E*TRADE Financial Corporation Announces Third Quarter 2012 Results

E*TRADE Financial Corporation (NASDAQ: ETFC):

Third Quarter Results
  • Net loss of $29 million, or $0.10 loss per share on total net revenue of $490 million
  • Gain on securities revenue of $79 million, including gains related to securities sold to reduce asset balances as a result of the termination of $520 million in wholesale funding obligations, which resulted in a $51 million loss on early extinguishment of debt
  • Provision for loan losses of $141 million, including $50 million related to new data on borrower bankruptcies acquired by the Company
  • Total special mention delinquencies decreased six percent sequentially; total at-risk delinquencies decreased seven percent
  • Total operating expenses of $289 million, including $13 million in severance paid for Company’s prior CEO
  • Balance sheet growth of $1.2 billion, driven by $3.2 billion in customer inflows and customer net selling, offset by of $1.3 billion from deleveraging actions
  • Daily Average Revenue Trades (DARTs) of 129,000
  • Net new brokerage accounts of 18,000, representing year-to-date net new accounts of 110,000, for 5.3% annualized growth
  • Net new brokerage assets of $1.9 billion, representing year-to-date net new assets of $8.1 billion, for 7.4% annualized growth(1); end of period customer assets of $204 billion

E*TRADE Financial Corporation (NASDAQ: ETFC) today announced results for its third quarter ended September 30, 2012, reporting a net loss of $29 million, or $0.10 loss per share. This compares with net income of $40 million, or $0.14 per share in the prior quarter, and net income of $71 million, or $0.24 per share in the third quarter of 2011. The Company reported total net revenue of $490 million for the third quarter of 2012, compared with $452 million in the prior quarter and $507 million in the third quarter of 2011.

“While this quarter’s results were marked by some unique items, we made good progress on our deleveraging and cost reduction initiatives, and continued to improve our risk profile,” said E*TRADE’s Chairman and Interim CEO, Frank Petrilli. “We delivered on our strategic initiatives during the third quarter and executed well in our brokerage business, while continuing to manage down the loan portfolio. We have identified or completed over $4 billion of balance sheet reductions, which are critical to achieving our goal of distributing capital from the Bank to the Parent. Importantly, our core brokerage franchise continues to grow assets and accounts at healthy rates, despite lackluster investor engagement across the industry. During the first three quarters of the year, we have surpassed the full year 2011 in terms of net new accounts, aided by record account retention. We are making headway in the retirement and investing customer segment, ending the quarter with over $1 billion in managed accounts, less than three years after introducing the products. In addition, our management team is delivering against cost reduction initiatives, with a new target of $100 million in run-rate reductions to be completed by the end of 2013.”

E*TRADE reported DARTs of 129,000 during the quarter, a decrease of seven percent from the prior quarter and a decrease of 22 percent versus the same quarter a year ago.

At quarter end, the Company reported 4.4 million customer accounts, which included 2.9 million brokerage accounts. Net new brokerage accounts were 18,000 during the quarter compared with 46,000 in the prior quarter and 13,000 in the third quarter of 2011.

The Company ended the quarter with $204 billion in total customer assets, compared with $193 billion at the end of the second quarter and $160 billion from the year-ago period.

During the quarter, customers added $1.9 billion in net new brokerage assets. Brokerage related cash increased by $3.4 billion to $32.6 billion during the period, as customers were net sellers of approximately $2.2 billion of securities. Margin receivables averaged $5.6 billion in the quarter, flat sequentially and up four percent year over year.

Net operating interest income for the third quarter was $261 million, down from $279 million in the prior quarter and $306 million a year ago. Third quarter results reflected a net interest spread of 2.28 percent on average interest-earning assets of $44.9 billion, compared with a net interest spread of 2.44 percent on average interest-earning assets of $44.8 billion in the prior quarter.

Commissions, fees and service charges, principal transactions, and other revenue in the third quarter were $153 million, compared with $154 million in the prior quarter and $181 million in the third quarter of 2011. Average commission per trade for the quarter was $11.24, compared to $10.68 in the prior quarter, and $10.76 in the third quarter of 2011.

Total operating expenses for the quarter increased $8 million sequentially to $289 million. Compensation and benefits included the impact of $13 million in severance associated with the August departure of the Company’s former Chief Executive Officer.

Total assets ended the quarter at $50.4 billion, growing $1.2 billion from the prior quarter, as customer net selling and net inflows increased cash and deposits by $3.2 billion, which was partially offset by deleveraging actions of $1.3 billion. Deleveraging included approximately $0.8 billion in brokerage-related customer cash directed to third party institutions, as well as $0.5 billion in terminated wholesale funding obligations, which resulted in a pre-tax loss of $51 million on early extinguishment of debt. The corresponding reduction to assets resulted in a gain on sale of securities, included in the $79 million of total net gains recorded during the quarter.

The Company’s loan portfolio ended the quarter at $11.1 billion, contracting $616 million from the prior quarter, primarily related to $458 million of paydowns. Provision for loan losses of $141 million included approximately $50 million related to loan charge-offs associated with newly identified bankruptcy filings. The Company utilizes third party servicers to obtain bankruptcy data specific to its loan portfolio. During the third quarter the Company identified an increase in bankruptcies reported to them by one specific servicer. In researching this increase the Company discovered that the servicer had not been reporting all prior bankruptcy data on a timely basis. As a result the Company implemented an enhanced procedure around all servicer reporting to corroborate bankruptcy reporting with independent third party data. Through this additional process, approximately $90 million of loans were identified in which the servicers failed to report the bankruptcy filing to the Company. Of those loans, approximately 90 percent are current. In accordance with the Company’s long-standing policy to write down loans to their collateral value when notified of a borrower bankruptcy, these loans were written down during the third quarter, resulting in an increase to provision for loan losses of approximately $50 million. The Company also noted these additional charge-offs were not a result of the recently-issued regulatory guidance on the treatment of discharged bankruptcies.

