|
|
|||||||||
| Asset management and administration fees | |||||||||||
| Mutual funds, ETFs, and CTFs |
|
|
|||||||||
| Advice solutions |
|
|
|||||||||
| Other |
|
|
|||||||||
| Asset management and administration fees |
|
|
|||||||||
| Trading revenue | |||||||||||
| Commissions |
|
|
|||||||||
| Order flow revenue |
|
|
|||||||||
| Principal transactions |
|
|
|||||||||
| Trading revenue |
|
|
|||||||||
| Bank deposit account fees |
|
|
|||||||||
| Other |
|
|
|||||||||
| Total net revenues | $ |
|
$ |
|
|||||||
For a summary of revenue provided by our reportable segments, see Note 17. The recognition of revenue is not impacted by the operating segment in which revenue is generated.
- 29 -
THE CHARLES SCHWAB CORPORATION
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted)
(Unaudited)
Contract balances
Substantially all receivables from contracts with customers within the scope of ASC 606,
Revenue From Contracts With Customers
(ASC 606), are included in other assets on the condensed consolidated balance sheets, and totaled $
652
million and $
637
million at March 31, 2022 and December 31, 2021, respectively. Schwab did not have any other significant contract assets or contract liability balances as of March 31, 2022 or December 31, 2021.
Unsatisfied performance obligations
- 30 -
THE CHARLES SCHWAB CORPORATION
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted)
(Unaudited)
4.
Investment Securities
The amortized cost, gross unrealized gains and losses, and fair value of the Company’s AFS and HTM investment securities are as follows:
| March 31, 2022 |
Amortized
Cost |
Gross
Unrealized Gains |
Gross
Unrealized Losses |
Fair
Value |
||||||||||||||||||||||
| Available for sale securities | ||||||||||||||||||||||||||
| U.S. agency mortgage-backed securities | $ |
|
$ |
|
$ |
|
$ |
|
||||||||||||||||||
| U.S. Treasury securities |
|
|
|
|
||||||||||||||||||||||
|
Asset-backed securities
(1)
|
|
|
|
|
||||||||||||||||||||||
|
Corporate debt securities
(2)
|
|
|
|
|
||||||||||||||||||||||
| U.S. state and municipal securities |
|
|
|
|
||||||||||||||||||||||
| Non-agency commercial mortgage-backed securities |
|
|
|
|
||||||||||||||||||||||
| Certificates of deposit |
|
|
|
|
||||||||||||||||||||||
| Foreign government agency securities |
|
|
|
|
||||||||||||||||||||||
|
Commercial paper
(3)
|
|
|
|
|
||||||||||||||||||||||
| Other |
|
|
|
|
||||||||||||||||||||||
| Total available for sale securities | $ |
|
$ |
|
$ |
|
$ |
|
||||||||||||||||||
| Held to maturity securities | ||||||||||||||||||||||||||
| U.S. agency mortgage-backed securities | $ |
|
$ |
|
$ |
|
$ |
|
||||||||||||||||||
| Total held to maturity securities | $ |
|
$ |
|
$ |
|
$ |
|
||||||||||||||||||
| December 31, 2021 |
Amortized
Cost |
Gross
Unrealized Gains |
Gross
Unrealized Losses |
Fair
Value |
||||||||||||||||||||||
| Available for sale securities | ||||||||||||||||||||||||||
| U.S. agency mortgage-backed securities | $ |
|
$ |
|
$ |
|
$ |
|
||||||||||||||||||
| U.S. Treasury securities |
|
|
|
|
||||||||||||||||||||||
|
Asset-backed securities
(1)
|
|
|
|
|
||||||||||||||||||||||
|
Corporate debt securities
(2)
|
|
|
|
|
||||||||||||||||||||||
| U.S. state and municipal securities |
|
|
|
|
||||||||||||||||||||||
| Non-agency commercial mortgage-backed securities |
|
|
|
|
||||||||||||||||||||||
| Certificates of deposit |
|
|
|
|
||||||||||||||||||||||
| Foreign government agency securities |
|
|
|
|
||||||||||||||||||||||
|
Commercial paper
(3)
|
|
|
|
|
||||||||||||||||||||||
| Other |
|
|
|
|
||||||||||||||||||||||
| Total available for sale securities | $ |
|
$ |
|
$ |
|
$ |
|
||||||||||||||||||
(1)
Approximately
51
% and
58
% of asset-backed securities held as of March 31, 2022 and December 31, 2021, respectively, were Federal Family Education Loan Program Asset-Backed Securities. Asset-backed securities collateralized by credit card receivables represented approximately
28
% and
30
% of the asset-backed securities held as of March 31, 2022 and December 31, 2021, respectively.
(2)
As of March 31, 2022 and December 31, 2021, approximately
37
% and
31
%, respectively, of the total AFS in corporate debt securities were issued by institutions in the financial services industry.
(3)
Included in cash and cash equivalents on the condensed consolidated balance sheets, but excluded from this table is $
4.6
billion of AFS commercial paper as of March 31, 2022 (
none
as of December 31, 2021). These holdings have maturities of three months or less and an aggregate market value equal to amortized cost.
In January 2022, the Company transferred $
108.8
billion of U.S. agency mortgage-backed securities with a total net unrealized loss at the time of transfer of $
2.4
billion from the AFS category to the HTM category. HTM securities, which the Company has the intent and ability to hold until maturity, are carried at amortized cost, net of any allowance for credit losses. The allowance for credit losses represents expected credit losses over the remaining expected life of HTM securities. The Company measures credit losses as the difference between the securities amortized cost basis and the net amount expected to be collected. The Company’s accounting policy excludes accrued interest when estimating any allowance for credit losses on HTM securities. HTM securities are placed on nonaccrual status on a timely basis and any accrued interest receivable is reversed through interest income. For certain securities, the Company is not required to estimate an allowance for credit losses because expected nonpayment of the amortized cost basis is zero based on historical credit loss information adjusted for current conditions and reasonable and supportable forecasts.
- 31 -
THE CHARLES SCHWAB CORPORATION
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted)
(Unaudited)
At March 31, 2022, our banking subsidiaries had pledged securities with a fair value of $
53.0
billion as collateral to secure borrowing capacity on secured credit facilities with the Federal Home Loan Bank (FHLB) (see Note 8). Our banking subsidiaries also pledge investment securities as collateral to secure borrowing capacity at the Federal Reserve discount window, and had pledged securities with a fair value of $
10.3
billion as collateral for this facility at March 31, 2022. The Company also pledges securities issued by federal agencies to secure certain trust deposits. The fair value of these pledged securities was $
1.6
billion at March 31, 2022.
Securities with unrealized losses, aggregated by category and period of continuous unrealized loss, of AFS investment securities are as follows:
| Less than 12 months | 12 months or longer | Total | |||||||||||||||||||||||||||||||||
| March 31, 2022 |
Fair
Value |
Unrealized
Losses |
Fair
Value |
Unrealized
Losses |
Fair
Value |
Unrealized
Losses |
|||||||||||||||||||||||||||||
| Available for sale securities | |||||||||||||||||||||||||||||||||||
| U.S. agency mortgage-backed securities | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||||||
| U.S. Treasury securities |
|
|
|
|
|
|
|||||||||||||||||||||||||||||
| Asset-backed securities |
|
|
|
|
|
|
|||||||||||||||||||||||||||||
| Corporate debt securities |
|
|
|
|
|
|
|||||||||||||||||||||||||||||
| U.S. state and municipal securities |
|
|
|
|
|
|
|||||||||||||||||||||||||||||
| Non-agency commercial mortgage-backed securities |
|
|
|
|
|
|
|||||||||||||||||||||||||||||
| Certificates of deposit |
|
|
|
|
|
|
|||||||||||||||||||||||||||||
| Foreign government agency securities |
|
|
|
|
|
|
|||||||||||||||||||||||||||||
| Other |
|
|
|
|
|
|
|||||||||||||||||||||||||||||
| Total | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||||||
| December 31, 2021 | |||||||||||||||||||||||||||||||||||
| U.S. agency mortgage-backed securities | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||||||
| U.S. Treasury securities |
|
|
|
|
|
|
|||||||||||||||||||||||||||||
| Asset-backed securities |
|
|
|
|
|
|
|||||||||||||||||||||||||||||
| Corporate debt securities |
|
|
|
|
|
|
|||||||||||||||||||||||||||||
| Certificates of deposit |
|
|
|
|
|
|
|||||||||||||||||||||||||||||
| U.S. state and municipal securities |
|
|
|
|
|
|
|||||||||||||||||||||||||||||
| Total | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||||||
At March 31, 2022, substantially all rated securities in the investment portfolios were investment grade. U.S. agency mortgage-backed securities do not have explicit credit ratings; however, management considers these to be of the highest credit quality and rating given the guarantee of principal and interest by the U.S. government or U.S. government-sponsored enterprises.
For a description of management’s quarterly evaluation of AFS securities in unrealized loss positions see Item 8 – Note 2 in the 2021 Form 10-K.
No
amounts were recognized as credit loss expense and
no
securities were written down to fair value through earnings for the three months ended March 31, 2022 and the year ended December 31, 2021.
None
of the Company’s AFS securities held as of March 31, 2022 and December 31, 2021 had an allowance for credit losses. All HTM securities as of March 31, 2022 were U.S. agency mortgage-backed securities and therefore had
no
allowance for credit losses because expected nonpayment of the amortized cost basis is zero.
The Company had $
674
million of accrued interest for AFS and HTM securities as of March 31, 2022 and $
683
million of accrued interest receivable for AFS securities as of December 31, 2021. These amounts are excluded from the amortized cost basis and fair market value of AFS and HTM securities and included in other assets on the condensed consolidated balance sheets. There were
no
writeoffs of accrued interest receivable on AFS and HTM securities during the three months ended March 31, 2022, or for AFS securities for the year ended December 31, 2021.
- 32 -
THE CHARLES SCHWAB CORPORATION
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted)
(Unaudited)
In the table below, mortgage-backed securities and other asset-backed securities have been allocated to maturity groupings based on final contractual maturities. As borrowers may have the right to call or prepay certain obligations underlying our investment securities, actual maturities may differ from the scheduled contractual maturities presented below.
