E*TRADE Financial Corporation Announces Fourth Quarter and Full Year 2012 Results

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

Fourth Quarter Results

  • Net loss of $186 million, or $0.65 loss per share on total net revenue of $468 million
  • Gain on securities revenue of $62 million, including gains related to securities sold to reduce asset balances as a result of the reduction of approximately $1 billion in wholesale funding obligations, which resulted in a loss of $28 million included in loss on early extinguishment of debt
  • Provision for loan losses of $74 million
  • Refinance of $1.3 billion of corporate debt, which resulted in a $257 million loss on early extinguishment of debt
  • Balance sheet contraction of $3.0 billion, primarily driven by approximately $3.6 billion in deleveraging and $0.5 billion of customer net buying
  • Daily Average Revenue Trades (DARTs) of 128,000
  • Net new brokerage accounts of 10,000
  • Net new brokerage assets of $2.3 billion; end of period customer assets of $201 billion

Full Year 2012 Performance

  • Net loss of $113 million, or $0.39 loss per share
  • Total net revenue of $1.9 billion
  • Provision for loan losses of $355 million
  • DARTs of 138,000
  • Net new brokerage accounts of 120,000
  • Net new brokerage assets of $10.4 billion

E*TRADE Financial Corporation (NASDAQ: ETFC) today announced results for its fourth quarter ended December 31, 2012, reporting a net loss of $186 million, or $0.65 loss per share. This compares with a net loss of $29 million, or $0.10 loss per share in the prior quarter, and a net loss of $6 million, or $0.02 loss per share in the fourth quarter of 2011. The Company reported total net revenue of $468 million for the fourth quarter of 2012, compared with $490 million in the prior quarter and $475 million in the fourth quarter of 2011.

During the quarter, the Company’s income tax benefit included approximately $38 million of expense related primarily to a recent change to the California tax code and its impact on certain state deferred tax assets.

“While 2012 was characterized by a retrenchment of the retail investor, our brokerage business remained resilient,” said Matthew Audette, CFO. “Our net new assets and accounts surpassed 2011 levels as we continued to grow the franchise and made solid early progress in the retirement and investing segment. Additionally, we strengthened the financial position of the firm by executing on several elements of our long-term Strategic and Capital Plan. We deleveraged our balance sheet, improved our Bank capital ratios, refinanced $1.3 billion in expensive corporate debt and identified over $100 million of cost reductions. We look forward to building on this momentum during 2013.”

On January 17, E*TRADE’s Board of Directors announced the appointment of Paul Idzik as Chief Executive Officer, effective January 22.

“E*TRADE has built a lasting and iconic brand trusted by traders and investors alike, allowing the brokerage franchise to strengthen in the midst of a difficult economic environment,” said Paul Idzik, CEO. “I am enthusiastic about this opportunity and look forward to leading this company during its next phase of growth.”

E*TRADE reported DARTs of 128,000 during the quarter, a decrease of one percent from the prior quarter and a decrease of nine percent versus the same quarter a year ago. DARTs for the full year were 138,000, down from 157,000 in 2011.

At quarter end, the Company reported 4.5 million customer accounts, which included 2.9 million brokerage accounts. Net new brokerage accounts were 10,000 during the quarter compared with 18,000 in the prior quarter and 10,000 in the fourth quarter of 2011. For the full year, net new brokerage accounts totaled 120,000, compared with 99,000 in 2011.

The Company ended the quarter with $201 billion in total customer assets, compared with $204 billion at the end of the third quarter and $172 billion at the end of 2011.

During the quarter, customers added $2.3 billion in net new brokerage assets, totaling $10.4 billion for the full year. Brokerage related cash increased by $1.3 billion to $33.9 billion during the period, while customers were net buyers of approximately $0.5 billion of securities. Margin receivables averaged $5.8 billion in the quarter, up four percent sequentially and up 18 percent year over year.

Net operating interest income for the fourth quarter was $260 million, down from $261 million in the prior quarter and $289 million a year ago. Fourth quarter results reflected a net interest spread of 2.38 percent on average interest-earning assets of $42.9 billion, compared with a net interest spread of 2.28 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 fourth quarter were $151 million, compared with $153 million in the prior quarter and $156 million in the fourth quarter of 2011. Average commission per trade for the quarter was $11.10, compared to $11.24 in the prior quarter, and $10.80 in the fourth quarter of 2011.

Total operating expenses for the quarter decreased $4 million sequentially to $285 million. For the year, operating expenses were $1.2 billion.

In December, the Company completed a refinance of its 12.50% Springing Lien Notes due 2017 and its 7.875% Senior Notes due 2015, using the net proceeds from a $1.305 billion issuance of new Senior Notes. The new Senior Notes were issued in two tranches - $505 million of 6.0% notes due 2017, and $800 million of 6.375% notes due 2019. The transaction, which resulted in a pre-tax loss of $257 million on early extinguishment of debt, lowered the Company’s annual debt servicing costs by approximately $70 million on a pre-tax basis.

Total assets ended the quarter at $47.4 billion, decreasing $3.0 billion from the prior quarter, as the Company completed deleveraging actions of approximately $3.6 billion. Deleveraging included approximately $2.6 billion in brokerage-related customer cash directed to third party institutions, consisting of $1.2 billion in sweep deposits; $0.9 billion in customer payables; and $0.5 billion from newly-opened accounts. Additionally, approximately $1 billion in wholesale funding obligations were reduced in the quarter, resulting in a pre-tax loss of $28 million on early extinguishment of debt. The corresponding reduction to assets resulted in a gain on sale of securities, included in the $62 million of total net gains recorded during the quarter.

