Richard G. Fowler, Senior Vice President: (415) 667-1841
Chelsea de St. Paer, Vice President: (415) 667-1064

The commentary in this section speaks only as of the date specified below. The company makes no commitment to update any of this information.
 

January 19, 2016

Those of you who follow The Charles Schwab Corporation closely may receive our quarterly financial results through a wire service/email, a market data aggregator, or simply by checking our corporate website.  This morning, we began making our results available via another widely-used platform: Twitter.  You can find our page on www.Twitter.com with the handle @CharlesSchwab.  Today’s activity includes a Tweet noting the availability of fourth quarter 2015 results with a link to our press release, and follow-ups sharing the headlines from this morning’s announcement. 

Companies have increasingly leveraged Twitter to share insight about their industry, clients, and initiatives.  Several years ago, the SEC provided guidance on how publicly-traded companies could use social media platforms in compliance with Regulation FD.  Since then, news about financial results has also been increasingly shared and discussed on the platform.  We hope to “join the conversation” – boosting awareness of our business progress and the accessibility of our disclosures – by making our earnings package available via Twitter.

In addition to quarterly earnings releases, we also intend to alert investors to our Business Update events.  Next month, you’ll see us Tweet in advance of our Winter Business Update, letting you know the time and place to tune in.  We’ll then Tweet as it begins, and afterward share a link to the webcast replay. 

For now, we plan to use social media to alert folks that financial information is going out through our established channels.  Our Twitter page will essentially be another place that conveniently links to our regular disclosures.  We will check in with SCHW owners and followers later this year on our financial communication practices and look to refine our approach based on your feedback.  We remain committed to a transparent and effective communications effort.

The commentary in this section speaks only as of the date specified below. The company makes no commitment to update any of this information.

December 14, 2015

Today we released our November Monthly Activity Report.  While we produced another month of solid client metrics, we have no illusions about another press release stealing the show later this week.  As you know, the Federal Reserve is widely anticipated to begin raising interest rates on December 16th.  We have seen economic and employment reports meet expectations, FOMC minutes evolve, and member speeches show increasing conviction.  While it’s impossible to be certain about what will be announced on the 16th or how Fed actions will unfold, we thought it might be a good time to review our comments on the revenue impact of rising interest rates, and specifically to discuss how we would expect the effects of an initial rate hike in December to unfold.

There are two main areas where the rate environment has a revenue impact – our money market mutual funds, and the interest-bearing assets and liabilities on our balance sheet.  Let’s begin with our money market funds.  As rates rise, the fee waivers we are currently granting clients will decrease; waivers totaled $166 million last quarter, or $664 million annualized.  The average management fee across our $160 billion in money funds (as of Q3) was 59 basis points versus an average yield of 18 basis points, and the weighted average maturity of investments is currently 43 days.  Given that the money funds will have investments pricing or repricing daily, we anticipate that portfolio yields will improve as soon as short term rates react to any Fed move. We should note that short term rates have already been rising in anticipation of an approaching rate hike, which means that some of the rate hike benefit is already being realized. 

There obviously wouldn’t be much room for a significant impact on fourth quarter results, but the relatively short duration of these portfolios means that we’d be capturing the vast majority of a December rate hike as the first quarter progressed. As we’ve been saying, we expect the industry, including Schwab, to retain any incremental yield improvement until the waivers are eliminated.  While most of our money funds carry fees that are at least 25 basis points higher than current yields, a few carry lower fees that will be met within the first 25 basis points of rate increase; a majority will cap out if we see a second 25 basis point increase.

Turning to the potential balance sheet impact, the “coiled spring” we’ve been talking about for most of my tenure as CFO remains very much in place, growing over the years in keeping with the growth in our business.  As you’ll remember, we have shared that, assuming a parallel shift in the yield curve, we expect to see 60 basis points of Net Interest Margin (“NIM”) improvement on our interest-bearing assets for every 100 basis points of Fed Funds rate increase, and that the same goes for the next 100 basis points.  For reference, our third quarter 2015 NIM was 1.57%.  To the extent rate increases occur in smaller doses, say 25 basis points at a time, we’d expect the NIM improvement to be roughly proportionate to that 60-per-100 rule of thumb.

