Company News »

E*TRADE Financial Corporation Announces First Quarter 2015 Results

Business Wire
Share on StockTwits
Published on

E*TRADE Financial Corporation (NASDAQ:ETFC) :

First Quarter Results

  • Net income of $40 million, or $0.14 per share
  • Net income of $85 million(1), or $0.29 per share(1) excluding a charge related to the early extinguishment of corporate debt
  • Total net revenue of $456 million
  • Total operating expenses of $300 million
  • Provision for loan losses of $5 million
  • Daily Average Revenue Trades (DARTs) of 170,000
  • End of period margin receivables of $8.2 billion
  • Net new brokerage accounts of 39,000; annualized attrition rate of 8.8 percent
  • Net new brokerage assets of $3.5 billion; end of period customer assets of $299 billion

E*TRADE Financial Corporation (NASDAQ:ETFC) today announced results for its first quarter ended March 31, 2015, reporting net income of $40 million, or $0.14 per share, compared to $41 million, or $0.14 per share, from the prior quarter. Excluding pre-tax losses on early extinguishment of corporate debt of $73 million in the first quarter of 2015 and $59 million in the prior quarter, net income would have been $85 million(1), or $0.29 per share(1), and $78 million(1) or $0.26 per share(1). This also compares with net income of $97 million, or $0.33 per share in the first quarter of 2014. Total net revenue of $456 million decreased from $461 million in the prior quarter and $475 million in the first quarter of 2014.

“Our year is off to a solid start on several fronts,” said Paul Idzik, Chief Executive Officer. “Our core business is strong and growing stronger, demonstrated by healthy trading levels, record high margin balances and continued growth in accounts and assets. The key regulatory approvals we announced at the beginning of the year enabled us to reduce our corporate debt to our target level of $1 billion. We will ultimately have more than a few options for further capital deployment as the team’s hard work has led to a level of capital flexibility this company hasn’t seen in years. As we move forward I can promise we will never stop focusing on two things: our customer experience, and on being a good and faithful steward of capital for our owners.”

E*TRADE reported DARTs of 170,000 during the quarter, an increase of one percent from the prior quarter and a decrease of 14 percent versus the same quarter a year ago.

The Company ended the quarter with 3.2 million brokerage accounts, an increase of 39,000 from the prior quarter. This compared with 17,000 net new brokerage accounts in the prior quarter and 72,000 in the first quarter of 2014. Brokerage account attrition for the first quarter was 8.8 percent annualized.

The Company ended the quarter with $299 billion in total customer assets, compared with $290 billion at the end of the prior quarter and $269 billion from a year ago.

During the quarter, customers added $3.5 billion in net new brokerage assets, representing an annualized growth rate of 5.7 percent. Brokerage related cash increased by $0.5 billion to $41.6 billion during the first quarter. Customers were net buyers of approximately $3.1 billion of securities. Margin receivables averaged $7.9 billion in the quarter, flat with the prior quarter and up 14 percent year over year, ending the quarter at $8.2 billion.

Corporate cash ended the quarter at $258 million(2), an increase of $25 million from the prior quarter, primarily due to a $434 million dividend from E*TRADE Securities and a $75 million dividend from the bank, offset by the use of $432 million to reduce and refinance corporate debt.

Net operating interest income(3) for the first quarter was $271 million, down from $279 million in the prior quarter and up from $263 million a year ago. First quarter results reflected a net interest spread of 2.62 percent on average interest-earning assets of $41.1 billion, compared with 2.69 percent on $40.9 billion in the prior quarter and 2.47 percent on $42.1 billion in the first quarter of 2014.

Commissions, fees and service charges(3), and other revenue in the first quarter were $176 million, flat with the prior quarter and down from $187 million in the first quarter of 2014. Average commission per trade for the quarter was $10.94, compared with $10.84 in the prior quarter, and $10.64 in the first quarter of 2014.

Total net revenue in the quarter also included $9 million of net gains on loans and securities. This compared with $6 million in the prior quarter and $15 million in the first quarter of 2014.

Total operating expenses in the quarter of $300 million increased $6 million sequentially, and increased $10 million from the year ago period.

In March 2015, the Company completed a transaction to reduce and refinance a portion of its corporate debt. The issuance of $460 million of 4.625% Senior Notes due 2023, along with approximately $432 million of corporate cash were used to redeem $800 million of 6.375% Senior Notes due 2019. The transaction, which resulted in a pre-tax loss of $73 million on early extinguishment of debt, reduced the Company’s debt burden by $340 million and lowered its annual debt service costs by approximately $30 million on a pre-tax basis.

The Company’s loan portfolio ended the quarter at $6.1 billion, contracting approximately $0.3 billion from the prior quarter. First quarter provision for loan losses of $5 million decreased from $10 million in the previous quarter.

Net charge-offs in the quarter were $7 million, flat with the prior quarter. The allowance for loan losses ended the quarter at $402 million, down $2 million from the previous quarter.

