CEO
Quarterly Update Video to E*TRADE Employees – July 2009
Below
is the script from an internal quarterly update video from E*TRADE FINANCIAL
Corp. CEO Don Layton to E*TRADE employees.
Q2
in Review
Hello
E*TRADE. Today, with second quarter earnings under our belt, I come
to you energized and optimistic.
We
posted a truly notable quarter. Our core customer business continues
to thrive, while our loan portfolio shows meaningful improvement. And
our capital issues are becoming very manageable, thanks to
the successful capital raise and pending debt exchange.
Let’s start with
the core business. Our back-to-basics approach and our focus on the
customer franchise is paying off. In Q2 we hit a record number of
DARTs for the second time in three quarters — 221,000. We gained
54,000 net new brokerage accounts — the most profitable type for E*TRADE —
ending the period with both record numbers of brokerage accounts, as well as
total accounts.
We
continue to take market share from traditional brokerage firms as investors
leave firms that charge hefty fees for what turns out to have been “follow the
market” advice. At the same time, our attrition rate has decreased
from a year ago — a testament to your hard work to improve service
quality. And as shown by our strong customer metrics, you all have
been doing a great job making sure that E*TRADE is getting its fair share of the
business, growing right along with our online competitors.
I
want to emphasize that our results this quarter don’t just stem from riding the
markets’ wave. With your hard work, E*TRADE continues to make meaningful
progress in improving our capabilities and competitiveness, with a commitment to
excellence and discipline in execution.
This quarter, we
gave long-term investors the Investor Resource Center and Online Advisor; and we
improved our offering for sophisticated and active traders with MobilePro for
iPhone. These solutions are gaining traction with customers
already. Earlier this month, the Apple App Store named MobilePro one
of its “favorite apps,” the only trading application to achieve this
honor. Since its launch in May, the Investor Resource Center has been
visited over half a million times by customers. And in its first month,
the Online Advisor tool guided 2,000 portfolio recommendations.
At
the same time, we continue to address top customer dissatisfiers — reducing
account maintenance fees and improving deposit hold times. Recent
customer surveys show that, collectively, customers rated their satisfaction
with E*TRADE higher than ever. Clearly our intensified focus on
service quality continues to pay off.
Moving to the
balance sheet, Q2 was another consecutive quarter of meaningful improvement in
credit quality. We continue to assert that our loan portfolio is
further advanced in the credit cycle than the broader industry — and the
improvement in portfolio special-mention and at-risk delinquencies leads us to
believe that Q2 represents the peak in
charge-offs.
We
were able to reduce provision for loan losses for the third quarter in a row —
this time by $49 million. Over the last three quarters, we’ve cut
provision by more than $100 million since its peak in Q308.
However, while
credit has improved incrementally, it is simply too early to declare the issues
fully behind
us. Provision for loan losses, while declining nicely, is however
still high enough that we are running a bottom-line loss.
Now, let’s turn to
capital.
Our successful
equity raise of more than $600 million in gross proceeds significantly
strengthened our balance sheet. As a result, E*TRADE Bank’s capital
ratios are now significantly stronger than they were at the beginning of the
year and will help ensure that we remain above the well capitalized thresholds
as defined by our regulators — even under weaker economic conditions than are
expected.
Equally important,
assuming completion, our pending debt exchange for $1.7 billion will cut our
cash interest payments at the Parent company by more than half.
Needless to say, I
am pleased with the results of our re-capitalization to-date. The
success demonstrates that investors see the strong franchise value and growth
potential of our online brokerage business, that they see credit issues
declining and becoming manageable, and that they see that our recapitalization
gives our Bank a balance sheet strong enough to carry it through the rest of the
credit cycle.
In
other words, perception of E*TRADE is most definitely changing for the
better.
A
Look Ahead
I
believe that down the line, we will remember this as a turning point for
E*TRADE. Once again E*TRADE has proven itself a true competitor
— and each of you should be proud of the work you have diligently done to be
certain that we beat the odds.
As
we launch into the second half of the year, we continue to be conservative with
our outlook. Though first half transaction performance was
impressive, including the record DARTs this quarter, we have begun the
always-anticipated seasonal summer slowdown.
Just as we did in
the first half of the year, we all must continue to manage expenses aggressively
and to therefore be well positioned to take advantage of any
upside. I want to thank all of you for continuing to practice
disciplined expense management, keeping down those costs that are within your
control.
Already we are
realizing significant cost savings across all businesses by reviewing and
renegotiating our vendor relationships. We are also maximizing use of
our real estate assets to generate additional savings.
These initiatives
are generating real dollars that can be reinvested in our core customer
business.
Now, our priorities
for the remainder of the year for the customer
franchise. (1) Keep improving service
quality. (2) Keep the product pipeline full and producing,
and (3) Improve our execution and efficiency in general.
