Title

Presentation

The Charles Schwab Corporation beats earnings expectations. Reported EPS is $0.73, expectations were $0.717.

Jeff Edwards: Good morning, everyone, and welcome to the Schwab 2024 Summer Business Update. This is Jeff Edwards, Head of Investor Relations; and I’m joined today by our Co-Chairman and CEO, Walt Bettinger; President, Rick Wurster; and CFO, Peter Crawford. We got a bit of an early start today to beat the Texas heat, so let’s run through our housekeeping items and get in today’s remarks. The slides for today’s business update will be posted to their usual spot on the IR website at the beginning of Peter’s section. Q&A remains structured as one question, no follow-ups, please, but you can certainly reenter the queue to ask another question if time permits. And as always, please don’t hesitate to reach out with any follow-up questions for the IR team. And lastly, the wall of words, which showcases our forward-looking statements, reminding us that the future is uncertain, so please stay in touch with our disclosures. And with that, I’ll turn it over to Walt.

Walt Bettinger: Thank you, Jeff, and good morning, everyone. Thanks for joining us for our July business update. Earlier this year, we spoke about 2024 being a transition year for the firm. We define this year as transitional for a series of reasons. We were anticipating completing the last transition groups from the Ameritrade acquisition. And we anticipated that former Ameritrade clients would move from negative asset flows to positive levels of net new assets. We further anticipated that former Ameritrade retail clients would begin to utilize Schwab capabilities in the areas of investment advisory, financial planning and banking. We anticipated the investment advisers, who formerly used Ameritrade for custodial services, would also begin to bring net new assets to Schwab, and their evaluation of our service levels would improve rather dramatically.

We anticipated that Schwab users of StreetSmart would begin to take advantage of the powerful trading capabilities in the Thinkorswim platforms. From a capital standpoint, we anticipated that we would organically build capital throughout the year toward our long-term objectives. And from a financial standpoint, we anticipated improving, albeit somewhat uneven, earnings results during the year with Q4 2024 delivering somewhere between $0.80 and $0.90, and then with strong growth continuing into 2025 and beyond. Halfway through the year, this definition of a transition year is being realized, again, as we anticipated. And all of these issues position us for a strong period of growth in client metrics and financial results in the coming years.

So, with these critical indicators of success unfolding in such a positive manner, let’s take a quick look tactically at how the second quarter of this year looked. Inflation showed some encouraging signs of moderating, closer to the Fed target of 2%, which continued pushing a select number of primarily technology stocks ever higher during the quarter. Investor sentiment remained solidly positive at quarter-end with investors purchasing stocks throughout the quarter and overall trading activity was a bit higher than in the prior year. Now as I stated earlier, as we anticipated, we completed the last client transition group during the second quarter. That’s almost $2 trillion in assets, 17 million client accounts, and over 3.5 million daily average trades, all done with the attrition levels that are well below other integrations in our industry, as well as our estimates at the time of the acquisition, which were 5% to 6% asset attrition and 4% revenue attrition.

And while it’s still somewhat early, the client response to the combined platform has been even stronger than we anticipated. Promoter Scores for former Ameritrade retail clients are now increasing about 50 points nine months post conversion date. While the Promoter Scores for advisory services, including the former Ameritrade adviser clients, have returned to pre-conversion levels. Impressively, former Ameritrade retail clients who converted in 2023 are already bringing in assets on a net basis. However, their level of net new assets still remains below our target range. Clearly, this illustrates that we’re reaching an inflection point as attrition continues to abate and we rebuild back to firm-wide net new asset levels in our targeted 5% to 7% range.

And lastly, former Ameritrade retail clients are already making up about one-third of our overall enrollments in advisory solutions, an early illustration of the power of combining the two firms and their interest in Schwab’s broader offering of wealth management solutions. The overall client engagement was solid in the second quarter with the equity buy-sell ratio at about 1.1, while daily average trades remained at relatively high levels for a second quarter and above the same period from last year. Meanwhile, we’ve seen a large increase in interest among our clients in our Managed Investing solutions. So overall, key client metrics continue to be solid. Net new assets year-to-date were over $150 billion, including Q2 asset gathering of about $60 billion, up 17% from the same period last year, again, still somewhat below our long-term goal of 5% to 7% to an economic cycle but growing closer to that figure as the impact from former Ameritrade client attrition begins to wane.

New brokerage accounts were again almost $1 million — I’m sorry, 1 million accounts during the quarter. Looking deeper at the types of clients we’re attracting. These new-to-firm households continue to set us up well for the long term with almost six out of 10 new clients under the age of 40. And investment adviser clients of all sizes continue to entrust their client assets to our custodial services. For years, we’ve emphasized that Schwab Advisor Services is the premier offering for RIAs of all sizes, and we are equally committed to each segment of advisers. And these net new asset results are particularly encouraging as they reflect our success serving again every size adviser. Let me take a brief step back to take a more big-picture look at Schwab and the growth trajectory we’ve been on for over 50 years.

