Business Wire | Jul 23, 2020 04:06PM EDT

E*TRADE Financial Corporation Announces Second Quarter 2020 Results

Jul. 23, 2020

ARLINGTON, Va.--(BUSINESS WIRE)--Jul. 23, 2020--E*TRADE Financial Corporation (NASDAQ:ETFC):

Second Quarter Results

* Net income of $196 million * Diluted earnings per common share of $0.88 * Total net revenue of $716 million * Daily Average Revenue Trades (DARTs) of 1,010,000 and derivative DARTs of 253,000, both Company records(1) * Average interest-earning assets of $60.6 billion; net interest margin of 256 basis points * Average margin receivables of $8.0 billion; end-of-period margin receivables of $9.4 billion * Net new retail accounts of 327,000, annualized growth rate of 24 percent * Net new retail assets of $13.6 billion, annualized growth rate of 17 percent

E*TRADE Financial Corporation (NASDAQ: ETFC) today announced results for its second quarter ended June 30, 2020, reporting net income of $196 million, diluted earnings per common share of $0.88, and total net revenue of $716 million.

"The second quarter was extraordinary as we achieved levels of customer engagement that are without precedent in our nearly 40-year history. In the first six months of the year we have set six sequential records for both total and derivative DARTs, resulting in over a million DARTs for the second quarter, and culminating in over 1.1 million DARTs in the month of June. The volumes we achieved in derivatives alone surpassed our DARTs across all securities types from just a few years ago. Furthermore, the blistering pace of account and asset growth continued in the second quarter, with $13.6 billion in net new retail assets, and 327,000 net new retail accounts, bringing our year-to-date retail asset flows to $31.9 billion and account growth to 656,000. We generated greater retail organic asset growth in the first half of this year alone than in the previous two years combined, and generated more retail organic account growth than the previous five years combined. The second quarter was also a standout for our Corporate Services channel, as we generated record participant proceeds and made remarkable headway in retaining those proceeds - reflecting the success of our executive services offering, ongoing enhancements to the participant experience, and increases in retail engagement across the board. On a trailing twelve-month basis, we have seen proceeds retention march steadily upward from its historical 15% to end this quarter at an astounding 24%." said Mike Pizzi, Chief Executive Officer. "In concert with our efforts to continue capturing market share, we are diligently preparing to close our merger with Morgan Stanley, which is anticipated to occur in the fourth quarter of this year. We obtained shareholder approval for the merger last week, and along with Morgan Stanley, are working to obtain the remaining required regulatory approvals."

"We delivered strong financial results on top of continued record setting operating metrics," said Chad Turner, Chief Financial Officer. "We generated our highest period ever of revenue from trading-related activity, which more than offset the quarter-over-quarter pressure on net interest income, given the Fed's recent rate cuts to near zero. While we remain prudent on managing expenses as we navigate this low interest rate environment, we continue to opportunistically invest in sales and marketing to maintain the tremendous momentum in growth of accounts, assets, and deposits amid an environment that is particularly ripe for franchise growth."

"With yet another quarter of record growth now etched into our history, our model proves its might once again, illustrating that we continue to reach previously unthinkable heights in serving digitally-inclined retail investors and institutional clients," continued Mike Pizzi. "In setting our sights on the horizon, we look forward to joining forces with Morgan Stanley - following the anticipated fourth quarter close - creating an unparalleled leader in wealth management and workplace solutions. As the original place to invest online, E*TRADE invented a category nearly forty years ago, and continued to leverage its digital ethos to improve myriad corners of the financial services industry, including investing, trading, stock plan administration, RIA custody, and student loan benefits. It is thrilling to contemplate what we can achieve within the umbrella of a world-class financial services powerhouse."

The Company also declared a quarterly cash dividend of $0.14 per share on the Company's outstanding shares of common stock. The dividend is payable on August 25, 2020, to shareholders of record as of the close of business on August 19, 2020.

In lieu of a conference call, the Company published supplementary materials to its corporate website. Historical metrics and financials can also be found on the E*TRADE Financial corporate website at about.etrade.com.

