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E*TRADE Financial Corporation Announces Third Quarter 2014 Results

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E*TRADE Financial Corporation (NASDAQ:ETFC) :

Third Quarter Results

  • Net income of $86 million, or $0.29 per share
  • Total net revenue of $440 million
  • Total operating expenses of $277 million
  • Provision for loan losses of $10 million
  • Corporate cash of $610 million(1), including a dividend from the bank of $75 million
  • Daily Average Revenue Trades (DARTs) of 153,000
  • End of period margin receivables of $8.1 billion
  • Net new brokerage accounts of 24,000; annualized attrition rate of 9.1 percent
  • Net new brokerage assets of $2.3 billion; end of period customer assets of $282 billion

E*TRADE Financial Corporation (NASDAQ:ETFC) today announced results for its third quarter ended September 30, 2014, reporting net income of $86 million, or $0.29 per share. This compares with net income of $69 million, or $0.24 per share in the prior quarter, and $47 million, or $0.16 per share in the third quarter of 2013. Total net revenue of $440 million increased from $438 million in the prior quarter and $417 million in the third quarter of 2013.

During the quarter, the Company’s income tax expense included a benefit of approximately $8 million, or $0.03 per share(2), primarily related to the settlement of a state tax audit.

“Our solid performance continued through the third quarter as our core business showed strength despite the typically slower summer months and uncertainty in the broader global markets,” said Paul Idzik, Chief Executive Officer. “Our customers remained engaged, with DARTs up six percent from a year ago and margin balances at all-time highs for the Company. Additionally, we continue to make meaningful progress on the regulatory and capital front as evidenced by $400 million in dividends from the bank to the parent over the past five quarters. We remain focused on putting this capital to work for our owners, and aim to rationalize our capital structure – leading with actions to address our corporate debt profile. I am quite excited about the prospects ahead of us, and I look forward to closing out 2014 as a year of significant accomplishments for E*TRADE.”

E*TRADE reported DARTs of 153,000 during the quarter, a decrease of one percent from the prior quarter and an increase of six percent versus the same quarter a year ago.

The Company ended the quarter with 3.1 million brokerage accounts, an increase of 24,000 from the prior quarter. This compared with 33,000 net new brokerage accounts in the prior quarter and 13,000 in the third quarter of 2013. Brokerage account attrition for the quarter was 9.1 percent annualized.

The Company ended the quarter with $282 billion in total customer assets, compared with $281 billion at the end of the prior quarter and $241 billion from a year ago.

During the quarter, customers added $2.3 billion in net new brokerage assets, representing an annualized growth rate of 3.9 percent. Brokerage related cash increased by $0.4 billion to $40.4 billion during the period. Customers were net buyers of approximately $2.2 billion of securities. Margin receivables averaged $7.6 billion in the quarter, up four percent over last quarter and up 29 percent year over year, ending the quarter at $8.1 billion.

Corporate cash ended the quarter at $610 million(1), an increase of $40 million from the prior quarter, driven primarily by a $75 million dividend distributed from the Company’s bank subsidiary to its parent during the quarter.

Net operating interest income for the third quarter was $269 million, down slightly from $270 million in the prior quarter and up from $241 million a year ago. Third quarter results reflected a net interest spread of 2.54 percent on average interest-earning assets of $41.3 billion, compared with 2.55 percent on $41.4 billion in the prior quarter.

Commissions, fees and service charges, and other revenue in the third quarter were $163 million, compared with $161 million in the prior quarter and $152 million in the third quarter of 2013. Average commission per trade for the quarter was $11.05, compared with $10.72 in the prior quarter, and $11.15 in the third quarter of 2013.

Total net revenue in the quarter also included $8 million of net gains on loans and securities. This compared with $7 million in the prior quarter, which included gains related to the sale of modified loans, and $12 million in the third quarter of 2013.

Total operating expenses in the quarter of $277 million decreased $7 million sequentially, and increased $6 million from the year ago period.

The Company’s loan portfolio ended the quarter at $6.7 billion, contracting approximately $0.4 billion from the prior quarter. Third quarter provision for loan losses of $10 million was down from $12 million in the prior quarter.

Net charge-offs in the quarter were $10 million, compared with $14 million in the prior quarter. The allowance for loan losses ended the quarter unchanged from the previous quarter at $401 million.

As of September 30, 2014, the Company reported bank and consolidated Tier 1 leverage ratios of 10.4 percent(3) and 7.7 percent(4), respectively, compared with 10.2 percent(3) and 7.5 percent(4) in the prior quarter.

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 5:00 p.m. ET today. This conference call will be available to domestic participants by dialing 800-772-0358 while international participants should dial +1 212-231-2930. A live audio webcast and replay of this conference call will also be available at about.etrade.com.

About E*TRADE Financial

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

Important Notices

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

Forward-Looking Statements

The statements contained in this news release that are forward looking, including statements regarding rationalization of our capital structure, taking action on corporate debt, and future prospects for the Company are “forward-looking statements” within the meaning of the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995, and are subject to a number of uncertainties and risks. Actual results may differ materially from those indicated in the forward-looking statements. The uncertainties and risks include, but are not limited to, macro trends of the economy in general and the residential real estate market, instability in the consumer credit markets and credit trends, increased mortgage loan delinquency and default rates, portfolio growth, portfolio seasoning and resolution through collections, sales or charge-offs, the uncertainty surrounding the foreclosure process, and the potential negative regulatory consequences resulting from the implementation of financial regulatory reform as well as from actions by or more restrictive policies or interpretations of the Federal Reserve and the Office of the Comptroller of the Currency or other regulators. Further information about these risks and uncertainties can be found in the annual, quarterly, and current reports on Form 10-K, Form 10-Q, and Form 8-K previously filed by E*TRADE Financial Corporation with the Securities and Exchange Commission (including information in these reports under the caption “Risk Factors”). Any forward-looking statement included in this release speaks only as of the date of this communication; the Company disclaims any obligation to update any information.

