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Press release from Business Wire

E*TRADE Financial Corporation Announces Second Quarter 2013 Results

<p class='bwalignc'> <i><b>Company to exit market making business</b></i> </p>

Wednesday, July 24, 2013

E*TRADE Financial Corporation Announces Second Quarter 2013 Results

16:05 EDT Wednesday, July 24, 2013

NEW YORK (Business Wire) -- E*TRADE Financial Corporation (NASDAQ: 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 (NASDAQ: 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 36,567
Clearing and servicing 31,062 31,644 32,837
FDIC insurance premiums 25,054 29,291 27,195
Professional services 18,634 17,302 19,934
Occupancy and equipment 18,153 17,516 18,244
Communications 18,618 18,514 18,358
Depreciation and amortization 22,797 23,048 23,104
Amortization of other intangibles 6,067 6,067 6,295
Impairment of goodwill 142,423 - -
Facility restructuring and other exit activities 9,892 7,569 1,589
Other operating expenses   11,922     12,349     11,783  
Total operating expense   413,927     295,535     281,455  
Income (loss) before other income (expense) and income tax expense (20,145 ) 81,680 103,692
Other income (expense):
Corporate interest income 11 13 20
Corporate interest expense (28,613 ) (28,620 ) (45,285 )
Equity in income of investments and other   966     4,294     2,113  
Total other income (expense)   (27,636 )   (24,313 )   (43,152 )
Income (loss) before income tax expense (47,781 ) 57,367 60,540
Income tax expense   6,622     22,243     21,030  
Net income (loss) $ (54,403 ) $ 35,124   $ 39,510  
 
Basic earnings (loss) per share $ (0.19 ) $ 0.12 $ 0.14
Diluted earnings (loss) per share $ (0.19 ) $ 0.12 $ 0.14
Shares used in computation of per share data:
Basic 286,903 286,626 285,645
Diluted 286,903 291,696 290,044
 
 

E*TRADE FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheet
(In thousands, except share data)
(Unaudited)
         
 
June 30, March 31, December 31,
  2013     2013     2012  
ASSETS
Cash and equivalents $ 1,045,252 $ 1,507,722 $ 2,761,494
Cash required to be segregated under federal or other regulations 855,352 318,817 376,898
Trading securities - 100,538 101,270
Available-for-sale securities 13,060,921 12,676,378 13,443,020
Held-to-maturity securities 9,900,743 9,856,513 9,539,948
Margin receivables 5,970,042 5,748,626 5,804,041
Loans receivable, net 9,105,916 9,585,286 10,098,723
Investment in FHLB stock 77,150 61,400 67,400
Property and equipment, net 261,939 278,266 288,170
Goodwill 1,791,809 1,934,232 1,934,232
Other intangibles, net 227,327 254,555 260,622
Other assets   2,710,074     2,643,981       2,710,921  
Total assets $ 45,006,525   $ 44,966,314     $ 47,386,739  
 
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits $ 25,548,527 $ 25,877,748 $ 28,392,552
Securities sold under agreements to repurchase 4,598,487 4,459,421 4,454,661
Customer payables 5,082,970 5,084,337 4,964,922
FHLB advances and other borrowings 1,627,658 1,265,489 1,260,916
Corporate debt 1,766,827 1,765,905 1,764,982
Other liabilities   1,621,428     1,561,587       1,644,236  
Total liabilities   40,245,897     40,014,487       42,482,269  
 
Shareholders' equity:
Common stock, $0.01 par value, shares authorized: 400,000,000 at
June 30, 2013, March 31, 2013 and December 31, 2012, shares issued
and outstanding: 286,900,541 at June 30, 2013, 286,776,149 at
March 31, 2013, and 286,114,334 at December 31, 2012 2,869 2,868 2,861
Additional paid-in-capital 7,324,425 7,320,491 7,319,257
Accumulated deficit (2,126,999 ) (2,072,596 ) (2,107,720 )
Accumulated other comprehensive loss   (439,667 )   (298,936 )     (309,928 )
Total shareholders' equity   4,760,628     4,951,827       4,904,470  
Total liabilities and shareholders' equity $ 45,006,525   $ 44,966,314     $ 47,386,739  
 
 

Segment Reporting
         
Three Months Ended June 30, 2013

Trading and
Investing

Balance Sheet
Management

Corporate/
Other

Eliminations (6) 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 March 31, 2013

