E*TRADE Financial Corporation Announces Fourth Quarter And Full Year 2013 Results

E*TRADE Financial Corporation (NASDAQ:ETFC):

Fourth Quarter Results
  • Net income of $58 million, or $0.20 per share on total net revenue of $447 million
  • Total operating expenses of $295 million, including restructuring charges of $5 million
  • Provision for loan losses of $17 million; net charge-offs of $23 million
  • Corporate cash of $415 million, including a dividend from the bank of $75 million
  • Daily Average Revenue Trades (DARTs) of 160,000
  • End of period margin receivables of $6.4 billion
  • Net new brokerage accounts of 22,000
  • Net new brokerage assets of $3.2 billion; end of period customer assets of $261 billion

Full Year 2013 Performance
  • Net income of $86 million, or $0.29 per share; excluding the impact of the decision to exit the market making business, net income of $204 million or $0.70 per share (1)
  • Total net revenue of $1.7 billion
  • Total operating expenses of $1.3 billion, including goodwill impairment of $142 million and restructuring charges of $28 million
  • Provision for loan losses of $143 million
  • Dividends of $175 million from bank to parent
  • DARTs of 151,000
  • Net new brokerage accounts of 95,000
  • Net new brokerage assets of $10.4 billion

E*TRADE Financial Corporation (NASDAQ:ETFC) today announced results for its fourth quarter ended December 31, 2013, reporting net income of $58 million, or $0.20 per share. This compares with net income of $47 million, or $0.16 per share in the prior quarter, and a net loss of $186 million, or $0.65 loss per share in the fourth quarter of 2012. Total net revenue of $447 million for the fourth quarter of 2013 improved from $417 million in the prior quarter, and was down from $468 million in the fourth quarter of 2012.

“We had a positive 2013,” said Paul Idzik, Chief Executive Officer. “Our core business posted solid results, as the improving operating environment fueled encouraging trends in credit and retail engagement. Internally, we made significant changes to position the Company for growth and to capitalize on our positive momentum. We installed a highly-experienced new management team; we completed a rigorous review of our expense base; and we executed well on our Capital Plan, culminating in two quarters of dividends from our bank to our parent. With these many foundational elements in a solid place, and our legacy risks continuing to diminish, we are focused even more acutely on our core business and on putting our customers at the forefront of everything we do. As we build on the solid progress made in 2013, I am excited about what’s in store for the coming year and beyond – entering our next phase of growth in a very deliberate way.”

E*TRADE reported DARTs of 160,000 during the quarter, an increase of 10 percent from the prior quarter and an increase of 25 percent versus the same quarter a year ago. DARTs for the full year were 151,000, up from 138,000 in 2012.

The Company ended the quarter with 3.0 million brokerage accounts, an increase of 22,000 from the prior quarter. This compared with 13,000 net new brokerage accounts in the prior quarter and 10,000 in the fourth quarter of 2012. For the full year, the Company added 95,000 net new brokerage accounts. Brokerage account attrition for the fourth quarter was 8.9 percent annualized. For the full year, attrition was 8.8 percent, representing an improvement from 9.0 percent in 2012.

The Company ended the quarter with $261 billion in total customer assets, compared with $241 billion at the end of the third quarter and $201 billion from the fourth quarter of 2012.

During the quarter, customers added $3.2 billion in net new brokerage assets, totaling $10.4 billion for the full year. Brokerage related cash increased by $1.5 billion to $39.7 billion during the period. Customers were net buyers of approximately $0.8 billion of securities. Margin receivables averaged $6.4 billion in the quarter, up eight percent over last quarter and up 10 percent year over year, ending the quarter at $6.4 billion.

Corporate cash ended the quarter at $415 million, an increase of $42 million from the prior quarter, driven primarily by a $75 million dividend distributed from the Company’s bank subsidiary to its parent during the quarter.

Net operating interest income for the fourth quarter was $257 million, up from $241 million in the prior quarter and down from $260 million a year ago. Fourth quarter results reflected a net interest spread of 2.40 percent on average interest-earning assets of $41.7 billion, compared with 2.30 percent on $40.8 billion in the prior quarter.

Commissions, fees and service charges, principal transactions, and other revenue in the fourth quarter were $178 million, compared with $164 million in the prior quarter and $151 million in the fourth quarter of 2012. Average commission per trade for the quarter was $10.97, compared with $11.15 in the prior quarter, and $11.10 in the fourth quarter of 2012.

Total net revenue in the quarter also included $12 million of net gains on loans and securities, net of impairment, compared with $12 million in the prior quarter, and $56 million in the fourth quarter of 2012 which was elevated due to the Company’s deleveraging efforts.

Total operating expenses for the quarter were $295 million, including $5 million of restructuring charges. Excluding the restructuring charges, operating expenses increased $25 million sequentially, to $290 million (2). For the full year, operating expenses were $1.3 billion, including $142 million of goodwill impairment and $28 million of restructuring charges.

“The improving operating environment and our diminishing legacy issues have given us more flexibility to start increasing spend to fuel our growth,” said Matthew Audette, Chief Financial Officer. “This increased focus on prudently investing in our core business is reflected in our fourth quarter results, which included some additional expenses in compensation, professional services and restructuring.”

The Company’s loan portfolio ended the quarter at $8.6 billion, contracting approximately $0.4 billion from the prior quarter and $2.0 billion from the fourth quarter of 2012. Fourth quarter provision for loan losses of $17 million was down from $37 million in the prior quarter.

Net charge-offs in the quarter were $23 million, a decrease of $6 million from the prior quarter. The allowance for loan losses ended the quarter at $453 million, down $6 million from the previous quarter.

As of December 31, 2013, the Company reported Bank and consolidated Tier 1 leverage ratios of 9.5 percent (3) and 6.7 percent (4), respectively, compared with 9.5 percent (3) and 6.6 percent (4) 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. EST today. This conference call will be available to domestic participants by dialing 800-771-6759 while international participants should dial +1 212-231-2928. 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 positive credit and retail trends, improvements in the operating environment, increased investment in the Company’s core business, continuing improvements to the Company’s risk profile and future capital distributions from the bank to its parent are “forward-looking statements” within the meaning of the safe haror provisions of the U.S. Private Securities Litigation Reform Act of 1995, and are subject to a number of uncertainties and risks. Actual results may differ materially from those indicated in the forward-looking statements. The uncertainties and risks include, but are not limited to, 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.

