Schwab Reports Third Quarter Results

Improving Markets Encourage Client Engagement

Thursday, October 15, 2009 5:45 am PDT

Dateline:

SAN FRANCISCO

Public Company Information:

NASDAQ:
SCHW

SAN FRANCISCO--(BUSINESS WIRE)--The Charles Schwab Corporation announced today that its net income was $200 million for the third quarter of 2009, down 34% from the third quarter of 2008. For the nine months ended September 30, 2009, the company’s net income was $623 million, down 31% from the year-earlier period. As previously discussed by the company, Schwab’s year-to-date 2009 financial results have been impacted by revenue declines stemming from falling interest rates and generally lower equity market valuations, which have been partially offset by expense reduction measures.

Chairman Charles Schwab said, “The equity markets’ sustained rebound from March lows has reminded us all of the importance of developing an investment plan and sticking with it in all market cycles. Here at Schwab, we have seen the fear that gripped investor sentiment in 2008 and early 2009 begin to subside, with branch, website, and phone traffic all showing signs that more individuals are reexamining their investing strategies and looking for direction in managing their investments for the future. Our clients know they can turn to us for help in finding the right path forward – help that we provide through a combination of time-tested investment principles, market and economic perspectives and personalized guidance, along with access to the independent investment advisors served by the company. These capabilities are part of the uniquely comprehensive range of advice, products and services – at a great value – available to assist our clients with achieving their individual objectives. In addition, after yet another quarter of solid operating performance, Schwab maintains the financial strength and stability that investors expect in a trusted financial services relationship.”

 
  Three Months Ended     Nine Months Ended  

--September 30,--

% --September 30,-- %
Financial Highlights     2009       2008     Change     2009       2008     Change
 
Net revenues (in millions) $ 1,011   $ 1,251 (19 %) $ 3,207   $ 3,866 (17 %)
Net income (in millions) $ 200 $ 304 (34 %) $ 623 $ 904 (31 %)
Diluted earnings per share $ .17 $ .26 (35 %) $ .54 $ .78 (31 %)
Pre-tax profit margin 31.7 % 39.9 % 31.5 % 39.3 %

Return on stockholders’ equity (annualized)

    17 %     31 %         19 %     31 %    
 

CEO Walt Bettinger said, “It’s clear that our clients have no intention of setting aside their financial affairs in the face of even the toughest environments – and that they need and expect Schwab to be ready to help them regardless of current conditions. Right now, some individuals are relying on professional guidance to rebuild their participation in the equity markets, while others remain more comfortable emphasizing low-risk cash and FDIC-insured deposit products. In addition, the independent advisors served by Schwab are seeing increased demand for their expertise. Overall, we attracted another $20 billion in net new assets during the third quarter, added 181,000 new brokerage accounts, and ended the quarter with banking accounts and retirement plan participants up 67% and 10%, respectively, over year-earlier levels. Total client assets reached $1.36 trillion, up 5%, reflecting both improved equity market valuations and our success in continuing to attract and retain clients.”

“Ultimately, further growth in our client base will be heavily influenced by how well we serve our clients, so we continue to balance appropriate investment in our client service capabilities with disciplined financial management as we deal with revenue headwinds,” Mr. Bettinger said. “While growth in assets and accounts are direct measures of progress for us, we believe the fact that our internal measure of client loyalty – known as our Client Promoter Score – is actually higher now than at the beginning of the financial crisis, as well as our recent first-place finish in the 2009 J.D. Power Self-Directed Investor Study of client satisfaction, are both strong endorsements of our approach.”

CFO Joe Martinetto commented, “Our financial picture continues to evolve as expected given the environment, with a healthy balance sheet and solid profitability even in the face of ongoing revenue pressures. Impairment losses on our investment portfolio remain contained and centered in our holdings of Alt-A mortgage-backed securities – credit-related charges recognized during the quarter totaled $11 million. In addition, the delinquency, nonaccrual, and loan loss reserve ratios for Schwab Bank’s loan portfolio were 0.78%, 0.37%, and 0.63%, respectively, at month-end September, remaining well below national averages. We have well over $1 billion in readily available cash at the Parent level and we retain ample flexibility to support the company’s ongoing growth.”

