Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2018
Commission File Number: 1-9700
THE CHARLES SCHWAB CORPORATION
(Exact name of registrant as specified in its charter)
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Delaware (State or other jurisdiction of incorporation or organization) | 94-3025021 (I.R.S. Employer Identification No.) |
211 Main Street, San Francisco, CA 94105
(Address of principal executive offices and zip code)
Registrant’s telephone number, including area code: (415) 667-7000
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer ☒ | Accelerated filer ☐ |
Non-accelerated filer ☐ (Do not check if a smaller reporting company) | Smaller reporting company ☐ |
Emerging growth company ☐ | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the
Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☒
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
1,349,185,040 shares of $.01 par value Common Stock Outstanding on April 30, 2018
THE CHARLES SCHWAB CORPORATION
Quarterly Report on Form 10-Q
For the Quarter Ended March 31, 2018
Index
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| Item 1. | | | |
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| | | | 19-20 |
| | | | 21-51 |
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| Item 2. | | | 1-14 |
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| Item 3. | | | |
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| Item 4. | | | 52 |
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| Item 1. | | | |
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| Item 1A. | | | |
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| Item 2. | | | |
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| Item 3. | | | 53 |
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| Item 4. | | | |
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| Item 5. | | | |
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| Item 6. | | | |
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Part I – FINANCIAL INFORMATION
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)
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
INTRODUCTION
The Charles Schwab Corporation (CSC) is a savings and loan holding company engaged, through its subsidiaries (collectively referred to as “Schwab” or the “Company”), in wealth management, securities brokerage, banking, asset management, custody, and financial advisory services.
Significant business subsidiaries of CSC include the following:
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• | Charles Schwab & Co., Inc. (CS&Co), a securities broker-dealer; |
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• | Charles Schwab Bank (CSB), a federal savings bank; and |
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• | Charles Schwab Investment Management, Inc. (CSIM), the investment advisor for Schwab’s proprietary mutual funds (Schwab Funds®) and 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.
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 the aspiration of creating the most trusted leader in investment services, management has adopted a strategy described as “Through Clients’ Eyes.”
Under this approach, our strategic goals are focused on putting 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 aim to offer a broad range of products and solutions to meet client needs with a focus on transparency and value. 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. Finally, we seek to maximize our market valuation and stockholder returns over time.
Management estimates that investable wealth in the United States (U.S.) currently exceeds $30 trillion, which means the Company’s $3.31 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, 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 ended December 31, 2017 (2017 Form 10-K).
On our website, www.aboutschwab.com, we post the following filings after they are electronically filed with or furnished to the Securities and Exchange Commission (SEC): annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934. The SEC maintains a website at www.sec.gov that contains reports, proxy, and other information that we file electronically with the SEC.
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)
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,” 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:
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• | Schwab seeking to maximize its 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, generates earnings growth and builds stockholder value (see Introduction in Part I, Item 2); |
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• | Capital expenditures in 2018 (see Results of Operations); |
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• | The expected impact of new accounting standards not yet adopted (see New Accounting Standards in Part I, Item 1, Financial Information – Notes to Condensed Consolidated Financial Statements (Item 1) – Note 2); |
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• | The likelihood of indemnification and guarantee payment obligations (see Commitments and Contingencies in Item 1 – Note 9); and |
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• | 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:
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• | General market conditions, including the level of interest rates, equity valuations, and trading activity; |
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• | Our ability to attract and retain clients, develop trusted relationships, and grow client assets; |
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• | Client use of our investment advisory services and other products and services; |
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• | The level of client assets including cash balances; |
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• | Competitive pressure on pricing, including deposit rates; |
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• | Client sensitivity to interest rates; |
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• | Timing, amount, and impact of migration of certain balances from sweep money market funds into bank sweep deposits; |
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• | Capital and liquidity needs and management; |
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• | Our ability to manage expenses; |
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• | Our ability to develop and launch new products, services, and capabilities in a timely and successful manner; |
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• | The effect of adverse developments in litigation or regulatory matters and the extent of any related charges; and |
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• | 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 2017 Form 10-K.
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 client activity and financial metrics in evaluating Schwab’s financial position and operating performance. Results for the first quarters of 2018 and 2017 are: |
| | | | | | | | | | |
| Three Months Ended
March 31, | | Percent
Change |
| 2018 | | 2017 | |
Client Metrics: | | | | | |
Net new client assets (in billions) (1) | $ | (18.8 | ) | | $ | 38.9 |
| | (148 | )% |
Core net new client assets (in billions) | $ | 65.6 |
| | $ | 38.9 |
| | 69 | % |
Client assets (in billions, at quarter end) | $ | 3,305.4 |
| | $ | 2,922.5 |
| | 13 | % |
Average client assets (in billions) | $ | 3,382.1 |
| | $ | 2,871.9 |
| | 18 | % |
New brokerage accounts (in thousands) | 443 |
| | 362 |
| | 22 | % |
Active brokerage accounts (in thousands, at quarter end) | 11,005 |
| | 10,320 |
| | 7 | % |
Assets receiving ongoing advisory services (in billions, at quarter end) | $ | 1,717.6 |
| | $ | 1,481.8 |
| | 16 | % |
Client cash as a percentage of client assets (at quarter end) | 11.0 | % | | 12.4 | % | | |
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Company Financial Metrics: | |
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Total net revenues | $ | 2,398 |
| | $ | 2,081 |
| | 15 | % |
Total expenses excluding interest | 1,396 |
| | 1,238 |
| | 13 | % |
Income before taxes on income | 1,002 |
| | 843 |
| | 19 | % |
Taxes on income | 219 |
| | 279 |
| | (22 | )% |
Net income | $ | 783 |
| | $ | 564 |
| | 39 | % |
Preferred stock dividends and other | 37 |
| | 39 |
| | (5 | )% |
Net income available to common stockholders | $ | 746 |
| | $ | 525 |
| | 42 | % |
Earnings per common share — diluted | $ | .55 |
| | $ | .39 |
| | 41 | % |
Net revenue growth from prior year | 15 | % | | 18 | % | | |
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Pre-tax profit margin | 41.8 | % | | 40.5 | % | | |
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Return on average common stockholders’ equity | 18 | % | | 15 | % | | |
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Expenses excluding interest as a percentage of average client assets (annualized) | 0.17 | % | | 0.18 | % | | |
Consolidated Tier 1 Leverage Ratio (at quarter end) | 7.5 | % | | 7.1 | % | | |
(1) The three months ended March 31, 2018 includes outflows of $84.4 billion from certain mutual fund clearing services clients.
