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E*TRADE Financial Corporation (NASDAQ:ETFC)

Q1 2007 Earnings Call

April 18, 2007 5:00 pm ET

Executives

Mitchell Caplan - CEO

Jarrett Lilien - President, COO

Robert Simmons - CFO

Analysts

William Tanona - Goldman Sachs

Rich Repetto - Sandler O'Neill

Matt Snowling - Friedman, Billings Ramsey

Mike Vinciquerra - BMO Capital Markets

Richard Herr - KBW

Roger Freeman - Lehman Brothers

Howard Chen - Credit Suisse

Matthew Fischer - Deutsche Bank

Mike Carrier - UBS

Presentation

Operator

Welcome to E*TRADE Financial Corporation's First Quarter 2007 Earnings Call. At this time, all participants have been placed on a listen-only mode. Following the presentation, the floor will be open for questions.

I've been asked to begin this call with the following Safe Harbor statement. During this conference call, the company will be sharing with you certain projections or other forward-looking statements regarding future events or its future performance. E*TRADE Financial cautions you that certain factors, including risks and uncertainties referred to in the 10-Ks, 10-Qs, and other reports it periodically files with the Securities and Exchange Commission, could cause the company's actual results to differ materially from those indicated by its projections or forward-looking statements.

This call will present information as of April 18, 2007. Please note that E*TRADE Financial disclaims any duty to update any forward-looking statements made in the presentation.

In this call, E*TRADE Financial may also discuss some non-GAAP financial measures in talking about its performance. These measures will be reconciled to GAAP either during the course of this call or in the company's press release, which can be found on its website at www.etrade.com.

This call is being recorded. Replays of this call will be available via phone, webcast and podcast beginning at approximately 7:00 p.m. Eastern Time today through 11:00 p.m. Eastern Time on Wednesday, May 2nd. The call is being webcast live at www.etrade.com. No other recordings or copies of this call are authorized or may be relied upon.

I will now turn the call over to Mitchell Caplan, Chief Executive Officer of E*TRADE Financial Corporation, who is joined by Jarrett Lilien, President and Chief Operating Officer and Robert Simmons, Chief Financial Officer. Mr. Caplan?

Mitchell Caplan

Good evening and thank you for joining us for our first quarter conference call. In February, we held our fifth consecutive Analysts' Day. During the course of that event, and in describing our strategy to build long-term franchise, one of the consistent themes was the importance of optionality, both for our customers, and ultimately for our shareholders.

By offering an integrated value-based suite of financial solutions to our customers, we empower them to maximize their wealth and optimize their financial futures across changing macroeconomic environments.

By operating a global integrated financial services business, we offer our shareholders a unique franchise capable of delivering growth in a variety of economic environments and capable of creating value through consolidation.

We have and will continue to offer this optionality through a unique combination of integration, innovation, scale and efficiency, coupled with a conservative philosophy towards the management of our global balance sheet.

Our first quarter results illustrate the power of our unique blend of optionality, conservative management, and our commitment to long-term growth and creating maximum shareholder value. Second theme of our Analysts' Day was the importance of our target segment customers and our ability to grow that base. We described how these target segment customers drive over 75% of our total revenues. If we succeed in growing our base of target accounts, we succeed period.

I'm pleased to report that during the first quarter, we achieved record quarterly organic growth in overall accounts, and more importantly, continue a solid 20% annualized growth rate in our target segment, what was a growing base.

We also delivered 12% annualized total customer asset growth. Our net new client asset inflows of $2.9 billion, achieving two new milestones. First, total client assets topped $200 billion, and second, end of period assets per customer reached almost $58,000, all in a flat equities market.

Further, we delivered the strongest increase in customer cash and deposits in a single quarter, with growth of $2.4 billion, surpassing last quarter's record of $2 billion. Our successes, not only drove records in customer metrics, they also drove record total net revenues of $645 million for the company.

On the bottom line, we delivered net income of $169 million or $0.39 per share, up 18% over the year ago period. Included in the $0.39 per share this quarter, was $0.04 of non-operating income. $0.03 of this was the result of the sale of our investment in E*TRADE Australia. Our strategy in our international operation has been to ultimately own 100% or sell the investment.

During the quarter, an Australian bank offered to buy E*TRADE Australia making a 100% ownership unlikely and boosting the share value beyond our return targets. Given the run-up in the stock price, we sold our stake in the company.

Further, we realized a benefit of approximately $0.01 per share in equity earnings from our holdings of Investsmart in India and other equity investments.

We are pleased with how our strategic ownership in Investsmart is benefiting us today and positions us to monetize future growth opportunities in that emerging market.

The economics associated with this non-operating income can now be redeployed to fuel further growth across the business or into share repurchases that create additional value to shareholders.

Accordingly, today we announced a new authorization from our Board of Directors for an additional $250 million of share repurchase. While we are pleased with our first quarter results and the positive trends we are seeing within our account base, both the macroeconomic environment and the behavior of the retail investor has changed since we issued our guidance in December.

The global equities market, have demonstrated continued choppiness, leading to decreases in retail customer trading and investing activity. Against this, customers have chosen to migrate to our cash solutions, as an alternative to the equity markets.

The success of our complete savings account product is a testament to the power of offering customers a choice in products, to strengthen and broaden relationships in any environment.

While offering value on rate, impacts interest rate spread, we continue to generate growth in net interest income, as a result of a positive rate volume trade-off.

Further, these investing customers, who are migrating to the cash accounts, particularly those within our target segment, continue to engage in other products.

In fact, this past quarter 83% of new deposit account balances belong to customers who either had an existing investing account or opened a new investing relationship, demonstrating a solid cross-sell trend.

Equally as important, 79% of existing investing customers who opened new deposit accounts during the quarter, increased their assets quarter-over-quarter. And nearly half of them increased their assets by 20% or more, all driving record asset levels. Again, a benefit of optionality, both for the customer and for the long-term franchise.

As the data shows, we are building deeper and stronger relationships with our customers by offering the right products at the right time. Once engagement trends improve to more normal levels, we expect to realize the full economic benefit of this growing base of high quality customers.

With much having been reported about rising delinquencies and default rates among sub-prime asset portfolios, we also recognized that we are operating in a changing credit environment.

Given our historic and continued strict discipline with respect to credit, we believe that the risk to our balance sheet is significantly mitigated, compared to financial institutions with a more traditional mix of assets.

We recognized that we are not immune to the current environment and we are anticipating upward trends in delinquencies and charge-offs in our portfolio, versus last year levels and even versus our assumptions when we gave guidance in December.

To set some context, in 2006, we booked $45 million in provision for loan losses. Embedded in our guidance for 2007 last December, we forecasted an increase in our provisions of 51% to $68 million, or to approximately $17 million per quarter based both on the growth and the seasoning of our portfolio.

