We are live. Good morning, everyone. Welcome to Schwab's Spring 2020 Business Update. This is Rich Fowler, Head of Investor Relations, coming to you from a sparsely populated 211 Main Street in San Francisco. We hope you and your families are safe and well and coping successfully with all the challenges, both large and small, that this environment entails. On that front, I have a quick story to tell on myself. I think most folks on this call probably know by now that I've had a beard for a while now. I thought I'd been doing pretty well in keeping up my grooming routines, even while not necessarily having to be fully inspection ready every day per usual.
When I caught a glance at myself in the mirror yesterday and saw Ben Gunn from Treasure Island glaring back at me, I realized I might have gotten a bit behind here or there. In all seriousness, though, thanks for spending some time with us in the midst of this truly challenging environment, and thanks in advance for putting up with whatever hiccups we might have as we go through this in a new setup reflective of our current realities. Joining me today, both virtually and literally, are Peter Crawford, our CFO, and Walt Bettinger, our President and CEO. Per our usual practice with interim updates, we'll spend a focused hour with these two sharing their perspectives on life at Schwab right now, starting off with some prepared comments and then following up with Q&A until it's time to wrap.
Our goal, as always, is to keep you current regarding management's thinking as efficiently as possible. Regarding questions, also as usual, we'll do so via the webcast console as well as the dial-in. To help us get to as many folks as possible, as usual, we very much appreciate your sticking to a one-plus follow-on approach to questions. Walt will start us off today to discuss our strategic picture, which, of course, includes the company's operating performance during the COVID-19 crisis. Then Peter will review our recent financial performance and current outlook before taking us into Q&A. Before that, let's spend a second on the wonderful wall of words, still at two pages, courtesy of shrinking fonts. The main point of which is to remind everyone that outcomes can differ from expectations, so please keep an eye on our disclosures.
Finally, per our usual practice, the slides will be posted on the IR site following the prepared remarks. With that, I think we're ready to get going. Walt, we've certainly got plenty of catching up to do with this group, so please take it away.
Thank you, Rich. Good morning, everyone. Thanks for joining us. I'm going to begin here on slide seven. We were last together in February, and clearly a lot has changed in the last 90 days. However, in areas of business that really matter, such as our long-term strategy at Schwab, really nothing has changed. Our focus on Through Clients' Eyes and our execution of the strategy via the virtuous cycle have been at work. We recognize that the overall world as we know it has changed, likely forever, with the COVID-19 pandemic. As a result, our clients have engaged with us at truly unprecedented levels, and we've been there for them, delivering service and access throughout this crisis. We achieved it critically while protecting the safety of our employees and their families.
We delivered record results across many client metrics and our All Weather financial model, as Peter will go through, delivered reasonable earnings despite serious headwinds brought on by another bout of ZIRP or zero interest rate policy in a sharply declining equity market. Our time-tested Through Clients' Eyes strategy proved once again to pass the test that these really unpredictable markets have presented, and we remain on offense with all of our efforts. Let's go ahead and go to slide eight there. We all understand what the pandemic has done to the equity markets and interest rates. We all know that behind these charts is the real-world impact on investors. Whether new to investing or with decades of experience, the turbulence of these last few months is going to stay with investors, in our view, for a long, long time.
They will remember those firms that were there for them with service and availability for years to come. In the last 90 days, clients have engaged with us at levels never seen before, particularly in the trading area. We also experienced higher volumes of phone calls and digital engagement as investors turned to us for help navigating this equity market decline, as well as the collapse in interest rates and the volatility in the fixed income areas. As has been the pattern during prior periods of high market volatility and bear markets, clients moved to cash. Part of what made this period different is that a significant degree of the movement to cash actually came from fixed income. Of course, important to keep in mind that we were also moving off exceptionally low levels of client cash holdings as a percentage of total client assets.
During these difficult times, we continued our track record of serving clients in a manner that is consistently recognized by third- parties. In early 2020, we have been recognized as number one by J.D. Power for self-directed investors investing on their own, number one for J.D. Power for direct banking. We actually came in number two by J.D. Power for self-directed investors seeking guidance. We fell a single point behind Vanguard on 1,000 -point scale. Maybe the optimist in me calls that a virtual tie. Although I think we recognize that third-party acknowledgment is helpful from a marketing standpoint, but really our superior organic growth is a result of a combination of great value, high-quality service, consistent availability, a trustworthy brand, really fundamentally, when you put it all together, our no trade-offs approach to delighting clients, both on the retail side and on the advisor side.
What's critical is that we achieve these results while protecting the safety and health of our employees, and also supporting them, whether it be with special financial recognition, assistance with home offices, no-cost COVID-19 testing, and a variety of other efforts designed to support them and their families during this crisis. Caring for our clients really begins with caring for our employees. Make no mistake, our employees care deeply about serving our clients. They've demonstrated exceptional commitment, dedication throughout this crisis, and the success that we've enjoyed with clients and our client metrics would absolutely not be possible without the collective service mentality of all of our employees. Taking a look at some of the metrics, $73 billion of core net new assets in Q1. I hesitate to say much more after a number like that. Of course, it is a record for Schwab.
