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.
Principal business subsidiaries of CSC include the following:
•Charles Schwab & Co., Inc. (CS&Co), incorporated in 1971, a securities broker-dealer; •TD Ameritrade, Inc., an introducing securities broker-dealer; •TD Ameritrade Clearing, Inc. (TDAC), a securities broker-dealer that provides trade execution and clearing services toTD Ameritrade, Inc. ; •CharlesSchwab Bank , SSB (CSB), our principal banking entity; and •Charles Schwab Investment Management, Inc. (CSIM), the investment advisor for Schwab's proprietary mutual funds (Schwab Funds®) and for Schwab's exchange-traded funds (Schwab ETFs™).
Unless otherwise indicated, the terms "Schwab," "the Company," "we," "us," or "our" mean CSC together with its consolidated subsidiaries.
Schwab provides financial services to individuals and institutional clients through two segments - Investor Services and Advisor Services. The Investor Services segment provides retail brokerage 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. EffectiveOctober 6, 2020 , the Company completed its acquisition of TD Ameritrade Holding Corporation (TDA Holding ) and its consolidated subsidiaries (collectively referred to as "TD Ameritrade" or "TDA"). 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. The TD Ameritrade acquisition is further described in the business and asset acquisition discussion below. Our consolidated financial statements include the results of operations and financial condition of TD Ameritrade beginning onOctober 6, 2020 . 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$60 trillion , which means the Company's$7.07 trillion in total client assets leaves substantial opportunity for growth. Our strategy is based on the principle that developing trusted relationships will translate into more assets from both new and existing clients, ultimately driving more revenue, and along with expense discipline and thoughtful capital management, will generate earnings growth and build long-term stockholder value. - 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)
This Management's Discussion and Analysis should be read in conjunction with our
Annual Report on Form 10-K for the fiscal year ended December 31, 2020 (2020
Form 10-K).
On our website, https://www.aboutschwab.com, we post the following filings after
they are electronically filed with or furnished to the Securities and Exchange
Commission (SEC): 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 average liquidity
coverage ratio. The SEC maintains a website at https://www.sec.gov that contains
reports, proxy statements, and other information that we file electronically
with them.
FORWARD-LOOKING STATEMENTS
In addition to historical information, this Quarterly Report on Form 10-Q
contains "forward-looking statements" within the meaning of Section 27A of the
Securities Act, and Section 21E of the Securities Exchange Act of 1934.
Forward-looking statements are identified by words such as "believe,"
"anticipate," "expect," "intend," "plan," "will," "may," "estimate," "appear,"
"could," "would," "expand," "aim," "maintain," "continue," and other similar
expressions. In addition, any statements that refer to expectations,
projections, or other characterizations of future events or circumstances are
forward-looking statements.
These forward-looking statements, which reflect management's beliefs,
objectives, and expectations as of the date hereof, are estimates based on the
best judgment of Schwab's senior management. These statements relate to, among
other things:
•Maximizing our market valuation and stockholder returns over time; our belief
that developing trusted relationships will translate into more client assets
which drives revenue and, along with expense discipline and thoughtful capital
management, generates earnings growth and builds stockholder value (see
Introduction in Part I, Item 2);
•Capital management; Tier 1 Leverage operating objective; sources of liquidity
and capital (see Overview and Capital Management);
•Expected benefits from the TD Ameritrade acquisition; scope of technology work
related to the integration; and expected timing for the client conversion (see
Overview, Business Acquisitions in Part I, Item 1, Financial Information - Notes
to Condensed Consolidated Financial Statements (Item 1) - Note 3, and Exit and
Other Related Liabilities in Item 1 - Note 11);
•Cost estimates and timing related to the TD Ameritrade integration, including
acquisition and integration-related costs and capital expenditures, cost
synergies, and exit and other related costs (see Overview, Business Acquisitions
in Item 1 - Note 3, and Exit and Other Related Liabilities in Note 11);
•Money market fund fee waivers (see Results of Operations);
•2021 capital expenditures (see Results of Operations);
•The phase-out of the use of LIBOR (see Risk Management);
•The migration of IDA balances to our balance sheet (see Capital Management and
Commitments and Contingencies in Item 1 - Note 10);
•The likelihood of indemnification and guarantee payment obligations and clients
failing to fulfill contractual 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.
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 advice solutions and other products and services;
•The level of client assets, including cash balances;
•Competitive pressure on pricing, including deposit rates;
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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)
•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 in a win-win manner;
•The scope and duration of the COVID-19 pandemic and actions taken by
governmental authorities to contain the spread of the virus and the economic
impact;
•Our ability to support client activity levels;
•The risk that expected cost synergies and other benefits from the TD Ameritrade
acquisition may not be fully realized or may take longer to realize than
expected;
•The timing of integration-related and other technology projects;
•Real estate and workforce decisions;
•Migrations of BDA balances;
•Prepayment levels for mortgage-backed securities;
•Client cash allocations;
•LIBOR trends;
•Adverse developments in litigation or regulatory matters and any related
charges; and
•Potential breaches of contractual terms for which we have indemnification and
guarantee obligations.
