Charles Schwab Corporation — Q2 2009 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2009; comparative periods are the corresponding 2008 periods. The unaudited filing covers Schwab’s brokerage, banking, and related financial-services businesses. Dollar amounts below are in millions unless stated otherwise.
Financial performance and position
| Metric | Q2 2009 | Q2 2008 | First half 2009 | First half 2008 |
|---|---|---|---|---|
| Net revenues | $1,085 | $1,308 | $2,196 | $2,615 |
| Net interest revenue | $302 | $427 | $608 | $846 |
| Income before tax from continuing operations | $335 | $514 | $690 | $1,022 |
| Net income | $205 | $295 | $423 | $600 |
| Diluted EPS | $0.18 | $0.26 | $0.36 | $0.52 |
| Pre-tax margin from continuing operations | 30.9% | 39.3% | 31.4% | 39.1% |
| Operating cash flow | Not separately provided for the quarter | $1,106 | $(224) |
- Q2 revenue fell 17% year over year and net income fell 31%. Lower asset-management and administration fees and net interest revenue were partly offset by higher trading revenue.
- Q2 asset-management and administration fees were $486, down 21%; trading revenue was $272, up 18%. Net interest revenue declined 29% as low rates compressed yields.
- Expenses excluding interest declined 6% in Q2 and 5% for the first half. The Q2 expense base included $40 of facilities and severance charges and a $16 FDIC special assessment.
- At June 30, total assets were $62.3 billion, total liabilities $57.6 billion, and stockholders’ equity $4.6 billion. Cash and cash equivalents were $9.4 billion; banking deposits were $31.7 billion. Long-term debt was $1.56 billion, up from $883 million at December 31, 2008.
- First-half cash flow from investing was $(5,644), and financing was $8,458, including $7,864 of net growth in banking deposits and $747 from long-term debt issuance. Cash increased $3,920 to $9,362.
Changes, outlook, and notable items
- Net new client assets were $17.3 billion in Q2, down 33% year over year; quarter-end client assets were $1.224 trillion, down 12%. Daily average trades rose 17% to 349,700.
- Management said depressed equity valuations and very low interest rates continued to weigh on fees and net interest revenue. If those conditions persisted, management expected further year-over-year pressure on these revenue sources; the filing provides no formal earnings or revenue guidance.
- The company recognized net securities impairment losses of $13 in Q2 and $27 in the first half, tied to non-agency residential mortgage-backed securities. It reported $787 of unrealized losses on available-for-sale securities, concentrated in non-agency mortgage-backed securities, and warned further collateral deterioration could lead to additional impairment.
- A first-quarter repurchase of trust preferred securities for $38 resulted in a $26 gain. The company issued $750 of 4.95% Senior Notes due 2014 in June. Debt was 25% of total financial capital at quarter-end, versus 18% at year-end 2008.
- Cost-reduction measures included severance and facilities charges totaling $99 for the first half. Headcount was 12,100 at quarter-end, down 10% year over year. The company paid $139 in first-half dividends and made no share repurchases under its program.
- Credit quality weakened from year-end: banking-client nonaccrual loans were $17 versus $8, and nonperforming assets were $20 versus $9. The allowance for credit losses rose to $41 from $20. Management reported a 21% loan-to-deposit ratio and Schwab Bank capital ratios above “well capitalized” thresholds.
- Material legal matters include the New York Attorney General’s stated intent to pursue civil claims concerning auction-rate securities, class-action and regulatory matters involving the YieldPlus Fund, and litigation involving the Total Bond Market Fund. The company said it could not estimate a liability or range for YieldPlus matters; it warned some legal outcomes could materially affect a future period’s operating results.
Most important facts for investors to verify
- Whether client asset values, net new assets, and trading activity recover, and how these trends affect fee revenue.
- Net interest revenue sensitivity to persistently low rates, customer deposit growth, and margin-loan balances.
- Performance and valuation of non-agency mortgage-backed securities, including Alt-A holdings, and any additional impairment charges.
- Changes in loan delinquencies, nonaccrual loans, allowance coverage, and the concentration of real-estate lending in California.
- Developments in the auction-rate, YieldPlus, and Total Bond Market Fund proceedings, including potential liability and insurance recoveries.
- Execution of expense-reduction measures and the effect of new debt and deposit growth on capital, liquidity, and funding costs.