Press Release Details

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E*TRADE Financial Corporation Announces Second Quarter 2018 Results

Jul 19, 2018

 

NEW YORK--(BUSINESS WIRE)-- E*TRADE Financial Corporation (NASDAQ:ETFC):

Second Quarter Results

  • Net income of $250 million; diluted earnings per common share of $0.95
  • Total net revenue of $710 million
  • Operating margin of 49 percent; adjusted operating margin of 46 percent(1)
  • Average interest-earning assets of $60 billion; net interest margin of 302 basis points
  • Daily Average Revenue Trades (DARTs) of 259,000, including derivative DARTs of 87,000 and a derivatives mix of 34 percent, a Company record(2)
  • Customer margin balances of $11 billion, a Company record(2)
  • Net new brokerage accounts of 188,000; excluding the TCA acquisition, net new brokerage accounts of 40,000
  • Net new brokerage assets of $21.1 billion; excluding the TCA acquisition, net new brokerage assets of $2.5 billion
  • Managed products of $5.8 billion
  • Repurchased 3.0 million shares at an average price of $62.51; total utilization under the Company's $1 billion program is $690 million at an average price of $48.64

E*TRADE Financial Corporation (NASDAQ: ETFC) today announced results for its second quarter ended June 30, 2018, reporting net income of $250 million, or diluted earnings per common share of $0.95 and total net revenue of $710 million. Operating margin for the quarter was 49 percent and adjusted operating margin was 46 percent(1).

"We built on our strong business momentum in the second quarter, delivering solid operating and financial results and driving meaningful value for shareholders," said Karl Roessner, Chief Executive Officer. "E*TRADE customer engagement was remarkable, underscored by robust customer trading, steady net buying, and record margin balances. Not to be outdone, our derivatives mix reached historic highs, aided by our steadfast commitment to continuously enhance the customer experience for our most discerning trader base. Our Corporate Services team onboarded nearly $11 billion in new plan assets during the quarter, while replenishing a strong pipeline. We completed the acquisition of Trust Company of America, and our initiatives to generate value from this powerful combination are well underway. Our strong operational execution translated to stellar financial performance, as E*TRADE once again delivered solid revenue, while expanding our adjusted operating margin for the seventh consecutive quarter to 46%. As we look to the second half of 2018, we intend to build on our many accomplishments and continue to thrive in this intensely competitive marketplace."

Historical metrics and financials can be found on the E*TRADE Financial corporate website at about.etrade.com.

The Company will host a conference call to discuss the results beginning at 5 p.m. ET today. This conference call will be available to domestic participants by dialing 800-675-8395 while international participants should dial +1 303-223-4369. A live audio webcast and replay of this conference call will also be available at about.etrade.com.

About E*TRADE Financial

E*TRADE Financial and its subsidiaries provide financial services including brokerage and banking products and services to retail customers. Securities products and services are offered by E*TRADE Securities LLC (Member FINRA/SIPC). Commodity futures and options on futures products and services are offered by E*TRADE Futures LLC (Member NFA). Managed Account Solutions are offered through E*TRADE Capital Management, LLC, a Registered Investment Adviser. Bank products and services are offered by E*TRADE Bank, and RIA custody solutions are offered by E*TRADE Savings Bank, both of which are national federal savings banks (Members FDIC). More information is available at www.etrade.com. ETFC-E

Important Notices

E*TRADE Financial, E*TRADE, the E*TRADE logo, OptionsHouse and Trust Company of America are registered trademarks of E*TRADE Financial Corporation.

Forward-Looking Statements

The statements contained in this press release that are forward looking, including statements regarding the Company's ability to continue to achieve financial results and succeed in a competitive environment, are "forward-looking statements" within the meaning of the federal securities laws, and are subject to a number of uncertainties and risks. Actual results may differ materially from those indicated in the forward-looking statements. The uncertainties and risks include, but are not limited to: risks related to the Company's proposed acquisition of brokerage accounts from Capital One Financial Corporation, including that the closing of the transaction may not occur or may be delayed and that the actual aggregate consideration to be paid in connection with the transaction is still subject to final determination; macro trends of the economy in general; market volatility and its impact on trading volumes; fluctuations in interest rates; the ability to attract and retain customers and develop new products and services; increased competition; potential system disruptions and security breaches; increased restrictions resulting from financial regulatory reform or changes in the policies of our regulators; adverse developments in litigation or regulatory matters; the timing and duration of, and the amount of shares repurchased and amount of cash expended in connection with, the share repurchase program; and the other factors set forth in our annual, quarterly, and current reports on Form 10-K, Form 10-Q, and Form 8-K previously filed with the Securities and Exchange Commission (including information in these reports under the caption "Risk Factors"). Any forward-looking statement included in this release speaks only as of the date of this communication; the Company disclaims any obligation to update any information, except as required by law.