Mr. Martinetto added, “Our third quarter revenues were down 19% from the year-earlier period, reflecting the headwinds we’ve been discussing for some time. Net interest revenue declined 34% year-over-year despite continued growth in client cash balances as further reductions in short-term interest rates lowered investment portfolio yields. Asset management and administration fees were helped by improving asset valuations, but money market fund fee waivers increased to $78 million as anticipated, resulting in a 24% decline. In addition, client trading activity slowed modestly from year-earlier levels, leading to a 4% drop in trading revenues. By sticking to our expense commitments, we were able to reduce costs by 8% for the quarter, which enabled the company to achieve a 32% pre-tax profit margin and a 17% return on equity.”

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

Investor Services

  • Net new accounts for the quarter totaled approximately 29,000, up 41% year-over-year. Total accounts reached 5.3 million as of September 30, 2009, up 3% year-over-year.
  • Year to date, new households enrolled in Schwab’s fee-based advice offerings = 30,000, up 56% from the same period in 2008.
  • More than 1,600 client facing representatives completed a rigorous training curriculum covering Schwab’s solutions for clients nearing, and transitioning to, retirement.

Institutional Services

Advisor Services

  • Launched the next-generation Schwab Advisor Center™ website which offers new features and functionality enabling independent advisors to explore and use client data in a more flexible and efficient way.
  • Announced enhancements to the Company’s Business Consulting Services offer to include a Technology Adoption Scorecard, the elimination of fees tied to Schwab’s Mergers & Acquisitions Listing Service, and access to personalized client surveying tools to help fuel growth and improve efficiency.
  • Released a new semi-annual Independent Advisor Outlook Study, which measures the current views of nearly 1,200 advisors with more than $280 billion in total assets under management on a variety of topics, including the economic and political landscape, market opportunities, and client concerns.

Corporate and Retirement Services

  • Retirement plans converted to Schwab administration during the quarter = 28, with approximately 9,300 participants, compared with 62 plans and approximately 29,300 participants in 3Q08. Year-to-date plan conversions/participants of 155/141,000 are consistent with the Company’s expectations for 2009.
  • Introduced a new Co-Sourced Stock Plan Administration offer, which enables stock plan administrators to operate more efficiently by shifting certain functions to Schwab, including recordkeeping and reconciliation of plan activity; report generation, scheduling and distribution; and plan participant statements and confirmations.
  • Two Schwab-administered retirement plans were recognized in the Profit Sharing/401(k) Council of America 2009 Signature Awards program. In addition, Schwab won two APEX Awards for Publication Excellence.

Products and Infrastructure

  • For Charles Schwab Bank:
    • Balance sheet assets = $38.2 billion, up 61% year-over-year.
    • Outstanding mortgage and home equity loans = $6.7 billion, up 26% year-over-year.
    • First mortgage originations during the quarter = $825 million.
  • Schwab Bank High Yield Investor Checking® accounts = 392,000, with $6.5 billion in balances.

Supporting schedules are either attached or located at: http://www.aboutschwab.com/media/xls/q3_2009_schedule.xls

About Charles Schwab

The Charles Schwab Corporation (Nasdaq:SCHW) is a leading provider of financial services, with more than 300 offices and 7.6 million client brokerage accounts, 1.5 million corporate retirement plan participants, 667,000 banking accounts, and $1.36 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. Named Highest in Investor Satisfaction by J.D. Power and Associates, 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 Advisor Services 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   Nine Months
Ended Ended
September 30, September 30,
            2009       2008       2009       2008  
   
Net Revenues
Asset management and administration fees $ 451 $ 596 $ 1,439 $ 1,827
 
Interest revenue 356 497 1,063 1,485
Interest expense   (62 )   (50 )   (161 )   (192 )
Net interest revenue 294 447 902 1,293
 
