E*TRADE Financial Corporation (NASDAQ: ETFC):
Fourth Quarter Results
- Net income of $127 million, or $0.46
per diluted share, which includes a net benefit of $7 million, or
$0.03 per diluted share, related to benefit to provision for loan
losses, partially offset by restructuring and acquisition-related
activities
- Total net revenue of $509 million
- Allowance for loan losses of $221
million, resulting in a benefit to provision for loan losses of $18
million
- Total non-interest expense of $322
million, including restructuring and acquisition-related activities
of $7 million
- Operating margin of 40%; adjusted
operating margin of 37%(1)
- Daily Average Revenue Trades (DARTs) of
188,000
- Customer margin balances(2) of $7.1
billion
- Net new brokerage accounts of 24,000;
annualized growth rate of 2.8 percent
- Net new brokerage assets of $3.2
billion; annualized growth rate of 4.7 percent; end of period total
customer assets of $311 billion
Full Year 2016 Results
- Net income of $552 million, or $1.98
per diluted share, which includes a net benefit of $93 million, or
$0.33 per diluted share, related to benefit to provision for loan
losses and benefit to income tax related to the release of state
valuation allowances(3), partially offset by executive severance
and restructuring and acquisition-related activities
- Total net revenue of $1.9 billion
- Benefit to provision for loan losses of
$149 million
- Total non-interest expense of $1.3
billion, including executive severance of $6 million and
restructuring and acquisition-related activities of $32 million
related to the OptionsHouse acquisition and other corporate
restructuring during the second half of 2016
- Operating margin of 43%; adjusted
operating margin of 35%(1)
- DARTs of 164,000
- Net new brokerage accounts of 249,000;
excluding the OptionsHouse acquisition, net new brokerage accounts
of 101,000 and growth rate of 3.2 percent
- Net new brokerage assets of $13.1
billion; excluding the OptionsHouse acquisition, net new brokerage
assets of $9.4 billion and growth rate of 3.8 percent
E*TRADE Financial Corporation (NASDAQ: ETFC) today announced
results for its fourth quarter ended December 31, 2016,
reporting net income of $127 million, or $0.46 per diluted share.
This compares to net income of $89 million, or $0.30 per diluted
share, in the fourth quarter of 2015. Total net revenue of $509
million increased from net revenue of $439 million in the fourth
quarter of 2015. Total non-interest expense in the quarter was $322
million compared to $305 million in the year-ago period.
“We ended the year as a more focused and energized company, and
I am exceptionally proud what our team has accomplished during the
past four months,” said Karl Roessner, Chief Executive Officer.
“The acquisition of OptionsHouse provided the catalyst to realign
the leadership team and refocus the entire Company on business
performance. After taking a hard look at our structure and list of
projects, we exited 2016 as a leaner, more agile organization,
poised to reclaim our position as the best home for active traders
and investors alike, with the number one options platform in the
industry. As for results, 2016 marks our strongest earnings in 10
years, demonstrating our commitment to managing expenses with
discipline, deploying multiple capital initiatives, and diminishing
risk associated with our legacy loan portfolio. With balance sheet
expansion already well under way, and the team aligned and marching
forward on our business growth objectives, I am confident in our
ability to continue to create long-term value for our shareholders
in the years to come.”
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 (877) 256-7753 while
international participants should dial +1 (303) 223-2689. 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, E*TRADE Financial, E*TRADE Bank, the Converging Arrows
logo and OptionsHouse are registered trademarks of E*TRADE
Financial Corporation or its subsidiaries in the United States and
in other countries.
Forward-Looking Statements
The statements contained in this news release that are forward
looking, including statements regarding the Company’s ability to
grow its balance sheet, execute on its growth plans, or create
long-term value for shareholders 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, 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, the ability to attract and retain
customers and develop new products and services, increased
competition, potential system disruptions and security breaches,
the ability to realize synergies or to implement integration plans
and other risks from mergers and acquisitions, increased
restrictions resulting from financial regulatory reform or changes
in the policies of our regulators, adverse developments in
litigation or regulatory matters, 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.
© 2017 E*TRADE Financial Corporation. All rights reserved.
