CHARLES SCHWAB 
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
INTRODUCTION
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 Note 3 of the notes to the condensed consolidated financial statements 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$7.57 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 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) 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," 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);
•Expected benefits from the TD Ameritrade acquisition; scope of technology work
related to the integration; expected timing for the client conversion; 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 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);
•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);
•Capital management; Tier 1 Leverage operating objective; sources of liquidity
and capital (see Capital 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;
•Client sensitivity to interest rates;
•Regulatory guidance;
•Capital and liquidity needs and management;
•Our ability to manage expenses;
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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)
•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 and scope of integration-related and other technology projects;
•Real estate and workforce decisions;
•Migrations of bank deposit account balances (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 second quarter and first six months of 2021 and 2020 are:
Three Months Ended Six Months Ended
June 30, Percent June 30, Percent
2021 2020 Change 2021 2020 Change
Client Metrics
Net new client assets (in billions) (1) $ 108.8 $ 137.4 (21) % $ 242.6 $ 210.6 15 %
Core net new client assets (in billions)
133 %$ 257.0 $ 119.8 115 %
Client assets (in billions, at quarter
84 %
end)
Average client assets (in billions)
91 %$ 7,155.6 $ 3,884.2 84 % New brokerage accounts (in thousands) (2) 1,657 1,652 - 4,810 2,261 113 % Active brokerage accounts (in thousands, 32,265 14,107 129 % at quarter end) Assets receiving ongoing advisory services (in billions,$ 3,734.4 $ 2,092.7 78 % at quarter end) Client cash as a percentage of client 10.5 % 13.6 % assets (at quarter end) Company Financial Information and Metrics Total net revenues$ 4,527 $ 2,450 85 %$ 9,242 $ 5,067 82 % Total expenses excluding interest 2,808 1,562 80 % 5,563 3,132 78 % Income before taxes on income 1,719 888 94 % 3,679 1,935 90 % Taxes on income 454 217 109 % 930 469 98 % Net income 1,265 671 89 % 2,749 1,466 88 % Preferred stock dividends and other 148 50 196 % 244 88 177 % Net income available to common$ 1,117 $ 621 80 %$ 2,505 $ 1,378 82 %
stockholders
Earnings per common share - diluted (3)
23 %$ 1.32 $ 1.07 23 % Net revenue growth from prior year 85 % (9) % 82 % (6) % Pre-tax profit margin 38.0 % 36.2 % 39.8 % 38.2 % Return on average common stockholders' 10 % 10 % 10 % 12 % equity (annualized) Expenses excluding interest as a percentage of average client 0.15 % 0.16 % 0.16 % 0.16 % assets (annualized) Consolidated Tier 1 Leverage Ratio (at 6.4 % 5.9 % quarter end) Non-GAAP Financial Measures (4) Adjusted total expenses (5)$ 2,510 $ 1,469 $ 4,992 $ 2,996 Adjusted diluted EPS (3)$ .70 $ .54 $ 1.55 $ 1.14 Return on tangible common equity 20 % 12 % 21 % 15 % (1) The first six months of 2021 includes an outflow of$14.4 billion from a mutual fund clearing services client. The second quarter and first six months of 2020 include inflows of$79.9 billion related to the acquisition of the assets ofUSAA's Investment Management Company (USAA-IMCO) and$10.9 billion from a mutual fund clearing services client. (2) The second quarter and first six months of 2020 include 1.1 million new brokerage accounts related to the acquisition of assets from USAA-IMCO. (3) 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 second quarter and first six months of 2021 relative to the same periods in 2020. (4) See Non-GAAP Financial Measures for further details and a reconciliation of such measures to GAAP reported results. (5) Adjusted total expenses is a non-GAAP financial measure adjusting total expenses excluding interest. See Non-GAAP Financial Measures. During the second quarter and first six months of 2021, theU.S. saw signs of returning normalcy in everyday life as vaccinations accelerated, social activities largely resumed, and people started returning to corporate offices. Schwab successfully re-opened nearly all of our 406 branch offices, including 80 independent branches during the second quarter. Throughout the first six months of 2021, equity markets continued to rise, with both the S&P 500® and NASDAQ® achieving record highs during the second quarter, while longer-term interest rates fluctuated as investors digested economic recovery data andFederal Reserve commentary. Schwab continued to support highly engaged investors throughout the first six months of 2021, even as trading activity levels moderated in the second quarter from the surge seen in the first quarter. Clients opened 1.7 million and 4.8 million new - 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)
brokerage accounts during the second quarter and first six months of 2021,
respectively. Daily average trades (DATs) were 6.0 million during the second
quarter of 2021, representing a 28% slowdown from the first quarter's average of
8.4 million, but still 4% higher than the fourth quarter of 2020. Core net new
assets totaled $108.8 billion during the second quarter of 2021, rising 133%
from the second quarter of 2020. This continued strong asset gathering brought
core net new assets for the first six months of 2021 to $257.0 billion ,
representing a year-to-date organic growth rate of 8%, and total client assets
reached $7.57 trillion as of June 30, 2021 , up 7% during the quarter and up 84%
from the year-earlier period.
