E*TRADE Financial Corporation (NASDAQ:ETFC):
Third Quarter Results
- Net income of $139 million, or $0.51
per diluted share, which includes $19 million, or $0.07 per diluted
share, related to executive severance, restructuring and other
acquisition-related activities, and benefit to provision for loan
losses
- Total net revenue of $486 million
- Allowance for loan losses of $235
million resulting in a benefit to provision for loan losses of $62
million
- Total non-interest expense of $323
million, including executive severance of $6 million and
restructuring and acquisition-related activities of $25
million
- Acquired OptionsHouse(1) for $725
million, funded through the issuance of $400 million of
non-cumulative perpetual preferred stock and $325 million of
corporate cash
- Daily Average Revenue Trades (DARTs) of
152,000, including 6,500 DARTs from the OptionsHouse
acquisition(1)
- Customer margin balances(2) of $6.8
billion, including $0.3 billion from the OptionsHouse
acquisition
- Net new brokerage accounts of 162,000,
including 148,000 from the OptionsHouse acquisition, and an
annualized attrition rate of 8.0 percent
- Net new brokerage assets of $5.4
billion, including $3.7 billion from the OptionsHouse acquisition;
end of period total customer assets of $307 billion
E*TRADE Financial Corporation (NASDAQ: ETFC) today announced
results for its third quarter ended September 30, 2016,
reporting net income of $139 million, or $0.51 per diluted share.
This compares to a net loss of $153 million, or $0.53 per diluted
share, in the third quarter of 2015, which includes $409 million(3)
of net pre-tax charges related to the termination of the Company's
legacy wholesale funding obligations and other early extinguishment
of debt. Total net revenue of $486 million increased from net
revenue of $61 million, or adjusted net revenue of $431 million(3)
in the third quarter of 2015, excluding $370 million of losses
related to the termination of the Company's legacy wholesale
funding obligations. Total non-interest expense in the quarter of
$323 million included executive severance of $6 million and
restructuring and acquisition-related activities of $25 million.
This compares to total non-interest expense of $332 million in the
year-ago period which included $39 million of losses on early
extinguishment of debt.
“This quarter was transformative for E*TRADE as we completed our
first acquisition in over a decade, restructured our executive team
and refocused the entire organization on growth, which is our
unambiguous charge,” said Karl Roessner, Chief Executive Officer.
“We have a handful of clear-cut objectives around which we have
aligned: First, to swiftly and flawlessly integrate OptionsHouse,
with a commitment to fully realize the value of the acquisition;
second, to reclaim our position as a trading powerhouse while at
the same time emphasizing our investing offerings; and third, to
improve our marketing to more effectively engage with customers and
prospects. While we have serious work to do on a very aggressive
timeline, I am confident in our ability to get the job done.
Separately we are maniacally focused on driving operating leverage
through increased efficiency and have taken meaningful steps,
reducing $21 million of annual expense, over and above all expense
synergies related to the OptionsHouse acquisition. On a personal
front, I am thrilled to be leading this company, which I have
supported and cared so deeply about for over 15 years. E*TRADE is a
fantastic franchise with tremendous opportunity and I believe we
are in a strong position to continue to deliver value for our
shareholders and our customers.”
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) 708-4339 while
international participants should dial +1 (303) 223-4392. 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 online brokerage and related banking products
and services to retail investors. Securities products and services
are offered by E*TRADE Securities (Member FINRA/SIPC). Bank
products and services are offered by E*TRADE Bank, a Federal
savings bank, Member FDIC, or its subsidiaries and affiliates. More
information is available at www.etrade.com. ETFC-E
Important Notices
E*TRADE Financial, E*TRADE and the E*TRADE logo are trademarks
or registered trademarks of E*TRADE Financial Corporation.
Forward-Looking Statements
The statements contained in this news release that are forward
looking, including statements regarding the Company's ability to
integrate OptionsHouse, improve its market position in trading or
retirement, drive operating leverage, improve marketing, or deliver
value for shareholders are “forward-looking statements” within the
meaning of the safe harbor provisions of the U.S. Private
Securities Litigation Reform Act of 1995, 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, macro
trends of the economy in general and the residential real estate
market, market volatility and its impact on trading volumes,
instability in the consumer credit markets and credit trends, such
as fluctuations in interest rates, increased mortgage loan
delinquency and default rates, portfolio seasoning and resolution
through collections, sales or charge-offs, the uncertainty
surrounding the foreclosure process, the Company's ability to
attract and retain customers, grow customer relationships and
develop new products and services, increased competition, potential
system disruptions and security breaches, and the potential
negative regulatory consequences resulting from the implementation
of financial regulatory reform as well as from actions by or more
restrictive policies or interpretations of the Federal Reserve, the
Office of the Comptroller of the Currency, the FDIC, the Department
of Labor, or other regulators. Further information about these
risks and uncertainties can be found 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 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.
© 2016 E*TRADE Financial Corporation. All rights reserved.
