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E*TRADE Financial Corporation Announces Second Quarter 2018 Results

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E*TRADE Financial Corporation (NASDAQ:ETFC):

Second Quarter Results

  • Net income of $250 million; diluted earnings per common share of
    $0.95
  • Total net revenue of $710 million
  • Operating margin of 49 percent; adjusted operating margin of 46
    percent
    (1)
  • Average interest-earning assets of $60 billion; net interest margin
    of 302 basis points
  • Daily Average Revenue Trades (DARTs) of 259,000, including
    derivative DARTs of 87,000 and a derivatives mix of 34 percent, a
    Company record
    (2)
  • Customer margin balances of $11 billion, a Company record(2)
  • Net new brokerage accounts of 188,000; excluding the TCA
    acquisition, net new brokerage accounts of 40,000
  • Net new brokerage assets of $21.1 billion; excluding the TCA
    acquisition, net new brokerage assets of $2.5 billion
  • Managed products of $5.8 billion
  • Repurchased 3.0 million shares at an average price of $62.51; total
    utilization under the Company's $1 billion program is $690 million at
    an average price of $48.64

E*TRADE Financial Corporation (NASDAQ:ETFC) today announced results for
its second quarter ended June 30, 2018, reporting net income of $250
million, or diluted earnings per common share of $0.95 and total net
revenue of $710 million. Operating margin for the quarter was 49 percent
and adjusted operating margin was 46 percent(1).

"We built on our strong business momentum in the second quarter,
delivering solid operating and financial results and driving meaningful
value for shareholders," said Karl Roessner, Chief Executive Officer.
"E*TRADE customer engagement was remarkable, underscored by robust
customer trading, steady net buying, and record margin balances. Not to
be outdone, our derivatives mix reached historic highs, aided by our
steadfast commitment to continuously enhance the customer experience for
our most discerning trader base. Our Corporate Services team onboarded
nearly $11 billion in new plan assets during the quarter, while
replenishing a strong pipeline. We completed the acquisition of Trust
Company of America, and our initiatives to generate value from this
powerful combination are well underway. Our strong operational execution
translated to stellar financial performance, as E*TRADE once again
delivered solid revenue, while expanding our adjusted operating margin
for the seventh consecutive quarter to 46%. As we look to the second
half of 2018, we intend to build on our many accomplishments and
continue to thrive in this intensely competitive marketplace."

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 800-675-8395 while international participants
should dial +1 303-223-4369. 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 brokerage and banking products and services to retail
customers. 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 national federal
savings banks (Members FDIC). More information is available at www.etrade.com.
ETFC-E

Important Notices

E*TRADE Financial, E*TRADE, the E*TRADE logo, OptionsHouse and Trust
Company of America are 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
achieve financial results and succeed in a competitive environment, 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 the Company's proposed acquisition of
brokerage accounts from Capital One Financial Corporation, including
that the closing of the transaction may not occur or may be delayed and
that the actual aggregate consideration to be paid in connection with
the transaction is still subject to final determination; macro trends of
the economy in general; market volatility and its impact on trading
volumes; fluctuations in interest rates; the ability to attract and
retain customers and develop new products and services; increased
competition; potential system disruptions and security breaches;
increased restrictions resulting from financial regulatory reform or
changes in the policies of our regulators; adverse developments in
litigation or regulatory matters; the timing and duration of, and the
amount of shares repurchased and amount of cash expended in connection
with, the share repurchase program; and the other factors set forth in
our annual, quarterly, and current reports on Form 10-K, Form 10-Q, and
Form 8-K previously filed with the Securities and Exchange Commission
(including information in these reports under the caption "Risk
Factors"). Any forward-looking statement included in this release speaks
only as of the date of this communication; the Company disclaims any
obligation to update any information, except as required by law.

