E*TRADE Financial Corporation (NASDAQ: ETFC):
Second Quarter Results
- Net income of $219 million
- Diluted earnings per common share of $0.90, which includes net losses of $53 million, or $0.22 per diluted share, related to losses from balance sheet repositioning, partially offset by the benefit to provision for loan losses(1)
- Total net revenue of $685 million
- Operating margin of 43 percent; adjusted operating margin of 42 percent(2)
- Return on common equity of 15 percent; adjusted return on common equity of 14 percent(3)
- Average interest-earning assets of $61.4 billion; net interest margin of 320 basis points
- Daily Average Revenue Trades (DARTs) of 268,000, including derivative DARTs of 89,000
- Margin receivables of $9.9 billion; average margin receivables of $10.1 billion
- Net new accounts of 70,000
- Net new retail and advisor services assets of $1.6 billion
- Capital return to shareholders(4) of $256 million, including share repurchases of $222 million and dividends of $34 million
E*TRADE Financial Corporation (NASDAQ: ETFC) today announced results for its second quarter ended June 30, 2019, reporting net income of $219 million, diluted earnings per common share of $0.90 and total net revenue of $685 million. Operating margin for the quarter was 43 percent and adjusted operating margin was 42 percent(2).
The Company repositioned its balance sheet during the second quarter through the sales of $4.5 billion of lower-yielding investment securities. These sales enabled a reduction of balance sheet size through the move of deposits to third-party banks, generating additional capital capacity to support share repurchases. Gains (losses) on securities and other, net includes $80 million of losses related to the sales. The losses were partially offset by $16 million in gains from other investment security activity in this line item.
“This past quarter we continued to build on our positive momentum, generating solid underlying performance, while further enhancing the value proposition for E*TRADE retail and institutional clients” said Karl Roessner, Chief Executive Officer. “Further, we are pleased to announce a new $1.5 billion share repurchase authorization, as we seize the opportunity to reduce our outstanding shares at tremendous value, while preserving future earnings power. Amid meaningful shifts in the economic and market environment, we continued to deliver for our customers, and we used the flexibility of our business model to accelerate capital return to our shareholders by shifting deposits to third parties to reduce the size of our balance sheet. As we enter into the second half of the year, our model continues to demonstrate its power and we are well positioned to thrive over the long term.”
The Company also declared a quarterly cash dividend of $0.14 per share on the Company's outstanding shares of common stock. The dividend is payable on August 26, 2019, to shareholders of record as of the close of business on August 19, 2019.
The Company will host a conference call beginning at 5 p.m. ET today to discuss the quarterly results. This conference call will be available to domestic participants by dialing 800-705-7259 while international participants should dial +1 303 223 2693. A live audio webcast and replay of this conference call will also be available at about.etrade.com.
Historical metrics and financials can be found on the E*TRADE Financial corporate website at about.etrade.com.
About E*TRADE Financial
E*TRADE Financial and its subsidiaries provide financial services including brokerage and banking products and services to traders, investors, stock plan administrators and participants and registered investment advisors (RIAs). Securities products and services are offered by E*TRADE Securities LLC (Member FINRA/SIPC). Commodity futures and options on futures products and services are offered by E*TRADE Futures LLC (Member NFA). Managed Account Solutions are offered through E*TRADE Capital Management, LLC, a Registered Investment Adviser. Bank products and services are offered by E*TRADE Bank, and RIA custody solutions are offered by E*TRADE Savings Bank, both of which are federal savings banks (Members FDIC). More information is available at www.etrade.com. ETFC-E
Important Notices
E*TRADE, E*TRADE Financial, E*TRADE Bank, E*TRADE Savings Bank, the Converging Arrows logo, the E*TRADE logo, and Trust Company of America are trademarks or registered trademarks of E*TRADE Financial Corporation.
Forward-Looking Statements
The statements contained in this press release that are forward looking, including statements regarding the Company's ability to continue to grow over the long term and pay additional dividends in the future, the Company’s planned repurchases of its common stock and the benefits of such repurchases, 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: risks related to macro trends of the economy in general; market volatility and its impact on trading volumes; fluctuations in interest rates; potential system disruptions and security breaches; our ability to attract and retain customers and develop new products and services; increased competition; increased restrictions resulting from financial regulatory reform or changes in the policies of our regulators, including with respect to approval of any future dividend or share repurchase; our ability to participate in consolidation opportunities in our industry, to complete consolidation transactions and to realize synergies or implement integration plans; 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 and dividend payments; and the other factors set forth in our annual and quarterly reports on Form 10-K, as amended, and Form 10-Q 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.
© 2019 E*TRADE Financial Corporation. All rights reserved.
