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E*TRADE Financial Corporation Announces Second Quarter 2020 Results

E*TRADE Financial Corporation (NASDAQ:ETFC):

Second Quarter Results

  • Net income of $196 million
  • Diluted earnings per common share of $0.88
  • Total net revenue of $716 million
  • Daily Average Revenue Trades (DARTs) of 1,010,000 and derivative DARTs of 253,000, both Company records(1)
  • Average interest-earning assets of $60.6 billion; net interest margin of 256 basis points
  • Average margin receivables of $8.0 billion; end-of-period margin receivables of $9.4 billion
  • Net new retail accounts of 327,000, annualized growth rate of 24 percent
  • Net new retail assets of $13.6 billion, annualized growth rate of 17 percent

E*TRADE Financial Corporation (NASDAQ: ETFC) today announced results for its second quarter ended June 30, 2020, reporting net income of $196 million, diluted earnings per common share of $0.88, and total net revenue of $716 million.

“The second quarter was extraordinary as we achieved levels of customer engagement that are without precedent in our nearly 40-year history. In the first six months of the year we have set six sequential records for both total and derivative DARTs, resulting in over a million DARTs for the second quarter, and culminating in over 1.1 million DARTs in the month of June. The volumes we achieved in derivatives alone surpassed our DARTs across all securities types from just a few years ago. Furthermore, the blistering pace of account and asset growth continued in the second quarter, with $13.6 billion in net new retail assets, and 327,000 net new retail accounts, bringing our year-to-date retail asset flows to $31.9 billion and account growth to 656,000. We generated greater retail organic asset growth in the first half of this year alone than in the previous two years combined, and generated more retail organic account growth than the previous five years combined. The second quarter was also a standout for our Corporate Services channel, as we generated record participant proceeds and made remarkable headway in retaining those proceeds – reflecting the success of our executive services offering, ongoing enhancements to the participant experience, and increases in retail engagement across the board. On a trailing twelve-month basis, we have seen proceeds retention march steadily upward from its historical 15% to end this quarter at an astounding 24%.” said Mike Pizzi, Chief Executive Officer. “In concert with our efforts to continue capturing market share, we are diligently preparing to close our merger with Morgan Stanley, which is anticipated to occur in the fourth quarter of this year. We obtained shareholder approval for the merger last week, and along with Morgan Stanley, are working to obtain the remaining required regulatory approvals.”

“We delivered strong financial results on top of continued record setting operating metrics,” said Chad Turner, Chief Financial Officer. “We generated our highest period ever of revenue from trading-related activity, which more than offset the quarter-over-quarter pressure on net interest income, given the Fed's recent rate cuts to near zero. While we remain prudent on managing expenses as we navigate this low interest rate environment, we continue to opportunistically invest in sales and marketing to maintain the tremendous momentum in growth of accounts, assets, and deposits amid an environment that is particularly ripe for franchise growth.”

“With yet another quarter of record growth now etched into our history, our model proves its might once again, illustrating that we continue to reach previously unthinkable heights in serving digitally-inclined retail investors and institutional clients,” continued Mike Pizzi. “In setting our sights on the horizon, we look forward to joining forces with Morgan Stanley – following the anticipated fourth quarter close – creating an unparalleled leader in wealth management and workplace solutions. As the original place to invest online, E*TRADE invented a category nearly forty years ago, and continued to leverage its digital ethos to improve myriad corners of the financial services industry, including investing, trading, stock plan administration, RIA custody, and student loan benefits. It is thrilling to contemplate what we can achieve within the umbrella of a world-class financial services powerhouse.”

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 25, 2020, to shareholders of record as of the close of business on August 19, 2020.

In lieu of a conference call, the Company published supplementary materials to its corporate website. Historical metrics and financials can also 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 advisers (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). Employee stock and student loan benefit plan solutions are offered by E*TRADE Financial Corporate Services, Inc. More information is available at www.etrade.com. ETFC-E

Important Notices

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

Forward-Looking Statements

This press release contains forward-looking statements made pursuant to the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995. The statements contained in this press release that are forward looking, including statements regarding the Company's future plans and its ability to gain market share and manage expenses, pay additional dividends in the future, and the consummation of the proposed transaction with Morgan Stanley and the anticipated benefits thereof, 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; the consummation of the proposed transaction with Morgan Stanley and the anticipated benefits thereof; adverse developments in litigation or regulatory matters; the timing and duration of, and the amount of cash expended in connection with dividend payments; the extent to which a disease pandemic, such as the coronavirus (COVID-19) outbreak, and measures taken in response thereto could materially adversely affect our business, results of operations and financial condition; and the other factors set forth in our annual report on Form 10-K and subsequent reports on Forms 10-Q and 8-K, filed with the US Securities and Exchange Commission (including information 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.

