E*TRADE FINANCIAL, LLC
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, 2019.
OVERVIEW
Company Overview
E*TRADE is a financial services company that provides brokerage and related
products and services for traders, investors, stock plan administrators and
participants, and registered investment advisors (RIAs). Founded on the
principle of innovation, we aim to enhance the financial independence of
customers through a powerful digital offering that includes tools and
educational materials, complemented by professional advice and support, catering
to the complex and unique needs of customers to help meet their near- and
long-term investing goals. We provide these services through our digital
platforms and network of industry-licensed customer service representatives and
financial consultants, over the phone, by email and online via two national
financial centers, and in-person at 30 regional financial centers across the
United States . We also operate federally chartered savings banks with the
primary purpose of maximizing the value of deposits generated through our
brokerage business.
We operate directly and through several subsidiaries, many of which are overseen
by governmental and self-regulatory organizations (SROs). Our most important
subsidiaries are described below:
•E*TRADE Securities LLC (E*TRADE Securities ) is a registered broker-dealer that
clears and settles customer transactions
•E*TRADE Bank is a federally chartered savings bank that provides Federal
Deposit Insurance Corporation (FDIC) insurance on certain qualifying amounts of
customer deposits and provides other banking and cash management capabilities
•E*TRADE Savings Bank , a subsidiary of E*TRADE Bank , is a federally chartered
savings bank that provides FDIC insurance on certain qualifying amounts of
customer deposits and provides custody solutions for RIAs
•E*TRADE Financial Corporate Services, Inc. (E*TRADE Financial Corporate
Services) is a provider of software and services for managing equity
compensation plans and student loan and financial wellness benefits to our
corporate clients
•E*TRADE Futures LLC (E*TRADE Futures) is a registered non-clearing Futures
Commission Merchant (FCM) that provides retail futures transaction capabilities
for our customers
•E*TRADE Capital Management LLC (E*TRADE Capital Management ) is an RIA that
provides investment advisory services for our customers
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Delivering a powerful digital offering for our customers is a core pillar of our
business strategy and we believe our focus on being a digital leader in the
financial services industry is a competitive advantage. We offer a broad range
of products and services to customers through the following channels:
•Retail: Our retail channel services individual brokerage and banking customers
that utilize our web, mobile and/or active trading platforms to meet trading,
investing and/or banking needs.
•Institutional: Our institutional channels include Corporate Services and
Advisor Services. We provide stock plan, student loan and financial wellness
solutions for public and private companies globally through our corporate
services channel. We provide custody services to independent RIAs through our
advisor services channel.
STRATEGY
Our business strategy is focused on leveraging our brand, hybrid support model,
and technology to grow our retail and institutional channels while generating
robust earnings growth and maximizing shareholder returns.
Leverage our brand, hybrid support model, and leading technology for scale and
growth
E*TRADE's unrivaled and tech-forward brand is synonymous with digital brokerage
and drives outsized awareness and consideration among business-to-customer and
business-to-business audiences. Our customers benefit from digitally led
experiences, complemented by professional advice and support. We cater to the
complex and unique needs of traders, investors, stock plan administrators and
participants, and independent RIAs. We are able to serve peak volumes across
channels with capacity for growth through our strong and scalable
infrastructure.
Empower self-directed retail customers through a powerful digital offering and
professional guidance
E*TRADE has three core digital offerings for the retail investor-trading,
investing, and banking. We maintain a leading position among active and
derivatives traders through the Power E*TRADE web-based platform and support
model. We connect customers with a range of easy to use wealth management
solutions. We are also advancing digital banking capabilities to complement our
existing product set and increase engagement with customers and prospects.
Capitalize on symbiotic institutional channels to drive growth
E*TRADE's corporate services and advisor services channels are critical for
growth. We aim to expand on our #1 position in stock plan administration through
innovative digital solutions, complementary service offerings and expert
support-driving growth in retail and institutional relationships. We plan to
leverage the power of E*TRADE's brand, digital ethos, and our broad customer
base to grow the advisor services channel. We also plan to connect retail
customers and stock plan participants seeking higher touch services to top-tier
advisors through our referral network-driving asset growth and retention.
Generate robust earnings growth and shareholder returns
We aim to deliver superior returns on customer assets by capturing the full
value of our retail and institutional relationships and leveraging E*TRADE's
highly scalable model to generate robust earnings growth and maximize
shareholder returns.
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PRODUCTS AND SERVICES
Our hybrid delivery model is available through the following award-winning
digital platforms which are complemented by professional advice and support.
Platforms for Retail Channel(1) Platforms for Institutional Channels(1)
Web Equity Edge Online(2)
Our easy to use site is the primary channel Equity Edge
to interact with customers and prospects Online is the #1
rated platform in
the stock plan
administration
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offers automation
and flexibility
Mobile Gradifi
Our industry leading mobile applications Gradifi is a
include integrations with leading mobile scalable,
artificial intelligence assistants streamlined
platform that
offers student
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financial
wellness benefits
Active Trading Platforms Liberty
Active derivatives trading platforms Liberty is
include sophisticated trading tools, intuitive
advanced portfolio and market tracking, and technology built
idea generation and analysis for RIAs that
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investment and
management of
client assets
Complemented by professional advice and support
Customer Service Financial Consultants
Customer service is available 24/7 via Financial
phone, email or chat from industry licensed consultants are
representatives. White glove service is available by
available for our highest-tiered customers phone or at
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provide
one-on-one
investing advice
Active Trader Services Corporate Services
Active trader services includes specialized Corporate
support for sophisticated customers with services support
advanced knowledge and skill includes
personalized
service on a
global scale
driven by
dedicated
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service managers
backed by
comprehensive
training and
education
Advisor Services
Advisor services
support includes
dedicated
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managers who act
as a single point
of contact for
specialized
support
(1)In August 2019 , E*TRADE was rated the #1 online broker in Kiplinger's 2019
Best Online Brokers Review. In the current year, we maintained our #1 ranking
for Mobile Trading, Options Trading, and Web-based Platform (Power E*TRADE) in
Stockbrokers.com's 2020 review of Best Online Brokers for Stock Trading. We also
finished Best in Class for research, education, active trading, futures trading,
and IRA accounts. In March 2020 , E*TRADE was also named Best Broker for ease of
trading and beginning options traders in Investopedia's 2020 Online Broker
review.
