Q1 2025 Earnings Call Transcript

Good morning, everyone, and welcome to Schwab's 2025 Spring Business Update. This is Jeff Edwards, Head of Investor Relations. And I'm joined in our Westlake headquarters by our President and CEO, Rick Wurster; and CFO, Mike Verdeschi. Our earnings release crossed the wires about an hour ago.

So hopefully, everyone has had an opportunity to review our strong 1Q results. Before we jump in a few quick housekeeping items. The slide to the business update will be posted to their usual spot on the IR Web site at the conclusion of today's prepared remarks. Q&A remains structured as one question no follow ups please with negative points awarded to those posing questions with four to five separate questions nested within.

This approach enables us to address as many questions as possible during our time together this morning. It's worth noting that questions may also be submitted via the online console. And of course, please don't hesitate to reach out to the IR team with any follow-up questions after today's update. And finally, the forward-looking statements page, our omnipresent wall of words, which reminds us that outcomes can differ from expectations.

So please keep in touch with our disclosures. All right, with all that covered, let me turn it over to Rick.

Thanks Jeff. And good morning, everyone. Welcome to our spring business update. The first quarter of 2025 can be summed up in one word growth.

With our Through Clients' Eyes strategy, investors turned to us during the first quarter and trusting us with $138 billion in core new assets, which is up 44% over the first quarter of last year. Clients opened 1.2 million new accounts. Our clients remained highly active with high levels of trading activity, record engagement with our wealth solutions and strong utilization of margin. And through it all, we were there for our clients.

We delivered strong service levels for advisors and retail investors. Retail client promoter scores and our client easy score for advisors. Both remain strong with legacy Ameritrade satisfaction increasing, translated to strong financial performance to begin the year, including year-over-year revenue growth of 18%, record net revenues and a 41% year-over-year increase in adjusted earnings per share. We're continuing to play offense and deliver on initiatives that support growth across multiple measures, routing new financial consultants and opening up branches in our retail business.

Our advisor business continues to grow and delight clients and we've invested to continue to enhance the experience for advisors. In the first quarter, we launched several new offers to help our clients take ownership of their financial futures. And I'm going to talk more about these in a few minutes. And we're not taking our foot off the gas.

We're continuing to make investments to make it easier for clients to do business at Schwab while conducting more of their financial lives with us. As we shared in January and continue to believe, we expect strong revenue and earnings expansion in 2025. And after recent capital actions we're poised for additional capital return over the course of the year. With Through Clients' Eyes as our guide, we remain well positioned to accelerate our growth over the long term. In the first quarter, the S&P 500 was down 5%.

The VIX increased in investors sentiment dampened. Through this volatility, we were there when clients needed us. Retail calls to our service centers increased as clients had more questions about what to do during periods of uncertainty. We consistently answered their calls in under 30 seconds.

And our retail advisor and workplace relationship teams stood by clients to help them navigate their personal financial situations. It is in periods like this where our omnichannel client model really shines just as it did this quarter. And it is in periods like this where it's so important to remember why we are here. Because behind every trade and every call to our service teams is a person who is watching the headlines and considering their next best financial decision, whether they're a new investor, an active trader, an engaged retiree or a dedicated advisor supporting their clients.

With Through Clients' Eyes as our guide we delivered an outstanding experience to our clients and powered growth across all fronts, client growth, solutions growth and financial growth. Looking at client growth core net new assets grew 44% year-over-year to $138 billion, representing a 5.5% annualized growth rate. This is driven by momentum across all three of our client businesses with each seeing strong growth. The momentum in our advisor services business continued from last year while retail NNA increased 50% year-over-year as we moved further away from the final client conversions.

At the same time, we also had a record quarter in our workplace business. As we move further away from the Ameritrade integration, our NNA continues to move to our normal historical levels just as we suggested it would. We continue to see NNA from legacy Ameritrade clients grow as we deepen those relationships over time. New brokerage account openings grew to 1.2 million, an increase of 8% over the prior year quarter.

We continue to delight clients earning strong client promoter scores in all of our businesses. Clients continue to turn to our wealth, lending and trading solutions, another key measure of our growth as we broaden and deepen relationships with clients. Managed investing net flows increased 15% over the same period last year to a new record with continued strong contribution from Ameritrade clients. We now have nearly $500 billion in assets under management in our holistic wealth solutions, Schwab Wealth Advisory and Schwab Advisor Network.

We also attracted record net flows across several offers, including our flagship Schwab Wealth Advisory as well as Schwab Personalized Indexing. Bank lending balances reached $47.1 billion, a 15% year-over-year increase. Finally, daily average trades increased 24% to 7.4 million for the quarter. Our early April numbers are well above even what we saw in the first quarter.

