E*TRADE Q4 Earnings Call Transcript

123jump.com Staff
02 Feb, 2010
New York City

Sales fell 22% to $420.4 million and net loss was $67 million or 4 cents per diluted share. Total operating expense for the quarter rose $17 million to $318 million. Total net charge-offs in the quarter were $324 million, a decrease of $27 million from the prior quarter.

E*TRADE Financial Corporation ((ETFC))
Q4 2009 Conference Call
January 27, 2009 5:00 p.m. ET

Executives

Susan Hickey (ph)
Robert Druskin – Chairman and Interim Chief Executive Officer
Bruce Nolop – Executive Vice President and Chief Financial Officer
Paul Brandow – Chief Risk Officer
Matthew Audette – Executive Vice President, Finance
Robert V. Burton – President of E*TRADE Bank
Michael Curcio - Executive Vice President and President of E*TRADE Securities

Analysts

William Tanona - Collins Stewart
Matthew Snowling - FBR Capital Markets
Richard Repetto - Sandler O’Neill
Michael Vinciquerra - BMO Capital Markets
Daniel Harris - Goldman Sachs
Roger Freeman - Barclays Capital
Faye Elliott - Bank of America/Merrill Lynch
Michael Carrier - Deutsche Bank
Howard Chen - Credit Suisse
Michael Hecht - JMP Securities
Matt Fischer – CLSA

Presentation

Operator

Welcome to the E*TRADE Financial Fourth Quarter and Year-End 2009 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 questions-and-answers. At that time, if you have a question, please press star then the number 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 my pleasure to turn the call over to Susan Hickey (ph) from E*TRADE Financial. Please go ahead.

Susan Hickey

Thank you. Good afternoon and thank you for joining us today. Joining me are Bob Druskin, E*TRADE''s Chairman and Interim CEO and Bruce Nolop, our CFO and other members of E*TRADE''s Management Team.

Before turning the call over to Bob, I would 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 certainly factors, including risks and uncertainties referred to in the 10-Ks and 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 in its forward-looking statements. This call will present information as of January 27, 2010. Please note that E*TRADE Financial disclaims any duty to update any forward looking statements made in the presentations.

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 at approximately 7 PM Eastern Time. 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 turn the call over to Bob Druskin.

Robert Druskin

Thank you everyone for joining us this afternoon. I''m pleased to be participating in my first call as E*TRADE''s new Chairman and also as Interim CEO. During my nearly two years as a board member, I worked closely with Don Layton and the entire leadership team at E*TRADE, so from my perspective, it has been a very smooth transition and I''m happy to be working more closely with the organization during this interim period.

The knowledge I pick up while acting as CEO will be helpful to me and hopefully to the entire company in my ongoing role as Chairman. During today''s call, I will discuss a number of 2009 highlights and key issues and then turn it over to Bruce who will provide a financial overview for the quarter and year. From there, I will share our outlook on 2010 and then we will open up the call for questions.

Like many companies, E*TRADE began 2009 in uncharted waters, while our core franchise, the online brokerage business was strong. We continued to be weighed down by unsettled markets, a very weak global economy and our own asset quality issues.

By executing on a number of key initiatives though, we ended the year with a much stronger company position for sustainable, profitable growth supported by a stronger balance sheet and capital structure. While significant time and energy were devoted to our recapitalization efforts during the year, we stayed focused on the online brokerage business, enabling us to gain market share from traditional brokers while competing effectively against our on-line competitors.

During 2009, we recorded our highest dart levels in history and added more than 115,000 net new brokerage accounts. We ended the year with a record 2.7 million brokerage accounts and so both brokerage cash and margin receivables increased during the period.

If we exclude the loan loss provision and any gains or losses on securities, our operating profit increased 8% when compared with 2008. Our success during the year was supported by continued investments in our online brokerage business, specifically product and service enhancements to address the needs of both active traders and long-term investors. This was a high priority for us.

We did not want to succeed in recapitalizing the company and find that our core business franchise had been eroded. We delivered several new investor offerings including an IRA converter tool to support customers through the rules governing 2010 (inaudible) conversions and enhanced investor resource center to simplify access to our comprehensive offerings.

An expanded fixed income offering to broaden our product base and appeal to a wider group of investors and E*TRADE mobile pro for iPhone where we are seeing adoption across all consumer segments as investors increase their alliance on mobile devices for information and transactions. We also launched a number of new initiatives in customer service that have helped drive a greater level of customer satisfaction and contributed to a decline in our annual brokerage account attrition from 16.7% in 2008 to 13.5% in 2009.

We are further sharpening our focus on the products and services that we believe are key to attracting, retaining and extending relationships with long-term investors, will be an important segment in driving our future growth. In essence, we''re focused on four objectives as our business evolves.

One, grow our valuable active trader franchise. Two, deepen our penetration in the long-term investor segment. Three, increase the quality of the customer accounts and four, further reduce our attrition rate, a key to continued sustainable growth in brokerage accounts.

We made great progress during the year in reducing exposure in our loan portfolios, shrinking total loans by more than $5.3 billion, including $1.1 billion in the fourth quarter. We have reached an inflection point where our provision for loan loss has crossed below the level of net charge offs and we are recorded our fifth straight quarterly decline in provisions.

Finally, as I alluded to earlier, we were able to execute a very significant recapitalization. We were a $765 million of cash equity investing most of the $733 million of net proceeds in the bank, materially improving our queue ratios and liquidity. We also executed a debt exchange of interesting bearing debt to non-interest bearing convertible debt, reducing our annual corporate interest payments by more than half and deferring any material debt maturities until 2013.

