Schwab Reports Second Quarter Earnings Per Share of $.48, Including $.06 Per Share of Acquisition-related Expenses

Core Net New Assets Rise 25% Year-Over-Year to $46.6 Billion

Client Assets Reach a Record $4.11 Trillion, up 11%

SAN FRANCISCO--(BUSINESS WIRE)--The Charles Schwab Corporation announced today that its net income for the second quarter of 2020 was $671 million compared with $795 million for the first quarter of 2020, and $937 million for the second quarter of 2019. Net income for the six months ended June 30, 2020 was $1.5 billion, compared with $1.9 billion for the year-earlier period. The company’s financial results for both the second quarter and first half of 2020 include certain acquisition and integration-related costs as well as the amortization of acquired intangibles, which together totaled $93 million and $136 million, respectively, on a pre-tax basis.

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Beginning with this quarter’s earnings release, the company’s financial presentations will include references to adjusted measures of expenses, net income, diluted earnings per common share, pre-tax profit margin, as well as return on tangible common equity (ROTCE), which are intended to help investors evaluate Schwab’s operating performance as well as facilitate a meaningful comparison of our current results to both historic and future periods.

CEO Walt Bettinger said, “Throughout the second quarter, the COVID-19 pandemic and its effects continued to dominate the macroeconomic environment, presenting myriad challenges for our clients and Schwab alike. We grappled with the ongoing health crisis, a contracting U.S. economy, and sustained pressures on interest rates, yet there were some encouraging signs as the quarter progressed, including domestic equity markets recovering to pre-pandemic levels. Whatever path the crisis takes from here, our focus on clients has been and will remain unwavering, even as almost 95% of our employees continue to work remotely. Our compelling ‘no trade-offs’ approach to combining value, service, transparency, and trust helped sustain strong business momentum during the second quarter. We gathered $137.4 billion in net new assets, with core net new assets totaling $46.6 billion before including the effects of the USAA acquisition and a large mutual fund clearing inflow. Aided by ongoing engagement across both of our primary businesses, as well as an extended tax-filing season, our year-to-date core net new assets reached $119.8 billion, representing a 6% annualized organic growth rate for the first half. Our staff and systems continued to accommodate heavy volumes during the second quarter as investors utilized our contemporary full-service model – we handled over 230 million more client interactions across web, mobile, chat, and messaging versus a year ago. We also supported strong daily trading activity, which averaged 1.6 million for the second quarter, up 126% year-over-year. While volatility subsided from March’s peak levels, access to our investment professionals remained very much in demand, with Schwab Intelligent Portfolios Premium^® planning appointments increasing 30% from a year earlier. Total active brokerage accounts ended June at 14.1 million, up 18% year-over-year, which includes the addition of 1.1 million USAA member accounts to our platform when that transaction closed. Renewed strength in equity market valuations, along with our ongoing asset-gathering and approximately $80 billion in client assets transferred from USAA, helped push total client assets to a record $4.11 trillion at June 30^th, up 11% year-over-year.”

Mr. Bettinger added, “Providing investors with innovative solutions to help them build their financial futures remains at the forefront of our ‘Through Clients’ Eyes’ strategy across all environments. As part of this ongoing effort, we introduced Schwab Stock Slices^TM, a simple and engaging way to buy fractional shares of any S&P 500^® stock in amounts as small as $5 and with no transaction fee. Shortly thereafter, we announced the acquisition of the technology and intellectual property of Motif to help us unlock the flexibility of personalized thematic investing, build upon our real-time fractional share trading abilities, and continue our work towards developing a comprehensive direct indexing solution that will complement Schwab’s diverse suite of advice offerings. Our unique blend of people and technology across those offerings has helped build overall client balances receiving ongoing advisory services by 8% year-over-year to $2.09 trillion. Within that total, client utilization of our digital advisory solutions remained strong, with balances up 12% versus a year ago to $45.9 billion at June 30^th. In our Advisor Services business, we launched integrations with leading Health Savings Account providers, enabling advisors to manage their clients’ investments via a Schwab brokerage window. We also introduced a number of enhanced workflows as part of Schwab Advisor Center^® aimed at improving processing times. Such improvements allow advisors to set up account features digitally, including Schwab MoneyLink^® and Limited Power of Attorney, making it easier to complete tasks securely, quickly, and with fewer errors.”

