Schwab Reports First Quarter Results

The Charles Schwab Corporation announced today that its net income for the first quarter of 2015 was $302 million, down 14% from $350 million for the fourth quarter of 2014, and down 7% from $326 million for the first quarter of 2014. These results lag the outlook expressed in the company’s press release dated March 13, 2015, primarily due to the earlier timing of certain compensation expenses.

CEO Walt Bettinger said, “Our strong client momentum continued in the first quarter of 2015, as our innovative, full-service model continued to resonate with investors. We gathered $34.2 billion of core net new assets during the first quarter, a 6% annualized organic growth rate. Net new assets from retail investors were the highest since the first quarter of 2008, totaling $12.5 billion, up 16% sequentially and 28% year-over-year. Clients have now entrusted us with assets totaling $2.52 trillion – 9% above the March 2014 level. In addition, clients opened 274,000 new brokerage accounts, up 6% year-over-year. As March ended, we were serving 9.5 million active brokerage accounts, 986,000 banking accounts, and 1.5 million retirement plan participants, up 3%, 6% and 10%, respectively, from year-earlier levels.”

“We continued to build awareness of our wealth management capabilities during the first quarter, and client balances receiving ongoing advisory services kept growing faster than assets overall,” Mr. Bettinger continued. “At quarter-end, $1.06 trillion was under the guidance of a registered independent advisor and $188.4 billion was enrolled in one of our retail or other advisory solutions, up 9% and 18%, respectively, over the first quarter of 2014. Significantly, while our Client Promoter Score from retail investors reached a record 52 in the first quarter, the score from those clients enrolled in one of our advisory services averaged 6 points higher at 58.”

Mr. Bettinger added, “We launched Schwab Intelligent Portfolios^™ on March 9^th, continuing our tradition of innovation on behalf of investors. Intelligent Portfolios is the only fully automated investment advisory service using sophisticated computer algorithms to build, monitor, and rebalance diversified portfolios based on an investor’s stated goals, time horizon and risk tolerance without charging any advisory fees, commissions, or account service fees; 24/7/365 live professional assistance is included. Thus far, individual investor enrollments are running well ahead of our initial expectations, and we look forward to launching Institutional Intelligent Portfolios^™ for our RIA clients in the second quarter of 2015. Also during the first quarter, we expanded Schwab ETF OneSource^™, the largest commission-free ETF platform, to offer 18 more ETFs. Investors can now trade 198 ETFs covering 64 Morningstar Categories for $0 online trade commissions. Schwab ETF OneSource balances reached $47.1 billion as of quarter-end, up 65% from a year ago. Within that total, our proprietary ETF balances reached $31.0 billion by quarter-end. Total ETF balances at Schwab were $252.4 billion at month-end March, up 19% year-over-year. We also launched Trade Source^™ for our more actively trading clients, bringing them the information they need to make investing decisions via a more efficient, powerful tool that is accessible on a browser or tablet. Trade Source provides a customized set of relevant updates for traders based on their own holdings and watch lists, enables them to select preferences for viewing information, and remembers those preferences for future sessions.”

CFO Joe Martinetto commented, “Even as our business growth remained strong, environmental factors contributed to a disappointing rate of revenue growth for the first quarter. Our revenue picture was shaped by an environment that included volatile equity market performance, largely flat-to-lower interest rates, and client trading activity that slowed as the quarter progressed. While that trading slowdown resulted in an 8% decline in trading revenue from the first quarter of 2014, our continued strength in gathering client assets helped asset management and administration fees and net interest revenue increase by 5% and 6%, respectively, resulting in 3% overall revenue growth for the quarter. Our 2015 expense planning included increased first quarter spending on both a sequential and year-over-year basis driven by strong business growth and a fully-funded project list, including the development and launch of Schwab Intelligent Portfolios. Our plans also incorporated seasonal effects such as payroll tax resets, our annual health savings account contribution, typical salary adjustments and higher marketing outlays relating to Intelligent Portfolios, as mentioned in our March 13^th SMART report. Closing out the quarter, actual expenses for the period also reflected an accelerated 401(k) match as more employees chose to fund their contributions from annual bonuses paid in March and the company moved to match contributions by pay period instead of annually, as well as the earlier recognition of certain equity-based incentives due to plan changes.”

“These additional items increased our first quarter expenses by $13 million relative to our March 13^th commentary,” Mr. Martinetto said. “Between the effects of the environment on our revenue and our overall spending, the company’s pre-tax profit margin was 31.7% for the first quarter. While we will continue to monitor our spending levels in view of our developing revenue picture, our expected overall expense growth remains at a modest pace of approximately 4% for 2015 and we are well positioned to translate business growth into improving financial performance as the year continues.”

