Charles Schwab Corporation (The)

Good morning, everyone, and welcome to Schwab's 2025 Winter Business Update. This is Jeff Edwards, Head of Investor Relations, and we're coming to you live from the frozen tundra of Westlake, Texas. I'm joined in the room today with a slightly different, but hopefully still very familiar group, President and now CEO, Rick Worcester, as well as our CFO, Mike Pradechi. Hopefully, everyone has had an opportunity to review our strong results for the fourth quarter and full year 2024 that were posted earlier this morning. During our time together today, the team will take a look back at 2024 and discuss key drivers that helped us build momentum through the year, as well as highlight the opportunities they see to continue driving growth across the firm in 2025 and beyond. Before we dive into the good stuff, let's quickly run through a few housekeeping items. The slides for today's business update will be posted to their usual spot on the IR website at the end of the prepared remarks. During Q&A, please respect the one question, no follow-up rule. Though, as always, we encourage you to jump back into the queue to ask another question if time permits. And, of course, the IR team is available to assist with any questions following today's update. Lastly, before we start, let's spend a minute on the ever-important forward-looking statements page, which exists to remind us all that outcomes can differ from expectations, so please keep in touch with our disclosures. And with that, it looks like we're all set to begin, so let me turn it over to Rick.

Thank you, Jeff. And hello, everyone. Welcome to the call. It's my first opportunity to speak with all of you in my new role. I'm very grateful to Walt, to Chuck and the board for entrusting me with this responsibility. And I know I have big shoes to fill. I love our company and the work we do for clients. And as you'll hear from me today, I couldn't be more excited about the opportunities we have in front of us. For the last 50 years, our purpose at Schwab has been to champion our clients' goals with passion and integrity, helping people invest and grow their wealth, whether investing directly or through an advisor. We've had a relentless focus on serving our clients and meeting their evolving needs across our retail, advisor services, and workplace businesses. I can assure you that our focus remains unchanged as we move into 2025 and beyond. I believe you should come away from this morning's discussion hearing three key messages. First, we delivered strong results across multiple measures in a transition year where we completed the largest integration in the history of the industry. The one-word summary of our year and quarter is growth. Net new assets growth was strong. up 20% for the year and 51% for the quarter. Total new brokerage accounts in 2024 were up 10% from the prior year. Revenue was up 4% for the year and up 20% over the fourth quarter of 2023. Fourth quarter earnings per share increased nearly 50% on an adjusted basis versus Q4. Clients were active with strong levels of trading activity record engagement with our trading, coaching, and education, and record flows into our managed investing and lending solutions. Client promoter scores reached all-time highs for the firm. I'd also note that client cash grew in the fourth quarter and supplemental borrowing is down to $50 billion. Finally, we grew our capital ratios to our target levels. The second message I hope you take away is that with these strong results, momentum is continuing to build. We are in a position of strength and poised for liftoff in 2025. With integration behind us, we are focused on helping our clients while growing and deepening relationships. I'd highlight two points on client growth. First, we believe our NNA and account growth will accelerate in 2025 just as it did in 2024. As we move past the integration, we remain confident in our ability to progress back into our long-term 5 to 7 percent growth range. Second, we believe there is an opportunity to grow revenue by doing more for our existing 43 million client accounts in the areas of wealth, banking, and trading. We also refer to this as win-win monetization. We have consistently demonstrated that when we have compelling Schwab capabilities, products, and solutions for clients, our clients love to engage. Good examples are Wasmer, Schwab Wealth Advisory, and our lending solutions. And when you look at our traders, thinkorswim adoption is up over 60 percent year over year on desktop and mobile. As our clients engage, they achieve better outcomes and are more satisfied. We attract more of their assets and earn more revenue from the assets we do hold. N&A remains an important metric, and we are confident in our organic growth. And at the same time, we are also focused on new account growth, revenue on client assets, revenue growth, and earnings growth. We expect strong growth for both revenue and earnings as we project our supplemental borrowing to diminish significantly in 2025 and our investments in deepening client relationships to continue to pay off. And we're poised for greater capital return during 2025. And the third message I hope you walk away with today is our future is bright. With a relentless focus on our clients, we are continuing to innovate with solutions, capabilities, and experiences to meet clients' evolving needs, fueling our long-term profitable growth. 