Charles Schwab Corporation (The)

to Schwab's 2022 Fall Business Update. This is Jeff Edwards, Managing Director of Investor Relations, and I'm joined today by our co-chairman and CEO, Walt Bettinger, President Rick Worcester, and CFO Peter Crawford. And finally, please don't forget about the enduring wall of words, which reminds us all that the future is uncertain, so please stay up to date with our disclosures.

With that, Walt, take it away. that began in 2020 and many others. In each of these time periods, there was a list of doubters. In fact, I recently went back and read some of the reports and articles that were written about Schwab during those periods. And although I generally respect those who doubted us, I have enormous confidence in our firm and in our people. I have enormous confidence in our ability to serve our 30 million plus clients. and enormous confidence in our ability to deliver for our long-term stockholders. As we all know, the third quarter was very difficult for investors. The Federal Reserve continued with an aggressive policy designed to battle deep-seated inflation. They did so with steep increases in rates, and at the same time, equity markets fell for the third consecutive quarter. The S&P 500 and NASDAQ now showing year-to-date losses between 25 and 32 percent. And yet, despite these challenging days for investing, our all-weather business model continued to prove successful. Whether we're looking at our strong organic asset growth rate of 7 percent, reflected in $115 billion of net new assets, or the fact that our retail net new assets in the third quarter were 20 percent higher than the same period last year, it's clear that our through-client size strategy is working and a major contributor to our organic growth. And just as our client strategy was successful, our commitment to encouraging a long-term approach to investing was also reflected in our clients' actions. Even with investing sentiment near record lows, our clients remained resilient with net equity buys exceeding net sales. and our clients remained trusting in our advisory services with flows into these solutions in excess of $8 billion during the quarter. Now, as expected in a difficult investing environment, cash is an important part of our clients' investing approach. Now, this is something that we've always known, always believed in, and as I often say, there's no investor who has ever lived through a bear market who then doubts that cash is a critical part of an asset allocation strategy. Recently, we know there's been a lot of commentary about so-called client cash sorting. And there's been a lot of commentary as if it's some kind of bad thing or something that we didn't expect, or frankly, didn't welcome. And to the contrary, we view it as both expected and as a positive. In fact, we put a lot of effort into helping our clients make the most of their cash. Our approach to assisting clients with their cash needs is robust, and it's very focused on their needs. For example, for transactional cash, we offer competitive yields and features relative to other transaction accounts, including taking steps like pioneering fee-free ATM withdrawals worldwide. And for investment cash, we offer money market funds with low fees, CDs from banks across the country, and a variety of quality fixed income investment options. Our clients' decisions with their cash are, of course, influenced by the interest rate environment. During a ZERP or zero interest rate environment, clients have little yield motivation to move money from a transactional category, like a bank sweep or checking, to an investment category like a purchase money fund or a fixed income offering. And then, of course, when rates rise, it's a prudent decision for clients to make that move with their investment cash. And we encourage that. We encourage those moves. We make outbound phone calls from our financial consultants and others. We do seminars. We offer marketing that encourages clients to position their investment cash into higher yielding alternatives. Now, some might question, well, Why would Schwab do that? We know that we take a revenue hit with every dollar that moves, for example, from a bank sweep to a money market fund. But to those individuals who question it, I would suggest that maybe they don't really understand what we mean when we say through clients' eyes, or they don't really understand our long-term horizon for growth. Because we proactively contact clients because it's the right thing to do. the right thing to move their investment cash into higher yielding options. And our clients, not surprisingly, respond very favorably to our proactive efforts to show them how to increase their yields on investment cash. I guess if I were to summarize this slide, I'd say that if you understand our firm, if you understand Schwab, you know we are doing exactly what you should expect us to do in the middle of a rapidly rising rate environment. And our clients are doing exactly what we expect that they would and, frankly, should do. And none of what is happening should interfere with our ability to grow our revenue and our net interest margin. And none of it should impact our ability to deliver earnings growth consistent with our financial formula over the coming quarters and years. Before I pass it over to Rick to cover some of our strategic efforts in more detail, I want to spend a couple of moments on the status of our Ameritrade integration and conversion. Because we're closing our second full year of preparing for conversion, and we feel very good about where we are. We have built tremendous scale and capacity, far greater than we anticipated when we announced this acquisition. We've committed to retaining our high-end clients with capabilities that take great features from both firms and For example, from Ameritrade, things like iReval or Thinkorswim and Thinkpipes. We've worked diligently to make the actual conversion process streamlined and simple for our combined clients, along with retaining key high-quality employees. And of course, we've done all this, as you know, in the middle of a global pandemic. When we complete this integration, we think we will be offering the industry's top overall investing experience. Of course, nothing as large and complex as this integration and conversion goes perfectly. In addition to the pandemic-related issues, which we're all familiar with, two additional issues are likely to push our total integration spend about 10% higher than we anticipated 18 months ago. The first one is probably obvious to everyone. It's inflation. Technology equipment, cloud contracts, market-driven staff compensation, all these cost more. Frankly, they cost a lot more than we anticipated back in 2019 and 2020. In addition, in light of the war in the Ukraine, we made a decision. We believe a correct decision. And this is actually creating the largest reason for these higher costs and also likely to push the last conversion of somewhere around 1% or 2% of our clients back into the first part of 2024. But I want to emphasize it will not impact the amount or timing of the expense synergies we've committed to, and here's why. The thinkorswim system at Ameritrade relied very heavily on software developers and engineers based in Russia. These individuals managed the majority of the TOS systems. from design to enhancement and even to ongoing daily maintenance. When the war in Ukraine began, we stopped using those Russian-based resources. This meant not only moving all of those efforts, but also training dozens and dozens of new engineers and developers on the TOS system. And this was very costly, but it was the right thing to do. And I know that anyone listening to this call would have made the exact same decision that we made. But just to sum all this up, despite the pandemic, despite record client engagement, despite the highest inflation in 40 years, despite geopolitical and market volatility, we remain on track to convert 98 to 99% of our clients in 2023, deliver on the expense synergies we committed to at the very outset, and do so with a total integration budget only modestly above our early 2021 estimates. So, Rick, let me go ahead and turn it over to you to talk in more detail about some of our strategic efforts.