The Company’s loan portfolio ended the quarter at $10.6 billion, contracting $557 million from the prior quarter and a reduction of $2.6 billion from the year ago quarter, primarily related to $455 million and $1.9 billion of paydowns for the respective periods. Fourth quarter provision for loan losses decreased from $141 million in the prior quarter to $74 million.

Net charge-offs in the quarter were $102 million, a decrease of $57 million from the prior quarter. The allowance for loan losses at quarter-end was $481 million, down $28 million from the previous quarter.

For the Company’s entire loan portfolio, special mention delinquencies increased five percent sequentially, and total at-risk delinquencies increased one percent versus the third quarter. As compared to the year-ago period, special mention delinquencies declined 27 percent and total at-risk delinquencies declined 28 percent.

As of December 31, 2012, the Company reported consolidated Tier 1 leverage and risk-based ratios(1) of 5.5 percent and 13.7 percent, respectively; down from 5.8 percent and 14.3 percent in the prior period. The Company’s consolidated Tier 1 common ratio(2) ended the quarter at 10.3 percent, down from 10.9 percent in the prior period. E*TRADE Bank ended the quarter with Tier 1 leverage(3) and total risk-based capital ratios of 8.7 percent and 20.6 percent, up from 7.9 percent and 19.3 percent, respectively, at the end of the prior 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. EST today. This conference call will be available to domestic participants by dialing 800-709-0218 and international participants by dialing 212-231-2910. 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, including statements regarding our growth in net new assets and accounts, progress in the retirement and investing segment, strengthening the financial position of the firm, deleveraging of the balance sheet, capital ratio improvement and cost saves, 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, 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. 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
(In thousands, except per share amounts)
(Unaudited)
               
 
Three Months Ended Twelve Months Ended
December 31, December 31,
  2012     2011     2012     2011  
 
Revenue:
Operating interest income $ 320,340 $ 366,519 $ 1,371,098 $ 1,532,339
Operating interest expense   (60,109 )   (77,261 )   (286,033 )   (312,380 )
Net operating interest income   260,231     289,258     1,085,065     1,219,959  
Commissions 86,675 94,553 377,843 436,243
Fees and service charges 30,194 27,153 122,170 130,452
Principal transactions 25,594 24,682 93,156 105,359
Gains on loans and securities, net 61,798 32,547 200,366 120,233
Net impairment (5,729 ) (2,765 ) (16,925 ) (14,907 )
Other revenues   8,893     9,582     37,821     39,260  
Total non-interest income   207,425     185,752     814,431     816,640  
Total net revenue   467,656     475,010     1,899,496     2,036,599  
Provision for loan losses 74,410 123,036 354,637 440,614
Operating expense:
Compensation and benefits 80,108 88,673 352,725 333,646
Clearing and servicing 30,387 33,957 128,635 147,052
Advertising and market development 29,295 36,530 139,451 145,172
FDIC insurance premiums 30,341 25,154 117,240 105,442
Professional services 25,631 24,940 86,321 89,672
Occupancy and equipment 18,825 17,842 74,346 68,840
Communications 18,016 17,623 73,054 67,335
Depreciation and amortization 22,229 21,939 90,616 89,583
Amortization of other intangibles 6,296 6,538 25,183 26,151
Facility restructuring and other exit activities 4,174 1,650 7,689 7,706
Other operating expenses   20,056     29,414     66,825     154,305  
Total operating expense   285,358     304,260     1,162,085     1,234,904  
Income before other income (expense) and income tax expense (benefit) 107,888 47,714 382,774 361,081
Other income (expense):
Corporate interest income 35 13 90 702
Corporate interest expense (43,984 ) (44,959 ) (179,877 ) (177,829 )
Gains on sales of investments, net 1 6 18 44
Gains (losses) on early extinguishment of debt (284,653 ) - (335,261 ) 3,091
Equity in income (loss) of investments and venture funds   (482 )   (1,956 )   1,292     (1,759 )
Total other income (expense)   (329,083 )   (46,896 )   (513,738 )   (175,751 )
Income (loss) before income tax expense (benefit) (221,195 ) 818 (130,964 ) 185,330
Income tax expense (benefit)   (35,136 )   7,164     (18,381 )   28,629  
Net income (loss) $ (186,059 ) $ (6,346 ) $ (112,583 ) $ 156,701  
 
Basic earnings (loss) per share $ (0.65 ) $ (0.02 ) $ (0.39 ) $ 0.59
Diluted earnings (loss) per share $ (0.65 ) $ (0.02 ) $ (0.39 ) $ 0.54
Shares used in computation of per share data:
Basic 286,016 285,153 285,748 267,291
Diluted 286,016 285,153 285,748 289,822
 
 

E*TRADE FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statement of Income
(In thousands, except per share amounts)
(Unaudited)
             
 
Three Months Ended
December 31, September 30, December 31,
  2012     2012     2011  
Revenue:
Operating interest income $ 320,340 $ 333,977 $ 366,519
Operating interest expense   (60,109 )   (73,100 )   (77,261 )
Net operating interest income   260,231     260,877     289,258  
Commissions 86,675 90,424 94,553
Fees and service charges 30,194 30,915 27,153
Principal transactions 25,594 22,177 24,682
Gains on loans and securities, net 61,798 78,977 32,547
Net impairment (5,729 ) (2,395 ) (2,765 )
Other revenues   8,893     9,060     9,582  
Total non-interest income   207,425     229,158     185,752  
Total net revenue   467,656     490,035     475,010  
Provision for loan losses 74,410 141,019 123,036
Operating expense:
Compensation and benefits 80,108 94,790 88,673
Clearing and servicing 30,387 30,856 33,957
Advertising and market development 29,295 26,001 36,530
FDIC insurance premiums 30,341 31,342 25,154
Professional services 25,631 20,421 24,940
Occupancy and equipment 18,825 19,423 17,842
Communications 18,016 17,560 17,623
Depreciation and amortization 22,229 23,044 21,939
Amortization of other intangibles 6,296 6,296 6,538
Facility restructuring and other exit activities 4,174 2,350 1,650
Other operating expenses   20,056     16,950     29,414  
Total operating expense   285,358     289,033     304,260  
Income before other income (expense) and income tax expense (benefit) 107,888 59,983 47,714
Other income (expense):
Corporate interest income 35 21 13
Corporate interest expense (43,984 ) (45,483 ) (44,959 )
Gains on sales of investments, net 1 18 6
Losses on early extinguishment of debt (284,653 ) (50,608 ) -
Equity in loss of investments and venture funds   (482 )   (234 )   (1,956 )
Total other income (expense)   (329,083 )   (96,286 )   (46,896 )
Income (loss) before income tax expense (benefit) (221,195 ) (36,303 ) 818
Income tax expense (benefit)   (35,136 )   (7,678 )   7,164  
Net loss $ (186,059 ) $ (28,625 ) $ (6,346 )
 
