Charles Schwab Corporation (The)

Good morning, everyone, and welcome to the Schwab 2024 Spring Business Update. This is Jeff Edwards, Head of Investor Relations, and I'm joined today by our co-chairman and CEO, Walt Bettinger, President Rick Worcester, and CFO Peter Crawford. As you saw in earnings today, we had a nice, strong start to the year, so there's plenty to cover today. But before jumping in, let's quickly cover off a few of the typical housekeeping items. The slides for today's business update will be posted to the IR website at the start of Peter's remarks, Q&A is still one question, no follow up. And let's try to limit the six and seven part questions, if possible. Of course, we always encourage you to jump back in the queue if additional questions come to mind. And as always, please don't hesitate to contact us, Rob, by our team regarding any clarifying or some of the more tactical questions. And finally, the ever present wall of words that showcases our forward looking statements and remind us that the future is indeed uncertain. So please stay up to date with our disclosures. And with that, I'll turn it over to Walt.

Thank you, Jeff. And good morning, everyone. Thanks for joining us for our April business update. So we began welcoming the majority of our employees back to the office last October 1st. And as a result, I began traveling the country, hosting town halls and roundtables to meet many of the employees who had joined us both before or during the pandemic and hear from them. In addition, I shared some of my perspectives on the economic environment, the strength of the Schwab franchise, and my confidence for the future. After having lived and worked through many economic cycles, I shared with our people that right when things often seem the darkest, they tend to turn around and begin to appear brighter. Of course, I didn't know last fall just how accurate that would turn out to be. It's a wonderful lesson in not overreacting to things that are outside our control. As I sit here today and, of course, recognizing that there are certain environmental and geopolitical risks that remain, the green shoots of a turnaround in the environment are appearing, and we're seeing it positively impacting virtually every area at Schwab, from investor engagement to net new assets to client cash realigning to capital building and, of course, to revenue and earnings. Combined with the timelessness of our through client size strategy, and the hard work of our incredible team of Schwab employees, my optimism for the future is strong. Of course, we didn't simply wait around and wait for a better environment. Our teams have been hard at work on key areas like the Ameritrade integration, enhancing our digital capabilities and platforms, and delivering the world-class level of service our clients have grown to trust and expect from us. So let's go ahead and dig into the first quarter of the year. Inflation remained at relatively moderate levels during the quarter, down substantially from just over a year or two ago. And even as the market reduced expectations for the pace and extent of Fed easing due to the stubborn inflation readings, the equity markets continued to move higher during the quarter. Investor sentiment continued its recovery, with the bull bear spread maintaining its recent strong position. And not surprisingly, traders also began to become more active for our Schwab Trading Index, or STAX, looking for opportunities to benefit from the improving overall sentiment. Encouraged by the improving environment, our clients became even more engaged in the markets, with daily average trades up 15% over the prior quarter, client borrowing or margin balances up 9% in one quarter alone, Total client interactions with Schwab were up 17%, and as they engaged more, they also took the opportunity to seek our help more often, with net flows into our investment advisory solutions up almost 70% quarter over quarter. All these metrics reinforce the confidence our clients have in us, and each of them provides support for our optimistic view of the future. As we progressed through the quarter, we were gratified to see a resumption in the strong organic growth we've been able to produce for many decades. Highlighted by core net new assets for the quarter, just shy of $100 billion, and with the month of March particularly encouraging, with about $45 billion of core NNA, and that's a 6% annualized growth rate. New brokerage accounts also grew to over 1 million in the quarter. That's the first time that we've exceeded 1 million since the initial quarter of last year. Our progress in net new assets during the quarter was due, at least in part, to a slowing of the level of expected asset attrition from the Ameritrade integration. Although we continue to expect to see some degree of attrition throughout the balance of this year, overall attrition from former Ameritrade clients continues to moderate and remains below the levels that we anticipated when we announced the acquisition in late 2019. A major factor in the falling attrition is, of course, that clients become accustomed to the Schwab platform, as well as they recognize that many of the prior Ameritrade platform features we have built into the Schwab platforms. I'll go ahead and share a little bit more around the details of how former Ameritrade retail clients are responding