Certain of these factors, as well as general risk factors affecting the Company,
are discussed in greater detail in Part I - Item 1A - Risk Factors in the 2020
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 first quarter of 2021 and 2020 are:
Three Months Ended
March 31, Percent
2021 2020 Change
Client Metrics
Net new client assets (in billions) (1) $ 133.8 $ 73.2 83 %
Core net new client assets (in billions) $ 148.2 $ 73.2 102 %
Client assets (in billions, at quarter end) $ 7,069.1 $ 3,496.9 102 %
Average client assets (in billions) $ 6,952.2 $ 3,918.8 77 %
New brokerage accounts (in thousands) 3,153 609 N/M
Active brokerage accounts (in thousands, at quarter end) 31,902 12,736 150 %
Assets receiving ongoing advisory services (in billions,
at quarter end)$ 3,493.1 $ 1,822.8 92 %
Client cash as a percentage of client assets (at quarter end) 11.5 %
15.1 %
Company Financial Information and Metrics
Total net revenues $ 4,715 $ 2,617 80 %
Total expenses excluding interest 2,755 1,570 75 %
Income before taxes on income 1,960 1,047 87 %
Taxes on income 476 252 89 %
Net income 1,484 795 87 %
Preferred stock dividends and other 96 38 153 %
Net income available to common stockholders $ 1,388 $ 757 83 %
Earnings per common share - diluted (2) $ .73 $ .58 26 %
Net revenue growth from prior year 80 % (4) %
Pre-tax profit margin 41.6 % 40.0 %
Return on average common stockholders' equity (annualized) 12 % 14 %
Expenses excluding interest as a percentage of average client
assets (annualized) 0.16 % 0.16 % Consolidated Tier 1 Leverage Ratio (at quarter end) 6.4 % 6.9 % Non-GAAP Financial Measures (3) Adjusted total expenses (4)$ 2,482 $ 1,527 Adjusted diluted EPS$ .84 $ .61 Return on tangible common equity 24 % 16 % (1) First quarter of 2021 includes an outflow of$14.4 billion from a mutual fund clearing services client. (2) In connection with the acquisition of TD Ameritrade, Schwab issued approximately 586 million common shares to TD Ameritrade stockholders, increasing our weighted average common shares outstanding for the first quarter of 2021 relative to the first quarter of 2020. (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. N/M Not meaningful. Percentage changes greater than 200% are presented as not meaningful. Schwab saw an unprecedented operating environment during the first three months of 2021. TheU.S. economic recovery advanced, supported by expanding COVID-19 vaccine rollouts and government aid packages, and the equity markets continued to rise, with the S&P 500® rising 78% between the pandemic-driven low inMarch 2020 and the end of the first quarter of 2021. Interest rates began to lift as well, with the 10-yearTreasury yield moving to 1.74% by quarter-end - its highest level sinceJanuary 2020 . This environment contributed to another rise in client engagement and activity. Clients opened 3.2 million new brokerage accounts, exceeding our total for all of 2020, exclusive of the accounts we acquired as part of our 2020 acquisitions of TD Ameritrade andUSAA's Investment Management Company (USAA-IMCO). Daily average trades (DATs) rose considerably to - 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)
8.4 million in the first three months of 2021, rising 45% from the average of
5.8 million seen in the fourth quarter of 2020. Amidst this surge in activity,
core net new assets totaled $148.2 billion in the first quarter of 2021, rising
102% from the first quarter of 2020 and 24% higher than the fourth quarter of
2020. Total client assets ended the first quarter of 2021 at $7.07 trillion , up
102% from March 31, 2020 and up 6% from year-end 2020.
With significantly heightened client activity levels during the first quarter of
2021, our service quality was impacted at times. As a result, we took multiple
steps to better deliver the service experience our clients deserve and rely on,
including enhancing online self-service capabilities, streamlining our
call-routing processes, and increasing hiring, including 10% growth in client
service professionals since year-end 2020. Our efforts were already yielding
results by quarter-end, with significant improvement in client service levels.
Against this market and client activity backdrop, Schwab generated strong
financial results during the first three months of 2021. Net income totaled $1.5
billion in the first quarter of 2021, up 87% from the first quarter of 2020, and
the Company produced diluted earnings per common share (EPS) of $.73 , up 26%
from the first quarter of 2020. Adjusted diluted EPS (1), which excludes
acquisition and integration-related costs, amortization of acquired intangible
assets, and related income tax effects, amounted to $.84 , up 38% from the first
quarter of 2020. These increases from the first quarter of 2020 were due largely
to our October 6, 2020 acquisition of TD Ameritrade.
Total net revenues were $4.7 billion in the first quarter of 2021, up 80% from
the first quarter of 2020, as TD Ameritrade contributed total net revenues of
$2.2 billion . Total net revenues increased 13% from the fourth quarter of 2020,
driven primarily by higher trading revenue and higher net interest revenue.
Net interest revenue totaled $1.9 billion in the first quarter, up 22% from the
first quarter of 2020 and up 6% from the fourth quarter of 2020. The increase
from the first quarter of 2020 reflected the inclusion of TD Ameritrade, which
contributed $548 million of net interest revenue in the first quarter of 2021.
The increase from the fourth quarter of 2020 was largely due to elevated margin
loan utilization and higher overall interest-earning assets stemming from rising
client cash balances. These factors more than offset the ongoing impacts of the
Fed's Zero Interest Rate Policy, including elevated prepayments of
mortgage-backed securities. Asset management and administration fees totaled
$1.0 billion , up 23% from the first quarter of 2020, due largely to the
contribution of $142 million from TD Ameritrade in the first quarter of 2021, as
well as overall growth in advice solutions balances including managed account
assets from USAA, partially offset by money market fund fee waivers. Asset
management and administration fees grew 3% from the fourth quarter of 2020 as
growth in advisory solution balances and strong equity markets more than offset
a $10 million increase in money market fund fee waivers.
Trading revenue was $1.2 billion in the first quarter of 2021, up from $188
million in the first quarter of 2020 and up from $854 million in the fourth
quarter of 2020. The significant increase in the first quarter of 2021 reflected
early-2021 market events on top of an already busy trading environment, as DATs
increased significantly. TD Ameritrade contributed $980 million of trading
revenue in the first quarter of 2021. Bank deposit account fee revenue totaled
$351 million in the first quarter of 2021, decreasing 1% from the fourth quarter
of 2020. Bank deposit account balances (BDA balances) remained relatively
consistent from December 31, 2020 , and certain balances repriced to current
rates.
Total expenses excluding interest were $2.8 billion in the first quarter of
2021, increasing 75% from the first quarter of 2020 due primarily to the
inclusion of TD Ameritrade's results, which contributed $917 million . Total
expenses excluding interest increased 2% from the fourth quarter of 2020
reflecting the impact of extraordinary client activity alongside anticipated
integration spending and increased headcount to support our expanding client
base. Acquisition and integration-related costs totaled $119 million in the
first quarter of 2021, and amortization of acquired intangible assets was $154
million . Exclusive of these items, adjusted total expenses (1) were $2.5 billion
in the first quarter of 2021, up 63% and 9% from the first and fourth quarters
of 2020, respectively. Return on average common stockholders' equity was 12% for
the first quarter of 2021, down from 14% in the first quarter of 2020, as the
return generated from higher net income was offset by higher balances of common
stockholders' equity due to the TD Ameritrade acquisition. Return on tangible
common equity (1) (ROTCE) was 24% in the first quarter of 2021, up from 16% in
the first quarter of 2020, due primarily to higher net income.
(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.
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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)
The Company continued its disciplined approach to capital management in the
first quarter of 2021. During the first quarter, we completed two preferred
stock offerings: Series I for $2.25 billion and Series J for $600 million . As
previously announced, proceeds from the Series J preferred stock issuance will
be used to redeem our $600 million Series C preferred stock on June 1, 2021 . In
addition, we issued 3- and 7-year senior notes totaling $4.0 billion in March
2021 . Our priority for capital management remains centered on maintaining
flexibility to support ongoing growth while also helping us move towards our
long-term Tier 1 Leverage Ratio operating objective of 6.75%-7.00%. Schwab's
consolidated balance sheet assets were $563 billion at the end of the first
quarter of 2021, up 3% from year-end 2020, and our Tier 1 Leverage Ratio
increased to 6.4%.
