Periodically, our Chief Financial Officer will use this forum to provide insight and commentary regarding Schwab's financial picture. For any questions, please contact Investor Relations via email or call:
Richard G. Fowler, Senior Vice President: (415) 667-1841
The commentary in this section speaks only as of the date specified below. The company makes no commitment to update any of this information.
December 22, 2017
Today, President Trump signed significant tax reform legislation into law and I wanted to spend a moment focusing on the potential impacts to Schwab’s effective tax rate. As you may know, we have historically paid close to the full statutory federal corporate income tax rate, so the benefits are likely to be meaningful – though the new law does include the disallowance of some Schwab-relevant deductions. I wanted to give you a brief overview of the key elements of the law that are likely to affect our tax rate:
Net Deferred Tax Asset Repricing: I’ll start with the most complex implication to explain. Certain income and expense items are sometimes recognized at different times on tax returns vs. financial statements. These items result in deferred tax assets (DTAs) and deferred tax liabilities (DTLs), based on the tax rate assumed to be in effect in the future recognition period. When a future period’s tax rate changes, we are required to revalue our DTAs and DTLs to reflect the new tax value associated with the future income and expense items. The one-time repricing of these DTAs and DTLs occurs in the period that the law is enacted (upon the President’s signature) and is posted in the tax expense line of the income statement. Our DTAs are currently greater than our DTLs and we estimate that Schwab will have a net DTA adjustment of approximately $40 million (i.e., a $40 million increase in GAAP tax expense), with the actual amount dependent upon the final valuation of tax-sensitive balance sheet items as of the date of enactment.
Corporate Tax Rate: Per the law, our statutory federal corporate income tax rate will be reduced from 35% to 21%, starting in 2018.
FDIC Deposit Insurance Assessment Deduction: Under the law, banks with over $50 billion in assets may no longer deduct FDIC insurance assessments, including both standard and surcharge assessments, starting in 2018. This will slightly offset the reduction in our statutory tax rate (though the impact of this lost deduction will decrease whenever the temporary FDIC surcharge ends, which we estimate to be either late 2018 or early 2019). We won’t know the exact amount until each quarter, when we actually compute and pay the assessments.
Other Deductions: Certain other deductions will also no longer be available (e.g., Executive Compensation Over $1 Million, Section 199); and the value of some other deductions will be reduced by the lower tax rate (e.g., State Taxes, Municipal Interest).
So, putting it all together, in 4Q 2017, we could see an increase in our tax expense (for GAAP purposes) of $40 million due to net deferred tax asset repricing. For 2018 and beyond, we estimate a net reduction in our tax rate of 11.5%-12.0% from this law. We will continue to evaluate the impacts of tax reform and provide updates as necessary.
This commentary contains forward-looking statements relating to the effect of the 2017 tax reform legislation on the company’s effective tax rate, including estimates of the company’s net deferred tax asset adjustment and related increase in tax expense and the net reduction in the company’s tax rate in 2018 and beyond, and the timing of when the temporary FDIC surcharge will end.
Important factors that may cause such differences include, but are not limited to, the final valuation of tax-sensitive balance sheet items as of the date of the law’s enactment, the impact of the loss of the deduction for FDIC insurance assessments and the value of other deductions that are no longer available or reduced.
Today we announced another reduction in our online equity, ETF, and option trade commission rates, following moves we announced just a few weeks ago on February 2nd. With this second action coming right on the heels of the first, I thought it might be useful to share some context regarding how they both fit within our financial planning for 2017.
Those of you who follow The Charles Schwab Corporation closely may receive our quarterly financial results through a wire service/email, a market data aggregator, or simply by checking our corporate website. This morning, we began making our results available via another widely-used platform: Twitter. You can find our page on www.Twitter.com with the handle @CharlesSchwab. Today’s activity includes a Tweet noting the availability of fourth quarter 2015 results with a link to our press release, and follow-ups sharing the headlines from this morning’s announcement.
Today we released our November Monthly Activity Report. While we produced another month of solid client metrics, we have no illusions about another press release stealing the show later this week. As you know, the Federal Reserve is widely anticipated to begin raising interest rates on December 16th. We have seen economic and employment reports meet expectations, FOMC minutes evolve, and member speeches show increasing conviction.
We issued our SMART report for the month of August today, and between the client metrics shown there and the trading data that we’ve already posted it’s clear we’ve been busy. With the elevated market volatility late in the month, our clients made extensive use of our branches, phone-based service centers and online capabilities to help keep their investing on track. Many of them engaged with our financial consultants and subject matter experts to ask questions about how their assets enrolled in our advisory solutions are positioned, as well as assess their holdings and determine what, if any, action should be taken.
By now, you may have noticed that we recently made a few changes to our disclosures, and I’d like to make sure everyone is aware of these developments as well as provide context for how they help tell our story. As a large savings and loan holding company, our required reporting has expanded significantly in recent years. In addition, as Schwab evolves, we revisit our reporting and strive to keep it closely aligned with the everyday workings of the business. In the second quarter of 2015, we added a new Other Regulatory Disclosures tab to our corporate website, made changes to the Asset Management and Administration Fees (AMAF) table in our earnings release package, and included some new information in our 10-Q filing.
As we announced in our earnings release today, our Q4 ’14 financial results included two nonrecurring items related to the company’s non-agency residential mortgage-backed securities (RMBS) portfolio: net litigation proceeds of approximately $28 million and net losses of $8 million from selling securities totaling approximately $500 million. Taken together, these items increased pre-tax income by approximately $20 million, or $.01 per share. With the financial crisis well behind us, it’s been a while since we’ve needed to discuss these securities, so I wanted to walk through some history and share a perspective on these recent developments.
Concurrent with our Earnings Release today, we are inaugurating a new approach to reporting on our clients’ trading activity intra-quarter. We have retired the inclusion of trade reporting in our Monthly Market Activity Report (“SMART”) and are now providing a weekly look at trading activity, including revenue, asset-based and other trades, which is posted on the Investor Relations landing page on aboutschwab.com. Here’s a link to our initial report: http://www.aboutschwab.com/investor-relations.
As you look through today’s earnings release, you might notice that the size of our balance sheet (shown in the Financial and Operating Highlights table on page 5) hasn’t changed much since year-end 2013, continuing to hover around $144 billion. That’s unusual for us – for example, the company’s balance sheet grew by approximately $8 billion during the second half of 2013. Given the factors influencing this situation, I wanted to share some perspective on current client behavior and ramifications for our capital management going forward.
As I mentioned in my last post, here are a few more thoughts on the evolution of client behavior during the market recovery, which is now a full five years along: With the S&P 500 up over 170% from its lowest point in the first quarter of 2009 and setting new records, it’s not really surprising to see investors put cash back to work in the markets. There are, however, some interesting aspects to the way our clients have reallocated their holdings across products and asset classes during the recovery thus far.
The S&P 500 Index bottomed at 676.53 on March 9, 2009, so we are now a full five years into the market recovery. As the recovery has strengthened in recent months, we have been asked more often about individual investor engagement, with the questioner usually equating engagement with trading activity.
This is my inaugural CFO Commentary. I expect to use this site regularly to provide perspectives on Schwab's financial picture, including color on our performance and details on topical issues. Over time, I can see sharing more significant financial information that might be better discussed in a forum like this, versus press releases or other forms of communication.
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