(c) 2014 E*TRADE Financial Corporation. All rights reserved.

Financial Statements

E*TRADE FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statement of Income
(In millions, except share data and per share amounts)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
2014 2013 2014 2013
Revenue:
Operating interest income $ 319 $ 301 $ 963 $ 903
Operating interest expense (50 ) (60 ) (158 ) (178 )
Net operating interest income 269 241 805 725
Commissions 108 103 341 310
Fees and service charges 45 40 138 113
Principal transactions 13 10 56
Gains on loans and securities, net 8 12 30 49
Net impairment (1 ) (3 )
Other revenues 10 9 29 27
Total non-interest income 171 176 548 552
Total net revenue 440 417 1,353 1,277
Provision for loan losses 10 37 26 126
Operating expense:
Compensation and benefits 108 88 305 270
Advertising and market development 21 21 88 81
Clearing and servicing 21 31 72 94
FDIC insurance premiums 18 25 61 79
Professional services 27 23 79 59
Occupancy and equipment 22 17 59 53
Communications 17 16 53 53
Depreciation and amortization 19 22 60 68
Amortization of other intangibles 5 6 16 18
Impairment of goodwill 142
Facility restructuring and other exit activities 2 6 6 23
Other operating expenses 17 16 52 40
Total operating expense 277 271 851 980
Income before other income (expense) and income tax expense 153 109 476 171
Other income (expense):
Corporate interest expense (29 ) (29 ) (86 ) (86 )
Losses on early extinguishment of debt (12 )
Equity in income of investments and other 1 3 5
Total other income (expense) (28 ) (29 ) (95 ) (81 )
Income before income tax expense 125 80 381 90
Income tax expense 39 33 129 62
Net income $ 86 $ 47 $ 252 $ 28
Basic earnings per share $ 0.30 $ 0.17 $ 0.87 $ 0.10
Diluted earnings per share $ 0.29 $ 0.16 $ 0.86 $ 0.10
Shares used in computation of per share data:
Basic (in thousands) 288,843 287,111 288,536 286,882
Diluted (in thousands) 294,119 292,630 293,968 292,249
E*TRADE FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statement of Income
(In millions, except share data and per share amounts)
(Unaudited)
Three Months Ended
September 30, June 30, September 30,
2014 2014 2013
Revenue:
Operating interest income $ 319 $ 322 $ 301
Operating interest expense (50 ) (52 ) (60 )
Net operating interest income 269 270 241
Commissions 108 105 103
Fees and service charges 45 46 40
Principal transactions 13
Gains on loans and securities, net 8 7 12
Net impairment (1 )
Other revenues 10 10 9
Total non-interest income 171 168 176
Total net revenue 440 438 417
Provision for loan losses 10 12 37
Operating expense:
Compensation and benefits 108 99 88
Advertising and market development 21 33 21
Clearing and servicing 21 23 31
FDIC insurance premiums 18 19 25
Professional services 27 28 23
Occupancy and equipment 22 19 17
Communications 17 18 16
Depreciation and amortization 19 20 22
Amortization of other intangibles 5 6 6
Facility restructuring and other exit activities 2 1 6
Other operating expenses 17 18 16
Total operating expense 277 284 271
Income before other income (expense) and income tax expense 153 142 109
Other income (expense):
Corporate interest expense (29 ) (29 ) (29 )
Equity in income (loss) of investments and other 1 (1 )
Total other income (expense) (28 ) (30 ) (29 )
Income before income tax expense 125 112 80
Income tax expense 39 43 33
Net income $ 86 $ 69 $ 47
Basic earnings per share $ 0.30 $ 0.24 $ 0.17
Diluted earnings per share $ 0.29 $ 0.24 $ 0.16
Shares used in computation of per share data:
Basic (in thousands) 288,843 288,705 287,111
Diluted (in thousands) 294,119 293,826 292,630
E*TRADE FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheet
(In millions, except share data)
(Unaudited)

September 30,

June 30, December 31,
2014 2014 2013

ASSETS

Cash and equivalents $ 1,809 $ 1,807 $ 1,838
Cash required to be segregated under federal or other regulations 608 1,215 1,066
Available-for-sale securities 12,516 12,837 13,592
Held-to-maturity securities 11,847 11,356 10,181
Margin receivables 8,117 7,340 6,353
Loans receivable, net 6,302 6,656 8,123
Investment in FHLB stock 77 56 61
Property and equipment, net 240 227 237
Goodwill 1,792 1,792 1,792
Other intangibles, net 199 205 216
Other assets 2,312 2,257 2,821
Total assets $ 45,819 $ 45,748 $ 46,280
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Deposits $ 24,927 $ 25,084 $ 25,971
Securities sold under agreements to repurchase 3,917 3,742 4,543
Customer payables 6,526 6,626 6,310
FHLB advances and other borrowings 1,294 1,291 1,279
Corporate debt 1,771 1,770 1,768
Other liabilities 2,110 2,047 1,553
Total liabilities 40,545 40,560 41,424
Shareholders’ equity:
Common stock, $0.01 par value, shares authorized: 400,000,000 at
September 30, 2014, June 30, 2014 and December 31, 2013, shares issued
and outstanding: 288,812,764 at September 30, 2014, 288,687,146 at
June 30, 2014 and 287,357,001 at December 31, 2013 3 3 3
Additional paid-in-capital 7,340 7,336 7,328
Accumulated deficit (1,770 ) (1,856 ) (2,022 )
Accumulated other comprehensive loss (299 ) (295 ) (453 )
Total shareholders’ equity 5,274 5,188 4,856
Total liabilities and shareholders’ equity $ 45,819 $ 45,748 $ 46,280

