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E*TRADE Financial (NASDAQ:ETFC)

Q1 2013 Earnings Call

April 18, 2013 5:00 pm ET

Executives

Paul Thomas Idzik - Chief Executive Officer, Director and President of E*Trade Bank

Matthew J. Audette - Chief Financial Officer, Principal Accounting Officer, Executive Vice President and Controller

Analysts

Richard H. Repetto - Sandler O'Neill + Partners, L.P., Research Division

Howard Chen - Crédit Suisse AG, Research Division

Joel Jeffrey - Keefe, Bruyette, & Woods, Inc., Research Division

Alexander Blostein - Goldman Sachs Group Inc., Research Division

Christopher J. Allen - Evercore Partners Inc., Research Division

Keith Murray - Nomura Securities Co. Ltd., Research Division

Michael Carrier - BofA Merrill Lynch, Research Division

Brian Bedell - ISI Group Inc., Research Division

Operator

Good evening, and thank you for joining the E*TRADE Financial First Quarter 2013 Earnings Conference Call. Joining the call today are Chief Executive Officer Paul Idzik; and Chief Financial Officer, Matt Audette; as well as other members of E*TRADE's management team.

Today's call may include forward-looking statements, which reflect management's current estimates or beliefs and are subject to risks and uncertainties that may cause actual results to differ materially.

During the call, the company may also discuss non-GAAP financial measures. For a reconciliation of such non-GAAP measures to the comparable GAAP figures and for a discussion of additional risks and uncertainties that may affect the future results of E*TRADE Financial, please refer to our earnings release furnished with Form 8-K and our 10-Ks, 10-Qs and other documents the company has filed with the SEC. All of these documents are available at investor.etrade.com.

This call will present information as of April 18, 2013. The company disclaims any duty to update forward-looking statements made during the call. This call is being recorded, and a replay will be available via phone and webcast later this evening at investor.etrade.com. No other recordings or copies of this call are authorized or may be relied upon.

With that, I will now turn the call over to Paul Idzik.

Paul Thomas Idzik

Thank you. Good evening. It is a pleasure to be here speaking with you. I've come to learn a lot over the last 3 months, and I'm pleased to share my thoughts on the quarter and the company with you.

To begin, I want to make my mission here clear, which includes 3 things: first, to ruthlessly execute on the financial and capital plan laid out by management and the board nearly 1 year ago; second, to refine and intensify our focus within the brokerage franchise to drive a superior customer experience; and third, to maximize value for our owners.

As for how I'm spending my time, I'm focused on getting a deep understanding of what my colleagues do across the business and how it impacts our customers and our profitability and learning everything I can about the company and what I believe to be significant opportunities to improve customer engagement and satisfaction.

Now, my first quarter here was a busy one, and I'd like to address the more provocative items upfront, including the handful of management and board departures and the final sale of stock by our largest shareholder for the better part of 5 years.

On management departures, ensuring we have the right leadership team in place is a critical priority of mine, so I've been accordingly focused on reviewing the composition, roles and responsibilities of the executive committee since I arrived. First, consistent with the company's and my own philosophy to drive efficiency, I made the decision to eliminate the role of Chief Technology and Operations Officer. We are now in the midst of better aligning these functions to enhance the customer experience and get the most from each dollar spent.

On the marketing side, our team has done a good job creating compelling advertising and building brand awareness. However, given the current stage of the company's evolution, I saw a need for much sharper focus in our customer and prospect marketing, specifically more analytical decision-making and less emphasis on blanket advertising. Accordingly, I'm in the process of searching for a new marketing leader. I've seen a number of impressive candidates thus far and hope to make an announcement in the near future.

I also made an addition to the team during the quarter, bringing an experienced, long-standing colleague of mine, Mike Foley. Mike is leading the tech infrastructure and operations functions, as well as overseeing the marketing organization pending the completion of our search. Mike also brings a highly professional approach to project management, which is important at E*TRADE given the many initiatives and projects underlying the successful execution of our operational strategy and our continued success in serving our customers overall.

At the board level, we have 3 current members who have let us know that they do not wish to stand for reelection at the Annual Meeting on the 9th of May. The first is our Chairman, Frank Petrilli, who has been a board member since January 2012 and served as Interim CEO for nearly 6 of those months. Frank's decision relates to his other business and personal obligation. He leaves the Chairman position in capable hands with Rodger Lawson slated to assume the role. Roger's been a board member since February of 2012, served as Lead Independent Director during Frank's tenure as Interim CEO and brings a wealth of relevant industry experience through prior roles at Fidelity and Prudential. I've been working closely with Rodger, and I'm confident that his capabilities and judgment will serve our board and our shareholders well.

Another valued board member, Ron Fisher, who has been with the company since 2000, has decided to leave based on his increased responsibilities in his full-time job as President of SoftBank. Ron's professionalism and insight will be missed.

