Item 2. Management report and analysis of the financial situation and operating results
INTRODUCTIONThe Charles Schwab Corporation (CSC) is a savings and loan holding company. CSC engages, through its subsidiaries (collectively referred to as Schwab or the Company), in wealth management, securities brokerage, banking, asset management, custody, and financial advisory services.
The main commercial subsidiaries of CSC are as follows:
•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 specified, references to “Schwab”, “the company”, “we”, “us” or “our” refer to CSC and its consolidated subsidiaries.
Schwab provides financial services to individuals and institutional clients through two segments - Investor Services and Advisor Services. The Investor Services segment provides retail brokerage, investment advisory, and banking and trust services to individual investors, and retirement plan services, as well as other corporate brokerage services, to businesses and their employees. The Advisor Services segment provides custodial, trading, banking and trust, and support services, as well as retirement business services, to independent registered investment advisors (RIAs), independent retirement advisors, and recordkeepers. Schwab was founded on the belief that all Americans deserve access to a better investing experience. Although much has changed in the intervening years, our purpose remains clear - to champion every client's goals with passion and integrity. Guided by this purpose and our vision of creating the most trusted leader in investment services, management has adopted a strategy described as "Through Clients' Eyes." This strategy emphasizes placing clients' perspectives, needs, and desires at the forefront. Because investing plays a fundamental role in building financial security, we strive to deliver a better investing experience for our clients - individual investors and the people and institutions who serve them - by disrupting longstanding industry practices on their behalf and providing superior service. We also aim to offer a broad range of products and solutions to meet client needs with a focus on transparency, value, and trust. In addition, management works to couple Schwab's scale and resources with ongoing expense discipline to keep costs low and ensure that products and solutions are affordable as well as responsive to client needs. In combination, these are the key elements of our "no trade-offs" approach to serving investors. We believe that following this strategy is the best way to maximize our market valuation and stockholder returns over time. Management estimates that investable wealth 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$70 trillion , which means the Company's$7.86 trillion in client assets leaves substantial opportunity for growth. Our strategy is based on the principle that developing trusted relationships will translate into more assets from both new and existing clients, ultimately driving more revenue, and along with expense discipline and thoughtful capital management, will generate earnings growth and build long-term stockholder value. This Management's Discussion and Analysis should be read in conjunction with our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2021 (2021 Form 10-K). On our website, https://www.aboutschwab.com, we post the following filings after they are electronically filed with or furnished to theSecurities and Exchange Commission (SEC or Commission): annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports filed or furnished pursuant to Section 13(a) - 1 - --------------------------------------------------------------------------------THE CHARLES SCHWAB CORPORATION
Management report and analysis of the financial situation and the results of
Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)
or 15(d) of the Securities Exchange Act of 1934. In addition, the website also
includes the Dodd-Frank stress test results, our regulatory capital disclosures
based on Basel III, and our average liquidity coverage ratio (LCR). The SEC
maintains a website at https://www.sec.gov that contains reports, proxy
statements, and other information that we file electronically with them.
FORWARD-LOOKING STATEMENTS
In addition to historical information, this Quarterly Report on Form 10-Q
contains "forward-looking statements" within the meaning of Section 27A of the
Securities Act, and Section 21E of the Securities Exchange Act of 1934.
Forward-looking statements are identified by words such as "believe,"
"anticipate," "expect," "intend," "plan," "will," "may," "estimate," "appear,"
"could," "would," "expand," "aim," "maintain," "continue," "seek," and other
similar expressions. In addition, any statements that refer to expectations,
projections, or other characterizations of future events or circumstances are
forward-looking statements.
These forward-looking statements, which reflect management's beliefs,
objectives, and expectations as of the date hereof, are estimates based on the
best judgment of Schwab's senior management. These statements relate to, among
other things:
•Maximizing our market valuation and stockholder returns over time; our belief
that developing trusted relationships will translate into more client assets
which drives revenue and, along with expense discipline and thoughtful capital
management, generates earnings growth and builds stockholder value (see
Introduction in Part I - Item 2);
•Capital management; sources of liquidity and capital; Tier 1 Leverage Ratio
operating objective (see Overview, Liquidity Risk, and Capital Management);
•Expected timing for the TD Ameritrade client conversions; cost estimates and
timing related to the TD Ameritrade integration, including acquisition and
integration-related costs and capital expenditures, cost synergies, and exit and
other related costs (see Overview, Exit and Other Related Liabilities in Part I
- Item 1 - Financial Information - Notes to Condensed Consolidated Financial
Statements (Item 1) - Note 10);
•Net interest revenue; money market fund fee waivers (see Results of
Operations);
•Capital expenditures (see Results of Operations);
•The phase-out of the use of LIBOR (see Risk Management);
•The migration of Insured Deposit Account (IDA) agreement balances to our
balance sheet (see Capital Management and Commitments and Contingencies in Item
1 - Note 9);
•The expected impact of new accounting standards not yet adopted (see New
Accounting Standards in Item 1 - Note 2);
•The likelihood of indemnification and guarantee payment obligations and clients
failing to fulfill contractual obligations (see Commitments and Contingencies in
Item 1 - Note 9); and
•The impact of legal proceedings and regulatory matters (see Commitments and
Contingencies in Item 1 - Note 9 and Legal Proceedings in Part II - Item 1).
Achievement of the expressed beliefs, objectives, and expectations described in
these statements is subject to certain risks and uncertainties that could cause
actual results to differ materially from the expressed beliefs, objectives, and
expectations. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date of this Quarterly
Report on Form 10-Q or, in the case of documents incorporated by reference, as
of the date of those documents.
Important factors that may cause actual results to differ include, but are not
limited to:
•General market conditions, including equity valuations, trading activity, and
the level of interest rates;
•Our ability to attract and retain clients, develop trusted relationships, and
grow client assets;
•Client use of our advisory and lending solutions and other products and
services;
•The level of client assets, including cash balances;
•Competitive pressure on pricing, including deposit rates;
•Client sensitivity to rates;
•Regulatory guidance;
•Capital and liquidity needs and management;
•Our ability to manage expenses;
•Our ability to attract and retain talent;
•Our ability to develop and launch new and enhanced products, services, and
capabilities, as well as enhance our infrastructure, in a timely and successful
manner;
•Our ability to monetize client assets;
- 2 -
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THE CHARLES SCHWAB CORPORATION
Management report and analysis of the financial situation and the results of
Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)
•The scope and duration of the COVID-19 pandemic and actions taken by
governmental authorities to contain the spread of the virus and the economic
impact;
•Our ability to support client activity levels;
•The risk that expected cost synergies and other benefits from the TD Ameritrade
acquisition may not be fully realized or may take longer to realize than
expected and that integration-related expenses may be higher than expected;
•The timing and scope of integration-related and other technology projects;
•Real estate and workforce decisions;
•Migrations of bank deposit account balances (BDA balances);
•Balance sheet positioning relative to changes in interest rates;
•Prepayment levels for mortgage-backed securities;
•Client cash allocations;
•LIBOR trends;
•Adverse developments in litigation or regulatory matters and any related
charges; and
•Potential breaches of contractual terms for which we have indemnification and
guarantee obligations.
