SCHW Charles Schwab Corporation

The Charles Schwab Corporation announced today that its net income was $195 million for the first quarter of 2012, up 20% from $163 million for the fourth quarter of 2011, and down 20% from $243 million for the year-earlier quarter.

     

Three Months Ended

   

--March 31,--

%

Financial Highlights

       

2012

       

2011

     

Change

  Net revenues (in millions) $ 1,189     $ 1,207 (1 )% Net income (in millions) $ 195 $ 243 (20 )% Diluted earnings per share $ .15 $ .20 (25 )% Pre-tax profit margin 26.3 % 32.6 % Return on stockholders’ equity (annualized) 10 % 15 %                              

President and CEO Walt Bettinger said, “The power of our ‘through clients’ eyes’ strategy helped us deliver strong results in the first quarter. Our client metrics included $26.9 billion in core net new assets, the highest since the first quarter of 2008. Clients also opened 240,000 new brokerage accounts during the quarter, and net new enrollments in our retail advisory offerings totaled $2.7 billion, bringing overall advised balances to $118.4 billion at month-end March, up 7% from a year ago. We finished the quarter serving a record $1.83 trillion in total client assets, 8.6 million active brokerage accounts, 801,000 banking accounts, and 1.52 million corporate retirement plan participants.”

“Both interest rates and equity market valuations picked up during the first quarter before declining thus far in April,” Mr. Bettinger noted. “The improved first quarter environment and our ongoing success in building stronger client relationships helped revenues grow 7% sequentially, with increases in all three major categories. Our ongoing expense discipline limited sequential growth in costs to 2%, and our pre-tax profit margin improved by nearly 4 percentage points from the fourth quarter of 2011 to 26.3%.”

Mr. Bettinger concluded, “Our momentum in expanding Schwab’s client service capabilities continues unabated. We are leveraging last year’s accelerated spending with a reduced but still significant project budget this year to drive a number of initiatives to completion and into clients’ hands. Already in 2012, we’ve launched Schwab Index Advantage™, our unique index-based 401(k) offering; bolstered our mortgage lending program with Quicken Loans as our new service provider; and added three new platforms to our integrated technology initiative for independent advisors. These are a few of the latest steps in Schwab’s continuing tradition of finding a better way to serve investors – a tradition that helps our full-service, high-value brokerage model resonate with clients and supports individual investor loyalty scores that are the highest we’ve ever recorded.”

CFO Joe Martinetto said, “Easing environmental headwinds immediately allow the ongoing growth in our client base to be reflected in the company’s financial performance. First quarter 2012 asset management and administration fees, net interest revenue and trading revenue were 6, 10 and 4% higher, respectively, than the preceding period. Reflecting the company’s operating leverage and earnings power, net income rose by 20%. Overall, revenues were right where we expected them to be given the environment, and our expenses are on track with our 2012 plan. By carefully balancing our spending against environmental conditions, we are poised to deliver both expanded client service capabilities and improving revenues and earnings throughout 2012 if interest rates at least stabilize.”

“During the first quarter we took the opportunity to bolster our capital flexibility through a cost-effective, non-dilutive preferred stock offering,” Mr. Martinetto noted. “We are positioned to support potentially strong balance sheet growth in 2012 as our client initiatives drive ongoing business momentum and we strive to optimize net interest revenue in a volatile environment.”

____________________________

Core net new assets exclude significant one-time flows, such as acquisitions or extraordinary mutual fund clearing transfers

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

Investor Services

• Net new accounts for the quarter totaled approximately 44,000, up 19% year-over-year. Total accounts reached 6.1 million as of March 31, 2011, up 9% year-over-year.
• Opened a second independent branch, part of the company’s franchising initiative designed to make financial advice and guidance more accessible in local communities across the country.
• Launched the newly expanded Learning Center on schwab.com, making it easier and more intuitive for clients to find the education resources they need.

Institutional Services

Advisor Services

• Launched three technology platforms as part of the Schwab Intelligent Integration™ initiative – Schwab Openview Integrated Office™, a turnkey solution, and two versions of Schwab Openview Gateway™, which take a flexible, open-architecture approach – to enable data integration between Schwab systems and those of third-party technology providers.
• Announced support for The Depository Trust & Clearing Corporation’s Alternative Investment Products service. This service is expected to improve industry standardization for the custody and trading of alternative investments.

