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Schwab Reports Fourth Quarter Net Income Up 29% Year-Over-Year

Stocks in this article: SCHW

Supporting schedules are either attached or located at: www.aboutschwab.com/investor_relations/financial_reports

Forward Looking Statements

This press release contains forward looking statements relating to enrollment and participation in the company’s new index-based 401(k) offering, growth of the company’s business, revenues, earnings and expense discipline. Achievement of these expectations is subject to risks and uncertainties that could cause actual results to differ materially from the expressed expectations. Important factors that may cause such differences include, but are not limited to, the enrollment rate in the company’s index-based 401(k) offering, general market conditions, including the level of interest rates, equity valuations and trading activity; net interest margin; level of expenses; the company’s ability to attract and retain clients and grow client assets/relationships; competitive pressures on rates and fees; the level of client assets, including cash balances; the company’s ability to monetize client assets; the company’s ability to develop and launch new products, services and capabilities in a timely and successful manner; capital needs and management; the impact of changes in market conditions on money market fund fee waivers, revenues, expenses and pre-tax margins; the effect of adverse developments in litigation or regulatory matters and the extent of any charges associated with legal matters; any adverse impact of financial reform legislation and related regulations; and other factors set forth in the company’s Form 10-Q for the period ended September 30, 2012.

About Charles Schwab

The Charles Schwab Corporation (NYSE: SCHW) is a leading provider of financial services, with more than 300 offices and 8.8 million active brokerage accounts, 1.6 million corporate retirement plan participants, 865,000 banking accounts, and $1.95 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; compliance and trade monitoring solutions; referrals to independent fee-based investment advisors; and custodial, operational and trading support for independent, fee-based investment advisors through Schwab Advisor Services. Its banking subsidiary, Charles Schwab Bank (member FDIC and an Equal Housing Lender), provides banking and lending services and products. More information is available at www.schwab.com and www.aboutschwab.com.

 
THE CHARLES SCHWAB CORPORATION

Consolidated Statements of Income

(In millions, except per share amounts)
(Unaudited)
                 
  Three Months Ended   Twelve Months Ended
December 31, December 31,
    2012   2011   2012   2011
   
Net Revenues
Asset management and administration fees $ 539 $ 458 $ 2,043 $ 1,928
 
Interest revenue 467 436 1,914 1,900
Interest expense   (34 )   (41 )   (150 )   (175 )
Net interest revenue 433 395 1,764 1,725
 
Trading revenue 202 233 868 927
Other 47 41 256 160
Provision for loan losses (2 ) (5 ) (16 ) (18 )
Net impairment losses on securities (1) (4 ) (9 ) (32 ) (31 )
                 
Total net revenues     1,215       1,113       4,883       4,691  
 
Expenses Excluding Interest
Compensation and benefits 450 442 1,803 1,732
Professional services 101 99 388 387
Occupancy and equipment 78 79 311 301
Advertising and market development 68 69 241 228
Communications 54 54 220 220
Depreciation and amortization 50 48 196 155
Class action litigation and regulatory reserve - - - 7
Other     70       70       274       269  
Total expenses excluding interest     871       861       3,433       3,299  
 
Income before taxes on income 344 252 1,450 1,392
Taxes on income     133       89       522       528  
 
Net Income     211       163       928       864  
 
Preferred stock dividends     22       -       45       -  
 
Net Income Available to Common Stockholders   $ 189     $ 163     $ 883     $ 864  
 
Weighted-Average Common Shares Outstanding — Diluted     1,278       1,271       1,275       1,229  
 
Earnings Per Common Share — Basic $ .15 $ .13 $ .69 $ .70
 
Earnings Per Common Share — Diluted   $ .15     $ .13     $ .69     $ .70  
(1)   Net impairment losses on securities include total other-than-temporary impairment losses of $0 million and $5 million, net of $(4) million and $(4) million recognized in other comprehensive income, for the three months ended December 31, 2012 and 2011, respectively. Net impairment losses on securities include total other-than-temporary impairment losses of $15 million and $18 million, net of $(17) million and $(13) million recognized in other comprehensive income, for the twelve months ended December 31, 2012 and 2011, respectively.
 