It's a rather astonishing number when you compare it to any of the publicly traded competitors we have in brokerage or investment services or asset manager. Certainly, the publicly traded ones who have audited metrics that they provide to the public markets. I think what makes this accomplishment all the more remarkable is that typically in times of market stress, investors retreat from investing. We see net new assets and new accounts soften measurably. Although certainly this may still play out in the coming months, so far what we've seen is the opposite, with investors and advisors turning to Schwab at a record level, and we've been there to support them. Critically, even during this crisis, we have to continue to move the business forward.
We have done so with a number of key initiatives that are designed to grow the firm long-term, both organically and inorganically. On slide 15, our technology investments are certainly paying off. We're now at over 90% straight-through processing rate for key service and operational areas like trading and settlement and custody. Our technology systems' capability and capacity to manage high volumes of trades was certainly validated as we saw a doubling of daily trades relative to the prior four quarters. Of course, bear in mind, this was all done with similar levels of employees to the year prior. In the first quarter, we announced the pending acquisition of Wasmer Schroeder, a high-quality fixed income asset manager. It's based out of Naples, Florida.
Wasmer is known throughout the industry as a premier bond manager, as evidenced by their historical placement on the recommendation platform of a number of our competitors. Wasmer is going to help us better serve clients with quality, low-cost fixed income management solutions, as well as, over time, contribute to our asset management revenue growth. We also continued to build out our other programs designed to assist clients with key investing and planning needs, headlined in the first quarter, again, by our introduction of Schwab Intelligent Income. Our client segmentation efforts were also successful in the first quarter. We continued growing our mortgage lending offering, building deeper relationships with many of our investor and advisor clients. This capability is key as many of our major banking competitors strive to leverage low-rate lending solutions by linking them to the transfer of investable assets.
By offering competitive lending programs ourselves to these same clients, these assets tend to stay with us at Schwab. Our efforts to serve RIAs were rewarded in the first quarter. We had very high levels of engagement in our educational and consulting and market analysis programs. We also built out more capabilities to serve RIAs with our alternative investment enhancements, as well as an introduction of consulting services for smaller RIAs, a key segment of our RIA business. All three of our announced inorganic efforts remain on track, with USAA scheduled to close in late Q2 or early Q3. On TD Ameritrade, we are excited as ever about the prospects of bringing our two great companies together to better serve clients of all types and sizes.
The Department of Justice continues their responsible and thorough review of the transaction, and we continue to provide them information so as to assist them in their review. We remain optimistic about the approval of the transaction, given the substantial benefits to consumers, both on the retail side and on the RIA side. With respect to Wasmer Schroeder, we are looking for that transaction to close here in mid-2020. Again, offering our fixed income clients a level of exceptional professional fixed income management. On slide 19, let me just close up before turning over to Peter. I just want to restate a couple of key points from the first quarter. Our strategy works, and it remains consistent. Our execution, in our view, is second to none, and it's illustrated by our client metrics.
Our employees performed incredibly well in the first quarter while we implemented efforts to ensure their safety and health. Throughout the quarter, we remained on offense. We're building a world-class company, serving millions of clients with the staying power to thrive through the most challenging of times. That wraps up the comments I wanted to make. Peter, let me turn it over to you.
All right. Well, thank you very much, Walt. It's certainly great to be here today and seeing Rich and his newly trimmed beard for the first time in, I think, about a month, although certainly maintaining a socially appropriate distance. Walt talked about the very challenging health and economic backdrop, the record-setting business momentum we have in spite of what we talked about, the historic market volatility, and how we've been focused on helping both our clients and our employees ride out this storm, as well as the investments we're making to drive profitable growth in the quarters and the years ahead.
In my time today, I'll talk about how that challenging environment influenced our first quarter financial results. I'll also talk about the actions we're taking to navigate through the crisis, ensuring we continue to deliver for our clients, employees, and stockholders in the quarters and years ahead. Finally, I'll provide an update on the outlook we shared at the Winter Business Update, given how much the world has changed in just the last couple of months. The overall message you should hear is that even though we are not immune to the financial pressures around us, we're performing remarkably well, we're well-positioned, and we're focused on emerging from this crisis even stronger than when it began. Now, Walt talked about our ability to continue driving strong organic growth in spite of market volatility and about the high engagement level of our clients.
That success translated into huge year-over-year increases in new brokerage accounts and net new assets. If you exclude mutual fund clearing, that year-over-year increase jumps to 59%. Total brokerage accounts increased by 950,000, or 8% year-over-year, the largest year-over-year increase in almost 20 years. Unfortunately, the $244 billion in net new assets over the last 12 months was not quite enough to offset the impact of the Q1 market decline on our total client assets. Our financial performance was obviously impacted by the environment and to a lesser extent by our decision last year to eliminate online equity commissions. Overall revenue fell 9% year-over-year. This was mostly due to a 6% decline in net interest revenue.
Average interest earning assets rose year-over-year, but that wasn't enough to overcome a 32 basis point reduction in our net interest margin as the Fed cut rates by 225 basis points over the past year. Asset management and admin fees were up 10% year-over-year due to increase in advised assets and purchased money fund balances. Trading was down 13% year-over-year as daily average trading nearly doubled from a year ago, but the commission per revenue trade declined, of course. In case you didn't notice, we are now including order flow revenue in the trading revenue line item. Of course, we reclassified the prior periods to ensure an apples-to-apples comparison. It's not called out on the page, but other revenue was also down year-over-year due to some unusual items.