About E*TRADE Financial

E*TRADE Financial and its subsidiaries provide financial services including brokerage and banking products and services to traders, investors, stock plan administrators and participants and registered investment advisers (RIAs). Securities products and services are offered by E*TRADE Securities LLC (Member FINRA/SIPC). Commodity futures and options on futures products and services are offered by E*TRADE Futures LLC (Member NFA). Managed Account Solutions are offered through E*TRADE Capital Management, LLC, a Registered Investment Adviser. Bank products and services are offered by E*TRADE Bank, and RIA custody solutions are offered by E*TRADE Savings Bank, both of which are federal savings banks (Members FDIC). Employee stock and student loan benefit plan solutions are offered by E*TRADE Financial Corporate Services, Inc. More information is available at www.etrade.com. ETFC-E

Important Notices

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

Forward-Looking Statements

This press release contains forward-looking statements made pursuant to the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995. The statements contained in this press release that are forward looking, including statements regarding the Company's future plans and its ability to gain market share and manage expenses, pay additional dividends in the future, and the consummation of the proposed transaction with Morgan Stanley and the anticipated benefits thereof, are "forward-looking statements" within the meaning of the federal securities laws, and are subject to a number of uncertainties and risks. Actual results may differ materially from those indicated in the forward-looking statements. The uncertainties and risks include, but are not limited to: risks related to macro trends of the economy in general; market volatility and its impact on trading volumes; fluctuations in interest rates; potential system disruptions and security breaches; our ability to attract and retain customers and develop new products and services; increased competition; increased restrictions resulting from financial regulatory reform or changes in the policies of our regulators, including with respect to approval of any future dividend; the consummation of the proposed transaction with Morgan Stanley and the anticipated benefits thereof; adverse developments in litigation or regulatory matters; the timing and duration of, and the amount of cash expended in connection with dividend payments; the extent to which a disease pandemic, such as the coronavirus (COVID-19) outbreak, and measures taken in response thereto could materially adversely affect our business, results of operations and financial condition; and the other factors set forth in our annual report on Form 10-K and subsequent reports on Forms 10-Q and 8-K, filed with the US Securities and Exchange Commission (including information under the caption "Risk Factors"). Any forward-looking statement included in this release speaks only as of the date of this communication; the Company disclaims any obligation to update any information, except as required by law.

(c) 2020 E*TRADE Financial Corporation. All rights reserved.

E*TRADE FINANCIAL CORPORATION

Consolidated Statements of Income

(In millions, except share data and per share amounts)

(Unaudited)



Three Months Ended Six Months Ended

June 30, March 31, June 30, June 30,

2020 2020 2019 2020 2019

Revenue:

Interest income $ 409 $ 443 $ 560 $ 852 $ 1,115

Interest expense (21 ) (43 ) (70 ) (64 ) (133 )

Net interest income 388 400 490 788 982

Commissions 89 71 121 160 243

Fees and service 205 203 126 408 244 charges

Gains (losses) onsecurities and 23 20 (64 ) 43 (53 )other, net

Other revenue 11 13 12 24 24

Total non-interest 328 307 195 635 458 income

Total net revenue 716 707 685 1,423 1,440

Provision (benefit) (1 ) 6 (8 ) 5 (20 )for credit losses

Non-interest expense:

Compensation and 176 168 168 344 332 benefits

Advertising and 64 56 48 120 102 market development

Clearing and 47 44 32 91 62 servicing

Professional 30 23 26 53 48 services

Occupancy and 37 36 32 73 64 equipment

Communications 35 29 29 64 44

Depreciation and 24 23 21 47 42 amortization

FDIC insurance 3 4 4 7 8 premiums

Amortization of 15 15 15 30 30 other intangibles

Restructuring andacquisition-related 2 16 - 18 - activities

Other non-interest 20 31 23 51 41 expenses

Total non-interest 453 445 398 898 773 expense

Income before 264 256 295 520 687 income tax expense

Income tax expense 68 75 76 143 178

Net income $ 196 $ 181 $ 219 $ 377 $ 509

Preferred stock - 20 - 20 20 dividends

Net incomeavailable to common $ 196 $ 161 $ 219 $ 357 $ 489 shareholders



Basic earnings per $ 0.89 $ 0.73 $ 0.90 $ 1.61 $ 2.00 common share

Diluted earnings $ 0.88 $ 0.72 $ 0.90 $ 1.61 $ 2.00 per common share

Weighted averagecommon shares outstanding:

Basic (in 221,438 222,295 243,007 221,866 244,620 thousands)

Diluted (in 221,693 222,742 243,465 222,218 245,190 thousands)



Dividends declared $ 0.14 $ 0.14 $ 0.14 $ 0.28 $ 0.28 per common share



E*TRADE FINANCIAL CORPORATION

Consolidated Balance Sheets

(In millions, except share data)

(Unaudited)