© 2018 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,
2018 2018 2017 2018 2017
Revenue:
Interest income $ 489 $ 468 $ 378 $ 957 $ 719
Interest expense (36 ) (23 ) (22 ) (59 ) (44 )
Net interest income(3) 453   445   356   898   675  
Commissions 121 137 105 258 232
Fees and service charges 110 105 98 215 184
Gains on securities and other, net(3) 15 10 7 25 17
Other revenue 11   11   11   22   22  
Total non-interest income 257   263   221   520   455  
Total net revenue 710   708   577   1,418   1,130  
Provision (benefit) for loan losses (19 ) (21 ) (99 ) (40 ) (113 )
Non-interest expense:
Compensation and benefits 160 152 133 312 269
Advertising and market development 47 60 42 107 85
Clearing and servicing 30 36 33 66 65
Professional services 25 22 24 47 46
Occupancy and equipment 30 30 29 60 56
Communications 28 31 36 59 61
Depreciation and amortization 23 22 20 45 40
FDIC insurance premiums 9 9 8 18 16
Amortization of other intangibles 12 10 9 22 18
Restructuring and acquisition-related activities 2 4 2 8
Other non-interest expenses 18   23   21   41   37  
Total non-interest expense 384   395   359   779   701  
Income before income tax expense 345 334 317 679 542
Income tax expense 95   87   124   182   204  
Net income $ 250 $ 247 $ 193 $ 497 $ 338
Preferred stock dividends   12     12   13  
Net income available to common shareholders $ 250   $ 235   $ 193   $ 485   $ 325  
 
Basic earnings per common share $ 0.95 $ 0.88 $ 0.70 $ 1.83 $ 1.18
Diluted earnings per common share $ 0.95 $ 0.88 $ 0.70 $ 1.82 $ 1.17
Shares used in computation of per common share data:
Basic (in thousands) 263,809 266,558 275,410 265,220 275,167
Diluted (in thousands) 264,929 267,699 276,272 266,351 276,370
 
 

E*TRADE FINANCIAL CORPORATION
Consolidated Balance Sheet
(In millions, except share data)
(Unaudited)
       
June 30, March 31, December 31,
2018 2018 2017
ASSETS
Cash and equivalents $ 532 $ 498 $ 931
Cash required to be segregated under federal or other
regulations 620 472 872
Available-for-sale securities 23,810 24,835 20,679
Held-to-maturity securities 21,199 20,657 23,839
Margin receivables 10,955 10,515 9,071
Loans receivable, net 2,375 2,506 2,654
Receivables from brokers, dealers and clearing organizations 626 735 1,178
Property and equipment, net 259 251 253
Goodwill 2,485 2,370 2,370
Other intangibles, net 403 275 284
Other assets(3) 1,089   1,073   1,234  
Total assets $ 64,353   $ 64,187   $ 63,365  
 
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits $ 42,664 $ 42,902 $ 42,742
Customer payables 9,959 8,947 9,449
Payables to brokers, dealers and clearing organizations 1,666 2,892 1,542
Other borrowings 1,259 910 910
Corporate debt 1,408 992 991
Other liabilities 494   655   800  
Total liabilities 57,450   57,298   56,434  
 
Shareholders' equity:
Preferred stock, $0.01 par value; shares authorized:

1,000,000; shares issued and outstanding at June 30,

  2018: 403,000

689 689 689

Common stock, $0.01 par value; shares authorized:

400,000,000; shares issued and outstanding at June 30,

  2018: 261,819,526

3 3 3
Additional paid-in-capital 6,257 6,434 6,582
Retained earnings (accumulated deficit) 189 (61 ) (317 )
Accumulated other comprehensive loss (235 ) (176 ) (26 )
Total shareholders' equity 6,903   6,889   6,931  
Total liabilities and shareholders' equity $ 64,353   $ 64,187   $ 63,365  
 
 

Key Performance Metrics(4)          
 

Corporate

Qtr
ended
6/30/18

Qtr
ended
3/31/18

Qtr ended
6/30/18
vs.
3/31/18

Qtr
ended
6/30/17

 

Qtr ended
6/30/18
vs.
6/30/17

 
Operating margin %(1) 49 % 47 % 2 % 55 % (6 )%
Adjusted operating margin %(1) 46 % 44 % 2 % 38 % 8 %
 
