Letter from the CFO

"Our team did an extraordinary job in navigating an intensely challenging environment to serve our clients AND drive strategic progress while delivering solid profitability in 2020."

Peter Crawford 
Chief Financial Officer

Pushing Through

Pushing Through

Anyone who knows me will tell you that I’m rarely at a loss for words. I must admit, however, to struggling a bit with the best way to frame a discussion of 2020. How do you wrap your arms around a year like the one we’ve just come through and tell a crisp, focused narrative? On the one hand, I could simply say that Schwab’s 2020 operating and financial results, which include TD Ameritrade from October 6 forward, demonstrate our ongoing success with clients and the benefits of our diversified revenue model in the face of environmental headwinds. While absolutely true, that statement lacks any sense of the amazingly complex interplay of environmental, industry, and company-specific elements that contributed to our 2020 story. We all realize the full importance and impact of last year’s events will only be understood with the passage of time. But even so, I’ll do my best to connect the dots and weave together a narrative of our 2020 financial performance, including the impact of the year’s unusual developments.

How best to describe 2020? Walt used the word “amazing” in his letter—and that certainly is appropriate. Other possibilities would be “challenging,” “historic,” or “unpredictable.” Perhaps the word I would use is “extraordinary”—that feels like the right way to describe the environment we faced. The emergence of a global pandemic and ensuing economic lockdowns, along with social tensions and election-year politics, added unprecedented levels of uncertainty, volatility, and complexity for our clients, for our employees, and for the company. Whatever the environment, we are fortunate to have Schwab’s “Through Clients’ Eyes” strategy to help guide our actions. When the world started turning upside down in March, we didn’t panic, we just focused on helping our clients.

Before I get into the specifics of our recent performance, I should make a very important point. We have long recognized that the successful execution of our strategy means not only being there for our clients in the moment, but also ensuring we continue building an ever stronger and more capable firm— one that’s there for them over the long term. We can’t pause this progress when things get tough, because we’d risk falling behind in delivering the quality service our clients expect or making the necessary investments to build for the future. While extraordinary is an apt description of the environment we faced, it is an equally appropriate word to describe the efforts our team put forth in pushing through obstacles to serve our clients while still driving the business forward. Despite the macroeconomic picture, despite the difficulties in working from home, despite the challenges of supporting record volumes—despite all of that, we still made significant progress pressing forward on our strategic agenda. As Walt noted, we were quite active on the M&A front, including completing the TD Ameritrade acquisition— the largest retail brokerage transaction in history—and three other transactions that further enhance our scale and enable us to deliver new capabilities to clients. We also introduced new offerings intended to help investors achieve their financial goals, such as Schwab Stock Slices™, our fractional share trading platform, which provides access to leading companies listed on the S&P 500® for as little as $5. These are select examples of the work going on across the firm to deliver our “no trade-offs” approach to meeting the needs of investors. I view our ability to balance driving strategic progress with serving clients and generating appropriate near-term profitability as a key strength of this company. While we cannot predict what the future holds, we know that consistent growth is only made possible by managing for the long term and serving our clients with clarity and focus— regardless of the circumstances.

Now let’s turn to our results amidst last year’s tumult before closing with some thoughts about the year ahead.


2020 Results

2020 Results

We begin every year dealing with some level of uncertainty, and we tend to use a “scenario” approach to allow for that uncertainly when discussing the company’s financial outlook and performance. The unique nature of events in 2020, however, necessitated a couple of resets on this front during the year. In early February, we outlined an initial set of scenarios that showed an opportunity for low-single-digit revenue growth, 6%–7% GAAP expense growth, and a pre-tax profit margin of at least 41% under certain assumptions. While this view incorporated around six months of financial contribution from the USAA acquisition, it did not factor in the others—particularly TD Ameritrade, given the uncertainty surrounding transaction close timing. The key drivers behind that February outlook included 6.5% equity market appreciation, a static Fed Funds target of 1.50%–1.75%, an average 10-year U.S. Treasury yield of 1.93%, an 11% lift in trading activity, and a balance sheet that would finish anywhere from approximately flat to up 12% for the year.

We did not even make it through the first quarter of the year before that initial view was rendered obsolete, as the escalation of the COVID-19 pandemic impacted key drivers across our business model. Given the tectonic shift in the environment, we introduced an updated perspective on a potential range of outcomes at our Business Update in April. We stepped down our assumption for full-year equity market returns, and our estimates for both short- and long-term rates moved down sharply, reflecting the Federal Reserve’s swift pivot to a very accommodative monetary policy. We also recalibrated our expectations for trading activity and the trajectory of balance sheet growth in an attempt to better align with observed client behavior following the onset of the global crisis.

