Charles Schwab Corporation (The)

Good morning, everyone, and welcome to Schwab's 2025 Summer Business Update, broadcasting live from our very warm and toasty Westlake headquarters. This is Jeff Edwards, Head of Investor Relations, and I'm joined by our President and CEO, Rick Worcester, and CFO, Mike Pradeshi. Hopefully, you've had the opportunity to peruse our Strong Learnings release that hit the wires about an hour ago. The team is excited to provide some additional color around those strong results, as well as provide a broader strategic and financial update as we move into the back half of the year. Let's quickly hit on the typical housekeeping items. The slides for the business update will be posted to the usual spot on the IR website at the conclusion of today's prepared remarks. Q&A is structured as one question, no follow-up, thus allowing time to get as many questions from all the interested parties as we can during today's meeting. As always, please don't hesitate to reach out to the IR team with any follow-up questions after today's business update. And yes, the wall of words, our forward-looking statements page, which reminds us that outcomes can differ from expectations. So please keep in touch with our disclosures. With that, it's my pleasure to turn it over to Rick.

Thank you, Jeff, and good morning, everyone. Thank you for joining us for our summer business update. Our longstanding through client size approach to serving investors powered strong results during the first half of 2025. Core net new assets reached $218 billion in the first half of the year, up 39%. In the second quarter, investors opened 1.1 million new brokerage accounts, demonstrating that Schwab continues to be where Americans turn for investing because they know we will champion their goals with passion and integrity and help them achieve their financial dreams. We offer clients a differentiated value proposition, award-winning service, platforms, support, and expertise to support investors of every type, all at great value, and with a firm they know puts them at the forefront of every decision. We are deepening relationships with our clients and serving more of their financial needs across our wealth, banking, trading, and asset management offers. And our clients remain highly engaged in the markets. Daily average trades reached $7.6 million for the second quarter and margin balances were $83.4 billion following record trading days in early April. Our focus on serving client needs combined with our diversified model resulted in robust year-over-year revenue growth and record earnings per share. And we continued to return capital in multiple forms. From a position of strength, we are continuing to play offense. We're investing in initiatives that will help fuel client growth and evolve the way we meet clients' needs. We continue to anticipate strong revenue and earnings growth in 2025, which Mike will elaborate on in just a few minutes. This is supported by our client growth and growing utilization of our wealth and lending capabilities, alongside expense discipline and the pay down of supplemental borrowing. and we expect to continue opportunistic excess capital return as we move forward. In summary, we are moving full steam ahead to deliver long-term profitable growth. After a period of volatility at the start of April, both markets and investor sentiment rebounded throughout the second quarter. Periods like this are a great reminder of why we are different. Through a volatile market, we were there when and where our clients needed us. Year-to-date, we answered more than 14 million calls across all client-facing businesses and did so quickly in an average of under 30 seconds. With 1,000 trading experts answering the phone in 15 seconds on average, ready to support our trader clients every day. We help nearly 16,000 advisors support their clients. We welcome thousands of clients into our retail branches on a daily basis. and we've produced hours of training, market insights, and coaching, providing guidance for our clients no matter where they are in their investing journey. Our mission is to make our clients' financial lives better, and we do this in many ways, through the financial consultants in our branches, through our service professionals answering the phones, through our advisor services, relationship managers, and through our digital channels when that's how our clients want to engage. We offer so much more than just an app. Our buyer unwavering through client size strategy, we're delivering strong growth across all fronts. With a relentless focus on serving our clients, we attracted $80.3 billion in core net new assets in the second quarter, an increase of 31% over the same period last year. Core NNA for June increased was $42.6 billion, a 46% increase over June of 2024. New brokerage accounts increased 11% over the second quarter of 2024 to $1.1 million. Turning now to solutions growth, our clients remain highly engaged across wealth, lending, and trading. Minus investing net flows increased 37%, year over year for the second quarter, and we reached an all-time record level of flows for the first six months of the year. Within managed investing, our flagship wealth offering, Schwab Wealth Advisory, had over $10 billion in net flows in the first half of 2025. And net flows in Schwab Personalized Indexing increased 44% over the first half of 2024. Bank lending balances increased 19% over the second quarter of last year, and daily average trades increased 38% over Q2, supported by a headline-driven macro environment. These statistics show we are clearly a growth company. With strong client engagement and our diversified model, total revenue for the second quarter was $5.9 billion, up 25% over the same period last year. Q2 2025 adjusted earnings per share reached $1.14, a 56% increase over the second quarter of last year. As we look to the future, we remain confident we'll continue to drive growth across a range of environments. Our competitive position remains unmatched. We are number one in the industry across several key measures, including total client assets among peers that report on this data, RIA custodial assets, and daily average trades. We continue to