October 20, 2016

E*TRADE Financial Corporation Announces Third Quarter 2016 Results

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

Third Quarter Results

  • Net income of $139 million, or $0.51 per diluted share, which includes $19 million, or $0.07 per diluted share, related to executive severance, restructuring and other acquisition-related activities, and benefit to provision for loan losses
  • Total net revenue of $486 million
  • Allowance for loan losses of $235 million resulting in a benefit to provision for loan losses of $62 million
  • Total non-interest expense of $323 million, including executive severance of $6 million and restructuring and acquisition-related activities of $25 million
  • Acquired OptionsHouse(1) for $725 million, funded through the issuance of $400 million of non-cumulative perpetual preferred stock and $325 million of corporate cash
  • Daily Average Revenue Trades (DARTs) of 152,000, including 6,500 DARTs from the OptionsHouse acquisition(1)
  • Customer margin balances(2) of $6.8 billion, including $0.3 billion from the OptionsHouse acquisition
  • Net new brokerage accounts of 162,000, including 148,000 from the OptionsHouse acquisition, and an annualized attrition rate of 8.0 percent
  • Net new brokerage assets of $5.4 billion, including $3.7 billion from the OptionsHouse acquisition; end of period total customer assets of $307 billion

E*TRADE Financial Corporation (NASDAQ: ETFC) today announced results for its third quarter ended September 30, 2016, reporting net income of $139 million, or $0.51 per diluted share. This compares to a net loss of $153 million, or $0.53 per diluted share, in the third quarter of 2015, which includes $409 million(3) of net pre-tax charges related to the termination of the Company's legacy wholesale funding obligations and other early extinguishment of debt. Total net revenue of $486 million increased from net revenue of $61 million, or adjusted net revenue of $431 million(3) in the third quarter of 2015, excluding $370 million of losses related to the termination of the Company's legacy wholesale funding obligations. Total non-interest expense in the quarter of $323 million included executive severance of $6 million and restructuring and acquisition-related activities of $25 million. This compares to total non-interest expense of $332 million in the year-ago period which included $39 million of losses on early extinguishment of debt.

"This quarter was transformative for E*TRADE as we completed our first acquisition in over a decade, restructured our executive team and refocused the entire organization on growth, which is our unambiguous charge," said Karl Roessner, Chief Executive Officer. "We have a handful of clear-cut objectives around which we have aligned: First, to swiftly and flawlessly integrate OptionsHouse, with a commitment to fully realize the value of the acquisition; second, to reclaim our position as a trading powerhouse while at the same time emphasizing our investing offerings; and third, to improve our marketing to more effectively engage with customers and prospects. While we have serious work to do on a very aggressive timeline, I am confident in our ability to get the job done. Separately we are maniacally focused on driving operating leverage through increased efficiency and have taken meaningful steps, reducing $21 million of annual expense, over and above all expense synergies related to the OptionsHouse acquisition. On a personal front, I am thrilled to be leading this company, which I have supported and cared so deeply about for over 15 years. E*TRADE is a fantastic franchise with tremendous opportunity and I believe we are in a strong position to continue to deliver value for our shareholders and our customers."

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

The Company will host a conference call to discuss the results beginning at 5 p.m. ET today. This conference call will be available to domestic participants by dialing (800) 708-4339 while international participants should dial +1 (303) 223-4392. A live audio webcast and replay of this conference call will also be available at about.etrade.com.

About E*TRADE Financial

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

Important Notices

E*TRADE Financial, E*TRADE and the E*TRADE logo are trademarks or registered trademarks of E*TRADE Financial Corporation.

Forward-Looking Statements

The statements contained in this news release that are forward looking, including statements regarding the Company's ability to integrate OptionsHouse, improve its market position in trading or retirement, drive operating leverage, improve marketing, or deliver value for shareholders are "forward-looking statements" within the meaning of the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995, and are subject to a number of uncertainties and risks. Actual results may differ materially from those indicated in the forward-looking statements. The uncertainties and risks include, but are not limited to, macro trends of the economy in general and the residential real estate market, market volatility and its impact on trading volumes, instability in the consumer credit markets and credit trends, such as fluctuations in interest rates, increased mortgage loan delinquency and default rates, portfolio seasoning and resolution through collections, sales or charge-offs, the uncertainty surrounding the foreclosure process, the Company's ability to attract and retain customers, grow customer relationships and develop new products and services, increased competition, potential system disruptions and security breaches, and the potential negative regulatory consequences resulting from the implementation of financial regulatory reform as well as from actions by or more restrictive policies or interpretations of the Federal Reserve, the Office of the Comptroller of the Currency, the FDIC, the Department of Labor, or other regulators. Further information about these risks and uncertainties can be found in the annual, quarterly, and current reports on Form 10-K, Form 10-Q, and Form 8-K previously filed by E*TRADE Financial Corporation with the Securities and Exchange Commission (including information in these reports under the caption "Risk Factors"). Any forward-looking statement included in this release speaks only as of the date of this communication; the Company disclaims any obligation to update any information, except as required by law.