Integration of TD Ameritrade
Against a backdrop of unprecedented client activity and volume growth in the first quarter of 2021, the Company continued its integration of TD Ameritrade. As a result of the significant growth seen in recent quarters across key client volume metrics, including the number of active brokerage accounts, DATs, and peak daily trades, the Company is expanding the scope of technology work related to the integration. We anticipate greater technology build-out to support the expanded volumes of our combined client base. Based on our revised integration plans and expanded scope of technology work, the Company expects to complete client conversion within 30 to 36 months from the date of acquisition, and we expect to incur total acquisition and integration-related costs and capital expenditures of between$2.0 billion and$2.2 billion . The Company's estimates of the nature, amounts, and timing of recognition of acquisition and integration-related costs remain subject to change based on a number of factors, including the expected duration and complexity of the integration process and the heightened uncertainty of the current economic environment. More specifically, factors that could cause variability in our expected acquisition and integration-related costs include the level of employee attrition, workforce redeployment from eliminated positions into open roles, changes in the levels of client activity, as well as increased real estate-related exit cost variability due to effects of the COVID-19 pandemic. Over the course of the integration, we continue to expect to realize annualized cost synergies of between$1.8 billion and$2.0 billion , with one-quarter to one-third on an annualized run-rate basis expected by the end of the first year following acquisition. Estimated timing and amounts of synergy realization are subject to change as we progress in the integration. Refer to Item 7 - Overview in our 2020 Form 10-K and Item 1 - Note 11 for additional information regarding our integration of TD Ameritrade.
Current Regulatory Environment and Other Developments
Liquidity Coverage Ratio
As a result of our average weighted short-term wholesale funding for the past four quarters exceeding$75 billion , we will become subject to daily reporting of our liquidity coverage ratio (LCR) and net stable funding ratio (NSFR) to theFederal Reserve onJuly 1, 2021 , and to the full (100%) LCR and NSFR (up from 85%) onOctober 1, 2021 .
Financial Holding Company Election
OnMarch 16, 2021 , CSC's declaration electing to be treated as aFinancial Holding Company (FHC) was deemed effective by theFederal Reserve . In addition to the activities that savings and loan holding companies that have not elected to be treated as an FHC are permitted to conduct, the Company may now also engage in activities that are financial in nature or incidental to a financial activity (FHC Activities), including securities underwriting, dealing and making markets in securities, various insurance underwriting activities, and making merchant banking investments in non-financial companies. TheFederal Reserve has the authority to limit an FHC's ability to conduct otherwise permissible FHC Activities if the FHC or any of its depository institution subsidiaries ceases to meet the applicable eligibility requirements, including requirements that the FHC and each of its depository institution subsidiaries maintain their status as "well-capitalized" and "well-managed." If theFederal Reserve finds that an FHC fails to meet these requirements, the FHC and its subsidiaries may not commence any new FHC Activity, either de novo or through an acquisition, without priorFederal Reserve approval. TheFederal Reserve may also impose any additional limitations or conditions on the conduct or activities of the FHC or any of its subsidiaries as it deems appropriate. If the FHC still fails to satisfy the applicable eligibility requirements 180 days after theFederal Reserve's finding, the agency may require divestiture of all of the FHC's depository institution subsidiaries or, alternatively, the FHC may elect to cease all of its FHC Activities. In addition, if any depository institution controlled by an FHC fails to maintain at least a - 6 - --------------------------------------------------------------------------------THE CHARLES SCHWAB CORPORATION
Management's Discussion and Analysis of Financial Condition and Results of
Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)"Satisfactory" rating under the Community Reinvestment Act, the FHC and its subsidiaries are prohibited from engaging in additional FHC Activities.
RESULTS OF OPERATIONS Total Net Revenues
The following tables present a comparison of revenue by category:
2021 2020
% of % of
Percent Total Net Total Net
Three Months Ended March 31, Change Amount Revenues Amount Revenues
Net interest revenue
Interest revenue 18 % $ 2,015 43 % $ 1,708 65 %
Interest expense (24) % (104) (2) % (136) (5) %
Net interest revenue 22 % 1,911 41 % 1,572 60 %
Asset management and administration fees
Mutual funds, exchange-traded funds (ETFs),
and collective trust
funds (CTFs) 4 % 470 10 % 452 17 %
Advice solutions 50 % 468 10 % 312 12 %
Other 24 % 78 2 % 63 3 %
Asset management and administration fees 23 % 1,016 22 % 827 32 %
Trading revenue
Commissions N/M 614 13 % 113 4 %
Order flow revenue N/M 591 13 % 55 2 %
Principal transactions (45) % 11 - 20 1 %
Trading revenue N/M 1,216 26 % 188 7 %
Bank deposit account fees N/M 351 7 % - -
Other N/M 221 4 % 30 1 %
Total net revenues 80 % $ 4,715 100 % $ 2,617 100 %
N/M Not meaningful. Percentage changes greater than 200% are presented as not meaningful.