Finally, Ken Griffin, founder and CEO of Citadel. Kenneth decided not to stand for reelection following the final sale of his company's investment in E*TRADE. Since late 2007, Citadel has been our largest investor and Kenneth served on the board since 2009. Citadel, and Ken specifically, played a critical role in recapitalizing the company in both 2000, and again, in 2009. I will very much miss Ken's counsel, drive and insight on our board. On behalf of the board and management, I'd like to personally thank each one of these individuals for their commitments and contributions through the years.

Now moving on to the business and our results. Aside from some minor perturbations in the results, it was a decent quarter from a core business perspective. We posted a profit of $35 million or $0.12 per share and encouragingly recorded solid client metrics. Matthew will provide more detail on the financials, but to highlight one bright spot, as a result of capital generation and deleveraging, the bank's Tier 1 leverage ratio ended the quarter at 9.3%, just 20 basis points shy of the objective in our capital plan with 3 quarters of the year yet to go.

With respect to our core retail franchise, we helped clients reengage in a slightly more meaningful way this quarter as DARTs of 149,000 were up 16% sequentially. April to date, we're seeing a slight pullback with DARTs tracking down 5% from Q1 levels though up 1% from March. While retail investors across the industry remain understandably cautious, we are pleased with the activity we've seen thus far.

Derivatives continued to been an important component of how our customers engage with the market, and during quarter, options represented 24% of our DARTs, up slightly from a year ago. Net new brokerage assets for the quarter were a healthy $3.1 billion, representing an annualized growth rate of over 7%. We brought in 30,000 net new brokerage accounts, which is off the pace of 46,000 in the same quarter last year. While growing accounts is obviously core to our success in the brokerage business, the quality of these new accounts is of even greater importance. Our financial consultant network of approximately 270 professionals is key to that quality growth as they were responsible for about 35% of our net new assets. As a reminder, the accounts brought in through our FCs tend to be over 5x larger than those acquired through our other channels.

Beyond bringing new accounts on board, importantly, we are also doing a better job of retaining those accounts. With 8.5% annualized brokerage attrition in Q1, we posted an improvement of 130 basis points from the prior quarter and a 50 basis points improvement from the full year 2012. Deepening our relationship with customers through better service or assignment to an FC proves critical to doing more to help our customers, and in doing so, drive value for our shareholders.

We made a series of upgrades to our customer offering during the quarter, enhancing our customer education and research resources including thematic-based investing tools and significantly bolstering our already powerful Active Trader platform. We also hosted our second annual Retirement Education Day in New York, followed by events at each of our 30 branches, all with noteworthy attendance.

With customers increasingly disconnecting from desktop computing, our mobile platforms are an important component to fit customers' lifestyles. Within our 7 platforms offered, we launched a revamped tablet experience and enhanced our iPhone and Android platforms during the quarter, adding useful tools like mobile bill pay and access to index futures, giving customers better insight into the markets outside of traditional trading hours. Our mobile trade this quarter grew to over 7% of our DARTs, up from just under 6% a year ago.

Continually innovating and upgrading our industry-leading Active Trader platform, E*TRADE Pro, is core to maintaining our competitive edge. Recently, we significantly enhanced its capabilities with the integration of futures trading, allowing us to provide customers with a much more streamlined futures trading experience.

Within retirement investing, we continue to make progress as we gain traction with enhanced brand awareness and new and expanded products and services. We ended the quarter with $37 billion in retirement assets, an all-time high for the firm and inclusive of $15 billion of rollover assets. Net rollover flows for the quarter were $400 million, up 8% from the year-ago quarter.

Slightly more than 3 years after our launch, we are well ahead of our internal targets for growth in managed products. We ended the quarter with $1.6 billion in managed accounts, a 24% increase from the prior quarter and an 83% increase from the year-ago quarter. We are encouraged here and are working on ways to accelerate this growth. We've been hiding our capabilities here a bit under a bushel. As we do a great job for our customers and tell our story a bit better, I see some real potential for growth in these areas, along with helping our customers strengthen their financial health.

So in summary, it was a busy first quarter for me on the job. I'm pleased with the changes we've made to date and the direction this company is headed. I look forward to updating you next quarter as I continue to gain traction across the firm with our customers and with our owners.

With that, I will turn the call over to our Chief Financial Officer, Matthew Audette.

Matthew J. Audette

Thank you, Paul. For the first quarter, we reported net income of $35 million or $0.12 per share. Our results included a couple of noteworthy items, which collectively did not impact our bottom line results. They are a $13 million benefit to provision for loan losses from a settlement with a third-party mortgage originator and restructuring and other severance related costs of $12 million, attributable to the company's cost reduction program and executive terminations.

