NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1—ORGANIZATION, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
—E*TRADE Financial Corporation is a financial services company that provides brokerage and related products and services primarily to individual retail investors under the brand "E*TRADE Financial." The Company also provides investor-focused banking products, primarily sweep deposits, to retail investors.
Basis of Presentation
—The consolidated financial statements include the accounts of the Company and its majority-owned subsidiaries as determined under the voting interest model. Entities in which the Company has the ability to exercise significant influence but in which the Company does not possess control are generally accounted for by the equity method. Entities in which the Company does not have the ability to exercise significant influence are generally carried at cost. However, investments in marketable equity securities where the Company does not have the ability to exercise significant influence over the entities are accounted for as available-for-sale equity securities. The Company also evaluates its initial and continuing involvement with certain entities to determine if the Company is required to consolidate the entities under the variable interest entity ("VIE") model. This evaluation is based on a qualitative assessment of whether the Company is the primary beneficiary of the VIE, which requires the Company to possess both: 1) the power to direct the activities that most significantly impact the economic performance of the VIE; and 2) the obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to the VIE.
The Company's consolidated financial statements are prepared in accordance with GAAP. Intercompany accounts and transactions are eliminated in consolidation. These consolidated financial statements reflect all adjustments, which are all normal and recurring in nature, necessary to present fairly the financial position, results of operations and cash flows for the periods presented. These consolidated financial statements should be read in conjunction with the Annual Report on Form 10-K for the year ended
December 31, 2015
.
Beginning January 1, 2016, the Company changed its segment reporting structure to align with the manner in which the Chief Operating Decision Maker now reviews business performance and makes resource allocation decisions. As the Chief Operating Decision Maker's business performance assessments and resource allocation decisions are based on consolidated operating margin, the Company no longer has separate operating segments and, accordingly, no longer presents disaggregated segment financial results. The Company also updated the presentation of its consolidated statement of income (loss) to reflect how business performance is now measured and prior periods have been reclassified to conform to the current period presentation as follows:
|
|
•
|
interest expense related to corporate debt and interest income related to corporate cash reclassified from other income (expense) to net interest income;
|
|
|
•
|
losses on early extinguishment of debt, net reclassified from other income (expense) to non-interest expense; and
|
|
|
•
|
other income (expense) reclassified from other income (expense) to gains (losses) on securities and other, net.
|
Use of Estimates
—Preparing the Company's consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and related notes for the periods presented. Actual results could differ from management’s estimates. Certain significant accounting policies are critical because they are based on estimates and assumptions that require complex and subjective judgments by management. Changes in these estimates or assumptions could materially impact the Company’s financial condition and results of operations. Material estimates in which management believes changes could reasonably occur include: allowance for loan losses; asset impairment, including goodwill impairment and OTTI; estimates of effective tax rates, deferred taxes and valuation allowance; accounting for derivative instruments; and fair value measurements.
Financial Statement Descriptions and Related Accounting Policies
Margin Receivables
—Margin receivables represent credit extended to customers to finance their purchases of securities by borrowing against securities the customers own. Securities owned by customers are held as collateral for amounts due on the margin receivables, the value of which is not reflected in the consolidated balance sheet. The Company is permitted to sell or re-pledge these securities held as collateral and to use the securities to enter into securities lending transactions, to collateralize borrowings or for delivery to counterparties to cover customer short positions.
The fair value of securities that the Company received as collateral in connection with margin receivables and securities borrowing activities, where the Company is permitted to sell or re-pledge the securities, was approximately
$9.4 billion
and
$10.1 billion
at
September 30, 2016 and December 31, 2015
, respectively. Of this amount,
$2.1 billion
and
$2.5 billion
had been pledged or sold in connection with securities loans and deposits with clearing organizations at
September 30, 2016 and December 31, 2015
, respectively.
New Accounting and Disclosure Guidance
—Below is the new accounting and disclosure guidance that relates to activities in which the Company is engaged.
Adoption of New Accounting Standards
Disclosures of Uncertainties about an Entity’s Ability to Continue as a Going Concern
In August 2014, the FASB amended the guidance related to an entity’s evaluations and disclosures of going concern uncertainties. The new guidance requires management to perform interim and annual assessments of the entity’s ability to continue as a going concern within one year of the date the financial statements are issued, and to provide certain disclosures if conditions or events raise substantial doubt about the entity’s ability to continue as a going concern. The Company adopted the amended guidance for annual and interim periods beginning on January 1, 2016. The adoption of the amended guidance did not impact the Company’s financial condition, results of operations or cash flows.
Consolidation
In February 2015, the FASB amended the guidance on consolidation of certain legal entities. The amended guidance modifies the evaluation of whether limited partnerships and similar legal entities are VIEs or voting interest entities, eliminates the presumption that a general partner should consolidate a limited partnership, and clarifies how to determine whether a group of equity holders has power over an entity. The Company adopted the amended guidance for annual and interim periods beginning on January 1, 2016 on a modified retrospective basis. The adoption of the amended guidance did not impact the Company’s financial condition, results of operations or cash flows.
Accounting for Customer Fees Paid in a Cloud Computing Arrangement
In April 2015, the FASB amended the accounting guidance on customer fees paid in a cloud computing arrangement. The amended guidance requires that internal-use software accessed by a customer in cloud computing arrangements be accounted for as software licenses if specific criteria are met; otherwise they should be accounted for as service contracts. The Company adopted the amended guidance for annual and interim periods beginning on January 1, 2016 on a prospective basis. The adoption of the amended guidance did not impact the Company’s financial condition, results of operations or cash flows.
New Accounting Standards Not Yet Adopted
Revenue Recognition on Contracts with Customers
In May 2014, the FASB amended the guidance on revenue recognition on contracts with customers. The new standard outlines a single comprehensive model for entities to apply in accounting for revenue arising from contracts with customers. The FASB issued supplemental amendments to the new standard to clarify certain accounting guidance and provide narrow scope improvements and practical expedients in the first half of 2016. The amended guidance will be effective for annual and interim periods beginning on January 1, 2018 for the Company and may be applied on either a full retrospective or modified retrospective basis. The Company is currently evaluating the impact of the new accounting guidance and expects to complete this evaluation in 2017; however, the adoption of the
amended guidance is not expected to have a material impact on the Company’s financial condition, results of operations or cash flows.
Classification and Measurement of Financial Instruments
In January 2016, the FASB amended the accounting and disclosure guidance on the classification and measurement of financial instruments. Relevant changes in the amended guidance include the requirement that equity investments, excluding those accounted for under the equity method of accounting or those resulting in consolidation of the investee, be measured at fair value in the consolidated balance sheet with changes in fair value recognized in net income. For disclosure purposes, the Company will no longer be required to disclose the methods and significant assumptions used to estimate fair value for financial instruments measured at amortized cost in the consolidated balance sheet. The amended guidance will be effective for interim and annual periods beginning on January 1, 2018 for the Company and is required to be applied on a modified retrospective basis by means of a cumulative-effect adjustment to the consolidated balance sheet on that date. While the Company is currently evaluating the impact of the new accounting guidance, the adoption of the amended guidance is not expected to have a material impact on the Company’s financial condition, results of operations or cash flows.
Accounting for Leases
In February 2016, the FASB amended the guidance on accounting for leases. The new standard requires lessees to recognize assets and liabilities on the balance sheet for the rights and obligations created by all qualifying leases with terms of more than twelve months. The recognition, measurement and presentation of expenses and cash flows arising from a lease by a lessee remains substantially unchanged and depends on classification as a finance or operating lease. The new standard also requires additional quantitative and qualitative disclosures that provide additional information about the amounts related to leasing arrangements recorded in the financial statements. The new guidance will be effective for interim and annual periods beginning on January 1, 2019 for the Company and is required to be applied on a modified retrospective basis to the earliest period presented, which includes practical expedient options in certain circumstances. The Company is currently evaluating the impact of the new accounting guidance on the Company's financial condition, results of operations and cash flows.
Accounting for Employee Share-based Payments
In March 2016, the FASB amended the accounting guidance on employee shared-based payments. Relevant changes in the amended guidance include the requirement to recognize all excess tax benefits and deficiencies upon exercise or vesting as income tax expense or benefit in the income statement; to treat excess tax benefits and deficiencies as discrete items in the reporting period they occur; to not delay recognition of excess tax benefits until the tax benefit is realized through a reduction in current taxes payable; and to make an accounting policy election to either estimate forfeitures or account for forfeiture as they occur. The new guidance will be effective for interim and annual periods beginning on January 1, 2017 for the Company and application methods vary based on the amended guidance. Early adoption in interim periods is permitted. The adoption of the amended guidance is not expected to have a material impact on the Company’s financial condition, results of operations or cash flows.
Accounting for Credit Losses
In June 2016, the FASB amended the accounting guidance on accounting for credit losses. The amended guidance requires measurement of all expected credit losses for financial instruments and other commitments to extend credit held at the reporting date. For financial assets measured at amortized cost, factors such as historical experience, current conditions, and reasonable and supportable forecasts will be used to estimate expected credit losses. The amended guidance will also change the manner in which credit losses are recognized on debt securities classified as available-for-sale. The new guidance will be effective for interim and annual periods beginning January 1, 2020 for the Company. Early adoption is permitted. The Company is currently evaluating the impact of the new accounting guidance on the Company's financial condition, results of operations and cash flows.
Classification of Certain Cash Receipts and Cash Payments
In August 2016, the FASB amended the guidance on the presentation and classification of certain cash receipts and cash payments in the statement of cash flows to eliminate current diversity in practice. The new guidance will be effective for interim and annual periods beginning January 1, 2018 for the Company and must be applied using a retrospective transition method to each period presented. Early adoption is permitted. The Company is currently evaluating the impact of the new accounting guidance.
NOTE 2—BUSINESS ACQUISITION
OptionsHouse Acquisition
On September 12, 2016, the Company completed its acquisition of all of the outstanding equity of Aperture New Holdings, Inc., the ultimate parent company of OptionsHouse, from Aperture Holdings, L.P. for
$725 million
. OptionsHouse is an online brokerage firm focused on serving active traders through its derivatives platform. The acquisition will enhance E*TRADE's derivatives capabilities and offerings to current customers while providing the benefit of an expanded breadth of offerings, including 24 hour customer service, long-term investing tools, and mobile experience, for current OptionsHouse customers.
The results of OptionsHouse's operations have been included in the Company's consolidated statement of income (loss) for the three and nine months ended September 30, 2016 from the date of the acquisition. OptionsHouse's net revenue from September 12, 2016 through September 30, 2016 was
$6 million
. Supplemental pro forma financial information related to the acquisition is not included because the impact on the Company's
consolidated statement of income (loss)
is not material.
The following table summarizes the provisional allocation of the purchase price to the net assets of OptionsHouse as of September 12, 2016 (dollars in millions):
|
|
|
|
|
|
September 12, 2016
|
Purchase price
|
$
|
725
|
|
Purchased cash adjustment
|
26
|
|
Working capital adjustment
|
(2
|
)
|
Total cash consideration paid
|
$
|
749
|
|
Fair value of net assets acquired
|
$
|
171
|
|
Provisional goodwill
|
$
|
578
|
|
The following table summarizes the provisional fair values of the assets acquired and liabilities assumed as of the acquisition date. The allocation of the purchase price is provisional and subject to further adjustment as information relative to the acquisition date fair value of intangible assets is finalized. We do not expect that any adjustments to the provisional fair value will be material to the Company's consolidated financial statements (dollars in millions):
|
|
|
|
|
|
September 12, 2016
|
Assets
|
|
Cash and equivalents
|
$
|
26
|
|
Identifiable intangible assets
|
169
|
|
Property and equipment
|
6
|
|
Other assets
|
12
|
|
Total assets acquired
|
$
|
213
|
|
Liabilities
|
|
Deferred tax liabilities, net
|
$
|
31
|
|
Accrued expenses and other liabilities
|
11
|
|
Total liabilities assumed
|
$
|
42
|
|
Net assets acquired
|
$
|
171
|
|
The provisional goodwill of
$578 million
, which is allocated to the retail brokerage reporting unit, is composed primarily of the synergies expected to result from combining operations with OptionsHouse and coupling its derivatives platform with the Company's existing product offerings. Approximately
$122 million
of this goodwill will be deductible for tax purposes.
The Company recorded provisional intangible assets of
$169 million
, which are subject to amortization over their estimated useful lives. Approximately
$63 million
of the intangible assets will be deductible for tax purposes. The provisional fair value of the intangible assets was determined under the income approach. The following table summarizes the provisional estimated fair value and estimated useful lives of the intangible assets (dollars in millions):
|
|
|
|
|
|
|
|
Estimated Fair Value
|
|
Estimated Useful Life (In Years)
|
Customer relationships
|
$
|
118
|
|
|
14
|
Technology
|
48
|
|
|
7
|
Trade name
|
3
|
|
|
2
|
Total intangible assets
|
$
|
169
|
|
|
|
NOTE 3— RESTRUCTURING AND ACQUISITION-RELATED ACTIVITIES
The following table shows the components of restructuring and acquisition-related activities expense for the
three and nine months ended
September 30, 2016
and
2015
(dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Restructuring activities
|
$
|
18
|
|
|
$
|
2
|
|
|
$
|
21
|
|
|
$
|
8
|
|
Acquisition-related costs
|
7
|
|
|
—
|
|
|
7
|
|
|
—
|
|
Total restructuring and acquisition-related activities
|
$
|
25
|
|
|
$
|
2
|
|
|
$
|
28
|
|
|
$
|
8
|
|
The Company incurred
$7 million
of acquisition-related costs in connection with its purchase of OptionsHouse, which was completed on September 12, 2016. Restructuring activities during the three and nine months ended September 30, 2016 includes approximately
$16 million
of costs, primarily related to employee severance, from the realignment of our core brokerage business and organizational structure. The liability for restructuring activities at September 30, 2016 was
$11 million
.
NOTE 4— INTEREST INCOME AND INTEREST EXPENSE
The following table shows the components of interest income and interest expense for the
three and nine months ended
September 30, 2016
and
2015
(dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Interest income:
|
|
|
|
|
|
|
|
Cash and equivalents
|
$
|
2
|
|
|
$
|
1
|
|
|
$
|
5
|
|
|
$
|
2
|
|
Cash required to be segregated under federal or other regulation
|
2
|
|
|
1
|
|
|
4
|
|
|
1
|
|
Available-for-sale securities
|
66
|
|
|
57
|
|
|
198
|
|
|
189
|
|
Held-to-maturity securities
|
109
|
|
|
85
|
|
|
319
|
|
|
259
|
|
Margin receivables
|
60
|
|
|
70
|
|
|
185
|
|
|
208
|
|
Loans
|
46
|
|
|
58
|
|
|
146
|
|
|
177
|
|
Broker-related receivables and other
|
—
|
|
|
—
|
|
|
1
|
|
|
2
|
|
Subtotal interest income
|
285
|
|
|
272
|
|
|
858
|
|
|
838
|
|
Other interest revenue
(1)
|
24
|
|
|
25
|
|
|
65
|
|
|
85
|
|
Total interest income
|
309
|
|
|
297
|
|
|
923
|
|
|
923
|
|
Interest expense:
|
|
|
|
|
|
|
|
Deposits
|
(1
|
)
|
|
(1
|
)
|
|
(3
|
)
|
|
(4
|
)
|
Customer payables
|
(2
|
)
|
|
(2
|
)
|
|
(4
|
)
|
|
(4
|
)
|
Other borrowings
(2)
|
(4
|
)
|
|
(30
|
)
|
|
(13
|
)
|
|
(112
|
)
|
Corporate debt
|
(13
|
)
|
|
(13
|
)
|
|
(40
|
)
|
|
(46
|
)
|
Subtotal interest expense
|
(20
|
)
|
|
(46
|
)
|
|
(60
|
)
|
|
(166
|
)
|
Other interest expense
(3)
|
(2
|
)
|
|
(2
|
)
|
|
(3
|
)
|
|
(6
|
)
|
Total interest expense
|
(22
|
)
|
|
(48
|
)
|
|
(63
|
)
|
|
(172
|
)
|
Net interest income
(4)
|
$
|
287
|
|
|
$
|
249
|
|
|
$
|
860
|
|
|
$
|
751
|
|
|
|
(1)
|
Represents interest income on securities loaned.
|
|
|
(2)
|
In September 2015, the Company terminated
$4.4 billion
of legacy wholesale funding obligations.
|
|
|
(3)
|
Represents interest expense on securities borrowed.
|
|
|
(4)
|
Beginning in 2016, interest expense related to corporate debt and interest income related to corporate cash are presented within net interest income. Prior periods have been reclassified to conform with current period presentation.
|
NOTE 5—FAIR VALUE DISCLOSURES
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In determining fair value, the Company may use various valuation approaches, including market, income and/or cost approaches. The fair value hierarchy requires the Company to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Fair value is a market-based measure considered from the perspective of a market participant. Accordingly, even when market assumptions are not readily available, the Company’s own assumptions reflect those that market participants would use in pricing the asset or liability at the measurement date. The fair value measurement accounting guidance describes the following three levels used to classify fair value measurements:
|
|
•
|
Level 1—Unadjusted quoted prices in active markets for identical assets or liabilities that are accessible by the Company.
|
|
|
•
|
Level 2—Quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly.
|
|
|
•
|
Level 3—Unobservable inputs that are significant to the fair value of the assets or liabilities.
|
The availability of observable inputs can vary and in certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the
significance of a particular input to a fair value measurement requires judgment and consideration of factors specific to the asset or liability.
Recurring Fair Value Measurement Techniques
Mortgage-backed Securities
The Company’s mortgage-backed securities portfolio is primarily comprised of agency mortgage-backed securities and collateralized mortgage obligations ("CMOs"). Agency mortgage-backed securities and CMOs are gu
aranteed by U.S. government sponsored enterprises and federal agencies. The weighted average coupon rates for the available-for-sale
mortgage-backed securities at
September 30, 2016
are shown in the following table:
|
|
|
|
|
Weighted Average
Coupon Rate
|
Agency mortgage-backed securities
|
2.83
|
%
|
Agency CMOs
|
3.27
|
%
|
The fair value of agency mortgage-backed securities was determined using a market approach with quoted market prices, recent market transactions and spread data for similar instruments. The fair value of agency CMOs was determined using market and income approaches along with the Company’s own trading activities for identical or similar instruments. Agency mortgage-backed securities and CMOs were categorized in Level 2 of the fair value hierarchy.
