July 19, 2012

E*TRADE Financial Corporation Announces Second Quarter 2012 Results

NEW YORK--(BUSINESS WIRE)-- E*TRADE Financial Corporation (NASDAQ: ETFC):

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

E*TRADE FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statement of Income
(In thousands, except per share amounts)
(Unaudited)
             
Three Months Ended Six Months Ended
June 30, June 30,
2012 2011 2012 2011
 
Revenue:
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 ) 38
Gains on early extinguishment of debt - 3,091 - 3,091
Equity in income (loss) of investments and venture funds   2,113     675     2,008     (323 )
Total other income (expense)   (43,152 )   (40,957 )   (88,369 )   (84,616 )
Income before income tax expense 60,540 82,608 126,534 161,572
Income tax expense   21,030     35,490     24,433     69,221  
Net income $ 39,510   $ 47,118   $ 102,101   $ 92,351  
 
Basic earnings per share $ 0.14 $ 0.18 $ 0.36 $ 0.37
Diluted earnings per share $ 0.14 $ 0.16 $ 0.35 $ 0.32
Shares used in computation of per share data:
Basic 285,645 269,119 285,561 249,817
Diluted 290,044 289,643 290,184 289,725
 
 

E*TRADE FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statement of Income
(In thousands, except per share amounts)
(Unaudited)
         
 
Three Months Ended
June 30, March 31, June 30,
2012 2012 2011
Revenue:
Operating interest income $ 354,520 $ 362,261 $ 394,653
Operating interest expense   (75,415 )   (77,409 )   (79,232 )
Net operating interest income   279,105     284,852     315,421  
Commissions 93,313 107,431 103,850
Fees and service charges 29,063 31,998 36,608
Principal transactions 21,239 24,146 23,756
Gains on loans and securities, net 24,685 34,906 31,011
Net impairment (5,269 ) (3,532 ) (2,884 )
Other revenues   10,272     9,596     9,857  
Total non-interest income   173,303     204,545     202,198  
Total net revenue   452,408     489,397     517,619  
Provision for loan losses 67,261 71,947 103,136
Operating expense:
Compensation and benefits 85,549 92,278 80,518
Clearing and servicing 32,837 34,555 39,192
Advertising and market development 36,567 47,588 37,019
FDIC insurance premiums 27,195 28,362 24,031
Professional services 19,934 20,335 21,492
Occupancy and equipment 18,244 17,854 17,163
Communications 18,358 19,120 17,227
Depreciation and amortization 23,104 22,239 22,724
Amortization of other intangibles 6,295 6,296 6,537
Facility restructuring and other exit activities 1,589 (424 ) 2,046
Other operating expenses   11,783     18,036     22,969  
Total operating expense   281,455     306,239     290,918  
Income before other income (expense) and income tax expense 103,692 111,211 123,565
Other income (expense):
Corporate interest income 20 14 63
Corporate interest expense (45,285 ) (45,125 ) (44,824 )
Gains (losses) on sales of investments, net - (1 ) 38
Gains on early extinguishment of debt - - 3,091
Equity in income (loss) of investments and venture funds   2,113     (105 )   675  
Total other income (expense)   (43,152 )   (45,217 )   (40,957 )
Income before income tax expense 60,540 65,994 82,608
Income tax expense   21,030     3,403     35,490  
Net income $ 39,510   $ 62,591   $ 47,118  
 
Basic earnings per share $ 0.14 $ 0.22 $ 0.18
Diluted earnings per share $ 0.14 $ 0.22 $ 0.16
Shares used in computation of per share data:
Basic 285,645 285,478 269,119
Diluted 290,044 290,017 289,643
 
 

E*TRADE FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheet
(In thousands, except share data)
(Unaudited)
             
 
June 30, March 31, December 31,
2012   2012   2011
ASSETS
Cash and equivalents $ 1,378,454 $ 2,018,438 $ 2,099,839
Cash required to be segregated under federal or other regulations 761,485 1,411,678 1,275,587
Trading securities 60,081 58,830 54,372
Available-for-sale securities 16,152,748 17,496,733 15,651,493
Held-to-maturity securities 8,433,682 7,640,118 6,079,512
Margin receivables 5,804,350 5,285,791 4,826,256
Loans receivable, net 11,225,848 11,796,468 12,332,807
Investment in FHLB stock 131,478 140,330 140,183
Property and equipment, net 297,344 298,425 299,693
Goodwill 1,934,232 1,934,232 1,934,232
Other intangibles, net 273,213 279,509 285,805
Other assets   2,702,915       2,931,192       2,960,673  
Total assets $ 49,155,830     $ 51,291,744     $ 47,940,452  
 
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits $ 27,911,100 $ 29,581,388 $ 26,459,985
Securities sold under agreements to repurchase 4,717,656 5,022,253 5,015,499
Customer payables 5,128,653 5,706,213 5,590,858
FHLB advances and other borrowings 2,741,383 2,732,900 2,736,935
Corporate debt 1,501,278 1,497,376 1,493,552
Other liabilities   2,076,151       1,715,713       1,715,673  
Total liabilities   44,076,221       46,255,843       43,012,502  
 
Shareholders' equity:
Common stock, $0.01 par value, shares authorized: 400,000,000 at
June 30, 2012, March 31, 2012 and December 31, 2011, shares issued
and outstanding: 285,740,705 at June 30, 2012, 285,676,131 at March 31, 2012
and 285,368,075 at December 31, 2011 2,857 2,857 2,854
Additional paid-in-capital 7,310,487 7,307,207 7,306,862
Accumulated deficit (1,893,036 ) (1,932,546 ) (1,995,137 )
Accumulated other comprehensive loss   (340,699 )     (341,617 )     (386,629 )
Total shareholders' equity   5,079,609       5,035,901       4,927,950  
Total liabilities and shareholders' equity $ 49,155,830     $ 51,291,744     $ 47,940,452  
 
 

Segment Reporting
             
Three Months Ended June 30, 2012

Trading and
Investing

Balance Sheet
Management

Corporate/
Other

Eliminations(5)