Financial Statements E*TRADE FINANCIAL CORPORATION AND
SUBSIDIARIES Consolidated Statement of Income
(Loss)(4) (In millions, except share data and per
share amounts) (Unaudited)
Three Months Ended Nine Months Ended
September 30, June 30,
September 30, September 30, 2016
2016 2015 2016
2015 Revenue: Interest income $ 309 $ 306 $ 297 $ 923 $ 923
Interest expense (22 ) (20 ) (48 ) (63 ) (172 ) Net interest income
287 286 249 860 751 Commissions
107 106 108 320 325 Fees and service charges 68 62 52 188 159
Gains (losses) on securities andother
14 10 (358 ) 34 (333 ) Other revenue 10 10 10
30 29 Total non-interest income (loss) 199 188
(188 ) 572 180 Total net revenue 486
474 61 1,432 931 Provision (benefit)
for loan losses (62 ) (35 ) (25 ) (131 ) (17 ) Non-interest
expense: Compensation and benefits 123 125 123 374 354 Advertising
and market development 27 30 23 100 89 Clearing and servicing 26 25
23 75 72 Professional services 26 22 24 70 77 Occupancy and
equipment 24 24 21 71 64 Communications 22 20 24 65 62 Depreciation
and amortization 20 20 21 60 61 FDIC insurance premiums 6 6 7 18 36
Amortization of other intangibles 5 5 5 15 15
Restructuring and
acquisition-relatedactivities
25 1 2 28 8
Losses on early extinguishment ofdebt
— — 39 — 112 Other non-interest expenses 19 17 20
54 64 Total non-interest expense 323
295 332 930 1,014
Income (loss) before income taxexpense
(benefit)
225 214 (246 ) 633 (66 ) Income tax expense (benefit) 86 81
(93 ) 208 (245 ) Net income (loss) $ 139 $ 133
$ (153 ) $ 425 $ 179 Basic earnings
(loss) per share $ 0.51 $ 0.48 $ (0.53 ) $ 1.53 $ 0.62 Diluted
earnings (loss) per share $ 0.51 $ 0.48 $ (0.53 ) $ 1.52 $ 0.61
Shares used in computation of pershare
data:
Basic (in thousands) 274,362 277,013 290,480 278,864 290,105
Diluted (in thousands) 275,472 277,978 290,480 280,136 294,998
E*TRADE FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheet (In millions, except share
data) (Unaudited)
September 30, June 30,
December 31, 2016 2016 2015
ASSETS Cash and equivalents $ 1,467 $ 2,393 $ 2,233
Cash required to be segregated under
federal or other regulations
2,159 1,821 1,057 Available-for-sale securities 13,493 13,895
12,589 Held-to-maturity securities 16,189 15,716 13,013 Margin
receivables 6,552 6,824 7,398 Loans receivable, net 3,832 4,089
4,613
Receivables from brokers, dealers and
clearing organizations
1,118 692 520 Property and equipment, net 231 231 236 Goodwill
2,370 1,792 1,792 Other intangibles, net 328 164 174 Deferred tax
assets, net 725 830 1,033 Other assets 735 755 769
Total assets $ 49,199 $ 49,202 $ 45,427
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities: Deposits $ 31,697 $ 32,964 $ 29,445 Customer
payables 7,827 6,712 6,544 Payables to brokers, dealers and
clearing organizations 1,227 1,744 1,576 Other borrowings 409 409
491 Corporate debt 994 993 997 Other liabilities 729 595
575 Total liabilities 42,883 43,417
39,628
Shareholders' equity:
Preferred stock, $0.01 par value; $1,000
liquidation preference; shares authorized:
1,000,000; shares issued and outstanding at
September 30, 2016: 400,000
394 — —
Common stock, $0.01 par value; shares
authorized: 400,000,000; shares issued and
outstanding at September 30, 2016: 273,810,222
3 3 3 Additional paid-in-capital 6,916 6,911 7,356 Accumulated
deficit (1,036 ) (1,175 ) (1,461 ) Accumulated other comprehensive
income (loss) 39 46 (99 ) Total shareholders' equity
6,316 5,785 5,799 Total liabilities and
shareholders' equity $ 49,199 $ 49,202 $ 45,427
Key Performance Metrics(5)
Corporate
Qtrended9/30/16
Qtrended6/30/16
Qtrended9/30/16
vs. 6/30/16
Qtrended9/30/15
Qtr ended9/30/16 vs.
9/30/15
Operating margin %(6) 46% 45% 1% N.M. N.M Adjusted operating
margin %(3) 34% 38% (4)% 32% 2% Employees 3,655 3,588 2%
3,310 10% Consultants and other 130 180 (28)% 105 24% Total
headcount 3,785 3,768 —% 3,415 11% Common equity book value
per share(7) $ 21.63 $ 21.14 2% $ 20.01 8% Tangible common equity
book value per share(7) $ 13.82 $ 15.74 (12)% $ 14.78 (6)%
Cash and equivalents ($MM) $ 1,467 $ 2,393 (39)% $ 1,453 1%
Corporate cash ($MM)(8) $ 306 $ 523 (41)% $ 432 (29)% Net
interest margin (basis points) 259 264 (2)% 247 5% Interest-earning
assets, average ($MM) $ 44,489 $ 43,422 2% $ 40,485 10%
Customer
Activity(1)
Qtrended9/30/16
Qtrended6/30/16
Qtrended9/30/16
vs. 6/30/16
Qtrended9/30/15
Qtr ended9/30/16 vs.