© 2020 E*TRADE Financial Corporation. All rights reserved.

E*TRADE FINANCIAL CORPORATION

Consolidated Statements 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,

2020

2020

2019

2020

2019

Revenue:

Interest income

$

409

$

443

$

560

$

852

$

1,115

Interest expense

(21

)

(43

)

(70

)

(64

)

(133

)

Net interest income

388

400

490

788

982

Commissions

89

71

121

160

243

Fees and service charges

205

203

126

408

244

Gains (losses) on securities and other, net

23

20

(64

)

43

(53

)

Other revenue

11

13

12

24

24

Total non-interest income

328

307

195

635

458

Total net revenue

716

707

685

1,423

1,440

Provision (benefit) for credit losses

(1

)

6

(8

)

5

(20

)

Non-interest expense:

Compensation and benefits

176

168

168

344

332

Advertising and market development

64

56

48

120

102

Clearing and servicing

47

44

32

91

62

Professional services

30

23

26

53

48

Occupancy and equipment

37

36

32

73

64

Communications

35

29

29

64

44

Depreciation and amortization

24

23

21

47

42

FDIC insurance premiums

3

4

4

7

8

Amortization of other intangibles

15

15

15

30

30

Restructuring and acquisition-related activities

2

16

18

Other non-interest expenses

20

31

23

51

41

Total non-interest expense

453

445

398

898

773

Income before income tax expense

264

256

295

520

687

Income tax expense

68

75

76

143

178

Net income

$

196

$

181

$

219

$

377

$

509

Preferred stock dividends

20

20

20

Net income available to common shareholders

$

196

$

161

$

219

$

357

$

489

Basic earnings per common share

$

0.89

$

0.73

$

0.90

$

1.61

$

2.00

Diluted earnings per common share

$

0.88

$

0.72

$

0.90

$

1.61

$

2.00

Weighted average common shares outstanding:

Basic (in thousands)

221,438

222,295

243,007

221,866

244,620

Diluted (in thousands)

221,693

222,742

243,465

222,218

245,190

Dividends declared per common share

$

0.14

$

0.14

$

0.14

$

0.28

$

0.28

 

E*TRADE FINANCIAL CORPORATION

Consolidated Balance Sheets

(In millions, except share data)

(Unaudited)

June 30,

December 31,

2020

2019

ASSETS

Cash and equivalents

$

436

$

750

Cash segregated under federal or other regulations

5,570

1,879

Available-for-sale securities

19,992

19,501

Held-to-maturity securities

27,182

21,969

Margin receivables

9,422

9,675

Loans receivable, net(2)

1,608

1,595

Receivables from brokers, dealers and clearing organizations

1,128

1,395

Property and equipment, net

356

339

Goodwill

2,509

2,510

Other intangibles, net

405

433

Other assets

1,763

1,370

Total assets

$

70,371

$

61,416

LIABILITIES AND SHAREHOLDERS' EQUITY

Liabilities:

Deposits

$

43,667

$

38,606

Customer payables

15,671

12,849

Payables to brokers, dealers and clearing organizations

1,524

893

Corporate debt

1,412

1,410

Other liabilities

1,277

1,115

Total liabilities

63,551

54,873

Shareholders' equity:

Preferred stock, $0.01 par value, 1,000,000 shares authorized, 403,000 shares issued and outstanding at both June 30, 2020 and December 31, 2019, respectively; aggregate liquidation preference of $700 at both June 30, 2020 and December 31, 2019, respectively

689

689

Common stock, $0.01 par value, 400,000,000 shares authorized, 221,092,693 and 222,622,333 shares issued and outstanding at June 30, 2020 and December 31, 2019, respectively

2

2

Additional paid-in-capital

4,328

4,416

Retained earnings

1,843

1,464

Accumulated other comprehensive loss

(42

)

(28

)

Total shareholders' equity

6,820

6,543

Total liabilities and shareholders' equity

$

70,371

$

61,416

 

Key Performance Metrics(3)