Employees 4,095 3,768 9 % 3,614 13 %
Consultants and other 102   136   (25 )% 99   3 %
Total headcount 4,197 3,904 8 % 3,713 13 %
 
Common equity book value per share(5) $ 23.73 $ 23.41 1 % $ 22.86 4 %
Tangible common equity book value per share(5) $ 14.35 $ 15.03 (5 )% $ 15.29 (6 )%
 
Cash and equivalents ($MM) $ 532 $ 498 7 % $ 1,091 (51 )%
Corporate cash ($MM)(6) $ 943 $ 439 115 % $ 478 97 %
 
Net interest margin (basis points) 302 297 5 274 28
Interest-earning assets, average ($MM) $ 59,967 $ 59,837 % $ 51,899 16 %
 

Customer Activity

Qtr
ended
6/30/18

Qtr 
ended
3/31/18

Qtr ended
6/30/18
vs.
3/31/18

Qtr
ended
6/30/17

Qtr ended
6/30/18
vs.
6/30/17

 
Trading days 64.0 61.0 N.M. 63.0 N.M.
 
DARTs 258,844 309,469 (16 )% 208,205 24 %
Derivative DARTs 86,848 97,658 (11 )% 66,350 31 %
Derivative DARTs % 34 % 32 % 2 % 32 % 2 %
Adjusted Derivative DARTs %(7) 34 % 32 % 2 % 32 % 2 %
 
Total trades (MM) 16.6 18.9 (12 )% 13.1 27 %
Average commission per trade $ 7.31 $ 7.27 1 % $ 8.02 (9 )%
 
 

Key Performance Metrics(4)          
 

Customer Activity

Qtr ended
6/30/18

Qtr ended
3/31/18

Qtr ended
6/30/18

vs.

3/31/18

Qtr ended
6/30/17

Qtr ended
6/30/18

vs.

6/30/17

 
Gross new brokerage accounts 268,636 161,042 67 % 120,204 123%
Gross new stock plan accounts 177,285 93,690 89 % 66,773 166%
Gross new banking accounts 3,024 1,179 156 % 876 245%
Closed accounts (129,679 ) (160,041 ) (19 )% (137,666 ) (6)%
Net new accounts 319,266 95,870 233 % 50,187 N.M.
 
Net new brokerage accounts(7) 187,642 59,685 214 % 41,271 355%
Net new stock plan accounts 134,025 39,953 235 % 13,154 N.M.
Net new banking accounts (2,401 ) (3,768 ) 36 % (4,238 ) 43%
Net new accounts 319,266 95,870 233 % 50,187 N.M.
 
End of period brokerage accounts(7) 3,882,236 3,694,594 5 % 3,562,489 9%
End of period stock plan accounts 1,666,354 1,532,329 9 % 1,474,692 13%
End of period banking accounts 292,680   295,081   (1 )% 308,729   (5)%
End of period total accounts 5,841,270 5,522,004 6 % 5,345,910 9%
 
Annualized net new brokerage account
growth rate 20.3 % 6.6 % 13.7 % 4.7 % 15.6%
Adjusted annualized net new brokerage
account growth rate((7)) 4.3 % 6.6 % (2.3 )% 4.7 % (0.4)%
 
Customer margin balances(8) (NYSE:B) $ 11.0 $ 10.5 5 % $ 8.2 34%
 

Customer Assets(NYSE:B)

Security holdings(7) $ 337.6 $ 296.0 14 % $ 255.3 32%
Sweep deposits(7) 37.8 38.0 (1 )% 34.9 8%
Customer cash held by third parties(9) 5.0 5.0 % 8.8 (43)%
Customer payables (cash) 10.0   8.9   12 % 8.0   25%
Brokerage customer assets 390.4   347.9   12 % 307.0   27%
Unexercised stock plan holdings (vested) 45.4 39.9 14 % 36.1 26%
Savings, checking and other banking assets 4.9   5.0   (2 )% 5.1   (4)%
Total customer assets $ 440.7   $ 392.8   12 % $ 348.2   27%
 
Net new brokerage assets(7)(10) $ 21.1 $ 5.3 298 % $ 2.6 N.M.
Net new banking assets(10) (0.1 )   (100 )% (0.3 ) (67)%
Net new customer assets(7) $ 21.0 $ 5.3 296 % $ 2.3 N.M.
 