Other Debt Securities
The Company's fair value level classification of U.S. Treasuries is based on the original maturity dates of the securities and whether the securities are the most recent issuances of a given maturity. U.S. Treasuries with original maturities less than one year are classified as Level 1. U.S. Treasuries with original maturities longer than one year are classified as Level 1 if they represent the most recent issuance of a given maturity; otherwise, these securities are classified as Level 2.
The fair value measurements of agency debentures and agency debt securities were determined using market and income approaches along with the Company’s own trading activities for identical or similar instruments and were categorized in Level 2 of the fair value hierarchy.
The Company’s municipal bonds are revenue bonds issued by state and other local government agencies. The valuation of corporate bonds is impacted by the credit worthiness of the corporate issuer. All of the Company’s municipal bonds and corporate bonds were rated investment grade at
September 30, 2016
. These securities were valued using a market approach with pricing service valuations corroborated by recent market transactions for identical or similar bonds. Municipal bonds and corporate bonds were categorized in Level 2 of the fair value hierarchy.
Publicly Traded Equity Securities
The fair value measurements of the Company's publicly traded equity securities were classified as Level 1 of the fair value hierarchy as they were based on quoted market prices in active markets.
Derivative Instruments
Interest rate swap and option contracts were valued with an income approach using pricing models that are commonly used by the financial services industry. The market observable inputs used in the pricing models include the swap curve, the volatility surface, and prime or overnight indexed swap basis from a financial data provider. The Company does not consider these models to involve significant judgment on the part of management, and the Company corroborated the fair value measurements with counterparty valuations. The Company’s derivative instruments were categorized in Level 2 of the fair value hierarchy. The consideration of credit risk, the Company’s or the counterparty’s, did not result in an adjustment to the valuation of its derivative instruments in the periods presented.
Nonrecurring Fair Value Measurement Techniques
Certain other assets are recorded at fair value on a nonrecurring basis: 1) one- to four-family and home equity loans in which the amount of the loan balance in excess of the estimated current value of the underlying property less
estimated selling costs has been charged-off; and 2) real estate owned that is carried at the lower of the property’s carrying value or fair value less estimated selling costs.
The Company evaluates and reviews assets that have been subject to fair value measurement requirements on a quarterly basis in accordance with policies and procedures that were designed to be in compliance with guidance from the Company’s regulators. These policies and procedures govern the frequency of the review, the use of acceptable valuation methods, and the consideration of estimated selling costs.
Loans Receivable
Loans that have been delinquent for 180 days or that are in bankruptcy and certain TDR loan modifications are charged-off based on the estimated current value of the underlying property less estimated selling costs. Property valuations for these one- to four-family and home equity loans are based on the most recent "as is" property valuation data available, which may include appraisals, broker price opinions ("BPOs"), automated valuation models or updated values using home price indices. Subsequent to the recording of an initial fair value measurement, these loans continue to be measured at fair value on a nonrecurring basis, utilizing the estimated value of the underlying property less estimated selling costs. These property valuations are updated on a monthly, quarterly or semi-annual basis depending on the type of valuation initially used. If the value of the underlying property has declined, an additional charge-off is recorded. If the value of the underlying property has increased, previously charged-off amounts are not reversed. If the valuation data obtained is significantly different from the valuation previously received, the Company reviews additional property valuation data to corroborate or update the valuation.
BPOs are a type of valuation input used to determine the estimated property values of our collateral dependent mortgage loans. In addition, when available, BPOs are used in various loss mitigation, default management and portfolio monitoring efforts, allowance for loan losses modeling and CLTV estimates. The Company validates BPOs through quality control measures, including comparison to tax records, comparable sale and listing data, prior BPO values and original appraisals. The Company does not adjust BPO values but will only utilize BPOs that pass validation.
Real Estate Owned
Property valuations for real estate owned are based on the lowest value of the most recent property valuation data available, which may include appraisals, listing prices or approved offer prices.
Nonrecurring fair value measurements on one- to four-family and home equity loans and real estate owned were classified as Level 3 of the fair value hierarchy as the valuations included unobservable inputs that were significant to the fair value. The following table presents additional information about significant unobservable inputs used in the valuation of assets measured at fair value on a nonrecurring basis that were categorized in Level 3 of the fair value hierarchy at
September 30, 2016 and December 31, 2015
:
|
|
|
|
|
|
|
|
|
|
Unobservable Inputs
|
|
Average
|
|
Range
|
September 30, 2016
|
|
|
|
|
|
Loans receivable:
|
|
|
|
|
|
One- to four-family
|
Appraised value
|
|
$
|
440,700
|
|
|
$39,800-$1,954,000
|
Home equity
|
Appraised value
|
|
$
|
303,700
|
|
|
$6,000-$2,450,000
|
Real estate owned
|
Appraised value
|
|
$
|
330,300
|
|
|
$17,000-$1,900,000
|
|
|
|
|
|
|
December 31, 2015
|
|
|
|
|
|
Loans receivable:
|
|
|
|
|
|
One- to four-family
|
Appraised value
|
|
$
|
422,900
|
|
|
$8,500-$1,900,000
|
Home equity
|
Appraised value
|
|
$
|
274,100
|
|
|
$9,000-$1,300,000
|
Real estate owned
|
Appraised value
|
|
$
|
330,700
|
|
|
$26,500-$1,250,000
|
Recurring and Nonrecurring Fair Value Measurements
Assets and liabilities measured at fair value at
September 30, 2016 and December 31, 2015
are summarized in the following tables (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
Fair Value
|
September 30, 2016:
|
|
|
|
|
|
|
|
Recurring fair value measurements:
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
Available-for-sale securities:
|
|
|
|
|
|
|
|
Debt securities:
|
|
|
|
|
|
|
|
Agency mortgage-backed securities and CMOs
|
$
|
—
|
|
|
$
|
12,180
|
|
|
$
|
—
|
|
|
$
|
12,180
|
|
Agency debentures
|
—
|
|
|
850
|
|
|
—
|
|
|
850
|
|
U.S. Treasuries
|
—
|
|
|
311
|
|
|
—
|
|
|
311
|
|
Agency debt securities
|
—
|
|
|
81
|
|
|
—
|
|
|
81
|
|
Municipal bonds
|
—
|
|
|
34
|
|
|
—
|
|
|
34
|
|
Corporate bonds
|
—
|
|
|
4
|
|
|
—
|
|
|
4
|
|
Total debt securities
|
—
|
|
|
13,460
|
|
|
—
|
|
|
13,460
|
|
Publicly traded equity securities
|
33
|
|
|
—
|
|
|
—
|
|
|
33
|
|
Total available-for-sale securities
|
33
|
|
|
13,460
|
|
|
—
|
|
|
13,493
|
|
Other assets:
|
|
|
|
|
|
|
|
Derivative assets
(1)
|
—
|
|
|
4
|
|
|
—
|
|
|
4
|
|
Total assets measured at fair value on a recurring basis
(2)
|
$
|
33
|
|
|
$
|
13,464
|
|
|
$
|
—
|
|
|
$
|
13,497
|
|
Liabilities
|
|
|
|
|
|
|
|
Derivative liabilities
(1)
|
$
|
—
|
|
|
$
|
131
|
|
|
$
|
—
|
|
|
$
|
131
|
|
Total liabilities measured at fair value on a recurring basis
(2)
|
$
|
—
|
|
|
$
|
131
|
|
|
$
|
—
|
|
|
$
|
131
|
|
Nonrecurring fair value measurements:
|
|
|
|
|
|
|
|
Loans receivable:
|
|
|
|
|
|
|
|
One- to four-family
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
24
|
|
|
$
|
24
|
|
Home equity
|
—
|
|
|
—
|
|
|
19
|
|
|
19
|
|
Total loans receivable
|
—
|
|
|
—
|
|
|
43
|
|
|
43
|
|
Real estate owned
|
—
|
|
|
—
|
|
|
28
|
|
|
28
|
|
Total assets measured at fair value on a nonrecurring basis
(3)
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
71
|
|
|
$
|
71
|
|
|
|
(1)
|
All derivative assets and liabilities were interest rate contracts at
September 30, 2016
. Information related to derivative instruments is detailed in
Note 9—Derivative Instruments and Hedging Activities
.
|
|
|
(2)
|
Assets and liabilities measured at fair value on a recurring basis represented
27%
and less than
1%
of the Company’s total assets and total liabilities, respectively, at
September 30, 2016
.
|
|
|
(3)
|
Represents the fair value of assets prior to deducting estimated selling costs that were carried on the consolidated balance sheet at
September 30, 2016
, and for which a fair value measurement was recorded during the period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
Fair Value
|
December 31, 2015:
|
|
|
|
|
|
|
|
Recurring fair value measurements:
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
Available-for-sale securities:
|
|
|
|
|
|
|
|
Debt securities:
|
|
|
|
|
|
|
|
Agency mortgage-backed securities and CMOs
|
$
|
—
|
|
|
$
|
11,763
|
|
|
$
|
—
|
|
|
$
|
11,763
|
|
Agency debentures
|
—
|
|
|
557
|
|
|
—
|
|
|
557
|
|
U.S. Treasuries
|
—
|
|
|
143
|
|
|
—
|
|
|
143
|
|
Agency debt securities
|
—
|
|
|
55
|
|
|
—
|
|
|
55
|
|
Municipal bonds
|
—
|
|
|
35
|
|
|
—
|
|
|
35
|
|
Corporate bonds
|
—
|
|
|
4
|
|
|
—
|
|
|
4
|
|
Total debt securities
|
—
|
|
|
12,557
|
|
|
—
|
|
|
12,557
|
|
Publicly traded equity securities
|
32
|
|
|
—
|
|
|
—
|
|
|
32
|
|
Total available-for-sale securities
|
32
|
|
|
12,557
|
|
|
—
|
|
|
12,589
|
|
Other assets:
|
|
|
|
|
|
|
|
Derivative assets
(1)
|
—
|
|
|
10
|
|
|
—
|
|
|
10
|
|
Total assets measured at fair value on a recurring basis
(2)
|
$
|
32
|
|
|
$
|
12,567
|
|
|
$
|
—
|
|
|
$
|
12,599
|
|
Liabilities
|
|
|
|
|
|
|
|
Derivative liabilities
(1)
|
$
|
—
|
|
|
$
|
55
|
|
|
$
|
—
|
|
|
$
|
55
|
|
Total liabilities measured at fair value on a recurring basis
(2)
|
$
|
—
|
|
|
$
|
55
|
|
|
$
|
—
|
|
|
$
|
55
|
|
Nonrecurring fair value measurements:
|
|
|
|
|
|
|
|
Loans receivable:
|
|
|
|
|
|
|
|
One- to four-family
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
41
|
|
|
$
|
41
|
|
Home equity
|
—
|
|
|
—
|
|
|
22
|
|
|
22
|
|
Total loans receivable
|
—
|
|
|
—
|
|
|
63
|
|
|
63
|
|
Real estate owned
|
—
|
|
|
—
|
|
|
26
|
|
|
26
|
|
Total assets measured at fair value on a nonrecurring basis
(3)
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
89
|
|
|
$
|
89
|
|
|
|
(1)
|
All derivative assets and liabilities were interest rate contracts at
December 31, 2015
. Information related to derivative instruments is detailed in
Note 9—Derivative Instruments and Hedging Activities
.
|
|
|
(2)
|
Assets and liabilities measured at fair value on a recurring basis represented
28%
and less than
1%
of the Company’s total assets and total liabilities, respectively, at
December 31, 2015
.
|
|
|
(3)
|
Represents the fair value of assets prior to deducting estimated selling costs that were carried on the consolidated balance sheet at
December 31, 2015
, and for which a fair value measurement was recorded during the period.
|
The following table presents losses recognized on assets measured at fair value on a nonrecurring basis during the
three and nine months ended September 30, 2016 and 2015
(dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
One- to four-family
|
$
|
1
|
|
|
$
|
1
|
|
|
$
|
3
|
|
|
$
|
6
|
|
Home equity
|
2
|
|
|
4
|
|
|
9
|
|
|
12
|
|
Total losses on loans receivable measured at fair value
|
$
|
3
|
|
|
$
|
5
|
|
|
$
|
12
|
|
|
$
|
18
|
|
Losses (gains) on real estate owned measured at fair value
|
$
|
(1
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1
|
|
Transfers Between Levels 1 and 2
For assets and liabilities measured at fair value on a recurring basis, the Company’s transfers between levels of the fair value hierarchy are deemed to have occurred at the beginning of the reporting period on a quarterly basis. The Company had no transfers between Level 1 and 2 during the
nine months ended September 30, 2016 and 2015
.
Recurring Fair Value Measurements Categorized within Level 3
For the periods presented, no assets or liabilities measured at fair value on a recurring basis were categorized within Level 3 of the fair value hierarchy.
Fair Value of Financial Instruments Not Carried at Fair Value
The following table summarizes the carrying values, fair values and fair value hierarchy level classification of financial instruments that are not carried at fair value on the consolidated balance sheet at
September 30, 2016 and December 31, 2015
(dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
Carrying
Value
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
Fair Value
|
Assets
|
|
|
|
|
|
|
|
|
|
Cash and equivalents
|
$
|
1,467
|
|
|
$
|
1,467
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,467
|
|
Cash required to be segregated under federal or other regulations
|
$
|
2,159
|
|
|
$
|
2,159
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,159
|
|
Held-to-maturity securities:
|
|
|
|
|
|
|
|
|
|
Agency mortgage-backed securities and CMOs
|
$
|
13,176
|
|
|
$
|
—
|
|
|
$
|
13,564
|
|
|
$
|
—
|
|
|
$
|
13,564
|
|
Agency debentures
|
119
|
|
|
—
|
|
|
120
|
|
|
—
|
|
|
120
|
|
Agency debt securities
|
2,894
|
|
|
—
|
|
|
2,986
|
|
|
—
|
|
|
2,986
|
|
Total held-to-maturity securities
|
$
|
16,189
|
|
|
$
|
—
|
|
|
$
|
16,670
|
|
|
$
|
—
|
|
|
$
|
16,670
|
|
Margin receivables
|
$
|
6,552
|
|
|
$
|
—
|
|
|
$
|
6,552
|
|
|
$
|
—
|
|
|
$
|
6,552
|
|
Loans receivable, net:
|
|
|
|
|
|
|
|
|
|
One- to four-family
|
$
|
2,061
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,061
|
|
|
$
|
2,061
|
|
Home equity
|
1,503
|
|
|
—
|
|
|
—
|
|
|
1,446
|
|
|
1,446
|
|
Consumer
|
268
|
|
|
—
|
|
|
—
|
|
|
273
|
|
|
273
|
|
Total loans receivable, net
(1)
|
$
|
3,832
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,780
|
|
|
$
|
3,780
|
|
Receivables from brokers, dealers and clearing organizations
|
$
|
1,118
|
|
|
$
|
—
|
|
|
$
|
1,118
|
|
|
$
|
—
|
|
|
$
|
1,118
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
Deposits
|
$
|
31,697
|
|
|
$
|
—
|
|
|
$
|
31,697
|
|
|
$
|
—
|
|
|
$
|
31,697
|
|
Customer payables
|
$
|
7,827
|
|
|
$
|
—
|
|
|
$
|
7,827
|
|
|
$
|
—
|
|
|
$
|
7,827
|
|
Payables to brokers, dealers and clearing organizations
|
$
|
1,227
|
|
|
$
|
—
|
|
|
$
|
1,227
|
|
|
$
|
—
|
|
|
$
|
1,227
|
|
Trust preferred securities
|
$
|
409
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
285
|
|
|
$
|
285
|
|
Corporate debt
|
$
|
994
|
|
|
$
|
—
|
|
|
$
|
1,068
|
|
|
$
|
—
|
|
|
$
|
1,068
|
|
|
|
(1)
|
The carrying value of loans receivable, net includes the allowance for loan losses of
$235 million
and loans that are recorded at fair value on a nonrecurring basis at
September 30, 2016
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
Carrying
Value
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
Fair Value
|
Assets
|
|
|
|
|
|
|
|
|
|
Cash and equivalents
|
$
|
2,233
|
|
|
$
|
2,233
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,233
|
|
Cash required to be segregated under federal or other regulations
|
$
|
1,057
|
|
|
$
|
1,057
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,057
|
|
Held-to-maturity securities:
|
|
|
|
|
|
|
|
|
|
Agency mortgage-backed securities and CMOs
|
$
|
10,353
|
|
|
$
|
—
|
|
|
$
|
10,444
|
|
|
$
|
—
|
|
|
$
|
10,444
|
|
Agency debentures
|
127
|
|
|
—
|
|
|
125
|
|
|
—
|
|
|
125
|
|
Agency debt securities
|
2,523
|
|
|
—
|
|
|
2,544
|
|
|
—
|
|
|
2,544
|
|
Other non-agency debt securities
|
10
|
|
|
—
|
|
|
—
|
|
|
10
|
|
|
10
|
|
Total held-to-maturity securities
|
$
|
13,013
|
|
|
$
|
—
|
|
|
$
|
13,113
|
|
|
$
|
10
|
|
|
$
|
13,123
|
|
Margin receivables
|
$
|
7,398
|
|
|
$
|
—
|
|
|
$
|
7,398
|
|
|
$
|
—
|
|
|
$
|
7,398
|
|
Loans receivable, net:
|
|
|
|
|
|
|
|
|
|
One- to four-family
|
$
|
2,465
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,409
|
|
|
$
|
2,409
|
|
Home equity
|
1,810
|
|
|
—
|
|
|
—
|
|
|
1,660
|
|
|
1,660
|
|
Consumer
|
338
|
|
|
—
|
|
|
—
|
|
|
343
|
|
|
343
|
|
Total loans receivable, net
(1)
|
$
|
4,613
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4,412
|
|
|
$
|
4,412
|
|
Receivables from brokers, dealers and clearing organizations
|
$
|
520
|
|
|
$
|
—
|
|
|
$
|
520
|
|
|
$
|
—
|
|
|
$
|
520
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
Deposits
|
$
|
29,445
|
|
|
$
|
—
|
|
|
$
|
29,444
|
|
|
$
|
—
|
|
|
$
|
29,444
|
|
Customer Payables
|
$
|
6,544
|
|
|
$
|
—
|
|
|
$
|
6,544
|
|
|
$
|
—
|
|
|
$
|
6,544
|
|
Payables to brokers, dealers and clearing organizations
|
$
|
1,576
|
|
|
$
|
—
|
|
|
$
|
1,576
|
|
|
$
|
—
|
|
|
$
|
1,576
|
|
Other borrowings:
|
|
|
|
|
|
|
|
|
|
Securities sold under agreements to repurchase
|
$
|
82
|
|
|
$
|
—
|
|
|
$
|
82
|
|
|
$
|
—
|
|
|
$
|
82
|
|
Trust preferred securities
|
409
|
|
|
—
|
|
|
—
|
|
|
252
|
|
|
252
|
|
Total other borrowings
|
$
|
491
|
|
|
$
|
—
|
|
|
$
|
82
|
|
|
$
|
252
|
|
|
$
|
334
|
|
Corporate debt
|
$
|
997
|
|
|
$
|
—
|
|
|
$
|
1,055
|
|
|
$
|
—
|
|
|
$
|
1,055
|
|
|
|
(1)
|
The carrying value of loans receivable, net includes the allowance for loan losses of
$353 million
and loans that are recorded at fair value on a nonrecurring basis at
December 31, 2015
.
|
The fair value measurement techniques for financial instruments not carried at fair value on the consolidated balance sheet at
September 30, 2016 and December 31, 2015
are summarized as follows:
Cash and equivalents, cash required to be segregated under federal or other regulations, margin receivables, receivables from brokers, dealers and clearing organizations, customer payables and payables to brokers, dealers and clearing organizations
—Due to their short term nature, fair value is estimated to be carrying value.