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. Throughout the first quarter of 2021, short-term rates remained near zero, but as theU.S. economic recovery advanced, longer-term interest rates began to rise. The overall environment continued to contribute to elevated levels of prepayments on mortgage-backed securities, resulting in additional reinvestment of the available for sale (AFS) portfolio during the period. Client engagement in the equity markets greatly increased, and clients were net buyers of equity securities and other investment products during the first quarter. At the same time, Schwab saw significant growth in new client brokerage accounts and net new client assets, driving further growth in Schwab's interest-earning assets. - 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)
The following tables present net interest revenue information corresponding to
interest-earning assets and funding sources on the condensed consolidated
balance sheets:
2021 2020
Interest Interest
Average Revenue/ Average Average Revenue/ Average
Three Months Ended March 31, Balance Expense Yield/Rate Balance Expense Yield/Rate
Interest-earning assets
Cash and cash equivalents $ 38,898 $ 7 0.08 % $ 32,134 $ 85 1.04 %
Cash and investments segregated 48,149 10 0.08 % 23,716 87 1.45 %
Receivables from brokerage clients 67,738 563 3.32 % 19,151 168 3.47 % Available for sale securities (1) 338,245 1,091 1.29 % 197,745 1,185 2.39 % Bank loans 24,476 139 2.27 % 18,897 144 3.06 % Total interest-earning assets 517,506 1,810 1.40 % 291,643 1,669 2.28 % Securities lending revenue (2) 204 37 Other interest revenue (2) 1 2
Total interest-earning assets (3)
1.56 %$ 291,643 $ 1,708 2.33 % Funding sources Bank deposits$ 363,099 $ 13 0.01 %$ 227,523 $ 57 0.10 % Payables to brokerage clients 87,339 2 0.01 % 30,287 8 0.10 % Short-term borrowings (4) 1,093 - 0.22 % 3 - 1.07 % Long-term debt 14,245 85 2.37 % 7,527 66 3.53 % Total interest-bearing liabilities 465,776 100 0.09 % 265,340 131 0.20 % Non-interest-bearing funding sources (3) 51,730 26,303 Securities lending expense (2) 5 7 Other interest expense (2) (1) (2) Total funding sources (3)$ 517,506 $ 104 0.08 %$ 291,643 $ 136 0.19 % Net interest revenue$ 1,911 1.48 %$ 1,572 2.14 % (1) Amounts have been calculated based on amortized cost. (2) Beginning in the fourth quarter of 2020, securities lending revenue has been reclassified from broker-related receivables and other revenue. Securities lending expense has been reclassified from other expense. Prior period amounts have been reclassified to reflect this change. (3) Beginning in the fourth quarter of 2020, broker-related receivables were removed from total interest earning assets and netted against non-interest-bearing funding sources, resulting in an immaterial reduction to total interest-earning assets and total funding sources. Prior period amounts have been reclassified to reflect this change. (4) Interest revenue or expense was less than$500 thousand in the period or periods presented. Net interest revenue increased$339 million , or 22%, in the first quarter of 2021 compared to the same period in 2020, due primarily to growth in interest-earning assets, including elevated margin utilization, and growth in securities lending revenue, partially offset by lower average yields. Accelerated premium amortization stemming from the elevated prepayment of mortgage-related debt securities in the AFS portfolio partially offset the growth in net interest revenue. TD Ameritrade contributed$548 million of net interest revenue during the first quarter of 2021. Average interest-earning assets for the first quarter of 2021 were higher by 77% compared to the same period in 2020. This increase resulted from higher bank deposits and payables to brokerage clients, due to rising client cash balances driven by the low interest rate environment and strong net new client cash inflows, as well as our 2020 acquisitions of TD Ameritrade and USAA-IMCO. Our net interest margin decreased to 1.48% during the first quarter of 2021, from 2.14% in the same period of 2020. This decrease was driven primarily by lower yields received on interest-earning assets due largely to theFederal Reserve's first quarter 2020 interest rate reductions as well as higher premium amortization on mortgage-related debt securities. Due to the low interest rate environment, purchases of investment securities throughout 2020 and the first quarter of 2021 were made at rates below the average yield on AFS portfolio, which negatively impacted our net interest margin. This more than offset higher revenue from increased margin utilization and securities lending, which comprised 40% of net interest revenue during the first quarter of 2021, up from 13% in the first quarter of 2020. - 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)Asset Management and Administration Fees
The following tables present asset management and administration fees, average client assets, and average fee yields:
2021 2020
Average Average
Client Average Client Average
Three Months Ended March 31, Assets Revenue Fee Assets Revenue Fee
Schwab money market funds before fee
waivers $ 169,683 $ 122 0.29 % $ 203,772 $ 152 0.30 %
Fee waivers (78) -
Schwab money market funds $ 169,683 44 0.11 % $ 203,772 152 0.30 %
Schwab equity and bond funds, ETFs, and
CTFs 377,282 86 0.09 % 290,808 76 0.11 %
Mutual Fund OneSource® and other
non-transaction fee funds 222,455 172 0.31 % 188,583 147 0.31 %
Other third-party mutual funds and ETFs
(1) 849,409 168 0.08 % 451,959 77 0.07 %
Total mutual funds, ETFs, and CTFs (2) $ 1,618,829 470 0.12 % $ 1,135,122 452 0.16 %
Advice solutions (2)
Fee-based $ 424,629 468 0.45 % $ 263,256 312 0.48 %
Non-fee-based 84,767 - - 71,229 - -
Total advice solutions $ 509,396 468 0.37 % $ 334,485 312 0.38 %
Other balance-based fees (3) 576,562 64 0.05 % 432,847 54 0.05 %
Other (4) 14 9
Total asset management and administration
fees $ 1,016 $ 827
(1) Beginning in the fourth quarter of 2020, includes third-party money funds
related to the acquisition of TD Ameritrade.
(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 $189 million , or 23%, in
the first quarter of 2021 compared to the same period in 2020. This increase was
due to the acquisition of TD Ameritrade, as well as additional growth in advice
solutions, including managed account assets from USAA, and overall strength in
the equity markets during the first quarter of 2021 relative to the same period
in 2020. These increases were partially offset by the effect of money market
fund fee waivers due to declining portfolio yields. TD Ameritrade contributed
$142 million of asset management and administration fees in the first quarter of
2021. The amount of fee waivers in coming quarters is dependent on a variety of
factors, including the level of short-term interest rates and client preferences
across our money market fund line-up.
The following table presents a roll forward of client assets for the Schwab money market funds, Schwab equity and bond funds, exchange-traded funds (ETFs), and collective trust funds (CTFs), and Mutual Fund OneSource® and other non-transaction fee (NTF) funds. These funds generated 30% of the asset management and administration fees earned during the first quarter of 2021 compared to 45% of asset management and administration fees for the first quarter of 2020:
Schwab Money Schwab Equity and Mutual Fund OneSource®
Market Funds Bond Funds, ETFs, and CTFs and Other NTF funds
Three Months Ended March 31, 2021 2020 2021 2020 2021 2020
Balance at beginning of period
341,689$ 286,275 $ 223,857 $ 202,068 Net inflows (outflows) (12,522) 1,989 12,805 6,531 (4,688) (10,565) Net market gains (losses) and other 14 913 19,323 (57,183) 8,120 (29,864)
Balance at end of period
373,817$ 235,623 $ 227,289 $ 161,639 - 9 -
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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)
Trading Revenue
The following table presents trading revenue and related information:
Three Months Ended March 31, Percent
2021 2020 Change
Trading revenue $ 1,216 $ 188 N/M
Clients' daily average trades (DATs) (in thousands) 8,414 1,540 N/M
Number of trading days 61.0 62.0 (2) %
Revenue per trade (1) $ 2.37 $ 1.97 20 %
(1) Revenue per trade is calculated as trading revenue divided by DATs
multiplied by the number of trading days.
N/M Not meaningful. Percentage changes greater than 200% are presented as not
meaningful.