 

Corporate (dollars in millions)

 

Qtr ended
6/30/20

Qtr ended
3/31/20

Qtr ended
6/30/20

vs.
3/31/20

Qtr ended
6/30/19

Qtr ended
6/30/20

vs.
6/30/19

 

Operating margin %(4)

 

37

%

36

%

1%

43

%

(6)%

Adjusted operating margin %(4)

 

37

%

37

%

—%

42

%

(5)%

 

Employees

 

4,178

4,116

2%

4,261

(2)%

 

Return on common equity(5)

 

13

%

11

%

2%

15

%

(2)%

Adjusted return on common equity(5)

 

13

%

12

%

1%

14

%

(1)%

Common equity book value per share(6)

 

$

27.73

$

26.38

5%

$

25.75

8%

Tangible common equity book value per share(6)

 

$

16.72

$

15.26

10%

$

15.35

9%

 

Cash and equivalents

 

$

436

$

1,105

(61)%

$

380

15%

Corporate cash(7)

 

$

377

$

438

(14)%

$

323

17%

 

Average interest-earning assets

 

$

60,604

$

56,662

7%

$

61,361

(1)%

Net interest margin (basis points)

 

256

282

(26)

320

(64)

 

Customer Activity (dollars in billions)

 

Qtr ended
6/30/20

Qtr ended
3/31/20

Qtr ended
6/30/20

vs.
3/31/20

Qtr ended
6/30/19

Qtr ended
6/30/20

vs.
6/30/19

 

Customer directed trades (MM)(8)

 

63.6

40.4

57%

17.3

268%

Trading days

 

63.0

62.0

N.M.

63.0

N.M.

 

DARTs(8)(9)

 

1,009,956

657,183

54%

274,838

267%

Derivative DARTs(8)(9)

 

253,320

187,080

35%

91,358

177%

Derivative DARTs %(8)(9)

 

25

%

28

%

(3)%

33

%

(8)%

 

Margin receivables

 

$

9.4

$

7.3

29%

$

9.9

(5)%

 

Key Performance Metrics(3)

 

Customer Activity (dollars in billions)

 

Qtr ended
6/30/20

Qtr ended
3/31/20

Qtr ended
6/30/20

vs.
3/31/20

Qtr ended
6/30/19

Qtr ended
6/30/20

vs.
6/30/19

 

Gross new retail accounts

 

393,540

431,937

(9)%

143,205

175%

Gross new advisor services accounts(10)

 

6,019

6,932

(13)%

6,775

(11)%

Gross new corporate services accounts

 

84,756

92,485

(8)%

91,388

(7)%

Gross new accounts

 

484,315

531,354

(9)%

241,368

101%

 

Net new retail accounts

 

326,669

328,839

(1)%

34,072

N.M.

Net new advisor services accounts(10)

 

(3,549

)

(3,745

)

5%

53

N.M.

Net new corporate services accounts

 

32,951

38,120

(14)%

35,892

(8)%

Net new accounts

 

356,071

363,214

(2)%

70,017

409%

 

End of period retail accounts

 

5,825,265

5,498,596

6%

5,122,669

14%

End of period advisor services accounts(10)

 

140,904

144,453

(2)%

151,275

(7)%

End of period corporate services accounts

 

1,979,907

1,946,956

2%

1,853,875

7%

End of period accounts

 

7,946,076

7,590,005

5%

7,127,819

11%

 

Net new retail account growth rate

 

23.8

%

25.4

%

(1.6)%

2.7

%

21.1%

Net new advisor services account growth rate(10)

 

(9.8

)%

(10.1

)%

0.3%

0.1

%

(9.9)%

Net new corporate services account growth rate

 

6.8

%

8.0

%

(1.2)%

7.9

%

(1.1)%

Net new total account growth rate

 

18.8

%

20.1

%

(1.3)%

4.0

%

14.8%

 

Net new retail assets(11)

 

$

13.6

$

18.3

(26)%

$

1.7

N.M.

Net new advisor services assets(10)(11)

 

(0.1

)

(0.4

)

75%

(0.1

)

—%

Net new retail and advisor services assets

 

$

13.5

$

17.9

(25)%

$

1.6

N.M.