Thank you, Walt. Walt shared the success we're having with clients, and it starts with seeing through clients' eyes and making a difference in clients' financial lives. We continue to be guided by our through clients' eyes approach and have additional opportunities to expand how we help clients. We're currently focused on three strategic focus areas, scale and efficiency, win-win monetization, and client segmentation. Within scale and efficiency, Walt just shared an update on our firm's number one priority, integration. As part of the integration, we've accelerated investments in technology and the client experience to make it even easier for clients to do business with us. Being through clients' eyes by making it easier to invest and build wealth has been a hallmark of both Schwab and Ameritrade. Our ongoing efforts to enhance experiences for our clients and our field will continue to be a key differentiator. I'll spend our time today going into more detail on three opportunities, wealth management, lending, and our RIA client segment. Said it before and it remains true today, we are bullish on advice. Although investor sentiment has fallen in this current market environment, our clients are still highly engaged in our wealth and advice solutions, and flows continue to be strong. I've spoken in prior quarters about how Schwab is uniquely positioned to deliver a continuum of wealth management experiences to meet a range of client needs. On one end of the continuum, we offer clients access to investment solutions they can use for part of their portfolios. The acquisitions Acquisition of the Wasmer Schroeder strategies is a clear example of a win-win opportunity for both clients and our firm. We brought down the cost of access to fixed income managed accounts on our platform, and flows have moved to Schwab. The strategies have attracted over $5 billion in net flows over the last two years. This includes a billion dollars in net flows in the third quarter alone, the highest quarterly net flows we've seen since launching these strategies on the retail platform in January of 2021. Another investment solution I'll highlight briefly is Schwab Personalized Indexing. We're still in the early days and our efforts are focused on educating clients in the field about the potential benefits direct indexing can provide. We expect it will grow more rapidly as clients continue to learn about it. Moving along the continuum, we're also meeting client needs with our two full-service wealth offerings, Schwab Wealth Advisory and Schwab Advisor Network, or SAN. Despite a challenging market environment, Clients are highly engaged. Both Schwab Wealth Advisory and SAN attracted strong quarterly net flows in the third quarter at $2.6 billion and $5.2 billion, respectively. This is an opportunity for win-win monetization, as it is an area where we are investing in the client experience and have several levers to improve our economics. First, we believe there's an opportunity to attract more clients to the programs. particularly at Ameritrade, where less than 7% of assets are engaged in advice, and we have already seen 40% of Ameritrade FCs enroll a client in Schwab Wealth Advisory, and over 80% of Ameritrade FCs have enrolled a client in some form of Schwab advice. Second, we believe we can increase flows into Schwab Wealth Advisory through continuing to enhance the program for clients and making it easier for our field to use. Third, We are reviewing our SAND program economics to make sure we are capturing our fair share given the value Schwab brings to the program including our track record of successful new client acquisition, our sustained marketing investment, our brand, and the important role our field plays in the process and with clients. Schwab Wealth Advisory consistently has the highest client promoter scores at the firm and we're investing in the program to make sure it remains that way and increases its growth. As I've shared previously, we are adding to our capacity to sustain growth, training advisors in new ways to add to the wealth expertise we're bringing to clients, and making investments in the sales team that supports this offer. We're enhancing the client experience, including making it easier to access our supporting expert teams and beginning to add to our digital experiences. And we are expanding our capabilities, and over time, plan to provide a discretionary wealth management experience. We believe that demand for advice will continue to increase, and we expect to see growth in both Schwab Wealth Advisory and SAN. With Through Client's Eyes as our North Star, we want to make sure that no matter what type of advice an investor needs, that we can connect them with the right model. When we think about long-term growth, we believe lending is a win-win opportunity as well. We know that retail clients want to consolidate as much of their financial lives as possible in one place. We know that RIAs want to reduce the number of relationships their clients need to have with financial institutions. Clients who do their borrowing at Schwab today are delighted by our competitive rates, and our client promoter scores exemplify that. And with a large balance sheet, this is a productive use of capital for us. With our lending offer, we are making investments today so we can be the preferred lending provider for clients on our platform. We introduced a preferred rate program and we are enhancing the digital experience. We are building out our service teams to provide more tailored service akin to what you might see at the largest banks or wealth firms. In the third quarter, we expanded the rollout of the ultra high net worth senior lending team model to six more retail regions in preparation for full retail rollout by the end of the year. In the last quarter, we started to train and license more than 600 Ameritrade FCs so they can offer PAL and mortgage loans to their clients. We've also seen increased retail FC adoption of lending despite rising rates. And we've partnered with advisor services to help onboard some significant new RIAs with billions in assets through our lending capabilities. These efforts have been met with very positive feedback. Even in a difficult lending environment, we are seeing growth. PAL demand continues to grow. It is up 31% compared to last year because demand is driven by factors outside of the rate cycle. As we continue to build out the offer for the future, we will take the no trade-offs approach to lending that clients expect from Schwab. Attractive rates, enhanced digital experiences, and a tailored service model. As we've shared previously, About 2% of retail clients turn to Schwab for their borrowing needs. We see about the same level of utilization among RIA clients as well. We believe there is an attractive amount of potential upside here. Now let's turn to client segmentation. We are continuing to enhance and expand the services and solutions that we offer to our RIA client segment. Expanding our institutional no transaction fee, or INTF, mutual fund offering for RIAs who custody at Schwab and Ameritrade makes us even more attractive. Earlier this month, we added more than 800 institutional funds without a transaction fee from 15 leading third-party asset managers. This is in addition to over 130 funds already available through our strategic relationship with T. Rowe Price. We're thrilled to offer this expanded lineup to advisors with more choices for low-cost share classes without a transaction fee RIAs can personalize their clients' investment portfolios and put more of their clients' initial investments to work. It is a win for RIAs and their clients, and it is a win for us at Schwab. As I look at opportunities on the horizon, our through-client-size approach continues to be both our north star and our winning strategy. Clients are continuing to turn to Schwab, and they remain engaged despite economic uncertainties. This challenging environment reinforces the importance of our strategy and delivering on our strategic priorities. I'm energized by the momentum we've built. By continuing to keep clients at the forefront of everything we do, I'm confident that Schwab remains well-positioned to capitalize on the key opportunities ahead of us. And with that, I'll turn it over to Peter.

