Press Release Details

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E*TRADE Financial Corporation Announces Third Quarter 2018 Results

Oct 18, 2018

NEW YORK--(BUSINESS WIRE)--Oct. 18, 2018-- E*TRADE Financial Corporation (NASDAQ:ETFC):

COMPANY TO INITIATE QUARTERLY DIVIDEND ON COMMON STOCK

ANNOUNCES NEW $1 BILLION SHARE REPURCHASE PROGRAM

Third Quarter Results

  • Net income of $285 million; net income available to common shareholders of $261 million
  • Diluted earnings per common share of $1.00, which includes a net benefit of $30 million, or $0.12 per diluted share, related to the benefit to provision for loan lossesand other items(1)
  • Total net revenue of $720 million, a Company record(2)
  • Operating margin of 52 percent; adjusted operating margin of 48 percent, a Company record(2),(3)
  • Average interest-earning assets of $60 billion; net interest margin of 310 basis points
  • Daily Average Revenue Trades (DARTs) of 266,000, including derivative DARTs of 86,000
  • Customer margin balances of $11.2 billion, a Company record(2)
  • Net new brokerage accounts of 67,000
  • Net new brokerage assets of $3.2 billion
  • Managed products of $6.2 billion
  • Repurchased 5.3 million shares, completing the prior $1 billion share repurchase program at an average price of $51.38

E*TRADE Financial Corporation (NASDAQ:ETFC) today announced results for its third quarter ended September 30, 2018, reporting net income of $285 million, diluted earnings per common share of $1.00 and total net revenue of $720 million. Operating margin for the quarter was 52 percent and adjusted operating margin was 48 percent(3).

The Company announced that its Board of Directors declared a quarterly cash dividend of $0.14 per share on the Company's outstanding shares of common stock. The dividend is payable on November 15, 2018, to shareholders of record as of the close of business on October 30, 2018.

The Company also announced that its Board of Directors approved the launch of a new $1 billion share repurchase program.

“I am pleased to exit the last 24 months with such positive trajectory,” said Karl Roessner, Chief Executive Officer. “The Company has made exceptional progress— returning to our roots as the undisputed leader for digitally inclined traders and investors, driving strong business momentum, and creating significant value for our shareholders. I couldn’t be more proud of the team whose focus and tireless efforts led to a broadened suite of offerings, meaningful growth in our client base, and the addition of a new RIA custody platform. Today, we are also initiating a new $1 billion share repurchase program and a quarterly dividend— actions which underscore the stability of our earnings base, and our commitment to return excess capital to our shareholders. As we look to the future, we intend to fully leverage our many accomplishments to maintain our growth trajectory and to continue to deliver meaningful long-term value for our shareholders.”

The Company will host a conference call beginning at 5 p.m. ET today to discuss the quarterly results, as well as the Board of Directors' assessment of the long-term strategy for the firm. This conference call will be available to domestic participants by dialing 800-920-5564 while international participants should dial +1 415-226-5357. A live audio webcast and replay of this conference call will also be available at about.etrade.com where the Company has also posted an updated investor presentation with supplementary information for this conference call.

Historical metrics and financials can be found on the E*TRADE Financial corporate website 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, 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 grow and deliver value for its shareholders, the planned payment of its quarterly dividend in November 2018, the Company's ability to generate capital and pay additional dividends in the future, and the Company's planned repurchases of its common stock, 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 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, including with respect to approval of any future dividend or share repurchase; 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   Nine Months Ended
    September 30,   June 30,   September 30,   September 30,
    2018   2018   2017   2018   2017
Revenue:                    
Interest income   $ 514     $ 489     $ 413     $ 1,471     $ 1,132  
Interest expense   (48 )   (36 )   (22 )   (107 )   (66 )
Net interest income(4)   466     453     391     1,364     1,066  
Commissions   117     121     100     375     332  
Fees and service charges   108     110     92     323     276  
Gains on securities and other, net(4)   17     15     6     42     23  
Other revenue   12     11     10     34     32  
Total non-interest income   254     257     208     774     663  
Total net revenue   720     710     599     2,138     1,729  
Provision (benefit) for loan losses   (34 )   (19 )   (29 )   (74 )   (142 )
Non-interest expense:                    
Compensation and benefits   157     160     139     469     408  
Advertising and market development   45     47     38     152     123  
Clearing and servicing   28     30     29     94     94  
Professional services   23     25     25     70     71  
Occupancy and equipment   29     30     28     89     84  
Communications   30     28     29     89     90  
Depreciation and amortization   25     23     20     70     60  
FDIC insurance premiums   8     9     8     26     24  
Amortization of other intangibles   12     12     9     34     27  
Restructuring and acquisition-related activities   4     2     4     6     12  
Losses on early extinguishment of debt   4         58     4     58  
Other non-interest expenses   15     18     18     56     55  
Total non-interest expense   380     384     405     1,159     1,106  
Income before income tax expense   374     345     223     1,053     765  
Income tax expense   89     95     76     271     280  
Net income   $ 285     $ 250     $ 147     $ 782     $ 485  
Preferred stock dividends   24         12     36     25  
Net income available to common shareholders   $ 261     $ 250     $ 135     $ 746     $ 460  
                     