Against this backdrop, Schwab delivered solid financial performance during the
second quarter and first six months of 2021. Net income totaled $1.3 billion and
$2.7 billion during the second quarter and first six months of 2021,
respectively, increasing 89% and 88% from the same periods in 2020. Diluted
earnings per common share (EPS) totaled $.59 and $1.32 during the second quarter
and first six months of 2021, respectively, rising 23% from both comparable
periods in 2020. Adjusted diluted EPS (1), which excludes acquisition and
integration-related costs, amortization of acquired intangible assets, and
related income tax effects, amounted to $.70 and $1.55 for the second quarter
and first six months of 2021, up 30% and 36%, respectively, from the same prior
year periods. Our financial results in the second quarter and first half of 2021
were significantly impacted by the inclusion of TD Ameritrade, as detailed
further in Results of Operations.
Total net revenues were $4.5 billion and $9.2 billion in the second quarter and
first half of 2021, up 85% and 82%, respectively from the same periods in the
prior year. Net interest revenue totaled $1.9 billion and $3.9 billion during
the second quarter and first half of 2021, respectively, rising 40% and 30% from
the comparable periods in 2020 and reflective of the inclusion of TD Ameritrade.
Net interest revenue in the second quarter grew 2% from the first quarter of
2021, as modest growth in interest-earning assets, including growth in bank
loans and higher margin loan utilization, helped offset the Federal Reserve's
ongoing Zero Interest Rate Policy and persistent prepayment activity within our
investment securities portfolio.
Asset management and administration fees totaled $1.0 billion and $2.1 billion
in the second quarter and first half of 2021, increasing 31% and 27%,
respectively, from the same periods in 2020. These increases were due to the
inclusion of TD Ameritrade in the first half of 2021, as well as strong asset
gathering, positive equity markets, and growth in advice solutions balances,
partially offset by money market fund fee waivers. Strong asset gathering and
sustained growth in advice solutions in the second quarter of 2021 also helped
drive a 3% increase in asset management and administration fees from the first
quarter of the year.
Trading revenue was $955 million and $2.2 billion in the second quarter and
first half of 2021, respectively, up from $193 million and $381 million in the
same periods in 2020. This growth was due to the inclusion of TD Ameritrade in
the first half of 2021 and the overall strong trading environment. Trading
revenue decreased 21% in the second quarter of 2021 relative to the first
quarter of the year, as client activity remained strong relative to past levels
but decreased from the first quarter's surge. Bank deposit account fees totaled
$337 million and $688 million during the second quarter and first six months of
2021, respectively. BDA balances ended the second quarter at $161.8 billion ,
down 1% from year-end 2020.
Total expenses excluding interest were $2.8 billion and $5.6 billion in the
second quarter and first half of 2021, increasing 80% and 78%, respectively,
from the comparable prior year periods. These increases are due primarily to the
inclusion of TD Ameritrade's results and a $200 million charge for a regulatory
matter recorded in the second quarter of 2021 (see Item 1 - Note 10). During the
second quarter and first six months of 2021, acquisition and integration-related
costs totaled $144 million and $263 million , respectively, and amortization of
acquired intangible assets was $154 million and $308 million , respectively.
Exclusive of these items, adjusted total expenses (1) were $2.5 billion and $5.0
billion for the second quarter and first six months of 2021, up 71% and 67%,
respectively, from the same periods in 2020. Total expenses excluding interest
increased 2% in the second quarter of 2021 relative to the first quarter of the
year, and adjusted total expenses increased 1%.
Return on average common stockholders' equity was 10% for both the second
quarter and first six months of 2021, compared with 10% and 12% for the same
periods in 2020. Return on tangible common equity (1) (ROTCE) was 20% and 21% in
the second quarter and first six months of 2021, respectively, up from 12% and
15% in the comparable respective periods in 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 maintained a consistent approach to balance sheet management
throughout the first half of 2021. We continued to support organic growth and
prepared for initial BDA balance migrations, which began in July. We
supplemented our funding mix in the second quarter by issuing $2.25 billion in
long-term senior notes and repaying $1.2 billion in similar debt that matured in
May. In addition, we issued senior notes totaling $4.0 billion in March 2021 .
During the first quarter, we completed two preferred stock offerings: Series I
for $2.25 billion and Series J for $600 million , and in June, we redeemed our
$600 million Series C preferred stock. Consolidated balance sheet assets totaled
$575 billion at June 30th , up 2% from the first quarter and up 5% from year-end
2020. Our Tier 1 Leverage Ratio of 6.4% was consistent with the first quarter
and up slightly from year-end 2020's ratio of 6.3%.
Though significantly heightened client activity levels during the first quarter
of 2021 impacted our service quality at times, we have taken 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. Our efforts have been yielding results, with
significant improvement in client service levels by the end of the first quarter
of 2021, and our service levels continued to improve in the second quarter as
client activity moderated.
Integration of TD Ameritrade
Against a backdrop of elevated client activity and volume in the first six
months of 2021, including the unprecedented client activity in the first quarter
of the year, 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 has increased the scope of technology work related to the
integration. We have commenced greater technology build-out to support the
expanded volumes of our combined client base. Based on our current 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 . Through the second quarter of 2021, we have achieved approximately
one-third of this amount on an annualized run-rate basis, and currently expect
to achieve approximately 40% 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 became subject to daily reporting of our liquidity coverage ratio (LCR) and net stable funding ratio (NSFR) to theFederal Reserve onJuly 1, 2021 , and will become subject 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.
