E*TRADE Financial Corporation Announces Third Quarter 2015 Results

NEW YORK--(BUSINESS WIRE)--E*TRADE Financial Corporation (NASDAQ:ETFC) today announced results for its third quarter ended September 30, 2015, reporting a net loss of $153 million, or $0.53 per diluted share. This compares to net income of $292 million, or $0.99 per diluted share, in the prior quarter and net income of $86 million, or $0.29 per diluted share, in the third quarter of 2014. The third quarter included charges related to the termination of wholesale funding obligations of $413 million pre-tax, or $251 million after tax. Excluding these charges, net income would have been $98 million⁽¹⁾, or $0.33 per diluted share⁽¹⁾. This compares with adjusted net income of $72 million⁽¹⁾, or $0.25 per diluted share⁽¹⁾ in the prior quarter which excluded an income tax benefit related to finalizing an IRS audit. Total net revenue of $73 million includes $370 million of losses related to the termination of wholesale funding obligations. Excluding these losses, net revenue would have been $443 million⁽¹⁾ compared to $445 million in the prior quarter and $440 million in the third quarter of 2014.

“The third quarter was positive for E*TRADE as our customers remained active in the midst of overall market uncertainty, our risk profile continued to improve, and we took another important leap forward on the capital front,” said Paul Idzik, Chief Executive Officer. “Increased customer trading activity – during what is typically a seasonally slow quarter – was punctuated by an all-time record day in August when we executed 394,000 trades. Our legacy loan portfolio continued its march toward extinction, with third quarter performance that led us to lower reserves. During the quarter we successfully deployed excess capital to eliminate high-cost legacy wholesale funding – a transaction that provides an immediate boost to our earnings power and creates capacity to on-board more valuable customer deposits – an opportunity that we have already begun to seize. As we near the end of 2015, I am optimistic about the opportunities for our business coupled with our ability to continue putting capital to work for our owners.”

E*TRADE also announced that its President, Navtej S. Nandra, will depart at the end of this year. The Company does not intend to replace the position. In connection with his departure, the Company will record a charge of approximately $6 million in the fourth quarter.

E*TRADE reported DARTs of 156,000 during the quarter, an increase of 4 percent from the prior quarter and an increase of 2 percent versus the same quarter a year ago.

The Company ended the quarter with 3.2 million brokerage accounts. Net new accounts in the quarter were 19,000⁽²⁾ which compares to 25,000⁽²⁾ accounts in the prior quarter and 24,000 accounts in the third quarter of 2014. Brokerage account attrition for the third quarter was 9.3 percent annualized⁽²⁾.

The Company ended the quarter with $277 billion in total customer assets, compared with $302 billion at the end of the prior quarter and $282 billion from a year ago.

During the quarter, customers added $2.1 billion in net new brokerage assets. Brokerage related cash decreased by $1.8 billion to $40.2 billion during the third quarter as customers were net buyers of approximately $3.7 billion of securities. Margin receivables averaged $8.0 billion in the quarter, down 1 percent from the prior quarter and up 5 percent year over year, ending the quarter at $7.9 billion.

Corporate cash ended the quarter at $432 million⁽³⁾, an increase of $26 million from the prior quarter, which included a $30 million dividend from E*TRADE Securities.

Net operating interest income⁽⁴⁾ for the third quarter was $263 million, down from $267 million in the prior quarter and $265 million a year ago. Third quarter results reflected a net interest spread of 2.58 percent on average interest-earning assets of $40.4 billion, compared with 2.50 percent on $42.3 billion in the prior quarter and 2.54 percent on $41.3 billion in the third quarter of 2014.

Commissions, fees and service charges⁽⁴⁾, and other revenue in the third quarter were $170 million, up from $167 million in both the prior quarter and the third quarter of 2014. Average commission per trade for the quarter was $10.87, compared with $10.96 in the prior quarter and $11.05 in the third quarter of 2014. Total net revenue in the quarter also included $10 million of net gains on securities and other. This compared with $11 million in the prior quarter and $8 million in the third quarter of 2014.

Total operating expenses in the quarter of $293 million decreased $16 million sequentially, and increased $16 million from the year ago period. The prior quarter included $6 million of executive severance and $9 million related to a third party contract amendment.