Trading revenue increased $1.0 billion in the first quarter of 2021 compared to
the same period in 2020, primarily due to the acquisition of TD Ameritrade and
heightened client engagement, which together drove significantly higher DATs.
This increased trading activity drove significant growth in both commissions and
order flow revenue. Overall, TD Ameritrade contributed $980 million of trading
revenue in the first quarter of 2021.
Bank Deposit Account Fees
Beginning in the fourth quarter of 2020, the Company began earning bank deposit account fee revenue pursuant to the Insured Deposit Account agreement (IDA agreement) withTD Bank USA , National Association andTD Bank, National Association (together, the TD Depository Institutions) and arrangements with other third-party banks. Bank deposit account fees are primarily affected by average BDA balances and floating- and fixed-rate reference yields. Fees earned under the IDA agreement are affected by changes in interest rates and the composition of balances designated as fixed- and floating-rate. Bank deposit account fees totaled$351 million during the three months endedMarch 31, 2021 . During this period, the total average BDA balance was$166.8 billion , of which approximately 80% was designated as fixed-rate obligation amounts and approximately 20% as floating-rate obligation amounts.
Other Revenue
Other revenue includes exchange processing fees, certain service fees, software fees, and non-recurring gains. Other revenue increased$191 million in the first quarter of 2021 compared to the same period in 2020 primarily due to the acquisition of TD Ameritrade as well as higher exchange processing fees resulting from higher trade volumes. - 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)Total Expenses Excluding Interest
The following table shows a comparison of expenses excluding interest:
Three Months Ended
March 31, Percent
2021 2020 Change
Compensation and benefits
Salaries and wages $ 776 $ 502 55 %
Incentive compensation 409 227 80 %
Employee benefits and other 245 168 46 %
Total compensation and benefits $ 1,430 $ 897 59 %
Professional services 226 182 24 %
Occupancy and equipment 237 142 67 %
Advertising and market development 116 67 73 %
Communications 147 75 96 %
Depreciation and amortization (1) 129 90 43 %
Amortization of acquired intangible assets (1) 154 6 N/M
Regulatory fees and assessments 78 34 129 %
Other 238 77 N/M
Total expenses excluding interest $ 2,755 $ 1,570 75 %
Expenses as a percentage of total net revenues
Compensation and benefits 30 % 34 %
Advertising and market development 2 % 3 %
Full-time equivalent employees (in thousands)
At quarter end 32.0 20.2 58 %
Average 32.1 20.0 61 %
(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. Percentage changes greater than 200% are presented as not
meaningful.
Expenses excluding interest increased $1.2 billion , or 75%, in the first quarter
of 2021 compared to the same period in 2020. In the first quarter of 2021, total
expenses excluding interest included $917 million from TD Ameritrade. Adjusted
total expenses, which excludes acquisition and integration-related costs and
amortization of acquired intangible assets, increased $955 million , or 63%, in
the first quarter of 2021 compared the same period in 2020. See Non-GAAP
Financial Measures for further details and a reconciliation of such measures to
GAAP reported results.
Total compensation and benefits increased in the first quarter of 2021, compared
to the same period in 2020, primarily due to an overall increase in employee
headcount, driven primarily by our acquisition of TD Ameritrade. The increase
was also due to additional headcount to support our expanding client base and
service levels amidst heightened client engagement, as well as annual merit
increases and higher bonus accrual. Compensation and benefits in the first
quarter of 2021 included $72 million of acquisition and integration-related
costs, up from $8 million in the first quarter of 2020.
Professional services expense increased in the first quarter of 2021 compared to
the same period in 2020, primarily due to the inclusion of TDA's results of
operations and overall growth in the business. Professional services expense
included $27 million of acquisition and integration-related costs, increasing
from $23 million in the first quarter of 2020.
Occupancy and equipment expense increased in the first quarter of 2021 compared
to the same period in 2020, primarily due to the inclusion of TDA's results of
operations and costs related to the integration of TD Ameritrade, as well as an
increase in technology equipment costs associated with higher customer trade
volumes and overall growth in the business.
Advertising and market development expense increased in the first quarter of
2021 compared to the same period in 2020, primarily due to the inclusion of
TDA's results of operations.
- 11 -
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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)
Communications expense increased in the first quarter of 2021 compared to the
same period in 2020, primarily due the inclusion of TDA's results of operations,
as well as higher communications expenses due to higher customer trade volumes
and overall growth of the business.
Depreciation and amortization expenses grew in the first quarter of 2021
compared to the same period in 2020, primarily resulting from growth in fixed
assets due to the TDA acquisition, higher amortization of purchased and
internally developed software, and higher depreciation of buildings related to
expansion of our campuses in the U.S. Amortization of acquired intangible assets
increased in 2021 as a result of acquisitions completed in 2020.
Regulatory fees and assessments increased in the first quarter of 2021 primarily
as a result of the inclusion of TDA's results of operations and overall growth
in the business, including higher FDIC assessments due to asset growth.
Other expense increased in the first quarter of 2021 compared to the same period
in 2020, primarily due the inclusion of TDA's results of operations and
increases in processing fees and related expenses due to higher customer trade
volumes and market volatility.
Capital expenditures were $209 million and $250 million in the first quarter of
2021 and 2020, respectively. The decrease in capital expenditures from the prior
year was primarily due to lower building expansion and lower capitalized
software costs in 2021, partially offset by higher hardware costs relative to
the first three months of 2020. We anticipate capital expenditures for full-year
2021 to be approximately 6-7% of total net revenues.
Taxes on Income
Taxes on income were$476 million and$252 million for the first quarters of 2021 and 2020, respectively, resulting in effective income tax rates on income before taxes of 24.3% and 24.1%, respectively. The increase in the effective tax rate in the first quarter of 2021 compared to the same period in 2020 was primarily due to the impact of state rate changes on the Company's deferred tax liabilities during the first quarter of 2021, increased state tax expense due to uncertain tax position accruals, and state-related tax benefits recognized during the first quarter of 2020. Partially offsetting the increase in the effective tax rate from these items was an increase in equity compensation tax benefits during the first quarter of 2021.