post-conversion in terms of their promoter scores when I move to the next slide. So speaking of retail client promoter scores, we achieved record levels as measured in the first quarter. Our overall score was 69. And interestingly, with our premier fee-based advisory solution, Schwab Wealth Advisory, which some of you may know by its former name of Schwab Private Client, it reached a promoter score of 80. I think what's particularly interesting here is that we achieved this lofty score in a solution where clients are paying fees for our advice and guidance. It's clearly a reflection of just how far we have come at Schwab from our roots as purely a discount broker and the appreciation our clients have for the investments we've made in building our modern wealth management capabilities. Of course, we still offer world-class service for self-directed investors and a an incredible value for fee-conscious investors, but the diversification of our model is building. Now, as I mentioned earlier, we're also tracking our promoter scores for former Ameritrade retail clients who converted over to the Schwab platform. And what we see there is an initial dip in those scores, probably to be expected given the changes that they face. They have to learn a new mobile app, a new website, and the like. But over a fairly short period of time, their scores begin trending toward our historic scores for Schwab clients. Ninety days post-conversion, their scores increase on average about 25 points. And after nine months, their scores have improved about 45 points. I think these results are another testament to the quality of integration and conversion work that's been done by our dedicated people who have been working on the Ameritrade conversion. And while mentioning the strength of our offerings for retail investors, we continue to be recognized by independent third parties for the quality of our platform and service. I do want to call out a special mention of the success we're achieving in our 401 and defined contribution business that operates under our workplace financial services arm. The premier evaluation of service providers in that industry is done by plan sponsor magazine. And they again recognize Schwab with the highest number of best in class awards for the seventh consecutive year. And that's more than two times the number of best in class awards compared to the second place finisher, a relatively remarkable run of recognition and a challenging business line where bigger is often mistaken as better. And then lastly, from a third party recognition standpoint, we were honored when J.D. Power named Ameritrade and Schwab as number one and number two in their satisfaction survey for self-directed investors. Ameritrade's number one ranking reflects the highest they have ever scored, and it was clearly aided by the multiple Schwab enhancements that we've made to the client experience for Ameritrade users, a couple of those being the addition of our Schwab security guarantee and a substantial reduction in the speed to answer client phone calls. I think this recognition illustrates the power of the combined platforms, and our decision as part of the integration to go with the best of both in design. I understand that this approach added some time to our integration efforts, but I'm confident it will pay dividends for years to come. Before I turn it over to Rick, I'd like to spend just a moment commenting on the final client transition group that is planned to convert over to Schwab next month, as well as maybe summarize the overall Ameritrade integration. Next month, we'll convert the last 10% of Ameritrade client accounts and assets. But this group is incredibly important, and it's also unique. It's made up of our most active traders, and many are power users of the Think or Swim platform. For these clients, the conversion experience should go relatively smoothly. because unlike the prior four transition groups, for this group the client experience is essentially unchanged. They'll continue to have access to the trading platform, TOS, that they have historically utilized while also adding all of the features and benefits of Schwab. In terms of the clients of the overall integration effort, As largely expected after initial settling in period, clients in our transition groups are engaging with Schwab and the expanded array of capabilities we offer. These clients are now beginning to bring new assets to us and their trading volumes now exceed the levels of trading they were doing pre-conversion when they were exclusively at Ameritrade. And we're not saying that all integration related asset attrition is over just yet. But as we've shared previously, when all is said and done, we expect to have performed in line or even better than the levels of client asset and revenue attrition that we projected when we announced the acquisition in late 2019. In my opinion, the combination of the best of Ameritrade with the best of Schwab sets the bar for anyone serving retail investors and independent investment advisors alike. Our combination of platform, service, dedicated relationships, investment advisory for retail clients, and expertise serving independent investment advisors is a powerful combination for driving future growth. So, Rick, let me turn it over to you for some more discussion on our efforts and results during the first quarter.

