XNAS:ETFC E*Trade Financial Corp Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended June 30, 2012

or

 

¨

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 1-11921

 

 

E*TRADE Financial Corporation

(Exact Name of Registrant as Specified in its Charter)

 

Delaware   94-2844166

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification Number)

1271 Avenue of the Americas, 14th Floor, New York, New York 10020

(Address of Principal Executive Offices and Zip Code)

(646) 521-4300

(Registrant’s Telephone Number, including Area Code)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   x

   Accelerated filer  ¨

Non-accelerated filer  ¨ (Do not check if a smaller reporting company)

   Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

As of July 27, 2012, there were 285,740,705 shares of common stock outstanding.


Table of Contents

E*TRADE FINANCIAL CORPORATION

FORM 10-Q QUARTERLY REPORT

For the Quarter Ended June 30, 2012

TABLE OF CONTENTS

 

PART I—FINANCIAL INFORMATION

  

Item 1. Consolidated Financial Statements (Unaudited)

     49   

Consolidated Statement of Income

     49   

Consolidated Statement of Comprehensive Income

     50   

Consolidated Balance Sheet

     51   

Consolidated Statement of Shareholders’ Equity

     52   

Consolidated Statement of Cash Flows

     53   

Notes to Consolidated Financial Statements (Unaudited)

     55   

Note 1—Organization, Basis of Presentation and Summary of Significant Accounting Policies

     55   

Note 2—Operating Interest Income and Operating Interest Expense

     59   

Note 3—Fair Value Disclosures

     60   

Note 4—Available-for-Sale and Held-to-Maturity Securities

     69   

Note 5—Loans Receivable, Net

     73   

Note 6—Accounting for Derivative Instruments and Hedging Activities

     81   

Note 7—Deposits

     85   

Note 8—Securities Sold Under Agreements to Repurchase and FHLB Advances and Other Borrowings

     85   

Note 9—Corporate Debt

     86   

Note 10—Earnings per Share

     86   

Note 11—Regulatory Requirements

     87   

Note 12—Commitments, Contingencies and Other Regulatory Matters

     88   

Note 13—Segment Information

     94   

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     3   

Overview

     3   

Earnings Overview

     6   

Segment Results Review

     15   

Balance Sheet Overview

     19   

Liquidity and Capital Resources

     23   

Risk Management

     27   

Concentrations of Credit Risk

     29   

Summary of Critical Accounting Policies and Estimates

     39   

Glossary of Terms

     41   

Item 3. Quantitative and Qualitative Disclosures about Market Risk

     46   

Item 4. Controls and Procedures

     96   

PART II—OTHER INFORMATION

        

Item 1.     Legal Proceedings

     96   

Item 1A.  Risk Factors

     101   

Item 2.     Unregistered Sales of Equity Securities and Use of Proceeds

     101   

Item 3.     Defaults Upon Senior Securities

     101   

Item 4.     Mine Safety Disclosures

     101   

Item 5.     Other Information

     101   

Item 6.     Exhibits

     102   

Signatures

     103   

Unless otherwise indicated, references to “the Company,” “we,” “us,” “our” and “E*TRADE” mean E*TRADE Financial Corporation and its subsidiaries.

E*TRADE, E*TRADE Financial, E*TRADE Bank, Equity Edge, OptionsLink and the Converging Arrows logo are registered trademarks of E*TRADE Financial Corporation in the United States and in other countries.

 

2


Table of Contents

FORWARD-LOOKING STATEMENTS

This report contains forward-looking statements involving risks and uncertainties. These statements relate to our future plans, objectives, expectations and intentions. These statements may be identified by the use of words such as “expect,” “may,” “anticipate,” “intend,” “plan” and similar expressions. Our actual results could differ materially from those discussed in these forward-looking statements, and we caution that we do not undertake to update these statements. Factors that could contribute to our actual results differing from any forward-looking statements include those discussed under Risk Factors, Management’s Discussion and Analysis of Financial Condition and Results of Operations and elsewhere in this report. The cautionary statements made in this report should be read as being applicable to all forward-looking statements wherever they appear in this report. We further caution that there may be risks associated with owning our securities other than those discussed in our filings. Important factors that may cause actual results to differ materially from any forward-looking statements are set forth in Item 1A. Risk Factors in the Annual Report on Form 10-K for the year ended December 31, 2011, and as updated in this report.

ITEM 2.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the consolidated financial statements and the related notes that appear elsewhere in this document and with the Annual Report on Form 10-K for the year ended December 31, 2011.

GLOSSARY OF TERMS

In analyzing and discussing our business, we utilize certain metrics, ratios and other terms that are defined in the Glossary of Terms, which is located at the end of Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Overview

Strategy

Our core business is our trading and investing customer franchise. Building on the strengths of this franchise, our strategy is focused on:

 

   

Strengthening our overall financial and franchise position. We are focused on achieving and maintaining an enterprise-wide risk culture and platform consistent with industry best-practices and top tier regulatory guidelines and expectations. We plan on strengthening our overall capital structure by deleveraging the balance sheet and reducing costs.

 

   

Improving our market position in our retail brokerage business. We plan to grow our customer base by continuing to focus on developing innovative products and services, investing in our sales force, and continuously enhancing the customer experience.

 

   

Capitalizing on the value of our complementary brokerage businesses. Our corporate services and market making businesses enhance our strategy by allowing us to realize additional economic benefit from our retail brokerage business.

 

   

Enhancing our position in retirement and investing. We believe growing our retirement and investing products and services is key to our long term success. Our primary focus is to expand the reach of our brand along with the awareness of our products to this key customer segment.

 

   

Continuing to manage and de-risk the Bank. We are focused on optimizing the value of customer deposits, while continuing to mitigate credit losses in our loan portfolio. Our near term priorities are de-risking, de-leveraging and strengthening our risk management function. In addition, we do not plan to offer new banking products to customers, including mortgages.

 

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Key Factors Affecting Financial Performance

Our financial performance is affected by a number of factors outside of our control, including:

 

   

customer demand for financial products and services;

 

   

weakness or strength of the residential real estate and credit markets;

 

   

performance, volume and volatility of the equity and capital markets;

 

   

customer perception of the financial strength of our franchise;

 

   

market demand and liquidity in the secondary market for mortgage loans and securities;

 

   

market demand and liquidity in the wholesale borrowings market, including securities sold under agreements to repurchase;

 

   

our ability to obtain regulatory approval to move capital from our bank to our parent company; and

 

   

changes to the rules and regulations governing the financial services industry.

In addition to the items noted above, our success in the future will depend upon, among other things, our ability to:

 

   

have continued success in the acquisition, growth and retention of brokerage customers;

 

   

generate meaningful growth in the retirement and investing customer group;

 

   

strengthen our risk management function;

 

   

reduce credit costs and the size of the balance sheet;

 

   

generate capital sufficient to meet our operating needs at both our bank and our parent company;

 

   

assess and manage interest rate risk; and

 

   

have disciplined expense control and improved operational efficiency.

Management monitors a number of metrics in evaluating the Company’s performance. The most significant of these are shown in the table and discussed in the text below:

 

      As of or For the
Three Months Ended

June 30,
    Variance     As of or For the
Six Months Ended

June 30,
    Variance  
     2012     2011     2012 vs. 2011     2012     2011     2012 vs. 2011  

Customer Activity Metrics:

            

DARTs

     138,653       147,908       (6 )%      147,747       162,476       (9 )% 

Average commission per trade

   $ 10.68     $ 11.14       (4 )%    $ 10.87     $ 11.24       (3 )% 

Margin receivables (dollars in billions)

   $ 5.8     $ 5.7       2   $ 5.8     $ 5.7       2

End of period brokerage accounts

     2,874,605       2,759,773       4     2,874,605       2,759,773       4

Net new brokerage accounts

     45,599       24,950       *        91,593       75,462       *   

Customer assets (dollars in billions)

   $ 192.5     $ 185.6       4   $ 192.5     $ 185.6       4

Net new brokerage assets (dollars in billions)

   $ 2.2     $ 1.5       *      $ 6.2     $ 5.4       *   

Brokerage related cash (dollars in billions)

   $ 29.2     $ 26.3       11   $ 29.2     $ 26.3       11

Company Financial Metrics:

            

Corporate cash (dollars in millions)

   $ 436.5     $ 423.7       3   $ 436.5     $ 423.7       3

E*TRADE Financial Tier 1 leverage ratio

     5.7     5.4     0.3     5.7     5.4     0.3

E*TRADE Financial Tier 1 common ratio

     10.2     8.4     1.8     10.2     8.4     1.8

E*TRADE Bank Tier 1 leverage ratio(1)

     7.9     7.9     0.0     7.9     7.9     0.0

Special mention loan delinquencies (dollars in millions)

   $ 349.5     $ 461.3       (24 )%    $ 349.5     $ 461.3       (24 )% 

Allowance for loan losses (dollars in millions)

   $ 525.8     $ 878.6       (40 )%    $ 525.8     $ 878.6       (40 )% 

Enterprise net interest spread

     2.44     2.89     (0.45 )%      2.47     2.87     (0.40 )% 

Enterprise interest-earning assets (average dollars in billions)

   $ 44.8     $ 42.9       4   $ 44.8     $ 42.8       5

 

*   

Percentage not meaningful.

(1)   

The Company transitioned from reporting under the Office of Thrift Supervision (“OTS”) reporting requirements to reporting under the Office of the Comptroller of the Currency (“OCC”) reporting requirements in the first quarter of 2012. The Tier 1 leverage ratio is the OCC Tier 1 leverage ratio as of June 30, 2012 and the OTS Tier 1 capital ratio at June 30, 2011. The OTS Tier 1 capital ratio and OCC Tier 1 leverage ratio are both calculated in the same manner using adjusted total assets.

 

4


Table of Contents

Customer Activity Metrics

 

   

DARTs are the predominant driver of commissions revenue from our customers.

 

   

Average commission per trade is an indicator of changes in our customer mix, product mix and/or product pricing.

 

   

Margin receivables represent credit extended to customers to finance their purchases of securities by borrowing against securities they own. Margin receivables are a key driver of net operating interest income.

 

   

End of period brokerage accounts and net new brokerage accounts are indicators of our ability to attract and retain brokerage customers.

 

   

Changes in customer assets are an indicator of the value of our relationship with the customer. An increase in customer assets generally indicates that the use of our products and services by existing and new customers is expanding. Changes in this metric are also driven by changes in the valuations of our customers’ underlying securities.

 

   

Net new brokerage assets are total inflows to all new and existing brokerage accounts less total outflows from all closed and existing brokerage accounts and are a general indicator of the use of our products and services by existing and new brokerage customers.

 

   

Brokerage related cash is an indicator of a deepening engagement with our brokerage customers and is a key driver of net operating interest income.

Company Financial Metrics

 

   

Corporate cash is an indicator of the liquidity at the parent company. It is the primary source of capital above and beyond the capital deployed in our regulated subsidiaries.

 

   

E*TRADE Financial Tier 1 leverage ratio is Tier 1 capital divided by average total assets for the parent company for leverage capital purposes. E*TRADE Financial Tier 1 common ratio is 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 for the holding company. The Tier 1 leverage and Tier 1 common ratios are non-GAAP measures as the parent company is not yet held to these regulatory capital requirements and are indications of E*TRADE Financial’s capital adequacy. See Liquidity and Capital Resources for a reconciliation of these non-GAAP measures to the comparable GAAP measures.

 

   

E*TRADE Bank Tier 1 leverage ratio is Tier 1 capital divided by adjusted total assets for E*TRADE Bank and is an indication of E*TRADE Bank’s capital adequacy.

 

   

Special mention loan delinquencies are loans 30-89 days past due and are an indicator of the expected trend for charge-offs in future periods as these loans have a greater propensity to migrate into nonaccrual status and ultimately charge-off.

 

   

Allowance for loan losses is an estimate of probable losses inherent in the loan portfolio as of the balance sheet date and is typically equal to management’s forecast of loan losses in the twelve months following the balance sheet date as well as the forecasted losses, including economic concessions to borrowers, over the estimated remaining life of loans modified as troubled debt restructurings (“TDR”). See Summary of Critical Accounting Policies and Estimates for a discussion of the estimates and assumptions used in the allowance for loan losses.