This sensitivity comes from the way we have deliberately engineered our balance sheet so that the majority of our interest-bearing assets and liabilities are tied to the shorter end of the yield curve.  The only places on the asset side of our balance sheet where we allow average duration beyond approximately 90 days are Schwab Bank’s investment portfolio, where about half of the total is invested in longer-dated assets, and the mortgages in the Bank’s loan book – altogether about 35-40% of the company’s interest-bearing assets.  You’ll also remember that we manage the rate we pay on the vast majority of our interest-bearing liabilities, with the most notable exception being the modest amount of fixed-rate debt employed in our capital base.  The net result is that the yield on interest-bearing assets will rise faster than the cost of supporting balances as market rates rise.  As with the money funds, we have assets pricing or repricing daily, so the NIM improvement is starting already and will continue as floating-rate assets reprice and short-term assets mature and are reinvested.  It will take a quarter or two for the majority of the rate hike effect to be felt, and well over a year before the full effect shows up.   

Finally, while this may not be an issue for a while, I should repeat that once short term rates get to 2% or so, we anticipate that market forces will lead to lower incremental NIM on further rate increases, as we expect competitive pressures to mount for deposits, causing their rates to move up more quickly in response to market movements. 

So that’s the revenue side.  We know that you’re also interested in how we’ll approach expense management once rates start to rise, but we’ll need to wait until the Winter Business Update in early February to discuss our thinking more fully.  For now, I’ve already shared our broad brush thinking about 2016 expense growth in a no-rate-hike scenario – somewhere above our 2015 growth rate but south of double digits.  Where our 2016 spending plan goes from there will depend on multiple factors, including the Fed’s December decision and our best read on the expected timing and pace of future Fed actions.  We continue to maintain a prioritized list of areas where we can increase investment to drive stronger long-term growth and build stockholder value; at the same time we continue to expect to deliver a substantial portion of rate-hike related revenue growth to pre-tax profit as the process of raising rates begins. 

After all these years and multiple head fakes, we’ve become well versed in talking to you about hypothetical rate increases and their impact.  Here’s hoping that the “uncoiling” of the spring soon becomes a reality.  We look forward to updating you on our evolving financial picture at the Winter Business Update.

Forward-Looking Statements

This commentary contains forward-looking statements relating to a December 2015 interest rate increase by the Federal Reserve; expectations regarding the effects of a December 2015 and other interest rate increases, including the impact and timing of impact on money market fund fee waivers and portfolio yields and net interest margin improvement; the retention of incremental yield improvement; the yield on interest-bearing assets rising faster than the cost of supporting balances; 2016 expense growth; and delivering rate-hike related revenue growth to pre-tax profit.

Important factors that may cause such differences include, but are not limited to, general market conditions, including the level of interest rates; competitive pressures on rates and fees; client sensitivity to interest rates; the volume of prepayments in the company’s mortgage-backed securities portfolio; the company’s ability to manage expenses; and other factors set forth in the company’s most recent reports on Form 10-K and Form 10-Q.
 

The commentary in this section speaks only as of the date specified below. The company makes no commitment to update any of this information.


September 15, 2015

We issued our SMART report for the month of August today, and between the client metrics shown there and the trading data that we’ve already posted it’s clear we’ve been busy.  With the elevated market volatility late in the month, our clients made extensive use of our branches, phone-based service centers and online capabilities to help keep their investing on track.  Many of them engaged with our financial consultants and subject matter experts to ask questions about how their assets enrolled in our advisory solutions are positioned, as well as assess their holdings and determine what, if any, action should be taken. 