June 30, December 31,

2020 2019

ASSETS

Cash and equivalents $ 436 $ 750

Cash segregated under federal or other regulations 5,570 1,879

Available-for-sale securities 19,992 19,501

Held-to-maturity securities 27,182 21,969

Margin receivables 9,422 9,675

Loans receivable, net^(2) 1,608 1,595

Receivables from brokers, dealers and clearing 1,128 1,395 organizations

Property and equipment, net 356 339

Goodwill 2,509 2,510

Other intangibles, net 405 433

Other assets 1,763 1,370

Total assets $ 70,371 $ 61,416



LIABILITIES AND SHAREHOLDERS' EQUITY

Liabilities:

Deposits $ 43,667 $ 38,606

Customer payables 15,671 12,849

Payables to brokers, dealers and clearing 1,524 893 organizations

Corporate debt 1,412 1,410

Other liabilities 1,277 1,115

Total liabilities 63,551 54,873



Shareholders' equity:

Preferred stock, $0.01 par value, 1,000,000 sharesauthorized, 403,000 shares issued and outstanding atboth June 30, 2020 and December 31, 2019, 689 689 respectively; aggregate liquidation preference of$700 at both June 30, 2020 and December 31, 2019,respectively

Common stock, $0.01 par value, 400,000,000 sharesauthorized, 221,092,693 and 222,622,333 shares issued 2 2 and outstanding at June 30, 2020 and December 31,2019, respectively

Additional paid-in-capital 4,328 4,416

Retained earnings 1,843 1,464

Accumulated other comprehensive loss (42 ) (28 )

Total shareholders' equity 6,820 6,543

Total liabilities and shareholders' equity $ 70,371 $ 61,416



Key Performance Metrics^(3)

Qtr Qtr ended endedCorporate (dollars Qtr ended Qtr ended 6/30/ Qtr ended 6/30/in millions) 6/30/20 3/31/20 20 6/30/19 20 vs. vs. 3/31/ 6/30/ 20 19



Operating margin %^ 37 % 36 % 1% 43 % (6)%(4)

Adjusted operating 37 % 37 % -% 42 % (5)%margin %^(4)



Employees 4,178 4,116 2% 4,261 (2)%



Return on common 13 % 11 % 2% 15 % (2)%equity^(5)

Adjusted return on 13 % 12 % 1% 14 % (1)%common equity^(5)

Common equity book $ 27.73 $ 26.38 5% $ 25.75 8%value per share^(6)

Tangible commonequity book value $ 16.72 $ 15.26 10% $ 15.35 9%per share^(6)



Cash and $ 436 $ 1,105 (61)% $ 380 15%equivalents

Corporate cash^(7) $ 377 $ 438 (14)% $ 323 17%



Averageinterest-earning $ 60,604 $ 56,662 7% $ 61,361 (1)%assets

Net interest margin 256 282 (26) 320 (64)(basis points)



Qtr Qtr ended endedCustomer Activity Qtr ended Qtr ended 6/30/ Qtr ended 6/30/(dollars in 6/30/20 3/31/20 20 6/30/19 20billions) vs. vs. 3/31/ 6/30/ 20 19



Customer directed 63.6 40.4 57% 17.3 268%trades (MM)^(8)

Trading days 63.0 62.0 N.M. 63.0 N.M.



DARTs^(8)(9) 1,009,956 657,183 54% 274,838 267%

Derivative DARTs^ 253,320 187,080 35% 91,358 177%(8)(9)

Derivative DARTs %^ 25 % 28 % (3)% 33 % (8)%(8)(9)



Margin receivables $ 9.4 $ 7.3 29% $ 9.9 (5)%



Key Performance Metrics^(3)

Qtr QtrCustomer ended endedActivity Qtr ended Qtr ended 6/30/ Qtr ended 6/30/(dollars in 6/30/20 3/31/20 20 6/30/19 20billions) vs. vs. 3/31/ 6/30/ 20 19



Gross new 393,540 431,937 (9)% 143,205 175%retail accounts

Gross newadvisor 6,019 6,932 (13)% 6,775 (11)%services accounts^(10)

Gross newcorporate 84,756 92,485 (8)% 91,388 (7)%services accounts

Gross new 484,315 531,354 (9)% 241,368 101%accounts



Net new retail 326,669 328,839 (1)% 34,072 N.M.accounts

Net new advisorservices (3,549 ) (3,745 ) 5% 53 N.M.accounts^(10)

Net newcorporate 32,951 38,120 (14)% 35,892 (8)%services accounts

Net new 356,071 363,214 (2)% 70,017 409%accounts



End of period 5,825,265 5,498,596 6% 5,122,669 14%retail accounts

End of periodadvisor 140,904 144,453 (2)% 151,275 (7)%services accounts^(10)