Excluding the effect of these additional charge-offs, provision for loan losses increased $24 million from the prior quarter to $91 million (2). This sequential increase was due primarily to a decline of $16 million in put-back settlements.

Including the $50 million in charge-offs related to the aforementioned adjustments, net charge-offs in the quarter were $158 million, an increase of $38 million from the prior quarter. The allowance for loan losses at quarter-end was $508 million, down $17 million from the previous quarter. Despite the decline in the reserve balance, coverage ratios improved slightly across the portfolio.

For the Company’s entire loan portfolio, special mention delinquencies decreased six percent sequentially, and total at-risk delinquencies declined seven percent versus the second quarter. As compared to the year-ago period, both special mention delinquencies and total at-risk delinquencies declined 29 percent.

As of September 30, 2012, the Company reported a consolidated Tier 1 common ratio of 10.9 percent (3), up from 10.2 percent in the prior period and 9.3 percent at the end of the third quarter of 2011. E*TRADE Bank ended the quarter with Tier 1 leverage (4) and total risk-based capital ratios of 7.9 percent and 19.3 percent, compared with 7.9 percent and 18.0 percent, respectively, at the end of the prior period and 8.1 percent and 17.2 percent, respectively, in the year-ago period.

Historical metrics and financials can be found on the E*TRADE Financial Investor Relations website at investor.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 888-754-4437 and international participants by dialing +44 (0) 800-528-0638 or 212-271-4651. No conference ID number is required. A live audio webcast and replay of this conference call will also be available at investor.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 balance sheet reductions, cost reduction initiatives and the growth of our brokerage franchise, are based on current expectations that 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.

© 2012 E*TRADE Financial Corporation. All rights reserved.

Financial Statements
E*TRADE FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statement of Income
(In thousands, except per share amounts)
(Unaudited)
                 
Three Months Ended Nine Months Ended
September 30, September 30,
2012 2011 2012 2011
 
Revenue:
Operating interest income $ 333,977 $ 383,701 $ 1,050,758 $ 1,165,820
Operating interest expense   (73,100 )   (78,123 )   (225,924 )   (235,119 )
Net operating interest income   260,877     305,578     824,834     930,701  
Commissions 90,424 113,407 291,168 341,690
Fees and service charges 30,915 29,446 91,976 103,299
Principal transactions 22,177 27,345 67,562 80,677
Gains on loans and securities, net 78,977 24,341 138,568 87,686
Net impairment (2,395 ) (3,196 ) (11,196 ) (12,142 )
Other revenues   9,060     10,354     28,928     29,678  
Total non-interest income   229,158     201,697     607,006     630,888  
Total net revenue   490,035     507,275     1,431,840     1,561,589  
Provision for loan losses 141,019 98,384 280,227 317,578
Operating expense:
Compensation and benefits 94,790 80,452 272,617 244,973
Clearing and servicing 30,856 34,748 98,248 113,095
Advertising and market development 26,001 27,258 110,156 108,642
FDIC insurance premiums 31,342 35,690 86,899 80,288
Professional services 20,421 19,772 60,690 64,732
Occupancy and equipment 19,423 17,021 55,521 50,998
Communications 17,560 16,930 55,038 49,712
Depreciation and amortization 23,044 22,873 68,387 67,644
Amortization of other intangibles 6,296 6,538 18,887 19,613
Facility restructuring and other exit activities 2,350 458 3,515 6,056
Other operating expenses   16,950     79,972     46,769     124,891  
Total operating expense   289,033     341,712     876,727     930,644  
Income before other income (expense) and income tax expense (benefit) 59,983 67,179 274,886 313,367
Other income (expense):
Corporate interest income 21 10 55 689
Corporate interest expense (45,483 ) (44,769 ) (135,893 ) (132,870 )
Gains on sales of investments, net 18 - 17 38
Gains (losses) on early extinguishment of debt (50,608 ) - (50,608 ) 3,091
Equity in income (loss) of investments and venture funds   (234 )   520     1,774     197  
Total other income (expense)   (96,286 )   (44,239 )   (184,655 )   (128,855 )
Income (loss) before income tax expense (benefit) (36,303 ) 22,940 90,231 184,512
Income tax expense (benefit)   (7,678 )   (47,756 )   16,755     21,465  
Net income (loss) $ (28,625 ) $ 70,696   $ 73,476   $ 163,047  
 
Basic earnings (loss) per share $ (0.10 ) $ 0.25 $ 0.26 $ 0.62
Diluted earnings (loss) per share $ (0.10 ) $ 0.24 $ 0.25 $ 0.56
Shares used in computation of per share data:
Basic 285,850 283,807 285,658 261,272
Diluted 285,850 289,706 290,395 289,770
 
 

E*TRADE FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statement of Income
(In thousands, except per share amounts)
(Unaudited)
             
 
Three Months Ended
September 30, June 30, September 30,
2012 2012 2011
Revenue:
Operating interest income $ 333,977 $ 354,520 $ 383,701
Operating interest expense   (73,100 )   (75,415 )   (78,123 )
Net operating interest income   260,877     279,105     305,578  
Commissions 90,424 93,313 113,407
Fees and service charges 30,915 29,063 29,446
Principal transactions 22,177 21,239 27,345
Gains on loans and securities, net 78,977 24,685 24,341
Net impairment (2,395 ) (5,269 ) (3,196 )
Other revenues   9,060     10,272     10,354  
Total non-interest income   229,158     173,303     201,697  
Total net revenue   490,035     452,408     507,275  
Provision for loan losses 141,019 67,261 98,384
Operating expense:
Compensation and benefits 94,790 85,549 80,452
Clearing and servicing 30,856 32,837 34,748
Advertising and market development 26,001 36,567 27,258
FDIC insurance premiums 31,342 27,195 35,690
Professional services 20,421 19,934 19,772
Occupancy and equipment 19,423 18,244 17,021
Communications 17,560 18,358 16,930
Depreciation and amortization 23,044 23,104 22,873
Amortization of other intangibles 6,296 6,295 6,538
Facility restructuring and other exit activities 2,350 1,589 458
Other operating expenses   16,950     11,783     79,972  
Total operating expense   289,033     281,455     341,712  
Income before other income (expense) and income tax expense (benefit) 59,983 103,692 67,179
Other income (expense):
Corporate interest income 21 20 10
Corporate interest expense (45,483 ) (45,285 ) (44,769 )
Gains on sales of investments, net 18 - -
Losses on early extinguishment of debt (50,608 ) - -
Equity in income (loss) of investments and venture funds   (234 )   2,113     520  
Total other income (expense)   (96,286 )   (43,152 )   (44,239 )
Income (loss) before income tax expense (benefit) (36,303 ) 60,540 22,940
Income tax expense (benefit)   (7,678 )   21,030     (47,756 )
Net income (loss) $ (28,625 ) $ 39,510   $ 70,696  
 
