Schwab Charles Corp Q4 FY2024 Earnings Call

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 Wurster, as well as our CFO, Mike Verdeschi. 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 the 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. This is 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 adviser. 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 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. We had 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% 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% 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. NNA 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 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 long-standing 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. 25% 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 was up 20% over the prior year and up 10% sequentially over the third quarter of 2024. Adjusted earnings per share were $1.01 for the fourth quarter, up 49% over the prior year and up 31% 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 RIAs of all sizes. We are attracting younger investors, with 33% 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 traders 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 of 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 24/5 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 RIAs of all sizes while also helping new advisors transition to independence. And we'll continue our multiyear 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% 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 lift-off 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 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 the 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 continued 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 $0.03 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. 2024 revenue reached $19.6 billion, up 4% year-over-year, which adjusted expense growth finished in line with expectations at approximately 2%, resulting in adjusted pre-tax margin expanding to 42.5% and earnings per share increasing to $3.25. 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 sweep 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 paydown 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 the long-term average of 6.5%; and client trading activity and mix remaining generally in-line with 4Q '24 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 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. To 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 GAAP 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.

Thank you, Rick and Mike. Operator, can you please open up the line and remind everyone how they can ask a question?

Thank you. We will now start our question-and-answer session. Our first question comes from Steve Chubak with Wolfe Research. Your line is open.

Hi. Good morning, Rick. Good morning, Mike. So, wanted to start with a question on the NNA target. So, Rick, you noted RIA is delivering organic growth in line with the target range. You're seeing some recovery or normalization of retail flows. And just looking at the results this year, RIA hit 5%, retail was closer to 3.5%. Just given RIA is only at the lower end of that target range, the gap in retail is still fairly wide. Why is that 5% to 7% still the appropriate NNA target? And it might be helpful if you could just unpack some of the building blocks supporting the closure of that gap.

Thank you for the question, Steven. I want to emphasize a few points about our growth. This is where we anticipated being after a significant integration effort. We transitioned a quarter of our assets and nearly half of our brokerage accounts from one system to another. The numbers you're observing reflect our expectation of initial outflows from our Ameritrade clients during the integration process, which have now shifted from negative to slightly positive, and increasingly more positive. Importantly, as we interact with these Ameritrade clients, we’re seeing them conduct more business with us. Approximately one-third of the flows into our solutions are now from Ameritrade clients. We are exactly at the point we expected in this transition, helping a client base that represents half of our brokerage accounts adjust to a new experience, ensuring they feel comfortable and building a trusting relationship so they can have the same confidence in Schwab that they had with their previous firm. This strategy is proving effective, and we’re witnessing accelerated growth within this group. Looking at our overall Schwab clients, our growth remains within the historical range we've discussed. It’s crucial that we excel with these Ameritrade clients, and we are making significant investments in building relationships and enhancing our physical presence to help foster trust among these legacy clients. I also encourage investors to consider our broader growth outlook. We remain committed to our historical NNA target range as it's vital to our firm's success and growth. However, it's equally important to expand our understanding of Schwab's growth potential. We have a vast growth opportunity ahead of us with the 44 million client accounts we serve, and we can deepen our engagement with them. This approach is similar to Apple’s strategy, where they have diversified their growth beyond the iPhone through various avenues with their existing customers. We find ourselves in a similar position with many opportunities to assist clients, whether it's providing advice in a bullish market, enhancing our lending capabilities, or expanding our support for RIAs in tax, trust, and estate services. There are numerous ways we can do more for our existing 44 million client accounts. Therefore, it is important to consider both our goal of reaching 5% to 7% growth and our broader efforts with these client accounts.

Thank you. Our next question comes from Ken Worthington with JPMorgan. Your line is open.

Hi. Good morning. Thanks for taking the question. I wanted to maybe dig into the alternative buildout for retail and the program that you're trying to build together. I think part of the plan was to begin launching alts for part of the retail customer base last quarter. So, what does Schwab currently offer for retail clients in alternatives today? How do you see the timetable for that buildout? And I know that the RIAs have access to alts already, but you do have more curated programs, like INTF, that could be impactful. What are your aspirations for alts on the advisor side?

