10-QPeriod: Q3 FY2008

SCHWAB CHARLES CORP Quarterly Report for Q3 Ended Sep 30, 2008

Filed November 6, 2008For Securities:SCHWSCHW-PDSCHW-PJ

Summary

Charles Schwab Corporation (SCHW) reported its third-quarter 2008 financial results amidst a challenging economic environment marked by significant market volatility. Total net revenues for the quarter were $1.251 billion, a slight decrease of 3% compared to the prior year's third quarter, impacted by a decline in asset management and administration fees and a notable negative "Other" revenue line item driven by investment losses. However, net interest revenue and trading revenue showed increases. Expenses excluding interest were managed down by 3%, demonstrating expense discipline. Income from continuing operations was $304 million, a decrease of 6% year-over-year, resulting in diluted EPS of $0.26. The company experienced a decrease in net new client assets of 35% year-over-year, reflecting market conditions, though client assets under management remained substantial at $1.305 trillion. Trading volumes saw an increase, indicating continued client engagement. The company's banking subsidiary, Schwab Bank, maintained its well-capitalized status. Despite the difficult market, Schwab's diversified business model and focus on expense control helped navigate the quarter, though the outlook for the remainder of 2008 and into 2009 remains subject to significant market uncertainty.

Financial Highlights

26 data points
Beta

Revenue

$1.25B

Net Income

$304.00M

24.3% Net Margin

EPS (Diluted)

$0.26

Cash & Equivalents

$5.32B

Free Cash Flow

-$535.00M

Financial Statements
Beta
Revenue$1.25B
Operating Income$922.00M
Interest Expense$50.00M
Net Income$304.00M
EPS (Basic)$0.26
EPS (Diluted)$0.26
Shares Outstanding (Diluted)1.16B

Key Highlights

  • 1Total net revenues for Q3 2008 were $1.251 billion, a 3% decrease year-over-year, impacted by market conditions.
  • 2Income from continuing operations was $304 million, down 6% from Q3 2007, with diluted EPS of $0.26.
  • 3Expenses excluding interest decreased by 3% year-over-year, showcasing expense management.
  • 4Net new client assets decreased by 35% to $24.4 billion in Q3 2008, reflecting market deterioration.
  • 5Total client assets stood at $1.305 trillion at the end of Q3 2008, down 9% from the prior year.
  • 6Client daily average trades increased by 14% year-over-year, indicating active client engagement.
  • 7Schwab Bank maintained its 'well capitalized' regulatory status.

Frequently Asked Questions

The decrease in 'Other' revenue was primarily due to losses of $73 million recognized on two corporate debt securities within the company's securities available for sale portfolio. Specifically, this included an other-than-temporary impairment charge of $44 million on debt securities issued by Lehman Brothers following its bankruptcy filing, and a $29 million loss from the sale of debt securities issued by Washington Mutual Bank.

The volatile market conditions led to a 9% decrease in total client assets to $1.305 trillion by the end of Q3 2008. Net new client assets also declined by 35% year-over-year to $24.4 billion, reflecting lower asset valuations and market sentiment. However, clients remained actively engaged, as evidenced by a 14% increase in daily average trades compared to the prior year.

The company acknowledges the extraordinary market conditions and significant volatility. While it has demonstrated expense discipline and maintained a strong capital position, it notes that further declines in interest rates and equity markets will continue to pressure net interest revenue and asset management fees. The company anticipates that earnings and its stock price may continue to be subject to significant volatility.

Schwab Bank maintained its 'well capitalized' status as per banking regulatory guidelines at September 30, 2008. Its Tier 1 Capital ratio was 16.0% and Total Capital ratio was 16.2%, both significantly above the minimum requirements.