October 23, 2013

E*TRADE Financial Corporation Announces Third Quarter 2013 Results

Company to sell market making business to an affiliate of Susquehanna International Group, LLP for $75 million(1)


Third Quarter Results

  • Net income of $47 million, or $0.16 per share on total net revenue of $417 million
  • Total operating expenses of $271 million, including restructuring charges of $6 million
  • Provision for loan losses of $37 million; net charge-offs of $29 million
  • Corporate cash of $373 million, including a dividend from the Bank of $100 million
  • Daily Average Revenue Trades (DARTs) of 145,000
  • End of period margin receivables of $6.2 billion
  • Net new brokerage accounts of 13,000
  • Net new brokerage assets of $2.4 billion; end of period customer assets of $241 billion

E*TRADE Financial Corporation (NASDAQ: ETFC) today announced results for its third quarter ended September 30, 2013, reporting net income of $47 million, or $0.16 per share. This compares with a net loss of $54 million, or $0.19 loss per share in the prior quarter, and a net loss of $29 million, or $0.10 loss per share in the third quarter of 2012. The prior periods' net losses were driven primarily by a $142 million impairment to goodwill in the second quarter, and $50 million in charge-offs related to untimely reporting of borrower bankruptcies in the year-ago quarter. Total net revenue of $417 million for the third quarter of 2013 compares with $440 million in the prior quarter, and was down from $490 million in the third quarter of 2012.

E*TRADE also announced today that it has entered into a definitive agreement to sell its market making business, G1 Execution Services, to an affiliate of Susquehanna International Group, LLP for $75 million. The transaction is subject to regulatory approvals and other customary closing conditions and is expected to close in three to six months. In addition, the Company will enter into an order flow arrangement whereby E*TRADE agrees, subject to best execution standards, to route 70 percent of its customer equity order flow to G1 Execution Services over the next five years.

"Our core business delivered solid performance in the third quarter as customers continued to engage, with DARTs up 13 percent over the year-ago quarter and customer margin at a five-year high," said Paul Idzik, Chief Executive Officer. "Our consolidated results benefited from the ongoing improvement to the Company's risk profile, which contributed to our ability to distribute capital from the Bank to the Parent this quarter — a significant milestone for E*TRADE. Finally, we are pleased to strike a deal to sell our market maker that will serve our customers and shareholders well, and allow Management to concentrate our time and attention on the core business and our customers."

E*TRADE reported DARTs of 145,000 during the quarter, a decrease of three percent from the prior quarter and an increase of 13 percent versus the same quarter a year ago.

The Company ended the quarter with 3.0 million brokerage accounts, an increase of 13,000 from the prior quarter and representing 9.0 percent annualized attrition. This compared with 30,000 net new brokerage accounts in the prior quarter and 18,000 in the third quarter of 2012, and annualized attrition rates of 8.4 percent and 8.5 percent, respectively.

The Company ended the quarter with $241 billion in total customer assets, compared with $220 billion at the end of the second quarter and $204 billion from the year-ago period.

During the quarter, customers added $2.4 billion in net new brokerage assets. Brokerage related cash increased by $2.6 billion to $38.2 billion during the period. Customers were net sellers of approximately $0.7 billion of securities. Margin receivables averaged $5.9 billion in the quarter, up four percent over last quarter and up five percent year over year, ending the quarter at $6.2 billion.

Corporate cash ended the period at $373 million, an increase of $122 million from the prior period, driven primarily by a $100 million dividend distributed from the Company's Bank subsidiary to its Parent during the quarter.

Net operating interest income for the third quarter was $241 million, down from $243 million in the prior quarter and down from $261 million a year ago. Third quarter results reflected a net interest spread of 2.30 percent on average interest-earning assets of $40.8 billion, compared with 2.35 percent and $40.2 billion in the prior quarter.