Thank you for the question, Ken. I'd like to provide some context regarding the launch of retail alternatives. This initiative is a crucial aspect of our offerings for high net worth and ultra-high net worth clients, where we are seeing significant success and are continually expanding how we serve them. In October, we introduced alternatives to a select group of clients, and we plan to roll it out more broadly to our retail clients in the first half of this year. The offering includes five or six different categories of alternatives, such as private equity, private credit, hedge funds, long/short strategies, and exchange funds, which allow clients to swap a concentrated position for a diversified portfolio. Initially, we will provide one to three options within these categories, with plans to expand the menu over time. We have assembled a team of alternative specialists to assist our clients in navigating their options and finding investments that align with their goals, alongside our financial consultants. Regarding the timeline, we aim to fully launch our retail offerings in the first half of this year. In terms of advisor services, there are also numerous opportunities available. Our advisor clients currently custody a significant amount of alternative assets with us, and we offer various alternative programs at Schwab. Going forward, our goal is to provide a more curated selection of alternatives to our advisors rather than merely holding the assets. This approach benefits our advisors by helping them identify suitable alternatives and also improves our economic position. Therefore, we perceive alternatives as a growing area within the industry, where we believe we can be quite competitive, strengthening our position as the leading choice for high net worth and ultra-high net worth investors in the country.

Thank you. Our next question comes from Brennan Hawken with UBS. Your line is open.

Good morning. Thanks for taking my question. Mike, you spoke to capital returns increasing here in 2025, particularly given the adjusted leverage ratio inside your targeted range. Could you speak specifically to appetite if we end up seeing TD? TD has sort of made some public comments about their stake. And if they come to market, the appetite and ability to participate in any kind of secondary from a large owner?

Hi, Brennan. Thank you for the question. And, again, not much I would say on this topic, for obvious reasons. And hard to comment in any definitive way on that, but if you look back at history at similar types of situations when we're given the appropriate time and opportunity to evaluate, this tends to be a situation we like to be part of. But again, I won't go beyond that at this point. We feel very good about the progress we've made broadly. And as you note, we are building capital, and we are now in that targeted operating range. Thank you for the question.

Thank you. Our next question comes from Dan Fannon with Jefferies. Your line is open.

Thanks. Good morning. Mike, I was hoping you could talk about client cash trends. We obviously saw the normal seasonality in December. And as I think you said in your prepared remarks, expect some of that to go back in as we start the year here. But as you look beyond the first couple of months, how are you thinking about client cash levels? And do you think the cash holding is still a theme here as we think about 2025 more broadly?

Thank you for the question. Based on what we've observed over the past few quarters, it suggests that we are entering a more normalized environment for client cash. Looking back at the previous year, the first half showed a continued normalization and realignment, followed by two consecutive quarters of cash growth in the second half. While the December figure reflects seasonality, it is more indicative of this normalized environment. Moving forward, I believe deposit levels will be influenced partly by new account growth, along with other macroeconomic factors such as the central banks' role affecting liquidity in the system. Overall, I think we are currently in a more normalized environment. As we've experienced, month-to-month and quarter-to-quarter fluctuations due to seasonality will occur, but I feel encouraged by the trends from the last couple of quarters.

Thank you. Our next question comes from Brian Bedell with Deutsche Bank. Your line is open.

Great. Thanks. Good morning, everyone. To tie two questions together regarding deposit formation, what do you see as the main drivers of this given the focus on increasing net new assets this year? Additionally, do you believe you can reach that 5% level at some point this year? While 5% to 7% is the long-term target, considering the development and the new products you're introducing, including the alternatives platform, do you think you can achieve the 5% range sometime in the second half?

Hi. Thanks for the question. It's Mike. I'll take the first part of that and then Rick can pick up the second part of that question. Again, we're encouraged by the trends we're seeing in deposits, two consecutive quarters of growth. And as I highlighted, I think the account growth that we've seen historically really is associated with that new account openings. And the portion of assets that come to us that's in the form of cash. And of course, there could be a percentage that's off-balance sheet versus on-balance sheet. But again, we're seeing indicators that the realignment activity has certainly decelerated last year, and we're looking at that new account formation now being the driver of that cash. And keep in mind, it's been a long time since the Fed had hiked rates previously. Of course, the Fed began lowering rates at the back end of the year. And so, we think, again, that represents a lower propensity to realign. So again, encouraging trends.