2024 was a strong year for markets, in part helped by the easing of rates by the Federal Reserve. Within Schwab, it was a year of client transitions, as we successfully completed the largest brokerage conversion in the history of our industry. In total, through the integration, we welcomed over 17 million Ameritrade client accounts and brought nearly $2 trillion in assets to Schwab. We did so near flawlessly and with less client attrition than forecasted. It was also a year of leadership transitions where we executed on our longstanding and thoughtful succession planning. Through it all, with through client size as our guide, we delivered exceptional results across multiple measures. When we measure our growth, we look holistically at client growth, adoption and usage of our solutions and capabilities, as well as our financial growth. And 2024 was a year of robust growth across all major fronts. From a client perspective, we drove meaningful growth in NNA and new brokerage accounts in 2024 with good momentum into 2025. As you can see on the page, core NNA reached $367 billion for the year, up 20% over 2023. We attracted nearly $115 billion in NNA in the fourth quarter, up 51% from the prior year. We're more than a year out from the advisor services conversion, and we've seen NNA in that segment return to normalized growth levels. Within our retail segment, we're making progress in returning to normalized growth in NNA, as you would expect, only six months removed from the most complex part of the transition. Retail core NNA grew by over 50% versus the prior year quarter and nearly 20% for the year. We are making solid progress in growing our relationships with Legacy Ameritrade. Specifically, Legacy Ameritrade NNA continues to increase, and these clients are engaging in advice and banking beyond our estimates, which is a positive sign for the future. And notably, Schwab clients are adopting the best of Ameritrade's offer. Twenty-five percent of thinkorswim users are now Legacy Schwab clients. This is exactly where we expected to be at this point past the integration, where legacy Ameritrade clients are now used to our platform and we're building and deepening relationships. As this continues, we fully expect to return to our organic growth rate of 5% to 7%. And we are confident we'll see meaningful asset growth in 2025 that will bring us closer to these levels. The more time we spend with legacy Ameritrade clients, the more NNA they are bringing and the more they are engaging in our solutions. At the same time, we're continuing to deepen relationships with Schwab clients. It is an exciting time for our growth at Schwab. And it is important to emphasize while NNA and account growth are important, we are also focused on other measures of growth for the firm. Clients continue to do more and more with us. This is a reflection of the trust they place in us, the success we are having in serving them, and an indicator of our ability to drive future profitable growth. In 2024, clients engaged strongly in our trading, wealth, and lending solutions. Daily average trades grew nearly 10% year over year. Managed investing net flows reached a record $55 billion in 2024, up nearly 70% over last year and 80% for the quarter. Our pledged asset line balances increased to $17 billion, up more than 25% year over year. These growth measures show we are broadening and deepening relationships with our clients. doing more to meet their evolving needs and helping them conduct more of their financial lives in one place with us. This is an important source of revenue growth for us in the future. And more importantly, it helps our clients achieve better financial outcomes for their families and for themselves. With meaningful client solutions growth, you can see on the page we've also delivered growth in revenue and earnings. Fourth quarter total revenue is up 20 percent over the prior year and up 10 percent sequentially over the third quarter of 2024. Adjusted earnings per share were $1.01 for the fourth quarter, up 49 percent over the prior year and up 31 percent sequentially over Q3. Adjusted pre-tax margins came in at 46.6% for the fourth quarter and 42.5% for the full year, fueled by our revenue growth and disciplined expense management. As you can see with this holistic picture of our profitable growth, we are turning the page on our 2024 transition year in a position of strength. And we believe we are well positioned for liftoff in 2025 across the multiple measures I just discussed. There are several reasons for our confidence. First, we are a leader in the two fastest growing segments in our industry, and we have a value proposition that we believe sets the standard for the industry. Second, our business fundamentals are healthy. Clients are trading more, borrowing more, and seeking more advised solutions. Third, our client base is diverse and growing across age groups and wealth segments. We are winning with RAs of all