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The Charles Schwab Corporation
Corporate OverviewData as of September 2004
2
The Charles Schwab CorporationCorporate Overview
Table of Contents
Page
I. Description of Business 3
A. Mission, Vision and Values 6
B. Competitive Advantages 8
C. Strategic Priorities 16
D. Corporate Structure 19
II. Financial Management 26
III. Selected Financial and Operating Data 34
IV. Earnings Release and SMART Report 45
3
Description of Business
4
Schwab is a distributor and manufacturer of financial services focusing on a core client base of individual investors and the investment advisors who serve them. The Company has the:
vision and values,
competitive advantages,
strategic focus and
corporate structure
needed to remain an industry leader.
Description of Business
5
The financial services marketplace is experiencing profound change.
75 million “baby boomers” are entering their prime saving and investing years.
U.S. investable wealth is estimated at nearly $18 trillion.
Social security is expected to lack adequate funding.
Company-sponsored retirement plans have largely shifted from defined benefit to defined contribution.
Clients are willing to use the PC and telephone to take charge of their personal investing, but many need guidance.
Description of Business
6
Our Mission:
“To provide the most useful and ethical financial services
in the world.”
Description of Business
7
Our vision is supported by a strong set of values.
Vision:To be recognized by
our service quality, investment insight and client relationships as the most trusted
firm in the financial services business.
To be fair, empathetic,
and responsive inserving our
clients.
To respect and reinforce our colleagues
and the spirit of teamwork.
To always earnand be worthy
of our clients’ trust.
To striverelentlessly to innovate what
we do andhow we do it.
Description of Business
8
Schwab has a distinct set of competitive advantages that make it uniquely capable of winning in the marketplace.
Broad product line at a superior value
National brand names
Ability to combine people and technology in unique ways
Full-choice model for the individual investor
Continued significant insider ownership
Description of Business
9
We offer clients access to a broad array of products, including:
Stocks, Options and Futures Mutual Fund Marketplace
OneSource, SchwabFunds® - Money Market Funds, Stock & Bond Funds, Index Funds, Fund of Funds.
Excelsior & Laudus.
Certificates of Deposit (CDs) Bonds and Treasuries
Corporate, Municipal, Mortgage-backed, Agencies, Bond funds. Preferred stocks, Unit Investment Trusts (UITs).
Annuities and Term Life Insurance Managed Accounts
Description of Business
10
Schwab also provides products and services that complement its core offerings.
Asset Management Products and Services (AMPS) and Fixed Income continually look for ways to enhance the broad range of investment alternatives available to clients.
Schwab’s Corporate Services (SCS) enterprise provides individuals with investment services and advice through their workplace.
Schwab Bank provides access to mortgage, HELOC, deposit and credit card products.
Description of Business
11
Our brands resonate well with the full spectrum of investors. Since 1Q99, we have ranked first or second for new account
consideration among affluent investors. Investors with more than $100,000 in investable assets were
asked which major brokerage firm they would most likely consider when opening an account.*
U.S. Trust is the premier brand for the ultra high net worth, specializing in comprehensive wealth management, private banking and multi-generational relationships.
We are recognized for the comprehensive services offered to self-directed clients. Watchfire GomezPro and Forbes have named us the #1 or #2
Online Broker since 1Q00 in recognition of our range of services, planning tools and research.
Description of Business
*Source: Brand Tracking Survey
12
Combining people and technology means: Providing multiple distribution channels.
Clients can visit one of our 321 offices or access Schwab via telephonic, online and wireless channels.
Schwab remains an online leader – 88% of our total trades are placed through online channels.
Building scaleable product and service offerings while maintaining a competitive cost structure. Advice is offered through our branch network, call centers and online
tools. Web-enabled tools, interactive web-based advice seminars,
Marketplace internal Web site, Schwab Equity Ratings, solutions for investment advisors.
Actively-trading investors have access to state of the art order entry, routing and management technology through Schwab and CyberTrader.
Description of Business
13
LowerCommissions
$0
$250
$500
$750
$1,000
Our ability to build a full-choice firm focused on the individual investor has made us the industry leader in gathering assets.