In the first quarter, we reported $21 million of provision, an extra $4 million or $0.005 per share against earnings. We believe that this is the result of what is happening in the broader credit environment.

If you annualize these trends it translates into an additional $0.02 per share provision expense for 2007, over and above what was embedded in our original guidance.

Exercising pertinence and for guidance purposes, we are assuming provision expense of $96 million for the year, or quarterly provision expenses of approximately $25 million for the balance of the year. This translates into $0.04 per share of headwind to our original earnings guidance for the year. This number represents the 2% reduction to the midpoint of our original guidance, and is relatively contained, given the benefits of the credit quality of our portfolio.

Looking across our $37 billion loan portfolio, over $26 billion is in one-to-four family mortgages and home equity products. $7 billion is margin debt from our investing customers and the remainder is legacy consumer loans that are in run-off mode.

Across the entire mortgage portfolio, our dollar weighted average FICO score remained at a solid 735. The average loan to value ratio is 73% and the average debt-to-income ratio is 35%, all numbers consistent with this time last year.

In our one-to-four family first-lien portfolio, the average FICO is 738, LTVs average is 68% and DTI average is 34%.

As we continue to grow our mortgage portfolio throughout this year, growth will tend to be more heavily weighted. 70% in one-to-four-family first-lien products meeting that criteria.

In second-lien product, the average FICO is 732, LTVs average 79% with an average DTI of 36%. Specifically, with respect to subprime loans, based on the standard industry definition of borrowers with FICO scores of 620 or below, we hold approximately $50 million of balances or less than one-fifth of 1% of our $29 billion whole loan portfolio, a de-minimus amount.

Turning now to All Pay loans, our portfolio consists of those which are almost exclusively documentation-related and not credit-related. This portfolio is backed by loans with average LTVs of 69%, which also confirms that these borrowers had significant assets with which to make down payments. That portion of the All Pay portfolio, where the FICO was below 700, LTVs are higher than 69% and DTI is above 40, is approximately $167 million or a little over one-half of 1% of our $29 billion whole loan portfolio, again a de-minimus amount.

In the aggregate, our All Pay portfolio continues to perform, as we originally modeled for the year. Regardless of asset type, we remain firmly committed to the same highly risk-averse credit philosophy, the bank has employed for the last 18 years.

Without question, like everyone else in the financial services sector, we are facing an environment that is different from the one anticipated even just a few months ago. As a result, we believe it is appropriate at this time to reset expectations for the year recognizing that we will revisit our guidance again, should customer engagement level improve or credit dynamics not prove to be as we currently anticipate, and are projecting today.

Rob will provide the full details of our revised guidance a little later in the call. To be clear, while we are lowering expectations for 2007 because of market conditions being worse than expected, we also believe it is important to remain committed to our long-term strategic vision for the business.

By maintaining our strict expense discipline and being mindful of returns on investment in accordance with our stated goals, we will drive our future success and maintain the strategic optionality of our franchise.

Now to provide further details on the success of our operations and the growth trends we are experiencing, I would like to turn the call over to Jarrett.

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Jarrett Lilien

Thanks, Mitch. Without question, the first quarter was characterized by economic uncertainty, as the equities market peaked and tumbled. The real estate markets continued to soften and the sub-prime mortgage sector went into, what some refer to as a meltdown.

With all this noise, we focused on our commitment to financial discipline, innovation and service in order to drive growth in our target client segment and we are succeeding.

The investments we have made in marketing, operations and service are paying off in terms of strong organic account growth particularly within our target segment.

In the quarter, total net new accounts increased by a record 119,000, led by record gross new accounts of 350,000. Target segment accounts grew at an annualized rate of 20% this quarter.

Our increased investment in marketing during the first quarter has also generated a record pipeline of unsegmented accounts that will be segmented in the second quarter. Recent trends suggest that approximately 37% of pipeline accounts could move into our target segment after their 90-day seasoning period. Applying this factor to the pipeline, we are positioned well for continued strong target segment growth in Q2.

Despite the strong account growth we generated in the quarter, overall retail investor activity turned out to be a bit weaker than we had expected coming into the year. Nonetheless, total DART volume in quarter was 170,000, up 9% sequentially, but down 6% year-over-year.

Continued strong results from our international clients served to offset some of the weakness in US and provided greater stability to our transaction volumes versus our US centric competitors.

Along with the growth in trading, international assets have more than doubled since the beginning of 2005, growing almost 53% in the last 12 months. We hope to further accelerate this growth in international client assets through our European banking initiative. We expect to receive approval for our UK charter this quarter and we'll begin to launch cash management products throughout Europe in the second half of the year.

We were also very pleased with the performance of our systems, service, operations, and products in the first quarter. On February 27th, along with the 400 point decline in the Dow Jones Industrial Average, many, including E*TRADE experienced record trading activity. Market systems were stress tested and E*TRADE excelled.

As measured by third-party vendors, our customers experienced delays measured in milliseconds during these peak volumes, while customers at some competitors and several of the large banks experienced system delays of up to several minutes. Time matters in volatile markets and once again our operations had a chance to demonstrate some of the tangible benefits of the services we provide.

Aside from February 27th, retail investors traded less than we expected. But engagement across our cash management products was very strong. Through our integrated offering of investing and banking products, we were able to generate growth and broaden client relationships as their needs changed.

As Mitch stated, during the quarter total customer cash and deposits grew a record $2.4 billion. We grew total client cash balances by this record level, even as our customers were net buyers during the quarter, moving $1.9 billion of cash into equities.

Another interesting data point was the record transaction volumes we saw through our Quick Transfer feature. This tool allows customers to transfer money into and out of E*TRADE from other financial institutions, free of charge. Each month in the quarter brought a new record to Quick Transfer usage. And in March we completed 400,000 transactions in a single month for the first time.

March also set a record of over $0.5 billion of net cash inflows with over 25% of those net inflows coming in from traditional banks, offering free trading such as Banc of America and Wells Fargo. We believe this continues to speak to the appeal of our value proposition through different economic environments. Given these trends, we are proving that growth in accounts and assets is significantly less dependent on equity market activity than in the past.

A key contributor to our cash growth story over the past few quarters has also been our new complete savings account. We launched this product late in the fourth quarter and it has proven to be highly effective in (inaudible) engagement from existing customers as well as accounting for measurable new investing customer growth.

Today, 75% of all CSA accounts are held by customers that also have an investing or trading relationship with us.

Even more encouraging, is that a significant number of these customers went on to open additional cash management-related accounts after opening a CSA account.

