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

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

NEW YORK--(BUSINESS WIRE)-- E*TRADE Financial Corporation (NAS: 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 (NAS: 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 percentand 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