OnlineInvesting
ActiveTrader
Services
IndependentInvestmentAdvisorsMutual
FundInvesting
BranchNetwork& 18 x 7Service
EquityTransactions
LowerCommissions
MarketAccess
MoreChoice
MoneyManagement
Direct Access
InvestmentInsight
Strategic Heritage
Description of Business
SchwabPersonalChoice
FullChoice
Affluent Advice &
Relationships
Client Assets ($ in billions)
14
Schwab is supported by continued significant insider ownership.
Chuck Schwab and other Executive Committee members control over 260 million shares, or just under 20% of shares outstanding.
Including other officers, employees and directors, insider ownership totals over 350 million shares, or 26% of shares outstanding.
Description of Business
Data as of June 2004:
15
Leveraging our competitive advantages to win in the marketplace means gathering and retaining client assets through long-term relationships.
Our fundamental strength indicators include:
Net new client assets
Total client assets
New accounts
Description of Business
16
Our strategic priorities currently include: Build and maintain our differentiation as the firm that
delivers the most ethical and useful services in the world, with a focus on independent investors and the advisors who serve them.
Improve the Company’s financial performance by enhancing the value delivered to clients, simplifying and streamlining the organization and expanding returns on capital.
Combine people and technology to deliver high value, unconflicted investing, trading, and banking services.
Add products where we can provide higher client value, increase our profitability, and mitigate our cyclicality.
Description of Business
17
The strategic “blueprint” below illustrates how we think about our strategy overall, and how we evaluate our growth opportunities.
Description of Business
More Services, Offers, Pricing Options, Advising Capabilities, Relationship Options
Adding New Investment
Instruments and Banking Products
Strengthening our Foundational
Capabilities
Active(48+)
Core($50-$500k)
Affluent($500k+)
The Expanded “Core”
Advisors Advisors
18
Recent strategic progress includes: Schwab Personal Choice™, launched in February 2004, provides
investors with a full range of trading, investing and advice services tailored and priced to their needs and preferences.
We reduced online equity trade commissions in June 2004. We also announced further price reductions in October 2004. Lower-cost trades are now available for individual investor and investment advisor clients based on either their household asset level or their trading activity.
We launched Schwab Bank in April 2003 with an initial focus on mortgages, pledged-asset mortgages, HELOCs and deposits.
Our banking offer is aimed at complementing our existing capabilities and facilitating household asset consolidation.
Clients now have access to a VISA credit card. Our acquisition of State Street’s Private Asset Management group
strengthens U.S. Trust’s presence in the New England wealth market.
Description of Business
19
IndividualInvestor
InstitutionalInvestor
U.S. Trust
Administrative/Support Enterprises• Schwab Technology • Schwab Operations
Client EnterprisesSegments
Schwab is structured as a set of enterprises...
Serve individual investors directly
Serve individual investors indirectly
Independent & Advised Investing
U.S. Trust
Schwab Institutional
Corporate Services
Fixed IncomeAsset Management
Products and Services
Description of Business
Active Trader
Global Dollar
Schwab Bank
• Finance, Risk & Strategy• Marketing
• Human Resources • Business Strategy
Develop product solutions for all investors
20
Schwab Advisor Network
…that combine to form a full-choice financial services firm designed to meet the needs of all types of individual investors.
DelegatorSelf-Directed
CyberTrader
Schwab PrivateClient
U.S. Trust
Description of Business
SchwabSignatureTrading
Signature
Validator
Active Trading Independent Investing Advised Investing
FoundationalTiered service levels
Schwab Personal Choice Offers
A La Carte Advice
SchwabComprehensive
Consultation
SchwabPersonal Financial
Plan
Schwab EquityCompensationConsultation
Schwab Retirement
Consultation
21
The Individual Investor Group utilizes multiple channels to serve actively trading and independent investors, as well as investors who seek some level of advice.
Provide help and advice through 283 branch offices. 45% of new accounts are opened through our branch offices. 19 offices and our automated telephone system provide Chinese,
Korean, Spanish and Vietnamese language services.
Handle trades and account administration through four telephone service centers.