The
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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 FHC and each of its depository institution subsidiaries maintain their
status as "well-capitalized" and "well-managed." If the Federal 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 prior Federal Reserve approval. The Federal 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 the Federal
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 "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 June 30, Change Amount Revenues Amount Revenues
Net interest revenue
Interest revenue 39 % $ 2,068 46 % $ 1,486 61 %
Interest expense 25 % (121) (3) % (97) (4) %
Net interest revenue 40 % 1,947 43 % 1,389 57 %
Asset management and administration fees
Mutual funds, exchange-traded funds (ETFs),
and collective trust 13 % 481 11 % 425 17 %
funds (CTFs)
Advice solutions 56 % 490 11 % 314 13 %
Other 23 % 76 1 % 62 3 %
Asset management and administration fees 31 % 1,047 23 % 801 33 %
Trading revenue
Commissions N/M 479 11 % 111 5 %
Order flow revenue N/M 465 10 % 72 3 %
Principal transactions 10 % 11 - 10 -
Trading revenue N/M 955 21 % 193 8 %
Bank deposit account fees N/M 337 7 % - -
Other N/M 241 6 % 67 2 %
Total net revenues 85 % $ 4,527 100 % $ 2,450 100 %
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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)
2021 2020
% of % of
Percent Total Net Total Net
Six Months Ended June 30, Change Amount Revenues Amount Revenues
Net interest revenue
Interest revenue 28 % $ 4,083 44 % $ 3,194 63 %
Interest expense (3) % (225) (2) % (233) (5) %
Net interest revenue 30 % 3,858 42 % 2,961 58 %
Asset management and administration fees
Mutual funds, ETFs, and CTFs 8 % 951 10 % 877 17 %
Advice solutions 53 % 958 10 % 626 12 %
Other 23 % 154 2 % 125 3 %
Asset management and administration fees 27 % 2,063 22 % 1,628 32 %
Trading revenue
Commissions N/M 1,093 12 % 224 4 %
Order flow revenue N/M 1,056 11 % 127 3 %
Principal transactions (27) % 22 1 % 30 1 %
Trading revenue N/M 2,171 24 % 381 8 %
Bank deposit account fees N/M 688 7 % - -
Other N/M 462 5 % 97 2 %
Total net revenues 82 % $ 9,242 100 % $ 5,067 100 %
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. As theU.S. economic recovery advanced in the first half of 2021, interest rates remained historically low. Short-term rates remained near zero throughout the first half of 2021; longer-term interest rates began to rise in the first quarter, yet declined slightly during the second quarter. The overall environment continued to contribute to elevated levels of prepayments on mortgage-backed securities, resulting in accelerated reinvestment of the available for sale (AFS) portfolio during the first half of 2021. Client engagement in the equity markets greatly increased early in 2021, and clients were net buyers of equity securities and other investment products throughout the first half of the year, resulting in outflows of client cash. 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. - 8 - --------------------------------------------------------------------------------THE CHARLES SCHWAB CORPORATION
Management's Discussion and Analysis of Financial Condition and Results of
Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)
The following 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 June 30, Balance Expense Yield/Rate Balance Expense Yield/Rate
Interest-earning assets
Cash and cash equivalents $ 41,913 $ 9 0.07 % $ 56,553 $ 19 0.13 %
Cash and investments segregated 41,037 4 0.04 % 33,521 27 0.32 %
Receivables from brokerage clients 75,737 609 3.18 % 17,915 111 2.44 % Available for sale securities (1) 344,719 1,103 1.28 % 234,346 1,146 1.95 % Bank loans 27,234 148 2.18 % 20,163 133 2.63 % Total interest-earning assets 530,640 1,873 1.40 % 362,498 1,436 1.58 % Securities lending revenue (2) 194 49 Other interest revenue (2) 1 1 Total interest-earning assets (3)$ 530,640 $ 2,068 1.55 %$ 362,498 $ 1,486 1.63 % Funding sources Bank deposits$ 368,026 $ 13 0.01 %$ 288,990 $ 12 0.02 % Payables to brokerage clients 87,367 2 0.01 % 37,500 1 0.01 % Short-term borrowings (4) 3,245 3 0.33 % 39 - 0.24 % Long-term debt 18,349 97 2.12 % 8,524 77 3.60 % Total interest-bearing liabilities 476,987 115 0.10 % 335,053 90 0.11 % Non-interest-bearing funding sources (3) 53,653 27,445 Securities lending expense (2) 7 9 Other interest expense (2) (1) (2) Total funding sources (3)$ 530,640 $ 121 0.09 %$ 362,498 $ 97 0.10 % Net interest revenue $
1,947 1.46 %$ 1,389 1.53 % - 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)
2021 2020
Interest Interest
Average Revenue/ Average Average Revenue/ Average
Six Months Ended June 30, Balance Expense Yield/Rate Balance Expense Yield/Rate
Interest-earning assets
Cash and cash equivalents $ 40,414 $ 16 0.08 % $ 44,343 $ 104 0.46 %
Cash and investments segregated 44,573 14 0.06 % 28,619 114 0.79 %
