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)

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

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

 
E*TRADE FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statement of Income (Loss)
(In thousands, except per share amounts)
(Unaudited)
           
 
Three Months Ended Nine Months Ended
September 30, September 30,
  2013     2012     2013     2012  
Revenue:
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 ) (135,893 )
Losses on early extinguishment of debt - (50,608 ) - (50,608 )
Equity in income (loss) of investments and other   (133 )   (216 )   5,127     1,791  
Total other income (expense)   (28,729 )   (96,286 )   (80,678 )   (184,655 )
Income (loss) before income tax expense (benefit) 79,930 (36,303 ) 89,516 90,231
Income tax expense (benefit)   32,502     (7,678 )   61,367     16,755  
Net income (loss) $ 47,428   $ (28,625 ) $ 28,149   $ 73,476  
 
Basic earnings (loss) per share $ 0.17 $ (0.10 ) $ 0.10 $ 0.26
Diluted earnings (loss) per share $ 0.16 $ (0.10 ) $ 0.10 $ 0.25
Shares used in computation of per share data:
Basic 287,111 285,850 286,882 285,658
Diluted 292,630 285,850 292,249 290,395
 
 

E*TRADE FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statement of Income (Loss)
(In thousands, except per share amounts)
(Unaudited)
         
 
Three Months Ended
September 30, June 30, September 30,
  2013     2013     2012  
 
Revenue:
Operating interest income $ 300,915 $ 301,830 $ 333,977
Operating interest expense   (60,068 )   (59,289 )   (73,100 )
Net operating interest income   240,847     242,541     260,877  
Commissions 102,753 106,361 90,424
Fees and service charges 39,924 40,367 30,915
Principal transactions 12,631 21,176 22,177
Gains on loans and securities, net 12,213 21,061 78,977
Net impairment (586 ) (580 ) (2,395 )
Other revenues   9,020     9,005     9,060  
Total non-interest income   175,955     197,390     229,158  
Total net revenue   416,802     439,931     490,035  
Provision for loan losses 37,399 46,149 141,019
Operating expense:
Compensation and benefits 88,405 86,021 94,790
Advertising and market development 20,925 23,284 26,001
Clearing and servicing 30,941 31,062 30,856
FDIC insurance premiums 24,707 25,054 31,342
Professional services 22,842 18,634 20,421
Occupancy and equipment 17,675 18,153 19,423
Communications 15,279 18,618 17,560
Depreciation and amortization 21,839 22,797 23,044
Amortization of other intangibles 5,699 6,067 6,296
Impairment of goodwill - 142,423 -
Facility restructuring and other exit activities 6,410 9,892 2,350
Other operating expenses   16,022     11,922     16,950  
Total operating expense   270,744     413,927     289,033  
Income (loss) before other income (expense) and income tax expense (benefit) 108,659 (20,145 ) 59,983
Other income (expense):
Corporate interest income 9 11 21
Corporate interest expense (28,605 ) (28,613 ) (45,483 )
Losses on early extinguishment of debt - - (50,608 )
Equity in income (loss) of investments and other   (133 )   966     (216 )
Total other income (expense)   (28,729 )   (27,636 )   (96,286 )
Income (loss) before income tax expense (benefit) 79,930 (47,781 ) (36,303 )
Income tax expense (benefit)   32,502     6,622     (7,678 )
Net income (loss) $ 47,428   $ (54,403 ) $ (28,625 )
 
Basic earnings (loss) per share $ 0.17 $ (0.19 ) $ (0.10 )
Diluted earnings (loss) per share $ 0.16 $ (0.19 ) $ (0.10 )
Shares used in computation of per share data:
Basic 287,111 286,903 285,850
Diluted 292,630 286,903 285,850
 
 

E*TRADE FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheet
(In thousands, except share data)
(Unaudited)
         
 
September 30, June 30, December 31,
  2013     2013     2012  
ASSETS
Cash and equivalents $ 1,796,181 $ 1,045,252 $ 2,761,494
Cash required to be segregated under federal or other regulations 738,221 855,352 376,898
Trading securities - - 101,270
Available-for-sale securities 13,281,458 13,060,921 13,443,020
Held-to-maturity securities 9,944,153 9,900,743 9,539,948
Margin receivables 6,188,708 5,970,042 5,804,041
Loans receivable, net 8,564,614 9,105,916 10,098,723
Investment in FHLB stock 61,400 77,150 67,400
Property and equipment, net 246,186 261,939 288,170
Goodwill 1,791,809 1,791,809 1,934,232
Other intangibles, net 221,628 227,327 260,622
Other assets   2,713,121     2,710,074       2,710,921  
Total assets $ 45,547,479   $ 45,006,525     $ 47,386,739  
 
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits $ 25,869,797 $ 25,548,527 $ 28,392,552
Securities sold under agreements to repurchase 4,449,665 4,598,487 4,454,661
Customer payables 5,830,257 5,082,970 4,964,922
FHLB advances and other borrowings 1,285,011 1,627,658 1,260,916
Corporate debt 1,767,749 1,766,827 1,764,982
Other liabilities   1,515,426     1,621,428       1,644,236  
Total liabilities   40,717,905     40,245,897       42,482,269  
 