As we anticipate similar behavior, this bodes well for our new Max-Rate Checking product. A transaction account that offers premium cash management features and a yield over eight times the national average for balances over $5,000, but has a favorable cost of funds for our balance sheet.

Products such as the CSA and Max-Rate Checking clearly demonstrate our unique ability to offer high value through innovative cash management solutions, given the distinct efficiencies of our global balance sheet and integrated low cost infrastructure.

Through this strong engagement with our cash products, we were able to grow the balance sheet in the first quarter and make further improvements in our mix of assets and liabilities. Average enterprise interest earning assets increased by $3 billion or about 7% sequentially.

We continue to grow the balance sheet with high quality mortgage whole loans, while our consumer loan portfolio continued to roll-off as expected.

Loans, as a percent of interest-earning assets increased to 66% from 65% in the fourth quarter, moving us towards our stated goal of 70%.

On the liability side, we also made progress as a result of the continued growth in customer cash, deposits as a percentage of interest-bearing liabilities increased to 62.1% from 61.6% in the fourth quarter keeping us on track toward our goal of 70%.

Net interest spread came in near the high-end of our expected range at 274 basis points, down 11 basis points from the fourth quarter. This was the result of a three basis point-decline in asset yields and an eight basis point-increase in liability costs, driven as expected by the strong growth in CSA.

So, despite how the overall market environment plays out, we remain focused and committed to doing things we can control to drive growth in our target customer segment.

Bumpy markets typically inhibit account growth, but we are succeeding nonetheless. And this is evidence of the transformation of our model and value proposition.

While customers may engage with us a bit differently than anticipated, even a few months ago, continued quality account growth is what will set us up for future growth, once normalized market conditions return and we remain focused on this effort.

With that I will the turn the call over to Rob, for more of the financial details for the quarter.

Robert Simmons

Okay. Thanks, Jarrett. During the quarter, we remained focused on execution driving top-line growth, well both investing for the future and managing expenses. Demonstrating the advantage of multiple points of engagement in cyclical markets, first quarter total net revenue increased $16 million or 3% sequentially, to a record $645 million.

Commission revenue was up 7% over last quarter with retail commissions representing 19% of total net revenue. Net interest income after provision increased 2% sequentially. The increase in net interest income was the result of a larger balance sheet, supported by our strong organic cash growth, as we continue to invest [firstly] in mortgage assets, with strong credit characteristics.

Fees and service charges declined to 8% over last quarter, returning to a more normalized run-rate driven primarily by fees earned from corporate reorganizations in Q4.

Principle transactions are up 19% over last quarter, driven primarily by an increase in market making revenues from higher trading volumes and slightly higher revenue capture rates, gain on sales, and other revenues, are largely flat with Q4.

Turning to expenses, we continue to exercise prudent control and deliver efficiency across our operations. Total operating expenses, excluding corporate interest, were up $18.6 million or 5% sequentially to $374 million. Included in this increase was our investment of $15 million in additional advertising spend. While we expect to continue to invest in marketing this year, we will continue to prudently allocate the marketing spend across our suite of products, consistent with market opportunity.

Compensation and benefits came in at 19% of revenue this quarter, consistent with our target. Comp expense is up 5.9%, driven primarily by payroll taxes, seasonally always higher in Q1 as we enter a new tax year and employees haven't reached their withholding caps.

Clearing and Servicing is up 6.6% this quarter, consistent with higher DART volumes and larger loan balances.

Depreciation is up by $1.7 million from Q4, driven by new equipment and leaseholds coming online and software amortization expense. Occupancy is up by $1 million, driven primarily by a new enterprise backup site in Virginia.

Worthy of note, is the fact that excluding the investment we made in marketing and service this quarter versus Q4, the cost of operating the business held relatively flat, while total net revenue increased. This demonstrates the scale and efficiency in our operating infrastructure.

Operating margin was a solid 42%. Excluding the $15 million incremental increase in marketing spend, operating margin expanded to 44% from 43% in the prior quarter.

I want to note certain changes we made to the format of our financial statements for 2007. Over the last couple of years, the income statement line item, other revenue, has become quite large. The growth in this line item has been driven primarily by order flow income and other fee-like revenue that have grown organically, as well as from the Harrison Brown acquisitions.

As a result, we are moving the fee-like items, formerly in other revenue, up to the fees and service charges line item. The moved items includes things like payment for order flow, foreign exchange margin revenue, 12b1 fees, fixed income product revenues and management fee revenue.

For ease of reconciliation, we have included represented income statements for the past two years on our Investor Relations website.

First quarter market volatility once again provided a window for us to opportunistically continue our share repurchase program.

During the quarter, we purchased in the open market, approximately $23 million of stock, or about 1 million shares, at an average price of $22.35 per share. After this purchase activity, including our new $250 million repurchase plan announced today, our total outstanding repurchase authorization is $284 million.

Our debt-to-equity ratio ending Q1 was 29%, down from 30% last quarter on continued strong cash flow and retained earnings. We continue to look to deploy our capital against the projects with the best returns, with respect to out outlook for the remainder of the year.

Today, we are revising our 2007 earnings guidance to reflect the changes in both retail behavior and economic conditions, since we originally established guidance in December. Our new estimated EPS range of $1.55 to $1.75 lowers the midpoint of our original range of $1.72 by $0.07 or 4% to $1.65 and widens the range by a nickel based on increased market uncertainty.

As Jarrett and Mitch noted earlier, our investments are generating meaningful returns in excess of our stated goals, specifically in the form of high quality account growth. Yet, the general behavior of retail investors is playing out differently, than we had originally expected.

The $0.07 reduction of the midpoint of our guidance range is the net effect of the following items. First, a $0.06 reduction from lower expectations around DART activity of 15,000 for the year. Our original guidance of 170,000 to 200,000 DARTs for the year is now 155,000 to 185,000.

Second, a $0.04 reduction from higher provision as previously discussed. Third, a $0.02 reduction from other volume related earnings for a total of $0.12.

Then, partially offsetting these reductions, we are now factoring in a previously unexpected $0.05 of below the line gains for the year, $0.03 of which were recognized in the first quarter and $0.02 for the remainder of the year, which gets to year total of $0.07. Expected operating margin for the year is 45% with the tax rate of 34% to 37%.

Given the results we are seeing throughout the rest of the business, we are maintaining our original ranges for the other key drivers that we outlined in December.

In conclusion, we are pleased with the company's performance through the changing market conditions. We remain focused on building an integrated global franchise to deliver superior shareholder value over the long-term.

And with that we would like to open the call to questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). Your first question is coming from William Tanona of Goldman Sachs. Please go ahead.

