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, 2003 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)
120 Kearny Street, San Francisco, CA 94108
(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 by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
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.
1,356,592,538 shares of $.01 par value Common Stock
Outstanding on October 31, 2003
THE CHARLES SCHWAB CORPORATION
Quarterly Report on Form 10-Q
For the Quarter Ended September 30, 2003
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 - 11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12 - 29
Item 3. Quantitative and Qualitative Disclosures About Market Risk 29 - 31
Item 4. Controls and Procedures 32
Part II - Other Information
Item 1. Legal Proceedings 32
Item 2. Changes in Securities and Use of Proceeds 32
Item 3. Defaults Upon Senior Securities 32
Item 4. Submission of Matters to a Vote of Security Holders 32
Item 5. Other Information 32
Item 6. Exhibits and Reports on Form 8-K 32 - 33
Signature 34
Part I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
THE CHARLES SCHWAB CORPORATION
Condensed Consolidated Statement of Income
(In millions, except per share amounts)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
- ------------------------------------------------------------------------------------------------------------------------------------
Revenues
Asset management and administration fees $ 467 $ 431 $1,340 $1,316
Commissions 320 305 873 893
Interest revenue 236 287 719 899
Interest expense (55) (83) (183) (264)
------- ------- ------- -------
Net interest revenue 181 204 536 635
Principal transactions 45 47 121 147
Other 38 33 99 114
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Total 1,051 1,020 2,969 3,105
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Expenses Excluding Interest
Compensation and benefits 445 466 1,311 1,391
Other compensation - merger retention programs - - - 22
Occupancy and equipment 108 109 330 338
Depreciation and amortization 71 78 218 240
Communications 62 62 180 195
Advertising and market development 32 50 101 153
Professional services 45 41 126 134
Commissions, clearance and floor brokerage 21 19 54 53
Restructuring charges 37 159 61 188
Impairment charges - - 5 -
Other 33 37 107 95
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Total 854 1,021 2,493 2,809
- ------------------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations before taxes on income
and extraordinary gain 197 (1) 476 296
Taxes on income (73) - (152) (110)
- ------------------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations before extraordinary gain 124 (1) 324 186
Gain (loss) from discontinued operations, net of tax 3 (3) - (10)
Extraordinary gain on sale of corporate trust business, net of tax expense - - - 12
- ------------------------------------------------------------------------------------------------------------------------------------
Net Income (Loss) $ 127 $ (4) $ 324 $ 188
====================================================================================================================================
Weighted-Average Common Shares Outstanding - Diluted 1,366 1,358 1,361 1,382
====================================================================================================================================
Earnings Per Share - Basic
Income (loss) from continuing operations before extraordinary gain $ .09 - $ .24 $ .14
Gain (loss) from discontinued operations, net of tax - - - $ (.01)
Extraordinary gain, net of tax expense - - - $ .01
Net income (loss) $ .09 - $ .24 $ .14
Earnings Per Share - Diluted
Income (loss) from continuing operations before extraordinary gain $ .09 - $ .24 $ .14
Gain (loss) from discontinued operations, net of tax - - - $ (.01)
Extraordinary gain, net of tax expense - - - $ .01
Net income (loss) $ .09 - $ .24 $ .14
====================================================================================================================================
Dividends Declared Per Common Share $ .014 $ .011 $ .036 $ .033
====================================================================================================================================
All periods have been adjusted to summarize the impact of The Charles Schwab Corporation's sale of its United Kingdom brokerage
subsidiary, Charles Schwab Europe, in gain (loss) from discontinued operations.
See Notes to Condensed Consolidated Financial Statements.
- 1 -
THE CHARLES SCHWAB CORPORATION
Condensed Consolidated Balance Sheet
(In millions, except share and per share amounts)
(Unaudited)
September 30, December 31,
2003 2002
- ------------------------------------------------------------------------------------------------------------------------------------
Assets
Cash and cash equivalents $ 2,515 $ 3,114
Cash and investments segregated and on deposit for federal or other
regulatory purposes(1) (including resale agreements of $17,891 in 2003
and $16,111 in 2002) 22,419 21,005
Securities owned - at market value (including securities pledged of $374
in 2003 and $337 in 2002) 2,744 1,716
Receivables from brokers, dealers and clearing organizations 306 222
Receivables from brokerage clients - net 7,666 6,845
Loans to banking clients - net 5,616 4,555
Loans held for sale 75 -
Equipment, office facilities and property - net 976 868
Goodwill - net 605 603
Other assets 838 777
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Total $ 43,760 $ 39,705
====================================================================================================================================
Liabilities and Stockholders' Equity
Deposits from banking clients $ 6,508 $ 5,231
Drafts payable 149 134
Payables to brokers, dealers and clearing organizations 3,171 1,476
Payables to brokerage clients 26,124 26,401
Accrued expenses and other liabilities 1,318 1,302
Short-term borrowings 1,402 508
Long-term debt 776 642
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Total liabilities 39,448 35,694
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Stockholders' equity:
Preferred stock - 9,940,000 shares authorized; $.01 par value per share;
none issued - -
Common stock - 3 billion shares authorized; $.01 par value per share;
1,392,091,544 and 1,391,991,180 shares issued in 2003 and 2002, respectively 14 14
Additional paid-in capital 1,747 1,744
Retained earnings 3,007 2,769
Treasury stock - 36,841,293 and 47,195,631 shares in 2003 and 2002,
respectively, at cost (348) (465)
Unamortized stock-based compensation (96) (33)
Accumulated other comprehensive loss (12) (18)
- ------------------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 4,312 4,011
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Total $ 43,760 $ 39,705
====================================================================================================================================
(1) Amounts included represent actual balances on deposit, whereas cash and investments required to be segregated for federal or
other regulatory purposes were $21,845 million and $21,252 million at September 30, 2003 and December 31, 2002, respectively.
On October 2, 2003, the Company withdrew $170 million of excess segregated cash. On January 2, 2003, the Company deposited $655
million into its segregated reserve bank accounts.
See Notes to Condensed Consolidated Financial Statements.
- 2 -
THE CHARLES SCHWAB CORPORATION
Condensed Consolidated Statement of Cash Flows
(In millions)
(Unaudited)
Nine Months Ended
September 30,
2003 2002
- ------------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities
Net income $ 324 $ 188
Adjustments to reconcile net income to net cash used for operating activities:
Depreciation and amortization 218 240
Impairment charges 5 -
Tax benefit from, and amortization of, stock-based awards 19 22
Deferred income taxes 5 44
Non-cash restructuring charges 9 17
Extraordinary gain on sale of corporate trust business, net of tax expense - (12)
Other (11) (1)
Originations of loans held for sale (1,267) -
Proceeds from sales of loans held for sale 1,197 -
Net change in:
Cash and investments segregated and on deposit for federal or other
regulatory purposes (2,142) (1,531)
Securities owned (excluding securities available for sale) (118) 42
Receivables from brokers, dealers and clearing organizations (102) 245
Receivables from brokerage clients (825) 2,540
Other assets (66) (60)
Drafts payable 14 (177)
Payables to brokers, dealers and clearing organizations 1,719 269
Payables to brokerage clients 418 (2,134)
Accrued expenses and other liabilities (71) (69)
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Net cash used for operating activities (674) (377)
- ------------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities
Purchases of securities available for sale (1,725) (1,085)
Proceeds from sales of securities available for sale 369 578
Proceeds from maturities, calls and mandatory redemptions of securities
available for sale 537 275
Net increase in loans to banking clients (1,063) (483)
Proceeds from sale of banking client loans - 196
Purchase of equipment, office facilities and property - net (101) (114)
Cash payments for business combinations and investments, net of cash received (9) -
Proceeds from sales of subsidiaries 53 26
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Net cash used for investing activities (1,939) (607)
- ------------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities
Net change in deposits from banking clients 1,277 (748)
Net increase in short-term borrowings 894 182
Proceeds from long-term debt - 100
Repayment of long-term debt (100) (203)
Dividends paid (49) (45)
Purchase of treasury stock (32) (230)
Proceeds from stock options exercised 24 23
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) financing activities 2,014 (921)
- ------------------------------------------------------------------------------------------------------------------------------------
Decrease in Cash and Cash Equivalents (599) (1,905)
Cash and Cash Equivalents at Beginning of Period 3,114 4,407
- ------------------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Period $ 2,515 $ 2,502
====================================================================================================================================
See Notes to Condensed Consolidated Financial Statements.
- 3 -
THE CHARLES SCHWAB CORPORATION
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Amounts and Ratios)
(Unaudited)
1. Basis of Presentation
The Charles Schwab Corporation (CSC) is a financial holding company
engaged, through its subsidiaries, in securities brokerage, banking, and related
financial services. Charles Schwab & Co., Inc. (Schwab) is a securities
broker-dealer with 352 domestic branch offices in 48 states, as well as a branch
in the Commonwealth of Puerto Rico. U.S. Trust Corporation (USTC, and with its
subsidiaries collectively referred to as U.S. Trust) is a wealth management firm
that through its subsidiaries also provides fiduciary services and private
banking services with 34 offices in 13 states. Other subsidiaries include
Charles Schwab Investment Management, Inc., the investment advisor for Schwab's
proprietary mutual funds, Schwab Capital Markets L.P. (SCM), a market maker in
Nasdaq and other securities providing trade execution services primarily to
broker-dealers and institutional clients, CyberTrader, Inc. (CyberTrader), an
electronic trading technology and brokerage firm providing services to highly
active, online traders, and Charles Schwab Bank, N.A. (Schwab Bank), a retail
bank which commenced operations in the second quarter of 2003.