Held-to-maturity securities
—The held-to-maturity securities portfolio included agency mortgage-backed securities and CMOs, agency debentures, agency debt securities, and other non-agency debt securities. The fair value of agency mortgage-backed securities is determined using market and income approaches with quoted market prices, recent market transactions and spread data for similar instruments. The fair value of agency CMOs and agency debt securities is determined using market and income approaches along with the Company’s own trading activities for identical or similar instruments. The fair value of agency debentures is based on quoted market prices that were derived from assumptions observable in the marketplace. Fair value of other non-agency debt securities is estimated to be carrying value.
Loans receivable, net
—Fair value is estimated using a discounted cash flow model. Loans are differentiated based on their individual portfolio characteristics, such as product classification, loan category and pricing features. Assumptions for expected losses, prepayments, cash flows and discount rates are adjusted to reflect the individual
characteristics of the loans, such as credit risk, coupon, lien position, and payment characteristics, as well as the secondary market conditions for these types of loans.
Although the market for one- to four-family and home equity loan portfolios has improved, given the lack of observability of valuation inputs, these fair value measurements cannot be determined with precision and changes in the underlying assumptions used, including discount rates, could significantly affect the results of current or future fair value estimates. In addition, the amount that would be realized in a forced liquidation, an actual sale or immediate settlement could be lower than both the carrying value and the estimated fair value of the portfolio.
Deposits
—Fair value is the amount payable on demand at the reporting date for sweep deposits, complete savings deposits, other money market and savings deposits and checking deposits. For certificates of deposit, fair value is estimated by discounting future cash flows using discount factors derived from current observable rates implied for other similar instruments with similar remaining maturities.
Securities sold under agreements to repurchase
—Fair value for securities sold under agreements to repurchase was determined by discounting future cash flows using discount factors derived from current observable rates implied for other similar instruments with similar remaining maturities.
Trust preferred securities
—For subordinated debentures, fair value is estimated by discounting future cash flows at the yield implied by dealer pricing quotes.
Corporate debt
—For interest-bearing corporate debt, fair value is estimated using dealer pricing quotes. The fair value of the non-interest-bearing convertible debentures is directly correlated to the intrinsic value of the Company’s underlying stock; therefore, as the price of the Company’s stock increases relative to the conversion price, the fair value of the convertible debentures increases.
Fair Value of Commitments and Contingencies
In the normal course of business, the Company makes various commitments to extend credit and incur contingent liabilities that are not reflected in the consolidated balance sheet. Changes in the economy or interest rates may influence the impact that these commitments and contingencies have on the Company in the future. The Company does not estimate the fair value of those commitments. The Company has the right to cancel these commitments in certain circumstances and has closed a significant amount of customer HELOCs in the past eight years. At
September 30, 2016
, the Company had approximately
$32 million
of unfunded commitments to extend credit. Information related to such commitments and contingent liabilities is included in
Note 17—Commitments, Contingencies and Other Regulatory Matters
.
NOTE 6—OFFSETTING ASSETS AND LIABILITIES
For financial statement purposes, the Company does not offset derivative instruments, repurchase agreements, or securities borrowing and securities lending transactions. These activities are generally transacted under master agreements that are widely used by counterparties and that may allow for net settlements of payments in the normal course, as well as offsetting of all contracts with a given counterparty in the event of bankruptcy or default of one of the two parties to the transaction. The following table presents information about these transactions to enable the users of the Company’s financial statements to evaluate the potential effect of rights of set-off between these recognized assets and recognized liabilities at
September 30, 2016 and December 31, 2015
(dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Amounts Not Offset in the Consolidated Balance Sheet
|
|
|
|
|
|
|
Gross Amounts of Recognized Assets and Liabilities
|
|
Gross Amounts Offset in the Consolidated Balance Sheet
|
|
Net Amounts Presented in the Consolidated Balance Sheet
(1)(2)
|
|
Financial Instruments
|
|
Collateral Received or Pledged (Including Cash)
|
|
Net Amount
|
September 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits paid for securities borrowed
(3)
|
$
|
657
|
|
|
$
|
—
|
|
|
$
|
657
|
|
|
$
|
(195
|
)
|
|
$
|
(449
|
)
|
|
$
|
13
|
|
|
|
|
Total
|
$
|
657
|
|
|
$
|
—
|
|
|
$
|
657
|
|
|
$
|
(195
|
)
|
|
$
|
(449
|
)
|
|
$
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits received for securities loaned
(4)
|
$
|
1,188
|
|
|
$
|
—
|
|
|
$
|
1,188
|
|
|
$
|
(195
|
)
|
|
$
|
(922
|
)
|
|
$
|
71
|
|
|
|
Derivative liabilities
(5)(6)
|
32
|
|
|
—
|
|
|
32
|
|
|
—
|
|
|
(32
|
)
|
|
—
|
|
|
|
|
Total
|
$
|
1,220
|
|
|
$
|
—
|
|
|
$
|
1,220
|
|
|
$
|
(195
|
)
|
|
$
|
(954
|
)
|
|
$
|
71
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits paid for securities borrowed
(3)
|
$
|
120
|
|
|
$
|
—
|
|
|
$
|
120
|
|
|
$
|
(94
|
)
|
|
$
|
(18
|
)
|
|
$
|
8
|
|
|
|
|
Total
|
$
|
120
|
|
|
$
|
—
|
|
|
$
|
120
|
|
|
$
|
(94
|
)
|
|
$
|
(18
|
)
|
|
$
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits received for securities loaned
(4)
|
$
|
1,535
|
|
|
$
|
—
|
|
|
$
|
1,535
|
|
|
$
|
(94
|
)
|
|
$
|
(1,314
|
)
|
|
$
|
127
|
|
|
|
Repurchase agreements
(6)
|
82
|
|
|
—
|
|
|
82
|
|
|
—
|
|
|
(81
|
)
|
|
1
|
|
|
|
Derivative liabilities
(5)(6)
|
11
|
|
|
—
|
|
|
11
|
|
|
—
|
|
|
(11
|
)
|
|
—
|
|
|
|
|
Total
|
$
|
1,628
|
|
|
$
|
—
|
|
|
$
|
1,628
|
|
|
$
|
(94
|
)
|
|
$
|
(1,406
|
)
|
|
$
|
128
|
|
|
|
(1)
|
Net amount of deposits paid for securities borrowed are reflected in the receivables from brokers, dealers and clearing organizations line item in the consolidated balance sheet.
|
|
|
(2)
|
Net amount of deposits received for securities loaned, repurchase agreements and derivative liabilities are reflected in the payables to brokers, dealers and clearing organizations, other borrowings and other liabilities line items in the consolidated balance sheet, respectively.
|
|
|
(3)
|
Included in the gross amounts of deposits paid for securities borrowed was
$359 million
and
$34 million
at
September 30, 2016 and December 31, 2015
, respectively, transacted through a program with a clearing organization, which guarantees the return of cash to the Company. For presentation purposes, these amounts presented are based on the counterparties under the Company’s master securities loan agreements.
|
|
|
(4)
|
Included in the gross amounts of deposits received for securities loaned was
$703 million
and
$722 million
at
September 30, 2016 and December 31, 2015
, respectively, transacted through a program with a clearing organization, which guarantees the return of securities to the Company. For presentation purposes, these amounts presented are based on the counterparties under the Company’s master securities loan agreements.
|
|
|
(5)
|
Excludes net accrued interest payable of
$1 million
and
$3 million
at
September 30, 2016 and December 31, 2015
, respectively.
|
|
|
(6)
|
The Company pledges available-for-sale and held-to-maturity securities as collateral for amounts due on repurchase agreements and derivative liabilities. The collateral pledged included available-for-sale securities at fair value and held-to-maturity securities at amortized cost for
September 30, 2016
and available-for-sale securities at fair value for
December 31, 2015
.
|
Derivative Transactions
Certain types of derivatives that the Company utilizes in its hedging activities are subject to derivatives clearing agreements ("cleared derivatives contracts") under the Dodd-Frank Act. These cleared derivatives contracts enable clearing by a derivatives clearing organization through a clearing member. Under the contracts, the clearing member typically has a one-way right to offset all contracts in the event of the Company’s default or bankruptcy. Collateral exchanged under these contracts is not included in the table above as the contracts may not qualify as master netting agreements. At
September 30, 2016
and
December 31, 2015
, the Company had
$4 million
and
$10 million
, respectively, of cleared derivative contract assets. At
September 30, 2016
and
December 31, 2015
, the Company had
$99 million
and
$44 million
, respectively, of cleared derivative contract liabilities.
Securities Lending Transactions
Deposits paid for securities borrowed and deposits received for securities loaned are recorded at the amount of cash collateral advanced or received. Deposits paid for securities borrowing transactions require the Company to deposit cash with the lender whereas deposits received for securities loaned result in the Company receiving collateral in the form of cash in an amount generally in excess of the market value of the securities loaned. Securities lending transactions have overnight or continuous remaining contractual maturities.
Securities lending transactions expose the Company to counterparty credit risk and market risk. To manage the counterparty risk, the Company maintains internal standards for approving counterparties, reviews and analyzes the credit rating of each counterparty, and monitors its positions with each counterparty on an ongoing basis. In addition, for certain of the Company's securities lending transactions, the Company uses a program with a clearing organization that guarantees the return of securities. The Company monitors the market value of the securities borrowed and loaned using collateral arrangements that require additional collateral to be obtained from or excess collateral to be returned to the counterparties based on changes in market value, to maintain specified collateral levels.
NOTE 7—AVAILABLE-FOR-SALE AND HELD-TO-MATURITY SECURITIES
The amortized cost and fair value of available-for-sale and held-to-maturity securities at
September 30, 2016 and December 31, 2015
are shown in the following tables (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
Cost
|
|
Gross
Unrealized /
Unrecognized
Gains
|
|
Gross
Unrealized /
Unrecognized
Losses
|
|
Fair Value
|
September 30, 2016:
|
|
|
|
|
|
|
|
Available-for-sale securities:
(1)
|
|
|
|
|
|
|
|
Debt securities:
|
|
|
|
|
|
|
|
Agency mortgage-backed securities and CMOs
|
$
|
12,064
|
|
|
$
|
140
|
|
|
$
|
(24
|
)
|
|
$
|
12,180
|
|
Agency debentures
|
794
|
|
|
59
|
|
|
(3
|
)
|
|
850
|
|
U.S. Treasuries
|
300
|
|
|
15
|
|
|
(4
|
)
|
|
311
|
|
Agency debt securities
|
79
|
|
|
2
|
|
|
—
|
|
|
81
|
|
Municipal bonds
|
33
|
|
|
1
|
|
|
—
|
|
|
34
|
|
Corporate bonds
|
5
|
|
|
—
|
|
|
(1
|
)
|
|
4
|
|
Total debt securities
|
13,275
|
|
|
217
|
|
|
(32
|
)
|
|
13,460
|
|
Publicly traded equity securities
(2)
|
33
|
|
|
—
|
|
|
—
|
|
|
33
|
|
Total available-for-sale securities
|
$
|
13,308
|
|
|
$
|
217
|
|
|
$
|
(32
|
)
|
|
$
|
13,493
|
|
Held-to-maturity securities:
(1)
|
|
|
|
|
|
|
|
Agency mortgage-backed securities and CMOs
|
$
|
13,176
|
|
|
$
|
406
|
|
|
$
|
(18
|
)
|
|
$
|
13,564
|
|
Agency debentures
|
119
|
|
|
1
|
|
|
—
|
|
|
120
|
|
Agency debt securities
|
2,894
|
|
|
92
|
|
|
—
|
|
|
2,986
|
|
Total held-to-maturity securities
|
$
|
16,189
|
|
|
$
|
499
|
|
|
$
|
(18
|
)
|
|
$
|
16,670
|
|
|
|
|
|
|
|
|
|
December 31, 2015:
|
|
|
|
|
|
|
|
Available-for-sale securities:
|
|
|
|
|
|
|
|
Debt securities:
|
|
|
|
|
|
|
|
Agency mortgage-backed securities and CMOs
|
$
|
11,888
|
|
|
$
|
41
|
|
|
$
|
(166
|
)
|
|
$
|
11,763
|
|
Agency debentures
|
551
|
|
|
18
|
|
|
(12
|
)
|
|
557
|
|
U.S. Treasuries
|
147
|
|
|
—
|
|
|
(4
|
)
|
|
143
|
|
Agency debt securities
|
55
|
|
|
—
|
|
|
—
|
|
|
55
|
|
Municipal bonds
|
35
|
|
|
—
|
|
|
—
|
|
|
35
|
|
Corporate bonds
|
5
|
|
|
—
|
|
|
(1
|
)
|
|
4
|
|
Total debt securities
|
12,681
|
|
|
59
|
|
|
(183
|
)
|
|
12,557
|
|
Publicly traded equity securities
(2)
|
33
|
|
|
—
|
|
|
(1
|
)
|
|
32
|
|
Total available-for-sale securities
|
$
|
12,714
|
|
|
$
|
59
|
|
|
$
|
(184
|
)
|
|
$
|
12,589
|
|
Held-to-maturity securities:
|
|
|
|
|
|
|
|
Agency mortgage-backed securities and CMOs
|
$
|
10,353
|
|
|
$
|
149
|
|
|
$
|
(58
|
)
|
|
$
|
10,444
|
|
Agency debentures
|
127
|
|
|
—
|
|
|
(2
|
)
|
|
125
|
|
Agency debt securities
|
2,523
|
|
|
34
|
|
|
(13
|
)
|
|
2,544
|
|
Other non-agency debt securities
|
10
|
|
|
—
|
|
|
—
|
|
|
10
|
|
Total held-to-maturity securities
|
$
|
13,013
|
|
|
$
|
183
|
|
|
$
|
(73
|
)
|
|
$
|
13,123
|
|
|
|
(1)
|
During the three months ended June 30, 2016, securities with a fair value of approximately
$492 million
were transferred from available-for-sale securities to held-to-maturity securities pursuant to an evaluation of our investment strategy and an assessment by management about our intent and ability to hold those particular securities until maturity. See
Note 14—Shareholders' Equity
for information on the impact to accumulated other comprehensive income.
|
|
|
(2)
|
Consists of investments in a mutual fund related to the Community Reinvestment Act.
|
Contractual Maturities
The contractual maturities of all available-for-sale and held-to-maturity debt securities at
September 30, 2016
are shown in the following table (dollars in millions):
|
|
|
|
|
|
|
|
|
|
Amortized Cost
|
|
Fair Value
|
Available-for-sale debt securities:
|
|
|
|
Due within one year
|
$
|
—
|
|
|
$
|
—
|
|
Due within one to five years
|
11
|
|
|
11
|
|
Due within five to ten years
|
3,756
|
|
|
3,835
|
|
Due after ten years
|
9,508
|
|
|
9,614
|
|
Total available-for-sale debt securities
|
$
|
13,275
|
|
|
$
|
13,460
|
|
Held-to-maturity debt securities:
|
|
|
|
Due within one year
|
$
|
—
|
|
|
$
|
—
|
|
Due within one to five years
|
1,382
|
|
|
1,440
|
|
Due within five to ten years
|
4,615
|
|
|
4,783
|
|
Due after ten years
|
10,192
|
|
|
10,447
|
|
Total held-to-maturity debt securities
|
$
|
16,189
|
|
|
$
|
16,670
|
|
At
September 30, 2016
, the Company pledged
$6 million
of available-for-sale debt securities and
$0.6 billion
of held-to-maturity debt securities as collateral for derivatives and other purposes. At
December 31, 2015
, the Company pledged
$17 million
of available-for-sale debt securities and
$0.7 billion
of held-to-maturity debt securities as collateral for derivatives and other purposes.