End of periodcorporate 1,979,907 1,946,956 2% 1,853,875 7%services accounts

End of period 7,946,076 7,590,005 5% 7,127,819 11%accounts



Net new retail (1.6)account growth 23.8 % 25.4 % % 2.7 % 21.1%rate

Net new advisorservices (9.8 ) (10.1 ) 0.3% 0.1 % (9.9)account growth % % %rate^(10)

Net newcorporate (1.2) (1.1)services 6.8 % 8.0 % % 7.9 % %account growthrate

Net new total (1.3)account growth 18.8 % 20.1 % % 4.0 % 14.8%rate



Net new retail $ 13.6 $ 18.3 (26)% $ 1.7 N.M.assets^(11)

Net new advisorservices assets (0.1 ) (0.4 ) 75% (0.1 ) -%^(10)(11)

Net new retailand advisor $ 13.5 $ 17.9 (25)% $ 1.6 N.M.services assets



Net new retail (3.3)assets growth 16.9 % 20.2 % % 2.1 % 14.8%rate

Net new advisorservices assets (2.1 ) (7.1 ) 5.0% (1.2 ) (0.9)growth rate^ % % % %(10)

Net new retailand advisor 15.9 % 18.8 % (2.9) 1.9 % 14.0%services assets %growth rate



Retail Assets

Security $ 307.6 $ 238.6 29% $ 268.2 15%holdings

Cash and 91.0 82.6 10% 61.2 49%deposits

Retail assets $ 398.6 $ 321.2 24% $ 329.4 21%



Advisor Services Assets

Security $ 17.0 $ 14.6 16% $ 18.4 (8)%holdings

Cash and 1.2 2.0 (40)% 1.0 20%deposits

Advisorservices assets $ 18.2 $ 16.6 10% $ 19.4 (6)%^(10)



Corporate Services Assets

Vested equity $ 134.0 $ 97.6 37% $ 95.3 41%holdings

Vested options 57.5 38.2 51% 47.0 22%holdings

Corporateservices vested $ 191.5 $ 135.8 41% $ 142.3 35%assets

Unvested 173.5 113.7 53% 117.0 48%holdings

Corporate $ 365.0 $ 249.5 46% $ 259.3 41%services assets



Total Customer Assets

Security $ 324.6 $ 253.2 28% $ 286.6 13%holdings

Cash and 92.2 84.6 9% 62.2 48%deposits^(12)

Retail andadvisor $ 416.8 $ 337.8 23% $ 348.8 19%services assets

Corporateservices vested 191.5 135.8 41% 142.3 35%assets

Retail, advisorservices, andcorporate $ 608.3 $ 473.6 28% $ 491.1 24%services vestedassets

Corporateservices 173.5 113.7 53% 117.0 48%unvested holdings

Total customer $ 781.8 $ 587.3 33% $ 608.1 29%assets



Net (buy) / sell activity

Retail net(buy) / sell $ (6.4 ) $ (1.9 ) N.M. $ (0.5 ) N.M.activity

Advisorservices net (0.9 ) 1.0 N.M. 0.2 N.M.(buy) / sell activity

Net (buy) / $ (7.3 ) (0.9 ) N.M. $ (0.3 ) N.M.sell activity



Market Indices

Dow JonesIndustrial 25,813 21,917 18% 26,600 (3)%Average

Nasdaq 10,059 7,700 31% 8,006 26%Composite

Standard & 3,100 2,585 20% 2,942 5%Poor's 500

Qtr Qtr Qtr Qtr ended Qtr endedCapital ended ended 6/30/20 ended 6/30/20 6/30/20 3/31/20 vs. 6/30/19 vs. 3/31/20 6/30/19



E*TRADE Financial

Tier 1 leverage ratio^(13) 6.7 % 6.8 % (0.1 )% 6.7 % - %

Common Equity Tier 1 capital 29.4 % 29.3 % 0.1 % 33.9 % (4.5 )%ratio^(13)

Tier 1 risk-based capital 34.9 % 35.1 % (0.2 )% 40.4 % (5.5 )%ratio^(13)

Total risk-based capital 34.9 % 35.1 % (0.2 )% 40.7 % (5.8 )%ratio^(13)



E*TRADE Bank

Tier 1 leverage ratio^(13) 7.2 % 7.4 % (0.2 )% 7.3 % (0.1 )%

Common Equity Tier 1 capital 34.9 % 35.8 % (0.9 )% 40.2 % (5.3 )%ratio^(13)

