UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1995 Commission file number 1-9700
THE CHARLES SCHWAB CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 94-3025021
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
101 Montgomery Street, San Francisco, CA 94104
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code: (415) 627-7000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes x No
--- ---
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
174,677,878* shares of $.01 par value Common Stock
Outstanding on November 1, 1995
* Reflects the March 1995 three-for-two common stock split and the
September 1995 two-for-one common stock split.
THE CHARLES SCHWAB CORPORATION
Quarterly Report on Form 10-Q
For the Quarter Ended September 30, 1995
Index
Page
----
Part I - Financial Information
Item 1. Condensed Consolidated Financial Statements:
Statement of Income 1
Balance Sheet 2
Statement of Cash Flows 3
Notes 4-5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 6-13
Part II - Other Information
Item 1. Legal Proceedings 13
Item 2. Changes in Securities 13
Item 3. Defaults Upon Senior Securities 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 13-14
Signature 15
Part 1 - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
THE CHARLES SCHWAB CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(In thousands, except per share amounts)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
1995 1994 1995 1994
---- ---- ---- ----
Revenues
Commissions $206,831 $121,574 $ 537,023 $414,008
Interest revenue, net of interest expense* 55,180 42,127 150,867 118,114
Principal transactions 51,985 34,180 148,020 124,645
Mutual fund service fees 58,745 41,365 156,585 113,810
Other 12,820 8,843 32,637 23,611
- --------------------------------------------------------------------------------------------------------------
Total 385,561 248,089 1,025,132 794,188
- --------------------------------------------------------------------------------------------------------------
Expenses Excluding Interest
Compensation and benefits 161,456 103,506 423,801 331,140
Communications 34,214 25,639 90,674 81,819
Occupancy and equipment 28,233 22,185 79,062 64,895
Depreciation and amortization 17,773 14,080 46,465 40,472
Commissions, clearance and floor brokerage 22,877 11,385 57,728 35,080
Advertising and market development 10,888 7,346 34,081 28,184
Professional services 10,666 4,388 26,515 15,056
Other 21,396 7,966 52,080 29,185
- --------------------------------------------------------------------------------------------------------------
Total 307,503 196,495 810,406 625,831
- --------------------------------------------------------------------------------------------------------------
Income before taxes on income 78,058 51,594 214,726 168,357
Taxes on income 30,837 20,399 84,710 66,813
- --------------------------------------------------------------------------------------------------------------
Net Income $ 47,221 $ 31,195 $ 130,016 $101,544
==============================================================================================================
Weighted average number of common and
common equivalent shares outstanding** 179,688 174,215 178,001 175,221
==============================================================================================================
Earnings per Common Equivalent Share** $ .26 $ .18 $ .73 $ .58
==============================================================================================================
Dividends Declared per Common Share** $ .040 $ .023 $ .100 $ .069
==============================================================================================================
* Interest revenue is presented net of interest expense. Interest expense
for the three months ended September 30, 1995 and 1994 was $94,039 and
$54,598, respectively. Interest expense for the nine months ended
September 30, 1995 and 1994 was $260,908 and $132,928, respectively.
** Reflects the March 1995 three-for-two common stock split and the September
1995 two-for-one common stock split.
See Notes to Condensed Consolidated Financial Statements.
- 1 -
THE CHARLES SCHWAB CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(In thousands, except share data)
September 30, December 31,
1995 1994
---- ----
(Unaudited)
-----------
Assets
Cash and equivalents (including resale agreements of $242,500 in 1994) $ 474,610 $ 380,616
Cash and investments required to be segregated under Federal or other
regulations (including resale agreements of $4,725,625 in 1995
and $3,787,984 in 1994) 4,943,103 4,206,466
Receivable from brokers, dealers and clearing organizations 146,435 86,028
Receivable from customers (less allowance for doubtful accounts
of $4,497 in 1995 and $3,204 in 1994) 3,551,622 2,923,867
Equipment, office facilities and property (less accumulated
depreciation and amortization of $196,615 in 1995 and $162,474 in 1994) 189,984 129,105
Intangible assets (less accumulated amortization of $149,260 in 1995
and $140,860 in 1994) 69,640 26,813
Other assets 208,445 164,967
- ----------------------------------------------------------------------------------------------------------------
Total $9,583,839 $7,917,862
================================================================================================================
Liabilities and Stockholders' Equity
Drafts payable $ 159,940 $ 117,383
Payable to brokers, dealers and clearing organizations 459,473 296,420
Payable to customers 7,870,512 6,670,362
Accrued expenses 256,373 195,320
Long-term borrowings 216,162 171,363
- ----------------------------------------------------------------------------------------------------------------
Total liabilities 8,962,460 7,450,848
- ----------------------------------------------------------------------------------------------------------------
Stockholders' equity:
Preferred stock - 10,000,000 shares authorized; $.01 par value
per share; none issued
Common stock - 200,000,000 shares authorized; $.01 par value per
share; 178,459,416 shares issued in 1995 and 1994* 1,785 595
Additional paid-in capital 184,479 166,103
Retained earnings 484,770 373,161
Treasury stock - 4,155,698 shares in 1995 and 7,563,990 shares in
1994, at cost* (38,973) (57,968)
Unearned ESOP shares (5,081) (10,174)
Unamortized restricted stock compensation (4,673) (4,703)
Foreign currency translation adjustment (928)
- ----------------------------------------------------------------------------------------------------------------
Stockholders' equity 621,379 467,014
- ----------------------------------------------------------------------------------------------------------------
Total $9,583,839 $7,917,862
================================================================================================================
* Reflects the March 1995 three-for-two common stock split and the September
1995 two-for-one common stock split.