9/30/15
Trading days 64.0 64.0 N.M. 64.0 N.M. DARTs 151,905
152,488 —% 155,985 (3)% Derivative DARTs % 26% 24% 2% 25% 1%
Total trades (MM) 9.7 9.8 (1)% 10.0 (3)% Average commission per
trade $ 10.97 $ 10.82 1% $ 10.87 1%
Key
Performance Metrics(5)
Customer
Activity(1)
Qtr ended9/30/16
Qtr ended6/30/16
Qtr
ended9/30/16vs.6/30/16
Qtr ended9/30/15
Qtr
ended9/30/16vs.9/30/15
Gross new brokerage accounts 227,309 90,779 150% 93,324 144%
Gross new stock plan accounts 62,144 68,362 (9)% 110,731 (44)%
Gross new banking accounts 1,061 1,157 (8)% 1,158 (8)% Closed
accounts(9) (122,336) (124,546) N.M. (145,359) N.M. Net new
accounts 168,178 35,752 N.M. 59,854 N.M. Net new brokerage
accounts(9) 161,885 23,090 N.M. 2,205 N.M. Net new stock plan
accounts 11,368 18,488 N.M. 64,513 N.M. Net new banking accounts
(5,075) (5,826) N.M. (6,864) N.M. Net new accounts 168,178
35,752 N.M. 59,854 N.M. End of period brokerage accounts(9)
3,438,975 3,277,090 5% 3,203,531 7% End of period stock plan
accounts 1,454,421 1,443,053 1% 1,358,470 7% End of period banking
accounts 324,650 329,725 (2)% 344,089 (6)% End of period
total accounts 5,218,046 5,049,868 3% 4,906,090 6%
Annualized brokerage account attrition rate(9)(10) 8.0% 8.3% N.M.
11.4% N.M. Customer margin balances(2) ($B) $ 6.8 $ 6.8 —% $
7.9 (14)%
Customer
Assets(1) ($B)
Security holdings $ 222.1 $ 208.8 6% $ 197.0 13% Sweep deposits
26.5 27.8 (5)% 20.3 31% Customer assets held by third parties(11)
14.0 8.5 65% 13.9 1% Customer payables (cash) 7.8 6.7 16%
6.0 30% Brokerage customer assets 270.4 251.8 7% 237.2 14%
Unexercised stock plan holdings (vested) 31.2 28.9 8% 34.1 (9)%
Savings, checking and other banking assets 5.2 5.2 —% 5.3
(2)% Total customer assets $ 306.8 $ 285.9 7% $ 276.6 11%
Net new brokerage assets(12) $ 5.4 $ 1.6 N.M. $ 2.1 N.M. Net
new banking assets(12) — (0.2) N.M. (0.2) N.M. Net new
customer assets(12) $ 5.4 $ 1.4 N.M. $ 1.9 N.M. Brokerage
related cash $ 48.3 $ 43.0 12% $ 40.2 20% Other cash and deposits
5.2 5.2 —% 5.3 (2)% Total customer cash and deposits $ 53.5
$ 48.2 11% $ 45.5 18% Stock plan customer holdings
(unvested) $ 73.4 $ 64.6 14% $ 66.6 10% Customer net (buy) /
sell activity $ 2.4 $ (1.4) N.M. $ (3.7) N.M.
Key
Performance Metrics(5)
Loans
Qtr ended9/30/16
Qtr ended6/30/16
Qtr
ended9/30/16vs.6/30/16
Qtr ended9/30/15
Qtr
ended9/30/16vs.9/30/15
Loans receivable
($MM)
Average loans receivable $ 4,202 $ 4,512 $ (310 ) $ 5,441 $ (1,239
) Ending loans receivable, net $ 3,832 $ 4,089 $ (257 ) $ 4,906 $
(1,074 ) Loan servicing expense $ 7 $ 8 $ (1 ) $ 8 $ (1 )
Loan performance
detail (all loans, includingTDRs)
($MM)
One- to
Four-Family
Current $ 1,927 $ 2,062 $ (135 ) $ 2,440 $ (513 ) 30-89 days
delinquent 65 68 (3 ) 60 5 90-179 days delinquent 19 26 (7 ) 22 (3
)
180+ days delinquent (net of $32, $37
and $43 in charge-offs for Q316, Q216
and Q315, respectively)
97 103 (6 ) 116 (19 ) Total delinquent
loans(13) 181 197 (16 ) 198 (17 ) Gross loans
receivable(14) $ 2,108 $ 2,259 (151 ) $ 2,638
(530 )
Home
Equity
Current $ 1,569 $ 1,695 $ (126 ) $ 2,149 $ (580 ) 30-89 days
delinquent 38 47 (9 ) 47 (9 ) 90-179 days delinquent 24 27 (3 ) 28
(4 )
180+ days delinquent (net of $29, $29
and $26 in charge-offs for Q316, Q216
and Q315, respectively)
55 59 (4 ) 50 5 Total delinquent loans(13) 117
133 (16 ) 125 (8 ) Gross loans receivable(14)
$ 1,686 $ 1,828 (142 ) $ 2,274 (588 )
Consumer and
Other