Tier 1 risk-based capital 34.9 % 35.8 % (0.9 )% 40.2 % (5.3 )%ratio^(13)

Total risk-based capital 34.9 % 35.8 % (0.9 )% 40.5 % (5.6 )%ratio^(13)



Average Balance Sheet Data

(dollars in Three Months Endedmillions)

June 30, 2020 March 31, 2020

Average Interest Average Average Interest Average Balance Inc./ Yield/ Balance Inc./ Yield/ Exp. Cost Exp. Cost

Cash and equivalents $ 633 $ - 0.14% $ 767 $ 2 1.01%

Cash segregatedunder federal or 5,467 3 0.20% 2,586 8 1.26%other regulations

Investment 43,571 272 2.50% 41,033 285 2.78%securities

Margin receivables 8,039 68 3.40% 9,361 94 4.04%

Loans 1,515 16 4.18% 1,564 21 5.36%

Broker-relatedreceivables and 1,379 - 0.13% 1,351 4 1.24%other

Totalinterest-earning 60,604 359 2.37% 56,662 414 2.93%assets

Other interest - 50 - 29 revenue^(a)

Totalinterest-earning 60,604 409 2.70% 56,662 443 3.13%assets

Total non-interest 7,172 6,673 earning assets

Total assets $ 67,776 $ 63,335



Sweep deposits:

Brokerage sweep $ 36,684 $ 2 0.02% $ 31,641 $ 5 0.06%deposits

Bank sweep deposits 232 - 0.13% 3,307 13 1.63%

Savings deposits 1,692 - 0.01% 2,234 3 0.45%

Other deposits 1,700 - 0.02% 1,603 - 0.02%

Customer payables 16,921 1 0.02% 14,076 4 0.13%

Broker-related 976 - 0.01% 836 - 0.03%payables and other

Other borrowings 6 1 N.M. 5 1 N.M.

Corporate debt 1,411 13 3.87% 1,411 14 3.86%

Totalinterest-bearing 59,622 17 0.11% 55,113 40 0.29%liabilities

Other interest - 4 - 3 expense^(b)

Totalinterest-bearing 59,622 21 0.14% 55,113 43 0.31%liabilities

Totalnon-interest-bearing 1,461 1,861 liabilities

Total liabilities 61,083 56,974

Total shareholders' 6,693 6,361 equity

Total liabilitiesand shareholders' $ 67,776 $ 63,335 equity

Excess interestearning assets overinterest bearing $ 982 $ 388 2.56% $ 1,549 $ 400 2.82%liabilities/ net interest income/ netinterest margin

Other interest revenue is earned on certain securities loaned balances. Interest expense incurred on other securities loaned balances is(a) presented on the broker-related payables and other line item above.

Other interest expense is incurred on certain securities borrowed balances. Interest income earned on other securities borrowed balances is(b) presented on the broker-related receivables and other line item above.



Average Balance Sheet Data Three Months Ended

(dollars in millions) June 30, 2019

Average Interest Average

Balance Inc./ Yield/ Exp. Cost

Cash and equivalents $ 452 $ 3 2.33%

Cash segregated under federal or other 871 6 2.63%regulations

Investment securities 47,375 368 3.11%

Margin receivables 10,084 130 5.17%

Loans 1,920 28 5.75%

Broker-related receivables and other 659 3 2.23%

Total interest-earning assets 61,361 538 3.51%

Other interest revenue^(a) - 22

Total interest-earning assets 61,361 560 3.66%

Total non-interest-earning assets 5,093

Total assets $ 66,454



Sweep deposits:

Brokerage sweep deposits $ 37,380 $ 18 0.20%

Bank sweep deposits^(b) - - -%

Savings deposits 6,347 23 1.47%

Other deposits 1,732 - 0.03%

Customer payables 10,593 8 0.31%

Broker-related payables and other 1,050 1 0.46%

Other borrowings 312 4 3.78%

Corporate debt 1,410 14 4.06%

Total interest-bearing liabilities 58,824 68 0.47%

Other interest expense^(c) - 2

Total interest-bearing liabilities 58,824 70 0.48%

Total non-interest-bearing liabilities 1,016

Total liabilities 59,840

Total shareholders' equity 6,614

Total liabilities and shareholders' equity $ 66,454

Excess interest earning assets over interestbearing liabilities/ net interest income/ net $ 2,537 $ 490 3.20%interest margin

Other interest revenue is earned on certain securities loaned balances. Interest expense incurred on other securities loaned balances is(a) presented on the broker-related payables and other line item above.

