E*TRADE Financial's Management Presents at 2013 Barclays Global Financial Services Conference (Transcript)

| About: E*TRADE Financial (ETFC)

E*TRADE Financial Corporation (NASDAQ:ETFC)

2013 Barclays Global Financial Services Conference

September 10, 2013 7:30 AM ET


Matthew J. Audette - Executive Vice President and Chief Financial Officer


Kenneth Hill - Barclays Capital

Kenneth Hill - Barclays Capital

All right, good morning everyone. So we’re going to kick it off this morning. By the way, my name is Ken Hill. I am an analyst here at Barclays on the exchanges and the e-broker space. Today, we're kicking it off with E*TRADE Financial. We have an E*TRADE veteran, Matt Audette, here. Also have [Betsy] [ph] and Brett sitting here in the front row as well to help out with any questions after the presentation or during.

It's an exciting time for E*TRADE. This company has made a lot of strides as of late. Recently they had the upstreaming of the dividend – of the capital back to the parent, so a lot of stuff to talk about, that and the current environment. So with that, I guess I’ll turn it over to Matt to give a summary.

Matthew J. Audette

All right. Thanks Ken. I appreciate you referring to me as Matt and not Matthew as well. So basically an invitation to speak here at the conference, I've got a lot of information to go through, especially want to give some color commentary on the recent dividend that was approved. So let me get right into the presentation, hopefully we have ample time for some questions.

So with that, I'm going to start with our normal notice to investors, our Safe Harbor. I think everybody knows what these are. To the extent that I speak to some forward-looking statements today, our actual results could vary materially from that. So please, please keep that in mind as I go through the information.

So starting off about our key areas of focus, this really encompasses our strategy, and there's five key points here. These have been the same key points for quite some time. We've had a few tactical changes to some of these, but really the focus of the Company has not changed in a while. So I'm not going to spend a lot of time on these here. The rest of the presentation has really some details behind each of these.

So just to refresh or remind of where our areas of focus are, top of the page, first and foremost, to strengthen our overall financial position. This is focused on improving our capital ratios, through deleveraging and earnings, our cost reductions, and ultimately deploying capital from the Bank to the parent which I'm assuming everybody here read our announcement last week that we received approval for our first dividend. So we're going to talk a bit more about that, but that's really the crux of strengthening our overall financial position.

The second item what's on the page, and just as important if not more important, is our brokerage business. It's core of the Company. Making sure that we continue to focus on that and invest in that is critical. So I'll take you through the strategy there as well as some of our results and where we have been successful.

Next is capitalizing the value of our corporate services business. So those of you who have seen this presentation before might remember this section. It's typically capitalizing on our corporate services business and our market making business. We decided a couple of months ago to get out of the market making business, so in the process right now of conducting a sales process for that business. So as far as our strategy goes, really just focused on corporate services and I'll get into what this business is and why it's important a little bit later.

Fourth is retirement and investing, so very closely connected to the retail brokerage. I'll take you through this area of our strategy, it's really our long-term focus, I'll take you through why it's our long-term focus and why we think it's important.

And then finally continuing to manage and derisk the Bank. We have been focused on this since 2007, a lot of good progress on the loan portfolio, and I'll take you through what we have done there and some of the key metrics.

So with that moving to the next slide, so the long-term impact of our current strategy to earnings, we believe the strategy that I went through in the prior page is incredibly powerful. What this slide attempts to summarize is really the impact that strategy could have on our earnings potential with the business as we have it today. So really the upper left hand corner of the slide, this is our income statement over the last 12 months, and if you look down just at the bottom of that column, our pre-tax income was $150 million.

Now, if you look on the upper right-hand corner of this slide, it's a pro forma for the same time period but a pro forma for the impact of our strategy, and if you look at the bottom of that column, pre-tax income is nearly $1 billion. So getting from $150 million to $1 billion we think is a very impactful strategy and the key of course is how do we get there. So if you look at the blue bars in the middle, those are the key steps we need to take to achieve that $1 billion over the long-term.

So starting at the top, our net interest spread, so in the current interest rate environment our spread has been under pressure, right, no different than the other financial institutions. I'll take it with you a little bit later. Our spread has been hovering in the 230 to 235 basis point range. Over time, we expect that spread to increase to 300 basis points as the interest rate environment improves. So they have a nice impact on the net interest income.