Trading and
Investing

Balance Sheet
Management

Corporate/
Other

Eliminations (6) Total
(In thousands)
Revenue:
Operating interest income $ 139,232 $ 230,102 $ - $ (69,274 ) $ 300,060
Operating interest expense   (5,117 )   (122,888 )   -     69,274     (58,731 )
Net operating interest income   134,115     107,214     -     -     241,329  
Commissions 100,732 - - - 100,732
Fees and service charges 32,056 454 - - 32,510
Principal transactions 21,746 - - - 21,746

Gains on loans and securities, net

- 15,680 - - 15,680
Net impairment - (1,165 ) - - (1,165 )
Other revenues   8,031     1,002     -     -     9,033  
Total non-interest income   162,565     15,971     -     -     178,536  
Total net revenue   296,680     123,185     -     -     419,865  
Provision for loan losses - 42,650 - - 42,650
Operating expense:
Compensation and benefits 71,443 3,713 20,495 - 95,651
Advertising and market development 36,584 - - - 36,584
Clearing and servicing 19,008 12,636 - - 31,644
FDIC insurance premiums - 29,291 - - 29,291
Professional services 8,378 547 8,377 - 17,302
Occupancy and equipment 15,970 459 1,087 - 17,516
Communications 17,783 356 375 - 18,514
Depreciation and amortization 18,881 161 4,006 - 23,048
Amortization of other intangibles 6,067 - - - 6,067
Facility restructuring and other exit activities - - 7,569 - 7,569
Other operating expenses   4,126     2,924     5,299     -     12,349  
Total operating expense   198,240     50,087     47,208     -     295,535  
Segment income (loss) before other income (expense)   98,440     30,448     (47,208 )   -     81,680  
Other income (expense):
Corporate interest income - - 13 - 13
Corporate interest expense - - (28,620 ) - (28,620 )
Equity in income of investments and other   -     -     4,294     -     4,294  
Total other income (expense)   -     -     (24,313 )   -     (24,313 )
Segment income (loss) $ 98,440   $ 30,448   $ (71,521 ) $ -   $ 57,367  
 
 
Three Months Ended June 30, 2012

Trading and
Investing

Balance Sheet
Management

Corporate/
Other

Eliminations (6)

Total
(In thousands)
Revenue:
Operating interest income $ 174,368 $ 284,682 $ 3 $ (104,533 ) $ 354,520
Operating interest expense   (9,165 )   (170,783 )   -     104,533     (75,415 )
Net operating interest income   165,203     113,899     3     -     279,105  
Commissions 93,313 - - - 93,313
Fees and service charges 28,395 668 - - 29,063
Principal transactions 21,239 - - - 21,239
Gains (losses) on loans and securities, net (114 ) 24,799 - - 24,685
Net impairment - (5,269 ) - - (5,269 )
Other revenues   8,887     1,385     -     -     10,272  
Total non-interest income   151,720     21,583     -     -     173,303  
Total net revenue   316,923     135,482     3     -     452,408  
Provision for loan losses - 67,261 - - 67,261
Operating expense:
Compensation and benefits 64,973 4,156 16,420 - 85,549
Advertising and market development 36,529 38 - - 36,567
Clearing and servicing 16,327 16,510 - - 32,837
FDIC insurance premiums - 27,195 - - 27,195
Professional services 10,632 1,307 7,995 - 19,934
Occupancy and equipment 16,502 452 1,290 - 18,244
Communications 17,570 356 432 - 18,358
Depreciation and amortization 18,984 159 3,961 - 23,104
Amortization of other intangibles 6,295 - - - 6,295
Facility restructuring and other exit activities - - 1,589 - 1,589
Other operating expenses   297     6,435     5,051     -     11,783  
Total operating expense   188,109     56,608     36,738     -     281,455  
Segment income (loss) before other income (expense)   128,814     11,613     (36,735 )   -     103,692  
Other income (expense):
Corporate interest income - - 20 - 20
Corporate interest expense - - (45,285 ) - (45,285 )
Equity in income of investments and other   -     -     2,113     -     2,113  
Total other income (expense)   -     -     (43,152 )   -     (43,152 )
Segment income (loss) $ 128,814   $ 11,613   $ (79,887 ) $ -   $ 60,540  
 
 

Key Performance Metrics (7)

         

Corporate Metrics

Qtr ended
6/30/13

Qtr ended
3/31/13

Qtr ended
6/30/13
vs.
3/31/13

Qtr ended
6/30/12

Qtr ended
6/30/13
vs.
6/30/12

 

Operating margin % (8)

Consolidated N.M. 19 % N.M. 23 % N.M.
Trading and Investing N.M. 33 % N.M. 41 % N.M.
Balance Sheet Management 33 % 25 % 8 % 9 % 24 %
 
