CHARLES SCHWAB Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
INTRODUCTIONThe Charles Schwab Corporation (CSC) is a savings and loan holding company and engages, through its subsidiaries, in wealth management, securities brokerage, banking, asset management, custody, and financial advisory services. Unless otherwise indicated, the terms "Schwab," "the Company," "we," "us," or "our" mean CSC together with its consolidated subsidiaries as ofSeptember 30, 2020 .
Principal business subsidiaries of CSC include the following:
•Charles Schwab & Co., Inc. (CS&Co), a securities broker-dealer;
•Charles
Subsequent toSeptember 30, 2020 , the Company completed its previously announced acquisition of TD Ameritrade Holding Corporation and its consolidated subsidiaries (collectively referred to as "TD Ameritrade" or "TDA"), effectiveOctober 6, 2020 . Upon completion of the acquisition, TD Ameritrade Holding Corporation (TDA Holding ) became a wholly-owned subsidiary of CSC and the below became principal business subsidiaries of CSC:
•TD Ameritrade, Inc., an introducing securities broker-dealer; and
•TD Ameritrade Clearing, Inc. (TDAC), a securities broker-dealer that provides
trade execution and clearing services on a fully-disclosed basis to
Unless otherwise noted, this Management's Discussion and Analysis excludes the results of operations and financial condition of TD Ameritrade. See Overview and Item 1 - Notes 3 and 17 for additional information on our acquisition of TD Ameritrade. Schwab provides financial services to individuals and institutional clients through two segments - Investor Services and Advisor Services. The Investor Services segment provides retail brokerage and banking 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 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 inthe 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$45 trillion , which means Schwab's and TD Ameritrade's combined total client assets of approximately$6 trillion leaves substantial opportunity for growth. Our strategy is based on the principle that developing trusted relationships will translate into - 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)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 endedDecember 31, 2019 (2019 Form 10-K). On our website, https://www.aboutschwab.com, we post the following filings after they are electronically filed with or furnished to theSecurities and Exchange Commission (SEC): 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) 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 quarterly average liquidity coverage ratio (LCR). TheSEC 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," 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); •Impacts related to the coronavirus (COVID-19) pandemic; advancing strategic goals to drive scale, monetization and segmentation (see Overview); •Expected benefits from recently completed transactions; expected timing for the TD Ameritrade integration; bank deposit account fee revenue; (see Overview, Risk Management, Business Acquisitions in Part I, Item 1, Financial Information - Notes to Condensed Consolidated Financial Statements (Item 1) - Note 3, and Subsequent Events in Item 1 - Note 17); •The expected impact of the final net stable funding ratio rule (see Current Regulatory Environment and Other Developments); •Objective for amount of deposits held in excess reserves at theFederal Reserve (see Results of Operations); •Net interest margin compression and net interest revenue; money market fund fee waivers (see Results of Operations); •2020 capital expenditures (see Results of Operations); •The phase-out of the use of LIBOR (see Risk Management); •Sources of capital; Tier 1 Leverage Ratio operating objective (see Capital Management); •The expected impact of new accounting standards not yet adopted (see Summary of Significant Accounting Policies in Item 1 - Note 2); •The likelihood of indemnification and guarantee payment obligations (see Commitments and Contingencies in Item 1 - Note 10); and •The impact of legal proceedings and regulatory matters (see Commitments and Contingencies in Item 1 - Note 10 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. - 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)
Important factors that may cause actual results to differ include, but are not
limited to:
•General market conditions, including equity valuations, trading activity, the
level of interest rates - which can impact money market fund fee waivers, and
credit spreads;
•Our ability to attract and retain clients, develop trusted relationships, and
grow client assets;
•Client use of our advisory solutions and other products and services;
•The level of client assets, including cash balances;
•Competitive pressure on pricing, including deposit rates;
•Client sensitivity to interest rates;
•Regulatory guidance;
•Capital and liquidity needs and management;
•Our ability to manage expenses;
•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;
•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;
•The company's ability to support client activity levels;
•The risk that expected revenue and expense synergies and other benefits from
recent acquisitions may not be fully realized or may take longer to realize than
expected;
•Timing and ability to invest amounts held in excess reserves at the Federal
Reserve into higher yielding investments in the company's bank securities
portfolio;
•Changes in prepayment levels for mortgage-backed and other asset-backed
securities and loans;
•Client cash allocations;
•LIBOR trends;
•The availability and terms of external financing;
•The timing of campus expansion work and technology projects;
•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 2019
Form 10-K.
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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)
OVERVIEWManagement focuses on several client activity and financial metrics in evaluating Schwab's financial position and operating performance. Results for the third quarter and first nine months of 2020 and 2019 are:
Three Months Ended Nine Months Ended
September 30, Percent September 30, Percent
2020 2019 Change 2020 2019 Change
Client Metrics
Net new client assets (in billions) (1) $ 51.2 $ 56.6 (10) % $ 261.8 $ 145.5 80 %
Core net new client assets (in billions)
(25) %$ 162.5 $ 145.5 12 % Client assets (in billions, at quarter end)$ 4,395.3 $ 3,768.4 17 %
Average client assets (in billions)
16 %$ 4,033.3 $ 3,611.0 12 % New brokerage accounts (in thousands) (2) 592 363 63 % 2,853 1,135 151 % Active brokerage accounts (in thousands, at quarter end) 14,393 12,118 19 % Assets receiving ongoing advisory services (in billions, at quarter end)$ 2,231.3 $ 1,977.9 13 % Client cash as a percentage of client assets (at quarter end) 12.8 % 11.4 % Company Financial Information and Metrics Total net revenues$ 2,448 $ 2,711 (10) %$ 7,515 $ 8,115 (7) % Total expenses excluding interest 1,559 1,475 6 % 4,691 4,379 7 % Income before taxes on income 889 1,236 (28) % 2,824 3,736 (24) % Taxes on income 191 285 (33) % 660 884 (25) % Net income 698 951 (27) % 2,164 2,852 (24) % Preferred stock dividends and other 83 38 118 % 171 127 35 % Net income available to common stockholders$ 615 $ 913 (33) %$ 1,993 $ 2,725 (27) %
Earnings per common share - diluted
(31) %$ 1.54 $ 2.05 (25) % Net revenue growth from prior year (10) % 5 % (7) % 9 % Pre-tax profit margin 36.3 % 45.6 % 37.6 % 46.0 % Return on average common stockholders' equity (annualized) 10 % 20 % 12 % 20 % Expenses excluding interest as a percentage of average client assets (annualized) 0.14 % 0.16 % 0.16 % 0.16 % Consolidated Tier 1 Leverage Ratio (at quarter end) 5.7 % 7.3 % Non-GAAP Financial Measures (3) Adjusted total expenses (4)$ 1,492 $ 1,465 $ 4,488 $ 4,351 Adjusted diluted EPS$ .51 $ .70 $ 1.66 $ 2.07 Return on tangible common equity 12 % 21 % 14 % 22 % (1) The third quarter and first nine months of 2020 include inflows of$8.5 billion related to the acquisition ofWasmer, Schroeder & Company, LLC . The first nine months of 2020 also includes$79.9 billion related to the acquisition of the assets ofUSAA's Investment Management Company (USAA-IMCO) and an inflow of$10.9 billion from a mutual fund clearing services client. (2) The first nine months of 2020 include 1.1 million new brokerage accounts related to the acquisition of assets from USAA-IMCO. (3) See Non-GAAP Financial Measures for further details and a reconciliation of such measures to GAAP reported results. (4) Adjusted total expenses is a non-GAAP financial measure adjusting total expenses excluding interest. See Non-GAAP Financial Measures. While the COVID-19 pandemic and challenging macroeconomic conditions persisted throughout the third quarter and first nine months of 2020, the Company's business model and our continued focus on clients' needs helped drive sustained business momentum. Schwab continued to operate without significant client disruption, advancing the Company's strategic goals to drive scale, monetization, and segmentation in ways that benefit our clients. Most notably, subsequent toSeptember 30, 2020 , Schwab completed its acquisition of TD Ameritrade, which closed onOctober 6, 2020 , as discussed further below. Throughout the third quarter of 2020, the equity markets generally increased while both short- and long-term interest rates remained under pressure. Net new assets totaled$51.2 billion in the third quarter, despite seasonal tax outflows in July from a delayed tax filing deadline. In addition to an$8.5 billion inflow to our Advisor Services business related to closing our acquisition ofWasmer, Schroeder & Company, LLC , core net new assets totaled$42.7 billion in the third quarter of 2020, bringing year-to-date core net new assets to$162.5 billion , which represents a 5% annualized growth rate. New brokerage accounts totaled 592 thousand in the third quarter of 2020, and we ended the period at 14.4 million accounts, up 19% fromSeptember 30, 2019 . Our clients continued to be highly engaged with their investments, as daily average trades were 1.5 million - 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)
in both the third quarter and first nine months of 2020, up 103% and 109%,