 

   

Enterprise interest-earning assets, in conjunction with our enterprise net interest spread, are indicators of our ability to generate net operating interest income.

 

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Significant Events in the Second Quarter of 2012

Submission of Our Strategic and Capital Plan

 

   

We submitted a long-term strategic and capital plan to the OCC and Federal Reserve, which included: our five-year business strategy; forecasts of our business results and capital ratios; capital distribution plans in current and adverse operating conditions; and internally developed stress tests.

Enhancements to Our Trading and Investing Products and Services

 

   

We enhanced our E*TRADE Pro platform by adding new tools including a trading ladder and strategy screeners and implemented changes to simplify the overall user experience on our customer website;

 

   

We continued to offer investor education with over 300,000 interactions during the quarter, comprising seminars, webinars and videos, both live and on-demand; and

 

   

We opened two new branches in Cupertino, California and New York, New York which increased our total network to 30 branches.

EARNINGS OVERVIEW

We generated net income of $39.5 million and $102.1 million, or $0.14 and $0.35 per diluted share, on total net revenue of $452.4 million and $941.8 million for the three and six months ended June 30, 2012, respectively. Net operating interest income decreased 12% and 10% to $279.1 million and $564.0 million for the three and six months ended June 30, 2012, respectively, compared to the same periods in 2011, which was driven primarily by a decrease in enterprise net interest spread during the comparable periods. Commissions, fees and service charges, principal transactions and other revenue decreased 12% and 13% to $153.9 million and $327.1 million for the three and six months ended June 30, 2012, respectively, compared to the same periods in 2011, which was driven primarily by decreases in trading activity during the comparable periods. In addition, gains on loans and securities, net and net impairment decreased 31% and 7% to $19.4 million and $50.8 million for the three and six months ended June 30, 2012, respectively, compared to the same periods in 2011.

Provision for loan losses declined 35% and 36% to $67.3 million and $139.2 million for the three and six months ended June 30, 2012, respectively, compared to the same periods in 2011, driven primarily by improving credit trends and loan portfolio run-off. Total operating expenses decreased 3% to $281.5 million and decreased slightly to $587.7 million for the three and six months ended June 30, 2012, respectively, compared to the same periods in 2011. These decreases were driven primarily by decreases in clearing and servicing and other operating expenses offset by increases in compensation and benefits expense and FDIC insurance premiums for the three and six months ended June 30, 2012.

The following sections describe in detail the changes in key operating factors and other changes and events that affected net revenue, provision for loan losses, operating expense, other income (expense) and income tax expense.

 

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Table of Contents

Revenue

The components of revenue and the resulting variances are as follows (dollars in millions):

 

     Three Months
Ended June 30,
     Variance      Six Months
Ended June 30,
     Variance  
        2012 vs. 2011         2012 vs. 2011  
      2012      2011      Amount      %      2012      2011      Amount      %  

Net operating interest income

   $ 279.1      $ 315.4      $ (36.3)         (12)%       $ 564.0      $ 625.1      $ (61.1)         (10)%   

Commissions

     93.3        103.8        (10.5)         (10)%         200.7        228.3        (27.6)         (12)%   

Fees and service charges

     29.1        36.6        (7.5)         (21)%         61.1        73.9        (12.8)         (17)%   

Principal transactions

     21.2        23.8        (2.6)         (11)%         45.4        53.3        (7.9)         (15)%   

Gains on loans and securities, net

     24.7        31.0        (6.3)         (20)%         59.6        63.3        (3.7)         (6)%   

Net impairment

     (5.3)         (2.9)         (2.4)         83%         (8.8)         (8.9)         0.1        (2)%   

Other revenues

     10.3        9.9        0.4        4%         19.8        19.3        0.5        3%   
  

 

 

    

 

 

    

 

 

       

 

 

    

 

 

    

 

 

    

Total non-interest income

     173.3        202.2        (28.9)         (14)%         377.8        429.2        (51.4)         (12)%   
  

 

 

    

 

 

    

 

 

       

 

 

    

 

 

    

 

 

    

Total net revenue

   $ 452.4      $ 517.6      $ (65.2)         (13)%       $ 941.8      $ 1,054.3      $ (112.5)         (11)%   
  

 

 

    

 

 

    

 

 

       

 

 

    

 

 

    

 

 

    

Net Operating Interest Income

Net operating interest income decreased 12% and 10% to $279.1 million and $564.0 million for the three and six months ended June 30, 2012, respectively, compared to the same periods in 2011. Net operating interest income is earned primarily through investing customer cash and deposits in enterprise interest-earning assets, which include: real estate loans, margin receivables, available-for-sale securities and held-to-maturity securities.

 

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Table of Contents

The following tables present enterprise average balance sheet data and enterprise income and expense data for our operations, as well as the related net interest spread, yields and rates and have been prepared on the basis required by the SEC’s Industry Guide 3, “Statistical Disclosure by Bank Holding Companies” (dollars in millions):

    Three Months Ended June 30,  
    2012     2011  
    Average
Balance
    Operating
Interest
Inc./Exp.
    Average
Yield/
Cost
    Average
Balance
    Operating
Interest
Inc./Exp.
    Average
Yield/
Cost
 

Enterprise interest-earning assets:

  

Loans(1)

  $ 12,324.6     $ 125.0       4.06   $ 15,030.0     $ 181.0       4.82

Margin receivables

    5,633.4       55.4       3.96     5,732.5       58.7       4.11

Available-for-sale securities

    16,336.1       98.6       2.41     15,428.2       107.0       2.78

Held-to-maturity securities

    8,108.5       60.3       2.97     3,950.3       32.9       3.34

Cash and equivalents

    1,115.7       0.5       0.19     1,489.2       0.8       0.20

Segregated cash

    741.8       0.1       0.06     638.6       0.2       0.09

Securities borrowed and other

    509.4       12.7       10.02     639.2       12.5       7.84
 

 

 

   

 

 

     

 

 

   

 

 

   

Total enterprise interest-earning assets

    44,769.5       352.6       3.15     42,908.0       393.1       3.67
   

 

 

       

 

 

   

Non-operating interest-earning and non-interest earning assets(2)

    4,605.1           4,290.5      
 

 

 

       

 

 

     

Total assets

  $ 49,374.6         $ 47,198.5      
 

 

 

       

 

 

     

 

     Three Months Ended June 30,  
    2012     2011  
    Average
Balance
    Operating
Interest
Inc./Exp.
    Average
Yield/
Cost
    Average
Balance
    Operating
Interest
Inc./Exp.
    Average
Yield/
Cost
 

Enterprise interest-bearing liabilities:

  

Deposits

  $ 28,583.3       6.6       0.09   $ 26,091.5       11.8       0.18

Customer payables

    5,303.4       2.9       0.22     5,489.3       2.1       0.16

Securities sold under agreements to repurchase

    4,802.8       40.5       3.33     5,369.1       38.0       2.80

Federal Home Loan Bank (“FHLB”) advances and other borrowings

    2,733.3       25.4       3.68     2,745.2       26.9       3.89

Securities loaned and other

    702.2       0.0        0.02     655.2       0.4       0.24
 

 

 

   

 

 

     

 

 

   

 

 

   

Total enterprise interest-bearing liabilities

    42,125.0       75.4       0.71     40,350.3       79.2       0.78
   

 

 

       

 

 

   

Non-operating interest-bearing and non-interest bearing liabilities(3)

    2,197.2           2,208.5      
 

 

 

       

 

 

     

Total liabilities

    44,322.2           42,558.8      

Total shareholders’ equity

    5,052.4           4,639.7      
 

 

 

       

 

 

     

Total liabilities and shareholders’ equity

  $ 49,374.6         $ 47,198.5      
 

 

 

       

 

 

     

Excess of enterprise interest-earning assets over enterprise interest-bearing liabilities/Enterprise net interest income/Spread

  $ 2,644.5     $ 277.2       2.44   $ 2,557.7     $ 313.9       2.89
 

 

 

   

 

 

     

 

 

   

 

 

   

Enterprise net interest margin (net yield on enterprise interest-earning assets)

  

    2.48         2.93

Ratio of enterprise interest-earning assets to enterprise interest-bearing liabilities

  

    106.28         106.34

Return on average:

           

Total assets

        0.32         0.40

Total shareholders’ equity

        3.13         4.06

Average equity to average total assets

        10.23         9.83

Reconciliation from enterprise net interest income to net operating interest income (dollars in millions):

 

      Three Months Ended
June 30,
 
     2012     2011  

Enterprise net interest income

   $ 277.2     $ 313.9  

Taxable equivalent interest adjustment

     (0.3     (0.3

Earnings on customer cash held by third parties and other(4)

     2.2       1.8  
  

 

 

   

 

 

 

Net operating interest income

   $ 279.1     $ 315.4  
  

 

 

   

 

 

 

 

(1)   

Nonaccrual loans are included in the average loan balances. Interest payments received on nonaccrual loans are recognized on a cash basis in operating interest income until it is doubtful that full payment will be collected, at which point payments are applied to principal.

(2)   

Non-operating interest-earning and non-interest earning assets consist of property and equipment, net, goodwill, other intangibles, net and other assets that do not generate operating interest income. Some of these assets generate corporate interest income.

(3)   

Non-operating interest-bearing and non-interest bearing liabilities consist of corporate debt and other liabilities that do not generate operating interest expense. Some of these liabilities generate corporate interest expense.

(4)   

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

 

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Table of Contents
     Six Months Ended June 30,  
     2012     2011  
     Average
Balance
     Operating
Interest
Inc./Exp.
     Average
Yield/Cost
    Average
Balance
     Operating
Interest
Inc./Exp.
     Average
Yield/Cost
 

Enterprise interest-earning assets:

                

Loans(1)

   $ 12,648.6      $ 264.5        4.18   $ 15,425.2      $ 367.3        4.76

Margin receivables

     5,245.4        103.4        3.96     5,588.7        115.0        4.15

Available-for-sale securities

     16,195.5        204.6        2.53     15,589.6        218.2        2.80

Held-to-maturity securities

     7,513.1        113.6        3.03     3,238.4        53.7        3.32

Cash and equivalents

     1,360.4        1.4        0.20     1,659.7        1.7        0.20

Segregated cash

     1,285.8        0.5        0.07     682.7        0.4        0.11

Securities borrowed and other

     581.2        25.3        8.77     641.5        22.3        7.00
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total enterprise interest-earning assets

     44,830.0        713.3        3.19     42,825.8        778.6        3.64
     

 

 

         

 

 

    

Non-operating interest-earning and non-interest earning assets(2)

     4,522.9             4,381.0        
  

 

 

         

 

 

       

Total assets

   $ 49,352.9           $ 47,206.8        
  

 

 

         

 

 

       

Enterprise interest-bearing liabilities:

                

Deposits

   $ 28,255.6        15.0        0.11   $ 25,864.7        24.0        0.19

Customer payables

     5,634.4        5.5        0.20     5,404.6        4.0        0.15

Securities sold under agreements to repurchase

     4,896.0        81.2        3.28     5,625.6        76.0        2.69

Federal Home Loan Bank (“FHLB”) advances and other borrowings

     2,732.7        50.8        3.68     2,748.7        52.2        3.78

Securities loaned and other

     645.4        0.2        0.06     670.0        0.7        0.22
  

 

 

    

 

 

      

 

 

    

 

 

    

Total enterprise interest-bearing liabilities

     42,164.1        152.7        0.72     40,313.6        156.9        0.77
     

 

 

         

 

 

    

Non-operating interest-bearing and non-interest bearing liabilities(3)

     2,175.3             2,497.3        
  

 

 

         

 

 

       

Total liabilities

     44,339.4             42,810.9        

Total shareholders’ equity

     5,013.5             4,395.9        
  

 

 

         

 

 

       

Total liabilities and shareholders’ equity

   $ 49,352.9           $ 47,206.8        
  

 

 

         

 

 

       

Excess of enterprise interest-earning assets over enterprise interest-bearing liabilities/Enterprise net interest income/Spread

   $ 2,665.9      $ 560.6        2.47   $ 2,512.2      $ 621.7        2.87
  

 

 

    

 

 

      

 

 

    

 

 

    
                

Enterprise net interest margin (net yield on enterprise interest-earning assets)

           2.50           2.90

Ratio of enterprise interest-earning assets to enterprise interest-bearing liabilities

           106.32           106.23

Return on average:

                

Total assets

           0.41           0.39

Total shareholders’ equity

           4.07           4.20

Average equity to average total assets

           10.16           9.31

Reconciliation from enterprise net interest income to net operating interest income (dollars in millions):

 

     Six Months Ended
June 30,
 
     2012     2011  

Enterprise net interest income

   $ 560.6     $ 621.7  

Taxable equivalent interest adjustment

     (0.6     (0.6

Earnings on customer cash held by third parties and other(4)

     4.0       4.0  
  

 

 

   

 

 

 

Net operating interest income

   $ 564.0     $ 625.1  
  

 

 

   

 

 

 

 

(1)   

Nonaccrual loans are included in the average loan balances. Interest payments received on nonaccrual loans are recognized on a cash basis in operating interest income until it is doubtful that full payment will be collected, at which point payments are applied to principal.