Segment Reporting

Three Months Ended September 30, 2014

Trading and
Investing

Balance Sheet
Management

Corporate/
Other

Eliminations(5) Total
(In millions)
Revenue:
Operating interest income $ 170 $ 221 $ $ (72 ) $ 319
Operating interest expense (5 ) (117 ) 72 (50 )
Net operating interest income 165 104 269
Commissions 108 108
Fees and service charges 45 45
Gains on loans and securities, net 8 8
Other revenues 9 1 10
Total non-interest income 162 9 171
Total net revenue 327 113 440
Provision for loan losses 10 10
Operating expense:
Compensation and benefits 72 4 32 108
Advertising and market development 21 21
Clearing and servicing 13 8 21
FDIC insurance premiums 18 18
Professional services 16 1 10 27
Occupancy and equipment 17 1 4 22
Communications 17 17
Depreciation and amortization 15 4 19
Amortization of other intangibles 5 5
Facility restructuring and other exit activities 2 2
Other operating expenses 7 4 6 17
Total operating expense 183 36 58 277
Segment income (loss) before other income (expense) 144 67 (58 ) 153
Other income (expense):
Corporate interest expense (29 ) (29 )
Equity in income of investments and other 1 1
Total other income (expense) (28 ) (28 )
Segment income (loss) $ 144 $ 67 $ (86 ) $ $ 125
Three Months Ended June 30, 2014

Trading and
Investing

Balance Sheet
Management

Corporate/
Other

Eliminations(5) Total
(In millions)
Revenue:
Operating interest income $ 155 $ 233 $ $ (66 ) $ 322
Operating interest expense (4 ) (114 ) 66 (52 )
Net operating interest income 151 119 270
Commissions 105 105
Fees and service charges 45 1 46
Gains on loans and securities, net 7 7
Other revenues 8 2 10
Total non-interest income 158 10 168
Total net revenue 309 129 438
Provision for loan losses 12 12
Operating expense:
Compensation and benefits 69 3 27 99
Advertising and market development 33 33
Clearing and servicing 14 9 23
FDIC insurance premiums 19 19
Professional services 15 1 12 28
Occupancy and equipment 15 4 19
Communications 17 1 18
Depreciation and amortization 16 4 20
Amortization of other intangibles 6 6
Facility restructuring and other exit activities 1 1
Other operating expenses 11 4 3 18
Total operating expense 196 36 52 284
Segment income (loss) before other income (expense) 113 81 (52 ) 142
Other income (expense):
Corporate interest expense (29 ) (29 )
Equity in loss of investments and other (1 ) (1 )
Total other income (expense) (30 ) (30 )
Segment income (loss) $ 113 $ 81 $ (82 ) $ $ 112
Three Months Ended September 30, 2013

Trading and
Investing

Balance Sheet
Management

Corporate/
Other

Eliminations(5) Total
(In millions)
Revenue:
Operating interest income $ 139 $ 231 $ $ (69 ) $ 301
Operating interest expense (5 ) (124 ) 69 (60 )
Net operating interest income 134 107 241
Commissions 103 103
Fees and service charges 39 1 40
Principal transactions 13 13
Gains on loans and securities, net 12 12
Net impairment (1 ) (1 )
Other revenues 8 1 9
Total non-interest income 163 13 176
Total net revenue 297 120 417
Provision for loan losses 37 37
Operating expense:
Compensation and benefits 60 3 25 88
Advertising and market development 21 21
Clearing and servicing 19 12 31
FDIC insurance premiums 25 25
Professional services 10 13 23
Occupancy and equipment 15 2 17
Communications 16 16
Depreciation and amortization 17 1 4 22
Amortization of other intangibles 6 6
Facility restructuring and other exit activities 6 6
Other operating expenses 7 2 7 16
Total operating expense 171 43 57 271
Segment income (loss) before other income (expense) 126 40 (57 ) 109
Other income (expense):
Corporate interest expense (29 ) (29 )
Total other income (expense) (29 ) (29 )
Segment income (loss) $ 126 $ 40 $ (86 ) $ $ 80

Key Performance Metrics(6)

Corporate Metrics

Qtr ended
9/30/14

Qtr ended
6/30/14

Qtr ended
9/30/14
vs.
6/30/14

Qtr ended
9/30/13

Qtr ended
9/30/14
vs.
9/30/13

Operating margin %(7)

Consolidated 35 % 32 % 3 % 26 % 9 %
Trading and Investing 44 % 37 % 7 % 42 % 2 %
Balance Sheet Management 59 % 63 % (4)% 33 % 26 %
Employees 3,146 3,113 1 % 2,913 8 %
Consultants and other 129 142 (9)% 92 40 %
Total headcount 3,275 3,255 1 % 3,005 9 %
Book value per share $ 18.26 $ 17.97 2 % $ 16.82 9 %

Tangible book value per share(8)

$ 12.69 $ 12.34 3 % $ 10.96 16 %

Corporate cash ($MM)(1)

$ 610 $ 570 7 % $ 373 64 %

Enterprise net interest spread (basis points)(9)

254 255 0 % 230 10 %
Enterprise interest-earning assets, average ($MM) $ 41,346 $ 41,395 0 % $ 40,812 1 %

Earnings before interest, taxes, depreciation & amortization (“EBITDA”) ($MM)

Net income $ 86 $ 69 25 % $ 47 83 %
Income tax expense 39 43 (9)% 33 18 %
Depreciation & amortization 24 26 (8)% 28 (14)%
Corporate interest expense 29 29 0 % 29 0 %
EBITDA $ 178 $ 167 7 % $ 137 30 %

Interest coverage(10)

6.2 5.8 N.M. 4.8 N.M.