Total
(In thousands)
Revenue:
Operating interest income $ 174,368 $ 284,682 $ 3 $ (104,533 ) $ 354,520
Operating interest expense   (9,165 )   (170,783 )   -     104,533     (75,415 )
Net operating interest income   165,203     113,899     3     -     279,105  
Commissions 93,313 - - - 93,313
Fees and service charges 28,395 668 - - 29,063
Principal transactions 21,239 - - - 21,239
Gains (losses) on loans and securities, net (114 ) 24,799 - - 24,685
Net impairment - (5,269 ) - - (5,269 )
Other revenues   8,887     1,385     -     -     10,272  
Total non-interest income   151,720     21,583     -     -     173,303  
Total net revenue   316,923     135,482     3     -     452,408  
Provision for loan losses - 67,261 - - 67,261
Operating expense:
Compensation and benefits 64,973 4,156 16,420 - 85,549
Clearing and servicing 16,327 16,510 - - 32,837
Advertising and market development 36,529 38 - - 36,567
FDIC insurance premiums - 27,195 - - 27,195
Professional services 10,632 1,307 7,995 - 19,934
Occupancy and equipment 16,502 452 1,290 - 18,244
Communications 17,570 356 432 - 18,358
Depreciation and amortization 18,984 159 3,961 - 23,104
Amortization of other intangibles 6,295 - - - 6,295
Facility restructuring and other exit activities - - 1,589 - 1,589
Other operating expenses   297     6,435     5,051     -     11,783  
Total operating expense   188,109     56,608     36,738     -     281,455  
 
Segment income (loss) before other income (expense)   128,814     11,613     (36,735 )   -     103,692  
Other income (expense):
Corporate interest income - - 20 - 20
Corporate interest expense - - (45,285 ) - (45,285 )
Equity in income of investments and venture funds   -     -     2,113     -     2,113  
Total other income (expense)   -     -     (43,152 )   -     (43,152 )
Segment income (loss) $ 128,814   $ 11,613   $ (79,887 ) $ -   $ 60,540  
 
 
Three Months Ended March 31, 2012

Trading and
Investing

Balance Sheet
Management

Corporate/
Other

Eliminations(5)

Total

(In thousands)
Revenue:
Operating interest income $ 181,250 $ 299,816 $ 1 $ (118,806 ) $ 362,261
Operating interest expense   (10,802 )   (185,413 )   -     118,806     (77,409 )
Net operating interest income   170,448     114,403     1     -     284,852  
Commissions 107,431 - - - 107,431
Fees and service charges 30,965 1,033 - - 31,998
Principal transactions 24,146 - - - 24,146
Gains (losses) on loans and securities, net (88 ) 35,007 (13 ) - 34,906
Net impairment - (3,532 ) - - (3,532 )
Other revenues   7,935     1,661     -     -     9,596  
Total non-interest income   170,389     34,169     (13 )   -     204,545  
Total net revenue   340,837     148,572     (12 )   -     489,397  
Provision for loan losses - 71,947 - - 71,947
Operating expense:
Compensation and benefits 69,200 4,731 18,347 - 92,278
Clearing and servicing 18,263 16,292 - - 34,555
Advertising and market development 47,374 214 - - 47,588
FDIC insurance premiums - 28,362 - - 28,362
Professional services 10,358 2,717 7,260 - 20,335
Occupancy and equipment 16,416 539 899 - 17,854
Communications 18,346 351 423 - 19,120
Depreciation and amortization 17,741 175 4,323 - 22,239
Amortization of other intangibles 6,296 - - - 6,296
Facility restructuring and other exit activities - - (424 ) - (424 )
Other operating expenses   7,547     5,214     5,275     -     18,036  
Total operating expense   211,541     58,595     36,103     -     306,239  
 
Segment income (loss) before other income (expense)   129,296     18,030     (36,115 )   -     111,211  
Other income (expense):
Corporate interest income - - 14 - 14
Corporate interest expense - - (45,125 ) - (45,125 )
Losses on sale of investments, net - - (1 ) - (1 )
Equity in loss of investments and venture funds   -     -     (105 )   -     (105 )
Total other income (expense)   -     -     (45,217 )   -     (45,217 )
Segment income (loss) $ 129,296   $ 18,030   $ (81,332 ) $ -   $ 65,994  
 
 
Three Months Ended June 30, 2011

Trading and
Investing

Balance Sheet
Management

Corporate/
Other

Eliminations(5) Total
(In thousands)
Revenue:
Operating interest income $ 205,372 $ 321,813 $ 6 $ (132,538 ) $ 394,653
Operating interest expense   (13,620 )   (198,150 )   -     132,538     (79,232 )
Net operating interest income   191,752     123,663     6     -     315,421  
Commissions 103,850 - - - 103,850
Fees and service charges 35,809 799 - - 36,608
Principal transactions 23,756 - - - 23,756
Gains (losses) on loans and securities, net (337 ) 31,391 (43 ) - 31,011
Net impairment - (2,884 ) - - (2,884 )
Other revenues   8,050     1,807     -     -     9,857  
Total non-interest income   171,128     31,113     (43 )   -     202,198  
Total net revenue   362,880     154,776     (37 )   -     517,619  
Provision for loan losses - 103,136 - - 103,136
Operating expense:
Compensation and benefits 58,968 4,204 17,346 - 80,518
Clearing and servicing 19,398 19,794 - - 39,192
Advertising and market development 37,019 - - - 37,019
FDIC insurance premiums - 24,031 - - 24,031
Professional services 12,181 1,336 7,975 - 21,492
Occupancy and equipment 15,650 716 797 - 17,163
Communications 16,550 300 377 - 17,227
Depreciation and amortization 17,692 351 4,681 - 22,724
Amortization of other intangibles 6,537 - - - 6,537
Facility restructuring and other exit activities - - 2,046 - 2,046
Other operating expenses   8,599     7,533     6,837     -     22,969  
Total operating expense   192,594     58,265     40,059     -     290,918  
 
Segment income (loss) before other income (expense)   170,286     (6,625 )   (40,096 )   -     123,565  
Other income (expense):
Corporate interest income - - 63 - 63
Corporate interest expense - - (44,824 ) - (44,824 )
Gains on sale of investments, net - - 38 - 38
Gains on early extinguishment of debt - - 3,091 - 3,091
Equity in income of investments and venture funds   -     -     675     -     675  
Total other income (expense)   -     -     (40,957 )   -     (40,957 )
Segment income (loss) $ 170,286   $ (6,625 ) $ (81,053 ) $ -   $ 82,608  
 
 

Key Performance Metrics(6)

     

Corporate Metrics

Qtr ended
6/30/12

Qtr ended
3/31/12

Qtr ended
6/30/12
vs.
3/31/12

Qtr ended
6/30/11

Qtr ended
6/30/12
vs.
6/30/11

   

Operating margin %(7)

Consolidated 23 % 23 % 0 % 24 % (1)%
Trading and Investing 41 % 38 % 3 % 47 % (6)%
Balance Sheet Management 9 % 12 % (3)% N.M. N.M.
 