(2)   

Non-operating interest-earning and non-interest earning assets consist of property and equipment, net, goodwill, other intangibles, net and other assets that do not generate operating interest income. Some of these assets generate corporate interest income.

(3)   

Non-operating interest-bearing and non-interest bearing liabilities consist of corporate debt and other liabilities that do not generate operating interest expense. Some of these liabilities generate corporate interest expense.

(4)   

Includes revenue earned on average customer assets of $3.7 billion for both the six months ended June 30, 2012 and 2011, held by parties outside E*TRADE Financial, including third party money market funds and sweep deposit accounts at unaffiliated financial institutions.

 

 

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The fluctuation in enterprise interest-earning assets is driven primarily by changes in enterprise interest-bearing liabilities, specifically customer cash and deposits. Average enterprise interest-earning assets increased 4% to $44.8 billion and 5% to $44.8 billion for the three and six months ended June 30, 2012, respectively, compared to the same periods in 2011. This was primarily a result of the increases in average segregated cash and average available-for-sale and held-to-maturity securities, offset by decreases in average loans and average margin receivables.

Average enterprise interest-bearing liabilities increased 4% to $42.1 billion and 5% to $42.2 billion for the three and six months ended June 30, 2012, respectively, compared to the same periods in 2011. The increase in average enterprise interest-bearing liabilities was due primarily to an increase in average deposits offset by a decrease in average securities sold under agreements to repurchase.

Enterprise net interest spread decreased by 45 basis points to 2.44% and by 40 basis points to 2.47% for the three and six months ended June 30, 2012, respectively, compared to the same periods in 2011, due primarily to lower yields on loans and the impact of the current interest rate environment, which remains challenging. We expect enterprise net interest spread to continue to decline during the remainder of 2012, averaging slightly above 2.40% for the full year; however, spread may fluctuate based on the size and mix of the balance sheet.

Commissions

Commissions revenue decreased 10% to $93.3 million and 12% to $200.7 million for the three and six months ended June 30, 2012, respectively, compared to the same periods in 2011. The main factors that affect commissions are DARTs, average commission per trade and the number of trading days during the period. Average commission per trade is impacted by customer mix and the different commission rates on various trade types (e.g. equities, options, fixed income, stock plan, exchange-traded funds, mutual funds, forex and cross border). Accordingly, changes in the mix of trade types will impact average commission per trade.

DART volume decreased 6% to 138,653 and 9% to 147,747 for the three and six months ended June 30, 2012, respectively, compared to the same periods in 2011. Option-related DARTs as a percentage of total DARTs represented 24% of trading volume for both the three and six months ended June 30, 2012, compared to 20% for the same periods in 2011. Exchange-traded funds-related DARTs as a percentage of total DARTs represented 9% and 8% of trading volume for the three and six months ended June 30, 2012, respectively, compared to 10% and 9% for the comparable periods in 2011.

Average commission per trade decreased 4% to $10.68 and 3% to $10.87 for the three and six months ended June 30, 2012, respectively, compared to the same periods in 2011. The decreases were driven primarily by changes in customer mix; specifically customers who have a higher commission per trade traded less during the three and six months ended June 30, 2012 compared to our active trader customers, who generally have lower commission per trade, when compared to the same periods in 2011.

 

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Table of Contents

Fees and Service Charges

Fees and service charges decreased 21% to $29.1 million and 17% to $61.1 million for the three and six months ended June 30, 2012, respectively, compared to the same periods in 2011. The decrease was driven primarily by lower reorganization fee revenue related to a large public company reorganization in the second quarter of 2011 and by a decline in other fees and service charges due to decreased customer activity. The table below shows the components of fees and service charges and the resulting variances (dollars in millions):

 

    

Three Months Ended

June 30,

     Variance    

Six Months Ended
June 30,

     Variance  
        2012 vs. 2011        2012 vs. 2011  
     2012      2011      Amount     %     2012      2011      Amount      %  

Order flow revenue

   $ 13.2      $ 14.0      $ (0.8     (6 )%    $ 28.7      $ 30.8      $ (2.1      (7 )% 

Mutual fund service fees

     4.0        4.1        (0.1     (2 )%      7.8        7.7        0.1        1

Foreign exchange revenue

     2.1        2.9        (0.8     (28 )%      5.5        6.6        (1.1      (17 )% 

Reorganization fees

     2.0        6.6        (4.6     (70 )%      3.6        9.5        (5.9      (62 )% 

Advisor management fees

     1.4        0.6        0.8       133     2.5        2.8        (0.3      (11 )% 

Other fees and service charges

     6.4        8.4        (2.0     (24 )%      13.0        16.5        (3.5      (21 )% 
  

 

 

    

 

 

    

 

 

     

 

 

    

 

 

    

 

 

    

Total fees and service charges

   $ 29.1      $ 36.6      $ (7.5     (21 )%    $ 61.1      $ 73.9      $ (12.8      (17 )% 
  

 

 

    

 

 

    

 

 

     

 

 

    

 

 

    

 

 

    

Principal Transactions

Principal transactions decreased 11% to $21.2 million and 15% to $45.4 million for the three and six months ended June 30, 2012, respectively, compared to the same periods in 2011. Principal transactions are derived from our market making business in which we act as a market-maker for our brokerage customers’ orders as well as orders from third party customers. The decrease in principal transactions revenue was driven primarily by a decrease in trading volume when compared to the same periods in 2011.

Gains on Loans and Securities, Net

Gains on loans and securities, net were $24.7 million and $59.6 million for the three and six months ended June 30, 2012 as shown in the following table (dollars in millions):

 

    

Three Months Ended

June 30,

     Variance    

Six Months Ended
June 30,

     Variance  
        2012 vs. 2011        2012 vs. 2011  
     2012     2011      Amount     %     2012     2011      Amount      %  

Gains on loans, net

   $ 0.2     $ 0.1      $ 0.1       *      $ 0.2     $ 0.1      $ 0.1        *   
  

 

 

   

 

 

    

 

 

     

 

 

   

 

 

    

 

 

    

Gains on available-for-sale securities, net

     30.1       25.3        4.8       19     65.0       61.1        3.9        6

Gains (losses) on trading securities, net

     (0.1     0.3        (0.4     *        (0.1     0.9        (1.0      *   

Hedge ineffectiveness

     (5.5     5.3        (10.8     *        (5.5     1.2        (6.7      *   
  

 

 

   

 

 

    

 

 

     

 

 

   

 

 

    

 

 

    

Gains on securities, net

     24.5       30.9        (6.4     (21 )%      59.4       63.2        (3.8      (6 )% 
  

 

 

   

 

 

    

 

 

     

 

 

   

 

 

    

 

 

    

Gains on loans and securities, net

   $ 24.7     $ 31.0      $ (6.3     (20 )%    $ 59.6     $ 63.3      $ (3.7      (6 )% 
  

 

 

   

 

 

    

 

 

     

 

 

   

 

 

    

 

 

    

 

*  

Percentage not meaningful.

 

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Net Impairment

We recognized $5.3 million and $8.8 million of net impairment during the three and six months ended June 30, 2012, respectively, on certain securities in our non-agency CMO portfolio due to continued deterioration in the expected credit performance of the underlying loans in those specific securities. The gross other-than-temporary impairment (“OTTI”) and the noncredit portion of OTTI, which was or had been previously recorded through other comprehensive income, are shown in the table below (dollars in millions):

 

     Three Months Ended     Six Months Ended  
     June 30,     June 30,  
     2012     2011     2012     2011  

Other-than-temporary impairment (“OTTI”)

   $ (1.4   $ (2.0   $ (14.1   $ (6.9

Less: noncredit portion of OTTI recognized into (out of) other comprehensive income (loss) (before tax)

     (3.9     (0.9     5.3        (2.0
  

 

 

   

 

 

   

 

 

   

 

 

 

Net impairment

   $ (5.3   $ (2.9   $ (8.8   $ (8.9
  

 

 

   

 

 

   

 

 

   

 

 

 

Provision for Loan Losses

Provision for loan losses decreased 35% to $67.3 million and 36% to $139.2 million for the three and six months ended June 30, 2012, respectively, compared to the same periods in 2011. The decrease in provision for loan losses was driven primarily by improving credit trends, as evidenced by the lower levels of delinquent loans in the one- to four-family and home equity loan portfolios, and loan portfolio run-off. The provision for loan losses has declined 87% from its peak of $517.8 million in the third quarter of 2008. We expect provision for loan losses to continue to decline over the long term, although it is subject to variability from quarter to quarter.

Operating Expense

The components of operating expense and the resulting variances are as follows (dollars in millions):

 

    

Three Months Ended

June 30,

     Variance    

Six Months Ended

June 30,

     Variance  
        2012 vs. 2011        2012 vs. 2011  
     2012      2011      Amount     %     2012      2011      Amount      %  

Compensation and benefits

   $ 85.6      $ 80.5      $ 5.1       6   $ 177.8      $ 164.5      $ 13.3        8

Clearing and servicing

     32.8        39.2        (6.4     (16 )%      67.4        78.3        (10.9      (14 )% 

Advertising and market development

     36.6        37.0        (0.4     (1 )%      84.1        81.4        2.7        3

FDIC insurance premiums

     27.2        24.0        3.2       13     55.6        44.6        11.0        25

Professional services

     19.9        21.5        (1.6     (7 )%      40.3        44.9        (4.6      (10 )% 

Occupancy and equipment

     18.2        17.2        1.0       6     36.1        34.0        2.1        6

Communications

     18.4        17.2        1.2       7     37.5        32.8        4.7        14

Depreciation and amortization

     23.1        22.7        0.4       2     45.3        44.8        0.5        1

Amortization of other intangibles

     6.3        6.5        (0.2     (4 )%      12.6        13.1        (0.5      (4 )% 

Facility restructuring and other exit activities

     1.6        2.1        (0.5     *        1.2        5.6        (4.4      *   

Other operating expenses

     11.8        23.0        (11.2     (49 )%      29.8        44.9        (15.1      (34 )% 
  

 

 

    

 

 

    

 

 

     

 

 

    

 

 

    

 

 

    

Total operating expense

   $ 281.5      $ 290.9      $ (9.4     (3 )%    $ 587.7      $ 588.9      $ (1.2      (0 )% 
  

 

 

    

 

 

    

 

 

     

 

 

    

 

 

    

 

 

    

 

*  

Percentage not meaningful.

Compensation and Benefits

Compensation and benefits increased 6% to $85.6 million and 8% to $177.8 million for the three and six months ended June 30, 2012, respectively, compared to the same periods in 2011. The increase resulted primarily from higher compensation expense as a result of a 3% increase in the employee base from June 30, 2011 to June 30, 2012.

 

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Table of Contents

Clearing and Servicing

Clearing and servicing decreased 16% to $32.8 million and 14% to $67.4 million for the three and six months ended June 30, 2012, respectively, compared to the same periods in 2011. These decreases resulted primarily from lower trading volumes and lower loan balances compared to the same periods in 2011.