The next two items are associated with the loan portfolio. So our provision expense and our servicing expense are connected to the loan portfolio. The strategy in the loan portfolio over time is really to attempt zero. So if we have no loan portfolio, no provision for loan losses, no servicing expenses for that loan portfolio.

The next is our FDIC expenses. So a little bit less intuitive but the rate that the FDIC charges you for insurance is a risk-based rate. So things like your capital ratios, your regulatory ratings, your credit quality, all of those things go into the rate that they charge you. So over time, as we improve in those areas, we would expect the rate to come down. Our estimate is the rate would come down roughly by half. So you can see on the page, FDIC expenses of $116 million coming down roughly to half, we are talking $50 million to $60 million in savings.

Now moving down to the bottom last blue box is our corporate interest expense. So this is the interest expense on our corporate debt. So we refinanced that debt at the end of last year. The run rate on this expense before that was around $180 million. You can see in the last four quarters, it was $147 million. Over time, we believe we'll have enough capital either within the Bank today or ultimately earnings over time to ultimately pay off all of that debt.

Now we may decide that it doesn't make sense to do so, that might not be the best use of capital, but as an illustrative point, we believe we'll have enough capital to pay that off in its entirety, completely eliminating that expense. So when you pull all of that together, it's an incredibly powerful strategy in our view and that's very important that we execute over time.

Now I have had this slide in our presentations for a while, so what we have added here in the bottom is at least a start to show where we're making progress in some of these areas. So here in the bottom left-hand corner, progress on provision, hopefully you can see the bars. The purple bar in the left is the calendar year 2011, moving to the right is calendar year 2012, to the right of that is the last four quarters, and then to the right of that is 2013 annualized, so the first half of this year annualized. You can see provision just looking at 2013 annualized versus 2011 is down 60%.

Moving to the right of the page, servicing expenses, down 30%. FDIC expenses, no progress there yet, but again the concepts that I laid out above, over time we feel confident. Then the corporate interest expense due to that refinance, the run rate for 2013 is down 36%. So lots of progress here and the key for us is to make sure that we keep focused on this and achieve it over time.

Now, one of the most important things in our capital plan is getting dividends out of the Bank up to the parent. So we were incredibly happy to announce last week, if you look at the updated section on this chart, we received regulatory approval to dividend $100 million from the Bank to the parent, and our intent here – just to emphasize, that was a dividend for $100 million in the quarter, not a dividend approval of a plan – our intent here though in that update box is to seek a recurring $100 million dividend on quarterly basis over the near-term, so roughly think about the next year.

And then we'll need to seek regulatory approval each and every quarter but I think we feel good about the track that we are on, but if we continue to stay on that track exclusive of any macro events, we feel very good about receiving that dividend in the quarter, we feel good about intending to seek it over time. So this is really the culmination of probably two years worth of work, given two years was the last time we had a dividend down at the Bank to the parent.

One of the primary things that we needed to achieve was improving the leverage ratio at the Bank. You can see in the upper right-hand corner, where we ended the second quarter, the leverage ratio at the bank, 9.5%. A couple of years ago we were in the mid to upper 7% range. That was one of the key factors in getting this. We feel very good about the dividend.

Some points of context we have added here on the bottom half of the page, just to give you a sense of the dividend generating capacity or potential in the future. The bottom left-hand corner is the capital generated at the Bank through earnings over the last 12 months. So if you just look on the left-hand side, the capital at the Bank ended at the second quarter of last year at $3.5 billion, ended the second quarter of this year at $4 billion. So you're talking over that time period around $500 million of capital generation.

The other thing to keep in mind is over time our dividend plans assume that we were able to reduce that leverage ratio from 9.5% down to a small number, but our plans assume 50 basis point decline each year coming down to 8%, ultimately down to 8%. So if you take our balance sheet as of the end of the second quarter and look at the bottom right-hand corner, it just gives you a sense, if we are able to achieve that goal, how much capital could come out of the Bank over that time period.

So just looking at the far bottom right-hand corner, if we're able to get down to 8% at the end of 2016, that's an incremental $600 million of capital. So if you put these two charts together, we feel like if we are able to achieve these dividends, we've got a lot of potential that will drive a lot of value for the Company overall.