E*TRADE Bank net income ($MM)(11)

$ 119 $ 106 12 % $ 85 40 %

Trading and Investing Metrics

Trading days 63.5 63.0 N.M. 63.5 N.M.
DARTs 153,494 155,194 (1)% 145,150 6 %
Total trades (MM) 9.7 9.8 (1)% 9.2 5 %
Average commission per trade $ 11.05 $ 10.72 3 % $ 11.15 (1)%
End of period margin receivables ($B) $ 8.1 $ 7.3 11 % $ 6.2 31 %
Average margin receivables ($B) $ 7.6 $ 7.3 4 % $ 5.9 29 %
Gross new brokerage accounts 94,261 99,136 (5)% 79,923 18 %
Gross new stock plan accounts 57,648 59,084 (2)% 61,614 (6)%
Gross new banking accounts 2,015 2,001 1 % 2,406 (16)%
Closed accounts (120,548) (117,670) N.M. (119,123) N.M.
Net new accounts 33,376 42,551 N.M. 24,820 N.M.
Net new brokerage accounts 23,510 33,005 N.M. 13,111 N.M.
Net new stock plan accounts 17,547 17,787 N.M. 18,885 N.M.
Net new banking accounts (7,681) (8,241) N.M. (7,176) N.M.
Net new accounts 33,376 42,551 N.M. 24,820 N.M.
End of period brokerage accounts 3,126,476 3,102,966 1 % 2,975,842 5 %
End of period stock plan accounts 1,263,729 1,246,182 1 % 1,204,692 5 %
End of period banking accounts 371,626 379,307 (2)% 406,420 (9)%
End of period total accounts 4,761,831 4,728,455 1 % 4,586,954 4 %

Annualized brokerage account attrition rate(12)

9.1% 8.6% N.M. 9.0% N.M.

Customer Assets ($B)

Security holdings $ 199.0 $ 197.8 1 % $ 162.8 22 %
Customer payables (cash) 6.5 6.6 (2)% 5.8 12 %

Customer assets held by third parties(13)

14.8 14.3 3 % 12.9 15 %
Unexercised stock plan customer holdings (vested) 36.4 37.1 (2)% 33.2 10 %
Customer assets in brokerage and stock plan accounts 256.7 255.8 0 % 214.7 20 %
Sweep deposits 19.1 19.1 0 % 19.5 (2)%
Savings, transaction and other 5.9 6.0 (2)% 6.4 (8)%
Customer assets in banking accounts 25.0 25.1 0 % 25.9 (3)%
Total customer assets $ 281.7 $ 280.9 0 % $ 240.6 17 %

Net new brokerage assets ($B)(14)

$ 2.3 $ 1.0 N.M. $ 2.4 N.M.

Net new banking assets ($B)(14)

(0.2) (0.3) N.M. (0.1) N.M.

Net new customer assets ($B)(14)

$ 2.1 $ 0.7 N.M. $ 2.3 N.M.
Brokerage related cash ($B) $ 40.4 $ 40.0 1 % $ 38.2 6 %
Other customer cash and deposits ($B) 5.9 6.0 (2)% 6.4 (8)%
Total customer cash and deposits ($B) $ 46.3 $ 46.0 1 % $ 44.6 4 %
Stock plan customer holdings (unvested) ($B) $ 73.7 $ 73.6 0 % $ 63.4 16 %
Customer net (buy) / sell activity ($B) $ (2.2) $ (0.4) N.M. $ 0.7 N.M.

Balance Sheet Management Metrics

Loans receivable ($MM)

Average loans receivable $ 6,851 $ 7,201 (5)% $ 9,246 (26)%
Ending loans receivable, net $ 6,302 $ 6,656 (5)% $ 8,565 (26)%

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

One- to Four-Family

Current $ 2,957 $ 3,100 (5)% $ 4,226 (30)%
30-89 days delinquent 95 88 8 % 197 (52)%
90-179 days delinquent 22 27 (19)% 71 (69)%
Total 30-179 days delinquent 117 115 2 % 268 (56)%
180+ days delinquent (net of $53M, $58M and $111M in charge-offs for Q314, Q214 and Q313, respectively) 136 145 (6)% 239 (43)%

Total delinquent loans(15)

253 260 (3)% 507 (50)%

Gross loans receivable(16)

$ 3,210 $ 3,360 (4)% $ 4,733 (32)%

Home Equity

Current $ 2,873 $ 3,033 (5)% $ 3,498 (18)%
30-89 days delinquent 56 56 0 % 69 (19)%
90-179 days delinquent 27 32 (16)% 38 (29)%
Total 30-179 days delinquent 83 88 (6)% 107 (22)%
180+ days delinquent (net of $23M, $24M and $23M in charge-offs for Q314, Q214 and Q313, respectively) 45 45 0 % 38 18 %

Total delinquent loans(15)

128 133 (4)% 145 (12)%

Gross loans receivable(16)

$ 3,001 $ 3,166 (5)% $ 3,643 (18)%

Consumer and Other

Current $ 482 $ 519 (7)% $ 633 (24)%
30-89 days delinquent 8 11 (27)% 12 (33)%
90-179 days delinquent 2 1 100 % 3 (33)%
Total 30-179 days delinquent 10 12 (17)% 15 (33)%
180+ days delinquent N.M. N.M.
Total delinquent loans 10 12 (17)% 15 (33)%