(2)In September 2019 , Equity Edge Online was rated #1 in Loyalty and Overall
Satisfaction for the eighth consecutive year in the Group Five Stock Plan
Administration Benchmark Study.
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We deliver a broad range of products and services through our retail and
institutional channels across the following five product areas: Trading,
Investing, Banking and Cash Management, Corporate Services and Advisor Services.
Trading
The Company delivers automated trade order placement and execution services,
offering our customers a full range of investment vehicles, including US
equities, ETFs, options, bonds, futures, American depositary receipts and
non-proprietary mutual funds. We also offer margin accounts, enabling qualifying
customers to borrow against their securities, supported by robust customer tools
to analyze positions and understand collateral requirements. The Company also
offers a fully paid lending program which allows customers to earn income on
certain securities when they permit us to lend these securities.
The Company markets trading products and services to active traders and
self-directed investors. Products and services are delivered through web,
mobile, and active trading platforms. Trading tools are supported by guidance,
including options, futures and fixed income specialists available on-call for
customers. Other tools and resources include independent research and analytics,
live and on-demand education, market commentary, trading ideas, strategies, and
screeners for major asset classes.
Investing
The Company endeavors to help investors build wealth and address their long-term
investing needs through a suite of managed products, asset allocation models,
and other services. These include our Core Portfolios, Blend Portfolios,
Dedicated Portfolios, and Fixed Income Portfolios. The Company offers
self-directed digital tools across web and mobile platforms, including mutual
fund and ETF screeners, All-Star Lists, a collection of pre-built ETF or mutual
fund portfolios based on time frame and risk tolerance, an assortment of
planning and allocation tools, thematic investing opportunities, education and
editorial content. Investors also have access to a wide selection of ETFs and
mutual funds, including approximately 2,300 ETFs and more than 4,500 no-load,
no-transaction fee mutual funds.
The Company also offers guidance through a team of licensed financial
consultants and Chartered Retirement Planning CounselorsSM at our 30 regional
financial centers and through our two national financial centers by phone, email
and online. Customers can also receive complimentary portfolio reviews and
personalized investment recommendations.
Banking and Cash Management
The Company's banking and cash management capabilities include deposit accounts
insured by the FDIC , which are fully integrated into customer brokerage
accounts. E*TRADE Bank's deposit account offerings include the Premium Savings
Account, which generally provides a higher yield to savings account customers as
compared to our other deposit products. Among other features, E*TRADE Bank's
customers can transfer to and from accounts at E*TRADE and elsewhere for free,
and checking account customers have access to debit cards with ATM fee refunds,
online and mobile bill pay, and mobile check deposits. We also offer the E*TRADE
Line of Credit, a securities-based lending program, which allows customers to
borrow against the market value of securities pledged as collateral.
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Corporate Services
Through our industry-leading platform, Equity Edge Online, the Company offers
fully-automated employee stock plan and employee stock purchase plan
administration, as well as comprehensive accounting, reporting and scenario
modeling tools. The integrated stock plan solutions include multi-currency
settlement and delivery, and streamlined tax calculation. Additionally,
corporate clients are offered 10b5-1 plan design and implementation, along with
SEC filing assistance and automated solutions. Participants have full access to
E*TRADE's robust investing and trading capabilities, including tailored
education and planning tools, and dedicated stock plan service representatives.
Comprehensive financial wellness and student loan solutions have been introduced
to complement our existing corporate services offering with the acquisition of
Gradifi, Inc. (Gradifi) in December 2019 . Refer to Note 2-Acquisitions and
Restructuring for further details.
Corporate Services is an important driver of account and asset growth, serving
as a conduit to the retail channel. Over the trailing 12 months, there were
$96 billion of gross inflows into our corporate services channel, primarily
driven by new corporate client implementations and new grants and employee stock
purchase plan transactions. Over this same period, domestic stock plan
participants generated $42 billion of net proceeds through transactions of
vested assets. These participant proceeds represent a key source of net new
assets for the retail customer channel.
Advisor Services
Through our proprietary technology platform, Liberty, the Company offers
sophisticated modeling, rebalancing, reporting, and practice management
capabilities that are fully customizable for the RIA. E*TRADE's financial
consultants can refer retail customers to pre-qualified RIAs on our custody
platform through our referral program, the E*TRADE Advisor Network, which is
offered through our two national and 30 regional financial centers. We expect
the E*TRADE Advisor Network will improve the Company's ability to drive asset
growth and retain customers seeking specialized services and sophisticated
advice.
Significant Events
Proposed merger with Morgan Stanley
On February 20, 2020 , the Company entered into an Agreement and Plan of Merger
(the Merger Agreement) with Morgan Stanley under which Morgan Stanley agreed to
acquire the Company in an all-stock transaction. The Company's shareholders
approved the merger on July 17, 2020 . The acquisition is subject to customary
closing conditions, including regulatory approvals, and is expected to close in
the fourth quarter of 2020. Please refer to Note 2-Acquisitions and
Restructuring for additional details.
Global economy disrupted by COVID-19 pandemic
In March 2020 , the World Health Organization declared the outbreak of COVID-19 a
pandemic. The Company responded by executing its business continuity plan and
transitioning nearly all of its workforce to a remote working environment to
prioritize the safety of its employees and customers. The pandemic, and actions
taken by governmental authorities to contain its financial and economic impact,
has resulted in significant market volatility and a significant reduction in
interest rates. As a result, the Company experienced sequential declines in net
interest margin, net interest income and other related revenues. While these
decreases were offset by increased trading-based revenues resulting from
continued record customer engagement, we cannot be certain that such levels will
persist should the scope and duration of the disruption be prolonged.
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On March 27, 2020 , the Coronavirus Aid, Relief, and Economic Security Act (CARES
Act) was enacted to provide stimulus to the US economy in the form of financial
aid to individuals and business, among other groups. The CARES Act includes
provisions for housing assistance, including mortgage forbearance and
foreclosure relief for eligible borrowers. The CARES Act also provides relief
from certain generally accepted accounting principles (GAAP) requirements,
including guidance related to the classification of loan modifications as
troubled debt restructurings (TDRs). The Company adopted the provisions of the
CARES Act and related guidance issued by US banking agencies (interagency
guidance) during the second quarter of 2020. Refer to Note 1-Organization, Basis
of Presentation and Summary of Significant Accounting Policies and Note 7-Loans
Receivable and Allowance for Credit Losses for additional details.