Net income for the first quarter of 2018 grew 39% from the same period in 2017 driven primarily by sustained business momentum, higher interest rates, and lower corporate income taxes. Total revenues rose 15% due to increases in all major sources of revenue as a result of strong organic growth, client engagement, and the economic environment. Total expenses grew 13%, reflecting higher spending to support the expanding investor base and higher client assets, as well as a $15 million charge associated with unsecured client margin losses in volatility-related products during early February. Altogether, we achieved a 240 basis point gap between revenue and expense growth, which resulted in a 41.8% pre-tax profit margin; combined with a lower tax rate of 21.9%, we delivered net income of $783 million for the first quarter of 2018, up $219 million from a year ago.
During the first quarter of 2018, clients opened 443,000 new brokerage accounts, helping to bring active brokerage accounts to 11.0 million at March 31, 2018. Excluding planned mutual funding clearing outflows of $84.4 billion, core net new assets gathered during the first quarter of 2018 were $65.6 billion, compared to $38.9 billion for the same period a year ago. Client engagement remained strong during the first quarter of 2018, with daily average revenue trades rising 46% from the same period in 2017.
We also transferred approximately $25 billion from sweep money market funds to bank sweep deposits and paid off $15 billion in borrowings from the Federal Home Loan Bank. The net effect of these moves and client activity lifted our consolidated balance sheet assets to $248 billion at March 31, 2018. Our financial results, combined with the benefits of the Tax Cuts and Jobs Act (Tax Act), lifted our first quarter return on equity to 18% compared to 15% for the same period in 2017.
THE CHARLES SCHWAB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)
RESULTS OF OPERATIONS
Total Net Revenues
Total net revenues grew 15% during the first quarter of 2018 compared to the same period in 2017, reflecting increases in all major sources of revenue. |
| | | | | | | | | | | | | | | | | |
Three Months Ended March 31, | | | | 2018 | | 2017 |
| | Percent
Change | | Amount | | % of
Total Net
Revenues | | Amount | | % of
Total Net
Revenues |
Net interest revenue | | | | | | | | | | |
Interest revenue | | 35 | % | | $ | 1,421 |
| | 59 | % | | $ | 1,055 |
| | 51 | % |
Interest expense | | 187 | % | | (158 | ) | | (6 | )% | | (55 | ) | | (3 | )% |
Net interest revenue | | 26 | % | | 1,263 |
| | 53 | % | | 1,000 |
| | 48 | % |
Asset management and administration fees | | | | | | | | | | |
Mutual funds and ETF service fees | | (3 | )% | | 493 |
| | 21 | % | | 506 |
| | 24 | % |
Advice Solutions | | 16 | % | | 282 |
| | 12 | % | | 244 |
| | 12 | % |
Other | | 4 | % | | 76 |
| | 3 | % | | 73 |
| | 4 | % |
Asset management and administration fees | | 3 | % | | 851 |
| | 36 | % | | 823 |
| | 40 | % |
Trading revenue | | | | | | | | | | |
Commissions | | 6 | % | | 189 |
| | 7 | % | | 178 |
| | 8 | % |
Principal transactions | | (14 | )% | | 12 |
| | 1 | % | | 14 |
| | 1 | % |
Trading revenue | | 5 | % | | 201 |
| | 8 | % | | 192 |
| | 9 | % |
Other | | 26 | % | | 83 |
| | 3 | % | | 66 |
| | 3 | % |
Total net revenues | | 15 | % | | $ | 2,398 |
| | 100 | % | | $ | 2,081 |
| | 100 | % |
THE CHARLES SCHWAB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)
Net Interest Revenue
The following table presents net interest revenue information corresponding to interest-earning assets and funding sources on the condensed consolidated balance sheets: |
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Three Months Ended March 31, | | 2018 | | 2017 |
| | Average Balance | | Interest Revenue/ Expense | | Average Yield/ Rate | | Average
Balance | | Interest
Revenue/
Expense | | Average
Yield/
Rate |
Interest-earning assets: | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 17,084 |
| | $ | 66 |
| | 1.53 | % | | $ | 9,047 |
| | $ | 17 |
| | 0.76 | % |
Cash and investments segregated | | 13,969 |
| | 48 |
| | 1.37 | % | | 21,820 |
| | 35 |
| | 0.65 | % |
Broker-related receivables (1) | | 287 |
| | 1 |
| | 1.32 | % | | 388 |
| | — |
| | 0.55 | % |
Receivables from brokerage clients | | 18,872 |
| | 179 |
| | 3.79 | % | | 15,245 |
| | 126 |
| | 3.35 | % |
Available for sale securities (2) | | 50,371 |
| | 240 |
| | 1.91 | % | | 71,430 |
| | 251 |
| | 1.43 | % |
Held to maturity securities | | 121,412 |
| | 721 |
| | 2.38 | % | | 83,368 |
| | 485 |
| | 2.36 | % |
Bank loans | | 16,456 |
| | 130 |
| | 3.19 | % | | 15,527 |
| | 110 |
| | 2.87 | % |
Total interest-earning assets | | 238,451 |
| | 1,385 |
| | 2.33 | % | | 216,825 |
| | 1,024 |
| | 1.92 | % |
Other interest revenue | | | | 36 |
| | | | | | 31 |
| | |
Total interest-earning assets | | $ | 238,451 |
| | $ | 1,421 |
| | 2.39 | % | | $ | 216,825 |
| | $ | 1,055 |
| | 1.97 | % |
Funding sources: | | | | | | | | | | | | |
Bank deposits | | $ | 176,988 |
| | $ | 64 |
| | 0.15 | % | | $ | 163,682 |
| | $ | 19 |
| | 0.05 | % |
Payables to brokerage clients | | 22,469 |
| | 7 |
| | 0.14 | % | | 27,666 |
| | 2 |
| | 0.03 | % |
Short-term borrowings | | 12,170 |
| | 47 |
| | 1.55 | % | | 1,332 |
| | 2 |
| | 0.61 | % |
Long-term debt | | 4,392 |
| | 37 |
| | 3.37 | % | | 3,090 |
| | 28 |
| | 3.67 | % |
Total interest-bearing liabilities | | 216,019 |
| | 155 |
| | 0.29 | % | | 195,770 |
| | 51 |
| | 0.11 | % |
Non-interest-bearing funding sources | | 22,432 |
| | | | | | 21,055 |
| | | | |
Other interest expense | | | | 3 |
| | | | | | 4 |
| | |
Total funding sources | | $ | 238,451 |
| | $ | 158 |
| | 0.27 | % | | $ | 216,825 |
| | $ | 55 |
| | 0.10 | % |
Net interest revenue | | | | $ | 1,263 |
| | 2.12 | % | | | | $ | 1,000 |
| | 1.87 | % |
(1) Interest revenue or expense was less than $500,000 in the period or periods presented.