Beginning November 2019, bank sweep deposits include Premium Savings(b) Accounts participating in a sweep deposit account program.

Other interest expense is incurred on certain securities borrowed balances. Interest income earned on other securities borrowed balances is(c) presented on the broker-related receivables and other line item above.



Fees and Service Charges

(dollars in millions) Three Months Ended

June 30, March 31, June 30, 2020 2020 2019

Order flow revenue $ 120 $ 85 $ 45

Money market funds and sweep deposits 22 60 23 revenue^(a)

Advisor management and custody fees 19 19 19

Reorganization fees 12 4 7

Mutual fund service fees 10 13 13

Foreign exchange revenue 9 9 8

Other fees and service charges 13 13 11

Total fees and service charges $ 205 $ 203 $ 126

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



Explanation of Non-GAAP Measures

Management believes that adjusting GAAP measures by excluding or including certain items is helpful to investors and analysts who may wish to use some or all of this information to analyze the Company's current performance, prospects, and valuation. Management uses this non-GAAP information internally to evaluate operating performance and in formulating the budget for future periods. Management believes that the non-GAAP measures discussed below are appropriate for evaluating the operating and liquidity performance of the Company.

Adjusted Operating Margin

Adjusted operating margin is calculated by dividing adjusted income before income taxes by net revenue. Adjusted income before income taxes excludes the provision (benefit) for credit losses. Management believes that excluding the provision (benefit) for credit losses from operating margin provides a useful measure of the Company's ongoing operating performance because management excludes these when evaluating operating margin performance. See endnote (4) for a reconciliation of this non-GAAP measure to the most directly comparable GAAP measure.

Adjusted Return on Common Equity

Adjusted return on common equity is calculated by dividing annualized adjusted net income available to common shareholders by average common shareholders' equity, which excludes preferred stock. Adjusted net income available to common shareholders excludes the after-tax impact of the provision (benefit) for credit losses. Management believes that excluding the provision (benefit) for credit losses from net income available to common shareholders provides a useful measure of the Company's ongoing operating performance because management excludes these when evaluating return on common equity performance. See endnote (5) for a reconciliation of this non-GAAP measure to the most directly comparable GAAP measure.

Tangible Common Equity Book Value per Share

Tangible common equity book value per share represents common shareholders' equity, which excludes preferred stock, less goodwill and other intangible assets (net of related deferred tax liabilities) divided by common stock outstanding. The Company believes that tangible common equity book value per share is a measure of the Company's capital strength. See endnote (6) for a reconciliation of this non-GAAP measure to the most directly comparable GAAP measure.

Corporate Cash

Corporate cash represents cash held at the parent company as well as cash held in certain subsidiaries, not including bank and brokerage subsidiaries, that can distribute cash to the parent company without any regulatory approval or notification. The Company believes that corporate cash is a useful measure of the parent company's liquidity as it is the primary source of capital above and beyond the capital deployed in regulated subsidiaries. See endnote (7) for a reconciliation of this non-GAAP measure to the most directly comparable GAAP measure.

It is important to note that these non-GAAP measures may involve judgment by management and should be considered in addition to, not as substitutes for, or superior to, measures prepared in accordance with GAAP. For additional information on the adjustments to these non-GAAP measures, please see the Company's financial statements and "Management's Discussion and Analysis of Financial Condition and Results of Operations" that will be included in the periodic report the Company expects to file with the SEC with respect to the financial periods discussed herein.

ENDNOTES

(1) Records based on the period during which metric has been reported by the Company and exclude activity related to acquisitions.

(2) The following table presents the allowance for credit losses (dollars in millions):

Q2 2020 Q4 2019^(a)



Allowance for credit losses, beginning^(a) $ 86 $ (27 )

(Provision) benefit for credit losses^(a) 1 19

Charge-offs (recoveries), net (5 ) (9 )

Allowance for credit losses, ending $ 82 $ (17 )

The Company adopted amended accounting guidance related to accounting for(a) credit losses on January 1, 2020. Prior year amounts related to the allowance for loan losses were not restated as the amended accounting guidance was adopted on a modified retrospective basis.



Loan servicing expense was $2 million, $3 million, and $3 million for the three months ended June 30, 2020, March 31, 2020 and June 30, 2019, respectively. Loan servicing expense was $5 million and $6 million for the six months ended June 30, 2020 and 2019, respectively.

