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Schwab Reports Second Quarter Results

Stocks in this article: SCHW

About Charles Schwab

The Charles Schwab Corporation (NYSE: SCHW) is a leading provider of financial services, with more than 300 offices and 9.0 million active brokerage accounts, 1.6 million corporate retirement plan participants, 910,000 banking accounts, and $2.05 trillion in client assets as of June 30, 2013. 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 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 EndedJune 30,   Six Months EndedJune 30,
    2013   2012   2013   2012
   
Net Revenues
Asset management and administration fees $ 572 $ 496 $ 1,124 $ 980
 
Interest revenue 499 497 996 969
Interest expense   (26 )   (39 )   (54 )   (77 )
Net interest revenue 473 458 942 892
 
Trading revenue 235 219 458 462
Other 59 121 115 167
Provision for loan losses 1 (4 ) (5 ) (4 )
Net impairment losses on securities (1) (3 ) (7 ) (7 ) (25 )
                 
Total net revenues     1,337       1,283       2,627       2,472  
 
Expenses Excluding Interest
Compensation and benefits 494 446 1,030 911
Professional services 106 93 205 189
Occupancy and equipment 77 80 154 156
Advertising and market development 67 57 141 124
Communications 56 55 110 113
Depreciation and amortization 51 48 102 96
Other     74       72       142       138  
Total expenses excluding interest     925       851       1,884       1,727  
 
Income before taxes on income 412 432 743 745
Taxes on income     156       157       281       275  
 
Net Income     256       275       462       470  
 
Preferred stock dividends     23       14       31       14  
 
Net Income Available to Common Stockholders   $ 233     $ 261     $ 431     $ 456  
 
Weighted-Average Common Shares Outstanding — Diluted     1,288       1,274       1,285       1,273  
 
Earnings Per Common Share — Basic $ .18 $ .20 $ .33 $ .36
 
Earnings Per Common Share — Diluted   $ .18     $ .20     $ .33     $ .36  
(1) Net impairment losses on securities include total other-than-temporary impairment losses of $2 million and $12 million, net of $(1) million and $5 million reclassified from or recognized in other comprehensive income, for the three months ended June 30, 2013 and 2012, respectively. Net impairment losses on securities include total other-than-temporary impairment losses of $2 million and $14 million, net of $(5) million and $(11) million reclassified from other comprehensive income, for the six months ended June 30, 2013 and 2012, 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)
     
 

Q2-13 % change

2013   2012
(In millions, except per share amounts and as noted) vs.Q2-12   vs.Q1-13 SecondQuarter   FirstQuarter   FourthQuarter   ThirdQuarter   SecondQuarter
Net Revenues      
Asset management and administration fees 15 % 4 % $ 572 $ 552 $ 539 $ 524 $ 496
Net interest revenue 3 % 1 % 473 469 433 439 458
Trading revenue 7 % 5 % 235 223 202 204 219
Other (1) (51 %) 5 % 59 56 47 42 121
Provision for loan losses (125 %) (117 %) 1 (6 ) (2 ) (10 ) (4 )
Net impairment losses on securities (57 %) (25 %)   (3 )     (4 )     (4 )     (3 )     (7 )
Total net revenues 4 % 4 %   1,337       1,290       1,215       1,196       1,283  
Expenses Excluding Interest
Compensation and benefits 11 % (8 %) 494 536 450 442 446
Professional services 14 % 7 % 106 99 101 98 93
Occupancy and equipment (4 %) - 77 77 78 77 80
Advertising and market development 18 % (9 %) 67 74 68 49 57
Communications 2 % 4 % 56 54 54 53 55
Depreciation and amortization 6 % - 51 51 50 50 48
Other 3 % 9 %   74       68       70       66       72  
Total expenses excluding interest 9 % (4 %)   925       959       871       835       851  
Income before taxes on income (5 %) 24 % 412 331 344 361 432
Taxes on income (2) (1 %) 25 %   156       125       133       114       157  
Net Income (7 %) 24 % $ 256     $ 206     $ 211     $ 247     $ 275  
Preferred stock dividends 64 % 188 %   23       8       22       9       14  
Net Income Available to Common Stockholders (11 %) 18 % $ 233     $ 198     $ 189     $ 238     $ 261  
Basic earnings per common share (10 %) 20 % $ .18 $ .15 $ .15 $ .19 $ .20
Diluted earnings per common share (10 %) 20 % $ .18 $ .15 $ .15 $ .19 $ .20
Dividends declared per common share - - $ .06 $ .06 $ .06 $ .06 $ .06
Weighted-average common shares outstanding - diluted 1 % -   1,288       1,282       1,278       1,275       1,274  
Performance Measures
Pre-tax profit margin 30.8 % 25.7 % 28.3 % 30.2 % 33.7 %
Return on average common stockholders’ equity (annualized) (3)   10 %     9 %     9 %     11 %     13 %
Financial Condition (at quarter end, in billions)
Cash and investments segregated 19 % - $ 27.0 $ 26.9 $ 28.5 $ 25.0 $ 22.7
Receivables from brokerage clients 7 % 2 % $ 12.8 $ 12.5 $ 13.5 $ 11.9 $ 12.0
Loans to banking clients 19 % 4 % $ 11.7 $ 11.3 $ 10.7 $ 10.1 $ 9.8
Total assets 22 % 2 % $ 135.9 $ 133.3 $ 133.6 $ 117.7 $ 111.8
Deposits from banking clients 27 % 2 % $ 84.3 $ 82.4 $ 79.4 $ 68.8 $ 66.3
Payables to brokerage clients 16 % - $ 36.9 $ 36.9 $ 40.3 $ 34.8 $ 31.8
Long-term debt (20 %) - $ 1.6 $ 1.6 $ 1.6 $ 1.8 $ 2.0
Stockholders' equity (4) 7 % (1 %) $ 9.7     $ 9.8     $ 9.6     $ 9.5     $ 9.1  
Other
Full-time equivalent employees (at quarter end, in thousands) 1 % (1 %) 13.9 14.0 13.8 13.6 13.7