Our first quarter net revenues were $420 million, down from $468 million in the prior quarter, which included deleveraging-related gains and $489 million in the year-ago quarter. Revenues included net interest income of $241 million, a 7% sequential decline as a result of 8 basis points of net interest spread compression, as well as a $2 billion reduction in the average balance sheet size. The decline in our spread this quarter was driven primarily by the continued runoff of our loan portfolio and reinvestment into lower yielding securities, as well as a slight increase in prepayment fees on the securities portfolio.

On the liability side, our cost of funding increased 3 basis points in the quarter, driven by an increase of FHLB funding costs related to the deleveraging actions we completed in the fourth quarter. Going forward, we expect FHLB funding rates to be roughly in line with this quarter.

We continue to expect our average net interest spread in 2013 to decline approximately 10 basis points from 2012's average, implying a full year spread of slightly below 230 basis points. I would also highlight that our Q1 results do not include the full impact of our deleveraging actions completed during the quarter. The majority of planned deleveraging is behind us, so there should be little in the way of proactive balance sheet reduction in the second half of this year.

Commissions, fees and service charges, principal transactions and other revenue in the first quarter were $164 million, up 8% from the prior quarter and down 5% from the same quarter of 2012. Average commission per trade was $11.30, up from $11.10 last quarter, largely as a result of an increase in the number of Stock Plan trades. Along with a more favorable customer mix is a smaller portion of trades came from Active Traders. Principal transactions revenue was down sequentially as a result of mix and the lowest levels of market volatility we have seen since late 2006.

Revenue in this quarter also included $15 million of net gains on loans of securities, down from $56 million in the prior quarter, which included deleveraging-related gains. Historically, gains have been in the range of $25 million to $35 million per quarter. Going forward, we expect them to be in the $10 million to $15 million range per quarter. However, while this is our expectation today, this range can be materially impacted by the interest rate environment and any deleveraging.

Our legacy loan portfolio ended the quarter at $10 billion, a contraction of approximately $500 million during the quarter. It is now down 69% from its peak. We expect loan runoff to average approximately $400 million per quarter for the rest of 2013, generally consistent with the 4% to 5% quarterly decline we have experienced for some time. This quarter's provision for loan losses was $43 million, including a $13 million benefit from a settlement related to loans purchased from a third-party mortgage originator. Since 2008, we have actively pursued these types of settlements amounting to approximately $420 million to date.

Excluding the benefit from this settlement, provision was $56 million, down from $74 million last quarter, relating primarily to lower charge-offs in the quarter. For the remainder of this year, barring any unforeseen external disruptions, we expect quarterly provision expense to be in the range of $50 million to $70 million. However, I must emphasize the nature of the quarterly provision is inherently uncertain. So this range, while our best estimate today, could vary meaningfully.

Total net charge-offs in the quarter were $68 million, down from $102 million in the prior quarter, and again, benefited from the $13 million settlement. Delinquencies in the quarter were down 9% sequentially in the 30- to 89-day category, reversing the seasonal increase we saw in Q4. The total allowance for loan losses ended the quarter at $455 million, down $26 million from last quarter and inclusive of $148 million specific reserves for modified loans.

Our coverage remains relatively constant for non-modified loans with this quarter's allowance covering 80% of loans at least 90 days past due. This compares to 76% last quarter. For modified loans, our total expected losses decreased from 37% in the prior quarter to 35% as of March 31.

During the quarter, we modified $34 million of loans, down from $44 million in the prior quarter, and again, representing the lowest quarterly level of modification since we began the program in 2009. We expect modifications to remain at low levels over the near term. However, we are monitoring the HELOC book closely with a focus on loans that are not yet amortizing. Once those loans do convert to amortizing, modification is one of the tools we could use as part of our overall loss mitigation strategy.

And I realize this topic has been an area of focus for many of you. As we have indicated in past presentations, these conversions will not take place in a material way until 2015 and beyond. Of our $3.2 billion HELOC portfolio, 26% are scheduled to convert in 2015, with an additional 40% in 2016. I would remind you that our average loan size is $75,000 and that during all of 2012, we saw annual voluntary principal reductions of at least $500 from 40% of our borrowers. And approximately half of those borrowers, or 20% of the total, reduced their principal balance by at least $2,500 during 2012. So this portfolio continues to shrink as a result of these paydowns as well as charge-offs. So at the point when these begin to amortize in a material way, we expect the balances to be smaller than they are today.

Moving on, as we continue to focus on derisking and deleveraging, we took additional steps this quarter to clean up our balance sheet. We sold approximately $230 million of nonagency CMOs from a legacy portfolio that has reduced in size from $1.8 billion at its peak in 2007 to just $14 million today. We are also planning to sell approximately $30 million of credit card loans that resided within the Consumer and Other portfolio. We expect the sale to close later in the year. Individually, these steps may not appear to be significant. However, taken together, they represent solid progress on our strategy to de-risk the bank.