This greatly enhanced financial structure has allowed us to further shift our focus and resources from repairing our balance sheet to building on our core strengths and provides the flexibility we need to execute against our objectives. I''ll now turn the call over to Bruce to discuss our financial performance.

Bruce Nolop

Thank you, Bob. During the quarter, we had a net loss of $67 million or $0.04 per share, compared with a net loss of $276 million or $0.50 per share a year ago. For the full year, we reported a net loss of $1.3 billion or $1.18 per share. Excluding the one-time non-cash charge associated with our debt exchange, our net loss for the year would have been $525 million or $0.47 per share. And this compares with a full year 2008 loss of $809 million, or $1.58 per share from continuing operations.

During the quarter, we generated $523 million of net revenue, which compares with $575 million in the third quarter and represents an 8% increase from $486 million in the same quarter a year ago. Our reported revenue included net interest income of $321 million, which was essentially flat from last quarter.

This reflected a net interest spread of 2.86% on average interest earning assets of $43.8 billion. So while we saw a $459 million decline in average interest earning assets during the quarter, this was offset by a 4 basis point expansion in the interest income spread.

We continue to be pleased that we have been able to maintain this level of interest rate spread, despite the low level of market interest rates. Commissions, fees and service charges, principal transactions and other revenue in the fourth quarter were $205 million.

This was an 11% sequential decline compared to the third quarter, which reflected the lower trading activity as well as a $0.19 decline in average commission per trade due to a less favorable customer mix. Our total operating expense for the quarter rose $17 million to $318 million.

The increase was primarily due to $14 million in charges associated with the restructuring of our international operations, as well as a seasonal increase in advertising and higher real estate owned expenses. For the full year, our operating expense declined 4% as we benefited from prudent expense management, while investing appropriately for long-term growth.

I should also note that if we exclude the premiums for FDI insurance, our operating expense declined by 9% from the prior year. For the full year 2009, we achieved record darts of 197,000 and added 115,000 net new brokerage accounts, ending the year with 2.7 million brokerage accounts.

Brokerage customer cash increased by $4.7 billion in 2009 to nearly $21 billion. And margin receivables were up 37% to $3.8 billion compared to a year ago. Looking specifically at the fourth quarter, darts were 174,000, down 12% sequentially due to seasonality and lower market volatility and off 20% as compared to the fourth quarter of 2008, one of the most volatile market periods in history.

We experienced a slight decline in brokerage accounts during the quarter, down 17,000 accounts, with about half of this decline due to our exit from local market trading in Germany. We believe that the rest of the decline can be largely explained by the attrition of less seasoned accounts that were acquired at the peak of market volatility, when we saw an unprecedented surge in new account activity.

Also we believe that the lower market volatility during the fourth quarter caused a slowdown in the new account additions, since we typically see a strong correlation between new accounts and the volatility index. Although net new customer assets were a negative $300 million during the quarter, net asset flows into our U.S. brokerage business were a positive $1.5 billion and while our balance sheet reduction strategy drove a decrease in savings deposits, brokerage cash increased by $600 million during the quarter, even as our customers were net buyers of $800 million of securities.

While the majority of our restructuring in the U.S. is well behind us, we have some additional work in our international business to ensure we are focused only on opportunities where we can truly add value and achieve consistent profitability. We will continue to offer cross border trade, where customers residing outside of the U.S. trade in U.S. securities, but we are exiting the local market trading business, where customers residing outside of the U.S. trade in non U.S. securities.

During the fourth quarter, we completed the sale of our local German operation and we expect to divest our local Nordic and U.K. businesses in the first half of this year. As a result, we expect to record additional restructuring charges which we currently estimate to be around $15 million during the first half of 2010. This strategic redirection will improve operating margins in our international business and lead to higher levels of profitability.

Turning to the balance sheet. Over the course of the year, we made significant progress in our loan portfolio. Our loan loss provision declined from $347 million in the third quarter to $292 million in the fourth quarter. Total net charge-offs in the quarter were $324 million, a decrease of $27 million from the prior quarter.

We also delivered improved performance as measured by special mention and ad risk delinquencies, with year-over-year total special mentioned delinquencies declining by 22% and total at risk delinquencies declining by 13%. Sequentially, the decreases were 3% and 2% respectively.

Our quarterly loan loss provision has declined 44% from its peak in the third quarter of 2008. Our loan loss allowance has stabilized at $1.2 billion and is now 6% of total loans. The loan loss allowance includes a reserve against modified loans of $193 million or 16% of the total allowance to reflect the accounting for troubled debt restructurings.

We continue to be pleased with the impact that our loan modification program is having on our credit exposure and comfortable with our provisioning as the level of re-delinquency continues to be favorable to industry expectations. We also ended the year in a strong capital position, with our bank capital ratios substantially in excess of regulatory well capitalized thresholds.

As of December 31st, the Tier 1 capital ratio was 6.7% to total adjusted assets and 12.8% to risk-weighted assets. We also had $899 million of risk-based total capital, in excess of the level that our regulators defined as well capitalized. We ended the year with $393 million in corporate cash, a decline of approximately $100 million from the prior quarter.

As we discussed in our third quarter earnings call, this was due primarily to the transfer of $91 million from the parent company to the bank, for a tax refund related to the sale of our Canadian subsidiary in 2008. And speaking of taxes, I want to call your attention to a $23 million adjustment that we have made on our tax provision for the third quarter. This adjustment is described in the supplemental information in our price release.

