Announces Acquisition of Leading RIA
Technology and Custody Platform
E*TRADE Financial Corporation (NASDAQ:ETFC):
Third Quarter Results
- Net income of $147 million; net income
available to common shareholders of $135 million
- Diluted earnings per common share of
$0.49, which includes net expense of $16 million, or $0.06 per
diluted share, related to losses on early extinguishment of debt
and other items(1)
- Total net revenue of $599 million
- Operating margin of 37 percent;
adjusted operating margin of 42 percent(2)
- Consolidated balance sheet assets of
$60 billion; average interest-earning assets of $54.8 billion; net
interest margin of 285 basis points
- Daily Average Revenue Trades (DARTs) of
206,000; 32 percent in derivatives
- Customer margin balances of $8.5
billion(3)
- Net new brokerage accounts of
26,000
- Net new brokerage assets of $2.2
billion; end of period total customer assets of $365.3 billion
- Managed products of $4.9 billion
- Utilized $187 million to repurchase 4.6
million shares at an average price of $40.64
E*TRADE Financial Corporation (NASDAQ:ETFC) today announced
results for its third quarter ended September 30, 2017,
reporting net income of $147 million and $0.49 diluted earnings per
common share. This compares to $193 million, or $0.70, in the prior
quarter, and $139 million, or $0.51, in the third quarter of 2016.
Total net revenue of $599 million increased from $577 million in
the prior quarter and $486 million in the third quarter of 2016.
Operating margin for the quarter was 37 percent and adjusted
operating margin was 42 percent(2) which compares to 55 percent and
38 percent(2) in the prior quarter and 46 percent and 34 percent(2)
in the year-ago quarter.
“It was another great quarter for E*TRADE, as we surpassed a
number of key milestones, and recorded solid progress against our
growth objectives, all the while producing strong financial
results,” said Karl Roessner, Chief Executive Officer. “We
completed the integration of OptionsHouse—bringing all customers
into one ecosystem, and capturing all expected revenue and expense
synergies. This allows us to decisively pivot our efforts toward
unleashing the full power of our industry-leading derivatives
platform. As it relates to activity, our derivatives mix sustained
last quarter’s record level, and margin balances ended the period
at an all-time high. Our customers remain highly engaged, putting
us on pace for our strongest year on record. On the financial
front, we capitalized on our improved credit profile and the robust
issuance market to refinance our corporate debt at the most
attractive coupons in the Company’s history. We also marched
forward on our capital initiatives, onboarding deposits to grow our
balance sheet through $60 billion, and progressing at pace against
our $1 billion share repurchase program. In all it was another
phenomenal quarter in which we continued to flex our muscles and
harden our resolve. As we close out 2017, I am inspired by all that
the team is poised to accomplish in the quarters and years to
come.”
E*TRADE Financial Corporation also announced today that it has
entered into a definitive agreement to acquire Trust Company of
America (TCA), a leading provider of technology solutions and
custody services to the independent Registered Investment Adviser
(RIA) market, for $275 million in cash. TCA is based in Denver,
Colorado, and has approximately $17 billion in institutional
assets under custody and over 180 active RIAs on its platform, as
of September 2017.
“I am pleased to announce the acquisition of TCA, a leader in
their field, which will help us tap into a growing segment of our
industry, and bolster our ability to attract and retain customers
in need of higher-touch services,” continued Mr. Roessner. “In our
highly competitive sector, we are more than encouraged by the
opportunity to join forces with such an innovative and
well-positioned company. Their superior technology solutions in the
RIA space are a natural complement to the cutting edge digital
experiences we offer to retail investors. Beyond the ability to
offer enhanced services to certain segments of our client base, we
are confident that the extension of the E*TRADE brand will provide
the TCA team with some additional firepower to accelerate
growth.”
E*TRADE expects the transaction to be neutral to earnings in
2018 and accretive in 2019 when full run-rate synergies are
expected. The Company intends to fund the transaction through
issuance of non-cumulative perpetual preferred stock. The
transaction is expected to close in the second quarter of 2018,
subject to customary closing conditions and regulatory
approvals.
E*TRADE was advised by J.P. Morgan Securities LLC and Skadden,
Arps, Slate, Meagher & Flom.
Trust Company of America was advised by Financial Technology
Partners.
Historical metrics and financials can be found on the E*TRADE
Financial corporate website at about.etrade.com.
The Company will host a conference call to discuss the results
beginning at 5 p.m. ET today. This conference call will be
available to domestic participants by dialing (800) 685-3601 while
international participants should dial +1 (303) 223-2699. A live
audio webcast and replay of this conference call will also be
available at about.etrade.com.