Last year, you may recall, benefited from a gain on our assignment of our lease at 215 Fremont. This year's number was impacted both by an increase in our allowance for credit losses as well as a loss on the rate locks that we provide to mortgage clients in the pipeline. Expenses were up at roughly 8%, but that would have been only about 3% without the acquisition and integration expenses for USAA, TD Ameritrade, and most recently, Wasmer Schroeder, as well as the COVID-19 related spending on our employees. Yes, I'm aware that 8% minus 4% equals 4%, and not the 3% I just mentioned, but that's due to rounding and not some sort of new math. I may have said revenue was up 4%. I meant revenue was down 4% year-over-year, of course.
With revenue down and expenses up, our pre-tax margin declined to 40%, or 42.5% without the $64 million in unusual items I just referenced. Our ROE declined to 14%. Note, however, that 2 percentage points of that ROE decline from the prior quarter was due to a $4 billion increase in GAAP equity resulting from mark-to-market gains in our available-for-sale portfolio. That's sort of a bad news, good news story. Then another point of the ROE decline was related to the unusual expenses I just mentioned. We'll spend a bit more time on the balance sheet today because there's been a lot happening.
The biggest thing is, of course, is the unprecedented surge in client cash that came onto our balance sheet in late February and throughout March, driving a 26% sequential increase in assets and a 28% increase in Bank Sweep balances. Though we made investments totaling roughly $30 billion in the quarter, finding some nice opportunities as others were forced to sell, we simply could not keep pace with the rapid influx of client cash, which means that we ended the quarter with nearly $70 billion in cash, most of which is invested in excess reserves with the Fed. We expect to invest a substantial majority of that cash over the next quarter or two. We have a lot of liquidity, the banks, the broker-dealer, and the parent.
That being said, our need for parent liquidity is a function of needs of the broker-dealer, which itself is influenced by day-to-day swings in client cash balances. Given the extreme market volatility, client cash movement, and trading activity, we felt it was prudent to supplement that strong current liquidity with a $1.1 billion of debt. The rapid increase in assets helped push our Tier 1 leverage ratio down to 6.9%, right in the middle of our operating objective of 6.75%- 7%. Remember, though, that Tier 1 leverage is measured based off of average assets. If we were to look at that ratio on a spot basis, the numbers would be somewhere below 6%. We remain paused on stock buybacks, and I'll talk in a few minutes, in another slide, about how we think about our capital levels moving forward.
It wouldn't be a business update without a page on client cash. You saw from our quarterly disclosures the dramatic increase in Bank Sweep and Schwab One balances, which built on our typical seasonal increase in cash in the fourth quarter. As we discussed at the Winter Business Update, we anticipate we might see clients continue to be net sellers of equities. Indeed, that did happen in the first quarter. As Walt mentioned, what really caused the spike in client cash late in the quarter was clients selling fixed income securities and not reinvesting proceeds from dividends, fixed income they own, CDs, and other bonds that mature. That's what it shows in the other column there.
This increase in client cash on the balance sheet is quite consistent with what we expected and certainly what we've communicated previously, that we often see client cash balances increase when the equity markets fall, and the portion of that cash sitting on the balance sheet increases as well as interest rates fall. It's an internal hedge within our business model and something that makes us more resilient as a company. It's impossible to say how long that cash will stay here and how quickly it will get redeployed. I'll say, though, if history is any indication, it will likely take an increase in interest rates for the trend to reverse, especially given where a lot of that cash is coming from, out of the fixed income markets.
Even then, our experience after the financial crisis suggests the cash tends to get reinvested more slowly than it got "uninvested." The environment has clearly changed a lot since we laid out our baseline scenario at the Winter Business Update. Interest rates and the equity markets are lower, of course, while trading and balance sheet growth have been much stronger. Given all the changes, we thought it'd be useful to update that scenario and show how, in spite of the environment, we are well-positioned to weather the storm, continue to grow organically, and produce solid financial performance. All right. Now the page I know you've all been waiting for, our updated scenario. Let's start with some basic assumptions. Relatively stable interest rates through the year, with the exception of LIBOR, which we assume decreases to more of its historical premium relative to Fed funds.
Average market appreciation from the end of March levels and a return of trading activity closer to historical levels versus the pace we saw in the first quarter. The big variable in this scenario, as with the last scenario we shared at the Winter Business Update, of course, is the amount of balance sheet growth from here through the end of the year. Do clients continue selling out of fixed income and equities, or does that stabilize? Depending on the answer to that question, we could see balance sheet growth of 30%-40% over the course of the year. Relative to 3/31 , that could mean up $10 billion to up $50 billion. Based on what happens with the balance sheet, we expect revenue comps to be somewhere in the -4% to -7% range year-over-year.
Our expectation is that year-over-year expense growth will be somewhere in the 4.5%-5.5% range, excluding TD Ameritrade acquisition and integration costs. About 150 basis points lower than what we expected two months ago. In terms of core expense growth, I'll show this in a moment, that translates to roughly 2.5%-3.5% up year-over-year. That would lead to pre-tax margins of at least 38%. Clearly below where we've been the last few years, but a lot better in this shadow of the financial crisis, and I'd hope you'd agree, quite healthy under the circumstances. Our Q1 net interest margin fell 20 basis points from the fourth quarter of 2019. We'd expect another step down in NIM between Q1 and Q2, likely bigger than the drop from Q4 to Q1. Let me explain why.