© 2014 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 Twelve Months Ended
December 31, December 31,
2013 2012 2013 2012
Revenue:
Operating interest income $ 317,107 $ 320,340 $ 1,219,912 $ 1,371,098
Operating interest expense   (59,982 )   (60,109 )   (238,070 )   (286,033 )
Net operating interest income   257,125     260,231     981,842     1,085,065  
Commissions 110,253 86,675 420,099 377,843
Fees and service charges 42,249 30,194 155,050 122,170
Principal transactions 17,109 25,594 72,662 93,156
Gains on loans and securities, net 11,637 61,798 60,591 200,366
Net impairment - (5,729 ) (2,331 ) (16,925 )
Other revenues   8,726     8,893     35,784     37,821  
Total non-interest income   189,974     207,425     741,855     814,431  
Total net revenue   447,099     467,656     1,723,697     1,899,496  
Provision for loan losses 17,273 74,410 143,471 354,637
Operating expense:
Compensation and benefits 92,721 80,108 362,798 352,725
Advertising and market development 27,615 29,295 108,408 139,451
Clearing and servicing 30,346 30,387 123,993 128,635
FDIC insurance premiums 24,375 30,341 103,427 117,240
Professional services 26,387 25,631 85,165 86,321
Occupancy and equipment 19,538 18,825 72,882 74,346
Communications 16,621 18,016 69,032 73,054
Depreciation and amortization 21,427 22,229 89,111 90,616
Amortization of other intangibles 5,698 6,296 23,531 25,183
Impairment of goodwill - - 142,423 -
Facility restructuring and other exit activities 4,528 4,174 28,399 7,689
Other operating expenses   25,803     20,056     66,096     66,825  
Total operating expense   295,059     285,358     1,275,265     1,162,085  

Income before other income (expense) and income tax expense (benefit)
134,767 107,888 304,961 382,774
Other income (expense):
Corporate interest income 40 35 73 90
Corporate interest expense (28,595 ) (43,984 ) (114,433 ) (179,877 )
Losses on early extinguishment of debt (100 ) (284,653 ) (100 ) (335,261 )
Equity in income (loss) of investments and other   (689 )   (481 )   4,438     1,310  
Total other income (expense)   (29,344 )   (329,083 )   (110,022 )   (513,738 )
Income (loss) before income tax expense (benefit) 105,423 (221,195 ) 194,939 (130,964 )
Income tax expense (benefit)   47,560     (35,136 )   108,927     (18,381 )
Net income (loss) $ 57,863   $ (186,059 ) $ 86,012   $ (112,583 )
 
Basic earnings (loss) per share $ 0.20 $ (0.65 ) $ 0.30 $ (0.39 )
Diluted earnings (loss) per share $ 0.20 $ (0.65 ) $ 0.29 $ (0.39 )
Shares used in computation of per share data:
Basic 287,316 286,016 286,991 285,748
Diluted 293,149 286,016 292,589 285,748
 

 
E*TRADE FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statement of Income (Loss)
(In thousands, except per share amounts)
(Unaudited)
     
Three Months Ended
December 31, September 30, December 31,
2013 2013 2012
 
Revenue:
Operating interest income $ 317,107 $ 300,915 $ 320,340
Operating interest expense   (59,982 )   (60,068 )   (60,109 )

Net operating interest income
  257,125     240,847     260,231  
Commissions 110,253 102,753 86,675
Fees and service charges 42,249 39,924 30,194
Principal transactions 17,109 12,631 25,594
Gains on loans and securities, net 11,637 12,213 61,798
Net impairment - (586 ) (5,729 )
Other revenues   8,726     9,020     8,893  
Total non-interest income   189,974     175,955     207,425  
Total net revenue   447,099     416,802     467,656  
Provision for loan losses 17,273 37,399 74,410
Operating expense:
Compensation and benefits 92,721 88,405 80,108
Advertising and market development 27,615 20,925 29,295
Clearing and servicing 30,346 30,941 30,387
FDIC insurance premiums 24,375 24,707 30,341
Professional services 26,387 22,842 25,631
Occupancy and equipment 19,538 17,675 18,825
Communications 16,621 15,279 18,016
Depreciation and amortization 21,427 21,839 22,229
Amortization of other intangibles 5,698 5,699 6,296
Facility restructuring and other exit activities 4,528 6,410 4,174
Other operating expenses   25,803     16,022     20,056  

Total operating expense
  295,059     270,744     285,358  
Income before other income (expense) and income tax expense (benefit) 134,767 108,659 107,888
Other income (expense):
Corporate interest income 40 9 35
Corporate interest expense (28,595 ) (28,605 ) (43,984 )
Losses on early extinguishment of debt (100 ) - (284,653 )
Equity in loss of investments and other   (689 )   (133 )   (481 )
Total other income (expense)   (29,344 )   (28,729 )   (329,083 )
Income (loss) before income tax expense (benefit) 105,423 79,930 (221,195 )
Income tax expense (benefit)   47,560     32,502     (35,136 )
Net income (loss) $ 57,863   $ 47,428   $ (186,059 )
 
Basic earnings (loss) per share $ 0.20 $ 0.17 $ (0.65 )
Diluted earnings (loss) per share $ 0.20 $ 0.16 $ (0.65 )
Shares used in computation of per share data:
Basic 287,316 287,111 286,016
Diluted 293,149 292,630 286,016
 

 
E*TRADE FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheet
(In thousands, except share data)
(Unaudited)
     
December 31, September 30, December 31,
2013 2013 2012
ASSETS
Cash and equivalents $ 1,838,012 $ 1,796,181 $ 2,761,494
Cash required to be segregated under federal or other regulations 1,066,069 738,221 376,898
Trading securities - - 101,270
Available-for-sale securities 13,592,239 13,281,458 13,443,020
Held-to-maturity securities 10,180,794 9,944,153 9,539,948
Margin receivables 6,352,695 6,188,708 5,804,041
Loans receivable, net 8,122,617 8,564,614 10,098,723
Investment in FHLB stock 61,400 61,400 67,400
Property and equipment, net 237,161 246,186 288,170
Goodwill 1,791,809 1,791,809 1,934,232
Other intangibles, net 215,930 221,628 260,622
Other assets   2,821,130     2,713,121       2,710,921  
Total assets $ 46,279,856   $ 45,547,479     $ 47,386,739  
 