The maturities of AFS and HTM investment securities are as follows:
| March 31, 2022 |
Within
1 year |
After 1 year
through 5 years |
After 5 years
through 10 years |
After
10 years |
Total | ||||||||||||||||||||||||
| U.S. agency mortgage-backed securities | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||
| U.S. Treasury securities |
|
|
|
|
|
||||||||||||||||||||||||
| Asset-backed securities |
|
|
|
|
|
||||||||||||||||||||||||
| Corporate debt securities |
|
|
|
|
|
||||||||||||||||||||||||
| U.S. state and municipal securities |
|
|
|
|
|
||||||||||||||||||||||||
| Non-agency commercial mortgage-backed securities |
|
|
|
|
|
||||||||||||||||||||||||
| Certificates of deposit |
|
|
|
|
|
||||||||||||||||||||||||
| Foreign government agency securities |
|
|
|
|
|
||||||||||||||||||||||||
| Commercial paper |
|
|
|
|
|
||||||||||||||||||||||||
| Other |
|
|
|
|
|
||||||||||||||||||||||||
| Total fair value | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||
| Total amortized cost | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||
| Held to maturity securities | |||||||||||||||||||||||||||||
| U.S. agency mortgage-backed securities | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||
| Total fair value | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||
| Total amortized cost | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||
Proceeds and gross realized gains and losses from sales of AFS investment securities are as follows:
|
Three Months Ended
March 31, |
|||||||||||
| 2022 | 2021 | ||||||||||
| Proceeds | $ |
|
$ |
|
|||||||
| Gross realized gains |
|
|
|||||||||
| Gross realized losses |
|
|
|||||||||
- 33 -
THE CHARLES SCHWAB CORPORATION
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted)
(Unaudited)
5.
Bank Loans and Related Allowance for Credit Losses
The composition of bank loans and delinquency analysis by portfolio segment and class of financing receivable is as follows:
| March 31, 2022 | Current |
30-59 days
past due |
60-89 days
past due |
>
90 days past
due and other nonaccrual loans (3) |
Total past due
and other nonaccrual loans |
Total
loans |
Allowance
for credit losses |
Total
bank loans – net |
||||||||||||||||||
| Residential real estate: | ||||||||||||||||||||||||||
|
First Mortgages
(1,2)
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
||||||||||
|
HELOCs
(1,2)
|
|
|
|
|
|
|
|
|
||||||||||||||||||
| Total residential real estate |
|
|
|
|
|
|
|
|
||||||||||||||||||
| Pledged asset lines |
|
|
|
|
|
|
|
|
||||||||||||||||||
| Other |
|
|
|
|
|
|
|
|
||||||||||||||||||
| Total bank loans | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
||||||||||
| December 31, 2021 | ||||||||||||||||||||||||||
| Residential real estate: | ||||||||||||||||||||||||||
|
First Mortgages
(1,2)
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
||||||||||
|
HELOCs
(1,2)
|
|
|
|
|
|
|
|
|
||||||||||||||||||
| Total residential real estate |
|
|
|
|
|
|
|
|
||||||||||||||||||
| Pledged asset lines |
|
|
|
|
|
|
|
|
||||||||||||||||||
| Other |
|
|
|
|
|
|
|
|
||||||||||||||||||
| Total bank loans | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
||||||||||
(1)
First Mortgages and HELOCs include unamortized premiums and discounts and direct origination costs of $
94
million and $
91
million at March 31, 2022 and December 31, 2021, respectively.
(2)
First Mortgage and HELOC portfolios concentrated in California as of March 31, 2022 and December 31, 2021 were
45
% and
46
%, respectively. These loans have performed in a manner consistent with the portfolio as a whole.
(3)
There were
no
loans accruing interest that were contractually 90 days or more past due at March 31, 2022 or December 31, 2021.
At March 31, 2022, CSB had pledged the full balance of First Mortgages and HELOCs pursuant to a blanket lien status collateral arrangement to secure borrowing capacity on a secured credit facility with the FHLB (see Note 8).
Changes in the allowance for credit losses on bank loans were as follows:
| March 31, 2022 | March 31, 2021 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Three Months Ended | First Mortgages | HELOCs | Total residential real estate | Other | Total | First Mortgages | HELOCs | Total residential real estate | Other | Total | |||||||||||||||||||||||||||||||||||||||||||||||||
|
Balance at beginning of
period |
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||||||||||||||||||||||
| Charge-offs |
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||||||||||||||
| Recoveries |
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||||||||||||||
|
Provision for credit
losses |
|
|
|
|
|
(
|
(
|
(
|
|
(
|
|||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at end of period | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||||||||||||||||||||||
PALs are subject to the collateral maintenance practical expedient under ASC 326
Financial Instruments – Credit Losses
. All PALs were fully collateralized by securities with fair values in excess of borrowings as of March 31, 2022 and December 31, 2021. Therefore, no allowance for credit losses for PALs as of those dates was required. For further details on Schwab’s application of ASC 326 see Item 8 – Note 2 in the 2021 Form 10-K.
Indicators of economic activity and employment continue to strengthen despite the recent Omicron wave, which dampened growth in some COVID-sensitive sectors of the economy. Management’s macroeconomic outlook reflects continued moderate
- 34 -
THE CHARLES SCHWAB CORPORATION
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted)
(Unaudited)
growth in home prices and lower unemployment anticipated over the near term, however recent increases in treasury yields and mortgage rates may reduce borrower affordability and extend the expected life of the portfolio. These changes in the macroeconomic outlook resulted in higher modeled projections of loss rates at March 31, 2022 compared to December 31, 2021, even as credit quality metrics continue to be strong in the Company’s bank loans portfolio
.
A summary of bank loan-related nonperforming assets and troubled debt restructurings is as follows:
| March 31, 2022 | December 31, 2021 | ||||||||||
|
Nonaccrual loans
(1)
|
$ |
|
$ |
|
|||||||
|
Other real estate owned
(2)
|
|
|
|||||||||
| Total nonperforming assets |
|
|
|||||||||
| Troubled debt restructurings |
|
|
|||||||||
| Total nonperforming assets and troubled debt restructurings | $ |
|
$ |
|
|||||||
(1)
Nonaccrual loans include nonaccrual troubled debt restructurings.
(2)
Included in other assets on the condensed consolidated balance sheets.
Credit Quality
In addition to monitoring delinquency, Schwab monitors the credit quality of First Mortgages and HELOCs by stratifying the portfolios by the following:
•
Year of origination;
•
Borrower FICO scores at origination (Origination FICO);
•
Updated borrower FICO scores (Updated FICO);
•
Loan-to-value (LTV) ratios at origination (Origination LTV); and
•
Estimated Current LTV ratios (Estimated Current LTV).
Borrowers’ FICO scores are provided by an independent third-party credit reporting service and generally updated quarterly. The Origination LTV and Estimated Current LTV for a HELOC include any first lien mortgage outstanding on the same property at the time of the HELOC’s origination. The Estimated Current LTV for each loan is updated on a monthly basis by reference to a home price appreciation index.
- 35 -
THE CHARLES SCHWAB CORPORATION
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted)
(Unaudited)
The credit quality indicators of the Company’s bank loan portfolio are detailed below:
| First Mortgages Amortized Cost Basis by Origination Year | ||||||||||||||||||||||||||||||||
| March 31, 2022 | 2022 | 2021 | 2020 | 2019 | 2018 | pre-2018 | Total First Mortgages | Revolving HELOCs amortized cost basis | HELOCs converted to term loans | Total HELOCs | ||||||||||||||||||||||
| Origination FICO | ||||||||||||||||||||||||||||||||
| <620 | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
||||||||||||
| 620 – 679 |
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||||||
| 680 – 739 |
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||||||
| ≥740 |
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||||||
| Total | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
||||||||||||
| Origination LTV | ||||||||||||||||||||||||||||||||
| ≤70% | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
||||||||||||
| >70% – ≤90% |
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||||||
| >90% – ≤100% |
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||||||
| Total | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
||||||||||||
| Updated FICO | ||||||||||||||||||||||||||||||||
| <620 | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
||||||||||||
| 620 – 679 |
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||||||
| 680 – 739 |
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||||||
| ≥740 |
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||||||
| Total | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
||||||||||||
|
Estimated Current LTV
(1)
|
||||||||||||||||||||||||||||||||
| ≤70% | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
||||||||||||
| >70% – ≤90% |
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||||||
| >90% – ≤100% |
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||||||
| >100% |
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||||||
| Total | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
||||||||||||
|
Percent of Loans on
Nonaccrual Status |
|
% |
|
% |
|
% |
|
% |
|
% |
|
% |
|
% |
|
% |
|
% |
|
% | ||||||||||||
(1)
Represents the LTV for the full line of credit (drawn and undrawn) for revolving HELOCs.
- 36 -
THE CHARLES SCHWAB CORPORATION
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted)
(Unaudited)
| First Mortgages Amortized Cost Basis by Origination Year | |||||||||||||||||||||||||||||
| December 31, 2021 | 2021 | 2020 | 2019 | 2018 | pre-2018 | Total First Mortgages | Revolving HELOCs amortized cost basis | HELOCs converted to term loans | Total HELOCs | ||||||||||||||||||||
| Origination FICO | |||||||||||||||||||||||||||||
| <620 | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||
| 620 – 679 |
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
| 680 – 739 |
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
| ≥740 |
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
| Total | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||
| Origination LTV | |||||||||||||||||||||||||||||
| ≤70% | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||
| >70% – ≤90% |
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
| >90% – ≤100% |
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
| Total | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||
| Updated FICO | |||||||||||||||||||||||||||||
| <620 | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||
| 620 – 679 |
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
| 680 – 739 |
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
| ≥740 |
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
| Total | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||
|
Estimated Current LTV
(1)
|
|||||||||||||||||||||||||||||
| ≤70% | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||
| >70% – ≤90% |
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
| >90% – ≤100% |
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
| >100% |
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
| Total | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||
|
Percent of Loans on
Nonaccrual Status |
|
% |
|
% |
|
% |
|
% |
|
% |
|
% |
|
% |
|
% |
|
% | |||||||||||
At March 31, 2022, First Mortgage loans of $
18.3
billion had adjustable interest rates. Substantially all of these mortgages have initial fixed interest rates for
to
ten years
and interest rates that adjust annually thereafter. Approximately
28
% of the balance of these mortgages consisted of loans with interest-only payment terms. The interest rates on approximately
90
% of the balance of these interest-only loans are not scheduled to reset for
or more years. Schwab’s mortgage loans do not include interest terms described as temporary introductory rates below current market rates.
At March 31, 2022 and December 31, 2021, Schwab had $
64
million and $
57
million, respectively, of accrued interest on bank loans, which is excluded from the amortized cost basis of bank loans and included in other assets on the condensed consolidated balance sheets.
The HELOC product has a
30
-year loan term with an initial draw period of
ten years
from the date of origination. After the initial draw period, the balance outstanding at such time is converted to a
20
-year amortizing loan. The interest rate during the initial draw period and the
20
-year amortizing period is a floating rate based on the prime rate plus a margin.
- 37 -
THE CHARLES SCHWAB CORPORATION
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted)
(Unaudited)
The following table presents HELOCs converted to amortizing loans during each period presented:
|
Three Months Ended
March 31, |
|||||||||||
| 2022 | 2021 | ||||||||||
| HELOCs converted to amortizing loans | $ |
|
$ |
|
|||||||
The following table presents when current outstanding HELOCs will convert to amortizing loans:
| March 31, 2022 | Balance | |||||||
| Converted to an amortizing loan by period end | $ |
|
||||||
| Within 1 year |
|
|||||||
| > 1 year – 3 years |
|
|||||||
| > 3 years – 5 years |
|
|||||||
| > 5 years |
|
|||||||
| Total | $ |
|
||||||
At March 31, 2022, $
469
million of the HELOC portfolio was secured by second liens on the associated properties. Second lien mortgage loans typically possess a higher degree of credit risk given the subordination to the first lien holder in the event of default. In addition to the credit monitoring activities described previously, Schwab also monitors credit risk by reviewing the delinquency status of the first lien loan on the associated property. At March 31, 2022, the borrowers on approximately
53
% of HELOC loan balances outstanding only paid the minimum amount due.