We supported heavy client trading volumes during this period, including a new daily record of just under 860 thousand revenue trades on August 24.  Thus far in September, trading activity has moderated to the levels we saw in July of this year.  At the same time, the S&P 500 Index is down more than 5% from month-end June, and with the continuing evolution of our model to encompass modern wealth management as well as self-directed investing, this becomes an ever more important factor in driving our revenue outlook.  As we head towards the end of the quarter, I’m confident the investment community will keep an eye on the interplay between the interest rate environment, equity market valuations and trading activity while monitoring our near-term revenue picture.

We noted in the SMART report that average interest bearing assets reached $161 billion in August, up 16% year-over-year.  This strong growth reflects our continued success in building our client base, as well as our focus on transitioning a significant portion of client sweep cash balances to Schwab Bank as capital levels allow.  In early August we supplemented our capital base by issuing $600 million of preferred stock with a dividend rate of 6% and quarterly payments beginning December 1.  As discussed during our Business Update back in July, we expect to utilize this additional capital to support the transition of certain client sweep cash balances from money funds to Schwab Bank.  Our initial plans call for moving approximately $4 billion of these balances over several months, beginning in September, with the majority transferring in December.  We expect to continue to use excess capital above our desired consolidated Tier 1 Leverage ratio of 6.75% to 7.00% to support profitable balance sheet growth by moving additional sweep balances from money funds to the Bank over time.
 

Forward-Looking Statements
This commentary contains forward-looking statements relating to building our client base and the transition of client sweep cash balances from money funds to Schwab Bank, including amount, timing and expectations.  Achievement of these expectations and objectives is subject to risks and uncertainties that could cause actual results to differ materially from the expressed expectations.             

Important factors that may cause such differences include, but are not limited to, general market conditions, including the level of interest rates, equity valuations and trading activity; the company’s ability to attract and retain clients and grow client assets/relationships; competitive pressures on rates and fees; the level of client assets, including cash balances; the company’s ability to monetize client assets; client use of the company’s investment advisory services and other products and services; the company’s ability to develop and launch new products, services and capabilities in a timely and successful manner; the company’s ability to manage expenses; capital needs and management; client sensitivity to interest rates; regulatory guidance; the effect of adverse developments in litigation or regulatory matters and the extent of any charges associated with legal matters; any adverse impact of financial reform legislation and related regulations; and other factors set forth in the company’s most recent reports on Form 10-K and Form 10-Q.

The commentary in this section speaks only as of the date specified below. The company makes no commitment to update any of this information.

August 14, 2015

By now, you may have noticed that we recently made a few changes to our disclosures, and I’d like to make sure everyone is aware of these developments as well as provide context for how they help tell our story.  As a large savings and loan holding company, our required reporting has expanded significantly in recent years.  In addition, as Schwab evolves, we revisit our reporting and strive to keep it closely aligned with the everyday workings of the business.  In the second quarter of 2015, we added a new Other Regulatory Disclosures tab to our corporate website, made changes to the Asset Management and Administration Fees (AMAF) table in our earnings release package, and included some new information in our 10-Q filing.

The Other Regulatory Disclosures tab is accessible via our Investor Relations landing page on aboutschwab.com.  This tab contains our Basel III Standardized Approach Disclosures and 2015 Annual Dodd-Frank Act Stress Test (DFAST) Disclosure.  The Basel III disclosures pull together and organize key capital information from our Forms 10-K, 10-Q, FR Y-9C (for bank holding companies), and FFIEC 041 (for domestic banks).  We see this as a very helpful tool for readers seeking to understand Schwab’s capital picture as efficiently as possible.  With the posting of DFAST results, viewers now have a more concrete, empirical look at Schwab’s results under the Severely Adverse Scenario as prescribed by the Office of the Comptroller of the Currency, which regulates the Bank.  The Basel III disclosures will be updated quarterly; the DFAST results are published annually.

Shifting to our earnings release, the AMAF table now breaks out three categories for Advice solutions – Fee-based, Intelligent Portfolios, and Legacy Non-Fee – as opposed to the single, all-inclusive line shown previously.  This makes it easier to track Intelligent Portfolios’ progress while preserving an accurate view of the revenue yield from Fee-based advice solutions.  In addition, the AMAF table now reflects a reclassification of certain mutual fund balances out of OneSource to Other third party mutual funds.  The balances are no longer shown on the table, and the corresponding revenue is now included in Other AMAF revenue.  Although these funds generate balance-related revenue, they are not technically part of OneSource. 