As
an example, many of you are involved in our full product development
pipeline. Some key new launches are gearing up. First, our
highly-anticipated online version of Equity Edge, a comprehensive, on-demand
stock plan management toolset for Corporate Services clients. Second,
many of you are also working toward the launch of a portfolio margin accounting
system, which will give our sophisticated investor customers more flexibility in
how they manage risk and leverage capital by providing more accurate margin
requirements.
Now for the
question on all of our minds — when will E*TRADE return to
profitability? Our core business operations remain consistently
profitable; therefore any predictions about the Company’s return to
profitability are almost entirely a function of the loan losses that we will
incur. With respect to our loan loss projections, while we expect
that our level of provisioning will continue to decline, we just cannot forecast
the exact timeframe of when they will decline enough for the Company to have a
profit.
But, the building
blocks are firmly in place to get there. And this means the focus of
management can move away from an undue concentration on issues of capital
generation and credit — and move even more toward ensuring long-term success for
our customers and our shareholders, as well as for our employees.
The
New E*TRADE
As
time passes and I get to know more of you within the company, I see so many
employees go above and beyond your job responsibilities to make things happen at
E*TRADE. So many of you embody the I-C-E principles: innovation,
customer-centricity and execution.
I
want each of you to think about the impressive work your colleagues are
doing. As you know, we have launched “The Chairman’s Award,” a new
internal recognition program that will reward remarkable employees at the
Associate through Senior Manager levels. The Award relies on
peer-level nominations, and aims to reinforce the core company I-C-E
values.
The participation
of employees is key to making this program a success. I encourage
eligible employees to nominate a peer who inspires, motivates, and executes — an
all-around MVP.
In
closing, I thank you sincerely for the work you do at E*TRADE. I know
that it has been a long and challenging road. But this quarter’s
results show that there is most assuredly light at the end of the
tunnel.
Let me emphasize
this again — the opportunity to grow the online brokerage business here is
fantastic.
Forward-Looking
Statements. The
statements contained in this employee video script that are forward looking are
based on current expectations that are subject to a number of uncertainties and
risks, and actual results may differ materially. Such statements
include those relating to loan portfolio and delinquency trends, the ability of
the Company to reduce balance sheet risk, the Company’s expectation that the
amount of its quarterly provision will drop below quarterly charge-offs later
this year and the belief that quarterly charge-offs peaked this quarter, the
ability of the Company to remain above the well capitalized thresholds as
defined
by the Company’s regulators, the Company’s expectation that capital issues are
becoming manageable and the ability of the Company to complete the Exchange
Offer and reduce annual interest expense. The uncertainties and risks
include, but are not limited to, potential negative regulatory consequences
resulting from actions by the Office of Thrift Supervision or other regulators,
potential failure to obtain regulatory and shareholder approval for the Exchange
Offer and related matters. Additional uncertainties and risks
affecting the business, financial condition, results of operations and prospects
of the Company include, but are not limited to, potential changes in market
activity, anticipated changes in the rate of new customer acquisition, the
conversion of new visitors to the site to customers, the activity of customers
and assets held at the institution, seasonality, macro trends of the economy in
general and the residential real estate market, instability in the consumer
credit markets and credit trends, rising mortgage interest rates, tighter
mortgage lending guidelines across the industry, increased mortgage loan
delinquency and default rates, portfolio growth, portfolio seasoning and
resolution through collections, sales or charge-offs, the development and
enhancement of products and services, competitive pressures (including price
competition), system failures, economic and political conditions, including
changes to the U.S. Treasury’s Troubled Asset Relief Program, changes in
consumer behavior and the introduction of competing products having
technological and/or other advantages. Further information about
these risks and uncertainties can be found in the “Risk Factors” section of our
prospectus supplements dated June 18 and July 2, 2009, and in the information
included or incorporated in the annual, quarterly and current reports on Form
10-K, Form 10-Q and Form 8-K previously filed by E*TRADE FINANCIAL Corporation
with the SEC (including information under the caption “Risk
Factors”). Any forward-looking statement included in this employee
video script speaks only as of the date of this communication; the Company
disclaims any obligation to update any information.
Proxy
Statement. In
connection with the Special Meeting of Shareholders, E*TRADE FINANCIAL
Corporation filed a definitive proxy statement with the Securities and Exchange
Commission (the “SEC”). Shareholders
are advised
to read the definitive proxy statement because it contains important information
about the proposals to be presented and voted upon. Shareholders may
also obtain a copy of the definitive proxy statement and any other relevant
documents filed by E*TRADE
FINANCIAL Corporation for free at the SEC web site at
www.sec.gov. The definitive proxy statement and other documents also
may be obtained for free from E*TRADE FINANCIAL Corporation, Attn: Corporate
Secretary, 135
East 57th Street,
New
York,
New
York,
10022.
E*TRADE
FINANCIAL Corporation and its directors, executive officers and other members of
management and employees may be deemed participants in the solicitation of
proxies and voting instructions for the 2009 Special Meeting of
Shareholders. Information
concerning the interests of these persons, if any, in the matters to be voted
upon is set forth in the proxy statement.