Trading revenue 241 252 772 728
Other 36 - 132 62
 
Total other-than-temporary impairment losses (52 ) (44 ) (239 ) (44 )
Noncredit portion of loss recognized in other comprehensive income   41     -     201     -  
Net impairment losses on securities (11 ) (44 ) (38 ) (44 )
                                   
  Total net revenues     1,011       1,251       3,207       3,866  
 
Expenses Excluding Interest
Compensation and benefits 371 390 1,173 1,265
Professional services 70 86 194 254
Occupancy and equipment 67 75 245 221
Advertising and market development 34 47 141 181
Communications 48 51 155 155
Depreciation and amortization 38 38 121 113
  Other     63       65       168       156  
  Total expenses excluding interest     691       752       2,197       2,345  
 
Income from continuing operations before taxes on income 320 499 1,010 1,521
Taxes on income     (120 )     (195 )     (387 )     (599 )
 
Income from continuing operations 200 304 623 922
Loss from discontinued operations, net of tax     -       -       -       (18 )
 
Net Income   $ 200     $ 304     $ 623     $ 904  
 
Weighted-Average Common Shares Outstanding — Diluted     1,163       1,158       1,160       1,157  
 
Earnings Per Share — Basic
Income from continuing operations $ .17 $ .26 $ .54 $ .80
Loss from discontinued operations, net of tax

$

-

$

-

$

-

$ (.01 )
Net income $ .17 $ .26 $ .54 $ .79
 
Earnings Per Share — Diluted
Income from continuing operations $ .17 $ .26 $ .54 $ .80
Loss from discontinued operations, net of tax

$

-

$

-

$

-

$ (.02 )
  Net income   $ .17     $ .26     $ .54     $ .78  
 
Dividends Declared Per Common Share   $ .06     $ .06     $ .18     $ .16  
 
 
See Notes to Consolidated Statements of Income, Financial and Operating Highlights, and Net Interest Revenue Information.
 
 
THE CHARLES SCHWAB CORPORATION
Financial and Operating Highlights
(Unaudited)
                   
     

Q3-09 % change

2009   2008  

(In millions, except per share amounts and as noted)

vs.
Q3-08

 

vs.
Q2-09

Third
Quarter

 

Second
Quarter

 

First
Quarter

 

Fourth
Quarter

 

Third
Quarter

Net Revenues
Asset management and administration fees (24 %) (7 %) $ 451 $ 486 $ 502 $ 528 $ 596
Net interest revenue (34 %) (3 %) 294 302 306 372 447
Trading revenue (4 %) (11 %) 241 272 259 352 252
Other (1) N/M (5 %) 36 38 58 32 -
    Net impairment losses on securities (2) (75 %) (15 %)   (11 )     (13 )     (14 )     -       (44 )
Total net revenues (19 %) (7 %)   1,011       1,085       1,111       1,284       1,251  
Expenses Excluding Interest
Compensation and benefits (5 %) (2 %) 371 377 425 402 390
Professional services (19 %) 9 % 70 64 60 80 86
Occupancy and equipment (11 %) (31 %) 67 97 81 78 75
Advertising and market development (28 %) (31 %) 34 49 58 62 47
Communications (6 %) (11 %) 48 54 53 56 51
Depreciation and amortization - (7 %) 38 41 42 39 38
    Other (3) (3 %) (7 %)   63       68       37       60       65  
Total expenses excluding interest (8 %) (8 %)   691       750       756       777       752  
Income before taxes on income (36 %) (4 %) 320 335 355 507 499
Taxes on income (38 %) (8 %)   (120 )     (130 )     (137 )     (199 )     (195 )
Net Income (34 %) (2 %) $ 200     $ 205     $ 218     $ 308     $ 304  
Basic earnings per share (35 %) (6 %) $ .17 $ .18 $ .19 $ .27 $ .26
Diluted earnings per share (35 %) (6 %) $ .17 $ .18 $ .19 $ .27 $ .26
Dividends declared per common share - - $ .06 $ .06 $ .06 $ .06 $ .06
Weighted-average common shares outstanding - diluted - -   1,163       1,160       1,156       1,158       1,158  
 