Gross loans receivable(16)

$ 492 $ 531 (7)% $ 648 (24)%

Total Loans Receivable

Current $ 6,312 $ 6,652 (5)% $ 8,357 (24)%
30-89 days delinquent 159 155 3 % 278 (43)%
90-179 days delinquent 51 60 (15)% 112 (54)%
Total 30-179 days delinquent 210 215 (2)% 390 (46)%
180+ days delinquent 181 190 (5)% 277 (35)%

Total delinquent loans(15)

391 405 (3)% 667 (41)%

Total gross loans receivable(16)

$ 6,703 $ 7,057 (5)% $ 9,024 (26)%

TDR performance detail ($MM)(17)

One- to Four-Family TDRs

Current $ 236 $ 244 (3)% $ 921 (74)%
30-89 days delinquent 28 19 47 % 101 (72)%
90-179 days delinquent 5 6 (17)% 44 (89)%
Total 30-179 days delinquent 33 25 32 % 145 (77)%
180+ days delinquent (net of $23M, $25M and $68M in charge-offs for Q314, Q214 and Q313, respectively) 48 50 (4)% 130 (63)%
Total delinquent TDRs 81 75 8 % 275 (71)%
TDRs $ 317 $ 319 (1)% $ 1,196 (73)%

Home Equity TDRs

Current $ 183 $ 184 (1)% $ 210 (13)%
30-89 days delinquent 12 15 (20)% 15 (20)%
90-179 days delinquent 7 8 (13)% 10 (30)%
Total 30-179 days delinquent 19 23 (17)% 25 (24)%
180+ days delinquent (net of $15M, $14M and $14M in charge-offs for Q314, Q214 and Q313, respectively) 19 19 0 % 18 6 %
Total delinquent TDRs 38 42 (10)% 43 (12)%
TDRs $ 221 $ 226 (2)% $ 253 (13)%

Total TDRs

Current $ 419 $ 428 (2)% $ 1,131 (63)%
30-89 days delinquent 40 34 18 % 116 (66)%
90-179 days delinquent 12 14 (14)% 54 (78)%
Total 30-179 days delinquent 52 48 8 % 170 (69)%
180+ days delinquent 67 69 (3)% 148 (55)%
Total delinquent TDRs 119 117 2 % 318 (63)%
TDRs $ 538 $ 545 (1)% $ 1,449 (63)%

Capital Metrics

E*TRADE Bank

Tier 1 leverage ratio(3)

10.4 % 10.2 % 0.2 % 9.5 % 0.9 %

Tier 1 risk-based capital ratio(3)

24.6 % 24.7 % (0.1)% 22.2 % 2.4 %

Total risk-based capital ratio(3)

25.9 % 26.0 % (0.1)% 23.5 % 2.4 %

Tier 1 common ratio(3)

24.6 % 24.7 % (0.1)% 22.2 % 2.4 %

E*TRADE Financial

Tier 1 leverage ratio(4)

7.7 % 7.5 % 0.2 % 6.6 % 1.1 %

Tier 1 risk-based capital ratio(4)

18.5 % 18.3 % 0.2 % 15.3 % 3.2 %

Total risk-based capital ratio(4)

19.7 % 19.5 % 0.2 % 16.6 % 3.1 %

Tier 1 common ratio(4)

16.1 % 15.8 % 0.3 % 12.9 % 3.2 %

Activity in Allowance for Loan Losses

Three Months Ended September 30, 2014

One- to Four-
Family

Home Equity

Consumer
and Other

Total
(In millions)
Allowance for loan losses, ending 6/30/14 $ 44 $ 337 $ 20 $ 401
Provision for loan losses (16 ) 29 (3 ) 10
Charge-offs, net (1 ) (6 ) (3 ) (10 )
Allowance for loan losses, ending 9/30/14 $ 27 $ 360 $ 14 $ 401
Three Months Ended June 30, 2014

One- to Four-
Family

Home Equity

Consumer
and Other

Total
(In millions)
Allowance for loan losses, ending 3/31/14 $ 52 $ 327 $ 24 $ 403
Provision for loan losses (8 ) 21 (1 ) 12
Charge-offs, net (11 ) (3 ) (14 )
Allowance for loan losses, ending 6/30/14 $ 44 $ 337 $ 20 $ 401
Three Months Ended September 30, 2013

One- to Four-
Family

Home Equity

Consumer
and Other

Total
(In millions)
Allowance for loan losses, ending 6/30/13 $ 144 $ 279 $ 28 $ 451
Provision for loan losses (24 ) 60 1 37
Charge-offs, net (7 ) (20 ) (2 ) (29 )
Allowance for loan losses, ending 9/30/13 $ 113 $ 319 $ 27 $ 459

Specific Valuation Allowance Activity(18)

As of September 30, 2014

Recorded
Investment in
Modifications
before
charge-offs

Charge-offs

Recorded
Investment in
Modifications

Specific
Valuation
Allowance

Net Investment
in
Modifications

Specific
Valuation
Allowance as a
% of
Modifications

Total
Expected
Losses(19)

(Dollars in millions)
One- to four-family $ 229 $ (45 ) $ 184 $ (9 ) $ 175 5 % 24 %
Home equity 313 (140 ) 173 (59 ) 114 34 % 64 %
Total $ 542 $ (185 ) $ 357 $ (68 ) $ 289 19 % 47 %
As of June 30, 2014

Recorded
Investment in
Modifications
before
charge-offs

Charge-offs

Recorded
Investment in
Modifications

Specific
Valuation
Allowance

Net Investment
in
Modifications

Specific
Valuation
Allowance as a
% of
Modifications

Total
Expected
Losses(19)

