E*TRADE Financial Management Discusses Q2 2012 Results - Earnings Call Transcript

E*TRADE Financial (ETFC)

Q2 2012 Earnings Call

July 19, 2012 5:00 pm ET


Steven J. Freiberg - Chief Executive Officer and Director

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


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

Brian Bedell - ISI Group Inc., Research Division

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

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

Howard Chen - Crédit Suisse AG, Research Division

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

Alexander Blostein - Goldman Sachs Group Inc., Research Division

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

Michael Carrier - Deutsche Bank AG, Research Division

David J. Chiaverini - BMO Capital Markets U.S.

Faye Elliott-Gurney - BGB Securities, Inc., Research Division

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

Christopher Harris - Wells Fargo Securities, LLC, Research Division



Good afternoon, and thank you for joining us for E*TRADE Financial's Second Quarter 2012 Earnings Conference Call. Joining the call today are Steven Freiberg, E*TRADE's Chief Executive Officer; Matt Audette, 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 and 10-Qs and other document 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 July 19, 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. The company provides these measures due to its belief that they provide important information about its operating results. These measures will be reconciled to the most directly comparable GAAP financial measures 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. These non-GAAP financial measures should be considered in conjunction with the comparable GAAP measures.

This call is being recorded and a replay of this call will be available via phone and webcast beginning this evening at approximately 8:00 P.M. The call is being webcast live at the investor.etrade.com. No other recordings or copies of this call are authorized or may be relied upon. Following management's comments, the call will be opened up for questions. [Operator Instructions] With that, I will now turn the call over to Steve Freiberg. Steve, the floor is yours.

Steven J. Freiberg

Thank you. Good afternoon, and thank you for joining today's call. The second quarter was another significant step forward for E*TRADE as we grew our 4 franchise in the face of macroeconomic challenges at a market-wide lull in retail investor engagement. We continue to derisk the company, submitted our strategic and capital plan to our regulators and completed our offer to purchase auction rate securities.

We reported earnings per share of $0.14 on revenue of $452 million, inclusive of a few unique items, which Matt will cover in more detail. On the brokerage front, starts were down 6% versus the year-ago quarter, reflective of a generally weak retail trading environment. That aside, we generated healthy growth in net new accounts and assets, comprising the key long-term growth drivers for the franchise. Net new brokerage accounts of 46,000 brings the total for the first half of the year to 92,000 accounts, nearly equaling the 99,000 that we brought in during the entirety of 2011, and well above the 54,000 in 2010. Similarly, the $2.2 billion in net new brokerage assets brings the year-to-date total to $6.2 billion and places us on track to exceed our full-year levels of $9.7 billion in 2011 and $8.1 billion in 2010. Additionally, customer margin receivables ended the period at $5.8 billion, a 4-year high and reflective of increases in both the number of accounts using margin and balances per account during the quarter.

We were also proud to post another quarterly franchise record for brokerage account attrition of 8.4% annualized during the second quarter. This represents an improvement of more than 200 basis points from a year ago and is a testament to our focus on an extraordinary customer experience.

Turning to credit. Our legacy loan portfolio ended the quarter at $11.8 billion, down 5% sequentially and 64% from its peak. Our overall delinquencies were down 11% during the quarter while special mention delinquencies were down 7%. Both are at their lowest levels in approximately 5 years. We are proud of our progress on the continued derisking of the company as we closely manage the runoff of this portfolio.

As for our customer offering, we made enhancements to our E*TRADE pro- platform and simplified the overall user experience on the customer website. We added new tools, including a trading ladder and strategy screeners, giving customers even more realtime market depth and information, including realtime quotes for all E*TRADE 360 users. We opened 2 new branches during the quarter, one in Cupertino, California and one in New York City, bringing our branch total to 30. Over half of our 270 financial consultants reside within our branches providing an important point of contact for our customers, particularly as we expand our activities in the retirement and long-term investing segments. With $33 billion in retirement assets across nearly 800,000 accounts, we have a meaningful base from which to grow. Additionally, we ended the quarter with just under $1 billion in managed assets, over half of which are retirement assets. We're encouraged by our progress and are focused on continuing to build out our brand as a trusted destination for rollover accounts and other retirement services by providing solutions, advice and guidance and client education. Educated investors are typically more engaged customers, so we remain committed to our education efforts across a broad spectrum of categories with over 300,000 interactions during the quarter comprising seminars, webinars and videos, both live and on-demand. We believe that a clear indication of the increasing sophistication of our customers is the steady increase of options as a percentage of DARTs.

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