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Schwab Third Quarter Revenues Rise 15%, Reach Highest Level In 13 Years

Important factors that may cause such differences include, but are not limited to, general market conditions, including the level of interest rates, equity valuations and trading activity; 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; capital needs and management; the company’s ability to develop and launch new products, services and capabilities in a timely and successful manner, including the ETF 401(k) Plan solution; operating and expense discipline; the impact of changes in market conditions on money market fund fee waivers, revenues, expenses and pre-tax margins; the level of field sales activity and related incentive compensation; regulatory guidance; acquisition integration costs; the volume of prepayments in the company’s mortgage-backed securities portfolio; net interest margin; client enrollments in advised solutions and utilization of commission-free platforms; trading activity; 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 June 30, 2013.

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, 1.3 million corporate retirement plan participants, 930,000 banking accounts, and $2.15 trillion in client assets as of September 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 Ended   Nine Months Ended
September 30, September 30,
      2013   2012   2013   2012
   
Net Revenues
Asset management and administration fees $ 583 $ 524 $ 1,707 $ 1,504
Interest revenue 531 478 1,527 1,447
Interest expense   (25 )   (39 )   (79 )   (116 )
Net interest revenue 506 439 1,448 1,331
Trading revenue 224 204 682 666
Other 57 42 172 209
Provision for loan losses 4 (10 ) (1 ) (14 )
Net impairment losses on securities (1)       (1 )     (3 )     (8 )     (28 )
Total net revenues       1,373       1,196       4,000       3,668  
Expenses Excluding Interest
Compensation and benefits 482 442 1,512 1,353
Professional services 103 98 308 287
Occupancy and equipment 77 77 231 233
Advertising and market development 57 49 198 173
Communications 55 53 165 166
Depreciation and amortization 51 50 153 146
Other       84       66       226       204  
Total expenses excluding interest       909       835       2,793       2,562  
Income before taxes on income 464 361 1,207 1,106
Taxes on income       174       114       455       389  
Net Income       290       247       752       717  
Preferred stock dividends       8       9       39       23  
Net Income Available to Common Stockholders     $ 282     $ 238     $ 713     $ 694  
Weighted-Average Common Shares Outstanding — Diluted       1,296       1,275       1,288       1,274  
Earnings Per Common Share — Basic $ .22 $ .19 $ .55 $ .54
Earnings Per Common Share — Diluted     $ .22     $ .19     $ .55     $ .54  
(1)   Net impairment losses on securities include total other-than-temporary impairment losses of $0 million and $1 million, net of $(1) million and $(2) million reclassified from other comprehensive income, for the three months ended September 30, 2013 and 2012, respectively. Net impairment losses on securities include total other-than-temporary impairment losses of $2 million and $15 million, net of $(6) million and $(13) million reclassified from other comprehensive income, for the nine months ended September 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)
               
 

