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Charles Schwab: Schwab Reports Record Third Quarter Revenue Of $1.6 Billion

The following excerpt is from the company's SEC filing.

Quarterly Earnings Rise 17% Year-Over-Year; Year-to-Date Earnings Reach a Record $1.0 Billion

Core Net New Assets Total $30.8 Billion for Third Quarter; $102.0 Billion Year-to-Date

The Charles Schwab Corporation announced today that its net income for the third quarter of 2015 was $376 million, up 7% from $353 million for the second quarter of 2015, and up 17% from $321 million for the third quarter of 2014. Net income for the nine months ended September 30, 2015 was $1.0 billion, up 6% from the year-earlier period. The company’s financial results for the third quarter and first nine months of both 2015 and 2014 include certain non-recurring items; descriptions of these items are included below.

Three Months Ended

Nine Months Ended

September 30,

Financial Highlights

Change

Net revenues (in millions)

1,597

1,551

3

4,689

4,507

4

Net income (in millions)

376

321

17

1,031

971

Diluted earnings per common share

Pre-tax profit margin

36.5

33.4

34.9

34.6

Return on average common

stockholders’ equity (annualized)

13

12

EPS Impact of Certain Non-Recurring Items

$14 million net tax benefits

(included in Taxes on income)

$17 million litigation proceeds

(included in Other revenue)

$45 million net insurance recovery

$68 million charge related to geographic

footprint (included in Compensation

and benefits expense)

CEO Walt Bettinger said, “Schwab’s third quarter results reflect the continued success of our ‘through clients’ eyes’ strategy

and our contemporary approach to helping clients manage their wealth. As we helped investors navigate recent market volatility, we also drove solid business growth. Core net new assets were $30.8 billion in the third

quarter, bringing our year-to-date total to $102.0 billion. In addition, clients opened 254,000 new brokerage accounts, up 11% year-over-year. Faced with economic uncertainty and the resulting market volatility, investors increasingly turned to our advice offerings throughout the quarter. Approximately 36,000 accounts enrolled in one of our retail advisory solutions during the last three months, 57% more than the year-earlier period, and total accounts using these solutions reached 550,000, up 13% year-over-year. Total client assets were $2.42 trillion, up 1% from a year ago, reflecting the $117.5 billion impact of reduced market valuations on client portfolios over the last 12 months. We finished the quarter serving 9.7 million brokerage accounts, 1.0 million banking accounts, and 1.5 million retirement plan participants, up 4%, 6% and 6%, respectively, from a year ago.”

“Schwab has built out a wide range of full-service investing and wealth management capabilities to support investors through market conditions like those experienced this August,” Mr. Bettinger continued. “During that month, the S&P 500

dropped 11% in six trading days and the CBOE Volatility Index

spiked to 41 on the 24

after averaging 14 for the prior four weeks. Throughout this period, we proactively engaged investors across multiple channels to discuss developments and appropriate courses of action. Schwab’s senior investment strategists and other experts shared our point of view through a series of published perspectives; TV, radio and print news stories; and recorded video commentaries. As volatility peaked, we reached out to over 4.5 million clients and prospects via email, helping connect them with our insights and service representatives. During the week of August 24

, client and prospect visits to our website increased 35% and 58%, respectively, from the prior week. At the same time, total calls to Schwab representatives increased 26%.”

Mr. Bettinger added, “While providing these resources for dealing with market turbulence, Schwab continued with ongoing initiatives to enhance our clients’ financial lives, including the security of their accounts and assets. For nearly 10 years, Schwab has provided a Security Guarantee that covers 100% of any losses in Schwab accounts due to unauthorized activity. To better support our clients’ desire to be active partners in safe online security practices, we recently introduced SchwabSafe

, an online resource with perspectives and tips on cyber security. In the third quarter, we also announced the addition of one new ETF provider – J.P. Morgan Asset Management – and nine new ETFs to Schwab ETF OneSource

. This expansion gives investors more choice within two popular categories: currency-hedged ETFs and strategic beta funds across U.S. and international markets. Schwab ETF OneSource continues to provide investors and advisors with access to the most commission-free ETFs anywhere in our industry.”

CFO Joe Martinetto commented, “Our diversified revenue sources continued to support solid financial performance during the third quarter, even in the face of deteriorating equity market valuations. Broad market declines limited asset management and administration fees to $663 million, or 2% growth year-over-year. At the same time, however, the environment helped drive strong growth in our other two main revenue sources. Organic balance sheet growth and a slight uptick in short term interest rates contributed to net interest revenue of $635 million, up 11% from the third quarter of 2014. August market volatility, which culminated in a record number of client revenue trades on the 24

, helped lift trading revenue to $228 million, up 9%. Total net revenues of $1.6 billion represent a record for a third quarter, as well as a 3% increase from a year ago. Our third quarter expenses of $1.0 billion kept us on track for planned full-year expense growth of approximately 4% and enabled us to produce a pre-tax profit margin of 36.5%, our highest since the fourth quarter of 2008. We recognized net tax benefits of approximately $14 million in the third quarter relating to certain prior-year matters. Overall, net income totaled $376 million, the highest quarter in our history save those affected by the sale of US Trust. Our year-to-date earnings of $1.0 billion are also the highest in our history despite the mixed revenue environment that has unfolded in 2015.”

Mr. Martinetto concluded, “In the midst of heightened economic uncertainty and market volatility, our financial discipline remains the same – managing the levers that are under our control to ensure flexibility, continuing to maintain a healthy balance sheet, and actively working to more effectively monetize client cash balances. We are in the process of utilizing our recent $600 million preferred issuance to support approximately $4.0 billion in bulk transfers of cash sweep balances from money market funds to Schwab Bank. We completed the first $1.1 billion transfer in September, and plan to move the remainder during the fourth quarter.”

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 158,000, up 12% year-over-year; total accounts were 6.8 million as of September 30, 2015, up 1% year-over-year.

Held financial planning conversations with approximately 29,000 clients, up 7% year-over-year.

Launched the Schwab One

Chip Platinum 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.

Enhanced flexibility for Schwab.com passwords – clients may now create passwords with up to 234 characters, including special and case-sensitive characters.

Added an “Ideas” tab to Trade Source

, Schwab’s specialized web interface for traders, enabling users to search for stocks based on nine strategic predefined screens that can be used as starting points for potential trade ideas.

Advisor Services

Held our annual SOLUTIONS events in 12 cities across the country, helping advisors discover how our technology and tools can streamline workflow, optimize performance and support exceptional client service.

Added two funds to Schwab Alternative Investment OneSource

, a platform that provides advisors and their clients with access to alternative investment funds registered under the Securities Act of 1933. At quarter-end, 31 funds were available on the platform.

Products and Infrastructure

For Charles...


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