Charles Schwab Corporation (The)

Good morning, everyone. Welcome to Schwab's 2022 Summer Business Update. This is Jeff Edwards, Managing Director of Investor Relations. I can only imagine how unsettling it might be for some of our more tenured update attendees to not hear the soothing rhythm of Mr. Fowler's voice kicking off the webcast this morning, but fear not that he is here comfortably perched right next to me in his best Ariat boots as we broadcast live from our headquarters in Westlake, Texas. We once again have our esteemed triumvirate of presenters for our 60-minute session today, which will include prepared remarks followed by Q&A. Walt Bettinger, along with Rick Worcester, will provide a strategic update, including insights into the current investor mindset as they navigate what has proven to be a challenging time in the market. Peter Crawford will then review our recent record financial performance, as well as discuss our current financial outlook before taking us to Q&A, which I will help moderate. For the Q&A portion, we will take questions from both the phone lines and the web console, And as always, we ask that you respect the one question plus one follow-up approach. A friendly reminder that today's materials will be posted to the IR website at the beginning of Peter's remarks. Last, but certainly not least, please do not forget to review our lovely wall of words, which reminds us all that outcomes can differ from expectations, so please stay up to date with our disclosures. With all that behind us, it's time to dive in. Walt, over to you.

Thanks a lot Jeff and good morning everyone. Thanks for investing some time to listen in on our July business update. So three months ago I emphasized the word consistency during our time together and I stressed the way consistency plays a critical role at Schwab. A consistent business strategy, a consistent commitment to feeding the virtuous cycle and innovating on behalf of investors. a consistent financial reporting cadence, a consistent commitment to our employees and the communities that we live and work in, and a consistent long-term approach that is focused not just on the current year, but on years to come. And today, as we discuss our second quarter results and our viewpoint for the future, the benefits of our consistent strategy and commitment to clients I think is highly evident. Because it's times like these when investor sentiment is negative, when the equity markets are falling. These are the times that separate companies who chase headlines and or focus on short-term success from a company like Schwab, a company built to last, a company built to succeed in all environments by serving investors and advisors in good times and difficult times while also delivering the superior financial results that you've seen. Before we discuss the second quarter in a bit more specifics, I want to touch on the announcement this morning from our board of directors that I would be joining our founder, Chuck Schwab, as co-chair of our board. Although it's personally a tremendous honor that Chuck and the board have seen fit to entrust me with this additional responsibility, the reality is this announcement is not about me. The announcement is aligned with the consistency theme that I just spoke of. Consistency and continuity are hallmarks of Schwab. They add to a sense of confidence that our clients, our employees, stockholders, and the communities where we live and work can rely on. Our consistent strategy that we refer to as through clients' eyes is not a catchy slogan. It's a timeless strategy. It's timeless because, in our view, it is the only business strategy that can stand the test of time, a strategy that places our clients first at the forefront of the decisions we make. And a key part of my new responsibilities as co-chair of the board will be to ensure that our focus on clients, our consistent focus on clients, remains the hallmark of Schwab for years to come. As all of you know well, in the second quarter, the equity markets officially entered bear market territory. Volatility remained quite high. And the Federal Reserve advanced their efforts to bring inflation under control by raising interest rates. And of course, this continued with another 75 basis point increase yesterday, moving the target rate to between 2.25% and 2.5%. Now, not surprisingly, investors felt this pain. They felt the pain from the equity market declines, with investor sentiment falling sharply and reaching levels that we haven't seen in many, many years. Interestingly, however, Schwab clients continued to invest for the long haul. I guess you could say consistency is a hallmark of our clients also. The net buy-sell ratio of our clients during the quarter, as punishing as the second quarter was, was only modestly lower than it was during the meme stock quarter back in Q1 of last year. I guess the takeaway is that our clients are investors. And with well over 30 million investor accounts, yes, there are different approaches for certain. Some are buy and hold. Some trade actively. Some rely on an independent advisor. Of course, many are a combination of all these. But what's important is that collectively, they take a long-term view of the markets. Collectively, they understand the power of being in the market. Collectively, they know that consistency, again, is the path to success when it comes to long-term investing. This long-term focus by our clients, it's not an accident. It's an outcome of our purpose and our strategy at Schwab because we focus on attracting long-term investors, on cultivating them, on educating them on the power of long-term diversified investing, on being in the market and staying in the market and being consistent with their investing strategies. And of course, there it is again, that word consistency. We believe that A major part of why our clients can feel confident with taking a long-term approach to their investing is the confidence that they have in us, said Schwab. Despite, again, what anyone would describe as a relatively brutal equity and bond market of late, our clients still give us net promoter scores in the mid to high 60s. With our fastest growing client base, high net worth investors offering us our highest scores overall. Our client easy score is now more than 90, reflecting our commitment to making it easy for our clients to do business with us. And meanwhile, 83% of our clients rate their phone-based service experience with us as perfect, a score of 7 out of 