January 26, 2017

E*TRADE Financial Corporation Announces Fourth Quarter and Full Year 2016 Results

NEW YORK--(BUSINESS WIRE)-- E*TRADE Financial Corporation (NASDAQ: ETFC):

Fourth Quarter Results

  • Net income of $127 million, or $0.46 per diluted share, which includes a net benefit of $7 million, or $0.03 per diluted share, related to benefit to provision for loan losses, partially offset by restructuring and acquisition-related activities
  • Total net revenue of $509 million
  • Allowance for loan losses of $221 million, resulting in a benefit to provision for loan losses of $18 million
  • Total non-interest expense of $322 million, including restructuring and acquisition-related activities of $7 million
  • Operating margin of 40%; adjusted operating margin of 37%(1)
  • Daily Average Revenue Trades (DARTs) of 188,000
  • Customer margin balances(2) of $7.1 billion
  • Net new brokerage accounts of 24,000; annualized growth rate of 2.8 percent
  • Net new brokerage assets of $3.2 billion; annualized growth rate of 4.7 percent; end of period total customer assets of $311 billion

Full Year 2016 Results

  • Net income of $552 million, or $1.98 per diluted share, which includes a net benefit of $93 million, or $0.33 per diluted share, related to benefit to provision for loan losses and benefit to income tax related to the release of state valuation allowances(3), partially offset by executive severance and restructuring and acquisition-related activities
  • Total net revenue of $1.9 billion
  • Benefit to provision for loan losses of $149 million
  • Total non-interest expense of $1.3 billion, including executive severance of $6 million and restructuring and acquisition-related activities of $32 million related to the OptionsHouse acquisition and other corporate restructuring during the second half of 2016
  • Operating margin of 43%; adjusted operating margin of 35%(1)
  • DARTs of 164,000
  • Net new brokerage accounts of 249,000; excluding the OptionsHouse acquisition, net new brokerage accounts of 101,000 and growth rate of 3.2 percent
  • Net new brokerage assets of $13.1 billion; excluding the OptionsHouse acquisition, net new brokerage assets of $9.4 billion and growth rate of 3.8 percent

E*TRADE Financial Corporation (NASDAQ: ETFC) today announced results for its fourth quarter ended December 31, 2016, reporting net income of $127 million, or $0.46 per diluted share. This compares to net income of $89 million, or $0.30 per diluted share, in the fourth quarter of 2015. Total net revenue of $509 million increased from net revenue of $439 million in the fourth quarter of 2015. Total non-interest expense in the quarter was $322 million compared to $305 million in the year-ago period.

"We ended the year as a more focused and energized company, and I am exceptionally proud what our team has accomplished during the past four months," said Karl Roessner, Chief Executive Officer. "The acquisition of OptionsHouse provided the catalyst to realign the leadership team and refocus the entire Company on business performance. After taking a hard look at our structure and list of projects, we exited 2016 as a leaner, more agile organization, poised to reclaim our position as the best home for active traders and investors alike, with the number one options platform in the industry. As for results, 2016 marks our strongest earnings in 10 years, demonstrating our commitment to managing expenses with discipline, deploying multiple capital initiatives, and diminishing risk associated with our legacy loan portfolio. With balance sheet expansion already well under way, and the team aligned and marching forward on our business growth objectives, I am confident in our ability to continue to create long-term value for our shareholders in the years to come."

Historical metrics and financials can be found on the E*TRADE Financial corporate website at about.etrade.com.

The Company will host a conference call to discuss the results beginning at 5 p.m. ET today. This conference call will be available to domestic participants by dialing (877) 256-7753 while international participants should dial +1 (303) 223-2689. A live audio webcast and replay of this conference call will also be available at about.etrade.com.

About E*TRADE Financial

E*TRADE Financial and its subsidiaries provide financial services including online brokerage and related banking products and services to retail investors. Securities products and services are offered by E*TRADE Securities (Member FINRA/SIPC). Bank products and services are offered by E*TRADE Bank, a Federal savings bank, Member FDIC, or its subsidiaries and affiliates. More information is available at www.etrade.com. ETFC-E

Important Notices

E*TRADE, E*TRADE Financial, E*TRADE Bank, the Converging Arrows logo and OptionsHouse are registered trademarks of E*TRADE Financial Corporation or its subsidiaries in the United States and in other countries.

Forward-Looking Statements

The statements contained in this news release that are forward looking, including statements regarding the Company's ability to grow its balance sheet, execute on its growth plans, or create long-term value for shareholders are "forward-looking statements" within the meaning of the federal securities laws, and are subject to a number of uncertainties and risks. Actual results may differ materially from those indicated in the forward-looking statements. The uncertainties and risks include, but are not limited to, macro trends of the economy in general and the residential real estate market, market volatility and its impact on trading volumes, instability in the consumer credit markets and credit trends, such as fluctuations in interest rates, increased mortgage loan delinquency and default rates, the ability to attract and retain customers and develop new products and services, increased competition, potential system disruptions and security breaches, the ability to realize synergies or to implement integration plans and other risks from mergers and acquisitions, increased restrictions resulting from financial regulatory reform or changes in the policies of our regulators, adverse developments in litigation or regulatory matters, and the other factors set forth in our annual, quarterly, and current reports on Form 10-K, Form 10-Q, and Form 8-K previously filed with the Securities and Exchange Commission (including information in these reports under the caption "Risk Factors"). Any forward-looking statement included in this release speaks only as of the date of this communication; the Company disclaims any obligation to update any information, except as required by law.