Thanks, Walt, and hello, everyone. We're coming out of the first quarter with strong momentum in our four strategic priority areas as we continue to focus on driving scale and efficiency, win-win monetization, meeting the personalized needs of our client segments, and delivering brilliantly on the basics that our clients expect. Let me start with scale and efficiency. Scale and efficiency has been a key enabler of our success and our ability to disrupt the industry. Looking back to 2013, expense per account has come down 23%. In inflation adjusted terms, we've cut the expense to serve an account roughly in half. At the same time, as you can see on the right-hand side of the page, we have an expense advantage against our competitors. This means more of our clients' wealth is working towards meeting their goals. This is a hallmark of our business model and a driver of the virtuous cycle because it means we can reinvest back in our clients over time. With our consistent focus on expense discipline and scale, combined with the synergies from the Ameritrade conversion and continuously improving our operations, we are able to drive down costs. As we look forward, we'll fully realize our planned synergies from the Ameritrade integration, and we'll invest in AI, we'll invest in end-to-end process transformation, and we'll invest in technology enhancements to add to our expense advantage while making sure we continue to deliver a no-trade-offs experience to clients. Enhancing our wealth and lending offerings remains an important win-win monetization opportunity. We are making progress on both fronts. Our clients continue to seek out our advisory solutions in record numbers, and we have made a number of important advancements in our lending capabilities, which clients have really appreciated. In the first quarter, we saw a record $14 billion in net flows into our advisory solutions, a 60% increase over last year. we have seen continued interest in our flagship wealth offering Schwab Wealth Advisory, along with increased interest in Wasmer and Schwab Personalized Indexing. Schwab Wealth Advisory attracted a record $4.4 billion in net flows for the first quarter, with approximately 30% of those enrollments coming from legacy Ameritrade households, which to us demonstrates the power of the opportunity ahead of us as we introduce more Ameritrade clients to the breadth of all we have to offer. Demand for our Wasmer Schroeder fixed income strategies continues to be strong with $2.3 billion of net flows, which is up 55% over last year. And as Walt highlighted earlier, the clients in these wealth offers are our happiest clients at Schwab. These solutions consistently achieve our highest client promoter scores. As we look forward, we are investing to add capabilities to our wealth and advice platform to support our accelerated growth. Turning now to client segmentation, while we will always meet the needs of the full spectrum of investors, we continue to provide tailored offers for specific client segments. The specialized experiences we recently launched for retail high net worth clients, which we call Schwab Private Client Services and Schwab Private Wealth Services are just two examples. Our high net worth and ultra high net worth client segments are among the fastest growing at Schwab, and they represent approximately three quarters of our total retail client assets today. And the specialized service models that we launched last year are serving these clients well. In the first quarter, the teams serving these clients answered calls on average in less than 10 seconds. And 80% of the calls were resolved by the rep who first answered the phone without needing to transfer the client to another rep or group. We are adding to our product and advice capabilities for these clients with the anticipated rollout this year of an alternatives platform for retail investors. We've also launched our investor advantage pricing for clients and are working on additional lending capabilities to meet this client segment's needs. We're also continuing to invest to provide a trader-client experience that is unparalleled in our industry with our Schwab trading powered by Ameritrade offer. The first quarter, we saw robust trading activity across the board, including strong continued engagement from our Ameritrade clients. Traders at Schwab have access to the thinkorswim trading platforms as well as specialized service teams and tailored education for traders of all levels of expertise and sophistication. And this is an area that we continue to invest in to maintain and expand our advantage. We doubled the number of Schwab households this quarter that use thinkorswim. We believe that our trading offer has never been stronger in terms of our execution, our platform, our service, and the combined research that we offer to our clients through the research and educational capabilities of both Schwab and Ameritrade. Turning now to Brilliant Basics, we want to delight our clients with exceptional experiences in every interaction they have with us at Schwab. And we want to be the easiest place in the industry for our clients to do business. This means that we're continuing to make investments to enhance the investor experience for all of our clients. This includes digital interactions like our streamlined digital onboarding for RIAs, where they can now open and fund multiple accounts in just minutes, or in our enhanced pledged asset line process, where we can now process a pledged asset line in just minutes for most loans. For the pledged asset line, the client experience is usually a conversation with their FC or their RIA to discuss the product, to discuss the rate and what assets they'd like to pledge. Clients then get a DocuSign email asking them to sign to apply for the loan. The time from that email to the email that says the line opened and is ready to draw is just about three to five minutes. The feedback from our clients on this process has been off the charts. We've also worked hard in our digital experiences to be as welcoming as possible to Ameritrade clients by incorporating the features and functionality that's of greatest importance to them. We've also enhanced our move money and self-service capabilities and incorporated DocuSign into our commonly used forms. And it also means we're providing access and intuitive experiences when and where our clients want to engage with us, whether that's in one of our 380 branches, whether it's on the phone where clients can expect their calls to be answered in less than a minute, or whether it's online through our Schwab Intelligent Assistant. With Through Client's Eyes as our foundation, investors continue to turn to us to serve their wealth management and investing needs through all market cycles. We are both ready for the final Ameritrade conversion group and ready to push forward on our four strategic focus areas to serve our clients. We believe we are well positioned to meet the evolving needs of clients and deliver organic growth in line with our historical levels. And with that, I'll turn it over to Peter.