7. In addition to our efforts, of course, around ease of business and quality of service being recognized by our clients, we're gratified that many third parties do as well. The importance of service quality, timely and responsive service, it's especially critical during difficult times for investors because it's service quality that helps keep these investors informed, aware, and as confident as possible. It contributes to client engagement and optimism for the future. I just encourage you not to make the mistake and think that given where the markets are that our clients are not highly engaged, optimistic, and investing for the long term. I think as evidence reflecting this optimism, our clients continued to add money to their investing strategies at a relatively high rate, despite the bear market, with annualized organic growth about 5%, and really rather astonishing for a bear market, 6% when we exclude April, and of course its record-breaking levels of tax payments. This is a picture of a strong healthy company, excelling during a quarter as difficult as any quarter in many years. But I think what's also incredibly important is it's a picture of a healthy client base, a client base taking a long-term approach to investing, a consistent long-term philosophy. With over $180 billion in CoreNet new assets in the first half of this year and our seventh consecutive quarter with over 1 million new brokerage accounts, Our organic growth is indisputable. We still maintain a net TOA ratio of approximately 1.6 to 1. That means we're winning $1.60 from competitors for every dollar they win from us. Again, reflecting our competitive strength from a relative market is also there. Importantly, our efforts to ensure long-term organic growth continues as we diversify our client base. You can see that over half of our new to retail clients are under the age of 40, and they drove over half of our new client net new assets. So this is particularly important because it illustrates that not only are we winning in the under 40 segment, but we are winning under 40 investors with substantial investable assets, not simply winning younger investors who have little money with which to invest. And as we've repeatedly emphasized, our business serving independent investment advisors continues its success serving the needs of all sizes of advisors. So we aim to provide the best platform for every RIA, regardless of size or business model or specialty. And our success in winning clients of all shapes and sizes clearly indicates we're succeeding. Now, while we continue to be the leader in serving the largest advisors, again, what's fascinating about this chart is is that our largest share of net new assets year-to-date have actually come from smaller advisors, those who manage less than $500 million. As we've repeatedly stated, and I don't know how many more times we can continue, but we will keep saying it, our RIA custody business is committed to serving advisors of all sizes in a world-class manner and without charging custodial fees. So, Rick, let me turn it over to you, and you can cover some more details of some of our efforts.

Thanks, Walt, and hello, everyone. I'll spend the next few minutes talking more about why clients continue to turn to us in good times and in challenging times, and I'll share an update on several of our strategic initiatives. At the heart of our success is our through clients' eyes strategy, which has been our consistent strategy for years. When we see through our clients' eyes, our priorities are clear. And what we continue to hear from clients is they want the combination of low-cost and high-quality experiences and solutions that deliver great value. The transparency that is the foundation of any trusted relationship, multi-channel experiences that meet them where they are, and ease. Clients expect their interactions with us to be easy. And they also want to consolidate as much of their financial lives as possible into one place. The reason... clients continue to turn to Schwab is our consistent no trade-offs approach that you've heard Walt talk about. At Schwab, clients don't have to choose between low cost and stellar service. Access to some of the best service professionals in the industry and the digital and technology platforms and experiences they expect from a modern firm. Straightforward foundational investment offers and more personalized solutions. Tools and capabilities for those who want to take investing into their own hands and and a spectrum of advised offers that help clients get to where they want to go with the help of a professional. Proprietary and third-party products that give them the choice they want. They don't need to make any trade-offs because Schwab is uniquely positioned to deliver it all here with our strength as a wealth manager, as a bank, and as an asset manager. Our size and our focus uniquely enable us to deliver for clients in a way that sets us apart in the industry. And this focus which starts with seeing through clients' eyes, drives the virtuous cycle. This means we will continue to put clients at the forefront and challenge the status quo to benefit investors. And when we do that, investors will reward us by trusting us with more of their assets. This leads to consistent financial results and outstanding stockholder value, which enables us to continue to invest in our business to serve our clients' needs. And that brings us back to the start of the virtuous cycle. You see on this page what no trade-offs looks like for our clients. It is a competitive blended advice rate and the ability to talk to us quickly when you call for support. It is making investments to hire more client-facing employees who are there when a client walks in the door and investments in technology to make their experiences with us as easy as possible. It is a continuum of offerings ranging from straightforward to personalized, that meets the needs of investors who are just starting out and the needs of our high net worth clients who are seeking advice. It is industry recognized tools and resources for self-directed investors and advised offerings that continue to attract investors with more complex financial needs. And it is the product choice that our clients want. Our consistent strategy is supporting our clients through a challenging environment. At the same time, we remain focused on strengthening our offer to meet client needs into the future through our strategic focus areas. First, we're achieving even