(3) Amounts and percentages may not recalculate due to rounding. For percentage-based metrics, the variance represents the current period less the prior period. Net new account and asset growth rates have been annualized.

(4) Operating margin is the percentage of net revenue that results in income before income taxes. The percentage is calculated by dividing income before income taxes by total net revenue. As noted above, adjusted operating margin is a non-GAAP measure. The following table provides a reconciliation of GAAP operating margin percentage to non-GAAP adjusted operating margin (dollars in millions):

Q2 2020 Q1 2020 Q2 2019

Amount Operating Amount Operating Amount Operating Margin % Margin % Margin %



Income beforeincome taxexpense and $ 264 37 % $ 256 36 % $ 295 43 %operatingmargin^(a)

Provision(benefit) for (1 ) 6 (8 ) credit losses

Adjustedincome beforeincome taxexpense and $ 263 37 % $ 262 37 % $ 287 42 %adjustedoperatingmargin^(a)

In Q2 2019, income before income tax expense and adjusted income before income tax expense includes $80 million of losses from balance sheet(a) repositioning, which resulted in a 6 percentage point reduction to both operating margin and adjusted operating margin.



(5) Return on common equity is calculated by dividing annualized net income available to common shareholders by average common shareholders' equity, which excludes preferred stock. As noted above, adjusted return on common equity is a non-GAAP measure. The following table provides a reconciliation of GAAP return on common equity percentage to non-GAAP adjusted return on common equity percentage (dollars in millions):

Q2 2020 Q1 2020 Q2 2019

Return Return Return on on on Amount Common Amount Common Amount Common Equity Equity Equity % % %



Net income availableto common shareholders $ 196 13 % $ 161 11 % $ 219 15 %and return on commonequity^(a)

Add back impact of the following items:

Provision (benefit) (1 ) 6 (8 ) for credit losses

Income tax impact - (2 ) 2

Net of tax (1 ) 4 (6 )

Adjusted net incomeavailable to commonshareholders and $ 195 13 % $ 165 12 % $ 213 14 %return on commonequity^(a)

In Q2 2019, net income available to common shareholders and adjusted net income available to common shareholders includes $59 million of after-tax losses from balance sheet repositioning, which resulted in a 4 percentage(a) point reduction to both return on common equity and adjusted return on common equity.



(6) As noted above, tangible common equity book value and tangible common equity book value per share are non-GAAP measures. The following table provides a reconciliation of GAAP common equity book value and common equity book value per share to non-GAAP tangible common equity book value and tangible common equity book value per share at period end (dollars in millions, except per share amounts):

Q2 2020 Q1 2020 Q2 2019

Amount Per Amount Per Amount Per Share Share Share

Commonequity book $ 6,131 $ 27.73 $ 5,830 $ 26.38 $ 6,181 $ 25.75 value

Less:Goodwill andother (2,914 ) (2,928 ) (2,946 ) intangibles,net

Add:Deferred taxliabilitiesrelated to 481 472 450 goodwill andotherintangibles,net

Tangiblecommon $ 3,698 $ 16.72 $ 3,374 $ 15.26 $ 3,685 $ 15.35 equity bookvalue



(7) As noted above, corporate cash is a non-GAAP measure. The following table provides a reconciliation of GAAP consolidated cash and equivalents to non-GAAP corporate cash at period end (dollars in millions):

Q2 2020 Q1 2020 Q2 2019

Consolidated cash and equivalents $ 436 $ 1,105 $ 380

Less: Cash at regulated subsidiaries (404 ) (1,094 ) (373 )

Add: Cash on deposit at E*TRADE Bank^(a) 345 427 316

Corporate cash $ 377 $ 438 $ 323

Corporate cash includes the parent company's deposits placed with E*TRADE Bank. E*TRADE Bank may use these deposits for investment purposes;(a) however, these investments are not included in consolidated cash and equivalents.



(8) Beginning in November 2019, the definition of DARTs was updated to reflect all customer-directed trades. This includes trades associated with no-transaction-fee mutual funds, options trades through the Dime Buyback Program, and all exchange-traded funds transactions (including those formerly classified as commission-free). DARTs is calculated by dividing these customer-directed trades by the number of trading days during the period. This update did not result in a significant impact to the presentation of DARTs, derivative DARTs, and derivative DARTs %. Prior periods have been updated to conform with the current period presentation.

(9) Q1 2020 has been updated to reflect approximately 5,000 DARTs, including approximately 1,000 Derivative DARTs, that were not previously reflected in that period's reporting.