Moving down to our deferred tax assets, so the silver lining a bit coming out of credit crisis, is our losses generated a large deferred tax asset, so $1.3 billion. The key here, if you look on the right-hand side of the page, and this really continued on the capital discussion from the prior page, is a majority of the deferred tax assets is not included in regulatory capital. So if you look in the upper right-hand corner, that's DTA at the parents, the consolidated DTA of $1.3 billion. The grey section of the chart is the amount that's not included in capital.

So $1.25 billion, if you look at the bottom right-hand corner, of the $1.3 billion DTA, $1.1 billion of it is at the Bank. So the vast majority of it is at the Bank. And the grey section there as well as the amount does not include capital. So $700 million of basically embedded capital on the balance sheet, simply through the passage of time and earnings, we've got capital source in the balance sheet. So, something to keep an eye on over time.

So moving to the brokerage business, so just as important as strengthening our financial position is really focusing on our core business, right. The brokerage business is who we are. We are committed to grow on this space. If you look at the top half of the page and just some examples of some outside recognition we have received, SmartMoney, Barron's, and Kiplinger's. We typically do some nice recognition, you can see some examples there. And the bottom half of the page is broadly where we are focused, some things that we have been doing, from investing in our public website, to our mobile platforms, to continuing to invest in and develop our brand.

Now getting a little more specific on the strategy, so a little more specific but still a bit of a high level, we have a three-pronged focus. On the left-hand side of the page is our trading business. So if you think of the brokerage business as the core of the Company, within brokerage, the trading offering is really the core of the core, right. That's what we are known for, that's what we started with, and making sure that we don't forget that, that we invest in that, that we continue to develop that, is very important.

Connected to that on the far right-hand side of the page is retirement and investing. So we'll talk a little bit more about this on a later slide but this is an area of long-term focus for us. We think there is a huge potential here for long-term growth and I'll take you through why in a bit.

And then really connecting those things together, in the middle of the page, is improving the customer experience. If you don't have a great customer experience, whether it's sales, it's service, it's your products, it's your platform, those left-hand side and the right-hand side of the page are not going to matter, right, because customers are not going to come to you and if they do they're not going to stay. So that's something that we are very focused on, we think we have been doing a very good job of over time.

So getting into some of our results, so this slide summarizes some of our key growth metrics. The overall theme here is we've been growing and we've been growing at a fairly consistent pace for a while now. If you look at the upper left-hand corner, net new brokerage accounts, just looking at that box within the box, 2011 we had generated 99,000 net new accounts, 2012 120,000, this year we're on a nice pace of 60,000 through the first half of the year. If this chart went back to 2010, you'd see it was around 50,000 new accounts. So we've got a nice steady growth and a nice steady improvement.

Very similar trend on the asset side, which is just as important, at the bottom left-hand corner. 2011 we were just under $10 billion in net new assets, 2012 just over, so some good success this year, a little bit slow rate this year so far but still some nice growth. Now one of the reasons that we think we are doing so well here, and just kind of playing off of the focus on customer experience on the prior page, is we've really been able to reduce our customer attrition.

If you look at the upper right-hand corner, you can see our customer attrition, 8.5% year to date through first half of this year. We were at over 10% in 2011. If you went back a few years prior to that, we were consistently in the mid-teens, like roughly 15% range. So we have spent a lot of time and focus here driving this number down. If you look at the quarterly numbers, you can see Q2 2013 a record low of 8.4%. So a lot of good stuff going on there in our view.

Now, as important as it is that we grow the customer base, they also need to engage with us. So this slide summarizes some of the key engagement metrics here. Trading levels are DARTs in the upper left-hand corner. We have seen some nice improvement in trading this year. You can see year-to-date, through the first half of this year, trades were 149,000 versus 138,000 in 2012. In the month of July, our trades in Q3 typically expect a seasonal slowdown, July was 141,000. The month of August was 148,000. So a 5% increase over the last month and a 21% increase over August last year. So we have seen some nice pickup in activity levels.

