E*TRADE Q3 Earnings Call Transcript

123jump.com Staff
26 Oct, 2010
New York City

The financial services provider net revenue declined 15% to $489 million in the quarter. Net income generated in the quarter was $8.4 million, or 3 cents per diluted share, compared to a net loss of $855.0 million or $6.74 per share in the prior-year period.

E*TRADE Financial Corporation ((ETFC))
Q3 2010 Earnings Conference Call
October 20, 2010 5:00 p.m. ET

Executives

Susan Hickey – Financial Media Relations
Steven J. Freiberg – Chief Executive Officer
Bruce P. Nolop – Executive Vice President and Chief Financial Officer
Paul Brandow – Chief Risk Officer
Robert V. Burton – Executive Vice President and President of E*TRADE Bank
Michael J. Curcio – Executive Vice President and President of E*TRADE Securities

Analysts

Daniel Harris – Goldman Sachs
Richard Repetto – Sandler O’Neill
Eric Bertrand – Barclays Capital
Howard Chen – Credit Suisse
Michael Carrier – Deutsche Bank
Michael Vinciquerra – BMO Capital Markets
Matthew Snowling – FBR Capital Markets
Faye Elliot – Bank of America/Merrill Lynch
Patrick O''Shaughnessy – Raymond James
Brennan Hawken – Collins Stewart
Joel Jeffrey – KBW

Presentation

Operator

Welcome to the E*TRADE Financial Third Quarter 2010 Earnings Conference Call. At this time, all participants have been placed in a listen-only mode. Following the formal remarks, we will open the call for Q&A. At that time, if you have a question, please press star one on your touchtone phone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Thank you. It is now my pleasure to turn the floor over to Susan Hickey from E*TRADE Financial. Please go ahead.

Susan Hickey

Thank you. Good afternoon and thank you for joining us for E*TRADE Financial''s third quarter 2010 conference call. Joining me today are Steve Freiberg, E*TRADE''s Chief Executive Officer, Bruce Nolop, our Chief Financial Officer, and other members of E*TRADE''s management team.

Before turning the call over to Steve, I’d like to remind everyone that during this conference call, the company will be sharing with you certain projections or other forward-looking statements regarding future events or its future performance. E*TRADE Financial cautions you that certain factors, including risks and uncertainties referred to in the 10-Ks, 10-Qs and other documents E*TRADE files with the Securities and Exchange Commission could cause the company''s actual results to differ materially from those indicated by its projections or forward-looking statements. This call will present information as of October 20, 2010.

Please note that E*TRADE Financial disclaims any duty to update any forward-looking statements made in the presentation. During this call, E*TRADE Financial may also discuss some non-GAAP financial measures in talking about its performance. These measures will be reconciled to GAAP either during the course of this call or in the company''s press release, which can be found on its website at investor.etrade.com.

This call is being recorded. A replay of this call will be available via phone, webcast and podcast beginning this evening at approximately 7 p.m. The call is being webcast live at investor.etrade.com. No other recordings or copies of this call are authorized or may be relied upon. And with that, I will now turn the call over to Steve Freiberg.

Steven J. Freiberg

Thank you everyone for joining us today. To begin this afternoon''s call, I will cover highlights from the third quarter and then Bruce will take you through the results. From there, I will share some thoughts on the opportunities we see for the business after which we will be happy to take your questions.

The third quarter was an important one for E*TRADE as we delivered our second consecutive quarterly profit. We reported pretax income of $36 million and achieved positive net income for the quarter despite an unusually high reported tax rate. Strength in a number of areas supported our performance in a quarter that was notable for the industrywide decline in trading activity and a challenging interest rate environment.

We were pleased with the growth in net new assets and average margin receivables and with the quality of new accounts in the brokerage business. Improvement in loan performance trends drove the eighth consecutive quarterly decline in our loan loss provision.

Effective balance sheet strategies resulted in solid net interest income. And we benefited from opportunistic gains in our securities portfolio. Our results demonstrated progress in positioning the company for sustainable profitability and growth as we continued to execute on a number of key objectives.

Our provision for loan losses has been below charge-offs for five consecutive quarters. We have generated organic bank regulatory capital each quarter this year and we have delivered our second consecutive profitable quarter.

During the quarter, we executed on a number of initiatives to expand our offering to both active traders and long-term investors. In June, we released application programming interface or API, allowing third-party vendors and independent software developers to interface seamlessly with our investing platform.

In September, we introduced new research and trade idea generation tools including Market Commentary from Dreyfus and Buzz & Banter from Minyanville, a leading business and finance site. Also in September, we launched a new cross media ad campaign including TV spots that are running during highly rated fall sporting events and prime time programming.

The campaign with the new tag line, ""investing unleashed"" includes several new E*TRADE Baby spots as well as product ads that speak directly to self-directed investors who are already taking control of their finances. It is a high-impact campaign that moves the brand forward and positions us well for the fourth quarter as well as 2011.

In addition, our ongoing investment in the overall customer experience, including a growing relationship management team and simplified pricing continues to pay off. This supported a sequential improvement in our annualized brokerage account attrition rate from 13% to 10%, our lowest attrition rate in more than six years and a level we strive -- we will strive to sustain over the long run.

We also received industry recognition for our corporate services organization from Group Five, a leader in equity compensation research, which named us number one in overall satisfaction and loyalty for Stock Plan Administration, in its Tenth Annual Benchmarking Survey. Our corporate services group, which provides stock plant administrative tools and services, continues to gain traction and now counts 20% of the S&P500 as clients.