Q3-13 % change

2013

2012

vs. vs. Third Second First Fourth Third
(In millions, except per share amounts and as noted) Q3-12 Q2-13 Quarter   Quarter   Quarter   Quarter   Quarter
Net Revenues
Asset management and administration fees 11 % 2 % $ 583 $ 572 $ 552 $ 539 $ 524
Net interest revenue 15 % 7 % 506 473 469 433 439
Trading revenue 10 % (5 %) 224 235 223 202 204
Other 36 % (3 %) 57 59 56 47 42
Provision for loan losses (140 %) N/M 4 1 (6 ) (2 ) (10 )
Net impairment losses on securities (67 %) (67 %)   (1 )     (3 )     (4 )     (4 )     (3 )
Total net revenues 15 % 3 %   1,373       1,337       1,290       1,215       1,196  
Expenses Excluding Interest
Compensation and benefits 9 % (2 %) 482 494 536 450 442
Professional services 5 % (3 %) 103 106 99 101 98
Occupancy and equipment - - 77 77 77 78 77
Advertising and market development 16 % (15 %) 57 67 74 68 49
Communications 4 % (2 %) 55 56 54 54 53
Depreciation and amortization 2 % - 51 51 51 50 50
Other 27 % 14 %   84       74       68       70       66  
Total expenses excluding interest 9 % (2 %)   909       925       959       871       835  
Income before taxes on income 29 % 13 % 464 412 331 344 361
Taxes on income (1) 53 % 12 %   174       156       125       133       114  
Net Income 17 % 13 % $ 290     $ 256     $ 206     $ 211     $ 247  
Preferred stock dividends (11 %) (65 %)   8       23       8       22       9  
Net Income Available to Common Stockholders 18 % 21 % $ 282     $ 233     $ 198     $ 189     $ 238  
Basic earnings per common share 16 % 22 % $ .22 $ .18 $ .15 $ .15 $ .19
Diluted earnings per common share 16 % 22 % $ .22 $ .18 $ .15 $ .15 $ .19
Dividends declared per common share - - $ .06 $ .06 $ .06 $ .06 $ .06
Weighted-average common shares outstanding - diluted 2 % 1 %   1,296       1,288       1,282       1,278       1,275  
Performance Measures
Pre-tax profit margin 33.8 % 30.8 % 25.7 % 28.3 % 30.2 %
Return on average common stockholders’ equity (annualized) (2)   13 %     10 %     9 %     9 %     11 %
Financial Condition (at quarter end, in billions)
Cash and investments segregated (6 %) (13 %) $ 23.5 $ 27.0 $ 26.9 $ 28.5 $ 25.0
Receivables from brokerage clients 10 % 2 % $ 13.1 $ 12.8 $ 12.5 $ 13.5 $ 11.9
Loans to banking clients 20 % 3 % $ 12.1 $ 11.7 $ 11.3 $ 10.7 $ 10.1
Total assets 19 % 3 % $ 140.2 $ 135.9 $ 133.3 $ 133.6 $ 117.7
Deposits from banking clients 33 % 8 % $ 91.2 $ 84.3 $ 82.4 $ 79.4 $ 68.8
Payables to brokerage clients (1 %) (7 %) $ 34.5 $ 36.9 $ 36.9 $ 40.3 $ 34.8
Long-term debt 6 % 19 % $ 1.9 $ 1.6 $ 1.6 $ 1.6 $ 1.8
Stockholders' equity 6 % 4 % $ 10.1     $ 9.7     $ 9.8     $ 9.6     $ 9.5  
Other
Full-time equivalent employees (at quarter end, in thousands) 1 % (1 %) 13.8 13.9 14.0 13.8 13.6

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

13 % 3 % $ 398 $ 385 $ 369 $ 355 $ 352

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

97 % (6 %) $ 65     $ 69     $ 45     $ 40     $ 33  
Clients’ Daily Average Trades (in thousands)
Revenue trades (3) 8 % (6 %) 283.2 301.5 298.7 265.7 261.5
Asset-based trades (4) 29 % (16 %) 58.3 69.0 64.5 59.6 45.2
Other trades (5) 43 % 8 %   137.1       126.7       135.7       124.7       95.7  
Total 19 % (4 %)   478.6       497.2       498.9       450.0       402.4  
Average Revenue Per Revenue Trade (3) - 2 % $ 12.39     $ 12.19     $ 12.34     $ 12.49     $ 12.44  
   
(1)   Includes a non-recurring state tax benefit of $20 million in the third quarter of 2012.
(2) Return on average common stockholders' equity is calculated using net income available to common stockholders divided by average common stockholders' equity.
(3) Includes all client trades that generate either commission revenue or revenue from principal markups (i.e., fixed income); also known as DART.
(4) Includes eligible trades executed by clients who participate in one or more of the Company's asset-based pricing relationships.
(5) 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 EndedSeptember 30,

   

