And we are live. Good morning, everyone. Welcome to Schwab's Spring 2021 Business Update. This is Rich Fowler, Head of Investor Relations, and we're also
pleased to report that we're
still partially populated 211 Main Street in San Francisco. Although activity around here is picking up bit by bit and we as I believe to be the case with many of you are now more actively discussing How a General Return to Office Might Look and Unfold for Schwab. In the meantime, we hope everyone on the call and your families remain safe and well. We thank you for spending time with us today. Let's set the stage and get underway.
So joining me both virtually and literally Again, are Walt Benjure, our President and CEO Joe Martnetto, Senior EVP and COO and Chief Financial Officer, Peter Crawford. With the TDA integration process in full stride, it looks like Joe is probably going to be something of a regular around here at least for a while. And so we'll once again plan to spend a bit longer than normal with this call around or up to let's say an hour and a quarter, so these 3 can bring you up to date on life at Schwab right now, starting off with some prepared comments and following up with Q and A until it's time to wrap up. We will follow tradition on questions. We'll do so via the webcast console as well as the dial in.
So to help us get to as many folks as possible, we very much appreciate as always everyone sticking to a 1 plus follow on approach to asking questions. Walt will start us off today to talk about the strategic picture. Joe is indeed here to share an update on the integration process and Peter will review the recent financial performance of the combined organization and then move to discussing our current financial outlook before taking us into Q and A, which Jeff Edwards will moderate. Before that, let's spend one second on the wonderful all the words holding steady at that single riveting page, The main point of which is to remind everyone that outcomes can differ from expectations, so please keep an eye on our ongoing disclosures. Finally, the slides as we've begun doing will be posted on the IR site during Peter's prepared remarks.
With that, I think we're ready to get going. So Walt, over to you.
Thank you, Rich, and good morning everyone. Thank you for joining us. The Q1 of 2021 was rather remarkable on many fronts, highlighted by record client engagement, record growth in core net new assets and new brokerage accounts and of course record financial results also. The results were made possible by the powerful combination of a surge in investor enthusiasm As well as the no trade offs positioning we've worked so hard to achieve in recent years. And yet, I think even as we celebrate the Successes of the Q1, we also recognize that the quarter brought challenges as well for our systems, for our service levels and for our people.
In many ways, the timing though of the Extraordinary client engagement and the related volumes of the Q1 was a blessing to us. Where in the past, we might have thought, For example of technology capacity needs as measured in multiples of peak prior volume and build our infrastructure to support that. I think we now recognize that this approach was likely not the correct path. We now realize that as we progress in the integration with TD Ameritrade, we need to think about capacity in an entirely different light. By taking advantage of the scalability of modern technology including the cloud in order to Really access what I would call massively scalable capacity at a moment's notice, so that we can ensure that we're there from a technology standpoint to serve our clients.
Our commitment to remaining the leading provider of Scaled investment services in the industry never waivers. And despite some of the service challenges we faced in Q1, Our mystery shopping of competitors, even greater service challenges throughout Q1 validates that we remained a leader. Now Nevertheless, we hold ourselves to a higher standard, a standard of no trade offs and we're continuing our pursuit of this aspiration. Our strategy remains It's client focused and successful as our Q1 results validate. So the environment in Q1 was friendly to investors, I suppose apart from certain bondholders.
Equity markets climbed and the yield curve steepened as confidence grew around a post pandemic recovery in the economy. And that led investors to a positive sentiment on investing, a positive sentiment that rivals their most optimistic view since the pandemic began early in 2020. The combination of positive investor sentiment, strong equity markets and our market leading strategy and positioning led to record levels of net new assets and new brokerage accounts. You can see here that core net new assets were Almost $150,000,000,000 in the quarter. That's double the level of Q1 a year ago and higher than the entire 2016 calendar year.
Similarly, new brokerage accounts were a record dollars 3,150,000 in Q1. That's higher than the entire 2020 calendar year and Approximately double the full calendar year levels from recent years. I think what's important when looking at metrics like that is that These come as a degree of trust from our clients and that's both humbling to us as well as a clear message of the confidence that our clients have in Schwab serving their investment needs. Given the extraordinary trading volumes during the Q1 and all the related Publicity, it can be easy to ascribe our Q1 results to a one time trading surge. However, I think when you look closely at our internal metrics, it shows that there's a lot more to Q1 than simply trade volumes.
Clients engaged with us at record levels in a variety of areas including our stock slices offering, working with our Financial planners, as well as taking advantage of margin lending, to be able to leverage investment opportunities for the long term during the growing equity market that we experienced. Both our Investor Services and Advisor Services units set records for net new assets during Q1. Investor Services also set records For new to firm household acquisition, we exceeded 1,500,000 new to firm households during the quarter. And continuing our appeal to younger investors, about 70% of those new to firm households were people below the age of 40. Our overall competitive position remained very strong.
We continued with about 30% of our flows, Our inflows coming our net inflows coming via transfers from competitors that's similar to the level that we were in Q1 of last year. And our transfer ratio, a solid measure of our competitive position remained quite strong at 1.6:one. One of the things that comes up a lot particularly after an extraordinary quarter Like Q1 is we're asked whether this is a new normal I guess for trading activity. And if it's not, What do we think that new normal will be? And of course, when might we reach it?
And the short answer, of course, is that no one really knows. As we moved into March and now well into April, we did see client engagement moderate to some extent. It still is elevated. But it does appear at levels that may be more sustainable for the long term. Our view is that with the move to 0 Equity commissions as well as the popularity and ease of mobile investing and mobile trading, It implies that we're going to see an overall higher baseline level of trade volume that we might have seen in the past.
At the same time, our experience suggests that we're Likely to see periods of spikes in trade volumes, but often followed by slowdowns in activity, as has gone on for many, many years in the investing world. I think when I look at Q1 what is really Critical to me is that, where we experienced one of those spikes in trading volumes and asset Flows and new client household acquisition, they also create an ongoing growth opportunity. They're not simply about one time revenue benefits. Go back to my example adding 1,500,000 new to firm households. That type of strong organic growth in the Q1 That should contribute to ongoing revenue streams that should benefit us for years to come.
