Charles Schwab Corporation (The)

Hello and welcome to the Schwab 2023 Fall Business Update. This is Jeff Edwards, Head of Investor Relations, and I'm joined today by our panel of presenters, Co-Chairman and CEO Walt Bettinger, President Rick Worcester, and CFO Peter Crawford. We have plenty to cover today, so I'm certainly going to get out of the way here pretty quickly, but let's touch on a few housekeeping matters. Similar to past events, I'll be helping facilitate Q&A and another friendly reminder to please adhere to the one question, no follow-up format. As always, please don't hesitate to reach out to your family IR team with any clarifying or other reconciling questions. The slides for today's business update will be posted to the IR website at the beginning of Peter's section. And finally, the forward-looking statements page in all its glory, which reminds us all that the future is indeed uncertain, so please stay in touch with our ongoing disclosures. And with that, I'll turn it over to Walt.

Well, good morning, everyone. Thank you for joining us for our October Business Update. Rick, Peter and I are excited to share good news with you as we review our third quarter. You'll hear about our tremendous progress in the conversion of former Ameritrade clients over to Schwab, our ongoing success serving clients and gathering assets, the significant opportunity for ongoing organic growth and marked improvement in some of the key indicators that have attracted outsized attention recently, including the pace of client cash realignment. But maybe most importantly, you'll hear about the consistency of our strategy, our ideal positioning in the fastest growing segments of the investment services industry, our ever-strengthening position as the low-cost provider, the world-class trust and confidence our clients place in us, our superior pre-tax profit margins even during one of the most difficult environments possible for our financial model and our commitment to disciplined ongoing investments designed to drive organic growth for many years to come. Now, certainly I understand that the overall backdrop of the environment today is decidedly negative. And I understand that for some, it might be easier to look at the near term challenges we face at Schwab. But I encourage you to consider the entirety of our position and the potential it creates for the future. So the actions of the Federal Reserve to recover from their mistaken transitory inflation viewpoint continue to reverberate across the financial markets. These actions are slowing the rate of inflation, but at a significant cost to the markets, to consumers, to investors, and to firms like Schwab. While short-term interest rates continued to rise over the past year, longer-term rates are now also rising. During the third quarter, investors began to feel this pain. They acknowledge it as investor sentiment plunged during the quarter, moving down into bear market sentiment. Of course, it's not surprising as both equity and fixed-income markets continued to suffer. Cash was virtually the only safe place to invest. An interesting perspective, as at Schwab, we have always believed that cash should be a key part of every investor's long-term investment portfolio. I think it's particularly important to look at the chart on the bottom of this slide and place ourselves in the minds of investors who viewed their bonds as conservative ballast against the expected volatility of equity markets. Even those who maintained shorter bond holdings of two to five years have seen substantial declines in their assets between 7 and 13 percent. Again, truly, there have been few places for investors to go in recent times to avoid losses other than in cash. And of course, at Schwab, we've been similarly impacted by falling bond prices and a rush to cash investments. But throughout this period, our clients have continued to trust us, continue to be loyal, and continue to recommend Schwab as a place for their friends and family to invest. And third parties clearly feel the same way. With Schwab Bank recently named by a wide margin, incidentally, the most trusted bank in the industry, by Investors Business Daily. And Schwab was ranked by J.D. Power as number one in investor satisfaction among full-service wealth management firms. I share these third-party endorsements not because we place undue weight on them, but as a reminder that our strong client positioning contributes to our optimism for ongoing organic growth. And the metrics back this up. Year to date, we've captured approximately $230 billion in core net new assets and opened well over 2 million new brokerage accounts. Of course, these firm-wide new asset figures reflect the expected attrition from the integration of Ameritrade clients. And of course, the July and August net new asset figures were impacted as some of the 7,000 REA firms from Ameritrade opted to find alternative custodians ahead of our Labor Day conversion by either their decision or in cases by ours. And while this attrition weighed on our net new assets for those two months, it was less than what we had allowed for in our original deal-related modeling, and it has largely passed. By looking only at clients who originally opened their accounts at Schwab, we've captured approximately $250 billion in core net new assets year to date, an increase of about 12% year over