Charles Schwab 2008 Annual Report Download - page 30

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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)
- 16 -
Net revenue per average full-time equivalent employee is considered by management to be the Company’s broadest
measure of productivity.
The Company’s major sources of net revenues are asset management and administration fees, net interest revenue, and trading
revenue. The Company generates asset management and administration fees through its proprietary and third-party mutual
fund offerings, as well as fee-based investment management and advisory services. 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 Company's ability to attract new clients,
and client activity levels. The Company generates trading revenues through commissions earned for executing trades for
clients and principal transaction revenues from trading activity in fixed income securities. Trading revenues are impacted by
trading volumes, the volatility of equity prices in the securities markets and commission rates.
2008 Compared to 2007
2008 was marked by extraordinary market conditions, including continued downward pressure on home prices, tighter credit
markets, liquidity concerns, significant volatility and sharp declines in the equity markets, and continued slowing of general
economic activity. The Nasdaq Composite Index, Standard and Poor’s 500 Index, and the Dow Jones Industrial Average
decreased during the year by 41%, 38%, and 34%, respectively, with a significant portion of these decreases occurring in the
fourth quarter. In addition, the federal funds rate decreased during the year by 4.25% to a range of zero to 0.25% at
December 31, 2008.
Even with this unprecedented market environment, clients remained actively engaged with the Company in managing their
investments and made heavy use of all of the Company’s service channels – branch, phone, and internet. Net new client assets
totaled $113.4 billion for the year, down 29% from a year ago, reflecting continued deterioration in the equity markets and
lower asset valuations. Total client assets were $1.137 trillion at December 31, 2008, down 21% from December 31, 2007.
Additionally, clients’ daily average trades increased 22% to 346,600 in 2008 from 2007.
Net revenues grew by 3% in 2008 from the prior year primarily due to an increase in trading revenue partially offset by a
decrease in other revenue. Trading revenue increased in 2008 primarily due to higher trading volume as a result of significant
volatility in the equity markets during the year. The decrease in other revenue in 2008 related to losses of $75 million on
investments in the Company’s securities available for sale portfolio. Asset management and administration fees remained
relatively flat in 2008 reflecting the Company’s ability to attract and retain clients. Net interest revenue increased by 1% in
2008 due to higher levels of interest-earning assets offset by the impact of a decrease in the average net yield earned on these
assets. Although expenses excluding interest remained relatively flat in 2008, compensation and benefits expense decreased
reflecting lower incentive compensation, while other expense and occupancy and equipment expense increased. The loss from
discontinued operations of $18 million in 2008 relates to the adjustment to finalize the income tax gain related to the sale of
U.S. Trust. As a result of the Company’s sustained expense discipline in 2008, the Company achieved a pre-tax profit margin
from continuing operations of 39.4% and return on stockholders’ equity of 31% in 2008. Return on stockholders’ equity in
2007 included a $1.2 billion after-tax gain on the sale of U.S. Trust, as well as incremental interest revenue generated from
temporarily investing the proceeds from the sale. Net revenue per average full-time equivalent employee was $383,000 in
2008, down 1% from 2007 as net revenue growth was lower than the increase in average full-time equivalent employees.
2007 Compared to 2006
Overall equity market returns for 2007 showed gains for the three major indices – the Nasdaq Composite Index increased by
10%, the Dow Jones Industrial Average increased 6%, and the Standard and Poor's 500 Index increased 4%.
Net new client assets totaled $160.2 billion for 2007, up 92% from 2006, which included $23.0 billion related to the
acquisition of The 401(k) Company in 2007. Total client assets were $1.446 trillion at December 31, 2007, up 17% from
December 31, 2006. Clients’ daily average trades increased 6% to 284,900 in 2007 from 2006.