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

The Charles Schwab Corporation announced today that its net income for the third quarter of 2013 was $290 million, up 13% from $256 million for the second quarter of 2013, and up 17% from $247 million for the third quarter of 2012. Net income for the nine months ended September 30, 2013 was $752 million, up 5% from the year-earlier period. The company’s financial results for the nine months ended September 30, 2012 include a pre-tax gain of $70 million, or $44 million after-tax, relating to the resolution of a vendor dispute and a non-recurring state tax benefit of $20 million, which were recorded in the second and third quarters of last year, respectively.

CEO Walt Bettinger said, “Today’s Schwab is a full-service investment firm capable of helping all types of investors plan for and build their financial futures, with over $2 trillion in client assets – a total that has grown by a compound annual rate of 10% over the past five years. A record $1 trillion of those assets are currently enrolled in some form of ongoing advice, reflecting a decades-long evolution at Schwab beyond our discount-brokerage roots. We’ve made notable progress, ending the third quarter of 2013 with $145 billion in client assets enrolled in one of our 8 retail advisory offers, as well as $891 billion under the guidance of independent advisors, representing year-over-year increases of 17% each. Our work on this front continues, as we provide an alternative to the traditional Wall Street model by offering sophisticated, needs-based approaches designed to enable today’s investors to get the help that’s right for them.”

“As we pursue our strategy of building a better investment firm ‘through clients’ eyes’, we are succeeding in driving growth in both our client base and stockholder value,” Mr. Bettinger continued. “Our core net new assets of nearly $43 billion were 97% higher than a year ago and the highest in Schwab history for a summer quarter; our year-to-date core net new assets of $108.8 billion represent an annualized growth rate of approximately 7.4%. In addition, we ended September with 9.0 million active brokerage accounts and 930,000 banking accounts, up 3% and 10%, respectively, over the third quarter of 2012. While total corporate retirement plan participants declined in keeping with our announced consolidation of plan recordkeeping technology platforms, we are seeing strong interest in our new index-based 401(k) offering. Meanwhile, introduction of our groundbreaking, innovative ETF 401(k) Plan solution is pending resolution of a final regulatory issue.”

Mr. Bettinger noted, “These client results supported double-digit percentage increases in all three of our main revenue sources and 15% overall revenue growth versus the year-ago quarter. Even with the continued headwind created by an interest rate environment that remains at historic lows, our third quarter revenues surpassed all our prior quarterly results save the extraordinary spike we experienced at the height of the internet bubble.”

CFO Joe Martinetto commented, “With our client investments running at appropriate levels, we were able to convert Schwab’s strong revenue performance into a 33.8% pre-tax profit margin and $290 million of net income for the third quarter, our highest quarterly earnings since the peak year of 2008. As we deliver improved earnings and our balance sheet growth tracks with our core asset gathering activity, our capital flexibility increases – we ended the quarter with a preliminary consolidated Tier I Leverage Ratio of 6.3% versus our target minimum ratio of 6.0%.”

Mr. Martinetto concluded, “Assuming an ongoing economic recovery, as well as interest rates and client trading activity that remain at or above recent levels, our outlook for the remainder of this year and into 2014 has not changed – we expect our 2013 revenue growth will outpace expenses by approximately 100 to 200 basis points, helping us to achieve a pre-tax profit margin of at least 30% and earnings per share in the mid-$.70s for the year. Additionally, we are aiming for a gap of approximately 300 to 500 basis points between revenue and expense growth in 2014. We continue to believe we possess all of the elements necessary for strong growth and increased operating leverage going forward: business momentum, operating and expense discipline, a healthy balance sheet, and a solid capital base.”

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

Investor Services

• Net new retail brokerage accounts for the quarter totaled approximately 16,000, up 14% year-over-year; total accounts reached 6.2 million as of September 30, 2013, up 2% year-over-year.
• Delivered financial plans to approximately 26,000 clients, up 63% year-over-year. Approximately 74,000 clients have received a financial plan year-to-date.
• Redesigned the Schwab Learning Center to offer new Trading Paths, which provide simple, efficient trading information and insights, and intuitive access to live and on-demand workshops, event schedules, and Trading Catalog articles covering a range of trading topics.

Products and Infrastructure

• For Charles Schwab Bank:
  • Balance sheet assets = $97.9 billion, up 30% year-over-year.
  • Outstanding mortgage and home equity loans = $10.9 billion, up 17% year-over-year.
  • First mortgage originations through its loan program during the quarter = $1.2 billion.
  • Delinquency, nonaccrual, and loss reserve ratios for Schwab Bank’s loan portfolio = 0.51%, 0.38% and 0.43%, respectively, at month-end September.
  • Schwab Bank High Yield Investor Checking^® accounts = 733,000, with $11.6 billion in balances.
• Client assets managed by Windhaven^® totaled $18.2 billion, up 46% from the third quarter of 2012.
• Client assets managed by ThomasPartners^® totaled $3.3 billion.
• Introduced six Schwab Fundamental Index* ETFs, expanding the company’s existing proprietary offering to 21 equity and fixed income ETFs.
• Total assets under management in Schwab ETFs^™ = $14.3 billion. Total assets in Schwab Managed Portfolios-ETFs = $2.8 billion.

*Schwab is a registered trademark of Charles Schwab & Co., Inc. Fundamental Index is a registered trademark of Research Affiliates LLC.

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 growth in the company’s client base and stockholder value; introduction of the ETF 401(k) Plan solution; improved earnings, balance sheet growth and increased capital flexibility; growth in revenues, earnings and profits; gap between revenue and expense growth; pre-tax profit margin; and growth and increased operating leverage. Achievement of these expectations and objectives 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, 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.

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