respectively, from the same periods in 2019. Against this backdrop, total client
assets ended the third quarter at
Our results of operations for the third quarter and first nine months of 2020 reflect the strength of our business model as well as our financial management, even as the current macroeconomic environment remained challenging. Schwab's net income was$698 million and$2.2 billion for the third quarter and first nine months of 2020, decreasing 27% and 24%, respectively, from the same periods in 2019. Diluted earnings per common share (EPS) amounted to$.48 and$1.54 during the third quarter and first nine months of 2020, respectively, down 31% and 25% from the same periods in the prior year. Adjusted diluted EPS (1), which excludes acquisition and integration-related costs, amortization of acquired intangible assets, and related income tax effects, were$.51 and$1.66 during the third quarter and first nine months of 2020, respectively, down 27% and 20% from the same periods in the prior year. Total net revenues were$2.4 billion and$7.5 billion in the third quarter and first nine months of 2020, declining 10% and 7%, respectively, from the same periods in the prior year, primarily as a result of lower net interest revenue. Net interest revenue was helped by rising interest-earning asset levels throughout the third quarter and first nine months of 2020, though still decreased$288 million and$617 million , respectively, from the comparable periods in 2019. These declines in net interest revenue primarily resulted from the overall decline in both short- and long-term interest rates driven by theFederal Reserve's monetary easing, as well as the related acceleration of mortgage-backed security prepayment speeds within our investment securities portfolio. Asset management and administration fees totaled$860 million and$2.5 billion during the third quarter and first nine months of 2020, increasing 4% and 5%, respectively, from the comparable periods in the prior year. The growth in asset management and administration fees was due primarily to rising balances in advisory solutions, which more than offset higher money market fund fee waivers. Trading revenue declined 12% and 11% during the third quarter and first nine months of 2020, respectively, compared with the same periods in the prior year, as ourOctober 2019 pricing actions more than offset increased trading volumes throughout the first nine months of 2020. Total expenses excluding interest were$1.6 billion and$4.7 billion in the third quarter and first nine months of 2020, representing increases of 6% and 7%, respectively, relative to the comparable periods in 2019. In the third quarter and first nine months of 2020, total expenses excluding interest reflected acquisition and integration-related expenses of$42 million and$160 million , respectively, as well as amortization of acquired intangible assets of$25 million and$43 million , respectively. Exclusive of these items (1), adjusted total expenses were up 2% and 3% during the third quarter and first nine months of 2020, respectively, from the comparable periods in 2019. Throughout the first nine months of 2020, the Company maintained its disciplined approach to capital management, helping sustain ongoing balance sheet growth. Total balance sheet assets increased to$419.4 billion atSeptember 30, 2020 , representing growth of 5% from the end of the second quarter and 43% fromDecember 31, 2019 . This growth in total balance sheet assets was driven by growth in our client base and continued higher client cash allocations due to the reduced attractiveness of fixed income and other cash alternatives in the low rate environment. During the second quarter, we issued$2.5 billion of preferred stock, Series G, at an initial fixed rate of 5.375%, bringing total preferred stock to$5.3 billion , which represented approximately 23% of Tier 1 Capital atSeptember 30, 2020 . The Company's Tier 1 leverage ratio was 5.7% atSeptember 30, 2020 . Return on average common stockholders' equity was 10% and 12% during the third quarter and first nine months of 2020, respectively, down from 20% in both the third quarter and first nine months of 2019. Return on tangible common equity (1) (ROTCE) was 12% and 14% for the third quarter and first nine months of 2020, down from 21% and 22% in the comparable periods of 2019. The decreases in both return on average common stockholders' equity and ROTCE reflect lower net income as well as significantly higher balances of average accumulated other comprehensive income (AOCI) due to unrealized gains in our available for sale (AFS) investment securities portfolio. (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. - 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)Business and Asset Acquisitions
In addition to theOctober 6, 2020 acquisition of TD Ameritrade described below, the Company completed several acquisitions during the nine months endedSeptember 30, 2020 . OnMay 26, 2020 , the Company completed its acquisition of the assets of USAA-IMCO for$1.6 billion in cash. Along with the asset purchase agreement, the companies entered into a long-term referral agreement that makes Schwab the exclusive provider of wealth management and investment brokerage services for USAA members. The USAA-IMCO acquisition adds scale to the Company's operations through the addition of 1.1 million brokerage and managed portfolio accounts with approximately$80 billion in client assets at the acquisition date. The transaction also provides Schwab the opportunity to further expand our client base by servingUSAA's members through the long-term referral agreement. See Item 1 - Note 3 for more information on the USAA-IMCO acquisition. Additionally, during the second quarter of 2020 the Company completed its acquisition of technology and intellectual property of Motif, a financial technology company. The Motif assets help us build on our existing capabilities and help accelerate our development of thematic and direct index investing for Schwab's retail investors and RIA clients. OnJuly 1, 2020 , the Company completed its acquisition ofWasmer, Schroeder & Company, LLC , which adds established strategies and new separately managed account offerings to our existing fixed income lineup.
Subsequent Events
Acquisition of TD Ameritrade Holding Corporation
EffectiveOctober 6, 2020 , the Company completed its previously announced acquisition of TD Ameritrade. TD Ameritrade provides securities brokerage services, including trade execution, clearing services, and margin lending, through its broker-dealer subsidiaries; and futures and foreign exchange trade execution services through its futures commission merchant (FCM) and forex dealer member (FDM) subsidiary. TDA also provides cash sweep and deposit account products through third-party relationships. TDA's principal securities broker-dealers,TD Ameritrade, Inc. and TDAC, are registered broker-dealers with theSEC and members of theFinancial Industry Regulatory Authority, Inc. (FINRA).TD Ameritrade, Inc. is also a registered investment advisor with theSEC .TD Ameritrade Futures & Forex LLC (TDAFF) is registered as an FCM and FDM with theCommodity Futures Trading Commission (CFTC), and is a member of theNational Futures Association (NFA). TDA provides services to individual retail investors and traders and to RIAs predominantly through the Internet, a national branch network, and relationships with RIAs. At the time of acquisition, TD Ameritrade had approximately 10,000 employees. TD Ameritrade's sources of net revenues consist primarily of commissions and transaction fees, bank deposit account fees, net interest revenue, and investment product fees.
•TDA's commissions and transaction fees have included commissions earned on trades of certain securities and derivatives, as well as order flow revenue.
•TDA's bank deposit account fees have been generated through TD Ameritrade's insured deposit account agreement withTD Bank USA , National Association andTD Bank, National Association (together, the TD Depository Institutions), as well as bank deposit account agreements with other third-party depository institutions, whereby uninvested cash held by certain of TDA's brokerage clients is swept intoFederal Deposit Insurance Corporation (FDIC)-insured (up to specified limits) money market deposit accounts at theTD Depository Institutions and other third-party depository institutions. TDA has earned revenue on client cash at these depository institutions based on the return of floating-rate and fixed-rate notional investments, less the interest paid to clients and certain other fees.
•TDA's net interest revenue has been generated primarily through margin lending, securities lending activity, as well as segregated and operating cash and investments. Interest-bearing liabilities have primarily consisted of interest-bearing payables to brokerage clients.
•TDA's investment product fee revenue has consisted of revenues earned on client assets invested in money market funds, other mutual funds, and certain investment programs. Investment product fees also includes referral and asset-based program fees on its client assets managed by independent RIAs utilizing TDA's trading and investing platforms.
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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)
Concurrently with the execution of the Agreement and Plan of Merger, dated as of
November 24, 2019 , as amended (the merger agreement), CSC entered into a
stockholder agreement with The Toronto-Dominion Bank (TD Bank), a registration
rights agreement with TD Bank and Charles R. Schwab , and an amended and restated
insured deposit account agreement (IDA agreement) with the TD Depository
Institutions. These agreements were effective upon the merger and are further
detailed in Part I - Item 1 of our 2019 Form 10-K.
Effective upon the merger, Todd M. Ricketts , Brian M. Levitt , and Bharat B.
Masrani were elected to CSC's Board of Directors. Mr. Ricketts was designated by
TD Ameritrade pursuant to the terms of the merger agreement and Messrs. Levitt
and Masrani were designated by TD Bank pursuant to the terms of the merger
agreement and the stockholder agreement between Schwab and TD Bank.
