updated 10/15/2004 12:06:04 PM ET 2004-10-15T16:06:04

Slumping stock broker Charles Schwab Corp. suffered a third-quarter loss of $41 million, reflecting the costs of an expansion gone awry.

The loss of 3 cents per share, reported Friday, represents yet another setback for the San Francisco-based company, which has been in a financial funk for nearly four years. The results for the three months ended in September contrasted with a profit of $127 million, or 9 cents per share, at the same time last year.

Revenue for the period totaled $1 billion compared to $997 million last year.

Schwab attributed the poor quarter to a $70 million charge to account for a recent spate of cutbacks as well as $87 million in losses from its capital markets division, which the company is in the process of selling at a discounted price.

If not for those items, Schwab said it would have earned 8 cents per share. That figure still was a penny below the mean estimate among analysts surveyed by Thomson First Call.

Investors apparently were braced for worst. Schwab's shares gained 25 cents to $8.72 during Friday's trading on the New York Stock Exchange.

The quarter was the brokerage's first since founder Charles Schwab returned as chief executive. The company's board demanded the resignation of Schwab's longtime partner, David Pottruck, in July after concluding he had been leading the brokerage in the wrong direction.

The missteps included a rapid buildup of Schwab's work force that has been haunting the company for years and a series of other moves that haven't panned out.

Since taking over, Schwab has moved aggressively to repair some of the problems by closing branches, laying off more employees, cutting prices and agreeing to sell the capital markets division less than a year after completing a $340 million acquisition to expand the business.

The company is selling the capital markets division to Swiss banking giant UBS AG for $265 million — a deal that will result in another $75 million charge when it closes later in the fourth quarter.

Schwab also expects to absorb another $40 million in fourth-quarter charges to pay for further streamlining that will include another 400 to 500 job cuts, according to Christopher Dodds, the company's chief financial officer.

"It's very difficult to say goodbye, but it's necessary to lay the groundwork for improved performance," Dodds said during a Friday interview.

Schwab ended September with 14,800 employees, a 9 percent reduction from 16,300 workers at the end of June. At its peak in late 2000, Schwab employed more than 26,000 workers.

After all the cost cutting is done, Schwab expects its annual expenses to decline by about $275 million, enabling the brokerage to pay for a recent round of price reductions designed to spur more stock trading.

The company collected an average of $26.09 per trade in the third quarter, down 29 percent from an average of $36.96 at the same time last year. The price cuts didn't generate more activity during the summer, traditionally a sluggish time in the stock market. The brokerage averaged 128,100 revenue-generating daily trades in the quarter, a 12 percent decline from 145,100 last year.

Management blamed the trading downturn on jitters about high oil prices, as well as uncertainties about the war in Iraq and upcoming presidential election.

"We have seen some very challenging conditions throughout the industry," Dodds said. "We are disappointed with our reported results, but we are encouraged by the signs of progress we are seeing."

The third-quarter positives included $801 million in non-trading revenue — the most Schwab has ever generated from fees and other income sources during a three-month period. Current and new customers also brought in an additional $10.9 billion during the quarter while the rate of brokerage account defections declined.

Schwab's customers also seemed more interested in the stock market in early October, with the brokerage's daily trades averaging 148,000 during the first nine days of the month. That was up from an average of 132,500 daily trades last month, but volume still lagged the average volume of 156,000 daily trades in October 2003.

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