Schwab Charles Corp Q1 FY2025 Earnings Call

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 website at the conclusion of today's prepared remarks. Q&A remains structured as one question with 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, 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, 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 start 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 are 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 as 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, and investor sentiment was 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. Our retail advisor and workplace relationship teams stood by clients to help them navigate their financial situations. It is in periods like this where our omnichannel client model really shines, just as it did this quarter. It is essential to remember why we are here. Behind every trade and every call to our service teams is a person who is watching the headlines and considering their next 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 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 contributions 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 and 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, 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. 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 measures 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, and 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 unmatched service. Our pledged asset line balances increased 34% year-over-year, supported by strong digital adoption, with 95% of new loans originated through a digital channel. 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 and 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. 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 detailed 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. We delivered on these priorities across multiple fronts in the first quarter. We're expanding our branch footprint and hiring hundreds of financial 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 an omnichannel experience and those that may want limited interaction. Our AI investments support 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. 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. Additionally, we advanced our efforts to deepen client relationships. We delivered several enhancements to our wealth offer, rolled out retail alternatives to all eligible clients, launched a discretionary option for clients within Schwab Wealth Advisory, and enhanced both Schwab Personalized Indexing and our Wasmer Schroeder offers. Recently, we announced a strategic investment in Wealth.com, a leader in digital estate planning. This investment enhances our estate planning capabilities and experience for clients and is part of our broader effort to provide more of an ecosystem for our RIA clients as we help them grow, compete, and succeed. These wealth enhancements 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 24/5 trading capability on our thinkorswim platform. All Schwab 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 investing 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 operate more efficiently. Our third focus area is the brilliant basics. Our biggest opportunity for long-term growth is delighting our clients in the everyday interactions they have with us so they trust us with more of their financial life. 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. We're continuing to optimize workflows and talent development and recognition programs that help us foster our unique culture of service. I want to wrap up with 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're tracking 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. Momentum in net asset gathering continued to build with core NNA reaching $138 billion. Clients utilized 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. 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 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% 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 second half of the year. 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 contract slightly from the level indicated in our January financial scenario. Of course, movements in the fold curve are nothing new, and we'd expect it to continue to change as investors assess the shifting macroeconomic picture. 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. 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 adjusted their exposure to risk assets. With another quarter of encouraging cash performance, we used the cash flows coming off the securities portfolio plus some cash on hand to further reduce high-cost supplemental funding at the banks. In terms of Q2, we expect to see a typical drawdown in client cash due to tax disbursement payments in April. 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, approximately down 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 than 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 have evolved over time, including expanding the available set of products, solutions, and services. This 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. Our scale and efficiency is a significant competitive advantage, enabling us to maintain key investments and flexibility to navigate various macroeconomic environments. Our enhanced approach to the balance sheet is expected to create incremental tailwinds moving forward. The balance sheet plays a key role in deepening relationships with clients via lending, cash management, and other activities. By further reducing outstanding high-cost funding, we can 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. In summary, 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 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. With that, let's get on to Q&A. Jeff, back to you.

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

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. 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 in an 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. 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 consult with their advisor and know that Schwab stands behind them and supports that, this is a period where we shine. We’ve seen in the first part of April, 2 to 3 times the level of new accounts being opened for two reasons. We think there are some clients that want to get into Schwab and buy the dip. Second, we're seeing clients who want a fuller service model and want to talk to someone who provides the advice and guidance that we can bring to the table. We're 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. 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 reductions in margin and net equity selling. 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 about what that means for our diversified business model?

When you think about the volume of transactions that we’re seeing, 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. 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 in 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 growth outlook? Also, could you highlight one or two of the positives that give you confidence about the acceleration 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 we got away from the retail integration. 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. Those legacy Ameritrade clients are becoming comfortable with the platform and sharing that they not only have become comfortable with it but that they like it better than what they had before due to the benefits around the platform. It's just a continuation of bringing the Ameritrade clients into Schwab and giving them the service and breadth of our offering as we have provided to all our Schwab clients. We saw a real acceleration in the first quarter where we observed robust NNA growth—not quite at the 5% level plus from our Schwab retail clients, but they got roughly halfway there. That’s terrific progress, and we're excited about it. The retail Ameritrade clients showed the greatest growth in retail client promoter scores at Schwab. The second driver is the environment, which is generally beneficial to net new asset growth. We have seen both at Schwab and particularly at Ameritrade among retail clients that volatility brings NNA. Our share of wallet remains with legacy Ameritrade clients at around 30%. At Schwab, it's well into the 50% range. Those clients have money elsewhere, and when markets become more volatile, they want to be more active, bringing money into Schwab. We have a big opportunity with Ameritrade clients to broaden how we serve them, capturing greater share of their wallet and being there not just for their trading assets but for their whole financial life. I’m really excited about that. I'll also comment on advisor services, which saw robust growth throughout the year with an acceleration of growth in advisory services, and we continue to see that in the first quarter. It grows, I believe, 19% year-over-year in net new assets compared to the first quarter of last year. It’s a solid growth story.