As of March 31, 2015, the Company reported bank and consolidated Tier 1 leverage ratios under the Basel III Standardized Approach of 9.8 percent(4) and 8.4 percent(5). In the previous quarter the Company reported bank and consolidated Tier 1 leverage ratios of 10.6 percent(4) and 8.1 percent(5) prior to the implementation of Basel III and the move of E*TRADE Securities.

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 800-735-5968 while international participants should dial +1 212-271-4651. 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 (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 capital generation at the Company, dividend requests from the bank, and future capital deployment by the Company and its subsidiaries 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) 2015 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
March 31, December 31, March 31,
2015 2014 2014
Revenue:
Operating interest income $ 316 $ 326 $ 319
Operating interest expense (45 ) (47 ) (56 )
Net operating interest income 271 279 263
Commissions 114 115 128
Fees and service charges 52 52 50
Principal transactions 10
Gains on loans and securities, net 9 6 15
Other revenues 10 9 9
Total non-interest income 185 182 212
Total net revenue 456 461 475
Provision for loan losses 5 10 4
Operating expense:
Compensation and benefits 113 107 98
Advertising and market development 34 32 34
Clearing and servicing 24 22 28
FDIC insurance premiums 18 18 24
Professional services 27 33 24
Occupancy and equipment 21 20 18
Communications 19 18 18
Depreciation and amortization 20 18 21
Amortization of other intangibles 5 6 5
Facility restructuring and other exit activities 4 2 3
Other operating expenses 15 18 17
Total operating expense 300 294 290
Income before other income (expense) and income tax expense 151 157 181
Other income (expense):
Corporate interest expense (21 ) (27 ) (28 )
Losses on early extinguishment of debt (73 ) (59 ) (12 )
Equity in income of investments and other 6 3
Total other income (expense) (88 ) (86 ) (37 )
Income before income tax expense 63 71 144
Income tax expense 23 30 47
Net income $ 40 $ 41 $ 97
Basic earnings per share $ 0.14 $ 0.14 $ 0.34
Diluted earnings per share $ 0.14 $ 0.14 $ 0.33
Shares used in computation of per share data:
Basic (in thousands) 289,741 289,209 288,051
Diluted (in thousands) 294,722 294,364 293,819
E*TRADE FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheet
(In millions, except share data)
(Unaudited)
March 31, December 31, March 31,
2015 2014 2014
ASSETS
Cash and equivalents $ 1,025 $ 1,783 $ 1,585
Cash required to be segregated under federal or other regulations 849 555 981
Available-for-sale securities 13,841 12,388 12,766
Held-to-maturity securities 12,517 12,248 11,248
Margin receivables 8,220 7,675 7,346
Loans held-for-sale 795
Loans receivable, net 5,664 5,979 6,982
Investment in FHLB stock 86 88 56
Property and equipment, net 241 245 224
Goodwill 1,792 1,792 1,792
Other intangibles, net 189 194 210
Other assets 2,401 2,583 2,453
Total assets $ 46,825 $ 45,530 $ 46,438
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Deposits $ 26,272 $ 24,890 $ 25,749
Securities sold under agreements to repurchase 3,668 3,672 4,345
Customer payables 6,293 6,455 6,260
FHLB advances and other borrowings 1,304 1,299 1,287
Corporate debt 1,025 1,366 1,769
Other liabilities 2,810 2,473 1,996
Total liabilities 41,372 40,155 41,406
Shareholders’ equity:
Common stock, $0.01 par value, shares authorized: 400,000,000 at
March 31, 2015, December 31, 2014 and March 31, 2014, shares issued
and outstanding: 289,897,529 at March 31, 2015, 289,272,576 at
December 31, 2014 and 288,519,125 at March 31, 2014 3 3 3
Additional paid-in-capital 7,350 7,350 7,333
Accumulated deficit (1,689 ) (1,729 ) (1,925 )
Accumulated other comprehensive loss (211 ) (249 ) (379 )
Total shareholders’ equity 5,453 5,375 5,032
Total liabilities and shareholders’ equity $ 46,825 $ 45,530 $ 46,438

Segment Reporting

Three Months Ended March 31, 2015

Trading and
Investing

Balance Sheet
Management

Corporate/
Other

Eliminations(6) Total
(In millions)
Revenue:
Operating interest income $ 169 $ 218 $ $ (71 ) $ 316
Operating interest expense (4 ) (112 ) 71 (45 )
Net operating interest income 165 106 271
Commissions 114 114
Fees and service charges 52 52
Gains on loans and securities, net 9 9
Other revenues 8 2 10
Total non-interest income 174 11 185
Total net revenue 339 117 456
Provision for loan losses 5 5
Operating expense:
Compensation and benefits 78 4 31 113
Advertising and market development 34 34
Clearing and servicing 16 8 24
FDIC insurance premiums 18 18
Professional services 13 2 12 27
Occupancy and equipment 17 4 21
Communications 19 19
Depreciation and amortization 16 4 20
Amortization of other intangibles 5 5
Facility restructuring and other exit activities 4 4
Other operating expenses 5 4 6 15
Total operating expense 203 36 61 300
Segment income (loss) before other income (expense) 136 76 (61 ) 151
Other income (expense):
Corporate interest expense (21 ) (21 )
Losses on early extinguishment of debt (73 ) (73 )
Equity in income of investments and other 6 6
Total other income (expense) (88 ) (88 )
Segment income (loss) $ 136 $ 76 $ (149 ) $ $ 63
Three Months Ended December 31, 2014