William Tanona - Goldman Sachs

Hey. Good evening, guys. The net new assets, obviously was a pretty good number for you. It's the first time that we got to take a look at that figure. Obviously, you didn't report what it was in past quarters. And I wonder if you could just give us a sense of what that is or how good of a number that is, relative to what you've seen in the past?

And also can you help define what is included in that net new assets figure? Is it the interest and dividends as well as kind of distributions from mutual funds, as well as what you might see in corporate services. Just give us a sense as to what that new asset figure comprises?

Mitchell Caplan

Happy to do it. So, as you pointed out, we are pretty pleased. Assets for the first time ever for us crossed $200 billion. And I mean if you look at it, we are seeing a nice annualized growth rate across the board in assets. And then, we have been talking about that for quite some time. We have been also promising to really deliver this net new asset inflow number. So, it is $2.9 billion.

We stated last quarter on the phone that that quarter it was about $1 billion, that was about the number. So, it's up nicely from last quarter, about three times as great. And again, I think it's going to the testament around the value of these customers that we are getting.

So, I think as Jarrett pointed out, we are seeing pretty strong growth rates, whenever it's about 12% growth rate in just overall customers. First time, we have seen that in a while and continuing to see 20% or a little better in the target segment. And they are bringing in the right kind of assets. And a lot of stuff we took you through around Analysts' Day.

To your point, the way in which we think about net asset inflows. It is in fact all the new assets in total that are coming into the system. So, if we don't include by way of example, you see that somebody has a cash balance and that cash balance goes to buy equities.

As Jarrett said this quarter, we had close to $1.9 billion of net buying by our customers. So, where they took cash within the system to get over. It wouldn't include if people were selling and moving back into cash. So, this is coming in the form of new overall cash, securities, mutual funds, fixed income, it's all the traditional products that you would see that we are getting, brought in the system.

William Tanona - Goldman Sachs

But does that include the interest and dividends that are paid, or is it just net money coming in from clients?

Mitchell Caplan

No. it does include interests and dividends that are getting paid to the clients during the course of the quarter. So it's new money. Right?

William Tanona - Goldman Sachs

Okay.

Mitchell Caplan

What it doesn't include to be clear in any market movement, appreciation or depreciation. So, it's totally independent of any market impact.

William Tanona - Goldman Sachs

Great, helpful. And then could you just give us some more color around the uptick in the charge-offs in the quarter? Obviously, you've constantly talked about the portfolio and FICO scores and the LTVs, clearly a healthy portfolio.

But, I would be surprised to see that big of an up-tick quarter-over-quarter despite what's going on in the sub-prime world. Considering how little of sub-prime business you guys have. So, a sense as to what you are seeing out there, and what's strong?

Mitchell Caplan

Happy to do it. So as I said, last year we had charge-offs, as you saw of about $45 billion. We assumed, as I said in the prepared remarks was $45 million. And this quarter, as we were really building the guidance for this year. Don't forget, we've had pretty consistent growth in the balance sheet.

So, under any circumstances, not withstanding the fact that we have stayed completely disciplined about focusing on what we call prime and really super prime borrowers, you are going to see an increase in charge-offs just as a result of an increasing balance sheet side.

We also assume that as the balance sheet, which has been growing continues to season, you would see an up-tick. So, as we were modeling for this year and last year and then gave guidance in December, we had always assumed that it would go up to the $68 million or about $17 million a quarter.

So, in our model, we had always presumed that that was going to be the case, having nothing to do with a more difficult credit environment in any meaningful way, but simply as a result of both size of the balance sheet and seasoning of the balance sheet.

The incremental difference this quarter that we saw of the 17 that we would have expected to about 21, we believe is a result of what's happening in the overall credit market, which is the discussion about what's happening in sub-prime? What's happening in Alt-A? And to the extent that more importantly any of that is bleeding up into the general prime and super prime market.

Our review I guess going forward is, and we were trying to be prudent about this. Is that is, you look forward for the rest of this year, we could simply have said, all right, we saw a $4 million unexpected increase. If you annualize that, it would have been somewhere in the neighborhood of $16 million or $0.02.

But we believe, given what we are seeing and what we are trying to prepare for is sort of the worst case scenario in absolute mortgage meltdown, that you would see a lost severity trend in the small percentage of our portfolio that we discussed, literally increasing by 50%, that's what will drive the increase of the $28 million.

It may not come out to bear, but I guess in our minds, given everything we are seeing, we are better off being prudent around discussing it and then putting context around the size of the raw balance sheet. And then being clear for the first time ever, that when you look at, what the market is concerned about in either sub-prime or Alt-A, one of them is less than one-fifth of 1% of the overall whole loan balances and the other one is less than a half a percent.

So, I feel pretty good when I recognized that over 99% of our whole loan portfolio is in fact in those products which have traditionally not been impacted in markets like this.

William Tanona - Goldman Sachs

Great. Thanks for the color.

Mitchell Caplan

Absolutely.

Operator

Okay. Your next question is coming from Rich Repetto of Sandler O'Neill. Please go ahead.

Rich Repetto - Sandler O'Neill

Can you hear me, Mitch?

Mitchell Caplan

Absolutely. Hey Rich.

Rich Repetto - Sandler O'Neill

Yeah. Just a follow-up on, one, the credit situation, Mitch. I understand you are just trying to stay ahead of the curve. But can you give a color on what do you are seeing now, where are the non-performance? Where are the charge offs, right now? Is it from the ELOC portfolios, about half of the loan. Can you give any more color on what you are seeing right now? I know you are worried about the lead-up but where do you see it now?

Mitchell Caplan

Happy to do it. So, when you look at the consumer loan portfolio, actually what we are seeing is the opposite. It continues to roll-off and the delinquency pipeline, as we look at it right now, for the consumer loan that's literally cut in half, Q4 to Q1. So, ultimately, our focus has to be principally on the mortgage loan portfolio. And we are looking at it.

It's not really being driven by ELOC. We are looking at it across the board. The impact that you are seeing is going to be driven both in first-lien and in ELOC. And it's going to be in that part of the portfolio, where you believe there is a confluence of events. Meaning, you may have lower FICO score. You may have a higher LTV, alright. And you may have a little bit more DTI, debt-to-income.

So ultimately, you could be in a place where you have a borrower, who typically became a bit overleveraged, traditionally would say, the high FICO borrower has owned multiple products, and as a result of that, traditionally he has been able to have a whole host of other resources to be able to go to, to refinance that product. That's why you are seeing refinance speeds as high as they are, or prepayments speeds, as high as they are.

Ultimately, given what happened in this past quarter, in the credit market, there was effectively a pooling of credit. So, as a result of that, it was much more difficult for customers who were on the edge, to be able to go out and refinance, so they were more likely to turnover.

