10-QPeriod: Q3 FY2010

SCHWAB CHARLES CORP Quarterly Report for Q3 Ended Sep 30, 2010

Filed November 8, 2010For Securities:SCHWSCHW-PDSCHW-PJ

Summary

The Charles Schwab Corporation (SCHW) reported its financial results for the quarter ended September 30, 2010. The company saw a modest increase in net revenues of 5% year-over-year, reaching $1,063 million, primarily driven by growth in net interest revenue and asset management fees. However, net income declined significantly by 38% to $124 million, largely due to increased expenses, including substantial charges for a class action litigation reserve related to the Schwab YieldPlus Fund and money market mutual fund losses. Despite the drop in profitability, key client activity metrics remained strong, with net new client assets totaling $14.6 billion and total client assets reaching $1.47 trillion, an 8% increase from the prior year. The company's balance sheet also strengthened, with total assets increasing to $87.3 billion and total liabilities growing to $81.3 billion, largely due to an increase in deposits from banking clients. Schwab Bank maintained its 'well capitalized' status, indicating a solid financial foundation.

Financial Highlights

37 data points
Beta

Revenue

$1.06B

Net Income

$124.00M

11.7% Net Margin

EPS (Diluted)

$0.10

Total Assets

$87.30B

Cash & Equivalents

$5.70B

Free Cash Flow

$138.00M

Financial Statements
Beta
Revenue$1.06B
Interest Expense$55.00M
Net Income$124.00M
EPS (Basic)$0.10
EPS (Diluted)$0.10
Shares Outstanding (Basic)1.19B
Shares Outstanding (Diluted)1.19B

Key Highlights

  • 1Net revenues increased by 5% to $1,063 million, driven by higher net interest revenue and asset management fees.
  • 2Net income decreased by 38% to $124 million, impacted by significant one-time charges related to litigation reserves and money market fund losses.
  • 3Total client assets grew 8% year-over-year to $1.47 trillion, reflecting continued client trust and asset growth.
  • 4Net new client assets were $14.6 billion for the quarter, demonstrating ongoing client acquisition.
  • 5Deposits from banking clients saw a substantial increase of approximately $10 billion, bolstering the company's funding base.
  • 6Schwab Bank maintained its 'well capitalized' regulatory status, indicating strong capital adequacy.
  • 7The company issued $700 million in Senior Notes during the quarter to support balance sheet growth.

Frequently Asked Questions

The significant decrease in net income was primarily due to substantial charges recognized during the quarter. These included a $132 million charge related to covering losses in Schwab money market mutual funds from a 2008 default and a $196 million reserve for the Schwab YieldPlus Fund class action litigation, which was accrued in the first quarter but impacted the nine-month results.

Asset management and administration fees increased by 4% to $468 million for the quarter, driven by higher investment management and trust fees and increased asset valuations. However, this was partially offset by money market mutual fund fee waivers, which were $93 million in the quarter, up from $78 million in the prior year, reflecting the low interest rate environment.

The low interest rate environment is constraining net interest revenue growth. While higher average balances of interest-earning assets provided some offset, the overall yields on these assets declined. The company is also incurring increased money market mutual fund fee waivers to maintain positive returns for clients, which reduces asset management fees.

The company's liquidity appears robust, with strong deposit growth and well-capitalized banking operations. Schwab Bank remains 'well capitalized' by regulatory standards. The company also completed an equity offering in January 2010 and issued $700 million in Senior Notes in the third quarter to support balance sheet growth and liquidity.