In our second quarter 10-Q filing, we began including the AMAF table, and provided additional detail regarding the fund flows that generate AMAF revenue.  We added a roll-forward of client assets in Schwab proprietary money market funds and equity and bond funds, as well as Mutual Fund OneSource.  Beginning balances, net flows, net market gains or losses, and ending balances are presented for each of these groupings. 

Finally, the 10-Q includes new disclosure discussing our order flow revenue and its drivers. While less than 2% of our annual net revenues come from this source, we recognize there is substantial investor interest in the subject and believe this transparency will provide useful perspective on our practices.

We remain committed to evolving Schwab’s disclosures to better reflect our business and its drivers.  We hope you find these changes helpful as you follow the company and assess its progress.  

The commentary in this section speaks only as of the date specified below. The company makes no commitment to update any of this information.

January 16, 2015

As we announced in our earnings release today, our Q4 ’14 financial results included two nonrecurring items related to the company’s non-agency residential mortgage-backed securities (RMBS) portfolio: net litigation proceeds of approximately $28 million and net losses of $8 million from selling securities totaling approximately $500 million. Taken together, these items increased pre-tax income by approximately $20 million, or $.01 per share. With the financial crisis well behind us, it’s been a while since we’ve needed to discuss these securities, so I wanted to walk through some history and share a perspective on these recent developments.

When the crisis hit full swing in 2008, we owned roughly $3.5 billion of non-agency RMBS in Schwab Bank’s investment portfolio. While we generally favor agency-backed securities, we had carefully researched these specific instruments and purchased them based on the representations made regarding the nature and underwriting of underlying collateral, level of credit support, etc. As the crisis continued, the credit performance of private label securities in general, and the ones in our portfolio specifically, began to deteriorate, and valuations suffered significantly. At the end of 2008, we had unrealized mark-to-market losses of $862 million on our non-agency portfolio. These bonds have been the primary source of the $170 million in impairment charges we’ve recognized since the crisis, and we have continually asked ourselves whether stockholders might be better off if we were to simply liquidate the position and move on.

The thing is, there were really two issues at stake here: the actual performance-driven impairment charges we took as the defective nature of the underlying collateral became apparent, and beyond that, unrealized losses stemming from the value the market was assigning to the securities. As you may know, we’ve been pursuing recovery from the underwriters of these securities in connection with misrepresentations that were made about the underlying collateral. With respect to the unrealized losses, our assessments kept telling us that the market was mispricing these securities, that while we might not recover all of their amortized cost, we were likely to do better than market prices implied. Since we had purchased these securities with the intent and ability to hold them through maturity, we therefore felt our best economic choice was to continue to hold and monitor these bonds and their market valuations. The point is simple but goes to the heart of our financial management philosophy – focus on maximizing stockholder value over the long term. In this case, why lock in a loss to avoid some near-term uncertainty when you’re convinced more value is there and that incurring further loss is unnecessary?

The market valuations for these non-agency RMBS are now more consistent with their current performance. We are continuing to vigorously pursue our legal claims on these securities, and we’ve started to make progress on that front. At this point, we have chosen to sell the vast majority of our remaining non-agency RMBS in order to mitigate the risk of further impairment charges. We have marked the remaining $15 million of these securities in our portfolio to market and recorded a $0.6 million charge in Q4, so there is limited remaining downside.

We hope you’ll agree that the patient approach is the right one for stockholders in this case.

The commentary in this section speaks only as of the date specified below. The company makes no commitment to update any of this information.
 

October 15, 2014

Concurrent with our Earnings Release today, we are inaugurating a new approach to reporting on our clients’ trading activity intra-quarter.  We have retired the inclusion of trade reporting in our Monthly Market Activity Report (“SMART”) and are now providing a weekly look at trading activity, including revenue, asset-based and other trades, which is posted on the Investor Relations landing page on aboutschwab.com.  Here’s a link to our initial report: http://www.aboutschwab.com/investor-relations.