receive industry recognition, most recently for our investing platforms, our customer service, and our banking offer. Our business fundamentals are healthy. Total client interactions across all channels, in our branches, in our service centers, on our digital channels, are up 17% over last year. Margin loans are up 16%. Our pledged asset line balances reached a record $21 billion, and record managed investing flows and rebounding equity markets helped assets in both our wealth and our asset management businesses reach all-time highs. We're continuing to attract new clients across sizes and demographics. Our best-in-class RAA business supports advisors of all sizes, In our retail business, we attract 606,000 new to firm households in the first half of the year. And we're continuing to win with younger investors and traders. In fact, one in six new to firm retail households are under the age of 24. More than 30% of our new to firm clients are under the age of 30, and nearly 60% are under the age of 40. An increasing number of traders are turning to us for best-in-class trading experience. New clients who exhibit more advanced trading behavior, such as complex options or high single-option volume, now account for one-third of new traders, up from about one-fifth just two years ago. And finally, it is worth highlighting that investors and traders of all ages are turning to us to invest in digital assets through ETFs futures, and closed-end funds. Swab is an industry leader in crypto ETPs, with over $25 billion of our clients' assets in those products today, representing around 20% of the total market. This is a reflection of a client base that wants exposure to digital assets in a straightforward, safe, low-cost, and low-tax way, all alongside an ecosystem of expertise, education, and support that our clients know they can expect from Schwab. As we build out our digital assets offer, which will include spot trading on Bitcoin and Ethereum, We are also focused on helping educate and support our millions of clients around how digital assets can fit within a diversified portfolio, as well as the opportunities and risks that define this asset class. We are continuing to invest in and deliver on our four strategic focus areas, growth, scale and efficiency, the brilliant basics, and our people. Our first strategic focus area is driving growth. We do this by attracting NNA from new and existing clients as we provide the capabilities and solutions they need. At the same time, we are also deepening relationships to help our clients conduct more of their financial lives in one place here at Schwab, which also results in further diversification of our revenue streams. And we delivered on this in the second quarter. In our advisor services business, we launched Advisor ProDirect, a fee-based, membership-driven offer designed to support independence for new RIAs. In our retail business, we continue to invest in deepening relationships. Clients with a financial consultant relationship bring in more than two times the net new assets and are more engaged in our managed investing and banking offers than clients without a relationship. These relationships are impactful, and we're on track to open more than 10 retail branches this year and to hire hundreds of FCs and wealth consultants to be there for our clients and connect them with the capabilities and solutions they need to meet their goals. In our wealth business, we continue to invest in Schwab Wealth Advisory. We launched a discretionary version of our full-service wealth management capability, an important step in meeting the holistic needs of our clients. This quarter, we also broadly rolled out our retail alternatives platform to our eligible clients. We are enhancing our tax stress and estate capabilities, including plans to offer Wealth.com's estate planning tools to our retail clients. As we look to the future, we see a number of ways to monetize our product platforms beyond what we are doing today. We will share more details in the coming quarters, but I want to highlight that we see a meaningful revenue opportunity here. Turning to our second strategic focus area, our scale and efficiency efforts are will not only help us keep our cost-to-serve clients low so we can reinvest in new capabilities and experiences to serve their evolving needs, but will be a win for clients as well. These include investments in artificial intelligence. In the near term, these AI efforts will help power our client-facing reps as they serve our clients and help make our internal teams more efficient. Today, we have 40 AI use cases in various stages of development, including in use. Over the longer term, we believe AI will meaningfully enhance the way we serve our clients and allow us to reach our clients in an even more personalized way. Our third focus area is the brilliant basics. When we deliver for clients on the basics and make every interaction they have with us feel easy, They will reward us with more business. We're delivering across the board. Our Schwab Wealth Advisory client promoter scores are some of the highest in the firm. Legacy Ameritrade client promoter scores continue to improve each quarter, approaching the consistently strong scores we see with Legacy Schwab clients. And our Advisor Services EZ score was 93% for the quarter. Last, but certainly not least, we are continuing to invest in our people. The more we can do to make our colleagues more efficient, their jobs easier, to help them develop professionally, the better we will be able to serve our clients. We are continuing to build momentum as we head into the second half of 2025. Guided by our through clients' eyes strategy, we are playing offense. We're attracting net new assets and new clients to Schwab as we deepen relationships to serve even more of their wealth and financial needs. We're investing in scale and efficiency initiatives, delivering brilliantly on the basics, continuing to invest in our people who are key to all we do here at Schwab. In short, we are well positioned to continue growing on all fronts and for the long term. And with that, I'll turn it over to Mike for an overview of our financial picture and an updated view on our financial scenario.