Financial Statements E*TRADE FINANCIAL CORPORATION AND
SUBSIDIARIES Consolidated Statement of Income(4)
(In millions, except share data and per share amounts)
(Unaudited) Three Months
Ended Twelve Months Ended December 31,
September 30, December 31, December
31, 2016 2016 2015
2016 2015 Revenue: Interest income $ 310 $ 309
$ 292 $ 1,233 $ 1,215 Interest expense (22 ) (22 ) (22 ) (85 ) (194
) Net interest income 288 287 270 1,148
1,021 Commissions 122 107 99 442 424 Fees and service
charges 80 68 51 268 210 Gains (losses) on securities and other,
net 8 14 9 42 (324 ) Other revenue 11 10 10 41
39 Total non-interest income 221 199
169 793 349 Total net revenue 509 486
439 1,941 1,370 Provision (benefit) for
loan losses (18 ) (62 ) (23 ) (149 ) (40 ) Non-interest expense:
Compensation and benefits 127 123 112 501 466 Advertising and
market development 31 27 35 131 124 Clearing and servicing 30 26 23
105 95 Professional services 27 26 26 97 103 Occupancy and
equipment 27 24 24 98 88 Communications 22 22 28 87 90 Depreciation
and amortization 19 20 20 79 81 FDIC insurance premiums 7 6 5 25 41
Amortization of other intangibles 8 5 5 23 20 Restructuring and
acquisition-related activities 7 25 9 35 17 Losses on early
extinguishment of debt, net — — — — 112 Other non-interest expenses
17 19 18 71 82 Total
non-interest expense 322 323 305 1,252
1,319 Income before income tax expense (benefit) 205 225 157
838 91 Income tax expense (benefit) 78 86 68
286 (177 ) Net income $ 127 $ 139 $ 89
$ 552 $ 268 Basic earnings per share $ 0.46 $
0.51 $ 0.31 $ 1.99 $ 0.92 Diluted earnings per share $ 0.46 $ 0.51
$ 0.30 $ 1.98 $ 0.91 Shares used in computation of per share data:
Basic (in thousands) 274,585 274,362 292,713 277,789 290,762
Diluted (in thousands) 275,840 275,472 294,947 279,048 295,011
E*TRADE FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheet (In millions, except share
data) (Unaudited)
December 31, September 30, December 31,
2016 2016 2015 ASSETS Cash and
equivalents $ 1,950 $ 1,467 $ 2,233 Cash required to be segregated
under federal or other regulations 1,460 2,159 1,057
Available-for-sale securities 13,892 13,493 12,589 Held-to-maturity
securities 15,751 16,189 13,013 Margin receivables 6,731 6,552
7,398 Loans receivable, net 3,551 3,832 4,613 Receivables from
brokers, dealers and clearing organizations 1,056 1,118 520
Property and equipment, net 239 231 236 Goodwill 2,370 2,370 1,792
Other intangibles, net 320 328 174 Deferred tax assets, net 756 725
1,033 Other assets 923 735 769 Total assets $
48,999 $ 49,199 $ 45,427
LIABILITIES
AND SHAREHOLDERS' EQUITY Liabilities: Deposits $ 31,682
$ 31,697 $ 29,445 Customer payables 8,159 7,827 6,544 Payables to
brokers, dealers and clearing organizations 983 1,227 1,576 Other
borrowings 409 409 491 Corporate debt 994 994 997 Other liabilities
500 729 575 Total liabilities 42,727