(Dollars in millions)
One- to four-family $ 232 $ (45 ) $ 187 $ (14 ) $ 173 7 % 25 %
Home equity 322 (145 ) 177 (62 ) 115 35 % 64 %
Total $ 554 $ (190 ) $ 364 $ (76 ) $ 288 21 % 48 %
As of September 30, 2013

Recorded
Investment in
Modifications
before
charge-offs

Charge-offs

Recorded
Investment in
Modifications

Specific
Valuation
Allowance

Net Investment
in
Modifications

Specific
Valuation
Allowance as a
% of
Modifications

Total
Expected
Losses(19)

(Dollars in millions)
One- to four-family $ 1,375 $ (320 ) $ 1,055 $ (67 ) $ 988 6 % 28 %
Home equity 348 (150 ) 198 (68 ) 130 34 % 63 %
Total $ 1,723 $ (470 ) $ 1,253 $ (135 ) $ 1,118 11 % 35 %

Average Enterprise Balance Sheet Data

Three Months Ended
September 30, 2014

Average

Operating
Interest

Average
Balance Inc./Exp. Yield/Cost
Enterprise interest-earning assets: (In millions)

Loans(20)

$ 6,871 $ 70 4.05 %
Available-for-sale securities 12,595 70 2.23 %
Held-to-maturity securities 11,366 81 2.84 %
Margin receivables 7,645 67 3.47 %
Cash and equivalents 1,316 0.15 %
Segregated cash 904 0.06 %
Securities borrowed and other 649 28 16.89 %
Total enterprise interest-earning assets $ 41,346 316 3.04 %
Enterprise interest-bearing liabilities:
Deposits $ 25,068 $ 2 0.03 %
Customer payables 6,624 2 0.13 %

Securities sold under agreements to repurchase(21)

3,753 30 3.07 %

FHLB advances and other borrowings(21)

1,290 16 4.75 %
Securities loaned and other 1,634 0.03 %
Total enterprise interest-bearing liabilities $ 38,369 50 0.50 %

Enterprise net interest income/spread(9)

$ 266 2.54 %
Three Months Ended
June 30, 2014
Average

Operating
Interest

Average
Balance Inc./Exp. Yield/Cost
Enterprise interest-earning assets: (In millions)

Loans(20)

$ 7,416 $ 77 4.18 %
Available-for-sale securities 12,742 72 2.28 %
Held-to-maturity securities 11,298 82 2.91 %
Margin receivables 7,330 65 3.56 %
Cash and equivalents 1,310 1 0.15 %
Segregated cash 799 1 0.10 %
Securities borrowed and other 500 21 16.43 %
Total enterprise interest-earning assets $ 41,395 319 3.08 %
Enterprise interest-bearing liabilities:
Deposits $ 25,239 $ 2 0.03 %
Customer payables 6,250 3 0.16 %

Securities sold under agreements to repurchase(21)

4,010 30 2.98 %

FHLB advances and other borrowings(21)

1,285 17 5.24 %
Securities loaned and other 1,506 0.03 %
Total enterprise interest-bearing liabilities $ 38,290 52 0.53 %

Enterprise net interest income/spread(9)

$ 267 2.55 %
Three Months Ended
September 30, 2013
Average

Operating
Interest

Average
Balance Inc./Exp. Yield/Cost
Enterprise interest-earning assets: (In millions)

Loans(20)

$ 9,288 $ 96 4.15 %
Available-for-sale securities 13,011 69 2.11 %
Held-to-maturity securities 9,853 65 2.62 %
Margin receivables 5,938 56 3.75 %
Cash and equivalents 1,544 1 0.20 %
Segregated cash 517 0.09 %
Securities borrowed and other 661 12 7.08 %
Total enterprise interest-earning assets $ 40,812 299 2.92 %
Enterprise interest-bearing liabilities:
Deposits $ 25,804 $ 4 0.05 %
Customer payables 5,548 2 0.15 %

Securities sold under agreements to repurchase(21)

4,446 37 3.29 %

FHLB advances and other borrowings(21)

1,292 17 5.20 %
Securities loaned and other 874 0.01 %
Total enterprise interest-bearing liabilities $ 37,964 60 0.62 %

Enterprise net interest income/spread(9)

$ 239 2.30 %

Reconciliation from Enterprise Net Interest Income to Net Operating Interest Income

Three Months Ended
September 30, June 30, September 30,
2014 2014 2013
(In millions)
Enterprise net interest income $ 266 $ 267 $ 239

Taxable equivalent interest adjustment(22)

(1 ) (1 )

Earnings on customer assets held by third parties(23)

4 3 3
Net operating interest income $ 269 $ 270 $ 241

Explanation of Non-GAAP Measures and Certain Metrics

Management believes that corporate cash, tangible book value per share, EBITDA, interest coverage, E*TRADE Bank Tier 1 common ratio and E*TRADE Financial capital ratios are appropriate measures for evaluating the operating and liquidity performance of the Company. 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 non-GAAP information internally to evaluate operating performance and in formulating the budget for future periods.

Corporate Cash

Corporate cash represents cash held at the parent company as well as cash held in certain subsidiaries that can distribute cash to the parent company without any regulatory approval. 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 (1) for a reconciliation of this non-GAAP measure to the comparable GAAP measure.

Tangible Book Value per Share

Tangible book value per share represents shareholders’ equity less goodwill (net of related deferred tax liability) and other intangible assets divided by common stock outstanding. The Company believes that tangible book value per share is a measure of the Company’s capital strength. See endnote (8) for a reconciliation of this non-GAAP measure to the comparable GAAP measure.