Segment Information
Financial information for our segments is presented in the following tables:
Investor Services Advisor Services Total
Percent
Three Months Ended March 31, Percent Change 2021 2020 Percent Change 2021 2020 Change 2021 2020
Net Revenues
Net interest revenue 29 % $ 1,454 $ 1,128 3 % $ 457 $ 444 22 % $ 1,911 $ 1,572
Asset management and
administration fees 24 % 742 600 21 % 274 227 23 % 1,016 827
Trading revenue N/M 1,097 119 72 % 119 69 N/M 1,216 188
Bank deposit account fees N/M 254 - N/M 97 - N/M 351 -
Other N/M 178 20 N/M 43 10 N/M 221 30
Total net revenues 100 % 3,725 1,867 32 % 990 750 80 % 4,715 2,617
Expenses Excluding Interest 83 % 2,109 1,154 55 % 646 416 75 % 2,755 1,570
Income before taxes on income 127 % $ 1,616 $ 713 3 % $ 344 $ 334 87 %
Net New Client Assets (in billions) (1) 84 %$ 65.1 $ 35.3 81 %$ 68.7 $ 37.9 83 %$ 133.8 $ 73.2 (1) In the first three months of 2021, Investor Services includes an outflow of$14.4 billion from a mutual fund clearing services client. N/M Not meaningful. Percentage changes greater than 200% are presented as not meaningful. Segment Net Revenues Investor Services and Advisor Services total net revenues increased by 100% and 32%, respectively, in the first quarter of 2021 compared to the same quarter in 2020, primarily due to ourOctober 6, 2020 acquisition of TD Ameritrade, as both segments saw growth in all revenue line items. The increase in net interest revenue in both segments was due to growth in interest- - 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)
earning assets, partially offset by lower average yields. Growth in asset
management and administration fees in Investor Services was supported by growth
in advice solutions, including managed account assets from USAA, and asset
management and administration fees grew in both segments as a result of overall
strength in the equity markets, partially offset by money market fund fee
waivers. The increase in trading revenue for both segments was also supported by
a significant increase in client trading activity. Bank deposit account fee
revenue was earned at both segments during the first quarter of 2021, following
the TDA acquisition.
Segment Expenses Excluding Interest
Investor Services and Advisor Services total expenses excluding interest increased by 83% and 55%, respectively, in the first quarter of 2021 compared to the same quarter in 2020, primarily due to the inclusion of TD Ameritrade's results of operations and higher customer trade volume. In addition, both segments saw higher compensation and benefits expenses due to additional increases in headcount to support our expanding client base and service levels amidst heightened client engagement, as well as annual merit increases and higher bonus accrual. ForInvestor Services , total expenses excluding interest also increased as a result of our hiring former USAA employees in connection with the 2020 acquisition of assets of USAA-IMCO.
RISK MANAGEMENT
Schwab's business activities expose it to a variety of risks, including operational, compliance, credit, market, and liquidity risks. The Company has a comprehensive risk management program to identify and manage these risks and their associated potential for financial and reputational impact.
As part of our integration of TD Ameritrade, the Company is aligning TD Ameritrade's historical risk exposures with Schwab's risk appetite. Our integration work includes evaluating new or changed risks impacting the combined company, and may involve modifications to our existing risk management processes. Though integration work continues, the Company's operations, inclusive of TD Ameritrade, remain consistent with our Enterprise Risk Management (ERM) framework.
For a discussion of our risk management programs, see Item 7 - Risk Management in the 2020 Form 10-K.
Interest Rate Risk Simulations
Net Interest Revenue Simulation
For our net interest revenue sensitivity analysis, we use net interest revenue
simulation modeling techniques to evaluate and manage the effect of changing
interest rates. The simulations include all balance sheet interest
rate-sensitive assets and liabilities. Key assumptions include the projection of
interest rate scenarios with rate floors, prepayment speeds of mortgage-related
investments, repricing of financial instruments, and reinvestment of matured or
paid-down securities and loans.
Net interest revenue is affected by various factors, such as the distribution
and composition of interest-earning assets and interest-bearing liabilities, the
spread between yields earned on interest-earning assets and rates paid on
interest-bearing liabilities, which may reprice at different times or by
different amounts, and the spread between short and long-term interest rates.
Interest-earning assets include investment securities, margin loans, and bank
loans. These assets are sensitive to changes in interest rates and changes in
prepayment levels that tend to increase in a declining rate environment and
decrease in a rising rate environment. Because we establish the rates paid on
certain brokerage client cash balances and bank deposits and the rates charged
on certain margin and bank loans, and control the composition of our investment
securities, we have some ability to manage our net interest spread, depending on
competitive factors and market conditions.
Net interest revenue sensitivity analysis assumes the asset and liability
structure of the consolidated balance sheet would not be changed as a result of
the simulated changes in interest rates. As we actively manage the consolidated
balance sheet and interest rate exposure, in all likelihood we would take steps
to manage additional interest rate exposure that could result from changes in
the interest rate environment.
- 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)
The following table shows the simulated change to net interest revenue over the
next 12 months beginning
March 31, 2021 December 31, 2020
Increase of 100 basis points 14.2 % 14.2 %
Decrease of 100 basis points (4.2) % (4.3) %
Net interest revenue sensitivities as of March 31, 2021 remained relatively
consistent with December 31, 2020 , due to the continued low interest rate
environment. Higher short-term interest rates would positively impact net
interest revenue as yields on interest-earning assets are expected to rise
faster than the cost of funding sources. A decline in interest rates could
negatively impact the yield on the Company's investment and loan portfolio to a
greater degree than any offsetting reduction in interest expense from funding
sources, compressing net interest margin.
In addition to measuring the effect of a gradual 100 basis point parallel increase or decrease in current interest rates, we regularly simulate the effects of larger parallel- and non-parallel shifts in interest rates on net interest revenue.
Bank Deposit Account Fees Simulation
Consistent with the presentation on the consolidated statement of income, the sensitivity of bank deposit account fee revenue to interest rate changes is assessed separately from the net interest revenue simulation described above. As ofMarch 31, 2021 , simulated changes in bank deposit account fee revenue from gradual 100 basis point changes in market interest rates relative to prevailing market rates did not have a significant impact on the Company's total net revenues.
Economic Value of Equity Simulation
Management also uses economic value of equity (EVE) simulations to measure interest rate risk. EVE sensitivity measures the long-term impact of interest rate changes on the net present value of assets and liabilities. EVE is calculated by subjecting the balance sheet to hypothetical instantaneous shifts in the level of interest rates. This analysis is highly dependent upon asset and liability assumptions based on historical behaviors as well as our expectations of the economic environment. Key assumptions in our EVE calculation include projection of interest rate scenarios with rate floors, prepayment speeds of mortgage-related investments, term structure models of interest rates, non-maturity deposit behavior, and pricing assumptions. Our net interest revenue, bank deposit account fee revenue, and EVE simulations reflect the assumption of non-negative investment yields.
Phase-out of LIBOR
The Company has established a firm-wide team to address the phasing-out 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 before the end ofDecember 2021 , per guidance from theFederal Reserve Board . 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.