In addition to the shifting macroeconomic picture, the closing of our four acquisitions also played a role in shaping our financial picture for 2020. Beginning with our second-quarter results and following the closing of the USAA transaction, we introduced certain non-GAAP metrics. These adjusted measures of expenses, pre-tax profit margin, net income, and diluted earnings per share, as well as return on tangible common equity, are intended to help investors evaluate Schwab’s underlying operating performance by excluding certain transaction-related expenses (e.g., acquisition, integration, and amortization of acquired intangible assets).1 The magnitude of these adjustments increased over the year as we closed the other transactions, culminating in the fourth quarter with TD Ameritrade. In the subsequent Business Update held at the end of October, we provided our updated view of potential full-year outcomes that included the impact of all four acquisitions. We expected top-line revenue growth to land within a 7.5%–8.0% range, while we anticipated adjusted total expense growth of 15.5%–16.5%.1 It is worth noting that incorporating these four acquisitions into our financial results contributed approximately 13% to full-year adjusted expense growth expectations.

Amidst these shifting sands, our business performed quite well, meeting or surpassing those updated expectations. Clients turned to us at record levels, entrusting us with $282 billion of core net new assets. This represented a combined organic growth rate equal to 7% and the third consecutive year in excess of $200 billion. Aided by contributions from our acquisitions—most notably TD Ameritrade—we delivered 9% year-over-year revenue growth. Net interest revenue declined 6% from its 2019 record level to $6.1 billion, as the strong build in interest-earning assets did not offset the impact of the return to a zero interest rate policy and accelerating mortgage prepayment speeds. Rebounding equity markets, along with growth in advisory solutions, helped push asset management and administration fees up 8% to $3.5 billion. Record trading levels at both Schwab and TD Ameritrade helped us book trading revenue of $1.4 billion for the year. Beginning with the fourth-quarter results, you probably noticed our newest revenue line: bank deposit account (BDA) fees. This item captures revenue derived from TD Ameritrade client cash held off balance sheet under an Insured Deposit Account (IDA) agreement with certain Toronto-Dominion affiliates and, to a lesser extent, arrangements with a handful of other banks. We renegotiated this pre-existing arrangement in conjunction with the acquisition, and I will discuss the role of BDA fees for 2021 in the next section.

Net revenues§

(In billions at year-end)

Pre-tax profit margin§

Return on equity§

ROTCE = Return on tangible common equity.
§ Full-year 2020 results include TD Ameritrade from October 6, 2020, forward; adjusted measures, including ROTCE, exclude acquisition and integration-related costs as well as the amortization of acquired intangible assets.1

While our expectations for expenses shifted during the year, 2020 spending was ultimately in line given our acquisition activities, along with the need to support our clients and employees under extraordinary circumstances. GAAP expenses increased 26% to $7.4 billion for the full year, which encompassed $442 million in acquisition and integration-related costs and $190 million in amortization of acquired intangibles. Our adjusted total expenses,1 which exclude those transaction-related items, were up 16% year-over-year largely due to the inclusion of TD Ameritrade’s operating expenses for nearly a full quarter. The challenges of the past 12 months notwithstanding, our flexibility as an organization enabled us to successfully harness efficiencies and leverage our scale in order to produce a still-solid 36.8% pre-tax profit margin, or 42.2% on an adjusted basis.2 Return on equity contracted approximately 10 percentage points to 9%, as reduced earnings power from ultra-low interest rates and the creation of sizeable intangible assets related to our acquisitions weighed on the calculation. Note that we’ve introduced return on tangible common equity1 as a supplemental measure to help assess Schwab’s capital efficiency and returns relative to the composition of our balance sheet. That number was 15% for the year.

From a capital management perspective, supporting the growth of our business remains our priority. Given the extraordinary expansion of our balance sheet in 2020, through both organic growth and acquisitions, there was limited capacity for opportunistic capital return actions (e.g., share repurchases), but we did continue our common dividend at the current $0.18 per-share rate. We ended the year with a consolidated Tier 1 Leverage Ratio of 6.3%, which reflects the issuance of an additional $2.5 billion of preferred equity in early December.

2021 Outlook

2021 Outlook

Turning our attention to 2021, we’re clearly facing a highly unsettled environment, but our success in 2020 positions us strongly for the coming year. We always have a number of uncontrollable and often unpredictable external dynamics which influence our financial performance. Those alone can make it challenging to develop and communicate a specific financial outlook, but there are two additional factors specific to this year that make the task even more difficult. First, the combination with TD Ameritrade has shifted our revenue model to be more sensitive to client engagement via trading, margin lending, and securities lending. I want to emphasize that we view this as a good development, as it helps bolster revenue diversification. Secondly, the underlying drivers of these sources of revenue (daily average trades, margin balances, etc.) achieved record levels and I doubt anyone can say definitively what their path will look like from here. Given these challenges, we are adjusting our approach to expressing our potential financial outlook. Rather than describing two specific scenarios that frame a range of possible outcomes (as we typically do), we are instead sharing three “mathematical illustrations”—not forecasts or expectations but rather expressions of potential financial performance based on the evolution of client activity relative to the fourth quarter of 2020. Core assumptions underpinning the calculations include: 6.5% equity market appreciation from December 31, 2020, levels; no increase in the Fed Funds target; a gradual increase in long-term rates consistent with market expectations; and the continuation of elevated prepayment speeds for mortgage-backed securities for most of the year. Additionally, all illustrations assume the same pace of potential BDA migrations. As a reminder, under the renegotiated IDA with Toronto-Dominion Bank, our option to begin moving eligible balances to our balance sheet, and earn improved economics, begins on June 30, 2021.