6.
Variable Interest Entities
As of March 31, 2022 and December 31, 2021, all of Schwab’s involvement with variable interest entities (VIEs) is through CSB’s Community Reinvestment Act (CRA)-related investments and most of these are related to LIHTC investments. As part of CSB’s community reinvestment initiatives, CSB invests in funds that make equity investments in multifamily affordable housing properties and receives tax credits and other tax benefits for these investments.
Aggregate assets, liabilities, and maximum exposure to loss
The aggregate assets, liabilities, and maximum exposure to loss from those VIEs in which Schwab holds a variable interest, but is not the primary beneficiary, are summarized in the table below:
| March 31, 2022 | December 31, 2021 | |||||||||||||||||||||||||||||||||||||
|
Aggregate
assets |
Aggregate
liabilities |
Maximum
exposure to loss |
Aggregate
assets |
Aggregate
liabilities |
Maximum
exposure to loss |
|||||||||||||||||||||||||||||||||
|
LIHTC investments
(1)
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
||||||||||||||||||||||||||
|
Other CRA investments
(2)
|
|
|
|
|
|
|
||||||||||||||||||||||||||||||||
| Total | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
||||||||||||||||||||||||||
(1)
Aggregate assets and aggregate liabilities are included in other assets and accrued expenses and other liabilities, respectively, on the condensed consolidated balance sheets.
(2)
Other CRA investments are accounted for as loans at amortized cost, equity method investments, AFS securities, or using the adjusted cost method. Aggregate assets are included in AFS securities, bank loans – net, or other assets on the condensed consolidated balance sheets.
- 38 -
THE CHARLES SCHWAB CORPORATION
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted)
(Unaudited)
7.
Bank Deposits
Bank deposits consist of interest-bearing and non-interest-bearing deposits as follows:
| March 31, 2022 | December 31, 2021 | |||||||||||||
| Interest-bearing deposits: | ||||||||||||||
| Deposits swept from brokerage accounts | $ |
|
$ |
|
||||||||||
| Checking |
|
|
||||||||||||
| Savings and other |
|
|
||||||||||||
| Total interest-bearing deposits |
|
|
||||||||||||
| Non-interest-bearing deposits |
|
|
||||||||||||
| Total bank deposits | $ |
|
$ |
|
||||||||||
8.
Borrowings
CSC Senior Notes
CSC’s Senior Notes are unsecured obligations. CSC may redeem some or all of the Senior Notes of each series prior to their maturity, subject to certain restrictions, and the payment of an applicable make-whole premium in certain instances. Interest is payable semi-annually for the fixed-rate Senior Notes and quarterly for the floating-rate Senior Notes.
TDA Holding Senior Notes
TDA Holding’s Senior Notes are unsecured obligations. TDA Holding may redeem some or all of the Senior Notes of each series prior to their maturity, subject to certain restrictions, and the payment of an applicable make-whole premium in certain instances. Interest is payable semi-annually for the fixed-rate Senior Notes.
- 39 -
THE CHARLES SCHWAB CORPORATION
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted)
(Unaudited)
The following table lists long-term debt by instrument outstanding as of March 31, 2022 and December 31, 2021.
| Date of Issuance | Principal Amount Outstanding | ||||||||||
| March 31, 2022 | December 31, 2021 | ||||||||||
| CSC Fixed-rate Senior Notes: | |||||||||||
|
|
08/29/12 | $ |
|
$ |
|
||||||
|
|
12/07/17 |
|
|
||||||||
|
|
10/31/18 |
|
|
||||||||
|
|
03/18/21 |
|
|
||||||||
|
|
09/24/21 |
|
|
||||||||
|
|
03/10/15 |
|
|
||||||||
|
|
03/24/20 |
|
|
||||||||
|
|
09/24/21 |
|
|
||||||||
|
|
05/22/18 |
|
|
||||||||
|
|
11/13/15 |
|
|
||||||||
|
|
12/11/20 |
|
|
||||||||
|
|
05/13/21 |
|
|
||||||||
|
|
03/02/17 |
|
|
||||||||
|
|
03/03/22 |
|
|
||||||||
|
|
09/24/21 |
|
|
||||||||
|
|
12/07/17 |
|
|
||||||||
|
|
03/18/21 |
|
|
||||||||
|
|
10/31/18 |
|
|
||||||||
|
|
05/22/19 |
|
|
||||||||
|
|
09/24/21 |
|
|
||||||||
|
|
03/24/20 |
|
|
||||||||
|
|
12/11/20 |
|
|
||||||||
|
|
05/13/21 |
|
|
||||||||
|
|
08/26/21 |
|
|
||||||||
|
|
03/03/22 |
|
|
||||||||
| CSC Floating-rate Senior Notes: | |||||||||||
|
SOFR +
|
03/18/21 |
|
|
||||||||
|
SOFR +
|
05/13/21 |
|
|
||||||||
|
SOFR +
|
03/03/22 |
|
|
||||||||
| Total CSC Senior Notes |
|
|
|||||||||
| TDA Holding Fixed-rate Senior Notes: | |||||||||||
|
|
03/09/15 |
|
|
||||||||
|
|
11/01/18 |
|
|
||||||||
|
|
10/22/14 |
|
|
||||||||
|
|
04/27/17 |
|
|
||||||||
|
|
08/16/19 |
|
|
||||||||
| Total TDA Holding Senior Notes |
|
|
|||||||||
| Finance lease liabilities |
|
|
|||||||||
| Unamortized premium — net |
|
|
|||||||||
| Debt issuance costs |
(
|
(
|
|||||||||
| Total long-term debt | $ |
|
$ |
|
|||||||
- 40 -
THE CHARLES SCHWAB CORPORATION
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted)
(Unaudited)
Annual maturities on all long-term debt outstanding at March 31, 2022 are as follows:
| Maturities | |||||
| 2022 | $ |
|
|||
| 2023 |
|
||||
| 2024 |
|
||||
| 2025 |
|
||||
| 2026 |
|
||||
| Thereafter |
|
||||
| Total maturities |
|
||||
| Unamortized premium— net |
|
||||
| Debt issuance costs |
(
|
||||
| Total long-term debt | $ |
|
|||
Short-term borrowings:
CSC has the ability to issue up to $
5.0
billion of commercial paper notes with maturities up to
270
days; and had $
2.4
billion outstanding at March 31, 2022 and $
3.0
billion at December 31, 2021. CSC and CS&Co also have access to uncommitted lines of credit with external banks with total borrowing capacity of $
1.5
billion;
no
amounts were outstanding as of March 31, 2022 or December 31, 2021.
Our banking subsidiaries maintain secured credit facilities with the FHLB. Amounts available under these facilities are dependent on the amount of our First Mortgages, HELOCs, and the fair value of certain of their investment securities that are pledged as collateral. As of March 31, 2022 and December 31, 2021, the collateral pledged provided a total borrowing capacity of $
68.2
billion and $
63.5
billion, respectively, of which
no
amounts were outstanding at the end of either period.
Our banking subsidiaries have access to funding through the Federal Reserve discount window. Amounts available are dependent upon the fair value of certain investment securities that are pledged as collateral. As of March 31, 2022 and December 31, 2021, our collateral pledged provided total borrowing capacity of $
10.3
billion and $
12.0
billion, respectively, of which
no
amounts were outstanding at the end of either period.
Our banking subsidiaries may engage with external banks in repurchase agreements collateralized by investment securities as another source of short-term liquidity. The Company had
no
borrowings outstanding pursuant to such repurchase agreements at March 31, 2022 or December 31, 2021.
TDAC maintains secured uncommitted lines of credit, under which TDAC borrows on either a demand or short-term basis and pledges client margin securities as collateral. There was $
1.9
billion outstanding under the secured uncommitted lines of credit as of March 31, 2022 and December 31, 2021. See Note 11 for additional information.
TDAC maintained
one
senior unsecured committed revolving credit facility as of March 31, 2022 with an aggregate borrowing capacity of $
600
million which matured in April 2022 and was not renewed. There were
no
borrowings outstanding under the TDAC senior revolving facilities as of March 31, 2022 or December 31, 2021.
- 41 -
THE CHARLES SCHWAB CORPORATION
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted)
(Unaudited)
9.
Commitments and Contingencies
Loan Portfolio:
CSB provides a co-branded loan origination program for CSB clients (the Program) with Rocket Mortgage, LLC (Rocket Mortgage
®
), formerly known as Quicken Loans, LLC. Pursuant to the Program, Rocket Mortgage originates and services First Mortgages and HELOCs for CSB clients. Under the Program, CSB purchases certain First Mortgages and HELOCs that are originated by Rocket Mortgage. CSB purchased First Mortgages of $
2.7
billion and $
2.8
billion during the first quarters of 2022 and 2021, respectively. CSB purchased HELOCs with commitments of $
90
million and $
99
million during the first quarters of 2022 and 2021, respectively.
The Company’s commitments to extend credit on bank lines of credit and to purchase First Mortgages are as follows:
| March 31, 2022 | December 31, 2021 | ||||||||||
| Commitments to extend credit related to unused HELOCs, PALs, and other lines of credit | $ |
|
$ |
|
|||||||
| Commitments to purchase First Mortgage loans |
|
|
|||||||||
| Total | $ |
|
$ |
|
|||||||
Guarantees and indemnifications:
Schwab has clients that sell (i.e., write) listed option contracts that are cleared by the Options Clearing Corporation – a clearing house that establishes margin requirements on these transactions. We partially satisfy the margin requirements by arranging unsecured standby letter of credit agreements (LOCs), in favor of the Options Clearing Corporation, which are issued by several banks. At March 31, 2022, the aggregate face amount of these LOCs totaled $
15
million. There were
no
funds drawn under any of these LOCs at March 31, 2022. In connection with its securities lending activities, Schwab is required to provide collateral to certain brokerage clients. The Company satisfies the collateral requirements by providing cash as collateral.
The Company also provides guarantees to securities clearing houses and exchanges under standard membership agreements, which require members to guarantee the performance of other members. Under the agreements, if another member becomes unable to satisfy its obligations to the clearing houses and exchanges, other members would be required to meet shortfalls. The Company’s liability under these arrangements is not quantifiable and may exceed the amounts it has posted as collateral. The Company also engages third-party firms to clear clients’ futures and options on futures transactions and to facilitate clients’ foreign exchange trading, and has agreed to indemnify these firms for any losses that they may incur from the client transactions introduced to them by the Company. The potential requirement for the Company to make payments under these arrangements is remote. Accordingly,
no
liability has been recognized for these guarantees.