Employees 2,871 2,858 0 % 3,104 (8)%
Consultants and other   78   79 (1)%   110 (29)%
Total headcount 2,949 2,937 0 % 3,214 (8)%
 
Book value per share 16.59 $ 17.27 (4)% $ 17.78 (7)%
Tangible book value per share(9) 10.66 $ 10.70 0 % $ 11.08 (4)%
 
Corporate cash ($MM) $ 250.9 $ 351.6 (29)% $ 436.5 (43)%
 
Enterprise net interest spread (basis points)(10) 235 230 2 % 244 (4)%
Enterprise interest-earning assets, average ($MM) $ 40,166 $ 40,896 (2)% $ 44,770 (10)%
 

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

Net Income (loss) $ (54.4) $ 35.1 N.M. $ 39.5 N.M.
Income tax expense 6.6 22.3 N.M. 21.0 N.M.
Depreciation & amortization 28.9 29.1 (1)% 29.4 (2)%
Corporate interest expense   28.6   28.6 0 %   45.3 (37)%
EBITDA 9.7 115.1 N.M. 135.2 N.M.
Impairment of goodwill   142.4   - N.M.   - N.M.
Adjusted EBITDA $ 152.1 $ 115.1 32 % $ 135.2 13 %
 
Interest coverage(11) 0.3 4.0 N.M. 3.0 N.M.
Adjusted interest coverage(11) 5.3 4.0 N.M. 3.0 N.M.
 
Bank earnings before taxes and before credit losses ($MM)(12) $ 162.4 $ 128.9 26 % $ 153.9 6 %
 

Trading and Investing Metrics

 
Trading days 64.0 60.0 N.M. 63.0 N.M.
 
DARTs 149,670 148,538 1 % 138,653 8 %
 
Total trades (MM) 9.6 8.9 8 % 8.7 10 %
Average commission per trade $ 11.10 $ 11.30 (2)% $ 10.68 4 %
 
End of period margin receivables ($B) $ 6.0 $ 5.7 5 % $ 5.8 3 %
Average margin receivables ($B) $ 5.7 $ 5.7 0 % $ 5.6 2 %
 
 
Gross new brokerage accounts 90,963 91,735 (1)% 104,659 (13)%
Gross new stock plan accounts 56,015 56,836 (1)% 52,173 7 %
Gross new banking accounts 2,541 2,723 (7)% 4,328 (41)%
Closed accounts   (110,369)   (108,367) N.M.   (102,587) N.M.
Net new accounts 39,150 42,927 N.M. 58,573 N.M.
 
Net new brokerage accounts 29,506 30,034 N.M. 45,599 N.M.
Net new stock plan accounts 18,040 20,173 N.M. 22,899 N.M.
Net new banking accounts   (8,396)   (7,280) N.M.   (9,925) N.M.
Net new accounts 39,150 42,927 N.M. 58,573 N.M.
 
End of period brokerage accounts 2,962,731 2,933,225 1 % 2,874,605 3 %
End of period stock plan accounts 1,185,807 1,167,767 2 % 1,104,302 7 %
End of period banking accounts   413,596   421,992 (2)%   446,148 (7)%
End of period total accounts 4,562,134 4,522,984 1 % 4,425,055 3 %
 
Annualized brokerage account attrition rate(13) 8.4% 8.5% N.M. 8.4% N.M.
 

Customer Assets ($B)

Security holdings $ 150.8 $ 149.4 1 % $ 134.9 12 %
Customer payables (cash) 5.1 5.1 0 % 5.1 0 %
Customer cash balances held by third parties(14) 11.5 10.7 7 % 3.6 219 %
Unexercised stock plan customer options (vested)   27.2   27.6 (1)%   21.0 30 %
Customer assets in brokerage and stock plan accounts   194.6   192.8 1 %   164.6 18 %
Sweep deposits 19.0 18.9 1 % 20.5 (7)%
Savings, transaction and other   6.5   7.0 (7)%   7.4 (12)%
Customer assets in banking accounts   25.5   25.9 (2)%   27.9 (9)%
Total customer assets $ 220.1 $ 218.7 1 % $ 192.5 14 %
 
Net new brokerage assets ($B)(15) $ 1.7 $ 3.1 N.M. $ 2.2 N.M.
Net new banking assets ($B)(15)   (0.4)   (0.2) N.M.   (0.5) N.M.
Net new customer assets ($B)(15) $ 1.3 $ 2.9 N.M. $ 1.7 N.M.
 