(2) Amounts have been calculated based on amortized cost.
Net interest revenue increased $263 million, or 26%, in the first quarter of 2018 compared to the same period in 2017 primarily due to higher interest rates and growth in interest-earning assets.
Our net interest margin improved to 2.12% during the first quarter of 2018, up from 1.87% a year earlier as a result of the Federal Reserve’s 2017 and March 2018 interest rate hikes, partially offset by higher interest rates paid on bank deposits and short-term borrowings.
In the first quarter of 2018, average interest earning assets grew 10% compared to the same period in 2017. This increase was driven by higher bank deposits from net client flows and bulk transfers, as well as higher short-term borrowings.
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 table presents asset management and administration fees, average client assets, and average fee yields:
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Three Months Ended March 31, | 2018 | | 2017 |
Average Client Assets | | Revenue | | Average Fee | | Average
Client
Assets | | Revenue | | Average
Fee |
Schwab money market funds before fee waivers | $ | 156,362 |
| | $ | 182 |
| | 0.47 | % | | $ | 162,789 |
| | $ | 231 |
| | 0.58 | % |
Fee waivers | | | — |
| | | | | | (8 | ) | | |
Schwab money market funds | 156,362 |
| | 182 |
| | 0.47 | % | | 162,789 |
| | 223 |
| | 0.56 | % |
Schwab equity and bond funds and ETFs | 196,950 |
| | 63 |
| | 0.13 | % | | 140,054 |
| | 55 |
| | 0.16 | % |
Mutual Fund OneSource® and other NTF funds | 222,669 |
| | 178 |
| | 0.32 | % | | 202,416 |
| | 170 |
| | 0.34 | % |
Other third-party mutual funds and ETFs (1) | 319,722 |
| | 70 |
| | 0.09 | % | | 272,626 |
| | 58 |
| | 0.09 | % |
Total mutual funds and ETFs | $ | 895,703 |
| | 493 |
| | 0.22 | % | | $ | 777,885 |
| | 506 |
| | 0.26 | % |
Advice solutions (2) : | | | | | | | | | | | |
Fee-based | $ | 224,760 |
| | 282 |
| | 0.51 | % | | $ | 191,775 |
| | 244 |
| | 0.52 | % |
Non-fee-based | 59,762 |
| | — |
| | — |
| | 42,722 |
| | — |
| | — |
|
Total advice solutions | $ | 284,522 |
| | 282 |
| | 0.40 | % | | $ | 234,497 |
| | 244 |
| | 0.42 | % |
Other balance-based fees (3) | 426,012 |
| | 66 |
| | 0.06 | % | | 388,739 |
| | 61 |
| | 0.06 | % |
Other (4) | | | 10 |
| | | | | | 12 |
| | |
Total asset management and administration fees | | | $ | 851 |
| | | | | | $ | 823 |
| | |
(1) Includes Schwab ETF OneSource™.
(2) Beginning in the fourth quarter of 2017, a change was made to add non-fee based average assets from managed portfolios. Average client assets for advice solutions may also include the asset balances contained in the mutual fund and/or ETF categories listed above. Prior periods have been adjusted to accommodate this change.
(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 $28 million, or 3%, in the first quarter of 2018 compared to the same period in 2017, due to growing balances in advised solutions, equity and bond funds, and ETFs, partially offset by lower money market fund revenue as a result of bulk transfers to bank sweep deposits and fee reductions in the fourth quarter of 2017.
The following table presents a roll forward of client assets for the Schwab money market funds, Schwab equity and bond funds and exchange-traded funds (ETFs), and Mutual Fund OneSource® and other non-transaction fee (NTF) funds. These funds generated 50% of the asset management and administration fees earned during the first quarter of 2018, compared to 54% for the same period in 2017:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Schwab Money
Market Funds | | Schwab Equity and
Bond Funds and ETFs | | Mutual Fund OneSource®
and Other NTF Funds |
Three Months Ended March 31, | | 2018 | | 2017 | | 2018 | | 2017 | | 2018 | | 2017 |
Balance at beginning of period | | $ | 163,650 |
| | $ | 163,495 |
| | $ | 181,608 |
| | $ | 125,813 |
| | $ | 225,202 |
| | $ | 198,924 |
|
Net inflows (outflows) | | (19,122 | ) | | (724 | ) | | 8,646 |
| | 7,175 |
| | (4,929 | ) | | (4,590 | ) |
Net market gains (losses) and other | | 467 |
| | 116 |
| | (2,324 | ) | | 6,424 |
| | 1,341 |
| | 10,553 |
|
Balance at end of period | | $ | 144,995 |
| | $ | 162,887 |
| | $ | 187,930 |
| | $ | 139,412 |
| | $ | 221,614 |
| | $ | 204,887 |
|
THE CHARLES SCHWAB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)
Trading Revenue
The following table presents trading revenue and the related drivers: |
| | | | | | | | | | |
| Three Months Ended
March 31, | | Percent
Change |
| 2018 | | 2017 | |
Daily average revenue trades (DARTs) (in thousands) | 462 |
| | 317 |
| | 46 | % |
Clients’ daily average trades (in thousands) | 812 |
| | 585 |
| | 39 | % |
Number of trading days | 61.0 |
| | 62.0 |
| | (2 | )% |
Daily average revenue per revenue trade | $ | 7.24 |
| | $ | 9.84 |
| | (26 | )% |
Trading revenue | $ | 201 |
| | $ | 192 |
| | 5 | % |
DART volumes increased 46% in the first quarter of 2018 compared to the prior year. This led to an increase in trading revenue of 5%, as the volume growth more than offset Schwab’s commission pricing reductions implemented in the first quarter of 2017. At that time, Schwab announced two trading price reductions which lowered standard equity, ETF, and option trade commissions from $8.95 to $4.95 and lowered the per contract option fee from $.75 to $.65.