year. Again, illustrating the strength of the business, and that works out to an over 6% organic growth rate. So let me pivot here for a few moments, speak more in depth about the Ameritrade acquisition and progress on our integration efforts. We announced the deal in late 2019, merely a few months before the COVID pandemic hit. At the time of that deal announcement, Ameritrade had approximately $1.3 trillion in client assets, 12 million client brokerage accounts, and was processing about 1.3 million trades per day. By the time we got to year end 2022, those figures had grown substantially. to approximately $1.8 trillion in client assets, 16.6 million client brokerage accounts, and amazingly, about 3.6 million trades per day. Now, from the day the deal was approved by stockholders and regulators, we began an integration process that we refer to as best of both. It means that unlike in most acquisitions where the acquired firm's clients are merely ported over to the acquiring firm's platforms, we instead carefully evaluated the capabilities of both firms and built capabilities that would maintain and leverage the best of both firms' services and platforms. This approach was consistent with our through client size strategy, and we believe it also sets up the combined firm in an ideal position for long-term organic growth after the integration is complete. So where are we today? We've completed three of five total transition groups. These groups make up about 80 percent of the total Ameritrade retail clients and 100 percent of the RIA firms who previously custodied their client assets at Ameritrade. To date, we've executed this integration with a level of accuracy and service that I have not previously seen in any conversion. During the three conversions to date, our speed to answer client phone calls has averaged less than one minute. And with our largest conversion over the Labor Day weekend now completed, we are averaging 45 complaints per one million of converted accounts. I just want to reemphasize that. Forty-five complaints per one million of converted accounts. Just to put that into context, Client escalations during the mean stock activity in early 2021, there were approximately 200 escalations for 1 million accounts. Now, clearly, there is an adjustment period for some of our clients as they familiarize themselves with new processes, new websites, new mobile apps, and we continue to make enhancements in every one of these areas. Now, the work is far from done. But even the most negative observers have acknowledged the skill and attention to detail that is going into our integration efforts. And clients are responding. Former Ameritrade retail clients are rewarding us with levels of loyalty and retention that are far better than we anticipated when we announced the acquisition back in 2019. And similarly, attrition from former Ameritrade RIA custodial clients is also below our estimates. Even taking into consideration the substantial amount of assets that we actively moved away from because we felt these firms did not either fit our risk profile at Schwab or who would be better served by converting to an alternative custodian given the RIA firm's emphasis on maintaining a substantial sales commission driven business model. Excuse me. And as we've communicated, almost all RIA attrition occurs before the conversion date because a firm considering leaving Schwab would not want their employees and clients to learn our new processes and technology, only to switch to a different custodian and have to relearn all new processes and technology at that new custodian. We carefully tracked all RIA firms and their engagement with the many seminars and planning events that we offered prior to the conversion weekend. And not surprisingly, those firms who took advantage of these programs, which make up the majority of the client assets, have had the smoothest path to conversion. Lastly, the vast majority of active former Ameritrade RIA firms are operating their businesses, placing trades, and already opening new accounts on the Schwab platform. Where RIA firms have offered us suggestions for enhancements and improvements, we're fast at work making these, and we're grateful to the firms for their ideas. When we complete the final two transition groups, we are confident that we will have the broadest, most robust offering in investment services for individual investors and the advisors who serve them. From industry-leading advisory solutions to world-class trading platforms, banking solutions at exceptional pricing, award-winning digital content and investor education, including the newly renamed Schwab Network, 24-7, 365 phone service combined with almost 400 branches for in-person planning and service, value pricing that is supported by what we believe is the lowest cost structure in the industry, and a rich history of client benefiting disruption. Rick, before I turn it over to you, I want to take a moment to review a slide that I've shared in the past. Despite the environment, despite the noise, we are supremely confident in our positioning for long-term growth. As I mentioned earlier, we are ideally positioned among the fastest-growing segments of investment services. Our competitive advantages are unmatched, and our current domestic market share is modest at approximately 12 percent. I truly believe the opportunity before us is quite bright.