Basic loss per share $ (0.65 ) $ (0.10 ) $ (0.02 )
Diluted loss per share $ (0.65 ) $ (0.10 ) $ (0.02 )
Shares used in computation of per share data:
Basic 286,016 285,850 285,153
Diluted 286,016 285,850 285,153
 
 

E*TRADE FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheet
(In thousands, except share data)
(Unaudited)
           
 
December 31, September 30, December 31,
  2012     2012     2011  
ASSETS
Cash and equivalents $ 2,761,494 $ 2,825,012 $ 2,099,839
Cash required to be segregated under federal or other regulations 376,898 1,434,330 1,275,587
Trading securities 101,270 107,378 54,372
Available-for-sale securities 13,443,020 14,925,459 15,651,493
Held-to-maturity securities 9,539,948 9,684,568 6,079,512
Margin receivables 5,804,041 5,608,253 4,826,256
Loans receivable, net 10,098,723 10,627,434 12,332,807
Investment in FHLB stock 67,400 128,944 140,183
Property and equipment, net 288,170 294,517 299,693
Goodwill 1,934,232 1,934,232 1,934,232
Other intangibles, net 260,622 266,918 285,805
Other assets   2,710,921         2,518,560         2,960,673  
Total assets $ 47,386,739       $ 50,355,605       $ 47,940,452  
 
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits $ 28,392,552 $ 29,127,826 $ 26,459,985
Securities sold under agreements to repurchase 4,454,661 4,609,117 5,015,499
Customer payables 4,964,922 6,013,640 5,590,858
FHLB advances and other borrowings 1,260,916 2,325,846 2,736,935
Corporate debt 1,764,982 1,505,466 1,493,552
Other liabilities   1,644,236         1,679,856         1,715,673  
Total liabilities   42,482,269         45,261,751         43,012,502  
 
Shareholders' equity:
Common stock, $0.01 par value, shares authorized: 400,000,000 at
December 31, 2012, September 30, 2012 and December 31, 2011, shares issued
and outstanding: 286,114,334 at December 31, 2012, 286,056,306 at September 30, 2012
and 285,368,075 at December 31, 2011 2,861 2,861 2,854
Additional paid-in-capital 7,319,257 7,316,057 7,306,862
Accumulated deficit (2,107,720 ) (1,921,661 ) (1,995,137 )
Accumulated other comprehensive loss   (309,928 )       (303,403 )       (386,629 )
Total shareholders' equity   4,904,470         5,093,854         4,927,950  
Total liabilities and shareholders' equity $ 47,386,739       $ 50,355,605       $ 47,940,452  
 
 

 

                   

Segment Reporting

Three Months Ended December 31, 2012

Trading and
Investing

 

Balance Sheet
Management

 

Corporate/
Other

  Eliminations(4)   Total
(In thousands)
Revenue:
Operating interest income $ 153,296 $ 249,634 $ - $ (82,590 ) $ 320,340
Operating interest expense   (5,282 )   (137,417 )   -     82,590     (60,109 )
Net operating interest income   148,014     112,217     -     -     260,231  
Commissions 86,675 - - - 86,675
Fees and service charges 29,727 467 - - 30,194
Principal transactions 25,594 - - - 25,594
Gains (losses) on loans and securities, net (12 ) 61,993 (183 ) - 61,798
Net impairment - (5,729 ) - - (5,729 )
Other revenues   7,676     1,217     -     -     8,893  
Total non-interest income   149,660     57,948     (183 )   -     207,425  
Total net revenue   297,674     170,165     (183 )   -     467,656  
Provision for loan losses - 74,410 - - 74,410
Operating expense:
Compensation and benefits 58,958 3,303 17,847 - 80,108
Clearing and servicing 16,575 13,812 - - 30,387
Advertising and market development 29,293 2 - - 29,295
FDIC insurance premiums - 30,341 - - 30,341
Professional services 16,010 174 9,447 - 25,631
Occupancy and equipment 16,669 425 1,731 - 18,825
Communications 17,208 336 472 - 18,016
Depreciation and amortization 17,987 169 4,073 - 22,229
Amortization of other intangibles 6,296 - - - 6,296
Facility restructuring and other exit activities - - 4,174 - 4,174
Other operating expenses   10,085     3,636     6,335     -     20,056  
Total operating expense   189,081     52,198     44,079     -     285,358  
Segment income (loss) before other income (expense)   108,593     43,557     (44,262 )   -     107,888  
Other income (expense):
Corporate interest income - - 35 - 35
Corporate interest expense - - (43,984 ) - (43,984 )
Gains on sale of investments, net - - 1 - 1
Losses on early extinguishment of debt - - (284,653 ) - (284,653 )
Equity in loss of investments and venture funds   -     -     (482 )   -     (482 )
Total other income (expense)   -     -     (329,083 )   -     (329,083 )
Segment income (loss) $ 108,593   $ 43,557   $ (373,345 ) $ -   $ (221,195 )
 