Mr. Bettinger concluded, “Recent weeks have included a string of M&A milestones for our firm, each representing another step on our path of building a more capable Schwab. In addition to closing the USAA and Motif transactions, we also brought Wasmer Schroeder in-house, adding a leading investment manager of fixed income separate accounts to Schwab’s advisory line-up. Moreover, we made significant progress on our pending acquisition of TD Ameritrade, with the completion of the Department of Justice antitrust review and affirmative votes by both Schwab and TD Ameritrade stockholders. Our teams are working diligently on integration planning efforts and we remain on track for closing during the second half of this year. Pulling off four acquisitions in close succession, concurrent with sustained progress on our other initiatives to build scale and efficiency, further diversify our revenues, and enhance our product and service capabilities across client segments, would be challenging enough under the most favorable conditions. Doing all of this in the face of today’s headwinds is especially rewarding because we know pushing ahead is the right thing to do – the company will emerge stronger and even better positioned to serve the needs of individual investors and independent advisors. We have the talent, experience, and leadership needed across the firm to stay on offense, and I’m excited to be working with this team in writing the next chapter of Schwab’s story.”

CFO Peter Crawford commented, “Our results thus far in 2020 reflect the company’s ability to convert ongoing success with clients into solid financial performance even as strong environmental headwinds weigh on revenues. As the impact of the Fed’s dramatic monetary easing during March extended across the yield curve, the further compression in asset returns outweighed growth in client cash sweep balances from both ongoing asset gathering and the USAA acquisition, driving a 14% year-over-year decline in net interest revenue to $1.4 billion. We were able to limit that decline somewhat by working throughout the quarter to move over $30 billion out of excess reserves at the Fed and investing those balances at higher yields within our bank securities portfolio. We ended the quarter with excess reserves at the Fed of $27.5 billion at month-end June, or 9% of total deposits, versus a longer-term objective of approximately 5%-7%. Asset management and administration fees increased 2% year-over-year to $801 million as a result of clients’ increased utilization of money market funds and higher balances in advisory solutions, including managed account assets transferred from USAA. These increases more than offset the effect of money market fund fee waivers due to declining portfolio yields, lower Mutual Fund OneSource^® balances, and pressured equity market valuations at the beginning of the quarter. Trading volume remained elevated in the second quarter compared with a year ago – if not at the record shattering heights experienced in March 2020 – but the impact of our October 2019 pricing actions still led to a 7% year-over-year decline in trading revenue to $193 million. Overall, total revenues contracted 9% from a year earlier to $2.5 billion, while reported expenses rose 8% to $1.6 billion. Noteworthy contributors to our second quarter expense growth included $39 million in USAA acquisition and integration-related costs, $42 million in other acquisition costs, and $12 million in amortization of acquired intangibles. Exclusive of these items ⁽¹⁾, adjusted total expenses were $1.5 billion, up 2% year-over-year, largely consistent with the expectations we laid out during our Spring Business Update. Overall, we produced a 36.2% pre-tax profit margin (40.0% on an adjusted basis) and 10% return on equity (12% ROTCE). Though we are not immune to external headwinds, these results reinforce our confidence that disciplined management of the levers under our control will enable us to sustain a balance between near-term profitability and appropriate investment for ongoing growth.”

