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E*TRADE Financial (NASDAQ:ETFC)

Q3 2013 Earnings Call

October 23, 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

Alexander Blostein - Goldman Sachs Group Inc., Research Division

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

Christopher Harris - Wells Fargo Securities, LLC, Research Division

Howard Chen - Crédit Suisse AG, Research Division

Michael Carrier - BofA Merrill Lynch, Research Division

Devin P. Ryan - JMP Securities LLC, Research Division

Operator

Good evening, and thank you for joining the E*TRADE Financial Third Quarter 2013 Earnings Conference Call. Joining the call today are Chief Executive Officer, Paul Idzik; and Chief Financial Officer, Matthew Audette.

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 measure 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 about.etrade.com.

This call will present information as of October 23, 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 about.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 Mr. Idzik. Please go ahead, sir.

Paul Thomas Idzik

Thank you, Patrick. Good evening. It's a pleasure to be speaking with you again. This third quarter was solid in terms of results and retail activity. It was also marked by some important accomplishments. Most notably, the regulatory approval for distribution of an intercompany dividend, something this company has been working toward for quite some time and a significant development in our ever improving capital strength. And secondarily, entering into an agreement to sell our market making unit, allowing management to more acutely focus our energy on things that truly matter to our customers and drive value for our shareholders. I will cover some of the highlights and then pass the baton to Matthew to walk you through the details.

Starting with our financial plan. Five quarters ago, the company submitted a comprehensive plan to our regulators, with the objective of achieving capital strength and flexibility. I am delighted that the focus and hard work of my colleagues led the company to achieve the goals outlined in the plan and continued to deliver on the ongoing concomitant improvements to enhance risk management and control of the business. We received regulatory approval for a $100 million dividend from the bank to the parent in early September, one quarter sooner than we originally anticipated. We intend to build on this first milestone with recurring quarterly dividends of similar amounts over the near term.

Today, we also announced that we signed a deal to sell our market-making unit to Susquehanna, concluding a process begun last quarter. As you will recall, we made the decision to exit this business after determining it was not strategically core. The transaction, upon which Matthew will elaborate, is one with which we are quite pleased and we believe is in the best outcome for our customers and shareholders. We are confident in Susquehanna's ability to deliver best execution for our customers and we look forward to having them as a partner.

In terms of results, we posted earnings of $0.16 a share, reflecting some positive trends in retail engagement, improving performance in our legacy loan portfolio, which supports continued derisking of the balance sheet and prudent expense control benefiting from our previously completed $110 million cost-reduction exercise.

Trading activity improved year-over-year for the second consecutive quarter after declining for the previous 6. DARTs of 145,000 were up 13% from the year-ago quarter and exhibited a mix consistent with recent history and that approximately a quarter of trades were in options. It's also worth noting that our customers are increasingly engaging with their finances in a broad variety of environments. As trades executed via mobile devices grew to a record 9% of total DARTs this quarter, more than 3x the level we saw only 3 years ago. Margin balances, an important indicator of customer engagement and confidence, grew to their highest levels in 5 years during the quarter, averaging $5.9 billion and finishing the quarter up at $6.2 billion.

In the midst of the political morass in Washington, our customers have remained engaged and active in October, with DARTs averaging 158,000 month-to-date, a 7% increase over September.

In terms of brokerage accounts and assets, we had a reasonable quarter, generating fewer accounts than both the prior quarter and Q3 2012, but exceeding both comparable periods in terms of net new assets. We added 13,000 net new accounts this quarter, while attrition increased modestly to 9% on an annualized basis, from a firm record 8.4% last quarter. This increase does reflect some seasonality. We brought in $2.4 billion of net new brokerage assets to total $7.2 billion year-to-date, representing an annualized growth rate of 5.6%.

Our retirement investing and savings business continues to be a central focus, as we aim to drive greater awareness and interest in our offerings. Leveraging our cadre of financial consultants is key to this effort and especially crucial, with retirement planning season having kicked off at the beginning of this month. Through Q3, results in this area have been promising. Our retirement assets under management have grown 16% year-to-date and now exceed $40 billion. And we are particularly pleased with the continued growth in managed accounts, now surpassing the $2 billion mark, a significant achievement for the company and representing roughly 60% growth year-to-date.