IDA agreement:
The Company’s IDA agreement with the TD Depository Institutions became effective on October 6, 2020. The IDA agreement creates responsibilities of the Company and certain contingent obligations. Pursuant to the IDA agreement, uninvested cash within eligible brokerage client accounts is swept off-balance sheet to deposit accounts at the TD Depository Institutions. Schwab provides recordkeeping and support services to the TD Depository Institutions with respect to the deposit accounts for which Schwab receives an aggregate monthly fee. Though unlikely, in the event the sweep arrangement fee computation were to result in a negative amount in any given month, Schwab would be required to pay the TD Depository Institutions.
The IDA agreement provides that, as of July 1, 2021, Schwab has the option to migrate up to $
10
billion of IDA balances every 12 months to Schwab’s balance sheet, subject to certain limitations and adjustments. The Company’s ability to migrate these balances to its balance sheet is dependent upon multiple factors including having sufficient capital levels to sustain these incremental deposits and certain binding limitations specified in the IDA agreement, including the requirement that Schwab can only move IDA balances designated as floating-rate obligations. In addition, Schwab also must maintain a minimum $
50
billion IDA balance through June 2031, and at least
80
% of the IDA balances must be designated as fixed-rate obligations through June 2026.
The total ending IDA balance was $
143.5
billion as of March 31, 2022 and $
147.2
billion as of December 31, 2021. If IDA balances were to decline below the required IDA balance minimum, Schwab could be required to direct additional sweep cash from its balance sheet to the IDA program. During the first quarter of 2022, Schwab moved $
12.7
billion of IDA balances to its balance sheet.
- 42 -
THE CHARLES SCHWAB CORPORATION
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted)
(Unaudited)
Legal contingencies:
Schwab is subject to claims and lawsuits in the ordinary course of business, including arbitrations, class actions and other litigation, some of which include claims for substantial or unspecified damages. The Company is also the subject of inquiries, investigations, and proceedings by regulatory and other governmental agencies.
Predicting the outcome of a litigation or regulatory matter is inherently difficult, requiring significant judgment and evaluation of various factors, including the procedural status of the matter and any recent developments; prior experience and the experience of others in similar cases; available defenses, including potential opportunities to dispose of a case on the merits or procedural grounds before trial (e.g., motions to dismiss or for summary judgment); the progress of fact discovery; the opinions of counsel and experts regarding potential damages; and potential opportunities for settlement and the status of any settlement discussions. It may not be reasonably possible to estimate a range of potential liability until the matter is closer to resolution – pending, for example, further proceedings, the outcome of key motions or appeals, or discussions among the parties. Numerous issues may have to be developed, such as discovery of important factual matters and determination of threshold legal issues, which may include novel or unsettled questions of law. Reserves are established or adjusted or further disclosure and estimates of potential loss are provided as the matter progresses and more information becomes available.
Schwab believes it has strong defenses in all significant matters currently pending and is contesting liability and any damages claimed. Nevertheless, some of these matters may result in adverse judgments or awards, including penalties, injunctions or other relief, and the Company may also determine to settle a matter because of the uncertainty and risks of litigation. Described below are matters in which there is a reasonable possibility that a material loss could be incurred or where the matter may otherwise be of significant interest to stockholders. Unless otherwise noted, the Company is unable to provide a reasonable estimate of any potential liability given the stage of proceedings in the matter. With respect to all other pending matters, based on current information and consultation with counsel, it does not appear reasonably possible that the outcome of any such matter would be material to the financial condition, operating results, or cash flows of the Company.
Schwab Intelligent Portfolios
®
SEC Investigation
: As disclosed on July 1, 2021, the Company has been responding to an enforcement investigation by the SEC arising from a compliance examination and concerning historic disclosures related to the Schwab Intelligent Portfolios digital advisory solution. In connection with a tentative agreement reached with SEC staff to resolve the matter, financial results for 2021 included a liability and related non-deductible charge of approximately $
200
million. Completion of any settlement is always contingent on a vote of the Commission. The Company continues to cooperate with SEC staff with the goal of fully resolving the matter.
TD Ameritrade Acquisition Litigation
: As disclosed previously, on May 12, 2020, a putative class action lawsuit related to the acquisition was filed in the Delaware Court of Chancery (Hawkes v. Bettino et al.) on behalf of a proposed class of TD Ameritrade’s stockholders, excluding, among others, TD Bank. On February 5, 2021, plaintiff filed an amended complaint naming an officer and certain directors of TD Ameritrade at the time the acquisition was approved, as well as TD Bank, certain TD Bank related entities, and Schwab. The amended complaint asserts separate claims for breach of fiduciary duty by the TD Ameritrade officer, certain members of the TD Ameritrade board and TD Bank, and against Schwab for aiding and abetting such breaches, the allegation being that the amendment of the Insured Deposit Account Agreement TD Bank negotiated directly with Schwab allowed TD Bank to divert merger consideration from TD Ameritrade’s minority public stockholders. Plaintiff seeks to recover monetary damages, costs and attorneys’ fees. Schwab and the other defendants consider the allegations to be entirely without merit and on April 29, 2021, the defendants filed motions to dismiss the amended complaint. On March 25, 2022, the parties filed a joint stipulation proposing a settlement of the lawsuit on a class basis. A settlement hearing is scheduled for July 11, 2022. If the settlement is approved, Schwab will pay an immaterial amount on behalf of the former TD Ameritrade officer and director defendants pursuant to indemnification obligations.
Crago Order Routing Litigation
: On July 13, 2016, a securities class action lawsuit was filed in the U.S. District Court for the Northern District of California on behalf of a putative class of customers executing equity orders through CS&Co. The lawsuit names CS&Co and CSC as defendants and alleges that an agreement under which CS&Co routed orders to UBS Securities LLC between July 13, 2011 and December 31, 2014 violated CS&Co’s duty to seek best execution. Plaintiffs seek unspecified damages, interest, injunctive and equitable relief, and attorneys’ fees and costs. Defendants consider the allegations to be entirely without merit and have been vigorously contesting the lawsuit. After a first amended complaint was dismissed with leave to amend, plaintiffs filed a second amended complaint on August 14, 2017. Defendants again moved to dismiss, and in a decision issued December 5, 2017, the court denied the motion. Plaintiffs filed a motion for class certification on April 30, 2021, and in a decision on October 27, 2021, the court denied the motion and held that certification of a class action is inappropriate. Plaintiffs sought review of the order denying class certification by the Ninth Circuit Court of Appeals, which was denied, and on February 3, 2022, plaintiffs filed a motion for reconsideration of that denial, which is pending.
- 43 -
THE CHARLES SCHWAB CORPORATION
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted)
(Unaudited)
10.
Exit and Other Related Liabilities
The Company completed its acquisition of TD Ameritrade effective October 6, 2020 and integration work continued during the first quarter of 2022. Based on our current integration plans and expanded scope of technology work, the Company continues to expect to complete client conversions across multiple groups within approximately
30
to
36
months from the October 6, 2020 acquisition date, ending in the fourth quarter of 2023.
To achieve our integration objectives, the Company expects to recognize significant additional acquisition and integration-related costs and capital expenditures throughout the integration process. Such acquisition and integration-related costs have included, and are expected to continue to include professional fees, such as legal, advisory, and accounting fees, compensation and benefits expenses for employees and contractors involved in the integration work, and costs for technology enhancements.
The Company’s acquisition and integration-related spending also includes exit and other related costs, which are primarily comprised of employee compensation and benefits such as severance pay, other termination benefits, and retention costs, as well as costs related to facility closures, such as accelerated amortization and depreciation or impairments of assets in those locations. Exit and other related costs are a component of the Company’s overall acquisition and integration-related spending, and support the Company’s ability to achieve integration objectives including expected synergies.
Our estimates of the nature, amounts, and timing of recognition of acquisition and integration-related costs remain subject to change based on a number of factors, including the expected duration and complexity of the integration process and the continued uncertainty of the current economic environment. More specifically, factors that could cause variability in our expected acquisition and integration-related costs include the level of employee attrition, workforce redeployment from eliminated positions into open roles, changes in the levels of client activity, as well as increased real estate-related exit cost variability due to the effects of the COVID-19 pandemic including changes in remote working trends.
Inclusive of costs recognized through March 31, 2022, Schwab currently expects to incur total exit and other related costs for the integration of TD Ameritrade ranging from $
650
million to $
1
billion, consisting of employee compensation and benefits, facility exit costs, and certain other costs. During the three months ended March 31, 2022 and 2021, the Company recognized $
12
million and $
43
million of acquisition-related exit costs, respectively. The Company expects the remaining exit and other related costs will be incurred and charged to expense over the next
18
to
30
months; some costs are expected to be incurred after client conversion. In addition to ASC 420
Exit or Disposal Cost Obligations
, certain of the costs associated with these activities are accounted for in accordance with ASC 360
Property, Plant and Equipment
, ASC 712
Compensation
–
Nonretirement Post Employment Benefits
, ASC 718
Compensation
–
Stock Compensation
, and ASC 842
Leases
.
- 44 -
THE CHARLES SCHWAB CORPORATION
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted)
(Unaudited)
The following is a summary of the activity in the Company’s exit and other related liabilities for the three months ended March 31, 2022:
|
Investor Services
Employee Compensation and Benefits |
Advisor Services
Employee Compensation and Benefits |
Total | |||||||||||||||
| Balance at December 31, 2021 | $ |
|
$ |
|
$ |
|
|||||||||||
|
Amounts recognized in expense
(1)
|
|
|
|
||||||||||||||
| Costs paid or otherwise settled |
(
|
(
|
(
|
||||||||||||||
|
Balance at March 31, 2022
(2)
|
$ |
|
$ |
|
$ |
|
|||||||||||
(1)
Amounts recognized in expense for severance pay and other termination benefits, as well as retention costs, are primarily included in compensation and benefits on the condensed consolidated statements of income.
(2)
Included in accrued expenses and other liabilities on the condensed consolidated balance sheets.
The following is a summary of the activity in the Company’s exit and other related liabilities for the three months ended March 31, 2021:
|
Investor Services
Employee Compensation and Benefits |
Advisor Services
Employee Compensation and Benefits |
Total | |||||||||||||||
| Balance at December 31, 2020 | $ |
|
$ |
|
$ |
|
|||||||||||
|
Amounts recognized in expense
(1)
|
|
|
|
||||||||||||||
| Costs paid or otherwise settled |
(
|
(
|
(
|
||||||||||||||
|
Balance at March 31, 2021
(2)
|
$ |
|
$ |
|
$ |
|
|||||||||||
(1)
Amounts recognized in expense for severance pay and other termination benefits, as well as retention costs, are primarily included in compensation and benefits on the condensed consolidated statements of income.
(2)
Included in accrued expenses and other liabilities on the condensed consolidated balance sheets.