Receivables from brokerage clients 71,760 1,172 3.25 % 18,533 279 2.97 % Available for sale securities (1) 341,500 2,194 1.28 % 216,045 2,331 2.15 % Bank loans 25,862 287 2.22 % 19,530 277 2.84 % Total interest-earning assets 524,109 3,683 1.40 % 327,070 3,105 1.89 % Securities lending revenue (2) 398 86 Other interest revenue (2) 2 3 Total interest-earning assets (3)$ 524,109 $ 4,083 1.55 %$ 327,070 $ 3,194 1.94 % Funding sources Bank deposits$ 365,576 $ 26 0.01 %$ 258,256 $ 69 0.05 % Payables to brokerage clients 87,353 4 0.01 % 33,894 9 0.05 % Short-term borrowings (4) 2,175 3 0.30 % 21 - 0.31 % Long-term debt 16,308 182 2.23 % 8,025 143 3.57 % Total interest-bearing liabilities$ 471,412 $ 215 0.09 %$ 300,196 $ 221 0.15 % Non-interest-bearing funding sources (3) 52,697 26,874 Securities lending expense (2) 12 16 Other interest expense (2) (2) (4) Total funding sources (3)$ 524,109 $ 225 0.08 %$ 327,070 $ 233 0.14 % Net interest revenue$ 3,858 1.47 %$ 2,961 1.80 % (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$558 million , or 40%, and$897 million or 30% in the second quarter and first six months of 2021 compared to the same periods in 2020. These increases were due largely to significant growth in margin loans and securities lending revenue as a result of our acquisition of TD Ameritrade. The increases in net interest revenue were also supported by overall growth in interest-earning assets, including growth in bank loans, 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$558 million and$1.1 billion of net interest revenue during the second quarter and first six months of 2021, respectively. Average interest-earning assets for the second quarter and first six months of 2021 were higher by 46% and 60%, respectively, compared to the same periods in 2020. This increase resulted from higher bank deposits and payables to brokerage clients, due to heightened client cash balances driven by the low interest rate environment and strong net new client cash inflows, as well as our 2020 acquisitions of TD Ameritrade and USAA-IMCO. Our net interest margin decreased to 1.46% and 1.47% during the second quarter and first six months of 2021, respectively, down from 1.53% and 1.80% during the same periods in 2020. This decrease was driven primarily by lower yields received on interest-earning assets, in part due to purchases of investment securities throughout 2020 and the first six months of 2021 which were made at rates below the average yield on the AFS portfolio. This more than offset the benefit from increased margin utilization and securities lending, which comprised 41% and 40% of net interest revenue during the second quarter and first six months of 2021, respectively, compared to 11% and 12% of net interest revenue for the same periods in 2020. - 10 - -------------------------------------------------------------------------------- THE CHARLES SCHWAB CORPORATION
Management's Discussion and Analysis of Financial Condition and Results of
Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)Asset Management and Administration Fees
The following tables present asset management and administration fees, average client assets, and average fee yields:
2021 2020
Average Average
Client Average Client Average
Three Months Ended June 30, Assets Revenue Fee Assets Revenue Fee
Schwab money market funds before fee
0.29 %$ 213,037 $ 164 0.31 % waivers Fee waivers (85) (15) Schwab money market funds$ 157,057 29 0.07 %$ 213,037 149 0.28 % Schwab equity and bond funds, ETFs, and 415,311 94 0.09 % 274,570 68 0.10 %
CTFs
Mutual Fund OneSource® and other 228,890 180 0.32 % 175,067 135 0.31
%
non-transaction fee funds Other third-party mutual funds and ETFs 896,236 178 0.08 % 416,242 73 0.07 %
(1)
Total mutual funds, ETFs, and CTFs (2)$ 1,697,494 481 0.11 %$ 1,078,916 425 0.16 % Advice solutions (2) Fee-based$ 448,107 490 0.44 %$ 260,653 314 0.48 % Non-fee-based 87,857 - - 69,234 - - Total advice solutions$ 535,964 490 0.37 %$ 329,887 314 0.38 % Other balance-based fees (3) 605,617 63 0.04 % 407,796 45 0.04 % Other (4) 13 17 Total asset management and administration$ 1,047 $ 801 fees 2021 2020 Average Average Client Average Client Average Six Months Ended June 30, Assets Revenue Fee Assets Revenue Fee
Schwab money market funds before fee
0.29%$ 208,405 0.30% waivers$ 316 Fee waivers (163) (15) Schwab money market funds$ 163,370 73 0.09%$ 208,405 301 0.29% Schwab equity and bond funds, ETFs, and 396,296 180 0.09% 282,689 144 0.10%
CTFs
Mutual Fund OneSource® and other 225,673 352 0.31% 181,825 282 0.31% non-transaction fee funds Other third-party mutual funds and ETFs 872,822 346 0.08% 434,100 150 0.07%
(1)
Total mutual funds, ETFs, and CTFs (2)$ 1,658,161 951 0.12%$ 1,107,019 877 0.16% Advice solutions (2) Fee-based$ 436,368 958 0.44%$ 261,954 626 0.48% Non-fee-based 86,312 - - 70,232 - - Total advice solutions$ 522,680 958 0.37%$ 332,186 626 0.38% Other balance-based fees (3) 591,090 127 0.04% 420,321 99 0.05% Other (4) 27 26 Total asset management and administration$ 2,063 $ 1,628
fees
(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$246 million , or 31%, and$435 million , or 27% in the second quarter and first six months of 2021, respectively compared to the same periods in 2020. These increases were 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 six months 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$146 million and$288 million of asset management and administration fees in the second quarter and first six months of 2021, respectively. The amount of fee waivers in coming quarters is dependent on a variety of factors, including the level of short-term interest rates and client preferences across our money market fund line-up. - 11 - --------------------------------------------------------------------------------THE CHARLES SCHWAB CORPORATION
Management's Discussion and Analysis of Financial Condition and Results of
Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)
The following tables present a roll forward of client assets for the Schwab
money market funds, Schwab equity and bond funds, exchange-traded funds (ETFs),
and collective trust funds (CTFs), and Mutual Fund OneSource® and other
non-transaction fee (NTF) funds. These funds generated 29% of the asset
management and administration fees earned in both the second quarter and first