Thank you very much, Rick. So you all heard Kurt, Walt, and Rick talk about our increasing momentum in the market driven by our no trade-offs positioning and the satisfaction and loyalty of our existing clients. The significant progress we've made with the Ameritrade integration and the success we're having is trying to unlock the substantial opportunities the combination enables. And our progress and plans around our four strategic priorities, which we're confident will allow us to continue growing with both our existing clients and new to firm. In my time today, I'll review our solid first quarter financial performance. I'll provide an update on some of the key factors influencing our near-term story. And I'll share some high-level thoughts on the rest of 2024, though recognizing that it's still early in the year, so we won't be sharing updated mathematical illustrations until July. The important point is that we sit here today, one year removed from the events surrounding the regional banking crisis, we are in a very strong position. with nearly all key business and financial indicators improving, in some cases substantially. We've seen meaningful progress back towards our historical pace of organic growth, a continued moderation of client cash realignment activity, with the pace slowing, in fact, even faster than our expectations, a further reduction in the usage of supplemental borrowing, Revenue and earnings that have bounced up from the prior quarter with much more room to grow throughout this year and beyond. Continued expense discipline with headcount down modestly from year-end and a full 10 percent lower from the year-ago levels. And finally, a continued increase in our capital levels, both our regulatory levels and those inclusive of NAOCI. Now, back in January, Walt and I both said that 2024 is likely to be somewhat of a transitional year from a financial standpoint, but one with steadily improving financial results that bridge from what proved to be a challenging 2023 to what we believe is a very promising future ahead. One quarter of the way through the year, that transition is well on its way. As our core earnings power is becoming less obscured by some of the near-term headwinds, And our long-term financial formula that you're all familiar with, growth in the client franchise, driving scale in the business, leading to improving financials, and ultimately capital return, reenters the picture. As Walt mentioned, the first quarter has been characterized by a supportive macro backdrop, increased engagement, and solid organic growth. We saw that reflected in external benchmarks such as the S&P 500. as well as key drivers of our business performance, including trading activity up 15 percent from the fourth quarter of 2023, and margin balances up 9 percent sequentially as well. That constructive foundation paved the way for our financial performance to improve significantly from the fourth quarter, with $4.7 billion of revenue driven by a 5 percent sequential increase in net interest revenue and a record $1.3 billion of asset management and admin fees, an adjusted pre-tax margin of roughly 41%, up nearly 500 basis points sequentially, and adjusted EPS of 74 cents, up 6 cents from the prior quarter, a demonstration of the leverage our model provides as the headwinds we've been facing begin to abate. Now, turning our attention to the balance sheet, Total assets dropped by 5%, driven by the pay down of parent-level debt and the continuation, albeit at a much slower pace, of the client cash realignment activity we've experienced for roughly two years. We saw a notable reduction in activity from January to February and March. And the overall level of realignment in the quarter was more than 80% less than the same quarter in 2023. And within the bank, was an amount that we could support with a cash flow from the investment portfolio. And that allowed us to reduce our usage of supplemental borrowing by nearly $9 billion during the quarter, bringing the total down roughly $25 billion from the peak last May. And finally, despite increasing rates during the quarter, our capital position continues to get even stronger, with our consolidated Tier 1 leverage ratio rising to 8.8 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 at 5.7 percent, meaning that we're now above what will likely be the new, quote, well-capitalized standard at our banks over four years ahead of the earliest anticipated implementation date. During last quarter's update, we talked about the slowing pace of client cash realignment, but we also shared our expectation that we'd likely see some typical seasonal activity to start the year. And that's indeed been the case. And while clients continue to engage in the market, both the number of newer realigners and the size of those realignment events continues to trend lower, bringing us ever closer to the point where any residual activity among existing clients will be more than offset by the contribution of cash from new accounts and making client cash realignment a story that we're optimistic will soon move to the back pages. Now, as we turn our attention from the solid quarter we just completed to what we expect to be a very bright future, we expect our net interest margin to expand through 2024 and 2025 and approach 3% by the end of 2025. driven mostly by the pay down of supplemental borrowing. Now, the actual pace of paying off that borrowing will be influenced, of course, by the level of deposit growth, but also by the growth of margin balances. Why is that? Given the way that the liquidity ratio or LCR rule works, for every dollar of margin balance growth, we need an extra roughly $1.50 of client cash of the broker dealers. And that requires us to reroute some client cash balances from bank sweep to the broker dealer cash solution. And those are balances that we'd otherwise have used to pay down the supplemental borrowing. But I want to make very clear that increased margin loans expand both our net interest margin and our net interest revenue. We are happy to carry some of these supplemental borrowings at roughly 5-ish percent to support lending activity that currently generates closer to 8%. Now, on the expense side, we continue to maintain spending discipline with the objective of flattish expenses year over year. Even as we have grown accounts and assets during the quarter, average headcount dropped roughly 3% from the fourth quarter and is down nearly 10% year over year. But, of course, the ultimate path of expenses will depend, to a certain extent, on some volume-related factors, such as trading and equity market valuations, which, of course, correspond to revenue. And finally, we continue to expect strong growth in revenue and earnings through the year, with an exit velocity in the fourth quarter substantially higher than where we are today, and the potential for continued sequential growth in 2025 and beyond. One final but important point I would make. The long-term NIM expectation I communicated is based off the dot plot forecast from a few weeks ago in anticipation that we'd see interest rates come down in the coming years. And to the extent those rates stay higher for longer, that is a good thing for our business. We are asset sensitive. A continuation of higher rates means higher yields on the little bit more than one third of our assets that are floating. Margin loans, pledged asset lines, cash, et cetera. And potentially more time for us to capitalize on higher rates once we resume our investment activity following the pay down of our supplemental borrowing. So again, if we don't see 150 basis points of easing by the end of 2025, as the Fed suggested a few weeks ago, our net interest margin could actually exceed that 3 percent figure above, all else being equal. And finally, despite long-term rates that moved higher during the quarter, our capital ratios have continued to grow, with our banks now all measurably above the well-capitalized level, even if AOCI is included. And we continue to expect our consolidated adjusted Tier 1 leverage ratio to reach the upper 6 percent range by the end of 2024, at which point we'll be in a position to at least consider potential options for resuming further capital return. And that paves the way for return to our long-term financial formula, one that combines our position as the premier asset gatherer in our industry with a track record of consistent 5 to 7 percent organic growth through the cycle, industry-leading client loyalty, a leadership position in the two fastest growing segments within wealth management and significant opportunity in front of us. Our diversified revenue model, allowing us to convert asset growth into revenue growth with contributions from net interest revenue, asset management fees and trading, and over the next several years, a major tailwind in the form of NIM expansion. A focus on disciplined expense management, highlighted by a recognition that our low-cost structure is a big competitive advantage, as Rick talked about, and a scalable business model that enables both margin expansion over time and investments to continue to grow the business, and a business model that can combine that strong organic growth and revenue growth with more meaningful capital return, as our capital levels, inclusive of AOCI, march higher. This is the formula that has worked in the past, and it's every bit as relevant today as ever. With that, I'll turn it over to Jeff to facilitate our Q&A.