Certain of these factors, as well as general risk factors affecting the Company,
are discussed in greater detail in Part I - Item 1A - Risk Factors in the 2021
Form 10-K.
- 3 -
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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)
OVERVIEW
Management focuses on several customer activities and financial measures to assess Schwab’s financial condition and operating performance. The results for the first quarters of 2022 and 2021 are as follows:
Three Months Ended
March 31, Percent
2022 2021 Change
Client Metrics
Net new client assets (in billions) (1) $ 120.5 $ 133.8 (10) %
Core net new client assets (in billions) $ 120.5 $ 148.2 (19) %
Client assets (in billions, at quarter end) $ 7,862.1 $ 7,069.1 11 %
Average client assets (in billions) $ 7,766.4 $ 6,952.2 12 %
New brokerage accounts (in thousands) 1,202 3,153 (62) %
Active brokerage accounts (in thousands, at quarter end) 33,577 31,902 5 %
Assets subject to ongoing advisory services (in billions,
$ 3,493.1 13 %
end of quarter) Client cash as a percentage of client assets (end of quarter) 11.4%
11.5 % Company Financial Information and Metrics Total net revenues$ 4,672 $ 4,715 (1) % Total expenses excluding interest 2,833 2,755 3 % Income before taxes on income 1,839 1,960 (6) % Taxes on income 437 476 (8) % Net income 1,402 1,484 (6) % Preferred stock dividends and other 124 96 29 % Net income available to common stockholders$ 1,278 $ 1,388 (8) % Earnings per common share - diluted$ .67 $ .73 (8) % Net revenue growth from prior year (1) % 80 % Pre-tax profit margin 39.4 % 41.6 % Return on average common stockholders' equity (annualized) 12 % 12 %
Non-interest expense as a percentage of average customer 0.15%
0.16 % assets (annualized) Consolidated Tier 1 Leverage Ratio (at quarter end) 6.1 % 6.4 % Non-GAAP Financial Measures (2) Adjusted total expenses (3)$ 2,583 $ 2,482 Adjusted diluted EPS$ .77 $ .84 Return on tangible common equity 26 % 24 % (1) The first quarter of 2021 includes an outflow of$14.4 billion from a mutual fund clearing services client. (2) See Non-GAAP Financial Measures for further details and a reconciliation of such measures to GAAP reported results. (3) Adjusted total expenses is a non-GAAP financial measure adjusting total expenses excluding interest. See Non-GAAP Financial Measures. Schwab's business momentum remained strong during the first quarter of 2022, as we supported clients through a challenging macroeconomic environment that included continued progress against the COVID-19 pandemic, rising inflation, geopolitical turmoil driven by the Russian invasion ofUkraine , theFederal Reserve initiating its first tightening cycle since late 2015, and volatile equity markets that remained below year-end 2021 levels for much of the quarter. Against this backdrop, client engagement remained strong during the first quarter of 2022, though client trading activity and new brokerage account openings were substantially lower than the extraordinary levels seen in the first quarter of 2021. Clients' daily average trades (DATs) totaled 6.6 million in the first quarter of 2022, decreasing 22% from 8.4 million seen in the first quarter of the prior year. Clients opened 1.2 million new brokerage accounts in the first quarter of 2022, and core net new assets totaled$120.5 billion , which represents a 6% annualized organic growth rate. We ended the first quarter of 2022 with 33.6 million active brokerage accounts and$7.86 trillion in total client assets, up 5% and 11%, respectively, over year-earlier levels. - 4 - -------------------------------------------------------------------------------- THE CHARLES SCHWAB CORPORATION
Management report and analysis of the financial situation and the results of
Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)
Schwab's first quarter 2022 financial results reflected the Company's ongoing
success with clients while contending with the effects of a challenging
environment. First quarter 2022 net income totaled $1.4 billion , down 6% from
the first quarter of 2021, and the Company produced diluted earnings per common
share (EPS) of $.67 , down 8% from the first quarter of 2021. Adjusted diluted
EPS (1), which excludes acquisition and integration-related costs, amortization
of acquired intangible assets, and related income tax effects, was $.77 , a
decrease of 8% from the first quarter of 2021.
Total net revenues were $4.7 billion in the first quarter of 2022, down 1% from
the first quarter of 2021, with growth in net interest revenue and asset
management and administration fees largely offsetting the effects of decreases
in other revenue streams. Net interest revenue totaled $2.2 billion in the first
quarter of 2022, increasing 14% over the first quarter of 2021 primarily due to
growth in interest-earning assets and some improvement in short-term interest
rates. Asset management and administration fees totaled $1.1 billion , increasing
5% from the first quarter of 2021 as a result of growth in advice solutions
balances and proprietary mutual funds and ETFs, as well as lower money market
fund fee waivers. Growth in net interest revenue and asset management and
administration fees was somewhat muted by equity market weakness and volatility,
which affected margin loan balances and securities lending activity as well as
client asset valuations.
Trading revenue was $963 million in the first quarter of 2022, down 21% from the
first quarter of 2021. Client trading activity remained strong as DATs increased
8% from the fourth quarter of 2021, though volume was down significantly from
the extraordinary levels seen in the first quarter of 2021. Bank deposit account
fee revenues totaled $294 million in the first quarter of 2022, down 16% from
the first quarter of 2021. Bank deposit account balances (BDA balances) totaled
$154.8 billion at March 31, 2022 , down 6% from March 31, 2021 and down 2% from
year-end 2021, reflecting migrations to Schwab's balance sheet in 2021 and the
first quarter of 2022 partially offset by growth in client cash balances.
Total expenses excluding interest increased 3% from the first quarter of 2021 to
$2.8 billion in the first quarter of 2022, which included $96 million of
acquisition and integration-related costs and $154 million of amortization of
acquired intangible assets. Exclusive of these items, adjusted total expenses
(1) were $2.6 billion in the first quarter of 2022, increasing 4% from the first
quarter of 2021. These increases in expenses reflect higher compensation and
benefits expense as we invest in our people and our ability to support current
and ongoing growth in our client base. Return on average common stockholders'
equity remained consistent year-over-year at 12%, while return on tangible
common equity (1) increased to 26% in the first quarter of 2022 from 24% in the
year-earlier period due to lower stockholders' equity. The decrease in
stockholders' equity was due to a decrease in AOCI as higher market interest
rates resulted in larger unrealized losses on our available for sale (AFS)
portfolio.
The Company's priority for capital management remains centered on maintaining
flexibility for supporting ongoing growth. Total balance sheet assets increased
2% from year-end 2021, primarily as a result of the migration of $12.7 billion
of Insured Deposit Account (IDA) balances onto our balance sheet during the
first quarter of the year. To support our capital position for this growth in
assets in the first quarter of 2022, we issued $750 million in preferred stock.
