Schwab Reports Third Quarter Net Income Up 11% Year-Over-Year

The Charles Schwab Corporation announced today that its net income for the third quarter of 2014 was $321 million, comparable to $324 million in the second quarter of 2014, and up 11% from $290 million for the third quarter of 2013. Net income for the nine months ended September 30, 2014 was $971 million, up 29% from the year-earlier period. The company’s financial results for the third quarter and first nine months of 2014 include two nonrecurring items: a net insurance recovery of approximately $45 million (included in Other revenue); and a charge relating to future changes in the company’s geographic footprint totaling $68 million (included in Compensation and benefits expense). Taken together, these two items reduced pre-tax income by approximately $23 million, or $0.01 per share.

CEO Walt Bettinger commented, “Our full-service investing model continues to resonate with clients and drive business growth. During the third quarter of 2014, we gathered $34.7 billion in net new assets – a 6% annualized growth rate – and we ended the quarter with $2.40 trillion in total client assets, up 12% from last September. While there were signs of a summer effect in client interactions during the quarter, we still attracted 229,000 new brokerage accounts, and we finished the period serving 9.3 million brokerage accounts, 970,000 banking accounts, and 1.4 million retirement plan participants, up 3, 4 and 8%, respectively, from month-end September 2013.”

“Against a backdrop of heightened market volatility during the quarter, we saw increased utilization of the help and advice available through Schwab, reflecting investors’ trust in our ability to help them navigate towards a better financial future,” Mr. Bettinger continued. “We held another 27,000 planning conversations during the quarter, and assets enrolled in one of our retail or other advisory solutions reached $177 billion at quarter end. Including relationships under the guidance of independent advisors, $1.19 trillion in client assets at Schwab are currently receiving some form of ongoing advisory service, an increase of 15% versus year-ago levels.”

Mr. Bettinger added, “We continue to focus on creating an unparalleled investing experience via our ‘through clients’ eyes’ strategy. During the third quarter we expanded our commission-free Schwab ETF OneSource^™ platform to include 65 additional funds. Clients can now choose from a total offering of 182 ETFs, from Schwab and 12 other providers, covering 65 Morningstar categories, without incurring transaction costs. Schwab ETF OneSource^™ balances have grown by $19.4 billion following the launch of the program in February 2013. We also converted the first 401(k) plan to the recently launched ETF version of our Schwab Index Advantage^® offering. SIA provides access to low cost, index-focused mutual funds or ETFs, in combination with personalized advice, to help retirement plan participants achieve better outcomes. More than 100 plans and over 50,000 participants have enrolled in SIA to date.”

CFO Joe Martinetto said, “Continued success with clients, diversified revenue sources, and sustained expense discipline kept Schwab’s financial performance in line with our expectations for the third quarter given the environment. Asset management and administration fees and net interest revenue both showed double-digit percentage increases over the year-ago quarter and set new quarterly records, more than offsetting the effect of lower client revenue trades. With or without the $45 million recovery, our third quarter revenues are the second highest quarter in our history – surpassed only by an extraordinary spike during the internet bubble – and they mark the 8^th consecutive quarter of sequential growth for the firm.”

“The charge described above is consistent with expectations we’ve shared for shrinking our footprint in San Francisco and setting the stage for future growth in other more cost-effective locations,” Mr. Martinetto noted. “Recognizing the charge in the third quarter reflects our progress to the point where we can estimate severance relating to this effort, which is expected to extend over the next three years. By carefully managing our reinvestment for growth and other operating costs to ensure they continued to track closely to plan, we were able to achieve a pre-tax profit margin of 33.4% for the quarter including both non-recurring items. This is a particularly strong result given that the one-timers represent a 250 basis point net reduction in the ratio. Even with that drag, our year-to-date earnings of $971 million keep us on the strongest pace of any year in our history. Given our strong business momentum, operating and expense discipline, a healthy balance sheet and growing capital flexibility, we are well positioned to continue driving profitable growth in the months ahead.”