Thank you, Rick, and good morning, everyone. This was indeed a dynamic quarter with markets very much on the move and a host of macroeconomic factors influencing investors around the globe. Against this shifting landscape, Schwab's strong momentum continued. With growth across the franchises, we serve our clients' needs with our broad array of modern wealth solutions. We posted our third consecutive quarter of over 1 million new brokerage accounts. Core net new assets during the second quarter exceeded $80 billion, bringing the year-to-day total to $218 billion, or an increase of nearly 40% versus the first half of 2024. and we saw robust flows into our managed investing and lending products, as well as supported another strong quarter in trading with 7.6 million daily average trades. In addition to healthy organic growth and sustained product utilization, we delivered record financial results during the second quarter with year-over-year revenue growth of 25% to $5.9 billion, adjusted pre-tax margins exceeding 50%, and adjusted earnings per share of $1.14, an increase of 56% versus 2Q24. Transactional cash levels continue to reflect normal cash behaviors, inclusive of organic growth, typical 2Q tax seasonality, and client engagement, albeit with an investor sentiment remaining somewhat cautious. At the same time, we made further progress in reducing higher-cost funding at the banks. bringing the level down to approximately $28 billion. We also increased the return of capital via the redemption of our Series G preferred stock and the continuation of common stock repurchases. Inclusive of these actions, our capital ratios expanded versus the first quarter, finishing slightly above our target range. Before diving into our latest thinking regarding the remainder of 2025, let's take a moment to walk through some of the drivers influencing our strong 2Q results. Revenue increased 25% year-over-year to a record $5.9 billion for 2Q, representing a third consecutive quarter of double-digit year-over-year growth across all line items. The further reduction of high-cost borrowings at the bank, sequential build in client transactional sweep cash, and a late quarter uptake in securities lending activity helped expand net interest margin and drive a 31% increase in net interest revenue versus 2Q24. Asset management and administration fees of $1.6 billion represent a year-over-year increase of 14% driven by rebounding equity markets, healthy organic growth, and continued client adoption of Schwab's wealth and asset management solutions. Client trading volumes remain robust in the second quarter, increasing 38% year-over-year to 7.6 million daily average trades, with client engagement across equities, ETFs, and index options accounting for the vast majority of the year-over-year uptick in trading activity. Bank deposit account fees moved higher due to an improved net yield as a growing percentage of the balances continue to convert to the floating rate bucket. Finally, the other revenue line reflected typical 2Q seasonal items related to corporate proxy season as well as elevated client trading volumes. Note that there was a slight offset in this other line due to the SEC's decision to lower exchange processing fees to zero beginning in mid-May. Of course, this rate change is P&L neutral as there is a corresponding decrease in the other expense line as well. In terms of expenses, adjusted expenses for the quarter were up 5% versus 2Q24 as we continue to make ongoing investments to support sustainable growth, including opening new branches and hiring financial consultants, as well as evolving our suite of offerings to clients with new products and capabilities, such as our retail alternatives platform, and further driving efficiencies by powering our client-facing reps with AI and as they serve our clients. Our continued progress in reducing high-cost borrowings at the banks and strong trading volumes powered record top-line growth. In conjunction with balanced expense management, adjusted pre-tax profit margin reached 50.1%. Adjusted earnings per share was $1.14 or a year-over-year increase of 56%. These second quarter financial results reflect the continued positive inflection in Schwab's earnings trajectory through the first six months of 2025, as well as highlight the durability of our diversified model in delivering financial results across a range of environments. Moving on to our balance sheet, we continue to support our clients as their needs evolve through this dynamic environment. Following the deleveraging that began in late 1Q and extended into April, client margin balances at the broker-dealer rebounded during 2Q to finish at $83.4 billion or down slightly from year-end 2024 levels. Bank loans grew with PAL balances up 24% versus the prior year-end. And as anticipated, we saw seasonal tax-related outflows in client transactional sweet cash during April, And after another slight reduction in May, transactional sweet cash fell during the month of June, bringing the quarter-over-quarter increase to approximately $4.3 billion. With a continuation of normal client cash trends, we were able to utilize a combination of cash flows coming off of the securities portfolio as well as excess cash on hand to further reduce high-cost funding at the banks. Looking ahead... we believe trends will continue to reflect normal client activity, and we plan to keep a close eye on a range of macro factors as shifts in market sentiment tend to influence client cash allocations. As I've noted previously, we are focused on maintaining flexibility in managing the balance sheet in a manner that keeps us well-positioned to navigate a wide range of potential environments. Turning to high-cost bank funding, following the nearly $12 billion paydown during the first quarter, we reduced the balances by another $10 billion during the second quarter of 2025, bringing the outstanding balance as of June 30 to $27.7 billion, or down more than 70% from the peak. As previously mentioned, we are not planning to reduce bank wholesale funding levels to zero. However, as we move into the back half of the year, we expect to make additional progress each quarter until these higher-cost bank liabilities are in a range more consistent with our long-term diversified funding