Shareholders' equity:
Common stock, $0.01 par value, shares authorized: 400,000,000 at
September 30, 2013, June 30, 2013 and December 31, 2012, shares issued
and outstanding: 287,182,972 at September 30, 2013, 286,900,541 at
June 30, 2013, and 286,114,334 at December 31, 2012 2,872 2,869 2,861
Additional paid-in-capital 7,326,891 7,324,425 7,319,257
Accumulated deficit (2,079,571 ) (2,126,999 ) (2,107,720 )
Accumulated other comprehensive loss   (420,618 )   (439,667 )     (309,928 )
Total shareholders' equity   4,829,574     4,760,628       4,904,470  
Total liabilities and shareholders' equity $ 45,547,479   $ 45,006,525     $ 47,386,739  
 
 

Segment Reporting
         
Three Months Ended September 30, 2013

Trading and
Investing

Balance Sheet
Management

Corporate/
Other

Eliminations(5)

Total
(In thousands)
Revenue:
Operating interest income 138,865 $ 230,427 $ - $ (68,377 ) $ 300,915
Operating interest expense   (5,487 )   (122,958 )   -     68,377     (60,068 )
Net operating interest income   133,378     107,469     -     -     240,847  
Commissions 102,753 - - - 102,753
Fees and service charges 39,468 456 - - 39,924
Principal transactions 12,631 - - - 12,631
Gains on loans and securities, net - 12,213 - - 12,213
Net impairment - (586 ) - - (586 )
Other revenues   7,883     1,137     -     -     9,020  
Total non-interest income   162,735     13,220     -     -     175,955  
Total net revenue   296,113     120,689     -     -     416,802  
Provision for loan losses - 37,399 - - 37,399
Operating expense:
Compensation and benefits 60,502 3,163 24,740 - 88,405
Advertising and market development 20,925 - - - 20,925
Clearing and servicing 18,881 12,060 - - 30,941
FDIC insurance premiums - 24,707 - - 24,707
Professional services 9,703 411 12,728 - 22,842
Occupancy and equipment 15,359 386 1,930 - 17,675
Communications 14,504 343 432 - 15,279
Depreciation and amortization 17,365 104 4,370 - 21,839
Amortization of other intangibles 5,699 - - - 5,699
Facility restructuring and other exit activities - - 6,410 - 6,410
Other operating expenses   7,406     2,315     6,301     -     16,022  
Total operating expense   170,344     43,489     56,911     -     270,744  
Segment income (loss) before other income (expense)   125,769     39,801     (56,911 )   -     108,659  
Other income (expense):
Corporate interest income - - 9 - 9
Corporate interest expense - - (28,605 ) - (28,605 )
Equity in loss of investments and other   -     -     (133 )   -     (133 )
Total other income (expense)   -     -     (28,729 )   -     (28,729 )
Segment income (loss) $ 125,769   $ 39,801   $ (85,640 ) $ -   $ 79,930  
 
Three Months Ended June 30, 2013

Trading and
Investing

Balance Sheet
Management

Corporate/
Other

Eliminations(5)

Total
(In thousands)
Revenue:
Operating interest income $ 138,419 $ 231,054 $ - $ (67,643 ) $ 301,830
Operating interest expense   (5,183 )   (121,749 )   -     67,643     (59,289 )
Net operating interest income   133,236     109,305     -     -     242,541  
Commissions 106,361 - - - 106,361
Fees and service charges 39,822 545 - - 40,367
Principal transactions 21,176 - - - 21,176
Gains (losses) on loans and securities, net - 21,062 (1 ) - 21,061
Net impairment - (580 ) - - (580 )
Other revenues   7,997     1,008     -     -     9,005  
Total non-interest income   175,356     22,035     (1 )   -     197,390  
Total net revenue   308,592     131,340     (1 )   -     439,931  
Provision for loan losses - 46,149 - - 46,149
Operating expense:
Compensation and benefits 59,978 3,442 22,601 - 86,021
Advertising and market development 23,284 - - - 23,284
Clearing and servicing 18,555 12,507 - - 31,062
FDIC insurance premiums - 25,054 - - 25,054
Professional services 7,965 526 10,143 - 18,634
Occupancy and equipment 16,035 441 1,677 - 18,153
Communications 17,856 336 426 - 18,618
Depreciation and amortization 18,554 134 4,109 - 22,797
Amortization of other intangibles 6,067 - - - 6,067
Impairment of goodwill 142,423 - - - 142,423
Facility restructuring and other exit activities - - 9,892 - 9,892
Other operating expenses   8,060     (1,026 )   4,888     -     11,922  
Total operating expense   318,777     41,414     53,736     -     413,927  
Segment income (loss) before other income (expense)   (10,185 )   43,777     (53,737 )   -     (20,145 )
Other income (expense):
Corporate interest income - - 11 - 11
Corporate interest expense - - (28,613 ) - (28,613 )
Equity in income of investments and other   -     -     966     -     966  
Total other income (expense)   -     -     (27,636 )   -     (27,636 )
Segment income (loss) $ (10,185 ) $ 43,777   $ (81,373 ) $ -   $ (47,781 )
 
Three Months Ended September 30, 2012

Trading and
Investing

Balance Sheet
Management

Corporate/
Other

Eliminations(5)