Trading and
Investing

Balance Sheet
Management

Corporate/
Other

Eliminations(6) Total
(In millions)
Revenue:
Operating interest income $ 172 $ 223 $ 1 $ (70 ) $ 326
Operating interest expense (3 ) (114 ) 70 (47 )
Net operating interest income 169 109 1 279
Commissions 115 115
Fees and service charges 52 52
Gains on loans and securities, net 6 6
Other revenues 7 2 9
Total non-interest income 174 8 182
Total net revenue 343 117 1 461
Provision for loan losses 10 10
Operating expense:
Compensation and benefits 69 3 35 107
Advertising and market development 32 32
Clearing and servicing 14 8 22
FDIC insurance premiums 18 18
Professional services 15 1 17 33
Occupancy and equipment 15 1 4 20
Communications 17 1 18
Depreciation and amortization 14 4 18
Amortization of other intangibles 6 6
Facility restructuring and other exit activities 2 2
Other operating expenses 10 4 4 18
Total operating expense 192 35 67 294
Segment income (loss) before other income (expense) 151 72 (66 ) 157
Other income (expense):
Corporate interest expense (27 ) (27 )
Losses on early extinguishment of debt (59 ) (59 )
Total other income (expense) (86 ) (86 )
Segment income (loss) $ 151 $ 72 $ (152 ) $ $ 71
Three Months Ended March 31, 2014

Trading and
Investing

Balance Sheet
Management

Corporate/
Other

Eliminations(6) Total
(In millions)
Revenue:
Operating interest income $ 145 $ 240 $ $ (66 ) $ 319
Operating interest expense (5 ) (117 ) 66 (56 )
Net operating interest income 140 123 263
Commissions 128 128
Fees and service charges 50 50
Principal transactions 10 10
Gains on loans and securities, net 15 15
Other revenues 8 1 9
Total non-interest income 196 16 212
Total net revenue 336 139 475
Provision for loan losses 4 4
Operating expense:
Compensation and benefits 71 3 24 98
Advertising and market development 34 34
Clearing and servicing 18 10 28
FDIC insurance premiums 24 24
Professional services 12 12 24
Occupancy and equipment 15 3 18
Communications 17 1 18
Depreciation and amortization 16 5 21
Amortization of other intangibles 5 5
Facility restructuring and other exit activities 3 3
Other operating expenses 7 3 7 17
Total operating expense 195 41 54 290
Segment income (loss) before other income (expense) 141 94 (54 ) 181
Other income (expense):
Corporate interest expense (28 ) (28 )
Losses on early extinguishment of debt (12 ) (12 )
Equity in income of investments and other 3 3
Total other income (expense) (37 ) (37 )
Segment income (loss) $ 141 $ 94 $ (91 ) $ $ 144

Key Performance Metrics(7)

Corporate Metrics

Qtr ended
3/31/15

Qtr ended
12/31/14

Qtr ended
3/31/15
vs.
12/31/14

Qtr ended
3/31/14

Qtr ended
3/31/15
vs.
3/31/14

Operating margin %(8)

Consolidated
Trading and Investing 33 % 34 % (1)% 38 % (5)%
Balance Sheet Management 40 % 44 % (4)% 42 % (2)%
65 % 62 % 3 % 68 % (3)%
Employees
Consultants and other 3,250 3,221 1 % 3,013 8 %
Total headcount 105 156 (33)% 131 (20)%
3,355 3,377 (1)% 3,144 7 %
Book value per share
Tangible book value per share(9) $ 18.81 $ 18.58 1 % $ 17.44 8 %
$ 13.38 $ 13.08 2 % $ 11.76 14 %
Corporate cash ($MM)(2)
$ 258 $ 233 11 % $ 525 (51)%
Enterprise net interest spread (basis points)(10)
Enterprise interest-earning assets, average ($MM) 262 269 (3)% 247 6 %
$ 41,086 $ 40,905 0 % $ 42,114 (2)%

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

Net income
Income tax expense $ 40 $ 41 (2)% $ 97 (59)%
Depreciation & amortization 23 30 (23)% 47 (51)%
Corporate interest expense 25 24 4 % 26 (4)%
EBITDA 21 27 (22)% 28 (25)%
$ 109 $ 122 (11)% $ 198 (45)%
Interest coverage(11)
5.2 4.5 N.M. 6.9 N.M.
E*TRADE Bank net income ($MM)(12)
$ 92 $ 112 (18)% $ 116 (21)%