Basic earnings per common share   $ 1.01     $ 0.95     $ 0.49     $ 2.84     $ 1.67  
Diluted earnings per common share   $ 1.00     $ 0.95     $ 0.49     $ 2.82     $ 1.67  
Shares used in computation of per common share data:                    
Basic (in thousands)   259,498     263,809     273,441     263,292     274,565  
Diluted (in thousands)   260,661     264,929     274,594     264,433     275,703  
                               

 

 
E*TRADE FINANCIAL CORPORATION
Consolidated Balance Sheet
(In millions, except share data)
(Unaudited)
             
    September 30,   June 30,   December 31,
    2018   2018   2017
ASSETS            
Cash and equivalents   $ 596     $ 532     $ 931  
Cash required to be segregated under federal or other regulations   856     620     872  
Available-for-sale securities   22,864     23,810     20,679  
Held-to-maturity securities   22,026     21,199     23,839  
Margin receivables   11,184     10,955     9,071  
Loans receivable, net   2,251     2,375     2,654  
Receivables from brokers, dealers and clearing organizations   786     626     1,178  
Property and equipment, net   261     259     253  
Goodwill   2,485     2,485     2,370  
Other intangibles, net   391     403     284  
Other assets(4)   1,006     1,089     1,234  
Total assets   $ 64,706     $ 64,353     $ 63,365  
             
LIABILITIES AND SHAREHOLDERS' EQUITY            
Liabilities:            
Deposits   $ 43,074     $ 42,664     $ 42,742  
Customer payables   10,534     9,959     9,449  
Payables to brokers, dealers and clearing organizations   1,845     1,666     1,542  
Other borrowings   550     1,259     910  
Corporate debt   1,408     1,408     991  
Other liabilities   529     494     800  
Total liabilities   57,940     57,450     56,434  
             
Shareholders' equity:            

Preferred stock, $0.01 par value; shares authorized:
1,000,000; shares issued and outstanding at September
30, 2018: 403,000

  689     689     689  

Common stock, $0.01 par value; shares authorized:
400,000,000; shares issued and outstanding at
September 30, 2018: 256,765,011

  3     3     3  
Additional paid-in-capital   5,953     6,257     6,582  
Retained earnings (accumulated deficit)   450     189     (317 )
Accumulated other comprehensive loss   (329 )   (235 )   (26 )
Total shareholders' equity   6,766     6,903     6,931  
Total liabilities and shareholders' equity   $ 64,706     $ 64,353     $ 63,365  
                         

 

                     
Key Performance Metrics(5)                    

Corporate

 

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ended
9/30/18

 

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ended
6/30/18

 

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9/30/18
vs.
6/30/18

 

Qtr
ended
9/30/17

 

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9/30/18
vs.
9/30/17

                     
Operating margin %(3)   52 %   49 %   3%   37 %   15%
Adjusted operating margin %(3)   48 %   46 %   2%   42 %   6%
                     
Employees   4,091     4,095     —%   3,584     14%
Consultants and other   87     102     (15)%   96     (9)%
Total headcount   4,178     4,197     —%   3,680     14%
                     
Return on common equity(6)   17 %   16 %   1%   9 %   8%
Adjusted return on common equity(6)   16 %   15 %   1%   10 %   6%
Common equity book value per share(7)   $ 23.67     $ 23.73     —%   $ 23.10     2%
Tangible common equity book value per share(7)   $ 14.13     $ 14.35     (2)%   $ 15.51     (9)%
                     
Cash and equivalents ($MM)   $ 596     $ 532     12%   $ 896     (33)%
Corporate cash ($MM)(8)   $ 517     $ 943     (45)%   $ 309     67%
                     
Net interest margin (basis points)   310     302     8   285     25
Interest-earning assets, average ($MM)   $ 60,112     $ 59,967     —%   $ 54,839     10%
                     

Customer Activity

 

Qtr
ended
9/30/18

 

Qtr
ended
6/30/18

 

Qtr ended
9/30/18
vs.
6/30/18

 

Qtr
ended
9/30/17

 

Qtr ended
9/30/18
vs.
9/30/17

                     
Trading days   62.5     64.0     N.M.   62.5     N.M.
                     