Other Revenue
Other revenue includes order flow revenue, other service fees, software fees from our portfolio management solutions, exchange processing fees, and non-recurring gains. Order flow revenue was $38 million and $27 million during the first quarters of 2018 and 2017, respectively.
THE CHARLES SCHWAB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)
Total Expenses Excluding Interest
The following table shows a comparison of expenses excluding interest: |
| | | | | | | | | | | |
| | Three Months Ended March 31, | | Percent
Change |
| | 2018 | | 2017 | |
Compensation and benefits | | | | | | |
Salaries and wages | | $ | 411 |
| | $ | 367 |
| | 12 | % |
Incentive compensation | | 212 |
| | 202 |
| | 5 | % |
Employee benefits and other | | 147 |
| | 132 |
| | 11 | % |
Total compensation and benefits | | $ | 770 |
| | $ | 701 |
| | 10 | % |
Professional services | | 156 |
| | 133 |
| | 17 | % |
Occupancy and equipment | | 122 |
| | 105 |
| | 16 | % |
Advertising and market development | | 73 |
| | 71 |
| | 3 | % |
Communications | | 62 |
| | 57 |
| | 9 | % |
Depreciation and amortization | | 73 |
| | 65 |
| | 12 | % |
Regulatory fees and assessments | | 51 |
| | 44 |
| | 16 | % |
Other | | 89 |
| | 62 |
| | 44 | % |
Total expenses excluding interest | | $ | 1,396 |
| | $ | 1,238 |
| | 13 | % |
Expenses as a percentage of total net revenues: | | | | | | |
Compensation and benefits | | 32 | % | | 34 | % | |
|
Advertising and market development | | 3 | % | | 3 | % | |
|
Full-time equivalent employees (in thousands): | | | | | | |
At quarter end | | 18.2 |
| | 16.5 |
| | 10 | % |
Average | | 18.0 |
| | 16.5 |
| | 9 | % |
Total compensation and benefits increased in the first quarter of 2018 compared to the same period in 2017, primarily due to an increase in employee headcount to support our expanding customer base as well as annual salary increases.
Professional services expense increased in the first quarter of 2018 compared to the same period in 2017, primarily due to an increase in asset management and administration related expenses resulting from growth in the Schwab Funds® and Schwab ETFs™ and higher spending on technology projects.
Occupancy and equipment expense increased in the first quarter of 2018 compared to the same period in 2017, primarily due to an increase in software maintenance expenses and additional licenses to support growth in the business.
Depreciation and amortization expenses grew in the first quarter of 2018 compared to the same period in 2017, primarily due to higher amortization of internally developed software associated with our investment in software and technology enhancements.
Regulatory fees and assessments increased in the first quarter of 2018 compared to the same period in 2017, primarily due to an increase in Federal Deposit Insurance Corporation (FDIC) insurance assessments, which rose as a result of higher average assets.
THE CHARLES SCHWAB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)
Other expenses increased in the first quarter of 2018 compared to the same period in 2017, primarily due to a $15 million charge associated with unsecured client margin losses in volatility-related products and other miscellaneous expense growth related to the growing client asset base.
Capital expenditures were $135 million and $67 million in the first quarters of 2018 and 2017, respectively. The increase in capital expenditures from the prior year was due to our office campus expansion in the U.S. and investments in technology projects. As we continue to pursue our geographic strategy, we anticipate increasing capital expenditures for full-year 2018 from our typical range of 3-5% of total net revenues to approximately 6-7%.
Taxes on Income
Taxes on income were $219 million and $279 million for the first quarters of 2018 and 2017, respectively, resulting in effective income tax rates on income before taxes of 21.9% and 33.1%, respectively. The decrease in the effective tax rate was primarily due to the Tax Act which was signed into law on December 22, 2017. Among other things, the Tax Act lowered the federal corporate income tax rate from 35% to 21%, effective for tax years including or commencing January 1, 2018.
Segment Information
Financial information for our segments is presented in the following table: |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Investor Services | | Advisor Services | | Total |
Three Months Ended March 31, | | Percent Change | | 2018 | | 2017 | | Percent
Change | | 2018 | | 2017 | | Percent
Change | | 2018 | | 2017 |
Net Revenues | | | | | | | | | | | | | | | | | | |
Net interest revenue | | 27 | % | | $ | 957 |
| | $ | 753 |
| | 24 | % | | $ | 306 |
| | $ | 247 |
| | 26 | % | | $ | 1,263 |
| | $ | 1,000 |
|
Asset management and administration fees | | 5 | % | | 593 |
| | 566 |
| | — |
| | 258 |
| | 257 |
| | 3 | % | | 851 |
| | 823 |
|
Trading revenue | | 7 | % | | 127 |
| | 119 |
| | 1 | % | | 74 |
| | 73 |
| | 5 | % | | 201 |
| | 192 |
|
Other | | 28 | % | | 64 |
| | 50 |
| | 19 | % | | 19 |
| | 16 |
| | 26 | % | | 83 |
| | 66 |
|
Total net revenues | | 17 | % | | 1,741 |
| | 1,488 |
| | 11 | % | | 657 |
| | 593 |
| | 15 | % | | 2,398 |
| | 2,081 |
|
Expenses Excluding Interest | | 12 | % | | 1,042 |
| | 930 |
| | 15 | % | | 354 |
| | 308 |
| | 13 | % | | 1,396 |
| | 1,238 |
|
Income before taxes on income | | 25 | % | | $ | 699 |
| | $ | 558 |
| | 6 | % | | $ | 303 |
| | $ | 285 |
| | 19 | % | | $ | 1,002 |
| | $ | 843 |
|
Investor Services
Total net revenues rose by 17% in the first quarter of 2018 compared to the same period in 2017, primarily due to increases in net interest revenue and asset management and administration fees. Net interest revenue increased primarily due to higher net interest margins and higher interest-earning assets. Asset management and administration fees increased primarily due to higher client assets enrolled in advisory solutions partially offset by lower money market fund revenue.
Expenses excluding interest increased by 12% in the first quarter of 2018 compared to the same period in 2017, due to higher compensation and benefits, technology project spend, and asset management and administration related expenses to support our expanding client and asset base.
Advisor Services
Total net revenues rose by 11% in the first quarter of 2018 compared to the same period in 2017, primarily due to an increase in net interest revenue. Net interest revenue increased primarily due to higher net interest margins and higher interest-earning assets.