Our next question comes from Ken Worthington with JPMorgan.

Can you talk about the buildout mentioned in your prepared remarks on the branch network and the advisor base? What sort of numbers are we discussing in terms of additions expected this year? What level do you expect to end the branch network and advisor base by year-end? How important is this advisor base concerning the opportunity in wealth advisory services and the new alternative assets platform?

The branch network is critical to the success of our firm and an important part of our value proposition that distinguishes us. We know that when we have a dedicated one-to-one relationship with a client, NNA goes up appreciably, client satisfaction goes up, and engagement with our wealth solutions and bank capabilities increases. We believe that one-to-one relationship is important and critical to helping our clients achieve success. We expect to open around 16 new branches this year; that’s a large number for us and reflects the importance of the role, migration of wealth to different parts of the country, and the opportunity to add more branches where we want to be more present for clients. We expect to grow roughly 250 new financial and wealth consultants during the year, which we believe will have a meaningful long-term impact on our ability to grow net new assets. This isn't just a 2025 story. You'll continue to see us invest in '26 and '27 because we believe relationships are critical to client success and supporting our 5% to 7% organic growth rate.

Our next question comes from Bill Katz of TD Cowen.

I wanted to step back. Now that you're getting closer in terms of normalizing the balance sheet and paying down some of the higher-cost deposits, it seems like client cash sorting has peaked for the cycle and your growth is accelerating. Can you share how you are thinking about balance sheet growth into the second half of this year or maybe 2026?

As you highlight, our focus continues to be managing the balance sheet in a way to meet client needs while driving broader objectives of reducing supplemental borrowings. We're seeing good take up in lending, certainly in the bank, in our PAL product. We've talked also about margin growth recently. Of course, that may vary based on the market dynamics. If you're heading for a lower rate environment, it's possible to see more growth in the mortgage portfolio. We will continue to manage the balance sheet to support lending activity. As we pay down those supplemental borrowings, we have a securities portfolio that we will begin to roll and reinvest. The yield on that portfolio is sub-2%, so based on today's rates, it would be accretive. These factors point to good earnings growth and organic capital growth. Thus, when we discuss capital management, we're confident in returning capital, whether through dividends or opportunistic buybacks. We'll support loan growth and assess 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 bit about how the firm manages exposure in a more volatile environment? Perhaps the steps taken on the balance sheet, liquidity management, client exposures, etc.?

Regarding risk exposures, we feel good about our management in this environment. We are supporting our clients through their engagement. What’s important is the capabilities we’ve enhanced prior to this environment. You've heard us talk about the balance sheet work that we’ve done ahead of markets becoming more volatile. Liquidity and funding diversification we now have both at the bank and the nonbank. Capital strength is growing organically through strong earnings and impacted by interest rates on the investment portfolio and variability affecting capital ratios. Our securities portfolio is weighted more toward HTM versus AFS. The shorter duration of available-for-sale securities at around two years helps maintain resilience. To further manage interest rate risk, we’ve enhanced some tools using simple interest rate swaps to reduce sensitivity to lower rates. Overall, we remain well disciplined and well-positioned.

Our next question comes from Kyle Voigt with KBW.

I wanted to dig into 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. Can you share how many investment products are being offered on the platform today, how you expect that number to grow over time, and whether you'd expect to be able to offer alternative investment products to accredited investors as well?

We want to meet clients’ varied needs for alternatives in a range of ways, and we have seen innovation in the industry around making alternatives available to clients of any size. You've seen public and private firms combining products that trade like an exchange-traded fund, making it possible for all investors to participate in the alternatives theme. Our efforts around alternatives focus on meeting the demand seen among higher net worth clients and advisor clients to add alternatives to their portfolios. We've made that available to our clients with more than $5 million in household assets, backed by a team of alternative experts proficient in the asset class and specific funds that can help clients decide on what's right for them. Our firm aims to drive accessibility, making alternatives available to anyone regardless of their wealth, and we will be at the forefront as these innovative products launch, facilitating their adoption.