Financial Performance
Our net revenue is generated primarily from net interest income, commissions and
fees and service charges:
•Net interest income is largely impacted by the size of our balance sheet, our
balance sheet mix, and average yields on our assets and liabilities. Net
interest income is driven primarily from interest earned on investment
securities, margin receivables, securities lending, and our legacy loan
portfolio, less interest incurred on interest-bearing liabilities, including
deposits, customer payables, corporate debt and other borrowings.
•Commissions revenue is generated by customer trades and is largely impacted by
trade volume and trade type, specifically options contract charges.
•Fees and service charges revenue is primarily impacted by order flow revenue,
fees earned from customer cash held by third parties, advisor management and
custody fees, and mutual fund service fees.
Our net revenue is offset by non-interest expenses, the largest of which are
compensation and benefits and advertising and market development.
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Key Performance Metrics
Management monitors customer activity and corporate metrics to evaluate the
Company's performance. The most significant of these are displayed below.
Customer Activity Metrics
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Daily Average Revenue Trades (DARTs) is an important measure of customer trading
activity and is a key driver of trading-based revenue. DARTs were 1,009,956 and
834,980 for the three and six months ended June 30, 2020 , respectively, compared
to 274,838 and 279,839 for the same periods in 2019. DARTs volume is impacted by
market sentiment as well as volatility of the equity markets.
Derivative DARTs, a key component of overall DARTs that represents advanced
trading activities by our customers, is the daily average number of options and
futures trades, and Derivative DARTs percentage is the mix of options and
futures trades as a component of total DARTs. We expect that options trades will
be the primary driver of commissions revenue in future periods. Derivative DARTs
were 253,320 and 220,465 for the three and six months ended June 30, 2020 ,
respectively, compared to 91,358 and 91,644 for the same periods in 2019.
Derivative DARTs represented 25% and 26% of total DARTs for the three and six
months ended June 30, 2020 , respectively, compared to 33% for both of the same
periods in 2019.
E*TRADE Q2 2020 10-Q | Page 9
-------------------------------------------------------------------------------- Table of Contents Margin receivables represent credit extended to customers to finance their purchases of securities by borrowing against securities they own and is a key driver of net interest income. Margin receivables were$9.4 billion and$9.9 billion atJune 30, 2020 and 2019, respectively. Average margin receivables balances are significant drivers of net interest income. Average margin receivables were$8.0 billion and$8.7 billion for the three and six months endedJune 30, 2020 , respectively, compared to$10.1 billion and$9.9 billion for the same periods in 2019. The margin receivables balance increased during the three months endedJune 30, 2020 as equity markets stabilized; however, a lower beginning balance, driven by decreases in equity market valuations in lateMarch 2020 , drove average margin receivables down relative to the prior period. [[Image Removed: etfc-20200630_g13.jpg]] [[Image Removed: etfc-20200630_g14.jpg]] End of period accounts and net new accounts are indicators of our ability to attract and retain customers. Net new accounts represent gross new accounts less accounts attrited during the period. The following table presents end of period accounts by channel: 2Q 2020 1Q 2020 4Q 2019 3Q 2019 2Q 2019 End of period retail accounts 5,825,265 5,498,596 5,169,757 5,130,138
5,122,669
End of period advisor services accounts 140,904 144,453 148,198 150,401
151,275
End of period corporate services
accounts 1,979,907 1,946,956 1,908,836 1,893,881 1,853,875
End of period accounts 7,946,076 7,590,005 7,226,791 7,174,420 7,127,819
The following table presents net new accounts and annualized growth rates by
channel:
2Q 2020 1Q 2020 4Q 2019 3Q 2019 2Q 2019
Net new retail accounts 326,669 328,839 39,619 7,469 34,072
Net new advisor services accounts (3,549) (3,745) (2,203) (874) 53
Net new corporate services accounts 32,951 38,120 14,955 40,006 35,892
Net new accounts 356,071 363,214 52,371 46,601 70,017
Net new retail account growth rate 23.8 % 25.4 % 3.1 % 0.6 % 2.7 %
Net new advisor services account growth
rate (9.8) % (10.1) % (5.9) % (2.3) % 0.1 %
Net new corporate services account
growth rate 6.8 % 8.0 % 3.2 % 8.6 % 7.9 %
Net new total account growth rate 18.8 % 20.1 % 2.9 % 2.6 % 4.0 %
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Net new retail and advisor services assets equals total inflows to new and
existing retail and advisor services accounts less total outflows from closed
and existing retail and advisor services accounts. The net new retail and
advisor services assets metric is a general indicator of the use of our products
and services by new and existing retail and advisor services customers. Net new
retail and advisor services assets exclude the effects of market movements in
the value of retail and advisor services assets. Net new retail and advisor
services assets were $13.5 billion and $31.4 billion for the three and six
months ended June 30, 2020 , respectively, compared to $1.6 billion and
$6.3 billion for the same periods in 2019. The increase from the prior year was
as a result of record customer engagement beginning in March 2020 and continuing
through the end of the second quarter 2020. The following table presents
annualized net new retail and advisor services assets growth rates:
2Q 2020 1Q 2020 4Q 2019 3Q 2019 2Q2019
Net new retail assets growth rate 16.9 % 20.2 % 7.0 % 3.4 % 2.1 % Net new advisor services assets growth rate (2.1) % (7.1) % (2.3) % 0.8 % (1.2) % Net new retail and advisor services assets growth rate 15.9 % 18.8 % 6.5 % 3.2 % 1.9 % Total customer assets is an indicator of the value of our relationship with our customers. An increase generally indicates that the use of our products and services is expanding. Changes in this metric are also driven by changes in the valuations of our customers' underlying securities. The net increase in customer assets during the three months endedJune 30, 2020 was driven by continued net new asset growth and a relative stabilization of equity markets after the volatility of the first quarter 2020. The following table presents the significant components of total customer assets (dollars in billions): 2Q 2020 1Q 2020 4Q 2019 3Q 2019 2Q 2019 Security holdings$ 324.6 $ 253.2 $ 310.7 $ 284.7 $ 286.6 Cash and deposits 92.2 84.6 71.0 65.0 62.2 Retail and advisor services assets 416.8 337.8 381.7 349.7 348.8 Corporate services vested assets 191.5 135.8 159.1 138.9 142.3 Retail, advisor services, and corporate services vested assets 608.3 473.6 540.8 488.6 491.1 Corporate services unvested holdings 173.5 113.7 136.7 115.4 117.0 Total customer assets$ 781.8 $ 587.3 $ 677.5 $ 604.0 $ 608.1 E*TRADE Q2 2020 10-Q | Page 11 -------------------------------------------------------------------------------- Table of Contents Customer cash and deposits is a significant component of total customer assets 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. The following table presents the significant components of total customer cash and deposits (dollars in billions): 2Q 2020 1Q 2020 4Q 2019 3Q 2019 2Q 2019 Sweep deposits: Brokerage sweep deposits$ 39.9 $ 38.1 $ 27.9 $ 30.8 $ 31.7 Bank sweep deposits(1) 0.2 0.7 6.4 - - Customer payables 15.7 16.0 12.8 11.2 10.6 Savings, checking, and other banking assets(2) 3.6 3.3 4.3 9.6 8.6 Total on-balance sheet customer cash and deposits 59.4 58.1 51.4 51.6 50.9