- 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)
To meet daily funding needs, we maintain liquidity in the form of overnight cash
deposits and short-term investments. For unanticipated liquidity needs, we also
maintain a buffer of highly liquid investments, including U.S. Treasury
securities.
In addition to internal sources of liquidity, Schwab has access to external
funding. The following table describes external debt facilities available at
March 31, 2021 :
Description Borrower Outstanding Available
Federal Home Loan Bank secured credit facility
(1) Banking subsidiaries $ - $ 54,539
Federal Reserve discount window (2) Banking subsidiaries - 10,050
Uncommitted, unsecured lines of credit with
various external banks CSC, CS&Co - 1,522
Unsecured commercial paper (3) CSC 1,500 -
Committed, unsecured credit facility with
various external banks (4) CSC - 700
Committed, unsecured credit facilities with
various external banks (5) TDAC - 1,450
Secured uncommitted lines of credit with various
external banks (6) TDAC 1,000 -
(1) Amounts available are dependent on the amount of First Mortgages, 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.
(3) In February 2021 , the Company increased the amount of commercial paper
available to issue from $750 million to $1.5 billion .
(4) This facility matures on May 28, 2021 , and the Company anticipates it will
not renew this facility.
(5) Comprised of two senior unsecured committed facilities for $850 million and
$600 million . The $850 million senior revolving credit facility matured on April
20, 2021 and was not renewed.
(6) Secured borrowing capacity is made available based on TDAC's ability to
provide acceptable collateral to the lender as determined by the credit
agreement.
CSC's ratings for Commercial Paper Notes are P1 by Moody's Investor Service
(Moody's), A1 by Standard & Poor's
CSC also has a universal automatic shelf registration statement on file with the
Liquidity Coverage Ratio
Schwab is currently 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 2020 Form 10-K for additional information. The Company was in compliance with the reduced LCR rule atMarch 31, 2021 . Schwab will become subject to the full (100%) LCR onOctober 1, 2021 . The table below presents information about our average daily LCR: Average for the Three Months Ended March 31, 2021 Total eligible high quality liquid assets $ 87,451 Net cash outflows $ 81,892 LCR 107 % - 15 -
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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
March 31, 2021 Outstanding Maturity Interest Rate Moody's & Poor's Fitch
CSC Senior Notes $ 13,881 2021 - 2031 2.33% A2 A A
TDA Senior Notes $ 3,550 2021 - 2029 2.79% A2 A -
New Debt Issuances
Schwab's debt issuances in the first quarter of 2021 were senior unsecured
obligations. Interest is payable semi-annually for the fixed-rate Senior Notes
and quarterly for the floating-rate Senior Notes. Additional details are as
follows:
Issuance Date Issuance Amount Maturity Date Interest Rate
03/18/2021 $ 1,500 03/18/2024 0.750 %
03/18/2021 $ 1,250 03/18/2024 SOFR + 0.500%
03/18/2021 $ 1,250 03/20/2028 2.000%
Equity Issuances
CSC's preferred stock issued and net proceeds for the first quarter of 2021 are
as follows:
Date Issued and Sold Net Proceeds
Series I March 18, 2021 $ 2,222
Series J March 30, 2021 $ 584
On April 6, 2021 , the Company announced it will redeem on June 1, 2021 , all of
the outstanding shares of its 6.00% Non-Cumulative Perpetual Preferred Stock,
Series C, and the corresponding depositary shares. The redemption will be funded
with the net proceeds from the Series J preferred stock offering.
For further discussion of CSC's long-term debt and information on the equity offerings, see Item 1 - Notes 9 and 14.
CAPITAL MANAGEMENT
Schwab seeks to manage capital to a level and composition sufficient to support execution of our business strategy, including anticipated balance sheet growth inclusive of migration of IDA balances (see further discussion below), providing financial support to our subsidiaries, and sustained access to the capital markets, while at the same time meeting our regulatory capital requirements and serving as a source of financial strength to our banking subsidiaries. Schwab's primary sources of capital are funds generated by the operations of subsidiaries and securities issuances by CSC in the capital markets. To ensure that Schwab has sufficient capital to absorb unanticipated losses or declines in asset values, we have adopted a policy to remain well capitalized even in stressed scenarios. As a result of significant inflows of client cash in 2020, our Tier 1 Leverage Ratio declined below our long-term operating objective for consolidated CSC of 6.75%-7.00%, ending 2020 at 6.3%. Due to ourMarch 2021 issuances of preferred stock and strength in earnings in the first quarter of 2021, our Tier 1 Leverage Ratio increased to 6.4% atMarch 31, 2021 . Though still below our long-term operating objective, this ratio is well above the regulatory minimum. The pace of return to our long-term operating objective over time depends on a number of factors including the overall size of the Company's balance sheet, earnings, and capital issuance and deployment. We continue to manage our capital position in accordance with our policy and strategy described above and in further detail in our 2020 Form 10-K. - 16 - --------------------------------------------------------------------------------THE CHARLES SCHWAB CORPORATION
Management's Discussion and Analysis of Financial Condition and Results of
Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)Regulatory Capital Requirements
CSC and our banking subsidiaries are subject to various capital requirements set by regulatory agencies as discussed in further detail in the 2020 Form 10-K and in Item 1 - Note 17. As ofMarch 31, 2021 , CSC and our banking subsidiaries are considered well capitalized.
The following table details CSC's consolidated and CSB's capital ratios as of
March 31, 2021 December 31, 2020
CSC CSB CSC CSB
Total stockholders' equity $ 55,594 $ 21,790 $ 56,060 $ 22,223 Less:
Preferred stock 10,539 - 7,733 - Common Equity Tier 1 Capital before regulatory adjustments$ 45,055 $ 21,790 $ 48,327 $ 22,223
Less:
$ 11,897 $ 13
Other intangible assets, net of associated deferred tax liabilities
7,966 - 8,103 -
Deferred tax assets, net of valuation allowances and deferred tax liabilities
17 12 17 12
AOCI adjustment 878 654 5,394 4,672
Common Equity Tier 1 Capital $ 24,297 $ 21,111 $ 22,916 $ 17,526
Tier 1 Capital $ 34,836 $ 21,111 $ 30,649 $ 17,526
Total Capital 34,874 21,130 30,688 17,558
Risk-Weighted Assets 133,167 96,252 123,881 91,062
Total Leverage Exposure 547,854 355,689 491,469 325,437
Common Equity Tier 1 Capital/Risk-Weighted Assets 18.2 % 21.9 % 18.5 % 19.2 %
Tier 1 Capital/Risk-Weighted Assets 26.2 % 21.9 % 24.7 % 19.2 %
Total Capital/Risk-Weighted Assets 26.2 % 22.0 % 24.8 % 19.3 %
Tier 1 Leverage Ratio 6.4 % 6.0 % 6.3 % 5.5 %
Supplementary Leverage Ratio 6.4 % 5.9 % 6.2 % 5.4 %
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 and the
Texas Department of Savings and Mortgage Lending (TDSML) to declare dividends to
CSC.