Shifting our investment allocation last year from 60/40 fixed to floating to more like 80/20 helped shield us a lot from the impact of the dramatic easing the Fed embarked upon in the first quarter. Even so, our overall balance sheet still is about 40%-45% tied to short-term rates when you consider margin loans, segregated cash at the broker-dealer, and liquidity we maintain within the banks, which you typically hold as excess reserves at the Fed. Given that short-term rates dropped a lot late in Q1, and again, it was late in Q1, you'd expect some degree of NIM compression from Q1 to Q2. The flip side of the surge in client cash late in the quarter is that we exited Q1 with a much higher level of excess reserves than typical.
It's going to take us a bit of time to get that cash invested in our usual range of available-for-sale securities. That also compresses NIM somewhat. When I say compresses NIM, I mean exiting Q1 with that higher level of cash compresses NIM somewhat in the short- term. Said another way, having that cash on our balance sheet is negative for net interest margin, at least in the short- term, but positive for net interest revenue. Add in some assumptions that LIBOR rates drop a bit closer to their longer-term averages relative to Fed funds, and that's why you see a bigger impact moving from Q1 to Q2.
After that point, the NIM should mostly stabilize, perhaps shedding a smaller amount of basis points over the course of the year and settling in the mid-150s by Q4, assuming stable interest rates. We cannot control the environment, but we can mostly control our spending levels. We have communicated to clients and employees that we do not plan to do any layoffs related to COVID-19 or the resulting financial turbulence. We're driving strong organic growth. We have a lot of momentum right now, which creates higher demands on resources. Our clients are highly engaged, which despite the tremendous progress on digital adoption, increases the burden on our people and our systems. We have some really important initiatives we want to invest in. The integration of USAA and TD Ameritrade and now Wasmer Schroeder. Our digital transformation work, application modernization, to name a few.
That being said, we would expect our expense growth rate to be perhaps 150 basis points lower than the 6%-7% we communicated at the Winter Business Update, due to what I'd call environmental factors. For example, lower third-party expenses and mutual funds and ETFs, lower incentive compensation, which results in an expected core expense growth rate of more like 2.5%-3.5%. Pretty good considering the strong organic growth that we've been driving. I feel very confident in saying that the year will not unfold exactly as either end of that range of possible outcomes envisions. Each of you, I'm sure, has your own views on how the year unfolds. Let me give you the sensitivities. These are generally pretty similar to the ones we shared at the Winter Business Update, with the notable exception being the sensitivity to Fed funds.
That's obviously increased a fair amount given the fact that we're back in a range where we expect deposit betas to be quite low. Our balance sheet has grown a lot, and of course, as I mentioned, we're holding more cash right now, so somewhat more sensitive to Fed funds movements. Last but certainly not least, let's turn our attention to capital. We came into the year with capital levels above our operating objective, which as you know, themselves are far above the regulatory minimum. The dramatic growth in the balance sheet has reduced those capital levels, and when we close the USAA transaction, those capital levels will fall a bit further. If the balance sheet stays at the size it currently is, we could find our Tier 1 leverage ratio in the low 5s post USAA, and we're comfortable with that.
That's still well above the regulatory minimum for the consolidated company. The Fed has encouraged banks generally, and us individually, to utilize our capital buffers. That's why you maintain them in good times, so you can utilize them during stressed environments. This is what we're seeing right now is very consistent with our capital stress testing and our capital planning programs. We have levers we can deploy if we anticipate those ratios dropping further, specifically either monetizing some of the gains in our available-for-sale portfolio or, as a last resort, utilizing the s weep tower to move some client cash balances off our balance sheet into a government money fund. Even so, it's reasonable to expect us to tap the preferred markets in the next quarter or two if those markets continue to be constructive.
Due to restrictions related to the TD Ameritrade acquisition, we already face limitations on our ability to buy back stock. That's not really a factor anyway. Of course, we'll continue to pay our $0.18 quarterly dividend. Let me close with a few thoughts. This is clearly a very challenging environment for the world and a very challenging environment for the company. At the same time that record low interest rates put some strains on our top-line revenue, our clients and our employees need us more than ever. We're not blind to these near-term pressures, nor are we intimidated by them. We have a strategy that is working and a position in the market that is clearly resonating with investors. What's going to help us get through this crisis are the same attributes that have made us successful in the past.
Our focus on clients, the talent and dedication of our employees, the discipline with which we manage expenses and capital, and our long-term orientation. That's how, even as we work to overcome the near-term hurdles presented by this crisis, we're confident looking forward towards the future. With that, let me turn it back to Rich for some Q&A. Thank you.
All right, gents. Thank you very much. Well, as they say, let's go to the phones. Shall we get started on callers, please?
Thank you. If you would like to ask question over the phone, please press star followed by the number one on your phone, unmute your phone, record your name clearly when prompted. Your name is required to introduce your question. To cancel your request, press star followed by the number two. Our first question over the phone comes from Will Nance. Your line is now open.
Hey, guys. Good morning.
Good morning.
Maybe I'll start on the rates environment. Given how much cash you're going to be deploying into the portfolio over the next couple of months, could you give us a sense for what the yield on those securities might be in this sort of environment? Maybe just bigger picture, if we kind of stay at these levels of interest rates for a long period of time, where would you expect the net interest margin to bottom out at the current balance sheet mix or maybe at the target balance sheet mix?