About E*TRADE Financial
Securities products and services are offered by E*TRADE
Securities LLC, Member FINRA/SIPC. Investment advisory services are
offered through E*TRADE Capital Management, LLC, a Registered
Investment Adviser. Commodity futures products and services are
offered by E*TRADE Futures LLC, Member NFA. Banking products and
services are offered by E*TRADE Bank, a federal savings bank,
Member FDIC, or its subsidiaries. E*TRADE Securities LLC, E*TRADE
Capital Management, LLC, E*TRADE Futures LLC, and E*TRADE Bank are
separate but affiliated companies. More information is available at
www.etrade.com. ETFC-E
Important Notices
E*TRADE Financial, E*TRADE, the E*TRADE logo, and OptionsHouse
are trademarks or registered trademarks of E*TRADE Financial
Corporation.
Forward-Looking Statements
The statements contained in this news release that are forward
looking, including statements regarding the Company’s proposed
transaction with TCA and its benefits and timing, trading activity,
ability to execute on its business and balance sheet growth plans,
customer acquisition and retention efforts, the potential of the
Company’s derivatives platform, proposed issuance of preferred
stock and the expected financing of the proposed transaction and
the repurchase of shares of its common stock are “forward-looking
statements” within the meaning of the federal securities laws, and
are subject to a number of uncertainties and risks. Actual results
may differ materially from those indicated in the forward-looking
statements. The uncertainties and risks include, but are not
limited to, that the closing of the transaction with TCA may not
occur or may be delayed, regulatory risks associated with the
transaction, unanticipated restructuring costs which may be
incurred or undisclosed liabilities assumed, attempts to retain key
personnel may not succeed, expected synergies and other financial
benefits may not be realized or integration plans may not be
implemented as anticipated and other risks from mergers and
acquisitions, macro trends of the economy in general, market
volatility and its impact on trading volumes, fluctuations in
interest rates, the ability to attract and retain customers and
develop new products and services, increased competition, potential
system disruptions and security breaches, increased restrictions
resulting from financial regulatory reform or changes in the
policies of our regulators, adverse developments in litigation or
regulatory matters, the timing and duration of, and the amount of
shares repurchased and amount of cash expended in connection with,
the share repurchase program, the availability, timing and size of
any preferred stock issuance and the other factors set forth in our
annual, quarterly, and current reports on Form 10-K, Form 10-Q, and
Form 8-K previously filed with the Securities and Exchange
Commission (including information in these reports under the
caption “Risk Factors”). Any forward-looking statement included in
this release speaks only as of the date of this communication; the
Company disclaims any obligation to update any information, except
as required by law.
© 2017 E*TRADE Financial Corporation. All rights reserved.
E*TRADE FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statement of Income (In millions, except
share data and per share amounts) (Unaudited)
Three Months Ended Nine Months
Ended September 30, June 30,
September 30, September 30, 2017 2017
2016 2017 2016 Revenue: Interest income
$ 413 $ 378 $ 309 $ 1,132 $ 923 Interest expense (22 ) (22 ) (22 )
(66 ) (63 ) Net interest income 391 356 287
1,066 860 Commissions 100 105 107 332 320 Fees and
service charges 92 98 68 276 188 Gains on securities and other, net
6 7 14 23 34 Other revenue 10 11 10 32
30 Total non-interest income 208 221 199
663 572 Total net revenue 599 577
486 1,729 1,432 Provision (benefit) for
loan losses (29 ) (99 ) (62 ) (142 ) (131 ) Non-interest expense:
Compensation and benefits 139 133 123 408 374 Advertising and
