Charles Schwab(SCHW) - 2023 Q4 - Annual Report

Products and Services - Schwab offers a broad range of products and services, including brokerage, mutual funds, ETFs, advice solutions, alternative investments, banking, and trust services[18] - Schwab Private Client Services™ is available for clients with $1 million – $10 million, and Schwab Private Wealth Services™ for clients with $10 million or more in total assets[21] - Schwab Wealth Advisory™ features a personal advice relationship with a dedicated Wealth Advisor, with minimum investments starting as low as $5,000[22] - Schwab introduced Schwab Trading Powered by Ameritrade™ in 2023, combining the best of Schwab and Ameritrade's trading platforms[22] - Schwab Equity Ratings provides ratings on approximately 3,000 stocks, and Schwab Equity Ratings International covers approximately 4,000 foreign companies[24] - Schwab Stock Slices™ enables investors to purchase a single stock slice or up to 30 different stock slices from the S&P 500 commission-free[24] - Retirement Plan Services offers a bundled 401(k) retirement plan product with extensive investment options and automatic enrollment features[26] - Advisor Services provides custodial, trading, banking, and support services to RIAs, with no custody fee charged to the RIA or end client[31] - The thinkpipes trading platform and iRebal® portfolio rebalancing solution were launched as part of the integration of TD Ameritrade[32] Revenue Sources - Schwab's primary sources of net revenues include net interest revenue, asset management and administration fees, trading revenue, and bank deposit account fees[33] - Net interest revenue is derived from the difference between interest earned on interest-earning assets and interest paid on funding sources, primarily from uninvested client cash balances[33] - Asset management and administration fees are earned from proprietary money market mutual funds, mutual funds, ETFs, and fee-based advisory solutions[34] - Trading revenue includes commissions from executing trades in equities, options, futures, fixed income securities, and third-party mutual funds and ETFs[34] - Bank deposit account fees are recognized under the IDA agreement with TD Depository Institutions, where uninvested cash is swept off-balance sheet[34] - Trading revenue is primarily generated through commissions and order flow revenue, with commissions earned and collected upon trade execution and settlement, and order flow revenue recognized and collected monthly or quarterly[393] - Bank deposit account fees are earned from sweep programs, where uninvested client cash is swept to FDIC-insured accounts, with revenues based on floating and fixed yields, less interest paid to clients, and collected monthly[394] - Other revenue includes exchange processing fees, which are the most significant portion, earned and collected upon trade execution, and recognized gross of amounts remitted to third-parties[395] Regulatory and Compliance - The service fee on client cash deposits held at the TD Depository Institutions remains at 15 basis points under the 2023 IDA agreement[16] - CSC is subject to the Liquidity Coverage Ratio (LCR) rule, requiring it to maintain High Quality Liquid Assets (HQLA) to cover 100% of total stressed net cash outflows[45] - CSC is required to maintain an Available Stable Funding (ASF) ratio equal to 100% of its Required Stable Funding (RSF) under the Net Stable Funding Ratio (NSFR) rule[46] - CSC's stress capital buffer is set at 2.5% following the Federal Reserve's 2022 and 2023 CCAR results[50] - CSB submitted a resolution plan to the FDIC in November 2022, demonstrating how the bank could be resolved in an orderly manner in the event of receivership[54] - The FDIC increased the initial base deposit insurance assessment rates by two basis points, effective for the first quarterly assessment period of 2023, aiming to raise the DIF reserve ratio to the minimum threshold within the FDIC's restoration plan[56] - The FDIC's amended brokered deposits rule, effective April 1, 2021, introduced a "25 percent" business relationship designated exception for broker-dealers to qualify for the primary purpose exception[57] - Schwab's depository institution subsidiaries are subject to the Community Reinvestment Act (CRA), with institutions rated as "outstanding," "satisfactory," "needs to improve," or "substantial noncompliance," impacting activities like acquisitions and branch openings[58] - Schwab's principal broker-dealer subsidiaries, including CS&Co and TDAC, are registered with the SEC and subject to FINRA and MSRB regulations, with net capital requirements under the Uniform Net Capital Rule[60][61][63] - Schwab's broker-dealer subsidiaries are subject to cash deposit and collateral requirements with clearing houses, which fluctuate based on client trading activity and market volatility[64] Financial Performance - Net revenues for 2023 decreased to $18.837 billion from $20.762 billion in 2022, a decline of 9.3%[370] - Net income available to common stockholders dropped to $4.649 billion in 2023 from $6.635 billion in 2022, a decrease of 29.9%[370] - Total assets decreased to $493.178 billion in 2023 from $551.772 billion in 2022, a reduction of 10.6%[375] - Bank deposits declined to $289.953 billion in 2023 from $366.724 billion in 2022, a decrease of 20.9%[375] - Compensation and benefits expenses increased to $6.315 billion in 2023 from $5.936 billion in 2022, a rise of 6.4%[370] - Regulatory fees and