Employees 3,104 3,162 (2)% 3,024 3 %
Consultants and other   110   136 (19)%   214 (49)%
Total headcount 3,214 3,298 (3)% 3,238 (1)%
 
Book value per share $ 17.78 $ 17.63 1 % $ 17.20 3 %
Tangible book value per share(8) $ 11.08 $ 10.87 2 % $ 10.08 10 %
 
Corporate cash ($MM) $ 436.5 $ 483.8 (10)% $ 423.7 3 %
 
Enterprise net interest spread (basis points)(9) 244 249 (2)% 289 (16)%
Enterprise interest-earning assets, average ($MM) $ 44,770 $ 44,890 0 % $ 42,908 4 %
 

Earnings before interest, taxes, depreciation & amortization ("EBITDA") ($MM)

Net income $ 39.5 $ 62.6 (37)% $ 47.1 (16)%
Income tax expense 21.0 3.4 N.M. 35.5 N.M.
Depreciation & amortization 29.4 28.6 3 % 29.3 0 %
Corporate interest expense   45.3   45.1 0 %   44.8 1 %
EBITDA $ 135.2 $ 139.7 (3)% $ 156.7 (14)%
 
Interest coverage(10) 3.0 3.1 N.M. 3.5 N.M.
 
Bank earnings before taxes and before credit losses ($MM)(11) $ 153.9 $ 153.6 0 % $ 216.2 (29)%
 

Trading and Investing Metrics

 
Trading days 63.0 62.0 N.M. 63.0 N.M.
 
DARTs 138,653 156,988 (12)% 147,908 (6)%
 
Total trades (MM) 8.7 9.7 (10)% 9.3 (6)%
Average commission per trade $ 10.68 $ 11.04 (3)% $ 11.14 (4)%
 
End of period margin receivables ($B) $ 5.8 $ 5.3 9 % $ 5.7 2 %
Average margin receivables ($B) $ 5.6 $ 4.9 14 % $ 5.7 (2)%
 
 
Gross new brokerage accounts 104,659 106,418 (2)% 97,888 7 %
Gross new stock plan accounts 52,173 61,234 (15)% 45,658 14 %
Gross new banking accounts 4,328 4,978 (13)% 5,366 (19)%
Closed accounts   (102,587)   (123,142) N.M.   (152,122) N.M.
Net new accounts 58,573 49,488 N.M. (3,210) N.M.
 
Net new brokerage accounts 45,599 45,994 N.M. 24,950 N.M.
Net new stock plan accounts 22,899 10,989 N.M. (14,059) N.M.
Net new banking accounts   (9,925)   (7,495) N.M.   (14,101) N.M.
Net new accounts 58,573 49,488 N.M. (3,210) N.M.
 
End of period brokerage accounts 2,874,605 2,829,006 2 % 2,759,773 4 %
End of period stock plan accounts 1,104,302 1,081,403 2 % 1,054,046 5 %
End of period banking accounts   446,148   456,073 (2)%   484,567 (8)%
End of period total accounts 4,425,055 4,366,482 1 % 4,298,386 3 %
 
Annualized brokerage account attrition rate(12) 8.4% 8.7% N.M. 10.7% N.M.
 

Customer Assets ($B)

Security holdings $ 134.9 $ 138.3 (2)% $ 127.4 6 %
Customer payables (cash) 5.1 5.7 (11)% 5.3 (4)%
Customer cash balances held by third parties 3.6 3.7 (3)% 3.4 6 %
Unexercised stock plan customer options (vested)   21.0   24.6 (15)%   23.5 (11)%
Customer assets in brokerage and stock plan accounts   164.6   172.3 (4)%   159.6 3 %
Sweep deposits 20.5 21.6 (5)% 17.6 16 %
Savings, transaction and other   7.4   8.0 (8)%   8.4 (12)%
Customer assets in banking accounts   27.9   29.6 (6)%   26.0 7 %
Total customer assets $ 192.5 $ 201.9 (5)% $ 185.6 4 %
 
Net new brokerage assets ($B)(13) $ 2.2 $ 4.0 N.M. $ 1.5 N.M.
Net new banking assets ($B)(13)   (0.5)   0.1 N.M.   (0.4) N.M.
Net new customer assets ($B)(13) $ 1.7 $ 4.1 N.M. $ 1.1 N.M.
 
Brokerage related cash ($B) $ 29.2 $ 31.0 (6)% $ 26.3 11 %

Other customer cash and deposits ($B)

  7.4   8.0 (8)%   8.4 (12)%
Total customer cash and deposits ($B) $ 36.6 $ 39.0 (6)% $ 34.7 5 %
 
Unexercised stock plan customer options (unvested) ($B) $ 43.5 $ 47.5 (8)% $ 42.8 2 %
 
Customer net purchase activity ($B) $ (3.9) $ (0.1) N.M. $ (0.2) N.M.
 