Brokerage sweep deposits at unaffiliated financial institutions
22.0 15.4 16.9 11.7 9.6
Bank sweep deposits at unaffiliated financial
institutions(1) 8.7 9.1 0.8 - -
Money market funds and other 2.1 2.0 1.9 1.7 1.7
Total customer cash held by third parties(3) 32.8 26.5 19.6 13.4 11.3
Total customer cash and deposits $
92.2
(1)Beginning in Q4 2019, bank sweep deposits include Premium Savings Accounts participating in the newly established bank sweep deposit account program. Refer to MD&A-Balance Sheet Overview for additional information. (2)Savings, checking, and other banking assets include$1.0 billion ,$6.3 billion and$5.1 billion of deposits atDecember 31, 2019 ,September 30, 2019 andJune 30, 2019 , respectively in our Premium Savings Account product that were subsequently converted to the bank sweep deposit program. There were no such balances atJune 30, 2020 orMarch 31, 2020 . (3)Customer cash held by third parties is held outside E*TRADE and includes sweep deposit accounts and money market funds at unaffiliated financial institutions, net of deposit balances from unaffiliated institutions held on-balance sheet. Customer cash held by third parties is not reflected in the Company's consolidated balance sheet and is not immediately available for liquidity purposes. The following table presents the average balances and net fees earned on brokerage and bank sweep deposits held at unaffiliated financial institutions (dollars in billions, fees in basis points): 2Q 2020 1Q 2020 4Q 2019 3Q 2019 2Q 2019 Brokerage sweep deposits at unaffiliated financial institutions$ 20.4 $ 15.4 $ 14.7 $ 11.0 $ 3.7 Brokerage sweep deposit fees(1) 34 148 179 218 221 Bank sweep deposits at unaffiliated financial institutions$ 9.2 $ 5.5 $ 0.3 $ - $ - Bank sweep deposit fees(1) 15 8 6 - -
(1)Fees are net of interest paid.
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Corporate Metrics:
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Diluted earnings per common share is the portion of a company's profit allocated
to each diluted share of common stock and is a key indicator of the Company's
profitability. Diluted earnings per common share was $0.88 and $1.61 for the
three and six months ended June 30, 2020 , respectively, compared to $0.90 and
$2.00 for the same periods in 2019. See MD&A-Earnings Overview for further
details.
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 37% for both the three and six months ended June 30, 2020 ,
respectively, compared to 43% and 48% for the same periods in 2019. Income
before income tax expense and net revenue, the numerator and denominator in the
operating margin calculation, included $80 million of losses from balance sheet
repositioning for the three and six months ended June 30, 2019 , which resulted
in a 6 percentage point reduction and a 2 percentage point reduction in
operating margin for the same periods.
Adjusted operating margin is a non-GAAP measure that provides useful information
about our ongoing operating performance by excluding the provision (benefit) for
credit 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 37% for both the three and six months
ended June 30, 2020 , respectively, compared to 42% and 46% for the same periods
in 2019. Adjusted income before income tax expense and net revenue, the
numerator and denominator in the adjusted operating margin calculation, included
$80 million of losses from balance sheet repositioning for the three and six
months ended June 30, 2019 , which resulted in a 6 percentage point reduction and
a 3 percentage point reduction in adjusted operating margin for the same
periods. See MD&A-Earnings Overview for a reconciliation of adjusted operating
margin to operating margin.
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Return on common equity is calculated by dividing net income available to common
shareholders by average common shareholders' equity, which excludes preferred
stock. Return on common equity was 13% and 12% for the three and six months
ended June 30, 2020 , respectively, compared to 15% and 17% for the same periods
in 2019. Net income available to common shareholders included $80 million of
losses from balance sheet repositioning for the three and six months ended June
30, 2019 , which had an after-tax impact of $59 million and resulted in a 4
percentage point reduction and a 2 percentage point reduction in return on
common equity for the same periods.
Adjusted return on common equity is a non-GAAP measure calculated by dividing
adjusted net income available to common shareholders by average common
shareholders' equity, which excludes preferred stock. Adjusted net income
available to common shareholders is a non-GAAP measure which excludes the
provision (benefit) for credit losses, which is not viewed as key factor
governing our investment in the business and is excluded by management when
evaluating return on common equity performance. Adjusted return on common equity
was 13 and 12% for the three and six months ended June 30, 2020 , respectively,
compared to 14% and 16% for the same periods in 2019. See MD&A-Earnings Overview
for a reconciliation of adjusted net income available to common shareholders to
net income and adjusted return on common equity to return on common equity.
Adjusted net income available to common shareholders included $80 million of
losses from balance sheet repositioning for the three and six months ended June
30, 2019 , which had an after-tax impact of $59 million and resulted in a 4
percentage point reduction and a 2 percentage point reduction in adjusted return
on common equity for the same periods.
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Corporate cash, a non-GAAP measure, is a component of cash and equivalents and
represents the primary source of capital above and beyond the capital deployed
in our regulated subsidiaries. Cash and equivalents was $436 million and $380
million at June 30, 2020 and 2019, respectively, while corporate cash was $377
million and $323 million for the same periods. See MD&A-Liquidity and Capital
Resources for a reconciliation of corporate cash to cash and equivalents.
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Average interest-earning assets, along with net interest margin, are indicators
of our ability to generate net interest income. Average interest-earning assets
were $60.6 billion and $58.6 billion for the three and six months ended June 30,
2020 , respectively, compared to $61.4 billion and $61.2 billion for the same
periods in 2019.