So, it's not that we really see it in any one area. It's just that, the behavior. That happens to be, as we pointed out a very, very small percentage of our overall portfolio, less than 1%. And when we have moved forward and said, okay, let's take our severity ratios and literally increase them by 50%. What we come up with is up to this $28 million or the additional $0.04. So, I hope that gives you some color.

Rich Repetto - Sandler O'Neill

Okay. Yes, and I can follow-up more offline. I guess my follow-up question, Mitch, would be, it appears you've been effective. In the target segment, given, the weaker market conditions. Your peer yesterday announced a $100 million in investment spending. And I guess a lot of the same client facing, client touching initiatives that you've tested last year and invested as well, but you're more willing to talk about the revenue side of it.

And I guess, I'm ultimately coming to a question, consolidation. If you both move into a model that is tied to asset gathering, higher quality customer and so forth, has your views or anything happen in the market? Any of these, what we are experiencing now, changed the situation in regards to outlook for consolidation?

Mitchell Caplan

Absolutely. A couple of points. One is we've talked about this for quite some time. And I read everything that gets written, pretty much in the marketplace about this. And I think there are a couple of points that are pretty consistent in [seeing]. One is, there is very little doubt, when you look at the business model, certainly in the US around the principle players. There is definitely a convergence of model. There is just no doubt about it.

And a year or two years or three years to go, you might have been in a place where you've said, I have a particular model focusing on a strategy that looks like this, and a competitor has a different model focusing on a different point of execution. Whether it was modeling, whatever it maybe. There is definitely a convergence of model.

There is no doubt, and I think anybody in this space, and certainly when you are talking about TD AMERITRADE. Without a doubt, Joe has done an excellent job of doing acquisitions over the year, which he has integrated and he has created value. I believe that we have done a good job of doing acquisitions and integrating, certainly across a whole host of companies and in this space with Harris and Brown. And so, there is very little doubt that each of us or even SWAP or Fidelity recognized the power in consolidation and the economics around it.

So, what may traditionally have been a barrier, understanding the direction that you wanted to go in and strategically and being brought on the same page. I think a lot of those have come down. And so as a result of it, I think I have been saying for a while and I believe this that we were still in the early innings of consolidation, domestically and internationally.

And the one thing that's sort of wonderful and I guess we've always talked about this, is some time, bumpy market makes for great partners. Because, you get to a place where people recognize, you are trying to do the same thing. You recognize the importance of this strategy. You understand the investments that need to be made. And so the power of scale is meaningfully powerful. I mean it's really important. And I would guess that over the long-term, certainly when you get into periods like this, it increases the value of being opportunistic and looking for ways in which you can create long-term shareholder value through consolidation or otherwise.

I don't know if that gives you an answer, but it's certainly our view. I think we've been very clear. We thought that it was early innings and when consolidation occurred, we would like to participate.

Rich Repetto - Sandler O'Neill

Yeah. I think you probably said everything you could reasonably say.

Mitchell Caplan

Yeah. I think it makes sense, and I would suspect that if you have talked to Chuck or Bob Reynolds or Joe or anybody else, they would all say the same thing. There is a clear recognition in the value.

Rich Repetto - Sandler O'Neill

Well, yeah. I will get going. I'll stick to the rules of the follow-up, but well said. Thanks.

Operator

Your next question comes from Matt Snowling of Friedman, Billings Ramsey. Please go ahead.

Matt Snowling - Friedman, Billings Ramsey

Thanks. Mitch, can you help us think about how the mortgage and consumer portfolio is seasoned in terms of peak charge-off. Is it a quarter or two down the road or is it a year or two down the road?

Mitchell Caplan

I would say it's probably within this year. And the reason that's the case, as you know, Matt, is that given, our focus on trying to grow our core origination business and we have been more successful. And by the way, our origination business focuses really exclusively on super prime. Because it's our own customers. But, for better or worse, a lot of the growth has still been in the form of acquisitions rather than origination. In those acquisitions, we typically buy seasoned product. That seasoned product is usually 18, 19, 20 months of seasoning.

So, my guess is that we think about the risk embedded in this. We see it really coming through [the sense], that there is a risk, that's going to come through this year. And then, all things being equal, and not seeing an overall meltdown and the mortgage market moving up into the super prime space. Given what we are seeing, we think it's unlikely.

Matt Snowling - Friedman, Billings Ramsey

Okay. And, how are you thinking about trade-off between buyback stock at these levels and really growing the balance sheet. Because if my math is correct, you are basically using all your capital to support the balance sheet growth?

Mitchell Caplan

It's actually a great question. Originally, I think your point is well taken when we gave guidance we would have presumed that a lot of the growth, a lot of the cash that was being generated in the original '07 guidance, was being used to support the balance sheet.

So first of all, we now have new information. At the time, quite frankly in December, we thought there was as much likelihood that we might want to try to buy a 100% of Australia as development in a [stellar] position. We didn't know that E*TRADE Korea would be successfully going public. I can go on E*TRADE Japan otherwise.

So, its pretty clear, that now we are in a place where we can buyback stock as a result of the cash that's being generated as a result of the sale. And, not only it's the beginning, it's also the recoup of our base of our investment. So the cash amount is actually greater and allows us to have an opportunity to go out and aggressively purchase back our share. But we think there's value creation in doing that. And obviously, we sought the approval of our Board and we announced it today.

As well, I think your point is extremely well taken which is, if we think about our balance sheet, one of the issues is, we consistently wanted to move away from what would be viewed as wholesale funding and mortgage-backed security.

So by example, you will see average MBS quarter-over-quarter was only up a couple of hundred million dollars, and a lot of the growth in mortgage-backed securities which occurred in Q1 were simply a fully hedged-out MBS, as a placeholder, precluding clearing under the bank and replacing it with other assets like margin balances.

So finally to be succinct it wouldn't be surprising if we believe that it was the right thing to do to slow the growth of the balance sheet, particularly around MBS and around wholesale borrowings and use that freed-up capital, to both optimize earnings and use the capital to add on to other cash flow to buyback our stock.

Matt Snowling - Friedman, Billings Ramsey

One quick question, while I still have you. The gain on sale for the loan securities, I think the 70 million this quarter.

Mitchell Caplan

Yeah.

Matt Snowling - Friedman, Billings Ramsey

Does that have any Alt-A product involved? Or none of that?

Mitchell Caplan

No.

Matt Snowling - Friedman, Billings Ramsey

No.

Mitchell Caplan

No, it doesn't.

Matt Snowling - Friedman, Billings Ramsey

And typically not?