Expenses excluding interest increased by 15% in the first quarter of 2018 compared to the same period in 2017, primarily due to higher compensation and benefits, technology project spend, and asset management and administration related expenses to support our expanding client and asset base.
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)
RISK MANAGEMENT
Schwab’s business activities expose us to a variety of risks, including operational, credit, market, liquidity, and compliance risk. The Company has a comprehensive risk management program to identify and manage these risks and their associated potential for financial and reputational impact. For a discussion of our risk management programs, see Item 7 – Risk Management in the 2017 Form 10-K.
Net Interest Revenue Simulation
For Schwab’s net interest revenue sensitivity analysis, we use net interest revenue simulation modeling techniques to evaluate and manage the effect of changing interest rates. The simulation includes all interest-sensitive assets and liabilities. Key variables in the simulation include the repricing of financial instruments, prepayment, reinvestment, and product pricing assumptions. The simulations involve assumptions that are inherently uncertain and, as a result, cannot precisely estimate net interest revenue or predict the impact of changes in interest rates on net interest revenue. Actual results may differ from simulated results due to balance growth or decline and the timing, magnitude, and frequency of interest rate changes, as well as changes in market conditions and management strategies, including changes in asset and liability mix.
If our guidelines for net interest revenue sensitivity are breached, management must report the breach to the Financial Risk Oversight Committee and establish a plan to address the interest rate risk. There were no breaches of Schwab’s net interest revenue sensitivity risk limits during the three months ended March 31, 2018, or year ended December 31, 2017.
As represented by the simulations presented below, our investment strategy is structured to produce an increase in net interest revenue when interest rates rise and, conversely, a decrease in net interest revenue when interest rates fall.
The simulations in the following table assume that the asset and liability structure of the consolidated balance sheets would not be changed as a result of the simulated changes in interest rates. As we actively manage the consolidated balance sheets and interest rate exposure, in all likelihood we would take steps to manage additional interest rate exposure that could result from changes in the interest rate environment. The following table shows the simulated net interest revenue change over the next 12 months beginning March 31, 2018 and December 31, 2017 of a gradual 100 basis point increase or decrease in market interest rates relative to prevailing market rates at the end of each reporting period:
|
| | | | | | |
| | March 31, 2018 | | December 31, 2017 |
Increase of 100 basis points | | 3.5 | % | | 3.3 | % |
Decrease of 100 basis points | | (5.2 | )% | | (6.2 | )% |
The change in net interest revenue sensitivities as of March 31, 2018 reflects the increase in interest rates across all maturities.
THE CHARLES SCHWAB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)
Liquidity Risk
Schwab’s primary source of funds is cash generated by client activity: 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, and cash provided by external debt or equity financing.
To meet daily funding needs, we maintain liquidity in the form of overnight cash deposits and short-term investments. For unanticipated liquidity needs, a buffer of highly liquid investments, currently comprised of U.S. Treasury notes, is also maintained.
In addition to internal sources of liquidity, Schwab has access to external funding. The following table describes external debt facilities available at March 31, 2018: |
| | | | | | | | | |
Description | Borrower | | Outstanding | | Available |
Committed, unsecured credit facility with various external banks | CSC | | $ | — |
| | $ | 750 |
|
Uncommitted, unsecured lines of credit with various external banks | CSC, CS&Co | | — |
| | 1,199 |
|
Federal Reserve Bank discount window (1) | CSB | | — |
| | 2,456 |
|
Federal Home Loan Bank secured credit facility (2) | CSB | | — |
| | 31,369 |
|
Unsecured commercial paper (3) | CSC | | — |
| | 750 |
|
(1) Amounts available are dependent on the fair value of certain investment securities that are pledged as collateral.
(2) Amounts available are dependent on the amount of first lien residential real estate mortgage loans (First Mortgages), home equity lines of credit (HELOCs), and the fair value of certain investment securities that are pledged as collateral.
(3) CSC has authorization from its Board of Directors to issue Commercial Paper Notes to not exceed $1.5 billion. Management has set a current limit not to exceed the amount of the committed, unsecured credit facility.
CSC’s ratings for Commercial Paper Notes are P1 by Moody’s Investor Service (Moody’s), A1 by Standard & Poor’s Rating Group (Standard & Poor’s), and F1 by Fitch Ratings, Ltd (Fitch).
Borrowings
The following are details of the Senior Notes and short-term borrowings:
|
| | | | | | | | | | |
March 31, 2018 | Par
Outstanding | | Maturity | Weighted Average
Interest Rate | Moody’s | Standard
& Poor’s | Fitch |
Senior Notes | $ | 4,106 |
| | 2018 - 2028 | 3.24% fixed | A2 | A | A |
Short-term borrowings | $ | — |
| | N/A | N/A | N/A | N/A | N/A |
N/A Not applicable.
Schwab is subject to, and was in compliance with, the modified liquidity coverage ratio rule at March 31, 2018.
CAPITAL MANAGEMENT
Schwab seeks to manage capital to a level and composition sufficient to support execution of our business strategy, including anticipated balance sheet growth, providing financial support to our subsidiaries, and sustained access to the capital markets, while at the same time meeting our regulatory capital requirements, and serving as a source of financial strength to our banking subsidiaries. Schwab’s primary sources of capital are funds generated by the operations of subsidiaries and securities issuances by CSC in the capital markets. To ensure that Schwab has sufficient capital to absorb unanticipated losses or declines in asset values, we have adopted a policy to remain well capitalized even in stressed scenarios.
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 CSB are subject to various capital requirements set by regulatory agencies as discussed in further detail in the 2017 Form 10-K and in Item 1 – Note 16. As of March 31, 2018, CSC and CSB are considered well capitalized.
