NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1—ORGANIZATION, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
E*TRADE Financial Corporation is a financial services company that provides brokerage and related products and services primarily to individual retail investors under the brand E*TRADE Financial. The Company also provides investor-focused banking products, primarily sweep deposits, to retail investors.
Basis of Presentation
The condensed consolidated financial statements, also referred to herein as the consolidated financial statements, include the accounts of the Company and its majority-owned subsidiaries as determined under the voting interest model. Entities in which the Company has the ability to exercise significant influence but in which the Company does not possess control are generally accounted for by the equity method. Entities in which the Company does not have the ability to exercise significant influence are generally carried at cost. Investments in marketable equity securities where the Company does not have the ability to exercise significant influence over the entities are accounted for as available-for-sale equity securities. The Company also evaluates its initial and continuing involvement with certain entities to determine if the Company is required to consolidate the entities under the variable interest entity (VIE) model. This evaluation is based on a qualitative assessment of whether the Company is the primary beneficiary of the VIE, which requires the Company to possess both: 1) the power to direct the activities that most significantly impact the economic performance of the VIE; and 2) the obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to the VIE. The consolidated financial statements do not include any consolidated VIEs for all periods presented.
The Company's consolidated financial statements are prepared in accordance with GAAP. Intercompany accounts and transactions are eliminated in consolidation. These financial statements reflect all adjustments, which are normal and recurring in nature, necessary to present fairly the financial position, results of operations and cash flows for the periods presented. These consolidated financial statements should be read in conjunction with the Annual Report on Form 10-K for the year ended
December 31, 2016
. While certain disclosures included in annual financial statements prepared
in accordance with GAAP have been omitted in this quarterly report, the Company believes that the information and disclosures presented herein are adequate and that such disclosures are not misleading.
Use of Estimates
Preparing the Company's consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and related notes for the periods presented. Actual results could differ from management’s estimates. Certain significant accounting policies are critical because they are based on estimates and assumptions that require complex and subjective judgments by management. Changes in these estimates or assumptions could materially impact the Company’s financial condition and results of operations. Material estimates in which management believes changes could reasonably occur include: allowance for loan losses; valuation and impairment of goodwill and acquired intangible assets; and estimates of effective tax rates, deferred taxes and valuation allowance.
E*TRADE
|
Q1 2017 10-Q
41
Adoption of New Accounting Standards
Accounting for Employee Share-Based Payments
In March 2016, the FASB amended the accounting guidance on employee share-based payments. Relevant changes in the amended guidance include the requirement to recognize all excess tax benefits and deficiencies upon exercise or vesting as income tax expense or benefit in the consolidated statement of income; to treat excess tax benefits and deficiencies as discrete items in the reporting period they occur; to not delay recognition of excess tax benefits until the tax benefit is realized through a reduction in current taxes payable; and to make an accounting policy election to either estimate forfeitures or account for them as they occur. The Company adopted the amended accounting guidance as of January 1, 2017 and recognized a
$3 million
deferred tax asset and cumulative-effect adjustment to equity as of the beginning of the period. In addition, for the three months ended March 31, 2016 the Company reclassified
$12 million
related to shares withheld to pay taxes from cash flows from operating activities to cash flows from financing activities. Forfeitures will continue to be estimated consistent with the Company's prior accounting policies. The impact to the Company's financial condition, results of operations and cash flows will vary based on, among other factors, the market price of the Company's common stock. During the three months ended March 31, 2017 the Company recognized a
$5 million
income tax benefit in accordance with the new guidance.
New Accounting Standards Not Yet Adopted
Revenue Recognition on Contracts with Customers
In May 2014, the FASB amended the guidance on revenue recognition on contracts with customers. The new standard outlines a single comprehensive model for entities to apply in accounting for revenue arising from contracts with customers. The Company's accounting for net interest income is not expected to be impacted by the new standard. The FASB issued supplemental amendments to the new standard to clarify certain accounting guidance and provide narrow scope improvements and practical expedients during 2016. The amended guidance will be effective for annual and interim periods beginning on January 1, 2018 and may be applied on either a full retrospective or modified retrospective basis. The Company is currently evaluating the impact of the new accounting guidance and expects to complete this evaluation in 2017. The adoption of the amended revenue recognition guidance is not expected to have a material impact on the Company’s financial condition, results of operations or cash flows as the satisfaction of performance obligations under the new guidance is expected to be materially consistent with the Company's existing revenue recognition policies.
The Company is also evaluating the impact of the amended accounting guidance on the accounting for incremental costs of obtaining contracts and on additional disclosure requirements.
Classification and Measurement of Financial Instruments
In January 2016, the FASB amended the accounting and disclosure guidance on the classification and measurement of financial instruments. Relevant changes in the amended guidance include the requirement that equity investments, excluding those accounted for under the equity method of accounting or those resulting in consolidation of the investee, be measured at fair value in the consolidated balance sheet with changes in fair value recognized in net income. For disclosure purposes, the Company will no longer be required to disclose the methods and significant assumptions used to estimate fair value for financial instruments measured at amortized cost in the consolidated balance sheet. The amended guidance will be effective for interim and annual periods beginning on January 1, 2018 and is required to be applied on a modified retrospective basis by means of a cumulative-effect adjustment to the consolidated balance sheet on that date. The Company is currently evaluating the impact of the new accounting guidance; however, the adoption is not expected to have a material impact on the Company’s financial condition, results of operations or cash flows as debt securities represent the majority of the Company's investment portfolio.
E*TRADE
|
Q1 2017 10-Q
42
Accounting for Leases
In February 2016, the FASB amended the guidance on accounting for leases. The new standard requires lessees to recognize assets and liabilities on the balance sheet for the rights and obligations created by all qualifying leases with terms of more than twelve months. The recognition, measurement and presentation of expenses and cash flows arising from a lease by a lessee remains substantially unchanged and depends on classification as a finance or operating lease. The new standard also requires quantitative and qualitative disclosures that provide information about the amounts related to leasing arrangements recorded in the consolidated financial statements. The new guidance will be effective for interim and annual periods beginning on January 1, 2019 and is required to be applied on a modified retrospective basis to the earliest period presented, which includes practical expedient options in certain circumstances.
The Company is currently evaluating the impact of the new accounting guidance on the Company's financial condition, results of operations and cash flows; however, the Company's business model of providing services through digital platforms and via phone and online channels in addition to
30
regional branches may limit the impact of the amended lease accounting guidance to the Company's financial condition.
Accounting for Credit Losses
In June 2016, the FASB amended the accounting guidance on accounting for credit losses. The amended guidance requires measurement of all expected credit losses for financial instruments and other commitments to extend credit held at the reporting date. For financial assets measured at amortized cost, factors such as historical experience, current conditions, and reasonable and supportable forecasts will be used to estimate expected credit losses. The amended guidance will also change the manner in which credit losses are recognized on debt securities classified as available-for-sale. The new guidance will be effective for interim and annual periods beginning January 1, 2020. Early adoption is permitted. The Company is currently evaluating the impact of the new accounting guidance on the Company's financial condition, results of operations and cash flows; however, given the recent performance of the Company's run-off legacy loan portfolio and the credit profile of the current investment securities portfolio, the Company does not expect the amended accounting guidance to have as significant of an impact as it could have if the Company were originating or purchasing loans.
Classification of Certain Cash Receipts and Cash Payments
In August 2016, the FASB amended the guidance on the presentation and classification of certain cash receipts and cash payments in the consolidated statement of cash flows to eliminate current diversity in practice. The new guidance will be effective for interim and annual periods beginning January 1, 2018 and must be applied using a retrospective transition method to each period presented. Early adoption is permitted. The Company does not expect the amended accounting guidance to have a significant impact on its consolidated statement of cash flows.
Classification of Restricted Cash
In November 2016, the FASB amended the guidance on the presentation and classification of changes in restricted cash in the consolidated statement of cash flows to eliminate current diversity in practice. The amended guidance requires the consolidated statement of cash flows to explain the change during the period in the total cash, cash equivalents, and amounts generally described as restricted cash and restricted cash equivalents. The guidance will be effective for interim and annual periods beginning January 1, 2018 and must be applied using a retrospective transition method to each period presented. Early adoption is permitted. The Company is currently evaluating the impact of the new presentation and classification guidance.
Clarifying the Definition of a Business
In January 2017, the FASB issued guidance to clarify the definition of a business in order to assist companies in the evaluation of whether transactions should be accounted for as acquisitions or disposals of assets or businesses. The amended guidance also removes the existing evaluation of a market participant's ability to replace missing elements and narrows the definition of output to achieve consistency with other topics. The guidance will be effective for interim and annual periods beginning January 1, 2018 and must be applied prospectively. Early adoption is permitted.
E*TRADE
|
Q1 2017 10-Q
43
Simplifying the Test for Goodwill Impairment
In January 2017, the FASB issued guidance to simplify the test for goodwill impairment by eliminating Step 2 from the goodwill impairment test. The amended guidance requires the Company to perform its annual goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized at the amount by which the carrying amount exceeds the fair value of the reporting unit; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Income tax effects resulting from any tax deductible goodwill should be considered when measuring the goodwill impairment loss, if applicable. The Company will still have the option to perform a qualitative assessment to conclude whether it is more likely than not that the carrying amount of the Company exceeds its fair value. The guidance will be effective for interim and annual periods beginning January 1, 2020 and must be applied prospectively. Early adoption is permitted.
Premium Amortization on Purchased Callable Debt Securities
In March 2017, the FASB issued guidance to amend the amortization period for certain purchased callable debt securities held at a premium. The amended guidance shortens the amortization period for certain callable debt securities held at a premium by requiring the premium to be amortized to the earliest call date. The guidance does not amend the accounting for securities held at a discount. The guidance will be effective for interim and annual periods beginning January 1, 2019 and must be applied on a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption. Early adoption is permitted. Based on the current composition of the Company's securities portfolio, the new guidance is not expected to have a significant impact on the Company's financial condition or results of operations.
E*TRADE
|
Q1 2017 10-Q
44
NOTE 2—INTEREST INCOME AND INTEREST EXPENSE
The following table shows the components of interest income and interest expense (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
2017
|
|
2016
|
|
Interest income:
|
|
|
|
|
Cash and equivalents
|
$
|
2
|
|
|
$
|
2
|
|
|
Cash required to be segregated under federal or other regulation
|
3
|
|
|
1
|
|
|
Available-for-sale securities
|
85
|
|
|
64
|
|
|
Held-to-maturity securities
|
120
|
|
|
103
|
|
|
Margin receivables
|
66
|
|
|
64
|
|
|
Loans
|
43
|
|
|
51
|
|
|
Subtotal interest income
|
319
|
|
|
285
|
|
|
Other interest revenue
(1)
|
22
|
|
|
23
|
|
|
Total interest income
|
341
|
|
|
308
|
|
|
Interest expense:
|
|
|
|
|
Deposits
|
(1
|
)
|
|
(1
|
)
|
|
Customer payables
|
(1
|
)
|
|
(1
|
)
|
|
Other borrowings
|
(5
|
)
|
|
(5
|
)
|
|
Corporate debt
|
(14
|
)
|
|
(13
|
)
|
|
Subtotal interest expense
|
(21
|
)
|
|
(20
|
)
|
|
Other interest expense
(2)
|
(1
|
)
|
|
(1
|
)
|
|
Total interest expense
|
(22
|
)
|
|
(21
|
)
|
|
Net interest income
|
$
|
319
|
|
|
$
|
287
|
|
|
|
|
|
(1)
|
Represents interest income on securities loaned.
|
|
|
|
|
(2)
|
Represents interest expense on securities borrowed.
|
NOTE 3—FAIR VALUE DISCLOSURES
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In determining fair value, the Company may use various valuation approaches, including market, income and/or cost approaches. The fair value hierarchy requires the Company to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Fair value is a market-based measure considered from the perspective of a market participant. Accordingly, even when market assumptions are not readily available, the Company’s own assumptions reflect those that market participants would use in pricing the asset or liability at the measurement date. The fair value measurement accounting guidance describes the following three levels used to classify fair value measurements:
|
|
|
|
•
|
Level 1—unadjusted quoted prices in active markets for identical assets or liabilities that are accessible by the Company
|
|
|
|
|
•
|
Level 2—quoted prices for similar assets and liabilities in an active market, quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly
|
|
|
|
|
•
|
Level 3—unobservable inputs that are significant to the fair value of the assets or liabilities
|
The availability of observable inputs can vary and in certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to a fair value measurement requires judgment and consideration of factors specific to the asset or liability.
E*TRADE
|
Q1 2017 10-Q
45
Recurring Fair Value Measurement Techniques
Mortgage-backed Securities
The Company’s mortgage-backed securities portfolio is comprised of agency mortgage-backed securities which are gu
aranteed by U.S. government sponsored enterprises and federal agencies.
The fair value of agency mortgage-backed securities was determined using a market approach with quoted market prices, recent transactions and spread data for identical or similar instruments. Agency mortgage-backed securities were categorized in Level 2 of the fair value hierarchy.
Other Debt Securities
The Company's fair value level classification of U.S. Treasuries is based on the original maturity dates of the securities and whether the securities are the most recent issuances of a given maturity. U.S. Treasuries with original maturities less than one year are classified as Level 1. U.S. Treasuries with original maturities longer than one year are classified as Level 1 if they represent the most recent issuance of a given maturity; otherwise, these securities are classified as Level 2.