Annualized net new brokerage asset growth
rate 24.2 % 6.3 % 17.9 % 3.5 % 20.7%
Adjusted annualized net new brokerage
asset growth rate((7)) 2.8 % 6.3 % (3.5 )% 3.5 % (0.7)%
 
Brokerage related cash $ 52.8 $ 51.9 2 % $ 51.7 2%
Other cash and deposits 4.9   5.0   (2 )% 5.1   (4)%
Total customer cash and deposits $ 57.7 $ 56.9 1 % $ 56.8 2%
 
Managed products $ 5.8 $ 5.6 4 % $ 4.6 26%
Stock plan customer holdings (unvested) $ 108.0 $ 95.3 13 % $ 83.5 29%
 
Customer net (buy) / sell activity $ (2.9 ) $ (6.9 ) N.M. $ (4.0 ) N.M.
 
 

Key Performance Metrics(4)          
 

Loans

Qtr ended
6/30/18

Qtr ended
3/31/18

Qtr ended
6/30/18

vs.

3/31/18

Qtr ended
6/30/17

Qtr ended
6/30/18

vs.

6/30/17

 

Loans receivable ($MM)

One- to four-family $ 1,237 $ 1,327 $ (90 ) $ 1,641 $ (404 )
Home equity 920 991 (71 ) 1,205 (285 )
Consumer and other 218   188   30   209   9  
Loans receivable, net $ 2,375   $ 2,506   $ (131 ) $ 3,055   $ (680 )
 
Loan servicing expense $ 5 5 5
 

Loan performance detail ($MM)

Current $ 2,222 $ 2,335 $ (113 ) $ 2,901 $ (679 )
30-89 days delinquent 83 93 (10 ) 103 (20 )
90-179 days delinquent 28 33 (5 ) 46 (18 )
180+ days delinquent 96   103   (7 ) 121   (25 )
Total delinquent loans 207   229   (22 ) 270   (63 )
Gross loans receivable(11) $ 2,429   $ 2,564   $ (135 ) $ 3,171   $ (742 )
 
 

Activity in Allowance for Loan Losses

     

($MM)

  Three Months Ended June 30, 2018

 

One- to Four-
Family

Home Equity

Consumer
and Other

  Total  

Allowance for loan losses, ending 3/31/18 $ 20 $ 35 $ 3 $ 58
Provision (benefit) for loan losses (6 ) (12 ) (1 ) (19 )
(Charge-offs) recoveries, net 2   13     15  
Allowance for loan losses, ending 6/30/18 $ 16   $ 36   $ 2   $ 54  
 
Three Months Ended March 31, 2018

One- to Four-
Family

Home Equity

Consumer
and Other

  Total  

Allowance for loan losses, ending 12/31/17 $ 24 $ 46 $ 4 $ 74
Provision (benefit) for loan losses (5 ) (16 ) (21 )
(Charge-offs) recoveries, net 1   5   (1 ) 5  
Allowance for loan losses, ending 3/31/18 $ 20   $ 35   $ 3   $ 58  
 
Three Months Ended June 30, 2017

One- to Four-
Family

Home Equity

Consumer
and Other

  Total  

Allowance for loan losses, ending 3/31/17 $ 46 $ 162 $ 5 $ 213
Provision (benefit) for loan losses (18 ) (81 ) (99 )
(Charge-offs) recoveries, net 1   1     2  
Allowance for loan losses, ending 6/30/17 $ 29   $ 82   $ 5   $ 116  
 
 

Capital  

Qtr ended
6/30/18

 

Qtr ended
3/31/18

 

Qtr ended
6/30/18

vs.