Other Institutional Services

• Launched Schwab Index Advantage, a unique 401(k) plan offer designed to lower costs, simplify investing and help workers better prepare for retirement.

Products and Infrastructure

• For Charles Schwab Bank:
  • Balance sheet assets = $67.8 billion, up 22% year-over-year.
  • Outstanding mortgage and home equity loans = $9.0 billion, up 5% year-over-year.
  • Launched a nationwide first-mortgage lending offer with new partner Quicken Loans. First mortgage originations by Quicken Loans and Schwab during the quarter = $748 million.
  • Delinquency, nonaccrual, and loss reserve ratios for Schwab Bank’s loan portfolio = 0.76%, 0.48% and 0.51%, respectively, at month-end March.
• Schwab Bank High Yield Investor Checking® accounts = 612,000, with $11.1 billion in balances.
• Client assets managed by Windhaven™ totaled $10.3 billion; up 20% from year-end 2011.
• Total assets under management in Schwab ETFs™ = $6.6 billion. Total assets in Schwab Managed Portfolios-ETFs = $2.6 billion.

Supporting schedules are either attached or located at: www.aboutschwab.com/investor_relations/financial_reports/

Forward Looking Statements

This press release contains forward looking statements relating to the ongoing growth of the company’s client base; the impact of the easing of environmental headwinds on the company’s financial performance; the company’s delivery of expanded client service capabilities and improving revenues and earnings; strong balance sheet growth; and net interest revenue. Achievement of these expectations 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 attract and retain clients and grow client assets/relationships; competitive pressures on rates and fees; general market conditions, including the level of interest rates, equity valuations and trading activity; the level of client assets, including cash balances; the company’s ability to develop and launch new products, services and capabilities in a timely and successful manner; capital needs; level of expenses; the impact of changes in market conditions on money market fund fee waivers, revenues, expenses and pre-tax margins; 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, 2011.

About Charles Schwab

The Charles Schwab Corporation (NYSE: SCHW) is a leading provider of financial services, with more than 300 offices and 8.6 million active brokerage accounts, 1.52 million corporate retirement plan participants, 801,000 banking accounts, and $1.83 trillion in client assets. 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 mortgage services and products. More information is available at www.schwab.com and www.aboutschwab.com.

THE CHARLES SCHWAB CORPORATION Consolidated Statements of Income (In millions, except per share amounts) (Unaudited)                       Three Months Ended March 31,         2012     2011 Net Revenues     Asset management and administration fees $ 484 $ 502 Interest revenue 472 481 Interest expense   (38 )   (45 ) Net interest revenue 434 436 Trading revenue 243 241 Other 46 39 Provision for loan losses - (4 ) Net impairment losses on securities (1)         (18 )       (7 ) Total net revenues         1,189         1,207   Expenses Excluding Interest Compensation and benefits 465 437 Professional services 96 92 Occupancy and equipment 76 71 Advertising and market development 67 60 Communications 58 56 Depreciation and amortization 48 35 Other         66         62   Total expenses excluding interest         876         813   Income before taxes on income 313 394 Taxes on income         (118 )       (151 ) Net Income       $ 195       $ 243   Weighted-Average Common Shares Outstanding — Diluted         1,273         1,207   Earnings Per Share — Basic $ .15 $ .20 Earnings Per Share — Diluted       $ .15       $ .20   (1)   Net impairment losses on securities include total other-than-temporary impairment losses of $2 million and $0 million, net of $(16) million and $(7) million recognized in other comprehensive income, for the three months ended March 31, 2012 and 2011, respectively.   See Notes to Consolidated Statements of Income, Financial and Operating Highlights, and Net Interest Revenue Information.   THE CHARLES SCHWAB CORPORATION Financial and Operating Highlights (Unaudited)                