Nine Months EndedSeptember 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 $ 8,034 $ 4 0.20 % $ 7,942 $ 4 0.20 % $ 7,094 $ 12 0.23 % $ 6,741 $ 12 0.24 %
Cash and investments segregated 24,425 8 0.13 % 23,516 12 0.20 % 26,148 29 0.15 % 25,259 33 0.17 %
Broker-related receivables (1) 351 - 0.01 % 414 - - 370 - 0.09 % 345 - 0.02 %
Receivables from brokerage clients 11,846 109 3.65 % 10,956 112 4.07 % 11,588 321 3.70 % 10,750 333 4.14 %
Securities available for sale (2) 49,205 138 1.11 % 40,701 146 1.43 % 48,250 413 1.14 % 38,443 443 1.54 %
Securities held to maturity 26,819 166 2.46 % 15,311 95 2.47 % 23,601 430 2.44 % 15,175 302 2.66 %
Loans to banking clients 12,004 84 2.78 % 10,014 77 3.06 % 11,569 243 2.81 % 9,921 233 3.14 %
Loans held for sale (1)       -     -   -         1     -   4.06 %   -     -   -         24     1   4.12 %
Total interest-earning assets       132,684     509   1.52 %       108,855     446   1.63 %   128,620     1,448   1.51 %       106,658     1,357   1.70 %
Other interest revenue           22               32           79               90    
Total interest-earning assets     $ 132,684   $ 531   1.59 %     $ 108,855   $ 478   1.74 % $ 128,620   $ 1,527   1.59 %     $ 106,658   $ 1,447   1.81 %
Funding sources:
Deposits from banking clients $ 87,793 $ 7 0.03 % $ 67,027 $ 11 0.07 % $ 83,492 $ 24 0.04 % $ 63,577 $ 31 0.07 %
Payables to brokerage clients 29,312 1 0.01 % 28,435 1 0.01 % 30,847 2 0.01 % 29,651 2 0.01 %
Long-term debt       1,833     17   3.68 %       1,923     27   5.59 %   1,699     51   4.01 %       1,974     81   5.48 %
Total interest-bearing liabilities       118,938     25   0.08 %       97,385     39   0.16 %   116,038     77   0.09 %       95,202     114   0.16 %
Non-interest-bearing funding sources 13,746 11,470 12,582 11,456
Other interest expense           -               -           2               2    
Total funding sources     $ 132,684   $ 25   0.08 %     $ 108,855   $ 39   0.14 % $ 128,620   $ 79   0.08 %     $ 106,658   $ 116   0.14 %
Net interest revenue         $ 506   1.51 %         $ 439   1.60 %     $ 1,448   1.51 %         $ 1,331   1.67 %
(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. 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, as updated by the Company's Current Report on Form 8-K filed on June 24, 2013, relating to the realignment of the Company's reportable segments.
 
**********
 
THE CHARLES SCHWAB CORPORATION
Asset Management and Administration Fees Information
(In millions)
(Unaudited)
                                                   
  Three Months Ended

September 30,

Nine Months Ended

September 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

$ 163,936 $ 239 0.58 % $ 154,977 $ 221 0.57 % $ 161,589 $ 695 0.58 % $ 154,682 $ 663 0.57 %
Fee waivers         (180 )           (136 )           (492 )           (445 )    
Schwab money market funds 163,936 59 0.14 % 154,977 85 0.22 % 161,589 203 0.17 % 154,682 218 0.19 %
Equity and bond funds (1) 64,956 41 0.25 % 48,557 32 0.26 % 60,591 114 0.25 % 46,851 95 0.27 %
Mutual Fund OneSource ®     241,653     195     0.32 %   217,540     171     0.31 %   238,792     570     0.32 %   214,972     501     0.31 %
Total mutual funds (2)   $ 470,545     295     0.25 % $ 421,074     288     0.27 % $ 460,972     887     0.26 % $ 416,505     814     0.26 %
Advice solutions (2) $ 145,468 183 0.50 % $ 120,112 148 0.49 % $ 141,040 523 0.50 % $ 117,536 427 0.49 %
Other (3)         105             88             297             263      