market development 38 42 27 123 100 Clearing and servicing 29 33 26
94 75 Professional services 25 24 26 71 70 Occupancy and equipment
28 29 24 84 71 Communications 29 36 22 90 65 Depreciation and
amortization 20 20 20 60 60 FDIC insurance premiums 8 8 6 24 18
Amortization of other intangibles 9 9 5 27 15 Restructuring and
acquisition-related activities 4 4 25 12 28 Losses on early
extinguishment of debt 58 — — 58 — Other non-interest expenses 18
21 19 55 54 Total non-interest
expense 405 359 323 1,106 930
Income before income tax expense 223 317 225 765 633 Income tax
expense 76 124 86 280 208 Net
income $ 147 $ 193 $ 139 $ 485 $ 425 Preferred stock dividends 12
— — 25 — Net income available to
common shareholders $ 135 $ 193 $ 139 $ 460
$ 425 Basic earnings per common share $ 0.49 $
0.70 $ 0.51 $ 1.67 $ 1.53 Diluted earnings per common share $ 0.49
$ 0.70 $ 0.51 $ 1.67 $ 1.52 Shares used in computation of per
common share data: Basic (in thousands) 273,441 275,410 274,362
274,565 278,864 Diluted (in thousands) 274,594 276,272 275,472
275,703 280,136
E*TRADE FINANCIAL CORPORATION AND
SUBSIDIARIES Consolidated Balance Sheet (In millions,
except share data) (Unaudited)
September 30, June 30, December 31,
2017 2017 2016 ASSETS Cash and
equivalents $ 896 $ 1,091 $ 1,950
Cash required to be segregated under
federal or other regulations
696 889 1,460 Available-for-sale securities 19,173 18,890 13,892
Held-to-maturity securities 22,920 21,502 15,751 Margin receivables
8,535 7,773 6,731 Loans receivable, net 2,838 3,055 3,551
Receivables from brokers, dealers and
clearing organizations
1,108 1,237 1,056 Property and equipment, net 250 245 239 Goodwill
2,370 2,370 2,370 Other intangibles, net 294 303 320 Deferred tax
assets, net 416 519 756 Other assets 879 879 923
Total assets $ 60,375 $ 58,753 $ 48,999
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities: Deposits $ 41,543 $ 40,072 $ 31,682 Customer
payables 8,716 7,992 8,159 Payables to brokers, dealers and
clearing organizations 1,392 1,473 983 Other borrowings 609 1,009
409 Corporate debt 991 992 994 Other liabilities 476 532
500 Total liabilities 53,727 52,070
42,727
Shareholders' equity:
Preferred stock, $0.01 par value; $1,000
liquidation preference; shares authorized: 1,000,000;
shares issued and outstanding at September 30, 2017:
400,000
394 394 394
Common stock, $0.01 par value; shares
authorized: 400,000,000; shares issued and outstanding
at September 30, 2017: 270,688,918
3 3 3 Additional paid-in-capital 6,747 6,929 6,921 Accumulated
deficit (446 ) (581 ) (909 ) Accumulated other comprehensive loss
(50 ) (62 ) (137 ) Total shareholders' equity 6,648 6,683
6,272 Total liabilities and shareholders' equity $
60,375 $ 58,753 $ 48,999
Key
Performance Metrics(4)
Corporate
Qtr ended 9/30/17
Qtr ended 6/30/17
Qtr ended 9/30/17 vs.
6/30/17
Qtr ended 9/30/16
Qtr ended 9/30/17 vs.
9/30/16
Operating margin %(2) 37 % 55 % (18)% 46 % (9)% Adjusted
operating margin %(2) 42 % 38 % 4% 34 % 8% Employees 3,584
3,614 (1)% 3,655 (2)% Consultants and other 96 99
(3)% 130 (26)% Total headcount 3,680 3,713 (1)% 3,785 (3)%
Common equity book value per share(5) $ 23.10 $ 22.86 1% $
21.63 7% Tangible common equity book value per share(5) $ 15.51 $
15.29 1% $ 13.82 12% Cash and equivalents ($MM) $ 896 $
1,091 (18)% $ 1,467 (39)% Corporate cash ($MM)(6) $ 309 $ 478 (35)%
$ 306 1% Net interest margin (basis points) 285 274 11 259
26 Interest-earning assets, average ($MM) $ 54,839 $ 51,899 6% $
44,489 23%
Customer
Activity
Qtr ended 9/30/17
Qtr ended 6/30/17
Qtr ended 9/30/17 vs.
6/30/17
Qtr ended 9/30/16
Qtr ended 9/30/17 vs.
9/30/16
Trading days 62.5 63.0 N.M. 64.0 N.M. DARTs 205,763
208,205 (1)% 151,905 35% Derivative DARTs % 32 % 32 % —% 26 % 6%
Total trades (MM) 12.9 13.1 (2)% 9.7 33% Average commission
per trade $ 7.76 $ 8.02 (3)% $ 10.97 (29)%
Key
Performance Metrics(4)
Customer
Activity
Qtr ended
9/30/17
Qtr ended
6/30/17
Qtr ended
9/30/17
vs.
6/30/17
Qtr ended
9/30/16
Qtr ended
9/30/17
vs.