All right. Well, thank you very much, Rick. So you all had a chance to hear Walt and Rick talk about how our through clients' eyes strategy continues to resonate with investors despite the challenging environment and very low investor sentiment, how our cash strategy is consistent with that strategy, the progress we're making with the Ameritrade acquisition in spite of a number of unforeseen challenges, and how we're continuing to advance our appropriately ambitious strategic agenda. In my time today, I'll talk about how the combination of strong business momentum and rising interest rates overcame a tough equity market and more bearish investor sentiment to produce yet another quarter of record financial performance. I'll also provide an updated outlook for the rest of the year. And finally, I'll talk about how we're confident we will navigate through this environment and continue producing strong financial performance in the quarters and years ahead. What should hopefully become clear is that we're certainly benefiting from higher rates and are poised to benefit even more in the quarters and years ahead. even as we take steps to manage through some of the speed bumps that those higher rates present. But those speed bumps are quite manageable, which means that the most important factor in our long-term success is the strength of our business and our through client-side strategy, something that's producing strong momentum and positioning us to continue thriving even after rates eventually normalize. Let's talk about some of the factors that contributed to our record financial performance in the third quarter. Compared to the second quarter, we faced more headwinds than tailwinds, with equity markets down and the resulting bearish investor sentiment weighing on trading activity and margin utilization. We did, of course, benefit from rates that continued to increase across the curve. Now, in spite of the volatile market, we've been able to continue driving strong organic growth, roughly $300 billion in core net new assets in the first nine months of the year, despite record high tax payments by clients. and an average of over 1 million new accounts per quarter. Despite these headwinds, our financial performance in the third quarter broke multiple records. Revenue increased 20% year-over-year and 8% sequentially, driven by a 44% increase in net interest revenue, reflecting higher interest-earning assets, and a 52 basis point increase in our net interest margin year-over-year to 197 basis points. which was also up 35 basis points sequentially. That more than offset a decline in asset management and admin fees due to falling equity markets. Adjusted expenses were up 12 percent year-over-year, consistent with our expectations given higher headcount and the 5 percent across-the-board salary increase we implemented late last year. And we increased our adjusted pre-tax margin to 53 percent and produced a record $1.10 in adjusted EPS. Bank deposits were down 10% sequentially due to client cash allocation decisions that were broadly consistent with our expectations given the dramatic increase in rates. The decline in stockholders' equity was the product of unrealized mark-to-market losses in our available-for-sale portfolio, as well as $1.5 billion of common share buybacks and the redemption of our $400 million Series A preferred. Despite that nearly $2 billion of capital return, Our consolidated Tier 1 leverage ratio finished above our operating objective. Despite the challenging equity markets, we feel very confident about our ability to continue driving strong revenue growth, even as we maintain a high level of capital return. Assuming the Fed funds rate exits 2022 at 4.5%, we'd expect to produce an 11% to 13% year-over-year increase in revenue, consistent with the scenario we shared earlier. That reflects continued expansion of our net interest margin to the mid-210s in Q4, a roughly 10% to 12% decline in average interest-earning assets from December 2021 to December 2022, and net interest revenue higher than Q3 despite continued client cash allocations, decisions, and some limited and temporary borrowing from the FHLB to fund some of those outflows. We have taken steps to limit expense growth and would now expect full-year expense growth to be on the lower end of the 7% to 8% range we communicated a few months ago. Looking ahead to 2023, we continue to see no reason that the magnitude of client cash shorting will be dramatically different than the last rising rate cycle, suggesting balances trough at some point next year. We have ample sources of liquidity to support our clients and anticipate growth in both net interest margin and net interest revenue from Q4 of this year to Q4 of next year and beyond. And of course, you can expect that the higher pace of capital return we started in Q3 will continue. There's obviously been a lot of commentary, perhaps too much, on the topic of client cash shorting, and we continue to receive a lot of questions. I want to emphasize that this is a dynamic which we view as very much temporary, quite manageable and not a factor in our long-term