E*TRADE Financial Corporation (NASDAQ: ETFC) today announced results for its third quarter ended September 30, 2019, reporting net income of $274 million, diluted earnings per common share of $1.08 and total net revenue of $767 million. Operating margin for the quarter was 50 percent and adjusted operating margin was 48 percent(2).

“This past quarter was marked by record net revenue, strong operating results and customer engagement, as well as a myriad of accolades for the intuitive experience we deliver to our customers time and again,” said Mike Pizzi, Chief Executive Officer. “The commission changes over the past few weeks have caused a meaningful shift for the industry—making it even more crucial to deliver a cutting-edge and easy-to-use experience to investors and traders alike. As a digital-first company, backed by one of the most sophisticated customer support teams in the industry, we will leverage our advantage to grow and take share, especially as price is removed as a point of competitive differentiation. Our business is well positioned for the long-term, and we will remain dynamic, optimizing our model in a manner that best delivers long-term value for shareholders.”

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 November 15, 2019, to shareholders of record as of the close of business on November 8, 2019.

The Company will host a conference call beginning at 5 p.m. ET today to discuss the quarterly results. This conference call will be available to domestic participants by dialing 800-705-7259 while international participants should dial +1 303 223 4387. A live audio webcast and replay of this conference call will also be available at about.etrade.com.

Historical metrics and financials can 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). Equity compensation plan services 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, the Converging Arrows logo, and the E*TRADE logo are trademarks or registered trademarks of E*TRADE Financial Corporation.

Forward-Looking Statements

The statements contained in this press release that are forward looking, including statements regarding the Company's long-term positioning and its ability to leverage its competitive advantages to grow and gain market share, optimize its business model to deliver long-term value for shareholders and pay additional dividends in the future, 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 or share repurchase; our ability to participate in consolidation opportunities in our industry, to complete consolidation transactions and to realize synergies or implement integration plans; 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 dividend payments; and the other factors set forth in our annual and quarterly reports on Form 10-K, as amended, and Form 10-Q previously filed with the Securities and Exchange Commission (including information in these reports under the caption “Risk Factors”). Any forward-looking statement included in this release speaks only as of the date of this communication; the Company disclaims any obligation to update any information, except as required by law.

© 2019 E*TRADE Financial Corporation. All rights reserved.

E*TRADE FINANCIAL CORPORATION
Consolidated Statement of Income
(In millions, except share data and per share amounts)
(Unaudited)

 

 

Three Months Ended

Nine Months Ended

September 30,

June 30,

September 30,

September 30,

 

 

2019

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Revenue:

 

 

 

 

Interest income

$

521

 

$

560

 

$

514

 

$

1,636

 

$

1,471

 

Interest expense

(66

)

 

(70

)

 

(48

)

 

(199

)

 

(107

)

Net interest income

 

455

 

 

490

 

 

466

 

 

1,437

 

 

1,364

 

Commissions

 

122

 

 

121

 

 

117

 

 

365

 

 

375

 

Fees and service charges

 

163

 

 

126

 

 

108

 

 

407

 

 

323

 

Gains (losses) on securities and other, net

 

16

 

 

(64

)

 

17

 

 

(37

)

 

42

 

Other revenue

 

11

 

 

12

 

 

12

 

 

35

 

 

34

 

Total non-interest income

 

312

 

 

195

 

 

254

 

 

770

 

 

774

 

Total net revenue

 

767

 

 

685

 

 

720

 

 

2,207

 

 

2,138

 

Provision (benefit) for loan losses

 

(12

)

 

(8

)

 

(34

)

 

(32

)

 

(74

)

Non-interest expense:

 

 

 

 

 

Compensation and benefits

 

167

 

 

168

 

 

157

 

 

499

 

 

469

 

Advertising and market development

 

41

 

 

48

 

 

45

 

 

143

 

 

152

 

Clearing and servicing

 

36

 

 

32

 

 

28

 

 

98

 

 

94

 

Professional services

 

27

 

 

26

 

 

23

 

 

75

 

 

70

 

Occupancy and equipment

 

34

 

 

32

 

 

29

 

 

98

 

 

89

 

Communications

 

26

 

 

29

 

 

30

 

 

70

 

 

89

 

Depreciation and amortization

 

23

 

 

21

 

 

25

 

 

65

 

 

70

 

FDIC insurance premiums

 