9/30/16
Gross new brokerage accounts 105,166 120,204 (13)% 227,309
(54)% Gross new stock plan accounts 74,194 66,773 11% 62,144 19%
Gross new banking accounts 834 876 (5)% 1,061 (21)% Closed accounts
(158,009 ) (137,666 ) 15% (122,336 ) 29% Net new accounts 22,185
50,187 (56)% 168,178 (87)% Net new brokerage accounts 26,225
41,271 (36)% 161,885 (84)% Net new stock plan accounts 554 13,154
(96)% 11,368 (95)% Net new banking accounts (4,594 ) (4,238 ) (8)%
(5,075 ) 9% Net new accounts 22,185 50,187 (56)% 168,178 (87)%
End of period brokerage accounts 3,588,714 3,562,489 1%
3,438,975 4% End of period stock plan accounts 1,475,246 1,474,692
—% 1,454,421 1% End of period banking accounts 304,135
308,729 (1)% 324,650 (6)% End of period total
accounts 5,368,095 5,345,910 —% 5,218,046 3% Annualized net
new brokerage account growth rate 2.9 % 4.7 % (1.8)% 1.7 % 1.2%
Annualized brokerage account attrition rate(7) 8.9 % 9.0 % (0.1)%
8.0 % 0.9% Customer margin balances(3) ($B) $ 8.5 $ 8.2 4% $
6.8 25%
Customer
Assets($B)
Security holdings $ 270.1 $ 255.3 6% $ 222.1 22% Sweep deposits
36.5 34.9 5% 26.5 38% Customer cash held by third parties(8) 7.1
8.8 (19)% 14.0 (49)% Customer payables (cash) 8.7 8.0
9% 7.8 12% Brokerage customer assets 322.4 307.0
5% 270.4 19% Unexercised stock plan holdings (vested)
37.9 36.1 5% 31.2 21% Savings, checking and other banking assets
5.0 5.1 (2)% 5.2 (4)% Total customer assets $
365.3 $ 348.2 5% $ 306.8 19% Net new
brokerage assets(9) $ 2.2 $ 2.6 (15)% $ 5.4 (59)% Net new banking
assets(9) (0.1 ) (0.3 ) (67)% — N.M. Net new customer
assets(9) $ 2.1 $ 2.3 (9)% $ 5.4 (61)% Annualized net new
brokerage asset growth rate 2.9 % 3.5 % (0.6)% 2.7 % 0.2%
Brokerage related cash $ 52.3 $ 51.7 1% $ 48.3 8% Other cash and
deposits 5.0 5.1 (2)% 5.2 (4)% Total customer
cash and deposits $ 57.3 $ 56.8 1% $ 53.5 7% Managed
products $ 4.9 $ 4.6 7% $ 3.7 32% Stock plan customer holdings
(unvested) $ 88.3 $ 83.5 6% $ 73.4 20% Customer net (buy) /
sell activity $ (1.3 ) $ (4.0 ) N.M. $ 2.4 N.M.
Key Performance Metrics(4)
Loans
Qtr ended
9/30/17
Qtr ended
6/30/17
Qtr ended
9/30/17
vs.
6/30/17
Qtr ended
9/30/16
Qtr ended
9/30/17
vs.
9/30/16
Loans receivable
($MM)
One- to four-family $ 1,520 $ 1,641 $ (121) $ 2,061 $ (541) Home
equity 1,128 1,205 (77) 1,503 (375) Consumer and Other 190
209 (19) 268 (78) Loans receivable, net $ 2,838
$ 3,055 $ (217) $ 3,832 $ (994) Loan servicing
expense $ 5 $ 5 $ — $ 7 $ (2)
Loan performance
detail ($MM)
Current $ 2,664 $ 2,901 $ (237) $ 3,765 $ (1,101) 30-89 days
delinquent 102 103 (1) 107 (5) 90-179 days delinquent 46 46 — 43 3
180+ days delinquent 120 121 (1) 152 (32)
Total delinquent loans 268 270 (2) 302 (34)
Gross loans receivable(10) $ 2,932 $ 3,171 $ (239) $
4,067 $ (1,135)
Activity in Allowance for
Loan Losses Three Months Ended September 30,
2017
One- to Four-
Family
Home Equity
Consumer
and Other
Total (In millions) Allowance for loan losses, ending
6/30/17 $ 29 $ 82 $ 5 $ 116 Provision (benefit) for loan losses (12
) (17 ) — (29 ) (Charge-offs) recoveries, net 4 4 (1
) 7 Allowance for loan losses, ending 9/30/17 $ 21 $
69 $ 4 $ 94
Three Months Ended June
30, 2017
One- to Four-
Family
Home Equity
Consumer
and Other
Total (In millions) Allowance for loan losses, ending
3/31/17 $ 46 $ 162 $ 5 $ 213 Provision (benefit) for loan losses
(18 ) (81 ) — (99 ) (Charge-offs) recoveries, net 1 1
— 2 Allowance for loan losses, ending 6/30/17 $ 29
$ 82 $ 5 $ 116
Three Months
Ended September 30, 2016
One- to Four-
Family
Home Equity
Consumer
and Other
Total (In millions) Allowance for loan losses, ending
6/30/16 $ 42 $ 245 $ 6 $ 293 Provision (benefit) for loan losses 2
(64 ) — (62 ) (Charge-offs) recoveries, net 3 2 (1 )
4 Allowance for loan losses, ending 9/30/16 $ 47 $
183 $ 5 $ 235
Capital
Qtr ended
9/30/17
Qtr ended
6/30/17
Qtr ended
9/30/17 vs.