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits $ 25,970,849 $ 25,869,797 $ 28,392,552
Securities sold under agreements to repurchase 4,542,842 4,449,665 4,454,661
Customer payables 6,309,743 5,830,257 4,964,922
FHLB advances and other borrowings 1,279,041 1,285,011 1,260,916
Corporate debt 1,768,649 1,767,749 1,764,982
Other liabilities   1,552,807     1,515,426       1,644,236  
Total liabilities   41,423,931     40,717,905       42,482,269  
 
Shareholders' equity:
Common stock, $0.01 par value, shares authorized: 400,000,000 at
December 31, 2013, September 30, 2013 and December 31, 2012, shares issued
and outstanding: 287,357,001 at December 31, 2013, 287,182,972 at
September 30, 2013, and 286,114,334 at December 31, 2012 2,874 2,872 2,861
Additional paid-in-capital 7,328,202 7,326,891 7,319,257
Accumulated deficit (2,021,708 ) (2,079,571 ) (2,107,720 )
Accumulated other comprehensive loss   (453,443 )   (420,618 )     (309,928 )
Total shareholders' equity   4,855,925     4,829,574       4,904,470  
Total liabilities and shareholders' equity $ 46,279,856   $ 45,547,479     $ 47,386,739  
 

 
Segment Reporting
         
Three Months Ended December 31, 2013

Trading and

Investing

Balance Sheet

Management

Corporate/

Other
Eliminations (5) Total
(In thousands)
Revenue:
Operating interest income $ 144,460 $ 241,795 $ - $ (69,148 ) $ 317,107
Operating interest expense   (5,568 )   (123,562 )   -     69,148     (59,982 )
Net operating interest income   138,892     118,233     -     -     257,125  
Commissions 110,253 - - - 110,253
Fees and service charges 41,974 275 - - 42,249
Principal transactions 17,109 - - - 17,109
Gains on loans and securities, net - 11,637 - - 11,637
Net impairment - - - - -
Other revenues   7,443     1,283     -     -     8,726  
Total non-interest income   176,779     13,195     -     -     189,974  
Total net revenue   315,671     131,428     -     -     447,099  
Provision for loan losses - 17,273 - - 17,273
Operating expense:
Compensation and benefits 64,976 2,691 25,054 - 92,721
Advertising and market development 27,615 - - - 27,615
Clearing and servicing 18,680 11,666 - - 30,346
FDIC insurance premiums - 24,375 - - 24,375
Professional services 13,587 532 12,268 - 26,387
Occupancy and equipment 16,739 390 2,409 - 19,538
Communications 15,876 353 392 - 16,621
Depreciation and amortization 16,995 141 4,291 - 21,427
Amortization of other intangibles 5,698 - - - 5,698
Facility restructuring and other exit activities - - 4,528 - 4,528
Other operating expenses   15,959     3,625     6,219     -     25,803  
Total operating expense   196,125     43,773     55,161     -     295,059  
Segment income (loss) before other income (expense)   119,546     70,382     (55,161 )   -     134,767  
Other income (expense):
Corporate interest income - - 40 - 40
Corporate interest expense - - (28,595 ) - (28,595 )
Losses on early extinguishment of debt - - (100 ) - (100 )
Equity in loss of investments and other   -     -     (689 )   -     (689 )
Total other income (expense)   -     -     (29,344 )   -     (29,344 )
Segment income (loss) $ 119,546   $ 70,382   $ (84,505 ) $ -   $ 105,423  
 
 
Three Months Ended September 30, 2013

Trading and

Investing

Balance Sheet

Management

Corporate/

Other
Eliminations (5) Total
(In thousands)
Revenue:
Operating interest income 138,865 $ 230,427 $ - $ (68,377 ) $ 300,915
Operating interest expense   (5,487 )   (122,958 )   -     68,377     (60,068 )
Net operating interest income   133,378     107,469     -     -     240,847  
Commissions 102,753 - - - 102,753
Fees and service charges 39,468 456 - - 39,924
Principal transactions 12,631 - - - 12,631

Gains on loans and securities, net
- 12,213 - - 12,213
Net impairment - (586 ) - - (586 )
Other revenues   7,883     1,137     -     -     9,020  
Total non-interest income   162,735     13,220     -     -     175,955  
Total net revenue   296,113     120,689     -     -     416,802  
Provision for loan losses - 37,399 - - 37,399
Operating expense:
Compensation and benefits 60,502 3,163 24,740 - 88,405
Advertising and market development 20,925 - - - 20,925
Clearing and servicing 18,881 12,060 - - 30,941
FDIC insurance premiums - 24,707 - - 24,707
Professional services 9,703 411 12,728 - 22,842
Occupancy and equipment 15,359 386 1,930 - 17,675
Communications 14,504 343 432 - 15,279
Depreciation and amortization 17,365 104 4,370 - 21,839
Amortization of other intangibles 5,699 - - - 5,699
Facility restructuring and other exit activities - - 6,410 - 6,410
Other operating expenses   7,406     2,315     6,301     -     16,022  
Total operating expense   170,344     43,489     56,911     -     270,744  
Segment income (loss) before other income (expense)   125,769     39,801     (56,911 )   -     108,659  
Other income (expense):
Corporate interest income - - 9 - 9
Corporate interest expense - - (28,605 ) - (28,605 )

Equity in loss of investments and other
  -     -     (133 )   -     (133 )
Total other income (expense)   -     -     (28,729 )   -     (28,729 )
Segment income (loss) $ 125,769   $ 39,801   $ (85,640 ) $ -   $ 79,930  

 
 