The accompanying unaudited condensed consolidated financial statements
include CSC and its majority-owned subsidiaries (collectively referred to as the
Company). These financial statements have been prepared pursuant to the rules
and regulations of the Securities and Exchange Commission 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 in the U.S. (GAAP). All
adjustments were of a normal recurring nature, except as discussed in Note "6 -
Discontinued Operations." Certain items in prior periods' financial statements
have been reclassified to conform to the 2003 presentation. 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 2002 Annual Report to
Stockholders, which is filed as Exhibit 13.1 to the Company's Form 10-K for the
year ended December 31, 2002, and the Company's Quarterly Reports on Form 10-Q
for the periods ended March 31, 2003 and June 30, 2003. The Company's results
for any interim period are not necessarily indicative of results for a full year
or any other interim period.
2. New Accounting Standards
Financial Accounting Standards Board Interpretation (FIN) No. 45 -
Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others, was issued in November 2002. This
interpretation addresses the disclosures to be made by a guarantor in its
interim and annual financial statements about its obligations under certain
guarantees. FIN No. 45 also clarifies that a guarantor is required to recognize,
at the inception of a guarantee, a liability for the fair value of the
obligation undertaken in issuing the guarantee. In accordance with FIN No. 45,
the Company adopted the disclosure requirements on December 31, 2002 and the
recognition requirements on January 1, 2003. The adoption of FIN No. 45 did not
have a material impact on the Company's financial position, results of
operations, earnings per share (EPS), or cash flows.
FIN No. 46 - Consolidation of Variable Interest Entities, an Interpretation
of Accounting Research Bulletin No. 51 - Consolidated Financial Statements, was
issued in January 2003. This interpretation provides new criteria for
determining whether a company is required to consolidate (i.e., record the
assets and liabilities on the balance sheet) a variable interest entity. Upon
adoption of this interpretation in the first quarter of 2003, the Company
consolidated a special purpose trust (Trust) that was formed in 2000 to finance
the acquisition and renovation of an office building and land. The Trust,
through an agent, raised the $245 million needed to acquire and renovate the
building and land by issuing long-term debt ($235 million) and raising equity
capital ($10 million). Upon adoption, the Company recorded: the building and
land at a cost of $245 million, net of accumulated depreciation of $16 million;
long-term debt of $235 million; and a net reduction of accrued expenses and
other liabilities of $7 million. The cumulative effect of this accounting change
was immaterial.
The building is being depreciated on a straight-line basis over twenty
years. The long-term debt consists of a variable-rate note maturing in June
2005. The interest rate on the note was 1.55% at September 30, 2003, and ranged
from 1.54% to 1.66% during the quarter, and 1.54% to 1.82% for the first nine
months of 2003. The building and land have been pledged as collateral for the
long-term debt. At September 30, 2003, the carrying value of the building and
land was $221 million (net of accumulated depreciation of $24 million).
Additionally, the Company has guaranteed the debt of the Trust up to a maximum
of $202 million. The lender does not have recourse to any other assets of the
Company.
- 4 -
The annual impact of the adoption of FIN No. 46 on the Company's Condensed
Consolidated Statement of Income is to cease both amortizing the shortfall of
the residual value guarantee and recording rent expense on the lease and to
record both the depreciation on the building and the interest expense associated
with the debt. The adoption of FIN No. 46 did not have and is not expected to
have a material impact on the Company's results of operations, EPS, or cash
flows.
Statement of Financial Accounting Standards (SFAS) No. 149 - Amendment of
Statement 133 on Derivative Instruments and Hedging Activities was issued in
April 2003. This statement amends and clarifies financial accounting and
reporting for derivative instruments, including certain derivative instruments
embedded in other contracts and for hedging activities under SFAS No. 133 -
Accounting for Derivative Instruments and Hedging Activities. SFAS No. 149 also
amends certain other existing pronouncements. The Company adopted the provisions
of this statement on June 30, 2003. The adoption of this statement did not have
and is not expected to have a material impact on the Company's financial
position, results of operations, EPS, or cash flows.
SFAS No. 150 - Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity was issued in May 2003. This
statement establishes standards for how to classify and measure certain
financial instruments with characteristics of both liabilities and equity (e.g.,
redeemable preferred stock). The Company adopted the provisions of this
statement on July 1, 2003. The adoption of this statement did not have an impact
on the Company's financial position, results of operations, EPS, or cash flows.
3. Stock Incentive Plans
The Company's stock incentive plans provide for granting options to
employees, officers, and directors. Options are granted for the purchase of
shares of common stock at an exercise price not less than market value on the
date of grant, and expire within ten years from the date of grant. Options
generally vest over a four-year period from the date of grant.
A summary of option activity follows:
- --------------------------------------------------------------------------------
2003 2002
----------------- -------------------
Weighted- Weighted-
Number Average Number Average
of Exercise of Exercise
Options Price Options Price
- --------------------------------------------------------------------------------
Outstanding at
beginning of year 156 $15.38 153 $16.20
Granted:
Quarter ended March 31 -(1) $ 9.26 7 $13.15
Quarter ended June 30 2 $ 8.93 2 $12.12
Quarter ended September 30 -(1) $11.30 2 $ 9.68
- --------------------------------------------------------------------------------
Total granted 2 $ 9.09 11 $12.42
Exercised (4) $ 6.23 (4) $ 6.53
Canceled (12) $18.58 (8) $20.58
- --------------------------------------------------------------------------------
Outstanding
at September 30 142 $15.26 152 $15.92
================================================================================
Exercisable
at September 30 85 $14.27 73 $12.65
- --------------------------------------------------------------------------------
Available for future
grant at September 30 41 47
- --------------------------------------------------------------------------------
Weighted-average fair
value of options granted:
Quarter ended March 31 $ 4.34 $ 6.33
Quarter ended June 30 $ 3.96 $ 5.51
Quarter ended September 30 $ 5.06 $ 4.58
- --------------------------------------------------------------------------------
(1) Less than 500,000 options were granted during each of the first and third
quarters of 2003.
The fair value of each option granted is estimated as of the grant date
using the Black-Scholes option pricing model with the following assumptions:
- --------------------------------------------------------------------------------
Three Months Ended
March 31, June 30, September 30,
-------------- ------------- -------------
2003 2002 2003 2002 2003 2002
- --------------------------------------------------------------------------------
Expected dividend yield .30% .30% .30% .30% .30% .30%
Expected volatility 52% 50% 49% 50% 49% 50%
Risk-free interest rate 2.9% 4.1% 2.6% 4.4% 2.9% 3.5%
Expected life (in years) 5 5 5 5 5 5
- --------------------------------------------------------------------------------
The Company applies Accounting Principles Board Opinion No. 25 - Accounting
for Stock Issued to Employees, and related interpretations, for its stock-based
employee
- 5 -
compensation plans. Because the Company grants stock option awards at market
value, there is no compensation expense recorded, except for
restructuring-related expense for modifications of officers' stock options.
Had compensation expense for the Company's stock option awards been
determined based on the Black-Scholes fair value at the grant dates for awards
under those plans consistent with the fair value method of SFAS No. 123 -
Accounting for Stock-Based Compensation, the Company would have recorded
additional compensation expense and its net income and EPS would have been
reduced to the pro forma amounts presented in the following table:
- --------------------------------------------------------------------------------
Three Nine
Months Ended Months Ended
September 30, September 30,
2003 2002 2003 2002
- --------------------------------------------------------------------------------
Compensation expense for stock
options (after-tax):
As reported $ 6 $ - $ 6 $ 2
Pro forma (1) $ 31 $ 36 $ 89 $114
- --------------------------------------------------------------------------------
Net income (loss):
As reported $127 $ (4) $324 $188
Pro forma $102 $ (40) $241 $ 76
- --------------------------------------------------------------------------------
Basic EPS:
As reported $.09 $ - $.24 $.14
Pro forma $.08 $(.03) $.18 $.06
Diluted EPS:
As reported $.09 $ - $.24 $.14
Pro forma $.07 $(.03) $.18 $.06
- --------------------------------------------------------------------------------
(1) Includes pro forma compensation expense related to stock options granted in
both current and prior periods. Pro forma stock option compensation is
amortized on a straight-line basis over the vesting period beginning with
the month in which the option was granted.
4. Restructuring
In 2001, the Company initiated a restructuring plan to reduce operating
expenses due to economic uncertainties and difficult market conditions. This
restructuring plan was completed in 2002 and included a workforce reduction, a
reduction in operating facilities, and the removal of certain systems hardware,
software, and equipment from service. Included in these initiatives were costs
associated with the withdrawal from certain international operations.