We are the number one firm traders turn to among competitors to report on those metrics and there isn't a closed second as we bring the industry's leading platform, research and education and trader support. When we deliver for our clients, it translates to healthy financial growth. In the first quarter, total revenue increased 18% year-over-year to $5.6 billion and adjusted earnings per share increased 41% over the first quarter of 2024. We are off to a strong start with growth across all key measures for the first quarter. Looking ahead, we remain confident in our ability to accelerate our growth over this year and for the long term, and we believe that is true even in a period of market uncertainty.

There are several reasons for our confidence. First, we have a strong competitive positioning. We remain a leader in the two fastest growing segments of the financial services industry, self-directed investors and registered investment advisors. We're number one in total client assets for publicly reported peers, number one in RIA custodial assets and number one in daily average trades.

And we continue to receive third party recognition, including being named the number one overall broker by StockBrokers.com. Second, we have healthy business fundamentals. Our transfer of assets or TOA ratio, which is a measure of how we stack up to competitors is 1.5. That means for every dollar that leaves Schwab, $1.50 comes to us from our competitors. Investors turn to us because our no trade-offs approach means they get world class platforms, solutions that meet the spectrum of wealth and trading needs, access when and where they want it, whether that's on their phone in a branch or through one of our advisor or workplace relationship managers along with service that can't be matched.

Our pledged asset line balances increased 34% year-over-year, supported by strong digital adoption, 95% of new loans originated through a digital channel. And even with the increase in volumes, we're delivering industry leading cycle times averaging only 1.1 days. Third, we have a growing and diverse client base. We serve RIAs of all sizes and attract healthy NNA from all segments as we delight them and meet their needs.

In our retail business, new to firm households are up 14% over last year and we're attracting clients across the spectrum of ages in life stages. In the first quarter, 33% of new to firm clients were under 30 and nearly 60% were under the age of 40. Traders were a key part of the story in the first quarter and will remain so with volatility at higher levels. We continue to attract traders to our leading offer. The number of clients who have adopted thinkorswim has more than doubled over the last year.

Traders are a highly engaged group. We're number one in the industry in daily average trades and option contracts. We're number one because of our outstanding platforms, multiple destinations for trading for all levels of investors, educational content and insights combined with incredible trader support from trading professionals here at Schwab. And as the last few weeks have shown, we're meeting trader needs through market swings and record trading days.

Fourth, we're continuing to deliver the capabilities, experience and solutions that our clients want and expect. We're investing in the four focus areas that you see here. Our first priority is driving growth. There are two aspects of our growth, driving NNA with new and existing clients and deepening relationships with those clients.

And we delivered on these priorities across multiple fronts in the first quarter. We're expanding our branch footprint and hiring hundreds of financial consultants and wealth consultants to deepen relationships with our higher net worth retail clients and their families. We're also investing in our support of self-directed clients, including our AI powered capabilities. Our goal is to be the leader for clients that want to know omnichannel experience and those that may want limited inter interaction.

Our AI investments are part of supporting both. We are investing in our marketing spend, which drives approximately 40% of new to firm retail clients. We are firing on all cylinders in AAS as our client satisfaction continues to be at all time highs. And we're working on a multi-year investment in our workplace business to grow it over the long term and increase the client base to whom we can introduce Schwab.

We also advanced our efforts to deepen client relationships. First, we delivered several enhancements to our wealth offer. We rolled out retail alternatives to all eligible clients. We launched a discretionary option for clients within Schwab Wealth Advisory and we continue to enhance both Schwab Personalized Indexing and our Wasmer Schroeder offers.

And just yesterday, we announced a strategic investment in Wealth.com. Wealth.com is a leader in digital estate planning. In addition to enhancing our estate planning capabilities and experience for clients, this investment is one part of our broader effort to provide more of an ecosystem for our RIA clients as we help them grow, compete and succeed. The wealth enhancements I've just described help us meet the full spectrum of our clients' needs while also bolstering the company's fee based revenue over time.

Second, we expanded our trader offer with the delivery of a 24 by five trading capability on our thinkorswim platform. All of Schwab's retail clients can now trade 24 hours a day, five days a week in an expanded list of stocks and hundreds of additional ETFs. This capability comes with our specialized 24 hour service and support, as well as tailored education. Turning now to scale and efficiency.

These are initiatives that benefit clients while allowing us to operate more efficiently, maintain our low cost to serve and reinvest in our growth initiatives. In the first quarter, we launched Schwab Knowledge Assistant for advisor services clients. We also just launched Schwab Intelligent Assistant for our international clients, leveraging a large language model to provide on-demand support and personalized assistance tailored to our international clients. We're continuing to invest in longer term efficiency initiatives, including a focus on removing paper from the system, which will make it easier on clients while also helping us to operate even more efficiently.