Investments with Unrealized or Unrecognized Losses
The following tables show the fair value and unrealized or unrecognized losses on available-for-sale and held-to-maturity securities, aggregated by investment category, and the length of time that individual securities have been in a continuous unrealized or unrecognized loss position at
September 30, 2016 and December 31, 2015
(dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 Months
|
|
12 Months or More
|
|
Total
|
|
Fair Value
|
|
Unrealized /
Unrecognized
Losses
|
|
Fair Value
|
|
Unrealized /
Unrecognized
Losses
|
|
Fair Value
|
|
Unrealized /
Unrecognized
Losses
|
September 30, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities:
|
|
|
|
|
|
|
|
|
|
|
|
Debt securities:
|
|
|
|
|
|
|
|
|
|
|
|
Agency mortgage-backed securities and CMOs
|
$
|
2,911
|
|
|
$
|
(15
|
)
|
|
$
|
1,186
|
|
|
$
|
(9
|
)
|
|
$
|
4,097
|
|
|
$
|
(24
|
)
|
Agency debentures
|
128
|
|
|
(3
|
)
|
|
—
|
|
|
—
|
|
|
128
|
|
|
(3
|
)
|
U.S. Treasuries
|
150
|
|
|
(4
|
)
|
|
—
|
|
|
—
|
|
|
150
|
|
|
(4
|
)
|
Corporate bonds
|
—
|
|
|
—
|
|
|
4
|
|
|
(1
|
)
|
|
4
|
|
|
(1
|
)
|
Total temporarily impaired available-for-sale securities
|
$
|
3,189
|
|
|
$
|
(22
|
)
|
|
$
|
1,190
|
|
|
$
|
(10
|
)
|
|
$
|
4,379
|
|
|
$
|
(32
|
)
|
Held-to-maturity securities:
|
|
|
|
|
|
|
|
|
|
|
|
Agency mortgage-backed securities and CMOs
|
$
|
529
|
|
|
$
|
(2
|
)
|
|
$
|
1,311
|
|
|
$
|
(16
|
)
|
|
$
|
1,840
|
|
|
$
|
(18
|
)
|
Agency debt securities
|
77
|
|
|
—
|
|
|
18
|
|
|
—
|
|
|
95
|
|
|
—
|
|
Total temporarily impaired held-to-maturity securities
|
$
|
606
|
|
|
$
|
(2
|
)
|
|
$
|
1,329
|
|
|
$
|
(16
|
)
|
|
$
|
1,935
|
|
|
$
|
(18
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015:
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt securities:
|
|
|
|
|
|
|
|
|
|
|
|
Agency mortgage-backed securities and CMOs
|
$
|
6,832
|
|
|
$
|
(88
|
)
|
|
$
|
2,496
|
|
|
$
|
(78
|
)
|
|
$
|
9,328
|
|
|
$
|
(166
|
)
|
Agency debentures
|
329
|
|
|
(12
|
)
|
|
9
|
|
|
—
|
|
|
338
|
|
|
(12
|
)
|
U.S. Treasuries
|
143
|
|
|
(4
|
)
|
|
—
|
|
|
—
|
|
|
143
|
|
|
(4
|
)
|
Agency debt securities
|
55
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
55
|
|
|
—
|
|
Municipal bonds
|
—
|
|
|
—
|
|
|
15
|
|
|
—
|
|
|
15
|
|
|
—
|
|
Corporate bonds
|
—
|
|
|
—
|
|
|
4
|
|
|
(1
|
)
|
|
4
|
|
|
(1
|
)
|
Publicly traded equity securities
|
32
|
|
|
(1
|
)
|
|
—
|
|
|
—
|
|
|
32
|
|
|
(1
|
)
|
Total temporarily impaired available-for-sale securities
|
$
|
7,391
|
|
|
$
|
(105
|
)
|
|
$
|
2,524
|
|
|
$
|
(79
|
)
|
|
$
|
9,915
|
|
|
$
|
(184
|
)
|
Held-to-maturity securities:
|
|
|
|
|
|
|
|
|
|
|
|
Agency mortgage-backed securities and CMOs
|
$
|
2,807
|
|
|
$
|
(25
|
)
|
|
$
|
1,495
|
|
|
$
|
(33
|
)
|
|
$
|
4,302
|
|
|
$
|
(58
|
)
|
Agency debentures
|
114
|
|
|
(2
|
)
|
|
—
|
|
|
—
|
|
|
114
|
|
|
(2
|
)
|
Agency debt securities
|
1,006
|
|
|
(10
|
)
|
|
134
|
|
|
(3
|
)
|
|
1,140
|
|
|
(13
|
)
|
Total temporarily impaired held-to-maturity securities
|
$
|
3,927
|
|
|
$
|
(37
|
)
|
|
$
|
1,629
|
|
|
$
|
(36
|
)
|
|
$
|
5,556
|
|
|
$
|
(73
|
)
|
The Company does not believe that any individual unrealized loss in the available-for-sale portfolio or unrecognized loss in the held-to-maturity portfolio as of
September 30, 2016
represents a credit loss. The Company does not intend to sell the debt securities in an unrealized or unrecognized loss position as of the balance sheet date and it is not more likely than not that the Company will be required to sell the debt securities before the anticipated
recovery of its remaining amortized cost of the debt securities in an unrealized or unrecognized loss position at
September 30, 2016
.
There were
no
impairment losses recognized in earnings on available-for-sale or held-to-maturity securities during the
nine months ended September 30, 2016 and 2015
, respectively.
Included within the Company's securities portfolios are securities that have been written-down to a zero carrying value. The credit loss component of debt securities held by the Company that had a noncredit loss component previously recognized in other comprehensive income decreased to
$136 million
at September 30, 2016 from
$152 million
at December 31, 2015, as a result of the sale and pay off of our remaining impaired securities during the third quarter of 2016. Of these amounts,
$136 million
and
$123 million
at
September 30, 2016 and December 31, 2015
, respectively, relate to debt securities that have been factored to zero, but the Company still holds legal title to these securities until maturity or until they are sold
.
Gains (Losses) on Securities and Other, Net
The following table shows the components of the gains (losses) on securities and other, net line items on the
consolidated statement of income (loss)
for the
three and nine months ended
September 30, 2016
and
2015
(dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Reclassification of deferred losses on cash flow hedges
|
$
|
—
|
|
|
$
|
(370
|
)
|
|
$
|
—
|
|
|
$
|
(370
|
)
|
Gains on available-for-sale securities, net:
|
|
|
|
|
|
|
|
Gains on available-for-sale securities
|
17
|
|
|
30
|
|
|
46
|
|
|
48
|
|
Losses on available-for-sale securities
|
—
|
|
|
(19
|
)
|
|
—
|
|
|
(19
|
)
|
Subtotal
|
17
|
|
|
11
|
|
|
46
|
|
|
29
|
|
Hedge ineffectiveness
|
(4
|
)
|
|
(2
|
)
|
|
(8
|
)
|
|
—
|
|
Equity method investment income (loss) and other
|
1
|
|
|
3
|
|
|
(4
|
)
|
|
8
|
|
Gains (losses) on securities and other, net
|
$
|
14
|
|
|
$
|
(358
|
)
|
|
$
|
34
|
|
|
$
|
(333
|
)
|
NOTE 8—LOANS RECEIVABLE, NET
Loans receivable, net at
September 30, 2016 and December 31, 2015
are summarized as follows (dollars in millions):
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
December 31, 2015
|
One- to four-family
|
$
|
2,094
|
|
|
$
|
2,488
|
|
Home equity
|
1,685
|
|
|
2,114
|
|
Consumer
|
271
|
|
|
341
|
|
Total loans receivable
|
4,050
|
|
|
4,943
|
|
Unamortized premiums, net
|
17
|
|
|
23
|
|
Allowance for loan losses
|
(235
|
)
|
|
(353
|
)
|
Total loans receivable, net
|
$
|
3,832
|
|
|
$
|
4,613
|
|
At
September 30, 2016
, the Company pledged
$3.4 billion
and
$0.3 billion
of loans as collateral to the FHLB and Federal Reserve Bank, respectively. At
December 31, 2015
, the Company pledged
$4.2 billion
and
$0.3 billion
of loans as collateral to the FHLB and Federal Reserve Bank, respectively.
The following table presents the total recorded investment in loans receivable and allowance for loan losses by loans that have been collectively evaluated for impairment and those that have been individually evaluated for impairment by loan class at
September 30, 2016 and December 31, 2015
(dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recorded Investment
|
|
Allowance for Loan Losses
|
|
September 30, 2016
|
|
December 31, 2015
|
|
September 30, 2016
|
|
December 31, 2015
|
Collectively evaluated for impairment:
|
|
|
|
|
|
|
|
One- to four-family
|
$
|
1,850
|
|
|
$
|
2,219
|
|
|
$
|
41
|
|
|
$
|
31
|
|
Home equity
|
1,484
|
|
|
1,915
|
|
|
132
|
|
|
255
|
|
Consumer
|
273
|
|
|
344
|
|
|
5
|
|
|
6
|
|
Total collectively evaluated for impairment
|
3,607
|
|
|
4,478
|
|
|
178
|
|
|
292
|
|
Individually evaluated for impairment:
|
|
|
|
|
|
|
|
One- to four-family
|
258
|
|
|
286
|
|
|
6
|
|
|
9
|
|
Home equity
|
202
|
|
|
202
|
|
|
51
|
|
|
52
|
|
Total individually evaluated for impairment
|
460
|
|
|
488
|
|
|
57
|
|
|
61
|
|
Total
|
$
|
4,067
|
|
|
$
|
4,966
|
|
|
$
|
235
|
|
|
$
|
353
|
|
Credit Quality and Concentrations of Credit Risk
The Company tracks and reviews factors to predict and monitor credit risk in its mortgage loan portfolio on an ongoing basis. These factors include: loan type, estimated current LTV/CLTV ratios, delinquency history, borrowers’ current credit scores, housing prices, loan vintage and geographic location of the property. The Company believes LTV/CLTV ratios and credit scores are the key factors in determining future loan performance. The factors are updated on at least a quarterly basis. The Company tracks and reviews delinquency status to predict and monitor credit risk in the consumer loan portfolio on at least a quarterly basis.
Credit Quality
The following tables show the distribution of the Company’s mortgage loan portfolios by credit quality indicator at
September 30, 2016 and December 31, 2015
(dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to Four-Family
|
|
Home Equity
|
Current LTV/CLTV
(1)
|
September 30, 2016
|
|
December 31, 2015
|
|
September 30, 2016
|
|
December 31, 2015
|
<=80%
|
$
|
1,368
|
|
|
$
|
1,519
|
|
|
$
|
721
|
|
|
$
|
843
|
|
80%-100%
|
462
|
|
|
609
|
|
|
448
|
|
|
549
|
|
100%-120%
|
162
|
|
|
227
|
|
|
308
|
|
|
420
|
|
>120%
|
102
|
|
|
133
|
|
|
208
|
|
|
302
|
|
Total mortgage loans receivable
|
$
|
2,094
|
|
|
$
|
2,488
|
|
|
$
|
1,685
|
|
|
$
|
2,114
|
|
Average estimated current LTV/CLTV
(2)
|
74
|
%
|
|
77
|
%
|
|
88
|
%
|
|
90
|
%
|
Average LTV/CLTV at loan origination
(3)
|
71
|
%
|
|
71
|
%
|
|
81
|
%
|
|
81
|
%
|
|
|
(1)
|
Current CLTV calculations for home equity loans are based on the maximum available line for HELOCs and outstanding principal balance for home equity installment loans. For home equity loans in the second lien position, the original balance of the first lien loan at origination date and updated valuations on the property underlying the loan are used to calculate CLTV. Current property values are updated on a quarterly basis using the most recent property value data available to the Company. For properties in which the Company did not have an updated valuation, home price indices were utilized to estimate the current property value.
|
|
|
(2)
|
The average estimated current LTV/CLTV ratio reflects the outstanding balance at the balance sheet date and the maximum available line for HELOCs, divided by the estimated current value of the underlying property.
|
|
|
(3)
|
Average LTV/CLTV at loan origination calculations are based on LTV/CLTV at time of purchase for one- to four-family purchased loans and home equity installment loans and maximum available line for HELOCs
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to Four-Family
|
|
Home Equity
|
Current FICO
(1)
|
September 30, 2016
|
|
December 31, 2015
|
|
September 30, 2016
|
|
December 31, 2015
|
>=720
|
$
|
1,224
|
|
|
$
|
1,423
|
|
|
$
|
852
|
|
|
$
|
1,069
|
|
719 - 700
|
189
|
|
|
246
|
|
|
163
|
|
|
222
|
|
699 - 680
|
149
|
|
|
198
|
|
|
145
|
|
|
183
|
|
679 - 660
|
132
|
|
|
150
|
|
|
125
|
|
|
152
|
|
659 - 620
|
166
|
|
|
198
|
|
|
161
|
|
|
203
|
|
<620
|
234
|
|
|
273
|
|
|
239
|
|
|
285
|
|
Total mortgage loans receivable
|
$
|
2,094
|
|
|
$
|
2,488
|
|
|
$
|
1,685
|
|
|
$
|
2,114
|
|
|
|
(1)
|
FICO scores are updated on a quarterly basis; however, there were approximately
$31 million
and
$39 million
of one- to four-family loans at
September 30, 2016 and December 31, 2015
, respectively, and
$2 million
and
$3 million
of home equity loans at
September 30, 2016 and December 31, 2015
, respectively, for which the updated FICO scores were not available. For these loans, the current FICO distribution included the most recent FICO scores where available, otherwise the original FICO score was used.
|
Concentrations of Credit Risk
One- to four-family loans include loans for a
five
to
ten
year interest-only period, followed by an amortizing period ranging from
20
to
25
years. At
September 30, 2016
,
31%
of the Company's one- to four-family portfolio was not yet amortizing. During the trailing twelve months ended
September 30, 2016
, borrowers of approximately
15%
of the portfolio made voluntary annual principal payments of at least
$2,500
and of this population,
nearly half
made principal payments that were
$10,000
or greater.
The home equity loan portfolio is primarily second lien loans on residential real estate properties, which have a higher level of credit risk than first lien mortgage loans. Approximately
13%
of the home equity portfolio was in the first lien position and the Company holds both the first and second lien positions in less than
1%
of the home equity loan portfolio at
September 30, 2016
. The home equity loan portfolio consists of approximately
18%
of home equity installment loans and approximately
82%
of HELOCs at
September 30, 2016
.
Home equity installment loans are primarily fixed rate and fixed term, fully amortizing loans that do not offer the option of an interest-only payment. The majority of HELOCs convert to amortizing loans at the end of the draw period, which typically ranges from
five
to
ten
years. At
September 30, 2016
, approximately
1%
of this portfolio will require the borrowers to repay the loan in full at the end of the draw period in a future period. At
September 30, 2016
,
27%
of the HELOC portfolio had not converted from the interest-only draw period and had not begun amortizing. During the trailing twelve months ended
September 30, 2016
, borrowers of approximately
40%
of the portfolio made annual principal payments of at least
$500
on their HELOCs and
slightly under half
reduced their principal balance by at least
$2,500
.
The following table outlines when one- to four-family and HELOCs convert to amortizing by percentage of the one- to four-family portfolio and HELOC portfolios, respectively, at
September 30, 2016
:
|
|
|
|
|
Period of Conversion to Amortizing Loan
|
% of One- to Four-Family
Portfolio
|
|
% of Home Equity Line of
Credit Portfolio
|
Already amortizing
|
69%
|
|
73%
|
Through December 31, 2016
|
7%
|
|
12%
|
Year ending December 31, 2017
|
24%
|
|
14%
|
Year ending December 31, 2018 or later
|
—%
|
|
1%
|
The average age of our mortgage loans receivable was
10.6
and
9.9 years
at
September 30, 2016 and December 31, 2015
, respectively. Approximately
36%
and
37%
of the Company’s mortgage loans receivable were concentrated in California at
September 30, 2016 and December 31, 2015
, respectively. No other state had concentrations of mortgage loans that represented 10% or more of the Company’s mortgage loans receivable at
September 30, 2016 and December 31, 2015
.
Delinquent Loans
The following table shows total loans receivable by delinquency category at
September 30, 2016 and December 31, 2015
(dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
30-89 Days
Delinquent
|
|
90-179 Days
Delinquent
|
|
180+ Days
Delinquent
|
|
Total
|
September 30, 2016
|
|
|
|
|
|
|
|
|
|
One- to four-family
|
$
|
1,913
|
|
|
$
|
65
|
|
|
$
|
19
|
|
|
$
|
97
|
|
|
$
|
2,094
|
|
Home equity
|
1,568
|
|
|
38
|
|
|
24
|
|
|
55
|
|
|
1,685
|
|
Consumer
|
267
|
|
|
4
|
|
|
—
|
|
|
—
|
|
|
271
|
|
Total loans receivable
|
$
|
3,748
|
|
|
$
|
107
|
|
|
$
|
43
|
|
|
$
|
152
|
|
|
$
|
4,050
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
|
One- to four-family
|
$
|
2,279
|
|
|
$
|
72
|
|
|
$
|
26
|
|
|
$
|
111
|
|
|
$
|
2,488
|
|
Home equity
|
1,978
|
|
|
52
|
|
|
31
|
|
|
53
|
|
|
2,114
|
|
Consumer
|
334
|
|
|
6
|
|
|
1
|
|
|
—
|
|
|
341
|
|
Total loans receivable
|
$
|
4,591
|
|
|
$
|
130
|
|
|
$
|
58
|
|
|
$
|
164
|
|
|
$
|
4,943
|
|
Loans delinquent 180 days and greater have been written down to their expected recovery value. Loans delinquent 90 to 179 days generally have not been written down to their expected recovery value (unless they are in process of bankruptcy or are modifications for which there is substantial doubt as to the borrower’s ability to repay the loan), but present a risk of future charge-off. Additional charge-offs on loans delinquent 180 days and greater are possible if home prices decline beyond current estimates.
The Company monitors loans in which a borrower’s current credit history casts doubt on their ability to repay a loan. Loans are classified as special mention when they are between 30 and 89 days past due. The trend in special mention loan balances is generally indicative of the expected trend for charge-offs in future periods, as these loans have a greater propensity to migrate into nonaccrual status and ultimately charge-off. One- to four-family loans are generally secured in a first lien position by real estate assets, reducing the potential loss when compared to an unsecured loan. Home equity loans are generally secured by real estate assets; however, the majority of these loans are secured in a second lien position, which substantially increases the potential loss when compared to a first lien position. The loss severity of our second lien home equity loans was approximately
92%
for a trailing twelve-month period as of
September 30, 2016
.