 

Net new retail assets growth rate

 

16.9

%

20.2

%

(3.3)%

2.1

%

14.8%

Net new advisor services assets growth rate(10)

 

(2.1

)%

(7.1

)%

5.0%

(1.2

)%

(0.9)%

Net new retail and advisor services assets growth rate

 

15.9

%

18.8

%

(2.9)%

1.9

%

14.0%

 

Retail Assets

 

Security holdings

 

$

307.6

$

238.6

29%

$

268.2

15%

Cash and deposits

 

91.0

82.6

10%

61.2

49%

Retail assets

 

$

398.6

$

321.2

24%

$

329.4

21%

 

Advisor Services Assets

 

Security holdings

 

$

17.0

$

14.6

16%

$

18.4

(8)%

Cash and deposits

 

1.2

2.0

(40)%

1.0

20%

Advisor services assets(10)

 

$

18.2

$

16.6

10%

$

19.4

(6)%

 

Corporate Services Assets

 

Vested equity holdings

 

$

134.0

$

97.6

37%

$

95.3

41%

Vested options holdings

 

57.5

38.2

51%

47.0

22%

Corporate services vested assets

 

$

191.5

$

135.8

41%

$

142.3

35%

Unvested holdings

 

173.5

113.7

53%

117.0

48%

Corporate services assets

 

$

365.0

$

249.5

46%

$

259.3

41%

 

Total Customer Assets

 

Security holdings

 

$

324.6

$

253.2

28%

$

286.6

13%

Cash and deposits(12)

 

92.2

84.6

9%

62.2

48%

Retail and advisor services assets

 

$

416.8

$

337.8

23%

$

348.8

19%

Corporate services vested assets

 

191.5

135.8

41%

142.3

35%

Retail, advisor services, and corporate services vested assets

 

$

608.3

$

473.6

28%

$

491.1

24%

Corporate services unvested holdings

 

173.5

113.7

53%

117.0

48%

Total customer assets

 

$

781.8

$

587.3

33%

$

608.1

29%

 

Net (buy) / sell activity

 

Retail net (buy) / sell activity

 

$

(6.4

)

$

(1.9

)

N.M.

$

(0.5

)

N.M.

Advisor services net (buy) / sell activity

 

(0.9

)

1.0

N.M.

0.2

N.M.

Net (buy) / sell activity

 

$

(7.3

)

(0.9

)

N.M.

$

(0.3

)

N.M.

 

Market Indices

 

Dow Jones Industrial Average

 

25,813

21,917

18%

26,600

(3)%

Nasdaq Composite

 

10,059

7,700

31%

8,006

26%

Standard & Poor's 500

 

3,100

2,585

20%

2,942

5%

Capital

 

Qtr ended
6/30/20

Qtr ended
3/31/20

Qtr ended
6/30/20

vs.
3/31/20

Qtr ended
6/30/19

Qtr ended
6/30/20

vs.
6/30/19

 

E*TRADE Financial

 

Tier 1 leverage ratio(13)

 

6.7

%

6.8

%

(0.1

)%

6.7

%

%

Common Equity Tier 1 capital ratio(13)

 

29.4

%

29.3

%

0.1

%

33.9

%

(4.5

)%

Tier 1 risk-based capital ratio(13)

 

34.9

%

35.1

%

(0.2

)%

40.4

%

(5.5

)%

Total risk-based capital ratio(13)

 

34.9

%

35.1

%

(0.2

)%

40.7

%

(5.8

)%

 

E*TRADE Bank

 

Tier 1 leverage ratio(13)

 

7.2

%

7.4

%

(0.2

)%

7.3

%

(0.1

)%

Common Equity Tier 1 capital ratio(13)

 

34.9

%

35.8

%

(0.9

)%

40.2

%

(5.3

)%

Tier 1 risk-based capital ratio(13)

 

34.9

%

35.8

%

(0.9

)%

40.2

%

(5.3

)%

Total risk-based capital ratio(13)

 

34.9

%

35.8

%

(0.9

)%

40.5

%

(5.6

)%

 

Average Balance Sheet Data

 

(dollars in millions)

 

Three Months Ended

 

June 30, 2020

March 31, 2020

 

Average

Interest

Average

Average

Interest

Average

 

Balance

Inc./Exp.

Yield/Cost

Balance

Inc./Exp.