3

 

 

4

 

 

8

 

 

11

 

 

26

 

Amortization of other intangibles

 

16

 

 

15

 

 

12

 

 

46

 

 

34

 

Restructuring and acquisition-related activities

 

2

 

—

 

4

 

 

2

 

 

6

 

Losses on early extinguishment of debt

—

—

 

4

 

—

 

4

 

Other non-interest expenses

 

24

 

 

23

 

 

15

 

 

65

 

 

56

 

Total non-interest expense

 

399

 

 

398

 

 

380

 

 

1,172

 

 

1,159

 

Income before income tax expense

 

380

 

 

295

 

 

374

 

 

1,067

 

 

1,053

 

Income tax expense

 

106

 

 

76

 

 

89

 

 

284

 

 

271

 

Net income

$

274

 

$

219

 

$

285

 

$

783

 

$

782

 

Preferred stock dividends

 

20

 

—

 

24

 

 

40

 

 

36

 

Net income available to common shareholders

$

254

 

$

219

 

$

261

 

$

743

 

$

746

 

Basic earnings per common share

$

1.08

 

$

0.90

 

$

1.01

 

$

3.08

 

$

2.84

 

Diluted earnings per common share

$

1.08

 

$

0.90

 

$

1.00

 

$

3.07

 

$

2.82

 

Weighted average common shares outstanding:

 

 

 

 

 

Basic (in thousands)

 

235,829

 

 

243,007

 

 

259,498

 

 

241,657

 

 

263,292

 

Diluted (in thousands)

 

236,313

 

 

243,465

 

 

260,661

 

 

242,199

 

 

264,433

 

Dividends declared per common share

$

0.14

 

$

0.14

 

$ —

$

0.42

 

$ —

E*TRADE FINANCIAL CORPORATION
Consolidated Balance Sheet
(In millions, except share data)
(Unaudited)

 

 

September 30,

December 31,

 

2019

 

 

2018

 

ASSETS

 

 

Cash and equivalents

$

493

 

$

2,333

 

Cash segregated under federal or other regulations

 

1,365

 

 

1,011

 

Available-for-sale securities

 

21,020

 

 

23,153

 

Held-to-maturity securities

 

21,542

 

 

21,884

 

Margin receivables

 

9,859

 

 

9,560

 

Loans receivable, net(4)

 

1,747

 

 

2,103

 

Receivables from brokers, dealers and clearing organizations

 

1,038

 

 

760

 

Property and equipment, net

 

338

 

 

281

 

Goodwill

 

2,485

 

 

2,485

 

Other intangibles, net

 

446

 

 

491

 

Other assets

 

1,374

 

 

942

 

Total assets

$

61,707

 

$

65,003

 

 

LIABILITIES AND SHAREHOLDERS' EQUITY

 

 

Liabilities:

 

 

Deposits

$

40,382

 

$

45,313

 

Customer payables

 

11,183

 

 

10,117

 

Payables to brokers, dealers and clearing organizations

 

1,091

 

 

948

 

Corporate debt

 

1,410

 

 

1,409

 

Other liabilities

 

1,072

 

 

654

 

Total liabilities

 

55,138

 

 

58,441

 

Shareholders' equity:

 

 

Preferred stock, $0.01 par value; shares authorized: 1,000,000; shares issued and outstanding at September 30, 2019: 403,000

689

689

 

Common stock, $0.01 par value; shares authorized: 400,000,000; shares issued and outstanding at September 30, 2019: 226,795,480

2

 

 

2

 

Additional paid-in-capital

4,578

5,462

 

Retained earnings

1,324

684

 

Accumulated other comprehensive loss

(24

)

 

(275

)

Total shareholders' equity

6,569

6,562

 

Total liabilities and shareholders' equity

$

61,707

$

65,003

 

Key Performance Metrics(5)

Corporate (dollars in millions)

Qtr
ended
9/30/19

Qtr
ended
6/30/19

Qtr ended
9/30/19
vs.
6/30/19

Qtr
ended
9/30/18

Qtr ended
9/30/19
vs.
9/30/18

Operating margin%(2)

 

50

%

 

43

%

7

%

 

52

%

(2

)%

Adjusted operating margin%(2)

 

48

%

 

42

%

6

%

 

48

%

—

%

Employees

 

4,297

 

 

4,261

 

1

%

 

4,091

 