Nonperforming Loans
The Company classifies loans as nonperforming when they are no longer accruing interest, which includes loans that are 90 days and greater past due, TDRs that are on nonaccrual status for all classes of loans (including loans in bankruptcy) and certain junior liens that have a delinquent senior lien. The following table shows the comparative data for nonperforming loans at
September 30, 2016 and December 31, 2015
(dollars in millions):
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
December 31, 2015
|
One- to four-family
|
$
|
230
|
|
|
$
|
263
|
|
Home equity
|
150
|
|
|
154
|
|
Consumer
|
—
|
|
|
1
|
|
Total nonperforming loans receivable
|
$
|
380
|
|
|
$
|
418
|
|
Real Estate Owned and Loans with Formal Foreclosure Proceedings in Process
At
September 30, 2016 and December 31, 2015
, the Company held
$30 million
and
$27 million
, respectively, of real estate owned that were acquired through foreclosure or through a deed in lieu of foreclosure or similar legal agreement. The Company also held
$104 million
and
$108 million
of loans for which formal foreclosure proceedings were in process at
September 30, 2016 and December 31, 2015
, respectively.
Allowance for Loan Losses
The following table provides a roll forward by loan portfolio of the allowance for loan losses for the
three and nine months ended September 30, 2016 and 2015
(dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2016
|
|
One- to
Four-Family
|
|
Home
Equity
|
|
Consumer
|
|
Total
|
Allowance for loan losses, beginning of period
|
$
|
42
|
|
|
$
|
245
|
|
|
$
|
6
|
|
|
$
|
293
|
|
Provision (benefit) for loan losses
|
2
|
|
|
(64
|
)
|
|
—
|
|
|
(62
|
)
|
Charge-offs
|
—
|
|
|
(4
|
)
|
|
(1
|
)
|
|
(5
|
)
|
Recoveries
|
3
|
|
|
6
|
|
|
—
|
|
|
9
|
|
Net (charge-offs) recoveries
|
3
|
|
|
2
|
|
|
(1
|
)
|
|
4
|
|
Allowance for loan losses, end of period
|
$
|
47
|
|
|
$
|
183
|
|
|
$
|
5
|
|
|
$
|
235
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2015
|
|
One- to
Four-Family
|
|
Home
Equity
|
|
Consumer
|
|
Total
|
Allowance for loan losses, beginning of period
|
$
|
49
|
|
|
$
|
345
|
|
|
$
|
8
|
|
|
$
|
402
|
|
Provision (benefit) for loan losses
|
(10
|
)
|
|
(15
|
)
|
|
—
|
|
|
(25
|
)
|
Charge-offs
|
—
|
|
|
(7
|
)
|
|
(2
|
)
|
|
(9
|
)
|
Recoveries
|
—
|
|
|
7
|
|
|
1
|
|
|
8
|
|
Net (charge-offs) recoveries
|
—
|
|
|
—
|
|
|
(1
|
)
|
|
(1
|
)
|
Allowance for loan losses, end of period
|
$
|
39
|
|
|
$
|
330
|
|
|
$
|
7
|
|
|
$
|
376
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2016
|
|
One- to
Four-Family
|
|
Home
Equity
|
|
Consumer
|
|
Total
|
Allowance for loan losses, beginning of period
|
$
|
40
|
|
|
$
|
307
|
|
|
$
|
6
|
|
|
$
|
353
|
|
Provision (benefit) for loan losses
|
2
|
|
|
(134
|
)
|
|
1
|
|
|
(131
|
)
|
Charge-offs
|
(1
|
)
|
|
(13
|
)
|
|
(5
|
)
|
|
(19
|
)
|
Recoveries
|
6
|
|
|
23
|
|
|
3
|
|
|
32
|
|
Net (charge-offs) recoveries
|
5
|
|
|
10
|
|
|
(2
|
)
|
|
13
|
|
Allowance for loan losses, end of period
|
$
|
47
|
|
|
$
|
183
|
|
|
$
|
5
|
|
|
$
|
235
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2015
|
|
One- to
Four-Family
|
|
Home
Equity
|
|
Consumer
|
|
Total
|
Allowance for loan losses, beginning of period
|
$
|
27
|
|
|
$
|
367
|
|
|
$
|
10
|
|
|
$
|
404
|
|
Provision (benefit) for loan losses
|
15
|
|
|
(32
|
)
|
|
—
|
|
|
(17
|
)
|
Charge-offs
|
(3
|
)
|
|
(26
|
)
|
|
(8
|
)
|
|
(37
|
)
|
Recoveries
|
—
|
|
|
21
|
|
|
5
|
|
|
26
|
|
Net (charge-offs) recoveries
|
(3
|
)
|
|
(5
|
)
|
|
(3
|
)
|
|
(11
|
)
|
Allowance for loan losses, end of period
|
$
|
39
|
|
|
$
|
330
|
|
|
$
|
7
|
|
|
$
|
376
|
|
Total loans receivable designated as held-for-investment decreased
$0.8 billion
during the
nine months ended September 30, 2016
. The allowance for loan losses was
$235 million
, or
5.8%
of total loans receivable, as of
September 30, 2016
compared to
$353 million
, or
7.1%
of total loans receivable, as of
December 31, 2015
. The
benefit for loan losses was
$62 million
and
$131 million
for the
three and nine months ended
September 30, 2016
. The
quantitative allowance methodology continues to include the identification of higher risk mortgage loans and the period of forecasted loan losses captured within the general allowance includes the total probable loss over the remaining life of these loans.
The current period provision benefit of
$62 million
includes approximately
$40 million
resulting from updated performance expectations based on the sustained outperformance of a substantial volume of the high-risk HELOCs. The current period benefit also reflected recoveries in excess of prior expectations, including recoveries of previous charge-offs that were not included in our loss estimates, as well as payoffs on loans converting to amortizing.
Impaired Loans—Troubled Debt Restructurings
TDRs include two categories of loans: (1) loan modifications completed under the Company’s programs that involve granting an economic concession to a borrower experiencing financial difficulty, and (2) loans that have been charged off based on the estimated current value of the underlying property less estimated selling costs due to bankruptcy notification.
Delinquency status is the primary measure the Company uses to evaluate the performance of loans modified as TDRs. As mentioned above, the Company classifies loans as nonperforming when they are no longer accruing interest, which includes loans that are
90 days
and greater past due, TDRs that are on nonaccrual status for all classes of loans, including loans in bankruptcy, and certain junior liens that have a delinquent senior lien. The following table shows a summary of the Company’s recorded investment in TDRs that were on accrual and nonaccrual status, further disaggregated by delinquency status, in addition to the recorded investment in TDRs at
September 30, 2016 and December 31, 2015
(dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonaccrual TDRs
|
|
|
|
Accrual
TDRs
(1)
|
|
Current
(2)
|
|
30-89 Days
Delinquent
|
|
90-179 Days
Delinquent
|
|
180+ Days
Delinquent
|
|
Total Recorded
Investment in
TDRs
(3)(4)
|
September 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
One- to four-family
|
$
|
100
|
|
|
$
|
96
|
|
|
$
|
18
|
|
|
$
|
4
|
|
|
$
|
40
|
|
|
$
|
258
|
|
Home equity
|
116
|
|
|
50
|
|
|
8
|
|
|
5
|
|
|
23
|
|
|
202
|
|
Total
|
$
|
216
|
|
|
$
|
146
|
|
|
$
|
26
|
|
|
$
|
9
|
|
|
$
|
63
|
|
|
$
|
460
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
One- to four-family
|
$
|
106
|
|
|
$
|
106
|
|
|
$
|
19
|
|
|
$
|
8
|
|
|
$
|
47
|
|
|
$
|
286
|
|
Home equity
|
120
|
|
|
42
|
|
|
11
|
|
|
8
|
|
|
21
|
|
|
202
|
|
Total
|
$
|
226
|
|
|
$
|
148
|
|
|
$
|
30
|
|
|
$
|
16
|
|
|
$
|
68
|
|
|
$
|
488
|
|
|
|
(1)
|
Represents loans modified as TDRs that are current and have made six or more consecutive payments.
|
|
|
(2)
|
Represents loans modified as TDRs that are current but have not yet made six consecutive payments, bankruptcy loans and certain junior lien TDRs that have a delinquent senior lien.
|
|
|
(3)
|
The unpaid principal balance in one- to four-family TDRs was
$256 million
and
$283 million
at
September 30, 2016 and December 31, 2015
, respectively. For home equity loans, the recorded investment in TDRs represents the unpaid principal balance.
|
|
|
(4)
|
Total recorded investment in TDRs at
September 30, 2016
consisted of
$325 million
of loans modified as TDRs and
$135 million
of loans that have been charged off due to bankruptcy notification. Total recorded investment in TDRs at
December 31, 2015
consisted of
$334 million
of loans modified as TDRs and
$154 million
of loans that have been charged off due to bankruptcy notification.
|
The following table shows the average recorded investment and interest income recognized both on a cash and accrual basis for the Company’s TDRs during the
three and nine months ended September 30, 2016 and 2015
(dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Recorded Investment
|
|
Interest Income Recognized
|
|
Three Months Ended September 30,
|
|
Three Months Ended September 30,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
One- to four-family
|
$
|
264
|
|
|
$
|
300
|
|
|
$
|
2
|
|
|
$
|
3
|
|
Home equity
|
205
|
|
|
212
|
|
|
5
|
|
|
4
|
|
Total
|
$
|
469
|
|
|
$
|
512
|
|
|
$
|
7
|
|
|
$
|
7
|
|
|
|
|
|
|
|
|
|
|
Average Recorded Investment
|
|
Interest Income Recognized
|
|
Nine Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
One- to four-family
|
$
|
275
|
|
|
$
|
307
|
|
|
$
|
7
|
|
|
$
|
7
|
|
Home equity
|
205
|
|
|
216
|
|
|
13
|
|
|
13
|
|
Total
|
$
|
480
|
|
|
$
|
523
|
|
|
$
|
20
|
|
|
$
|
20
|
|
Included in the allowance for loan losses was a specific valuation allowance of
$57 million
and
$61 million
that was established for TDRs at
September 30, 2016 and December 31, 2015
, respectively. The specific allowance for these individually impaired loans represents the forecasted losses over the estimated remaining life of the loans, including the economic concessions granted to the borrowers. The following table shows detailed information related to the Company’s TDRs at
September 30, 2016 and December 31, 2015
(dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
December 31, 2015
|
|
Recorded
Investment
in TDRs
|
|
Specific
Valuation
Allowance
|
|
Net Investment
in TDRs
|
|
Recorded
Investment
in TDRs
|
|
Specific
Valuation
Allowance
|
|
Net Investment
in TDRs
|
With a recorded allowance:
|
|
|
|
|
|
|
|
|
|
|
|
One- to four-family
|
$
|
61
|
|
|
$
|
6
|
|
|
$
|
55
|
|
|
$
|
72
|
|
|
$
|
9
|
|
|
$
|
63
|
|
Home equity
|
$
|
112
|
|
|
$
|
51
|
|
|
$
|
61
|
|
|
$
|
111
|
|
|
$
|
52
|
|
|
$
|
59
|
|
Without a recorded allowance:
(1)
|
|
|
|
|
|
|
|
|
|
|
|
One- to four-family
|
$
|
197
|
|
|
$
|
—
|
|
|
$
|
197
|
|
|
$
|
214
|
|
|
$
|
—
|
|
|
$
|
214
|
|
Home equity
|
$
|
90
|
|
|
$
|
—
|
|
|
$
|
90
|
|
|
$
|
91
|
|
|
$
|
—
|
|
|
$
|
91
|
|
Total:
|
|
|
|
|
|
|
|
|
|
|
|
One- to four-family
|
$
|
258
|
|
|
$
|
6
|
|
|
$
|
252
|
|
|
$
|
286
|
|
|
$
|
9
|
|
|
$
|
277
|
|
Home equity
|
$
|
202
|
|
|
$
|
51
|
|
|
$
|
151
|
|
|
$
|
202
|
|
|
$
|
52
|
|
|
$
|
150
|
|
|
|
(1)
|
Represents loans where the discounted cash flow analysis or collateral value is equal to or exceeds the recorded investment in the loan.
|
Troubled Debt Restructurings — Loan Modifications
The Company has loan modification programs that focus on the mitigation of potential losses in the one- to four-family and home equity mortgage loan portfolio. The Company currently does not have an active loan modification program for consumer loans. The various types of economic concessions that may be granted in a loan modification typically consist of interest rate reductions, maturity date extensions, principal forgiveness or a combination of these concessions. The Company uses specialized servicers that focus on loan modifications and pursue trial modifications for loans that are more than
180 days
delinquent. Trial modifications are classified immediately as TDRs and continue to be reported as delinquent until the successful completion of the trial period, which is typically
90 days
. The loan then becomes a permanent modification reported as current but remains on nonaccrual status until six consecutive payments have been made.
The following table shows loans modified as TDRs by delinquency category at
September 30, 2016 and December 31, 2015
(dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Modifications
Current
|
|
Modifications
30-89 Days
Delinquent
|
|
Modifications
90-179 Days
Delinquent
|
|
Modifications
180+ Days
Delinquent
|
|
Total Recorded
Investment in
Modifications
(1)
|
September 30, 2016
|
|
|
|
|
|
|
|
|
|
One- to four-family
|
$
|
130
|
|
|
$
|
10
|
|
|
$
|
2
|
|
|
$
|
14
|
|
|
$
|
156
|
|
Home equity
|
146
|
|
|
6
|
|
|
4
|
|
|
13
|
|
|
169
|
|
Total
|
$
|
276
|
|
|
$
|
16
|
|
|
$
|
6
|
|
|
$
|
27
|
|
|
$
|
325
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
|
One- to four-family
|
$
|
138
|
|
|
$
|
11
|
|
|
$
|
5
|
|
|
$
|
16
|
|
|
$
|
170
|
|
Home equity
|
139
|
|
|
8
|
|
|
6
|
|
|
11
|
|
|
164
|
|
Total
|
$
|
277
|
|
|
$
|
19
|
|
|
$
|
11
|
|
|
$
|
27
|
|
|
$
|
334
|
|
|
|
(1)
|
Includes loans modified as TDRs that also had received a bankruptcy notification of
$44 million
and
$42 million
at
September 30, 2016 and December 31, 2015
, respectively.
|
The following table shows loans modified as TDRs and the specific valuation allowance by loan portfolio as well as the percentage of total expected losses at
September 30, 2016 and December 31, 2015
(dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recorded
Investment in
Modifications
before
Charge-offs
|
|
Charge-offs
|
|
Recorded
Investment in
Modifications
|
|
Specific
Valuation
Allowance
|
|
Net Investment in
Modifications
|
|
Specific
Valuation
Allowance
as a % of
Modifications
|
|
Total
Expected
Losses
|
September 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to four-family
|
$
|
200
|
|
|
$
|
(44
|
)
|
|
$
|
156
|
|
|
$
|
(6
|
)
|
|
$
|
150
|
|
|
4
|
%
|
|
25
|
%
|
Home equity
|
279
|
|
|
(110
|
)
|
|
169
|
|
|
(51
|
)
|
|
118
|
|
|
30
|
%
|
|
57
|
%
|
Total
|
$
|
479
|
|
|
$
|
(154
|
)
|
|
$
|
325
|
|
|
$
|
(57
|
)
|
|
$
|
268
|
|
|
17
|
%
|
|
44
|
%
|
December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to four-family
|
$
|
216
|
|
|
$
|
(46
|
)
|
|
$
|
170
|
|
|
$
|
(9
|
)
|
|
$
|
161
|
|
|
5
|
%
|
|
25
|
%
|
Home equity
|
284
|
|
|
(120
|
)
|
|
164
|
|
|
(52
|
)
|
|
112
|
|
|
32
|
%
|
|
61
|
%
|
Total
|
$
|
500
|
|
|
$
|
(166
|
)
|
|
$
|
334
|
|
|
$
|
(61
|
)
|
|
$
|
273
|
|
|
18
|
%
|
|
45
|
%
|
The recorded investment in loans modified as TDRs includes the charge-offs related to certain loans that were written down to the estimated current value of the underlying property less estimated selling costs. These charge-offs were recorded on modified loans that were delinquent in excess of 180 days, in bankruptcy, or when certain characteristics of the loan, including CLTV, borrower’s credit and type of modification, cast substantial doubt on the borrower’s ability to repay the loan. The total expected loss on loans modified as TDRs includes both the previously recorded charge-offs and the specific valuation allowance.