Our third focus area is the brilliant basics. Our biggest opportunity for growth over the long term is delighting our clients in the everyday interactions they have with us so they entrust more of their financial life to Schwab. That means picking up the phone quickly, answering questions efficiently and providing intuitive digital experiences. In the first quarter, service levels were strong across the board.

We continue to enhance our digital processes and our AAS easy score reached 93%. Finally, our fourth focus area is continuing to invest in our people. Our ability to serve our clients and fuel growth into the future comes down to our people. And we're continuing to optimize workflows as well as talent development and recognition programs that help us foster our unique culture of service.

I want to wrap up with some comments on April and our outlook for the year. We are seeing record trading levels with our two highest trading days ever and high levels of engagement digitally and with our reps. We have been there during this period when our clients needed us most. Our technology has performed well, our service has been solid and our business metrics continue to perform well.

We continue to track well to the financial scenario we outlined at the beginning of the year as Mike will expand upon shortly. The combination of a strong first quarter and robust activity in April has us off to a strong start in 2025. With Through Clients' Eyes as our guide, we're continuing to play offense by investing in focus areas that will drive both growth and efficiency while delighting our clients and supporting our employees. With continued innovation around client solutions, capabilities and experience, we are well positioned to accelerate profitable growth through the cycle. And with that, I will turn it over to Mike to share our financial picture.

Thanks, Rick. I'm looking forward to speaking with you all this morning about our strong start to 2025. To echo Rick, we saw solid growth across all fronts during the first quarter as we continued to meet the evolving needs of our growing client base. New account formation was approximately 1.2 million during the period, our highest total in several years. And momentum in net asset gathering continue to build with core NNA reaching $138 billion.

Clients utilize the full breadth of Schwab's modern wealth management solutions during a period of increasing uncertainty across global markets, including 7.4 million daily average trades, record net inflows into our managed investing solutions and sustained growth in our bank lending products. This combination of organic growth and increased client utilization of our leading products and solutions resulted in year-over-year revenue and adjusted earnings growth of 18% and 41% respectively. Transactional cash levels continue to reflect normalized cash behaviors inclusive of organic growth, seasonality and investor sentiment.

And we made additional progress on reducing the level of bank supplemental funding to approximately $38 billion, down more than 60% from peak levels. We increased the return of capital through the previously announced higher common stock dividend and stock buybacks in the first quarter, and our capital ratios finished [1.2], slightly above the upper end of our target range. Given the shifting macroeconomic backdrop to begin this year, there are plenty of moving pieces. So let's unpack some of the key factors influencing the first quarter.

First quarter revenue increased 18% year-over-year to a record $5.6 billion, including double digit growth across all line items versus 1Q '24. The further reduction in higher cost bank supplemental funding drove sequential net interest margin expansion of 20 basis points, helping net interest revenue increase 21% year-over-year. Asset management and administration fees grew by 14% year-over-year to $1.5 billion for the quarter as robust asset gathering and sustained interest in Schwab's wealth and asset management solutions more than offset the impact of recent equity market declines. Building on the post-election momentum observed in late 2024, daily average trading volume increased significantly during the first three months of the year as investors navigated an increasingly uncertain and volatile market.

This uptick in trading activity pushed trading revenue up 11% year-over-year while bank deposit account fees moved higher due to an improved net yield as a growing percentage of the balances have converted to the floating rate bucket. On expenses, adjusted expenses for the quarter were up 6% and 8% versus 4Q '24 and 1Q '24 respectively. This includes typical first quarter seasonality to start the year, which was accounted for within our full spending plan of 4.5% to 5.5% outlined during the January business update. We also began to make progress on a number of key focus areas for 2025, including investments to support sustainable organic growth and drive incremental scale and efficiency.

This balanced approach to expense management has enabled us to drive expense on client assets down into the low double digits and improved cost per account by more than 20% and over the last decade. Strong top line growth plus balanced expense management generated a 46.2% adjusted pretax profit margin, representing over 500 basis points of expansion versus 1Q '24 and earnings per share of $1.04, a year-over-year increase of over 40%. Our first quarter financial results reflect the continued positive inflection in Schwab's earnings trajectory as well as the durability of our diversified model to deliver across a wide range of environments.

While we plan to provide a more comprehensive update on our full year 2025 financial scenario at the summer business update in July, given all the moving pieces, we want to spend a few moments discussing what has changed since mid-January. We've seen sizable movements across three of the inputs to our financial scenario, including a lower expected future path of interest rates, lower equity markets and a sequential step-up in client trading activity as the market pulled back and volatility reemerged. In terms of rates, the outlook for 2025 remains dynamic with the forward curve moving between three to four 25 basis point cuts to the Fed's target rate versus the one cut assumed back in January for our financial scenario.