© 2017 E*TRADE Financial Corporation. All rights reserved.

Financial Statements
E*TRADE FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statement of Income(4)
(In millions, except share data and per share amounts)
(Unaudited)
 
      Three Months Ended   Twelve Months Ended
December 31,   September 30,   December 31, December 31,
2016   2016   2015 2016   2015
Revenue:
Interest income $ 310 $ 309 $ 292 $ 1,233 $ 1,215
Interest expense (22 ) (22 ) (22 ) (85 ) (194 )
Net interest income 288   287   270   1,148   1,021  
Commissions 122 107 99 442 424
Fees and service charges 80 68 51 268 210
Gains (losses) on securities and other, net 8 14 9 42 (324 )
Other revenue 11   10   10   41   39  
Total non-interest income 221   199   169   793   349  
Total net revenue 509   486   439   1,941   1,370  
Provision (benefit) for loan losses (18 ) (62 ) (23 ) (149 ) (40 )
Non-interest expense:
Compensation and benefits 127 123 112 501 466
Advertising and market development 31 27 35 131 124
Clearing and servicing 30 26 23 105 95
Professional services 27 26 26 97 103
Occupancy and equipment 27 24 24 98 88
Communications 22 22 28 87 90
Depreciation and amortization 19 20 20 79 81
FDIC insurance premiums 7 6 5 25 41
Amortization of other intangibles 8 5 5 23 20
Restructuring and acquisition-related activities 7 25 9 35 17
Losses on early extinguishment of debt, net 112
Other non-interest expenses 17   19   18   71   82  
Total non-interest expense 322   323   305   1,252   1,319  
Income before income tax expense (benefit) 205 225 157 838 91
Income tax expense (benefit) 78   86   68   286   (177 )
Net income $ 127   $ 139   $ 89   $ 552   $ 268  
 
Basic earnings per share $ 0.46 $ 0.51 $ 0.31 $ 1.99 $ 0.92
Diluted earnings per share $ 0.46 $ 0.51 $ 0.30 $ 1.98 $ 0.91
Shares used in computation of per share data:
Basic (in thousands) 274,585 274,362 292,713 277,789 290,762
Diluted (in thousands) 275,840 275,472 294,947 279,048 295,011
 
 

E*TRADE FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheet
(In millions, except share data)
(Unaudited)
       
December 31, September 30, December 31,
2016 2016 2015
ASSETS
Cash and equivalents $ 1,950 $ 1,467 $ 2,233
Cash required to be segregated under federal or other regulations 1,460 2,159 1,057
Available-for-sale securities 13,892 13,493 12,589
Held-to-maturity securities 15,751 16,189 13,013
Margin receivables 6,731 6,552 7,398
Loans receivable, net 3,551 3,832 4,613
Receivables from brokers, dealers and clearing organizations 1,056 1,118 520
Property and equipment, net 239 231 236
Goodwill 2,370 2,370 1,792
Other intangibles, net 320 328 174
Deferred tax assets, net 756 725 1,033
Other assets 923   735   769  
Total assets $ 48,999   $ 49,199   $ 45,427  
 
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits $ 31,682 $ 31,697 $ 29,445
Customer payables 8,159 7,827 6,544
Payables to brokers, dealers and clearing organizations 983 1,227 1,576
Other borrowings 409 409 491
Corporate debt 994 994 997
Other liabilities 500   729   575  
Total liabilities 42,727   42,883   39,628  
 
Shareholders' equity:

Preferred stock, $0.01 par value; $1,000 liquidation
   preference; shares authorized: 1,000,000; shares issued
   and outstanding at December 31, 2016: 400,000

394 394

Common stock, $0.01 par value; shares authorized:
   400,000,000; shares issued and outstanding at December
   31, 2016: 273,963,415

3 3 3
Additional paid-in-capital 6,921 6,916 7,356
Accumulated deficit (909 ) (1,036 ) (1,461 )
Accumulated other comprehensive income (loss) (137 ) 39   (99 )
Total shareholders' equity 6,272   6,316   5,799  
Total liabilities and shareholders' equity $ 48,999   $ 49,199   $ 45,427  
 
 

Key Performance Metrics(5)          
 

Corporate

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ended
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Operating margin %(6) 40% 46% (6)% 36% 4%
Adjusted operating margin %(1) 37% 34% 3% 31% 6%
 
Employees 3,601 3,655 (1)% 3,421 5%
Consultants and other   134   130 3% 120 12%
Total headcount 3,735 3,785 (1)% 3,541 5%
 
Common equity book value per share(7) $ 21.46 $ 21.63 (1)% $ 19.90 8%
Tangible common equity book value per share(7) $ 13.71 $ 13.82 (1)% $ 14.71 (7)%
 
Cash and equivalents ($MM) $ 1,950 $ 1,467 33% $ 2,233 (13)%
Corporate cash ($MM)(8) $ 461 $ 306 51% $ 447 3%
 
Net interest margin (basis points) 260 259 —% 274 (0.1)%
Interest-earning assets, average ($MM) $ 44,260 $ 44,489 (1)% $ 39,500 12%
 

Customer Activity

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ended
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vs.
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Trading days 62.5 64.0 N.M. 63.0 N.M.
 