Rick? Thank you, Walt, and good morning, everyone. I want to spend our time today talking about how we've driven 5 to 7 percent organic growth historically and how we plan to drive it in the future through our model of generating 3 to 5 percent of NNA growth from our existing clients and 2 to 3 percent of growth from new clients and a return on our strategic focus areas. Our through client size strategy has allowed us to generate 3% to 5% growth from existing clients. When clients turn to Schwab, they know they will get industry-leading value, exceptional service, and transparency in every interaction they have. By treating clients the way they want to be treated, we build trust and we're able to deepen relationships and capture a greater share of wallet. You see this in the $51.2 billion in year-to-date NNA we see from existing retail clients, and the $43.4 billion in year-to-date NNA we see from existing advisor clients. We have also been able to consistently drive 2 to 3 percent asset growth from new clients. This is due in part to our diversified acquisition model, which includes leveraging the strong personal relationships created by our branch footprint and our RIA service model. earning referrals from our delighted clients, and deploying data-driven marketing campaigns, and investing in complementary acquisition channels, including our workplace business, which I'll talk more about shortly. Year-to-date, this has driven 744,000 new-to-firm households to our retail business, approximately 60 percent of whom are under age 40 and approximately 240 advisor and transition teams. The third part of our growth recipe is our continued investment in our strategic focus areas. I'll start today with scale and efficiency. We shared with you in July that we are taking steps to enhance our flexibility and efficiency with an annual run rate expense savings target of $1 billion plus. Walt spoke earlier about our Ameritrade integration, and one component of our expense savings will come from capturing $500 million in remaining Ameritrade expense synergies. Another $500 million-plus in annual savings will come from streamlining our operating model, which includes eliminating positions from predominantly non-client-facing areas and reducing our real estate footprint. As we've previously shared, these actions are expected to result in a non-GAAP expense charge of $400 million to $500 million. a portion of which you saw in our results this morning, with the remainder to follow either later this year or in 2024. With these actions, we expect year-over-year expense growth to be roughly flat, even while we continue to invest aggressively in client products and service. It's this investment that leads to the win-win monetization I'll talk about now. One area we are investing in, and one I've discussed in this forum several times, is wealth. I've said it before, there is a bull market for advice. Today we have approximately $530 billion in retail assets receiving ongoing advisory services. Not only do these clients see Schwab as a place to get advice, but our advice offers have among the highest client promoter scores across all of Schwab. With the investments we've made and continue to make, more and more of our retail clients are turning to us for wealth management as they move into a life phase where they need advice. You can see this in our managed investing flows where we've seen year-to-date record highs in Schwab Wealth Advisory, Wasmer Schroeder, and Schwab Personalized Indexing. Year-to-date net flows in the Schwab Wealth Advisory are a record $9.2 billion. up nearly 60% over last year. The third quarter was also a record quarter for Schwab Wealth Advisory, with $3.3 billion in flows coming into our flagship wealth solution. Year-to-date net flows into Wasmer Schroeder are a record $4.5 billion, up nearly 130% over last year. While we believe we are still in the early days, clients and FCs are starting to learn about the potential benefits of direct indexing. and the combination of tax benefits and personalization are attractive to them. Lending is also an increasingly important part of the wealth management relationship, and we've recently launched a fully digital onboarding experience that lets advisors access a pledged asset line or a PAL for their clients. The new PAL process reduced the time to submit a PAL application to just minutes and enables clients to be approved in just one to two days. Growing Pal is a win-win opportunity. It's good for the advisor because it helps them retain assets and compete with banks. And it's good for Schwab because of the positive spread to securities. Now, I'll turn to another area where we have a win-win monetization opportunity, and that's our workplace business. Our workplace business meets the needs of individuals who become investors through their employers and includes our retirement plan business and our stock plan business, among others. This business is strategic. as it allows us to introduce millions of workplace participants to Schwab, many of whom are investing for the very first time, providing us with a pipeline of future retail and advisor services clients. Workplace connects more than 5,500 employers, 2,700 advisory firms, and 2.5 million investor households to greater Schwab. In fact, today, one in three new to firm households at Schwab are originated through our workplace business. We retain 50 percent of eligible rollover retirement assets, and our stock plan business contributes about 10 percent to retail NNA. And finally, nearly 20 percent of workplace households have a broader relationship at Schwab, and when they do, they have four times the assets through those relationships. With workplace, we have an opportunity to fuel NNA growth for Schwab into the future, through our grow, retain, and extend approach. To do this, we are making investments to more fully integrate our workplace digital experiences so participants can benefit from all we have to offer on Schwab.com, mobile, and with our broader retail offer. And we're investing in our technology. This will require a multi-year investment and will provide a deeper dive and more specifics about this opportunity at future updates. I'll turn now to our third strategic focus area, client segmentation. Last quarter, I talked about our two new branded client experiences within retail, Schwab Private Client Services and Schwab Private Wealth Services for our 1 million plus and 10 million plus clients, respectively. This is all about delivering differentiated experiences across relationship, service, operations, product, and price. the launch has been very well received by our clients. This quarter, I'll talk more about our trader offer. Traders are one of our most highly engaged client segments. On average, compared to non-trader retail clients, they bring in 6.5 times the NNA and have 3.8 times the household assets and generate 2.8 times higher ROCA. We're continuing to invest in this offer to provide the world-class trading experience traders expect. Just today, we launched our reimagined trader offer, Schwab Trading powered by Ameritrade. With this new experience, we're combining the best of Schwab and Ameritrade by giving all of our clients access to the thinkorswim and Schwab trading platforms. Unparalleled trading education, including many elements of Ameritrade's trader education offer, and specialized service. Traders at Schwab have access to all that Schwab has to offer, wealth management, banking, and more. In fact, our virtual active trader branch includes active trader financial consultants who focus on both trader coaching and wealth management to help meet the unique needs of qualifying traders. We think this offer sets the bar for what a trading experience should be. Putting it all together, with our through client size strategy, we are well positioned to consistently generate 5 to 7 percent organic growth from both existing and new clients. And there is an opportunity ahead as we start to see returns on the investments we've made in our strategic focus areas. As we've shared in prior quarters, we have an opportunity to close the share of wallet gap between Ameritrade and Schwab clients, and we have an attractive opportunity to delight our retail clients with our wealth management and to delight both our retail and advisor clients with our lending offerings while growing our revenue. And I'll wrap up where Walt started. Our relentless focus on serving our clients' needs creates a clear path to organic growth and delivering long-term value to our clients and stockholders. And with that, I'll turn it over to Peter.