Trading and Investing Metrics

Trading days 61.0 63.0 N.M. 61.0 N.M.
DARTs 169,951 168,318 1 % 197,944 (14)%
Total trades (MM) 10.4 10.6 (2)% 12.1 (14)%
Average commission per trade $ 10.94 $ 10.84 1 % $ 10.64 3 %
End of period margin receivables ($B) $ 8.2 $ 7.7 6 % $ 7.3 12 %
Average margin receivables ($B) $ 7.9 $ 7.9 0 % $ 6.9 14 %
Gross new brokerage accounts 107,887 88,689 22 % 125,342 (14)%
Gross new stock plan accounts 65,133 55,746 17 % 56,693 15 %
Gross new banking accounts 1,249 1,528 (18)% 2,658 (53)%
Closed accounts (131,040) (138,043) N.M. (112,559) N.M.
Net new accounts 43,229 7,920 N.M. 72,134 N.M.
Net new brokerage accounts 38,716 17,447 N.M. 71,902 N.M.
Net new stock plan accounts 9,684 55 N.M. 8,822 N.M.
Net new banking accounts (5,171) (9,582) N.M. (8,590) N.M.
Net new accounts 43,229 7,920 N.M. 72,134 N.M.
End of period brokerage accounts 3,182,639 3,143,923 1 % 3,069,961 4 %
End of period stock plan accounts 1,273,468 1,263,784 1 % 1,228,395 4 %
End of period banking accounts 356,873 362,044 (1)% 387,548 (8)%
End of period total accounts 4,812,980 4,769,751 1 % 4,685,904 3 %
Annualized brokerage account attrition rate(13) 8.8% 9.1% N.M. 7.1% N.M.

Customer Assets ($B)

Security holdings $ 213.8 $ 204.7 4 % $ 187.2 14 %
Customer payables (cash) 6.3 6.5 (3)% 6.3 0 %
Customer assets held by third parties(14) 14.8 15.5 (5)% 14.4 3 %
Sweep deposits 20.5 19.1 7 % 19.4 6 %
Brokerage customer assets 255.4 245.8 4 % 227.3 12 %
Unexercised stock plan customer holdings (vested) 38.2 38.7 (1)% 35.4 8 %
Savings, checking and other banking customer assets 5.8 5.8 0 % 6.3 (8)%
Total customer assets $ 299.4 $ 290.3 3 % $ 269.0 11 %
Net new brokerage assets ($B)(15) $ 3.5 $ 3.5 N.M. $ 4.1 N.M.
Net new banking assets ($B)(15) 0.0 (0.1) N.M. (0.0) N.M.
Net new customer assets ($B)(15) $ 3.5 $ 3.4 N.M. $ 4.1 N.M.
Brokerage related cash ($B) $ 41.6 $ 41.1 1 % $ 40.1 4 %
Other customer cash and deposits ($B) 5.8 5.8 0 % 6.3 (8)%
Total customer cash and deposits ($B) $ 47.4 $ 46.9 1 % $ 46.4 2 %
Stock plan customer holdings (unvested) ($B) $ 79.2 $ 79.5 0 % $ 68.9 15 %
Customer net buy activity ($B) $ (3.1) $ (1.2) N.M. $ (3.9) N.M.

Balance Sheet Management Metrics

Loans receivable ($MM)

Average loans receivable $ 6,203 $ 6,520 $ (317) $ 8,360 $ (2,157)
Ending loans receivable, net $ 5,664 $ 5,979 $ (315) $ 6,982 $ (1,318)

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

One- to Four-Family

Current $ 2,687 $ 2,833 $ (146) $ 3,195 $ (508)
30-89 days delinquent 107 88 19 123 (16)
90-179 days delinquent 25 28 (3) 27 (2)
Total 30-179 days delinquent 132 116 16 150 (18)

180+ days delinquent (net of $47M, $48M and $64M in charge-offs for Q115,
Q414 and Q114, respectively)

129 131 (2) 149 (20)
Total delinquent loans(16) 261 247 14 299 (38)
Gross loans receivable(17) $ 2,948 $ 3,080 (132) $ 3,494 (546)

Home Equity

Current $ 2,541 $ 2,710 $ (169) $ 3,180 $ (639)
30-89 days delinquent 77 60 17 62 15
90-179 days delinquent 27 29 (2) 38 (11)
Total 30-179 days delinquent 104 89 15 100 4

180+ days delinquent (net of $25M, $25M and $24M in charge-offs for Q115,
Q414 and Q114, respectively)

42 43 (1) 41 1
Total delinquent loans(16) 146 132 14 141 5
Gross loans receivable(17) $ 2,687 $ 2,842 (155) $ 3,321 (634)

Consumer and Other

Current $ 423 $ 453 $ (30) $ 558 $ (135)
30-89 days delinquent 7 7 10 (3)
90-179 days delinquent 1 1 2 (1)
Total 30-179 days delinquent 8 8 12 (4)
180+ days delinquent
Total delinquent loans 8 8 12 (4)
Gross loans receivable(17) $ 431 $ 461 (30) $ 570 (139)

Total Loans Receivable

Current $ 5,651 $ 5,996 $ (345) $ 6,933 $ (1,282)
30-89 days delinquent 191 155 36 195 (4)
90-179 days delinquent 53 58 (5) 67 (14)
Total 30-179 days delinquent 244 213 31 262 (18)
180+ days delinquent 171 174 (3) 190 (19)
Total delinquent loans(16) 415 387 28 452 (37)
Gross loans receivable(17) $ 6,066 $ 6,383 (317) $ 7,385 (1,319)