DARTs   266,290     258,844     3%   205,763     29%
Derivative DARTs   85,977     86,848     (1)%   66,122     30%
Derivative DARTs %   32 %   34 %   (2)%   32 %   —%
Adjusted Derivative DARTs %(9)   33 %   34 %   (1)%   32 %   1%
                     
Total trades (MM)   16.6     16.6     —%   12.9     29%
Average commission per trade   $ 7.04     $ 7.31     (4)%   $ 7.76     (9)%
                                 

 

                     
Key Performance Metrics(5)                    

Customer Activity

 

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9/30/18

 

Qtr ended
6/30/18

 

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9/30/18
vs.
6/30/18

 

Qtr ended
9/30/17

 

Qtr ended
9/30/18
vs.
9/30/17

                     
Gross new brokerage accounts   165,381     268,636     (38)%   105,166     57%
Gross new stock plan accounts   114,712     177,285     (35)%   74,194     55%
Gross new banking accounts   5,292     3,024     75%   834     N.M.
Closed accounts   (149,319 )   (129,679 )   15%   (158,009 )   (5)%
Net new accounts   136,066     319,266     (57)%   22,185     N.M.
                     
Net new brokerage accounts(9)   67,163     187,642     (64)%   26,225     156%
Net new stock plan accounts   69,321     134,025     (48)%   554     N.M.
Net new banking accounts   (418 )   (2,401 )   83%   (4,594 )   91%
Net new accounts   136,066     319,266     (57)%   22,185     N.M.
                     
End of period brokerage accounts(9)   3,949,399     3,882,236     2%   3,588,714     10%
End of period stock plan accounts   1,735,675     1,666,354     4%   1,475,246     18%
End of period banking accounts   292,262     292,680     —%   304,135     (4)%
End of period total accounts   5,977,336     5,841,270     2%   5,368,095     11%
                     
Annualized net new brokerage account growth rate   6.9 %   20.3 %   (13.4)%   2.9 %   4.0%
Adjusted annualized net new brokerage account growth rate(9)   6.9 %   4.3 %   2.6%   2.9 %   4.0%
                     
Customer margin balances ($B)   $ 11.2     $ 11.0     2%   $ 8.5     32%
                     

Customer Assets($B)

                   
Security holdings(9)   $ 364.2     $ 337.6     8%   $ 270.1     35%
Sweep deposits(9)   38.0     37.8     1%   36.5     4%
Customer cash held by third parties(10)   4.8     5.0     (4)%   7.1     (32)%
Customer payables (cash)   10.5     10.0     5%   8.7     21%
Brokerage customer assets   417.5     390.4     7%   322.4     29%
Unexercised stock plan holdings (vested)   50.2     45.4     11%   37.9     32%
Savings, checking and other banking assets   5.1     4.9     4%   5.0     2%
Total customer assets   $ 472.8     $ 440.7     7%   $ 365.3     29%
                     
Net new brokerage assets(9)(11)   $ 3.2     $ 21.1     (85)%   $ 2.2     45%
Net new banking assets(11)   0.2     (0.1 )   N.M.   (0.1 )   N.M.
Net new customer assets(9)   $ 3.4     $ 21.0     (84)%   $ 2.1     62%
                     
Annualized net new brokerage asset growth rate   3.3 %   24.2 %   (20.9)%   2.9 %   0.4%
Adjusted annualized net new brokerage asset growth rate(9)   3.1 %   2.8 %   0.3%   2.9 %   0.2%
                     
Brokerage related cash   $ 53.3     $ 52.8     1%   $ 52.3     2%
Other cash and deposits   5.1     4.9     4%   5.0     2%
Total customer cash and deposits   $ 58.4     $ 57.7     1%   $ 57.3     2%
                     
Managed products   $ 6.2     $ 5.8     7%   $ 4.9     27%
Stock plan customer holdings (unvested)   $ 119.5     $ 108.0     11%   $ 88.3     35%
                     
Customer net (buy) / sell activity(9)   $ (2.2 )   $ (2.9 )   N.M.   $ (1.3 )   N.M.
                                 