Market Making

Equity shares traded (MM) 101,415 108,613 (7)% 151,699 (33)%
Average revenue capture per 1,000 equity shares $ 0.206 $ 0.220 (6)% $ 0.154 34 %
% of Bulletin Board equity shares to total equity shares 93.6% 93.3% 0 % 95.7% (2)%
 

Balance Sheet Management Metrics

 

Loans receivable ($MM)

Average loans receivable $ 12,310 $ 12,958 (5)% $ 15,026 (18)%
Ending loans receivable, net $ 11,226 $ 11,796 (5)% $ 13,675 (18)%
 

Loan performance detail (all loans, including TDRs) ($MM)

 

One- to Four-Family

Current $ 5,329 $ 5,543 (4)% $ 6,277 (15)%
30-89 days delinquent 227 252 (10)% 286 (21)%
90-179 days delinquent   119   114 4 %   167 (29)%
Total 30-179 days delinquent 346 366 (5)% 453 (24)%

180+ days delinquent (net of $181M, $232M and $266M in charge-
offs for Q212, Q112 and Q211, respectively)

  338   413 (18)%   645 (48)%
Total delinquent loans(14)   684   779 (12)%   1,098 (38)%
Gross loans receivable(15) $ 6,013 $ 6,322 (5)% $ 7,375 (18)%
 

Home Equity

Current $ 4,543 $ 4,776 (5)% $ 5,579 (19)%
30-89 days delinquent 104 106 (2)% 155 (33)%
90-179 days delinquent   71   80 (11)%   116 (39)%
Total 30-179 days delinquent 175 186 (6)% 271 (35)%

180+ days delinquent (net of $25M, $24M and $22M in charge-offs
for Q212, Q112 and Q211, respectively)

  43   49 (12)%   51 (16)%
Total delinquent loans(14)   218   235 (7)%   322 (32)%
Gross loans receivable(15) $ 4,761 $ 5,011 (5)% $ 5,901 (19)%
 

Consumer and Other

Current $ 957 $ 1,021 (6)% $ 1,254 (24)%
30-89 days delinquent 18 17 6 % 20 (10)%
90-179 days delinquent   3   5 (40)%   4 (25)%

Total 30-179 days delinquent

21 22 (5)% 24 (13)%
180+ days delinquent   -   - N.M.   - N.M.
Total delinquent loans   21   22 (5)%   24 (13)%
Gross loans receivable(15) $ 978 $ 1,043 (6)% $ 1,278 (23)%
 

Total Loans Receivable

Current $ 10,829 $ 11,340 (5)% $ 13,110 (17)%
30-89 days delinquent 349 375 (7)% 461 (24)%
90-179 days delinquent   193   199 (3)%   287 (33)%
Total 30-179 days delinquent 542 574 (6)% 748 (28)%
180+ days delinquent   381   462 (18)%   696 (45)%
Total delinquent loans(14)   923   1,036 (11)%   1,444 (36)%
Total gross loans receivable(15) $ 11,752 $ 12,376 (5)% $ 14,554 (19)%
 

TDR performance detail ($MM)(16)

 

One- to Four-Family TDRs

Current $ 843 $ 782 8 % $ 631 34 %
30-89 days delinquent 89 91 (2)% 58 53 %
90-179 days delinquent   46   38 21 %   20 130 %
Total 30-179 days delinquent 135 129 5 % 78 73 %

180+ days delinquent (net of $49M, $52M and $25M in charge-offs
for Q212, Q112 and Q211, respectively)

  79   83 (5)%   48 65 %
Total delinquent TDRs   214   212 1 %   126 70 %
TDRs $ 1,057 $ 994 6 % $ 757 40 %
 

Home Equity TDRs

Current $ 242 $ 272 (11)% $ 370 (35)%
30-89 days delinquent 20 21 (5)% 48 (58)%
90-179 days delinquent   11   13 (15)%   31 (65)%
Total 30-179 days delinquent 31 34 (9)% 79 (61)%

180+ days delinquent (net of $3M, $3M and $3M in charge-offs for
Q212, Q112 and Q211, respectively)

  5   5 0 %   4 25 %
Total delinquent TDRs   36   39 (8)%   83 (57)%
TDRs $ 278 $ 311 (11)% $ 453 (39)%
 

Total TDRs

Current $ 1,085 $ 1,054 3 % $ 1,001 8 %
30-89 days delinquent 109 112 (3)% 106 3 %
90-179 days delinquent   57   51 12 %   51 12 %

Total 30-179 days delinquent

166 163 2 % 157 6 %
180+ days delinquent   84   88 (5)%   52 62 %
Total delinquent TDRs   250   251 0 %   209 20 %
TDRs $ 1,335 $ 1,305 2 % $ 1,210 10 %
 

Capital Metrics

 

E*TRADE Bank

Tier 1 leverage ratio(4)(17) 7.9 % 7.3 % 0.6 % 7.9 % 0.0 %
Tier 1 risk-based capital ratio(17) 16.7 % 15.7 % 1.0 % 15.0 % 1.7 %
Total risk-based capital ratio(17) 18.0 % 17.0 % 1.0 % 16.2 % 1.8 %
Tier 1 common ratio(17)(18) 16.7 % 15.7 % 1.0 % 10.3 % 6.4 %
E*TRADE Bank excess Tier 1 capital ($MM)(17) $ 1,303.8 $ 1,072.6 22 % $ 1,232.4 6 %
E*TRADE Bank excess Tier 1 risk-based capital ($MM)(17) $ 2,263.2 $ 2,101.7 8 % $ 2,001.3 13 %
E*TRADE Bank excess risk-based capital ($MM)(17) $ 1,686.2 $ 1,513.7 11 % $ 1,390.0 21 %
 

E*TRADE Financial

Tier 1 leverage ratio(19) 5.7 % 5.5 % 0.2 % 5.4 % 0.3 %
Tier 1 risk-based capital ratio(19) 12.2 % 11.4 % 0.8 % 10.3 % 1.9 %
Total risk-based capital ratio(19) 13.4 % 12.6 % 0.8 % 11.6 % 1.8 %
Tier 1 common ratio(3) 10.2 % 9.4 % 0.8 % 8.4 % 1.8 %
 
 

Activity in Allowance for Loan Losses

     
Three Months Ended June 30, 2012

One- to Four-
Family

  Home Equity  

Consumer
and Other

  Total
(In thousands)
Allowance for loan losses, ending 3/31/12 $ 239,602 $ 291,015 $ 48,558 $ 579,175
Provision for loan losses 247 65,050 1,964 67,261
Charge-offs, net (23,915) (89,182) (7,583) (120,680)
Allowance for loan losses, ending 6/30/12 $ 215,934 $ 266,883 $ 42,939 $ 525,756
 