TDR performance detail ($MM)(18)

One- to Four-Family TDRs

Current $ 219 $ 232 $ (13) $ 244 $ (25)
30-89 days delinquent 30 24 6 21 9
90-179 days delinquent 10 12 (2) 8 2
Total 30-179 days delinquent 40 36 4 29 11

180+ days delinquent (net of $24M, $23M and $24M in charge-offs for Q115,
Q414 and Q114, respectively)

50 48 2 48 2
Total delinquent TDRs 90 84 6 77 13
TDRs $ 309 $ 316 (7) $ 321 (12)

Home Equity TDRs

Current $ 184 $ 178 $ 6 $ 189 $ (5)
30-89 days delinquent 17 14 3 15 2
90-179 days delinquent 6 6 9 (3)
Total 30-179 days delinquent 23 20 3 24 (1)

180+ days delinquent (net of $16M, $15M and $15M in charge-offs for Q115,
Q414 and Q114, respectively)

18 19 (1) 19 (1)
Total delinquent TDRs 41 39 2 43 (2)
TDRs $ 225 $ 217 8 $ 232 (7)

Total TDRs

Current $ 403 $ 410 $ (7) $ 433 $ (30)
30-89 days delinquent 47 38 9 36 11
90-179 days delinquent 16 18 (2) 17 (1)
Total 30-179 days delinquent 63 56 7 53 10
180+ days delinquent 68 67 1 67 1
Total delinquent TDRs 131 123 8 120 11
TDRs $ 534 $ 533 1 $ 553 (19)

Capital Metrics(19)

E*TRADE Bank

Tier 1 leverage ratio(4) 9.8% 10.6 % (0.8)% 9.7 % 0.1%
Tier 1 risk-based capital ratio(4) 42.4% 25.7 % 16.7% 22.8 % 19.6%
Total risk-based capital ratio(4) 43.7% 26.9 % 16.8% 24.0 % 19.7%
Common Equity Tier 1 ratio(4) 42.4% N/A N.M. N/A N.M.
Tier 1 common ratio(4) N/A 25.7 % N.M. 22.8 % N.M.

E*TRADE Financial

Tier 1 leverage ratio(5) 8.4% 8.1 % 0.3% 7.0 % 1.4%
Tier 1 risk-based capital ratio(5) 35.0% 19.6 % 15.4% 16.7 % 18.3%
Total risk-based capital ratio(5) 39.4% 20.8 % 18.6% 18.0 % 21.4%
Common Equity Tier 1 ratio(5) 35.0% N/A N.M. N/A N.M.
Tier 1 common ratio(5) N/A 17.1 % N.M. 14.3 % N.M.
Activity in Allowance for Loan Losses
Three Months Ended March 31, 2015

One- to Four-
Family

Home Equity

Consumer
and Other

Total
(In millions)
Allowance for loan losses, ending 12/31/14 $ 27 $ 367 $ 10 $ 404
Provision for loan losses 5 (2 ) 2 5
Charge-offs, net (1 ) (5 ) (1 ) (7 )
Allowance for loan losses, ending 3/31/15 $ 31 $ 360 $ 11 $ 402
Three Months Ended December 31, 2014

One- to Four-
Family

Home Equity

Consumer
and Other

Total
(In millions)
Allowance for loan losses, ending 9/30/14 $ 27 $ 360 $ 14 $ 401
Provision for loan losses 12 (2 ) 10
Charge-offs, net (5 ) (2 ) (7 )
Allowance for loan losses, ending 12/31/14 $ 27 $ 367 $ 10 $ 404
Three Months Ended March 31, 2014

One- to Four-
Family

Home Equity

Consumer
and Other

Total
(In millions)
Allowance for loan losses, ending 12/31/13 $ 102 $ 326 $ 25 $ 453
Provision for loan losses (18 ) 20 2 4
Charge-offs, net (32 ) (19 ) (3 ) (54 )
Allowance for loan losses, ending 3/31/14 $ 52 $ 327 $ 24 $ 403

Specific Valuation Allowance Activity(20)

As of March 31, 2015

Recorded
Investment in
Modifications
before charge-
offs

Charge-offs

Recorded
Investment in
Modifications

Specific
Valuation
Allowance

Net Investment
in
Modifications

Specific
Valuation
Allowance as a
% of
Modifications

Total
Expected
Losses(21)

(Dollars in millions)
One- to four-family $ 225 $ (45 ) $ 180 $ (11 ) $ 169 6 % 24 %
Home equity 312 (132 ) 180 (62 ) 118 35 % 62 %
Total $ 537 $ (177 ) $ 360 $ (73 ) $ 287 20 % 46 %
As of December 31, 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(21)