© 2018 E*TRADE Financial Corporation. All rights reserved.

E*TRADE FINANCIAL CORPORATION
Consolidated Statement of Income
(In millions, except share data and per share amounts)
(Unaudited)
                         
        Three Months Ended   Six Months Ended
        June 30,   March 31,   June 30,   June 30,
        2018   2018   2017   2018   2017
Revenue:                    
  Interest income   $ 489     $ 468     $ 378     $ 957     $ 719  
  Interest expense   (36 )   (23 )   (22 )   (59 )   (44 )
    Net interest income(3)   453     445     356     898     675  
  Commissions   121     137     105     258     232  
  Fees and service charges   110     105     98     215     184  
  Gains on securities and other, net(3)   15     10     7     25     17  
  Other revenue   11     11     11     22     22  
    Total non-interest income   257     263     221     520     455  
    Total net revenue   710     708     577     1,418     1,130  
Provision (benefit) for loan losses   (19 )   (21 )   (99 )   (40 )   (113 )
Non-interest expense:                    
  Compensation and benefits   160     152     133     312     269  
  Advertising and market development   47     60     42     107     85  
  Clearing and servicing   30     36     33     66     65  
  Professional services   25     22     24     47     46  
  Occupancy and equipment   30     30     29     60     56  
  Communications   28     31     36     59     61  
  Depreciation and amortization   23     22     20     45     40  
  FDIC insurance premiums   9     9     8     18     16  
  Amortization of other intangibles   12     10     9     22     18  
  Restructuring and acquisition-related activities   2         4     2     8  
  Other non-interest expenses   18     23     21     41     37  
    Total non-interest expense   384     395     359     779     701  
Income before income tax expense   345     334     317     679     542  
Income tax expense   95     87     124     182     204  
Net income   $ 250     $ 247     $ 193     $ 497     $ 338  
Preferred stock dividends       12         12     13  
Net income available to common shareholders   $ 250     $ 235     $ 193     $ 485     $ 325  
                         
Basic earnings per common share   $ 0.95     $ 0.88     $ 0.70     $ 1.83     $ 1.18  
Diluted earnings per common share   $ 0.95     $ 0.88     $ 0.70     $ 1.82     $ 1.17  
Shares used in computation of per common share data:                    
  Basic (in thousands)   263,809     266,558     275,410     265,220     275,167  
  Diluted (in thousands)   264,929     267,699     276,272     266,351     276,370  
                                 
                                 

 

E*TRADE FINANCIAL CORPORATION
Consolidated Balance Sheet
(In millions, except share data)
(Unaudited)
                   
          June 30,   March 31,   December 31,
          2018   2018   2017
ASSETS            
Cash and equivalents   $ 532     $ 498     $ 931  
Cash required to be segregated under federal or other                  
regulations   620     472     872  
Available-for-sale securities   23,810     24,835     20,679  
Held-to-maturity securities   21,199     20,657     23,839  
Margin receivables   10,955     10,515     9,071  
Loans receivable, net   2,375     2,506     2,654  
Receivables from brokers, dealers and clearing organizations   626     735     1,178  
Property and equipment, net   259     251     253  
Goodwill     2,485     2,370     2,370  
Other intangibles, net   403     275     284  
Other assets(3)   1,089     1,073     1,234  
Total assets       $ 64,353     $ 64,187     $ 63,365  
                   
LIABILITIES AND SHAREHOLDERS' EQUITY            
Liabilities:            
Deposits     $ 42,664     $ 42,902     $ 42,742  
Customer payables   9,959     8,947     9,449  
Payables to brokers, dealers and clearing organizations   1,666     2,892     1,542  
Other borrowings   1,259     910     910  
Corporate debt   1,408     992     991  
Other liabilities   494     655     800  
Total liabilities       57,450     57,298     56,434  
                   
Shareholders' equity:            
Preferred stock, $0.01 par value; shares authorized:                  

1,000,000; shares issued and outstanding at June 30,

                 

  2018: 403,000

  689     689     689  

Common stock, $0.01 par value; shares authorized:

                 

400,000,000; shares issued and outstanding at June 30,

                 

  2018: 261,819,526

  3     3     3  
Additional paid-in-capital   6,257     6,434     6,582  
Retained earnings (accumulated deficit)   189     (61 )   (317 )
Accumulated other comprehensive loss   (235 )   (176 )   (26 )
Total shareholders' equity       6,903     6,889     6,931  
Total liabilities and shareholders' equity     $ 64,353     $ 64,187     $ 63,365  
                           
                           

 