The other thing our customers do with us is they keep cash with us, right. So separate from the tactics we've had on deleveraging, growing customer cash over the long-term is going to be incredibly valuable. So you can see in the bottom left-hand corner, we ended the second quarter with $36 billion of brokerage related cash, up from $31 billion at the end of the first quarter of 2012, and it's incredibly low rate, incredible sticky cash. You can see the average cost there has been hovering around 11 basis points, and so far this year it's been 9 basis points. So some nice engagement we've seen on the customers. As you could see, customer margin on the upper right-hand side $6 billion at the end of the second quarter, hasn't been at that level in many, many years. So it's a real good engagement going on.

Now if we move to the next area of retirement and investing, so I've said a couple of times, a scenario of focus for us over the long term. The first thing I want to emphasize though is we are not new in this space. If you look in the bottom left-hand corner, we have $37.6 billion of retirement assets alone. It's about 20% of our total customer brokerage related assets, right, so something that we're in a fair way.

We believe that we have an opportunity to grow this much larger than that. If you look on the right-hand side of the page, second bullet, we estimate we have about 12% wallet share for our customers. So if you take total customer investable assets of roughly call it $200 billion, the total investable assets that they have are approaching $2 trillion. So this is a large opportunity with our existing customer base to have them bring investable assets over.

So how are we going about that? The first thing is we want to make sure that we have the products and services that they want. So if you look at the left hand side of the page here, we could see some of our products listed, some of the services. We have spent the last couple of years or past few years making sure that we have the products and services that they want and we believe they do.

The next key thing for us is to make sure that they're aware of that. So if you look at the box on the right-hand side of the page, we've been focused on growing our financial consultants. We have around 285 financial consultants. This is up about 50% from the level we had at the end of 2010 when we started this focus. So again this is something for the long-term and we think we have the right products and services and we are growing the financial consultant base, so keep an eye on this over time.

Moving into fourth here, so capitalizing the value of the corporate services business. So this is our Stock Plan Administration Group. So if you think about companies that issue stock options and restricted stock to their employees, we provide the tools and administration and services for those programs and we also provide the ability to execute the stock options or sell their restricted stock, but the key here for us is when an employee of those companies exercises the stock option or sells the restricted stock, we give them the opportunity to put those proceeds in a brokerage account, a retail brokerage account for us, and that's the real opportunity here.

So if you look at the second bullet on the top half of the page, this business drives about a third of our gross new accounts in the brokerage business. So it's a great feeder channel. Just a little point of context on the opportunity here, if you look at the bottom right-hand corner of the page, this shows the total dollar amount of vested and unvested value in these plans. So the green section just at the end of second quarter, $27 billion of vested value in these plans and then the long, long term opportunity in the unvested value in these plans of $52 billion, right. So an incredibly powerful feeder channel that we expect to focus on going forward and over the long term.

Moving into the last area, so continuing to manage and derisk the bank. So our investment strategies and our funding reliability strategy is unchanged and has been unchanged for quite some time. If you look on the left-hand side of the page, our strategy is to runoff the loan portfolio. That's the green section on the chart. You can see it's been running off from a peak of $32 billion back in 2007 down to around $10 billion today. And our investment strategy is unchanged as well. It's incredibly low credit risk assets, primarily agency backed securities. That's the purple bar in the section. You can see that growing over time.

Similar concept of the funding side. Our objective is to drive down the cost of our wholesale borrowings, you can see that in the green section of the chart, and replace that over time with our customer cash, our customer deposits which is the purple section. So we have been at this for quite some time, we don't anticipate a change there either.

Now moving to credit, so the credit story continues to be a good one, meaning an improving one. If you look in the upper left-hand corner, this summarizes our delinquencies. So delinquencies are down 74% from their peak at the end of 2008. Very similar story on the cost associated with the loan portfolio which is the provision in the upper right-hand corner, down 91% from the peak.

And if you go back to that peak, just to emphasize where we were at the end of 2008, the provision for loan losses was $500 million per quarter, not per year, per quarter, versus where we are today, in the most recent quarter it was under $50 million. It is a dramatic decline and you can see largely driven by the decline in delinquencies and then also the size of the portfolio which is on the bottom half of the page, and again it's from a peak of $32 billion, it's now down around $10 billion today.

Now a little bit more color on our reserves or the allowance for loan loss. The top half of the page shows the allowance over time and three components of it. It's down to around roughly $450 million. So as our loan portfolio has declined and as the delinquencies and losses have declined, the allowances' health has come down as well.