performance. I want to reiterate a few high-level observations regarding our current beliefs around sorting, with additional detail in the appendix, which you're welcome to discuss with the IR team after the call. Now, we have broken these into two categories regarding the pace of sorting and the ultimate magnitude of sorting. First, we have extensive data that suggests that the rate we pay on transactional cash has little or no impact on the pace or magnitude of sorting. So you're not going to see us change our sweep deposit pricing philosophy to catch up or to influence client behavior. Second, we've also seen from experience, and it's consistent with intuition, that the pace of client cash reallocations decreases once the Fed stops hiking rates. we have seen over time that clients seek to maintain a minimum level of transactional or sweep cash in their account. And as we reach that point, any remaining client cash sorting is offset by organic cash inflows to both new and existing accounts. Fourth, higher cash balance accounts tend to move earliest, and we've already seen them decrease their activity. And fifth and finally, our client base today has a higher mix of clients who tend to maintain higher relative levels of transactional cash. Put all that together and we are confident that the activity we're seeing will abate. And as we said in our recent CFO commentary, we believe we're now in the middle innings of this process. There's also been a lot of speculation about actions we may need to take to support these client cash allocation decisions. So we thought it'd be helpful to share a few facts. First, we have access to roughly $100 to $150 billion of readily available cash over the next 15 months, roughly half of that from excess cash on hand or that the investment portfolio will generate, and the other half from cash that comes in through our net new assets. Second, we also have access to a very large amount of funding from the FHLB, from retail CDs we're looking to offer, and various forms of supplemental funding. In the last two weeks, we initiated borrowings from the FHLB of roughly $10 billion. We expect the usage of these to be quite limited, perhaps no more than a mid-single-digit percent of our liabilities, and quite temporary. But the capacity to do more and for a longer period of time is certainly there. So, any potential asset sales we do are likely to be very limited and opportunistic. It's really important to recognize that even after we reach peak rates this cycle, we have the ability to continue expanding our net interest margin over the following years as our fixed investment portfolio rolls over. And this NIM expansion would be additive to the through the cycle financial formula we have delivered over the years and expect to continue moving forward. I don't think I need to spend much time on capital return. We've been certainly discussing for a while our expectation for a higher level of capital return, and you saw that begin in the third quarter. Before I close, I want to pull up from some of our near-term dynamics and remind everyone about that through the cycle financial formula, which has worked over multiple decades, and we'd expect to continue working in the decades ahead. It's built on our through client size strategy and no trade-offs positioning, leading to consistent organic growth. And then even as we've worked our way through multiple rate cycles, made disruptive moves like cutting equity commissions to zero and acquiring Ameritrade, we've been able to convert that strong organic growth into asset growth, revenue growth, and through ongoing expense discipline, expanding margins and EPS growth over 20%. That has been the investment thesis for Schwab for much of our history, and it continues to be the same today. We were speaking with a member of the investment community last week who said this last quarter demonstrated our ability to, quote, walk and chew gum at the same time. He was referring to our ability to grow top-line revenue and deliver capital return at the same time. And while we'd argue that this feat is a bit more difficult for most firms to achieve than that well-worn analogy would suggest, he is right. That is exactly what we expect of ourselves. But equally notable is our ability this quarter, this year, to both help our clients and our business navigate this extraordinary environment while at the same time taking the steps necessary to drive long-term operating and financial performance. As I noted previously, in the last 20 years, we have been through two full rate cycles, down, up, down, up. On the way down, we get asked about capital and premium amortization. On the way up, we're asked about liquidity and sorting. But meanwhile, amidst all these questions, the Schwab engine keeps chugging along, adding clients, finding new revenue opportunities, driving greater efficiency, returning capital to stockholders, growing earnings power. rewarding those stockholders who have a long-term orientation. And I am confident that all of those components will be part of our story this cycle. Jeff, let me turn it over to you for our Q&A.