See Note to Consolidated Statements of Income, Financial and Operating Highlights, and Net Interest Revenue Information.

 
 
THE CHARLES SCHWAB CORPORATION
Financial and Operating Highlights
(Unaudited)
                 
 

Q4-12 % change

2012 2011
vs.   vs. Fourth Third Second First Fourth
(In millions, except per share amounts and as noted) Q4-11 Q3-12 Quarter   Quarter   Quarter   Quarter   Quarter
Net Revenues
Asset management and administration fees 18 % 3 % $ 539 $ 524 $ 496 $ 484 $ 458
Net interest revenue 10 % (1 %) 433 439 458 434 395
Trading revenue (13 %) (1 %) 202 204 219 243 233
Other (1) 15 % 12 % 47 42 121 46 41
Provision for loan losses (60 %) (80 %) (2 ) (10 ) (4 ) - (5 )
Net impairment losses on securities (56 %) 33 %   (4 )     (3 )     (7 )     (18 )     (9 )
Total net revenues 9 % 2 %   1,215       1,196       1,283       1,189       1,113  
Expenses Excluding Interest
Compensation and benefits 2 % 2 % 450 442 446 465 442
Professional services 2 % 3 % 101 98 93 96 99
Occupancy and equipment (1 %) 1 % 78 77 80 76 79
Advertising and market development (1 %) 39 % 68 49 57 67 69
Communications - 2 % 54 53 55 58 54
Depreciation and amortization 4 % - 50 50 48 48 48
Other - 6 %   70       66       72       66       70  
Total expenses excluding interest 1 % 4 %   871       835       851       876       861  
Income before taxes on income 37 % (5 %) 344 361 432 313 252
Taxes on income (2) 49 % 17 %   133       114       157       118       89  
Net Income 29 % (15 %) $ 211     $ 247     $ 275     $ 195     $ 163  
Preferred stock dividends N/M 144 %   22       9       14       -       -  
Net Income Available to Common Stockholders 16 % (21 %) $ 189     $ 238     $ 261     $ 195     $ 163  
Basic earnings per common share 15 % (21 %) $ .15 $ .19 $ .20 $ .15 $ .13
Diluted earnings per common share 15 % (21 %) $ .15 $ .19 $ .20 $ .15 $ .13
Dividends declared per common share - - $ .06 $ .06 $ .06 $ .06 $ .06
Weighted-average common shares outstanding - diluted 1 % -   1,278       1,275       1,274       1,273       1,271  
Performance Measures
Pre-tax profit margin 28.3 % 30.2 % 33.7 % 26.3 % 22.6 %
Return on average common stockholders’ equity (annualized) (3)   9 %     11 %     13 %     10 %     8 %
Financial Condition (at quarter end, in billions)
Cash and investments segregated 10 % 14 % $ 28.5 $ 25.0 $ 22.7 $ 26.9 $ 26.0
Receivables from brokerage clients 22 % 13 % $ 13.5 $ 11.9 $ 12.0 $ 11.2 $ 11.1
Loans to banking clients 9 % 6 % $ 10.7 $ 10.1 $ 9.8 $ 9.8 $ 9.8
Total assets 23 % 14 % $ 133.6 $ 117.7 $ 111.8 $ 111.5 $ 108.6
Deposits from banking clients 30 % 15 % $ 79.4 $ 68.8 $ 66.3 $ 62.3 $ 60.9
Payables to brokerage clients 14 % 16 % $ 40.3 $ 34.8 $ 31.8 $ 36.4 $ 35.5
Long-term debt (20 %) (11 %) $ 1.6 $ 1.8 $ 2.0 $ 2.0 $ 2.0
Stockholders' equity (4) 25 % 1 % $ 9.6     $ 9.5     $ 9.1     $ 8.3     $ 7.7  
Other
Full-time equivalent employees (at quarter end, in thousands) (2 %) 1 % 13.8 13.6 13.7 14.0 14.1

