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EX-32.1 - EXHIBIT 32.1 - E TRADE FINANCIAL CORPetfc-2017630xex321.htm
EX-31.2 - EXHIBIT 31.2 - E TRADE FINANCIAL CORPetfc-2017630xex312.htm
EX-31.1 - EXHIBIT 31.1 - E TRADE FINANCIAL CORPetfc-2017630xex311.htm


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, 2017

Commission File Number 1-11921
 ________________________________
Eetradeasteriska02.jpgTRADE Financial Corporation
(Exact Name of Registrant as Specified in its Charter)
______________________________________________
Delaware
 
94-2844166
(State or other jurisdiction
of incorporation or organization)
 
(I.R.S. Employer
Identification Number)
1271 Avenue of the Americas, 14th Floor, New York, New York 10020
(Address of principal executive offices and Zip Code)
(646) 521-4300
(Registrant’s telephone number, including area code)
 _____________________________________
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 and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted 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 and post 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 31, 2017, there were 274,709,880 shares of common stock outstanding.



E*TRADE FINANCIAL CORPORATION
FORM 10-Q QUARTERLY REPORT
For the Quarter Ended June 30, 2017
TABLE OF CONTENTS
PART I
FINANCIAL INFORMATION
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
 
 
 
 
Item 3.
 
Item 4.
PART II
 
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
 
 




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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, the Converging Arrows logo and OptionsHouse are registered trademarks of E*TRADE Financial Corporation in the United States and in other countries.



E*TRADE | Q2 2017 10-Q
 
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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 and include statements regarding our business strategy, objectives and vision; our plans and ability to deliver new products and solutions; our ability to improve client acquisition and deepen relationships with existing clients; our ability to effectively monetize brokerage relationships by investing in agency mortgage-backed securities; our capital plan initiatives, the expected balance sheet size, any balance sheet growth and the incremental regulatory and reporting requirements that our balance sheet size and growth may require; our plans to run off our legacy loan portfolio; repurchases of our common stock, payment of dividends on our preferred stock; our ability to maintain required regulatory capital ratios; our plans for the payment of dividends from our subsidiaries to our parent company; our ability to identify and manage risks appropriately; and 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 condition; performance, volume and volatility in the equity and capital markets; fluctuations in interest rates; customer demand for financial products and services; increased competition; cyber security threats, potential system disruptions and other security breaches; our ability to participate in consolidation opportunities in our industry; the ability to realize synergies or to implement integration plans and other risks from mergers and acquisitions; our ability to service our corporate debt; changes in government regulation or actions by our regulators; our ability to move capital to our parent company from our subsidiaries; adverse developments in litigation or regulatory matters; the timing and duration of, and the amount of shares repurchased and amount of cash expended in connection with, the share repurchase program; and other factors discussed 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 Form 10-Q; and Part I. Item 1A. Risk Factors of our Annual Report on Form 10-K for the year ended December 31, 2016, filed with the Securities and Exchange Commission (SEC), which are incorporated herein by reference. 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. The forward-looking statements contained in this report reflect our expectations only as of the date of this report. You should not place undue reliance on forward-looking statements, as we do not undertake to update or revise forward-looking statements to reflect the impact of circumstances or events that arise after the date the forward-looking statements were made, except as required by law.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 Annual Report on Form 10-K for the year ended December 31, 2016.



E*TRADE | Q2 2017 10-Q
 
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OVERVIEW
Company Overview
E*TRADE is a financial services company that provides online brokerage and related products and services primarily to individual retail investors. Our mission is to enhance the financial independence of traders and investors through a powerful digital offering and professional guidance. Our vision is to be the #1 digital broker and advisor to traders and investors, known for ease of use and the completeness of our offering.
Strategy
Our business strategy is centered on two key objectives: accelerating the growth of our core brokerage business to drive organic growth and improve competitive position, and generating robust earnings growth and healthy returns on capital to deliver long-term value for our stakeholders.
Accelerate Growth of Core Brokerage Business
Enhance overall customer experience
We are focused on delivering cutting-edge trading solutions while improving our market position in investing products. Through these offerings, we aim to drive customer acquisition while deepening engagement with our existing customers.
Capitalize on value of corporate services channel
We leverage our industry-leading position in corporate stock plan administration to improve client acquisition and engage with plan participants to bolster awareness of our full suite of offerings. Our corporate services channel is a strategically important driver of brokerage account and asset growth.
Generate Robust Earnings Growth and Healthy Returns on Capital
Utilize balance sheet to enhance returns
We utilize our bank structure to effectively monetize brokerage relationships by investing stable, low-cost deposits primarily in agency mortgage-backed securities.
Put capital to work for shareholders
We have put significant capital to work through balance sheet growth, share repurchases and acquisition activity. We are focused on generating and effectively deploying capital for the benefit of our shareholders.
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 and margin receivables, less interest paid on interest-bearing liabilities, including deposits, customer payables, corporate debt and other borrowings. Net interest income is also earned on our legacy loan portfolio which we expect to continue to run off in future periods. Commissions revenue is generated by customer trades and is largely impacted by trade volume and commission rates. Fees and service charges revenue is mainly impacted by order flow revenue, fees earned on off-balance sheet customer cash and other assets, and advisor management fees. Our net revenue is offset by non-interest expenses, the largest of which are compensation and benefits and advertising and market development.



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Significant Events in the Second Quarter of 2017
Consolidated Tier 1 leverage ratio threshold reduced to 6.5%
Beginning July 2017, E*TRADE Financial's consolidated Tier 1 leverage ratio threshold is 6.5%, which was reduced from the previous threshold of 7.0%.
Authorized the repurchase of up to $1 billion of shares of our common stock
In July 2017, we announced that our Board of Directors authorized the repurchase of up to $1 billion of shares of our common stock. The timing and exact amount of any common stock repurchases will depend on various factors, including market conditions and our capital position. As of July 31, 2017, we have subsequently repurchased 0.7 million shares of common stock at an average price of $41.24 for a total of approximately $26.8 million.
Launch of new advertising campaign - Don't Get Mad, Get E*TRADE
We launched a new advertising campaign, Don't Get Mad, Get E*TRADE. This campaign acknowledges the everyday frustrations that consumers feel when bombarded by depictions of exaggerated wealth, and encourages consumers to channel these frustrations into positive action. Through the campaign we aim to tell consumers that we understand them, and we offer a way for them to have greater control over their future.
Key Performance Metrics
Management monitors a number of customer activity and company metrics to evaluate the Company’s performance. The most significant of these are displayed below along with the percentage variance for the three months ended June 30, 2017 from the same period in 2016, where applicable, and includes OptionsHouse from the September 12, 2016 acquisition date.
Customer Activity Metrics:
etfc-201763_chartx26156.jpg etfc-201763_chartx27179.jpg



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etfc-201763_chartx28723.jpg etfc-201763_chartx30775.jpg
etfc-201763_chartx32241.jpg etfc-201763_chartx33640.jpg
etfc-201763_chartx35213.jpg etfc-201763_chartx36796.jpg