(Dollars in millions)
One- to four-family $ 231 $ (46 ) $ 185 $ (9 ) $ 176 5 % 24 %
Home equity 305 (136 ) 169 (57 ) 112 34 % 63 %
Total $ 536 $ (182 ) $ 354 $ (66 ) $ 288 19 % 46 %
As of March 31, 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(21)

(Dollars in millions)
One- to four-family $ 229 $ (44 ) $ 185 $ (15 ) $ 170 8 % 26 %
Home equity 330 (148 ) 182 (60 ) 122 33 % 63 %
Total $ 559 $ (192 ) $ 367 $ (75 ) $ 292 20 % 48 %

Average Enterprise Balance Sheet Data

Three Months Ended
March 31, 2015
Average

Operating
Interest

Average
Balance Inc./Exp. Yield/Cost
Enterprise interest-earning assets: (In millions)
Loans(22) $ 6,204 $ 62 4.00 %
Available-for-sale securities 12,341 66 2.15 %
Held-to-maturity securities 12,279 88 2.86 %
Margin receivables 7,888 68 3.49 %
Cash and equivalents 1,408 1 0.18 %
Segregated cash 309 0.08 %
Securities borrowed and other 657 31 19.13 %
Total enterprise interest-earning assets $ 41,086 316 3.09 %
Enterprise interest-bearing liabilities:
Deposits $ 25,051 $ 2 0.03 %
Customer payables 6,388 1 0.08 %
Securities sold under agreements to repurchase(23) 3,729 26 2.77 %
FHLB advances and other borrowings(23) 1,301 15 4.65 %
Securities loaned and other 1,759 1 0.13 %
Total enterprise interest-bearing liabilities $ 38,228 45 0.47 %
Enterprise net interest income/spread(10) $ 271 2.62 %
Three Months Ended
December 31, 2014
Average

Operating
Interest

Average
Balance Inc./Exp. Yield/Cost
Enterprise interest-earning assets: (In millions)
Loans(22) $ 6,532 $ 66 4.07 %
Available-for-sale securities 12,231 68 2.20 %
Held-to-maturity securities 11,921 88 2.96 %
Margin receivables 7,859 70 3.53 %
Cash and equivalents 1,341 1 0.13 %
Segregated cash 406 0.15 %
Securities borrowed and other 615 32 21.27 %
Total enterprise interest-earning assets $ 40,905 325 3.17 %
Enterprise interest-bearing liabilities:
Deposits $ 24,694 $ 2 0.03 %
Customer payables 6,420 1 0.08 %
Securities sold under agreements to repurchase(23) 3,761 28 2.91 %
FHLB advances and other borrowings(23) 1,295 15 4.68 %
Securities loaned and other 1,701 0.04 %
Total enterprise interest-bearing liabilities $ 37,871 46 0.48 %
Enterprise net interest income/spread(10) $ 279 2.69 %
Three Months Ended
March 31, 2014
Average

Operating
Interest

Average
Balance Inc./Exp. Yield/Cost
Enterprise interest-earning assets: (In millions)
Loans(22) $ 8,397 $ 84 3.99 %
Available-for-sale securities 13,492 79 2.33 %
Held-to-maturity securities 10,551 77 2.90 %
Margin receivables 6,937 62 3.64 %
Cash and equivalents 1,148 0.15 %
Segregated cash 837 0.11 %
Securities borrowed and other 752 17 9.42 %
Total enterprise interest-earning assets $ 42,114 319 3.05 %
Enterprise interest-bearing liabilities:
Deposits $ 25,693 $ 2 0.03 %
Customer payables 6,371 2 0.15 %
Securities sold under agreements to repurchase(23) 4,457 35 3.14 %
FHLB advances and other borrowings(23) 1,281 17 5.28 %
Securities loaned and other 1,226 0.05 %
Total enterprise interest-bearing liabilities $ 39,028 56 0.58 %
Enterprise net interest income/spread(10) $ 263 2.47 %

Explanation of Non-GAAP Measures and Certain Metrics

Management believes that net income and EPS excluding the loss on the early extinguishment of corporate debt, corporate cash, tangible book value per share, EBITDA, interest coverage, E*TRADE Bank Tier 1 common ratio and E*TRADE Financial capital ratios calculated prior to Basel III becoming effective for the Company on January 1, 2015 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.

Net Income and EPS Excluding the Loss on Early Extinguishment of Corporate Debt

Management believes that excluding the loss on the early extinguishment of corporate debt from net income and EPS provides useful additional measures of the Company’s ongoing operating performance because the charge is not directly related to our 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 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 (2) 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 (9) 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 (11) 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

Prior to Basel III becoming effective for the Company on January 1, 2015, E*TRADE Financial capital ratios, including Tier 1 leverage, Tier 1 risk-based capital and total risk-based capital ratios, were based on the Federal Reserve regulatory minimum well-capitalized threshold. E*TRADE Bank’s and E*TRADE Financial’s Tier 1 common ratios were 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 capital ratios are an important measure of E*TRADE Bank’s and the Company’s capital strength. See endnotes (4) and (5) 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 net income and EPS after adjusting for the loss on early extinguishment of corporate debt to GAAP net income and EPS (dollars in millions, except for per share amounts):