Three Months Ended December 31, 2012

Trading and

Investing

Balance Sheet

Management

Corporate/

Other
Eliminations (5) Total
(In thousands)
Revenue:
Operating interest income $ 153,296 $ 249,634 $ - $ (82,590 ) $ 320,340
Operating interest expense   (5,282 )   (137,417 )   -     82,590     (60,109 )
Net operating interest income   148,014     112,217     -     -     260,231  
Commissions 86,675 - - - 86,675
Fees and service charges 29,727 467 - - 30,194
Principal transactions 25,594 - - - 25,594
Gains (losses) on loans and securities, net (12 ) 61,993 (183 ) - 61,798
Net impairment - (5,729 ) - - (5,729 )
Other revenues   7,676     1,217     -     -     8,893  
Total non-interest income   149,660     57,948     (183 )   -     207,425  
Total net revenue   297,674     170,165     (183 )   -     467,656  
Provision for loan losses - 74,410 - - 74,410
Operating expense:
Compensation and benefits 58,958 3,303 17,847 - 80,108
Advertising and market development 29,293 2 - - 29,295
Clearing and servicing 16,575 13,812 - - 30,387
FDIC insurance premiums - 30,341 - - 30,341
Professional services 16,010 174 9,447 - 25,631
Occupancy and equipment 16,669 425 1,731 - 18,825
Communications 17,208 336 472 - 18,016
Depreciation and amortization 17,987 169 4,073 - 22,229
Amortization of other intangibles 6,296 - - - 6,296
Facility restructuring and other exit activities - - 4,174 - 4,174
Other operating expenses   10,085     3,636     6,335     -     20,056  
Total operating expense   189,081     52,198     44,079     -     285,358  
Segment income (loss) before other income (expense)   108,593     43,557     (44,262 )   -     107,888  
Other income (expense):
Corporate interest income - - 35 - 35
Corporate interest expense - - (43,984 ) - (43,984 )
Losses on early extinguishment of debt - - (284,653 ) - (284,653 )
Equity in loss of investments and other   -     -     (481 )   -     (481 )
Total other income (expense)   -     -     (329,083 )   -     (329,083 )
Segment income (loss) $ 108,593   $ 43,557   $ (373,345 ) $ -   $ (221,195 )
 

 

Key Performance Metrics (6)
           

Corporate Metrics

Qtr ended

12/31/13

Qtr ended

9/30/13

Qtr ended

12/31/13

vs.

9/30/13

Qtr ended

12/31/12

Qtr ended

12/31/13

vs.

12/31/12
 

Operating margin % (7)
Consolidated 30 % 26 % 4 % 23 % 7 %
Trading and Investing 38 % 42 % (4)% 36 % 2 %
Balance Sheet Management 54 % 33 % 21 % 26 % 28 %
 
Employees 3,009 2,913 3 % 2,988 1 %
Consultants and other   119   92 29 %   100 19 %
Total headcount 3,128 3,005 4 % 3,088 1 %
 
Book value per share $ 16.90 $ 16.82 0 % $ 17.14 (1)%

Tangible book value per share (8)
$ 11.14 $ 10.96 2 % $ 10.50 6 %
 
Corporate cash ($MM) $ 415.1 $ 372.9 11 % $ 407.6 2 %
 

Enterprise net interest spread (basis points) (9)
240 230 4 % 238 1 %
Enterprise interest-earning assets, average ($MM) $ 41,685 $ 40,812 2 % $ 42,882 (3)%
 

Earnings before interest, taxes, depreciation & amortization ("EBITDA") ($MM)
Net Income (loss) $ 57.9 $ 47.4 22 % $ (186.1) N.M.
Income tax expense 47.5 32.5 46 % (35.1) N.M.
Depreciation & amortization 27.1 27.6 (2)% 28.5 (5)%
Corporate interest expense   28.6   28.6 0 %   44.0 (35)%
EBITDA $ 161.1 $ 136.1 18 % $ (148.7) N.M.
 

Interest coverage (10)
5.6 4.8 N.M. (3.4) N.M.
 

E*TRADE Bank net income ($MM) (11)
$ 95.8 $ 84.8 13 % $ 32.6 194 %
 

Trading and Investing Metrics
 
Trading days 63.0 63.5 N.M. 61.0 N.M.
 
DARTs 159,569 145,150 10 % 128,009 25 %
 
Total trades (MM) 10.1 9.2 10 % 7.8 29 %
Average commission per trade $ 10.97 $ 11.15 (2)% $ 11.10 (1)%
 
End of period margin receivables ($B) $ 6.4 $ 6.2 3 % $ 5.8 10 %
Average margin receivables ($B) $ 6.4 $ 5.9 8 % $ 5.8 10 %
 
Gross new brokerage accounts 88,716 79,923 11 % 81,285 9 %
Gross new stock plan accounts 67,594 61,614 10 % 63,934 6 %
Gross new banking accounts 2,289 2,406 (5)% 2,381 (4)%
Closed accounts   (131,783)   (119,123) N.M.   (117,119) N.M.
Net new accounts 26,816 24,820 N.M. 30,481 N.M.
 
Net new brokerage accounts 22,217 13,111 N.M. 10,339 N.M.
Net new stock plan accounts 14,881 18,885 N.M. 28,754 N.M.
Net new banking accounts   (10,282)   (7,176) N.M.   (8,612) N.M.
Net new accounts 26,816 24,820 N.M. 30,481 N.M.
 
End of period brokerage accounts 2,998,059 2,975,842 1 % 2,903,191 3 %
End of period stock plan accounts 1,219,573 1,204,692 1 % 1,147,594 6 %
End of period banking accounts   396,138   406,420 (3)%   429,272 (8)%
End of period total accounts 4,613,770 4,586,954 1 % 4,480,057 3 %
 

Annualized brokerage account attrition rate (12)
8.9% 9.0% N.M. 9.8% N.M.
 

Customer Assets ($B)
Security holdings $ 178.2 $ 162.8 9 % $ 138.7 28 %
Customer payables (cash) 6.3 5.8 9 % 5.0 26 %

Customer assets held by third parties (13)
13.8 12.9 7 % 7.6 82 %
Unexercised stock plan customer options (vested)   36.5   33.2 10 %   21.5 70 %
Customer assets in brokerage and stock plan accounts   234.8   214.7 9 %   172.8 36 %
Sweep deposits 19.6 19.5 1 % 21.3 (8)%
Savings, transaction and other   6.4   6.4 0 %   7.1 (10)%
Customer assets in banking accounts   26.0   25.9 0 %   28.4 (8)%
Total customer assets $ 260.8 $ 240.6 8 % $ 201.2 30 %
 

Net new brokerage assets ($B) (14)
$ 3.2 $ 2.4 N.M. $ 2.3 N.M.

