“Full-year 2026 interest earning assets are expected to expand modestly year-over-year.”

In context

“Mike Verdeschi: Thank you, Rick, and good morning, everyone. During my time today, I'll discuss how we converted our sustained business momentum into another quarter of record financial results. In addition, I'll cover how our approach to managing the balance sheet and financial resources enables us to support robust engagement as we seek to meet the evolving needs of our clients across different environments. I will also share an updated perspective on the full year 2026 financial scenario. Finally, as we continue to do more for our clients across our platform, including incorporating emerging technologies such as AI, Schwab's model becomes increasingly diversified and scalable, helping to further enhance our financial durability through the cycle. In doing so, we remain positioned to continue providing individual investors and RIAs with an industry-leading value proposition. 2Q was yet another strong quarter for Schwab, where the combination of our continued business momentum, client engagement, and diversified model enable us to deliver strong outcomes well beyond the second quarter scenario we shared with you at Investor Day in May. This outperformance was a result of a number of factors, including a further acceleration in client trading activity through the end of the quarter. Total revenue grew 21% year-over-year to $7.1 billion, including a 19% increase in net interest revenue versus the prior year period due to increased utilization of our lending solutions by clients, the reduction of higher cost borrowings at the banks, and demand for long-short strategies. Momentum within the technology sector helped lift equity markets to their best quarterly performance since early 2020, which in combination with robust asset gathering and client interest in Schwab's wealth and asset management offerings, drove 16% year-over-year growth in asset management and administration fees to $1.8 billion. Schwab's industry-leading retail trading platform supported continued client engagement with daily average trades of 11.9 million, driving a 28% increase in trading revenue to $1.2 billion. Bank deposit account fees grew 35% year-over-year due to continued improvement in the net yield, other revenue was up 32% versus 2Q 2025, with stronger trading volumes as well as typical second quarter seasonality. Moving to expenses. Adjusted expenses for the second quarter grew 11% year-over-year, reflecting strong client engagement across our trading, wealth, and banking solutions, and the first full quarter of Forge, while underlying expenses remain in line with our initial expectations. We also continue to make investments in key strategic initiatives to support organic growth, new products, client experience, scale and efficiency, as well as artificial intelligence. Record quarterly revenue combined with balanced expense management delivered adjusted pre-tax profit margin of 54.3%, as second quarter adjusted earnings per share reached a record $1.62, a year-over-year increase of 42%. Moving to the balance sheet. Demand for our secured lending solutions remained strong. Total margin balances ended the quarter at $165.1 billion, including continued growth in long-short related activity. Led by new Pledged Asset Line originations, total bank loan balances grew to $67 billion, up 33% from 2Q 2025 and 16% versus the prior year-end, while investment securities remain relatively flat as we continue to support client lending needs. Increased lending activity helps further deepen relationships with clients and drives relative improvements to both Schwab's revenue growth and mix as we earn an incremental spread to the security we'd otherwise purchase. Client cash followed typical seasonal trends, including tax payments in April. While strong equity markets lifted sentiment and supported elevated trading activity, transactional sweep cash increased by $24.2 billion in 2Q, largely driven by demand for long-short strategies as well as organic asset gathering. Beyond the growth related to long-short, client cash trends remain strong with year-to-date underlying cash performing better than our initial expectations coming into the year. At the same time, we continue to optimize our funding mix to efficiently meet the client demand for our lending solutions. Looking ahead, we'll keep prioritizing flexibility in managing the balance sheet to remain well-positioned for different macroeconomic environments. Capital levels remain strong, with our adjusted Tier 1 Leverage Ratio finishing the quarter within the 6.75%-7% range. Our adjusted ratio of 6.8% reflects our support of business growth and client engagement, as well as the net redemption of preferred equity and the repurchase of $1 billion worth of common shares. Looking ahead, we will continue to apply our consistent capital management framework, including prioritizing our resources to support client activity and the growth of our franchise. The second quarter further demonstrated the strength of Schwab's model, positioning the firm to continue supporting clients while delivering strong financial outcomes over time. Pivoting to the full-year 2026 scenario, let's take a moment to review how certain key assumptions have evolved over the first six months of the year. At the Investor Day back in May, we spoke to a scenario that reflected flat sub-funds for the year, stronger equity markets, and increased client trading activity. We also incorporated Forge's revenue and expenses following the acquisition's close in 1Q. While the impact of that acquisition is not material to the 2026 scenario, it does influence the revenue and expense year-over-year growth rates. In terms of where we are today, market expectations for interest rates continue to evolve, with the forward curve pricing in one 25 basis point rate hike before the end of the year. Given the strong year-to-date equity market returns, we are now assuming approximately 13% full-year market appreciation. Our asset gathering momentum reinforces our confidence in the 5% organic growth rate we outlined for 2026. Following another quarter of strong trading volumes, we have taken full-year daily average trades up to 10.6 million. This trading assumption does include a pullback from recent monthly levels, reflecting an expected moderation in activity, in part due to the seasonal slowdown during the summer. Therefore, we would anticipate revenue per trade to increase modestly from 2Q26 levels as rate and volume tend to be inversely correlated. Finally, today's updated scenario includes Forge, but excludes the impact from any opportunistic share repurchases during the second half of 2026. Using these updates, we would expect total revenue growth of 17.5%-18.5% in 2026. With full-year net interest margin expanding to a range of 3%-310%, an average 4Q 2026 net interest margin expected to finish in the 3.25%-330% range as the timing of the potential Fed rate hike late in the year limits the impact in 2026. Full-year 2026 interest earning assets are expected to expand modestly year-over-year. Given our sustained business momentum, we now anticipate annual expense growth to range from 9.5%-10.5%. I would note that underlying expenses still remain in line with the 5.5%-6.5% range we shared at the January winter business update. The higher expense view is driven by a couple of factors. First, volume-related expenses as we support a client engagement, where this increase is more than offset by stronger revenue. Second, the inclusion of Forge, which contributes approximately 100 basis points to the year-over-year growth rate. Putting it all together, today's scenario implies stronger positive operating leverage and expanded adjusted pre-tax margin levels versus our prior scenarios. Similar to past business updates, when we share a financial scenario, we have included a set of high-level static revenue sensitivities. Today's sensitivities are as of June 30 and are intended to complement the updated scenario we just walked through, helping you refine your estimates and shape your own perspective around the remainder of 2026. To wrap up, I wanted to revisit the financial formula slide from our investor day. Schwab's strong momentum and success over the past five decades has been driven by our focus on clients. As Rick noted upfront, we remain extremely well-positioned for the future with an expanding set of wealth and investing solutions to help clients meet their financial goals. In continuing to do more for our clients, we can drive long-term organic growth while further diversifying our revenue streams. Which when combined with Schwab's leading scale, as well as our disciplined approach to expense and balance sheet management, helps reinforce our confidence in delivering mid-teen earnings growth through the cycle. With that, let's move on to Q&A. Jeff.”