5

%

Return on common equity(6)

 

17

%

 

15

%

2

%

 

17

%

—

%

Adjusted return on common equity(6)

 

16

%

 

14

%

2

%

 

16

%

—

%

Common equity book value per share(7)

$

25.92

 

$

25.75

 

1

%

$

23.67

 

10

%

Tangible common equity book value per share(7)

$

15.01

 

$

15.35

 

(2

)%

$

14.13

 

6

%

Cash and equivalents

$

493

 

$

380

 

30

%

$

596

 

(17

)%

Corporate cash(8)

$

380

 

$

323

 

18

%

$

517

 

(26

)%

Average interest-earning assets

$

55,438

 

$

61,361

 

(10

)%

$

60,112

 

(8

)%

Net interest margin (basis points)

 

328

 

 

320

 

8

 

 

310

 

18

Customer Activity (dollars in billions)

Qtr
ended
9/30/19

Qtr
ended
6/30/19

Qtr ended
9/30/19
vs.
6/30/19

Qtr
ended
9/30/18

Qtr ended
9/30/19
vs.
9/30/18

Commissionable trades (MM)(9)

 

17.0

 

 

16.9

 

1%

 

15.9

 

7%

Trading days

 

63.5

 

 

63.0

 

N.M.

 

62.5

 

N.M.

DARTs(9)

 

266,935

 

 

268,488

 

(1)%

 

255,139

 

5%

Derivative DARTs(9)

 

94,895

 

 

89,402

 

6%

 

84,978

 

12%

Derivative DARTs %(9)

 

36

%

 

33

%

3%

 

33

%

3%

Average commission per trade(9)

$

7.18

 

$

7.14

 

1%

$

7.34

 

(2)%

Margin receivables

$

9.9

$

9.9

 

—%

$

11.2

 

(12)%

Customer Activity (dollars in billions)

Qtr
ended
9/30/19

Qtr
ended
6/30/19

Qtr ended
9/30/19
vs.
6/30/19

Qtr
ended
9/30/18

Qtr ended
9/30/19
vs.
9/30/18

Gross new retail accounts

 

121,754

 

 

143,205

 

(15)%

 

150,715

 

(19

)%

Gross new advisor services accounts

 

6,785

 

 

6,775

 

— %

 

8,695

 

(22

)%

Gross new corporate services accounts

 

86,870

 

 

91,388

 

(5)%

 

109,998

 

(21

)%

Gross new accounts

 

215,409

 

 

241,368

 

(11)%

 

269,408

 

(20

)%

Net new retail accounts

7,469

 

34,072

 

(78)%

63,841

 

(88

)%

Net new advisor services accounts

 

(874

)

 

53

 

N.M.

 

2,423

 

(136

)%

Net new corporate services accounts

 

40,006

 

 

35,892

 

11%

 

69,321

 

(42

)%

Net new accounts

 

46,601

 

 

70,017

 

(33)%

 

135,585

 

(66

)%

End of period retail accounts

5,130,138

5,122,669

 

—%

4,056,416

 

26

%

End of period advisor services accounts

 

150,401

 

 

151,275

 

(1)%

 

150,063

 

—

%

End of period corporate services accounts

 

1,893,881

 

 

1,853,875

 

2%

 

1,735,675

 

9

%

End of period accounts

 

7,174,420

 

 

7,127,819

 

1%

 

5,942,154

 

21

%

Net new retail account growth rate

0.6

%

2.7

%

(2.1)%

6.4

%

(5.8

)%

Net new advisor services account growth rate

 

(2.3

)%

 

0.1

%

(2.4)%

 

6.6

%

(8.9

)%

Net new corporate services account growth rate

 

8.6

%

 

7.9

%

0.7%

 

16.6

%

(8.0

)%

Net new total account growth rate

 

2.6

%

 

4.0

%

(1.4)%

 

9.3

%

(6.7

)%

Net new retail assets(10)

$

2.8

 

$

1.7

 

65%

$

3.1

 

(10

)%

Net new advisor services assets(10)

—

 

(0.1

)

100%

 

0.3

 

(100

)%

Net new retail and advisor services assets

$

2.8

 

$

1.6

 

75%

$

3.4

 

(18

)%

Net new retail assets growth rate

3.4

%

2.1

%

1.3%

4.2

%

(0.8

)%

Net new advisor services assets growth rate

 