EBITDA

EBITDA represents net income (loss) before taxes, depreciation and amortization and corporate interest expense. Management believes that EBITDA provides a useful additional measure of the Company’s performance by excluding certain non-cash charges and expenses that are not directly related to the performance of the business. See the table entitled “Key Performance Metrics” for a reconciliation of this non-GAAP measure to the comparable GAAP measure.

Interest Coverage

Interest coverage represents EBITDA divided by corporate interest expense. Management believes that by excluding the charges and expenses that are excluded from EBITDA, interest coverage provides a useful additional measure of the Company’s ability to continue to meet interest obligations and liquidity needs. See endnote (10) for a calculation of this non-GAAP measure on a GAAP basis.

E*TRADE Bank Tier 1 Common Ratio and E*TRADE Financial Capital Ratios

E*TRADE Financial ratios, including Tier 1 leverage, Tier 1 risk-based capital and total risk-based capital ratios, are based on the Federal Reserve regulatory minimum well-capitalized threshold. E*TRADE Bank’s and E*TRADE Financial’s Tier 1 common ratios are defined as the Tier 1 capital less elements of Tier 1 capital that are not in the form of common equity, such as trust preferred securities, divided by total risk-weighted assets. Management believes these ratios are an important measure of E*TRADE Bank’s and the Company’s capital strength. See endnotes (3) and (4) for reconciliations of these non-GAAP measures to the comparable GAAP measures.

It is important to note these metrics and other non-GAAP measures may involve judgment by management and should be considered in addition to, not as substitutes for, or superior to, net income, consolidated statements of cash flows, or other measures of financial performance 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 Results of Operations and Financial Condition” that will be included in the periodic report the Company expects to file with the SEC with respect to the financial periods discussed herein.

ENDNOTES

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

Q3 2014 Q2 2014 Q3 2013
Corporate cash $ 610 $ 570 $ 373
Bank cash 1,175 1,215 1,401
International brokerage and other cash 24 22 22
Total consolidated cash and equivalents $ 1,809 $ 1,807 $ 1,796

(2) The following table provides a reconciliation for the calculation of the income tax impact, primarily related to the settlement of a state tax audit (dollars in millions, except per share amounts):

Q3 2014
Amount EPS
Income before income tax expense $ 125 $ 0.42
Income tax expense (benefit):
Income tax expense 47 0.16

Income tax benefit primarily related to the settlement of a state tax audit

(8) (0.03)
Net income $ 86 $ 0.29

(3) E*TRADE Bank’s Tier 1 leverage, Tier 1 risk-based capital, total risk-based capital and Tier 1 common ratios are preliminary for the current period. E*TRADE Bank’s Tier 1 common ratio is a non-GAAP measure. Management believes this ratio is an important measure of capital strength. E*TRADE Bank’s Tier 1 leverage, Tier 1 risk-based capital, total risk-based capital and Tier 1 common ratios are calculated as follows (dollars in millions):

Q3 2014 Q2 2014 Q3 2013
E*TRADE Bank shareholder’s equity $ 6,014 $ 5,974 $ 5,753
DEDUCT:
Losses in OCI on AFS debt securities and cash flow hedges, net of tax (304 ) (300 ) (426 )
Goodwill & other intangible assets, net of deferred tax liabilities 1,482 1,500 1,547
Disallowed servicing assets and deferred tax assets 397 450 619
E*TRADE Bank Tier 1 capital/Tier 1 common 4,439 4,324 4,013
ADD:
Allowable allowance for loan losses 228 221 230
E*TRADE Bank total capital $ 4,667 $ 4,545 $ 4,243
E*TRADE Bank total assets $ 44,510 $ 44,517 $ 44,395
DEDUCT:
Losses in OCI on AFS debt securities and cash flow asset hedges, net of tax (51 ) (26 ) (107 )
Goodwill & other intangible assets, net of deferred tax liabilities 1,482 1,500 1,547
Disallowed servicing assets and deferred tax assets 397 450 619
E*TRADE Bank total assets for leverage capital purposes $ 42,682 $ 42,593 $ 42,336

E*TRADE Bank total risk-weighted assets(a)

$ 18,035 $ 17,502 $ 18,075
E*TRADE Bank Tier 1 leverage ratio (Tier 1 capital / Total assets for leverage capital purposes) 10.4 % 10.2 % 9.5 %
E*TRADE Bank Tier 1 capital / Total risk-weighted assets 24.6 % 24.7 % 22.2 %
E*TRADE Bank total capital / Total risk-weighted assets 25.9 % 26.0 % 23.5 %
E*TRADE Bank Tier 1 common / Total risk-weighted assets 24.6 % 24.7 % 22.2 %

(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.

(4) E*TRADE Financial’s Tier 1 leverage, Tier 1 risk-based capital, total risk-based capital and Tier 1 common ratios are preliminary for the current period, and are based on the Federal Reserve’s well-capitalized requirements. While E*TRADE Financial is not currently subject to capital requirements, the implementation of holding company capital requirements are effective in 2015 as a result of the Dodd-Frank Act. Management believes these ratios are an important measure of the Company’s capital strength and accordingly manages capital against ratios currently applicable to bank holding companies, in preparation for the application of these requirements. The Tier 1 leverage, Tier 1 risk-based capital, total risk-based capital and Tier 1 common ratios are calculated as follows (dollars in millions):

Q3 2014 Q2 2014 Q3 2013
E*TRADE Financial shareholders’ equity $ 5,274 $ 5,188 $ 4,829
DEDUCT:
Losses in OCI on AFS debt securities and cash flow hedges, net of tax (304 ) (300 ) (426 )
Goodwill & other intangible assets, net of deferred tax liabilities 1,609 1,626 1,681
Disallowed servicing assets and deferred tax assets 1,063 1,097 1,223
E*TRADE Financial Tier 1 common 2,906 2,765 2,351
ADD:

Qualifying restricted core capital elements (TRUPs)(a)

433 433 433
E*TRADE Financial Tier 1 capital 3,339 3,198 2,784
ADD:
Allowable allowance for loan losses 228 221 231
E*TRADE Financial total capital $ 3,567 $ 3,419 $ 3,015
E*TRADE Financial total average assets $ 45,869 $ 45,598 $ 45,123
DEDUCT:
Goodwill & other intangible assets, net of deferred tax liabilities 1,609 1,626 1,681
Disallowed servicing assets and deferred tax assets 1,063 1,097 1,223
Average total assets for leverage capital purposes $ 43,197 $ 42,875 $ 42,219

E*TRADE Financial total risk-weighted assets(b)

$ 18,070 $ 17,510 $ 18,200
E*TRADE Financial Tier 1 leverage ratio (Tier 1 capital / Average total assets for leverage capital purposes) 7.7 % 7.5 % 6.6 %
E*TRADE Financial Tier 1 capital / Total risk-weighted assets 18.5 % 18.3 % 15.3 %
E*TRADE Financial total capital / Total risk-weighted assets 19.7 % 19.5 % 16.6 %
E*TRADE Financial Tier 1 common / Total risk-weighted assets 16.1 % 15.8 % 12.9 %

(a) The Company is continuing to include TRUPs in E*TRADE Financial’s Tier 1 capital due to the regulatory agencies’ delay in the implementation of the TRUPs phase-out for the Company until January 1, 2015.

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

(5) Reflects elimination of transactions between Trading and Investing and Balance Sheet Management segments, which includes deposit and intercompany transfer pricing arrangements.

(6) Amounts and percentages may not calculate due to rounding.

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

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

Q3 2014 Q2 2014 Q3 2013
Book value $ 5,274 $ 5,188 $ 4,829
Less: Goodwill and other intangibles, net (1,991 ) (1,997 ) (2,014 )
Less: Deferred tax liability related to goodwill 382 371 333
Tangible book value $ 3,665 $ 3,562 $ 3,148

Q3 2014

Q2 2014

Q3 2013

Book value per share

$

18.26

$

17.97

$

16.82

Less: Goodwill and other intangibles, net per share

(6.89)

(6.92)

(7.01)

Less: Deferred tax liability related to goodwill per share

1.32

1.29

1.15

Tangible book value per share

$

12.69

$

12.34

$

10.96

(9) Enterprise net interest spread is the taxable equivalent rate earned on average enterprise interest-earning assets less the rate paid on average enterprise interest-bearing liabilities, excluding corporate interest-earning assets and liabilities and customer assets held by third parties.

(10) Interest coverage represents the ratio of the Company’s EBITDA to its corporate interest expense. The interest coverage ratio calculated based on the Company’s net income (loss) to its corporate interest expense was 3.0, 2.4, and 1.7 for the three months ended September 30, 2014, June 30, 2014, and September 30, 2013, respectively.

(11) E*TRADE Bank net income is calculated as follows (dollars in millions):

Q3 2014 Q2 2014 Q3 2013
Total net revenue $ 427 $ 426 $ 397
Provision for loan losses 10 12 37
Total operating expenses 238 254 221
Other income (expense) (1 ) (1 ) (0 )
Income before income taxes 178 159 139
Income tax expense 59 53 54
Net income $ 119 $ 106 $ 85

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

(13) Customer assets held by third parties are held outside E*TRADE Financial and include money market funds and sweep deposit accounts at unaffiliated financial institutions. Customer assets held by third parties are not reflected in the Company’s consolidated balance sheet and are not immediately available for liquidity purposes. However, we maintain the ability to bring these customer assets back on-balance sheet with appropriate notification to the third parties.

(14) Net new customer assets are total inflows to all new and existing customer accounts less total outflows from all closed and existing customer accounts. The net new banking assets and net new brokerage assets metrics treat asset flows between E*TRADE entities in the same manner as unrelated third party accounts.

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

Q3 2014 Q2 2014 Q3 2013
One- to four-family $ 131 $ 137 $ 424
Home equity 267 274 286
Total charge-offs $ 398 $ 411 $ 710

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

(17) The TDR loan performance detail is a subset of the Company’s total loan performance. TDRs include loan modifications performed under the Company’s modification programs. Beginning in Q412, loans that had been charged-off due to bankruptcy notification were also considered TDRs.

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

Q3 2014 Q2 2014 Q3 2013
Modified loans $ 357 $ 364 $ 1,253
Bankruptcy loans 181 181 196
Total TDRs $ 538 $ 545 $ 1,449

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

(20) Includes loans held-for-sale and excludes loans to customers on margin.

(21) Scheduled balances for FHLB advances and securities sold under agreements to repurchase are shown below (dollars in millions):

Date Balance
12/31/2014 $ 4,570
12/31/2015 $ 4,205
12/31/2016 $ 3,510
12/31/2017 $ 2,655
12/31/2018 $ 1,940
12/31/2019 $ 1,445
12/31/2020 $ 1,150
12/31/2021 $ 1,050
12/31/2022 $

(22) Represents gross-up for tax-exempt securities.

(23) Includes interest earned on average customer assets of $14.6 billion, $14.1 billion and $12.0 billion for the quarters ended September 30, 2014, June 30, 2014, and September 30, 2013, respectively, held by third parties outside E*TRADE Financial, including money market funds and sweep deposit accounts at unaffiliated financial institutions.

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