E*TRADE Financial (ETFC)

Q4 2011 Earnings Call

January 25, 2012 5:00 pm ET


Steven J. Freiberg - Interim Chairman, Chief Executive officer and Member of Finance & Risk Oversight Committee

Matthew J. Audette - Chief Financial Officer, Executive Vice President and Controller


Patrick J. O'Shaughnessy - Raymond James & Associates, Inc., Research Division

Eric Bertrand - Barclays Capital, Research Division

Brian Bedell - ISI Group Inc., Research Division

Michael Carrier - Deutsche Bank AG, Research Division

Joel Jeffrey - Keefe, Bruyette, & Woods, Inc., Research Division

Christopher J. Allen - Evercore Partners Inc., Research Division

Daniel F. Harris - Goldman Sachs Group Inc., Research Division

Howard Chen - Crédit Suisse AG, Research Division

Richard H. Repetto - Sandler O'Neill + Partners, L.P., Research Division

Matt Fischer - Credit Agricole Securities (USA) Inc., Research Division

Christopher Harris - Wells Fargo Securities, LLC, Research Division

Keith Murray - Nomura Securities Co. Ltd., Research Division



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Good afternoon, and thank you for joining us for E*TRADE Financial Fourth Quarter 2011 Earnings Conference Call. Joining me today are Steven Freiberg, E*TRADE's Chief Executive Officer; Matt Audette, E*TRADE's Chief Financial Officer; and other members of E*TRADE's management team.

Before turning the call over to Steve, I'd like to remind everyone that during this conference call, the company will be sharing with you certain projections or other forward-looking statements regarding future events or its future performance. E*TRADE Financial cautions you that certain factors, including risks and uncertainties referred to in the 10-Ks, 10-Qs and other documents E*TRADE files with the Securities and Exchange Commission could cause the company's actual results to differ materially from those indicated by its projections or forward-looking statement.

This call will present information as of January 25, 2012. Please note that E*TRADE Financial disclaims any duty to update any forward-looking statements made in the presentation.

During this call, E*TRADE Financial may also discuss some non-GAAP financial measures in talking about its performance. These measures will be reconciled to GAAP either during the course of this call or in the company's press release, which can be found on its website at investor.etrade.com.

This call is being recorded, and a replay of this call will be available via phone and webcast beginning this evening at approximately 7 p.m. This call is being webcast live at investor.etrade.com. No other recordings or copies of this call are authorized or may be relied upon.

With that, I will now turn the call over to Steve Freiberg.

Steven J. Freiberg

Operator, thank you. Good afternoon, and thank you for joining today's call. I will begin by covering highlights from the year, just a few items from the quarter, and then Matt will take you through the results. I will follow with additional comments, after which, we'll open up the call for questions.

Let me begin by saying I am pleased to report that 2011 was the company's first profitable year since 2006. It wasn't an easy year by any measure, but we maintained a focus on the business and on our customers, and are proud of the way our team executed. We faced challenging headwinds during 2011, including a near-0 interest rate environment, which pressured our spread and net interest income.

Global macroeconomic uncertainty, leaving many retail investors less engaged than they otherwise would have been and continued stress in real estate.

However, we proactively worked to mitigate these environmental pressures as we grew broker-related cash by 13% during the year, offsetting the majority of spread compression at the 12 basis points contraction in spread only led to a $6 million decline in net interest income.

Despite the macroeconomic challenges, we grew DARTs by 5% during the year as we continue to increase accounts and assets. And we continue to aggressively focus our loss-mitigation strategies, including short sales, loan modifications and transfers to higher touch servicers.

Separately, the company transitioned regulators during the second half of the year from the OTS to the OCC and the Fed.

Throughout 2011, we focused our efforts on strengthening our core business and in addition, have made significant strides in de-risking the company.

I will now highlight several key accomplishments that have enhanced our strategic positon.

First and foremost, we remained focused on strengthening the financial position of the company. We moved forward on many fronts as we progressed from significant losses in 2007 to profitability in 2011.

In addition, we increased our capital levels and ratios. And with the exception of a slight dip in Q4, our capital levels at both the bank and the parent are the strongest in the firm's history.

Finally, we continued to improve our risk profile as the legacy loan portfolio declined another $3 billion during the year, while delinquencies improved double digits. The portfolio ended the year at $13.2 billion, down 60% from its peak.

With regards to our core brokerage franchise, we made solid progress on improving our competitive position. During 2011, we nearly doubled the amount of net new brokerage accounts from the last year's levels and broadened net new assets of $9.7 billion, up from $8.1 billion in the prior year.

Additionally, our attrition rate decreased nearly 200 basis points through a firm record 10%.

We continue to grow our institutional businesses. Our Corporate Services group brought on 46 new clients in 2011 and starts the year off well with a pipeline of 33 clients.

Our market making business grew revenue in a tough environment and increased its external NMS order flow.

Finally, we remained committed to enhancing our market position in the long-term investor segment. While this is a relatively new focus for us, we continue to grow balances and accounts, and we are building a solid foundation for this business.

Our sales force initiative is a very important element of this strategy. In 2011, we grew our team of financial consultants by 42% and remained committed to this effort.

We also announced the number of enhancements in new products during the year. We launched E*TRADE Pro Elite for our most valuable active traders portfolio margin, expanded CNBC contact, algorithmic charts, a number of options tools, and we introduced the E*TRADE Community.

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