 
 
 
 
Three Months Ended September 30, 2012

Trading and
Investing

 

Balance Sheet
Management

 

Corporate/
Other

  Eliminations(4)   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
Clearing and servicing 17,409 13,447 - - 30,856
Advertising and market development 26,000 1 - - 26,001
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 )
Gains on sale of investments, net - - 18 - 18
Losses on early extinguishment of debt - - (50,608 ) - (50,608 )
Equity in loss of investments and venture funds   -     -     (234 )   -     (234 )
Total other income (expense)   -     -     (96,286 )   -     (96,286 )
Segment income (loss) $ 127,004   $ (11,649 ) $ (151,658 ) $ -   $ (36,303 )
 
 
Three Months Ended December 31, 2011

Trading and
Investing

 

Balance Sheet
Management

 

Corporate/
Other

  Eliminations(4) Total
(In thousands)
Revenue:

 

Operating interest income $ 190,804 $ 300,227 $ 5 $ (124,517 ) $ 366,519
Operating interest expense   (10,893 )   (190,885 )   -     124,517     (77,261 )
Net operating interest income   179,911     109,342     5     -     289,258  
Commissions 94,553 - - - 94,553
Fees and service charges 26,783 370 - - 27,153
Principal transactions 24,682 - - - 24,682
Gains (losses) on loans and securities, net 340 32,275 (68 ) - 32,547
Net impairment - (2,765 ) - - (2,765 )
Other revenues   7,783     1,799     -     -     9,582  
Total non-interest income   154,141     31,679     (68 )   -     185,752  
Total net revenue   334,052     141,021     (63 )   -     475,010  
Provision for loan losses - 123,036 - - 123,036
Operating expense:
Compensation and benefits 66,412 4,221 18,040 - 88,673
Clearing and servicing 16,175 17,782 - - 33,957
Advertising and market development 36,492 38 - - 36,530
FDIC insurance premiums - 25,154 - - 25,154
Professional services 14,120 729 10,091 - 24,940
Occupancy and equipment 16,725 572 545 - 17,842
Communications 16,853 369 401 - 17,623
Depreciation and amortization 17,468 193 4,278 - 21,939
Amortization of other intangibles 6,538 - - - 6,538
Facility restructuring and other exit activities - - 1,650 - 1,650
Other operating expenses   2,096     11,211     16,107     -     29,414  
Total operating expense   192,879     60,269     51,112     -     304,260  
Segment income (loss) before other income (expense)   141,173     (42,284 )   (51,175 )   -     47,714  
Other income (expense):
Corporate interest income - - 13 - 13
Corporate interest expense - - (44,959 ) - (44,959 )
Gains on sales of investments, net - - 6 - 6
Equity in loss of investments and venture funds   -     -     (1,956 )   -     (1,956 )
Total other income (expense)   -     -     (46,896 )   -     (46,896 )
Segment income (loss) $ 141,173   $ (42,284 ) $ (98,071 ) $ -   $ 818  
 
 

 

                   

Key Performance Metrics(5)

 

Corporate Metrics

Qtr ended
12/31/12

 

Qtr ended
9/30/12

 

Qtr ended
12/31/12
vs.
9/30/12

 

Qtr ended
12/31/11

 

 

Qtr ended
12/31/12
vs.
12/31/11

 

Operating margin %(6)

Consolidated 23 % 12 % 11 % 10 % 13 %
Trading and Investing 36 % 41 % (5)% 42 % (6)%
Balance Sheet Management 26 % N.M. N.M. N.M. N.M.
 
Employees 2,988 3,086 (3)% 3,240 (8)%
Consultants and other   100   100 0 %   167 (40)%
Total headcount 3,088 3,186 (3)% 3,407 (9)%
 
Book value per share $ 17.14 $ 17.81 (4)% $ 17.27 (1)%
Tangible book value per share(7) $ 10.50 $ 11.17 (6)% $ 10.44 1 %
 
Corporate cash ($MM) $ 407.6 $ 430.8 (5)% $ 484.4 (16)%
 
Enterprise net interest spread (basis points)(8) 238 228 4 % 266 (11)%
Enterprise interest-earning assets, average ($MM) $ 42,882 $ 44,853 (4)% $ 42,565 1 %
 

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

Net loss $ (186.1) $ (28.6) N.M. $ (6.3) N.M.
Income tax expense (benefit) (35.1) (7.7) N.M. 7.2 N.M.
Depreciation & amortization 28.5 29.3 (3)% 28.4 0 %
Corporate interest expense   44.0   45.5 (3)%   45.0 (2)%
EBITDA $ (148.7) $ 38.5 N.M. $ 74.3 N.M.

 

Interest coverage(9) (3.4) 0.8 N.M. 1.7 N.M.
 
Bank earnings before taxes and before credit losses ($MM)(10) $ 137.6 $ 145.9 (6)% $ 174.9 (21)%
 

Trading and Investing Metrics

 
Trading days 61.0 62.5 N.M. 62.5 N.M.
 
DARTs 128,009 128,701 (1)% 140,059 (9)%
 
Total trades (MM) 7.8 8.0 (3)% 8.8 (11)%
Average commission per trade $ 11.10 $ 11.24 (1)% $ 10.80 3 %
 
End of period margin receivables ($B) $ 5.8 $ 5.6 4 % $ 4.8 21 %
Average margin receivables ($B) $ 5.8 $ 5.6 4 % $ 4.9 18 %
 
 
Gross new brokerage accounts 81,285 79,534 2 % 75,953 7 %
Gross new stock plan accounts 63,934 55,539 15 % 40,802 57 %
Gross new banking accounts 2,381 3,492 (32)% 4,497 (47)%
Closed accounts   (117,119)   (114,044) N.M.   (111,945) N.M.
Net new accounts 30,481 24,521 N.M. 9,307 N.M.
 