See Notes to Condensed Consolidated Financial Statements.
- 2 -
THE CHARLES SCHWAB CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
(Unaudited)
Nine Months Ended
September 30,
1995 1994
---- ----
Cash flows from operating activities
Net income $ 130,016 $ 101,544
Noncash items included in net income:
Depreciation and amortization 46,465 40,472
Deferred income taxes (9,553) 8,372
Other 15,275 2,662
Change in accrued expenses 76,211 27,578
Change in other assets (14,201) 5,013
- -----------------------------------------------------------------------------------------------------------------
Net cash provided before change in customer-related balances 244,213 185,641
- -----------------------------------------------------------------------------------------------------------------
Change in customer-related balances (excluding the effects of
businesses acquired):
Payable to customers 1,113,323 457,301
Receivable from customers (616,895) (239,994)
Drafts payable 36,723 (11,922)
Payable to brokers, dealers and clearing organizations 142,047 112,495
Receivable from brokers, dealers and clearing organizations (19,934) (21,151)
Cash and investments required to be segregated under
Federal or other regulations (672,478) (305,928)
- -----------------------------------------------------------------------------------------------------------------
Net change in customer-related balances (17,214) (9,199)
- -----------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 226,999 176,442
- -----------------------------------------------------------------------------------------------------------------
Cash flows from investing activities
Purchase of equipment, office facilities and property - net (94,087) (26,547)
Cash payments for businesses acquired, net of cash received (68,113)
Other (1,898)
- -----------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (162,200) (28,445)
- -----------------------------------------------------------------------------------------------------------------
Cash flows from financing activities
Proceeds from long-term borrowings 40,000 20,000
Purchase of treasury stock (34,329)
Dividends paid (17,261) (12,026)
Other 7,110 1,796
- -----------------------------------------------------------------------------------------------------------------
Net cash provided (used) by financing activities 29,849 (24,559)
- -----------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash and equivalents (654)
- -----------------------------------------------------------------------------------------------------------------
Increase in cash and equivalents 93,994 123,438
Cash and equivalents at beginning of period 380,616 279,828
- -----------------------------------------------------------------------------------------------------------------
Cash and equivalents at end of period $ 474,610 $ 403,266
=================================================================================================================
See Notes to Condensed Consolidated Financial Statements.
- 3 -
THE CHARLES SCHWAB CORPORATION
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
Basis of Presentation
The accompanying unaudited condensed consolidated financial
statements include The Charles Schwab Corporation (CSC) and its
subsidiaries (collectively the Company), including Charles
Schwab & Co., Inc. (Schwab) and Mayer & Schweitzer, Inc. (M&S).
These financial statements have been prepared pursuant to the rules
and regulations of the Securities and Exchange Commission (SEC)
and, in the opinion of management, reflect all adjustments
necessary to present fairly the financial position, results of
operations and cash flows for the periods presented in conformity
with generally accepted accounting principles. All adjustments
were of a normal recurring nature. All material intercompany
balances and transactions have been eliminated. These financial
statements should be read in conjunction with the consolidated
financial statements and notes thereto included in the Company's
1994 Annual Report to Stockholders, which are incorporated by
reference in the Company's 1994 Annual Report on Form 10-K, and the
Company's Quarterly Reports on Form 10-Q for the periods ended
March 31, 1995 and June 30, 1995.
Intangible assets represent goodwill and customer lists. Prior
periods' financial statements have been reclassified to conform to
the 1995 presentation.
Foreign Currency Translation
Assets and liabilities denominated in foreign currencies are
translated at the exchange rate on the balance sheet date, while
revenues and expenses are translated at average rates of exchange
prevailing during the period. Translation adjustments are
accumulated as a separate component of stockholders' equity.
Stock Split
On July 18, 1995, the Board of Directors approved a two-for-one
stock split of the Company's common stock, effected in the form of
a 100% stock dividend, paid September 1, 1995 to stockholders of
record August 1, 1995. Share and per share data have been restated
to reflect this transaction and the March 1995 three-for-two common
stock split. The Board also increased the quarterly cash dividend
from $.03 per share to $.04 per share paid August 15, 1995 to
stockholders of record August 1, 1995.