six months of 2021, compared to 44% and 45% of the asset management and
administration fees earned in the second quarter and first six months of 2020,
respectively:
Schwab Money Schwab Equity and Mutual Fund OneSource®
Market Funds Bond Funds, ETFs, and CTFs and Other NTF funds
Three Months Ended June 30, 2021 2020 2021 2020 2021 2020
Balance at beginning of period
373,817$ 235,623 $ 227,289 $ 161,639 Net inflows (outflows) (11,647) 7,625 13,875 (1,416) (1,784) (4,488) Net market gains (losses) and other 9 205 23,399 39,139 14,676 35,848 Balance at end of period$ 151,943 $ 211,558 $ 411,091 $ 273,346 $ 240,181 $ 192,999 Schwab Money Schwab Equity and Mutual Fund OneSource® Market Funds Bond Funds, ETFs, and CTFs and Other NTF funds Six Months Ended June 30, 2021 2020 2021 2020 2021 2020
Balance at beginning of period
341,689$ 286,275 $ 223,857 $ 202,068 Net inflows (outflows) (24,169) 9,614 26,680 5,115 (6,472) (15,053) Net market gains (losses) and other 23 1,118 42,722 (18,044) 22,796 5,984
Balance at end of period
411,091$ 273,346 $ 240,181 $ 192,999 Trading Revenue The following table presents trading revenue and related information: Six Months Ended Three Months Ended June 30, Percent June 30, Percent 2021 2020 Change 2021 2020 Change Trading revenue$ 955 $ 193 N/M$ 2,171 $ 381 N/M Clients' daily average trades (DATs) (in thousands) 6,042 1,619 N/M 7,209 1,580 N/M Number of trading days 63.0 63.0 - 124.0 125.0 (1) % Revenue per trade (1)$ 2.51 $ 1.89 33 %$ 2.43 $ 1.93 26 % (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$762 million and$1.8 billion in the second quarter and first six months of 2021, respectively, compared to the same periods in 2020, primarily due to the acquisition of TD Ameritrade and heightened client engagement, which together drove significantly higher DATs throughout the first six months of 2021. This increased trading activity and a higher percentage of options trades drove significant growth in commissions and order flow revenue. Overall, TD Ameritrade contributed$767 million and$1.7 billion of trading revenue in the second quarter and first six months of 2021, respectively.
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
- 12 -
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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)Other Revenue
Other revenue includes exchange processing fees, certain service fees, software fees, and non-recurring gains. Other revenue increased$174 million and$365 million in the second quarter and first six months of 2021, respectively, compared to the same periods in 2020 primarily due to the acquisition of TD Ameritrade, higher service fees resulting from higher trade volume and growth in customer base, and a gain on the sale of an investment during the second quarter of 2021.
Total Expenses Excluding Interest
The following table shows a comparison of expenses excluding interest:
Three Months Ended Six Months Ended
June 30, Percent June 30, Percent
2021 2020 Change 2021 2020 Change
Compensation and benefits
Salaries and wages $ 796 $ 523 52 % $ 1,572 $ 1,025 53 %
Incentive compensation 331 181 83 % 740 408 81 %
Employee benefits and other 191 115 66 % 436 283 54 %
Total compensation and benefits
61 %$ 2,748 $ 1,716 60 % Professional services 247 198 25 % 473 380 24 % Occupancy and equipment 239 152 57 % 476 294 62 % Advertising and market development 128 70 83 % 244 137 78 % Communications 166 78 113 % 313 153 105 % Depreciation and amortization (1) 135 97 39 % 264 187 41 % Amortization of acquired intangible assets (1) 154 12 N/M 308 18 N/M Regulatory fees and assessments 66 36 83 % 144 70 106 % Other 355 100 N/M 593 177 N/M
Total expenses excluding interest
80 %$ 5,563 $ 3,132 78 % Expenses as a percentage of total net revenues Compensation and benefits 29 % 33 % 30 % 34 % Advertising and market development 3 % 3 % 3 % 3 % Full-time equivalent employees (in thousands) At quarter end 32.5 21.8 49 % Average 32.4 21.3 52 % 32.3 20.6 57 % (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 by 80% and 78% in the second quarter and first six months of 2021, respectively, compared to the same periods in 2020. In the second quarter and first six months of 2021, total expenses excluding interest included$0.9 billion and$1.8 billion , respectively, from TD Ameritrade. Adjusted total expenses, which excludes acquisition and integration-related costs and amortization of acquired intangible assets, increased 71% and 67% in the second quarter and first six months of 2021, respectively, compared to the same periods 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 second quarter and first six months of 2021, compared to the same periods 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 second quarter and first six months of 2021 included$97 million and$169 million , respectively, of acquisition and integration-related costs, up from$13 million and$21 million in the second quarter and first six months of 2020, respectively.
Professional services expense increased in the second quarter and first six month of 2021 compared to the same periods in 2020, primarily due to the inclusion of TDA's results of operations and overall growth in the business.
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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)
Occupancy and equipment expense increased in the second quarter and first six
months of 2021 compared to the same periods 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 second quarter and
first six months of 2021 compared to the same periods in 2020, primarily due to
the inclusion of TDA's results of operations.