Key Performance Metrics(4)                    
                     

Corporate

 

Qtr
ended
6/30/18

 

Qtr
ended
3/31/18

 

Qtr ended
6/30/18
vs.
3/31/18

 

Qtr
ended
6/30/17

 

Qtr ended
6/30/18
vs.
6/30/17

                     
Operating margin %(1)   49 %   47 %   2 %   55 %   (6 )%
Adjusted operating margin %(1)   46 %   44 %   2 %   38 %   8 %
                     
Employees   4,095     3,768     9 %   3,614     13 %
Consultants and other   102     136     (25 )%   99     3 %
Total headcount   4,197     3,904     8 %   3,713     13 %
                     
Common equity book value per share(5)   $ 23.73     $ 23.41     1 %   $ 22.86     4 %
Tangible common equity book value per share(5)   $ 14.35     $ 15.03     (5 )%   $ 15.29     (6 )%
                     
Cash and equivalents ($MM)   $ 532     $ 498     7 %   $ 1,091     (51 )%
Corporate cash ($MM)(6)   $ 943     $ 439     115 %   $ 478     97 %
                     
Net interest margin (basis points)   302     297     5     274     28  
Interest-earning assets, average ($MM)   $ 59,967     $ 59,837     %   $ 51,899     16 %
                     

Customer Activity

 

Qtr
ended
6/30/18

 

Qtr 
ended
3/31/18

 

Qtr ended
6/30/18
vs.
3/31/18

 

Qtr
ended
6/30/17

 

Qtr ended
6/30/18
vs.
6/30/17

                     
Trading days   64.0     61.0     N.M.   63.0     N.M.
                     
DARTs   258,844     309,469     (16 )%   208,205     24 %
Derivative DARTs   86,848     97,658     (11 )%   66,350     31 %
Derivative DARTs %   34 %   32 %   2 %   32 %   2 %
Adjusted Derivative DARTs %(7)   34 %   32 %   2 %   32 %   2 %
                     
Total trades (MM)   16.6     18.9     (12 )%   13.1     27 %
Average commission per trade   $ 7.31     $ 7.27     1 %   $ 8.02     (9 )%
                           
                           

 

Key Performance Metrics(4)                    
                     

Customer Activity

 

Qtr ended
6/30/18

 

Qtr ended
3/31/18

 

Qtr ended
6/30/18
vs.
3/31/18

 

Qtr ended
6/30/17

 

Qtr ended
6/30/18
vs.
6/30/17

                     
Gross new brokerage accounts   268,636     161,042     67 %   120,204     123%
Gross new stock plan accounts   177,285     93,690     89 %   66,773     166%
Gross new banking accounts   3,024     1,179     156 %   876     245%
Closed accounts   (129,679 )   (160,041 )   (19 )%   (137,666 )   (6)%
Net new accounts   319,266     95,870     233 %   50,187     N.M.
                     
Net new brokerage accounts(7)   187,642     59,685     214 %   41,271     355%
Net new stock plan accounts   134,025     39,953     235 %   13,154     N.M.
Net new banking accounts   (2,401 )   (3,768 )   36 %   (4,238 )   43%
Net new accounts   319,266     95,870     233 %   50,187     N.M.
                     
End of period brokerage accounts(7)   3,882,236     3,694,594     5 %   3,562,489     9%
End of period stock plan accounts   1,666,354     1,532,329     9 %   1,474,692     13%
End of period banking accounts   292,680     295,081     (1 )%   308,729     (5)%
End of period total accounts   5,841,270     5,522,004     6 %   5,345,910     9%
                     
Annualized net new brokerage account                            
growth rate   20.3 %   6.6 %   13.7 %   4.7 %   15.6%
Adjusted annualized net new brokerage                            
account growth rate((7))   4.3 %   6.6 %   (2.3 )%   4.7 %   (0.4)%
                     
Customer margin balances(8) ($B)   $ 11.0     $ 10.5     5 %   $ 8.2     34%
                     

Customer Assets($B)

                   
Security holdings(7)   $ 337.6     $ 296.0     14 %   $ 255.3     32%
Sweep deposits(7)   37.8     38.0     (1 )%   34.9     8%
Customer cash held by third parties(9)   5.0     5.0     %   8.8     (43)%
Customer payables (cash)   10.0     8.9     12 %   8.0     25%
Brokerage customer assets   390.4     347.9     12 %   307.0     27%
Unexercised stock plan holdings (vested)   45.4     39.9     14 %   36.1     26%
Savings, checking and other banking assets   4.9     5.0     (2 )%   5.1     (4)%
Total customer assets   $ 440.7     $ 392.8     12 %   $ 348.2     27%
                     
Net new brokerage assets(7)(10)   $ 21.1     $ 5.3     298 %   $ 2.6     N.M.
Net new banking assets(10)   (0.1 )       (100 )%   (0.3 )   (67)%
Net new customer assets(7)   $ 21.0     $ 5.3     296 %   $ 2.3     N.M.
                     