sizes. We are attracting younger investors with 33 percent of our new-to-firm retail households under the age of 30. and more than 50% under the age of 40. The percentage of new to firm retail households classified as trader is growing. And higher net worth clients who comprise 70% of our retail assets continue to turn to Schwab for their more complex financial and wealth management needs. Fourth, with that backdrop and positive momentum, we're playing offense and leaning further into investments that will fuel our profitable growth across all measures. In combination, investments within our four strategic focus areas will help us serve our clients' evolving needs, make it easier for them to do business with us and help us operate even more efficiently. Growing and deepening client relationships is our first focus area. Over the past couple years, we've made investments in our trading, wealth, and lending offers, and those efforts are paying off with the type of growth I've shared. In 2025, we'll make even more investments to deepen and expand relationships. We will hire hundreds of new financial consultants and expand our physical branch network in a meaningful and thoughtful way in the year ahead. We're making incremental investments in marketing and advertising to raise awareness of Schwab among retail investors and advisors alike. We'll continue to enhance our capabilities and solutions for client segments with specific needs with investments in our trader offer, our wealth offer, and our ultra high net worth capabilities for RIA and retail clients. This includes enhancing our alternative investment solutions and expanding our lending capabilities as well as our tax, trust, and estate tools. Our award-winning bank was purpose-built for investors and helps us stand apart by offering among the lowest lending rates in the industry, FDIC-insured cash, access to pledged asset lines in a day, and strong transactional capabilities. In combination with our fixed income and money fund capabilities, there is no better place for liquid assets than here at Schwab. We'll continue to invest in our industry-leading trader offer, including expanding 24-by-5 trading, launching spot crypto trading when and if regulations make it permissible, and continuing to invest in our trading education and coaching, which is a key differentiator. In advisor services, we are adding support and capabilities for RAs of all sizes, while also helping new advisors transition to independence. and we'll continue our multi-year effort to introduce even more workplace clients to our investing and wealth management capabilities. Our second strategic focus area is creating value through scale and efficiency. In 2024, we captured 100 percent of the Ameritrade run rate expense synergies. We invested in new technologies and capabilities that help our employees do their jobs more efficiently. We increased usage of Schwab Knowledge Assistant by 90% in 2024, which is our AI technology supporting the efficiency of our service professionals. Through these efforts and others, we're able to drive down our cost per client account, which has decreased more than 25% in the last decade. On an inflation-adjusted basis, cost per account has decreased nearly 50%. This focus helps us keep costs low for our clients while also enabling us to invest in our highest priority growth opportunities. In 2025, these critical efforts will continue. We'll invest in continued process transformation and systems modernization. We'll continue to invest in AI and other technology to help employees across the firm do their jobs more efficiently. These efforts benefit our clients by making it easier to work with us, benefit our employees by making their jobs easier, and also free up expense capacity to fund our growth. Our third strategic focus area is delivering on the brilliant basics for our clients, which is one of the most effective ways we can build trust and nurture client loyalty. simply put we strive to make it easy for clients to work with us in every interaction in every channel and we delivered for clients in 2024 which you can see with our record client satisfaction scores in 2025 delivering on the brilliant basics remains a top priority everything we do is oriented towards setting our client service and experience apart Finally, we can't serve our clients without our highly engaged, dedicated employee base that provides our exceptional client service and experience. In 2025 and beyond, we'll continue to invest in our people to deliver the differentiated service that our clients value and that sets us apart. With a clear purpose and relentless focus on clients, it is an exciting time for Schwab. In 2024, we delivered strong growth across multiple measures during our transition year. With strong competitive positioning, healthy business fundamentals, and a growing and diverse client base, momentum is continuing to build. 2025 is a liftoff year. As we look to the long term, we're confident our continued investments in innovation will drive client growth, solutions growth, and financial growth through the cycle. And with that, I will turn it over to Mike to share more detail on our financial picture.