Integration Overview
We anticipate the acquisition of TD Ameritrade will significantly increase our scale to help support the Company's ongoing efforts to enhance the client experience, provide deeper resources for individual investors as well as RIAs, and continue to improve our operating efficiency. With a combined total for Schwab and TD Ameritrade of approximately$6 trillion in client assets and 29 million brokerage accounts at the time of closing, we expect our enhanced scale will lower total expenses as a percentage of client assets. Combining the respective strengths of Schwab and TD Ameritrade will enable the Company to invest in enhanced client experience capabilities and further our financial success to the benefit of clients, employees, and stockholders. The integration of Schwab's and TD Ameritrade's operations is expected to occur over 18 to 36 months from the date of acquisition, though planning for integration has been underway since the acquisition was announced onNovember 25, 2019 . In October, the Company began efforts to reduce overlapping or redundant roles across the two firms and to rationalize branch locations of Schwab and TDA. These and other integration activities are expected to continue throughout the integration process. Until the integration is complete, Schwab and TD Ameritrade will continue to operate separate broker-dealers to serve their respective clients. Starting in the fourth quarter of 2020, TD Ameritrade will be incorporated into our two existing reportable segments.
Amended IDA Agreement and Bank Deposit Account Fee Revenue
In accordance with the amended IDA agreement with theTD Depository Institutions, cash held in TD Ameritrade's eligible customer accounts will continue to be swept to money market deposit accounts at theTD Depository Institutions. Schwab will provide marketing, recordkeeping and support services to the TD Depository Institutions with respect to the money market deposit accounts for which Schwab receives an aggregate monthly fee, determined by reference to certain yields, less a service fee on client cash deposits held at the TD Depository Institutions,FDIC deposit assessments, and interest on deposits paid to customers. Under the amended IDA, the service fee on client cash deposits held at the TD Depository Institutions was reduced by 40%, from 25 basis points to 15 basis points for the life of the agreement. Under TDA's prior IDA agreement, TDA had floors in place which enabled them to carve-out up to$20 billion of floating-rate investments from the applicable service fee during specified low-rate environments. Pursuant to the amended IDA agreement, the 15 basis point service fee will be applied across all designated fixed and floating IDA balances. Beginning in the fourth quarter of 2020, we expect to begin recognizing significant bank deposit account fee revenue pursuant to the amended IDA agreement with the TD Depository Institutions and TDA's existing agreements with other third-party depository institutions. The net fees earned by Schwab under these arrangements will be included in a new revenue line item in our consolidated statement of income titled bank deposit account fees. In addition, as part of our management of interest rate risk, Schwab will begin performing interest rate sensitivity analysis on our bank deposit account fee revenue. BeginningJuly 1, 2021 , Schwab will have the option to begin reducing deposit balances swept to the TD Depository Institutions by up to$10 billion over each 12-month period, subject to certain limitations and adjustments, migrating them instead to Schwab's balance sheet. Our ability to migrate these balances to our balance sheet is dependent on certain binding limitations, including Schwab's obligation to move all of the uninsured IDA sweep balances on that date, and the requirement that Schwab can only move floating IDA balances. Schwab's initial reduction will also be affected by the net change in IDA sweep balances between the effective date of the IDA agreement andJune 30, 2021 . In addition, Schwab also must maintain a minimum$50 billion IDA sweep balance throughJune 2031 , and at least 80% of the IDA sweep balances must be designated as fixed-rate obligations throughJune 2026 . - 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)See Item 1 - Notes 3 and 17 as well as Risk Management, Off-Balance Sheet Arrangements, and Contractual Obligations for additional information on the acquisition of TD Ameritrade and related matters.
Planned Change of CSC Headquarters
Subsequent toSeptember 30, 2020 and in conjunction with the close of the acquisition of TD Ameritrade, CSC's Board of Directors approved an amendment to Section 1.02 of the Company's Fourth Restated Bylaws to change our corporate headquarters fromSan Francisco toWestlake, Texas , effectiveJanuary 1, 2021 . Opened in late 2019, theWestlake location provides a more centrally located hub for the Company given our nationwide presence across our network of branches and operations centers.
Current Regulatory Environment and Other Developments
EffectiveMarch 20, 2020 ,CSB andCharles Schwab Premier Bank , SSB (CSPB) converted toTexas -chartered state savings banks. CSB and CSPB became members of theFederal Reserve and are subject to regulation, supervision and examination by theFederal Reserve and theTexas Department of Savings and Mortgage Lending . InSeptember 2020 , theFederal Reserve issued a notice of proposed rulemaking that, among other things, would amend the stress testing rules for covered savings and loan holding companies to provide that their capital distribution assumptions would match those of comparable bank holding companies. The rule proposal also solicits feedback on whether large savings and loan holding companies (SLHCs) should be subject to the capital planning and stress capital buffer requirements that apply to large bank holding companies. The comment period for the proposed rule and SLHC questions ends onNovember 20, 2020 . InOctober 2020 , theFederal Reserve , theOffice of the Comptroller of the Currency , and theFDIC issued a final net stable funding ratio (NSFR) rule that will require certain banking organizations with$100 billion or more in consolidated assets to maintain a minimum level of stable funding based on the liquidity characteristics of the banking organization's assets, commitments, and derivative exposures over a one-year time horizon. The NSFR will be expressed as a ratio of a banking organization's available stable funding to its required stable funding. Banking organizations subject to the full requirement must maintain an NSFR equal to at least 1.0 on an ongoing basis. As a banking organization subject to Category III standards with less than$75 billion in average weighted short-term wholesale funding, CSC will be subject to a reduced NSFR requirement equal to 85% of the full requirement. The rule will take effect onJuly 1, 2021 and beginning in 2023, holding companies regulated by theFederal Reserve will be required to publicly disclose their NSFR levels semiannually. The Company does not expect the NSFR rule to have a material impact on the Company's business, financial condition, or results of operations. - 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)RESULTS OF OPERATIONS
Total Net Revenues
The following tables present a comparison of revenue by category:
2020 2019
% of % of
Percent Total Net Total Net
Three Months Ended September 30, Change Amount Revenues Amount Revenues
Net interest revenue
Interest revenue (24) % $ 1,432 59 % $ 1,892 70 %
Interest expense (66) % (89) (4) % (261) (10) %
Net interest revenue (18) % 1,343 55 % 1,631 60 %
Asset management and administration fees
Mutual funds, exchange traded funds (ETFs),
and collective trust
funds (CTFs) (5) % 423 17 % 445 16 %
Advice solutions 22 % 373 15 % 305 11 %
Other (15) % 64 3 % 75 3 %
Asset management and administration fees 4 % 860 35 % 825 30 %
Trading revenue
Commissions (32) % 108 4 % 159 6 %
Principal transactions (54) % 6 - 13 -
Order flow revenue (1) 97 % 67 3 % 34 2 %
Trading revenue (1) (12) % 181 7 % 206 8 %
Other (1) 31 % 64 3 % 49 2 %
Total net revenues (10) % $ 2,448 100 % $ 2,711 100 %
2020 2019
% of % of
Percent Total Net Total Net
Nine Months Ended September 30, Change Amount Revenues Amount Revenues
Net interest revenue
Interest revenue (20) % $ 4,626 61 % $ 5,817 72 %
Interest expense (64) % (322) (4) % (896) (11) %
Net interest revenue (13) % 4,304 57 % 4,921 61 %
Asset management and administration fees
Mutual funds, ETFs, and CTFs 1 % 1,300 17 % 1,287 16 %
Advice solutions 14 % 999 13 % 878 11 %
Other (6) % 189 3 % 201 2 %
Asset management and administration fees 5 % 2,488 33 % 2,366 29 %
Trading revenue
Commissions (30) % 332 4 % 477 6 %
Principal transactions (33) % 36 1 % 54 1 %
Order flow revenue (1) 96 % 194 3 % 99 1 %
Trading revenue (1) (11) % 562 8 % 630 8 %
Other (1) (19) % 161 2 % 198 2 %
Total net revenues (7) % $ 7,515 100 % $ 8,115 100 %
(1) Beginning in the first quarter of 2020, order flow revenue was reclassified from other revenue to trading revenue. Prior period amounts have been reclassified to reflect this change.