42,883 39,628
Shareholders' equity:
Preferred stock, $0.01 par value; $1,000
liquidation preference; shares authorized:
1,000,000; shares issued and outstanding at
December 31, 2016: 400,000
394 394 —
Common stock, $0.01 par value; shares
authorized: 400,000,000; shares issued and
outstanding at December 31, 2016: 273,963,415
3 3 3 Additional paid-in-capital 6,921 6,916 7,356 Accumulated
deficit (909 ) (1,036 ) (1,461 ) Accumulated other comprehensive
income (loss) (137 ) 39 (99 ) Total shareholders' equity
6,272 6,316 5,799 Total liabilities and
shareholders' equity $ 48,999 $ 49,199 $ 45,427
Key Performance Metrics(5)
Corporate
Qtrended12/31/16
Qtr ended9/30/16
Qtr ended 12/31/16
vs. 9/30/16
Qtr ended
12/31/15
Qtr ended 12/31/16
vs. 12/31/15
Operating margin %(6) 40% 46% (6)% 36% 4% Adjusted operating
margin %(1) 37% 34% 3% 31% 6% Employees 3,601 3,655 (1)%
3,421 5% Consultants and other 134 130 3% 120 12%
Total headcount 3,735 3,785 (1)% 3,541 5% Common equity book
value per share(7) $ 21.46 $ 21.63 (1)% $ 19.90 8% Tangible common
equity book value per share(7) $ 13.71 $ 13.82 (1)% $ 14.71 (7)%
Cash and equivalents ($MM) $ 1,950 $ 1,467 33% $ 2,233 (13)%
Corporate cash ($MM)(8) $ 461 $ 306 51% $ 447 3% Net
interest margin (basis points) 260 259 —% 274 (0.1)%
Interest-earning assets, average ($MM) $ 44,260 $ 44,489 (1)% $
39,500 12%
Customer
Activity
Qtr ended
12/31/16
Qtr ended 9/30/16
Qtrended 12/31/16
vs. 9/30/16
Qtrended 12/31/15
Qtr ended 12/31/16
vs. 12/31/15
Trading days 62.5 64.0 N.M. 63.0 N.M. DARTs 187,620
151,905 24% 146,949 28% Derivative DARTs % 29% 26% 3% 25% 4%
Total trades (MM) 11.7 9.7 21% 9.3 26% Average commission per trade
$ 10.42 $ 10.97 (5)% $ 10.66 (2)%
Key Performance
Metrics(5)
Customer
Activity
Qtr ended 12/31/16
Qtr ended 9/30/16
Qtr
ended12/31/16vs.9/30/16
Qtr ended 12/31/15
Qtr
ended12/31/16vs.12/31/15
Gross new brokerage accounts 102,137 227,309 (55)% 79,397
29% Gross new stock plan accounts 64,397 62,144 4% 94,326 (32)%
Gross new banking accounts 843 1,061 (21)% 1,037 (19)% Closed
accounts(9) (149,687) (122,336) N.M. (119,268 ) N.M. Net new
accounts 17,690 168,178 N.M. 55,492 N.M. Net new brokerage
accounts(9) 24,028 161,885 N.M. 10,010 N.M. Net new stock plan
accounts 1,639 11,368 N.M. 49,683 N.M. Net new banking accounts
(7,977) (5,075) N.M. (4,201 ) N.M. Net new accounts 17,690 168,178
N.M. 55,492 N.M. End of period brokerage accounts(9)
3,463,003 3,438,975 1% 3,213,541 8% End of period stock plan
accounts 1,456,060 1,454,421 —% 1,408,153 3% End of period banking
accounts 316,673 324,650 (2)% 339,888 (7)% End of period
total accounts 5,235,736 5,218,046 —% 4,961,582 6%
Annualized net new brokerage account growth rate 2.8% 1.7% 1.1% 1.2
% 1.6% Annualized brokerage account attrition rate(9)(10) 9.1% 8.0%
N.M. 8.7 % N.M. Customer margin balances(2) ($B) $ 7.1 $ 6.8
4% $ 7.4 (4)%
Customer
Assets($B)