Brokerage related cash ($B) $ 35.6 $ 34.7 3 % $ 29.2 22 %
Other customer cash and deposits ($B)   6.5   7.0 (7)%   7.4 (12)%
Total customer cash and deposits ($B) $ 42.1 $ 41.7 1 % $ 36.6 15 %
 
Unexercised stock plan customer options (unvested) ($B) $ 52.1 $ 51.5 1 % $ 43.5 20 %
 
Customer net (purchase) / sell activity ($B) $ (0.3) $ (1.2) N.M. $ (3.9) N.M.
 

Market Making

Equity shares traded (MM) 103,003 118,895 (13)% 101,415 2 %
Average revenue capture per 1,000 equity shares $ 0.202 $ 0.179 13 % $ 0.206 (2)%
% of Bulletin Board equity shares to total equity shares 94.0% 93.7% 0 % 93.6% 0 %
 

Balance Sheet Management Metrics

 

Loans receivable ($MM)

Average loans receivable $ 9,766 $ 10,397 (6)% $ 12,310 (21)%
Ending loans receivable, net $ 9,106 $ 9,585 (5)% $ 11,226 (19)%
 

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

 

One- to Four-Family

Current $ 4,495 $ 4,657 (3)% $ 5,329 (16)%
30-89 days delinquent 187 220 (15)% 227 (18)%
90-179 days delinquent   76   100 (24)%   119 (36)%
Total 30-179 days delinquent 263 320 (18)% 346 (24)%
180+ days delinquent (net of $127M, $131M and $181M in charge-offs for Q213, Q113 and Q212, respectively)   262   262 0 %   338 (22)%
Total delinquent loans(16)   525   582 (10)%   684 (23)%
Gross loans receivable(17) $ 5,020 $ 5,239 (4)% $ 6,013 (17)%
 

Home Equity

Current $ 3,689 $ 3,883 (5)% $ 4,543 (19)%
30-89 days delinquent 70 76 (8)% 104 (33)%
90-179 days delinquent   42   52 (19)%   71 (41)%
Total 30-179 days delinquent 112 128 (13)% 175 (36)%
180+ days delinquent (net of $22M, $22M and $25M in charge-offs for Q213, Q113 and Q212, respectively)   41   42 (2)%   43 (5)%
Total delinquent loans(16)   153   170 (10)%   218 (30)%
Gross loans receivable(17) $ 3,842 $ 4,053 (5)% $ 4,761 (19)%
 

Consumer and Other

Current $ 681 $ 730 (7)% $ 957 (29)%
30-89 days delinquent 12 16 (25)% 18 (33)%
90-179 days delinquent   2   2 0 %   3 (33)%
Total 30-179 days delinquent 14 18 (22)% 21 (33)%
180+ days delinquent   -   - N.M.   - N.M.
Total delinquent loans   14   18 (22)%   21 (33)%
Gross loans receivable(17) $ 695 $ 748 (7)% $ 978 (29)%
 

Total Loans Receivable

Current $ 8,865 $ 9,270 (4)% $ 10,829 (18)%
30-89 days delinquent 269 312 (14)% 349 (23)%
90-179 days delinquent   120   154 (22)%   193 (38)%
Total 30-179 days delinquent 389 466 (17)% 542 (28)%
180+ days delinquent   303   304 0 %   381 (20)%
Total delinquent loans(16)   692   770 (10)%   923 (25)%
Total gross loans receivable(17) $ 9,557 $ 10,040 (5)% $ 11,752 (19)%
 

TDR performance detail ($MM) (18)

 

One- to Four-Family TDRs

Current $ 917 $ 916 0 % $ 843 9 %
30-89 days delinquent 108 116 (7)% 89 21 %
90-179 days delinquent   46   60 (23)%   46 0 %
Total 30-179 days delinquent 154 176 (13)% 135 14 %
180+ days delinquent (net of $76M, $70M and $49M in charge-offs for Q213, Q113 and Q212, respectively)   139   125 11 %   79 76 %
Total delinquent TDRs   293   301 (3)%   214 37 %
TDRs $ 1,210 $ 1,217 (1)% $ 1,057 14 %
 

Home Equity TDRs

Current $ 216 $ 228 (5)% $ 242 (11)%
30-89 days delinquent 13 17 (24)% 20 (35)%
90-179 days delinquent   9   10 (10)%   11 (18)%
Total 30-179 days delinquent 22 27 (19)% 31 (29)%
180+ days delinquent (net of $14M, $12M and $3M in charge-offs for Q213, Q113 and Q212, respectively)   21   20 5 %   5 320 %
Total delinquent TDRs   43   47 (9)%   36 19 %
TDRs $ 259 $ 275 (6)% $ 278 (7)%
 