The fair value measurements of agency debentures and agency debt securities were determined using market and income approaches along with the Company’s own trading activities for identical or similar instruments and were categorized in Level 2 of the fair value hierarchy.
All of the Company’s municipal bonds were rated investment grade at
March 31, 2017
. These securities were valued using a market approach with pricing service valuations corroborated by recent market transactions for identical or similar bonds. Municipal bonds and corporate bonds were categorized in Level 2 of the fair value hierarchy.
Publicly Traded Equity Securities
The fair value measurements of the Company's publicly traded equity securities were classified as Level 1 of the fair value hierarchy as they were based on quoted prices in active markets.
Derivative Instruments
Interest rate swap and option contracts were valued with an income approach using pricing models that are commonly used by the financial services industry. The market observable inputs used in the pricing models include the swap curve, the volatility surface, and prime or overnight indexed swap basis from a financial data provider. The Company does not consider these models to involve significant judgment on the part of management, and the Company corroborated the fair value measurements with counterparty valuations. The Company’s derivative instruments were categorized in Level 2 of the fair value hierarchy. The consideration of credit risk, the Company’s or the counterparty’s, did not result in an adjustment to the valuation of its derivative instruments in the periods presented.
Nonrecurring Fair Value Measurement Techniques
Certain other assets are recorded at fair value on a nonrecurring basis: 1) one- to four-family and home equity loans in which the amount of the loan balance in excess of the estimated current value of the underlying property less estimated selling costs has been charged-off; and 2) real estate owned that is carried at the lower of the property’s carrying value or fair value less estimated selling costs.
The Company evaluates and reviews assets that have been subject to fair value measurement requirements on a quarterly basis in accordance with policies and procedures that were designed to be in compliance with guidance from the Company’s regulators. These policies and procedures govern the frequency of the review, the use of acceptable valuation methods, and the consideration of estimated selling costs.
E*TRADE
|
Q1 2017 10-Q
46
Loans Receivable
Loans that have been delinquent for 180 days or that are in bankruptcy and certain TDR loan modifications are charged-off based on the estimated current value of the underlying property less estimated selling costs. Property valuations for these one- to four-family and home equity loans are based on the most recent "as is" property valuation data available, which may include appraisals, broker price opinions (BPOs), automated valuation models or updated values using home price indices. Subsequent to the recording of an initial fair value measurement, these loans continue to be measured at fair value on a nonrecurring basis, utilizing the estimated value of the underlying property less estimated selling costs. These property valuations are updated on a monthly, quarterly or semi-annual basis depending on the type of valuation initially used. If the value of the underlying property has declined, an additional charge-off is recorded. If the value of the underlying property has increased, previously charged-off amounts are not reversed. If the valuation data obtained is significantly different from the valuation previously received, the Company reviews additional property valuation data to corroborate or update the valuation.
Real Estate Owned
Property valuations for real estate owned are based on the lowest value of the most recent property valuation data available, which may include appraisals, listing prices or approved offer prices.
Nonrecurring fair value measurements on one- to four-family and home equity loans and real estate owned were classified as Level 3 of the fair value hierarchy as the valuations included unobservable inputs that were significant to the fair value. The following table presents additional information about significant unobservable inputs used in the valuation of assets measured at fair value on a nonrecurring basis that were categorized in Level 3 of the fair value hierarchy at
March 31, 2017 and December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unobservable Inputs
|
|
Average
|
|
Range
|
|
March 31, 2017
|
|
|
|
|
|
|
Loans receivable:
|
|
|
|
|
|
|
One- to four-family
|
Appraised value
|
|
$
|
397,700
|
|
|
$50,000-$1,100,000
|
|
Home equity
|
Appraised value
|
|
$
|
312,300
|
|
|
$15,000-$2,400,000
|
|
Real estate owned
|
Appraised value
|
|
$
|
290,600
|
|
|
$29,000-$1,450,000
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
|
|
|
Loans receivable:
|
|
|
|
|
|
|
One- to four-family
|
Appraised value
|
|
$
|
408,100
|
|
|
$50,000-$1,490,000
|
|
Home equity
|
Appraised value
|
|
$
|
312,000
|
|
|
$6,000-$2,500,000
|
|
Real estate owned
|
Appraised value
|
|
$
|
342,300
|
|
|
$21,500-$1,800,000
|
E*TRADE
|
Q1 2017 10-Q
47
Recurring and Nonrecurring Fair Value Measurements
Assets and liabilities measured at fair value at
March 31, 2017 and December 31, 2016
are summarized in the following tables (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
Fair Value
|
|
March 31, 2017:
|
|
|
|
|
|
|
|
|
Recurring fair value measurements:
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
Available-for-sale securities:
|
|
|
|
|
|
|
|
|
Debt securities:
|
|
|
|
|
|
|
|
|
Agency mortgage-backed securities
|
$
|
—
|
|
|
$
|
16,496
|
|
|
$
|
—
|
|
|
$
|
16,496
|
|
|
Agency debentures
|
—
|
|
|
929
|
|
|
—
|
|
|
929
|
|
|
U.S. Treasuries
|
—
|
|
|
281
|
|
|
—
|
|
|
281
|
|
|
Agency debt securities
|
—
|
|
|
24
|
|
|
—
|
|
|
24
|
|
|
Municipal bonds
|
—
|
|
|
32
|
|
|
—
|
|
|
32
|
|
|
Total debt securities
|
—
|
|
|
17,762
|
|
|
—
|
|
|
17,762
|
|
|
Publicly traded equity securities
|
7
|
|
|
—
|
|
|
—
|
|
|
7
|
|
|
Total available-for-sale securities
|
7
|
|
|
17,762
|
|
|
—
|
|
|
17,769
|
|
|
Receivables from brokers, dealers and clearing organizations:
|
|
|
|
|
|
|
|
|
U.S. Treasuries
|
122
|
|
|
—
|
|
|
—
|
|
|
122
|
|
|
Other assets:
|
|
|
|
|
|
|
|
|
Derivative assets
(1)
|
—
|
|
|
128
|
|
|
—
|
|
|
128
|
|
|
Total assets measured at fair value on a recurring basis
(2)
|
$
|
129
|
|
|
$
|
17,890
|
|
|
$
|
—
|
|
|
$
|
18,019
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Other liabilities:
|
|
|
|
|
|
|
|
|
Derivative liabilities
(1)
|
$
|
—
|
|
|
$
|
12
|
|
|
$
|
—
|
|
|
$
|
12
|
|
|
Total liabilities measured at fair value on a recurring basis
(2)
|
$
|
—
|
|
|
$
|
12
|
|
|
$
|
—
|
|
|
$
|
12
|
|
|
Nonrecurring fair value measurements:
|
|
|
|
|
|
|
|
|
Loans receivable, net:
|
|
|
|
|
|
|
|
|
One- to four-family
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
9
|
|
|
$
|
9
|
|
|
Home equity
|
—
|
|
|
—
|
|
|
22
|
|
|
22
|
|
|
Total loans receivable
|
—
|
|
|
—
|
|
|
31
|
|
|
31
|
|
|
Other assets:
|
|
|
|
|
|
|
|
|
Real estate owned
|
—
|
|
|
—
|
|
|
17
|
|
|
17
|
|
|
Total assets measured at fair value on a nonrecurring basis
(3)
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
48
|
|
|
$
|
48
|
|
|
|
|
|
(1)
|
All derivative assets and liabilities were interest rate contracts at
March 31, 2017
. Information related to derivative instruments is detailed in
Note 7—Derivative Instruments and Hedging Activities
.
|
|
|
|
|
(2)
|
Assets and liabilities measured at fair value on a recurring basis represented
32%
and less than
1%
of the Company’s total assets and total liabilities, respectively, at
March 31, 2017
.
|
|
|
|
|
(3)
|
Represents the fair value of assets prior to deducting estimated selling costs that were carried on the consolidated balance sheet at
March 31, 2017
, and for which a fair value measurement was recorded during the period.
|
E*TRADE
|
Q1 2017 10-Q
48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
Fair Value
|
|
December 31, 2016:
|
|
|
|
|
|
|
|
|
Recurring fair value measurements:
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
Available-for-sale securities:
|
|
|
|
|
|
|
|
|
Debt securities:
|
|
|
|
|
|
|
|
|
Agency mortgage-backed securities
|
$
|
—
|
|
|
$
|
12,634
|
|
|
$
|
—
|
|
|
$
|
12,634
|
|
|
Agency debentures
|
—
|
|
|
788
|
|
|
—
|
|
|
788
|
|
|
U.S. Treasuries
|
—
|
|
|
407
|
|
|
—
|
|
|
407
|
|
|
Agency debt securities
|
—
|
|
|
24
|
|
|
—
|
|
|
24
|
|
|
Municipal bonds
|
—
|
|
|
32
|
|
|
—
|
|
|
32
|
|
|
Total debt securities
|
—
|
|
|
13,885
|
|
|
—
|
|
|
13,885
|
|
|
Publicly traded equity securities
|
7
|
|
|
—
|
|
|
—
|
|
|
7
|
|
|
Total available-for-sale securities
|
7
|
|
|
13,885
|
|
|
—
|
|
|
13,892
|
|
|
Other assets:
|
|
|
|
|
|
|
|
|
Derivative assets
(1)
|
—
|
|
|
165
|
|
|
—
|
|
|
165
|
|
|
Total assets measured at fair value on a recurring basis
(2)
|
$
|
7
|
|
|
$
|
14,050
|
|
|
$
|
—
|
|
|
$
|
14,057
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Other liabilities:
|
|
|
|
|
|
|
|
|
Derivative liabilities
(1)
|
$
|
—
|
|
|
$
|
31
|
|
|
$
|
—
|
|
|
$
|
31
|
|
|
Total liabilities measured at fair value on a recurring basis
(2)
|
$
|
—
|
|
|
$
|
31
|
|
|
$
|
—
|
|
|
$
|
31
|
|
|
Nonrecurring fair value measurements:
|
|
|
|
|
|
|
|
|
Loans receivable, net:
|
|
|
|
|
|
|
|
|
One- to four-family
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
25
|
|
|
$
|
25
|
|
|
Home equity
|
—
|
|
|
—
|
|
|
21
|
|
|
21
|
|
|
Total loans receivable
|
—
|
|
|
—
|
|
|
46
|
|
|
46
|
|
|
Other assets:
|
|
|
|
|
|
|
|
|
Real estate owned
|
—
|
|
|
—
|
|
|
35
|
|
|
35
|
|
|
Total assets measured at fair value on a nonrecurring basis
(3)
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
81
|
|
|
$
|
81
|
|
|
|
|
|
(1)
|
All derivative assets and liabilities were interest rate contracts at
December 31, 2016
. Information related to derivative instruments is detailed in
Note 7—Derivative Instruments and Hedging Activities
.
|
|
|
|
|
(2)
|
Assets and liabilities measured at fair value on a recurring basis represented
29%
and less than
1%
of the Company’s total assets and total liabilities, respectively, at
December 31, 2016
.
|
|
|
|
|
(3)
|
Represents the fair value of assets prior to deducting estimated selling costs that were carried on the consolidated balance sheet at
December 31, 2016
, and for which a fair value measurement was recorded during the period.
|
The following table presents gains and losses recognized on assets measured at fair value on a nonrecurring basis during the
three months ended
March 31, 2017
and 2016
(dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
2017
|
|
2016
|
|
One- to four-family
|
$
|
1
|
|
|
$
|
1
|
|
|
Home equity
|
1
|
|
|
3
|
|
|
Total losses on loans receivable measured at fair value
|
$
|
2
|
|
|
$
|
4
|
|
|
|
|
|
|
|
Losses (gains) on real estate owned measured at fair value
|
$
|
(1
|
)
|
|
$
|
—
|
|
E*TRADE
|
Q1 2017 10-Q
49
Transfers Between Levels 1, 2 and 3
For assets and liabilities measured at fair value on a recurring basis, the Company’s transfers between levels of the fair value hierarchy are deemed to have occurred at the beginning of the reporting period on a quarterly basis. The Company had no transfers between levels during the
three months ended March 31, 2017 and 2016
.
Recurring Fair Value Measurements Categorized within Level 3
For the periods presented, no assets or liabilities measured at fair value on a recurring basis were categorized within Level 3 of the fair value hierarchy.