Security holdings $ 224.4 $ 222.1 1% $ 203.8 10% Sweep deposits
26.4 26.5 —% 24.0 10% Customer cash held by third parties(11) 16.8
14.0 20% 11.2 50% Customer payables (cash) 8.2 7.8 5% 6.5
26% Brokerage customer assets 275.8 270.4 2% 245.5 12%
Unexercised stock plan holdings (vested) 30.2 31.2 (3)% 36.9 (18)%
Savings, checking and other banking assets 5.3 5.2 2% 5.5
(4)% Total customer assets $ 311.3 $ 306.8 1% $ 287.9 8%
Net new brokerage assets(12) $ 3.2 $ 5.4 N.M. $ 2.8 N.M. Net
new banking assets(12) 0.1 — N.M. 0.1 N.M. Net new customer
assets(12) $ 3.3 $ 5.4 N.M. $ 2.9 N.M. Annualized net new
brokerage asset growth rate 4.7% 2.7% 2.0% 4.7 % —%
Brokerage related cash $ 51.4 $ 48.3 6% $ 41.7 23% Other cash and
deposits 5.3 5.2 2% 5.5 (4)% Total customer cash and
deposits $ 56.7 $ 53.5 6% $ 47.2 20% Managed products $ 3.9
$ 3.7 5% $ 3.2 22% Stock plan customer holdings (unvested) $ 73.2 $
73.4 —% $ 70.7 4% Customer net (buy) / sell activity $ 0.8 $
2.4 N.M. $ 0.3 N.M.
Key Performance
Metrics(5)
Loans
Qtr ended 12/31/16
Qtr ended 9/30/16
Qtr ended
12/31/16vs.9/30/16
Qtr ended 12/31/15
Qtr
ended12/31/16vs.12/31/15
Loans receivable
($MM)
Average loans receivable $ 3,892 $ 4,202 $ (310 ) $ 5,097 $ (1,205
) Ending loans receivable, net $ 3,551 $ 3,832 $ (281 ) $ 4,613 $
(1,062 ) Loan servicing expense $ 6 $ 7 $ (1 ) $ 7 $ (1 )
Loan performance
detail (all loans, including TDRs) ($MM)
One- to
Four-Family
Current $ 1,787 $ 1,927 $ (140 ) $ 2,296 $ (509 ) 30-89 days
delinquent 67 65 2 72 (5 ) 90-179 days delinquent 23 19 4 26 (3 )
180+ days delinquent (net of $28, $32
and $41 in charge-offs for Q416, Q316
and Q415, respectively)
86 97 (11 ) 111 (25 ) Total delinquent
loans(13) 176 181 (5 ) 209 (33 ) Gross loans
receivable(14) $ 1,963 $ 2,108 (145 ) $ 2,505
(542 )
Home
Equity
Current $ 1,442 $ 1,569 $ (127 ) $ 1,981 $ (539 ) 30-89 days
delinquent 43 38 5 52 (9 ) 90-179 days delinquent 18 24 (6 ) 31 (13
)
180+ days delinquent (net of $30,
$29 and $26 in charge-offs for Q416, Q316
and Q415, respectively)
53 55 (2 ) 53 — Total delinquent loans(13) 114
117 (3 ) 136 (22 ) Gross loans receivable(14)
$ 1,556 $ 1,686 (130 ) $ 2,117 (561 )
Consumer
Current $ 248 $ 269 $ (21 ) $ 337 $ (89 ) 30-89 days delinquent 4 4
— 6 (2 ) 90-179 days delinquent 1 — 1 1 — 180+ days delinquent —
— — — — Total delinquent loans 5 4
1 7 (2 ) Gross loans receivable(14) $ 253 $
273 (20 ) $ 344 (91 )
Total Loans
Receivable
Current $ 3,477 $ 3,765 $ (288 ) $ 4,614 $ (1,137 ) 30-89 days
delinquent 114 107 7 130 (16 ) 90-179 days delinquent 42 43 (1 ) 58
(16 )
180+ days delinquent (net of $58,
$61 and $67 in charge-offs for Q416, Q316
and Q415, respectively)
139 152 (13 ) 164 (25 ) Total delinquent
loans(13) 295 302 (7 ) 352 (57 ) Gross loans
receivable(14) $ 3,772 $ 4,067 (295 ) $ 4,966
(1,194 )
Key Performance Metrics(5)
Loans
Qtr ended 12/31/16
Qtr ended 9/30/16
Qtr
ended12/31/16vs.9/30/16
Qtr ended12/31/15
Qtr
ended12/31/16vs.12/31/15
TDR performance
detail ($MM)(15)
One- to Four-Family
TDRs
Current $ 187 $ 196 $ (9 ) $ 212 $ (25 ) 30-89 days delinquent 16
18 (2 ) 19 (3 ) 90-179 days delinquent 8 4 4 8 —
180+ days delinquent (net of $17,
$19 and $23 in charge-offs for Q416,
Q316 and Q415, respectively)
35 40 (5 ) 47 (12 ) Total delinquent TDRs 59