Yield/Cost

Cash and equivalents

 

$

633

$

0.14%

$

767

$

2

1.01%

Cash segregated under federal or other regulations

 

5,467

3

0.20%

2,586

8

1.26%

Investment securities

 

43,571

272

2.50%

41,033

285

2.78%

Margin receivables

 

8,039

68

3.40%

9,361

94

4.04%

Loans

 

1,515

16

4.18%

1,564

21

5.36%

Broker-related receivables and other

 

1,379

0.13%

1,351

4

1.24%

Total interest-earning assets

 

60,604

359

2.37%

56,662

414

2.93%

Other interest revenue(a)

 

50

29

Total interest-earning assets

 

60,604

409

2.70%

56,662

443

3.13%

Total non-interest earning assets

 

7,172

6,673

Total assets

 

$

67,776

$

63,335

 

Sweep deposits:

 

Brokerage sweep deposits

 

$

36,684

$

2

0.02%

$

31,641

$

5

0.06%

Bank sweep deposits

 

232

0.13%

3,307

13

1.63%

Savings deposits

 

1,692

0.01%

2,234

3

0.45%

Other deposits

 

1,700

0.02%

1,603

0.02%

Customer payables

 

16,921

1

0.02%

14,076

4

0.13%

Broker-related payables and other

 

976

0.01%

836

0.03%

Other borrowings

 

6

1

N.M.

5

1

N.M.

Corporate debt

 

1,411

13

3.87%

1,411

14

3.86%

Total interest-bearing liabilities

 

59,622

17

0.11%

55,113

40

0.29%

Other interest expense(b)

 

4

3

Total interest-bearing liabilities

 

59,622

21

0.14%

55,113

43

0.31%

Total non-interest-bearing liabilities

 

1,461

1,861

Total liabilities

 

61,083

56,974

Total shareholders' equity

 

6,693

6,361

Total liabilities and shareholders' equity

 

$

67,776

$

63,335

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

 

$

982

$

388

2.56%

$

1,549

$

400

2.82%

 (a) 

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.

 (b) 

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, 2019

 

Average

Interest

Average

 

Balance

Inc./Exp.

Yield/Cost

Cash and equivalents

 

$

452

$

3

2.33%

Cash segregated under federal or other regulations

 

871

6

2.63%

Investment securities

 

47,375

368

3.11%

Margin receivables

 

10,084

130

5.17%

Loans

 

1,920

28

5.75%

Broker-related receivables and other

 

659

3

2.23%

Total interest-earning assets

 

61,361

538

3.51%

Other interest revenue(a)

 

22

Total interest-earning assets

 

61,361

560

3.66%

Total non-interest-earning assets

 

5,093

Total assets

 

$

66,454

 

Sweep deposits:

 

Brokerage sweep deposits

 

$

37,380

$

18

0.20%

Bank sweep deposits(b)

 

—%

Savings deposits

 

6,347

23

1.47%

Other deposits

 

1,732

0.03%

Customer payables

 

10,593

8

0.31%

Broker-related payables and other

 

1,050

1

0.46%

Other borrowings

 

312

4

3.78%

Corporate debt

 

1,410

14

4.06%

Total interest-bearing liabilities

 

58,824

68

0.47%

Other interest expense(c)

 

2

Total interest-bearing liabilities

 

58,824

70

0.48%

Total non-interest-bearing liabilities

 

1,016

Total liabilities

 

59,840

Total shareholders' equity

 

6,614

Total liabilities and shareholders' equity

 

$

66,454

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

 

$

2,537

$

490

3.20%

 (a) 

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.

 (b) 

Beginning November 2019, bank sweep deposits include Premium Savings Accounts participating in a sweep deposit account program.

 (c) 

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, 2020

March 31, 2020

June 30, 2019

Order flow revenue

 

$

120

$

85

$

45

Money market funds and sweep deposits revenue(a)

 

22

60

23

Advisor management and custody fees

 

19

19

19

Reorganization fees

 

12

4

7

Mutual fund service fees

 

10

13

13

Foreign exchange revenue

 

9

9

8

Other fees and service charges

 

13

13

11

Total fees and service charges

 

$

205

$

203

$

126

 (a) 

Includes revenue earned on average customer cash held by third parties based on the federal funds rate or LIBOR plus a negotiated spread or other contractual arrangements with the third-party institutions. 