© 2016 E*TRADE Financial Corporation. All rights reserved.

Financial Statements
E*TRADE FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statement of Income (Loss)(4)
(In millions, except share data and per share amounts)
(Unaudited)
        Three Months Ended     Nine Months Ended
September 30,     June 30,     September 30, September 30,
2016     2016     2015 2016     2015
Revenue:
Interest income $ 309 $ 306 $ 297 $ 923 $ 923
Interest expense (22 ) (20 ) (48 ) (63 ) (172 )
Net interest income 287   286   249   860   751  
Commissions 107 106 108 320 325
Fees and service charges 68 62 52 188 159

Gains (losses) on securities and
other

14 10 (358 ) 34 (333 )
Other revenue 10   10   10   30   29  
Total non-interest income (loss) 199   188   (188 ) 572   180  
Total net revenue 486   474   61   1,432   931  
Provision (benefit) for loan losses (62 ) (35 ) (25 ) (131 ) (17 )
Non-interest expense:
Compensation and benefits 123 125 123 374 354
Advertising and market development 27 30 23 100 89
Clearing and servicing 26 25 23 75 72
Professional services 26 22 24 70 77
Occupancy and equipment 24 24 21 71 64
Communications 22 20 24 65 62
Depreciation and amortization 20 20 21 60 61
FDIC insurance premiums 6 6 7 18 36
Amortization of other intangibles 5 5 5 15 15

Restructuring and acquisition-related
activities

25 1 2 28 8

Losses on early extinguishment of
debt

39 112
Other non-interest expenses 19   17   20   54   64  
Total non-interest expense 323   295   332   930   1,014  

Income (loss) before income tax
expense (benefit)

225 214 (246 ) 633 (66 )
Income tax expense (benefit) 86   81   (93 ) 208   (245 )
Net income (loss) $ 139   $ 133   $ (153 ) $ 425   $ 179  
 
Basic earnings (loss) per share $ 0.51 $ 0.48 $ (0.53 ) $ 1.53 $ 0.62
Diluted earnings (loss) per share $ 0.51 $ 0.48 $ (0.53 ) $ 1.52 $ 0.61

Shares used in computation of per
share data:

Basic (in thousands) 274,362 277,013 290,480 278,864 290,105
Diluted (in thousands) 275,472 277,978 290,480 280,136 294,998
 
 

E*TRADE FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheet
(In millions, except share data)
(Unaudited)
             
 
September 30, June 30, December 31,
2016 2016 2015
ASSETS
Cash and equivalents $ 1,467 $ 2,393 $ 2,233

Cash required to be segregated under federal or other
   regulations

2,159 1,821 1,057
Available-for-sale securities 13,493 13,895 12,589
Held-to-maturity securities 16,189 15,716 13,013
Margin receivables 6,552 6,824 7,398
Loans receivable, net 3,832 4,089 4,613

Receivables from brokers, dealers and clearing
   organizations

1,118 692 520
Property and equipment, net 231 231 236
Goodwill 2,370 1,792 1,792
Other intangibles, net 328 164 174
Deferred tax assets, net 725 830 1,033
Other assets 735   755   769  
Total assets $ 49,199   $ 49,202   $ 45,427  
 
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits $ 31,697 $ 32,964 $ 29,445
Customer payables 7,827 6,712 6,544
Payables to brokers, dealers and clearing organizations 1,227 1,744 1,576
Other borrowings 409 409 491
Corporate debt 994 993 997
Other liabilities 729   595   575  
Total liabilities 42,883   43,417   39,628  
 
Shareholders' equity:

Preferred stock, $0.01 par value; $1,000 liquidation
   preference; shares authorized: 1,000,000; shares issued
   and outstanding at September 30, 2016: 400,000

394

Common stock, $0.01 par value; shares authorized:
   400,000,000; shares issued and outstanding at
   September 30, 2016: 273,810,222

3 3 3
Additional paid-in-capital 6,916 6,911 7,356
Accumulated deficit (1,036 ) (1,175 ) (1,461 )
Accumulated other comprehensive income (loss) 39   46   (99 )
Total shareholders' equity 6,316   5,785   5,799  
Total liabilities and shareholders' equity $ 49,199   $ 49,202   $ 45,427  
 
 

Key Performance Metrics(5)                    

Corporate

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ended
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ended
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ended
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vs.
6/30/16