62 (3 ) 74 (15 ) TDRs $ 246 $ 258
(12 ) $ 286 (40 )
Home Equity
TDRs
Current $ 160 $ 166 $ (6 ) $ 162 $ (2 ) 30-89 days delinquent 10 8
2 11 (1 ) 90-179 days delinquent 4 5 (1 ) 8 (4 )
180+ days delinquent (net of $19,
$19 and $17 in charge-offs for Q416,
Q316 and Q415, respectively)
21 23 (2 ) 21 — Total delinquent TDRs 35
36 (1 ) 40 (5 ) TDRs $ 195 $ 202
(7 ) $ 202 (7 )
Total
TDRs
Current $ 347 $ 362 $ (15 ) $ 374 $ (27 ) 30-89 days delinquent 26
26 — 30 (4 ) 90-179 days delinquent 12 9 3 16 (4 )
180+ days delinquent (net of $36,
$38 and $40 in charge-offs for Q416,
Q316 and Q415, respectively)
56 63 (7 ) 68 (12 ) Total delinquent TDRs 94
98 (4 ) 114 (20 ) TDRs $ 441 $ 460
(19 ) $ 488 (47 )
Activity in
Allowance for Loan Losses
Three Months Ended December 31, 2016
One- to Four- Family
Home Equity Consumer Total (In millions)
Allowance for loan losses, ending 9/30/16 $ 47 $ 183 $ 5 $ 235
Provision (benefit) for loan losses (4 ) (14 ) — (18 )
(Charge-offs) recoveries, net 2 2 — 4
Allowance for loan losses, ending 12/31/16 $ 45 $ 171
$ 5 $ 221
Three Months Ended
September 30, 2016
One- to Four- Family
Home Equity Consumer 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 December 31, 2015
One- to Four- Family
Home Equity Consumer Total (In millions)
Allowance for loan losses, ending 9/30/15 $ 39 $ 330 $ 7 $ 376
Provision (benefit) for loan losses — (23 ) — (23 ) (Charge-offs)
recoveries, net 1 — (1 ) — Allowance for loan
losses, ending 12/31/15 $ 40 $ 307 $ 6 $ 353
Specific Valuation Allowance
Activity(16) As of
December 31, 2016
Recorded Investment
inModifications before charge-offs
Charge-offs
Recorded Investment in
Modifications
SpecificValuation
Allowance
Net Investment in
Modifications
Specific Valuation
Allowance as a % of Modifications
Total Expected Losses
(17)
(Dollars in millions) One- to four-family $ 198 $ (45 ) $ 153 $ (7
) $ 146 4% 26% Home equity 271 (108 ) 163 (51 ) 112
31% 59% Total $ 469 $ (153 ) $ 316 $ (58 ) $
258 18% 45%
As of September 30, 2016
Recorded Investment
inModifications before charge-offs
Charge-offs
Recorded Investment in
Modifications
SpecificValuation
Allowance
Net Investment in
Modifications
Specific Valuation
Allowance as a % of Modifications
Total Expected Losses
(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 December 31, 2015
Recorded Investment
inModifications before charge-offs
Charge-offs
Recorded Investment in
Modifications
SpecificValuation
Allowance
Net Investment in
Modifications
Specific Valuation
Allowance as a % of Modifications
Total Expected Losses
(17)
(Dollars in millions) One- to four-family $ 216 $ (46 ) $ 170 $ (9
) $ 161 5% 25% Home equity 284 (120 ) 164 (52 ) 112
32% 61% Total $ 500 $ (166 ) $ 334 $ (61 ) $
273 18% 45%
Capital
Qtr ended 12/31/16
Qtr ended 9/30/16
Qtr ended
12/31/16vs.9/30/16
Qtr ended 12/31/15
Qtr ended
12/31/16vs.12/31/15
E*TRADE
Financial
Tier 1 leverage ratio(18) 7.8% 7.3% 0.5% 9.0% (1.2)% Common Equity
Tier 1 capital ratio(18)
37.0%
34.0% 3.0% 39.3% (2.3)% Tier 1 risk-based capital ratio(18) 38.3%
35.1% 3.2% 39.3% (1.0)% Total risk-based capital ratio(18) 44.0%
40.7% 3.3% 43.9% 0.1%
E*TRADE
Bank
Tier 1 leverage ratio(19) 8.8% 8.5% 0.3% 9.7% (0.9)% Common Equity
Tier 1 capital ratio(19) 38.3% 36.7% 1.6% 36.5% 1.8% Tier 1