3/31/18

 

Qtr ended
6/30/17

 

Qtr ended
6/30/18

vs.

6/30/17

 

E*TRADE Financial

Tier 1 leverage ratio(12) 7.1% 7.3% (0.2)% 7.5% (0.4)%
Common Equity Tier 1 capital ratio(12) 34.3% 35.0% (0.7)% 35.0% (0.7)%
Tier 1 risk-based capital ratio(12) 40.7% 41.4% (0.7)% 37.5% 3.2%
Total risk-based capital ratio(12) 45.0% 45.7% (0.7)% 42.4% 2.6%
 

E*TRADE Bank

Tier 1 leverage ratio(13) 7.2% 7.6% (0.4)% 8.0% (0.8)%
Common Equity Tier 1 capital ratio(13) 34.9% 37.4% (2.5)% 35.1% (0.2)%
Tier 1 risk-based capital ratio(13) 34.9% 37.4% (2.5)% 35.1% (0.2)%
Total risk-based capital ratio(13) 35.5% 38.0% (2.5)% 36.3% (0.8)%
 
 

Average Balance Sheet Data            
($MM ) Three Months Ended
June 30, 2018 March 31, 2018
Average Interest Average Average Interest Average
Balance Inc./Exp. Yield/Cost Balance Inc./Exp. Yield/Cost
Cash and equivalents $ 533 $ 2 1.66 % $ 803 $ 3 1.42 %
Cash required to be segregated under federal or
other regulations 753 4 1.95 % 795 3 1.62 %
Investment securities(3) 44,973 303 2.69 % 45,194 290 2.57 %
Margin receivables 10,291 118 4.60 % 9,466 103 4.41 %
Loans 2,468 33 5.32 % 2,629 33 5.07 %
Broker-related receivables and other 949   4 1.74 % 950   4   1.55 %
Subtotal interest-earning assets 59,967 464 3.10 % 59,837 436 2.92 %
Other interest revenue(a)   25   32  
Total interest-earning assets 59,967 489 3.26 % 59,837 468   3.14 %
Total non-interest earning assets 4,364   4,787  
Total assets $ 64,331   $ 64,624  
 
Deposits $ 43,006 $ 8 0.07 % $ 43,178 $ 2 0.02 %
Customer payables 9,533 4 0.16 % 9,556 1 0.06 %
Broker-related payables and other 2,207 3 0.65 % 1,566 1 0.20 %
Other borrowings 829 8 3.77 % 932 7 3.12 %
Corporate debt 1,042   10 3.68 % 991   9   3.62 %
Subtotal interest-bearing liabilities 56,617 33 0.23 % 56,223 20 0.14 %
Other interest expense(b)   3   3  
Total interest-bearing liabilities 56,617 36 0.25 % 56,223 23   0.17 %
Total non-interest-bearing liabilities 633   1,329  
Total liabilities 57,250 57,552
Total shareholders' equity 7,081   7,072  
Total liabilities and shareholders' equity $ 64,331   $ 64,624  
 
Excess interest earning assets over interest bearing
liabilities/ net interest income/ net interest
margin $ 3,350   $ 453 3.02 % $ 3,614   $ 445  

2.97

%

 

(a)  Represents interest income on securities loaned.

(b)  Represents interest expense on securities borrowed.

 
 

    Three Months Ended
June 30, 2017
Average   Interest   Average
Balance Inc./Exp. Yield/Cost
Cash and equivalents $ 890 $ 2 0.87 %
Cash required to be segregated under federal or other regulations 1,355 3 0.94 %
Investment securities 37,922 232 2.45 %
Margin receivables 7,258 75 4.14 %
Loans 3,332 41 4.88 %
Broker-related receivables and other 1,142   1   0.20 %
Subtotal interest-earning assets 51,899 354 2.73 %
Other interest revenue(a)   24  
Total interest-earning assets 51,899 378   2.91 %
Total non-interest-earning assets 4,951  
Total assets $ 56,850  
 