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ended
9/30/15

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vs.
9/30/15

 
Operating margin %(6) 46% 45% 1% N.M. N.M
Adjusted operating margin %(3) 34% 38% (4)% 32% 2%
 
Employees 3,655 3,588 2% 3,310 10%
Consultants and other 130 180 (28)% 105 24%
Total headcount 3,785 3,768 —% 3,415 11%
 
Common equity book value per share(7) $ 21.63 $ 21.14 2% $ 20.01 8%
Tangible common equity book value per share(7) $ 13.82 $ 15.74 (12)% $ 14.78 (6)%
 
Cash and equivalents ($MM) $ 1,467 $ 2,393 (39)% $ 1,453 1%
Corporate cash ($MM)(8) $ 306 $ 523 (41)% $ 432 (29)%
 
Net interest margin (basis points) 259 264 (2)% 247 5%
Interest-earning assets, average ($MM) $ 44,489 $ 43,422 2% $ 40,485 10%
 

Customer Activity(1)

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ended
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ended
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Qtr
ended
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vs.
6/30/16

Qtr
ended
9/30/15

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vs.
9/30/15

 
Trading days 64.0 64.0 N.M. 64.0 N.M.
 
DARTs 151,905 152,488 —% 155,985 (3)%
Derivative DARTs % 26% 24% 2% 25% 1%
 
Total trades (MM) 9.7 9.8 (1)% 10.0 (3)%
Average commission per trade $ 10.97 $ 10.82 1% $ 10.87 1%
 
 

Key Performance Metrics(5)                    

Customer Activity(1)

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vs.
6/30/16

Qtr ended
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vs.
9/30/15

 
Gross new brokerage accounts 227,309 90,779 150% 93,324 144%
Gross new stock plan accounts 62,144 68,362 (9)% 110,731 (44)%
Gross new banking accounts 1,061 1,157 (8)% 1,158 (8)%
Closed accounts(9) (122,336)   (124,546) N.M. (145,359) N.M.
Net new accounts 168,178 35,752 N.M. 59,854 N.M.
 
Net new brokerage accounts(9) 161,885 23,090 N.M. 2,205 N.M.
Net new stock plan accounts 11,368 18,488 N.M. 64,513 N.M.
Net new banking accounts (5,075)   (5,826) N.M. (6,864) N.M.
Net new accounts 168,178 35,752 N.M. 59,854 N.M.
 
End of period brokerage accounts(9) 3,438,975 3,277,090 5% 3,203,531 7%
End of period stock plan accounts 1,454,421 1,443,053 1% 1,358,470 7%
End of period banking accounts 324,650   329,725 (2)% 344,089 (6)%
End of period total accounts 5,218,046 5,049,868 3% 4,906,090 6%
 
Annualized brokerage account attrition rate(9)(10) 8.0% 8.3% N.M. 11.4% N.M.
 
Customer margin balances(2) ($B) $ 6.8 $ 6.8 —% $ 7.9 (14)%
 

Customer Assets(1) ($B)

Security holdings $ 222.1 $ 208.8 6% $ 197.0 13%
Sweep deposits 26.5 27.8 (5)% 20.3 31%
Customer assets held by third parties(11) 14.0 8.5 65% 13.9 1%
Customer payables (cash) 7.8   6.7 16% 6.0 30%
Brokerage customer assets 270.4   251.8 7% 237.2 14%
Unexercised stock plan holdings (vested) 31.2 28.9 8% 34.1 (9)%
Savings, checking and other banking assets 5.2   5.2 —% 5.3 (2)%
Total customer assets $ 306.8   $ 285.9 7% $ 276.6 11%
 
Net new brokerage assets(12) $ 5.4 $ 1.6 N.M. $ 2.1 N.M.
Net new banking assets(12)   (0.2) N.M. (0.2) N.M.
Net new customer assets(12) $ 5.4 $ 1.4 N.M. $ 1.9 N.M.
 
Brokerage related cash $ 48.3 $ 43.0 12% $ 40.2 20%
Other cash and deposits 5.2   5.2 —% 5.3 (2)%
Total customer cash and deposits $ 53.5 $ 48.2 11% $ 45.5 18%
 
Stock plan customer holdings (unvested) $ 73.4 $ 64.6 14% $ 66.6 10%
 
Customer net (buy) / sell activity $ 2.4 $ (1.4) N.M. $ (3.7) N.M.
 