During the first quarter we also issued $3.0 billion in senior notes primarily
for ongoing liquidity purposes. At the end of the first quarter of 2022,
Schwab's Tier 1 Leverage Ratio was 6.1%, down slightly from year-end 2021.
(1) Adjusted diluted EPS, adjusted total expenses, and return on tangible common
equity are non-GAAP financial measures. Please see Non-GAAP Financial Measures
for further details and a reconciliation of such measures to GAAP reported
results.
TD Ameritrade integration
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"). Integration work continued during the first quarter of 2022. Based on our current integration plans and expanded scope of technology work, the Company continues to expect to complete client conversions across multiple groups within approximately 30 to 36 months from theOctober 6, 2020 acquisition date, ending in the fourth quarter of 2023. We continue to expect to incur total acquisition and integration-related costs and capital expenditures of between$2.0 billion and$2.2 billion . The Company's estimates of the nature, amounts, and timing of recognition of acquisition and integration-related costs remain subject to change based on a number of factors, including the expected duration and complexity of the integration process and the continued uncertainty of the current economic environment. More specifically, factors that could cause variability in our expected acquisition and integration-related costs include the level of employee attrition, workforce redeployment from eliminated positions into open roles, changes in the levels of client activity, as well as increased real estate-related exit cost variability due to effects of the COVID-19 pandemic including changes in remote working trends. - 5 - --------------------------------------------------------------------------------THE CHARLES SCHWAB CORPORATION
Management report and analysis of the financial situation and the results of
Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)
Acquisition and integration-related costs, which are inclusive of related exit
costs, totaled $96 million and $119 million for the first quarters of 2022 and
2021, respectively. Over the course of the integration, we continue to expect to
realize annualized cost synergies of between $1.8 billion and $2.0 billion , and,
through March 31, 2022 , we have achieved over half of this amount on an
annualized run-rate basis. Estimated timing and amounts of synergy realization
are subject to change as we progress in the integration. Refer to Part II - Item
7 - Overview in our 2021 Form 10-K and Item 1 - Note 10 for additional
information regarding our integration of TD Ameritrade.
RESULTS OF OPERATIONS
Total Net Revenues
The following tables provide a comparison of revenues by category:
2022 2021
% of % of
Percent Total Net Total Net
Three Months Ended March 31, Change Amount Revenues Amount Revenues
Net interest revenue
Interest revenue 15 % $ 2,319 50 % $ 2,015 43 %
Interest expense 31 % (136) (3) % (104) (2) %
Net interest revenue 14 % 2,183 47 % 1,911 41 %
Asset management and administration fees
Mutual funds, exchange-traded funds (ETFs),
and collective trust 4 % 489 10 % 470 10 %
funds (CTFs)
Advice solutions 6 % 496 11 % 468 10 %
Other 6 % 83 2 % 78 2 %
Asset management and administration fees 5 % 1,068 23 % 1,016 22 %
Trading revenue
Commissions (21) % 484 10 % 614 13 %
Order flow revenue (20) % 470 10 % 591 13 %
Principal transactions (18) % 9 - 11 -
Trading revenue (21) % 963 20 % 1,216 26 %
Bank deposit account fees (16) % 294 6 % 351 7 %
Other (26) % 164 4 % 221 4 %
Total net revenues (1) % $ 4,672 100 % $ 4,715 100 %
Net Interest Revenue
Revenue on interest-earning assets is affected by various factors, such as the
composition of assets, prevailing interest rates and spreads at the time of
origination or purchase, changes in interest rates on floating-rate securities
and loans, and changes in prepayment levels for mortgage-backed and other
asset-backed securities and loans.
Interest rates largely remained historically low for much of the first quarter
of 2022. Short-term rates remained near zero until the Federal Reserve increased
the federal funds target overnight rate by 25 basis points near the end of the
quarter, while long-term interest rates steadily increased during the quarter.
Schwab continued to see strength in net new client assets and consistent client
cash allocation levels throughout the first three months of 2022, which, along
with transfers of BDA balances to the Company's balance sheet (see Bank Deposit
Account Fees), drove growth in Schwab's interest-earning assets. Partially
offsetting this growth, equity market volatility and softening investor
sentiment during the first quarter of 2022 reduced demand for margin loans,
which declined 7% from year-end 2021. In addition, over recent quarters, the
Company has increased its cash holdings and reduced the duration of incremental
investment securities purchases to provide flexibility to support potential
changes in client cash allocations associated with expected higher short-term
interest rates. These steps also help keep Schwab positioned to benefit if rates
increase further.
- 6 -
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THE CHARLES SCHWAB CORPORATION
Management report and analysis of the financial situation and the results of
Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)
The following table presents net interest revenue information corresponding to
interest-earning assets and funding sources on the condensed consolidated
balance sheets:
2022 2021
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 $ 72,465 $ 34 0.19 % $ 38,898 $ 7 0.08 %
Cash and investments segregated 51,913 15 0.11 % 48,149 10
0.08%
Receivables from brokerage clients 84,204 626 2.97 % 67,738 563 3.32 % Available for sale securities (1,2) 284,526 947 1.33 % 338,245 1,091 1.29 % Held to maturity securities (1,2) 103,416 378 1.46 % - - - Bank loans 35,852 187 2.10 % 24,476 139 2.27 % Total interest-earning assets 632,376 2,187 1.38 % 517,506 1,810 1.40 % Securities lending revenue 129 204 Other interest revenue 3 1 Total interest-earning assets$ 632,376 $ 2,319 1.47 %$ 517,506 $ 2,015 1.56 % Funding sources Bank deposits$ 452,692 $ 16 0.01 %$ 363,099 $ 13 0.01 % Payables to brokerage clients 105,929 2 0.01 % 87,339 2 0.01 % Short-term borrowings (3) 4,717 4 0.33 % 1,093 - 0.22 % Long-term debt 19,864 108 2.18 % 14,245 85 2.37 % Total interest-bearing liabilities 583,202 130 0.09 % 465,776 100 0.09 % Non-interest-bearing funding sources 49,174 51,730 Securities lending expense 7 5 Other interest expense (1) (1) Total funding sources$ 632,376 $ 136 0.09 %$ 517,506 $ 104 0.08 % Net interest revenue$ 2,183 1.38 %$ 1,911 1.48 % (1) Amounts have been calculated based on amortized cost. Interest revenue on investment securities is presented net of related premium amortization. (2) InJanuary 2022 , the Company transferred a portion of its investment securities designated as available for sale to the held to maturity category, as described in Item 1 - Note 4. (3) Interest revenue or expense was less than$500 thousand in the period or periods presented. Net interest revenue increased$272 million , or 14%, in the first quarter 2022 compared to the same period in 2021. This increase was due to overall growth in interest-earning assets, as well as higher average yields on investment securities as a result of some improvement in market interest rates and lower premium amortization. Net premium amortization of investment securities decreased to$486 million in the first quarter of 2022 from$624 million in the first quarter of 2021. These positive effects were partially offset by lower securities lending revenue and lower average yields in margin and bank lending. Average interest-earning