And That's why it's so important to be there for our clients to lead the industry in phone availability and speed to answer, even if it's during the most challenging times as part of Q1 was. These periodic unique opportunities to acquire outsized levels of clients, They often come up unexpectedly. They're really not something you can necessarily anticipate and yet they create opportunities that should positively impact our financial results for years to come. So just taking a look maybe a bit more tactically at the first quarter. The metrics here on Slide 10, they paint a picture of just how engaged our clients were.
And I think they provide further support on just how critical it is to offer an omnichannel approach to acquiring and serving clients. In addition to record levels of mobile and web engagement, we saw call volumes spike during the quarter to truly unprecedented levels. And of course, as all of you are well aware, trade volume records were set repeatedly throughout the first Now as I referenced briefly earlier, throughout Q1, we utilized mystery shopping to evaluate the Call responsiveness of our competitors and be able to compare it to ours. And although there were definitely times that we were not Satisfied with our speed to answer on calls due to the extraordinary volumes. Based on the mystery shopping by 3rd party, we fared well relative to competition, with our speed to answer on average noticeably faster than most competitors.
At the same time, we were diligent in our efforts to address client service volumes throughout the quarter. We implemented a series of strategic as well as tactical actions. And by quarter end, we'd largely solved the challenges of answering client calls in less than a minute. Now that's still a little bit longer And we historically have targeted and averaged, but we did get that speed answer down under a minute as the quarter drew to a close. We also recognize though that we retain our value clients by serving them well, by serving them in the manner that we want to be served, really the essence of our through client size strategy.
And maybe to draw a parallel, even in the most challenging of times, We're committed to not simply having the nicest house on a block of dilapidated houses. An argument maybe that we could make about our client service experiences in the Q1. But our goal is really to have the nicest house on the nicest street and on the nicest block in town at all times. Our clients frankly deserve nothing less and We aspire to deliver that degree of service to them. So let me move back a little bit more to the bigger picture.
Our 3 company wide strategic initiatives, of course remain intact scale and efficiency, win win monetization that benefits And as I stated in early February, Each of the acquisitions or project investments or product introductions or enhanced capabilities that we previously announced or are working on, They all fit clearly into one of these three initiatives. So taking a look As I think you all know, we are passionate about scale and efficiency. And we're passionate about it Because the firm that can deliver an industry leading level of service and client experience at the lowest operating cost maintain strategic advantages. And you can leverage those strategic advantages to both better serve our clients as well as at the right times to take actions that can capitalize from a competitive standpoint. When it comes to scale and efficiency and the metric here, our goal is to continue to push this operating efficiency metric lower and lower.
That enables us to both reward our clients with ever greater value, but also to reward our stockholders with strong margins and Profitable Growth. And I know Joe is going to discuss here momentarily, we're continuing on our progress toward the TD Ameritrade integration and The same time, we maintain all of our existing efforts around the digital evolution of our firm overall. So looking at win win monetization, we're progressing on a series of tracks. We're actually not going to spend a lot of time on that this quarter, But we'll certainly be spending time in upcoming quarters throughout 2021 and into early 2022 on a number of our efforts here. One area of focus in 2020 and then carrying over into Q1 of 2021 was further developing our investment solutions and advisory capabilities.
We start to see some dividends paid on that in Q1 with about $19,000,000,000 in flows into our investment advisory solutions. Inside that, I was very encouraged by one item in particular over $1,000,000,000 in fixed income flows to our Wassmer Schroeder unit that was just opened up to our clients on the fixed income side. We also had about $11,000,000,000 into our Schwab ETF franchise. So that was also very encouraging. As I mentioned, I'm going to share a lot more on our win win monetization efforts as this year progresses and we move into 2022.
We also continue to see positive responses to our client segmentation efforts. Again, I'm going to talk a lot more about that as the year goes on, because in the Q1 of this year, we largely avoided introducing new services into our clients so that our people could focus on client service and our clients had enough going on at that time without new segmentation introduced. But even then our efforts over the past year have shown some success particularly on the lending side, on the liability side of our Our mortgage originations grew to about $20,000,000,000 in the last year And our pledged asset lines were up over 60%. So client usage of our capabilities on the lending side of the balance sheet continued. Again, on the big picture, as always, our strategic priorities revolve around our commitment to a no trade offs approach to serving our clients.
And by that we mean value, service, transparency and trust. Those are The hallmarks of our commitment to clients, they're the north stars that we follow as we execute on our strategies. So let me go ahead and summarize here. Q1 It was very unique. It was a unique and extraordinary quarter.
On the negative side, unprecedented industry wide volumes meant that As I shared, we did not always live up to the expectations we have for ourselves or that our clients have for us. On the positive side, we saw that record client engagement leading to record client volumes, record organic growth and record financial results as Peter is going to discuss. I think what's important though particularly after a quarter like Q1 of 2021 is that we remember that our view at Schwab is never quarter to quarter. We're always focused on the long term. We recognize that the path forward will always have mountains and valleys.
That's just the nature of the Investment Services business. During those periodic times of environmental upheaval, our strategies, our priorities, our strategic initiatives, They remain consistent and they remain intact. I often say that, if it takes more than a few words to explain your company's strategy, You don't have one. And at Schwab, you can be confident that we do through client's eyes. Yesterday, today and tomorrow no matter what goes on in any given quarter.
So Joe, let me go ahead and turn it over to you to walk through some of the where we are with the TD Ameritrade integration process as well as Some of the impact of these record client volumes on our planning for that.
Hey, great. Thank you, Walt. And hello and thank you to everybody in the investment community that's joining us this morning. I'm sure you'll remember that back in the winter business update, we weren't Quite in a position to provide an update on integration timing. So I'm here today to provide that update to offer some thoughts on what integration will look like and then also update you on some of the projected synergies.
Since this transaction was announced, we've been through a pretty remarkable period, which has led to incredible growth. You've read or heard a lot of the metrics already and I'm not going to repeat them. While this kind of growth is great for the long term franchise value, we've needed to reframe the integration planning in light of this level of activity. So for example, our original deal model at the time of acquisition assumes that we needed capacity to be able to handle about 12,000,000 trades. Well, we broke through that $12,000,000 mark with a record high of $12,300,000 in Q1 and had several other days that were pretty close to that.