Operating expenses for the quarter were $296 million, including $12 million of severance and restructuring-related charges. And to update you on the status of our expense reduction efforts and the buildout of our enterprise risk management capabilities, through Q1, we have implemented 85% of our targeted $110 million in cost savings. Additionally, we continue to expect our ongoing investment in ERM to total approximately $10 million annually.

Consistent with our plan, we expect the full $100 million in net savings to be included in our run rate in Q1 2014. For the remainder of 2013, keeping in mind that seasonality and market volumes can impact individual quarters, we expect our expense run rate to be in the range of $265 million to $280 million.

Turning to corporate cash. We ended the quarter at $352 million, a decline of $56 million from year-end levels and relating predominantly to seasonal compensation-related uses in addition to other intercompany allocations. For the remaining quarters of this year, we expect corporate cash to decline in line with our debt servicing costs, though there can be noise in the individual quarters relating to tax settlements and other intercompany allocations. I'd also point out that our current level of corporate cash represents approximately 3 years worth of debt service coverage.

Our capital ratios improved at the bank across all measures during the quarter with our Tier 1 leverage ratio ending the quarter at 9.3%, up 60 basis points from last quarter's and within striking distance of our 9.5% target. For all other bank risk-based ratios, we were between 20% and 22%, well in excess of regulatory minimums. At the parent, our ratios increased across the board as well. We ended the quarter with a Tier 1 leverage ratio of 6%, up 50 basis points from the prior quarter. Our risk-based measures at the parent are between 11% and 15%, again, well in excess of regulatory minimums. Our parent Tier 1 common ratio ended the quarter at 11.2%, and we estimate it would be approximately 100 basis points higher under the current Basel III proposed guidelines.

One more note on consolidated capital ratios. A yet to be enacted element of capital reform, outlined under Dodd-Frank, includes the ultimate exclusion of trust preferred securities from Tier 1 capital. Initial guidance require companies to phase out TRUPs from inclusion in capital from the beginning of 2013 to 2016 with a quarter of the balance coming out each year. These changes have not yet been enacted by the regulators. So this transition out of capital has yet to begin. So we are still including 100% of our $433 million of TRUPs in our parent capital calculations. Had this phaseout begun in Q1, it would have reduced our parent Tier 1 leverage ratio by 30 basis points to 5.7% at quarter end.

Moving to progress on our capital plan. We have now completed the majority of our deleveraging actions which, in conjunction with earnings generation, have been integral to our efforts to bolster our bank leverage ratio with a focus on exceeding our target of 9.5%. During Q1, we completed $3 billion of deleveraging, which consists of $2.3 billion in sweep deposits transferred off balance sheet; $600 million of new customer cash directed to money funds; and $100 million of customer payables converted into money funds. We have another $500 million of sweep deposits scheduled to transfer off balance sheet this month. In total, this brings us to $8.4 billion, just shy of our stated goal of $8.5 billion. Accordingly, we do not have additional plans to deleverage beyond continuing to direct new customer cash to money funds.

However, it is important to keep in mind that customer activity is the great unknown when it comes to forecasting balance sheet size. So in the event that customer net selling leaves us with a need to reduce assets further, we do have additional actions we can take. Therefore, we are confident in our ability to exceed the target of 9.5% Tier 1 leverage at the bank, which is a central component of our capital plan.

In closing, in addition to the healthy results in our core business, we are quite satisfied with the progress made in our capital plan. Derisking, deleveraging, implementing enhanced enterprise risk management capabilities, cutting costs and improving our key capital ratios are all critical to achieving the objectives laid out in our strategic plan and were all areas where we made good progress during the quarter.

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

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Rich Repetto.

Richard H. Repetto - Sandler O'Neill + Partners, L.P., Research Division

So I guess the first question, given that you're tracking so well on the Tier 1 leverage ratio, the deleveraging plans, cost cutting, so if you get there earlier than, say, year end, could you accelerate the request through the regulators to upstream capital?

Matthew J. Audette

So Rich, so the leverage ratio is the most visible and measurable component of our plan. But just keep in mind, there are lots of other things that we're working on, right? We've got to continue to build out the enterprise risk management framework. We've got to finish the cost cutting. We've got to continue to improve our earnings, derisk the bank. So there's lots of things that we need to do to get to a point where we're comfortable making that request and where I think the regulators will be comfortable receiving that request. So our plans are just the same, Rich, towards the end of this year.

Richard H. Repetto - Sandler O'Neill + Partners, L.P., Research Division

But you wouldn't say that in these other areas, besides the visible Tier 1 -- that you're ahead of plan as well?