Operator, can you please check the queue and see if we have any questions?

Yes, thank you. And at this time, if you would like 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, and thanks for taking the question. You paid down $2.4 billion of federal home loan bank borrowing, $9.1 billion of CDs this quarter or so, $11.5 billion in total. Is this the pace of borrowing pay down that you would expect for the next couple of quarters and to what extent are the higher markets and greater asset levels and the solid volume helping to boost the pace of payback versus your initial expectations?

Yeah, Ken, so we're certainly, you know, our priority is to pay down the supplemental borrowings, both the CDs and the FHLB, as quickly as we possibly can. And the pace of paying that down is really driven by, as I mentioned in my comments, both the levels of transactional cash that we see as well as the mix of that transactional cash between the bank and the broker-dealer. So, we'll do it as quickly as we can to the extent that we see, you know, greater contributions from new accounts and a greater level of deposit growth that will accelerate that. In terms of the market engagement and the strong markets, You know, there's really sort of two forces going on there. When markets are higher and moving higher, we do see clients more likely to change their asset allocation and move into the equity markets. And that ends up being a negative for some of that cash. On the other hand, when markets are higher, clients are more engaged. And so they're more likely to add to their accounts with money from outside of Schwab. And so that's certainly a positive for us as well.

Thank you. Our next question is from Steven Chubak with Wolf Research. You may go ahead.

Hi, good morning. So I wanted to ask a question on the sweep cash growth algorithm. Just given sorting is in the very late innings, the second derivative on sweep cash is steadily improving. I was hoping you could speak to the proportion of new cash dollars that are getting deployed into money market versus bank sweep. and how that informs expectations for when sweet deposits could not only stabilize, but actually begin to inflect positively?

Yeah. So, Stephen, you know, I would say that when you look at the new accounts, they tend to, over time, look a lot like the existing accounts. They come in with a heavier portion of cash, but we are seeing some of the new accounts kind of realigning ahead of bringing that money, that business to Schwab. One of the things we saw in this last quarter, for example, is we saw that our transfers accounts were actually a higher portion of our net new assets than they've been for the last year. That is a good thing. I mean, that means we are winning business from competitors. Clients are entrusting us and choosing to shift more of their business to Schwab versus our competitors. But that also means that some of that net new assets is coming in the form of securities and mutual funds, et cetera. So, you know, it really depends. You know, our expectation, of course, is we will see – uh that uh the realignment among the existing um clients continue to moderate uh not necessarily go to zero but continue to moderate and then get offset by as we uh see growth from uh contribution of cash from new accounts over time and we'll see a resumption of deposit growth and and over time our transactional cash will grow with the growth and accounts and the growth growth of our total assets

Thank you. Our next question comes from Alex Blastein with Goldman Sachs. You may go ahead.

Hey, good morning. Thank you for the question as well. Could you guys expand a little bit more on the capital return priorities as you make your way back to higher capital ratios, as you pointed out in the last couple of quarters? Would the preference be to a larger buyback, maybe kind of how we saw in the past or something else? Thanks.

Yeah, thanks, Alex. So certainly capital return, it remains a very important part of our financial formula. We've obviously paused our buyback at the moment to enable us to more quickly grow into what we expect will be our new capital requirements. But, you know, our baseline forecast anticipates that our capital levels growing, you know, inclusive of AOCI, growing to the levels that we had excluding AOCI previously. And at that point, you know, we expect to be in a position to at least consider, as I mentioned, returning more capital to our stockholders. Again, it's not, we've always said our buyback is opportunistic, not programmatic, not automatic. And in terms of our capital return priorities, you know, we always consider, you know, a few different things. We look, of course, at our dividend, which tends to grow with growth in earnings. We look at doing common buybacks. And then, of course, we also look at preferred redemptions. as well. And we want to look at the full landscape, I guess, if you will, and also take into consideration, as we do so, the interest rate environment, what we're seeing from clients, the level of supplemental borrowing we have outstanding, and so forth. But those are all the different aspects, the different vehicles that we consider as we think about capital return. capital return is a very, very important part of our financial formula and something we think, as you look over time, will continue to be very, very important for the company.