Mitchell Caplan

It's typically not. It's just usually, quite frankly, I think as we have guided, we've said that we expected that number to range anywhere on the institutional side, $5 million to $15 million, and that retail would run anywhere around in the neighborhood of $2 million, $3 million, $4 million, $5 million, $6 million. And that is going down actually on the retail side, because the goal is to originate and hold on balance sheet as opposed to selling secondary market.

So, on the institutional side, it's traditionally just sales of securities, that Dennis ultimately uses and he put on balance sheet as a placeholder, it typically hedges them out. And then sells them when he replaces them with other traditional whole loan assets.

Matt Snowling - Friedman, Billings Ramsey

Okay. Thanks.

Operator

Okay. Your next question is coming from Mike Vinciquerra of BMO Capital Markets. Please go ahead. Mike your line is live, please go ahead.

Mike Vinciquerra - BMO Capital Markets

Hello can you hear me?

Mitchell Caplan

Hey Mike.

Mike Vinciquerra - BMO Capital Markets

Sorry, I got you on speaker, because something in my handset is not working, can you hear me okay now?

Mitchell Caplan

Absolutely.

Mike Vinciquerra - BMO Capital Markets

Okay, I'll make it short here. Can you provide a little more detail; you are having great success in your international markets. Can you provide any breakdown for us between what's going on in Canada and what's going on kind of ex-North America? Just kind of getting a sense for your true global expansion and what's going on, particularly in your European operation?

Mitchell Caplan

So, let me say that we are not going to give a complete breakdown, just because it's too soon to really start breaking out all of international.

Mike Vinciquerra - BMO Capital Markets

Understood.

Mitchell Caplan

As international gets larger we will. I'd say that Canada is a significant part as a whole, but the fastest growth areas are at this point in Europe and the emerging markets. So by way of example, one of the nice things about the emerging market I think we will get to a place soon, I hope, where we own enough of India that would run through a different line item and not in the equity investments. But, you will continue hopefully to see success there as India grows and benefits from what they are doing and that for the moment is running through that equity line item.

You will continue to see other benefits in Europe and in Asia. The growth rates actually in Europe and in Asia are higher at this point across the board in almost every single metric that we look at, but again coming off of a lower base, because Canada has always been a bigger part of it. But together, they are all working in unison to deliver the sort of experience that we are seeing. I think Jarrett talked to it.

You see it in the DART numbers, you've seen it in the growth and cash balances, even asset balances were up this quarter. I think in the net asset inflows that we talked about of somewhere in the neighborhood of $2.9 billion; $600 million of it were internationally related. So, you are seeing international really begin to contribute to the overall story.

Mike Vinciquerra - BMO Capital Markets

Can you build on that then? Would you just talk about the cash management products you are going to rollout next quarter? What exactly you are going to start with? Is it going to be a complete savings account and what products do you plan to offer in second half of the year?

Mitchell Caplan

Yup, happy to do it. So, the one of the things that we actually have already rolled out is a cash management product in Canada. Now, we've done it without having banking license. So, we've done it in a way in which we effectively have tried to create a synthetic offering, because it's a little difficult for us to get a banking license in Canada, as we see right now. We are looking at what we may want to do there.

But, we did offer a product. It looks like a traditional. It looks a little like the CSA product in the US and Canada.

In Europe, I think Nick's view, [as he has] done research, is it will start with more traditional looking transaction accounts. Those seem to be the ones that are more interesting, given what we've seen in the competitive marketplace when you look at ING and others. And then as we see success there, we may create things like CSA and Max-Rate Checking.

Mike Vinciquerra - BMO Capital Markets

Great. Thank you very much. And just ending with my change of premises to note that I am in one of the accounts in your pipeline for the quarter and I hope to make a positive contribution to your metrics myself.

Mitchell Caplan

Excellent.

Mike Vinciquerra - BMO Capital Markets

Thanks guys.

Mitchell Caplan

Thanks a lot.

Operator

Thank you. Your next question is coming from Richard Herr of KBW. Please go ahead.

Richard Herr - KBW

Hi, good afternoon.

Mitchell Caplan

Hey Rich.

Richard Herr - KBW

Hi. Can you just maybe just talk a little bit about allowances here? I just want to get a sense of the allowance for loan losses relative to total loans. It looks like it continues to trickle down here, is it about 23 basis points now, down from 33 basis points in a year ago quarter. Is it just a mix shift in the loan base that makes you feel comfortable running at those levels or is something else here?

Mitchell Caplan

No, its exactly that. So in other words, from a year ago to now, we have dramatically increasing consumer and also within mortgage, we have dramatically increased first-liens compared to ELOC’s and again that’s what we intend to do this year. So as we look forward throughout the rest of the next three quarters, I think you would expect to see the growth that will occur. 70% of that will be in first-lien balances.

Richard Herr - KBW

Okay. And on the charge-offs here, just looking at the quarterly progression. It seems to be the case that you've always run $6.5 million to $8 million or so in the consumer, in terms of charge-offs per quarter. But now the mortgage is really, where we saw the big jump. It had about $2.5 million of charge-offs in Q1 '06. And I guess throughout 2006, it kind of trickled higher. But it looks like quarter-on-quarter, you doubled your charge-offs and mortgages. I think the question has already been asked, but where exactly does this come from, any particular regions, any color would help?

Mitchell Caplan

No. We didn’t see it. We've looked at every conceivable way. We didn't see it concentrated by region. There was nothing out there that really should have been. And I would say that basically, of the increase, the most significant part of the increase was a function of simply size in balance sheet growth and seasoning of balance sheet growth. So, it's as expected for us. That was the $17 million that we are trying to talk about.

The $4 million seems to be that part of the portfolio where you are absolutely seeing loss severity to be worse, in the area where, as a result of combination of DTI, LTV and FICO. Theoretically, it could be in a place where you see a more difficult time for them to refinance. And so that was fundamentally $4 million.

So, again, I think one way to think about it for us, is you are right you are seeing a tick-up. That said, we'll probably run. We typically run about half of the industry, so when you look at charge-offs for us versus the overall [threat in this] industry, we are basically about half. Our guess is that as you run through Q1 and other institutions start reporting. Even though we ticked up, so did everybody else and will also be running at about half.

Richard Herr - KBW

Okay. And just one last question on the guidance. Rob I noticed that you included gains in the guidance is $0.05 as an offset. Should we be thinking about that, I know when you gave out guidance there was no talk of, corporate gains. Should we be including that in our numbers? Do you think that, would that be consistent? It would certainly be consistent with last year. I was just kind of curious on the thing about modeling?

Robert Simmons

Yeah. You are right. We didn't include any gains in the assumptions originally around guidance for 2007. So respectively, you can think of it is that we first increased our number by the $0.05 of gains that we expect to realize in 2007. And then back off the $0.12, the net $0.07 which is from midpoint to midpoint, the original guidance versus the new guidance.