The following table details CSC’s consolidated and CSB’s capital ratios as of March 31, 2018 and December 31, 2017:
|
| | | | | | | | | | | | | | | | |
| | March 31, 2018 | | December 31, 2017 |
| | CSC | | CSB | | CSC | | CSB |
Total stockholders’ equity | | $ | 19,330 |
| | $ | 13,859 |
| | $ | 18,525 |
| | $ | 13,224 |
|
Less: | | | | | | | | |
Preferred stock | | 2,793 |
| | — |
| | 2,793 |
| | — |
|
Common Equity Tier 1 Capital before regulatory adjustments | | $ | 16,537 |
| | $ | 13,859 |
| | $ | 15,732 |
| | $ | 13,224 |
|
Less: | | | | | | | | |
Goodwill, net of associated deferred tax liabilities | | $ | 1,191 |
| | $ | 13 |
| | $ | 1,191 |
| | $ | 13 |
|
Other intangible assets, net of associated deferred tax liabilities | | 69 |
| | — |
| | 61 |
| | — |
|
Deferred tax assets, net of valuation allowances and deferred tax liabilities | | 2 |
| | — |
| | 2 |
| | — |
|
AOCI adjustment (1) | | (260 | ) | | (247 | ) | | (152 | ) | | (144 | ) |
Common Equity Tier 1 Capital | | $ | 15,535 |
| | $ | 14,093 |
| | $ | 14,630 |
| | $ | 13,355 |
|
Tier 1 Capital | | $ | 18,328 |
| | $ | 14,093 |
| | $ | 17,423 |
| | $ | 13,355 |
|
Total Capital | | 18,372 |
| | 14,121 |
| | 17,452 |
| | 13,382 |
|
Risk-Weighted Assets | | 78,610 |
| | 68,226 |
| | 75,866 |
| | 66,519 |
|
Common Equity Tier 1 Capital/Risk-Weighted Assets | | 19.8 | % | | 20.7 | % | | 19.3 | % | | 20.1 | % |
Tier 1 Capital/Risk-Weighted Assets | | 23.3 | % | | 20.7 | % | | 23.0 | % | | 20.1 | % |
Total Capital/Risk-Weighted Assets | | 23.4 | % | | 20.7 | % | | 23.0 | % | | 20.1 | % |
Tier 1 Leverage Ratio | | 7.5 | % | | 7.0 | % | | 7.6 | % | | 7.1 | % |
(1) CSC and CSB have elected to opt out of the requirement to include most components of accumulated other comprehensive income (AOCI) in Common Equity Tier 1 Capital.
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 Office of the Comptroller of the Currency and the Federal Reserve to declare dividends to CSC.
Schwab’s primary broker-dealer subsidiary, CS&Co, is subject to regulatory requirements of the Uniform Net Capital Rule. At March 31, 2018, CS&Co exceeded its net capital requirements.
In addition to the capital requirements above, Schwab’s subsidiaries are subject to other regulatory requirements intended to ensure financial soundness and liquidity. See Item 1 – Note 16 for additional information on the components of stockholders’ equity and information on the capital requirements of significant subsidiaries.
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
On January 25, 2018, the Board of Directors of the Company declared a two cent, or 25%, increase in the quarterly cash dividend to $.10 per common share.
Cash dividends paid and per share amounts for the first three months of 2018 and 2017 are as follows:
|
| | | | | | | | | | | | | | | | |
Three Months Ended March 31, | | 2018 | | 2017 |
| | Cash Paid | | Per Share
Amount | | Cash Paid | | Per Share
Amount |
Common Stock | | $ | 136 |
| | $ | .10 |
| | $ | 108 |
| | $ | .08 |
|
Series A Preferred Stock (1) | | 14 |
| | 35.00 |
| | 14 |
| | 35.00 |
|
Series B Preferred Stock (2,5) | | N/A |
| | N/A |
| | 7 |
| | 15.00 |
|
Series C Preferred Stock (2) | | 9 |
| | 15.00 |
| | 9 |
| | 15.00 |
|
Series D Preferred Stock (2) | | 11 |
| | 14.88 |
| | 11 |
| | 14.88 |
|
Series E Preferred Stock (3) | | 14 |
| | 2,312.50 |
| | 9 |
| | 1,554.51 |
|
Series F Preferred Stock (4) | | N/A |
| | N/A |
| | N/A |
| | N/A |
|
(1) Dividends paid semi-annually until February 1, 2022 and quarterly thereafter.
(2) Dividends paid quarterly.
(3) Dividends paid semi-annually until March 1, 2022 and quarterly thereafter.
(4) Series F Preferred Stock was issued on October 31, 2017. Dividends paid semi-annually beginning on June 1, 2018 until December 1, 2027, and quarterly thereafter.
(5) Series B Preferred Stock was redeemed on December 1, 2017.
N/A Not applicable.
OTHER
Foreign Holdings
At March 31, 2018, Schwab had exposure to non-sovereign financial and non-financial institutions in foreign countries, as well as agencies of foreign governments. At March 31, 2018, the fair value of these holdings totaled $6.8 billion, with the top three exposures being to issuers and counterparties domiciled in France at $2.4 billion, Sweden at $1.9 billion, and Canada at $0.6 billion. Our holdings of securities issued by agencies of foreign governments are explicitly guaranteed by the governments of the issuing agencies.
In addition to the direct holdings in foreign companies and securities issued by foreign government agencies, Schwab has indirect exposure to foreign countries through its investments in CSIM money market funds (collectively, the Funds) resulting from brokerage clearing activities. At March 31, 2018, Schwab had $59 million in investments in these Funds. Certain of the Funds’ positions include certificates of deposit, time deposits, commercial paper, and corporate debt securities issued by counterparties in foreign countries. Additionally, at March 31, 2018, Schwab had outstanding margin loans to foreign residents of $880 million.
Off-Balance Sheet Arrangements
Schwab enters into various off-balance sheet arrangements in the ordinary course of business, primarily to meet the needs of its 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 – Note 5, Note 6, Note 8, Note 9, and Note 10, and Item 8 – Note 13 in the 2017 Form 10-K.
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 2017 Form 10-K. There have been no changes to critical accounting estimates during the first three months of 2018.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
For discussion of the quantitative and qualitative disclosures about market risk, see Risk Management in Item 2.