Two points of context though, on the bottom half of the page. These are coverage ratios really to give context of the $450 million versus the loan portfolio. We look at it two ways, first on the non-modified loans, you can see on the bottom left-hand corner and the focus here is on the purple line on both charts. This just shows the coverage ratio for loans that are 90 days plus past due. You can see that as steadily increasing over time.

And on the bottom right-hand corner, this is the coverage of our modified loans. And on modified loans, since we reserve for estimated losses over the entire life, we do this as a percentage of the whole portfolio, and you can see that's been consistently just below 40% for a long, long time. So these are just good high level snip tests from our perspective to give you some sense of the allowance at $450 million which we are quite comfortable with.

Now a little bit more visibility into credit and the loan portfolios. So two specific items to highlight here. The first is on the top half of the page in the 1-4 family portfolio. Now our entire loan portfolio was acquired primarily in 2005, 2006 and 2007. The majority of the 1-4 family portfolio are adjustable rate mortgages but they had an initial fixed period. So when they get through that initial fixed and adjust for the very first time, they are adjusting from interest rates that were several years ago. So the key here is what happens to that payment when those loans adjust.

So we've shown here on the chart is when the loans adjust for the first time, and you can see, if you look on the left-hand side of the page, the majority of the loans have either already adjusted for the first time in 2011 or 2012 or they don't adjust in a material way until 2016 or 2017. So really there's not a lot going on in this portfolio as of today. The other thing to keep in mind is that the vast majority of these loans when they do adjust are adjusting to a lower payment because these are interest rates that were set back in 2005, 2006, 2007 when interest rates were much, much higher, so they are adjusting to a lower payment.

Now, a little bit of a different item on the home equity line, home equity books on the bottom half of the page. The majority of the home equity books are home equity lines of credit. The way the payments work typically on a home equity line of credit is it is an interest-only loan during the draw period which are typically 5 to 10 years from the initiation of loan, then they convert to an amortizing payment once the draw period closes. So when you convert to that amortizing payment, typically you have a payment increase. So what we've done on the chart here on the solid green line is show when the loan by dollar amount: convert from interest only to amortizing, and you can see it does not happen in a meaningful way until 2015 and 2016.

The other thing I would emphasize here is even though the loans or the majority of the loans are interest only today, a good bit of customers are actually making principal paydown. So if you look in the bottom left-hand corner of those last two bullets, about 40% of our home equity borrowers made principal reductions of at least $500 in the last 12 months, and then about half of those or 20% made principal reductions of $2,500 in the last 12 months. So payments are being made.

We tried to illustrate that, if you look again back at the bottom right-hand corner, if you look at the somewhat the lighter green bar behind the solid green bar, this shows the portfolio on when the conversion would occur as of the end of 2010. So just you can see where it was about 2.5 years ago, it's come down in a meaningful way. So by the time we get to 2015 and 2016, you can reasonably expect that these bars are going to be much, much smaller by then as well.

Final points to keep in mind here is the size of these loans. On average it was $75,000 per loan, meaning the payment increase that we are talking about here is a few hundred dollars a month in the current interest rate environment. So, not a material increase in payment when we get to that point. So all in all, these are the areas that we are focused on in credit but given all the things that I have walked through, there a lot of good mitigants against the credit risks here.

Moving to spreads, so top half of the page summarizes our spread going back to the beginning of 2010. Not a new story here, our spread came under pressure over time as the interest rate environment was very challenging, meaning interest rates were quite low. You can see over the last few quarters, we've been bouncing around the low 2.30% range. Our expectation for this year is to be actually slightly above 2.30% and for 2014 actually to start to improve up to 240 basis points based on where the interest rate environment is. So we are seeing some nice improvements in the interest rate environment, of course now on the short end of the curve, but when you start to get into the belly of the curve and up to the 10 year, interest rate environment has gotten much better than it was a few quarters ago.

That really manifests itself if you look in the very bottom left-hand corner. Our marginal investment rate on securities is in the 150 to 200 basis point range. If you went back a few quarters, this was hovering in the low 100 basis point range for a while. So this has started to improve.

And then one other thing to keep in mind over the long term as a wholesale funding book, so we've got that summarized here in the bottom right-hand corner. The average cost of this book is 3% or 4%. Over time we would expect to replace it with customer deposits, and the chart here just shows the natural schedule that it will roll off over time. So around $5.5 billion right now, it's going to be many, many years before it rolls off but just something to keep in mind that will be a positive driver spread over that time period.