 
Three Months Ended March 31, 2012

One- to Four-
Family

Home Equity

Consumer
and Other

Total
(In thousands)
Allowance for loan losses, ending 12/31/11 $ 314,187 $ 463,288 $ 45,341 $ 822,816
Provision for loan losses 15,867 42,977 13,103 71,947
Charge-offs, net (90,452) (215,250) (9,886) (315,588)
Allowance for loan losses, ending 3/31/12 $ 239,602 $ 291,015 $ 48,558 $ 579,175
 
 
Three Months Ended June 30, 2011

One- to Four-
Family

Home Equity

Consumer
and Other

Total
(In thousands)
Allowance for loan losses, ending 3/31/11 $ 353,117 $ 539,171 $ 61,318 $ 953,606
Provision for loan losses 33,067 64,664 5,405 103,136
Charge-offs, net (59,604) (110,284) (8,239) (178,127)
Allowance for loan losses, ending 6/30/11 $ 326,580 $ 493,551 $ 58,484 $ 878,615
 
 

Specific Valuation Allowance Activity

      As of June 30, 2012

Recorded
Investment
in TDRs
before
charge-offs

 

Charge-offs

 

Recorded
Investment
in TDRs

 

Specific
Valuation
Allowance

 

Net
Investment in
TDRs

 

Specific
Valuation
Allowance as
a % of TDR
Loans

 

Total
Expected
Losses(20)

(Dollars in thousands)
One- to four-family $ 1,356,888 $ (299,307 ) $ 1,057,581 $ (94,474 ) $ 963,107 9 % 29 %
Home equity   435,484   (158,072 )   277,412   (98,293 )   179,119 35 % 59 %
Total $ 1,792,372 $ (457,379 ) $ 1,334,993 $ (192,767 ) $ 1,142,226 14 % 36 %
 
As of March 31, 2012

Recorded
Investment
in TDRs
before
charge-offs

Charge-offs

Recorded
Investment
in TDRs

Specific
Valuation
Allowance

Net
Investment in
TDRs

Specific
Valuation
Allowance as
a % of TDR
Loans

Total
Expected
Losses(20)

(Dollars in thousands)
One- to four-family $ 1,282,541 $ (288,639 ) $ 993,902 $ (90,122 ) $ 903,780 9 % 30 %
Home equity   467,721   (156,836 )   310,885   (114,522 )   196,363 37 % 58 %
Total $ 1,750,262 $ (445,475 ) $ 1,304,787 $ (204,644 ) $ 1,100,143 16 % 37 %
 
As of June 30, 2011

Recorded
Investment
in TDRs
before
charge-offs

Charge-offs

Recorded
Investment
in TDRs

Specific
Valuation
Allowance

Net
Investment in
TDRs

Specific
Valuation
Allowance as
a % of TDR
Loans

Total
Expected
Losses(20)

(Dollars in thousands)
One- to four-family $ 901,011 $ (144,441 ) $ 756,570 $ (96,110 ) $ 660,460 13 % 27 %
Home equity   494,985   (42,117 )   452,868   (233,145 )   219,723 51 % 55 %
Total $ 1,395,996 $ (186,558 ) $ 1,209,438 $ (329,255 ) $ 880,183 27 % 37 %
 
 

Average Enterprise Balance Sheet Data

        Three Months Ended
June 30, 2012

Average
Balance

 

Operating
Interest
Inc./Exp.

 

Average
Yield/Cost

Enterprise interest-earning assets: (In thousands)
Loans(21) $ 12,324,567 $ 124,994 4.06 %
Margin receivables 5,633,453 55,418 3.96 %
Available-for-sale securities 16,336,062 98,625 2.41 %
Held-to-maturity securities 8,108,507 60,245 2.97 %
Cash and equivalents 1,115,736 527 0.19 %
Segregated cash 741,845 105 0.06 %
Securities borrowed and other   509,370     12,687   10.02 %
Total enterprise interest-earning assets $ 44,769,540     352,601   3.15 %
Enterprise interest-bearing liabilities:
Deposits $ 28,583,333 6,611 0.09 %
Customer payables 5,303,434 2,849 0.22 %
Securities sold under agreements to repurchase 4,802,784 40,473 3.33 %
FHLB advances and other borrowings 2,733,258 25,404 3.68 %
Securities loaned and other   702,216     32   0.02 %
Total enterprise interest-bearing liabilities $ 42,125,025     75,369   0.71 %
Enterprise net interest income/spread(9) $ 277,232   2.44 %
 
Three Months Ended
March 31, 2012

Average
Balance

Operating
Interest
Inc./Exp.

Average
Yield/Cost

Enterprise interest-earning assets: (In thousands)
Loans(21) $ 12,972,684 $ 139,501 4.30 %
Margin receivables 4,857,266 47,990 3.97 %
Available-for-sale securities 16,054,904 105,960 2.64 %
Held-to-maturity securities 6,917,621 53,406 3.09 %
Cash and equivalents 1,604,562 839 0.21 %
Segregated cash 1,830,021 365 0.08 %
Securities borrowed and other   653,097     12,664   7.80 %
Total enterprise interest-earning assets $ 44,890,155     360,725   3.22 %
Enterprise interest-bearing liabilities:
Deposits $ 27,927,872 8,342 0.12 %
Customer payables 5,965,680 2,670 0.18 %
Securities sold under agreements to repurchase 4,989,235 40,764 3.23 %
FHLB advances and other borrowings 2,732,185 25,422 3.68 %
Securities loaned and other   588,505     168   0.12 %
Total enterprise interest-bearing liabilities $ 42,203,477     77,366   0.73 %
Enterprise net interest income/spread(9) $ 283,359   2.49 %
 
Three Months Ended
June 30, 2011
Average
Balance

Operating
Interest
Inc./Exp.

