Document
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2019
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission File Number 1-11921

Eetradeasteriska02.jpgTRADE Financial Corporation
E*TRADE Financial Corporation
(Exact Name of Registrant as Specified in its Charter)
E TRADE FINANCIAL CORP
Delaware

94-2844166
(State or other jurisdiction
of incorporation or organization)
 
(I.R.S. Employer
Identification Number)
11 Times Square, 32nd Floor, New York, New York 10036
(Address of principal executive offices and Zip Code)
(646) 521-4300
(Registrant’s telephone number, including area code)
Securities Registered Pursuant to Section 12(b) of the Act:
Title of Each Class
Trading Symbol
Name of Each Exchange on Which Registered
Common Stock, par value $0.01 per share
ETFC
The NASDAQ Stock Market LLC
NASDAQ Global Select Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.   Yes x  No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).   Yes x  No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 x
 
Accelerated filer
 
Non-accelerated filer  ¨ (Do not check if a smaller reporting company)
Smaller reporting company
 
 
 
Emerging growth company
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes    No x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
As of July 30, 2019, there were 239,813,983 shares of common stock outstanding.


    

E*TRADE FINANCIAL CORPORATION
FORM 10-Q QUARTERLY REPORT
For the Quarter Ended June 30, 2019
TABLE OF CONTENTS
PART I
FINANCIAL INFORMATION
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
 
 
 
 
Item 3.
 
Item 4.
Part II
OTHER INFORMATION
 
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
 





E*TRADE Q2 2019 10-Q | Page i
 
                    

    

Unless otherwise indicated, references to "the Company," "we," "us," "our," "E*TRADE" and "E*TRADE Financial" mean E*TRADE Financial Corporation and its subsidiaries, and references to the parent company mean E*TRADE Financial Corporation but not its subsidiaries.
E*TRADE, E*TRADE Financial, E*TRADE Bank, E*TRADE Savings Bank, the Converging Arrows logo, Power E*TRADE, Equity Edge Online, Trust Company of America (TCA), now E*TRADE Advisor Services, E*TRADE Advisor Network, and Liberty are trademarks or registered trademarks of E*TRADE Financial Corporation in the United States and in other countries. All other trademarks are the property of their respective owners.


E*TRADE Q2 2019 10-Q | Page ii
 
                    

    

PART I
 
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, that involve risks and uncertainties. These statements discuss, among other things:
our future plans, objectives, outlook, strategies, expectations and intentions relating to our business and future financial and operating results and the assumptions that underlie these matters
our capital plan initiatives
the timing and payment of dividends on our common and preferred stock
the payment of dividends from our subsidiaries to our parent company
the management of our legacy mortgage and consumer loan portfolio
our ability to comply with future changes to government regulations
our ability to maintain required regulatory capital ratios
continued repurchases of our common stock
our ability to meet upcoming debt obligations
the integration and related restructuring costs of past and any future acquisitions
the expected outcome of existing or new litigation
our ability to execute our business plans and manage risk
future sources of revenue, expense and liquidity
the ability of our technology solution for advisors and our referral program to attract and retain customers seeking specialized services and sophisticated advice
any other statement that is not historical in nature
These statements may be identified by the use of words such as "assume," "expect," "believe," "may," "will," "should," "anticipate," "intend," "plan," "estimate," "continue" and similar expressions.
We caution that actual results could differ materially from those discussed in these forward-looking statements. Important factors that could contribute to our actual results differing materially from any forward-looking statements include, but are not limited to:
changes in business, economic or political conditions
performance, volume and volatility in the equity and capital markets
changes in interest rates or interest rate volatility
our ability to manage our balance sheet size and capital levels
disruptions or failures of our information technology systems or those of our third-party service providers
cyber security threats, system disruptions and other potential security breaches or incidents
customer demand for financial products and services
our ability to continue to compete effectively and respond to aggressive competition within our industry
our ability to participate in consolidation opportunities in our industry, to complete consolidation transactions and to realize synergies or implement integration plans
our ability to manage our significant risk exposures effectively
the occurrence of risks associated with our advisory services
our ability to manage credit risk with customers and counterparties
our ability to service our corporate debt and, if necessary, to raise additional capital


E*TRADE Q2 2019 10-Q | Page 1
 
                    

    

changes in government regulation, including interpretations, or actions by our regulators, including those that may result from the implementation and enforcement of regulatory reform legislation
adverse developments in any investigations, disciplinary actions or litigation
By their nature forward-looking statements are not guarantees of future performance or results and are subject to risks, uncertainties and assumptions that are difficult to predict or quantify. Actual future results may vary materially from expectations expressed or implied in this report or any of our prior communications. Investors should also consider the risks and uncertainties described elsewhere in this report, including under Part II. Item 1A. Risk Factors and Part I. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations of this Quarterly Report and Part I. Item 1A. Risk Factors of our Annual Report on Form 10-K for the year ended December 31, 2018, as amended by Amendment No. 1 on Form 10-K/A (the 2018 Annual Report), filed with the Securities and Exchange Commission (SEC), which are incorporated herein by reference. The forward-looking statements contained in this report reflect our expectations only as of the date of this report. Investors should not place undue reliance on forward-looking statements, as we do not undertake to update or revise forward-looking statements, except as required by law.


E*TRADE Q2 2019 10-Q | Page 2
 
                    

    

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (MD&A)
The following discussion should be read in conjunction with the consolidated financial statements and the related notes that appear elsewhere in this document and with the 2018 Annual Report.
OVERVIEW
Company Overview
E*TRADE is a financial services company that provides brokerage and related products and services for traders, investors, stock plan administrators and participants, and registered investment advisors (RIAs). Founded on the principle of innovation, we aim to enhance the financial independence of customers through a powerful digital offering that includes tools and educational materials, complemented by professional advice and support, catering to the complex and unique needs of customers to help meet their near- and long-term investing goals. We provide these services through our digital platforms and network of industry-licensed customer service representatives and financial consultants, over the phone, by email and online via two national financial centers and in-person at 30 regional financial centers across the United States. We operate directly and through several subsidiaries, many of which are overseen by governmental and self-regulatory organizations. Our most important subsidiaries are described below:
E*TRADE Securities LLC (E*TRADE Securities) is a registered broker-dealer that clears and settles customer transactions
E*TRADE Bank is a federally chartered savings bank that provides Federal Deposit Insurance Corporation (FDIC) insurance on certain qualifying amounts of customer deposits and provides other banking and cash management capabilities
E*TRADE Savings Bank, a subsidiary of E*TRADE Bank, is a federally chartered savings bank that provides FDIC insurance on certain qualifying amounts of customer deposits and provides custody solutions for RIAs
E*TRADE Financial Corporate Services, Inc. (E*TRADE Financial Corporate Services) is a provider of software and services for managing equity compensation plans to our corporate clients
E*TRADE Futures LLC (E*TRADE Futures) is a registered non-clearing Futures Commission Merchant (FCM) that provides retail futures transaction capabilities for our customers
E*TRADE Capital Management LLC (E*TRADE Capital Management) is an RIA that provides investment advisory services for our customers
Delivering a powerful digital offering for our customers is a core pillar of our business strategy and we believe our focus on being a digital leader in the financial services industry is a competitive advantage. We offer a broad range of products and services to customers through the following customer channels:
Retail: Our retail channel includes retail brokerage and banking customers that utilize our web, mobile and/or active trading platforms to meet trading, investing and/or banking needs.
Institutional: Our institutional channels include Corporate Services and Advisor Services. We provide stock plan administration services for public and private companies globally through our corporate services channel. We also provide custody services to independent RIAs through our advisor services channel.


