Schwab Fourth Quarter Net Income of $522 Million Caps Record Year

2016 Revenues Rise 17% to $7.5 Billion, Net Income Grows 31% to $1.9 Billion, Both Records

Total Client Assets Rise 11% to a Record $2.78 Trillion at Year-end

SAN FRANCISCO--(BUSINESS WIRE)-- The Charles Schwab Corporation announced today that its net income for the fourth quarter of 2016 was a record $522 million, up 4% from $503 million for the prior quarter, and up 25% from $416 million for the fourth quarter of 2015. Net income for the twelve months ended December 31, 2016 was $1.9 billion, up 31% year-over-year.

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CEO Walt Bettinger said, “Schwab achieved truly noteworthy results in 2016 by sustaining our ‘Through Clients’ Eyes’ strategy and working to earn our clients’ trust every day. During the year, from disappointing economic news early on, to the disruption of the Brexit vote, and then through the tumult of the presidential election, clients could trust that Schwab stood ready to help them navigate market volatility, and they made active use of our full-service capabilities. Our financial consultants held planning conversations with approximately 132,000 clients last year, up 18% from 2015. Client assets enrolled in one of our retail advisory solutions and those guided by independent advisors totaled $1.40 trillion at the end of 2016, up 12%. New and existing clients brought $125.5 billion in core net new assets to Schwab during 2016, marking a 5% annual organic growth rate and the 5th consecutive year over $100 billion. Net new assets in our Retail and Advisor Services businesses rose by 10% and 21%, respectively, over the prior year, while Mutual Fund Clearing and Retirement Plan flows slowed due to client turnover. Total client assets at year-end were a record $2.78 trillion, up 11%. We closed out 2016 serving more clients than ever, including 10.2 million active brokerage accounts, 1.1 million banking accounts and 1.5 million retirement plan participants, increases of 4%, 7% and 2%, respectively.”

Mr. Bettinger continued, “As Schwab continues to offer more value and a better investing experience, new and existing clients choose to entrust us with more of their assets, fueling our financial performance. Our revenues rose 17% to a record $7.5 billion in 2016. On the expense front, we entered the year with goals that allowed for needed growth in our infrastructure and increased reinvestment to better serve clients while still delivering improved profitability. We kept to those goals through the ups and downs of 2016, which helped us increase net income by nearly a third over our 2015 performance, to a record $1.9 billion.”

Mr. Bettinger added, “Our work to challenge the status quo on behalf of our clients continued across multiple fronts in 2016. We expanded and enhanced our Schwab OpenView Gateway® and Schwab Advisor Center® platforms to help the independent advisors who custody with us operate more efficiently and stay focused on serving their clients. We introduced Schwab Intelligent Advisory® as an extension of our contemporary, full-service approach to helping all individual clients build and manage their wealth. Schwab Intelligent Advisory is designed to be broadly accessible with a low balance minimum and fee, combining personalized financial and investment planning through CFP® professionals with automated and diversified portfolio management through Schwab Intelligent Portfolios®. As part of our commitment to offering more value to investors, we launched the Schwab Target Index Funds, a new series of target-date mutual funds constructed with Schwab ETFs that are designed to be the lowest cost of their kind available to employer-sponsored retirement plans and retail investors.* We also expanded Schwab ETF OneSource™ by 16 net new funds in 2016, enabling Schwab clients to choose from a total of 228 ETFs covering 69 Morningstar categories, all for $0 online trade commissions. In addition, we introduced the Schwab Live hub to provide traders with centralized access to the interactive and live content we offer to help them succeed. We also continued our work to make it easier to establish a relationship with a locally-based investment professional by extending our footprint across the country – we added 3 new company branches and 5 new independent branches during the year.”