Fair Value of Financial Instruments Not Carried at Fair Value
The following table summarizes the carrying values, fair values and fair value hierarchy level classification of financial instruments that are not carried at fair value on the consolidated balance sheet at
March 31, 2017 and December 31, 2016
(dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
|
Carrying
Value
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
Fair Value
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
Cash and equivalents
|
$
|
998
|
|
|
$
|
998
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
998
|
|
|
Cash required to be segregated under federal or other regulations
|
$1,876
|
|
$1,876
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,876
|
|
|
Held-to-maturity securities:
|
|
|
|
|
|
|
|
|
|
|
Agency mortgage-backed securities
|
$
|
16,218
|
|
|
$
|
—
|
|
|
$
|
16,209
|
|
|
$
|
—
|
|
|
$
|
16,209
|
|
|
Agency debentures
|
203
|
|
|
—
|
|
|
203
|
|
|
—
|
|
|
203
|
|
|
Agency debt securities
|
2,766
|
|
|
—
|
|
|
2,764
|
|
|
—
|
|
|
2,764
|
|
|
Other non-agency debt securities
|
4
|
|
|
—
|
|
|
—
|
|
|
4
|
|
|
4
|
|
|
Total held-to-maturity securities
|
$
|
19,191
|
|
|
$
|
—
|
|
|
$
|
19,176
|
|
|
$
|
4
|
|
|
$
|
19,180
|
|
|
Margin receivables
(1)
|
$
|
6,906
|
|
|
$
|
—
|
|
|
$6,906
|
|
$
|
—
|
|
|
$
|
6,906
|
|
|
Loans receivable, net:
|
|
|
|
|
|
|
|
|
|
|
One- to four-family
|
$
|
1,784
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,819
|
|
|
$
|
1,819
|
|
|
Home equity
|
1,276
|
|
|
—
|
|
|
—
|
|
|
1,225
|
|
|
1,225
|
|
|
Consumer
|
228
|
|
|
—
|
|
|
—
|
|
|
227
|
|
|
227
|
|
|
Total loans receivable, net
(2)
|
$
|
3,288
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,271
|
|
|
$
|
3,271
|
|
|
Receivables from brokers, dealers and clearing organizations
(1)
|
$
|
1,288
|
|
|
$
|
—
|
|
|
$1,288
|
|
$
|
—
|
|
|
$
|
1,288
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
$
|
37,384
|
|
|
$
|
—
|
|
|
$
|
37,384
|
|
|
$
|
—
|
|
|
$
|
37,384
|
|
|
Customer payables
|
$
|
8,926
|
|
|
$
|
—
|
|
|
$8,926
|
|
$
|
—
|
|
|
$
|
8,926
|
|
|
Payables to brokers, dealers and clearing organizations
|
$
|
1,288
|
|
|
$
|
—
|
|
|
$1,288
|
|
$
|
—
|
|
|
$
|
1,288
|
|
|
Trust preferred securities
|
$
|
409
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
305
|
|
|
$
|
305
|
|
|
Corporate debt
|
$
|
991
|
|
|
$
|
—
|
|
|
$
|
1,042
|
|
|
$
|
—
|
|
|
$
|
1,042
|
|
|
|
|
|
(1)
|
The fair value of securities that the Company received as collateral in connection with margin receivables and securities borrowing activities, where the Company is permitted to sell or re-pledge the securities, was approximately
$10.3 billion
and
$9.8 billion
at
March 31, 2017 and December 31, 2016
, respectively. Of this amount,
$2.5 billion
and
$2.0 billion
had been pledged or sold in connection with securities loans and deposits with clearing organizations at
March 31, 2017 and December 31, 2016
, respectively.
|
|
|
|
|
(2)
|
The carrying value of loans receivable, net includes the allowance for loan losses of
$213 million
and loans that are recorded at fair value on a nonrecurring basis at
March 31, 2017
.
|
E*TRADE
|
Q1 2017 10-Q
50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
Carrying
Value
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
Fair Value
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
Cash and equivalents
|
$
|
1,950
|
|
|
$
|
1,950
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,950
|
|
|
Cash required to be segregated under federal or other regulations
|
$
|
1,460
|
|
|
$
|
1,460
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,460
|
|
|
Held-to-maturity securities:
|
|
|
|
|
|
|
|
|
|
|
Agency mortgage-backed securities
|
$
|
12,868
|
|
|
$
|
—
|
|
|
$
|
12,839
|
|
|
$
|
—
|
|
|
$
|
12,839
|
|
|
Agency debentures
|
29
|
|
|
—
|
|
|
29
|
|
|
—
|
|
|
29
|
|
|
Agency debt securities
|
2,854
|
|
|
—
|
|
|
2,848
|
|
|
—
|
|
|
2,848
|
|
|
Total held-to-maturity securities
|
$
|
15,751
|
|
|
$
|
—
|
|
|
$
|
15,716
|
|
|
$
|
—
|
|
|
$
|
15,716
|
|
|
Margin receivables
|
$
|
6,731
|
|
|
$
|
—
|
|
|
$
|
6,731
|
|
|
$
|
—
|
|
|
$
|
6,731
|
|
|
Loans receivable, net:
|
|
|
|
|
|
|
|
|
|
|
One- to four-family
|
$
|
1,918
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,942
|
|
|
$
|
1,942
|
|
|
Home equity
|
1,385
|
|
|
—
|
|
|
—
|
|
|
1,311
|
|
|
1,311
|
|
|
Consumer
|
248
|
|
|
—
|
|
|
—
|
|
|
249
|
|
|
249
|
|
|
Total loans receivable, net
(1)
|
$
|
3,551
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,502
|
|
|
$
|
3,502
|
|
|
Receivables from brokers, dealers and clearing organizations
|
$
|
1,056
|
|
|
$
|
—
|
|
|
$
|
1,056
|
|
|
$
|
—
|
|
|
$
|
1,056
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
$
|
31,682
|
|
|
$
|
—
|
|
|
$
|
31,681
|
|
|
$
|
—
|
|
|
$
|
31,681
|
|
|
Customer Payables
|
$
|
8,159
|
|
|
$
|
—
|
|
|
$
|
8,159
|
|
|
$
|
—
|
|
|
$
|
8,159
|
|
|
Payables to brokers, dealers and clearing organizations
|
$
|
983
|
|
|
$
|
—
|
|
|
$
|
983
|
|
|
$
|
—
|
|
|
$
|
983
|
|
|
Trust preferred securities
|
$
|
409
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
288
|
|
|
$
|
288
|
|
|
Corporate debt
|
$
|
994
|
|
|
$
|
—
|
|
|
$
|
1,050
|
|
|
$
|
—
|
|
|
$
|
1,050
|
|
|
|
|
|
(1)
|
The carrying value of loans receivable, net includes the allowance for loan losses of
$221 million
and loans that are recorded at fair value on a nonrecurring basis at
December 31, 2016
.
|
The fair value measurement techniques for financial instruments not carried at fair value on the consolidated balance sheet at
March 31, 2017 and December 31, 2016
are summarized as follows:
Cash and equivalents, cash required to be segregated under federal or other regulations, margin receivables, receivables from brokers, dealers and clearing organizations, customer payables and payables to brokers, dealers and clearing organizations
—Due to their short term nature, fair value is estimated to be carrying value.
Held-to-maturity securities
—The held-to-maturity securities portfolio included agency mortgage-backed securities, agency debentures, agency debt securities, and other non-agency debt securities. The fair value of agency mortgage-backed securities is determined consistently with the pricing of available-for-sale securities described above.
Loans receivable, net
—Fair value is estimated using a discounted cash flow model. Loans are differentiated based on their individual portfolio characteristics, such as product classification, loan category and pricing features. Assumptions for expected losses, prepayments, cash flows and discount rates are adjusted to reflect the individual characteristics of the loans, such as credit risk, coupon, lien position, and payment characteristics, as well as the secondary market conditions for these types of loans.
Although the market for one- to four-family and home equity loan portfolios has improved, given the lack of observability of valuation inputs, these fair value measurements cannot be determined with precision and changes in the underlying assumptions used, including discount rates, could significantly affect the results of current or future fair value estimates. In addition, the amount that would be realized in a forced liquidation, an actual sale or immediate settlement could be lower than both the carrying value and the estimated fair value of the portfolio.
E*TRADE
|
Q1 2017 10-Q
51
Deposits
—For certificates of deposit, fair value is estimated using a discounted cash flow model. For the remainder of deposits, fair value is the amount payable on demand at the reporting date.
Trust preferred securities
—For subordinated debentures, fair value is estimated by discounting future cash flows at the yield implied by dealer pricing quotes.
Corporate debt
—For interest-bearing corporate debt, fair value is estimated using dealer pricing quotes. The fair value of the non-interest-bearing convertible debentures is directly correlated to the intrinsic value of the Company’s underlying stock; therefore, as the price of the Company’s stock increases relative to the conversion price, the fair value of the convertible debentures increases.
Fair Value of Commitments and Contingencies
In the normal course of business, the Company makes various commitments to extend credit and incur contingent liabilities that are not reflected in the consolidated balance sheet. Changes in the economy or interest rates may influence the impact that these commitments and contingencies have on the Company in the future. The Company does not estimate the fair value of those commitments. The Company has the right to cancel these commitments in certain circumstances and has closed a significant amount of customer HELOCs in the past
ten years
. Information related to such commitments and contingent liabilities is included in
Note 14—Commitments, Contingencies and Other Regulatory Matters
.
E*TRADE
|
Q1 2017 10-Q
52
NOTE 4—OFFSETTING ASSETS AND LIABILITIES
For financial statement purposes, the Company does not offset derivative instruments or securities borrowing and securities lending transactions. These activities are generally transacted under master agreements that are widely used by counterparties and that may allow for net settlements of payments in the normal course, as well as offsetting of all contracts with a given counterparty in the event of bankruptcy or default of one of the two parties to the transaction. The following table presents information about these transactions to enable the users of the Company’s consolidated financial statements to evaluate the potential effect of rights of set-off between these recognized assets and recognized liabilities at
March 31, 2017 and December 31, 2016
(dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Amounts Not Offset in the Consolidated Balance Sheet
|
|
|
|
|
|
|
|
Gross Amounts of Recognized Assets and Liabilities
|
|
Gross Amounts Offset in the Consolidated Balance Sheet
|
|
Net Amounts Presented in the Consolidated Balance Sheet
(1)
|
|
Financial Instruments
|
|
Collateral Received or Pledged (Including Cash)
|
|
Net Amount
|
|
March 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits paid for securities borrowed
(2)
|
$
|
995
|
|
|
$
|
—
|
|
|
$
|
995
|
|
|
$
|
(273
|
)
|
|
$
|
(700
|
)
|
|
$
|
22
|
|
|
|
|
|
Total
|
$
|
995
|
|
|
$
|
—
|
|
|
$
|
995
|
|
|
$
|
(273
|
)
|
|
$
|
(700
|
)
|
|
$
|
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits received for securities loaned
(3)
|
$
|
1,246
|
|
|
$
|
—
|
|
|
$
|
1,246
|
|
|
$
|
(273
|
)
|
|
$
|
(886
|
)
|
|
$
|
87
|
|
|
|
|
Derivative liabilities
(4)(5)
|
4
|
|
|
—
|
|
|
4
|
|
|
—
|
|
|
(4
|
)
|
|
—
|
|
|
|
|
|
Total
|
$
|
1,250
|
|
|
$
|
—
|
|
|
$
|
1,250
|
|
|
$
|
(273
|
)
|
|
$
|
(890
|
)
|
|
$
|
87
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits paid for securities borrowed
(2)
|
$
|
774
|
|
|
$
|
—
|
|
|
$
|
774
|
|
|
$
|
(192
|
)
|
|
$
|
(560
|
)
|
|
$
|
22
|
|
|
|
|
|
Total
|
$
|
774
|
|
|
$
|
—
|
|
|
$
|
774
|
|
|
$
|
(192
|
)
|
|
$
|
(560
|
)
|
|
$
|
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits received for securities loaned
(3)
|
$
|
926
|
|
|
$
|
—
|
|
|
$
|
926
|
|
|
$
|
(192
|
)
|
|
$
|
(661
|
)
|
|
$
|
73
|
|
|
|
|
Derivative liabilities
(4)(5)
|
6
|
|
|
—
|
|
|
6
|
|
|
—
|
|
|
(6
|
)
|
|
—
|
|
|
|
|
|
Total
|
$
|
932
|
|
|
$
|
—
|
|
|
$
|
932
|
|
|
$
|
(192
|
)
|
|
$
|
(667
|
)
|
|
$
|
73
|
|
|
|
|
|
(1)
|
Net amount of deposits paid for securities borrowed are reflected in the receivables from brokers, dealers and clearing organizations line item in the consolidated balance sheet. Net amount of deposits received for securities loaned and derivative liabilities are reflected in the payables to brokers, dealers and clearing organizations and other liabilities line items in the consolidated balance sheet, respectively.
|
|
|
|
|
(2)
|
Included in the gross amounts of deposits paid for securities borrowed was
$701 million
and
$307 million
at
March 31, 2017 and December 31, 2016
, respectively, transacted through a program with a clearing organization, which guarantees the return of cash to the Company. For presentation purposes, these amounts presented are based on the counterparties under the Company’s master securities loan agreements.
|
|
|
|
|
(3)
|
Included in the gross amounts of deposits received for securities loaned was
$745 million
and
$546 million
at
March 31, 2017 and December 31, 2016
, respectively, transacted through a program with a clearing organization, which guarantees the return of securities to the Company. For presentation purposes, these amounts presented are based on the counterparties under the Company’s master securities loan agreements.
|
|
|
|
|
(4)
|
Excludes net accrued interest payable of
$1 million
and
$2 million
at
March 31, 2017 and December 31, 2016
, respectively.
|
|
|
|
|
(5)
|
The collateral pledged included held-to-maturity securities at amortized cost for
March 31, 2017
and available-for-sale securities at fair value for
December 31, 2016
.
|
E*TRADE
|
Q1 2017 10-Q
53
Securities Lending Transactions
Deposits paid for securities borrowed and deposits received for securities loaned are recorded at the amount of cash collateral advanced or received. Securities borrowing transactions require the Company to deposit cash with the lender whereas securities lending transactions result in the Company receiving collateral in the form of cash, with both requiring cash in an amount generally in excess of the market value of the securities. These transactions have overnight or continuous remaining contractual maturities.
Securities lending transactions expose the Company to counterparty credit risk and market risk. To manage the counterparty risk, the Company maintains internal standards for approving counterparties, reviews and analyzes the credit rating of each counterparty, and monitors its positions with each counterparty on an ongoing basis. In addition, for certain of the Company's securities lending transactions, the Company uses a program with a clearing organization that guarantees the return of securities. The Company monitors the market value of the securities borrowed and loaned using collateral arrangements that require additional collateral to be obtained from or excess collateral to be returned to the counterparties based on changes in market value, to maintain specified collateral levels.