Mr. Crawford concluded, “During the second quarter, we remained intent on maintaining an all-weather balance sheet with healthy liquidity and capital levels. The sharp pandemic-driven increase in client sweep deposits during the first quarter was followed by more modest balance sheet expansion over the past three months, and after adding approximately $10 billion of USAA client cash to our deposits we ended June with total assets of $400 billion, up 8% from month-end March. We further solidified our capital mix during the quarter by issuing $2.5 billion of preferred stock at an initial fixed rate of 5.375%, bringing total preferred outstanding to $5.3 billion, or approximately 17% of stockholders’ equity. The company’s preliminary Tier 1 leverage ratio was 5.9% at quarter end, remaining well above regulatory minimums. So we continue to operate from a position of strength while our priorities for balance sheet management remain consistent and clear: ensure we have the capital and flexibility to support our ongoing growth, integrate our acquisitions, and continue investing in our clients regardless of how the operating environment unfolds.”

⁽¹⁾ Further details on non-GAAP financial measures and a reconciliation of such measures to reported results are included on pages 11-12 of this release.

Commentary from the CFO

Periodically, our Chief Financial Officer provides insight and commentary regarding Schwab’s financial picture at: https://www.aboutschwab.com/cfo-commentary. The most recent commentary, which provides perspective on The Charles Schwab Corporation’s recently completed acquisition of the assets of USAA’s Investment Management Company was posted on June 12, 2020.

Forward-Looking Statements

This press release contains forward-looking statements relating to progress on initiatives to build scale and efficiency, diversify revenues, and innovate and enhance product and service capabilities, including through acquisitions; the status and anticipated closing of the pending acquisition of TD Ameritrade; integration of acquisitions; company strength and positioning; converting success with clients into solid financial performance; objective for amount of deposits held in excess reserves at the Fed; sustaining balance between near-term profitability and investment for ongoing growth; balance sheet management; and liquidity and capital. Achievement of these expectations and objectives is subject to risks and uncertainties that could cause actual results to differ materially from the expressed expectations.

Important factors that may cause such differences include, but are not limited to, the company’s ability to develop and launch new and enhanced products, services, and capabilities, as well as enhance its infrastructure, in a timely and successful manner; client use of the company’s advisory solutions and other products and services; the risk that expected revenue, expense and other synergies and benefits from acquisitions may not be fully realized or may take longer to realize than expected; failure of the parties to satisfy the closing conditions in the agreement for the pending TD Ameritrade acquisition in a timely manner or at all, including regulatory approvals, and the implementation of integration plans; disruptions to the parties’ businesses as a result of the announcement and pendency of the TD Ameritrade acquisition; 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; general market conditions, including equity valuations, trading activity, the level of interest rates which can impact money market fund fee waivers, and credit spreads; the company’s ability to attract and retain clients and registered investment advisors and grow those relationships and client assets; competitive pressures on pricing, including deposit rates; client sensitivity to rates; level of client assets, including cash balances; client cash sorting; capital and liquidity needs and management; the company’s ability to manage expenses; timing and ability to invest amounts held in excess reserves at the Fed into higher yielding investments in the company’s bank securities portfolio; and other factors set forth in the company’s most recent reports on Form 10-K and Form 10-Q.

About Charles Schwab

The Charles Schwab Corporation (NYSE: SCHW) is a leading provider of financial services, with more than 360 offices and 14.1 million active brokerage accounts, 1.7 million corporate retirement plan participants, 1.5 million banking accounts, and $4.11 trillion in client assets as of June 30, 2020. Through its operating subsidiaries, the company provides a full range of wealth management, securities brokerage, banking, asset management, custody, and financial advisory services to individual investors and independent investment advisors. Its broker-dealer subsidiary, Charles Schwab & Co., Inc. (member SIPC, https://www.sipc.org), and affiliates offer a complete range of investment services and products including an extensive selection of mutual funds; financial planning and investment advice; retirement plan and equity compensation plan services; referrals to independent, fee-based investment advisors; and custodial, operational and trading support for independent, fee-based investment advisors through Schwab Advisor Services. Its banking subsidiary, Charles Schwab Bank (member FDIC and an Equal Housing Lender), provides banking and lending services and products. More information is available at https://www.schwab.com and https://www.aboutschwab.com.