This continues to be an attractive opportunity for us both as a standalone business and as a meaningful source of new retail brokerage accounts. With that, I will turn the call over to Bruce to take you through our results for the quarter.

Bruce P. Nolop

Thank you, Steve. While we were affected by the decline in overall trading, we were pleased with our results which were supported by strength in our brokerage business, continued positive trends in our loan portfolio and solid net interest income. We reported net income of $8 million or $0.03 per share, during the third quarter which compares with net income of $35 million or $0.12 per share in the prior quarter and a net loss of $855 million or $6.74 per share in the third quarter of 2009.

Our third quarter 2009 results included a non-cash charge on debt exchange of $773 million or $6.09 per share. When excluding the impact of the debt exchange, we had a net loss of $82 million or $0.65 per share in the third quarter of 2009.

We reported pre-tax income of $36 million for the quarter, but as Steve noted, we had an unusually high reported tax rate this quarter. So let me explain. Although our actual tax rate continues to be approximately 38%, our reported tax rate is much higher because certain of our expenses are not deductible for tax purposes.

For example and most importantly, about one-third of our interest expense on the springing lien notes is not deductible for tax purposes. Therefore, while our reported pretax income is $36 million, our income subject to taxation is higher resulting this quarter in a much higher reported tax rate of 76%. This is due not only to the higher amount of taxable income, but also to the fact that our reported pretax income for the year is relatively close to breakeven.

The additional pretax income from the springing lien notes is about $35 million per year and the annual tax on that income is about $10 million. Therefore, this issue will be mitigated if our reported pretax income grows in the future.

We produced $489 million of net revenue during the quarter, a decline of $45 million from the prior quarter and down $86 million or 15% from the same quarter a year ago. The decline in revenue was driven almost entirely by the decrease in trading activity as was experienced across the industry.

We were pleased to maintain a relatively consistent level of interest income of $299 million. The $3 million decline from the prior quarter reflected a $1.3 billion decrease in average interest earning assets to $39.7 billion, which was largely offset by a six basis point expansion and net interest spread to 2.95%. This reflects our strategy of maintaining a relatively consistent net interest spread, despite an environment of declining interest rates.

Commissions, fees and service charges, principle transactions and other revenue in the third quarter were $151 million. This was down 23% compared with the prior quarter and was impacted by the decline in DARTs and a very slight decline in average commission per trade from $11.05 to $11.03.

Our revenue this quarter also included $40 million of net gains on loans and securities, including a net impairment of $7 million, as we managed our investment portfolio to limit our risk and we realized gains due to favorable market opportunities. This compares with $37 million of net gains in the second quarter and $23 million in the third quarter of 2009.

Our total operating expense for the third quarter declined 3% or $9 million from the prior quarter to $267 million, which represented a 12% decline from the third quarter of 2009. This included lower compensation and clearing expense, as well as a $6 million credit against professional service fees as part of the legal settlement.

Let''s turn now to metrics. As noted, we experienced a slow down in trading activity over the summer, certainly in comparison to record highs in recent years. DARTs for the third quarter were 127,000, down 26% from the prior quarter and down 30% compared with the third quarter of 2009. Nevertheless, we saw strength in a number of areas.

Net new asset flows into our brokerage business were a positive $1.4 billion during the quarter and totaled $5.7 billion year-to-date. Net new brokerage accounts were 7,000, bringing account growth for the year to 27,000 and we ended the quarter with a record 2.7 million brokerage accounts.

Brokerage customer cash increased by $1.9 billion to $22.6 billion, while customers were net sellers of $1.3 billion in securities. Bank customer cash declined by $600 million. In total, we experienced a net increase of $1.3 billion of customer cash deposits, which was a positive contributor to our net interest income.

Another positive contributor was increased margin loans to customers. Average margin receivables grew by 4% during the quarter from $4.5 billion to $4.7 billion. This represented a 52% increase from a year ago. We were pleased with the performance of our loan portfolio. The portfolio contracted by $1 billion during the quarter and our loan loss provision declined from $166 million in the second quarter to $152 million in the third quarter. This is the eighth consecutive quarterly decline in the provision, which is now 71% below its peak in the third quarter of 2008.

Loan charge-offs declined slightly from $225 million in the second quarter to $222 million in the third quarter. This is the fifth consecutive quarterly decline and charge-offs are now 43% below their peak of $386 million in the second quarter of 2009.

The allowance for loan losses ended the quarter at $1 billion, down $70 million from the prior quarter and remains at 6% of gross loans receivable. We expect that credit costs will continue to decline. However, because the timing and magnitude of the improvement is affected by many factors, we anticipate variability in any one quarter while continuing to see a downward trend over the long-term.

Related to the recent decisions by a number of banks to suspend or review their foreclosure programs, we do not expect any material direct impact although we may be indirectly affected as any delays work their way through the system. As a reminder, E*TRADE does not service any of its loan portfolio and we rely exclusively on third-party servicers.

We are pleased that the bank generated capital again this quarter. The bank generated $81 million in regulatory risk-based capital bringing the year-to-date total to $191 million. As of September 30, the tier one capital ratio was 7.41% to total adjusted assets and 13.75% to risk-weighted assets.

We ended the quarter with $1.1 billion of risk-based total capital in excess of the level that our regulars define as well capitalized. On a consolidated basis, we ended the quarter with $1.5 billion in tier one capital and our tangible common equity was $2.1 billion, both slightly higher than second quarter levels.