The vast majority of the Company’s loans modified as TDRs include an interest rate reduction in combination with another type of concession. The Company prioritizes the interest rate reduction modifications in combination with the other modification categories. Each class is mutually exclusive in that if a modification had an interest rate reduction with an extension and other modification, the modification would only be presented in the extension column in the table below. The following tables provide the number of loans and post-modification balances immediately after being modified by major class during the
three and nine months ended September 30, 2016 and 2015
(dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2016
|
|
|
|
Interest Rate Reduction
|
|
|
|
|
|
Number of
Loans
|
|
Re-age/
Extension/
Interest
Capitalization
|
|
Other with
Interest Rate
Reduction
|
|
Other
(1)
|
|
Total
|
One- to four-family
|
11
|
|
|
$
|
2
|
|
|
$
|
—
|
|
|
$
|
2
|
|
|
$
|
4
|
|
Home equity
|
102
|
|
|
2
|
|
|
—
|
|
|
5
|
|
|
7
|
|
Total
|
113
|
|
|
$
|
4
|
|
|
$
|
—
|
|
|
$
|
7
|
|
|
$
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2015
|
|
|
|
Interest Rate Reduction
|
|
|
|
|
|
Number of
Loans
|
|
Re-age/
Extension/
Interest
Capitalization
|
|
Other with
Interest Rate
Reduction
|
|
Other
|
|
Total
|
One- to four-family
|
12
|
|
|
$
|
4
|
|
|
$
|
—
|
|
|
$
|
1
|
|
|
$
|
5
|
|
Home equity
|
40
|
|
|
1
|
|
|
1
|
|
|
1
|
|
|
3
|
|
Total
|
52
|
|
|
$
|
5
|
|
|
$
|
1
|
|
|
$
|
2
|
|
|
$
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2016
|
|
|
|
Interest Rate Reduction
|
|
|
|
|
|
Number of
Loans
|
|
Re-age/
Extension/
Interest
Capitalization
|
|
Other with
Interest Rate
Reduction
|
|
Other
(1)
|
|
Total
|
One- to four-family
|
32
|
|
|
$
|
8
|
|
|
$
|
—
|
|
|
$
|
4
|
|
|
$
|
12
|
|
Home equity
|
459
|
|
|
7
|
|
|
3
|
|
|
23
|
|
|
33
|
|
Total
|
491
|
|
|
$
|
15
|
|
|
$
|
3
|
|
|
$
|
27
|
|
|
$
|
45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2015
|
|
|
|
Interest Rate Reduction
|
|
|
|
|
|
Number of
Loans
|
|
Re-age/
Extension/
Interest
Capitalization
|
|
Other with
Interest Rate
Reduction
|
|
Other
(1)
|
|
Total
|
One- to four-family
|
28
|
|
|
$
|
7
|
|
|
$
|
—
|
|
|
$
|
2
|
|
|
$
|
9
|
|
Home equity
|
293
|
|
|
3
|
|
|
2
|
|
|
17
|
|
|
22
|
|
Total
|
321
|
|
|
$
|
10
|
|
|
$
|
2
|
|
|
$
|
19
|
|
|
$
|
31
|
|
|
|
(1)
|
Includes TDRs that resulted from a loan modification program being offered to a subset of borrowers with HELOCs whose original loan terms provided the borrowers the option to accelerate their date of conversion to amortizing loans. As certain terms of the Company's offer represented economic concessions, such as longer amortization periods than were in the original loan agreements, to certain borrowers experiencing financial difficulty, this program resulted in less than
$1 million
and
$15 million
of TDRs during the
three and nine months ended September 30, 2016
, respectively, and
$14 million
of TDRs during the
nine months ended September 30, 2015
.
|
The Company considers modifications that become 30 days past due to have experienced a payment default. The following table shows the recorded investment in modifications that experienced a payment default within 12 months after the modification for the
three and nine months ended September 30, 2016 and 2015
(dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
2016
|
|
2015
|
|
Number of
Loans
|
|
Recorded
Investment
|
|
Number of
Loans
|
|
Recorded
Investment
|
One- to four-family
(1)
|
1
|
|
|
$
|
—
|
|
|
2
|
|
|
$
|
1
|
|
Home equity
(2)
|
19
|
|
|
1
|
|
|
11
|
|
|
1
|
|
Total
|
20
|
|
|
$
|
1
|
|
|
13
|
|
|
$
|
2
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
2016
|
|
2015
|
|
Number of
Loans
|
|
Recorded
Investment
|
|
Number of
Loans
|
|
Recorded
Investment
|
One- to four-family
(1)
|
8
|
|
|
$
|
3
|
|
|
4
|
|
|
$
|
2
|
|
Home equity
(2)(3)
|
49
|
|
|
3
|
|
|
79
|
|
|
4
|
|
Total
|
57
|
|
|
$
|
6
|
|
|
83
|
|
|
$
|
6
|
|
|
|
(1)
|
For the
three and nine months ended September 30, 2016
, less than
$1 million
and
1 million
, respectively, of the recorded investment in one- to four-family loans had a payment default in the trailing 12 months that was classified as current, compared to less than
$1 million
for both the
three and nine months ended
September 30, 2015.
|
|
|
(2)
|
For the
three and nine months ended September 30, 2016
,
$1 million
and
$2 million
, respectively, of the recorded investment in home equity loans had a payment default in the trailing 12 months that was classified as current, compared to less than
$1 million
and
$3 million
for the
three and nine months ended
September 30, 2015
, respectively.
|
|
|
(3)
|
The majority of these home equity modifications during the
nine months ended September 30, 2015
experienced servicer transfers during this same period.
|
NOTE 9—DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Company enters into derivative transactions primarily to protect against interest rate risk on the value of certain assets, liabilities and future cash flows. Each derivative instrument is recorded on the consolidated balance sheet at fair value as a freestanding asset or liability. The following table summarizes the fair value of derivatives as reported in the consolidated balance sheet at
September 30, 2016 and December 31, 2015
(dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
|
|
Notional
|
|
Asset
(1)
|
|
Liability
(2)
|
|
Net
(3)
|
September 30, 2016
|
|
|
|
|
|
|
|
Interest rate contracts:
|
|
|
|
|
|
|
|
Fair value hedges
|
$
|
2,295
|
|
|
$
|
4
|
|
|
$
|
(131
|
)
|
|
$
|
(127
|
)
|
Total derivatives designated as hedging instruments
(4)
|
$
|
2,295
|
|
|
$
|
4
|
|
|
$
|
(131
|
)
|
|
$
|
(127
|
)
|
December 31, 2015
|
|
|
|
|
|
|
|
Interest rate contracts:
|
|
|
|
|
|
|
|
Fair value hedges
|
$
|
2,204
|
|
|
$
|
10
|
|
|
$
|
(55
|
)
|
|
$
|
(45
|
)
|
Total derivatives designated as hedging instruments
(4)
|
$
|
2,204
|
|
|
$
|
10
|
|
|
$
|
(55
|
)
|
|
$
|
(45
|
)
|
|
|
(1)
|
Reflected in the other assets line item on the consolidated balance sheet.
|
|
|
(2)
|
Reflected in the other liabilities line item on the consolidated balance sheet.
|
|
|
(3)
|
Represents net fair value of derivative instruments for disclosure purposes only.
|
|
|
(4)
|
All derivatives were designated as hedging instruments at
September 30, 2016 and December 31, 2015
.
|
Cash Flow Hedges
The Company terminated
$4.4 billion
of legacy wholesale funding obligations during the third quarter of 2015 along with the cash flow hedges used to hedge the forecasted transactions related to these obligations. As the Company's intent changed and the hedged forecasted transactions became probable of not occurring, the Company reclassified
$370 million
of pre-tax losses on cash flow hedges from accumulated other comprehensive loss into earnings during the three months ended September 30, 2015. See
Note 11— Other Borrowings
for additional information.
Fair Value Hedges
Fair value hedges are used to offset exposure to changes in value of certain fixed-rate assets and liabilities. Fair value hedges are accounted for by recording the fair value of the derivative instrument and the fair value of the asset or liability being hedged on the consolidated balance sheet. Changes in the fair value of both the derivative instruments and the underlying assets or liabilities are recognized in the
gains (losses) on securities and other, net
line item in the
consolidated statement of income (loss)
. To the extent that the hedge is ineffective, the changes in the fair values will not offset and the difference, or hedge ineffectiveness, is reflected in the
gains (losses) on securities and other, net
line item in the
consolidated statement of income (loss)
.
Hedge accounting is discontinued for fair value hedges if a derivative instrument is sold, terminated or otherwise de-designated. If fair value hedge accounting is discontinued, the previously hedged item is no longer adjusted for changes in fair value through the
consolidated statement of income (loss)
and the cumulative net gain or loss on the hedged asset or liability at the time of de-designation is amortized to interest income or interest expense using the effective interest method over the expected remaining life of the hedged item. Changes in the fair value of the derivative instruments after de-designation of fair value hedge accounting are recorded in the
gains (losses) on securities and other, net
line item in the
consolidated statement of income (loss)
.
The following table summarizes the effect of interest rate contracts designated as fair value hedges and related hedged items on the
consolidated statement of income (loss)
for the
three and nine months ended September 30, 2016 and 2015
(dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
2016
|
|
2015
|
|
Hedging
Instrument
|
|
Hedged
Item
|
|
Hedge
Ineffectiveness
(1)
|
|
Hedging
Instrument
|
|
Hedged
Item
|
|
Hedge
Ineffectiveness
(1)
|
Agency debentures
|
$
|
1
|
|
|
$
|
(3
|
)
|
|
$
|
(2
|
)
|
|
$
|
(30
|
)
|
|
$
|
30
|
|
|
$
|
—
|
|
Agency mortgage-backed securities
|
14
|
|
|
(16
|
)
|
|
(2
|
)
|
|
(72
|
)
|
|
70
|
|
|
(2
|
)
|
Total gains (losses) included in earnings
|
$
|
15
|
|
|
$
|
(19
|
)
|
|
$
|
(4
|
)
|
|
$
|
(102
|
)
|
|
$
|
100
|
|
|
$
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
2016
|
|
2015
|
|
Hedging
Instrument
|
|
Hedged
Item
|
|
Hedge
Ineffectiveness
(1)
|
|
Hedging
Instrument
|
|
Hedged
Item
|
|
Hedge
Ineffectiveness
(1)
|
Agency debentures
|
$
|
(89
|
)
|
|
$
|
85
|
|
|
$
|
(4
|
)
|
|
$
|
(15
|
)
|
|
$
|
15
|
|
|
$
|
—
|
|
Agency mortgage-backed securities
|
(100
|
)
|
|
96
|
|
|
(4
|
)
|
|
(32
|
)
|
|
32
|
|
|
—
|
|
Total gains (losses) included in earnings
|
$
|
(189
|
)
|
|
$
|
181
|
|
|
$
|
(8
|
)
|
|
$
|
(47
|
)
|
|
$
|
47
|
|
|
$
|
—
|
|
|
|
(1)
|
Reflected in the
gains (losses) on securities and other, net
line item on the
consolidated statement of income (loss)
.
|
NOTE 10—DEPOSITS
Deposits are summarized as follows (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount
|
|
Weighted-Average Rate
|
|
September 30, 2016
|
|
December 31, 2015
|
|
September 30, 2016
|
|
December 31, 2015
|
Sweep deposits
|
$
|
26,464
|
|
|
$
|
24,018
|
|
|
0.01
|
%
|
|
0.01
|
%
|
Complete savings deposits
|
3,182
|
|
|
3,357
|
|
|
0.01
|
%
|
|
0.01
|
%
|
Checking deposits
|
1,252
|
|
|
1,239
|
|
|
0.03
|
%
|
|
0.03
|
%
|
Other money market and savings deposits
|
765
|
|
|
792
|
|
|
0.01
|
%
|
|
0.01
|
%
|
Time deposits
(1)
|
34
|
|
|
39
|
|
|
0.18
|
%
|
|
0.38
|
%
|
Total deposits
(2)
|
$
|
31,697
|
|
|
$
|
29,445
|
|
|
0.01
|
%
|
|
0.01
|
%
|
|
|
(1)
|
Time deposits represent certificates of deposit as of
September 30, 2016 and December 31, 2015
, and include brokered certificates of deposit as of
December 31, 2015
.
|
|
|
(2)
|
As of
September 30, 2016 and December 31, 2015
, the Company had
$172 million
and
$173 million
in non-interest bearing deposits, respectively.
|
NOTE 11— OTHER BORROWINGS
Other borrowings at
September 30, 2016 and December 31, 2015
are summarized as follows (dollars in millions):
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
December 31, 2015
|
Trust preferred securities
(1)
|
$
|
409
|
|
|
$
|
409
|
|
Repurchase agreements
(2)
|
—
|
|
|
82
|
|
Total other borrowings
|
$
|
409
|
|
|
$
|
491
|
|
|
|
(1)
|
The Company's TRUPs begin maturing in
2031
.
|
|
|
(2)
|
The maximum amount at any month end for repurchase agreements was
$3.8 billion
for the year ended
December 31, 2015
.
|
The Company terminated
$4.4 billion
of legacy wholesale funding obligations during the third quarter of 2015. In connection with this termination, the Company recorded a pre-tax charge of
$413 million
in
consolidated statement of income (loss)
, including
$43 million
in the losses on early extinguishment of debt, net line item, and
$370 million
in the gains (losses) on securities and other, net line item that were reclassified from accumulated other comprehensive loss attributable to cash flow hedges.
The Company repurchased
$14 million
of trust preferred securities in advance of maturity during the third quarter of 2015 and recorded a gain on early extinguishment of debt of
$4 million
.
External Lines of Credit maintained at E*TRADE Clearing
E*TRADE Clearing's external liquidity lines total approximately
$1.1 billion
as of
September 30, 2016
and include the following:
|
|
•
|
a 364-day,
$400 million
senior unsecured committed revolving credit facility with a syndicate of banks that matures in June 2017;
|
|
|
•
|
secured committed lines of credit with
two
unaffiliated banks, aggregating to
$175 million
with a maturity date of June 2017;
|
|
|
•
|
unsecured uncommitted lines of credit with
two
unaffiliated banks aggregating to
$100 million
, of which
$75 million
was renewed and is scheduled to mature in June 2017 and the remaining line has no maturity date; and
|
|
|
•
|
secured uncommitted lines of credit with several unaffiliated banks aggregating to
$375 million
with no maturity date.
|
The revolving credit facility contains maintenance covenants relating to E*TRADE Clearing's minimum consolidated tangible net worth and regulatory net capital ratio. There were
no
outstanding balances for these lines at
September 30, 2016
.
NOTE 12—CORPORATE DEBT
Corporate debt at
September 30, 2016 and December 31, 2015
is outlined in the following table (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Face Value
|
|
Discount
|
|
Net
|
September 30, 2016
|
|
|
|
|
|
Interest-bearing notes:
|
|
|
|
|
|
5
3
/
8
% Notes, due 2022
|
$
|
540
|
|
|
$
|
(4
|
)
|
|
$
|
536
|
|
4
5
/
8
% Notes, due 2023
|
460
|
|
|
(5
|
)
|
|
455
|
|
Total interest-bearing notes
|
1,000
|
|
|
(9
|
)
|
|
991
|
|
Non-interest-bearing debt:
|
|
|
|
|
|
0% Convertible debentures, due 2019
|
3
|
|
|
—
|
|
|
3
|
|
Total corporate debt
|
$
|
1,003
|
|
|
$
|
(9
|
)
|
|
$
|
994
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Face Value
|
|
Discount
|
|
Net
|
December 31, 2015
|
|
|
|
|
|
Interest-bearing notes:
|
|
|
|
|
|
5
3
/
8
% Notes, due 2022
|
$
|
540
|
|
|
$
|
(6
|
)
|
|
$
|
534
|
|
4
5
/
8
% Notes, due 2023
|
460
|
|
|
(5
|
)
|
|
455
|
|
Total interest-bearing notes
|
1,000
|
|
|
(11
|
)
|
|
989
|
|
Non-interest-bearing debt:
|
|
|
|
|
|
0% Convertible debentures, due 2019
|
8
|
|
|
—
|
|
|
8
|
|
Total corporate debt
|
$
|
1,008
|
|
|
$
|
(11
|
)
|
|
$
|
997
|
|
4
5
/8% Notes
In March 2015, the Company issued an aggregate principal amount of
$460 million
in 4
5
/
8
% Notes due September 2023. Interest is payable semi-annually and the notes may be called by the Company beginning March 15, 2018 at a premium, which declines over time. The Company used the net proceeds from the issuance of the 4
5
/
8
% Notes, along with approximately
$432 million
of existing corporate cash to redeem all of the outstanding 6
3
/
8
% Notes including paying the associated redemption premiums of
$68 million
, accrued interest and related fees and expenses. This resulted in
$73 million
in losses on early extinguishment of debt for the quarter ended March 31, 2015.
Credit Facility
In November 2014, the Company entered into a
$200 million
senior secured revolving credit facility and in February of 2015, entered into an amendment to increase commitments thereunder by
$50 million
. At
September 30, 2016
, there was
no
outstanding balance under the revolving credit facility and available capacity for borrowings was
$250 million
. The credit facility expires in November 2017. The Company has the ability to borrow against the credit facility for working capital and general corporate purposes. The credit facility contains certain maintenance covenants, including the requirement for the parent company to maintain unrestricted cash of
$100 million
.
NOTE 13—INCOME TAXES
Income Tax Expense (Benefit)
Income tax expense was
$86 million
and
$208 million
for the
three and nine months ended
September 30, 2016
, respectively, compared to an income tax benefit of
$93 million
and
$245 million
for the same periods in
2015
. The effective tax rates were
38%
and
33%
for the
three and nine months ended
September 30, 2016
, respectively, compared to
38%
and
372%
for the same periods in
2015
.
The effective tax rate of
33%
for the
nine months ended September 30, 2016
was primarily driven by the release of valuation allowances on certain state deferred tax assets. Effective January 1, 2016, the Company elected to treat its broker-dealers, E*TRADE Securities and E*TRADE Clearing, as single member LLCs for tax purposes. The election to be treated as single member LLCs and future income projections at the broker-dealers will result in the utilization of certain state deferred tax assets, primarily state NOLs, against which the Company had recorded valuation allowances. Accordingly, the Company recognized a tax benefit of
$31 million
during the three months ended March 31, 2016.
The effective tax rate of
372%
for the
nine months ended
September 30, 2015
, was primarily driven by the settlement of an IRS examination of the Company's 2007, 2009, and 2010 federal tax returns, which resulted in the recognition of a
$220 million
income tax benefit in the second quarter of 2015.