Average
Yield/Cost
Enterprise interest-earning assets: (In thousands)
Loans(21) $ 15,029,986 $ 180,974 4.82 %
Margin receivables 5,732,452 58,682 4.11 %
Available-for-sale securities 15,428,197 107,051 2.78 %
Held-to-maturity securities 3,950,330 32,973 3.34 %
Cash and equivalents 1,489,236 741 0.20 %
Segregated cash 638,631 148 0.09 %
Securities borrowed and other   639,190     12,494   7.84 %
Total enterprise interest-earning assets $ 42,908,022     393,063   3.67 %
Enterprise interest-bearing liabilities:
Deposits $ 26,091,507 11,715 0.18 %
Customer payables 5,489,242 2,139 0.16 %
Securities sold under agreements to repurchase 5,369,083 37,981 2.80 %
FHLB advances and other borrowings 2,745,229 26,978 3.89 %
Securities loaned and other   655,202     385   0.24 %
Total enterprise interest-bearing liabilities $ 40,350,263     79,198   0.78 %
Enterprise net interest income/spread(9) $ 313,865   2.89 %
 

Reconciliation from Enterprise Net Interest Income to Net Operating Interest Income

Three Months Ended
June 30, March 31, June 30,
2012 2012 2011
(In thousands)
Enterprise net interest income $ 277,232 $ 283,359 $ 313,865
Taxable equivalent interest adjustment(22) (300 ) (298 ) (292 )
Earnings on customer cash held by third parties and other(23)   2,173     1,791     1,848  
Net operating interest income $ 279,105   $ 284,852   $ 315,421  
 
 

SUPPLEMENTAL INFORMATION

Explanation of Non-GAAP Measures and Certain Metrics

Management believes that tangible book value per share, corporate cash, EBITDA, interest coverage, Bank earnings before taxes and before credit losses, E*TRADE Bank Tier 1 common ratio and E*TRADE Financial ratios are appropriate measures for evaluating the operating and liquidity performance of the Company. Management believes that adjusting GAAP measures by excluding or including certain items is helpful to investors and analysts who may wish to use some or all of this information to analyze the Company's current performance, prospects and valuation. Management uses non-GAAP information internally to evaluate operating performance and in formulating the budget for future periods.

Tangible Book Value per Share

Tangible book value per share represents shareholders' equity less goodwill (net of related deferred tax liability) and other intangible assets divided by common stock outstanding. The Company believes that tangible book value per share is a measure of the Company's capital strength. See endnote (8) for a reconciliation of this non-GAAP measure to the comparable GAAP measure.

Corporate Cash

Corporate cash represents cash held at the parent company as well as cash held in certain subsidiaries that can distribute cash to the parent company without any regulatory approval. The Company believes that corporate cash is a useful measure of the parent company's liquidity as it is the primary source of capital above and beyond the capital deployed in regulated subsidiaries. See the Company's financial statements and "Management's Discussion and Analysis of Results of Operations and Financial Condition" that will be included in the periodic report the Company expects to file with the SEC with respect to the financial periods discussed herein for a reconciliation of this non-GAAP measure to the comparable GAAP measure.

EBITDA

EBITDA represents net income (loss) before taxes, depreciation and amortization and corporate interest expense. Management believes that EBITDA provides a useful additional measure of the Company's performance by excluding certain non-cash charges and expenses that are not directly related to the performance of the business.

Interest Coverage

Interest coverage represents EBITDA divided by corporate interest expense. Management believes that by excluding the charges and expenses that are excluded from EBITDA, interest coverage provides a useful additional measure of the Company's ability to continue to meet interest obligations and liquidity needs. See endnote (10) for a reconciliation of this non-GAAP measure to the comparable GAAP measure.

Bank Earnings Before Taxes and Before Credit Losses

Bank earnings before taxes and before credit losses represents the pre-tax earnings of E*TRADE Bank's holding company, ETB Holdings, Inc. ("Bank") before provision for loan losses, gains on loans and securities, net, net impairment and losses on early extinguishment of FHLB advances. This metric shows the amount of earnings that the Bank, after accruing for the interest expense on its trust preferred securities, generates each quarter prior to credit related losses, primarily provision and losses on securities. Management believes this non-GAAP measure is useful to investors and analysts as it is an indicator of the level of credit related losses the Bank can absorb without causing a decline in E*TRADE Bank's excess risk-based capital. See endnote (11) for a reconciliation of this non-GAAP measure to the comparable GAAP measure.

E*TRADE Bank Tier 1 Common Ratio and E*TRADE Financial Ratios

E*TRADE Financial ratios, including Tier 1 leverage, Tier 1 risk-based capital and total risk-based capital ratios, are based on the Federal Reserve regulatory minimum well-capitalized threshold. E*TRADE Bank's and E*TRADE Financial's Tier 1 common ratios are defined as the Tier 1 capital less elements of Tier 1 capital that are not in the form of common equity, such as trust preferred securities, divided by total risk-weighted assets. Management believes these ratios are an important measure of E*TRADE Bank's and the Company's capital strength. See endnotes (3), (18) and (19) for reconciliations of these non-GAAP measures to the comparable GAAP measures.

It is important to note these metrics and other non-GAAP measures may involve judgment by management and should be considered in addition to, not as a substitute for, or superior to, net income (loss), consolidated statements of cash flows, or other measures of financial performance prepared in accordance with GAAP. For additional information on the adjustments to these non-GAAP measures, please see the Company's financial statements and "Management's Discussion and Analysis of Results of Operations and Financial Condition" that will be included in the periodic report the Company expects to file with the SEC with respect to the financial periods discussed herein.

ENDNOTES

(1) The following table provides a reconciliation for the calculation of the income tax impact related to legal settlements and reserves on diluted EPS (dollars in thousands, except per share amounts):

      Q2 2012
Amount   Diluted EPS
Reversal of the ARS reserve $ 10,190   $ 0.03

Legal settlements and other reserves

  (3,117 )     (0.01 )

Legal settlements and reserves

7,073 0.02

Income tax benefit related to legal settlements and reserves

  (3,310 )     (0.01 )

Legal settlements and reserves, after tax

$ 3,763     $ 0.01  
 
 

(2) The annualized growth rate for net new brokerage assets is calculated by annualizing net new brokerage assets during the current period divided by the sum of security holdings, customer payables (cash), customer cash balances held by third parties and sweep deposits for the previous period end.