Total
(In thousands)
Revenue:
Operating interest income $ 165,523 $ 264,977 $ - $ (96,523 ) $ 333,977
Operating interest expense   (8,718 )   (160,905 )   -     96,523     (73,100 )
Net operating interest income   156,805     104,072     -     -     260,877  
Commissions 90,424 - - - 90,424
Fees and service charges 30,311 604 - - 30,915
Principal transactions 22,177 - - - 22,177
Gains (losses) on loans and securities, net 3 78,980 (6 ) - 78,977
Net impairment - (2,395 ) - - (2,395 )
Other revenues   7,747     1,313     -     -     9,060  
Total non-interest income   150,662     78,502     (6 )   -     229,158  
Total net revenue   307,467     182,574     (6 )   -     490,035  
Provision for loan losses - 141,019 - - 141,019
Operating expense:
Compensation and benefits 61,994 4,442 28,354 - 94,790
Advertising and market development 26,000 1 - - 26,001
Clearing and servicing 17,409 13,447 - - 30,856
FDIC insurance premiums - 31,342 - - 31,342
Professional services 7,218 388 12,815 - 20,421
Occupancy and equipment 17,381 453 1,589 - 19,423
Communications 16,819 330 411 - 17,560
Depreciation and amortization 18,946 167 3,931 - 23,044
Amortization of other intangibles 6,296 - - - 6,296
Facility restructuring and other exit activities - - 2,350 - 2,350
Other operating expenses   8,400     2,634     5,916     -     16,950  
Total operating expense   180,463     53,204     55,366     -     289,033  
Segment income (loss) before other income (expense)   127,004     (11,649 )   (55,372 )   -     59,983  
Other income (expense):
Corporate interest income - - 21 - 21
Corporate interest expense - - (45,483 ) - (45,483 )
Losses on early extinguishment of debt - - (50,608 ) - (50,608 )
Equity in loss of investments and other   -     -     (216 )   -     (216 )
Total other income (expense)   -     -     (96,286 )   -     (96,286 )
Segment income (loss) $ 127,004   $ (11,649 ) $ (151,658 ) $ -   $ (36,303 )
 
 

Key Performance Metrics(6)

         

Corporate Metrics

Qtr ended
9/30/13

Qtr ended
6/30/13

Qtr ended
9/30/13
vs.
6/30/13

Qtr ended
9/30/12

Qtr ended
9/30/13
vs.
9/30/12

 

Operating margin %(7)

Consolidated 26 % N.M. N.M. 12 % 14 %
Trading and Investing 42 % N.M. N.M. 41 % 1 %
Balance Sheet Management 33 % 33 % 0 % N.M. N.M.
 
Employees 2,913 2,871 1 % 3,086 (6)%
Consultants and other   92   78 18 %   100 (8)%
Total headcount 3,005 2,949 2 % 3,186 (6)%
 
Book value per share $ 16.82 $ 16.59 1 % $ 17.81 (6)%

Tangible book value per share(8)

$ 10.96 $ 10.66 3 % $ 11.17 (2)%
 
Corporate cash ($MM) $ 372.9 $ 250.9 49 % $ 430.8 (13)%
 

Enterprise net interest spread (basis points)(9)

230 235 (2)% 228 1 %
Enterprise interest-earning assets, average ($MM) $ 40,812 $ 40,166 2 % $ 44,853 (9)%
 

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

Net Income (loss) $ 47.4 $ (54.4) N.M. $ (28.6) N.M.
Income tax expense 32.5 6.6 N.M. (7.7) N.M.
Depreciation & amortization 27.6 28.9 (4)% 29.3 (6)%
Corporate interest expense   28.6   28.6 0 %   45.5 (37)%
EBITDA 136.1 9.7 N.M. 38.5 N.M.
Impairment of goodwill   -   142.4 N.M.   - N.M.
Adjusted EBITDA $ 136.1 $ 152.1 (11)% $ 38.5 254 %
 

Interest coverage(10)

4.8 0.3 N.M. 0.8 N.M.

Adjusted interest coverage(10)

4.8 5.3 N.M. 0.8 N.M.
 

Bank earnings before taxes and before credit losses ($MM)(11)

$ 161.4 $ 162.4 (1)% $ 145.9 11 %
 

Trading and Investing Metrics

 
Trading days 63.5 64.0 N.M. 62.5 N.M.
 
DARTs 145,150 149,670 (3)% 128,701 13 %
 
Total trades (MM) 9.2 9.6 (4)% 8.0 15 %
Average commission per trade $ 11.15 $ 11.10 0 % $ 11.24 (1)%
 
End of period margin receivables ($B) $ 6.2 $ 6.0 3 % $ 5.6 11 %
Average margin receivables ($B) $ 5.9 $ 5.7 4 % $ 5.6 5 %
 
 
Gross new brokerage accounts 79,923 90,963 (12)% 79,534 0 %
Gross new stock plan accounts 61,614 56,015 10 % 55,539 11 %
Gross new banking accounts 2,406 2,541 (5)% 3,492 (31)%
Closed accounts   (119,123)   (110,369) N.M.   (114,044) N.M.
Net new accounts 24,820 39,150 N.M. 24,521 N.M.
 
Net new brokerage accounts 13,111 29,506 N.M. 18,247 N.M.
Net new stock plan accounts 18,885 18,040 N.M. 14,538 N.M.
Net new banking accounts   (7,176)   (8,396) N.M.   (8,264) N.M.
Net new accounts 24,820 39,150 N.M. 24,521 N.M.
 
End of period brokerage accounts 2,975,842 2,962,731 0 % 2,892,852 3 %
End of period stock plan accounts 1,204,692 1,185,807 2 % 1,118,840 8 %
End of period banking accounts   406,420   413,596 (2)%   437,884 (7)%
End of period total accounts 4,586,954 4,562,134 1 % 4,449,576 3 %
 

Annualized brokerage account attrition rate(12)

9.0% 8.4% N.M. 8.5% N.M.
 