At this point in time, these potential incremental cuts are expected to be mostly in the back half of the year. And under such a scenario, we still expect full year 2025 net interest margin to expand into the 2.55% to 2.65% range. We also could see average 4Q NIM contracted slightly from the level indicated in our January financial scenario. Of course, movements in the fold curve is nothing new and we'd expect it to continue to change as investors assess the shifting macroeconomic picture.

And while the drivers of earnings are evolving with stronger cash levels and higher trading volumes versus lower equity markets and additional future rate cuts, the combination of our strong 1Q '25 results and diversified model has us currently tracking around the upper end of the full year scenario outlined at the winter business update in January, which implied earnings per share in the $4.10 to $4.20 range, excluding any impacts from buybacks. However, given the current backdrop, the key variables will likely continue to shift. And so we'll provide a more comprehensive update on our full year 2025 financial scenario at the next business update in July when we'll have a better view of how key trends are shaping up halfway through the year.

Moving to our balance sheet. We continue to support our clients as their needs evolve through the quarter. Following the deleveraging in late February and early March, client margin balances at the broker dealer finished at $83.6 billion or essentially flat with year end 2024 levels. Bank loans grew with CAL balances increasing 9% versus 4Q '24. As expected, we saw the seasonal outflow in client transactional sweep cash to begin the year and then cash building slightly during February and March.

This activity represents normal behavior in this type of environment as client redeployment of the 4Q cash build was offset by net equity selling as investors to exposure to risk assets. With another quarter of encouraging cash performance, we use the cash flows coming off of the securities portfolio plus some cash on hand to further reduce high cost supplemental funding at the banks. In terms of Q2, we still expect to see typical drawdown in client cash due to tax disbursement payments in April. And similar to past years, we expect this activity to impact both transactional sweep cash as well as other liquid cash alternatives, such as purchase money market funds.

However, it is possible that a continuation of market volatility in this quarter could influence client cash allocations. Given the increasing uncertainty in today's environment, we're focusing on flexibility in managing the balance sheet to remain well positioned to navigate a wide range of potential outcomes. Some additional thoughts on bank supplemental funding. Following the $15 billion paydown during the fourth quarter, we reduced the balances by another $11.8 billion during the first quarter of '25, bringing the outstanding balance as of March 31st to $38.1 billion or down approximately 60% from the peak.

As previously mentioned, we would not necessarily expect to reduce funding levels by the same magnitude every quarter. For example, sizable tax related outflows in 2Q will likely make it more challenging to replicate the level of paydown observed over the past two quarters. However, as we move forward, we still 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 finished 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 to par of unrealized marks with incremental benefit from the decline in interest rates. The ratio also reflects our common dividend and the $1.5 billion opportunistic share repurchase completed in connection with TD's secondary offering in mid-February. As we begin the second quarter, this strong capital position continues to provide flexibility ahead of the pending decision regarding our $2.5 billion Series G preferred that becomes redeemable later this quarter. Moving beyond the decision regarding the preferred, we expect to apply our familiar capital management framework as we prioritize maintaining capital to support the needs of our clients and the growth of our franchise while at the same time, making progress on reducing the amount of higher cost funding at the bank and returning capital in multiple forms as part of our through the cycle financial growth story.

While there is more uncertainty today from a few months ago, we remain highly confident in our long term diversified model. For over five decades, our Through Clients' Eyes strategy has focused on meeting the needs of individual investors, either directly or by supporting the growth of independent advisors. The ways in which Schwab has met those needs has evolved over time, including expanding the available set of products, solutions and services. The broader set of capabilities, which spans wealth management, trading, banking, asset management and much more, helps us efficiently attract a wide range of investors, driving sustainable organic growth and allows us to deepen relationships with our clients as their needs change over time supporting greater revenue diversification through the cycle.

At the same time, our scale and efficiency is a significant competitive advantage, enabling us to maintain key investments and flexibility to navigate various macroeconomic environments. Of course, our capabilities are also supported by our enhanced approach to the balance sheet where we expect incremental tailwinds moving forward. Not only does the balance sheet play a key role in deepening relationships with clients via lending, cash management and other activities but by further reducing outstanding high cost funding, we are able to expand NIM and increase the firm's earnings, therefore, supporting robust capital formation, which helps position us to further enhance stockholder value through the increased return of excess capital in 2025 and beyond.

So to wrap up this morning, our ability to support clients through a period of increasing uncertainty helped sustain our strong momentum into 2025 and we plan to stay on offense, investing to support long term organic growth and importantly, to help ensure our best-in-class client experience continues to meet the evolving needs of individual investors and the advisors who serve them. In doing so, we also helped further strengthen our diversified model, enabling us to deliver durable financial results through the cycle. And with that, let's get on to Q&A. Jeff, back to you.

Operator, can you please remind how they can ask a question?

[Operator Instructions] Our first question comes from Steven Chubak with Wolfe Research.