Total TDRs

Current $ 1,133 $ 1,144 (1)% $ 1,085 4 %
30-89 days delinquent 121 133 (9)% 109 11 %
90-179 days delinquent   55   70 (21)%   57 (4)%
Total 30-179 days delinquent 176 203 (13)% 166 6 %
180+ days delinquent   160   145 10 %   84 90 %
Total delinquent TDRs   336   348 (3)%   250 34 %
TDRs $ 1,469 $ 1,492 (2)% $ 1,335 10 %
 

Capital Metrics

 

E*TRADE Bank

Tier 1 leverage ratio(5) 9.5 % 9.3 % 0.2 % 7.9 % 1.6 %
Tier 1 risk-based capital ratio(5) 21.6 % 20.7 % 0.9 % 16.7 % 4.9 %
Total risk-based capital ratio(5) 22.9 % 21.9 % 1.0 % 18.0 % 4.9 %
Tier 1 common ratio(19) 21.6 % 20.7 % 0.9 % 16.7 % 4.9 %
E*TRADE Bank excess Tier 1 capital ($MM)(20) $ 1,879.0 $ 1,752.3 7 % $ 1,303.8 44 %
E*TRADE Bank excess Tier 1 risk-based capital ($MM)(20) $ 2,868.6 $ 2,703.1 6 % $ 2,263.2 27 %
E*TRADE Bank excess risk-based capital ($MM)(20) $ 2,366.7 $ 2,199.5 8 % $ 1,686.2 40 %
 

E*TRADE Financial

Tier 1 leverage ratio(3) 6.4 % 6.0 % 0.4 % 5.7 % 0.7 %
Tier 1 risk-based capital ratio(3) 14.5 % 13.6 % 0.9 % 12.2 % 2.3 %
Total risk-based capital ratio(3) 15.8 % 14.8 % 1.0 % 13.4 % 2.4 %
Tier 1 common ratio(4) 12.2 % 11.2 % 1.0 % 10.2 % 2.0 %
 
 

Activity in Allowance for Loan Losses        
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 March 31, 2013

One- to Four-
Family

Home Equity

Consumer and
Other

Total
(In thousands)
Allowance for loan losses, ending 12/31/12 $ 183,937 $ 257,333 $ 39,481 $ 480,751
Provision for loan losses (16,616 ) 55,248 4,018 42,650
Charge-offs, net   (6,286 )   (49,455 )   (12,628 )   (68,369 )
Allowance for loan losses, ending 3/31/13 $ 161,035   $ 263,126   $ 30,871   $ 455,032  
 
 
Three Months Ended June 30, 2012

One- to Four-
Family

Home Equity

Consumer and
Other

Total
(In thousands)
Allowance for loan losses, ending 3/31/12 $ 239,602 $ 291,015 $ 48,558 $ 579,175
Provision for loan losses 247 65,050 1,964 67,261
Charge-offs, net   (23,915 )   (89,182 )   (7,583 )   (120,680 )
Allowance for loan losses, ending 6/30/12 $ 215,934   $ 266,883   $ 42,939   $ 525,756  
 
 

Specific Valuation Allowance Activity (21)

 
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 (22)

(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 March 31, 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 (22)

(Dollars in thousands)
One- to four-family $ 1,391,076 $ (321,150 ) $ 1,069,926 $ (81,685 ) $ 988,241 8 % 29 %
Home equity   370,818   (155,959 )   214,859   (66,421 )   148,438 31 % 60 %
Total $ 1,761,894 $ (477,109 ) $ 1,284,785 $ (148,106 ) $ 1,136,679 12 % 35 %
 
As of June 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 (22)

(Dollars in thousands)
One- to four-family $ 1,356,888 $ (299,307 ) $ 1,057,581 $ (94,474 ) $ 963,107 9 % 29 %
Home equity   435,484   (158,072 )   277,412   (98,293 )   179,119 35 % 59 %
Total $ 1,792,372 $ (457,379 ) $ 1,334,993 $ (192,767 ) $ 1,142,226 14 % 36 %
 
 

Average Enterprise Balance Sheet Data

 
Three Months Ended
June 30, 2013
Average  

Operating
Interest

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

Loans(23)

$ 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 (10)

$ 239,283   2.35 %
 
Three Months Ended
March 31, 2013
Average

Operating
Interest

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

Loans(23)