Total asset management and administration fees

      $ 583           $ 524           $ 1,707           $ 1,504      
(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
Growth in Client Assets and Accounts
(Unaudited)
                 
 

Q3-13 % Change

2013 2012
vs.   vs. Third Second First Fourth Third
(In billions, at quarter end, except as noted)   Q3-12   Q2-13   Quarter   Quarter   Quarter   Quarter   Quarter
Assets in client accounts

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

21 % 3 % $ 125.0 $ 121.1 $ 119.2 $ 119.0 $ 103.7
Proprietary funds (Schwab Funds ® and Laudus Funds ®):
Money market funds 6 % 2 % 165.1 161.6 159.3 167.9 155.7
Equity and bond funds 33 % 9 %   64.2       59.0       56.3       49.6       48.4  
Total proprietary funds 12 % 4 %   229.3       220.6       215.6       217.5       204.1  

Mutual Fund Marketplace ® (1)

Mutual Fund OneSource ® 11 % 5 % 246.5 234.9 238.8 223.2 222.1
Mutual fund clearing services 22 % 17 % 164.5 140.6 181.5 159.1 134.4
Other third-party mutual funds 10 % (1 %)   384.1       388.3       388.4       360.1       350.0  
Total Mutual Fund Marketplace 13 % 4 %   795.1       763.8       808.7       742.4       706.5  
Total mutual fund assets 12 % 4 %   1,024.4       984.4       1,024.3       959.9       910.6  
Equity and other securities (1) 18 % 7 % 830.7 779.5 772.3 702.4 705.5
Fixed income securities (3 %) - 176.9 177.6 180.5 181.8 181.8
Margin loans outstanding (7 %) (3 %)   (12.0 )     (11.7 )     (11.4 )     (11.5 )     (11.2 )
Total client assets 13 % 5 % $ 2,145.0     $ 2,050.9     $ 2,084.9     $ 1,951.6     $ 1,890.4  
 
Client assets by business (2)
Investor Services 11 % 4 % $ 1,196.0 $ 1,150.5 $ 1,190.2 $ 1,112.1 $ 1,078.4
Advisor Services 17 % 5 %   949.0       900.4       894.7       839.5       812.0  
Total client assets 13 % 5 % $ 2,145.0     $ 2,050.9     $ 2,084.9     $ 1,951.6     $ 1,890.4  
 
Net growth in assets in client accounts (for the quarter ended)
Net new assets
Investor Services (2, 3, 4) (76 %) 107 % $ 2.4 $ (35.3 ) $ 27.5 $ 39.1 $ 10.0

Advisor Services (2, 5)

51 % 15 %   15.7       13.6       15.9       25.3       10.4  
Total net new assets (11 %) 183 %   18.1       (21.7 )     43.4       64.4       20.4  
Net market gains (losses) 12 % N/M   76.0       (12.3 )     89.9       (3.2 )     67.6  
Net growth (decline) 7 % N/M $ 94.1     $ (34.0 )   $ 133.3     $ 61.2     $ 88.0  
 
New brokerage accounts (in thousands, for the quarter ended) 13 % (8 %) 223 243 244 241 198
Clients (in thousands)
Active Brokerage Accounts (6) 3 % 1 % 9,013 8,962 8,865 8,787 8,736
Banking Accounts 10 % 2 % 930 910 888 865 844
Corporate Retirement Plan Participants (3) (16 %) (19 %)   1,297       1,595       1,575       1,571       1,547  
     
(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)

In third quarter of 2013, the Company reduced its reported totals for overall client assets and retirement plan participants by $24.7 billion and 317,000, respectively, to reflect the estimated impact of the consolidation of its retirement plan recordkeeping platforms and subsequent resignation from certain retirement plan clients.

(4)

Includes inflows of $17.5 billion and outflows of $2.1 billion from certain mutual fund clearing services clients in the third quarter of 2013. 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.

(5)

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.

(6)

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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