 

                     
Key Performance Metrics(5)                    

Loans

 

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6/30/18

 

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vs.
6/30/18

 

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9/30/17

 

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Loans receivable ($MM)

                   
One- to four-family   $ 1,145     $ 1,237     $ (92 )   $ 1,520     $ (375 )
Home equity   863     920     (57 )   1,128     (265 )
Consumer and other   243     218     25     190     53  
Loans receivable, net   $ 2,251     $ 2,375     $ (124 )   $ 2,838     $ (587 )
                     
Loan servicing expense   $ 5     5         5      
                     

Loan performance detail ($MM)

                   
Current   $ 2,105     $ 2,222     $ (117 )   $ 2,664     $ (559 )
30-89 days delinquent   76     83     (7 )   102     (26 )
90-179 days delinquent   27     28     (1 )   46     (19 )
180+ days delinquent   84     96     (12 )   120     (36 )
Total delinquent loans   187     207     (20 )   268     (81 )
Gross loans receivable(12)   $ 2,292     $ 2,429     $ (137 )   $ 2,932     $ (640 )
                                         
             
Activity in Allowance for Loan Losses            
($MM)   Three Months Ended September 30, 2018
   

One- to Four-
Family

  Home Equity  

Consumer
and Other

  Total
Allowance for loan losses, ending 6/30/18   $ 16     $ 36     $ 2     $ 54  
Provision (benefit) for loan losses   (6 )   (28 )       (34 )
(Charge-offs) recoveries, net   2     19         21  
Allowance for loan losses, ending 9/30/18   $ 12     $ 27     $ 2     $ 41  
                 
    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 September 30, 2017
   

One- to Four-
Family

  Home Equity  

Consumer
and Other

  Total
Allowance for loan losses, ending 6/30/17   $ 29     $ 82     $ 5     $ 116  
Provision (benefit) for loan losses   (12 )   (17 )       (29 )
(Charge-offs) recoveries, net   4     4     (1 )   7  
Allowance for loan losses, ending 9/30/17   $ 21     $ 69     $ 4     $ 94  
                                 

 

                     
Capital  

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6/30/18

 

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vs.
6/30/18

 

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vs.
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E*TRADE Financial

                   
Tier 1 leverage ratio(13)   7.1%   7.1%   —%   7.2%   (0.1)%
Common Equity Tier 1 capital ratio(13)   34.1%   34.3%   (0.2)%   35.2%   (1.1)%
Tier 1 risk-based capital ratio(13)   40.5%   40.7%   (0.2)%   37.8%   2.7%
Total risk-based capital ratio(13)   40.9%   45.0%   (4.1)%   42.4%   (1.5)%
                     

E*TRADE Bank

                   
Tier 1 leverage ratio(14)   7.1%   7.2%   (0.1)%   7.7%   (0.6)%
Common Equity Tier 1 capital ratio(14)   34.6%   34.9%   (0.3)%   35.5%   (0.9)%
Tier 1 risk-based capital ratio(14)   34.6%   34.9%   (0.3)%   35.5%   (0.9)%
Total risk-based capital ratio(14)   35.0%   35.5%   (0.5)%   36.4%   (1.4)%
                     

 

                         
Average Balance Sheet Data                        
($MM)   Three Months Ended
    September 30, 2018   June 30, 2018
    Average   Interest   Average   Average   Interest   Average
    Balance Inc./Exp. Yield/Cost   Balance Inc./Exp. Yield/Cost
Cash and equivalents   $ 471     $ 2     1.84%   $ 533     $ 2     1.66%
Cash required to be segregated under federal or other regulations   836     4     2.15%   753     4     1.95%
Investment securities(4)   44,773     315     2.82%   44,973     303     2.69%
Margin receivables   10,902     130     4.74%   10,291     118     4.60%
Loans   2,332     32     5.38%   2,468     33     5.32%
Broker-related receivables and other   798     4     2.02%   949     4     1.74%
Subtotal interest-earning assets   60,112     487     3.24%   59,967     464     3.10%
Other interest revenue(a)       27             25      
Total interest-earning assets   60,112     514     3.41%   59,967     489     3.26%
Total non-interest earning assets   4,291             4,364          
Total assets   $ 64,403             $ 64,331          
                         