Part I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
THE CHARLES SCHWAB CORPORATION
Condensed Consolidated Statements of Income
(In Millions, Except Per Share Amounts)
(Unaudited)
|
| | | | | | | | |
| | Three Months Ended
March 31, |
| | 2018 | | 2017 |
Net Revenues | | |
| | |
|
Interest revenue | | $ | 1,421 |
| | $ | 1,055 |
|
Interest expense | | (158 | ) | | (55 | ) |
Net interest revenue | | 1,263 |
| | 1,000 |
|
Asset management and administration fees | | 851 |
| | 823 |
|
Trading revenue | | 201 |
| | 192 |
|
Other | | 83 |
| | 66 |
|
Total net revenues | | 2,398 |
| | 2,081 |
|
Expenses Excluding Interest | | | | |
Compensation and benefits | | 770 |
| | 701 |
|
Professional services | | 156 |
| | 133 |
|
Occupancy and equipment | | 122 |
| | 105 |
|
Advertising and market development | | 73 |
| | 71 |
|
Communications | | 62 |
| | 57 |
|
Depreciation and amortization | | 73 |
| | 65 |
|
Regulatory fees and assessments | | 51 |
| | 44 |
|
Other | | 89 |
| | 62 |
|
Total expenses excluding interest | | 1,396 |
| | 1,238 |
|
Income before taxes on income | | 1,002 |
| | 843 |
|
Taxes on income | | 219 |
| | 279 |
|
Net Income | | 783 |
| | 564 |
|
Preferred stock dividends and other | | 37 |
| | 39 |
|
Net Income Available to Common Stockholders | | $ | 746 |
| | $ | 525 |
|
Weighted-Average Common Shares Outstanding: | | | | |
Basic | | 1,347 |
| | 1,336 |
|
Diluted | | 1,362 |
| | 1,351 |
|
Earnings Per Common Share: | | | | |
Basic | | $ | .55 |
| | $ | .39 |
|
Diluted | | $ | .55 |
| | $ | .39 |
|
Dividends Declared Per Common Share | | $ | .10 |
| | $ | .08 |
|
See Notes to Condensed Consolidated Financial Statements.
THE CHARLES SCHWAB CORPORATION
Condensed Consolidated Statements of Comprehensive Income
(In Millions)
(Unaudited)
|
| | | | | | | | |
| | Three Months Ended
March 31, |
| | 2018 | | 2017 |
Net Income | | $ | 783 |
| | $ | 564 |
|
Other comprehensive income (loss), before tax: | | |
| | |
|
Change in net unrealized gain (loss) on available for sale securities: | | |
| | |
|
Net unrealized gain (loss) | | (108 | ) | | 52 |
|
Reclassification of net unrealized loss transferred to held to maturity | | — |
| | 227 |
|
Other reclassifications included in other revenue | | — |
| | (1 | ) |
Change in net unrealized gain (loss) on held to maturity securities: | | | | |
Reclassification of net unrealized loss transferred from available for sale | | — |
| | (227 | ) |
Amortization of amounts previously recorded upon transfer from available for sale | | 9 |
| | 2 |
|
Other | | — |
| | (3 | ) |
Other comprehensive income (loss), before tax | | (99 | ) | | 50 |
|
Income tax effect | | 24 |
| | (19 | ) |
Other comprehensive income (loss), net of tax | | (75 | ) | | 31 |
|
Comprehensive Income | | $ | 708 |
| | $ | 595 |
|
See Notes to Condensed Consolidated Financial Statements.
THE CHARLES SCHWAB CORPORATION
Condensed Consolidated Balance Sheets
(In Millions, Except Per Share and Share Amounts)
(Unaudited)
|
| | | | | | |
| March 31, 2018 | December 31, 2017 |
Assets | | |
Cash and cash equivalents | $ | 14,145 |
| $ | 14,217 |
|
Cash and investments segregated and on deposit for regulatory purposes (including resale agreements of $4,434 at March 31, 2018 and $6,596 at December 31, 2017) | 12,823 |
| 15,139 |
|
Receivables from brokers, dealers, and clearing organizations | 894 |
| 649 |
|
Receivables from brokerage clients — net | 21,153 |
| 20,576 |
|
Other securities owned — at fair value | 500 |
| 539 |
|
Available for sale securities | 51,827 |
| 49,995 |
|
Held to maturity securities (fair value — $123,463 at March 31, 2018 and $120,373 at
December 31, 2017)
| 125,683 |
| 120,926 |
|
Bank loans — net | 16,389 |
| 16,478 |
|
Equipment, office facilities, and property — net | 1,540 |
| 1,471 |
|
Goodwill | 1,227 |
| 1,227 |
|
Intangible assets — net | 101 |
| 108 |
|
Other assets | 2,038 |
| 1,949 |
|
Total assets | $ | 248,320 |
| $ | 243,274 |
|
Liabilities and Stockholders’ Equity | | |
|
Bank deposits | $ | 190,184 |
| $ | 169,656 |
|
Payables to brokers, dealers, and clearing organizations | 1,122 |
| 1,287 |
|
Payables to brokerage clients | 31,088 |
| 31,243 |
|
Accrued expenses and other liabilities | 2,468 |
| 2,810 |
|
Short-term borrowings | — |
| 15,000 |
|
Long-term debt | 4,128 |
| 4,753 |
|
Total liabilities | 228,990 |
| 224,749 |
|
Stockholders’ equity: | | |
|
Preferred stock — $.01 par value per share; aggregate liquidation preference
of $2,850 at March 31, 2018 and December 31, 2017 | 2,793 |
| 2,793 |
|
Common stock — 3 billion shares authorized; $.01 par value per share; 1,487,543,446
shares issued | 15 |
| 15 |
|
Additional paid-in capital | 4,397 |
| 4,353 |
|
Retained earnings | 15,222 |
| 14,408 |
|
Treasury stock, at cost — 139,326,005 shares at March 31, 2018 and
142,210,890 shares at December 31, 2017 | (2,837 | ) | (2,892 | ) |
Accumulated other comprehensive income (loss) | (260 | ) | (152 | ) |
Total stockholders’ equity | 19,330 |
| 18,525 |
|
Total liabilities and stockholders’ equity | $ | 248,320 |
| $ | 243,274 |
|
See Notes to Condensed Consolidated Financial Statements.