Q1-12 % change

2012 2011 vs.   vs. First Fourth Third Second First (In millions, except per share amounts and as noted) Q1-11 Q4-11 Quarter   Quarter   Quarter   Quarter   Quarter Net Revenues Asset management and administration fees (4 %) 6 % $ 484 $ 458 $ 466 $ 502 $ 502 Net interest revenue - 10 % 434 395 443 451 436 Trading revenue 1 % 4 % 243 233 248 205 241 Other 18 % 12 % 46 41 45 35 39 Provision for loan losses (100 %) (100 %) - (5 ) (8 ) (1 ) (4 ) Net impairment losses on securities 157 % 100 %   (18 )     (9 )     (13 )     (2 )     (7 ) Total net revenues (1 %) 7 %   1,189       1,113       1,181       1,190       1,207   Expenses Excluding Interest Compensation and benefits 6 % 5 % 465 442 423 430 437 Professional services 4 % (3 %) 96 99 104 92 92 Occupancy and equipment 7 % (4 %) 76 79 78 73 71 Advertising and market development 12 % (3 %) 67 69 48 51 60 Communications 4 % 7 % 58 54 56 54 56 Depreciation and amortization 37 % - 48 48 39 33 35 Class action litigation and regulatory reserve - - - - - 7 - Other 6 % (6 %)   66       70       73       64       62   Total expenses excluding interest 8 % 2 %   876       861       821       804       813   Income before taxes on income (21 %) 24 % 313 252 360 386 394 Taxes on income (22 %) 33 %   (118 )     (89 )     (140 )     (148 )     (151 ) Net Income (20 %) 20 % $ 195     $ 163     $ 220     $ 238     $ 243   Basic earnings per share (25 %) 15 % $ .15 $ .13 $ .18 $ .20 $ .20 Diluted earnings per share (25 %) 15 % $ .15 $ .13 $ .18 $ .20 $ .20 Dividends declared per common share $ .06 $ .06 $ .06 $ .06 $ .06 Weighted-average common shares outstanding - diluted 5 % -   1,273       1,271       1,229       1,210       1,207   Performance Measures Pre-tax profit margin 26.3 % 22.6 % 30.5 % 32.4 % 32.6 % Return on stockholders’ equity (annualized)   10 %     8 %     12 %     14 %     15 % Financial Condition (at quarter end, in billions) Cash and investments segregated 16 % 3 % $ 26.9 $ 26.0 $ 27.0 $ 23.8 $ 23.1 Receivables from brokerage clients (1 %) 1 % $ 11.2 $ 11.1 $ 11.1 $ 11.6 $ 11.3 Loans to banking clients 8 % - $ 9.8 $ 9.8 $ 9.7 $ 9.5 $ 9.1 Total assets (1) 17 % 3 % $ 111.5 $ 108.6 $ 102.9 $ 97.6 $ 94.9 Deposits from banking clients 21 % 2 % $ 62.3 $ 60.9 $ 54.1 $ 52.3 $ 51.3 Payables to brokerage clients 13 % 3 % $ 36.4 $ 35.5 $ 36.6 $ 33.9 $ 32.1 Long-term debt - - $ 2.0 $ 2.0 $ 2.0 $ 2.0 $ 2.0 Stockholders' equity (2) 28 % 8 % $ 8.3     $ 7.7     $ 7.7     $ 6.7     $ 6.5   Other Full-time equivalent employees (at quarter end, in thousands) 7 % (1 %) 14.0 14.1 13.9 13.2 13.1

Annualized net revenues per average full-time equivalent employee (in thousands)

(8 %) 8 % $ 340 $ 316 $ 350 $ 361 $ 371

Capital expenditures - cash purchases of equipment, office facilities, and property, net (in millions)

(8 %) (38 %) $ 34     $ 55     $ 54     $ 44     $ 37   Clients’ Daily Average Trades (in thousands) Revenue trades (3) - 4 % 318.4 307.4 323.1 264.9 319.9 Asset-based trades (4) 10 % 17 % 53.7 45.9 50.6 43.6 48.8 Other trades (5) - (2 %)   104.1       106.3       101.7       88.6       103.8   Total 1 % 4 %   476.2       459.6       475.4       397.1       472.5   Average Revenue Per Revenue Trade (3) 2 % 1 % $ 12.35     $ 12.21     $ 12.04     $ 12.23     $ 12.12         (1)  

Total assets as of March 31, 2012, December 31, 2011, and September 30, 2011, reflect preliminary purchase accounting for the assignment of fair values to optionsXpress Holdings, Inc.'s assets and liabilities acquired. Amounts are subject to refinement as information relative to the closing date fair values becomes available.

(2)

In the first quarter of 2012, the Company issued and sold 400,000 shares of fixed-to-floating rate non-cumulative perpetual preferred stock, Series A, $0.01 par value, with a liquidation preference of $1,000 per share for a total of $400 million.