Derivative Transactions
Certain types of derivatives that the Company utilizes in its hedging activities are subject to derivatives clearing agreements (cleared derivatives contracts) under the Dodd-Frank Act. These cleared derivatives contracts enable clearing by a derivatives clearing organization through a clearing member. Under the contracts, the clearing member typically has a one-way right to offset all contracts in the event of the Company's default or bankruptcy. Collateral exchanged under these contracts is not included in the table above as the contracts may not qualify as master netting agreements. At
March 31, 2017 and December 31, 2016
, the Company had
$128 million
and
$165 million
, respectively, of cleared derivative contract assets. At
March 31, 2017 and December 31, 2016
, the Company had
$8 million
and
$25 million
, respectively, of cleared derivative contract liabilities.
In January 2017, a clearing organization through which the Company executes certain of its derivative contracts amended its rulebook to legally characterize variation margin payments as settlements of the derivatives' exposure rather than collateral against the exposure. For these contracts, amounts exchanged with counterparties are reflected as a reduction of the related derivative assets or liabilities, including accrued interest, on the consolidated balance sheet. At March 31, 2017, the Company had derivative assets and liabilities of
$16 million
and
$17 million
, respectively, excluding accrued interest, that were settled by variation margin payments and are therefore excluded from the table above.
E*TRADE
|
Q1 2017 10-Q
54
NOTE 5—AVAILABLE-FOR-SALE AND HELD-TO-MATURITY SECURITIES
The amortized cost and fair value of available-for-sale and held-to-maturity securities at
March 31, 2017 and December 31, 2016
are shown in the following tables (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
Cost
|
|
Gross
Unrealized /
Unrecognized
Gains
|
|
Gross
Unrealized /
Unrecognized
Losses
|
|
Fair Value
|
|
March 31, 2017:
|
|
|
|
|
|
|
|
|
Available-for-sale securities:
|
|
|
|
|
|
|
|
|
Debt securities:
|
|
|
|
|
|
|
|
|
Agency mortgage-backed securities
|
$
|
16,754
|
|
|
$
|
36
|
|
|
$
|
(294
|
)
|
|
$
|
16,496
|
|
|
Agency debentures
|
927
|
|
|
21
|
|
|
(19
|
)
|
|
929
|
|
|
U.S. Treasuries
|
298
|
|
|
—
|
|
|
(17
|
)
|
|
281
|
|
|
Agency debt securities
|
25
|
|
|
—
|
|
|
(1
|
)
|
|
24
|
|
|
Municipal bonds
|
32
|
|
|
—
|
|
|
—
|
|
|
32
|
|
|
Total debt securities
|
18,036
|
|
|
57
|
|
|
(331
|
)
|
|
17,762
|
|
|
Publicly traded equity securities
(1)
|
7
|
|
|
—
|
|
|
—
|
|
|
7
|
|
|
Total available-for-sale securities
|
$
|
18,043
|
|
|
$
|
57
|
|
|
$
|
(331
|
)
|
|
$
|
17,769
|
|
|
Held-to-maturity securities:
|
|
|
|
|
|
|
|
|
Agency mortgage-backed securities
|
$
|
16,218
|
|
|
$
|
132
|
|
|
$
|
(141
|
)
|
|
$
|
16,209
|
|
|
Agency debentures
|
203
|
|
|
—
|
|
|
—
|
|
|
203
|
|
|
Agency debt securities
|
2,766
|
|
|
26
|
|
|
(28
|
)
|
|
2,764
|
|
|
Other non-agency debt securities
|
4
|
|
|
—
|
|
|
—
|
|
|
4
|
|
|
Total held-to-maturity securities
|
$
|
19,191
|
|
|
$
|
158
|
|
|
$
|
(169
|
)
|
|
$
|
19,180
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016:
|
|
|
|
|
|
|
|
|
Available-for-sale securities:
|
|
|
|
|
|
|
|
|
Debt securities:
|
|
|
|
|
|
|
|
|
Agency mortgage-backed securities
|
$
|
12,946
|
|
|
$
|
24
|
|
|
$
|
(336
|
)
|
|
$
|
12,634
|
|
|
Agency debentures
|
791
|
|
|
18
|
|
|
(21
|
)
|
|
788
|
|
|
U.S. Treasuries
|
452
|
|
|
—
|
|
|
(45
|
)
|
|
407
|
|
|
Agency debt securities
|
25
|
|
|
—
|
|
|
(1
|
)
|
|
24
|
|
|
Municipal bonds
|
32
|
|
|
—
|
|
|
—
|
|
|
32
|
|
|
Total debt securities
|
14,246
|
|
|
42
|
|
|
(403
|
)
|
|
13,885
|
|
|
Publicly traded equity securities
(1)
|
7
|
|
|
—
|
|
|
—
|
|
|
7
|
|
|
Total available-for-sale securities
|
$
|
14,253
|
|
|
$
|
42
|
|
|
$
|
(403
|
)
|
|
$
|
13,892
|
|
|
Held-to-maturity securities:
|
|
|
|
|
|
|
|
|
Agency mortgage-backed securities
|
$
|
12,868
|
|
|
$
|
123
|
|
|
$
|
(152
|
)
|
|
$
|
12,839
|
|
|
Agency debentures
|
29
|
|
|
—
|
|
|
—
|
|
|
29
|
|
|
Agency debt securities
|
2,854
|
|
|
26
|
|
|
(32
|
)
|
|
2,848
|
|
|
Total held-to-maturity securities
|
$
|
15,751
|
|
|
$
|
149
|
|
|
$
|
(184
|
)
|
|
$
|
15,716
|
|
|
|
|
|
(1)
|
Consists of investments in a mutual fund related to the Community Reinvestment Act.
|
E*TRADE
|
Q1 2017 10-Q
55
Contractual Maturities
The contractual maturities of all available-for-sale and held-to-maturity debt securities at
March 31, 2017
are shown in the following table (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized Cost
|
|
Fair Value
|
|
Available-for-sale debt securities:
|
|
|
|
|
Due within one year
|
$
|
—
|
|
|
$
|
—
|
|
|
Due within one to five years
|
6
|
|
|
6
|
|
|
Due within five to ten years
|
6,452
|
|
|
6,324
|
|
|
Due after ten years
|
11,578
|
|
|
11,432
|
|
|
Total available-for-sale debt securities
|
$
|
18,036
|
|
|
$
|
17,762
|
|
|
Held-to-maturity debt securities:
|
|
|
|
|
Due within one year
|
$
|
152
|
|
|
$
|
153
|
|
|
Due within one to five years
|
1,575
|
|
|
1,614
|
|
|
Due within five to ten years
|
5,177
|
|
|
5,178
|
|
|
Due after ten years
|
12,287
|
|
|
12,235
|
|
|
Total held-to-maturity debt securities
|
$
|
19,191
|
|
|
$
|
19,180
|
|
At March 31, 2017 and December 31, 2016, the Company pledged
$2.6 billion
and
$0.5 billion
, respectively, of held-to-maturity debt securities, and
$6 million
of available-for-sale securities at both periods, as collateral for FHLB advances, derivatives and other purposes.
E*TRADE
|
Q1 2017 10-Q
56
Investments with Unrealized or Unrecognized Losses
The following tables show the fair value and unrealized or unrecognized losses on available-for-sale and held-to-maturity securities, aggregated by investment category, and the length of time that individual securities have been in a continuous unrealized or unrecognized loss position at
March 31, 2017 and December 31, 2016
(dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 Months
|
|
12 Months or More
|
|
Total
|
|
|
Fair Value
|
|
Unrealized /
Unrecognized
Losses
|
|
Fair Value
|
|
Unrealized /
Unrecognized
Losses
|
|
Fair Value
|
|
Unrealized /
Unrecognized
Losses
|
|
March 31, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency mortgage-backed securities
|
$
|
10,264
|
|
|
$
|
(243
|
)
|
|
$
|
1,666
|
|
|
$
|
(51
|
)
|
|
$
|
11,930
|
|
|
$
|
(294
|
)
|
|
Agency debentures
|
370
|
|
|
(19
|
)
|
|
—
|
|
|
—
|
|
|
370
|
|
|
(19
|
)
|
|
U.S. Treasuries
|
281
|
|
|
(17
|
)
|
|
—
|
|
|
—
|
|
|
281
|
|
|
(17
|
)
|
|
Agency debt securities
|
24
|
|
|
(1
|
)
|
|
—
|
|
|
—
|
|
|
24
|
|
|
(1
|
)
|
|
Municipal bonds
|
22
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
22
|
|
|
—
|
|
|
Publicly traded equity securities
|
7
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
7
|
|
|
—
|
|
|
Total temporarily impaired available-for-sale securities
|
$
|
10,968
|
|
|
$
|
(280
|
)
|
|
$
|
1,666
|
|
|
$
|
(51
|
)
|
|
$
|
12,634
|
|
|
$
|
(331
|
)
|
|
Held-to-maturity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency mortgage-backed securities
|
$
|
6,464
|
|
|
$
|
(113
|
)
|
|
$
|
1,189
|
|
|
$
|
(28
|
)
|
|
$
|
7,653
|
|
|
$
|
(141
|
)
|
|
Agency debentures
|
123
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
123
|
|
|
—
|
|
|
Agency debt securities
|
1,707
|
|
|
(28
|
)
|
|
18
|
|
|
—
|
|
|
1,725
|
|
|
(28
|
)
|
|
Total temporarily impaired held-to-maturity securities
|
$
|
8,294
|
|
|
$
|
(141
|
)
|
|
$
|
1,207
|
|
|
$
|
(28
|
)
|
|
$
|
9,501
|
|
|
$
|
(169
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency mortgage-backed securities
|
$
|
9,281
|
|
|
$
|
(279
|
)
|
|
$
|
1,620
|
|
|
$
|
(57
|
)
|
|
$
|
10,901
|
|
|
$
|
(336
|
)
|
|
Agency debentures
|
454
|
|
|
(21
|
)
|
|
—
|
|
|
—
|
|
|
454
|
|
|
(21
|
)
|
|
U.S. Treasuries
|
407
|
|
|
(45
|
)
|
|
—
|
|
|
—
|
|
|
407
|
|
|
(45
|
)
|
|
Agency debt securities
|
24
|
|
|
(1
|
)
|
|
—
|
|
|
—
|
|
|
24
|
|
|
(1
|
)
|
|
Municipal bonds
|
13
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
13
|
|
|
—
|
|
|
Publicly traded equity securities
|
7
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
7
|
|
|
—
|
|
|
Total temporarily impaired available-for-sale securities
|
$
|
10,186
|
|
|
$
|
(346
|
)
|
|
$
|
1,620
|
|
|
$
|
(57
|
)
|
|
$
|
11,806
|
|
|
$
|
(403
|
)
|
|
Held-to-maturity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency mortgage-backed securities
|
$
|
5,929
|
|
|
$
|
(123
|
)
|
|
$
|
1,272
|
|
|
$
|
(29
|
)
|
|
$
|
7,201
|
|
|
$
|
(152
|
)
|
|
Agency debentures
|
18
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
18
|
|
|
—
|
|
|
Agency debt securities
|
1,739
|
|
|
(32
|
)
|
|
18
|
|
|
—
|
|
|
1,757
|
|
|
(32
|
)
|
|
Total temporarily impaired held-to-maturity securities
|
$
|
7,686
|
|
|
$
|
(155
|
)
|
|
$
|
1,290
|
|
|
$
|
(29
|
)
|
|
$
|
8,976
|
|
|
$
|
(184
|
)
|
The Company does not believe that any individual unrealized loss in the available-for-sale portfolio or unrecognized loss in the held-to-maturity portfolio as of
March 31, 2017
represents a credit loss. The Company does not intend to sell the debt securities in an unrealized or unrecognized loss position as of the balance sheet date and it is not more likely than not that the Company will be required to sell the debt
E*TRADE
|
Q1 2017 10-Q
57
securities before the anticipated recovery of its remaining amortized cost of the debt securities in an unrealized or unrecognized loss position at
March 31, 2017
.
There were
no
impairment losses recognized in earnings on available-for-sale or held-to-maturity securities during the
three months ended
March 31, 2017 and 2016
, respectively.
Gains on Securities and Other, Net
The following table shows the components of the gains on securities and other, net line item on the
consolidated statement of income
for the
three months ended
March 31, 2017 and 2016
(dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
2017
|
|
2016
|
|
Gains on available-for-sale securities
|
$
|
8
|
|
|
$
|
15
|
|
|
Hedge ineffectiveness
|
(1
|
)
|
|
(2
|
)
|
|
Equity method investment income (loss) and other
|
3
|
|
|
(3
|
)
|
|
Gains on securities and other, net
|
$
|
10
|
|
|
$
|
10
|
|
NOTE 6—LOANS RECEIVABLE, NET
Loans receivable, net at
March 31, 2017 and December 31, 2016
are summarized as follows (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
December 31,
|
|
|
2017
|
|
2016
|
|
One- to four-family
|
$
|
1,819
|
|
|
$
|
1,950
|
|
|
Home equity
|
1,437
|
|
|
1,556
|
|
|
Consumer
|
230
|
|
|
250
|
|
|
Total loans receivable
|
3,486
|
|
|
3,756
|
|
|
Unamortized premiums, net
|
15
|
|
|
16
|
|
|
Allowance for loan losses
|
(213
|
)
|
|
(221
|
)
|
|
Total loans receivable, net
|
$
|
3,288
|
|
|
$
|
3,551
|
|
At
March 31, 2017
, the Company pledged
$2.9 billion
and
$0.2 billion
of loans as collateral to the FHLB and Federal Reserve Bank, respectively. At
December 31, 2016
, the Company pledged
$3.1 billion
and
$0.3 billion
of loans as collateral to the FHLB and Federal Reserve Bank, respectively.