Net new brokerage accounts 10,339 18,247 N.M. 10,196 N.M.
Net new stock plan accounts 28,754 14,538 N.M. 8,326 N.M.
Net new banking accounts   (8,612)   (8,264) N.M.   (9,215) N.M.
Net new accounts 30,481 24,521 N.M. 9,307 N.M.
 
End of period brokerage accounts 2,903,191 2,892,852 0 % 2,783,012 4 %
End of period stock plan accounts 1,147,594 1,118,840 3 % 1,070,414 7 %
End of period banking accounts   429,272   437,884 (2)%   463,568 (7)%
End of period total accounts 4,480,057 4,449,576 1 % 4,316,994 4 %
 
Annualized brokerage account attrition rate(11) 9.8% 8.5% N.M. 9.5% N.M.
 

Customer Assets ($B)

Security holdings $ 138.7 $ 141.2 (2)% $ 118.1 17 %
Customer payables (cash) 5.0 6.0 (17)% 5.6 (11)%
Customer cash balances held by third parties(12) 7.6 4.7 62 % 3.5 117 %
Unexercised stock plan customer options (vested)   21.5   23.1 (7)%   18.8 14 %
Customer assets in brokerage and stock plan accounts   172.8   175.0 (1)%   146.0 18 %
Sweep deposits 21.3 21.9 (3)% 18.6 15 %
Savings, transaction and other   7.1   7.2 (1)%   7.8 (9)%
Customer assets in banking accounts   28.4   29.1 (2)%   26.4 8 %
Total customer assets $ 201.2 $ 204.1 (1)% $ 172.4 17 %
 
Net new brokerage assets ($B)(13) $ 2.3 $ 1.9 N.M. $ 1.7 N.M.
Net new banking assets ($B)(13)   (0.1)   (0.2) N.M.   - N.M.
Net new customer assets ($B)(13) $ 2.2 $ 1.7 N.M. $ 1.7 N.M.
 
Brokerage related cash ($B) $ 33.9 $ 32.6 4 % $ 27.7 22 %
Other customer cash and deposits ($B)   7.1   7.2 (1)%   7.8 (9)%
Total customer cash and deposits ($B) $ 41.0 $ 39.8 3 % $ 35.5 15 %
 
Unexercised stock plan customer options (unvested) ($B) $ 46.7 $ 48.4 (4)% $ 38.2 22 %
 
Customer net (purchase) / sell activity ($B) $ (0.5) $ 2.2 N.M. $ 0.9 N.M.
 

Market Making

Equity shares traded (MM) 101,465 105,282 (4)% 73,597 38 %
Average revenue capture per 1,000 equity shares $ 0.248 $ 0.207 20 % $ 0.328 (24)%
% of Bulletin Board equity shares to total equity shares 93.0% 93.5% (1)% 91.0% 2 %
 

Balance Sheet Management Metrics

 

Loans receivable ($MM)

Average loans receivable $ 11,092 $ 11,711 (5)% $ 13,623 (19)%
Ending loans receivable, net $ 10,099 $ 10,627 (5)% $ 12,333 (18)%
 

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

 

One- to Four-Family

Current $ 4,858 $ 5,122 (5)% $ 5,756 (16)%
30-89 days delinquent 233 210 11 % 295 (21)%
90-179 days delinquent   95   108 (12)%   136 (30)%
Total 30-179 days delinquent 328 318 3 % 431 (24)%
180+ days delinquent (net of $145M, $157M and $226M in charge-offs for Q412, Q312 and Q411, respectively)   279   300 (7)%   458 (39)%
Total delinquent loans(14)   607   618 (2)%   889 (32)%
Gross loans receivable(15) $ 5,465 $ 5,740 (5)% $ 6,645 (18)%
 

Home Equity

Current $ 4,065 $ 4,277 (5)% $ 5,073 (20)%
30-89 days delinquent 90 99 (9)% 154 (42)%
90-179 days delinquent   64   65 (2)%   100 (36)%
Total 30-179 days delinquent 154 164 (6)% 254 (39)%
180+ days delinquent (net of $23M, $23M and $20M in charge-offs for Q412, Q312 and Q411, respectively)   41   42 (2)%   58 (29)%
Total delinquent loans(14)   195   206 (5)%   312 (38)%
Gross loans receivable(15) $ 4,260 $ 4,483 (5)% $ 5,385 (21)%
 

Consumer and Other

Current $ 829 $ 892 (7)% $ 1,104 (25)%
30-89 days delinquent 19 18 6 % 18 6 %
90-179 days delinquent   6   3 100 %   4 50 %
Total 30-179 days delinquent 25 21 19 % 22 14 %
180+ days delinquent   -   - N.M.   - N.M.
Total delinquent loans   25   21 19 %   22 14 %
Gross loans receivable(15) $ 854 $ 913 (6)% $ 1,126 (24)%
 

Total Loans Receivable

Current $ 9,752 $ 10,291 (5)% $ 11,933 (18)%
30-89 days delinquent 342 327 5 % 467 (27)%
90-179 days delinquent   165   176 (6)%   240 (31)%
Total 30-179 days delinquent 507 503 1 % 707 (28)%
180+ days delinquent   320   342 (6)%   516 (38)%
Total delinquent loans(14)   827   845 (2)%   1,223 (32)%
Total gross loans receivable(15) $ 10,579 $ 11,136 (5)% $ 13,156 (20)%
 

TDR performance detail ($MM)(16)