Matthew J. Audette

Well, I'd say I feel good about what we're working on. I think the capital ratios are very quantitative, so you can see exactly where you are. I mean, these -- a lot of these other areas are subjective. So we know what's important to work on. But we have to complete them. We have to implement them. We have to track how they're going. So I'd say in general, we are on track.

Richard H. Repetto - Sandler O'Neill + Partners, L.P., Research Division

Okay. And Paul, I guess getting your views as a relative newcomer but now 3 months, you made some quick decisions or big decisions. So I guess the question is as you look at the firm now, what's your view on both risk management and the cost saves? I don't expect you to update targets on cost saves, but do you think it's -- from the beginning when you took over to now, are they easily achievable or -- as well as the overall risk management process at the firm?

Paul Thomas Idzik

Yes. I'd say in cost saves, those things are never easy because it always, in a firm like us, involves taking action with individuals. And that's always difficult. But we've communicated the process and where we are to our employees and we're very confident. We've achieved 85%. We've communicated the actions, they're going to take us over the top on the rest. So I'm feeling very good about the cost reduction. With regard to the risk management, we clearly had some work to do. I feel very good about the progress to date. My opinion, while very important, needs to be paired up with the opinion of the regulators. And we'll continue to work with them to improve on the risk management front. But I think we've made a lot of progress in the last year. And certainly, I've seen a lot of progress in the 3 months I'm here. And importantly, what I'm seeing is many, many more of my colleagues actively involved in putting that front and center what they do as they try and help customers. So sorry, Rich, it was a little long there, but I feel good about both those areas.

Richard H. Repetto - Sandler O'Neill + Partners, L.P., Research Division

And one last quick thing, Matt. On the bank loans, the gain of loss on loans, to go -- essentially, it looks like you're cutting the gain run rate in half. And I guess can you give us a little bit more color on the chain? I know the interest rate environment played a big -- but that seems like an abrupt thing that's going to impact the models here.

Matthew J. Audette

Sure, Rich. I think we've -- I've tried to indicate over the long term we would expect gains to come down. I think when you look at the last 6 months, meaning the second half of 2012, we had a lot of deleveraging going on and planning for some of the deleveraging that we're going to be doing this quarter, so you had a lot of activity there. I think now that most of the deleveraging is done, the gain on sale is going to come down with respect to that. But keep in mind, of course, that, that rate can change based on any additional deleveraging need and changes in the interest rate environment. But where we sit right now, 10 to 15 is how we view it per quarter going forward.

Operator

Our next question comes from the line of Howard Chen.

Howard Chen - Crédit Suisse AG, Research Division

Matt, I'm having a little difficulty reconciling the $268 million, $280 million expense run rate guidance with continuing to realize and make steady progress with the $100 million net saving plan over the course of the year. Can you help kind of square those 2 items up?

Matthew J. Audette

Sure, Howard. So looking at Q1, a few things to keep in mind. First, you've got the $12 million of severance and restructuring-related costs in there. Second, Q1 is seasonally our highest quarter. So if you just look at our marketing expenses, right, our expectation is to spend $30 million less in 2013 than 2012, which would put us at a total spend for the year in roughly the $110 million range. And we spent a large -- our biggest quarter is going to be Q1, right? So the quarters for the rest of the year, they're going to be much smaller. Compensation and benefits, Q1 is seasonally the highest quarter on comp and ben, right? You've got the benefit expenses, taxes start over, people take a lot less vacation. So it's just a seasonally high quarter. So when you factor those things out, that's kind of where the range comes from, Howard. And I think hopefully, when you write those down, it should make sense.

Howard Chen - Crédit Suisse AG, Research Division

Right. And maybe just to walk through it. I must be missing something. But if I strip out the $12 million of severance and restructuring for this quarter and you just run it at the midpoint of the $260 million to $280 million. You get just shy of $1.1 billion of expenses. And that's, call it, down $50 million from the beginning point of when you announced that $100 million net plan. So I guess that's where I'm having difficulty bridging the gap.

Matthew J. Audette

Yes. So if you just do that, Howard, you're annualizing comp and ben, which is for the Q1, it's typically high. And the same thing with marketing, right? We've got $37 million of marketing and we plan to spend around $110 million for the whole year, right? So those things are going to come down later in the year.

Howard Chen - Crédit Suisse AG, Research Division

Okay, all right. And then a quick -- another numbers question. The $4 million of equity income and investment this quarter, what's the nature of that and what's the outlook for just future contributions there?

Matthew J. Audette

So the outlook is pretty small, Howard. So it is -- if you go way back into the company's history, 10-plus years, we had some venture funds that we still have one of them left today. And we update the value of that fund every quarter. It's typically very small and it's noise. We had some components in there that had big gains in the quarter. So it came from that venture fund. But if we were to see something like this in the future, I'd be surprised. I'd be pleasantly surprised, but I'd be surprised.