Thank you, Rick. And I could not agree more about how exciting of a time it is for Schwab right now, both in terms of what the firm has accomplished during 2024 and the tremendous opportunity still ahead of us. As Rick mentioned, although 2024 was a year of transition, we were able to deliver meaningful growth across the firm. Investors opened over 4 million new accounts during the year, and brought an increasing amount of assets to Schwab. Clients further deepened their relationships with us as they took advantage of the breadth of modern wealth solutions available on our platform, and we delivered strong revenue and earnings expansion over the course of the year. 2024 brought encouraging trends around transactional cash levels. Realignment activity continued to decelerate as we moved towards more business-as-usual client activity. At the same time, we made meaningful progress on reducing the level of bank supplemental funding to approximately $50 billion, down about 50% from peak levels, and our capital ratios increased within our targeted operating range. In summary, our success during 2024 enables us to enter this year with a lot of momentum, and we have a clear plan to drive meaningful business and financial growth in 2025 and beyond. Before we share some thoughts about the future, let's review our strong 2024 results. Revenue for 4Q totaled $5.3 billion, a year-over-year increase of 20% as we benefited from growth across all line items. The leveling off of cash realignment activity, the continued reduction in higher-cost bank supplemental funding, and healthy margin balance growth helped 4Q net interest revenue increase 19% versus the prior year. While a second consecutive year of 20-plus percent equity market appreciation, coupled with clients' increased utilization of our modern wealth solutions, pushed asset management and administration fees to a new record. 4Q trading revenue grew by 14% versus the fourth quarter of 2023, which benefited from a step up in client trading volumes as investor sentiment improved further. While bank deposit account fees moved higher to an improved net yield as a growing percentage of the balances have converted to the floating rate bucket. Now, looking at expenses, fourth quarter adjusted expenses came in flat on both a sequential and year-over-year basis, helping full-year 2024 adjusted expense growth to finish in line with our expectations of approximately 2%. During a transitional year, we continue to invest to drive growth and to enhance our client offering, while at the same time drive incremental scale and efficiency. In all, the fourth quarter represented a strong finish to the year, with significant top-line growth plus expense discipline producing a quarterly adjusted pre-tax profit margin approaching 47% and adjusted earnings per share of $1.01. While 4Q EPS included 3 cents from certain items, exiting the year with a run rate of around $1 demonstrates the progress we made toward our financial objectives and sets the stage for strong growth in 2025 and beyond. Finally, the firm's full-year financial results reflect the progress made across all aspects of the business during this past year. Twenty twenty four revenue reached nineteen point six billion up four percent year over year while adjusted expense growth finished in line with expectations at approximately two percent resulting in adjusted pre-tax margin expanding the forty two and a half percent and earnings per share increasing to three dollars and twenty five cents. Moving to our balance sheet, we continue to support our clients with both margin and bank loans to clients up significantly during the year, including 34% growth in margin balances at the broker-dealer and low double-digit bank loan growth with an over $1 billion increase in PAL balances in the fourth quarter alone. We saw a continuation of the build in transactional sweet cash during the fourth quarter, including $25 billion of net inflows in December. This strong seasonal inflow during the last month of the year is consistent with the historical trends. And if history remains a guide, we would anticipate much of this seasonal build to flow back out into the markets during the first couple of months of 2025. The combination of the principal and interest coming off of the securities portfolio, plus the cash inflow on the full quarter, enabled us to reduce high-cost supplemental funding at the banks. Double-clicking into our progress on reducing bank supplemental funding, following the $15 billion pay down during the fourth quarter, we have now cut the level of higher-cost supplemental funding in half from its peak level in May 2023. Due to a range of factors, including typical seasonality, we would not necessarily expect to reduce funding levels by the same magnitude every quarter. However, as we move forward, we do expect to make additional progress each quarter until the supplemental funding at the banks is reduced to a level consistent with our diversified long term funding profile. Finally, our capital levels moved to within the adjusted Tier 1 leverage objective of 6.75% to 7%. It is important to note the continued build of capital driven by our strong earnings as well as accretion of unrealized marks, even while long-term rates moved higher during the quarter. In 4Q, the pull to par of those unrealized marks alone offset the capital impact of the sharp rise in interest rates across the curve. Shifting the focus to 2025, we expect our momentum from 2024 to carry over into this year with strong client growth and deeper relationships as we continue to meet the evolving needs of individual investors and the advisors who serve them. We expect this will translate into meaningful and diversified financial growth as well. As is the case in any year, our financial outcomes will be influenced by a range of factors, including the path of interest rates, equity market performance, as well as client engagement and activity levels. Therefore, our 2025 