Commitments and Contingencies
In September 1995, the Company entered into an agreement to
purchase an office building located in Phoenix, Arizona for
$32 million to be used for the expansion of its operations. The
Company expects to close this transaction in April 1996.
In the normal course of its margin lending activities, Schwab is
contingently liable to the Options Clearing Corporation for the
margin requirement of customer margin securities transactions.
Such margin requirement is secured by a pledge of customers' margin
securities. This contingent liability was $169 million at
September 30, 1995.
M&S has been named as one of thirty-three defendant market-
making firms in a consolidated class action which is pending in
Federal District Court in the Southern District of New York
pursuant to an order of the Judicial Panel on Multidistrict
Litigation. On December 16, 1994, the plaintiffs filed a
consolidated amended complaint purportedly on behalf of certain
persons who purchased or sold Nasdaq securities during the period
May 1, 1989 through May 27, 1994. A second consolidated amended
complaint was filed on August 22, 1995. The consolidated complaint
does not set forth any specific conduct by M&S and does not request
any specific amount of damages, although it requests that the
actual damages be trebled where permitted by statute. The
consolidated complaint generally alleges an illegal combination and
conspiracy among the defendant market-making firms to fix and
maintain the spreads between the bid and ask prices of Nasdaq
securities. The ultimate outcome of this consolidated action
cannot currently be determined.
On June 30, 1995, a class was certified in Civil District Court
for the Parish of Orleans in Louisiana for Louisiana residents who
purchased or sold securities through Schwab between February 1,
1985 and February 1, 1995 for which Schwab received monetary
payments from the market maker or stock dealer who executed the
transaction. On August 16, 1995, another class was certified in
Civil District Court for the Parish of Natchitoches in Louisiana
for residents of all states who purchased or sold securities
through Schwab since 1985 for which Schwab received monetary
payments from the market maker or stock dealer who executed the
transaction. Schwab has appealed both class certifications to the
Louisiana Court of Appeals. Schwab has been named as a defendant in eight
- 4 -
additional class action lawsuits filed in state courts in
Minnesota, Illinois, New York, Texas, Florida and California. The
class actions were filed between August 12, 1993 and October 13,
1995, and purport to be brought on behalf of customers of Schwab
who purchased or sold securities for which Schwab received monetary
payments from the market maker or stock dealer who executed the
transaction. The complaints allege that Schwab failed to disclose
and remit such payments to members of the class, and generally seek
damages equal to the payments received by Schwab. The ultimate
outcome of these actions cannot currently be determined.
There are other various lawsuits pending against the Company
which, in the opinion of management, will be resolved with no
material impact on the Company's financial position or results of
operations.
Acquisition
During the third quarter of 1995, the Company purchased the
remaining outstanding common stock (approximately 7%) of ShareLink
Investment Services plc (ShareLink), bringing the total year-to-
date acquisition cost, including acquisition-related expenses, to
$66 million.
Regulatory Requirements
Schwab and M&S are subject to the SEC's Uniform Net Capital Rule
and each compute net capital under the alternative method permitted
by this Rule, which requires the maintenance of minimum net
capital, as defined, of the greater of 2% of aggregate debit
balances arising from customer transactions or a minimum dollar
amount, which is based on the type of business conducted by the
broker-dealer. The minimum dollar amount for both Schwab and M&S
is $1 million. Under the alternative method, a broker-dealer may
not repay subordinated borrowings, pay cash dividends, or make any
unsecured advances or loans to its parent or employees if such
payment would result in net capital of less than 5% of aggregate
debit balances or less than 120% of its minimum dollar amount
requirement. At September 30, 1995, Schwab's net capital was
$360 million (10% of aggregate debit balances), which was
$285 million in excess of its minimum required net capital and
$173 million in excess of 5% of aggregate debit balances. At
September 30, 1995, M&S' net capital was $4 million (113% of
aggregate debit balances), which was $3 million in excess of its
minimum required net capital.
Schwab and ShareLink had portions of their cash and investments
segregated for the exclusive benefit of customers at September 30,
1995, in accordance with applicable regulations. M&S had no such
cash reserve requirement at September 30, 1995.