From our origins as a discount broker, we have continually listened to client needs, as well as anticipated client needs, and added services and capabilities along the way. What is key is that we have always done so in a Schwab Way, through clients’ eyes, at a great value and without the client having to accept trade-offs. We call that modern wealth management. And when we look to the future, we believe this formula will only serve to build our market share larger and larger. Of course, one of the key capabilities we have added along the way has been banking services to meet the needs of our clients on both sides of their personal balance sheets. Now some have asked us after the regional banking crisis of 2023 whether we remain committed to serving our clients’ banking needs.

And the answer is a definite yes. That said, we have studied our approach to offering banking services in recent quarters and wanted to share a few additional perspectives on how we see banking unfolding in the future at Schwab. Offering lending services to our retail clients and the clients of the investment advisers we serve is important. Arguably, it’s critical as it meets client needs and deepens relationships in a meaningful way. Most of our significant competitors have the ability to assist clients with both their investing needs as well as their borrowing needs. We believe firms that do not offer lending services are at a strategic disadvantage that will show itself more and more over time. So, we are committed to offering quality lending services in a manner consistent with how we lend today, exclusively for our clients, residential mortgages, HELOCs for clients who have their first mortgage with us, and pledged asset lines.

And to support lending for our clients, we continue to invest in both technology to make the application and approval process streamlined and efficient, as well as experienced bankers who can help shepherd the more complex loans through. From the standpoint of the investments we make at the bank for deposits in excess of those needed for lending to our clients, over time, and by that, I mean, years, not months or quarters, we would envision some shortening of our overall balance sheet investment portfolio duration. That could lead to some modestly higher earnings volatility through an interest rate cycle but should help reduce volatility of our capital levels and the need to access supplemental borrowing when interest rates potentially rise rapidly.

One of our objectives is to increase our emphasis on attracting transactional bank deposits like checking balances with our award-winning checking product. This would serve as a means of increasing liquidity and further stabilizing our overall deposit base. And we envision the potential to increase our usage of third-party banks like TD Bank and others to achieve the following goals, deliver extended FDIC insurance for clients, lower our capital intensity, and improve liquidity, subject, of course, to obtaining economics from the third-party banks that make sense for us. Net, these various actions should lead, again, over time to a bank that is somewhat smaller than our bank has been in recent years, while retaining the ability to meet our clients’ banking needs, lower our capital intensity and, importantly, protect the economics we are able to generate from owning a bank.

So, while we see some modest changes in the way we manage and operate our bank, one thing you can count on, we will continue to operate our business in the Schwab Way, making decisions through clients’ eyes, offering clients great value, and delivering service and advice to our valued clients without asking for any trade-offs. So Rick, let me turn it over to you for some more discussion on our efforts as well as results during the second quarter.

Rick Wurster: Thanks, Walt, and good morning, everyone. With the successful completion of the Ameritrade conversion behind us, we are looking ahead to an exciting new chapter as we continue to advance our four strategic focus areas. And we will do so from a position of strength, having fully combined the best of Schwab and Ameritrade to offer our clients a no trade-offs experience. Our ability to increase our scale while also continuously driving efficiency in our operations remains one of our key competitive advantages. The Ameritrade integration is a clear example of how we have vastly increased our scale while cutting costs. And by the end of this year, we’ll realize the remaining 10% of run rate expense synergies from the acquisition.

Over time, our growing client base, our cost discipline and our ongoing investments in technology will continue to help us reduce our cost to serve our clients, in the same way it has over the past decade as we’ve decreased our cost per client account by 25% and by around 50% when you consider inflation. We plan to build on this competitive advantage. We will invest in technology, including artificial intelligence, that will ultimately help us lower our costs. We will implement operational enhancements and process transformation so we can serve our clients even more efficiently than we do today. And as we continue to increase our scale and enhance our efficiency, we’ll reinvest in our clients over time and support our growth for the long term, just as we’ve done historically.

Win-win monetization is about meeting more of our clients’ total financial needs. By offering the ease and convenience of having more of their financial life in one place, we’re also able to bolster our revenue growth and our wealth business is growing quickly. And this is a win for clients as Client Promoter Scores for our advice solutions are among the highest at the firm. So, these are our happiest clients. And it is a win for us. Year-to-date, we’ve attracted nearly $25 billion in Managed Investing net flows, a 56% increase over last year. And we see strong net flows across our spectrum of solutions. And you can see the growth on this page: 40% in Schwab Wealth Advisory, 53% in Wasmer Schroeder, and 127% and in Schwab Personalized Indexing.

By offering our clients a broad spectrum of the wealth solutions they need, we’re also supporting growth in our fee-based revenue streams, as you can see with the growth in our revenue on the right-hand side of this page. Looking within our Wealth Solutions, I wanted to do a bit of a deeper dive into our Wasmer strategies. These fixed income strategies provide clients with a wide range of tax-exempt and taxable solutions. Clients also have access to a dedicated team of portfolio managers and portfolio personalization capabilities, all at a lower cost than competitive offerings. With total assets under management of $25 billion, we’ve seen assets in these strategies grow at a compound annual growth rate of 23% since our acquisition in July of 2020 and have grown by nearly 80% in the last two years where we’ve had a higher interest rate environment.