FDIC Insurance Premiums

FDIC insurance premiums increased 13% to $27.2 million and 25% to $55.6 million for the three and six months ended June 30, 2012, respectively, compared to the same periods in 2011. The increases were due primarily to an industry wide change in the FDIC insurance premium assessment calculation, effective in the second quarter of 2011. The three and six months ended June 30, 2011 did not include approximately $6 million of FDIC insurance premium related to the new assessment calculation as it was not finalized and recorded until the third quarter of 2011.

Professional Services

Professional services decreased 7% to $19.9 million and 10% to $40.3 million for the three and six months ended June 30, 2012, respectively, compared to the same periods in 2011. The decreases were driven primarily by declines in legal expenses compared to the same periods in 2011.

Communications

Communications expense increased 7% to $18.4 million and 14% to $37.5 million for the three and six months ended June 30, 2012, respectively, compared to the same periods in 2011. This was driven primarily by increases in vendor service fees compared to the same periods in 2011.

Other Operating Expenses

Other operating expenses decreased 49% to $11.8 million and 34% to $29.8 million for the three and six months ended June 30, 2012, respectively, compared to the same periods in 2011. The decrease was driven by a $10.2 million benefit during the second quarter of 2012 related to our offer to purchase auction rate securities from eligible holders. The costs of this program, which expired on May 15, 2012, were approximately $10.2 million less than our previous estimate.

Other Income (Expense)

Other income (expense) increased 5% to $43.2 million and 4% to $88.4 million for the three and six months ended June 30, 2012, respectively, compared to the same periods in 2011 as shown in the following table (dollars in millions):

 

    

Three Months Ended

June 30,

    Variance    

Six Months Ended

June 30,

    Variance  
       2012 vs. 2011       2012 vs. 2011  
         2012             2011         Amount     %         2012             2011         Amount      %  

Corporate interest income

   $ —        $ 0.1     $ (0.1     *      $ —        $ 0.7     $ (0.7      *   

Corporate interest expense

     (45.3     (44.8     (0.5     1     (90.4     (88.1     (2.3      3

Gains on early extinguishment of debt

     —          3.1       (3.1     *        —          3.1       (3.1      *   

Equity in income (loss) of investments and venture funds

     2.1       0.6       1.5       *        2.0       (0.3     2.3        *   
  

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

    

Total other income (expense)

   $ (43.2   $ (41.0   $ (2.2     5   $ (88.4   $ (84.6   $ (3.8      4
  

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

    

 

*  

Percentage not meaningful.

 

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Table of Contents

Total other income (expense) primarily consisted of corporate interest expense on interest-bearing corporate debt for the three and six months ended June 30, 2012. Corporate interest expense increased 1% and 3% to $45.3 million and $90.4 million for the three and six months ended June 30, 2012, respectively, compared to the same periods in 2011. In addition to the stated interest on corporate debt, the corporate interest expense line item included the benefit of discontinued fair value hedges on corporate debt, which decreased $0.8 million and $2.2 million for the three and six months ended June 30, 2012, respectively, compared to the same periods in 2011. Offsetting interest expense for the three and six months ended June 30, 2011 was a $3.1 million gain on early extinguishment of debt related to the call of the 7 3/8% Notes due September 2013 in the second quarter of 2011.

Income Tax Expense

For the three months ended June 30, 2012, income tax expense and the effective tax rate were $21.0 million and 34.7%, compared to $35.5 million and 43.0%, respectively for the same period in 2011. For the six months ended June 30, 2012, income tax expense and the effective tax rate were $24.4 million and 19.3%, compared to $69.2 million and 42.8%, respectively for the same period in 2011.

During the first quarter of 2012, we recorded an income tax benefit of $26.3 million related to certain losses on the 2009 Debt Exchange that were previously considered non-deductible. Through additional research completed in the first quarter of 2012, we identified that a portion of those losses were incorrectly treated as non-deductible in 2009 and were deductible for tax purposes. The $26.3 million tax benefit resulted in a corresponding increase to the deferred tax assets, which were $1.5 billion as of June 30, 2012. Without this benefit, our effective tax rate for the six months ended June 30, 2012 would have been 40.1%, calculated as follows (dollars in thousands):

 

     Pre-tax
Income
     Tax Expense
(Benefit)
    Tax Rate  

Tax rate before tax benefit

   $ 126,534      $ 50,717       40.1

Income tax benefit related to certain losses on the 2009 Debt Exchange

     —           (26,284     N/A   
  

 

 

    

 

 

   

Total as reported

   $ 126,534      $ 24,433       19.3
  

 

 

    

 

 

   

In addition, the three and six months ended June 30, 2012 included a benefit of $6.7 million, primarily related to state tax credits generated from software development.

Valuation Allowance

We are required to establish a valuation allowance for deferred tax assets and record a charge to income if we determine, based on available evidence at the time the determination is made, that it is more likely than not that some portion or all of the deferred tax assets will not be realized. If we did conclude that a valuation allowance was required, the resulting loss could have a material adverse effect on our financial condition and results of operations.

We did not establish any valuation allowance against federal deferred tax assets as of June 30, 2012 as we believe that it is more likely than not that all of these assets will be realized. We continue to maintain a valuation allowance for certain of our state, foreign country and charitable contribution deferred tax assets as it is more likely than not that they will not be realized.

Tax Ownership Change

During the third quarter of 2009, we exchanged $1.7 billion principal amount of interest-bearing debt for an equal principal amount of non-interest-bearing convertible debentures. Subsequent to the Debt Exchange, $592.3 million and $128.7 million debentures were converted into 57.2 million and 12.5 million shares of common stock during the third and fourth quarters of 2009, respectively. As a result of these conversions, we believe we experienced a tax ownership change during the third quarter of 2009.

 

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Table of Contents

As of the date of the ownership change, we had federal net operating losses (“NOLs”) available to carry forward of approximately $1.4 billion. Section 382 imposes an annual limitation on the amount of post-ownership change taxable income a corporation may offset with pre-ownership change NOLs. We believe the tax ownership change will extend the period of time it will take to fully utilize our pre-ownership change NOLs, but will not limit the total amount of pre-ownership change NOLs we can utilize. Our updated estimate is that we will be subject to an overall annual limitation on the use of our pre-ownership change NOLs of approximately $194 million. The overall pre-ownership change NOLs, which were approximately $1.4 billion, have a statutory carry forward period of 20 years (the majority of which expire in 16 years). As a result, we believe we will be able to fully utilize these NOLs in future periods.

Our ability to utilize the pre-ownership change NOLs is dependent on our ability to generate sufficient taxable income over the duration of the carry forward periods and will not be impacted by our ability or inability to generate taxable income in an individual year.

SEGMENT RESULTS REVIEW

We report operating results in two segments: 1) trading and investing; and 2) balance sheet management. Trading and investing includes retail brokerage products and services; investor-focused banking products; market making; and corporate services. Balance sheet management includes the management of asset allocation; loans previously originated by the Company or purchased from third parties; customer cash and deposits; and credit, liquidity and interest rate risk for the Company as described in the Risk Management section. Costs associated with certain functions that are centrally-managed are separately reported in a corporate/other category.

Trading and Investing

The following table summarizes trading and investing financial information and key metrics as of and for the three and six months ended June 30, 2012 and 2011 (dollars in millions, except for key metrics):

 

     Three Months Ended
June 30,
    Variance     Six Months Ended
June 30,
    Variance  
      2012 vs. 2011       2012 vs. 2011  
    2012     2011     Amount     %     2012     2011     Amount     %  

Net operating interest income

  $ 165.2     $ 191.8     $ (26.6     (14 )%    $ 335.7     $ 380.6     $ (44.9     (12 )% 

Commissions

    93.3       103.8       (10.5     (10 )%      200.7       228.3       (27.6     (12 )% 

Fees and service charges

    28.4       35.8       (7.4     (21 )%      59.4       71.9       (12.5     (18 )% 

Principal transactions

    21.2       23.8       (2.6     (11 )%      45.4       53.3       (7.9     (15 )% 

Other revenues

    8.8       7.7       1.1       14     16.6       15.8       0.8       5
 

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

Total net revenue

    316.9       362.9       (46.0     (13 )%      657.8       749.9       (92.1     (12 )% 

Total operating expense

    188.1       192.6       (4.5     (2 )%      399.7       395.2       4.5       1
 

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

Trading and investing income

  $ 128.8     $ 170.3     $ (41.5     (24 )%    $ 258.1     $ 354.7     $ (96.6     (27 )% 
 

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

Key Metrics:

               

DARTs

    138,653       147,908       (9,255     (6 )%      147,747       162,476       (14,729     (9 )% 

Average commission per trade

  $ 10.68     $ 11.14     $ (0.46     (4 )%    $ 10.87     $ 11.24     $ (0.37     (3 )% 

Margin receivables (dollars in billions)

  $ 5.8     $ 5.7     $ 0.1       2   $ 5.8     $ 5.7     $ 0.1       2

End of period brokerage accounts

    2,874,605       2,759,773       114,832       4     2,874,605       2,759,773       114,832       4

Net new brokerage accounts

    45,599       24,950       20,649       *        91,593       75,462       16,131       *   

Customer assets (dollars in billions)

  $ 192.5     $ 185.6     $ 6.9       4   $ 192.5     $ 185.6     $ 6.9       4

Net new brokerage assets (dollars in billions)

  $ 2.2     $ 1.5     $ 0.7       *      $ 6.2     $ 5.4     $ 0.8       *   

Brokerage related cash (dollars in billions)

  $ 29.2     $ 26.3     $ 2.9       11   $ 29.2     $ 26.3     $ 2.9       11

 

*  

Percentage not meaningful.

 

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Table of Contents

The trading and investing segment offers products and services to individual retail investors, generating revenue from these brokerage and banking relationships and from market making and corporate services activities. This segment generates five main sources of revenue: net operating interest income; commissions; fees and service charges; principal transactions; and other revenues. Net operating interest income is generated primarily from margin receivables and from a deposit transfer pricing arrangement with the balance sheet management segment. The balance sheet management segment utilizes the vast majority of customer cash and deposits and compensates the trading and investing segment via a market-based transfer pricing arrangement. This compensation is reflected in segment results as operating interest income for the trading and investing segment and operating interest expense for the balance sheet management segment and is eliminated in consolidation. Customer cash and deposits utilized by the balance sheet management segment include retail deposits and customer payables. Other revenues include results from providing software and services for managing equity compensation plans from corporate customers, as we ultimately service retail investors through these corporate relationships.

Trading and investing income decreased 24% to $128.8 million and 27% to $258.1 million for the three and six months ended June 30, 2012, respectively, compared to the same periods in 2011. We continued to generate net new brokerage accounts, ending the quarter with 2.9 million accounts. Our brokerage related cash, which is one of our most profitable sources of funding, increased by $2.9 billion when compared to the same period in 2011.

Trading and investing commissions decreased by 10% to $93.3 million and 12% to $200.7 million for the three and six months ended June 30, 2012, respectively, compared to the same periods in 2011. These decreases in commissions were primarily the result of a decrease in DARTs of 6% to 138,653 and 9% to 147,747 for the three and six months ended June 30, 2012, respectively, compared to the same periods in 2011.

Trading and investing fees and service charges decreased 21% to $28.4 million and 18% to $59.4 million for the three and six months ended June 30, 2012, respectively, compared to the same periods in 2011. These decreases for the three and six months ended June 30, 2012 were driven by decreases in order flow revenue, reorganization fee revenue and foreign exchange fee revenue compared to the same periods in 2011.

Trading and investing principal transactions decreased 11% to $21.2 million and 15% to $45.4 million for the three and six months ended June 30, 2012, respectively, compared to the same periods in 2011. The decreases in principal transactions revenue were driven primarily by decreases in trading volume when compared to the same periods in 2011.

Trading and investing operating expense decreased 2% to $188.1 million and increased 1% to $399.7 million for the three and six months ended June 30, 2012, respectively, compared to the same periods in 2011. The decrease during the three months ended June 30, 2012 was driven by a $10.2 million benefit related to our offer to purchase auction rate securities from eligible holders which expired on May 15, 2012. The increase for the six months ended June 30, 2012 was driven primarily by an increase in compensation and benefits expense resulting from an increase in the employee base from June 30, 2011 to June 30, 2012, which was mostly offset by the $10.2 million benefit discussed above.