$ 10,398,062 $ 106,669 4.10 %
Available-for-sale securities 12,986,978 64,215 1.98 %
Held-to-maturity securities 9,500,372 58,069 2.44 %
Margin receivables 5,666,703 54,447 3.90 %
Cash and equivalents 1,593,420 835 0.21 %
Segregated cash 158,231 42 0.11 %
Securities borrowed and other   592,422     12,791   8.76 %
Total enterprise interest-earning assets $ 40,896,188     297,068   2.91 %
Enterprise interest-bearing liabilities:
Deposits $ 26,950,074 3,153 0.05 %
Customer payables 5,058,999 1,841 0.15 %
Securities sold under agreements to repurchase 4,453,599 36,703 3.30 %
FHLB advances and other borrowings 1,261,094 16,930 5.37 %
Securities loaned and other   748,988     14   0.01 %
Total enterprise interest-bearing liabilities $ 38,472,754     58,641   0.61 %

Enterprise net interest income/spread (10)

$ 238,427   2.30 %
 
Three Months Ended
June 30, 2012
Average Operating Interest Average
Balance Inc./Exp. Yield/Cost
Enterprise interest-earning assets: (In thousands)

Loans(23)

$ 12,324,567 $ 124,994 4.06 %
Available-for-sale securities 16,336,062 98,625 2.41 %
Held-to-maturity securities 8,108,507 60,245 2.97 %
Margin receivables 5,633,453 55,418 3.96 %
Cash and equivalents 1,115,736 527 0.19 %
Segregated cash 741,845 105 0.06 %
Securities borrowed and other   509,370     12,687   10.02 %
Total enterprise interest-earning assets $ 44,769,540     352,601   3.15 %
Enterprise interest-bearing liabilities:
Deposits $ 28,583,333 6,611 0.09 %
Customer payables 5,303,434 2,849 0.22 %
Securities sold under agreements to repurchase 4,802,784 40,473 3.33 %
FHLB advances and other borrowings 2,733,258 25,404 3.68 %
Securities loaned and other   702,216     32   0.02 %
Total enterprise interest-bearing liabilities $ 42,125,025     75,369   0.71 %
Enterprise net interest income/spread (10) $ 277,232   2.44 %
 

Reconciliation from Enterprise Net Interest Income to Net Operating Interest Income

 
Three Months Ended
June 30, March 31, June 30,
  2013     2013     2012  
(In thousands)
Enterprise net interest income $ 239,283 $ 238,427 $ 277,232
Taxable equivalent interest adjustment(24) (254 ) (210 ) (300 )
Earnings on customer cash held by third parties and other(25)   3,512     3,112     2,173  
Net operating interest income $ 242,541   $ 241,329   $ 279,105  
 
 

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 (9) 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 (11) 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 (11) 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 (12) 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 (3), (4) 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 following table provides reconciliation for the calculation of the impairment of goodwill and income tax impact related to the Company's decision to exit the market making business on diluted EPS (dollars in thousands, except per share amounts):

   
Q2 2013
Amount   Diluted EPS
 

Income before impairment of goodwill and income taxes

$ 94,642 $ 0.33

Impairment of goodwill

  (142,423 )     (0.50 )

Loss before income taxes

  (47,781 )     (0.17 )

Income taxes related to decision to exit the market making business

28,185 0.10

Income taxes excluding impact of decision to exit the market making business

  (34,807 )     (0.12 )

Total income taxes

  (6,622 )     (0.02 )
Net loss $ (54,403 )   $ (0.19 )
 

Income before impairment of goodwill and income taxes

$ 94,642 $ 0.33

Income taxes excluding impact of decision to exit the market making business

  (34,807 )     (0.12 )

Adjusted net income excluding impact of decision to exit the market making business

$ 59,835     $ 0.21  
 
 

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

  Q2 2013   Q1 2013
Total operating expense $ 413,927   $ 295,535
Add back:
Impairment of goodwill 142,423 -
Facility restructuring and severance expense   9,892     12,114
Adjusted total operating expense $ 261,612   $ 283,421
 
 

(3) The Tier 1 leverage, Tier 1 risk-based capital and total risk-based capital ratios at E*TRADE Financial are Q213 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):

  Q2 2013   Q1 2013   Q2 2012
E*TRADE Financial shareholders' equity $ 4,760.6   $ 4,951.8   $ 5,079.6
DEDUCT:
Losses in OCI on AFS debt securities and cash flow hedges, net of tax (444.7 ) (304.4 ) (343.2 )
Goodwill & other intangible assets, net of deferred tax liabilities 1,703.2 1,883.1 1,914.0
ADD:
Qualifying restricted core capital elements (TRUPs)(a)   433.0       433.0       433.0  

