ETFC
#Thank you.
Well, <UNK>, as <UNK> has said, we've been doing a lot of analysis and furrowing our brows a bit about what's the right way to talk about this.
But as <UNK> said, we could go over it today organically.
<UNK>, I don't know if you want to add anything to that, because it's difficult to forecast the way exactly <UNK> is describing it, particularly given the impact if there's a potential rate rise or a potential [rate reduction].
Yes, I think you're thinking about it in the correct way.
As rates move higher, the spread earned on that balance sheet will be larger.
So, we will need less balance to earn that compelling return.
At a lower rate environment, we're going to need more balance.
Look at the relative earnings on that relative to a reasonable equity cost, and then, therefore, a return on equity that you want to achieve as a target, and I think you can back into a number.
The guidance we gave holds some of those volatile components constant.
So, we are holding the margin balance constant at a rate that's level there.
We are holding stock loan contribution constant throughout that calculation.
And then essentially running a constant balance sheet at $49.5 billion to give you that spread guidance in the 270- to 275-basis-point range.
It also assumes no additional movements in federal funds.
The run rate expense guidance does not include any step up in fees.
The step-up in fees is out there as an issue.
We expect it to get closure sometime in 2016.
We've incorporated it into our planning and, therefore, it is incorporated into the operating margin guidance that we've given you.
But the run rate ---+ because we don't know the form that charge is going to take; it could be a one-time charge, it could be an ongoing assessment, it could actually be an element of both.
Because of that, we have not factored it into the dollar guidance, but we have taken it into consideration in the calculation of the operating margin.
Thanks, <UNK>.
Well, <UNK>, as you can well expect, and Mr.
<UNK> will talk more about this in a bit, we're subject to the same quiet period requirements as a corporation as we would as an individual.
And so, that has some issues with regard to what we can or can't do in accelerating or decelerating during this period of time.
But, <UNK>, do you want to ---+ .
Yes, I think, as you probably understand, we are operating under a plan, and that's with regard to the amount that we've done thus far this year, as we entered a quiet period late in December.
With that, that's been a consistent amount of purchases.
With the movement in prices and the volatility of the market, it's an item of active discussion between <UNK> and I as to what the appropriate set of actions will be when we exit this period in a couple of days.
From what I understand, most of our major competitors have now passed through that increase; some delayed it a little bit.
And we're not really seeing much in the way of any movement really, but it's been largely passed through.
The 175 basis points is the marginal rate of reinvestment.
So, in terms of where we are effectively buying duration match securities in today's market.
Please keep in mind, yields have been exceptionally volatile, as have spreads.
So, that number is bouncing around; we could think of it as a range of about 175 basis points to 2% right now.
We haven't historically disclosed our cost of equity, but it's actually a fairly straightforward calculation from a [CAPM] model; so, in terms of where we're coming out.
But I think from that, you're going to get around a 10%-ish type range cost.
Yes, so, if you move deposits back on the balance sheet, and you are buying in the 175 basis points to 2% range, you are giving up the fees that you're earning on the off-balance-sheet portion.
It's about 23 basis points.
If you go back and look, you'll see that comp and [ben] is always the highest in the first quarter.
That is really related to all of the tax items and resets that go on.
So, that will be occurring, as well as the ramp up in marketing, and then some of the full-year headcount really continuing.
But that's really more for the full year, not just for the first quarter.
Look, I think that, one, I'd say there's really no decision to cross at this point.
We are working on a plan, but a plan is not a decision point.
I think at some point, yes, with the growth in cash, it will become a more and more likely decision.
But at what point that is, is a little bit off into the future.
How the rules work ---+ some of the CCAR rules, you have five quarters to come into compliance with.
So, that gives you an operating window of time.
But obviously you want to have a very detailed and well thought out plan put in place before you start down that road because you have a fixed window to get it in place.
Other rules actually kick in; this is the heightened expectation rules.
They kick in day one when you cross $50 billion.