For more than 20 years, the SMART has included a monthly look at client trading, providing a perspective on how clients are interacting with Schwab and the markets, as well as an update on a revenue driver for the company.  During this time, Schwab has evolved to a firm offering a broad range of investment and cash management solutions, to both self-directed investors and those seeking help and/or advice, a firm where the number of client revenue trades plays a less important role in assessing our financial and operating performance.  ‘Headline’ online equity trade pricing has declined to commodity-like levels, and clients are increasingly comfortable with relationships where trading is included, such as Schwab Private Client™, and platforms where we generate revenues based on balances rather than transactions, such as Mutual Fund and ETF OneSource®.  For example, revenue trades made up 57% of overall trading activity during the third quarter of 2014, down from 60% last year and 67% in 2011.  With our evolution, we have built more diversified sources of revenue - asset management and administration fees and net interest revenues are currently approaching 3 times the size of our trading revenues. 

For these reasons, as well as our belief that trading activity remains over-emphasized as a proxy for investor sentiment, we’ve determined it’s time to remove that metric from the monthly report.  That change makes room in the SMART for other measures of client activity that have grown in relevance over the years.  Of course, supporting our clients’ trading needs clearly remains an important element of our business model, and their trading behavior continues to provide insight into their mindset, so we recognized the importance of continuing to share the data in some form.  As you can see in the new trade reporting layout, moving that activity to the IR section of aboutschwab.com enables us to deliver additional detail and increased frequency for our intra-quarter reporting.  We’ve also established a rolling 13-week history so the current quarter-to-date picture is always readily available.  The quarterly summaries of trading activity will continue to appear in the earnings release tables.

The space we’ve freed up in the SMART has been used to reorganize the report for clarity and to add data relating to advised asset balances, three new measures of client activity – inbound calls, website logins, and cash as a percentage of client assets – and the overall level of interest-bearing assets at the firm.  The redesigned format is included in our third quarter earnings release tables: http://www.aboutschwab.com/investor-relations/financial-reports.

Taken together, our changes to trade reporting and SMART content should provide the investment community and other members of our external audiences with better insight regarding intra-quarter client activity at Schwab and the drivers of our three main revenue streams.   We plan to maintain the current 10^th business day target for SMART releases, and the trade report should be available every Tuesday (or second business day) for the prior week. 

Charles Darwin famously alluded to the process of animals dropping scales, webbed toes, feathers, or a myriad of other features in the course of their evolution from one species to another.  Well, it’s time for Schwab to shed the skin that has defined us for decades.  Good-bye to monthly trade reporting, and hello to a better representation of the Schwab of today.  We remain committed to updating the company’s reporting over time to better reflect the firm’s evolution.

The commentary in this section speaks only as of the date specified below. The company makes no commitment to update any of this information.

July 16, 2014

As you look through today’s earnings release, you might notice that the size of our balance sheet (shown in the Financial and Operating Highlights table on page 5) hasn’t changed much since year-end 2013, continuing to hover around $144 billion. That’s unusual for us – for example, the company’s balance sheet grew by approximately $8 billion during the second half of 2013. Given the factors influencing this situation, I wanted to share some perspective on current client behavior and ramifications for our capital management going forward.

First, knowing that client cash balances, specifically Schwab One and bank deposit levels, are major drivers of balance sheet growth at Schwab, you might take a look at the Growth in Client Assets and Accounts table on page 8 to see what’s going on. Scanning that table, you can see that the first line – ‘Schwab One, other cash equivalents and deposits from banking clients’ – is down from year-end. So, too, are ‘Money market funds’ on the second line of the table. While client money fund holdings are not part of the company’s balance sheet, we think of them as part of client cash due to their highly liquid nature. Overall, clients are indeed keeping fewer dollars in cash.