Thank you very much, Rick. So, Walt and Rick talked about how despite a difficult environment, we're continuing to earn the loyalty and trust of our clients and driving strong organic growth. The enormous progress we've made with the Ameritrade acquisition and the exciting potential that the combination presents for our clients and our stockholders. The other significant growth opportunities we're pursuing and how we're working hard to capitalize on those opportunities, continue to invest in enhancing our platform even as we take steps to strengthen our industry-leading cost advantage. In my time today, I'll briefly review our third quarter financial performance, update our 2023 scenario, and offer some early thoughts on 2024 and beyond. The important point is that in the third quarter, we saw notable improvement across several, quote, tactical metrics on which there has been a lot of focus lately. We might argue too much focus in the context of our ability to create value over time. And I'm referring specifically to the pace of client cash reallocation activity, our capital levels, the level of supplemental borrowing, and the trajectory of our net interest margin. When you combine these developments with the measures Walt and Rick shared that demonstrate our strong business momentum, it reinforces our confidence and our ability to move through this part of the economic cycle as we have so many times before and emerge from this period a larger, stronger, and even more resilient company. As I mentioned, the third quarter was a challenging one for many of our clients and for our business model. And so, not surprisingly, our financial performance was off last year's record levels with a little under $5 billion of revenue and 77 cents of adjusted EPS. And yet, that bottom line performance was better than the second quarter of this year. And with an adjusted pre-tax margin of over 41 percent, 30 percent on a GAAP basis due to the large restructuring charge this quarter, we are navigating from a position of strength. Turning our attention to the balance sheet, bank deposits were down 7 percent sequentially due to client cash allocation decisions. But following a brief uptick in that activity in August, the pace slowed dramatically in September. As a result of that slowing activity, we were able to further reduce the amount of supplemental funding we have outstanding. We issued a little over $2 billion in debt to supplement our parent liquidity. And assuming the markets continue to be constructive, we will likely issue a bit more debt, primarily to build up extra liquidity ahead of some debt maturities we have early next year. And our capital position continues to get even stronger. with our consolidated Tier 1 leverage ratio rising to 8.2 percent and our adjusted Tier 1 leverage ratio inclusive of AOCI and therefore what our binding constraint would be if we lose the AOCI opt out at Schwab Bank now into the mid 4 percent range. And that's using average assets. It's more like 4.6 percent today on a spot basis as it steadily climbs towards 5 percent by the end of the year. meaning that we will be in a position to meet the new proposed regulatory requirement organically and several years ahead of the anticipated full implementation date. I know there's a lot of commentary. There has been a lot of commentary about the increased client cash allocation activity in August, activity which seemed to buck the clear trend of deceleration we've been experiencing over the previous several months. We said at the time that it felt more like an anomaly. And now having closed the books on September, we have a number of tangible proof points that indicate that outflows are easing and we're getting closer to the return of sweep cash growth, including the fact that the overall pace of realignment activity decelerated in September to the lowest level we have seen during the current cycle. We experienced our first month of bank sweep deposit growth since before the hiking cycle started. And both the absolute number and size of client realignment events dropped further from the level we shared last quarter. And all this in spite of an increase in rates across the curve. And while we saw increased flows into purchase money funds, we caution you again not to use those daily flow numbers as a proxy for overall deposit flows. Only around 20 percent of the purchase money fund purchases lately have been funded with Bank Sweep and Schwab One. with a remainder coming from equities, fixed income, or oftentimes money coming from outside Schwab that's been attracted by our very competitive yields and low expense ratios on those funds. Now, we're now halfway through October, and the trend has largely continued with overall transactional cash balances, including, again, Schwab 1 and the IDA, in line with the September trend, despite delayed tax payments by many of our clients in California and elsewhere. As we've said many times, that trend is not surprising, but it is encouraging, and it brings greater clarity towards our core earnings power. During Walt's and Rick's sections, they talked about some of the measures that demonstrate how we're continuing to win with clients. Metrics such as client promoter score, net new assets, new accounts, and our organic growth rate. The deal-related