0.8

%

 

(1.2

)%

2.0%

 

7.6

%

(6.8

)%

Net new retail and advisor services assets growth rate

3.2

%

1.9

%

1.3%

 

4.4

%

(1.2

)%

Key Performance Metrics(5)

Customer Activity (dollars in billions)

Qtr ended
9/30/19

Qtr ended
6/30/19

Qtr ended
9/30/19
vs.
6/30/19

Qtr ended
9/30/18

Qtr ended
9/30/19
vs.
9/30/18

Retail Assets

 

 

 

 

 

Security holdings

$

266.3

$

268.2

 

(1)%

$

256.1

 

4%

Cash and deposits

 

64.0

 

61.2

 

5%

 

57.1

 

12%

Retail assets

$

330.3

$

329.4

 

—%

$

313.2

 

5%

 

Advisor Services Assets

 

 

 

 

 

Security holdings

$

18.4

$

18.4

 

— %

$

18.3

 

1%

Cash and deposits

 

1.0

 

1.0

 

— %

 

1.3

 

(23)%

Advisor services assets

$

19.4

$

19.4

 

— %

$

19.6

 

(1)%

 

Corporate Services Assets

 

 

 

 

 

Vested equity holdings

$

95.6

$

95.3

 

— %

$

89.8

 

6%

Vested options holdings

 

43.3

 

47.0

 

(8)%

 

50.2

 

(14)%

Corporate services vested assets

$

138.9

$

142.3

 

(2)%

$

140.0

 

(1)%

Unvested holdings

 

115.4

 

117.0

 

(1)%

 

119.5

 

(3)%

Corporate services assets

$

254.3

$

259.3

 

(2)%

$

259.5

 

(2)%

 

Total Customer Assets

 

 

 

Security holdings

$

284.7

$

286.6

 

(1)%

$

274.4

 

4%

Cash and deposits(11)

 

65.0

 

62.2

 

5%

 

58.4

 

11%

Retail and advisor services assets

$

349.7

$

348.8

 

— %

$

332.8

 

5%

Corporate services vested assets

 

138.9

 

142.3

 

(2)%

 

140.0

 

(1)%

Retail, advisor services, and corporate services vested assets

$

488.6

$

491.1

(1)%

$

472.8

3%

Corporate services unvested holdings

 

115.4

 

117.0

 

(1)%

 

119.5

 

(3)%

Total customer assets

$

604.0

$

608.1

 

(1)%

$

592.3

 

2%

 

Net (buy) / sell activity

 

 

 

 

 

Retail net (buy) / sell activity

$

0.2

$

(0.5

)

N.M.

$

(2.2

)

N.M.

Advisor services net (buy) / sell activity

—

 

0.2

 

N.M.

—

N.M.

Net (buy) / sell activity

$

0.2

$

(0.3

)

N.M.

$

(2.2

)

N.M.

 

Market Indices

 

 

 

 

 

Dow Jones Industrial Average

 

26,917

 

26,600

 

1%

 

26,458

 

2%

Nasdaq Composite

 

7,999

 

8,006

 

—%

 

8,046

 

(1)%

Standard & Poor's 500

 

2,977

 

2,942

 

1%

 

2,914

 

2%

 

 

 

Capital

Qtr ended
9/30/19

 

Qtr ended
6/30/19

 

Qtr ended
9/30/19
vs.
6/30/19

 

Qtr ended
9/30/18

 

Qtr ended
9/30/19
vs.
9/30/18

 

 

 

 

 

 

 

 

 

 

E*TRADE Financial

 

 

 

 

 

 

 

 

 

Tier 1 leverage ratio(12)

6.9

%

 

6.7

%

 

0.2

%

 

7.1

%

 

(0.2

)%

Common Equity Tier 1 capital ratio(12)

31.4

%

 

33.9

%

 

(2.5

)%

 

34.1

%

 

(2.7

)%

Tier 1 risk-based capital ratio(12)

37.8

%

 

40.4

%

 

(2.6

)%

 

40.5

%

 

(2.7

)%

Total risk-based capital ratio(12)

38.2

%

 

40.7

%

 

(2.5

)%

 

40.9

%

 

(2.7

)%

 

 

 

 

 

 

 

 

 

 

E*TRADE Bank

 

 

 

 

 

 

 

 

 

Tier 1 leverage ratio(12)

