Schwab Reports Quarterly Results

Strength of Business Model Reflected in EPS From Continuing Operations of $.26, Which Includes $.04 of Previously Disclosed Charges

Wednesday, October 15, 2008 5:45 am PDT

Dateline:

SAN FRANCISCO

Public Company Information:

NASDAQ:
SCHW

SAN FRANCISCO--(BUSINESS WIRE)--The Charles Schwab Corporation announced today that its income from continuing operations was $304 million for the third quarter of 2008, down 6% from the record third quarter of 2007. For the nine months ended September 30, 2008, the companys income from continuing operations was $922 million, up 13% from the year-earlier period.

Chairman Charles Schwab said, Investors are experiencing market conditions that are as difficult as I have seen in my career and that test anyone's resolve and confidence. Schwabs focus has remained right where it belongs helping our clients navigate through this storm. Our operating discipline and the contributions of thousands of dedicated employees over these months have helped us maintain that focus and perform exceedingly well. We remain dedicated to the principles of safety and soundness, as they form the heart of our strong client relationships.

  Three Months Ended     Nine Months Ended  

--September 30,--

%

--September 30,-- %
Financial Highlights   2008   2007   Change   2008   2007   Change
 

Results from continuing operations (1):

   
Net revenues (in millions) $ 1,251 $ 1,291 (3%) $ 3,866 $ 3,649 6%
Pre-tax profit margin 39.9 % 39.7 % 39.3 % 36.4 %
Income (in millions) $ 304 $ 323 (6%) $ 922 $ 815 13%
Diluted earnings per share $ .26 $ .27 (4%) $ .80 $ .66 21%
 
Discontinued operations, net of tax $ - $ 1,211 N/M $ (18 ) $ 1,284 N/M

Net income (in millions) (2)

$ 304 $ 1,534 N/M $ 904

$

2,099

N/M

Diluted earnings per share (2)

$ .26 $ 1.28 N/M $ .78

$

1.69

N/M

Return on stockholders' equity (2)

31 %

145

%

 

31 % 67 %
 

(1) 

Prior period amounts are presented on a continuing operations basis to exclude U.S. Trust, which was sold for $3.3 billion on July 1, 2007.

(2) 

Prior period amounts reflect a one-time after-tax gain of $1.2 billion on the sale of U.S. Trust.

CFO Joe Martinetto commented, Our continued success in building client relationships helped third quarter net interest and trading revenues rise by 3% and 16%, respectively, while limiting the decline in asset management and administration fees to just 2%. The diverse revenue mix inherent in our business model and our ongoing expense discipline helped us keep overall revenues within 3% of last years results while achieving a 39.9% pre-tax profit margin and a 31% return on equity.

Mr. Martinetto added, We achieved these results in the face of a 20%-plus decline in equity market valuations over the past year. We also faced revenue headwinds this quarter due to the recognition of $73 million in pre-tax charges relating to losses on two corporate debt securities that were affected by market turmoil. In addition, last years third quarter included the gain on the sale of U.S. Trust, as well as a one-time lift in interest revenue from investing the proceeds. Regardless of the year-over-year comparisons, our third quarter 2008 performance represented outstanding results in an extraordinary environment, and we retain a flexible, all-weather balance sheet with over $4 billion of stockholders equity, multiple sources of liquidity and strong credit ratings.

CEO Walt Bettinger said, For many clients, todays market environment presents unprecedented challenges, and Schwabs ability to help them manage their investments has never been more important. During the extremely volatile month of September, our clients made heavy use of all of our service channels - branch, phone and internet and their trading activity resulted in 5 of the 10 highest volume days in our history. Solid retail and advisor client activity helped drive total net new assets to $24 billion during the third quarter, even after modest net outflows in our corporate Mutual Fund Clearing Business due to planned transfers and investor redemptions. Total client assets ended September 2008 at $1.3 trillion, down 9% from last September. Active brokerage accounts and retirement plan participants at quarter-end were up 5% and 14%, respectively, over year-earlier levels, and we now serve 399,000 banking accounts. All of our businesses remain well positioned to serve their clients including individuals, independent advisors and company retirement plans during these tough times.

