Are the company's client assets and client acquisition efforts still strong?

Yes, despite the decline in net income, key client activity metrics demonstrate continued strength. Total client assets reached a record $1.49 trillion by the end of the quarter, representing a 36% increase year-over-year. Additionally, net new client assets were a robust $23.3 billion, indicating ongoing success in attracting and retaining clients.

What is the nature of the litigation reserve and what are its implications?

The $196 million reserve was established to address a class action lawsuit related to the Schwab YieldPlus Fund. The company has accrued this reserve, reflecting a preliminary settlement of plaintiffs' state and federal claims, though the settlement is still subject to court approval. This litigation has had a material negative impact on the company's earnings for the quarter and highlights a significant contingent liability.

How is the company's investment portfolio performing, particularly concerning unrealized losses?

The company's portfolio of 'securities available for sale' had unrealized losses of $430 million, and 'securities held to maturity' had unrealized losses of $20 million as of March 31, 2010. These losses were primarily concentrated in non-agency residential mortgage-backed securities, with a portion of these being 'Alt-A' securities. The company continues to monitor these positions closely for other-than-temporary impairments.

SCHWAB CHARLES CORP 10-Q Quarterly Report Q1 FY2010

Q: What caused the significant drop in net income compared to the prior year?

The primary driver for the sharp decline in net income from $218 million in Q1 2009 to $6 million in Q1 2010 was a substantial increase in expenses. A significant factor was the recognition of a $196 million class action litigation reserve related to the Schwab YieldPlus Fund, which heavily impacted the 'Expenses Excluding Interest' category. While revenues also decreased, the surge in expenses had a more pronounced negative effect on profitability.

Summary

This filing for The Charles Schwab Corporation (SCHW) for the quarter ending March 31, 2010, reveals a significant shift in profitability compared to the previous year. Net income dropped dramatically from $218 million in Q1 2009 to just $6 million in Q1 2010. This decline was primarily driven by a substantial increase in expenses, most notably a $196 million class action litigation reserve related to the Schwab YieldPlus Fund, which heavily impacted the "Expenses Excluding Interest" category. While net revenues saw a decrease of 12% year-over-year, largely due to lower asset management and administration fees (exacerbated by money market mutual fund fee waivers) and reduced trading revenue, the surge in expenses overshadowed any revenue resilience. Despite the sharp decline in net income, key client activity metrics remained strong. Net new client assets were $23.3 billion, and total client assets reached a record $1.49 trillion, reflecting continued client trust and market recovery. The company also successfully completed a $543 million common stock offering in January 2010 to support balance sheet growth. Investors should closely monitor the ongoing litigation and regulatory matters, as they are a significant factor impacting current financial performance and future profitability.

Financial Highlights

34 data points

Beta

Revenue

$978.00M

Net Income

$6.00M

0.0% Net Margin

Total Assets

$78.34B

Cash & Equivalents

$6.29B

Free Cash Flow

-$618.00M

Financial Statements

Beta

Revenue	$978.00M
Interest Expense	$51.00M
Net Income	$6.00M
Shares Outstanding (Basic)	1.18B
Shares Outstanding (Diluted)	1.19B

Key Highlights

1Net income plummeted by 97% year-over-year, from $218 million to $6 million, largely due to a significant increase in expenses.
2Expenses excluding interest surged by 28%, driven primarily by a $196 million class action litigation reserve for the Schwab YieldPlus Fund.
3Total net revenues decreased by 12% to $978 million, with asset management and administration fees down 16% and trading revenue down 19%.
4Despite revenue and profit declines, client assets reached a record $1.49 trillion, up 36% year-over-year, and net new client assets were a strong $23.3 billion.
5The company completed a $543 million common stock offering in January 2010 to bolster its balance sheet.
6Securities available for sale and held to maturity showed unrealized losses totaling $430 million and $20 million, respectively, with a concentration in non-agency residential mortgage-backed securities.
7Schwab Bank maintained its 'well capitalized' status according to regulatory guidelines.

SCHWAB CHARLES CORP Quarterly Report for Q1 Ended Mar 31, 2010

Summary

Financial Highlights

Key Highlights

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