risk-based capital ratio(19) 38.3% 36.7% 1.6% 36.5% 1.8% Total
risk-based capital ratio(19) 39.5% 38.0% 1.5% 37.8% 1.7%
Average Balance Sheet Data(a)
Three Months Ended
December 31, 2016 September 30, 2016 Average
Interest Average Average Interest
Average Balance Inc./Exp. Yield/Cost
Balance Inc./Exp. Yield/Cost Cash and
equivalents $ 1,610 $ 2 0.47% $ 1,989 $ 2 0.42% Cash required to be
segregated under federal or other regulation 1,590 2 0.44% 1,885 2
0.33% Available-for-sale securities 13,612 68 2.01% 13,301 66 1.99%
Held-to-maturity securities 15,884 106 2.68% 15,937 109 2.73%
Margin receivables 6,711 64 3.76% 6,479 60 3.68% Loans 3,892 45
4.59% 4,202 46 4.44% Broker-related receivables and other 961
— 0.08% 696 — 0.13% Subtotal
interest-earning assets 44,260 287 2.59% 44,489 285 2.56% Other
interest revenue(b) — 23 — 24 Total
interest-earning assets 44,260 310 2.79% 44,489 309
2.77% Total non-interest earning assets 4,816 4,793
Total assets $ 49,076 $ 49,282 Deposits $
31,601 $ — 0.01% $ 32,285 $ 1 0.01% Customer payables 7,915 1 0.06%
7,592 2 0.06% Broker-related payables and other 1,093 — 0.00% 1,258
— 0.00% Other borrowings 411 5 4.30% 409 4 4.15% Corporate debt 994
14 5.47% 993 13 5.40% Subtotal
interest-bearing liabilities 42,014 20 0.19% 42,537 20 0.19% Other
interest expense(c) — 2 — 2 Total
interest-bearing liabilities 42,014 22 0.21% 42,537 22
0.20% Total non-interest-bearing liabilities 723 719
Total liabilities 42,737 43,256 Total shareholders' equity
6,339 6,026 Total liabilities and shareholders'
equity $ 49,076 $ 49,282
Excess interest earning assets over
interestbearing liabilities/ net interest income/ net
interestmargin
$ 2,246 $ 288 2.60% $ 1,952 $ 287 2.59%
(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)
December 31, 2015 Average Interest
Average Balance Inc./Exp.
Yield/Cost Cash and equivalents $ 1,834 $ 1 0.19% Cash
required to be segregated under federal or other regulation 692 —
0.17% Available-for-sale securities 11,660 56 1.92%
Held-to-maturity securities 12,283 87 2.86% Margin receivables
7,549 68 3.58% Loans 5,097 53 4.11% Broker-related receivables and
other 385 — 0.30% Subtotal interest-earning assets
39,500 265 2.68% Other interest revenue (b) — 27
Total interest-earning assets 39,500 292 2.96% Total
non-interest-earning assets 4,464 Total assets $ 43,964
Deposits $ 27,578 $ — 0.01% Customer payables 6,430 1
0.07% Broker-related payables and other 1,701 — 0.00% Other
borrowings 489 5 4.34% Corporate debt 997 13 5.38%
Subtotal interest-bearing liabilities 37,195 19 0.22% Other
interest expense(c) — 3 Total interest-bearing
liabilities 37,195 22 0.23% Total non-interest-bearing
liabilities 949 Total liabilities 38,144 Total shareholders'
equity 5,820 Total liabilities and shareholders' equity $
43,964
Excess interest earning assets over
interest bearing liabilities/net interest income/ net interest
margin
$ 2,305 $ 270 2.74% (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
Management believes that excluding the loss on termination of
legacy wholesale funding obligations provides more useful
information about the Company's ongoing operating performance
because this item is not directly related to our performance. See
endnote (1) for a reconciliation of this non-GAAP measure to the
comparable GAAP measure.