Subtotal

3,935.1 3,806.1 3,941.8
DEDUCT:
Disallowed servicing assets and deferred tax assets   1,252.8       1,265.2       1,304.8  
E*TRADE Financial Tier 1 capital   2,682.3       2,540.9       2,637.0  
ADD:
Allowable allowance for loan losses   234.5       237.6       275.3  
E*TRADE Financial total capital $ 2,916.8     $ 2,778.5     $ 2,912.3  
 
E*TRADE Financial total average assets $ 44,917.8 $ 45,679.4 $ 49,374.6
DEDUCT:
Goodwill & other intangible assets, net of deferred tax liabilities   1,703.2       1,883.1       1,914.0  
Subtotal 43,214.6 43,796.3 47,460.6
DEDUCT:
Disallowed servicing assets and deferred tax assets   1,252.8       1,265.2       1,304.8  
Average total assets for leverage capital purposes $ 41,961.8     $ 42,531.1     $ 46,155.8  
 
E*TRADE Financial total risk-weighted assets(b) $ 18,502.1 $ 18,741.8 $ 21,696.2
 
E*TRADE Financial Tier 1 leverage ratio (Tier 1 capital / Average total assets for leverage capital purposes) 6.4 % 6.0 % 5.7 %
E*TRADE Financial Tier 1 capital / Total risk-weighted assets 14.5 % 13.6 % 12.2 %
E*TRADE Financial total capital / Total risk-weighted assets 15.8 % 14.8 % 13.4 %
 

(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.

(4) The Tier 1 common ratio at E*TRADE Financial is a Q213 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):

  Q2 2013   Q1 2013   Q2 2012
E*TRADE Financial shareholders' equity $ 4,760.6   $ 4,951.8   $ 5,079.6
DEDUCT:
Losses in OCI on AFS debt securities and cash flow hedges, net of tax (444.7 ) (304.4 ) (343.2 )
Goodwill & other intangible assets, net of deferred tax liabilities   1,703.2       1,883.1       1,914.0  
Subtotal 3,502.1 3,373.1 3,508.8
DEDUCT:
Disallowed servicing assets and deferred tax assets   1,252.8       1,265.2       1,304.8  
E*TRADE Financial Tier 1 common $ 2,249.3     $ 2,107.9     $ 2,204.0  
 
E*TRADE Financial total risk-weighted assets(a) $ 18,502.1 $ 18,741.8 $ 21,696.2
 
E*TRADE Financial Tier 1 common / Total risk-weighted assets 12.2 % 11.2 % 10.2 %
 

(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.

(5) The Tier 1 leverage, Tier 1 risk-based capital and total risk-based capital ratios at E*TRADE Bank are Q213 estimates and calculated as follows (dollars in millions):

  Q2 2013   Q1 2013   Q2 2012
E*TRADE Bank shareholders' equity $ 5,749.5   $ 5,779.4   $ 5,629.4
DEDUCT:
Losses in OCI on AFS debt securities and cash flow hedges, net of tax (444.7 ) (304.4 ) (351.6 )
Goodwill & other intangible assets, net of deferred tax liabilities   1,568.6       1,584.5       1,623.5  
Subtotal 4,625.6 4,499.3 4,357.5
DEDUCT:
Disallowed servicing assets and deferred tax assets   654.5       689.6       825.6  
E*TRADE Bank Tier 1 capital   3,971.1       3,809.7       3,531.9  
ADD:
Allowable allowance for loan losses   233.1       234.1       268.7  
E*TRADE Bank total capital $ 4,204.2     $ 4,043.8     $ 3,800.6  
 
E*TRADE Bank total assets $ 43,951.6 $ 43,514.5 $ 47,107.0
DEDUCT:
Losses in OCI on AFS debt securities and cash flow asset hedges, net of tax (112.4 ) 93.6 94.9
Goodwill & other intangible assets, net of deferred tax liabilities   1,568.6       1,584.5       1,623.5  
Subtotal 42,495.4 41,836.4 45,388.6
DEDUCT:
Disallowed servicing assets and deferred tax assets   654.5       689.6       825.6  
E*TRADE Bank total assets for leverage capital purposes $ 41,840.9     $ 41,146.8     $ 44,563.0  
 
E*TRADE Bank total risk-weighted assets(a) $ 18,374.7 $ 18,442.4 $ 21,144.8
 
E*TRADE Bank Tier 1 leverage ratio (Tier 1 capital / Average total assets for leverage capital purposes) 9.5 % 9.3 % 7.9 %
E*TRADE Bank Tier 1 capital / Total risk-weighted assets 21.6 % 20.7 % 16.7 %
E*TRADE Bank total capital / Total risk-weighted assets 22.9 % 21.9 % 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.

