10-QPeriod: Q1 FY2011

SCHWAB CHARLES CORP Quarterly Report for Q1 Ended Mar 31, 2011

Filed May 6, 2011For Securities:SCHWSCHW-PDSCHW-PJ

Summary

Charles Schwab Corporation (SCHW) reported strong financial results for the first quarter ended March 31, 2011, with a significant increase in net income to $243 million, a substantial improvement from $6 million in the prior year's quarter. This robust performance was driven by a 23% rise in total net revenues, reaching $1.21 billion, fueled by growth across all major revenue streams: asset management and administration fees, net interest revenue, and trading revenue. Key factors contributing to this success include higher client asset valuations, continued asset inflows, and increased client trading activity, with daily average trades reaching a nine-quarter high. The company also saw a significant reduction in expenses, largely due to the absence of a large class action litigation reserve that impacted the prior year's first quarter. The company announced a definitive agreement to acquire optionsXpress Holdings, Inc. for approximately $1.0 billion, a strategic move expected to close in the third quarter of 2011.

Financial Highlights

36 data points
Beta

Revenue

$1.21B

Net Income

$243.00M

20.1% Net Margin

EPS (Diluted)

$0.20

Total Assets

$94.88B

Cash & Equivalents

$5.55B

Free Cash Flow

$1.26B

Financial Statements
Beta
Revenue$1.21B
Interest Expense$45.00M
Net Income$243.00M
EPS (Basic)$0.20
EPS (Diluted)$0.20
Shares Outstanding (Basic)1.20B
Shares Outstanding (Diluted)1.21B

Key Highlights

  • 1Net income surged to $243 million for Q1 2011, a dramatic increase from $6 million in Q1 2010.
  • 2Total net revenues grew by 23% year-over-year to $1.21 billion, driven by strong performance in asset management, net interest, and trading revenues.
  • 3Client assets under management reached $1.65 trillion, an increase of 10% year-over-year.
  • 4Daily average client trades were up 14% year-over-year to 472,500, the highest level in nine quarters.
  • 5Expenses excluding interest decreased by 16% primarily due to the absence of a $196 million class action litigation reserve recorded in Q1 2010.
  • 6The company announced an agreement to acquire optionsXpress for approximately $1.0 billion in stock, expected to close in Q3 2011.
  • 7Schwab Bank maintained its 'well capitalized' regulatory status.

Frequently Asked Questions

The primary driver of the substantial increase in net income from $6 million in Q1 2010 to $243 million in Q1 2011 was a combination of a 23% increase in total net revenues and a 16% decrease in expenses excluding interest. The revenue growth was fueled by higher client asset valuations, increased trading volumes, and improved net interest revenue. The expense reduction was largely due to the absence of a significant one-time charge related to a class action litigation reserve that was recorded in the prior year's quarter.

Client engagement shows positive trends. Net new client assets totaled $23.0 billion in the quarter, and total client assets reached $1.65 trillion, up 10% year-over-year. Furthermore, clients' daily average trades increased by 14% year-over-year to 472,500, representing the highest volume in nine quarters, indicating increased client activity and confidence.

The acquisition of optionsXpress, an online brokerage firm focused on equity options and futures, is a strategic move to expand Schwab's offerings in active trading and options-focused client segments. Valued at approximately $1.0 billion in stock, the deal is expected to enhance Schwab's market position and product suite, though it is subject to regulatory and shareholder approvals.

The current low interest rate environment continues to constrain net interest revenue growth, even with rising asset balances. While net interest revenue increased by 28% year-over-year primarily due to higher average balances, the low rates limit the company's ability to increase yields on its assets faster than the cost of its funding. The company's simulation models indicate that a 100 basis point decrease in rates could negatively impact net interest revenue, while a 100 basis point increase would be beneficial.