E*TRADE | Q2 2017 10-Q
 
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etfc-201763_chartx37877.jpg etfc-201763_chartx38921.jpg
etfc-201763_chartx40304.jpg
Daily Average Revenue Trades (DARTs) is the predominant driver of commissions revenue from our customers. DARTs were 208,205 and 207,717 for the three and six months ended June 30, 2017, respectively, compared to 152,488 and 158,653 for the same periods in 2016.
Derivative DARTs percentage is the mix of options and futures as a component of total DARTs and is a key driver of commissions revenue. Derivative DARTs represented 32% and 30% of total DARTs for the three and six months ended June 30, 2017, respectively, compared to 24% for the same periods in 2016.
Average commission per trade is an indicator of changes in our customer mix, product mix and/or product pricing. Average commission per trade was $8.02 and $8.93 for the three and six months ended June 30, 2017, respectively, compared to $10.82 and $10.73 for the same periods in 2016. Average commission per trade for the three and six months ended June 30, 2017 was impacted by our reduced commission rates for equity and options trades effective March 13, 2017.
Customer margin balances represents credit extended to customers to finance their purchases of securities by borrowing against securities they own and are a key driver of net interest income. Customer margin balances were $8.2 billion and $6.8 billion at June 30, 2017 and 2016, respectively. Customer margin includes OptionsHouse balances which are currently held by a third party clearing firm. Those balances were $0.4 billion at June 30, 2017.
Managed products represents customer assets in our Managed Investment Portfolio, Unified Managed Account, Adaptive Portfolio, and Fixed Income Separately Managed Account products. Managed products are a driver of fees and service charges revenue. Managed products were $4.6 billion and $3.4 billion at June 30, 2017 and 2016, respectively.



E*TRADE | Q2 2017 10-Q
 
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End of period brokerage accounts, net new brokerage accounts and brokerage account attrition rate are indicators of our ability to attract and retain brokerage customers. End of period brokerage accounts were 3.6 million and 3.3 million at June 30, 2017 and 2016, respectively. Net new brokerage accounts were 41,271 and 99,486 for the three and six months ended June 30, 2017, respectively, and 23,090 and 63,549 for the same periods in 2016. Our annualized brokerage account attrition rate was 9.0% and 9.2% for the three and six months ended June 30, 2017, respectively, compared to 8.3% and 8.1% for the same periods in 2016. During the three and six months ended June 30, 2017, our annualized net new brokerage account growth rate was 4.7% and 5.7%, respectively, compared to 2.8% and 4.0% for the same periods in 2016. End of period brokerage accounts and net new brokerage accounts for the three months ended September 30, 2016 include 147,761 accounts from the OptionsHouse acquisition.
Customer assets is an indicator of the value of our relationship with the customer. An increase generally indicates that the use of our products and services by existing and new customers is expanding. Changes in this metric are also driven by changes in the valuations of our customers' underlying securities. Customer assets were $348.2 billion and $285.9 billion at June 30, 2017 and 2016, respectively.
Net new brokerage assets is total inflows to new and existing brokerage accounts less total outflows from closed and existing brokerage accounts. The net new brokerage assets metric is a general indicator of the use of our products and services by new and existing brokerage customers. Net new brokerage assets were $2.6 billion and $6.8 billion for the three and six months ended June 30, 2017, respectively, compared to $1.6 billion and $4.5 billion for the same periods in 2016. During the three and six months ended June 30, 2017, our annualized net new brokerage asset growth rate was 3.5% and 4.9%, respectively, compared to 2.6% and 3.7% for the same periods in 2016. Net new brokerage assets for the three months ended September 30, 2016 includes $3.7 billion from the OptionsHouse acquisition.
Brokerage related cash is an indicator of the level of engagement with our brokerage customers and 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. Brokerage related cash was $51.7 billion and $43.0 billion at June 30, 2017 and 2016, respectively.
Company Metrics:
etfc-201763_chartx41300.jpg etfc-201763_chartx42446.jpg




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etfc-201763_chartx43559.jpg etfc-201763_chartx44653.jpg

etfc-201763_chartx45629.jpg etfc-201763_chartx46693.jpg

etfc-201763_chartx47747.jpg etfc-201763_chartx48990.jpg



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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 55% and 48% for the three and six months ended June 30, 2017, respectively, compared to 45% and 43% for the same periods in 2016.
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 38% for both the three and six months ended June 30, 2017, respectively, compared to 38% and 36% for the same periods in 2016. See Earnings Overview for a reconciliation of this non-GAAP measure to the most directly comparable GAAP measure.
Corporate cash is a component of cash and equivalents and represents the primary source of capital above and beyond the capital deployed in our regulated subsidiaries. Corporate cash was $478 million and $523 million at June 30, 2017 and 2016, respectively. See Liquidity and Capital Resources for a reconciliation of this non-GAAP measure to the most directly comparable GAAP measure.
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 7.5% at both June 30, 2017 and 2016. E*TRADE Bank's Tier 1 leverage ratio was 8.0% and 8.2% at June 30, 2017 and 2016, respectively. See Liquidity and Capital Resources for additional information, including the calculation of regulatory capital ratios.
Allowance for loan losses is an estimate of probable losses inherent in the loan portfolio as of the balance sheet date, as well as the forecasted losses, including economic concessions to borrowers, over the estimated remaining life of loans modified as troubled debt restructurings (TDRs). Allowance for loan losses was $116 million and $293 million at June 30, 2017 and 2016, respectively.
Interest-earning assets, along with net interest margin, is an indicator of our ability to generate net interest income. Average interest-earning assets were $51.9 billion and $50.3 billion for the three and six months ended June 30, 2017, respectively, compared to $43.4 billion and $42.2 billion for the same periods in 2016.
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 2.74% and 2.68% for the three and six months ended June 30, 2017, respectively, compared to 2.64% and 2.72% for the same periods in 2016.
Total employees were 3,614 and 3,588 at June 30, 2017 and 2016, respectively.
Regulatory Developments
In April 2016, the U.S. Department of Labor published its final fiduciary regulations under the Employee Retirement Income Security Act of 1974 and the Internal Revenue Code of 1986. Certain aspects of these regulations began to take effect in June 2017. These regulations generally subject particular persons, such as broker-dealers and other financial advisers providing investment advice to individual retirement accounts and other qualified retirement plans and accounts, to fiduciary duties and additional regulatory restrictions for a wider range of customer interactions. The remaining aspects of these regulations are currently scheduled to take effect on January 1, 2018. During the transition period from June 2017 to January 2018, the Department of Labor indicated in Field Assistance Bulletin 2017-02 issued in May 2017 that it will not take enforcement actions against impacted parties that are in reasonable compliance with the regulations. The Company is in the process of implementing the remaining applicable regulations by the end date of the transition period.
The Company has historically not been subject to certain regulatory requirements that apply to banking organizations with $50 billion or more in total consolidated assets as defined by each applicable regulation. Total consolidated assets of $50 billion, which is measured in accordance with each applicable regulation, but generally on the basis of the average of the four most recent quarters, is a meaningful regulatory threshold as U.S. banking organizations become subject to a number of additional and, in some cases, more stringent