Deposits $ 37,894 $ 1 0.01 %
Customer payables 8,686 2 0.06 %
Broker-related payables and other 1,237 0.00 %
Other borrowings 674 5 3.18 %
Corporate debt 991   13   5.41 %
Subtotal interest-bearing liabilities 49,482 21 0.17 %
Other interest expense(b)   1  
Total interest-bearing liabilities 49,482 22   0.18 %
Total non-interest-bearing liabilities 884  
Total liabilities 50,366
Total shareholders' equity 6,484  
Total liabilities and shareholders' equity $ 56,850  
 
Excess interest earning assets over interest bearing liabilities/
net interest
income/ net interest margin $ 2,417   $ 356   2.74 %
 

(a)  Represents interest revenue on securities loaned.

(b)  Represents interest expense on securities borrowed.

 
 
Fees and Service Charges      
($MM) Three Months Ended
June 30, 2018 March 31, 2018 June 30, 2017
Order flow revenue $ 43 $ 47 $ 34
Money market funds and sweep deposits revenue(a) 18 17

26

Advisor management and custody fees 16 11 9
Mutual fund service fees 12 11 10
Foreign exchange revenue 6 8 6
Reorganization fees 4 3 5
Other fees and service charges 11   8   8
Total fees and service charges $ 110   $ 105   $ 98
 
(a)   Includes revenue earned on average customer cash held by third
parties based on the federal funds rate or LIBOR plus a negotiated
spread or other contractual arrangements with the third party
institutions.

Explanation of Non-GAAP Measures

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

Adjusted Operating Margin

Adjusted operating margin is calculated by dividing adjusted income
before income taxes by net revenue. Adjusted income before income taxes
excludes the provision (benefit) for loan losses. 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 it when evaluating operating
margin performance. See endnote (1) for a reconciliation of this
non-GAAP measure to the comparable GAAP measure.

Corporate Cash

Corporate cash represents cash held at the parent company as well as
cash held in certain subsidiaries, not including bank and 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 (6) for a reconciliation of this
non-GAAP measure to the comparable GAAP measure.

Tangible Common Equity Book Value per Share

Tangible common equity book value per share represents common
shareholders' equity, which excludes preferred stock, less goodwill and
other intangible assets (net of related deferred tax liabilities)
divided by common stock outstanding. The Company believes that tangible
common equity book value per share is a measure of the Company's capital
strength. See endnote (5) for a reconciliation of this non-GAAP measure
to the comparable GAAP measure.

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

ENDNOTES

(1) Operating margin is the percentage of net revenue that results in
income before income taxes. The percentage is calculated by dividing
income before income taxes by total net revenue. The following table
provides a reconciliation of GAAP operating margin percentage to
non-GAAP adjusted operating margin percentage (dollars in millions):

  Q2 2018   Q1 2018   Q2 2017
Amount  

Operating
Margin %

Amount  

Operating
Margin %

Amount  

Operating
Margin %

 
Income before income tax expense and
operating margin $ 345 49 % $ 334 47 % $ 317 55 %
Provision (benefit) for loan losses (19 ) (21 ) (99 )
Adjusted income before income tax
expense and adjusted operating margin $ 326   46 % $ 313   44 % $ 218   38 %
 

(2) Records based on the period during which metric has been reported by
the Company.

(3) Beginning in the first quarter of 2018, the Company updated the
presentation of its consolidated financial statements as follows:

  • On the consolidated statement of income, fair value hedging
    adjustments, previously referred to as hedge ineffectiveness, are
    included within net interest income beginning in the first quarter of
    2018. Amounts prior to 2018 have not been reclassified to conform to
    current period presentation and continue to be reflected within gains
    on securities and other, net. Fair value hedging adjustments were
    expenses of $5 million, $3 million and $2 million for the three months
    ended June 30, 2018, March 31, 2018 and June 30, 2017, respectively.
    Fair value hedging adjustments were expenses of $8 million, and $3
    million for the six months ended June 30, 2018, and June 30, 2017,
    respectively.
  • On the consolidated balance sheet, reclassified deferred tax assets,
    net to other assets. Prior periods have been reclassified to conform
    to current period presentation. Deferred tax assets were $146 million,
    $218 million and $251 million at June 30, 2018, March 31, 2018 and
    December 31, 2017, respectively.