Customer Assets ($B)

Security holdings $ 162.8 $ 150.8 8 % $ 141.2 15 %
Customer payables (cash) 5.8 5.1 14 % 6.0 (3)%

Customer cash balances held by third parties(13)

12.9 11.5 12 % 4.7 174 %
Unexercised stock plan customer options (vested)   33.2   27.2 22 %   23.1 44 %
Customer assets in brokerage and stock plan accounts   214.7   194.6 10 %   175.0 23 %
Sweep deposits 19.5 19.0 3 % 21.9 (11)%
Savings, transaction and other   6.4   6.5 (2)%   7.2 (11)%
Customer assets in banking accounts   25.9   25.5 2 %   29.1 (11)%
Total customer assets $ 240.6 $ 220.1 9 % $ 204.1 18 %
 

Net new brokerage assets ($B)(14)

$ 2.4 $ 1.7 N.M. $ 1.9 N.M.

Net new banking assets ($B)(14)

  (0.1)   (0.4) N.M.   (0.2) N.M.

Net new customer assets ($B)(14)

$ 2.3 $ 1.3 N.M. $ 1.7 N.M.
 
Brokerage related cash ($B) $ 38.2 $ 35.6 7 % $ 32.6 17 %
Other customer cash and deposits ($B)   6.4   6.5 (2)%   7.2 (11)%
Total customer cash and deposits ($B) $ 44.6 $ 42.1 6 % $ 39.8 12 %
 
Unexercised stock plan customer options (unvested) ($B) $ 63.4 $ 52.1 22 % $ 48.4 31 %
 
Customer net (purchase) / sell activity ($B) $ 0.7 $ (0.3) N.M. $ 2.2 N.M.
 

Market Making

Equity shares traded (MM) 86,246 103,003 (16)% 105,282 (18)%
Average revenue capture per 1,000 equity shares $ 0.142 $ 0.202 (30)% $ 0.207 (31)%
% of Bulletin Board equity shares to total equity shares 93.5% 94.0% (1)% 93.5% 0 %
 

Balance Sheet Management Metrics

 

Loans receivable ($MM)

Average loans receivable $ 9,246 $ 9,766 (5)% $ 11,711 (21)%
Ending loans receivable, net $ 8,565 $ 9,106 (6)% $ 10,627 (19)%
 

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

 

One- to Four-Family

Current $ 4,226 $ 4,495 (6)% $ 5,122 (17)%
30-89 days delinquent 197 187 5 % 210 (6)%
90-179 days delinquent   71   76 (7)%   108 (34)%
Total 30-179 days delinquent 268 263 2 % 318 (16)%
180+ days delinquent (net of $111M, $127M and $157M in charge-offs for Q313, Q213 and Q312, respectively)   239   262 (9)%   300 (20)%

Total delinquent loans(15)

  507   525 (3)%   618 (18)%

Gross loans receivable(16)

$ 4,733 $ 5,020 (6)% $ 5,740 (18)%
 

Home Equity

Current $ 3,498 $ 3,689 (5)% $ 4,277 (18)%
30-89 days delinquent 69 70 (1)% 99 (30)%
90-179 days delinquent   38   42 (10)%   65 (42)%
Total 30-179 days delinquent 107 112 (4)% 164 (35)%
180+ days delinquent (net of $23M, $22M and $23M in charge-offs for Q313, Q213 and Q312, respectively)   38   41 (7)%   42 (10)%

Total delinquent loans(15)

  145   153 (5)%   206 (30)%

Gross loans receivable(16)

$ 3,643 $ 3,842 (5)% $ 4,483 (19)%
 

Consumer and Other

Current $ 633 $ 681 (7)% $ 892 (29)%
30-89 days delinquent 12 12 0 % 18 (33)%
90-179 days delinquent   3   2 50 %   3 0 %
Total 30-179 days delinquent 15 14 7 % 21 (29)%
180+ days delinquent   -   - N.M.   - N.M.
Total delinquent loans   15   14 7 %   21 (29)%

Gross loans receivable(16)

$ 648 $ 695 (7)% $ 913 (29)%
 

Total Loans Receivable

Current $ 8,357 $ 8,865 (6)% $ 10,291 (19)%
30-89 days delinquent 278 269 3 % 327 (15)%
90-179 days delinquent   112   120 (7)%   176 (36)%
Total 30-179 days delinquent 390 389 0 % 503 (22)%
180+ days delinquent   277   303 (9)%   342 (19)%

Total delinquent loans(15)

  667   692 (4)%   845 (21)%

Gross loans receivable(16)

$ 9,024 $ 9,557 (6)% $ 11,136 (19)%
 

TDR performance detail ($MM)(17)

 

One- to Four-Family TDRs

Current $ 921 $ 917 0 % $ 849 8 %
30-89 days delinquent 101 108 (6)% 95 6 %
90-179 days delinquent   44   46 (4)%   40 10 %
Total 30-179 days delinquent 145 154 (6)% 135 7 %
180+ days delinquent (net of $68M, $76M and $47M in charge-offs for Q313, Q213 and Q312, respectively)   130   139 (6)%   80 63 %
Total delinquent TDRs   275   293 (6)%   215 28 %
TDRs $ 1,196 $ 1,210 (1)% $ 1,064 12 %
 