We ended the quarter with $490 million in corporate cash. This is an increase of approximately $9 million from the prior quarter and included a $34 million dividend from the bank. Finally, I want to note that our corporate interest income this quarter benefited by $6 million from a legal settlement.

In all, we were very pleased with our performance in the quarter and look forward to building on our momentum. And with that, I''ll turn the call back to Steve for additional remarks.

Steven J. Freiberg

Thank you, Bruce. Before opening the call for questions, I would like to share a few comments related to future plans and initiatives. When we spoke last quarter, I had been on board approximately 100 days and we had just reported our first quarter of profitability in three years. The company has achieved a number of important milestones, allowing us to shift gears from defense to offense and providing the flexibility to review opportunities for future growth.

We seem to have focused on areas where we see potential for driving and has growth and profitability that will highlight four categories. First, we have a solid retail brokerage franchise that has performed extremely well throughout its history, most recently contributing great results that were often overshadowed by challenges in the loan portfolio.

With a base of all-time high, 2.7 million brokerage accounts complemented by an enhanced marketing spend. We believe there are continued opportunities to expand our relationship sales, product and service initiatives to grow our active trader and long-term investor customer basis.

Our growing sales force will emphasize long-term investor retirement solutions including the advisor-based managed investment portfolios as well as a full suite of fund and fixed income brokerage product offerings. We will also continue to expand our offering for active traders and are in the early launch phase of portfolio margining three and four-leg up auction spreads, E*TRADE communities and additions to our mobile trading applications, specifically E*TRADE Mobile Pro for Android.

On the marketing side, as I mentioned earlier, we have been involved -- we have been evolving our advertising to include product and service focused messaging in addition to iconic E*TRADE Baby. And we believe we have a terrific opportunity to better engage with the 15 million prospects that visit our website each year.

Second, we have significant institutional brokerage opportunities, notably our corporate services and capital markets groups. Both these businesses have scaled and are market leaders. Our corporate services group continues to make progress with new and expanded business in both software and services and is an important source of new retail brokerage accounts.

Our capital markets group also provides a strong foundation for organic growth in our market making activities. We are competing effectively and acquiring more external order flow. And we will continue to ensure we are extracting maximum economic benefit from our retail customer engagement.

Third, as we continue to expand our wealth management offering for long-term investors via existing sales and service channels, we will leverage our heritage of innovation with an eye towards delivering value propositions that redefine the customer experience for self-directed investors.

E*TRADE was a pioneer in online trading. And we believe that we have an opportunity to play similar role in online investing as customer needs and technologies evolve. Finally, we believe our bank can play an important role in helping us to optimize the value of a very large and stable brokerage customer deposit base.

With a focus on these four areas which build on our current strengths and in many cases existing assets, we are optimistic about the opportunities ahead. We are actively executing against these growth strategies and will keep you informed on our progress.

As we do this, I assure you that we will remain intensely focused on flawless execution and rigorous expense management. I''m gratified to see the energy across the organization as we seize the growth opportunities that lie ahead for E*TRADE.

With that, operator, we are ready to take questions.

Question-and-Answer Session

Operator

At this time, I would like to remind everyone in order to ask a question, please press star one on your telephone keypad. Again, to ask a question, please press star one. We’ll pause for just a moment to compile the Q&A roster. Your first question comes from Daniel Harris of Goldman Sachs.

Daniel Harris – Goldman Sachs

Hey, good evening, guys. How are you?

Steven J. Freiberg

Good Dan.

Daniel Harris – Goldman Sachs

I was wondering if we could start on the net interest margin. One of the things that we have seen across the sector is that reinvestment risk is coming to the floor in terms of how you think about loans rolling off and where you are reinvesting those dollars. So could you remind us how you thinking about your strategy going forward here?

Steven J. Freiberg

Yeah. First, we agree our preference is to have this basically distinctive upward slope on the yield curve and elevated level of rates, which clearly has been quite of a challenge which Bruce alluded to during the quarter.

That said, we''ve done several things that helped maintain the basically the net interest margin, in fact, improved the net interest margin during the period. First, which I think is strategic for us, we continue to basically grow our margin book, which is actually important.

Second, we basically have the opportunity that we''ve executed on to deploy investment strategies and keep cash at a lower level than we might have otherwise but sufficient to run our businesses. So cash basically earning very little in the overall business.

And finally, we have had the opportunity to basically invest as you know in agency-backed securities, which is essentially where we invest our excess, as our legacy loan portfolios come down. I think our basically our treasury area has played essentially that role basically smartly and have done very well in that pursuit.

Bruce said on the call three months back that we would strive to keep net interest margin in roughly the 300 basis point range. Obviously, there is no precision around 300, but we would say that the level of confidence that we will maintain it within that range plus or minus but we strive to stay relatively neutral on rate moves in either direction.

Daniel Harris – Goldman Sachs

Okay. Thanks. That''s really helpful. One of the things I''ve heard you say Steve is that you having spent some time looking through the bank. There''s clearly a good bank within E*TRADE especially for those clients that are probably bank and brokerage accounts. Have you guy done any more work on identifying that, what is the size of that portfolio and how would you think about monetizing that further?

Steven J. Freiberg

Let me answer that. For the broader audience, we have since my arrival, done segmentation work on what could be described as good bank, bad bank. Without going through detail, either analysis or numbers, as expected, embed in the roughly $17 billion legacy portfolio, there are large number of customers of E*TRADE that have very good profiles, both from a standpoint of how they look on their own basically set of, I would say FICO, demographic and other. In addition to that, they''ve had basically consistent level of payment history with us and absolutely nothing wrong with them.