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

12 % 1 % $ 355 $ 352 $ 372 $ 340 $ 316

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

(27 %) 21 % $ 40     $ 33     $ 31     $ 34     $ 55  
Clients’ Daily Average Trades (in thousands) (5)
Revenue trades (6) (14 %) 2 % 265.7 261.5 285.2 318.4 307.4
Asset-based trades (7) 30 % 32 % 59.6 45.2 50.6 53.7 45.9
Other trades (8) 17 % 30 %   124.7       95.7       99.8       104.1       106.3  
Total (2 %) 12 %   450.0       402.4       435.6       476.2       459.6  
Average Revenue Per Revenue Trade (5,6) 2 % - $ 12.49     $ 12.44     $ 12.15     $ 12.35     $ 12.21  
 
(1)   Includes a pre-tax gain of $70 million relating to a confidential resolution of a vendor dispute in the second quarter of 2012.
(2) Includes a non-recurring state tax benefit of $20 million in the third quarter of 2012.
(3) Return on average common stockholders' equity is calculated using net income available to common stockholders divided by average common stockholders' equity.
(4) In the second quarter and first quarter of 2012, the Company issued non-cumulative perpetual preferred stock, Series B, for a total liquidation preference of $485 million
and non-cumulative perpetual preferred stock, Series A, with a total liquidation preference of $400 million, respectively.
(5) The fourth quarter of 2012 does not include two trading days due to weather-related market closures on October 29 and 30, 2012.
(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.
(8) Includes all commission free trades, including Schwab Mutual Fund OneSource ® funds and ETFs, and other proprietary products.

N/M

Not meaningful.

 
See Note 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 Twelve Months Ended
December 31, December 31,
2012   2011 2012   2011
  Interest   Average   Interest   Average   Interest   Average   Interest   Average
Average Revenue/ Yield/ Average Revenue/ Yield/ Average Revenue/ Yield/ Average Revenue/ Yield/
    Balance   Expense   Rate Balance   Expense   Rate Balance   Expense   Rate Balance   Expense   Rate
 
Interest-earning assets:
Cash and cash equivalents $ 8,287 $ 6 0.29 % $ 5,736 $ 4 0.28 % $ 7,130 $ 18 0.25 % $ 5,554 $ 13 0.23 %
Cash and investments segregated 25,284 13 0.20 % 27,912 9 0.13 % 25,263 46 0.18 % 25,831 39 0.15 %
Broker-related receivables (1) 366 - 0.11 % 203 - 0.04 % 351 - 0.04 % 310 - 0.05 %
Receivables from brokerage clients 11,460 113 3.92 % 10,225 111 4.31 % 10,928 446 4.08 % 10,637 467 4.39 %
Securities available for sale (2) 43,624 140 1.28 % 30,789 124 1.60 % 39,745 583 1.47 % 27,486 456 1.66 %
Securities held to maturity 15,954 95 2.37 % 15,268 79 2.05 % 15,371 397 2.58 % 16,050 492 3.07 %
Loans to banking clients 10,447 76 2.89 % 9,857 79 3.18 % 10,053 309 3.07 % 9,472 310 3.27 %
Loans held for sale     -     -   -     74     1   3.99 %   18     1   4.12 %   65     3   4.62 %
Total interest-earning assets     115,422     443   1.53 %   100,064     407   1.61 %   108,859     1,800   1.65 %   95,405     1,780   1.87 %
Other interest revenue         24           29           114           120    
Total interest-earning assets   $ 115,422   $ 467   1.61 % $ 100,064   $ 436   1.73 % $ 108,859   $ 1,914   1.76 % $ 95,405   $ 1,900   1.99 %
Funding sources:
Deposits from banking clients $ 71,411 $ 11 0.06 % $ 55,822 $ 13 0.09 % $ 65,546 $ 42 0.06 % $ 52,701 $ 62 0.12 %
Payables to brokerage clients 30,368 1 0.01 % 32,079 1 0.01 % 29,831 3 0.01 % 29,992 3 0.01 %
Long-term debt     1,815     22   4.82 %   2,002     27   5.35 %   1,934     103   5.33 %   2,004     108   5.39 %
Total interest-bearing liabilities     103,594     34   0.13 %   89,903     41   0.18 %   97,311     148   0.15 %   84,697     173   0.20 %
Non-interest-bearing funding sources 11,828 10,161 11,548 10,708
Other interest expense         -           -           2           2    
Total funding sources   $ 115,422   $ 34   0.12 % $ 100,064   $ 41   0.16 % $ 108,859   $ 150   0.14 % $ 95,405   $ 175   0.18 %
Net interest revenue       $ 433   1.49 %     $ 395   1.57 %     $ 1,764   1.62 %     $ 1,725   1.81 %
(1)   Interest revenue was less than $500,000 in the period or periods presented.
(2) Amounts have been calculated based on amortized cost.
 