E*TRADE FINANCIAL CORPORATION | |||||||||||||||||||||||
Consolidated Statement of Income | |||||||||||||||||||||||
(In millions, except share data and per share amounts) | |||||||||||||||||||||||
(Unaudited) | |||||||||||||||||||||||
Three Months Ended | Six Months Ended | ||||||||||||||||||||||
June 30, | March 31, | June 30, | June 30, | ||||||||||||||||||||
2019 | 2019 | 2018 | 2019 | 2018 | |||||||||||||||||||
Revenue: | |||||||||||||||||||||||
Interest income | $ | 560 | $ | 555 | $ | 489 | $ | 1,115 | $ | 957 | |||||||||||||
Interest expense | (70 | ) | (63 | ) | (36 | ) | (133 | ) | (59 | ) | |||||||||||||
Net interest income | 490 | 492 | 453 | 982 | 898 | ||||||||||||||||||
Commissions | 121 | 122 | 121 | 243 | 258 | ||||||||||||||||||
Fees and service charges | 126 | 118 | 110 | 244 | 215 | ||||||||||||||||||
Gains (losses) on securities and other, net | (64 | ) | 11 | 15 | (53 | ) | 25 | ||||||||||||||||
Other revenue | 12 | 12 | 11 | 24 | 22 | ||||||||||||||||||
Total non-interest income | 195 | 263 | 257 | 458 | 520 | ||||||||||||||||||
Total net revenue | 685 | 755 | 710 | 1,440 | 1,418 | ||||||||||||||||||
Provision (benefit) for loan losses | (8 | ) | (12 | ) | (19 | ) | (20 | ) | (40 | ) | |||||||||||||
Non-interest expense: | |||||||||||||||||||||||
Compensation and benefits | 168 | 164 | 160 | 332 | 312 | ||||||||||||||||||
Advertising and market development | 48 | 54 | 47 | 102 | 107 | ||||||||||||||||||
Clearing and servicing | 32 | 30 | 30 | 62 | 66 | ||||||||||||||||||
Professional services | 26 | 22 | 25 | 48 | 47 | ||||||||||||||||||
Occupancy and equipment | 32 | 32 | 30 | 64 | 60 | ||||||||||||||||||
Communications | 29 | 15 | 28 | 44 | 59 | ||||||||||||||||||
Depreciation and amortization | 21 | 21 | 23 | 42 | 45 | ||||||||||||||||||
FDIC insurance premiums | 4 | 4 | 9 | 8 | 18 | ||||||||||||||||||
Amortization of other intangibles | 15 | 15 | 12 | 30 | 22 | ||||||||||||||||||
Restructuring and acquisition-related activities | — | — | 2 | — | 2 | ||||||||||||||||||
Other non-interest expenses | 23 | 18 | 18 | 41 | 41 | ||||||||||||||||||
Total non-interest expense | 398 | 375 | 384 | 773 | 779 | ||||||||||||||||||
Income before income tax expense | 295 | 392 | 345 | 687 | 679 | ||||||||||||||||||
Income tax expense | 76 | 102 | 95 | 178 | 182 | ||||||||||||||||||
Net income | $ | 219 | $ | 290 | $ | 250 | $ | 509 | $ | 497 | |||||||||||||
Preferred stock dividends | — | 20 | — | 20 | 12 | ||||||||||||||||||
Net income available to common shareholders | $ | 219 | $ | 270 | $ | 250 | $ | 489 | $ | 485 | |||||||||||||
Basic earnings per common share | $ | 0.90 | $ | 1.10 | $ | 0.95 | $ | 2.00 | $ | 1.83 | |||||||||||||
Diluted earnings per common share | $ | 0.90 | $ | 1.09 | $ | 0.95 | $ | 2.00 | $ | 1.82 | |||||||||||||
Weighted average common shares outstanding: | |||||||||||||||||||||||
Basic (in thousands) | 243,007 | 246,252 | 263,809 | 244,620 | 265,220 | ||||||||||||||||||
Diluted (in thousands) | 243,465 | 246,934 | 264,929 | 245,190 | 266,351 | ||||||||||||||||||
Dividends declared per common share | $ | 0.14 | $ | 0.14 | $ | — | $ | 0.28 | $ | — | |||||||||||||
E*TRADE FINANCIAL CORPORATION | |||||||||||
Consolidated Balance Sheet | |||||||||||
(In millions, except share data) | |||||||||||
(Unaudited) | |||||||||||
June 30, | December 31, | ||||||||||
2019 | 2018 | ||||||||||
ASSETS | |||||||||||
Cash and equivalents | $ | 380 | $ | 2,333 | |||||||
Cash segregated under federal or other regulations | 948 | 1,011 | |||||||||
Available-for-sale securities | 19,714 | 23,153 | |||||||||
Held-to-maturity securities | 23,398 | 21,884 | |||||||||
Margin receivables | 9,930 | 9,560 | |||||||||
Loans receivable, net(5) | 1,849 | 2,103 | |||||||||
Receivables from brokers, dealers and clearing organizations | 902 | 760 | |||||||||