E*TRADE | Q2 2017 10-Q
 
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regulatory requirements once they reach that size. The Company surpassed $50 billion in total consolidated assets on a four quarter average in the first quarter of 2017.
The Company expects these regulatory requirements, not all of which have been finalized, to start becoming applicable to it in 2018. The Company has begun implementing policies, procedures, systems and governance structures that are designed to comply with the requirements. Additionally, while savings and loan holding companies are currently excluded from the scope of certain regulations that apply to bank holding companies, the Company expects it will ultimately be subject to these requirements. For additional information see Part I. Item 1. Business of our Annual Report on Form 10-K for the year ended December 31, 2016.
EARNINGS OVERVIEW
We generated net income of $193 million and $338 million on total net revenue of $577 million and $1.1 billion for the three and six months ended June 30, 2017, respectively. The following chart provides a reconciliation of net income for the three months ended June 30, 2016 to net income for the three months ended June 30, 2017 (dollars in millions):
etfc-201763_chartx35306.jpg



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The significant components of the consolidated statement of income are as follows (dollars in millions except per share amounts):
 
Three Months Ended June 30,
 
Variance
 
Six Months Ended June 30,
 
Variance
 
 
2017 vs. 2016
 
 
2017 vs. 2016
 
2017
 
2016
 
Amount
 
%
 
2017
 
2016
 
Amount
 
%
Net interest income
$
356

 
$
286

 
$
70

 
24
%
 
$
675

 
$
573

 
$
102

 
18
%
Total non-interest income
221

 
188

 
33

 
18
%
 
455

 
373

 
82

 
22
%
Total net revenue
577

 
474

 
103

 
22
%
 
1,130

 
946

 
184

 
19
%
Provision (benefit) for loan losses
(99
)
 
(35
)
 
(64
)
 
183
%
 
(113
)
 
(69
)
 
(44
)
 
64
%
Total non-interest expense
359

 
295

 
64

 
22
%
 
701

 
607

 
94

 
15
%
Income before income tax expense
317

 
214

 
103

 
48
%
 
542

 
408

 
134

 
33
%
Income tax expense
124

 
81

 
43

 
53
%
 
204

 
122

 
82

 
67
%
Net income
$
193

 
$
133

 
$
60

 
45
%
 
$
338

 
$
286

 
$
52

 
18
%
Preferred stock dividends

 

 

 
%
 
13

 

 
13

 
100
%
Net income available to common shareholders
$
193

 
$
133

 
$
60

 
45
%
 
$
325

 
$
286

 
$
39

 
14
%
Diluted earnings per common share
$
0.70

 
$
0.48

 
$
0.22

 
46
%
 
$
1.17

 
$
1.01

 
$
0.16

 
16
%
Net income increased 45% to $193 million and 18% to $338 million for the three and six months ended June 30, 2017, respectively, compared to the same periods in 2016. Net income available to common shareholders was $193 million and $325 million for the three and six months ended June 30, 2017, respectively, which reflects payment of a $13 million preferred stock dividend in the first quarter of 2017, compared to $133 million and $286 million during the same periods in 2016. We recognized a benefit for loan losses of $99 million and $113 million for the three and six months ended June 30, 2017, respectively, compared to $35 million and $69 million for the same periods in 2016. Net income for the three and six months ended June 30, 2017 also included $9 million and $15 million, respectively, of pre-tax costs primarily incurred in connection with the OptionsHouse integration and preparation for the incremental regulatory and reporting requirements that our balance sheet growth requires. Higher advertising and market development expenses driven by our new advertising campaign, as well as increased communications expense, also impacted current quarter results. Net income for the six months ended June 30, 2016 included an income tax benefit related to the release of a valuation allowance against certain state deferred tax assets.



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Net Revenue
The components of net revenue and the resulting variances are as follows (dollars in millions):
 
Three Months Ended June 30,
 
Variance
 
Six Months Ended June 30,
 
Variance
 
 
2017 vs. 2016
 
 
2017 vs. 2016
 
2017
 
2016
 
Amount
 
%
 
2017
 
2016
 
Amount
 
%
Net interest income
$
356

 
$
286

 
$
70

 
24
 %
 
$
675

 
$
573

 
$
102

 
18
 %
Commissions
105

 
106

 
(1
)
 
(1
)%
 
232

 
213

 
19

 
9
 %
Fees and service charges
98

 
62

 
36

 
58
 %
 
184

 
120

 
64

 
53
 %
Gains on securities and other, net
7

 
10

 
(3
)
 
(30
)%
 
17

 
20

 
(3
)
 
(15
)%
Other revenue
11

 
10

 
1

 
10
 %
 
22

 
20

 
2

 
10
 %
Total non-interest income
221

 
188

 
33

 
18
 %
 
455

 
373

 
82

 
22
 %
Total net revenue
$
577

 
$
474

 
$
103

 
22
 %
 
$
1,130

 
$
946

 
$
184

 
19
 %
Net Interest Income
Net interest income increased 24% to $356 million and 18% to $675 million for the three and six months ended June 30, 2017, respectively, compared to the same periods in 2016. Net interest income is earned primarily through investment securities, margin receivables and our legacy loan portfolio, offset by funding costs.



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The following table presents average balance sheet data and interest income and expense data, as well as the related net interest margin, yields and rates prepared on the basis required by the SEC’s Industry Guide 3, "Statistical Disclosure by Bank Holding Companies" (dollars in millions): 
 
Three Months Ended June 30,
 
2017
 
2016
 
Average Balance
 
Interest Inc./Exp.
 
Average Yield/
Cost
 
Average Balance
 
Interest Inc./Exp.
 
Average Yield/
Cost
Cash and equivalents
$
890

 
$
2

 
0.87
%
 
$
1,589

 
$
1

 
0.36
%
Cash required to be segregated under federal or other regulations
1,355

 
3

 
0.94
%
 
1,599

 
1

 
0.34
%
Available-for-sale securities
18,197

 
95

 
2.10
%
 
13,503

 
68

 
2.01
%
Held-to-maturity securities
19,725

 
137

 
2.78
%
 
15,354

 
107

 
2.80
%
Margin receivables
7,258

 
75

 
4.14
%
 
6,502

 
61

 
3.76
%
Loans (1)
3,332

 
41

 
4.88
%
 
4,512

 
49

 
4.32
%
Broker-related receivables and other
1,142

 
1

 
0.20
%
 
363

 
1

 
0.29
%
Subtotal interest-earning assets
51,899

 
354

 
2.73
%
 
43,422

 
288

 
2.65
%
Other interest revenue (2)

 
24

 
 
 

 
18

 
 
    Total interest-earning assets
51,899

 
378

 
2.91
%
 
43,422

 
306

 
2.83
%
Total non-interest-earning assets (3)
4,951

 
 
 
 
 
4,815

 
 
 
 
Total assets
$
56,850

 
 
 
 
 
$
48,237

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Deposits
$
37,894

 
$
1

 
0.01
%
 
$
31,865

 
$
1

 
0.01
%
Customer payables
8,686

 
2

 
0.06
%
 
6,913

 
1

 
0.07
%
Broker-related payables and other
1,237

 

 
0.00
%
 
1,345

 

 
0.00
%
Other borrowings
674

 
5

 
3.18
%
 
410

 
4

 
4.43
%
Corporate debt
991

 
13

 
5.41
%
 
993

 
14

 
5.40
%
Subtotal interest-bearing liabilities
49,482

 
21

 
0.17
%
 
41,526

 
20

 
0.19
%
Other interest expense (4)

 
1

 
 
 

 

 
 
    Total interest-bearing liabilities
49,482

 
22

 
0.18
%
 
41,526

 
20

 
0.20
%
Total non-interest-bearing liabilities (5)
884

 
 
 
 
 
969

 
 
 
 
Total liabilities
50,366

 
 
 
 
 
42,495

 
 
 
 
Total shareholders' equity
6,484

 
 
 
 
 
5,742

 
 
 
 
Total liabilities and shareholders' equity
$
56,850

 
 
 
 
 
$
48,237

 
 
 
 
Excess interest earning assets over interest bearing liabilities/net interest income/net interest margin
$
2,417

 
$
356

 
2.74
%
 
$
1,896

 
$
286

 
2.64
%
(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)
Represents interest income on securities loaned.
(3)
Non-interest earning assets consist of property and equipment, net, goodwill, other intangibles, net and other assets that do not generate interest income.
(4)
Represents interest expense on securities borrowed.
(5)
Non-interest bearing liabilities consist of other liabilities that do not generate interest expense.