As of June 30, 2012, we had approximately 2.9 million brokerage accounts, 1.1 million stock plan accounts and 0.4 million banking accounts. For the three months ended June 30, 2012 and 2011, our brokerage products contributed 70% and 68%, respectively, and our banking products contributed 30% and 32%, respectively, of total trading and investing net revenue. For the six months ended June 30, 2012 and 2011, our brokerage products contributed 69% and 70%, respectively, and our banking products contributed 31% and 30%, respectively, of total trading and investing net revenue.

 

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Table of Contents

Balance Sheet Management

The following table summarizes balance sheet management financial information and key metrics as of and for the three and six months ended June 30, 2012 and 2011 (dollars in millions):

 

     Three Months  Ended
June 30,
    Variance     Six Months  Ended
June 30,
    Variance  
       2012 vs. 2011       2012 vs. 2011  
     2012     2011     Amount     %     2012     2011     Amount      %  

Net operating interest income

   $ 113.9     $ 123.7     $ (9.8     (8 )%    $ 228.3     $ 244.5     $ (16.2      (7 )% 

Fees and service charges

     0.7       0.8       (0.1     (16 )%      1.7       1.9       (0.2      (10 )% 

Gains on loans and securities, net

     24.8       31.4       (6.6     (21 )%      59.8       63.6       (3.8      (6 )% 

Net impairment

     (5.3     (2.9     (2.4     83     (8.8     (8.9     0.1        (2 )% 

Other revenues

     1.4       1.8       (0.4     (23 )%      3.0       3.3       (0.3      (9 )% 
  

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

    

Total net revenue

     135.5       154.8       (19.3     (12 )%      284.0       304.4       (20.4      (7 )% 

Provision for loan losses

     67.3       103.1       (35.8     (35 )%      139.2       219.2       (80.0      (36 )% 

Total operating expense

     56.6       58.3       (1.7     (3 )%      115.2       111.7       3.5        3
  

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

    

Balance sheet management income (loss)

   $ 11.6     $ (6.6   $ 18.2       *      $ 29.6     $ (26.5   $ 56.1        *   
  

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

    

Key Metrics:

                 

Special mention loan delinquencies

   $ 349.5     $ 461.3     $ (111.8     (24 )%    $ 349.5     $ 461.3     $ (111.8      (24 )% 

Allowance for loan losses

   $ 525.8     $ 878.6     $ (352.8     (40 )%    $ 525.8     $ 878.6     $ (352.8      (40 )% 

Allowance for loan losses as a % of gross loans receivable

     4.47     6.04     *        (1.57 )%      4.47     6.04     *         (1.57 )% 

 

*  

Percentage not meaningful.

The balance sheet management segment generates revenue from managing loans previously originated by the Company or purchased from third parties, as well as utilizing customer cash and deposits to generate additional net operating interest income. The balance sheet management segment utilizes customer cash and deposits from the trading and investing segment, wholesale borrowings and proceeds from loan pay-downs to invest in available-for-sale and held-to-maturity securities. Net operating interest income is generated from interest earned on available-for-sale and held-to-maturity securities and loans receivable, net of interest paid on wholesale borrowings and on a deposit transfer pricing arrangement with the trading and investing segment. The balance sheet management segment utilizes the vast majority of customer cash and deposits and compensates the trading and investing segment via a market-based transfer pricing arrangement. This compensation is reflected in segment results as operating interest income for the trading and investing segment and operating interest expense for the balance sheet management segment and is eliminated in consolidation. Customer cash and deposits utilized by the balance sheet management segment include retail deposits and customer payables.

The balance sheet management segment reported income of $11.6 million and $29.6 million for the three and six months ended June 30, 2012. The balance sheet management income was due primarily to a decrease in provision for loan losses of 35% to $67.3 million and 36% to $139.2 million for the three and six months ended June 30, 2012, respectively.

Gains on loans and securities, net were $24.8 million and $59.8 million for the three and six months ended June 30, 2012, respectively, compared to $31.4 million and $63.6 million for the same periods in 2011 due to gains on the sale of certain agency mortgage-backed securities and agency debentures.

We recognized $5.3 million and $8.8 million of net impairment during the three and six months ended June 30, 2012, respectively, on certain securities in the non-agency CMO portfolio due to continued deterioration in the expected credit performance of the underlying loans in those specific securities. The net impairment

 

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included gross OTTI of $1.4 million and $14.1 million for the three and six months ended June 30, 2012, respectively. The amount that had been previously recorded through other comprehensive income and was reclassified into earnings during the three months ended June 30, 2012 was $3.9 million. For the six months ended June 30, 2012, $5.3 million related to the noncredit portion of OTTI, which was recorded through other comprehensive income.

Provision for loan losses decreased 35% to $67.3 million and 36% to $139.2 million for the three and six months ended June 30, 2012, respectively, compared to the same periods in 2011. The decreases in provision for loan losses were driven primarily by improving credit trends, as evidenced by the lower levels of delinquent loans in the one- to four- family and home equity loan portfolios, and loan portfolio run-off.

Total balance sheet management operating expense decreased 3% to $56.6 million and increased 3% to $115.2 million for the three and six months ended June 30, 2012, respectively, compared to the same periods in 2011. The decrease in operating expense for the three months ended June 30, 2012 resulted primarily from lower clearing and servicing expense due to lower loan balances compared to the same period in 2011. The increase in operating expense for the six months ended June 30, 2012 was due primarily to increased FDIC insurance premiums as a result of an industry wide change in the FDIC insurance premium assessment calculation, effective in the second quarter of 2011, partially offset by lower clearing and servicing expense due to lower loan balances.

Corporate/Other

The following table summarizes corporate/other financial information for the three and six months ended June 30, 2012 and 2011 (dollars in millions):

 

    

Three Months Ended

June 30,

    Variance    

Six Months Ended

June 30,

     Variance  
       2012 vs. 2011        2012 vs. 2011  
     2012     2011     Amount     %     2012     2011      Amount      %  

Total net revenue

   $ —        $ —        $ —          *      $ —        $ —         $ —           *   
  

 

 

   

 

 

   

 

 

     

 

 

   

 

 

    

 

 

    

Compensation and benefits

     16.4       17.3       (0.9     (5 )%      34.8       35.0        (0.2      (1 )% 

Professional services

     8.0       8.0       —          *        15.2       17.5        (2.3      (13 )% 

Occupancy and equipment

     1.3       0.8       0.5       62     2.2       1.8        0.4        24

Communications

     0.4       0.4       —          *        0.8       0.7        0.1        22

Depreciation and amortization

     4.0       4.7       (0.7     (15 )%      8.3       9.4        (1.1      (12 )% 

Facility restructuring and

                  

other exit activities

     1.6       2.1       (0.5     *        1.2       5.6        (4.4      *   

Other operating expenses

     5.0       6.8       (1.8     (26 )%      10.3       12.0        (1.7      (14 )% 
  

 

 

   

 

 

   

 

 

     

 

 

   

 

 

    

 

 

    

Total operating expense

     36.7       40.1       (3.4     (8 )%      72.8       82.0        (9.2      (11 )% 
  

 

 

   

 

 

   

 

 

     

 

 

   

 

 

    

 

 

    

Operating loss

     (36.7     (40.1     3.4       (8 )%      (72.8     (82.0      9.2        (11 )% 

Total other income (expense)

     (43.2     (41.0     (2.2     5     (88.4     (84.6      (3.8      4
  

 

 

   

 

 

   

 

 

     

 

 

   

 

 

    

 

 

    

Corporate/other loss

   $ (79.9   $ (81.1   $ 1.2       (1 )%    $ (161.2   $ (166.6    $ 5.4        (3 )% 
  

 

 

   

 

 

   

 

 

     

 

 

   

 

 

    

 

 

    

 

*  

Percentage not meaningful.

The corporate/other category includes costs that are centrally-managed, technology related costs incurred to support centrally-managed functions, restructuring and other exit activities, corporate debt and corporate investments.

The corporate/other loss before income taxes was $79.9 million and $161.2 million for the three and six months ended June 30, 2012, compared to $81.1 million and $166.6 million, respectively, for the same periods in 2011. For the six months ended June 30, 2012, the decrease in the loss was due primarily to restructuring activities for the six months ended June 30, 2011, for which there were not similar activities in the current period.

 

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Table of Contents

Total other income (expense) primarily consisted of corporate interest expense on interest-bearing corporate debt for the three and six months ended June 30, 2012. Corporate interest expense increased 1% to $45.3 million and 3% to $90.4 million for the three and six months ended June 30, 2012, respectively, compared to the same periods in 2011. In addition to the stated interest on corporate debt, the corporate interest expense line item included the benefit of discontinued fair value hedges on corporate debt, which decreased $0.8 million and $2.2 million, respectively, for the three and six months ended June 30, 2012 compared to the same periods in 2011. Offsetting interest expense for the three and six months ended June 30, 2011 was a $3.1 million gain on early extinguishment of debt related to the call of the 7  3/8% Notes due September 2013 in the second quarter of 2011.

BALANCE SHEET OVERVIEW

The following table sets forth the significant components of the consolidated balance sheet (dollars in millions):

 

                    Variance  
     June 30,
2012
     December  31,
2011
     2012 vs. 2011  
           Amount     %  

Assets:

          

Cash and equivalents

   $ 1,378.5      $ 2,099.8      $ (721.3     (34 )% 

Segregated cash

     761.5        1,275.6        (514.1     (40 )% 

Securities(1)

     24,646.5        21,785.4        2,861.1       13

Margin receivables

     5,804.3        4,826.3        978.0       20

Loans receivable, net

     11,225.8        12,332.8        (1,107.0     (9 )% 

Investment in FHLB stock

     131.5        140.2        (8.7     (6 )% 

Other(2)

     5,207.7        5,480.4        (272.7     (5 )% 
  

 

 

    

 

 

    

 

 

   

Total assets

   $ 49,155.8      $ 47,940.5      $ 1,215.3       3
  

 

 

    

 

 

    

 

 

   

Liabilities and shareholders’ equity:

          

Deposits

   $ 27,911.1      $ 26,460.0      $ 1,451.1       5

Wholesale borrowings(3)

     7,459.0        7,752.4        (293.4     (4 )% 

Customer payables

     5,128.7        5,590.9        (462.2     (8 )% 

Corporate debt

     1,501.3        1,493.5        7.8       1

Other liabilities

     2,076.1        1,715.7        360.4       21
  

 

 

    

 

 

    

 

 

   

Total liabilities

     44,076.2        43,012.5        1,063.7       2

Shareholders’ equity

     5,079.6        4,928.0        151.6       3
  

 

 

    

 

 

    

 

 

   

Total liabilities and shareholders’ equity

   $ 49,155.8      $ 47,940.5      $ 1,215.3       3
  

 

 

    

 

 

    

 

 

   

 

(1)   

Includes balance sheet line items trading, available-for-sale and held-to-maturity securities.

(2)   

Includes balance sheet line items property and equipment, net, goodwill, other intangibles, net and other assets.

(3)   

Includes balance sheet line items securities sold under agreements to repurchase and FHLB advances and other borrowings.

Segregated Cash

Segregated cash decreased by $0.5 billion during the six months ended June 30, 2012. The level of cash required to be segregated under federal or other regulations, or segregated cash, is driven largely by customer cash and securities lending balances we hold as a liability in excess of the amount of margin receivables and securities borrowed balances we hold as an asset. The excess represents customer cash that we are required by our regulators to segregate for the exclusive benefit of our brokerage customers.