Property and equipment, net | 325 | 281 | |||||||||
Goodwill | 2,485 | 2,485 | |||||||||
Other intangibles, net | 461 | 491 | |||||||||
Other assets | 1,198 | 942 | |||||||||
Total assets | $ | 61,590 | $ | 65,003 | |||||||
LIABILITIES AND SHAREHOLDERS' EQUITY | |||||||||||
Liabilities: | |||||||||||
Deposits | $ | 40,289 | $ | 45,313 | |||||||
Customer payables | 10,629 | 10,117 | |||||||||
Payables to brokers, dealers and clearing organizations | 1,146 | 948 | |||||||||
Other borrowings | 300 | — | |||||||||
Corporate debt | 1,410 | 1,409 | |||||||||
Other liabilities | 946 | 654 | |||||||||
Total liabilities | 54,720 | 58,441 | |||||||||
Shareholders' equity: | |||||||||||
Preferred stock, $0.01 par value; shares authorized: 1,000,000;
| 689 | 689 | |||||||||
Common stock, $0.01 par value; shares authorized: 400,000,000;
| 2 | 2 | |||||||||
Additional paid-in-capital | 5,133 | 5,462 | |||||||||
Retained earnings | 1,104 | 684 | |||||||||
Accumulated other comprehensive loss | (58 | ) | (275 | ) | |||||||
Total shareholders' equity | 6,870 | 6,562 | |||||||||
Total liabilities and shareholders' equity | $ | 61,590 | $ | 65,003 | |||||||
| Key Performance Metrics(6) | |||||||||||||||||||||||
Corporate (dollars in millions) | Qtr
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Operating margin %(2) | 43 | % | 52 | % | (9 | )% | 49 | % | (6 | )% | |||||||||||||
Adjusted operating margin %(2) | 42 | % | 50 | % | (8 | )% | 46 | % | (4 | )% | |||||||||||||
Employees | 4,261 | 4,105 | 4 | % | 4,095 | 4 | % | ||||||||||||||||
Return on common equity(3) | 15 | % | 19 | % | (4 | )% | 16 | % | (1 | )% | |||||||||||||
Adjusted return on common equity(3) | 14 | % | 18 | % | (4 | )% | 15 | % | (1 | )% | |||||||||||||
Common equity book value per share(7) | $ | 25.75 | $ | 24.90 | 3 | % | $ | 23.73 | 9 | % | |||||||||||||
Tangible common equity book value per share(7) | $ | 15.35 | $ | 14.61 | 5 | % | $ | 14.35 | 7 | % | |||||||||||||
Cash and equivalents | $ | 380 | $ | 523 | (27 | )% | $ | 532 | (29 | )% | |||||||||||||
Corporate cash(8) | $ | 323 | $ | 329 | (2 | )% | $ | 943 | (66 | )% | |||||||||||||
Average interest-earning assets | $ | 61,361 | $ | 61,017 | 1 | % | $ | 59,967 | 2 | % | |||||||||||||
Net interest margin (basis points) | 320 | 323 | (3 | ) | 302 | 18 | |||||||||||||||||
Customer Activity (dollars in billions) | Qtr
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Commissionable trades (MM)(9) | 16.9 | 17.0 | (1 | )% | 16.0 | 6 | % | ||||||||||||||||
Trading days | 63.0 | 61.0 | N.M. | 64.0 | N.M. | ||||||||||||||||||
DARTs(9) | 268,488 | 279,405 | (4 | )% | 250,326 | 7 | % | ||||||||||||||||
Derivative DARTs(9) | 89,402 | 90,042 | (1 | )% | 85,967 | 4 | % | ||||||||||||||||
Derivative DARTs %(9) | 33 | % | 32 | % | 1 | % | 34 | % | (1 | )% | |||||||||||||
Average commission per trade(9) | $ | 7.14 | $ | 7.17 | — | % | $ | 7.56 | (6 | )% | |||||||||||||
Margin receivables | $ | 9.9 | $ | 10.3 | (4 | )% | $ | 11.0 | (10 | )% | |||||||||||||
| Key Performance Metrics(6) | ||||||||||||||||||||
Customer Activity (dollars in billions) | Qtr ended
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Gross new retail accounts | 143,205 | 162,237 | (12 | )% | 113,025 | 27 | % | |||||||||||||
Gross new advisor services accounts(10) | 6,775 | 6,689 | 1 | % | 151,311 | (96 | )% | |||||||||||||
Gross new corporate services accounts | 91,388 | 96,667 | (5 | )% | 172,835 | (47 | )% | |||||||||||||
Gross new accounts | 241,368 | 265,593 | (9 | )% | 437,171 | (45 | )% | |||||||||||||
Net new retail accounts | 34,072 | 80,830 | (58 | )% | 37,444 | (9 | )% | |||||||||||||
Net new advisor services accounts(10) | 53 | (19 | ) | N.M. | 147,640 | (100 | )% | |||||||||||||
Net new corporate services accounts | 35,892 | 54,154 | (34 | )% | 134,025 | (73 | )% | |||||||||||||