7.4

%

 

7.3

%

 

0.1

%

 

7.1

%

 

0.3

%

Common Equity Tier 1 capital ratio(12)

37.2

%

 

40.2

%

 

(3.0

)%

 

34.6

%

 

2.6

%

Tier 1 risk-based capital ratio(12)

37.2

%

 

40.2

%

 

(3.0

)%

 

34.6

%

 

2.6

%

Total risk-based capital ratio(12)

37.5

%

 

40.5

%

 

(3.0

)%

 

35.0

%

 

2.5

%

Average Balance Sheet Data
(dollars in millions)

Three Months Ended

September 30, 2019

June 30, 2019

 

Average
Balance

Interest
Inc./Exp.

Average
Yield/Cost

Average
Balance

Interest
Inc./Exp.

Average
Yield/Cost

Cash and equivalents

$

429

$

2

2.11

%

$

452

$

3

2.33

%

Cash segregated under federal or other regulations

 

1,073

 

7

2.41

%

 

871

 

6

2.63

%

Investment securities

 

41,326

 

324

3.13

%

 

47,375

 

368

3.11

%

Margin receivables

 

9,880

 

120

4.83

%

 

10,084

 

130

5.17

%

Loans

 

1,812

 

25

5.58

%

 

1,920

 

28

5.75

%

Broker-related receivables and other

 

918

 

5

2.02

%

 

659

 

3

2.23

%

Total interest-earning assets

 

55,438

 

483

3.47

%

 

61,361

 

538

3.51

%

Other interest revenue(a)

—

38

—

22

Total interest-earning assets

 

55,438

 

521

3.74

%

 

61,361

 

560

3.66

%

Total non-interest earning assets

 

5,859

 

 

 

5,093

 

 

Total assets

$

61,297

 

 

$

66,454

 

 

 

Sweep deposits

 

$

 

30,559

 

$

 

11

 

0.14

 

%

 

$

 

37,380

 

$

 

18

 

0.20

 

%

Savings deposits

 

7,533

 

27

1.44

%

 

6,347

 

23

1.47

%

Other deposits

 

1,614

—

0.03

%

 

1,732

—

0.03

%

Customer payables

 

10,915

 

7

0.27

%

 

10,593

 

8

0.31

%

Broker-related payables and other

 

1,241

 

2

0.51

%

 

1,050

 

1

0.46

%

Other borrowings

 

102

 

1

4.77

%

 

312

 

4

3.78

%

Corporate debt

 

1,410

 

14

3.86

%

 

1,410

 

14

4.06

%

Total interest-bearing liabilities

 

53,374

 

62

0.46

%

 

58,824

 

68

0.47

%

Other interest expense(b)

—

4

—

2

 Total interest-bearing liabilities

 

53,374

 

66

0.49

%

 

58,824

 

70

0.48

%

Total non-interest-bearing liabilities

 

1,251

 

 

 

1,016

 

 

Total liabilities

 

54,625

 

 

 

59,840

 

 

Total shareholders' equity

 

6,672

 

 

 

6,614

 

 

Total liabilities and shareholders' equity

$

61,297

 

 

$

66,454

 

 

Excess interest earning assets over interest bearing liabilities/ net interest income/ net interest margin

$

2,064

$

455

3.28

%

$

2,537

$

490

3.20

%

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

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

Average Balance Sheet Data

Three Months Ended

(dollars in millions)

September 30, 2018

Average
Balance

Interest
Inc./Exp.

Average
Yield/Cost

Cash and equivalents

$

471

$

2

1.84

%

Cash segregated under federal or other regulations

 

836

 

4

2.15

%

Investment securities

 

44,773

 

315

2.82

%

Margin receivables

 

10,902

 

130

4.74

%

Loans

 

2,332

 

32

5.38

%

Broker-related receivables and other

 

798

 

4

2.02

%

Total interest-earning assets

 

60,112

 

487

3.24

%

Other interest revenue(a)

—

 

27

 

Total interest-earning assets

 

60,112

 

514

3.41

%

Total non-interest-earning assets

 

4,291

 

 

Total assets

$

64,403

 

 

 

Sweep deposits

 

$

 

37,550

 

$

 

14

 

0.15

 

%

Savings deposits

 

2,972

 

2

0.26

%

Other deposits

 

1,934

—

0.03

%

Customer payables

 

10,352

 