attrition that has been lower than our initial expectations. and advice flows. And those are clearly the most important predictors of our long-term success and all portend a bright future. But the more tactical balance sheet metrics have all trended in a positive direction as well. And we believe we are well on our way towards those indicators returning to more normal levels. The level of supplemental borrowing has continued to fall as the ongoing cash flow generated from our investment portfolio has been more than sufficient to support the slowing deposit bank sweep outflows. And we'd expect this level of temporary borrowing to drop substantially over the next handful of quarters, paving the way for us to resume reinvestment activity in 2025, which, assuming rates follow expectations, will provide a meaningful boost to our net interest margin. Speaking of net interest margin, assuming rates follow the dot plots, we still anticipate it building through 2024 and approaching 3 percent by the end of 2025. Despite rising interest rates, our adjusted Tier 1 leverage ratio at the banks and for the consolidated corporation rose roughly 40 basis points during the quarter, approaching the level to be considered well capitalized several years before that measure is slated to become our regulatory ratio. And we'd expect those ratios to continue to increase due to continued strong capital formation, the accretion of the unrealized marks back to equity, and a reduction of our balance sheet as we pay off the remaining supplemental borrowings, bringing back the potential for opportunistic capital return over time. So what does all this mean for the rest of this year in 2024? Our outlook for this year is pretty similar to what we shared back in July. As client cash allocation activity continues to abate, we'd still expect to see a return of transactional cash growth later this year. We should see a stabilization of revenue and then a resumption of growth over time. In the full year 2023, revenue is expected to decline a bit more than the previously mentioned 7 to 8 percent range, though ultimately trading volumes and market levels will influence how things shake out. On the expense side, we'd still expect our 2023 adjusted expense growth to be somewhere in the 6-ish percent range, inclusive of the $160 million one-time FDIC charge that, of course, was not contemplated when we set out our initial spending plans beginning of the year, meaning that our other spending is tracking at least 300 basis points below the range we communicated back in January as we adjust and optimize our expense base consistent with Rick's earlier comments. I'll turn our attention to 2024. We'll share specific scenarios of our winter business update. But needless to say, the revenue outlook will be shaped by a range of factors, including, of course, the path of interest rates in the equity markets, the pace of deposit growth, and the level of client engagement. But our expectation is that we'll make substantial progress in reducing our usage of FHLB advances and CDs. Rick described the work we're doing on the expense front, and we expect that to result in 2024 adjusted expenses that are no higher than 2023. And finally, we'd expect to continue to grow both our regulatory capital ratios and our adjusted Tier 1 leverage ratio, boosting that latter ratio back above 6.5 percent several years before it becomes a formal requirement. There is no doubt that we have been navigating through a difficult environment, but it should be apparent that the core pillars of the multi-decade investment thesis for Schwab are as strong today as ever. We are the premier asset gatherer with industry-leading client loyalty, a strong competitive moat, and a leadership position in the two fastest growing segments within wealth management. We have multiple ways to convert that asset growth into revenue growth, including growing advice with both Schwab and Ameritrade clients, as well as a long-term NIM tailwind as we eventually reinvest our securities portfolio at much higher prevailing rates. We continue to manage expenses with discipline, with $1 billion or more of remaining expense synergies and other efficiency opportunities. And we are a company that has shown the ability to couple strong organic growth with opportunistic capital return, a combination which we're confident will reemerge in the years ahead. Now, admittedly, that powerful combination has been obscured recently by some of the fog, as Walt described it back in July. But this fog continues to clear, with deal-related attrition abating, allowing our net new assets to return to our normal levels, which are anything but, client cash allocation activity slowing, supplemental borrowing decreasing and our NIM rebounding, expense growth slowing and poised to slow further as we prepare for the significant remaining expense actions in the quarters ahead, and our capital levels building despite the headwind posed by increasing rates. I talked earlier about long-term predictors of success versus more tactical near-term metrics. But when you step back to look at the whole picture, you see a healthy, resilient company with a lot of momentum and a lot of opportunity in front of it. With that, I'll turn it over to Jeff to facilitate our Q&A. Jeff Fischer Great.