DARTs 187,620 151,905 24% 146,949 28%
Derivative DARTs % 29% 26% 3% 25% 4%
 
Total trades (MM) 11.7 9.7 21% 9.3 26%
Average commission per trade $ 10.42 $ 10.97 (5)% $ 10.66 (2)%
 
 

Key Performance Metrics(5)          
 

Customer Activity

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Gross new brokerage accounts 102,137 227,309 (55)% 79,397 29%
Gross new stock plan accounts 64,397 62,144 4% 94,326 (32)%
Gross new banking accounts 843 1,061 (21)% 1,037 (19)%
Closed accounts(9) (149,687) (122,336) N.M. (119,268 ) N.M.
Net new accounts 17,690 168,178 N.M. 55,492 N.M.
 
Net new brokerage accounts(9) 24,028 161,885 N.M. 10,010 N.M.
Net new stock plan accounts 1,639 11,368 N.M. 49,683 N.M.
Net new banking accounts (7,977) (5,075) N.M. (4,201 ) N.M.
Net new accounts 17,690 168,178 N.M. 55,492 N.M.
 
End of period brokerage accounts(9) 3,463,003 3,438,975 1% 3,213,541 8%
End of period stock plan accounts 1,456,060 1,454,421 —% 1,408,153 3%
End of period banking accounts 316,673 324,650 (2)% 339,888   (7)%
End of period total accounts 5,235,736 5,218,046 —% 4,961,582 6%
 
Annualized net new brokerage account growth rate 2.8% 1.7% 1.1% 1.2 % 1.6%
Annualized brokerage account attrition rate(9)(10) 9.1% 8.0% N.M. 8.7 % N.M.
 
Customer margin balances(2) ($B) $ 7.1 $ 6.8 4% $ 7.4 (4)%
 

Customer Assets($B)

Security holdings $ 224.4 $ 222.1 1% $ 203.8 10%
Sweep deposits 26.4 26.5 —% 24.0 10%
Customer cash held by third parties(11) 16.8 14.0 20% 11.2 50%
Customer payables (cash) 8.2 7.8 5% 6.5   26%
Brokerage customer assets 275.8 270.4 2% 245.5   12%
Unexercised stock plan holdings (vested) 30.2 31.2 (3)% 36.9 (18)%
Savings, checking and other banking assets 5.3 5.2 2% 5.5   (4)%
Total customer assets $ 311.3 $ 306.8 1% $ 287.9   8%
 
Net new brokerage assets(12) $ 3.2 $ 5.4 N.M. $ 2.8 N.M.
Net new banking assets(12) 0.1 N.M. 0.1   N.M.
Net new customer assets(12) $ 3.3 $ 5.4 N.M. $ 2.9 N.M.
 
Annualized net new brokerage asset growth rate 4.7% 2.7% 2.0% 4.7 % —%
 
Brokerage related cash $ 51.4 $ 48.3 6% $ 41.7 23%
Other cash and deposits 5.3 5.2 2% 5.5   (4)%
Total customer cash and deposits $ 56.7 $ 53.5 6% $ 47.2 20%
 
Managed products $ 3.9 $ 3.7 5% $ 3.2 22%
Stock plan customer holdings (unvested) $ 73.2 $ 73.4 —% $ 70.7 4%
 
Customer net (buy) / sell activity $ 0.8 $ 2.4 N.M. $ 0.3 N.M.
 
 

Key Performance Metrics(5)          
 

Loans

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vs.
9/30/16

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vs.
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Loans receivable ($MM)

Average loans receivable $ 3,892 $ 4,202 $ (310 ) $ 5,097 $ (1,205 )
Ending loans receivable, net $ 3,551 $ 3,832 $ (281 ) $ 4,613 $ (1,062 )
Loan servicing expense $ 6 $ 7 $ (1 ) $ 7 $ (1 )
 

Loan performance detail (all loans, including TDRs) ($MM)

 

One- to Four-Family

Current $ 1,787 $ 1,927 $ (140 ) $ 2,296 $ (509 )
30-89 days delinquent 67 65 2 72 (5 )
90-179 days delinquent 23 19 4 26 (3 )

180+ days delinquent (net of $28, $32 and
   $41 in charge-offs for Q416, Q316 and
   Q415, respectively)

86   97   (11 ) 111   (25 )
Total delinquent loans(13) 176   181   (5 ) 209   (33 )
Gross loans receivable(14) $ 1,963   $ 2,108   (145 ) $ 2,505   (542 )
 

Home Equity

Current $ 1,442 $ 1,569 $ (127 ) $ 1,981 $ (539 )
30-89 days delinquent 43 38 5 52 (9 )
90-179 days delinquent 18 24 (6 ) 31 (13 )

180+ days delinquent (net of $30, $29
   and $26 in charge-offs for Q416, Q316 and
   Q415, respectively)

53   55   (2 ) 53  
Total delinquent loans(13) 114   117   (3 ) 136   (22 )
Gross loans receivable(14) $ 1,556   $ 1,686   (130 ) $ 2,117   (561 )
 