Cash Flow Information
Certain information affecting the cash flows of the Company
follows (in thousands):
Nine Months
Ended
September 30,
1995 1994
---- ----
Income taxes paid $ 61,895 $ 52,434
======== ========
Interest paid:
Customer cash balances $234,381 $117,682
Long-term borrowings 11,221 11,037
Other 13,687 4,924
-------- --------
Total interest paid $259,289 $133,643
======== ========
- 5 -
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
General
The Charles Schwab Corporation (CSC) and its subsidiaries
(collectively referred to as the Company) provide brokerage and
related investment services to customers with 3.3 million active(a)
accounts and assets that totaled $169.6 billion at September 30,
1995. With a network of over 200 branch offices, the Company's
principal subsidiary, Charles Schwab & Co., Inc. (Schwab), is
physically represented in 46 states, the Commonwealth of Puerto
Rico and the United Kingdom. Mayer & Schweitzer, Inc. (M&S), a
market maker in Nasdaq securities, provides trade execution
services to broker-dealers and institutional customers.
The Company's business, like that of other securities brokerage
firms, is directly affected by fluctuations in volumes and price
levels in securities markets, which are in turn affected by many
national and international economic and political factors that
cannot be predicted. Transaction-based revenues, primarily
commission and principal transaction revenues, represent the
majority of the Company's revenues. In the short term, most of the
Company's expenses do not vary directly with fluctuations in
securities trading volume and do not increase or decrease quickly,
which could result in the Company experiencing increased
profitability with rapid increases in revenues, or reduced
profitability (or losses) in the event of a material reduction in
revenues.
Due to the factors discussed above, the results of any interim
period are not necessarily indicative of results for a full year,
and it is not unusual for the Company to experience significant
variations in quarterly revenue growth. In addition, these factors
may subject the Company's future earnings and common stock price to
significant volatility.
The Company has historically used discount pricing as a tactic
in its efforts to gain market share and enhance the value of its
services. In recent years, Schwab has introduced additional price-
competitive product offerings such as its No-Annual-Fee IRA, its
Mutual Fund OneSource (registered trademark) service and its Schwab
500 Brokerage (trademark) service, which includes commission
discounts from Schwab's standard rates. Schwab's on-line brokerage
services such as TeleBroker (registered trademark) and StreetSmart
(registered trademark) also provide customers with discounts on
commissions. Management expects to continue aggressive use of this
value-pricing philosophy in the marketing of new products and
services.
Three Months Ended September 30, 1995
Compared To Three Months Ended
September 30, 1994
Summary
Net income for the third quarter of 1995 totaled $47 million or
$.26 per share, up 51% from third quarter 1994 net income of
$31 million or $.18 per share. All share and per share amounts
reflect the March 1995 three-for-two common stock split and the
September 1995 two-for-one common stock split.
Third quarter 1995 revenues were $386 million, up 55% from
$248 million for the third quarter of 1994, due to increases in all
revenue categories primarily resulting from higher trading volume
and an increase in customer assets.
Assets in customer accounts totaled $169.6 billion at
September 30, 1995, $52.9 billion, or 45%, more than a year ago
primarily resulting from increases in customers' equity securities
of $22.6 billion, or 48%, and increases in customer assets in
Schwab's Mutual Fund Marketplace (registered trademark) of
$14.5 billion, or 45%. Customer assets in cash and money market
funds
(a) Accounts with balances or activity within the preceding twelve months.
- 6 -
at September 30, 1995 increased 37% over the year-ago level
to $35.4 billion. Schwab added 164,400 new customer accounts
during the third quarter of 1995, compared to 145,400 new accounts
during the third quarter of 1994.
Total operating expenses excluding interest during the third
quarter of 1995 were $308 million, up 56% from $196 million for the
third quarter of 1994, primarily resulting from additional staff to
support the Company's continued growth and expansion, higher
variable compensation and higher transaction-related expenses. In
the third quarter of 1995, the Company continued the expansion of
its customer telephone service centers and opened three new branch
offices. In 1994's third quarter, the Company instituted certain
cost reduction measures, mainly relating to reductions in staffing
and capacity expenses, to respond to declines in customer trading
activity. Such cost reduction measures were not in place during
the third quarter of 1995 as customer trading levels were
significantly higher resulting in higher expenses for 1995's third
quarter compared to 1994's third quarter.
The profit margin for the third quarter of 1995 was 12%, down
from 13% for the third quarter of 1994. The return on
stockholders' equity for the third quarter of 1995 was 32%, up from
29% for the third quarter of 1994.
Commissions
Schwab executes commission transactions for customers on an
agency basis. Commission revenues totaled $207 million for the
third quarter of 1995, up $85 million, or 70%, from the third
quarter of 1994. Commissions earned on retail agency trades, which
exclude commissions from institutional customers, totaled
$194 million on a daily average retail agency trade level of 41,100
in the third quarter of 1995, compared with commission revenues of
$116 million on a daily average retail agency trade level of 25,800
for the comparable period in 1994. The following table shows a
comparison of certain factors that influence retail agency
commission revenues:
- -------------------------------------------------------------------
Three Months
Ended
September 30, Percent
1995 1994 Change
- -------------------------------------------------------------------
Number of customer
accounts that traded during
the quarter (in thousands) 720 559 29%
Average number of retail agency
transactions per account
that traded 3.59 2.95 22
Total number of retail agency
transactions (in thousands) 2,588 1,651 57
Average commission per
retail agency transaction $74.85 $70.52 6
Total retail agency commission
revenues (in millions) $ 194 $ 116 67
==================================================================
Note: The above table excludes customer transactions in
Schwab's Mutual Fund OneSource (registered trademark) service.