 

Explanation of Non-GAAP Measures

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

Adjusted Operating Margin

Adjusted operating margin is calculated by dividing adjusted income before income taxes by net revenue. Adjusted income before income taxes excludes the provision (benefit) for credit losses. Management believes that excluding the provision (benefit) for credit losses from operating margin provides a useful measure of the Company's ongoing operating performance because management excludes these when evaluating operating margin performance. See endnote (4) for a reconciliation of this non-GAAP measure to the most directly 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 credit losses. Management believes that excluding the provision (benefit) for credit losses from net income available to common shareholders provides a useful measure of the Company's ongoing operating performance because management excludes these when evaluating return on common equity performance. See endnote (5) for a reconciliation of this non-GAAP measure to the most directly 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 (6) for a reconciliation of this non-GAAP measure to the most directly 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 (7) for a reconciliation of this non-GAAP measure to the most directly 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) Records based on the period during which metric has been reported by the Company and exclude activity related to acquisitions.

(2) The following table presents the allowance for credit losses (dollars in millions):

 

Q2 2020

Q4 2019(a)

 

Allowance for credit losses, beginning(a)

 

$

86

$

(27

)

(Provision) benefit for credit losses(a)

 

1

19

Charge-offs (recoveries), net

 

(5

)

(9

)

Allowance for credit losses, ending

 

$

82

$

(17

)

(a)  

The Company adopted amended accounting guidance related to accounting for credit losses on January 1, 2020. Prior year amounts related to the allowance for loan losses were not restated as the amended accounting guidance was adopted on a modified retrospective basis. 

 

Loan servicing expense was $2 million, $3 million, and $3 million for the three months ended June 30, 2020, March 31, 2020 and June 30, 2019, respectively. Loan servicing expense was $5 million and $6 million for the six months ended June 30, 2020 and 2019, respectively.

(3) 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.

(4) 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 2020

Q1 2020

Q2 2019

Amount

Operating
Margin %

Amount

Operating
Margin %

Amount

Operating
Margin %

Income before income tax expense and operating margin(a)

$

264

37

%

$

256

36

%

$

295

43

%

Provision (benefit) for credit losses

(1

)

6

(8

)

Adjusted income before income tax expense and adjusted operating margin(a)

$

263

37

%

$

262

37

%

$

287

42

%

 (a) 

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. 

 

(5) 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 2020

Q1 2020

Q2 2019

Amount

Return
on
Common
Equity %

Amount

Return
on
Common
Equity %

Amount

Return
on
Common
Equity %

Net income available to common shareholders and return on common equity(a)

$

196

13

%

$

161

11

%

$

219

15

%

Add back impact of the following items:

Provision (benefit) for credit losses

(1

)

6

(8

)

Income tax impact

(2

)

2

Net of tax

(1

)

4

(6

)

Adjusted net income available to common shareholders and return on common equity(a)

$

195

13

%

$

165

12

%

$

213

14

%

 (a) 

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. 

 

(6) 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 2020

Q1 2020

Q2 2019

Amount

Per
Share

Amount

Per
Share

Amount

Per
Share

Common equity book value

$

6,131

$

27.73

$

5,830

$

26.38

$

6,181

$

25.75

Less: Goodwill and other intangibles, net

(2,914

)

(2,928

)

(2,946

)

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

481

472

450

Tangible common equity book value

$

3,698

$

16.72

$

3,374

$

15.26

$

3,685

$

15.35

 

(7) 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 2020

Q1 2020

Q2 2019

Consolidated cash and equivalents

 

$

436

$

1,105

$

380

Less: Cash at regulated subsidiaries

 

(404

)

(1,094

)

(373

)

Add: Cash on deposit at E*TRADE Bank(a)

 

345

427

316

Corporate cash

 

$

377

$

438

$

323

 (a) 

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.

 

(8) Beginning in November 2019, the definition of DARTs was updated to reflect all customer-directed trades. This includes trades associated with no-transaction-fee mutual funds, options trades through the Dime Buyback Program, and all exchange-traded funds transactions (including those formerly classified as commission-free). DARTs is calculated by dividing these customer-directed trades by the number of trading days during the period. This update did not result in a significant impact to the presentation of DARTs, derivative DARTs, and derivative DARTs %. Prior periods have been updated to conform with the current period presentation.

(9) Q1 2020 has been updated to reflect approximately 5,000 DARTs, including approximately 1,000 Derivative DARTs, that were not previously reflected in that period’s reporting.

(10) Q1 2020 advisor services accounts and assets include an outflow of 3,000 accounts and $425 million in assets related to the termination of a large adviser services client.