Howard Chen - Crédit Suisse AG, Research Division

Okay. Just one clarification. Is that markup or harvesting?

Matthew J. Audette

Markup.

Operator

Our next question comes from the line of Joel Jeffrey.

Joel Jeffrey - Keefe, Bruyette, & Woods, Inc., Research Division

Just a quick question. In terms of the interest earning assets, I appreciate the color in terms of the efforts you're making on the deleveraging side. But can you give us a sense for where the asset level ended the quarter?

Matthew J. Audette

The interest earning assets?

Joel Jeffrey - Keefe, Bruyette, & Woods, Inc., Research Division

Yes.

Matthew J. Audette

Yes, about $500 million less than the average.

Joel Jeffrey - Keefe, Bruyette, & Woods, Inc., Research Division

Okay, great. And then just another bit of a housekeeping question. In terms of the $12 million in severance and restructuring charges, how much of that was in the comp line and how much was in the restructuring line?

Matthew J. Audette

So the majority of the restructuring line was severance, right? So that's $7.5 million was in restructuring. The majority of that was severance. So I'd say roughly $5 million was back in comp and ben.

Joel Jeffrey - Keefe, Bruyette, & Woods, Inc., Research Division

Okay. And then just lastly, I apologize if I missed this earlier, but the increase in the fees and service charge line, is that driven by higher payment for order flow? Or is there something else in there?

Matthew J. Audette

So the biggest item in that category is payment for order flow. So in general, it should move in line with commissions, and you saw it increase. So that would be the main item.

Operator

Our next question comes from the line of Alex Blostein.

Alexander Blostein - Goldman Sachs Group Inc., Research Division

I want to go back on the discussion for potentially getting some dividend out of the bank on to the Holdco and the regulatory approval process that you guys are going through. Paul, one of the things you mentioned is derisking the bank. You guys are selling $30 million of credit card loans. Is that something that we should think about as more of a viable option for you guys in the current environment where real estate prices are maybe a little bit better and maybe there's a little more of a bid for riskier assets for you to, I guess, derisk the bank more aggressively by actually selling either the first liens or the home equity loans?

Matthew J. Audette

This is Matt. I'll take that one. So the credit card one was more of a tactical item similar to the CMO sales we did. When you go back to the loan portfolio, we pay very close attention to the best way to maximize value for our shareholders on that portfolio. Keeping it, managing the way we have versus if there's anything to do in the secondary market. So things are definitely improving overall. I think it's one of the reasons we saw provision come down. Home prices are going up, which helps. But the dynamic of does it make more sense to sell it versus keep it, hasn't changed. So our intention is to continue to do what we've been doing.

Alexander Blostein - Goldman Sachs Group Inc., Research Division

Got it. And then I guess along similar lines, you mentioned reserves and the provisions for the quarter. I guess when we look at the first lien book, it looks like even after you adjust for the settlement, you guys still released some reserves in the book. Can you walk us through the rationale there?

Matthew J. Audette

Sure, Alex. I think from the allowance, we always focus on it overall. So keep in mind, the charge-offs came down pretty much in line. We've got provisions coming down. I think that the majority or the vast majority of that settlements, the $13 million, was in the one-to-four book. But I think broadly, when you look at the performance, even just looking at the charge-offs, the charge-offs for the one-to-four book came down dramatically as well. So I wouldn't focus on the individual bucket. I think it's more overall. And then keeping in mind the home equity book came down a little bit less as well. So I don't think there's anything to that other than the settlement came into that line item.

Alexander Blostein - Goldman Sachs Group Inc., Research Division

Okay. Yes, I mean, just even excluding the settlement, it's still an add back. That's why it didn't -- it looks like allowance to total liquidities has been coming down pretty progressively over the last few quarters. And I just wonder, if house prices continue to recover, is that, I guess, the area where we should see more relief on the provision side?

Matthew J. Audette

Oh, sure.

Alexander Blostein - Goldman Sachs Group Inc., Research Division

And it seems like that was the only difference, I guess, this quarter.

Matthew J. Audette

Yes. So continued improvements in home prices would certainly benefit the one-to-four book more than the home equity book just because the home equity book is primarily second lien versus the one-to-four is going to be a first lien. So improvements in the collateral are going to help more on the one-to-four side. So that's certainly part of the dynamic.

Alexander Blostein - Goldman Sachs Group Inc., Research Division

Got it. And then the last one for me, I just want to spend a second, I guess, on the roll forward for net interest income, how should we think about, I guess, some of the rates. I guess one of the things you highlighted for a decline in the yields you guys earned in the securities portfolio is a pickup in prepaid speeds. I find it a little surprising given the fact that rates have come up during the quarter and I think generally what we've heard so far in the quarter, that prepayments have slowed down and not the other way. So I guess maybe you can help us understand how much of the drag the prepayments were in the quarter and whether or not that rate should, I guess, pick up a little bit as prepayments maybe continue to slow.