The increase in average commission per retail agency transaction
was due to a higher proportion of equity transactions, which carry
a higher average commission per trade.
Schwab continues to experience significant commission price
competition and expects to continue to develop price-competitive
products and services that address the needs of customers for whom
pricing is a primary factor in their selection of financial
services.
Interest Revenue, Net of Interest Expense
Interest revenue, net of interest expense, increased
$13 million, or 31%, to $55 million from the prior year's third
quarter as shown in the following table (in millions):
- 7 -
- -----------------------------------------------------------
Three Months
Ended
September 30,
1995 1994
- -----------------------------------------------------------
Interest Revenue
Investments, customer-related $ 76 $ 46
Margin loans to customers 68 49
Other 5 2
- -----------------------------------------------------------
Total 149 97
- -----------------------------------------------------------
Interest Expense
Customer cash balances 84 49
Long-term borrowings 3 3
Other 7 3
- -----------------------------------------------------------
Total 94 55
- -----------------------------------------------------------
Interest Revenue, Net of
Interest Expense $55 $42
===========================================================
Customer-related daily average balances, interest rates and
average net interest margin for the third quarters of 1995 and 1994
are summarized in the following table (dollars in millions):
- -------------------------------------------------------------------
Three Months Ended
September 30,
1995 1994
- -------------------------------------------------------------------
Earning Assets (customer-related):
Investments:
Average balance outstanding $5,188 $3,919
Average interest rate 5.95% 4.60%
Margin loans to customers:
Average balance outstanding $3,306 $2,777
Average interest rate 8.31% 6.95%
Average yield on earning assets 6.86% 5.58%
Funding Sources (customer-related
and other):
Interest-bearing customer cash balances:
Average balance outstanding $6,891 $5,484
Average interest rate 4.95% 3.53%
Other interest-bearing sources:
Average balance outstanding $ 449 $ 385
Average interest rate 4.46% 3.16%
Average noninterest-bearing portion $1,154 $ 827
Average interest rate on funding sources 4.25% 3.08%
Summary:
Average yield on earning assets 6.86% 5.58%
Average interest rate on funding sources 4.25% 3.08%
- ------------------------------------------------------------------
Average net interest margin 2.61% 2.50%
==================================================================
The increase in interest revenue, net of interest expense, from
the prior year's third quarter was primarily due to higher levels of
average earning assets compared to funding sources, and to sharper
increases in average interest rates on earning assets
compared to funding sources.
Principal Transactions
During the third quarter of 1995, principal transaction revenues
increased $18 million, or 52%, from the comparable period in 1994
to $52 million. This increase was due to higher trading volume
handled by M&S and higher revenues relating to specialist posts.
During the end of 1994's third quarter, Schwab commenced operation
of specialist posts on the Pacific Stock Exchange. At
September 30, 1995, Schwab had nine posts that collectively made
markets in over 420 securities. The increase in principal
transaction revenues was partially offset by providing price
improvement to customers on certain trades in Nasdaq securities
beginning in August 1995 (see discussion below).
During 1994, the Department of Justice, the Securities and
Exchange Commission (SEC) and the National Association of
Securities Dealers, Inc. (NASD) commenced a series of
investigations and regulatory actions involving the activities of
many market makers in Nasdaq securities. These investigations and
regulatory actions have continued into 1995. During the third
quarter of 1995, Nasdaq's daily average share volume was
443 million shares, of which orders handled by M&S totaled approximately 8%
of such shares. Thus, M&S is a significant participant in the
Nasdaq market.
Current and proposed rulemaking, regulatory actions,
improvements in technology, changes in market practices and new
market systems, if approved, could significantly impact the manner
in which business is currently conducted in the Nasdaq market. For
example, the Company's new service, Assurance Trading (trademark),
provides an opportunity for price improvement to customers
- 8 -
on certain trades in certain Nasdaq securities through technological
innovation by scanning multiple computer systems for a price better
than the current quoted Nasdaq inside price. The above factors
may, individually or in the aggregate, have a material adverse
impact on M&S' future revenues from principal transactions.
Mutual Fund Service Fees
Mutual fund service fees increased $17 million, or 42%, to
$59 million in the third quarter of 1995 from the comparable period
in 1994. The increase was primarily attributable to significant
increases in customer assets in Schwab's proprietary funds,
collectively referred to as the SchwabFunds (registered trademark),
and customer assets in funds purchased through Schwab's Mutual Fund
OneSource (registered trademark) service. Most of these fees are
earned for transfer agent, shareholder and investment management
services provided to proprietary money market funds, and for record
keeping and shareholder services provided to funds in the Mutual
Fund OneSource service.