assets for the first quarter of 2022 were higher by 22% compared to the same period in 2021. This increase was primarily due to growth in bank deposits and payables to brokerage clients, which resulted from strong net new client asset inflows and transfers of BDA balances to our balance sheet in the second half of 2021 and the first quarter of 2022. Net interest margin decreased to 1.38% during the first quarter of 2022 from 1.48% during the same period in 2021. This decrease was primarily driven by lower securities lending revenue resulting from lower market demand, as well as lower yields received on margin and bank lending which were consistent with yields seen in the fourth quarter of 2021. Partially offsetting these decreases, yields on investment securities improved as a result of higher market interest rates. New issuances of long-term debt since the first quarter of 2021 have been at lower interest rates, thereby increasing interest expense but lowering the average rate, and helping the average yield on funding sources during the first quarter of 2022 to remain relatively consistent with the first quarter of 2021. - 7 - -------------------------------------------------------------------------------- THE CHARLES SCHWAB CORPORATION
Management report and analysis of the financial situation and the results of
Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)
Asset management and administration fees
The following table shows asset management and administration fees, average client assets and average fee yields:
2022 2021
Average Average
Client Average Client Average
Three Months Ended March 31, Assets Revenue Fee Assets Revenue Fee
Schwab Money Market Fund before fees
0.29 %$ 169,683 $ 122 0.29 % waivers Fee waivers (54) (78) Schwab money market funds$ 144,732 48 0.13 %$ 169,683 44 0.11 % Schwab equity and bond funds, ETFs, and 456,326 97 0.09 % 377,282 86 0.09 %
FFC
Mutual Fund OneSource® and other 212,641 165 0.31 % 222,455 172 0.31 % non-transaction fee funds Other third-party mutual funds and ETFs 872,212 179 0.08 % 849,409 168 0.08 % Total mutual funds, ETFs, and CTFs (1)$ 1,685,911 489 0.12 %$ 1,618,829 470 0.12 % Advice solutions (1) Fee-based$ 469,325 496 0.43 %$ 424,629 468 0.45 % Non-fee-based 90,335 - - 84,767 - - Total advice solutions$ 559,660 496 0.36 %$ 509,396 468 0.37 % Other balance-based fees (2) 616,679 67 0.04 % 576,562 64 0.05 % Other (3) 16 14 Total asset management and administration$ 1,068 $ 1,016
costs
(1) Average client assets for advisory solutions may also include asset balances contained in the mutual fund and/or ETF categories listed above. (2) Includes various asset-related fees, such as trust fees, 401(k) record keeping fees, mutual fund clearing fees and other service fees. (3) Includes various service and transaction fees related to mutual funds and ETFs that are not balance-based.
Asset management and administration fees increased by$52 million , or 5%, in the first quarter of 2022 compared to the same period in 2021. This increase was due to growth in advice solutions and proprietary mutual funds and ETFs, as well as lower money market fund fee waivers due to improved portfolio yields during the first three months of 2022. These increases were partially offset by lower balances in money market funds and Mutual Fund OneSource®, as well as equity market weakness and volatility during the first quarter of 2022, which negatively impacted client asset valuations. The Company anticipates that money market fund fee waivers will be substantially eliminated following an additional increase to the federal funds target rate of 25 basis points beyond the increase in March. The following table presents a roll forward of client assets for the Schwab money market funds, Schwab equity and bond funds, exchange-traded funds (ETFs), and collective trust funds (CTFs), and Mutual Fund OneSource® and other non-transaction fee (NTF) funds. These funds generated 29% and 30% of the asset management and administration fees earned in the first quarter of 2022 and 2021, respectively: Schwab Money Schwab Equity and Mutual Fund OneSource® Market Funds Bond Funds, ETFs, and CTFs and Other NTF funds Three Months Ended March 31, 2022 2021 2022 2021 2022 2021
Balance at beginning of period
454,864$ 341,689 $ 234,940 $ 223,857 Net inflows (outflows) (3,420) (12,522) 9,461 12,805 (8,556) (4,688) Net market gains (losses) and other 16 14 (20,048) 19,323 9,081 8,120 Balance at end of period$ 143,105 $ 163,581 $ 444,277 $ 373,817 $ 235,465 $ 227,289 Trading Revenue Trading revenue includes commissions, order flow revenue, and principal transaction revenues. Commissions and order flow revenue are primarily affected by volume and mix of client trades executed. Principal transaction revenue is recognized primarily as a result of accommodating clients' fixed income trading activity, and includes adjustments to the fair value of securities positions held to facilitate such client trading activity. - 8 - -------------------------------------------------------------------------------- THE CHARLES SCHWAB CORPORATION
Management report and analysis of the financial situation and the results of
Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)
The following table presents trading revenues and related information:
Three Months Ended March 31, Percent
2022 2021 Change
Trading revenue $ 963 $ 1,216 (21) %
Clients' daily average trades (DATs) (in thousands) 6,578 8,414 (22) %
Number of trading days 62.0 61.0 2 %
Revenue per trade (1) $ 2.36 $ 2.37 -
(1) Revenue per trade is calculated as trading revenue divided by DAT multiplied by the number of trading days.
Trading revenue decreased$253 million in the first quarter of 2022 compared to the same period in 2021, primarily due to lower client trading activity during the first quarter of 2022 relative to the extraordinary trading volume experienced during the first quarter of 2021. This decreased trading activity in the first quarter of 2022 resulted in lower commissions and order flow revenue, which declined 21% and 20%, respectively, relative to the first quarter of 2021.
Bank deposit account fees
The Company earns bank deposit account fee revenue pursuant to the Insured Deposit Account agreement (IDA agreement) withTD Bank USA , National Association andTD Bank, National Association (together, the TD Depository Institutions) and arrangements with other third-party banks. The following table presents bank deposit account fee revenue, average BDA balances, average net yield, and average balances earning floating- and fixed-rate yields: Three Months Ended March 31, 2022 2021 Percent Change
Bank deposit account fees $ 294$ 351 (16) % Average BDA balances$ 155,809 $ 166,750 (7) % Average net yield 0.75 % 0.84 % Percentage of average BDA balances designated as: Fixed-rate balances 77 % 79 % Floating-rate balances 23 % 21 % Bank deposit account fees decreased$57 million , or 16%, in the first quarter of 2022 compared with the first quarter of 2021. This decrease was primarily due to lower average BDA balances and lower average net yield. The Company transferred$10.6 billion and$12.7 billion of BDA balances to its balance sheet during the second half of 2021 and first quarter of 2022, respectively. The transfer of these balances to our balance sheet was the primary driver of the decrease in average BDA balances in the first quarter of 2022 compared with the first quarter of 2021. Transfers of BDA balances to Schwab's balance sheet result in lower balances upon which bank deposit account fee revenue is earned but provide a source of funding to invest in interest-earning assets to increase net interest revenue. See also Capital Management and Item 1 - Note 9 for discussion of the IDA agreement and the potential to move IDA balances to Schwab's balance sheet.