In summary, we have made significant progress this year in our financial performance, our capital position and our risk profile. With a healthier balance sheet in place, we have entered 2010 with a clearer focus on initiatives that will help drive growth in our core brokerage business.

And with that, I will turn the call back to Bob for closing remarks.

Robert Druskin

Thank you, Bruce. Before opening up the call for questions, let me share our outlook for 2010. While it''s always difficult to predict market conditions, for planning purposes we anticipate customer activity levels similar to what we saw in 2009. We also expect that we will have lower interest earning assets as we continue to shrink the bank''s balance sheet.

This should largely be offset by an improvement in our net interest spread and reflects our assumption that short term interest rates will continue to stay low for most of if not all 2010. We anticipate the credit trends we saw in 2009 to continue in 2010 and we expect the bank to reach a capital breakeven point in 2010, where we are generating rather than using regulatory risk weighted capital.

This year we plan to increase our investment in the brokerage business with an eye toward providing an expanded suite of products and tools and an enhanced service capability in order to attract and retain quality brokerage accounts. To this end, E*TRADE customers will soon have access to high quality active portfolio management service resources, with a competitive advisory fee structure and an accessible entry point of $25,000.

Initial customer interest in this managed investment portfolio has been strong and we look forward to building on this momentum as we roll the product out more broadly. We expect operating expenses and headcount to decline modestly this year, with net increases in our customer facing and technology spend and a net decrease in administrative and overhead costs. We also have a continued commitment to our advertising and marketing programs which are budgeted to remain consistent with our 2009 spend.

During my tenure as a Director, I''ve been impressed with the strength of the E*TRADE organization and the vibrancy of its brokerage business. The loyalty of the customer base during some extremely challenging times was a testament to the team and the franchise.

Now, after almost one month as Interim CEO, I am confident that we have a solid foundation and the right Senior Management Team to drive the company''s success. We are making meaningful progress in bringing aboard our next CEO to lead the company forward. In the mean time I assure you that I am fully engaged and actively involved to make certain that we take advantage of the strong momentum we enjoy going into 2010.

With that operator, we are ready to take questions.

Question-and-Answer Session

Operator

And once again, as a reminder, in order to ask questions, please press star then the number on your telephone keypad now. Your first question comes from the line of William Tanona with Collins Stewart.

William Tanona - Collins Stewart

Good evening. First in terms of your outlook, particularly as it relates to credit, I guess what gives you the confidence or what is it that you''re saying that makes you feel comfortable with releasing the reserves this early in the cycle?

Paul Brandow

This is Paul Brandow. I''m the Chief Risk Officer at E*TRADE. I guess the overriding factor that gives us more comfort than you would – than other firms might have are two-fold. Number one, we''ve seen, as you can see in our release, very steady improvement in delinquency experience over the course of 2009 in both our home equity and first lien portfolios. And that''s being driven by the overriding factor which is our portfolio is much more seasoned than our competitors. Our last purchases were in 2007 and since that time, we have a liquidating portfolio. So the combination of what we experience in the delinquencies, plus the seasonality, season nature of the portfolio gives us that number.

William Tanona - Collins Stewart

And is there any chance that we could get the updated statistics on the LTVs and the FICO scores as if you were to kind of re-originate those loans today as opposed to when they were originally issued?

Paul Brandow

That''s actually not a piece of information that we release.

Matthew Audette

Hey Bill, this is (inaudible). On the LTVs, we typically and will provide the update in the 10-Q or 10-K. So this year end it will be in the 10-K when file it at the end of February.

William Tanona - Collins Stewart

Okay. Thanks, Matt. And then I guess, just moving on to the brokerage business, looking at the net new assets as it relates to the brokerage business itself, obviously there''s been a lot of volatility, generally-speaking, I would say you''ve been anywhere from 10% to the low single digits here most recently. How should we be thinking about that going forward? What are you guys looking to target as you think about reinvesting in the brokerage business and do you think it''s feasible to do it consistently, like the other peers whether it be Schwab or Ameritrade in the high single double digit type of range going forward?

Robert Druskin

This is Bob. Let me take a first crack at that. What we talked a little about in our opening remarks was a broadening, I would say, of our investor base. The company has historically had very volatile asset flows and customer account net openings or closings. As Bruce mentioned, there''s been a high correlation between assets opening and volatility. What we want to do is as I said before, is to expand that customer base, to bring in higher quality accounts. We really are going to continue to grow the active investor base. We want to reach out a little more into a long-term investor base, broaden that out, attract a different kind of client in addition to what we already have, reduce the churn on the other end, because there''s an enormous amount of accounts that come in here and then leave.

And some of the reduction, actually, that you see in the account for this quarter, are because of a relatively small fee that got imposed and had the effect of driving accounts below the minimum that we consider our threshold for counting someone as an active account. So we want to move away from that. It will be an evolutionary process and I think as we go further down that path, you''ll start to see more stability in both the account opening and closing, as well as net new asset generation.

William Tanona - Collins Stewart

Okay. That''s helpful. And then lastly, just what is currently your deferred tax asset and then remind us again how much of that is actually being included in the regulatory capital. I believe it''s only 15% is that right?

Bruce Nolop

The total of deferred tax asset is $1.4 billion and in terms of regulatory capital, it comes in through the other comprehensive income. And so that''s the only place that''s really accounted and percentage-wise, I think that probably is real close.

Matthew Audette

Yes.

Bruce Nolop

That''s probably as good a number as anyway.