(3) The Tier 1 common ratio at E*TRADE Financial is a Q212 estimate and is a non-GAAP measure. Management believes this ratio is an important measure of the Company's capital strength. The Tier 1 common ratio is calculated as follows (dollars in thousands):

      Q2 2012 Q1 2012 Q2 2011
Shareholders' equity $ 5,079,609 $ 5,035,901 $ 4,812,345
DEDUCT:
Losses in OCI on AFS debt securities and cash flow hedges, net of tax (343,238 ) (345,336 ) (383,517 )
Goodwill and other intangible assets, net of deferred tax liabilities   1,914,018     1,930,657     1,992,814  
Subtotal 3,508,829 3,450,580 3,203,048
DEDUCT:
Disallowed servicing assets and deferred tax assets   1,304,810     1,353,189     1,248,393  
Tier 1 common $ 2,204,019   $ 2,097,391   $ 1,954,655  
 
Total risk-weighted assets $ 21,696,165 $ 22,243,997 $ 23,154,668
 
Tier 1 common ratio (Tier 1 common / Total risk-weighted assets) 10.2 % 9.4 % 8.4 %
 
 

(4) In Q112, the Company transitioned from reporting under the OTS reporting requirements to reporting under the OCC reporting requirements. The Tier 1 leverage ratio in this release is the OCC Tier 1 leverage ratio for Q212 and Q112 and the OTS Tier 1 capital ratio previously reported for Q211. The OTS Tier 1 capital ratio and OCC Tier 1 leverage ratio are both calculated using total adjusted assets.

(5) Reflects elimination of transactions between Trading and Investing and Balance Sheet Management segments, which includes deposit and intercompany transfer pricing arrangements.

(6) Amounts and percentages may not calculate due to rounding.

(7) Operating margin is the percentage of net revenue that results in income (loss) before other income (expense) and income taxes. The percentage is calculated by dividing income (loss) before other income (expense) and income taxes by total net revenue.

(8) The following tables provide a reconciliation of GAAP book value and book value per share to non-GAAP tangible book value and tangible book value per share (dollars in thousands, except per share amounts):

      Q2 2012   Q1 2012   Q2 2011
Book value $ 5,079,609   $ 5,035,901   $ 4,812,345
Less: Goodwill and other intangibles, net (2,207,445 ) (2,213,741 ) (2,233,112 )
Less: Deferred tax liability related to goodwill   293,427       283,084       240,298  
Tangible book value $ 3,165,591     $ 3,105,244     $ 2,819,531  
 

 

 

 

      Q2 2012     Q1 2012     Q2 2011
Book value per share $ 17.78     $ 17.63     $ 17.20
Less: Goodwill and other intangibles, net per share (7.73 ) (7.75 ) (7.98 )
Less: Deferred tax liability related to goodwill per share   1.03         0.99         0.86  
Tangible book value per share $ 11.08       $ 10.87       $ 10.08  
 
 

(9) Enterprise net interest spread is the taxable equivalent rate earned on average enterprise interest-earning assets less the rate paid on average enterprise interest-bearing liabilities, excluding corporate interest-earning assets and liabilities and customer cash held by third parties.

(10) Interest coverage represents the ratio of the Company's EBITDA to its corporate interest expense. The interest coverage ratio based on the Company's net income was 0.9, 1.4, and 1.1 for the three months ended June 30, 2012, March 31, 2012, and June 30, 2011, respectively.

(11) Bank earnings before taxes and before credit losses represents the pre-tax earnings of E*TRADE Bank's holding company, ETB Holdings, Inc. ("Bank") before provision for loan losses, gains on loans and securities, net, net impairment and losses on early extinguishment of FHLB advances. This metric shows the amount of earnings that the Bank, after accruing for the interest expense on its trust preferred securities, generates each quarter prior to credit related losses, primarily provision and loss on securities. Management believes this non-GAAP measure is useful to investors and analysts as it is an indicator of the level of credit related losses the Bank can absorb without causing a decline in E*TRADE Bank's excess risk-based capital(a). Below is a reconciliation of Bank earnings before taxes and before credit losses from income before income taxes (dollars in thousands):

      Q2 2012   Q1 2012   Q2 2011
Income before income taxes $ 60,540   $ 65,994   $ 82,608
Add back:
Non-bank loss before income tax benefit(b) 45,478 47,075 58,578
Provision for loan losses 67,261 71,947 103,136
Gains on loans and securities, net (24,685 ) (34,906 ) (31,011 )
Net impairment   5,269       3,532       2,884  
Bank earnings before taxes and before credit losses $ 153,863     $ 153,642     $ 216,195  
 
 

(a) Excess risk-based capital is the excess capital that E*TRADE Bank has compared to the regulatory minimum well-capitalized threshold.

(b) Non-bank loss represents all of the Company's subsidiaries, including Corporate, but excluding the Bank.

(12) The brokerage account attrition rate is calculated by dividing attriting brokerage accounts, which are gross new brokerage accounts less net new brokerage accounts, by total brokerage accounts at the previous period end. This rate is presented on an annualized basis.

(13) Net new customer assets are total inflows to all new and existing customer accounts less total outflows from all closed and existing customer accounts. The net new banking assets and net new brokerage assets metrics treat asset flows between E*TRADE entities in the same manner as unrelated third party accounts.

(14) Delinquent loans include charge-offs for loans that are in bankruptcy or are 180 days past due which have been written down to their expected recovery value. The following table shows the total amount of charge-offs on loans that are still held by the Company as of the periods presented (dollars in millions):

      Q2 2012   Q1 2012   Q2 2011
One- to four-family $ 470   $ 514   $ 431
Home equity   277     275     142
Total charge-offs $ 747   $ 789   $ 573
 
 

(15) Includes unpaid principal balances and premiums (discounts).

(16) The TDR loan performance detail is a subset of the Company's total loan performance.