Business highlights for the third quarter (data as of quarter-end unless otherwise noted):

Schwab Investor Services Business (SIS)

  • Net new accounts for the quarter totaled 21,000, up 51% year-over-year. Total accounts reached 5.2 million as of September 30, 2008, up 4% year-over-year.
  • Launched an online community for Active Trader clients where they can discuss investing topics, exchange information, ideas and trading experiences, and gain access to Schwab and third party trading experts.

Schwab Institutional® Business (SI)

  • Expanded outreach to help advisors considering independence via a webcast, new marketing materials, and Discovery events designed to help them explore their options.
  • Launched the Transfer of Accounts Wizard on www.schwabinstitutional.com as part of a suite of online tools that helps advisors efficiently open, fund and monitor new accounts and transfers.

Schwab Corporate and Retirement Services Business (SCRS)

  • Retirement plans converted to Schwab administration during the quarter = 62, with approximately 29,300 participants, compared with 38 plans and approximately 16,800 participants in the third quarter of 2007.
  • Eight Schwab-administered retirement plans were recognized in the Profit Sharing/401(k) Council of America 2008 Signature Awards program. Schwab was recognized for communication to plan sponsors and participant education.

Products and Infrastructure

  • For Charles Schwab Bank:
               

-- 

Balance sheet assets = $23.7 billion, up 78% year-over-year.
-- Outstanding mortgage and home equity loans = $5.3 billion, up 77% year-over-year.
-- First mortgage originations during the quarter = $511 million.
  • Schwab Banks High Yield Investor CheckingTM ended the third quarter with 276,000 accounts and $3.8 billion in balances.

Supporting schedules are either attached or located at: http://www.aboutschwab.com/media/xls/q3_2008_schedule.xls

About Charles Schwab

The Charles Schwab Corporation (Nasdaq:SCHW) is a leading provider of financial services, with more than 300 offices and 7.3 million client brokerage accounts, 1.3 million corporate retirement plan participants, 399,000 banking accounts, and $1.3 trillion in client assets. Through its operating subsidiaries, the company provides a full range of securities brokerage, banking, money management and financial advisory services to individual investors and independent investment advisors. Its broker-dealer subsidiary, Charles Schwab & Co., Inc. (member SIPC, 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 its Schwab Institutional division. The Charles Schwab Bank (member FDIC) provides banking and mortgage services and products. More information is available at www.schwab.com.

THE CHARLES SCHWAB CORPORATION
Consolidated Statements of Income
(In millions, except per share amounts)
(Unaudited)
                 
 

Three Months
Ended
September 30,

 

Nine Months
Ended
September 30,

    2008   2007   2008   2007
   
Net Revenues
Asset management and administration fees $ 596 $ 610 $ 1,827 $ 1,730
 
Interest revenue 497 593 1,485 1,697
Interest expense   (50 )   (160 )   (192 )   (491 )
Net interest revenue 447 433 1,293 1,206
 
Trading revenue 252 218 728 618
Other     (44 )     30       18       95  
Total net revenues     1,251       1,291       3,866       3,649  
 
Expenses Excluding Interest
Compensation and benefits 390 447 1,265 1,326
Professional services 86 81 254 236
Occupancy and equipment 75 70 221 208
Advertising and market development 47 44 181 162
Communications 51 50 155 150
Depreciation and amortization 38 39 113 117
Other     65       48       156       123  
Total expenses excluding interest     752       779       2,345       2,322  
 
Income from continuing operations before taxes on income 499 512 1,521 1,327
Taxes on income     (195 )     (189 )     (599 )     (512 )
 
Income from continuing operations 304 323 922 815
(Loss) income from discontinued operations, net of tax     -       1,211       (18 )     1,284  
 
Net Income   $ 304     $ 1,534     $ 904     $ 2,099  
 
Weighted-Average Common Shares Outstanding Diluted     1,158       1,201       1,157       1,242  
 
Earnings Per Share Basic
Income from continuing operations $ .26 $ .27 $ .80 $ .66
(Loss) income from discontinued operations, net of tax $ - $ 1.02 $ (.01 ) $ 1.05
Net income $ .26 $ 1.29 $ .79 $ 1.71
 
Earnings Per Share Diluted
Income from continuing operations $ .26 $ .27 $ .80 $ .66
(Loss) income from discontinued operations, net of tax $ - $ 1.01 $ (.02 ) $ 1.03
Net income   $ .26     $ 1.28     $ .78     $ 1.69  
 
Dividends Declared Per Common Share   $ .06     $ 1.05     $ .16     $ 1.15  
 
 
See Notes to Consolidated Statements of Income and Financial and Operating Highlights.
 