William Tanona - Collins Stewart

Okay. Great. Thank you.

Operator

Thank you. And your next question comes from the line of Matt Snowling with FBR Capital Markets.

Matthew Snowling - FBR Capital Markets

Hi. Good evening. I guess, I have two questions for you. First, looking at regulatory filings a while back it shows that you''re planning on selling deposits to Discover and wondering if you could give us a little bit of detail on the profile of those customers and maybe some pricing?

Robert Druskin

Well, this is Bob. We''re not going to go through pricing, but the question about the profile is a good one. That sale is really in keeping with the strategy of reducing the bank''s balance sheet and therefore the capital required to support the bank. We did take a very hard look though and made sure that the accounts we''re selling have no ongoing brokerage relationship with the company, because we don''t want to loose those accounts where we do multiple types of business with a client but those are bank customers only.

Matthew Snowling - FBR Capital Markets

Okay. Is it fair to assume there''s a premium associated west these deposits?

Bruce Nolop

It is fair to say that this is not unfavorable financially to us.

Matthew Snowling - FBR Capital Markets

I guess, the second question, just looking at your average balance sheet, looks like you shifted a lot of cash into a securities portfolio during the quarter. Any sense in terms of the duration that you''re taking on these assets?

Bruce Nolop

This is Bruce and just a general comment is I think you''re familiar with our past statements in other earnings calls that we had more cash than we desired. So this was something that we did not in terms of specific strategy related to markets, but more of our goal of utilizing more of the cash and assets and we -- secondly, only invest in high quality agency securities. So we are not increasing the risk exposure of the company. So we are just earning a higher yield and then in terms of duration, generally, we''re trying to match up with what we think is the duration of our liability structure and roughly two and a half years would be an approximation of what it averages.

Robert Druskin

This is Bob. One of the ways that we''re able to keep our interest spread where we did was we had higher margin balances. We reduced the rate on the CSA accounts, but we also took some of this excess cash and invested it. We had multiple goals. One was to create higher income and higher spread. Two was to, as Bruce said, to match the assets and liabilities and in conjunction with that, was to keep our interest rate exposure quite low and we think, with what we did, we accomplished all those goals.

Matthew Snowling - FBR Capital Markets

Great. Thanks.

Operator

Thank you. Next question comes from the line of Rich Repetto with Sandler O''Neill.

Richard Repetto - Sandler O’Neill

Good evening. I guess the first question, I think, goes to Matt Audette, but I see some increased transparency on regulatory capital was helpful. And I guess the question on what I didn''t understand, the $28 million looked like it was upstream capital from the bank as well as a $57 million usage of capital for changes in risk-weighted assets? If you could explain those two changes in capital, it would be

Matthew Audette

Yes. Sure Rich. So one of the things we had to deal with moving E*TRADE securities under the bank was to rework the transfer pricing a little bit. So to make those two numbers comparable I would like at the 247, the first line on that table netted off against the 28, so kind of $220 million of bank earnings precredit costs. Now the other capital changes, kind of Bob touched on a little before. Two things were going on. One, the increase in margin during the period. We broke that out as a separate line for you of $37 million and then second is the increase in mortgage-backed securities that we just talked about, about $2 billion. Each of those were $40 million in capital. Put together, that''s roughly about the $80 million of usage you saw. And then the loan portfolio runoff you could see was at $81 million.

Richard Repetto - Sandler O’Neill

Got it. Okay. That''s helpful. And then I guess this is for Bob and Bruce, but we know the broker is going to be interest rate asset sensitive. Have you looked at this overall interest rate sensitivity? If sometime in the future we get a raise in rates, how it would impact the bank, given the profile now?

Robert Druskin

Rich, we have. This is Bob. We''ve looked at both at a jump in short term rates only and alternatively, we''ve looked at a parallel shift in rates and under both scenarios, the exposure is very small. On a shift in short term rates, up a hundred points, it''s like $30 million. A parallel shift is, you wouldn''t even notice it.

Richard Repetto - Sandler O’Neill

Okay. $30 million to the negative then?

Robert Druskin

Yeah.

Richard Repetto - Sandler O’Neill

Okay.

Robert Druskin

And that''s with a hundred-base point jump in short rates.

Richard Repetto - Sandler O’Neill

Got it. Okay. And then I guess the last question would be, you''ve given some pretty good forward-looking, at least your thoughts on where the provision is going in a steadily or stable credit environment. I just want an update on that, because I think from the beginning of the year, you said it would continue to decline and it has. So just a little bit more specific on your outlook for the provision for 1Q, even in it''s just 1Q.

Paul Brandow

This is Paul Brandow again. So I think what I say is when we get this question before, our allowance is reflective of our forward-looking 12-month estimate of losses on the bulk of our portfolio, plus for our modified loans that are TDRs, it reflects a lifetime loss. So that would give you an idea looking forward for the next year or so and that''s generally all that we actually release.

Richard Repetto - Sandler O’Neill

Okay. Okay. Thank you very much.

Paul Brandow

Sure.

Robert Druskin

You''re welcome, Rich.

Operator

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

Michael Vinciquerra - BMO Capital Markets

One clarification, I want to ask on the net new assets and the brokerage of a $1.5 billion, how much of that was actually transfers over from the banking subsidiary into the brokerage account instead?

Robert Druskin

This is Bob. That''s a great question and the answer is very, very little. I think it was $38 million, because we had the same issue as we looked through several levels down in those flows to make sure we really understood them. And I think it was $38 million exactly.