So Rick, I did want to ask on the outlook for April. Admittedly, you and the team delivered a really strong set of results in 1Q but we've entered a very different operating environment to start 2Q. And I was hoping you could just speak to what you're seeing in terms of retail sentiment and how that's manifesting across different brokerage metrics, whether it's changes in transactional cash, margin balances and NNA?

April has brought levels of engagement that are historical for us. We saw our two highest trading days ever, the Friday before the pausing of the tariffs and then the day that we paused tariffs. We did 14 million trades and all-time record that day and so it's been very busy. I think we have been supporting clients through it all.

We saw 500 million log-ins in the first quarter, an all-time record. That level of log-in pace has continued and actually accelerated into the start of the second quarter. So it's been a period of robust activity in a period where I think our model really sets itself apart. The ability for a client to call up and quickly get an answer to walk into a branch and talk to someone to talk with their advisor and know that Schwab stands behind them and supports that, this is a period where we shine.

And we've seen the first part of April, 2 times to 3 times the level of new accounts being opening for two reasons. We think there are some clients that want to get into Schwab and buy the dip. And second, because we're seeing clients that want a fuller service model and want to be able to talk to someone who want the advice and guidance that we can bring to the table. So we're just seeing high levels of engagement, 40 times the consumption of our research that we typically see.

In terms of what that translates to and some of the metrics that you described, in aggregate, we've seen a slight risk off tone from our investors in the first few weeks of April. And by that we've seen higher levels of cash growth than we would have expected in a month where we've got April tax payments due, some slight reduction in margin and net equity selling. But with $44 million in client accounts, we see a wide range of behavior, but that's how I'd sum it up in terms of overall client activity. I don't know, Mike, do you want to talk what that means for our diversified business model.

So when you think about the volume of transactions that we're seeing and even though you see some of that margin coming back a bit, the fact that we're picking up cash, the cash alone more than offsets the earnings impact of some of that margin coming off. So when you look at just the beginning of April, it continues to give us confidence about that earnings range that I provided, certainly the upper end of that range.

Next question comes from Dan Fannon with Jefferies.

So I wanted to talk about NNA. Obviously, it accelerated throughout the quarter. You reiterated your confidence on the longer term guide. But as you think about this type of backdrop with more volatility, does that have any input in terms of the behavior and/or the growth outlook?

And also, if you could -- you mentioned several positives around what gives you confidence around that? I guess if you could just highlight the one or two as to why it's accelerating now in the first half of this year?

There's a few things that have driven the acceleration of our NNA. First, as we shared previously, we expected NNA to accelerate the further and further we got away from the retail integration. And we saw retail NNA grow year-over-year by 50% as we're now further removed from the final Ameritrade integration. That's us deepening relationships with our legacy Ameritrade clients.

That's those legacy Ameritrade clients learning a new platform and becoming comfortable with it and sharing not only have they become comfortable with it that they like it better than what they had before, because of all we have around the platform. So it's just a continuation of bringing the Ameritrade clients into Schwab and giving them the service, the breadth of our offering that we've given to all our Schwab clients. And we've seen a real acceleration, again, as we would have expected in the way Ameritrade clients are engaging. If you looked at most of last year, Ameritrade retail clients, legacy retail clients were roughly flat in terms of their M&A contribution.

And as we move towards the end of the year and moved away from the integration, that inflected and it inflected even more so in the first quarter where we saw really robust NNA growth, not quite at the 5% level, plus level that we see from our Schwab retail clients but they got roughly halfway there, and that's terrific progress and we're excited to see that. And excited to see that the impact we're having and how much they're loving being on our platform. The retail Ameritrade clients was the place where we saw the greatest growth in retail client promoter scores at Schwab. So I think we're doing well there and that's part of the story.

In turn, the second thing I'd point to is the environment on balance is generally beneficial to net new asset growth. We have seen both at Schwab and in particular, at Ameritrade among retail clients that volatility brings NNA. And let me put into perspective why that may have happened, particularly at Ameritrade. At Ameritrade, our share of wallet remains with legacy Ameritrade clients still at around 30%.

At Schwab, it's well into the 50% plus range. And so those clients have money elsewhere. And when markets become more volatile and they want to be more active in markets, they're bringing money into Schwab. And what's great about that is we have such a big opportunity with Ameritrade clients to broaden the way we serve them to capture a greater share of their wallet and to be there, not just for their trading assets but to be there for their whole financial life, and that's one of the things I'm most excited about.

And I'll just end by commenting on advisor services that we saw robust growth throughout the year and an acceleration of growth in advisory services throughout the year and into the year. And we just saw a continuation of that in the first quarter. It's in a really solid position. It grew, I believe, 19% year-over-year in terms of net new assets versus the first quarter of last year.

It's just a continued solid growth story in advisor services. But the real uptick here was in retail as we move further away from the integration and continued to delight our Ameritrade clients as evidenced by their growing levels of satisfaction at Schwab.