Home Equity TDRs

Current $ 210 $ 216 (3)% $ 215 (2)%
30-89 days delinquent 15 13 15 % 18 (17)%
90-179 days delinquent   10   9 11 %   9 11 %
Total 30-179 days delinquent 25 22 14 % 27 (7)%
180+ days delinquent (net of $14M, $14M and $4M in charge-offs for Q313, Q213 and Q312, respectively)   18   21 (14)%   6 200 %
Total delinquent TDRs   43   43 0 %   33 30 %
TDRs $ 253 $ 259 (2)% $ 248 2 %
 

Total TDRs

Current $ 1,131 $ 1,133 0 % $ 1,064 6 %
30-89 days delinquent 116 121 (4)% 113 3 %
90-179 days delinquent   54   55 (2)%   49 10 %
Total 30-179 days delinquent 170 176 (3)% 162 5 %
180+ days delinquent   148   160 (8)%   86 72 %
Total delinquent TDRs   318   336 (5)%   248 28 %
TDRs $ 1,449 $ 1,469 (1)% $ 1,312 10 %
 

Capital Metrics

Qtr ended
9/30/13

Qtr ended
6/30/13

Qtr ended
9/30/13
vs.
6/30/13

Qtr ended
9/30/12

Qtr ended
9/30/13
vs.
9/30/12

 

E*TRADE Bank

Tier 1 leverage ratio(3)

9.5 % 9.5 % 0.0 % 7.9 % 1.6 %

Tier 1 risk-based capital ratio(3)

22.2 %

21.7 %

0.5 %

18.0 % 4.2 %

Total risk-based capital ratio(3)

23.5 % 22.9 % 0.6 % 19.3 % 4.2 %

Tier 1 common ratio(18)

22.2 %

21.7 %

0.5 %

18.0 % 4.2 %

 

E*TRADE Financial

Tier 1 leverage ratio(4)

6.6 % 6.4 % 0.2 % 5.8 % 0.8 %

Tier 1 risk-based capital ratio(4)

15.3 % 14.5 % 0.8 % 13.0 % 2.3 %

Total risk-based capital ratio(4)

16.6 % 15.8 % 0.8 % 14.3 % 2.3 %

Tier 1 common ratio(19)

12.9 % 12.2 % 0.7 % 10.9 % 2.0 %
 
 

Activity in Allowance for Loan Losses
  Three Months Ended September 30, 2013

One- to Four-
Family

  Home Equity  

Consumer
and Other

  Total
(In thousands)
Allowance for loan losses, ending 6/30/13 $ 143,569 $ 279,037 $ 28,340 $ 450,946
Provision for loan losses (23,748 ) 59,927 1,220 37,399
Charge-offs, net   (6,700 )   (19,886 )   (2,838 )   (29,424 )
Allowance for loan losses, ending 9/30/13 $ 113,121   $ 319,078   $ 26,722   $ 458,921  
 
 
Three Months Ended June 30, 2013

One- to Four-
Family

Home Equity

Consumer
and Other

Total
(In thousands)
Allowance for loan losses, ending 3/31/13 $ 161,035 $ 263,126 $ 30,871 $ 455,032
Provision for loan losses (8,212 ) 53,290 1,071 46,149
Charge-offs, net   (9,254 )   (37,379 )   (3,602 )   (50,235 )
Allowance for loan losses, ending 6/30/13 $ 143,569   $ 279,037   $ 28,340   $ 450,946  
 
 
Three Months Ended September 30, 2012

One- to Four-
Family

Home Equity

Consumer
and Other

Total
(In thousands)
Allowance for loan losses, ending 6/30/12 $ 215,934 $ 266,883 $ 42,939 $ 525,756
Provision for loan losses 24,702 105,022 11,295 141,019
Charge-offs, net   (34,236 )   (111,016 )   (13,241 )   (158,493 )
Allowance for loan losses, ending 9/30/12 $ 206,400   $ 260,889   $ 40,993   $ 508,282  
 
 

Specific Valuation Allowance Activity(20)

  As of September 30, 2013

Recorded
Investment in
Modifications
before charge-
offs

  Charge-offs  

Recorded
Investment in
Modifications

 

Specific
Valuation
Allowance

 

Net Investment
in
Modifications

 

Specific
Valuation
Allowance as a
% of
Modifications

 

Total
Expected
Losses(21)

(Dollars in thousands)
One- to four-family $ 1,374,603 $ (319,418 ) $ 1,055,185 $ (67,764 ) $ 987,421 6 % 28 %
Home equity   347,926   (150,036 )   197,890   (67,575 )   130,315 34 % 63 %
Total $ 1,722,529 $ (469,454 ) $ 1,253,075 $ (135,339 ) $ 1,117,736 11 % 35 %
 
As of June 30, 2013

Recorded
Investment in
Modifications
before charge-
offs

Charge-offs

Recorded
Investment in
Modifications

Specific
Valuation
Allowance

Net Investment
in
Modifications

Specific
Valuation
Allowance as a
% of
Modifications

Total
Expected
Losses(21)

(Dollars in thousands)
One- to four-family $ 1,386,364 $ (323,727 ) $ 1,062,637 $ (76,945 ) $ 985,692 7 % 29 %
Home equity   359,447   (153,666 )   205,781   (65,147 )   140,634 32 % 61 %
Total $ 1,745,811 $ (477,393 ) $ 1,268,418 $ (142,092 ) $ 1,126,326 11 % 35 %
 
As of September 30, 2012

Recorded
Investment in
Modifications
before charge-
offs

Charge-offs

Recorded
Investment in
Modifications

Specific
Valuation
Allowance

Net Investment
in
Modifications

Specific
Valuation
Allowance as a
% of
Modifications

Total
Expected
Losses(21)

