E*TRADE Financial Corporation Announces Second Quarter 2013 Results

E*TRADE Financial Corporation Announces Second Quarter 2013 Results

Company to exit market making business

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


Second Quarter Results

  • Net loss of $54 million, or $0.19 loss per share on total net revenue of $440 million

  • Total operating expenses of $414 million, including goodwill impairment of $142 million and restructuring charges of $10 million

  • Excluding impact of the decision to exit the market making business, net income of $60 million(1), or $0.21 per share(1)

  • Provision for loan losses of $46 million

  • Daily Average Revenue Trades (DARTs) of 150,000

  • Net new brokerage accounts of 30,000

  • Net new brokerage assets of $1.7 billion; end of period customer assets of $220 billion

E*TRADE Financial Corporation (NAS: ETFC) today announced results for its second quarter ended June 30, 2013, reporting a net loss of $54 million, or $0.19 loss per share, including $142 million of goodwill impairment, and $10 million of restructuring charges. Excluding the goodwill impairment, the Company recorded net income of $60 million(1), or $0.21 earnings per share(1). This compares with net income of $35 million, or $0.12 per share in the prior quarter, and net income of $40 million, or $0.14 per share in the second quarter of 2012. Total net revenue of $440 million for the second quarter of 2013, compared favorably with $420 million in the prior quarter, and was down from $452 million in the second quarter of 2012.

During the second quarter, the Company decided to exit its market making business. As a result, the Company classified the market making unit as held-for-sale during the quarter and impaired the entire amount of the associated goodwill, resulting in a $142 million impairment charge, before tax. This goodwill impairment is a non-cash charge and has no impact on the Company's tangible equity or regulatory capital position. The non-deductible nature of this charge and the impact of other state deferred tax items due to the decision to exit the market making business resulted in a consolidated effective tax rate of -14 percent for the quarter. Excluding this impact, the Company's effective tax rate was 37 percent.

"The second quarter was reflective of how well-geared the E*TRADE model is for improvements in the operating environment, as our normalized income demonstrated marked growth from prior periods. Our customers remained engaged, and we continued to grow assets and accounts, while delivering record account retention," said Paul Idzik, Chief Executive Officer. "I am pleased with the team's solid performance, as we sharpened our focus on delivering an exceptional customer experience, while identifying opportunities for efficiency. Additionally, our decision to exit the market making business underscores Management's intensifying focus on our core customer franchise and the desire to concentrate our efforts on areas that directly support the core of the Company. As we go forward, I am exceedingly confident in our prospects for our customers, our business, and our shareholders."

E*TRADE reported DARTs of 150,000 during the quarter, an increase of one percent from the prior quarter and an increase of eight percent versus the same quarter a year ago.

At quarter end, the Company reported 4.6 million customer accounts, which included 3.0 million brokerage accounts. Net new brokerage accounts were 30,000 during the quarter compared with 30,000 in the prior quarter and 46,000 in the second quarter of 2012. Brokerage account attrition for the quarter matched a record low for the Company at 8.4 percent annualized.

The Company ended the quarter with $220 billion in total customer assets, compared with $219 billion at the end of the first quarter and $193 billion from the year-ago period.

During the quarter, customers added $1.7 billion in net new brokerage assets. Brokerage related cash increased by $0.9 billion to $35.6 billion during the period, while customers were net buyers of approximately $0.3 billion of securities. Margin receivables averaged $5.7 billion in the quarter, flat sequentially and up two percent year over year, ending the quarter at $6.0 billion.

Net operating interest income for the second quarter was $243 million, up from $241 million in the prior quarter and down from $279 million a year ago. Second quarter results reflected a net interest spread of 2.35 percent on average interest-earning assets of $40.2 billion, compared with a net interest spread of 2.30 percent on average interest-earning assets of $40.9 billion in the prior quarter.

Commissions, fees and service charges, principal transactions, and other revenue in the second quarter were $177 million, compared with $164 million in the prior quarter and $154 million in the second quarter of 2012. Average commission per trade for the quarter was $11.10, compared to $11.30 in the prior quarter, and $10.68 in the second quarter of 2012.

Total net revenue in the quarter also included $20 million of net gains on loans and securities, net of impairment, compared with $15 million in the prior quarter, and $19 million in the second quarter of 2012.

Total operating expenses for the quarter were $414 million, including $142 million of goodwill impairment and $10 million of restructuring charges. Excluding the second quarter's goodwill impairment, as well as restructuring and severance charges from the second and first quarters, core operating expenses declined $21 million sequentially, from $283 million(2) to $262 million(2). As of the end of the quarter, the Company's cost reduction program had been substantially completed, reducing annual run-rate expenses by approximately $95 million, net, comprising $110 million in targeted reductions, offset by a larger than anticipated investment in enterprise risk management of $15 million.

Total assets ended the quarter at $45.0 billion, up slightly from the prior quarter, while average assets declined sequentially by $0.7 billion, as the quarter's deleveraging actions were offset by customer activity. The Company noted that its period end wholesale borrowings were temporarily increased by approximately $0.5 billion, to support increased customer activity during the last week of the quarter. This temporary increase was reversed during the first week of the third quarter.