This past quarter, we continued to bolster our education and planning resources to help investors organize, save and invest to meet their financial goals. Recently, our redesigned Investor Education Center received recognition from Corporate Insights, with the only A+ rating in their just completed e-Monitor study. Customers and prospects use our education resources to hone their investing skills, discover trends and opportunities and learn about various financial products, all to help make them better informed, as they make decisions to take control of their financial health. The retirement, investing and savings area of our business is a strategic priority and it is gratifying that we are seeing the fruits of our labor.

Lastly, we announced 2 additions to our Board of Directors during the quarter, welcoming Mr. Richard Carbone and Mr. Christopher Flink. Mr. Carbone is a seasoned industry veteran, having most recently served as EVP and Chief Financial Officer of Prudential Financial for 16 years. He brings a wealth of experience and financial perspective.

Mr. Flink brings visionary leadership with his experience as a design and innovation expert at IDEO, serving some of the world's most successful consumer brands, including Target, Apple and JetBlue. These 2 new members bring unique competencies to our board and we are excited to have them. With the additions of Rich and Chris, we are now at our target level of 12 board members.

In summary, I'm proud of our accomplishments this quarter. The dividend approval was a result of much hard work across the business and reflective of the good progress we have made, implementing a culture of risk management and professionalism and control. And the sale of our market maker illustrates our commitment to focus management's attention on what truly matters to our customers and our owners.

With our financial strength improving and a cohesive executive team in place, we are focused even more sharply on insuring that customer experience is at the forefront of everything we do. Somewhat in that same vein, with ongoing reductions to legacy risks and related expenses, coupled with an improving environment in customer engagement, we're exploring additional areas of prudent investment in the core business, to drive even more value for our customers and our owners.

I look forward to updating you once we have more to share on this topic. And with that, I will turn the call over to our unflappable CFO, Matthew Audette.

Matthew J. Audette

Thank you, Paul. For the third quarter, we reported net income of $47 million, or $0.16 per share, an improvement from the prior and year ago quarters, where we posted net losses of $54 million or $0.19 per share and $29 million or $0.10 per share, respectively. The prior period's net losses were driven primarily by $142 million impairments of goodwill in the second quarter, and $50 million in charge-offs related to the untimely reporting of borrower bankruptcies in the year-ago quarter.

Our third quarter net revenues were $417 million, down from $440 million in the prior quarter. Revenues included net interest income of $241 million, down slightly quarter-over-quarter, as a result of 5 basis points of net interest spread compression to 230 basis points, which was partially offset by $600 million increase in average balance sheet size on higher customer cash balances.

The decline in spread was primarily driven by less income from our stock lending business and higher average cash balances. We also saw prepayment fees in our securities portfolio slow late in the quarter, which had minimal impact on our Q3 results, but we anticipate will improve spread in Q4, if the slowing continues, as we have seen thus far in Q4. Our full year 2013 expectation remains just above 230 basis points. If rates move in line with what the forward curve assumes, we expect a slight improvement in 2014, with an average spread in the mid-230s. This is down slightly from our estimate less quarter, as the interest rate environment was more favorable 3 months ago than it is today.

Commissions, fees and service charges, principal transactions and other revenue in the third quarter were $164 million, down 7% from the prior quarter and up 8% from the same quarter of 2012. Average commission per trade was $11.15, up from $11.10 in the prior quarter and down from $11.24 in the year-ago period. The sequential increase related to a higher portion of stock plant trades. Principal transactions revenue was down $9 million in the quarter, as volatility remained at historically low levels. And overall volumes in our market making unit were down 16% from last quarter.

Upon completion of the sale of our market-making unit, the principal transactions line will be going away, as it relates solely to this business. Our fees and service charges revenue was in benefit from increased payment for order flow, as 100% of our order flow will be routed to third parties. I'll cover this in more detail shortly.

Revenue this quarter also included $12 million of net gains in loans and securities, in line with our previously communicated expectations. We expect gains for the next quarter or 2 will continue in the $10 million to $15 million range, though in 2014, we expect this range to decline to $5 million to $10 million quarterly, barring significant volatility in the rate environment.

This quarter's provision for loan losses was $37 million, compared with $46 million in the prior quarter. This is slightly below our originally forecasted range due to smaller than expected charge-offs of $29 million in the quarter, which were at their lowest levels since early 2007. Going forward, we expect provision expense to be in the $25 million to $50 million range per quarter.