Annualized net new brokerage asset growth                            
rate   24.2 %   6.3 %   17.9 %   3.5 %   20.7%
Adjusted annualized net new brokerage                            
asset growth rate((7))   2.8 %   6.3 %   (3.5 )%   3.5 %   (0.7)%
                     
Brokerage related cash   $ 52.8     $ 51.9     2 %   $ 51.7     2%
Other cash and deposits   4.9     5.0     (2 )%   5.1     (4)%
Total customer cash and deposits   $ 57.7     $ 56.9     1 %   $ 56.8     2%
                     
Managed products   $ 5.8     $ 5.6     4 %   $ 4.6     26%
Stock plan customer holdings (unvested)   $ 108.0     $ 95.3     13 %   $ 83.5     29%
                     
Customer net (buy) / sell activity   $ (2.9 )   $ (6.9 )   N.M.   $ (4.0 )   N.M.
                             
                             

 

Key Performance Metrics(4)                    
                     

Loans

 

Qtr ended
6/30/18

 

Qtr ended
3/31/18

 

Qtr ended
6/30/18
vs.
3/31/18

 

Qtr ended
6/30/17

 

Qtr ended
6/30/18
vs.
6/30/17

                     

Loans receivable ($MM)

                   
One- to four-family   $ 1,237     $ 1,327     $ (90 )   $ 1,641     $ (404 )
Home equity   920     991     (71 )   1,205     (285 )
Consumer and other   218     188     30     209     9  
Loans receivable, net   $ 2,375     $ 2,506     $ (131 )   $ 3,055     $ (680 )
                     
Loan servicing expense   $ 5     5         5      
                     

Loan performance detail ($MM)

                   
Current   $ 2,222     $ 2,335     $ (113 )   $ 2,901     $ (679 )
30-89 days delinquent   83     93     (10 )   103     (20 )
90-179 days delinquent   28     33     (5 )   46     (18 )
180+ days delinquent   96     103     (7 )   121     (25 )
Total delinquent loans   207     229     (22 )   270     (63 )
Gross loans receivable(11)   $ 2,429     $ 2,564     $ (135 )   $ 3,171     $ (742 )
                                         
                                         

Activity in Allowance for Loan Losses

           

($MM)

  Three Months Ended June 30, 2018

 

 

One- to Four-
Family

  Home Equity  

Consumer
and Other

 

  Total  

Allowance for loan losses, ending 3/31/18   $ 20     $ 35     $ 3     $ 58  
Provision (benefit) for loan losses   (6 )   (12 )   (1 )   (19 )
(Charge-offs) recoveries, net   2     13         15  
Allowance for loan losses, ending 6/30/18   $ 16     $ 36     $ 2     $ 54  
                 
    Three Months Ended March 31, 2018
   

One- to Four-
Family

  Home Equity  

Consumer
and Other

 

  Total  

Allowance for loan losses, ending 12/31/17   $ 24     $ 46     $ 4     $ 74  
Provision (benefit) for loan losses   (5 )   (16 )       (21 )
(Charge-offs) recoveries, net   1     5     (1 )   5  
Allowance for loan losses, ending 3/31/18   $ 20     $ 35     $ 3     $ 58  
                 
    Three Months Ended June 30, 2017
   

One- to Four-
Family

  Home Equity  

Consumer
and Other

 

  Total  

Allowance for loan losses, ending 3/31/17   $ 46     $ 162     $ 5     $ 213  
Provision (benefit) for loan losses   (18 )   (81 )       (99 )
(Charge-offs) recoveries, net   1     1         2  
Allowance for loan losses, ending 6/30/17   $ 29     $ 82     $ 5     $ 116  
                                 
                                 

 

Capital  

Qtr ended
6/30/18

 

Qtr ended
3/31/18

 

Qtr ended
6/30/18
vs.
3/31/18

 

Qtr ended
6/30/17

 

Qtr ended
6/30/18
vs.
6/30/17

                     

E*TRADE Financial

                   
Tier 1 leverage ratio(12)   7.1%   7.3%   (0.2)%   7.5%   (0.4)%
Common Equity Tier 1 capital ratio(12)   34.3%   35.0%   (0.7)%   35.0%   (0.7)%
Tier 1 risk-based capital ratio(12)   40.7%   41.4%   (0.7)%   37.5%   3.2%
Total risk-based capital ratio(12)   45.0%   45.7%   (0.7)%   42.4%   2.6%
                     