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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)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. Late in the first quarter of 2020, theFederal Reserve cut the federal funds target overnight rate twice, for a total of 150 basis points to near zero; on the longer-end of the curve, the 10-yearTreasury rate declined by over 120 basis points. Lower interest rates across maturities persisted from the end of the first quarter through the third quarter of 2020, while credit spreads also compressed. Moreover, changes in the economic environment throughout the first nine months of 2020 resulting from the COVID-19 pandemic drove significantly higher levels of client cash sweep balances. As these balances rapidly accumulated in the first quarter of 2020, the Company initially placed a substantial amount in excess reserves held at theFederal Reserve , and subsequently deployed a significant amount of this cash build-up in the second and third quarters, as part of AFS securities purchases totaling$73.9 billion and$45.2 billion , respectively. These purchases were made at rates below the average yield on the existing AFS portfolio due to the current low interest rate environment. As ofSeptember 30, 2020 , the Company held$21.9 billion , or 6.8% of total deposits, in excess reserves, ending the quarter within our longer-term objective of approximately 5-7%. - 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)
The following tables present net interest revenue information corresponding to
interest-earning assets and funding sources on the condensed consolidated
balance sheets:
2020 2019
Interest Interest
Average Revenue/ Average Average Revenue/ Average
Three Months Ended September 30, Balance Expense Yield/Rate Balance Expense Yield/Rate
Interest-earning assets
Cash and cash equivalents $ 32,628 $ 8 0.10 % $ 22,288 $ 123 2.16 %
Cash and investments segregated 33,214 14 0.16 % 16,140 92 2.25 %
Broker-related receivables (1) 754 - 0.05 % 216 2 2.34 %
Receivables from brokerage clients 21,242 125 2.31 % 19,438 205 4.13 %
Available for sale securities (2,3) 276,081 1,103 1.59 % 53,487 366 2.71 %
Held to maturity securities (3) - - - 136,880 906 2.63 %
Bank loans 21,668 134 2.46 % 16,724 146 3.49 %
Total interest-earning assets 385,587 1,384 1.43 % 265,173 1,840 2.75 %
Other interest revenue 48 52
Total interest-earning assets $ 385,587 $ 1,432 1.47 % $ 265,173 $ 1,892 2.82 %
Funding sources
Bank deposits $ 310,685 $ 12 0.02 % $ 208,592 $ 166 0.32 %
Payables to brokerage clients 40,169 1 0.01 % 25,080 21 0.33 %
Short-term borrowings (1) 5 - 0.12 % 21 - 2.48 %
Long-term debt 7,992 69 3.46 % 7,425 67 3.58 %
Total interest-bearing liabilities 358,851 82 0.09 % 241,118 254 0.42 %
Non-interest-bearing funding sources 26,736 24,055
Other interest expense 7 7
Total funding sources $ 385,587 $ 89 0.09 % $ 265,173 $ 261 0.39 %
Net interest revenue $ 1,343 1.38 % $ 1,631 2.43 %
2020 2019
Interest Interest
Average Revenue/ Average Average Revenue/ Average
Nine Months Ended September 30, Balance Expense Yield/Rate Balance Expense Yield/Rate
Interest-earning assets
Cash and cash equivalents $ 40,410 $ 112 0.37 % $ 24,506 $ 432 2.33 %
Cash and investments segregated 30,162 128 0.56 % 14,771 264 2.36 %
Broker-related receivables 638 2 0.60 % 225 4 2.21 %
Receivables from brokerage clients 19,442 404 2.73 % 19,279 636 4.35 %
Available for sale securities (2,3) 236,204 3,434 1.93 % 58,738 1,203 2.72 %
Held to maturity securities (3) - - - 134,031 2,721 2.70 %
Bank loans 20,248 411 2.70 % 16,621 443 3.56 %
Total interest-earning assets 347,104 4,491 1.72 % 268,171 5,703 2.82 %
Other interest revenue 135 114
Total interest-earning assets $ 347,104 $ 4,626 1.77 % $ 268,171 $ 5,817 2.88 %
Funding sources
Bank deposits $ 275,860 $ 81 0.04 % $ 213,089 $ 616 0.39 %
Payables to brokerage clients 36,001 10 0.04 % 23,443 68 0.39 %
Short-term borrowings (1) 16 - 0.29 % 18 - 2.49 %
Long-term debt 8,014 212 3.53 % 7,122 192 3.59 %
Total interest-bearing liabilities 319,891 303 0.13 % 243,672 876 0.48 %
Non-interest-bearing funding sources 27,213 24,499
Other interest expense 19 20
Total funding sources $ 347,104 $ 322 0.13 % $ 268,171 $ 896 0.45 %
Net interest revenue $ 4,304 1.64 % $ 4,921 2.43 %
(1) Interest revenue or expense was less than $500 thousand in the period or
periods presented.
(2) Amounts have been calculated based on amortized cost.
(3) On January 1, 2020 , the Company transferred all of its investment securities
designated as held to maturity (HTM) to the AFS category, as described in Item 1
- Note 5.
- 11 -
--------------------------------------------------------------------------------
THE CHARLES SCHWAB CORPORATIONManagement's Discussion and Analysis of Financial Condition and Results of
Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)
Net interest revenue decreased $288 million , or 18%, and $617 million , or 13% in
the third quarter and first nine months of 2020 compared to the same periods in
2019, due primarily to lower average investment yields partially offset by
growth in interest-earning assets. Accelerated premium amortization on debt
securities in the third quarter and first nine months of 2020 also contributed
to the reduction in net interest revenue, as the decline in long-term interest
rates in the first nine months of 2020 resulted in higher prepayments of
mortgage-related debt securities.
Average interest-earning assets for the third quarter and first nine months of
2020 were higher by 45% and 29%, respectively, compared to the same periods in
2019. These increases in average interest-earning assets were primarily driven
by higher client cash balances in bank deposits and payables to brokerage
clients.
Our net interest margin was 1.38% and 1.64% during the third quarter and first
nine months of 2020, respectively, down from 2.43% during both the third quarter
and first nine months of 2019. These decreases were driven primarily by lower
yields received on interest-earning assets due largely to the Federal Reserve's
2019 and 2020 interest rate reductions and higher premium amortization on
mortgage-related debt securities. The amount of any further net interest margin
compression and resulting net interest revenue is dependent on a number of
factors, including changes to LIBOR, premium amortization, and growth in client
cash balances.
Asset Management and Administration Fees
The following tables present asset management and administration fees, average client assets, and average fee yields:
2020 2019
Average Average
Client Average Client Average
Three Months Ended September 30, Assets Revenue Fee Assets Revenue Fee
Schwab money market funds before fee
waivers $ 199,822 $ 153 0.30 % $ 177,892 $ 133 0.30 %
Fee waivers (44) -
Schwab money market funds $ 199,822 109 0.22 % $ 177,892 133 0.30 %
Schwab equity and bond funds, ETFs, and
CTFs 306,899 75 0.10 % 274,005 75 0.11 %
Mutual Fund OneSource® and other non-transaction fee funds 197,809 154 0.31 % 192,409 153 0.32
%
Other third-party mutual funds and ETFs (1) 469,822 85 0.07 % 486,285 84 0.07
%
Total mutual funds, ETFs, and CTFs (2)$ 1,174,352 423 0.14 %$ 1,130,591 445 0.16 % Advice solutions (2) Fee-based$ 307,983 373 0.48 %$ 251,591 305 0.48 % Non-fee-based 73,850 - - 71,195 - - Total advice solutions$ 381,833 373 0.39 %$ 322,786 305 0.37 % Other balance-based fees (3) 443,929 51 0.05 % 421,241 56 0.05 % Other (4) 13 19 Total asset management and administration fees$ 860 $ 825 - 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)
2020 2019
Average Average
Client Average Client Average
Nine Months Ended September 30, Assets Revenue Fee Assets Revenue Fee
Schwab money market funds before fee
waivers $ 205,544 $ 469 0.30 % $ 166,053 $ 378 0.30 %
Fee waivers (59) -
Schwab money market funds $ 205,544 410 0.27 % $ 166,053 378 0.30 %
Schwab equity and bond funds, ETFs, and
CTFs 290,759 219 0.10 % 260,034 219 0.11 %
Mutual Fund OneSource ® and other
non-transaction fee funds 187,153 436 0.31 % 190,847 452 0.32 %
Other third-party mutual funds and ETFs (1) 446,007 235 0.07 % 469,901 238 0.07 %
Total mutual funds, ETFs, and CTFs (2) $ 1,129,463 1,300 0.15 % $ 1,086,835 1,287 0.16 %
Advice solutions (2)
Fee-based $ 277,297 999 0.48 % $ 241,678 878 0.49 %
Non-fee-based 71,438 - - 69,136 - -
Total advice solutions $ 348,735 999 0.38 % $ 310,814 878 0.38 %
Other balance-based fees (3) 428,191 150 0.05 % 407,762 162 0.05 %
Other (4) 39 39
Total asset management and administration
fees $ 2,488 $ 2,366
(1) Beginning in the fourth quarter of 2019, Schwab ETF OneSource™ was
discontinued as a result of the elimination of online trading commissions for
U.S. and Canadian-listed ETFs.