(4) Amounts and percentages may not recalculate due to rounding. For
percentage based metrics, the variance represents the current period
less the prior period.

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

  Q2 2018   Q1 2018   Q2 2017
Amount  

Per
Share

Amount  

Per
Share

Amount  

Per
Share

Common equity book value $ 6,214 $ 23.73 $ 6,200 $ 23.41 $ 6,289 $ 22.86
Less: Goodwill and other intangibles, net (2,888 ) (2,645 ) (2,673 )
Add: Deferred tax liabilities related to
goodwill and other intangibles, net 430     426     591    
Tangible common equity book value $ 3,756   $ 14.35   $ 3,981   $ 15.03   $ 4,207   $ 15.29
 

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

  Q2 2018(a)   Q1 2018   Q2 2017
Consolidated cash and equivalents $ 532 $ 498 $ 1,091
Less: Cash at regulated subsidiaries (527 ) (493 ) (823 )
Add: Cash on deposit at E*TRADE Bank(b) 938   434   210  
Corporate cash $ 943   $ 439   $ 478  
 

(a) The increase in corporate cash from March 2018 was largely driven by
a timing difference between the Company's corporate debt issuance in
June 2018 and the third quarter redemption of our trust preferred
securities that substantially completed in July 2018. Corporate cash
activity during the second quarter also included a $176 million dividend
from E*TRADE Bank and a $100 million dividend from E*TRADE Securities,
offset by share repurchases.

(b) Cash on deposit at E*TRADE Bank is eliminated in consolidation.

(7) Includes the April 2018 acquisition impact of TCA as follows:

  • Gross new brokerage accounts of 146,000
  • Net new brokerage assets of $18.4 billion, which includes $17.2
    billion of security holdings and $1.2 billion of sweep deposits

As of and for the quarter ended June 30, 2018, the impact of TCA was as
follows:

  • Total DARTs of 3,000, none of which represented derivatives DARTs
  • Net new and end of period brokerage accounts of 148,000
  • Brokerage customer assets of $18.8 billion, which includes $17.6
    billion of security holdings and $1.2 billion of sweep deposits
  • Net new brokerage assets of $18.6 billion

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

  Q2 2018   Q1 2018   Q2 2017
Margin receivables held on balance sheet $ 11.0 $ 10.5 $ 7.8
Customer margin balances held by a third party clearing firm     0.4
Total customer margin balances(a) $ 11.0   $ 10.5   $ 8.2
 

(a) Represents margin receivables held on the balance sheet and customer
margin balances held by a third party clearing firm. The balances held
by a third party were transferred to E*TRADE Securities during the three
months ended September 30, 2017 in connection with the OptionsHouse
integration.

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

  Q2 2018       Q1 2018       Q2 2017
Sweep deposits at unaffiliated financial institutions $   3.5   $   3.4   $   6.6
Customer cash held by a third party clearing firm(a) 1.7
Money market funds and other 1.5     1.6     0.5
Total customer cash held by third parties $   5.0     $   5.0     $   8.8
 

(a) During the three months ended September 30, 2017, customer cash held
by a third party clearing firm was transferred to E*TRADE Securities in
connection with the integration of OptionsHouse.

(10) Net new brokerage assets are total inflows to all new and existing
brokerage customer accounts less total outflows from all closed and
existing brokerage customer accounts, excluding the effects of market
movements in the value of brokerage customer assets. Net new banking
assets are total inflows to all new and existing banking customer
accounts less total outflows from all closed and existing banking
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.