We relieved some of the pressure of working from home by delivering thousands of high-end workstations to employees and helping offset the cost of broadband.

2021 Outlook con't

On top of these underlying assumptions, we flex daily average trades (DATs), along with end-of-period margin balances and Schwab balance sheet cash. The comparison base for these client-related metrics is 4Q20, and so, the year-over-year illustrations take the following form:

  1. Further step-up in engagement: Revenue of 5%–7%
    • DATs up 20%
    • Margin balances up 10%
    • Schwab balance sheet cash up 10%

  2. Continuation of recent run rate: Revenue of (1%)–1%
    • DATs remain flat
    • Margin balances remain flat
    • Schwab balance sheet cash stays flat

  3. Pullback in activity levels: Revenue of (8%)–(6%)
    • DATs drop 20%
    • Margin balances decline 10%
    • Schwab balance sheet cash contracts 10%

The point of these illustrations is to help you develop your own expectations for our revenue growth based on your beliefs regarding these drivers. To aid with this exercise, we’ve also provided estimated revenue sensitivities for certain financial drivers within our 2021 Winter Business Update materials. From an expense perspective, we will be managing several key priorities throughout the year, including our ongoing integration of TD Ameritrade, a full year of operating expense from our acquisitions, and investments in client service capacity. I should spend an extra minute here. Walt talked about the strong business momentum we enjoyed in 2020, as reflected in huge year-over-year increases in new accounts, net new assets, and new-to-firm households. We also have experienced a large increase in client engagement, as reflected in much higher trading levels, phone calls, and web logins—a trend that has continued into early 2021. All of this activity, while constructive for the company longer term, has stressed our people and our systems. The demands increased so rapidly that we have not been able to ramp as quickly as needed to serve our clients at the same high level that they—and we—expect. So we need to make the investments necessary to bring our service capacity fully up to the growth we’ve already achieved, and ensure we meet our clients’ needs as we go deeper into 2021.

We estimate that transaction-related expenses, including integration spend and amortization of acquired intangible assets, will total just north of $1 billion in 2021—we exclude those costs for purposes of calculating our adjusted total expenses.1 In addition, we remain on track to achieve between one-fourth and one-third of our $1.8 to $2.0 billion target TD Ameritrade run-rate cost synergies by the October 2021 deal close anniversary. Pulling all this together, we believe 2021 GAAP expense growth could range between (5%)–(3%) or 1%–4% on an adjusted basis,1 versus annualized 4Q20 results, largely depending on how client activity unfolds. With investments in expanded service capacity and corporate true-ups— such as bonus funding and business seasonality—contributing up to 3% of growth, fundamental operating growth remains consistent with our mid-single-digit longer-term expense trajectory.

Finally, I don’t expect us to change our approach to capital management for the foreseeable future—supporting ongoing business growth will likely stay our top priority. While our current Tier 1 leverage ratio is well above regulatory minimums, our long-term operating objective of 6.75%–7.00% remains in place, and we’ll continue to forge a path to those levels in coming quarters.



OK, I’ll use the word one more time—I believe our team did an extraordinary job in navigating an intensely challenging environment to serve our clients AND drive strategic progress while delivering solid profitability in 2020. Hopefully you now have a richer sense of the significance of that simple summing up I offered at the beginning of this letter.

We have so much to do in 2021 as we continue to pursue the enormous growth opportunities still ahead—progress on the TD Ameritrade integration; sustaining our key strategic initiatives of scale and efficiency, win-win monetization, and segmentation; and building a firm capable of supporting activity levels that are multiples beyond anything conceivable just a year ago. Yet I look ahead with a confidence that is enhanced, not diminished, by our experience in the crucible of 2020: We know what we need to do; we have the resources to do it; and, most importantly, we have a team that was tested this past year and proved capable of pushing through whatever obstacles the environment throws at us.

We remain grateful for your ongoing support as we tackle these challenges, and I’m excited to share our ongoing journey with you.

Crawford signature


Peter Crawford
March 4, 2021



1 Further details on non-GAAP financial measures are included within our 10-K filed in February 2021.

2 Adjusted pre-tax profit margin is calculated as adjusted income before taxes on income divided by net revenues. Adjusted net income before taxes on income equals net revenues of $11.7 billion less total adjusted expenses of $6.8 billion, or $4.9 billion. Dividing this adjusted net income before taxes on income of $4.9 billion by net revenues of $11.7 billion equals an adjusted pre-tax profit margin of 42.2%. Further details on non-GAAP financial measures are included within our 10-K filed in February 2021.