Net new banking assets ($B) (14)
  (0.1)   (0.1) N.M.   (0.1) N.M.

Net new customer assets ($B) (14)
$ 3.1 $ 2.3 N.M. $ 2.2 N.M.
 
Brokerage related cash ($B) $ 39.7 $ 38.2 4 % $ 33.9 17 %
Other customer cash and deposits ($B)   6.4   6.4 0 %   7.1 (10)%
Total customer cash and deposits ($B) $ 46.1 $ 44.6 3 % $ 41.0 12 %
 
Unexercised stock plan customer options (unvested) ($B) $ 71.1 $ 63.4 12 % $ 46.7 52 %
 
Customer net (buy) / sell activity ($B) $ (0.8) $ 0.7 N.M. $ (0.5) N.M.
 

Market Making
Equity shares traded (MM) 89,679 86,246 4 % 101,465 (12)%
Average revenue capture per 1,000 equity shares $ 0.188 $ 0.142 32 % $ 0.248 (24)%
% of Bulletin Board equity shares to total equity shares 93.8% 93.5% 0 % 93.0% 1 %
 

Balance Sheet Management Metrics
 

Loans receivable ($MM)
Average loans receivable $ 8,764 $ 9,246 (5)% $ 11,092 (21)%
Ending loans receivable, net $ 8,123 $ 8,565 (5)% $ 10,099 (20)%
 

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

One- to Four-Family
Current $ 4,007 $ 4,226 (5)% $ 4,858 (18)%
30-89 days delinquent 190 197 (4)% 233 (18)%
90-179 days delinquent   70   71 (1)%   95 (26)%
Total 30-179 days delinquent 260 268 (3)% 328 (21)%
180+ days delinquent (net of $106M, $111M and $145M in charge-offs for Q413, Q313 and Q412, respectively)   227   239 (5)%   279 (19)%

Total delinquent loans (15)
  487   507 (4)%   607 (20)%

Gross loans receivable (16)
$ 4,494 $ 4,733 (5)% $ 5,465 (18)%
 

Home Equity
Current $ 3,329 $ 3,498 (5)% $ 4,065 (18)%
30-89 days delinquent 69 69 0 % 90 (23)%
90-179 days delinquent   36   38 (5)%   64 (44)%
Total 30-179 days delinquent 105 107 (2)% 154 (32)%
180+ days delinquent (net of $23M, $23M and $23M in charge-offs for Q413, Q313 and Q412, respectively)   40   38 5 %   41 (2)%

Total delinquent loans (15)
  145   145 0 %   195 (26)%

Gross loans receivable (16)
$ 3,474 $ 3,643 (5)% $ 4,260 (18)%
 

Consumer and Other
Current $ 593 $ 633 (6)% $ 829 (28)%
30-89 days delinquent 12 12 0 % 19 (37)%
90-179 days delinquent   3   3 0 %   6 (50)%
Total 30-179 days delinquent 15 15 0 % 25 (40)%
180+ days delinquent   -   - N.M.   - N.M.
Total delinquent loans   15   15 0 %   25 (40)%

Gross loans receivable (16)
$ 608 $ 648 (6)% $ 854 (29)%
 

Total Loans Receivable
Current $ 7,929 $ 8,357 (5)% $ 9,752 (19)%
30-89 days delinquent 271 278 (3)% 342 (21)%
90-179 days delinquent   109   112 (3)%   165 (34)%
Total 30-179 days delinquent 380 390 (3)% 507 (25)%
180+ days delinquent   267   277 (4)%   320 (17)%

Total delinquent loans (15)
  647   667 (3)%   827 (22)%

Total gross loans receivable (16)
$ 8,576 $ 9,024 (5)% $ 10,579 (19)%
 

TDR performance detail ($MM) (17)
 

One- to Four-Family TDRs
Current $ 901 $ 921 (2)% $ 927 (3)%
30-89 days delinquent 102 101 1 % 119 (14)%
90-179 days delinquent   44   44 0 %   49 (10)%
Total 30-179 days delinquent 146 145 1 % 168 (13)%
180+ days delinquent (net of $66M, $68M and $76M in charge-offs for Q413, Q313 and Q412, respectively)   125   130 (4)%   134 (7)%
Total delinquent TDRs   271   275 (1)%   302 (10)%
TDRs $ 1,172 $ 1,196 (2)% $ 1,229 (5)%
 

Home Equity TDRs
Current $ 198 $ 210 (6)% $ 232 (15)%
30-89 days delinquent 17 15 13 % 17 0 %
90-179 days delinquent   7   10 (30)%   8 (13)%
Total 30-179 days delinquent 24 25 (4)% 25 (4)%
180+ days delinquent (net of $15M, $14M and $12M in charge-offs for Q413, Q313 and Q412, respectively)   19   18 6 %   20 (5)%
Total delinquent TDRs   43   43 0 %   45 (4)%
TDRs $ 241 $ 253 (5)% $ 277 (13)%
 

Total TDRs
Current $ 1,099 $ 1,131 (3)% $ 1,159 (5)%
30-89 days delinquent 119 116 3 % 136 (13)%
90-179 days delinquent   51   54 (6)%   57 (11)%
Total 30-179 days delinquent 170 170 0 % 193 (12)%
180+ days delinquent   144   148 (3)%   154 (6)%
Total delinquent TDRs   314   318 (1)%   347 (10)%
TDRs $ 1,413 $ 1,449 (2)% $ 1,506 (6)%
 