Operator, can you please remind everyone how they can queue up and ask a question, and then let's go ahead and get started.

Yes, thank you. For those on the phone that wish to ask a question, please ensure that your phone is unmuted. Press star 1 and record your name clearly when prompted. If you would need to withdraw your request, you may press star 2. Again, to ask a question, that is star 1. And our first question comes from Ken Worthington with JP Morgan. You may go ahead.

Hi, good morning. Thanks for taking the question. So, interest-earning assets have declined in recent quarters. You mentioned the positive deposit growth for September. And on the last call, you highlighted the expectation that deposits would grow later this year. Given your prioritization for the pay down and short-term borrowing, if current macro trends continue and the forward curve is right, When would you expect to see interest earning assets trough and at about what level would you expect them to trough?

Thanks, Ken, for the question. So, you know, our expectation is that we will continue to prioritize paying down the supplemental borrowings. That is the fastest way to get to that 3% NIM that we talked about by the end of 2025. So what that could mean is that You know, we could be seeing deposits grow, transactional cash grow, even as interest-earning assets are declining, because our focus is really on paying down those supplemental borrowings. So that would be, you know, you could see a scenario where interest-earning assets are declining, but NIM is growing, and actually net interest revenue is growing, even as that is happening. Thanks.

Thank you. Our next question is from Patrick Moley with Piper Sandler. You may go ahead.

Yeah, thanks for taking my question. So, great to see the slower cash realignment in September, and appreciate the comments on the 20% of money market fund inflows coming from customer cash. But just wondering, on the pickup and realignment activity in August, maybe if you could elaborate on what you thought triggered that sorting, and maybe the types of accounts that that was coming from, and whether that 20% number applied in the month of August. It seemed like it was triggered by the rate hike in late July, and maybe just sort of piggybacking off of Ken's question, if you could maybe just talk about how you're thinking about customer behavior as it relates to realignment in the event we see a couple more rate hikes this cycle. Thanks.

Sure. So, yeah, I don't recall the exact percent of the assets that were or purchase money fund balances that were coming from BankSuite. But I can say is You know, August, I think, was a couple of things. It was, in part, a reaction to the Fed's increase in late July and some of the headlines maybe that that captured. We also saw actually net inflows into equities. So there was definitely an investor sentiment aspect to it. In terms of, you know, going forward, I mean, our expectation is that when the Fed increases, it has a small, but decreasing and temporary impact on deposit flows. You know, if people are yield sensitive, the cash is yield sensitive, and Fed funds, you know, five and a quarter, you know, they'll move. It doesn't make a huge difference whether it's five and a half. I think it's more about the headlines, frankly, that creates that may prompt some people to move. But I want to emphasize that uh you know a high for longer scenario is is a very good scenario for schwab for our for our business model uh while in the near term that rate increase can lead to a little bit more and uh deposit uh activity uh you know that higher rate uh over the long term means you know more uh a higher yield on the roughly one-third of our interest earning assets that are tied to floating rates. That's things like our margin lending and the cash, the segregated cash, and the cash we have at the parent, the cash we have at the bank, et cetera. So sort of a high for longer scenario, which it seems to be what we're easing our way into here, is a good scenario for us because that impact on transactional cash balances is short-lived.

Thank you. Our next question is from Brennan Hawken with UBS. You may go ahead.

Good morning. Thanks for taking my question. Peter, I would appreciate if we could maybe try and square slide 31 where you talked about the client cash realignment versus when we run through the calculation for the September monthly data based on the various cash disclosures, percentage of client assets and whatnot. If I adjust out the CDs and the money funds out of there so I'm just getting which should be the Bank Sweep, BDA, and the broker-dealer cash. It looks like it's down similar to a decline that we saw in July. And so, how do I square that with the slide 31? Does slide 31 just not include the broker-dealer cash? Is that the delta? Can you help me understand that?

Jeff Fischer Hey, Bernard. It's Jeff. I'm happy to cover that off. I mean, it includes the same stuff it always has in terms of Bank Sweep plus broker zero balance is S1 plus BDA. So it's the same consistent view we've talked about. So we can take that offline and chat about any of the other items that are in there. But yeah, this is a consistent view with the monthly and higher quarterly data.

Thank you. The next question is from Kyle Voigt with KBW. You may go ahead.

Hi, good morning. So question for Peter. You issued about $1 billion of CDs in September. Just given the trends that you're seeing with cash sorting, can you talk about expectations for the short-term funding mix between CDs and FHLB as we look out over the next couple quarters? And kind of maybe within that, maybe you could kind of address how you intend to handle CD maturities going forward, and then what happens if we do see another kind of reacceleration or another blip in another month going forward, how you intend to How would you manage through that in terms of liquidity and where you access liquidity from? Thank you.

Sure. So, you know, I would expect that we're going to have a mix of CDs and FHLB going forward. There are, you know, advantages of each. The CDs today are a little bit lower cost and we'd, you know, we like the idea of paying our clients and clients of other brokers. The nice thing about the FHLB is that it's very, you can really dial in the maturity and get the exact amount. You can also prepay FHLB. So if we see, you know, growth in deposits, we have the ability to prepay those FHLB advances. So I'd expect it to be a mix. We like the fact of having a diversity of funding sources, you know, going forward. But I think either way, I think we'd expect both of those balances and collectively to go to trend down, as I said, over the next several quarters.

I'm going to take one question here from the console operator. This one, let's do the one for Walt. Walt, obviously, since the time we had the Ameritrade approval for the deal and actually beginning the conversion was around, say, two and a half or three years, This timeframe is a bit longer than maybe some more other recent transactions. Could you talk a little bit about what drove that timeline?

