10-QPeriod: Q2 FY2012

SCHWAB CHARLES CORP Quarterly Report for Q2 Ended Jun 30, 2012

Filed August 6, 2012For Securities:SCHWSCHW-PDSCHW-PJ

Summary

The Charles Schwab Corporation (SCHW) reported its financial results for the quarter and six months ended June 30, 2012. The company demonstrated resilience in a challenging market, with net revenues increasing by 8% year-over-year in the second quarter to $1.28 billion, driven by growth in trading and other revenues. Net income for the quarter also saw a significant increase of 16% to $275 million, boosted by a one-time gain from a vendor dispute resolution. Despite a slight decrease in asset management and administration fees and relatively flat net interest revenue due to the persistent low interest rate environment, the company managed expenses effectively, with a 6% increase excluding interest, largely due to the integration of optionsXpress. For the first half of the year, net revenues grew 3% to $2.47 billion, while net income slightly decreased by 2% to $470 million, impacted by higher net impairment losses on certain mortgage-backed securities. However, the company's client engagement remained strong, with net new client assets up 43% year-over-year for the first half to $54.9 billion and total client assets reaching $1.8 trillion. Schwab Bank maintained its "well capitalized" status, and both major broker-dealer subsidiaries met regulatory capital requirements, underscoring the company's stable financial condition.

Financial Highlights

37 data points
Beta

Revenue

$1.28B

Net Income

$275.00M

21.4% Net Margin

EPS (Diluted)

$0.20

Total Assets

$111.82B

Cash & Equivalents

$8.09B

Free Cash Flow

-$364.00M

Financial Statements
Beta
Revenue$1.28B
Interest Expense$39.00M
Net Income$275.00M
EPS (Basic)$0.20
EPS (Diluted)$0.20
Shares Outstanding (Basic)1.27B
Shares Outstanding (Diluted)1.27B

Key Highlights

  • 1Net revenues increased 8% to $1.28 billion in Q2 2012 compared to Q2 2011.
  • 2Net income rose 16% to $275 million in Q2 2012 compared to Q2 2011, aided by a $70 million pre-tax gain from a vendor dispute.
  • 3Net new client assets grew significantly, up 43% year-over-year for the first six months of 2012 to $54.9 billion.
  • 4Total client assets reached $1.80 trillion as of June 30, 2012, a 9% increase year-over-year.
  • 5Expenses excluding interest increased 6% in Q2 2012, primarily due to the inclusion of optionsXpress expenses.
  • 6Schwab Bank maintained its "well capitalized" regulatory status.
  • 7Net impairment losses on securities increased significantly in the first six months of 2012, primarily due to credit deterioration in non-agency residential mortgage-backed securities.

Frequently Asked Questions

Revenue growth in the second quarter of 2012 was primarily driven by increases in trading revenue, due to higher daily average revenue trades including those from the acquired optionsXpress business, and 'Other' revenue, which included a significant pre-tax gain of $70 million from the resolution of a vendor dispute.

The persistent low interest rate environment continued to constrain net interest revenue. While higher average balances of interest-earning assets helped offset this to some extent, lower interest rate spreads compressed profitability. This also impacted asset management fees, particularly for money market funds, where yields remained low and the company waived some fees to maintain positive returns for clients.

The acquisition of optionsXpress, completed in September 2011, contributed to revenue growth, particularly in trading revenue, due to higher daily average revenue trades, including option and future trades. However, it also led to an increase in expenses, primarily in compensation, benefits, depreciation, and amortization, impacting overall profitability.

The filing mentions net impairment losses on certain non-agency residential mortgage-backed securities due to credit deterioration, which increased in the first half of 2012. The company is also involved in legal proceedings and regulatory matters, including those related to Auction Rate Securities and optionsXpress, though it believes it has strong defenses. The company also has exposure to market and credit risks, particularly related to its investment securities and loan portfolios.