Q1 2015 Q4 2014
Amount Diluted EPS Amount Diluted EPS
Net income $ 40 $ 0.14 $ 41 $ 0.14
Add back impact of corporate debt reduction and refinance:
Loss on early extinguishment of corporate debt 73 0.25 59 0.20
Income tax related to loss on early extinguishment of corporate debt (28 ) (0.10 ) (22 ) (0.08 )
Net of tax 45 0.15 37 0.12
Adjusted net income $ 85 $ 0.29 $ 78 $ 0.26

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

Q1 2015 Q4 2014 Q1 2014
Corporate cash $ 258 $ 233 $ 525
Bank cash 606 1,523 1,036

E*TRADE Securities cash(a)

134 N/A N/A
International brokerage and other cash 27 27 24
Total consolidated cash and equivalents $ 1,025 $ 1,783 $ 1,585
(a)

Prior to the E*TRADE Securities move out from under E*TRADE Bank in February 2015, E*TRADE Securities’ cash was included in the “Bank cash” line item.

(3) Beginning in the first quarter of 2015, the Company reclassified the revenue earned on customer assets held by third parties from operating interest income to fees and service charges. Prior periods have been reclassified to conform to the current period presentation.

(4) E*TRADE Bank’s Tier 1 leverage, Tier 1 risk-based capital, total risk-based capital and Common Equity Tier 1 ratios are preliminary for the current period. Prior to Basel III becoming effective for E*TRADE Bank on January 1, 2015, E*TRADE Bank’s Tier 1 common ratio was a non-GAAP measure that management believes is an important measure of capital strength. Common Equity Tier 1 capital under Basel III replaced Tier 1 common capital. E*TRADE Bank’s capital ratios are calculated as follows (dollars in millions):

Q1 2015 Q4 2014 Q1 2014

E*TRADE Bank shareholder’s equity(a)

$ 4,165 $ 6,102 $ 5,857
DEDUCT:
Losses in OCI on AFS debt securities and cash flow hedges, net of tax (216 ) (255 ) (384 )
Goodwill & other intangible assets, net of deferred tax liabilities 38 1,467 1,513
Disallowed servicing assets and deferred tax assets 66 342 532

E*TRADE Bank Tier 1 capital/Common Equity Tier 1 capital(b)

4,277 N/A N/A

E*TRADE Bank Tier 1 capital/Tier 1 common capital(b)

N/A 4,548 4,196
ADD:
Allowable allowance for loan losses 130 224 233
E*TRADE Bank total capital $ 4,407 $ 4,772 $ 4,429

E*TRADE Bank average/total assets(a)(c)

$ 43,622 $ 44,672 $ 45,323
DEDUCT:
Losses in OCI on AFS debt securities and cash flow asset hedges, net of tax (13 ) (102 )
Goodwill & other intangible assets, net of deferred tax liabilities 38 1,467 1,513
Disallowed servicing assets and deferred tax assets 66 342 532
E*TRADE Bank adjusted total assets for leverage capital purposes $ 43,518 $ 42,876 $ 43,380

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

$ 10,094 $ 17,717 $ 18,439

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

9.8 % 10.6 % 9.7 %
E*TRADE Bank Tier 1 capital / Total risk-weighted assets 42.4 % 25.7 % 22.8 %
E*TRADE Bank total capital / Total risk-weighted assets 43.7 % 26.9 % 24.0 %
E*TRADE Bank Common Equity Tier 1 capital / Total risk-weighted assets 42.4 % N/A N/A
E*TRADE Bank Tier 1 common capital / Total risk-weighted assets N/A 25.7 % 22.8 %
(a) Amounts presented for E*TRADE Bank exclude E*TRADE Securities as of February 1, 2015. We recently received regulatory approval to move both E*TRADE Clearing and E*TRADE Securities out from under E*TRADE Bank. E*TRADE Securities was moved from under E*TRADE Bank effective February 1, 2015 and we plan to move E*TRADE Clearing later in 2015.
(b) Common Equity Tier 1 capital under Basel III replaced Tier 1 common capital.
(c) As of March 31, 2015, E*TRADE Bank’s Tier 1 Leverage ratio was calculated using average total assets. Prior to Basel III becoming effective for E*TRADE Bank, E*TRADE Bank’s Tier 1 Leverage ratio was calculated using end of period total assets.
(d) 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) E*TRADE Financial’s Tier 1 leverage, Tier 1 risk-based capital, total risk-based capital and Common Equity Tier 1 ratios are preliminary for the current period. Prior to Basel III becoming effective for E*TRADE Financial on January 1, 2015, E*TRADE Financial’s capital ratios were based on the Federal Reserve’s well-capitalized requirements as management believes these ratios are an important measure of the Company’s capital strength and managed capital against ratios then applicable to bank holding companies in preparation for the application of these requirements. Common Equity Tier 1 capital under Basel III replaced Tier 1 common capital. E*TRADE Financial’s capital ratios are calculated as follows (dollars in millions):