financial scenario is grounded in several key macroeconomic assumptions. We include one 25 basis point cut to the Fed's target rate, bringing the upper bound to 4.25% by the end of 2025. Equity market returns consistent with a long-term average of 6.5%, and client trading activity and mix remaining generally in line with 4Q24 levels. Against this type of macro backdrop, we would expect total revenue growth of 13 to 15% in 2025. This scenario also results in continued reduction of bank supplemental funding, full year net interest margin of 2.55 to 2.65%, with average 4Q 2025 NIM expanding through the 2.8% level. Also, full-year 2025 interest-earning assets are expected to decline slightly year-over-year as we prioritize the continued paydown of higher-cost supplemental funding at the banks. From a 2025 expense perspective, we still anticipate mid-single-digit growth relative to 2024, or somewhere within the 4.5% to 5.5% range. In terms of expense planning for the year, as Rick outlined earlier, we are playing offense and taking steps to further accelerate client, solution, and financial growth. Therefore, we have aligned our spending plan to our key strategic initiatives with a significant portion earmarked for growth, including hiring FCs and other client-facing personnel, expanding the breadth of solutions we offer investors, as well as leaning into targeted marketing and advertising initiatives. Beyond growth, we are also continuing to invest in our firm's scale and efficiency, which offers both near and long-term benefits. And we will keep investing in other key fundamentals, such as continuing to advance our technology stack and, of course, our people, who are foundational in driving our best in class service experience. One reminder on expenses. We'd expect outlays during the year to remain generally consistent with the historical cadence, with slightly higher levels in the first quarter due to typical seasonal factors. So bringing this all together, the combination of strong top line growth and balanced expense management implies healthy margin expansion into the upper 40s, with fourth quarter adjusted pre-tax margins approaching 50%. If you follow the math all the way down to the bottom line, this full year scenario implies potential adjusted earnings in the $4.10 to $4.20 area. which would represent year-over-year earnings growth of around 25% to 30%. While rates, client activity, and other variables may differ from our financial scenario, we are confident in our ability to drive strong financial outcomes across a range of environments. Before we move away from the scenario, we thought it might be helpful to provide a set of static revenue sensitivities based on year-end 2024 levels in an effort to help you adjust estimates and shape your own view around 2025. Please don't hesitate to reach out to the IR team with any questions about these sensitivities or certain underlying assumptions for the 2025 financial scenario. As mentioned, Now that we have moved to within our adjusted Tier 1 operating range, we expect to pivot and begin to look across our capital framework. To many of you, this will be a familiar framework. As always, our top capital priority is to support long-term business growth. the extent we have excess capital beyond our needs we have sought throughout our history to return to stockholders through a variety of means including our common dividend which historically has risen alongside gap earnings preferred security redemptions considering costs and an optimized equity funding mix as well as opportunistic stock buybacks as i noted back in october In the very near term, there's another consideration, our continued progress on further reducing bank supplemental funding. To the extent we continue to make the expected progress on our key financial objectives, it is reasonable to believe we will commence various forms of capital return over the course of 2025. As excited as we are about 2025, we do not view this current year as our final destination. With our long-term diversified model intact, we are equally enthusiastic about the tremendous long-term opportunity in front of us, given our attractive value proposition and leadership position within the two fastest-growing segments of the U.S. wealth market, We expect to generate healthy organic account and asset growth as we serve an increasing number of investors with our suite of modern wealth management solutions across advice, lending, trading, and asset management. This enables us to deepen client relationships while further diversifying our revenues. And of course, we continue to invest to support our long-term growth trajectory, while at the same time driving enhanced scale and efficiency, which helps to further enhance our leading cost to serve. This combination of diversified revenue growth and disciplined expense management positions us to drive incremental margin expansion through the cycle. Guided by our balance sheet principles, we'll maintain the resources needed to support client growth while returning excess capital to shareholders inclusive of opportunistic buybacks. To wrap up, during a transitional year, we achieved significant progress on all fronts in 2024, client base, product and solution set, and financial results. This momentum has carried over into 2025 and helps position us for further substantial growth in the year ahead. And importantly, our confidence regarding 2025 stems from the durability of our model, meaning we can drive strong year-over-year financial growth across a wide range of environments and with the key components of our diversified financial model intact, healthy organic growth, deepening client relationships and therefore revenue from multiple sources, expense discipline, and efficient deployment of the firm's capital and liquidity. We have a tremendous opportunity to continue to meet the evolving needs of our clients and deliver profitable growth through the cycle. With that, Jeff, I'll hand it back to you.