July 19, 2012

E*TRADE Financial Corporation Announces Second Quarter 2012 Results


Second Quarter Results

  • Net income of $40 million, or $0.14 per share on total net revenue of $452 million
  • Other expenses included a pre-tax benefit of $7 million, or $0.01 per share(1), primarily related to the Company's reserve established in 2011 to purchase auction rate securities (ARS)
  • Provision for loan losses of $67 million
  • Daily Average Revenue Trades (DARTs) of 139,000
  • Net new brokerage accounts of 46,000, representing year-to-date net new accounts of 92,000, for 6.6% annualized growth
  • Net new brokerage assets of $2.2 billion, representing year-to-date net new assets of $6.2 billion, for 8.5% annualized growth(2)

E*TRADE Financial Corporation (NASDAQ: ETFC) today announced results for its second quarter ended June 30, 2012, reporting net income of $40 million, or $0.14 per share. This compares with net income of $63 million, or $0.22 per share in the prior quarter, and net income of $47 million, or $0.16 per share in the second quarter of 2011. The Company reported total net revenue of $452 million for the second quarter of 2012, compared with $489 million in the prior quarter and $518 million in the second quarter of 2011.

"The second quarter was another significant step forward for E*TRADE as we continued our momentum in growing the brokerage franchise and in reducing our legacy credit exposure" said Steven Freiberg, Chief Executive Officer. "Our growth in accounts and assets is on track to exceed last year's results, and our credit costs are at a five year low. While we are encouraged by this performance, we continue to face a challenging macro-economic environment with low levels of retail investor engagement. Accordingly, we are increasing our focus on strategic cost management, deleveraging, and risk reduction to provide a solid basis for earnings and capital efficiency."

E*TRADE reported DARTs of 139,000 during the quarter, a decrease of 12 percent from the prior quarter and a decrease of six percent versus the same quarter a year ago.

At quarter end, the Company reported 4.4 million customer accounts, which included 2.9 million brokerage accounts. Net new brokerage accounts were 46,000 during the quarter compared with 46,000 in the prior quarter and 25,000 in the second quarter of 2011.

The Company ended the quarter with $193 billion in total customer assets, compared with $202 billion at the end of the first quarter and $186 billion from the year-ago period.

During the quarter, customers added $2.2 billion in net new brokerage assets. Brokerage related cash decreased by $1.8 billion to $29.2 billion during the period, as customers were net buyers of approximately $3.9 billion of securities. Margin receivables averaged $5.6 billion in the quarter, up 14 percent sequentially and down two percent year over year, ending the quarter at $5.8 billion.

Net operating interest income for the second quarter was $279 million, down from $285 million in the prior quarter and $315 million a year ago. Second quarter results reflected a net interest spread of 2.44 percent on average interest-earning assets of $44.8 billion, compared with a net interest spread of 2.49 percent on average interest-earning assets of $44.9 billion in the prior quarter.

Commissions, fees and service charges, principal transactions, and other revenue in the second quarter were $154 million, compared with $173 million in the prior quarter and $174 million in the second quarter of 2011. Average commission per trade for the quarter was $10.68, compared to $11.04 in the prior quarter, and $11.14 in the second quarter of 2011.

Total net revenue in the quarter also included $19 million of net gains on loans and securities, including a net impairment of $5 million, compared with $31 million in the prior quarter, including a net impairment of $4 million.

Total operating expenses for the quarter decreased $25 million sequentially to $281 million due to seasonally higher advertising and compensation expenses incurred during the first quarter. Other expenses included legal settlements and other reserves of $3.1 million, as well as a $10.2 million benefit related to a reduction of the Company's reserve resulting from the completion of an offer to purchase auction rate securities from eligible holders which expired on May 15, 2012. Over the course of the program, the Company has purchased and subsequently liquidated approximately $145 million in auction rate securities from approximately 1,000 customers. With the completion of the offer to purchase, the Company does not believe it has any remaining material exposure related to auction rate securities.

The Company's loan portfolio ended the quarter at $11.8 billion, contracting $624 million from the prior quarter, primarily related to $503 million of paydowns. Second quarter provision for loan losses decreased $5 million from the prior quarter to $67 million.

Net charge-offs in the quarter were $121 million, a decrease of $195 million from the prior quarter. Approximately half of the prior quarter's charge-offs related to aligning certain loan modification policies and procedures with the guidance of the Company's new primary banking regulator. The allowance for loan losses at quarter-end was $526 million, down $53 million from the previous quarter.

For the Company's entire loan portfolio, special mention delinquencies decreased seven percent sequentially, and total at-risk delinquencies declined six percent. As compared to the year-ago period, special mention delinquencies declined 24 percent and total at-risk delinquencies declined 28 percent.