(Dollars in thousands)
One- to four-family $ 1,374,800 $ (311,122 ) $ 1,063,678 $ (98,628 ) $ 965,050 9 % 30 %
Home equity   405,302   (156,809 )   248,493   (92,702 )   155,791 37 % 62 %
Total $ 1,780,102 $ (467,931 ) $ 1,312,171 $ (191,330 ) $ 1,120,841 15 % 37 %
 
 

Average Enterprise Balance Sheet Data

 
Three Months Ended
September 30, 2013
Average  

Operating
Interest

  Average
Balance Inc./Exp. Yield/Cost
Enterprise interest-earning assets: (In thousands)

Loans(22)

$ 9,288,330 $ 96,365 4.15 %
Available-for-sale securities 13,011,124 68,764 2.11 %
Held-to-maturity securities 9,853,077 64,486 2.62 %
Margin receivables 5,938,256 56,073 3.75 %
Cash and equivalents 1,543,689 766 0.20 %
Segregated cash 516,756 114 0.09 %
Securities borrowed and other   661,039     11,793   7.08 %
Total enterprise interest-earning assets $ 40,812,271     298,361   2.92 %
Enterprise interest-bearing liabilities:
Deposits $ 25,804,278 3,306 0.05 %
Customer payables 5,547,910 2,053 0.15 %
Securities sold under agreements to repurchase 4,445,606 37,431 3.29 %
FHLB advances and other borrowings 1,291,738 17,152 5.20 %
Securities loaned and other   874,193     33   0.01 %
Total enterprise interest-bearing liabilities $ 37,963,725     59,975   0.62 %

Enterprise net interest income/spread(9)

$ 238,386   2.30 %
 
Three Months Ended
June 30, 2013
Average

Operating
Interest

Average
Balance Inc./Exp. Yield/Cost
Enterprise interest-earning assets: (In thousands)

Loans(22)

$ 9,810,788 $ 102,188 4.17 %
Available-for-sale securities 12,399,516 66,808 2.16 %
Held-to-maturity securities 9,769,854 61,264 2.51 %
Margin receivables 5,674,983 53,939 3.81 %
Cash and equivalents 1,364,796 718 0.21 %
Segregated cash 467,944 118 0.10 %
Securities borrowed and other   678,591     13,456   7.95 %
Total enterprise interest-earning assets $ 40,166,472     298,491   2.97 %
Enterprise interest-bearing liabilities:
Deposits $ 25,598,389 3,221 0.05 %
Customer payables 5,292,674 1,842 0.14 %
Securities sold under agreements to repurchase 4,464,506 37,010 3.28 %
FHLB advances and other borrowings 1,287,348 17,101 5.26 %
Securities loaned and other   856,421     34   0.02 %
Total enterprise interest-bearing liabilities $ 37,499,338     59,208   0.62 %

Enterprise net interest income/spread(9)

$ 239,283   2.35 %
 
Three Months Ended
September 30, 2012
Average

Operating
Interest

Average
Balance Inc./Exp. Yield/Cost
Enterprise interest-earning assets: (In thousands)

Loans(22)

$ 11,727,325 $ 118,747 4.05 %
Available-for-sale securities 14,992,705 82,959 2.21 %
Held-to-maturity securities 8,984,586 61,923 2.76 %
Margin receivables 5,604,036 55,465 3.94 %
Cash and equivalents 2,268,833 1,219 0.21 %
Segregated cash 693,057 115 0.07 %
Securities borrowed and other   582,746     11,897   8.12 %
Total enterprise interest-earning assets $ 44,853,288     332,325   2.96 %
Enterprise interest-bearing liabilities:
Deposits $ 28,631,403 5,885 0.08 %
Customer payables 5,646,155 2,839 0.20 %
Securities sold under agreements to repurchase 4,709,203 40,136 3.34 %
FHLB advances and other borrowings 2,622,282 24,153 3.60 %
Securities loaned and other   705,235     30   0.02 %
Total enterprise interest-bearing liabilities $ 42,314,278     73,043   0.68 %

Enterprise net interest income/spread(9)

$ 259,282   2.28 %
 

Reconciliation from Enterprise Net Interest Income to Net Operating Interest Income

Three Months Ended
September 30, June 30, September 30,
  2013     2013     2012  
(In thousands)
Enterprise net interest income $ 238,386 $ 239,283 $ 259,282

Taxable equivalent interest adjustment(23)

(294 ) (254 ) (298 )

Earnings on customer cash held by third parties and other(24)

  2,755     3,512     1,893  
Net operating interest income $ 240,847   $ 242,541   $ 260,877  
 
 

Explanation of Non-GAAP Measures and Certain Metrics

Management believes that tangible book value per share, corporate cash, EBITDA, adjusted EBITDA, interest coverage, adjusted 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.

Adjusted EBITDA

Adjusted EBITDA represents net income (loss) before taxes, depreciation and amortization, corporate interest expense and impairment of goodwill. Management believes that adjusted EBITDA provides a useful additional measure of the Company's performance by excluding certain non-cash charges and expenses, including impairment of goodwill, 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.

Adjusted Interest Coverage

Adjusted interest coverage represents adjusted EBITDA divided by corporate interest expense. Management believes that by excluding the charges and expenses, including impairment of goodwill, that are excluded from adjusted EBITDA, adjusted 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 wholesale borrowings. 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 (4), (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 $75 million sale price is based on the tangible capital in G1 Execution Services as of September 30, 2013 as well as $27 million of additional purchase price. The amount of tangible capital in the business could change through the closing of a sale which could impact the final sales price.