And while we were able to maintain pretty solid availability, we definitely felt strains in our systems and our service levels. So we've updated the integration plan to address the higher capacity needs in both systems and service. But as I said, these are good challenges to have. Revenues from the TDA business have also been substantially higher than our original deal model indicated as a result of the higher volumes and the very strong organic growth that we've seen on the TDA platform over the last 11 months, suggests that the long term revenue potential of the business has increased as well. The revised integration scope covers 3 main areas.
First, as Walt referenced, We're building a massively scalable back office. We've now incorporated the completion of the application modernization program into our conversion timeline. That alone gets as much of our infrastructure decoupled from the mainframe and configured to run-in both private and public cloud. We expect we'll be using more public clouds for future production environments to allow us to manage infrastructure costs as well as to provide capacity for activity spikes Sure. Growth.
2nd, we're adding a number of client capabilities to make them available upon conversion. With the growth in clients and accounts, the additional digital and self-service capabilities will help to limit excess demands on our call capacity and ensure a smoother transition for TDA clients as well as adding new functionality for existing Schwab clients. Much of this work was on our post conversion roadmap, but we've determined it's necessary to ensure a smooth client conversion. And finally, we're continuing to make investments in process automation to drive scalability into our operations. At the higher volumes, more of this work has a positive payback and the work will also limit hiring necessary to support growth in the future.
You might say that we're addressing some near term conversion challenges, but in doing so, we're creating an even better client experience for all clients, while also increasing scale for the long run. The additional scope pushes us out to the long end of our initial timeframe and we now expect to complete conversion within 30 to 36 months. We also expect that the work will cost more than originally estimated given the increase in scope, pushing the total integration budget up to $2,000,000,000 to $2,200,000,000 Roughly half the increase Roughly half the increase is driven by the volume changes alone and the remainder is the additional work that we brought into scope to provide a superior client experience and mitigate some of the future risks to our service platform. So I'll wrap up by reiterating our confidence in achieving the Synergies that we previously shared delivering on 25% to 35% of the total expense reduction in the 1st year after deal close. And with the added growth and some additional opportunities on the revenue front, we now expect total synergies to reach to $4,300,000,000 to $4,800,000,000 which is an increase of $800,000,000 from our original estimate.
Some of this is coming from the franchise growth beyond our original model, largely impacting the IDA repatriation and some from some newly sized opportunities like additional wealth management, order flow revenues, Securities Lending and Pricing Harmonization. Roughly 40% of the increase is coming from these newly sized areas and 60% from franchise growth. So let me take a minute to summarize all of the financial impacts. We've increased the upfront integration cost estimate by $400,000,000 to $600,000,000 and we've increased the recurring revenue synergy by $800,000,000 And since the announcement of the transaction, we've seen revenues from the TDA platform exceed the deal model by about $2,000,000,000 We're still within our original timeframe even with the added work. We're committed to achieving the cost synergies and looking to outstrip our original revenue synergy estimates.
The upfront cost is higher, but for that added cost we'll have a more scalable technology platform, a stronger client offering at conversion and a more scalable operations platform to support future growth in the original integration model contemplated. We believe we're making the right trade off decisions for the future of the firm and for enhancing long term shareholder value. Now, I'll turn the mic over to our CFO, Peter Crawford.
All right. Well, thank you very much, Joe. It's great to see you here again. So Walt talked about the Unprecedented level of client engagement we're experiencing about the strong momentum we have in the market as demonstrated by record new accounts, new to firm retail households and core net new assets and about the steps we're taking to improve our service and press ahead on our strategic priorities around scale, Win Win Monetization and Segmentation. And then Joe, of course, talked about where we are with the TD Ameritrade integration, some of the challenges we're tackling, But also quite importantly, our excitement and our confidence about both the financial and the strategic benefits the acquisition has brought and we think we'll continue to bring.
So in my time today, I'll talk about how we're able to translate that record client engagement and record business momentum into record financial results as well. Also provide an updated outlook for the rest of the year rolling forward the mathematical illustrations we shared back in February, which reflected difficulties in predicting the evolution of client engagement in the near future. What you'll hopefully hear is that this is a company that is thriving, a A company whose actions over the last several years as Walt mentioned are combining with some long awaited tailwinds to produce strong operating and financial results. While we don't know how long this heightened level of client engagement will last nor the future path of interest rates, we feel quite confident in our ability to continue growing and continue producing enviable financial performance regardless of the environment, even as we make appropriate investments in building for the future, supporting our clients and capturing opportunities to serve them better. And that's what fuels our optimism and our excitement about the future.
So let's talk about some of
the factors that contributed to our record financial results in Q1. It was a quarter where nearly everything lined up quite well. An improving macro environment highlighted by higher equity markets and finally interest rates starting to move higher as well. Continued positive investor sentiment, but in the higher margin balances and trading And our no trade off positioning producing strong organic growth as indicated by nearly $150,000,000,000 in core net new assets and over 3,000,000 new accounts. When robust client engagement, a constructive macro environment and strong organic growth come together, Very healthy financial performance should be the result and indeed it was.
Given that our reported financials didn't include TD Ameritrade in the Q1 2020 and consistent with the outlook we shared at the winter business update, we are comparing our results here instead of the Q4 of last year. Revenue increased 13% sequentially, driven mostly by a 42% increase in trading revenue due to higher debts or daily average trades and also by a 6% increase in net interest revenue as higher interest earning assets more than offset a 7 basis point decline in net interest margin due to reinvestment rates that have improved, but were still below our overall portfolio yield. While asset management and admin fees increased by the slight decrease in money fund fee waivers due to a drop in short rates. Our expenses increased 9 Percent sequentially, reflecting seasonal items such as payroll taxes and compensation, which we anticipated and called out in the waterfall chart. You may call we shared back in February.