As of June 30, 2012, the Company reported a consolidated Tier 1 common ratio of 10.2 percent(3), up from 9.4 percent in the prior period and 8.4 percent at the end of the second quarter of 2011. E*TRADE Bank ended the quarter with Tier 1 leverage(4) and total risk-based capital ratios of 7.9 percent and 18.0 percent, compared with 7.3 percent and 17.0 percent, respectively, at the end of the prior period and 7.9 percent and 16.2 percent, respectively, in the year-ago period.

Historical metrics and financials can be found on the E*TRADE Financial Investor Relations website at investor.etrade.com.

The Company will host a conference call to discuss the results beginning at 5:00 p.m. EDT today. This conference call will be available to domestic participants by dialing 888-657-8143 and 973-935-8153 for international participants. The conference ID number is 97859078. A live audio webcast and replay of this conference call will also be available at investor.etrade.com.

About E*TRADE Financial

The E*TRADE Financial family of companies provides financial services including online brokerage and related banking products and services to retail investors. Specific business segments include Trading and Investing and Balance Sheet Management. Securities products and services are offered by E*TRADE Securities LLC (Member FINRA/SIPC). Bank products and services are offered by E*TRADE Bank, a Federal savings bank, Member FDIC, or its subsidiaries and affiliates. More information is available at www.etrade.com. ETFC-E

Important Notices

E*TRADE Financial, E*TRADE and the E*TRADE logo are trademarks or registered trademarks of E*TRADE Financial Corporation.

Forward-Looking Statements: The statements contained in this news release that are forward looking are based on current expectations that are subject to a number of uncertainties and risks, and actual results may differ materially. The uncertainties and risks include, but are not limited to, potential changes in market activity, anticipated changes in the rate of new customer acquisition and in rate of net acquisition of brokerage accounts and assets, macro trends of the economy in general and the residential real estate market, instability in the consumer credit markets and credit trends, potential changes in liability relating to auction rate securities, increased mortgage loan delinquency and default rates, portfolio growth, portfolio seasoning and resolution through collections, sales or charge-offs, the uncertainty surrounding the foreclosure process, and the potential negative regulatory consequences resulting from the implementation of financial regulatory reform as well as from actions by or potentially more restrictive policies or interpretations of the Federal Reserve and the Office of the Comptroller of the Currency or other regulators. Further information about these risks and uncertainties can be found in the annual, quarterly, and current reports on Form 10-K, Form 10-Q, and Form 8-K previously filed by E*TRADE Financial Corporation with the Securities and Exchange Commission (including information in these reports under the caption "Risk Factors"). Any forward-looking statement included in this release speaks only as of the date of this communication; the Company disclaims any obligation to update any information.

© 2012 E*TRADE Financial Corporation. All rights reserved.

Financial Statements

Consolidated Statement of Income
(In thousands, except per share amounts)
Three Months Ended Six Months Ended
June 30, June 30,
2012 2011 2012 2011
Operating interest income $ 354,520 $ 394,653 $ 716,781 $ 782,119
Operating interest expense   (75,415 )   (79,232 )   (152,824 )   (156,996 )
Net operating interest income   279,105     315,421     563,957     625,123  
Commissions 93,313 103,850 200,744 228,283
Fees and service charges 29,063 36,608 61,061 73,853
Principal transactions 21,239 23,756 45,385 53,332
Gains on loans and securities, net 24,685 31,011 59,591 63,345
Net impairment (5,269 ) (2,884 ) (8,801 ) (8,946 )
Other revenues   10,272     9,857     19,868     19,324  
Total non-interest income   173,303     202,198     377,848     429,191  
Total net revenue   452,408     517,619     941,805     1,054,314  
Provision for loan losses 67,261 103,136 139,208 219,194
Operating expense:
Compensation and benefits 85,549 80,518 177,827 164,521
Clearing and servicing 32,837 39,192 67,392 78,347
Advertising and market development 36,567 37,019 84,155 81,384
FDIC insurance premiums 27,195 24,031 55,557 44,598
Professional services 19,934 21,492 40,269 44,960
Occupancy and equipment 18,244 17,163 36,098 33,977
Communications 18,358 17,227 37,478 32,782
Depreciation and amortization 23,104 22,724 45,343 44,771
Amortization of other intangibles 6,295 6,537 12,591 13,075
Facility restructuring and other exit activities 1,589 2,046 1,165 5,598
Other operating expenses   11,783     22,969     29,819     44,919  
Total operating expense   281,455     290,918     587,694     588,932  
Income before other income (expense) and income tax expense 103,692 123,565 214,903 246,188
Other income (expense):
Corporate interest income 20 63 34 679
Corporate interest expense (45,285 ) (44,824 ) (90,410 ) (88,101 )
Gains (losses) on sales of investments, net - 38 (1