Matthew J. Audette

Sure. So it was -- if you look at the overall spreads, so 230 basis points for the quarter, so the impact of those prepayments was about 5 basis points, meaning if we didn't have them, it would be around 235. And then if you look at the individual months, we primarily saw it in January and February. We did see a slowdown in March. For what we can see so far in April, it's continuing to slow down. So from what we see right now, we don't expect that prepayment pickup we saw in January, February to continue into Q2. So that's what we've seen so far.

Alexander Blostein - Goldman Sachs Group Inc., Research Division

Got it. So you should see a little bit of recovery there. And most of that is in held to maturity or available for sale?

Matthew J. Audette

I'd look at -- I'd view it as both books together.

Operator

Our next question comes from the line of Chris Allen.

Christopher J. Allen - Evercore Partners Inc., Research Division

I just wanted to actually keep on the NII and net interest spread. Matt, you mentioned that the full impact of deleveraging was not reflected in the spread. I'm just wondering what that would have been if it had been fully in place for the quarter?

Matthew J. Audette

Well, just going back to the earlier question on the ending interest earning assets. They're about $500 million less than the average. And then we've got plans for another $500 million of deleveraging in the month of April. So those are the 2 things I would add to that.

Christopher J. Allen - Evercore Partners Inc., Research Division

Got it. But you would expect the spread to remain around the $230 million that we saw reported for the quarter?

Matthew J. Audette

Well, I wouldn't comment on the individual quarters. Our expectation for the year is to be slightly below $230 million. I don't have precise numbers on you for Q2, Q3 and Q4 individually, though.

Christopher J. Allen - Evercore Partners Inc., Research Division

No, I was just asking for the first quarter, if there was more info on the deleverage. But I guess -- yes, just on the outlook, I mean, obviously, you had pretty material move in rate since the beginning of the year. That hasn't factored into the outlook for the full year or it hasn't changed it materially?

Matthew J. Audette

It has not. I mean, if you look at all the individual nuances that go into a yield -- or a spread forecast, things are always moving. But our overall view has not changed.

Operator

[Operator Instructions] Our next question comes from the line of Keith Murray.

Keith Murray - Nomura Securities Co. Ltd., Research Division

Can we spend a minute on the provision guidance? You talked about the $50 million to $70 million. I know, obviously, it's a wide range there. But should we be thinking about it, that provision should generally be getting close to matching net charge-offs?

Matthew J. Audette

No, not necessarily. I mean, I don't have charge-off guidance for you other than the ultimate guidance of as the loan portfolio ultimately disappears, the allowance itself is ultimately going to disappear. But I think for 2013 perspective, the guidance is really just on provision. So that's $50 million to $70 million.

Keith Murray - Nomura Securities Co. Ltd., Research Division

Okay. And then on the TRUPs that you mentioned, if you were to call them or replace them, do you have a guess at this point if that would equate to savings on the interest expense side?

Matthew J. Audette

Well, I don't. I think it's more back in the bucket of what would we do with capital, if and when we get out the bank at the parent, kind of thinking about the different uses for that capital. But that's not something that we can do today. So I think we've looked at what the best use of that capital was at that time and TRUPs could be one of the things that we would look at or could look at.

Keith Murray - Nomura Securities Co. Ltd., Research Division

And then finally, is there the potential for any more settlements with other mortgage originators?

Matthew J. Audette

There is potential, but not much. I mean, I think we're looking at a handful of things. I'd put them in the bucket of single-digit range from settlement purposes. So I'd say that largely our settlements are behind us. And if we have anything of size in the future, I think we would be pleasantly surprised by that.

Operator

Our next question comes from the line of Michael Carrier.

Michael Carrier - BofA Merrill Lynch, Research Division

Just on the balance sheet. So if we look after the second quarter, when we get into the second half, is your assumption you get the regulatory approval and then keep the balance sheet basically as is -- I mean, obviously, it depends on what clients do, but you can offload some of that to third parties or money market funds in terms of cash, but in the near term, kind of stick around on the current levels?

Matthew J. Audette

Yes, Mike. I mean, the customer activity is the big item that moves the size of the balance sheet. But as far as our expected deleveraging actions, we've got that $500 million planned for this month and then just continuing to direct new customer cash to money funds, which is not a dramatic amount, but it'll be a small amount. So that's really all we have planned for now.

Michael Carrier - BofA Merrill Lynch, Research Division

Okay, got it. And then just on that provision, the $50 million to $70 million, it just seems like if we look over the past 3 years, credit quality continues to improve. The provision has declined pretty consistently over time. Obviously, there's been kind of one-offs in there. But if we look at the adjusted provision for the quarter, being around 56, it just seems like $50 million to $70 million seemed a little bit on the high end. Is that like conservatism? Is it you just don't know, other things can pop up like they have in the past? It just seems like it's a little bit higher than just given where the credit trends are and just given were the current provision is.