6/30/17
Qtr ended
9/30/16
Qtr ended
9/30/17 vs.
9/30/16
E*TRADE
Financial
Tier 1 leverage ratio(11) 7.2% 7.5% (0.3)% 7.3% (0.1)% Common
Equity Tier 1 capital ratio(11) 35.2% 35.0% 0.2% 34.0% 1.2% Tier 1
risk-based capital ratio(11) 37.8% 37.5% 0.3% 35.1% 2.7% Total
risk-based capital ratio(11) 42.4% 42.4% —% 40.7% 1.7%
E*TRADE
Bank
Tier 1 leverage ratio(12) 7.7% 8.0% (0.3)% 8.5% (0.8)% Common
Equity Tier 1 capital ratio(12) 35.5% 35.1% 0.4% 36.7% (1.2)% Tier
1 risk-based capital ratio(12) 35.5% 35.1% 0.4% 36.7% (1.2)% Total
risk-based capital ratio(12) 36.4% 36.3% 0.1% 38.0% (1.6)%
Average Balance Sheet Data Three
Months Ended September 30, 2017 June 30,
2017 Average Interest
Average Average Interest
Average Balance Inc./Exp. Yield/Cost
Balance Inc./Exp. Yield/Cost Cash and
equivalents $ 905 $ 2 1.06% $ 890 $ 2 0.87%
Cash required to be segregated under
federal orother regulations
759 3 1.26% 1,355 3 0.94% Available-for-sale securities 19,064 102
2.13% 18,197 95 2.10% Held-to-maturity securities 22,162 153 2.77%
19,725 137 2.78% Margin receivables 8,096 87 4.26% 7,258 75 4.14%
Loans 3,024 37 4.95% 3,332 41 4.88% Broker-related receivables and
other 829 1 0.45% 1,142 1 0.20%
Subtotal interest-earning assets 54,839 385 2.80% 51,899 354 2.73%
Other interest revenue(a) — 28 — 24
Total interest-earning assets 54,839 413 3.01% 51,899 378
2.91% Total non-interest earning assets 4,952 4,951
Total assets $ 59,791 $ 56,850 Deposits
$ 40,758 $ 1 0.01% $ 37,894 $ 1 0.01% Customer payables 8,463 1
0.06% 8,686 2 0.06% Broker-related payables and other 1,301 — 0.00%
1,237 — 0.00% Other borrowings 831 6 2.91% 674 5 3.18% Corporate
debt 1,002 12 4.64% 991 13 5.41%
Subtotal interest-bearing liabilities 52,355 20 0.15% 49,482 21
0.17% Other interest expense(b) — 2 — 1
Total interest-bearing liabilities 52,355 22 0.17% 49,482 22
0.18% Total non-interest-bearing liabilities 820 884
Total liabilities 53,175 50,366 Total shareholders' equity
6,616 6,484 Total liabilities and shareholders'
equity $ 59,791 $ 56,850
Excess interest earning assets over
interestbearing liabilities/ net interest income/ net
interestmargin
$ 2,484 $ 391 2.85% $ 2,417 $ 356 2.74%
(a) Represents interest revenue on securities loaned for the
periods presented. (b) Represents interest expense on securities
borrowed for the periods presented.