And higher volume related expenses, which frankly exceeded our expectations, but are a fraction of the revenue associated with those activities. So I think you can say the expense variance is definitely a high class problem, although I'd argue it's probably not really even a problem at all, given the revenue associated with it. With 400 basis points of operating leverage sequentially, Our pre tax margin increased 6 points and our adjusted pre tax margin increased 2 points to over 47%. Our return on tangible common equity climbed to 24%. And all of this, All of this in the midst of an environment where interest rates are still at extraordinarily low levels.
This I think demonstrates the durability and resilience of our business model. We've all seen how well we can perform in a more normalized rate environment. But with greater diversification now via trading and asset There are simply more ways to achieve the same strong level financial performance. How was the income statement? Let's turn our attention to the balance sheet.
Our balance sheet grew by 3% sequentially, reflecting a roughly $9,000,000,000 increase in client cash on our balance sheet, nearly $7,000,000,000 of financing activities in March that we undertook. And that was partially offset by a roughly $4,500,000,000 reduction in AOCI reflecting the impact of higher rates on the mark to market value of our available for sale portfolio. Now the composition of our balance sheet changed somewhat as well. We saw roughly $10,000,000,000 increase in margin balances mostly on the TD Ameritrade platform and a 7% increase in bank loans as clients continue to capitalize on the exceptional mortgage and pledged asset line rates offered by Schwab Bank. We benefited from the market's appetite for yield and added roughly $4,000,000,000 of debt to supplement parent liquidity and and $2,250,000,000 preferred equity to increase our capital levels.
And finally, You'll see we issued a further $600,000,000 in Series J preferred earmarked to redeem our Series C effectively lowering the coupon by 155 basis points. And with all of that, we increased our apparent liquidity to over $14,000,000,000 giving us more funds to support our clients' day to day trading needs and support our liquidity coverage ratio obligations. And our Tier 1 leverage ratio climbed to 6.4% within sight of our operating objective of 6.75% to 7%. Now the winter business update, we shared 3 so called mathematical illustrations, demonstrating how our 2021 financial performance might unfold given changes in trading, margin balances and client cash balances. And we did that of course Given the difficulty in predicting exactly how client behavior would evolve from the then record activity levels we saw in Q4.
Those three illustrations shared a set of common assumptions around normal equity market appreciation, relatively stable interest rates that followed the forward curve at that time. The timing of our initial migrations from the BDA to our balance sheet and our level of CapEx. And as we've discussed, the macro environment has started the year markedly better than contemplated in those illustrations. Now as you may recall, where the three illustrations varied is in their assumptions about trading, which we flexed plus 20%, minus 20% and flat. Margin balances, which we adjusted plus 10%, minus 10% and flat and then client cash on the balance sheet also plus 10 minuteus 10 and flat excluding the IDA migrations.
Now the year started out with even more activity than the upside illustrations had assumed with Trading and margin balance is up 45% 19% respectively. And cash balance is trending consistently with that plus 10% illustration, 1 quarter of the way, of course, through the year. So not Surprisingly, therefore, your revenue, expense and adjusted pretax margin all start off the year higher than the outcomes of that upside illustration. Now given the strong start to the year, we thought it was appropriate to roll forward the illustrations we shared 2.5 months ago. As you've seen our reported metrics, there has been a lot there has been a bit of softening of client trading while margin borrowing growth has paused for a little bit.
Whether these trends are temporary or not remains to be seen. So just as we did at the winter business update, we're once again sharing with you three Updated Illustrations. These illustrations also have a set of underlying assumptions, several of which mirror what we shared previously, including rates that follow the current forward curve, equity markets that grow modestly from here and base securities lending revenue that's consistent with recent levels. We've also now made growth in client cash balances a fixed assumption across all the illustrations rather than a third variable. What we vary once again is trading and margin balances with Q1 rather than Q4 as our new jumping off point, but the same variation, plus and minus 20% in flat for trading and plus and minus 10% for and flat for margin balances.
Each of these three illustrations would produce different levels of revenue growth relative to our annualized Q4 revenue. So Q4 to be consistent with what we shared previously. And you can see that depending on how the year unfolds, We could see revenue growth of 18% to 20% in the first illustration to a revenue increase of 7% to 9% in the third illustration. And adjusted total expenses will also vary of course from 5% to 7% growth off our annualized Q4 number. Now this is of course a few 100 basis points higher than what we shared at the winter business update.
But let me assure you that there has been no change, Okay. No change in our expectations for synergy realization in 2021 or Importantly, in what we're seeing in terms of core expense growth. Rather the higher expenses are entirely function of higher volume related costs, including a couple of percentage points related to higher trading costs, including pass through fees and a couple of percentage points related to higher bonus funding from the higher profitability relative to the plan we set at the start of the year. And across all three of those illustrations, we'd expect an adjusted pre tax margin of at least 46%, even as we bolster spending to maintain service levels. Now these illustrations, I think, continue to demonstrate the tremendous Operating leverage we have on our business.
Due to the nature of the drivers being flexed, the implied profit margin on the incremental growth Across the 3 different scenarios is 80% or more, which is especially noteworthy given our need to support very strong organic growth we've seen to start the year. With higher reinvestment rates and the early growth in margin lending, those mathematical illustrations I Share will result in a net interest margin or NIM in the mid to upper 140s for the year. And an average yield on our available sale portfolio that is relatively stable over the next couple of quarters before perhaps increasing a bit in Q4 if Prepayment speeds, easy for me to say, is slow as many expect and therefore premium amortization declines. With the usual caveat that the exact trajectory of NIM is influenced by a number of factors including how soon and to what extent prepayment speeds Flow due to the increase in rates, the trends in reinvestment rates, the growth and composition of interest earning assets including margin utilization and what happens with securities lending. Our number one priority for capital management continues to be enabling the continued growth of our business, supporting our clients who choose to entrust us with their cash allocation.