Great. Operator, can we please go ahead and go to the first question?

Yes, if you'd like to ask a question, please press star 1 on your phone. Unmute and record your name. One moment for the first question. Our first question will come from Ken Worthington with JP Morgan. Your line is open.

Hi. Good afternoon. Thanks for taking the one question. On win-win monetization, as these programs that you have in place season, so just the existing ones you have, what do you think that could add to revenue as it seasons sort of annually? on the 800 funds. How much in AUM do those 800 funds have on the platform right now, and how quickly do you expect that to ramp into the fee-free institutional offering? Thanks.

Thanks for the question. In terms of the win-win monetization opportunities, we believe we have a lot of upside. I mean, both wealth management and lending, two examples of programs that we're focused on today, we think there's enormous upside there. And I shared some of the levers we're trying to pull on wealth. And in lending, of course, we think we'll see more of the upside when we get back into a more normalized interest rate environment. But essentially what we've done is we've set the table, we've graded the digital experiences, the product capabilities, And we've educated our field to be ready to engage clients in those discussions. And so when the interest rate environment becomes more favorable, we expect there to be benefits there. When we think about personalized indexing, which is another one of the programs we've talked about for a while, we expect that to be a 10-year ride of money moving from active strategies and some taxable assets that are in taxable ETFs to move in there. So we think there's a long runway to all three of these programs that we think will provide meaningful upside in the coming years. As it relates to the INTF platform, it is very new. We are seeing assets flow there, and our expectation there, of course, is also strong. I think part of what we're seeing, or part of the challenge broadly, whether it's INTF or our relationship with T. Rowe Price, It's just it's been a difficult time for active management, and so that's one that we believe over the long run, again, will pay dividends, but it will in part depend on it being an environment where active management is in favor.

Great. Thank you very much.

Our next question comes from Rich Rapetto with Piper Sandler. Your line is open.