What else can you see in the tables? Client assets overall at Schwab have shown solid growth – over $150 billion thus far in 2014 - with approximately $57 billion of that growth coming from net new assets. With that kind of asset growth, the lower cash balances certainly aren’t leaving us, they’re effectively going into other asset categories. Looking at the client asset table and the SMART report that follows, it’s also clear that both mutual funds and ETFs have attracted significant inflows throughout the first half, and that in fact every asset category except for the two cash lines is up since year-end. So clients are currently engaging with their investments and the markets in ways that limit the resulting growth in our balance sheet – in effect, taking cash off the sidelines and putting it into the markets.

It’s also worth noting that we have moved less than $900 million year-to-date in client sweep balances from certain money funds to Schwab Bank as part of our cash migration work, where we seek to ensure sweep balances are housed in the most appropriate venue at Schwab based on the client’s relationship with the company. In comparison, we moved $2.8 billion from the money funds to the Bank in 2013, and over $8 billion between 2008 and 2012. The reduction in migration work, and associated slowdown in balance sheet growth, reflects the fact that we are essentially fully executed against our existing cash strategy and in maintenance mode, making adjustments just to reflect clients’ updated account status.

There are several ramifications to the recent lull in balance sheet growth. First, we shouldn’t kid ourselves about this being some sort of secular shift in client behavior and our strategic story – we firmly believe that client-driven growth in our balance sheet will resume, potentially very soon. I have spoken before about how clients very consistently leave around 13% or so of their assets at Schwab in some form of cash, so the current 12% level is not likely to persist as they rebalance over time. Even if the ratio of cash to assets did find a new lower level, as long as we’re gathering positive net new assets some amount will be in cash and therefore adding to balance sheet growth through higher bank deposit balances. That’s a good thing in any event – even in this economy and rate environment, we can monetize that growth at attractive returns and build stockholder value; we’ve been talking for a long time about the improved returns available on client cash as the environment normalizes.

What’s noteworthy here is that our record first half earnings have combined with the recent lull in balance sheet growth to help move us closer to our desired capital range a bit faster than we might have expected. We’ve talked about wanting to see our consolidated Tier I Leverage Ratio in a 25 basis point band topping out at 7.0%, which we believe provides an appropriate buffer over our target of at least 6.0%. Our preliminary Tier I Leverage Ratio as of June 30 is 6.8%, so we’ve arrived at the cusp of our intended level after beginning the year at 6.4%. We’re getting to the point where we can assess the potential timing and extent of adjustments to our sweep cash alternatives that might bring more client cash onto the balance sheet, thereby optimizing the monetization of that cash while continuing to provide an appropriate return to clients. We also maintain a target dividend payout ratio of 20-30%, so as earnings improve we’re positioned to reward stockholders with higher cash payouts. Finally, if we run out of opportunities to deploy capital at acceptable returns, we’ll look to other capital return options, like share repurchases or special dividends.

None of this is news to folks who’ve been following the company for a while – Walt and I have been discussing these options publicly for months. I simply hope our stockholders will agree it’s encouraging to see real progress in approaching the point where we can start turning some of these possibilities into reality.
 

Forward-Looking Statements
This commentary contains forward-looking statements relating to client cash balances; balance sheet growth; ratio of client cash to client assets; monetization of cash; Tier 1 leverage ratio; cash migration; target dividend payout ratio; earnings improvement; higher cash payouts to stockholders; and capital return options. Achievement of these expectations and objectives is subject to risks and uncertainties that could cause actual results to differ materially from the expressed expectations.

Important factors that may cause such differences include, but are not limited to, general market conditions, including the level of interest rates, equity valuations and trading activity; the company’s ability to attract and retain clients and grow client assets/relationships; competitive pressures on rates and fees; the level of client assets, including cash balances; the company’s ability to monetize client assets; capital needs and management; client enrollments in advisory services; the company’s ability to develop and launch new products, services and capabilities in a timely and successful manner; the company’s ability to manage expenses; the impact of changes in market conditions on money market fund fee waivers, revenues, expenses and pre-tax margins; regulatory guidance; acquisition integration costs; trading activity; the effect of adverse developments in litigation or regulatory matters and the extent of any charges associated with legal matters; any adverse impact of financial reform legislation and related regulations; and other factors set forth in the company’s most recent reports on Form 10-K and Form 10-Q.
 