Michael Vinciquerra - BMO Capital Markets

Okay. So predominantly, we''re losing the assets only out of the bank and they''re generally just banking customers and don''t have that extended relationship with the brokerage site in general?

Robert Druskin

That''s essentially correct and the fact that we''re losing those is on strategy, as we''ve said for quite some time that we''re going to shrink the bank a little bit and reduce the capital and redeploy. So the fact that they''re shrinking for us is a good think right now.

Michael Vinciquerra - BMO Capital Markets

Very good. Okay. And then just two line item questions. You mentioned, Bruce, the OREO costs going up from Q3 to Q4. Can you tell us what the actual number was this quarter and is that running through the other expense line?

Bruce Nolop

It''s through the other expense and it''s running at about $9 million this quarter and that''s up from the prior. And just -- we probably will continue to see increases in that expense line for 2010 and into 2011 gradually increasing, with the size of the assets in the portfolio.

Michael Vinciquerra - BMO Capital Markets

And the Delta versus Q3, that $9 million in Q3 was what?

Bruce Nolop

About $3 million.

Michael Vinciquerra - BMO Capital Markets

And then lastly, assets lost. If you could give us a sense from the sale of the German operation and the expected loss of assets with the sale of Nordic coming up, so we can kind of recalibrate?

Bruce Nolop

Assets? I''m not sure about that, but the -- Germany was about half.

Paul Brandow

I think it''s about $500 million.

Bruce Nolop

The assets held by a customer.

Paul Brandow

It''s about $500 million, I''m pretty sure of that number.

Michael Vinciquerra - BMO Capital Markets

Great. I just want to make sure we are starting from the right base when we look at quarter over quarter growth. Great. Thanks.

Paul Brandow

Yes. 500 is a good number.

Michael Vinciquerra - BMO Capital Markets

Okay. Thank you.

Operator

Thank you. Next question comes from the line of Daniel Harris with Goldman Sachs.

Daniel Harris - Goldman Sachs

Hi, good afternoon, guys.

Robert Druskin

Hi.

Daniel Harris - Goldman Sachs

I was wondering if you could comment a little on the strategy you''re taking in pricing on the retail side of the business. A couple of your peers are meaningfully below you on the flat pricing and how do you see yourself fitting into that. And do you think that has any impact on your net new account or asset generation?

Robert Druskin

This is Bob. We look at this all of the time and certainly have taken a much harder look recently, given what Schwab did. We haven''t seen a lot of reaction to that, either from competitors or from our own clients, quite frankly. But nonetheless, what we''re going to try to do as we move forward and I think it''s consistent with what we''re trying to do on the segment patient of our clients, is we''re going to continue to try to simplify our pricing structure. We''re going to continue to look hard at any nuisance sort of fees that clients might see, but what we really want to do is not necessarily be the cheapest. I don''t think it''s a winning game for us to just compete on price. What we''re going to try and do is compete on value. And I talked a lot in my opening comments about new products and services upgraded levels of client satisfaction. And so we think as long as we''re price competitive and deliver good technology, good products, good service, we can create a value proposition that we think could be a winner. And so that''s how I would think about it.

Daniel Harris - Goldman Sachs

Okay. No. That''s helpful. As I think about the loan portfolio and the pace of change that you have seen on a sequential basis and if you annualize it, it''s pretty significant, at about 20%. When you think about that going forward, should we be thinking of that on a personal decline or nominal dollar decline? How do you think about the runoff in that portfolio?

Paul Brandow

Well, in terms of the runoff of the portfolio, I think you can expect to see, certainly through 2010, the same pace of reduction, about $1 billion dollars a quarter that we saw in the last couple of quarters. So of course that assumes no significant change in prepayments fees, but that''s a reasonable assumption.

Robert Druskin

And that''s a pretty consistent.

Daniel Harris - Goldman Sachs

That''s helpful as we model out over the next year. And then just lastly for me, on sort of the principal transaction side and the market making business. How do you think about the revenue capture per share trade there? It''s obviously trending down and I know you have some agreements in place, but as those start to shift off towards the end of the year, do you think about that revenue capture changing in any meaningful way?

Michael Curcio

This is Mike Curcio, Head of Brokerage. We see a lot of opportunities towards the end of the year, when we''ll reassess all our order flow and what we send internally versus externally. We''ve also been very pleased with a lot of customers coming back, so we think there''s a real opportunity to expand that.

Daniel Harris - Goldman Sachs

Okay.

Robert Druskin

Yes. And so is in other words the amount that we can gain should be able to offset the lower fee in some of the areas such as options.

Daniel Harris - Goldman Sachs

Okay. Thanks a lot, guys.

Michael Curcio

You''re welcome.

Operator

Thank you. And your next question comes from the line of Roger Freeman with Barclays Capital.

Roger Freeman - Barclays Capital

Just coming back to the change in net accounts, I guess sort of tying to your comments about the lower volatility resulting in some of the accounts from before the -- before the market fell off, coming off. Would you say that''s unique to your business? Just looking at obviously Schwab is a little different, but Ameritrade even had increasing net ads during the fourth quarter and just curious if you saw any differences there.

Robert Druskin

Well, the three largest quarters that E*TRADE ever had in terms of net new account generation was the fourth quarter of 2008 and the first two quarters of 2009. So I think we really had an exaggerated move in account. And a lot of those accounts, unfortunately and this gets back to account churn, it all comes back to the same things. A lot of those accounts then sort of moved out as the year went by. I would tell you, though, that January, from this same kind of metric we''re looking at, we haven''t closed the month, so everything is preliminary, but it looks much better. It looks more normal for us.

