E*TRADE Financial Corporation ( ETFC)

Q4 2010 Earnings Call

January 26, 2011 5:00 pm ET

Executives

Susan Hickey - Media Relations

Steven J. Freiberg - Chief Executive Officer

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

Analysts

Daniel Harris - Goldman Sachs

Matt Snowling - FBR Capital Markets & Co.

Richard Repetto - Sandler O'Neill & Partners L.P.

Eric Bertrand - Barclays Capital

Howard Chen - Credit Suisse

Michael Vinciquerra - BMO Capital Markets

Michael Carrier - Deutsche Bank Securities

Joel Jeffrey - Keefe, Bruyette & Woods

Patrick O'Shaughnessy - Raymond James

Presentation

Operator

Welcome to the E*TRADE Financial Fourth Quarter and Full Year 2010 Earnings Conference Call. At this time, all participants have been placed in a listen-only mode. Following the formal remarks, we will open the call for Q&A. (Operator Instructions) Thank you.

It is now my pleasure to turn the floor over to Susan Hickey from E*TRADE Financial. Please go ahead.

Susan Hickey

Good afternoon and thank you for joining us for E*TRADE Financial’s fourth quarter and full year 2010 conference call. Joining me today are Steven Freiburg, E*TRADE’s Chief Executive Officer; Matt Audette, our 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 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 statements.

This call will present information as of January 26, 2011. Please note that E*TRADE Financial disclaim 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 7:00 p.m. The call is being webcast live at investor.etrade.com. No other recordings or copies of this call are authorized or may be relied upon.

And with that, I will turn the call over to Steve Freiburg.

Steven J. Freiberg

Thank you everyone for joining us this afternoon. To begin today’s call, I will cover the highlights from the quarter and year and Matt will take you through the results. From there, I will share some thoughts about 2011, after which we will be happy to take your questions.

2010 was a significant year for E*TRADE as we made important progress to position the company for sustainable profitability and growth. While we navigated challenges of an industry wide decline in trading activity and a difficult interest rate environment, we also benefited from solid execution in our retail brokerage franchise, a strength in capital structure and improving trends in our legacy loan portfolio. Overall, we made marked progress and improved from a loss of $1.3 billion in 2009 to a loss of $28 million in 2010.

Our fourth quarter performance was quite strong, notwithstanding several expenses that we do not expect to incur in future periods as well as an increased advertising spend. Matt will provide additional color later in the call, but let me take just a moment upfront as well.

These expenses included a $60 million increase to the qualitative component of our loan loss reserve. While we continue to be pleased with the progress of our legacy loan portfolio, in particular trends in delinquencies and our loan modification program, this increase reflects the growing size and importance of our loan modification program as well as the limited historical information or industry knowledge of how these modified loans will perform over the cycle.

On the expense side, we incurred approximately $15 million of expenses related primarily to restructuring and severance, which will drive future savings. At the same time, our increased advertising spend is driving meaningful results and supports our strategy to attract and retain customers and increase brokerage inflows. We’re optimistic that this spend will help continue the momentum we enjoyed in the fourth quarter, which included our highest brokerage and stock plan account growth and net new assets flows since mid-2009.

Turning back now to the year, we entered 2010 with a solid brokerage business and improving trends in our loan portfolio supported by a successful recapitalization. Over the course of the year, we delivered growth in net new accounts, net new assets, and margin receivables.

Improving loan performance trends drove a significant decline in our loan loss provision and effective balance sheet strategies resulted in solid net interest income while we benefited from opportunistic gains in our securities portfolio. During the year, we executed on a number of initiatives to expand our offering and enhance the customer experience for both active traders and long-term investors. And I'll highlight a few.

E*TRADE capital management launched managed investment portfolios with a competitive fee structure and an accessible entry point of $25,000. E*TRADE securities simplified its pricing structure and we believe is competitively positioned from a price/value perspective.

We released API allowing third-party vendors and independent software developers to interface seamlessly with our investing platform. We expanded Power E*TRADE Pro's customization, news and information, and navigation tools, and added CNBC streaming video. We extended our leadership in the mobile space by adding E*TRADE Mobile Pro for iPad, Android and Blackberry Storm, and now see approximately 100,000 unique customers logging in via our mobile applications each week.

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