(3) Includes all client trades that generate either commission revenue or revenue from principal markups (i.e., fixed income); also known as DART. (4) Includes eligible trades executed by clients who participate in one or more of the Company's asset-based pricing relationships. (5) Includes all commission free trades, including Schwab Mutual Fund OneSource® funds and ETFs, and other proprietary products.   See Notes to Consolidated Statements of Income, Financial and Operating Highlights, and Net Interest Revenue Information.   THE CHARLES SCHWAB CORPORATION Net Interest Revenue Information (In millions) (Unaudited)   Three Months Ended March 31,     2012         2011       Average

Balance

  Interest

Revenue/

Expense

  Average

Yield/

Rate

        Average

Balance

  Interest

Revenue/

Expense

  Average

Yield/

Rate

Interest-earning assets:         Cash and cash equivalents $ 6,246 $ 4 0.26 % $ 4,955 $ 3 0.25 % Cash and investments segregated 26,847 10 0.15 % 23,191 14 0.24 % Broker-related receivables (1) 315 - 0.09 % 373 - 0.16 % Receivables from brokerage clients 10,200 106 4.18 % 10,335 117 4.59 % Securities available for sale (2) 36,197 145 1.61 % 25,016 106 1.72 % Securities held to maturity 14,972 99 2.66 % 17,138 140 3.31 % Loans to banking clients 9,864 79 3.22 % 9,009 75 3.38 % Loans held for sale       53     1   4.15 %           113     1   3.59 % Total interest-earning assets       104,694     444   1.71 %           90,130     456   2.05 % Other interest revenue           28                   25     Total interest-earning assets     $ 104,694   $ 472   1.81 %         $ 90,130   $ 481   2.16 % Funding sources: Deposits from banking clients $ 61,105 $ 10 0.07 % $ 50,329 $ 17 0.14 % Payables to brokerage clients 30,560 1 0.01 % 27,055 1 0.01 % Long-term debt       2,001     27   5.43 %           2,005     27   5.46 % Total interest-bearing liabilities       93,666     38   0.16 %           79,389     45   0.23 % Non-interest-bearing funding sources       11,028                   10,741         Total funding sources     $ 104,694   $ 38   0.14 %         $ 90,130   $ 45   0.20 % Net interest revenue         $ 434   1.67 %             $ 436   1.96 % (1)   Interest revenue was less than $500,000 in the period or periods presented. (2) Amounts have been calculated based on amortized cost.   See Notes to Consolidated Statements of Income, Financial and Operating Highlights, and Net Interest Revenue Information.     Notes to Consolidated Statements of Income, Financial and Operating Highlights,

and Net Interest Revenue Information

(Unaudited)   The Company The consolidated statements of income, financial and operating highlights, and net interest revenue information include The Charles Schwab Corporation (CSC) and its majority-owned subsidiaries (collectively referred to as the Company), including Charles Schwab & Co., Inc. and Charles Schwab Bank. Certain prior year amounts have been reclassified to conform to the 2012 presentation. The consolidated statements of income, financial and operating highlights, and net interest revenue information should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011. **********   THE CHARLES SCHWAB CORPORATION Asset Management and Administration Fees Information (In millions) (Unaudited)   Three Months Ended March 31,   2012       2011     Average

Client

Assets

 

Revenue

  Average

Fee

Average

Client

Assets

 

Revenue

  Average

Fee

          Schwab money market funds before fee waivers $ 156,614 $ 222 0.57 % $ 152,402 $ 211 0.56 % Fee waivers         (163 )           (112 )     Schwab money market funds 156,614 59 0.15 % 152,402 99 0.26 % Equity and bond funds (1) 45,630 32 0.28 % 41,207 29 0.29 % Mutual Fund OneSource ®     215,350     166     0.31 %   215,967     172     0.32 % Total mutual funds (2)   $ 417,594     257     0.25 % $ 409,576     300     0.30 % Advice solutions (2) $ 115,496 139 0.48 % $ 109,093 129 0.48 % Other (3)         88             73       Total asset management and administration fees       $ 484           $ 502       (1)   Includes Schwab ETFs. (2)

Advice solutions include separately managed accounts, customized personal advice for tailored portfolios, and specialized planning and full-time portfolio management offered through the Company's Schwab Private Client, Schwab Managed Portfolio and Managed Account Select programs. Advice solutions also includes Schwab Advisor Network, Schwab Advisor Source, and Windhaven. Average client assets for advice solutions may also include the asset balances contained in the three categories of mutual funds listed above.