Includes several electronic channels such as the website, TeleBroker
®, Schwab by Phone® and wireless channels. Active traders have access to schwab.com, StreetSmart Pro and
CyberTrader platforms.
32% of employees, 53% of revenues, 5.8 million active accounts
Description of Business
22
Schwab Institutional provides over 5,000 independent fee-based investment advisory firms (IAs) with back-office business solutions. Includes securities brokerage, record keeping and additional
services, such as transition support, along with market and regulatory updates.
Partners with IAs through the Advisor Network referral service. Client assets associated with referral programs total $23 billion to-date.
Promotes advisor growth by: Allowing them to outsource technology - Advisor branded web services,
portfolio accounting, reconciliation and reporting. Expanding the wealth management services and investment alternatives
available to IAs and their clients. – Working with U.S. Trust to develop the trust and private banking services,
research and specialized products IAs need.
5% of employees, 17% of revenues, 1.3 million active sub-accounts
Description of Business
23
Corporate Services serves individuals through their workplace. Leverages the brand, breadth, distribution and values of Schwab for
the benefit of corporations and their employees.
Combines retirement plan, equity compensation plan and retail group sales; provides a single point of contact and a seamless experience for plan participants.
Offers 401(k) recordkeeping, advice and other retirement plan services directly through SchwabPlan® and indirectly through alliances with third-party administrators. Assets in employer-sponsored retirement plans total $122 billion.
Provides stock option plan administration to corporate clients and trade execution and education services to their employees.
5% of employees, 4% of revenues
Description of Business
24
U.S. Trust provides investment management, fiduciary and private banking services to high net worth individuals and institutional clients. Provides premier client service to our most affluent clients
and their families. Receives referrals from Schwab investment consultants.
Combines Schwab’s high-tech capabilities with their traditional high-touch service to create a comprehensive set of wealth management services for emerging affluent and affluent investors.
Serves clients through 38 offices located in most major wealth centers in the U.S.
Description of Business
17% of employees, 20% of revenues
25
Asset Management Products and Services (AMPS) continually seeks to enhance our already broad range of investment alternatives. Manages Schwab’s relationship with third party mutual funds
as well as proprietary SchwabFunds. Clients now have access to just under 1,900 third party funds from
over 300 families, including nearly 1,100 OneSource funds.
SchwabFunds include money market, bond, index and quantitatively-oriented equity funds, as well as our “fund of funds” and sector fund series.
AXA Rosenberg adoption (Laudus) provides more choice.
Continually explores expanding proprietary funds and developing research capabilities.
Invests in the OneSource and Laudus brands.
Description of Business
26
Financial Management
27
For Schwab, financial success means achieving superior growth rates and consistent margins.
Operating Revenue Growth 20% 6% 10%
After-tax Operating Profit Margin 12%+ 12.5% 12.0%
Return on Equity 20% 14% 7%
Financial Management
Annual CorporateObjectives
1998 - 2003Average
YTDSeptember
2004
28
Schwab’s expense management is guided by an investment philosophy that continually balances long-term investment with short-term profitability. Development spending is adjusted but not stopped
throughout market cycles which, in our experience, follow three different patterns:
Seasonality
Temporary Slowdowns
Extended Slowdowns
Financial Management
29
Schwab’s track record in managing its variable revenue stream.
Extended slowdowns:
Temporary slowdowns (pre-election):
Seasonality slowdowns:
Note: Dollars in millions. Based on operating results. 1994 and 1996 data excludes U.S. Trust.
1Q94 2Q94 % ChangeRevenues $288 $258 (10)%Expenses 224 205 (8)%After-Tax Margin 13.3% 12.4%
2Q96 3Q96 % ChangeRevenues $492 $430 (13)%Expenses 373 333 (11)%After-Tax Margin 14.3% 13.3%
2002 2003 % ChangeRevenues $4,091 $4,070 (1)%Expenses 3,442 3,291 (4)%After-Tax Margin 10.0% 12.0%
Financial Management
30
The development spending evaluation process is a rigorous annual process, which is refined quarterly.
Financial Management
The process includes:
Alignment with our strategic focus.
Peer review by finance executives.