If we had a choice we would rather maintain them longer than shorter. So with that said now that we have a view of good bank, bad bank, we are looking at and evaluating strategies that might allow us to optimize within but it''s a bit premature to go through any detail related to that other than to say the $17 billion or so is not a monolith. And within that, there is opportunity and when we are basically further down the line, we would be more than pleased to have a broader dialogue on that topic.

Daniel Harris – Goldman Sachs

Okay. Great. I will step back in the queue, thanks.

Steven J. Freiberg

Thank you.

Operator

You next question comes from Rich Repetto of Sandler O''Neill.

Richard Repetto – Sandler O’Neill

Good evening, Steve and Bruce.

Steven J. Freiberg

Good evening,

Richard Repetto – Sandler O’Neill

Just a question on the home equity loans, just a slight uptick in the special mention loans on home equity and I''m also looking at the allowance on the modified loans on the TDRs. That looked like the allowance increased 11%. So I guess, can you just comment on where you think the credit situation is going on with home equity?

Paul Brandow

Hi. This is Paul Brandow. I will comment on that. So we are actual overall very pleased with the performance of delinquencies over this year. I think total special mention including both first lien and home equity are down in the neighborhood of 25%. You are right. The improvement more recently in home equity has been flatter than first lien that we expected because our first lien portfolio was less seasoned so it took longer time for some of the poorer credits to run through there.

But where we are now, it''s still believing that we are within this long-term trend but there will be variability from month-to-month. So you''re right, in September, there was what I would call a fairly modest uptick but if you look over the past four or five or six months, the trend has been flattish to down.

So I don''t think that will change. But we think the rate of improvement particularly in home equity would probably be more moderate.

Richard Repetto – Sandler O’Neill

Just on the TDR allowance? For home equity.

Paul Brandow

TDR allowance -- the home equity did the allowances did go up. I don''t know where you got 11% from -- the evaluation allowance I think went from 50% at the end of last quarter to 55% at the end of this quarter. That''s very much consistent with our experience with regard to delinquencies and so it is up. It''s within the range of what we expected and our performance with regard to delinquencies in modified loans we believe to be considerably or better than what we can glean in terms of overall market performance.

Richard Repetto – Sandler O’Neill

Okay. And then I guess Bruce or Steve, I think you alluded to this, but the cash that you invested, it looks like on the bank average enterprise balance sheet that the significant amount of cash was deployed. And I guess, can you just talk about looks like it went down on average $2.3 billion out of cash and cash equivalents in to at least a portion of it in to other investments?

Bruce P. Nolop

Yes. In fact if you recall in the last earnings forecast that we gave in discussion with you, we talked about one of our goals was to redeploy more of our cash and not to have as much of it at the low return and we were successful. Frankly, we still have more to go that it''s always difficult to determine how much cash you are going to have to reinvest. And we did have those securities gains so we ended up with more than we would like. And we still see more upside in redeploying cash into more lucrative investments going forward.

Richard Repetto – Sandler O’Neill

Okay. Very last quick question. Why isn''t the interest expense for the springing lien notes deductible?

Bruce P. Nolop

Right. There is really a restriction by the Internal Revenue Service as to how much of high yield debt interest can be deductible. So it''s a combination of the rate plus the -- to the extent you have original issued discount. And just to clarify, I want to make sure I said the right number. It''s $12 million, is the tax that would be due to this nondeductible interest.

Steven J. Freiberg

Rich, this is Steve. Just to add to Bruce''s commentary, it''s roughly one-third of the interest is not deductible, not the interest.

Richard Repetto – Sandler O’Neill

Right.

Steven J. Freiberg

And so it''s that one-third as well as the original issue discount that is getting advertised out and clearly, it''s not deductible. Obviously, when the firm is losing money, it was either an issued -- an obvious -- the real challenge is when essentially the profitability is relatively small that the $12 million effect of this gets magnified on a relative basis which is the tax rate and over the longer term, assuming the company returns to normal levels of profitability becomes relatively mild in its impact.

Richard Repetto – Sandler O’Neill

Understood. Got it. Good solid quarter, guys. Thanks.

Operator

Your next question comes from Eric Bertrand of Barclays Capital.

Eric Bertrand – Barclays Capital

Continuing on the technical part of the tax, is it $12 million per quarter or $12 million per year. I heard you say earlier it was annually.

Bruce P. Nolop

Yeah. That''s correct, Eric. Just maybe I can just answer your question that the way you do your taxes each quarter you have to do an estimate of the annual pretax income that''s taxable and your annual tax payments and then that gets run through your quarterly statement and at any one quarter, you can end up with wild slings and the impact. That was the case this quarter. So, but overall if you are doing an annual forecast, you should assume $12 million is an incremental tax above and beyond a typical 38% effective tax rate.

Eric Bertrand – Barclays Capital

That answered the second part of the question. Cool, thanks.

Bruce P. Nolop

Eric, by the way congratulations on your promotion.

Eric Bertrand – Barclays Capital

Okay. Thank you very much. Getting into the NIM then again -- following up on I believe Dan''s question earlier, are you suggesting that NIM will not compress if we continue to see the yield curve stay where it or even press a little bit lower over the next year or so with quantitative easing?

Bruce P. Nolop

No. I think what we said which is consistent with last quarter that we expect to have basically a NIM in the 300 basis point range as our goal. We are close to that now even with the challenges that the industry as well as E*TRADE faced in the second quarter. But in any given quarter or any given period, it could vary from that and so we can''t guarantee 300 basis points.