E*TRADE Bank

                   
Tier 1 leverage ratio(13)   7.2%   7.6%   (0.4)%   8.0%   (0.8)%
Common Equity Tier 1 capital ratio(13)   34.9%   37.4%   (2.5)%   35.1%   (0.2)%
Tier 1 risk-based capital ratio(13)   34.9%   37.4%   (2.5)%   35.1%   (0.2)%
Total risk-based capital ratio(13)   35.5%   38.0%   (2.5)%   36.3%   (0.8)%
                     
                     

 

Average Balance Sheet Data                        
($MM )     Three Months Ended
      June 30, 2018   March 31, 2018
      Average   Interest   Average   Average   Interest   Average
      Balance Inc./Exp. Yield/Cost   Balance Inc./Exp. Yield/Cost
Cash and equivalents   $ 533     $ 2   1.66 %   $ 803     $ 3     1.42 %
Cash required to be segregated under federal or                              
other regulations   753     4   1.95 %   795     3     1.62 %
Investment securities(3)     44,973     303   2.69 %   45,194     290     2.57 %
Margin receivables   10,291     118   4.60 %   9,466     103     4.41 %
Loans   2,468     33   5.32 %   2,629     33     5.07 %
Broker-related receivables and other   949     4   1.74 %   950     4     1.55 %
Subtotal interest-earning assets   59,967     464   3.10 %   59,837     436     2.92 %
Other interest revenue(a)       25           32      
Total interest-earning assets   59,967     489   3.26 %   59,837     468     3.14 %
Total non-interest earning assets   4,364             4,787          
Total assets   $ 64,331             $ 64,624          
                         
Deposits   $ 43,006     $ 8   0.07 %   $ 43,178     $ 2     0.02 %
Customer payables   9,533     4   0.16 %   9,556     1     0.06 %
Broker-related payables and other   2,207     3   0.65 %   1,566     1     0.20 %
Other borrowings   829     8   3.77 %   932     7     3.12 %
Corporate debt   1,042     10   3.68 %   991     9     3.62 %
Subtotal interest-bearing liabilities   56,617     33   0.23 %   56,223     20     0.14 %
Other interest expense(b)       3           3      
Total interest-bearing liabilities   56,617     36   0.25 %   56,223     23     0.17 %
Total non-interest-bearing liabilities   633             1,329          
Total liabilities   57,250             57,552          
Total shareholders' equity   7,081             7,072          
Total liabilities and shareholders' equity   $ 64,331             $ 64,624          
                         
Excess interest earning assets over interest bearing                                      
liabilities/ net interest income/ net interest                                      
margin   $ 3,350     $ 453   3.02 %   $ 3,614     $ 445    

2.97

%

                                       

(a)  Represents interest income on securities loaned.

(b)  Represents interest expense on securities borrowed.

 
 

 

      Three Months Ended
      June 30, 2017
      Average   Interest   Average
      Balance   Inc./Exp.   Yield/Cost
Cash and equivalents   $ 890     $ 2     0.87 %
Cash required to be segregated under federal or other regulations   1,355     3     0.94 %
Investment securities   37,922     232     2.45 %
Margin receivables   7,258     75     4.14 %
Loans   3,332     41     4.88 %
Broker-related receivables and other   1,142     1     0.20 %
Subtotal interest-earning assets   51,899     354     2.73 %
Other interest revenue(a)       24      
Total interest-earning assets   51,899     378     2.91 %
Total non-interest-earning assets   4,951          
Total assets   $ 56,850          
             
Deposits   $ 37,894     $ 1     0.01 %
Customer payables   8,686     2     0.06 %
Broker-related payables and other   1,237         0.00 %
Other borrowings   674     5     3.18 %
Corporate debt   991     13     5.41 %
Subtotal interest-bearing liabilities   49,482     21     0.17 %
Other interest expense(b)       1      
Total interest-bearing liabilities   49,482     22     0.18 %
Total non-interest-bearing liabilities   884          
Total liabilities   50,366          
Total shareholders' equity   6,484          
Total liabilities and shareholders' equity   $ 56,850          
             
Excess interest earning assets over interest bearing liabilities/ net interest                      
income/ net interest margin   $ 2,417     $ 356     2.74 %
                       

(a)  Represents interest revenue on securities loaned.

(b)  Represents interest expense on securities borrowed.

 
 
Fees and Service Charges            
($MM)   Three Months Ended
    June 30, 2018   March 31, 2018   June 30, 2017
Order flow revenue   $ 43     $ 47     $ 34
Money market funds and sweep deposits revenue(a)   18     17    

26

Advisor management and custody fees   16     11     9
Mutual fund service fees   12     11     10
Foreign exchange revenue   6     8     6
Reorganization fees   4     3     5
Other fees and service charges   11     8     8
Total fees and service charges   $ 110     $ 105     $ 98
                       
(a)   Includes revenue earned on average customer cash held by third parties based on the federal funds rate or LIBOR plus a negotiated spread or other contractual arrangements with the third party institutions.