Capital Metrics
 

E*TRADE Bank

Tier 1 leverage ratio (3)
9.5 % 9.5 % 0.0 % 8.7 % 0.8 %

Tier 1 risk-based capital ratio (3)
23.0 % 22.2 % 0.8 % 19.3 % 3.7 %

Total risk-based capital ratio (3)
24.3 % 23.5 % 0.8 % 20.6 % 3.7 %

Tier 1 common ratio (18)
23.0 % 22.2 % 0.8 % 19.3 % 3.7 %
 

E*TRADE Financial

Tier 1 leverage ratio (4)
6.7 % 6.6 % 0.1 % 5.5 % 1.2 %

Tier 1 risk-based capital ratio (4)
16.2 % 15.3 % 0.9 % 12.5 % 3.7 %

Total risk-based capital ratio (4)
17.4 % 16.6 % 0.8 % 13.7 % 3.7 %

Tier 1 common ratio (19)
13.8 % 12.9 % 0.9 % 10.3 % 3.5 %
 

       
Activity in Allowance for Loan Losses
Three Months Ended December 31, 2013

One- to Four-

Family
Home Equity

Consumer

and Other
Total
(In thousands)
Allowance for loan losses, ending 9/30/13 $ 113,121 $ 319,078 $ 26,722 $ 458,921
Provision for loan losses (6,294 ) 23,240 327 17,273
Charge-offs, net   (4,594 )   (16,259 )   (2,382 )   (23,235 )
Allowance for loan losses, ending 12/31/13 $ 102,233   $ 326,059   $ 24,667   $ 452,959  
 
 
Three Months Ended September 30, 2013

One- to Four-

Family
Home Equity

Consumer

and Other
Total
(In thousands)
Allowance for loan losses, ending 6/30/13 $ 143,569 $ 279,037 $ 28,340 $ 450,946
Provision for loan losses (23,748 ) 59,927 1,220 37,399
Charge-offs, net   (6,700 )   (19,886 )   (2,838 )   (29,424 )
Allowance for loan losses, ending 9/30/13 $ 113,121   $ 319,078   $ 26,722   $ 458,921  
 
 
Three Months Ended December 31, 2012

One- to Four-

Family
Home Equity

Consumer

and Other
Total
(In thousands)
Allowance for loan losses, ending 9/30/12 $ 206,400 $ 260,889 $ 40,993 $ 508,282
Provision for loan losses 9,586 57,981 6,843 74,410
Charge-offs, net   (32,049 )   (61,537 )   (8,355 )   (101,941 )
Allowance for loan losses, ending 12/31/12 $ 183,937   $ 257,333   $ 39,481   $ 480,751  
 

 

Specific Valuation Allowance Activity (20)
 
As of December 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 (21)
(Dollars in thousands)
One- to four-family $ 1,353,855 $ (317,612 ) $ 1,036,243 $ (60,246 ) $ 975,997 6 % 28 %
Home equity   338,596   (150,361 )   188,235   (64,128 )   124,107 34 % 63 %
Total $ 1,692,451 $ (467,973 ) $ 1,224,478 $ (124,374 ) $ 1,100,104 10 % 35 %
 
As of September 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 (21)
(Dollars in thousands)
One- to four-family $ 1,374,603 $ (319,418 ) $ 1,055,185 $ (67,764 ) $ 987,421 6 % 28 %
Home equity   347,926   (150,036 )   197,890   (67,575 )   130,315 34 % 63 %
Total $ 1,722,529 $ (469,454 ) $ 1,253,075 $ (135,339 ) $ 1,117,736 11 % 35 %
 
As of December 31, 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 (21)

 

(Dollars in thousands)
One- to four-family $ 1,383,254 $ (317,085 ) $ 1,066,169 $ (89,684 ) $ 976,485 8 % 29 %
Home equity   382,663   (159,244 )   223,419   (81,690 )   141,729 37 % 63 %
Total $ 1,765,917 $ (476,329 ) $ 1,289,588 $ (171,374 ) $ 1,118,214 13 % 37 %
 

 

Average Enterprise Balance Sheet Data
   
Three Months Ended
December 31, 2013
Average   Operating Interest   Average
Balance Inc./Exp. Yield/Cost
Enterprise interest-earning assets: (In thousands)
Loans (22) $ 8,799,180 $ 89,411 4.06 %
Available-for-sale securities 13,889,959 80,076 2.31 %
Held-to-maturity securities 9,959,838 71,639 2.88 %
Margin receivables 6,427,231 59,512 3.67 %
Cash and equivalents 1,235,961 538 0.17 %
Segregated cash 680,056 175 0.10 %
Securities borrowed and other   692,706     12,884   7.38 %
Total enterprise interest-earning assets $ 41,684,931     314,235   3.01 %
Enterprise interest-bearing liabilities:
Deposits $ 25,831,330 3,017 0.05 %
Customer payables 6,066,404 2,339 0.15 %
Securities sold under agreements to repurchase 4,501,617 37,255 3.24 %
FHLB advances and other borrowings 1,323,964 17,180 5.08 %
Securities loaned and other   956,689     81   0.03 %
Total enterprise interest-bearing liabilities $ 38,680,004     59,872   0.61 %
Enterprise net interest income/spread (9) $ 254,363   2.40 %
 
Three Months Ended
September 30, 2013
Average Operating Interest Average
Balance Inc./Exp. Yield/Cost
Enterprise interest-earning assets: (In thousands)
Loans (22) $ 9,288,330 $ 96,365 4.15 %
Available-for-sale securities 13,011,124 68,764 2.11 %
Held-to-maturity securities 9,853,077 64,486 2.62 %
Margin receivables 5,938,256 56,073 3.75 %
Cash and equivalents 1,543,689 766 0.20 %
Segregated cash 516,756 114 0.09 %
Securities borrowed and other   661,039     11,793   7.08 %
Total enterprise interest-earning assets $ 40,812,271     298,361   2.92 %
Enterprise interest-bearing liabilities:
Deposits $ 25,804,278 3,306 0.05 %
Customer payables 5,547,910 2,053 0.15 %
Securities sold under agreements to repurchase 4,445,606 37,431 3.29 %
FHLB advances and other borrowings 1,291,738 17,152 5.20 %
Securities loaned and other   874,193     33   0.01 %
Total enterprise interest-bearing liabilities $ 37,963,725     59,975   0.62 %
Enterprise net interest income/spread (9) $ 238,386   2.30 %
 