Deposits   $ 42,456     $ 16     0.15%   $ 43,006     $ 8     0.07%
Customer payables   10,352     8     0.30%   9,533     4     0.16%
Broker-related payables and other   1,880     3     0.53%   2,207     3     0.65%
Other borrowings   752     6     2.95%   829     8     3.77%
Corporate debt   1,408     13     3.90%   1,042     10     3.68%
Subtotal interest-bearing liabilities   56,848     46     0.32%   56,617     33     0.23%
Other interest expense(b)       2             3      
Total interest-bearing liabilities   56,848     48     0.33%   56,617     36     0.25%
Total non-interest-bearing liabilities   859             633          
Total liabilities   57,707             57,250          
Total shareholders' equity   6,696             7,081          
Total liabilities and shareholders' equity   $ 64,403             $ 64,331          
                         
Excess interest earning assets over interest bearing liabilities/ net interest income/ net interest margin   $ 3,264     $ 466     3.10%   $ 3,350     $ 453     3.02%
(a)     Represents interest income on securities loaned.
(b)     Represents interest expense on securities borrowed.
       

 

     
    Three Months Ended
    September 30, 2017
    Average   Interest   Average
    Balance   Inc./Exp.   Yield/Cost
Cash and equivalents   $ 905     $ 2     1.06%
Cash required to be segregated under federal or other regulations   759     3     1.26%
Investment securities   41,226     255     2.47%
Margin receivables   8,096     87     4.26%
Loans   3,024     37     4.95%
Broker-related receivables and other   829     1     0.45%
Subtotal interest-earning assets   54,839     385     2.80%
Other interest revenue(a)       28      
Total interest-earning assets   54,839     413     3.01%
Total non-interest-earning assets   4,952          
Total assets   $ 59,791          
             
Deposits   $ 40,758     $ 1     0.01%
Customer payables   8,463     1     0.06%
Broker-related payables and other   1,301         0.00%
Other borrowings   831     6     2.91%
Corporate debt   1,002     12     4.64%
Subtotal interest-bearing liabilities   52,355     20     0.15%
Other interest expense(b)       2      
Total interest-bearing liabilities   52,355     22     0.17%
Total non-interest-bearing liabilities   820          
Total liabilities   53,175          
Total shareholders' equity   6,616          
Total liabilities and shareholders' equity   $ 59,791          
             
Excess interest earning assets over interest bearing liabilities/ net interest income/ net interest margin   $ 2,484     $ 391     2.85%
(a)     Represents interest revenue on securities loaned.
(b)     Represents interest expense on securities borrowed.
       
             
Fees and Service Charges            
($MM)   Three Months Ended
    September 30, 2018   June 30, 2018   September 30, 2017
Order flow revenue   $ 40   $ 43   $ 33
Money market funds and sweep deposits revenue(a)   18   18   23
Advisor management and custody fees   19   16   9
Mutual fund service fees   13   12   10
Foreign exchange revenue   7   6   6
Reorganization fees   3   4   5
Other fees and service charges   8   11   6
Total fees and service charges   $ 108   $ 110   $ 92
(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 and losses on early extinguishment of debt. Management believes that excluding the provision (benefit) for loan losses and losses on early extinguishment of debt 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 (3) 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 (8) for a reconciliation of this non-GAAP measure to the comparable GAAP measure.

Adjusted Return on Common Equity

Adjusted return on common equity is calculated by dividing annualized adjusted net income available to common shareholders by average common shareholders' equity. Adjusted net income available to common shareholders excludes the after-tax impact of provision (benefit) for loan losses and losses on early extinguishment of debt. Management believes that excluding the provision (benefit) for loan losses and losses on early extinguishment of debt from net income available to common shareholders provides a useful measure of the Company's ongoing operating performance because management excludes it when evaluating return on common equity performance. 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 (7) 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) Net income of $285 million, or per $1.00 diluted share, includes net after-tax benefits of $30 million, or $0.12 per diluted share, related to the following items:

  • $34 million pre-tax, or $0.10, of benefit to provision for loan losses
  • $8 million, or $0.03, of income tax benefit related to the revaluation of net deferred tax assets
  • $5 million pre-tax, or $0.01, of gains related to the sale of our legacy equity investment in the Chicago Stock Exchange
  • $4 million pre-tax, or $0.01, of costs related to restructuring and acquisition-related activities
  • $4 million pre-tax, or $0.01, of losses on early extinguishment of debt