E*TRADE | Q2 2017 10-Q
 
12  
                                    


 
Six Months Ended June 30,
 
2017
 
2016
 
Average Balance
 
Interest Inc./Exp.
 
Average Yield/
Cost
 
Average Balance
 
Interest Inc./Exp.
 
Average Yield/
Cost
Cash and equivalents
$
1,116

 
$
4

 
0.73
%
 
$
1,600

 
$
3

 
0.38
%
Cash required to be segregated under federal or other regulations
1,519

 
6

 
0.81
%
 
1,366

 
2

 
0.33
%
Available-for-sale securities
17,396

 
180

 
2.08
%
 
13,072

 
132

 
2.02
%
Held-to-maturity securities
18,634

 
257

 
2.76
%
 
14,515

 
210

 
2.90
%
Margin receivables
7,021

 
141

 
4.04
%
 
6,590

 
125

 
3.82
%
Loans (1)
3,469

 
84

 
4.82
%
 
4,658

 
100

 
4.28
%
Broker-related receivables and other
1,131

 
1

 
0.16
%
 
356

 
1

 
0.29
%
Subtotal interest-earning assets
50,286

 
673

 
2.68
%
 
42,157

 
573

 
2.72
%
Other interest revenue (2)

 
46

 
 
 

 
41

 
 
    Total interest-earning assets
50,286

 
719

 
2.87
%
 
42,157

 
614

 
2.92
%
Total non-interest-earning assets (3)
5,100

 
 
 
 
 
4,868

 
 
 
 
Total assets
$
55,386

 
 
 
 
 
$
47,025

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Deposits
$
36,390

 
$
2

 
0.01
%
 
$
30,716

 
$
2

 
0.01
%
Customer payables
8,686

 
3

 
0.06
%
 
6,682

 
2

 
0.07
%
Broker-related payables and other
1,199

 

 
0.00
%
 
1,398

 

 
0.00
%
Other borrowings
584

 
10

 
3.46
%
 
423

 
9

 
4.28
%
Corporate debt
992

 
27

 
5.40
%
 
994

 
27

 
5.39
%
Subtotal interest-bearing liabilities
47,851

 
42

 
0.17
%
 
40,213

 
40

 
0.20
%
Other interest expense (4)

 
2

 
 
 

 
1

 
 
    Total interest-bearing liabilities
47,851

 
44

 
0.18
%
 
40,213

 
41

 
0.21
%
Total non-interest-bearing liabilities (5)
1,142

 
 
 
 
 
1,079

 
 
 
 
Total liabilities
48,993

 
 
 
 
 
41,292

 
 
 
 
Total shareholders' equity
6,393

 
 
 
 
 
5,733

 
 
 
 
Total liabilities and shareholders' equity
$
55,386

 
 
 
 
 
$
47,025

 
 
 
 
Excess interest earning assets over interest bearing liabilities/net interest income/net interest margin
$
2,435

 
$
675

 
2.68
%
 
$
1,944

 
$
573

 
2.72
%
(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)
Represents interest income on securities loaned.
(3)
Non-interest earning assets consist of property and equipment, net, goodwill, other intangibles, net and other assets that do not generate interest income.
(4)
Represents interest expense on securities borrowed.
(5)
Non-interest bearing liabilities consist of other liabilities that do not generate interest expense.
Average interest-earning assets increased 20% to $51.9 billion and 19% to $50.3 billion for the three and six months ended June 30, 2017, respectively, compared to the same periods in 2016. 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 19% to $49.5 billion and 19% to $47.9 billion for the three and six months ended June 30, 2017, respectively, compared to the same periods in 2016. The increase was primarily due to higher deposits as a result of transferring customer cash held by third parties to our balance sheet. For additional information on our balance sheet growth and customer cash held by third parties, see Balance Sheet Overview.
Net interest margin increased 10 basis points to 2.74% and decreased 4 basis points to 2.68% for the three and six months ended June 30, 2017, respectively, compared to the same periods in 2016. Net interest margin is driven by the mix of asset and liability average balances and the interest rates earned or paid on those balances. The increase during the three months ended June 30, 2017, compared to the same period in 2016, is due to higher interest rates earned on increased margin receivable balances and higher



E*TRADE | Q2 2017 10-Q
 
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securities lending activities, partially offset by the continued run-off of our higher yielding legacy loan portfolio. The decline during the six months ended June 30, 2017, compared to the same period in 2016, is due to an increase in the overall allocation of lower yielding securities purchased with customer cash transferred to our balance sheet and proceeds from principal payments received on our higher yielding legacy loan portfolio that continues to become a smaller percentage of our interest-earning assets, partially offset by higher interest rates earned on increased average margin balances.
Commissions
Commissions revenue decreased 1% to $105 million and increased 9% to $232 million for the three and six months ended June 30, 2017, respectively, compared to the same periods in 2016. The main factors that affect commissions revenue are DARTs, average commission per trade and the number of trading days. DARTs volume increased 37% to 208,205 and 31% to 207,717 for the three and six months ended June 30, 2017, respectively, compared to the same periods in 2016, mainly driven by the inclusion of OptionsHouse accounts and the strength of the equity markets. Derivative DARTs represented 32% and 30% of trading volume for the three and six months ended June 30, 2017, respectively, compared to 24% of trading volume for both periods in 2016. Average commission per trade decreased 26% to $8.02 and 17% to $8.93 for the three and six months ended June 30, 2017, respectively, compared to the same periods in 2016. Average commission per trade is impacted by customer mix and differing commission rates on various trade types (e.g. equities, derivatives, stock plan and mutual funds). Average commission per trade for the three and six months ended June 30, 2017 was impacted by reduced commission rates implemented in March 2017 as well as our lower price structure for OptionsHouse customers.
Fees and Service Charges
The components of fees and service charges and the resulting variances are as follows (dollars in millions):    
 