But I would say that we are striving hard to maintain consistency on our spread and as you recall, the 289 can grow to 295. And we are working hard to maintain our spreads. But to point, we are basically subject to reinvestment risk and the environment so we are not immune.

Eric Bertrand – Barclays Capital

So let me ask it a different way then. If the rates environment that we have today persists and doesn''t change, how much downside is there to NIM as you reprice to the existing rate curve?

Steven J. Freiberg

The question is clear. I just don''t feel comfortable giving you a quantitative or quantified answer to it. But it -- clearly, I can tell you directionally in the stable rate environment to today, we feel that there is stability in our spreads. Again it may not be precise but there is stability in our spreads. If the environment were to say, flatten from here, it could be reinvestment risk is real and if rates basically were to rise with time, given that the average duration of our portfolio is about three, three-and-a-half years. You can get a sense of any given period what we are reinvesting.

Eric Bertrand – Barclays Capital

Okay. I will squeeze in one more quick…

Steven J. Freiberg

I''m not trying to be difficult on the question but it''s not something I can give you a precise answer to.

Bruce P. Nolop

Eric, this is Bruce. One other thing to add is that it will also be a function of to the extent we realize the gains because right now we have seen good gains in the portfolio. And we are always making an economic decision as to whether it''s best to lock in some of those gains versus having the interest income flow in future quarters.

Eric Bertrand – Barclays Capital

Okay. Lastly, on the liability side, your deposit balances and rate continue to compress, is that still desirable from a capital ratio perspective or is this a business decision that you want to continue shrinking your deposit base and your exposure to that very low cost of funding?

Steven J. Freiberg

I''d say at this point Eric, that we are having the deposits come from brokerage customers and we are making money on all of those deposits. So there is not the same desire to reduce the deposits. There is some natural run-off on the bank side. But you saw that overall customer cash was quite strong that you had actually an increase this quarter. And from us -- for our standpoint that''s a good thing and as we said we still generated our organic capital despite this increase in assets and that to us is the best of both worlds.

Eric Bertrand – Barclays Capital

Okay. Great. Thanks for another profitable quarter.

Operator

Your next question comes from Howard Chen of Credit Suisse.

Howard Chen – Credit Suisse

Hi. Good afternoon.

Steven J. Freiberg

Hello.

Howard Chen – Credit Suisse

Given all that''s going on in DC, just curious, any clarity on whether you will ultimately maintain your thrift charter. Do you envision any shifts to that charter and with a $40 billion balance sheet, do you think there is a probability you''ll be -- or high probability you will be deemed systemically important?

Steven J. Freiberg

From a standpoint of our charter, we don''t see any either issue or risk to our charter. Obviously, what we do know, factually is that the OTS will become an operating arm of the OCC through basically, I think, through the latter part of next year. But that said, our expectations would be that we are basically well capitalized banking institution with a purpose and that should not basically have any adverse impact as the OTS moves under the OCC.

I don''t know how else to answer that question. At this point, we have every degree of confidence that we operated well with our current regulator and will operate well with whatever the succession plan will be.

Howard Chen – Credit Suisse

Okay. Thanks Steve. And then just to follow up on that comment with regard to well capitalized. I guess Dodd-Franks seems to focus a lot on parent company capital. Given your view that you''ve got excess capital within the bank, what''s the appetite and ability to really upstream that in to the parent company?

Bruce P. Nolop

At this point, all I can say is that we are at a position with excess capital. We are generating organic capital each quarter, but at this point I just cannot give you any forecast as to when we maybe able to take money up from the bank to the parent. That''s just something that''s down the road.

Steven J. Freiberg

I mean, just to add to it without predicting, as you''d expect clearly it''s our preference to upstream capital over time which provides us more flexibility as well as the opportunity to have not only a well capitalized bank but a well capitalized holding company as well. So these are basically areas we are actively engaged but it''s premature to basically bring either specificity to it or prediction particularly around time. But the issue is one that we have as priority.

Howard Chen – Credit Suisse

Okay. Thanks and a final quick one. You mentioned the gains on sales were opportunistic, could we just get some more color on what exactly you guys sold within the portfolio?

Bruce P. Nolop

Simple answer is agency securities. We can do more specifics if you would like but it''s all in that securities portfolio and there has been gains through spreads narrowing in general.

Howard Chen – Credit Suisse

Okay. We will follow up offline. Thanks so much.

Bruce P. Nolop

Yeah.

Operator

Next question comes from Michael Carrier of Deutsche Bank.

Michael Carrier – Deutsche Bank

Thanks guys. Just one -- thanks for the detail on the future plans and areas that focus on it''s helpful. Just on that point when we think about the balance sheet, it has been running off about $1 billion a quarter, is that still sort of an expected run rate in the near-term or if you do get deposits in, would you be keeping it at a certain level more from a forecasting standpoint?

Steven J. Freiberg

I think the best way to think about it is the legacy asset portfolio should continue to run off at $1 billion a quarter although not in perpetuity, obviously, the portfolio gets smaller, there will be a relative adjustment to that. But I''d say that the trend has been approximately $1.25 billion, probably holds for a while, then diminishes in absolute dollar terms just by nature of the size of the portfolio.