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 2.56% and 2.69% for the three and six months
ended June 30, 2020 , respectively compared to 3.20% and 3.21% and for the same
periods in 2019.
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Tier 1 leverage ratio is an indicator of capital adequacy for E*TRADE Financial
and E*TRADE Bank . Tier 1 leverage ratio is Tier 1 capital divided by adjusted
average assets for leverage capital purposes. E*TRADE Financial's Tier 1
leverage ratio was 6.7% at both June 30, 2020 and 2019, respectively. E*TRADE
Bank's Tier 1 leverage ratio was 7.2% and 7.3% at June 30, 2020 and 2019,
respectively. The internal threshold for E*TRADE Financial's Tier 1 leverage
ratio is 6.5% and the internal threshold for E*TRADE Bank's Tier 1 leverage
ratio is 7.0%. See MD&A-Liquidity and Capital Resources for additional
information, including the calculation of regulatory capital ratios.
Total employees is the key driver of compensation and benefits expense, our
largest non-interest expense category. Total employees were 4,178 and 4,261 at
June 30, 2020 and 2019, respectively.
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EARNINGS OVERVIEW
We generated net income of $196 million and $377 million on total net revenue of
$716 million and $1.4 billion for the three and six months ended June 30, 2020 ,
respectively. The following chart presents a reconciliation of net income for
the three months ended June 30, 2019 to net income for the three months ended
June 30, 2020 (dollars in millions):
[[Image Removed: etfc-20200630_g27.jpg]]
(1)Includes professional services, occupancy and equipment, depreciation and
amortization,
E*TRADE Q2 2020 10-Q | Page 16
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Table of Contents The following table presents significant components of the consolidated statements of income (dollars in millions, except per share amounts):
Variance Variance
Three Months Ended June 30, 2020 vs. 2019 Six Months Ended June 30, 2020 vs. 2019
2020 2019 Amount % 2020 2019 Amount %
Net interest income $ 388 $ 490 $ (102) (21) % $ 788 $ 982 $ (194) (20) %
Total non-interest income 328 195 133 68 % 635 458 177 39 %
Total net revenue 716 685 31 5 % 1,423 1,440 (17) (1) %
Provision (benefit) for
credit losses (1) (8) 7 (88) % 5 (20) 25 *
Total non-interest expense 453 398 55 14 % 898 773 125 16 %
Income before income tax
expense 264 295 (31) (11) % 520 687 (167) (24) %
Income tax expense 68 76 (8) (11) % 143 178 (35) (20) %
Net income $ 196 $ 219 $ (23) (11) % $ 377 $ 509 $ (132) (26) %
Preferred stock dividends - - - - % 20 20 - - %
Net income available to
common shareholders $ 196 $ 219 $ (23) (11) % $ 357 $ 489 $ (132) (27) %
Diluted earnings per common
share $ 0.88 $ 0.90 $ (0.02) (2) % $ 1.61 $ 2.00 $ (0.39) (20) %
* Percentage not meaningful.
Net income decreased 11% to $196 million , or $0.88 per diluted share, and 26% to
$377 million , or $1.61 per diluted share, for the three and six months ended
June 30, 2020 , respectively, compared to the same periods in 2019. Net income
available to common shareholders was $196 million and $357 million for the three
and six months ended June 30, 2020 , respectively, compared to $219 million and
$489 million for the same periods in 2019. Net income available to common
shareholders included $20 million in preferred stock dividends for both the six
months ended June 30, 2020 and 2019, respectively. The decrease in net income
for the three months ended June 30, 2020 was a result of higher non-interest
expense primarily due to increases in advertising and market development and
clearing and servicing expense, partially offset by higher net revenues. The
decrease in net income for the six months ended June 30, 2020 was the result of
higher non-interest expense primarily driven by increased clearing and
servicing, communications, advertising and market development, and restructuring
and acquisition-related activities expenses, lower net revenues and a provision
for credit losses recorded during the six months ended June 30, 2020 as compared
to a provision (benefit) for credit losses in the prior period.
Net Revenue
The following table presents the significant components of total net revenue
(dollars in millions):
Variance Six Months Ended Variance
Three Months Ended June 30, 2020 vs. 2019 June 30, 2020 vs. 2019
2020 2019 Amount % 2020 2019 Amount %
Net interest income $ 388 $ 490 $ (102) (21) % $ 788 $ 982 $ (194) (20) %
Commissions 89 121 (32) (26) % 160 243 (83) (34) %
Fees and service charges 205 126 79 63 % 408 244 164 67 %
Gains (losses) on securities
and other, net 23 (64) 87 * 43 (53) 96 *
Other revenue 11 12 (1) (8) % 24 24 - - %
Total non-interest income 328 195 133 68 % 635 458 177 39 %
Total net revenue $ 716 $ 685 $ 31 5 % $ 1,423 $ 1,440 $ (17) (1) %
* Percentage not meaningful.
E*TRADE Q2 2020 10-Q | Page 17
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Table of Contents
Net Interest Income
Net interest income decreased 21% to $388 million and 20% to $788 million for
the three and six months ended June 30, 2020 , respectively, compared to the same
periods in 2019. Net interest income is earned primarily through investment
securities, margin receivables, securities lending, and our legacy loan
portfolio, offset by funding costs.