And Brian, I'll take the part on NNA and highlight two things. First, we expect to make progress this year. So, we finished the year at 4.3% for the year in terms of percentages. We expect that to be higher in 2025. We are also confident that over the long run, 5% to 7% remains the right number. And our goal this year is to make progress towards that, for all the reasons that I mentioned earlier.

Thank you. Our next question comes from David Smith with Truist Securities. Your line is open.

Good morning. Back on the topic of the buyback, can you give us a sense of how low supplemental funding has to get before you can resume that? And on a related note, is there an upper bound that you see to the adjusted AOCI above which just you would feel compelled to repurchase shares?

We observed significant progress in reducing supplemental borrowings this quarter, driven by cash inflows and the principal and interest from our investment portfolio. Looking ahead, we anticipate continuing this reduction throughout the year. However, it's important to note that we do not plan to eliminate supplemental funding entirely. While we aim for consistent progress, maintaining a level of funding diversification is crucial for effective liquidity management. We intend to lower bank supplemental funding to minimal levels while keeping it operational to ensure flexibility, which aligns with sound liquidity practices. Therefore, I don't see this as a significant constraint for the year; our goal is progress, but we do not aim for it to reach zero.

Thank you. Our next question comes from Ben Budish with Barclays. Your line is open.

Hi. Good morning, and thank you for taking the question. I wanted to just ask about the OpEx growth for next year. I think there's a couple of one-time items in 2024. I was under the impression there would be a little bit of expense synergies that will still be incremental going into next year. And the mid-single-digit sort of number feels a little bit more in line. I know there are some other factors too, like some of the exchange fees around trading volumes, but just curious if there's anything else going on. Any other sort of one-time items to think about? And how you would compare next year's guide in the context of your longer-term financial formula? Thank you.

Thank you. So, for that expense, we talked about mid-single digits at 4.5% to 5.5%. We feel very good about that range. Again, we're in a position where we want to invest in growth. We want to invest the solutions and the capabilities that we're providing to clients. And importantly, we're also investing in that efficiency. And again, that is going to enable us to recycle that efficiency and to continue to grow, while at the same time, ensuring that we're maintaining that low cost to serve, while at the same time achieving our financial outcomes. I don't think there's anything too substantial in that range that really, when I look at that range, I'm thinking about that combination of investing in our growth while at the same time maintaining that discipline. Certainly, you did see some of a pickup given the volumes. So, of course, that is incorporated into that expense number. And of course, with the back end of the year with the continued good engagement and, certainly, what we're expecting this year, that continued engagement, that we'll see that as a component of the spend for 2025 as well.

Thank you. Our next question comes from Bill Katz with TD Cowen. Your line is open.

Okay. Thank you very much, and congrats again both you guys on your new positions, again. Just sticking with the balance sheet for a moment. I think you mentioned it's going to be about flattish year-on-year. Can you talk to us through a little bit in terms of the ins and outs, and how you sort of see it? I think on the prior management, there was sort of a conversation about potentially shrinking the balance sheet longer term. Just wondering how we should be thinking about that once you get on the other side of the supplemental reduction. And is this just a replacement opportunity of migrating down from securities into bank loans? And how should we think about maybe the long-term opportunity for NIM? Thank you.

Bill, thank you. When considering the balance sheet for 2025, it will reflect how our clients engage with us. We are focused on meeting their evolving needs and have seen positive momentum in margin lending and our banking offerings. Throughout the year, we expect this activity to be represented in our balance sheet. We also anticipate an improved liability mix as we work on reducing supplemental borrowings, indicating a shift back to a more normalized environment. This is central to my view on the balance sheet’s evolution. Regarding the size of the balance sheet, it's important to remember that we are a growth-focused firm, dedicated to fulfilling our clients' changing needs. The banking platform, as Rick highlighted earlier, is crucial for meeting our strategic goals. We plan to increase client loans while intentionally reducing supplemental borrowings. However, there may be times when liquidity increases in the system, and having the flexibility to manage some liquidity off the balance sheet could be beneficial for our clients and the economics. This capability would provide operational flexibility across various environments, but our primary strategy remains focused on growth.

Thank you. Our next question comes from Devin Ryan with Citizens JMP. Your line is open.