(2) The following table provides reconciliation for the operating expense, excluding one-time items related to impairment of goodwill and restructuring and severance costs (dollars in millions):

     

Q3 2013

Q2 2013

Total operating expense $ 271 $ 414
Add back:
Impairment of goodwill related to the market making business - 142
Facility restructuring and severance expense   6   10
Adjusted total operating expense $ 265 $ 262
 

(3) The Tier 1 leverage, Tier 1 risk-based capital and total risk-based capital ratios at E*TRADE Bank are Q313 estimates and calculated as follows (dollars in millions):

    Q3 2013   Q2 2013   Q3 2012
E*TRADE Bank shareholder's equity $ 5,752.9 $ 5,749.5 $ 5,676.0
DEDUCT:
Losses in OCI on AFS debt securities and cash flow hedges, net of tax (426.2 ) (444.7 ) (307.4 )
Goodwill & other intangible assets, net of deferred tax liabilities   1,546.8       1,568.6       1,607.4  
Subtotal 4,632.3 4,625.6 4,376.0
DEDUCT:
Disallowed servicing assets and deferred tax assets   619.2     653.7     735.1  
E*TRADE Bank Tier 1 capital   4,013.1       3,971.9       3,640.9  
ADD:
Allowable allowance for loan losses   229.5       232.4       256.9  
E*TRADE Bank total capital $ 4,242.6     $ 4,204.3     $ 3,897.8  
 
E*TRADE Bank total assets $ 44,395.2 $ 43,951.6 $ 48,752.5
DEDUCT:
Gains (losses) in OCI on AFS debt securities and cash flow asset hedges, net of tax (106.8 ) (112.4 ) 140.2
Goodwill & other intangible assets, net of deferred tax liabilities   1,546.8       1,568.6       1,607.4  
Subtotal 42,955.2 42,495.4 47,004.9
DEDUCT:
Disallowed servicing assets and deferred tax assets   619.2       653.7       735.1  
E*TRADE Bank total assets for leverage capital purposes $ 42,336.0     $ 41,841.7     $ 46,269.8  
 
E*TRADE Bank total risk-weighted assets(a) $ 18,075.0 $ 18,320.2 $ 20,211.2
 
E*TRADE Bank Tier 1 leverage ratio (Tier 1 capital / Average total assets for leverage capital purposes) 9.5 % 9.5 % 7.9 %
E*TRADE Bank Tier 1 capital / Total risk-weighted assets 22.2 % 21.7 % 18.0 %
E*TRADE Bank total capital / Total risk-weighted assets 23.5 % 22.9 % 19.3 %

(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.

(4) The Tier 1 leverage, Tier 1 risk-based capital and total risk-based capital ratios at E*TRADE Financial are Q313 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 in 2015 as a result of the Dodd-Frank Act. Management believes these ratios are an important measure of the Company's capital strength and accordingly manages capital against the current capital ratios that apply to bank holding companies in preparation for the application of these requirements. The Tier 1 leverage, Tier 1 risk-based capital and total risk-based capital ratios are calculated as follows (dollars in millions):

  Q3 2013   Q2 2013   Q3 2012
E*TRADE Financial shareholders' equity $ 4,829.6   $ 4,760.6   $ 5,093.9
DEDUCT:
Losses in OCI on AFS debt securities and cash flow hedges, net of tax (426.2 ) (444.7 ) (307.6 )
Goodwill & other intangible assets, net of deferred tax liabilities 1,681.4 1,703.2 1,897.6
ADD:
Qualifying restricted core capital elements (TRUPs)(a)   433.0       433.0       433.0  
Subtotal 4,007.4 3,935.1 3,936.9
DEDUCT:
Disallowed servicing assets and deferred tax assets   1,223.6       1,252.8       1,259.1  
E*TRADE Financial Tier 1 capital   2,783.8       2,682.3       2,677.8  
ADD:
Allowable allowance for loan losses   230.9       234.5       261.6  
E*TRADE Financial total capital $ 3,014.7     $ 2,916.8     $ 2,939.4  
 
E*TRADE Financial total average assets $ 45,123.9 $ 44,917.8 $ 49,400.8
DEDUCT:
Goodwill & other intangible assets, net of deferred tax liabilities   1,681.4       1,703.2       1,897.6  
Subtotal 43,442.5 43,214.6 47,503.2
DEDUCT:
Disallowed servicing assets and deferred tax assets   1,223.6       1,252.8       1,259.1  
Average total assets for leverage capital purposes $ 42,218.9     $ 41,961.8     $ 46,244.1  
 
E*TRADE Financial total risk-weighted assets(b) $ 18,199.6 $ 18,502.1 $ 20,614.9
 
E*TRADE Financial Tier 1 leverage ratio (Tier 1 capital / Average total assets for leverage capital purposes) 6.6 % 6.4 % 5.8 %
E*TRADE Financial Tier 1 capital / Total risk-weighted assets 15.3 % 14.5 % 13.0 %
E*TRADE Financial total capital / Total risk-weighted assets 16.6 % 15.8 % 14.3 %

(a) The Company is continuing to include TRUPs in E*TRADE Financial's Tier 1 capital due to the regulatory agencies announcement of a delay in the implementation of the TRUPs phase-out.

(b) 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.