Thanks, Will. Reinvestment rates right now are about 80, 85 basis points below the average investment yield that we saw in the first quarter. That's a function of lower benchmark rates, both LIBOR as well as longer-term rates, offset to a certain degree by wider credit spreads that we're seeing across the range of sectors that we invest in. That's where we are today. In terms of where that NIM could end up, I talked about where we could see it in Q4. I think that's probably a reasonable place to give what we're talking about. It really depends on the interest rate environment. It's hard to say that exactly. In terms of where that would land.
I think that's where we're sort of assuming flat rates, assuming relatively stable credit spreads with the exception, as I mentioned, of where our assumption that LIBOR falls a little bit over the next quarter or so. We think that's an appropriate place to be expectation in terms of the fourth quarter.
Got it. Maybe just on the capital front, you mentioned being in the low 5s I guess as late as the early third quarter. Could you just give us a sense for how you're thinking about tapping the preferred market? If you do wind up kind of in the low 5s, where would you like to get it to kind of be a little bit more comfortable?
Our number one priority from a capital standpoint is having sufficient capital to support the organic growth of our balance sheet. I mean, that is our abiding focus and our priority. Our operating objective continues to be 6.75%- 7%, but we're also quite aware and quite comfortable with the fact that we may run below that level for quite some period of time. I think it is reasonable to expect that we would tap the preferred markets at some point in the future. Again, depending on how the market looks and what the appetite is, that'll dictate, I think, more about what we do in terms of the preferred. Again, our capital levels, we have buffers on top of buffers, on top of buffers, frankly.
This is a time to be utilizing those buffers to support our clients and to support the balance sheet growth that we're seeing.
Understood. Thank you for taking my questions.
All right. Thanks, Will. Next caller.
Next question comes from Rich Repetto. Your line is now open.
Yeah. Good morning, Walt. Good morning, Peter. I guess the first question is on the reinvestment rate. Just to make sure I heard you clearly, you said, I think it was 80-85 below. We're looking at reinvestment rates right now around the 155-160 range. Is that what you were sort of implying?
Yeah, I mean, Rich, it's a little bit lower on the floating rate than it is on fixed rate, as you can imagine. Higher on some of the credit. The securities have a little bit more credit exposure than some of the agency MBS that we have. It's kind of all within a range. I would say the average is a little bit south of that but not too far below that.
Okay. I guess the other question is on the deployment of cash. I think it was you ended the quarter with $59 billion of cash in excess reserves at the Fed. Client cash overall, I think is around $72 billion or something. I think you mentioned that earlier. I guess the question is, you said you would look at deploying that. I thought you said fully, but can you tell us the amount that you imply by fully over the next quarter or two?
If I said fully, I certainly didn't intend to imply we'd be putting all of that to work. I would anticipate, we typically run about 5%- 7% of our deposits staying liquid. Today, that number is well north of 20%. I would think an environment like this, we'd want to keep a somewhat higher level of liquidity than that 5%- 7% typical, but certainly well below where we are today. What I was suggesting is that excess liquidity that we're holding, we'd expect to deploy that excess liquidity over the next quarter or two as we see those investment opportunities materialize. There's a certain pace at which we can invest that cash, given the fact that we also have ongoing pay down activity and other organic balance sheet growth that we're seeing.
We want to be thoughtful and judicious about that while certainly working towards putting that money to work.
Got it. That's the excess over the 5%-7% of deposits. That's the excess.
Correct. Bearing in mind that I think we're going to end with a bit higher levels of liquidity than we might have under a normal environment.
Understood. Thank you very much.
Thanks, Rich. Next question.
Next is Brennan Hawken. Your line is now open.
Good morning. Thanks for taking my question. Just wanted to follow up on that question about the investment rate and cash trends and such. I think you said you ended the quarter 3/31 at about $70 billion of cash. What have you been able to put to work so far? Where do we stand now? Have you seen any trends or change in client cash balances since 3/31 to today? Just to maybe give us the latest touchpoint since we've got you in a Reg FD environment and everything.
I mentioned that we put about $30 billion to work in March. I think that's a reasonable pace to be in terms of expectation. I don't think I'm going to get into the sort of day-by-day parsing of exactly how much we're investing. I will say in April, we have seen a slowdown in that cash balance build. It's still positive for April, but not nearly to the extent that we saw in March. Again, I think that's somewhat consistent with what we've seen in prior periods. If you look at the financial crisis, the cash balances built relatively quickly, then they built more slowly. Then at some point they got redeployed. When the cash moved off the balance sheet, it moved off over a long period of time. It was actually about a two and a half year period of time.
Our view is this cash is, we think, is relatively sticky. That is probably what it's going to take, as I mentioned, is an increase in interest rates across the curve for that cash to move off the balance sheet. Even if and when that happens, that it won't move off quickly when that time comes.
Yeah. Okay, Peter, thanks. That's helpful, and appreciate not wanting to get into the granular details, but even a high-level sense is great. Fee waivers, could you maybe give us an update about how we should think about fee waivers? I'm guessing, given what we're seeing in some of the Treasury markets on the govie and muni side, that we're probably either there or close. What trends have you seen as far as that goes? What should we expect, and what trends are you seeing as far as mix of AUM? Are you seeing some increased demand for prime given the relative resilience of LIBOR? Thanks for taking my questions.