The following table presents the total recorded investment in loans receivable and allowance for loan losses by loans that have been collectively evaluated for impairment and those that have been individually evaluated for impairment by loan class at
March 31, 2017 and December 31, 2016
(dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recorded Investment
|
|
Allowance for Loan Losses
|
|
|
March 31,
|
|
December 31,
|
|
March 31,
|
|
December 31,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
Collectively evaluated for impairment:
|
|
|
|
|
|
|
|
|
One- to four-family
|
$
|
1,595
|
|
|
$
|
1,717
|
|
|
$
|
41
|
|
|
$
|
38
|
|
|
Home equity
|
1,249
|
|
|
1,361
|
|
|
117
|
|
|
120
|
|
|
Consumer
|
233
|
|
|
253
|
|
|
5
|
|
|
5
|
|
|
Total collectively evaluated for impairment
|
3,077
|
|
|
3,331
|
|
|
163
|
|
|
163
|
|
|
Individually evaluated for impairment:
|
|
|
|
|
|
|
|
|
One- to four-family
|
236
|
|
|
246
|
|
|
5
|
|
|
7
|
|
|
Home equity
|
188
|
|
|
195
|
|
|
45
|
|
|
51
|
|
|
Total individually evaluated for impairment
|
424
|
|
|
441
|
|
|
50
|
|
|
58
|
|
|
Total
|
$
|
3,501
|
|
|
$
|
3,772
|
|
|
$
|
213
|
|
|
$
|
221
|
|
E*TRADE
|
Q1 2017 10-Q
58
Credit Quality and Concentrations of Credit Risk
The Company tracks and reviews factors to predict and monitor credit risk in its mortgage loan portfolio on an ongoing basis. These factors include: loan type, estimated current LTV/CLTV ratios, delinquency history, borrowers’ current credit scores, housing prices, loan vintage and geographic location of the property. The Company believes LTV/CLTV ratios and credit scores are the key factors in determining future loan performance. The factors are updated on at least a quarterly basis. The Company tracks and reviews delinquency status to predict and monitor credit risk in the consumer loan portfolio on at least a quarterly basis.
Credit Quality
The following tables show the distribution of the Company’s mortgage loan portfolios by credit quality indicator at
March 31, 2017 and December 31, 2016
(dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to Four-Family
|
|
Home Equity
|
|
|
March 31,
|
|
December 31,
|
|
March 31,
|
|
December 31,
|
|
Current LTV/CLTV
(1)
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
<=80%
|
$
|
1,208
|
|
|
$
|
1,308
|
|
|
$
|
650
|
|
|
$
|
686
|
|
|
80%-100%
|
392
|
|
|
413
|
|
|
379
|
|
|
414
|
|
|
100%-120%
|
130
|
|
|
143
|
|
|
249
|
|
|
274
|
|
|
>120%
|
89
|
|
|
86
|
|
|
159
|
|
|
182
|
|
|
Total mortgage loans receivable
|
$
|
1,819
|
|
|
$
|
1,950
|
|
|
$
|
1,437
|
|
|
$
|
1,556
|
|
|
Average estimated current LTV/CLTV
(2)
|
73
|
%
|
|
73
|
%
|
|
86
|
%
|
|
87
|
%
|
|
Average LTV/CLTV at loan origination
(3)
|
71
|
%
|
|
71
|
%
|
|
81
|
%
|
|
81
|
%
|
|
|
|
|
(1)
|
Current CLTV calculations for home equity loans are based on the maximum available line for HELOCs and outstanding principal balance for home equity installment loans. For home equity loans in the second lien position, the original balance of the first lien loan at origination date and updated valuations on the property underlying the loan are used to calculate CLTV. Current property value estimates are updated on a quarterly basis.
|
|
|
|
|
(2)
|
The average estimated current LTV/CLTV ratio reflects the outstanding balance at the balance sheet date and the maximum available line for HELOCs, divided by the estimated current value of the underlying property.
|
|
|
|
|
(3)
|
Average LTV/CLTV at loan origination calculations are based on LTV/CLTV at time of purchase for one- to four-family purchased loans and home equity installment loans and maximum available line for HELOCs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to Four-Family
|
|
Home Equity
|
|
|
March 31,
|
|
December 31,
|
|
March 31,
|
|
December 31,
|
|
Current FICO
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
>=720
|
$
|
1,041
|
|
|
$
|
1,121
|
|
|
$
|
705
|
|
|
$
|
778
|
|
|
719 - 700
|
166
|
|
|
179
|
|
|
152
|
|
|
156
|
|
|
699 - 680
|
140
|
|
|
153
|
|
|
128
|
|
|
141
|
|
|
679 - 660
|
106
|
|
|
121
|
|
|
99
|
|
|
117
|
|
|
659 - 620
|
140
|
|
|
154
|
|
|
143
|
|
|
149
|
|
|
<620
|
226
|
|
|
222
|
|
|
210
|
|
|
215
|
|
|
Total mortgage loans receivable
|
$
|
1,819
|
|
|
$
|
1,950
|
|
|
$
|
1,437
|
|
|
$
|
1,556
|
|
E*TRADE
|
Q1 2017 10-Q
59
Concentrations of Credit Risk
The following table outlines when one- to four-family and HELOCs convert to amortizing by percentage of the one- to four-family portfolio and HELOC portfolios, respectively, at
March 31, 2017
:
|
|
|
|
|
|
|
|
Period of Conversion to Amortizing Loan
|
% of One- to Four-Family
Portfolio
|
|
% of Home Equity Line of
Credit Portfolio
|
|
Already amortizing
|
84%
|
|
96%
|
|
Q2 2017
|
11%
|
|
3%
|
|
Q3 2017 or later
|
5%
|
|
1%
|
The average age of our mortgage loans receivable was
11.1
and
10.8 years
at
March 31, 2017 and December 31, 2016
, respectively. Approximately
36%
of the Company’s mortgage loans receivable were concentrated in California at
March 31, 2017 and December 31, 2016
.
No
other state had concentrations of mortgage loans that represented 10% or more of the Company’s mortgage loans receivable at
March 31, 2017 and December 31, 2016
.
Delinquent Loans
The following table shows total loans receivable by delinquency category at
March 31, 2017 and December 31, 2016
(dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
30-89 Days
Delinquent
|
|
90-179 Days
Delinquent
|
|
180+ Days
Delinquent
|
|
Total
|
|
March 31, 2017
|
|
|
|
|
|
|
|
|
|
|
One- to four-family
|
$
|
1,623
|
|
|
$
|
84
|
|
|
$
|
25
|
|
|
$
|
87
|
|
|
$
|
1,819
|
|
|
Home equity
|
1,327
|
|
|
43
|
|
|
20
|
|
|
47
|
|
|
1,437
|
|
|
Consumer
|
225
|
|
|
4
|
|
|
1
|
|
|
—
|
|
|
230
|
|
|
Total loans receivable
|
$
|
3,175
|
|
|
$
|
131
|
|
|
$
|
46
|
|
|
$
|
134
|
|
|
$
|
3,486
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
One- to four-family
|
$
|
1,774
|
|
|
$
|
67
|
|
|
$
|
23
|
|
|
$
|
86
|
|
|
$
|
1,950
|
|
|
Home equity
|
1,442
|
|
|
43
|
|
|
18
|
|
|
53
|
|
|
1,556
|
|
|
Consumer
|
245
|
|
|
4
|
|
|
1
|
|
|
—
|
|
|
250
|
|
|
Total loans receivable
|
$
|
3,461
|
|
|
$
|
114
|
|
|
$
|
42
|
|
|
$
|
139
|
|
|
$
|
3,756
|
|
One- to four-family loans are generally secured in a first lien position by real estate assets, reducing the potential loss when compared to an unsecured loan. Home equity loans are generally secured by real estate assets; however, the majority of these loans are secured in a second lien position, which substantially increases the potential loss when compared to a first lien position. The loss severity of our second lien home equity loans was approximately
91%
for a trailing twelve-month period as of
March 31, 2017
.
Nonperforming Loans
The following table shows the comparative data for nonperforming loans at
March 31, 2017 and December 31, 2016
(dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
December 31,
|
|
|
2017
|
|
2016
|
|
One- to four-family
|
$
|
212
|
|
|
$
|
215
|
|
|
Home equity
|
130
|
|
|
136
|
|
|
Consumer
|
1
|
|
|
1
|
|
|
Total nonperforming loans receivable
|
$
|
343
|
|
|
$
|
352
|
|
E*TRADE
|
Q1 2017 10-Q
60
At
March 31, 2017 and December 31, 2016
, the Company held
$29 million
and
$35 million
, respectively, of real estate owned that were acquired through foreclosure or through a deed in lieu of foreclosure or similar legal agreement. The Company held
$114 million
and
$112 million
of loans for which formal foreclosure proceedings were in process at March 31, 2017 and December 31, 2016, respectively.
Allowance for Loan Losses
The following table provides a roll forward by loan portfolio of the allowance for loan losses for the
three months ended
March 31, 2017
and
2016
(dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2017
|
|
|
One- to
Four-Family
|
|
Home
Equity
|
|
Consumer
|
|
Total
|
|
Allowance for loan losses, beginning of period
|
$
|
45
|
|
|
$
|
171
|
|
|
$
|
5
|
|
|
$
|
221
|
|
|
Provision (benefit) for loan losses
|
—
|
|
|
(15
|
)
|
|
1
|
|
|
(14
|
)
|
|
Charge-offs
|
—
|
|
|
—
|
|
|
(2
|
)
|
|
(2
|
)
|
|
Recoveries
|
1
|
|
|
6
|
|
|
1
|
|
|
8
|
|
|
Net (charge-offs) recoveries
|
1
|
|
|
6
|
|
|
(1
|
)
|
|
6
|
|
|
Allowance for loan losses, end of period
|
$
|
46
|
|
|
$
|
162
|
|
|
$
|
5
|
|
|
$
|
213
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2016
|
|
|
One- to
Four-Family
|
|
Home
Equity
|
|
Consumer
|
|
Total
|
|
Allowance for loan losses, beginning of period
|
$
|
40
|
|
|
$
|
307
|
|
|
$
|
6
|
|
|
$
|
353
|
|
|
Provision (benefit) for loan losses
|
8
|
|
|
(42
|
)
|
|
—
|
|
|
(34
|
)
|
|
Charge-offs
|
(1
|
)
|
|
(5
|
)
|
|
(2
|
)
|
|
(8
|
)
|
|
Recoveries
|
2
|
|
|
7
|
|
|
2
|
|
|
11
|
|
|
Net (charge-offs) recoveries
|
1
|
|
|
2
|
|
|
—
|
|
|
3
|
|
|
Allowance for loan losses, end of period
|
$
|
49
|
|
|
$
|
267
|
|
|
$
|
6
|
|
|
$
|
322
|
|
Impaired Loans—Troubled Debt Restructurings
The following table shows a summary of the Company’s recorded investment in TDRs that were on accrual and nonaccrual status, further disaggregated by delinquency status, in addition to the recorded investment in TDRs at
March 31, 2017 and December 31, 2016
(dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonaccrual TDRs
|
|
|
|
|
Accrual
TDRs
(1)
|
|
Current
(2)
|
|
30-89 Days
Delinquent
|
|
90-179 Days
Delinquent
|
|
180+ Days
Delinquent
|
|
Total Recorded
Investment in
TDRs
(3)(4)
|
|
March 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to four-family
|
$
|
96
|
|
|
$
|
80
|
|
|
$
|
19
|
|
|
$
|
6
|
|
|
$
|
35
|
|
|
$
|
236
|
|
|
Home equity
|
112
|
|
|
41
|
|
|
11
|
|
|
4
|
|
|
20
|
|
|
188
|
|
|
Total
|
$
|
208
|
|
|
$
|
121
|
|
|
$
|
30
|
|
|
$
|
10
|
|
|
$
|
55
|
|
|
$
|
424
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to four-family
|
$
|
97
|
|
|
$
|
90
|
|
|
$
|
16
|
|
|
$
|
8
|
|
|
$
|
35
|
|
|
$
|
246
|
|
|
Home equity
|
119
|
|
|
41
|
|
|
10
|
|
|
4
|
|
|
21
|
|
|
195
|
|
|
Total
|
$
|
216
|
|
|
$
|
131
|
|
|
$
|
26
|
|
|
$
|
12
|
|
|
$
|
56
|
|
|
$
|
441
|
|
|
|
|
|
(1)
|
Represents loans modified as TDRs that are current and have made six or more consecutive payments.
|
|
|
|
|
(2)
|
Represents loans modified as TDRs that are current but have not yet made six consecutive payments, bankruptcy loans and certain junior lien TDRs that have a delinquent senior lien.
|
E*TRADE
|
Q1 2017 10-Q
61
|
|
|
|
(3)
|
The unpaid principal balance in one- to four-family TDRs was
$234 million
and
$243 million
at
March 31, 2017 and December 31, 2016
, respectively. For home equity loans, the recorded investment in TDRs represents the unpaid principal balance.
|
|
|
|
|
(4)
|
Total recorded investment in TDRs at
March 31, 2017
consisted of
$307 million
of loans modified as TDRs and
$117 million
of loans that have been charged off due to bankruptcy notification. Total recorded investment in TDRs at
December 31, 2016
consisted of
$316 million
of loans modified as TDRs and
$125 million
of loans that have been charged off due to bankruptcy notification.
|
The recorded investment in loans modified as TDRs includes the charge-offs related to certain loans that were written down to estimated current value of the underlying property less estimated selling costs. These charge-offs were recorded on modified loans that were delinquent in excess of 180 days, in bankruptcy, or when certain characteristics of the loan, including CLTV, borrower's credit and type of modification, cast substantial doubt on the borrower's ability to repay the loan.