See Note to Consolidated Statements of Income, Financial and Operating Highlights, and Net Interest Revenue Information.

 
Note 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 period amounts have been reclassified to conform to the 2012 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, 2011.
 
 
THE CHARLES SCHWAB CORPORATION
Asset Management and Administration Fees Information
(In millions)
(Unaudited)
                                                 
  Three Months Ended Twelve Months Ended
December 31, December 31,
2012   2011 2012   2011
Average     Average     Average     Average    
Client Average Client Average Client Average Client Average
    Assets   Revenue   Fee Assets   Revenue   Fee Assets   Revenue   Fee Assets   Revenue   Fee

 

Schwab money market funds before fee waivers

$ 159,421 $ 228 0.57 % $ 157,863 $ 226 0.57 % $ 155,866 $ 891 0.57 % $ 153,478 $ 865 0.56 %
Fee waivers         (142 )           (168 )           (587 )           (568 )    
Schwab money market funds 159,421 86 0.21 % 157,863 58 0.15 % 155,866 304 0.20 % 153,478 297 0.19 %
Equity and bond funds (1) 50,559 30 0.24 % 40,711 29 0.28 % 47,778 125 0.26 % 41,347 118 0.29 %
Mutual Fund OneSource ®     221,338     179     0.32 %   200,779     160     0.32 %   216,564     680     0.31 %   210,907     680     0.32 %
Total mutual funds (2)   $ 431,318     295     0.27 % $ 399,353     247     0.25 % $ 420,208     1,109     0.26 % $ 405,732     1,095     0.27 %
Advice solutions (2) $ 125,589 153 0.48 % $ 108,048 130 0.48 % $ 119,850 580 0.48 % $ 109,703 522 0.48 %
Other (3)         91             81             354             311      

Total asset management and administration fees

      $ 539           $ 458           $ 2,043           $ 1,928      
(1)   Includes Schwab ETFs.
(2)

Advice solutions include separately managed accounts, customized personal advice for tailored portfolios, and specialized planning and full-time portfolio management offered through the Company's Schwab Private Client, Schwab Managed Portfolio and Managed Account Select programs. Advice solutions also includes Schwab Advisor Network, Schwab Advisor Source, and Windhaven. Average client assets for advice solutions may also include the asset balances contained in the three categories of mutual funds listed above.

(3) Includes various asset based fees, such as trust fees, 401k record keeping fees, and mutual fund clearing and other service fees.
 