 

Explanation of Non-GAAP Measures

Management believes that adjusting GAAP measures by excluding or including certain items is helpful to investors and analysts who may wish to use some or all of this information to analyze the Company's current performance, prospects and valuation. Management uses this non-GAAP information internally to evaluate operating performance and in formulating the budget for future periods. Management believes that the non-GAAP measures discussed below are appropriate for evaluating the operating and liquidity performance of the Company.

Adjusted Operating Margin

Adjusted operating margin is calculated by dividing adjusted income before income taxes by net revenue. Adjusted income before income taxes excludes the provision (benefit) for loan losses. Management believes that excluding the provision (benefit) for loan losses from operating margin provides a useful measure of the Company's ongoing operating performance because management excludes it when evaluating operating margin performance. See endnote (1) for a reconciliation of this non-GAAP measure to the comparable GAAP measure.

Corporate Cash

Corporate cash represents cash held at the parent company as well as cash held in certain subsidiaries, not including bank and brokerage subsidiaries, that can distribute cash to the parent company without any regulatory approval or notification. The Company believes that corporate cash is a useful measure of the parent company's liquidity as it is the primary source of capital above and beyond the capital deployed in regulated subsidiaries. See endnote (6) for a reconciliation of this non-GAAP measure to the comparable GAAP measure.

Tangible Common Equity Book Value per Share

Tangible common equity book value per share represents common shareholders' equity, which excludes preferred stock, less goodwill and other intangible assets (net of related deferred tax liabilities) divided by common stock outstanding. The Company believes that tangible common equity book value per share is a measure of the Company's capital strength. See endnote (5) for a reconciliation of this non-GAAP measure to the comparable GAAP measure.

It is important to note that these non-GAAP measures may involve judgment by management and should be considered in addition to, not as substitutes for, or superior to, measures prepared in accordance with GAAP. For additional information on the adjustments to these non-GAAP measures, please see the Company's financial statements and "Management's Discussion and Analysis of Financial Condition and Results of Operations" that will be included in the periodic report the Company expects to file with the SEC with respect to the financial periods discussed herein.

ENDNOTES

(1) Operating margin is the percentage of net revenue that results in income before income taxes. The percentage is calculated by dividing income before income taxes by total net revenue. The following table provides a reconciliation of GAAP operating margin percentage to non-GAAP adjusted operating margin percentage (dollars in millions):

    Q2 2018   Q1 2018   Q2 2017
    Amount  

Operating
Margin %

  Amount  

Operating
Margin %

  Amount  

Operating
Margin %

                         
Income before income tax expense and                                    
operating margin   $ 345     49 %   $ 334     47 %   $ 317     55 %
Provision (benefit) for loan losses   (19 )       (21 )       (99 )    
Adjusted income before income tax                                    
expense and adjusted operating margin   $ 326     46 %   $ 313     44 %   $ 218     38 %
                                     

(2) Records based on the period during which metric has been reported by the Company.

(3) Beginning in the first quarter of 2018, the Company updated the presentation of its consolidated financial statements as follows:

  • On the consolidated statement of income, fair value hedging adjustments, previously referred to as hedge ineffectiveness, are included within net interest income beginning in the first quarter of 2018. Amounts prior to 2018 have not been reclassified to conform to current period presentation and continue to be reflected within gains on securities and other, net. Fair value hedging adjustments were expenses of $5 million, $3 million and $2 million for the three months ended June 30, 2018, March 31, 2018 and June 30, 2017, respectively. Fair value hedging adjustments were expenses of $8 million, and $3 million for the six months ended June 30, 2018, and June 30, 2017, respectively.
  • On the consolidated balance sheet, reclassified deferred tax assets, net to other assets. Prior periods have been reclassified to conform to current period presentation. Deferred tax assets were $146 million, $218 million and $251 million at June 30, 2018, March 31, 2018 and December 31, 2017, respectively.

(4) Amounts and percentages may not recalculate due to rounding. For percentage based metrics, the variance represents the current period less the prior period.