Performance Measures
Pre-tax profit margin 31.7 % 30.9 % 32.0 % 39.5 % 39.9 %
    Return on stockholders’ equity (annualized)   17 %     18 %     21 %     30 %     31 %
 
Financial Condition (at quarter end, in billions)
Cash and investments segregated 26 % 12 % $ 17.4 $ 15.5 $ 15.9 $ 14.7 $ 13.8
Receivables from brokerage clients (25 %) 3 % $ 7.9 $ 7.7 $ 6.3 $ 7.1 $ 10.6
Loans to banking clients 25 % 6 % $ 6.9 $ 6.5 $ 6.3 $ 6.0 $ 5.5
Total assets 29 % 9 % $ 68.0 $ 62.3 $ 54.9 $ 51.7 $ 52.8
Deposits from banking clients 61 % 12 % $ 35.5 $ 31.7 $ 26.6 $ 23.8 $ 22.0
Payables to brokerage clients 9 % 8 % $ 23.4 $ 21.6 $ 20.6 $ 20.3 $ 21.5

Long-term debt (4)

67 % (6 %) $ 1.5 $ 1.6 $ .8 $ .9 $ .9
    Stockholders’ equity 20 % 7 % $ 4.9     $ 4.6     $ 4.3     $ 4.1     $ 4.1  
 
Other
Full-time equivalent employees (at quarter end, in thousands) (10 %) 1 % 12.2 12.1 12.4 13.4 13.5

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

(11 %) (7 %) $ 331 $ 356 $ 350 $ 378 $ 371
   

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

(26 %) (15 %)

 

$ 35     $ 41     $ 31     $ 67     $ 47  
 
Clients’ Daily Average Trades (in thousands)
Revenue trades (5) (3 %) (9 %) 273.7 301.2 302.9 358.3 282.9
Investor Services (6) 4 % (5 %) 25.0 26.3 27.7 28.7 24.0
Advisor Services (6) (30 %) (12 %) 18.4 20.8 27.4 36.6 26.4
    Corporate and Retirement Services (6) (7 %) -   1.4       1.4       1.4       1.6       1.5  
Total (5 %) (9 %)   318.5       349.7       359.4       425.2       334.8  
Average Revenue Per Revenue Trade (5) (5 %) 1 % $ 13.93     $ 13.84     $ 14.06     $ 14.63     $ 14.59  
     
 
(1)

The first quarter of 2009 includes a $26 million gain relating to the repurchase of junior subordinated notes. The third quarter of 2008 includes a $29 million loss on the sale of a corporate debt security.

(2)

The third quarter, second quarter, and first quarter of 2009 include credit related other-than-temporary impairment charges on securities available for sale of $11 million, $13 million, and $14 million, respectively. The third quarter of 2008 includes an other-than-temporary impairment charge of $44 million related to a corporate debt security.

(3)

The second quarter and first quarter of 2009 include $2 million and $19 million, respectively, for individual client complaints and arbitration claims relating to Schwab YieldPlus Fund® investments (collectively YieldPlus Expenses). These expenses were offset by $4 million and $30 million of insurance recoveries, resulting in a net credit of $2 million and $11 million in other expense for the second and first quarter of 2009, respectively. The fourth quarter and third quarter of 2008 include $5 million and $8 million of YieldPlus Expenses, respectively. YieldPlus Expenses and insurance recoveries in the third quarter of 2009 were not material.

(4) In the second quarter of 2009, the Company issued $750 million of Senior Notes that mature in 2014.
(5) Includes all client trades that generate either commission revenue or revenue from principal markups (i.e., fixed income); also known as DART.
(6) 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, Financial and Operating Highlights, and Net Interest Revenue Information.
 