Net new accounts | 70,017 | 134,965 | (48 | )% | 319,109 | (78 | )% | |||||||||||||
End of period retail accounts | 5,122,669 | 5,088,597 | 1 | % | 3,992,575 | 28 | % | |||||||||||||
End of period advisor services accounts(10) | 151,275 | 151,222 | — | % | 147,640 | 2 | % | |||||||||||||
End of period corporate services accounts | 1,853,875 | 1,817,983 | 2 | % | 1,666,354 | 11 | % | |||||||||||||
End of period accounts | 7,127,819 | 7,057,802 | 1 | % | 5,806,569 | 23 | % | |||||||||||||
Net new retail account growth rate | 2.7 | % | 6.5 | % | (3.8 | )% | 3.8 | % | (1.1 | )% | ||||||||||
Net new advisor services account growth rate(10) | 0.1 | % | (0.1 | )% | 0.2 | % | 100.0 | % | (99.9 | )% | ||||||||||
Net new corporate services account growth rate | 7.9 | % | 12.3 | % | (4.4 | )% | 35.0 | % | (27.1 | )% | ||||||||||
Net new total account growth rate(10) | 4.0 | % | 7.8 | % | (3.8 | )% | 23.3 | % | (19.3 | )% | ||||||||||
Net new retail assets(11) | $ | 1.7 | $ | 4.8 | (65 | )% | $ | 2.4 | (29 | )% | ||||||||||
Net new advisor services assets(10)(11) | (0.1 | ) | (0.1 | ) | — | % | 18.6 | (101 | )% | |||||||||||
Net new retail and advisor services assets | $ | 1.6 | $ | 4.7 | (66 | )% | $ | 21.0 | (92 | )% | ||||||||||
Net new retail assets growth rate | 2.1 | % | 6.8 | % | (4.7 | )% | 3.3 | % | (1.2 | )% | ||||||||||
Net new advisor services assets growth rate(10) | (1.2 | )% | (3.5 | )% | 2.3 | % | 100.0 | % | (101.2 | )% | ||||||||||
Net new retail and advisor services assets growth rate(10) | 1.9 | % | 6.2 | % | (4.3 | )% | 29.5 | % | (27.6 | )% | ||||||||||
Retail Assets | ||||||||||||||||||||
Security holdings | $ | 268.2 | $ | 261.1 | 3 | % | $ | 240.1 | 12 | % | ||||||||||
Cash and deposits | 61.2 | 60.7 | 1 | % | 56.5 | 8 | % | |||||||||||||
Retail assets | $ | 329.4 | $ | 321.8 | 2 | % | $ | 296.6 | 11 | % | ||||||||||
Advisor Services Assets | ||||||||||||||||||||
Security holdings | $ | 18.4 | $ | 18.2 | 1 | % | $ | 17.6 | 5 | % | ||||||||||
Cash and deposits | 1.0 | 1.0 | — | % | 1.2 | (17 | )% | |||||||||||||
Advisor services assets | $ | 19.4 | $ | 19.2 | 1 | % | $ | 18.8 | 3 | % | ||||||||||
Corporate Services Assets | ||||||||||||||||||||
Vested equity holdings | $ | 95.3 | $ | 92.1 | 3 | % | $ | 79.9 | 19 | % | ||||||||||
Vested options holdings | 47.0 | 48.5 | (3 | )% | 45.4 | 4 | % | |||||||||||||
Corporate services vested assets | $ | 142.3 | $ | 140.6 | 1 | % | $ | 125.3 | 14 | % | ||||||||||
Unvested holdings | 117.0 | 115.4 | 1 | % | 108.0 | 8 | % | |||||||||||||
Corporate services assets | $ | 259.3 | $ | 256.0 | 1 | % | $ | 233.3 | 11 | % | ||||||||||
Total Customer Assets | ||||||||||||||||||||
Security holdings | $ | 286.6 | $ | 279.3 | 3 | % | $ | 257.7 | 11 | % | ||||||||||
Cash and deposits(12) | 62.2 | 61.7 | 1 | % | 57.7 | 8 | % | |||||||||||||
Retail and advisor services assets | $ | 348.8 | $ | 341.0 | 2 | % | $ | 315.4 | 11 | % | ||||||||||
Corporate services vested assets | 142.3 | 140.6 | 1 | % | 125.3 | 14 | % | |||||||||||||
Retail, advisor services, and corporate services vested assets | $ | 491.1 | $ | 481.6 | 2 | % | $ | 440.7 | 11 | % | ||||||||||
Corporate services unvested holdings | 117.0 | 115.4 | 1 | % | 108.0 | 8 | % | |||||||||||||
Total customer assets | $ | 608.1 | $ | 597.0 | 2 | % | $ | 548.7 | 11 | % | ||||||||||
Net (buy) / sell activity | ||||||||||||||||||||
Retail net (buy) / sell activity | $ | (0.5 | ) | $ | (2.7 | ) | N.M. | $ | (2.1 | ) | N.M. | |||||||||
Advisor services net (buy) / sell activity | 0.2 | (0.6 | ) | N.M. | (0.8 | ) | N.M. | |||||||||||||
Net (buy) / sell activity | $ | (0.3 | ) | $ | (3.3 | ) | N.M. | $ | (2.9 | ) | N.M. | |||||||||
Market Indices | ||||||||||||||||||||
Dow Jones Industrial Average | 26,600 | 25,929 | 3 | % | 24,271 | 10 | % | |||||||||||||