 

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Table of Contents

Securities

Trading, available-for-sale and held-to-maturity securities are summarized as follows (dollars in millions):

 

                   Variance  
     June  30,
2012
     December  31,
2011
     2012 vs. 2011  
           Amount     %  

Trading securities

   $ 60.1      $ 54.4      $ 5.7       10
  

 

 

    

 

 

    

 

 

   

Available-for-sale securities:

          

Residential mortgage-backed securities:

          

Agency mortgage-backed securities and CMOs

   $ 14,244.4      $ 13,965.7      $ 278.7       2

Non-agency CMOs

     314.2        341.6        (27.4     (8 )% 
  

 

 

    

 

 

    

 

 

   

Total residential mortgage-backed securities

     14,558.6        14,307.3        251.3       2

Investment securities

     1,594.1        1,344.2        249.9       19
  

 

 

    

 

 

    

 

 

   

Total available-for-sale securities

   $ 16,152.7      $ 15,651.5      $ 501.2       3
  

 

 

    

 

 

    

 

 

   

Held-to-maturity securities:

          

Residential mortgage-backed securities:

          

Agency mortgage-backed securities and CMOs

   $ 7,222.4      $ 5,296.5      $ 1,925.9       36

Investment securities

     1,211.3        783.0        428.3       55
  

 

 

    

 

 

    

 

 

   

Total held-to-maturity securities

   $ 8,433.7      $ 6,079.5      $ 2,354.2       39
  

 

 

    

 

 

    

 

 

   

Total securities

   $ 24,646.5      $ 21,785.4      $ 2,861.1       13
  

 

 

    

 

 

    

 

 

   

Securities represented 50% and 45% of total assets at June 30, 2012 and December 31, 2011, respectively. The increase in available-for-sale securities was due primarily to increases of $0.3 billion and $0.2 billion in agency mortgage-backed securities and CMOs and investment securities, respectively. The increase in held-to-maturity securities was due primarily to an increase of $1.9 billion in agency mortgage-backed securities and CMOs. The purchases of securities were driven primarily by the increase in customer deposits, which we invested in available-for-sale and held-to-maturity securities.

Loans Receivable, Net

Loans receivable, net are summarized as follows (dollars in millions):

 

                 Variance  
     June 30,
2012
    December  31,
2011
    2012 vs. 2011  
         Amount     %  

One- to four-family

   $ 5,987.3     $ 6,615.8     $ (628.5     (10 )% 

Home equity

     4,715.3       5,328.7       (613.4     (12 )% 

Consumer and other

     966.7       1,113.2       (146.5     (13 )% 

Unamortized premiums, net

     82.3       97.9       (15.6     (16 )% 

Allowance for loan losses

     (525.8     (822.8     297.0       (36 )% 
  

 

 

   

 

 

   

 

 

   

Total loans receivable, net

   $ 11,225.8     $ 12,332.8     $ (1,107.0     (9 )% 
  

 

 

   

 

 

   

 

 

   

Loans receivable, net decreased 9% to $11.2 billion at June 30, 2012 from $12.3 billion at December 31, 2011. This decline was due primarily to our strategy of reducing balance sheet risk by allowing the loan portfolio to pay down, which we plan to do for the foreseeable future.

During the six months ended June 30, 2012, the allowance for loan losses decreased by $297.0 million from the level at December 31, 2011. During the first quarter of 2012, we completed an evaluation of certain programs

 

20


Table of Contents

and practices that were designed in accordance with guidance from our former regulator, the OTS. This evaluation was initiated in connection with our transition from the OTS to the OCC, our new primary banking regulator. As a result of our evaluation, loan modification policies and procedures were aligned with the guidance from the OCC. The review resulted in a significant increase in charge-offs during the first quarter of 2012. The majority of the losses associated with these charge-offs were previously reflected in the specific valuation allowance and qualitative component of the general allowance for loan losses. See Summary of Critical Accounting Policies and Estimates for a discussion of the estimates and assumptions used in the allowance for loan losses, including the qualitative reserve.

Deposits

Deposits are summarized as follows (dollars in millions):

 

                   Variance  
     June 30,
2012
     December  31,
2011
     2012 vs. 2011  
           Amount      %  

Sweep deposits

   $ 20,482.6      $ 18,619.0      $ 1,863.6        10%   

Complete savings deposits

     5,328.9        5,720.8        (391.9)         (7)%   

Other money market and savings deposits

     1,001.9        1,033.2        (31.3)         (3)%   

Checking deposits

     921.9        863.3        58.6        7%   

Certificates of deposit

     145.4        190.5        (45.1)         (24)%   

Brokered certificates of deposit

     30.4        33.2        (2.8)         (8)%   
  

 

 

    

 

 

    

 

 

    

Total deposits

   $ 27,911.1      $ 26,460.0      $ 1,451.1        5%   
  

 

 

    

 

 

    

 

 

    

Deposits represented 63% and 62% of total liabilities at June 30, 2012 and December 31, 2011, respectively. At June 30, 2012, 92% of our customer deposits were covered by FDIC insurance. Deposits provide the benefit of lower interest costs compared with wholesale funding alternatives. Deposits increased 5% to $27.9 billion at June 30, 2012 from $26.5 billion at December 31, 2011. The increase was driven primarily by an increase of $1.9 billion in sweep deposits.

The deposits balance is a component of the total customer cash and deposits balance reported as a customer activity metric of $36.6 billion and $35.5 billion at June 30, 2012 and December 31, 2011, respectively. The total customer cash and deposits balance is summarized as follows (dollars in millions):

 

                Variance  
    June  30,
2012
    December  31,
2011
    2012 vs. 2011  
        Amount     %  

Deposits

  $ 27,911.1      $ 26,460.0      $ 1,451.1        5%   

Less: brokered certificates of deposit

    (30.4)        (33.2)        2.8        (8)%   
 

 

 

   

 

 

   

 

 

   

Retail deposits

    27,880.7        26,426.8        1,453.9        6%   

Customer payables

    5,128.7        5,590.9        (462.2)        (8)%   

Customer cash balances held by third parties and other

    3,583.2        3,520.1        63.1        2%   
 

 

 

   

 

 

   

 

 

   

Total customer cash and deposits

  $ 36,592.6      $ 35,537.8      $ 1,054.8        3%   
 

 

 

   

 

 

   

 

 

   

 

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Wholesale Borrowings

Wholesale borrowings, which consist of securities sold under agreements to repurchase and FHLB advances and other borrowings, are summarized as follows (dollars in millions):

                   Variance  
    

June 30,

2012

    

December 31,

2011

     2012 vs. 2011  
           Amount      %  

Securities sold under agreements to repurchase

   $ 4,717.6      $ 5,015.5      $ (297.9)         (6)%   
  

 

 

    

 

 

    

 

 

    

FHLB advances

   $ 2,311.1      $ 2,302.7      $ 8.4        0%   

Subordinated debentures

     427.7        427.6        0.1        0%   

Other

     2.6        6.6        (4.0)         (60)%   
  

 

 

    

 

 

    

 

 

    

Total FHLB advances and other borrowings

   $ 2,741.4      $ 2,736.9      $ 4.5        0%   
  

 

 

    

 

 

    

 

 

    

Total wholesale borrowings

   $ 7,459.0      $ 7,752.4      $ (293.4)         (4)%   
  

 

 

    

 

 

    

 

 

    

Wholesale borrowings represented 17% and 18% of total liabilities at June 30, 2012 and December 31, 2011, respectively. Securities sold under agreements to repurchase and FHLB advances are the primary wholesale funding sources of the Bank. We anticipate a decrease in securities sold under agreements to repurchase of approximately $150 million during the fourth quarter of 2012.

Corporate Debt

Corporate debt by type is shown as follows (dollars in millions):

 

     Face Value      Discount     Fair Value
Hedge
Adjustment
     Net  

June 30, 2012

                          

Interest-bearing notes:

          

7 7/8% Notes, due 2015

   $ 243.2      $ (1.0   $ 6.5      $ 248.7  

6 3/4% Notes, due 2016

     435.0        (6.6     —           428.4  

12 1/2% Springing lien notes, due 2017

     930.2        (154.6     5.7        781.3  
  

 

 

    

 

 

   

 

 

    

 

 

 

Total interest-bearing notes

     1,608.4        (162.2     12.2        1,458.4  

Non-interest-bearing debt:

          

0% Convertible debentures, due 2019

     42.9        —          —           42.9  
  

 

 

    

 

 

   

 

 

    

 

 

 

Total corporate debt

   $ 1,651.3      $ (162.2   $ 12.2      $ 1,501.3  
  

 

 

    

 

 

   

 

 

    

 

 

 

 

     Face Value      Discount     Fair Value
Hedge
Adjustment
     Net  

December 31, 2011

                          

Interest-bearing notes:

          

7 7/8% Notes, due 2015

   $ 243.2      $ (1.2   $ 7.4      $ 249.4  

6 3/4% Notes, due 2016

     435.0        (7.4     —           427.6  

12 1/2% Springing lien notes, due 2017

     930.2        (162.9     6.2        773.5  
  

 

 

    

 

 

   

 

 

    

 

 

 

Total interest-bearing notes

     1,608.4        (171.5     13.6        1,450.5  

Non-interest-bearing debt:

          

0% Convertible debentures, due 2019

     43.0        —          —           43.0  
  

 

 

    

 

 

   

 

 

    

 

 

 

Total corporate debt

   $ 1,651.4      $ (171.5   $ 13.6      $ 1,493.5  
  

 

 

    

 

 

   

 

 

    

 

 

 

 

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Table of Contents

Shareholders’ Equity

The activity in shareholders’ equity during the six months ended June 30, 2012 is summarized as follows (dollars in millions):

 

      Common Stock/
Additional Paid-In
Capital
     Accumulated
Deficit/  Other
Comprehensive Loss
     Total  
        

Beginning balance, December 31, 2011

   $ 7,309.7      $ (2,381.7)       $ 4,928.0  

Net income

     —           102.1        102.1  

Net change from available-for-sale securities

     —           58.2        58.2  

Net change from cash flow hedging instruments

     —           (11.8)         (11.8)   

Other(1)

     3.6        (0.5)         3.1  
  

 

 

    

 

 

    

 

 

 

Ending balance, June 30, 2012

   $ 7,313.3      $ (2,233.7)       $ 5,079.6  
  

 

 

    

 

 

    

 

 

 

 

(1)   

Other includes employee share-based compensation, conversions of convertible debentures and changes in accumulated other comprehensive loss from foreign currency translation.

LIQUIDITY AND CAPITAL RESOURCES

We have established liquidity and capital policies to support the successful execution of our business strategies, while ensuring ongoing and sufficient liquidity through the business cycle. These policies are especially important during periods of stress in the financial markets, which have been ongoing since the fourth quarter of 2007 and could continue for some time.

We believe liquidity is of critical importance to the Company and especially important within E*TRADE Bank. The objective of our policies is to ensure that we can meet our corporate and banking liquidity needs under both normal operating conditions and under periods of stress in the financial markets. Our corporate liquidity needs are primarily driven by the amount of principal and interest due on our corporate debt as well as any capital needs at E*TRADE Bank. Our banking liquidity needs are driven primarily by the level and volatility of our customer deposits. Management maintains an extensive set of liquidity sources and monitors certain business trends and market metrics closely in an effort to ensure we have sufficient liquidity and to avoid dependence on other more expensive sources of funding. Management believes the following sources of liquidity are of critical importance in maintaining ample funding for liquidity needs: Corporate cash, Bank cash, deposits and unused FHLB borrowing capacity. Management believes that within deposits, sweep deposits are of particular importance as they are the most stable source of liquidity for E*TRADE Bank when compared to non-sweep deposits. Overall, management believes that these liquidity sources, which we expect to fluctuate in any given period, are more than sufficient to meet our needs for the foreseeable future.

Capital is generated primarily through the business operations of the trading and investing and balance sheet management segments, which are primarily contained within E*TRADE Bank; therefore, we believe a key indicator of the capital generated or used in our business operations is the level of regulatory capital in E*TRADE Bank. As of June 30, 2012, E*TRADE Bank’s Tier 1 leverage ratio was 7.9%. We are focused on improving the Tier 1 leverage ratio at E*TRADE Bank through a reduction in our balance sheet size by focusing on a reduction in our wholesale borrowings and retail deposits.