Deferred Taxes and Valuation Allowance
Deferred income taxes are recorded when revenues and expenses are recognized in different periods for financial statement and tax return purposes. The Company maintains valuation allowances against the portion of deferred tax assets that it does not believe would be realized. The Company’s deferred tax asset, valuation allowance, and deferred tax liability balances at
September 30, 2016 and December 31, 2015
are summarized in the following table (dollars in millions):
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
December 31,
|
|
2016
|
|
2015
|
Total deferred tax assets
|
$
|
1,266
|
|
|
$
|
1,548
|
|
Valuation allowance
|
(42
|
)
|
|
(82
|
)
|
Total deferred tax assets, net of valuation allowance
|
1,224
|
|
|
1,466
|
|
Total deferred tax liabilities
|
(499
|
)
|
|
(433
|
)
|
Deferred tax assets, net
|
$
|
725
|
|
|
$
|
1,033
|
|
NOTE 14—SHAREHOLDERS' EQUITY
The following tables present after-tax changes in each component of accumulated other comprehensive income (loss) for the
three and nine months ended September 30, 2016 and 2015
(dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-Sale
Securities
(1)
|
|
Cash Flow
Hedging
Instruments
|
|
Foreign
Currency
Translation
|
|
Total
|
Balance, December 31, 2015
|
$
|
(101
|
)
|
|
$
|
—
|
|
|
$
|
2
|
|
|
$
|
(99
|
)
|
Other comprehensive income before reclassifications
|
94
|
|
|
—
|
|
|
—
|
|
|
94
|
|
Amounts reclassified from accumulated other comprehensive loss
|
(9
|
)
|
|
—
|
|
|
—
|
|
|
(9
|
)
|
Net change
|
85
|
|
|
—
|
|
|
—
|
|
|
85
|
|
Balance, March 31, 2016
|
$
|
(16
|
)
|
|
$
|
—
|
|
|
$
|
2
|
|
|
$
|
(14
|
)
|
Other comprehensive income before reclassifications
|
69
|
|
|
—
|
|
|
—
|
|
|
69
|
|
Amounts reclassified from accumulated other comprehensive income
|
(9
|
)
|
|
—
|
|
|
—
|
|
|
(9
|
)
|
Net change
|
60
|
|
|
—
|
|
|
—
|
|
|
60
|
|
Balance, June 30, 2016
|
$
|
44
|
|
|
$
|
—
|
|
|
$
|
2
|
|
|
$
|
46
|
|
Other comprehensive income before reclassifications
|
3
|
|
|
—
|
|
|
—
|
|
|
3
|
|
Amounts reclassified from accumulated other comprehensive income
|
(10
|
)
|
|
—
|
|
|
—
|
|
|
(10
|
)
|
Net change
|
(7
|
)
|
|
—
|
|
|
—
|
|
|
(7
|
)
|
Balance, September 30, 2016
|
$
|
37
|
|
|
$
|
—
|
|
|
$
|
2
|
|
|
$
|
39
|
|
|
|
(1)
|
Includes unamortized unrealized losses of approximately
$8 million
at September 30, 2016, related to available-for-sale securities that were transferred to held-to-maturity during the three months ended June 30, 2016. See
Note 7—Available-for-Sale and Held-to-Maturity Securities
for additional information.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-Sale
Securities
|
|
Cash Flow
Hedging
Instruments
|
|
Foreign
Currency
Translation
|
|
Total
|
Balance, December 31, 2014
|
$
|
7
|
|
|
$
|
(261
|
)
|
|
$
|
5
|
|
|
$
|
(249
|
)
|
Other comprehensive income (loss) before reclassifications
|
39
|
|
|
(11
|
)
|
|
—
|
|
|
28
|
|
Amounts reclassified from accumulated other comprehensive loss
|
(6
|
)
|
|
16
|
|
|
—
|
|
|
10
|
|
Net change
|
33
|
|
|
5
|
|
|
—
|
|
|
38
|
|
Balance, March 31, 2015
|
$
|
40
|
|
|
$
|
(256
|
)
|
|
$
|
5
|
|
|
$
|
(211
|
)
|
Other comprehensive income (loss) before reclassifications
|
(59
|
)
|
|
6
|
|
|
—
|
|
|
(53
|
)
|
Amounts reclassified from accumulated other comprehensive loss
|
(5
|
)
|
|
16
|
|
|
—
|
|
|
11
|
|
Net change
|
(64
|
)
|
|
22
|
|
|
—
|
|
|
(42
|
)
|
Balance, June 30, 2015
|
$
|
(24
|
)
|
|
$
|
(234
|
)
|
|
$
|
5
|
|
|
$
|
(253
|
)
|
Other comprehensive income (loss) before reclassifications
|
17
|
|
|
(5
|
)
|
|
—
|
|
|
12
|
|
Amounts reclassified from accumulated other comprehensive loss
|
(7
|
)
|
|
239
|
|
|
—
|
|
|
232
|
|
Net change
|
10
|
|
|
234
|
|
|
—
|
|
|
244
|
|
Balance, September 30, 2015
|
$
|
(14
|
)
|
|
$
|
—
|
|
|
$
|
5
|
|
|
$
|
(9
|
)
|
The following tables present other comprehensive income (loss) activity and the related tax effect for the
three and nine months ended September 30, 2016 and 2015
(dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
2016
|
|
2015
|
|
Before Tax
|
|
Tax Effect
|
|
After Tax
|
|
Before Tax
|
|
Tax Effect
|
|
After Tax
|
Available-for-sale securities:
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains, net
|
$
|
5
|
|
|
$
|
(2
|
)
|
|
$
|
3
|
|
|
$
|
28
|
|
|
$
|
(11
|
)
|
|
$
|
17
|
|
Reclassification into earnings, net
|
(17
|
)
|
|
7
|
|
|
(10
|
)
|
|
(11
|
)
|
|
4
|
|
|
(7
|
)
|
Net change from available-for-sale securities
|
(12
|
)
|
|
5
|
|
|
(7
|
)
|
|
17
|
|
|
(7
|
)
|
|
10
|
|
Cash flow hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized losses, net
|
—
|
|
|
—
|
|
|
—
|
|
|
(8
|
)
|
|
3
|
|
|
(5
|
)
|
Reclassification into earnings, net
|
—
|
|
|
—
|
|
|
—
|
|
|
387
|
|
|
(148
|
)
|
|
239
|
|
Net change from cash flow hedging instruments
|
—
|
|
|
—
|
|
|
—
|
|
|
379
|
|
|
(145
|
)
|
|
234
|
|
Other comprehensive income (loss)
|
$
|
(12
|
)
|
|
$
|
5
|
|
|
$
|
(7
|
)
|
|
$
|
396
|
|
|
$
|
(152
|
)
|
|
$
|
244
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
2016
|
|
2015
|
|
Before Tax
|
|
Tax Effect
|
|
After Tax
|
|
Before Tax
|
|
Tax Effect
|
|
After Tax
|
Available-for-sale securities:
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains (losses), net
|
$
|
269
|
|
|
$
|
(103
|
)
|
|
$
|
166
|
|
|
$
|
(5
|
)
|
|
$
|
2
|
|
|
$
|
(3
|
)
|
Reclassification into earnings, net
|
(46
|
)
|
|
18
|
|
|
(28
|
)
|
|
(29
|
)
|
|
11
|
|
|
(18
|
)
|
Net change from available-for-sale securities
|
223
|
|
|
(85
|
)
|
|
138
|
|
|
(34
|
)
|
|
13
|
|
|
(21
|
)
|
Cash flow hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized losses, net
|
—
|
|
|
—
|
|
|
—
|
|
|
(17
|
)
|
|
7
|
|
|
(10
|
)
|
Reclassification into earnings, net
|
—
|
|
|
—
|
|
|
—
|
|
|
439
|
|
|
(168
|
)
|
|
271
|
|
Net change from cash flow hedging instruments
|
—
|
|
|
—
|
|
|
—
|
|
|
422
|
|
|
(161
|
)
|
|
261
|
|
Other comprehensive income
|
$
|
223
|
|
|
$
|
(85
|
)
|
|
$
|
138
|
|
|
$
|
388
|
|
|
$
|
(148
|
)
|
|
$
|
240
|
|
The following table presents the consolidated statement of income (loss) line items impacted by reclassifications out of accumulated other comprehensive income (loss) for the
three and nine months ended September 30, 2016 and 2015
(dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated Other Comprehensive Income (Loss) Components
|
|
Amounts Reclassified from Accumulated Other Comprehensive Income (Loss)
|
|
Affected Line Items in the Consolidated Statement of Income (Loss)
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
|
Available-for-sale securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
17
|
|
|
$
|
11
|
|
|
$
|
46
|
|
|
$
|
29
|
|
|
Gains (losses) on securities and other, net
|
|
|
(7
|
)
|
|
(4
|
)
|
|
(18
|
)
|
|
(11
|
)
|
|
Tax expense
|
|
|
$
|
10
|
|
|
$
|
7
|
|
|
$
|
28
|
|
|
$
|
18
|
|
|
Reclassification into earnings, net
|
Cash flow hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
—
|
|
|
$
|
(370
|
)
|
|
$
|
—
|
|
|
$
|
(370
|
)
|
|
Gains (losses) on securities and other, net
|
|
|
—
|
|
|
(17
|
)
|
|
—
|
|
|
(69
|
)
|
|
Interest expense
|
|
|
—
|
|
|
(387
|
)
|
|
—
|
|
|
(439
|
)
|
|
Reclassification into earnings, before tax
|
|
|
—
|
|
|
148
|
|
|
—
|
|
|
168
|
|
|
Tax benefit
|
|
|
$
|
—
|
|
|
$
|
(239
|
)
|
|
$
|
—
|
|
|
$
|
(271
|
)
|
|
Reclassification into earnings, net
|
The Company terminated
$4.4 billion
of
legacy wholesale funding obligations
during the third quarter of 2015. In connection with this termination, the Company recorded a pre-tax charge of
$413 million
in the
consolidated statement of income (loss)
, including
$43 million
in the losses on early extinguishment of debt, net line item, and
$370 million
in the gains (losses) on securities and other, net line item that were reclassified from accumulated other comprehensive loss attributable to cash flow hedges.
Conversions of Convertible Debentures
During the
nine months ended September 30, 2016 and 2015
,
$5 million
and
$4 million
of the Company’s convertible debentures were converted into
0.5 million
and
0.3 million
shares of common stock, respectively.
Issuance of Preferred Stock
On August 25, 2016, the Company issued
400,000
shares of Series A fixed-to-floating rate non-cumulative perpetual preferred stock for gross proceeds of
$400 million
. Net proceeds, after issuance cost, were approximately
$394 million
. The shares have a par value of
$0.01
and a liquidation preference of
$1,000
per share. Dividends are non-cumulative and are payable semi-annually at a rate of
5.875%
from the original issue date to, but excluding, September 15, 2026. Dividends thereafter are payable at a floating rate equal to the three-month U.S. dollar LIBOR on the related dividend determination date plus 4.435%. As
no
preferred stock dividends were declared during the three months ended September 30, 2016, the Company has not presented net income available to common shareholders on the consolidated statement of income (loss). The Company used the proceeds of the issuance, along with existing corporate cash, to fund the acquisition of OptionsHouse. See
Note 2—Business Acquisition
for additional information.
Share Repurchases
On November 19, 2015, the Company announced that its Board of Directors authorized the repurchase of up to
$800 million
of shares of the Company's common stock through March 31, 2017. During the six months ended June 30, 2016, the Company repurchased a total of
$452 million
, or
19.0 million
shares, of common stock under this program which brings total repurchases to
$502 million
, or
20.6 million
shares, since inception. As of
September 30, 2016
,
$298 million
remained available for additional repurchases. The Company accounts for share repurchases retired after repurchase by allocating the excess repurchase price over par to additional paid-in-capital. Due to the OptionsHouse acquisition, the Company did not repurchase shares during the third quarter of 2016. The Company will continue to assess the best use of corporate cash and anticipates resuming share repurchases in the second half of 2017.
NOTE 15—EARNINGS (LOSS) PER SHARE
The following table presents a reconciliation of basic and diluted earnings (loss) per share (in millions, except share data and per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Basic:
|
|
|
|
|
|
|
|
Net income (loss)
|
$
|
139
|
|
|
$
|
(153
|
)
|
|
$
|
425
|
|
|
$
|
179
|
|
Basic weighted-average shares outstanding (in thousands)
|
274,362
|
|
|
290,480
|
|
|
278,864
|
|
|
290,105
|
|
Basic earnings (loss) per share
|
$
|
0.51
|
|
|
$
|
(0.53
|
)
|
|
$
|
1.53
|
|
|
$
|
0.62
|
|
Diluted:
|
|
|
|
|
|
|
|
Net income (loss)
|
$
|
139
|
|
|
$
|
(153
|
)
|
|
$
|
425
|
|
|
$
|
179
|
|
Basic weighted-average shares outstanding (in thousands)
|
274,362
|
|
|
290,480
|
|
|
278,864
|
|
|
290,105
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
Weighted-average convertible debentures (in thousands)
|
318
|
|
|
—
|
|
|
411
|
|
|
3,517
|
|
Weighted-average options and restricted stock issued to employees (in thousands)
|
792
|
|
|
—
|
|
|
861
|
|
|
1,376
|
|
Diluted weighted-average shares outstanding (in thousands)
|
275,472
|
|
|
290,480
|
|
|
280,136
|
|
|
294,998
|
|
Diluted earnings (loss) per share
|
$
|
0.51
|
|
|
$
|
(0.53
|
)
|
|
$
|
1.52
|
|
|
$
|
0.61
|
|
The Company excluded the following shares from the calculation of diluted earnings (loss) per share as the effect would have been anti-dilutive (shares in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Weighted-average shares excluded as a result of the Company's net loss:
|
|
|
|
|
|
|
|
Convertible debentures
|
—
|
|
|
3.3
|
|
|
—
|
|
|
—
|
|
Stock options and restricted stock awards and units
|
—
|
|
|
1.3
|
|
|
—
|
|
|
—
|
|
Stock options and restricted stock awards and units
|
0.2
|
|
|
0.1
|
|
|
0.1
|
|
|
0.1
|
|
Total
|
0.2
|
|
|
4.7
|
|
|
0.1
|
|
|
0.1
|
|
NOTE 16—REGULATORY REQUIREMENTS
Broker-Dealer Capital Requirements
The Company’s U.S. broker-dealer subsidiaries are subject to the Uniform Net Capital Rule (the "Rule") under the Securities Exchange Act of 1934 administered by the SEC and FINRA, which requires the maintenance of minimum net capital. The minimum net capital requirements can be met under either the Aggregate Indebtedness method or the Alternative method. Under the Aggregate Indebtedness method, a broker-dealer is required to maintain minimum net capital of the greater of 6
2
/
3
% of its aggregate indebtedness, as defined, or a minimum dollar amount. Under the Alternative method, a broker-dealer is required to maintain net capital equal to the greater of
$250,000
or
2%
of aggregate debit balances arising from customer transactions. The method used depends on the individual U.S. broker-dealer subsidiary. The Company’s U.S. broker-dealer subsidiaries are also subject to Commodity Futures Trading Commission (“CFTC”) regulations (“Reg. 1.17”) under the Commodity Exchange Act, which require the maintenance of minimum net capital equal to the greater of net capital requirement under Reg. 1.17 or the sum of
8%
of the total risk margin requirements for all positions carried in client accounts and
8%
of the total risk margin requirements for all positions carried in non-client accounts, as defined in Reg. 1.17. The Company’s international broker-dealer subsidiary is subject to capital requirements determined by its respective regulator.
At
September 30, 2016 and December 31, 2015
, all of the Company’s broker-dealer subsidiaries met minimum net capital requirements. The tables below summarize the minimum capital requirements and excess capital for the Company’s broker-dealer subsidiaries at
September 30, 2016 and December 31, 2015
(dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Required Net
Capital
|
|
Net Capital
|
|
Excess Net
Capital
|
September 30, 2016:
|
|
|
|
|
|
E*TRADE Clearing
(1)(2)
|
$
|
151
|
|
|
$
|
884
|
|
|
$
|
733
|
|
E*TRADE Securities
(1)(3)
|
1
|
|
|
75
|
|
|
74
|
|
OptionsHouse
(4)
|
1
|
|
|
15
|
|
|
14
|
|
Other broker-dealer
|
—
|
|
|
17
|
|
|
17
|
|
Total
|
$
|
153
|
|
|
$
|
991
|
|
|
$
|
838
|
|
December 31, 2015:
|
|
|
|
|
|
E*TRADE Clearing
(1)
|
$
|
161
|
|
|
$
|
1,007
|
|
|
$
|
846
|
|
E*TRADE Securities
(1)
|
—
|
|
|
49
|
|
|
49
|
|
Other broker-dealers
|
1
|
|
|
15
|
|
|
14
|
|
Total
|
$
|
162
|
|
|
$
|
1,071
|
|
|
$
|
909
|
|
|
|
(1)
|
Elected to use the Alternative method to compute net capital. E*TRADE Securities' minimum net capital requirement was
$250,000
as of December 31, 2015 and
$1 million
as of September 30, 2016 as a result of its registration as a Futures Commission Merchant during the three months ended September 30, 2016.
|
|
|
(2)
|
E*TRADE Clearing paid dividends of
$227 million
to the parent company during the
nine months ended September 30, 2016
. Effective October 1, 2016, E*TRADE Clearing was merged into E*TRADE Securities.
|
|
|
(3)
|
E*TRADE Securities paid dividends of
$108 million
to the parent company during the
nine months ended September 30, 2016
.
|
|
|
(4)
|
The Company completed the acquisition of OptionsHouse on September 12, 2016. OptionsHouse elected to use the Aggregate Indebtedness method to compute net capital; however, as OptionsHouse is an FCM, the prescribed fixed-dollar minimum capital requirement is
$1 million
.