In the third quarter of 2002, the Company commenced additional
restructuring initiatives due to continued difficult market conditions. These
initiatives were intended to reduce operating expenses and adjust the Company's
organizational structure to improve productivity, enhance efficiency, and
increase profitability. The restructuring initiatives were substantially
completed in 2002 and primarily included further reductions in the Company's
workforce and facilities.
In the third quarter of 2003, the Company commenced additional
restructuring initiatives to further adjust the Company's workforce and
facilities in response to the market environment and the 2002 restructuring
initiatives, which resulted in the centralization of several support functions.
The third quarter initiatives included mandatory staff reductions of 175
employees and the consolidation of certain facilities, including 20 Schwab
domestic branch offices. The Company recorded pre-tax restructuring charges of
$31 million in the third quarter of 2003 related to these restructuring
initiatives.
The Company recorded total pre-tax restructuring charges of $37 million and
$61 million in the third quarter of 2003 and first nine months of 2003,
respectively. These charges include the amounts noted above related to the 2003
restructuring initiatives, as well as charges primarily due to changes in
estimates of sublease income associated with previously announced efforts to
sublease excess facilities. The Company recorded total pre-tax restructuring
charges of $159 million and $188 million in the third quarter of 2002 and first
nine months of 2002, respectively, all of which related to its 2001 and 2002
restructuring initiatives. The actual costs of the Company's restructuring
initiatives could differ from the estimated costs, depending primarily on the
Company's ability to sublease properties.
- 6 -
A summary of the activity in the restructuring reserve related to the
Company's restructuring initiatives for the third quarter of 2003 and the nine
months ended September 30, 2003 is as follows:
- --------------------------------------------------------------------------------
Three months ended Workforce Facilities
September 30, 2003 Reduction Reduction Total
- --------------------------------------------------------------------------------
Balance at June 30, 2003 $ 27 $ 218 $ 245
Restructuring charges 21 16 37
Cash payments (12) (20) (32)
Non-cash charges (1) (8) (1) (9)
Other (2) - 2 2
- --------------------------------------------------------------------------------
Balance at September 30, 2003 $ 28 (3) $ 215 (4) $ 243
================================================================================
- --------------------------------------------------------------------------------
Nine months ended Workforce Facilities
September 30, 2003 Reduction Reduction Total
- --------------------------------------------------------------------------------
Balance at December 31, 2002 $ 68 $ 227 $ 295
Balance related to discontinued
operations - (3) (3)
Restructuring charges 21 40 61
Cash payments (53) (54) (107)
Non-cash charges (1) (8) (1) (9)
Other (2) - 6 6
- --------------------------------------------------------------------------------
Balance at September 30, 2003 $ 28 (3) $ 215 (4) $ 243
================================================================================
(1) Primarily includes charges for officers' stock option compensation and
write-downs of fixed assets.
(2) Primarily includes the accretion of facilities restructuring reserves,
which are initially recorded at net present value. Accretion expense is
recorded in occupancy and equipment expense on the Company's Condensed
Consolidated Statement of Income.
(3) Includes $4 million, $12 million, and $12 million related to the Company's
2001, 2002, and 2003 restructuring initiatives, respectively. The Company
expects to substantially utilize the remaining workforce reduction reserve
through cash payments for severance pay and benefits over the respective
severance periods through 2005.
(4) Includes $123 million, $85 million, and $7 million related to the Company's
2001, 2002, and 2003 restructuring initiatives, respectively. The Company
expects to substantially utilize the remaining facilities reduction reserve
through cash payments for the net lease expense over the respective lease
terms through 2017.
5. Sale of Corporate Trust Business
In June 2001, U.S. Trust sold its Corporate Trust business to The Bank of
New York Company, Inc. During the first quarter of 2002, the Company recorded an
extraordinary gain of $22 million, or $12 million after tax, which represented
the remaining proceeds from this sale that were realized upon satisfaction of
certain client retention requirements.
6. Discontinued Operations
On January 31, 2003, the Company sold its United Kingdom (U.K.) brokerage
subsidiary, Charles Schwab Europe (CSE), to Barclays PLC. The results of the
operations of CSE, net of income taxes, have been presented as discontinued
operations on the Condensed Consolidated Statement of Income. A summary of
revenues and pre-tax gains (losses) for CSE is as follows:
- --------------------------------------------------------------------------------
Three Nine
Months Ended Months Ended
September 30, September 30,
2003 2002 2003 2002
- --------------------------------------------------------------------------------
Revenues $ - $ 11 $ 4 $ 34
Pre-tax gains (losses) $ 5 $ (5) $ - $(16)
After-tax gains (losses) $ 3 $ (3) $ - $(10)
- --------------------------------------------------------------------------------
An after-tax loss of $2 million on the sale was recorded in the first
quarter of 2003 and included the estimated costs associated with certain CSE
obligations that were retained by the Company, principally related to facilities
leases and other contracts. In the third quarter of 2003, the Company recorded a
pre-tax gain of $5 million (after-tax gain of $3 million) primarily due to
changes in estimates of costs related to this sale.
7. Business Acquisition and Divestiture
In June 2003, the Company sold its investment in Aitken Campbell, a
market-making joint venture in the U.K., to the Company's joint venture partner,
TD Waterhouse Group, Inc. In the first quarter of 2003, the Company recorded an
impairment charge of $5 million pre tax to reduce the carrying value of its
investment and a deferred income tax benefit of $16 million that was realized
following the completion of the sale. The Company's share of Aitken Campbell's
historical earnings, which was accounted for under the equity method, has not
been material to the Company's results of operations, EPS, or cash flows.
In June 2003, the Company announced that U.S. Trust agreed to acquire State
Street Corporation's Private Asset Management group, a provider of wealth
management services to clients in the New England area, for $365 million to be
paid in cash, subject to certain possible adjustments. See note "16 - Subsequent
Event" for further discussion on this acquisition.
- 7 -
8. Loans to Banking Clients and Related Allowance for Credit Losses
An analysis of the composition of the loan portfolio is as follows:
- --------------------------------------------------------------------------------
September 30, December 31,
2003 2002
- --------------------------------------------------------------------------------
Residential real estate mortgages $ 4,514 $ 3,580
Consumer loans 681 630
Other 447 369
- --------------------------------------------------------------------------------
Total loans 5,642 4,579
Less: allowance for credit losses (26) (24)
Loans to banking clients - net $ 5,616 $ 4,555
================================================================================
Included in the loan portfolio are nonaccrual loans totaling $1 million at
both September 30, 2003 and December 31, 2002. Nonaccrual loans are considered
impaired by the Company, and represent all of the Company's nonperforming assets
at both September 30, 2003 and December 31, 2002. For each of the three- and
nine-month periods ended September 30, 2003 and 2002, the impact of interest
revenue which would have been earned on nonaccrual loans versus interest revenue
recognized on these loans was not material to the Company's results of
operations.
The amount of loans accruing interest that were contractually 90 days or
more past due was immaterial at both September 30, 2003 and December 31, 2002.
Recoveries and charge-offs related to the allowance for credit losses on
the loan portfolio were not material for each of the three- and nine-month
periods ended September 30, 2003 and 2002.
9. Deposits from Banking Clients
Deposits from banking clients consist of money market and other savings
deposits, noninterest-bearing deposits and certificates of deposit. Deposits
from banking clients are as follows:
- --------------------------------------------------------------------------------
September 30, December 31,
2003 2002
- --------------------------------------------------------------------------------
Interest-bearing deposits $ 5,951 $ 4,471
Noninterest-bearing deposits 557 760
- --------------------------------------------------------------------------------
Total $ 6,508 $ 5,231
================================================================================
The average rate paid by the Company on its interest-bearing deposits from
banking clients was 1.72% and 2.39% for the three-month periods ended
September 30, 2003 and 2002, respectively, and 1.90% and 2.37% for the
nine-month periods ended September 30, 2003 and 2002, respectively.
10. Comprehensive Income
Comprehensive income includes net income and changes in equity except those
resulting from investments by, or distributions to, stockholders. Comprehensive
income is presented in the following table:
- --------------------------------------------------------------------------------
Three Nine
Months Ended Months Ended
September 30, September 30,
2003 2002 2003 2002
- --------------------------------------------------------------------------------
Net income (loss) $127 $ (4) $324 $188
Other comprehensive income (loss):
Net gain (loss) on cash flow
hedging instruments 7 (8) 13 (10)
Foreign currency translation
adjustment - 2 5 8
Change in net unrealized gain
on securities available for sale (10) 10 (12) 17
- --------------------------------------------------------------------------------
Total comprehensive income,
net of tax $124 $ - $330 $203
================================================================================
- 8 -
11. Earnings Per Share
Basic EPS excludes dilution and is computed by dividing net income by the
weighted-average number of common shares outstanding for the period. Diluted EPS
reflects the potential reduction in EPS that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock.
