10-QPeriod: Q3 FY2020

SCHWAB CHARLES CORP Quarterly Report for Q3 Ended Sep 30, 2020

Filed November 9, 2020For Securities:SCHWSCHW-PDSCHW-PJ

Summary

The Charles Schwab Corporation (SCHW) reported its third-quarter 2020 financial results, highlighting the significant completion of the TD Ameritrade acquisition on October 6, 2020. This transformative event positions Schwab for substantial growth, combining approximately $6 trillion in client assets and 29 million brokerage accounts. While the quarter's financial performance showed a year-over-year decline in net income and EPS, this was largely attributed to lower net interest revenue due to prevailing low interest rates and increased expenses related to ongoing acquisitions and integration efforts. Despite these headwinds, client engagement remained strong with significant increases in new brokerage accounts and daily average trades. Looking ahead, the integration of TD Ameritrade is expected to drive enhanced client experiences, deeper resources for investors and advisors, and improved operating efficiency, leading to anticipated expense synergies. The company's strategic focus on client relationships and disciplined capital management continues to underpin its long-term value creation strategy. Investors should monitor the successful integration of TD Ameritrade and the company's ability to navigate the low-interest-rate environment while capitalizing on the expanded scale and market opportunities.

Financial Highlights

39 data points
Beta

Revenue

$2.45B

Net Income

$698.00M

28.5% Net Margin

EPS (Diluted)

$0.48

Total Assets

$419.36B

Cash & Equivalents

$27.46B

Free Cash Flow

-$210.00M

Financial Statements
Beta
Revenue$2.45B
Interest Expense$89.00M
Net Income$698.00M
EPS (Basic)$0.48
EPS (Diluted)$0.48
Shares Outstanding (Basic)1.29B
Shares Outstanding (Diluted)1.29B

Key Highlights

  • 1Completion of the transformative acquisition of TD Ameritrade on October 6, 2020, creating a significantly larger entity with combined client assets of approximately $6 trillion and 29 million brokerage accounts.
  • 2Third-quarter 2020 net income available to common stockholders decreased by 33% to $615 million, and diluted EPS fell by 31% to $0.48, primarily due to lower net interest revenue.
  • 3Total net revenues declined 10% year-over-year for the quarter, impacted by lower net interest revenue driven by low interest rates and accelerated mortgage-backed security prepayments.
  • 4Client engagement remained robust, with new brokerage accounts increasing by 63% to 592,000 in Q3 2020 and daily average trades up significantly year-over-year.
  • 5Total client assets grew 17% year-over-year to $4.40 trillion by the end of the quarter.
  • 6Expenses excluding interest rose 6% in Q3 2020, influenced by acquisition and integration costs related to recent business combinations.
  • 7The company maintained a strong capital position, with a Consolidated Tier 1 Leverage Ratio of 5.7% as of September 30, 2020, though below its long-term objective, it remained well above regulatory minimums.

Frequently Asked Questions

The acquisition of TD Ameritrade, completed on October 6, 2020, significantly increases Schwab's scale, combining approximately $6 trillion in client assets and 29 million brokerage accounts. This integration is expected to enhance client experience, provide deeper resources, and improve operating efficiency, leading to anticipated expense synergies. While the immediate financial results were impacted by acquisition costs and the low-rate environment, the long-term strategic benefits are substantial.

The decrease in net income and EPS for the third quarter of 2020 compared to the prior year was primarily driven by a decline in net interest revenue. This was due to persistently low interest rates impacting yields on interest-earning assets and higher premium amortization on mortgage-related debt securities. Additionally, expenses increased due to acquisition and integration-related costs for recent business combinations, including TD Ameritrade.

Schwab's net interest revenue has been negatively impacted by low interest rates. To manage this, the company is focusing on growing its client base and asset levels, which helps offset some of the yield compression. The acquisition of TD Ameritrade is expected to provide new revenue streams, such as bank deposit account fees, which will be sensitive to interest rates. Management is actively monitoring interest rate risk through simulation modeling.

As of September 30, 2020, Schwab's Consolidated Tier 1 Leverage Ratio was 5.7%, which was below its long-term operating objective of 6.75%-7.00%, partly due to increased client cash balances. While this ratio is well above regulatory minimums, it may limit the ability to return excess capital to stockholders through measures like share repurchases until the ratio improves. The company continues to manage its capital in line with its policy and strategy.