This year-to-date alone, we’ve seen net flows of $4 billion, demonstrating that these solutions are indeed meeting client needs. Turning now to client segmentation. At Schwab, we will always meet the needs of a wide spectrum of investors and RIA firms, but we also need to serve our distinct client segments. And strong relationships are the foundation of our ability to do this. When we build relationships by meeting client needs and meeting clients where they are and with the service models, the tailored education and the specialized capabilities they need, we will retain our existing clients and attract new ones. RIAs, which are one of our key client segments, we strengthened our relationships with RIAs of all sizes through an unparalleled offer that helps each of them grow, compete and succeed.

For example, we offer advisers turnkey asset management solutions, flexible technology, and highly specialized business consultant teams, all at an incredible value with zero custody fees and no intention of changing that. Turning to our retail business, high net worth retail clients are another important segment where the power of strong relationships is clear. Our high net worth retail investors who have a financial consultant, bringing more than 3x the average household net new assets, 2.8x the Managed Investing net flows, and have better TOA ratios, and notably higher Client Promoter Scores compared to retail high net worth clients who do not have an FC. Continuing to invest so we can build and expand on these valuable client relationships will help support our growth over the long term.

Our fourth strategic focus area is the Brilliant Basics. We know that we can make it even easier for our clients to do business with us, and if we can deliver on the basics for our clients in every interaction they have at Schwab, we’ll build loyalty and our delighted clients will grow their wealth with us and refer their friends and family members to us. One example of how we’re delivering on this for clients is the enhancements we continue to make to the best-in-class Schwab mobile app. We know clients and third parties like it today. Our mobile app has a 4.8-star rating on the App Store. And for the second year in a row, Corporate Insight has ranked us the number one mobile app experience among brokerage firms. And we continue to invest in and enhance that experience.

We’re introducing features our former Ameritrade clients love, like the recently launched customizable dashboard. Other recent and planned enhancements will simplify the client experience by reducing clicks and expanding on our customization capabilities. Guided by our consistent through client-size strategy, we remain well positioned for continued growth. While there are several factors that can influence asset gathering in the near term, things like the macroeconomic environment, seasonality and some behavioral differences we see in the former Ameritrade client base, we believe our through-the-cycle growth recipe remains intact. Over the longer term, we expect we’ll continue to see 5% to 7% annualized NNA growth from existing and new clients, bolstered by delivering on our four strategic focus areas.

As we’ve shared, 2024 is a transition year, with strong client engagement, a successful integration, continued progress on our strategic focus areas, and opportunities to introduce our client base to the best of Schwab and Ameritrade, we remain well positioned to continue serving our growing client base and delivering profitable long-term growth to stockholders. With that, I’ll turn it over to Peter.

Peter Crawford: Well, thank you very much, Rick. So, Walt and Rick talked about the exciting results we’ve already seen from the Ameritrade integration and the opportunities it enables, our strong momentum in the market and the success we have enjoyed in attracting a diverse mix of clients, the progress we have made in continuing to enhance our leading value proposition at the same time that we continue to drive greater efficiency throughout our business. And finally, our commitment to continuing that journey, combining ever greater efficiency with sustained investments in improving the client experience. For my time today, I’ll review our solid financial performance in the second quarter and over the first half of the year.

I’ll provide some high-level perspective on what we’re seeing with regard to our clients’ transactional cash, and I’ll share an updated scenario for 2024. The important point is that we are proceeding through what we’ve described previously, and what Walt talked about at the outset, as a transitional year. But frankly, at a slightly faster pace than we had anticipated just six months ago, with our organic growth rebounding towards historical levels, a continued moderation of client cash realignment activity despite seasonal pressures and the impact of very high investor engagement, sequential growth in our net interest margin, continued expense discipline with adjusted expenses basically flat year-over-year excluding some unusual items, and finally, a steady increase in our capital levels, both our regulatory levels and those inclusive of AOCI.

And all of that sets the stage for what we expect will be more of a return to normal, the unlocking of our core earnings power and, frankly, a much simpler financial story in the quarters and years ahead, but one featuring strong growth in revenue and earnings in the back half of 2024 and over the next several years. As Walt mentioned, the first half of the year has been characterized by strong equity markets, increased client engagement and solid organic growth. We saw that reflected in external benchmarks such as the S&P 500 and NASDAQ, as well as key drivers of our business performance, including margin balances up 15% from the end of 2023, trading activity up slightly from the first six months of last year, and as Rick mentioned, a real surge in interest among clients for our advisory solutions.

