Charles Schwab Corporation (The)

All right, and we're off. Good morning, everyone, and welcome to Schwab's 2025 Spring Business Update. This is Jeff Edwards, Head of Investor Relations, and I'm joined in our Westlake headquarters by our President and CEO, Rick Worcester, and CFO, Mike Berdeschi. Our earnings release crossed the wires about an hour ago, so hopefully everyone has had an opportunity to review our strong 1Q results. Before we jump in, a few quick housekeeping items. The slide to the business update will be posted to their usual spot on the IR website at the conclusion of today's prepared remarks. Q&A remains structured as one question, no follow-ups please, with negative points awarded to those posing questions with four to five separate questions nested within. This approach enables us to address as many questions as possible during our time together this morning. It's worth noting that questions may also be submitted via the online console. And of course, please don't hesitate to reach out to the IR team with any follow up questions after today's update. And finally, the forward looking statements page, our omnipresent wall of words, which reminds us that outcomes can differ from expectations. So please keep in touch with our disclosures. All right, with all that covered, let me turn it over to Rick.

Thanks, Jeff. And good morning, everyone. Welcome to our spring business update. The first quarter of 2025 can be summed up in one word, growth. With our through client size strategy, investors turned to us during the first quarter entrusting us with $138 billion in coordinate new assets, which is up 44% over the first quarter of last year. Clients opened 1.2 million new accounts. Our clients remained highly active with high levels of trading activity record engagement with our wealth solutions and strong utilization of margin and through it all we were there for our clients we delivered strong service levels for advisors and retail investors retail client promoter scores and our client easy score for advisors both remain strong with legacy ameritrade satisfaction increasing this sustained client momentum translated to strong financial performance to begin the year including year-over-year revenue growth of 18 percent, record net revenues, and a 41 percent year-over-year increase in adjusted earnings per share. We're continuing to play offense and deliver on initiatives that support growth across multiple measures. We're adding new financial consultants and opening up branches in our retail business. Our advisor business continues to grow and delight clients and we've invested to continue to enhance the experience for advisors. In the first quarter, we launched several new offers to help our clients take ownership of their financial futures. And I'm going to talk more about these in a few minutes. And we're not taking our foot off the gas. We're continuing to make investments to make it easier for clients to do business at Schwab while conducting more of their financial lives with us. As we shared in January and continue to believe, we expect strong revenue and earnings expansion in 2025. And after recent capital actions, we're poised for additional capital return over the course of the year. With ThruClientSize as our guide, we remain well positioned to accelerate our growth over the long term. In the first quarter, the S&P 500 was down 5 percent. The VIX increased and investor sentiment dampened. Through this volatility, we were there when clients needed us. Retail calls to our service centers increased as clients had more questions about what to do during periods of uncertainty. We consistently answered their calls in under 30 seconds. And our retail, advisor, and workplace relationship teams stood by clients to help them navigate their personal financial situations. It is in periods like this where our omnichannel client model really shines just as it did this quarter. And it is in periods like this where it is so important to remember why we are here. Because behind every trade and every call to our service teams is a person who is watching the headlines and considering their next best financial decision, whether they are a new investor, an active trader, an engaged retiree, or a dedicated advisor supporting their clients. With Through Client's Eyes as our guide, we delivered an outstanding experience to our clients and powered growth across all fronts, client growth, solutions growth, and financial growth. Looking at client growth, Core Net New Assets grew 44% year-over-year to $138 billion, representing a 5.5% annualized growth rate. This is driven by momentum across all three of our client businesses, with each seeing strong growth. The momentum in our advisor services business continued from last year, while retail NNA increased 50% year over year as we moved further away from the final client conversions. At the same time, we also had a record quarter in our workplace business. As we move further away from the Ameritrade integration, our NNA continues to move to our normal historical levels, just as we suggested it would. We continue to see NNA from legacy Ameritrade clients grow as we deepen those relationships over time. New brokerage account openings grew to 1.2 million, an increase of 8% over the prior year quarter. We continue to delight clients, earning strong client promoter scores in all of our businesses. Clients continue to turn to our wealth, lending, and trading solutions, another key measure of our growth as we broaden and deepen relationships with clients. Managed investing net flows increased 15% over the same period last year to a new record, with continued strong contribution from Ameritrade clients. We now have nearly $500 billion in assets under management in our holistic wealth solutions, Schwab Wealth Advisory and Schwab Advisor Network. We also attracted record net flows across several offers, including our flagship Schwab Wealth Advisory, as well as Schwab Personalized Indexing. Bank lending balances reached $47.1 billion, a 15% year-over-year increase. Finally, daily average trades increased 24 percent to 7.4 million for the quarter. Our early April numbers are well above even what we saw in the first quarter. We are the number one firm traders turn to among competitors to report on those metrics, and there isn't a close second as we bring the industry's leading platform, research and education, and trader support. When we deliver for our clients, it translates to healthy financial growth. In the first quarter, total revenue increased 18 percent year over year to $5.6 billion. And adjusted earnings per share increased 41 percent over the first quarter of 2024. We are off to a strong start with growth across all key measures for the first quarter. Looking ahead, we remain confident in our ability to accelerate our growth over this year and for the long term. And we believe that is true even in a period of market uncertainty. There are several reasons for our confidence. First, we have a strong competitive positioning. We remain a leader in the two fastest growing segments of the financial services industry, self-directed investors and registered investment advisors. We're number one in total client assets for publicly reported peers, number one in RIA custodial assets, and number one in daily average trades. And we continue to receive third-party recognition, including being named the number one overall broker by stockbrokers.com. Second, we have healthy business fundamentals. Our transfer of assets, or TOA ratio, which is a measure of how we stack up to competitors, is 1.5. That means for every dollar that leaves Schwab, $1.50 comes to us from our competitors. Investors turn to us because our no-tradeoffs approach means they get world-class platforms, solutions that meet the spectrum of wealth and trading needs, access when and where they want it, whether that's on their phone, in a branch, or through one of our advisor or workplace relationship managers, along with service that can't be matched. Our pledged asset line balances increased 34% year-over-year, supported by strong digital adoption. 