10-QPeriod: Q3 FY2013

SCHWAB CHARLES CORP Quarterly Report for Q3 Ended Sep 30, 2013

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

Summary

Charles Schwab Corporation (SCHW) reported solid financial results for the third quarter and the first nine months of 2013, demonstrating revenue growth and improved profitability. Net revenues increased by 15% year-over-year in the third quarter, driven by strong performance across asset management and administration fees, net interest revenue, and trading revenue. This top-line growth translated into a 17% increase in net income for the quarter. The company also saw significant growth in client activity metrics, with net new client assets up 97% year-over-year in Q3, reaching a record high for the period, and total client assets climbing to $2.15 trillion. Expenses, excluding interest, also rose but at a slower pace than revenues, leading to an expansion in the pre-tax profit margin to 33.8% in Q3. The company maintained a strong capital position, with Schwab Bank being considered "well capitalized" by regulatory standards. Despite a challenging low-interest-rate environment that continues to put pressure on net interest margins, Schwab demonstrated resilience through increased asset volumes and strategic fee management. The company also provided updates on ongoing legal matters and upcoming regulatory changes, none of which are expected to materially impact its financial condition in the near term.

Financial Highlights

38 data points
Beta

Revenue

$1.37B

Net Income

$290.00M

21.1% Net Margin

EPS (Diluted)

$0.22

Total Assets

$140.21B

Cash & Equivalents

$7.36B

Free Cash Flow

$596.00M

Financial Statements
Beta
Revenue$1.37B
Interest Expense$25.00M
Net Income$290.00M
EPS (Basic)$0.22
EPS (Diluted)$0.22
Shares Outstanding (Basic)1.29B
Shares Outstanding (Diluted)1.30B

Key Highlights

  • 1Total net revenues increased by 15% to $1.373 billion in Q3 2013 compared to $1.196 billion in Q3 2012.
  • 2Net income available to common stockholders grew by 18% to $282 million in Q3 2013 from $238 million in Q3 2012.
  • 3Diluted earnings per common share rose to $0.22 in Q3 2013, up from $0.19 in Q3 2012.
  • 4Net new client assets increased significantly by 97% to $42.8 billion in Q3 2013 compared to the prior year quarter, reaching a record for the period.
  • 5Total client assets grew to $2.15 trillion as of September 30, 2013, a 13% increase year-over-year.
  • 6Schwab Bank maintained its "well capitalized" status with strong regulatory capital ratios.
  • 7Expenses excluding interest increased by 9% in Q3 2013, growing at a slower pace than net revenues, which improved the pre-tax profit margin.

Frequently Asked Questions

Revenue growth in Q3 2013 was primarily driven by increases in asset management and administration fees (up 11%), net interest revenue (up 15%), and trading revenue (up 10%). This was supported by higher client assets under management, increased balances of interest-earning assets, and higher daily average revenue trades.

The low interest rate environment is constraining net interest revenue and putting pressure on the net interest margin. While increased balances of interest-earning assets helped offset some of this impact, the company noted that it limits the extent to which it can reduce interest expense paid on funding sources. Additionally, yields on some money market mutual funds remain at or below management fees, potentially impacting asset management fees.

Charles Schwab Corporation and its subsidiary Schwab Bank maintained strong capital positions. Schwab Bank was considered "well capitalized" by banking regulatory guidelines, exceeding minimum capital requirements across Tier 1 Risk-Based Capital, Total Risk-Based Capital, and Tier 1 Leverage ratios. The company also noted its compliance with net capital rules for its broker-dealer subsidiaries.

The company is involved in ongoing legal proceedings, including an appeal related to auction rate securities regulatory inquiries and a class action lawsuit concerning the Schwab Total Bond Market Fund. It also reported a settlement with the SEC regarding optionsXpress entities. While the company believes it has strong defenses, these matters inherently carry uncertainty and potential for material loss, although they were not deemed material to the financial condition at the time of filing for most matters.