8

0.30

%

Broker-related payables and other

 

1,880

 

3

0.53

%

Other borrowings

 

752

 

6

2.95

%

Corporate debt

 

1,408

 

13

3.90

%

Total interest-bearing liabilities

 

56,848

 

46

0.32

%

Other interest expense(b)

—

 

2

 

Total interest-bearing liabilities

 

56,848

 

48

0.33

%

Total non-interest-bearing liabilities

 

859

 

 

Total liabilities

 

57,707

 

 

Total shareholders' equity

 

6,696

 

 

Total liabilities and shareholders' equity

$

64,403

 

 

Excess interest earning assets over interest bearing liabilities/ net interest income/ net interest margin

$

3,264

$

466

3.10

%

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

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

Fees and Service Charges
(dollars in millions)

 

Three Months Ended

 

September 30, 2019

June 30, 2019

September 30, 2018

Money market funds and sweep deposits revenue(a)

$

62

$

23

$

18

Order flow revenue

 

46

 

45

 

40

Advisor management and custody fees

 

19

 

19

 

19

Mutual fund service fees

 

13

 

13

 

13

Foreign exchange revenue

 

8

 

8

 

7

Reorganization fees

 

5

 

7

 

3

Other fees and service charges

 

10

 

11

 

8

Total fees and service charges

$

163

$

126

$

108

(a) 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.

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 loan losses and losses on early extinguishment of debt. Management believes that excluding the provision (benefit) for loan losses and losses on early extinguishment of debt 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 (2) 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 loan losses and losses on early extinguishment of debt.

Management believes that excluding the provision (benefit) for loan losses and losses on early extinguishment of debt 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 (6) 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 (7) 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 (8) 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.

(2) 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):

Q3 2019

Q2 2019

Q3 2018

Amount

Operating
Margin %

Amount

Operating
Margin %

Amount

Operating
Margin %

Income before income tax expense and operating margin(a)

$

380

 

50

%

 

$

295

 

43

%

 

$

374

 

52

%

 

Provision (benefit) for loan losses

 

(12

)

 

 

(8

)

 

 

(34

)

Losses on early extinguishment of debt

 

—

 

 

 

—

 

 

4

 

Subtotal

 

(12

)

 

(8

)

 

(30

)

Adjusted income before income tax expense and adjusted operating margin(a)

$

368

 

48

%

$

287

 

42

%

$

344

 

48

%

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

(3) Capital return to shareholders represents the amount returned to shareholders through share repurchases and common stock dividends.

(4) The following table presents the allowance for loan losses (dollars in millions):

 

Q3 2019

Q4 2018

Allowance for loan losses, beginning

$

30

$

41

Provision (benefit) for loan losses

 

(12)

 

(12)

(Charge-offs) recoveries, net

 

9

 

8

Allowance for loan losses, ending

$

27

$

37

Loan servicing expense was $3 million, $3 million, and $5 million for the three months ended September 30, 2019, June 30, 2019, and September 30, 2018, respectively. Loan servicing expense was $9 million and $15 million for the nine months ended September 30, 2019 and 2018, respectively.

(5) 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.

(6) 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):

Q3 2019

Q2 2019

Q3 2018

Amount

Return
on
Common
Equity %

Amount

Return
on
Common
Equity %

Amount

Return
on
Common
Equity %

Net income available to common shareholders and return on common equity(a)

$

254

17

%

$

219

15

%

$

261

17

%

Add back impact of the following items:

 

 

Provision (benefit) for loan losses

 

(12

)

 

(8

)

 

(34

)

Losses on early extinguishment of debt

—

—

 

 

4

 

Subtotal

 

(12

)

 

(8

)

 

(30

)

Income tax impact

 

3

 

 

2

 

 

8

 

Net of tax

 

(9

)

 

(6

)

 

(22

)

Adjusted net income available to common shareholders and return on common equity(a)

$

245

 

16

%

 

213

 

14

%

$

239

 

16

%

(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 point reduction to both return on common equity and adjusted return on common equity.