 

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Table of Contents

Consolidated Cash and Equivalents

The consolidated cash and equivalents balance decreased by $721.3 million to $1.4 billion for the six months ended June 30, 2012. The majority of this balance is cash held in regulated subsidiaries, primarily the Bank, outlined as follows (dollars in millions):

 

     June  30,
2012
     December  31,
2011
     Variance  
            2012 vs. 2011  

Corporate cash

   $ 436.5      $ 484.4      $ (47.9

Bank cash

     903.4        1,574.1        (670.7

International brokerage and other cash

     38.6        41.3        (2.7
  

 

 

    

 

 

    

 

 

 

Total consolidated cash

   $ 1,378.5      $ 2,099.8      $ (721.3
  

 

 

    

 

 

    

 

 

 

Corporate cash is the primary source of liquidity at the parent company. We define corporate cash as 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. We believe 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 our regulated subsidiaries. Corporate cash can fluctuate in any given quarter and is impacted primarily by tax settlements, approval and timing of subsidiary dividends, debt service costs and other overhead cost sharing arrangements. We target corporate cash to be two times our annual debt service, or approximately $330 million. From the level of corporate cash at June 30, 2012, we expect that it will decline generally in line with our corporate interest expense. However, the parent company has approximately $0.4 billion in deferred tax assets, which will ultimately become sources of corporate cash as the parent’s subsidiaries reimburse the parent for the use of its deferred tax assets.

Liquidity Available from Subsidiaries

Liquidity available to the Company from its subsidiaries is limited by regulatory requirements. In addition, neither E*TRADE Bank nor its subsidiaries may pay dividends to the parent company without approval from its regulators. Loans by E*TRADE Bank to the parent company and its other non-bank subsidiaries are subject to various quantitative, arm’s length, collateralization and other requirements.

E*TRADE Bank is subject to capital requirements determined by its primary regulators. At June 30, 2012 and December 31, 2011, E*TRADE Bank had $1.3 billion and $1.2 billion, respectively, of Tier 1 capital in excess of the regulatory minimum level required to be considered “well capitalized.” Historically, the Company had requested and received the approval of its primary regulators to send quarterly dividends from E*TRADE Bank to the parent. The dividend had been equal to profits from the previous quarter of E*TRADE Securities LLC, which is a subsidiary of E*TRADE Bank. We believe our former regulator, the OTS, viewed these dividend requests as distinct from a more comprehensive request to release a portion of E*TRADE Bank’s excess capital. During the third quarter of 2011, the Company transitioned regulators from the OTS to the OCC and the Federal Reserve. We believe our new regulators would subject all dividend requests to an equal level of scrutiny; therefore, rather than request a dividend from E*TRADE Bank in an amount equal to the profits of E*TRADE Securities LLC in the prior quarter, we believe the best path for the Company’s shareholders is to work on a comprehensive dividend plan that efficiently distributes capital among our regulated entities and parent company. The Company submitted a long-term strategic and capital plan to the OCC and Federal Reserve during the second quarter of 2012. The plan includes: our five-year business strategy; forecasts of our business results and capital ratios; capital distribution plans in current and adverse operating conditions; and internally developed stress tests. During the remainder of 2012, we plan to engage in dialogue with our regulators on this plan and hope to gain a better understanding of the timing of any future dividends; however, we cannot predict the likelihood or the timing of regulatory approval for any such dividends.

 

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Table of Contents

The Company’s broker-dealer subsidiaries are subject to capital requirements determined by their respective regulators. At June 30, 2012 and December 31, 2011, all of our brokerage subsidiaries met their minimum net capital requirements. Our broker-dealer subsidiaries had excess net capital of $741.2 million at June 30, 2012, an increase of $66.1 million from $675.1 million at December 31, 2011. The excess net capital of the broker-dealer subsidiaries at June 30, 2012 included $497.9 million and $207.8 million of excess net capital at E*TRADE Clearing LLC and E*TRADE Securities LLC, respectively, which are subsidiaries of E*TRADE Bank and are also included in the excess capital of E*TRADE Bank.

Financial Regulatory Reform Legislation and Basel III Accords

Under the Dodd-Frank Act, our former primary regulator, the OTS, was abolished during July 2011 and its functions and personnel distributed among the OCC, the FDIC and the Federal Reserve. Although the Dodd-Frank Act maintains the federal thrift charter, it eliminates certain benefits of the charter and imposes new penalties for failure to comply with the qualified thrift lender test. The Dodd-Frank Act also requires all companies, including savings and loan holding companies, that directly or indirectly control an insured depository institution to serve as a source of strength for the institution.

The implementation of holding company capital requirements will impact us as the parent company was not previously subject to regulatory capital requirements. These requirements are expected to become effective within the next three years. We believe these requirements are an important measure of our capital strength and we continue to track these ratios, using the current capital ratios that apply to bank holding companies, as we plan for this future requirement. The Tier 1 leverage, Tier 1 risk-based capital and total risk-based capital ratios are non-GAAP measures as the parent company is not yet held to these regulatory capital requirements and are calculated as follows (dollars in millions):

 

     June 30,
2012
    December 31,
2011
    June 30,
2011
 

Shareholders’ equity

   $ 5,079.6     $ 4,928.0     $ 4,812.3  

Deduct:

      

Losses in other comprehensive income on available-for-sale debt securities and cash flow hedges, net of tax

     (343.2     (389.6     (383.6

Goodwill and other intangible assets, net of deferred tax liabilities

     1,914.0       1,947.5       1,992.8  

Add:

      

Qualifying restricted core capital elements

     433.0       433.0       433.0  
  

 

 

   

 

 

   

 

 

 

Subtotal

     3,941.8       3,803.1       3,636.1  

Deduct:

      

Disallowed servicing assets and deferred tax assets

     1,304.8       1,331.0       1,248.4  
  

 

 

   

 

 

   

 

 

 

Tier 1 capital

     2,637.0       2,472.1       2,387.7  
  

 

 

   

 

 

   

 

 

 

Add:

      

Allowable allowance for loan losses

     275.3       277.6       296.7  
  

 

 

   

 

 

   

 

 

 

Total capital

   $ 2,912.3     $ 2,749.7     $ 2,684.4  
  

 

 

   

 

 

   

 

 

 

Total average assets

   $ 49,374.6     $ 46,964.2     $ 47,198.5  

Deduct:

      

Goodwill and other intangible assets, net of deferred tax liabilities

     1,914.0       1,947.5       1,992.8  
  

 

 

   

 

 

   

 

 

 

Subtotal

     47,460.6       45,016.7       45,205.7  

Deduct:

      

Disallowed servicing assets and deferred tax assets

     1,304.8       1,331.0       1,248.4  
  

 

 

   

 

 

   

 

 

 

Average total assets for leverage capital purposes

   $ 46,155.8     $ 43,685.7     $ 43,957.3  
  

 

 

   

 

 

   

 

 

 

Total risk-weighted assets(1)

   $ 21,696.2     $ 21,668.1     $ 23,154.7  

Tier 1 leverage ratio (Tier 1 capital / Average total assets for leverage capital purposes)

     5.7     5.7     5.4

Tier 1 capital / Total risk-weighted assets

     12.2     11.4     10.3

Total capital / Total risk-weighted assets

     13.4     12.7     11.6

 

(1)   

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.

 

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As of June 30, 2012, the parent company Tier 1 leverage ratio was approximately 5.7% compared to the minimum ratio required to be “well capitalized” of 5%, the Tier 1 risk-based capital ratio was approximately 12.2% compared to the minimum ratio required to be “well capitalized” of 6%, and the total risk-based capital ratio was approximately 13.4% compared to the minimum ratio required to be “well capitalized” of 10%.

Our Tier 1 common ratio, which is a non-GAAP measure and currently has no mandated minimum or “well capitalized” standard, was 10.2% as of June 30, 2012. We believe this ratio is an important measure of our capital strength. The Tier 1 common ratio is 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. The following table shows the calculation of Tier 1 common ratio (dollars in millions):

 

     June 30,
2012
    December 31,
2011
    June 30,
2011
 

Shareholders’ equity

   $ 5,079.6     $ 4,928.0     $ 4,812.3  

Deduct:

      

Losses in other comprehensive income on available-for-sale debt securities and cash flow hedges, net of tax

     (343.2     (389.6     (383.6

Goodwill and other intangible assets, net of deferred tax liabilities

     1,914.0       1,947.5       1,992.8  
  

 

 

   

 

 

   

 

 

 

Subtotal

     3,508.8       3,370.1       3,203.1  

Deduct:

      

Disallowed servicing assets and deferred tax assets

     1,304.8       1,331.0       1,248.4  
  

 

 

   

 

 

   

 

 

 

Tier 1 common

   $ 2,204.0     $ 2,039.1     $ 1,954.7  
  

 

 

   

 

 

   

 

 

 

Total risk-weighted assets

   $ 21,696.2     $ 21,668.1     $ 23,154.7  

Tier 1 common ratio (Tier 1 common / Total risk-weighted assets)

     10.2     9.4     8.4

In June 2012, the Federal banking agencies published notices of proposed rulemaking for comment related to the implementation of the Basel III regulatory capital reforms. We are in process of assessing the proposal and believe the most relevant elements of the proposal to us relate to the proposed risk-weighting of mortgage loans and margin receivables in addition to an alternative method to exclude from Tier 1 capital unrealized gains (losses) related to government and agency-backed securities. Under the current proposal, we do not believe the incorporation of these elements will have a significant impact on our capital ratios. However, the final impact of the Basel III capital standards on regulatory requirements will continue to remain unknown for at least some time until capital regulations are adopted for U.S. institutions. We will continue to monitor the ongoing rule-making and comment process to assess both the timing and the impact of the Dodd-Frank Act and Basel III capital standards on our business.

Other Sources of Liquidity

We also maintain uncommitted lines of credit with unaffiliated banks to finance margin lending, with available balances subject to approval when utilized. At June 30, 2012, there were no outstanding balances.

We rely on borrowed funds, from sources such as securities sold under agreements to repurchase and FHLB advances, to provide liquidity for E*TRADE Bank. Our ability to borrow these funds is dependent upon the continued availability of funding in the wholesale borrowings market. In addition, we can borrow from the Federal Reserve Bank’s discount window to meet short-term liquidity requirements, although it is not viewed as the primary source of funding. At June 30, 2012, E*TRADE Bank had approximately $3.0 billion and $1.3 billion in additional collateralized borrowing capacity with the FHLB and the Federal Reserve Bank, respectively. We also have the ability to generate liquidity in the form of additional deposits by raising the yield on our customer deposit account products.

 

26


Table of Contents

Off-Balance Sheet Arrangements

We enter into various off-balance-sheet arrangements in the ordinary course of business, primarily to meet the needs of our customers and to reduce our own exposure to interest rate risk. These arrangements include firm commitments to extend credit and letters of credit. Additionally, we enter into guarantees and other similar arrangements as part of transactions in the ordinary course of business. For additional information on each of these arrangements, see Item 1. Consolidated Financial Statements (Unaudited).

RISK MANAGEMENT

As a financial services company, we are exposed to risks in every component of our business. The identification and management of existing and potential risks are the keys to effective risk management. Risks cannot be completely eliminated; however, risks can be identified and managed within the Company’s risk tolerance. We believe our current risk management framework supports decision-making, improves the success rate for new initiatives and strengthens the organization; however a key focus of our strategic plan is to strengthen our risk management function by achieving and maintaining an enterprise-wide risk culture and platform consistent with industry best-practices and top tier regulatory guidelines and expectations.

Our businesses expose us to the following four major categories of risk that often overlap:

 

   

Credit Risk—the risk of loss resulting from adverse changes in the ability or willingness of a borrower or counterparty to meet the agreed-upon terms of their financial obligations.

 

   

Liquidity Risk—the risk of loss resulting from the inability to meet current and future cash flow and collateral needs.

 

   

Interest Rate Risk—the risk of loss from adverse changes in interest rates, which could cause fluctuations in our long-term earnings or in the value of the Company’s net assets.

 

   

Operational Risk—the risk of loss resulting from fraud, inadequate controls or the failure of the internal controls process, third party vendor issues, processing issues and external events.

For additional information on liquidity risk, see Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources. For additional information about our interest rate risk, see Item 3. Quantitative and Qualitative Disclosures about Market Risk. Operational risk and the management of risk are more fully described in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2011. We are also subject to other risks that could impact our business, financial condition, results of operations or cash flows in future periods. See Item 1A. Risk Factors in the Annual Report on Form 10-K for the year ended December 31, 2011, and as updated in this report.