Mr. Martinetto noted, “We bolstered our balance sheet liquidity during the first quarter by issuing $1 billion in long term debt comprised of $625 million in 1.50% senior notes due in three years, and $375 million in 3.00% senior notes due in ten years; the majority of the proceeds were invested in term Treasury Notes. Also during the quarter, we completed a $2 billion bulk transfer of sweep balances from broker/dealer Schwab One^® accounts to Schwab Bank. Average interest-earning assets were $149.4 billion for the first quarter of 2015, up 9% from a year ago. With quarter-end stockholders equity of $12.2 billion and a preliminary consolidated Tier 1 Leverage Ratio of 6.8%, we continue to maintain a healthy balance sheet capable of supporting the company’s ongoing growth.”

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

Investor Services

• New retail brokerage accounts for the quarter totaled approximately 178,000, up 9% from the year-earlier period; total accounts were 6.7 million as of March 31, 2015, up 2% year-over-year.
• Held planning conversations with approximately 25,000 clients.
• Schwab Trading Services^™ hosted the company’s first-ever Google Hangout, titled Schwab Live: After the Bell. The forum allowed traders of all experience levels to ask Schwab’s industry professionals about the day’s market activity.
• Launched Trade Source, a simplified, one-stop destination for trading on Schwab.com that allows Trading Services clients to easily monitor the markets, manage accounts, access fundamental and technical data, and place trades.

Advisor Services

• Schwab Intelligent Technologies^® announced that Orion Advisor Services and Redtail Technology will participate in Schwab OpenView Gateway^™, the open-architecture platform enabling data integration between Schwab systems and those of technology providers used by advisors.
• Hosted a webcast attended by nearly 1,800 advisor clients, announcing the details of Institutional Intelligent Portfolios, Schwab’s automated investment management solution for independent registered investment advisors.
• Launched ETF trading services for advisors managing portfolios within corporate retirement plans. The new capability, offered by Retirement Business Services, broadens investment options by allowing fractional share trading and next day settlement of ETFs, similar to traditional mutual funds.

Products and Infrastructure

• For Charles Schwab Bank:
  • Balance sheet assets = $118.6 billion, up 15% year-over-year.
  • Outstanding mortgage and home equity loans = $11.0 billion.
  • First mortgage originations through its loan program during the quarter = $900 million.
  • Pledged Asset Line^® balances = $2.5 billion. Pledged Asset Lines can now be integrated into Schwab Private Client^™ relationships.
  • Delinquency, nonaccrual, and loss reserve ratios for Schwab Bank’s loan portfolio = 0.24%, 0.23% and 0.28%, respectively, at month-end March.
  • Schwab Bank High Yield Investor Checking^® accounts = 795,000, with $12.7 billion in balances.
  • Schwab Bank went live with Apple Pay^™. Clients can add their Schwab Bank debit card to Apple Pay on iPhone^® 6 or iPhone 6 Plus, then make convenient purchases at over 220,000 retailers and in many apps.
• Client assets managed by Windhaven^® totaled $15.6 billion, down 16% from the first quarter of 2014.
• Client assets managed by ThomasPartners^® totaled $7.1 billion, up 42% from the first quarter of 2014.
• Launched Schwab Intelligent Portfolios, a fully automated investment advisory service that charges no advisory fees, commissions, or account service fees.
• Expanded Schwab ETF OneSource to offer 18 more ETFs; investors can now trade 198 ETFs covering 64 Morningstar Categories for $0 online trade commissions.
• Charles Schwab Investment Management reached $31.0 billion in ETF assets under management and is now the 7^th largest ETF provider in the U.S.

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

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 January 16, 2015.

Forward Looking Statements

This press release contains forward-looking statements relating to the launch of Institutional Intelligent Portfolios; expense growth; translating business growth into improving financial performance; and maintaining a healthy balance sheet capable of supporting the company’s ongoing 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 company’s ability to develop and launch new products, services and capabilities in a timely and successful manner, including Institutional Intelligent Portfolios; the company’s ability to manage expenses; 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 impact of changes in market conditions on money fund fee waivers, revenues, expenses and pre-tax margin; client use of the company’s investment advisory services and other products and services; the timing and amount of severance and other costs related to reducing the company’s San Francisco footprint; regulatory guidance; the level of field sales activity and related incentive compensation; acquisition integration costs; net interest margin; client 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-K for the period ended December 31, 2014.

About Charles Schwab

The Charles Schwab Corporation (NYSE:SCHW) is a leading provider of financial services, with more than 325 offices and 9.5 million active brokerage accounts, 1.5 million corporate retirement plan participants, 986,000 banking accounts, and $2.52 trillion in client assets as of March 31, 2015. Through its operating subsidiaries, the company provides a full range of wealth management, 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.