CFO Joe Martinetto commented, “Schwab’s 2016 performance is a clear example of the company’s financial formula again working as designed: solid business growth driving solid revenue growth through diversified sources, leading to improved profitability through continued expense discipline. We expanded client assets by 11% during an environment that had some rough patches but ultimately included improving economic conditions, positive equity market returns and, at long last, the second small step by the Federal Reserve away from its zero interest rate policy of recent years. We achieved 17% revenue growth by generating record levels of net interest revenue and asset management and administration fees, which more than offset lower revenue from trading and the conclusion of certain litigation. Net interest revenue rose 32% to $3.3 billion due to a strong increase in client cash sweep deposits and higher short-term interest rates. Asset management and administration fees rose by 15% to $3.1 billion largely due to higher money market fund management fees relating to the rate environment and continued lift in client assets enrolled in one of our retail advisory solutions. Higher rates provided breathing room for our increased investment in people and technology, resulting in 9% expense growth for 2016. This increase more than doubled our constrained 2015 increase but still allowed for a 780 basis point gap between revenue and expense growth and a record 40% pre-tax profit margin, beating the prior high-water mark set in 2008.”

Mr. Martinetto concluded, “We remain focused on managing the company’s balance sheet to support growth initiatives and further our strategy of optimizing the spread earned on client cash sweep balances. We completed approximately $8 billion in bulk transfers to Schwab Bank during 2016, including approximately $4 billion in the fourth quarter. These transfers, along with growth in bank deposits from our ongoing asset gathering, helped increase interest-earning assets on our balance sheet by 22% during 2016 to $216 billion at year-end. We supported this growth with capital generated through earnings and the issuance of approximately $1.4 billion in additional preferred stock. As part of managing Schwab’s capital levels, we maintain a target range for common stock dividends equal to 20-30% of earnings; consistent with our improving earnings picture, we increased our quarterly cash dividend by 17% during the year, to $0.07. We ended 2016 with a preliminary Tier-1 Leverage ratio of 7.2% and a full-year return on equity of 14%, the highest in seven years. Our solid capital position and healthy returns position Schwab to continue investing for profitable growth and sharing the benefits of our scale with clients while building long-term stockholder value.”

Business highlights for the fourth quarter (data as of quarter-end unless otherwise noted):

Investor Services

• New retail brokerage accounts for the quarter totaled approximately 182,000, up 21% year-over-year; total accounts were 7.1 million, up 3% year-over-year.
• Held financial planning conversations with approximately 32,000 clients during the quarter, up 10% year-over-year. Approximately 132,000 planning conversations were held in 2016, up 18% from the prior year.
• Opened two company branches in Brookfield, WI and Aspen, CO and opened two independent branches in Gainesville, FL and Peoria, IL. Schwab has over 335 branches across the country that offer clients access to a range of investing and personal finance guidance, services, and products.
• Graduated the second class of FC Academy, a 24-month development rotational program preparing recent college graduates for a career in one of our branch offices.
• Graduated the second class of FC University, a 10-week onboarding program that prepares new hires to be successful at Schwab and supports the expansion of our branch network.
• Launched “Investing Principles” on schwab.com that outline Schwab’s core beliefs and approach to investing. Divided into three key components – Identify Your Goals, Get Invested, and Stay on Track – they create a foundation for every client, no matter where they are on their investing journey.

Advisor Services

• Announced enhancements to Institutional Intelligent Portfolios®, the automated investment management platform designed for independent advisors. The primary update is enhanced portfolio customization, which provides advisors greater flexibility to design portfolios based on their investment philosophies.
• Announced enhancements to Schwab Advisor Center, the custody and trading platform for independent advisors. The platform now offers an array of automation features and tools, along with online support, enabling advisors and their clients to reduce paperwork and complexity.
• Hosted over 5,100 advisors, exhibitors, sponsors, and media at our IMPACT® conference – the largest and longest-running annual gathering of independent registered investment advisors. This year, Schwab executives and industry leaders focused on growth, cybersecurity, and talent.

