Charles Schwab 2014 Annual Report Download - page 40

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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2013 Compared to 2012
Valuations in the broad equity markets improved during 2013 compared to 2012, as the Nasdaq Composite Index, Standard
& Poor’s 500 Index, and Dow Jones Industrial Average increased 38%, 30%, and 26%, respectively. While the federal funds
target rate remained unchanged at a range of zero to 0.25%, the average 10-year Treasury yield increased by 55 basis points
to 2.33% during 2013 compared to 2012. In the same period however, the average three-month Treasury Bill yield decreased
by 3 basis points to 0.05%.
The Company continued to experience growth in its client base during 2013 – core net new client assets totaled
$140.8 billion, up 25% from $112.4 billion in 2012. Total client assets ended the year at a record $2.25 trillion, up 15% from
2012. In addition, the Company added almost 1 million new brokerage accounts during 2013, and active brokerage accounts
reached 9.1 million, up 3% from 2012.
As a result of the Company’s strong key client activity metrics, the Company achieved a pre-tax profit margin of 31.4% in
2013. Overall, net income increased by 15% in 2013 from 2012 and the return on average common stockholders’ equity was
11% in 2013.
Along with the growth in its client base, enrollments in client advisory solutions and stability in the economic environment
helped the Company achieve increases in all three major revenue lines in 2013 compared to 2012. Overall, net revenues
increased by 11% in 2013 from 2012, primarily due to increases in asset management and administration fees, net interest
revenue, and trading revenue, partially offset by a decrease in other revenue – net. Asset management and administration fees
increased primarily due to increases in mutual fund service fees and advice solutions fees. Net interest revenue increased
primarily due to higher balances of interest-earning assets and higher interest rates on new fixed-rate investments. This
increase was partially offset by the effect lower average short-term interest rates and the maturity of short-term interest-
earning assets had on the Company’s average net interest margin. Trading revenue increased primarily due to higher daily
average revenue trades and two additional trading days during the year. Other revenue – net decreased primarily due to a non-
recurring gain of $70 million relating to a confidential resolution of a vendor dispute in 2012.
Expenses excluding interest increased by 9% in 2013 from 2012 primarily due to increases in compensation and benefits,
professional services, advertising and market development, and other expense. Compensation and benefits expense increased
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™.
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 implementation of the rules began on January 1, 2015. The