Customer assets invested in the SchwabFunds, substantially all
of which are in money market funds, were $29.5 billion at
September 30, 1995, compared to $21.0 billion at September 30,
1994, a 40% increase. Customer assets held by Schwab that have been
purchased through the Mutual Fund OneSource service, excluding
SchwabFunds, totaled $21.8 billion at September 30, 1995, compared
to $12.8 billion at September 30, 1994, a 70% increase.
Expenses Excluding Interest
Total operating expenses excluding interest for the third
quarter of 1995 were $308 million, up 56% from $196 million for the
third quarter of 1994. Compensation and benefits expense for the
third quarter of 1995 increased $58 million, or 56%, to
$161 million primarily due to increases in salaries and wages, and
variable compensation. At September 30, 1995, the Company had full-
time, part-time and temporary employees, and persons employed on a
contract basis that represented the equivalent of approximately
8,400 full-time employees, compared to approximately 6,000 at
September 30, 1994.
Communications expense increased $9 million, or 33%, to
$34 million from the prior year's third quarter primarily due to
higher customer trading and call volumes, which contributed to
higher telephone, financial news and securities quotation services
expenses.
Occupancy and equipment expense increased $6 million, or 27%, to
$28 million from the prior year's third quarter primarily due to
increased data processing equipment expense, and to customer
telephone service center and branch network expansions.
Commissions, clearance and floor brokerage expense increased
$11 million, or 101%, to $23 million from the prior year's third
quarter primarily due to increases in the number of trades
processed by M&S and Schwab.
Professional services expense increased $6 million, or 143%, to
$11 million from the prior year's third quarter primarily due to
increases in consulting fees relating to various company
development projects.
Other expenses increased $13 million, or 169%, to $21 million from
the prior year's third quarter due in part to increases in travel-related
expenses, losses relating to trading system problems experienced on two
occasions during the quarter, and the handling of customer orders for a
security following its initial public offering.
The Company's effective income tax rate for the third quarter of
1995 and the third quarter of 1994 was 39.5%.
- 9 -
Nine Months Ended September 30, 1995
Compared To Nine Months Ended
September 30, 1994
Summary
Net income for the first nine months of 1995 totaled $130
million or $.73 per share, compared with net income of $102 million
or $.58 per share for the first nine months of 1994.
Revenues for the first nine months of 1995 were $1.0 billion, up
29% from $794 million for the first nine months of 1994, due to
increases in all revenue categories primarily resulting from higher
trading volume and an increase in customer assets.
Total operating expenses excluding interest during the first
nine months of 1995 were $810 million, up 29% from $626 million for
the first nine months of 1994, primarily resulting from additional
staff to support the Company's continued growth and expansion,
higher variable compensation and higher-transaction related
expenses. In the first nine months of 1995, Schwab's trading
volume was 11.1 million trades, up 26% from the first nine months
of 1994. Also during this period, the Company continued the
expansion of its customer telephone service centers and opened five
new branch offices.
The profit margin for the first nine months of 1995 and the
first nine months of 1994 was 13%. The return on stockholders'
equity for the first nine months of 1995 was 32%, down from 33% for
the first nine months of 1994.
Commissions
Commission revenues totaled $537 million for the first nine
months of 1995, up $123 million, or 30%, from the first nine months
of 1994. Commissions earned on retail agency trades, which exclude
commissions from institutional customers, totaled $510 million on a
daily average retail agency trade level of 36,700 in the first nine
months of 1995, compared with commission revenues of $397 million
on a daily average retail agency trade level of 29,100 for the
comparable period in 1994. The following table shows a comparison
of certain factors that influence retail agency commission
revenues:
- --------------------------------------------------------------------
Nine Months
Ended
September 30, Percent
1995 1994 Change
- --------------------------------------------------------------------
Number of customer
accounts that traded during
the period (in thousands) 1,326 1,163 14%
Average number of retail agency
transactions per account
that traded 5.29 4.73 12
Total number of retail agency
transactions (in thousands) 7,008 5,506 27
Average commission per
retail agency transaction $72.81 $72.08 1
Total retail agency commission
revenues (in millions) $ 510 $ 397 28
====================================================================
Note: The above table excludes customer transactions in Schwab's
Mutual Fund OneSource (registered trademark) service.
Schwab added 508,200 new customer accounts during the first nine
months of 1995, compared to 589,700 new accounts during the first
nine months of 1994. The decrease was due in part to the $1,000
minimum opening balance requirement implemented in July 1994 for
basic brokerage accounts.
