Charles Schwab 2015 Annual Report Download - page 48

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)
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ending the year up 13%, 11%, and 8%, respectively. The federal funds target rate remained unchanged at a range of zero to
.25% during 2014. The average 10-year U.S. Treasury yield increased by 20 basis points to 2.53% during 2014 compared to
2013, while the yield ended the year down 86 basis points to 2.17%. In the same period, the average three-month U.S.
Treasury Bill yield decreased by 3 basis points to .02%.
The Company’s steady focus on serving investor needs through its full-service investing model continued to drive growth
during 2014. Total client assets ended the year at $2.46 trillion, up 10% from 2013, reflecting net new client assets of
$124.8 billion and a rising equity market environment. In addition, the Company added almost 1 million new brokerage
accounts to its client base during 2014. Active brokerage accounts reached 9.4 million in 2014, up 3% from 2013.
As a result of the Company’s strong key client activity metrics, the Company achieved a pre-tax profit margin of 34.9% in
2014. Overall, net income increased by 23% in 2014 from 2013 and the return on average common stockholders’ equity was
12% in 2014.
Overall, net revenues increased by 11% in 2014 from 2013, primarily due to increases in net interest revenue, asset
management and administration fees, and other revenue.
x Net interest revenue increased primarily due to higher balances of interest-earning assets, including margin loans
and the Company’s investment portfolio (securities available for sale and securities held to maturity), and the effect
higher average interest rates on securities held to maturity had on the Company’s average net interest margin.
x Asset management and administration fees increased due to fees from mutual fund services, advice solutions, and
other asset management and administration services.
x Other revenue increased primarily due to a net insurance settlement of $45 million, net litigation proceeds of
$28 million related to the Company’s non-agency residential mortgage-backed securities (RMBS) portfolio, and
increases in order flow revenue.
Expenses excluding interest increased by 6% in 2014 from 2013 primarily due to an increase in compensation and benefits
expense as a result of a charge of $68 million for estimated future severance benefits resulting from changes in the
Company’s geographic footprint and an increase in professional services expense.
Current Regulatory Environment and Other Developments
In December 2015, the OCC issued proposed guidelines to establish standards for recovery planning by national banks and
federal savings banks with total consolidated assets of $50 billion or more. The proposed guidelines would require each bank
to develop and maintain a recovery plan that sets forth the bank’s plan for how it will remain a going concern when it is
experiencing considerable financial or operational stress. The comment period for the proposed guidelines ended on
February 16, 2016 and the guidelines are subject to further modification. The Company is currently evaluating the impact of
the proposed guidelines.
In October 2015, the Federal Reserve issued a notice of proposed rulemaking that would require certain financial institutions
that are subject to the Federal Reserve’s capital rules to apply a regulatory capital deduction treatment to their investments in
unsecured debt issued by U.S. bank holding companies identified as global systemically important banking organizations.
The comment period for the rule proposal ended on February 19, 2016 and the rule proposal is subject to further
modification. The Company is currently evaluating the impact of the proposed rule.
In October 2015, the FDIC issued a notice of proposed rulemaking that would impose a surcharge on the quarterly
assessments of insured depository institutions with total assets of $10 billion or more. The surcharge would equal an annual
rate of 4.5 basis points applied to the institution’s assessment base, with certain adjustments. The FDIC expects the proposed
surcharge to commence in the third quarter of 2016 and continue through the quarter that the reserve ratio of the DIF reaches
1.35%. Under the proposed rule, if by year-end 2018, the reserve ratio has not reached 1.35%, the FDIC would impose a
shortfall assessment on the institutions subject to the surcharge. The comment period for the rule proposal ended on
January 5, 2016 and the rule proposal is subject to further modification. The Company will continue to evaluate the impact of
the proposed rule.