Schwab Reports Second Quarter Results

Schwab Reports Second Quarter Results

Core Net New Assets Total $22.6 Billion, up 41% Year-over-Year

Revenues Rise 10% Excluding One-Time Gain in 2012(1); Growth is 4% Including Gain


SAN FRANCISCO--(BUSINESS WIRE)-- The Charles Schwab Corporation announced today that its net income for the second quarter of 2013 was $256 million, up 24% from $206 million for the first quarter of 2013, and down 7% from $275 million for the second quarter of 2012. Net income for the six months ended June 30, 2013 was $462 million, down 2% from the year-earlier period. The company's financial results for both the second quarter and first half of 2012 include a pre-tax gain of $70 million, or $44 million after-tax, relating to the resolution of a vendor dispute. Excluding the gain, net income rose by 11% year-over-year for the second quarter of 2013, and 8% for the first half of the year(1).

  Three Months Ended
--June 30,--
  %   Six Months Ended
--June 30,--
  %
Financial Highlights   2013     2012     Change   2013     2012     Change
   
Net revenues (in millions) $ 1,337 $ 1,283 4% $ 2,627 $ 2,472 6%
Net income (in millions) $ 256 $ 275 (7)% $ 462 $ 470 (2)%
Diluted earnings per common share $ .18 $ .20 (10)% $ .33 $ .36 (8)%
Pre-tax profit margin 30.8 % 33.7 % 28.3 % 30.1 %

Return on average common stockholders' equity (annualized)

10 % 13 % 10 % 11 %
 

Excluding one-time gain in 2012 (1) :

Net revenues (in millions) $ 1,337 $ 1,213 10% $ 2,627 $ 2,402 9%
Net income (in millions) $ 256 $ 231 11% $ 462 $ 426 8%
                                 
____________________________
(1) Net revenues and net income excluding one-time gain in 2012 are non-GAAP financial measures. For a reconciliation of these measures to reported results, see page 8 of this News Release.
 

CEO Walt Bettinger said, "Schwab's evolution from transaction specialist to full-service investment firm reflects our deep understanding of the changing needs of investors, as well as the advisors and employers who serve them. More than ever, clients look to us for help as they take ownership of their financial future. Over 430,000 accounts and $138 billion in assets are now enrolled in our retail advisory offers, increases of 12 and 17%, respectively, from a year ago. Including relationships under the guidance of independent advisors, more than 2.6 million accounts and over $980 billion in client assets at Schwab are currently receiving some form of ongoing advice."

"We expanded our lineup of advised solutions during the second quarter by adding Thomas Partners' dividend growth strategy to our offerings for retail and advisor-guided clients," Mr. Bettinger said. "Our progress on other key client initiatives remains in line with expectations as we move into the middle of 2013. The Schwab ETF OneSource platform, which offers commission-free access to 105 ETFs from Schwab and 5 other providers, has already grown by approximately $3 billion since its launch in February. Also during the second quarter, we continued to build client awareness of optionsXpress' innovative options and futures capabilities by announcing the Trading Patterns tool, which adds the ability to view the most popular underlying and option symbols being traded to a lineup that already includes the Idea Hub and Walk Limit tools. Additionally, we enhanced our platform for independent advisors through Schwab OpenView MarketSquare, a venue for the advisor community to rate and discuss industry vendors, and we announced a new advisor lookup tool, which will enable individuals to search for local advisors through Schwab."

Mr. Bettinger added, "Overall, our continued success in serving investor needs enabled the company to produce another quarter of combined strength in business growth and financial performance. We ended June with $2.05 trillion in total client assets, up 14% year-over-year, and our client base grew to 9.0 million active brokerage accounts, 910,000 banking accounts, and 1.6 million corporate retirement plan participants, up 3%, 11%, and 5%, respectively. At the same time, we produced sequential improvement in all three of our main revenue sources, expanded total revenue by 4% over the first quarter of 2013, and delivered a 30.8% pre-tax profit margin. We continue to believe our strong business momentum, combined with our operating and expense discipline, will yield increasing operating leverage during the rest of 2013 and into 2014."

CFO Joe Martinetto commented, "With no major surprises or disruptions from the environment, we came through the second quarter about where we expected to be financially - balance and spread-related revenues ran at or slightly above plan, trading revenue remained relatively muted, and expenses reflected our moves to ensure spending growth remains below revenue expansion."