Interest Revenue, Net of Interest Expense
Interest revenue, net of interest expense, increased
$33 million, or 28%, to $151 million from the prior year's first
nine months as shown in the following table (in millions):
- 10 -
- -------------------------------------------------------
Nine Months
Ended
September 30,
1995 1994
- -------------------------------------------------------
Interest Revenue
Investments, customer-related $209 $115
Margin loans to customers 188 130
Other 15 6
- -------------------------------------------------------
Total 412 251
- -------------------------------------------------------
Interest Expense
Customer cash balances 235 118
Long-term borrowings 9 9
Other 17 6
- -------------------------------------------------------
Total 261 133
- -------------------------------------------------------
Interest Revenue, Net of
Interest Expense $151 $118
=======================================================
Customer-related daily average balances, interest rates, and
average net interest margin for the first nine months of 1995 and
1994 are summarized in the following table (dollars in millions):
- --------------------------------------------------------------------
Nine Months Ended
September 30,
1995 1994
- --------------------------------------------------------------------
Earning Assets (customer-related):
Investments:
Average balance outstanding $4,701 $3,929
Average interest rate 6.00% 3.91%
Margin loans to customers:
Average balance outstanding $3,038 $2,704
Average interest rate 8.31% 6.44%
Average yield on earning assets 6.91% 4.94%
Funding Sources (customer-related
and other):
Interest-bearing customer cash balances:
Average balance outstanding $6,312 $5,413
Average interest rate 5.01% 2.92%
Other interest-bearing sources:
Average balance outstanding $ 400 $ 351
Average interest rate 4.31% 2.80%
Average noninterest-bearing portion $1,027 $ 869
Average interest rate on funding sources 4.31% 2.53%
Summary:
Average yield on earning assets 6.91% 4.94%
Average interest rate on funding sources 4.31% 2.53%
- --------------------------------------------------------------------
Average net interest margin 2.60% 2.41%
====================================================================
The increase in interest revenue, net of interest expense, from
the first nine months of 1994 was primarily due to higher levels of
average earning assets compared to funding sources, and to sharper
increases in average interest rates on earning assets compared to funding
sources.
Principal Transactions
Principal transaction revenues increased $23 million, or 19%,
from prior year's first nine months to $148 million. This increase
was due to higher trading volume handled by M&S and higher revenues
relating to specialist posts. The increase in principal
transaction revenues was partially offset by the continuing impact,
beginning in July 1994, of the NASD Interpretation to its Rules of
Fair Practice governing the way in which market makers in Nasdaq
securities handle the execution of customer limit orders. The
increase in principal transaction revenues was also partially
offset by providing price improvement to customers on certain
trades in Nasdaq securities beginning in August 1995.
Mutual Fund Service Fees and Expenses Excluding Interest
The changes in mutual fund service fees and expenses excluding
interest between the nine-month periods are generally attributable
to the changes described in the comparisons between the three-month
periods.
The Company's effective income tax rate for the first nine
months of 1995 was 39.5% compared to 39.7% for the comparable
period in 1994.
- 11 -
Liquidity and Capital Resources
Liquidity
Schwab
Liquidity needs relating to customer trading and margin
borrowing activities are met primarily through cash balances in
customer accounts, which totaled $7.8 billion at September 30,
1995, up 18% from the December 31, 1994 level of $6.7 billion.
Earnings from Schwab's operations are the primary source of
liquidity for capital expenditures and investments in new services,
marketing and technology. Management believes that customer cash
balances and operating earnings will continue to be the primary
sources of liquidity for Schwab in the future.
To manage Schwab's regulatory capital position, CSC provides
Schwab with a $180 million subordinated revolving credit facility
maturing in September 1996, of which $99 million was outstanding at
September 30, 1995. At quarter end, Schwab also had outstanding
$25 million in fixed-rate subordinated term loans from CSC maturing
in 1997. Borrowings under these subordinated lending arrangements
qualify as regulatory capital for Schwab.
For use in its brokerage operations, Schwab maintains
uncommitted bank credit lines totaling $505 million, of which
$425 million is available on an unsecured basis. Schwab used such
borrowings for eight days during the first nine months of 1995,
with the daily amounts borrowed averaging $24 million. These lines
were unused at September 30, 1995.
The Charles Schwab Corporation
CSC's liquidity needs are generally met through cash generated
by its subsidiaries. Schwab and M&S are subject to regulatory
requirements that are intended to ensure the general financial
soundness and liquidity of broker-dealers. These regulations would
prohibit Schwab and M&S from repaying subordinated borrowings to
CSC, paying cash dividends, or making any unsecured advances or
loans to their parent or employees if such payment would result in
net capital of less than 5% of their aggregate debit balances or
less than 120% of their minimum dollar amount requirement of
$1 million. At September 30, 1995, Schwab had $360 million of net
capital (10% of aggregate debit balances), which was $285 million
in excess of its minimum required net capital. At September 30,
1995, M&S had $4 million of net capital (113% of aggregate debit
balances), which was $3 million in excess of its minimum required
net capital. Management believes that funds generated by the
operations of CSC's subsidiaries will continue to be the primary
funding source in meeting CSC's liquidity needs and maintaining
Schwab's and M&S' net capital.