While I say this every quarter, I must emphasize that while this is our best estimate today, it could vary meaningfully. In particular, I want to underscore that with a provision at such relatively low levels, the volatility of actual results versus our estimates is likely to increase, as rather small improvements or deteriorations in credit performance or outlook could drive material changes in individual quarter's provision.

Loan pay downs also came in better than anticipated this quarter at $500 million, driving a total decline in the portfolio of $530 million, versus our expectations for $400 million. Pay downs were the highest level in 7 quarters, as improving home values enable more borrowers to refinance. LTVs and MCLTVs have improved substantially over the last 2 quarters and now average 94% for One- to Four-Family and 102% for home equity. We expect the quarterly runoff of the portfolio to be roughly $500 million over the next quarter or 2, dropping off to $350 million per quarter by the end of next year.

Our loan portfolio ended the quarter at $9 billion and our allowance ended the quarter at $459 million, increasing $8 million from the prior quarter. Our allowance includes $135 million for modified loans, which combined with the prior write-downs, accounts for the full life of loan loss expectation. While the portfolio balance continues to decline and the relative performance in quality continues to demonstrate improvement, we are mindful of future conversions in the home equity portfolio, which could drive higher defaults. Accordingly our reserves have began to capture these events and we expect this will continue in future quarters.

Total special mention, delinquencies were up 3% sequentially, and included some inter-quarter noise. In June, we completed a service for transfer of $1.6 billion of One- to Four-Family loans, driving a temporary spike in delinquencies resulting from changes to borrower payment process. Consistent with past transfers, the temporary spike has largely reversed in the following months and we expect it to fully revert to pre-transfer levels.

Our loan modifications continue to be at relatively low levels, as we modified $17 million of loans this quarter. This compared to $35 million in the prior quarter and represents the lowest amount since we began the program. We expect these to remain at low levels over the near term, though they'd serve as an impactful loss mitigation tool, should they be needed when our fee loss begin to convert from the IO to amortizing in a meaningful way.

Moving to progress on our capital plan. We have made great strides since we submitted the initial plan back in June of 2012, accomplishing the many quantifiable goals, addressing the more qualitative ones, and achieving our crucial Tier 1 leverage target at the bank. This quarter's $100 million dividend represents important progress with our regulators and an early milestone in our efforts to create a more efficient capital structure. It is now imperative that we continue to execute on the many ongoing commitments included in our plan, upon which our continued progress is paramount to future dividend approvals.

Our plans for dividend request remain to seek approval for $100 million a quarter over the near term. Over the long-term, the capital we intend to request will be determined by the amount in excess of our ultimate target threshold of 8% Tier 1 leverage at the bank. Including the bank dividend, corporate cash ended the quarter at $373 million, which is approximately $150 million above our target of 2 years of debt service coverage.

We expect our corporate cash levels to continue to grow, assuming we receive regulatory approval for future dividends. As such, we are intensely focused on analyzing the best use of this corporate cash. Our initial thoughts are squarely focused on reducing our debt level at the parent. However, there is more work to do to finalize this view.

We feel quite good about our bank's Tier 1 leverage ratio, ending the quarter at our targeted 9.5%, even in the face of $500 million in balance sheet growth from customer net selling and the $100 million dividend.

As far as our other capital ratios, we improved across the board, at both the bank and the parent. As we discussed last quarter, the Basel III capital rules are favorable to us across all risk-based measures. Improving Tier 1 common ratios at the bank and parent from their current 22.2% and 12.9%, respectively, to 32.3% and 19.6%. Regarding our parent Tier 1 leverage ratio, we continue to plan for the phaseout of props, which would have reduced our current ratio of 6.6% by 110 basis points this quarter.

Regarding the sale of our market maker. I am pleased we were able to execute an efficient sales process. We have agreed to sell the business for $75 million and subject to regulatory approvals and other closing conditions. We hope to close on the sale in 3 to 6 months.

I would also note that the sale proceeds of $75 million will increase our corporate cash balances upon closing. In addition to the sale, we entered into an order flow agreement, under which we will route 70% of our equity order flow to Susquehanna over the next 5 years, subject to best execution standards. We expect the impact of this transaction on our ongoing earnings to be immaterial. More specifically, upon completion of the transaction, principal transactions will be eliminated. Fees and service charges will increase from additional payment for a default and offsetting expenses, predominantly in clearing and compensation, will be eliminated. And just to reemphasize, we expect the net impact of all these changes to be immaterial to ongoing earnings.

