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Charles Schwab Corporation’s (SCHW - Analyst Report) third quarter 2012 earnings of 19 cents per share were marginally ahead of the Zacks Consensus Estimate of 17 cents. Also, this compares favorably with the year-ago quarter’s earnings of 18 cents. The results in the reported quarter also included a non-recurring state tax benefit of about $20 million.

Improved asset management and administration fees as well as balance sheet restructuring actions were the positives for the quarter. Yet, higher operating expenses and provision for loan losses as well as a fall in net interest income and trading revenue partially dented the results.

Net income available to common shareholders was recorded at $238 million, up 8% from $220 million in the prior-year quarter.

Behind the Headlines

Net revenue was $1,196 million, up 1.3% from $1,181 million in the prior-year quarter. However, this was marginally lower than the Zacks Consensus Estimate of $1,197 million.

The modest rise in net revenue was primarily driven by the higher asset management and administration fees (up 12%). However, this was partially offset by lower net interest revenue (down 1%) as well as decline in trading revenue (down 18%).

Schwab’s average interest-earning assets for the reported quarter augmented about 12.5% year over year to $108.9 billion.

Total non-interest expense grew 1.7% year over year to $835 million. The increase was primarily due to higher compensation and benefit expenses. Further, provision for loan losses was $10 million, up 25% from $8 million in the previous-year quarter.

Pre-tax profit margin marginally fell from 30.5% to 30.2% in the reported quarter.

Annualized return on equity (ROE) as of September 30, 2012, came in at 11%, down from 12% in the prior-year quarter and 13% in the prior quarter.

Other Business Developments

As of September 30, 2012, Schwab had total client assets of $1.89 trillion (up 20% year over year). Total new assets were $20.4 billion compared with $86.0 billion in the year-ago quarter. New brokerage accounts were 198,000, down from 506,000 in the prior-year quarter.

As of September 30, 2012, Schwab had a total of 8.7 million active brokerage accounts, 844,000 banking accounts and 1.55 million corporate retirement plan participants.

In addition, Schwab undertook a few balance sheet restructuring initiatives during the quarter. The company redeemed all of its outstanding trust preferred securities along with the underlying 7.50% junior subordinated notes. Moreover, the company completed a debt exchange offer, thereby replacing $256 million of outstanding 4.95% senior notes due in 2014 for new 10-year senior notes at a lower cost.

Recent Acquisition

Concurrent with the earnings release, Schwab announced a deal to acquire ThomasPartners, Inc. The transaction, which includes a cash payment of $85 million and the additional payments contingent on future growth in assets under management, is expected to close during the current quarter. Upon closing, the deal will not affect the company’s earnings for the first 12 months and become marginally accretive in the following year.

Our Viewpoint

While focusing on low-cost capital structure will help improve results in the upcoming quarters, Schwab’s financials will continue to be hampered by lower trading activities, weaker equity markets and reduced interest rate yields.

Moreover, we remain concerned about Schwab’s low capital intensity relative to its peers. Nevertheless, we believe synergies from the acquisitions and stable capital position will boost the company’s financials to some extent.

Schwab currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. Also, 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 third quarter results on October 18.

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