Nasdaq Composite | 8,006 | 7,729 | 4 | % | 7,510 | 7 | % | |||||||||||||
Standard & Poor's 500 | 2,942 | 2,834 | 4 | % | 2,718 | 8 | % | |||||||||||||
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E*TRADE Financial | |||||||||||||||
Tier 1 leverage ratio(13) | 6.7 | % | 6.7 | % | — | % | 7.1 | % | (0.4 | )% | |||||
Common Equity Tier 1 capital ratio(13) | 33.9 | % | 30.1 | % | 3.8 | % | 34.3 | % | (0.4 | )% | |||||
Tier 1 risk-based capital ratio(13) | 40.4 | % | 35.9 | % | 4.5 | % | 40.7 | % | (0.3 | )% | |||||
Total risk-based capital ratio(13) | 40.7 | % | 36.3 | % | 4.4 | % | 45.0 | % | (4.3 | )% | |||||
E*TRADE Bank | |||||||||||||||
Tier 1 leverage ratio(13) | 7.3 | % | 7.1 | % | 0.2 | % | 7.2 | % | 0.1 | % | |||||
Common Equity Tier 1 capital ratio(13) | 40.2 | % | 33.9 | % | 6.3 | % | 34.9 | % | 5.3 | % | |||||
Tier 1 risk-based capital ratio(13) | 40.2 | % | 33.9 | % | 6.3 | % | 34.9 | % | 5.3 | % | |||||
Total risk-based capital ratio(13) | 40.5 | % | 34.2 | % | 6.3 | % | 35.5 | % | 5.0 | % | |||||
| Average Balance Sheet Data | |||||||||||||||||||||||
(dollars in millions) | Three Months Ended | ||||||||||||||||||||||
June 30, 2019 | March 31, 2019 | ||||||||||||||||||||||
Average | Interest | Average | Average | Interest | Average | ||||||||||||||||||
Balance | Inc./Exp. | Yield/Cost | Balance | Inc./Exp. | Yield/Cost | ||||||||||||||||||
Cash and equivalents | $ | 452 | $ | 3 | 2.33 | % | $ | 607 | $ | 3 | 2.31 | % | |||||||||||
Cash segregated under federal or other regulations | 871 | 6 | 2.63 | % | 986 | 6 | 2.63 | % | |||||||||||||||
Investment securities | 47,375 | 368 | 3.11 | % | 46,968 | 365 | 3.10 | % | |||||||||||||||
Margin receivables | 10,084 | 130 | 5.17 | % | 9,766 | 126 | 5.24 | % | |||||||||||||||
Loans | 1,920 | 28 | 5.75 | % | 2,058 | 28 | 5.48 | % | |||||||||||||||
Broker-related receivables and other | 659 | 3 | 2.23 | % | 632 | 4 | 2.24 | % | |||||||||||||||
Total interest-earning assets | 61,361 | 538 | 3.51 | % | 61,017 | 532 | 3.50 | % | |||||||||||||||
Other interest revenue(a) | — | 22 | — | 23 | |||||||||||||||||||
Total interest-earning assets | 61,361 | 560 | 3.66 | % | 61,017 | 555 | 3.65 | % | |||||||||||||||
Total non-interest earning assets | 5,093 | 4,991 | |||||||||||||||||||||
Total assets | $ | 66,454 | $ | 66,008 | |||||||||||||||||||
Sweep deposits | $ | 37,380 | $ | 18 | 0.20 | % | $ | 38,433 | $ | 20 | 0.21 | % | |||||||||||
Savings deposits | 6,347 | 23 | 1.47 | % | 4,968 | 15 | 1.22 | % | |||||||||||||||
Other deposits | 1,732 | — | 0.03 | % | 1,785 | — | 0.03 | % | |||||||||||||||
Customer payables | 10,593 | 8 | 0.31 | % | 10,462 | 9 | 0.34 | % | |||||||||||||||
Broker-related payables and other | 1,050 | 1 | 0.46 | % | 999 | 1 | 0.49 | % | |||||||||||||||
Other borrowings | 312 | 4 | 3.78 | % | 269 | 2 | 3.81 | % | |||||||||||||||
Corporate debt | 1,410 | 14 | 4.06 | % | 1,409 | 14 | 3.91 | % | |||||||||||||||
Total interest-bearing liabilities | 58,824 | 68 | 0.47 | % | 58,325 | 61 | 0.42 | % | |||||||||||||||
Other interest expense(b) | — | 2 | — | 2 | |||||||||||||||||||
Total interest-bearing liabilities | 58,824 | 70 | 0.48 | % | 58,325 | 63 | 0.44 | % | |||||||||||||||
Total non-interest-bearing liabilities | 1,016 | 1,183 | |||||||||||||||||||||
Total liabilities | 59,840 | 59,508 | |||||||||||||||||||||
Total shareholders' equity | 6,614 | 6,500 | |||||||||||||||||||||
Total liabilities and shareholders' equity | $ | 66,454 | $ | 66,008 | |||||||||||||||||||
Excess interest earning assets over interest bearing
| $ | 2,537 | $ | 490 | 3.20 | % | $ | 2,692 | $ | 492 | 3.23 | % | |||||||||||
- Other interest revenue is earned on certain securities loaned balances. Interest expense incurred on other securities loaned balances is presented on the broker-related payables and other line item above.
