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Charles Schwab: Schwab Reports Net Income Up 36% To $412 Million, A First Quarter Record

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

Revenues Grow 16% Year-Over-Year to a Record $1.8 Billion

Core Net New Assets Total $32.0 Billion in First Quarter and $132.5 Billion Over Last 12 Months

SAN FRANCISCO, April 15, 2016

The Charles Schwab Corporation announced today that its net income for the first quarter of 2016 was $412 million, comparable to $416 million for the fourth quarter of 2015, and up 36% from $302 million for the first quarter of 2015.

Three Months Ended

Financial Highlights

Change

Net revenues (in millions)

1,764

1,526

16

Net income (in millions)

412

302

36

Diluted earnings per common share

32

Pre-tax profit margin

37.1

31.7

Return on average common

stockholders’ equity (annualized)

13

10

CEO Walt Bettinger said, “Through periods of volatility, we continue to see strong client engagement and demand for Schwab’s contemporary, full-service wealth management capabilities. Investors faced sharp market swings during the first quarter, as the major equity indices fell by double-digit percentages and subsequently recovered. Clients consistently turn to us for help navigating conditions like these – over 33,000 accounts enrolled in one of our retail advisory solutions during the quarter, comparable to the fourth quarter 2015 total. At March-end, 567,000 accounts were enrolled in a Schwab

advice program, up 11% year-over-year. In addition, our financial consultants held 34,000 planning conversations during the quarter, up 36%. We ended March with 9.9 million active brokerage accounts, 1.0 million banking accounts, and 1.5 million retirement plan participants, up 4%, 6% and 4%, respectively, from the prior year. Clients brought $32.0 billion of core net new assets to Schwab in the first three months of 2016, representing a solid 5% annualized organic growth rate in the midst of fluctuating asset valuations. While the company has gathered $132.5 billion in core net new assets over the last 12 months, total client assets ended March at $2.56 trillion, up 1% from a year ago, reflecting the challenging environment for equity valuations.”

Mr. Bettinger continued, “This quarter, we celebrated milestones for two unique and innovative Schwab offerings, and enhanced them with features developed ‘through clients’ eyes.’ February marked the three-year anniversary of Schwab ETF OneSource

, the program that offers Schwab clients the most online commission-free ETFs anywhere in our industry. Launched with six providers and 105 funds, the program has more than doubled to now offer 225 commission-free ETFs spanning 66 Morningstar Categories from 16 providers. Assets in Schwab ETF OneSource reached $52.3 billion this quarter, growing at a 50% compound annual growth rate since inception. The 14 funds added thus far in 2016 expand access to areas of client interest and demand, including strategic beta, currency-hedging, and

fixed income. In March, we observed the first anniversary of Schwab Intelligent Portfolios

, the only fully automated investment advisory service offering diversified portfolios based on an investor’s stated goals, supported by 24/7/365 live professional service, that charges zero advisory fees.

Together with Institutional Intelligent Portfolios

, our version for registered independent advisors, digital advice at Schwab has amassed $6.6 billion in assets since launching last year. We recently introduced the Goal Tracker feature, which helps clients set and monitor an investment goal using Monte Carlo analysis to demonstrate how a portfolio might perform in a variety of market conditions. We also integrated real-time external account transfers, enabling clients to seamlessly move funds in and out of their Intelligent Portfolios accounts.”

Mr. Bettinger noted, “Our products, services, and people earned us recognition among Fortune’s top 50 Most Admired Companies in 2016. We also ranked highest in J.D. Power’s 2016 U.S. Full-Service Investor Satisfaction Study, which together with our top rank in the 2015 J.D. Power Self-Directed Investor Satisfaction Study, reinforces Schwab’s ability to meet a broad range of investor needs. In addition, the Museum of American Finance recently honored our founder and Chairman, Chuck Schwab, with its Financial Innovation Award. Chuck’s original vision of finding a better way for investors still drives the firm’s growth initiatives today.”

CFO Joe Martinetto commented, “The ongoing effect of the Fed’s initial interest rate hike in December has provided a glimpse of Schwab’s earnings power as rates normalize, with our diversified revenue streams generating strong first quarter revenue growth and our steady expense discipline continuing. Asset management and administration fees rose 9% year-over-year – boosted by a $61 million sequential improvement in money market fund revenue due to higher short-term rates and higher balances, but limited by market valuations that persisted below year-end levels for much of the quarter. Net interest revenue jumped 31% year-over-year, reflecting robust interest-earning asset growth during the past several quarters, and the firm’s greater sensitivity to the rise in short rates relative to the decline in the long end of the curve. Trading revenue rose 2%, as the volatility and particularly strong volume that characterized January and early February generally subsided through March. Altogether, revenues grew approximately 16% from the prior year to a quarterly record of $1.8 billion. On the expense side, spending increased approximately 6%, in keeping with our expectations of reinvesting a portion of improved revenues for stronger growth. Our pre-tax profit margin of approximately 37% was up well over five percentage points from first quarter 2015. This produced earnings of $412 million, a record first quarter and a 36% increase from the year-earlier period.

Overall, while the market volatility shaped a path that was a bit different than originally thought, our first quarter financial results were consistent with the baseline 2016 scenario that we introduced in early February. As the rest of the year unfolds, we intend to monitor the evolving environment – including the pace of Fed rate actions – and apply the flexibility built into our spending plans as necessary to balance near-term profitability with reinvestment for growth.”

Mr. Martinetto concluded, “During the first quarter, we continued working to migrate

client cash to our balance sheet while maintaining healthy capital levels. The company issued $750 million of non-cumulative perpetual preferred stock at a rate of 5.95%. Proceeds will help support th

e transfer of approximately $6

billion in balances relating to money fund regulatory reform

, primarily

in the July to September timeframe. In addition, we expe

ct to support approximately $3

billion of incremental Schwab Bank deposit growth throughout the second half of the year, as the Bank is now the default sweep option for all new accounts. We also completed a $1.4 billion bulk transfer of client sweep cash from the broker-dealer to Schwab Bank in March. The company ended the first quarter of 2016 with a preliminary consolidated Tier 1 Leverage ratio of 7.3%.”

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 163,000, down 8% year-over-year; total accounts were 6.9 million, up 3% year-over-year.

Held financial planning conversations with approximately 34,000 clients during the quarter, up 36% year-over-year.

Launched our voice ID service, enhancing both the safety and convenience of interacting with Schwab. Biometric technology allows clients to quickly and securely authenticate over the phone simply by saying a passphrase.

Schwab Trading Services

hosted an interactive online trading event for 3,600 clients and prospects, featuring a conversation with Alan Greenspan, a panel hosted by Schwab traders, and a presentation on profit-taking techniques.

d a new online account opening process with streamlined steps and

mobile-optimized viewing

, enhancing the experience for clients using the web or a mobile device.

Advisor Services

Engaged over 1,300 advisors on the topics of cybercrime and fraud. Advisor Services conducted two webcasts and seven regional events educating on current trends and sharing best practices for strengthening security programs.

Enabled advisors and their clients to conveniently view...


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