EPS under the basic and diluted computations are presented in the following
table:
- --------------------------------------------------------------------------------
Three Nine
Months Ended Months Ended
September 30, September 30,
2003 2002 2003 2002
- --------------------------------------------------------------------------------
Net income (loss) $ 127 $ (4) $ 324 $ 188
- --------------------------------------------------------------------------------
Weighted-average common
shares outstanding - basic 1,342 1,358 1,341 1,364
Common stock equivalent shares
related to stock incentive plans 24 - 20 18
- --------------------------------------------------------------------------------
Weighted-average common
shares outstanding - diluted 1,366 1,358 1,361 1,382
================================================================================
Basic EPS:
Income (loss) from continuing
operations before
extraordinary gain $ .09 $ - $ .24 $ .14
Gain (loss) from discontinued
operations, net of tax - - - $(.01)
Extraordinary gain, net of
tax expense - - - $ .01
Net income (loss) $ .09 $ - $ .24 $ .14
- --------------------------------------------------------------------------------
Diluted EPS:
Income (loss) from continuing
operations before
extraordinary gain (1) $ .09 $ - $ .24 $ .14
Gain (loss) from discontinued
operations, net of tax - - - $(.01)
Extraordinary gain, net of
tax expense - - - $ .01
Net income (loss) $ .09 $ - $ .24 $ .14
- --------------------------------------------------------------------------------
(1) For the three months ended September 30, 2002 this computation excludes
common stock equivalent shares related to stock incentive plans of
14 million because inclusion of such shares would be antidilutive.
The computation of diluted EPS excludes outstanding stock options to
purchase 88 million and 114 million shares for the three months ended
September 30, 2003 and 2002, respectively, and 111 million and 114 million
shares for the nine months ended September 30, 2003 and 2002, respectively,
because the exercise prices for those options were greater than the average
market price of the common shares, and therefore the effect would be
antidilutive.
12. Regulatory Requirements
CSC is a financial holding company, which is a type of bank holding company
subject to supervision and regulation by the Board of Governors of the Federal
Reserve System (the Federal Reserve Board) under the Bank Holding Company Act of
1956, as amended (the Act).
Under the Act, the Federal Reserve Board has established consolidated
capital requirements for bank holding companies. The regulatory capital and
ratios of the Company, U.S. Trust, United States Trust Company of New York
(U.S. Trust NY), and Schwab Bank are presented in the following table:
- --------------------------------------------------------------------------------
2003 2002
----------------- -----------------
September 30, Amount Ratio(1) Amount Ratio(1)
- --------------------------------------------------------------------------------
Tier 1 Capital:
Company $ 3,784 23.6% $ 3,574 23.5%
U.S. Trust $ 647 15.3% $ 618 17.5%
U.S. Trust NY $ 361 10.3% $ 381 13.4%
Schwab Bank(2) $ 276 60.0% - -
Total Capital:
Company $ 3,813 23.7% $ 3,601 23.7%
U.S. Trust $ 673 15.9% $ 641 18.2%
U.S. Trust NY $ 384 10.9% $ 401 14.1%
Schwab Bank(2) $ 276 60.0% - -
Tier 1 Leverage:
Company $ 3,784 9.0% $ 3,574 9.6%
U.S. Trust $ 647 8.8% $ 618 9.5%
U.S. Trust NY $ 361 5.9% $ 381 7.3%
Schwab Bank(2) $ 276 24.7% - -
- --------------------------------------------------------------------------------
(1) Minimum tier 1 capital, total capital, and tier 1 leverage ratios are 4%,
8%, and 3%-5%, respectively, for bank holding companies and banks.
Additionally, Schwab Bank is subject to a minimum tier 1 leverage ratio of
8% for its first three years of operations. Well-capitalized tier 1
capital, total capital, and tier 1 leverage ratios are 6%, 10%, and 5%,
respectively. Each of CSC's other depository institution subsidiaries
exceed the well-capitalized standards set forth by the banking regulatory
authorities.
(2) Schwab Bank commenced operations in the second quarter of 2003. Therefore,
Schwab Bank regulatory capital and ratios are not presented for 2002.
Based on their respective regulatory capital ratios at September 30, 2003
and 2002, the Company, U.S. Trust, and U.S. Trust NY are considered well
capitalized (the highest category). Additionally, based on its regulatory
capital ratios at September 30, 2003, Schwab Bank is also considered well
capitalized. There are no conditions or events that management believes have
changed the Company's, U.S. Trust's, U.S. Trust NY's or Schwab Bank's
well-capitalized status.
In the first quarter of 2003, the Company implemented a value-at-risk (VAR)
model to estimate the risks associated with its inventory portfolios. Since VAR
is considered to be a
- 9 -
comprehensive measurement tool for estimating market risk, the Federal Reserve
Board requires certain bank holding companies to incorporate VAR in determining
their Tier 1 Capital and Total Capital ratios. The implementation of VAR had the
effect of increasing both the Company's Tier 1 Capital and Total Capital ratios
by .9% at September 30, 2003.
Schwab and SCM are subject to the Uniform Net Capital Rule under the
Securities Exchange Act of 1934 (the Rule). Schwab and SCM compute net capital
under the alternative method permitted by this Rule. This method requires the
maintenance of minimum net capital, as defined, of the greater of 2% of
aggregate debit balances arising from client transactions or a minimum dollar
requirement, which is based on the type of business conducted by the
broker-dealer. The minimum dollar requirement for both Schwab and SCM 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
requirement. At September 30, 2003, Schwab's net capital was $1.2 billion (16%
of aggregate debit balances), which was $1.1 billion in excess of its minimum
required net capital and $832 million in excess of 5% of aggregate debit
balances. At September 30, 2003, SCM's net capital was $76 million, which was
$75 million in excess of its minimum required net capital.
13. Commitments and Contingent Liabilities
Guarantees: The Company provides certain indemnifications (i.e., protection
against damage or loss) to counterparties in connection with the disposition of
certain of its assets. These indemnification agreements have various expiration
dates and the Company's liability under these agreements is generally limited to
certain maximum amounts. The Company, however, remains subject to certain
uncapped potential liabilities. Other than the possible uncapped obligations, at
September 30, 2003, the Company's maximum potential liability under these
indemnification agreements is limited to approximately $100 million.
Standby letters of credit (LOCs) are conditional commitments issued by
U.S. Trust to guarantee the performance of a client to a third party. At
September 30, 2003, U.S. Trust had LOCs outstanding totaling $73 million, which
are short-term in nature and generally expire within one year.
In accordance with FIN No. 45, the Company recognizes, at the inception of
a guarantee, a liability for the estimated fair value of the obligation
undertaken in issuing the guarantee. The fair values of the obligations relating
to LOCs are estimated based on fees charged to enter into similar agreements,
considering the creditworthiness of the counterparties. The fair values of the
obligations relating to other guarantees are estimated based on transactions for
similar guarantees or expected present value measures. The Company does not
believe that any material loss related to indemnification agreements, including
the uncapped indemnification obligations, or LOCs is likely and therefore at
September 30, 2003, the liabilities recorded for these guarantees are
immaterial.
Legal contingencies: The nature of the Company's business subjects it to
claims, lawsuits, regulatory examinations, and other proceedings in the ordinary
course of business. The results of these matters cannot be predicted with
certainty. There can be no assurance that these matters will not have a material
adverse effect on the Company's results of operations in any future period,
depending partly on the results for that period, and a substantial judgment
could have a material adverse impact on the Company's financial condition,
results of operations, and cash flows. However, it is the opinion of management,
after consultation with legal counsel, that the ultimate outcome of existing
claims and proceedings will not have a material adverse impact on the financial
condition, results of operations, or cash flows of the Company.
For further discussion of legal proceedings, see Part II - Other
Information, Item 1 - Legal Proceedings.
14. Segment Information
The Company structures its segments according to its various types of
clients and the services provided to those clients. These segments have been
aggregated, based on similarities in economic characteristics, types of clients,
services provided, distribution channels, and regulatory environment, into four
reportable segments - Individual Investor, Institutional Investor, Capital
Markets, and U.S. Trust.
Financial information for the Company's reportable segments is presented in
the following table. The Company periodically reallocates certain revenues and
expenses among the segments to align them with the changes in the Company's
organizational structure. Previously-reported segment information has been
revised to reflect changes during the year in the Company's internal
organization. The Company evaluates the performance of its segments based on
adjusted operating income before taxes (a non-GAAP income measure), which
excludes restructuring charges, acquisition-related charges, impairment charges,
discontinued operations, and extraordinary gains. Intersegment revenues are not
material and are therefore not disclosed. Total revenues, income from continuing
operations before taxes on income and extraordinary gain, and net income are
equal to the
- 10 -
amounts as reported on the Company's Condensed Consolidated Statement of Income.