"While year-over-year growth in total revenues and net income for the second quarter was limited by last year's $70 million pre-tax gain, the signs of our building earnings power are clear," Mr. Martinetto said. "Strength in asset gathering and advice enrollments helped asset management and administration fees grow by 15% over the second quarter of 2012, net interest revenue rose by 3% even though short-term interest rates were below year-earlier levels, and a modest rebound in client activity lifted trading revenues by 7%. The temporary and seasonal factors that elevated compensation and benefits expense in the first quarter faded largely as anticipated and we continue to expect that careful headcount management will result in limited growth during the rest of 2013. We're still aiming for full-year 2013 expense growth that allows for both increased investment in our clients and improvement in profit margin and earnings for the year."

Mr. Martinetto concluded, "Recent increases in longer-term rates driven by the ongoing economic recovery are certainly helpful in mitigating downward pressure on our net interest margin, as we reinvest our fixed-rate assets at maturity. Since our balance sheet is structured so that Schwab's net interest revenue is more sensitive to changes in short-term interest rates - which have held relatively steady lately after dipping earlier in the year - more rapid and significant revenue impacts will be visible as that end of the yield curve begins to rise. With the economic recovery and overall rate environment currently pointing towards continued easing of headwinds for the company, the healthy balance sheet and solid capital base we've built keep us well positioned to drive growth going forward."

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

Investor Services

  • Net new accounts for the quarter totaled approximately 47,000, up 18% year-over-year. Total accounts reached 6.2 million as of June 30, 2013, up 2% year-over-year.
  • Launched Secure Messaging, a communication channel that provides an alternative to fax and mail, enabling clients to log in to Schwab.com and send and receive messages securely, including transmitting documents electronically.
  • Enhanced options pairing logic at Schwab to optimize margin calculations, resulting in higher buying power for clients with certain multi-leg positions. Also introduced the optionsXpress-inspired All in One Trade Ticket and Trade & Probability Calculator for Schwab clients.
  • Announced Morningstar Associates, LLC as a managed account provider for Schwab Index Advantage®.

Advisor Services

  • Launched Schwab PortfolioCenter Hosted, a full functionality, cloud-based version of Schwab's PortfolioCenter®, giving independent registered investment advisors (RIAs) the added benefit of outsourcing their technology infrastructure and management to Schwab.
  • Launched Schwab OpenView MarketSquare, a review site that compiles feedback and ratings from independent RIAs on some of the leading technology vendors and products in the industry.

Products and Infrastructure

  • For Charles Schwab Bank:
    • Balance sheet assets = $90.9 billion, up 26% year-over-year.
    • Outstanding mortgage and home equity loans = $10.6 billion, up 16% year-over-year.
    • First mortgage originations through its loan program during the quarter = $1.6 billion.
    • Delinquency, nonaccrual, and loss reserve ratios for Schwab Bank's loan portfolio = 0.57%, 0.36% and 0.48%, respectively, at month-end June.
    • Schwab Bank High Yield Investor Checking® accounts = 712,000, with $11.4 billion in balances.
  • Client assets managed by Windhaven® totaled $17.3 billion, up 56% from the second quarter of 2012.
  • Total assets under management in Schwab ETFs = $12.2 billion. Total assets in Schwab Managed Portfolios-ETFs = $2.6 billion.
  • Introduced ThomasPartners®, a dividend income-focused money management strategy available to retail and RIA clients.

The SMART report can be viewed in its entirety at www.aboutschwab.com/investor_relations/financial_reports.

Forward Looking Statements

This press release contains forward looking statements relating to the company's client initiatives, client metrics, expense growth, operating leverage, earnings, headcount management, compensation and benefits expense, investment in clients, profit margin, net interest margin, revenue, headwinds and capital base. 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 company's ability to develop and launch new products, services and capabilities in a timely and successful manner; 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 manage expenses; regulatory guidance; the level of field sales activity and related incentive compensation; net interest margin; acquisition integration costs; 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-K for the period ended December 31, 2012.

About Charles Schwab

The Charles Schwab Corporation (NYS: 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 Ended
June 30,
  Six Months Ended
June 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
Second
Quarter
  First
Quarter
  Fourth
Quarter
  Third
Quarter
  Second
Quarter
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 %)

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