|
Bank Capital Requirements
E*TRADE Financial and E*TRADE Bank are subject to various regulatory capital requirements administered by federal banking agencies. Beginning January 1, 2015, both E*TRADE Financial and E*TRADE Bank calculate regulatory capital under the Basel III framework using the Standardized Approach, subject to transition provisions. Failure to meet minimum capital requirements can trigger certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on E*TRADE Financial’s and E*TRADE Bank’s financial condition and results of operations. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, E*TRADE Financial and E*TRADE Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. In addition, E*TRADE Bank may not pay dividends to the parent company without the non-objection, or in certain cases the approval, of its regulators, and any loans by E*TRADE Bank to the parent company and its other non-bank subsidiaries are subject to various quantitative, arm’s length, collateralization and other requirements. E*TRADE Financial’s and E*TRADE Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy require E*TRADE Financial and E*TRADE Bank to meet minimum Common equity Tier 1 capital, Tier 1 risk-based capital, Total risk-based capital, and Tier 1 leverage ratios. Events beyond management's control, such as deterioration in credit markets, could adversely affect future earnings and E*TRADE Financial’s and E*TRADE Bank’s ability to meet future capital requirements. E*TRADE Financial and E*TRADE Bank were categorized as "well capitalized" under the regulatory framework for prompt corrective action for the periods presented in the table below (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
December 31, 2015
|
|
Actual
|
|
Well Capitalized Minimum Capital
|
|
Excess Capital
|
|
Actual
|
|
Well Capitalized Minimum Capital
|
|
Excess Capital
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
Amount
|
E*TRADE Financial
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 leverage
|
$
|
3,396
|
|
|
7.3
|
%
|
|
$
|
2,318
|
|
|
5.0
|
%
|
|
$
|
1,078
|
|
|
$
|
3,747
|
|
|
9.0
|
%
|
|
$
|
2,093
|
|
|
5.0
|
%
|
|
$
|
1,654
|
|
Common equity Tier 1 capital
|
$
|
3,286
|
|
|
34.0
|
%
|
|
$
|
629
|
|
|
6.5
|
%
|
|
$
|
2,657
|
|
|
$
|
3,747
|
|
|
39.3
|
%
|
|
$
|
620
|
|
|
6.5
|
%
|
|
$
|
3,127
|
|
Tier 1 risk-based capital
|
$
|
3,396
|
|
|
35.1
|
%
|
|
$
|
774
|
|
|
8.0
|
%
|
|
$
|
2,622
|
|
|
$
|
3,747
|
|
|
39.3
|
%
|
|
$
|
763
|
|
|
8.0
|
%
|
|
$
|
2,984
|
|
Total risk-based capital
|
$
|
3,938
|
|
|
40.7
|
%
|
|
$
|
968
|
|
|
10.0
|
%
|
|
$
|
2,970
|
|
|
$
|
4,186
|
|
|
43.9
|
%
|
|
$
|
954
|
|
|
10.0
|
%
|
|
$
|
3,232
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
December 31, 2015
|
|
Actual
|
|
Well Capitalized Minimum Capital
|
|
Excess Capital
|
|
Actual
|
|
Well Capitalized Minimum Capital
|
|
Excess Capital
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
Amount
|
E*TRADE Bank
(1)(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 leverage
|
$
|
3,069
|
|
|
8.5
|
%
|
|
$
|
1,806
|
|
|
5.0
|
%
|
|
$
|
1,263
|
|
|
$
|
3,075
|
|
|
9.7
|
%
|
|
$
|
1,579
|
|
|
5.0
|
%
|
|
$
|
1,496
|
|
Common equity Tier 1 capital
|
$
|
3,069
|
|
|
36.7
|
%
|
|
$
|
544
|
|
|
6.5
|
%
|
|
$
|
2,525
|
|
|
$
|
3,075
|
|
|
36.5
|
%
|
|
$
|
548
|
|
|
6.5
|
%
|
|
$
|
2,527
|
|
Tier 1 risk-based capital
|
$
|
3,069
|
|
|
36.7
|
%
|
|
$
|
669
|
|
|
8.0
|
%
|
|
$
|
2,400
|
|
|
$
|
3,075
|
|
|
36.5
|
%
|
|
$
|
674
|
|
|
8.0
|
%
|
|
$
|
2,401
|
|
Total risk-based capital
|
$
|
3,176
|
|
|
38.0
|
%
|
|
$
|
837
|
|
|
10.0
|
%
|
|
$
|
2,339
|
|
|
$
|
3,185
|
|
|
37.8
|
%
|
|
$
|
842
|
|
|
10.0
|
%
|
|
$
|
2,343
|
|
|
|
(1)
|
The Basel III final rule introduces a capital conservation buffer that limits a banking organization’s ability to make capital distributions and discretionary bonus payments to executive officers if a banking organization fails to maintain a Common Equity Tier 1 capital conservation buffer of more than
2.5%
, on a fully phased-in basis, of total risk-weighted assets above each of the following minimum risk-based capital ratio requirements: Common Equity Tier 1 (
4.5%
), Tier 1 (
6.0%
), and total risk-based capital (
8.0%
). This requirement was effective beginning on January 1, 2016, and will be fully phased-in by 2019. Certain new regulatory deductions and adjustments are subject to a phase-in period over a
four
year period, beginning at
40%
in 2015 and fully implemented at
100%
in 2018.
|
|
|
(2)
|
E*TRADE Bank paid dividends of
$373 million
to the parent company during the
nine months ended September 30, 2016
.
|
NOTE 17—COMMITMENTS, CONTINGENCIES AND OTHER REGULATORY MATTERS
Legal Matters
The Company reviews its lawsuits, regulatory inquiries and other legal proceedings on an ongoing basis and provides disclosure and records loss contingencies in accordance with the loss contingencies accounting guidance. The Company establishes an accrual for losses at management's best estimate when it assesses that it is probable that a loss has been incurred and the amount of the loss can be reasonably estimated. The estimated liability is revised based on currently available information.
Litigation Matters
On October 27, 2000, Ajaxo, Inc. ("Ajaxo") filed a complaint in the Superior Court for the State of California, County of Santa Clara. Ajaxo sought damages and certain non-monetary relief for the Company’s alleged breach of a non-disclosure agreement with Ajaxo pertaining to certain wireless technology that Ajaxo offered the Company as well as damages and other relief against the Company for their alleged misappropriation of Ajaxo’s trade secrets. Following a jury trial, a judgment was entered in 2003 in favor of Ajaxo against the Company for
$1 million
for breach of the Ajaxo non-disclosure agreement. Although the jury found in favor of Ajaxo on its claim against the Company for misappropriation of trade secrets, the trial court subsequently denied Ajaxo’s requests for additional damages and relief. On December 21, 2005, the California Court of Appeal affirmed the above-described award against the Company for breach of the nondisclosure agreement but remanded the case to the trial court for the limited purpose of determining what, if any, additional damages Ajaxo may be entitled to as a result of the jury’s previous finding in favor of Ajaxo on its claim against the Company for misappropriation of trade secrets. Although the Company paid Ajaxo the full amount due on the above-described judgment, the case was remanded back to the trial court, and on May 30,
2008, a jury returned a verdict in favor of the Company denying all claims raised and demands for damages against the Company. Following the trial court’s entry of judgment in favor of the Company on September 5, 2008, Ajaxo filed post-trial motions for vacating this entry of judgment and requesting a new trial. The trial court denied these motions. On December 2, 2008, Ajaxo filed a notice of appeal with the Court of Appeal of the State of California for the Sixth District. On August 30, 2010, the Court of Appeal affirmed the trial court’s verdict in part and reversed the verdict in part, remanding the case. The Company petitioned the Supreme Court of California for review of the Court of Appeal decision. On December 16, 2010, the California Supreme Court denied the Company’s petition for review and remanded for further proceedings to the trial court. The testimonial phase of the third trial in this matter concluded on June 12, 2012. By order dated May 28, 2014, the Court determined to conduct a second phase of this bench trial to allow Ajaxo to attempt to prove entitlement to additional royalties. Hearings in phase two of the trial concluded January 8, 2015. In a Judgment and Statement of Decision filed September 16, 2015, the Court denied all claims for royalties by Ajaxo. Ajaxo’s post-trial motions were denied. Ajaxo has appealed to the Court of Appeal, Sixth District. There is no briefing schedule on this appeal. The Company will continue to defend itself vigorously.
On May 16, 2011, Droplets Inc., the holder of
two
patents pertaining to user interface servers, filed a complaint in the U.S. District Court for the Eastern District of Texas against E*TRADE Financial Corporation, E*TRADE Securities, E*TRADE Bank and multiple other unaffiliated financial services firms. Plaintiff contends that the defendants engaged in patent infringement under federal law. Plaintiff seeks unspecified damages and an injunction against future infringements, plus royalties, costs, interest and attorneys’ fees. On March 28, 2012, a change of venue was granted and the case was transferred to the United States District Court for the Southern District of New York. The Company's motion for summary judgment on the grounds of non-infringement was granted by the U.S. District Court in a Decision and Order dated March 9, 2015. All remaining claims are stayed pending resolution of issues on Droplet's remaining patents under review by the Patent Trial and Appeal Board ("PTAB"). On July 6, 2015, the PTAB instituted an inter partes review of plaintiff's '115 patent. A hearing on the inter partes review was conducted on March 14, 2016. On June 23, 2016, the PTAB deemed Droplets’ putative '115 patent to be “unpatentable.” In a separate proceeding, the PTAB has also separately deemed Droplets’ putative '838 patent to be “unpatentable.” Droplets has appealed to the Circuit Court of Appeals for the District of Columbia. The Company will continue to defend itself vigorously in this matter.
Several cases have been filed nationwide involving the April 2007 leveraged buyout ("LBO") of the Tribune Company ("Tribune") by Sam Zell, and the subsequent bankruptcy of Tribune. In William Niese et al. v. A.G. Edwards et al., in Superior Court of Delaware, New Castle County, former Tribune employees and retirees claimed that Tribune was actually insolvent at the time of the LBO and that the LBO constituted a fraudulent transaction that depleted the plaintiffs’ retirement plans, rendering them worthless. E*TRADE Clearing, along with numerous other financial institutions, is a named defendant in this case. One of the defendants removed the action to federal district court in Delaware on July 1, 2011. In Deutsche Bank Trust Company Americas et al. v. Adaly Opportunity Fund et al., filed in the Supreme Court of New York, New York County on June 3, 2011, the Trustees of certain notes issued by Tribune allege wrongdoing in connection with the LBO. In particular the Trustees claim that the LBO constituted a constructive fraudulent transfer under various state laws. G1 Execution Services, LLC (formerly known as E*TRADE Capital Markets, LLC), along with numerous other financial institutions, is a named defendant in this case. In Deutsche Bank et al. v. Ohlson et al., filed in the U.S. District Court for the Northern District of Illinois, noteholders of Tribune asserted claims of constructive fraud and G1 Execution Services, LLC is a named defendant in this case. Under the agreement governing the sale of G1 Execution Services, LLC to Susquehanna International Group, LLP, the Company remains responsible for any resulting actions taken against G1 Execution Services, LLC as a result of such investigation. In EGI-TRB LLC et al. v. ABN-AMRO et al., filed in the Circuit Court of Cook County Illinois, creditors of Tribune assert fraudulent conveyance claims against multiple shareholder defendants and E*TRADE Clearing is a named defendant in this case. These cases have been consolidated into a multi-district litigation. The Company’s time to answer or otherwise respond to the complaints has been stayed pending further orders of the Court. On September 18, 2013, the Court entered the Fifth Amended Complaint. On September 23, 2013, the Court granted the defendants’ motion to dismiss the individual creditors’ complaint. The individual creditors filed a notice of appeal. The steering committees for plaintiffs and defendants have submitted a joint plan for the next phase of litigation. The next phase of the action will involve individual motions to dismiss. On April 22, 2014, the Court issued its protocols for dismissal motions for those defendants who were "mere conduits" who facilitated the transactions at issue. The motion to dismiss Count I of the Fifth Amended Complaint for failure to state a cause of action was fully briefed on July 2, 2014, and the parties await decision on that motion. The Litigation Trustee for the Plaintiffs dismissed all claims against E*TRADE Clearing pursuant to a Stipulation confirmed by the Court on June 7, 2016. The only E*TRADE entity remaining in the case is the E*TRADE S&P 500 Fund. The claims against the E*TRADE S&P 500 Fund are not material in amount. Nevertheless, the Company will continue to defend itself vigorously in these matters.
On April 30, 2013, a putative class action was filed by John Scranton, on behalf of himself and a class of persons similarly situated, against E*TRADE Financial Corporation and E*TRADE Securities in the Superior Court of California, County of Santa Clara, pursuant to the California procedures for a private Attorney General action. The complaint alleged that the Company misrepresented through its website that it would always automatically exercise options that were in-the-money by
$0.01
or more on expiration date. Plaintiffs allege violations of the California Unfair Competition Law, the California Consumer Remedies Act, fraud, misrepresentation, negligent misrepresentation and breach of fiduciary duty. The case has been deemed complex within the meaning of the California Rules of Court, and a case management conference was held on September 13, 2013. The Company’s demurrer and motion to strike the complaint were granted by order dated December 20, 2013. The Court granted leave to amend the complaint. A second amended complaint was filed on January 31, 2014. On March 11, 2014, the Company moved to strike and for a demurrer to the second amended complaint. On October 20, 2014, the Court sustained the Company's demurrer, dismissing
four
counts of the second amended complaint with prejudice and
two
counts without prejudice. The plaintiffs filed a third amended complaint on November 10, 2014. The Company filed a third demurrer and motion to strike on December 12, 2014. By order dated March 18, 2015, the Superior Court entered a final order sustaining the Company's demurrer on all remaining claims with prejudice. Final judgment was entered in the Company's favor on April 8, 2015. Plaintiff filed a Notice of Appeal April 27, 2015. Briefing is scheduled to continue through 2016. The Company will continue to defend itself vigorously in this matter.
On March 26, 2015, a putative class action was filed in the U.S. District Court for the Northern District of California by Ty Rayner, on behalf of himself and all others similarly situated, naming E*TRADE Financial Corporation and E*TRADE Securities as defendants. The complaint alleges that E*TRADE breached a fiduciary duty and unjustly enriched itself in connection with the routing of its customers’ orders to various market-makers and exchanges. Plaintiff seeks unspecified damages, declaratory relief, restitution, disgorgement of payments received by the Company, and attorneys’ fees. By stipulation, the parties have agreed to extend indefinitely the due date for a response to the claim. On July 23, 2016, a putative class action was filed in the U.S. District Court for the Southern District of New York by Craig L. Schwab, on behalf of himself and others similarly situated, naming E*TRADE Financial Corporation, E*TRADE Securities LLC, and former Company executives as defendants. The complaint alleges that E*TRADE violated federal securities laws in connection with the routing of its customers’ orders to various market-makers and exchanges. Plaintiff seeks unspecified damages, declaratory relief, restitution, disgorgement of payments received by the Company, and attorneys’ fees. By stipulation, the
Rayner
case has been consolidated with the
Schwab
case and both matters are now venued in the Southern District of New York. The Company will continue to defend itself vigorously in these matters.
In addition to the matters described above, the Company is subject to various legal proceedings and claims that arise in the normal course of business. In each pending matter, the Company contests liability or the amount of claimed damages. In view of the inherent difficulty of predicting the outcome of such matters, particularly in cases where claimants seek substantial or indeterminate damages, or where investigation or discovery have yet to be completed, the Company is unable to estimate a range of reasonably possible losses on its remaining outstanding legal proceedings; however, the Company believes any losses, both individually or in the aggregate, would not be reasonably likely to have a material adverse effect on the consolidated financial condition or results of operations of the Company.
An unfavorable outcome in any matter could have a material adverse effect on the Company’s business, financial condition, results of operations or cash flows. In addition, even if the ultimate outcomes are resolved in the Company’s favor, the defense of such litigation could entail considerable cost or the diversion of the efforts of management, either of which could have a material adverse effect on the Company’s business, financial condition, results of operations or cash flows.
Regulatory Matters
The securities, futures, foreign currency and banking industries are subject to extensive regulation under federal, state and applicable international laws. From time to time, the Company has been threatened with or named as a defendant in lawsuits, arbitrations and administrative claims involving securities, banking and other matters. The Company is also subject to periodic regulatory examinations and inspections. Compliance and trading problems that are reported to regulators, such as the SEC, Federal Reserve Bank of Richmond, FINRA, CFTC, NFA or OCC by dissatisfied customers or others are investigated by such regulators, and may, if pursued, result in formal claims being filed against the Company by customers or disciplinary action being taken against the Company or its employees by regulators. Any such claims or disciplinary actions that are decided against the Company could have a material impact on the financial results of the Company or any of its subsidiaries.
During 2012, the Company completed a review of order handling practices and pricing for order flow between E*TRADE Securities and G1 Execution Services, LLC. The Company implemented changes to its practices and procedures that were recommended during the review. Banking regulators and federal securities regulators were regularly updated during the course of the review. Subsequently, on July 11, 2013, FINRA notified E*TRADE Securities and G1 Execution Services, LLC that it was conducting an examination of both firms’ order handling practices. On March 19, 2015, the Company received a Wells notice from FINRA's Market Regulation Department relating to the adequacy of E*TRADE Securities' order-routing disclosures and supervisory process for reviewing execution quality during the period covered by the Company's 2012 internal review (July 2011 - June 2012). The Company cooperated fully with FINRA in the examination. In June 2016, E*TRADE Securities entered into a settlement with FINRA whereby it agreed to a censure and paid a
$900,000
fine.
Insurance
The Company maintains insurance coverage that management believes is reasonable and prudent. The principal insurance coverage it maintains covers commercial general liability; property damage; hardware/software damage; cyber liability; directors and officers; employment practices liability; certain criminal acts against the Company; and errors and omissions. The Company believes that such insurance coverage is adequate for the purpose of its business. The Company’s ability to maintain this level of insurance coverage in the future, however, is subject to the availability of affordable insurance in the marketplace.
Commitments
In the normal course of business, the Company makes various commitments to extend credit and incur contingent liabilities that are not reflected in the consolidated balance sheet. Significant changes in the economy or interest rates may influence the impact that these commitments and contingencies have on the Company in the future.
The Company’s equity method, cost method and other investments are generally limited liability investments in partnerships, companies and other similar entities, including tax credit partnerships and community development entities, which are not required to be consolidated. The Company had
$51 million
in unfunded commitments with respect to these investments at
September 30, 2016
.
At
September 30, 2016
, the Company had approximately
$24 million
of certificates of deposit scheduled to mature in less than one year and approximately
$32 million
of unfunded commitments to extend credit.
Guarantees
In prior periods when the Company sold loans, the Company provided guarantees to investors purchasing mortgage loans, which are considered standard representations and warranties within the mortgage industry. The primary guarantees are that: the mortgage and the mortgage note have been duly executed and each is the legal, valid and binding obligation of the Company, enforceable in accordance with its terms; the mortgage has been duly acknowledged and recorded and is valid; and the mortgage and the mortgage note are not subject to any right of rescission, set-off, counterclaim or defense, including, without limitation, the defense of usury, and no such right of rescission, set-off, counterclaim or defense has been asserted with respect thereto. The Company is responsible for the guarantees on loans sold. If these claims prove to be untrue, the investor can require the Company to repurchase the loan and return all loan purchase and servicing release premiums. Management does not believe the potential liability exposure will have a material impact on the Company’s results of operations, cash flows or financial condition due to the nature of the standard representations and warranties, which have resulted in a minimal amount of loan repurchases.
Prior to 2008, ETBH raised capital through the formation of trusts, which sold TRUPs in the capital markets. The capital securities must be redeemed in whole at the due date, which is generally
30 years
after issuance. Each trust issued TRUPs at par, with a liquidation amount of
$1,000
per capital security. The trusts used the proceeds from the sale of issuances to purchase subordinated debentures issued by ETBH.
During the
30
-year period prior to the redemption of the TRUPs, ETBH guarantees the accrued and unpaid distributions on these securities, as well as the redemption price of the securities and certain costs that may be incurred in liquidating, terminating or dissolving the trusts (all of which would otherwise be payable by the trusts). At
September 30, 2016
, management estimated that the maximum potential liability under this arrangement, including the current carrying value of the trusts, was equal to approximately
$418 million
or the total face value of these securities plus accrued interest payable, which may be unpaid at the termination of the trust arrangement.