Current $ 269 $ 290 $ (21 ) $ 363 $ (94 ) 30-89 days delinquent 4 5
(1 ) 6 (2 ) 90-179 days delinquent — — — 1 (1 ) 180+ days
delinquent — — — — — Total delinquent loans 4
5 (1 ) 7 (3 ) Gross loans receivable(14) $ 273
$ 295 (22 ) $ 370 (97 )
Total Loans
Receivable
Current $ 3,765 $ 4,047 $ (282 ) $ 4,952 $ (1,187 ) 30-89 days
delinquent 107 120 (13 ) 113 (6 ) 90-179 days delinquent 43 53 (10
) 51 (8 )
180+ days delinquent (net of $61, $66
and $69 in charge-offs for Q316, Q216
and Q315, respectively)
152 162 (10 ) 166 (14 ) Total delinquent
loans(13) 302 335 (33 ) 330 (28 ) Gross loans
receivable(14) $ 4,067 $ 4,382 (315 ) $ 5,282
(1,215 )
Key Performance Metrics(5)
Loans
Qtr ended9/30/16
Qtr ended6/30/16
Qtr
ended9/30/16vs.6/30/16
Qtr ended9/30/15
Qtr
ended9/30/16vs.9/30/15
TDR performance
detail ($MM)(15)
One- to Four-Family
TDRs
Current $ 196 $ 202 $ (6 ) $ 224 $ (28 ) 30-89 days delinquent 18
18 — 18 — 90-179 days delinquent 4 6 (2 ) 8 (4 )
180+ days delinquent (net of $19,
$21 and $23 in charge-offs for Q316,
Q216 and Q315, respectively)
40 44 (4 ) 46 (6 ) Total delinquent TDRs 62
68 (6 ) 72 (10 ) TDRs $ 258 $ 270
(12 ) $ 296 (38 )
Home Equity
TDRs
Current $ 166 $ 168 $ (2 ) $ 171 $ (5 ) 30-89 days delinquent 8 10
(2 ) 10 (2 ) 90-179 days delinquent 5 6 (1 ) 7 (2 )
180+ days delinquent (net of $19, $19and
$15 in charge-offs for Q316, Q216and Q315, respectively)
23 24 (1 ) 20 3 Total delinquent TDRs 36
40 (4 ) 37 (1 ) TDRs $ 202 $ 208
(6 ) $ 208 (6 )
Total
TDRs
Current $ 362 $ 370 $ (8 ) $ 395 $ (33 ) 30-89 days delinquent 26
28 (2 ) 28 (2 ) 90-179 days delinquent 9 12 (3 ) 15 (6 )
180+ days delinquent (net of $38,
$40 and $38 in charge-offs for Q316,
Q216 and Q315, respectively)
63 68 (5 ) 66 (3 ) Total delinquent TDRs 98
108 (10 ) 109 (11 ) TDRs $ 460 $ 478
(18 ) $ 504 (44 )
Activity in
Allowance for Loan Losses
Three Months Ended September 30, 2016 One- to Four-
Family Home Equity Consumer and Other
Total (In millions) Allowance for loan losses, ending
6/30/16 $ 42 $ 245 $ 6 $ 293 Provision (benefit) for loan losses 2
(64 ) — (62 ) (Charge-offs) recoveries, net 3 2 (1 )
4 Allowance for loan losses, ending 9/30/16 $ 47 $
183 $ 5 $ 235
Three Months
Ended June 30, 2016
One- to Four-Family
Home Equity
Consumerand Other
Total (In millions) Allowance for loan losses, ending
3/31/16 $ 49 $ 267 $ 6 $ 322 Provision (benefit) for loan losses (8
) (28 ) 1 (35 ) (Charge-offs) recoveries, net 1 6 (1
) 6 Allowance for loan losses, ending 6/30/16 $ 42 $
245 $ 6 $ 293
Three Months
Ended September 30, 2015
One- to Four-Family
Home Equity
Consumerand Other
Total (In millions) Allowance for loan losses, ending
6/30/15 $ 49 $ 345 $ 8 $ 402 Provision (benefit) for loan losses
(10 ) (15 ) — (25 ) (Charge-offs) recoveries, net — —
(1 ) (1 ) Allowance for loan losses, ending 9/30/15 $ 39 $
330 $ 7 $ 376
Specific
Valuation Allowance Activity(16)
As of September
30, 2016
RecordedInvestment
inModificationsbeforecharge-offs
Charge-offs
RecordedInvestment
inModifications
SpecificValuationAllowance
NetInvestment
inModifications
SpecificValuationAllowance asa %
ofModifications
TotalExpectedLosses
(17)
(Dollars in millions) One- to four-family $ 200 $ (44 ) $ 156 $ (6
) $ 150 4% 25% Home equity 279 (110 ) 169 (51 ) 118
30% 57% Total $ 479 $ (154 ) $ 325 $ (57 ) $
268 17% 44%
As of June 30, 2016
RecordedInvestment
inModificationsbeforecharge-offs
Charge-offs
RecordedInvestment
inModifications
SpecificValuationAllowance
NetInvestment