- --------------------------------------------------------------------------------
Three Nine
Months Ended Months Ended
September 30, September 30,
2003 2002 2003 2002
- --------------------------------------------------------------------------------
Revenues:
Individual Investor $ 605 $ 584 $1,699 $1,774
Institutional Investor 210 211 602 632
Capital Markets 78 65 208 196
U.S. Trust 158 160 460 503
- --------------------------------------------------------------------------------
Total $1,051 $1,020 $2,969 $3,105
================================================================================
Adjusted operating income
(loss) before taxes:
Individual Investor $ 153 $ 95 $ 293 $ 229
Institutional Investor 53 37 174 162
Capital Markets (4) (5) (7) 9
U.S. Trust (1) 32 31 82 111
- --------------------------------------------------------------------------------
Adjusted operating income
before taxes 234 158 542 511
Excluded items (2) (37) (159) (66) (215)
- --------------------------------------------------------------------------------
Income (loss) from continuing
operations before taxes on
income and extraordinary gain 197 (1) 476 296
Taxes on income (73) - (152) (110)
Gain (loss) from discontinued
operations, net of tax (3) 3 (3) - (10)
Extraordinary gain on sale of
corporate trust business,
net of tax expense - - - 12
- --------------------------------------------------------------------------------
Net Income (Loss) $ 127 $ (4) $ 324 $ 188
================================================================================
(1) Excludes an extraordinary pre-tax gain of $22 million for the nine months
ended September 30, 2002 relating to the sale of U.S. Trust's Corporate
Trust business (see note "5 - Sale of Corporate Trust Business").
(2) Includes restructuring charges of $37 million and $61 million (see note "4
- Restructuring") for the three and nine months ended September 30, 2003,
respectively. Also includes an impairment charge of $5 million related to
the Company's investment in its U.K. market-making operation for the nine
months ended September 30, 2003 (see note "7 - Business Acquisition and
Divestiture"). Includes restructuring charges of $159 million and
$188 million for the three and nine months ended September 30, 2002,
respectively, and acquisition-related charges of $27 million for the nine
months ended September 30, 2002.
(3) Represents the impact of the Company's sale of its U.K. brokerage
subsidiary, which was previously included in the Individual Investor
segment (see note "6 - Discontinued Operations").
15. Supplemental Cash Flow Information
Certain information affecting the cash flows of the Company is presented in
the following table:
- --------------------------------------------------------------------------------
Nine
Months Ended
September 30,
2003 2002
- --------------------------------------------------------------------------------
Income taxes paid $ 167 $ 81
- --------------------------------------------------------------------------------
Interest paid:
Brokerage client cash balances $ 63 $ 135
Deposits from banking clients 65 63
Long-term debt 33 51
Short-term borrowings 12 19
Other 13 5
- --------------------------------------------------------------------------------
Total interest paid $ 186 $ 273
================================================================================
Non-cash investing and financing activities:
Consolidation of special purpose trust: (1)
Building and land $ 229 -
Long-term debt and other liabilities $ 228 -
Common stock and options issued
for purchase of businesses $ 4 $ 4
- --------------------------------------------------------------------------------
(1) Upon adoption of FIN No. 46 in the first quarter of 2003, the Company
consolidated a special purpose trust. See note "2 - New Accounting
Standards."
16. Subsequent Event
U.S. Trust's acquisition of State Street Corporation's Private Asset
Management group closed on October 31, 2003.
- 11 -
THE CHARLES SCHWAB CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Description of Business
The Company: The Charles Schwab Corporation (CSC) and its subsidiaries
(collectively referred to as the Company) provide securities brokerage, banking,
and related financial services for 7.6 million active client accounts(a). Client
assets in these accounts totaled $876.7 billion at September 30, 2003. Charles
Schwab & Co., Inc. (Schwab) is a securities broker-dealer with 352 domestic
branch offices in 48 states, as well as a branch in the Commonwealth of Puerto
Rico. U.S. Trust Corporation (USTC, and with its subsidiaries collectively
referred to as U.S. Trust) is a wealth management firm that through its
subsidiaries also provides fiduciary services and private banking services with
34 offices in 13 states. Other subsidiaries include Charles Schwab Investment
Management, Inc. (CSIM), the investment advisor for Schwab's proprietary mutual
funds, Schwab Capital Markets L.P. (SCM), a market maker in Nasdaq and other
securities providing trade execution services primarily to broker-dealers and
institutional clients, CyberTrader, Inc. (CyberTrader), an electronic trading
technology and brokerage firm providing services to highly active, online
traders, and Charles Schwab Bank, N.A. (Schwab Bank), a retail bank which
commenced operations in the second quarter of 2003.
The Company provides financial services to individuals, institutional
clients, and broker-dealers through four segments - Individual Investor,
Institutional Investor, Capital Markets, and U.S. Trust. The Individual Investor
segment includes the Company's retail brokerage and banking operations. The
Institutional Investor segment provides custodial, trading and support services
to independent investment advisors (IAs), serves company 401(k) plan sponsors
and third-party administrators, and supports company stock option plans. The
Capital Markets segment provides trade execution services in Nasdaq,
exchange-listed, and other securities primarily to broker-dealers, including
Schwab, and institutional clients. The U.S. Trust segment provides investment,
wealth management, custody, fiduciary, and private banking services to
individual and institutional clients.
Business Strategy: The Company's primary strategy is to serve the needs of
individual investors either directly or indirectly through intermediaries, IAs,
or corporate retirement plan sponsors. The Company's products and services are
designed to meet clients' varying investment and financial needs, including help
and advice and access to extensive investment research, news and information.
The Company's infrastructure and resources are focused on pursuing six strategic
priorities:
o providing the spectrum of affluent investors with the advice,
relationships, and choices that support their desired investment outcomes;
o delivering the information, technology, service, and pricing needed to
remain a leader in serving active traders;
o continuing to provide high-quality service to emerging affluent clients -
those with less than $250,000 in assets;
o providing individual investing services through employers, including
retirement and option plans as well as personal brokerage accounts;
o offering selected banking services and developing investment products that
give clients greater control and understanding of their finances; and
o retaining a strong capital markets business to address investors' financial
product and trade execution needs.
For further discussion of the Company's business strategy, see
"Management's Discussion and Analysis of Results of Operations and Financial
Condition - Description of Business - Business Strategy" in the Company's 2002
Annual Report to Stockholders, which is filed as Exhibit 13.1 to the Company's
Form 10-K for the year ended December 31, 2002. See also Item 1 - Business
Narrative Description of Business - "Products, Services, and Advice Offerings"
in the Company's Form 10-K for the year ended December 31, 2002. Significant
recent developments relating to certain of these strategic priorities, as well
as other significant developments, follow:
Services for Affluent Investors: The Company's full-service advice and
relationship service offering includes Schwab Advisor Network(R), Schwab Private
Client(TM), and Schwab Equity Ratings(TM). The Schwab Advisor Network is a
referral program that provides investors who want the assistance of an
independent professional with access to approximately 330 participating IAs.
Schwab Private Client is a fee-based service designed to help clients who want
access to an ongoing, face-to-face advice relationship with a designated Schwab
consultant while retaining day-to-day responsibility for their investment
decisions. Schwab Equity Ratings provide clients with an objective stock rating
system
- --------
(a) Accounts with balances or activity within the preceding eight months.
Reflects the removal of 192,000 accounts in the second quarter of 2003
related to the Company's withdrawal from the Employee Stock Purchase Plan
business and the transfer of those accounts to other providers.
- 12 -
on more than 3,000 stocks, assigning each equity a single grade: A, B, C, D, or
F.
For investors enrolled in Schwab Private Client, the Company introduced the
Schwab Personal Portfolio Dividend Equity(TM) account, a managed account that
invests primarily in dividend-paying stocks that have been rated A or B by
Schwab Equity Ratings.
Schwab is focused on enhancing the support services it offers to IAs. IAs
provide customized and personalized portfolio management and financial planning
services to investors who prefer to delegate their financial management
responsibilities to an independent professional. During the third quarter of
2003, the Company sponsored a series of 13 Institutional Workshops across the
country. These workshops provided over 800 IA back office staff with training
and suggestions designed to improve operating efficiency as part of our overall
effort to help IAs focus on growing their practices. In addition, The Schwab
Fund for Charitable Giving(R) introduced Charitable Asset Management, a service
which enables IAs working with our Services for Investment Managers group or
U.S. Trust to manage the donated assets in client Charitable Gift Accounts of
$500,000 or more in a flexible, personalized manner.
In June 2003, the Company announced that U.S. Trust agreed to acquire State
Street Corporation's Private Asset Management group (PAM), a provider of wealth
management services to clients in the New England area, for $365 million to be
paid in cash, subject to certain possible adjustments. This transaction is
intended to provide U.S. Trust with an immediate presence in an important wealth
market, as well as enable the Company to add a full array of private banking
capabilities to complement the investment management and fiduciary services
already provided by PAM. See note "16 - Subsequent Event" in the Notes to
Condensed Consolidated Financial Statements for further discussion on this
acquisition.
Services for Active Traders: In the third quarter of 2003, the Company
announced a price reduction for those clients who trade more than 30 times a
quarter - commissions were lowered to $14.95, or $.01 per share for trades over
1,000 shares with a $14.95 minimum. Additionally, the Company introduced the
Profit Taking Strategies online seminar, which covers strategies for setting and
adhering to price targets. The Company also commenced a new service that enables
CyberTrader(R) clients to trade E-mini S&P 500(R) and Nasdaq 100 stock index
futures contracts.
Corporate Services: In the third quarter of 2003, the Company launched a
new service for participants in bundled 401(k) plans serviced by Schwab.