 

One- to Four-Family TDRs

Current $ 927 $ 849 9 % $ 767 21 %
30-89 days delinquent 119 95 25 % 88 35 %
90-179 days delinquent   49   40 23 %   33 48 %
Total 30-179 days delinquent 168 135 24 % 121 39 %
180+ days delinquent (net of $76M, $47M and $40M in charge-offs for Q412, Q312 and Q411, respectively)   134   80 68 %   85 58 %
Total delinquent TDRs   302   215 40 %   206 47 %
TDRs $ 1,229 $ 1,064 16 % $ 973 26 %
 

Home Equity TDRs

Current $ 232 $ 215 8 % $ 352 (34)%
30-89 days delinquent 17 18 (6)% 51 (67)%
90-179 days delinquent   8   9 (11)%   35 (77)%
Total 30-179 days delinquent 25 27 (7)% 86 (71)%
180+ days delinquent (net of $12M, $4M and $2M in charge-offs for Q412, Q312 and Q411, respectively)   20   6 233 %   8 150 %
Total delinquent TDRs   45   33 36 %   94 (52)%
TDRs $ 277 $ 248 12 % $ 446 (38)%
 

Total TDRs

Current $ 1,159 $ 1,064 9 % $ 1,119 4 %
30-89 days delinquent 136 113 20 % 139 (2)%
90-179 days delinquent   57   49 16 %   68 (16)%
Total 30-179 days delinquent 193 162 19 % 207 (7)%
180+ days delinquent   154   86 79 %   93 66 %
Total delinquent TDRs   347   248 40 %   300 16 %
TDRs $ 1,506 $ 1,312 15 % $ 1,419 6 %
 
 
    December 31, 2012
Modifications     Bankruptcies     Total TDRs

TDR reconciliation ($MM)(16)

 

One- to Four-Family TDRs

Current $ 838 $ 89 $ 927
30-89 days delinquent 105 14 119
90-179 days delinquent   44   5   49
Total 30-179 days delinquent 149 19 168
180+ days delinquent   79   55   134
Total delinquent TDRs   228   74   302
TDRs $ 1,066 $ 163 $ 1,229
 

Home Equity TDRs

Current $ 196 $ 36 $ 232
30-89 days delinquent 15 2 17
90-179 days delinquent   6   2   8
Total 30-179 days delinquent 21 4 25
180+ days delinquent   7   13   20
Total delinquent TDRs   28   17   45
TDRs $ 224 $ 53 $ 277
 

Total TDRs

Current $ 1,034 $ 125 $ 1,159
30-89 days delinquent 120 16 136
90-179 days delinquent   50   7   57
Total 30-179 days delinquent 170 23 193
180+ days delinquent   86   68   154
Total delinquent TDRs   256   91   347
TDRs $ 1,290 $ 216 $ 1,506
 
 

Capital Metrics

   

Qtr ended
12/31/12

   

Qtr ended
9/30/12

   

 

Qtr ended
12/31/12
vs.
9/30/12

   

Qtr ended
12/31/11

   

 

Qtr ended
12/31/12
vs.
12/31/11

       

E*TRADE Bank

Tier 1 leverage ratio(3)(17) 8.7 % 7.9 % 0.8 % 7.8 % 0.9 %
Tier 1 risk-based capital ratio(17) 19.3 % 18.0 % 1.3 % 16.0 % 3.3 %
Total risk-based capital ratio(17) 20.6 % 19.3 % 1.3 % 17.3 % 3.3 %
Tier 1 common ratio(17)(18) 19.3 % 18.0 % 1.3 % 16.0 % 3.3 %
E*TRADE Bank excess Tier 1 capital ($MM)(17) $ 1,595.1 $ 1,327.5 20 % $ 1,188.1 34 %
E*TRADE Bank excess Tier 1 risk-based capital ($MM)(17) $ 2,594.6 $ 2,428.3 7 % $ 2,086.9 24 %
E*TRADE Bank excess risk-based capital ($MM)(17) $ 2,063.5 $ 1,876.7 10 % $ 1,516.1 36 %
 

E*TRADE Financial

Tier 1 leverage ratio(1) 5.5 % 5.8 % (0.3)% 5.7 % (0.2)%
Tier 1 risk-based capital ratio(1) 12.5 % 13.0 % (0.5)% 11.4 % 1.1 %
Total risk-based capital ratio(1) 13.7 % 14.3 % (0.6)% 12.7 % 1.0 %
Tier 1 common ratio(2) 10.3 % 10.9 % (0.6)% 9.4 % 0.9 %
 
 
   

Activity in Allowance for Loan Losses

Three Months Ended December 31, 2012

One- to Four-
Family

   

Home Equity

   

Consumer
and Other

    Total
(In thousands)
Allowance for loan losses, ending 9/30/12 $ 206,400   $ 260,889 $ 40,993   $ 508,282
Provision for loan losses 9,586 57,981 6,843 74,410
Charge-offs, net   (32,049 )   (61,537 )   (8,355 )   (101,941 )
Allowance for loan losses, ending 12/31/12 $ 183,937   $ 257,333   $ 39,481   $ 480,751  
 
 
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  
 
 
Three Months Ended December 31, 2011

One- to Four-
Family

  Home Equity

Consumer
and Other

  Total
(In thousands)
Allowance for loan losses, ending 9/30/11 $ 311,451 $ 454,042 $ 54,562 $ 820,055
Provision for loan losses 52,547 66,269 4,220 123,036
Charge-offs, net   (49,811 )   (57,023 )   (13,441 )   (120,275 )
Allowance for loan losses, ending 12/31/11 $ 314,187   $ 463,288   $ 45,341   $ 822,816  
 
 

 

Specific Valuation Allowance Activity(19)