The Company's loan portfolio ended the quarter at $9.6 billion, contracting approximately $0.5 billion from the prior quarter. Second quarter provision for loan losses of $46 million was up from $43 million in the prior quarter, which included a $13 million benefit from a settlement with a third party mortgage originator.

Net charge-offs in the quarter were $50 million, a decrease of $18 million from the prior quarter. The allowance for loan losses ended the quarter at $451 million, down $4 million from the previous quarter.

For the Company's entire loan portfolio, special mention delinquencies decreased 14 percent sequentially, and total at-risk delinquencies decreased 17 percent versus the first quarter. As compared to the year-ago period, special mention delinquencies declined 23 percent and total at-risk delinquencies declined 28 percent.

As of June 30, 2013, the Company reported consolidated Tier 1 leverage and total risk-based ratios(3) of 6.4 percentand 15.8 percent, respectively; increasing from 6.0 percent and 14.8 percent in the prior period. The Company's consolidated Tier 1 common ratio(4) ended the quarter at 12.2 percent, improving from 11.2 percent in the prior period. E*TRADE Bank ended the quarter with Tier 1 leverage and total risk-based capital ratios(5) of 9.5 percent and 22.9 percent, rising from 9.3 percent and 21.9 percent, respectively, 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 800-404-5245 while international participants should dial +1 303-223-4399. 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 our ability to drive an exceptional customer experience, to grow assets and accounts, and to deliver results for our customers, our business and our shareholders 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 (Loss)

(In thousands, except per share amounts)

(Unaudited)

Three Months Ended

Six Months Ended

June 30,

June 30,

2013

2012

2013

2012

Revenue:

Operating interest income

$

301,830

$

354,520

$

601,890

$

716,781

Operating interest expense

(59,289

)

(75,415

)

(118,020

)

(152,824

)

Net operating interest income

242,541

279,105

483,870

563,957

Commissions

106,361

93,313

207,093

200,744

Fees and service charges

40,367

29,063

72,877

61,061

Principal transactions

21,176

21,239

42,922

45,385

Gains on loans and securities, net

21,061

24,685

36,741

59,591

Net impairment

(580

)

(5,269

)

(1,745

)

(8,801

)

Other revenues

9,005

10,272

18,038

19,868

Total non-interest income

197,390

173,303

375,926

377,848

Total net revenue

439,931

452,408

859,796

941,805

Provision for loan losses

46,149

67,261

88,799

139,208

Operating expense:

Compensation and benefits

86,021

85,549

181,672

177,827

Advertising and market development

23,284

36,567

59,868

84,155

Clearing and servicing

31,062

32,837

62,706

67,392

FDIC insurance premiums

25,054

27,195

54,345

55,557

Professional services

18,634

19,934

35,936

40,269

Occupancy and equipment

18,153

18,244

35,669

36,098

Communications

18,618

18,358

37,132

37,478

Depreciation and amortization

22,797

23,104

45,845

45,343

Amortization of other intangibles

6,067

6,295

12,134

12,591

Impairment of goodwill

142,423

-

142,423

-

Facility restructuring and other exit activities

9,892

1,589

17,461

1,165

Other operating expenses

11,922

11,783

24,271

29,819

Total operating expense

413,927

281,455

709,462

587,694

Income (loss) before other income (expense) and income tax expense

(20,145

)

103,692

61,535

214,903

Other income (expense):

Corporate interest income

11

20

24

34

Corporate interest expense

(28,613

)

(45,285

)

(57,233

)

(90,410

)

Equity in income of investments and other

966

2,113

5,260

2,007

Total other income (expense)

(27,636

)

(43,152

)

(51,949

)

(88,369

)

Income (loss) before income tax expense

(47,781

)

60,540

9,586

126,534

Income tax expense

6,622

21,030

28,865

24,433

Net income (loss)

$

(54,403

)

$

39,510

$

(19,279

)

$

102,101

Basic earnings (loss) per share

$

(0.19

)

$

0.14

$

(0.07

)

$

0.36

Diluted earnings (loss) per share

$

(0.19

)

$

0.14

$

(0.07

)

$

0.35

Shares used in computation of per share data:

Basic

286,903

285,645

286,765

285,561

Diluted

286,903

290,044

286,765

290,184

E*TRADE FINANCIAL CORPORATION AND SUBSIDIARIES

Consolidated Statement of Income (Loss)

(In thousands, except per share amounts)

(Unaudited)

Three Months Ended

June 30,

March 31,

June 30,

2013

2013

2012

Revenue:

Operating interest income

$

301,830

$

300,060

$

354,520

Operating interest expense

(59,289

)

(58,731

)

(75,415

)

Net operating interest income

242,541

241,329

279,105

Commissions

106,361

100,732

93,313

Fees and service charges

40,367

32,510

29,063

Principal transactions

21,176

21,746

21,239

Gains on loans and securities, net

21,061

15,680

24,685

Net impairment

(580

)

(1,165

)

(5,269

)

Other revenues

9,005

9,033

10,272

Total non-interest income

197,390

178,536

173,303

Total net revenue

439,931

419,865

452,408

Provision for loan losses

46,149

42,650

67,261

Operating expense:

Compensation and benefits

86,021

95,651

85,549

Advertising and market development

23,284

36,584