Good morning or good afternoon, Walt and Rick and Peter. First, thanks, Walt, for emphasizing the long-term franchise value related to cash allocation. That's a helpful reminder for us. I guess my question would be, Peter, is you offered some reasons why you thought that cash sorting had reached the middle innings and why it won't exceed the last cycle. Can you put any numbers behind that? Maybe a little bit more detail on why you expect that, and is it due? Well, that would be the question, I guess.

Thank you, Rich, for the question. So, you know, we have some details in the appendix, which you can certainly reference, and I encourage you to follow up with the IR team if you want more explanation on those. But it really comes back to a number of different factors that contribute to that view. It comes back to the fundamentals of our cash strategy, We look at the evidence from what we've seen and the empirical experience that we have from the last rising rate cycles. We look at the dynamics we see with what we're seeing thus far, which are fitting the patterns that we've seen in that prior rate cycle. In fact, I was looking at some model output just the other day that suggested that what we've seen thus far is entirely consistent with what we saw in the last rising rate cycle when you control for the fact that the rates have moved up much more quickly than they did that last cycle. So we're really not seeing anything that is shaking our view that this is proceeding exactly how we would anticipate. Okay.

Thanks very much, Peter.

Our next question comes from Dan Fannin with Jefferies. Your line is open.

Thanks. I wanted to follow up on that just with regards to the funding of some of the sorting. And you talked about utilizing the FHLB line, but I think you also said that will be short term. So thinking about the access that you have, the capital and the uses, you know, what gives you confidence that you're not going to need to tap into that for longer periods?

So it comes back to our view on when the, you know, we've seen over time that these client cash allocation decisions at level transactional cash reaches a certain floor, and as it starts to approach that floor, it starts to taper off, the allocations start to taper off, and then it's offset by cash that comes in through new accounts. And so we view, our view is that that's going to trough at some point in 2023. And then as new cash comes in, we'll be able to reduce the use of the FHLB and any retail CD offers that we have or any other forms of funding that we access.

Our next question comes from Steven Chewback with Wolf Research. Your line is open.

Hi, good afternoon. So, Peter, I wanted to ask a question on capital. You've announced a large buyback authorization. As you've noted, under your binding regulatory constraint of Tier 1 leverage, you're already in an excess position, but your TCE ratio is running at low levels, largely a function of negative AOCI marks, but it's prompted questions as to whether your lower TCE might preclude buyback. If it turns negative, it could even preclude tapping of the FHLB facility. So to what extent does the TCE ratio impact your ability to execute buybacks or tapping the FHLB? And how should we think about your philosophy around optimizing capital ratios to ensure you're not running with too much excess?

Yeah, thanks for the question. So I think I said last time in the business update that our AOCI was not at all a factor in our capital planning decisions, and that remains the case. I would say that the idea of negative TCE or something like that is not at all a major source of concern. We actually are now in the process of transferring additional securities from available for sale to held to maturity. And as we do that, it would take an instantaneous several hundred basis points increase in rates for our tangible common equity to go negative. which certainly seems like a very remote possibility. And given the fact that the duration on that available for sale portfolio is under three and a half, that amortizes down relatively quickly. So over time, it would take even a larger increase in interest rates for TCE to go negative. And while you're right that negative TC means that prevents us from initiating new borrowings from the FHLB without Fed approval, it doesn't affect existing borrowings. It also doesn't affect any of the other forms of funding that I talked about, the CDs or some of the other forms of funding. So we really just don't think that this is a meaningful issue or a meaningful concern. And optimizing the buybacks? Sorry. Sorry, and on the buybacks, I think no change in our thinking on the buybacks. We still, as you point out, AOCI is not part of our regulatory capital. That is what we manage to, and we continue to, as you've seen in Q3, continue to pursue the opportunistic return of capital to our stockholders.

That's great. Thanks so much for taking my questions.

Let's take a question from the web console. This is from Ben Budish at Barclays. Walt, maybe you can take this. Can you speak a little bit to the pipeline for new RIAs coming in, and if we should think about how the integration and conversion might factor into that trend going forward?

Sure. Thanks, Ben, for the question. I was actually just looking at a report on pipeline for new RIAs moving independent, and those numbers remain very robust. They are on par with what we have seen over recent quarters. Actually, if I were to think about a slowdown in RIAs moving into the independent model, I wouldn't think of it correlated to integration. I would think of it more correlated to the market environment, and that's what I was interested in when I actually asked this exact question myself a week or so ago to see whether the equity market declined had made it less apt for RIAs to consider moving to independence. And the fact that the pipeline was comparable to what it's been over recent quarters actually was very encouraging to me. So I guess in summary, I would say I would not expect the integration to have an impact on breakaways, but I do think you have to watch the equity markets because over time it can be more difficult for someone to break away when they're asking their clients to follow them after a period in which the equity markets have suffered as much as they have of late.