Our next question comes from Ken Worthington with JPMorgan.

Can you talk about the build out that you mentioned in your prepared remarks on the branch network and the advisor base? I think you kind of indicated both these priorities. What sort of numbers are we talking about in terms of additions expected this year? And what level do you expect to end the branch network in the advisor base by year end?

And ultimately, how important is this advisor base in terms of capturing the opportunity that you see for yourself in the wealth advisory services in your new alternative assets platform?

The branch network is critical to the success of our firm and an important part of our value proposition and what distinguishes us as a firm. We know that when we have a dedicated one-to-one relationship with a client, NNA goes up appreciably, client satisfaction goes up and their engagement and other solutions outside of just pure investing increases. They become bigger users of our wealth solutions and our bank capabilities. So we believe that one-to-one relationship is important.

And importantly, it's critical to helping our clients achieve success in us helping us achieve our mission. We are in the business of championing our clients' financial goals and doing everything we can to help them get to where they want to be in their financial life, and that one-to-one relationship is so valuable. We expect to open up around 16 new branches this year. That's a large number of new branches for us, I think the most we've opened in many years.

And that's a reflection of the importance of the role, the migration of wealth to different parts of the country where we think we have an opportunity to add more branches, the repositioning of some of our branches in some areas where money has moved in terms of where it's located within certain states and we want to be there for clients. And so we expect to grow roughly 250 new financial and wealth consultants during the year and we believe that will have a meaningful impact on our ability over the long term to grow net new assets. And it's not -- this is not just a 2025 story. You'll continue to see us invest in this in '26 and '27, because we think relationships are critical to our clients' success and critical to supporting our 5% to 7% organic growth rate.

Our next question comes from Bill Katz of TD Cowen.

I just wanted to just maybe take a step back. Now that you're getting much closer in terms of normalizing the balance sheet in terms of paying down some of the higher cost deposits seems like client cash sorting has peaked for the cycle and your growth is accelerating and you ended the quarter slightly north of your capital ratio. So it sort of all begs the question of how are you thinking about balance sheet growth into the second half of this year or maybe 2026 with the thought of, is it time to start remixing the earning assets into more of a loan focus in terms of security based lending or residential mortgages?

And does that sort of free up a more consistent capital return story as we look at it?

So as you highlight, as we think about the balance sheet this year. Yes, our focus continues to be managing balance sheet in the way that's going to meet our client needs, while at the same time, driving some of those broader objectives of bringing down the supplemental borrowings. And we feel very confident about the continued progress that we'll make over the course of the year. Of course, the -- our focus on supporting clients and their engagement with us.

We've seen good take up in lending certainly in the bank, in our PAL product. We talked about the margin growth recently as well. And of course, that will vary based on the market dynamics. If you're heading for a lower rate environment, it's possible you could see more growth in the mortgage portfolio, we haven't seen as much there.

But we're going to continue to manage the balance sheet in a way to support that lending activity. And of course, over time, as we pay down those supplemental borrowings, we have a securities portfolio that we will begin to roll and reinvest. And of course, the yield on that portfolio today is sub-2%. And so at least based on where the rates are today that would be accretive.

So all those things continue to point to good earnings growth and the organic growth of capital. And that's why when we talk about capital and that framework we're confident in returning capital, whether it's through dividends. Of course, we have an important decision this quarter around the preferred security and whether we call that and then, of course, to be able to opportunistically return capital in the form of buybacks as well. So it's all part of the set of considerations.

And again, we're going to continue to support that loan growth and those client needs.

We're going to answer the question from the console. This one comes from Michael Cypress at Morgan Stanley. A question for Mike around risk exposure. Can you talk a little bit about how the firm manages exposure in a more volatile environment? Perhaps what steps are taking on the balance sheet, liquidity management, client exposures, et cetera?

So around risk exposures, we feel really good about how we're managing in this environment. We continue to support clients and their great engagement. And what's important is the capabilities that we've enhanced prior to this environment. You've heard we talked a lot about the balance sheet and the capabilities around the balance sheet.

It's so important that we do that work in advance of markets that become more volatile. And you think about those risk strides liquidity, we've talked about funding diversification that we now have both at the bank and the nonbank. In capital, in terms of the strength of capital, we're growing that organically through strong earnings, but importantly too, the impact of interest rates on the investment portfolio and the variability that could create in the capital ratio. Keep in mind that our securities portfolio is much more weighted now towards HTM versus AFS.

And what we do have in available for sale securities are short dated around two years. So even shocks in interest rates that balance sheet remains very resilient. And of course, an interest rate risk as well. We've enhanced some of our tools using simple interest rate swaps to help us reduce the sensitivity to lower rates.