assessments surged to $547 million in 2023 from $262 million in 2022, an increase of 108.8%[370] - Comprehensive income for 2023 was $9.557 billion, compared to $7.183 billion in 2022, an increase of 33.1%[373] - Available for sale securities decreased to $107.646 billion in 2023 from $147.871 billion in 2022, a decline of 27.2%[375] - Long-term debt increased to $26.128 billion in 2023 from $20.828 billion in 2022, a rise of 25.4%[375] - Total expenses excluding interest rose to $12.459 billion in 2023 from $11.374 billion in 2022, an increase of 9.5%[370] - Net income for 2021 was $5.855 billion, increasing to $7.183 billion in 2022, and then slightly decreasing to $5.067 billion in 2023[377] - Total stockholders' equity increased from $56.060 billion in 2020 to $56.261 billion in 2021, then decreased to $36.608 billion in 2022, and further increased to $40.958 billion in 2023[377] - Dividends declared on common stock increased from $1.367 billion in 2021 ($0.72 per share) to $1.592 billion in 2022 ($0.84 per share), and further to $1.838 billion in 2023 ($1.00 per share)[377] - Repurchase of common stock amounted to $2.435 billion in 2022 and increased to $2.866 billion in 2023[377] - Accumulated other comprehensive income (loss) showed significant fluctuations, with a loss of $6.503 billion in 2021, a larger loss of $21.512 billion in 2022, and a partial recovery with a loss of $18.131 billion in 2023[377] - Preferred stock issuance and redemption activities were notable, with net issuance of $2.806 billion in 2021, $740 million in 2022, and redemptions totaling $600 million in 2021, $1.000 billion in 2022, and $471 million in 2023[377] - Share-based compensation increased from $229 million in 2021 to $348 million in 2022, and then slightly decreased to $294 million in 2023[377] - Retained earnings grew from $21.975 billion in 2020 to $25.992 billion in 2021, $31.066 billion in 2022, and $33.901 billion in 2023[377] - Treasury stock at cost increased from $5.578 billion in 2020 to $5.338 billion in 2021, $8.639 billion in 2022, and $11.354 billion in 2023[377] - Nonvoting common stock decreased from 79 million shares in 2020 to 51 million shares in 2023, reflecting conversions and repurchases[377] - Net income for 2023 was $5,067 million, a decrease from $7,183 million in 2022[379] - Net cash provided by operating activities in 2023 was $19,587 million, compared to $2,057 million in 2022[379] - Net cash provided by investing activities in 2023 was $57,411 million, compared to $32,048 million in 2022[379] - Net cash used for financing activities in 2023 was $61,245 million, compared to $68,723 million in 2022[379] - Cash and cash equivalents, including amounts restricted, at the end of 2023 were $74,473 million, up from $58,720 million in 2022[379] - Interest paid during 2023 was $5,623 million, compared to $1,355 million in 2022[381] - Income taxes paid during 2023 were $1,620 million, compared to $2,130 million in 2022[381] - Securities transferred from available for sale to held to maturity in 2022 were valued at $188,555 million[381] - Total cash and cash equivalents, including amounts restricted, were $74,473 million at the end of 2023[381] Investment Securities - Available for sale securities (AFS) total fair value was $107.646 billion as of December 31, 2023, with U.S. agency mortgage-backed securities accounting for $62.795 billion[460] - Held to maturity securities (HTM) total fair value was $147.091 billion as of December 31, 2023, primarily consisting of U.S. agency mortgage-backed securities[460] - The company transferred $188.6 billion of U.S. agency mortgage-backed securities from AFS to HTM in 2022, with a net pre-tax unrealized loss of $18.2 billion at the time of transfer[460] - As of December 31, 2023, the total remaining unamortized loss on securities transferred to HTM was $11.5 billion net of tax effect[460] - Banking subsidiaries pledged $70.1 billion in investment securities as collateral to secure borrowing capacity with the FHLB as of December 31, 2023[461] - Securities pledged as collateral for the Federal Reserve discount window totaled $6.2 billion, and $39.2 billion was pledged for the Bank Term Funding Program as of December 31, 2023[461] - HTM securities pledged under repurchase agreements had an aggregate amortized cost of $3.7 billion, while AFS securities pledged had an aggregate fair value of $1.5 billion as of December 31, 2023[462] - AFS securities consisting of U.S. Treasury securities with an aggregate fair value of $195 million were pledged as initial margin on interest rate swaps as of December 31, 2023[463] - Substantially all rated securities in the investment portfolios were investment grade as of December 31, 2023, with U.S. agency mortgage-backed securities considered of the highest credit quality[465] - No credit loss expense was recognized, and no securities were written down to fair value through earnings for the years ended December 31, 2023 and 2022[466] - The Company had $565 million and $685 million of accrued interest receivable for AFS and HTM securities as of December 31, 2023 and 2022, respectively[467] - The estimated effective duration of the total AFS and HTM investment securities portfolio is approximately 4.0 years as of December 31, 2023[468] - The total fair value of AFS investment securities is $107,646 million, with U.S. agency mortgage-backed securities accounting for $62,795 million[469] - The total amortized cost of AFS investment securities is $116,355 