Basic earnings (loss) per share $ (0.10 ) $ 0.14 $ 0.25
Diluted earnings (loss) per share $ (0.10 ) $ 0.14 $ 0.24
Shares used in computation of per share data:
Basic 285,850 285,645 283,807
Diluted 285,850 290,044 289,706
 
 

E*TRADE FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheet
(In thousands, except share data)
(Unaudited)
             
 
September 30, June 30, December 31,
2012     2012     2011
ASSETS
Cash and equivalents $ 2,825,012 $ 1,378,454 $ 2,099,839
Cash required to be segregated under federal or other regulations 1,434,330 761,485 1,275,587
Trading securities 107,378 60,081 54,372
Available-for-sale securities 14,925,459 16,152,748 15,651,493
Held-to-maturity securities 9,684,568 8,433,682 6,079,512
Margin receivables 5,608,253 5,804,350 4,826,256
Loans receivable, net 10,627,434 11,225,848 12,332,807
Investment in FHLB stock 128,944 131,478 140,183
Property and equipment, net 294,517 297,344 299,693
Goodwill 1,934,232 1,934,232 1,934,232
Other intangibles, net 266,918 273,213 285,805
Other assets   2,518,560         2,702,915         2,960,673  
Total assets $ 50,355,605       $ 49,155,830       $ 47,940,452  
 
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits $ 29,127,826 $ 27,911,100 $ 26,459,985
Securities sold under agreements to repurchase 4,609,117 4,717,656 5,015,499
Customer payables 6,013,640 5,128,653 5,590,858
FHLB advances and other borrowings 2,325,846 2,741,383 2,736,935
Corporate debt 1,505,466 1,501,278 1,493,552
Other liabilities   1,679,856         2,076,151         1,715,673  
Total liabilities   45,261,751         44,076,221         43,012,502  
 
Shareholders' equity:

Common stock, $0.01 par value, shares authorized: 400,000,000 at  September 30, 2012, June 30, 2012 and December 31, 2011, shares issued  and outstanding: 286,056,306 at September 30, 2012, 285,740,705 at June 30, 2012  and 285,368,075 at December 31, 2011
2,861 2,857 2,854
Additional paid-in-capital 7,316,057 7,310,487 7,306,862
Accumulated deficit (1,921,661 ) (1,893,036 ) (1,995,137 )
Accumulated other comprehensive loss   (303,403 )       (340,699 )       (386,629 )
Total shareholders' equity   5,093,854         5,079,609         4,927,950  
Total liabilities and shareholders' equity $ 50,355,605       $ 49,155,830       $ 47,940,452  
 
 

                     

Segment Reporting
Three Months Ended September 30, 2012

Trading andInvesting
 

Balance SheetManagement
 

Corporate/Other
  Eliminations(5) Total
(In thousands)
Revenue:
Operating interest income $ 165,523 $ 264,977 $ - $ (96,523 ) $ 333,977
Operating interest expense   (8,718 )   (160,905 )   -     96,523     (73,100 )
Net operating interest income   156,805     104,072     -     -     260,877  
Commissions 90,424 - - - 90,424
Fees and service charges 30,311 604 - - 30,915
Principal transactions 22,177 - - - 22,177
Gains (losses) on loans and securities, net 3 78,980 (6 ) - 78,977
Net impairment - (2,395 ) - - (2,395 )
Other revenues   7,747     1,313     -     -     9,060  
Total non-interest income   150,662     78,502     (6 )   -     229,158  
Total net revenue   307,467     182,574     (6 )   -     490,035  
Provision for loan losses - 141,019 - - 141,019
Operating expense:
Compensation and benefits 61,994 4,442 28,354 - 94,790
Clearing and servicing 17,409 13,447 - - 30,856
Advertising and market development 26,000 1 - - 26,001
FDIC insurance premiums - 31,342 - - 31,342
Professional services 7,218 388 12,815 - 20,421
Occupancy and equipment 17,381 453 1,589 - 19,423
Communications 16,819 330 411 - 17,560
Depreciation and amortization 18,946 167 3,931 - 23,044
Amortization of other intangibles 6,296 - - - 6,296
Facility restructuring and other exit activities - - 2,350 - 2,350
Other operating expenses   8,400     2,634     5,916     -     16,950  
Total operating expense   180,463     53,204     55,366     -     289,033  
Segment income (loss) before other income (expense)   127,004     (11,649 )   (55,372 )   -     59,983  
Other income (expense):
Corporate interest income - - 21 - 21
Corporate interest expense - - (45,483 ) - (45,483 )
Gains on sale of investments, net - - 18 - 18
Losses on early extinguishment of debt - - (50,608 ) - (50,608 )
Equity in loss of investments and venture funds   -     -     (234 )   -     (234 )
Total other income (expense)   -     -     (96,286 )   -     (96,286 )
Segment income (loss) $ 127,004   $ (11,649 ) $ (151,658 ) $ -   $ (36,303 )
 