Our next question comes from Devin Ryan with J&P Securities. Your line is open.

Hey, thanks. Good afternoon. Just another one on the balance sheet so I understand. So the $10 billion in FHLB, does that provide liquidity for additional cash sorting from here so you're getting ahead of something, or is that just meeting kind of what you've seen thus far, just trying to understand the strategy around that? And then any help that you can provide just thinking about kind of the blended borrowing cost to get to the $3 billion in NIR and how you're thinking about deposit data on future Fed hikes?

Yeah, so this may be one where you want to take this offline and have a conversation with the IR team around going through those costs, Devin. But the FHLB borrowing was a bit to cover some of what we've seen thus far in October and also a bit to get ahead of it. We always want to be ahead of the game from a liquidity standpoint. And then in terms of the costs and all that, we can get into that in more detail offline with the IR team.

Sure. Okay. Thank you.

Our next question comes from Kyle Voigt with KBW. Your line is open.

Thank you. Maybe just a follow-up on the disclosure of the $100 to $150 billion of cash flows that are available from cash on hand, cash from NNA and the portfolio cash flows. I guess given the current pace of sorting, I was wondering if you could provide a little bit more granularity on some of those buckets. So what was the current excess cash on hand on the balance sheet as of the third quarter? And then maybe over the next 12-month period, what percentage of the securities portfolio would you expect to mature? Or even giving that in dollar terms would also be very helpful.

Hey, Kyle, it's Jeff. Definitely happy to follow up with you kind of after the call on some of those more tactical questions. I definitely would point to the appendix and some of the things we've talked about as good directional proxies on that. But again, we're happy to take that.

Our next question comes from Brian Bedell with Deutsche Bank. Your line is open.

Thanks very much. I'll take my question. Maybe looking longer term in the development of the NEM that you talked about, Peter, three or more, how are you thinking about potentially protecting that in the future? I know this is a little bit well out in the future, but if we have a situation for whatever reason that the Fed really pulls back on rate cuts at some point in the future, is there a way to either naturally hedge that with the securities portfolio reinvestments, or would you consider using derivatives to lock in some of the benefit of the rate increases that we've recently had?

It's an interesting question. So I'd say a couple of things. We The way we think about managing the duration on the asset side of the equation is really very much an outcome of what we view as the liability duration. And in different rate environments, of course, that liability duration changes. So in a higher rate environment, liability duration shrinks, and so on the margin, you tend to shrink your asset duration, and the reverse is obviously true. You know, we have recently resumed the capability to have derivatives. You know, we're not thinking about that in the context necessarily of hedging sort of downside risk, but we see that as sometimes, in some cases, a more efficient way to manage overall asset duration. I would anticipate a dramatic change in our philosophy than what we have done previously. And there's certainly no assumption in that chart that you saw there that we shared any assumption there that we manage our investing philosophy differently than what we've done in the past.

Our next question comes from Bill Katz with Credit Suisse. Your line is open.

Okay, thank you very much. I think I'll switch up the topic here a little bit, and maybe we can talk a little about expense outlook. So, Walt, you mentioned a little bit of inflation on sort of the integration charges, and then, Peter, you sort of took down the guidance to a low end of the range for the fourth quarter, which is great to see. Looking into 2023 and thinking about incremental margin on the revenue growth coming off of NII, and some of these inflationary type of factors. How should we think about maybe core expense growth for 23, maybe into 24, particularly as you get a greater line of sight to residual savings with the Ameritrade integration? Thank you.

Thanks, Bill. So if I tell you everything about expenses now, you won't come to the winter business update in February. So I want to make sure I want to know in all seriousness, we're still working through our expense planning for 2023 and certainly 2024. I would say maybe a couple of things. First, maybe to take a step back. Our number one priority from an expense standpoint is always to support our clients. And this is a time of period where our clients certainly need us. Beyond that, our priorities are really around driving down expense on client assets and through the cycle, not every year, but through the cycle, delivering operating leverage, which is a key part of our financial formula. And then, of course, making appropriate investments and and the long-term profitable growth of our business. It's certainly a delicate balance to manage all three, but I think you've seen us do that in the past. When we're facing more headwinds than tailwinds, we tend to pull back on that third one, and when we got the wind at our backs, we tend to lean a little bit more into some of those longer-term investments. In terms of the, as you think about 2024, Walt talked about this, but maybe just to reiterate it on the expense area, there's really no no changes in our thinking around expense or expectations around expense synergies. Certainly the magnitude of those synergies, we continue to be very committed to and confident in our ability to deliver on those. We'd expect by the end of this year we'll probably have achieved on a run rate basis roughly 60%, 65% of those expense synergies. And then with the integration timeline that Walt talked about, we would expect to deliver the vast majority of those remaining synergies by the end of 2024.