Products and Infrastructure

• For Charles Schwab Bank:
  • Launched a series of client experience, risk management, and efficiency improvements including two-way text fraud alerts for debit cards, online joint Schwab Bank High Yield Investor Checking® account opening, paperless Schwab Bank High Yield Investor Saving® statements, and paperless 1099-INT statements.
  • Balance sheet assets = $175.7 billion, up 26% year-over-year.
  • Outstanding mortgage and home equity loans = $11.5 billion, up 4% year-over-year.
  • Pledged Asset Line® balances = $3.9 billion, up 22% year-over-year.
  • Schwab Bank High Yield Investor Checking accounts = 914,000, with $13.8 billion in balances.
• Client assets managed by Windhaven® totaled $9.0 billion, down 24% from the fourth quarter of 2015.
• Client assets managed by ThomasPartners® totaled $10.2 billion, up 40% from the fourth quarter of 2015.
• Client assets managed by Intelligent Portfolios (Schwab Intelligent Portfolios® and Institutional Intelligent Portfolios®) totaled $12.3 billion, up $2.1 billion from the third quarter of 2016.

Supporting schedules are either attached or located at: http://www.aboutschwab.com/investor-relations/financial-reports.

* For more information about Schwab Target Index Funds and Schwab ETFs, see csimfunds.com.

Commentary from the CFO

Joe Martinetto, Senior Executive Vice President and Chief Financial Officer, provides insight and commentary regarding Schwab’s financial picture at: http://www.aboutschwab.com/investor-relations/cfo-commentary. The most recent commentary was posted on January 19, 2016.

Business Update

The company also announced today that it has scheduled a Business Update for institutional investors on Thursday, February 2, 2017. This Update is designed to help the investment community keep abreast of recent developments and management’s strategic focus. The program is scheduled to run from approximately 8:30 a.m. - 12:15 p.m. PT, 11:30 a.m. - 3:15 p.m. ET. Participants will include members of the company’s executive management. A simultaneous webcast of this Update will be accessible to the public at http://schwabevents.com/corporation.

Forward-Looking Statements

This press release contains forward-looking statements relating to client value and investing experience; growth in the client base and client assets; financial performance; business growth; revenue growth; improved profitability; expense discipline; balance sheet management; growth initiatives; optimizing the spread earned on client cash; target range for common stock dividends; investing for profitable growth; sharing the benefits of scale with clients; and building long-term stockholder value. 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, the company’s ability to develop and launch new products, services and capabilities in a timely and successful manner; the company’s ability to attract and retain clients and registered investment advisors and grow those relationships and client assets; general market conditions, including the level of interest rates, equity valuations and trading activity; competitive pressures on rates and fees; client use of the company’s advisory solutions and other products and services; the level of client assets, including cash balances; the company’s ability to manage expenses; capital needs and management; the company’s ability to monetize client assets; the timing, amount and impact of bulk transfers; the quality of the company’s balance sheet assets; 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.

About Charles Schwab

The Charles Schwab Corporation (NYSE: SCHW) is a leading provider of financial services, with more than 335 offices and 10.2 million active brokerage accounts, 1.5 million corporate retirement plan participants, 1.1 million banking accounts, and $2.78 trillion in client assets as of December 31, 2016. Through its operating subsidiaries, the company provides a full range of wealth management, securities brokerage, banking, money management, custody, and financial advisory services to individual investors and independent investment advisors. Its broker-dealer subsidiary, Charles Schwab & Co., Inc. (member SIPC, http://www.sipc.org), and affiliates offer a complete range of investment services and products including an extensive selection of mutual funds; financial planning and investment advice; retirement plan and equity compensation plan services; referrals to independent fee-based investment advisors; and custodial, operational and trading support for independent, fee-based investment advisors through Schwab Advisor Services. Its banking subsidiary, Charles Schwab Bank (member FDIC and an Equal Housing Lender), provides banking and lending services and products. More information is available at www.schwab.com and www.aboutschwab.com.