(17) E*TRADE Bank capital ratios and excess capital amounts are Q212 estimates based on the regulatory minimum well-capitalized threshold. Below is a reconciliation of beginning to ending E*TRADE Bank excess risk-based capital for the quarterly periods presented:

      Q2 2012   Q1 2012   Q2 2011
Beginning E*TRADE Bank excess risk-based capital ($MM) $ 1,514   $ 1,516   $ 1,255
Bank earnings before taxes and before credit losses 154 154 216
Provision for loan losses (67 ) (72 ) (103 )
Loan portfolio run-off(a) 55 66 55
Margin decrease (increase) (52 ) (50 ) 5
Capital upstream(b) - - (34 )
Changes in disallowed deferred tax assets 22 (79 ) (4 )
Other capital changes(c)   60       (21 )     -  
Ending E*TRADE Bank excess risk-based capital ($MM) $ 1,686     $ 1,514     $ 1,390  
 
 

(a) The capital release from loan portfolio run-off includes the decrease in risk-based capital required for the one- to four-family, home equity and consumer loan portfolios.

(b) Represents cash flows to and from the parent company.

(c) Represents the capital impact related to changes in other risk-weighted assets.

(18) The increase in the E*TRADE Bank Tier 1 common ratio from Q211 was due to the conversion of the Company's $1.05 billion in preferred stock in E*TRADE Bank to common stock in December 2011. As a result of the conversion, the common stock is includable in the Tier 1 common capital for E*TRADE Bank. The Tier 1 common ratio at E*TRADE Bank is a Q212 estimate and is a non-GAAP measure. Management believes this ratio is an important measure of E*TRADE Bank's capital strength. The E*TRADE Bank Tier 1 common ratio is calculated as follows (dollars in thousands):

      Q2 2012   Q1 2012   Q2 2011
E*TRADE Bank shareholder's equity $ 5,629,406   $ 5,562,499   $ 5,331,880
DEDUCT:
Losses in OCI on AFS debt securities and cash flow hedges, net of tax (351,610 ) (350,059 ) (384,259 )
Goodwill and other intangible assets, net of deferred tax liabilities   1,623,467       1,639,725       1,690,513  
Subtotal 4,357,549 4,272,833 4,025,626
DEDUCT:
Disallowed servicing assets and deferred tax assets 825,609 877,652 664,256
Deduction for low-level recourse and residual interests - - 18,931
Preferred stock   -       -       1,050,000  
E*TRADE Bank Tier 1 common $ 3,531,940     $ 3,395,181     $ 2,292,439  
 
E*TRADE Bank total risk-weighted assets $ 21,144,847 $ 21,557,377 $ 22,351,661
 
E*TRADE Bank tier 1 common ratio (Tier 1 common / Total risk-weighted assets) 16.7 % 15.7 % 10.3 %
 
 

(19) The Tier 1 leverage, Tier 1 risk-based capital and total risk-based capital ratios at E*TRADE Financial are Q212 estimates based on the Federal Reserve regulatory minimum well-capitalized requirements. E*TRADE Financial is not currently subject to capital requirements; however, the implementation of holding company capital requirements are expected to become effective within the next three years as a result of the Dodd-Frank Act. Management believes this ratio is an important measure of the Company's capital strength and has begun to track this ratio internally, using the current capital guidelines that apply to bank holding companies. The Tier 1 leverage, Tier 1 risk-based capital and total risk-based capital ratios are calculated as follows (dollars in thousands):

      Q2 2012   Q1 2012   Q2 2011
Shareholders' equity $ 5,079,609   $ 5,035,901   $ 4,812,345
DEDUCT:
Losses in OCI on AFS debt securities and cash flow hedges, net of tax (343,238) (345,336) (383,517)
Goodwill and other intangible assets, net of deferred tax liabilities 1,914,018 1,930,657 1,992,814
ADD:
Qualifying restricted core capital elements (TRUPs) 433,000   433,000   433,000

Subtotal

3,941,829 3,883,580 3,636,048
DEDUCT:
Disallowed servicing assets and deferred tax assets 1,304,810   1,353,189   1,248,393
Tier 1 capital 2,637,019   2,530,391   2,387,655
ADD:
Allowable allowance for loan losses 275,254   282,464   296,707
Total capital $ 2,912,273   $ 2,812,855   $ 2,684,362
 
Total average assets $ 49,374,635 $ 49,331,407 $ 47,198,483
DEDUCT:
Goodwill and other intangible assets, net of deferred tax liabilities 1,914,018   1,930,657   1,992,814
Subtotal 47,460,617 47,400,750 45,205,669
DEDUCT:
Disallowed servicing assets and deferred tax assets 1,304,810   1,353,189   1,248,393
Average total assets for leverage capital purposes $ 46,155,807   $ 46,047,561   $ 43,957,276
 
Total risk-weighted assets(a) $ 21,696,165 $ 22,243,997 $ 23,154,668
 
Tier 1 leverage ratio (Tier 1 capital / Average total assets for leverage capital purposes) 5.7% 5.5% 5.4%
Tier 1 capital / Total risk-weighted assets 12.2% 11.4% 10.3%
Total capital / Total risk-weighted assets 13.4% 12.6% 11.6%
 
 

(a) Under the regulatory guidelines for risk-based capital, on-balance sheet assets and credit equivalent amounts of derivatives and off-balance sheet items are assigned to one of several broad risk categories according to the obligor or, if relevant, the guarantor or the nature of any collateral. The aggregate dollar amount in each risk category is then multiplied by the risk weight associated with that category. The resulting weighted values from each of the risk categories are aggregated for determining total risk-weighted assets.

(20) The total expected losses on TDRs includes both the previously recorded charge-offs and the specific valuation allowance.

(21) Excludes loans to customers on margin.

(22) Gross-up for tax-exempt securities.

(23) Includes interest earned on average customer assets of $3.6 billion, $4.0 billion, and $3.7 billion for the quarters ended June 30, 2012, March 31, 2012, and June 30, 2011, respectively, held by parties outside E*TRADE Financial, including third party money market funds and sweep deposit accounts at unaffiliated financial institutions.

E*TRADE Financial Media Relations
646-521-4418
corpcomm@etrade.com
or
E*TRADE Financial Investor Relations
Brett Goodman, 646-521-4406
brett.goodman@etrade.com

Source: E*TRADE Financial Corporation

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