95% of new loans originated through a digital channel, and even with the increase in volumes, we're delivering industry-leading cycle times, averaging only 1.1 days. Third, we have a growing and diverse client base. We serve RIAs of all sizes and attract healthy NNA from all segments as we delight them and meet their needs. In our retail business, new to firm households are up 14% over last year, and we're attracting clients across the spectrum of ages and life stages. In the first quarter, 33% of new to firm clients were under 30 and nearly 60% were under the age of 40. Traders were a key part of the story in the first quarter and will remain so with volatility at higher levels. We continue to attract traders to our leading offer. The number of clients who have adopted Thinkorswim has more than doubled over the last year. Traders are a highly engaged group. We're number one in the industry in daily average trades and option contracts. We're number one because of our outstanding platforms, multiple destinations for trading for all levels of investors, educational content and insights, combined with incredible trader support from trading professionals here at Schwab. And as the last few weeks have shown, we're meeting trader needs through market swings and record trading days. Fourth, we're continuing to deliver the capabilities, experience, and solutions that our clients want and expect. We're investing in the four focus areas that you see here. Our first priority is driving growth. There are two aspects of our growth, driving N&A with new and existing clients and deepening relationships with those clients. And we delivered on these priorities across multiple fronts in the first quarter. We're expanding our branch footprint and hiring hundreds of financial consultants and wealth consultants to deepen relationships with our higher net worth retail clients and their families. We're also investing in our support of self-directed clients, including our AI-powered capabilities. Our goal is to be the leader for clients that want an omni-channel experience and those that may want limited interaction. Our AI investments are part of supporting both. We are investing in our marketing spend, which drives approximately 40% of new to firm retail clients. We are firing on all cylinders in AS as our client satisfaction continues to be at all-time highs. And we are working on a multi-year investment in our workplace business to grow it over the long term and increase the client base to whom we can introduce Schwab. We also advanced our efforts to deepen client relationships. first we delivered several enhancements to our wealth offer we rolled out retail alternatives to all eligible clients we launched a discretionary option for clients within schwab wealth advisory and we continue to enhance both schwab personalized indexing and our wasmer schroeder offers and just yesterday we announced a strategic investment in wealth.com wealth.com is a leader in digital estate planning In addition to enhancing our estate planning capabilities and experience for clients, this investment is one part of our broader effort to provide more of an ecosystem for our RIA clients as we help them grow, compete, and succeed. The wealth enhancements I've just described help us meet the full spectrum of our clients' needs while also bolstering the company's fee-based revenue over time. Second, we expanded our trader offer with the delivery of a 24 by 5 trading capability on our thinkorswim platform. All of Schwab's retail clients can now trade 24 hours a day, five days a week in an expanded list of stocks and hundreds of additional ETFs. This capability comes with our specialized 24 hour service and support as well as tailored education. Turning now to scale and efficiency, these are initiatives that benefit clients while allowing us to operate more efficiently, maintain our low cost to serve, and reinvest in our growth initiatives. In the first quarter, we launched Schwab Knowledge Assistant for advisor services clients. We also just launched Schwab Intelligent Assistant for our international clients, leveraging a large language model to provide on-demand support and personalized assistance tailored to our international clients. We're continuing to invest in longer-term efficiency initiatives, including a focus on removing paper from the system, which will make it easier on clients while also helping us to operate even more efficiently. Our third focus area is the brilliant basics. Our biggest opportunity for growth over the long term is delighting our clients in the everyday interactions they have with us so they entrust more of their financial life to Schwab. That means picking up the phone quickly, answering questions efficiently, and providing intuitive digital experiences. In the first quarter, service levels were strong across the board. We continue to enhance our digital processes, and our AS EASY score reached 93%. Finally, our fourth focus area is continuing to invest in our people. our ability to serve our clients and fuel growth into the future comes down to our people and we're continuing to optimize workflows as well as talent development and recognition programs that help us foster our unique culture of service i want to wrap up with some comments on april and our outlook for the year We are seeing record trading levels with our two highest trading days ever and high levels of engagement digitally and with our reps. We have been there during this period when our clients needed us most. Our technology has performed well, our service has been solid, and our business metrics continue to perform well. We continue to track well to the financial scenario we outlined at the beginning of the year, as Mike will expand upon shortly. The combination of a strong first quarter and robust activity in April has us off to a strong start in 2025. With Through Client's Eyes as our guide, we're continuing to play offense by investing in focus areas that will drive both growth and efficiency while delighting our clients and supporting our employees. With continued innovation around client solutions capabilities and experiences, we are well positioned to accelerate profitable growth through the cycle. And with that, I will turn it over to Mike to share our financial picture.