The following table summarizes the exit and other related costs recognized in expense for the three months ended March 31, 2022:
| Investor Services | Advisor Services | ||||||||||||||||||||||||||||||||||||||||
| Employee Compensation and Benefits |
Facility Exit Costs
(1)
|
Investor Services Total | Employee Compensation and Benefits |
Facility Exit Costs
(1)
|
Advisor Services Total | Total | |||||||||||||||||||||||||||||||||||
| Compensation and benefits | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||||||||||
| Occupancy and equipment |
|
|
|
|
|
|
|
||||||||||||||||||||||||||||||||||
| Total | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||||||||||
(1)
Costs related to facility closures. These costs, which are comprised of accelerated amortization of right-of-use (ROU) assets, relate to the impact of abandoning leased properties.
The following table summarizes the exit and other related costs recognized in expense for the three months ended March 31, 2021:
| Investor Services | Advisor Services | ||||||||||||||||||||||||||||||||||||||||
| Employee Compensation and Benefits |
Facility Exit Costs
(1)
|
Investor Services Total | Employee Compensation and Benefits |
Facility Exit Costs
(1)
|
Advisor Services Total | Total | |||||||||||||||||||||||||||||||||||
| Compensation and benefits | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||||||||||
| Occupancy and equipment |
|
|
|
|
|
|
|
||||||||||||||||||||||||||||||||||
| Professional services |
|
|
|
|
|
|
|
||||||||||||||||||||||||||||||||||
| Other |
|
|
|
|
|
|
|
||||||||||||||||||||||||||||||||||
| Total | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||||||||||
(1)
Costs related to facility closures. These costs, which are primarily comprised of accelerated amortization of ROU assets, relate to the impact of abandoning leased and other properties.
- 45 -
THE CHARLES SCHWAB CORPORATION
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted)
(Unaudited)
The following table summarizes the exit and other related costs incurred from October 6, 2020 through March 31, 2022:
| Investor Services | Advisor Services | ||||||||||||||||||||||||||||||||||||||||
| Employee Compensation and Benefits |
Facility Exit Costs
(1)
|
Investor Services Total | Employee Compensation and Benefits |
Facility Exit Costs
(1)
|
Advisor Services Total | Total | |||||||||||||||||||||||||||||||||||
| Compensation and benefits | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||||||||||
| Occupancy and equipment |
|
|
|
|
|
|
|
||||||||||||||||||||||||||||||||||
| Depreciation and amortization |
|
|
|
|
|
|
|
||||||||||||||||||||||||||||||||||
| Professional services |
|
|
|
|
|
|
|
||||||||||||||||||||||||||||||||||
| Other |
|
|
|
|
|
|
|
||||||||||||||||||||||||||||||||||
| Total | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||||||||||
(1)
Costs related to facility closures. These costs, which are primarily comprised of accelerated amortization of ROU assets and accelerated depreciation of fixed assets, relate to the impact of abandoning leased and other properties.
11.
Financial Instruments Subject to Off-Balance Sheet Credit Risk
Resale agreements:
Schwab enters into collateralized resale agreements principally with other broker-dealers, which could result in losses in the event the counterparty fails to purchase the securities held as collateral for the cash advanced and the fair value of the securities declines. To mitigate this risk, Schwab requires that the counterparty deliver securities to a custodian, to be held as collateral, with a fair value at or in excess of the resale price. Schwab also sets standards for the credit quality of the counterparty, monitors the fair value of the underlying securities as compared to the related receivable, including accrued interest, and requires additional collateral where deemed appropriate. The collateral provided under these resale agreements is utilized to meet obligations under broker-dealer client protection rules, which place limitations on our ability to access such segregated securities. For Schwab to repledge or sell this collateral, we would be required to deposit cash and/or securities of an equal amount into our segregated reserve bank accounts in order to meet our segregated cash and investment requirement. Schwab’s resale agreements as of March 31, 2022 and December 31, 2021 were not subject to master netting arrangements.
Securities lending:
Schwab loans brokerage client securities temporarily to other brokers and clearing houses in connection with its securities lending activities and receives cash as collateral for the securities loaned. Increases in security prices may cause the fair value of the securities loaned to exceed the amount of cash received as collateral. In the event the counterparty to these transactions does not return the loaned securities or provide additional cash collateral, we may be exposed to the risk of acquiring the securities at prevailing market prices in order to satisfy our client obligations. Schwab mitigates this risk by requiring credit approvals for counterparties, monitoring the fair value of securities loaned, and requiring additional cash as collateral when necessary. In addition, most of our securities lending transactions are through a program with a clearing organization, which guarantees the return of cash to us. We also borrow securities from other broker-dealers to fulfill short sales by brokerage clients and deliver cash to the lender in exchange for the securities. The fair value of these borrowed securities was $
549
million and $
566
million at March 31, 2022 and December 31, 2021, respectively. Our securities lending transactions are subject to enforceable master netting arrangements with other broker-dealers; however, we do not net securities lending transactions. Therefore, the securities loaned and securities borrowed are presented gross in the condensed consolidated balance sheets.
- 46 -
THE CHARLES SCHWAB CORPORATION
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted)
(Unaudited)
The following table presents information about our resale agreements, securities lending, and other activity depicting the potential effect of rights of setoff between these recognized assets and recognized liabilities.
|
Gross
Assets/ Liabilities |
Gross Amounts
Offset in the Condensed Consolidated Balance Sheets |
Net Amounts
Presented in the Condensed Consolidated Balance Sheets |
Gross Amounts Not Offset in the
Condensed Consolidated Balance Sheets |
Net
Amount |
|||||||||||||||||||||||||||||||||||||
|
Counterparty
Offsetting |
Collateral | ||||||||||||||||||||||||||||||||||||||||
| March 31, 2022 | |||||||||||||||||||||||||||||||||||||||||
| Assets | |||||||||||||||||||||||||||||||||||||||||
|
Resale agreements
(1)
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
(
|
(2)
|
$ |
|
||||||||||||||||||||||||||||
|
Securities borrowed
(3)
|
|
|
|
(
|
(
|
|
|||||||||||||||||||||||||||||||||||
| Total | $ |
|
$ |
|
$ |
|
$ |
(
|
$ |
(
|
$ |
|
|||||||||||||||||||||||||||||
| Liabilities | |||||||||||||||||||||||||||||||||||||||||
|
Securities loaned
(4,5)
|
$ |
|
$ |
|
$ |
|
$ |
(
|
$ |
(
|
$ |
|
|||||||||||||||||||||||||||||
|
Secured short-term borrowings
(6)
|
|
|
|
|
(
|
|
|||||||||||||||||||||||||||||||||||
| Total | $ |
|
$ |
|
$ |
|
$ |
(
|
$ |
(
|
$ |
|
|||||||||||||||||||||||||||||
| December 31, 2021 | |||||||||||||||||||||||||||||||||||||||||
| Assets | |||||||||||||||||||||||||||||||||||||||||
|
Resale agreements
(1)
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
(
|
(2)
|
$ |
|
||||||||||||||||||||||||||||
|
Securities borrowed
(3)
|
|
|
|
(
|
(
|
|
|||||||||||||||||||||||||||||||||||
| Total | $ |
|
$ |
|
$ |
|
$ |
(
|
$ |
(
|
$ |
|
|||||||||||||||||||||||||||||
| Liabilities | |||||||||||||||||||||||||||||||||||||||||
|
Securities loaned
(4,5)
|
$ |
|
$ |
|
$ |
|
$ |
(
|
$ |
(
|
$ |
|
|||||||||||||||||||||||||||||
|
Secured short-term borrowings
(6)
|
|
|
|
|
(
|
|
|||||||||||||||||||||||||||||||||||
| Total | $ |
|
$ |
|
$ |
|
$ |
(
|
$ |
(
|
$ |
|
|||||||||||||||||||||||||||||
(1)
Included in cash and investments segregated and on deposit for regulatory purposes in the condensed consolidated balance sheets.
(2)
Actual collateral was greater than or equal to the value of the related assets. At March 31, 2022 and December 31, 2021, the fair value of collateral received in connection with resale agreements that are available to be repledged or sold was $
14.4
billion and $
13.4
billion, respectively.
(3)
Included in other assets in the condensed consolidated balance sheets.
(4)
Included in accrued expenses and other liabilities in the condensed consolidated balance sheets. The cash collateral received from counterparties under securities lending transactions was equal to or greater than the market value of the securities loaned at March 31, 2022 and December 31, 2021.
(5)
Securities loaned are predominantly comprised of equity securities held in client brokerage accounts with overnight and continuous remaining contractual maturities.
Margin lending:
Clients with margin loans have agreed to allow Schwab to pledge collateralized securities in their brokerage accounts in accordance with federal regulations.
The following table summarizes the fair value of client securities that were available, under such regulations, that could have been used as collateral, as well as the fair value of securities that we had pledged to third parties under such regulations and from securities borrowed transactions:
| March 31, 2022 | December 31, 2021 | |||||||||||||||||||||||||
| Fair value of client securities available to be pledged | $ |
|
$ |
|
||||||||||||||||||||||
| Fair value of securities pledged for: | ||||||||||||||||||||||||||
|
Fulfillment of requirements with the Options Clearing Corporation
(1)
|
$ |
|
$ |
|
||||||||||||||||||||||
| Fulfillment of client short sales |
|
|
||||||||||||||||||||||||
| Securities lending to other broker-dealers |
|
|
||||||||||||||||||||||||
| Collateral for short-term borrowings |
|
|
||||||||||||||||||||||||
| Total collateral pledged to third parties | $ |
|
$ |
|
||||||||||||||||||||||
Note: Excludes amounts available and pledged for securities lending from fully-paid client securities. The fair value of fully-paid client securities available and pledged was $
242
million as of March 31, 2022 and $
118
million as of December 31, 2021.
- 47 -
THE CHARLES SCHWAB CORPORATION
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted)
(Unaudited)
12.
Fair Values of Assets and Liabilities
Assets and liabilities measured at fair value on a recurring basis
Schwab’s assets and liabilities measured at fair value on a recurring basis include: certain cash equivalents, certain investments segregated and on deposit for regulatory purposes, AFS securities, and certain other assets and accrued expenses and other liabilities. The Company uses the market approach to determine the fair value of assets and liabilities. When available, the Company uses quoted prices in active markets to measure the fair value of assets and liabilities. Quoted prices for investments in exchange-traded securities represent end-of-day close prices published by exchanges. Quoted prices for money market funds and other mutual funds represent reported net asset values. When utilizing market data and bid-ask spread, the Company uses the price within the bid-ask spread that best represents fair value. When quoted prices in active markets do not exist, the Company uses prices obtained from independent third-party pricing services to measure the fair value of investment assets. We generally obtain prices from three independent third-party pricing sources for assets recorded at fair value.