E*TRADE Q2 2019 10-Q | Page 3
 
                    

    

Strategy
Our business strategy is focused on leveraging our brand, hybrid support model, and technology to grow our retail and institutional channels while generating robust earnings and exceptional returns for the benefit of our shareholders.
Leverage our brand, hybrid support model, and leading technology for scale and growth
E*TRADE's unrivaled and tech-forward brand is synonymous with digital brokerage and drives outsized awareness and consideration among business-to-customer and business-to-business audiences. We are able to serve peak volumes across channels with capacity for growth and acquisition through our strong and scalable infrastructure. Our customers benefit from digitally led experiences, complemented by professional advice and support. We cater to the complex and unique needs of traders, investors, stock plan administrators and participants, and independent RIAs.
Empower self-directed retail customers through a powerful digital offering and professional guidance
E*TRADE has three core digital offerings for the retail investor—trading, investing, and banking. With trading, we maintain a leading position among active and derivatives traders through the Power E*TRADE web-based platform and support model. On the investing front we connect customers with a range of easy-to-use wealth management solutions. We are also advancing digital banking capabilities to help increase engagement with customers and prospects.
Capitalize on symbiotic institutional channels to drive growth
E*TRADE's corporate services and advisor services channels are critical for growth. We aim to expand on our #1 position in stock plan administration through innovative digital solutions and expert support—driving growth in retail and institutional relationships. We plan to leverage the power of E*TRADE's brand, digital ethos, and our broad customer base to grow the advisor services channel. We also plan to connect retail customers and stock plan participants seeking higher touch services to top-tier advisors through our recently launched referral network—driving asset growth and retention.
Generate robust earnings growth and returns
We aim to deliver superior returns on customer assets by capturing the full value of our retail and institutional relationships and leveraging E*TRADE's highly scalable model to expand operating margin and generate robust earnings growth. We aim to return a significant portion of our earnings to shareholders and expand return on equity over time.


E*TRADE Q2 2019 10-Q | Page 4
 
                    

    

Products and Services
Our hybrid delivery model is available through the following award-winning digital platforms which are complemented by professional advice and support.
 
Platforms for Retail Channel
Platforms for Institutional Channel
 
 
 
 
 
 
web.jpg
Web
toolboxwelcomekiticon.jpg
Equity Edge Online(1)
 
Our easy-to-use site is the primary channel to interact with customers and prospects
Equity Edge Online is the #1 rated platform in the stock plan administration industry that offers automation and flexibility
 
 
 
 
 
 
 
mob.jpg
Mobile(2)
transactionicon.jpg
Liberty
 
Our top-rated mobile applications are industry leading and include integrations with leading artificial intelligence assistants
Liberty is intuitive technology built for RIAs that simplifies the investment and management of client assets
 
 
 
 
 
 
 
 
actvtrd.jpg
Active Trading Platforms
 
 
 
Active trading platforms include sophisticated trading tools, advanced portfolio and market tracking, and idea generation and analysis
 
 
 
 
 
 
 
 
 
 
 
Complemented by professional advice and support
 
 
 
 
 
 
helpcustomersvcicon.jpg
Customer Service
capturefc2.jpg
Financial Consultants
 
Customer service is available 24/7 via phone, email or chat from industry licensed representatives. White glove service is available for our highest-tiered customers
Financial consultants are available by phone or at branches to provide one-on-one investing advice
 
 
 
 
 
 
 
 
actvtrd.jpg
Active Trader Services
toolboxwelcomekiticon.jpg
Corporate Services
 
Active trader services support includes specialized support for sophisticated customers with advanced knowledge and skill
Corporate services support includes personalized service on a global scale driven by dedicated relationship and service managers backed by comprehensive training and education
 
 
 
 
 
 
 
 
transactionicon.jpg
Advisor Services
 
 
 
Advisor services support includes dedicated relationship managers who act as a single point of contact for specialized support
 
 
 
(1)
Equity Edge Online was rated #1 in Loyalty and Overall Satisfaction in the 2018, 2017, 2016, 2015, 2014, 2013, and 2012 Group Five Stock Plan Administration Study Industry Report.
(2)
E*TRADE was awarded the #1 Mobile Trading award in StockBrokers.com's 2019 Online Broker Review of 17 firms across 284 different variables.


E*TRADE Q2 2019 10-Q | Page 5
 
                    

    

We deliver a broad range of products and services through the retail and institutional customer channels across the following five product areas: Trading, Investing, Banking and Cash Management, Corporate Services and Advisor Services.
Trading
The Company delivers automated trade order placement and execution services, offering our customers a full range of investment vehicles, including US equities, exchange-traded funds (ETFs), options, bonds, futures, American depositary receipts and non-proprietary mutual funds. We also offer margin accounts, enabling qualifying customers to borrow against their securities, supported by robust tools enabling customers to analyze their positions and easily understand collateral requirements. The Company also offers a fully paid lending program which allows customers to earn income on certain securities held in cash accounts when they permit us to lend their securities.
The Company markets trading products and services to active traders and self-directed investors. Products and services are delivered through web, desktop and mobile platforms. Trading and investing tools are supported by guidance, including fixed income, options and futures specialists available on-call for customers. Other tools and resources include independent research and analytics, live and on-demand education, market commentary, and strategies, trading ideas and screeners for major asset classes.
Investing
The Company endeavors to help investors build wealth and address their long-term investing needs through a variety of products and services, a suite of managed products and asset allocation models. These include our Core Portfolios, Blend Portfolios, Dedicated Portfolios, and Fixed Income Portfolios. The Company also offers self-directed digital tools across web and mobile platforms, including mutual fund and ETF screeners, All-Star Lists, a collection of pre-built ETF or mutual fund portfolios based on time frame and risk tolerance, an assortment of planning and allocation tools, thematic investing opportunities, education and editorial content. Investors also have access to a wide selection of ETFs and mutual funds, including more than 300 commission-free ETFs and more than 4,400 no-load, no-transaction fee mutual funds.
The Company also offers guidance through a team of licensed financial consultants and Chartered Retirement Planning CounselorsSM at our 30 regional financial centers and through our two national financial centers by phone, email and online. Customers can receive complimentary portfolio reviews and personalized investment recommendations.
Banking and Cash Management Capabilities
The Company's banking and cash management capabilities include deposit accounts insured by the FDIC, which are fully integrated into customer brokerage accounts. Among other features, E*TRADE Bank's customers can transfer to and from accounts at E*TRADE and elsewhere for free and checking account customers have access to debit cards with ATM fee refunds, online and mobile bill pay, and mobile check deposits. E*TRADE Bank's savings account offerings include the Premium Savings Account, which provides a higher yield to savings account customers as compared to our other deposit products. The E*TRADE Line of Credit program allows customers to borrow against the market value of securities pledged as collateral.