So closing out, so we definitely had some challenges and opportunities. If I look at the environmental challenges, the very top of the page, I think the thing that I feel good about on each of these is while they remain challenges, they are improving. So the prolonged low interest rate environment is still a challenge, the interest rate environment is much better today than it was a few quarters ago. Home prices remained a challenge but we've seen consistent growth in home prices, especially over the last year. Weak consumer/investor confidence is a challenge, but as I talked about in trading activity, we've seen some nice improvements in trading activity this year. And then heightened regulatory sensitivity, this is an area of focus in our environment but we have been at it for quite some time. I think our relationship with our regulators improves as we focus on it and over time I think it's really just going to be part of who we are. So I feel very good about the direction now.

Now challenges specific to us, continuing to mitigate the losses on loan portfolio. Even though it has come down from that $500 million a quarter to under $50 million this past quarter, we've got to keep focused on it. Continuing to distribute capital from the Bank to the parent, it feels incredibly good to have that approval of that $100 million, but it was just an approval of $100 million, we have to keep doing the things that we did to get to that $100 million approval to make us be in a very good position to get approval in future quarters, right, so it's very important that we do that. And one of the things that's closely connected to that is our enterprise risk management capabilities. My view we made incredible progress in building those out but we have a lot more to do, so we need to keep at it.

Now on the opportunity side is really the brokerage business. We have spent the last two years I think executing incredibly well on our capital plan, but the core of the Company is the brokerage business, right. So we need to focus on accelerating the growth of that core business, expanding that long-term focus on retirement and investing, and then making sure as we pivot from completing cost reductions into making sure we have the appropriate investments in our core business, we have to make sure we don't lose that culture of operational efficiency that I think we really developed in a very good way over the past couple of years. So all in all, I feel very good about what we have accomplished and I feel very good about our prospects.

So with that, I'll be happy to take some questions.

Question-and-Answer Session

Kenneth Hill - Barclays Capital

So we've got about four questions we're going to go through, so if we could pull those up. Don't have them. I think we'll go ahead and skip those then. I guess we'll go ahead and take questions from the room if anybody has any questions in the room.

Unidentified Participant

A longer term, is there any reason why your capital ratios could be significantly lower than – if you look at Charles Schwab, they are at 6.6%, you're at I think 9%, 9.5%. I know you still have the plan for it to come down every year but any reason why structurally long term it couldn't be in that range?

Matthew J. Audette

Yes, so definitely of where their leverage ratio is. I think it's good to see where your competitors' capital ratios are and think of that as ultimately a long-term goal. I think what is critical for us is to make sure that we keep focused on our capital plan and our ratios, but I think over the long, long, long term, if we continue to execute and our business models looked entirely the same, I think that would certainly be a conversation we want to have, but I think it's important that we just focus on the plan that we've laid out for right now.

Kenneth Hill - Barclays Capital

Okay, I'll go ahead and ask the next one here. So just given with the recent upstreaming of the capital to the parent, how are you kind of thinking about future outlays going forward? I know you guys have some debt that's callable here in I think November of 2014. Beyond that, what kind of things are you thinking about behind acquisitions or share repurchases or paying down additional debt or maybe investing more in the business, what's kind of the pecking order there?

Matthew J. Audette

I love getting that question now, that’s exciting. You can imagine we are looking at all those things, right, what our primary driver is going to be, what's the best use of capital for our shareholders. As you laid out, a lot of several different options that you would have. I think when you look at our balance sheet, debt reduction is an obvious one that we need to focus on and understand what we can and can't do. To your point, we don't have anything that's callable until the end of 2014, so we need to focus on what's the best way to go about that. We moved a lot of deposits off balance-sheet, $8.5 billion deposits off balance sheet. We didn't get rid of those deposits, we just off balance sheet, so when does it make sense or does it make sense to bring those back on. Investing in the business is critical, returning capital to our shareholders is important to us. We would look at all of those things, and over time as we come to conclusions on what makes the most sense, we'll update everybody, but for right now, we're just really doing the analysis.

Unidentified Participant

What are your thoughts I guess right now around timing, do you need to speak with the Fed around potential capital outlays from the parent, so can you guys give us an idea of when we could potentially hear something?