The following tables present average balance sheet data and interest income and
expense data, as well as related net interest margin, yields, and rates (dollars
in millions):
Three Months Ended June 30,
2020 2019
Interest Average Yield/ Interest Average Yield/
Average Balance Inc./Exp. Cost Average Balance Inc./Exp. Cost
Cash and equivalents $ 633 $ - 0.14 % $ 452 $ 3 2.33 %
Cash and investments segregated under federal or
other regulations 5,467 3 0.20 % 871 6 2.63 %
Investment securities 43,571 272 2.50 % 47,375 368 3.11 %
Margin receivables 8,039 68 3.40 % 10,084 130 5.17 %
Loans(1) 1,515 16 4.18 % 1,920 28 5.75 %
Broker-related receivables and other 1,379 - 0.13 % 659 3 2.23 %
Total interest-earning assets 60,604 359 2.37 % 61,361 538 3.51 %
Other interest revenue(2) - 50 - 22
Total interest-earning assets 60,604 409 2.70 % 61,361 560 3.66 %
Total non-interest-earning assets 7,172 5,093
Total assets $ 67,776 $ 66,454
Sweep deposits:
Brokerage sweep deposits $ 36,684 $ 2 0.02 % $ 37,380 $ 18 0.20 %
Bank sweep deposits(3) 232 - 0.13 % - - - %
Savings deposits 1,692 - 0.01 % 6,347 23 1.47 %
Other deposits 1,700 - 0.02 % 1,732 - 0.03 %
Customer payables 16,921 1 0.02 % 10,593 8 0.31 %
Broker-related payables and other 976 - 0.01 % 1,050 1 0.46 %
Other borrowings 6 1 * 312 4 3.78 %
Corporate debt 1,411 13 3.87 % 1,410 14 4.06 %
Total interest-bearing liabilities 59,622 17 0.11 % 58,824 68 0.47 %
Other interest expense(4) - 4 - 2
Total interest-bearing liabilities 59,622 21 0.14 % 58,824 70 0.48 %
Total non-interest-bearing liabilities 1,461 1,016
Total liabilities 61,083 59,840
Total shareholders' equity 6,693 6,614
Total liabilities and shareholders' equity $ 67,776 $ 66,454
Excess interest earning assets over interest
bearing liabilities/net interest income/net
interest margin $ 982 $ 388 2.56 % $ 2,537 $ 490 3.20 %
* Percentage not meaningful.
(1)Nonaccrual loans are included in the average loan balances. Interest payments
received on nonaccrual loans are recognized on a cash basis in interest income
until it is doubtful that full payment will be collected, at which point
payments are applied to principal.
(2)Other interest revenue is earned on certain securities loaned balances.
Interest expense incurred on other securities loaned balances is presented on
the broker-related payables and other line item above.
(3)Beginning in Q4 2019, bank sweep deposits include Premium Savings Accounts
participating in the newly established bank sweep deposit account program. Refer
to MD&A-Balance Sheet Overview for additional information.
(4)Other interest expense is incurred on certain securities borrowed balances.
Interest income earned on other securities borrowed balances is presented on the
broker-related receivables and other line item above.
E*TRADE Q2 2020 10-Q | Page 18--------------------------------------------------------------------------------
Table of Contents
Six Months Ended June 30,
2020 2019
Interest Average Yield/ Interest Average Yield/
Average Balance Inc./Exp. Cost Average Balance Inc./Exp. Cost
Cash and equivalents $ 700 $ 2 0.62 % $ 529 $ 6 2.32 %
Cash and investments segregated under federal or
other regulations 4,027 11 0.54 % 928 12 2.63 %
Investment securities 42,302 557 2.63 % 47,172 733 3.11 %
Margin receivables 8,700 162 3.75 % 9,926 256 5.21 %
Loans(1) 1,539 37 4.78 % 1,989 56 5.61 %
Broker-related receivables and other 1,365 4 0.68 % 646 7 2.24 %
Total interest-earning assets 58,633 773 2.64 % 61,190 1,070 3.51 %
Other interest revenue(2) - 79 - 45
Total interest-earning assets 58,633 852 2.91 % 61,190 1,115 3.66 %
Total non-interest-earning assets 6,923 5,043
Total assets $ 65,556 $ 66,233
Sweep deposits:
Brokerage sweep deposits $ 34,162 $ 7 0.04 % $ 37,904 $ 38 0.20 %
Bank sweep deposits(3) 1,770 13 1.53 % - - - %
Savings deposits 1,963 3 0.26 % 5,661 38 1.36 %
Other deposits 1,652 - 0.02 % 1,758 - 0.03 %
Customer payables 15,498 5 0.07 % 10,528 17 0.32 %
Broker-related payables and other 906 - 0.02 % 1,025 2 0.47 %
Other borrowings 6 2 * 291 6 3.80 %
Corporate debt 1,411 27 3.87 % 1,409 28 3.98 %
Total interest-bearing liabilities 57,368 57 0.20 % 58,576 129 0.44 %
Other interest expense(4) - 7 - 4
Total interest-bearing liabilities 57,368 64 0.22 % 58,576 133 0.46 %
Total non-interest-bearing liabilities 1,661 1,099
Total liabilities 59,029 59,675
Total shareholders' equity 6,527 6,558
Total liabilities and shareholders' equity $ 65,556 $ 66,233
Excess interest earning assets over interest
bearing liabilities/net interest income/net
interest margin $ 1,265 $ 788 2.69 % $ 2,614 $ 982 3.21 %
* Percentage not meaningful.
(1)Nonaccrual loans are included in the average loan balances. Interest payments
received on nonaccrual loans are recognized on a cash basis in interest income
until it is doubtful that full payment will be collected, at which point
payments are applied to principal.
(2)Other interest revenue is earned on certain securities loaned balances.
Interest expense incurred on other securities loaned balances is presented on
the broker-related payables and other line item above.
(3)Beginning in Q4 2019, bank sweep deposits include Premium Savings Accounts
participating in the newly established bank sweep deposit account program. Refer
to MD&A-Balance Sheet Overview for additional information.
(4)Other interest expense is incurred on certain securities borrowed balances.
Interest income earned on other securities borrowed balances is presented on the
broker-related receivables and other line item above.