THE CHARLES SCHWAB CORPORATION
Growth in Client Assets and Accounts
(Unaudited)
             
 

Q4-12 % Change

2012 2011
vs. vs. Fourth Third Second First Fourth
(In billions, at quarter end, except as noted) Q4-11 Q3-12 Quarter   Quarter   Quarter   Quarter Quarter
Assets in client accounts

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

23 % 15 % $ 119.0 $ 103.7 $ 98.2 $ 98.8 $ 96.4
Proprietary funds (Schwab Funds ® and Laudus Funds ®):
Money market funds 5 % 8 % 167.9 155.7 152.9 154.4 159.8
Equity and bond funds 30 % 2 %   49.6       48.4       45.3       45.8       38.2  
Total proprietary funds 10 % 7 %   217.5       204.1       198.2       200.2       198.0  
Mutual Fund Marketplace ® (1)
Mutual Fund OneSource ® 12 % - 223.2 222.1 211.2 219.5 198.6
Mutual fund clearing services 53 % 18 % 159.1 134.4 126.4 127.0 104.2
Other third-party mutual funds 18 % 3 %   360.1       350.0       328.7       334.1       305.9  
Total Mutual Fund Marketplace 22 % 5 %   742.4       706.5       666.3       680.6       608.7  
Total mutual fund assets 19 % 5 %   959.9       910.6       864.5       880.8       806.7  
Equity and other securities (1) 16 % - 702.4 705.5 670.4 685.0 607.9
Fixed income securities 3 % - 181.8 181.8 180.5 179.4 176.9
Margin loans outstanding 13 % 3 %   (11.5 )     (11.2 )     (11.2 )     (10.5 )     (10.2 )
Total client assets 16 % 3 % $ 1,951.6     $ 1,890.4     $ 1,802.4     $ 1,833.5     $ 1,677.7  
 
Client assets by business
Investor Services 11 % 1 % $ 775.4 $ 770.4 $ 737.0 $ 753.3 $ 697.9
Advisor Services 16 % 3 % 788.5 762.3 727.6 735.9 679.0
Other Institutional Services 29 % 8 %   387.7       357.7       337.8       344.3       300.8  
Total client assets by business 16 % 3 % $ 1,951.6     $ 1,890.4     $ 1,802.4     $ 1,833.5     $ 1,677.7  
 
Net growth in assets in client accounts (for the quarter ended)
Net new assets
Investor Services (2) 98 % 144 % $ 10.5 $ 4.3 $ 2.9 $ 5.9 $ 5.3
Advisor Services (3) 165 % 157 % 24.4 9.5 9.9 12.6 9.2
Other Institutional Services (4) N/M N/M   29.5       6.6       3.2       20.4       7.0  
Total net new assets N/M N/M   64.4       20.4       16.0       38.9       21.5  
Net market (losses) gains (104 %) (105 %)   (3.2 )     67.6       (47.1 )     116.9       79.8  
Net growth (decline) (40 %) (30 %) $ 61.2     $ 88.0     $ (31.1 )   $ 155.8     $ 101.3  
 
New brokerage accounts (in thousands, for the quarter ended) 19 % 22 % 241 198 221 240 203
Clients (in thousands)
Active Brokerage Accounts (5) 3 % 1 % 8,787 8,736 8,720 8,639 8,552
Banking Accounts 11 % 2 % 865 844 822 801 780
Corporate Retirement Plan Participants 5 % 2 %   1,571       1,547       1,524       1,516       1,492  
 
(1)   Excludes all proprietary money market, equity, and bond funds.
(2) Includes outflows of approximately $100 million as a result of the sale of Open E Cry, LLC, in the third quarter of 2012.
(3) Includes inflows of approximately $900 million as a result of the acquisition of ThomasPartners, Inc., in the fourth quarter of 2012.
(4)

Includes inflows of $21.1 billion from mutual fund clearing services clients and outflows of $900 million related to a planned transfer from Corporate Brokerage Services in the fourth quarter of 2012. Includes outflows of $1.2 billion as a result of the closure of brokersXpress LLC in the third quarter of 2012. Includes inflows of $12.0 billion from a mutual fund clearing services client in the first quarter of 2012.

(5)

Removed approximately 30,000 due to escheatment and other factors in the fourth quarter of 2012. Reduced by 19,000 as a result of the sale of Open E Cry, LLC, and the closure of brokersXpress LLC in the third quarter of 2012.

N/M

Not meaningful





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