10-QPeriod: Q3 FY2009

SCHWAB CHARLES CORP Quarterly Report for Q3 Ended Sep 30, 2009

Filed November 5, 2009For Securities:SCHWSCHW-PDSCHW-PJ

Summary

The Charles Schwab Corporation (SCHW) reported a decrease in net revenues for the third quarter and first nine months of 2009 compared to the same periods in 2008, primarily driven by lower asset management and administration fees and net interest revenue. This was partly due to money market mutual fund fee waivers and a challenging low-interest-rate environment. Despite revenue declines, the company managed expenses effectively, leading to a solid pre-tax profit margin. Client assets under management grew modestly, and the company continued to attract new client assets, indicating resilience in client engagement. However, the company is facing ongoing legal and regulatory challenges, notably related to auction rate securities and the YieldPlus Fund, which could lead to material financial impacts. Financially, the company showed an increase in cash and cash equivalents and maintained strong regulatory capital ratios, particularly for Schwab Bank, which was considered well-capitalized. The balance sheet also reflects an increase in long-term debt, largely due to new debt issuance. Investors should note the continued impact of the economic environment on revenue streams and the significant contingent liabilities from litigation and regulatory actions.

Financial Highlights

39 data points
Beta

Revenue

$1.01B

Net Income

$200.00M

19.8% Net Margin

EPS (Diluted)

$0.17

Total Assets

$67.98B

Cash & Equivalents

$8.12B

Free Cash Flow

-$445.00M

Financial Statements
Beta
Revenue$1.01B
Operating Income$623.00M
Interest Expense$62.00M
Net Income$200.00M
EPS (Basic)$0.17
EPS (Diluted)$0.17
Shares Outstanding (Basic)1.16B
Shares Outstanding (Diluted)1.16B

Key Highlights

  • 1Net revenues decreased by 19% year-over-year in Q3 2009 and 17% for the first nine months, primarily due to lower asset management fees (impacted by fee waivers) and net interest revenue (due to the low-rate environment).
  • 2Income from continuing operations declined by 34% in Q3 and 32% year-to-date, reflecting lower revenues.
  • 3Total client assets grew 5% year-over-year to $1.36 trillion, and the company attracted $19.9 billion in net new client assets in Q3.
  • 4Expenses excluding interest decreased by 8% in Q3 and 6% year-to-date, demonstrating effective cost management.
  • 5Schwab Bank maintained its 'well capitalized' status with strong Tier 1 capital and leverage ratios.
  • 6The company reported significant unrealized losses on securities available for sale, particularly in non-agency residential mortgage-backed securities, totaling $643 million.
  • 7Significant ongoing legal and regulatory matters, including inquiries regarding auction rate securities and class-action lawsuits concerning the YieldPlus Fund, pose potential financial risks.

Frequently Asked Questions

The challenging market conditions, including declines in home valuations and continued tight credit markets, along with a persistent low-interest-rate environment, negatively impacted Schwab's revenues. Specifically, asset management and administration fees were reduced by money market mutual fund fee waivers, and net interest revenue declined due to lower interest rates. While client trading activity slowed modestly, the company successfully attracted new client assets and maintained overall client asset levels.

Schwab holds significant investments in residential mortgage-backed securities, totaling $13.8 billion at September 30, 2009. The company recognized net impairment charges of $11 million in Q3 and $38 million year-to-date on certain non-agency residential mortgage-backed securities due to credit deterioration. There were unrealized losses of $643 million on securities available for sale, concentrated in non-agency residential mortgage-backed securities, some of which are collateralized by Alt-A loans.

Yes, Schwab is involved in several significant legal and regulatory matters. These include industry-wide inquiries from regulators regarding the sale of auction rate securities, and class-action lawsuits concerning the Schwab YieldPlus Fund, which has led to Wells notices from the SEC and FINRA. The company is unable to estimate the potential financial impact of these matters, but they could be material to operating results for a particular future period.

Schwab has demonstrated effective cost management, with expenses excluding interest decreasing by 8% in Q3 and 6% year-to-date. This was achieved through reductions in compensation and benefits, professional services, and advertising expenses, among others. These expense controls helped mitigate the impact of lower revenues, contributing to a pre-tax profit margin of 31.7% in Q3 2009.