Sure. Thanks, Jeff. I referenced in my prepared remarks about our best of both approach in which rather than following a traditional integration, which is simply moving clients in the acquired firm over to the platform's of the acquiring company. Instead, we looked to bring over a series of capabilities, whether it's Thinkorswim that I think now is available to all Schwab clients as of today, things like iRebound Thinkpipes. But maybe even to go beyond that just quickly, every brokerage conversion that I am familiar with in the history of our industry involves simply bringing over accounts, assets, and then a limited amount of demographic data, things like address, Social Security numbers, things like that. We took a very different approach. In addition to bringing over the most basic information that others would always bring over, we also brought over transaction history. I think, I believe it was four years of history. We brought over historical documents, All of the documents that the client would have had at Ameritrade, open orders, client preferences, watch lists, things like cashiering and move money instructions. So we just took a very different approach. And I think that that is part of what has contributed to the extraordinarily low level of client complaints that we have seen, as, again, I referenced in my prepared remarks. And so I just would roll this all back into the big picture of our through client size strategy that we've approached this integration that these are exceptionally important clients that we look to serve for many, many years to come. And despite the environment that we happen to be in, make the right long-term decision. It's fascinating to hear all the discussion around client cash realigning because client cash realigning is cyclical. But Arthur, client-side strategy is not. And as we work our way through the very tactical issues being raised today and the near-term issues, I think the power of Schwab is going to emerge and once again reward our clients as well as our stockholders in a manner we have many, many times in the past.

Thank you. Our next question is from Dan Fannin with Jefferies. You may go ahead.

Dan Fannin Thanks. Good morning. I wanted to follow up on NNA. I get the outlook and the guidance and certainly September was improved. Can you talk about the backlog today for potential advisors and how that compares to previous periods? And then with the Ameritrade integration now mostly done, should we not anticipate you know much in terms of movement in nna as a result of that and also if you could maybe clarify on some of those outflows how much was you know schwab's decision to walk away from that business or client decisions sure absolutely um as it relates to the backlog

backlog of advisors. We continue to see a healthy pipeline in our advisor services business. So no change there. Very robust. And I think what we are seeing is a resumption of that activity for, you know, for a few months around the conversion. A lot of our effort and energy was put into that. A lot of advisors were holding back clients that they would have brought to Schwab because they didn't want them to have to go through a conversion. So they held on them. And now we're seeing a resumption back to all normal levels of activity. So that's on the backlog of advisors. What was the last one? Oh, so, yeah, let me talk about some of the attrition on our advisor services side. It really came from a combination of three things. Number one were some relationships where it just didn't fit, either for economic reasons or for services that the RIA firm wanted that we weren't going to provide. Second reason, there may have been some other business reasons why it didn't make sense. It used to be an advisor maybe that we had served, and the relationship didn't make sense for us to serve in the future. So there was a chunk of relationships where it didn't make sense for both parties for us to serve them. And then there was some element of regrettable attrition, clients we would have liked to have served, But for a variety of reasons, they chose to go somewhere else. So it was a combination of those three things.

One of the things that's very important when we talk about NNA is we put it in the context of the $1.8 trillion of assets that are coming over as part of this acquisition. If I can remember properly from four years ago, we estimated something like 5 to 6 percent asset attrition and about 4 percent revenue attrition. And we are substantially outperforming those numbers. But the reality is 5 to 6 percent of what is now $1.8 trillion is a meaningful number. And so, when you compare attrition from this acquisition and you apply it to monthly net new asset figures, you're going to get a decline in monthly numbers. It's just math. As Rick indicated accurately, this is waning, and the RAA side was all concentrated in the couple of months before the conversion. So we feel exceptionally good about where we are, despite the very few RAAs who Rick identified who did choose, regrettably, to go somewhere else. But that was a small number overall and a significant amount of the attrition were clients that we had previously terminated relationships with who had maybe switched over to Ameritrade or, as I mentioned, run a commission-oriented business that really doesn't fit with our model. We work much better with advisors who have decided to principally go fee and get largely out of the commission side.

Thank you. And our next question is from Steven Chuback with Wolf Research. You may go ahead.

Good morning. So it's certainly encouraging to see the capital build, the NNA acceleration in September. I think the one element of area of concern for investors continues to be the sweet cash dynamics. And while bank sweep deposits increasing in September are certainly encouraging, total sweep cash was down $9 billion for the month. And, Peter, you alluded to the fact that you're seeing similar trends in October versus September. How should we interpret what the total cash sweep decline will be, not exclusively the bank sweep deposits? It feels like there's some bifurcated trends between payables and bank sweep deposits. Hoping you can unpack that better.

Yeah, so thanks to you. And so I'm not sure where your $9 billion figure is coming from, but that is 2x higher than what we're tracking. If you do the math on that page where we show the daily flow, you're looking at a number that's about half that level. So I'm not sure where the $9 billion is coming from, and you can maybe work that through with the IR team. And so October is tracking in line with that lower number. So again, it just reinforces the fact that You know, we saw a decline from April to May and May to June and June to July. And then we had this one blip in August. And then September has really continued the trend. And October is consistent with September. So all this reinforces our conviction that we've been saying for quite some time, which is this cash reallocation activity is declining. And we're seeing again in terms of the number of people who are reallocating and the size of those trades that they're making. So it all reinforces our conviction that we're very close to the end of this cycle.