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

3 % 4 % $ 385 $ 369 $ 355 $ 352 $ 372

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

123 % 53 % $ 69     $ 45     $ 40     $ 33     $ 31  
Clients’ Daily Average Trades (in thousands)
Revenue trades (5) 6 % 1 % 301.5 298.7 265.7 261.5 285.2
Asset-based trades (6) 36 % 7 % 69.0 64.5 59.6 45.2 50.6
Other trades (7) 27 % (7 %)   126.7       135.7       124.7       95.7       99.8  
Total 14 % -   497.2       498.9       450.0       402.4       435.6  
Average Revenue Per Revenue Trade (5) - (1 %) $ 12.19     $ 12.34     $ 12.49     $ 12.44     $ 12.15  
 
(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 of 2012, the Company issued non-cumulative perpetual preferred stock, Series B, for a total liquidation preference of $485 million.
(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.
(7) Includes all commission free trades, including Schwab Mutual Fund OneSource ® funds and ETFs, and other proprietary products.
 
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 EndedJune 30,

Six Months EndedJune 30,

2013   2012 2013   2012
    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 $ 6,148 $ 3 0.20 % $ 5,721 $ 4 0.28 % $ 7,023 $ 8 0.23 % $ 6,134 $ 8 0.26 %
Cash and investments segregated 26,438 9 0.14 % 25,429 11 0.17 % 27,011 21 0.16 % 26,140 21 0.16 %
Broker-related receivables (1) 398 - 0.12 % 306 - 0.06 % 379 - 0.13 % 311 - 0.07 %
Receivables from brokerage clients 11,571 106 3.67 % 11,091 115 4.17 % 11,457 212 3.73 % 10,646 221 4.17 %
Securities available for sale (2) 48,611 137 1.13 % 38,407 152 1.59 % 47,764 275 1.16 % 37,302 297 1.60 %
Securities held to maturity 22,857 133 2.33 % 15,240 108 2.85 % 21,965 264 2.42 % 15,106 207 2.76 %
Loans to banking clients 11,603 79 2.73 % 9,884 77 3.13 % 11,348 159 2.83 % 9,874 156 3.18 %
Loans held for sale (1)     -     -   -     18     -   4.04 %   -     -   -     36     1   4.12 %
Total interest-earning assets     127,626     467   1.47 %   106,096     467   1.77 %   126,947     939   1.49 %   105,549     911   1.74 %
Other interest revenue         32           30           57           58    
Total interest-earning assets   $ 127,626   $ 499   1.57 % $ 106,096   $ 497   1.88 % $ 126,947   $ 996   1.58 % $ 105,549   $ 969   1.85 %
Funding sources:
Deposits from banking clients $ 82,260 $ 7 0.03 % $ 62,560 $ 10 0.06 % $ 81,306 $ 17 0.04 % $ 61,833 $ 20 0.07 %
Payables to brokerage clients (1) 31,164 - 0.01 % 29,977 - 0.01 % 31,627 1 0.01 % 30,266 1 0.01 %
Long-term debt     1,630     17   4.18 %   1,999     27   5.43 %   1,631     34   4.20 %   2,000     54   5.43 %
Total interest-bearing liabilities     115,054     24   0.08 %   94,536     37   0.16 %   114,564     52   0.09 %   94,099     75   0.16 %
Non-interest-bearing funding sources 12,572 11,560 12,383 11,450
Other interest expense         2           2           2           2    
Total funding sources   $ 127,626   $ 26   0.08 % $ 106,096   $ 39   0.14 % $ 126,947   $ 54   0.08 % $ 105,549   $ 77   0.15 %
Net interest revenue       $ 473   1.49 %     $ 458   1.74 %     $ 942   1.50 %     $ 892   1.70 %
(1) Interest revenue or expense 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. 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, 2012.
 