    As of December 31, 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(20)

(Dollars in thousands)
One- to four-family $ 1,383,254   $ (317,085 ) $ 1,066,169   $ (89,684 )   $ 976,485   8 %   29 %
Home equity   382,663   (159,244 )   223,419   (81,690 )   141,729 37 % 63 %
Total $ 1,765,917 $ (476,329 ) $ 1,289,588 $ (171,374 ) $ 1,118,214 13 % 37 %
 
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(20)

(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 %
 
As of December 31, 2011

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(20)

(Dollars in thousands)
One- to four-family $ 1,209,361 $ (236,408 ) $ 972,953 $ (101,188 ) $ 871,765 10 % 28 %
Home equity   490,421   (44,482 )   445,939   (218,955 )   226,984 49 % 55 %
Total $ 1,699,782 $ (280,890 ) $ 1,418,892 $ (320,143 ) $ 1,098,749 23 % 35 %
 
 

 

Average Enterprise Balance Sheet Data

    Three Months Ended
December 31, 2012
Average    

Operating
Interest

    Average
Balance Inc./Exp. Yield/Cost
Enterprise interest-earning assets: (In thousands)
Loans(21) $ 11,099,147 $ 113,223 4.08 %
Available-for-sale securities 13,584,735 73,542 2.17 %
Held-to-maturity securities 9,605,213 61,387 2.56 %
Margin receivables 5,785,166 57,214 3.93 %
Cash and equivalents 1,677,106 999 0.24 %
Segregated cash 566,531 133 0.09 %
Securities borrowed and other   563,838     11,432   8.07 %
Total enterprise interest-earning assets $ 42,881,736     317,930   2.96 %
Enterprise interest-bearing liabilities:
Deposits $ 27,807,088 3,204 0.05 %
Customer payables 5,678,243 2,049 0.14 %
Securities sold under agreements to repurchase 4,601,941 37,145 3.16 %
FHLB advances and other borrowings 1,777,594 17,652 3.89 %
Securities loaned and other   707,570     22   0.01 %
Total enterprise interest-bearing liabilities $ 40,572,436     60,072   0.58 %
Enterprise net interest income/spread(8) $ 257,858   2.38 %
 
Three Months Ended
September 30, 2012
Average

Operating
Interest

Average
Balance Inc./Exp. Yield/Cost
Enterprise interest-earning assets: (In thousands)
Loans(21) $ 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(8) $ 259,282   2.28 %
 
Three Months Ended
December 31, 2011
Average

Operating
Interest

Average
Balance Inc./Exp. Yield/Cost
Enterprise interest-earning assets: (In thousands)
Loans(21) $ 13,630,858 $ 155,104 4.55 %
Available-for-sale securities 15,118,778 101,700 2.69 %
Held-to-maturity securities 5,347,207 42,684 3.19 %
Margin receivables 4,924,505 51,155 4.12 %
Cash and equivalents 1,622,995 774 0.19 %
Segregated cash 1,324,309 310 0.09 %
Securities borrowed and other   596,543     13,423   8.93 %
Total enterprise interest-earning assets $ 42,565,195     365,150   3.43 %
Enterprise interest-bearing liabilities:
Deposits $ 25,859,600 8,650 0.13 %
Customer payables 5,522,278 2,343 0.17 %
Securities sold under agreements to repurchase 5,078,591 39,164 3.02 %
FHLB advances and other borrowings 2,733,340 26,702 3.82 %
Securities loaned and other   573,105     365   0.25 %
Total enterprise interest-bearing liabilities $ 39,766,914     77,224   0.77 %
Enterprise net interest income/spread(8) $ 287,926   2.66 %
 

Reconciliation from Enterprise Net Interest Income to Net Operating Interest Income

 
Three Months Ended
December 31, September 30, December 31,
  2012     2012     2011  
(In thousands)
Enterprise net interest income $ 257,858 $ 259,282 $ 287,926
Taxable equivalent interest adjustment(22) (212 ) (298 ) (291 )
Earnings on customer cash held by third parties and other(23)   2,585     1,893     1,623  
Net operating interest income $ 260,231   $ 260,877   $ 289,258  
 
 

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 (7) 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 (9) 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 (10) 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 (1), (2) and (18) 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 Tier 1 leverage, Tier 1 risk-based capital and total risk-based capital ratios at E*TRADE Financial are Q412 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):

    Q4 2012     Q3 2012     Q4 2011
Shareholders' equity $ 4,904,470     $ 5,093,854     $ 4,927,950
DEDUCT:
Losses in OCI on AFS debt securities and cash flow hedges, net of tax (315,369 ) (307,587 ) (389,623 )
Goodwill and other intangible assets, net of deferred tax liabilities 1,899,365 1,897,547 1,947,488
ADD:
Qualifying restricted core capital elements (TRUPs)   433,000         433,000         433,000  
Subtotal 3,753,474 3,936,894 3,803,085
DEDUCT:
Disallowed servicing assets and deferred tax assets   1,278,912         1,259,101         1,331,001  
Tier 1 capital   2,474,562         2,677,793         2,472,084  
ADD:
Allowable allowance for loan losses   251,842         261,589         277,665  
Total capital $ 2,726,404       $ 2,939,382       $ 2,749,749  
 
Total average assets $ 48,152,713 $ 49,400,750 $ 46,964,166
DEDUCT:
Goodwill and other intangible assets, net of deferred tax liabilities   1,899,365         1,897,547         1,947,488  
Subtotal 46,253,348 47,503,203 45,016,678
DEDUCT:
Disallowed servicing assets and deferred tax assets   1,278,912         1,259,101         1,331,001  
Average total assets for leverage capital purposes $ 44,974,436       $ 46,244,102       $ 43,685,677  
 
Total risk-weighted assets(a) $ 19,854,479 $ 20,614,940 $ 21,668,053
 
Tier 1 leverage ratio (Tier 1 capital / Average total assets for leverage capital purposes) 5.5 % 5.8 % 5.7 %
Tier 1 capital / Total risk-weighted assets 12.5 % 13.0 % 11.4 %
Total capital / Total risk-weighted assets 13.7 % 14.3 % 12.7 %

(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.