Richard Herr - KBW

Alright.

Mitchell Caplan

And Richard, I think one way to think about this is to be direct. When we gave guidance in December, internally at that moment in time is asked. We have been asked by many people about our equity ownership in E*TRADE Australia. At that point E*TRADE Korea was not public, E*TRADE Japan and couple of other small holdings that we have.

I think we always said that we believe if we couldn't own in making meaningful control and contribution that ultimately we were better off taking the cash and redeploying it in our business, whether to buyback stock or put it into some other product to be able to grow and succeed.

And at the time that we had to ultimately decide where we were going on guidance, we thought there was as reasonable a chance that we might buy Australia, and to be in a position where we couldn't and would sell our position.

With respect to Korea, it had not yet gone public, so you didn't have a public market, even though you expected it happen.

So, both of those things are new pieces of information and data. But consistent with the belief that ultimately we wanted to sell everything that we believe we can't control and can't make a meaningful difference to our bottom-line.

Richard Herr - KBW

Well, that's certainly helpful. Nice job in a tough quarter guys.

Mitchell Caplan

Thanks a lot.

Operator

Your next question is coming from Roger Freeman of Lehman Brothers. Please go ahead.

Roger Freeman - Lehman Brothers

Hey, good evening.

Mitchell Caplan

Hey Roger.

Roger Freeman - Lehman Brothers

I guess on the asset side of the balance sheet in terms of mortgage-backed securities. Do you have much in the line of credit exposure there with --?

Mitchell Caplan

No. I think that we’re AAA.

Roger Freeman - Lehman Brothers

All AAA, okay. Bigger picture question, you started offering international equities trading and futures trading. Can you talk about how that's going in the early days, relative to the expectations sort of where you think some of the opportunities are?

Mitchell Caplan

I mean, I would say that relative to expectations, we are probably doing the same or better than we had hoped. But -- you want to continue.

Robert Simmons

Yeah. Its early days. The cross-border trading for US accounts is still in the pilot, which ends later this quarter. But the pilot results have been quite encouraging. And again, the big picture on the cross-border trading, is not only is that an additional product for our US customers, but it's the first big step to really integrating our total global platform and having that true global platform, which will help us as we expand internationally as well.

So anyway you look at it that has been very encouraging in the early days, both from a product for customers, but also what it's doing for us operationally and helping us bring together our global operations. And on the future side same thing, early days, but very positive so far.

Roger Freeman - Lehman Brothers

Okay.

Mitchell Caplan

And I would say the other thing is if you look, Rob talked about how we were thinking about moving some of our revenue from other entities and services. And he talked about FX or exchange and those numbers are actually growing. So, we are getting the benefit of that as a result.

And the other thing that you might notice is even principal transactions, we did quite well in the quarter, we were up as a result of volume related from our own customers, but we were also up volume related because of international.

So again, you are beginning to see some of the benefit of trying to become more global in the way we operate. And it's running through a couple of different line items. So, early indications are positive.

Roger Freeman - Lehman Brothers

Great, that's helpful. Thanks. Just real quickly on the average commission rate, ticked up a penny in the quarter, was that driven by a higher mix of options?

Mitchell Caplan

It was. Options were up a little bit this quarter, I think we were right about 14, right in that range. So it was up a little bit. Number of contracts, was pretty consistent with last quarter, if I remember correctly. But the actual percentage was up, so it helped.

Roger Freeman - Lehman Brothers

Got it. Okay. Thanks.

Operator

Okay. Your next question is coming from Howard Chen of Credit Suisse. Please go ahead.

Howard Chen - Credit Suisse

Hi, everyone.

Mitchell Caplan

Hey Howard.

Howard Chen - Credit Suisse

Thanks for the detail on the updated earnings guidance. On your thoughts regarding the upward trend in delinquencies and charge-offs we have seen, how much of that $25 million of quarterly provision are you assuming is net charge-offs versus reserve build?

Mitchell Caplan

I think we will assume that there will be a reserve build in there. But it will be pretty much what you see traditionally. Typically, I think you have seen reserve build in anywhere from $500,000 to $1.5 million more a quarter, sort of in that range.

Howard Chen - Credit Suisse

Okay. And then I don't know if I am calculating this right, but it looks like MPAs were up about 30% sequential quarter and it moved above the $100 million. I realized your volume mix is change in between [gains] and the residential mortgage. But are you comfortable with the 59% MPA coverage ratio you are at now and what's the bottom threshold to that comfort range?

Mitchell Caplan

Yes, we are and given the mix shift, I think we are pretty comfortable with it. I think given what we thought through this, about I guess Matt Snowling's question about when we think it's going to peak seasonality, and the seasoning, in terms of how long we have owned this stuff. We feel pretty good about it.

I am guessing, we are probably where we need to be from a coverage ratio. It's going to be pretty consistent from this point forward. But there is very little doubt in my mind that it is sort of consistent with the levels where we were in the past, when we had about 90% mortgage.

So if you went back historically and looked at our business and our operations, it is pretty consistent with what we have done over the last 18 years. And I look back at the last time we had the mix at the level that we are right now and I feel pretty good about it.

Howard Chen - Credit Suisse

Okay. That's helpful. And then I think in the recent quarters, Mitch, you have talked that roughly half of your balance sheet loan growth has come organically and half via acquisition. Can you talk about what that mix was roughly this quarter, and provide any commentary on how the secondary mortgage market has evolved in recent months, given all that we're seeing and hearing?

Mitchell Caplan

Yup. It has been a much tougher quarter for our mortgage origination business. If I remember correctly, we did about $1 billion. What we did this quarter in total? $1.6 billion or something, between both of them. I can't. I don't really have it, $1.7 billion between the two.

Howard Chen - Credit Suisse

Okay. And then finally --

Jarrett Lilien

In other words, the bottom-line is that we were very skewed this past quarter to purchasing. Again, the purchasing was skewed to one-to-four, and we purchased with seasoning.

Howard Chen - Credit Suisse

Okay. And finally on the revised EPS guidance Rob, are you still assuming at the midpoint that we have a [two-set bun cuts] that drive yield curve steepening or have you reevaluated that assumption as well?

Mitchell Caplan

No. The original guidance was always one set.

Howard Chen - Credit Suisse

Right, one, sorry.

Mitchell Caplan

One. And we have revised our guidance and assumed nothing.

Howard Chen - Credit Suisse

Okay. So, just to be clear in the revised EPS guidance at the midpoint that assumes continued yield curve inversion?

Mitchell Caplan

It does. Or pretty much flat to where we were. That's right. I think if you remember correctly, the midpoint with the 25 basis points cut, but looking pretty much like where at the point at which there was some inversion.