Our clients’ transactional cash balances are typically pressured in the first half of the year by engagement in the markets in January and February and then tax season in April and early May. And that was no different in 2024. But even so, we continue to see a moderation of the rate-driven client cash realignment activity. Now that backdrop helped support solid financial performance in the second quarter, with revenue up 1% year-over-year to $4.7 billion. Adjusted expenses in Q2 were up just under 2% year-over-year, but that included several onetime and/or unusual items without which our adjusted expenses would have been down more than 1%. We produced an adjusted pretax margin of roughly 41% and adjusted EPS of $0.73. Turning our attention to the balance sheet.

Total assets dropped by 4%, driven primarily by tax-related outflows and the continuation, albeit at a much slower pace, of the client cash realignment activity we have experienced for a little over two years. And the overall level of realignment within Bank Sweep and Schwab One in the quarter was down about 50% versus the same quarter in 2023. Now as I mentioned earlier, we have seen strong growth in margin utilization to start the year. And to support that activity, we directed about $5 billion of client cash from the banks to the broker-dealers. That caused our level of supplemental borrowing to rise slightly in the quarter. What I want to emphasize again, that this is a good thing. We are more than happy to absorb a bit more borrowing on which we’re paying just over 5% to support margin loans on which we’re earning just under 8%.

And finally, despite rates that increased slightly during the quarter, our capital position continued to get even stronger. With our adjusted Tier 1 leverage ratio, again, reminding you that’s the one that’s inclusive of AOCI and, therefore, what our binding constraint would be if we lose the AOCI opt-out, at Schwab Bank now well over 6% and just under 6% for the Company overall. Meaning, we are marching steadily towards our new operating objective for capital. Now despite the influence of typical seasonal pressure to start the year coupled with atypically bullish, very bullish, investor sentiment, client cash balances have largely trended consistent with our expectations, despite rates remaining higher than the Fed and the market predicted earlier in the year.

And all indications support that we are in the very late innings of client cash realignment activity. In fact, over the course of Q2, client-driven outflows from Bank Sweep despite the seasonal tax payments, have been less than the cash flow generated from our investment portfolio, which in the absence of any other actions on our part would have led to continued decline to supplemental borrowing. Now with new client acquisition and organic growth returning to our historical norms, and all signs suggesting that the Fed funds rate has likely peaked, meaning, in the absence of this catalyst, we expect the utilization of investment cash alternatives such as purchase money funds and CDs to stabilize and then eventually decrease over time, we believe we’re nearing the point where aggregate transactional cash balances should flatten and then ultimately resume growing again.

Now that solid start to the year lays the foundation for what we expect will be an even stronger end of the year, propelling us into growth through 2025 and beyond. We now expect our full year revenue to range between flat to up 2% versus 2023 or roughly in the middle of the mathematical illustrations you may recall we shared back in January. And as I shared back in May at our Investor Day, we now expect our adjusted expenses to be approximately 2% higher than 2023. And as a reminder, about half that change from the previous guidance is due to unanticipated onetime items such as the FDIC surcharge and the regulatory accrual, with the remainder coming from the increase in the SEC 31 fee, which is, again, is a pass-through expense and, therefore, P&L neutral.

But to use the transitional word again, that annualized view masks the progression in earnings power by the end of the year. We’re expecting flattish earnings from Q2 to Q3, but assuming the Fed cuts rates in September as is widely expected, we could see our NIM reach the mid-2.20s in Q4 on its way to approaching 3% by the end of 2025, which we believe will support adjusted earnings per share in the middle of the $0.80 to $0.90 range we outlined at the beginning of the year, with our earnings power building in 2025 and beyond. Despite long-term rates moving a little bit higher during the quarter, our capital levels are climbing steadily, and we continue to expect our consolidated adjusted Tier 1 leverage ratio to approach our slightly updated operating objective of 6.75% to 7% on a consolidated basis by the end of 2024, at which point it becomes more of a live conversation regarding whether and how we want to do further capital return, our number one priority for capital is always to support business growth.

Now to the extent that we have capital in excess of what is needed to do that, we have, throughout our history, taking steps to return that to stockholders. That can be through increasing our dividend, which generally rises alongside earnings. That can be by redeeming outstanding preferreds to create additional dry powder for the future, especially preferreds that might be or might become relatively expensive, and that can also be, of course, through stock buybacks, which we do opportunistically. There is one additional consideration right now, which is to the extent that we have outstanding supplemental borrowing, we may choose to utilize some of the liquidity we’d otherwise use for buybacks to reduce some of that bank-level debt. Now doing that reduces our reliance on nonbusiness-as-usual funding sources, and given the relatively higher cost of the supplemental borrowing, it’s likely more accretive to earnings in the near term, while preserving the capacity, the ability to implement stock repurchases at a later date.

So by doing that, we can kind of have our cake and eat it too. Now those of you who have followed the Company for a while know that we don’t tend to communicate bold, long-term financial targets. Rather, we continue to talk about our long-term financial formula, a relatively simple and straightforward formula that is based on our clear and straightforward business strategy, which we articulated, as you know, is through clients’ eyes. And what makes that financial formula simple and straightforward is that it’s based on a set of a pretty reasonable assumptions, for Schwab at least, around organic growth, revenue growth, expense containment and capital return, assumptions that we have delivered through the cycle over multiple decades. Over the last two-plus years, that formula has admittedly been obscured to an extent by the impact of rising rates and what that has done to client transactional cash balances.