On fee waivers, I think that the short answer is I think fee waivers will not be nearly as big a story this time around as they were during the financial crisis because the average yield on our money funds is lower than it was last time. Last time, we had a lot higher portion of our money funds, the balances were in sweep money funds, which have higher expense ratios. Since that time, we also reduced the expense ratios on all of our funds. We can support a lower level of interest rates before fee waivers start becoming a factor. You're right that you're likely to see those fee waivers come in to play initially in the Treasury money fund and the government money fund before it hits the prime funds and the muni funds.
We had a very, very small amount, in the tens of thousands of dollars, of waivers in the first quarter. I think it's likely that the second quarter will see that number be somewhat bigger than what we saw in the first quarter. Again, focused on those Treasury and government money funds. As you imagined, you're definitely seeing some interest, money flowing back into some of these money funds, some of the prime funds, given the fact that they are offering more attractive yields.
Yeah, that makes sense. Thanks for that color. Should we think about the floor of that 12-13 basis points being the right way to think about it that you experienced last time? That can now adjust for the lower price point that you referenced, Pete?
I'm not sure. Can you clarify the 12 or 13 basis points? I'm not sure what that's referring to.
On a net basis, that was where the money fund, on a gross basis, yes, you were higher, like 50 basis points for the fee rate. Once you netted down the fee waivers, it actually, at a trough, the prior zero interest rate period, Schwab ended up netting about 12 or 13 basis points on the money funds. Is that a decent barometer for how to think about gross versus net this time and where a trough would be?
It's really hard because it's so dependent on the money fund and the mix that you see. I would hesitate to give you a specific number like that. I think you have to look at it on a fund-by-fund basis to see what those dynamics would end up being.
Okay, thanks.
Okay, thanks, Brennan. Next call.
Next, we have Mike Carrier, the line is now open.
Hi, good morning. Thanks for taking the questions. Maybe Peter, first just on expenses, thanks for the update. I think in past periods, when you guys were facing a lot of revenue pressure, eventually we saw the expense base come down. I know this is early on and there's a lot of things in place in the short- term that probably keeps the 2020 base or the outlook where it is. Where are some of those levers if we're in an extended period of weaker revenues? I think just on the advertising, it seems like that came in probably less than we would've expected, but the organic growth was still very strong. How's that correlation maybe relative to the past, and is that something that you can pull on?
On the expense side, what I'd say is remember that we took some expense actions in the third quarter of last year to bring down the rate of our spending growth and made some tough decisions, and that certainly adjusted our expense base a fair amount at that point in time. We came into this period, I would say, having taken action on a lot of the "easier opportunities to reduce our expenses." Not to suggest that any of those actions were easy by any means. We felt like we're in sort of fighting shape, if you will, coming into this period of time, which is why I say we don't see opportunities, necessarily big opportunities to make major adjustments right now in the near- term.
It's also important in an environment like this, there are a number of expense items that do adjust and vary based off of what's happening with the environment. I mentioned third-party expenses in our mutual funds, our Schwab mutual funds and ETF. Sub-advisory fees in our managed account programs. Incentive compensation, our compensation for some of our employees is tied to the equity markets or assets under management. Those end up adjusting. Our bonus funding, to the extent that our performance is less than our initial planning at the beginning of the year, that adjusts. Given the environment, our travel and entertainment costs have come down, although we already brought those down a fair amount last year. Those have come down further.
We're seeing with India largely shut down, we've had a reduction in offshore spending, offshore expenses. That's contributing to that reduction in expenses. To go further than that, there are certainly levers that we can pull in the near- term. We could proactively adjust offshore labor more than that. We could reduce advertising. We could reduce our project spending. To do that, we'd want to be very, very thoughtful about doing that because what we wouldn't want to do is react to a near-term financial situation in a way that in any way undermines or decreases our long-term momentum, our ability to grow profitably long- term, the positioning that we have in the market. We entered this period with a lot of momentum. We want to make sure that we exit this period with even more momentum.
I think as we look back on our experience during the financial crisis, I think we did a really good job of that, of managing our expenses in an appropriate way, but not overreacting such that when the environment got better, we exited in a really, really strong position with a lot of momentum. That's what we really, really want to make sure we stay focused on in this time, is to keep focused on our clients and keep focused on that long- term, even as we obviously keep an eye on the near-term financial performance.
Okay, that's helpful. Then just a quick follow-up. With Schwab, credit risk and provision, it's not something that we typically focus too much on. Just given the environment and the areas that you guys do have a little bit of credit risk, just maybe an update on the balance sheet and how you're thinking about that in this current environment.
Yeah, we feel very, very good about where we are. As you know, the vast majority of our balance sheet is invested in government-backed securities. Where we take "credit risk" in our investment portfolio are also very good credits. On our mortgage portfolio, we have very low loan-to-value ratios. These are clients that typically have a lot of assets with us, high FICO scores. We have seen some requests, not surprising, for forbearance, but they're a very small, manageable number, under 1% of our overall mortgages. The vast majority of those clients have low LTVs, high FICO, and assets with us. Our experience suggests in that situation, those clients are very, very likely to pay back those mortgages. There's nothing that concerns us from that standpoint at all.
All right, thanks a lot.
Thank you. Next, we have Ken Worthington. Your line is now open.