Bruce Nolop

The other thing I would point out is that -- this is Bruce, that we tend to have more variation quarter to quarter. So when we look at for the full year and we try to make it as much apples to apples as we could, we feel comfortable that our account growth was right in line with our competitors.

Roger Freeman - Barclays Capital

Okay. Got it. Okay. And I guess on the commission rate, can you just maybe delve a little bit more into the mix issues? Was this just more active traders? Was your option mix up or down? Because it''s -- I think it probably would have been up in the quarter, which would have been a positive buy.

Bruce Nolop

Yes. The options were pretty good, about 15% of dart. Where you saw the unfavorable mix was in a lower dart scenario, less volatility on the main street, customers tend to be less active and they''re the ones that have the premium pricing structure.

Roger Freeman - Barclays Capital

Okay. And the 15% options mix compared to what in the third quarter?

Bruce Nolop

It was 14.

Roger Freeman - Barclays Capital

Got it. And was there any change in dynamic for payment for overflow to you that was down or anything like that?

Robert Druskin

No. It was pretty flat, wasn''t it?

Bruce Nolop

It was just relative to trading activity.

Roger Freeman - Barclays Capital

Yeah. Exactly.

Bruce Nolop

But in terms of the amount per trade, we''re --

Robert Druskin

Yes. Pretty flat.

Roger Freeman - Barclays Capital

And then I guess a couple of things on the sort of net interest income. I guess one thing is on the -- as you''ve been trying to push down the cash deposits in the bank, your cost of deposits it looks like went down to 34 basis points from 53 and your cash did go down, but in the grand scheme of things, correct me if I''m wrong, just doesn''t seem that much relative to where you wanted to go. Are your customers pretty rate insensitive at this point? And if so, how do you force the agenda from here, because you can''t really do it by cutting rates?

Robert Druskin

That''s a good question. They seem to be pretty rate insensitive, as you implied. And so we will -- we may push rates a little bit more, test that theory, that''s something we''re always talking about. We''ll look, as we have done in the past, at securitizing different things. We''ll look at possible sales from time to time. There''s lots of ways to move around the balance sheet dropping rates to a point where people stop leaving is just one way to do it. So we''re focused on what we want to get done. There''s lots of ways we can do it. We will only do thinks, though, when they make sense to us from a pricing standpoint and where they''re economically feasible. We don''t want to rush towards a goal and shoot ourself in the foot getting there. So we''re actively looking at lots of different avenues and we''ll see what makes the most sense as we move through the year.

Roger Freeman - Barclays Capital

Do you think -- is it fair to maybe assume that as rates start to move back up that you may be a laggered in raising your rates and that may be one way to do that, would that make you potentially more asset sensitive than you indicated before?

Robert Druskin

Again, we would -- there''s trade-offs and we would look at what raising rates or rather not raising rates would do. We always look at what all of that means in terms of our interest rate sensitivity and will make a judgment at that time. It''s hard to predict not knowing all the variables.

Roger Freeman - Barclays Capital

Got it. Thanks.

Operator

Thank you. Next question comes from the line of Faye Elliott with Merrill Lynch.

Faye Elliott - Bank of America/Merrill Lynch

Hi. Back to account growth. If we chart advertising and marketing expense against account growth, we see that a two quarter or a one to two quarter lag and given your higher ad spend in 4Q. Are you seeing signs or beginning to see signs yet of any stronger account activity?

Robert Druskin

Well, it''s -- as I said before, January looks much better than the rate in the fourth quarter, especially as you moved later in the quarter. So I''m not sure how you attribute that exactly. And, again, just not to beat this thought to death, but we don''t just want to get accounts in through the door, although it''s important to do, we want to make sure that we continue to upgrade the quality of the accounts that we bring in, because we think that they''ll be more likely to be retained, that the asset and revenue characteristics will be more be favorable than some of the new accounts that we''ve gone in the past and it''s going to be a juggling act. It''s going to be some of one and some of the other, but longer term, that''s the direction we''re headed.

Faye Elliott - Bank of America/Merrill Lynch

Okay. Great. And then back to the expenses. You had mentioned there was about $9 million of OREO and your other operating expense was a $3 million Delta over 3Q 2009. Would -- and you had said that it might increase over the course of 2010. I''m assuming you don''t mean it would increase by that same Delta throughout the year, would it would it hang around $9 million in other operating expenses? What would be the incremental increase we could expect?

Bruce Nolop

It would be starting from that kind of base and would gradually increase. It wouldn''t be the same percentage increase. It would just be a gradual flow and …

Faye Elliott - Bank of America/Merrill Lynch

Okay. So not the jump we saw in the -- in this sequential?

Bruce Nolop

No. But it -- but it will be something that will be noticeable in the other expense line and we can update you as we go, but for modeling, it would be something you should just factor in a gradual increase.

Faye Elliott - Bank of America/Merrill Lynch

All right. Great. Thank you.

Operator

Thank you. Next question comes from the line of Michael Carrier with Deutsche Bank.

Michael Carrier - Deutsche Bank

What your capital levels are at the bank and then at the parent and then let''s just assume that you do breakeven at the bank sometime this year, you gave me your conversations with the regulators and then potential changes in regulatory capital requirements. When do you feel like what are the things that you''re looking for where you feel like you''re going to have enough excess capital as the balance sheet continues to shrink that you will be look to deploy that?