But with rates seeming to plateau and client cash realignment moderating, while organic growth returns to that historical level, we’re nearing the point where that simple and straightforward formula, that simple and straightforward financial story should become more clear, one that without making some big leap of faith combined strong organic growth, strong profitability and substantial capital return. With that, I’ll turn it over to Jeff to facilitate our Q&A. Jeff?

Jeff Edwards: Thank you very much, Peter. Operator, can you please remind everyone how they may ask a question?

Operator: [Operator Instructions] Our first question comes from Brian Bedell from Deutsche Bank. Please go ahead.

Brian Bedell: Great. Thanks very much for the presentation. Maybe just, Peter, could you talk about your view on how you make deposit rates as the Fed cuts — and I guess, first and foremost is your assumption in your targets based on, I guess, how many Fed cuts are based on that? And then just maybe just talk about how you might reduce direct deposit rates in sweep and the banking deposits as the Fed cuts — essentially the deposit beta to that?

Peter Crawford: Sure. So, thanks, Brian. So, the scenario that I outlined is based off the Fed cutting rates a single time in the rest of this year in September. In terms of deposit betas, I wouldn’t necessarily assume that deposit betas are symmetrical. If you look historically, deposit betas tend to be a bit higher on the — in the easing cycle than they are in a tightening cycle. And so, while we certainly haven’t made any decisions exactly about what we’ll do with deposit rates, I think that’s a reasonable expectation. And we also would expect that as rates come down, the cost of any replacement supplemental funding that we have to access comes down as well. And we’d also expect that, on the margin, that rate cuts would, over time, bring about higher levels of clients’ transactional cash as the incentive for them to utilize alternative solutions like purchase money funds and CDs become somewhat less.

Operator: Next, we’ll go to the line of Ken Worthington from JPMorgan. Please go ahead.

Ken Worthington: In terms of the use of third-party banks like TD, how much of your bank assets might migrate to third-party banks over time at sort of steady state? And how would you expect the economics to compare to the fees that you currently earn on a money market fund or in the Schwab Bank spread over rate cycle? And I guess lastly, given the Wells comments on Friday, is there a risk that using third-party banks might risk regulators having an opinion on the yields passed on to certain end-customers in the advisory or other segments of your business?

Walt Bettinger: Yes. So, I think it’s I think it’s early to have definitive answers on the first set of questions that you asked. Although if you research our IDA agreement with TD Bank, it probably gives you a good direction with respect to the economics. The economics can be very attractive for us in terms of not needing to have capital relative to those deposits. And that’s where I would probably direct you to look in terms of the economics of that. In terms of the level, we want to make sure that we maintain sufficient deposits at our bank to, again, fund the loans that our clients want, and then have appropriate levels of liquidity over and above that. With respect to the Wells Fargo issue, we have provided money market fund sweep cash and — or money market yields on bank cash for all of our fiduciary-driven investment advisory solutions already.

So, I don’t really see the Wells Fargo report having any kind of meaningful implications for us. We’ve been doing this for an extended period of time already.

Operator: Next, we’ll go to the line of Kyle Voigt from KBW. Please go ahead.

Kyle Voigt: Good morning. Just maybe on the Ameritrade attrition abating and net new assets getting back to that 5% to 7% level as they have grown historically. I guess with the knowledge of doing prior brokerage integrations, albeit at a smaller scale than the Ameritrade integration, so do you have any expectation of when you could get back into that range? And typically, when do you see attrition effectively fully abate after the last migration, which we’ve obviously just went through?

Walt Bettinger: Let me start by saying first — thanks for the question, Kyle. Let me start by saying when we look at our Schwab client base, we continue to grow within that 5% to 7% organic growth rate that we target over the long term. When you look at the Company level metrics, what’s keeping us from the 5% to 7% overall is, in fact, behavior of the Ameritrade clients. And the great thing that we’re seeing is we are seeing a change in their behavior. And it’s in line with what we would expect, which is, first, we need to stop clients from leaving the firm and from Ameritrade flows being negative. And I think we’re in the process of that happening. Walt referenced the significant improvement in Client Promoter Scores. That’s true both on the retail side and the adviser side.

So, Client Promoter Scores are getting higher. As those Client Promoter Scores are getting higher, we’re moving from outflows from our Ameritrade clients to inflows. What we then need to do is to move a client base that hasn’t had client flows quite in line with where Schwab organic growth rate has been historically. We need to move them from being positive contributors to net new assets to contributing at the same level as Schwab — as our Schwab organic growth rate. And the way we’ll do that is by introducing our Schwab model to Ameritrade clients, the financial consultant, the relationship model, the service, the advice, the consultants that we bring on the advisory side. All of that, we believe, will help accelerate the Ameritrade net new asset formation.