- Other interest expense is incurred on certain securities borrowed balances. Interest income earned on other securities borrowed balances is presented on the broker-related receivables and other line item above.
Average Balance Sheet Data | Three Months Ended | |||||||||||
(dollars in millions) | June 30, 2018 | |||||||||||
Average | Interest | Average | ||||||||||
Balance | Inc./Exp. | Yield/Cost | ||||||||||
Cash and equivalents | $ | 533 | $ | 2 | 1.66 | % | ||||||
Cash segregated under federal or other regulations | 753 | 4 | 1.95 | % | ||||||||
Investment securities | 44,973 | 303 | 2.69 | % | ||||||||
Margin receivables | 10,291 | 118 | 4.60 | % | ||||||||
Loans | 2,468 | 33 | 5.32 | % | ||||||||
Broker-related receivables and other | 949 | 4 | 1.74 | % | ||||||||
Total interest-earning assets | 59,967 | 464 | 3.10 | % | ||||||||
Other interest revenue(a) | — | 25 | ||||||||||
Total interest-earning assets | 59,967 | 489 | 3.26 | % | ||||||||
Total non-interest-earning assets | 4,364 | |||||||||||
Total assets | $ | 64,331 | ||||||||||
Sweep deposits | $ | 38,196 | $ | 7 | 0.08 | % | ||||||
Savings deposits | 2,766 | 1 | 0.06 | % | ||||||||
Other deposits | 2,044 | — | 0.02 | % | ||||||||
Customer payables | 9,533 | 4 | 0.16 | % | ||||||||
Broker-related payables and other | 2,207 | 3 | 0.65 | % | ||||||||
Other borrowings | 829 | 8 | 3.77 | % | ||||||||
Corporate debt | 1,042 | 10 | 3.68 | % | ||||||||
Total interest-bearing liabilities | 56,617 | 33 | 0.23 | % | ||||||||
Other interest expense(b) | — | 3 | ||||||||||
Total interest-bearing liabilities | 56,617 | 36 | 0.25 | % | ||||||||
Total non-interest-bearing liabilities | 633 | |||||||||||
Total liabilities | 57,250 | |||||||||||
Total shareholders' equity | 7,081 | |||||||||||
Total liabilities and shareholders' equity | $ | 64,331 | ||||||||||
Excess interest earning assets over interest bearing liabilities/ net interest
| $ | 3,350 | $ | 453 | 3.02 | % | ||||||
- Other interest revenue is earned on certain securities loaned balances. Interest expense incurred on other securities loaned balances is presented on the broker-related payables and other line item above.
- Other interest expense is incurred on certain securities borrowed balances. Interest income earned on other securities borrowed balances is presented on the broker-related receivables and other line item above.
Fees and Service Charges | ||||||||||||
(dollars in millions) | Three Months Ended | |||||||||||
June 30,
| March 31,
| June 30,
| ||||||||||
Order flow revenue | $ | 45 | $ | 43 | $ | 43 | ||||||
Money market funds and sweep deposits revenue(a) | 23 | 21 | 18 | |||||||||
Advisor management and custody fees | 19 | 18 | 16 | |||||||||
Mutual fund service fees | 13 | 12 | 12 | |||||||||
Foreign exchange revenue | 8 | 8 | 6 | |||||||||
Reorganization fees | 7 | 6 | 4 | |||||||||
Other fees and service charges | 11 | 10 | 11 | |||||||||
Total fees and service charges | $ | 126 | $ | 118 | $ | 110 | ||||||
- 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. Management believes that excluding the provision (benefit) for loan losses from operating margin provides a useful measure of the Company's ongoing operating performance because management excludes this when evaluating operating margin performance. See endnote (2) for a reconciliation of this non-GAAP measure to the comparable GAAP measure.
Adjusted Return on Common Equity
Adjusted return on common equity is calculated by dividing annualized adjusted net income available to common shareholders by average common shareholders' equity, which excludes preferred stock. Adjusted net income available to common shareholders excludes the after-tax impact of the provision (benefit) for loan losses. Management believes that excluding the provision (benefit) for loan losses from net income available to common shareholders provides a useful measure of the Company's ongoing operating performance because management excludes this when evaluating return on common equity performance. See endnote (3) 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.
Corporate Cash
Corporate cash represents cash held at the parent company as well as cash held in certain subsidiaries, not including bank and brokerage 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.