 
THE CHARLES SCHWAB CORPORATION
Net Interest Revenue Information
(In millions)
(Unaudited)
                         
                                                   
Three Months Ended

September 30,

Nine Months Ended

September 30,

2009 2008 2009 2008
       

Average

Balance

  Interest

Revenue/

Expense

  Average

Yield/

Rate

  Average

Balance

  Interest

Revenue/

Expense

  Average

Yield/

Rate

Average

Balance

  Interest

Revenue/

Expense

  Average

Yield/

Rate

  Average

Balance

  Interest

Revenue/

Expense

  Average

Yield/

Rate

 
Interest-earning assets:
Cash and cash equivalents $ 9,366 $ 7 0.30% $ 4,333 $ 27 2.48% $ 7,795 $ 27 0.46% $ 4,808 $ 108 3.00%
Cash and investments segregated 16,584 16 0.38% 10,506 64 2.42% 15,815 67 0.57% 10,350 231 2.98%
Broker-related receivables (1) 383 - 0.14% 435 2 1.83% 355 1 0.38% 501 8 2.13%
Receivables from brokerage clients 7,006 89 5.04% 11,133 159 5.68% 6,457 254 5.26% 11,348 508 5.98%
Other securities owned (2) 158 - 0.87% - - - 53 - 0.88% - - -
Securities available for sale (3) 18,942 127 2.66% 13,493 145 4.28% 17,235 389 3.02% 10,865 360 4.43%
Securities held to maturity 2,874 28 3.87% - - - 1,443 43 3.98% - - -
Loans to banking clients 6,795 61 3.56% 5,232 62 4.71% 6,497 177 3.64% 4,491 164 4.88%
Loans held for sale     69     1   5.75%     51     1   7.80%   121     5   5.52%     73     3   5.49%
    Total interest-earning assets     62,177     329   2.10%     45,183     460   4.05%   55,771     963   2.31%     42,436     1,382   4.35%
Other interest revenue         27             37           100             103    
Total interest-earning assets   $ 62,177   $ 356   2.27%   $ 45,183   $ 497   4.38% $ 55,771   $ 1,063   2.55%   $ 42,436   $ 1,485   4.67%
Funding sources:
Deposits from banking clients $ 33,792 $ 32 0.38% $ 20,416 $ 22 0.43% $ 29,285 $ 73 0.33% $ 17,862 79 0.59%
Payables to brokerage clients (4) 18,474 - 0.01% 15,084 6 0.16% 17,393 2 0.02% 15,144 49 0.43%
Short-term borrowings (5) - - - 47 - 2.27% - - - 47 1 2.20%
Long-term debt     1,535     22   5.69%     882     14   6.31%   1,134     51   6.01%     892     44   6.59%
    Total interest-bearing liabilities     53,801     54   0.40%     36,429     42   0.46%   47,812     126   0.35%     33,945     173   0.68%
Non-interest bearing funding sources 8,376 8,754 7,959 8,491
Provision for credit losses 7 5 33 11
Other interest expense         1             3           2             8    
Total funding sources   $ 62,177   $ 62   0.39%   $ 45,183   $ 50   0.44% $ 55,771   $ 161   0.39%   $ 42,436   $ 192   0.60%
Net interest revenue       $ 294   1.88%       $ 447   3.94%     $ 902   2.16%       $ 1,293   4.07%
 
(1)

Includes receivables from brokers, dealers, and clearing organizations. Interest revenue on broker-related receivables was less than $500,000 in the third quarter of 2009.

(2) Interest revenue on other securities owned was less than $500,000 in the third quarter and first nine months of 2009.
(3) Amounts have been calculated based on amortized cost.
(4) Interest expense on payables to brokerage clients was less than $500,000 in the third quarter of 2009.
(5) Interest expense on short-term borrowings was less than $500,000 in the third quarter of 2008.
 
See Notes to Consolidated Statements of Income, Financial and Operating Highlights, and Net Interest Revenue Information.
 
 

Notes to Consolidated Statements of Income, Financial and Operating Highlights,
and Net Interest Revenue Information

(Unaudited)
 
The Company

The consolidated statements of income, financial and operating highlights, and net interest revenue information 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. Certain prior year amounts have been reclassified to conform to the 2009 presentation. The consolidated statements of income, financial and operating highlights, and net interest revenue information should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008.

