Schwab Reports First Quarter Net Income Up 58% Year-over-Year

The Charles Schwab Corporation announced today that its net income for the first quarter of 2014 was $326 million, up 2% from $319 million for the fourth quarter of 2013, and up 58% from $206 million for the first quarter of 2013.

CEO Walt Bettinger said, “Our contemporary full-service investing model continued to resonate with investors during the first quarter. We gathered $34.2 billion of net new assets during the quarter, a 6% annualized organic growth rate, and 258,000 new brokerage accounts, up 6% year-over-year. Clients have now entrusted us with $2.31 trillion of assets – a record high. In addition, client trading activity rose in early 2014, as we executed an average of over 550,000 total trades a day during the first quarter, the highest quarterly volume in our history. More significantly, however, our work to build awareness of our professional advice capabilities continued during the quarter, and we ended March with approximately half of all client assets receiving some form of ongoing advisory service, with $974 billion under the guidance of an independent advisor and $159 billion enrolled in one of our retail advisory solutions, up 16% and 17%, respectively, over the first quarter of 2013. We also saw a steady pace of planning conversations, as an increasing proportion of clients engage with investing as a long-term process, not a moment in time. At quarter-end we were serving 9.2 million active brokerage accounts and 933,000 banking accounts, up 4% and 5%, respectively, from year-earlier levels.”

“Schwab’s unique business model is able to produce solid operating results while enabling clients to invest as they choose,” Mr. Bettinger continued. “Our focus on providing outstanding service and a wide range of innovative products at a great value helps us to both build our client base and diversify our revenue sources. As a result, our company can succeed by helping clients pursue their financial goals in whichever way is best for them, whether they’re investing in individual equities, utilizing our commission-free OneSource platforms or enrolling in an advisory solution. Higher levels of client trading activity, balances in fee-based products and services, and cash held at Schwab as part of investing relationships all contributed to the 15% year-over-year increase in revenue we achieved for the first quarter.”

Mr. Bettinger noted, “We continued to innovate on behalf of investors during the quarter by rolling out the ETF version of our Schwab Index Advantage 401(k) offering, providing plan sponsors with a choice of low-cost index-based mutual funds and ETFs to offer their participants, along with tailored guidance, to help them achieve better outcomes with their retirement investments. Overall, we have strong momentum with clients across our businesses, we are well positioned to attract and serve a growing share of investable wealth in the U.S., and we remain poised to benefit from the eventual normalization of interest rates as the economy continues to recover.”

CFO Joe Martinetto commented, “The company continued to translate strong business growth into demonstrated earnings power in early 2014. The interest rate picture remained a mixed bag – long-term interest rates ended the first quarter above year-ago levels even after recent declines, yet short-term rates remained lower than the first quarter of 2013. In addition, the S&P 500 average rose by about 4% between the fourth and first quarters, and client trading volumes picked up significantly on both a sequential and year-over-year basis. The net effect of these factors is that we are operating in an environment that no longer masks our business progress. We achieved double-digit growth in all three major revenue categories for the first quarter – asset management and administration fees and trading revenue both increased by 11% and net interest revenue rose 18% to a record $553 million. Our commitment to careful expense management helped keep spending roughly flat year-over-year, expanding our operating leverage significantly, as planned, while continuing substantial investments in our clients and our brand. That discipline combined with the company’s solid top-line performance to achieve a pre-tax profit margin of over 35%. With net income rising by nearly 60%, our strong financial performance supports continued growth in our capital base and allows us the resources and flexibility to pursue the opportunities ahead.”

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

Investor Services

• Net new retail brokerage accounts for the quarter totaled approximately 35,000, down from 41,000 a year ago; total accounts reached 6.6 million as of March 31, 2014, up 3% year-over-year. Retail brokerage accounts now include Compliance Solutions and Stock Plan Services.
• Launched the exchange-traded fund (ETF) version of Schwab Index Advantage^® (SIA), a full-service 401(k) program based on fully integrating low-cost ETFs as core investments in the plan; SIA-ETF provides clients commission-free intraday investing along with the ability to transact in partial shares.
• Held financial planning conversations with approximately 29,000 clients, up 30% from a year ago.

Advisor Services

• Launched Schwab OpenView Mobile^™, a customizable app that Registered Investment Advisors can use to create a turnkey, branded mobile presence for their firms.

Products and Infrastructure

• For Charles Schwab Bank:
  • Balance sheet assets = $103.3 billion, up 16% year-over-year.
  • Outstanding mortgage and home equity loans = $11.1 billion, up 8% year-over-year.
  • First mortgage originations through its loan program during the quarter = $465 million.
  • Delinquency, nonaccrual, and loss reserve ratios for Schwab Bank’s loan portfolio = 0.44%, 0.32% and 0.38%, respectively, at month-end March.
  • Schwab Bank High Yield Investor Checking^® accounts = 740,000, with $12.3 billion in balances.
• Client assets managed by Windhaven^® totaled $18.5 billion, up 19% from the first quarter of 2013.
• Client assets managed by ThomasPartners^® totaled $5.0 billion, up 92% from the first quarter of 2013.
• Total assets in Schwab Managed Portfolios-ETFs = $19.9 billion.
• Extended an agreement with J.P. Morgan to provide Schwab clients with access to a broad range of J.P. Morgan’s new issue and secondary municipal bonds and corporate debt securities.
• Announced the availability of the Pledged Asset Line^® (PAL) for Investor Services clients. The PAL product enables clients to remain fully invested while providing liquidity for personal or business needs.

Supporting schedules are either attached or located at: http://www.aboutschwab.com/media/xls/q1_2014_schedule.xls

Commentary from the CFO

Joe Martinetto, Executive Vice President and Chief Financial Officer, provides insight and commentary regarding Schwab’s financial picture at: http://www.aboutschwab.com/investor_relations/cfo_commentary. The most recent commentary was posted on March 31, 2014.

Forward-Looking Statements

This press release contains forward-looking statements relating to the company’s operating results; client momentum; growth in market share; benefit from normalization of interest rates; business growth; earnings power; financial performance; and growth in capital base. 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; client enrollments in advisory solutions; the company’s ability to develop and launch new products, services and capabilities in a timely and successful manner; the company’s ability to manage expenses; the impact of changes in market conditions on money market fund fee waivers, revenues, expenses and pre-tax margins; regulatory guidance; acquisition integration costs; 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 most recent report on Form 10-K.

About Charles Schwab

The Charles Schwab Corporation (NYSE:SCHW) is a leading provider of financial services, with more than 325 offices and 9.2 million active brokerage accounts, 1.3 million corporate retirement plan participants, 933,000 banking accounts, and $2.31 trillion in client assets as of March 31, 2014. 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, http://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.

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