Our primary independent pricing service provides prices for our fixed income investments such as commercial paper; certificates of deposit; U.S. government and agency securities; state and municipal securities; corporate debt securities; asset-backed securities; foreign government agency securities; and non-agency commercial mortgage-backed securities. Such prices are based on observable trades, broker/dealer quotes, and discounted cash flows that incorporate observable information such as yields for similar types of securities (a benchmark interest rate plus observable spreads) and weighted-average maturity for the same or similar “to-be-issued” securities. We compare the prices obtained from the primary independent pricing service to the prices obtained from the additional independent pricing services to determine if the price obtained from the primary independent pricing service is reasonable. Schwab does not adjust the prices received from independent third-party pricing services unless such prices are inconsistent with the definition of fair value and result in material differences in the amounts recorded.
Liabilities measured at fair value on a recurring basis include repurchase liabilities related to client-held fractional shares of equities, ETFs, and other securities, which are included in other assets on the condensed consolidated balance sheets. The Company has elected the fair value option pursuant to ASC 825
Financial Instruments
for the repurchase liabilities to match the measurement and accounting of the related client-held fractional shares. The fair values of the repurchase liabilities are based on quoted market prices or other observable market data consistent with the related client-held fractional shares. Unrealized gains and losses on client-held fractional shares offset the unrealized gains and losses on the corresponding repurchase liabilities, resulting in no impact to the consolidated statements of income. The Company’s liabilities to repurchase client-held fractional shares do not have credit risk, and, as a result, the Company has not recognized any gains or losses in the condensed consolidated statements of income or comprehensive income attributable to instrument-specific credit risk for these repurchase liabilities. The repurchase liabilities are included in accrued expenses and other liabilities on the condensed consolidated balance sheets.
For a description of the fair value hierarchy and Schwab’s fair value methodologies, see Item 8 – Note 2 in the 2021 Form 10-K. The Company did not adjust prices received from the primary independent third-party pricing service at March 31, 2022 or December 31, 2021.
- 48 -
THE CHARLES SCHWAB CORPORATION
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted)
(Unaudited)
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following tables present the fair value hierarchy for assets and liabilities measured at fair value on a recurring basis:
| March 31, 2022 | Level 1 | Level 2 | Level 3 |
Balance at
Fair Value |
|||||||||||||||||||
| Cash equivalents: | |||||||||||||||||||||||
| Money market funds | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
| Commercial paper |
|
|
|
|
|||||||||||||||||||
| Total cash equivalents |
|
|
|
|
|||||||||||||||||||
| Investments segregated and on deposit for regulatory purposes: | |||||||||||||||||||||||
| Certificates of deposit |
|
|
|
|
|||||||||||||||||||
| U.S. Government securities |
|
|
|
|
|||||||||||||||||||
| Total investments segregated and on deposit for regulatory purposes |
|
|
|
|
|||||||||||||||||||
| Available for sale securities: | |||||||||||||||||||||||
| U.S. agency mortgage-backed securities |
|
|
|
|
|||||||||||||||||||
| U.S. Treasury securities |
|
|
|
|
|||||||||||||||||||
| Asset-backed securities |
|
|
|
|
|||||||||||||||||||
| Corporate debt securities |
|
|
|
|
|||||||||||||||||||
| U.S. state and municipal securities |
|
|
|
|
|||||||||||||||||||
| Non-agency commercial mortgage-backed securities |
|
|
|
|
|||||||||||||||||||
| Certificates of deposit |
|
|
|
|
|||||||||||||||||||
| Foreign government agency securities |
|
|
|
|
|||||||||||||||||||
| Commercial paper |
|
|
|
|
|||||||||||||||||||
| Other |
|
|
|
|
|||||||||||||||||||
| Total available for sale securities |
|
|
|
|
|||||||||||||||||||
| Other assets: | |||||||||||||||||||||||
| Equity, corporate debt, and other securities |
|
|
|
|
|||||||||||||||||||
| Mutual funds and ETFs |
|
|
|
|
|||||||||||||||||||
| State and municipal debt obligations |
|
|
|
|
|||||||||||||||||||
| U.S. Government securities |
|
|
|
|
|||||||||||||||||||
| Total other assets |
|
|
|
|
|||||||||||||||||||
| Total assets | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
| Accrued expenses and other liabilities | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
| Total liabilities | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
- 49 -
THE CHARLES SCHWAB CORPORATION
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted)
(Unaudited)
| December 31, 2021 | Level 1 | Level 2 | Level 3 |
Balance at
Fair Value |
|||||||||||||||||||
| Cash equivalents: | |||||||||||||||||||||||
| Money market funds | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
| Total cash equivalents |
|
|
|
|
|||||||||||||||||||
| Investments segregated and on deposit for regulatory purposes: | |||||||||||||||||||||||
| Certificates of deposit |
|
|
|
|
|||||||||||||||||||
| U.S. Government securities |
|
|
|
|
|||||||||||||||||||
| Total investments segregated and on deposit for regulatory purposes |
|
|
|
|
|||||||||||||||||||
| Available for sale securities: | |||||||||||||||||||||||
| U.S. agency mortgage-backed securities |
|
|
|
|
|||||||||||||||||||
| U.S. Treasury securities |
|
|
|
|
|||||||||||||||||||
| Asset-backed securities |
|
|
|
|
|||||||||||||||||||
| Corporate debt securities |
|
|
|
|
|||||||||||||||||||
| U.S. state and municipal securities |
|
|
|
|
|||||||||||||||||||
| Non-agency commercial mortgage-backed securities |
|
|
|
|
|||||||||||||||||||
| Certificates of deposit |
|
|
|
|
|||||||||||||||||||
| Foreign government agency securities |
|
|
|
|
|||||||||||||||||||
| Commercial paper |
|
|
|
|
|||||||||||||||||||
| Other |
|
|
|
|
|||||||||||||||||||
| Total available for sale securities |
|
|
|
|
|||||||||||||||||||
| Other assets: | |||||||||||||||||||||||
| Equity, corporate debt, and other securities |
|
|
|
|
|||||||||||||||||||
| Mutual funds and ETFs |
|
|
|
|
|||||||||||||||||||
| State and municipal debt obligations |
|
|
|
|
|||||||||||||||||||
| U.S. Government securities |
|
|
|
|
|||||||||||||||||||
| Total other assets |
|
|
|
|
|||||||||||||||||||
| Total assets | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
| Accrued expenses and other liabilities | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
| Total liabilities | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
- 50 -
THE CHARLES SCHWAB CORPORATION
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted)
(Unaudited)
Fair Value of Other Financial Instruments
The following tables present the fair value hierarchy for other financial instruments:
| March 31, 2022 |
Carrying
Amount |
Level 1 | Level 2 | Level 3 |
Balance at
Fair Value |
||||||||||||||||||||||||
| Assets | |||||||||||||||||||||||||||||
| Cash and cash equivalents | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||
|
Cash and investments segregated and on deposit for
regulatory purposes |
|
|
|
|
|
||||||||||||||||||||||||
| Receivables from brokerage clients — net |
|
|
|
|
|
||||||||||||||||||||||||
| Held to maturity securities: | |||||||||||||||||||||||||||||
| U.S. agency mortgage-backed securities |
|
|
|
|
|
||||||||||||||||||||||||
| Total held to maturity securities |
|
|
|
|
|
||||||||||||||||||||||||
| Bank loans — net: | |||||||||||||||||||||||||||||
| First Mortgages |
|
|
|
|
|
||||||||||||||||||||||||
| HELOCs |
|
|
|
|
|
||||||||||||||||||||||||
| Pledged asset lines |
|
|
|
|
|
||||||||||||||||||||||||
| Other |
|
|
|
|
|
||||||||||||||||||||||||
| Total bank loans — net |
|
|
|
|
|
||||||||||||||||||||||||
| Other assets |
|
|
|
|
|
||||||||||||||||||||||||
| Liabilities | |||||||||||||||||||||||||||||
| Bank deposits | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||
| Payables to brokerage clients |
|
|
|
|
|
||||||||||||||||||||||||
| Accrued expenses and other liabilities |
|
|
|
|
|
||||||||||||||||||||||||
| Short-term borrowings |
|
|
|
|
|
||||||||||||||||||||||||
| Long-term debt |
|
|
|
|
|
||||||||||||||||||||||||
| December 31, 2021 |
Carrying
Amount |
Level 1 | Level 2 | Level 3 |
Balance at
Fair Value |
||||||||||||||||||||||||
| Assets | |||||||||||||||||||||||||||||
| Cash and cash equivalents | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||
|
Cash and investments segregated and on deposit for
regulatory purposes |
|
|
|
|
|
||||||||||||||||||||||||
| Receivables from brokerage clients — net |
|
|
|
|
|
||||||||||||||||||||||||
| Bank loans — net: | |||||||||||||||||||||||||||||
| First Mortgages |
|
|
|
|
|
||||||||||||||||||||||||
| HELOCs |
|
|
|
|
|
||||||||||||||||||||||||
| Pledged asset lines |
|
|
|
|
|
||||||||||||||||||||||||
| Other |
|
|
|
|
|
||||||||||||||||||||||||
| Total bank loans — net |
|
|
|
|
|
||||||||||||||||||||||||
| Other assets |
|
|
|
|
|
||||||||||||||||||||||||
| Liabilities | |||||||||||||||||||||||||||||
| Bank deposits | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||
| Payables to brokerage clients |
|
|
|
|
|
||||||||||||||||||||||||
| Accrued expenses and other liabilities |
|
|
|
|
|
||||||||||||||||||||||||
| Short-term borrowings |
|
|
|
|
|
||||||||||||||||||||||||
| Long-term debt |
|
|
|
|
|
||||||||||||||||||||||||
- 51 -
THE CHARLES SCHWAB CORPORATION
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted)
(Unaudited)
13.
Stockholders’ Equity
On March 4, 2022, the Company issued and sold
750,000
depositary shares, each representing a 1/100th ownership interest in a share of
5.000
% fixed-rate reset non-cumulative perpetual preferred stock, Series K, $
.01
par value, with a liquidation preference of $
100,000
per share (equivalent of $
1,000
per depositary share). The net proceeds of the offering were $
740
million, after deducting the underwriting discount and offering expenses
On January 30, 2019, CSC publicly announced that its Board of Directors authorized a share repurchase program to repurchase up to $
4.0
billion of common stock. The share repurchase authorization does not have an expiration date. There were
no
repurchases of CSC’s common stock under this authorization during the three months ended March 31, 2022 and 2021. As of March 31, 2022, $
1.8
billion remained on the authorization.