On the other side, basically picking up on Bruce''s commentary that we would expect and strategically want to grow our consumer deposit base, particularly our consumer deposits coming from our brokerage business. That said as the deposits grow and they have been growing we probably will diminish, which is what we have been doing as well, continue to do this wholesale funding and hopefully we will grow the business. And I think the balance sheet over the longer term will be more determined by the size of our customer deposits, strategic customer deposits than anything else and it will adjust the asset side of the balance sheet accordingly.

So hopefully with time, legacy assets come down, wholesale funding comes down, consumer deposits go up. We''ll build the asset side of the balance sheet in accordance to the size of that deposit base.

Michael Carrier – Deutsche Bank

Okay. Thanks. That''s helpful. And then just one more on the capital side, if we think about if you had either target for the holding company, just because if we think about whether the amount of capital in the bank, the earnings generation, DTA benefit, you could kind of back into it. But I don''t know if you have some sense or maybe you will in a few quarters down the road if you get more clarity, but just wanting your thoughts on that because there are a lot of moving pieces.

Bruce P. Nolop

At this point, we’re monitoring what the regulatory requirements are going to be. But in general, the only thing we know for sure is that there will be similar ratios to what is applied to the bank. And so we are already just making sure that we have forecasted good tier one capital as a percent of total assets and red tier one capital as a percent of risk-weighted asset and we also pay attention to tangible equity as another ratio that makes sense.

We haven''t set specific targets. But from all the commentary we''ve seen about potential goals that maybe set by regulators, we feel very confident that over time we should be able to maintain and fulfill any requirement without the need for external capital.

Michael Carrier – Deutsche Bank

Okay. That''s helpful. And then just on expenses continuing to trend down and you guys are finding ways to pay down, this quarter you have some seasonality. I guess just going forward, ex the maybe the lift up in advertising we typically see, anything unusual there or any other lay downs from other initiatives that are in place.

Bruce P. Nolop

At this point, we think relatively constant expenses, there would be some mix changes as we talked that more emphasis on customer facing and customer service people as opposed to back office people. But the heavy lifting on the overall reduction expenses has occurred and there will be more just as Steve put it, managing our expenses to make sure that we don''t increase them as our profitability improves.

Steven J. Freiberg

And then just to add to that, basically -- the general mode of operation is going to be is -- that we can is to redirect expenses into growth opportunities both short-to-immediate term and hopefully that will basically it has the trajectory of the business. So it''s not so much expenses as an aggregate, there are good expenses and bad expenses. We want to make sure that we have an overabundance of good expense in the business and really drive down the expenses that are not adding value or distracting our hobbies.

Michael Carrier – Deutsche Bank

Okay. Thanks guys.

Operator

Next question comes from the line of Mike Vinciquerra of BMO Capital Markets.

Michael Vinciquerra – BMO Capital Markets

Thank you. One more thing on the interest income, I want to make sure that I understand that the corporate interest income this quarter was a positive $6 million. Is that the number you are talking about in terms of reinvesting the corporate cash because I think that''s excluded from the enterprise interest earning assets, is it not?

Bruce P. Nolop

That is. They''re really two different topics. There is one which is corporate interest expense and that had a credit from the legal settlement. The prior discussion was on our net interest spread and that referred to cash primarily in our bank and so that would not be affected by the credit.

Michael Vinciquerra – BMO Capital Markets

I understand. Okay. Thank you.

Bruce P. Nolop

And then the drop in your attrition rate at the brokerage pretty impressive from 13% to 10%, can you quantify at all how big of an impact the fact that you guys basically started waiving IRA service fees and account service fees, I guess the first and second quarters. Has that been playing a role because you are not pushing people down below the $25 minimum on your own, they are staying on lower balanced accounts?

Steven J. Freiberg

This is Steve again. Clearly, it''s not one element that has driven down the rate but clearly, that''s been helpful. I think simplifying our pricing basically taking off inactivity fees. But I think more importantly when we measure essentially the service satisfaction of our client base that''s been on a constantly improving track, that promoter scores which is essentially how people feel not only about the firm but willingness to recommend us to others that''s been improving as well, plus we''ve been enhancing both product as well as utility, which is our platform.

I think it''s really, kind of, the aggregation of all those pieces that have brought the attrition rate down to what has been a goal for the company. And also actually quite I think impressive march from where it had been if you look back over the last, I would say six quarters or so to where it is today. As I said in the opening commentary, our expectation is we will strive hard to maintain it. I’d like to say is we will try hard to improve upon it to get into the single digits but it''s a big deal when you have 2.7 million brokerage accounts, every 1%, that''s a lot of accounts if you think about it in essentially numeric terms.

If you think about 1%, it''s 27,000 accounts, how much we just spent to get 27,000 accounts. So what we are trying to operate on not only is the front end bringing on new customers but bringing on new customers, really maintaining the relationship that we have with our customers. And importantly, broadening out the relationship with the existing customers so that we could help them further and we can derive more benefit as they derive basically more utility from what we offer. But it''s all wrapped together.

Michael Vinciquerra – BMO Capital Markets

Right. Right. To a comment you made before, Steve, on the stock plan business being a key driver to your new accounts, can you actually quantify how important that''s been to helping drive the gross new accounts coming out? What percentage comes from that business?

Steven J. Freiberg

Typically and it varies a bit but typically 20% to 25% of our new retail accounts come through that stream. And so in a world where everyone has limits to resources, that has become a very high priority for us, one to grow the business because on its own it''s compelling.