So enhanced capabilities, really helping us manage the balance sheet in a more efficient way and certainly protecting that safety and soundness in times of volatile periods. In terms of our broader exposure, we're not exposed to meaningful credit risk. I do want to touch on credit as well. Where we do lend, it is secured and our clients have strong credit profiles.

For example, in real estate, our clients have very high FICO scores and they have high equity levels in those positions too. In other areas such as secured lending, we have high visibility into the securities they maintain with us. So overall, we remain very well disciplined and well positioned.

Our next question comes from Kyle Voigt with KBW.

I just wanted to dig in a bit more to your alternative investments platform. You noted last week that the platform is now available to all retail clients with more than $5 million in household assets at Schwab, which would put them in the qualified purchaser bucket. However, there are also a range of alternative products that are available to credit investors as well. I just wanted to get some sense as to how many investment products are being offered on the platform today.

How you expect that to grow over time, that number of products to grow over time? And whether you'd expect to be able to offer alternative investment products to accredited investors as well over time?

We want to meet clients' varied needs for alternatives in a range of ways and we have seen more innovation in the industry around making alternatives available to clients of any size. And you've seen combinations of public and private firms putting together products that trade like an exchange traded fund. And so I do think you'll see the ability for all investors to participate in the theme around alternatives. Our more recent effort around alternatives has been geared towards meeting the demand that we see among higher net worth clients and among our advisor clients to increasingly add alternatives to their portfolio.

And we have made that available to our 5 million plus clients backed by a team of alternative experts that have expertise in both the asset class and the particular funds and can help clients decide whether it's right for them. But we -- our firm started to drive accessibility through investing in our country and to make it something that anyone regardless of what their wealth is could invest in, and I think we've been very successful at that. And I expect as these products innovate and launch that appeal to investors of all asset sizes, we're going to be at the front of the line helping that -- helping facilitate that.

Our next question comes from Devin Ryan with Citizens Bank.

Would love to just unpack the NIM commentary a bit on the year. I appreciate there's a lot of moving parts here and market expectations are kind of moving day-to-day. But just curious, does it imply faster supplemental pay down of transactional cash builds here with volatility, does it reflect changes in margin utilization? It just seems like the balance sheet is actually performing a bit better than we had modeled at least at the beginning of the year.

So it would just be great to just get some thoughts on that. And then just also just more broadly, if Fed funds do drop faster than maybe the market baked in the year or some of the other areas in the model that might flex a bit?

Regarding NIM, we still feel good about the ability to expand NIM. And of course, the interest rate environment is evolving. As I mentioned in my prepared remarks, when we came into the year in our financial scenario, we assumed one cut in May and now the market is as much as four cuts over the course of the year. So when you take some of the puts and takes here, you're right, the pickup in cash, we performed a little bit better in cash that's enabled a faster reduction of supplemental borrowings.

Of course, that could continue over the course of the year, remains to be seen how the environment evolves. So that's a tailwind. Of course, the headwind is the fact that we are still asset sensitive and therefore, in a lower rate environment on those floating rate assets do reset lower. But putting that all together, we still feel very good about the ability to expand net interest margin over the course of the year and importantly, continue to grow earnings and we're growing them organically and building capital.

Our next question comes from Ben Budish with Barclays.

I was wondering, Mike, if you could give a little bit more color on the cadence of OpEx growth over the course of the year. It sounds like there's no change at this point to your full year target but Q1 came in a little faster than expected. So how do we think about sort of the cadence of spend given the investments you're making in the advisor network and opening up more branches, and what does that sort of imply for the exit rate? I would assume next year is probably another investment and growth oriented year but operating leverage has always been part of the financial formula.

So any color you can give there would be helpful.

So I talked about the -- I mean, first, just that full year earnings per share range, we feel very good about that range and in fact, the upper end of that range. When I think about expenses, yes, we do see an uptick in 1Q. I mean that is typical seasonality. Keep in mind that some of that cost also is higher volumes and higher volume related costs.

But that is contemplated -- this kind of spend in the first quarter is contemplated in that full year range that we provided of 4.5% to 5.5% of expense growth. And again, we feel good about this expense growth even in this environment because we're investing in growth, we're investing in capabilities. We're going to do more for clients. While at the same time, we're investing in efficiency and that's going to ensure that we can maintain that low cost to serve and be able to continue to make progress in that area as well.

Our next question comes from Ben Rubin with UBS.

Another question here for Mike on the balance sheet. You paid down nearly $30 billion in supplemental funding over the past two quarters alone, which is encouraging to see. But in your prepared remarks, you spoke to achieving more funding diversity over the long term between sweep deposits, other products like brokered CDs, as well as potential third party arrangements. So just curious, how do you view the optimal mix across your different funding sources over the long term?

Funding diversification to me is just a basic capability that we want to maintain. But at the same time, that funding diversification is going to be done in a way is efficient and achieve the financial outcomes we want to achieve. Starting with the bank, yes, good progress in paying down that bank supplemental funding. And we're going to continue to make progress there.