(7) 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):

 

Q3 2019

Q2 2019

Q3 2018

 

Amount

Per
Share

 

Amount

Per

Share

 

Amount

Per

Share

Common equity book value

$

5,880

 

$

25.92

$

6,181

 

$

25.75

$

6,077

 

$

23.67

Less: Goodwill and other intangibles, net

 

(2,931

)

 

(2,946

)

 

(2,876

)

Add: Deferred tax liabilities related to

goodwill and other intangibles, net

 

456

 

 

 

450

 

 

 

426

 

 

Tangible common equity book value

$

3,405

 

$

15.01

$

3,685

 

$

15.35

$

3,627

 

$

14.13

(8) 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):

 

Q3 2019

Q2 2019

Q3 2018

Consolidated cash and equivalents

$

493

 

$

380

 

$

596

 

Less: Cash at regulated subsidiaries

 

(465

)

 

(373

)

 

(590

)

Add: Cash on deposit at E*TRADE Bank(a)

 

352

 

 

316

 

 

511

 

Corporate cash

$

380

 

$

323

 

$

517

 

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

(9) Commissionable trades exclude trades related to no transaction fee mutual funds and commission-free exchange-traded funds, rebalancing trades associated with managed products, and other non-commissionable trades.

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

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

 

Q3 2019

Q2 2019

Q3 2018

Sweep deposits

$

30.8

$

31.7

$

38.0

Customer payables

 

11.2

 

10.6

 

10.5

Savings, checking and other banking assets(a)

 

9.6

 

8.6

 

5.1

Total on-balance sheet cash

 

51.6

 

50.9

 

53.6

Sweep deposits at unaffiliated financial institutions

 

11.7

 

9.6

 

3.0

Money market funds and other

 

1.7

 

1.7

 

1.8

Total customer cash held by third parties(b)

 

13.4

 

11.3

 

4.8

Total cash and deposits

$

65.0

$

62.2

$

58.4

(a) Includes $6.3 billion, $5.1 billion and $0.7 billion of deposits at September 30, 2019, June 30, 2019 and September 30, 2018, respectively, in our Premium Savings Account product.

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

(12) 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

Q3 2019

Q4 2018

Q3 2019

Q4 2018

Shareholders’ equity

$

6,569

 

$

6,562

 

$

3,662

 

$

3,557

 

Deduct:

Preferred stock

 

(689

)

 

(689

)

—

—

Common Equity Tier 1 capital before regulatory adjustments

$

5,880

 

$

5,873

 

$

3,662

 

$

3,557

 

Add:

 

 

 

 

Losses in other comprehensive income on available-for-sale debt securities, net of tax

 

24

 

 

275

 

 

24

 

 

275

 

Deduct:

 

 

 

 

Goodwill and other intangible assets, net of deferred tax liabilities

 

(2,475

)

 

(2,540

)

 

(279

)

 

(287

)

Disallowed deferred tax assets

 

(74

)

 

(200

)

 

(3

)

 

(61

)

Common Equity Tier 1 capital

$

3,355

 

$

3,408

 

$

3,404

 

$

3,484

 

Add:

 

 

 

 

Preferred stock

 

689

 

 

689

 

—

—

Tier 1 capital

$

4,044

 

$

4,097

 

$

3,404

 

$

3,484

 

Add:

 

 

 

 

Other

 

35

 

 

46

 

 

27

 

 

37

 

Total capital

$

4,079

 

$

4,143

 

$

3,431

 

$

3,521

 

 

Average assets for leverage capital purposes

$

61,364

$

64,767

$

46,126

$

49,568

Deduct:

Goodwill and other intangible assets, net of deferred tax liabilities

 

(2,475

)

 

(2,540

)

 

(279

)

 

(287

)

Disallowed deferred tax assets

 

(74

)

 

(200

)

 

(3

)

 

(61

)

Adjusted average assets for leverage capital purposes

$

58,815

 

$

62,027

 

$

45,844

 

$

49,220

 

 

Total risk-weighted assets(a)

$

10,689

 

$

10,970

 

$

9,155

 

$

9,994

 

 

Tier 1 leverage ratio (Tier 1 capital / Adjusted average assets for leverage capital purposes)

 

6.9

%

 

6.6

%

 

7.4

%

 

7.1

%

Common Equity Tier 1 capital / Total risk-weighted assets(a)

 

31.4

%

 

31.1

%

 

37.2

%

 

34.9

%

Tier 1 capital / Total risk-weighted assets

 

37.8

%

 

37.3

%

 

37.2

%

 

34.9

%

Total capital / Total risk-weighted assets

 

38.2

%

 

37.8

%

 

37.5

%

 

35.2

%

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