 
Three Months Ended June 30, 2012

Trading andInvesting

Balance SheetManagement

Corporate/Other

Eliminations(5)
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
Clearing and servicing 16,327 16,510 - - 32,837
Advertising and market development 36,529 38 - - 36,567
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 venture funds   -     -     2,113     -     2,113  
Total other income (expense)   -     -     (43,152 )   -     (43,152 )
Segment income (loss) $ 128,814   $ 11,613   $ (79,887 ) $ -   $ 60,540  
 
 
Three Months Ended September 30, 2011

Trading andInvesting

Balance SheetManagement

Corporate/Other
Eliminations(5) Total
(In thousands)
Revenue:
Operating interest income $ 197,905 $ 313,516 $ 4 $ (127,724 ) $ 383,701
Operating interest expense   (12,373 )   (193,474 )   -     127,724     (78,123 )
Net operating interest income   185,532     120,042     4     -     305,578  
Commissions 113,407 - - - 113,407
Fees and service charges 29,268 178 - - 29,446
Principal transactions 27,345 - - - 27,345
Gains (losses) on loans and securities, net (935 ) 25,278 (2 ) - 24,341
Net impairment - (3,196 ) - - (3,196 )
Other revenues   8,286     2,068     -     -     10,354  
Total non-interest income   177,371     24,328     (2 )   -     201,697  
Total net revenue   362,903     144,370     2     -     507,275  
Provision for loan losses - 98,384 - - 98,384
Operating expense:
Compensation and benefits 58,558 4,607 17,287 - 80,452
Clearing and servicing 18,363 16,385 - - 34,748
Advertising and market development 26,928 330 - - 27,258
FDIC insurance premiums - 35,690 - - 35,690
Professional services 10,966 1,063 7,743 - 19,772
Occupancy and equipment 15,968 668 385 - 17,021
Communications 16,179 338 413 - 16,930
Depreciation and amortization 17,893 284 4,696 - 22,873
Amortization of other intangibles 6,538 - - - 6,538
Facility restructuring and other exit activities - - 458 - 458
Other operating expenses   66,460     7,060     6,452     -     79,972  
Total operating expense   237,853     66,425     37,434     -     341,712  
Segment income (loss) before other income (expense)   125,050     (20,439 )   (37,432 )   -     67,179  
Other income (expense):
Corporate interest income - - 10 - 10
Corporate interest expense - - (44,769 ) - (44,769 )
Equity in income of investments and venture funds   -     -     520     -     520  
Total other income (expense)   -     -     (44,239 )   -     (44,239 )
Segment income (loss) $ 125,050   $ (20,439 ) $ (81,671 ) $ -   $ 22,940  
 
 

Key Performance Metrics(6)

Corporate Metrics
   

Qtr ended9/30/12
   

Qtr ended6/30/12
   

Qtr ended9/30/12vs.6/30/12
   

Qtr ended9/30/11
   

Qtr ended9/30/12vs.9/30/11
       

Operating margin %(7)
Consolidated 12 % 23 % (11)% 13 % (1)%
Trading and Investing 41 % 41 % 0 % 34 % 7 %
Balance Sheet Management N.M. 9 % N.M. N.M. N.M.
 
Employees 3,086 3,104 (1)% 3,122 (1)%
Consultants and other   100   110 (9)%   161 (38)%
Total headcount 3,186 3,214 (1)% 3,283 (3)%
 
Book value per share $ 17.81 $ 17.78 0 % $ 17.34 3 %
Tangible book value per share(8) $ 11.17 $ 11.08 1 % $ 10.41 7 %
 
Corporate cash ($MM) $ 430.8 $ 436.5 (1)% $ 438.2 (2)%
 
Enterprise net interest spread (basis points)(9) 228 244 (7)% 281 (19)%
Enterprise interest-earning assets, average ($MM) $ 44,853 $ 44,770 0 % $ 42,681 5 %
 

Earnings before interest, taxes, depreciation & amortization ("EBITDA") ($MM)
Net income (loss) $ (28.6) $ 39.5 N.M. $ 70.7 N.M.
Income tax expense (benefit) (7.7) 21.0 N.M. (47.8) N.M.
Depreciation & amortization 29.3 29.4 0 % 29.4 0 %
Corporate interest expense   45.5   45.3 0 %   44.8 2 %
EBITDA $ 38.5 $ 135.2 (72)% $ 97.1 (60)%
 
Interest coverage(10) 0.8 3.0 N.M. 2.2 N.M.
 
Bank earnings before taxes and before credit losses ($MM)(11) $ 145.9 $ 153.9 (5)% $ 152.3 (4)%
 

Trading and Investing Metrics
 
Trading days 62.5 63.0 N.M. 64.0 N.M.
 
DARTs 128,701 138,653 (7)% 164,715 (22)%
 
Total trades (MM) 8.0 8.7 (8)% 10.5 (24)%
Average commission per trade $ 11.24 $ 10.68 5 % $ 10.76 4 %
 
End of period margin receivables ($B) $ 5.6 $ 5.8 (3)% $ 5.2 8 %
Average margin receivables ($B) $ 5.6 $ 5.6 0 % $ 5.4 4 %
 
 
Gross new brokerage accounts 79,534 104,659 (24)% 85,515 (7)%
Gross new stock plan accounts 55,539 52,173 6 % 49,421 12 %
Gross new banking accounts 3,492 4,328 (19)% 5,064 (31)%
Closed accounts   (114,044)   (102,587) N.M.   (130,699) N.M.
Net new accounts 24,521 58,573 N.M. 9,301 N.M.
 
Net new brokerage accounts 18,247 45,599 N.M. 13,043 N.M.
Net new stock plan accounts 14,538 22,899 N.M. 8,042 N.M.
Net new banking accounts   (8,264)   (9,925) N.M.   (11,784) N.M.
Net new accounts 24,521 58,573 N.M. 9,301 N.M.
 