 

Key Performance Metrics(5)                    

Loans

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vs.
6/30/16

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9/30/15

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vs.
9/30/15

 

Loans receivable ($MM)

Average loans receivable $ 4,202 $ 4,512 $ (310 ) $ 5,441 $ (1,239 )
Ending loans receivable, net $ 3,832 $ 4,089 $ (257 ) $ 4,906 $ (1,074 )
Loan servicing expense $ 7 $ 8 $ (1 ) $ 8 $ (1 )
 

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

 

One- to Four-Family

Current $ 1,927 $ 2,062 $ (135 ) $ 2,440 $ (513 )
30-89 days delinquent 65 68 (3 ) 60 5
90-179 days delinquent 19 26 (7 ) 22 (3 )

180+ days delinquent (net of $32, $37 and
   $43 in charge-offs for Q316, Q216 and
   Q315, respectively)

97   103   (6 ) 116   (19 )
Total delinquent loans(13) 181   197   (16 ) 198   (17 )
Gross loans receivable(14) $ 2,108   $ 2,259   (151 ) $ 2,638   (530 )
 

Home Equity

Current $ 1,569 $ 1,695 $ (126 ) $ 2,149 $ (580 )
30-89 days delinquent 38 47 (9 ) 47 (9 )
90-179 days delinquent 24 27 (3 ) 28 (4 )

180+ days delinquent (net of $29, $29 and
   $26 in charge-offs for Q316, Q216 and
   Q315, respectively)

55   59   (4 ) 50   5
Total delinquent loans(13) 117   133   (16 ) 125   (8 )
Gross loans receivable(14) $ 1,686   $ 1,828   (142 ) $ 2,274   (588 )
 

Consumer and Other

Current $ 269 $ 290 $ (21 ) $ 363 $ (94 )
30-89 days delinquent 4 5 (1 ) 6 (2 )
90-179 days delinquent 1 (1 )
180+ days delinquent      
Total delinquent loans 4   5   (1 ) 7   (3 )
Gross loans receivable(14) $ 273   $ 295   (22 ) $ 370   (97 )
 

Total Loans Receivable

Current $ 3,765 $ 4,047 $ (282 ) $ 4,952 $ (1,187 )
30-89 days delinquent 107 120 (13 ) 113 (6 )
90-179 days delinquent 43 53 (10 ) 51 (8 )

180+ days delinquent (net of $61, $66 and
   $69 in charge-offs for Q316, Q216 and
   Q315, respectively)

152   162   (10 ) 166   (14 )
Total delinquent loans(13) 302   335   (33 ) 330   (28 )
Gross loans receivable(14) $ 4,067   $ 4,382   (315 ) $ 5,282   (1,215 )
 
 

Key Performance Metrics(5)                    

Loans

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vs.
6/30/16

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vs.
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TDR performance detail ($MM)(15)

 

One- to Four-Family TDRs

Current $ 196 $ 202 $ (6 ) $ 224 $ (28 )
30-89 days delinquent 18 18 18
90-179 days delinquent 4 6 (2 ) 8 (4 )

180+ days delinquent (net of $19, $21
   and $23 in charge-offs for Q316, Q216
   and Q315, respectively)

40   44   (4 ) 46   (6 )
Total delinquent TDRs 62   68   (6 ) 72   (10 )
TDRs $ 258   $ 270   (12 ) $ 296   (38 )
 

Home Equity TDRs

Current $ 166 $ 168 $ (2 ) $ 171 $ (5 )
30-89 days delinquent 8 10 (2 ) 10 (2 )
90-179 days delinquent 5 6 (1 ) 7 (2 )

180+ days delinquent (net of $19, $19
and $15 in charge-offs for Q316, Q216
and Q315, respectively)

23   24   (1 ) 20   3
Total delinquent TDRs 36   40   (4 ) 37   (1 )
TDRs $ 202   $ 208   (6 ) $ 208   (6 )
 

Total TDRs

Current $ 362 $ 370 $ (8 ) $ 395 $ (33 )
30-89 days delinquent 26 28 (2 ) 28 (2 )
90-179 days delinquent 9 12 (3 ) 15 (6 )

180+ days delinquent (net of $38, $40
   and $38 in charge-offs for Q316, Q216
   and Q315, respectively)

63   68   (5 ) 66   (3 )
Total delinquent TDRs 98   108   (10 ) 109   (11 )
TDRs $ 460   $ 478   (18 ) $ 504   (44 )
 
 

Activity in Allowance for Loan Losses      
    Three Months Ended September 30, 2016
One- to Four- Family Home Equity Consumer and Other Total
(In millions)
Allowance for loan losses, ending 6/30/16 $ 42 $ 245 $ 6 $ 293
Provision (benefit) for loan losses 2 (64 ) (62 )
(Charge-offs) recoveries, net 3   2   (1 ) 4  
Allowance for loan losses, ending 9/30/16 $ 47   $ 183   $ 5   $ 235  
 