Matthew J. Audette

Well, a year from now, looking back, I hope you're right. But it's definitely our best estimate today. I mean, and if we go back 2, 3 years individual quarters, it definitely moves around. So we're giving you the best information, or best insight that we have at $50 million to $70 million.

Michael Carrier - BofA Merrill Lynch, Research Division

Okay. And Paul, just one thing, you mentioned some of the growth areas. Just anything that -- and granted it's early and maybe we'll get more updates next quarter or the quarter after, but just any, maybe 1 or 2 areas that kind of stand out where you feel like there's more opportunity just given who E*TRADE is or your background that can drive some growth going forward?

Paul Thomas Idzik

Yes. I think there are 2 areas clearly we're making good progress. One is in managed product where we're constructing products that provide the type of risk and return profile that our clients are finding attractive. And clearly, our overall investment product space is an area that we can absolutely continue to grow. And I would also say we have the opportunity to do more for existing customers across a number of products, and I think we'll be looking to just continue increasing the intimacy with customers, and therefore, gaining a little greater sure of what they're doing each day with us.

Operator

[Operator Instructions] Our next question comes from the line of Brian Bedell.

Brian Bedell - ISI Group Inc., Research Division

Can you -- just going back to the capital plan, if you do get to where you want to be by year end, can you just outline again through the priorities of what you think you would do to deploy excess capital, I guess, between, as we said in the past, paying down debt, the 2 large tranches that are callable in later '14 and then '15 versus, say, a share buyback or paying down the wholesale borrowing?

Matthew J. Audette

Sure, Brian. So the wholesale borrowing, I think, is more of a bank capital thing. But I think once we have capital up at the parent, we would look at all those things, right. Our guiding principle here is going to be what's in the best interest of our shareholders and also keeping in mind that we have, in addition to the OCC at the bank, we have a regulator at the parent called the Fed. And they're certainly going to have a view and input on what we would do with capital at the parent. So we would just have to work through all those things at that time.

Brian Bedell - ISI Group Inc., Research Division

Right. So you're just keeping it [indiscernible] at this stage. Is the share buyback a possibility?

Matthew J. Audette

We would look at everything. Again, keeping in mind our regulators' input, as well as what's in the best interest for the shareholders.

Brian Bedell - ISI Group Inc., Research Division

Okay, great. And then just on the principal transactions, the market-making business, are there any structural changes in your business there? Or is it really just a factor of market volume, and as you mentioned, volatility going forward for this year?

Matthew J. Audette

Yes, well, in the quarter, it was definitely volatility, right? That was the big driver of our reduction in the revenues there, reducing principal transactions from -- down to that roughly $22 million for the quarter. I don't have a comment on the rest of the year, just that was really the impact on Q1.

Brian Bedell - ISI Group Inc., Research Division

Okay, great. And then just -- and while we're on seasonality, obviously the Stock Plan business is very strong in the first quarter. You've given your efforts on the growth and bringing in relatively decent net new asset numbers. Can you sort of comment on what your view is coming into the second quarter, whether we'll see any kind of negative seasonality comps versus the first quarter given the strong Stock Plan business? Or do you feel that you're making pretty good progress on the FC side that might offset that?

Matthew J. Audette

Well, Brian, Q1 is definitely the best quarter, the biggest quarter on the Stock Plan side. And then keeping in mind, just on the asset side, the proceeds that come through Stock Plan, we typically keep 35% after 3 months and 15% at the end of the year. So you're going to have a natural outflow later in the year. But that happens every year. So I think if you look at our historical -- look at the past couple of years and just look at the trends that happen in the individual quarters, that's probably going to be the best guide there on what we would see for this coming year.

Brian Bedell - ISI Group Inc., Research Division

Okay, great. That's helpful. And then just lastly, a question for Paul. Just, you mentioned, obviously, the growth opportunities. Can you talk about whether there's any interest in venturing into the RIA channel that Ameritrade and Schwab and Fidelity are in? Or would you rather continue to focus on the advice and guidance and retirement planning segment, investing incremental capital or incremental dollars in that area?

Paul Thomas Idzik

The RIA channel is something that this company has tried in the past and it didn't turn out well for our shareholders. And so that's unlikely to be anything that features in our future, at least in the short term. We think we have a lot to offer by continuing to provide better tools for FCs, our existing FCs, so they can help our customers more, and adding FCs over time. So I think we don't have any intention of changing a model that we see is doing quite well for our customers and increasingly well for our shareholders.

So I want to thank all of you for joining us this evening. And that will conclude the call, and we'll see you next quarter. Thank you. Good night.

Operator

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation, and you may now disconnect your lines.

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