THE CHARLES SCHWAB CORPORATION
Financial and Operating Highlights
(Unaudited)
             
    Q3-08 % change   2008 2007
(In millions, except per share amounts and as noted)  

vs.
Q3-07

 

vs.
Q2-08

 

Third
Quarter

 

Second
Quarter

 

First
Quarter

Fourth
Quarter

 

Third
Quarter

Net Revenues (1)  
Asset management and administration fees (2%) (4%) $ 596 $ 618 $ 613 $ 628 $ 610
Net interest revenue 3% 5% 447 427 419 441 433
Trading revenue 16% 10% 252 230 246 242 218
  Other (2) N/M N/M   (44 )     33       29     34       30  
Total net revenues (3%) (4%)   1,251       1,308       1,307     1,345       1,291  
Expenses Excluding Interest (1)
Compensation and benefits (13%) (11%) 390 438 437 455 447
Professional services 6% 2% 86 84 84 88 81
Occupancy and equipment 7% 4% 75 72 74 74 70
Advertising and market development 7% (19%) 47 58 76 68 44
Communications 2% (2%) 51 52 52 50 50
Depreciation and amortization (3%) 3% 38 37 38 39 39
  Other (3) 35% 23%   65       53       38     45       48  
Total expenses excluding interest (3%) (5%)   752       794       799     819       779  
Income from continuing operations before taxes on income (3%) (3%) 499 514 508 526 512
Taxes on income (1) 3% (3%)   (195 )     (201 )     (203 )   (221 )     (189 )
Income from continuing operations (6%) (3%) 304 313 305 305 323

(Loss) income from discontinued operations, net of tax (4,5)

N/M N/M   -       (18 )     -     3       1,211  
Net Income N/M 3% $ 304     $ 295     $ 305   $ 308     $ 1,534  
Diluted earnings per share from continuing operations (4%) (4%) $ .26 $ .27 $ .26 $ .26 $ .27
Basic earnings per share N/M - $ .26 $ .26 $ .27 $ .27 $ 1.29
Diluted earnings per share N/M - $ .26 $ .26 $ .26 $ .26 $ 1.28
Dividends declared per common share N/M 20% $ .06 $ .05 $ .05 $ .05 $ 1.05
Weighted-average common shares outstanding - diluted (4%) -   1,158       1,154       1,159     1,167       1,201  
 
Performance Measures
Pre-tax profit margin from continuing operations (1) 39.9 % 39.3 % 38.9 % 39.1 % 39.7 %
  Annualized return on stockholders equity   31 %     32 %     33 %   35 %     145 %
 
Financial Condition (at quarter end, in billions)
Cash and investments segregated (1) 47% 47% $ 13.8 $ 9.4 $ 11.1 $ 8.8 $ 9.4
Receivables from brokerage clients (5%) (18%) $ 10.6 $ 12.9 $ 11.5 $ 12.3 $ 11.2

Loans to banking clients (1)

77% 12% $ 5.5 $ 4.9 $ 4.0 $ 3.4 $ 3.1
Total assets 34% 9% $ 52.8 $ 48.4 $ 44.6 $ 42.3 $ 39.3

Deposits from banking clients (1)

76% 11% $ 22.0 $ 19.9 $ 15.6 $ 13.8 $ 12.5
Payables to brokerage clients 14% 10% $ 21.5 $ 19.5 $ 20.4 $ 20.3 $ 18.9

Long-term debt (1)

50% - $ .9 $ .9 $ .9 $ .9 $ .6
  Stockholders equity 21% 5% $ 4.1     $ 3.9     $ 3.6   $ 3.7     $ 3.4  
 

Other (1)

Full-time equivalent employees (at quarter end, in thousands) 5% 1% 13.5 13.4 13.4 13.3 12.9

Annualized net revenues per average full-time equivalent employee (in thousands)