million, with a weighted-average yield of 2.18%[469] - The total fair value of HTM investment securities is $147,091 million, with U.S. agency mortgage-backed securities accounting for $147,091 million[469] - The total amortized cost of HTM investment securities is $159,452 million, with a weighted-average yield of 1.75%[469] - Proceeds from sales of AFS investment securities were $8,465 million in 2023, compared to $24,704 million in 2022[472] - Gross realized losses from sales of AFS investment securities were $62 million in 2023, compared to $166 million in 2022[472] Loans and Credit Quality - Total bank loans as of December 31, 2023, were $40,414 million, with residential real estate loans accounting for $26,584 million[473] - The allowance for credit losses on total bank loans was $38 million as of December 31, 2023[473] - The allowance for credit losses on bank loans decreased from $73 million at the end of 2022 to $38 million at the end of 2023, with a significant reduction in provision for credit losses from $58 million in 2022 to $(35) million in 2023[476] - Total nonperforming assets decreased from $25 million in 2022 to $15 million in 2023, with nonaccrual loans dropping from $23 million to $15 million[479] - The company projects lower loss rates for 2023 compared to 2022, driven by improved credit quality metrics and stable home prices despite higher mortgage rates[477] - No allowance for credit losses was required for Pledged Asset Lines (PALs) as they were fully collateralized by securities with fair values exceeding borrowings as of December 31, 2023 and 2022[476] - The company monitors credit quality of First Mortgages and HELOCs using factors such as origination year, FICO scores, and loan-to-value ratios, with FICO scores updated quarterly and LTV ratios updated monthly[482] - Total First Mortgages amortized cost basis for FICO ≥740 is $23,122 million, representing 88.4% of total first mortgages[483] - Total HELOCs amortized cost basis is $479 million, with $390 million (81.4%) from FICO ≥740 borrowers[483] - Origination LTV ≤70% accounts for $21,076 million (80.6%) of total first mortgages amortized cost basis[483] - Updated FICO ≥740 represents $23,483 million (89.8%) of total first mortgages amortized cost basis[483] - Estimated current LTV ≤70% is $23,790 million (90.9%) of total first mortgages amortized cost basis[483] - Percent of loans on nonaccrual status is 0.03% for total first mortgages and 0.84% for total HELOCs[483] - Gross charge-offs for both first mortgages and HELOCs are $0 million[483] - Revolving HELOCs amortized cost basis is $311 million, with $261 million (83.9%) from FICO ≥740 borrowers[483] - HELOCs converted to term loans have an amortized cost basis of $168 million, with $129 million (76.8%) from FICO ≥740 borrowers[483] - Origination FICO 680-739 accounts for $2,930 million (11.2%) of total first mortgages amortized cost basis[483] - Total First Mortgages amortized cost basis for 2022 is $25.198 billion, with $22.263 billion from FICO scores ≥740[485] - HELOCs amortized cost basis is $597 million, with $489 million from FICO scores ≥740[485] - 27% of the $21.5 billion adjustable-rate First Mortgage loans have interest-only payment terms, with 86% of these loans not scheduled to reset for three or more years[485] - Schwab had $157 million of accrued interest on bank loans at December 31, 2023, up from $134 million in 2022[486] - $379 million of the HELOC portfolio is secured by second liens, with 60% of borrowers paying only the minimum amount due[489] Fixed Assets and Intangible Assets - Equipment, office facilities, and property are depreciated over estimated useful lives: equipment and furniture (3-10 years), buildings (40 years), building and land improvements (20 years), software (3-10 years), and leasehold improvements (lesser of useful life or lease term)[422] - Goodwill is tested for impairment annually or when indications of impairment exist, with impairment charges recorded if the carrying amount exceeds the estimated fair value[423] - Finite-lived intangible assets are amortized over their useful lives, with impairment reviews conducted when events indicate potential unrecoverable carrying amounts[425] - The Company uses the proportional amortization method for Low-Income Housing Tax Credit (LIHTC) investments, amortizing costs over the period of expected tax credits[426] - Leases are classified as operating or finance leases, with right-of-use (ROU) assets and lease liabilities recognized based on the present value of lease payments[427] - The Company uses its incremental borrowing rate to determine the present value of lease payments when implicit rates are not readily determinable[428] - Share-based compensation is measured at fair value on the grant date and amortized over the requisite service period, with adjustments for estimated forfeitures[433] - Derivative instruments are recorded at fair value, with hedge accounting applied to match the timing of gain or loss recognition with the hedged risk[434] - Assets and liabilities measured at fair value on a recurring basis include cash equivalents, AFS securities, interest rate swaps, and certain accrued expenses, with fair value determined using market approaches and quoted prices in active markets[443] - The primary independent pricing service provides prices for fixed income investments based on observable trades, broker/dealer quotes, and discounted cash flows, with prices compared across multiple independent