Other income
Other revenue includes exchange processing fees, certain service fees, software fees, non-recurring gains, and the provision for credit losses on bank loans. Other revenue decreased$57 million in the first quarter of 2022 compared to the same period in 2021 primarily due to an increase in the provision for credit losses on bank loans and lower exchange processing fees. The provision for credit losses on bank loans increased as a result of higher loan loss factors driven primarily by higher forecasted interest rates during the first quarter of 2022 and growth of the loan portfolio. Exchange processing fees decreased as a result of lower averageSEC fee rates and lower trading volume. - 9 - --------------------------------------------------------------------------------THE CHARLES SCHWAB CORPORATION
Management report and analysis of the financial situation and the results of
Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)
Total non-interest expenses
The following table presents a comparison of non-interest expenses:
Three Months Ended
March 31, Percent
2022 2021 Change
Compensation and benefits
Salaries and wages $ 853 $ 776 10 %
Incentive compensation 417 409 2 %
Employee benefits and other 276 245 13 %
Total compensation and benefits $ 1,546 $ 1,430 8 %
Professional services 244 226 8 %
Occupancy and equipment 269 237 14 %
Advertising and market development 102 116 (12) %
Communications 144 147 (2) %
Depreciation and amortization 150 129 16 %
Amortization of acquired intangible assets 154 154
–
Regulatory fees and assessments 68 78 (13) % Other 156 238 (34) % Total expenses excluding interest$ 2,833 $ 2,755 3 % Expenses as a percentage of total net revenues Compensation and benefits 33 % 30 % Advertising and market development 2 % 2 % Full-time equivalent employees (in thousands) At quarter end 34.2 32.0 7 % Average 33.9 32.1 6 % Expenses excluding interest increased by$78 million , or 3%, in the first quarter of 2022 compared to the same period in 2021. Adjusted total expenses, which excludes acquisition and integration-related costs and amortization of acquired intangible assets, increased 4% in the first quarter of 2022 compared to the same period in 2021. See Non-GAAP Financial Measures for further details and a reconciliation of such measures to GAAP reported results. Total compensation and benefits increased in the first quarter of 2022 compared to the same period in 2021, primarily due to growth in employee headcount to support our expanding client base, annual merit increases, as well as a 5% employee salary increase and other targeted compensation adjustments that went into effect in late 2021. Compensation and benefits in the first quarter of 2022 included$56 million of acquisition and integration-related costs, down from$72 million in the first quarter of 2021. Professional services expense increased in the first quarter of 2022 compared to the same period in 2021, primarily due to increased utilization of technology-related and other professional services to support overall growth of the business and enhancement to technological infrastructure to support our expanding client base, as well as the integration of TD Ameritrade. Professional services included acquisition and integration-related costs of$31 million and$27 million in the first quarter of 2022 and 2021, respectively. Occupancy and equipment expense increased in the first quarter of 2022 compared to the same period in 2021, primarily due to an increase in software maintenance and licensing as well as other technology equipment costs to support growth of the business and the integration of TD Ameritrade. Occupancy and equipment included$4 million and$16 million of acquisition and integration-related costs in the first quarter of 2022 and 2021, respectively. Advertising and market development expense decreased in the first quarter of 2022 compared to the same period in 2021, primarily due to decreases in spending for marketing communications for TD Ameritrade. Communications expense decreased slightly in the first quarter of 2022 compared to the same period in 2021, primarily due to lower news and quotation services expenses, driven by lower trade volumes, as well as lower telecommunications spending. - 10 - -------------------------------------------------------------------------------- THE CHARLES SCHWAB CORPORATION
Management report and analysis of the financial situation and the results of
Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)
Depreciation and amortization expense increased in the first quarter of 2022
compared to the same period in 2021, primarily as a result of higher
amortization of purchased and internally developed software and higher
depreciation of hardware, driven by capital expenditures in 2021 and the first
quarter of 2022 to support the TDA integration and enhance our technological
infrastructure to support growth of the business.
Regulatory fees and assessments decreased in the first quarter of 2022 compared to the same period in 2021, mainly due to lower client trading activity, partially offset by an increase
Other expense decreased in the first quarter of 2022 compared to the same period in 2021, primarily due to lower exchange processing fees, brokerage clearing fees, and lower charges for trade errors and bad debt expense. These decreases were due to lower client trading volume and, for exchange processing fees, lower averageSEC fee rates. Capital expenditures were$209 million in both the first quarter of 2022 and 2021, with spending in both periods primarily related to TDA integration and to enhance our technological infrastructure to support greater capacity for our expanding client base. We continue to anticipate capital expenditures for full-year 2022 will be approximately 4-5% of total net revenues.
Income taxes
Taxes on income were$437 million and$476 million for the first quarters of 2022 and 2021, respectively, resulting in effective income tax rates on income before taxes of 23.8% and 24.3%, respectively. The decrease in the effective tax rate in the first quarter of 2022 compared to the same period in 2021 was primarily due to the impact of blended state tax rate changes on the Company's deferred taxes and a decrease in state tax expense due to uncertain tax position accruals during the first quarter of 2022.
Segment information
Financial information for our segments is presented in the following tables:
Investor Services Advisor Services Total
Percent
Three Months Ended March 31, Percent Change 2022 2021 Percent Change 2022 2021 Change 2022 2021
Net Revenues
Net interest revenue 8 % $ 1,574 $ 1,454 33 % $ 609 $ 457 14 % $ 2,183 $ 1,911
Asset management and
administration fees 5 % 781 742 5 % 287 274 5 % 1,068 1,016
Trading revenue (23) % 844 1,097 - 119 119 (21) % 963 1,216
Bank deposit account fees (21) % 200 254 (3) % 94 97 (16) % 294 351
Other (29) % 127 178 (14) % 37 43 (26) % 164 221
Total net revenues (5) % 3,526 3,725 16 % 1,146 990 (1) % 4,672 4,715
Expenses Excluding Interest 1 % 2,131 2,109 9 % 702 646 3 % 2,833 2,755
Income before taxes on income (14) % $ 1,395 $ 1,616 29 % $ 444 $ 344
(6)%
Net New Client Assets (in billions) (1) (16) %$ 54.6 $ 65.1 (4) %$ 65.9 $ 68.7 (10) %$ 120.5 $ 133.8
(1) In the first quarter of 2021, Investor Services includes an exit from
Sector net income
Investor Services total net revenues decreased by 5% in the first quarter of
2022 compared to the same quarter in 2021, while Advisor Services total net
revenues increased by 16% in the first quarter of 2022 compared to the same
quarter in 2021. Net interest revenue increased for both segments due to overall
growth in interest-earning assets and higher average yields on investment
securities, partially offset by lower securities lending revenue in Investor
Services and lower average yields on margin and bank lending in both segments.