THE CHARLES SCHWAB CORPORATION Asset Management and Administration Fees Information(In millions)(Unaudited)
     
 

Three Months EndedJune 30,

Six Months EndedJune 30,

2013   2012 2013   2012
    Average

Client

Assets

 

Revenue

  Average

Fee

Average

Client

Assets

 

Revenue

  Average

Fee

Average

Client

Assets

 

Revenue

  Average

Fee

Average

Client

Assets

 

Revenue

  Average

Fee

               

Schwab money market funds before fee waivers

$ 158,194 $ 226 0.57 % $ 153,103 $ 220 0.58 % $ 160,416 $ 456 0.57 % $ 154,858 $ 442 0.57 %
Fee waivers         (157 )           (146 )           (312 )           (309 )    
Schwab money market funds 158,194 69 0.17 % 153,103 74 0.19 % 160,416 144 0.18 % 154,858 133 0.17 %
Equity and bond funds (1) 61,276 38 0.25 % 46,375 31 0.27 % 58,408 73 0.25 % 46,003 63 0.28 %
Mutual Fund OneSource ®     239,763     191     0.32 %   212,028     164     0.31 %   237,361     375     0.32 %   213,689     330     0.31 %
Total mutual funds (2)   $ 459,233     298     0.26 % $ 411,506     269     0.26 % $ 456,185     592     0.26 % $ 414,550     526     0.26 %
Advice solutions (2) $ 142,181 177 0.50 % $ 117,001 140 0.48 % $ 138,827 340 0.49 % $ 116,248 279 0.48 %
Other (3)         97             87             192             175      

Total asset management and administration fees

      $ 572           $ 496           $ 1,124           $ 980      
(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 include Schwab Advisor Network, Schwab Advisor Source, Windhaven, and ThomasPartners. 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, 401(k) record keeping fees, and mutual fund clearing and other service fees.
 
THE CHARLES SCHWAB CORPORATION Reconciliation of Net Revenues and Net Income Excluding Certain Items to Reported Amounts(In millions)(Unaudited)
 
Three Months EndedJune 30,   Six Months EndedJune 30,
  2013   2012   % Change   2013   2012   % Change
       
Net Revenues Excluding Certain Items (1) $ 1,337 $ 1,213 10% $ 2,627 $ 2,402 9%
Other revenues (2)   -     70     N/M     -     70     N/M
 
Reported Net Revenues $ 1,337   $ 1,283     4%   $ 2,627   $ 2,472     6%
 
Net Income Excluding Certain Items (1) $ 256 $ 231 11% $ 462 $ 426 8%
Add: Other revenues excluded above - 70 N/M - 70 N/M
Tax expense   -     (26 )   N/M     -     (26 )   N/M
 
Reported Net Income $ 256   $ 275     (7%)   $ 462   $ 470     (2%)
(1)

Management believes these non-GAAP financial measures are useful indicators of the Company's ongoing financial performance that can provide meaningful insight into financial performance without the effects of a certain material item that is not expected to be an ongoing part of operations.

(2) Relates to a confidential resolution of a vendor dispute, which was received in the second quarter of 2012.
N/M Not meaningful.
 