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 losses on early extinguishment of debt. The related loss
on termination of legacy wholesale funding obligations is excluded
from both adjusted net revenue and adjusted income before income
taxes. 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 (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
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 tables provide reconciliations of non-GAAP
adjusted income before income tax expense (benefit), adjusted
operating margin percentage and adjusted net revenue to the
comparable GAAP measures (dollars in millions):
Q4 2016 Q3 2016 Q4 2015
Amount
Operating Margin %
Amount
Operating Margin %
Amount
Operating Margin %
Income before income tax expense (benefit) and operating
margin $ 205 40% $ 225 46% $ 157 36% Provision (benefit) for loan
losses (18 ) (62 ) (23 ) Adjusted income
before income tax expense (benefit) / adjusted operating margin $
187 37% $ 163 34% $ 134 31%
Twelve Months Ended December 31(a),
2016 2015 Net revenue $ 1,941 $ 1,370 Add back
impact of termination of legacy wholesale funding obligations —
370 Adjusted net revenue $ 1,941 $ 1,740
(a) A reconciliation of adjusted net revenue to net
revenue is presented for the twelve months ended December 31, 2015
only as no other periods presented include adjustments to net
revenue for the purpose of reporting adjusted operating margin.
Twelve Months Ended Twelve Months Ended
December 31, 2016 December 31, 2015 Amount
Operating Margin %
Amount
Operating Margin %
Income before income tax expense (benefit) and operating
margin $ 838 43% $ 91 7% Add back impact of pre-tax items: Loss
included in Gains (losses) on securities and other, net — 370
Provision (benefit) for loan losses (149 ) (40 ) Loss included in
Losses on early extinguishment of debt, net — 112
Adjusted income before income tax expense (benefit) /
adjusted operating margin $ 689 35% $ 533 31%
(2) Customer margin balances include the following (dollars in
billions):
Q4 2016 Q3 2016 Q4 2015
Margin receivables held on balance sheet $ 6.7 $ 6.5 $ 7.4 Customer
margin balances held by third party(a) 0.4 0.3 —
Total customer margin balances $ 7.1 $ 6.8 $ 7.4
(a) Represents OptionsHouse's customer margin
receivables held by third party.
(3) Effective January 1, 2016, the Company elected to treat
E*TRADE Securities and E*TRADE Clearing as single member limited
liability companies which resulted in a net tax benefit of $25
million for the full year 2016.
(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, net.
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 2016.
(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):
Q4 2016 Q3 2016 Q4 2015
Amount
PerShare
Amount
PerShare
Amount
PerShare
Common equity book value $ 5,878 $ 21.46 $ 5,922 $ 21.63 $ 5,799 $
19.90 Less: Goodwill and other intangibles, net (2,690 ) (2,698 )
(1,966 )
Add: Deferred tax liabilities related
togoodwill and other intangibles, net
569 560 454 Tangible
common equity book value $ 3,757 $ 13.71 $ 3,784
$ 13.82 $ 4,287 $ 14.71
(8) The following table provides a reconciliation of GAAP
consolidated cash and equivalents to non-GAAP corporate cash at
period end (dollars in millions):
Q4 2016 Q3 2016 Q4 2015
Consolidated cash and equivalents $ 1,950 $ 1,467 $ 2,233 Less:
Bank cash (840 ) (482 ) (1,264 ) Less: U.S. broker-dealers' cash
(614 ) (646 ) (497 ) Less: Other (35 ) (33 ) (25 ) Corporate cash $
461 $ 306 $ 447
(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 fourth quarter 2015 were impacted by the
closure of 3,007 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 by total brokerage accounts
at the previous period end, and is presented on an annualized
basis. Attriting brokerage accounts are derived by subtracting net
new brokerage accounts from gross new brokerage accounts.
(11) Customer cash held by third parties are held outside
E*TRADE Financial and include 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 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 cash held by third
parties (dollars in billions):
Q4 2016 Q3 2016 Q4 2015
Sweep deposits at unaffiliated financial institutions $ 14.9 $ 12.3
$ 5.8 Customer cash held by third party clearing firm(a) 1.6 1.5 —
Municipal funds and other 0.3 0.2 3.6 Money market fund — —
1.8 Total customer cash held by third parties $ 16.8
$ 14.0 $ 11.2 (a) Represents
OptionsHouse's customer cash held by third party.