Three Months Ended June 30,
 
Variance
 
Six Months Ended June 30,
 
Variance
 
 
2017 vs. 2016
 
 
2017 vs. 2016
 
2017
 
2016
 
Amount
 
%
 
2017
 
2016
 
Amount
 
%
Order flow revenue
$
34

 
$
22

 
$
12

 
55
%
 
$
65

 
$
44

 
$
21

 
48
%
Money market funds and sweep deposits revenue(1)
26

 
10

 
16

 
160
%
 
48

 
18

 
30

 
167
%
Mutual fund service fees
10

 
9

 
1

 
11
%
 
19

 
18

 
1

 
6
%
Advisor management fees
9

 
6

 
3

 
50
%
 
17

 
13

 
4

 
31
%
Foreign exchange revenue
6

 
5

 
1

 
20
%
 
14

 
9

 
5

 
56
%
Reorganization fees
5

 
4

 
1

 
25
%
 
8

 
7

 
1

 
14
%
Other fees and service charges
8

 
6

 
2

 
33
%
 
13

 
11

 
2

 
18
%
Total fees and service charges
$
98

 
$
62

 
$
36

 
58
%
 
$
184

 
$
120

 
$
64

 
53
%
(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.
Fees and service charges increased 58% to $98 million and 53% to $184 million for the three and six months ended June 30, 2017, respectively, compared to the same periods in 2016. The increase in fees and service charges was primarily driven by the impact of a higher interest rate environment and higher average balances of customer cash held by third parties. The gross yield on customer cash held by third parties for the three and six months ended June 30, 2017 of approximately 90 and 70 basis points compares to approximately 40 and 35 basis points for the same periods in 2016. In addition, fees and service charges benefited from increased order flow revenue resulting primarily from higher options trading activity and improved rates.



E*TRADE | Q2 2017 10-Q
 
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Gains on Securities and Other, Net
The components of gains on securities and other, net and the resulting variances are as follows (dollars in millions):
 
Three Months Ended June 30,
 
Variance
 
Six Months Ended June 30,
 
Variance
 
 
2017 vs. 2016
 
 
2017 vs. 2016
 
2017
 
2016
 
Amount
 
%
 
2017
 
2016
 
Amount
 
%
Gains on available-for-sale securities
$
10

 
$
14

 
$
(4
)
 
(29
)%
 
$
18

 
$
29

 
$
(11
)
 
(38
)%
Hedge ineffectiveness
(2
)
 
(2
)
 

 
 %
 
(3
)
 
(4
)
 
1

 
(25
)%
Equity method investment income (loss) and other
(1
)
 
(2
)
 
1

 
(50
)%
 
2

 
(5
)
 
7

 
(140
)%
Gains on securities and other, net
$
7

 
$
10

 
$
(3
)
 
(30
)%
 
$
17

 
$
20

 
$
(3
)
 
(15
)%
Provision (Benefit) for Loan Losses
We recognized a benefit for loan losses of $99 million and $113 million for the three and six months ended June 30, 2017, respectively, compared to a benefit of $35 million and $69 million for the same periods in 2016. The timing and magnitude of the provision (benefit) for loan losses is affected by many factors that could result in variability. The current period reflected approximately $70 million of benefit resulting from refined default assumptions based on the sustained outperformance of converted mortgage loans that had been amortizing for 12 months or longer. The current period benefit also reflected recoveries in excess of prior estimates, including recoveries of previous charge-offs. For additional information on management's estimate of the allowance for loan losses, see Concentrations of Credit Risk and Summary of Critical Accounting Policies and Estimates.
Non-Interest Expense
The components of non-interest expense and the resulting variances are as follows (dollars in millions):
 
Three Months Ended June 30,
 
Variance
 
Six Months Ended June 30,
 
Variance
 
 
2017 vs. 2016
 
 
2017 vs. 2016
 
2017
 
2016
 
Amount
 
%
 
2017
 
2016
 
Amount
 
%
Compensation and benefits
$
133

 
$
125

 
$
8

 
6
%
 
$
269

 
$
251

 
$
18

 
7
%
Advertising and market development
42

 
30

 
12

 
40
%
 
85

 
73

 
12

 
16
%
Clearing and servicing
33

 
25

 
8

 
32
%
 
65

 
49

 
16

 
33
%
Professional services
24

 
22

 
2

 
9
%
 
46

 
44

 
2

 
5
%
Occupancy and equipment
29

 
24

 
5

 
21
%
 
56

 
47

 
9

 
19
%
Communications
36

 
20

 
16

 
80
%
 
61

 
43

 
18

 
42
%
Depreciation and amortization
20

 
20

 

 
%
 
40

 
40

 

 
%
FDIC insurance premiums
8

 
6

 
2

 
33
%
 
16

 
12

 
4

 
33
%
Amortization of other intangibles
9

 
5

 
4

 
80
%
 
18

 
10

 
8

 
80
%
Restructuring and acquisition-related activities
4

 
1

 
3

 
300
%
 
8

 
3

 
5

 
167
%
Other non-interest expenses
21

 
17

 
4

 
24
%
 
37

 
35

 
2

 
6
%
Total non-interest expense
$
359

 
$
295

 
$
64

 
22
%
 
$
701

 
$
607

 
$
94

 
15
%



E*TRADE | Q2 2017 10-Q
 
15  
                                    


Compensation and Benefits
Compensation and benefits expense increased 6% to $133 million and 7% to $269 million for the three and six months ended June 30, 2017, respectively, compared to the same periods in 2016. The increase was primarily driven by the increase in employee headcount during the three and six months ended June 30, 2017 resulting from our acquisition of OptionsHouse.
Advertising and Market Development
Advertising and market development expense increased 40% to $42 million and 16% to $85 million for the three and six months ended June 30, 2017, respectively, compared to the same periods in 2016. The increase was primarily due to higher spending as we launched our new advertising campaign during the three months ended June 30, 2017.
Clearing and Servicing
Clearing and servicing expense increased 32% to $33 million and 33% to $65 million for the three and six months ended June 30, 2017, respectively, compared to the same periods in 2016. The increase was primarily related to higher trading volume compared to the same periods in 2016.
Occupancy and Equipment
Occupancy and equipment expense increased 21% to $29 million and 19% to $56 million for the three and six months ended June 30, 2017, respectively, compared to the same periods in 2016. The increase was primarily driven by higher information technology expenses associated with the Company's balance sheet growth and information security initiatives, compared to the same periods in 2016.
Communications
Communications expense increased 80% to $36 million and 42% to $61 million for the three and six months ended June 30, 2017, respectively, compared to the same periods in 2016. The increase was primarily driven by increased market data fees. During the three months ended June 30, 2017, we made significant progress in gathering customer data used to identify the population of professional users of real time market data. As the exchanges assess higher rates for these users, we updated our accrual estimate and recognized $9 million related to previous usage.
Operating Margin
Operating margin was 55% and 48% for the three and six months ended June 30, 2017, respectively, compared to 45% and 43% for the same periods in 2016. Adjusted operating margin, a non-GAAP measure, was 38% for both the three and six months ended June 30, 2017, respectively, compared to 38% and 36% for the same periods in 2016.