(2) Average client assets for advice solutions may also include the asset
balances contained in the mutual fund and/or ETF categories listed above.
(3) Includes various asset-related fees, such as trust fees, 401(k)
recordkeeping fees, and mutual fund clearing fees and other service fees.
(4) Includes miscellaneous service and transaction fees relating to mutual funds
and ETFs that are not balance-based.
Asset management and administration fees increased by $35 million , or 4%, and
$122 million , or 5% in the third quarter and first nine months of 2020,
respectively, compared to the same periods in 2019. These increases were
primarily driven by higher balances in advice solutions, including managed
account assets from USAA, as well as purchased money market funds, in the third
quarter and first nine months of 2020 relative to the same periods in 2019.
These increases were partially offset by the effect of money market fund fee
waivers due to declining portfolio yields. The amount of fee waivers in coming
quarters is dependent on a variety of factors, including the level of short-term
interest rates and client preferences across our money market fund line-up.
The following tables present a roll forward of client assets for the Schwab
money market funds, Schwab equity and bond funds, ETFs, and CTFs, and Mutual
Fund OneSource® and other non-transaction fee (NTF) funds. These funds generated
39% and 43% of the asset management and administration fees earned during the
third quarter and first nine months of 2020, respectively, compared to 44% of
asset management and administration fees for both the third quarter and first
nine months of 2019:
Schwab Money Schwab Equity and Mutual Fund OneSource®
Market Funds Bond Funds, ETFs, and CTFs and Other NTF funds
Three Months Ended September 30, 2020 2019 2020 2019 2020 2019
Balance at beginning of period
273,346 $ 254,460 $ 192,999 $ 197,777
Net inflows (outflows) (21,280) 18,044 3,564 7,408 (2,504) (5,586)
Net market gains (losses) and
other 34 843 17,539 1,296 13,098 2,482
Balance at end of period $ 190,312 $ 186,951 $ 294,449 $ 263,164 $ 203,593 $ 194,673
Schwab Money Schwab Equity and Mutual Fund OneSource®
Market Funds Bond Funds, ETFs, and CTFs and Other NTF funds
Nine Months Ended September 30, 2020 2019 2020 2019 2020 2019
Balance at beginning of period
286,275 $ 209,471 $ 202,068 $ 180,532
Net inflows (outflows) (11,665) 30,735 8,679 20,789 (17,557) (16,729)
Net market gains (losses) and
other 1,151 2,744 (505) 32,904 19,082 30,870
Balance at end of period $ 190,312 $ 186,951 $ 294,449 $ 263,164 $ 203,593 $ 194,673
- 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)
Trading Revenue
The following table presents trading revenue and related information:
Three Months Ended Nine Months Ended
September 30, Percent September 30, Percent
2020 2019 Change 2020 2019 Change
Trading revenue (1) $ 181 $ 206 (12) % $ 562 $ 630 (11) %
Clients' daily average trades
(DATs) (in thousands) 1,460 718 103 % 1,539 737 109 %
Number of trading days 64.0 63.5 1 % 189.0 187.5 1 %
Revenue per trade (2) $ 1.94 $ 4.52 (57) % $ 1.93 $ 4.56 (58) %
Note: Effective October 7, 2019, CS&Co eliminated online trade commissions for
U.S. and Canadian-listed stocks and ETFs, as well as the base charge on options.
(1) Beginning in the first quarter of 2020, order flow revenue was
reclassified from other revenue to trading revenue. Prior period amounts have
been reclassified to reflect this change.
(2) Revenue per trade is calculated as trading revenue divided by DATs
multiplied by the number of trading days.
Trading revenue decreased $25 million , or 12%, and $68 million , or 11%, in the
third quarter and first nine months of 2020 compared to the same periods in
2019, due primarily to our October 2019 pricing actions, which more than offset
a significant increase in clients' daily average trades and higher order flow
revenue. Order flow revenue was $67 million and $34 million during the third
quarters of 2020 and 2019, and $194 million and $99 million during the first
nine months of 2020 and 2019, respectively. The increases in order flow revenue
were due to a higher volume of trades throughout the third quarter and first
nine months of 2020 relative to the same periods in 2019.
Other Revenue
Other revenue includes exchange processing fees, certain service fees, software fees, and non-recurring gains. Other revenue increased$15 million , or 31%, in the third quarter of 2020 compared to the third quarter of 2019 primarily due to increases in exchange processing fees and other service fees. Other revenue decreased$37 million , or 19% in the first nine months of 2020 compared to the same period in 2019 primarily driven by a gain from the sale of a portfolio management and reporting software solution for advisors toTamarac Inc. recognized in the second quarter of 2019, a gain from the assignment of leased office space recognized in the first quarter of 2019, and an increase in the allowance for credit losses on bank loans in the first quarter of 2020. These decreases in the first nine months of 2020 compared with the same period in 2019 were partially offset by higher exchange processing fees due to higher trade volume. - 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)
Total Expenses Excluding Interest
The following table shows a comparison of expenses excluding interest:
Three Months Ended Nine Months Ended
September 30, Percent September 30, Percent
2020 2019 Change 2020 2019 Change
Compensation and benefits
Salaries and wages $ 532 $ 546 (3) % $ 1,557 $ 1,498 4 %
Incentive compensation 179 183 (2) % 587 597 (2) %
Employee benefits and other 129 128 1 % 412 419 (2) %
Total compensation and benefits
(2) %$ 2,556 $ 2,514 2 % Professional services 194 168 15 % 574 516 11 % Occupancy and equipment 155 144 8 % 449 408 10 % Advertising and market development 66 71 (7) % 203 217 (6) % Communications 73 63 16 % 226 187 21 % Depreciation and amortization (1) 97 82 18 % 284 235 21 % Amortization of acquired intangible assets (1) 25 6 N/M 43 20 115 % Regulatory fees and assessments 36 30 20 % 106 92 15 % Other 73 54 35 % 250 190 32 %
Total expenses excluding interest
6 %$ 4,691 $ 4,379 7 % Expenses as a percentage of total net revenues Compensation and benefits 34 % 32 % 34 % 31 % Advertising and market development 3 % 3 % 3 % 3 % Full-time equivalent employees (in thousands) At quarter end 22.1 19.8 12 % Average 22.1 20.2 9 % 21.1 20.1 5 % (1) Beginning in the third quarter of 2020, amortization of acquired intangible assets was reclassified from depreciation and amortization. Prior periods have been reclassified to reflect this change. N/M Not meaningful. Expenses excluding interest increased by 6% and 7% in the third quarter and first nine months of 2020, respectively, compared to the same periods in 2019. Adjusted total expenses, which excludes acquisition and integration-related costs and amortization of acquired intangible assets, increased 2% and 3% in the third quarter and first nine months of 2020, respectively. See Non-GAAP Financial Measures for further details and a reconciliation of such measures to GAAP reported results. Total compensation and benefits remained relatively flat in the third quarter and first nine months of 2020, compared to the same periods in 2019. Increases in employee headcount in 2020 to support our expanding client base as well as acquisition and integration-related activity, including the hiring of approximately 400 former USAA employees in connection with the USAA-IMCO acquisition, were partially offset by severance charges incurred in the third quarter of 2019 and a lower corporate bonus accrual in 2020. The increase in the year-to-date amounts also reflected the Company's payment of$1,000 to all non-officer employees inMarch 2020 to help them cover costs incurred due to the COVID-19 pandemic. Professional services expense increased in the third quarter and first nine months of 2020 compared to the same periods in 2019, primarily due to expenses relating to acquisition and integration-related activity. Occupancy and equipment expense increased in the third quarter and first nine months of 2020 compared to the same periods in 2019, primarily due to an increase in technology equipment costs associated with higher customer trade volumes and overall growth in the business. Communications expense increased in the third quarter and first nine months of 2020 compared to the same periods in 2019, primarily due to higher customer trade volumes as well as overall growth in our business and client base. Depreciation and amortization expenses grew in the third quarter and first nine months of 2020 compared to the same periods in 2019, primarily due to higher amortization of purchased and internally developed software, as well as higher depreciation of buildings and equipment related to expansion of our campuses in theU.S. in 2019 and 2020. Amortization of acquired intangible assets grew due to acquisitions completed in the second and third quarters of 2020. - 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)
Other expenses increased in the third quarter and first nine months of 2020
compared to the same periods in 2019, primarily resulting from acquisition and
integration-related costs and increases in processing fees and related expenses
due to higher customer trade volumes and market volatility. These increases were
partially offset by lower travel and entertainment expense.