more scale and efficiency. Integration remains our number one priority. The integration is bringing capabilities that make our combined offer and experiences stronger than either firm was on its own. Our Schwab clients will benefit from Thinkorswim, iRebel, and ThinkPipes, while our Ameritrade clients will benefit from the advice capabilities, banking solutions, and digital experiences at Schwab. Together, our no-tradeoffs approach is even stronger. As we look to client day one beginning in 2023, we have already multiplied the scalability in our systems and increased our capacity to support client needs and growth well into the future. For example, we've increased systems capacity to support the volumes of the combined company with plenty of capacity for spikes in transaction volumes. The modernization work on our platforms has made them both more resilient as well as much easier to scale as the client base continues to expand. Our systems now support four to six times the previous volume of transactions with faster processing times across the board, including for trades and client communications. We also remain focused on EAST, making it easier for clients to do business with us and enhancing our operating model to support future growth. We're essentially accelerating several years of digital transformation into the integration window, enabling us to support a smooth client transition, deliver on our expense synergy commitments, and limit expense growth after client conversion. Turning now to win-win monetization opportunities, we remain focused on three key areas, wealth management, asset management, and lending. And I'll speak more about wealth and asset management in a moment, and I'll start with lending. the bank continues to be a differentiator for Schwab. We won the J.D. Power Award for being ranked highest in customer satisfaction with direct retail banking four years in a row. When we look at our lending business, even in the current interest rate environment, our PAL portfolio balance, or pledged asset line portfolio balance, was $14.8 billion, 42% above the prior year. And as we look ahead, We're excited to roll out a number of enhancements that will make it even easier to go through the loan process at Schwab. Finally, we're doing more to meet the segmented needs of our clients, including our high net worth clients, RIAs, and other key client segments. As Walt mentioned in his opening comments, a key aspect of being an enduring company is serving a broad range of clients and continuing to meet their needs as their circumstances and behavior change. We compete, however, against a number of firms that focus on specific client segments. To successfully compete against these firms, we will stay focused on our clients and leverage our scale to meet the needs of the various client segments that we serve. I'll wrap up today with a deeper look into how we're delivering a continuum of wealth management experiences, and I'll share more about our trader segment in particular. Looking at the continuum of our wealth management offer, we have attractive full-service wealth programs and investing solutions that clients are turning to in the current market environment. When you look at our full-service wealth programs, we recently rebranded our premier wealth management offer, Schwab Private Client, to be named Schwab Wealth Advisory, to better reflect what the offer does for clients. We're investing in the offer, including enhancing our digital experience, providing resources and support to advisors to ensure even greater advice and service, and bringing more of our wealth expertise at Schwab to the clients. We also have investing solutions that clients often use as a part of their portfolio. With the increase in interest rates, we've seen record flows into Wasmer Schroeder on the Schwab platform. We've also launched new personalized investing solutions to complement the core offering. Schwab personalized indexing launched and is delivered for clients in a volatile market and is delivered on the promised tax savings. We continue to make progress on expanding our thematic investing offer, And in the second quarter, we further expanded our ESG tools with the introduction of MSCI's ESG ratings for individual stocks. There is tremendous opportunity ahead to enhance the wealth management experience. Over time, we'll look at providing a discretionary wealth management experience for clients and have plans to add digital capabilities to meet clients where they are. Now, I'd like to turn to the work we are doing to support traders, one of our key segments. One of the benefits of integration is we will be able to offer Schwab and Ameritrade clients a leading end-to-end trading experience with Thinkorswim, one of the strongest active trader platforms in the industry. In August 2020, we announced plans to adopt Thinkorswim and integrate its award-winning trading platforms, education, and tools into our trader offerings for clients. This will provide our trader clients with three interconnected channels of engagement across desktop, web, and mobile, all integrated with one another. It's enhanced trading experiences and a comprehensive set of trading tools across the product space, supporting equities, options, ETFs, futures, and foreign exchange trading, and a tightly integrated trade and portfolio analysis capability. In fact, we recently rolled out new enhancements that reinforce our commitment to the Thinkorswim platform, including providing clients with greater opportunities for customization. And in April, we launched a virtual active trader branch. Here, active trader financial consultants Focus on trader coaching and wealth management to help meet the unique needs of qualifying self-directed traders. Finally, I'd point out that one of our biggest focus areas for our trader clients is trading platform stability. Nothing is more important to our business than safeguarding our systems and ensuring our clients have reliable access to their accounts. I'll wrap up where Walt started. With our through client size approach as our consistent strategy, we continue to be there for our clients even as the market has become more challenging for them. This approach sets us apart in the industry and puts us in a strong competitive position, allowing us to continue to invest in the strategic initiatives that will meet client needs into the future while enabling the outstanding financial performance that Peter's about to discuss. So, Peter, over to you.