Evaluation using multiple benchmarks.
Quarterly review of various projects by the Executive Committee.
Review of projects after completion.
31
What’s included in development spending?
55% 22%
23%
Revenue Productivity Infrastructure
2004 Plan
Compliance, Regulatory, Technology Enhancement
Personal Choice,US Trust PersonalWealth Solutions,Fixed Income Initiatives,Corporate Services Initiatives, Banking Initiatives
Productivity & Process Improvement(e.g., workflow enhancements, Imaging, New cost accounting system)
Financial Management
Note: Development spending on this slide refers to “project” development only and excludes advertising and marketing.
32
Schwab’s liquidity and capital management reflect a straightforward balance sheet... Size is driven by liabilities.
Over 90% of the balance sheet is client-related.
Credit balances are used to fund client activity.
One complication: Cash and Equivalents does not equate to available Corporate resources.
A substantial portion relates to ongoing operations (supporting margin loans).
Trade Settlement.
Financial Management
33
…that does not require significant external funding. Substantial cash flow is used to support:
Low, growth-oriented common stock dividend,
Opportunistic, dilution-linked share repurchases,
Debit-driven incremental capital requirements,
Capital expenditures of about 5% of Net Revenues and
Corporate acquisitions.
Our A2/A- Medium Term Note program is used to provide flexibility and manage our cost of capital.
Financial Management
34
Selected Financial and Operating Data
35
12/31/93 * 9/30/04 $95.8 Billion $1,000.9 Billion
Schwab Money Market Funds& Schwab One$20.1
* Excludes U.S. Trust** Stocks Net of Margin Loans
OneSource $114.5
Equities$400.9 **
Schwab ProprietaryFunds $38.4
Fixed IncomeSecurities
$155.7
Schwab Money
Market Funds & Schwab One
$149.7
Other Mutual FundMarketplace$103.6
Components of Client Assets
OtherMutual Fund Marketplace$16.6
Fixed Income Securities$10.0
Equities$39.5 **
Schwab Proprietary Funds $1.3
11%
40%
4%
4%
10%
16%
15%
Mutual FundClearing Services $38.1
Selected Financial & Operating Data
OneSource $8.3 21%
9%
1%
17%
41%
10%
36
Client Assets
Selected Financial & Operating Data
768
1,000.9
13
18
$0
$200
$400
$600
$800
$1,000
$1,200
3Q01 4Q01 1Q02 2Q02 3Q02 4Q02 1Q03 2Q03 3Q03 4Q03 1Q04 2Q04 3Q04
$0
$5
$10
$15
$20
$25
$30Total Client Assets Net New Assets
(1) Includes $12 billion related to the acquisition of State Street Corporation’s Private Asset Management group.(2) Includes a one-time $6 billion outflow related to our mutual fund clearing business. (3) Includes a one-time $2 billion inflow related to our mutual fund clearing business.
(billions) (billions)
(1)
(2)
(3)
37
Client Accounts
Selected Financial & Operating Data
7.87.4
184
114
0
1
2
3
4
5
6
7
8
9
10
3Q01 4Q01 1Q02 2Q02 3Q02 4Q02 1Q03 2Q03 3Q03 4Q03 1Q04 2Q04 3Q04
0
50
100
150
200
250Total Client Accounts New Accounts(millions) (000s)
38
Trading Activity
Selected Financial & Operating Data
128134
2.8
3.8
0
50
100
150
200
250
3Q01 4Q01 1Q02 2Q02 3Q02 4Q02 1Q03 2Q03 3Q03 4Q03 1Q04 2Q04 3Q04
0
1
2
3
4
5
6
7
8Daily Average Revenue Trades Frequency Proxy*
5-year average frequency proxy
* Annualized Revenue Trades per $100K in Average Client Assets.