Asset management and administration fees increased in Investor Services
primarily due to growth in advice solutions, while both segments benefited from
growth in proprietary mutual funds and ETFs, and lower money market fund fee
waivers. Trading revenue decreased for Investor Services primarily as a result
of reduced client trading activity, while Advisor Services trading revenue
remained consistent in the first quarter of 2022 compared to the same quarter in
2021. Bank deposit account fee revenue decreased for Investor Services, and to a
lesser degree Advisor Services, primarily as a result of migrating BDA balances
to Schwab's balance sheet during the second half of 2021 and the first quarter
of 2022, and
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THE CHARLES SCHWAB CORPORATION
Management report and analysis of the financial situation and the results of
Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)
lower average net yield. Declines in other revenue for both segments were
primarily due to an increase in the provision for credit losses on bank loans
and lower exchange processing fees in the first quarter of 2022 compared to the
same quarter in 2021.
Non-interest sector expenditure
Investor Services and Advisor Services total expenses excluding interest increased by 1% and 9%, respectively, in the first quarter of 2022 compared to the same period in 2021. These increases were primarily a result of higher compensation and benefits expenses in both segments due to additional increases in headcount to support our expanding client base, annual merit increases, as well as a 5% employee salary increase and other targeted compensation adjustments that went into effect in late 2021. In addition, both segments saw higher occupancy and equipment expenses in the first quarter of 2022 compared to the same period in 2021, primarily due to an increase in software maintenance and licensing as well as other technology equipment costs to support growth of the business and the integration of TD Ameritrade. These increases were partially offset by decreases of other expenses in both segments, primarily due to lower exchange processing fees, brokerage clearing fees, and lower charges for trade errors and bad debt expense. These decreases were due to lower client trading volume and, for exchange processing fees, lower averageSEC fee rates. RISK MANAGEMENT Schwab's business activities expose it to a variety of risks, including operational, compliance, credit, market, and liquidity risks. The Company has a comprehensive risk management program to identify and manage these risks and their associated potential for financial and reputational impact. As part of our on-going integration of TD Ameritrade, the Company has aligned TD Ameritrade's risk management practices with Schwab's risk appetite. Our integration work included evaluating new or changed risks impacting the combined company, and taking action through various means. Though integration work continues, the Company's operations, inclusive of TD Ameritrade, remain consistent with our Enterprise Risk Management (ERM) framework.
For a discussion of our risk management programs, see Part II – Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Risk Management in Form 10-K 2021.
Interest rate risk simulations
Simulation of net interest income
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.
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THE CHARLES SCHWAB CORPORATION
Management report and analysis of the financial situation and the results of
Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)
The following table shows the simulated change in net interest income over the next 12 months beginning
March 31, 2022 December 31, 2021 Increase of 100 basis points 12.0 % 14.1 % Decrease of 100 basis points (8.0) % (4.5) % The Company's simulated increase of 100 basis points in market interest rates had a lower impact on net interest revenue as ofMarch 31, 2022 compared toDecember 31, 2021 primarily due to an increase in the Company's projected repricing of client deposit rates across higher market interest rate scenarios and decreased sensitivity to prepayments on the Company's mortgage-backed investment securities. This was partially offset as a result of higher cash and segregated cash and investments balances atMarch 31, 2022 relative to year-end. A simulated decrease of 100 basis points in market interest rates had a larger impact on net interest revenue as ofMarch 31, 2022 compared toDecember 31, 2021 primarily as a result of holding a higher allocation of floating-rate assets. Higher short-term interest rates would positively impact net interest revenue as yields on interest-earning assets are expected to rise faster than the cost of funding sources. A decline in interest rates could negatively impact the yield on the Company's investment and loan portfolio to a greater degree than any offsetting reduction in interest expense from funding sources, compressing net interest margin.
In addition to measuring the effect of a gradual parallel increase or decrease of 100 basis points in current interest rates, we regularly simulate the effects of larger parallel and non-parallel changes in interest rates on net interest income.
Simulation of bank deposit account fees
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, 2022 andDecember 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.
Simulation of the economic value of equity
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.
Phasing out of LIBOR
The Company has made significant progress in preparing for the phasing out of LIBOR, as described in Part II – Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Risk Management in Form 10 -K 2021, and additional transition LIBOR phase-out readiness efforts continue.
OnMarch 15, 2022 ,President Biden signed the Consolidated Appropriations Act of 2022 into law, which includes the Adjustable Interest Rate (LIBOR) Act, containing legislation related to the transition away from LIBOR. This legislation is intended to establish a uniform process for replacing LIBOR in existing contracts and securities that continue after the cessation of LIBOR and do not contain clearly defined or practicable fallback provisions. The Company believes this legislation helps provide clarity for the transition of our legacy LIBOR contracts, including investment securities, loans, and preferred stock, to alternative reference rates in an orderly manner. - 13 - --------------------------------------------------------------------------------THE CHARLES SCHWAB CORPORATION
Management report and analysis of the financial situation and the results of
Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)
Liquidity risk
Liquidity risk is the potential that Schwab will be unable to sell assets or meet cash flow obligations when they come due without incurring unacceptable losses. We have established liquidity policies to support the successful execution of business strategies, while ensuring ongoing and sufficient liquidity to meet operational needs and satisfy applicable regulatory requirements under both normal and stressed conditions. We employ a variety of methodologies to monitor and manage liquidity, which are described below and in greater detail in Part II - Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations - Risk Management - Liquidity Risk in our 2021 10-K. Funding Sources
Schwab’s primary source of funds is cash generated from customer activity, which includes bank deposits and cash balances in customer brokerage accounts. These funds are used to purchase investment securities and make loans to customers.
Other sources of funds may include cash flow from operations, maturities and sales of investment securities, loan repayments, securities lending of assets held in client brokerage accounts, repurchase agreements and liquidity 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 financing. The following table describes the external credit facilities available at the
Description Borrower Outstanding Available
$ -$ 68,208 Federal Reserve discount window Banking subsidiaries - 10,309 Uncommitted, unsecured lines of credit with various external banks CSC, CS&Co - 1,522 Unsecured commercial paper CSC 2,386 2,614 Committed, unsecured credit facility with various external banks (1) TDAC - 600 Secured uncommitted lines of credit with various external banks (2) TDAC 1,850 -
(1) This line matured on
Our banking subsidiaries may also engage with external banks in repurchase agreements collateralized by investments securities as another source of short-term liquidity. CSC's ratings for Commercial Paper Notes are P1 by Moody's Investor Service (Moody's), A1 by Standard & Poor'sRating Group (Standard & Poor's ), and F1 byFitch Ratings, Ltd (Fitch) atMarch 31, 2022 andDecember 31, 2021 . CSC also has a universal automatic shelf registration statement on file with theSEC , which enables it to issue debt, equity, and other securities.
See Part II – Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Risk Management – Liquidity Risk in the 2021 Form 10-K for additional information on these and other borrowing facilities. .
To support the growth of margin loan balances of our brokerage subsidiaries while meeting our LCR requirements, the Company may issue commercial paper or draw on secured lines of credit, in addition to capital markets issues .
