10-QPeriod: Q2 FY2013

SCHWAB CHARLES CORP Quarterly Report for Q2 Ended Jun 30, 2013

Filed August 6, 2013For Securities:SCHWSCHW-PDSCHW-PJ

Summary

The Charles Schwab Corporation's (SCHW) Q2 2013 report shows steady revenue growth driven by asset management and administration fees, and net interest revenue, despite a slight decrease in net income compared to the prior year. This dip in net income was primarily influenced by a significant year-over-year increase in compensation and benefits expenses, as well as the absence of a large vendor dispute resolution gain from Q2 2012. The company demonstrated strong client asset growth and account acquisition, indicating positive business momentum. Financially, SCHW maintained robust client assets at over $2 trillion and expanded its new brokerage accounts. The company's balance sheet remains strong, with significant levels of cash and investments, and well-capitalized banking and broker-dealer subsidiaries. Management highlighted ongoing efforts to manage interest rate sensitivity and navigate the current low-interest-rate environment, while also addressing regulatory changes and potential market risks.

Financial Highlights

37 data points
Beta

Revenue

$1.34B

Net Income

$256.00M

19.1% Net Margin

EPS (Diluted)

$0.18

Total Assets

$135.91B

Cash & Equivalents

$6.23B

Free Cash Flow

$470.00M

Financial Statements
Beta
Revenue$1.34B
Interest Expense$26.00M
Net Income$256.00M
EPS (Basic)$0.18
EPS (Diluted)$0.18
Shares Outstanding (Basic)1.28B
Shares Outstanding (Diluted)1.29B

Key Highlights

  • 1Net revenues increased by 4% to $1,337 million in Q2 2013 compared to Q2 2012, driven by growth in asset management and administration fees (+15%) and net interest revenue (+3%).
  • 2Net income available to common stockholders decreased by 11% to $233 million in Q2 2013, impacted by higher operating expenses, particularly compensation and benefits, and the absence of a prior year gain.
  • 3Total client assets reached $2,050.9 billion, an increase of 14% year-over-year, demonstrating continued client trust and asset gathering capabilities.
  • 4New brokerage accounts grew by 10% to 243,000 in Q2 2013, indicating successful client acquisition efforts.
  • 5The company's banking subsidiary, Schwab Bank, remains well-capitalized, exceeding all regulatory requirements.
  • 6Subsequent to the quarter, on July 25, 2013, SCHW issued $275 million in Senior Notes maturing in 2018 with a 2.20% interest rate.
  • 7Operating expenses excluding interest rose by 9% in Q2 2013, mainly due to increased compensation and benefits, advertising, and professional services costs.

Frequently Asked Questions

Net revenues increased by 4% to $1,337 million in Q2 2013 compared to Q2 2012. This growth was primarily driven by a 15% increase in asset management and administration fees and a 3% increase in net interest revenue. These increases were partially offset by a decrease in 'Other' revenue, largely due to the absence of a significant vendor dispute resolution gain recorded in the prior year's second quarter.

Net income available to common stockholders decreased by 11% to $233 million in Q2 2013. This decline was primarily due to a 9% increase in operating expenses excluding interest. Specifically, compensation and benefits expenses rose significantly, influenced by a new incentive compensation payout schedule and increased sales volume, along with higher advertising and professional services costs. The prior year's results also benefited from a $70 million pre-tax gain from a vendor dispute resolution, which was not present in Q2 2013.

The company actively manages its interest rate risk through simulation models and by monitoring its net interest margin and the average maturity of its interest-earning assets and funding sources. While the majority of its assets and liabilities are sensitive to short-term rates, management aims to structure its portfolios to benefit from rising rates and mitigate negative impacts from falling rates. The current low-interest-rate environment is noted as a constraint on reducing interest expense, and simulations indicate a potential decrease in net interest revenue with a 100 basis point drop in rates, but an increase with a 100 basis point rise. The company has not breached its sensitivity guidelines.

The company's banking subsidiary, Schwab Bank, remains well-capitalized, exceeding all regulatory minimums and classified in the highest 'well capitalized' category. Similarly, the broker-dealer subsidiaries, Schwab and optionsXpress, Inc., comply with net capital requirements. The parent company, CSC, also maintains adequate capital and liquidity to support its subsidiaries and meets its target Tier 1 Leverage Ratio.