Hi, good morning. Was hoping to get a better sense of the capacity you have to grow deposits from current levels maybe given your current 1Q capital ratios. You talked about Tier 1 leverage falling lower based on the ending balance sheet, and you talked about the leverage ratios falling further as USAA closes, as well as a willingness to operate below that targeted range that you've been putting out for some time. As we put it all together, how big a deposit base you feel comfortable managing, I guess maybe just level set to the 1Q capital ratios that you have?
Ken, you rightly pointed out that the amount of balances we can support is a function of those capital ratios and maintaining enough and managing those capital ratios. The regulatory minimum on consolidated Tier 1 leverage is 4%. To be well-capitalized at the banks, it's a 5% Tier 1 leverage. Both those measures based off of average assets. What I can't do is give you a number above that that says at this number, 4 point X%, we're absolutely going to cap the balance sheet growth or do something like that because the short answer is it depends. It depends on the circumstances. It depends on the pace of balance sheet growth. It depends on the environment. It depends on as we look out in the future and think about the organic capital formation.
What I can say is we don't see right now a need to certainly cap that balance sheet growth. We're going to continue to monitor it and continue to take a look at those capital ratios, both now and into the future. There isn't sort of a hard number that I can say, "Here's the point at which we absolutely will not go below that," other than, of course, the regulatory minimum ratios I just mentioned.
Okay. Getting into the 4s, in the right circumstances is something that would be feasible and tolerable for Schwab.
That is correct. I don't think that's something we'd want to be doing for a long, long period of time. We'd want to be working our way back out of that. If we see a path to be able to do that for a period of time, we could live with that.
Okay. Great. Thank you so much.
Thanks, Ken.
Okay, next we have Dan Fannon. Your line is now open.
Thanks. A question on organic growth. Obviously a record quarter. Just thinking about the rest of the year and getting closer to the Ameritrade closing of that deal. Do you anticipate kind of any slowdown as advisors might be debating kind of moving over to your platform or even to Ameritrade's during this time period as the conversion potentially starts to take hold and you go through that closing? Just want to get a sense of how those dialogues are going, how that backlog looks for those prospective advisors.
Walt, you want to take that one?
Sure. I don't necessarily expect a slowdown from business with RIAs. We had a very strong first quarter. I think that the RIA community continues to have success. What's interesting is that some of the growth rates of RIAs below $200 million or $300 million were actually some of the highest organic growth rates on our platform. We really think that the notion that RIAs will slow business with us as the date for closing of the transaction with TD Ameritrade approaches is not something that is likely to unfold. We have deep relationships, very positive relationships with the vast, vast majority of the RIAs that we work with. Our belief is that TD Ameritrade does also, so we're not anticipating any kind of meaningful change in the trajectory of that business as that date approaches.
Great. Thank you.
Thank you. Our next question comes from Craig Siegenthaler . Your line is now open.
Good morning, Walt. Good morning, Peter. Hope you're both doing well. Given that you expect Tier 1 leverage to fall into the 5% range, and your response to Ken's question, that it would be okay if it temporarily fell into the high 4s, does this imply that there'll be no share repurchases until it normalizes back up to the 6.75% range?
As I mentioned, our number one priority from a capital standpoint is to support the organic growth of our balance sheet. We would not want to do anything from a buyback standpoint that would get in the way of doing that. In the near- term, there are some limitations anyway on our ability to buy back stock, as I've talked about a couple of times before. Ahead of the stockholder vote for the TD Ameritrade acquisition, potentially as we get further along with the DOJ and might have some information that would close the window on doing that. I wouldn't go so far as to say we would not put a rule in there and say as long as we're still below 6.75%, we're never going to buy back stock. I wouldn't say that at all.
At the same time, we don't want to do something by buying back stock and then later have to monetize our gains in our available-for-sale portfolio or implement a sweep tower in a way that we would regret, I guess, having bought back that stock. I do think it's important, though, to take a step back and say we continue to believe buybacks and capital return more broadly is a very important part of our financial formula. There are some periods of time when the balance sheet is growing more slowly, where we have more capacity for capital return and buybacks, and some periods of time when the balance sheet is growing more quickly and therefore somewhat less capacity for capital return and buybacks. Over the cycle, our expectation is that cash balances grow.
As we talked about many times, cash balances grow consistent with the growth in total client assets and the growth in accounts. Through the cycle, that still gives us plenty of opportunity for meaningful capital return. It's an important part of our financial formula longer term.
Got it. My last one. I just wanted, and I know you kind of explained this a few ways, but I wanted a few details in terms of why Schwab has seen an acceleration and actually record quarterly core net new assets despite the volatility in the second half of the quarter. As we look ahead into 2Q and 3Q, which generally contains the summer months when things slow down a little bit, how sustainable is this strong organic growth going forward?
Walt, do you want to start us off on that one?
Sure. I think as I mentioned in my comments that we have a strategy that is working. It's consistent. You haven't heard us talk about new approaches, new strategies, changes in 15 years. It works. It is client-oriented. We were there for our clients. I'd like to believe that we are a trusted port in this storm that has been going on for investors. When they make that decision, whether you are an end investor or an RIA, and of course, many end investor clients of the RIAs make the decision on where they want the assets custodied. They have great comfort and confidence in coming to Schwab. I do think as you move out into subsequent quarters after a period of extreme volatility or a period of volatility where the market declines, it is not uncommon, historically at least, to see flows begin to moderate.
