Charles Schwab 2013 Annual Report Download - page 31

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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in 2013 from 2012 primarily due to higher incentive compensation relating to the transition to a new payout schedule for field
incentive plans, increased individual sales performance compensation as a result of field sales volume, increased and
accelerated health savings account (HSA) contributions, equity incentive plan changes to vesting for retirement-eligible
employees, and increased funding for the corporate bonus plan commensurate with achieving higher earnings per common
share. Advertising and market development expense increased primarily due to investment in the Company’s new advertising
and branding initiative, Own your tomorrow™.
2012 Compared to 2011
Valuations in the broad equity markets improved during 2012 compared to 2011, as the Nasdaq Composite Index, Standard
& Poor’s 500 Index, and Dow Jones Industrial Average increased 16%, 13%, and 7%, respectively. While the federal funds
target rate remained unchanged at a range of zero to 0.25%, the average three-month Treasury Bill yield increased by 4 basis
points to 0.08% during 2012 compared to 2011. At the same time, the average 10-year Treasury yield decreased by 98 basis
points to 1.78%.
Despite continuing economic and interest rate challenges during the year, the Company’s sustained client focus helped
deliver strong key client activity metrics in 2012. While net new client assets decreased slightly by 4% to $139.7 billion in
2012, core net new client assets totaled $112.4 billion, up 37% from $82.3 billion in 2011. Total client assets ended the year
at a record $1.95 trillion, up 16% from 2011. In addition, the Company added 900,000 new brokerage accounts to its client
base during 2012, a decrease of 21% from the prior year due to the removal of approximately 30,000 accounts due to
escheatment and other factors in 2012, and the addition of 315,000 new brokerage accounts from the acquisition of
optionsXpress in 2011. Active brokerage accounts reached a record 8.8 million, up 3% from 2011.
Net revenues increased by 4% in 2012 from 2011 primarily due to increases in asset management and administration fees, net
interest revenue, and other revenue – net, partially offset by a decrease in trading revenue. Asset management and
administration fees increased primarily due to increases in advice solutions fees and other asset management and
administration fees. Net interest revenue increased primarily due to higher average balances of interest-earning assets,
partially offset by the effect of low overall interest rates and higher amortization of premiums relating to mortgage-backed
securities. Other revenue – net increased primarily due to a non-recurring gain of $70 million relating to a confidential
resolution of a vendor dispute in the second quarter of 2012. Trading revenue decreased primarily due to lower daily average
revenue trades, partially offset by the inclusion of optionsXpress’ trading activity from its acquisition in September 2011.
Expenses excluding interest were higher by 4% in 2012 compared to 2011 primarily due to the inclusion of a full year of
optionsXpress’ expenses. Taxes on income in 2012 include a non-recurring state tax benefit of $20 million recorded in the
third quarter of 2012. Overall, growth in the Company’s client base and ongoing expense discipline helped the Company
increase net income by 7% in 2012 from 2011, and achieve a pre-tax profit margin of 29.7% and return on common
stockholders’ equity of 11% in 2012.
CURRENT MARKET AND REGULATORY ENVIRONMENT AND OTHER DEVELOPMENTS
To the extent short-term interest rates remain at current low levels, the Company’s net interest revenue will continue to be
constrained, even as growth in average balances helps to increase such revenue. The low short-term interest rate environment
also affects asset management and administration fees. The Company continues to waive a portion of its management fees, as
the overall yields on certain Schwab-sponsored money market mutual funds have remained at levels at or below the
management fees on those funds. These and certain other Schwab-sponsored money market mutual funds may not be able to
replace maturing securities with securities of equal or higher yields. As a result, the yields on such funds may remain around
or decline from their current levels, and therefore below the stated management fees on those funds. To the extent this occurs,
asset management and administration fees may continue to be negatively affected.
In July 2013, the U.S. banking agencies issued regulatory capital rules that implemented BASEL III and relevant provisions
of the Dodd-Frank Act (Final Regulatory Capital Rules), which are applicable to savings and loan holding companies, such
as CSC, and federal savings banks, such as Schwab Bank. The rules will be phased in beginning on January 1, 2015.