The following table shows the average recorded investment and interest income recognized both on a cash and accrual basis for the Company’s TDRs during the
three months ended
March 31, 2017
and
2016
(dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Recorded Investment
|
|
Interest Income Recognized
|
|
|
Three Months Ended March 31,
|
|
Three Months Ended March 31,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
One- to four-family
|
$
|
241
|
|
|
$
|
282
|
|
|
$
|
3
|
|
|
$
|
2
|
|
|
Home equity
|
192
|
|
|
205
|
|
|
4
|
|
|
4
|
|
|
Total
|
$
|
433
|
|
|
$
|
487
|
|
|
$
|
7
|
|
|
$
|
6
|
|
The following table shows detailed information related to the Company’s TDRs and specific valuation allowances at
March 31, 2017 and December 31, 2016
(dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
December 31, 2016
|
|
|
Recorded
Investment
in TDRs
|
|
Specific
Valuation
Allowance
|
|
Net
Investment
in TDRs
|
|
Recorded
Investment
in TDRs
|
|
Specific
Valuation
Allowance
|
|
Net
Investment
in TDRs
|
|
With a recorded allowance:
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to four-family
|
$
|
55
|
|
|
$
|
5
|
|
|
$
|
50
|
|
|
$
|
61
|
|
|
$
|
7
|
|
|
$
|
54
|
|
|
Home equity
|
$
|
101
|
|
|
$
|
45
|
|
|
$
|
56
|
|
|
$
|
111
|
|
|
$
|
51
|
|
|
$
|
60
|
|
|
Without a recorded allowance:
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to four-family
|
$
|
181
|
|
|
$
|
—
|
|
|
$
|
181
|
|
|
$
|
185
|
|
|
$
|
—
|
|
|
$
|
185
|
|
|
Home equity
|
$
|
87
|
|
|
$
|
—
|
|
|
$
|
87
|
|
|
$
|
84
|
|
|
$
|
—
|
|
|
$
|
84
|
|
|
Total:
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to four-family
|
$
|
236
|
|
|
$
|
5
|
|
|
$
|
231
|
|
|
$
|
246
|
|
|
$
|
7
|
|
|
$
|
239
|
|
|
Home equity
|
$
|
188
|
|
|
$
|
45
|
|
|
$
|
143
|
|
|
$
|
195
|
|
|
$
|
51
|
|
|
$
|
144
|
|
|
|
|
|
(1)
|
Represents loans where the discounted cash flow analysis or collateral value is equal to or exceeds the recorded investment in the loan.
|
E*TRADE
|
Q1 2017 10-Q
62
The following tables provide the number of loans and post-modification balances immediately after being modified by major class during the
three months ended
March 31, 2017
and
2016
(dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2017
|
|
|
|
|
Interest Rate Reduction
|
|
|
|
|
|
|
Number of
Loans
|
|
Re-age/
Extension/
Interest
Capitalization
|
|
Other with
Interest Rate
Reduction
|
|
Other
(1)
|
|
Total
|
|
One- to four-family
|
8
|
|
|
$
|
2
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2
|
|
|
Home equity
|
161
|
|
|
3
|
|
|
—
|
|
|
8
|
|
|
11
|
|
|
Total
|
169
|
|
|
$
|
5
|
|
|
$
|
—
|
|
|
$
|
8
|
|
|
$
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2016
|
|
|
|
|
Interest Rate Reduction
|
|
|
|
|
|
|
Number of
Loans
|
|
Re-age/
Extension/
Interest
Capitalization
|
|
Other with
Interest Rate
Reduction
|
|
Other
(1)
|
|
Total
|
|
One- to four-family
|
14
|
|
|
$
|
4
|
|
|
$
|
—
|
|
|
$
|
1
|
|
|
$
|
5
|
|
|
Home equity
|
193
|
|
|
2
|
|
|
1
|
|
|
12
|
|
|
15
|
|
|
Total
|
207
|
|
|
$
|
6
|
|
|
$
|
1
|
|
|
$
|
13
|
|
|
$
|
20
|
|
|
|
|
|
(1)
|
Amounts represent loans whose terms were modified in a manner that did not result in an interest rate reduction, including re-aged loans, extensions, and loans with capitalized interest.
|
E*TRADE
|
Q1 2017 10-Q
63
NOTE 7—DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Company enters into derivative transactions primarily to protect against interest rate risk on the value of certain assets. Each derivative instrument is recorded on the consolidated balance sheet at fair value as a freestanding asset or liability. The following table summarizes the fair value of derivatives as reported in the consolidated balance sheet at
March 31, 2017 and December 31, 2016
(dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
(1)
|
|
|
Notional
|
|
Asset
(2)
|
|
Liability
(3)
|
|
Net
(4)
|
|
March 31, 2017
|
|
|
|
|
|
|
|
|
Interest rate contracts:
|
|
|
|
|
|
|
|
|
Fair value hedges
|
$
|
5,569
|
|
|
$
|
128
|
|
|
$
|
(12
|
)
|
|
$
|
116
|
|
|
Total derivatives designated as hedging instruments
(4)
|
$
|
5,569
|
|
|
$
|
128
|
|
|
$
|
(12
|
)
|
|
$
|
116
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
Interest rate contracts:
|
|
|
|
|
|
|
|
|
Fair value hedges
|
$
|
3,862
|
|
|
$
|
165
|
|
|
$
|
(31
|
)
|
|
$
|
134
|
|
|
Total derivatives designated as hedging instruments
(4)
|
$
|
3,862
|
|
|
$
|
165
|
|
|
$
|
(31
|
)
|
|
$
|
134
|
|
|
|
|
|
(1)
|
At March 31, 2017, excludes derivative assets and liabilities of
$16 million
and
$17 million
, respectively, that were executed through a central clearing organization and were settled by variation margin payments. See
Note 4—Offsetting Assets and Liabilities
for additional information.
|
|
|
|
|
(2)
|
Reflected in the other assets line item on the consolidated balance sheet.
|
|
|
|
|
(3)
|
Reflected in the other liabilities line item on the consolidated balance sheet.
|
|
|
|
|
(4)
|
Represents net fair value of derivative instruments for disclosure purposes only.
|
|
|
|
|
(5)
|
All derivatives were designated as hedging instruments at
March 31, 2017 and December 31, 2016
.
|
Fair Value Hedges
Fair value hedges are used to offset exposure to changes in value of certain fixed-rate assets. Fair value hedges are accounted for by recording the fair value of the derivative instrument and the fair value of the asset being hedged on the consolidated balance sheet. Changes in the fair value of both the derivative instruments and the underlying assets are recognized in the
gains on securities and other, net
line item in the
consolidated statement of income
. To the extent that the hedge is ineffective, the changes in the fair values will not offset and the difference, or hedge ineffectiveness, is reflected in the
gains on securities and other, net
line item in the
consolidated statement of income
.
Hedge accounting is discontinued for fair value hedges if a derivative instrument is sold, terminated or otherwise de-designated. If fair value hedge accounting is discontinued, the previously hedged item is no longer adjusted for changes in fair value through the
consolidated statement of income
and the cumulative net gain or loss on the hedged asset or liability at the time of de-designation is amortized to interest income or interest expense using the effective interest method over the expected remaining life of the hedged item. Changes in the fair value of the derivative instruments after de-designation of fair value hedge accounting are recorded in the
gains on securities and other, net
line item in the
consolidated statement of income
.
E*TRADE
|
Q1 2017 10-Q
64
The following table summarizes the effect of interest rate contracts designated as fair value hedges and related hedged items on the
consolidated statement of income
for the
three months ended
March 31, 2017
and
2016
(dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
2017
|
|
2016
|
|
|
Hedging
Instrument
|
|
Hedged
Item
|
|
Hedge
Ineffectiveness
(1)
|
|
Hedging
Instrument
|
|
Hedged
Item
|
|
Hedge
Ineffectiveness
(1)
|
|
Agency debentures
|
$
|
11
|
|
|
$
|
(11
|
)
|
|
$
|
—
|
|
|
$
|
(47
|
)
|
|
$
|
46
|
|
|
$
|
(1
|
)
|
|
Agency mortgage-backed securities
|
13
|
|
|
(14
|
)
|
|
(1
|
)
|
|
(69
|
)
|
|
68
|
|
|
(1
|
)
|
|
Total gains (losses) included in earnings
|
$
|
24
|
|
|
$
|
(25
|
)
|
|
$
|
(1
|
)
|
|
$
|
(116
|
)
|
|
$
|
114
|
|
|
$
|
(2
|
)
|
|
|
|
|
(1)
|
Reflected in the
gains on securities and other, net
line item on the
consolidated statement of income
.
|
NOTE 8—DEPOSITS
Deposits are summarized as follows (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount
|
|
Weighted-Average Rate
|
|
|
March 31, 2017
|
|
December 31, 2016
|
|
March 31, 2017
|
|
December 31, 2016
|
|
Sweep deposits
|
$
|
31,955
|
|
|
$
|
26,362
|
|
|
0.01
|
%
|
|
0.01
|
%
|
|
Savings deposits
|
3,238
|
|
|
3,185
|
|
|
0.01
|
%
|
|
0.01
|
%
|
|
Other deposits
(1)(2)
|
2,191
|
|
|
2,135
|
|
|
0.03
|
%
|
|
0.03
|
%
|
|
Total deposits
|
$
|
37,384
|
|
|
$
|
31,682
|
|
|
0.01
|
%
|
|
0.01
|
%
|
|
|
|
|
(1)
|
Includes checking deposits, money market and time deposits.
|
|
|
|
|
(2)
|
As of
March 31, 2017 and December 31, 2016
, the Company had
$195 million
and
$177 million
in non-interest bearing deposits, respectively.
|
NOTE 9—OTHER BORROWINGS
Other borrowings at
March 31, 2017 and December 31, 2016
represent trust preferred securities, which begin maturing in
2031
.
External Lines of Credit maintained at E*TRADE Securities
E*TRADE Securities' external liquidity lines total approximately
$1.1 billion
as of
March 31, 2017
and include the following:
|
|
|
|
•
|
A 364-day,
$400 million
senior unsecured committed revolving credit facility with a syndicate of banks that matures in June 2017
|
|
|
|
|
•
|
Secured committed lines of credit with
two
unaffiliated banks, aggregating to
$175 million
with a maturity date of June 2017
|
|
|
|
|
•
|
Unsecured uncommitted lines of credit with
two
unaffiliated banks aggregating to
$100 million
, of which
$75 million
is scheduled to mature in June 2017 and the remaining line has no maturity date
|
|
|
|
|
•
|
Secured uncommitted lines of credit with several unaffiliated banks aggregating to
$375 million
with no maturity date
|
The revolving credit facility contains maintenance covenants related to E*TRADE Securities' minimum consolidated tangible net worth and regulatory net capital ratio. There were
no
outstanding balances for these lines at
March 31, 2017
.
E*TRADE
|
Q1 2017 10-Q
65
NOTE 10—CORPORATE DEBT
Corporate debt at
March 31, 2017 and December 31, 2016
is outlined in the following table (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Face Value
|
|
Discount
|
|
Net
|
|
March 31, 2017
|
|
|
|
|
|
|
Interest-bearing notes:
|
|
|
|
|
|
|
5
3
/
8
% Notes, due 2022
|
$
|
540
|
|
|
$
|
(5
|
)
|
|
$
|
535
|
|
|
4
5
/
8
% Notes, due 2023
|
460
|
|
|
(4
|
)
|
|
456
|
|
|
Total corporate debt
|
$
|
1,000
|
|
|
$
|
(9
|
)
|
|
$
|
991
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
|
|
|
Interest-bearing notes:
|
|
|
|
|
|
|
5
3
/
8
% Notes, due 2022
|
$
|
540
|
|
|
$
|
(5
|
)
|
|
$
|
535
|
|
|
4
5
/
8
% Notes, due 2023
|
460
|
|
|
(4
|
)
|
|
456
|
|
|
Total interest-bearing notes
|
1,000
|
|
|
(9
|
)
|
|
991
|
|
|
Non-interest-bearing debt:
|
|
|
|
|
|
|
0% Convertible debentures, due 2019
|
3
|
|
|
—
|
|
|
3
|
|
|
Total corporate debt
|
$
|
1,003
|
|
|
$
|
(9
|
)
|
|
$
|
994
|
|
Conversions of Convertible Debentures
During the
three months ended
March 31, 2017
,
$3 million
of the Company’s convertible debentures were converted into
0.3 million
shares of common stock.