Our March issuances boosted our Tier 1 leverage ratio to 6 0.4%, still below our operating objective of 6.75% to 7%, but our highest level in a year and well above the regulatory minimum. Going forward, as I mentioned, we've earmarked $600,000,000 to redeem our Series C preferred and we'd expect to begin onboarding the First of the IDA migrations in the second half at the end of the second quarter. Maintaining sufficient liquidity is also critical as the industry was vividly reminded during the January trading frenzy. The primary driver of our need for liquidity is supporting our clients' trading activity as well as maintaining a liquidity coverage ratio over 100%. And as well positioned as we've been, we decided to further supplement our liquidity position out of an abundance Caution with the debt offering and utilization of our commercial paper facility.
Let me close with a few thoughts. A year ago at this meeting, I said our objective was to emerge from this crisis in a stronger position than when we entered it. And while the crisis is by no means over, I think it's fair to say that we are indeed a more potent, a more resilient and a more competitive firm than we were 12 months ago and one with an even more all weather business model. But we're as Walt mentioned, we're not taking any victory laps here. I think both Walt and Joe talked as much or more about the challenges we face and the opportunities before us as they did about our past successes.
And those of you who have followed the company for a while know that's very typical for us. We spend a lot more time looking towards the future than celebrating the past. That's how we continue building the company that delivers on the high expectations of our clients, our employees and our stockholders. One that continues to win in the market, continues to drive strong top line growth and continues to improve efficiency and deliver strong financial performance. That's how we deliver for both clients and stockholders over the long term.
With that, Jeff, let me turn over to you to facilitate our Q and A. Thank you.
Great. Thank you
so much Peter, Walt and Joe for your remarks today. Operator, let's go ahead and open up the lines and start Q and A. Can you remind folks how They may ask a question.
Yes. Thank you. We will now begin the question and answer session. Like our first question comes from Dan Fannon. Your line is open, sir.
You may ask your question. And please check your mute feature.
Thank you. Good morning. I was hoping you could provide a bit of a breakdown of the incremental revenue synergies, the 800,000,000 that you quantified it in the various buckets that they're coming from. If you could provide a little more color there that would be very helpful.
Sure. So I
don't know that we're going
to get into a lot of detail beyond what we've already articulated, but I think about 60% of it's coming from just the overall growth in the size of the franchise. So bulk of that's going to get driven by The deposit movements about 40% coming from some of the items that we didn't have as much clarity around on in terms of sizing. So Things like wealth management, asset management sales, securities lending, some of the trading Revenue flows, fees, those kinds of things are making up the remaining 40%. So again piece of it's coming from the Just the overall growth we've experienced in the franchise, a chunk of it's also coming from things that we now have a clearer vision in. I would say that we're going to try to as always accelerate as much of the opportunities as we can, See what we can recognize before that client day 1 conversion actually happens.
Right now, I don't think we're in a position to provide detailed kind of update, but I'm sure Peter will be continuing to update everybody as time goes on and how to think about factoring that into the ongoing updates he's providing around earnings and revenues.
Great. Thank you. And then just as a follow-up, Walt, just wanted to get some No color around the sustainability and activity. And obviously, we've seen some normalization or slowdown here in April, but you talked about Getting comfort that we're maybe getting closer to a flattening of that. So maybe talk about what you're seeing, whether that's the profile of the new accounts that have come on board or the kind of manner in which your clients are engaging with your platform that gives you comfort that we are in It's more of a stable period.
Sure, Dan. I mean, I don't know that I can Commented when it comes to trade volumes. But I think what you have and this is going to be somewhat consistent with Joe's comment A response to your first question is that the base is much larger. And so when we look at historical metrics around Whether it be trade behavior or investment behavior or cash balances that clients maintain, The franchise is just larger and as a result, I think it gives us a degree of confidence around future performance of the firm. We definitely have are tracking metrics around the change in client behavior that began a quarter or so after we moved to 0 commissions.
It takes time for that to work through the system and consumers to understand what has changed even though we all live it on a day to day basis. And the trend lines that we've seen, if you take out a bit of the spike that occurred earlier in Q1 around some Very, I think, unique behaviors and unique issues. If you sort of take that spike out, You see a trend line that is relatively consistent since the move in to the 0 commission. So I think the combination of those two things are what give us the confidence.
Thank you.
Thank you. And this question comes from Steven Chubak. You may ask your question. Your line is open.
Hi, good morning. So, maybe for my first one, Peter, I have a meaty question on PremiumM, if you'll indulge me. You had a great slide at the winter business update highlighting Drag had been at the securities on the securities yield, but it's more challenging converting that into an NII dollar Just because you continue to grow the MBS portfolio at a really rapid clip. And if we look at the 2020 premium M, it was More than $1,000,000,000 higher than 2019. I think even if we adjust for growth, the Premium M headwind is still in the range of about $800,000,000 or so.
So prepayments fees normalized close to 2019 levels. How should we think about the NII benefit in dollar terms? Is that 800,000,000 A reasonable expectation. And how much of that benefit contemplated in the NIM guidance you gave on this call for the remainder of the year?
Okay. You are right. That is a meaty question and a difficult one to answer in this context in a short period of time. So let me maybe take a step back and talk a little bit about premium amortization. So you're right that premium amortization is driven by, I would say, 3 factors.
1 is just the overall growth in the balance sheet. 2nd is the fact that we've been With low interest rates, we've been buying more securities that actually have an embedded premium in there and therefore we need to the way that the accounting works is we amortize that premium over time. And then 3rd is the acceleration of prepayment speeds, which has accelerated the amortization of premium on some existing securities. So while we expect some degree of premium amortization, we wouldn't expect that it was going to go down to 0 or anything like that. If you look back on from the numbers from roughly Q1 to Q4, that acceleration component, I'm looking at Jeff, I say it was about a 30 or 40 basis point increase, if I recall on the available for sale portfolio somewhere in that range in terms of the impact of that.
And I would say in the Q1, I think the numbers were plus or minus a few basis points from that. We would expect with the increase in rates, we would expect that those That pay down activity to slow, and therefore that accelerated portion of the premium amortization to slow down as well. It typically takes a few months between when you see an increase in in rates and that happens. And so our expectation is this is something that will begin to be reflected in our Overall, available for sale yield as well as our net interest margin more in the second half of the year than in the second quarter. And it is contemplated in those illustrations that we shared with you earlier in the deck.