E*TRADE Q2 2019 10-Q | Page 6
 
                    

    

Corporate Services
Through our industry-leading platform, Equity Edge Online, we serve approximately 20% of S&P 500 companies, including nearly 50% of technology companies within the S&P 500 index. The Company offers management of employee stock option plans, employee stock purchase plans, and restricted stock plans with fully-automated stock plan administration. Accounting, reporting and scenario modeling tools are also available. The integrated stock plan solutions include multi-currency settlement and delivery, and streamlined tax calculation. Additionally, corporate clients are offered 10b5-1 plan design and implementation, along with SEC filing assistance and automated solutions. Through our platform, participants have enhanced visibility into the creation and approval of their plan through digital tools and resources. Participants have full access to E*TRADE's robust investing and trading capabilities, including tailored education and planning tools, and dedicated stock plan service representatives.
Corporate Services is an important driver of account and asset growth, serving as a conduit to the retail channel. Over the last 12 months ending June 30, 2019, there were $100 billion of gross inflows into our corporate services channel, driven by $23 billion of new corporate client implementations and $77 billion of new grants and employee stock purchase plan transactions. Over this same 12 month period, domestic stock plan participants generated $29 billion of net proceeds through transactions of vested assets. These participant proceeds represent a key source of net new assets for the retail customer channel.
Advisor Services
Through our proprietary technology platform, Liberty, the Company offers sophisticated modeling, rebalancing, reporting, and practice management capabilities that are fully customizable for the RIA. E*TRADE's financial consultants can refer retail customers to pre-qualified RIAs on our custody platform through our referral program, the E*TRADE Advisor Network. We expect the E*TRADE Advisor Network will improve the Company's ability to drive asset growth and retain customers seeking specialized services and sophisticated advice.
Financial Performance
Our net revenue is generated primarily from net interest income, commissions and fees and service charges:
Net interest income is largely impacted by the size of our balance sheet, our balance sheet mix, and average yields on our assets and liabilities. Net interest income is driven primarily from interest earned on investment securities, margin receivables, and our legacy loan portfolio, less interest incurred on interest-bearing liabilities, including deposits, customer payables, corporate debt and other borrowings.
Commissions revenue is generated by customer trades and is largely impacted by trade volume, trade type, and commission rates.
Fees and service charges revenue is primarily impacted by order flow revenue, fees earned on off-balance sheet customer cash and other assets, advisor management and custody fees, and mutual fund service fees.
Our net revenue is offset by non-interest expenses, the largest of which are compensation and benefits and advertising and market development.


E*TRADE Q2 2019 10-Q | Page 7
 
                    

    

Significant Events
Generated additional capital capacity by repositioning balance sheet
The Company sold $4.5 billion of lower-yielding investment securities, enabling the reduction of the size of our balance sheet. Gains (losses) on securities and other, net includes $80 million of losses related to these sales. During the second quarter, the Company moved $6.6 billion of deposits to third-party banks, generating additional capital capacity to support future share repurchases. The Company's balance sheet repositioning prioritized longer-term growth in earnings per share and capital return to shareholders over short-term revenue growth and operating margin. See MD&A—Earnings Overview, MD&A—Balance Sheet Overview and Note 5—Available-for-Sale and Held-to-Maturity Securities for additional information.
Announced new $1.5 billion share repurchase program
In July 2019 the Company announced that its Board of Directors authorized a new $1.5 billion share repurchase program. We had $157 million remaining under our previous $1 billion share repurchase program at June 30, 2019. We intend to complete the new $1.5 billion authorization by the end of the third quarter of 2020. The timing and exact amount of any common stock repurchases will depend on various factors, including market conditions, our capital position, and other available investment opportunities.
Key Performance Metrics
Management monitors customer activity and corporate metrics to evaluate the Company’s performance. The most significant of these are displayed below.
In the first quarter of 2019, the Company updated the structure of its customer activity metrics to better align to its retail and institutional customer channels. Additionally, the Company has refined the presentation of certain customer activity metrics, as follows:
Commissionable trades: The definition of trades was updated to capture only commissionable trades (this impacts daily average revenue trades (DARTs), derivative DARTs percentage, and average commission per trade).
Customer accounts: The definition of accounts was updated to align the minimum threshold for gross new and end of period retail accounts to $25. The definition for gross new retail accounts sourced from Corporate Services was also updated to include only those accounts which maintain a minimum balance of $25 at the end of the reporting period or trade within the reporting period.
These updates have been reflected in the customer activity metrics for all periods presented and did not have an impact on the Company’s financial statements.


E*TRADE Q2 2019 10-Q | Page 8
 
                    

    

Customer Activity Metrics
chart-be553c8014295fafbd3.jpgchart-898aa1aba18e5ce997a.jpg chart-e8ec1d3bb37f5073afb.jpg chart-4a64f86c723051068e5.jpg
Daily Average Revenue Trades is an important measure of customer trading activity, and is a key driver of commissions revenue. DARTs were 268,488 and 273,858 for the three and six months ended June 30, 2019, respectively, compared to 250,326 and 274,407 for the same periods in 2018.
Derivative DARTs, a key component of overall DARTs that represents advanced trading activities by our customers, is the daily average number of options and futures trades, and Derivative DARTs percentage is the mix of options and futures trades as a component of total DARTs. Derivative DARTs were 89,402 and 89,717 for the three and six months ended June 30, 2019, respectively, compared to 85,967 and 91,256 for the same periods in 2018. Derivative DARTs represented 33% of total DARTs for both the three and six months ended June 30, 2019, respectively, compared to 34% and 33% for the same periods in 2018.

Average commission per trade is an indicator of changes in our customer mix, product mix and/or product pricing. Average commission per trade was $7.14 and $7.15 for the three and six months ended June 30, 2019, respectively, compared to $7.56 and $7.53 for the same periods in 2018.
Margin receivables represent credit extended to customers to finance their purchases of securities by borrowing against securities they own and is a key driver of net interest income. Margin receivables were $9.9 billion and $11.0 billion at June 30, 2019 and 2018, respectively.


E*TRADE Q2 2019 10-Q | Page 9
 
                    

    

chart-93053fd77142585a818.jpg chart-3d464a1387515b63855.jpg
End of period accounts and net new accounts are indicators of our ability to attract and retain customers. The following table presents end of period accounts by channel:
 
2Q 2019
 
1Q 2019
 
4Q 2018
 
3Q 2018
 
2Q 2018
End of period retail accounts
5,122,669

 
5,088,597

 
5,007,767

 
4,056,416

 
3,992,575

End of period advisor services accounts
151,275

 
151,222

 
151,241

 
150,063

 
147,640

End of period corporate services accounts
1,853,875

 
1,817,983

 
1,763,829

 
1,735,675

 
1,666,354

End of period accounts
7,127,819

 
7,057,802

 
6,922,837

 
5,942,154

 
5,806,569


The following table presents net new accounts and annualized growth rates by channel:
 
2Q 2019
 
1Q 2019
 
4Q 2018
 
3Q 2018
 
2Q 2018
Net new retail accounts
34,072

 
80,830

 
951,351

 
63,841

 
37,444

Net new advisor services accounts
53

 
(19)

 
1,178

 
2,423

 
147,640

Net new corporate services accounts
35,892

 
54,154

 
28,154

 
69,321

 
134,025

Net new accounts
70,017

 
134,965

 
980,683

 
135,585

 
319,109

 
 
 
 
 
 
 
 
 
 
Net new retail account growth rate
2.7
%
 
6.5
 %
 
93.8
%
 
6.4
%
 
3.8
%
Net new advisor services account growth rate
0.1
%
 
(0.1
)%
 
3.1
%
 
6.6
%
 
100.0
%
Net new corporate services account growth rate
7.9
%
 
12.3
 %
 
6.5
%
 
16.6
%
 
35.0
%
Net new total account growth rate
4.0
%
 
7.8
 %
 
66.0
%
 
9.3
%
 
23.3
%

We added 1,057,956 net new accounts as part of acquisitions during the year ended December 31, 2018, including 145,891 advisor services accounts related to the TCA acquisition in the three months ended June 30, 2018 and 912,065 retail accounts related to the Capital One account acquisition in the three months ended December 31, 2018.