Losses on early extinguishment of debt of $39 million included a $43 million loss associated with the termination of wholesale funding obligations, offset by a $4 million gain related to the repurchase of $14 million of trust preferred securities.

The Company’s total assets ended the quarter at $41.2 billion, a decrease of $5.9 billion from the prior quarter. The decrease was driven by the termination of wholesale funding obligations as well as reductions in deposits and customer payables.

The Company’s loan portfolio ended the quarter at $5.3 billion, contracting approximately $0.4 billion from the prior quarter. Net charge-offs in the quarter were $1 million compared with $3 million in the prior quarter and $10 million in the third quarter of 2014. The allowance for loan losses ended the quarter at $376 million, down from $402 million in the prior quarter and $401 million in the third quarter of 2014. The decrease in the allowance resulted in a benefit to provision for loan losses of $25 million which compared with a provision for loan losses of $3 million in the previous quarter and $10 million in the third quarter of 2014.

As of September 30, 2015, the Company reported bank and consolidated Tier 1 leverage ratios of 9.2 percent⁽⁵⁾ and 8.5 percent⁽⁶⁾, compared with 9.8 percent⁽⁵⁾ and 8.5 percent⁽⁶⁾ in the previous 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 p.m. ET today. This conference call will be available to domestic participants by dialing 800-617-1412 while international participants should dial +1 303-223-4365. 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 continued progress on our legacy loan portfolio, opportunities for our business and our ability to continue to put capital to work for the benefit of our owners 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, market volatility, 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.

© 2015 E*TRADE Financial Corporation. All rights reserved.

Financial Statements

Explanation of Non-GAAP Measures and Certain Metrics

Management believes that adjusted net revenue, adjusted net income, adjusted EPS, corporate cash, tangible book value per share, EBITDA, adjusted 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.

Adjusted Net Revenue, Adjusted Net Income, and Adjusted EPS

Management believes that excluding the loss on termination of wholesale funding obligations and the income tax benefit related to finalizing the IRS examination of the Company’s 2007, 2009, and 2010 federal tax returns from net revenue, net income and EPS provides useful additional measures of the Company’s ongoing operating performance because the charges are not directly related to our performance. See endnote (1) for a reconciliation of these non-GAAP measures to the comparable GAAP measures.

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 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 (3) 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 (10) 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.

Adjusted EBITDA

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

Interest Coverage and Adjusted Interest Coverage

Interest coverage represents EBITDA divided by corporate interest expense. Adjusted interest coverage represents adjusted EBITDA divided by corporate interest expense. Management believes that by excluding the charges and expenses that are excluded from EBITDA and adjusted EBITDA, interest coverage and adjusted interest coverage provide a useful additional measure of the Company’s ability to continue to meet interest obligations and liquidity needs. See endnote (12) 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 E*TRADE Financial’s capital strength. See endnotes (5) and (6) 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 revenue, net income and EPS after adjusting for the loss on termination of wholesale funding obligations and the income tax benefit related to finalizing the IRS examination of our 2007, 2009, and 2010 federal tax returns to GAAP net income and EPS (dollars in millions, except for per share amounts):

(2) Net new brokerage accounts and end of period brokerage accounts were impacted by the closure of 16,818 and 3,325 accounts related to the shutdown of the Company’s global trading platform in the third and second quarters of 2015, respectively. Net new and end of period brokerage accounts in the second quarter were also impacted by the closure of 3,484 accounts related to the escheatment of unclaimed property.

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

(4) 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.

(5) 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):

(6) 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 non-GAAP measures and 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):

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

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

(9) 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.

(10) 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):

(11) 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.

(12) Adjusted interest coverage represents the ratio of the Company’s adjusted EBITDA to its corporate interest expense. The interest coverage ratio calculated based on the Company’s adjusted net income to its corporate interest expense was 7.0, 4.8, and 3.0 for the three months ended September 30, 2015, June 30, 2015, and September 30, 2014, respectively.

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

(14) 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.

(15) 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):

(16) 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.

(17) 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):

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

(19) 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 and loans that have been charged-off due to bankruptcy notification.

(20) 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.

(21) 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 for which the Company received a notification of bankruptcy (dollars in millions):

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

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