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 $219 million, or $0.90 per diluted share, includes net after-tax losses of $53 million, or $0.22 per diluted share, related to the following items:
- $80 million pre-tax, or $0.24 per diluted share, of losses from balance sheet repositioning related to the sale of $4.5 billion of lower-yielding investment securities
- $8 million pre-tax, or $0.02 per diluted share, of benefit to provision for loan losses
(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. As noted above, adjusted operating margin is a non-GAAP measure. The following table provides a reconciliation of GAAP operating margin percentage to non-GAAP adjusted operating margin (dollars in millions):
Q2 2019 | Q1 2019 | Q2 2018 | |||||||||||||||||||
Amount | Operating
| Amount | Operating
| Amount | Operating
| ||||||||||||||||
Income before income tax expense and
| $ | 295 | 43 | % | $ | 392 | 52 | % | $ | 345 | 49 | % | |||||||||
Provision (benefit) for loan losses | (8 | ) | (12 | ) | (19 | ) | |||||||||||||||
Adjusted income before income tax
| $ | 287 | 42 | % | $ | 380 | 50 | % | $ | 326 | 46 | % | |||||||||
- In Q2 2019, income before income tax expense and adjusted income before income tax expense includes $80 million of losses from balance sheet repositioning, which resulted in a 6 percentage point reduction to both operating margin and adjusted operating margin.
(3) Return on common equity is calculated by dividing annualized net income available to common shareholders by average common shareholders' equity, which excludes preferred stock. As noted above, adjusted return on common equity is a non-GAAP measure. The following table provides a reconciliation of GAAP return on common equity percentage to non-GAAP adjusted return on common equity percentage (dollars in millions):
Q2 2019 | Q1 2019 | Q2 2018 | |||||||||||||||||||
Amount | Return
| Amount | Return
| Amount | Return
| ||||||||||||||||
Net income available to common
| $ | 219 | 15 | % | $ | 270 | 19 | % | $ | 250 | 16 | % | |||||||||
Add back impact of the following item: | |||||||||||||||||||||
Provision (benefit) for loan losses | (8 | ) | (12 | ) | (19 | ) | |||||||||||||||
Income tax impact | 2 | 3 | 5 | ||||||||||||||||||
Net of tax | (6 | ) | (9 | ) | (14 | ) | |||||||||||||||
Adjusted net income available to common
| $ | 213 | 14 | % | $ | 261 | 18 | % | $ | 236 | 15 | % | |||||||||
- In Q2 2019, net income available to common shareholders and adjusted net income available to common shareholders includes $59 million of after-tax losses from balance sheet repositioning, which resulted in a 4 percentage point reduction to both return on common equity and adjusted return on common equity.
(4) Capital return to shareholders represents the amount returned to shareholders through share repurchases and common stock dividends.
(5) The following table presents the allowance for loans losses (dollars in millions):
Q2 2019 | Q4 2018 | |||||||
Allowance for loan losses, beginning | $ | 32 | $ | 41 | ||||
Provision (benefit) for loan losses | (8 | ) | (12 | ) | ||||
(Charge-offs) recoveries, net | 6 | 8 | ||||||
Allowance for loan losses, ending | $ | 30 | $ | 37 | ||||
Loan servicing expense was $3 million, $3 million, and $5 million for the three months ended June 30, 2019, March 31, 2019, and June 30, 2018, respectively. Loan servicing expense was $6 million and $10 million for the six months ended June 30, 2019 and 2018, respectively.
(6) Amounts and percentages may not recalculate due to rounding. For percentage based metrics, the variance represents the current period less the prior period. Net new account and asset growth rates have been annualized.
(7) As noted above, tangible common equity book value and tangible common equity book value per share are non-GAAP measures. 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):
Q2 2019 | Q1 2019 | Q2 2018 | ||||||||||||||||||||||
Amount | Per
| Amount | Per
| Amount | Per
| |||||||||||||||||||
Common equity book value | $ | 6,181 | $ | 25.75 | $ | 6,093 | $ | 24.90 | $ | 6,214 | $ | 23.73 | ||||||||||||
Less: Goodwill and other intangibles, net | (2,946 | ) | (2,961 | ) | (2,888 | ) | ||||||||||||||||||
Add: Deferred tax liabilities related to
| 450 | 442 | 430 | |||||||||||||||||||||
Tangible common equity book value | $ | 3,685 | $ | 15.35 | $ | 3,574 | $ | 14.61 | $ | 3,756 | $ | 14.35 | ||||||||||||
(8) As noted above, corporate cash is a non-GAAP measure. The following table provides a reconciliation of GAAP consolidated cash and equivalents to non-GAAP corporate cash at period end (dollars in millions):
Q2 2019 | Q1 2019 | Q2 2018 | ||||||||||
Consolidated cash and equivalents | $ | 380 | $ | 523 | $ | 532 | ||||||
Less: Cash at regulated subsidiaries | (373 | ) | (518 | ) | (527 | ) | ||||||
Add: Cash on deposit at E*TRADE Bank(a) | 316 | 324 | 938 | |||||||||
Corporate cash | $ | 323 | $ | 329 | $ | 943 | ||||||
- Corporate cash includes the parent company's deposits placed with E*TRADE Bank. E*TRADE Bank may use these deposits for investment purposes; however, these investments are not included in consolidated cash and equivalents.