Participants in these plans now have either online, telephonic, or in-person
access to customized advice provided by a third party, including specific
recommendations about savings rates and the core investment fund choices
available in a given retirement plan. Participants also have the option of
automatic account rebalancing.
Banking and Other Financial Products: Schwab Bank received final regulatory
approvals and commenced operations as a retail bank in the second quarter of
2003. Schwab Bank is focused on providing mortgage, home equity line of credit,
and deposit services to Schwab's existing clients, as well as new clients.
Schwab Bank offers its products through a variety of channels, including its
main office in Reno, Nevada, as well as telephone and online channels. During
the third quarter of 2003, Schwab Bank originated $1.1 billion in first
mortgages and outstanding home equity lines of credit totaled $101 million at
quarter end. In addition, Schwab Bank's loan commitments at September 30, 2003
included approximately $350 million in first mortgages and approximately
$450 million in new home equity lines of credit. Currently, substantially all
fixed-rate first mortgage loans originated by Schwab Bank are intended for sale,
and are classified as held for sale on the Company's Condensed Consolidated
Balance Sheet. Schwab Bank had total assets of $1.6 billion and deposits from
banking clients of $1.2 billion at September 30, 2003.
Capital Markets: In the third quarter of 2003, the Company increased its
institutional equities trading capabilities by adding 2 more professionals to
lead its sales function for exchange-listed securities and a new Chicago office.
Revenues from institutional equities trading were $91 million in the first nine
months of 2003, up 78% from the first nine months of 2002. Institutional
equities trading is an integral part of the Schwab Liquidity Network(TM), a
market-making system that pools the orders of the Company's individual investor
client base with those of hundreds of broker-dealers and institutional
investment firms in a manner designed to offer greater opportunities for the
best possible price on most stock trades. The Schwab Liquidity Network traded
over 11,000 securities at September 30, 2003, up from about 5,000 securities at
its launch in February 2003.
Other Significant Developments: The Company introduced the Schwab Dividend
Equity Fund(TM), a mutual fund designed to offer clients current income and
capital appreciation by primarily investing in dividend-paying stocks that have
been rated A or B by Schwab Equity Ratings. This fund, which recognizes the
importance of recent changes in dividend taxation, is the fourth member of the
SchwabFunds Family(R) that utilizes Schwab Equity Ratings to help guide stock
selection.
Regulatory Developments: As with other major mutual fund companies in the
United States and broker-dealers that
- 13 -
distribute mutual fund shares, affiliates of the Company are responding to
inquiries from federal and state regulators as part of an industry-wide review
of mutual fund trading, distribution and servicing practices. These inquiries
include examinations by the Securities and Exchange Commission of affiliates of
CSC and USTC, and subpoenas issued to affiliates of USTC by the New York State
Attorney General. The Company is cooperating with regulators and is conducting
its own review of fund trading, distribution and servicing practices at or
through Company affiliates. Among other things, the Company is investigating
circumstances in which a small number of parties were permitted to engage in
short-term trading of U.S. Trust's Excelsior(R) Funds; and a limited number of
instances at Schwab in which fund orders may have been entered or processed
after the 4:00 p.m. E.S.T. closing time in a manner contrary to Schwab policies.
The Company's investigation is ongoing and the Company is taking steps to ensure
compliance with its policies on market timing and late trading.
In addition, various securities regulators are considering new regulations
concerning mutual fund distribution and servicing, some of which, if adopted,
could have a negative impact on mutual fund investing generally, including
investments through mutual fund supermarkets such as the Company's Mutual Fund
Marketplace(R) service. The Company is currently unable to predict whether any
such regulations will be adopted or the final form of any potential new
regulations.
Risk Management
For discussion on the Company's principal risks and some of the policies
and procedures for risk identification, assessment, and mitigation, see
"Management's Discussion and Analysis of Results of Operations and Financial
Condition - Risk Management" in the Company's 2002 Annual Report to
Stockholders, which is filed as Exhibit 13.1 to the Company's Form 10-K for the
year ended December 31, 2002. See Liquidity and Capital Resources of this report
for a discussion on liquidity risk; and see Item 3 - Quantitative and
Qualitative Disclosures About Market Risk for additional information relating to
market risk.
The Company expects to continue to evaluate and consider potential
strategic transactions, including business combinations, acquisitions and
dispositions of businesses, services, and other assets. At any given time, the
Company may be engaged in discussions or negotiations with respect to one or
more of such transactions. Any such transaction could have a material impact on
the Company's financial position, results of operations, earnings per share
(EPS), or cash flows. There is no assurance that any such discussions or
negotiations will result in the consummation of any transaction. In addition,
the process of integrating any acquisition may create unforeseen operating
difficulties, expenditures, and other risks.
Given the nature of the Company's revenues, expenses, and risk profile, the
Company's earnings and CSC's common stock price have been and may continue to be
subject to significant volatility from period to period. The Company's results
for any interim period are not necessarily indicative of results for a full year
or any other interim period. Risk is inherent in the Company's business.
Consequently, despite the Company's attempts to identify areas of risk, oversee
operational areas involving risk, and implement policies and procedures designed
to mitigate risk, there can be no assurance that the Company will not suffer
unexpected losses due to operating or other risks.
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains "forward-looking statements"
within the meaning of Section 27A of the Securities Act, and Section 21E of the
Securities Exchange Act of 1934. Forward-looking statements are identified by
words such as "believe," "expect," "intend," "plan," "will," "may," and other
similar expressions. In addition, any statements that refer to expectations,
projections or other characterizations of future events or circumstances are
forward-looking statements. These forward-looking statements, which reflect
management's beliefs, objectives, and expectations as of the date hereof, are
necessarily estimates based on the best judgment of the Company's senior
management. These statements relate to, among other things, the Company's
ability to achieve its strategic priorities (see Description of Business -
Business Strategy), the impact of potential new regulations concerning mutual
fund distribution and servicing (see Description of Business - Business Strategy
- - Regulatory Developments), the potential impact of future strategic
transactions (see Risk Management), the impact of expense reduction measures on
the Company's results of operations (see Financial Overview), sources of
liquidity and capital (see Liquidity and Capital Resources - Liquidity and -
Commitments), the Company's cash position, cash flows, and capital expenditures
(see Liquidity and Capital Resources - Cash and Capital Resources), the impact
of the Company's trading risk as estimated by a value-at-risk measurement
methodology (see Item 3 - Quantitative and Qualitative Disclosures About Market
Risk - Financial Instruments Held For Trading Purposes), net interest expense
under interest rate swaps (see Item 3 - Quantitative and Qualitative Disclosures
About Market Risk - Financial Instruments Held For Purposes Other Than Trading -
Interest Rate Swaps), and contingent liabilities (see Part II - Other
Information, Item 1 - Legal Proceedings). Achievement of the expressed beliefs,
objectives and expectations described in these statements is subject to certain
risks and uncertainties that could cause actual results
- 14 -
to differ materially from the expressed beliefs, objectives and expectations.
Important factors that may cause such differences are noted in this interim
report and include, but are not limited to: the Company's success in building
fee-based relationships with its clients; the effect of client trading patterns
on Company revenues and earnings; changes in revenues and profit margin due to
cyclical securities markets and fluctuations in interest rates; the level and
continuing volatility of equity prices; a significant downturn in the securities
markets over a short period of time or a sustained decline in securities prices,
trading volumes, and investor confidence; geopolitical developments affecting
the securities markets, the economy, and investor sentiment; the size and number
of the Company's insurance claims; and a significant decline in the real estate
market, including the Company's ability to sublease certain properties. Other
more general factors that may cause such differences include, but are not
limited to: the Company's inability to attract and retain key personnel; the
timing and impact of changes in the Company's level of investments in personnel,
technology, or advertising; changes in technology; computer system failures and
security breaches; evolving legislation, regulation and changing industry
practices adversely affecting the Company; adverse results of litigation or
regulatory matters; the inability to obtain external financing at acceptable
rates; the effects of competitors' pricing, product and service decisions; and
intensified industry competition and consolidation.
Critical Accounting Policies
Certain of the Company's accounting policies that involve a higher degree
of judgment and complexity are discussed in "Management's Discussion and
Analysis of Results of Operations and Financial Condition - Critical Accounting
Policies" in the Company's 2002 Annual Report to Stockholders, which is filed as
Exhibit 13.1 to the Company's Form 10-K for the year ended December 31, 2002.
There have been no material changes to these critical accounting policies during
the first nine months of 2003.
Three Months Ended September 30, 2003 Compared To Three
Months Ended September 30, 2002
All references to EPS information in this report reflect diluted earnings
per share unless otherwise noted.
FINANCIAL OVERVIEW
The Company's financial performance in the third quarter of 2003 reflects
continued improvement in the market environment, which led to higher levels of
client asset valuations and trading activity. The Company's trading revenues
increased 4% from the third quarter of 2002, primarily due to higher client
trading activity, partially offset by lower average revenue per trade (reflected
in commission revenues).