(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):
Q4 2016 Q3 2016 Q4 2015
One- to four-family $ 96 $ 101 $ 113 Home equity 193 200
224 Total charge-offs $ 289 $ 301 $ 337
(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):
Q4 2016 Q3 2016 Q4 2015
Modified loans $ 316 $ 325 $ 334 Bankruptcy loans 125 135
154 Total TDRs $ 441 $ 460 $ 488
(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):
Q4 2016 Q3 2016 Q4 2015
E*TRADE Financial shareholders' equity $ 6,272 $ 6,316 $ 5,799
DEDUCT: Preferred stock (394 ) (394 ) — E*TRADE Financial
Common Equity Tier 1 capital before regulatory adjustments $ 5,878
$ 5,922 $ 5,799 ADD:
(Gains) losses in other comprehensive
income on available-for-sale debtsecurities, net of tax
139 (37 ) 102 DEDUCT: Goodwill and other intangible assets, net of
deferred tax liabilities (2,029 ) (2,043 ) (1,419 ) Disallowed
deferred tax assets (505 ) (556 ) (839 ) Other(a) — —
104 E*TRADE Financial Common Equity Tier 1 capital $ 3,483
$ 3,286 $ 3,747 ADD: Preferred stock 394 394 —
DEDUCT: Disallowed deferred tax assets (267 ) (284 ) —
E*TRADE Financial Tier 1 capital $ 3,610 $ 3,396 $
3,747 ADD: Allowable allowance for loan losses 124 128 129
Non-qualifying capital instruments subject
to phase-out (trust preferredsecurities)(a)
414 414 310 E*TRADE Financial total capital $
4,148 $ 3,938 $ 4,186 E*TRADE Financial
average assets for leverage capital purposes $ 49,113 $ 49,240 $
44,016 DEDUCT:
Goodwill and other intangible assets, net
of deferred tax liabilities
(2,029 ) (2,043 ) (1,419 ) Disallowed deferred tax assets (772 )
(840 ) (839 ) Other(a) — — 104 E*TRADE
Financial adjusted average assets for leverage capital purposes $
46,312 $ 46,357 $ 41,862 E*TRADE
Financial total risk-weighted assets(b) $ 9,422 $ 9,678 $ 9,536
E*TRADE Financial Tier 1 leverage ratio
(Tier 1 capital / Adjusted average assets for
leverage capital purposes)
7.8 % 7.3 % 9.0 % E*TRADE Financial Common Equity Tier 1 capital /
Total risk-weighted assets 37.0 % 34.0 % 39.3 % E*TRADE Financial
Tier 1 capital / Total risk-weighted assets 38.3 % 35.1 % 39.3 %
E*TRADE Financial total capital / Total risk-weighted assets 44.0 %
40.7 % 43.9 % (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):
Q4 2016 Q3 2016 Q4 2015
E*TRADE Bank shareholder's equity $ 3,153 $ 3,278 $ 3,181 ADD:
(Gains) losses in other comprehensive
income on available-for-sale debtsecurities, net of tax
139 (37 ) 102 DEDUCT: Goodwill and other intangible assets, net of
deferred tax liabilities (38 ) (38 ) (38 ) Disallowed deferred tax
assets (122 ) (134 ) (169 ) E*TRADE Bank Common Equity Tier 1
capital / Tier 1 capital $ 3,132 $ 3,069 $ 3,076
ADD: Allowable allowance for loan losses 105 107
110 E*TRADE Bank total capital $ 3,237 $ 3,176
$ 3,186 E*TRADE Bank average assets for
leverage capital purposes $ 35,885 $ 36,300 $ 31,785 DEDUCT:
Goodwill and other intangible assets, net of deferred tax
liabilities (38 ) (38 ) (38 ) Disallowed deferred tax assets (122 )
(134 ) (169 ) E*TRADE Bank adjusted average assets for leverage
capital purposes $ 35,725 $ 36,128 $ 31,578
E*TRADE Bank total risk-weighted assets(a) $ 8,187 $ 8,368 $
8,424
E*TRADE Bank Tier 1 leverage ratio (Tier 1
capital / Adjusted average assetsfor leverage capital purposes)
8.8 % 8.5 % 9.7 % E*TRADE Bank Common Equity Tier 1 capital / Total
risk-weighted assets 38.3 % 36.7 % 36.5 % E*TRADE Bank Tier 1
capital / Total risk-weighted assets 38.3 % 36.7 % 36.5 % E*TRADE
Bank total capital / Total risk-weighted assets 39.5 % 38.0 % 37.8
% (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.
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