Capital expenditures were $122 million and $541 million in the third quarter and
first nine months of 2020, respectively, compared with $190 million and $544
million in the third quarter and first nine months of 2019, respectively.
Capital expenditures decreased in the third quarter and first nine months of
2020 compared to the same periods in 2019, primarily due to lower building
expansion in 2020 relative to the first nine months of 2019, largely offset by
higher capitalized software costs. We anticipate capital expenditures for
full-year 2020 to be approximately 5-6% of total net revenues.
Taxes on Income
Taxes on income were$191 million and$285 million for the third quarters of 2020 and 2019, respectively, resulting in effective income tax rates on income before taxes of 21.5% and 23.1%, respectively. Taxes on income were$660 million and$884 million for the first nine months of 2020 and 2019, respectively, resulting in effective income tax rates on income before taxes of 23.4% and 23.7%, respectively. The decrease in the effective tax rate in the third quarter and first nine months of 2020 compared to the same periods in 2019 was primarily due to federal tax benefits recognized during the current period including settlement of theIRS examination of tax years 2011-2014 and an increase in Low-Income Housing Tax Credit (LIHTC) benefits. Partially offsetting the decrease in the effective tax rate from these items was an increase in nondeductible acquisition costs andFDIC insurance premium disallowance, as well as a decrease in equity compensation tax deduction benefits during the nine-month period. - 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)Segment Information
Financial information for our segments is presented in the following tables:
Investor Services Advisor Services Total
Three Months Ended Percent
September 30, Percent Change 2020 2019 Percent Change 2020 2019 Change 2020 2019
Net Revenues
Net interest revenue (20) % $ 948 $ 1,182 (12) % $ 395 $ 449 (18) % $ 1,343 $ 1,631
Asset management and
administration fees 10 % 643 586 (9) % 217 239 4 % 860 825
Trading revenue (1) (1) % 139 140 (36) % 42 66 (12) % 181 206
Other (1) 42 % 51 36 - 13 13 31 % 64 49
Total net revenues (8) % 1,781 1,944 (13) % 667 767 (10) % 2,448 2,711
Expenses Excluding Interest 9 % 1,167 1,070 (3) % 392 405 6 % 1,559 1,475
Income before taxes on income (30) % $ 614 $ 874 (24) % $ 275 $ 362 (28) % $ 889 $ 1,236
Net New Client Assets (in
billions) (2) (26) % $ 18.9 $ 25.4 4 % $ 32.3 $ 31.2 (10) % $ 51.2 $ 56.6
Investor Services Advisor Services Total
Percent Percent
Nine Months Ended September 30, Percent Change 2020 2019 Change 2020 2019 Change 2020 2019
Net Revenues
Net interest revenue (14) % $ 3,028 $ 3,531 (8) % $ 1,276 $ 1,390 (13) % $ 4,304 $ 4,921
Asset management and
administration fees 9 % 1,826 1,679 (4) % 662 687 5 % 2,488 2,366
Trading revenue (1) (6) % 396 421 (21) % 166 209 (11) % 562 630 Other (1) 6 % 122 115 (53) % 39 83 (19) % 161 198 Total net revenues (7) % 5,372 5,746 (10) % 2,143 2,369 (7) % 7,515 8,115 Expenses Excluding Interest 9 % 3,489 3,189 1 % 1,202 1,190 7 % 4,691 4,379 Income before taxes on income (26) %$ 1,883 $ 2,557 (20) %$ 941 $ 1,179
(24) %
Net New Client Assets (in billions) (2) 131 %$ 167.2 $ 72.5 30 %$ 94.6 $ 73.0
80 %
(1) Beginning in the first quarter of 2020, order flow revenue was reclassified from other revenue to trading revenue. Prior period amounts have been reclassified to reflect this change. (2) In the third quarter and first nine months of 2020, Advisor Services includes an inflow of$8.5 billion related to the acquisition ofWasmer, Schroeder & Company, LLC . Also in the first nine months of 2020, Investor Services includes inflows of$79.9 billion related to the acquisition of the assets of USAA-IMCO and$10.9 billion from a mutual fund clearing services client.
Investor Services
Total net revenues decreased by 8% and 7% in the third quarter and first nine months of 2020, respectively, compared to the same periods in 2019, primarily due to decreases in net interest revenue and trading revenue, partially offset by an increase in asset management and administration fees. Net interest revenue decreased primarily due to lower average investment yields, partially offset by growth in interest-earning assets. Trading revenue decreased primarily as a result of our 2019 pricing actions, more than offsetting higher trading volume in 2020. Asset management and administration fees increased primarily due to higher balances in advice solutions, including managed account assets from USAA, as well as increased balances in purchased money market funds, partially offset by money market fund fee waivers. Expenses excluding interest increased by 9% both in the third quarter and first nine months of 2020, compared to the same periods in 2019, primarily due to increases in compensation and benefits, professional services, depreciation and amortization, amortization of acquired intangible assets, and other expenses. Compensation and benefits increased primarily as a result of increased headcount to support our expanding client base and acquisition and integration-related activities, as well as the Company'sMarch 2020 payment of$1,000 to all non-officer employees to help them cover costs due to the COVID-19 pandemic, partially offset by severance charges incurred in the third quarter of 2019 and a lower corporate bonus accrual in 2020. Professional services increased primarily due to acquisition and integration-related activity. Depreciation and amortization increased primarily due to higher amortization of purchased and internally developed software and higher depreciation of buildings and equipment related to expansion of our campuses in 2019 and 2020. Amortization of acquired intangible assets increased due to our 2020 acquisitions. Other expenses increased primarily due to acquisition and integration- - 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)related costs, as well as exchange processing fees and related expenses resulting from higher customer trade volumes and market volatility, partially offset by lower travel and entertainment expenses.
Advisor Services
Total net revenues decreased by 13% and 10% in the third quarter and first nine months of 2020, respectively, compared to the same periods in 2019, primarily due to decreases in net interest revenue, asset management and administration fees, trading revenue, and other revenue. Net interest revenue decreased primarily due to lower average investment yields, partially offset by growth in interest-earning assets. Asset management and administration fees decreased primarily due to lower Mutual Fund OneSource® balances. Trading revenue decreased primarily as a result of the Company's 2019 pricing actions, partially offset by higher trading volume. The year to date decrease in other revenue was primarily driven by a gain from the sale of a portfolio management and reporting software solution for advisors toTamarac Inc. recognized in the second quarter of 2019, and a gain from the assignment of leased office space recognized in the first quarter of 2019. Expenses excluding interest remained relatively flat, decreasing 3% and increasing 1% in the third quarter and first nine months of 2020, respectively, compared to the same periods in 2019. Compensation and benefits decreased primarily due to third quarter of 2019 severance charges and a lower corporate bonus accrual in 2020, partially offset by increased headcount and the Company'sMarch 2020 payment of$1,000 to all non-officer employees to help them cover costs incurred due to the COVID-19 pandemic. Largely offsetting this decrease were increases in professional services, depreciation and amortization, and communications. The increase in professional services was driven by expenses related to our acquisitions and overall growth in the business. Depreciation and amortization increased due to higher amortization of purchased and internally developed software, and higher depreciation of buildings and equipment related to expansion of our campuses. Communications expense increased due to higher customer trade volumes and overall growth in our business and client base.
RISK MANAGEMENT
Schwab's business activities expose us to a variety of risks, including operational, credit, market, liquidity, and compliance risks. The Company has a comprehensive risk management program to identify and manage these risks and their associated potential for financial and reputational impact. For a discussion of our risk management programs, see Item 7 - Risk Management in the 2019 Form 10-K.
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 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 primarily 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.
- 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)
Net interest revenue sensitivity analysis assumes that 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. The following table shows the simulated net
interest revenue change over the next 12 months beginning September 30, 2020 and
December 31, 2019 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:
September 30, 2020 December 31, 2019
Increase of 100 basis points 13.9 % 4.8 %
Decrease of 100 basis points (4.8) % (7.4) %
The change in net interest revenue sensitivities as of September 30, 2020
reflects a significantly lower interest rate curve from the fourth quarter of
2019 due to the global economic impact from the COVID-19 pandemic. 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.
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. As a result of the low interest rate environment in the third quarter and first nine months of 2020, the downward assessments of our net interest revenue and EVE simulations as ofSeptember 30, 2020 reflected the assumption of non-negative investment yields. Through our IDA agreement and bank deposit account agreements with other third-party depository institutions resulting from our acquisition of TD Ameritrade, we expect to start earning significant bank deposit account fee revenue beginning in the fourth quarter of 2020. Though accounted for and presented separately from net interest revenue, bank deposit account fee revenue will be sensitive to interest rates. Therefore, beginning in the fourth quarter of 2020, management will evaluate bank deposit account fee revenue as part of Schwab's comprehensive management of our exposure to interest rate risk, through modeling and simulation analysis.