profile. Our capital levels finish the quarter slightly above the upper bound of the firm's adjusted Tier 1 leverage objective of 6.75 to 7%. The quarter-over-quarter build was primarily driven by earnings and the continued pull-apart of unrealized marks. The ratio also reflects the $5.3 billion in total capital returned through the first six months, including an increased common dividend, the redemption of the $2.5 billion Series G preferred stock, and the resumption of open market common stock repurchases in June, where we repurchased approximately $350 million worth of stock. bringing the year-to-date buyback total to $1.85 billion, including the $1.5 billion we repurchased back in February. Looking ahead, we will continue to prioritize maintaining capital to support the needs of our clients and the growth of our franchise, while returning excess capital in multiple forms as part of our through-the-cycle financial growth story. Now, let's turn our attention to the full year 2025. Back in January, we outlined an initial financial scenario informed by a host of inputs, including a mid-January forward interest rate curve, which called for a single 25 basis point cut to Fed funds, 6.5% annualized equity market appreciation, and client trading volume generally consistent with mix in volumes observed during 4Q24, Obviously, things have evolved quite a bit. So as part of our updated full year 2025 scenario, we have refreshed these inputs. The interest rate forward curve currently calls for two 25 basis point cuts before year end. Markets rebounded from early April lows to finish the quarter strong. Therefore, applying an annualized 6.5% equity market return from June 30 levels implies full-year S&P returns of approximately 9% for 2025. While we have observed sustained strength in client trading over the first six months, the updated scenario allows for some pullback in volumes, though we still anticipate full-year 2025 daily average trading volume to finish significantly higher than than the four Q24 levels used for the initial financial scenario discussed back in January. From a trading mix perspective, we expect first-half trends to generally persist, though macro factors and client preference will inform the ultimate mix. Assuming these updated factors and keeping in mind the current macro backdrop, we would expect total revenue growth of 18.5% to 19.5% for the full year 2025. The scenario assumes further reduction in high-cost funding at the banks to a level generally consistent with our long-term diversified funding profile, full-year net interest margin of 2.65% to 2.75%, which is up slightly from the January scenario due to the pace of paydowns, year-to-date transactional sweep cash trends, and a recent pickup in securities lending activity. In this scenario, average 4Q NIM is expected to expand well into the 280s basis point range, and full-year average interest earning assets are still expected to decline slightly in 2025 versus 2024. Full-year 2025 expenses are still trending towards the mid-single-digit zone, though with a slightly tighter range of 4.75% to 5.25%. This reflects year-to-date investments across our key priorities and that supporting growth across all fronts, as well as the elevated level of client engagement, including transaction and related asset-level fees. and the mid-May reduction of the SEC 31 fee rate to zero. We continue to feel good about this range of spending for 2025 and how it positions us to achieve our objectives. Of course, market levels and client trading levels during the second half will continue to shape the absolute dollar amount for the year. So putting the pieces together, the combination of strong top-line growth and balanced expense management implies pre-tax margins in the very high 40s for the full year. If you follow the math all the way down to the bottom line, this full year scenario implies potential adjusted earnings in the $4.55 to $4.65 area, excluding the impact of any incremental buybacks in the second half, representing potential year-over-year earnings growth into the very high 40% zone. The first half of this year served as a reminder that market expectations can change quickly, so we'd encourage you to continue to reference the static setup of revenue sensitivities included in today's summer business update to help you craft a high-level perspective of how changes from these assumptions could influence results. These directional figures have been refreshed and are based on June 30, 2025 levels. One additional item I'd flag for you is that the Fed Fund sensitivity incorporates hedging programs we have stood up over recent quarters to help manage through different interest rate environments. Please don't hesitate to reach out to the IR team with any questions about these sensitivities or the underlying assumptions for the firm's updated 2025 financial scenario. Throughout Schwab's history, the firm has made investments to support sustainable through-the-cycle growth on multiple fronts, as well as further enhancing our capabilities. These capabilities help bolster our flexibility to manage the firm in a manner that enables us to serve the evolving needs of our clients with a growing suite of modern wealth solutions. While this most recent quarter highlights the power of our financial model when strategy, capabilities, and macroeconomic tailwinds intersect, history tells us that rates, markets, client engagement levels, and many other variables can change quickly. However, Schwab's through client-side strategy, enhanced set of capabilities, and diversified model keeps us positioned to deliver strong financial outcomes across a wide range of environments. In closing, it has been a strong first half of 2025, helping to sustain the momentum that began last year following the completion of the Ameritrade integration. While the environment continues to evolve, we plan to stay on offense, investing to support long-term organic growth and continuing to ensure our value proposition and client experience remain best in class. While the environment can change quickly, Schwab's diversified model will helps keep us well-positioned heading into the months ahead, and supports our confidence in the long-term trajectory for the firm beyond 2025. And with that, Jeff, let's move on to Q&A.