Credit Risk Management

Our primary sources of credit risk are our loan and securities portfolios, where risk results from extending credit to customers and purchasing securities, respectively. The degree of credit risk associated with our loans and securities varies based on many factors including the size of the transaction, the credit characteristics of the borrower, features of the loan product or security, the contractual terms of the related documents and the availability and quality of collateral. Credit risk is one of the most common risks in financial services and is one of our most significant risks.

Credit risk is monitored by our Credit Risk Committee, whose objective is to monitor current and expected market conditions and the associated probable impact on the Company’s credit risk. The Credit Risk Committee establishes credit risk guidelines in accordance with the Company’s strategic objectives and existing policies. The Credit Risk Committee reviews investment and lending activities involving credit risk to ensure consistency with those established guidelines. These reviews involve an analysis of portfolio balances, delinquencies, losses,

 

27


Table of Contents

recoveries, default management and collateral liquidation performance, as well as any credit risk mitigation efforts relating to the portfolios. In addition, the Credit Risk Committee reviews and approves credit related counterparties engaged in financial transactions with the Company.

Loss Mitigation

We have a credit management team that focuses on the mitigation of potential losses in the loan portfolio. Through a variety of strategies, including voluntary line closures, automatically freezing lines on all delinquent accounts, and freezing lines on loans with materially reduced home equity, we have reduced our exposure to open home equity lines from a high of over $7 billion in 2007 to $0.4 billion as of June 30, 2012.

We have an initiative to assess our servicing relationships and where appropriate transfer certain mortgage loans to servicers that specialize in managing troubled assets. We believe this initiative has improved and will continue to improve the credit performance of the loans transferred in future periods when compared to the expected credit performance of these same loans if they had not been transferred. A total of $2.8 billion of our mortgage loans were held at servicers that specialize in managing troubled assets as of June 30, 2012.

We have a loan modification program that focuses on the mitigation of potential losses in the loan portfolio. We consider modifications in which we make an economic concession to a borrower experiencing financial difficulty a TDR. During the six months ended June 30, 2012, we modified $247.5 million and $25.4 million of one- to four-family and home equity loans, respectively, in which the modification was considered a TDR. During the first quarter of 2012, we completed an evaluation of certain programs and practices that were designed in accordance with guidance from our former regulator, the OTS. This evaluation was initiated in connection with our transition from the OTS to the OCC, our new primary banking regulator. As a result of our evaluation, loan modification policies and procedures were aligned with the guidance from the OCC. During the fourth quarter of 2011, we suspended certain home equity loan modification programs that required changes. These suspended programs were discontinued in the first quarter of 2012, which we expect to result in a decrease in the volume of TDRs in 2012.

Trial modifications are classified immediately as TDRs and continue to be reported as delinquent until the successful completion of the trial period, which is typically 90 days. The loan is then classified as current and becomes a permanent modification.

We also processed minor modifications on a number of loans through traditional collections actions taken in the normal course of servicing delinquent accounts. These actions typically result in an insignificant delay in the timing of payments; therefore, we do not consider such activities to be economic concessions to the borrowers. As of June 30, 2012 and December 31, 2011, we had $42.1 million and $44.7 million of mortgage loans, respectively, in which the modification was not considered a TDR due to the insignificant delay in the timing of payments. Approximately 6% and 8% of these loans were classified as nonperforming as of June 30, 2012 and December 31, 2011, respectively.

We continue to review the mortgage loan portfolio in order to identify loans to be repurchased by the originator. Our review is primarily focused on identifying loans with violations of transaction representations and warranties or material misrepresentation on the part of the seller. Any loans identified with these deficiencies are submitted to the original seller for repurchase. During the second quarter of 2012, we agreed to settlements with two particular originators specific to loans sold to us by those originators. One-time payments of $11.2 million were made to us to satisfy in full all pending and future repurchase requests with those specific originators. We applied the full amount during the second quarter of 2012 to the allowance for loan losses, resulting in a corresponding reduction to our net charge-offs as well as our provision for loan losses. Approximately $34.0 million of loans were repurchased by or settled with the original sellers for the six months ended June 30, 2012. A total of $369.5 million of loans were repurchased by the original sellers since we actively started reviewing our purchased loan portfolio beginning in 2008.

 

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Table of Contents

CONCENTRATIONS OF CREDIT RISK

Loans

We track and review factors to predict and monitor credit risk in the mortgage loan portfolio on an ongoing basis. These factors include: loan type, estimated current loan-to-value (“LTV”)/combined loan-to-value (“CLTV”) ratios, delinquency history, documentation type, borrowers’ current credit scores, housing prices, loan acquisition channel, loan vintage and geographic location of the property. In economic conditions in which housing prices generally appreciate, we believe that loan type, LTV/CLTV ratios, documentation type and credit scores are the key factors in determining future loan performance. In a housing market with declining home prices and less credit available for refinance, we believe the LTV/CLTV ratio becomes a more important factor in predicting and monitoring credit risk. The factors are updated on at least a quarterly basis. We track and review delinquency status to predict and monitor credit risk in the consumer and other loan portfolio on an ongoing basis.

The home equity loan portfolio is primarily second lien loans on residential real estate properties, which have a higher level of credit risk than first lien mortgage loans. Approximately 15% of the home equity portfolio was in the first lien position as of June 30, 2012. We hold both the first and second lien positions in less than 1% of the home equity loan portfolio. The home equity loan portfolio consists of home equity installment loans and home equity lines of credit.

Home equity installment loans are primarily fixed rate and fixed term, fully amortizing loans that do not offer the option of an interest-only payment. Home equity lines of credit convert to amortizing loans at the end of the draw period, which ranges from five to ten years. At June 30, 2012, the vast majority of the home equity line of credit portfolio had not converted from the interest-only draw period to an amortizing loan. In addition, approximately 79% of the home equity line of credit portfolio will not begin amortizing until after 2014. The following table outlines when home equity lines of credit convert to amortizing for the home equity line of credit portfolio as of June 30, 2012:

 

Period of Conversion to Amortizing Loan

   % of Home Equity Line
of Credit Portfolio

Already amortizing

     8%

Through December 31, 2012

     1%

Year ending December 31, 2013

     5%

Year ending December 31, 2014

     7%

Year ending December 31, 2015

   25%

Year ending December 31, 2016

   41%

Year ending December 31, 2017

   13%

The following tables show the distribution of the mortgage loan portfolios by credit quality indicator (dollars in millions):

 

     One- to Four-Family     Home Equity  

Current LTV/CLTV (1)

   June 30,
2012
    December 31,
2011
    June 30,
2012
    December 31,
2011
 

<=80%

   $ 1,415.1     $ 1,596.3     $ 1,018.2     $ 1,168.9  

80%-100%

     1,482.1       1,716.8       863.6       967.9  

100%-120%

     1,383.1       1,527.3       1,034.5       1,191.9  

>120%

     1,707.0       1,775.4       1,799.0       2,000.0  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total mortgage loans receivable

   $ 5,987.3     $ 6,615.8     $ 4,715.3     $ 5,328.7  
  

 

 

   

 

 

   

 

 

   

 

 

 

Average estimated current LTV/CLTV (2)

     109.5     106.7     114.3     112.1

Average LTV/CLTV at loan origination (3)

     71.1     71.0     79.2     79.2

 

(1)   

Current CLTV calculations for home equity loans are based on the maximum available line for home equity lines of credit and outstanding principal balance for home equity installment loans. Current property values are updated on a quarterly basis using the most recent property value data available to us. For properties in which we did not have an updated valuation, we utilized home price indices to estimate the current property value.

(2)   

The average estimated current LTV/CLTV ratio reflects the outstanding balance at the balance sheet date and the maximum available line for home equity lines of credit, divided by the estimated current value of the underlying property.

(3)   

Average LTV/CLTV at loan origination calculations are based on LTV/CLTV at time of purchase for one- to four-family purchased loans and undrawn balances for home equity loans.

 

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Table of Contents
     One- to Four-Family      Home Equity  

Documentation Type

   June 30,
2012
     December 31,
2011
     June 30,
2012
     December 31,
2011
 

Full documentation

   $ 2,565.3      $ 2,845.6      $ 2,414.4      $ 2,699.2  

Low/no documentation

     3,422.0        3,770.2        2,300.9        2,629.5  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total mortgage loans receivable

   $ 5,987.3      $ 6,615.8      $ 4,715.3      $ 5,328.7  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

      One- to Four-Family      Home Equity  

Current FICO (1)

   June 30,
2012
     December 31,
2011
     June 30,
2012
     December 31,
2011
 

>=720

   $ 3,140.7      $ 3,557.6      $ 2,503.2      $ 2,780.2  

719 - 700

     534.5        585.2        456.8        497.7  

699 - 680

     463.3        448.6        378.9        408.8  

679 - 660

     379.3        385.0        299.1        325.8  

659 - 620

     474.6        525.9        410.5        447.9  

<620

     994.9        1,113.5        666.8        868.3  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total mortgage loans receivable

   $ 5,987.3      $ 6,615.8      $ 4,715.3      $ 5,328.7  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)   

FICO scores are updated on a quarterly basis; however, as of June 30, 2012 and December 31, 2011, there were some loans for which the updated FICO scores were not available. The current FICO distribution as of June 30, 2012 included original FICO scores for approximately $140 million and $24 million of one- to four-family and home equity loans, respectively. The current FICO distribution as of December 31, 2011 included original FICO scores for approximately $153 million and $30 million of one- to four-family and home equity loans, respectively.

 

     One- to Four-Family      Home Equity  

Acquisition Channel

   June 30,
2012
     December 31,
2011
     June 30,
2012
     December 31,
2011
 

Purchased from a third party

   $ 4,918.4      $ 5,420.8      $ 4,137.0      $ 4,669.6  

Originated by the Company

     1,068.9        1,195.0        578.3        659.1  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total mortgage loans receivable

   $ 5,987.3      $ 6,615.8      $ 4,715.3      $ 5,328.7  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     One- to Four-Family      Home Equity  

Vintage Year

   June 30,
2012
     December 31,
2011
     June 30,
2012
     December 31,
2011
 

2003 and prior

   $ 213.9      $ 239.9      $ 259.2      $ 302.6  

2004

     567.0        620.5        412.6        472.9  

2005

     1,229.8        1,377.7        1,252.7        1,387.0  

2006

     2,319.1        2,528.5        2,176.7        2,480.0  

2007

     1,652.2        1,841.1        603.8        674.8  

2008

     5.3        8.1        10.3        11.4  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total mortgage loans receivable

   $ 5,987.3      $ 6,615.8      $ 4,715.3      $ 5,328.7  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     One- to Four-Family      Home Equity  

Geographic Location

   June 30,
2012
     December 31,
2011
     June 30,
2012
     December 31,
2011
 

California

   $ 2,825.8      $ 3,096.0      $ 1,492.0      $ 1,690.3  

New York

     426.4        488.2        346.0        387.0  

Florida

     409.4        458.2        332.6        377.8  

Virginia

     253.8        280.8        211.9        234.1  

Other states

     2,071.9        2,292.6        2,332.8        2,639.5  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total mortgage loans receivable

   $ 5,987.3      $ 6,615.8      $ 4,715.3      $ 5,328.7  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

30


Table of Contents

Approximately 40% of the Company’s real estate loans were concentrated in California at both June 30, 2012 and December 31, 2011. No other state had concentrations of real estate loans that represented 10% or more of the Company’s real estate portfolio.

Additionally, in the current and anticipated interest rate environment, we do not expect interest rate resets to be a material driver of credit costs in the future. As of June 30, 2012, a total of $2.8 billion of one- to four-family loans have already reset for the first time and another $2.7 billion are expected to reset for the first time in the next six years, including less than $0.1 billion in the remainder of 2012. We expect approximately $1.5 billion in one- to four-family loans that have already reset to experience another interest rate reset in the remainder of 2012. We estimate that less than 2% of all one- to four-family loans expected to reset in the remainder of 2012 will experience a payment increase of more than 10% and nearly 70% are expected to reset to a lower payment in 2012. The following table outlines the percentage of one- to four-family loans that have reset and are expected to reset for the first time as of June 30, 2012:

 

Period of First Interest Rate Reset

   % of Total One- to  Four-
Family First Resets

Already reset

   50%

Through December 31, 2012

     1%

Year ending December 31, 2013

     4%

Year ending December 31, 2014

    &