Hi, operator. We have a few questions that have kind of trickled in over the course of the day on the console here, so maybe let's insert one. Maybe this one's for Walt. Recognizing this is a bit of a topic du jour across most industries, Could you spend a minute talking about the role of AI or artificial intelligence in Schwab's go-forward strategy?

Thanks, Jeff. You're right. There's an incredible amount of hype that they have to sort through here. But we do believe that AI has a lot of long-term potential for us in making a difference in serving our various client segments. For us, it can really impact the efficiency of service as well as enhance digital experiences for our clients. At the same time, we tend to believe that it will be the marriage of AI with humans that will deliver best for our clients. Of course, we have been very active in the use of AI for for things like security and fraud detection for a number of years. And of course, the challenges there is it's also being leveraged by bad actors. So there's a constant effort to stay a couple of steps ahead there from a security and fraud detection. I think from a productivity and efficiency standpoint, Big opportunities are there. And a very simple example is take the difference between someone answering a client call who has a year of experience versus someone that has 20 years of experience. That gap today, even with access to our knowledge center capability, likely exists just given the difference in tenure. and experience, I would expect that gap to close dramatically given some of the projects and initiatives that we have going on with AI today that will provide real-time knowledge support for all of our reps. You know, when you switch over to something like generative AI, I think it's going to be a while to watch that technology mature. I know that may not match some of the hype that we hear some speaking of, but I think that technology will need to mature. There will be a lot of work that will go on with regulators along the way. to ensure that we can deliver for clients without some of the inherent biases that you sometimes see. But AI is a big, big opportunity for us to further delight our clients, to deliver on the brilliant basics that Rick spoke of, and continue to ensure fairness and transparency and accountability with AI usage as we navigate the opportunities that will be present there.

Thank you. And our next question comes from Brennan Hawken with UBS. You may go ahead.

Good morning. Thanks for taking my question. Given that today is April 15th and we have our taxes due, hoping that you could give us an update around what trends you've seen around tax payments month to date and maybe an early read on how this tax season compares with other tax seasons you've seen.

Sure, Brendan. So, you know, we're still not all the way through, obviously, through the tax season. But I would say, on the whole, this tax season is proceeding, generally speaking, consistent with our expectations. It looks a lot more like tax seasons from years prior to 22 and 23, with more of our clients' cash being in money funds. A lot more of the tax payments are being paid through redemptions of those money funds. Again, not surprisingly. So overall, you know, consistent with what we've seen in, again, in previous years before 22 and 23.

Thank you. Our next question comes from Devin Ryan with Citizens JMP. You may go ahead.

Thanks so much. Good morning. So you guys have about $350 billion more in money market balances today than you guys did at the beginning of 2022 when the Fed policy shifted. So if the path of interest rates is lower from here, how sticky are those balances? And do you think your money flowing out of money market funds over time, is that a net opportunity for Schwab or is it drag? I guess it would just seem to matter where some of that money would flow. So just great to get an update there given how large those balances are today. Thanks.

Yeah, so I guess I would want to split that into two pieces. You know, you're right. So, obviously, balances and money funds are certainly a lot higher today than they were a few years ago and obviously higher than when we were in the zero interest rate environment. You know, to the extent that money – so it depends on why that money is flowing out of the money funds. If it's flowing out of the money funds into the equity markets, into mutual funds, et cetera, of course, then it depends on what the vehicle is. If it's flowing out of money funds into cash on our balance sheet, then clearly that's a positive for us from a revenue standpoint. What I'd say is if interest – our expectation is if interest rates fall modestly under 100 basis points or something like that, you'd see a – Over time, you'd see a little bit of a shift in the proportion of cash that's sitting in those transactional cash solutions like BankSweep and the broker-dealer cash solution versus money funds. It's not going to happen immediately. It's not like people sell their money funds when rates fall by 75 basis points. But what happens is if they need cash, they may sell a money fund. And if cash accumulates, they may be on the margin somewhat less likely to put that into a money fund. And so over time, you see that shift. change slowly. Where you see a much more dramatic impact would be, of course, if rates fall back to levels that we saw in 2020 and 2021. That tends to be the period of time where you'd see a much more significant reduction or shift from money funds onto transactional cash. And the nice thing about that is that is something where in an environment like that where spreads on some of our floating rate assets compress, having more of that cash on our balance sheet allows us to offset some or all of that impact. So, it is sort of a some dry powder, if you will, that helps mitigate the revenue, potential revenue impact from a very low interest rate environment.

Michael Heaney We're going to push out one more of those consult questions here. I think this one's for Rick. It was great to see the interest from the Ameritrade side in terms of enrollments in Schwab Wealth Advisory. Maybe a little more color about what other advice solutions they're gravitating towards?