Bruce Nolop

This is Bruce and I would just sat they in our projections, we feel very good about the ability to generate capital in the bank both from earnings and from the reduction in the balance sheet. And we also feel good about the amount of corporate cash we have. Having said that, there will come a time where we -- when we want more dividends coming up from the bank. So the real question is when the regulators will feel comfortable enough that there is a confidence in allowing the earnings of the bank to be divvied up beyond what the securities subsidiary earns. And we hope that we''ll be beginning those conversations with the regulators this year and we will be monitoring that as one of the key variables going forward.

Michael Carrier - Deutsche Bank

Okay. And then just on the expense guidance. You were saying a modest decrease year-over-year and that''s just -- that''s including the investment in the brokerage unit and the in line marketing expense?

Robert Druskin

Yes. That is an all-in number. There''s going to somebody ups and downs as we go through the year, but we believe that we''ll deliver lower operating expenses for this year, but there will be, I think, a careful parsing of those expenses. We want to put more money where we can provide better services to our clients, make sure we have sufficient marketing support for all that and continue to squeeze on general and administrative overhead to fund that. So while the overall number will be slightly down, we''ll make sure that we''re spending it where we get the best return for it.

Michael Carrier - Deutsche Bank

Okay. And then finally, just on the OREO expense, any size of that portfolio and in terms of the units that you''re going to be exiting, the Nordic, the U.K., are those roughly breakeven? Meaning we have the charge, but in terms of a P&L impact?

Bruce Nolop

Let me answer the question about the international. This is Bruce and then we can focus on the OREO question. They did not break even. The local operations are losing money and so one of the reasons that we wanted to do this is it will allow us to focus on the profitable cross border business and we believe that we can recover the cost incurred for restructuring relatively soon with a payback as soon as a year.

Michael Carrier - Deutsche Bank

Okay.

Robert V. Burton

This is Bob Burton on the REO. In general over 2009 our deposition of OREO properties more or less kept pace with new properties coming in, so we were more or less flat from the end of 2008. We do expect, however, that in 2010, that number will start to climb, probably through the first three quarters of the year and then turn at that point.

Michael Carrier - Deutsche Bank

Okay. Thanks.

Operator

Thank you. Next question comes from the line of Howard Chen with Credit Suisse.

Howard Chen - Credit Suisse

Hi. Good evening everyone. Just following up on a prior question. If the loan portfolio shrinks about $1 billion a quarter, should we anticipate similar shrinkage on the funding side or maybe anticipate a bit of balance sheet mix shift?

Bruce Nolop

In terms of the asset side, the real issue is whether or not we can reduce our liabilities and that gets back to this whole question about deposits. And we need to essentially reduce our cash that we obtained through brokerage deposits and bank deposits and that''s been our constraint in reducing the balance sheet assets at the same pace as loans have been repaid and that will be a primary factor going forward.

Howard Chen - Credit Suisse

Okay. Thanks.

Robert Druskin

And the negating factor has been the liability side.

Howard Chen - Credit Suisse

Right. And then I guess just following up to that, are you baking in any other deposit sales or loan sales when you think about your expectations for that shrinking balance sheet in 2010?

Robert Druskin

We don''t have -- we don''t have anything baked in, because it would probably be a mistake to build a budget around the expectation of a transaction or a series of transactions because then you''re almost forced to do something, even if the right economics and opportunities don''t materialize. So the answer is no, it''s not baked in, but we are going to be opportunistic in continuing to explore all possible options to hasten our progress, in moving towards those goals. But no we didn''t bake it in, because you can get forced into a corner that way.

Howard Chen - Credit Suisse

Okay. Thanks, Bob and makes sense to me and then you''ve provided some interesting details relating to the mod program in the past both size and state of average payment reduction. Just curious if you could just refresh us on some of those stats related to the program.

Robert V. Burton

Sure. This is Bob Burton. Looking at PDR mods, which are the most significant part of the mods that we do. In 2009, we did about 686 million of those. 435 home equity and 250 in mortgages. We''re running about 40 million a month in home equity mods and about 25 million a month in first trustee mods. What we''re targeting, particularly in home equity, is a 50% reduction in payment and we think that significant reduction in payment has really helped to produce a very strong redelinquency performance that we feel very good about.

Howard Chen - Credit Suisse

Okay. Thanks. And then just a quick numbers cleanup. What''s the starting point you''re using for expenses, as I know, there''s a bunch of one time items in 2009, whether it be like FDIC insurance premiums, or other stuff like that.

Matthew Audette

I would say that definitely fourth quarter is abnormal. That would not be the run rate that we would start with. Probably more in the nature of the average, in other words, if you take the 2009 operating expense and just divided that by four that would be kind of the run rate we would begin with. And when we talk about being modestly town, we''re looking at 2010 compared to 2009. Not necessarily every quarter or every line item.

Robert Druskin

So to just follow up, just to make sure, we''re not giving ourselves the benefit of saying we''re going to reduce it, ignoring the FDIC is there. It''s an operating expense, there''s nothing we can do about it and so we''re going to manage down 2010 versus 2009 year-over-year.

Howard Chen - Credit Suisse

Thanks and then just finally can you just confirm what the diluted share count heads to when the firm turns profitable?

Bruce Nolop

$2.9 billion is the approximate number.

Howard Chen - Credit Suisse

Great. Thanks so much for taking the question.

Robert Druskin

Okay. You''re welcome.

Operator

Thank you. Next question comes from the line of Michael Hecht with JMP Securities.

Michael Hecht - JMP Securities

Hi guys. Good evening. Any update on the just the CEO search? Maybe you can help us with the characteristics you and the board are looking for and is it taking longer than you thought and when do you expect to wrap up the search?