Consumer

Current $ 248 $ 269 $ (21 ) $ 337 $ (89 )
30-89 days delinquent 4 4 6 (2 )
90-179 days delinquent 1 1 1
180+ days delinquent      
Total delinquent loans 5   4   1 7   (2 )
Gross loans receivable(14) $ 253   $ 273   (20 ) $ 344   (91 )
 

Total Loans Receivable

Current $ 3,477 $ 3,765 $ (288 ) $ 4,614 $ (1,137 )
30-89 days delinquent 114 107 7 130 (16 )
90-179 days delinquent 42 43 (1 ) 58 (16 )

180+ days delinquent (net of $58, $61
   and $67 in charge-offs for Q416, Q316 and
   Q415, respectively)

139   152   (13 ) 164   (25 )
Total delinquent loans(13) 295   302   (7 ) 352   (57 )
Gross loans receivable(14) $ 3,772   $ 4,067   (295 ) $ 4,966   (1,194 )
 
 

Key Performance Metrics(5)          
 

Loans

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TDR performance detail ($MM)(15)

 

One- to Four-Family TDRs

Current $ 187 $ 196 $ (9 ) $ 212 $ (25 )
30-89 days delinquent 16 18 (2 ) 19 (3 )
90-179 days delinquent 8 4 4 8

180+ days delinquent (net of $17, $19
   and $23 in charge-offs for Q416, Q316
   and Q415, respectively)

35   40   (5 ) 47   (12 )
Total delinquent TDRs 59   62   (3 ) 74   (15 )
TDRs $ 246   $ 258   (12 ) $ 286   (40 )
 

Home Equity TDRs

Current $ 160 $ 166 $ (6 ) $ 162 $ (2 )
30-89 days delinquent 10 8 2 11 (1 )
90-179 days delinquent 4 5 (1 ) 8 (4 )

180+ days delinquent (net of $19, $19
   and $17 in charge-offs for Q416, Q316
   and Q415, respectively)

21   23   (2 ) 21  
Total delinquent TDRs 35   36   (1 ) 40   (5 )
TDRs $ 195   $ 202   (7 ) $ 202   (7 )
 

Total TDRs

Current $ 347 $ 362 $ (15 ) $ 374 $ (27 )
30-89 days delinquent 26 26 30 (4 )
90-179 days delinquent 12 9 3 16 (4 )

180+ days delinquent (net of $36, $38
   and $40 in charge-offs for Q416, Q316
   and Q415, respectively)

56   63   (7 ) 68   (12 )
Total delinquent TDRs 94   98   (4 ) 114   (20 )
TDRs $ 441   $ 460   (19 ) $ 488   (47 )
 
 

Activity in Allowance for Loan Losses      
 
  Three Months Ended December 31, 2016

One- to Four-
Family

Home Equity Consumer Total
(In millions)
Allowance for loan losses, ending 9/30/16 $ 47 $ 183 $ 5 $ 235
Provision (benefit) for loan losses (4 ) (14 ) (18 )
(Charge-offs) recoveries, net 2   2     4  
Allowance for loan losses, ending 12/31/16 $ 45   $ 171   $ 5   $ 221  
 
 
Three Months Ended September 30, 2016

One- to Four-
Family

Home Equity Consumer Total
(In millions)
Allowance for loan losses, ending 6/30/16 $ 42 $ 245 $ 6 $ 293
Provision (benefit) for loan losses 2 (64 ) (62 )
(Charge-offs) recoveries, net 3   2   (1 ) 4  
Allowance for loan losses, ending 9/30/16 $ 47   $ 183   $ 5   $ 235  
 
 
Three Months Ended December 31, 2015

One- to Four-
Family

Home Equity Consumer Total
(In millions)
Allowance for loan losses, ending 9/30/15 $ 39 $ 330 $ 7 $ 376
Provision (benefit) for loan losses (23 ) (23 )
(Charge-offs) recoveries, net 1     (1 )  
Allowance for loan losses, ending 12/31/15 $ 40   $ 307   $ 6   $ 353  
 
 

Specific Valuation Allowance Activity(16)        
 
As of December 31, 2016

Recorded
Investment in
Modifications
before
charge-offs

  Charge-offs  

Recorded
Investment in
Modifications

Specific
Valuation
Allowance

Net
Investment in
Modifications

Specific
Valuation
Allowance as
a % of
Modifications

Total
Expected
Losses (17)

(Dollars in millions)
One- to four-family $ 198 $ (45 ) $ 153 $ (7 ) $ 146 4% 26%
Home equity 271   (108 ) 163   (51 ) 112   31% 59%
Total $ 469   $ (153 ) $ 316   $ (58 ) $ 258   18% 45%
 
As of September 30, 2016

Recorded
Investment in
Modifications
before
charge-offs

Charge-offs

Recorded
Investment in
Modifications

Specific
Valuation
Allowance

Net
Investment in
Modifications

Specific
Valuation
Allowance as
a % of
Modifications

Total
Expected
Losses (17)

(Dollars in millions)
One- to four-family $ 200 $ (44 ) $ 156 $ (6 ) $ 150 4% 25%
Home equity 279   (110 ) 169   (51 ) 118   30% 57%
Total $ 479   $ (154 ) $ 325   $ (57 ) $ 268   17% 44%
 