E*TRADE | Q2 2017 10-Q
 
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Adjusted operating margin is a non-GAAP measure calculated by dividing adjusted income before income tax expense by total net revenue. Adjusted income before income tax expense excludes the provision (benefit) for loan losses. The following table provides 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,
 
2017
 
2016
 
2017
 
2016
 
Amount
 
Operating Margin %
 
Amount
 
Operating Margin %
 
Amount
 
Operating Margin %
 
Amount
 
Operating Margin %
Income before income tax expense / operating margin
$
317

 
55%
 
$
214

 
45%
 
$
542

 
48%
 
$
408

 
43%
Provision (benefit) for loan losses
(99
)
 
 
 
(35
)
 
 
 
(113
)
 
 
 
(69
)
 
 
Adjusted income before income tax expense / adjusted operating margin
$
218

 
38%
 
$
179

 
38%
 
$
429

 
38%
 
$
339

 
36%
Income Tax Expense
Income tax expense was $124 million and $204 million for the three and six months ended June 30, 2017, respectively, compared to $81 million and $122 million for the same periods in 2016. The effective tax rates were 39% and 38% for the three and six months ended June 30, 2017, respectively, compared to 38% and 30% for the same periods in 2016.
The effective tax rate of 38% for the six months ended June 30, 2017 includes a tax benefit related to the adoption of amended accounting guidance for employee share-based compensation. See Note 1—Organization, Basis of Presentation and Summary of Significant Accounting Policies for additional information. The effective tax rate of 30% for the six months ended June 30, 2016 was impacted by a tax benefit related to the release of valuation allowances against certain state deferred tax assets.



E*TRADE | Q2 2017 10-Q
 
17  
                                    


BALANCE SHEET OVERVIEW
The following table sets forth the significant components of the consolidated balance sheet (dollars in millions):
 
 
 
Variance
 
June 30,
 
December 31,
 
2017 vs. 2016
 
2017
 
2016
 
Amount
 
%
Assets:
 
 
 
 
 
 
 
Cash and equivalents
$
1,091

 
$
1,950

 
$
(859
)
 
(44
)%
Segregated cash
889

 
1,460

 
(571
)
 
(39
)%
Securities(1)
40,392

 
29,643

 
10,749

 
36
 %
Margin receivables
7,773

 
6,731

 
1,042

 
15
 %
Loans receivable, net
3,055

 
3,551

 
(496
)
 
(14
)%
Receivables from brokers, dealers and clearing organizations(2)
1,237

 
1,056

 
181

 
17
 %
Goodwill and other intangibles, net
2,673

 
2,690

 
(17
)
 
(1
)%
Deferred tax assets, net
519

 
756

 
(237
)
 
(31
)%
Other(3)
1,124

 
1,162

 
(38
)
 
(3
)%
Total assets
$
58,753

 
$
48,999

 
$
9,754

 
20
 %
Liabilities and shareholders’ equity:
 
 
 
 
 
 
 
Deposits
$
40,072

 
$
31,682

 
$
8,390

 
26
 %
Customer payables
7,992

 
8,159

 
(167
)
 
(2
)%
Payables to brokers, dealers and clearing organizations(4)
1,473

 
983

 
490

 
50
 %
Other borrowings
1,009

 
409

 
600

 
147
 %
Corporate debt
992

 
994

 
(2
)
 
 %
Other liabilities
532

 
500

 
32

 
6
 %
Total liabilities
52,070

 
42,727

 
9,343

 
22
 %
Shareholders’ equity
6,683

 
6,272

 
411

 
7
 %
Total liabilities and shareholders’ equity
$
58,753

 
$
48,999

 
$
9,754

 
20
 %
(1)
Includes balance sheet line items available-for-sale and held-to-maturity securities.
(2)
Includes deposits paid for securities borrowed of $668 million and $774 million as of June 30, 2017 and December 31, 2016, respectively.
(3)
Includes balance sheet line items property and equipment, net and other assets.
(4)
Includes deposits received for securities loaned of $1.4 billion and $926 million as of June 30, 2017 and December 31, 2016, respectively.
Cash and Equivalents
Cash and equivalents decreased 44% to $1.1 billion during the six months ended June 30, 2017 and includes corporate cash of $478 million as of June 30, 2017. Cash and equivalents will fluctuate based on a variety of factors, including, among other drivers, liquidity needs at the parent, customer activity at our regulated subsidiaries, and the timing of investments at E*TRADE Bank. For additional information on our use of cash and equivalents, including corporate cash, see Liquidity and Capital Resources.
Segregated Cash
Cash required to be segregated under federal or other regulations decreased 39% to $889 million during the six months ended June 30, 2017. The level of segregated cash is driven largely by customer payables and securities lending balances we hold as liabilities compared with the amount of margin receivables and securities borrowed balances we hold as assets. The excess represents customer cash that we are required by our regulators to segregate for the exclusive benefit of our brokerage customers. At June 30, 2017 and December 31, 2016, $850 million and $500 million, respectively, of reverse repurchase agreements between E*TRADE Securities and E*TRADE Bank, representing investments that are required



E*TRADE | Q2 2017 10-Q
 
18  
                                    


to be segregated under federal or other regulations by E*TRADE Securities, were eliminated in consolidation.
Securities
Available-for-sale and held-to-maturity securities are summarized as follows (dollars in millions):
 
 
 
Variance
 
June 30,
 
December 31,
 
2017 vs. 2016
 
2017
 
2016
 
Amount
 
%
Available-for-sale securities:
 
 
 
 
 
 
 
Debt securities:
 
 
 
 
 
 
 
Agency mortgage-backed securities
$
17,380

 
$
12,634

 
$
4,746

 
38
%
Other debt securities
1,503

 
1,251

 
252

 
20
%
Total debt securities
18,883

 
13,885

 
4,998

 
36
%
Publicly traded equity securities(1)
7

 
7

 

 
%
Total available-for-sale securities
$
18,890

 
$
13,892

 
$
4,998

 
36
%
Held-to-maturity securities:
 
 
 
 
 
 
 
Agency mortgage-backed securities
$
18,426

 
$
12,868

 
$
5,558

 
43
%
Other debt securities
3,076

 
2,883

 
193

 
7
%
Total held-to-maturity securities
$
21,502

 
$
15,751

 
$
5,751

 
37
%
Total investments in securities
$
40,392

 
$
29,643

 
$
10,749

 
36
%
(1)
Consists of Community Reinvestment Act investments in a mutual fund.
Securities represented 69% and 60% of total assets at June 30, 2017 and December 31, 2016, respectively. We classify debt securities as available-for-sale or held-to-maturity based on our investment strategy and management’s assessment of our intent and ability to hold the debt securities until maturity.
The increase in total investments in securities during the six months ended June 30, 2017 was primarily due to net purchases of investment securities as a result of our efforts to grow the balance sheet by transferring customer cash held by third parties to our balance sheet.
Margin Receivables
Margin receivables increased 15% to $7.8 billion during the six months ended June 30, 2017. The increase in margin receivables was primarily driven by improved market sentiment increasing demand for additional margin lending.
Loans Receivable, Net
Loans receivable, net are summarized as follows (dollars in millions):
 
 
 
Variance
 
June 30,
 
December 31,
 
2017 vs. 2016
 
2017
 
2016
 
Amount
 
%
One- to four-family
$
1,659

 
$
1,950

 
$
(291
)
 
(15
)%
Home equity
1,287

 
1,556

 
(269
)
 
(17
)%
Consumer
212

 
250

 
(38
)
 
(15
)%
Total loans receivable
3,158

 
3,756

 
(598
)
 
(16
)%
Unamortized premiums, net
13

 
16

 
(3
)
 
(19
)%
Allowance for loan losses
(116
)
 
(221
)
 