In closing, the third quarter was a good one, as our brokerage business produced solid results in what tends to be a seasonally slow quarter, and the credit performance of our legacy assets improved nicely. We are happy to have reached a deal to sell our market-making unit to such a quality partner as Susquehanna, in a deal that we view to be positive for all parties involved.

I'm incredibly proud of what we have accomplished in our capital plan and feel good about where we stand going forward. Today, I believe our company is in its strongest position in years. And frankly, I look forward to continuing the trend of hosting earnings calls with diminishing complexity.

With that, operator, we will open the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Rich Repetto with Sandler O'Neil.

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

My question is for Mr. Unflappable first. So first, Matt, you did address this in the prepared remarks a bit. And you talked about the reserve, how you build in a reserve and home equity for the potential conversion. Can you give us any -- a little bit more color on what you're expecting, I guess? And you've updated us on metrics in the past, on paid ons and stuff, What do you expect? And what level are you going to build the reserve? And -- some metrics on what we can expect there going forward?

Matthew J. Audette

Sure, Rich. I think the trends that we've talked about at the last few quarters has still continued, right? So the comments on the average loan size and home equities is relatively small at $75,000, the average payment increase we're talking about here is a few hundred dollars. A lot of the borrowers, even though they only need to make interest-only payments today, are still making some principal payments. 40% have paid over $500 in the last 12 months. Just under 20% have paid over $2,500. So all those dynamics are continuing at play. And if you look at the reserves, just looking over the last few quarters, looking at the trends in the One- to Four-Family book, where charge-offs are coming down and the provisions actually negative on that particular portfolio. Then on the home equity side, you see the provisions on the last few quarters hovering in the 50%-plus range. So I think, the comments are really that all the trends that we've seen in the past few quarters really continue on the home equity book.

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

Okay. All right. And then I guess a question for Paul, more broadly, about E*TRADE. So Paul, you've been there for a while. You get your team more in place of new marketing officers, new President, COO. Can you talk to us a little bit how the culture is changing? And I know you stress process improvement and efficiency, but what's going on into E*TRADE now, as we're seeing all these other metrics improve? Financial metrics.

Paul Thomas Idzik

Sure, Rich, let me point to 2 things in our announcement today that will underscore some of the transition we're going through. The transition we're going through is moving from a company that's been focused to quite a great extent on its past, to a company that's focused much more on its existing customers, its future and between those delivering the best value for our shareholders. Today, we are able to announce that we have sold G1X, which allows this management team to focus on the core business and drive value there. And the team did a great job executing a transaction that will be immaterial to our earnings, but quite material to our ability to focus on what's important. And secondly, underscoring the fact that we were allowed to generate a dividend inter-company, illustrating the regulators confidence in our capital position, and quite frankly their confidence in how we built out risk management and controls. So the new team is focused together on really driving to the next-generation, if you will, of E*TRADE and changing and improving how we deliver value to our customers and our shareholders. So does that make sense, Rich?

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

Yes, it does. And I -- well, I know you've put these new people in, I guess, after the 3 months that they've been there or so. Just trying to -- whether there was any more concrete things that they -- they've implemented. But I see things are changing.

Paul Thomas Idzik

Yes. Well things are changing. If you were here, Rich, you'd see more attention to process improvement, you'd see much more science around listening to customers and understanding what they want and baking them into product development. Much tighter integration between the technology resources and the business -- and the business development people. So, it's difficult to describe over the phone. If you were here, you'd find it palpable. And you'll start to see it in our customer numbers over time.

Operator

Our next question comes from the line of Alex Blostein with Goldman Sachs.

Alexander Blostein - Goldman Sachs Group Inc., Research Division

So just a quick clarification on the provision, and Matthew, to your comments around the home equity portfolio and the potential -- potentially higher risk associated with adding it to 2015. The way you guys think about the provision and the guidance you should have provided, $25 million to $50 million per quarter, does that already reflect, I guess, your potential expectations for higher losses in that home equity portfolio, or that could creep higher?