As of December 31, 2015

Recorded
Investment in
Modifications
before
charge-offs

Charge-offs

Recorded
Investment in
Modifications

Specific
Valuation
Allowance

Net
Investment in
Modifications

Specific
Valuation
Allowance as
a % of
Modifications

Total
Expected
Losses (17)

(Dollars in millions)
One- to four-family $ 216 $ (46 ) $ 170 $ (9 ) $ 161 5% 25%
Home equity 284   (120 ) 164   (52 ) 112   32% 61%
Total $ 500   $ (166 ) $ 334   $ (61 ) $ 273   18% 45%
 
 

Capital

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vs.
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E*TRADE Financial

Tier 1 leverage ratio(18) 7.8% 7.3% 0.5% 9.0% (1.2)%
Common Equity Tier 1 capital ratio(18)

37.0%

34.0% 3.0% 39.3% (2.3)%
Tier 1 risk-based capital ratio(18) 38.3% 35.1% 3.2% 39.3% (1.0)%
Total risk-based capital ratio(18) 44.0% 40.7% 3.3% 43.9% 0.1%
 

E*TRADE Bank

Tier 1 leverage ratio(19) 8.8% 8.5% 0.3% 9.7% (0.9)%
Common Equity Tier 1 capital ratio(19) 38.3% 36.7% 1.6% 36.5% 1.8%
Tier 1 risk-based capital ratio(19) 38.3% 36.7% 1.6% 36.5% 1.8%
Total risk-based capital ratio(19) 39.5% 38.0% 1.5% 37.8% 1.7%
 
 

Average Balance Sheet Data(a)            
  Three Months Ended
December 31, 2016 September 30, 2016
Average Interest Average Average Interest Average
Balance Inc./Exp. Yield/Cost Balance Inc./Exp. Yield/Cost
Cash and equivalents $ 1,610 $ 2 0.47% $ 1,989 $ 2 0.42%
Cash required to be segregated under federal or other regulation 1,590 2 0.44% 1,885 2 0.33%
Available-for-sale securities 13,612 68 2.01% 13,301 66 1.99%
Held-to-maturity securities 15,884 106 2.68% 15,937 109 2.73%
Margin receivables 6,711 64 3.76% 6,479 60 3.68%
Loans 3,892 45 4.59% 4,202 46 4.44%
Broker-related receivables and other 961     0.08% 696     0.13%
Subtotal interest-earning assets 44,260 287 2.59% 44,489 285 2.56%
Other interest revenue(b)   23     24  
Total interest-earning assets 44,260 310   2.79% 44,489 309   2.77%
Total non-interest earning assets 4,816   4,793  
Total assets $ 49,076   $ 49,282  
 
Deposits $ 31,601 $ 0.01% $ 32,285 $ 1 0.01%
Customer payables 7,915 1 0.06% 7,592 2 0.06%
Broker-related payables and other 1,093 0.00% 1,258 0.00%
Other borrowings 411 5 4.30% 409 4 4.15%
Corporate debt 994   14   5.47% 993   13   5.40%
Subtotal interest-bearing liabilities 42,014 20 0.19% 42,537 20 0.19%
Other interest expense(c)   2     2  
Total interest-bearing liabilities 42,014 22   0.21% 42,537 22   0.20%
Total non-interest-bearing liabilities 723   719  
Total liabilities 42,737 43,256
Total shareholders' equity 6,339   6,026  
Total liabilities and shareholders' equity $ 49,076   $ 49,282  
 

Excess interest earning assets over interest
bearing liabilities/ net interest income/ net interest
margin

$ 2,246   $ 288   2.60% $ 1,952   $ 287   2.59%
 
 
(a)     Beginning in 2016, corporate interest income and corporate interest expense are presented within net interest income. In addition, the Company transitioned to net interest margin as the key metric for measuring balance sheet performance. Prior periods have been reclassified to conform with the current period presentation.
(b) Represents interest revenue on securities loaned for the periods presented.
(c) Represents interest expense on securities borrowed for the periods presented.
 
 

    Three Months Ended(a)
December 31, 2015
Average   Interest   Average
Balance Inc./Exp. Yield/Cost
Cash and equivalents $ 1,834 $ 1 0.19%
Cash required to be segregated under federal or other regulation 692 0.17%
Available-for-sale securities 11,660 56 1.92%
Held-to-maturity securities 12,283 87 2.86%
Margin receivables 7,549 68 3.58%
Loans 5,097 53 4.11%
Broker-related receivables and other 385     0.30%
Subtotal interest-earning assets 39,500 265 2.68%
Other interest revenue (b)   27  
Total interest-earning assets 39,500 292   2.96%
Total non-interest-earning assets 4,464  
Total assets $ 43,964  
 
Deposits $ 27,578 $ 0.01%
Customer payables 6,430 1 0.07%
Broker-related payables and other 1,701 0.00%
Other borrowings 489 5 4.34%
Corporate debt 997   13   5.38%
Subtotal interest-bearing liabilities 37,195 19 0.22%
Other interest expense(c)   3  
Total interest-bearing liabilities 37,195 22   0.23%
Total non-interest-bearing liabilities 949  
Total liabilities 38,144
Total shareholders' equity 5,820  
Total liabilities and shareholders' equity $ 43,964  
 

Excess interest earning assets over interest bearing liabilities/
net interest income/ net interest margin

$ 2,305   $ 270   2.74%
 
 
(a)     Beginning in 2016, corporate interest income and corporate interest expense are presented within net interest income. In addition, the Company transitioned to net interest margin as the key metric for measuring balance sheet performance. Prior periods have been reclassified to conform with the current period presentation.
(b) Represents interest revenue on securities loaned for the periods presented.
(c) Represents interest expense on securities borrowed for the periods presented.
 