End of period brokerage accounts 2,892,852 2,874,605 1 % 2,772,816 4 %
End of period stock plan accounts 1,118,840 1,104,302 1 % 1,062,088 5 %
End of period banking accounts   437,884   446,148 (2)%   472,783 (7)%
End of period total accounts 4,449,576 4,425,055 1 % 4,307,687 3 %
 
Annualized brokerage account attrition rate(12) 8.5% 8.4% N.M. 10.5% N.M.
 

Customer Assets ($B)
Security holdings $ 141.2 $ 134.9 5 % $ 109.9 28 %
Customer payables (cash) 6.0 5.1 18 % 5.4 11 %
Customer cash balances held by third parties 4.7 3.6 31 % 3.3 42 %
Unexercised stock plan customer options (vested)   23.1   21.0 10 %   16.1 43 %
Customer assets in brokerage and stock plan accounts   175.0   164.6 6 %   134.7 30 %
Sweep deposits 21.9 20.5 7 % 17.4 26 %
Savings, transaction and other   7.2   7.4 (3)%   7.8 (8)%
Customer assets in banking accounts   29.1   27.9 4 %   25.2 15 %
Total customer assets $ 204.1 $ 192.5 6 % $ 159.9 28 %
 
Net new brokerage assets ($B)(13) $ 1.9 $ 2.2 N.M. $ 2.6 N.M.
Net new banking assets ($B)(13)   (0.2)   (0.5) N.M.   (0.5) N.M.
Net new customer assets ($B)(13) $ 1.7 $ 1.7 N.M. $ 2.1 N.M.
 
Brokerage related cash ($B) $ 32.6 $ 29.2 12 % $ 26.1 25 %
Other customer cash and deposits ($B)   7.2   7.4 (3)%   7.8 (8)%
Total customer cash and deposits ($B) $ 39.8 $ 36.6 9 % $ 33.9 17 %
 
Unexercised stock plan customer options (unvested) ($B) $ 48.4 $ 43.5 11 % $ 33.2 46 %
 
Customer net (purchase) / sell activity ($B) $ 2.2 $ (3.9) N.M. $ (2.2) N.M.
 

Market Making
Equity shares traded (MM) 105,282 101,415 4 % 94,219 12 %
Average revenue capture per 1,000 equity shares $ 0.207 $ 0.206 1 % $ 0.290 (29)%
% of Bulletin Board equity shares to total equity shares 93.5% 93.6% (0)% 92.4% 1 %
 

Balance Sheet Management Metrics
 

Loans receivable ($MM)
Average loans receivable $ 11,711 $ 12,310 (5)% $ 14,298 (18)%
Ending loans receivable, net $ 10,627 $ 11,226 (5)% $ 13,000 (18)%
 

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

One- to Four-Family
Current $ 5,122 $ 5,329 (4)% $ 6,000 (15)%
30-89 days delinquent 210 227 (7)% 292 (28)%
90-179 days delinquent   108   119 (9)%   141 (23)%
Total 30-179 days delinquent 318 346 (8)% 433 (27)%
180+ days delinquent (net of $157M, $181M and $243M in charge-offs for Q312, Q212 and Q311, respectively)   300   338 (11)%   556 (46)%
Total delinquent loans(14)   618   684 (10)%   989 (38)%
Gross loans receivable(15) $ 5,740 $ 6,013 (5)% $ 6,989 (18)%
 

Home Equity
Current $ 4,277 $ 4,543 (6)% $ 5,330 (20)%
30-89 days delinquent 99 104 (5)% 147 (33)%
90-179 days delinquent   65   71 (8)%   109 (40)%
Total 30-179 days delinquent 164 175 (6)% 256 (36)%
180+ days delinquent (net of $23M, $25M and $21M in charge-offs for Q312, Q212 and Q311, respectively)   42   43 (2)%   51 (18)%
Total delinquent loans(14)   206   218 (6)%   307 (33)%
Gross loans receivable(15) $ 4,483 $ 4,761 (6)% $ 5,637 (20)%
 

Consumer and Other
Current $ 892 $ 957 (7)% $ 1,170 (24)%
30-89 days delinquent 18 18 0 % 20 (10)%
90-179 days delinquent   3   3 0 %   4 (25)%
Total 30-179 days delinquent 21 21 0 % 24 (13)%
180+ days delinquent   -   - N.M.   - N.M.
Total delinquent loans   21   21 0 %   24 (13)%
Gross loans receivable(15) $ 913 $ 978 (7)% $ 1,194 (24)%
 

Total Loans Receivable
Current $ 10,291 $ 10,829 (5)% $ 12,500 (18)%
30-89 days delinquent 327 349 (6)% 459 (29)%
90-179 days delinquent   176   193 (9)%   254 (31)%
Total 30-179 days delinquent 503 542 (7)% 713 (29)%
180+ days delinquent   342   381 (10)%   607 (44)%
Total delinquent loans(14)   845   923 (8)%   1,320 (36)%
Total gross loans receivable(15) $ 11,136 $ 11,752 (5)% $ 13,820 (19)%
 

TDR performance detail ($MM)(16)
 

One- to Four-Family TDRs
Current $ 849 $ 843 1 % $ 726 17 %
30-89 days delinquent 95 89 7 % 66 44 %
90-179 days delinquent   40   46 (13)%   32 25 %
Total 30-179 days delinquent 135 135 0 % 98 38 %

180+ days delinquent (net of $47M, $49M and $49M in charge-offs for Q312, Q212 and Q311, respectively)
  80   79 1 %   120 (33)%
Total delinquent TDRs   215   214 0 %   218 (1)%
TDRs $ 1,064 $ 1,057 1 % $ 944 13 %
 

Home Equity TDRs
Current $ 215 $ 242 (11)% $ 361 (40)%
30-89 days delinquent 18 20 (10)% 54 (67)%
90-179 days delinquent   9   11 (18)%   25 (64)%
Total 30-179 days delinquent 27 31 (13)% 79 (66)%
180+ days delinquent (net of $4M, $3M and $3M in charge-offs for Q312, Q212 and Q311, respectively)   6   5 20 %   4 50 %
Total delinquent TDRs   33   36 (8)%   83 (60)%
TDRs $ 248 $ 278 (11)% $ 444 (44)%
 