(10) Q1 2020 advisor services accounts and assets include an outflow of 3,000 accounts and $425 million in assets related to the termination of a large adviser services client.

(11) Net new retail and advisor services assets exclude the effects of market movements in the value of retail and advisor services assets.

(12) The following table provides the components of total cash and deposits (dollars in billions):

Q2 2020 Q1 2020 Q2 2019

Brokerage sweep deposits $ 39.9 $ 38.1 $ 31.7

Bank sweep deposits^(a) 0.2 0.7 -

Customer payables 15.7 16.0 10.6

Savings, checking, and other banking assets^(a) 3.6 3.3 8.6

Total on-balance sheet customer cash and deposits 59.4 58.1 50.9

Brokerage sweep deposits at unaffiliated 22.0 15.4 9.6 financial institutions^(b)

Bank sweep deposits at unaffiliated financial 8.7 9.1 - institutions^(c)

Money market funds and other 2.1 2.0 1.7

Total customer cash held by third parties^(d) 32.8 26.5 11.3

Total customer cash and deposits $ 92.2 $ 84.6 $ 62.2

Beginning November 2019, bank sweep deposits include Premium Savings Accounts participating in the bank sweep deposit account program.(a) Savings, checking, and other banking assets included $5.1 billion of deposits at June 30, 2019 in our Premium Savings Account product that were subsequently converted to the bank sweep deposit account program.

Average brokerage sweep deposit balances at unaffiliated financial(b) institutions were $20.4 billion, $15.4 billion and $3.7 billion for the three months ended June 30, 2020, March 31, 2020 and June 30, 2019, respectively. The Company received 34 bps, 148 bps and 221 bps, net of interest paid, on these balances for the same periods.

Average bank sweep deposits at unaffiliated institutions were $9.2 billion and $5.5 billion for the three months ended June 30, 2020 and(c) March 31, 2020, respectively. The Company received 15 bps and 8 bps, net of interest paid, on these balances for the same periods.

Customer cash held by third parties is held outside E*TRADE Financial and includes money market funds and sweep deposit accounts at unaffiliated(d) financial institutions, net of deposit balances from unaffiliated financial institutions held on-balance sheet. Customer cash held by third parties is not reflected in the Company's consolidated balance sheet and is not immediately available for liquidity purposes.



(13) E*TRADE Financial and E*TRADE Bank's capital ratios are calculated as follows and are preliminary for the current period (dollars in millions):

E*TRADE Financial E*TRADE Bank

Q2 2020 Q4 2019 Q2 2020 Q4 2019

Shareholders' equity $ 6,820 $ 6,543 $ 3,758 $ 3,488

Deduct:

Preferred stock (689 ) (689 ) - -

Common Equity Tier 1capital before regulatory $ 6,131 $ 5,854 $ 3,758 $ 3,488 adjustments

Add:

Losses in othercomprehensive income on 42 28 42 28 available-for-sale debt securities, net of tax

Deduct:

Goodwill and otherintangible assets, net of (2,433 ) (2,466 ) (270 ) (276 )deferred tax liabilities

Disallowed deferred tax (42 ) (70 ) (3 ) - assets

Common Equity Tier 1 $ 3,698 $ 3,346 $ 3,527 $ 3,240 capital

Add:

Preferred stock 689 689 - -

Tier 1 capital $ 4,387 $ 4,035 $ 3,527 $ 3,240

Add:

Other - 25 - 17

Total capital $ 4,387 $ 4,060 $ 3,527 $ 3,257



Average assets for leverage $ 67,722 $ 60,968 $ 49,247 $ 45,320 capital purposes

Deduct:

Goodwill and otherintangible assets, net of (2,433 ) (2,466 ) (270 ) (276 )deferred tax liabilities

Disallowed deferred tax (42 ) (70 ) (3 ) - assets

Adjusted average assets for $ 65,247 $ 58,432 $ 48,974 $ 45,044 leverage capital purposes



Total risk-weighted assets^ $ 12,569 $ 10,635 $ 10,094 $ 8,872 (a)



Tier 1 leverage ratio (Tier1 capital / Adjusted 6.7 % 6.9 % 7.2 % 7.2 %average assets for leverage capital purposes)

Common Equity Tier 1capital / Total 29.4 % 31.5 % 34.9 % 36.5 %risk-weighted assets^(a)

Tier 1 capital / Total 34.9 % 37.9 % 34.9 % 36.5 %risk-weighted assets

Total capital / Total 34.9 % 38.2 % 34.9 % 36.7 %risk-weighted assets

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

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