 

Explanation of Non-GAAP Measures and Certain Metrics

Management believes that adjusting GAAP measures by excluding or including certain items is helpful to investors and analysts who may wish to use some or all of this information to analyze the Company's current performance, prospects and valuation. Management uses this non-GAAP information internally to evaluate operating performance and in formulating the budget for future periods. Management believes that the non-GAAP measures and metrics discussed below are appropriate for evaluating the operating and liquidity performance of the Company.

Adjusted Net Revenue

Management believes that excluding the loss on termination of legacy wholesale funding obligations provides more useful information about the Company's ongoing operating performance because this item is not directly related to our performance. See endnote (1) for a reconciliation of this non-GAAP measure to the comparable GAAP measure.

Adjusted Operating Margin

Adjusted operating margin is calculated by dividing adjusted income before income taxes by adjusted net revenue. Adjusted income before income taxes excludes the provision (benefit) for loan losses and losses on early extinguishment of debt. The related loss on termination of legacy wholesale funding obligations is excluded from both adjusted net revenue and adjusted income before income taxes. Management believes that excluding these items from operating margin provides a useful measure of the Company's ongoing operating performance because management excludes these items when evaluating operating margin performance. See endnote (1) for a reconciliation of this non-GAAP measure to the comparable GAAP measure.

Corporate Cash

Corporate cash represents cash held at the parent company as well as cash held in certain subsidiaries, not including bank and broker-dealer subsidiaries, that can distribute cash to the parent company without any regulatory approval or notification. The Company believes that corporate cash is a useful measure of the parent company's liquidity as it is the primary source of capital above and beyond the capital deployed in regulated subsidiaries. See endnote (8) for a reconciliation of this non-GAAP measure to the comparable GAAP measure.

Tangible Common Equity Book Value per Share

Tangible common equity book value per share represents common shareholders' equity, which excludes preferred stock, less goodwill and other intangible assets (net of related deferred tax liabilities) divided by common stock outstanding. The Company believes that tangible common equity book value per share is a measure of the Company's capital strength. See endnote (7) for a reconciliation of this non-GAAP measure to the comparable GAAP measure.

It is important to note that these metrics and other non-GAAP measures may involve judgment by management and should be considered in addition to, not as substitutes for, or superior to, net income or other measures prepared in accordance with GAAP. For additional information on the adjustments to these non-GAAP measures, please see the Company's financial statements and "Management's Discussion and Analysis of Financial Condition and Results of Operations" that will be included in the periodic report the Company expects to file with the SEC with respect to the financial periods discussed herein.

ENDNOTES

(1) The following tables provide reconciliations of non-GAAP adjusted income before income tax expense (benefit), adjusted operating margin percentage and adjusted net revenue to the comparable GAAP measures (dollars in millions):

  Q4 2016   Q3 2016   Q4 2015
Amount  

Operating
Margin %

Amount  

Operating
Margin %

Amount  

Operating
Margin %

 
Income before income tax expense (benefit) and operating margin $ 205 40% $ 225 46% $ 157 36%
Provision (benefit) for loan losses (18 )   (62 )   (23 )  
Adjusted income before income tax expense (benefit) / adjusted operating margin $ 187   37% $ 163   34% $ 134   31%
 
 
  Twelve Months Ended December 31(a),
2016   2015
Net revenue $ 1,941 $ 1,370
Add back impact of termination of legacy wholesale funding obligations   370
Adjusted net revenue $ 1,941   $ 1,740
 
 
(a)   A reconciliation of adjusted net revenue to net revenue is presented for the twelve months ended December 31, 2015 only as no other periods presented include adjustments to net revenue for the purpose of reporting adjusted operating margin.
  Twelve Months Ended   Twelve Months Ended
December 31, 2016 December 31, 2015
Amount  

Operating
Margin %

Amount  

Operating
Margin %

 
Income before income tax expense (benefit) and operating margin $ 838 43% $ 91 7%
Add back impact of pre-tax items:
Loss included in Gains (losses) on securities and other, net 370
Provision (benefit) for loan losses (149 ) (40 )
Loss included in Losses on early extinguishment of debt, net     112    
Adjusted income before income tax expense (benefit) / adjusted operating margin $ 689   35% $ 533   31%
 
 

(2) Customer margin balances include the following (dollars in billions):

  Q4 2016   Q3 2016   Q4 2015
Margin receivables held on balance sheet $ 6.7 $ 6.5 $ 7.4
Customer margin balances held by third party(a) 0.4   0.3  
Total customer margin balances $ 7.1   $ 6.8   $ 7.4
 
 
(a)   Represents OptionsHouse's customer margin receivables held by third party.

(3) Effective January 1, 2016, the Company elected to treat E*TRADE Securities and E*TRADE Clearing as single member limited liability companies which resulted in a net tax benefit of $25 million for the full year 2016.