Robert Druskin

Well, this is Bob. I would say, we''ve said that we''ve made meaningful progress, which is in fact true. We have a preferred candidate now. There''s only so much you can say about this without our general counsel saying something to me, but we have a preferred candidate in our sights. We''re going through what I would call some logistical issues and our intention is to have an announcement in the near future. Now, if you ask me what characteristics are important? I would tell you it''s someone is with a relatively long horizon. We''re not looking for someone to come in for a year or two. It''s someone who has got to have a strong background in financial services, someone who is very comfortable with technology and has some technology of substance in their background and someone who understands retail financial services in particular. Those are the kind of characteristics we are looking for. I would tell you, too, that we have seen enormously attractive candidates.

Michael Hecht - JMP Securities

Okay. Thanks. Great. That''s very helpful. And then on the divestiture front, I''m just wondering if any other divestitures planned? Nothing specifically I know you can probably say, but just generally to further both your capital ratios. Many times you have had a few more small deals here and there, but are you largely done on the divestiture front, or are there things you can do?

Robert Druskin

Well, I don''t think we -- the policy is we don''t talk about potential acquisitions or divestitures, so I''m going to have to -- I''m afraid I''m going to have to hide behind that one.

Michael Hecht - JMP Securities

That''s fair. And then just last one for me. Dart in the month of December, looking at just the U.S. darts only, I think they fell about 8%, December versus November. So maybe a little bit weaker than what we''ve seen out of some of the peers, what we''ve heard from others is that January has been strong so far, Ameritrade in particular saw maybe a 20% increase. Any reason to think you are seeing anything different on that front?

Robert Druskin

No. There''s no not. We''re actually a little bit stronger than that, but in that same zip code.

Michael Hecht - JMP Securities

Okay. Great. Thanks.

Robert Druskin

You''re welcome.

Operator

Thank you. Next question comes from the line of Rich Repetto with Sandler O''Neill. I''m sorry, he must have dropped off. Next question comes from the line of Matt Fischer with CLSA.

Matt Fischer - CLSA

Real quick, just on the, you said you want to strengthen long-term investor. Do you have any specific plans there, whether it''s branches or buildout in RIA franchise? Could you kind of give some color there?

Michael Curcio

This is Mike Curcio again. We always look at how many branches we want, but it''s more of building easy to use, easy to buy and easy to transfer products. So, we are pretty happy with our branch structure now. I can see in the future maybe 10 more branches we would look at if we looked out the next three to five years. We are not going to be -- have a national or a business like our -- excuse me -- our competitors do. So it''s really based on all of our product mix. So we''re really focused on. Last year we had on-line advisor. We have the investor resource center. We really beefed up all our retirement plans and you''ll see a lot more than that and tied into changing the focus of the business where the last few year it was more on keeping the customers we have. Now it''s really going to be going after share of wallet play. And we''ve seen some modest success at the very beginning of that initiative in 2009 and that''s going to continue to strengthen this year.

Matt Fischer - CLSA

Okay. And then just back to the restructuring charges. You mentioned $15 million in the first half of 2010. Any color in terms of whether that''s more heavily weighted in the first quarter, or how we should think about that?

Bruce Nolop

Yes. It would -- we expect to it be predominantly in the first quarter with possibly some spill over in the second and that would be the extent of the charges for the year.

Robert Druskin

And what we said before, I just wanted to reemphasize. We think these restructuring charges fourth quarter 2009, first quarter 2010 are well -- are good investments for us because we -- the recapture for that should be about a year.

Matt Fischer - CLSA

Okay. Okay thank you.

Robert Druskin

You''re welcome.

Operator

And our final question comes from the line of Mike Vinciquerra with BMO Capital Markets.

Michael Vinciquerra - BMO Capital Markets

Sneak one more than in here at the end, just a question on the first lien book. Are you at all surprised by the continued trends in that book with the delinquency rate now 16.5%? Are we starting to see any signs that the book itself is improving, or is that kind of trending along with what you had anticipated?

Paul Brandow

Right, so -- this is Paul Brandow again. Actually we''re actually relatively constructive here. You notice that during the course of 2009, our -- the special mention delinquencies actually declined and even in the fourth quarter, which is typically, as you know, a very difficult one from a seasonal perspective, delinquency levels were flat. So we''ve always expected that the first lien portfolio would improve more slowly than the home equity, because it''s less seasoned and because, frankly, it was a relatively high quality portfolio in terms of LTVs and therefore took longer for the housing market declines to affect that portfolio. But quite honestly, we were very constructive about what we saw in terms of delinquencies and payment trends in the fourth quarter. And it''s nothing that we''ve seen so far. Again, as Bob mentioned, we''re not through the month yet, put nothing we''ve seen in the daily delinquency numbers that we get for either our home equity or our first lien portfolio that would cause us to change that view.

Michael Vinciquerra - BMO Capital Markets

And the severity levels when you''re actually having to repossess, can you give us a sense for how those are shaking out?

Paul Brandow

Yes. Most recently, it''s been a home-ec in the first lien portfolio is about 40%.

Michael Vinciquerra - BMO Capital Markets

Okay. Thank you very much.

Robert Druskin

Okay. If there are no further questions, I’d just like to thank everyone for joining us tonight. We feel good about the progress that we made last year. We look forward to continuing that progress in 2010 and we''ll speak with you again next quarter. Thanks very much.

Operator

This does conclude today''s conference call. You may now disconnect.