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THE CHARLES SCHWAB CORPORATION
Management report and analysis of the financial situation and the results of
Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)
Liquidity Ratio
Schwab is subject to the full LCR rule, which requires the Company to hold high quality liquid assets (HQLA) in an amount equal to at least 100% of the Company's projected net cash outflows over a prospective 30-calendar-day period of acute liquidity stress, calculated on each business day. See Part I - Item 1 - Business - Regulation in the 2021 Form 10-K for additional information. The Company was in compliance with the LCR rule atMarch 31, 2022 , and the table below presents information about our average daily LCR: Average for the Three Months Ended March 31, 2022 Total eligible HQLA $ 129,040 Net cash outflows $ 115,861 LCR 111 % Borrowings
The Company had short-term borrowings outstanding
The following table provides information about our Senior Notes outstanding atMarch 31, 2022 : Par Weighted Average Standard March 31, 2022 Outstanding Maturity Interest Rate Moody's & Poor's Fitch CSC Senior Notes$ 20,768 2022 - 2032 2.46% A2 A A TDA Holding Senior Notes$ 963 2022 - 2029 3.06% A2 A - New Debt Issuances The below debt issuances in the first quarter of 2022 were senior unsecured obligations. Interest is payable semi-annually for the fixed-rate Senior Notes and quarterly for the floating-rate Senior Notes. Additional details are as follows: Issuance Date Issuance Amount Maturity Date Interest Rate March 3, 2022 $ 500 03/03/2027 SOFR (1) + 1.050% March 3, 2022 $ 1,500 03/03/2027 2.450% March 3, 2022 $ 1,000 03/03/2032 2.900%
(1) Guaranteed overnight funding rate
Share issues
CSC's preferred stock issued and net proceeds for the first quarter of 2022 are
as follows:
Date Issued and Sold Net Proceeds
Series K March 4, 2022 $ 740
For further discussion, see Item 1 - Note 8 for the Company's outstanding debt
and borrowing facilities and Item 1 - Note 13 for equity outstanding balances,
issuances, and redemptions.
Schwab additionally enters into guarantees and other similar arrangements in the
ordinary course of business. For information on these arrangements, see Item 1 -
Notes 5, 6, 8, 9, and 11.
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THE CHARLES SCHWAB CORPORATION
Management report and analysis of the financial situation and the results of
Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)
CAPITAL MANAGEMENT
Schwab seeks to manage capital to a level and composition sufficient to support execution of our business strategy, including anticipated balance sheet growth inclusive of migration of IDA balances (see further discussion below), providing financial support to our subsidiaries, and sustained access to the capital markets, while at the same time meeting our regulatory capital requirements and serving as a source of financial strength to our banking subsidiaries. Schwab's primary sources of capital are funds generated by the operations of subsidiaries and securities issuances by CSC in the capital markets. To ensure that Schwab has sufficient capital to absorb unanticipated losses or declines in asset values, we have adopted a policy to remain well capitalized even in stressed scenarios.
Regulatory capital requirements
CSC and certain subsidiaries, including our banking and brokerage subsidiaries, are subject to various capital requirements set by regulators, as further explained in Part II – Item 7 – MD&A of Financial Condition and Results of Operations – Capital Management in 2021 Form 10-K and in Item 1 – Note 16. Dated
The following table details the consolidated capital ratios of CSC and CSB as at
March 31, 2022 December 31, 2021
CSC CSB CSC CSB
Total stockholders' equity $ 48,098 $ 21,036 $ 56,261 $ 27,035
Less:
Preferred stock 10,694 - 9,954 - Common Equity Tier 1 Capital before regulatory adjustments$ 37,404 $ 21,036 $ 46,307 $ 27,035
Less:
$ 11,857 $ 13
Other intangible assets, net of related deferred tax liabilities
7,446 - 7,579 -
Deferred tax assets, net of impairment and deferred tax liabilities
27 25 13 12 AOCI adjustment (1) (11,045) (9,674) (1,109) (1,004) Common Equity Tier 1 Capital$ 29,119 $ 30,672 $ 27,967 $ 28,014 Tier 1 Capital$ 39,813 $ 30,672 $ 37,921 $ 28,014 Total Capital 39,850 30,701 37,950 28,033 Risk-Weighted Assets 154,355 113,108 141,969 104,409 Total Leverage Exposure 653,783 435,882 614,466 400,532 Common Equity Tier 1 Capital/Risk-Weighted Assets 18.9 % 27.1 % 19.7 % 26.8 % Tier 1 Capital/Risk-Weighted Assets 25.8 % 27.1 % 26.7 % 26.8 % Total Capital/Risk-Weighted Assets 25.8 % 27.1 % 26.7 % 26.8 % Tier 1 Leverage Ratio 6.1 % 7.1 % 6.2 % 7.1 % Supplementary Leverage Ratio 6.1 % 7.0 % 6.2 % 7.0 %
(1) Changes in market interest rates may result in unrealized gains or losses on AFS securities, which are included in AOCI. As a Tier III banking organization, CSC has elected to exclude AOCI from regulatory capital.
The Company's issuance of preferred stock and quarterly earnings in the first quarter of 2022 helped to largely maintain our Tier 1 Leverage Ratio, as bank deposits and payables to brokerage clients grew by a total of$21.7 billion , or 4%, during the quarter. We ended the first quarter of 2022 with a consolidated Tier 1 Leverage Ratio of 6.1%, down slightly from 6.2% at year-end 2021. CSB's Tier 1 Leverage Ratio remained consistent with year-end 2021, ending the first quarter of 2022 at 7.1%. Though our Tier 1 Leverage Ratio is below our long-term operating objective for consolidated CSC, this ratio is well above the regulatory minimum. The pace of return to our long-term operating objective over time depends on a number of factors including the overall size of the Company's balance sheet, earnings, and capital issuance and deployment. We continue to manage our capital position in accordance with our policy and strategy described in further detail in our 2021 Form 10-K. - 16 - --------------------------------------------------------------------------------THE CHARLES SCHWAB CORPORATION
Management report and analysis of the financial situation and the results of
Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)
IDA agreement
Certain brokerage client deposits are swept off-balance sheet to the TD Depository Institutions pursuant to the IDA agreement. During the first quarter of 2022, Schwab moved$12.7 billion of IDA balances to its balance sheet. The Company's overall capital management strategy includes supporting migration of IDA balances in future periods as available pursuant to the terms of the IDA agreement. The Company's ability to migrate these balances to its balance sheet is dependent upon multiple factors including having sufficient capital levels to sustain these incremental deposits and the availability of IDA balances designated as floating-rate obligations. See Item 1 - Note 9 for further information on the IDA agreement.
Dividends
Cash dividends paid and per share amounts for the first three months of 2022 and
2021 are as follows:
2022 2021
Per Share Per Share
Three Months Ended March 31, Cash Paid Amount Cash Paid Amount
Common and Nonvoting Common Stock $ 381 $ .20 $ 341 $ .18
Series A Preferred Stock (1) 14 35.00 14 35.00
Series C Preferred Stock (2) - - 9 15.00
Series D Preferred Stock (3) 11 14.88 11 14.88
Series E Preferred Stock (4) 14 2,312.50 14 2,312.50
Series F Preferred Stock (5) - - - -
Series G Preferred Stock (3) 34 1,343.75 34 1,343.75
Series H Preferred Stock (6) 25 1,000.00 22 888.89
Series I Preferred Stock (7) 23 1,000.00 - -
Series J Preferred Stock (8) 7 11.13 - -
Series K Preferred Stock (9) - - N/A N/A
(1) Dividends were paid semi-annually until February 1, 2022 and are paid
quarterly thereafter.