105

 
(48
)%
Total loans receivable, net
$
3,055

 
$
3,551

 
$
(496
)
 
(14
)%
Loans receivable, net decreased 14% to $3.1 billion during the six months ended June 30, 2017. During the three months ended June 30, 2017 the Company sold certain loans with a carrying value of $41 million for



E*TRADE | Q2 2017 10-Q
 
19  
                                    


proceeds that approximated book value. We expect the remaining legacy loan portfolio to continue its run-off for the foreseeable future. As our portfolio has seasoned and substantially all interest-only loans have converted to amortizing, we continue to assess underlying performance, the economic environment, and the value of the portfolio in the marketplace. While it is our intention to hold these loans, if the markets improve our strategy could change. For additional information on management's estimate of the allowance for loan losses, see Concentrations of Credit Risk and Summary of Critical Accounting Policies and Estimates.
Deposits
Deposits are summarized as follows (dollars in millions):
 
 
 
Variance
 
June 30,
 
December 31,
 
2017 vs. 2016
 
2017
 
2016
 
Amount
 
%
Sweep deposits
$
34,937

 
$
26,362

 
$
8,575

 
33
 %
Savings deposits
3,078

 
3,185

 
(107
)
 
(3
)%
Other deposits
2,057

 
2,135

 
(78
)
 
(4
)%
Total deposits
$
40,072

 
$
31,682

 
$
8,390

 
26
 %
Deposits represented 77% and 74% of total liabilities at June 30, 2017 and December 31, 2016, respectively. At June 30, 2017, approximately 92% of our customer deposits were covered by FDIC insurance. Deposits increased $8.4 billion during the six months ended June 30, 2017 primarily as a result of transferring customer cash held by third parties to our balance sheet.
The majority of the deposits balance, specifically sweep deposits, is included in brokerage related cash, which is reported as a customer activity metric. Total brokerage related cash is summarized as follows (dollars in millions):
 
 
 
Variance
 
June 30,
 
December 31,
 
2017 vs. 2016
 
2017
 
2016
 
Amount
 
%
Sweep deposits(1)
$
34,937

 
$
26,362

 
$
8,575

 
33
 %
Customer payables
7,992

 
8,159

 
(167
)
 
(2
)%
Subtotal
42,929


34,521

 
8,408

 
24
 %
Customer cash held by third parties(2)
8,814

 
16,848

 
(8,034
)
 
(48
)%
Total brokerage related cash
$
51,743

 
$
51,369

 
$
374

 
1
 %
 
(1)
Sweep deposits are held at bank subsidiaries and are included in the deposits line item on our consolidated balance sheet.
(2)
Customer cash held by third parties is not reflected on our consolidated balance sheet and is not immediately available for liquidity purposes.
We offer an extended insurance sweep deposit account (ESDA) program to our brokerage customers. The ESDA program utilizes our bank subsidiaries, in combination with additional third party program banks, to allow customers the ability to have aggregate deposits they hold in the ESDA program insured up to $1,250,000 for each category of legal ownership. As of June 30, 2017, approximately 99% of sweep deposits were in the ESDA program.



E*TRADE | Q2 2017 10-Q
 
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Customer cash held by third parties is maintained at unaffiliated financial institutions and a third party clearing firm. The components of customer cash held by third parties are summarized as follows (dollars in millions):
 
 
 
Variance
 
June 30,
 
December 31,
 
2017 vs. 2016
 
2017
 
2016
 
Amount
 
%
Sweep deposits held by unaffiliated financial institutions
$
6,602

 
$
14,943

 
$
(8,341
)
 
(56
)%
Customer cash held by third party clearing firm(1)
1,655

 
1,634

 
21

 
1
 %
Municipal funds and other
557

 
271

 
286

 
106
 %
Customer cash held by third parties
$
8,814

 
$
16,848

 
$
(8,034
)
 
(48
)%
(1)
Represents OptionsHouse customer cash held by third party.
As of June 30, 2017, approximately $5 billion of customer cash held by third parties was available for balance sheet growth. The timing of our balance sheet growth will be impacted by a variety of factors, including the capital requirements applicable to both the Company and E*TRADE Bank.
Other Borrowings
Other borrowings are summarized as follows (dollars in millions):
 
 
 
Variance
 
June 30,
 
December 31,
 
2017 vs. 2016
 
2017
 
2016
 
Amount
 
%
Repurchase agreements
$
400

 
$

 
$
400

 
100
%
FHLB advances
200

 

 
200

 
100
%
Total repurchase agreements and FHLB advances
600

 

 
600

 
100
%
Trust preferred securities
409

 
409

 

 
%
Total other borrowings
$
1,009

 
$
409

 
$
600

 
147
%
Other borrowings increased 147% to $1.0 billion during the six months ended June 30, 2017 as we utilized repurchase agreements and Federal Home Loan Bank (FHLB) advances for short-term liquidity and funding requirements. See Liquidity and Capital Resources for additional information on liquidity and funding sources at E*TRADE Bank.
LIQUIDITY AND CAPITAL RESOURCES
We have established liquidity and capital policies to support the successful execution of our business strategy, while maintaining ongoing and sufficient liquidity through the business cycle. We believe liquidity is of critical importance to the Company and especially important for E*TRADE Bank and our broker-dealer subsidiaries. The objective of our policies is to ensure that we can meet our corporate, banking and broker-dealer liquidity needs under both normal operating conditions and under periods of stress in the financial markets.
Liquidity
Our corporate liquidity needs are primarily driven by capital needs at E*TRADE Bank and E*TRADE Securities as well as by the principal and interest due on our corporate debt and the amount of dividend payments on our preferred stock. Our banking and brokerage subsidiaries' liquidity needs are driven primarily by the level and volatility of our customer activity. Management maintains a set of liquidity sources and monitors certain business trends and market metrics closely in an effort to ensure we have sufficient liquidity. Potential loans by E*TRADE Bank to the parent company and its other non-bank subsidiaries are subject to various quantitative, arm’s length, collateralization, capital and other requirements.



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Parent Company Liquidity
The parent company's primary source of liquidity is corporate cash. Corporate cash, a non-GAAP measure, is a component of cash and equivalents; see the consolidated statement of cash flows within Item 1. Condensed Consolidated Financial Statements (Unaudited) for information on cash and equivalents activity. We define corporate cash as cash held at the parent company and certain subsidiaries, not including bank and broker-dealer subsidiaries, that can be distributed to the parent company without any regulatory approval or notification. E*TRADE Bank and its subsidiaries require regulatory approval prior to the payment of certain dividends to the parent company. Our broker-dealer subsidiaries can pay dividends to the parent company with proper regulatory notifications.
We believe 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 our regulated subsidiaries. Corporate cash can fluctuate in any given quarter and is impacted primarily by the following:
Dividends from subsidiaries
Non-cumulative preferred stock dividends
Share repurchases
Debt service costs
Acquisitions and investments
Tax payments and the reimbursement from the parent company's subsidiaries for the use of its deferred tax assets
Other overhead and expense reimbursements through cost sharing arrangements