 

**********
 
               
 
THE CHARLES SCHWAB CORPORATION
Growth in Client Assets and Accounts
(Unaudited)
     
     

Q3-09

% change

2009   2008  
(In billions, at quarter end, except as noted)

vs.
Q3-08

 

vs.
Q2-09

Third
Quarter

 

Second
Quarter

 

First
Quarter

 

Fourth
Quarter

 

Third
Quarter

Assets in client accounts

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

35 % 11 % $ 59.3 $ 53.6 $ 47.6 $ 44.4 $ 43.8
Proprietary funds (Schwab Funds® and Laudus Funds®):
Money market funds (11 %) (7 %) 178.7 191.4 210.7 209.7 200.1
    Equity and bond funds (5 %) 14 %   40.0       35.2       31.2       33.9       42.0  
    Total proprietary funds (10 %) (3 %)   218.7       226.6       241.9       243.6       242.1  
Mutual Fund Marketplace® (1):
Mutual Fund OneSource® 38 % 55 % 200.9 129.2 105.8 110.6 145.9
Mutual fund clearing services 8 % 21 % 74.4 61.6 52.1 54.2 68.8
    Other third-party mutual funds (8 %) (6 %)   192.3       203.5       169.8       169.1       210.0  
    Total Mutual Fund Marketplace 10 % 19 %   467.6       394.3       327.7       333.9       424.7  
    Total mutual fund assets 3 % 11 %   686.3       620.9       569.6       577.5       666.8  
Equity and other securities (1) 2 % 17 % 456.3 388.6 323.9 357.2 447.2
Fixed income securities 8 % - 169.0 168.2 164.2 164.1 156.4
    Margin loans outstanding (25 %) 4 %   (7.3 )     (7.0 )     (5.6 )     (6.2 )     (9.7 )
    Total client assets 5 % 11 % $ 1,363.6     $ 1,224.3     $ 1,099.7     $ 1,137.0     $ 1,304.5  
 
Client assets by business
Investor Services 2 % 10 % $ 564.8 $ 515.0 $ 466.0 $ 482.6 $ 551.9
Advisor Services 4 % 12 % 564.2 505.4 457.0 477.2 542.1
    Corporate and Retirement Services 11 % 15 %   234.6       203.9       176.7       177.2       210.5  
    Total client assets by business 5 % 11 % $ 1,363.6     $ 1,224.3     $ 1,099.7     $ 1,137.0     $ 1,304.5  
 
Net growth in assets in client accounts (for the quarter ended)
Net new assets
Investor Services (68 %) (38 %) $ 2.3 $ 3.7 $ 6.2 $ 8.1 $ 7.3
Advisor Services (21 %) 44 % 11.1 7.7 9.6 11.7 14.1
    Corporate and Retirement Services 117 % 10 %   6.5       5.9       9.5       1.9       3.0  
    Total net new assets (18 %) 15 %   19.9       17.3       25.3       21.7       24.4  
    Net market gains (losses) N/M 11 %   119.4       107.3       (62.6 )     (189.2 )     (116.8 )
    Net growth (decline) N/M 12 % $ 139.3     $ 124.6     $ (37.3 )   $ (167.5 )   $ (92.4 )
 
New brokerage accounts (in thousands, for the quarter ended) (6 %) (8 %) 181 197 207 224 193
Clients (in thousands)
Active Brokerage Accounts 4 % 1 % 7,620 7,556 7,479 7,401 7,310
Banking Accounts 67 % 12 % 667 593 508 447 399
    Corporate Retirement Plan Participants 10 % (2 %)   1,471       1,495       1,520       1,407       1,333  
     
 
(1) Excludes all proprietary money market, equity, and bond funds.
N/M Not meaningful
 

The SMART report can be viewed in its entirety at http://www.aboutschwab.com/media/xls/q3_2009_schedule.xls  

Contact:

Charles Schwab
MEDIA:
Greg Gable, 415-667-0473
INVESTORS/ANALYSTS:
Rich Fowler, 415-667-1841

Corporate Public Relations
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888-767-5432

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