Charles Schwab Corporation (The)

Hi, good morning, everyone, and welcome to Schwab's 2026 Fall Business Update. This is Karthik Sharma, Head of Investor Relations, and I am joined in Westlake today by our President and CEO, Rick Wurster, and our CFO, Mike Verdeschi. A few housekeeping items before we get started. The slides for today's business update will be posted to the usual spot on the IR website at the conclusion of the call. Q&A remains at one question. If you have more than one, please simply hop back into the queue and ask another if time allows. And as always, the IR team is available to assist with any questions following today's update. Finally, please review our forward-looking statements page and remember that outcomes may differ from expectations, so please stay up to date with our disclosures. And with that, I'll turn it over to Rick.

Thank you, Kartik, and good morning, everyone. Thanks for joining the fall business update. I hope you've had a chance to review our results and agree that Schwab is in a position of strength. We are winning today and uniquely positioned among our peers to continue winning well into the future. There are four overarching messages I hope you take away from the call. One, our through client size strategy endures the test of time and is fueling our record performance and growth. Two, we have an unmatched, no trade-offs value proposition that positions us at the center of our clients' financial lives. Three, we have a clear strategy and we are delivering client-focused capabilities at a fast pace as a powerful combination of people and artificial intelligence amplifies our advantages. And four, we have a diversified financial model that drives durable earnings growth across market cycles. We are growing our client base. Clients opened 1.2 million brokerage accounts in the third quarter. We attracted $190 billion in core net new assets in the third quarter, up 38% over last year, and representing an annualized organic growth rate of nearly 6%. We are deepening relationships with clients as they continue turning to Schwab for more of their financial lives. Managed investing net flows reached a quarterly record of $24 billion, and bank lending reached $72 billion, up 35% year over year. This translates to another quarter of record financial results, with total net revenues of $7.2 billion and adjusted earnings per share of $1.69, up 29% over last year. Most importantly, our through client size strategy is delighting clients. Client promoter scores and easy scores continue to climb, and we continue to earn industry recognition. Those measures reinforce what we see in the business every day. Clients value the combination of service, ease, capabilities, and trust that Schwab delivers. We remain the trusted platform of choice for investors and registered investment advisors. We are number one by total client assets, number one by RIA custodial assets, and number one in daily average trades. Year to date, clients interact with us are all with us a record 1.8 billion times in the channel of their choice, whether digitally or in our branches. Our firm-wide transfer assets ratio is approximately 1.8, reflecting continued improvement over time. And notably, clients are actively and intentionally conducting their day-to-day financial lives with us month in and month out, moving nearly $4 trillion in cash every month to invest, We are building, acquiring, and partnering where each approach makes the most sense. And we are delivering at a rapid pace. We've launched single stock futures and binary options related to the financial markets for our trader clients. All clients can now access Schwab crypto. We are rolling out the ability for clients to transfer their crypto holdings to Schwab, and we are launching access to three new coins by the end of the year. For our RIA clients, we have collaborated with Anthropic and are proud to be the first RIA custodian included in CLOD for financial advisors. We just introduced Charlie, our new AI-powered conversational assistant that will be available to all clients in the coming months. And we're not slowing down as we continue to innovate across our businesses. I want to spend a moment talking more about our investments in AI. AI is an opportunity for Schwab. It is attracting more people to investing while amplifying our strengths. It will help us create more personalized experiences for our clients while improving the productivity of the teams serving them. 77% of U.S. investors use AI today, and at the same time, more than 90% for human involvement alongside AI technology. That combination of people and technology has always been central to Schwab and can't be underestimated. It is and has been a key source of our differentiation. If you look at growth across the industry and at Schwab, relationships and trust still matter a lot. While there's no question AI is going to make our clients' financial lives easier, it has to be safe and secure, which is why we will bring AI to our clients in the following ways. First, we are blocking unauthorized agents to try to log in on behalf of clients. It is not a safe way for our clients to access Schwab, and we are blocking it to protect clients and our firm. Second, we are bringing the power of AI to our clients through Charlie. For our retail clients, Charlie combines best of third-party LLMs with Schwab's trusted data and security. Charlie uses a constellation of underlying LLM models and is designed to select the one most appropriate for the task at hand. Today, Charlie is primarily a source of information and synthesis and can take action on a client's behalf for some administrative tasks like changing an address or naming a trusted contact. Over time, Charlie will do a lot more, ultimately becoming an important front door to Schwab. Third, we will also allow clients to use their LLMs to connect to our MCP servers. Quad for Financial Advisors, which I mentioned earlier, is just one example of how we are using an MCP layer to bring the power of AI to our clients. We are also using it with our retail trading clients as we can secure authentication and control or limit access to the riskiest actions like moving money. Enhancing the client experience is only part of the AI equation. We're using AI internally to help our developers and professionals work more effectively and efficiently. We've already seen developer productivity increase by about 25%. That is the future we are building. Our people and AI working together to deliver better outcomes for clients. As investors