Communications expense increased in the second quarter and first six months of
2021 compared to the same periods in 2020, primarily due to 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 second quarter and first six
months of 2021 compared to the same periods in 2020, primarily resulting from
growth in fixed assets due to the TDA acquisition, higher amortization of
purchased and internally developed software, higher depreciation of buildings
related to expansion of our campuses in the U.S. , and higher depreciation of
hardware. Amortization of acquired intangible assets increased in 2021 as a
result of acquisitions completed in 2020.
Regulatory fees and assessments increased in the second quarter and first six
months of 2021 compared to the same periods in 2020, 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 second quarter and first six months of 2021
compared to the same periods in 2020, primarily due to the inclusion of TDA's
results of operations and a $200 million regulatory matter charge in the second
quarter of 2021 (see Item 1 - Note 10).
Capital expenditures were $225 million and $434 million in the second quarter
and first six months of 2021, respectively, compared with $169 million and $419
million in the second quarter and first six months of 2020, respectively. The
increases in capital expenditures from the prior year were primarily due to
higher hardware costs offset by lower building expansion and lower capitalized
software costs in 2021, relative to the first six 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 $454 million and $217 million for the second quarters of
2021 and 2020, respectively, resulting in effective income tax rates on income
before taxes of 26.4% and 24.4%, respectively. Taxes on income were $930 million
and $469 million for the first six months of 2021 and 2020, respectively,
resulting in effective income tax rates on income before taxes of 25.3% and
24.2%, respectively. The increase in the effective tax rate in the second
quarter and first six months of 2021 compared to the same periods in 2020 was
primarily related to increased state tax expense due to uncertain tax position
accruals, the tax impact of a non-deductible regulatory matter charge in the
second quarter of 2021 (see Item 1 - Note 10), and the impact of state rate
changes on the Company's deferred tax liabilities. Partially offsetting the
increases in the effective tax rates from these items was an increase in equity
compensation tax benefits during the second quarter and first six months of
2021.
- 14 -
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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)Segment Information
Financial information for our segments is presented in the following tables:
Investor Services Advisor Services Total
Percent
Three Months Ended June 30, Percent Change 2021 2020 Percent Change 2021 2020 Change 2021 2020
Net Revenues
Net interest revenue 55 % $ 1,478 $ 952 7 % $ 469 $ 437 40 % $ 1,947 $ 1,389
Asset management and
administration fees 32 % 769 583 28 % 278 218 31 % 1,047 801
Trading revenue N/M 861 138 71 % 94 55 N/M 955 193
Bank deposit account fees N/M 249 - N/M 88 - N/M 337 - Other N/M 170 51 N/M 71 16 N/M 241 67 Total net revenues 105 % 3,527 1,724 38 % 1,000 726 85 % 4,527 2,450 Expenses Excluding Interest 87 % 2,188 1,168 57 % 620 394 80 % 2,808 1,562 Income before taxes on income 141 %$ 1,339 $ 556 14 %$ 380 $ 332 94 %$ 1,719 $ 888 Net New Client Assets (in billions) (1) (61) %$ 44.5 $ 113.0 164 %$ 64.3 $ 24.4 (21) %$ 108.8 $ 137.4 Investor Services Advisor Services Total Percent Six Months Ended June 30, Percent Change 2021 2020 Percent Change 2021 2020 Change 2021 2020 Net Revenues Net interest revenue 41 %$ 2,932 $ 2,080 5 %$ 926 $ 881 30 %$ 3,858 $ 2,961 Asset management and administration fees 28 % 1,511 1,183 24 % 552 445 27 % 2,063 1,628 Trading revenue N/M 1,958 257 72 % 213 124 N/M 2,171 381 Bank deposit account fees N/M 503 - N/M 185 - N/M 688 - Other N/M 348 71 N/M 114 26 N/M 462 97 Total net revenues 102 % 7,252 3,591 35 % 1,990 1,476 82 % 9,242 5,067 Expenses Excluding Interest 85 % 4,297 2,322 56 % 1,266 810 78 % 5,563 3,132 Income before taxes on income 133 %$ 2,955 $ 1,269 9 %$ 724 $ 666 90 %$ 3,679 $ 1,935 Net New Client Assets (in billions) (1) (26) %$ 109.6 $ 148.3 113 %$ 133.0 $ 62.3 15 %$ 242.6 $ 210.6 (1) In the first six months of 2021, Investor Services includes an outflow of$14.4 billion from a mutual fund clearing services client. For the second quarter and first six months of 2020, Investor Services includes inflows of$79.9 billion related to the acquisition of assets of USAA-IMCO and$10.9 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 105% and 38%, respectively, in the second quarter and 102% and 35%, respectively, for the first six months of 2021 compared to the same periods in 2020. Both segments saw growth in all revenue line items, primarily due to ourOctober 6, 2020 acquisition of TD Ameritrade. Net interest revenue increased for both segments due to significant growth from TDA in margin loans and securities lending revenue, as well as overall growth in interest-earning assets, including growth in bank loans, 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 increases in trading revenue for both segments were supported by heightened client trading activity. Bank deposit account fee revenue was earned at both segments during the first six months of 2021, following the TDA acquisition. Increases in other revenue for both segments were primarily due to the TD Ameritrade acquisition.