(2) The Tier 1 common ratio at E*TRADE Financial is a Q412 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):

    Q4 2012     Q3 2012     Q4 2011
Shareholders' equity $ 4,904,470     $ 5,093,854     $ 4,927,950
DEDUCT:
Losses in OCI on AFS debt securities and cash flow hedges, net of tax (315,369 ) (307,587 ) (389,623 )
Goodwill and other intangible assets, net of deferred tax liabilities   1,899,365         1,897,547         1,947,488  
Subtotal 3,320,474 3,503,894 3,370,085
DEDUCT:
Disallowed servicing assets and deferred tax assets   1,278,912         1,259,101         1,331,001  
Tier 1 common $ 2,041,562       $ 2,244,793       $ 2,039,084  
 
Total risk-weighted assets $ 19,854,479 $ 20,614,940 $ 21,668,053
 
Tier 1 common ratio (Tier 1 common / Total risk-weighted assets) 10.3 % 10.9 % 9.4 %
 
 

(3) 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 Q412 and Q312 and the OTS Tier 1 capital ratio previously reported for Q411. The OTS Tier 1 capital ratio and OCC Tier 1 leverage ratio are both calculated using total adjusted assets.

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

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

(6) 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.

(7) 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):

           
Q4 2012     Q3 2012     Q4 2011
Book value $ 4,904,470 $ 5,093,854 $ 4,927,950
Less: Goodwill and other intangibles, net (2,194,854 ) (2,201,150 ) (2,220,037 )
Less: Deferred tax liability related to goodwill   295,489         303,603         272,549  
Tangible book value $ 3,005,105       $ 3,196,307       $ 2,980,462  
 
 
    Q4 2012     Q3 2012     Q4 2011
Book value per share $ 17.14     $ 17.81     $ 17.27
Less: Goodwill and other intangibles, net per share (7.67 ) (7.70 ) (7.78 )
Less: Deferred tax liability related to goodwill per share   1.03         1.06         0.95  
Tangible book value per share $ 10.50       $ 11.17       $ 10.44  
 
 

(8) 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.

(9) 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 loss was (4.2), (0.6), and (0.1) for the three months ended December 31, 2012, September 30, 2012, and December 31, 2011, respectively.

(10) 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 thousands):

    Q4 2012     Q3 2012     Q4 2011
Income (loss) before income taxes $ (221,195 )     $ (36,303 )     $ 818
Add back:
Non-bank loss before income tax benefit(b) 312,701 67,156 80,839
Provision for loan losses 74,410 141,019 123,036
Gains on loans and securities, net (61,798 ) (78,977 ) (32,547 )
Net impairment 5,729 2,395 2,765
Losses on early extinguishment of wholesale borrowings   27,776         50,608         -  
Bank earnings before taxes and before credit losses $ 137,623       $ 145,898       $ 174,911  

(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.

(11) 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.

(12) 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.

(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):

    Q4 2012     Q3 2012     Q4 2011
One- to four-family $ 457     $ 463     $ 458
Home equity   307       310       148
Total charge-offs $ 764     $ 773     $ 606
 
 

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

(16) 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, reported TDRs also included 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.

(17) E*TRADE Bank capital ratios and excess capital amounts are Q412 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:

    Q4 2012     Q3 2012     Q4 2011
Beginning E*TRADE Bank excess risk-based capital ($MM) $ 1,877     $ 1,686     $ 1,537
Bank earnings before taxes and before credit losses 138 146 175
Provision for loan losses (74 ) (141 ) (123 )
Loan portfolio run-off(a) 17 1 51
Margin decrease (increase) (20 ) 20 34
Capital upstream(b) (58 ) - -
Changes in disallowed deferred tax assets 19 88 (145 )
Other capital changes(c)   165         77         (13 )
Ending E*TRADE Bank excess risk-based capital ($MM) $ 2,064       $ 1,877       $ 1,516  

(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 Tier 1 common ratio at E*TRADE Bank is a Q412 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):

    Q4 2012     Q3 2012     Q4 2011
E*TRADE Bank shareholder's equity $ 5,703,018     $ 5,676,026     $ 5,445,234
DEDUCT:
Losses in OCI on AFS debt securities and cash flow hedges, net of tax (315,369 ) (307,371 ) (392,951 )
Goodwill and other intangible assets, net of deferred tax liabilities   1,600,457         1,607,376         1,656,176  
Subtotal 4,417,930 4,376,021 4,182,009
DEDUCT:
Disallowed servicing assets and deferred tax assets 655,687 735,083 830,149
Deduction for low-level recourse and residual interests   -         -         13,242  
E*TRADE Bank Tier 1 common $ 3,762,243       $ 3,640,938       $ 3,338,618  
 
E*TRADE Bank total risk-weighted assets $ 19,461,264 $ 20,211,214 $ 20,862,432
 
E*TRADE Bank tier 1 common ratio (Tier 1 common / Total risk-weighted assets) 19.3 % 18.0 % 16.0 %
 
 

(19) 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.

(20) The total expected losses on modifications 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 $5.9 billion, $3.9 billion, and $3.7 billion for the quarters ended December 31, 2012, September 30, 2012, and December 31, 2011, respectively, held by third parties outside E*TRADE Financial, including money market funds and sweep deposit accounts at unaffiliated financial institutions.

Contacts

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

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Contacts

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