Charles Schwab 2011 Annual Report Download - page 46

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THE CHARLES SCHWAB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)
- 18 -
mutual fund offerings, as well as fee-based advisory solutions. Net interest revenue is the difference between interest earned
on interest-earning assets and interest paid on funding sources. Asset management and administration fees and net interest
revenue are impacted by securities valuations, interest rates, the amount and mix of interest-earning assets and interest-
bearing funding sources, the Company’s ability to attract new clients, and client activity levels. The Company generates
trading revenue through commissions earned for executing trades for clients and principal transaction revenue from trading
activity in fixed income securities. Trading revenue is impacted by trading volumes, the volatility of prices in the equity and
fixed income markets, and commission rates.
2011 Compared to 2010
Economic and market conditions were challenging throughout 2011, marked by volatility in the equity markets, lower market
valuations, and further declines in interest rates. The Standard and Poor’s 500 Index, Nasdaq Composite Index, and Dow
Jones Industrial Average decreased on average 6%, 5%, and 4%, respectively, between the first and second halves of the
year. The federal funds target rate remained unchanged during the year at a range of zero to 0.25% and the three-month
Treasury Bill and 10-year Treasury yields declined by 11 and 141 basis points to 0.01% and 1.88%, respectively.
The Company’s key client activity metrics in 2011 were stable in the midst of a weakened economic and market
environment. Net new client assets totaled $145.9 billion in 2011. Core net new client assets, which exclude significant one-
time flows, totaled $82.3 billion in 2011 up from $78.1 billion in 2010. Total client assets ended the year at $1.68 trillion, up
7% from 2010. In addition, clients’ daily average trades were 451,100, up 13% from 2010.
Net revenues increased by 10% in 2011 from 2010 due to increases in all of the Company’s major sources of net revenues.
Asset management and administration fees increased primarily due to an increase in revenue from the Company’s advice
solutions and continued asset inflows, partially offset by money market mutual fund fee waivers, which increased to
$568 million in 2011 from $433 million in 2010. Net interest revenue increased primarily due to higher average balances of
interest-earning assets during the year, partially offset by the effect of lower interest rate spreads resulting from higher
amortization of premiums relating to residential mortgage-backed securities caused by higher mortgage prepayments in 2011.
Trading revenue increased primarily due to higher daily average revenue trades and the addition of optionsXpress, which was
acquired in September 2011.
While total expenses excluding interest were lower by 5% in 2011 compared to 2010, the Company experienced increases in
compensation and benefits, professional services, occupancy and equipment, and advertising and market development
expenses in aggregate of $266 million in 2011 compared to 2010. Significant charges in 2010 included class action litigation
and regulatory reserves relating to the Schwab YieldPlus Fund®, losses recognized for Schwab money market mutual funds,
and a charge relating to the termination of the Company’s Invest First® and WorldPoints(a) Visa(b) credit card program for a
total of $482 million.
As a result of the Company’s ongoing investment in clients and sustained expense discipline, the Company achieved a pre-
tax profit margin of 29.7% and return on stockholders’ equity of 12% in 2011.
2010 Compared to 2009
The equity markets improved during 2010 and remained well above their prior year lows. The Nasdaq Composite Index, the
Standard & Poor’s 500 Index, and the Dow Jones Industrial Average increased 17%, 13%, and 11%, respectively. The low
interest rate environment continued throughout the year as the federal funds target rate remained unchanged during the year
at a range of zero to 0.25%.
The Company’s sustained investment in expanding and improving product and service capabilities for its clients was
reflected in the strength of its key client activity metrics in 2010 - net new client assets totaled $78.1 billion, excluding
(a) WorldPoints is a registered trademark of FIA Card Services, N.A.
(b) Visa is a registered trademark of Visa International Service Association.