But more importantly, it''s one of the best sources of good quality new customers that we have. And we have a strong presence within that space. And in addition to that it was probably the largest single capital expenditure this company has made over the last 2.5 years, was to completely upgrade its capabilities and platforms as well as its people and it''s been recognized externally and we see it as a important lever to grow the business and we''re very excited about it. And we are working very hard on that aspect as we speak.

Michael Vinciquerra – BMO Capital Markets

That''s great. Thanks very much.

Operator

Your next question comes from Matt Snowling of FBR Capital Markets.

Matthew Snowling – FBR Capital Markets

Hi. Good evening. I have got a follow-up question for Steve on capital. Once you are actually able to upstream the capital, can you give us a sense as to what your views are and how you would allocate that? I guess what I''m asking is you have debt that''s callable next year, one could argue that the stock is looking attractive on normalized earnings and how you weigh that versus Basel requirements?

Steven J. Freiberg

I guess we look at it on a, I would say, on a hypothetical because clearly it would have an upstream to capital at this point. But if we were to upstream capital, we think about it as potentially having three, let''s say three uses -- one, is we want to basically grow the business and how much capital is required to grow the business although largely, this is not a highly capital intensive business.

Second, to your point, we have a sizeable amount of high-priced debt, out in the marketplace. And if we could retire some of that debt, that would be a good thing because we spend pretty close to $170 million or so a year in servicing that debt, which was brought on largely when the company was stressed and needed to be recapped.

And then finally, to your point, we would basically look at alternatives including potential to buyback our own equity or stock but it will be situational. So when the events occur it''s hard to predict which would have the highest priority. But I think the universe is reasonably well defined as to what we might deploy that capital towards.

So I''m not abating but I can''t answer the question until I get to the point where I actually have the capital from the standpoint of flexibility but also understand the situation at that particular point in time.

Matthew Snowling – FBR Capital Markets

Fair enough.

Operator

Your next question comes from Faye Elliott of Merrill Lynch.

Faye Elliot – Bank of America/Merrill Lynch

Hi. Thanks for taking my call.

Steven J. Freiberg

Thanks, Faye.

Faye Elliot – Bank of America/Merrill Lynch

Could you just revisit the TDR allowances and the shortfall to the expected losses. I know, there is a footnote there that suggests that the expected losses do include charge-offs that you’ve already taken. If you net out your expectations versus what your expected losses are, do you come out ahead on the allowance?

Paul Brandow

Let me give a try at that answer. It''s Paul again. So if you''re looking at the exhibit in our press release, you are right. There are two columns. One is specific allowance as a percentage of the loans and one is total expected loss. The difference between those two numbers is due to the fact that at 180 days past due, we brought all of our loans down to expected recovery value.

So basically the difference between those columns is that. The penultimate column, specific valuation represents the reserve we have for the remaining losses we expect to take on those loans and that allowance we do believe is sufficient to cover those losses.

Faye Elliot – Bank of America/Merrill Lynch

So basically the specific valuation allowance is enough to cover your residual expected losses?

Bruce P. Nolop

Yes.

Faye Elliot – Bank of America/Merrill Lynch

Okay. So we don''t need a true-up there or shouldn''t be expecting one.

Bruce P. Nolop

No.

Faye Elliot – Bank of America/Merrill Lynch

Okay. Great. And then other of your peers have suggested that they might, kind of, reenter the lending game given reinvestment risk and so forth. Is this something that down the road you could consider, I know, that they were brokered loans before so that might involve a larger business build than you have in mind. But since you have the bank, would you consider getting into the lending game again?

Steven J. Freiberg

This is Steve. Let me try to provide perspective to that. The business that E*TRADE been in, predominantly the purchase of whole loans and securities, is a business that we would not reenter, definitively would not reenter other than qualify agency backed MBS is fine.

From a standpoint more broadly would we like to lend money to our high quality brokerage customers? That''s a different issue and one that we are basically assessing. So simply stated, we have a margin book as we said that''s approaching $5 billion. Would I like it to be twice the size? The answer is yes. We will be deploying additional product and capability, as I mentioned, over the coming quarters, hopefully giving us an opportunity to grow that further.

Then taking a step back, the universe that we are quite interested in is largely the one that is the core of our business, the 2.7 million brokerage customers and we''ll assess whether or not. We are not saying we would but we''ll assess whether or not that is a business that we want to enter. If we would enter the lending business, it would be very much focused on that client base which is a very different animal from we pump expectation being a relational-oriented business to a high quality basic customer could provide us an opportunity. But it is something that we are thinking about but we don''t have specific plans to pursue.

Faye Elliot – Bank of America/Merrill Lynch

Right. Understood. Something that would where you have insight in to the customers'' financial health and so you would probably -- if you didn''t feel comfortable with their abilities to cover their obligations and so forth.

Steven J. Freiberg

Correct.

Faye Elliot – Bank of America/Merrill Lynch

Okay. That''s all I have. Thanks so much.

Operator

Your next question comes from Patrick O''Shaughnessy of Raymond James.

Patrick O''Shaughnessy – Raymond James

Good afternoon, guys.

Steven J. Freiberg

Hi, Patrick.

Patrick O''Shaughnessy – Raymond James

Steve, in your prepared comments, you talked a little bit about some of your new growth initiatives and one that you touched was advisor-based managed portfolios. I was hoping you could provide a little bit more color on that and then just to address the bigger issue where if you look at some of your larger competitors in the space, the firms that are growing the client assets the fastest certainly have the advisor businesses. So how do you think about maybe trying to establish a bigger beachhead into that area?