Frequency P
roxyD
AR
T (
000s
)
39
Offices and Employees (end of period)
14.816.716.916.319.6
19.6
26.3
20.1
15.114.3
321
291315
368
415 429 422
376 377 374
10
15
20
25
30
1997 1998 1999 2000 2001 2002 2003 1Q04 2Q04 3Q04
150
225
300
375
450
Full-Time Equivalents Offices
Selected Financial & Operating DataF
ull-T
ime
Equ
ival
ents
(00
0s)
Offices
40
Commissions 17% 23% 30% 29% 29% 29% 25% 29% 29%
Principal Transactions 2 2 2 2 2 3 3 2 3
Trading Related 19% 25% 32% 31% 31% 32% 28% 31% 32%
Asset Management & Administration Fees 53% 50% 46% 47% 47% 46% 50% 46% 44%
Net Interest Income 25 22 19 18 18 18 20 20 21
Other 3 3 3 4 4 4 2 3 3
Non-trading Related 81% 75% 68% 69% 69% 68% 72% 69% 68%
Total 100% 100% 100% 100% 100% 100% 100% 100% 100%
Components of Net Revenues
Selected Financial & Operating Data
% of Total Revenues 3Q04 2Q04 1Q04 4Q03 3Q03 2Q03 1Q03 4Q02 3Q02
Note: Revenues have been restated to reflect Schwab Soundview Capital Markets and Charles Schwab Europe as discontinued operations in accordance with GAAP.
41
Operating Expenses as a % of Net RevenuesSelected Financial & Operating Data
Compensation & Benefits 46% 48% 44% 42% 42% 43% 45% 43% 45%
Occupancy & Equipment 10 10 9 10 11 11 12 12 11
Depreciation & Amortization 6 5 5 6 7 7 9 8 8
Communications 5 5 6 6 6 6 6 6 6
Professional Services 6 6 5 5 4 4 4 4 4
Advertising & Market Development 4 4 6 4 3 2 5 6 5
Commissions, Clearance & Floor Bkg. 1 1 1 1 1 1 1 1 1
Other 4 4 3 4 3 4 4 5 4Total 82% 83% 79% 78% 77% 78% 86% 85% 84%
% of Total Revenues 3Q04 2Q04 1Q04 4Q03 3Q03 2Q03 1Q03 4Q02 3Q02
Note: Revenues and expenses have been restated to reflect Schwab Soundview Capital Markets and Charles Schwab Europe as discontinued operations in accordance with GAAP.
42
30
60
90
120
150
3Q02 4Q02 1Q03 2Q03 3Q03 4Q03 1Q04 2Q04 3Q04
0
4
8
12
16
20Expenses/Client Assets Revenues/Client Assets Profit Margin
40 bps
Note: Results exclude non-operating items, such as gains or losses from discontinued operations, a non-recurring gain on the sale of an investment, restructuring charges, impairment charges, acquisition-related costs, as well as a non-recurring tax benefit.
Basis Points %
52bps
43 bps
Operating Revenues, Expenses and Profitability
Selected Financial & Operating Data
33 bps
10.9%10.4%
43
Selected Cash Flow Data
2003 2002 2001 2000 1999
Net Income $472 $109 $199 $718 $666 Depreciation/Amortization 284 312 404 307 182Non-cash restructuring
and Impairment Charges 18 79 80 0 0
Total 774 500 683 1,025 848
Capital Expenditures (86) (89) (222) (596) (302)Capitalized Software Development Costs (67) (71) (79) (109) (68)Debit Capital (207) 295 671 72 (742)Free Cash Flow 414 635 1,053 392 (264)
Share Repurchases (32) (299) (368) 0 (54)Dividends Paid (67) (60) (61) (62) (61)Net Long-Term Borrowings (100) (114) (40) 252 99
Selected Financial & Operating Data
44
Mutual Fund Market ShareBased on Direct-Marketed Stock and Bond Funds
Note: Share Values Include Schwab Only
Source: Strategic Insight/Mutual Funds Finance
Selected Financial & Operating Data
N/AN/A
Share of Assets
14.6%15.0% 15.2% 15.1%
15.5%
14.1% 14.3% 14.4%
15.5%
0%
4%
8%
12%
16%
3Q02 1Q03 3Q03 1Q04 3Q04
Share of Net Flows
23.8%
39.1%
25.7%24.3%
34.9% 34.4%
26.0%
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
3Q02 1Q03 3Q03 1Q04 3Q04