CSC has individual liquidity needs that arise from its issued
and outstanding $210 million Senior Medium-Term Notes, Series A
(Medium-Term Notes), as well as from the funding of cash dividends,
common stock repurchases and acquisitions. The Medium-Term Notes
have maturities ranging from 1996 to 2003 and fixed interest rates
ranging from 4.95% to 7.72% with interest payable semiannually.
In August 1995, a prospectus supplement covering the issuance of
up to $140 million in Senior or Senior Subordinated Medium-Term
Notes, Series A, was filed with the SEC. At September 30, 1995,
all $140 million in securities remain unissued under the prospectus
supplement.
In June 1995, CSC's committed unsecured credit facility with a
group of ten banks was increased to $250 million from $225 million.
This facility expires in June 1996. The funds are available for
general corporate purposes for which CSC pays a commitment fee on
the unused balance. The terms of this facility require CSC to
maintain minimum levels of stockholders' equity and Schwab and M&S
to maintain minimum levels of net capital, as defined. This
facility has never been used.
- 12 -
See "Commitments and Contingencies" note in the Notes to
Condensed Consolidated Financial Statements.
Cash Flows
Net cash provided by operating activities was $227 million for
the first nine months of 1995, up 29% from $176 million for the
first nine months of 1994. This increase was primarily due to
increases in accrued expenses and net income. During the first
nine months of 1995, the Company invested $94 million in equipment
and office facilities as it continued to enhance its data
processing and telecommunications systems. The Company also
continued the expansion of its customer telephone service centers
and opened five new branch offices. Capital expenditures may vary
significantly from period to period depending upon such factors as
general business conditions, the growth in the Company's customer
base, and the rate of development of new products and services. In
addition, the Company paid approximately $68 million, net of cash
received, for businesses acquired, and issued $40 million in Medium-
Term Notes during the first nine months of 1995.
In addition, the Company paid common stock cash dividends
totaling $17 million, up from $12 million paid during the first
nine months of 1994.
Capital Adequacy
The Company's stockholders' equity at September 30, 1995 totaled
$621 million. In addition to its equity, the Company had long-term
borrowings of $216 million that bear interest at a weighted average
rate of 6.22%. These borrowings, together with the Company's
equity, provided total financial capital of $837 million at
September 30, 1995, up $199 million, or 31% from December 31, 1994.
At September 30, 1995, the ratio of total assets to total
stockholders' equity was 15 to 1 compared to a ratio of 17 to 1 at
December 31, 1994. Over 94% of the Company's total assets relate
to customer activity (primarily segregated investments and margin
loans). Management believes that the Company's present level of
equity could support up to $6.9 billion of additional assets
relating to customer activity.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Discussed in Notes to Condensed Consolidated Financial
Statements, under "Commitments and Contingencies" in Part I,
Item 1, and in Management's Discussion and Analysis of Financial
Condition and Results of Operations, under "Principal Transactions"
in Part I, Item 2, and incorporated herein by reference. Also, see
the Company's Quarterly Report on Form 10-Q for the period ended
June 30, 1995.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are filed as part of this quarterly
report on Form 10-Q.
- 13 -
Exhibit
Number Exhibit
10.155 Forms of Restricted Share Award Agreements, incorporating
performance vesting provisions and/or supplemental cash
payment provisions.
10.156 Agreement of Sale, dated as of September 18, 1995, as amended
by letter agreement dated September 21, 1995 and by Second
Amendment to Agreement of Sale dated September 22, 1995,
between American Express Company and Charles Schwab & Co.,
Inc., regarding American Express Western Regional Operations
Center located at 2423 Lincoln Drive, Phoenix, Arizona.
11.1 Computation of Earnings per Common Equivalent Share.
12.1 Computation of Ratio of Earnings to Fixed Charges.
27.1 Financial Data Schedule (electronic only).
(b) Reports on Form 8-K
On September 25, 1995, the Registrant filed a Current Report on
Form 8-K relating to up to $140 million aggregate principal
amount of debt securities issuable by the Registrant pursuant to
Registration Statement Numbers 33-61943 and 33-50923 declared
effective by the SEC on August 18, 1995 and April 12, 1994,
respectively. Certain exhibits relating to Medium-Term Notes,
Series A, issuable pursuant to the Registration Statements are
contained in the Current Report.
- 14 -
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
THE CHARLES SCHWAB CORPORATION
(Registrant)
Date: November 9, 1995 /s/ A. John Gambs
---------------- -------------------------------------
A. John Gambs
Executive Vice President - Finance,
and Chief Financial Officer
- 15 -