(5) The following table provides a reconciliation of GAAP common equity book value and common equity book value per share to non-GAAP tangible common equity book value and tangible common equity book value per share at period end (dollars in millions, except per share amounts):

    Q2 2018   Q1 2018   Q2 2017
    Amount  

Per
Share

  Amount  

Per
Share

  Amount  

Per
Share

Common equity book value   $ 6,214     $ 23.73     $ 6,200     $ 23.41     $ 6,289     $ 22.86
Less: Goodwill and other intangibles, net   (2,888 )       (2,645 )       (2,673 )    
Add: Deferred tax liabilities related to                              
goodwill and other intangibles, net   430         426         591      
Tangible common equity book value   $ 3,756     $ 14.35     $ 3,981     $ 15.03     $ 4,207     $ 15.29
                                               

(6) The following table provides a reconciliation of GAAP consolidated cash and equivalents to non-GAAP corporate cash at period end (dollars in millions):

    Q2 2018(a)   Q1 2018   Q2 2017
Consolidated cash and equivalents   $ 532     $ 498     $ 1,091  
Less: Cash at regulated subsidiaries   (527 )   (493 )   (823 )
Add: Cash on deposit at E*TRADE Bank(b)   938     434     210  
Corporate cash   $ 943     $ 439     $ 478  
                         

(a) The increase in corporate cash from March 2018 was largely driven by a timing difference between the Company's corporate debt issuance in June 2018 and the third quarter redemption of our trust preferred securities that substantially completed in July 2018. Corporate cash activity during the second quarter also included a $176 million dividend from E*TRADE Bank and a $100 million dividend from E*TRADE Securities, offset by share repurchases.

(b) Cash on deposit at E*TRADE Bank is eliminated in consolidation.

(7) Includes the April 2018 acquisition impact of TCA as follows:

  • Gross new brokerage accounts of 146,000
  • Net new brokerage assets of $18.4 billion, which includes $17.2 billion of security holdings and $1.2 billion of sweep deposits

As of and for the quarter ended June 30, 2018, the impact of TCA was as follows:

  • Total DARTs of 3,000, none of which represented derivatives DARTs
  • Net new and end of period brokerage accounts of 148,000
  • Brokerage customer assets of $18.8 billion, which includes $17.6 billion of security holdings and $1.2 billion of sweep deposits
  • Net new brokerage assets of $18.6 billion

(8) Customer margin balances include the following (dollars in billions):

    Q2 2018   Q1 2018   Q2 2017
Margin receivables held on balance sheet   $ 11.0     $ 10.5     $ 7.8
Customer margin balances held by a third party clearing firm           0.4
Total customer margin balances(a)   $ 11.0     $ 10.5     $ 8.2
                       

(a) Represents margin receivables held on the balance sheet and customer margin balances held by a third party clearing firm. The balances held by a third party were transferred to E*TRADE Securities during the three months ended September 30, 2017 in connection with the OptionsHouse integration.

(9) Customer cash held by third parties is held outside E*TRADE Financial and includes money market funds and sweep deposit accounts at unaffiliated financial institutions and customer cash held by a third party clearing firm. Customer cash held by third parties is not reflected in the Company's consolidated balance sheet and is not immediately available for liquidity purposes. The following table provides details of customer cash held by third parties (dollars in billions):

    Q2 2018       Q1 2018       Q2 2017
Sweep deposits at unaffiliated financial institutions   $   3.5           $   3.4           $   6.6
Customer cash held by a third party clearing firm(a)                       1.7
Money market funds and other   1.5           1.6           0.5
Total customer cash held by third parties   $   5.0           $   5.0           $   8.8
                                         

(a) During the three months ended September 30, 2017, customer cash held by a third party clearing firm was transferred to E*TRADE Securities in connection with the integration of OptionsHouse.

(10) Net new brokerage assets are total inflows to all new and existing brokerage customer accounts less total outflows from all closed and existing brokerage customer accounts, excluding the effects of market movements in the value of brokerage customer assets. Net new banking assets are total inflows to all new and existing banking customer accounts less total outflows from all closed and existing banking customer accounts. The net new banking assets and net new brokerage assets metrics treat asset flows between E*TRADE entities in the same manner as unrelated third party accounts.

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

(12) E*TRADE Financial's capital ratios are calculated as follows and are preliminary for the current period (dollars in millions):

    Q2 2018   Q1 2018   Q2 2017
E*TRADE Financial shareholders' equity   $ 6,903     $ 6,889     $ 6,683  
DEDUCT:            
Preferred stock   (689 )   (689 )   (394 )
E*TRADE Financial Common Equity Tier 1 capital before regulatory                        
adjustments   $ 6,214     $ 6,200     $ 6,289  
ADD:            
(Gains) losses in other comprehensive income on available-for-sale debt                  
securities, net of tax   235     176     62  
DEDUCT:            
Goodwill and other intangible assets, net of deferred tax liabilities   (2,458 )   (2,219 )   (2,039 )
Disallowed deferred tax assets   (283 )   (353 )   (537 )
E*TRADE Financial Common Equity Tier 1 capital   $ 3,708     $ 3,804     $ 3,775  
ADD:            
Preferred stock   689     689     394  
DEDUCT:            
Disallowed deferred tax assets           (124 )
E*TRADE Financial Tier 1 capital   $ 4,397     $ 4,493     $ 4,045  
ADD:            
Allowable allowance for loan losses   54     58     116  
Non-qualifying capital instruments subject to phase-out (trust                  
preferred securities)   413     414     414  
E*TRADE Financial total capital   $ 4,864     $ 4,965     $ 4,575  
             