(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 millions, except per share amounts):

  Q3 2013   Q2 2013   Q3 2012
Book value $ 4,829.6   $ 4,760.6   $ 5,093.9
Less: Goodwill and other intangibles, net (2,013.4 ) (2,019.1 ) (2,201.2 )
Less: Deferred tax liability related to goodwill   332.0       316.0       303.6  
Tangible book value $ 3,148.2     $ 3,057.5     $ 3,196.3  
 
  Q3 2013   Q2 2013   Q3 2012
Book value per share $ 16.82   $ 16.59   $ 17.81
Less: Goodwill and other intangibles, net per share (7.01 ) (7.03 ) (7.70 )
Less: Deferred tax liability related to goodwill per share   1.15       1.10       1.06  
Tangible book value per share $ 10.96     $ 10.66     $ 11.17  

(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. Adjusted interest coverage represents the ratio of the Company's adjusted EBITDA to its corporate interest expense. The interest coverage ratio based on the Company's net income (loss) was 1.7, (1.9), and (0.6) for the three months ended September 30, 2013, June 30, 2013, and September 30, 2012, 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 wholesale borrowings. 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 (loss) before income taxes (dollars in millions):

  Q3 2013   Q2 2013   Q3 2012
Income (loss) before income taxes $ 79.9   $ (47.8 )   $ (36.3 )
Add back:
Non-bank loss before income tax benefit(b) 55.7 184.5 67.2
Provision for loan losses 37.4 46.1 141.0
Gains on loans and securities, net (12.2 ) (21.0 ) (79.0 )
Net impairment 0.6 0.6 2.4
Losses on early extinguishment of wholesale borrowings   -       -       50.6  
Bank earnings before taxes and before credit losses $ 161.4     $ 162.4     $ 145.9  

(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) Customer cash balances held by third parties are held outside E*TRADE Financial and include money market funds and sweep deposit accounts at unaffiliated financial institutions. Customer cash balances held by third parties are not reflected in the Company's consolidated balance sheet.

(14) 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.

(15) 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):

  Q3 2013   Q2 2013   Q3 2012
One- to four-family $ 424   $ 439   $ 463
Home equity   286     293     310
Total charge-offs $ 710   $ 732   $ 773

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

(17) The TDR loan performance detail is a subset of the Company's total loan performance. TDRs include loan modifications performed under the Company's modification programs. Beginning in Q412, loans that had been charged-off due to bankruptcy notification were also considered TDRs.

(18) The Tier 1 common ratio at E*TRADE Bank is a Q313 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 millions):

    Q3 2013   Q2 2013   Q3 2012
E*TRADE Bank shareholder's equity $ 5,752.9   $ 5,749.5   $ 5,676.0
DEDUCT:
Losses in OCI on AFS debt securities and cash flow hedges, net of tax (426.2 ) (444.7 ) (307.4 )
Goodwill and other intangible assets, net of deferred tax liabilities   1,546.8       1,568.6       1,607.4  

Subtotal

4,632.3 4,625.6 4,376.0
DEDUCT:
Disallowed servicing assets and deferred tax assets   619.2       653.7       735.1  
E*TRADE Bank Tier 1 common $ 4,013.1     $ 3,971.9     $ 3,640.9  
 
E*TRADE Bank total risk-weighted assets(a) $ 18,075.0 $ 18,320.2 $ 20,211.2
 
E*TRADE Bank Tier 1 common / Total risk-weighted assets 22.2 % 21.7 % 18.0 %

(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.

(19) The Tier 1 common ratio at E*TRADE Financial is a Q313 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 millions):

  Q3 2013   Q2 2013   Q3 2012
E*TRADE Financial shareholders' equity $ 4,829.6   $ 4,760.6   $ 5,093.9
DEDUCT:
Losses in OCI on AFS debt securities and cash flow hedges, net of tax (426.2 ) (444.7 ) (307.6 )
Goodwill & other intangible assets, net of deferred tax liabilities   1,681.4       1,703.2       1,897.6  
Subtotal 3,574.4 3,502.1 3,503.9
DEDUCT:
Disallowed servicing assets and deferred tax assets   1,223.6       1,252.8       1,259.1  
E*TRADE Financial Tier 1 common $ 2,350.8     $ 2,249.3     $ 2,244.8  
 
E*TRADE Financial total risk-weighted assets(a) $ 18,199.6 $ 18,502.1 $ 20,614.9
 
E*TRADE Financial Tier 1 common / Total risk-weighted assets 12.9 % 12.2 % 10.9 %

(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) Modifications are a subset of TDRs, and represent loan modifications performed under the Company's modification programs. They do not include loans that have been charged-off due to the Company receiving notification of bankruptcy if the loan has not been modified previously by the Company. The following table shows the reconciliation of total TDRs that had a modification and those which the Company received a notification of bankruptcy (dollars in millions):

  Q3 2013   Q2 2013   Q3 2012
Modified loans $ 1,253   $ 1,268   $ 1,312
Bankruptcy loans   196     201     -
Total TDRs $ 1,449   $ 1,469   $ 1,312
 
 

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

(22) Excludes loans to customers on margin.

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

(24) Includes interest earned on average customer assets of $12.0 billion, $11.2 billion, and $3.9 billion for the quarters ended September 30, 2013, June 30, 2013, and September 30, 2012, respectively, held by third parties outside E*TRADE Financial, including money market funds and sweep deposit accounts at unaffiliated financial institutions.

E*TRADE Financial Media Relations
Thayer Fox, 646-521-4418
thayer.fox@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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