consolidate their financial lives and our clients increasingly want to do more with their trusted Schwab relationship, we are uniquely positioned at the center of the investing ecosystem to meet their needs. Our breadth across investing, wealth, trading, banking, and lending allows us to simplify clients' financial lives and serve them in the ways they prefer. By combining our people, technology, scale, and value, we're creating a differentiated experience today while building the platform clients will need tomorrow. That is a powerful advantage and one that is very difficult to replicate. We have a clear strategy, and we are delivering for clients at a rapid pace. I'll spend the next few minutes highlighting some of the opportunities we have ahead. and how we are positioned to continue driving diversified and durable earnings growth through the cycle. We have two equally powerful growth opportunities in front of us, serving more clients and deepening the relationships that we already have. And we are delivering on both. Coronet New Assets have grown significantly over the past several years, reaching record levels in 2026, supported by strong momentum from both individual investors and RIAs. More clients are choosing Schwab. More clients are bringing us a greater share of their financial lives, and we are building deeper, longer-lasting relationships over time. We have built our advisor business around helping independent advisors grow, compete, and succeed. Today, we serve more than 16,000 firms representing 5.8 trillion in assets with a platform that brings together custody, trading, banking and lending capabilities, technology, and dedicated service and support. This business requires scale, trust, operational excellence, outstanding service, and the breadth to support advisors as their businesses and their clients' needs become more complex. That is why we win. Advisors of all sizes are turning to Schwab when they start their firms, and they're relying on us as they grow, move upmarket, and serve increasingly sophisticated clients. Last year, more than 1,100 advisory firms added Schwab as a custodian, more than three times the number of the next closest provider. We are continuing to invest in this business to meet advisors' needs. Turning to our retail business, we are serving individual investors who span the investor spectrum. Our retail business is built to win across generations Wealth tiers, investing styles, and engagement preferences. We are attracting younger clients. Approximately 70% of new to firm retail households are Gen Z and millennials. At the same time, investors of all wealth levels continue to turn to us for more of their financial lives. Roughly 80% of retail assets are held by ultra high net worth and high net worth households. and we are well positioned to continue serving future generations when that wealth is passed on. Our retention rate around wealth transfers is extremely high and we are winning assets with all generations. Retail clients who have a dedicated financial consultant generate approximately three times the household NNA, five times the managed investing net flows of comparable unassigned households, and three times the transfer of assets ratio. Relationships continue to matter. That is why we're investing in both people and technology so we can continue building, deepening and retaining those trusted relationships now and for the decades to come. Our second growth lever is deepening existing client relationships and helping clients conduct more of their financial lives here at Schwab. Today, I will highlight two of our opportunities, wealth and trading. Client demand for advice is accelerating. Managed investing net flows reached another record of $24 billion in the third quarter, up 22 percent from last year. Within that total, Schwab Wealth Advisory net flows increased 55 percent as we continue to delight these clients who have given us a client promoter score of 84 in the third quarter. Our opportunity and wealth remains compelling. Schwab has approximately 2% of the $37 trillion US advice market. While only about 5% of Schwab retail households currently use an advice solution, 31% say they are willing to pay for advice. Trading is another area where our leadership position creates meaningful opportunity. We remain the industry leader in trading, supported by a world-class trading platform, more than 1,200 expert trading specialists, and research, education, coaching, and service for traders at every level of sophistication. Traders value what we deliver. Trader client promoter scores increase seven points year over year. Traders are also highly engaged. Trader households generate approximately seven times the NNA and two times the revenue on client assets of the retail average. A subset of traders are already using AI to support their trading goals, connecting their LLMs to Schwab via our APIs and our MCP server. As an interesting aside, this group actually holds more cash than other active traders because they are focused on finding Their next great investment. As we look ahead, we are rolling out an AI-powered thinkorswim assistant and have started a pilot for traders to safely and securely connect to our MCP layer via the LLM of their choice. We've started the pilot with Quad and will expand to additional clients in LLMs in the coming months. Finally, we remain focused on continuing to enhance our scale and efficiency. We have several goals with our scale and efficiency efforts to drive productivity, make Schwab easier to work with, and keep our structural cost advantage, all of which allow us to reinvest in new capabilities and growth. We are simplifying and automating work so the powerful combination of our people and technology can support more clients. That is the power of our model. Efficiency makes it easier for clients to do business with us, helps our people serve them more effectively, keeps our costs to serve low, and creates capacity to reinvest in the technology and capabilities that help our clients achieve better outcomes in their financial lives. Given our position at the trusted center of the investing ecosystem, We are confident in Schwab's ability to continue driving diversified and durable earnings growth through the cycle. We are serving a growing number of clients. We are deepening existing relationships. We are enhancing scale and efficiency. And I'll turn to Mike to talk about how we are pairing that operating momentum with disciplined financial management and capital return to generate record financial results.