Jeff, maybe before I dive into the wealth solutions they're gravitating towards, I'd just make a comment about the overall integration. You know, we've gone through now four transition weekends. We'll have our fifth coming up shortly. From an operational standpoint, those have gone exceptionally well. And as Walt shared earlier, the more time Ameritrade clients spend at Schwab, the happier they become, as you see the robust expansion in their client promoter scores. We're now getting to what I think is the most exciting part of the combination, which is the ability to introduce the combined capabilities of our two firms to both sets of clients. And we've seen the number of Schwab clients that are using Thinkorswim. We saw those double in the first quarter. So our Schwab clients are taking advantage of one of the great capabilities of Ameritrade, which was its trading and educational platform. And we're seeing the same thing happen for Ameritrade clients. Our wealth platform, we think, is incredibly strong. And we've been able to introduce it to the Ameritrade clients through a through our relationship building and through a different approach to engaging with clients that's holistic and wealth and financial planning oriented. And that has led to much greater engagement in wealth solutions among Ameritrade clients than in the past. In fact, we've seen 97 percent of legacy Ameritrade FCs have opened up some form of wealth or advice solutions in the first quarter. In terms of your specific question, what they're gravitating towards, Jeff, the majority of the assets are going towards full-service wealth solutions, either our Schwab Wealth Advisory capability or Schwab Advisor Network, which makes RIAs available to our clients. They've also gravitated towards Schwab personalized indexing and to Wasmer Schroeder. So those would be the four, but the majority of flows are going to full service wealth. And that's exactly the power of the combination that we thought we'd see, and we're seeing it. And what's most gratifying about that for us is that on the other end of that is a client whose life we're making a big difference in. So we're excited about these trends.

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

Great. Thanks. Good morning, folks. Thanks for taking my question. Maybe just back on the balance sheet, Peter, in relation to the tax season, assuming obviously that we'd get a contraction in the balance sheet in the month of April just given tax season. But can you talk a little bit more about investing, you know, client risk on behavior, investing in assets, and then that coming more from the money market funds versus the transactional cash, and maybe just your confidence that your earning assets could rebuild throughout the year back to 1Q levels at the end of March, you know, or even potentially exceed that?

Yeah, so I'm not sure entirely. I guess what I'd say is, let me just try to answer your question, maybe a little bit higher level. So, without making sort of a specific prediction around where we're going to end the year, right? Back in January, we shared those mathematical illustrations, steering clear of giving you a specific prediction. And the reason we did that is because the actual pace of deposit growth depends on a number of factors that are frankly hard to anticipate, right? It depends on what's going to happen with interest rates, investor sentiment, the pace of new account formation, and the level of the contribution of cash from those new accounts. And those same dynamics are true today. As I mentioned, our clients in a strong equity market, clients tend to be net buyers of equities, although the impact is probably not as great as you might think. Oftentimes, when I look at the daily flows of into and out of equities and Oftentimes, you'll see our clients buying equities on those down days because they end up seeing it as an opportunity to step into the market and buy the dip, as it were. I think the more significant impact is that at a time when clients are feeling more enthusiastic, when investor sentiment is higher, they do tend to put more money into their accounts. both cash as well as they're more engaged in their accounts. And what we've seen over time is that when clients are more engaged in the investing process, that is a period of time when we tend to win. When clients sort of pick up their head and sort of look around and say, you know, I want to invest, they tend to shop around a little bit more. And in those situations, we tend to be a winner in terms of business. And so that, I think, is part of the reason that we've seen a very strong transfer of accounts this quarter, and we're gratified by that and hope that that continues.

Thank you. Our next question is from Bill Katz with TD Cowen. You may go ahead.

Okay. Thank you very much. Maybe just to mix up the topics a little bit, Peter, just coming back to expense guide for a moment. Q1 tends to be rather seasonally strong, just given FICA and sort of payroll increases, et cetera. The 2.8 sort of annualized out to just over $11 billion, but just given headcount reduction, period date, and seasonal dynamics, how should we be thinking about the sort of full-year bogey right now and the incremental margin on revenues? Thank you.

Yeah. So, Bill, we'll provide an updated expense outlook in our July update. As I mentioned in my prepared remarks, we're targeting flattish expense growth. We've definitely taken steps to limit our expenses and have been very disciplined in terms of the hiring and so forth. And that's why you've seen our overall labor equivalents come down from the end of year levels. Over the course of this year, we'll continue to capture some of the remaining expense synergies related to the Ameritrade integration with the expectation that we'll have fully captured those on a run rate basis by the end of this year. I'm not going to get into exactly timing around sort of when in the year we're going to capture those expense synergies, but that's certainly our expectation. So we're targeting flash expense growth. As you know, Bill, from following the company for a while, There are some expenses that grow and fall with levels of client engagement, things like trading. There's trading pass-through expenses that are aligned with revenue. There's third-party expenses that go up and down based on equity market valuations. There's, of course, our bonus funding, which goes up and down based off of our financial performance. So those are a little bit harder to gauge. But again, if those are going up, That's certainly good from a revenue standpoint. But our objective right now is and continues to be to be very disciplined on expenses and with the objective of maintaining that and at flattish level for the full year.