What you are now seeing is its flat, up a basis point something like that. I mean it's running up three, four basis points, just sort of flattish as I've looked at over the last couple of weeks. So, I'd say the midpoint for us is pretty much as expected and what we're seeing now.

Howard Chen - Credit Suisse

Okay. And then is there any change in your mix in business that drove like the change in a tax rate guidance from 34 to 37?

Mitchell Caplan

International.

Howard Chen - Credit Suisse

Okay. Great thanks

Operator

Thank you. Your next question is coming from Matthew Fischer of Deutsche Bank. Please go ahead.

Matthew Fischer - Deutsche Bank

Hi, thanks. Good evening guys.

Mitchell Caplan

Hey Matt

Matthew Fischer - Deutsche Bank

I had just a follow-up on that. Can you give some color on the revenue contribution from non-US as a percent of total?

Robert Simmons

That's not something that at this point we breakout. We do give the metrics around the DART component of it which obviously is --

Matthew Fischer - Deutsche Bank

5 - 20%

Robert Simmons

Yes, has been very strong. And the other point as you know is that with respect to retail international, it is largely trading still at this point as we launch our EU banking initiative, we do expect that to change, and we certainly have started to see some nice asset growth there. But, the only international breakout we give at this point is around DARTs.

Jarrett Lilien

I think directionally though a good way to think about this, if you are okay with this Rob is, like on Analysts' Day we said, that we expected last year to be some where in the 8% to 10% range and that we wanted it to move to 30%. And so that meant that it had to basically double. So, I'd say you continue to see improvement in Q1 moving directionally where you want to go to achieving that goal. And I suspect, that if we begin to have international, be a more significant part of the overall numbers both from revenue and our earnings, we will start to break it out. But clearly, to the extent that you are profitable and becoming more and more meaningfully profitable, there are some benefits to our overall tax rate and you are seeing it as a result of it.

Matthew Fischer - Deutsche Bank

Okay. And then, in terms of the environment, I guess mid-quarter, we had the shock in market. But now, the Dow is already closing at a new record. And what is the lag? And when do we start to see the retail investor become more active? And then, on top of that, the 20% of your DARTs being non-US, you could maybe give us a bit of color in terms of the sentiment abroad?

Jarrett Lilien

Yes, happy to do it. As we look out, part of what we were doing I think is being prudent. We looked and said, the original range of guidance we were basically in Q1 which was traditionally a stronger quarter coming in right at a 170, which is really sort of the low-end of the range that we had given in December for all of this year.

So, we knew that we had yet to go through Q2, which is traditionally a little slower. Q3 was in the summer where you clearly see it and then it picks back up in Q4. Without a doubt, the strength that you are seeing in the Dow and in all these market indices is driven institutionally rather than retail. It's much more of an institutional engagement. And my guess is that a big part of that it is there is so much liquidity in the institutional market that has to be put into work, that institutions will look for volatility to trade.

As we have changed our business model and we've gotten more and more of a customer who is a long-term investor, I think this is happening with everybody in our sector. You have people who are looking less to trade purely around volatility and more to put money to work over the long-term. And so, they are picking their spots.

Clearly, as we give this guidance we've had a very strong couple of days these last few days, but you have no belief that that is going to continue. And so, in our minds, we thought that the best thing to do given that we had to take a swag at this and look at going into Q2, into the summer in Q3 and Q4 was reach that expectation. You are going to see the numbers monthly. Clearly, if things pick up and they get better and you see the engagement, we will revisit.

Matthew Fischer - Deutsche Bank

Okay. And then last thing, the marketing spend, it seems like, looking at the account growth and asset growth, the marketing is working. Can you anticipate, and I know you've said in the past you are front loading those expenses, but they are working. Do we see that 15 million in the second quarter, some guidance around that?

Mitchell Caplan

No, I think we gave a guidance for all of '07 in December in terms of how much more we expected to spend and that we expected to front load it in Q1. I don't think that we've changed anything about our guidance there.

Matthew Fischer - Deutsche Bank

Okay. Great.

Mitchell Caplan

Now, I think what did happen is the marketing spend came in a little lighter, apart of that is that there were some degree of just deficiency in marketing. So what Nick would tell you is that, you do a lot of online -- before you talked about it specifically at Analyst Day, he has allocated a bigger and bigger percentage of its budget than he used to historically to online. And sometimes you just see efficiencies there because of either break points or [clicktor] rates or whatever it may be. And I think we have got some more efficiency and we feel pretty good about the marketing spend. So, as we look at the rest of this year we will be prudent. I don't think we are giving any different guidance about the overall marketing spend. But what we will do is think about the best way to allocate it based on the opportunity.

Matthew Fischer - Deutsche Bank

Okay, great. Thanks guys.

Mitchell Caplan

Absolutely.

Operator

And your final question is coming from Mike Carrier of UBS. Please go ahead.

Mike Carrier - UBS

Just one follow-up question, just on the mortgage side. Given the strong growth just during the quarter, when you talk about just the seasoning, the purchased mortgages, can you just kind of go through the process of the originated mortgages? What the timeframe would be just relative to the purchased mortgages, because that seem where you kind of see the increase given this year?

Mitchell Caplan

One more time, Mike, I am sorry. I am not exactly following what you are looking for?

Mike Carrier - UBS

Yes. Say on the credit quality side on the originated mortgages?

Mitchell Caplan

Right.

Mike Carrier - UBS

What you would see is sort of a normal kind of timeframe or path for like the charge-offs on that side of the business versus the purchase?

Mitchell Caplan

Right. Okay. So, I don't think that we would see really any meaningful difference. The issue is that on the originated side, literally, I mean I shouldn't say 100%, 99% of what gets originated is obviously through our current customer base. When you look at average FICO scores, when you look at loan-to-value, DTIs, they are all extremely, extremely conservative. And so, they look like the 99 plus percent of the overall portfolio, whether purchased or originated, where you really are protected across the Board with respect to underlying credit based on FICO and LTVs and DTIs, so no meaningful difference between the two.

Mike Carrier - UBS

Okay. And then just on the growth in the target account, during the quarter. Do you guys have any breakdown versus the investing versus the savings or not that in much detail?

Mitchell Caplan

No.

Mike Carrier - UBS

Okay. All right. Thanks a lot.

Mitchell Caplan

Absolutely.

Operator

Thank you. We have reached the allotted time for today's call. I will now turn the call to management for any closing comments.

Mitchell Caplan

Thanks, everybody for joining us and we look forward to the call next quarter.

Operator

Thank you. This concludes today's E*TRADE Financial Corporation's first quarter 2007 earnings conference call. You may now disconnect your lines at this time and have a wonderful evening.

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