inModifications
SpecificValuationAllowance asa %
ofModifications
TotalExpectedLosses
(17)
(Dollars in millions) One- to four-family $ 205 $ (46 ) $ 159 $ (7
) $ 152 4% 26% Home equity 285 (112 ) 173 (50 ) 123
29% 57% Total $ 490 $ (158 ) $ 332 $ (57 ) $
275 17% 44%
As of September 30, 2015
RecordedInvestment
inModificationsbeforecharge-offs
Charge-offs
RecordedInvestment
inModifications
SpecificValuationAllowance
NetInvestment
inModifications
SpecificValuationAllowance asa %
ofModifications
TotalExpectedLosses
(17)
(Dollars in millions) One- to four-family $ 220 $ (45 ) $ 175 $ (11
) $ 164 6% 26% Home equity 294 (125 ) 169 (56 ) 113
33% 62% Total $ 514 $ (170 ) $ 344 $ (67 ) $
277 20% 46%
Capital
Qtr ended9/30/16
Qtr ended6/30/16
Qtr
ended9/30/16vs.6/30/16
Qtr ended9/30/15
Qtr
ended9/30/16vs.9/30/15
E*TRADE
Financial
Tier 1 leverage ratio(18) 7.3% 7.5% (0.2)% 8.5% (1.2)% Common
Equity Tier 1 capital ratio(18) 34.0% 35.6% (1.6)% 39.5% (5.5)%
Tier 1 risk-based capital ratio(18) 35.1% 35.6% (0.5)% 39.5% (4.4)%
Total risk-based capital ratio(18) 40.7% 41.2% (0.5)% 44.3% (3.6)%
E*TRADE
Bank
Tier 1 leverage ratio(19) 8.5% 8.2% 0.3% 9.2% (0.7)% Common Equity
Tier 1 capital ratio(19) 36.7% 34.2% 2.5% 36.0% 0.7% Tier 1
risk-based capital ratio(19) 36.7% 34.2% 2.5% 36.0% 0.7% Total
risk-based capital ratio(19) 38.0% 35.5% 2.5% 37.3% 0.7%
Average Balance Sheet Data(a)
Three Months Ended September
30, 2016 June 30, 2016 Average Interest
Average Average Interest Average
Balance Inc./Exp. Yield/Cost Balance
Inc./Exp. Yield/Cost Cash and equivalents $ 1,989 $ 2
0.42% $ 1,589 $ 1 0.36%
Cash required to be segregated under
federal orother regulation
1,885 2 0.33% 1,599 1 0.34% Available-for-sale securities 13,301 66
1.99% 13,503 68 2.01% Held-to-maturity securities 15,937 109 2.73%
15,354 107 2.80% Margin receivables 6,479 60 3.68% 6,502 61 3.76%
Loans 4,202 46 4.44% 4,512 49 4.32% Broker-related receivables and
other 696 — 0.13% 363 1 0.29% Subtotal
interest-earning assets 44,489 285 2.56% 43,422 288 2.65% Other
interest revenue(b) — 24 — 18 Total
interest-earning assets 44,489 309 2.77% 43,422 306
2.83% Total non-interest earning assets 4,793 4,815
Total assets $ 49,282 $ 48,237 Deposits $
32,285 $ 1 0.01% $ 31,865 $ 1 0.01% Customer payables 7,592 2 0.06%
6,913 1 0.07% Broker-related payables and other 1,258 — 0.00% 1,345
— 0.00% Other borrowings 409 4 4.15% 410 4 4.43% Corporate debt 993
13 5.40% 993 14 5.40% Subtotal
interest-bearing liabilities 42,537 20 0.19% 41,526 20 0.19% Other
interest expense(c) — 2 — — Total
interest-bearing liabilities 42,537 22 0.20% 41,526 20
0.20% Total non-interest-bearing liabilities 719 969
Total liabilities 43,256 42,495 Total shareholders' equity
6,026 5,742 Total liabilities and shareholders'
equity $ 49,282 $ 48,237
Excess interest earning assets over
interestbearing liabilities/ net interest income/ net
interestmargin
$ 1,952 $ 287 2.59% $ 1,896 $ 286 2.64%
(a) Beginning in 2016, corporate interest
income and corporate interest expense are presented within net
interest income. In addition, the Company transitioned to net
interest margin as the key metric for measuring balance sheet
performance. Prior periods have been reclassified to conform with
the current period presentation. (b) Represents interest revenue on
securities loaned for the periods presented. (c) Represents
interest expense on securities borrowed for the periods presented.