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

(3) 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):

    Q3 2018   Q2 2018   Q3 2017
    Amount  

Operating
Margin %

  Amount  

Operating
Margin %

  Amount  

Operating
Margin %

                         
Income before income tax expense and operating margin   $ 374     52%   $ 345     49%   $ 223     37%
Add back impact of pre-tax items:                        
Provision (benefit) for loan losses   (34 )       (19 )       (29 )    
Losses on early extinguishment of debt   4                 58      
Subtotal   (30 )       (19 )       29      
Adjusted income before income tax expense and adjusted operating margin   $ 344     48%   $ 326     46%   $ 252     42%
                                     

 

(4) 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 as follows for the respective periods:
    • Expenses of $5 million, $5 million, and $2 million for the three months ended September 30, 2018, June 30, 2018 and September 30, 2017, respectively
    • Expenses of $13 million and $5 million for the nine months ended September 30, 2018, and September 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 $94 million, $146 million and $416 million at September 30, 2018, June 30, 2018 and September 30, 2017, respectively.

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

(6) Return on common equity is calculated by dividing annualized net income available to common shareholders by average common shareholders' equity, which excludes preferred stock. The following table provides a reconciliation of GAAP return on common equity percentage to non-GAAP adjusted return on common equity percentage (dollars in millions):

    Q3 2018   Q2 2018   Q3 2017
    Amount  

Return
on
Common
Equity %

  Amount  

Return
on
Common
Equity %

  Amount  

Return
on
Common
Equity %

                         
Net income available to common shareholders and return on common equity   $ 261     17%   $ 250     16%   $ 135     9%
Add back impact of the following items:                        
Provision (benefit) for loan losses   (34 )       (19 )       (29 )    
Losses on early extinguishment of debt   4                 58      
Subtotal   (30 )       (19 )       29      
Income tax impact of the items above   8         5         (12 )    
Net of tax   (22 )       (14 )       17      
Adjusted net income available to common shareholders and return on common equity   $ 239     16%   $ 236     15%   $ 152     10%
                                     

 

(7) 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):

    Q3 2018   Q2 2018   Q3 2017
    Amount  

Per
Share

  Amount  

Per
Share

  Amount  

Per
Share

Common equity book value   $ 6,077     $ 23.67     $ 6,214     $ 23.73     $ 6,254     $ 23.10
Less: Goodwill and other intangibles, net   (2,876 )       (2,888 )       (2,664 )    
Add: Deferred tax liabilities related to goodwill and other intangibles, net   426         430         609      
Tangible common equity book value   $ 3,627     $ 14.13     $ 3,756     $ 14.35     $ 4,199     $ 15.51
                                               

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

    Q3 2018   Q2 2018   Q3 2017
Consolidated cash and equivalents   $ 596     $ 532     $ 896  
Less: Cash at regulated subsidiaries   (590 )   (527 )   (729 )
Add: Cash on deposit at E*TRADE Bank(a)   511     938     142  
Corporate cash   $ 517     $ 943     $ 309  
(a) Corporate cash includes the parent company's deposits placed with E*TRADE Bank. E*TRADE Bank may use these deposits for investment purposes; however, these investments are not included in consolidated cash and equivalents.
 

(9) Includes the April 9, 2018 acquisition impact of the Trust Company of America (TCA) acquisition, including post-acquisition activity, as follows:

  • April 2018 acquisition impact: gross new brokerage accounts of 146,000, net new brokerage assets of $18.4 billion, which includes $17.2 billion of securities holdings and $1.2 billion of sweep deposits
  • As of and for the quarter ended June 30, 2018: net new brokerage accounts of 148,000, end of period brokerage customer assets of $18.8 billion, net new brokerage assets of $18.6 billion, DARTs of 3,000 and customer net buy activity of $700 million
  • As of and for the quarter ended September 30, 2018: net new brokerage accounts of 2,400, end of period brokerage customer assets of $19.7 billion, net new brokerage assets of $400 million, DARTs of 3,200 and customer net sell activity of $40 million

Adjusted derivative DARTs %, adjusted annualized net new brokerage account growth rate and adjusted annualized net new brokerage asset growth rate exclude the impact of TCA.

(10) 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. 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):

    Q3 2018   Q2 2018   Q3 2017
Sweep deposits at unaffiliated financial institutions   $ 3.0   $ 3.5   $ 6.4
Money market funds and other   1.8   1.5   0.7
Total customer cash held by third parties   $ 4.8   $ 5.0   $ 7.1
                   

(11) 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.