E*TRADE Q2 2019 10-Q | Page 10
 
                    

    

chart-f1e2847bce9e5345a0d.jpg chart-53fcec56a6f85cca926.jpg
Total customer assets is an indicator of the value of our relationship with our customers. An increase generally indicates that the use of our products and services is expanding. Changes in this metric are also driven by changes in the valuations of our customers' underlying securities. The following table presents the significant components of total customer assets (dollars in billions):
 
2Q 2019
 
1Q 2019
 
4Q 2018
 
3Q 2018
 
2Q 2018
Security holdings
$
286.6

 
$
279.3

 
$
242.0

 
$
274.4

 
$
257.7

Cash and deposits
62.2

 
61.7

 
60.2

 
58.4

 
57.7

Retail and advisor services assets
348.8

 
341.0

 
302.2

 
332.8

 
315.4

Corporate services vested assets
142.3

 
140.6

 
111.9

 
140.0

 
125.3

Retail, advisor services, and corporate services vested assets
491.1

 
481.6

 
414.1

 
472.8

 
440.7

Corporate services unvested holdings
117.0

 
115.4

 
94.4

 
119.5

 
108.0

Total customer assets
$
608.1

 
$
597.0

 
$
508.5

 
$
592.3

 
$
548.7

Customer cash and deposits is a significant component of total customer assets as it is a key driver of net interest income as well as fees and service charges revenue, which includes fees earned on customer cash held by third parties. The following table presents the significant components of total customer cash and deposits (dollars in billions):
 
2Q 2019
 
1Q 2019
 
4Q 2018
 
3Q 2018
 
2Q 2018
Sweep deposits
$
31.7

 
$
38.6

 
$
39.3

 
$
38.0

 
$
37.8

Customer payables
10.6

 
10.6

 
10.1

 
10.5

 
10.0

Savings, checking and other banking assets
8.6

 
7.7

 
6.0

 
5.1

 
4.9

Total on-balance sheet cash
50.9

 
56.9

 
55.4

 
53.6

 
52.7

Sweep deposits at unaffiliated financial institutions
9.6

 
3.0

 
3.0

 
3.0

 
3.5

Money market funds and other
1.7

 
1.8

 
1.8

 
1.8

 
1.5

Total customer cash held by third parties(1)
11.3

 
4.8

 
4.8

 
4.8

 
5.0

Total customer cash and deposits
$
62.2

 
$
61.7

 
$
60.2

 
$
58.4

 
$
57.7

 
(1)
Customer cash held by third parties is maintained at unaffiliated financial institutions. Customer cash held by third parties is not reflected in the Company's consolidated balance sheet and is not immediately available for liquidity purposes.


E*TRADE Q2 2019 10-Q | Page 11
 
                    

    

Net new retail and advisor services assets equals total inflows to new and existing retail and advisor services accounts less total outflows from closed and existing retail and advisor services accounts. The net new retail and advisor services assets metric is a general indicator of the use of our products and services by new and existing retail and advisor services customers. Net new retail and advisor services assets were $1.6 billion and $6.3 billion for the three and six months ended June 30, 2019, respectively, compared to $21.0 billion and $26.3 billion for the same periods in 2018. The following table presents annualized net new retail and advisor services assets growth rates:
 
2Q 2019
 
1Q 2019
 
4Q 2018
 
3Q 2018
 
2Q 2018
Net new retail assets growth rate
2.1
 %
 
6.8
 %
 
25.2
%
 
4.2
%
 
3.3
%
Net new advisor services assets growth rate
(1.2
)%
 
(3.5
)%
 
3.9
%
 
7.6
%
 
100.0
%
Net new retail and advisor services assets growth rate
1.9
 %
 
6.2
 %
 
24.0
%
 
4.4
%
 
29.5
%
We added $33.5 billion in net new retail and advisor services assets as part of acquisitions during the year ended December 31, 2018, including $18.4 billion in advisor services assets related to the TCA acquisition during the three months ended June 30, 2018 and $15.1 billion in retail assets related to the acquisition of customer accounts from Capital One during the three months ended December 31, 2018.
Corporate Metrics:
chart-b3109bc7099f59f1ae4.jpg chart-9d5c6dc725a75a008a9.jpg
Earnings per diluted common share is the portion of a company's profit allocated to each diluted share of common stock and is a key indicator of the Company's profitability. Earnings per diluted share was $0.90 and $2.00 for the three and six months ended June 30, 2019, respectively, compared to $0.95 and $1.82 for the same periods in 2018. Earnings per diluted share includes $80 million of losses from balance sheet repositioning for the three and six months ended June 30, 2019, which had an after-tax impact of $59 million, or $0.24 per diluted share in both periods.
Operating margin is the percentage of net revenue that results in income before income taxes and is an indicator of the Company's profitability. Operating margin was 43% and 48% for the three and six months ended June 30, 2019, respectively, compared to 49% and 48% for the same periods in 2018. Income before income tax expense and net revenue, the numerator and denominator in the operating margin calculation, include $80 million of losses from balance sheet repositioning for the three and six months ended June 30, 2019, which resulted in a 6 percentage point reduction and a 2 percentage point reduction in operating margin for the same periods.
Adjusted operating margin is a non-GAAP measure that provides useful information about our ongoing operating performance by excluding the provision (benefit) for loan losses which is not viewed as a key factor governing our investment in the business and is excluded by management when evaluating operating margin performance. Adjusted operating margin was 42% and 46% for the three and six months ended June 30, 2019, respectively, compared to 46% and 45% for the same periods in 2018. Adjusted income


E*TRADE Q2 2019 10-Q | Page 12
 
                    

    

before income tax expense and net revenue, the numerator and denominator in the adjusted operating margin calculation, include $80 million of losses from balance sheet repositioning for the three and six months ended June 30, 2019, which resulted in a 6 percentage point reduction and a 3 percentage point reduction in adjusted operating margin for the same periods.
See MD&A—Earnings Overview for a reconciliation of adjusted operating margin to operating margin.
chart-c8cf71f3e96d539cac0.jpg chart-0a59a11ebff75455b67.jpg
Capital return to shareholders represents the amount of earnings returned to shareholders through share repurchases and common stock dividends and Capital return percentage to shareholders is capital returned to shareholders as a percentage of net income available to common shareholders. Capital return to shareholders was $411 million and $1.2 billion for the six months ended June 30, 2019 and the year ended December 31, 2018, respectively. Capital return percentage to shareholders was 84% and 116% for the six months ended June 30, 2019 and the year ended December 31, 2018, respectively. In addition, the Company also returned capital to shareholders in the form of shares withheld for taxes of $17 million and $28 million for the six months ended June 30, 2019 and the year ended December 31, 2018, respectively.
Return on common equity is calculated by dividing net income available to common shareholders by average common shareholders' equity, which excludes preferred stock. Return on common equity was 15% and 17% for the three and six months ended June 30, 2019, respectively, compared to 16% and 15% for the same periods in 2018. Net income available to common shareholders includes $80 million of losses from balance sheet repositioning for the three and six months ended June 30, 2019, which had an after-tax impact of $59 million and resulted in a 4 percentage point reduction and a 2 percentage point reduction in return on common equity for the same periods.
Adjusted return on common equity is a non-GAAP measure calculated by dividing adjusted net income available to common shareholders by average common shareholders' equity, which excludes preferred stock. Adjusted net income available to common shareholders is a non-GAAP measure which excludes the provision (benefit) for loan losses which is not viewed as a key factor governing our investment in the business and is excluded by management when evaluating return on common equity performance. Adjusted return on common equity was 14% and 16% for the three and six months ended June 30, 2019, respectively, compared to 15% and 14% for the same periods in 2018. See MD&A—Earnings Overview for a reconciliation of adjusted net income available to common shareholders to net income and adjusted return on common equity to return on common equity. Adjusted net income available to common shareholders includes $80 million of losses from balance sheet repositioning for the three and six months ended June 30, 2019, which had an after-tax impact of $59 million and resulted in a 4 percentage point reduction and a 2 percentage point reduction in adjusted return on common equity for the same periods.