So, we’re confident we can grow in the 5% to 7% range. We continue to do so on the Schwab side today. And we’re right where we’d expect to be in terms of the process of moving Ameritrade clients from being net detractors in net new assets to now being slightly positive. And then, we anticipate by introducing our model to them to be able to grow them to the same level as Schwab clients over time.

Operator: Next, we’ll go to the line of Dan Fannon from Jefferies. Please go ahead.

Dan Fannon: Peter, I was hoping you could elaborate on your assumptions on what’s going to drive the sequential growth really after being flat in Q3 to Q4, and specifically things like margin balances, which are growing, but as you said, are drawing more short-term funding. So curious about short-term funding levels plus some of the other assumptions in that Q3 to Q4 ramp.

Peter Crawford: Yes. So, we can — certainly, we can follow up with — we have a number of assumptions on the page there, and you’re welcome to follow up with the IR team in terms of some of the details. But broadly speaking, as I mentioned previously, the assumptions are as a single Fed cut in September, client cash realignment activity that continues to moderate. We expect it will flatten and then, again, ultimately resume growth. And then more of a continuation of the general — relatively conventional assumptions on equity market depreciation, margin balance growth that goes along with that and so forth. In terms of supplemental borrowing, our priority, of course, is to pay that down as quickly as we can. But the pace at which we pay that down, it is dependent on the level of margin balance growth.

And if we see — continue to see more margin balance growth, we will, as we always do, want to make sure we support that growth. And at times, that means moving some cash out of the — some client cash out of the bank over to the broker-dealer. But again, that is a — we welcome the margin balance growth. It’s good for clients. It means we’re — our clients are engaged, that we are supporting our active trader community, which is a very important segment for us. It’s a very profitable interest-earning assets. So, we’re more than happy to support that even if it means that it delays, to a certain extent, the pay-down of supplemental borrowing. It’s accretive from a NIM standpoint, accretive from a net interest revenue standpoint, and so forth.

So, it’s why it’s really, I think, I’d caution everyone not to focus on supplemental borrowing just in isolation in a vacuum, because it’s influenced by other factors as well.

Operator: Next, we’ll go to the line of Steven Chubak from Wolfe Research. Please go ahead.

Steven Chubak: Hi, good morning. So, Peter, you had outlined a couple of different self-help levers. I mean, the first is the potential to migrate additional cash off balance sheet in the future. I actually wanted to focus on the potential opportunity to accelerate pay-downs of the high-cost liabilities by repositioning the securities portfolio. And I was hoping you could just unpack what are some of the constraints that we should be mindful of when thinking through the potential opportunity. And is it fair to assume that you would likely wait until you’re at your capital target at which point you would maybe consider pursuing that path?

Peter Crawford: Yes. So, thanks for the question, Steven. So, I would say, I know we’ve gotten this question — we’ve gotten this question a fair amount. And our thinking on repositioning trade hasn’t really changed. We certainly understand the benefit of that on accelerating the paydown of supplemental borrowing, accelerating the net interest margin accretion, earnings accretion that we expect to happen over time. At the same time, we’re very cognizant of, and very mindful, of doing anything that would jeopardize the trust our clients place in us, especially for the sake of, moving forward, something that we expect will happen on its own. And so that’s why we haven’t done that. So, I would say it’s not something we, by any means, rule out altogether, but it’s also not something we’re looking to do in the near term.

Operator: Next, we’ll go to the line of Brennan Hawken from UBS. Please go ahead.

Brennan Hawken: I’d like to follow up on the question around the shift to third-party banks as a place for deposits. So just at a high level, I’m curious if you could explain to us the strategic shift here because we spoke about it a year ago at the last what used to be the winter business update, now is the Investor Day, although I guess — well, in 2023, it was at a different timing. And there was a defense of using the bank subsidiary. So, what led you to shift there? And then maybe just like timing-wise, when should we expect this to happen? And how do you strike the — you referenced that you want liquidity above the need to fund the loans. How should we be thinking about what the bank will actually look like once things settle out and you take this journey?

Peter Crawford: Yes. Thanks, Brennan. And so as I indicated, we’re talking about years, not months and quarters. And we just want to foreshadow that, over those period of years, we think that there may be approaches that are more efficient in terms of rewarding our clients as well as rewarding our stockholders than maintaining 100% of the deposits at our bank. We want deposits, as I indicated, to be sufficient to cover the loans that we intend to do for our clients, that provide quality yields, deepen relationships and we’re able to do at exceptionally low credit risk, as well as having liquidity beyond that. But we all recognize that deposit flows can be very volatile depending on rate environments. And we have in place one agreement already today that provides us substantial flexibility for client deposits with exceptional economics for us without the need for capital.

And we think that there are other opportunities to consider expanding that. Again, I want to emphasize, the prepared remarks I made, that this is all subject to the economics of doing so. But we do think there are meaningful opportunities to lighten some of the capital load over time, again, measured in years, not months and quarters, that will provide us additional flexibility and also let us extend FDIC insurance to higher levels for our clients.