(3) Includes various asset based fees, such as trust fees, 401k record keeping fees, and mutual fund clearing and other service fees.                 THE CHARLES SCHWAB CORPORATION Growth in Client Assets and Accounts (Unaudited)    

Q1-12 % Change

2012 2011 vs. vs. First Fourth Third Second First (In billions, at quarter end, except as noted) Q1-11   Q4-11 Quarter   Quarter   Quarter   Quarter   Quarter Assets in client accounts

Schwab One®, other cash equivalents and deposits from banking clients

18 % 2 % $ 98.8 $ 96.4 $ 90.9 $ 86.5 $ 83.7 Proprietary funds (Schwab Funds® and Laudus Funds®): Money market funds 1 % (3 %) 154.4 159.8 155.5 152.0 152.2 Equity and bond funds (6 %) 20 %   45.8       38.2       34.3       49.6       48.9   Total proprietary funds - 1 %   200.2       198.0       189.8       201.6       201.1   Mutual Fund Marketplace® (1) Mutual Fund OneSource® - 11 % 219.5 198.6 187.9 220.8 219.7 Mutual fund clearing services 197 % 22 % 127.0 104.2 98.6 43.7 42.8 Other third-party mutual funds 9 % 9 %   334.1       305.9       290.4       314.2       307.7   Total Mutual Fund Marketplace 19 % 12 %   680.6       608.7       576.9       578.7       570.2   Total mutual fund assets 14 % 9 %   880.8       806.7       766.7       780.3       771.3   Equity and other securities (1) 9 % 13 % 685.0 607.9 552.9 624.5 631.0 Fixed income securities 5 % 1 % 179.4 176.9 176.4 175.1 171.5 Margin loans outstanding (1 %) 3 %   (10.5 )     (10.2 )     (10.5 )     (10.9 )     (10.6 ) Total client assets 11 % 9 % $ 1,833.5     $ 1,677.7     $ 1,576.4     $ 1,655.5     $ 1,646.9     Client assets by business Investor Services 5 % 8 % $ 753.3 $ 697.9 $ 655.4 $ 711.6 $ 714.8 Advisor Services 7 % 8 % 735.9 679.0 640.1 697.8 688.6 Other Institutional Services 41 % 14 %   344.3       300.8       280.9       246.1       243.5   Total client assets by business 11 % 9 % $ 1,833.5     $ 1,677.7     $ 1,576.4     $ 1,655.5     $ 1,646.9     Net growth in assets in client accounts (for the quarter ended) Net new assets Investor Services (2) 4 % 11 % $ 5.9 $ 5.3 $ 11.6 $ 2.0 $ 5.7 Advisor Services (11 %) 37 % 12.6 9.2 10.6 10.6 14.2 Other Institutional Services (3) N/M 191 %   20.4       7.0       63.8       2.8       3.1   Total net new assets 69 % 81 %   38.9       21.5       86.0       15.4       23.0   Net market gains (losses) 137 % 46 %   116.9       79.8       (165.1 )     (6.8 )     49.4   Net growth (decline) 115 % 54 % $ 155.8     $ 101.3     $ (79.1 )   $ 8.6     $ 72.4     New brokerage accounts (in thousands, for the quarter ended) (4) 7 % 18 % 240 203 506 205 224 Clients (in thousands) Active Brokerage Accounts 7 % 1 % 8,639 8,552 8,510 8,140 8,072 Banking Accounts 11 % 3 % 801 780 769 745 719 Corporate Retirement Plan Participants 5 % 2 %   1,516       1,492       1,462       1,439       1,444             (1)   Excludes all proprietary money market, equity, and bond funds. (2) Includes inflows of $7.5 billion in Investor Services from the acquisition of optionsXpress Holdings, Inc. in the third quarter of 2011. (3)

Includes inflows of $12.0 billion and $60.9 billion from mutual fund clearing services clients in the first quarter of 2012 and third quarter of 2011, respectively. Includes outflows of $2.1 billion from a mutual fund clearing services client in the first quarter of 2011.

(4) Includes 315,000 new brokerage accounts from the acquisition of optionsXpress Holdings, Inc. in the third quarter of 2011. N/M Not meaningful