Efforts to bolster bank’s appeal to advisers

The eight-month-old bank, based in Reno, Nev., earned $4 million in the third quarter, its first full reporting period. That’s a big improvement from its first two months of business, when it lost an estimated $1.6 million.

Charles Schwab Bank NA gathered $1.2 billion in deposits during its first five months of business. It originated $1.1 billion in first mortgages, and its home-equity lines reached $100 million. On top of that, it had loan commitments totaling $350 million in first mortgages and $450 million in home-equity lines.

In fact, business is so good for the San Francisco-based broker’s banking subsidiary that its chief executive, Richard F. Kenny, amended the unit’s three-year business plan for federal bank regulators in October.

“You get a sense of the trajectory” of the bank’s revenue growth, he says. “We were pretty surprised. We’re amending the plan, and our amendment is quite big.”

The bank, which is already winning rave reviews from some financial advisers, is also planning to bolster its efforts to appeal to them with more sophisticated loans.

To be sure, the unit represents a fraction of Schwab’s total profits, which amounted to $126 million during the third quarter.

It also faces intense competition from other brokers who have a head start in the banking business, including Merrill Lynch & Co. Inc. and TD Waterhouse Group Inc. both of New York. E*Trade Group Inc. of Menlo Park, Calif., also offers banking services to its brokerage customers.

“They’re going to come up against reality checks sooner than later,” says James M. Schutz, senior bank analyst with Sterne Agee & Leach Inc. of Birmingham, Ala., speaking of Schwab’s efforts.

Schwab’s bank is essentially a two-trick pony, critics say. By pushing mortgages during a refinancing boom and certificates of deposits during an income drought, the bank has proved itself to be Johnny on the spot. Eventually, customers will expect more-sophisticated lending capabilities from Schwab.

“What kind of assets are they putting on their balance sheet?” asks Jon D. Holtaway, a banking consultant with Xerxes Financial Consultants LLC in Springfield, Va. “The [loan] side of the balance sheet is the key for making a success of this kind of operation.”

“I think Schwab would need to go out and buy a lending business,” he adds.

Mr. Kenny, who headed Citibank Korea’s retail branch sales and service from 1995 to 2000, agrees that Schwab will to need to provide customers far more services and products to fulfill its destiny as a national banking force, but he says he needs to stay with a deliberate approach.

“The challenge is always keeping it in balance,” Mr. Kenny says. “I would not disagree that it’s important to grow the lending operation at a reasonable rate.”

He adds that Schwab’s next offering will be interest-only mortgages, which he plans to launch in the first quarter of 2004. So far, 10% of Schwab’s advisers have completed a loan with customers, he says.

Pressure is on

Schwab is getting plenty of pressure from the financial advisers who keep custody assets there.

Ellen D. Crowley, principal with Financial Management Partners in St. Louis, which has $300 million under management, says she is satisfied with Schwab now that its banking services are adequate to prevent brokers for Merrill Lynch from taking business from her.

She lost $1 million from an account for that reason last year, which she has since regained.

“I haven’t had to fight that battle in nine months,” Ms. Crowley says.

Jim Boucher, portfolio manager with SDR Capital Management Inc. in San Francisco, says he is also pleased by the quick progress Schwab Bank has made. He likes having this new power to make his clients happy, even though he doesn’t get paid directly for it.

“A loan is a very important part of the asset liability mix,” Mr. Boucher says.

Mr. Boucher, whose firm manages $500 million, says he just helped a client procure a mortgage for a client who was frustrated with a regional bank. The key, he says, was a three-way 40-minute conversation he had with his client and the Schwab banker.

“It’s not a poor use of my time,” he says.

Related Topics: Charles Schwab Corp.