10-QPeriod: Q1 FY2009

SCHWAB CHARLES CORP Quarterly Report for Q1 Ended Mar 31, 2009

Filed May 7, 2009For Securities:SCHWSCHW-PDSCHW-PJ

Summary

The Charles Schwab Corporation reported a decrease in net income for the first quarter of 2009 compared to the same period in 2008. Net income was $218 million ($0.19 per diluted share) in Q1 2009, down from $305 million ($0.26 per diluted share) in Q1 2008. This decline was primarily driven by lower net revenues, which fell 15% year-over-year to $1.11 billion, largely due to a decrease in asset management and administration fees and net interest revenue. The challenging market environment, characterized by depressed equity valuations and a low-interest-rate environment, significantly impacted revenue streams. Despite the revenue decline, the company managed to reduce expenses excluding interest by 5% through cost-saving measures, including severance and facilities charges. The company's balance sheet remained robust, with total assets increasing to $54.9 billion from $51.7 billion at the end of 2008. Schwab Bank also maintained its 'well capitalized' status. Investors should note the ongoing impact of market conditions on fee-based revenues and net interest income, as well as the potential for further impairment charges on certain mortgage-backed securities.

Financial Highlights

23 data points
Beta

Revenue

$1.11B

Net Income

$218.00M

19.6% Net Margin

EPS (Diluted)

$0.19

Cash & Equivalents

$6.54B

Free Cash Flow

$127.00M

Financial Statements
Beta
Revenue$1.11B
Interest Expense$40.00M
Net Income$218.00M
EPS (Basic)$0.19
EPS (Diluted)$0.19
Shares Outstanding (Diluted)1.16B

Key Highlights

  • 1Net income decreased by 29% to $218 million in Q1 2009 from $305 million in Q1 2008.
  • 2Diluted EPS fell to $0.19 in Q1 2009 from $0.26 in Q1 2008.
  • 3Total net revenues declined 15% to $1.11 billion, primarily due to lower asset management fees and net interest revenue.
  • 4Expenses excluding interest decreased by 5% to $756 million, reflecting cost reduction efforts.
  • 5Total assets grew to $54.9 billion as of March 31, 2009, from $51.7 billion as of December 31, 2008.
  • 6The company recorded $14 million in net impairment losses on securities, mainly related to mortgage-backed securities.
  • 7Schwab Bank maintained its 'well capitalized' regulatory status.

Frequently Asked Questions

The primary driver for the decrease in net income was lower net revenues. Asset management and administration fees declined due to lower equity valuations, and net interest revenue decreased significantly due to the persistent low-interest-rate environment. While expenses were managed, the revenue decline more than offset these savings.

The challenging market environment, including depressed equity valuations and low interest rates, directly impacted Schwab's revenue streams. Lower equity valuations reduced asset management and administration fees, while the low-interest-rate environment compressed net interest revenue. Client engagement remained high with an increase in daily average trades, but net new client assets decreased.

The company has exposure to mortgage-backed securities, particularly non-agency residential mortgage-backed securities, some of which are collateralized by 'Alt-A' loans. In the first quarter of 2009, Schwab recorded $14 million in impairment charges due to credit deterioration in these securities. Management indicated that further deterioration could lead to additional impairment charges.

The company's balance sheet remains strong, with total assets increasing to $54.9 billion. Schwab Bank maintained its 'well capitalized' regulatory status. The company has various credit facilities in place to manage liquidity needs, and its capital ratios remain strong, meeting regulatory requirements.