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

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

(8) 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.

(9) 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):

  Q2 2013   Q1 2013   Q2 2012
Book value $ 4,760.6   $ 4,951.8   $ 5,079.6
Less: Goodwill and other intangibles, net (2,019.1 ) (2,188.8 ) (2,207.4 )
Less: Deferred tax liability related to goodwill   316.0       305.7       293.4  
Tangible book value $ 3,057.5     $ 3,068.7     $ 3,165.6  
 
 
  Q2 2013   Q1 2013   Q2 2012
Book value per share $ 16.59   $ 17.27   $ 17.78
Less: Goodwill and other intangibles, net per share (7.03 ) (7.63 ) (7.73 )
Less: Deferred tax liability related to goodwill per share   1.10       1.06       1.03  
Tangible book value per share $ 10.66     $ 10.70     $ 11.08  
 
 

(10) 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.

(11) 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 (1.9), 1.2, and 0.9 for the three months ended June 30, 2013, March 31, 2013, and June 30, 2012, respectively.

(12) 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):

     
Q2 2013   Q1 2013   Q2 2012
Income (loss) before income taxes $ (47.8 ) $ 57.4 $ 60.5
Add back:
Non-bank loss before income tax benefit(b) 184.5 43.4 45.5
Provision for loan losses 46.1 42.6 67.3
Gains on loans and securities, net (21.0 ) (15.7 ) (24.7 )
Net impairment   0.6       1.2       5.3  
Bank earnings before taxes and before credit losses $ 162.4     $ 128.9     $ 153.9  
 

(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.

(13) 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.

(14) 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.

(15) 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.

(16) 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):

  Q2 2013   Q1 2013   Q2 2012
One- to four-family $ 439   $ 447   $ 470
Home equity   293     296     277
Total charge-offs $ 732   $ 743   $ 747
 
 

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

(18) 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.

(19) The Tier 1 common ratio at E*TRADE Bank is a Q213 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):

  Q2 2013   Q1 2013   Q2 2012
E*TRADE Bank shareholders' equity $ 5,749.5   $ 5,779.4   $ 5,629.4
DEDUCT:
Losses in OCI on AFS debt securities and cash flow hedges, net of tax (444.7 ) (304.4 ) (351.6 )
Goodwill and other intangible assets, net of deferred tax liabilities   1,568.6       1,584.5       1,623.5  
Subtotal 4,625.6 4,499.3 4,357.5
DEDUCT:
Disallowed servicing assets and deferred tax assets   654.5       689.6       825.6  
E*TRADE Bank Tier 1 common $ 3,971.1     $ 3,809.7     $ 3,531.9  
 
E*TRADE Bank total risk-weighted assets(a) $ 18,374.7 $ 18,442.4 $ 21,144.8
 
E*TRADE Bank Tier 1 common / Total risk-weighted assets 21.6 % 20.7 % 16.7 %
 

(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.

(20) E*TRADE Bank excess capital amounts are Q213 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:

  Q2 2013   Q1 2013   Q2 2012
Beginning E*TRADE Bank excess risk-based capital ($MM) $ 2,200   $ 2,064   $ 1,514
Bank earnings before taxes and before credit losses 162 129 154
Provision for loan losses (46 ) (43 ) (67 )
Loan portfolio run-off(a) 40 42 55
Margin decrease (increase) (22 ) 6 (52 )
Tax impact, including changes in disallowed deferred tax assets 8 (68 ) 22
Other capital changes(b)   25       70       60  
Ending E*TRADE Bank excess risk-based capital ($MM) $ 2,367     $ 2,200     $ 1,686  
 

(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 the capitalimpact related to changes in other risk-weighted assets.

(21) 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):

  Q2 2013   Q1 2013   Q2 2012
Modified loans $ 1,268   $ 1,285   $ 1,335
Bankruptcy loans   201     207     -
Total TDRs $ 1,469   $ 1,492   $ 1,335

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

(23) Excludes loans to customers on margin.

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

(25) Includes interest earned on average customer assets of $11.2 billion, $9.5 billion, and $3.6 billion for the quarters ended June 30, 2013, March 31, 2013, and June 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
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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