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

Investor Services

• New retail brokerage accounts for the quarter totaled approximately 141,000, comparable to the year-earlier period; total accounts reached 6.7 million as of September 30, 2014, up 2% year-over-year.
• Held planning conversations with approximately 27,000 clients. Approximately 86,000 planning conversations have been held year-to-date, up 16% year-over-year.
• Schwab transitioned the first 401(k) plan to the exchange-traded funds (ETFs) version of Schwab Index Advantage^® (SIA). Since its launch in March 2012, over 100 companies have adopted SIA with low-cost options of either index mutual funds or ETFs.
• Launched 3- and 4-leg online options trading capabilities on StreetSmart Edge^®, enabling Schwab clients to trade sophisticated strategies in a workflow inspired by optionsXpress’s All-in-One Trade Ticket^® tool.
• 28 Schwab Private Client^™ Portfolio Consultants graduated from the company’s inaugural Wealth Management Academy, each holding Certified Financial Planner^® and Certified Wealth Strategist^® designations. Top program graduates provide financial planning and ongoing portfolio management to high net worth clients across the nation.

Advisor Services

• Schwab Intelligent Technologies^® announced that Morningstar Inc. will participate in Schwab OpenView Gateway™, the open-architecture platform enabling data integration between Schwab systems and those of technology providers used by advisors.

Products and Infrastructure

• For Charles Schwab Bank:
  • Balance sheet assets = $105.6 billion, up 8% year-over-year.
  • Outstanding mortgage and home equity loans = $11.1 billion.
  • First mortgage originations through its loan program during the quarter = $722 million.
  • Pledged Asset Line^® (PAL) balances = $2.0 billion. Year-to-date, average PAL cycle time from application receipt to document generation is less than five days.
  • Delinquency, nonaccrual, and loss reserve ratios for Schwab Bank’s loan portfolio = 0.31%, 0.30% and 0.30%, respectively, at month-end September.
  • Schwab Bank High Yield Investor Checking^® accounts = 777,000, with $11.8 billion in balances.
  • Launched the Schwab Bank^® Visa^® Platinum chip debit card, enhancing security and reducing the chance of failed transactions for clients traveling in more than 130 countries, where chip readers are now standard.
• Client assets managed by Windhaven^® totaled $17.7 billion, down 3% from the third quarter of 2013.
• Client assets managed by ThomasPartners^® totaled $6.1 billion, up 85% from the third quarter of 2013.
• Schwab added 65 ETFs to Schwab ETF OneSource^™, the largest commission-free ETF platform; investors can now trade 182 ETFs covering 65 Morningstar Categories for $0 online trade commissions.

Supporting schedules are either attached or located at: www.aboutschwab.com/investor-relations/financial-reports.

Commentary from the CFO

Effective today, Schwab is adopting a new approach to reporting client trading activity. Updated client trading activity will be posted after 1:00 pm Pacific time on the second business day of each week, on our Investor Relations page at: www.aboutschwab.com/investor-relations.

Schwab is also making changes to its monthly client activity report, as reflected on page 9 of this release. Joe Martinetto, Executive Vice President and Chief Financial Officer, provides commentary regarding these changes at: www.aboutschwab.com/investor-relations/cfo-commentary.

Forward Looking Statements

This press release contains forward-looking statements relating to shrinking the company’s footprint in San Francisco and related severance cost and timing; future growth in other more cost-effective locations; business growth; earnings; operating and expense discipline; balance sheet strength; capital flexibility; and profitable growth. 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, the actual timing and severance and other costs for reducing the San Francisco footprint; the company’s ability to grow in other more cost-effective locations; use of the company’s wealth management and other products, solutions and services; 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 services; 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 reports on Form 10-K and Form 10-Q.

About Charles Schwab

The Charles Schwab Corporation (NYSE: SCHW) is a leading provider of financial services, with more than 325 offices and 9.3 million active brokerage accounts, 1.4 million corporate retirement plan participants, 970,000 banking accounts, and $2.40 trillion in client assets as of September 30, 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, 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.