Non-trading revenues, which include asset management and administration
fees, interest revenue, net of interest expense (referred to as net interest
revenue), and other revenues, increased 3% in the third quarter of 2003 compared
to the year-ago level. The increase in non-trading revenues was primarily due to
an 8% increase in asset management and administration fees, partially offset by
an 11% decrease in net interest revenue. The increase in asset management and
administration fees was primarily due to increases in average assets in and
service fees earned on Schwab's Mutual Fund OneSource(R) service, as well as
higher account fees. The decrease in net interest revenues was primarily due to
lower rates received on and lower levels of margin loans to clients.
Total expenses excluding interest during the third quarter of 2003 were
$854 million, down 16% from the third quarter of 2002. This decrease was
primarily due to lower restructuring charges and decreases in almost all expense
categories as a result of the Company's continued expense reduction measures.
On January 31, 2003, the Company sold its United Kingdom (U.K.) brokerage
subsidiary, Charles Schwab Europe (CSE), to Barclays PLC (Barclays). The results
of CSE's operations have been summarized as gain or loss from discontinued
operations, net of tax, on the Condensed Consolidated Statement of Income. The
reported gain was $3 million for the third quarter of 2003, primarily due to
changes in estimates of costs related to this sale, compared to a loss of
$3 million for the third quarter of 2002. The Company's consolidated prior
period revenues, expenses, and taxes on income have been adjusted to reflect
this presentation. For further information, see note "6 - Discontinued
Operations" in the Notes to Condensed Consolidated Financial Statements.
Income from continuing operations before taxes on income and extraordinary
gain was $197 million for the third quarter of 2003, compared to a $1 million
loss from continuing operations before taxes and extraordinary gain in the third
quarter of 2002. This increase was primarily due to the combination of factors
discussed separately above - lower restructuring charges and declines in almost
all expense categories, as well as higher revenues. Net income for the third
quarter of 2003 was $127 million, or $.09 per share, compared to a net loss of
$4 million for the third quarter of 2002. The change from a net loss to net
income was primarily due to higher income from continuing operations before
taxes on income and extraordinary gain as discussed above. The Company's
after-tax profit margin for the third quarter of 2003 was 12.1%, up from (.4%)
for the third quarter of 2002. The annualized return on
- 15 -
stockholders' equity for the third quarter of 2003 was 12%, up from 0% for the
third quarter of 2002.
In the third quarter of 2003, net income of $127 million included the
following items which in total had the effect of decreasing after-tax income by
$20 million: $23 million of restructuring charges and a $3 million gain from
discontinued operations. In the third quarter of 2002, net loss of $4 million
included the following items which in total had the effect of decreasing
after-tax income by $103 million: $100 million of restructuring charges and a $3
million loss from discontinued operations.
Segment Information: In evaluating the financial performance of the Company's
segments, management uses adjusted operating income, a non-generally accepted
accounting principles (non-GAAP) income measure which excludes the items
described in the preceding paragraph. Management believes that adjusted
operating income is a useful indicator of the ongoing financial performance of
the Company's segments, and a tool that can provide meaningful insight into
financial performance without the effects of certain material items that are not
expected to be an ongoing part of operations. As detailed in note "14 - Segment
Information" in the Notes to Condensed Consolidated Financial Statements,
adjusted operating income before taxes was $234 million for the third quarter of
2003, up $76 million, or 48%, from the third quarter of 2002 primarily due to
increases of $58 million, or 61%, in the Individual Investor segment and
$16 million, or 43%, in the Institutional Investor segment. The increase in the
Individual Investor segment was primarily due to lower expenses as a result of
the Company's expense reduction measures and higher revenues resulting from
increased client trading activity. The increase in the Institutional Investor
segment was primarily due to lower expenses as a result of the Company's expense
reduction measures.
Restructuring: In 2001, the Company initiated a restructuring plan to reduce
operating expenses due to economic uncertainties and difficult market
conditions. The restructuring plan was completed in 2002 and included a
workforce reduction, a reduction in operating facilities, and the removal of
certain systems hardware, software, and equipment from service. Included in
these initiatives were costs associated with the withdrawal from certain
international operations.
In the third quarter of 2002, the Company commenced additional
restructuring initiatives due to continued difficult market conditions. These
initiatives were intended to reduce operating expenses and adjust the Company's
organizational structure to improve productivity, enhance efficiency, and
increase profitability. These restructuring initiatives were substantially
completed in 2002 and primarily included further reductions in the Company's
workforce and facilities.
In the third quarter of 2003, the Company commenced additional
restructuring initiatives to further adjust the Company's workforce and
facilities in response to the market environment and the 2002 restructuring
initiatives, which resulted in the centralization of several support functions.
These initiatives include mandatory staff reductions of approximately 265
employees and the consolidation of certain facilities. Although the workforce
and facilities decisions were made and communicated in the third quarter, the
accounting treatment of the related expense spans both the third and fourth
quarters of 2003. The Company recorded pre-tax restructuring charges of
$31 million in the third quarter of 2003, primarily reflecting severance costs
for approximately 175 employees and the consolidation of certain facilities,
including 20 Schwab domestic branch offices. The Company expects to recognize
pre-tax restructuring charges in the fourth quarter of 2003 of approximately
$20 million, reflecting severance costs for the approximately 90 remaining
employees who were notified in the third quarter and the consolidation of
certain facilities, including 13 additional Schwab domestic branch offices. The
Company expects that selective hiring in certain areas will offset some of the
mandatory staff reductions. The actual costs of these restructuring initiatives
could differ from the estimated costs, depending primarily on the Company's
ability to sublease properties. The Company estimates that its 2003
restructuring initiatives will reduce pre-tax operating expenses for full-year
2004 by approximately $40 million compared to annualized third quarter of 2003
operating expenses. The Company expects, however, that these reductions will be
substantially offset by reinvestment in other areas of the Company.
The Company recorded total pre-tax restructuring charges of $37 million in
the third quarter of 2003. These charges include amounts related to the 2003
restructuring initiatives, as well as charges primarily due to changes in
estimates of sublease income associated with previously announced efforts to
sublease excess facilities. The Company recorded total pre-tax restructuring
charges of $159 million in the third quarter of 2002, all of which related to
its 2001 and 2002 restructuring initiatives.
As of September 30, 2003, the remaining facilities restructuring reserve of
$215 million related to the Company's restructuring initiatives is net of
estimated future sublease income of approximately $320 million. This estimated
future sublease income amount is determined based upon a number of factors,
including current and expected commercial real estate lease rates in the
respective properties' real estate markets, and estimated vacancy periods prior
to execution of tenant subleases. At September 30, 2003, approximately 45% of
the total square footage targeted for sublease under the restructuring
initiatives has been subleased, up from approximately 25% at December 31, 2002.
- 16 -
For further information on the Company's restructuring initiatives, see
note "4 - Restructuring" in the Notes to Condensed Consolidated Financial
Statements.
REVENUES
Revenues increased by $31 million, or 3%, to $1.1 billion in the third
quarter of 2003 compared to the third quarter of 2002, primarily due to a
$36 million, or 8%, increase in asset management and administration fees and a
$15 million, or 5%, increase in commission revenues, partially offset by a
$23 million, or 11%, decrease in net interest revenue. The Company's non-trading
revenues represented 65% of total revenues for each of the third quarters of
2003 and 2002 as shown in the following table:
- --------------------------------------------------------------------------------
Three Months
Ended
September 30,
Composition of Revenues 2003 2002
- --------------------------------------------------------------------------------
Asset management and administration fees 44% 42%
Net interest revenue 17 20
Other 4 3
- --------------------------------------------------------------------------------
Total non-trading revenues 65 65
- --------------------------------------------------------------------------------
Commissions 30 30
Principal transactions 5 5
- --------------------------------------------------------------------------------
Total trading revenues 35 35
- --------------------------------------------------------------------------------
Total 100% 100%
================================================================================
While the Individual Investor and Institutional Investor segments generate
both trading and non-trading revenues, the Capital Markets segment generates
primarily trading revenues and the U.S. Trust segment generates primarily
non-trading revenues. The $31 million increase in revenues from the third
quarter of 2002 was primarily due to increases in revenues of $21 million, or
4%, in the Individual Investor segment, and $13 million, or 20%, in the Capital
Markets segment. See note "14 - Segment Information" in the Notes to Condensed
Consolidated Financial Statements for financial information by segment.
Asset Management and Administration Fees
Asset management and administration fees include mutual fund service fees,
as well as fees for other asset-based financial services provided to individual
and institutional clients. The Company earns mutual fund service fees for
recordkeeping and shareholder services provided to third-party funds, and for
transfer agent services, shareholder services, administration, and investment
management provided to its proprietary funds. These fees are based upon the
daily balances of client assets invested in third-party funds and upon the
average daily net assets of the Company's proprietary funds. Mutual fund service
fees are earned through the Individual Investor, Institutional Investor, and
U.S. Trust segments. The Company also earns asset management and administration
fees for financial services, including investment management and consulting,
trust and fiduciary services, custody services, financial and estate planning,
and private banking services, provided to individual and institutional clients.
These fees are primarily based on the value and composition of assets under
management and are earned through the U.S. Trust, Individual Investor, and
Institutional Investor segments.