Total TDRs
Current $ 1,064 $ 1,085 (2)% $ 1,087 (2)%
30-89 days delinquent 113 109 4 % 120 (6)%
90-179 days delinquent   49   57 (14)%   57 (14)%
Total 30-179 days delinquent 162 166 (2)% 177 (8)%
180+ days delinquent   86   84 2 %   124 (31)%
Total delinquent TDRs   248   250 (1)%   301 (18)%
TDRs $ 1,312 $ 1,335 (2)% $ 1,388 (5)%
 

Capital Metrics
 

E*TRADE Bank
Tier 1 leverage ratio(4)(17) 7.9 % 7.9 % 0.0 % 8.1 % (0.2)%
Tier 1 risk-based capital ratio(17) 18.0 % 16.7 % 1.3 % 16.0 % 2.0 %
Total risk-based capital ratio(17) 19.3 % 18.0 % 1.3 % 17.2 % 2.1 %
Tier 1 common ratio(17)(18) 18.0 % 16.7 % 1.3 % 11.0 % 7.0 %
E*TRADE Bank excess Tier 1 capital ($MM)(17) $ 1,320.2 $ 1,303.8 1 % $ 1,308.8 1 %
E*TRADE Bank excess Tier 1 risk-based capital ($MM)(17) $ 2,421.1 $ 2,263.2 7 % $ 2,119.1 14 %
E*TRADE Bank excess risk-based capital ($MM)(17) $ 1,869.8 $ 1,686.2 11 % $ 1,537.3 22 %
 

E*TRADE Financial
Tier 1 leverage ratio(19) 5.8 % 5.7 % 0.1 % 5.7 % 0.1 %
Tier 1 risk-based capital ratio(19) 13.0 % 12.2 % 0.8 % 11.2 % 1.8 %
Total risk-based capital ratio(19) 14.2 % 13.4 % 0.8 % 12.5 % 1.7 %
Tier 1 common ratio(3) 10.9 % 10.2 % 0.7 % 9.3 % 1.6 %
 
 

Activity in Allowance for Loan Losses
      Three Months Ended September 30, 2012

One- to Four-Family
    Home Equity    

Consumerand Other
    Total
(In thousands)
Allowance for loan losses, ending 6/30/12 $ 215,934 $ 266,883 $ 42,939 $ 525,756
Provision for loan losses 24,702 105,022 11,295 141,019
Charge-offs, net   (34,236 )   (111,016 )   (13,241 )   (158,493 )
Allowance for loan losses, ending 9/30/12 $ 206,400   $ 260,889   $ 40,993   $ 508,282  
 
 
Three Months Ended June 30, 2012

One- to Four-Family
Home Equity

Consumerand 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  
 
 
Three Months Ended September 30, 2011

One- to Four-Family
Home Equity

Consumerand Other
Total
(In thousands)
Allowance for loan losses, ending 6/30/11 $ 326,580 $ 493,551 $ 58,484 $ 878,615
Provision for loan losses 29,202 65,114 4,068 98,384
Charge-offs, net   (44,331 )   (104,623 )   (7,990 )   (156,944 )
Allowance for loan losses, ending 9/30/11 $ 311,451   $ 454,042   $ 54,562   $ 820,055  
 
 

Specific Valuation Allowance Activity(16)
      As of September 30, 2012

RecordedInvestmentin TDRsbeforecharge-offs
    Charge-offs    

RecordedInvestmentin TDRs
   

SpecificValuationAllowance
   

NetInvestment inTDRs
   

SpecificValuationAllowance asa % of TDRLoans
   

TotalExpectedLosses(20)
(Dollars in thousands)
One- to four-family $ 1,374,800 $ (311,122 ) $ 1,063,678 $ (98,628 ) $ 965,050 9 % 30 %
Home equity   405,302   (156,809 )   248,493   (92,702 )   155,791 37 % 62 %
Total $ 1,780,102 $ (467,931 ) $ 1,312,171 $ (191,330 ) $ 1,120,841 15 % 37 %
 
As of June 30, 2012

RecordedInvestmentin TDRsbeforecharge-offs
  Charge-offs

RecordedInvestmentin TDRs
 

SpecificValuationAllowance
 

NetInvestment inTDRs
 

SpecificValuationAllowance asa % of TDRLoans
 

TotalExpectedLosses(20)
(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 %
 
As of September 30, 2011

RecordedInvestmentin TDRsbeforecharge-offs
  Charge-offs

RecordedInvestmentin TDRs
 

SpecificValuationAllowance
 

NetInvestment inTDRs
 

SpecificValuationAllowance asa % of TDRLoans
 

TotalExpectedLosses(20)
 
One- to four-family 1,147,693 (203,893 ) 943,800 (104,502 ) 839,298 11 % 27 %
Home equity   488,878   (45,013 )   443,865   (222,606 )   221,259 50 % 55 %
Total   1,636,571   (248,906 )   1,387,665   (327,108 )   1,060,557 24 % 35 %
 
 

Average Enterprise Balance Sheet Data
      Three Months Ended
September 30, 2012
Average    

OperatingInterest
    Average
Balance

Inc./Exp.
Yield/Cost
Enterprise interest-earning assets: (In thousands)
Loans(21) $ 11,727,325 $ 118,747 4.05 %
Margin receivables 5,604,036 55,465 3.94 %
Available-for-sale securities 14,992,705 82,959 2.21 %
Held-to-maturity securities 8,984,586 61,923 2.76 %
Cash and equivalents 2,268,833 1,219 0.21 %
Segregated cash 693,057 115 0.07 %
Securities borrowed and other   582,746     11,897   8.12 %
Total enterprise interest-earning assets $ 44,853,288     332,325   2.96 %
Enterprise interest-bearing liabilities:
Deposits $ 28,631,403 5,885 0.08 %
Customer payables 5,646,155 2,839 0.20 %
Securities sold under agreements to repurchase 4,709,203 40,136 3.34 %
FHLB advances and other borrowings 2,622,282 24,153 3.60 %
Securities loaned and other   705,235     30   0.02 %
Total enterprise interest-bearing liabilities $ 42,314,278     73,043   0.68 %
Enterprise net interest income/spread(9) $ 259,282   2.28 %
 