Thanks, Rick. I'm looking forward to speaking with you all this morning about our strong start to 2025. To echo Rick, we saw solid growth across all fronts during the first quarter as we continue to meet the evolving needs of our growing client base. New account formation was approximately 1.2 million during the period, our highest total in several years. And momentum in net asset gathering continued to build, with core NNA reaching 138 billion. Clients utilized the full breadth of Schwab's modern wealth management solutions during a period of increasing uncertainty across global markets, including 7.4 million daily average trades, record net inflows into our managed investing solutions, and sustained growth in our bank lending products. This combination of organic growth and increased client utilization of our leading products and solutions resulted in year-over-year revenue and adjusted earnings growth of 18 percent and 41 percent, respectively. Transactional cash levels continue to reflect normalized cash behaviors inclusive of organic growth seasonality, and investor sentiment. And we made additional progress in reducing the level of bank supplemental funding to approximately $38 billion, down more than 60 percent from peak levels. We increased the return of capital through the previously announced higher common stock dividend and stock buybacks in the first quarter, and our capital ratios finished 1-2, slightly above the upper end of our target range. Given the shifting macroeconomic backdrop to begin this year, there are plenty of moving pieces. So let's unpack some of the key factors influencing the first quarter. First quarter revenue increased 18% year-over-year to a record $5.6 billion, including double-digit growth across all line items versus 1Q24. The further reduction in higher-cost bank supplemental funding drove sequential net interest margin expansion of 20 basis points, helping net interest revenue increase 21% year-over-year. Asset management and administration fees grew by 14% year-over-year to $1.5 billion for the quarter as robust asset gathering and sustained interest in Schwab's wealth and asset management solutions more than offset the impact of recent equity market declines. Building on the post-election momentum observed in late 2024, daily average trading volume increased significantly during the first three months of the year as investors navigated an increasingly uncertain and volatile market. The subject and trading activity pushed trading revenue up 11 percent year over year. while bank deposit account fees moved higher due to an improved net yield as a growing percentage of the balances have converted to the floating rate bucket. On expenses, adjusted expenses for the quarter were up 6% and 8% versus 4Q24 and 1Q24 respectively. This includes typical first quarter seasonality to start the year, which was accounted for within our full spending plan a four and a half to five and a half percent outlined during the January business update. We also began to make progress on a number of key focus areas for 2025, including investments to support sustainable organic growth and drive incremental scale and efficiency. This balanced approach to expense management has enabled us to drive expense on client assets down into the low double digits and improve cost per account by more than 20% over the last decade. Strong top-line growth plus balanced expense management generated a 46.2% adjusted pre-tax profit margin, representing over 500 basis points of expansion versus 1Q24, and earnings per share of $1.04, a year-over-year increase of over 40%. Our first quarter financial results reflect the continued positive inflection in Schwab's earnings trajectory, as well as the durability of our diversified model to deliver across a wide range of environments. While we plan to provide a more comprehensive update on our full year 2025 financial scenario at the summer business update in July, given all the moving pieces, we want to spend a few moments discussing what has changed since mid-January. we've seen sizable movements across three of the inputs to our financial scenario, including a lower expected future path of interest rates, lower equity markets, and a sequential step-up in client trading activity as the market pulled back and volatility reemerged. In terms of rates, the outlook for 2025 remains dynamic, with the forward curve moving between three to four 25 basis point cuts to the Fed's target rate versus the one cut assumed back in January for our financial scenario. At this point in time, these potential incremental cuts are expected to be mostly in the back half of the year. And under such a scenario, we'd still expect full-year 2025 net interest margin to expand into the 255 to 2.65 percent range. We also could see average 4Q NIM contracted slightly from the level indicated in our January financial scenario. Of course, movements in a forward curve is nothing new, and we'd expect it to continue to change as investors assess the shifting macroeconomic picture. And while the drivers of earnings are evolving with stronger cash levels and higher trading volumes versus lower equity markets and additional future rate cuts, The combination of our strong 1Q25 results and diversified model has us currently tracking around the upper end of the full-year scenario outlined at the winter business update in January, which implied earnings per share in the $4.10 to $4.20 range, excluding any impacts from buybacks. However, given the current backdrop, the key variables will likely continue to shift And