Our next question comes from Devin Ryan with Citizens Bank.

Could we unpack the NIM commentary a bit on the year? I appreciate that there are lots of moving parts here, and market expectations are moving daily. But does it imply a faster supplemental paydown of transactional cash builds here with volatility? Does it reflect changes in margin utilization? It seems like the balance sheet is performing better than we modeled at the beginning of the year, so I would appreciate your thoughts on that.

Regarding NIM, we still feel good about the ability to expand NIM. The interest rate environment is evolving. At the beginning of the year, we assumed one cut in May, whereas now the market anticipates as much as four cuts over the year. The pickup in cash has allowed for a faster reduction of supplemental borrowings, which may persist throughout the year; however, that remains to be seen as the environment continues to evolve. Overall, we are optimistic about expanding the net interest margin this year while continuing to grow earnings organically and build capital.

Our next question comes from Ben Budish with Barclays.

Mike, could you give a little more color on the cadence of OpEx growth over the year? It sounds like there's no change to your full-year target, but Q1 came in faster than expected. How do we perceive the cadence of spend given investments in the advisor network and new branches? What does that imply for the exit rate? I would assume next year will likely involve another investment and growth-oriented year but maintaining operating leverage has always been part of your financial formula.

I talked about the full-year earnings per share range, and we feel good about the upper end of that range. We do see an uptick in Q1, which is typical seasonal behavior. Higher costs were accounted for in our full-year range of 4.5% to 5.5% spend growth, and we feel good about this expense trajectory even in this environment because we're investing in capabilities for our clients while also focusing on efficiency to maintain a low cost to serve.

Our next question comes from Ben Rubin with UBS.

I see you paid down nearly $30 billion in supplemental funding over the past two quarters, which is encouraging. Yet, you mentioned achieving more funding diversity long term across various products. I'm curious about your view of the optimal mix across different funding sources over the long term.

Funding diversification is essential; it's a basic capability we want to maintain. We are continuing to pay down that bank supplemental funding. A mix of secured and unsecured borrowings in the bank makes sense and we will continue to reassess that. In the nonbank, we can have a mix of funding sources that creates efficiency and flexibility to meet client needs. We'll keep progressing the paydown of bank supplemental funding and monitor our funding diversification.

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

Schwab has historically taken a cautious approach to the crypto ecosystem compared to some peers. Now that you have a new head of digital assets, could you share how you're approaching this space and potential additions to your capabilities and offerings?

We are doing well in crypto already today, which means a few things. First, we’re seeing robust engagement with existing crypto ETFs available in the marketplace, closed-end funds on our platform, and Bitcoin futures available for trading. We think we are a great destination for investors interested in crypto. We've seen a 400% increase in traffic to our crypto site recently, with 70% being prospects. This indicates that as people consider crypto, they want to work with a trusted brand that offers solid capabilities, and we are that firm. Our expectation is that as the regulatory environment changes, we are likely to launch direct spot crypto in the next 12 months, and we're on a positive path to do so. We're excited about meeting clients' crypto needs and looking forward to adding additional capabilities soon.

Operator, it looks like we've 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, which had been flat NNA about a year ago. Do you think you can close the other half of the gap over the next year, or does it get incrementally tougher as the gap closes? What are the major initiatives in place to continue that gap tightening?

I fully expect that we'll close the entire gap and potentially see Ameritrade clients grow at a level above the Schwab rate, as we're consolidating their assets and growing our share of wallet. Every quarter our relationship with Ameritrade clients deepens. Their satisfaction increases, engagement rises, and they become more comfortable with our platform. The analogy I like to use is if you had a BMW your whole life and suddenly, there was a Mercedes in the garage; that first day, you'd be confused about the new features. Eventually, however, you would grow comfortable and recognize the value of what it can do. We're experiencing that with our clients. The more they use Schwab, the more they appreciate it. We’re building relationships and expectation of continued success with Ameritrade clients as they see how much we can offer to support them!

Thank you for your questions and engagement this morning. I want to leave you with just a few thoughts. We do not know exactly what will happen with policy or how markets will react to developments in the near term, as all those things are beyond 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 downs for more than 50 years, and they are turning to us now because we've earned their trust as a safe haven during storms. Our primary focus remains on serving our clients in all environments and for the long term. We are in a strong position 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.