Asset management and administration fees were $467 million for the third
quarter of 2003, up $36 million from the third quarter of 2002, as shown in the
following table (in millions):
- --------------------------------------------------------------------------------
Three Months
Ended
September 30, Percent
Asset Management and Administration Fees 2003 2002 Change
- --------------------------------------------------------------------------------
Mutual fund service fees:
Proprietary funds
(SchwabFunds(R), Excelsior(R) and other) $223 $218 2%
Mutual Fund OneSource(R) 76 61 25
Other 13 10 30
Asset management and related services 155 142 9
- --------------------------------------------------------------------------------
Total $467 $431 8%
================================================================================
The increase in asset management and administration fees was primarily due
to increases in average assets in and service fees earned on Schwabs Mutual
Fund OneSource service, and higher asset-based fees from certain client
relationships.
Assets in client accounts were $876.7 billion at September 30, 2003, an
increase of $149.9 billion, or 21%, from a year ago as shown in the following
table. This increase from a year ago included net new client assets of
$41.4 billion and net market gains of $108.5 billion related to client accounts.
- 17 -
- --------------------------------------------------------------------------------
Change in Client Assets and Accounts
(In billions, at quarter end, September 30, Percent
except as noted) 2003 2002 Change
- --------------------------------------------------------------------------------
Assets in client accounts
Schwab One(R), other cash
equivalents and deposits
from banking clients $ 31.8 $ 29.0 10%
Proprietary funds (SchwabFunds(R),
Excelsior(R) and other):
Money market funds 124.4 129.2 (4)
Equity and bond funds 30.7 26.8 15
- --------------------------------------------------------------------------------
Total proprietary funds 155.1 156.0 (1)
- --------------------------------------------------------------------------------
Mutual Fund Marketplace(R) (1):
Mutual Fund OneSource(R) 90.1 70.0 29
Mutual fund clearing services 28.4 19.8 43
All other 88.3 68.5 29
- --------------------------------------------------------------------------------
Total Mutual Fund Marketplace 206.8 158.3 31
- --------------------------------------------------------------------------------
Total mutual fund assets 361.9 314.3 15
- --------------------------------------------------------------------------------
Equity and other securities (1) 355.9 272.9 30
Fixed income securities (2) 134.6 117.5 15
Margin loans outstanding (7.5) (6.9) 9
- --------------------------------------------------------------------------------
Total client assets $876.7 $726.8 21%
================================================================================
Net change in assets
in client accounts
(for the quarter ended)
Net new client assets $ 10.6 $ 10.6
Net market gains (losses) 21.4 (80.8)
- ---------------------------------------------------------------------
Net growth (decline) $ 32.0 $(70.2)
=====================================================================
New client accounts
(in thousands, for the
quarter ended) 123.9 159.6 (22%)
Active client accounts
(in millions) (3) 7.6 8.0 (5%)
- --------------------------------------------------------------------------------
Active online Schwab client
accounts (in millions) (4) 4.0 4.2 (5%)
Online Schwab client assets $341.5 $279.1 22%
- --------------------------------------------------------------------------------
(1) Excludes all proprietary money market, equity, and bond funds.
(2) Includes $23.8 billion and $15.1 billion at September 30, 2003 and 2002,
respectively, of certain other securities serviced by Schwab's fixed income
division, including exchange-traded unit investment trusts, real estate
investment trusts, and corporate debt.
(3) Active client accounts are defined as accounts with balances or activity
within the preceding eight months. Reflects the removal of 192,000 accounts
in the second quarter of 2003 related to the Company's withdrawal from the
Employee Stock Purchase Plan business and the transfer of those accounts to
other providers.
(4) Active online accounts are defined as all active individual and U.S.
dollar-based international accounts within a household that has had at
least one online session within the past twelve months. Excludes
independent investment advisor accounts and U.S. Trust accounts.
Commissions
The Company earns revenues by executing client trades primarily through the
Individual Investor and Institutional Investor segments, as well as the Capital
Markets segment. These revenues are affected by the number of client accounts
that trade, the average number of revenue-generating trades per account, and the
average revenue earned per revenue trade. As shown in the following table (in
millions), commission revenues for the Company were $320 million for the third
quarter of 2003, up $15 million, or 5%, from the third quarter of 2002. This
increase was primarily due to higher daily average trades, partially offset by
lower average revenue per revenue trade.
- --------------------------------------------------------------------------------
Three Months
Ended
September 30, Percent
Commissions 2003 2002 Change
- --------------------------------------------------------------------------------
Equity and other securities $ 267 $ 254 5%
Mutual funds 29 30 (3)
Options 24 21 14
- --------------------------------------------------------------------------------
Total $ 320 $ 305 5%
================================================================================
Total commission revenues include $17 million in the third quarter of 2003
and $20 million in the third quarter of 2002 related to certain securities
serviced by Schwab's fixed income division, including exchange-traded unit
investment trusts, real estate investment trusts, and corporate debt. Schwab's
fixed income division also generates principal transaction revenues.
Additionally, commission revenues include $29 million in the third quarter of
2003 and $15 million in the third quarter of 2002 related to Schwab's
institutional trading business. Schwab's institutional trading business also
generates principal transaction revenues, as well as other revenues.
- 18 -
The Company's client trading activity is shown in the following table (in
thousands):
- --------------------------------------------------------------------------------
Three Months
Ended
September 30, Percent
Daily Average Trades (1) 2003 2002 Change
- --------------------------------------------------------------------------------
Revenue Trades (2)
Online 125.9 107.3 17%
TeleBroker(R) and Schwab by Phone(TM) 4.8 5.4 (11)
Regional client telephone service
centers, branch offices, and other 14.4 16.4 (12)
- --------------------------------------------------------------------------------
Total 145.1 129.1 12%
================================================================================
Mutual Fund OneSource(R) and
Other Asset-Based Trades
Online 52.6 47.9 10%
TeleBroker and Schwab by Phone .4 .3 33
Regional client telephone service
centers, branch offices, and other 5.0 8.3 (40)
- --------------------------------------------------------------------------------
Total 58.0 56.5 3%
================================================================================
Total Daily Average Trades
Online 178.5 155.2 15%
TeleBroker and Schwab by Phone 5.2 5.7 (9)
Regional client telephone service
centers, branch offices, and other 19.4 24.7 (21)
- --------------------------------------------------------------------------------
Total 203.1 185.6 9%
================================================================================
(1) Effective in the third quarter of 2003, the Company considers reduced
exchange trading sessions as half days in calculating daily average trades.
(2) Includes all client trades (both individuals and institutions) that
generate either commission revenue or revenue from principal markups (i.e.,
fixed income).
As shown in the following table, the total number of client revenue trades
executed by the Company has increased 12% as the trading activity per account
that traded has increased, slightly offset by decreases in the number of client
accounts that traded during the quarter and the number of trading days.
- --------------------------------------------------------------------------------
Three Months
Ended
September 30, Percent
Trading Activity 2003 2002 Change
- --------------------------------------------------------------------------------
Total revenue trades
(in thousands) (1) 9,215 8,263 12%
Accounts that traded during
the quarter (in thousands) 1,267 1,284 (1)
Average revenue trades
per account that traded 7.3 6.4 14
Trading frequency proxy (2) 3.8 3.9 (3)
Number of trading days (3) 63.5 64.0 (1)
Average revenue earned
per revenue trade $36.96 $39.71 (7)
- --------------------------------------------------------------------------------
(1) Includes all client trades (both individuals and institutions) that
generate either commission revenue or revenue from principal markups (i.e.,
fixed income).
(2) Represents annualized revenue trades per $100,000 in total client assets.
(3) Effective in the third quarter of 2003, the Company considers reduced
exchange trading sessions as half days.
Net Interest Revenue
Net interest revenue is the difference between interest earned on assets
(mainly margin loans to clients, investments of segregated client cash balances,
loans to banking clients, and securities available for sale) and interest paid
on liabilities (mainly brokerage client cash balances and deposits from banking
clients). Net interest revenue is affected by changes in the volume and mix of
these assets and liabilities, as well as by fluctuations in interest rates and
hedging strategies.
Substantially all of the Company's net interest revenue is earned through
the Individual Investor, Institutional Investor, and U.S. Trust segments.
- 19 -
Net interest revenue was $181 million for the third quarter of 2003, down
$23 million, or 11%, from the third quarter of 2002 as shown in the following
table (in millions):
- --------------------------------------------------------------------------------
Three Months
Ended
September 30, Percent
2003 2002 Change
- --------------------------------------------------------------------------------
Interest Revenue
Margin loans to clients $ 86 $ 107 (20%)
Investments, client-related 67 87 (23)
Loans to banking clients 57 59 (3)
Securities available for sale 17 20 (15)
Other 9 14 (36)
- --------------------------------------------------------------------------------
Total 236 287 (18)
- --------------------------------------------------------------------------------
Interest Expense
Brokerage client cash balances 14 41 (66)
Deposits from banking clients 23 24 (4)
Long-term debt 8 10 (20)
Short-term borrowings 4 6 (33)
Other 6 2 n/m
- --------------------------------------------------------------------------------
Total 55 83 (34)
- --------------------------------------------------------------------------------
Net interest revenue $ 181 $ 204 (11%)
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