The commentary in this section speaks only as of the date specified below. The company makes no commitment to update any of this information.
 

March 31, 2014

As I mentioned in my last post, here are a few more thoughts on the evolution of client behavior during the market recovery, which is now a full five years along:

With the S&P 500 up over 170% from its lowest point in the first quarter of 2009 and setting new records, it’s not really surprising to see investors put cash back to work in the markets.  There are, however, some interesting aspects to the way our clients have reallocated their holdings across products and asset classes during the recovery thus far. 

At the height of the crisis, client cash as a percentage of total client assets peaked at 24% as clients reduced their allocations to individual equities and mutual funds while at the same time increasing their exposure to ETFs and fixed income. Following the market bottom in March 2009 we saw clients work down their cash positions to historically normal levels of about 13%, and return to equities at proportions we have not seen since the first half of 2008.

Unique to this recovery has been the greater utilization of ETFs, which appears to have supplanted what would otherwise have been allocated to individual equities. You can see in the chart below that mutual funds have returned to normal levels while individual equities remain lower - by about 4 percentage points - as ETFs have grown to 9% of client assets over the same period. You can also see that direct holdings of fixed income securities have not only declined from the market bottom, but actually dropped below the pre-crisis level. Our data indicates that clients have kept the mutual fund portion of their fixed income exposure relatively constant at a low double-digit percentage of client assets since the market bottom.  Their overall exposure was approximately 20% of client assets at year-end 2013, roughly the pre-crisis level.  Thus mutual funds now account for the majority of clients’ fixed income exposure at Schwab in this persistently low rate environment.

So cash and mutual funds are now back to pre-crisis levels, clients favor fixed income funds over direct exposure as they grapple with interest rates, and ETFs are taking a bigger piece of the asset pie.  As ETF utilization continues to grow in our client base, we plan to expand our disclosures in this area. Beginning with our first quarter earnings release, we will report ETF flows in the Monthly Market Activity Report and total balances in the Growth in Client Assets and Accounts Table.

*Estimated

The commentary in this section speaks only as of the date specified below. The company makes no commitment to update any of this information.


March 14, 2014

The S&P 500 Index bottomed at 676.53 on March 9, 2009, so we are now a full five years into the market recovery.  As the recovery has strengthened in recent months, we have been asked more often about individual investor engagement, with the questioner usually equating engagement with trading activity.  Trading certainly has picked up – thus far in 2014 we’ve had the strongest start of any year in our history, handling an average of more than 550,000 trades a day in both January and February; we also executed an average of over 500,000 trades a day last December. One might assume that trading paints a picture of renewed engagement, yet our raw trading statistics tell only a fraction of the engagement story at Schwab and miss what we consider to be the bigger picture.  For example, clients increasingly look to Schwab for help in aligning their investments with their financial goals - assets enrolled in one of our retail advisory solutions have grown from $68 billion in March 2009 to nearly $160 billion at month-end February, rising at a 19% compound annual growth rate versus 16% for client assets overall.  We had over 100,000 financial planning conversations with clients last year, an increase of more than 80% over 2012 and a volume beyond our reach in 2009.  In addition, last month the non-commissionable proportion of our daily average client trades was almost 40% - 215,000 out of 556,000.  These are trades executed through our OneSource platforms or as part of relationships where trading is included and our revenue is based on balances or other measures.  Back in March 2009, these trades made up just over 30% of our volume.  Client utilization of fee-based relationships is clearly growing, which enables us to supplant potentially volatile transaction revenue with relatively stable recurring revenue as we meet investor needs. 