The Company’s preferred stock issued and outstanding is as follows:
| Liquidation Preference Per Share | Dividend Rate in Effect at March 31, 2022 | Earliest Redemption Date | Date at Which Dividend Rate Resets or Becomes Floating | Reset / Floating Rate | Margin Over Reset / Floating Rate | ||||||||||||||||||||||||||||||
| Shares Issued and Outstanding (in ones) at | Carrying Value at | ||||||||||||||||||||||||||||||||||
|
March 31,
2022 (1) |
December 31, 2021
(1)
|
March 31, 2022 | December 31, 2021 | Issue Date | |||||||||||||||||||||||||||||||
| Fixed-rate: | |||||||||||||||||||||||||||||||||||
| Series D |
|
|
$ |
|
$ |
|
$ |
|
03/07/16 |
|
% | 06/01/21 | N/A | N/A | N/A | ||||||||||||||||||||
| Series J |
|
|
|
|
|
03/30/21 |
|
% | 06/01/26 | N/A | N/A | N/A | |||||||||||||||||||||||
| Fixed-to-floating-rate/Fixed-rate reset: | |||||||||||||||||||||||||||||||||||
| Series A |
|
|
|
|
|
01/26/12 |
|
% | 02/01/22 | 02/01/22 | 3M LIBOR |
|
% | ||||||||||||||||||||||
| Series E |
|
|
|
|
|
10/31/16 |
|
% | 03/01/22 | 03/01/22 | 3M LIBOR |
|
% | ||||||||||||||||||||||
| Series F |
|
|
|
|
|
10/31/17 |
|
% | 12/01/27 | 12/01/27 | 3M LIBOR |
|
% | ||||||||||||||||||||||
|
Series G
(2)
|
|
|
|
|
|
04/30/20 |
|
% | 06/01/25 | 06/01/25 |
|
|
% | ||||||||||||||||||||||
|
Series H
(3)
|
|
|
|
|
|
12/11/20 |
|
% | 12/01/30 | 12/01/30 |
|
|
% | ||||||||||||||||||||||
|
Series I
(2)
|
|
|
|
|
|
03/18/21 |
|
% | 06/01/26 | 06/01/26 |
|
|
% | ||||||||||||||||||||||
|
Series K
(4)
|
|
|
|
|
|
03/04/22 |
|
% | 06/01/27 | 06/01/27 |
|
|
% | ||||||||||||||||||||||
|
Total preferred
stock |
|
|
$ |
|
$ |
|
|||||||||||||||||||||||||||||
(1)
Represented by depositary shares, except for Series A.
(2)
The dividend rate for Series G and I resets on each
five-year
anniversary from the first reset date.
(3)
The dividend rate for Series H resets on each
ten-year
anniversary from the first reset date.
(4)
The Series K dividend rate resets on each
five-year
anniversary beginning on June 1, 2027 based on a
five-year
treasury rate, representing the average of the yields on actively traded U.S. treasury securities adjusted to constant maturity for
five-year
maturities. Series K is only redeemable on dividend payment dates on or after the first reset date.
N/A Not applicable.
- 52 -
THE CHARLES SCHWAB CORPORATION
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted)
(Unaudited)
Dividends declared on the Company’s preferred stock are as follows:
| Three Months Ended March 31, | ||||||||||||||||||||||||||
| 2022 | 2021 | |||||||||||||||||||||||||
|
Total
Declared |
Per Share
Amount |
Total
Declared |
Per Share
Amount |
|||||||||||||||||||||||
| Series A | $ |
|
$ |
|
$ |
|
$ |
|
||||||||||||||||||
|
Series C
(1)
|
|
|
|
|
||||||||||||||||||||||
| Series D |
|
|
|
|
||||||||||||||||||||||
| Series E |
|
|
|
|
||||||||||||||||||||||
| Series F |
|
|
|
|
||||||||||||||||||||||
| Series G |
|
|
|
|
||||||||||||||||||||||
| Series H |
|
|
|
|
||||||||||||||||||||||
|
Series I
(2)
|
|
|
|
|
||||||||||||||||||||||
|
Series J
(3)
|
|
|
|
|
||||||||||||||||||||||
|
Series K
(4)
|
|
|
|
|
||||||||||||||||||||||
| Total | $ |
|
$ |
|
||||||||||||||||||||||
(1)
Series C Preferred Stock was redeemed on June 1, 2021. Prior to redemption, dividends were paid quarterly and the final dividend was paid on June 1, 2021.
(2)
Series I Preferred Stock was issued on March 18, 2021. Dividends are paid quarterly, and the first dividend was paid on June 1, 2021.
(3)
Series J Preferred Stock was issued on March 30, 2021. Dividends are paid quarterly, and the first dividend was paid on June 1, 2021.
(4)
Series K Preferred Stock was issued on March 4, 2022. Dividends are paid quarterly, and the first dividend will be paid on June 1, 2022.
- 53 -
THE CHARLES SCHWAB CORPORATION
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted)
(Unaudited)
14.
Accumulated Other Comprehensive Income
AOCI represents cumulative gains and losses that are not reflected in earnings. AOCI balances and the components of other comprehensive income (loss) are as follows:
| Total AOCI | |||||
| Balance at December 31, 2020 | $ |
|
|||
| Available for sale securities: | |||||
|
Net unrealized gain (loss), net of tax expense (benefit) of $(
|
(
|
||||
|
Other reclassifications included in other revenue, net of tax expense (benefit) of $(
|
(
|
||||
| Balance at March 31, 2021 | $ |
|
|||
| Balance at December 31, 2021 | $ |
(
|
|||
| Available for sale securities: | |||||
|
Net unrealized gain (loss), excluding transfers to held to maturity, net of tax expense (benefit) of $(
|
(
|
||||
|
Net unrealized loss on securities transferred to held to maturity, net of tax expense (benefit) of $
|
|
||||
|
Other reclassifications included in other revenue, net of tax expense (benefit) of $(
|
(
|
||||
| Held to maturity securities: | |||||
|
Net unrealized loss on securities transferred from available for sale, net of tax expense (benefit) of $(
|
(
|
||||
|
Amortization of amounts previously recorded upon transfer from available for sale, net of tax expense (benefit) of $
|
|
||||
| Balance at March 31, 2022 | $ |
(
|
|||
(1)
In January 2022, the Company transferred a portion of its AFS securities to the HTM category. The transfer resulted in no net impact to AOCI. See Note 4 for additional discussion on the transfer of AFS securities to HTM.
- 54 -
THE CHARLES SCHWAB CORPORATION
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted)
(Unaudited)
15.
Earnings Per Common Share
For the three months ended March 31, 2022 and 2021, the Company had voting and nonvoting common stock outstanding. Since the rights of the voting and nonvoting common stock are identical, except with respect to voting, the net income of the Company has been allocated on a proportionate basis to the two classes. Diluted earnings per share is calculated using the treasury stock method for outstanding stock options and non-vested restricted stock units and the if-converted method for nonvoting common stock. For further details surrounding the EPS computation, see Note 25 in the 2021 Form 10-K.
EPS under the basic and diluted computations for both common stock and nonvoting common stock are as follows:
|
Three Months Ended
March 31, |
||||||||||||||
| 2022 | 2021 | |||||||||||||
|
Common
Stock |
Nonvoting
Common Stock |
Common
Stock |
Nonvoting
Common Stock |
|||||||||||
| Basic earnings per share: | ||||||||||||||
| Numerator | ||||||||||||||
| Net income | $ |
|
$ |
|
$ |
|
$ |
|
||||||
|
Preferred stock dividends and other
(1)
|
(
|
(
|
(
|
(
|
||||||||||
| Net income available to common stockholders | $ |
|
$ |
|
$ |
|
$ |
|
||||||
| Denominator | ||||||||||||||
| Weighted-average common shares outstanding — basic |
|
|
|
|
||||||||||
| Basic earnings per share | $ |
|
$ |
|
$ |
|
$ |
|
||||||
| Diluted earnings per share: | ||||||||||||||
| Numerator | ||||||||||||||
| Net income available to common stockholders | $ |
|
$ |
|
$ |
|
$ |
|
||||||
|
Reallocation of net income available to common stockholders as a result of conversion of nonvoting to
voting shares |
|
|
|
|
||||||||||
| Allocation of net income available to common stockholders: | $ |
|
$ |
|
$ |
|
$ |
|
||||||
| Denominator | ||||||||||||||
| Weighted-average common shares outstanding — basic |
|
|
|
|
||||||||||
| Conversion of nonvoting shares to voting shares |
|
|
|
|
||||||||||
| Common stock equivalent shares related to stock incentive plans |
|
|
|
|
||||||||||
|
Weighted-average common shares outstanding — diluted
(2)
|
|
|
|
|
||||||||||
| Diluted earnings per share | $ |
|
$ |
|
$ |
|
$ |
|
||||||
(1)
Includes preferred stock dividends and undistributed earnings and dividends allocated to non-vested restricted stock units.
- 55 -
THE CHARLES SCHWAB CORPORATION
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted)
(Unaudited)
16.
Regulatory Requirements
At March 31, 2022, CSC and CSB met all of their respective capital requirements.
The regulatory capital and ratios for CSC (consolidated) and CSB are as follows:
| Actual |
Minimum to be
Well Capitalized |
Minimum Capital Requirement | ||||||||||||||||||||||||||||||||||||
| March 31, 2022 | Amount | Ratio | Amount | Ratio | Amount |
Ratio
(1)
|
||||||||||||||||||||||||||||||||
| CSC | ||||||||||||||||||||||||||||||||||||||
| Common Equity Tier 1 Risk-Based Capital | $ |
|
|
% | N/A | $ |
|
|
% | |||||||||||||||||||||||||||||
| Tier 1 Risk-Based Capital |
|
|
% | N/A |
|
|
% | |||||||||||||||||||||||||||||||
| Total Risk-Based Capital |
|
|
% | N/A |
|
|
% | |||||||||||||||||||||||||||||||
| Tier 1 Leverage |
|
|
% | N/A |
|
|
% | |||||||||||||||||||||||||||||||
| Supplementary Leverage Ratio |
|
|
% | N/A |
|
|
% | |||||||||||||||||||||||||||||||
| CSB | ||||||||||||||||||||||||||||||||||||||
| Common Equity Tier 1 Risk-Based Capital | $ |
|
|
% | $ |
|
|
% | $ |
|
|
% | ||||||||||||||||||||||||||
| Tier 1 Risk-Based Capital |
|
|
% |
|
|
% |
|
|
% | |||||||||||||||||||||||||||||
| Total Risk-Based Capital |
|
|
% |
|
|
% |
|
|
% | |||||||||||||||||||||||||||||
| Tier 1 Leverage |
|
|
% |
|
|
% |
|
|
% | |||||||||||||||||||||||||||||
| Supplementary Leverage Ratio |
|
|
% | N/A |
|
|
% | |||||||||||||||||||||||||||||||
| December 31, 2021 | ||||||||||||||||||||||||||||||||||||||
| CSC | ||||||||||||||||||||||||||||||||||||||
| Common Equity Tier 1 Risk-Based Capital | $ |
|
|
% | N/A | $ |
|
|
% | |||||||||||||||||||||||||||||
| Tier 1 Risk-Based Capital |
|
|
% | N/A |
|
|
% | |||||||||||||||||||||||||||||||
| Total Risk-Based Capital |
|
|
% | N/A |
|
|
% | |||||||||||||||||||||||||||||||
| Tier 1 Leverage |
|
|
% | N/A |
|
|
% | |||||||||||||||||||||||||||||||
| Supplementary Leverage Ratio |
|
|
% | N/A |
|
|
% | |||||||||||||||||||||||||||||||
| CSB | ||||||||||||||||||||||||||||||||||||||
| Common Equity Tier 1 Risk-Based Capital | $ |
|
|
% | $ |
|
|
% | $ |
|
|
% | ||||||||||||||||||||||||||
| Tier 1 Risk-Based Capital |
|
|
% |
|
|
% |
|
|
% | |||||||||||||||||||||||||||||
| Total Risk-Based Capital |
|
|
% |
|
|
% |
|
|
% | |||||||||||||||||||||||||||||
| Tier 1 Leverage |
|
|
% |
|
|
% |
|
|
% | |||||||||||||||||||||||||||||
| Supplementary Leverage Ratio |
|
|
% | N/A |
|
|
% | |||||||||||||||||||||||||||||||
(1)
Under risk-based capital rules, CSC and CSB are also required to maintain additional capital buffers above the regulatory minimum risk-based capital ratios. Beginning in 2022, CSC will become subject to a stress capital buffer requirement once the Federal Reserve provides CSC with its final stress capital buffer requirement and it becomes effective on October 1, 2022. A firm that has not yet received a stress capital buffer but that is subject to capital planning requirements, such as CSC, is subject to a stress capital buffer requirement of 2.5% under regulatory requirements. CSB is required to maintain a capital conservation buffer of 2.5%. CSC and CSB are also required to maintain a countercyclical capital buffer above the regulatory minimum risk-based capital ratios, which was zero for both periods presented. If a buffer falls below the minimum requirement, CSC and CSB would be subject to increasingly strict limits on capital distributions and discretionary bonus payments to executive officers. At March 31, 2022, the minimum capital ratio requirements for both CSC and CSB, inclusive of their respective buffers, were 7.0%, 8.5%, and 10.5% for Common Equity Tier 1 Risk-Based Capital, Tier 1 Risk-Based Capital, and Total Risk-Based Capital, respectively.