Three Months Ended
December 31, 2012
Average Operating Interest Average
Balance Inc./Exp. Yield/Cost
Enterprise interest-earning assets: (In thousands)
Loans (22) $ 11,099,147 $ 113,223 4.08 %
Available-for-sale securities 13,584,735 73,542 2.17 %
Held-to-maturity securities 9,605,213 61,387 2.56 %
Margin receivables 5,785,166 57,214 3.93 %
Cash and equivalents 1,677,106 999 0.24 %
Segregated cash 566,531 133 0.09 %
Securities borrowed and other   563,838     11,432   8.07 %
Total enterprise interest-earning assets $ 42,881,736     317,930   2.96 %
Enterprise interest-bearing liabilities:
Deposits $ 27,807,088 3,204 0.05 %
Customer payables 5,678,243 2,049 0.14 %
Securities sold under agreements to repurchase 4,601,941 37,145 3.16 %
FHLB advances and other borrowings 1,777,594 17,652 3.89 %
Securities loaned and other   707,570     22   0.01 %
Total enterprise interest-bearing liabilities $ 40,572,436     60,072   0.58 %
Enterprise net interest income/spread (9) $ 257,858   2.38 %
 

Reconciliation from Enterprise Net Interest Income to Net Operating Interest Income
Three Months Ended
December 31, September 30, December 31,
  2013     2013     2012  
(In thousands)
Enterprise net interest income $ 254,363 $ 238,386 $ 257,858
Taxable equivalent interest adjustment (23) (260 ) (294 ) (212 )

Earnings on customer assets held by third parties (24)
  3,022     2,755     2,585  
Net operating interest income $ 257,125   $ 240,847   $ 260,231  
 

Explanation of Non-GAAP Measures and Certain Metrics

Management believes that net income and EPS excluding the impact of the decision to sell the market making business, operating expense excluding restructuring and severance costs, tangible book value per share, corporate cash, EBITDA, interest coverage, 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.

Net Income and EPS Excluding the Impact of the Decision to Sell the Market Making Business

Net income excluding the impact of the decision to sell the market making business represents the Company’s net income before the impairment of goodwill, net of tax. EPS excluding the impact of the decision to sell the market making business represents the Company’s net income before the impairment of goodwill, net of tax, divided by diluted shares. Management believes that excluding the impact of the decision to sell the market making business from net income and EPS provides useful additional measures of the Company’s ongoing operating performance because the charge is not directly related to our performance See endnote (1) for a reconciliation of this non-GAAP measure to the comparable GAAP measure.

Operating Expense Excluding Restructuring and Severance Costs

Management believes that excluding the impact of restructuring and severance from its total operating expense provides a useful additional measure of the Company’s ongoing operating performance because the restructuring and severance charges are not directly related to our performance See endnote (2) for a reconciliation of this non-GAAP measure to the comparable GAAP measure.

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. See the table entitled “Key Performance Metrics” for a reconciliation of this non-GAAP measure to the comparable GAAP measure.

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.

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 (4), (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 following table provides a reconciliation of net income after adjusting for the impact of the decision to the exit the market making business (dollars in thousands):
    Year Ended December 31, 2013  
Amount     Diluted EPS
     
Net income $ 86,012 $ 0.29
Add back: impact of the decision to exit the market making business, net of taxes   118,040         0.41  
Adjusted net income $ 204,052       $ 0.70  
 

(2) The following table provides reconciliation for the operating expense, excluding one-time items related to restructuring and severance costs (dollars in millions):
    Q4 2013   Q3 2013
Total operating expense $ 295   $ 271
Add back: Facility restructuring and severance expense   5     6
Adjusted total operating expense $ 290   $ 265
 

(3) The Tier 1 leverage, Tier 1 risk-based capital and total risk-based capital ratios at E*TRADE Bank are Q413 estimates and calculated as follows (dollars in millions):

  Q4 2013   Q3 2013   Q4 2012
E*TRADE Bank shareholder's equity $ 5,740.6   $ 5,752.9   $ 5,703.0
DEDUCT:
Losses in OCI on AFS debt securities and cash flow hedges, net of tax (459.0 ) (426.2 ) (315.4 )
Goodwill & other intangible assets, net of deferred tax liabilities   1,528.7       1,546.8       1,600.5  
Subtotal 4,670.9 4,632.3 4,417.9
DEDUCT:
Disallowed servicing assets and deferred tax assets   566.2       619.2       655.7  
E*TRADE Bank Tier 1 capital   4,104.7       4,013.1       3,762.2  
ADD:
Allowable allowance for loan losses   226.7       229.5       247.3  
E*TRADE Bank total capital $ 4,331.4     $ 4,242.6     $ 4,009.5  
 
E*TRADE Bank total assets $ 45,084.9 $ 44,395.2 $ 45,711.6
DEDUCT:
Gains (losses) in OCI on AFS debt securities and cash flow asset hedges, net of tax (167.5 ) (106.8 ) 112.7
Goodwill & other intangible assets, net of deferred tax liabilities   1,528.7       1,546.8       1,600.5  
Subtotal 43,723.7 42,955.2 43,998.4
DEDUCT:
Disallowed servicing assets and deferred tax assets   566.2       619.2       655.7  
E*TRADE Bank total assets for leverage capital purposes $ 43,157.5     $ 42,336.0     $ 43,342.7  
 
E*TRADE Bank total risk-weighted assets (a) $ 17,858.0 $ 18,075.0 $ 19,456.7
 
E*TRADE Bank Tier 1 leverage ratio (Tier 1 capital / Average total assets for leverage capital purposes) 9.5 % 9.5 % 8.7 %
E*TRADE Bank Tier 1 capital / Total risk-weighted assets 23.0 % 22.2 % 19.3 %
E*TRADE Bank total capital / Total risk-weighted assets 24.3 % 23.5 % 20.6 %

(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.