Three Months
Ended(a) September 30, 2015 Average
Interest Average Balance
Inc./Exp. Yield/Cost Cash and equivalents $ 1,806 $ 1
0.18% Cash required to be segregated under federal or other
regulation 318 1 0.18% Available-for-sale securities 12,584 57
1.83% Held-to-maturity securities 11,879 85 2.84% Margin
receivables 7,984 70 3.51% Loans 5,453 58 4.25% Broker-related
receivables and other 461 — 0.69% Subtotal
interest-earning assets 40,485 272 2.68% Other interest revenue (b)
— 25 Total interest-earning assets 40,485 297
2.93% Total non-interest-earning assets 4,220 Total assets $
44,705 Deposits $ 25,659 $ 1 0.01% Customer payables
6,348 2 0.07% Broker-related payables and other 1,749 — 0.00% Other
borrowings 3,582 30 3.38% Corporate debt 1,023 13
5.23% Subtotal interest-bearing liabilities 38,361 46 0.48% Other
interest expense(c) — 2 Total interest-bearing
liabilities 38,361 48 0.49% Total non-interest-bearing
liabilities 573 Total liabilities 38,934 Total shareholders'
equity 5,771 Total liabilities and shareholders' equity $
44,705
Excess interest earning assets over
interest bearing liabilities/net interest income/ net interest
margin
$ 2,124 $ 249 2.47% (a)
Beginning in 2016, corporate interest income and corporate interest
expense are presented within net interest income. In addition, the
Company transitioned to net interest margin as the key metric for
measuring balance sheet performance. Prior periods have been
reclassified to conform with the current period presentation. (b)
Represents interest revenue on securities loaned for the periods
presented. (c) Represents interest expense on securities borrowed
for the periods presented.
Explanation of Non-GAAP Measures and Certain Metrics
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 and metrics
discussed below are appropriate for evaluating the operating and
liquidity performance of the Company.
Adjusted Net Revenue, Adjusted Net Income and Adjusted
EPS
Management believes that excluding the loss on termination of
legacy wholesale funding obligations and the impact of other early
extinguishment of debt from net revenue, net income and EPS
provides more useful information about the Company’s ongoing
operating performance because these items are not directly related
to our performance. See endnote (3) for a reconciliation of these
non-GAAP measures to the comparable GAAP measures.
Adjusted Operating Margin
Adjusted operating margin is calculated by dividing adjusted
income before income taxes by adjusted net revenue. Adjusted income
before income taxes excludes the provision (benefit) for loan
losses and the losses on early extinguishment of debt line item.
The related loss on termination of legacy wholesale funding
obligations recognized in the gains (losses) on securities and
other line item is excluded from both adjusted income before income
taxes and adjusted net revenue. Management believes that excluding
these items from operating margin provides a useful measure of the
Company's ongoing operating performance because management excludes
these items 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
broker-dealer 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.
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 metrics and other non-GAAP
measures may involve judgment by management and should be
considered in addition to, not as substitutes for, or superior to,
net income or other 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) The following table provides information about OptionsHouse
customer activity metrics subsequent to the acquisition, for the
period beginning September 12, 2016 and ended September 30,
2016:
Customer Activity
- OptionsHouse
Qtr ended 9/30/16 DARTs 27,699
Derivative DARTs % 65 % Total trades (MM) 0.4 Average
commission per trade $ 8.36 Customer margin balances held by
third party(2) ($B) $ 0.3 Gross new brokerage accounts 1,956
Net new brokerage accounts 578
Customer Assets
($B)
Security holdings $ 2.2 Customer assets held by third party 1.5
OptionsHouse customer assets $ 3.7 Net new brokerage
assets ($MM) $ 28 Brokerage related cash $ 1.5
Customer net (buy) / sell activity $ 0.1
(2) Customer margin balances include the following (dollars in
billions):
Q3 2016 Q2 2016
Q3 2015 Margin receivables held on balance sheet $
6.5 $ 6.8 $ 7.9 Customer margin balances held by third party 0.3
— — Total customer margin balances $ 6.8 $ 6.8
$ 7.9
(3) The following tables provide reconciliations of non-GAAP
adjusted net income, adjusted EPS, adjusted net revenue, and
adjusted operating margin percentage to the comparable GAAP
measures (dollars in millions except for per share amounts):
Q3 2016 Q2 2016
Q3 2015 Amount
DilutedEPS
Amount
DilutedEPS
Amount
DilutedEPS
Net income (loss) $ 139 $ 0.51 $ 133 $ 0.48 $ (153 ) $ (0.53
)
Add back impact of termination of legacy
wholesalefunding obligations:
Loss included in Gains (losses) on
securitiesand other
— — 370
Loss included in Losses on early
extinguishmentof debt
— — 43
Total loss on termination of legacy
wholesalefunding obligations
— — 413
Income tax related to loss on termination
oflegacy wholesale funding obligations
— — (162 ) Net of tax $ — $ 251
Deduct other early extinguishment of debt:
Gain included in Losses on early
extinguishmentof debt
— — (4 )
Income tax related to early extinguishment
ofdebt
— — 2 Net of tax $ — $ —
$ (2 ) Adjusted net income and adjusted EPS(a) $ 139
$ 0.51 $ 133 $ 0.48 $ 96 $ 0.32
Q3 2016
Q2 2016 Q3 2015 Net revenue $ 486 $ 474
$ 61
Add back impact of termination of legacy
wholesale fundingobligations:
Loss included in Gains (losses) on
securities and other
— — 370 Adjusted net revenue $ 486 $ 474
$ 431
Q3 2016
Q2 2016 Q3 2015 Amount
OperatingMargin %
Amount
OperatingMargin %
Amount
OperatingMargin %
Income (loss) before income tax
expense(benefit) and operating margin
$ 225 46% $ 214 45% $ (246 ) N.M. Add back impact of pre-tax items:
Loss included in Gains (losses)
onsecurities and other
— — 370
Provision (benefit) for loan losses
(62 ) (35 ) (25 )
Losses on early extinguishment
ofdebt(b)
— — 39
Adjusted income before income taxexpense
(benefit) / adjusted operatingmargin
$ 163 34% $ 179 38% $ 138 32%
(a) Adjusted net income per share for the
third quarter 2015 is calculated based on 295,148 diluted shares.
