Charles Schwab Corporation’s ( SCHW - Analyst Report ) second quarter 2012 earnings of 18 cents per share were in line with the Zacks Consensus Estimate. However, this compares unfavorably with the year-ago quarter’s earnings of 20 cents.

After considering certain non-recurring items related to the resolution of a vendor dispute, net income available to common shareholders was recorded at $261 million or 20 cents per share. This was better than the year-ago quarter’s net income of $238 million or 20 cents per share.

Improved trading revenue and higher net interest income were the positives for the quarter. However, higher operating expenses and provision for loan losses as well as fall in asset management and administration fees were the primary dampeners.

Behind the Headlines

Net revenue was $1,283 million, up significantly by 8% from $1,190 million in the prior-year quarter. This also compares favorably with the Zacks Consensus Estimate of $1,229 million. The surge was primarily due to the higher net interest revenue (up 2%) as well as improved trading revenue (up 7%). However, these positive were partially offset by a decline in asset management and administration fees.

Schwab’s average interest-earning assets for the reported quarter increased about 15.5% year over year to $106.1 billion.

Total non-interest expense grew 6% year over year to $851 million. The jump was primarily due to higher compensation and benefit expenses along with a rise in marketing costs.

Schwab’s provision for loan losses was $4 million in the quarter under review, compared with $1 million in the previous-year quarter.

Schwab’s pre-tax profit margin improved to 33.7% from 32.4% in the year-ago quarter.

Annualized return on equity (ROE) as of June 30, 2012, came in at 13%, down from 14% in the prior-year quarter, but up from 10% in the prior quarter.

Other Business Developments

As of June 30, 2012, Schwab had total client assets of $1.80 trillion (up 9% year over year). Total new assets surged to $16.0 billion from $15.4 billion in the year-ago quarter. New brokerage accounts were 221,000, growing from 205,000 in the prior-year quarter.

As of June 30, 2012, Schwab had a total of 8.7 million active brokerage accounts, 822,000 banking accounts and 1.52 million corporate retirement plan participants.

Our Viewpoint

We believe that the recent acquisitions will boost Schwab’s top line to some extent, leading to an overall growth. While its focus on low-cost capital structure will help sustain better results in the upcoming quarters, the company’s financials will continue to be impacted by the lower trading activities and volatile interest rates. Moreover, we remain concerned about the company’s low capital intensity relative to its peers.

Schwab currently retains a Zacks #4 Rank, which translates into a short-term Sell rating. However, considering the fundamentals, we maintain a long-term Neutral recommendation on the shares.

One of Schwab’s peers, E*TRADE Financial Corporation ( ETFC - Analyst Report ) is slated to release its second-quarter results on July 19.