Segment Expenses Excluding Interest
Investor Services and Advisor Services total expenses excluding interest
increased by 87% and 57%, respectively, in the second quarter and 85% and 56%,
respectively, for the first six months of 2021, compared to the same periods in
2020, primarily due to
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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 inclusion of TD Ameritrade's results of operations and, for Investor
Services, a $200 million regulatory matter charge in the second quarter of 2021
(see Item 1 - Note 10). 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. For Investor 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.
The following table shows the simulated change to net interest revenue over the
next 12 months beginning
June 30, 2021 December 31, 2020
Increase of 100 basis points 13.0 % 14.2 %
Decrease of 100 basis points (4.0) % (4.3) %
Net interest revenue sensitivities as of
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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)
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 ofJune 30, 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.
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. - 17 - --------------------------------------------------------------------------------THE CHARLES SCHWAB CORPORATION
Management's Discussion and Analysis of Financial Condition and Results of
Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)
In addition to internal sources of liquidity, Schwab has access to external
funding. The following table describes external debt facilities available at
June 30, 2021 :
Description Borrower Outstanding Available
Federal Home Loan Bank secured credit facility
(1) Banking subsidiaries $ - $ 54,984
Federal Reserve discount window (2) Banking subsidiaries - 9,528
Uncommitted, unsecured lines of credit with
various external banks CSC, CS&Co - 1,522
Unsecured commercial paper CSC 1,500 -
Committed, unsecured credit facility with
various external banks TDAC - 600
Secured uncommitted lines of credit with various
external banks (3) TDAC 2,000 -
(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) Secured borrowing capacity is made available based on TDAC's ability to
provide acceptable collateral to the lenders as determined by the credit
agreements.
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 atJune 30, 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 June 30, 2021 Total eligible high quality liquid assets $ 88,167 Net cash outflows $ 81,154 LCR 109 % - 18 -
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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
June 30, 2021 Outstanding Maturity Interest Rate Moody's & Poor's Fitch
CSC Senior Notes $ 14,931 2022 - 2031 2.23% A2 A A
TDA Senior Notes $ 3,550 2021 - 2029 2.79% A2 A -
New Debt Issuances
Schwab's debt issuances in 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 $ 1,250 03/18/2024 SOFR + 0.500%
03/18/2021 $ 1,500 03/18/2024 0.750%
03/18/2021 $ 1,250 03/20/2028 2.000%
05/13/2021 $ 500 05/13/2026 SOFR + 0.520%
05/13/2021 $ 1,000 05/13/2026 1.150%
05/13/2021 $ 750 05/13/2031 2.300%
Equity Issuances
CSC's preferred stock issued and net proceeds for 2021 are as follows:
Date Issued and Sold Net Proceeds
Series I March 18, 2021 $ 2,222
Series J March 30, 2021 $ 584
On
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 our issuances of preferred stock and strength in earnings in the first half of 2021, our Tier 1 Leverage Ratio was 6.4% atJune 30, 2021 , consistent with the first quarter. 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. - 19 - --------------------------------------------------------------------------------THE CHARLES SCHWAB CORPORATION
Management's Discussion and Analysis of Financial Condition and Results of
Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)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 ofJune 30, 2021 , CSC and our banking subsidiaries are considered well capitalized.
The following table details CSC's consolidated and CSB's capital ratios as of
June 30, 2021 December 31, 2020
CSC CSB CSC CSB
Total stockholders' equity $ 57,450 $ 27,289 $ 56,060 $ 22,223 Less:
Preferred stock 9,954 - 7,733 - Common Equity Tier 1 Capital before regulatory adjustments$ 47,496 $ 27,289 $ 48,327 $ 22,223
Less:
$ 11,897 $ 13
Other intangible assets, net of associated deferred tax liabilities
7,833 - 8,103 -
Deferred tax assets, net of valuation allowances and deferred tax liabilities
17 12 17 12
AOCI adjustment 2,408 2,080 5,394 4,672
Common Equity Tier 1 Capital $ 25,341 $ 25,184 $ 22,916 $ 17,526
Tier 1 Capital $ 35,295 $ 25,184 $ 30,649 $ 17,526
Total Capital 35,314 25,198 30,688 17,558
Risk-Weighted Assets 132,148 98,604 123,881 91,062
Total Leverage Exposure 557,950 361,943 491,469 325,437
Common Equity Tier 1 Capital/Risk-Weighted Assets 19.2 % 25.5 % 18.5 % 19.2 %
Tier 1 Capital/Risk-Weighted Assets 26.7 % 25.5 % 24.7 % 19.2 %
Total Capital/Risk-Weighted Assets 26.7 % 25.6 % 24.8 % 19.3 %
Tier 1 Leverage Ratio 6.4 % 7.1 % 6.3 % 5.5 %
Supplementary Leverage Ratio 6.3 % 7.0 % 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