So, that work has to be done almost immediately, but some of that's a bit more structural and a bit easier to put in place.
So, as we step back from it, you don't have ---+ it's not going to take a full two years in terms of the expense period to go over [$50 million].
But there is going to be a period of ramp-up time as you're building out the plan, and as you're beginning on the execution of the first phases of the plan, particularly personnel to get some of this work done.
I can probably give you a little bit of color on that.
I think the gross charge-offs for the period were $21 million.
That will be coming out in our 10-K when we file it, and we are seeing an elevated level of recoveries that are driving the net charge-off number to $0.
That we expect that recovery stream to continue somewhat, but it has been exceptionally strong, and we are coming up on increased conversion balances.
So, that really squares to how we get to the loss modeling that's, of course, the $353 million allowance.
<UNK>, we're considering a number of things across three dimensions, which we've talked about on a couple calls now.
And let's remember the reason we brought this up is because we were in [purdah] for a period of time and couldn't entertain these at all.
So, as the music has changed here, we wanted to make sure that we were very clear with the street, with the sell side, with our investors that we are now in a different spot and we can entertain these things.
As we said today, two of those three categories have emerged as having more potential attractive opportunities; and I say potential.
One is certainly trying to find ways to add scale in the brokerage business because the operating leverage is so attractive.
The second is in banking, finding a way to monetize the value of our customer deposits to a greater degree than we do today.
And that would imply acquiring an institution that has strong capabilities in traditional intermediary activities.
That's a good question, <UNK>.
We look at partnerships all the time.
We recently got involved with a partnership in our back office that we think not only provides customers a better service level, but provides us better economics.
So, we look at those all the time, particularly as people produce new products.
And if you think about the introduction of TipRanks today, that's very much a partnership, and that's providing some additional valued, educational and investing knowledge to our customers through a partnership.
So, we think about those all the time.
Well, <UNK>, we're clearly continuing to invest in, for example, ETRADE Pro, which unquestionably signals the fact that we are absolutely committed to serving the needs of those valued customers.
And much of what you're introducing on the mobile devices is also aimed at serving that valuable client base, because they like to stay in touch and like to be able to take action when they want to take action.
So, our dedication to that area is very important.
Our modeling on that metric that you just described is influenced by a number of factors.
And including the impact of our corporate services business, and a change in buying behavior somewhat in the fourth quarter, as people repositioned and a few more mutual fund type purchases as opposed to just straight DARTs, straight equity trades.
So, there's a number of moving factors, <UNK>.
My pleasure.
If I could just make one correction to an earlier comment to <UNK>'s question.
I gave the gross revenue number on the off-balance-sheet sweep deposits.
There are fees paid in that arrangement.
So, when I gave the number of 23 basis points, we are actually in the 10- to 15-basis-point range because we have to pay the administrator fees.
So, it's not quite as high as that.
We also expect that to go up with the full quarter now of the ---+ post the Federal Reserve increase into the 25- to 30-basis-point range.
I'll take the second, first.
<UNK>, we just got permission to take it down to 8%.
So, you'll forgive us for wanting to catch our breath a bit.
And I appreciate your impatience, but we're going to catch our breath a bit.
We do think, as the loan portfolio continues to cure, that there's some more opportunity to take that down to a level ---+ towards the 7% handle.
But that's something that we want to carefully work through with our regulators, and make sure that all the right people are conformable before we even start entertaining that idea.
The dust has just begun to settle on the trophy of getting that done, so we're going to be patient and approach it in the same careful way we did in getting down to 8%.
And then <UNK> is going to take the other question.
Yes, on the 2 times debt service, and please keep in mind the 2 times debt service is actually a covenant in our revolver at this point in time.
So, we will not go below the $100 million number.
We view corporate cash as the ultimate free source of liquidity if we needed to use it between our legal entities, and it is also a source of capital.
So, therefore, we are not going to operate at a thinner margin than that 2 times level.