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The following chart provides a roll forward of corporate cash at December 31, 2016 to corporate cash at June 30, 2017 (dollars in millions):
etfc-201763_chartx26030.jpg
(1) Other activity includes contributions to subsidiaries and parent company overhead, offset by reimbursements from subsidiaries for use of the parent's deferred tax assets and related proceeds under overhead cost sharing arrangements.
The following table provides a reconciliation of consolidated cash and equivalents to corporate cash, a non-GAAP measure (dollars in millions):
 
June 30,
 
December 31,
 
June 30,
 
2017
 
2016
 
2016
Consolidated cash and equivalents
$
1,091

 
$
1,950

 
$
2,393

Less: Cash at regulated subsidiaries(1)
(613
)
 
(1,489
)
 
(1,870
)
Corporate cash
$
478

 
$
461

 
$
523

(1) Reported net of corporate cash on deposit at E*TRADE Bank that is eliminated in consolidation.
Corporate cash increased $17 million to $478 million during the six months ended June 30, 2017. Corporate cash included dividends of $120 million from E*TRADE Securities to the parent company during the six months ended June 30, 2017. Corporate cash also included the impact of preferred stock dividends, debt service, overhead cost sharing arrangements between the parent and our operating subsidiaries, and the impact of annual incentive compensation payments in the six months ended June 30, 2017.
We maintain corporate cash at a minimum of two times our scheduled annual corporate debt service payments and scheduled maturities over the next 12 months. As we do not have any scheduled maturities of corporate debt in the coming year, our current minimum is approximately $100 million. Our nearest maturity of interest-bearing corporate debt is November 2022.
On June 23, 2017, we entered into an unsecured committed revolving credit facility with certain lenders, which replaced our previous secured committed revolving credit facility entered into in November 2014 and



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increased our total borrowing capacity under the facility to $300 million. The Company has the ability to borrow against the credit facility for working capital and general corporate purposes. The unsecured committed revolving credit facility will mature on June 23, 2020. At June 30, 2017, there was no outstanding balance under this revolving credit facility.
E*TRADE Bank Liquidity
E*TRADE Bank relies on bank cash and deposits for liquidity needs. Management believes that within deposits, sweep deposits are of particular importance as they are a stable source of liquidity for E*TRADE Bank. We have the ability to generate liquidity in the form of additional deposits by raising the yield on our customer deposit products and by bringing additional deposits onto our balance sheet. Sweep deposits on our balance sheet as of June 30, 2017 increased $8.6 billion compared to December 31, 2016. We utilize our sweep deposit platform to efficiently manage our balance sheet size.
We may utilize wholesale funding sources for short-term liquidity and contingency funding requirements. Our ability to borrow these funds is dependent upon the continued availability of funding in the wholesale borrowings market. In addition, we can borrow from the Federal Reserve Bank of Richmond's discount window to meet short-term liquidity requirements, although it is not viewed as a primary source of funding. At June 30, 2017, E*TRADE Bank had approximately $4.8 billion and $0.6 billion in additional collateralized borrowing capacity with the FHLB and the Federal Reserve Bank of Richmond, respectively.
E*TRADE Securities Liquidity
E*TRADE Securities relies on customer payables, securities lending, and internal and external lines of credit to provide liquidity and to fund margin lending. At June 30, 2017, E*TRADE Securities' external liquidity lines totaled approximately $1.1 billion and included the following:
A 364-day, $450 million senior unsecured committed revolving credit facility with a syndicate of banks, with a maturity date of June 2018 and a commitment fee of 0.35% on unused balances
Secured committed lines of credit with two unaffiliated banks, aggregating to $175 million, with a maturity date of June 2018 and a commitment fee of 0.15% on unused balances
Unsecured uncommitted lines of credit with two unaffiliated banks, aggregating to $75 million, of which $50 million matures in June 2018 and the remaining line has no maturity date
Secured uncommitted lines of credit with several unaffiliated banks, aggregating to $375 million with no maturity date
The revolving credit facility contains certain covenants, including maintenance covenants related to E*TRADE Securities' minimum consolidated tangible net worth and regulatory net capital ratio. There were no outstanding balances for any of these lines at June 30, 2017. E*TRADE Securities also maintains lines of credit with the parent company and E*TRADE Bank.
Liquidity Coverage Ratio
As a result of the Company's balance sheet growth, we will be subject to the modified liquidity coverage ratio (LCR) requirement beginning April 1, 2018. The purpose of the LCR is to require banking organizations to hold minimum amounts of high-quality liquid assets (HQLA) based on a percentage of their net cash outflows over a 30-day period. Bank and savings and loan holding companies with total consolidated assets of $50 billion or more, based on the average of the four most recent quarters, are subject to a modified LCR requiring them to hold HQLA in an amount equal to at least 70% of their projected net cash outflows over a 30-day period. The Company believes the LCR is an important measure of liquidity and has been managing against it in preparation for the applicability of these requirements. In addition, beginning October 1, 2018, we will be required to disclose certain quantitative and qualitative information related to our LCR calculation after each calendar quarter.



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Capital Resources
Bank Capital Requirements
The Dodd-Frank Act requires all companies, including savings and loan holding companies, that directly or indirectly control an insured depository institution, to serve as a source of strength for the institution. The Company and E*TRADE Bank are subject to regulatory capital requirements. Some of these requirements are still subject to phase-in periods, including certain deductions from and adjustments to regulatory capital that will be fully implemented at 100% in 2018. For additional information on bank regulatory requirements and phase-in periods, see Part I. Item 1. Business—Regulation in our Annual Report on Form 10-K for the year ended December 31, 2016. At June 30, 2017, our regulatory capital ratios for E*TRADE Financial were well above the minimum ratios required to be "well capitalized." E*TRADE Financial's current Tier 1 Leverage ratio threshold of 6.5% was reduced from 7.0% in July 2017. E*TRADE Financial's capital ratios are as follows:
etfc-201763_chartx27950.jpg




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E*TRADE Financial's capital ratios are calculated as follows (dollars in millions):
 
June 30,
 
December 31,
 
June 30,
 
2017
 
2016
 
2016
E*TRADE Financial shareholders’ equity
$
6,683

 
$
6,272

 
$
5,785

Deduct:
 
 
 
 
 
Preferred stock
(394
)
 
(394
)
 

E*TRADE Financial Common Equity Tier 1 capital before regulatory adjustments
$
6,289

 
$
5,878

 
$
5,785

Add:
 
 
 
 
 
(Gains) losses in other comprehensive income on available-for-sale debt securities, net of tax
62

 
139

 
(43
)
Deduct:
 
 
 
 
 
Goodwill and other intangible assets, net of deferred tax liabilities
(2,039
)
 
(2,029
)
 
(1,422
)
Disallowed deferred tax assets
(537
)
 
(505
)
 
(857
)
E*TRADE Financial Common Equity Tier 1 capital
3,775

 
3,483

 
3,463

Add:
 
 
 
 
 
Preferred stock
394

 
394

 

Deduct:
 
 
 
 
 
Disallowed deferred tax assets
(124
)
 
(267
)
 

E*TRADE Financial Tier 1 capital
$
4,045

 
$
3,610

 
$
3,463

Add:
 
 
 
 
 
Allowable allowance for loan losses
116

 
124

 
129

Non-qualifying capital instruments subject to phase-out (trust preferred securities)
414

 
414

 
414

E*TRADE Financial total capital
$
4,575

 
$
4,148

 
$
4,006