Thank you, Rick. Good morning, everyone. During my time today, I'll discuss how our sustained business momentum and strong client engagement translated into another quarter of record financial results. I'll also cover how we continue to deploy financial resources to support the evolving needs of our clients as they engage across the range of investment solutions. While maintaining strong capital levels, and executing against our capital management framework. Finally, I'll provide some additional perspectives on the financial scenario we provided last quarter and share some initial considerations as we look ahead to 2027. With that, let's begin with the third quarter financial results. Third quarter revenue increased 17 percent year over year to a record $7.2 billion. Net interest revenue grew 14% year-over-year to nearly $3.5 billion, reflecting sustained interest in our secured lending programs, including margin loans and the bank's pledged asset line. Asset management and administration fees increased 14% versus the prior year to a record $1.9 billion due to a combination of equity market appreciation, strong organic growth, and continued client adoption of Schwab's wealth and asset management solutions. Trading revenue totaled $1.2 billion, up 16% versus 3Q25, as client engagement across our industry-leading retail trading platform remained robust, with daily average trades of $10.7 million. Bank deposit account fees were up 40% year-over-year due to continued improvement in the net yield. Turning to expenses, adjusted expenses were approximately $3.2 billion, up 9% from 3Q25. The year-over-year increase reflected strong client engagement across the Schwab platform, which contributed to higher volume-related costs, including performance-based compensation. While underlying expenses were slightly better due to efficiency, and we intend to reinvest some of those savings. Putting the revenue and expense performance together, we delivered an adjusted pre-tax profit margin of 54.8% for the third quarter, which is an expansion of approximately 350 basis points versus 3Q25. Third quarter adjusted earnings per share increased 29% year over year to a record $1.69. Moving to the balance sheet. Demand for our secured lending solutions remained strong. Total margin balances ended the quarter at $187.9 billion, including continued growth in long-short related activity. Total bank loan balances grew to $72.3 billion, up 35% from 3Q25, driven primarily by demand for pledged asset line loans. Transactional sweep cash balances finished the quarter at $492.8 billion, up $7.1 billion quarter over quarter, reflecting an increase in the long-short strategy and organic growth, partially offset by clients reinvesting in markets given improving sentiment. Given the growth of our secured lending programs, we utilize our diverse funding sources to support this client activity. As we look forward, we expect to see continued cash bail through net new assets and the normal seasonal inflow through year end. Capital levels remained strong with our adjusted Tier 1 leverage ratio finishing at the upper end of our 6.75 to 7% range. The adjusted ratio ended at 7% as we allowed capital to build to support continued strong client activity against a backdrop of volatile rates where yields moved meaningfully higher in the quarter. Through the first nine months of 2026, we have increased our common dividend, redeemed preferred stock, and repurchased almost $4 billion of common shares. Looking ahead, our capital management framework remains unchanged. Our first priority is maintaining capital levels that support ongoing business growth and the evolving needs of our clients across a range of environments. And beyond those priorities, We will seek to opportunistically return capital across multiple forms. Our third quarter results continue to demonstrate the strength of Schwab's model and our ability to support clients while delivering strong financial outcomes. Looking ahead to the remainder of 2026, the strength we are seeing across these client and business metrics Thank you for joining us today. and NIM expansion. And with just one quarter remaining in the year, we would expect revenue and full year NIM to grow towards the lower end of the ranges that we provided at the summer business update. At the same time, we expect expenses to come in at the low end of the range as well, reflecting our continued progress on efficiency while maintaining and adding investments in strategic initiatives to support long-term growth. Putting it all together, We expect to deliver strong business and financial performance for the year, including approximately 800 basis points of positive operating leverage, roughly double what we expected at the beginning of the year. Regarding 2027, we expect to enter the year with strong business momentum. As always, the operating environment will be shaped by a range of factors, including the macroeconomic backdrop, interest rates, Thank you for joining us today. We look forward to providing more detailed 2027 financial scenario at our winter business update in January. In closing, our third quarter performance further demonstrated the strength of Schwab's model. We continue to attract new clients and assets while deepening existing client relationships. And that sustained business momentum helped deliver record financial results. At the same time, We continue to invest in the products, services, and capabilities that support the needs of our clients while leveraging our scale to enhance efficiency and maintaining disciplined approach to financial management. These are the same elements that underpin the financial framework we outlined at Investor Day to deliver mid-teens earnings growth through the cycle. And with that, let's move on to Q&A. Kartik?