Matthew J. Audette

Absolutely, Alex. So keeping in mind that the conversions from IO to amortizing for home equity don't happen in a meaningful way for a couple of years. But that's absolutely included in our expectations. And again, just repeating the points that I made earlier, the loan values are relatively small. The payment increase is relatively small. One thing also to keep in mind, in addition to the borrowers are making principal payments today, home values continue to go up, right? So if you just look at the LTVs on the One- to Four-Family book, they're now meaningfully below 100%, at 94%. But if you look at the home equity book, when you go about a year ago, they were at 115%. Today, they're at 102%, right? So by the time we're in 2015 and '16, even if you just extrapolated that, we start to get to a place where it is actually a fair bit of equity behind our loans. So I think there's a lot of momentum going towards our -- the loss expectation you may have is going to be relatively mitigated. But only time will tell. There's really a lot of good things we see.

Alexander Blostein - Goldman Sachs Group Inc., Research Division

Yes. Makes sense. I just wanted to double check. And then second question is on capital levels. When you guys look at the Holdco and the leverage ratio, they're historically used to be a contributing factor for you guys as well. Clearly, not anymore. You guys are at 6.5%, 6.6%, then that's not including, I guess, the $75 million you're getting for the market maker. The question is, you guys still have 4 quarters or so until you can start reducing the debt, the first tranche, I guess, of the debt, in 2014. Is there anything else you guys can do with the capital flexibility in the interim rights over the next 3 quarters? Whether it's a buyback or maybe starting to bring some of the deposits back on the balance sheet, because you guys have said now you have a big capital flexibility. Help us kind of understand like what's the plan until you can start reducing the corporate debt?

Matthew J. Audette

So Alex, we're looking at all those things. I think when we start to think about what's the best use of the dividends, it really brings you back to what's the best use of the capital for shareholders, right? So we're reducing at the parent, doing share repurchases, investing in the business, bringing deposits back on balance sheet. Those are all the things that we're looking at. I think as I said in the prepared remarks, we're squarely focused on reducing debt at the parent. There's still more analysis to be done. There's lots of other parties involved, including our board, including our regulators, that will have input on what's makes the most sense to do. But I think at its core, we're looking at what makes the most sense for shareholders. So I think there'll be more to come, as we make decisions on it, but we're focused on, we're focused on -- squarely focused on the parent debt right now.

Operator

Our next question comes from the line of Chris Allen with Evercore.

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

I just had a, I guess, a quick follow-up on the HELOC provision. I know it's been already asked a couple of different ways. I wonder if you could give us any color on what your future loss expectations are for the loans as they reprice? Because the jump in provision expense -- I'm sorry, the provision billed in HELOC has been pretty material in the last couple of quarters, even though net charge-offs and the loan balance sheet are coming off pretty hard. So any way you could help frame it for us?

Matthew J. Audette

Not too much beyond what's in the numbers, all right? So if you look back in the last 3 or 4 quarters, the provision on home equity has hovered above $50 million for quite some time. It's certainly a bit of a reserve build versus the low charge-offs this quarter. But there's probably no more incremental detail I can get into other than we feel confident on the overall provision in the $25 million to $50 million range. We feel confident on the wind at our back with home prices going up, delinquencies coming down, that we get to the period where these loans are going to adjust, that they're small, the payment increases are small. I think there's just a lot of factors that give us comfort that we're headed in the right direction. But when you look at the individual buckets, the One- to Four-Family losses are coming down much more meaningfully than home equity. So you see a shift in the provision for the allowance from one bucket to the other.

Operator

Our next question comes from the line of Chris Harris with Wells Fargo.

Christopher Harris - Wells Fargo Securities, LLC, Research Division

So you guys highlighted a little bit the success you're having in retirement and managed assets. I mean, clearly some very impressive growth there. Just wondering, can you guys kind of share with us the economics you're getting on those assets? And then maybe a little color on whether the influence you're seeing there are new customers that are coming to E*TRADE for the first time because you have these solutions? Or are they more of your existing customer base, or kind of cross-selling to?

Matthew J. Audette

So I think on the retirement assets, I think just growing assets for the customers overall, just deepening that relationship, is incredibly important right? So having $40 billion of retirement assets is important. And then specific to our managed product, right? So we're now up to $2 billion of our managed product. We aren't anywhere, call it 70 to 80 basis points on that. So there's some nice recurring fee income there on that debt. When you look at the fees and service charges line, you're not going to see it jump dramatically in the short-term. But I think over time, as we continue to build those products that's the line where you're going to see some success there. So when you look out several years from now, hopefully, you've got a nice redistribution of our revenue into that area. So that's really where I'd focus in on that.