See Overview and Item 1 - Notes 3 and 17 for additional information on the Company's acquisition of TD Ameritrade and the amended IDA agreement.
Expected Phase-out of LIBOR
The Company has established a firm-wide team to address the likely discontinuation of LIBOR. As part of our efforts, we have assessed our LIBOR exposures, the largest of which are certain investment securities and loans. In purchasing new investment securities, we ensure that appropriate fall-back language is in the security's prospectus in the event that LIBOR is unavailable or deemed unreliable, and we have sold certain securities lacking appropriate fall-back language. We are updating loan agreements to ensure new LIBOR-based loans adequately provide for an alternative to LIBOR. Furthermore, we plan to phase-out the use of LIBOR as a reference rate in our new lending products beforeDecember 2021 . Consistent with our "Through Clients' Eyes" strategy, our focus throughout the LIBOR transition process is to ensure clients are treated fairly and consistently as this major change is occurring in the financial markets. The market transition process has not yet progressed to a point at which the impact to the Company's consolidated financial statements of LIBOR's discontinuation can be estimated. - 19 - --------------------------------------------------------------------------------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
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, includingU.S. Treasury securities. In addition to internal sources of liquidity, Schwab has access to external funding. The following table describes external debt facilities available atSeptember 30, 2020 : Description Borrower Outstanding AvailableFederal Home Loan Bank secured credit facility (1) Banking subsidiaries $ -$ 45,461 Federal Reserve discount window (2) Banking subsidiaries - 7,552 Uncommitted, unsecured lines of credit with various external banks CSC, CS&Co - 1,522 Unsecured commercial paper CSC - 750 Committed, unsecured credit facility with various external banks CSC - 700 (1) Amounts available are dependent on the amount of first lien residential real estate mortgage loans (First Mortgages), home equity lines of credit (HELOCs), and the fair value of certain investment securities that are pledged as collateral. (2) Amounts available are dependent on the fair value of certain investment securities that are pledged as collateral. CSC's ratings for Commercial Paper Notes are P1 by Moody's Investor Service (Moody's), A1 by Standard & Poor'sRating Group (Standard & Poor's ), and F1 byFitch Ratings, Ltd (Fitch) atSeptember 30, 2020 andDecember 31, 2019 . CSC also has a universal automatic shelf registration statement on file with theSEC , which enables it to issue debt, equity, and other securities. Liquidity Coverage Ratio Pursuant to the 2019 interagency regulatory capital and liquidity rules, beginning in the first quarter of 2020, Schwab became subject to a reduced LCR rule requiring the Company to hold high quality liquid assets (HQLA) in an amount equal to at least 85% 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 - Regulation in the 2019 Form 10-K for additional information. The Company was in compliance with the reduced LCR rule atSeptember 30, 2020 . The table below presents information about our average daily LCR: Average for the Three Months Ended September 30, 2020 Total eligible high quality liquid assets $ 70,021 Net cash outflows $ 64,595 LCR 108 % - 20 -
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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)Borrowings
The following are details of the Senior Notes:
Par Weighted Average Standard
September 30, 2020 Outstanding Maturity Interest Rate Moody's & Poor's Fitch
CSC Senior Notes $ 7,881 2021 - 2030 3.27% A2 A A
2020 Debt Issuances
Schwab's debt issuances in 2020 were senior unsecured obligations with interest payable semi-annually. Additional details are as follows:
Issuance Date Issuance Amount Maturity Date Interest Rate
03/24/20 $ 600 03/24/25 4.200 %
03/24/20 $ 500 03/22/30 4.625 %
2020 Equity Issuances
CSC's preferred stock issued and net proceeds for the nine months ended
Date Issued and Sold Net Proceeds
Series G April 30, 2020 $ 2,470 For further discussion of CSC's debt and equity, see Item 1 - Notes 9 and 13.
TD Ameritrade Acquisition
Subsequent toSeptember 30, 2020 , the Company completed its acquisition of TD Ameritrade, effectiveOctober 6, 2020 .TDA Holding has$3.6 billion of par value unsecured Senior Notes (TDA Senior Notes) outstanding, which were recognized at the date of acquisition at provisional fair value with no change in existing terms. For additional information on our acquisition of TD Ameritrade and the terms of the TDA Senior Notes, see Item 1 - Notes 3 and 9.
TD Ameritrade Lines of Credit and Revolving Credit Facilities
TDAC utilizes secured uncommitted lines of credit for short-term liquidity, under which TDAC borrows on either a demand or short-term basis and pledges client margin securities as collateral. There were no borrowings outstanding under the secured uncommitted lines of credit as of the effective time of the acquisition onOctober 6, 2020 . TDAC has access to two senior unsecured committed revolving credit facilities with an aggregate principal amount of$1.45 billion , consisting of an$850 million senior revolving credit facility and a$600 million senior revolving credit facility, maturing onApril 20, 2021 andApril 21, 2022 , respectively. There were no borrowings outstanding under the TDAC senior revolving facilities as of the effective time of the acquisition onOctober 6, 2020 .TDA Holding has access to a senior unsecured committed revolving credit facility in the aggregate principal amount of$300 million . The maturity date of theTDA Holding revolving credit facility isApril 21, 2022 . As ofOctober 6, 2020 , Schwab entered into a guaranty supplement to guarantee the obligations of TD Ameritrade under this credit agreement. The provision of the guaranty supplement by Schwab was a condition for certain financial covenant and reporting obligations being modified in the credit agreement. There were no borrowings outstanding under theTDA Holding revolving credit facility as of the effective time of the acquisition onOctober 6, 2020 . - 21 - --------------------------------------------------------------------------------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, 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. As a result of the significant inflow of client cash in the first nine months of 2020, our consolidated Tier 1 Leverage Ratio declined from 7.3% at year-end 2019 to 5.7% atSeptember 30, 2020 , below our long-term operating objective of 6.75%-7.00% but well above the regulatory minimum of 4.00%. The pace of our return to the 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 above and in further detail in the 2019 Form 10-K.
Regulatory Capital Requirements
CSC and CSB are subject to various capital requirements set by regulatory
agencies as discussed in further detail in the 2019 Form 10-K and in Item 1 -
Note 15. As of
The following table details CSC's consolidated and CSB's capital ratios as of
December 31, 2019
September 30, 2020 (1) (1)
CSC CSB CSC CSB
Total stockholders' equity $ 31,331 $ 21,606 $ 21,745 $ 14,832
Less:
Preferred stock 5,263 - 2,793 -
Common Equity Tier 1 Capital before regulatory
adjustments $ 26,068 $ 21,606 $ 18,952 $ 14,832 Less:
$ 13 $ 1,184 $ 13
Other intangible assets, net of associated deferred tax liabilities
1,234 - 104 -
Deferred tax assets, net of valuation allowances and deferred tax liabilities
16 11 4 -
AOCI adjustment (1) 5,686 4,934 - -
Common Equity Tier 1 Capital $ 17,438 $ 16,648 $ 17,660 $ 14,819
Tier 1 Capital $ 22,701 $ 16,648 $ 20,453 $ 14,819
Total Capital 22,735 16,680 20,472 14,837
Risk-Weighted Assets 109,364 87,019 90,512 71,521
Total Leverage Exposure 408,295 302,520 286,813 216,582
Common Equity Tier 1 Capital/Risk-Weighted Assets 15.9 % 19.1 % 19.5 % 20.7 %
Tier 1 Capital/Risk-Weighted Assets 20.8 % 19.1 % 22.6 % 20.7 %
Total Capital/Risk-Weighted Assets 20.8 % 19.2 % 22.6 % 20.7 %
Tier 1 Leverage Ratio 5.7 % 5.6 % 7.3 % 7.1 %
Supplementary Leverage Ratio 5.6 % 5.5 % 7.1 % 6.8 %
(1) In the interagency regulatory capital and liquidity rules adopted in October
2019 , Category III banking organizations such as CSC were given the ability to
opt-out of the inclusion of AOCI in regulatory capital, and CSC made this
opt-out election as of January 1, 2020 . Therefore, AOCI is excluded from the
amounts and ratios presented as of September 30, 2020 . In 2019, CSC and CSB were
required to include all components of AOCI in regulatory capital; the amounts
and ratios for December 31, 2019 are presented on this basis.
CSB is also subject to regulatory requirements that restrict and govern the
terms of affiliate transactions. In addition, CSB is required to provide notice
to, and may be required to obtain approval from, the Federal Reserve to declare
dividends to CSC.