E*TRADE Q2 2019 10-Q | Page 13
 
                    

    

chart-a9777c7b6bc1563084a.jpg chart-174b93b20e445c2e9ff.jpg
Corporate cash, a non-GAAP measure, is a component of cash and equivalents and represents the primary source of capital above and beyond the capital deployed in our regulated subsidiaries. Cash and equivalents was $380 million and $532 million at June 30, 2019 and 2018, respectively, while corporate cash was $323 million and $943 million for the same periods. See MD&A—Liquidity and Capital Resources for a reconciliation of corporate cash to cash and equivalents.
chart-f02274115d985f919b3.jpg chart-8450b06f5e355944bca.jpg
Average interest-earning assets, along with net interest margin, are indicators of our ability to generate net interest income. Average interest-earning assets were $61.4 billion and $61.2 billion for the three and six months ended June 30, 2019, respectively, compared to $60.0 billion and $59.9 billion for the same periods in 2018.
Net interest margin is a measure of the net yield on our average interest-earning assets. Net interest margin is calculated for a given period by dividing the annualized sum of net interest income by average interest-earning assets. Net interest margin was 3.20% and 3.21% for the three and six months ended June 30, 2019, respectively, compared to 3.02% and 3.00% for the same periods in 2018.


E*TRADE Q2 2019 10-Q | Page 14
 
                    

    

chart-f9e361ebc1505aaba40.jpg chart-61fd10df888352d1a60.jpg
Tier 1 leverage ratio is an indicator of capital adequacy for E*TRADE Financial and E*TRADE Bank. Tier 1 leverage ratio is Tier 1 capital divided by adjusted average assets for leverage capital purposes. E*TRADE Financial's Tier 1 leverage ratio was 6.7% and 7.1% at June 30, 2019 and 2018, respectively. E*TRADE Bank's Tier 1 leverage ratio was 7.3% and 7.2% at June 30, 2019 and 2018, respectively. The internal threshold for E*TRADE Financial's Tier 1 leverage ratio is 6.5% and the internal threshold for E*TRADE Bank's Tier 1 leverage ratio is 7.0%. See MD&A—Liquidity and Capital Resources for additional information, including the calculation of regulatory capital ratios.
Total employees is the key driver of compensation and benefits expense, our largest non-interest expense category. Total employees were 4,261 and 4,095 at June 30, 2019 and 2018, respectively.


E*TRADE Q2 2019 10-Q | Page 15
 
                    

    

EARNINGS OVERVIEW
We generated net income of $219 million and $509 million on total net revenue of $685 million and $1.4 billion for the three and six months ended June 30, 2019, respectively. The following chart presents a reconciliation of net income for the three months ended June 30, 2018 to net income for the three months ended June 30, 2019 (dollars in millions):
chart-30b3483a593f5d9fb6d.jpg
(1)
Includes advertising and market development, clearing and servicing, professional services, occupancy and equipment, communications, depreciation and amortization, restructuring and acquisition-related activities and other non-interest expenses.


E*TRADE Q2 2019 10-Q | Page 16
 
                    

    

The following table presents significant components of the consolidated statement of income (dollars in millions, except per share amounts):
 
Three Months Ended June 30,
 
Variance
 
Six Months Ended June 30,
 
Variance
 
 
2019 vs. 2018
 
 
2019 vs. 2018
 
2019
 
2018
 
Amount
 
%
 
2019
 
2018
 
Amount
 
%
Net interest income
$
490

 
$
453

 
$
37

 
8
 %
 
$
982

 
$
898

 
$
84

 
9
 %
Total non-interest income
195

 
257

 
(62
)
 
(24
)%
 
458

 
520

 
(62
)
 
(12
)%
Total net revenue
685

 
710

 
(25
)
 
(4
)%
 
1,440

 
1,418

 
22

 
2
 %
Provision (benefit) for loan losses
(8
)
 
(19
)
 
11

 
(58
)%
 
(20
)
 
(40
)
 
20

 
(50
)%
Total non-interest expense
398

 
384

 
14

 
4
 %
 
773

 
779

 
(6
)
 
(1
)%
Income before income tax expense
295

 
345

 
(50
)
 
(14
)%
 
687

 
679

 
8

 
1
 %
Income tax expense
76

 
95

 
(19
)
 
(20
)%
 
178

 
182

 
(4
)
 
(2
)%
Net income
$
219

 
$
250

 
$
(31
)
 
(12
)%
 
$
509

 
$
497

 
$
12

 
2
 %
Preferred stock dividends

 

 

 
 %
 
20

 
12

 
8

 
67
 %
Net income available to common shareholders
$
219

 
$
250

 
$
(31
)
 
(12
)%
 
$
489

 
$
485

 
$
4

 
1
 %
Diluted earnings per common share
$
0.90

 
$
0.95

 
$
(0.05
)
 
(5
)%
 
$
2.00

 
$
1.82

 
$
0.18


10
 %
Net income decreased 12% to $219 million or $0.90 per diluted share and increased 2% to $509 million or $2.00 per diluted share, for the three and six months ended June 30, 2019, respectively, compared to the same periods in 2018. Net income available to common shareholders was $219 million and $489 million for the three and six months ended June 30, 2019, respectively, which reflects payment of $20 million in preferred stock dividends in the first quarter of 2019, compared to $250 million and $485 million for the same periods in 2018, which reflects payment of $12 million in preferred stock dividends in the first quarter of 2018.
The decrease in net income for the three months ended June 30, 2019 was primarily driven by $80 million of pre-tax losses related to sales of $4.5 billion of lower-yielding investment securities as part of our balance sheet repositioning during the period, a lower benefit for loan losses and higher compensation and benefits expenses. These were partially offset by higher net interest income due to an improvement in net interest margin and higher revenue earned on customer cash held by third parties. The increase for the six months ended June 30, 2019 was primarily driven by higher net interest income partially offset by the losses related to the balance sheet repositioning and a lower benefit for loan losses.
Net Revenue
The following table presents the significant components of net revenue (dollars in millions):
 
Three Months Ended June 30,
 
Variance
 
Six Months Ended June 30,
 
Variance
 
 
2019 vs. 2018
 
 
2019 vs. 2018
 
2019
 
2018
 
Amount
 
%
 
2019
 
2018
 
Amount
 
%
Net interest income
$
490

 
$
453

 
$
37

 
8
 %
 
$
982

 
$
898

 
$
84

 
9
 %
Commissions
121

 
121

 

 
 %
 
243

 
258

 
(15
)
 
(6
)%
Fees and service charges
126

 
110

 
16

 
15
 %
 
244

 
215

 
29

 
13
 %
Gains (losses) on securities and other, net
(64
)
 
15

 
(79
)
 
*

 
(53
)
 
25

 
(78
)
 
*

Other revenue
12

 
11

 
1

 
9
 %
 
24

 
22

 
2

 
9
 %
Total non-interest income
195

 
257

 
(62
)
 
(24
)%
 
458

 
520

 
(62
)
 
(12
)%
Total net revenue
$
685

 
$
710

 
$
(25
)
 
(4
)%
 
$
1,440

 
$
1,418

 
$
22

 
2
 %
*
Percentage not meaningful.


E*TRADE Q2 2019 10-Q | Page 17
 
                    

    

Net Interest Income
Net interest income increased 8% to $490 million and 9% to $982 million for the three and six months ended June 30, 2019, respectively, compared to the same periods in 2018. Net interest income is earned primarily through investment securities, margin receivables and our legacy mortgage and consumer loan portfolio, offset by funding costs.
The following table presents average balance sheet data and interest income and expense data, as well as related net interest margin, yields, and rates (dollars in millions):
 
Three Months Ended June 30,
 
2019
 
2018
 
Average Balance
 
Interest Inc./Exp.
 