(b) Includes $43 million losses on early extinguishment of debt
during the three months ended September 30, 2015 related to the
termination of legacy wholesale funding obligations offset by a $4
million gain related to the repurchase of trust preferred
securities.
(4) Beginning in the first quarter of 2016, the Company updated
the presentation of its consolidated income statement line items
for all periods presented as follows:
- Reclassified corporate interest income
and corporate interest expense from other income (expense) to net
interest income;
- Reclassified losses on early
extinguishment of debt from other income (expense) to non-interest
expense; and
- Reclassified other income (expense)
from other income (expense) to gains (losses) on securities and
other.
Although the Company issued preferred stock during the third
quarter of 2016, it has not presented the net income available to
common shareholders line item as no related preferred stock
dividends were declared during the same period.
(5) Amounts and percentages may not recalculate due to
rounding.
(6) 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.
(7) The following tables provide 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 2016 Q2 2016
Q3 2015 Amount
PerShare
Amount
PerShare
Amount
PerShare
Common equity book value $ 5,922 $ 21.63 $ 5,785 $ 21.14 $ 5,812 $
20.01 Less: Goodwill and other intangibles, net (2,698 ) (1,956 )
(1,971 )
Add: Deferred tax liabilities related
togoodwill and other intangibles, net
560 478 452 Tangible
common equity book value $ 3,784 $ 13.82 $ 4,307
$ 15.74 $ 4,293 $ 14.78
(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 2016 Q2 2016
Q3 2015 Consolidated cash and equivalents $ 1,467 $
2,393 $ 1,453 Less: Bank cash (482 ) (1,306 ) (443 ) Less: U.S.
broker-dealers' cash(a) (646 ) (537 ) (549 ) Less: Other (33 ) (27
) (29 ) Corporate cash $ 306 $ 523 $ 432
(a) U.S. broker-dealers' cash includes E*TRADE
Securities and E*TRADE Clearing for the historical periods
presented. This line item also includes OptionsHouse for the third
quarter 2016. Effective October 1, 2016, E*TRADE Clearing was
merged into E*TRADE Securities.
(9) Net new and end of period brokerage accounts during the
third quarter of 2016 include 147,761 accounts acquired as part of
the OptionsHouse acquisition. Net new and end of period brokerage
accounts during the third quarter 2015 were impacted by the closure
of 16,818 accounts related to the shutdown of the Company's global
trading platform.
(10) The brokerage account attrition rate is calculated by
dividing attriting brokerage accounts, which are gross new
brokerage accounts less net new brokerage accounts, by total
brokerage accounts at the previous period end. This rate is
presented on an annualized basis.
(11) Customer assets held by third parties are held outside
E*TRADE Financial and include money market funds and sweep deposit
accounts at unaffiliated financial institutions. Customer assets
held by third parties are not reflected in the Company’s
consolidated balance sheet and are not immediately available for
liquidity purposes. The following table provides details of
customer assets held by third parties (dollars in billions):
Q3 2016 Q2 2016
Q3 2015 Sweep deposits at unaffiliated financial
institutions $ 12.3 $ 4.6 $ 3.3 Customer assets held by third party
1.5 — — Municipal funds and other 0.2 3.6 3.5 Money market fund —
0.3 7.1 Total customer assets held by third parties $
14.0 $ 8.5 $ 13.9
(12) Net new brokerage assets and net new customer assets during
the third quarter of 2016 include $3.7 billion of assets from the
OptionsHouse acquisition. Net new customer assets are total inflows
to all new and existing customer accounts less total outflows from
all closed and existing 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.
(13) Delinquent loans include charge-offs for loans that are in
bankruptcy or are 180 days past due which have been written down to
their expected recovery value. The following table shows the total
amount of charge-offs on loans that are still held by the Company
at the end of the periods presented (dollars in millions):
Q3 2016 Q2 2016
Q3 2015 One- to four-family $ 101 $ 108 $ 117 Home
equity 200 206 234 Total charge-offs $ 301 $
314 $ 351
(14) Includes unpaid principal balances and premiums
(discounts).
(15) The TDR loan performance detail is a subset of the
Company’s total loan performance. TDRs include loan modifications
performed under the Company’s modification programs and loans that
have been charged-off due to bankruptcy notification.
(16) Modifications are a subset of TDRs, and represent loan
modifications performed under the Company’s modification programs.
They do not include loans that have been charged-off due to the
Company receiving notification of bankruptcy if the loan has not
been modified previously by the Company. The following table shows
the reconciliation of total TDRs that had a modification and those
for which the Company received a notification of bankruptcy
(dollars in millions):
Q3 2016 Q2 2016
Q3 2015 Modified loans $ 325 $ 332 $ 344 Bankruptcy
loans 135 146 160 Total TDRs $ 460 $ 478
$ 504
(17) The total expected losses on modifications includes both
the previously recorded charge-offs and the specific valuation
allowance.