I’m not telling you anything new – all of the data discussed above can be gleaned from our regular reporting.  But many in the investment community tend to focus on trading, specifically the ups and downs of revenue trades, as a main measure of engagement.  So there’s an insight here that may elude outsiders yet is central to our future: clients at Schwab have been steadily increasing their level of engagement - with us and with investing, during the financial crisis and since - but in ways that highlight a desire for a deeper level of relationship and a greater interest in portfolio management and investment advice.  Trading will remain an important part of the services we provide, but its usefulness as a measure of engagement is likely to be increasingly limited as clients utilize our broader range of capabilities to help build their financial futures.

I plan to follow-up by the end of the month with a few more thoughts on the evolution of client behavior during the market recovery.
 

Forward-Looking Statements
This commentary contains forward-looking statements relating to increasing client demand for retail advisory solutions, investments through the One Source platforms, and advisory services; client utilization of fee-based relationships; supplanting transaction revenue with recurring revenue; and increasing client engagement.  Achievement of these expectations and objectives is subject to risks and uncertainties that could cause actual results to differ materially from the expressed expectations.

Important factors that may cause such differences include, but are not limited to, general market conditions, including the level of interest rates, equity valuations and trading activities; the company’s ability to attract and retain clients and grow client assets/relationships; competitive pressures on rates and fees; client enrollments in advisory solutions; and demand for fee-based products and services.

*Bookmark this page and check back monthly for the latest commentary.

The commentary in this section speaks only as of the date specified below. The company makes no commitment to update any of this information.
 

January 16, 2014

This is my inaugural CFO Commentary. I expect to use this site regularly to provide perspectives on Schwab's financial picture, including color on our performance and details on topical issues. Over time, I can see sharing more significant financial information that might be better discussed in a forum like this, versus press releases or other forms of communication.

To start us off, I thought I'd share a few observations regarding today's earnings release.

Our fourth-quarter and full-year results demonstrate our ability to deliver standout growth in both our business and earnings without dramatic improvement in the operating environment; we simply needed the environment to stop getting worse.

With the environment less of a factor in 2013, the company produced its best financial results since the early days of the financial crisis. Those of you who've followed Schwab for a longer period of time may remember the elements of our baseline formula for producing those results -- strong organic growth, plus market appreciation and modest changes in our overall pricing mix, should translate into low double-digit or better revenue growth. Coupled with that, expense discipline should yield earnings growth percentages in the mid to upper teens, and then careful capital management should yield earnings per share growth north of that. With revenue and earnings growth of 11% and 15%, respectively, we hit the first two milestones. With retained earnings still constrained in this environment, our pace of capital formation just exceeded the amount we needed to fuel the growth of the business, so the third element will have to wait a while longer. Still, our 13% improvement in EPS is significant -- it's our largest increase since 2008.

I also wanted to confirm that our lower tax rate for the fourth quarter was primarily the result of a $4 million non-recurring state tax benefit. That one-timer represented less than a half-cent of EPS for the period.

We'll share a more fully developed picture of our financial objectives for 2014 during our Business Update on February 12.

Forward-Looking Statements
This commentary contains forward-looking statements relating to growth in the company's business, revenue and earnings; expense discipline; and growth in earnings per share. Achievement of these expectations and objectives is subject to risks and uncertainties that could cause actual results to differ materially from the expressed expectations.

Important factors that may cause such differences include, but are not limited to, general market conditions, including the level of interest rates, equity valuations and trading activity; the company's ability to attract and retain clients and grow client assets/relationships; competitive pressures on rates and fees; the level of client assets, including cash balances; the company's ability to monetize client assets; capital needs and managment; the company's ability to develop and launch new products, services and capabilities in a timely and successful manner; the company's ability to manage expenses; the impact of changes in market conditions on money market fund fee waivers, revenues, expenses and pre-tax margins; regulatory guidance; acquisition integration costs; trading activity; the effect of adverse developments in litigation or regulatory matters and the extent of any charges associated with legal matters; any adverse impact of financial reform legislation and related regulations; and other factors set forth in the company's most recent reports on Form 10-K and Form 10-Q.

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