I think having some mix of secured and unsecured borrowings in the bank makes sense. How far do you bring that down, is it single digit billions or something in the teens, I think those levels make sense and we're going to continue to progress against that. I think in the nonbank, this is where you could have a mix of funding sources as well, where we have obviously, securities and financing those is a natural extension of that activity. So that diversification creates efficiency and it creates flexibility to meet the ongoing client needs.

So that's how I think about that approach to funding diversification. And again, we're going to continue to progress the paydown of that bank supplemental funding over the course of the year.

Our next question comes from Mike Brown with Wells Fargo Securities.

So Schwab's historically taken a kind of cautious approach to the crypto ecosystem compared to some of your peers. Now that you have a new head of digital assets, I just wanted to check in and see if you have an update on how you're approaching the space and maybe how you foresee adding capabilities and offerings there.

First thing I'd say is we are doing well in crypto already today and doing well to me means a few things. First, we're seeing robust engagement with the existing crypto ETFs that can be bought in the marketplace, the closed end funds that we make available on our platform and Bitcoin futures, which are also available on our platform. So we do think we are a great destination for investors interested in crypto. And we've seen that in the level of new account growth and the level of engagement in our crypto site where we saw a 400% increase in traffic to it recently, 70% of whom were prospects and what that -- were not clients.

And what that says to us is that as people in the industry are thinking about crypto, they'd love to work with a trusted brand and a firm that can bring them a lot of capabilities and we're that firm. So as we roll out more and more new capabilities, we're confident we will be a great destination for investors interested in crypto. Our expectation is that with the changing regulatory environment, we are hopeful and likely to be able to launch direct spot crypto and our goal is to do that in the next 12 months and we're on a great path to be able to do that. So we're excited about meeting our clients' crypto needs, we believe we are doing a lot of that today but we'll also add capabilities in the near term.

Operator, it looks like I think we have time for one more question before we wrap up.

Our last question comes from David Smith with Truist Companies.

You've got legacy TD customers to bring in NNAs now about half the pace of legacy Schwab when they just kind of been treading water at flat NNA about a year ago. Do you think you can get the other half of the gap closed over the next year or does it get incrementally tougher from here as the gap continues to close? And what are the big initiatives that you have today to keep that gap narrowing?

I fully I expect that we'll close the entire gap and at some point, possibly even see Ameritrade clients grow at a level above the Schwab rate, because we're consolidating their assets and growing our share of wallet with Ameritrade clients. What we're seeing from Ameritrade clients is that every quarter they spend with us their satisfaction grows, their level of engagement grows, their knowledge and understanding of the platform grows. And as a result, their net new assets have been growing. The way -- the analogy that I like to use for where we are with Ameritrade clients is it's like if you had been driving a BMW your whole life and one day, you went down in your garage and there was a Mercedes there, that first day, you would feel a bit of confusion.

You wouldn't know how to turn on the radio. If it was raining, you'd have to figure out how to get the wipers on. And you'd have a little bit of angst about that transition, about the car being in there. And then, of course, over time, you get really comfortable with the new car and realize how much it can do for you.

And that's where we are with our clients. They've made the transition. They're getting more and more comfortable with our platform. We are building relationships with them and we are winning their hearts and their wallets and supporting them in their financial journeys, in terms of what actions we're building and that's why we're leaning into our financial consultant growth.

It starts with having the best trading platform in the industry and then surrounding that with a set of educational resources and training resources that have never been stronger than what we have today because of the combination of Schwab and Ameritrade. And it ends with having 1,000 trader professionals at Schwab that wake up every day with the sole purpose and mission of supporting our more active traders. And those active traders really value being able to work off the best platform in the industry. But then when they want to call someone and talk about a trade or how to think about something or how to do something, they love having 1,000 people who like them at Schwab that pick up the phones and want to help them.

So I think we're right where we want to be on the -- right where we expected to be and right where we want to be on the journey with Ameritrade clients. And I couldn't be more optimistic about our years ahead with them as we serve them, support them, and I expect consolidate their assets as Schwab as they realize how much we can do for them. With that, why don't I -- I know we're out of time. So thank you for your questions and all your engagement this morning.

And I want to leave you with just a few thoughts. We don't know exactly what's going to happen with policy or how markets will react to developments in the near term. All of those things are outside of our control. But what is in our control is maintaining our unwavering focus on serving our clients.

We have been there for our clients during market ups and market downs for more than 50 years and they are turning to us now because we've earned their trust as a safe port in the storm. As we look ahead, our priority and our focus remains on serving our clients in all market environments and for the long term. We are in a position of strength today. And with our Through Clients' Eyes strategy as our guide, we believe our future is even brighter.

Thank you for joining and thank you for your time.