Okay. Thanks for all that color, Peter. And just for my follow-up, just on the bank lending opportunity that was touched on a bit more in today's presentation. You talked about the strong growth that you've seen. I think the balances were up about 30% year on year, noting just more competitive pricing on mortgage and pledged asset lines.
At the same time, your loan penetration is still well below many of your wealth management peers. I think you're at about 30 to 40 bps First it appears at 100 basis points plus. And how do you think about the opportunity to grow the loan book? And what penetration rate do you believe is achievable over the long term as you start to prioritize this a bit more.
Yes. It's a great question. So we think there's a lot of opportunity there to grow the loan book with both pledged asset lines and the mortgage product. If you look at the rates that Schwab Bank is offering today, they are even the rack rates are exceptional that we give. We have something called investor advantage pricing, which It gives our clients even better pricing depending on how much business they have with us.
And when you add those or subtract those discounts From the RAC rate, the pricing is truly spectacular. And it's been great the last year to seeing the incredible enthusiasm and awareness and confidence that our clients and our client facing employees have had in Schwab Bank and had a very good experience over the last year. And I certainly remain very hopeful and I think we all remain very hopeful that as the market shifts from more of a refinance market to more of a new purchase market that That credibility and that awareness and the experience, the more of our clients, more of our client facing employees will be We'll turn to Schwab Bank for their lending needs. And if you look at the penetration, as you say, among some of our competitors, the wirehouses And others, you can see penetration rates that are multiples of where we are today. And that Those products are not only helpful for us financially and offering us a better spread to the securities that we'd otherwise buy, but they're really important to us strategically as well and that They keep our clients from needing to turn to large banks for their lending needs.
So we're very enthusiastic about that opportunity. And that's one of those opportunities that frankly also see on the TD Ameritrade side as well and are very eager to pursue that and make them aware and have access to this capability as well. I just want to
jump in and make a very quick comment if I could on the part of the question that revolved around GOL. One of the things that maybe is a bit unique about the way we approach things at Schwab is we tend to not put goals out there for given products or given solutions because our experience is if you put a goal out there then well meaning people work really hard to achieve that client solution goal or product goal. And that's not necessarily through client's eyes. That's sort of through the company's eyes. And so rather than putting goals out there, our approach is to try to design solutions that are Great for clients.
And then if clients agree, then they utilize those products and solutions in a significant way. And if clients don't agree, then they don't utilize them and that sends us back to the drawing board. So, our approach is sort of the opposite of a lot of organizations. We come at it from the perspective of we don't want to establish a goal. We want to build the best solutions we can and then clients will tell us if we've achieved that.
And if we haven't, We go back and work to fix it rather than having it driven off a top down goal.
That's great. And thanks Walt for that additional perspective.
Thank you. Our next question comes from Ken Worthington. Your line is open. You may ask your question.
Hi, great. Thank you very much for taking my question. There's a lot of interesting cryptocurrencies, particularly from younger, smaller investors. What are your thoughts in offering crypto products? And how are you thinking about product capabilities that are important for your existing customer base today, balanced with the free crypto trading that might be attractive To a newer younger Schwab investor base for the future?
What would We are looking very closely and I think cautiously at the crypto market. We can certainly see some of the client excitement particularly with certain segments of the market. And I would expect as greater clarity is recognized potentially by regulators that we would consider offering capabilities in the crypto space. I think all of you would probably say that if we if Charles Schwab, the company decides to Participate in the crypto market. We will be highly competitive.
We will be disruptive and we will be client oriented. I think in the meantime, additional clarity from regulators would be important before we would consider offering a retail type trading experience on crypto. There are ways to invest In crypto today, some of which are available in a derivative basis through Schwab. And of course, we're keeping our eyes closely on whether there will be investment oriented product whether it be ETF or others that will be delivering crypto investing to a larger part of the market than can get it today via some of the funds that are out there, but it may be available on more limited basis. So we're watching I guess in summary, we're watching closely.
We recognize a bit I'd say well what's going on. We would like to see more regulatory clarity. And if and when that comes, you should expect Schwab to be a player in that space in the same way it has been a player in other investment opportunities across the spectrum.
Perfect. Thank you. And then I appreciate your comments about sort of a new normal. How should we be thinking about Minimum and maximum cash balances relative to total customer assets. To what extent are historic highs and lows And averages still reliable for what Schwab looks like today?
And any thoughts you have on the direction of client cash balances versus total customer assets, given the market conditions, if they remain robust? Thank you.
Yes. So I'll take that one. Thank you, Ken. So this is the age old question, where will cash balances go and What's the right ratio and what's the equilibrium level? And I think you've seen in our history those balances, to contend to move around a fair amount.
And You've seen the same thing if you look at the legacy TD Ameritrade business recognizing a bit of a different cash strategy. The numbers aren't totally dissimilar. I'd say a couple of things. So first is The advisor segment tends to keep less uninvested cash than the retail segment. So you as those different businesses grow Different rates, you might see some differences there.
But more broadly, what the biggest factors that influence cash balances are Really it's around the attractiveness of the alternatives and there's really 3 alternatives. So it's how attractive the equity markets and that is a function of investor sentiment, which was clients were moving out of the equity markets a bit last year and thus far this year have been net buyers of equities. 2nd is the relative attractiveness of money funds, which of course is a function of short term rates In a period of time like right now where money fund yields are down to a basis point, we see more of a de sorting process as clients end up being net sellers of money funds and are content to leave that cash on the balance sheet. So you tend to see higher cash allocations in a period like that. And then the third is the relative attractiveness of the fixed income markets, which is Yes, I would say less somewhat less impactful, but still can influence the level of cash allocation.
And so as interest rates increase, more clients may Avail themselves of the fixed income markets as well. So it really is very, very environmental. And then of course there's obviously a denominator effect of what's happening with their overall account balance. So we've talked in the past around sort of that 11% to 12% range. It's going to go above that and it's going to go below that over a period of time based off of those environmental factors.
Okay, great. Thank you very much.
Thank you. Our next question comes from Devin Ryan. Your line is open. You may ask your question.
Great. Good morning, everyone.