N/A Not applicable.
Based on its regulatory capital ratios at March 31, 2022, CSB is considered well capitalized (the highest category) under its respective regulatory capital rules. There are no conditions or events since March 31, 2022 that management believes have changed CSB’s capital category.
At March 31, 2022, the balance sheets of Charles Schwab Premier Bank, SSB (CSPB) and Charles Schwab Trust Bank (Trust Bank) consisted primarily of investment securities, and the entities held total assets of $
40.7
billion and $
15.6
billion, respectively. Based on their regulatory capital ratios, at March 31, 2022, CSPB and Trust Bank are considered well capitalized under their respective regulatory capital rules.
- 56 -
THE CHARLES SCHWAB CORPORATION
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted)
(Unaudited)
Net capital and net capital requirements for CS&Co, TDAC, and TD Ameritrade, Inc., are as follows:
| March 31, 2022 | December 31, 2021 | |||||||||||||
| CS&Co | ||||||||||||||
| Net capital | $ |
|
$ |
|
||||||||||
| Minimum dollar requirement |
|
|
||||||||||||
| 2% of aggregate debit balances |
|
|
||||||||||||
| Net capital in excess of required net capital | $ |
|
$ |
|
||||||||||
| TDAC | ||||||||||||||
| Net capital | $ |
|
$ |
|
||||||||||
| Minimum dollar requirement |
|
|
||||||||||||
| 2% of aggregate debit balances |
|
|
||||||||||||
| Net capital in excess of required net capital | $ |
|
$ |
|
||||||||||
| TD Ameritrade, Inc. | ||||||||||||||
| Net capital | $ |
|
$ |
|
||||||||||
| Minimum dollar requirement |
|
|
||||||||||||
| 2% of aggregate debit balances |
|
|
||||||||||||
| Net capital in excess of required net capital | $ |
|
$ |
|
||||||||||
Pursuant to the SEC’s Customer Protection Rule and other applicable regulations, Schwab had cash and investments segregated for the exclusive benefit of clients at March 31, 2022. The SEC’s Customer Protection Rule requires broker-dealers to segregate client fully-paid securities and cash balances not collateralizing margin positions and not swept to money market funds or bank deposit accounts. Amounts included in cash and investments segregated and on deposit for regulatory purposes represent actual balances on deposit. Cash and cash equivalents included in cash and investments segregated and on deposit for regulatory purposes are presented as part of Schwab’s cash balances in the condensed consolidated statements of cash flows.
17.
Segment Information
Schwab’s
two
reportable segments are Investor Services and Advisor Services. Schwab structures the operating segments according to its clients and the services provided to those clients. The Investor Services segment provides retail brokerage, investment advisory, and banking and trust services to individual investors, and retirement plan services, as well as other corporate brokerage services, to businesses and their employees. The Advisor Services segment provides custodial, trading, banking and trust, and support services, as well as retirement business services, to independent RIAs, independent retirement advisors, and recordkeepers. Revenues and expenses are attributed to the
two
segments based on which segment services the client.
Management evaluates the performance of the segments on a pre-tax basis. Segment assets and liabilities are not used for evaluating segment performance or in deciding how to allocate resources to segments. There are
no
revenues from transactions between the segments.
Financial information for the segments is presented in the following table:
| Investor Services | Advisor Services | Total | |||||||||||||||||||||||||||||||||
| Three Months Ended March 31, | 2022 | 2021 | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||||||||
| Net Revenues | |||||||||||||||||||||||||||||||||||
| Net interest revenue | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||||||
| Asset management and administration fees |
|
|
|
|
|
|
|||||||||||||||||||||||||||||
| Trading revenue |
|
|
|
|
|
|
|||||||||||||||||||||||||||||
| Bank deposit account fees |
|
|
|
|
|
|
|||||||||||||||||||||||||||||
| Other |
|
|
|
|
|
|
|||||||||||||||||||||||||||||
| Total net revenues |
|
|
|
|
|
|
|||||||||||||||||||||||||||||
| Expenses Excluding Interest |
|
|
|
|
|
|
|||||||||||||||||||||||||||||
| Income before taxes on income | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||||||
- 57 -
THE CHARLES SCHWAB CORPORATION
Item 4. Controls and Procedures
Evaluation of disclosure controls and procedures:
The management of the Company, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of March 31, 2022. Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were effective as of March 31, 2022.
Changes in internal control over financial reporting:
No change in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) was identified during the quarter ended March 31, 2022, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
- 58 -
THE CHARLES SCHWAB CORPORATION
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
For a discussion of legal proceedings, see Part I – Item 1 – Note 9.
Item 1A. Risk Factors
During the first three months of 2022, there have been no material changes to the risk factors in Part I – Item 1A – Risk Factors in the 2021 Form 10-K.
- 59 -
THE CHARLES SCHWAB CORPORATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
On January 30, 2019, CSC publicly announced that its Board of Directors authorized the repurchase of up to $4.0 billion of common stock. The authorization does not have an expiration date. There were no share repurchases under this authorization during the first quarter of 2022.
The following table summarizes purchases made by or on behalf of CSC of its common stock for each calendar month in the first quarter of 2022 (in millions, except number of shares, which are in thousands, and per share amounts):
| Month | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Program | Approximate Dollar Value of Shares That May Yet Be Purchased Under the Publicly Announced Program | ||||||||||||||||||||||
| January: | ||||||||||||||||||||||||||
| Share repurchase program | — | $ | — | — | $ | 1,780 | ||||||||||||||||||||
|
Employee transactions
(1)
|
84 | $ | 95.08 | N/A | N/A | |||||||||||||||||||||
| February: | ||||||||||||||||||||||||||
| Share repurchase program | — | $ | — | — | $ | 1,780 | ||||||||||||||||||||
|
Employee transactions
(1)
|
3 | $ | 89.40 | N/A | N/A | |||||||||||||||||||||
| March: | ||||||||||||||||||||||||||
| Share repurchase program | — | $ | — | — | $ | 1,780 | ||||||||||||||||||||
|
Employee transactions
(1)
|
436 | $ | 80.16 | N/A | N/A | |||||||||||||||||||||
| Total: | ||||||||||||||||||||||||||
| Share repurchase program | — | $ | — | — | $ | 1,780 | ||||||||||||||||||||
|
Employee transactions
(1)
|
523 | $ | 82.61 | N/A | N/A | |||||||||||||||||||||
(1)
Includes restricted shares withheld (under the terms of grants under employee stock incentive plans) to offset tax withholding obligations that occur upon vesting and release of restricted shares. CSC may receive shares delivered or attested to pay the exercise price and/or to satisfy tax withholding obligations by employees who exercise stock options granted under employee stock incentive plans, which are commonly referred to as stock swap exercises.
N/A Not applicable.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
- 60 -
THE CHARLES SCHWAB CORPORATION
Item 6. Exhibits
The following exhibits are filed as part of this Quarterly Report on Form 10-Q:
|
Exhibit
Number |
Exhibit | |||||||
| 3.26 | ||||||||
| 31.1 | ||||||||
| 31.2 | ||||||||
| 32.1 | (1) | |||||||
| 32.2 | (1) | |||||||
| 101.INS | Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | (2) | ||||||
| 101.SCH | Inline XBRL Taxonomy Extension Schema | (2) | ||||||
| 101.CAL | Inline XBRL Taxonomy Extension Calculation | (2) | ||||||
| 101.DEF | Inline XBRL Extension Definition | (2) | ||||||
| 101.LAB | Inline XBRL Taxonomy Extension Label | (2) | ||||||
| 101.PRE | Inline XBRL Taxonomy Extension Presentation | (2) | ||||||
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) | |||||||
| (1) | Furnished as an exhibit to this Quarterly Report on Form 10-Q. | |||||||
| (2) |
Attached as Exhibit 101 to this Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2022 are the following materials formatted in Inline XBRL (Extensible Business Reporting Language) (i) the Condensed Consolidated Statements of Income, (ii) the Condensed Consolidated Statements of Comprehensive Income, (iii) the Condensed Consolidated Balance Sheets, (iv) the Condensed Consolidated Statements of Stockholders’ Equity, (v) the Condensed Consolidated Statements of Cash Flows, and (vi) Notes to Condensed Consolidated Financial Statements.
|
|||||||
- 61 -
THE CHARLES SCHWAB CORPORATION
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| THE CHARLES SCHWAB CORPORATION | |||||||||||
| (Registrant) | |||||||||||
| Date: | May 9, 2022 | /s/ Peter Crawford | |||||||||
| Peter Crawford | |||||||||||
| Managing Director and Chief Financial Officer | |||||||||||
- 62 -
TABLE OF CONTENTS
Part I - Financial InformationprintItem 1. Condensed Consolidated Financial StatementsprintItem 4. Controls and ProceduresprintPart II - Other InformationprintItem 1. Legal ProceedingsprintItem 1A. Risk FactorsprintItem 2. Unregistered Sales Of Equity Securities and Use Of ProceedsprintItem 3. Defaults Upon Senior SecuritiesprintItem 4. Mine Safety DisclosuresprintItem 5. Other InformationprintItem 6. Exhibitsprint