Commissions, fees and service charges, principal transactions, and other revenue in the third quarter were $164 million, compared with $177 million in the prior quarter and $153 million in the third quarter of 2012. Average commission per trade for the quarter was $11.15, compared with $11.10 in the prior quarter, and $11.24 in the third quarter of 2012.

Total net revenue in the quarter also included $12 million of net gains on loans and securities, net of impairment, compared with $20 million in the prior quarter, and $77 million in the third quarter of 2012, driven by the Company's deleveraging efforts.

Total operating expenses for the quarter were $271 million, including $6 million of restructuring charges. Excluding this quarter's restructuring charge, as well as the second quarter's goodwill impairment and restructuring charges, operating expenses increased $3 million sequentially, to $265 million(2).

The Company's loan portfolio ended the quarter at $9.0 billion, contracting approximately $0.5 billion from the prior quarter. Third quarter provision for loan losses of $37 million was down from $46 million in the prior quarter.

Net charge-offs in the quarter were $29 million, a decrease of $21 million from the prior quarter. The allowance for loan losses ended the quarter at $459 million, up $8 million from the previous quarter.

As of September 30, 2013, the Company reported Bank and consolidated Tier 1 leverage ratios of 9.5 percent(3) and 6.6 percent(4), respectively, compared with 9.5 percent(3) and 6.4 percent(4) at the end of the prior period.

Historical metrics and financials can be found on the E*TRADE Financial corporate website at about.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 800-771-6759 while international participants should dial +1 212-231-2928. A live audio webcast and replay of this conference call will also be available at about.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, including statements regarding continuing improvements to the Company's risk profile, and future capital distributions from the Company's Bank to its Parent 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, our potential inability to reduce our balance sheet and costs, 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, 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. Other forward-looking statements include certain statements relating to our announcement of our sale of our market making business. The transaction is subject to regulatory approval and other closing conditions. 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.

© 2013 E*TRADE Financial Corporation. All rights reserved.

Financial Statements

Consolidated Statement of Income (Loss)
(In thousands, except per share amounts)
Three Months Ended Nine Months Ended
September 30, September 30,
  2013     2012     2013     2012  
Operating interest income $ 300,915 $ 333,977 $ 902,805 $ 1,050,758
Operating interest expense   (60,068 )   (73,100 )   (178,088 )   (225,924 )
Net operating interest income   240,847     260,877     724,717     824,834  
Commissions 102,753 90,424 309,846 291,168
Fees and service charges 39,924 30,915 112,801 91,976
Principal transactions 12,631 22,177 55,553 67,562
Gains on loans and securities, net 12,213 78,977 48,954 138,568
Net impairment (586 ) (2,395 ) (2,331 ) (11,196 )
Other revenues   9,020     9,060     27,058     28,928  
Total non-interest income   175,955     229,158     551,881     607,006  
Total net revenue   416,802     490,035     1,276,598     1,431,840  
Provision for loan losses 37,399 141,019 126,198 280,227
Operating expense:
Compensation and benefits 88,405 94,790 270,077 272,617
Advertising and market development 20,925 26,001 80,793 110,156
Clearing and servicing 30,941 30,856 93,647 98,248
FDIC insurance premiums 24,707 31,342 79,052 86,899
Professional services 22,842 20,421 58,778 60,690
Occupancy and equipment 17,675 19,423 53,344 55,521
Communications 15,279 17,560 52,411 55,038
Depreciation and amortization 21,839 23,044 67,684 68,387
Amortization of other intangibles 5,699 6,296 17,833 18,887
Impairment of goodwill - - 142,423 -
Facility restructuring and other exit activities 6,410 2,350 23,871 3,515
Other operating expenses   16,022     16,950     40,293     46,769  
Total operating expense   270,744     289,033     980,206     876,727  
Income before other income (expense) and income tax expense (benefit) 108,659 59,983 170,194 274,886
Other income (expense):
Corporate interest income 9 21 33 55
Corporate interest expense (28,605 ) (45,483 ) (85,838 )