THE CHARLES SCHWAB CORPORATION Growth in Client Assets and Accounts(Unaudited)
     
 

Q2-13 % Change

2013   2012
(In billions, at quarter end, except as noted) vs.Q2-12   vs.Q1-13 SecondQuarter   FirstQuarter   FourthQuarter   ThirdQuarter   SecondQuarter
Assets in client accounts        

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

23 % 2 % $ 121.1 $ 119.2 $ 119.0 $ 103.7 $ 98.2
Proprietary funds (Schwab Funds ® and Laudus Funds ®):
Money market funds 6 % 1 % 161.6 159.3 167.9 155.7 152.9
Equity and bond funds 30 % 5 %   59.0       56.3       49.6       48.4       45.3  
Total proprietary funds 11 % 2 %   220.6       215.6       217.5       204.1       198.2  
Mutual Fund Marketplace ® (1)
Mutual Fund OneSource ® 11 % (2 %) 234.9 238.8 223.2 222.1 211.2
Mutual fund clearing services 11 % (23 %) 140.6 181.5 159.1 134.4 126.4
Other third-party mutual funds 18 % -   388.3       388.4       360.1       350.0       328.7  
Total Mutual Fund Marketplace 15 % (6 %)   763.8       808.7       742.4       706.5       666.3  
Total mutual fund assets 14 % (4 %)   984.4       1,024.3       959.9       910.6       864.5  
Equity and other securities (1) 16 % 1 % 779.5 772.3 702.4 705.5 670.4
Fixed income securities (2 %) (2 %) 177.6 180.5 181.8 181.8 180.5
Margin loans outstanding 4 % 3 %   (11.7 )     (11.4 )     (11.5 )     (11.2 )     (11.2 )
Total client assets 14 % (2 %) $ 2,050.9     $ 2,084.9     $ 1,951.6     $ 1,890.4     $ 1,802.4  
 
Client assets by business (2)
Investor Services 12 % (3 %) $ 1,150.5 $ 1,190.2 $ 1,112.1 $ 1,078.4 $ 1,027.7
Advisor Services 16 % 1 %   900.4       894.7       839.5       812.0       774.7  
Total client assets by business 14 % (2 %) $ 2,050.9     $ 2,084.9     $ 1,951.6     $ 1,890.4     $ 1,802.4  
 
Net growth in assets in client accounts (for the quarter ended)
Net new assets (2)
Investor Services (3) N/M N/M $ (35.3 ) $ 27.5 $ 39.1 $ 10.0 $ 5.4
Advisor Services (4) 28 % (14 %)   13.6       15.9       25.3       10.4       10.6  
Total net new assets N/M (150 %)   (21.7 )     43.4       64.4       20.4       16.0  
Net market (losses) gains 74 % (114 %)   (12.3 )     89.9       (3.2 )     67.6       (47.1 )
Net (decline) growth (9 %) (126 %) $ (34.0 )   $ 133.3     $ 61.2     $ 88.0     $ (31.1 )
 
New brokerage accounts (in thousands, for the quarter ended) 10 % - 243 244 241 198 221
Clients (in thousands)
Active Brokerage Accounts (5) 3 % 1 % 8,962 8,865 8,787 8,736 8,720
Banking Accounts 11 % 2 % 910 888 865 844 822
Corporate Retirement Plan Participants 5 % 1 %   1,595       1,575       1,571       1,547       1,524  
 
(1) Excludes all proprietary money market, equity, and bond funds.
(2)

In the first quarter of 2013, the Company realigned its reportable segments as a result of organizational changes. The segment formerly reported as Institutional Services was renamed to Advisor Services. Additionally, the Retirement Plan Services and Corporate Brokerage Services business units are now part of the Investor Services segment. Prior period segment information has been recast to reflect these changes.

(3)

Includes outflows of $44.3 billion relating to the planned transfer of a mutual fund clearing services client in the second quarter of 2013. The second quarter of 2013 also includes inflows of $2.6 billion from another mutual fund clearing services client. Includes inflows of $10.3 billion from certain mutual fund clearing services clients in the first quarter of 2013. Includes inflows of $21.1 billion from certain 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 approximately $100 million as a result of the sale of Open E Cry, LLC, in the third quarter of 2012.

(4)

Includes inflows of approximately $900 million as a result of the acquisition of ThomasPartners, Inc., 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.

(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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