Well, within the NIM guidance, we are keeping it constant.
Now, constant doesn't mean the constant yield there.
It means it's a constant overall contribution.
Keep in mind that the hard to borrow component that is essentially the rebate earned on the stock lending is put up to the borrowing line, and the borrowing balance is driven by customer activity.
So, there's going to be a lot of volatility in the yield that's posted there.
But from a dollar perspective, we expect it to be relatively flat.
That includes provision, and our guidance on provision for the year is zero.
Well, as you'd expect, we have to react to that when it occurs.
If the provisions come in above what we anticipate, we'll have to look at where we may be able to reduce other costs.
Those numbers come in big and chunky though, so our ability to move the other numbers is not quite the flexibility you might have otherwise.
And if it comes in better, we'll again take a look and see.
We've oftentimes on these calls said we like to flex our marketing budget.
And when times are good, invest in driving future customer growth.
And when times are bad, being as responsible as we can.
So, that's a bit something we have to handle day to day as we see what happens.
Why don't you take the metrics one first.
Sure.
Anything we're looking at is going to have to have an extremely compelling return in terms of the investment that we are making in terms of either ROE or its return on invested capital.
We would also expect accretion commensurate to the deal size, and the risk in the deal.
So, we would expect higher metrics for deals that are going to be ---+ that have higher complexity or higher risk to them in terms of what we can achieve.
I guess the only thing that I would carve out of that is probably anything that's around a capability or a product.
We haven't talked much about that; they would largely be on the smaller side.
But any larger amount or use of capital is going to have to have an extremely compelling return profile and accretion.
On RIA, we've been pretty consistent in our thinking on this, which is not really all that intrigued by that opportunity right now, for two main reasons.
One, we really want to see how the Department of Labor regulations that are mooted might turn out.
That could have quite a significant impact in that business.
And secondly, if you're going to go into that business, I believe you need to enter that business with scale.
And so that would also make us think twice about that.
And so, for right now, that's not quite at the top of our mind.
I think we'll take ---+ what do we have, two more maybe we'll take.
Two more calls, please, Edison.
Well, let me just repeat that we've talked about potential acquisitions ---+ thinking about ---+ not even potential ---+ thinking about potential acquisitions across three fronts.
And I think, considering the type of credit risk that we have been managing over the past several years, and how it came on the books, is not exactly what I would consider traditional banking business.
I think you'll want to look at if ---+ when we think about things, we think about things that are going to complement our existing business, our business model, on how we go about things, the type of customers we have, will it have any resonance in with the ETRADE corporate services business.
And so, those are the type of applications of our thinking and the direction we're taking.
The guidance includes our projected headcount.
But it's not ---+ the headcount projection is not ---+ the continued growth rate is going to slow from what it has been.
So, you don't necessarily ---+ you're not necessarily going to see offsets.
The hiring in the fourth quarter is very much around staffing up for the tax season and financial season that we enter this time of year.
Well, we're working through that right now in terms of the actual conversions that are under way.
You'll notice that assets that are off balance sheet came down as we brought some on our balance sheet.
We have additional conversions that are going to occur this quarter, and that's going to be a live process, bringing us to our target level of $49.5 billion by sometime in the second quarter.
The additional $2 billion amount is really part of the same process.
If we wanted to bring it on, we could.
The remaining amount, for various reasons ---+ it's either in money funds that the customer has chosen to be in a tax exempt product.
It is money above the FDIC insurance threshold, so to be insured it has to be held at a different bank, therefore, it cannot be brought back onto our balance sheet.
So, of that $7 billion, $5 billion of it cannot be brought back; $2 billion can be brought back.
That's what we gave in the prepared remarks.
And then as we grow accounts and grow our Business over time, we expect that, too, to grow.
Thank you.
I'd just like to thank all of you again for spending this last hour with us.
We appreciate your interest, and hope you all have a really great evening.
Goodbye.