E*TRADE Financial average assets for leverage capital purposes   $ 64,248     $ 64,486     $ 56,928  
DEDUCT:            
Goodwill and other intangible assets, net of deferred tax liabilities   (2,458 )   (2,219 )   (2,039 )
Disallowed deferred tax assets   (283 )   (353 )   (661 )
E*TRADE Financial adjusted average assets for leverage capital purposes   $ 61,507     $ 61,914     $ 54,228  
             
E*TRADE Financial total risk-weighted assets(a)   $ 10,798     $ 10,856     $ 10,780  
             
E*TRADE Financial Tier 1 leverage ratio (Tier 1 capital / Adjusted average                  
assets for leverage capital purposes)   7.1 %   7.3 %   7.5 %
E*TRADE Financial Common Equity Tier 1 capital / Total risk-weighted assets   34.3 %   35.0 %   35.0 %
E*TRADE Financial Tier 1 capital / Total risk-weighted assets   40.7 %   41.4 %   37.5 %
E*TRADE Financial total capital / Total risk-weighted assets   45.0 %   45.7 %   42.4 %
                   
                   

(a) Under the regulatory guidelines for risk-based capital, on-balance sheet assets and credit equivalent amounts of derivatives and off-balance sheet items are assigned to one of several broad risk categories according to the obligor or, if relevant, the guarantor or the nature of any collateral. The aggregate dollar amount in each risk category is then multiplied by the risk weight associated with that category. The resulting weighted values from each of the risk categories are aggregated for determining total risk-weighted assets.

(13) E*TRADE Bank's capital ratios are calculated as follows and are preliminary for the current period (dollars in millions):

    Q2 2018   Q1 2018   Q2 2017
E*TRADE Bank shareholder's equity   $ 3,616     $ 3,721     $ 3,485  
ADD:            
(Gains) losses in other comprehensive income on available-for-sale debt                  
securities, net of tax   235     176     62  
DEDUCT:            
Goodwill and other intangible assets, net of deferred tax liabilities   (292 )   (38 )   (38 )
Disallowed deferred tax assets   (60 )   (66 )   (56 )
E*TRADE Bank Common Equity Tier 1 capital / Tier 1 capital   $ 3,499     $ 3,793     $ 3,453  
ADD:            
Allowable allowance for loan losses   54     58     116  
E*TRADE Bank total capital   $ 3,553     $ 3,851     $ 3,569  
             
E*TRADE Bank average assets for leverage capital purposes   $ 49,206     $ 50,063     $ 43,527  
DEDUCT:            
Goodwill and other intangible assets, net of deferred tax liabilities   (292 )   (38 )   (38 )
Disallowed deferred tax assets   (60 )   (66 )   (56 )
E*TRADE Bank adjusted average assets for leverage capital purposes   $ 48,854     $ 49,959     $ 43,433  
             
E*TRADE Bank total risk-weighted assets(a)   $ 10,019     $ 10,133     $ 9,840  
             
E*TRADE Bank Tier 1 leverage ratio (Tier 1 capital / Adjusted average assets                  
for leverage capital purposes)   7.2 %   7.6 %   8.0 %
E*TRADE Bank Common Equity Tier 1 capital / Total risk-weighted assets   34.9 %   37.4 %   35.1 %
E*TRADE Bank Tier 1 capital / Total risk-weighted assets   34.9 %   37.4 %   35.1 %
E*TRADE Bank total capital / Total risk-weighted assets   35.5 %   38.0 %   36.3 %

(a) Under the regulatory guidelines for risk-based capital, on-balance sheet assets and credit equivalent amounts of derivatives and off-balance sheet items are assigned to one of several broad risk categories according to the obligor or, if relevant, the guarantor or the nature of any collateral. The aggregate dollar amount in each risk category is then multiplied by the risk weight associated with that category. The resulting weighted values from each of the risk categories are aggregated for determining total risk-weighted assets.

 

E*TRADE Media Relations
646-521-4418
mediainq@etrade.com
or
E*TRADE Investor Relations
646-521-4406
ir@etrade.com

 

Source: E*TRADE Financial Corporation

 

 

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