Steven J. Freiberg

Let me answer both and Mike Curcio is here who runs the brokerage side. Mike should feel free to add his comments as well. On the RIA business, it hasn''t been a business we have been in, in the past and our business model really has been one that''s direct to the customer and so not disagreeing that it''s a faster growing segment of the broader industry. It just hasn''t been an area that we''ve pursued.

So it''s something that, again we would consider but in a world of prioritization, it''s not high on our list of priorities, at least over the near-to-intermediate term. In contrast, for example, we would much prefer to rev up our corporate services group and grow more rapidly there than basically enter an area that is costly to enter and will take a long time in our view to getting aggregate profitability.

So we just have to be conscious not only of the opportunity but the cost of entry and what our alternatives are. And again, because it wasn''t central for the business model over time, I will never say never but I don''t want to mislead anybody to say that we are going to jump into that area.

From the standpoint of managed investment products and the like, I will let Mike comment on that as to what we have in the marketplace, how we basically have distributed those products and what some of the near-term opportunities are in that particular space as we try to basically service both the investment needs of our clients in addition to what we''ve historically done, which is predominantly the trading needs of our clients.

Michael J. Curcio

Thanks Steve. This is Mike. On the MIPs or managed investment portfolios, we first started with the very simple wrap ETF and mutual fund accounts and we''ve expanded to -- we will be expanding to separately managed accounts in late Q4, early Q1 of next year. What we''ve seen is tremendous appetite from our customer base. We are hitting our target numbers and in conjunction with rapidly -- excuse me, extending our sales force, we are very optimistic of a lot more penetration in assets and MIPs as well as our mutual fund business overall.

Steven J. Freiberg

Let me just go back, just to add to the commentary because it may have been missed. It''s what I said in my opening comments that we worked through a segmentation of our portfolio and in our basically -- I would say in our most compelling segments what Mike and his team have been doing is adding relational sales capability and addition of the relational sales capability, products and services that would better serve not only the trading needs but the investment needs of our customers as well.

And it''s a fairly virtuous cycle that they basically broaden relationship with us, we can fulfill more of their needs. But in addition to that, we can begin to diversify from the transaction orientation on the brokerage side to one that gives us an actuarial stream in addition because of essentially, the management fees that come along with those particular products.

Patrick O’Shaughnessy – Raymond James

Got you. Appreciate the clarification and that''s all I had.

Steven J. Freiberg

Thanks.

Operator

Your next question comes from Brennan Hawken of Collins Stewart.

Brennan Hawken – Collins Stewart

Hi, guys, thanks for taking the question. In 2Q, you put back about $20 million to sellers of mortgages and so I was hoping that maybe you could give us some color on how further putbacks are going and also if maybe you could clarify, I know a great portion of your loans were purchased from third parties. And so if you maybe could give some details on who the originating parties were and what the standard practices are in putbacks whether they were brokers or banks or what have you.

Robert V. Burton

Sure. This is Bob Burton and I''ll answer that one. We have been very aggressive since 2007 in putting back loans to customers. We put back about $263 million of loans so far. Obviously, as a loan portfolio ages, our opportunity to put those loans back becomes somewhat smaller but we continue to work with the original sellers putback loans to them. We''ve done about $40 million this year. So it is slowing down but at the same time we are also talking to a variety of our original sellers about settlements of that right and some of the opportunities there.

In terms of who the sellers were, it really cuts across all of the people that were heavy originators of loans during that period. And so there is no particular concentration in any one originator. It really is pretty indicative of the market during those years.

Brennan Hawken – Collins Stewart

Fair enough. Thanks for the clarity.

Operator

Your next question comes from Joel Jeffrey of KBW.

Joel Jeffrey – KBW

Good afternoon guys. Could you just -- it looks like DARTS clearly were down in this quarter. Just wondering, if you get a sense, given that volumes have picked up again, how they are trending so far in the fourth quarter?

Steven J. Freiberg

Let me -- this is Steve again. Let me give perspective without giving numbers. Clearly, the industrywide softness we experienced we think were in line with basically with expectations. That said, the early part of the fourth quarter, really the basically the first 20 days or so of October, we''ve seen basically a fair amount of resiliency in trading activity without getting in to specificity.

So we are not declaring basically that it''s the point of inflection, now post the flash crash. But on the other hand, it does make us feel a bit more confident that the, I would say the retail client or the retail customer possibly is feeling well enough to wade back into the maybe the shallow end of the pool. But that said, it''s still very early days but I would rather be seeing the trend we are seeing in the first part of the quarter than not. I don''t know if that answers it but that''s the best we could say at the moment.

Joel Jeffrey – KBW

Close enough, I guess. Can you just give us a sense though for the last quarter what percentage of your DARTS came from options and ETFs?

Steven J. Freiberg

Approximately 18%. Actually, options was 18%.

Bruce P. Nolop

11% was ETF.

Steven J. Freiberg

So let''s say just short of 30% on the two components.

Joel Jeffrey – KBW

Okay. Great. And then just roughly, I know, you usually disclose this in the Q, but just wondering if you guys had the updated loan-to-value numbers for the one to four, the HELOC portfolios?

Steven J. Freiberg

Not at this point.

Bruce P. Nolop

It will be in the Q.

Joel Jeffrey – KBW

Thank you.

Operator

Thank you. This concludes the allotted time for our Q&A session. I will now turn the floor back over to Steve for any closing remarks.

Steven J. Freiberg

Thank you again for joining us tonight. We look forward to speaking with you again next quarter and good evening.

Operator

Thank you. This concludes your conference. You may now disconnect.