Q1 2015 Q4 2014 Q1 2014
E*TRADE Financial shareholders’ equity $ 5,453 $ 5,375 $ 5,032
DEDUCT:
Losses in OCI on AFS debt securities and cash flow hedges, net of tax (216 ) (255 ) (384 )
Goodwill & other intangible assets, net of deferred tax liabilities 1,451 1,592 1,638
Disallowed servicing assets and deferred tax assets 645 1,008 1,138

Other(a)

(108 )

E*TRADE Financial Common Equity Tier 1 capital(b)

3,681 N/A N/A

E*TRADE Financial Tier 1 common capital(b)

N/A 3,030 2,640
ADD:

Qualifying restricted core capital elements (TRUPs)(a)

433 433
E*TRADE Financial Tier 1 capital 3,681 3,463 3,073
ADD:
Allowable allowance for loan losses 140 223 232

Non-qualifying capital instruments subject to phase-out (TRUPs)(a)

325
E*TRADE Financial total capital $ 4,146 $ 3,686 $ 3,305
E*TRADE Financial average total assets $ 45,931 $ 45,445 $ 46,382
DEDUCT:
Goodwill & other intangible assets, net of deferred tax liabilities 1,451 1,592 1,638
Disallowed servicing assets and deferred tax assets 645 1,008 1,138

Other(a)

(108 )
Adjusted average total assets for leverage capital purposes $ 43,943 $ 42,845 $ 43,606

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

$ 10,522 $ 17,683 $ 18,403

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

8.4 % 8.1 % 7.0 %
E*TRADE Financial Tier 1 capital / Total risk-weighted assets 35.0 % 19.6 % 16.7 %
E*TRADE Financial total capital / Total risk-weighted assets 39.4 % 20.8 % 18.0 %
E*TRADE Financial Common Equity Tier 1 capital / Total risk-weighted assets 35.0 % N/A N/A
E*TRADE Financial Tier 1 common / Total risk-weighted assets N/A 17.1 % 14.3 %
(a) As a result of applying the transition provisions under Basel III, the Company included 25% of the TRUPs in the calculation of E*TRADE Financial’s Tier 1 capital and 75% of the TRUPs in the calculation of E*TRADE Financial’s total capital. Prior to Basel III becoming effective for E*TRADE Financial, the Company included 100% of the TRUPs in E*TRADE Financial’s Tier 1 capital due to the regulatory agencies’ delay in the implementation of the TRUPs phase-out until January 1, 2015.
(b) Common Equity Tier 1 capital under Basel III replaced Tier 1 common capital.
(c) 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.

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

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

(8) 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.

(9) 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):

Q1 2015 Q4 2014 Q1 2014
Book value $ 5,453 $ 5,375 $ 5,032
Less: Goodwill and other intangibles, net (1,981 ) (1,986 ) (2,002 )
Less: Deferred tax liability related to goodwill 407 394 364
Tangible book value $ 3,879 $ 3,783 $ 3,394
Q1 2015 Q4 2014 Q1 2014
Book value per share $ 18.81 $ 18.58 $ 17.44
Less: Goodwill and other intangibles, net per share (6.83 ) (6.86 ) (6.94 )
Less: Deferred tax liability related to goodwill per share 1.40 1.36 1.26
Tangible book value per share $ 13.38 $ 13.08 $ 11.76

(10) 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.

(11) 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 to its corporate interest expense was 1.9, 1.5, and 3.4 for the three months ended March 31, 2015, December 31, 2014, and March 31, 2014, respectively.

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

Q1 2015 Q4 2014 Q1 2014
Total net revenue $ 296 $ 448 $ 456
Provision for loan losses 5 10 4
Total operating expenses 138 254 253
Other income (expense) (1 ) (2 ) (12 )
Income before income taxes 152 182 187
Income tax expense 60 70 71
Net income $ 92 $ 112 $ 116

(13) 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.

(14) 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 the majority of these customer assets back on-balance sheet with appropriate notification to the third party financial institutions and customer consent, as appropriate. The following table provides details of customer assets held by third parties (dollars in billions):

Q1 2015 Q4 2014 Q1 2014

Money market fund

$ 7.6 $ 7.2 $ 6.3
Sweep deposits at unaffiliated financial institutions 3.6 4.7 4.5
Subtotal 11.2 11.9 10.8

Municipal funds and other

3.6 3.6 3.6
Total customer assets held by third parties $ 14.8 $ 15.5 $ 14.4

(15) 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.

(16) 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):

Q1 2015 Q4 2014 Q1 2014
One- to four-family $ 123 $ 127 $ 142
Home equity 250 258 280
Total charge-offs $ 373 $ 385 $ 422

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

(18) 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.

(19) Beginning on January 1, 2015, regulatory capital for E*TRADE Bank and E*TRADE Financial was calculated under the Basel III Standardized Approach, subject to transition provisions.

(20) 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):

Q1 2015 Q4 2014 Q1 2014
Modified loans $ 360 $ 354 $ 367
Bankruptcy loans 174 179 186
Total TDRs $ 534 $ 533 $ 553

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

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

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

Date Balance
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 $

Share on StockTwits