Thank you. Our next question is from Alex Blostein with Goldman Sachs. You may go ahead.

Thank you. Good morning. Just a quick question around the balance sheet again and some of the liquidity dynamics. Peter, can you just frame to us how much of securities will be maturing through the end of 2024 between available for sale and HTM buckets? Just a refresher on that. And then I know you made a point about long-term debt. So, as you kind of work through your liquidity requirements, any incremental capital changes, how do you think the appropriate level of long-term debt for Schwab will look like by the end of 24? Michael Nutterman Yeah.

So, in terms of when we think about principal and interest off of the investment portfolio, it's tracking now at about $4 billion or so per month. So, you know, roughly $11 to $12 billion per quarter. maybe a little bit more in the next quarter, but somewhere in that range over the next five quarters. So that, you know, that provides a meaningful amount of resources, liquidity to pay down those supplemental borrowings. When you add that together with, of course, the net new assets that we attract via new accounts, that's, you know, those are the two of the bigger drivers in terms of paying down those supplemental short-term borrowings. In terms of the right amount of liquidity, you know, I would think about this in terms of parent liquidity, in which we raise debt to keep liquidity at the parent. We do that primarily to support the activity our client needs at the broker-dealers. And so we have through, as we've been going through these conversions, we have wanted to operate with a little bit more parent liquidity. given to make sure we've got ample resources through these conversion weekends. And so we are running with a higher level of liquidity now than we might expect to have after we pay off. And we also have these debt maturities in the early part of next year. So we want to make sure we've got the funds necessary to pay off those maturities. So once we get done with that, we'll be comfortable with the level of liquidity that we have at the parent.

Thank you. Our next question is from Mike Cypress with Morgan Stanley. You may go ahead.

Hey, good morning. Thanks for taking the question. I wanted to circle back to your commentary on the workplace business. I was hoping you could help size the business just in terms of assets and accounts. How much does that represent? And maybe you could talk about how much that has contributed to M&A in recent years, as well as some of the steps that you're thinking about taking to broaden this client acquisition funnel in the next couple of years.

I think as it relates to the steps we're taking, it's an exciting opportunity for us because it increases the top of the funnel, the amount of clients that could become future Schwab clients for us. And what we're focused on is really twofold, increasing that top of the funnel, bringing more and more employees into the Schwab workplace business, and then secondly, in converting them into Schwab clients. And so we have efforts going along two fronts. Number one, integrating the business and tying it more into Schwab so the experience leverages all that Schwab has to offer. You know, our retail mobile site, our retail website, our branches, all of those capabilities that we can bring to bear for the workplace clients. If we do that successfully, we'll convert a greater number of our workplace clients into long-term Schwab clients. And when we do that, as I shared earlier, They bring four times the assets that they have through the workplace business. And then the second thing we need to do is we need to win more of the employee-based businesses at the top of the funnel. And that's why we're investing in the experience and the technology around it. So the business has the potential, I think, to add a lot more to our NNA going forward than it does today. And we're quite excited about the prospects.

Thank you. Our next question is from Brian Bedell with Deutsche Bank. You may go ahead.

Oh, great. Thanks. A lot of my questions were asked and answered. Maybe just one on the securities portfolio, the AOTI. The improved or the, you know, the stability there, is that entirely due to the accretion of the unrealized marks getting paid down or is hedging the securities portfolio playing a substantial part of that.

Yeah, no, thanks, Brian. No, that's mostly the, or I should say that really is the impact of the accretion of those marks back to par. You know, with a duration on our available for sale portfolio of just over two years, you're looking at, you know, roughly $600-ish million per quarter in terms of amortization. So that's you know, even in a flat rate scenario. So that's really what's going on there.

And just doing a time check here, looking, maybe we're up on the top of the hour here. Peter, do you want to maybe close with some of those final remarks?

Sure. Well, thanks, everyone. Appreciate the time you spent with us this morning and appreciate all the questions. I just want to close by picking up on some comments that Walt made at the outset. And he talked about how it's easy to focus attention on the near-term challenges we have faced. We're clearly not blind to those challenges, but nor are we fazed by them. We feel a great deal of confidence in our current position, our strategy, and the loyalty we have built with our clients. And we feel also a great deal of optimism about the opportunities ahead of us to serve our clients even better, to continue growing, to learn from our experience this year, but also to put in the rearview mirror as we continue to deliver for our clients and our stockholders in the years ahead. Thank you very much again, and we'll look forward to speaking with you in January.