Another question from the console here. This one's from Chris O'Brien at Barclays. Well, maybe you could start with this one. It's a question on retail competitive landscape. There's competitors that have been in the market with fairly attractive deposit matches, which appear to be driving cash inflows to those firms. Is this something that the firm is worthy of some sort of competitive response, or is it something that Schwab isn't really worried about?

Yeah, so let me first say that the least innovative thing any company can do in our industry is to buy business by giving someone cash. It is certainly a strategy that some firms employ. It is not a sustainable strategy over any period of time. It is not a sustainable strategy when you're talking about meaningful dollars. There have been some rare circumstances where we have chosen on certain clients to respond to those offers. When we have responded, we have been able to retain the clients that we wanted to retain for about 15% of what maybe an alternative firm might be offering in terms of cash. which I think is an interesting reflection of the way the client values the difference in their experience. There have been some clients that we have let go without offering any incentive to stay. Generally speaking, those are clients who have chosen to move assets that they have no intention of trading with or doing anything different with. So as an example, A client might have a significant holding in a given stock, Microsoft, Nvidia, something like that. And they'll take advantage of one of these offers and move those individual positions while leaving the rest of their assets at Schwab, knowing that they're not going to liquidate or trade or do anything with those assets and proactively telling us that as soon as the required holding period expires, they'll move those assets back to Schwab. So again, it's something that goes on in our industry and we watch it very, very closely, but it is not innovative and it is not sustainable as a means to grow. The only way to grow is to delight clients, offer them no trade-offs. operate your business through clients' eyes. That's the only way to have any form of sustainable organic growth. And we like our track record at that and are incredibly optimistic about our future with those approaches.

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

Hi, good morning. Just given the steady progress now on supplemental funding pay down, and as we look out over the next 12 months or so, it seems that we could be in a zone whereby the securities book is no longer in runoff and you begin to reinvest or even grow the book. I'm wondering if we could get an update on how you're thinking about the ideal structure of the securities portfolio in terms of fixed float mix and duration over the medium term. And should we expect any changes to your historical views on balance sheet structure as we get towards growing total interest earning assets once again?

Sure. So, you know, we're still going through the, you know, the process of thinking through that. You're right, you know, we will be in a position, of course, to resume our reinvestment. I would characterize the sort of balance sheet changes being more evolutionary versus revolutionary. You know, we've always assumed that when we lose the AOCI opt-out that we would need to be very mindful about the size and duration of our available for sale portfolio, given the potential variability, you know, capital variability that that would create. And so I think, you know, you'll see us take some steps to, you know, to manage that duration appropriately. What that does in terms of you think about our overall consolidated asset duration of sort of two to two and a half years, sort of top of the house, you know, that's still really a TBD. But I think on the AFS portfolio, again, you'll see us, you know, take steps to manage that. As I say, I think that the overall changes, though, are going to be, you know, evolutionary versus, again, not revolutionary.

It looks like we have maybe time for one last question. So, just given the continued interest here, maybe we'll do this last one from the console and maybe, Walt, you could start off just around the general approach that clients are taking on their cash and the continued evolution of those realignment trends more recently.

Yeah, and of course, Peter touched a little bit on it on the earlier question around equity trades. I think if you look at the supplemental metrics that we provide with our earnings, it really tells an important story that the notion of client cash realigning is a story of 2022 and the early parts of 2023. When I look at overall balance sheet cash over the last six months, it's down $8 billion. And at the same time, if I look over the last six months, for example, just at large capitalization stock purchases, which is the largest category by far of equity trades that clients do with us, those are up $25 billion. And so the concept of realigning is just sort of one that has played itself out. We were very early in the process. We were very proactive at reaching out to our clients, encouraging them to move their non-transactional or what we call investment cash into higher yielding alternatives. Not surprising when you're proactive and explain the benefit of that to a client, they take advantage of it. And they did, and they did early in the process. And today that's just not a meaningful part of our story. One last comment on it. I know there were past periods where people tried to equate the growth in purchase money funds to impact around client cash realigning. And I know Peter was particularly clear in emphasizing the danger in doing so that they really weren't correlated. Again, go back over those last six months where balance sheet cash went down about $8 billion in total. Purchase money fund is up $80 billion. So there's really no correlation there at this point in time. The story of client-cash realigning has played out.

Great. Thanks, Walt. I'll turn it over here to Peter to close this out.

All right. Well, thank you, Jeff and Rick and Walt. And thank you all very much for joining us and hearing our thoughts on the state of our business and and the opportunities in front of us, we're certainly gratified by the momentum we're building and the progress we're making on the integration of Ameritrade and really unleashing, as Rick talked about, the potential of the combined firm, the resumption of our historical organic growth rate, and really unlocking that core earnings power. You know, we're certainly mindful that we have a lot of work ahead of us, but we're really excited about the future. And we're looking forward to sharing more about what fuels that excitement at our Investor Day in May next month. I hope to see many of you there. Thanks, everyone.

Thank you. That does conclude today's conference. Thank you all for participating. You may disconnect at this time.