Peter Crawford
Managing Director, Chief Financial Officer at Charles Schwab
Well, thank you very much Rick. So Walt and Rick talked about the exciting results we've already seen from the Ameritrade integration and the opportunities it enables. Our strong momentum in the market and the success we have enjoyed in attracting a diverse mix of clients, the progress we have made in continuing to enhance our leading value proposition, at the same time that we continue to drive greater efficiency throughout our business. And finally, our commitment to continuing that journey, combining ever greater efficiency with sustained investments in improving the client experience.
In my time today, I'll review our solid financial performance in the second quarter and over the first half of the year. I'll provide some high level perspective on what we're seeing with regards to our clients' transactional cash and I'll share an updated scenario for 2024.
The important point is that we are proceeding through what we've described previously and what Walt talked about at the outset as a transitional year, but frankly at a slightly faster pace than we'd anticipated just six months ago. With our organic growth rebounding towards historical levels, a continued moderation of client cash realignment activity despite seasonal pressures and the impact of very high investor engagement, sequential growth in our net interest margin, continued expense discipline with adjusted expenses, basically flat year-over-year, excluding some unusual items, and finally, a steady increase in our capital levels, both our regulatory levels and those inclusive of AOCI. And all of that sets the stage for what we expect will be more of a return to normal, the unlocking of our core earnings power and frankly, a much simpler financial story in the quarters and years ahead, but one featuring strong growth in revenue and earnings in the back half of 2024 and over the next several years.
As Walt mentioned, the first half of the year has been characterized by strong equity markets, increased client engagement and solid organic growth. We saw that reflected in external benchmarks such as the S&P500 and NASDAQ, as well as key drivers of our business performance, including margin balances up 15% from the end of 2023. Trading activity up slightly from the first six months of last year, and as Rick mentioned, a real surge in interest among clients for our advisory solutions. Our clients' transactional cash balances are typically pressured in the first half of the year by engagement in the markets in January and February and then tax season in April and early May. And that was no different in 2024, but even so, we continue to see a moderation of the rate driven client cash realignment activity.
Now that backdrop helped support solid financial performance in the second quarter, with revenue up 1% year-over-year to $4.7 billion. Adjusted expenses in Q2 were up just under 2% year-over-year, but that included several one time and/or unusual items without which our adjusted expenses would have been down more than 1%. We produced an adjusted pre-tax margin of roughly 41% and adjusted EPS of $0.73.
Turning our attention to the balance sheet. Total assets dropped by 4%, driven primarily by tax related outflows and the continuation, albeit at a much slower pace, of the client cash realignment activity we have experienced for a little over two years. And the overall level of realignment within bank sweep and Schwab One in the quarter was down about 50% versus the same quarter in 2023. Now as I mentioned earlier, we have seen strong growth in margin utilization to start the year. And to support that activity, we directed about $5 billion of client cash from the banks to the broker-dealers. That caused our level of supplemental borrowing to rise slightly in the quarter. What I want to emphasize again, that this is a good thing. We are more than happy to absorb bit more borrowing on which we're paying just over 5% to support margin loans on which we're earning just under 8%.
And finally, despite rates that increased slightly during the quarter, our capital position continued to get even stronger. With our adjusted Tier 1 leverage ratio, again, reminding you that's the one that's inclusive of AOCI, and therefore what our binding constraint would be if we lose the AOCI -- AOCI opt-out, at Schwab Bank now well over 6% and just under 6% for the company overall. Meaning we are marching steadily towards our new operating objective for capital. Now despite the influence of typical seasonal pressure to start the year coupled with atypically bullish, very bullish, investor sentiment, client cash balances have largely trended consistent with our expectations, despite rates remaining higher than the Fed and the market predicted earlier in the year. And all indications support that we are in the very late innings of client cash realignment activity. In fact, over the course of Q2, client-driven outflows from bank sweep despite the seasonal tax payments, have been less than the cash flow generated from our investment portfolio, which in the absence of any other actions on our part would have led to continued decline to supplemental borrowing.
Now with new client acquisition and organic growth returning to our historical norms, and all signs suggesting that the Fed funds rate has likely peaked, meaning, in the absence of this catalyst, we expect the utilization of investment cash alternatives such as purchase money funds and CDs to stabilize and then eventually decrease over time, we believe we're nearing the point where aggregate transactional cash balances should flatten and then ultimately resume growing again. Now that solid start to the year lays the foundation for what we expect will be an even stronger end of the year, propelling us into growth through 2025 and beyond.
We now expect our full year revenue to range between flat to up 2% versus 2023 or roughly in the middle of the mathematical illustrations you may recall we shared back in January. And as I shared back in May at our Investor Day, we now expect our adjusted expenses to be approximately 2% higher than 2023. And as a reminder, about half that change from the previous guidance is due to unanticipated one-time items such as the FDIC surcharge and the regulatory accrual, with the remainder coming from the increase in the SEC 31 fee, which is again is a pass-through expense and therefore P&L neutral. But to use the transitional word again, that annualized view masks the progression in earnings power by the end of the year. We're expecting flattish earnings from Q2 to Q3, but assuming the Fed cuts rates in September as is widely expected, we could see our NIM reach the mid-2.20s [Phonetic] in Q4 on its way to approaching 3% by the end of 2025, which we believe will support adjusted earnings per share in the middle of the $0.80 to $0.90 range we outlined at the beginning of the year, with our earnings power building in 2025 and beyond.
Despite long-term rates moving a little bit higher during the quarter, our capital levels are climbing steadily and we continue to expect our consolidated adjusted Tier 1 leverage ratio to approach our slightly updated operating objective of 6.75% to 7% on a consolidated basis by the end of 2024, at which point it becomes more of a live conversation regarding whether and how we want to do further capital return, our number one priority for capital is always to support business growth.
Now to the extent that we have capital in excess of what is needed to do that, we have throughout our history, taking steps to return that to stockholders. That can be through increasing our dividend, which generally rises alongside earnings. That can be by redeeming outstanding preferred to create additional dry powder for the future, especially preferreds that might be or might become relatively expensive, and that can also be, of course, through stock buybacks, which we do opportunistically. There is one additional consideration right now, which is to the extent that we have outstanding supplemental borrowing, we may choose to utilize some of the liquidity we'd otherwise use for buybacks to reduce some of that bank level debt. Now doing that reduces our reliance on non-business as usual funding sources, and given the relatively higher cost of the supplemental borrowing, it's likely more accretive to earnings in the near term, while preserving the capacity, the ability to implement stock repurchases at a later date. So by doing that, we can kind of have our cake and eat it too.
Now those of you who have followed the company for a while know that we don't tend to communicate bold, long-term financial targets. Rather, we continue to talk about our long-term financial formula, a relatively simple and straightforward formula that is based on our clear and straightforward business strategy, which we articulated, as you know, is through clients' eyes. And what makes that financial formula simple and straightforward is that it's based on a set of a pretty reasonable assumptions, for Schwab at least around organic growth, revenue growth, expense containment and capital return, assumptions that we have delivered through the cycle over multiple decades.
Over the last two plus years, that formula has admittedly been obscured to an extent by the impact of rising rates and what that has done to client transactional cash balances. But with rates seeming to plateau and client cash realignment moderating, while organic growth returns to that historical level, we're nearing the point where that simple and straightforward formula, that simple and straightforward financial story, should become more clear, one that without making some big leap of faith combined strong organic growth, strong profitability and substantial capital return.
With that, I'll turn it over to Jeff to facilitate our Q&A. Jeff?