Average interest-earning assets decreased 1% to $60.6 billion and 4% to $58.6
billion for the three and six months ended June 30, 2020 , respectively, compared
to the same periods in 2019. The fluctuation in average interest-earning assets
is generally driven by changes in average interest-bearing liabilities,
primarily deposits and customer payables, which increased 1% to $59.6 billion
and decreased 2% to $57.4 billion for the three and six months ended June 30,
2020 , respectively, compared to the same periods in 2019 due to the following:
E*TRADE Q2 2020 10-Q | Page 19
-------------------------------------------------------------------------------- Table of Contents •Deposits and customer payables: The decrease in sweep deposits was primarily driven by the balance sheet repositioning during the second quarter of 2019, as we moved$6.6 billion of deposits to third-party banks. The decrease in savings deposits was primarily driven by the conversion of Premium Savings Accounts into the bank sweep deposit program beginning in Q4 2019. These decreases were partially offset by increased customer payables as a result of increased customer engagement during the three and six months endedJune 30, 2020 . Refer to MD&A-Balance Sheet Overview for additional information. •Other interest-bearing liabilities: The decrease in broker-related payables and other borrowings was driven by customer activity and short-term liquidity needs atE*TRADE Bank andE*TRADE Securities . Net interest margin decreased 64 basis points to 2.56% and 52 basis points to 2.69% for the three and six months endedJune 30, 2020 , respectively, compared to the same periods in 2019. Net interest margin is driven primarily by the mix of average asset and liability balances and the interest rates earned or paid on those balances. The decrease during the six months endedJune 30, 2020 was due to a lower interest rate environment, including the impact of actions taken by theFederal Reserve to contain the financial and economic impact of the COVID-19 pandemic, partially offset by other interest revenue and expense earned on securities lending. The decrease in interest income for the three and six months endedJune 30, 2020 is primarily the result of lower average interest earning assets, asset mix, and the lower interest rate environment as compared to the same periods in 2019. Commissions Commissions revenue decreased 26% to$89 million and 34% to$160 million for the three and six months endedJune 30, 2020 compared to the same periods in 2019. The decrease was primarily related to the elimination of retail commissions on US listed stock, ETF, and options trades inOctober 2019 . Prior to this date, the primary factors affecting commissions revenue were DARTs, derivative DARTs, trade type, and the number of trading days. We expect the majority of commissions revenue in future periods will be driven from options contract charges. For additional information see MD&A-Overview. DARTs volume increased 267% to 1,009,956 and 198% to 834,980 for the three and six months endedJune 30, 2020 , respectively, compared to the same periods in 2019. DARTs volume is impacted by market sentiment as well as volatility of the equity markets, which was elevated during the three and six months endedJune 30, 2020 . Derivative DARTs volume increased 177% to 253,320 and 141% to 220,465 for the three and six months endedJune 30, 2020 , respectively, compared to the same periods in 2019. E*TRADE Q2 2020 10-Q | Page 20
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Table of Contents
Fees and Service Charges
The following table presents the significant components of fees and service
charges (dollars in millions):
Variance Six Months Ended Variance
Three Months Ended June 30, 2020 vs. 2019 June 30, 2020 vs. 2019
2020 2019 Amount % 2020 2019 Amount %
Order flow revenue $ 120 $ 45 $ 75 167 % $ 205 $ 88 $ 117 133 %
Money market funds and sweep
deposits revenue(1) 22 23 (1) (4) % 82 44 38 86 %
Advisor management and custody
fees 19 19 - - % 38 37 1 3 %
Mutual fund service fees 10 13 (3) (23) % 23 25 (2) (8) %
Foreign exchange revenue 9 8 1 13 % 18 16 2 13 %
Reorganization fees 12 7 5 71 % 16 13 3 23 %
Other fees and service charges 13 11 2 18 % 26 21 5 24 %
Total fees and service charges $ 205 $ 126 $ 79 63 % $ 408 $ 244 $ 164 67 %
(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 63% to$205 million and 67% to$408 million for the three and six months endedJune 30, 2020 , respectively, compared to the same periods in 2019. The increase was primarily driven by higher order flow revenue resulting from record customer engagement during the three and six months endedJune 30, 2020 . Higher money market funds and sweep deposits revenue during the six months endedJune 30, 2020 was due to higher average customer cash held by third parties resulting from the balance sheet repositioning in the second quarter of 2019 and customer cash growth during the six months endedJune 30, 2020 , offset by lower net yields earned on customer cash due to the lower interest rate environment. E*TRADE Q2 2020 10-Q | Page 21 -------------------------------------------------------------------------------- Table of Contents Gains (Losses) on Securities and Other, Net The following table presents the significant components of gains (losses) on securities and other, net (dollars in millions): Variance Variance Three Months EndedJune 30, 2020 vs. 2019 Six Months EndedJune 30, 2020 vs. 2019 2020 2019 Amount % 2020 2019 Amount % Gains (losses) on available-for-sale securities, net: Gains on available-for-sale securities$ 38 $ 15 $ 23 153 %$ 57 $ 26 $ 31 119 % Losses on available-for-sale securities (15) (80) 65 81 % (15) (80) 65 81 % Subtotal 23 (65) 88 * 42 (54) 96 * Equity method investment income and other - 1 (1) (100) % 1 1 - - % Gains (losses) on securities and other, net$ 23 $ (64) $ 87 *$ 43 $ (53) $ 96 * * Percentage not meaningful. InJune 2020 , the Company sold$571 million of investment securities due to market conditions. Gains (losses) on securities and other, net includes$15 million of losses related to these sales. InJune 2019 , the Company sold$4.5 billion of lower-yielding investment securities at losses as it repositioned its balance sheet during the second quarter. Gains (losses) on securities and other, net includes$80 million of losses related to these sales in the second quarter of 2019. See MD&A-Overview, MD&A-Balance Sheet Overview and Note 6-Available-for-Sale and Held-to-Maturity Securities for additional information. Provision (Benefit) for Credit Losses We recognized a provision (benefit) for credit losses of$(1) million for the three months endedJune 30, 2020 and a provision for credit losses of$5 million for the six months endedJune 30, 2020 , respectively, as compared to a provision (benefit) for credit losses of$(8) million and$(20) million for the same periods in 2019. The Company adopted amended accounting guidance related to accounting for credit losses onJanuary 1, 2020 . The timing and magnitude of the provision (benefit) for credit losses is affected by many factors that could result in variability. Changes in management's reasonable and supportable forecasts of estimated credit losses and collateral valuations, as well as the impact of actual charge-offs net of recoveries, will drive variability in provision (benefit) for credit losses in future periods. For additional information on management's estimate of the allowance for credit losses, see Note 7-Loans Receivable and Allowance for Credit Losses. E*TRADE Q2 2020 10-Q | Page 22
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Table of Contents
Non-Interest Expense
The following table presents the significant components of non-interest expense
(dollars in millions):
Variance Variance
Three Months Ended June 30, 2020 vs. 2019 Six Months Ended June 30, 2020 vs. 2019
2020 2019 Amount % 2020 2019 Amount %
Compensation and benefits $ 176 $ 168 $ 8 5 % $ 344 $ 332 $ 12 4 %
Advertising and market development 64 48 16 33 % 120 102 18 18 %
Clearing and servicing 47 32 15 47 % 91 62 29 47 %
Professional services 30 26 4 15 % 53 48 5 10 %
Occupancy and equipment 37 32 5 16 % 73 64 9 14 %
Communications 35 29 6 21 % 64 44 20 45 %
Depreciation and amortization 24 21 3 14 % 47 42 5 12 %
FDIC insurance premiums 3 4 (1) (25) % 7 8 (1) (13) %
Amortization of other intangibles 15 15 - - % 30 30 - - %
Restructuring and acquisition-related
activities 2 - 2 100 % 18 - 18 100 %
Other non-interest expenses 20 23 (3) (13) % 51 41 10 24 %
Total non-interest expense $ 453 $ 398 $ 55 14 % $ 898 $ 773 $ 125 16 %
Compensation and Benefits
Compensation and benefits expense increased 5% to $176 million and 4% to $344
million for the three and six months ended June 30, 2020 , respectively, compared
to the same periods in 2019. This increase was primarily driven by increased
incentive compensation as compared to the prior periods.