 
Three Months Ended June 30, 2016

One- to Four-
Family

Home Equity

Consumer
and Other

Total
(In millions)
Allowance for loan losses, ending 3/31/16 $ 49 $ 267 $ 6 $ 322
Provision (benefit) for loan losses (8 ) (28 ) 1 (35 )
(Charge-offs) recoveries, net 1   6   (1 ) 6  
Allowance for loan losses, ending 6/30/16 $ 42   $ 245   $ 6   $ 293  
 
 
Three Months Ended September 30, 2015

One- to Four-
Family

Home Equity

Consumer
and Other

Total
(In millions)
Allowance for loan losses, ending 6/30/15 $ 49 $ 345 $ 8 $ 402
Provision (benefit) for loan losses (10 ) (15 ) (25 )
(Charge-offs) recoveries, net     (1 ) (1 )
Allowance for loan losses, ending 9/30/15 $ 39   $ 330   $ 7   $ 376  
 
 

Specific Valuation Allowance Activity(16)                
    As of September 30, 2016

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 June 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 $ 205 $ (46 ) $ 159 $ (7 ) $ 152 4% 26%
Home equity 285   (112 ) 173   (50 ) 123   29% 57%
Total $ 490   $ (158 ) $ 332   $ (57 ) $ 275   17% 44%
 
As of September 30, 2015

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 $ 220 $ (45 ) $ 175 $ (11 ) $ 164 6% 26%
Home equity 294   (125 ) 169   (56 ) 113   33% 62%
Total $ 514   $ (170 ) $ 344   $ (67 ) $ 277   20% 46%
 
 

Capital

   

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vs.
6/30/16

   

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vs.
9/30/15

 

E*TRADE Financial

Tier 1 leverage ratio(18) 7.3% 7.5% (0.2)% 8.5% (1.2)%
Common Equity Tier 1 capital ratio(18) 34.0% 35.6% (1.6)% 39.5% (5.5)%
Tier 1 risk-based capital ratio(18) 35.1% 35.6% (0.5)% 39.5% (4.4)%
Total risk-based capital ratio(18) 40.7% 41.2% (0.5)% 44.3% (3.6)%
 

E*TRADE Bank

Tier 1 leverage ratio(19) 8.5% 8.2% 0.3% 9.2% (0.7)%
Common Equity Tier 1 capital ratio(19) 36.7% 34.2% 2.5% 36.0% 0.7%
Tier 1 risk-based capital ratio(19) 36.7% 34.2% 2.5% 36.0% 0.7%
Total risk-based capital ratio(19) 38.0% 35.5% 2.5% 37.3% 0.7%
     
 

Average Balance Sheet Data(a)                        
  Three Months Ended
September 30, 2016 June 30, 2016
Average Interest Average Average Interest Average
Balance Inc./Exp. Yield/Cost Balance Inc./Exp. Yield/Cost
Cash and equivalents $ 1,989 $ 2 0.42% $ 1,589 $ 1 0.36%

Cash required to be segregated under federal or
other regulation

1,885 2 0.33% 1,599 1 0.34%
Available-for-sale securities 13,301 66 1.99% 13,503 68 2.01%
Held-to-maturity securities 15,937 109 2.73% 15,354 107 2.80%
Margin receivables 6,479 60 3.68% 6,502 61 3.76%
Loans 4,202 46 4.44% 4,512 49 4.32%
Broker-related receivables and other 696     0.13% 363   1   0.29%
Subtotal interest-earning assets 44,489 285 2.56% 43,422 288 2.65%
Other interest revenue(b)   24     18  
Total interest-earning assets 44,489 309   2.77% 43,422 306   2.83%
Total non-interest earning assets 4,793   4,815  
Total assets $ 49,282   $ 48,237  
 
Deposits $ 32,285 $ 1 0.01% $ 31,865 $ 1 0.01%
Customer payables 7,592 2 0.06% 6,913 1 0.07%
Broker-related payables and other 1,258 0.00% 1,345 0.00%
Other borrowings 409 4 4.15% 410 4 4.43%
Corporate debt 993   13   5.40% 993   14   5.40%
Subtotal interest-bearing liabilities 42,537 20 0.19% 41,526 20 0.19%
Other interest expense(c)   2      
Total interest-bearing liabilities 42,537 22   0.20% 41,526 20   0.20%
Total non-interest-bearing liabilities 719   969  
Total liabilities 43,256 42,495
Total shareholders' equity 6,026   5,742  
Total liabilities and shareholders' equity $ 49,282   $ 48,237  
 

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

$ 1,952   $ 287   2.59% $ 1,896   $ 286   2.64%
 
 
(a)   Beginning in 2016, corporate interest income and corporate interest expense are presented within net interest income. In addition, the Company transitioned to net interest margin as the key metric for measuring balance sheet performance. Prior periods have been reclassified to conform with the current period presentation.
(b) Represents interest revenue on securities loaned for the periods presented.
(c) Represents interest expense on securities borrowed for the periods presented.
 