so we'll provide a more comprehensive update on our full year 2025 financial scenario at the next business update in July, when we'll have a better view of how key trends are shaping up halfway through the year. Moving to our balance sheet, we continue to support our clients as their needs evolve through the quarter. Following the deleveraging in late February and early March, client margin balances at the broker-dealer finished at $83.6 billion, or essentially flat with year-end 2024 levels. Bank loans grew with PAL balances increasing 9% versus 4Q24. As expected, we saw the seasonal outflow in client transactional sweet cash to begin the year and then cash building slightly during February and March. This activity represents normal behavior in this type of environment, as client redeployment of the 4Q cash bill was offset by net equity selling as investors trim exposure to risk assets. With another quarter of encouraging cash performance, we used the cash flows coming off of the securities portfolio, plus some cash on hand, to further reduce high-cost supplemental funding at the banks. In terms of Q2, we still expect to see typical drawdown in client cash due to tax disbursement payments in April. And similar to past years, we expect this activity to impact both transactional sweet cash as well as other liquid cash alternatives, such as purchase money market funds. However, it is possible that a continuation of market volatility in this quarter could influence client cash allocations. Given the increasing uncertainty in today's environment, we're focusing on flexibility in managing the balance sheet to remain well-positioned to navigate a wide range of potential outcomes. Some additional thoughts on bank supplemental funding. Following the $15 billion pay down during the fourth quarter, we reduced the balances by another $11.8 billion during the first quarter of 25, bringing the outstanding balance as of March 31st to $38.1 billion or down approximately 60% from the peak. As previously mentioned, we would not necessarily expect to reduce funding levels by the same magnitude every quarter. For example, sizable tax-related outflows in 2Q will likely make it more challenging to replicate the level of paydown observed over the past two quarters. However, as we move forward, we still 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 finished the quarter slightly above the upper bound of the firm's adjusted Tier 1 leverage objective of 6.75 to 7 percent. The quarter-over-quarter build was primarily driven by earnings and the continued pull-apart of unrealized marks with incremental benefit from the decline in interest rates. The ratio also reflects our common dividend and the $1.5 billion opportunistic share repurchase completed in connection with TD's secondary offering in mid-February. As we begin the second quarter, this strong capital position continues to provide flexibility ahead of the pending decision regarding our $2.5 billion Series G preferred that becomes redeemable later this quarter. Moving beyond the decision regarding the preferred, we expect to apply our familiar capital management framework as we prioritize maintaining capital to support the needs of our clients and the growth of our franchise while at the same time making progress on reducing the amount of higher cost funding at the bank and returning capital in multiple forms as part of our through the cycle financial growth story. While there is more uncertainty today from a few months ago, we remain highly confident in our long-term diversified model. For over five decades, our through-client-side strategy has focused on meeting the needs of individual investors, either directly or by supporting the growth of independent advisors. The ways in which Schwab has met those needs has evolved over time, including expanding the available set of products, solutions, and services. The broader set of capabilities, which stands wealth management, trading, banking, asset management, and much more, helps us efficiently attract a wide range of investors, driving sustainable organic growth, and allows us to deepen relationships with our clients as their needs change over time, supporting greater revenue diversification through the cycle. At the same time, our scale and efficiency is a significant competitive advantage, enabling us to maintain key investments and flexibility to navigate various macroeconomic environments. Of course, our capabilities are also supported by our enhanced approach to the balance sheet, where we expect incremental tailwinds moving forward. Not only does the balance sheet play a key role in deepening relationships with clients via lending, cash management, and other activities, But by further reducing outstanding high-cost funding, we are able to expand NIM and increase the firm's earnings, therefore supporting robust capital formation, which helps position us to further enhance stockholder value through the increased return of excess capital in 2025 and beyond. So to wrap up this morning, our ability to support clients through a period of increasing uncertainty helped sustain our strong momentum into 2025. and we plan to stay on offense, investing to support long-term organic growth, and importantly, to help ensure our best-in-class client experience continues to meet the evolving needs of individual investors and the advisors who serve them. In doing so, we also help further strengthen our diversified model, enabling us to deliver durable financial results through the cycle. And with that, let's get on to Q&A. Jeff, back to you.