Operator: Next, we’ll go to the line of Benjamin Budish from Barclays. Please go ahead.

Benjamin Budish: Just thinking about the sort of cash inflows over the next maybe six to eight quarters, can you maybe provide an update on your expected pace of securities maturing off of the balance sheet? I think you’ve talked before about the back half of ’24. But is there any update you could perhaps provide on what to expect in 2025?

Peter Crawford: Yes. So, I mean I think I would think about that in terms of the pace of cash flows off the investment portfolio as sort of in the $10 billion to $11 billion a quarter, somewhere in that range, as the portfolio — the size of the portfolio goes down, that it’s reasonable to expect that that level of cash flow goes down as well, sort of commensurate with that. But sort of — and that’s a general rule of thumb over the next several quarters, I think, is a reasonable expectation.

Operator: Next, we’ll go to the line of Alex Blostein from Goldman Sachs. Please go ahead.

Alex Blostein: Well, so a lot of these things we’re talking about for the last several quarters are related to kind of self-help levers and improvement in the Company’s earnings power ultimately start with improvement in the deposit trajectory of the business that will help supplement the borrowings, capital returns, et cetera. So maybe help us sort of refresh, now that you’ve had the business with Ameritrade for some time, how are you thinking about the normalized framework for growth in Schwab’s deposits, sweep deposits, whether it’s a percentage of net new assets or some other metric, but I guess also considering that, even if we do get rate cuts, the Fed funds rate and the market rate is still going to be probably meaningfully higher versus kind of the available deposit yield that you and the industry are offering.

Peter Crawford: Yes. Thanks, Alex, for the question. So, I know there’s a lot of focus on kind of month-to-month, even at times week-to-week changes in deposit flows. I think it’s important to maybe set a little bit of context. So, first is deposit flows over a short period of time are influenced by net new assets, of course, the cash is brought in from new accounts, and then what clients do with that cash. And that can be rate-driven allocations that they make to purchase money funds, CDs and so forth. It can also be into engagement in the markets, equities, mutual funds and so forth. And so that can create some variability. We have seen strong engagement in the markets. And when we look at the rate-driven activity among our clients, that continues to go down.

The second point of context I would make, which is that you do see variability in those flows from, frankly, from day to day or month to month. And we can see $2 billion or $3 billion of net inflows or outflows on a particular day. And so, when you just look at a month’s numbers, depending on what day of the week the month ends on, it can influence the level of transactional cash that we report on that monthly basis. And I’d say June was sort of — was comparable to May. July has started off stronger. It’s still early, it’s about halfway through the month, so we’ll see how the month ends. But it is — it started off definitely stronger than in terms of deposit flows than May. In terms of the long term, to your question long term, we would expect in a stable environment that client transactional cash grows with the growth in accounts and the growth in total assets.

We actually recently did a study to look at clients who opened their accounts roughly 20 years ago. And what we see over time is, as those clients increase the net worth in their accounts, increase assets in their accounts, their cash balances go up and they actually stay at a relatively constant percent of the assets in the account. And so, I think as you are modeling our transactional cash over a long period of time, over years, I think it’s reasonable to expect that that transactional cash grows with the growth in assets and the growth in accounts. When rates are rising, it will — growth will be a little bit lower, and rates are falling, that growth will be a little bit faster. But I think over time in a stable environment, that’s a reasonable expectation over, again, over multiple years.

Operator: Next, we’ll go to the line of Bill Katz from TD Cowen. Please go ahead.

Bill Katz: Maybe a two-parter. The first one is just in terms of the Ameritrade metrics you had mentioned in terms of not up to the 5% to 7% growth rate that you’re experiencing with legacy platform, can you scale and size the two relative asset pools that we’re speaking to? And then the broader question I have is just as you’re thinking now about migrating the growth of the bank, how should we be thinking about the end state of the size of the bank? And does this change your capital return methodology?

Walt Bettinger: Let me start with the Ameritrade part of the question. We brought over about $2 trillion of Ameritrade client assets. We’re at $9.4 trillion overall. So, Ameritrade is clearly an important part of our business. Looking at the longer term, important to remember the enthusiasm we have for the combination of the strength of Ameritrade and Schwab. We were talking a lot about short-term dynamics around cash and net interest margin and things like that. We have an incredible franchise that we’ve just spent four years putting together the best of everything Ameritrade had to offer with the best of everything Schwab has to offer. And the behavior we’re seeing from our clients is exactly what we would expect. We went from clients who experienced a lot of change and might have had dual relationships at Ameritrade and somewhere else, making the decision that this wasn’t where they wanted to be.

And so we did see some attrition. That attrition was well below what our expectations were. And now we’re seeing what we’d expect to see in the next phase, which is client satisfaction from those clients that were moved, who had their experience change, improving dramatically. We’re up 35 points in our advisory services business in terms of our overall client promoter scores following the conversion. And on the retail side, nine months after a client moves, their satisfaction is up 50 points. So, we have built a platform that both sets of clients love. And now what we get to do for the long term and for the foreseeable future is deliver our mission of making a difference in our clients’ lives through a platform that’s never been stronger on the retail side and the adviser side than it is right now today.