Christopher Harris - Wells Fargo Securities, LLC, Research Division

All right. So just to clarify, is the year-on-year growth you guys are seeing in that line item, part of that is being driven by the growth of managed assets that you're seeing? Or is it too small -- okay, all right.

Matthew J. Audette

Yes. I mean, keep in mind, retirement assets overall $40 billion, manage accounts are $2 billion, right? So it's a very small piece in that proportion, but it is part of the growth.

Christopher Harris - Wells Fargo Securities, LLC, Research Division

Okay. And then a real quick follow-up on capital. Now, I tried to write down quickly, but I probably missed it. The conditions where you guys could potentially asked the regulators for more than $100 million in quarterly dividends from the bank, I think I heard you say it's when, in the amount of excess capital you have over your 8% Tier 1 leverage target, that's the target I don't believe that's really in play until the end of 2016? Is that the right way to think about it? Or am I getting that wrong?

Matthew J. Audette

Yes. So I was just reiterating our existing plans, which are getting us to 9.5%, and then floating that 9.5% down 50 basis points a year. So I think you got that right. It's just we're focused on a short term $100 million. I just want to reiterate that our long-term plans are to bring that down over time.

Christopher Harris - Wells Fargo Securities, LLC, Research Division

Okay. So just, you can't -- like in a year, you can't go back to the regulators and say "Hey, can we do more than $100 million?" It's -- you're going to go with this plan for the next few years and then kind of reassess at that point?

Matthew J. Audette

Well I think it's incumbent upon us to continue to execute on all the things that are important to improve our financial health. So I think if we continue to do that, then we'll be in a position where we feel comfortable even asking to bring that down. So I think that's the core. I just wanted to make sure that we reiterate that our long-term target would be to come down to 8%, but I think it's back to we need to execute well, improve our financial health and the dividends will take care of themselves.

Operator

Our next question comes from the line of Howard Chen with Credit Suisse.

Howard Chen - Crédit Suisse AG, Research Division

Matt, when you speak to the Susquehanna order execution arrangement being relatively material -- immaterial, what's the right base to think about that? If we annualized this quarter's principal transaction revenues, that's $50 million. But if you annualize the first half, that's $85 million. And it's a fairly wide bit of spread. I just wanted to kind of touch base on it.

Matthew J. Audette

Yes, so this quarter's principal transactions were fairly low. So I think if you look at the average year-to-date, for at least for the 9 months, you're at $56 million. So I think a good range is in the $60 million to $70 million of principal transactions. Keeping in mind that the margins of this business bounce around, but historically had been in the 10% to 20% range, probably closer to 10% today, right? So that's the net economics that we would be losing if you hold the sale. Then I think the economics of the order flow agreement would somewhat offset that, bringing to a place where we're comfortable the impact would be immaterial.

Howard Chen - Crédit Suisse AG, Research Division

And what do you assume, for DART levels and how much variability can there be in that negotiated rate?

Matthew J. Audette

Well, there can definitely be variability. So I think -- no specific assumptions around DART levels. I think if you just look at the volumes that we have today, the net impact would be immaterial.

Howard Chen - Crédit Suisse AG, Research Division

Okay. And then my follow-up, on the core brokerage franchise, your net new asset picture continues to improve nicely. I was just hoping, if you drill down into that, could you give us an update on what you're seeing in TOA data and how that may be compares to a year ago for the franchise?

Matthew J. Audette

Yes, sure Howard. There's nothing new. I think the broad trend of assets and customers moving from the off-line space to the online space is what we continue to see. There's always puts and takes within our space, amongst our direct competitors. But I think the long-term trend of getting assets from that space simply continues.

Operator

And our next question comes from the line of Mike Carrier with Bank of America.

Michael Carrier - BofA Merrill Lynch, Research Division

Just on the net interest income. You gave like the updated guidance on the net interest margin and the spread. Just on the interest-earning assets. We saw some growth this quarter. Just when you think about customer cash coming in, managing the capital ratios, how should we think about the growth in the balance sheet versus what we have seen as being relatively stable?

