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E*TRADE Expenses Remain Flat, Interest and Provisions Decline

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Increased spending

E*TRADE Financial’s (ETFC) major expenses include the following:

  • advertising and market development
  • compensation and benefits
  • FDIC (Federal Deposit Insurance Corporation) insurance premiums
  • clearing and servicing
  • professional services

The company incurred total expenses of $305 million in 4Q15. This includes a one-time charge to communications expense of $8 million and executive severance of $6 million. Excluding these charges, operating expenses increased by $1 million in 4Q15. The company’s debt reduction over the past few quarters has led to a rise in its credit rating by eight notches.

E*TRADE refinanced its new debt at a lower cost. The overall structuring resulted in a 70% fall in total debt service costs for E*TRADE totaling $50 million.

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Reduction in provisions

E*TRADE’s loan portfolio ended the December quarter at $5.0 billion. The portfolio contracted ~$0.3 billion from the prior quarter.

The company reduced its allowance to $353 million at the end of 4Q15 compared to $376 million in the prior quarter and $404 million in the fourth quarter of 2014. This lower-end reserve balance combined with only $0 million in net charge-offs resulted in $23 million in provision benefits for the quarter.

Since the company is maintaining healthy reserves, it’s adjusting its expected provision range for the current year to $0.0–$20 million per quarter. For 2016, the company is forecasting provisions from its prior range of $20–$30 million per quarter.

Here’s how a few of the company’s peers in the brokerage industry fared in terms of gross margins:

  • Interactive Brokers Group (IBKR) posted a gross margin of 93.5%.
  • TD Ameritrade (AMTD) posted a gross margin of 99.8%.
  • Charles Schwab (SCHW) posted a gross margin of 98.3%.

Together, these companies form 4.5% of the First Trust Dow Jones Internet ETF (FDN).

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