And so, we’re confident in our long-term organic growth rate. We think the behavior we’re seeing is exactly in line with what we would have expected, and are very optimistic for our future growth.

Operator: Next, we’ll go to the line of Michael Cyprys from Morgan Stanley. Please go ahead.

Michael Cyprys: Maybe just circling back to the Wells Fargo announcement. Maybe you could just help clarify for us the magnitude of cash that you have in fiduciary accounts, the types of accounts these represent where you offer the money funding equivalent yields, is this just retirement only? And then just more broadly, how do you think about the risk over the long term that industry practices evolve with more account types over time that capture these money fund equivalent yields?

Walt Bettinger: So, I just want to clarify, in our fiduciary relationships where we — in our Managed Investing programs, our wealth programs, cash assets are invested in a sweep government money fund. So, we don’t have this exposure that Wells Fargo has.

Operator: Next, we’ll go to the line of Chris Allen from Citi. Please go ahead.

Chris Allen: I wanted to ask about the 3% NIM outlook for 2025. Just wondering what are the parameters that you’re baking in to get there? Does this entail any of the changes that you talked about around the balance sheet strategy in terms of shortening duration as well?

Peter Crawford: Yes. Thanks, Chris. So, the 3% — approaching — NIM approaching 3% by the end of 2025, the primary driver of that is, again, the moderation of the client transactional cash realignment activity and the paydown of the supplemental borrowing. That is very, very accretive to our net interest margin. In terms of whether the comments that Walt provided have any influence over that, I’d just reiterate what he said, which is that is something that’s evolutionary, not revolutionary. It’s going to play out over multiple years. And so, it doesn’t influence at all really the — that more near-term outlook that we have for the end of — towards the end of 2025. Thanks for the question.

Jeff Edwards: Operator, I think that time for one short question, and then we’re going to close.

Operator: Absolutely. Our final question comes from the line of Devin Ryan from Citizens JMP. Please go ahead.

Devin Ryan: Just had a question about lending. And obviously, it’s been an area you guys have been talking about both at the Investor Day and then today as well. Just thinking about kind of where Schwab is, your 40 basis point decline assets. I think you highlighted that the industry [Technical Difficulty] [00:57:24] percent. So just would love to get some color around where — how much of that gap do you think you could actually close just with your, I guess, suite of products, number one. And number two, what you’re comfortable going to in terms of the mix of the balance sheet, especially just given some of the evolution of the balance sheet we’re talking about today as well.

Walt Bettinger: Thanks for the question, Devin. We certainly think we can expand our lending capabilities. And the way we’re focused on doing that is by creating the easiest, most straightforward, client-friendly process in the industry. We’ve seen that within our pledged asset line program where it’s now 1.7 days average cycle time to get a pledged asset line. It’s actually less than a day for individual and joint accounts, but our more complex ones drive up the average time. 85% of those originations are now done digitally. These are major enhancements. And we’re making other enhancements to our mortgage process, to the way we lend to our higher net worth clients and the experience they have. So, we’re trying to build an experience that makes it such that our Schwab clients never want to borrow somewhere else, they want to borrow from us.

So, we do think there is lots of runway to close that gap, and we’re quite bullish on our — on the opportunity here. Now, we are in an interest rate environment where there’s not as much borrowing as we’ve seen historically, not as much rolling over of loans and things. But we are confident that we’ve built the process, the experience and the offer that we should be for our clients an exceptional place to borrow. And that includes our industry-leading rates for clients that have assets with us. Final comment I’d make is it’s also a terrific way to add to the service that we provide to our adviser clients. Our advisers for years have been asking us to do more lending because they don’t want to have to introduce another party into the relationship.

And increasingly, we’re able to meet their needs, which delights them, and we think we’ll be able to do more of that over time.

Peter Crawford: All right. Well, I think it’s my opportunity or my time to close. I want to thank all of you for joining us this morning and hearing our thoughts on the business and the opportunity in front of us. I think it’s very easy to focus on very near-term practical measures. And as client cash realignment activity, plus or minus $1 billion, or supplement our borrowing or net interest margin in terms of — which we measure in terms of basis points. And those of you who follow the Company for a long time know that we manage for the long term. We have a very long-term orientation. Our faith in our clients, our faith in our strategy, our confidence in that strategy really helps us remain focused on long term. And Walt described this year at the outset as a transitional year.

And I think as we sit here halfway through the year, we feel really good about how that transition is going in terms of our strategic positioning, in terms of the completion of the Ameritrade integration and the satisfaction of those clients, in terms of the organic growth, the capital levels, and even the financial performance. And we certainly recognize the journey is not over by any means. We’re feeling very confident about where we are and where we’re going. Thanks, everyone, again, and we look forward to speaking with you again in October.