Three Months Ended September 30, 2016 Average
Interest Average Balance
Inc./Exp. Yield/Cost Cash and equivalents $ 1,989 $ 2
0.42% Cash required to be segregated under federal or other
regulations 1,885 2 0.33% Available-for-sale securities 13,301 66
1.99% Held-to-maturity securities 15,937 109 2.73% Margin
receivables 6,479 60 3.68% Loans 4,202 46 4.44% Broker-related
receivables and other 696 — 0.13% Subtotal interest-earning assets
44,489 285 2.56% Other interest revenue(a) — 24 Total
interest-earning assets 44,489 309 2.77% Total non-interest-earning
assets 4,793 Total assets $ 49,282 Deposits $ 32,285 $ 1
0.01% Customer payables 7,592 2 0.06% Broker-related payables and
other 1,258 — 0.00% Other borrowings 409 4 4.15% Corporate debt 993
13 5.40% Subtotal interest-bearing liabilities 42,537 20 0.19%
Other interest expense(b) — 2 Total interest-bearing liabilities
42,537 22 0.20% Total non-interest-bearing liabilities 719 Total
liabilities 43,256 Total shareholders' equity 6,026 Total
liabilities and shareholders' equity $ 49,282
Excess interest earning assets over
interest bearing liabilities/ net interestincome/ net interest
margin
$ 1,952 $ 287 2.59% (a) Represents interest revenue on
securities loaned for the periods presented. (b) Represents
interest expense on securities borrowed for the periods presented.
Fees and Service Charges
Three Months Ended September 30, 2017 June
30, 2017 September 30, 2016 Order flow revenue $
33 $ 34 $ 24 Money market funds and sweep deposits revenue(a) 23 26
13 Mutual fund service fees 10 10 9 Advisor management fees 9 9 8
Foreign exchange revenue 6 6 6 Reorganization fees 5 5 4 Other fees
and service charges 6 8 4 Total fees and service charges $ 92 $ 98
$ 68 (a) Includes revenue earned on average customer cash
held by third parties based on the federal funds rate or LIBOR plus
a negotiated spread or other contractual arrangements with the
third party institutions.
Explanation of Non-GAAP Measures
Management believes that adjusting GAAP measures by excluding or
including certain items is helpful to investors and analysts who
may wish to use some or all of this information to analyze the
Company’s current performance, prospects and valuation. Management
uses this non-GAAP information internally to evaluate operating
performance and in formulating the budget for future periods.
Management believes that the non-GAAP measures discussed below are
appropriate for evaluating the operating and liquidity performance
of the Company.
Adjusted Operating Margin
Adjusted operating margin is calculated by dividing adjusted
income before income taxes by net revenue. Adjusted income before
income taxes excludes the provision (benefit) for loan losses and
losses on early extinguishment of debt. Management believes that
excluding the provision (benefit) for loan losses and losses on
early extinguishment of debt from operating margin provides a
useful measure of the Company's ongoing operating performance
because management excludes it when evaluating operating margin
performance. See endnote (2) for a reconciliation of this non-GAAP
measure to the comparable GAAP measure.
Corporate Cash
Corporate cash represents cash held at the parent company as
well as cash held in certain subsidiaries, not including bank and
broker-dealer subsidiaries, that can distribute cash to the parent
company without any regulatory approval or notification. The
Company believes that corporate cash is a useful measure of the
parent company’s liquidity as it is the primary source of capital
above and beyond the capital deployed in regulated subsidiaries.
See endnote (6) for a reconciliation of this non-GAAP measure to
the comparable GAAP measure.
Tangible Common Equity Book Value per Share
Tangible common equity book value per share represents common
shareholders’ equity, which excludes preferred stock, less goodwill
and other intangible assets (net of related deferred tax
liabilities) divided by common stock outstanding. The Company
believes that tangible common equity book value per share is a
measure of the Company’s capital strength. See endnote (5) for a
reconciliation of this non-GAAP measure to the comparable GAAP
measure.
It is important to note that these non-GAAP measures may involve
judgment by management and should be considered in addition to, not
as substitutes for, or superior to, measures prepared in accordance
with GAAP. For additional information on the adjustments to these
non-GAAP measures, please see the Company’s financial statements
and “Management’s Discussion and Analysis of Financial Condition
and Results of Operations” that will be included in the periodic
report the Company expects to file with the SEC with respect to the
financial periods discussed herein.
ENDNOTES
(1) Net income of $147 million, or $0.49 per diluted share,
includes net after-tax expense of $24 million, or $0.09 per diluted
share, from losses on early extinguishment of debt as well as costs
related to the OptionsHouse integration and crossing the $50
billion regulatory threshold, partially offset by a benefit to
provision for loan losses; net income also includes an income tax
benefit of $8 million, or $0.03 per diluted share, related to the
revaluation of net deferred tax assets.