Now we don't know whether that's going to happen in coming quarters, but historically, that was something that we would see after periods like we've just experienced. I think we feel very confident that whether that starts to unfold industry-wide or not, we're going to continue to achieve organic growth rates that are outsized relative to our market position because of the strength of our franchise and the no trade-offs offer that we make available to investors and advisors.
Thank you.
Thank you. Next, we have Chris Shutler. Your line is now open.
Hey, guys. Good morning. Walt, with the Fed funds rate now down to effectively zero again, and the potential for rates to stay structurally low for a long time, maybe just talk for a second about how you as a management team and board think about the business model and, with a lot of it still being tied to interest rates, is there any greater desire to diversify the revenue streams, not just around the edges, but more materially in terms of increasing subscription revenue?
I think we feel great confidence, I do, and the board does, in our business model. We recognize that this is a unique occurrence. I think what's going on now is very different than what went on with the financial crisis, which took from, what, late 2008 into late 2015 for the Fed to move to a different place. Nevertheless, part of our initiatives, as I documented in my comments, involves monetization and segmentation, and a significant part of that monetization part is to continue to grow our revenue streams that are not spread related. That said, we will only undertake those kinds of initiatives to the extent they are in the best interest of our clients. That is the ultimate business model, the ultimate financial model for us. We feel very confident there.
I think we also have to recognize that coming out of the second unique governmental support required for money market funds in the last 15 years, that a lot of business models and a lot of revenue sources are likely to be subject to new rules, new oversight, and you really want to see where all of those things shake out also before anyone would look at significant moves around their business model. We don't have any plan to do so. We think there could be a meaningful competitive restructuring as some of those changes come into play.
Okay, thanks. One for Peter, maybe just going back to some of the questions from earlier. Could you put a finer point on where, for new money right now, you're investing in the fixed rate portfolio and the floating portfolio, what the rough yields are? I just want to make sure I heard those right.
What we're investing in is very similar to what we've always invested in, a heavy preponderance of mortgage-backed securities. We're targeting that 80/20 fixed to floating, we're definitely putting a substantial majority of new investments into fixed rate. From a duration standpoint, we are edging closer to more like a 3.5 duration. We're in the low 3s today, but edging closer to that 3.5. In terms of the yields we're investing at, we're sort of in the 150s or so on some of the fixed rate and a bit less than that on the floating rate in terms of those reinvestment rates. Again, those numbers have been moving around a fair amount as we see credit spreads tighten and widen and tighten again. We see LIBOR move and so forth.
I wouldn't want to be pinned down for too long on those exact numbers. Those are very much a point-in-time set of numbers.
Okay, understood. Thank you.
All right. Let's squeeze in one last question and then we'll wrap up.
Thank you. Our next and last question comes from Kyle Voigt. Your line is now open.
Hi. Thanks for squeezing me in. Just a couple clarification questions. Just one on the NIM assumptions. I think you said that you expect in those assumptions for credit spreads to remain relatively constant. Just wondering if you're also assuming that agency MBS spreads also remain relatively elevated at current levels. My second question, last question, is just on customer margin yields. I'm assuming we shouldn't simply model kind of a one-for-one correlation lower because of different pricing dynamics from the negotiated book. Just wondering if you can help us frame a sort of minimum level where you think that margin book could reprice to in this environment or even in March post the Fed cuts. Thank you.
On the NIM question, our assumption in the scenario that we presented is that LIBOR comes down. It came down, then it went up, now it's been trending down. Our assumption is it comes down over the next quarter or so to more of a sort of historical premium relative to Fed funds. One-month, three-month LIBOR, more in those 20s- 30s basis points. In terms of the margin book, the margin book, as you point out, a lot of that book is negotiated. Those negotiated rates are tied to different reference rates. Some are Fed funds, some are LIBOR, some are prime. Those negotiations, typically on the way down, when those reference rates come down, clients aren't shy about reaching out to us to have an adjustment and ensure that those rates reset along with that.
A lot of those rates already have felt the impact of the lower reference rate that they're tied to.
Peter, maybe one other thing on the spreads was on the agency side. Whether we thought those were going to stay wider or tighter, et cetera.
On the agency side, our assumption is we are seeing those spreads tighten up a little bit as the Fed has been in buying some of those securities and putting a bid in for some of those securities. We've seen some of those tighten up, and our expectation is that continues.
Okay. Well, with that, I think it's time actually to turn it back to you to close this out here.
All right. Well, thanks everyone. Thank you very much for your questions and for your time today. I'd be remiss if I didn't also thank our clients for really putting their trust in us during this period of time. Also really thank our employees for their just really unwavering and I think truly inspiring commitment, resourcefulness, dedication, and tenacity. It's really remarkable to see how much they have rallied over the last several months. We don't know how long this crisis is going to last or what the recovery is going to look like. What we do know is that we're going to continue to focus on the things that we can control, which is looking out for our clients, looking out for our employees, looking out for our stockholders.
That's what's made us successful for 40-something, 45 years now, and that's what's led to the incredible momentum, the incredible results that we had in the first quarter. By doing that's what makes us confident that we're going to persevere and we're going to emerge from this period of time stronger as a company and better positioned than when we entered it. We'll look forward to giving you an update in July and talking to you all again. Until then, be safe, everyone.
Thank you.