E*Trade Financial Corporation (NASDAQ: ETFC) today announced results for its first quarter ended March 31, 2012, reporting net income of $63 million, or $0.22 per share including a tax benefit of $26 million or $0.09 per share.
This compares with a net loss of $6 million, or $0.02 loss per share in the prior quarter, and net income of $45 million, or $0.16 per share in the first quarter of 2011. The Company reported total net revenue of $489 million for the first quarter, compared with $475 million in the prior quarter and $537 million in the year-ago period.
During the quarter the Company recorded an income tax benefit of approximately $26 million, or $0.09 per share, related to certain losses on the 2009 Debt Exchange previously considered non-deductible. Through additional research completed in the current quarter, the Company identified a portion of these losses that are deductible for tax purposes and were incorrectly treated as non-deductible in 2009. As a result of this change, the Company recorded a current period income tax benefit and a corresponding increase to the Company's deferred tax asset which currently stands at $1.6 billion.
"We started the year off with a solid first quarter, reflecting good momentum in the core brokerage business, and continued improvement in our legacy loan portfolio," said Steven Freiberg, Chief Executive Officer of E*TRADE Financial. "Achieving firm records in net new brokerage assets and account retention are a testament to our ongoing efforts in sales and service, while trading activity benefited from market-wide reengagement of the retail investor during the quarter. Meanwhile, we continued to improve our risk profile as our legacy loan portfolio declined in size and risk - now accounting for less than a quarter of the firm's assets with total special mention delinquencies down 20 percent sequentially, and down 26 percent year over year."
E*TRADE reported DARTs of 157,000 during the quarter, an increase of 12 percent from the prior quarter and a decrease of 11 percent versus the same quarter a year ago.
At quarter end, the Company reported 4.4 million customer accounts, which included 2.8 million brokerage accounts. Net new brokerage accounts were 46,000 during the quarter compared with 10,000 in the prior quarter and 51,000 in the first quarter of 2011.
The Company ended the quarter with $202 billion in total customer assets, compared with $172 billion at the end of the fourth quarter of 2011 and $189 billion from the year-ago period.
During the quarter, customers added a record $4.0 billion in net new brokerage assets. Brokerage related cash increased by $3.3 billion to $31.0 billion during the period, while customers were net buyers of approximately $0.1 billion of securities. Average margin receivables for the quarter remained flat at $4.9 billion, and decreased nine percent from the year-ago period, while end of period balances increased $0.5 billion in the quarter and declined $0.4 billion from the year-ago period, ending the quarter at $5.3 billion.
Net operating interest income for the first quarter was $285 million, down from $289 million in the prior quarter and $310 million a year ago. First quarter results reflected a net interest spread of 2.49 percent on average interest-earning assets of $44.9 billion, compared with a net interest spread of 2.66 percent on average interest-earning assets of $42.6 billion in the prior quarter.
Commissions, fees and service charges, principal transactions, and other revenue in the first quarter were $173 million, compared with $156 million in the prior quarter and $201 million in the first quarter of 2011. This sequential increase primarily reflected a rise in trading activity. Average commission per trade for the quarter was $11.04, compared to $10.80 in the prior quarter, and $11.32 in the first quarter of 2011.
Total net revenue in the quarter also included $31 million of net gains on loans and securities, including a net impairment of $4 million.
Total operating expenses for the quarter increased $2 million sequentially to $306 million and included an $11 million seasonal increase in advertising spend.
The Company's loan portfolio ended the quarter at $12.4 billion, contracting $780 million from the prior quarter, primarily related to $464 million of paydowns and $316 million in charge-offs. Approximately half of the charge-offs in the quarter resulted from aligning certain loan modification policies and procedures with the guidance of the Company's new primary banking regulator. The majority of the losses associated with these charge-offs were previously recognized. First quarter provision for loan losses was $72 million, down $51 million from the prior quarter.
"As we progress in our transition to the Fed and OCC, a key focus for management is aligning all of the Company's policies and procedures with the guidance of our new regulators, ensuring their confidence on all fronts," said Freiberg. "While our regulators are in the process of completing their initial review of our business and practices, the process itself is dynamic and ongoing and we can't be certain that additional changes or actions will not result from their continuing review."
The allowance for loan losses at quarter end was $579 million, or five percent of gross loans receivable.
For the Company's entire loan portfolio, special mention delinquencies decreased 20 percent sequentially, and total at-risk delinquencies declined 19 percent. As compared to the year-ago period, special mention delinquencies declined 26 percent and total at-risk delinquencies declined 33 percent.
As of March 31, 2012, the Company reported a consolidated Tier 1 common ratio of 9.4 percent(3), unchanged from the prior period and up from 6.5 percent at the end of the first quarter of 2011. E*TRADE Bank ended the quarter with Tier 1 leverage(4) and total risk-based capital ratios of 7.3 percent and 17.0 percent, compared with 7.8 percent and 17.3 percent, respectively, at the end of the prior period and 7.5 percent and 15.6 percent, respectively, in the year-ago period.