(4) Beginning in the first quarter of 2016, the Company updated the presentation of its consolidated income statement line items for all periods presented as follows:

  • Reclassified corporate interest income and corporate interest expense from other income (expense) to net interest income;
  • Reclassified losses on early extinguishment of debt from other income (expense) to non-interest expense; and
  • Reclassified other income (expense) from other income (expense) to gains (losses) on securities and other, net.

Although the Company issued preferred stock during the third quarter of 2016, it has not presented the net income available to common shareholders line item as no related preferred stock dividends were declared during 2016.

(5) Amounts and percentages may not recalculate due to rounding.

(6) Operating margin is the percentage of net revenue that results in income before income taxes. The percentage is calculated by dividing income before income taxes by total net revenue.

(7) The following tables provide a reconciliation of GAAP common equity book value and common equity book value per share to non-GAAP tangible common equity book value and tangible common equity book value per share at period end (dollars in millions, except per share amounts):

  Q4 2016   Q3 2016   Q4 2015
Amount  

Per
Share

Amount  

Per
Share

Amount  

Per
Share

Common equity book value $ 5,878 $ 21.46 $ 5,922 $ 21.63 $ 5,799 $ 19.90
Less: Goodwill and other intangibles, net (2,690 ) (2,698 ) (1,966 )

Add: Deferred tax liabilities related to
goodwill and other intangibles, net

569     560     454    
Tangible common equity book value $ 3,757   $ 13.71   $ 3,784   $ 13.82   $ 4,287   $ 14.71
 
 

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

  Q4 2016   Q3 2016   Q4 2015
Consolidated cash and equivalents $ 1,950 $ 1,467 $ 2,233
Less: Bank cash (840 ) (482 ) (1,264 )
Less: U.S. broker-dealers' cash (614 ) (646 ) (497 )
Less: Other (35 ) (33 ) (25 )
Corporate cash $ 461   $ 306   $ 447  
 
 

(9) Net new and end of period brokerage accounts during the third quarter of 2016 include 147,761 accounts acquired as part of the OptionsHouse acquisition. Net new and end of period brokerage accounts during the fourth quarter 2015 were impacted by the closure of 3,007 accounts related to the shutdown of the Company's global trading platform.

(10) The brokerage account attrition rate is calculated by dividing attriting brokerage accounts by total brokerage accounts at the previous period end, and is presented on an annualized basis. Attriting brokerage accounts are derived by subtracting net new brokerage accounts from gross new brokerage accounts.

(11) Customer cash held by third parties are held outside E*TRADE Financial and include money market funds and sweep deposit accounts at unaffiliated financial institutions and customer cash held by a third party clearing firm. Customer cash held by third parties are not reflected in the Company's consolidated balance sheet and are not immediately available for liquidity purposes. The following table provides details of customer cash held by third parties (dollars in billions):

  Q4 2016   Q3 2016   Q4 2015
Sweep deposits at unaffiliated financial institutions $ 14.9 $ 12.3 $ 5.8
Customer cash held by third party clearing firm(a) 1.6 1.5
Municipal funds and other 0.3 0.2 3.6
Money market fund     1.8
Total customer cash held by third parties $ 16.8   $ 14.0   $ 11.2
 
 
(a)   Represents OptionsHouse's customer cash held by third party.
 

(12) Net new brokerage assets and net new customer assets during the third quarter of 2016 include $3.7 billion of assets from the OptionsHouse acquisition. Net new customer assets are total inflows to all new and existing customer accounts less total outflows from all closed and existing customer accounts. The net new banking assets and net new brokerage assets metrics treat asset flows between E*TRADE entities in the same manner as unrelated third party accounts.

(13) Delinquent loans include charge-offs for loans that are in bankruptcy or are 180 days past due which have been written down to their expected recovery value. The following table shows the total amount of charge-offs on loans that are still held by the Company at the end of the periods presented (dollars in millions):

  Q4 2016   Q3 2016   Q4 2015
One- to four-family $ 96 $ 101 $ 113
Home equity 193   200   224
Total charge-offs $ 289   $ 301   $ 337
 
 

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

(15) The TDR loan performance detail is a subset of the Company's total loan performance. TDRs include loan modifications performed under the Company's modification programs and loans that have been charged-off due to bankruptcy notification.

(16) Modifications are a subset of TDRs, and represent loan modifications performed under the Company's modification programs. They do not include loans that have been charged-off due to the Company receiving notification of bankruptcy if the loan has not been modified previously by the Company. The following table shows the reconciliation of total TDRs that had a modification and those for which the Company received a notification of bankruptcy (dollars in millions):

  Q4 2016   Q3 2016   Q4 2015
Modified loans $ 316 $ 325 $ 334
Bankruptcy loans 125   135   154
Total TDRs $ 441   $ 460   $ 488
 
 

(17) The total expected losses on modifications includes both the previously recorded charge-offs and the specific valuation allowance.