(9) Commissionable trades exclude trades related to no transaction fee mutual funds and commission-free exchange-traded funds, rebalancing trades associated with managed products, and other non-commissionable trades.
(10) Advisor services metrics include the impact of the Trust Company of America acquisition, which was completed on April 9, 2018, including 145,891 advisor services accounts and $18.4 billion in advisor services assets.
(11) Net new retail and advisor services assets exclude the effects of market movements in the value of retail and advisor services assets.
(12) The following table provides the components of total cash and deposits (dollars in billions):
Q2 2019 | Q1 2019 | Q2 2018 | ||||||||||
Sweep deposits | $ | 31.7 | $ | 38.6 | $ | 37.8 | ||||||
Customer payables | 10.6 | 10.6 | 10.0 | |||||||||
Savings, checking and other banking assets(a) | 8.6 | 7.7 | 4.9 | |||||||||
Total on-balance sheet cash | 50.9 | 56.9 | 52.7 | |||||||||
Sweep deposits at unaffiliated financial institutions | 9.6 | 3.0 | 3.5 | |||||||||
Money market funds and other | 1.7 | 1.8 | 1.5 | |||||||||
Total customer cash held by third parties(b) | 11.3 | 4.8 | 5.0 | |||||||||
Total cash and deposits | $ | 62.2 | $ | 61.7 | $ | 57.7 | ||||||
- Includes $5.1 billion, $3.8 billion and $0.3 billion of deposits at June 30, 2019, March 31, 2019, and June 30, 2018, respectively, in our Premium Savings Account product.
- 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. Customer cash held by third parties is not reflected in the Company's consolidated balance sheet and is not immediately available for liquidity purposes.
(13) E*TRADE Financial and E*TRADE Bank's capital ratios are calculated as follows and are preliminary for the current period (dollars in millions):
E*TRADE Financial | E*TRADE Bank | |||||||||||||||
Q2 2019 | Q4 2018 | Q2 2019 | Q4 2018 | |||||||||||||
Shareholders’ equity | $ | 6,870 | $ | 6,562 | $ | 4,028 | $ | 3,557 | ||||||||
Deduct: | ||||||||||||||||
Preferred stock | (689 | ) | (689 | ) | — | — | ||||||||||
Common Equity Tier 1 capital before regulatory adjustments | $ | 6,181 | $ | 5,873 | $ | 4,028 | $ | 3,557 | ||||||||
Add: | ||||||||||||||||
Losses in other comprehensive income on available-for-sale debt securities, net of tax | 58 | 275 | 58 | 275 | ||||||||||||
Deduct: | ||||||||||||||||
Goodwill and other intangible assets, net of deferred tax liabilities | (2,496 | ) | (2,540 | ) | (282 | ) | (287 | ) | ||||||||
Disallowed deferred tax assets | (122 | ) | (200 | ) | (36 | ) | (61 | ) | ||||||||
Common Equity Tier 1 capital | $ | 3,621 | $ | 3,408 | $ | 3,768 | $ | 3,484 | ||||||||
Add: | ||||||||||||||||
Preferred stock | 689 | 689 | — | — | ||||||||||||
Tier 1 capital | $ | 4,310 | $ | 4,097 | $ | 3,768 | $ | 3,484 | ||||||||
Add: | ||||||||||||||||
Other | 40 | 46 | 30 | 37 | ||||||||||||
Total capital | $ | 4,350 | $ | 4,143 | $ | 3,798 | $ | 3,521 | ||||||||
Average assets for leverage capital purposes | $ | 66,665 | $ | 64,767 | $ | 51,749 | $ | 49,568 | ||||||||
Deduct: | ||||||||||||||||
Goodwill and other intangible assets, net of deferred tax liabilities | (2,496 | ) | (2,540 | ) | (282 | ) | (287 | ) | ||||||||
Disallowed deferred tax assets | (122 | ) | (200 | ) | (36 | ) | (61 | ) | ||||||||
Adjusted average assets for leverage capital purposes | $ | 64,047 | $ | 62,027 | $ | 51,431 | $ | 49,220 | ||||||||
Total risk-weighted assets(a) | $ | 10,677 | $ | 10,970 | $ | 9,369 | $ | 9,994 | ||||||||
Tier 1 leverage ratio (Tier 1 capital / Adjusted average assets for leverage capital purposes) | 6.7 | % | 6.6 | % | 7.3 | % | 7.1 | % | ||||||||
Common Equity Tier 1 capital / Total risk-weighted assets(a) | 33.9 | % | 31.1 | % | 40.2 | % | 34.9 | % | ||||||||
Tier 1 capital / Total risk-weighted assets | 40.4 | % | 37.3 | % | 40.2 | % | 34.9 | % | ||||||||
Total capital / Total risk-weighted assets | 40.7 | % | 37.8 | % | 40.5 | % | 35.2 | % | ||||||||
- 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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