As broker-dealers, CS&Co, TDAC, and TD Ameritrade, Inc. are subject to
regulatory requirements of the Uniform Net Capital Rule, which is intended to
ensure the general financial soundness and liquidity of broker dealers. At
March 31, 2021 , CS&Co, TDAC, and TD Ameritrade, Inc. were in compliance with
their respective net capital requirements.
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 17 for additional information on the components of
stockholders' equity and information on the capital requirements of significant
subsidiaries.
IDA Agreement
Pursuant to the IDA agreement, Schwab will move uninsured IDA balances out of
the IDA sweep program on June 30, 2021 . The IDA agreement also provides that,
starting July 1, 2021 , Schwab will have the option to migrate up to $10 billion
of IDA balances every 12 months to Schwab's balance sheet, subject to certain
limitations and adjustments. The Company's overall capital management strategy
includes supporting migration of the uninsured IDA balances on June 30, 2021 as
well as optional IDA balances in future periods as available pursuant to the
terms of the IDA agreement. The Company's ability to migrate these balances to
its balance sheet is dependent upon multiple factors including having sufficient
capital levels to sustain these incremental deposits and the availability of IDA
balances designated as floating-rate obligations. See Note 10 for further
information on the IDA agreement.
- 17 -
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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)
Dividends
Cash dividends paid and per share amounts for the first three months of 2021 and
2020 are as follows:
2021 2020
Per Share Per Share
Three Months Ended March 31, Cash Paid Amount Cash Paid Amount
Common and Nonvoting Common Stock $ 341 $ .18 $ 233 $ .18
Series A Preferred Stock (1) 14 35.00 14 35.00
Series C Preferred Stock (2) 9 15.00 9 15.00
Series D Preferred Stock (2) 11 14.88 11 14.88
Series E Preferred Stock (3) 14 2,312.50 14 2,312.50
Series F Preferred Stock (4) - - - -
Series G Preferred Stock (5) 34 1,343.75 N/A N/A
Series H Preferred Stock (6) 22 888.89 N/A N/A
Series I Preferred Stock (7) - - N/A N/A
Series J Preferred Stock (8) - - 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 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 .
(6) Series H Preferred Stock was issued on December 11, 2020 . Dividends are paid
quarterly, and the first dividend was paid on March 1, 2021 .
(7) Series I Preferred Stock was issued on March 18, 2021 . Dividends are paid
quarterly beginning on June 1, 2021 .
(8) Series J Preferred Stock was issued on March 30, 2021 . Dividends are paid
quarterly beginning on June 1, 2021 .
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 first quarter of 2021 or 2020. As ofMarch 31, 2021 ,$1.8 billion remained on our existing authorization. OTHER Foreign Exposure AtMarch 31, 2021 , Schwab had exposure to non-sovereign financial and non-financial institutions in foreign countries, as well as agencies of foreign governments. AtMarch 31, 2021 , the fair value of these holdings totaled$8.1 billion , with the top three exposures being to issuers and counterparties domiciled inFrance at$4.7 billion ,Germany at$1.2 billion , andCanada at$873 million . AtDecember 31, 2020 , the fair value of these holdings totaled$10.1 billion , with the top three exposures being to issuers and counterparties domiciled inFrance at$6.7 billion ,Germany at$1.2 billion , andCanada at$880 million . In addition, Schwab had outstanding margin loans to foreign residents of$4.7 billion and$2.2 billion atMarch 31, 2021 andDecember 31, 2020 , respectively. Outstanding margin loans to foreign residents atMarch 31, 2021 andDecember 31, 2020 include$3.1 billion and$1.2 billion , respectively, attributable to the inclusion of TDA balances. 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 12. Concurrent with the closing of the acquisition of TD Ameritrade effectiveOctober 6, 2020 , the IDA agreement with the TD Depository Institutions became effective. Pursuant to the IDA agreement, certain brokerage client deposits are required to be swept off-balance sheet to theTD Depository Institutions. TD Ameritrade also maintains agreements - 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)
pursuant to which client brokerage cash deposits are swept to other third-party
depository institutions. See Item 1 - Note 10 for additional information on the
IDA agreement.
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 2020 Form 10-K. There have been no changes to critical
accounting estimates during the first three months of 2021.
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 Investors and Uses by Management
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 is 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.
Beginning in 2021, the Company also uses adjusted diluted EPS and return on tangible common equity as components of performance criteria for employee bonus and certain executive management incentive compensation arrangements. The Compensation Committee of CSC's Board of Directors maintains discretion in evaluating performance against these criteria.
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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)
The following tables present reconciliations of GAAP measures to non-GAAP
measures:
Three Months Ended
March 31,
2021 2020
Total expenses excluding interest (GAAP) $ 2,755 $ 1,570
Acquisition and integration-related costs (1) (119) (37)
Amortization of acquired intangible assets (154) (6)
Adjusted total expenses (non-GAAP) $ 2,482 $ 1,527
(1) Acquisition and integration-related costs for the three months ended March
31, 2021 primarily consist of $72 million of compensation and benefits,
$27 million of professional services, and $16 million of occupancy and
equipment. Acquisition and integration-related costs for the three months ended
March 31, 2020 primarily consist of $23 million of professional services, $8
million of compensation and benefits, and $4 million of other expense.
Three Months Ended March 31,
2021 2020
Amount Diluted EPS Amount Diluted EPS Net income available to common stockholders (GAAP),
Earnings per common share - diluted (GAAP) $
1,388
119 .06 37 .03
Amortization of acquired intangible assets 154 .08 6 -
Income tax effects (1) (67) (.03) (11) -
Adjusted net income available to common stockholders
(non-GAAP), Adjusted diluted EPS (non-GAAP) $
1,594
(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
2021 2020
Return on average common stockholders' equity (GAAP) 12 % 14 %
Average common stockholders' equity $ 46,691 $ 21,215
Less: Average goodwill (11,952) (1,227)
Less: Average acquired intangible assets - net (9,915) (125)
Plus: Average deferred tax liabilities related to goodwill and acquired intangible assets - net
1,935 67
Average tangible common equity $ 26,759 $ 19,930
Adjusted net income available to common stockholders (1) $ 1,594 $ 789
Return on tangible common equity (non-GAAP) 24 % 16 %
(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