Credit Facility
The Company maintains a
$250 million
senior secured revolving credit facility, for which there was
no
outstanding balance at March 31, 2017. The credit facility expires in November 2017. The Company has the ability to borrow against the credit facility for working capital and general corporate purposes. The credit facility contains certain maintenance covenants, including the requirement for the parent company to maintain unrestricted cash of
$100 million
. At March 31, 2017, the Company was in compliance with the maintenance covenants.
E*TRADE
|
Q1 2017 10-Q
66
NOTE 11—SHAREHOLDERS' EQUITY
The following tables present after-tax changes in each component of accumulated other comprehensive loss for the
three months ended
March 31, 2017 and 2016
(dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-Sale
Securities
|
|
Foreign
Currency
Translation
|
|
Total
|
|
Balance, December 31, 2016
|
$
|
(139
|
)
|
|
$
|
2
|
|
|
$
|
(137
|
)
|
|
Other comprehensive income before reclassifications
|
46
|
|
|
—
|
|
|
46
|
|
|
Amounts reclassified from accumulated other comprehensive loss
|
(5
|
)
|
|
(2
|
)
|
|
(7
|
)
|
|
Net change
|
41
|
|
|
(2
|
)
|
|
39
|
|
|
Balance, March 31, 2017
|
$
|
(98
|
)
|
|
$
|
—
|
|
|
$
|
(98
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-Sale
Securities
|
|
Foreign
Currency
Translation
|
|
Total
|
|
Balance, December 31, 2015
|
$
|
(101
|
)
|
|
$
|
2
|
|
|
$
|
(99
|
)
|
|
Other comprehensive income before reclassifications
|
94
|
|
|
—
|
|
|
94
|
|
|
Amounts reclassified from accumulated other comprehensive loss
|
(9
|
)
|
|
—
|
|
|
(9
|
)
|
|
Net change
|
85
|
|
|
—
|
|
|
85
|
|
|
Balance, March 31, 2016
|
$
|
(16
|
)
|
|
$
|
2
|
|
|
$
|
(14
|
)
|
The following table presents other comprehensive income activity and the related tax effect for the
three months ended
March 31, 2017 and 2016
(dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
2017
|
|
2016
|
|
|
Before Tax
|
|
Tax Effect
|
|
After Tax
|
|
Before Tax
|
|
Tax Effect
|
|
After Tax
|
|
Other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains, net
|
$
|
76
|
|
|
$
|
(30
|
)
|
|
$
|
46
|
|
|
$
|
152
|
|
|
$
|
(58
|
)
|
|
$
|
94
|
|
|
Reclassification into earnings, net
|
(8
|
)
|
|
3
|
|
|
(5
|
)
|
|
(15
|
)
|
|
6
|
|
|
(9
|
)
|
|
Net change from available-for-sale securities
|
68
|
|
|
(27
|
)
|
|
41
|
|
|
137
|
|
|
(52
|
)
|
|
85
|
|
|
Reclassification of foreign currency translation gains
|
(2
|
)
|
|
—
|
|
|
(2
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Other comprehensive income
|
$
|
66
|
|
|
$
|
(27
|
)
|
|
$
|
39
|
|
|
$
|
137
|
|
|
$
|
(52
|
)
|
|
$
|
85
|
|
E*TRADE
|
Q1 2017 10-Q
67
The following table presents the consolidated statement of income line items impacted by reclassifications out of accumulated other comprehensive loss for the
three months ended
March 31, 2017 and 2016
(dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated Other Comprehensive Loss Components
|
|
Amounts Reclassified from Accumulated Other Comprehensive Loss
|
|
Affected Line Items in the Consolidated Statement of Income
|
|
|
|
Three Months Ended March 31,
|
|
|
|
|
|
2017
|
|
2016
|
|
|
|
Available-for-sale securities:
|
|
|
|
|
|
|
|
|
|
$
|
8
|
|
|
$
|
15
|
|
|
Gains on securities and other, net
|
|
|
|
(3
|
)
|
|
(6
|
)
|
|
Income tax expense
|
|
|
|
$
|
5
|
|
|
$
|
9
|
|
|
Reclassification into earnings, net
|
|
Foreign currency translation:
|
|
|
|
|
|
|
|
|
|
$
|
2
|
|
|
$
|
—
|
|
|
Other non-interest expenses
|
|
|
|
$
|
2
|
|
|
$
|
—
|
|
|
Reclassification into earnings, net
|
Preferred Stock Dividends
On February 2, 2017, the Board declared a dividend of
$32.64
per share, or
$13 million
, to holders of record of the Series A Preferred stock as of February 28, 2017. The dividend was paid on March 15, 2017.
NOTE 12—EARNINGS PER SHARE
The following table presents a reconciliation of basic and diluted earnings per common share (in millions, except share data and per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
2017
|
|
2016
|
|
Basic:
|
|
|
|
|
Net income
|
$
|
145
|
|
|
$
|
153
|
|
|
Preferred stock dividends
|
13
|
|
|
—
|
|
|
Net income available to common shareholders
|
$
|
132
|
|
|
$
|
153
|
|
|
Basic weighted-average shares outstanding (in thousands)
|
274,876
|
|
|
285,274
|
|
|
Basic earnings per common share
|
$
|
0.48
|
|
|
$
|
0.54
|
|
|
Diluted:
|
|
|
|
|
Net income
|
$
|
145
|
|
|
$
|
153
|
|
|
Preferred stock dividends
|
13
|
|
|
—
|
|
|
Net income available to common shareholders
|
$
|
132
|
|
|
$
|
153
|
|
|
Basic weighted-average shares outstanding (in thousands)
|
274,876
|
|
|
285,274
|
|
|
Effect of dilutive securities:
|
|
|
|
|
Weighted-average restricted stock and options issued to employees (in thousands)
|
1,109
|
|
|
809
|
|
|
Weighted-average convertible debentures (in thousands)
|
292
|
|
|
597
|
|
|
Diluted weighted-average shares outstanding (in thousands)
|
276,277
|
|
|
286,680
|
|
|
Diluted earnings per common share
|
$
|
0.48
|
|
|
$
|
0.53
|
|
For both the three months ended March 31, 2017 and 2016, the Company excluded less than
0.1 million
of stock options and restricted stock awards and units from the calculations of diluted earnings per share as the effect would have been anti-dilutive.
E*TRADE
|
Q1 2017 10-Q
68
NOTE 13—REGULATORY REQUIREMENTS
Broker-Dealer and FCM Capital Requirements
The Company’s U.S. broker-dealer subsidiaries are subject to the Uniform Net Capital Rule under the Securities Exchange Act of 1934 administered by the SEC and FINRA, which requires the maintenance of minimum net capital. The minimum net capital requirements can be met under either the Aggregate Indebtedness method or the Alternative method. Under the Aggregate Indebtedness method, a broker-dealer is required to maintain minimum net capital of the greater of 6
2
/
3
% of its aggregate indebtedness, as defined, or a minimum dollar amount. Under the Alternative method, a broker-dealer is required to maintain net capital equal to the greater of
$250,000
or
2%
of aggregate debit balances arising from customer transactions. The method used depends on the individual U.S. broker-dealer subsidiary. As FCMs, the Company’s U.S. broker-dealer subsidiaries are also subject to CFTC net capital requirements, including the maintenance of adjusted net capital equal to or in excess of the greater of (1)
$1,000,000
(2) the FCM's risk-based capital requirement, computed as
8%
of the total risk margin requirements for all positions carried in customer and non-customer accounts, (3) the amount of adjusted net capital required by the NFA or (4) the amount of net capital required by the SEC's net capital rule. The Company’s international broker-dealer subsidiary is subject to capital requirements determined by its respective regulator.
At
March 31, 2017 and December 31, 2016
, all of the Company’s broker-dealer subsidiaries met minimum net capital requirements. The tables below summarize the minimum capital requirements and excess capital for the Company’s broker-dealer subsidiaries at
March 31, 2017 and December 31, 2016
(dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Required Net
Capital
|
|
Net Capital
|
|
Excess Net
Capital
|
|
March 31, 2017:
|
|
|
|
|
|
|
E*TRADE Securities
(1)(2)
|
$
|
167
|
|
|
$
|
1,006
|
|
|
$
|
839
|
|
|
OptionsHouse
(3)
|
1
|
|
|
28
|
|
|
27
|
|
|
Other broker-dealer
|
1
|
|
|
20
|
|
|
19
|
|
|
Total
|
$
|
169
|
|
|
$
|
1,054
|
|
|
$
|
885
|
|
|
December 31, 2016:
|
|
|
|
|
|
|
E*TRADE Securities
(1)
|
$
|
158
|
|
|
$
|
969
|
|
|
$
|
811
|
|
|
OptionsHouse
(3)
|
1
|
|
|
22
|
|
|
21
|
|
|
Other broker-dealer
|
—
|
|
|
21
|
|
|
21
|
|
|
Total
|
$
|
159
|
|
|
$
|
1,012
|
|
|
$
|
853
|
|
|
|
|
|
(1)
|
Elected to use the Alternative method to compute required net capital.
|
|
|
|
|
(2)
|
E*TRADE Securities paid a dividend of
$70 million
to the parent company during the
three months ended March 31, 2017
and
$50 million
in April 2017.
|
|
|
|
|
(3)
|
Elected to use the Aggregate Indebtedness method to compute net capital; however, as OptionsHouse is an FCM, the prescribed fixed-dollar minimum capital requirement is
$1 million
.
|
Bank Capital Requirements
E*TRADE Financial and E*TRADE Bank are subject to various regulatory capital requirements administered by federal banking agencies. Failure to meet minimum capital requirements can trigger certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on E*TRADE Financial’s and E*TRADE Bank’s financial condition and results of operations. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, E*TRADE Financial and E*TRADE Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. In addition, E*TRADE Bank may not pay dividends to the parent company without the non-objection, or in certain cases the approval, of its regulators, and any loans by E*TRADE Bank to the parent company and its other non-bank subsidiaries are subject to various quantitative, arm’s length, collateralization and other requirements. E*TRADE Financial’s and E*TRADE Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.
E*TRADE
|
Q1 2017 10-Q
69
Quantitative measures established by regulation to ensure capital adequacy require E*TRADE Financial and E*TRADE Bank to meet minimum Tier 1 leverage, common equity Tier 1 capital, Tier 1 risk-based capital and total risk-based capital ratios. Events beyond management's control, such as deterioration in credit markets, could adversely affect future earnings and E*TRADE Financial’s and E*TRADE Bank’s ability to meet future capital requirements. E*TRADE Financial and E*TRADE Bank were categorized as "well capitalized" under the regulatory framework for prompt corrective action for the periods presented in the table below (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
December 31, 2016
|
|
|
Actual
|
|
Well Capitalized Minimum Capital
|
|
Excess Capital
|
|
Actual
|
|
Well Capitalized Minimum Capital
|
|
Excess Capital
|
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
E*TRADE Financial
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 leverage
|
$
|
3,710
|
|
|
7.2
|
%
|
|
$
|
2,560
|
|
|
5.0
|
%
|
|
$
|
1,150
|
|
|
$
|
3,610
|
|
|
7.8
|
%
|
|
$
|
2,316
|
|
|
5.0
|
%
|
|
$
|
1,294
|
|
|
Common equity Tier 1 capital
|
$
|
3,452
|
|
|
33.0
|
%
|
|
$
|
680
|
|
|
6.5
|
%
|
|
$
|
2,772
|
|
|
$
|
3,483
|
|
|
37.0
|
%
|
|
$
|
612
|
|
|
6.5
|
%
|
|
$
|
2,871
|
|
|
Tier 1 risk-based capital
|
$
|
3,710
|
|
|
35.4
|
%
|
|
$
|
837
|
|
|
8.0
|
%
|
|
$
|
2,873
|
|
|
$
|
3,610
|
|
|
38.3
|
%
|
|
$
|
754
|
|
|
8.0
|
%
|
|
$
|
2,856
|
|
|
Total risk-based capital
|
$
|
4,259
|
|
|
40.7
|
%
|
|
$
|
1,047
|
|
|
10.0
|
%
|
|
$
|
3,212
|
|
|
$
|
4,148
|
|
|
44.0
|
%
|
|
$
|
942
|
|
|
10.0
|
%
|
|
$
|
3,206
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
December 31, 2016
|
|
|
Actual
|
|
Well Capitalized Minimum Capital
|
|
Excess Capital
|
|
Actual
|
|
Well Capitalized Minimum Capital
|
|
Excess Capital
|
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
E*TRADE Bank
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 leverage
|
$
|
3,251
|
|
|
8.1
|
%
|
|
$
|
2,018
|
|
|
5.0
|
%
|
|
$
|
1,233
|
|
|
$
|
3,132
|
|
|
8.8
|
%
|
|
$
|
1,786
|
|
|
5.0
|
%
|
|
$
|
1,346
|
|
|
Common equity Tier 1 capital
|
$
|
3,251
|
|
|
35.0
|
%
|
|
$
|
603
|
|
|
6.5
|
%
|
|
$
|
2,648
|
|
|
$
|
3,132
|
|
|
38.3
|
%
|
|
$
|
532
|
|
|
6.5
|
%
|
|
$
|
2,600
|
|
|
Tier 1 risk-based capital
|
$
|
3,251
|
|
|
35.0
|
%
|
|
$
|
742
|
|
|
8.0
|
%
|
|
$
|
2,509
|
|
|
$
|
3,132
|
|
|
38.3
|
%
|
|
$
|
655
|
|
|
8.0
|
%
|
|
$
|
2,477
|
|
|
Total risk-based capital
|
$
|
3,369
|
|
|
36.3
|
%
|
|
$
|
928
|
|
|
10.0
|
%
|
|
$
|
2,441
|
|
|
$
|
3,237
|
|
|
39.5
|
%
|
|
$
|
819
|
|
|
10.0
|
%
|
|
$
|
2,418
|
|
|
|
|
|
(1)
|
The Basel III final rule introduces a capital conservation buffer that limits a banking organization’s ability to make capital distributions and discretionary bonus payments to executive officers if a banking organization fails to maintain a Common Equity Tier 1 capital conservation buffer of more than
2.5%
, on a fully phased-in basis, of total risk-weighted assets above each of the following minimum risk-based capital ratio requirements: Common Equity Tier 1 capital (
4.5%
), Tier 1 (
6.0%
), and total risk-based capital (
8.0%
). This requirement was effective beginning on January 1, 2016, and will be fully phased-in by 2019. Certain new regulatory deductions and adjustments are subject to a phase-in period over a
four
year period, beginning at
40%
in 2015 and fully implemented at
100%
in 2018.
|
NOTE 14—COMMITMENTS, CONTINGENCIES AND OTHER REGULATORY MATTERS
The Company reviews its lawsuits, regulatory inquiries and other legal proceedings on an ongoing basis and provides disclosure and records loss contingencies in accordance with the loss contingencies accounting guidance. The Company establishes an accrual for losses at management's best estimate when it assesses that it is probable that a loss has been incurred and the amount of the loss can be reasonably estimated. The Company monitors these matters for developments that would affect the likelihood of a loss and the accrued amount, if any, and adjusts the amount as appropriate.