(4) The Tier 1 leverage, Tier 1 risk-based capital and total risk-based capital ratios at E*TRADE Financial are Q413 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):
  Q4 2013   Q3 2013   Q4 2012
E*TRADE Financial shareholders' equity $ 4,855.9   $ 4,829.6   $ 4,904.5
DEDUCT:
Losses in OCI on AFS debt securities and cash flow hedges, net of tax (459.0 ) (426.2 ) (315.4 )
Goodwill & other intangible assets, net of deferred tax liabilities 1,654.2 1,681.4 1,899.4
ADD:
Qualifying restricted core capital elements (TRUPs) (a)   433.0       433.0       433.0  
Subtotal 4,093.7 4,007.4 3,753.5
DEDUCT:
Disallowed servicing assets and deferred tax assets   1,185.4       1,223.6       1,278.9  
E*TRADE Financial Tier 1 capital   2,908.3       2,783.8       2,474.6  
ADD:
Allowable allowance for loan losses   228.2       230.9       251.8  
E*TRADE Financial total capital $ 3,136.5     $ 3,014.7     $ 2,726.4  
 
E*TRADE Financial total average assets $ 46,038.4 $ 45,123.9 $ 48,152.7
DEDUCT:
Goodwill & other intangible assets, net of deferred tax liabilities   1,654.2       1,681.4       1,899.4  
Subtotal 44,384.2 43,442.5 46,253.3
DEDUCT:
Disallowed servicing assets and deferred tax assets   1,185.4       1,223.6       1,278.9  
Average total assets for leverage capital purposes $ 43,198.8     $ 42,218.9     $ 44,974.4  
 
E*TRADE Financial total risk-weighted assets (b) $ 17,991.9 $ 18,199.6 $ 19,849.9
 
E*TRADE Financial Tier 1 leverage ratio (Tier 1 capital / Average total assets for leverage capital purposes) 6.7 % 6.6 % 5.5 %
E*TRADE Financial Tier 1 capital / Total risk-weighted assets 16.2 % 15.3 % 12.5 %
E*TRADE Financial total capital / Total risk-weighted assets 17.4 % 16.6 % 13.7 %

(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.

(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 millions, except per share amounts):
    Q4 2013   Q3 2013   Q4 2012
Book value $ 4,855.9   $ 4,829.6   $ 4,904.5
Less: Goodwill and other intangibles, net (2,007.7 ) (2,013.4 ) (2,194.9 )
Less: Deferred tax liability related to goodwill   353.5       332.0       295.5  
Tangible book value $ 3,201.7     $ 3,148.2     $ 3,005.1  
 
Q4 2013   Q3 2013   Q4 2012
Book value per share $ 16.90 $ 16.82 $ 17.14
Less: Goodwill and other intangibles, net per share (6.99 ) (7.01 ) (7.67 )
Less: Deferred tax liability related to goodwill per share   1.23       1.15       1.03  
Tangible book value per share $ 11.14     $ 10.96     $ 10.50  
 

(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 calculated based on the Company’s net income (loss) to its corporate interest expense was 2.0, 1.7, and (4.2) for the three months ended December 31, 2013, September 30, 2013, and December 31, 2012, respectively.

(11) E*TRADE Bank net income is calculated as follows (dollars in millions):
    Q4 2013   Q3 2013   Q4 2012
Total net revenue $ 423.0   $ 396.8   $ 436.1
Provision for loan losses 17.3 37.4 74.4
Total operating expenses 257.6 220.5 238.4
Other income (expense)   (0.7 )     (0.0 )     (28.2 )
Income before income taxes 147.4 138.9 95.1
Income taxes   51.6       54.1       62.5  
Net income $ 95.8     $ 84.8     $ 32.6  
 

(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) Customer assets held by third parties are held outside E*TRADE Financial and include money market funds and sweep deposit accounts at unaffiliated financial institutions. Customer assets held by third parties are not reflected in the Company’s consolidated balance sheet and are not immediately available for liquidity purposes. However, we maintain the ability to bring these customer assets back on-balance sheet with appropriate notification to the third parties.

(14) 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.

(15) 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):
    Q4 2013   Q3 2013   Q4 2012
One- to four-family $ 416   $ 424   $ 457
Home equity   284     286     307
Total charge-offs $ 700   $ 710   $ 764

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

(17) 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.

(18) The Tier 1 common ratio at E*TRADE Bank is a Q413 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):
  Q4 2013   Q3 2013   Q4 2012
E*TRADE Bank shareholder's equity $ 5,740.6   $ 5,752.9   $ 5,703.0
DEDUCT:
Losses in OCI on AFS debt securities and cash flow hedges, net of tax (459.0 ) (426.2 ) (315.4 )
Goodwill and other intangible assets, net of deferred tax liabilities   1,528.7       1,546.8       1,600.5  
Subtotal 4,670.9 4,632.3 4,417.9
DEDUCT:
Disallowed servicing assets and deferred tax assets   566.2       619.2       655.7  
E*TRADE Bank Tier 1 common $ 4,104.7     $ 4,013.1     $ 3,762.2  
 
E*TRADE Bank total risk-weighted assets (a) $ 17,858.0 $ 18,075.0 $ 19,456.7
 
E*TRADE Bank Tier 1 common / Total risk-weighted assets 23.0 % 22.2 % 19.3 %

(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.

(19) The Tier 1 common ratio at E*TRADE Financial is a Q413 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):
  Q4 2013   Q3 2013   Q4 2012
E*TRADE Financial shareholders' equity $ 4,855.9   $ 4,829.6   $ 4,904.5
DEDUCT:
Losses in OCI on AFS debt securities and cash flow hedges, net of tax (459.0 ) (426.2 ) (315.4 )
Goodwill & other intangible assets, net of deferred tax liabilities   1,654.2       1,681.4       1,899.4  
Subtotal 3,660.7 3,574.4 3,320.5
DEDUCT:
Disallowed servicing assets and deferred tax assets   1,185.4       1,223.6       1,278.9  
E*TRADE Financial Tier 1 common $ 2,475.3     $ 2,350.8     $ 2,041.6  
 
E*TRADE Financial total risk-weighted assets (a) $ 17,991.9 $ 18,199.6 $ 19,849.9
 
E*TRADE Financial Tier 1 common / Total risk-weighted assets 13.8 % 12.9 % 10.3 %

(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) 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):
    Q4 2013   Q3 2013   Q4 2012
Modified loans $ 1,224   $ 1,253   $ 1,290
Bankruptcy loans   189     196     216
Total TDRs $ 1,413   $ 1,449   $ 1,506
 

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

(22) Excludes loans to customers on margin.

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

(24) Includes interest earned on average customer assets of $13.3 billion, $12.0 billion, and $5.9 billion for the quarters ended December 31, 2013, September 30, 2013, and December 31, 2012, respectively, held by third parties outside E*TRADE Financial, including money market funds and sweep deposit accounts at unaffiliated financial institutions.

Copyright Business Wire 2010

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