Matthew J. Audette

Yes, we had a bunch of growth this quarter. I think it's tough to tell. I mean, the government shutdown activities I don't think helped. You saw a lot of customers move cash to the sidelines. I mean we had customer net selling in the quarter of $700 million, which puts more cash on the balance sheet. And looking at the 3 quarters preceding that, we had customer net buying every quarter. So it's hard to predict, Mike. But I think that is absolutely the item that we always look at when we're focused on -- are we comfortable with our capital ratios. I don't get overly concerned with small increases like we saw this quarter. I think -- at 9.49%, it's not as if we have a problem with our capital ratio, and at 9.50%, we're okay. But if you add a meaningful increase to customer cash, that really put pressure on the leverage ratio, we'd be looking at -- to do something about that, on the deleveraging front. But what I saw this quarter doesn't give me that concern.

Michael Carrier - BofA Merrill Lynch, Research Division

And then just a follow-up, kind of like 2 random things. Just on the principal transactions, it just seems like that decline was pretty significant. I think the revenue capture was down. Is there any color on what drove that? And then on the share count, I just noticed a creep this quarter. Could be just the stock price, but just wanted to figure out of there was any of the new hires, just what the outlook was there?

Matthew J. Audette

Yes. So on the share count are you looking at the diluted increase?

Michael Carrier - BofA Merrill Lynch, Research Division

Yes, yes.

Matthew J. Audette

Yes, it was just -- we were -- I always hate when you ask that, because then I have to answer it with, its because we lost money last quarter. So whenever you lose money, yes, the basic and diluted are the same. It's just with the goodwill write down last quarter, so it's just a return to profitability. You go back to the actual diluted share count, so nothing going on, really, other than that. On the principal transaction, it's definitely down for me. If you look at the trend, this was the lowest quarter that we had in quite some time. Volumes were down, both volumes from our own broker-dealers, as well as, like, internal volumes. Volatility is at historically low levels even last quarter, went even lower this quarter. And then if I look at the individual months, which aren't in the release, but if I look at individual months, July and August were relatively normal and September was just a low month. What we've seen, so far, in October, is an improvement back up. So I think I put it in the bucket of just volumes are really low, volatility's really low and it drove down principal transactions for the quarter.

Operator

[Operator Instructions] Our next question comes from the line of Devin Ryan with JMP Securities.

Devin P. Ryan - JMP Securities LLC, Research Division

Appreciate the color on the margin expectations. Can you remind us on the timing and how long it takes to essentially -- are there loans going off or paying down? The ability to reinvest near those assets in that securities portfolio. How long does that take? And then I guess, with interest rates being volatile, how much market timing is involved with this and putting that cash into the securities portfolio?

Matthew J. Audette

Yes, so I mean it's not a lot of time, right? I mean, we're investing and looking at our cash balance as investments on a daily basis. I think it's fair to say that we're very sophisticated and deliberate in what we're doing and what we're buying. So we're not immediately just taking cash and buying anything that's out there. It's fairly deliberate. But I -- and I don't have anymore precision for you beyond that, other than we have a very sophisticated focus treasury group that works on this.

Devin P. Ryan - JMP Securities LLC, Research Division

Okay, thank you. And then if you were to bring some of the deposits back on the balance sheet in the future, as discussed, what would the timing of that look like in terms of if you decided to do it, how long would it take, actually, to do it? I'm just thinking about the contracts and how long these deposits are contractually tied up?

Matthew J. Audette

Oh, sure. We probably got the deposits off balance sheet in 2 primary buckets. The simplest bucket to bring back on are the deposits at our third-party banks. And those agreements have typical notice periods in the 90-day period. So it wouldn't be a long period of time to bring them back. The other funds that went off balance sheet are in money funds. That would certainly take longer. There's customer notification and consent periods that are applicable there, so that would take longer. But there's a fair bit of those deposits we could do in 90 days.

Operator

And we have no further questions on the phone at this time. Mr. Idzik, Mr. Audette, I'll turn the call back to you for your closing remarks.

Paul Thomas Idzik

I'd like to thank all of you for spending the time with us this evening and we look forward to talking to you again at the end of the fourth quarter. And Brett will be in touch with many of you over the time. Thank you. Have a good evening.

Operator

Ladies and gentlemen, that does conclude the call for today. We thank you for your participation and ask that you please disconnect your lines.

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