(7%) (5%) $ 371 $ 390 $ 391 $ 409 $ 400
 

Capital expenditures - cash purchases of equipment, office facilities, and property, net (in millions)

38% 47% $ 47     $ 32     $ 48   $ 52     $ 34  
 
Clients Daily Average Trades (in thousands)
Revenue trades (6) 12% 11% 282.9 254.7 274.6 275.5 253.5

Schwab Investor Services (7)

17% 9% 24.0 22.0 23.3 21.5 20.5
Schwab Institutional ® (7) 39% 23% 26.4 21.5 27.9 22.3 19.0
  Schwab Corporate and Retirement Services (7) 15% 25%   1.5       1.2       1.4     1.3       1.3  
Total 14% 12%   334.8       299.4       327.2     320.6       294.3  
Average Revenue Per Revenue Trade (6) 8% 1% $ 14.59     $ 14.38     $ 14.47   $ 13.87     $ 13.56  
         
 

(1) 

The third quarter of 2007 is presented on a continuing operations basis to exclude U.S. Trust Corporation, which was sold on July 1, 2007.

(2) 

The third quarter of 2008 includes $73 million of charges relating to losses on two corporate debt securities.

(3) 

The third quarter and second quarter of 2008 include $8 million and $16 million, respectively, for individual client complaints and arbitration claims relating to Schwab YieldPlus Fund® investments.

(4) 

The third quarter of 2007 includes a $1.2 billion after-tax gain on the sale of U.S. Trust Corporation.

(5) 

The second quarter of 2008 includes an $18 million adjustment to finalize the income tax gain related to the sale of U.S. Trust Corporation.

(6) 

Includes all client trades that generate either commission revenue or revenue from principal markups (i.e., fixed income); also known as DART.

(7) 

Includes eligible trades executed by clients who participate in one or more of the Company's asset-based pricing relationships.

N/M 

Not meaningful.
 
See Notes to Consolidated Statements of Income and Financial and Operating Highlights.
 
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Statements of Income and Financial and Operating Highlights
(Unaudited)
             
 
The Company

The consolidated statements of income and financial and operating highlights include The Charles Schwab Corporation (CSC) and its majority-owned subsidiaries (collectively referred to as the Company), including Charles Schwab & Co., Inc. and Charles Schwab Bank. Prior period amounts are presented on a continuing operations basis to exclude U.S. Trust Corporation, which was sold on July 1, 2007. The consolidated statements of income and financial and operating highlights should be read in conjunction with the consolidated financial statements and notes thereto included in the Companys Annual Report on Form 10-K for the year ended December 31, 2007. All material intercompany balances and transactions have been eliminated.

 

**********

 

Growth in Client Assets and Accounts
(Unaudited)
     
  Q3-08 % change 2008 2007
(In billions, at quarter end, except as noted)   vs.
Q3-07
  vs.
Q2-08
  Third
Quarter
  Second
Quarter
  First
Quarter
Fourth
Quarter
  Third
Quarter
Assets in client accounts

Schwab One®, other cash equivalents and deposits from banking clients

31% 9% $ 43.8 $ 40.1 $ 36.5 $ 35.9 $ 33.5

Proprietary funds (Schwab Funds® and Laudus Funds®):

Money market funds 25% 6% 200.1 189.2 203.3 183.1 160.3
  Equity and bond funds (35%) (11%)   42.0       47.0       49.0     58.7       64.3  
  Total proprietary funds 8% 2%   242.1       236.2       252.3     241.8       224.6  

Mutual Fund Marketplace® (1):

Mutual Fund OneSource® (24%) (14%) 145.9 170.2 168.2 180.9 190.8
Mutual fund clearing services (16%) (13%) 68.8 79.4 77.8 81.8 82.0
  Other third-party mutual funds (6%) (9%)   210.0       230.2       224.2     225.7       224.5  
  Total Mutual Fund Marketplace (15%) (11%)   424.7       479.8       470.2     488.4       497.3  
  Total mutual fund assets (8%) (7%)   666.8       716.0       722.5     730.2       721.9  
Equity and other securities (1) (18%) (11%) 447.2 503.7 498.4 545.2 547.8
Fixed income securities 5% 5% 156.4 149.4 146.4 145.8 148.3
  Margin loans outstanding (10%) (21%)   (9.7 )     (12.3 )     (10.8 )   (11.6 )     (10.8 )
  Total client assets (9%) (7%) $ 1,304.5     $ 1,396.9     $ 1,393.0   $ 1,445.5     $ 1,440.7  
 