Average Yield/
Cost
 
Average Balance
 
Interest Inc./Exp.
 
Average Yield/
Cost
Cash and equivalents
$
452

 
$
3

 
2.33
%
 
$
533

 
$
2

 
1.66
%
Cash segregated under federal or other regulations
871

 
6

 
2.63
%
 
753

 
4

 
1.95
%
Investment securities
47,375

 
368

 
3.11
%
 
44,973

 
303

 
2.69
%
Margin receivables
10,084

 
130

 
5.17
%
 
10,291

 
118

 
4.60
%
Loans(1)
1,920

 
28

 
5.75
%
 
2,468

 
33

 
5.32
%
Broker-related receivables and other
659

 
3

 
2.23
%
 
949

 
4

 
1.74
%
Total interest-earning assets
61,361

 
538

 
3.51
%
 
59,967

 
464

 
3.10
%
Other interest revenue(2)

 
22

 
 
 

 
25

 
 
Total interest-earning assets
61,361

 
560

 
3.66
%
 
59,967

 
489

 
3.26
%
Total non-interest-earning assets
5,093

 
 
 
 
 
4,364

 
 
 
 
Total assets
$
66,454

 
 
 
 
 
$
64,331

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Sweep deposits
$
37,380

 
$
18

 
0.20
%
 
$
38,196

 
$
7

 
0.08
%
Savings deposits
6,347

 
23

 
1.47
%
 
2,766

 
1

 
0.06
%
Other deposits
1,732

 

 
0.03
%
 
2,044

 

 
0.02
%
Customer payables
10,593

 
8

 
0.31
%
 
9,533

 
4

 
0.16
%
Broker-related payables and other
1,050

 
1

 
0.46
%
 
2,207

 
3

 
0.65
%
Other borrowings
312

 
4

 
3.78
%
 
829

 
8

 
3.77
%
Corporate debt
1,410

 
14

 
4.06
%
 
1,042

 
10

 
3.68
%
Total interest-bearing liabilities
58,824

 
68

 
0.47
%
 
56,617

 
33

 
0.23
%
Other interest expense(3)

 
2

 
 
 

 
3

 
 
Total interest-bearing liabilities
58,824

 
70

 
0.48
%
 
56,617

 
36

 
0.25
%
Total non-interest-bearing liabilities
1,016

 
 
 
 
 
633

 
 
 
 
Total liabilities
59,840

 
 
 
 
 
57,250

 
 
 
 
Total shareholders' equity
6,614

 
 
 
 
 
7,081

 
 
 
 
Total liabilities and shareholders' equity
$
66,454

 
 
 
 
 
$
64,331

 
 
 
 
Excess interest earning assets over interest bearing liabilities/net interest income/net interest margin
$
2,537

 
$
490

 
3.20
%
 
$
3,350

 
$
453

 
3.02
%
(1)
Nonaccrual loans are included in the average loan balances. Interest payments received on nonaccrual loans are recognized on a cash basis in interest income until it is doubtful that full payment will be collected, at which point payments are applied to principal.
(2)
Other interest revenue is earned on certain securities loaned balances. Interest expense incurred on other securities loaned balances is presented on the broker-related payables and other line item above.
(3)
Other interest expense is incurred on certain securities borrowed balances. Interest income earned on other securities borrowed balances is presented on the broker-related receivables and other line item above.


E*TRADE Q2 2019 10-Q | Page 18
 
                    

    

 
Six Months Ended June 30,
 
2019
 
2018
 
Average Balance
 
Interest Inc./Exp.
 
Average Yield/
Cost
 
Average Balance
 
Interest Inc./Exp.
 
Average Yield/
Cost
Cash and equivalents
$
529

 
$
6

 
2.32
%
 
$
668

 
$
5

 
1.52
%
Cash segregated under federal or other regulations
928

 
12

 
2.63
%
 
774

 
7

 
1.78
%
Investment securities
47,172

 
733

 
3.11
%
 
45,083

 
593

 
2.63
%
Margin receivables
9,926

 
256

 
5.21
%
 
9,881

 
221

 
4.51
%
Loans(1)
1,989

 
56

 
5.61
%
 
2,548

 
66

 
5.19
%
Broker-related receivables and other
646

 
7

 
2.24
%
 
949

 
8

 
1.65
%
Total interest-earning assets
61,190

 
1,070

 
3.51
%
 
59,903

 
900

 
3.01
%
Other interest revenue(2)

 
45

 
 
 

 
57

 
 
Total interest-earning assets
61,190

 
1,115

 
3.66
%
 
59,903

 
957

 
3.20
%
Total non-interest-earning assets
5,043

 
 
 
 
 
4,574

 
 
 
 
Total assets
$
66,233

 
 
 
 
 
$
64,477

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Sweep deposits
$
37,904

 
$
38

 
0.20
%
 
$
38,247

 
$
9

 
0.05
%
Savings deposits
5,661

 
38

 
1.36
%
 
2,799

 
1

 
0.04
%
Other deposits
1,758

 

 
0.03
%
 
2,046

 

 
0.02
%
Customer payables
10,528

 
17

 
0.32
%
 
9,544

 
5

 
0.11
%
Broker-related payables and other
1,025

 
2

 
0.47
%
 
1,889

 
4

 
0.47
%
Other borrowings
291

 
6

 
3.80
%
 
880

 
15

 
3.42
%
Corporate debt
1,409

 
28

 
3.98
%
 
1,017

 
19

 
3.65
%
Total interest-bearing liabilities
58,576

 
129

 
0.44
%
 
56,422

 
53

 
0.19
%
Other interest expense(3)

 
4

 
 
 

 
6

 
 
Total interest-bearing liabilities
58,576

 
133

 
0.46
%
 
56,422

 
59

 
0.21
%
Total non-interest-bearing liabilities
1,099

 
 
 
 
 
979

 
 
 
 
Total liabilities
59,675

 
 
 
 
 
57,401

 
 
 
 
Total shareholders' equity
6,558

 
 
 
 
 
7,076

 
 
 
 
Total liabilities and shareholders' equity
$
66,233

 
 
 
 
 
$
64,477

 
 
 
 
Excess interest earning assets over interest bearing liabilities/net interest income/net interest margin
$
2,614

 
$
982

 
3.21
%
 
$
3,481

 
$
898

 
3.00
%
(1)
Nonaccrual loans are included in the average loan balances. Interest payments received on nonaccrual loans are recognized on a cash basis in interest income until it is doubtful that full payment will be collected, at which point payments are applied to principal.
(2)
Other interest revenue is earned on certain securities loaned balances. Interest expense incurred on other securities loaned balances is presented on the broker-related payables and other line item above.
(3)
Other interest expense is incurred on certain securities borrowed balances. Interest income earned on other securities borrowed balances is presented on the broker-related receivables and other line item above.
Average interest-earning assets increased 2% to $61.4 billion and to $61.2 billion for both the three and six months ended June 30, 2019 compared to the same periods in 2018. The fluctuation in interest-earning assets is generally driven by changes in interest-bearing liabilities, primarily deposits and customer payables. Average interest-bearing liabilities increased 4% to $58.8 billion and to $58.6 billion for both the three and six months ended June 30, 2019 compared to the same periods in 2018 due to the following:
Deposits and customer payables: The increase to savings deposits was primarily driven by growth in the Premium Savings Account product first introduced in the second quarter of 2018. The deposits and customer payables balances were also impacted by customer net buying, which reflected $3.6 billion during the six months ended June 30, 2019, compared to net buying of $9.8 billion in the same period in 2018.