(18) E*TRADE Financial’s capital ratios are calculated as
follows and are preliminary for the current period (dollars in
millions):
Q3 2016 Q2 2016
Q3 2015 E*TRADE Financial shareholders' equity $
6,316 $ 5,785 $ 5,812 DEDUCT: Preferred stock (394 ) — —
E*TRADE Financial Common Equity Tier 1
capital before regulatoryadjustments
$ 5,922 $ 5,785 $ 5,812 ADD:
(Gains) losses in other comprehensive
income on available-for-sale debtsecurities, net of tax
(37 ) (43 ) 14 DEDUCT: Goodwill and other intangible assets, net of
deferred tax liabilities (2,043 ) (1,422 ) (1,428 ) Disallowed
deferred tax assets (556 ) (857 ) (873 ) Other(a) — —
105 E*TRADE Financial Common Equity Tier 1 capital $ 3,286
$ 3,463 $ 3,630 ADD: Preferred stock 394 — —
DEDUCT: Disallowed deferred tax assets (284 ) — —
E*TRADE Financial Tier 1 capital $ 3,396 $ 3,463 $
3,630 ADD: Allowable allowance for loan losses 128 129 126
Non-qualifying capital instruments subject
to phase-out (trust preferredsecurities)(a)
414 414 314 E*TRADE Financial total capital $
3,938 $ 4,006 $ 4,070 E*TRADE Financial
average assets for leverage capital purposes $ 49,240 $ 48,255 $
44,732 DEDUCT: Goodwill and other intangible assets, net of
deferred tax liabilities (2,043 ) (1,422 ) (1,428 ) Disallowed
deferred tax assets (840 ) (857 ) (873 ) Other(a) — —
105 E*TRADE Financial adjusted average assets for leverage
capital purposes $ 46,357 $ 45,976 $ 42,536
E*TRADE Financial total risk-weighted assets(b) $ 9,678 $
9,731 $ 9,196
E*TRADE Financial Tier 1 leverage ratio
(Tier 1 capital / Adjusted average assets for
leverage capital purposes)
7.3 % 7.5 % 8.5 % E*TRADE Financial Common Equity Tier 1 capital /
Total risk-weighted assets 34.0 % 35.6 % 39.5 % E*TRADE Financial
Tier 1 capital / Total risk-weighted assets 35.1 % 35.6 % 39.5 %
E*TRADE Financial total capital / Total risk-weighted assets 40.7 %
41.2 % 44.3 % (a) As a result of applying the
transition provisions under Basel III in 2015, the Company included
25% of the TRUPs in the calculation of E*TRADE Financial’s Tier 1
capital and 75% of the TRUPs in the calculation of E*TRADE
Financial’s total capital. In accordance with the transition
provisions, the TRUPs were fully phased out of E*TRADE Financial's
Tier 1 capital in 2016. (b) 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.
(19) E*TRADE Bank’s capital ratios are calculated as follows and
are preliminary for the current period (dollars in millions):
Q3 2016 Q2 2016
Q3 2015 E*TRADE Bank shareholders' equity $ 3,278 $
3,207 $ 3,171 ADD:
(Gains) losses in other comprehensive
income on available-for-sale debtsecurities, net of tax
(36 ) (43 ) 14 DEDUCT: Goodwill and other intangible assets, net of
deferred tax liabilities (38 ) (38 ) (38 ) Disallowed deferred tax
assets (135 ) (186 ) (187 ) E*TRADE Bank Common Equity Tier 1
capital / Tier 1 capital $ 3,069 $ 2,940 $ 2,960
ADD: Allowable allowance for loan losses 107 112
108 E*TRADE Bank total capital $ 3,176 $ 3,052
$ 3,068 E*TRADE Bank average assets for
leverage capital purposes $ 36,301 $ 36,292 $ 32,466 DEDUCT:
Goodwill and other intangible assets, net of deferred tax
liabilities (38 ) (38 ) (38 ) Disallowed deferred tax assets (135 )
(186 ) (187 ) E*TRADE Bank adjusted average assets for leverage
capital purposes $ 36,128 $ 36,068 $ 32,241
E*TRADE Bank total risk-weighted assets(a) $ 8,368 $ 8,594 $
8,230
E*TRADE Bank Tier 1 leverage ratio (Tier 1
capital / Adjusted average assets for leverage
capital purposes)
8.5% 8.2% 9.2% E*TRADE Bank Common Equity Tier 1 capital / Total
risk-weighted assets 36.7% 34.2% 36.0% E*TRADE Bank Tier 1 capital
/ Total risk-weighted assets 36.7% 34.2% 36.0% E*TRADE Bank total
capital / Total risk-weighted assets 38.0% 35.5% 37.3%
(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.
View source
version on businesswire.com: http://www.businesswire.com/news/home/20161020006469/en/
E*TRADE Media
RelationsThayer Fox,
646-521-4418thayer.fox@etrade.comorE*TRADE
Investor RelationsBrett Goodman,
646-521-4406ir@etrade.com
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