Client assets by business
Schwab Investor Services (2) (12%) (7%) $ 551.9 $ 590.7 $ 595.5 $ 625.3 $ 624.5
Schwab Institutional (7%) (6%) 542.1 575.3 569.7 583.5 581.0
  Schwab Corporate and Retirement Services (2) (11%) (9%)   210.5       230.9       227.8     236.7       235.2  
  Total client assets by business (9%) (7%) $ 1,304.5     $ 1,396.9     $ 1,393.0   $ 1,445.5     $ 1,440.7  
 
Net growth in assets in client accounts (for the quarter ended)
Net new assets
Schwab Investor Services (2) (22%) 22% $ 7.3 $ 6.0 $ 13.7 $ 14.3 $ 9.4
Schwab Institutional (18%) (3%) 14.1 14.5 19.9 17.9 17.1
Schwab Corporate and Retirement Services (2, 3) (72%) (45%)   3.0       5.5       7.7     7.3       10.8  
Total net new client assets (35%) (6%)   24.4       26.0       41.3     39.5       37.3  
  Net market (losses) gains N/M N/M   (116.8 )     (22.1 )     (93.8 )   (34.7 )     19.8  
  Net (decline) growth N/M N/M $ (92.4 )   $ 3.9     $ (52.5 ) $ 4.8     $ 57.1  
 
New brokerage accounts (in thousands, for the quarter ended) 5% (15%) 193 226 246 227 183
Clients (in thousands)
Active Brokerage Accounts 5% 1% 7,310 7,256 7,162 7,049 6,940
Banking Accounts 88% 12% 399 355 318 262 212
  Corporate Retirement Plan Participants 14% 3%   1,333       1,291       1,271     1,205       1,169  
         
 

(1) 

Excludes all proprietary money market, equity, and bond funds.

(2) 

In connection with recent organizational changes, the Company is reporting separately client assets for the Schwab Corporate and Retirement Services business, which was historically included in the Schwab Investor Services business. Additionally, the mutual fund clearing services business, which was historically disclosed separately, is included within the Schwab Corporate and Retirement Services business.

(3) 

Includes inflows of $3.3 billion in the third quarter of 2007 related to a mutual fund clearing services client.

N/M 

Not meaningful.
 
The Charles Schwab Corporation Monthly Market Activity Report For September 2008
                             

 2007

 2008

 

% change

Sep

Oct

Nov

Dec

Jan

Feb

Mar

Apr

May

Jun

Jul

Aug

Sep

Mo.

Yr.

 
Change in Client Assets
(in billions of dollars)
Net New Assets 9.1 11.7 12.1 15.7 11.1 12.5 17.7 3.8 12.2 10.0 10.4 7.7 6.3 (18%) (31%)
Net Market Gains (Losses) 41.8     31.4     (50.4 )   (15.7 ) (60.6 )   (17.8 )   (15.4 )   42.1     17.8     (82.0 )   (16.0 )   (1.4 ) (99.4 )
 
Total Client Assets
(at month end, in billions of dollars) 1,440.7     1,483.8     1,445.5     1,445.5   1,396.0     1,390.7     1,393.0     1,438.9     1,468.9     1,396.9     1,391.3     1,397.6   1,304.5   (7%) (9%)
 
New Brokerage Accounts
(in thousands) 57 75 74 78 94 69 83 94 67 65 64 57 72 26% 26%
 
Clients (at month end, in thousands)
Active Brokerage Accounts 6,940 6,974 7,013 7,049 7,093 7,119 7,162 7,206 7,232 7,256 7,272 7,287 7,310 -- 5%
Banking Accounts 212 229 247 262 286 302 318 332 344 355 367 377 399 6% 88%
Corporate Retirement Plan Participants 1,169 1,182 1,185 1,205 1,256 1,263 1,271 1,284 1,286 1,291 1,306 1,315 1,333 1% 14%
 