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

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

  Q2 2018   Q1 2018   Q2 2017
E*TRADE Financial shareholders' equity $ 6,903 $ 6,889 $ 6,683
DEDUCT:
Preferred stock (689 ) (689 ) (394 )
E*TRADE Financial Common Equity Tier 1 capital before regulatory
adjustments $ 6,214   $ 6,200   $ 6,289  
ADD:
(Gains) losses in other comprehensive income on available-for-sale
debt
securities, net of tax 235 176 62
DEDUCT:
Goodwill and other intangible assets, net of deferred tax liabilities (2,458 ) (2,219 ) (2,039 )
Disallowed deferred tax assets (283 ) (353 ) (537 )
E*TRADE Financial Common Equity Tier 1 capital $ 3,708   $ 3,804   $ 3,775  
ADD:
Preferred stock 689 689 394
DEDUCT:
Disallowed deferred tax assets     (124 )
E*TRADE Financial Tier 1 capital $ 4,397   $ 4,493   $ 4,045  
ADD:
Allowable allowance for loan losses 54 58 116
Non-qualifying capital instruments subject to phase-out (trust
preferred securities) 413   414   414  
E*TRADE Financial total capital $ 4,864   $ 4,965   $ 4,575  
 
E*TRADE Financial average assets for leverage capital purposes $ 64,248 $ 64,486 $ 56,928
DEDUCT:
Goodwill and other intangible assets, net of deferred tax liabilities (2,458 ) (2,219 ) (2,039 )
Disallowed deferred tax assets (283 ) (353 ) (661 )
E*TRADE Financial adjusted average assets for leverage capital
purposes
$ 61,507   $ 61,914   $ 54,228  
 
E*TRADE Financial total risk-weighted assets(a) $ 10,798 $ 10,856 $ 10,780
 
E*TRADE Financial Tier 1 leverage ratio (Tier 1 capital / Adjusted
average
assets for leverage capital purposes) 7.1 % 7.3 % 7.5 %
E*TRADE Financial Common Equity Tier 1 capital / Total risk-weighted
assets
34.3 % 35.0 % 35.0 %
E*TRADE Financial Tier 1 capital / Total risk-weighted assets 40.7 % 41.4 % 37.5 %
E*TRADE Financial total capital / Total risk-weighted assets 45.0 % 45.7 % 42.4 %
 
 

(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.

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

  Q2 2018   Q1 2018   Q2 2017
E*TRADE Bank shareholder's equity $ 3,616 $ 3,721 $ 3,485
ADD:
(Gains) losses in other comprehensive income on available-for-sale
debt
securities, net of tax 235 176 62
DEDUCT:
Goodwill and other intangible assets, net of deferred tax liabilities (292 ) (38 ) (38 )
Disallowed deferred tax assets (60 ) (66 ) (56 )
E*TRADE Bank Common Equity Tier 1 capital / Tier 1 capital $ 3,499   $ 3,793   $ 3,453  
ADD:
Allowable allowance for loan losses 54   58   116  
E*TRADE Bank total capital $ 3,553   $ 3,851   $ 3,569  
 
E*TRADE Bank average assets for leverage capital purposes $ 49,206 $ 50,063 $ 43,527
DEDUCT:
Goodwill and other intangible assets, net of deferred tax liabilities (292 ) (38 ) (38 )
Disallowed deferred tax assets (60 ) (66 ) (56 )
E*TRADE Bank adjusted average assets for leverage capital purposes $ 48,854   $ 49,959   $ 43,433  
 
E*TRADE Bank total risk-weighted assets(a) $ 10,019 $ 10,133 $ 9,840
 
E*TRADE Bank Tier 1 leverage ratio (Tier 1 capital / Adjusted
average assets
for leverage capital purposes) 7.2 % 7.6 % 8.0 %
E*TRADE Bank Common Equity Tier 1 capital / Total risk-weighted
assets
34.9 % 37.4 % 35.1 %
E*TRADE Bank Tier 1 capital / Total risk-weighted assets 34.9 % 37.4 % 35.1 %
E*TRADE Bank total capital / Total risk-weighted assets 35.5 % 38.0 % 36.3 %

(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.

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