Matthew J. Audette

So anything we do capital wise at the parent whether it's debt reduction, share repurchase, anything like that, we would certainly be engaged very closely with the Fed. As far as timing, I can't – I will tell you that we will update you on the way through presentations like this or on investor calls but no specific time on when we'd be ready, other than we're obviously working on it and focusing on it right now.

Kenneth Hill - Barclays Capital

Is there anything outside of maybe your tier 1 ratio there at the Bank that dictates that, I guess are there any factors maybe we can't, don't have a lot of kind of we can't see from the outside? For instance you mentioned your risk management systems that might cause that payment to vary on a quarter to quarter basis, and how can we think about that [carrying] [ph] over time?

Matthew J. Audette

So the build on of the enterprise risk management framework is probably the primary one that's not very visible. So the key things that you can see are the capital ratios themselves, completion of our deleveraging efforts and cost reduction that we did, continuing improvement of credit, continuing improvement and consistency in earnings, the macro environment is going to be a big driver, but I think that when it comes to dividend, it's always going to be from my perspective it's going to be a sophisticated approach and assessment by the regulators on whether something makes sense or not. So I don't think there's an answer key or some formula that you can calculate to see whether it makes sense or not other than to look at I think the last two years, and that's when we laid out the plans of things that we think are important and our ability to accomplish those, I think what this dividend shows is that if we are able to execute very well and the macro environment cooperates, that good things could happen. So I think it's just incumbent upon us to make sure that the trend of what we've done, what we've completed the last two years continues.

Kenneth Hill - Barclays Capital

Anything else from the room? Now it's early, I guess people are still waking up out there. I guess back when we sat down with Paul when he first took over, he talked about being more efficient as a platform. Are there any stats you guys can point to that kind of shows progress you have made or any kind of changes you guys have made internally as far as how you structure maybe sales teams or maybe strategy teams to maybe enhance how you guys are using data internally and what you guys are looking to do with that?

Matthew J. Audette

I think you have taken two broad and public things. We implement our cost reduction programs, right, so the cost – separate from the year end buildout, cost reductions of $110 million, that's completed, done, you can see the expense base has come down. At the same time, we are growing the business. Our attrition is at record low levels, new accounts are coming in, new assets are coming in. So you put those two things together, and that's just a good external proof point of how we've gotten more efficient, kind of hard to get into the tactics below that, but I think that's a good way to look at the efficiency.

Unidentified Participant

Page 14, just interested in – you show what your charge-offs are, you charged off about 25% of what your loan balances were in 2007. Could you comment on the loss content of what's left, what's your view on the loss content of what's left? Some will say it should be better because if you have made five to six years paying, I'm interested in your views.

Matthew J. Audette

Sure, and just to clarify, so the reduction in that 18 versus for the – the 18th paydown, so the charge-offs is, even though it's a large number, that's only $4 billion, so that's 25%. But the loss content, I mean it's always tough to tell. I think the best thing to do is just simply to look in the upper left-hand corner of the slide, and delinquencies are down and down in a meaningful way. So you start to get a thesis of anybody who could refinance and leave, therefore whatever is left is, call it, bad stuff. But again, look at delinquencies, delinquencies are down 74%. The trend continues to go down. So it's hard to predict. I would just focus on the actual results which I think speak for themselves that even though individual quarter can be a little bit jumpy, the credit quality continues to improve over time.

Kenneth Hill - Barclays Capital

Okay, anything else in the room? One more.

Unidentified Participant

In August starts, is there anything in particular that stands out to you, I mean I think July and August have both looked better, are you seeing anything or is there any additional color you can give us on where that's coming from?

Matthew J. Audette

No additional color. I mean the distribution of trades in our space, specifically for us, options are typically 25%. The types of stocks that retail customers trades are the ones that you would think of like an Apple or somebody like that. So I don't think there's anything unique to the quarter other than it's nice to see the engagement by August at 148, up 21% from August of last year. So just it's really nice to see the engagement but I wouldn't say there's anything unique beyond that.

Kenneth Hill - Barclays Capital

Okay, I think we'll leave it at that then. We're doing a breakout session here in the Clinton Suite. So if everyone had any additional questions, feel free to follow up there and thank you.

Matthew J. Audette

Alright, thank you.

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