THE CHARLES SCHWAB CORPORATION
Condensed Consolidated Statements of Stockholders’ Equity
(In Millions)
(Unaudited)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | Accumulated Other Comprehensive Income (Loss) | | |
| | Preferred Stock | | Common stock | | Additional Paid-in Capital | | Retained Earnings | | Treasury Stock,
at cost | | | Total |
| | | Shares | | Amount | | | | | |
Balance at December 31, 2016 | | $ | 2,783 |
| | 1,488 |
| | $ | 15 |
| | $ | 4,267 |
| | $ | 12,649 |
| | $ | (3,130 | ) | | $ | (163 | ) | | $ | 16,421 |
|
Net income | | — |
| | — |
| | — |
| | — |
| | 564 |
| | — |
| | — |
| | 564 |
|
Other comprehensive income (loss), net of tax | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 31 |
| | 31 |
|
Dividends declared on preferred stock | | — |
| | — |
| | — |
| | — |
| | (37 | ) | | — |
| | — |
| | (37 | ) |
Dividends declared on common stock | | — |
| | — |
| | — |
| | — |
| | (107 | ) | | — |
| | — |
| | (107 | ) |
Stock option exercises and other | | — |
| | — |
| | — |
| | (23 | ) | | — |
| | 81 |
| | — |
| | 58 |
|
Share-based compensation and related tax effects | | — |
| | — |
| | — |
| | 49 |
| | — |
| | — |
| | — |
| | 49 |
|
Other | | — |
| | — |
| | — |
| | 7 |
| | — |
| | (4 | ) | | — |
| | 3 |
|
Balance at March 31, 2017 | | $ | 2,783 |
| | 1,488 |
| | $ | 15 |
| | $ | 4,300 |
| | $ | 13,069 |
| | $ | (3,053 | ) | | $ | (132 | ) | | $ | 16,982 |
|
| | | | | | | | | | | | | | | | |
Balance at December 31, 2017 | | $ | 2,793 |
| | 1,488 |
| | $ | 15 |
| | $ | 4,353 |
| | $ | 14,408 |
| | $ | (2,892 | ) | | $ | (152 | ) | | $ | 18,525 |
|
Adoption of accounting standards (Note 2) | | — |
| | — |
| | — |
| | — |
| | 200 |
| | — |
| | (33 | ) | | 167 |
|
Net income | | — |
| | — |
| | — |
| | — |
| | 783 |
| | — |
| | — |
| | 783 |
|
Other comprehensive income (loss), net of tax | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (75 | ) | | (75 | ) |
Dividends declared on preferred stock | | — |
| | — |
| | — |
| | — |
| | (34 | ) | | — |
| | — |
| | (34 | ) |
Dividends declared on common stock | | — |
| | — |
| | — |
| | — |
| | (135 | ) | | — |
| | — |
| | (135 | ) |
Stock option exercises and other | | — |
| | — |
| | — |
| | (12 | ) | | — |
| | 61 |
| | — |
| | 49 |
|
Share-based compensation and related tax effects | | — |
| | — |
| | — |
| | 47 |
| | — |
| | — |
| | — |
| | 47 |
|
Other | | — |
| | — |
| | — |
| | 9 |
| | — |
| | (6 | ) | | — |
| | 3 |
|
Balance at March 31, 2018 | | $ | 2,793 |
| | 1,488 |
| | $ | 15 |
| | $ | 4,397 |
| | $ | 15,222 |
| | $ | (2,837 | ) | | $ | (260 | ) | | $ | 19,330 |
|
See Notes to Condensed Consolidated Financial Statements.
THE CHARLES SCHWAB CORPORATION
Condensed Consolidated Statements of Cash Flows
(in Millions)
(Unaudited)
|
| | | | | | | | |
| | Three Months Ended
March 31, |
| | 2018 | | 2017 (1) |
Cash Flows from Operating Activities | | |
| | |
Net income | | $ | 783 |
| | $ | 564 |
|
Adjustments to reconcile net income to net cash provided by (used for) operating activities: | | |
| | |
Share-based compensation | | 50 |
| | 52 |
|
Depreciation and amortization | | 73 |
| | 65 |
|
Premium amortization, net, on available for sale securities and held to maturity securities | | 96 |
| | 72 |
|
Other | | 36 |
| | 12 |
|
Net change in: | | |
| | |
|
Investments segregated and on deposit for regulatory purposes | | 853 |
| | (550 | ) |
Receivables from brokers, dealers, and clearing organizations | | (245 | ) | | 11 |
|
Receivables from brokerage clients | | (595 | ) | | 424 |
|
Other securities owned | | 39 |
| | (115 | ) |
Other assets | | (16 | ) | | 4 |
|
Payables to brokers, dealers, and clearing organizations | | (325 | ) | | (346 | ) |
Payables to brokerage clients | | (155 | ) | | (1,627 | ) |
Accrued expenses and other liabilities | | (346 | ) | | (143 | ) |
Net cash provided by (used for) operating activities | | 248 |
| | (1,577 | ) |
Cash Flows from Investing Activities | | | | |
Purchases of available for sale securities | | (4,631 | ) | | (1,992 | ) |
Proceeds from sales of available for sale securities | | — |
| | 1,064 |
|
Principal payments on available for sale securities | | 2,695 |
| | 3,067 |
|
Purchases of held to maturity securities | | (8,235 | ) | | (9,301 | ) |
Principal payments on held to maturity securities | | 3,548 |
| | 1,731 |
|
Net change in bank loans | | 74 |
| | (134 | ) |
Purchases of equipment, office facilities, and property | | (122 | ) | | (80 | ) |
Proceeds from sales of Federal Home Loan Bank stock | | 172 |
| | 64 |
|
Other investing activities | | (40 | ) | | (6 | ) |
Net cash provided by (used for) investing activities | | (6,539 | ) | | (5,587 | ) |
Cash Flows from Financing Activities | | | | |
Net change in bank deposits | | 20,528 |
| | 3,435 |
|
Net change in short-term borrowings | | (15,000 | ) | | 600 |
|
Issuance of long-term debt | | — |
| | 643 |
|
Repayment of long-term debt | | (627 | ) | | (2 | ) |
Dividends paid | | (184 | ) | | (158 | ) |
Proceeds from stock options exercised and other | | 49 |
| | 58 |
|
Other financing activities | | (10 | ) | | (8 | ) |
Net cash provided by (used for) financing activities | | 4,756 |
| | 4,568 |
|
Increase (Decrease) in Cash and Cash Equivalents, including Amounts Restricted | | (1,535 | ) | | (2,596 | ) |
Cash and Cash Equivalents, including Amounts Restricted at Beginning of Period | | 19,160 |
| | 17,873 |
|
Cash and Cash Equivalents, including Amounts Restricted at End of Period | | $ | 17,625 |
| | $ | 15,277 |
|
(1)Adjusted for the retrospective adoption of ASU 2016-18. See Note 2.
Continued on following page
THE CHARLES SCHWAB CORPORATION
Condensed Consolidated Statements of Cash Flows
(in Millions)
(Unaudited)
Continued from previous page
|
| | | | | | | | |
| | Three Months Ended
March 31, |
| | 2018 | | 2017 (1) |
Supplemental Cash Flow Information | | | | |
Cash paid during the period for: | | | | |
Interest | | $ | 169 |
| | $ | 75 |
|
Income taxes | | $ | 3 |
| | |