SAN FRANCISCO ( TheStreet) -- Charles Schwab ( SCHW) is racing ahead on Friday morning for one of the market's biggest gains, defying the selling in financial stocks specifically. Schwab exceeded expectations in its earnings, reporting earnings of 17 cents a share for the second quarter, which was two cents above the Street consensus. Schwab shares were up more than 5% on Friday morning, and were very active in trading, reaching its average daily trading volume of 13 million shares within an hour of the market open. The Schwab earnings beat was driven by a higher interest rate environment in the second quarter, a trend that had already begun to surface in Schwab's first quarter earnings. Analysts expected Schwab to benefit from the short-term rate improvement, as Schwab had suffered in previous quarters from the historically low rate environment. Schwab has investments in securities and a huge money market fund business linked to the floating rate environment. With LIBOR up meaningfully during the second quarter, Schwab's interest derived revenue had to rise, and the fees it has had to previously reimburse money market funds decline. Mark Lane, a William Blair financial stock analyst, said the Schwab earnings beat was primarily driven by the interest rate improvement, and the difference between a 15 cent consensus earnings call and the 17 cents earnings that Schwab reported may be no more than the difficulty the Street had in calculating exactly how much Schwab would benefit from the rate improvement in terms of earnings per share. "Relative to expectations, it was a good quarter, but people understood that short term rates as defined by LIBOR had increased," Lane said.
Schwab's quarterly profit was flat. Lane said that in regards to operational execution, what stood out in the Schwab earnings was a reduction of $19 million in advertising spending. More troubling for the William Blair analyst was that net flows into Schwab funds were down to $14 billion. In the first quarter, net flows were at $23 billion. Even though the decline in asset gathering by Schwab may not have a huge impact on earnings per share, the William Blair analyst expressed concern. "That's symptomatic of a more challenging environment," Lane said. Indeed, some of Schwab's bigger financial peers have been showing the slow road to recovery for the economy in earnings. Most notably, Bank of America reported disappointing earnings on Friday morning, leading to a selloff in financial stocks. Bank of America's CEO referred to the economy as "muddling along" in the bank's earnings call. -- Written by Eric Rosenbaum from New York. Follow TheStreet.com on Twitter and become a fan on Facebook.