10-QPeriod: Q3 FY2007

SCHWAB CHARLES CORP Quarterly Report for Q3 Ended Sep 30, 2007

Filed November 7, 2007For Securities:SCHWSCHW-PDSCHW-PJ

Summary

Charles Schwab Corporation (SCHW) reported strong financial performance for the nine months ended September 30, 2007, significantly driven by the substantial after-tax gain of $1.211 billion from the sale of its U.S. Trust business. This gain, coupled with growth in asset management and administration fees and net interest revenue, led to a consolidated net income of $2.099 billion, a significant increase from $760 million in the prior year period. The company also executed a notable capital restructuring plan, returning approximately $3.5 billion to stockholders through a special dividend and share repurchases, enhancing shareholder value and optimizing its capital structure. Operationally, the company demonstrated robust growth across its segments, with notable increases in net revenues and client assets, particularly in the Schwab Investor Services and Schwab Corporate and Retirement Services segments. Despite increased expenses, particularly in compensation and benefits and advertising, the company maintained a healthy pre-tax profit margin from continuing operations and saw positive returns on stockholders' equity, reflecting effective management and favorable market conditions. The successful acquisition of The 401(k) Company further bolstered its retirement services offerings.

Key Highlights

  • 1Net income for the nine months ended September 30, 2007, reached $2.099 billion, a significant increase from $760 million in the same period of 2006, largely due to a $1.211 billion after-tax gain from the sale of U.S. Trust.
  • 2Total net revenues increased by 14% to $3.649 billion for the nine months ended September 30, 2007, compared to $3.213 billion in the prior year.
  • 3Asset management and administration fees grew 21% year-over-year to $1.730 billion, driven by increased client assets and advisory services.
  • 4The company completed a significant capital restructuring, returning approximately $3.5 billion to shareholders via a $1.00 per share special dividend ($1.2 billion) and substantial share repurchases ($1.7 billion via tender offer and $369 million via stock purchase agreement).
  • 5Total client assets grew 22% to $1.44 trillion as of September 30, 2007, indicating strong client growth and market appreciation.
  • 6Operating expenses excluding interest increased by 10% to $2.322 billion for the nine months, primarily due to higher compensation and benefits and increased advertising spending.
  • 7The acquisition of The 401(k) Company for $115 million in cash on March 31, 2007, expanded the company's retirement services capabilities and contributed to the growth in the Schwab Corporate and Retirement Services segment.

Frequently Asked Questions

The primary driver of the significant increase in net income to $2.099 billion from $760 million was the $1.211 billion after-tax gain recognized on the sale of the U.S. Trust business, which was completed on July 1, 2007.

Charles Schwab Corporation implemented a capital restructuring plan, returning approximately $3.5 billion to stockholders. This included a special cash dividend of $1.00 per share ($1.2 billion) and the repurchase of approximately 102 million shares of common stock through a tender offer and a separate stock purchase agreement for a total of approximately $2.1 billion. The company also issued $250 million in Senior Medium-Term Notes.

Revenue growth appears strong, driven by increases in asset management and administration fees due to higher client assets, and net interest revenue benefitting from higher interest rates and the temporary investment of proceeds from the U.S. Trust sale. The acquisition of The 401(k) Company also contributes to revenue growth in the retirement services segment. However, investors should monitor expense growth, particularly in compensation and advertising, and market volatility.

The company reported strong performance across its segments. Schwab Investor Services saw a 23% increase in net revenues, Schwab Institutional a 20% increase, and Schwab Corporate and Retirement Services a significant 41% increase, partly due to the acquisition of The 401(k) Company. Client assets grew by 22% overall.