Market Indices (at month end)
Dow Jones Industrial Average 13,896 13,930 13,372 13,265 12,650 12,266 12,263 12,820 12,638 11,350 11,378 11,544 10,851 (6%) (22%)
Nasdaq Composite 2,702 2,859 2,661 2,652 2,390 2,271 2,279 2,413 2,523 2,293 2,326 2,368 2,092 (12%) (23%)
Standard & Poor's 500 1,527 1,549 1,481 1,468 1,379 1,331 1,323 1,386 1,400 1,280 1,267 1,283 1,166 (9%) (24%)
 
Clients' Daily Average Trades
(in thousands)
Revenue Trades (1) 231.5 277.3 297.2 250.7 311.2 242.7 268.1 250.6 258.4 255.3 282.1 227.0 339.7 50% 47%
Schwab Investor Services (2) 21.3 20.1 21.1 23.4 24.8 21.9 23.1 22.2 24.1 19.7 24.0 20.8 27.5 32% 29%
Schwab Institutional® (2) 17.4 20.1 24.9 22.2 32.0 23.5 28.0 21.5 20.9 22.0 29.4 20.6 29.0 41% 67%
Schwab Corporate & Retirement Services (2) 1.2     1.2     1.2     1.4   1.5     1.3     1.3     1.2     1.3     1.2     1.4     1.3   1.6   23% 33%
Total 271.4     318.7     344.4     297.7   369.5     289.4     320.5     295.5     304.7     298.2     336.9     269.7   397.8   47% 47%
 
Daily Average Market Share Volume
(in millions)
NYSE 1,378 1,324 1,630 1,320 1,927 1,514 1,727 1,310 1,218 1,400 1,531 1,081 1,603 48% 16%
Nasdaq 1,921     2,166     2,367     1,900   2,696     2,344     2,294     1,982     2,069     2,261     2,355     1,894   2,537   34% 32%
Total 3,299     3,490     3,997     3,220   4,623     3,858     4,021     3,292     3,287     3,661     3,886     2,975   4,140   39% 25%
 
Mutual Fund Net Buys (Sells) (3)
(in millions of dollars)
Large Capitalization Stock 337.0 240.6 (327.5 ) (130.3 ) (721.5 ) 819.1 (69.3 ) 689.1 738.5 284.5 (1,024.5 ) (88.2 ) (1,496.8 )
Small / Mid Capitalization Stock (2.9 ) (73.8 ) (641.9 ) (1,009.5 ) (1,168.7 ) (17.2 ) (410.0 ) 10.9 215.8 277.2 (306.5 ) 392.9 (243.7 )
International 663.1 842.2 (80.6 ) 262.5 (800.2 ) 283.1 (229.8 ) 262.1 800.7 (184.6 ) (1,036.8 ) (743.9 ) (2,240.3 )
Specialized 78.6 154.3 (191.3 ) (132.1 ) 53.0 206.6 (230.2 ) (20.7 ) 164.4 133.5 (192.1 ) (106.3 ) (571.8 )
Hybrid 202.1 179.6 117.9 199.2 202.0 601.8 457.2 457.1 405.7 273.0 227.1 289.5 (320.7 )
Taxable Bond 98.1 953.3 (379.4 ) (585.3 ) 1,407.0 1,047.6 (845.3 ) 582.0 1,113.1 344.2 440.9 487.7 (894.9 )
Tax-Free Bond 111.1 96.7 (152.1 ) (519.1 ) 204.1 (31.6 ) 10.9 158.6 459.4 358.4 179.7 263.4 (97.9 )
Money Market Funds 876.8 4,280.3 8,244.8 7,942.0 7,632.2 3,996.8 5,478.6 (7,347.2 ) (3,956.8 ) (2,378.1 ) 4,958.3 506.7 3,973.6  
 
 

(1) Includes all client trades that generate either commission revenue or revenue from principal markups (i.e., fixed income); also known as DART.

(2) Includes eligible trades executed by clients who participate in one or more of the Company's asset-based pricing relationships.

(3) Represents the principal value of client mutual fund transactions handled by Schwab, including transactions in proprietary funds. Includes institutional funds available only to Investment Managers.

Contact:

Charles Schwab
Media:
Greg Gable, 415-636-5847
Investors/Analysts:
Rich Fowler, 415-636-9869

Corporate Public Relations
Contacts for Journalists Only

 

888-767-5432

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