Three Months Ended
June 30, 2012

Average

OperatingInterest
Average
Balance Inc./Exp. Yield/Cost
Enterprise interest-earning assets: (In thousands)
Loans(21) $ 12,324,567 $ 124,994 4.06 %
Margin receivables 5,633,453 55,418 3.96 %
Available-for-sale securities 16,336,062 98,625 2.41 %
Held-to-maturity securities 8,108,507 60,245 2.97 %
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(9) $ 277,232   2.44 %
 
Three Months Ended
September 30, 2011
Average

OperatingInterest
Average
Balance Inc./Exp. Yield/Cost
Enterprise interest-earning assets: (In thousands)
Loans(21) $ 14,302,016 $ 169,704 4.75 %
Margin receivables 5,404,720 55,587 4.08 %
Available-for-sale securities 15,016,437 102,545 2.73 %
Held-to-maturity securities 4,854,034 40,546 3.34 %
Cash and equivalents 1,534,517 752 0.19 %
Segregated cash 965,083 180 0.07 %
Securities borrowed and other   604,633     13,069   8.58 %
Total enterprise interest-earning assets $ 42,681,440     382,383   3.58 %
Enterprise interest-bearing liabilities:
Deposits $ 25,858,216 10,240 0.16 %
Customer payables 5,492,074 2,267 0.16 %
Securities sold under agreements to repurchase 5,345,652 37,941 2.78 %
FHLB advances and other borrowings 2,733,920 27,257 3.90 %
Securities loaned and other   627,606     383   0.24 %
Total enterprise interest-bearing liabilities $ 40,057,468     78,088   0.77 %
Enterprise net interest income/spread(9) $ 304,295   2.81 %
 

Reconciliation from Enterprise Net Interest Income to Net Operating Interest Income
 
Three Months Ended
September 30, June 30, September 30,
2012 2012 2011
(In thousands)
Enterprise net interest income $ 259,282 $ 277,232 $ 304,295
Taxable equivalent interest adjustment(22) (298 ) (300 ) (291 )
Earnings on customer cash held by third parties and other(23)   1,893     2,173     1,574  
Net operating interest income $ 260,877   $ 279,105   $ 305,578  
 
 

SUPPLEMENTAL INFORMATION

Explanation of Non-GAAP Measures and Certain Metrics

Management believes that tangible book value per share, corporate cash, EBITDA, 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 (8) 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.

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 (10) 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 (11) 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), (18) 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 annualized growth rate for net new brokerage assets is calculated by annualizing net new brokerage assets during the current period divided by the sum of security holdings, customer payables (cash), customer cash balances held by third parties and sweep deposits for the previous period end.

(2) The following table provides a reconciliation for the calculation of the total provision for loan losses including the additional $50 million that was recognized as a result of the Company receiving new bankruptcy data from third party servicers (dollars in thousands):
            Q3 2012     Q2 2012     Q3 2011
Provision for loan losses $ 91,419     $ 67,261     $ 98,384
Additional charge-offs for bankrupt loans   49,600       -       -
Total provision for loan losses $ 141,019     $ 67,261     $ 98,384
 
 

(3) The Tier 1 common ratio at E*TRADE Financial is a Q312 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 thousands):

    Q3 2012     Q2 2012     Q3 2011
Shareholders' equity $ 5,093,854     $ 5,079,609     $ 4,946,215
DEDUCT:
Losses in OCI on AFS debt securities and cash flow hedges, net of tax (307,587 ) (343,238 ) (378,676 )
Goodwill and other intangible assets, net of deferred tax liabilities   1,897,547         1,914,018         1,975,293  
Subtotal 3,503,894 3,508,829 3,349,598
DEDUCT:
Disallowed servicing assets and deferred tax assets   1,267,471         1,304,810         1,312,423  
Tier 1 common $ 2,236,423       $ 2,204,019       $ 2,037,175  
 
Total risk-weighted assets $ 20,606,671 $ 21,696,165 $ 21,998,899
 
Tier 1 common ratio (Tier 1 common / Total risk-weighted assets) 10.9 % 10.2 % 9.3 %
 
 

(4) In Q112, the Company transitioned from reporting under the OTS reporting requirements to reporting under the OCC reporting requirements. The Tier 1 leverage ratio in this release is the OCC Tier 1 leverage ratio for Q312 and Q212 and the OTS Tier 1 capital ratio previously reported for Q311. The OTS Tier 1 capital ratio and OCC Tier 1 leverage ratio are both calculated using total adjusted assets.

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

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

(7) 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.

(8) 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 thousands, except per share amounts):
      Q3 2012     Q2 2012     Q3 2011
Book value $ 5,093,854     $ 5,079,609     $ 4,946,215
Less: Goodwill and other intangibles, net (2,201,150 ) (2,207,445 ) (2,226,574 )
Less: Deferred tax liability related to goodwill   303,603         293,427         251,281  
Tangible book value $ 3,196,307       $ 3,165,591       $ 2,970,922  
 
 
      Q3 2012     Q2 2012     Q3 2011
Book value per share $ 17.81     $ 17.78     $ 17.34
Less: Goodwill and other intangibles, net per share (7.70 ) (7.73 ) (7.81 )
Less: Deferred tax liability related to goodwill per share   1.06         1.03         0.88  
Tangible book value per share $ 11.17       $ 11.08       $ 10.41  
 
 

(9) 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.

(10) Interest coverage represents the ratio of the Company’s EBITDA to its corporate interest expense. The interest coverage ratio based on the Company’s net income (loss) was (0.6), 0.9, and 1.6 for the three months ended September 30, 2012, June 30, 2012, and September 30, 2011, respectively.