Litigation Matters
On October 27, 2000, Ajaxo, Inc. (Ajaxo) filed a complaint in the Superior Court for the State of California, County of Santa Clara. Ajaxo sought damages and certain non-monetary relief for the Company’s alleged breach of a non-disclosure agreement with Ajaxo pertaining to certain wireless technology that Ajaxo
E*TRADE
|
Q1 2017 10-Q
70
offered the Company as well as damages and other relief against the Company for their alleged misappropriation of Ajaxo’s trade secrets. Following a jury trial, a judgment was entered in 2003 in favor of Ajaxo against the Company for
$1 million
for breach of the Ajaxo non-disclosure agreement. Although the jury found in favor of Ajaxo on its claim against the Company for misappropriation of trade secrets, the trial court subsequently denied Ajaxo’s requests for additional damages and relief. On December 21, 2005, the California Court of Appeal affirmed the above-described award against the Company for breach of the nondisclosure agreement but remanded the case to the trial court for the limited purpose of determining what, if any, additional damages Ajaxo may be entitled to as a result of the jury’s previous finding in favor of Ajaxo on its claim against the Company for misappropriation of trade secrets. Although the Company paid Ajaxo the full amount due on the above-described judgment, the case was remanded back to the trial court, and on May 30, 2008, a jury returned a verdict in favor of the Company denying all claims raised and demands for damages against the Company. Following the trial court’s entry of judgment in favor of the Company on September 5, 2008, Ajaxo filed post-trial motions for vacating this entry of judgment and requesting a new trial. The trial court denied these motions. On December 2, 2008, Ajaxo filed a notice of appeal with the Court of Appeal of the State of California for the Sixth District. On August 30, 2010, the Court of Appeal affirmed the trial court’s verdict in part and reversed the verdict in part, remanding the case. The Company petitioned the Supreme Court of California for review of the Court of Appeal decision. On December 16, 2010, the California Supreme Court denied the Company’s petition for review and remanded for further proceedings to the trial court. The testimonial phase of the third trial in this matter concluded on June 12, 2012. By order dated May 28, 2014, the Court determined to conduct a second phase of this bench trial to allow Ajaxo to attempt to prove entitlement to additional royalties. Hearings in phase two of the trial concluded January 8, 2015. In a Judgment and Statement of Decision filed September 16, 2015, the Court denied all claims for royalties by Ajaxo. Ajaxo’s post-trial motions were denied. Ajaxo has appealed to the Court of Appeal, Sixth District. Briefing of this appeal is expected to conclude in August 2017. The Company will continue to defend itself vigorously.
On May 16, 2011, Droplets Inc., the holder of
two
patents pertaining to user interface servers, filed a complaint in the U.S. District Court for the Eastern District of Texas against E*TRADE Financial Corporation, E*TRADE Securities, E*TRADE Bank and multiple other unaffiliated financial services firms. Plaintiff contends that the defendants engaged in patent infringement under federal law. Plaintiff seeks unspecified damages and an injunction against future infringements, plus royalties, costs, interest and attorneys’ fees. On March 28, 2012, a change of venue was granted and the case was transferred to the United States District Court for the Southern District of New York. The Company's motion for summary judgment on the grounds of non-infringement was granted by the U.S. District Court in a Decision and Order dated March 9, 2015. All remaining claims are stayed pending resolution of issues on Droplet's remaining patents under review by the Patent Trial and Appeal Board (PTAB). On July 6, 2015, the PTAB instituted an inter partes review of plaintiff's '115 patent. A hearing on the
inter partes
review was conducted on March 14, 2016. On June 23, 2016, the PTAB deemed Droplets’ putative '115 patent to be “unpatentable.” In a separate proceeding, the PTAB has also separately deemed Droplets’ putative '838 patent to be “unpatentable.” Droplets has appealed to the Circuit Court of Appeals for the District of Columbia. The opening brief was filed on December 23, 2016 and briefing is expected to continue in 2017. The Company will continue to defend itself vigorously in this matter.
On April 30, 2013, a putative class action was filed by John Scranton, on behalf of himself and a class of persons similarly situated, against E*TRADE Financial Corporation and E*TRADE Securities in the Superior Court of California, County of Santa Clara, pursuant to the California procedures for a private Attorney General action. The complaint alleged that the Company misrepresented through its website that it would always automatically exercise options that were in-the-money by
$0.01
or more on expiration date. Plaintiffs allege violations of the California Unfair Competition Law, the California Consumer Remedies Act, fraud, misrepresentation, negligent misrepresentation and breach of fiduciary duty. The case has been deemed complex within the meaning of the California Rules of Court, and a case management conference was held on September 13, 2013. The Company’s demurrer and motion to strike the complaint were granted by order dated December 20, 2013. The Court granted leave to amend the complaint. A second amended complaint was filed on January 31, 2014. On March 11, 2014, the Company moved to strike and for a demurrer to the second amended complaint. On October 20, 2014, the Court sustained the Company's demurrer, dismissing
four
counts of the second amended complaint with prejudice and
two
counts without prejudice. The plaintiffs filed a third amended complaint on November 10, 2014. The Company filed a third demurrer and motion to strike on December 12, 2014. By order dated March 18, 2015, the Superior Court entered a final order sustaining the Company's demurrer on all remaining claims with prejudice. Final judgment was
E*TRADE
|
Q1 2017 10-Q
71
entered in the Company's favor on April 8, 2015. Plaintiff filed a Notice of Appeal April 27, 2015. Briefing is scheduled to continue through 2017. The Company will continue to defend itself vigorously in this matter.
On March 26, 2015, a putative class action was filed in the U.S. District Court for the Northern District of California by Ty Rayner, on behalf of himself and all others similarly situated, naming E*TRADE Financial Corporation and E*TRADE Securities as defendants. The complaint alleges that E*TRADE breached a fiduciary duty and unjustly enriched itself in connection with the routing of its customers’ orders to various market-makers and exchanges. Plaintiff seeks unspecified damages, declaratory relief, restitution, disgorgement of payments received by the Company, and attorneys’ fees. On July 23, 2016, a putative class action was filed in the U.S. District Court for the Southern District of New York by Craig L. Schwab, on behalf of himself and others similarly situated, naming E*TRADE Financial Corporation, E*TRADE Securities LLC, and former Company executives as defendants. The complaint alleges that E*TRADE violated federal securities laws in connection with the routing of its customers’ orders to various market-makers and exchanges. Plaintiff seeks unspecified damages, declaratory relief, restitution, disgorgement of payments received by the Company, and attorneys’ fees. By stipulation, the
Rayner
case has been consolidated with the
Schwab
case and both matters are now venued in the Southern District of New York. E*TRADE has moved to dismiss the complaint in
Rayner
. On April 2, 2017, the District Court dismissed the complaint in
Rayner.
E*TRADE moved to dismiss the
Schwab
case on January 11, 2017; and in response, the Schwab plaintiffs submitted an amended Complaint on February 10, 2017. The amended
Schwab
complaint asserts only
two
claims: violation of Section 10(b) of the Exchange Act by E*TRADE Securities LLC and E*TRADE Financial Corporation; and violation of Section 20(a) of the Exchange Act by E*TRADE's two most recent chief executive officers. Briefing is expected to continue in April 2017. The Company will continue to defend itself vigorously in these matters.
In addition to the matters described above, the Company is subject to various legal proceedings and claims that arise in the normal course of business. In each pending matter, the Company contests liability or the amount of claimed damages. In view of the inherent difficulty of predicting the outcome of such matters, particularly in cases where claimants seek substantial or indeterminate damages, or where investigation or discovery have yet to be completed, the Company is unable to estimate a range of reasonably possible losses on its remaining outstanding legal proceedings; however, the Company believes any losses, both individually or in the aggregate, would not be reasonably likely to have a material adverse effect on the consolidated financial condition or results of operations of the Company.
An unfavorable outcome in any matter could have a material adverse effect on the Company’s business, financial condition, results of operations or cash flows. In addition, even if the ultimate outcomes are resolved in the Company’s favor, the defense of such litigation could entail considerable cost or the diversion of the efforts of management, either of which could have a material adverse effect on the Company’s business, financial condition, results of operations or cash flows.
Regulatory Matters
The securities, futures, foreign currency and banking industries are subject to extensive regulation under federal, state and applicable international laws. From time to time, the Company has been threatened with or named as a defendant in lawsuits, arbitrations and administrative claims involving securities, banking and other matters. The Company is also subject to periodic regulatory examinations and inspections. Compliance and trading problems that are reported to regulators, such as the SEC, FINRA, NASDAQ, CFTC, NFA, FDIC, Federal Reserve Bank of Richmond, OCC, or the Consumer Financial Protection Bureau (CFPB) by dissatisfied customers or others are investigated by such regulators, and may, if pursued, result in formal claims being filed against the Company by customers or disciplinary action being taken against the Company or its employees by regulators. Any such claims or disciplinary actions that are decided against the Company could have a material impact on the financial results of the Company or any of its subsidiaries.
E*TRADE
|
Q1 2017 10-Q
72
Insurance
The Company maintains insurance coverage that management believes is reasonable and prudent. The principal insurance coverage it maintains covers commercial general liability; property damage; hardware/software damage; cyber liability; directors and officers; employment practices liability; certain criminal acts against the Company; and errors and omissions. The Company believes that such insurance coverage is adequate for the purpose of its business. The Company’s ability to maintain this level of insurance coverage in the future, however, is subject to the availability of affordable insurance in the marketplace.
Commitments
In the normal course of business, the Company makes various commitments to extend credit and incur contingent liabilities that are not reflected in the consolidated balance sheet. Significant changes in the economy or interest rates may influence the impact that these commitments and contingencies have on the Company in the future.
The Company’s equity method, cost method and other investments are generally limited liability investments in partnerships, companies and other similar entities, including tax credit partnerships and community development entities, which are not required to be consolidated. The Company had
$92 million
in unfunded commitments with respect to these investments at
March 31, 2017
.
At
March 31, 2017
, the Company had approximately
$23 million
of certificates of deposit scheduled to mature in less than one year and approximately
$11 million
of unfunded commitments to extend credit.
Guarantees
In prior periods when the Company sold loans, the Company provided guarantees to investors purchasing mortgage loans, which are considered standard representations and warranties within the mortgage industry. The primary guarantees are that: the mortgage and the mortgage note have been duly executed and each is the legal, valid and binding obligation of the Company, enforceable in accordance with its terms; the mortgage has been duly acknowledged and recorded and is valid; and the mortgage and the mortgage note are not subject to any right of rescission, set-off, counterclaim or defense, including, without limitation, the defense of usury, and no such right of rescission, set-off, counterclaim or defense has been asserted with respect thereto. The Company is responsible for the guarantees on loans sold. If these claims prove to be untrue, the investor can require the Company to repurchase the loan and return all loan purchase and servicing release premiums. Management does not believe the potential liability exposure will have a material impact on the Company’s results of operations, cash flows or financial condition due to the nature of the standard representations and warranties, which have resulted in a minimal amount of loan repurchases.
Prior to 2008, ETBH raised capital through the formation of trusts, which sold TRUPs in the capital markets. The capital securities must be redeemed in whole at the due date, which is generally
30 years
after issuance. Each trust issued TRUPs at par, with a liquidation amount of
$1,000
per capital security. The trusts used the proceeds from the sale of issuances to purchase subordinated debentures issued by ETBH.
During the
30
-year period prior to the redemption of the TRUPs, ETBH guarantees the accrued and unpaid distributions on these securities, as well as the redemption price of the securities and certain costs that may be incurred in liquidating, terminating or dissolving the trusts (all of which would otherwise be payable by the trusts). At
March 31, 2017
, management estimated that the maximum potential liability under this arrangement, including the current carrying value of the trusts, was equal to approximately
$416 million
or the total face value of these securities plus accrued interest payable, which may be unpaid at the termination of the trust arrangement.
E*TRADE
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Q1 2017 10-Q
73