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

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

    Q3 2018   Q2 2018   Q3 2017
E*TRADE Financial shareholders' equity   $ 6,766     $ 6,903     $ 6,648  
DEDUCT:            
Preferred stock   (689 )   (689 )   (394 )
E*TRADE Financial Common Equity Tier 1 capital before regulatory adjustments   $ 6,077     $ 6,214     $ 6,254  
ADD:            
(Gains) losses in other comprehensive income on available-for-sale debt securities, net of tax   329     235     50  
DEDUCT:            
Goodwill and other intangible assets, net of deferred tax liabilities   (2,450 )   (2,458 )   (2,014 )
Disallowed deferred tax assets   (257 )   (283 )   (472 )
E*TRADE Financial Common Equity Tier 1 capital   $ 3,699     $ 3,708     $ 3,818  
ADD:            
Preferred stock   689     689     394  
DEDUCT:            
Disallowed deferred tax assets           (112 )
E*TRADE Financial Tier 1 capital   $ 4,388     $ 4,397     $ 4,100  
ADD:            
Allowable allowance for loan losses   41     54     94  
Non-qualifying capital instruments subject to phase-out (trust preferred securities)       413     414  
E*TRADE Financial total capital   $ 4,429     $ 4,864     $ 4,608  
             
E*TRADE Financial average assets for leverage capital purposes   $ 64,676     $ 64,272     $ 59,835  
DEDUCT:            
Goodwill and other intangible assets, net of deferred tax liabilities   (2,450 )   (2,458 )   (2,014 )
Disallowed deferred tax assets   (257 )   (283 )   (584 )
E*TRADE Financial adjusted average assets for leverage capital purposes   $ 61,969     $ 61,531     $ 57,237  
             
E*TRADE Financial total risk-weighted assets(a)   $ 10,840     $ 10,800     $ 10,855  
             
E*TRADE Financial Tier 1 leverage ratio (Tier 1 capital / Adjusted average assets for leverage capital purposes)   7.1 %   7.1 %   7.2 %
E*TRADE Financial Common Equity Tier 1 capital / Total risk-weighted assets   34.1 %   34.3 %   35.2 %
E*TRADE Financial Tier 1 capital / Total risk-weighted assets   40.5 %   40.7 %   37.8 %
E*TRADE Financial total capital / Total risk-weighted assets   40.9 %   45.0 %   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.
 

 

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

    Q3 2018   Q2 2018   Q3 2017
E*TRADE Bank shareholder's equity   $ 3,489     $ 3,616     $ 3,608  
ADD:            
(Gains) losses in other comprehensive income on available-for-sale debt securities, net of tax   329     235     50  
DEDUCT:            
Goodwill and other intangible assets, net of deferred tax liabilities   (290 )   (292 )   (38 )
Disallowed deferred tax assets   (62 )   (60 )   (56 )
E*TRADE Bank Common Equity Tier 1 capital / Tier 1 capital   $ 3,466     $ 3,499     $ 3,564  
ADD:            
Allowable allowance for loan losses   41     54     94  
E*TRADE Bank total capital   $ 3,507     $ 3,553     $ 3,658  
             
E*TRADE Bank average assets for leverage capital purposes   $ 49,194     $ 49,229     $ 46,562  
DEDUCT:            
Goodwill and other intangible assets, net of deferred tax liabilities   (290 )   (292 )   (38 )
Disallowed deferred tax assets   (62 )   (60 )   (56 )
E*TRADE Bank adjusted average assets for leverage capital purposes   $ 48,842     $ 48,877     $ 46,468  
             
E*TRADE Bank total risk-weighted assets(a)   $ 10,027     $ 10,021     $ 10,044  
             
E*TRADE Bank Tier 1 leverage ratio (Tier 1 capital / Adjusted average assets for leverage capital purposes)   7.1 %   7.2 %   7.7 %
E*TRADE Bank Common Equity Tier 1 capital / Total risk-weighted assets   34.6 %   34.9 %   35.5 %
E*TRADE Bank Tier 1 capital / Total risk-weighted assets   34.6 %   34.9 %   35.5 %
E*TRADE Bank total capital / Total risk-weighted assets   35.0 %   35.5 %   36.4 %
(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.
 

 

Source: E*TRADE Financial Corporation

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