 

      Three Months Ended(a)
September 30, 2015
Average     Interest     Average
Balance Inc./Exp. Yield/Cost
Cash and equivalents $ 1,806 $ 1 0.18%
Cash required to be segregated under federal or other regulation 318 1 0.18%
Available-for-sale securities 12,584 57 1.83%
Held-to-maturity securities 11,879 85 2.84%
Margin receivables 7,984 70 3.51%
Loans 5,453 58 4.25%
Broker-related receivables and other 461     0.69%
Subtotal interest-earning assets 40,485 272 2.68%
Other interest revenue (b)   25  
Total interest-earning assets 40,485 297   2.93%
Total non-interest-earning assets 4,220  
Total assets $ 44,705  
 
Deposits $ 25,659 $ 1 0.01%
Customer payables 6,348 2 0.07%
Broker-related payables and other 1,749 0.00%
Other borrowings 3,582 30 3.38%
Corporate debt 1,023   13   5.23%
Subtotal interest-bearing liabilities 38,361 46 0.48%
Other interest expense(c)   2  
Total interest-bearing liabilities 38,361 48   0.49%
Total non-interest-bearing liabilities 573  
Total liabilities 38,934
Total shareholders' equity 5,771  
Total liabilities and shareholders' equity $ 44,705  
 

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

$ 2,124   $ 249   2.47%
 
 
(a)   Beginning in 2016, corporate interest income and corporate interest expense are presented within net interest income. In addition, the Company transitioned to net interest margin as the key metric for measuring balance sheet performance. Prior periods have been reclassified to conform with the current period presentation.
(b) Represents interest revenue on securities loaned for the periods presented.
(c) Represents interest expense on securities borrowed for the periods presented.
 
 

Explanation of Non-GAAP Measures and Certain Metrics

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

Adjusted Net Revenue, Adjusted Net Income and Adjusted EPS

Management believes that excluding the loss on termination of legacy wholesale funding obligations and the impact of other early extinguishment of debt from net revenue, net income and EPS provides more useful information about the Company's ongoing operating performance because these items are not directly related to our performance. See endnote (3) for a reconciliation of these non-GAAP measures to the comparable GAAP measures.

Adjusted Operating Margin

Adjusted operating margin is calculated by dividing adjusted income before income taxes by adjusted net revenue. Adjusted income before income taxes excludes the provision (benefit) for loan losses and the losses on early extinguishment of debt line item. The related loss on termination of legacy wholesale funding obligations recognized in the gains (losses) on securities and other line item is excluded from both adjusted income before income taxes and adjusted net revenue. Management believes that excluding these items from operating margin provides a useful measure of the Company's ongoing operating performance because management excludes these items when evaluating operating margin performance. See endnote (3) for a reconciliation of this non-GAAP measure to the comparable GAAP measure.

Corporate Cash

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

Tangible Common Equity Book Value per Share

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

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

ENDNOTES

(1) The following table provides information about OptionsHouse customer activity metrics subsequent to the acquisition, for the period beginning September 12, 2016 and ended September 30, 2016:

Customer Activity - OptionsHouse

    Qtr ended 9/30/16
 
DARTs 27,699
Derivative DARTs % 65 %
 
Total trades (MM) 0.4
Average commission per trade $ 8.36
 
Customer margin balances held by third party(2) ($B) $ 0.3
 
Gross new brokerage accounts 1,956
Net new brokerage accounts 578
 

Customer Assets ($B)

Security holdings $ 2.2
Customer assets held by third party 1.5  
OptionsHouse customer assets $ 3.7
 
Net new brokerage assets ($MM) $ 28
 
Brokerage related cash $ 1.5
 
Customer net (buy) / sell activity $ 0.1
 
 

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

    Q3 2016     Q2 2016     Q3 2015
Margin receivables held on balance sheet $ 6.5 $ 6.8 $ 7.9
Customer margin balances held by third party 0.3    
Total customer margin balances $ 6.8   $ 6.8   $ 7.9
 
 

(3) The following tables provide reconciliations of non-GAAP adjusted net income, adjusted EPS, adjusted net revenue, and adjusted operating margin percentage to the comparable GAAP measures (dollars in millions except for per share amounts):

    Q3 2016     Q2 2016     Q3 2015
Amount    

Diluted
EPS

Amount    

Diluted
EPS

Amount    

Diluted
EPS

 
Net income (loss) $ 139 $ 0.51 $ 133 $ 0.48 $ (153 ) $ (0.53 )

Add back impact of termination of legacy wholesale
funding obligations:

Loss included in Gains (losses) on securities
and other

370

Loss included in Losses on early extinguishment
of debt

    43  

Total loss on termination of legacy wholesale
funding obligations

    413  

Income tax related to loss on termination of
legacy wholesale funding obligations

    (162 )
Net of tax   $   $ 251  
Deduct other early extinguishment of debt:

Gain included in Losses on early extinguishment
of debt

(4 )

Income tax related to early extinguishment of
debt

    2  
Net of tax $     $     $ (2 )  
Adjusted net income and adjusted EPS(a) $ 139   $ 0.51   $ 133   $ 0.48   $ 96   $ 0.32  
 
 
    Q3 2016     Q2 2016     Q3 2015
Net revenue $ 486 $ 474 $ 61

Add back impact of termination of legacy wholesale funding
obligations:

Loss included in Gains (losses) on securities and other

    370
Adjusted net revenue $ 486   $ 474   $ 431
 
 
    Q3 2016     Q2 2016     Q3 2015
Amount    

Operating
Margin %

Amount    

Operating
Margin %

Amount    

Operating
Margin %

 

Income (loss) before income tax expense
(benefit) and operating margin

$ 225 46% $ 214 45% $ (246 ) N.M.
Add back impact of pre-tax items:

Loss included in Gains (losses) on
securities and other

370

Provision (benefit) for loan losses

(62 ) (35 ) (25 )

Losses on early extinguishment of
debt(b)

 

        39    

Adjusted income before income tax
expense (benefit) / adjusted operating
margin

$ 163   34% $ 179   38% $ 138   32%
     
 
(a)   Adjusted net income per share for the third quarter 2015 is calculated based on 295,148 diluted shares.
(b) Includes $43 million losses on early extinguishment of debt during the three months ended September 30, 2015 related to the termination of legacy wholesale funding obligations offset by a $4 million gain related to the repurchase of trust preferred securities.
 
 

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

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

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

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

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

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

    Q3 2016     Q2 2016     Q3 2015
Amount    

Per
Share

Amount    

Per
Share

Amount    

Per
Share

Common equity book value $ 5,922 $ 21.63 $ 5,785 $ 21.14 $ 5,812 $ 20.01
Less: Goodwill and other intangibles, net (2,698 ) (1,956 ) (1,971 )

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

560     478     452    
Tangible common equity book value $ 3,784   $ 13.82   $ 4,307   $ 15.74   $ 4,293   $ 14.78
 
 

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

    Q3 2016     Q2 2016     Q3 2015
Consolidated cash and equivalents $ 1,467 $ 2,393 $ 1,453
Less: Bank cash (482 ) (1,306 ) (443 )
Less: U.S. broker-dealers' cash(a) (646 ) (537 ) (549 )
Less: Other (33 ) (27 ) (29 )
Corporate cash $ 306   $ 523   $ 432  
 
 
(a)   U.S. broker-dealers' cash includes E*TRADE Securities and E*TRADE Clearing for the historical periods presented. This line item also includes OptionsHouse for the third quarter 2016. Effective October 1, 2016, E*TRADE Clearing was merged into E*TRADE Securities.
 
 

(9) Net new and end of period brokerage accounts during the third quarter of 2016 include 147,761 accounts acquired as part of the OptionsHouse acquisition. Net new and end of period brokerage accounts during the third quarter 2015 were impacted by the closure of 16,818 accounts related to the shutdown of the Company's global trading platform.

(10) The brokerage account attrition rate is calculated by dividing attriting brokerage accounts, which are gross new brokerage accounts less net new brokerage accounts, by total brokerage accounts at the previous period end. This rate is presented on an annualized basis.

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

    Q3 2016     Q2 2016     Q3 2015
Sweep deposits at unaffiliated financial institutions $ 12.3 $ 4.6 $ 3.3
Customer assets held by third party 1.5
Municipal funds and other 0.2 3.6 3.5
Money market fund   0.3   7.1
Total customer assets held by third parties $ 14.0   $ 8.5   $ 13.9
 
 

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

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

    Q3 2016     Q2 2016     Q3 2015
One- to four-family $ 101 $ 108 $ 117
Home equity 200   206   234
Total charge-offs $ 301   $ 314   $ 351
 
 

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

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

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

    Q3 2016     Q2 2016     Q3 2015
Modified loans $ 325 $ 332 $ 344
Bankruptcy loans 135   146   160
Total TDRs $ 460   $ 478   $ 504
 
 

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

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

    Q3 2016     Q2 2016     Q3 2015
E*TRADE Financial shareholders' equity $ 6,316 $ 5,785 $ 5,812
DEDUCT:
Preferred stock (394 )    

E*TRADE Financial Common Equity Tier 1 capital before regulatory
adjustments

$ 5,922   $ 5,785   $ 5,812  
ADD:

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

(37 ) (43 ) 14
DEDUCT:
Goodwill and other intangible assets, net of deferred tax liabilities (2,043 ) (1,422 ) (1,428 )
Disallowed deferred tax assets (556 ) (857 ) (873 )
Other(a)     105  
E*TRADE Financial Common Equity Tier 1 capital $ 3,286   $ 3,463   $ 3,630  
ADD:
Preferred stock 394
DEDUCT:
Disallowed deferred tax assets (284 )    
E*TRADE Financial Tier 1 capital $ 3,396   $ 3,463   $ 3,630  
ADD:
Allowable allowance for loan losses 128 129 126

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

414   414   314  
E*TRADE Financial total capital $ 3,938   $ 4,006   $ 4,070  
 
E*TRADE Financial average assets for leverage capital purposes $ 49,240 $ 48,255 $ 44,732
DEDUCT:
Goodwill and other intangible assets, net of deferred tax liabilities (2,043 ) (1,422 ) (1,428 )
Disallowed deferred tax assets (840 ) (857 ) (873 )
Other(a)     105  
E*TRADE Financial adjusted average assets for leverage capital purposes $ 46,357   $ 45,976   $ 42,536  
 
E*TRADE Financial total risk-weighted assets(b) $ 9,678 $ 9,731 $ 9,196
 

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

7.3 % 7.5 % 8.5 %
E*TRADE Financial Common Equity Tier 1 capital / Total risk-weighted assets 34.0 % 35.6 % 39.5 %
E*TRADE Financial Tier 1 capital / Total risk-weighted assets 35.1 % 35.6 % 39.5 %
E*TRADE Financial total capital / Total risk-weighted assets 40.7 % 41.2 % 44.3 %
 
 
(a)   As a result of applying the transition provisions under Basel III in 2015, the Company included 25% of the TRUPs in the calculation of E*TRADE Financial's Tier 1 capital and 75% of the TRUPs in the calculation of E*TRADE Financial's total capital. In accordance with the transition provisions, the TRUPs were fully phased out of E*TRADE Financial's Tier 1 capital in 2016.
(b) Under the regulatory guidelines for risk-based capital, on-balance sheet assets and credit equivalent amounts of derivatives and off-balance sheet items are assigned to one of several broad risk categories according to the obligor or, if relevant, the guarantor or the nature of any collateral. The aggregate dollar amount in each risk category is then multiplied by the risk weight associated with that category. The resulting weighted values from each of the risk categories are aggregated for determining total risk-weighted assets.
 
 

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

    Q3 2016     Q2 2016     Q3 2015
E*TRADE Bank shareholders' equity $ 3,278 $ 3,207 $ 3,171
ADD:

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

(36 ) (43 ) 14
DEDUCT:
Goodwill and other intangible assets, net of deferred tax liabilities (38 ) (38 ) (38 )
Disallowed deferred tax assets (135 ) (186 ) (187 )
E*TRADE Bank Common Equity Tier 1 capital / Tier 1 capital $ 3,069   $ 2,940   $ 2,960  
ADD:
Allowable allowance for loan losses 107   112   108  
E*TRADE Bank total capital $ 3,176   $ 3,052   $ 3,068  
 
E*TRADE Bank average assets for leverage capital purposes $ 36,301 $ 36,292 $ 32,466
DEDUCT:
Goodwill and other intangible assets, net of deferred tax liabilities (38 ) (38 ) (38 )
Disallowed deferred tax assets (135 ) (186 ) (187 )
E*TRADE Bank adjusted average assets for leverage capital purposes $ 36,128   $ 36,068   $ 32,241  
 
E*TRADE Bank total risk-weighted assets(a) $ 8,368 $ 8,594 $ 8,230
 

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

8.5% 8.2% 9.2%
E*TRADE Bank Common Equity Tier 1 capital / Total risk-weighted assets 36.7% 34.2% 36.0%
E*TRADE Bank Tier 1 capital / Total risk-weighted assets 36.7% 34.2% 36.0%
E*TRADE Bank total capital / Total risk-weighted assets 38.0% 35.5% 37.3%
 
 
(a)   Under the regulatory guidelines for risk-based capital, on-balance sheet assets and credit equivalent amounts of derivatives and off-balance sheet items are assigned to one of several broad risk categories according to the obligor or, if relevant, the guarantor or the nature of any collateral. The aggregate dollar amount in each risk category is then multiplied by the risk weight associated with that category. The resulting weighted values from each of the risk categories are aggregated for determining total risk-weighted assets.

E*TRADE Media Relations
Thayer Fox, 646-521-4418
thayer.fox@etrade.com
or
E*TRADE Investor Relations
Brett Goodman, 646-521-4406
ir@etrade.com

Source: E*TRADE Financial Corporation

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