(2) Operating margin is the percentage of net revenue that
results in income before income taxes. The percentage is calculated
by dividing income before income taxes by total net revenue. The
following table provides a reconciliation of GAAP operating margin
percentage to non-GAAP adjusted operating margin percentage
(dollars in millions):
Q3 2017 Q2 2017 Q3
2016 Amount
Operating Margin %
Amount
OperatingMargin %
Amount
OperatingMargin %
Income before income tax expense
andoperating margin
$ 223 37% $ 317 55% $ 225 46% Add back impact of pre-tax items:
Provision (benefit) for loan losses (29 ) (99 ) (62 ) Losses on
early extinguishment of debt 58 — — Subtotal
29 (99 ) (62 )
Adjusted income before income taxexpense /
adjusted operating margin
$ 252 42% $ 218 38% $ 163 34%
(3) Customer margin balances include the following (dollars in
billions):
Q3 2017 Q2 2017 Q3
2016 Margin receivables held on balance sheet $ 8.5 $ 7.8 $ 6.5
Customer margin balances held by a third party clearing firm — 0.4
0.3 Total customer margin balances(a) $ 8.5 $ 8.2 $ 6.8 (a)
Represents margin receivables held on the balance sheet and
customer margin balances held by a third party clearing firm. The
balances held by a third party were transferred to E*TRADE
Securities during three months ended September 30, 2017 in
connection with the integration of OptionsHouse.
(4) Amounts and percentages may not recalculate due to rounding.
For percentage based metrics, the variance represents the current
period less the prior period.
(5) The following table provides a reconciliation of GAAP common
equity book value and common equity book value per share to
non-GAAP tangible common equity book value and tangible common
equity book value per share at period end (dollars in millions,
except per share amounts):
Q3 2017 Q2 2017 Q3
2016 Amount
Per
Share
Amount
Per
Share
Amount
Per
Share
Common equity book value $ 6,254 $ 23.10 $ 6,289 $ 22.86 $ 5,922 $
21.63 Less: Goodwill and other intangibles, net (2,664 ) (2,673 )
(2,698 ) Add: Deferred tax liabilities related to goodwill and
other intangibles, net 609 591 560
Tangible common equity book value $ 4,199 $
15.51 $ 4,207 $ 15.29 $ 3,784 $ 13.82
(6) The following table provides a reconciliation of GAAP
consolidated cash and equivalents to non-GAAP corporate cash at
period end (dollars in millions):
Q3 2017 Q2 2017 Q3
2016 Consolidated cash and equivalents $ 896 $ 1,091 $ 1,467
Less: Cash at regulated subsidiaries(a) (587 ) (613 ) (1,161 )
Corporate cash
$ 309 $ 478 $ 306 (a) Reported
net of corporate cash on deposit at E*TRADE Bank that is eliminated
in consolidation.
(7) The brokerage account attrition rate is calculated by
dividing attriting brokerage accounts by total brokerage accounts
at the previous period end, and is presented on an annualized
basis. Attriting brokerage accounts are derived by subtracting net
new brokerage accounts from gross new brokerage accounts.
(8) Customer cash held by third parties is held outside E*TRADE
Financial and includes money market funds and sweep deposit
accounts at unaffiliated financial institutions and customer cash
held by a third party clearing firm. Customer cash held by third
parties is not reflected in the Company’s consolidated balance
sheet and is not immediately available for liquidity purposes. The
following table provides details of customer cash held by third
parties (dollars in billions):
Q3 2017 Q2 2017 Q3
2016 Sweep deposits at unaffiliated financial institutions $
6.4 $ 6.6 $ 12.3 Customer cash held by a third party clearing
firm(a) — 1.7 1.5 Municipal funds and other 0.7 0.5 0.2 Total
customer cash held by third parties $ 7.1 $ 8.8 $ 14.0 (a)
During the three months ended September 30, 2017, customer
cash held by a third party clearing firm were transferred to
E*TRADE Securities in connection with the integration of
OptionsHouse.
(9) Net new customer assets are total inflows to all new and
existing customer accounts less total outflows from all closed and
existing customer accounts. The net new banking assets and net new
brokerage assets metrics treat asset flows between E*TRADE entities
in the same manner as unrelated third party accounts.
(10) Includes unpaid principal balances and premiums
(discounts).