I want to come back to the conversation you were having with Stephen a minute ago on the premium amortization. I think it's an important topic. And so Maybe from just slightly different angle, if we look at I think the Q4, it looks like I think there were 60 basis points of observable Premium AM and it seems like that increased a bit in the Q1. And so what I'm just trying to get at here is if rates stay where they are now, I appreciate there's a little noise over the next couple of quarters, but it would seem that there's a stair step higher heading out of the year if rates remain at current levels. So I don't know it possible to quantify what that might look like just as we work through or maybe reverse some of the premium AM that's been affecting The NIM over the past really past year.
And then also in the NIM outlook, what are you expecting for sec lending contribution?
So let me take the second one first because that's the easier one. So the 2nd lending contribution we're assuming is consistent with the levels that we saw in the last a couple of quarters that we reported. So in terms of premium amortization, I'm just not in a position to be able to quantify exactly how many Points of NIM lift it's going to equate to. But I will say, if rates stay where they are, one would expect that the level of refinancing activity and pay down activity that we've seen over the last year is going to moderate. We're not certainly not the only ones who believe that.
I think many of our the banks have been talking about a similar dynamic. That does tend to happen with a little bit of a lagged effect as initially a lot of consumers end up Respond to higher rates by rushing to actually refinance and a lot of the mortgage brokers and the banks sort of rushed to get through as much of their pipeline as they possibly can. So, I'd expect as I said, I think I'd expect this to become a tailwind and be Appretive to our NIM in as we get into the latter part of this year and then heading into 2022 as well.
Yes. Okay. Thanks, Peter. And then quick follow-up just on the BDA yield, maybe some of the moving parts in terms of Where we are now and where that might bottom and then just thinking about kind of the ability for that to start to work its way higher inputs to drive that?
Sure. So I think you saw you've seen in the reported metrics the overall yield on the BDA has come down just a bit. That's a function of the rates that are the roll off rates and where those are. I think the most recent roll off rate I want to say is in the 160s range. If you look over the next 12 months, I think there's about $20,000,000,000 if I'm not mistaken that's rolling off.
I think the new investment rate depending on how far where we go out on the curve in terms of the fixed allocation and of course it's roughly eightytwenty to floating allocation and the agreement is in the probably 70 basis point to 115 basis point range. Of course, again, these numbers change because they're tied to the benchmark rates. So they can change day to day and certainly week to week. But and then of course As we get into the second half of the year, the new investments will be impacted because when we bring it on, The balance is most likely from the IDA onto our balance sheet. And so that those IDA both the balances as well as the rates will be impacted by that activity as well.
Okay, great. Thanks, Peter.
And Devin, Worth noting that there is some additional detail available on the IR website as well as in the appendix of the materials that have been posted on the BDA.
Thank you. Our next question comes from Will Nance. Your line is open. You may ask your question.
Hi, everyone. Good morning. I was wondering if I could ask a question on some of the asset management initiatives. I know you didn't have too much in the prepared I guess just on the 3 verticals that you've talked about on monetization in the past, so somatic and direct indexing, I know we're kind of waiting on new products there. But In fixed income, you highlighted some of the progress that you've seen.
Just wondering if you can maybe talk as well on some of the retail It's charging for shelf space aspect of the monetization strategy. And maybe just a long term more financially oriented question, The runoff of some of the higher fee rate products in OneSource and just general fee rate compression has kind of been a structural headwind over a long period of time. When you think about all of these initiatives, do you think and recognizing a lot of your comments earlier about not wanting to set explicit goals, But in your mind, are these opportunities large enough that they can maybe offset some of the structural pressure that we've seen and help drive asset management revenues Kind of grow in line with client assets over a longer period of time. Thank you.
Yes. So I think the answer is yes. But it does require a bit of a different way of thinking than we have in the past. So you've mentioned a couple of items that have application, certainly thematic Investing, which we expect to talk about quite a bit more over the course of the next year or so and direct indexing, which we expect to have similar conversations with you on are going to have an impact. We think that there are a series of in helping self directed investors do much more leveraging some of our rebalancing and tax loss harvesting engine.
So that's a significant one. When it comes to 3rd party asset management, We're in the early stages of an evolution that I would categorize With deference to the companies I'll reference, a bit of a transition at Schwab from maybe of a warehouse shopping model to more of a stitch fix type of model where we expect to have deeper relationships with a few select very high quality partners. And they would be partners with great track records and low expense levels, low relative expense levels consistent with the way we philosophically think about investing at Schwab. And I think That along with some of the other things I mentioned, we believe are going to have a meaningful impact from a revenue standpoint and give us the opportunity to address the headwinds
that you referenced.
Got it. Thank you for all that detail. And then maybe just one more tikitat question for Peter on some of the balance You're talking about kind of some actions that you took on the liquidity front. I think over the past couple of quarters, there's been a bit more of a buildup in call it Whether it's cash on the balance sheet, cash in the broker dealers or some of the trading activities. Just wondering how you kind of felt about the mix of the balance sheet Towards the end of the period, where are we in the process of kind of catching up to some of the outside cash balance growth that we've seen?
And how are you kind of thinking about Deployment plans over the next couple of quarters, obviously recognizing a lot of moving pieces with some of the BDA onboarding.
Yes, great question. So when you look at the cash on a consolidated basis, I think it's important to think about it actually in maybe 3 different buckets, because it's there's cash at the broker dealers, which is the segregated cash, which is a function of The client growth of the cash in their account minus whatever we're lending out in the margin lending book. So that's influenced By the growth in margin lending. There's cash at the parent, which we use to support the activities of the affiliates. And then there's cash in the bank.
Now in the bank, we have been running a bit higher. Our operating objective for cash in the banks is at Roughly 5.5% to 7.5% Fed reserves to total deposits. We were a bit higher than that in the end of the first quarter and that was in anticipation of tax related seasonal cash flows that we typically see in April and maybe now that we'll see a bit more in May. So I'd expect that those cash levels would return to more of that BAU operating level over the course of the second quarter.
Got it. Thanks for taking all my questions.
