Charles Schwab 2012 Annual Report Download - page 23

has clearly picked up. Remember that in our basic operating
model, client growth turns into earnings growth as long as
economic drivers are stable to improving.
To help solidify and advance our momentum with clients,
we chose to take advantage of the relative strength in 2012
revenues by allocating approximately $20 million more to project
spending than originally planned. The extra allocation helped
us to advance client initiatives across the board, including
more active near-term business development, while making
progress in extending our regulatory compliance infrastructure
as necessary in today’s more complex environment.
We were also active on the nancial management front in 2012.
We issued a total of $885 million in preferred stock, which
we view as a cost-effective, non-dilutive way of supporting
our ongoing growth. We redeemed all $202 million of our
remaining Trust Preferred Securities and the underlying 7.50
percent Junior Subordinated Notes given the Federal Reserve’s
proposal to phase out those securities’ eligibility for regulatory
capital treatment. Additionally, we retired all $750 million of
our outstanding 4.95 percent Senior Notes due in 2014 through
a debt exchange offer and the subsequent redemption of the
remaining balance. We issued $256 million of new 10-year
Senior Notes at a reduced cost via the exchange, and we
separately issued $350 million of 3-year Senior Notes with
a 0.85 percent coupon.
These transactions comprise a complicated set of actions
with a very straightforward goal — maximizing the company’s
earnings power by carefully managing both sides of the balance
sheet. We believe the company continues to have the resources
and exibility to pursue protable growth in all environments,
particularly given the diminishing effect of incremental Fed
monetary actions in the face of our balance sheet management
efforts and the extremely low level of current interest rates.
We’re neither expecting nor depending on a signicant
improvement in the environment during 2013. As long as
the economic picture holds up, we believe we can translate
stable interest rates, modest equity market gains, and a
recovery in trading activity into year-over-year improvement in
all three major sources of revenue — asset management and
administration fees, net interest revenue, and trading revenue —
and overall revenue growth at or near a double-digit percentage.
Under those circumstances, we’d expect to make progress in
normalizing our spending in three key areas: compensation, to
help with hiring and talent retention following a series of years
with tightly capped payouts; projects, to sustain and build
business momentum via a more fully-loaded list of initiatives;
and marketing, to help drive growth, bring our visibility to levels
more appropriate for a highly competitive industry, and build
the strength of our brand. At the same time, we’d expect to
accomplish this progress while lagging overall expense growth
behind revenues, thereby delivering an improved prot margin
and earnings growth along with stronger business momentum.
We do recognize that life rarely unfolds exactly as planned.
For example, client trading activity thus far for 2013 remains
relatively muted. To the extent conditions evolve differently
than our baseline scenario, our exible expense management
philosophy will enable us to adapt our spending as appropriate.
We’ve taken some major steps to continue building stockholder
value. What’s the next step for Schwab? We remain convinced
that the best path forward for the benet of both clients and
stockholders is the one we’re on — driving strong business
growth by investing in better client service capabilities,
building diversied revenue streams by expanding the products
and services we offer, and sustaining expense discipline by
allocating resources wisely as we balance our initiative spending
with strong protability. We can’t predict how the environment
will impact our progress on that path, but I’m dead certain
about one thing —
We’re not going sideways.
JOE MARTINETTO
March 8, 2013
LETTER FROM THE CHIEF FINANCIAL OFFICER 21
PRE-TAX PROFIT MARGIN
2008
39.4%
2012
29.7%
2011
29.7%
2009
30.4%
2010
18.3%