(11) E*TRADE Financial’s capital ratios are calculated as
follows and are preliminary for the current period (dollars in
millions):
Q3 2017 Q2 2017 Q3
2016 E*TRADE Financial shareholders' equity $ 6,648 $ 6,683 $
6,316 DEDUCT: Preferred stock (394 ) (394 ) (394 ) E*TRADE
Financial Common Equity Tier 1 capital before regulatory
adjustments $ 6,254 $ 6,289 $ 5,922 ADD:
(Gains) losses in other comprehensive
income on available-for-sale debtsecurities, net of tax
50 62 (37 ) DEDUCT: Goodwill and other intangible assets, net of
deferred tax liabilities (2,014 ) (2,039 ) (2,043 ) Disallowed
deferred tax assets (472 ) (537 ) (556 ) E*TRADE Financial Common
Equity Tier 1 capital $ 3,818 $ 3,775 $ 3,286
ADD: Preferred stock 394 394 394 DEDUCT: Disallowed deferred tax
assets (112 ) (124 ) (284 ) E*TRADE Financial Tier 1 capital $
4,100 $ 4,045 $ 3,396 ADD: Allowable allowance
for loan losses 94 116 128 Non-qualifying capital instruments
subject to phase-out (trust preferred securities) 414 414
414 E*TRADE Financial total capital $ 4,608 $
4,575 $ 3,938 E*TRADE Financial average assets
for leverage capital purposes $ 59,835 $ 56,928 $ 49,240 DEDUCT:
Goodwill and other intangible assets, net of deferred tax
liabilities (2,014 ) (2,039 ) (2,043 ) Disallowed deferred tax
assets (584 ) (661 ) (840 ) E*TRADE Financial adjusted average
assets for leverage capital purposes $ 57,237 $ 54,228
$ 46,357 E*TRADE Financial total risk-weighted
assets(a) $ 10,855 $ 10,780 $ 9,678
E*TRADE Financial Tier 1 leverage ratio
(Tier 1 capital / Adjusted average assets for
leverage capital purposes)
7.2 % 7.5 % 7.3 % E*TRADE Financial Common Equity Tier 1 capital /
Total risk-weighted assets 35.2 % 35.0 % 34.0 % E*TRADE Financial
Tier 1 capital / Total risk-weighted assets 37.8 % 37.5 % 35.1 %
E*TRADE Financial total capital / Total risk-weighted assets 42.4 %
42.4 % 40.7 % (a) Under the regulatory guidelines for
risk-based capital, on-balance sheet assets and credit equivalent
amounts of derivatives and off-balance sheet items are assigned to
one of several broad risk categories according to the obligor or,
if relevant, the guarantor or the nature of any collateral. The
aggregate dollar amount in each risk category is then multiplied by
the risk weight associated with that category. The resulting
weighted values from each of the risk categories are aggregated for
determining total risk-weighted assets.
(12) E*TRADE Bank’s capital ratios are calculated as follows and
are preliminary for the current period (dollars in millions):
Q3 2017 Q2 2017 Q3
2016 E*TRADE Bank shareholder's equity $ 3,608 $ 3,485 $ 3,278
ADD:
(Gains) losses in other comprehensive
income on available-for-sale debtsecurities, net of tax
50 62 (37 ) DEDUCT: Goodwill and other intangible assets, net of
deferred tax liabilities (38 ) (38 ) (38 ) Disallowed deferred tax
assets (56 ) (56 ) (134 ) E*TRADE Bank Common Equity Tier 1 capital
/ Tier 1 capital $ 3,564 $ 3,453 $ 3,069 ADD:
Allowable allowance for loan losses 94 116 107
E*TRADE Bank total capital $ 3,658 $ 3,569 $ 3,176
E*TRADE Bank average assets for leverage capital
purposes $ 46,562 $ 43,527 $ 36,300 DEDUCT: Goodwill and other
intangible assets, net of deferred tax liabilities (38 ) (38 ) (38
) Disallowed deferred tax assets (56 ) (56 ) (134 ) E*TRADE Bank
adjusted average assets for leverage capital purposes $ 46,468
$ 43,433 $ 36,128 E*TRADE Bank total
risk-weighted assets(a) $ 10,044 $ 9,840 $ 8,368
E*TRADE Bank Tier 1 leverage ratio (Tier 1
capital / Adjusted average assets for leverage capital
purposes)
7.7 % 8.0 % 8.5 % E*TRADE Bank Common Equity Tier 1 capital / Total
risk-weighted assets 35.5 % 35.1 % 36.7 % E*TRADE Bank Tier 1
capital / Total risk-weighted assets 35.5 % 35.1 % 36.7 % E*TRADE
Bank total capital / Total risk-weighted assets 36.4 % 36.3 % 38.0
% (a) Under the regulatory guidelines for risk-based
capital, on-balance sheet assets and credit equivalent amounts of
derivatives and off-balance sheet items are assigned to one of
several broad risk categories according to the obligor or, if
relevant, the guarantor or the nature of any collateral. The
aggregate dollar amount in each risk category is then multiplied by
the risk weight associated with that category. The resulting
weighted values from each of the risk categories are aggregated for
determining total risk-weighted assets.
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