Let's take Maybe 1 or 2 quick questions that we received from the web. First one is for you Walt. This comes from Jim Tierney, AllianceBernstein. Could you provide a little more color around the still strong, but perhaps slightly different TOA ratio of the 1.6 that you spoke to during your earlier remarks and how that trend compares to perhaps previous numbers we've shared.
Sure. And that's a really good question, Jim. I probably should have referenced that in my prepared remarks. So what you're looking at now are consolidated numbers between Schwab and TD Ameritrade. And TD Ameritrade historically has had Net TOA numbers significantly below Schwab's.
So when you aggregate the 2, even though the Schwab numbers are very high, the combined number appears to that it's Softened a bit if you're comparing to a Schwab only number from years past. Bear in mind TD Ameritrade Its model is a bit different in that it attracts a lot of people who tend to be more trading oriented and so they tend to come to TD Ameritrade with cash as opposed to coming with securities and Schwab's model may be a little bit different. But The reason you see it slightly lower is all due to the combination bringing the 2 together and the fact that TUMERITRADE Metrics on both the investor side and the RIA side are historically measurably lower than Schwab's.
Great. Thank you so much, Walt. Maybe Two quick ones also from the web for Peter, maybe we'll go and hopefully order of quickness. First Peter, maybe a little bit of color around the current reinvestment rates within the portfolio.
Sure. So reinvestment rates have certainly moved up over the course of the quarter. I would say there's still probably 10 or 15 basis points below where our average portfolio yield on a blended basis on our average portfolio yield in the Q1. That's a mix of floating rates that are down a bit to roughly 30 basis points as we've seen some of the benchmark rates come down over the course of the quarter. But fixed rates that have moved up probably 20 to 30 basis points or so over the course of the quarter up into more of that 130 range.
So at 85%, 90% fixed to floating, you get somewhere in that 115 basis points to 120 basis point range on the reinvestment rates.
Great. Thank you for that. And then maybe one more Peter, question from the web from Bill Katz Citi, is there a natural limit on pre tax margin kind of assuming top line backdrop particularly with what we've been seeing on the rate front, Further improvements or need to accelerate reinvestments or other changes around pricing products etcetera?
So, I guess there's a natural limit. 100% is a natural limit. But I mean, I think that we often say that trees don't grow to the Trees don't grow to the sky. But what I would say is we don't have any certainly we don't have any plans to sort of artificially cap The margin or the adjusted margin that we are able to derive, we've seen that we have a lot of operating leverage in our business. We continue to try to drive greater efficiency throughout the business, continue to bring down the costs of providing the services that we provide.
And so to the extent that we're in an environment where top line revenue is growing quickly, We're able to generate a lot of operating leverage and flow a lot of that to the bottom line.
Thank you. Our next question comes from I apologize, go ahead.
Back to you, operator.
Thank you. Our next question then comes from Brian Bedell. You may ask your question. Your line is open.
Great. Thanks. Good morning, folks. A lot of my questions have been asked and answered. But maybe just one quick one on the securities portfolio.
We've certainly answered a lot of this. Just on the Premium Am, is am I right to be assuming that roughly 3 quarters or so of that Premium Am Headwind on the portfolio is from the actual occurrence of prepays on those MBS versus a quarter or less from scheduled amortization that is Yes. That is amortized over the life of expected life of the securities.
Yes. So I don't have those numbers in front of me right now in terms of what that breakdown is. But it is as you say, it's a mix between the And it gets harder. What I'd say is we are certainly doing we're taking steps whatever steps we can to remove some of That prepayment risk, if you will, out of the securities that we're buying. We tend to buy securities that are less likely to prepay.
This is why it gets really, really hard to talk about some of these numbers on a go forward basis. This is just we're making changes to the portfolio that will influence those dynamics going forward. But it is a mix between those 2 different drivers, if you will.
Got it. That makes sense. And then just back on the integration synergies either for Joe or Peter. Just on some of the nearer Term 1 that I think you talked about previously or at the winter business update, the BDA. Just correct me if I'm wrong, but I believe you're able to bring about Are you expecting to bring about $20,000,000,000 over to the Schwab balance sheet on July 1 from that?
And is that right? Is there any change to that? And then I think you mentioned Joe at the business update about the payment for order flow harmonizing the Schwab And TD Systems and leveraging the sort of a better capture rate on that. I thought you said you start would start working on that in the second quarter. Is that still in play?
And is that part of this incremental synergy that we could see sort of sooner this year?
So I'll take the IDA one. So, the per the terms of the IDA agreement, we I have the obligation to bring over the uninsured balances on June 30. And that's those are about, I think, dollars 9 ish billion plus or minus $1,000,000,000 And then we have the option to bring over the balances equal to the difference between where the IDA is at that point in time and the level at Legal Day 1, and that's roughly $10 ish billion and we have the option to bring that over to our balance sheet over the following 12 months. So We haven't landed exactly how quickly, what timeframe we would exactly do that, but that's again, that's an optional. Our intention is to do that, but there's certainly no guarantee that we will.
Okay.
So on the rate harmonization, yes, We are moving forward with that here in the Q2. It will take time to get it implemented though, so it won't likely have a material impact in Q2. It is part of those newly sized opportunities that make up a part of the increased total number.
Okay. Okay, great. Thank you.
Okay. Thank you all very much. I think that's all the time we have left on Q and A. Apologies for those that we weren't able to get to, but strong demand. So I want to turn it back over to Peter to help close out with any final remarks.
Okay. Well, thank you, Jeff, and thank you all for hanging in there with This extra our bonus coverage, if you will, the extra 15 minutes here on the hour. Certainly appreciate that. I know we covered a lot of ground and I'm sorry we didn't I have time to answer all the questions. I know there was a few others out there.
But I missed all the discussion about service levels and integration timing and Cost and our Q1 financials and so forth, I hope what you see, I hope that comes through as a company that is driving exceptional organic growth, During very strong profitability has a lot of opportunities to both drive greater efficiency throughout our business and greater revenue And stands to benefit tremendously if the surge in trading gives way to higher rate interest rates in the future. And finally, a company that is not satisfied that is pushing forward aggressively on multiple fronts. Thank you very much and we'll look forward to talking to you again in July.