Advertising and Market Development
Advertising and market development expense increased 33% to $64 million and 18%
to $120 million for the three and six months ended June 30, 2020 , respectively,
compared to the same periods in 2019. This increase was related primarily to
increased promotions related to efforts to attract new customers as compared to
the prior periods.
Clearing and Servicing
Clearing and servicing expense increased 47% to $47 million and $91 million for
the three and six months ended June 30, 2020 , respectively, compared to the same
periods in 2019. This increase for the six months ended June 30, 2020 was
related primarily to increased customer engagement and trading volume resulting
from the market volatility experienced during the six months ended June 30,
2020 .
Communications
Communications expense increased 21% to $35 million and 45% to $64 million for
the three and six months ended June 30, 2020 , respectively, compared to the same
periods in 2019. The increase during the three months ended June 30, 2020 was
primarily driven by increased customer activity, while the increase during the
six months ended June 30, 2020 was driven by a $14 million benefit related to a
change in estimate for previous market data usage during the three months ended
March 31, 2019 .
E*TRADE Q2 2020 10-Q | Page 23
-------------------------------------------------------------------------------- Table of Contents Restructuring and Acquisition-Related Activities Restructuring and acquisition-related activities expense of$2 million and$18 million for the three and six months endedJune 30, 2020 , respectively, was driven by costs incurred in connection with the proposed merger with Morgan Stanley. There was no restructuring and acquisition-related activities expense during the three or six months endedJune 30, 2019 . Refer to Note 2-Acquisitions and Restructuring for additional information. Other Non-Interest Expenses Other non-interest expenses decreased 13% to$20 million and increased 24% to$51 million for the three and six months endedJune 30, 2020 , respectively, compared to the same periods in 2019. The decrease during the three months endedJune 30, 2020 was primarily driven by lower meetings and events expenses as compared to the prior period. The increase during the six months endedJune 30, 2020 was primarily driven by impairment of certain technology assets as a result of project cancellations during the three months endedMarch 31, 2020 as compared to the prior year. Operating Margin Operating margin was 37% for both the three and six months endedJune 30, 2020 , respectively, compared to 43% and 48% for the same periods in 2019. Adjusted operating margin, a non-GAAP measure, was 37% for both the three and six months endedJune 30, 2020 , respectively, compared to 42% and 46% for the same periods in 2019. Adjusted operating margin is calculated by dividing adjusted income before income tax expense by total net revenue. Adjusted income before income tax expense, a non-GAAP measure, excludes provision (benefit) for credit losses. The following table presents a reconciliation of adjusted income before income tax expense and adjusted operating margin, non-GAAP measures, to the most directly comparable GAAP measures (dollars in millions): Three Months Ended June 30, Six Months Ended June 30, 2020 2019 2020 2019 Operating Margin Operating Margin Operating Margin Operating Margin Amount % Amount % Amount % Amount % Income before income tax expense / operating margin(1)$ 264 37 %$ 295 43 %$ 520 37 %$ 687 48 % Provision (benefit) for credit losses (1) (8) 5 (20) Adjusted income before income tax expense / adjusted operating margin(1)$ 263 37 %$ 287 42 %$ 525 37 %$ 667 46 % (1)Income before income tax expense and adjusted income before income tax expense included$80 million of losses from balance sheet repositioning for the three and six months endedJune 30, 2019 , which resulted in a 6 percentage point reduction and a 2 percentage point reduction in operating margin and a 6 percentage point reduction and a 3 percentage point reduction in adjusted operating margin for the same periods. . E*TRADE Q2 2020 10-Q | Page 24
-------------------------------------------------------------------------------- Table of Contents Return on Common Equity Return on common equity was 13% and 12% for the three and six months endedJune 30, 2020 , respectively, compared to 15% and 17% for the same periods in 2019. Adjusted return on common equity, a non-GAAP measure, was 13% and 12 % for the three and six months endedJune 30, 2020 , respectively, compared to 14% and 16% for the same periods in 2019. Adjusted return on common equity is calculated by dividing adjusted net income available to common shareholders by average common shareholders' equity, which excludes preferred stock. Adjusted net income available to common shareholders, a non-GAAP measure, excludes the after-tax impact of the provision (benefit) for credit losses. The following table provides a reconciliation of GAAP net income available to common shareholders and return on common equity percentage to non-GAAP adjusted net income available to common shareholders and adjusted return on common equity percentage (dollars in millions): Three Months Ended June 30, Six Months Ended June 30, 2020 2019 2020 2019 Return on Return on Return on Common Common Return on Common Equity Amount Equity % Amount Equity % Amount Common Equity % Amount % Net income available to common shareholders and return on common equity(1)$ 196 13 %$ 219 15 %$ 357 12%$ 489 17 % Add back impact of the following item: Provision (benefit) for credit losses (1) (8) 5 (20) Income tax impact - 2 (1) 5 Net of tax (1) (6) 4 (15) Adjusted net income available to common shareholders and return on common equity(1)$ 195 13 %$ 213 14 %$ 361 12%$ 474 16 % (1)Net income available to common shareholders and adjusted net income available to common shareholders includes$80 million of losses from balance sheet repositioning for the three and six months endedJune 30, 2019 , which had an after-tax impact of$59 million and resulted in a 4 percentage point reduction and 2 percentage point reduction to return on common equity and adjusted return on common equity for the same periods. Income Tax Expense Income tax expense was$68 million and$143 million for the three and six months endedJune 30, 2020 , respectively, compared to$76 million and$178 million for the same periods in 2019. The effective tax rate was 26% and 27% for the three and six months endedJune 30, 2020 , respectively, compared to 26% for both periods in 2019. The increase in the effective tax rate for the six months endedJune 30, 2020 related primarily to discrete state tax expenses recognized during the period.
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