(11) 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 thousands):
      Q3 2012     Q2 2012     Q3 2011
Income (loss) before income taxes $ (36,303 )     $ 60,540     $ 22,940
Add back:
Non-bank loss before income tax benefit(b) 67,156 45,478 52,131
Provision for loan losses 141,019 67,261 98,384
Gains on loans and securities, net (78,977 ) (24,685 ) (24,341 )
Net impairment 2,395 5,269 3,196
Losses on early extinguishment of wholesale borrowings   50,608         -         -  
Bank earnings before taxes and before credit losses $ 145,898       $ 153,863       $ 152,310  
 
 

(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.

(12) 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.

(13) 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.

(14) 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):
            Q3 2012     Q2 2012     Q3 2011
One- to four-family $ 463     $ 470     $ 430
Home equity 310     277     150
Total charge-offs $ 773     $ 747     $ 580
 
 

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

(16) 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. TDRs 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.

(17) E*TRADE Bank capital ratios and excess capital amounts are Q312 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:
        Q3 2012     Q2 2012     Q3 2011
Beginning E*TRADE Bank excess risk-based capital ($MM) $ 1,686     $ 1,514     $ 1,390
Bank earnings before taxes and before credit losses 146 154 152
Provision for loan losses (141 ) (67 ) (98 )
Loan portfolio run-off(a) 1 55 61
Margin decrease (increase) 20 (52 ) 48
Capital upstream(b) - - -
Changes in disallowed deferred tax assets 81 22 (35 )
Other capital changes(c)   77         60         19  
Ending E*TRADE Bank excess risk-based capital ($MM) $ 1,870       $ 1,686       $ 1,537  
 
 

(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 cash flows to and from the parent company. (c) Represents the capital impact related to changes in other risk-weighted assets.

(18) The increase in the E*TRADE Bank Tier 1 common ratio from Q311 was due to the conversion of the Company’s $1.05 billion in preferred stock in E*TRADE Bank to common stock in December 2011. As a result of the conversion, the common stock is includable in the Tier 1 common capital for E*TRADE Bank. The Tier 1 common ratio at E*TRADE Bank is a Q312 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 thousands):
      Q3 2012     Q2 2012     Q3 2011
E*TRADE Bank shareholder's equity $ 5,676,026     $ 5,629,406     $ 5,379,667
DEDUCT:
Losses in OCI on AFS debt securities and cash flow hedges, net of tax (307,371 ) (351,610 ) (381,558 )
Goodwill and other intangible assets, net of deferred tax liabilities   1,607,376     1,623,467     1,673,377  
Subtotal 4,376,021 4,357,549 4,087,848
DEDUCT:
Disallowed servicing assets and deferred tax assets 742,686 825,609 676,990
Deduction for low-level recourse and residual interests - - 16,191
Preferred stock   -         -         1,050,000  
E*TRADE Bank Tier 1 common $ 3,633,335       $ 3,531,940       $ 2,344,667  
 
E*TRADE Bank total risk-weighted assets $ 20,203,613 $ 21,144,847 $ 21,259,474
 
E*TRADE Bank tier 1 common ratio (Tier 1 common / Total risk-weighted assets) 18.0 % 16.7 % 11.0 %
 
 

(19) The Tier 1 leverage, Tier 1 risk-based capital and total risk-based capital ratios at E*TRADE Financial are Q312 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 within the next three years as a result of the Dodd-Frank Act. Management believes this ratio is an important measure of the Company's capital strength and has begun to track this ratio internally, using the current capital guidelines that apply to bank holding companies. The Tier 1 leverage, Tier 1 risk-based capital and total risk-based capital ratios are calculated as follows (dollars in thousands):

    Q3 2012     Q2 2012     Q3 2011
Shareholders' equity $ 5,093,854     $ 5,079,609     $ 4,946,215
DEDUCT:
Losses in OCI on AFS debt securities and cash flow hedges, net of tax (307,587 ) (343,238 ) (378,676 )
Goodwill and other intangible assets, net of deferred tax liabilities 1,897,547 1,914,018 1,975,293
ADD:
Qualifying restricted core capital elements (TRUPs)   433,000         433,000         433,000  
Subtotal 3,936,894 3,941,829 3,782,598
DEDUCT:
Disallowed servicing assets and deferred tax assets   1,267,471         1,304,810         1,312,423  
Tier 1 capital   2,669,423         2,637,019         2,470,175  
ADD:
Allowable allowance for loan losses   261,485         275,254         281,715  
Total capital $ 2,930,908       $ 2,912,273       $ 2,751,890  
 
Total average assets $ 49,400,750 $ 49,374,635 $ 46,880,301
DEDUCT:
Goodwill and other intangible assets, net of deferred tax liabilities   1,897,547         1,914,018         1,975,293  
Subtotal 47,503,203 47,460,617 44,905,008
DEDUCT:
Disallowed servicing assets and deferred tax assets   1,267,471         1,304,810         1,312,423  
Average total assets for leverage capital purposes $ 46,235,732       $ 46,155,807       $ 43,592,585  
 
Total risk-weighted assets(a) $ 20,606,671 $ 21,696,165 $ 21,998,899
 
Tier 1 leverage ratio (Tier 1 capital / Average total assets for leverage capital purposes) 5.8 % 5.7 % 5.7 %
Tier 1 capital / Total risk-weighted assets 13.0 % 12.2 % 11.2 %
Total capital / Total risk-weighted assets 14.2 % 13.4 % 12.5 %

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

(21) Excludes loans to customers on margin.

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

(23) Includes interest earned on average customer assets of $3.9 billion, $3.6 billion, and $3.7 billion for the quarters ended September 30, 2012, June 30, 2012, and September 30, 2011, respectively, held by parties outside E*TRADE Financial, including third party money market funds and sweep deposit accounts at unaffiliated financial institutions.

Copyright Business Wire 2010

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