Our next question comes from Michael Cypress with Morgan Stanley. Your line is open.

Hey, thanks for taking the question. I was just hoping you could update us on the securities portfolio reinvestment strategy and yields. How's that evolving? And it also looked like duration on the portfolio shortened a little bit. So I was hoping you could unpack some of the moving pieces that drove that as rates did increase. Do you feel like at this point the book has sort of fully extended? And how do you think about any sort of risk of additional extension risk from here?

Thank you. So from a reinvestment rate standpoint, we are focused on cash right now and maintaining cash. There's not much reinvesting going on. On duration, you're absolutely right. Actually, despite the, you know, significant increase in rates across the curve in the last quarter, our duration on our investment portfolio actually shrank by a tenth. So we went from roughly 4.1 to a little under 4. And that reflects the types of securities that we have purchased that we really very much target securities that don't have that degree of extension risk. So we feel really good about that. If you look at, actually, there's a chart in the appendix I encourage you to take a look at that looks at the the duration profile of our portfolio over time versus what you see in some of the benchmarks. So we feel very, very good about the lack of duration extension risk in the portfolio.

Great. Thank you.

Our next question comes from Brennan Hawken with UBS. Your line is open.

Good afternoon. Thanks for taking my question. I just would like to maybe dig in a little bit on your current understanding that the situation's fluid, and thanks for the incremental $10 billion so far borrowing on FHLB and the color around that. Where would you think that that would peak out? I'd assume, given the pace we're running at and the fact that you don't think we're going to see any worse experience than what we saw last cycle, we're We're not very far from that period. And so is embedded within your guidance that the FHLB will ramp up into the beginning of next year and then be paid down as you hit that plateau and you see cash begin to grow normally and then it's off the balance sheet by the end of the year? Is that what's reflected? Or could you give a little color around what your expectations are for that funding?

Sure. So the important point is we definitely view this as very much a temporary funding source as it has been in the past. We've used FHLB previously as a temporary funding source, and we absolutely view it the same way today. I mentioned earlier that we would expect it to be no higher than a mid-single-digit percent of our overall interest-earning assets. And to be clear, that is the combination of FHLB as well as these other funding sources like CD issuance and so forth. and given our expectations that the client cash balances on the balance sheet trough at some point in 2023, that would be the period where we'd be at the peak level, and then as we get the cash balances grow, that that replaces the higher cost, but temporary higher cost, but temporary FHLB, CDs, et cetera, which, again, is a helpful clearly from a NIM standpoint as we start to pay those balances off and replace them with the client cash balances.

Great. Thank you for that, Culler. Just one quick follow-up.

The CDs, is there any term you're thinking? Sorry, yeah. Just remember, just one thing is in Peter's CFO commentary, right, he talked about a percentage that he thought might be appropriate through the remainder of the cycle. So that's definitely a good aiming point. And we aren't accepting follow-ups, so I think we are, it looks like the queue is now empty, so I'll turn it over to Walt to take us on.

Thanks again, Jeff, and I want to thank everyone for joining us today. Today is actually a special day, an important milestone. As many of you know, our own Rich Fowler, he of the top-down days, this is his last quarter as head of investor relations, and my understanding is he's going to sprint off into retirement. Those of you who know Rich know that he was a college-level sprinter, which is not to be a surprise to any of us who know Rich, but he's going to sprint off into retirement. Rich is the only C-I-R-O that we have ever had at Schwab. That's pretty remarkable. He's been here through three CFOs, over 100 quarterly earning cycles, But when I think of Rich, the things that stand out are his integrity, clarity, transparency, whether it's disclosures, interactions with all of you, incredibly special. And as great of a CRO as he is, he's an even better person. We're going to miss you, Rich. You've done a wonderful job of preparing Jeff and team to step into your shoes. And I just, in speaking directly to Rich, want him to rest assured that the Priorities and values that he's embodied at Schwab will continue long after he has crossed the next finish line in his sprint. So thanks again, Rich, and thanks to all of you for joining us, and we look forward to speaking with you again in a future business update. Bye-bye.