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

  Q4 2016   Q3 2016   Q4 2015
E*TRADE Financial shareholders' equity $ 6,272 $ 6,316 $ 5,799
DEDUCT:
Preferred stock (394 ) (394 )  
E*TRADE Financial Common Equity Tier 1 capital before regulatory adjustments $ 5,878   $ 5,922   $ 5,799  
ADD:

(Gains) losses in other comprehensive income on available-for-sale debt
securities, net of tax

139 (37 ) 102
DEDUCT:
Goodwill and other intangible assets, net of deferred tax liabilities (2,029 ) (2,043 ) (1,419 )
Disallowed deferred tax assets (505 ) (556 ) (839 )
Other(a)     104  
E*TRADE Financial Common Equity Tier 1 capital $ 3,483   $ 3,286   $ 3,747  
ADD:
Preferred stock 394 394
DEDUCT:
Disallowed deferred tax assets (267 ) (284 )  
E*TRADE Financial Tier 1 capital $ 3,610   $ 3,396   $ 3,747  
ADD:
Allowable allowance for loan losses 124 128 129

Non-qualifying capital instruments subject to phase-out (trust preferred
securities)(a)

414   414   310  
E*TRADE Financial total capital $ 4,148   $ 3,938   $ 4,186  
 
E*TRADE Financial average assets for leverage capital purposes $ 49,113 $ 49,240 $ 44,016
DEDUCT:

Goodwill and other intangible assets, net of deferred tax liabilities

(2,029 ) (2,043 ) (1,419 )
Disallowed deferred tax assets (772 ) (840 ) (839 )
Other(a)     104  
E*TRADE Financial adjusted average assets for leverage capital purposes $ 46,312   $ 46,357   $ 41,862  
 
E*TRADE Financial total risk-weighted assets(b) $ 9,422 $ 9,678 $ 9,536
 

E*TRADE Financial Tier 1 leverage ratio (Tier 1 capital / Adjusted average
   assets for leverage capital purposes)

7.8 % 7.3 % 9.0 %
E*TRADE Financial Common Equity Tier 1 capital / Total risk-weighted assets 37.0 % 34.0 % 39.3 %
E*TRADE Financial Tier 1 capital / Total risk-weighted assets 38.3 % 35.1 % 39.3 %
E*TRADE Financial total capital / Total risk-weighted assets 44.0 % 40.7 % 43.9 %
 
 
(a)   As a result of applying the transition provisions under Basel III in 2015, the Company included 25% of the TRUPs in the calculation of E*TRADE Financial's Tier 1 capital and 75% of the TRUPs in the calculation of E*TRADE Financial's total capital. In accordance with the transition provisions, the TRUPs were fully phased out of E*TRADE Financial's Tier 1 capital in 2016.
(b) Under the regulatory guidelines for risk-based capital, on-balance sheet assets and credit equivalent amounts of derivatives and off-balance sheet items are assigned to one of several broad risk categories according to the obligor or, if relevant, the guarantor or the nature of any collateral. The aggregate dollar amount in each risk category is then multiplied by the risk weight associated with that category. The resulting weighted values from each of the risk categories are aggregated for determining total risk-weighted assets.

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

  Q4 2016   Q3 2016   Q4 2015
E*TRADE Bank shareholder's equity $ 3,153 $ 3,278 $ 3,181
ADD:

(Gains) losses in other comprehensive income on available-for-sale debt
securities, net of tax

139 (37 ) 102
DEDUCT:
Goodwill and other intangible assets, net of deferred tax liabilities (38 ) (38 ) (38 )
Disallowed deferred tax assets (122 ) (134 ) (169 )
E*TRADE Bank Common Equity Tier 1 capital / Tier 1 capital $ 3,132   $ 3,069   $ 3,076  
ADD:
Allowable allowance for loan losses 105   107   110  
E*TRADE Bank total capital $ 3,237   $ 3,176   $ 3,186  
 
E*TRADE Bank average assets for leverage capital purposes $ 35,885 $ 36,300 $ 31,785
DEDUCT:
Goodwill and other intangible assets, net of deferred tax liabilities (38 ) (38 ) (38 )
Disallowed deferred tax assets (122 ) (134 ) (169 )
E*TRADE Bank adjusted average assets for leverage capital purposes $ 35,725   $ 36,128   $ 31,578  
 
E*TRADE Bank total risk-weighted assets(a) $ 8,187 $ 8,368 $ 8,424
 

E*TRADE Bank Tier 1 leverage ratio (Tier 1 capital / Adjusted average assets
for leverage capital purposes)

8.8 % 8.5 % 9.7 %
E*TRADE Bank Common Equity Tier 1 capital / Total risk-weighted assets 38.3 % 36.7 % 36.5 %
E*TRADE Bank Tier 1 capital / Total risk-weighted assets 38.3 % 36.7 % 36.5 %
E*TRADE Bank total capital / Total risk-weighted assets 39.5 % 38.0 % 37.8 %
 
 
(a)   Under the regulatory guidelines for risk-based capital, on-balance sheet assets and credit equivalent amounts of derivatives and off-balance sheet items are assigned to one of several broad risk categories according to the obligor or, if relevant, the guarantor or the nature of any collateral. The aggregate dollar amount in each risk category is then multiplied by the risk weight associated with that category. The resulting weighted values from each of the risk categories are aggregated for determining total risk-weighted assets.
 

E*TRADE Media Relations
646-521-4418
mediainq@etrade.com
or
E*TRADE Investor Relations
646-521-4406
ir@etrade.com

Source: E*TRADE Financial Corporation

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