(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 2020

Q1 2020

Q2 2019

Brokerage sweep deposits

 

$

39.9

$

38.1

$

31.7

Bank sweep deposits(a)

 

0.2

0.7

Customer payables

 

15.7

16.0

10.6

Savings, checking, and other banking assets(a)

 

3.6

3.3

8.6

Total on-balance sheet customer cash and deposits

 

59.4

58.1

50.9

Brokerage sweep deposits at unaffiliated financial institutions(b)

 

22.0

15.4

9.6

Bank sweep deposits at unaffiliated financial institutions(c)

 

8.7

9.1

Money market funds and other

 

2.1

2.0

1.7

Total customer cash held by third parties(d)

 

32.8

26.5

11.3

Total customer cash and deposits

 

$

92.2

$

84.6

$

62.2

 (a)

Beginning November 2019, bank sweep deposits include Premium Savings Accounts participating in the bank sweep deposit account program. Savings, checking, and other banking assets included $5.1 billion of deposits at June 30, 2019 in our Premium Savings Account product that were subsequently converted to the bank sweep deposit account program. 

(b) 

Average brokerage sweep deposit balances at unaffiliated financial institutions were $20.4 billion, $15.4 billion and $3.7 billion for the three months ended June 30, 2020, March 31, 2020 and June 30, 2019, respectively. The Company received 34 bps, 148 bps and 221 bps, net of interest paid, on these balances for the same periods. 

 (c)

Average bank sweep deposits at unaffiliated institutions were $9.2 billion and $5.5 billion for the three months ended June 30, 2020 and March 31, 2020, respectively. The Company received 15 bps and 8 bps, net of interest paid, on these balances for the same periods. 

(d) 

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, net of deposit balances from unaffiliated financial institutions held on-balance sheet. 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 2020

Q4 2019

Q2 2020

Q4 2019

Shareholders’ equity

 

$

6,820

$

6,543

$

3,758

$

3,488

Deduct:

 

Preferred stock

 

(689

)

(689

)

Common Equity Tier 1 capital before regulatory adjustments

 

$

6,131

$

5,854

$

3,758

$

3,488

Add:

 

Losses in other comprehensive income on available-for-sale debt securities, net of tax

 

42

28

42

28

Deduct:

 

Goodwill and other intangible assets, net of deferred tax liabilities

 

(2,433

)

(2,466

)

(270

)

(276

)

Disallowed deferred tax assets

 

(42

)

(70

)

(3

)

Common Equity Tier 1 capital

 

$

3,698

$

3,346

$

3,527

$

3,240

Add:

 

Preferred stock

 

689

689

Tier 1 capital

 

$

4,387

$

4,035

$

3,527

$

3,240

Add:

 

Other

 

25

17

Total capital

 

$

4,387

$

4,060

$

3,527

$

3,257

 

Average assets for leverage capital purposes

 

$

67,722

$

60,968

$

49,247

$

45,320

Deduct:

 

Goodwill and other intangible assets, net of deferred tax liabilities

 

(2,433

)

(2,466

)

(270

)

(276

)

Disallowed deferred tax assets

 

(42

)

(70

)

(3

)

Adjusted average assets for leverage capital purposes

 

$

65,247

$

58,432

$

48,974

$

45,044

 

Total risk-weighted assets(a)

 

$

12,569

$

10,635

$

10,094

$

8,872

 

Tier 1 leverage ratio (Tier 1 capital / Adjusted average assets for leverage capital purposes)

 

6.7

%

6.9

%

7.2

%

7.2

%

Common Equity Tier 1 capital / Total risk-weighted assets(a)

 

29.4

%

31.5

%

34.9

%

36.5

%

Tier 1 capital / Total risk-weighted assets

 

34.9

%

37.9

%

34.9

%

36.5

%

Total capital / Total risk-weighted assets

 

34.9

%

38.2

%

34.9

%

36.7

%

(a)  

Under the regulatory guidelines for risk-based capital, on-balance sheet assets, and credit-equivalent amounts of derivatives and off-balance sheet items are assigned to one of several broad risk categories according to the obligor or, if relevant, the guarantor or the nature of any collateral. The aggregate dollar amount in each risk category is then multiplied by the risk weight associated with that category. The resulting weighted values from each of the risk categories are aggregated for determining total risk-weighted assets. 

Contacts:

E*TRADE Media Relations
646-521-4418
mediainq@etrade.com

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