As a broker-dealer, CS&Co is subject to regulatory requirements of the Uniform
Net Capital Rule. At September 30, 2020 , CS&Co was in compliance with its net
capital requirements.
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THE CHARLES SCHWAB CORPORATIONManagement's Discussion and Analysis of Financial Condition and Results of
Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)
In addition to the capital requirements above, Schwab's subsidiaries are subject
to other regulatory requirements intended to ensure financial soundness and
liquidity. See Item 1 - Note 15 for additional information on the components of
stockholders' equity and information on the capital requirements of significant
subsidiaries.
Dividends
On
Cash dividends paid and per share amounts for the first nine months of 2020 and
2019 are as follows:
2020 2019
Per Share Per Share
Nine Months Ended September 30, Cash Paid Amount Cash Paid Amount
Common Stock $ 700 $ .54 $ 679 $ .51
Series A Preferred Stock (1) 28 70.00 28 70.00
Series C Preferred Stock (2) 27 45.00 27 45.00
Series D Preferred Stock (2) 33 44.64 33 44.64
Series E Preferred Stock (3) 28 4,625.00 28 4,625.00
Series F Preferred Stock (4) 13 2,500.00 13 2,500.00
Series G Preferred Stock (5) 45 1,806.60 N/A N/A
(1) Dividends paid semi-annually until February 1, 2022 and quarterly
thereafter.
(2) Dividends paid quarterly.
(3) Dividends paid semi-annually until March 1, 2022 and quarterly thereafter.
(4) Dividends paid semi-annually beginning on June 1, 2018 until December 1,
2027 , and quarterly thereafter.
(5) Series G Preferred Stock was issued on April 30, 2020 . Dividends are paid
quarterly, and the first dividend was paid on September 1, 2020 .
N/A Not applicable.
Share Repurchases
OnJanuary 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 third quarter and first nine months of 2020. As ofSeptember 30, 2020 ,$1.8 billion remained on our existing authorization. OTHER Foreign Exposure AtSeptember 30, 2020 , Schwab had exposure to non-sovereign financial and non-financial institutions in foreign countries, as well as agencies of foreign governments. AtSeptember 30, 2020 , the fair value of these holdings totaled$10.1 billion , with the top three exposures being to issuers and counterparties domiciled inFrance at$6.1 billion ,Germany at$950 million , andCanada at$794 million . In addition, Schwab had outstanding margin loans to foreign residents of$1.1 billion atSeptember 30, 2020 . Off-Balance Sheet Arrangements Schwab enters into various off-balance sheet arrangements in the ordinary course of business, primarily to meet the needs of our clients. These arrangements include firm commitments to extend credit. Additionally, Schwab enters into guarantees and other similar arrangements in the ordinary course of business. For information on each of these arrangements, see Item 1 - Notes 6, 7, 9, 10, and 11, and Item 8 - Note 14 in the 2019 Form 10-K. Subsequent toSeptember 30, 2020 , and concurrent with the closing of the acquisition of TD Ameritrade effectiveOctober 6, 2020 , the Company entered into an IDA agreement with the TD Bank Depository Institutions. Pursuant to the IDA agreement, certainTD Ameritrade, Inc. and TDAC brokerage customer deposits are required to be swept to theTD Bank Depository - 23 - --------------------------------------------------------------------------------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)
Institutions. TD Ameritrade also maintains agreements pursuant to which client
brokerage cash deposits are swept to other third-party depository institutions.
See Item 1 - Note 17 for additional information on the IDA agreement.
Contractual Obligations
TD Ameritrade's contractual obligations as ofOctober 6, 2020 , the effective date of the acquisition, are primarily comprised of principal and interest on long-term debt. As of the date of acquisition,TDA Holding's long-term debt had a par value of$3.6 billion . The table below summarizes the estimated future interest and principal payments ofTDA Holding's long-term debt as ofOctober 6, 2020 . Less than 1-3 3-5 More than October 6, 2020 1 Year Years Years 5 Years Total Long-term debt (1)$ 99 $ 1,509 $ 1,015 $ 1,395 $ 4,018 (1) Includes principal and estimated future interest payments through 2029 for the TDA Senior Notes. Interest payments are estimated based on the contractual terms of the TDA Senior Notes. Amounts exclude the fair value adjustment resulting from purchase accounting.
Other contractual obligations of TD Ameritrade include leases and purchase obligations entered into in the ordinary course of business for goods and services such as professional services, software, employee compensation and benefits, telecommunications, market information, and advertising and marketing.
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 2019 Form 10-K. There have been no changes to critical
accounting estimates during the first nine months of 2020.
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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)NON-GAAP FINANCIAL MEASURES
In addition to disclosing financial results in accordance with 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 Management and Investors
Acquisition and Schwab adjusts certain GAAP financial We exclude acquisition and integration-related
integration-related costs and measures to exclude the impact of costs and amortization of acquired intangible
amortization of acquired acquisition and integration-related costs assets for the purpose of calculating certain
intangible assets incurred as a result of the Company's non-GAAP measures because we believe doing so
acquisitions, amortization of acquired provides additional transparency of Schwab's
intangible assets, and, where applicable, ongoing operations, and may be useful in both
the income tax effect of these expenses. evaluating the operating performance of the
business and facilitating comparison of results
Adjustments made to exclude amortization of with prior and future periods.
acquired intangible assets are reflective
of all acquired intangible assets, which Acquisition and integration-related costs
were recorded as part of purchase fluctuate based on the timing of acquisitions and
accounting. These acquired intangible integration activities, thereby limiting
assets contribute to the Company's revenue comparability of results among periods, and are
generation. Amortization of acquired not representative of the costs of running the
intangible assets will continue in future Company's ongoing business. Amortization of
periods over their remaining useful lives. acquired intangible assets is excluded because
management does not believe it is indicative of
the Company's underlying operating performance.
Return on tangible common Return on tangible common equity represents Acquisitions typically result in the recognition
equity annualized adjusted net income available to of significant amounts of goodwill and acquired
common stockholders as a percentage of intangible assets. We believe return on tangible
average tangible common equity. Tangible common equity may be useful to investors as a
common equity represents common equity less supplemental measure to facilitate assessing
goodwill, acquired intangible assets - net, capital efficiency and returns relative to the
and related deferred tax liabilities. composition of Schwab's balance sheet.
The following tables present reconciliations of GAAP measures to non-GAAP
measures:
Three Months Ended
September 30, Nine Months Ended September 30,
2020 2019 2020 2019
Total expenses excluding interest (GAAP) $ 1,559 $ 1,475 $ 4,691 $ 4,379
Acquisition and integration-related costs (1) (42) (4) (160)
(8)
Amortization of acquired intangible assets (25) (6) (43)
(20)
Adjusted total expenses (non-GAAP) $ 1,492$ 1,465 $ 4,488 $
4,351
(1) Acquisition and integration-related costs are primarily included in professional services, compensation and benefits, and other expense.
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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)
Three Months Ended September 30, Nine Months Ended September 30,
2020 2019 2020 2019
Amount Diluted EPS Amount Diluted EPS Amount Diluted EPS Amount Diluted EPS
Net income available to common stockholders
(GAAP),
Earnings per common share - diluted (GAAP) $ 615 $ .48 $ 913 $ .70 $ 1,993 $ 1.54 $ 2,725 $ 2.05
Acquisition and integration-related costs 42 .03 4 - 160 .12 8 .01
Amortization of acquired intangible assets 25 .02 6 - 43 .03 20 .02 Income tax effects (1) (16) (.02) (3) - (49) (.03) (7) (.01) Adjusted net income available to common stockholders (non-GAAP), Adjusted diluted EPS (non-GAAP)$ 666 $ .51 $ 920 $ .70 $ 2,147 $ 1.66 $ 2,746
(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 September 30, Nine Months Ended September 30,
2020 2019 2020 2019
Return on average common stockholders' equity
(GAAP) 10 % 20 % 12 % 20 %
Average common stockholders' equity $ 25,810 $
18,544
(1,735) (1,227) (1,482) (1,227)
Less: Average acquired intangible assets - net (1,268) (137) (693) (143)
Plus: Average deferred tax liabilities related
to goodwill and acquired intangible assets -
net 67 67 67 67
Average tangible common equity $ 22,874 $
17,247
$ 666 $ 920 $ 2,147 $ 2,746 Return on tangible common equity (non-GAAP)
12 % 21 % 14 % 22 %
(1) See table above for the reconciliation of net income available to common stockholders to adjusted net income available to common stockholders (non-GAAP).
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THE CHARLES SCHWAB CORPORATION © Edgar Online, source