Great. Good morning, Rick and Mike. Thanks for the update. So, a question on spot crypto. Obviously, a fast-growing part of the market, high percentage of trading revenue for some other brokerages. And I know Schwab clients currently have access to ETFs and some other proxies. But how are you guys thinking about the incremental opportunity for Schwab? Do you have any sense of the demand that you can frame for us? And then, from a timing perspective, what are you currently expecting? And are you ready to move forward once there is a green light or some sign that you can do this? Thank you.

We're doing really well in crypto and have multiple ways to meet our clients' needs. Our crypto ETFs have seen significant growth on our platform, and clients can engage with futures and a variety of closed-end funds and products. We've established a dedicated crypto site that attracted a 400% increase in visitors in the fourth quarter, with 70% of those being prospects. This indicates that when investors consider crypto, they prefer to work with Schwab. We also saw a 200% increase in new account applications from clients who visited our crypto site. We aim to offer spot crypto and anticipate that regulatory changes will eventually allow us to do so, with a target launch sometime in 2025. We're eager to enter this market because we believe clients want to hold crypto at Schwab, a place they trust and where they conduct significant business. The substantial increase in clients engaging with our crypto site further reinforces our strong position in this space.

Thank you. Our next question comes from Alex Blostein with Goldman Sachs. Your line is open.

Hey, good morning. Thank you for the question. Could you guys spend a minute on your securities portfolio strategy as you roll through 2025? I guess, maybe just a reminder how much principal and interest you expect the securities portfolio to generate? And ultimately, how do you expect that to flow down either to paying down supplemental borrowings? And I guess, at what point do you feel like you could start to reinvest back in the securities portfolio? Thanks.

Thank you. So, I would say on the quarter, we've been around that $10 billion range for the principal and interest coming off of the portfolio and, as we highlighted, being used to pay down the supplemental borrowings. And so, over the course of the year, that is going to be a priority for the continued use of those proceeds to pay down those borrowings, make continued progress there. Again, in this environment now where rates seemingly at least the latest forwards are indicating that perhaps the Fed target rate won't come down as much as perhaps was contemplated at some point last year. At some point in the future, we would be in a position where we're reinvesting in that portfolio. Again, the near-term though, we're going to be very focused on paying down the supplemental borrowings. Longer term, I would say that allocation, similar to what we've done in the past, we're going to stay in highly liquid, high-credit quality, treasuries, agencies. And I've talked about how we think about the range of that duration of that portfolio also operating in a range that really contemplates the composition of liability. So, I think we're in a real good position to continue to use those proceeds to pay down supplemental. And then, over time, reinvesting in that securities portfolio, which at these levels in market rates would be much more accretive than what the yields are today in that portfolio.

Thank you. Our last question comes from Kyle Voigt with KBW. Your line is open.

Hi, good morning. Mike, maybe I can just ask another follow-up on the securities portfolio. Just wondering if you could provide some updated thoughts on the potential for securities repositioning. Does the recent positive trajectory on sweep cash balances, lower supplemental funding and the current reinvestment rate levels with yields moving higher make this a more attractive option now than even compared to a quarter ago? And given the progress you've made with the balance sheet already, could you just outline any remaining concerns with potentially executing this in 2025?

Thank you for the question. As we've discussed previously regarding the securities portfolio, we are very cautious about taking actions that may attract negative attention and undermine the trust our clients have in us. Therefore, we've been hesitant to make changes at this time. However, we are closely monitoring that portfolio and its performance. While restructuring remains an option we are considering, I believe you highlighted a significant aspect, which is how we might utilize the proceeds from a portfolio sale. One of our priorities is to continue reducing supplemental borrowings, and we are making headway on that after accounting for principal and interest payments, while also focusing on cash stabilization. This is a crucial factor for us. Additionally, we are aware of the prevailing interest rates in the market and their expected trends throughout the year. At this stage, we feel confident about the strategy we have in place.

Thanks, Mike, and thanks to all of you for your questions. Thank you for your engagement. I'd like to wrap up where I started. It's an exciting time for Schwab. We delivered strong growth across multiple measures in 2024. We are in a position of strength and poised for lift-off into 2025. And it is full steam ahead as we focus on serving our clients and accelerating our profitable and holistic growth for the long term and through the cycle. Thank you all for joining us. I hope you all have a good day. Take care.