E*TRADE Q2 2019 10-Q | Page 19
 
                    

    

Other interest-bearing liabilities: The decrease in broker-related payables and other borrowings was driven by customer activity, including short-term liquidity needs at E*TRADE Bank and E*TRADE Securities. In addition, net proceeds from the June 2018 issuance of corporate debt were used to redeem the Company's trust preferred securities in the third quarter of 2018, resulting in a decrease in other borrowings.
Net interest margin increased 18 basis points to 3.20% and 21 basis points to 3.21% for the three and six months ended June 30, 2019, respectively, compared to the same periods in 2018. Net interest margin is driven by the mix of average asset and liability balances and the interest rates earned or paid on those balances. The increase during the three and six months ended June 30, 2019, compared to the same periods in 2018, is due to higher interest rates earned on margin receivables and investment securities balances, partially offset by increased funding costs due to increased rates paid on deposits, including the Premium Savings Account product, and customer payables. The increase in rates was largely driven by the four increases in federal funds rates that occurred during 2018. Our net interest margin was also impacted by the continued run-off of our higher yielding legacy mortgage and consumer loan portfolio.
Commissions
Commissions revenue remained flat at $121 million and decreased 6% to $243 million for the three and six months ended June 30, 2019, respectively, compared to the same periods in 2018. The primary factors that affect commissions revenue are DARTs, average commission per trade and the number of trading days.
DARTs volume increased 7% to 268,488 and decreased less than 1% to 273,858 for the three and six months ended June 30, 2019, respectively, compared to the same periods in 2018. DARTs volume is impacted by market sentiment as well as volatility of the equity markets. Derivative DARTs volume increased 4% to 89,402 and decreased 2% to 89,717 for the three and six months ended June 30, 2019, respectively, compared to the same periods in 2018.
Average commission per trade decreased 6% to $7.14 and 5% to $7.15 for the three and six months ended June 30, 2019, respectively, compared to the same periods in 2018. Average commission per trade is impacted by trade mix and differing commission rates on various trade types (e.g. equities, derivatives, corporate services and mutual funds).
Fees and Service Charges
The following table presents the significant components of fees and service charges (dollars in millions):    
 
Three Months Ended June 30,
 
Variance
 
Six Months Ended June 30,
 
Variance
 
 
2019 vs. 2018
 
 
2019 vs. 2018
 
2019
 
2018
 
Amount
 
%
 
2019
 
2018
 
Amount
 
%
Order flow revenue
$
45

 
$
43

 
$
2

 
5
%
 
$
88

 
$
90

 
$
(2
)
 
(2
)%
Money market funds and sweep deposits revenue(1)
23

 
18

 
5

 
28
%
 
44

 
35

 
9

 
26
 %
Advisor management and custody fees
19

 
16

 
3

 
19
%
 
37

 
27

 
10

 
37
 %
Mutual fund service fees
13

 
12

 
1

 
8
%
 
25

 
23

 
2

 
9
 %
Foreign exchange revenue
8

 
6

 
2

 
33
%
 
16

 
14

 
2

 
14
 %
Reorganization fees
7

 
4

 
3

 
75
%
 
13

 
7

 
6

 
86
 %
Other fees and service charges
11

 
11

 

 
%
 
21

 
19

 
2

 
11
 %
Total fees and service charges
$
126

 
$
110

 
$
16

 
15
%
 
$
244

 
$
215

 
$
29

 
13
 %
(1)
Includes revenue earned on average customer cash held by third parties based on the federal funds rate or LIBOR plus a negotiated spread or other contractual arrangements with the third-party institutions.


E*TRADE Q2 2019 10-Q | Page 20
 
                    

    

Fees and service charges increased 15% to $126 million and 13% to $244 million for the three and six months ended June 30, 2019, respectively, compared to the same periods in 2018. These increases were primarily driven by higher money market funds and sweep deposits revenue driven by larger balances and a higher yield of approximately 170 and 165 basis points for the three and six months ended June 30, 2019, respectively, compared to 140 and 135 basis points for the same periods in 2018. Advisor management and custody fees also increased as a result of the acquisition of TCA in the second quarter of 2018.
Gains (Losses) on Securities and Other, Net
The following table presents the significant components of gains (losses) on securities and other, net (dollars in millions):
 
Three Months Ended June 30,
 
Variance
 
Six Months Ended June 30,
 
Variance
 
 
2019 vs. 2018
 
 
2019 vs. 2018
 
2019
 
2018
 
Amount
 
%
 
2019
 
2018
 
Amount
 
%
Gains (losses) on available-for-sale securities, net:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gains on available-for-sale securities
$
15

 
$
11

 
$
4

 
36
 %
 
$
26

 
$
22

 
$
4

 
18
 %
Losses on available-for-sale securities
(80
)
 

 
(80
)
 
(100
)%
 
(80
)
 

 
(80
)
 
(100
)%
Subtotal
(65
)
 
11

 
(76
)
 
*

 
(54
)
 
22

 
(76
)
 
*

Equity method investment income (loss) and other(1)
1

 
4

 
(3
)
 
(75
)%
 
1

 
3

 
(2
)
 
(67
)%
Gains (losses) on securities and other, net
$
(64
)
 
$
15

 
$
(79
)
 
*

 
$
(53
)
 
$
25

 
$
(78
)
 
*

*
Percentage not meaningful.
(1)
Includes $4 million in gains on Community Reinvestment Act (CRA) equity investments for the three months ended June 30, 2018.
In June 2019, the Company sold $4.5 billion of lower-yielding investment securities at losses as it repositioned its balance sheet during the second quarter. Gains (losses) on securities and other, net includes $80 million of losses related to these sales. The losses were partially offset by $16 million in gains from other investment security activity in this line item. See MD&A—Overview, MD&A—Balance Sheet Overview and Note 5—Available-for-Sale and Held-to-Maturity Securities for additional information.
Provision (Benefit) for Loan Losses
We recognized a benefit for loan losses of $8 million and $20 million for the three and six months ended June 30, 2019, respectively, compared to a benefit for loan losses of $19 million and $40 million for the same periods in 2018. The timing and magnitude of the provision (benefit) for loan losses is affected by many factors that could result in variability. These benefits reflected better than expected performance of our portfolio as well as recoveries in excess of prior expectations, including sales of charged-off loans and recoveries of previous charge-offs that were not included in our loss estimates. For additional information on management's estimate of the allowance for loan losses, see Note 6—Loans Receivable, Net.


E*TRADE Q2 2019 10-Q | Page 21
 
                    

    

Non-Interest Expense
The following table presents the significant components of non-interest expense (dollars in millions):
 
Three Months Ended June 30,
 
Variance
 
Six Months Ended June 30,
 
Variance
 
 
2019 vs. 2018
 
 
2019 vs. 2018
 
2019
 
2018
 
Amount
 
%
 
2019
 
2018
 
Amount
 
%
Compensation and benefits
$
168

 
$
160

 
$
8

 
5
 %
 
$
332

 
$
312

 
$
20

 
6
 %
Advertising and market development
48

 
47

 
1

 
2
 %
 
102

 
107

 
(5
)
 
(5
)%
Clearing and servicing
32

 
30

 
2

 
7
 %
 
62

 
66

 
(4
)
 
(6
)%
Professional services
26

 
25

 
1

 
4
 %
 
48

 
47

 
1

 
2
 %
Occupancy and equipment
32

 
30

 
2

 
7
 %
 
64

 
60

 
4

 
7
 %
Communications
29

 
28

 
1

 
4
 %
 
44

 
59

 
(15
)
 
(25
)%
Depreciation and amortization
21

 
23

 
(2
)
 