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 moved$8.7 billion of uninsured IDA balances out of the IDA sweep program inJuly 2021 . The IDA agreement also provides that, startingJuly 1, 2021 , Schwab has the option to migrate up to$10 billion of IDA balances every 12 months to Schwab's balance sheet, subject to certain limitations and adjustments. Inclusive of the uninsured balances and transfers relating to certain international accounts, IDA balances moved to Schwab's balance sheet totaled$9.9 billion throughJuly 31, 2021 . The Company's overall capital management strategy includes supporting migration of IDA balances in future periods as available pursuant to the terms of the IDA agreement. The Company's ability to migrate these balances to its balance sheet is dependent upon multiple factors including having sufficient capital levels to sustain these incremental deposits and the availability of IDA balances designated as floating-rate obligations. See Item 1 - Note 10 for further information on the IDA agreement. - 20 - -------------------------------------------------------------------------------- THE CHARLES SCHWAB CORPORATION Management's Discussion and Analysis of Financial Condition and Results of Operations (Tabular Amounts in Millions, Except Ratios, or as Noted) Dividends Cash dividends paid and per share amounts for the first six months of 2021 and 2020 are as follows: 2021 2020 Per Share Per Share Six Months Ended June 30, Cash Paid Amount Cash Paid Amount Common and Nonvoting Common Stock$ 682 $ .36 $ 466 $ .36 Series A Preferred Stock (1) 14 35.00 14 35.00 Series C Preferred Stock (2) 18 30.00 18 30.00 Series D Preferred Stock (3) 22 29.76 22 29.76 Series E Preferred Stock (4) 14 2,312.50 14 2,312.50 Series F Preferred Stock (5) 13 2,500.00 13 2,500.00 Series G Preferred Stock (6) 67 2,687.50 N/A N/A Series H Preferred Stock (7) 47 1,888.89 N/A N/A Series I Preferred Stock (8) 18 811.11 N/A N/A Series J Preferred Stock (9) 5 7.54 N/A N/A (1) Dividends paid semi-annually untilFebruary 1, 2022 and quarterly thereafter. (2) Series C Preferred Stock was redeemed onJune 1, 2021 . Prior to redemption, dividends were paid quarterly and the final dividend was paid onJune 1, 2021 . (3) Dividends paid quarterly. (4) Dividends paid semi-annually untilMarch 1, 2022 and quarterly thereafter. (5) Dividends paid semi-annually untilDecember 1, 2027 and quarterly thereafter. (6) Series G Preferred Stock was issued onApril 30, 2020 . Dividends are paid quarterly, and the first dividend was paid onSeptember 1, 2020 . (7) Series H Preferred Stock was issued onDecember 11, 2020 . Dividends are paid quarterly, and the first dividend was paid onMarch 1, 2021 . (8) Series I Preferred Stock was issued onMarch 18, 2021 . Dividends are paid quarterly, and the first dividend was paid onJune 1, 2021 . (9) Series J Preferred Stock was issued onMarch 30, 2021 . Dividends are paid quarterly, and the first dividend was paid onJune 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 six months of 2021 or 2020. As ofJune 30, 2021 ,$1.8 billion remained on our existing authorization. OTHER Foreign Exposure AtJune 30, 2021 , Schwab had exposure to non-sovereign financial and non-financial institutions in foreign countries, as well as agencies of foreign governments. AtJune 30, 2021 , the fair value of these holdings totaled$10.4 billion , with the top three exposures being to issuers and counterparties domiciled inFrance at$5.3 billion ,Germany at$1.2 billion , andCanada at$845 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$3.2 billion and$2.2 billion atJune 30, 2021 andDecember 31, 2020 , respectively. 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 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. - 21 - --------------------------------------------------------------------------------THE CHARLES SCHWAB CORPORATION Management's Discussion and Analysis of Financial Condition and Results of Operations (Tabular Amounts in Millions, Except Ratios, or as Noted)
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 six months of 2021.
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 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
June 30, Six Months Ended June 30,
2021 2020 2021 2020
Total expenses excluding interest (GAAP) $ 2,808 $ 1,562 $ 5,563 $ 3,132
Acquisition and integration-related costs (1) (144) (81) (263) (118)
Amortization of acquired intangible assets (154) (12) (308) (18)
Adjusted total expenses (non-GAAP) $ 2,510 $ 1,469 $ 4,992 $ 2,996
(1) Acquisition and integration-related costs for the three and six months ended
June 30, 2021 primarily consist of $97 million and $169 million of compensation
and benefits, $37 million and $64 million of professional services, and $7
million and $23 million of occupancy and equipment. Acquisition and
integration-related costs for the three and six months ended June 30, 2020
primarily consist of $46 million and $69 million of professional services and
$20 million and $24 million of other.
Three Months Ended June 30, Six Months Ended June 30,
2021 2020 2021 2020
Amount Diluted EPS Amount Diluted EPS Amount Diluted EPS Amount Diluted EPS
Net income available to common stockholders
(GAAP),
Earnings per common share - diluted (GAAP)
$ 1.07 Acquisition and integration-related costs 144 .08 81 .07 263 .14 118
.09
Amortization of acquired intangible assets 154 .08 12 .01 308 .16 18 .01 Income tax effects (1) (80) (.05) (22) (.02) (147) (.07) (33) (.03) Adjusted net income available to common stockholders
(non-GAAP), Adjusted diluted EPS (non-GAAP)
(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 June 30, Six Months Ended June 30,
2021 2020 2021 2020
Return on average common stockholders' equity
(GAAP) 10 % 10 % 10 % 12 %
Average common stockholders' equity $ 46,276 $ 24,515 $ 47,912 $ 22,253
Less: Average goodwill (11,952) (1,480) (11,952) (1,480)
Less: Average acquired intangible assets - net (9,762) (700) (9,838) (703)
Plus: Average deferred tax liabilities related
to goodwill and
acquired intangible assets - net 1,907 67 1,925 67
Average tangible common equity $ 26,469 $ 22,402 $ 28,047 $ 20,137
Adjusted net income available to common
stockholders (1) $ 1,335 $ 692 $ 2,929 $ 1,481
Return on tangible common equity (non-GAAP) 20 % 12 % 21 % 15 %
(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