(2) Series C Preferred Stock was redeemed on June 1, 2021 . Prior to redemption,
dividends were paid quarterly and the final dividend was paid on June 1, 2021 .
(3) Dividends paid quarterly.
(4) Dividends were paid semi-annually until March 1, 2022 and are paid quarterly
thereafter.
(5) Dividends paid semi-annually until December 1, 2027 and quarterly
thereafter.
(6) Series H Preferred Stock was issued on December 11, 2020 . Dividends are paid
quarterly, and the first dividend was paid on March 1, 2021 .
(7) Series I Preferred Stock was issued on March 18, 2021 . Dividends are paid
quarterly, and the first dividend was paid on June 1, 2021 .
(8) Series J Preferred Stock was issued on March 30, 2021 . Dividends are paid
quarterly, and the first dividend was paid on June 1, 2021 .
(9) Series K Preferred Stock was issued on March 4, 2022 . Dividends are paid
quarterly, and the first dividend will be paid on June 1, 2022 .
N/A Not applicable.
Share buybacks
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 three months of 2022 or 2021. As ofMarch 31, 2022 ,$1.8 billion remained on the authorization. OTHER Foreign Exposure AtMarch 31, 2022 , Schwab had exposure to non-sovereign financial and non-financial institutions in foreign countries, as well as agencies of foreign governments. AtMarch 31, 2022 , the fair value of these holdings totaled$18.6 billion , with the top three exposures being to issuers and counterparties domiciled in theUnited Kingdom at$6.4 billion ,France at$5.4 billion , andCanada at$1.8 billion . AtDecember 31, 2021 , the fair value of these holdings totaled$12.5 billion , with the top three exposures being to issuers and counterparties domiciled in theUnited Kingdom at$5.2 billion ,France at$3.9 billion , andSweden at$754 million . In addition, Schwab had outstanding margin loans to foreign residents of$3.8 billion and$3.3 billion atMarch 31, 2022 andDecember 31, 2021 , respectively. - 17 - --------------------------------------------------------------------------------THE CHARLES SCHWAB CORPORATION
Management report and analysis of the financial situation and the results of
Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)
CRITICAL ACCOUNTING ESTIMATES
Certain of our accounting policies that involve a higher degree of judgment and complexity are discussed in Part II - Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Estimates in the 2021 Form 10-K. There have been no changes to critical accounting estimates during the first three months of 2022.
NON-GAAP FINANCIAL MEASURES
In addition to disclosing financial results in accordance with generally accepted accounting principles in theU.S. (GAAP), Management's Discussion and Analysis of Financial Condition and Results of Operations contain references to the non-GAAP financial measures described below. We believe these non-GAAP financial measures provide useful supplemental information about the financial performance of the Company, and facilitate meaningful comparison of Schwab's results in the current period to both historic and future results. These non-GAAP measures should not be considered a substitute for, or superior to, financial measures calculated in accordance with GAAP, and may not be comparable to non-GAAP financial measures presented by other companies.
Schwab’s use of non-GAAP measures reflects certain adjustments to GAAP financial measures, as described below.
Non-GAAP Adjustment or Definition
Usefulness to Investors and Uses by Management
Measure 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 this
acquisitions, amortization of acquired
provides additional transparency from Schwab’s
intangible assets, and, where applicable,
ongoing operations, and is useful both
the income tax effect of these expenses.
assess the operational performance of
company and facilitate the comparison of results
Adjustments made to exclude amortization of
with past and future periods.
acquired intangible assets are reflective
of all acquired intangible assets, which
Acquisition and integration costs
were recorded as part of purchase
fluctuate depending on the timing of acquisitions and
accounting. These acquired intangible
integration activities, thus limiting
assets contribute to the Company's revenue
comparability of results between periods, and are
generation. Amortization of acquired
not representative of the operating costs of the
intangible assets will continue in future
The current affairs of the company. Amortization of
periods over their remaining useful lives.
acquired intangible assets are excluded because
management does not believe this indicates
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
significant and acquired goodwill
common stockholders as a percentage of
intangible assets. We believe that the return on tangible
average tangible common equity. Tangible
common stock may be useful to investors as
common equity represents common equity less
additional measure to facilitate evaluation
goodwill, acquired intangible assets - net,
capital efficiency and returns relative to the
and related deferred tax liabilities.
composition of Schwab’s balance sheet.
The Company also uses adjusted diluted EPS and return on tangible common equity
as components of performance criteria for employee bonus and certain executive
management incentive compensation arrangements. The Compensation Committee of
CSC's Board of Directors maintains discretion in evaluating performance against
these criteria.
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THE CHARLES SCHWAB CORPORATION
Management report and analysis of the financial situation and the results of
Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)
The following tables present reconciliations of GAAP measures to non-GAAP
measures:
Three Months Ended
March 31,
2022 2021
Total expenses excluding interest (GAAP) $ 2,833 $ 2,755
Acquisition and integration-related costs (1) (96) (119)
Amortization of acquired intangible assets (154) (154)
Adjusted total expenses (non-GAAP) $ 2,583 $ 2,482
(1) Acquisition and integration-related costs for the three months ended
March 31, 2022 primarily consist of $56 million of compensation and benefits,
$31 million of professional services, and $4 million of occupancy and equipment.
Acquisition and integration-related costs for the three months ended March 31,
2021 primarily consist of $72 million of compensation and benefits, $27 million
of professional services, and $16 million of occupancy and equipment.
Three Months Ended March 31,
2022 2021
Diluted EPS amount Diluted EPS amount Net income available to common shareholders (GAAP),
Earnings per common share - diluted (GAAP) $
1,278
Acquisition and integration costs
96 .05 119 .06 Amortization of acquired intangible assets 154 .08 154 .08 Income tax effects (1) (61) (.03) (67) (.03)
Adjusted net income available to common shareholders
(non-GAAP), Adjusted diluted EPS (non-GAAP) $
1,467
(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 completed
2022 2021 Return on average common stockholders' equity (GAAP) 12 % 12 % Average common stockholders' equity$ 41,856 $ 46,691 Less: Average goodwill (11,952) (11,952) Less: Average acquired intangible assets - net (9,303) (9,915)
Plus: Average deferred tax liabilities related to goodwill and acquired intangible assets – net
1,886 1,935 Average tangible common equity$ 22,487 $ 26,759 Adjusted net income available to common stockholders (1)$ 1,467 $ 1,594 Return on tangible common equity (non-GAAP) 26 % 24 %
(1) See table above for reconciliation of net earnings available to common shareholders and adjusted net earnings available to common shareholders (non-GAAP).
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THE CHARLES SCHWAB CORPORATION
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