(9
)%
 
42

 
45

 
(3
)
 
(7
)%
FDIC insurance premiums
4

 
9

 
(5
)
 
(56
)%
 
8

 
18

 
(10
)
 
(56
)%
Amortization of other intangibles
15

 
12

 
3

 
25
 %
 
30

 
22

 
8

 
36
 %
Restructuring and acquisition-related activities

 
2

 
(2
)
 
(100
)%
 

 
2

 
(2
)
 
(100
)%
Other non-interest expenses
23

 
18

 
5

 
28
 %
 
41

 
41

 

 
 %
Total non-interest expense
$
398

 
$
384

 
$
14

 
4
 %
 
$
773

 
$
779

 
$
(6
)
 
(1
)%
Compensation and Benefits
Compensation and benefits expense increased 5% to $168 million and 6% to $332 million for the three and six months ended June 30, 2019, respectively, compared to the same periods in 2018. The expense increase was primarily driven by a 4% increase in headcount as a result of acquisitions during 2018, as well as growth in our business. The three months ended June 30, 2019 also included severance of $7 million related to organizational realignment.
Communications
Communications expense increased 4% to $29 million and decreased 25% to $44 million for the three and six months ended June 30, 2019, respectively, compared to the same periods in 2018. The decrease during the six months ended June 30, 2019 was due to a $14 million benefit in the first quarter of 2019 related to a change in estimate for previous market data usage.
FDIC Insurance Premiums
FDIC insurance premiums expense decreased 56% to $4 million and $8 million for both the three and six months ended June 30, 2019, respectively, compared to the same periods in 2018. The decrease was driven primarily by the termination of surcharges paid to the Deposit Insurance Fund after it attained the minimum reserve ratio of 1.35 percent of insured deposits in September 2018.
Amortization of Other Intangibles
Amortization of other intangibles expense increased 25% to $15 million and 36% to $30 million for the three and six months ended June 30, 2019, respectively, compared to the same periods in 2018. The increase was primarily due to the intangible assets recognized in connection with the TCA acquisition and acquisition of retail accounts from Capital One during 2018.


E*TRADE Q2 2019 10-Q | Page 22
 
                    

    

Other Non-Interest Expenses
Other non-interest expenses increased 28% to $23 million and remained flat at $41 million for the three and six months ended June 30, 2019, respectively, compared to the same periods in 2018. The increase during the three months ended June 30, 2019 was primarily driven by higher expenses from our annual Directions conference, sponsored by our corporate services channel, where we hosted approximately 650 stock plan participants and prospective clients.
Operating Margin
Operating margin was 43% and 48% for the three and six months ended June 30, 2019, respectively, compared to 49% and 48% for the same periods in 2018. Adjusted operating margin, a non-GAAP measure, was 42% and 46% for the three and six months ended June 30, 2019, respectively, compared to 46% and 45% for the same periods in 2018.
Adjusted operating margin is calculated by dividing adjusted income before income tax expense by total net revenue. Adjusted income before income tax expense, a non-GAAP measure, excludes provision (benefit) for loan losses. The following table presents a reconciliation of adjusted income before income tax expense and adjusted operating margin, non-GAAP measures, to the most directly comparable GAAP measures (dollars in millions):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
 
Amount
 
Operating Margin %
 
Amount
 
Operating Margin %
 
Amount
 
Operating Margin %
 
Amount
 
Operating Margin %
Income before income tax expense / operating margin(1)
$
295

 
43
%
 
$
345

 
49
%
 
$
687

 
48%
 
$
679

 
48%
Provision (benefit) for loan losses
(8
)
 
 
 
(19
)
 
 
 
(20
)
 
 
 
(40
)
 
 
Adjusted income before income tax expense / adjusted operating margin(2)
$
287

 
42
%
 
$
326

 
46
%
 
$
667

 
46%
 
$
639

 
45%
(1)
Income before income tax expense included $80 million of losses from balance sheet repositioning for the three and six months ended June 30, 2019, which resulted in a 6 percentage point reduction and a 2 percentage point reduction in operating margin for the same periods.
(2)
Adjusted income before income tax expense included $80 million of losses from balance sheet repositioning for the three and six months ended June 30, 2019, which resulted in a 6 percentage point reduction and a 3 percentage point reduction in adjusted operating margin for the same periods.



E*TRADE Q2 2019 10-Q | Page 23
 
                    

    

Return on Common Equity
Return on common equity was 15% and 17% for the three and six months ended June 30, 2019, respectively, compared to 16% and 15% for the same periods in 2018. Adjusted return on common equity, a non-GAAP measure, was 14% and 16% for the three and six months ended June 30, 2019, respectively, compared to 15% and 14% for the same periods in 2018.
Adjusted return on common equity is calculated by dividing adjusted net income available to common shareholders by average common shareholders' equity, which excludes preferred stock. Adjusted net income available to common shareholders, a non-GAAP measure, excludes the after-tax impact of the provision (benefit) for loan losses. The following table provides a reconciliation of GAAP net income available to common shareholders and return on common equity percentage to non-GAAP adjusted net income available to common shareholders and adjusted return on common equity percentage (dollars in millions):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
 
Amount
 
Return on Common Equity %
 
Amount
 
Return on Common Equity %
 
Amount
 
Return on Common Equity %
 
Amount
 
Return on Common Equity %
Net income available to common shareholders and return on common equity(1)
$
219

 
15
%
 
$
250

 
16
%
 
$
489

 
17%
 
$
485

 
15
%
Add back impact of the following item:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Provision (benefit) for loan losses
(8
)
 
 
 
(19
)
 
 
 
(20
)
 
 
 
(40
)
 
 
Income tax impact
2

 
 
 
5

 
 
 
5

 
 
 
10

 
 
Net of tax
(6
)
 
 
 
(14
)
 
 
 
(15
)
 
 
 
(30
)
 
 
Adjusted net income available to common shareholders and return on common equity(1)
$
213

 
14
%
 
$
236

 
15
%
 
$
474

 
16%
 
$
455

 
14
%
(1)
Net income available to common shareholders and adjusted net income available to common shareholders includes $80 million of losses from balance sheet repositioning for the three and six months ended June 30, 2019, which had an after-tax impact of $59 million and resulted in a 4 percentage point reduction and 2 percentage point reduction to return on common equity and adjusted return on common equity for the same periods.
Income Tax Expense
Income tax expense was $76 million and $178 million for the three and six months ended June 30, 2019, respectively, compared to $95 million and $182 million for the same periods in 2018. The effective tax rate was 26% for both the three and six months ended June 30, 2019, compared to 27% for both periods in 2018.


E*TRADE Q2 2019 10-Q | Page 24
 
                    

    

BALANCE SHEET OVERVIEW
The following table presents the significant components of the consolidated balance sheet (dollars in millions):
 
 
 
Variance
 
June 30,
 
December 31,
 
2019 vs. 2018
 
2019
 
2018
 
Amount
 
%
Assets:
 
 
 
 
 
 
 
Cash and equivalents
$
380

 
$
2,333

 
$
(1,953
)
 
(84
)%
Segregated cash
948

 
1,011

 
(63
)
 
(6
)%
Investment securities
43,112

 
45,037

 
(1,925
)
 
(4
)%
Margin receivables
9,930

 
9,560

 
370

 
4
 %
Loans receivable, net
1,849

 
2,103

 
(254
)
 
(12
)%
Receivables from brokers, dealers and clearing organizations
902

 
760

 
142

 
19
 %
Goodwill and other intangibles, net
2,946

 
2,976

 
(30
)
 
(1
)%
Other(1)
1,523


1,223

 
300

 
25
 %
Total assets
$
61,590

 
$
65,003

 
$